Beware of These Pitfalls When Managing Investments Within Defined Benefit Plans

Updated September 5, 2026.

Start with the promised benefits

A defined benefit plan needs an investment and funding policy that supports the benefits it promises. There is no universal rule requiring a plan to earn 3% to 4%, and a year of strong investment returns does not automatically trigger a tax penalty. The plan’s liabilities, cash needs and funding position are more useful starting points than an arbitrary return target.

Separate funding calculations from portfolio returns

The actuary calculates contributions and liabilities under the rules that apply to the plan. Those calculations involve assumptions and prescribed methods; they are not an investment-performance ceiling. A cash balance plan’s interest-crediting formula is also distinct from the return its investments actually earn.

Weak investment results can increase future employer contributions. Strong results can reduce future funding needs, but may leave surplus assets if the plan’s promises and time horizon are limited. Review those possibilities against the company’s ability to contribute through a business downturn.

Understand when taxes and restrictions can arise

Failure to meet applicable minimum funding requirements can lead to excise taxes and other consequences. Separately, returning residual plan assets to the employer at termination can create income and excise taxes. The consequences depend on the transaction and applicable rules; neither an annual return above a target nor overfunding by itself is the same as a taxable employer reversion.

Coordinate before a sale or plan termination

Ask the actuary, plan administrator, investment fiduciary and tax counsel to compare funding scenarios, employee benefits, deduction limits and the proposed exit timetable. An owner considering a sale should understand how the plan will be handled in the transaction before assuming that surplus assets are available for personal or business use.

The objective is to fund promised benefits responsibly while managing the employer’s obligations. Choose investments and contributions together, and revisit the analysis as business conditions and the plan’s participant population change.

This article is general educational information. Plan-specific funding, investment and tax decisions require qualified professional review.

Sources for this update: IRS defined benefit plans; IRS Form 5330 instructions.