Executive benefits plans, once a luxury for executives, have now become a necessity resulting from historically low savings rates, limits on how much can be saved in qualified plans and limits on social security for the highly compensated. Here are some New Year’s Resolutions to enact now and anytime you want to ensure you’re doing what is necessary to help attract, retain and reward top performers.
In short: Resolve. Benchmark. Redesign. Educate. Save.
Offer an executive benefits program
Crazy as it may seem, many companies still do not offer executive benefits programs. While over 80% of large public and private employers (2,500+ employees) offer non-qualified programs, less than 50% of mid-market (500-2,500 employees) and less than 25% of small market (less than 500 employees) offer such programs. In an era where pension plans are rarely offered, highly compensated employees need something to supplement 401(k) and social security or they will not be able to maintain their pre-retirement lifestyle. Further, the ability to defer federal and state taxes, avoid capital gains, dividends and the new 3.8% tax on investment income, make non-qualified plans even more imperative.
Beat the competition
Unless you have done a peer review recently, you better be sure the competition does not offer a more attractive plan than you do. These plans are compensation. Offering a plan that is below par is like paying your top performer less than the competition. It’s only a matter of time before that costs the organization.
Offer compelling plan designs
Offering a program is step one but if that program is not designed properly, plan perception and participation will be low. You want to get and give the most for each dollar so if you are offering a plan, consider these features:
- Company match – extend 401(k) match to executive plan
- Pre-tax deferred retention/sign-on bonus – executive must work minimum number of years
- Pre-tax performance bonus – company paid if performance criteria met
- Ability to defer at least 75% of compensation
- Eligibility beyond just the C-suite
- In-service distributions – ability to elect to be paid out in as little as three years from deferral date
- Post-retirement distributions – ability to take distributions over as many as 10-20 years
- Investment lineup covering all market sectors including alternative investments
- Attractive fixed rate alternative 3%-4% plus death benefit (if informally funded with COLI)
Educate your people…in person
Unless someone is proactively reaching out to contact the plan eligibles and talk with them directly over the phone or in person, plan participation may be like the proverbial tree falling in the forest. We believe in the 25-25-50 theory. 25% of people understand the plan and will participate no matter what. 25% of people will never participate no matter what. The needle mover is the 50% of people who will not take action because they do not understand the plan and will not take the time unless they are contacted directly.
Informally fund the plan
While most companies informally fund and secure their non-qualified plans, some still do not. For public companies, many ratings agencies and analysts consider unfunded non-qualified liabilities to be debt. Further, waiting to fund these liabilities puts the burden of payment on future owners and shareholders which makes the company less attractive.
Many companies that do informally fund their plans continue to incur large tax costs resulting from taxable gains on assets used to informally fund their programs. If you would like to reduce the cost of the program, explore whether you can reduce cost through informal funding using tax-advantaged corporate owned life insurance (COLI). If you already use COLI, be sure that you do regular audits to ensure you are using the most current, cost-efficient COLI products designed to address today’s economic factors and designed to be flexible enough for tomorrow’s. One large COLI and BOLI carrier recently announced that effective February 1, 2014, cost of insurance rates will be increased for EXISTING policyholders due to persistently low interest rates.
Data shows that 81% of people do not keep New Year’s resolutions!
Being in the minority 19% ensures that your company, ownership, shareholders and most of all, your top executives will be better off.