{"id":2304,"date":"2023-06-15T16:46:43","date_gmt":"2023-06-15T16:46:43","guid":{"rendered":"https:\/\/www.amalgamatedbenefits.com\/amalgamated-employee-benefits-administrators\/?p=2304"},"modified":"2023-06-15T16:46:45","modified_gmt":"2023-06-15T16:46:45","slug":"best-practices-for-designing-and-administering-defined-benefit-plans","status":"publish","type":"post","link":"https:\/\/www.amalgamatedbenefits.com\/amalgamated-employee-benefits-administrators\/best-practices-for-designing-and-administering-defined-benefit-plans\/","title":{"rendered":"Best Practices for Designing and Administering Defined Benefit Plans"},"content":{"rendered":"

According to the Bureau of Labor Statistics, in March 2022, 15% of private industry workers and 86% of state and local government workers had access to defined benefit plans. How these types of retirement plans, commonly known as pensions, are designed and administered makes an important difference as to how well they will serve employees and their families during their retirement. Understanding and applying best practices is in the best interests of both employees and employers\/plan sponsors who must comply with two key federal laws \u2013 the Internal Revenue Code (i.e., Part 1 of Subchapter D of Chapter 1) and the Employee Retirement Income Security Act of 1974 (ERISA), as well as various other regulations. Failure to comply with these legal requirements can lead to significant penalties and the possibility of losing the tax-favored treatment of benefits provided under the defined contribution plan.<\/p>\n

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Establishing the Right Benefit Formula and Payment Forms<\/h3>\n

Designing the plan begins with determining the formula for the benefit to be paid; which is typically at an employee\u2019s normal retirement age or normal retirement date (i.e., the date on or after attaining normal retirement age). The formula can be a set dollar amount paid each month, for life, as of the employee\u2019s normal retirement age. Alternatively, it can be a monthly dollar amount multiplied by the employee\u2019s years of service; which is often used in collectively bargained plans. <\/p>\n

Other ways to establish the benefit formula include: to base the benefit on the employee\u2019s compensation over the years worked and provide a fixed percentage of that amount, often determined as a function of the years of service; or to provide a benefit based on the employee\u2019s compensation for the entire period he\/she was covered by the plan. Benefit payments can be in the form of a single life annuity, which is a fixed amount determined under the benefit formula for as long as the plan participant is alive. Another payment formula is for a certain period and life annuity for which the payment is the actuarial equivalent of the normal benefit and payable for the life of the participant. It guarantees a minimum number of years of payments.<\/p>\n

Administering the Defined Benefit Plan<\/h3>\n

Just as it is important to establish the right benefit formula and payment form, it is essential that defined benefit plans be optimally administered.\u00a0 This is a complex task which demands the expertise and experience of professionals knowledgeable on all aspects of defined benefit plan administration. Due to the associated complexities, including those relating to regulatory compliance, many organizations opt to outsource this function to a qualified third-party administrator (TPA). This firm will provide end-to-end pension and annuity administration encompassing several key functions. They include:<\/p>\n