Outperforming the Market Isn’t Always Great for Your Defined Benefit Plan
When most people think about investing, beating the market sounds like the ultimate goal. But in a defined benefit (DB) plan, investment performance works differently, and sometimes outsized gains can actually limit your ability to make contributions when you need them most.
Why Investment Strategy Matters in a DB Plan
A defined benefit plan promises employees (or, in the case of owner-only plans, the business owner) a lump sum or annuity at retirement. The plan’s funding is based on two key factors:
- The highest three consecutive years of compensation
- Investment returns within the plan
That means investment performance is directly tied to how much you’re required, or allowed, to contribute each year.
As Mike Bourne, Founder and Managing Partner at Mirador, explains:
“The biggest return on investment of a defined benefit plan are the tax deductions. That’s why we try to make sure the investment advisor and the plan sponsor understand we would really like to see about a 5% to 6% return on investment.”
When Investments Grow Too Fast
High returns may sound positive, but in a DB plan, they can create an unexpected problem. If the plan’s assets grow significantly, the funding requirements shrink, and sometimes contributions disappear entirely.
Mike shares the story of one client:
“Dr. Sam was heavily invested in just a few stocks, including Tesla and Pfizer. His plan nearly doubled in value during 2020. He was thrilled, until we had to tell him that there was no contribution allowed for that year because the investments had done too much.”
In Dr. Sam’s case, lower income during the pandemic meant the missed deduction wasn’t as painful. But for many high earners, losing the ability to contribute means losing valuable tax savings.
Why Conservative Returns Are Key
Unlike a 401(k), where high returns always feel like a win, DB plans benefit most from stability. Conservative returns in the 5–6% range create consistent room for contributions year after year. That allows business owners to:
- Maximize annual tax deductions
- Avoid unexpected contribution “holidays” caused by high returns
- Align retirement planning with income levels for better overall tax strategy
The Takeaway for Business Owners
The power of a DB plan lies in its tax efficiency. But without the right investment strategy, that benefit can disappear. That’s why plan design, funding rules, and investment management must work together.
For high earners looking to keep more of what they earn, the right balance of conservative investing and strategic plan design ensures DB plans deliver steady contributions, stable tax savings, and reliable long-term wealth building.
Ready to see how the right retirement plan strategy can help you save on taxes and build long-term wealth? Reach out to our team to start the conversation.
