Certified Plan Sponsor Professional (CPSP) Practice Exam

What is the primary benefit of using a cash balance plan?

1. It allows for greater investment choice.

2. It provides predictable retirement income for employees.

3. It offers tax deductions for employer contributions.

4. It is easier to administer than a defined benefit plan.

The correct answer is: It provides predictable retirement income for employees.

The primary benefit of using a cash balance plan is that it provides predictable retirement income for employees. Cash balance plans are a type of defined benefit plan, which means they promise a specific payout at retirement, similarly to traditional pension plans. However, instead of receiving a monthly annuity based on years of service and salary at retirement, employees in a cash balance plan accumulate a "hypothetical account" with a set interest credit. This structure enables employees to have a clearer understanding of their retirement savings and the benefits they can expect, which enhances predictability and financial planning. By contrast, while investment choice, tax deductions, and administrative ease are beneficial elements of different retirement plans, they do not compare to the fundamental characteristic of cash balance plans that directly addresses employee retirement income. The predictable and fixed compensation structure is especially appealing to employees seeking assurance for their future financial stability.