We own a small business.  Like many small business owners, we struggle with the best way to save for retirement while balancing our current cash flow needs.  When CNN's Small Business page posts a story title, "The best-kept tax secret for small businesses" you better believe I clicked on the link.  Enter a defined benefit plan - a pension plan - that I can invest in with pre-tax dollars.  Wow.  That does sounds pretty intriguing.

I have to research the hell out of everything, which is how I learned that "about 23 percent of private sector workers with defined benefit pension plans had a cash balance plan in 2000; in contrast, such plans were only available to 3 percent of defined benefit participants in 1991."  The article continues, "By their very nature, cash balance plans are guided by two opposing principles. First, they are defined benefit plans and thus by law must specify a normal retirement age and make benefits available in the form of an annuity. In fact, the automatic form of payment for a married employee must be a joint-and-survivor annuity. On the other hand,vested participants in cash balance plans are entitled access to their account balance in a lump sum at any time, regardless of the 'normal' retirement age. This is one of the appeals of such plans."

That's according to the Bureau of Labor Statistics web site.  A different BLS article states, "There are four major differences between typical cash balance plans and 401(k) plans.

• Participation. Participation in typical cash balance plans generally does not depend on the workers contributing part of their compensation to the plan; however, participation in a 401(k) plan does depend, in whole or in part, on an employee choosing to make a contribution to the plan.

• Investment Risks. The investments of cash balance plans are managed by the employer or an investment manager appointed by the employer. The employer bears the risks and rewards of the investments. Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants. By contrast, 401(k) plans often permit participants to direct their own investments within certain categories. Under 401(k) plans, participants bear the risks and rewards of investment choices.

• Life Annuities. Unlike many 401(k) plans, cash balance plans are required to offer employees the ability to receive their benefits in the form of lifetime annuities.

• Federal Guarantee. Since they are defined benefit plans, the benefits promised by cash balance plans are usually insured by a federal agency, the Pension Benefit Guaranty Corporation (PBGC). If a defined benefit plan is terminated with insufficient funds to pay all promised benefits, the PBGC has authority to assume trusteeship of the plan and to begin to pay pension benefits up to the limits set by law. Defined contribution plans, including 401(k) plans, are not insured by the PBGC."

Good to know what the risks are before I decide to jump in.  But what exactly is a cash balance plan?  According to Prudential:

Cash balance plans are retirement plans funded entirely by the Plan Sponsor.  The plan's funds requirements are based on a formula that includes one's age, years of service, and compensation. "This type of defined benefit plan is funded each year with a 'benefit credit'—tied to a percentage of your compensation, as well as an 'interest credit,'" while the cash balance plan's accrual is defined by the account's balance that one can track over time. "However, unlike defined contribution plans, the fluctuations of the market do not affect your specific benefit in the cash balance plan, as the investment risks are assumed by the organization sponsoring the plan. Your vested balance is not subject to market fluctuations and can only increase as time goes on."

After the current market meltdown, there may be more appetite for this type of retirement structure.  What I like about it is that - just like any retirement plan - I can save each month on a pre-tax basis.  But unlike a 401(k), the plan ensures a steady rate of return once the draw-down occurs. 

The best thing to do is consider the risks and rewards of any retirement system. Talk to someone who truly understands the various retirement vehicle options and make sure you understand all the risks involved with any plan you choose.  Because I firmly believe that any money I put into a retirement account is my money - and I plan to keep it.