DB Plan "When I'm 64"?

[SMB]

First, I fully admit that I'm a "DC" person. You know - know just enough about DB Plans to be dangerous!

With that in mind, I need to know whether it is within the realm of possibility for a 64-year old self-employed doctor (of course!) with annual earned income of ~$250,000 to adopt a DB Plan? Yes, no, maybe so? Pros and cons?

Thanks for any and all replies!

[Andy the Actuary]

No problem. The proviso should be the Doc is committed to making substantial annual likely varying contributions and should pay attention to his actuary regarding avoiding potential plan over-funding. There will be little, if any, funding flexibility. Keep repeating the word commitment. If the Doc has employees, then most if not all would need to be covered and their cost could be substantial depending upon their ages. The biggest caution is only undertake this if you work directly with the Doc and not through a third party such as a CPA or investment broker. These plans can be far more complicated than one might ever suspect.

[SMB]

Andy,

Thanks for the info. My first bit of advice to this individual would be to "Take thee to thy DB Actuary." My initial concern was that it might simply be "too late in the game" for a 64-year old business owner (no ees) to even consider adopting a DB Plan. I had also assumed, depending on the benefit desired, that the funding cost could be "substantial". But, again, that's the actuary's area of expertise - not mine.

[david rigby]

"substantial" is in the eye of the beholder.

AtA's advice is spot on, but don't assume the contribution is "too high". Rather, find out what the doc can afford, and we're probably assuming the plan is ongoing for at least 5 years, and then design the plan benefit to fit within the doc's ability to pay.

The actuary will know how to do this.

[mbozek]

For a 64 yr old doc the question is what is his exit strategy- how much longer will/can he work, how much of a benefit will he accrue, does he have employees who will recieve a benefit, what will be the normal form of benefit, etc. When he terminates the plan will an annuity have to be purchased for employees? Actuarial expertise does not guarantee that there will be enough plan assets to pay benefits from an insurance co annuity if interest rates remain low. Whoever becomes his plan advisor will have to put in plenty of disclaimers of financial risk regarding the sufficiency of plan assets to pay for all benefits.

Big risk for Doc is that when he terminates the plan, there will not be enough plan assets after other employees receive their benefits to fund 100% of doc's benefit.

[Andy the Actuary]

For a 64 yr old doc the question is what is his exit strategy- how much longer will/can he work, how much of a benefit will he accrue, does he have employees who will recieve a benefit, what will be the normal form of benefit, etc. When he terminates the plan will an annuity have to be purchased for employees? Actuarial expertise does not guarantee that there will be enough plan assets to pay benefits from an insurance co annuity if interest rates remain low. Whoever becomes his plan advisor will have to put in plenty of disclaimers of financial risk regarding the sufficiency of plan assets to pay for all benefits.

Big risk for Doc is that when he terminates the plan, there will not be enough plan assets after other employees receive their benefits to fund 100% of doc's benefit.

Bigger risk if that he may have excess assets. Clients are habitually counseled that if they are to have a conservative element in their overall investment portfolio that it be their DB plan. Experience has demonstrated that often neither client nor client's investment advisor pay a lick of attention. Some Docs just love to make lots of money on investments so don't buy into the conservative investment caveat. I once pleaded this position and the plan became grossly over-funded in three years by virtue of 30+% annual investment return.

[jpod]

With only $250K of EI ("only" is a relative term) and age 64, presumably he is not going to be able to afford to fund to the maximum 415 limit over a short period of time. Given that, I am struggling to see how he could seriously overfund. If he does "too well" on investments couldn't he just jack up his benefit upon termination? Also, and maybe I am not seeing the forest through the trees, but what's the downside of doing too well on investments? If he pays 90% tax on a reversion what's wrong with that?

[mbozek]

Bigger risk if that he may have excess assets. Clients are habitually counseled that if they are to have a conservative element in their overall investment portfolio that it be their DB plan. Experience has demonstrated that often neither client nor client's investment advisor pay a lick of attention. Some Docs just love to make lots of money on investments so don't buy into the conservative investment caveat. I once pleaded this position and the plan became grossly over-funded in three years by virtue of 30+% annual investment return.

I dont see how excess assets would be possible unless the Doc never retires. More likely scenario is that Doc will quit med practice for personal or medical reasons in a few years leaving plan only partly funded which will result in doc losing part or all of his benefit. Given the volitality in the investment markets over the last 11 years and the fact that 75% of investment advisors fail to beat their benchmarks I think you are being overly optimistic of over funding the plan over a period of less than 20 years. Also Doc would have to commence retirement benefits at 70 1/2. Isnt the max benefit that can be paid during the first 10 years after the plan is established phased in on a pro rata basis which could result in reversion? All I am saying is that any any advisor who recommends a DB plan based on above facts had better provide full disclosure of all the risks that may result in the Doc not receiving the benefits that he is expecting or have adequate malpractice coverage.