Defined Benefit Plans: A Powerful Tool for Retirement Security

Defined Benefit (DB) plans offer a valuable option for businesses looking to provide a strong retirement plan for their employees. They can be a powerful tool in promoting financial security after retirement, with benefits for both employers and employees.

Advantages of DB Plans for Businesses:

• Attract and Retain Top Talent: A well-designed DB plan can be a significant advantage in attracting and keeping talented employees. It demonstrates a commitment to their long-term well-being.

• Tax Advantages: Contributions made to employee accounts are generally tax-deductible for the employer.

• Flexibility: DB plans can benefit a mix of employees, from rank-and-file workers to owners and managers.

Establishing a DB Plan:

• Professional Help: Consider seeking help from a financial institution or retirement plan professional when establishing and maintaining your plan.

• Initial Steps:

  • Written Plan Document: This serves as the foundation for day-to-day operations.

  • Trust for Plan Assets: A trust ensures assets are used solely to benefit participants and beneficiaries.

  • Recordkeeping System: This tracks contributions, earnings/losses, investments, expenses, and benefit distributions.

  • Employee Information: Provide eligible employees with information on benefits, rights, and features.

Choosing Your DB Plan:

• Traditional DB Plan: Offers a relatively large contribution compared to many other qualified plans.

• Cash Balance Plan: Similar to a defined contribution plan, with a stated account value at any given time.

• Alternative DB Plan: Options exist beyond traditional and cash balance plans.

Operating a DB Plan:

• Participation: Typically, a mix of rank-and-file employees and owners/managers participate. Some exclusions may apply.

• Contributions: Company owners make contributions, typically once a year. The amount is based on a variety of factors considered by an actuary.

• Nondiscrimination: The plan must provide substantive benefits for rank-and-file employees, not just owners/managers. Regular testing ensures this.

• Investing Plan Monies: Choose investment options based on your actuary's "goal rate of return" to meet future obligations.

• Fiduciary Responsibilities: Those managing the plan have a duty to act in the best interests of participants and beneficiaries. There are also potential liabilities.

• Disclosing Plan Information: Employees need to be informed about the plan through documents like the Summary Plan Description (SPD).

• Reporting to Government Agencies: Annual filings like Form 5500 are required.

• Distributing Plan Benefits: Participants typically can choose a lump sum distribution, rollover to an IRA, or periodic distributions.

Terminating a DB Plan:

• Complex Process: Terminating a DB plan requires careful consideration and following specific steps.

Conclusion:

Defined Benefit Plans can be a valuable tool for employers seeking to enhance their retirement plan offerings. However, careful planning, ongoing management, and professional guidance are essential for success.

To learn more about implementing a Defined Benefit Plan for your business, download our free ebook: [Click here]

Kenner French, is a former small business contributor at Forbes.com, author of three books, an executive at AI-focused VastSolutionsGroup.com and VastHoldingsGroup.com, a keynote speaker, and a Dave Matthews Band fan!