The concept of retirement savings has changed rapidly over the past two decades. The classic “three-legged stool” concept — in which individuals rely equally on Social Security, their company pension, and their savings for their retirement nest egg — no longer rings true for most Americans. Retirement incomes of the future will more likely resemble a pedestal table, with one’s personal savings providing primary support and Social Security or employer-supplied plans acting as stabilizers.
As hard as many people have worked to stash money for the future, many still haven’t done the math to understand whether they’re doing enough. A recent study found that nearly 50 percent of Americans say calculating their retirement number is not easy and that they would not know where to begin.
This brings up a question: Who makes up this 50 percent? Intuitively, you might guess that the higher people’s income rises, the more likely it is they have a sound, well-calculated retirement strategy. But, experienced agents know that’s not necessarily true. Many people with higher net incomes have non-workplace investments upon which they rely for long-term income, but they have never actually nailed down “their number” with any certainty.
In truth, when agents help executives with this important calculation, chances are they discover a gap between the executives’ envisioned retirement lifestyle and the actual financial infrastructure necessary to support it. This is because the retirement savings playing field is tilted against high-income individuals because of IRS limits on their ability to contribute to qualified workplace savings plans.
Qualified retirement plans still offer the best savings opportunity for retirement — contributions are not taxed to employees until withdrawn from the plan, and employer contributions are tax deductible. But there is a limit to how much a participant can contribute to a qualified plan: $15,500 annually for 401(k), 403(b), and 457(b) plans.
This limitation effectively puts highly paid executives at a disadvantage. So, those who participate in a 401(k), 403(b), or 457(b) plan fail to receive the same ratio of before-to-after retirement income as the average worker enjoys. For example, an employee making $50,000 a year can contribute more than 30 percent of their income to a 401(k), 403(b), or 457(b) plan, whereas an executive making $200,000 can contribute only 7.75 percent of their income.
Clearly, highly paid employees need nonqualified retirement benefits to make up for the limits on their contributions to qualified retirement plans. Just as important, employers need to focus on the value of nonqualified benefits to help recruit and retain talented executives in a highly competitive marketplace. None of this need was diminished by the recent legislation that implemented ? 409A of the Internal Revenue Code, but with fewer agents engaged in the executive benefits business, the opportunity has grown for those agents with the knowledge and focus to tap into this potentially lucrative universe of clients.
Employers also have a growing need for executive benefits arrangements. The Bureau of Labor Statistics estimates there are over 350,000 chief executives and 2.2 million “top executives” in the U.S. today. And according to Entrepreneur magazine, a survey of CEOs of medium-sized companies — those with 200 to 500 employees — reveals that their No. 1 concern is attracting and retaining quality employees.
As a refresher, here are some of the nonqualified executive benefits plan types that may help you build your business in this arena:
- Split-dollar loans – In essence, the employer pays premiums on a life insurance policy owned by the executive, yet retains an interest in the policy. The policy provides the executive with a death benefit and potential retirement income.
- Executive bonus (? 162) plans – This gives executives a cash value life insurance policy using the employee’s after-tax dollars. The employer pays the premiums, treating them as taxable bonuses. So, the executive gets potential tax-preferred supplemental retirement money, plus a death benefit on an after-tax basis.
- Restricted executive bonus arrangements – These, like the executive bonus plan, have the employer paying premiums, yet they use a supplemental agreement that may, for example, require the executive to pay back some or all of these premium advances if they leave prior to retirement. This provides a solid incentive to stick around for the long haul.
In a rapidly changing and competitive marketplace, these nonqualified retirement plans can be an effective tool for recruiting, retaining, and rewarding valuable executives. With flexibility in design and the ability to discriminate in favor of key executives, these plans can be customized to meet the needs of both the business and top management. Competitive benefit levels, deferred vesting of substantial benefits, future benefits dependent on meeting current company objectives, and similar incentives encourage top executives to remain with the company.
Savvy agents can see this business imperative clearly and are taking advantage of tools and training that can help them enter this market segment. Like their clients, they have calculated “their number” and have quantified the potential that lies in the executive benefits arena.
Randy Kemnitz is manager of executive benefits at ING. He can be reached at firstname.lastname@example.org. Maggie Mitchell is vice president of advanced markets at ING. She can be reached at email@example.com.