As a fee-only advisory firm with $700 million in assets under management, Altfest has no inherent stake in whether a client chooses a CBP or a traditional DC retirement plan. Prendergast is up front in describing both the benefits and drawbacks to the plans. With a wide variety of clientele, Prendergast admits the choice is not to be taken lightly. It can involve a more focused and costly approach, including having administrators and actuaries do financial forecasting as well as examinations of a company's cash flow, long-term financial prospects, employee demographics, the age of employees and the hiring of future employees, which could affect the plan. In general, companies should have strong cash flow and strong long-term prospects before considering a CBP, he notes.

But the overriding benefit is that a CBP can favor a business owner's own retirement planning. A properly set up plan allows for much greater annual contributions than a 401(k) or a related profit-sharing retirement plan. It allows for, say, a 50-year-old middle-aged entrepreneur to make dramatic increases in his retirement funding-funding he may have failed to make at an earlier age.

And the CBP needn't be an either/or proposition, Prendergast says. "These plans can be set up in conjunction with other plans." So not only can business owners help bring their own retirement plans up to speed, they can pass the CBP along as a benefit to their employees.

Make no mistake, though. CBPs are qualified retirement plans (which is what gives them their tax-deferred status and allows them to accumulate assets rapidly). That means they must meet certain IRS requirements for performance, payout and employee inclusion-all of which can leave employers on the hook if the plans underperform. This problem was largely responsible in the past for the failure of corporate DB plans and it is why some advisors tell businesses to stay away from them.

Leonard Witman, an attorney with Witman Stadtmauer of Florham Park, N.J., which specializes in employee benefits, has worked for years with 401(k)s and CBPs. His advice: Stay away from CBPs. The risks far outweigh the benefits.
Although Congress and the IRS changed the regulations for CBPs in 2006 and again last year in an attempt to make the plans more user-friendly, Witman says they can still be nightmares. "Some are wonderful, but some haven't turned out so well," he says.

Though CBPs are qualified plans, he emphasizes they are "not socially conscious plans. They're basically for the employer who wants to provide for his family." And an employer can often simply do this with a 401(k) plan, without needing a CBP.

Witman sees several problems with CBPs. First, they require a higher level of maintenance and oversight than a typical off-the-shelf 401(k), many of which are run by large, reputable organizations that take most of the headaches-be they legal, financial or administrative-off the table for the business owner.

Another problem is that while a CBP might be set up initially to work seamlessly, it needs to be watched each and every year as a company's employee demographics change. "You'd better have a really good third-party administrator and actuary working along with the plans. What can happen is it can really get screwed up as things change."

Another problem occurs because it's a fixed obligation to provide a benefit." By way of example, Witman notes that a number of CBPs were invested with Bernard Madoff and the employers are now on the hook for the amount stolen-despite the fact that they were cheated just like their employees.

There is also a potential problem with a CBP over-performing. That's because employees see how well the plan is doing over time and then are unhappy to discover that none of that overperformance accrues to them. Plenty of employers have been sued by unhappy retirees, Witman says.