Running the Fund:The DB(k)'s Day Arrives

Illustration by Christopher Silas Neal

After years of talk, the DB(k) finally became available to small employers on January 1, but not many companies appear likely to adopt the plan-design option this year.

In 2006, the Pension Protection Act authorized the DB(k) for companies with 500 or fewer workers and outlined a safe harbor, following the DB(k) concept’s development by the American Society of Pension Professionals & Actuaries (ASPPA) and Principal Financial Group. It seeks to give workers at small companies more retirement security by making it less of a hassle for their employers to sponsor both a defined benefit plan and a defined contribution plan, and giving workers an easy way to put aside money.

“We were seeing workers who were not saving enough, and the number of defined benefit plans declining,” Principal Vice President Joni Tibbetts says. “This is a simple way to establish a plan and encourage employees to participate in it.” The 500-worker limit may have been established to limit the cost of the proposal, one source says.

A safe harbor DB(k) combines two plan designs: a traditional pension plan with a guaranteed lifetime payment providing an employee benefits equal to 1% of his or her final average compensation per year of service, up to 20 years, and vesting after three years; and automatic enrollment in a 401(k) plan that defers 4% of a participant’s salary, with a 50% employer match on that, plus immediate vesting. (The match applies to the first 4%, but a participant can opt to defer more or less.) An employer can set up the pension-plan portion using either the traditional defined benefit approach or a cash balance approach providing minimum pay credits of 2% for workers 30 or under, 4% for ages 31 to 40, 6% for ages 41 to 50, and 8% for workers 50 or older.

“From an employee perspective, ideally everybody would have a DB and a DC plan, and it does wrap those up together, with some decent minimum benefits provided,” says Judy Miller, Chief of Actuarial Issues at ASPPA in Arlington, Virginia. Since the cost of maintaining two plans instead of one is a more significant portion of overall expenses for smaller plans than larger ones, she says, employers at the smaller end of the size range allowed probably will find more meaningful cost savings.

Making It Easier

The DB(k) concept aims “to create a design opportunity that includes more than just the typical 401(k) plan,” says David Certner, AARP Legislative Policy Director in Washington. “Certainly it could be a good option for employees. The base guarantee would be helpful for people who are there for long periods of time.” AARP finds that Americans’ financial insecurity remains high, despite the partial market bounceback, he says. “A lot of older workers especially are concerned,” he says.  Forty-one percent of Americans age 45 and older surveyed by AARP say they lack confidence they will have enough money to pay for living and medical expenses in retirement, according to a September 2009 release.