Pension picking: help your employees boost retirement savings. (Management Advice).

Business owners who want to offer a retirement plan to their employees might want to pay attention to reruns of That '70s Show. "Trustee-directed defined contribution plans became popular in the 1970s" says Garry W. Bridgeman, a certified investment management analyst (C.I.M.A.), and First vice president, investments, with Merrill Lynch in Atlanta. "They're not used as widely now as participant-directed 401(k) plans, yet they have certain advantages."

To understand those advantages it's necessary to distinguish between the two main categories of employer-sponsored retirement plans:

* Defined benefit (DB) plans. These are traditional pension plans where the employer promises to pay retirees a certain amount of money in the future, based on annual compensation and years of service. DB plans generally work best for employees who put in 20 years or more with the same employer. Employees who change jobs in mid-career may not get much, if anything, from a DB plan, so such plans may not help attract and retain young workers today.

* Defined contribution (DC) plans. Here, no specific pension is promised. Instead, money is contributed to each worker's account and the ultimate payoff depends on how well that money was invested.

Recently popular 401(k) plans fall into the DC category. These plans, however require employees to fund most of their retirement themselves. Those who don't, participate will not build up a nest egg. Moreover, not every employee will invest prudently. Some will be too conservative and wind up with a small retirement fund, while others will be too aggressive and lose savings, for example, those who loaded up on overpriced tech stocks at the peak of the last bull market.

"Another form of defined contribution plan might be preferable," says Bridgeman. "Studies indicate that trustee-directed defined contribution plans have outperformed participant-directed plans by three to four percentage points a year." In fact, a trustee-directed DC plan, such as a profit sharing plan, may offer the best of both worlds. Like a DB plan, money is contributed by the employer. Unlike a DB plan, though, there may be considerable flexibility in its funding. In a bad year, an employer might be able to cut back or skip contributions altogether.

As the name suggests, investment decisions are centralized in a trustee-directed DB plan. The trustee (generally the employer) makes the decisions or hires a professional to do so. Often, a formal investment policy statement is drawn up and an asset allocation is formulated based upon the demographic of the plan's participants (e.g., the older the plan participants, the more conservative the asset allocation). Long-term, such a strategy is intended to help reach the investment objective and reduce overall plan volatility.

Small business owners should first decide if it's practical to offer any retirement plan at all. The main thing for an employer to consider before offering a retirement plan to employees is not the number of employees or the company's revenues, but the stability of the company's revenues, according to Richard Newman, a CPA and founder of the Institute for Retirement and Estate Planning. "You shouldn't offer a retirement plan just because you have had one good year," he points out. "If you make a $5,000 retirement plan contribution to an employee's account one year, for example, and then cut back. that employee likely will be upset. If all of your employees are upset, you're in trouble." If revenues are stable and business owners can make annual contributions, such a plan will help recruit and retain employees, says Newman.

The U.S. Department of Labor offers two brochures for small business owners that can help them decide on the right retirement plan: Simplified Employee Pensions (SEPs)--What Small Businesses Need to Know and Savings Incentive Match Plans for Employees of Small Employers (SIMPLE)--A Small Business Retirement Savings Advantage. For a copy, contact the publication hotline at 800-998-7542 or go to www.dol.gov/ pwba/pubs/savings.htm.