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A New Combination Plan
Did you know that The Pension Protection Act of 2006 will provide for a new kind of hybrid pension plan for employers with 500 or fewer employees?
What it is – How it works
According to PensionRights.org, until now, employee contributions to traditional pension plans have not been tax deferred. For that reason, few pension plans require or permit employee contributions. Instead, many employers supplement their pension plans with separate 401(k) plans which permit employees to defer taxes on their contributions.
The DB/K Plan
The new “DB/K plan” will combine a traditional defined benefit pension plan with a 401(k) savings plan. The plan will provide a low employer-paid guaranteed lifetime monthly retirement benefit that could be supplemented by voluntary tax deferred contributions by employees. The minimum pension benefit, payable to employees who work 3 or more years for the employer, will be equal to the lesser of 1 percent of average pay during the last five years of work multiplied by the number of years of service with the employer, or 20 percent of the average pay in the employee’s consecutive highest 5 years of earnings.
Assessment
The 401(k) component of the plan requires the employer to match at least 50% of an employee’s contributions up to 4% of the employee’s salary. The provision will take effect in 2010.
Read Section 903 of The Pension Protection Act of 2006 Public Law 109-280
Visit: www.PensionRights.org
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Filed under: "Advisors Only", Financial Planning, Retirement and Benefits | Tagged: DB[k] plan, Pension Protection Act 2006, retirement planning |
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This is a new and untested financial product; so be careful.
Mark
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Mark
Your response is symbolic of the flaw in the current retirement “system” in the U.S. Section 414(x) of the Internal Revenue Code, which authorizes “eligible combined plans” or DB/k plans is not a financial “product.” While it certainly is “new” in the sense that such plans can be adopted first in 2010, it is far from “untested.” 401(k) plans on a stand alone basis, have been around in abundance for about twenty years – They have been “tested” and have failed.
Defined benefit plans have been around forever and were quite successful as vehicles to provide adequate retirement benefits to public and private sector workers. Defined benefit plans were relegated to a marginal role in the private sector by the financial service industry’s love affair with the 401(k) concept.
Why the love affair? Why have one brokerage account with attendant fees (the typical defined benefit approach) when we can have an account for each participant? Viewing retirement plans as “products” or as an opportunity to sell more “products” brought us to the present failed state of the U.S. private sector retirement system. DB/ks might bring the party to an end. We’ll see.
Mike
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Mike,
Many thanks for the informed comment.
Mark
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