The Next Generation 401k Plan Is On the Horizon For 2010

Beginning in 2010, businesses with fewer than 500 employees will be able to offer their employees a new retirement plan, called the DB(k).  The Kiplinger Business Resource Center offers a synopsis of the new plan, and forecasts that  it will quickly pick up steam as the economy recovers and the competition for good workers increases.

The DB(k) is an attractive new option for an employer sponsored retirement plan that provides an opportunity to provide a strong retirement plan with fewer hassles and less financial drain than a traditional pension plan, according to Joan Pryde, Kiplinger's Senior Tax Editor. The DB(k) combines a 401(k) savings plan with a small guaranteed income stream to offer a blended plan that offers the best components of a traditional pension and 401(k) plan.

The key elements of the plan include:

• A defined benefit equal to 1% of the final average pay for each year of the employee's service, up to 20 years.
• The minimum pension benefit is payable to employees who work 3 or more years for their employer.
• An automatic enrollment feature for the 401(K) portion, with 4% employee contributions automatically deducted unless the employee specifically opts out.
• An employer match of at least 50% of the employee 401(k) contributions, with a maximum required match of 2% of pay.

What's particularly exciting is that the DB(k) plan is EXEMPT from "top-heavy" or discrimination testing rules!  The administrative paperwork involved will be less than if a company offered a separate pension and 401(k) plan, says Martella Turner-Joseph, a pension actuary with Kiplinger.  Only one plan document and Form 5500 will be required.

Congress authorized the DB(k) as a component of the 2006 Pension Protection Act, with its original intention to fix a flaw in the current retirement system that focuses on 401(k) plans.  Only 50% of companies now offer pensions (as of 2006, according to a PBS Frontline special, "Can You Afford to Retire?)"  

The premise for creating this website and television special was that we boomers are headed for a shock as we hit retirement age.  We'll live longer but be shorter on income than our parents were due to the economic decline, vanishing pensions and reduced 401(k) account balances.

They conclude in the hour-long special that traditional retirement is a thing of the past that boomers won't enjoy in the same way that our parents' generation did.  Instead, we will be working well into retirement age due to financial needs and increased longevity. 

There's no doubt that we boomers will have a huge impact to health care, investment markets, societal impacts, etc. simply due to the huge size of our member population.  Only time will tell how boomers will weather their "golden years" and maintain their middle class standard of living. But the DB(k) offers promise to following generations to enable them to better plan for their own retirement.

Becky Regan is the founder and President of Regan HR, Inc.,a human resources consulting firm specializing in compensation consulting for California employers and purveyor of online HR products. A former Corporate Human Resources Director (10,000+ employees) with more than 25 years of HR work experience in many industries, her team works with private, public and non-profit clients.  Becky is passionate about designing HR programs and compensation plans that build organizations.

Flickr photo courtesy of Creative April

Comments

[laurie ruettimann]

Good overview! Thanks!

[Becky Regan]

Glad you liked it, Laurie!

[Doug Sayed]

Fascinating post Becky. This is new information to me. Maybe it will help stem the decline of the defined benefit (DB) concept, and increase worker security for the benefit of both employers and employees.

[Becky Regan]

I certainly hope so, Doug. With the tipping point for Social Security to become financially unsustainable on the horizon, other retirement planning vehicles are truly a necessity for future retirees.

[Barb Grinbergs]

What if a business with fewer than 500 employees offers this, but then the business grows to more than 500 employees?

[Becky Regan]

Barb,

My guess would be that the employer would qualify once they've met the 500 employee threshold. I'm sure the DB(k) will be ERISA regulated and I'm not an attorney, so consider my response as a valid answer. It's an educated guess....