Defined Benefit Pension Plans: Hungry Octopus Just Took a $4.5 Million Bite out of Private Equity (Sun Capital)
When asked to explain a defined benefit pension plan and its risks to a business owner or new potential investor, I compare it to the beautiful yet predatory octopus. Octopuses are known for their intelligence, their ability to squeeze into small spaces, their ability to blend into their surroundings, their jet propulsion, and their ability to release a cloud of black ink that allows them to escape to live to see another day. An octopus catches prey with its arms, and kills prey by biting it with its tough beak, paralyzing the prey with a nerve poison. As carnivores, they eat a variety of prey, even prey with very tough shells. A distressed octopus may eat its own arm.
Many companies offer an employee retirement plan (such as a 401(k) or a SIMPLE IRA plan). These employer-sponsored plans are governed by the federal Employee Retirement Income Security Act (ERISA). The Department of Labor has taken an increasing interest in ERISA retirement plans – focusing on the suitability of the investments offered and the costs to participants.
The Internal Revenue Code sets forth various dollar limitations on benefits, contributions, compensation under employee benefit plans.