Pension-Backed Capital: Using Retirement Plans as Strategic Dry Powder for Venture Investment
If you want to have dry powder to invest on behalf of a business through one of their retirement plans as a venture capitalist, you’re primarily looking for retirement plans that allow for employer-directed investment control, ideally with flexibility to allocate to alternative investments like venture capital.
“Defined benefit plans, especially when structured for high-earning professionals or pooled through a multiple employer model, are one of the most overlooked sources of long-term, patient capital,” says Rebecca Lin, Venture Partner at Defined Benefits.
“Unlike traditional LPs who demand liquidity in 7–10 years, these plans are built for decades and align perfectly with the horizon of venture investing—plus, they offer incredible tax advantages for business owners while letting us deploy capital with true strategic intent.”
The best types for this purpose are:
🔹 Defined Benefit Plans (DB Plans)
Why: These plans are funded by the employer with a specific retirement payout promised to employees. Contributions can be large and are tax-deductible to the business.
Dry Powder Potential: Contributions are pooled and centrally managed—giving the plan sponsor (the employer) power to direct investments, including to venture capital or private equity funds.
Key Note: Must comply with ERISA, and if it’s covered by PBGC (e.g., for corporations), it provides added security, but also imposes stricter rules.
🔹 Cash Balance Plans (a type of DB Plan)
Why: Offers DB-style benefits with a more account-like feel. Contributions are still employer-funded and substantial.
Dry Powder Potential: Funds are pooled like traditional DB plans, allowing sponsor-directed investment strategies, including venture allocations through appropriate vehicles (e.g., LP interests, SPVs).
Ideal Use: High-earning professionals (e.g., doctors, dentists, partners) looking for tax-sheltered, high-limit retirement savings + investment flexibility.
🔹 Solo 401(k) Plans (with checkbook control)
Why: For owner-only businesses, these can allow self-directed investments into VC, real estate, etc.
Dry Powder Potential: If structured correctly with checkbook control (often through a trust or LLC), the plan owner can invest directly into private deals.
Limitations: Annual contribution limits are lower than DBs (~$69,000 total in 2024), and you can't pool large funds unless multiple owners join.
🔹 Multiple Employer Defined Benefit Plans (MEPs)
Why: Used to aggregate small businesses or professional groups under a common DB plan umbrella.
Dry Powder Potential: Centralized investment control allows the sponsor (or plan administrator/fiduciary) to allocate capital at scale, including into venture capital with proper legal structuring.
Use Case: Perfect for industry-specific funds (e.g., a venture firm offering MEPs to medical, legal, or tech founders).
⚠️ Plans to avoid if your goal is to control investments:
Participant-directed 401(k)s, SIMPLE IRAs, SEP IRAs: These typically give control to the employee, and investments are limited to mutual funds or public securities.
403(b) and 457 plans: These are for nonprofits and government employees and offer almost no flexibility for venture-style investing.
Here’s a concise summary of each retirement plan type:
1. Individual Retirement Arrangements (IRAs)
Personal retirement accounts with tax advantages. Contributions may be tax-deductible, and investments grow tax-deferred.
2. Roth IRAs
A type of IRA where contributions are made with after-tax dollars, but withdrawals (including earnings) are tax-free in retirement if conditions are met.
3. 401(k) Plans
Employer-sponsored plans allowing employees to defer a portion of their salary into investments. Often includes employer matching. Contributions are pre-tax (traditional) or post-tax (Roth 401(k)).
4. SIMPLE 401(k) Plans
A simplified 401(k) for small businesses (under 100 employees). Employers must provide matching or non-elective contributions. Less complex and lower cost to administer.
5. 403(b) Plans
Similar to 401(k) plans, but for employees of public schools, nonprofits, and certain religious organizations. Offers tax-deferred savings.
6. SIMPLE IRA Plans
For small businesses. Employees contribute via salary deferral, and employers make matching or fixed contributions. Easy and low-cost setup.
7. SEP Plans (Simplified Employee Pension)
Employer-funded IRAs for self-employed individuals and small business owners. High contribution limits but only employer contributions are allowed.
8. SARSEP Plans
A type of SEP plan that allows employee salary deferrals. Available only to plans established before 1997. Limited to 25 or fewer employees.
9. Payroll Deduction IRAs
Employees set up an IRA and authorize payroll deductions. No employer contributions required. Easy for small businesses to offer.
10. Profit-Sharing Plans
Employer discretionary contributions based on company profits. Contributions are allocated to employees’ retirement accounts using a formula.
11. Defined Benefit Plans
Employer promises a specific retirement benefit (e.g., $X/month for life). Contributions are actuarially determined. Employer bears investment and longevity risk.
12. Money Purchase Plans
Employer contributes a fixed percentage of salary annually, regardless of profits. More rigid than profit-sharing plans but offers predictable retirement funding.
13. Employee Stock Ownership Plans (ESOPs)
Employer-funded plans that invest primarily in employer stock. Employees become beneficial owners and may receive stock distributions upon retirement.
14. Governmental Plans
Retirement plans established by federal, state, or local governments, typically include pensions (defined benefit) and 457(b) deferred comp options.
15. 457 Plans
Deferred compensation plans for government and certain nonprofit employees. Allows pre-tax contributions similar to 401(k), but with different withdrawal rules.
16. Multiple Employer Plans (MEPs)
A retirement plan maintained by two or more unrelated employers. Allows cost-sharing and streamlined administration, increasingly popular among small businesses.
Help With Choosing a Retirement Plan
Solo or Self-Employed: Consider SEP, Solo 401(k), or Defined Benefit Plan.
Small Business with Employees: SIMPLE IRA, SEP, or 401(k).
High Earners Seeking Large Tax Deferrals: Defined Benefit Plan.
Low Admin Needs: Payroll Deduction IRA or SIMPLE IRA.
Nonprofits & Public Sector: 403(b) or 457 plan.