Understanding the DB(k)
| April 25, 2010 9:00 PM
In 2010, companies have a whole new retirement plan option.
What is a DB(k)? Basically, a DB(k) combines a pension plan with a matching 401(k) plan. As the name implies, it is a defined benefit retirement plan with some of the features of a 401(k).
DB(k)s could become great recruiting tools. These hybrid retirement plans will be very attractive to employees looking to restore pre-bear market retirement savings levels - not to mention workers who want to retire with a pension-style income like the one Mom and Dad had. In the coming years, firms in especially competitive industries may be prompted to offer DB(k)s as perks.
Won't it cost a lot for a company to fund one? Not necessarily. It is likely that the companies that do create them will have sizable cash reserves and profit margins. However, it isn't as if a business is funding two retirement plans at once. In fact, any businesses that offer both defined benefit plans and 401(k) plans may unite them in this new option.
A DB(k) could save a business paperwork and money. These plans are exempt from "top-heavy" rules, and a company can put one in place with just one Form 5500 and one plan document. Principal Financial Group vice-president Chris Mayer, whose firm helped to develop the DB(k), told the Washington Post that the cost of providing a DB(k) will probably work out to 6-8 percent of payroll for most companies. This is certainly beneath the administrative costs of having both a 401(k) and a pension plan. Companies with 2-500 employees are eligible to have DB(k)s.
What do employees get? An income stream, an employer match and a really neat tool to save for retirement. In brief, the DB(k) has four compelling attributes:
• An arrangement for lifelong monthly income. The income stream won't replace an employee's end salary, but it certainly will help. Loyalty is rewarded: the pension income equals either a) 1 percent of final average pay times the number of years of service, or
b) 20 percent of that worker's average salary during his or her five consecutive highest-earning years.
• Employees are automatically enrolled in the 401(k) portion. (They can choose to opt out.)
• The company automatically directs 4 percent of a worker's salary into his or her 401(k) account. The company also has to match 50 percent of that amount, which is vested upon the match. (Employees do have the choice to alter the contribution level up or down from 4 percent.)
• It only takes three years for an employee to become fully vested in a DB(k) pension plan. So even if they leave the company, the money is theirs.
The best of both worlds? Maybe. The DB(k) is shaping up as an intriguing 401(k) alternative, a new IRS-sanctioned way to offer valued employees something more than the usual voluntary retirement savings program. If you are saving for retirement, ask your company about it. If you own a business in a very competitive field, it may help you recruit, impress and retain the caliber of employees you really want.
Bradley A. Hunter is the president of Hunter Financial, Inc.