The Hewlett Packard Company Cash Account Pension Plan is a type of pension plan offered by Hewlett Packard (HP), a multinational information technology company. This plan is a cash balance pension plan, which means that participants receive a set percentage of their yearly compensation plus interest charges.
- Understanding Cash Balance Pension Plans
- Differences between Cash Balance Pension Plans and Traditional Pension Plans
- Differences between Cash Balance Pension Plans and 401(k) Plans
- Advantages and Disadvantages of the Hewlett Packard Company Cash Account Pension Plan
- Frequently Asked Questions
- The Bottom Line
Understanding Cash Balance Pension Plans
A cash balance pension plan is maintained on an individual account basis, similar to a defined-contribution plan. Unlike a traditional defined-benefit plan, the account balance in a cash balance plan is not affected by changes in the value of the participant's portfolio. The employer credits the participant's account with a set percentage of their yearly compensation plus interest charges.
Participants in the Hewlett Packard Company Cash Account Pension Plan are promised a specific benefit at retirement, stated in terms of a 401(k)-style account balance. The account balance grows over time to meet the balance promised by the company. At retirement, the participant can choose to receive a lump sum or monthly annuity payment.
Differences between Cash Balance Pension Plans and Traditional Pension Plans
The main difference between a cash balance pension plan and a traditional pension plan lies in how the benefits are determined. In a traditional plan, the monthly benefit is usually based on the last few years of the participant's highest compensation. In a cash balance plan, the benefit is determined based on the total number of years the participant has been with the company and is designed to have a predetermined amount in the account by retirement.
Differences between Cash Balance Pension Plans and 401(k) Plans
Another significant difference between a cash balance pension plan and a 401(k) plan is the investment risk. In a cash balance plan, the employer bears the investment risk and is responsible for ensuring that the participant receives the promised amount. In a 401(k) plan, the employee bears the investment risk and has control over how the plan's funds are invested.
Advantages and Disadvantages of the Hewlett Packard Company Cash Account Pension Plan
- Lump sum payouts: The Hewlett Packard Company Cash Account Pension Plan allows participants to receive their benefits in a lump sum, which can be beneficial for individuals who want to invest the funds or choose a different retirement savings instrument.
- Rollover: Participants can roll over their lump sum payout into an IRA or another pension plan.
- Tax-deferred: Contributions to the plan are tax-deferred, meaning that participants do not pay taxes on their distributions until they make withdrawals or take a lump sum payment.
- No contribution limit: Unlike other retirement plans like IRAs and 401(k)s, the Hewlett Packard Company Cash Account Pension Plan does not have contribution limits.
- Taxable distributions: While the tax-deferred treatment is a benefit, participants will have to pay taxes when they withdraw money from the plan.
- No employee contributions: Only the employer contributes to the plan, so participants cannot add capital from their wages.
- High costs to maintain: Cash balance pension plans like the one offered by Hewlett Packard can be more expensive for employers to administer compared to traditional retirement savings plans like 401(k)s. These plans require certification to ensure that they are adequately funded, resulting in higher costs for employers.
Frequently Asked Questions
Is a cash balance pension plan better than a 401(k)?
Both cash balance pension plans and 401(k) plans have their advantages and disadvantages. The better option depends on your preferences, goals, length of employment with the company, and current income.
What can I do with a cash balance plan?
Participants in the Hewlett Packard Company Cash Account Pension Plan can choose to make withdrawals or receive a lump sum payout. If they choose a lump sum, they can roll it into an IRA or another retirement plan if allowed.
What happens to my cash balance pension if I quit?
The cash balance pension plan is portable, meaning that participants can take the vested portion with them when they quit and roll it into another retirement account.
The Hewlett Packard Company Cash Account Pension Plan provides employees with a retirement savings option that offers tax-deferred contributions and the flexibility to receive benefits as a lump sum or monthly annuity. However, participants should carefully consider their financial situation and compare the plan to other retirement accounts to determine which option is best for them.