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Inside the New DB(k) Retirement Plan

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The coming alternative to the 401(k) that might just catch on.

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Over the last year it's become abundantly clear that the stock market can devastate even seemingly healthy retirement accounts. Even so, with the guaranteed income of traditional pensions disappearing, most investors have little choice.

The vulnerabilities of the 401(k) plan have cast doubt on whether a voluntary savings plan is the best way for workers to prepare for retirement. There are some possible alternatives coming, however, that might just catch on. One that may become available in January offers a guaranteed pension-like retirement benefit alongside a 401(k).

It's called the DB(k) and it was created in the tax code in 2006. The law allows companies with fewer than 500 workers to start the hybrid plan after Jan. 1, 2010, and some proponents would like to see it available to all workers. As it is now, barely 40% of all workers even participate in a retirement plan at work.

Here are some questions and answers that explain details of the DB(k):

Q: What are the basic features of the DB(k)?

A: There are two components to the plan:

Companies will be required to establish a pension fund sufficient to pay a worker in retirement up to 20% of that individual's average annual pay received during the last few years of work. After three years with a company, a new employee's benefits will be vested. This means the money is theirs even if they leave the company. Their balance in this account would be paid out at retirement in monthly checks like a traditional pension plan. Such plans are called defined benefit plans, which explains the DB part of the DB(k) name.

Alongside that benefit, the company will automatically take 4% of a worker's pay and put it in a 401(k) plan. The company must match 50% of that amount, which would be immediately vested. At retirement, the worker could withdraw additional funds from their 401(k) account to supplement the pension payments. Workers can opt out of their contribution or chose to set aside less.

Q: What's the reason for creating a hybrid pension/401(k) plan?

A: The DB(k) was developed by the American Society of Pension Professionals and Actuaries, and Principal Financial Group Inc. More companies are dropping pension plans and workers with a 401(k) often do not save enough, leaving US workers woefully unprepared financially for retirement. A recent study by The Center for Retirement Research at Boston College concluded that 51% of households likely will not have enough money in retirement to maintain their lifestyle, up from 44% in 2007.

The DB(k) idea allows companies to provide the benefits of a combined plan without onerous paperwork, regulatory requirements and costs that would come with operating the two plans separately, said Chris Mayer, a Principal Financial Group vice president. Workers get a more secure retirement with the guaranteed pension alongside their own savings.
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