July 25th, 2011 by Jim Cotterman
The common wisdom is that defined benefit (DB) plans have largely been replaced by defined contribution (DC) plans such as the 401(k). While generally true, DB plans are still being adopted. According to the GAO’s March 2011 Private Pensions report, “most new DB plans were started by highly paid, middle-aged professionals who run small businesses and were looking for ways to put as much tax-deferred income aside for retirement as possible.” The top three business classifications sponsoring new DB plans have been doctors, dentists and lawyers. Doctor and dentist offices are uniquely well suited because of their advantageous business model. Law firms are a bit less well suited, but there are still reasons to consider a DB plan in the right circumstances. The report’s data is for years 2003 - 2007 where 14,150 small DB plans (those with fewer than 100 members) were newly formed representing 8% of the total number of all plans created. Of those, approximately 1,000 were for law firms.
The GAO goes further to point out that these new DB plans are sometimes sponsored to supplement an existing DC plan that has reached its statutory contribution limits. Using a combination of plans can greatly enhance the ability to save for retirement. The attractiveness of securing retirement savings on a tax deferred basis is significant with a GAO estimate of 18% improvement in after tax retirement income after 10 years and 40% after 20 years.
Unfortunately, even with significant tax advantages, the private plan participation remains stalled at roughly half of the private sector workforce. Plan formation just barely surpassed plan terminations. And this was prior to the recession. Now un- and under-employment remain stubbornly high, with particular note to the growing problem of the long-term unemployed. The consequences of all this on participation rates and asset accumulation are still largely unknown.
This entry was posted on Monday, July 25th, 2011 at 10:15 am and is filed under Economics, Retirement. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.