Some clients and advisors now can contribute $100,000 plus to these plans.

You know those 40-something and older individuals who have woefully undersaved for retirement? Financial advisors now have what may seem like an unlikely tool to help some of them catch up fast and defer thousands in taxes.

The tool-a defined benefit plan-allows some high-income small business owners who usually are 45 or older to stash more than $100,000 annually and deduct the contributions on their income tax returns.

That compares with a maximum annual contribution in 2004 of $41,000 ($44,000 for persons 50 and over) to 401(k) plans. The maximum contribution includes a combination of $13,000 ($16,000 for 50 and over) in employee contributions and the rest contributed by the employer.

Recent tax law changes and new one-stop shopping programs offered by financial services companies have made defined benefit plans more attractive and easier to implement and maintain for small businesses.

High-income business owners employing only themselves may benefit the most from the plans. That's because they can put away large amounts for themselves without having to make contributions for other employees. Still, the new packaged programs are cost-efficient and simple enough to appeal to small businesses with as many as five employees, observers say.

Many financial services companies-among them Pioneer Investments, The Hartford Financial Services Group and UBS AG-are offering the programs by partnering with Metavante Corp., based in Milwaukee. The companies provide investment choices while Metavante provides actuarial and administrative services.

Metavante's services typically cost $1,500 annually plus $100 per participant. There's also a one-time setup fee of $1,200 and $50 per participant. Chip Swearngan, Metavante's director of investor and public relations, says seven firms currently are marketing its OnePersonPlus plan-introduced in October 2002 for businesses with one to five employees-and it is continuing to sign up more institutions.

Although firms like UBS and The Hartford have offered defined benefit plans for many years, they believe these new packaged programs, only available through financial advisors, will better serve a niche-highly compensated small business owners-and bring in new business.

"Metavante partnered with a consulting firm that just really saw the need for these small defined benefit plans, and they put together a Web site for financial advisors and went around and said, 'Here's the program.' We realized it would make it so much easier and partnered with them," says Joanne Carter, UBS' corporate vice president of retirement consulting services.

Other financial services companies also offer services to help advisors set up defined benefit plans for small business clients. For example, Charles Schwab & Co. offers The Schwab Personal Defined Benefit Plan, which allows advisors to establish plans for clients who are high-earning, self-employed professionals nearing retirement, able to contribute $60,000 or more per year and have one or no employees.

Schwab Retirement Plan Services (SRPS) provides administrative, recordkeeping and actuarial support, and the advisor manages the assets. For a single-person plan, SRPS generally charges a $750 setup fee and $750 for annual recordkeeping/reporting. For a one-employee plan, SRPS generally charges a $1,250 setup fee and $1,600 for annual recordkeeping/reporting.

Of course, financial advisors who want to set up defined benefit plans for themselves or their clients don't need to use a packaged plan. David Drucker, a financial advisor and freelance writer in Albuquerque, N.M., says he started his own plan about two years ago after selling most of his financial planning practice. "I had the opportunity to put away a lot of funds, much more than could be put away in a 401(k) plan, and I knew a defined benefit plan would be the way to do it," he says.

Drucker adds he paid about $3,000 in attorney and actuarial fees to set up the plan, and it costs about $1,000 a year to maintain. He says he's been making contributions of about $100,000 a year.

One-stop shopping plans may be more appealing to many people though, particularly if they are cheaper and easier to use, Drucker says. However, the expenses charged on the investments offered in these plans and the range of investments available also need to be considered, Drucker adds.

Although defined benefit plans may again be attractive for some small businesses, no one expects as many workers to be covered by them as they were 20 years ago. "I don't think there is anybody who doesn't think defined benefit plans have gone the way of the dodo bird," says Jodie Hale, vice president of retirement plans marketing at Pioneer Investments, which recently introduced the Uni-DB Plan.

According to the Pension Benefit Guaranty Corp. (PBGC), the U.S. government agency that insures defined benefit pension plans, the number of single-employer defined benefit pension plans plummeted from an all-time high of 112,000 in 1985 to 29,500 last year. The decline, it adds, primarily reflects a large number of terminations among small plans. And although the total number of participants that PBGC covers has grown in these and multi-employer plans (those established under collective bargaining agreements covering two or more unrelated employers), the percentage that are active workers dropped from more than 75% in 1980 to about 50% in 2001.

Hale says the drop can be attributed to a few reasons. Defined benefit plan incentives were taken away from small businesses, but plan expenses increased. And during the Reagan years, defined contribution plans, such as the 401(k), were introduced and grew rapidly in popularity as companies found them easier to administer and cheaper to maintain because, among other things, they made the worker rather than the employer responsible for contributions.

By the mid- to late 1990s, not many companies were paying attention to defined benefit plans, especially for very small businesses, Hale says. That began to change in 1999, when the Internal Revenue Service clarified part of the Small Business Job Protection Act of 1996 that repealed section 415(e) of the IRS Code. The repeal became effective in 2000. The section had limited contributions and benefits for individuals in a defined benefit plan if they also participated in a defined contribution plan maintained by the same employer.

Also, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) raised the limit on the annual benefit from a defined benefit plan, now at $165,000 for 2004. Annual earned compensation that can be considered in figuring out benefits was raised this year to $205,000, and that number will likely rise in the future because of cost-of-living adjustments. Also, EGTRRA lowered the retirement age for full benefits to 62 from 65.

Charles DiVencenzo, The Hartford's vice president and director of advanced product marketing, says aging baby boomers who haven't saved enough for retirement are good candidates for the plans. "It's a perfect fit for individuals 45 to 60 in their peak earning years who are consultants, doctors, lawyers and other professionals who want to maximize their tax savings," he says.

The plans also may work for a small business owner who makes, say $60,000 a year, and can contribute all that income annually to the plan because

his or her spouse makes a larger salary on which they can live comfortably, observers say.

Brad Wear, a manager for Portland, Ore.-based broker Strand, Atkinson, Williams & York, notes his firm has begun marketing Pioneer's plan and thinks it holds a lot of potential. Pioneer's Web site makes it very easy for advisors to set up the plans, which work for many of Strand, Atkinson's best clients, he says.

"By the end of this year, when more business people get to know what their fiscal year is going to be like in terms of profit, I think you'll see quite a bit of interest," says advisor Daniel Lamaute, CEO of Lamaute Capital Inc., Arlington, Va.

Peter Gellman, principal of Palmerston Group Advisors, a fee-only firm in Highland Park, N.J., says a big plus with plan distributions is that they can be rolled into an IRA. "The big general rule is you can save a lot more and turn it over into an IRA. That is the real beauty of this type of plan," he says.

However, he and everyone else interviewed stressed clients have a lot to consider before starting defined benefit plans. For one, businesses need to commit to making steady contributions for at least three to five years. Every year, an actuary determines the amount of contributions needed to reach the benefit goal for the plan. Contributions are based on many factors that include age, the average of the three highest years of income, planned retirement age, balances accumulated through contributions and investment performance.

A business owner should be able to contribute more than $41,000 annually. A firm with a highly compensated owner and younger, lower-paid employees will likely need to contribute less than one that has higher-paid workers.

Lamaute, for one, thinks the plans will work for a handful of his clients. "Most of our clients need the money to live, to run their business," he says. "For most of them, the $41,000 contribution for their 401(k) is just enough."