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."