Traditional Defined Benefit Pension Plans

As a financial advisor you undoubtedly have clients with unique financial objectives, and RPAS has the expertise to help them meet those objectives. While retirement plans come in various shapes and sizes, a traditional defined benefit pension plan brings unique features and benefits.

Advantages of a Traditional Defined Benefit Pension Plan

(Enhanced when used in a Combination Plan – See Below)

  • Larger tax-deductible contributions may be made compared to those permitted for defined contribution plans.
  • Retirement savings may be accelerated for targeted employees.
  • Plan design can favor owners and/or key employees, especially if they are older than staff (like New Comparability, but even better).
  • May limit the number of employees covered (must be 40% or more of employees), as long as each participant is provided with a meaningful benefit.
  • Participant does not bear the investment risk.
  • May be set up using a prototype plan document to avoid IRS filing.
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Good Candidates for a Traditional Defined Benefit Pension Plan

(Especially a Combination Plan – See Below)

  • Business owners (especially sole proprietors, or owners of successful family businesses and closely-held businesses) who want to contribute more than $54,000 / $60,000 (2017 limits).
  • Firms with patterns of consistent and sustainable profits.
  • Firms that can contribute at least 5% - 8% of compensation to employees.
  • Partners or other business owners over age 40 who desire to increase tax deferrals or to catch up on pension savings.
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Some Important Features

  • Higher contributions - contributions to fund retirement benefits can significantly exceed the 401(k) plan maximum ($54,000 or $60,000 in 2017 with catch-up).
  • Benefit is defined as a monthly amount to be received at retirement, based on a formula which generally reflects years of service and compensation.
  • Employer must fund enough each year to keep plan assets on course to pay the promised benefits.
  • Participants may find it difficult to understand the value of the benefit, which is expressed as a monthly annuity to start at a future date.
  • Employer funding costs are greater for older employees who have a shorter period to accumulate the funds for the annuity benefit.
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Some Disadvantages to Consider

  • Administrative costs may be higher than defined contribution plans.
  • Annual minimum contributions are required.
  • Employer bears the investment risk.
  • Employer must coordinate the investment policy with the funding policy and actuarial methodology (with help from the consulting actuary and the investment advisor).
  • Annual funding costs must be determined and certified by an Enrolled Actuary, based on extremely complex and evolving funding rules.
  • Plan may be required to pay PBGC premiums.
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Combination Plan

A Traditional Defined Benefit Pension Plan Combined with a 401(k) Profit Sharing Plan

A traditional defined benefit pension plan, when combined with a 401(k) profit sharing plan and cross-tested together, can bring even greater benefits. Total contributions and benefits allowed for targeted employees may greatly exceed annual benefit limits permitted under a defined contribution plan by itself. Here are illustrative 2017 plan year contribution limits for combination plans under near optimum conditions:

Age Defined Benefit Pension Plan 2017* + Defined Contribution Plan 2017 = Total 2017*
 45 $ 115,000   $ 54,000   $ 169,000
 55 $ 189,000   $ 60,000   $ 249,000
 65 $ 250,000   $ 60,000   $ 310,000

* Different amounts will result for each plan combination, depending on normal retirement age, interest rates, employee group demographics and benefit levels for nonhighly compensated employees; RPAS will optimize the 2-plan design to achieve the best results.

In addition, the Pension Protection Act’s elimination of the 25% of covered payroll deduction limit with multiple plans allows for much higher contributions for pension plans covered by PBGC.
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