What Physicians Should Know About Defined Benefit Plans and ERISA
At LABEST, walking around with “Defined Benefits” on my badge has made me a magnet for pension questions from curious investors, founders, and physicians alike.
LABEST is UCLA’s premier life sciences innovation showcase, bringing together entrepreneurs, researchers, investors, and industry leaders to highlight cutting-edge biotech and MedTech breakthroughs.
After one of the panels, I spoke with a physician interested in setting up his defined benefit (DB) pension plan. His questions were sharp, grounded, and relevant—not just for physicians, but for any professional exploring retirement strategies beyond the standard 401(k). Our discussion quickly touched on PBGC insurance, ERISA flexibility, access to venture capital, association-based structures, and why these powerful retirement tools remain underutilized.
This article unpacks those questions with clear, direct answers, framed for physicians and professionals exploring defined benefit plans both as a retirement strategy and a capital allocation tool.
1. How does the Pension Benefit Guaranty Corporation (PBGC) work?
The PBGC is a federally chartered insurance agency that steps in to pay retirement benefits if a defined benefit pension plan fails. It guarantees vested benefits up to a certain limit, ensuring participants receive promised payments even if the plan sponsor becomes insolvent.
2. How much is the insurance and how underfunded does the plan have to be for PBGC to step in?
PBGC premiums are paid annually by the plan sponsor and consist of two parts: a flat-rate premium (currently $101 per participant per year in 2025) and a variable-rate premium for underfunded plans (currently 5.2% of the plan’s unfunded vested benefits, capped at $686 per participant). PBGC steps in only if the employer sponsoring the plan becomes financially unable to meet its obligations—the level of underfunding is secondary to the sponsor’s solvency.
3. What discretion does ERISA allow for portfolio construction?
ERISA (the Employee Retirement Income Security Act) requires plan fiduciaries to act prudently and diversify investments to minimize the risk of large losses, but it does not mandate a specific investment mix. This means you can allocate to public equities, fixed income, alternatives, real estate, and even venture capital—so long as the investment decisions are made with prudence, due diligence, and in the best interest of plan participants.
“The key to ERISA compliance isn’t avoiding alternative assets—it’s documenting the decision-making process,” says Robert Mowry, partner at Defined Benefits. “If a venture investment fits the long-term goals of the plan and is selected through a prudent process, it can absolutely be part of a well-managed pension portfolio.”
4. What are the costs of having an actuary do a 5500 filing versus a venture capital fund that’s audited?
Hiring an actuary to maintain a DB plan—including annual Form 5500 filings, actuarial valuation, and IRS compliance—typically costs between $1,000 and $3,000 per year, depending on plan complexity. In contrast, a venture capital fund audit can cost $15,000 to $75,000+ annually, especially when subject to SEC, ERISA, or institutional investor oversight.
5. If ERISA only permits those managing a DB plan to earn 50 to 100 basis points (1%), how can a venture manager get access to capital?
ERISA restricts fees paid from the plan itself to "reasonable compensation"—generally interpreted as 0.5–1% management fees—but capital from the plan can still be invested into pooled investment vehicles (like a venture fund) that charge standard fees, so long as the fiduciary process supporting the investment is sound. In practice, this means a physician’s DB plan can allocate to a venture fund if the investment is prudently selected, well documented, and consistent with the plan’s goals—allowing managers to access pension capital under ERISA-compliant structures.
6. How do I get an ERISA bond?
You can obtain an ERISA fidelity bond from most insurance providers or third-party administrators that specialize in retirement plans; it typically costs $100–$300 annually for a $500,000 coverage bond. The bond is required by ERISA to protect the plan against fraud or dishonesty by the individuals who handle plan assets.
7. Why aren’t more people doing this?
Despite their substantial tax advantages, defined benefit plans are underused because they’re perceived as complex, expensive, and risky, especially when compared to 401(k)s. Additionally, most physicians and professionals default to retirement plans offered by hospitals or employers, which often limit customization and investment flexibility.
