A Powerful Weapon In War For Talent
One of the most important challenges any firm will face is winning the war for talent. Attracting, rewarding and retaining the best and brightest employees–especially senior executives who lead the company toward strategic and financial goals–is critical to ongoing success.
This is certainly true for high-profile Fortune 1000 corporations. But many people forget that its just as important for middle-market and smaller-sized firms.
Both large and small employers use a variety of tactics in the war for talent, including one that has gained tremendous popularity over the past decade–non-qualified deferred compensation plans. This product also offers a tremendous opportunity to financial professionals who understand these plans and how to sell them to middle- and small-market companies.
At many larger companies, the non-qualified deferred compensation plan complements other benefit programs such as a 401(k) plan, a defined benefit program, and stock option plans designed to attract and retain top talent. On the other hand, the nonqualified plan may be the only retirement benefit a small company offers its key executives, or it may be offered alongside a 401(k) plan.
In either case, it is just as effective in recruiting and holding on to key executives, because it is a benefit with high-perceived value. It can also be the single most important retirement-planning tool a small company can offer key employees.
Today, most Americans can no longer assume a financially sound retirement. For example, the savings rate in this country has dropped dramatically over the past decade. Americans saved 9% of their disposable income in 1985. That number was only 2% in 2001. Add to this the very uncertain future of Social Security. In 1990, there were 3.4 workers for every retiree. By the year 2040, there will be just two workers for every retiree. In 15 years, Social Security outflows will exceed contributions, placing a cornerstone of many workers retirement plans in jeopardy.
Even for those diligent about saving for retirement, the limits and restrictions currently in place for qualified plans like 401(k)s raise serious roadblocks to financing a secure retirement. This is especially true for highly compensated employees.
Executives in large and small companies alike are actually at a disadvantage with respect to qualified plans and Social Security. A standard 401(k) plan and Social Security may replace only 20%-25% of an executives earnings, while the same two sources may replace up to 70%-75% of a rank-and-file employees income.
For example, a worker earning $60,000 can contribute up to 20% of his or her income–or $12,000–to a 401(k) plan in 2003. But look at a more highly compensated married couple: The wife earns $150,000 and the husband earns $120,000. While the worker earning $60,000 a year can defer up to 20% of his earnings, the married couple is limited to just 8% and 10% of their earnings, respectively. All things being equal, the higher-compensated employee will end up with a dramatically lower percentage of income replacement at retirement.
A non-qualified plan can be the answer. Unlike qualified plans, the non-qualified deferred compensation plan enables executives voluntarily to defer a greater portion of their compensation until retirement, often up to 100% of salary, bonuses and other compensation–such as restricted stock. And in a professionally implemented plan, employees are not taxed on their deferrals until retirement or at death. But the funds may still earn returns. The result can be a larger retirement benefit than possible with qualified plans.