Login Form
|
Defined Benefit Pension Plans A defined benefit plan is the more traditional pension plan. The normal retirement benefit in a defined benefit pension plan is determined by a formula that can incorporate the employee's pay, years of employment, age at retirement, and other factors. These plans are funded entirely by the employer and all risk on monies invested to fund the benefit rests with the employer.A defined benefit plan is not an individual account plan and all the plan’s assets are available to provide all the participants’ retirement benefits.Since the retirement benefit is not tied to the investment results of the assets in the plan, the investment of the assets of a defined benefit plan is usually more conservative than in the case of defined contribution plans. A simple example of a defined benefit plan is a flat dollar plan design that provides a certain amount per month based on the time an employee works for the employer. For example, a plan offering $100 a month per year of service would provide $3,000 per month to a retiree with 30 years of service for their lifetime.Typical defined benefit plans in the United States are final average plans where the average salary over the last three or five years of an employees' career determines the pension. Benefits typically are not payable until normal retirement age and usually are paid in the form of a lifetime annuity. Nevertheless, more recently a substantial minority of plans permits single payments at retirement equivalent to the value of the normal retirement benefit. Monies received as a lifetime annuity will be taxed at ordinary income tax rates and are ineligible for rollover to an IRA. Single sum payments may be transferred to an IRA or another qualified plan to defer immediate taxation. The "funding cost" of a defined benefit plan is not easily calculated, and requires an actuary or actuarial software. However, even with the best of tools, the cost of a defined benefit plan will always be an estimate based on economic and financial assumptions. These assumptions include the average retirement age and life span of the employees, the returns earned by the pension plan's investments and any additional factors. So, for this arrangement, the benefit is known but the funding is adjusted year to year to adapt to changes of the conditions. The funding of defined benefit plan must be certified by an enrolled pension actuary.In addition, with some exceptions, the plan benefits are insured through the Pension Benefit Guarantee Corporation (PBGC). Both of these requirements add to the administration cost of a defined benefit plan. Recently defined benefit plans have become popular with high earning business people and professionals.A defined benefit plan can offer much higher deductible funding costs than can be achieved with a defined contribution plan, such as a 401(k) or profit sharing plan.This can allow a business owner who has neglected to start saving early for retirement the opportunity to make up for lost time and accumulate a sizable retirement benefit over a relatively short period of time. |
Search
Software
- This site best viewed with:
