What are DB(k) Plans?

With a new wave of tax law changes taking place in 2010, it is easy to overlook an exciting new retirement plan option that exists for business owners and employees who belong to a company offering the DB(k).  Let’s look at some of the ins and outs of these new plans to see if they may be a fit for you.

What is a DB(k)?

A DB(k) is a combination retirement plan that is part pension plan along with a matching 401(k) plan.  The “DB” is stands for a defined benefit retirement plan while the “k” of course is the 401(k) component. Why would a company offer these?  First off, they are a great recruiting tool.  If an employee was wiped out by the 2007-2009 stock market collapse or if they are an older employee look for a pension, the DB(k) can lure in potential employees who see the value these plans can offer.  Firms in competitive industries could offer DB(k)s as a perk to seal the deal with a potential employee.

Will these be expensive to companies offering the DB(k)?

The companies that create DB(k)s will have to keep sizable cash reserves and profit margins.   The good news is that a company will not have to fund two plans as the DB(k) is in fact one plan with two parts.  Businesses that currently have two separate plans (defined benefit plans and separate 401(k) plan) may consolidate and offer a DB(k).

What advantages do a DB(k) provide?

The biggest advantage is a DB(k) could save a business both paperwork and  money. DB(k) plans are exempt from “top-heavy” rules,which allows a company to open one with just one Form (5500) and one plan document. It is estimated that the cost of providing a DB(k) will fall in the amount of 6-8% percent of payroll for most companies. This is much lower than the administrative costs of having both a 401(k) and a pension plan.

What companies are eligible?

Companies with 2-500 employees are eligible to have DB(k)

What do employees get?

The DB(k) has four compelling attributes:

1. It provides for the arrangement of a lifelong monthly income (think pension). While the the income stream won’t replace the employee’s end salary, it certainly will help with retirement. Loyalty is rewarded with this plan.  The employee’ s pension income equals either:

1. 1% of final average pay times the number of years of service, or
2. 20% of that worker’s average salary during his or her five consecutive highest-earning years.

2. Employees are automatically enrolled in the 401(k) portion of the DB(k). The employee can  opt out if they choose.

3. The company automatically directs 4% of a worker’s salary into his or her 401(k) account. The company also has to match 50% of that amount, which is vested upon the match.  Employees do have the choice to increase above or decrease below the 4% contribution level.

4. It only takes three years for an employee to become fully vested in the pension part of the DB(k). This means if the employee stays at least 3 years, both the 401(k) and defined benefit portion earned belong to the employee.

In summary

The DB(k) is shaping up to be an interesting alternative to a 401(k).  This plan allows companies to offer valued employees something beyond the typical voluntary retirement savings program.   If you are an employee who is saving for retirement, ask your benefits department if they plan on offering a DB(k).  If you own and run a  business with at least two employees and are having difficulty attracting the right types of employees due to competition, consider offering a DB(k) to help you recruit, impress and retain the caliber of employees you really desire.