We compare two retirement programs where the document establishes the benefits. We will also discuss two plans where most of the complicated rules don't apply.

Generally the employee benefit, set out as a formula, is based on the participants compensation or years of service or both. For example, the document could provide for a monthly benefit of $10 for each year of service. The employer's annual contribution would be the actuarially estimated amount required to fund projected benefits.

Because benefits are fixed, market fluctuations of plan investments affect the required employer contributions. Small to medium-sized companies are reluctant to establish this type of plan because of the obligatory funding. This may be a burden if the investment values drop or the company is short of cash when contributions are due.

Typical Pension Plan vs. Cash Balance Plan. Hundreds of America's larger corporations are switching from one fixed benefit plan, a traditional pension, to another, a cash balance. Some experts say companies are making the change to reduce costs and use accounting techniques that present a better financial statement. Companies deny this.

Typical plans accrue benefits slowly in early years of employment -- rapidly in later years. Cash plans, on the other hand -- accrue benefits evenly throughout the worker's employment. Not surprisingly, younger workers prefer the change to a cash plan. If they leave early they take more funds with them. And not surprisingly, older workers don't like the change. This reduces their benefits at retirement.

Realizing the concern of older employees, when IBM converted to a cash balance, it softened the blow on them. The new plan provides that it will pay prior plan benefits to employees who are within five years of retirement.

Two Simple Plans. Retirement plans are regulated by one of the most complicated laws in the tax code. And to make sure no one ever really understands what's going on, Congress keeps changing it. Two plans Congress considers simple are referred to as SEP and SIMPLE. In both, the employer, instead of maintaining a pension fund, contributes to employees' Individual Retirement Accounts. The employer can contribute an amount larger than the employees can contribute to their own IRA.

The SIMPLE plan also allows for an employee to elect to make a contribution that the company matches.

Planning Tip. As IBM and a number of companies that switched plans discovered, employee relations should be an important consideration. Also check with an attorney to see if switching causes any legal problems.

Businesses employing only the owner or only family members have a unique opportunity for exclusive tax shelter benefits with one of the following arrangements: If the workers are young, adopt both a profit sharing plan and a money purchase pension plan. This arrangement would produce maximum benefits because of the long-term build up. If they are older, adopt a typical pension plan. This allows large contributions over the short time before retirement.

(more at Retirement Planning)

Released 9-6-99