There are two main types of DEFINED BENEFIT (DB) PLANS: traditional pension plans, and hybrid plans like cash balance plans. A traditional defined benefit plan is the most efficient for providing retirement benefits – because that’s where it focuses the money. Benefits are usually expressed as a monthly payment based on service and pay.
TRADITIONAL DB PLANS work well for single-owner companies and employers who want to focus their retirement dollars on, well, retirement. They also work well for employers who want to catch up on retirement contributions for past years. Each dollar you put into a traditional DB pension plan produces much higher benefits for employees who stay until retirement – and much lower benefits for employees who leave early – than the same dollar put into a typical defined contribution (DC) plan. For multiple-owner professional practices like law firms and physician groups, a cash balance plan is usually a better choice.
Most new defined benefit plans nowadays are set up for tax reasons, and deductible contributions can be very large because they’re not subject to the $50,000 DC plan limit. Total deductions reach a peak when the plan is set up at least 10 years before retirement because IRS maximum benefits are phased in over 10 years. The 2012 maximum DB payout is about $2.4 million at age 62.
You can follow current pension developments on the pension section of our retirement plan blog.
© 2011 Northern Consulting Actuaries, Inc. dba Van Iwaarden Associates.