When it comes to retirement planning, the term “pension” is becoming almost archaic. According to the Office of National Statistics (ONS) only 35% of workers in the private sector paid into a company pension fund last year. Most employers have adopted 401k plans and put the responsibility on the employee's shoulders to take care of funding their own retirement. While having control can be a blessing, it can also be a double-edged sword. Especially, for those that don't take the time to fully understand all of their investment options. For those people, there just might be a solution. It's called the DB(k) pension plan and here are the rules on how it works.
401(k) Match + Pension Plan = DB(k)
What exactly is a DB(k) pension plan? Essentially, it combines the benefits of an income stream of a pension with the matching of a 401(k) plan. Many boomers that still have pensions, love them because they know they have an income stream that they can depend on. The DB(k) offers the luxury of that stable income with a matching contribution to boot. Might be the closest example of having your cake and eating it too when it comes to retirement planning.
DB(k)s Could Be Popular to Employees
Many small businesses will bypass a Simple IRA or a SEP IRA and go straight to the 401(k) plan purely because of name recognition. Employees like perks and a potential employer with a 401(k) plan with a match sounds much more attractive that a SEP IRA. The DB(k) has the potential to be the next household name of retirement plans. Most workers that I come across that have 401(k)'s don't really understand them. Having a pension-style income like the one Mom and Dad had, may be a safer and less complicated solution.
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Are DB(k) Plans Expensive for Employers?
It's tough to say. With the recent adoption of these plans, it doesn't seem that employers are rushing off to get these started. I'm sure the slumping economy is the largest barrier. For those companies that do start these, they most likely have a very good cash reserve. However, it isn’t as if a business is funding two retirement plans at once. In fact, any businesses that offer both defined benefit plans and 401(k) plans may unite them in this new option.
Less Paperwork Makes Everybody a Happy Camper
Companies with 2-500 employees are eligible to have DB(k)s pension plans. Where 401(k) plans must meet certain “testing requirements” for top-heavy rules, the DB(k) is exempt and with a plan document and one simple form 5500, your business is ready to rock and roll DB(k) style.
These plans are exempt from “top-heavy” rules, and a company can put one in place with just one Form 5500 and one plan document. The cost of the overall plan is the question. Being new plans, it's hard to say, but based on most reports I've read the cost should be cheaper compared to having both a 401(k) and a pension plan.
Employee Benefits from DB(k) Plans
An income stream, an employer match and a really neat tool to save for retirement. In brief, the DB(k) has four compelling attributes:
- Monthly Paycheck for Life. The income stream won’t replace an employee’s end salary, but it certainly will help. Employees that have worked for the company for a longer period of time are rewarded: the pension income equals either
a) 1% of final average pay times the number of years of service, or
b) 20% of that worker's average salary during his or her five consecutive highest-earning years.
- Automatic Enrollment for 401k. That employees save for the future by default. (They can choose to opt out.)
- The company automatically directs 4% of a worker's salary into his or her 401(k) account. The company also has to match 50% of that amount, which is vested upon the match. (Employees do have the choice to alter the contribution level up or down from 4%.)
- It only takes three years for an employee to become fully vested in a DB(k) pension plan. So even if they leave the company, the money is theirs.
Is the DB(k) the Retirement Savior?
For now, it's too tough to say. The strongest benefits I see is the ability to offer more to your key employees. If you're able to offer a sweet retirement package, it may help retain and gather more productive and easier to manage staff.