Defined Benefit Plans | Campbell Albrecht

DB Plan Overview

Promises a specific monthly (or possibly lump sum) benefit, instead of accumulating contributions and earnings like a DCP
Employer must contribute enough funds to pay the promised benefits, regardless of profits and earnings
May be right for employers who want to shelter more than the annual defined contribution limit
Benefits usually based on employee compensation and years of service; may be affected by Social Security benefits
Maximum benefit allowable based on compensation averages and annual limits
Actuary determines yearly employer contributions using several variables
Non-vested accrued benefits forfeited by terminating employees can reduce employer contributions

Relatively new and exciting hybrid plans
Great fit for successful owners and executives approaching retirement
Best in circumstances in which there are older, highly compensated principals of an employer and, on average, a younger group of employees
Can substantially increase the annual maximum dollar amount allocated to an individual while substantially reducing the overall costs (compared to stand-alone DC/DB plans)
Tax-favored tool that allows for rapid accumulation of retirement plan assets
Can serve as a tax shelter for those who do not need additional retirement savings

Hybrid plan resembling a DC plan: employee’s benefit is expressed as a hypothetical account balance instead of monthly benefit
Employee's "account" receives an annual contribution credit, usually a percentage of compensation, and an interest credit based on a guaranteed fixed rate or some recognized index
Account balance is the sum of all contributions and interest credits
Offers the option of purchasing an annuity benefit, but most employees will take the cash balance and roll it over into an IRA
Contributions determined by the sum of the contribution credits for all employees, plus the amortization of the difference between the guaranteed interest credits and the actual investment earnings (or losses)
Employees can see their "accounts" grow, but are still protected against market fluctuations
More portable, as employees can usually roll it into an IRA when they terminate employment or retire