Help Clients Eliminate The Cap On Executive Retirement Savings

By Doug Campbell

If someone told you that there is a huge, mostly untapped market out there made up of some of the most desirable clients–small-to-medium-sized businesses and their top executives–who are a perfect fit for a product you can deliver, would it pique your interest?

Whats more, connecting with these lucrative clients offers the opportunity to cross-sell other high-end products and services like estate planning. This is a strategy deserving a closer look.

Retirement planning is a key concern for all employees. Surprisingly, top executives can actually be at a disadvantage because they are severely limited in what they can save in a tax-advantaged, defined-contribution plan. Qualified plans like 401(k) or IRAs are subject to a variety of IRS and ERISA restrictions that result in less than equitable treatment for highly compensated employees, because statutory limits cap the amount that can be contributed to the plan.

For this reason, employers are beginning to integrate a nonqualified supplemental retirement plan with their qualified 401(k) plan to create a benefit that will help key executives increase their retirement savings. This combination allows these employees to set aside additional pretax income for retirement that will grow tax deferred.

One of the most popular nonqualified options is known as the “401(k) Look-Alike plan using life insurance.” As its name implies, the Look-Alike plan works much like a conventional qualified 401(k) plan. However, unlike a 401(k) plan, most Look-Alike plans are funded by a variable universal life (VUL) insurance policy that also insures the life of the executive. This results in several benefits to the executive and the company.

For example, there is no limit on the amount an executive can contribute to the Look-Alike plan or on company-paid matching contributions. The employees contributions are pre-tax so they reduce his or her current taxable income. Any early withdrawals are not subject to the 401(k) plan 10% early withdrawal penalty. And the additional variable investment options offered by the VUL give the executive added flexibility in meeting his or her financial goals.

From the companys standpoint, the eventual retirement benefit is tax deductible and, with proper design, these benefits can be paid using income tax-free withdrawals or loans from the VUL policy. Finally, a Look-Alike plan is a valuable benefit that the company can use to attract and retain the outstanding talent it needs to ensure the growth and long-term success of the business.

How it works

Heres the essence of how a 401(k) Look-Alike plan using life insurance works. The company and the executive enter into a contractual agreement to defer future compensation for retirement. Each calendar year, the executive elects to defer a portion of the compensation he or she will receive during the upcoming year. As part of the contract, the company may agree to match all or part of the executives deferral and a rate of interest may be paid on the contributions and matches.

Then the company purchases a key person life insurance policy (usually a VUL) to fund the Look-Alike plan. As mentioned above, retirement benefits are paid using income tax-free withdrawals or loans from the VUL policy. Moreover, the cash values of the employer-owned policy can grow tax deferred and are general assets of the employer to be used when needs arise.

Finally, the policys death benefit is paid to the employer, who passes it on to the executives heirs. This benefit is income tax-free to the employer (but taxable income for the executive).

How to get started

Today, very few employers even know about the Look-Alike idea, much less offer these plans to their executives. So there is enormous potential to carve out a niche.

A good starting point is to partner with a financial services company that can educate you on all of the details of the Look-Alike plan and provide the tools and capabilities youll need to effectively bring this message to prospects and support their plans over time. Then begin contacting your current business clients, as well as professional advisors, like attorneys or accountants, who could refer their own clients to you. Be sure your presentation reviews why highly paid executives are at a disadvantage in saving for retirement, the multitude of benefits a Look-Alike offers to both the company and executive (see insert), and how easy it is to set up.

As conditions change–the market environment, legal and regulatory changes, shifts in consumer attitudes and needs–successful producers look for ways to turn these challenges into opportunities to help their clients and expand their own business. This 401(k) Look-Alike plan strategy is just such an opening.

Its an opportunity for you to establish another long-term tie to strengthen relationships with existing clients and a perfect entr?e to new prospects. Look-Alike plans can significantly add to the assets you manage and increase your income. And, they open the door to sell a number of other products and services to these lucrative clients.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 24, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.