New Study: A Significant Number of High-Income Professionals Should not Contribute to Tax-Qualified DB Plans

When a professional firm is considering adopting a tax-qualified defined benefit plan for its partners/shareholders, it will most likely consider using a classic cash balance format. Most professional firms have used that type of defined benefit plan.

For various reasons, under a classic cash balance plan the return on the partner/shareholder contributions usually will be a bond return. At least in a mid- to large-size firm it is likely that a significant number of the partners will express the concern that a bond return is "too low." That is: They will suspect that (given a bond return under the classic cash balance plan) pre-tax contributions to the cash balance plan will produce less spendable retirement income than would be produced by equal-effort, after-tax contributions to a taxable account under which they would have broad investment control.

A new study recently published by our firm shows some of these concerns are correct. Contributions to a tax-qualified plan will produce larger spendable retirement income.

That being said: There are a number of strategies that can be considered to deal with the problem. The study reviews these strategies. But there is no clear best strategy—and the analysis of the strategy can be very situation-specific.

Faegre & Benson has published a Paper that provides a guide to the leadership of professional firms when they are analyzing this type of situation and is available at.

Some of the principles discussed in the study have application to some type of non-qualified corporate deferred compensation plans. But the focus clearly is on tax-qualified DB plans sponsored by professional firms.