Today, many executives are facing a “retirement gap,” which is the difference between their retirement income objective and the retirement income provided by Social Security and qualified retirement plans.
The first step in addressing this problem is to quantify the gaps extent. The next step is determining how to fill it.
One way to fill this gap is through use of a nonqualified defined contribution deferred compensation plan.
Social Security and qualified retirement plans have various restrictions and caps. As a result, highly compensated executives end up with a much smaller percentage of income from these sources than rank-and-file employees.
To illustrate just how severe the gap may be for highly compensated executives, see the chart on this page.
Even in this example where retirement income is only paid out until age 75, there is a significant gap for high-income executives. A longer time frame would result in an even larger income replacement gap. Certainly, personal savings could be used to fill the gap and a customized analysis on an individual basis should include savings and investments.
There are a number of ways to fill the gap. In the right situation, an employer sponsored defined contribution deferred compensation plan (a.k.a. “excess plan” or “401(k) look-alike plan”) is an excellent way to help executives fill the gap on a tax deferred basis.
This employer sponsored plan allows select key management or highly compensated employees, who are limited in their ability to defer adequate dollars to the companys qualified plans, an option of deferring additional income to a nonqualified plan on a pre-tax basis. The plan is also flexible enough to allow the employer to make discretionary matching and/or profit sharing contributions to select employees accounts.
Most plans today look and feel very similar to the 401(k) plan because the executive can self-direct his contributions among multiple hypothetical investment options. State-of-the-art plans offer executives and plan sponsors Internet access, daily valuation, multiple money managers and investment options.