When corporate executives retire these days, chances are they will have had a hand in funding their leisure years using a salary reduction or other deferred compensation arrangement. That’s because a dwindling percentage of U.S. businesses are offering them the gold standard of retirement packages: the 100% employer-funded supplemental executive retirement plan.
“Just as we’ve observed a shift from defined benefit plans to cash balance plans, we’ve also seen the responsibility for retirement saving and deferral move from the employer to the employee,” says Ward Russell, president of the Todd Organization, Greensboro, N.C. “The demand for defined contribution, deferred compensation plans is now outpacing that of SERPs.”
Adds Andrew Dalgliesh, a chief financial officer for employer solutions at Principal Financial Group, Des Moines, Iowa: “Although our SERP business is growing, our deferred compensation business is growing faster because of the pressure to reduce costs to the business.”
A new study from the Todd Organization–”America’s Most Admired Companies: 2006 Executive Benefits Report”–bolsters these conclusions. Of 276 publicly held U.S. corporations surveyed in the report, 86% avail executives of voluntary deferred compensation plans. Additionally, 65% of the companies offer at least one company contribution, while another 48% provide 401(k) match restoration plans.
The percentages of companies offering defined benefit or account balance supplemental executive retirement plans are significantly lower. Defined benefit packages that use an annual accrual-based or target benefit formula–the most popular plans within the SERP world–have been adopted by just 47% and 16%, respectively, of the companies polled. SERPs using a fixed amount formula (for example, salary continuation plans) posted only a 4% adoption rate.
Why are SERPs, which in decades past nabbed the lion’s share of the non-qualified plan market, garnering a progressively smaller percentage of executive compensation packages? Experts interviewed by National Underwriter point to the shift generally among employers from defined benefit to defined contribution plans (both qualified and non-qualified) because of DB’s higher costs.
“With, say, a salary continuation plan, the onus is completely on the employer to fund the plan,” says Janice Forgays, a senior vice president at SunLife Financial, Wellesley Hills, Mass. “Regardless of how well the company’s business does, the company is committed to paying a sum certain at a time certain and for a period certain. And that may be a difficult burden to meet.”
The burden can be especially high, sources say, for start-up companies or businesses in volatile or seasonal industries that have difficulty meeting long-term financial obligations. Where SERPs continue to gain wide traction, these sources add, are in mature, stable companies that can count on consistent cash flow.
Absent that consistency, flexibility needs to be built into the plan. Hence the appeal of non-qualified plans that do not tie the business to a fixed dollar payout. Usually, observers say, this takes the form of a deferred compensation plan to which the company contributes but makes no guarantee as to the ultimate benefit.
Andrew Shapiro, a director of advance sales at Nationwide Financial, Columbus, Ohio, says most of Nationwide’s small business clients (broadly defined as firms with 250 or fewer employees) leverage a deferred comp package that mirrors a qualified 401(k) plan, thus pegging a defined contribution to a percentage of the executive’s compensation.
To be sure, SERPs continue to enjoy robust demand among small businesses. Dalgliesh notes that companies that still offer qualified pensions for all employees tend to supplement these plans with non-qualified SERPs for senior executives. Or, as is increasingly common among cash-strapped firms, they’re terminating or freezing qualified DB plans but maintaining non-qualified DB plans for top management.
Also common, says Dalgliesh, are companies that establish two-tiers of non-qualified executive compensation. In a 250-employee firm, for example, 30 managers and executives might be eligible for a voluntary deferred compensation package, 15 of whom may elect to participate. And of the 30, perhaps 2 or 3 top execs, such as the CEO and CFO, will also receive a SERP.
“We see this layering pretty frequently,” says Dalgliesh. “A good majority of deferred comp plans have a companion SERP plan.”
Among very small businesses, however, the SERP plan often stands alone.
“At businesses that don’t have a class of non-owner executives, there is really is no reason to implement a deferred comp plan,” says Peter Weinbaum, a vice president of advanced business and estate planning at National Life Group, Montpelier, Vt. Owners find they can do very different things for themselves, such as [Section 162] bonus plans.”