Offering benefits exclusive to highly compensated employees isnt a new concept, theyve been around for decades. Executive benefits have evolved, however, in response to Congress adjustment of contribution limits to help rank-and-file employees save money, says Joe Carpenter, president at NFP Executive Benefits.
The Employee Retirement Income Security Act encourages lower-paid employees to save, but HCEs need another option. Thats where executive benefits come in, Carpenter says.
Today, many employers are using non-qualified deferred compensation plans. Its inexpensive for the company, its of high value for the employee, says Stephen Mann, area vice president of Arthur J. Gallagher & Co.s executive benefits team in Chicago. There is a danger for employees who save this way, Carpenter says, and the plan sponsor must outlive the plan participant. If a plan sponsor goes bankrupt, a participant could lose it all. Everything that they defer is at risk, Carpenter says. The real need is for a retirement solution.
When it comes to executive benefits, an advisers role is that of risk manager, Carpenter says, and their focus should be on the consequences of an event occurring, not the probability of its occurrence. There are three areas to consider when designing a plan: pre-retirement death, disability and retirement, says Cline Young, an Austin-based retirement plan consultant with Gallagher. Addressing the needs of all employees, from millennials to baby boomers, is important, he says. Those two dont have the same plans in mind, Young says.
Carpenter suggests speaking with the employer and also top executives to find out what their needs are some are looking for a long-term savings plan while others are interested in short-term savings. A lawyer should draft a summary plan description and the final draft agreement, he says.
Communication is key
Communicating an executive benefits plan to all employees is essential, Mann says, as it can be seen as an extra benefit by the rank-and-file workforce. He says categorizing deferred compensation as retirement helps every employee better understand the benefit. Theres just no substitute for a well-communicated benefit plan, Mann says.
Due to a constantly changing Tax Code, advisers must be up-to-date on tax law before suggesting an executive benefits plan, says Suzette Clark, who runs the daily activities of Locktons executive benefits division.
Though deferred benefit plans arent new, Mann says there are still plenty of employers, mostly in the private sector, who are unaware of them, citing a client who had 400 executives each earning more than $200,000 a year and did not have a deferred benefit plan. Still, non-qualified plans have been gaining popularity among private companies, Young says. The private sector avoided them for three decades, he says, but private companies have been implementing non-qualified plans the past 10 years in order to attract talented workers that public companies are also seeking.
Because public and private companies are competing for the same employees, Young says, private employers want to know what their publicly traded peers are doing. Young says employers also expect advisers to understand all sides of an executive benefits plan design, implementation, administration, funding and ongoing service. We have to be adept at all those things, he says.
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