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.