The Portfolio Cash Balance Plan

The Portfolio Cash Balance Plan
Robert Newman, Partner
Covington & Burling

Key Features

• Employees are automatically enrolled
• Benefits are funded solely by the employer—no employee contributions are required
• The benefit is expressed as an account balance

• An employee’s balance is credited each year of employment with a “pay credit,” which is typically a percentage of the employee’s current pay
• The balance is adjusted each year until the benefit begins to be paid by an “investment credit,” which is based on the return on an individually-tailored retirement investment portfolio
• The plan provides automatic investment guarantees; at a minimum, principal is guaranteed against loss, while the employer is free to provide a higher, positive cumulative rate of return if it wishes

• The plan offers annuities for both employees and their surviving spouses
• The plan is also permitted to subsidize benefits that are paid upon death, disability, or pre-mature job loss (such as upon a plant closing)

Advantages to Employees

• Greater investment protection than a 401(k) plan due to minimum guaranteed return
• Benefits are employer funded
• Employee automatically enrolled
• Lifetime income options paid directly from the plan
• Professional investment management; no need to manage own retirement savings
• Shares investment risk, enjoying upside with guaranteed minimum return

Advantages to Employers

• Employer contributions more efficiently fund benefits for employees because funds are professionally invested
• Minimize funding volatility because assets can be invested to mirror individual accounts
• Employees feel more secure about retirement because minimum guaranteed return and availability of lifetime income options
• Employer contributions spread evenly among employees