No Annuities
Businesses also need to make sure they’re cutting their owners’ tax bills enough to make up for pensions’ higher costs. Because of the complex rules, it can cost thousands of dollars to set up and then administer a defined-benefit plan. Kravitz estimates the doctor’s office above would be charged a one-time set-up fee of $5,500 and annual fees of $8,880.
Charges can be much higher for larger firms, though they can spread the costs over more partners or participants. Typically the money is invested conservatively, guaranteeing a particular rate of return, such as 4 percent a year.
For rank-and-file workers, the great appeal of a defined-benefit pension is that it can guarantee a certain level of income for life. Cash balance plans effectively offer the same thing, with rules requiring them to offer a way to convert pension balances into an income stream from an annuity. In practice, the wealthy participants in cash balance plans aren’t interested.
“Nobody ever takes an annuity,” said John Lowell, a partner and actuary at October Three Consulting. “Ultimately, they are a tax play more than they are a retirement plan play.”
This article was provided by Bloomberg News.