Competition for qualified employees is fierce, but as a small business owner, you can attract them with a defined-benefit plan. A defined-benefit plan is a type of retirement plan you can offer employees in which you typically contribute money to the employees’ accounts but the employees do not. In some cases, defined-benefit plans may ask the employee to a small amount. These plans are different than defined-contribution plans in which the employee deposits money into their account and the employer may offer a match.
The benefits that an employee receives at retirement from a defined-benefit plan are usually based on the length of the employee’s employment at the company and their salary history. Just like any other retirement plan, there are rules on when and how an employee can access their benefits. These plans are known as defined-benefit plans because there is a formula involved that calculates the employer’s contributions to each employee’s account over time.
Money in the overall plan is usually invested in typical stock and bond investments, so the plan is exposed to market fluctuations. This means that over time as employees begin to withdraw benefits, the amount owed to them may be higher than the amount in the overall plan. This risk of being underfunded is on your shoulders, and you’d have to make up the difference with a deposit from the company’s earnings. The reverse can happen, as well. If the plan is overfunded due to great market performance, the company keeps the difference. Employees aren’t owed any more money than what the plan’s formula states is owed to them. Beyond this major pro and con, another benefit to employers is that there could be significant tax benefits depending on how the plan is set up.
Defined-benefit plans are a unique type of retirement plan you can use to attract more qualified employees. There are pros and cons to the approach, so before setting one up at your business, have a chat with a retirement planning professional.