A common misconception is that defined benefit plans have become obsolete. Consider a statement from my fellow actuary, Mike Clark (Contingencies, Sep/Oct 2012, p. 42): “It’s been said that the road to hell is paved with good intentions. So is the path leading to defined benefit plan extinction.”
I agree that pension plans have been over-regulated. In addition, their numbers have decreased due to investment uncertainties, PBGC escalating premiums, the popularity of 401(k) plans, and business failures. With only one exception, the number of PBGC-insured defined benefit plans has decreased every year since 1995. For a recent Social Security Administration study on this trend, refer to http://www.ssa.gov/policy/
Using PBGC data is convenient, but such numbers do not tell the full story. There are a number of plans exempt from PBGC coverage, not the least of which being owner-only plans. Small plans are still popular, particularly among sustainably profitable family businesses. A small business usually mirrors the owner, and small employers often seek out defined benefit plans for a variety of reasons.
- As a tax strategy, deferring income taxes until after retirement.
- As a retirement strategy, funding rapidly as a make-up for earlier years when they were building the business, raising the kids, and paying off the mortgage.
- As a business strategy, often involving succession planning and the ultimate sale of the business.
In this way, a defined benefit pension can become an important part of a small employer’s business plan. Consequently, the life cycle of the pension plan often reflects the life cycle of the business, itself. If you would like to discuss retirement plan opportunities for your small business, we would like to hear from you.
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