The New Zealander’s current three-year deal expires this May and Blues were keen to keep the 35-year-old.
“We are thrilled to be able to retain the services of Nick,” Blues chief executive Richard Holland said.
“Anyone who has watched Cardiff Blues this season… will have seen he is still producing the goods on the pitch, but on top of that he will now continue to play a key role in mentoring and developing young Welsh talent.
“We would like to thank PRB for their support throughout the process, which has culminated with a positive outcome for Cardiff Blues and our strategy to develop young talent from within, which is ultimately for the betterment of Welsh Rugby as a whole.
“Nick embodies all of the values we want at Cardiff Blues and this mentoring role has the potential to become something more long-term.”
Williams, who joined the Blues from Ulster in 2016, has made 66 appearances during his three seasons and scored 12 tries.
Williams said: “I’m very happy and blessed to be able to go again. I spoke to my family and they were all supportive, so I told John [Blues coach Mulvihill] in November that I was keen to stick around.
“The body feels fresh, mentally I feel good and it all seems to be working for us so I’m happy to get another year.
“After winning the Challenge Cup I thought it was a good way to go out but I didn’t really think about what I could give back to Rugby, particularly in regards to bringing young guys through.”