Advantages of DB(k) retirement funds

Defined Benefit cash deferment plans or DB(k) retirement funds arose out of Title IX, Section 903 of an amendment to the Employee Income Security Act of 1974 (ERISA).(1) This Amendment takes the form of a law called the Pension Protection Act of 2006. DB(k) plans are similar to traditional 401(k) plans but are subject to a newer set of rules in addition to rules governing the 401(k). There are several advantages to these DB(k) retirement funds.

• Favors employees of small companies

According to the Pension Rights Center, a consumer rights advocacy organization, DB(k) plans favor employees of small companies.(4) The Pension Protection Act of 2006 defines small business as one with 500 or less employees. The DB(k) plans are also easier to initiate than plans prior to the new law according to Kiplinger.(3)

• Tax deferred income

As with the 401(k), contributions made to a DB(k) fund can be subtracted from taxable income making that income tax deferred in effect.(4) As with all tax deferred financial instruments, a presumption is the retiree will be in a lower tax bracket during retirement and that not paying taxes up front will lead to a greater tax savings and higher income had the contributions not be made.

• Matching requirement

Another benefit of the DB(k) retirement fund are the matching contributions. Provided that the employee matches no more than 4% of the employees total income, that employer must match up to 50% of the employees contributions.(4) For example, if Catherine contributes $250 per month to her DB(k) plan, her employer must match up to $125.00 per month provided that this $125 does not exceed 4% of Catherine's income.

• Supplements Social Security Income

When income from DB(k) retirement funds are received, this income can be received in addition to social security income. Thus, the DB(k) fund, like 401(k) and Individual Retirement Accounts can be received in addition to social security thereby supplementing the individuals retirement income. The DB(k) plan benefits employees who receive annual pay raises in particular because the pension payments are based on a percentage of the employees highest salary.(4)

• Can be rolled over

DB(k) funds can also be directly rolled over into a Roth IRA and other retirement accounts.(2) This allows the employee to retain contributions and matched funds after leaving an employer without having to pay an early withdrawal penalty. However, tax must be paid on the contributions in order for the rolled over funds to qualify as post-tax contributions into the Roth account.

The Pension Protection Act of 2006 requires employees to work for a small business for at least 3 years in order to be eligible for 'nonforfeitable' right to the funds within the DB(k) fund. DB(k) retirement plan also provides a new option to employers seeking alternatives to the Simplified Employee Pension Plan (SEP IRA) and the 401(k) plan.

Sources:

1. http://bit.ly/aZN6D5 (Library of Congress)
2. http://bit.ly/cOeBcu (U.S. Department of Labor)
3. http://bit.ly/gMUYr (Kiplinger)
4. http://bit.ly/97L7Vt (Pension Rights Center)
5. http://bit.ly/c2BqMa (Cornell University Law School)