A defined benefit plan is the traditional pension plan that past generations of retirees relied on as their primary retirement income source. The employer contributes dollars into a pension pool on behalf of the employee using a formula based on the employee’s compensation, years of service and a target retirement age. A traditional defined benefit plan does not produce a personal cash account, but newer defined benefit plans - referred to as a cash balance plan – create a personal cash pension balance that can be taken as retirement income or transferred to a rollover IRA when the employee participant separates from service.
Defined pension plans are very expensive to administer, are subject to strict pension laws and requires funding of the plan each year. Consequently, many employers are terminating these plans and replacing them with defined contribution plans like the 401(k) plan. Moreover, a number of pension plans are seriously under-funded, placing some retiree’s future pension benefits at risk.
For high-income professionals employing a small staff, a fully insured 412(i) pension plan is a special small business defined benefit pension plan that can serve as an attractive retirement and tax savings strategy through exceedingly large tax-deductible contributions to the plan. The plan can only invest in life insurance and/or fixed annuities and the plan must benefit all employees proportionally.
We do not work with many small businesses that can afford the costs of sponsoring a defined benefit plan, but we do work with a number of retirees who participate in these plans. As retirement specialists, we help clients evaluate their various pension income options inside the plan to make the right financial decision for their retirement needs.
