Establishing a defined benefit pension plan may provide substantial tax advantages for highly profitable smaller employers (e.g., a professional organization), where the key employee(s) is older than other employees. However, adopting a defined benefit pension plan should be done carefully and deliberatively, since significant assets are involved, pension laws are complex, mistakes can be costly and specialized pension actuarial skills may be difficult to obtain.
Unfortunately, it is difficult for the employer to establish a defined benefit pension plan without using independent actuarial expertise due to the following:
1. Since service providers receive fees for performing the annual work required on defined benefit plans and may also receive income from plan investments, it is important to ensure they provide complete objectivity.This should include an analysis of the advantages and disadvantages of establishing a defined benefit pension plan for your company and whether other types of plans (or even no plan) may be more appropriate.
2. Pension regulations have become increasingly complex. In addition there are a relatively small number of pension plan actuaries available to manage the increasing complexities.
3. Since mistakes in a defined benefit retirement plan may result in serious penalties, it is important to prevent them, wherever possible. However, because specialized knowledge and actuarial skills are needed, it may be difficult for the employer to prevent or detect any mistakes made by the service provider. Therefore, an independent actuary should review the plan when it is set up.
4. The employer should be willing to obtain a basic understanding of defined benefit plans, the work involved, the legal requirements that must be met and the information that must be furnished on a timely basis to its service provider. Many small employers may feel they are too busy to do this personally. Furthermore it is difficult for small organizations to assign this to another employee, since the employer may consider the information requested is confidential or too difficult for another employee to assemble.
5. Communication between the actuary and employer is essential; however, actuaries are highly skilled technicians and may prefer providing their results in technical terms..
If you are considering adopting a defined benefit pension program and want to help ensure it is needed and serviced properly, please call us at 718-793-9885 or please complete our Defined Benefit Pension Plan Questionnaire. We will show you how you can accomplish this and how to make the best decisions in establishing it and avoiding future problems; it is important to do this since the amount eventually contained in the plan may be quite substantial.