“We’ve seen firsthand how much value gets left on the table when professionals rely solely on 401(k)s,” Mowry adds. “A well-structured DB plan can transform a physician’s retirement trajectory—both financially and from a risk perspective.”
8. How do people join an association and work together as side-gigs and collectively allow a single-employer DB plan to be spun up without personal liability for the returns?
Professionals can form or join an association—such as a medical or legal professional group—that functions as a bona fide employer entity, which then sponsors a single-employer defined benefit plan. As long as the association is the employer of record and contributions are made through the entity, individuals are shielded from personal liability, unlike in hospital or clinic-sponsored plans where liabilities may be tied to the business’s financial health or real estate ownership.
Reframing the Pension Plan: A Physician’s Capital Stack
Defined benefit plans are not just a way to save for retirement—they're a tool to shelter income, defer taxes, and allocate long-term capital into alternative investments with PBGC insurance protection. For high-earning physicians or entrepreneurial professionals, a properly structured plan can allow for contributions of $100,000 to $300,000+ annually, all tax-deductible and shielded from personal liability if organized under an association structure.
Pairing this with the ability to allocate into venture capital, private credit, or diversified real asset funds, these plans become mini-institutional endowments that benefit from compounded, tax-deferred growth.
Why PBGC-Backed DB Plans Are the Best-Kept Secret
There’s a paradox here: The defined benefit plan offers stronger guarantees, higher contribution limits, and institutional-level flexibility, yet it’s vastly less common than the 401(k) or IRA.
Here’s why:
Misconception about complexity: Most people believe DB plans require large businesses or complex administration—but small professional groups can use turnkey providers.
Unclear access to nontraditional investments: Many assume pensions must be in bonds or index funds, but ERISA permits a broader range with proper documentation.
Fear of long-term liability: PBGC coverage, when structured correctly, removes the fear of outliving plan assets or needing to "make up losses."
Lack of portability: Solo physicians think they can’t start their own plan outside of their hospital or clinic. In reality, they can use a side entity (e.g., a consulting LLC or medical media brand) and hire themselves into that entity to fund a compliant DB plan.
Creating a Collective Plan: The Association Model
Imagine ten physicians each doing side work—consulting, speaking, advising, or research. Alone, none may have a full-time W-2 or formal employer plan. But together, under a shared professional association or employment platform, they form a legitimate entity that:
Issues W-2 income or partnership allocations
Sponsors a single-employer DB plan with PBGC coverage
Offers centralized investment oversight, ideally with outside fiduciary support
Allows for each physician to have custom plan design and contribution targets
Shields individuals from investment liabilities through proper structuring
By separating the pension from their clinical employer (hospital, practice group, etc.), physicians gain autonomy over their retirement funds while protecting themselves from any real estate or malpractice-linked liability tied to employer-owned plans.
What’s the ROI on Getting This Right?
The tax advantages alone are meaningful. A physician in a high tax bracket who contributes $250,000 to a DB plan may save $100,000 or more in federal and state income tax each year. Over 10–15 years, that’s $1M+ in tax savings, not including compounded investment returns.
Combine that with the ability to allocate part of the portfolio into a venture fund, private equity, or real estate, and the DB plan becomes a strategic, low-volatility capital source—especially powerful in multi-employer models that diversify across participants and lower per-user costs.
Final Thoughts
For physicians and high-income professionals, defined benefit plans remain one of the most underutilized tools for long-term wealth building, risk management, and tax optimization. With PBGC insurance, ERISA-compliant flexibility, and the ability to scale through associations or multi-entity structures, DB plans offer a compelling answer to both retirement security and capital allocation—especially when paired with modern venture or alternative investment access.
If you’re a physician considering how to shield income, build durable retirement assets, and join a group of like-minded professionals doing the same, the time to explore a defined benefit plan is now.
Mr. Mowry is a pension strategist helping professionals optimize tax-deferred wealth while accessing nontraditional investment markets who works with doctors and family offices.