Traditional Defined Benefit Pension Plans

As a financial advisor you undoubtedly have clients with unique financial objectives, and RPAS has the expertise to help them meet those objectives. While retirement plans come in various shapes and sizes, a traditional defined benefit pension plan brings unique features and benefits.

Advantages of a Traditional Defined Benefit Pension Plan

(Enhanced when used in a Combination Plan – See Below)

  • Larger tax-deductible contributions may be made compared to those permitted for defined contribution plans.
  • Retirement savings may be accelerated for targeted employees.
  • Plan design can favor owners and/or key employees, especially if they are older than staff (like New Comparability, but even better).
  • May limit the number of employees covered (must be 40% or more of employees), as long as each participant is provided with a meaningful benefit.
  • Participant does not bear the investment risk.
  • May be set up using a prototype plan document to avoid IRS filing.
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Good Candidates for a Traditional Defined Benefit Pension Plan

(Especially a Combination Plan – See Below)

  • Business owners (especially sole proprietors, or owners of successful family businesses and closely-held businesses) who want to contribute more than $49,000 / $54,500 (2010 limits).
  • Firms with patterns of consistent and sustainable profits.
  • Firms that can contribute at least 5% - 8% of compensation to employees.
  • Partners or other business owners over age 40 who desire to increase tax deferrals or to catch up on pension savings.
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Some Important Features

  • Higher contributions - contributions to fund retirement benefits can significantly exceed the 401(k) plan maximum ($49,000 or $54,500 in 2010 with catch-up).
  • Benefit is defined as a monthly amount to be received at retirement, based on a formula which generally reflects years of service and compensation.
  • Employer must fund enough each year to keep plan assets on course to pay the promised benefits.
  • Participants may find it difficult to understand the value of the benefit, which is expressed as a monthly annuity to start at a future date.
  • Employer funding costs are greater for older employees who have a shorter period to accumulate the funds for the annuity benefit.
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Some Disadvantages to Consider

  • Administrative costs may be higher than defined contribution plans.
  • Annual minimum contributions are required.
  • Employer bears the investment risk.
  • Employer must coordinate the investment policy with the funding policy and actuarial methodology (with help from the consulting actuary and the investment advisor).
  • Annual funding costs must be determined and certified by an Enrolled Actuary, based on extremely complex and evolving funding rules.
  • Plan may be required to pay PBGC premiums.
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Combination Plan

A Traditional Defined Benefit Pension Plan Combined with a 401(k) Profit Sharing Plan

A traditional defined benefit pension plan, when combined with a 401(k) profit sharing plan and cross-tested together, can bring even greater benefits. Total contributions and benefits allowed for targeted employees may greatly exceed annual benefit limits permitted under a defined contribution plan by itself. Here are illustrative 2010 plan year contribution limits for combination plans under near optimum conditions:
Age Defined Benefit Pension Plan 2010* + Defined Contribution Plan 2010 = Total 2010*
 45 $ 101,000   $ 49,000   $ 150,000
 55 165,500   54,500   220,000
 65 230,500   54,500   285,000

* Different amounts will result for each plan combination, depending on normal retirement age, interest rates, employee group demographics and benefit levels for nonhighly compensated employees; RPAS will optimize the 2-plan design to achieve the best results.

In addition, the Pension Protection Act’s elimination of the 25% of covered payroll deduction limit with multiple plans allows for much higher contributions for pension plans covered by PBGC.

In 2010, once guidance is issued, “DB(k)” plans will become available under the law for small plans, with special safe harbor design options to avoid testing and multiple Form 5500s.
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