Whether or not your business already offers an employee retirement plan, there are ways to create retirement benefits that attract good workers. A defined benefit plan is one of these. What is a "defined benefit" plan, and how can you make it work for your business and your workforce? Here are the answers to these questions.
Defined Contribution vs. Defined Benefit
As an employer or a former employee, you're probably aware of defined contribution plans. These are what generally make up 401(k) plans at most employers. The "defined" part of this arrangement is the contribution that employees and employers put in. If your business contributes, for example, a matching contribution, you pay an equal amount toward your employee's retirement plan as they do.
The benefit, though, is dependent on varied market risks. The contributed money will grow along with the market and have its ups and downs. The final benefit will likewise be varied for each individual based on the conditions when they withdraw money, the amount contributed, and the types of risk they were taking in their portfolio.
A defined benefit plan offers more of a guarantee as to future benefits based on a worker's salary rather than based on their contributions. This makes retirement planning easier and more stable. The value of a defined benefit plan as an employer is that you can beat the competition when it comes to creating an attractive retirement plan in this uncertain era.
How Can You Manage Risk?
Of course, if you guarantee a certain benefit level to retirees, your company is on the hook to make that work. You'll need to work with an accountant to determine what you can afford to offer in future benefits and how to pay for these. For starters, you'll need to have a mandatory contribution by employees at an acceptable rate. This rate needs to be enough to pay sufficient parts of future costs but not so much that it alienates employees
Your investment strategy is the other key part of making a defined benefit (DB plan) work. You must create a portfolio in which to place company and employee contributions that allow for enough growth to pay future obligations while not being overly risky. Work with an experienced accountant and your business investment planner to find this balance.
Is a defined benefit retirement plan — an old-fashioned pension — right for your company? In a tight job market, it might be one of the best ways you have to entice quality employees and keep them. Contact your accountant today to learn more about retirement pension plans.