Could a defined benefit plan be right for your business?
Commonly referred to as a pension, a defined benefit plan is a great way to guarantee retirement benefits. If you are a business owner who doesn’t offer a benefit plan but is thinking of doing so, continue reading below to see why it could be right for you.
What is it?
A defined benefit plan is essentially a guarantee to employees that they will have benefits once they retire. These plans are mostly funded by employers with the payouts being further defined by the employee’s salary, age, and tenure with the company.
What it Promises
With this type of benefit plan, employers are guaranteeing a specific benefit amount once the employee retires. This means that employees don’t have access to these benefits until they are retired. It also means that it is the employer’s responsibility to invest the money and distribute the amount.
It is important to note that since employers take responsibility for the investment and its distributions they bear the risk that the returns might not cover the defined benefit amount.
The Cost
There is quite a high cost in offering a defined benefit plan. This is mainly due to the risk of losing out on returns from the investment. This type of plan also requires complex actuarial projections and insurance. Because of this, the administrative costs to run the plan can be extremely high which often deters smaller businesses from offering them.
Who is it for?
Defined benefit plans are mostly for public-sector businesses. For the most part, employers in the private sector don’t offer these plans given the high cost and administrative work that goes into them. The most common type of workplace that uses defined benefit plans are government-type jobs like firefighters, police officers, land surveyors, etc.
However, for certain small businesses, a defined benefit plan could be the right choice as it would leave them with the ability to make large retirement contributions in a shorter amount of time. This type of plan also offers the most tax savings possible. This is because a defined benefit plan does not have as many restrictions on contribution limits when compared to a typical IRA or 401(k). This means that large sums of money can be deposited into the account every year. These deposits are also tax deferred which would make these plans perfect for employers who are the sole owner of a company or are one of a few employees looking to save a lot of money in a short amount of time.
Payment Types
There are two payment types offered with defined payment plans. The first option is to be on an annuity payment plan. This means that the employee would receive monthly payments that are spread out until the employee’s death. The second option is a lump-sum payment where the entire value of the plan is paid out to the employee at one time.
The more popular of the two options is the annuity plan. Oftentimes, employers opt for this one because they won’t have to manage a large amount of money at a single time and it will leave them less vulnerable to market volatility.
Ultimately, if you’re a business owner and are thinking of offering a retirement plan, get in touch with a member of our team who can assess your finances, needs, and wants to determine the best option for you and your employees.
If you’d be interested in learning more, or knowing what services would benefit you, give us a call at 407-328-5001
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