Maxing out your 401(k) can feel like a major retirement milestone…until you realize you’d still like to save more and potentially reduce a sizable tax bill.

For high earners, business owners, and professionals, a cash balance plan can open the door to much larger retirement contributions than a traditional 401(k) alone. It offers a powerful way to accelerate retirement savings, create potential tax advantages, and build a more structured path toward long-term financial goals.

What Is a Cash Balance Plan?

A cash balance plan is a type of qualified retirement plan that combines some of the features of a traditional pension with the familiar account-style format of a 401(k).

Like a pension, the plan is funded by the employer and follows defined benefit plan rules. The employer makes contributions to the plan and is responsible for making sure there is enough money to provide the promised benefits.

But from the participant’s perspective, a cash balance plan may feel more like a 401(k). Each participant has a hypothetical account balance that grows over time. When someone retires or leaves the company, the vested benefit can generally be taken as a lump sum and, depending on the circumstances, rolled into an IRA or another eligible retirement plan.

Each year, a participant’s account typically receives:

• A pay credit, which may be based on a percentage of compensation or a flat dollar amount.
• An interest credit, which is usually based on a fixed rate or another formula established by the plan.

One important difference between a cash balance plan and a 401(k) is how investment performance affects participants. In a 401(k), your account balance rises and falls based on the performance of the investments you choose. In a cash balance plan, the benefit grows according to the formula established by the plan. Participants do not directly experience the day-to-day ups and downs of the market in their account balances.

The employer, however, takes on the responsibility of managing the plan’s investments and making sure the plan remains adequately funded.

The Biggest Advantage: The Ability to Save More

For many high earners, the biggest appeal of a cash balance plan is the opportunity to contribute significantly more toward retirement.

Because cash balance plans are treated as defined benefit pension plans under the tax code, contribution limits are calculated differently from those of a 401(k). Depending on a participant’s age, compensation, and the plan’s design, allowable contributions can be substantially higher.

For some business owners and professionals, that can mean the opportunity to make six-figure annual contributions toward retirement while potentially reducing current taxable income.

Who Should Consider a Cash Balance Plan?

John is a dental practice owner who has already been maxing out his 401(k) contributions each year. With strong, consistent income and a desire to accelerate retirement savings, he implements a cash balance plan alongside his existing 401(k).

Now, he can contribute an additional six-figure amount annually into the cash balance plan, significantly increasing his total retirement savings while also reducing his current taxable income. Over time, this strategy helps him build a larger retirement nest egg more efficiently than relying on a 401(k) alone.

This example shows just how powerful a cash balance plan can be in the right situation, but it also brings up an important question: who really benefits the most from this kind of strategy?

They are commonly used by:

• Business owners and partners with high incomes who are already maxing out their 401(k) contributions and want to save more.
• Physicians, dentists, attorneys, consultants, and other highly compensated professionals.
• Business owners in their 40s, 50s, or early 60s who want to accelerate retirement savings.
• Businesses with steady, predictable cash flow that can comfortably support ongoing contributions.
• Owner-only businesses and firms with a relatively small number of employees.

The keyword here is consistency. Cash balance plans generally work best for businesses with reliable income and owners who are comfortable maintaining the plan for several years. Contributions are not meant to be turned on and off whenever cash flow changes, so establishing a plan requires careful consideration of the company’s finances and long-term goals.

How Are Cash Balance Plans Invested?

Because a cash balance plan promises participants a specific rate of benefit growth, investing the plan’s assets looks a little different from managing a 401(k).

All of the plan’s assets are pooled and invested together. Participants do not choose their own investments. Instead, the employer and plan fiduciaries are responsible for the investment strategy and for keeping the plan adequately funded. In general, there are two approaches to investing cash balance plan assets:

The Predictable Return Approach

Many cash balance plans use a relatively conservative investment strategy designed to keep investment returns aligned with the plan’s interest crediting rate.

Portfolios may emphasize high-quality fixed-income investments and other lower-volatility strategies. The goal is not necessarily to generate the highest possible return; it’s to maintain stability, keep the plan properly funded, and reduce the likelihood of large swings in required employer contributions.

For businesses that value predictable cash flow and consistency, this approach can make a lot of sense.

The Higher-Growth Approach

Other plan sponsors may choose to include more exposure to growth-oriented investments, such as equities. The potential benefit is straightforward: if the plan’s investments earn more than the amount needed to provide promised benefits, the employer may be able to reduce future contributions.

But there is another side to that equation. If the investments underperform, the employer may need to contribute additional money to keep the plan adequately funded. That is why even growth-oriented cash balance plan portfolios are typically managed carefully rather than invested aggressively.

In practice, many cash balance plans fall somewhere in the middle. They use primarily conservative investments to manage funding risk while maintaining limited exposure to growth assets that may improve long-term efficiency.

Could a Cash Balance Plan Fit into Your Retirement Strategy?

A cash balance plan can create significant retirement savings opportunities, but the decision should be made in the context of your taxes, business cash flow, existing retirement accounts, and long-term goals.

At Approach Retirement Advisors, we help business owners and high earners evaluate strategies like cash balance plans as part of a comprehensive financial plan. If you’re wondering whether you could be saving more for retirement—or whether your current strategy is making the most of your income—let’s start the conversation.