A Bigger Parachute

Eager to boost your retirement fund? Believe it or not, a pension might be the answer.

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Many moons ago, the term "pension plan" evoked images of avuncular corporate bosses handing out gold watches, and lifetime benefits, to retirees. Now the old-fashioned retirement vehicle is making a comeback--not with big corporations, but with smaller private companies.

It runs counter to nearly every major retirement savings trend, but some owners of small businesses have discovered that the classic pension plan can help them set aside a large chunk of money for their golden years--often tens of thousands more per year than is possible with a 401(k)--and do it in a relatively short period of time. Unlike defined contribution plans such as 401(k)s, defined benefit plans guarantee a pension income at retirement. The other big difference is the amount of cash pension plans let you put away tax-deferred. All 401(k) plans cap the maximum annual contribution, including payments by both employee (who is capped at $15,000, or $20,000 for those 50 and older) and employer (who can add another $29,000). Anything over that amount can be taxed at rates as high as 50 percent. A properly structured pension, on the other hand, can allow a company to set aside more than $100,000 a year, the majority of which could land in the business owner's account. No surprise, then, that the plans have been embraced by baby boomers eager to play catch-up with their retirement accounts.

That pretty much describes John Tomassi, president of the Winfield Group, an independent insurance agency in Clifton Park, New York. Tomassi had been contributing the maximum amount allowed to his 401(k), $49,000. But, when he turned 54 last year, he started to feel like time was running out. He planned to retire in his early sixties--to volunteer, travel, scuba-dive. To accomplish that goal, he needed to save more, preferably in a tax-deferred account.

Last year, Tomassi heard about CCA Small Business Group, a Chicago company that sells pension plans through its websites, MyMaxPlan and OurMaxStrategies. After a brief telephone consultation with a CCA executive, Tomassi viewed an online demonstration about defined benefit plans. The demo explained that, under IRS rules, Tomassi could not set up a pension for himself without offering the same benefit to his employees. To determine how much that would cost, Tomassi sent CCA spreadsheets with data on himself and his 17 employees, including age, salary, and years of service. CCA's actuary ran the numbers and reported that in 2005, a defined benefit plan would allow the Winfield Group to set aside $105,000 for Tomassi and $20,000 for his employees, who would receive, on average, about $1,000 each in pension benefits in addition to the company's usual contribution to their 401(k) accounts.

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