Employer dollars contributed to both DB and DC plans provide for the most part equal tax efficiency. Contributions are almost always deductible immediately to the employer, both accumulate with investment earnings tax-free, and both are only taxed when paid to the employee.
Looking at it from another perspective, employers generally spend more money on older employees who are usually in higher pay categories and therefore also higher tax brackets. From this standpoint, employer dollars spent in the DB plan could be considered more tax effective.
Employers, however, generally spend more money on administration and compliance for a DB plan including the $30 per employee annual PBGC premium, actuarial consulting fees for the required actuarial valuations, and more complicated and complex administration systems needed.
Another major drawback with the DB plan over the DC plan is the unpredictability of costs. So not only is the DB plan generally more expensive, but costs cannot generally be budgeted as easily and as predictably as its counterpart, the DC plan.
But in spite of these higher costs and greater funding unpredictability, a larger percentage of employer contributions are made on behalf of your longer service, older employees in the DB plan compared to the DC plan where contributions are made without regard to age. At the older ages employees are more interested in retirement, usually being paid at higher rates, resulting in both employee greater appreciation and more cost effective use of employer money. But it is not the contribution you as an employer should only be concerned about, it should also more importantly be the level of benefit the employee earns at retirement.
And it can be shown through many different calculations and assumptions that the DB plan will provide a higher benefit for your long-service employees. Employers of the past used to have a more paternal instinct to look after these employees and have less of a concern for those employees who just drop into their workforce for short periods of time.
So why don´t you as an Employer look at ways to control costs within the DB plan and provide better cost-effective benefits to your workforce? Reach out to the regulators to make DB plans more portable, more cost predictable and put your employer contributions where they are truly more cost effective.
Whether you agree with the above changes or not, please feel free to comment using the button "Add Comment" on my blog page.
Again, I just want to remind you of our next Employers of Excellence National Conference 2006 this year at the beautiful Red Rock Casino Resort Spa in Las Vegas from October 24-27th. This year there will be a separate Global Benefits Track - Rolling Dice Across Borders sponsored by IBIS (International Benefits Information Service) in addition to our normal benefits workshops. I look forward to seeing you all there!
