Account balance pensions: the best of both worlds.

An account balance pension is a defined benefit plan, but it also contains features of defined contribution plans. An account balance plan establishes a separate account for each employee, with the employer contributing a specific amount (usually based on a percentage of pay) to each account. This account is credited with interest at a fixed rate for a specified period of time (usually one year); each year this rate is adjusted.

Separate accounts. The plan's most notable characteristics is the presence of these separate accounts. Because they receive periodic statements of their account balances, participants more easily see and more readily understand these amounts. Such plans also are more meaningful, as employees see their benefits accumulate.

In addition, the plans are easier to administer. Because the benefit amounts are easily calculated and the balances updated on a regular basis, such plans are less complex.