Investing Cash Balance Plan Assets

In a Cash Balance plan, the benefit is defined using a bookkeeping ledger called the Hypothetical Account. The Hypothetical Account receives deposits which are generally based on a percentage of annual pay, and interest credits which are based on either an index or a flat rate known as the Interest Crediting Rate (ICR). A Hypothetical Account is maintained for each plan participant. The plan’s Hypothetical Account is the sum of all the participant Hypothetical Account balances; but is separate and distinct from the actual money invested to provide the benefits defined by it. The rate of return on the actual plan assets—as compared to the plan’s ICR—can have profound implications on the required plan contributions. Employers sponsoring Cash Balance plans must understand that the way plan assets are invested can impact funding policy objectives.