Quiz 21: Cash Balance and Other Hybrid Retirement Plans

Business

Hybrid retirement plan: It is defined as a plan which contains the benefits of both defined contribution plan and defined benefit pension plan; it is developed to meet the objective of plan sponsors. The Employer who wishes to change from the traditional retirement plan to hybrid plan because the traditional plan does not meet the criteria of the employers and they are not very much flexible. The traditional plan does not encourage the younger workforce. The employer who changes the plan faces many issues in plan design; the existing plan should be kept or terminated in full. The cost associated with the new plans like legal, administration, actuarial cost. The decision to change the plan can be taken on the year end plan review or effectiveness of plan or when the company merges with another company or take over transactions. The changes in plan are to provide the minimum contributions and to overcome the limitations of the traditional plans.

Hybrid retirement plan: It is defined as a plan which contains the benefits of both defined contribution plan and defined benefit pension plan, it is developed to meet the objective of plan sponsors. Hybrid retirement plan is not a new plan it was in force in 1969 in the form of floor set hybrid plans. In 1980's cash balance hybrid plans were came into force. It consists of various plan types and plan designs. Each plan is considered as defined benefit pension plan or defined contribution plan for tax purposes. The plans are designed in such a way which help younger people by providing huge lump sum amount and maintain defined benefit security for older people. The plans are developed in such a way that it will be advantageous to the employers. One plan which is advantageous to one employer will not have same effect on other employer also. The following are the part of hybrid retirement plans Cash balance hybrid an, defined benefit hybrid plan, Pension equity plan.

Hybrid plan Hybrid retirement plan is mixture of traditional benefit pension plan and defined contribution plan. Each individual plan are not able to fulfil the objective of sponsor and thus a hybrid plan is used. One of the suggestion is to implement risk based premium where the amount of premium would increase based on the risk sponsor presents to the unfunded liability. The advantage of risk based premium model is that risk of defined benefit plan would be covered especially if the sponsor is unable to pay or runs into bankruptcy.

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