What is a Market-Based Cash Balance Plan?

A Market-Based Cash Balance Plan is a version of a Cash-Balance Plan, which is a type of pension plan that straddles the line between defined benefit plans and defined contribution plans. With a defined benefit plan, each eligible employee receives a specific benefit upon retirement, while a defined contribution plan outlines the employer’s contributions to an employee’s retirement account, with the actual benefits depending on contributions and investment gains or losses.

In the case of a cash balance plan, it operates like a defined benefit plan but with a twist—it defines the promised benefit more like a defined contribution plan, namely in terms of a stated account balance.

In a typical setup of a Cash Balance Plan, each year, a participant’s account receives a “pay credit” (like 5 percent of their compensation from the employer) and an “interest credit” (a fixed rate linked to an index such as the one-year treasury bill rate). The value of the plan’s investment does not directly affect the promised benefits; instead, the employer bears all the investment risks. The Market-Based Cash Balance Plan is a version of the Cash Balance Plan where the account’s growth is tied to the actual return on plan assets instead of a fixed rate.

When a participant becomes eligible for benefits, they receive them based on their account balance. For instance, if a participant’s balance is $100,000 upon reaching age 65, they might opt for an annuity around $8,500 per year for life. Alternatively, with spousal consent, they could choose a lump sum equal to their account balance.

If a participant elects for a lump sum, they generally have the option to roll it over into an IRA or another employer’s plan, provided the latter accepts rollovers.

American, Delta, Southwest, and United have developed MBCBP plans for their pilots through contract negotiations. Further information on the impact of these plans will be available once the IRA approves plan specifics.