Friday, December 4, 2009

Will the DB(k) Plan Replace the 401k?

eRollover Blog
 By Mike Rowan, 11/18/2009

Meet the DB(k) Retirement Plan

… One retirement plan that will become available in 2010 offers a 401k alongside a guaranteed pension-like retirement benefit.
This new plan is called the DB(k) and it has its beginning in tax code from 2006. The tax law allows companies with fewer than 500 workers to start the DB(k) after Jan. 1, 2010, and many advocates would like to see it available to everyone. …

Questions and answers about details of the new DB(k) Plan:

Q: What are the features of the DB(k) Plan?

A: There are two parts to the new plan:
Employers will be required to establish a pension fund sufficient to pay  up to 20 percent of that individual’s average annual salary received during the last few years in the workforce. Once the employee has spent three years with a company, their benefits will become fully vested.
… The balance in this retirement account would be paid at retirement like a traditional type of pension plan. …
At the same time, the employer will be required to take 4 percent of a worker’s salary and put it in a 401k plan. The company must match at least 50 percent of the contribution, and would be immediately vested. Upon reaching retirement, the worker could withdraw additional funds from their 401k account as needed.
Employees can opt out of their contribution or they could chose to set aside less.
Q: Why create a hybrid type of pension/401k plan?
A: More companies are dropping traditional pension plans and employees with a 401k often do not save enough, leaving workers woefully unprepared financially for retirement.
The concept behind the DB(k) allows employers to provide the benefits of a combined plan without the paperwork, regulatory requirements, and elevated costs that would come with operating a pension and 401k plan separately. As a result, in theory employees get a more secure retirement with a guaranteed pension alongside their own 401k savings.
Q: What types of companies would be a good fit for a DB(k) and why?
A: Companies must have at least two and no more than 500 workers to implement a DB(k) plan. It is anticipated that DB(k) retirement plans will be offered by companies looking for professional workers in competitive fields. The Employer completely funds the pension and provides matching contributions in the 401k plan
Q: When will we start seeing DB(k) plans in the marketplace?
A: The DB(k) plan is authorized by the Pension Protection Act of 2006, which gives permission for companies to begin offering the plans starting on Jan. 1 of 2010. However, the IRS and the U.S. Treasury Department only recently began developing rules for the DB(k), so it may be delayed until later in the year. …

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