Building Life Plans, One Client at a Time

Defined Benefit Pension Plans: Worth Considering

Employers have various ways to offer retirement benefits to their employees—and to themselves. The amount that a retiree will receive from defined contribution options such as 401(k) and profit-sharing plans is uncertain; all that is certain is the amount that is contributed.

Another option is a defined benefit plan (DB plan). As its name implies, the retirement benefits that an employee will receive are defined by the plan’s formula. Plan formulas vary according to the company, but typically benefits are calculated by using individual factors such as salary and length of employment.

Many employers moved away from DB plans when 401(k)s began being commonly used in the 1980s. They liked shifting the burden of retirement savings from the company to the employee. However, some savvy business owners are reconsidering DB plans for several reasons:

  • Contributions to a DB plan are tax deductible.
  • When profits devolve to the owner(s), contributions might lower income enough to move to a lower tax bracket or avoid alternative minimum tax.
  • Small business owners can make larger contributions than with other retirement plan options.
  • Annual payouts can be as high as $205,000, beginning as early as age 62.
  • Business owners can decide what formula best rewards valuable employees.
  • Within limits, contributions can vary by year, so larger contributions can be made in good years and smaller contributions in bad years.
  • It’s a valuable tool for recruiting and retaining employees—many employees prefer the security of a guaranteed benefit rather than the insecurity of a 401(k), whose value is entirely reliant on the investments chosen.
  • Plan assets are handled by professional investment managers and usually have higher yields than individually managed assets.
  • Employers and employees can continue to contribute to IRAs or 401(k) plans.
  • The Pension Protection Act, passed in 2006, provides significant protections for private plan participants by requiring the employer to make contributions to the plan that are determined by licensed actuaries.
  • A 1976 law called the Employee Retirement Income Security Act (ERISA) requires prudent and professional management of the plan assets.

How do you set up a defined benefit plan?

DB plans are not limited to large companies. In fact, a business owner needs to have only one employee to set one up.

To demonstrate how the process works, we will show how Accretive Wealth helps an owner establish a DB plan, with options for a separate 401(k) and profit-sharing plan to provide even greater retirement benefits to the business owner and employees.

Mr. Smith owns Desi Partners, LLC and wants to set up a DB plan for himself and his 5 employees.

  • We ask Mr. Smith to send us a census of his employees (dates of birth, dates of hire, total compensation, etc.).
  • We create an illustration demonstrating different levels of contribution to the DB plan and showing what benefits each of them would provide to Mr. Smith and his employees.
  • We work with Mr. Smith to help him select the contribution that would provide satisfactory benefits for everyone.
  • We open an account for Mr. Smith’s DB plan with Charles Schwab.

Accretive Wealth designs DB plans in conjunction with Primark Benefits, a leading pension consultancy in the Bay Area with more than 700 clients. Primark Benefits provides pension administration, recordkeeping, and actuarial services for more than $1 billion in assets, including our clients’ DB plans. The firm’s licensed actuaries determine how much money needs to be put in the plan annually based on factors such as compensation, age, years of service, and expected asset growth.

If you’d like to discuss whether a defined benefit plan might be good for your company, or the company your work for, please feel to call Faraz at (925) 365-1533 or send an e-mail to lifeplan@accretivewealth.com

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