Certified Plan Sponsor Professional (CPSP) Practice Exam

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Which of the following is the most common hybrid plan design?

  1. Defined benefit plan

  2. Cash balance plan

  3. Profit-sharing plan

  4. Target benefit plan

The correct answer is: Cash balance plan

The most common hybrid plan design is the cash balance plan because it combines features of both defined benefit and defined contribution plans. In a cash balance plan, the employer credits a participant's account with a set percentage of their yearly compensation plus interest charges. Unlike traditional defined benefit plans, which provide a pension payout based on a formula related to salary and years of service, cash balance plans provide participants with a balance that is easier to understand and manage. This design is particularly appealing to employers and employees alike because it provides predictable retirement savings while also retaining some of the risk management characteristics of traditional pensions. The certainty of a cash balance can be more attractive to employees, as they can see their account balance grow over time, making retirement planning more straightforward. By contrast, defined benefit plans can be less appealing due to their complexity and the fact that benefits are often determined at retirement age without an accessible account balance throughout an employee's career. Profit-sharing plans and target benefit plans also tend to focus more on employer contributions and investment risk rather than the hybrid characteristics that define a cash balance plan. Therefore, cash balance plans represent a growing trend in retirement plan design, combining the security of defined benefits with the flexibility and transparency of defined contribution plans.