For the most part, the news about Defined Benefit (DB) plans lately has not been particularly positive. Whether a big company could no longer fund its plan or how it was bankrupting their business, headlines have discouraged many businesses from seriously considering a DB plan.
We believe it's time to take another look. For smaller, more mature companies, a DB plan can be a great vehicle to help you and your employees prepare for retirement. With a Defined Contribution plan, it's your employees who make many of the contributions and take on the investment risk. Their retirement benefit is their accumulated balance. With a DB plan, you, as the plan sponsor, make the contributions and assume the risk. Your employees receive a promised benefit at retirement, typically in the form of monthly income.
A DB plan isn't for everyone, but you may find that type of plan may help you meet your tax and savings goals. For example, if you've been focused on building your company but have pushed off saving for retirement, a DB plan can be a tool to help you make up for lost time with substantial contributions. It may even help you retire early if that's something you're considering.
You can also use a DB plan as an incentive to attract new talent. While a 401(k) plan allows employees to contribute to their retirement savings, a DB plan is your responsibility to fund. This can present a competitive advantage if you need to recruit and retain top talent.
But only businesses that have predictable earnings and long-term viability should consider a DB plan, because there are consequences if required contributions are missed.