ERISA Defined Benefit (DB) Retirement Plans Aren’t Dead Yet

June 19th, 2008

In recent years, the news has been filled with stories of large companies terminating or freezing their DB (pension) plans.  IBM, Sears, Verizon, and United Airlines are just a few of the companies that recently either closed their DB plans to newly hired employees, froze the benefit accumulation for existing participants, or outright terminated the plan. 

The well-publicized problems that some companies have experienced with their pension plans gives the impression that DB plans are no longer viable alternatives as employer-sponsored retirement vehicles.  However, that is not necessarily true.  In the right circumstances, DB plans could be the best option for some companies. 

A DB plan is a qualified retirement plan that is structured to provide a predetermined benefit to plan participants, usually defined in the plan as a specific amount or as a percentage of annual compensation.  Employer contributions to a DB plan are determined annually by an actuary and are non-discretionary.  Generally, the limitation on the annual benefit under a DB plan is the lesser of $185,000 in 2008 or 100% of the participant’s average compensation (limited to $230,000 in 2008) for the three highest consecutive years.  In comparison, the annual limitation for defined contribution (DC) plan contributions for 2008 is $46,000.  DB plans offer the opportunity for small business owners to possibly double or triple the maximum DC contribution limit applicable to 401(k) and profit sharing plans.

DB plans are making a resurgence for certain companies.  DB plans can be wonderful retirement vehicles for small business owners looking to maximize retirement savings in a relatively short time period, while minimizing the company’s tax burden.  Companies that have a predictable earning stream over a long period of time, with significant profits in excess of the owner’s salaries, should look at DB plans when considering their retirement planning strategy.  For example, a physician’s office, a law firm, a small CPA firm, or an investment advisor partnership may find a DB plan to be the best option for them.

A word of caution – while DB plans have many advantages, some of which are detailed above, they are not for every company.  DB plans tend to be more administratively expensive and burdensome than other qualified retirement vehicles, and they have less flexibility when it comes to annual contributions.  However, these drawbacks can be more than offset by the increased annual contribution amounts allowed and the accompanying significant tax savings for the right company. 

Employers interested in establishing a DB plan should consult with professional advisors before making any decisions.  Each employer’s situation is unique and should be objectively reviewed to determine what the best course of action is based on the employer’s own circumstances.  Some of the factors that will need to be considered are:  the company’s employee demographics, the company’s short and long-term growth projections, and the company’s historical revenue stream.  These and other factors can significantly impact whether a DB plan is right for a business.

Please contact our office for more information about whether establishing a DB plan is right for your business.

2 Responses to “ERISA Defined Benefit (DB) Retirement Plans Aren’t Dead Yet”

  1. Barbara J. Avardon 20 Jun 2008 at 3:30 pm

    As the Administrator of a government DB plan which is 100% funded and which receives matching contributions from both the participants and the employer, I applaud your editorial.

    I believe that very few people can successfully accrue enough savings during their working life to sustain a reasonable retirement.

    I also believe every person lucky enough to have a DB retirement plan should participate in the funding of that plan.

    Those government DB plans which have been appropriately administered with good governance and using best practices have been successful and are well-funded and will continue to provide government employees with retirement income for a comfortable retirement until death.

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