Enhancing Senior Management Retirement Plan Benefits

July 25, 2014 (PLANSPONSOR.com) - There are a number of savings and compensation plans companies can use to both attract and retain members of senior management; two in particular are cash balance and non-qualified deferred compensation plans.

Most organizations use qualified retirement plans as the vehicle for providing retirement benefits to their rank and file employees. Qualified plans offer several advantages, the most important of which are tax-deferred savings for plan participants. These plans also offer immediate tax deductibility for all employer contributions and creditor protection for participants in the event the plan sponsor encounters financial distress.

The most common of these programs are 401(k) plans and 403(b) plans which are specifically structured not-for profit organizations. Both plans allow participants to contribute up to $17,500 in tax-deferred dollars to age 49, and up to $23,000 if 50 or older. Typically, these plans also offer an employee match or profit sharing contribution.

When properly designed, qualified plans can also provide enhanced benefits for members of the senior management team.

Cash Balance Plans

One option for providing enhanced benefits for selected participants only is to “layer” a cash balance plan on top of the 401(k) plan. When a company adds a cash balance component, it can provide additional tax deferrals to senior management. These deferral amounts range between $50,000 and $200,000, depending on the age of the participant. (It is important to understand that due to the costs associated with providing this enhanced benefit, cash balance plans generally are more appropriate for smaller companies).

Today’s cash balance plans are markedly different from earlier versions. Unlike the more traditional defined benefit and cash balance plans, variable cash balance plans offer the opportunity to customize benefits and, most importantly, to limit investment risk.

With a variable cash balance plan, the annual growth of the benefit is determined by the return on the trust assets. Consequently, there is no risk of the plan being either under or overfunded.

At the same time, it is important to understand that the plan must guarantee a 0% rate of return or protection of principal when a participant retires. However, the investment risk diminishes significantly within several years of the participant’s retirement.

As with 401(k) plans, participants enjoy creditor protection, and contributions made by the employer to the plan represent an immediate tax deduction.

Companies averse to the manner in which cash balance (qualified) plans are structured, or that are unwilling or unable to commit to making annual contributions, do have other options.

Non-Qualified Deferred Compensation Plans

While qualified plans must comply with various Employee Retirement Income Security Act (ERISA) nondiscrimination requirements, non-qualified plans do not. Rather, these plans are designed to be discriminatory since they may be offered only to a select group of senior managers. (In most instances, this select group will represent less than 15% of the company’s employees).

Plan sponsors have a number of alternatives for designing and funding these types of plans. Depending on the sponsor’s objectives, for example, plans may be funded with traditional investments, or with corporate-owned life insurance (COLI). However, because plan assets are considered an asset of the company until they are distributed, the company must pay taxes on all realized investment gains.

So called “phantom investments,” which shadow an index or other investment vehicles are book entries only and, therefore, are not considered taxable assets. However, the offset to this funding approach is that the plan sponsor must have the cash on hand at the time a distribution is made to a participant.

In addition, assets held in non-qualified deferred compensation plans are not creditor protected and, in the event the sponsor experiences financial difficulties, the sponsor’s creditors have “first rights” to the plan assets.

Using an Adviser’s Help

Due to the obvious complexities involved in selecting, implementing, and monitoring cash balance and non-qualified deferred compensation retirement plans, an investment adviser experienced in design and planning can render invaluable assistance to both plan sponsors and their key executives.

The first step an investment adviser should take is to gain a thorough understanding of the plan sponsor’s overall objectives and financial constraints. Once this analysis is completed, the adviser and the plan fiduciaries should focus on four areas:

  • Cost Modeling. Quantify costs to provide the benefits, both with regard to the estimated annual cash outlay, and the impact this outlay will have on the cash reserves on the plan sponsor’s books under financial accounting standards.
  • Benefit Modeling. Determine which key employees are to be included in the plan, and at what benefits level.
  • Risk Management. Develop an asset allocation strategy consistent with the plan sponsor’s risk tolerance, cost constraints, and objectives.
  • Plan Provider. Identify the most appropriate solution for accomplishing the plan sponsor’s overall objectives. These options may range from integrated/bundled services or an “a la carte” approach for maximum customization.

After completing this analysis, the investment adviser can help plan sponsor’s compare the available plan design options to the current plan and make recommendations as to the most appropriate plan (or plans) for accomplishing the plan sponsor’s overall objectives. 

Once the sponsor selects the plan design/approach, the investment adviser may assume responsibility for working with the investment committee and other plan fiduciaries in implementing the new plan.

About The Author  

Steve Bogner is a director with Treasury Partners, and is responsible for the firm’s retirement planning services. His areas of expertise include control/restricted stock, defined contribution/benefit plans, life insurance/annuities, and estate planning. He is a Certified 401(k) Professional (C(k)P), and holds Series 7, 31, and 63 securities licenses, a Series 65 investment adviser license, and is life and health insurance licensed.  


About Treasury Partners  

Headquartered in New York City, Treasury Partners is a team of 19 investment, portfolio management, analytical, and administrative professionals. Treasury Partners delivers an array of wealth management, corporate cash management, and retirement planning services.  

Treasury Partners is registered with HighTower Securities, LLC, member FINRA, MSRB, and SIPC, and & HighTower Advisers, LLC, a registered investment adviser with the SEC.   

See http://treasurypartners.com.    

About HighTower Advisors  

HighTower is a financial services firm offering a platform that blends objective wealth management advice with innovative technology.   

See http://hightoweradvisors.com.   

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.