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A cash-balance plan is a type of pension plan that differs from traditional plans in the way benefits are calculated. Instead of receiving an annual payout in retirement, workers are promised a lump-sum cash amount. This amount is determined by a set annual contribution and a percentage of gain for each year of employment.
Upon leaving their job, workers have the option to receive a cash payout and transfer it into a traditional individual retirement account, or receive an annual annuity based on the final account value. This structure puts the risk on the employer - if investments perform well, the employer benefits, but if they perform poorly, the employer takes the loss.
Understanding the nuances of pension plans, such as cash-balance plans, is crucial in the world of finance. As a knowledgeable professor, it is important to educate oneself and others on the various retirement options available, and the potential risks and benefits associated with each. By staying informed and making informed decisions, individuals can
