Will the DB(k) Plan Replace the 401k?

By Mike Rowan, 11/18/2009

Meet the DB(k) Retirement Plan

The recent history of the 401k plan has cast doubt on whether the savings plan is the best way for workers to prepare for retirement. As a direct result, there are some possible alternatives coming that might just catch on in a big way. One retirement plan that will become available in 2010 offers a 401k alongside a guaranteed pension-like retirement benefit.

This new plan is called the DB(k) and it was has its beginning in tax code from 2006. The tax law allows companies with fewer than 500 workers to start the DB(k) after Jan. 1, 2010, and many advocates would like to see it available to everyone. Currently, only 40 percent of all workers even participate in an employer sponsored retirement plan.

Questions and answers about details of the new DB(k) Plan:

Q: What are the features of the DB(k) Plan?

A: There are two parts to the new plan:

Employers will be required to establish a pension fund sufficient to pay a up to 20 percent of that individual’s average annual salary received during the last few years in the workforce. Once the employee has spent three years with a company, their benefits will become fully vested.

Simply put, this means that they can take the money with them, even if they leave the company. The balance in this retirement account would be paid at retirement like a traditional type of pension plan. Plans like these are called defined benefit plans, which mean that they will receive a fixed income that can’t be outlived once they reach retirement. This term explains the DB part of the DB(k) name.

At the same time, the employer will be required to take 4 percent of a worker’s salary and put it in a 401k plan. The company must match at least 50 percent of the contribution, and would be immediately vested. Upon reaching retirement, the worker could withdraw additional funds from their 401k account as needed.

Employees can opt out of their contribution or they could chose to set aside less.

Q: Why create a hybrid type of pension/401k plan?

A: More companies are dropping traditional pension plans and employees with a 401k often do not save enough, leaving workers woefully unprepared financially for retirement.

The concept behind the DB(k) allows employers to provide the benefits of a combined plan without the paperwork, regulatory requirements, and elevated costs that would come with operating a pension and 401k plan separately. As a result, in theory employees get a more secure retirement with a guaranteed pension alongside their own 401k savings.

Q: What types of companies would be a good fit for a DB(k) and why?

A: Companies must have at least two and no more than 500 workers to implement a DB(k) plan. It is anticipated that DB(k) retirement plans will to be offered by companies looking for professional workers in competitive fields. The Employer completely funds the pension and provides matching contributions in the 401k plan

Q: When will we start seeing DB(k) plans in the marketplace?

A: The DB(k) plan is authorized by the Pension Protection Act of 2006, which gives permission for companies to begin offering the plans starting on Jan. 1 of 2010. However, the IRS and the U.S. Treasury Department only recently began developing rules for the DB(k), so it may be delayed until later in the year. Still, the retirement industry expects interest to increase once the economy gets better and competition for workers intensifies.

More details about the inner workings of DB(k) retirement plans will not be known until the IRS and Treasury officials publish the final rules, which could affect the number of companies interested in implementing the plans.