When singer Peter Allen belted out “Everything old is new again,” was he referring to  retirement planning?

Probably not, but the “old” could have been defined-benefit retirement plans, and the “new” the uptick in excitement they are generating. That might surprise some, given the steady decline of such plans for more than a decade. According to the most recent statistics provided by the U.S. Department of Labor Employee Benefits Security Administration, published in a June 2013 report, the number of defined-benefit plans had dropped from about 180,000 in 1985 to fewer than 50,000 in 2011.

Despite the steep drop-off, however, financial advisors at Wells Fargo Advisors, Raymond James and other wealth management firms say that interest in such plans is climbing among one important sector: small business owners.

“They aren’t new, but I believe they have become very vogue because of expected changes in the tax laws,” says Robert H. Bosart, managing director of investments for the Bosart Investment Consulting Group, a part of Wells Fargo Advisors. Based in Birmingham, Mich., his nine-person team advises small to medium businesses and manages $1 billion in assets.

For Bosart’s business-owning clients, defined-benefit retirement plans allow them to sock away more pre-tax dollars than they could under a defined-contribution plan such as a 401(k). The idea of sheltering more income from taxes appeals to many, he says, who fear that federal tax rates will rise even in an improving economy.

The federal government limits annual pre-tax contributions to 401(k) and other qualified defined-contribution retirement plans to $17,500 for plan participants under the age of 50 and $22,500 for those who have reached that milestone. But the government has not set a maximum for the number of pre-tax dollars that may be added to a defined-benefit retirement plan each year. Instead, and with cash-balance defined-benefit plans in particular, maximum pre-tax contributions are calculated for each plan participant based on his or her age and earnings.

As a result, an older, highly compensated CEO, or practice-owning doctor or lawyer, can park more than $250,000 a year pre-tax into a defined-benefit account, even as the costs of such plans to their company or professional practice remain well below that of a 401(k).

How can that be? Cash-balance defined-benefit plans credit each participant’s account with a set percentage of his or her salary, plus a set interest rate applied to that balance. Upon retirement, participants receive a monthly income based on that formula. Age is a factor too, since the company’s contributions to the plan are weighted by age as well as salary. The younger and lower-paid the average participant, the lower the total contribution the company is required to make.


For the company owners who set their own salaries, a defined-benefit plan offers considerable advantages. If their employees are generally young and modestly compensated, the company can contribute generously to the accounts of its older, higher-paid employees, such as the owners, even as it pays out much less in aggregate compared with a defined-contribution plan. Yet the defined-benefit plan still meets government requirements for employee inclusion and contribution levels.

To illustrate how this works, Bosart cites a 10-doctor-owned practice with about 50 employees. The practice contributes around $250,000 annually into each physician-owner’s account in the group’s cash-balance defined-benefit plan, while paying out a total of less than $50,000 a year to maintain the level of federally mandated contributions for their employees.

Of the 90 retirement plans for 72 employers that Bosart’s group manages, about 20 are currently cash-balance defined-benefit retirement plans. But he expects that number to grow as the buzz over these plans among his clients continues to grow. “Just recently, over the last year and a half, there has been a ton of talk,” he says.

If deferring taxes and sheltering a larger portion of their income is the main draw for business owners considering these plans, simplified administration is another. Employer gripes over 401(k) administration have grown as federal regulators have increasingly insisted that plan sponsors educate their employee participants in financial and investment basics. In comparison, Bosart says, defined-benefit plans impose no such requirements on his business-owning clients. They simply require that a plan earns a reasonable rate of interest—typically at least that of U.S. Treasuries—and receives adequate funding to meet future obligations.

Defined-benefit plans offer the greatest advantages to business owners “when they are significantly older and making significantly more than their employees,” notes Sean Deviney, a retirement plan specialist and financial advisor at Provenance Wealth Advisors in Fort Lauderdale, Fla., whose team of 14 advisors manages more than $350 million in assets.

But Deviney says that for business owners to realize the benefits, they need to think long-term. That’s because the federal government has set three years as the minimum lifetime for a defined-benefit plan to qualify for the tax benefits. “Don’t think of this as a short-term tax shelter,” he warns.

At Raymond James-affiliated Cassandra Financial in Boynton Beach, Fla., John Cassandra specializes in structuring and managing retirement plans. “Up about 300 percent,” Cassandra says when asked about the number of inquiries he’s received this year compared to last from clients who are interested in starting a defined-benefit plan.

Cassandra, who has $250 million in assets under management, also warns about over enthusiasm for these plans. He cautions company owners to ensure that they have calculated what the growth in the employee roster will be in future years, because each new employee will add to a defined-benefit retirement plan’s costs. He tells his clients: “Solve for the maximum number; you can always dial back.”


Advisors might be less than sure about going in deep into the weeds with actuaries, which sounds like a requisite for structuring a cash-balance defined-benefit retirement plan. But those advisors, too, have an opportunity to offer clients alternatives to 401(k) plans. Some firms specialize in helping advisors structure cash-balance defined-benefit retirement plans for their clients and allow the advisors to continue to manage and earn revenues from the assets in the plan.

Rich Rausser is a senior vice president of client services at Pentegra, which manages more than 3,500 retirement plans with over $8 billion in retirement plan assets. Much of the company’s revenues come from large traditional defined-benefit pension plans for large corporations, the dinosaurs that have been declining in number for decades, he says. But Pentegra also markets its expertise to financial advisors who want to offer a defined-benefit retirement option to their company-owning clients.

“I was happy there has been a lot of interest in this type of solution lately,” says Rausser. “A financial advisor is going to need the type of expertise we have to design a plan–the actuaries in particular. There is a bit of an art to this. You have to be cognizant of the federal regulators. You need to know what the implications are for year after year. The last thing you want is where they are in over their heads and they want out of the plan by year two.”

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