Independent Actuaries, Inc. is a defined benefit plan expert.  Unlike most firms providing retirement plan services, we specialize in this type of retirement plan.  Defined benefit plans have been around for a long time, but are now often overlooked.  However, they are often the best choice.
 

Consider a Defined Benefit Plan What is a defined benefit (DB) plan? How do defined benefit and defined contribution plans differ? What are the advantages of DB plans?   Chart:  Comparison of deductions under different types of retirement plans When should a small business owner consider a DB plan? What other advantages does a DB plan have for the small business owner? Myths about defined benefit plans

More on DB Plan Advantages Austin Business Journal article

Learn More (see Links also) Qualified Retirement Plans Defined Benefit Plans Sponsoring a Plan Requirements & Limits Defined Contribution Plans

There are really just two differences:
 

1.	In a defined benefit plan, the employer bears the investment risk. This means that good returns lower the employer’s cost and bad returns increase it.  The employee’s benefit is not affected.  In a defined contribution plan, employees bear the investment risk.  Good returns increase their accounts and bad returns decrease them.  The employer’s cost is not affected.
2.	The IRS applies limits to both types of plans.  For a defined benefit plan, the limit applies to the benefit paid out.  For a defined contribution plan, the limit applies to the contribution going in.

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These two differences result in two key advantages of a defined benefit plan:
 

1.	Because it promises a benefit at retirement that is not a function of investment results, a defined benefit plan is the most efficient way to provide a guaranteed floor level of retirement benefit for employees.  The plan can be designed to manage the work force by encouraging early or later retirement, and the employer cost can be reduced by favorable investment returns.
2.	Because the IRS directly limits benefits, not contributions, and the plan promises benefits at a specific age, a defined benefit plan can provide for a much larger tax deduction and accumulation of retirement funds on a tax favored basis for the older business owner.  See the following illustration of defined benefit plan deductions compared to defined contribution plan deductions.

Deductions Comparison

The chart below compares maximum annual deduction amounts under defined contribution plans and defined benefit plans.  The example is based on a business owner earning $100,000 annually from his or her business.

As you can see, the maximum amount deductible for a combination of defined contribution plans for this business owner is $25,000, regardless of current age or planned retirement age.  The chart displays the significant advantage of the defined benefit plan for business owners who are at least 45 years of age.  The annual deductible contributions are consistently in excess of $25,000.  In most cases, the defined benefit contributions are triple or quadruple the deductible limit for defined contribution plans.
 

 

1.	Benefits may recognize prior service.  Typically, this is to the benefit of the business owner.
2.	The older a participant is, the more valuable the plan benefits are for that participant.  This is also typically to the benefit of the business owner.
3.	Contributions and deductions are not dependent on compensation in the current year.  The benefit, and IRS limits on the benefit, may be based on compensation in prior years.  Under some circumstances, the business owner may make a substantial contribution without any current taxable compensation.

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Myths About Defined Benefit Plans
 

1.	Only corporations can sponsor a DB plan.  NOT TRUE.  A sole proprietorship, partnership or limited liability corporation can sponsor a defined benefit plan on essentially the same basis as a corporation.
2.	Plan sponsors cannot control the level of contribution.  NOT TRUE.  While DB plans do have funding requirements, these requirements are dependent on the benefits the plan promises.  The plan sponsor can control the contribution by amending the plan to change the benefit to be provided.  All you need is a good actuary, like IAI, to guide you.
3.	Defined benefit plans are expensive to operate.  NOT AT INDEPENDENT ACTUARIES!  Give use a call at (888) 643-5179 or (503) 520-0848, or email us to request further information.

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