Benefits & ERISA Law

Maybe What We Need is a Deregulated Individual Defined Benefit Plan

By Suzanne Wynn

A few years ago, there was a lot of buzz about Congress creating some type of defined contribution plan for employees whose employer did not sponsor a plan. The idea was that if the employer was not sponsoring a qualified plan, the employee could create their own plan and contribute to their retirement accounts as a higher rate than is currently permitted by Individual Retirement Accounts (IRAs).

A recent article by Scott Burns in the Boston Globe has re-ignited this discussion among a bunch of my pension geek friends. The article was titled “Defined-benefit pension is a huge contributor to financial security in retirement”, and discussed a recent study by Ernst & Young LLP about financial security in retirement. One of the highlights of the article is the conclusion that households with retirement funds coming from a defined benefit plan are less likely to outlive their savings than households without retirement funds coming from a defined benefit plan.

While nothing about that conclusion is groundbreaking news to pension geeks, it does bring about some interesting discussions. Retirees with retirement funds coming from defined benefit plans are better off financially. The baby boomer generation is hitting retirement age. Defined benefit plan sponsorship is rapidly declining, in part because of number of law changes made by Congress and regulatory changes made by the IRS, Dept. of Labor and PBGC in the last 15 years which have increased the cost of creating and maintaining a defined benefit plan.

One of the suggestions in the article was for workers to convert some of their retirement savings into a lifetime annuity. I think this misses the point. In 2008, the maximum annual benefit for defined benefit plans was $185,000 while the maximum annual contribution for defined contribution plans was $46,000. Of that $46,000 maximum annual contribution limit for defined contribution plans, the maximum elective deferral limit for 2008 is $15,500.

For an individual whose employer does not sponsor a qualified plan, maybe the question should be how can Congress, the IRS, the DOL and the PBGC work together to create an attractive defined benefit plan, not whether an individual should be permitted to create and maintain a defined contribution plan. Reduced regulation for defined benefit plans with one participant might be a good place to start.

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Full post as published by Pension Protection Act Blog on September 08, 2008 (boomark / email).