Traditional Defined Benefit Plans

A traditional DB plan may help retain key employees, allow for potentially accelerated retirement savings (by allowing larger employer contributions), and provide potentially greater employer tax deductions or tax deferral as compared to a DC plan. Traditional DB pension plans promise employees a pre-defined lifetime monthly benefit starting at retirement. The amount of the benefit is known in advance and is usually based on factors such as:

Years of service
Compensation history
Age at retirement

Advantages of a Traditional Defined Benefit Plan for Employers:

Maximize benefits: Business owners can typically contribute significantly more compared to a DC plan alone.
Plan earnings: Plan earnings generally are not taxable to the employer.
Investment returns: Assets are invested by the plan’s fiduciary, rather than by individual plan participants, which provides the employer with more control over investments.
Pension Benefit Guaranty Corporation: Generally, DB plans are insured by the Pension Benefit Guaranty Corporation
Tax savings: Employer contributions are tax deductible, and an employer can make additional tax deductible contributions to fund future required contributions (within the limitations of the law).

Advantages of a Traditional Defined Benefit Plan for Employees:

Deferred taxation: Employees defer taxation on their benefit accruals until they begin receiving benefit payments (monthly annuity payments or a lump sum distribution).
A known benefit: Employees know the specific benefit they will receive at retirement.
Increased savings: Higher contributions typically allow for larger benefits for HCEs compared to a DC plan (based on factors such as age).
Increased contributions: Generally, employers can contribute more for employees with the least number of years until retirement.
Additional security: Retirement benefits are not dependent on how much an employee can afford to save.
Reliable benefits: Employees are provided with a defined retirement benefit regardless of stock market volatility.
Hands-off investment strategy: No investment decisions need to be made by participants.
ERISA protection: Qualified plan assets are protected in the event of a lawsuit or bankruptcy