The Advisors' Blog

– Liz Dunshee

Don’t let the name deceive you – a supplemental executive retirement plan doesn’t have to focus strictly on payouts in retirement. And if your company is trying to retain up-and-coming execs in their 40s, you probably don’t want it to. This Longnecker blog illustrates why you might want your plan to be more flexible. Here’s an excerpt:

Executive A is 57 years old. He’s married and has adult children who live on their own. A is maxing out his deferrals into the company 401(k) plan but still hasn’t saved enough for retirement. His employer wants to reward him for his 15 years of service and keep him around another 10 years until he plans on retiring. Putting a SERP in place that promises to pay him 40 percent of his final pay for life will accomplish the employer’s goal, because 10 years and retirement are foremost on the executive’s mind.

Now let’s take a look at his successor in training: Executive B is 40 years old. He’s married with three children, ages 4, 6 and 8. B’s wife stays at home to care for the children and doesn’t have formal employment. B is contributing to his 401(k) but is nowhere near maxing out contributions. His employer wants to retain him long term to succeed Executive A. The employer offers B the same SERP that will pay him 40 percent of final pay at retirement. Three years go by, and Executive B leaves the company for a higher-paying job. The plan did not achieve the employer’s goal. Why did it fail, and how could it improve?