Because of their flexibility and relatively low cost of operation, target benefit plans, a variation on corporate retirement-savings accounts, offer tremendous advantages. But they haven't shared the popularity of 401(k)s. That should change, thanks to recent congressional legislation that will make targets more appealing than ever. The 401A4 rule, which allows traditional profit-sharing plans to favor older employees -- including owners (see "Age-Weighted Profit-Sharing Plans," No. 02921071, February 1992) -- will permit target benefit plans to do likewise.
In a target benefit plan, an employer guarantees that each year it will make a fixed contribution to each worker's retirement-savings account. But the employer doesn't guarantee there will be any fixed retirement benefit for its workers -- all it does is project one. Although that may seem a slight distinction, the fact that employers are projecting, not guaranteeing, benefits frees them from some onerous federal regulations, and that makes target plans relatively inexpensive to operate.
"Companies aren't required by the federal government to buy Pension Benefit Guaranty Corp. insurance to ensure the payment of future benefits" in the event the company goes belly-up or doesn't have enough cash flow to pay, explains John Huss Jr., a managing vice-president at the Atlanta office of Noble Lowndes, an international benefits-consulting business. (PBGC insurance is pricey, currently pegged at a minimum annual fee of $19 per plan participant.)
With target plans, employers also get flexibility. "You can't box yourself into a financial corner where you owe your workers benefits you haven't funded -- and have no way out but bankruptcy," explains Huss.
Companies that set up target benefit plans now can make higher contributions to retirement-savings accounts in the names of older employees -- all with the ultimate goal of passing along greater financial benefits to corporate owners. But those companies will have to meet a set of clearly prescribed IRS standards.
For more on target benefit plans and rule 401A4, call Noble Lowndes's John Huss Jr. (404-233-2254) for a free report.
-- Jill Andresky Fraser* * *