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January 01, 2005 at 02:00 AM
We’ve all heard of a defined benefit plan and defined contribution plans like the 401(k). But what’s a DB(k)? Rep. Rob Andrews (D-NJ) introduced his pension reform bill on November 19, “The Retirement Enhancement Revenue Act of 2004,” which included a provision calling for the creation of a hybrid combination of a traditional DB plan and a 401(k).
The Principal Financial Group and the American Society of Pension Professionals & Actuaries (ASPPA) are the brains behind the DB(k). Rep. Andrews–the ranking Democrat on the House Education and Workforce’s Employer-Employee Relations Subcommittee–has been helping both groups develop the DB(k) concept. Larry Zimpleman, president of Retirement and Investor Services at The Principal, says the DB(k) “is essentially a defined benefit plan with 401(k) features but without the complexities of a traditional pension plan.”
The savings rate among Americans is at an all-time low, and the “vast majority of workers are employed by small businesses,” which lack the array of retirement savings programs available to larger firms, says Stuart Brahs, VP of federal government relations at The Principal. A recent study by the company found that less than 40% of small firms, those with 10 to 1,500 workers, offer DB plans, Brahs says. The DB(k) is designed to “encourage small- and medium-sized firms to provide both the stability of a DB plan and the flexibility of a DC plan,” he adds.
Small- and medium-sized firms avoid setting up DB plans because they’re costly to maintain and administer, in part, Brahs says, because of the annual premium that has to be paid to the Pension Benefit Guaranty Corp. (PBGC). DB plans are also complicated to structure. But the DB(k) is designed to “provide a slimmed-down arrangement whereby the cost and the administrative burden are kept at a minimum,” Brahs explains. The DB(k) would save money because small firms would only need one plan document and one Form 5500–the annual reporting document that’s filed with the government, Brahs says. By combining both plans in a DB(k), only one actuarial exam would need to be performed each year instead of two.
