Retirement Plans

Defined Contribution or Devined Benefit?

Defined Contribution

Most plans today are some sort of Defined Contribution (aka DC) plans.  Some examples of these are 401(k)’s, SEP-IRA’s, SIMPLE IRA’s, and 403(b)’s (for non-profit organizations).  What is defined is the contribution going into the account.  What is not certain is what you’ll have when it’s time to retire.  

Which plan do I pick for my company?  A number of factors will determine this.  Some items to consider are: how many participants there will be, how much money will flow into the plan on an ongoing basis, how many investment choices I want, how much fiduciary liability I am willing to assume and what am I willing to do to meet those obligations (aka IRS Code 404(c) Fiduciary Responsibilities). 

For those companies who already have a 401(k), do you have the right type?  There are several ways in which a 401(k) can be structured to help meet the ADP/ACP testing rules, such as an Age-weighted plan, a New Comparability plan, and a Safe-harbor plan.  If your current 401(k) provider has not discussed these options with you, perhaps you should call me and I will.  I had one client with a small company with about 10 employees and his 401(k) was set up by his CPA.  In order for him to contribute about $20,000 for himself, he had to contribute about $50,000 to his employees.  He had the wrong type of 401(k) plan.  By getting him the right type of 401(k) plan he was able to contribute over $45,000 for himself and only had a $15,000 contribution required for his employees.  Needless to say, CPA’s services are no longer being used by this business owner.

2019 Retirement Plan Contribution Limits

Type of Plan/Account Contribution Limit Catch-Up Contribution Limit (for Age 50+)
IRA (Traditional and Roth) $6,000 $1,0000
401(k), 403(b), 457 $19,000 $6,000
SIMPLE $13,000 $3,000
SEP-IRA $56,000

Defined Benefit Plans

These are more commonly known as Traditional Pension Plans or DB plans. Most companies have stopped using these because the amount that is required to be deposited into these accounts may change (significantly if the market is bearish). The uncertainty of these required distributions have caused many companies to feel they are better off using a defined contribution (DC) plan as the year to year impact on cash-flow is much more predictable.

So if companies aren’t using them, why are you discussing them? In the right situation, they can be a great tool to use to plan for retirement. An example of this would be for a physician who’s in his 50’s and has a small office. With a 401(k) plan the most he can contribute for 2011 is $49,000 (Employee contribution of $16,500 plus company contribution of $32,500). With a DB plan, he could contribute more then double or maybe even triple this. If you are a successful business owner who’s fortunate enough to be making several hundred thousand a year, this can be a great way to gain larger current tax deductions and set aside more money for a better retirement.

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