Defined benefit plans have been identified as the optimal pension plan because the associated risks lie mostly with the employer (Woodger, 2009).
With
defined benefit plans, the employer manages mortality risk by spreading pension commitments across a population of employees with different life spans.
The bottom line to Stanley was that enhancing his retirement plan by adding a
defined benefit plan decreased his combined federal and state income tax liability by over $35,000, approximately 40% of the contribution.
Defined benefit plans, as the name indicates, operate by setting a target benefit: the amount of a pension a given employee will receive in retirement.
Early overfunding of the
defined benefit plan is a factor in the long-term health of the plan.
* Although 18 percent of all private industry workers are currently covered by a
defined benefit plan, the percentage varies with the industry.
As I noted earlier, advisers who work with
defined benefit plans would be well-advised to take notice of these changes, to understand the consequences to their clients.
By the same token, the job of the executive in charge of a company's 401(k) needs to become more like that of the CIO of a
defined benefit plan, says Nieuwe Weme.
In a freeze, a company continues its
defined benefit plan, but future accruals for some or all participants stop.