Which is Better – A Defined Benefit Plan or a Defined Contribution Plan?

The answer is: it depends! The selection of a retirement plan is based upon the following:

Employer’s Objectives –

What is the funding level and length of time to fund?

Employer’s Goals –

Do they want to provide an opportunity for employees to save for retirement?

Do they need a retirement plan to recruit and retain valuable employees?

Employer Demographics –

Is the owner older than most of the employees?

When does the owner plan on retiring?

Demographics are a major determinant in the plan design process.

Will the employer know his goals and objectives?

Probably not! One of the most important aspects of working with your pension client and his financial advisors is defining retirement goals and objectives.

The Proposal Request Form, (qm1736A), provides a list of fact-finding questions that will help the owner with his evaluation. Once they have determined what the retirement plan needs to accomplish, we can help structure a plan to meet those goals.

The following list provides a highlight of the advantages/disadvantages of a defined contribution or a defined benefit program:

Advantages of a Defined Contribution Plan

Advantages of a Defined Benefit Plan

Discretionary contribution Can provide a substantial retirement benefit for owners and highly compensated employees
Investment gain will increase the individual account value May provide a higher tax deduction
Easy to understand Employees accrue a known retirement benefit regardless of investment gain or loss
Forfeitures may reduce costs or may be reallocated to the active participants’ accounts Forfeitures of non-vested accounts from terminating employees reduce future employer contributions

Disadvantages of a Defined Contribution Plan

Disadvantages of a Defined Benefit Plan

Older owners or employees may receive a smaller contribution Requires annual contributions
Contribution limit is 25% of covered payroll Payment of PBGC premiums (if plan is covered)
Investment loss will decrease retirement account Older employees may make the plan too costly
No guarantees for a retirement benefit Employer bears investment risk

Contact Lafayette Life Retirement Services representative today at 800.555.6048 to discuss which plans would be best for your clients!

This information is of a general nature and is not to be construed as legal or tax advice. Lafayette Life and its agents do not provide legal or tax advice.