Hybrid Plan

In Detail

Hybrid pension plans blend elements of traditional defined benefit pensions and defined contribution plans. The most common hybrid design is the cash balance plan, where each participant has a notional "account" that grows with annual employer credits (typically a percentage of salary) and interest credits (a guaranteed rate of return). Unlike a 401(k), the employer bears the investment risk — the account balance is a bookkeeping device, and the plan's actual investments are managed by the employer. At retirement, participants can typically choose between a lump sum (their account balance) or a traditional monthly annuity.

Other hybrid designs include pension equity plans and floor-offset plans. Hybrid plans have become increasingly popular as companies look for middle ground between the full risk of a traditional pension and the inadequacy concerns of a pure 401(k) approach. They offer employers more predictable costs than traditional pensions while providing employees with a guaranteed minimum return that 401(k) plans cannot match. Several states have adopted hybrid designs for new public employees, combining a smaller defined benefit pension with a mandatory defined contribution component.

Critics of hybrid plans note that the benefits they provide are typically less generous than traditional pensions for long-career employees.