Cash balance pensions fall under the category of defined contribution plans, but have some traits which set them apart from other types of defined contribution plans. These traits make them somewhat less risky for the employee participants.

Like other defined contribution plans, cash balance pension plan benefits include the contributions of an employer to the participant’s retirement fund. These contributions are usually defined in terms of a percentage of the employee’s salary for each year, as well as a variable rate of interest calculated based on current rates of inflation. For example, the employer may contribute an amount reached by matching 6% of an employee’s annual salary, plus an addition percentage of the contribution calculated based on the Treasury’s inflation index.

Thus the final benefits received by the employee at retirement will be variable, depending on inflation rates and the changes in the employee’s own salary. However, any losses that the employer might bear in investments using the fund will not be transferred to the employee.