Each year a cash balance plan adds two things to your account: a pay credit and an interest credit. The plan document fixes how the interest credit is set. Treasury regulations (Treas. Reg. 1.411(b)(5)-1(d)) cap it at a market rate of return and list the methods that qualify, including:
- a fixed rate of up to 6% a year
- the yield on 30-year Treasury bonds, or on shorter Treasuries plus a margin
- the corporate bond segment rates
- the actual return on the plan's own investments, if they are diversified
Some methods may add a guaranteed minimum rate, within limits. Every method is subject to preservation of capital: the benefit paid can never be less than the total of the pay credits.
The choice changes the size of the pay credit shown on your statement more than what the business contributes, because the contribution is aimed at the benefit the plan may pay at retirement. It does change what happens along the way. With a fixed rate, investment results above or below the rate leave the plan overfunded or short. With actual return crediting, the account moves with the assets. Either way the actuary needs an assumed rate to project the account; Maxed's estimates use 5%.