Defined Benefit Plans

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Defined Benefit plans

Overview and Benefits

These plans are primarily used by non-profit organizations, businesses and educational institutions. Defined benefit plans by definition are plans that promise a specific benefit paid to at some time in the future. An example of this benefit could be 65% of an employees salary starting at age 65.

Key Points to remember about Defined Benefit plans may include:

The investment risk of defined benefit plans remain with the plan sponsor and not the plan participant. By nature of the very plan, it promises to pay a certain benefit at a certain time. Investment performance during this time frame will have an effect upon the benefit payable. If investment performance has been poor in the past then additional contributions may be called for to make up the difference.
These plans are funded by the employer and not the employee. The employer is required to contribute whatever is actuarially determined to fund the benefits at some time in the future.
When evaluating defined benefit plans the age of the plan participants is a very important criteria. An aging workforce may require high contributions in order to fund benefits that will be paid upon retirement. A workforce that is comprised of younger individuals will require smaller contributions since there will be many years before the benefits will become payable.
Defined benefit plans are the only way for companies to make contributions of more than $40,000.00 or 100% of compensation which is the limit for most other employer sponsored retirement plans.

Defined benefit plans have decreased over the years in popularity due to the aging workforce in America and competition from more cost efficient plans.

If you would like to re-evaluate an existing plan and compare it to more cost effective alternatives or have an aging workforce please contact us for a free plan analysis and summary.

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