Pioneer Investments of Boston is carving out a deeper and broader niche for itself within the micro-plan retirement market, which includes sole proprietors, consultants, very small businesses and professional practices that employ up to five employees.

Last month, Pioneer debuted the Uni-DB Plan, a defined benefit pension plan for micro-businesses and professional practices such as doctors, lawyers, accountants and others. Pioneer charges $1,500 per year for the plan, plus $100 per plan participant. Metavante Corp., a financial services technology firm in Milwaukee, is handling third-party administration.

This is the second plan Pioneer has rolled out within the last 2-1/2 years specifically designed for compact-sized companies. In January 2002, Pioneer was the first to debut its Uni-K Plan, a 401(k) defined contribution plan for sole proprietors, when a Pioneer executive saw the opportunity to create a new plan after reading through soon-to-be-effective tax law changes.

According to BISYS Group in New York, the most recent U.S. census indicates there are 14.4 million small businesses owners claiming their business as their main source of income.

To DC or DB?

While defined benefit pension plans have fallen out of favor as employers have moved to offer defined contribution plans that shift the burden for contributions largely onto employees, this new defined benefit plan can supplement a tiny businesses' existing 401(k) plan.

A defined benefit plan created just for the small-fry business market can aid those who have maxed out their annual 401(k) contributions ($41,000 in 2004), and even those executives over 50 who are already contributing the extra $3,000 annual 401(k) "catch up" contribution limit currently allowed by law, said Jodie Hale, vice president of retirement plans marketing at Pioneer.

"Entrepreneurs who have high incomes and may have a couple of employees, are looking for ways to save for retirement in a tax-effective way," Hale said. "We're seeing interest in a product considered dead because the 401(k) has preempted defined benefit plans," she said.

This defined benefit plan can also be a boon to mini-business owners with significant business income who may not have socked away mega bucks for retirement, Hale said. Business owners who have traditionally plowed profits back into the business instead of plowing it into retirement savings, can now make large tax deductible retirement plan contributions and jump start retirement savings.

DC versus DB

Unlike defined contribution retirement plans, under which a specified dollar amount is contributed periodically throughout the year by an employee, sometimes with a matching employer contribution, the responsibility for contributions under defined benefit plans fall solely to employers to make on behalf of all full-time employees. Even if the business has had an off year, employers must make contributions, Hale explained. The good news is that all contributions are tax-deductible to the business.

As defined benefit plans are structured so that contributions are greater for higher-paid, more veteran employees, older owners drawing beefier salaries than younger workers tend to snare the lion's share of annual plan contributions, Hale said. Sometimes as much as 90% of a business' annual plan contribution is allocated to the owner, providing a big incentive to the owner to establish the plan, Hale added.

Also, unlike defined contribution plans, which have annual contribution limits, defined benefit plans work in reverse. Actuaries and financial advisers work with business owners to crunch numbers and annually determine what contribution amount must be contributed today, in order to provide for a certain dollar amount to be drawn out of the pension plan annually once an employee retires.

Defined benefit plans are far from new. But tax law changes made in 1996 and clarified in 1999 have made these plans more attractive to small businesses, Hale said.

Pioneer isn't the first or only firm to offer defined benefit plans to small business owners. At least two other firms now also dwell in this defined benefit arena. Furthermore, BISYS has plans to similarly debut a micro-company defined benefit plan, possibly in partnership with another firm, confirmed Chris Guarino, president of BISYS Retirement Services Group in Philadelphia. "This is absolutely on our drawing board, and absolutely set to launch by the end of the year," he said.

BISYS was the first company to obtain IRS approval for the creation of a prototype individual 401(k) defined contribution plan back in the fall of 2001. The firm built an administrative and recordkeeping system to go with it and has now partnered with 18 financial institutions, which use the prototype with clients. To date, the BISYS prototype is serving 2,300 individual 401(k) plans with a collective $17 million, Guarino said.

Technology firms are also jumping on the micro-market defined benefit bandwagon. PensionOnline, an Internet technology company in San Francisco that provides software applications to the pension industry, this month debuted its Internet and PC-based One Person (DB) Plan Analysis program. The technology lets financial advisers and third-party administrators easily do the calculations to determine if a plan makes sense for a small business owner, and what contributions to make, said Marco Brown, company president and CEO. PensionOnline already offers a similar analytical tool for one-person 401(k) plans.

While others may follow Pioneer's initiative, Pioneer believes its early market presence helped cement its success. The firm now supports 8,600 Uni-K plans with a total of $250 million in assets, Hale said.

Other early embracers of the sole proprietor defined contribution concept include AIM Investments of Houston, with its Solo-401(k); Fidelity Investments of Boston, with its Self-Employed 401(k); and Scudder Investments of New York, with its Personal(k) program. And the market is expected to grow.

"We saw a lot of potential, but not as many adopters as we thought," said Michelle Rappa, SVP of Seligman Advisors in New York, which debuted its One(k) plan in the fall of 2002. "But it is growing incrementally," she added.

The individual 401(k) plan market has proven its viability, and ease of administration, and these accounts tend to see significantly higher balances, said Luis Fleites, a senior analyst at Cerulli Associates in Boston.

In fact Financial Research Corp. (FRC) of Boston estimates the individual 401(k) market, with $1.5 billion in assets, will double to $3 billion by year-end.

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