What Is a Defined Benefit Plan (and Why You’ve Probably Overlooked It?)
Most people have heard of a 401(k). It’s the go-to retirement savings plan for employees across America. But there’s another powerful retirement tool out there that doesn’t get nearly as much attention: the defined benefit plan.
If you're a high-income earner, self-employed, or a small business owner, overlooking defined benefit plans could mean leaving significant tax advantages and retirement income on the table. In this article, we'll break down what a defined benefit plan is, how it compares to more familiar options like the 401(k), and why it might just be the best-kept secret in retirement planning.
The Basics: What Is a Defined Benefit Plan?
A defined benefit plan is a type of employer-sponsored retirement plan that guarantees a specific retirement benefit based on a formula. This formula usually considers your salary, years of service, and age.
In plain English? You get a predictable income in retirement—a set amount each month for life, much like an old-fashioned pension.
Here’s the key feature: the employer bears the investment risk. No matter what happens in the stock market, you’re promised a certain payout in retirement. Contrast that with a 401(k), where you bear the risk, and the amount you end up with depends entirely on how your investments perform.
Real-World Example: How It Works
Let’s say you’re a 50-year-old physician making $350,000 a year. You set up a defined benefit plan through your practice and fund it for 10-15 years. Based on IRS guidelines and actuarial calculations, you may be able to contribute $150,000 or more per year, all tax-deductible.
By retirement, your plan might provide you with a guaranteed $100,000 per year for life. That’s money you can count on, regardless of what the market does.
Defined Benefit vs. 401(k): What’s the Difference?
Let’s break this down simply:
Feature Defined Benefit Plan 401(k) Contribution Limit Often $100,000+ annually (age and income dependent) $23,000 in 2025 ($30,500 if age 50+) Investment Risk Employer bears the risk Employee bears the risk Retirement Income Guaranteed (based on formula) Not guaranteed (based on market performance) Setup Complexity Higher (requires actuary and plan administration) Lower Best For High-income earners, self-employed, small business owners All income levels
Why You’ve Probably Overlooked It
There are a few reasons why defined benefit plans fly under the radar:
They’re more complex. Unlike a 401(k), you can’t just open a DB plan at your local bank. It requires an actuary to calculate the allowable contribution and annual filings with the IRS.
They’re associated with big companies. Think GE, Boeing, or public school systems. But small businesses and solo professionals can use them too.
Few advisors mention them. Not every financial advisor is trained to design or manage a defined benefit plan. And many brokers prefer to sell easier, more scalable products like 401(k)s.
The Hidden Superpower: High Contribution Limits
If you’re a high-income professional—say a doctor, lawyer, dentist, or consultant—you may be maxing out your 401(k) but still have extra money you’d like to set aside for retirement while minimizing your tax bill.
Enter the defined benefit plan.
Depending on your age and income, you could potentially shelter hundreds of thousands of dollars a year from taxes—far more than you could with a 401(k) or SEP IRA.
The contributions you make are tax-deductible to your business (or to yourself if you’re a sole proprietor). That means lower taxable income today and guaranteed retirement income tomorrow.
Use Case: Solo Professional Over 45
Defined benefit plans are especially attractive for self-employed individuals over 45. That’s because the IRS lets you contribute more as you get older, since you have less time to save before retirement.
Let’s say you’re a 52-year-old business consultant who earns $300,000 per year. With a defined benefit plan, you might be able to contribute around $120,000 per year pre-tax—possibly more if you add a 401(k) “combo plan” alongside it.
Over 10 years, that’s $1.2 million+ sheltered from taxes, compounding in a tax-deferred environment.
What’s the Catch?
No financial product is perfect, and defined benefit plans come with a few strings attached:
1. You Must Commit
This isn’t a “set it and forget it” account. The IRS expects you to contribute for several years (typically 3–5), though there is some flexibility for changing income or closing the plan later.
2. You Need an Actuary
Because benefits are defined by a formula, and the IRS sets strict limits on how much you can contribute, an actuary must certify your plan each year. This adds to your annual cost.
3. You’ll Pay to Administer It
Expect to pay $2,000–$4,000 annually in plan administration and actuarial fees. But for high earners saving six figures per year, the tax savings often far outweigh the costs.
4. You Must Fund It Consistently
Even in a down year for your business, the plan may still require a minimum contribution, though this can often be planned for or adjusted with expert guidance.
Advanced Move: Combo Plans
Here’s where things get really interesting. You can combine a defined benefit plan with a 401(k) and even a profit-sharing plan. This allows you to stack your tax-deferred contributions—often over $200,000 annually in total.
These combo strategies are legal, IRS-approved, and extremely effective for small business owners or professionals with steady income and a desire to supercharge retirement savings.
Who Should Consider a Defined Benefit Plan?
You might want to take a serious look if you fit one or more of these categories:
You’re self-employed or own a small business.
You’re 45 or older and want to catch up on retirement savings.
You consistently earn $200,000+ per year and want to reduce your tax liability.
You’ve already maxed out your 401(k) or SEP IRA and want to do more.
You’re nearing retirement and want to build wealth quickly and tax-efficiently.
Tax Savings Today, Predictability Tomorrow
Defined benefit plans offer a rare combination of large current-year tax deductions and future financial predictability. In a world where most retirement plans are market-based and volatile, having a guaranteed stream of income can be a major advantage—especially as you age.
Plus, for professionals in their 50s or early 60s, they offer a chance to “catch up” on years of missed saving without putting all their eggs in the stock market basket.
The Bottom Line
While they’re not right for everyone, defined benefit plans deserve a spot in the retirement planning conversation—especially for high-income earners looking to minimize taxes and lock in future retirement income.
They take more setup and annual work, yes. But for many, the reward is well worth the effort. When paired with the right tax strategy and long-term vision, a defined benefit plan can be one of the most powerful tools in your retirement toolbox.
So if you’re tired of hearing the same “just max out your 401(k)” advice and wondering what else is out there—it might be time to take a second look at this often-overlooked, high-powered plan.