While defined benefit plans are now almost extinct in the large corporate space, they’re alive and kicking in America’s small business world, according to Karen Shapiro, co-founder and CEO of San Mateo, California-based Dedicated Defined Benefits Services, where Shapiro says they make perfect sense.
Dedicated DB, as the company is known, offers small business defined benefit plans that, Shapiro says, are among the most powerful tax-efficient retirement programs available today to high-income professionals and small businesses. Defined benefit plans allow the highest annual contributions to a qualified retirement plan, averaging more than $140,000 for new plans opened in 2006, according to Dedicated DB. With an average life of 8.2 years, each account could total over $1 million in assets and then be rolled into a 401(k) upon termination.
Dedicated DB’s end-to-end solution is specially geared toward Baby Boomer businesses that are made up of one to five persons, and to high-income Americans who want the highest allowable IRS deduction on earned income and retirement contributions. “This plan allows someone to contribute as much as they want on a annual basis and it is a deduction from their business income, which means the money doesn’t go [to paying] taxes, it goes into their savings,” Shapiro says. “People who follow our plan are looking at it as both a tax strategy and a retirement strategy.”
Unlike defined contributions plans, where there is a maximum amount an individual can contribute on an annual basis, the defined benefit plan such as the one proposed by Dedicated DB has no limit. An annual input calculation is done depending on what a person is earning today and what they would like to earn in retirement.
Of course, contributing large amounts on an annual basis means that this kind of defined benefit plan calls for a great deal of commitment on the part of an individual or a business for a period of three to five years. However, Dedicated DB does offer some flexibility in that it allows clients to put some of their savings into a 401(k) plan if they wish. “If someone’s opening a defined benefit plan with us, we will open a 401(k) plan for them if they want,” Shapiro says. “People might feel uncomfortable if they have to commit high amounts to a defined benefit plan every year, so instead they can put some into a 401(k). Likewise, if they want to go above what they have commited to putting into their defined benefit plan, they can put that into a 401(k) plan.”