Understanding Defined Benefit Plans: A Retirement Strategy Worth Considering in 2024

As tax professionals and financial advisors aim to offer comprehensive retirement solutions, defined benefit pension plans stand out as an often overlooked but highly effective strategy. In an era where most firms gravitate toward defined contribution plans (such as 401(k)s), there is value in reexamining the advantages of defined benefit plans, particularly for small business clients or high-net-worth individuals. Defined benefit plans guarantee a steady income during retirement, offering a level of security unmatched by more volatile, market-driven retirement accounts.

What Are Defined Benefit Plans?

Defined benefit plans promise a fixed retirement payout, calculated based on salary history, years of service, and age at retirement. This contrasts with defined contribution plans, which depend on employee and employer contributions and market performance. With defined benefit plans, the employer bears the investment risk, ensuring the retiree receives a predetermined payout regardless of the investment's performance over time.

The appeal of defined benefit plans lies in the certainty they offer. Employees can plan around a fixed retirement income, making these plans attractive for those seeking stability and predictability. In 2024, despite the rising popularity of defined contribution plans, defined benefit plans remain an excellent option for businesses seeking to reward long-serving employees with generous retirement benefits​.

Benefits of Defined Benefit Plans Over Defined Contribution Plans

For employers, a defined benefit pension plan can help attract and retain top talent, particularly in industries where loyalty and long service are highly valued. Furthermore, these plans can be structured to allow significant employer contributions, making them a valuable tool for high-income professionals who need to maximize retirement savings within IRS limits​.

1. Larger Contribution Limits: Defined benefit plans allow for significantly larger contributions compared to defined contribution plans. In 2024, the IRS increased the annual benefit limit for defined benefit plans to $275,000, making it an attractive option for business owners and key employees looking to save for retirement on a tax-deferred basis​.
   
   
2. Employer-Funded Security: Unlike defined contribution plans, where employees shoulder the investment risk, defined benefit pension plans provide retirement income that is guaranteed and typically adjusted for inflation. This can be a critical selling point for professionals concerned about market volatility.
   
   
3. Tax Advantages: Defined benefit plans allow employers to make significant tax-deductible contributions, which is a key advantage for businesses seeking to reduce taxable income while securing retirement benefits for their staff​. Excess contributions can also help reduce Pension Benefit Guaranty Corporation (PBGC) premiums and ensure long-term plan sustainability.

Potential Downsides and Risks to Consider

While defined benefit plans offer numerous advantages, there are also considerations that employers should weigh before adopting them. These plans often require more funding discipline and financial management compared to defined contribution plans. For example:

1. Funding Obligations: Employers must consistently fund the defined benefit plan, even in years of poor business performance. This can be challenging for smaller firms that may experience fluctuating revenues​.
   
   
2. Complex Administration: Managing a defined benefit pension plan requires regular actuarial assessments to ensure the plan remains adequately funded. Employers must also navigate complex IRS regulations regarding minimum contributions and potential penalties for underfunding​.

Is a Defined Benefit Plan the Right Fit for Your Clients?

Defined benefit plans are an especially effective tool for small business owners, partners in professional services firms, and high-income professionals who want to maximize their retirement contributions. For many accountants and tax professionals, advising clients on the implementation of a defined benefit plan can offer high-value service that sets them apart from competitors.

Additionally, as tax planning becomes increasingly integral to retirement strategy, products like TaxPlanIQ can help advisors identify the right retirement options for their clients. TaxPlanIQ simplifies the creation of tax-advantaged strategies by allowing advisors to input client data and receive curated tax-saving strategies quickly. This functionality is especially useful for integrating defined benefit plans into a broader financial plan​.

Future Considerations for Defined Benefit Plans in 2024 and Beyond

Looking forward, defined benefit plans continue to be an excellent option for employers who want to provide secure retirement benefits. However, these plans are not without challenges, including potential funding shortfalls if market conditions change, or if the employer underestimates future liabilities. It is essential to have an adaptable contribution strategy and consider alternative plan designs, such as hybrid models that combine the best of defined benefit and defined contribution plans​.

Employers should also keep an eye on regulatory changes that could impact defined benefit plan funding requirements or reporting obligations. For example, the SECURE 2.0 Act has introduced new provisions that could affect the landscape for these plans, including changes to required minimum distributions (RMDs) and the treatment of catch-up contributions​.

Leveraging Technology to Optimize Retirement Planning

Incorporating defined benefit plans into a client’s retirement strategy can be an excellent way to differentiate your tax and accounting firm. Tools like TaxPlanIQ allow professionals to effortlessly design custom retirement plans tailored to each client's specific financial situation. By using this software, advisors can show clients exactly how much they can save with a defined benefit plan and other tax-efficient strategies.

For those looking to expand their advisory services, integrating TaxPlanIQ into your practice is a smart move. The software’s user-friendly interface and ability to generate detailed tax-saving reports can help streamline the planning process, freeing up time to focus on higher-value tasks. You can also schedule a free demo of TaxPlanIQ to explore how it can help you provide the best possible advice to your clients.

A Forward-Looking Opportunity for Growth

As we move through 2024, defined benefit plans remain a robust solution for businesses seeking to provide their employees with reliable retirement income. By offering clients a mix of defined benefit and defined contribution plan options, tax professionals can help them achieve a more secure financial future. For firms looking to expand into retirement advisory services, the defined benefit plan represents a compelling opportunity that can deliver high-value outcomes for clients while strengthening the firm’s service portfolio.