Guide to Defined-Benefit Pension Plans for Sole Proprietors

Define your target benefit

Your target benefit can be based on a fixed percentage of your annual income, or you can choose a flat monthly dollar amount.

I recommend: Use retirement and savings planning calculators at FinancialPlanningToolkit.com to zero in on your retirement goals.

File appropriate forms

With a defined-benefit plan, you must file certain IRS forms annually and pay premiums to the PBGC, which insures the plan. These costs can drag down returns, unless you're contributing large sums of money

I recommend: Download Form 5500 and a Schedule B from the IRS. Note that an enrolled actuary must sign the Schedule B.

Hire an administrator and actuary

Because defined-benefit plans are so complex, you'll have to hire a retirement plan specialist to administer the plan and an actuary to calculate contributions and valuations. Many major retirement plan providers offer both these services.

I recommend: Pension Consultants Inc., which offers plan administration and on-staff actuaries, provides a printable copy of a sample defined-benefit plan for a company owner — just click on "types of plans" then on "defined-benefit" to download it. Fidelity Investments also offers both plan administration and actuarial services for small companies.

Consider fees

Since defined-benefit plans have gone mainstream, there's more help available when implementing a plan. However, you'll want to note advisor fees.

I recommend: Check out a fee table for Charles Schwab's Personal Defined-Benefit Plan; you'll find a link to it by scrolling to the bottom of the page.

Consider a 412(i) plan

Traditional defined-benefit plans allow for up to approximately $160,000 in annual contributions. Another type of defined-benefit plan that's gaining popularity is called a 412(i) and lets you contribute significantly more each year — up to $450,000 annually with some providers.

I recommend: Schedule a private Webinar on 412(i) plans from The Hartwood Group.

Choose additional retirement plans

Having a defined-benefit plan doesn't exclude you from holding other types of retirement plans as well. Consider other options, such as a 401(k), SEP or Roth IRA.

I recommend: ShareBuilder4019K.com offers a retirement plan for sole proprietors that combines the features of a defined-benefit plan with the benefits of an individual 401(k) plan.