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What Is a Defined Benefit Pension Plan, and What Is the Better Retirement Solution?

Many of the clients who come to Kai-Zen Insurance Experts for a free consultation ask us about defined benefit pension plans. And it’s a worthy question: what is a defined benefit pension plan, and is it worth the investment for your retirement? 

First, we want to explain what a defined benefit pension plan is, but more importantly, we want to explain what it is not. These distinctions are critical when planning out the remaining decades of your life, and the lives of your family. A Kai-Zen life insurance plan goes above and beyond defined benefit pensions to better protect all of you, and we’ll show you why.

Our retirement plan administrators are also here to help you if you have additional questions and can be contacted at any time. Let’s dive in!

What Is A Defined Benefit Pension Plan?

A defined benefit pension plan is a retirement savings vehicle option that has served as a cornerstone of retirement security for many throughout the years. This plan offers retirees a predetermined, reliable stream of income during their retirement years. 

Often simply referred to as a “pension plan,” a defined benefit pension plan is a retirement savings arrangement provided by employers to their employees. Under this plan, employees are promised a specific, predetermined amount of income during their retirement years. This amount is usually based on a combination of factors, including the employee’s salary, years of service, and a formula set by the employer.

How Does It Work?

The Benefit Formula

A key element of a defined benefit pension plan is the benefit formula. This formula takes into account various factors, such as the employee’s salary and the number of years they have worked for the employer. It typically includes a calculation like “final average salary x years of service x a certain percentage.”

Employer Contributions

Employers are responsible for funding the pension plan. They make regular contributions to the plan, often based on actuarial calculations, to ensure there are sufficient funds to meet the promised benefits.

Vesting Period

To be eligible for the benefits offered by the pension plan, employees usually need to meet certain requirements, such as completing a minimum number of years of service. Once they meet these requirements, they become “vested” and have a guaranteed right to receive pension benefits upon retirement.

Retirement Benefits

When an employee retires, they start receiving pension payments according to the predetermined formula. The payments are typically monthly and continue for the rest of the retiree’s life, offering a potentially stable source of retirement income.

Some Advantages of Defined Benefit Pension Plans

Guaranteed Income

One of the primary advantages of defined benefit pension plans is the certainty they can provide. Retirees receive a predetermined, guaranteed income stream, which can be a source of financial security during retirement.

Professional Management

Pension funds are usually managed by professional investment managers, which can result in more effective investment strategies and potentially higher returns.

Longevity Protection

Defined benefit plans continue to pay benefits as long as the retiree lives, offering protection against outliving one’s savings, a common concern in retirement planning.

Employer Contributions

Employers typically contribute to the pension fund, helping employees build a significant retirement nest egg over time.

Tax Benefits

Contributions to defined benefit plans are often tax-deductible, which can provide immediate tax benefits for employees and employers.

The Kai-Zen Life Insurance Plan: A Better Option

The Kai-Zen plan offers a strategic approach aimed at safeguarding your current lifestyle, even in the face of unforeseen circumstances such as chronic illness, premature death, or inadequate retirement savings. Preserving your income plays a pivotal role in ensuring a secure retirement, a task that can be particularly challenging for high-income people within the constraints of conventional retirement plans. To ensure a comfortable retirement without burdening your present financial situation, a proactive strategy is imperative.

Kai-Zen stands out as the sole strategy that leverages your resources to enhance the safeguards necessary for your family’s financial well-being. Combining the elements of financing and life insurance in a unique blend not only provides an increased level of protection but also unlocks the potential for greater retirement savings compared to what you could achieve without the application of leverage.

How Kai-Zen Plans Differ From Defined Benefit Pension Plans

Kai-Zen is NOT a defined benefit plan. Why?

Defined benefit pension plans have:

  • Strict rules about contribution limits
  • A set age when you can begin your withdrawals
  • Potential penalties
  • Costly required Form 5500 filings with the IRS

Defined benefit pension plans also have plan administrator fees, which can cost thousands of dollars a year. Additionally, they do not feature tax-free withdrawal options. 

Defined benefit plans have a specific benefit stated for each employee for retirement. Kai-Zen does not have that; rather, a Kai-Zen plan estimates the benefit, and it can be higher or lower than the estimate. Fortunately, the estimate is generally higher due to the conservative interest rate quoted for their retirement income projection.  Unfortunately for participants of defined benefit plans, their benefits can be lower, and they have no say about it. 

Better Benefits at Retirement

Kai-Zen is better than other pension plans because of three major factors:

  1. The potential for greater-than-estimated benefits at retirement.
  2. The bank contribution of 3 times the participant’s contribution.
  3. The tax-free income.

Kai-Zen Plans Can Result in More Money

It’s not so much the rate of return on your plan contributions, but rather how much you have in your plan at retirement that is important. 

More than 3 times the contribution of a defined benefit pension plan is available with Kai-Zen. So, even if Kai-Zen earns half the rate of return of a defined benefit plan, it will still have more retirement income accumulated because it started with so much more of an investment. Also, defined benefit pension plans are taxed as a 401(k) or IRA is taxed when withdrawals are taken. That can be a tremendous amount of money.

Another point: if an employer who owns the defined benefit plan gets in a bind, the employee can receive less than the expected pension income. Employees must place a great deal of trust in their employers to engage with defined benefit plans. If the employer doesn’t fund the plan according to the rules (which they can,) the employee can be led down the garden path and wind up with less than their plan originally promised.

Kai-Zen is also better in that not only are the contributions 3X greater than the DB plan (at no cost to the employee) it invests in the MOVEMENT of the stock markets with no risk of loss if the market moves downward.  DB plans do not have that advantage.  

Kai-Zen Risks are Lower Overall

Employers choose the investment options in defined benefit pension plans, which means a potentially inexperienced person is picking your stocks, bonds, and mutual funds. The employer also bears the responsibility of managing the investment and guaranteeing the retirement benefit. If they’re not good at their job, it’s you who is left out in the dust.

Checks and Balances for Kai-Zen Recipients

With Kai-Zen, the participant receives an annual review of their plan. With defined benefit pension plans, you only get a plan summary annual report. This report shows if the plan is not performing to standards for all of the participants. That’s good enough for some people, but the fact that it is a general report and not an individual report is where the risk lies.  

There are many moving parts in a defined benefit pension plan. Very few of those parts can be controlled by your employer. COVID-19, the dot-com bubble burst, mortgage-backed securities, etc. all impacted these types of plans. In a year, your investment could be gone.

With Kai-Zen, YOU are in full control. And your investments don’t have to disappear because of an unprepared retirement plan administrator. Want to learn more? It’s time to get in touch.

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