Employer-sponsored pension plans can significantly enhance employees’ compensation packages. A strong plan rewards loyal employees for their years of service, and it can help attract highly qualified prospective employees. Hiring a firm that specializes in defined benefit plan administration makes it easy for businesses to provide high-quality pension plans for their employees.
A defined benefit plan is an employer-funded pension plan. Employees’ payments are based on their average annual income and time with the company, and their benefits are expressed as a percentage of their annual income. Employees can receive their benefits as a lump sum or monthly payments that last for their lifetime, or they can roll their benefits over to an IRA account.
Unlike a direct contribution plan, such as a 401(k) or profit sharing plan, contributions to a defined benefit plan are often made by the employer. In direct contribution plans, employers may contribute to the plans, but employees also typically have to contribute as well. These contributions may be used to lower a business’ tax burden.
In general, defined benefit plans can invest in most market-based investments that individuals would consider. Plans are usually able to purchase stocks, bonds, mutual funds, real estate investment trusts (REITs), and government securities.
There are a few prohibited transactions. For example, plans can’t purchase houses for trustees, plan sponsors, or participants to live in, and collectibles like stamps, coins, and artwork aren’t allowed under certain circumstances. These are relatively uncommon circumstances, though, and there are many allowed investments for plans to use to reach their goals.
Almost any business can offer its employees a defined benefit plan. Sole proprietors, partnerships, and corporations can all typically sponsor a plan.
While most businesses are able to sponsor a defined benefit plan, it’s not always the best type of plan to offer. Generally speaking, defined benefit plans are well-suited for established small businesses. Larger companies may want to consider other types of plans, such as direct contribution plans.
To find out whether a defined benefit plan would most benefit their employees, business owners should talk with a defined benefit plan administration firm. They’re able to discuss the costs associated with and advantages of this type of plan, and they can also recommend another type of plan if there’s a better choice.
A defined benefit plan administration firm helps small businesses, which usually have limited resources, set up and run a defined benefit plan. They help businesses design a plan to meet their particular needs and get the legal paperwork for the plan in order. Once the plan is in place, an administration firm generally takes care of managing the plan and providing reports about its performance. They also can help determine what employees’ payments should be based on their average salary, years with the company, and chosen form of compensation.