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Say hello to the DB(k).

For decades, as the number of traditional defined benefit pension plans has dwindled and defined contribution arrangements like 401(k) plans have become the preeminent retirement vehicles for many Americans, lawmakers and plan sponsors have sought ways to give employees the best of both worlds: the guaranteed accrual and income stream of a defined benefit plan with the transparency and portability of a 401(k) plan.

"Cash-balance plans," in which participant account balances are credited with a fixed rate of return and converted into a monthly benefit at retirement, have been the most prominent of these "hybrid" plans. Unfortunately, high-profile litigation several years ago surrounding some conversions from traditional to cash-balance plans limited their popular appeal.

Meanwhile, cash-balance plan sponsors only recently have received some guidance by the Treasury Department and IRS with respect to issues under the Pension Protection Act of 2006.

At press time, the agencies were expected to issue regulations before the end of 2009. Despite this uncertainty, cash balance plans remain a small spring of vitality in the defined benefit plan world.

Now there is a new hybrid plan in town. Beginning this month, the so-called "DB(k)"will be eligible officially for adoption. The DB(k), authorized by the PPA, takes a hybrid approach that emphasizes combination rather than integration. Under a DB(k), companies with between two and 500 workers may establish a pension fund that would pay employees a defined benefit equal to I percent of final average pay for each year of service up to 20 years. Alternatively, employers may use a cash-balance formula, under which contributions increase with age. These benefits are vested after three years and paid out in the form of an annuity.


Participants are also automatically enrolled (though they may opt out) to direct 4 percent of pre-tax pay into a defined contribution portion of the plan, with the employer matching at least 50 percent (up to 2 percent of the employee's pay). Workers can then draw upon the defined contribution account when they reach retirement age.

The DB(k) might be desirable for many small, competitive firms looking to attract top talent as well as companies looking to streamline their existing, separate defined benefit and defined contribution programs. As an added incentive, these plans will also be exempted from "top-heavy" rules, which are intended to preclude retirement plans from disproportionately benefiting highly compensated workers, but also add an enormous layer of complexity to plan operations.

There will be challenges to immediate, widespread adoption, however. DB(k) plans are subject to strict funding requirements--the same requirements that have handcuffed traditional defined benefit plan sponsors in this tumultuous economic climate and necessitated urgent, temporary relief measures. Furthermore, the Treasury Department and IRS are not expected to issue regulations governing these plans until later in the year.

On behalf of potential plan sponsors and in response to an official request for information, the American Benefits Council has communicated with the Obama administration on such issues as the application of qualified plan requirements, minimum benefits and vesting under a defined benefit plan, minimum contributions and vesting under an applicable defined contribution plan, nondiscrimination and top-heavy rules, automatic contribution issues and reporting and notice requirements.

If the DB(k) model works for the current small-company population, with minimal transition and conversion issues, it is possible that lawmakers will expand these plans to reach larger companies and populations. In a benefits environment where some academics and even the mainstream media has advocated for "retiring" the 401(k) system altogether, it is encouraging to see a program that seeks to build on what works.

The DB(k), authorized by the PPA, takes a hybrid approach that emphasizes combination rather than integration.

James A. Klein can be reached via e-mail at
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Title Annotation:BeYOND THE BELTWAY
Author:Klein, James A.
Publication:Benefits Selling
Date:Jan 1, 2010
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