The Little-Known Retirement Plan the Wealthy Swear By

Cash balance pensions have seen significant growth over the past two decades, with their numbers increasing 15-fold and now accounting for nearly 50% of all defined benefit plans. Unlike traditional pensions or 401(k) plans, they offer a unique blend of features that make them an appealing choice for those seeking to build wealth.

Understanding how they work and how they differ from other retirement plans can help you leverage their potential to boost your long-term wealth.

What Is a Cash Balance Pension?

A cash balance pension is a type of defined benefit plan where the employer makes annual contributions to an individual’s account based on a set percentage of their salary. Compared to traditional pension plans, which pay a fixed benefit based on factors like years of service and salary at retirement, cash balance pension works more like a 401(k) but with guaranteed returns.

In addition to the employer contributions, known as pay credits, the account balance also grows through interest credits, which are based on a predetermined interest rate, either fixed or tied to the market index, ensuring the employees’ balance increases each year.

“Think of a cash balance pension plan as a mix between a traditional pension and a 401(k),” says Nadia Vanderhall, financial planner and founder of The Brands and Bands Strategy Group. “A cash balance plan gives you a set amount added to your account every year (like a deposit and interest), but it’s technically a pension—your job funds it, not you. You don’t have to pick investments, and the money grows at a set interest rate the plan guarantees.”

Calculating Your Potential Growth

With each passing year, the combination of pay credits and interest credits ensures a reliable and predictable increase in your account balance.

To calculate your pay credit:

Pay Credit = Employee Salary × Pay Credit Percentage

To calculate your interest credit:

Interest Credit = Account Balance × Interest Rate

Let’s say you participate in a cash balance pension plan at your company, receiving a pay credit percentage of 5% and an interest rate of 4%. If you earn $120,000, you will receive a pay credit of $6,000. With the 4% interest rate, the interest credit will be $240, bringing the account balance to $6,240.

Keep in mind that the contribution amount can increase based on factors such as pay raises, higher employer contribution rates, or adjustments based on your age to accelerate savings as you approach retirement. Once you retire, you can choose between receiving a lump sum payment and converting the balance into a monthly annuity.

However, if you change jobs before retiring, this impacts your options.

“The plan doesn’t move with you the same way a 401(k) does. It’ll usually be rolled over into an IRA, and the structure changes. If you’re switching jobs or making major business moves, talk to a financial pro to figure out the best way to roll it over without losing any tax benefits or momentum,” Vanderhall recommends.

How Cash Balance Pensions Help Build Wealth

Whether you’re a high-income earner, business owner, or simply planning ahead, a cash balance pension plan can help you build wealth efficiently and predictably. Here’s how:

Guaranteed Growth: Cash balance pension plans provide consistent, predictable growth through interest credits, offering a stable return without the fluctuations of the stock market.

Flexible Contribution Limits: The contribution limits for cash balance pension plans vary based on your salary, age, and target balance. Unlike IRAs and 401(k)s, which are subject to Internal Revenue Service (IRS) contribution limits, this plan offers more flexibility tailored to your financial situation. “You can stash away way more money than you could in a 401(k) alone—sometimes even hundreds of thousands per year, depending on your age and income,” Vanderhall says.

Tax-Deferred Growth: Contributions are tax deferred, meaning you don’t pay taxes until you withdraw funds. At the time of withdrawal, your tax bracket will influence how much you pay in taxes, so if you’re in a lower tax bracket, you’ll pay less.

Before You Commit to a Cash Balance Pension Plan

Before jumping into a cash balance pension plan, it’s important to understand that while these plans offer some serious wealth-building advantages, they’re not for everyone.

“These plans can be powerful for folks who are high earners or small business owners to better help them position the actual planning of their retirement, especially those who started saving for retirement later in life (it happens), want to catch up quickly, or have already maxed out a 401(k) or IRA, but still want to build,” Vanderhall says.

In other words, if you’re behind on retirement or have extra income you’re looking to shelter from taxes, this type of plan can give you space to accelerate your savings in a big way. But it’s important to also consider the cost of setting up this plan.

“They can be pricey to set up and run, especially for small businesses,” Vanderhall says. “We’re talking admin fees, actuaries, annual filings—the whole nine. If you’re self-employed or running a small business, work with a tax pro or financial planner who knows how to structure a cash balance plan alongside a 401(k). That combo can help lower overall costs and give you flexibility. You can also start with just the 401(k) and layer the cash balance plan on later when your income is more predictable.”

There are also expectations for the annual contribution to consider. Since defined benefit plans like these require consistent contributions, planning ahead ensures you keep up.

“You’re usually locked into making contributions every year. That commitment can be a lot if your income isn’t steady,” Vanderhall says. “Build a buffer into your cash flow or business budget, so you’re not scrambling to fund the plan each year. A profit-first or quarterly savings strategy can help cover contributions consistently.”

The Bottom Line

Cash balance pension plans offer a powerful way to build wealth for retirement. They are an increasingly popular choice for those looking for stability and steady growth. While they differ from traditional retirement savings options, they provide a unique opportunity for employees to accumulate retirement savings with minimal investment risks.