Course: Retirement Planning
Lesson 4: Understanding Types of Qualified Plans

Student Question:

Hi Bruce-

I have studied the material in depth, but am still struggling with the distinction between Money Purchase Plans, Cash Balance Plans, and Target Benefit Plans. I have read all of the notes and think I have it and then get a question and confusion sets in

Can you provide a few sentences on how you think of them in practice?

Instructor Response:

Hi Jim-

Great question.  These can be confusing.  Please see my notes below, and let me know if you have any questions.

Applications for Money Purchase Plan

  • Plan sponsor makes fixed annual contributions to participants
  • Fixed amount can change, but only prospectively (can change next year’s contribution rate but not this year’s)
  • Offers less sponsor-contribution flexibility than Profit Sharing Plan or 401(k) Plan
  • Less popular than Profit Sharing Plan or 401(k) Plan

Applications for Cash Balance Plan

  • Conversion of Defined Benefit to Cash Balance Plan
    • Plan sponsor no longer willing to accept investment risk
    • Overfunded Defined Benefit plan conversion to Cash Balance – no penalty if all excess Defined Benefit plan funding transfers to Cash Balance plan
      • Employer can use excess DB funding to make employer contributions to Cash Balance plan
    • Adopt Cash Balance Plan
      • Sponsors wishes to fund for past service but not willing to accept investment risk of a Defined Benefit plan

Applications for Target Benefit Plan

  • Was once one of few methods to discriminate in favor of older participants regarding plan contributions
  • Cross-testing in Profit Sharing plans and profit-sharing component of 401(k) plans are more effective ways to get more $$ to older participants.
  • Hence, Target Benefit plans not as popular as in years past.