A defined benefit plan (DBP) is an employer-sponsored plan wherein employee benefits are generally determined by a formula that uses a number of factors, including compensation history and length of employment.
The employer is tasked with plan management and risk, and typically hires an external manager for that.
By law, whether due to subpar investment returns or erroneous calculations or assumptions, employers must remedy any shortfall with a cash contribution.
Two prime examples of DBPs are pension and cash balance.
Generally, defined benefit plans require annual employer contributions. The required amount is equal to the value of the year’s benefit increases in addition to a 15-year amortization of all unfunded liabilities. An overfunded plan means there is no amortization.
Employees are usually unable to withdraw funds from their plan, as they could with a 401(k) plan. Instead, at an age “defined” by the plan’s rules, they can receive their benefit as a lifetime annuity. In some cases, the benefit can be taken as a lump sum.
As with most anything in the investment and finance space, there are benefits and drawbacks to defined benefit plans.
Unlike defined contribution plans, which are more common, DBPs call for the employer, rather than the employee, to handle all the planning and investment risk.
Likewise, a DBP chiefly requires the employer to make contributions, whereas a defined contribution plan has employees make most contributions, although many companies provide some matching contributions.
Also, unlike defined benefit plans, defined contribution plan payouts are not guaranteed, as they rely on investment performances and employee contributions.
Rather than a defined benefit plan, or in addition to one, individuals can save with after-tax accounts such as Roth IRAs or tax-deferred accounts like traditional IRAs. For this year, IRA savings can reach $6,500, or up to $7,500 if the person is at least 50.
Another alternative to traditional retirement plans is investments in alternative assets, which are increasingly popular as investors seek respite from constant stock market fluctuations.
Because of their low correlation to public markets, alternatives are generally not as volatile, and can provide steady income during retirement, and protection from inflation. In fact, in every economic downturn of the last 15 years, private markets have outperformed stocks.
Also increasingly popular as a way to easily invest in alternatives is the platform Yieldstreet, on which nearly $4 billion has been invested to date.
Focused on generating passive income for investors, Yieldstreet offers the broadest selection of alternative asset classes, including art, real estate, transportation, legal finance, private credit, and more. In addition to its highly vetted investment opportunities, Yieldstreet also has a free retirement calculator to help people calculate how much they will need for the Golden Years.
A crucial benefit of such investments is diversification – mixing a variety of asset types within a portfolio to reduce overall risk. In fact, diversifying one’s holdings is an essential pillar of long-term investing success.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.
With a defined benefit plan, an employee is guaranteed a specific benefit when they retire. Such plans can be beneficial to both the employee and employer.
Remember, too, that options for investing in one’s retirement can include alternatives, which also serve the vital purpose of portfolio diversification.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.