A defined benefit plan is great when a business has many older employees. It is a retirement plan sponsored by employers. With this plan, employees’ benefits are obtained by considering factors like employment history and salary.
The employer is responsible for the management of the plan. Most choose to hire investment managers to take care of it. Here are a few instances when defined business plans may be good ideas for small business owners.
1. Less Risk for Employees
This investment doesn’t require employees to take too much risk as most of it falls on the employer. Since employees don’t need to make any contributions to the plan, they don’t incur any costs. When your business is trying to lower the risk for its employees, defined benefit plans are great.
Pensions will automatically give your employees monthly payments for life. Beneficiaries can also receive them without having to make difficult investment decisions or buying annuity contracts. They will continue to receive a substantial income without having to deal with huge lump sums.
2. Maximizing Income for Employees
A defined benefit plan is the only option for providing employees and their spouses with income that meets their living standards when combined with Social Security. Income replacement ratios are used to measure post-retirement income. While 401 (k) plans are great, most of them do not compare to the benefits of defined benefit plans. This is because they don’t fully take advantage of the maximum contribution levels.
Many people retire believing that they have a lot of money only to be hurt by imperfect financial markets. People can lose up to 50 percent of their saved money. If you are a small business trying to ensure that your employees get the most from their retirement money, defined benefit plans are much better options.
3. Recruiting New Employees
Top employees are always looking for opportunities to work with companies that offer unique benefits. If they have the assurance of a good retirement income, they are likely to stick with your business. Small businesses looking to build the quality of their workforce and reduce employee turnover will benefit from this plan. Employees realize that they can only get part of their benefits if they leave your business too early. Depending on when they leave, they may not get anything at all.
Defined benefit plans offer flexibility in payouts and retirement dates. Most options allow you to go on early retirement after 55. Even though your retirement benefits may drop significantly, you can get a lot of your time back. Getting up to ten years back may ultimately be more valuable than the lost income. The payouts are flexible as well. You often get the opportunity to integrate your plan with OAS and CPP hence promoting tax efficiency. Consider giving your employees this plan to enhance flexibility.
5. Cost of Living Adjustments
This is an additional benefit that some businesses may choose to offer their employees. It covers employees against the effects of inflation over the years. Retirement plans that consider the effects of inflation are hard to beat. $50,000 today is very different from $50,000 in 15 years.
6. Income Splitting
After age 55, you and your spouse can split your pensionable income. Companies looking to offer this perk should consider offering defined benefit plans. Splitting income can give employees and their partners a considerable tax advantage.
Company pension plans are unique job perks. However, many small businesses don’t offer them. Defined benefit plans are some of your best options. Unlike in the past, where only big companies could offer these plans, many small businesses can now offer them. They are great when you need to provide flexibility and maximize employees’ income.