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CCH® PENSION — 1/22/08

Most Employers Will Maintain Executive Retirement Plans

From Spencer's Benefits Reports: An overwhelming majority of employers have no intention of terminating their nonqualified executive retirement plans as a result of final 2007 regulations under IRC Sec. 409A. This finding is among the results of a survey released by Buck Consultants.

Buck’s study, 2007 Nonqualified Deferred Compensation Survey, was conducted after the Internal Revenue Service issued its final rules in 2007. The survey found that 95% of respondents will retain their executive defined contribution plans and 89% will continue their executive defined benefit plans.

However, in response to the final rules, approximately 30% of these nonqualified plans have been split into two parts to take advantage of grandfathering provisions in the final rules.

“Benefits vested as of Dec. 31, 2004, are grandfathered into the old deferred compensation rules,” said David Wax, principal in Buck’s talent management and rewards strategies practice. “Many employers are taking advantage of this grandfathering by splitting their plans into two parts in order to preserve the flexibility of the pre-409A portion.”

Eighty organizations participated in the survey. Forty-four percent of the respondents sponsor at least one nonqualified executive plan, and 14% offer five or more such arrangements. Respondents represent a broad range of industries and employer size.

Investment Choices

Seventy-three percent of the respondents permit executives to choose from a menu of investments in their nonqualified defined contribution plans. Of those, another 73% offer the same investment choices (or a subset of investment choices) as offered in the 401(k) plan.

“One of the ways nonqualified plans have evolved recently is in the range of investment choices offered,” said Mr. Wax. “In the past, these arrangements provided only a fixed rate of return defined by the plan, or a limited investment choice.”

Funding

A majority (62%) of plan sponsors informally fund their executive defined contribution plans at 100% of pretax accrued liability using a rabbi trust. Only 19% report similar funding of executive defined benefit obligations. The primary reasons given for not funding nonqualified benefits are “finding better uses for corporate cash” (69%); and “the size of obligation does not justify funding” (41%).

“This is another evolving area,” said Mr. Wax. “In the past, it was not uncommon for plan sponsors to avoid funding their plans. The benefits were paid out of corporate assets when due. Because the liabilities on these plans have gotten so large, however, we are seeing increased funding in order to demonstrate security to the participants.”

Among executive defined contribution plan sponsors, 47% favor the use of mutual funds as a funding mechanism, while sponsors of funded executive defined benefit plans generally prefer life insurance. The expected pretax return on funding assets is used as the primary metric for making funding decisions.

Fifty-two percent of sponsors have written policy statements governing the funding of executive defined contribution plan obligations, while only 33% of executive defined benefit plan sponsors have documented their funding policies.

Twenty percent of sponsors have never conducted a performance review of their funding programs for nonqualified plans. “This survey result suggests there is room for improvement in monitoring the performance of company assets that fund these plans,” said Peter Bell, a principal at Buck Consultants. “A well-written funding policy with performance objectives is not only good business practice, but also helps management understand why funding was established and what it is expected to deliver.”

Plan Design

Nonqualified defined benefit plans overwhelmingly use a final average pay formula (89%). Pay is defined as base salary plus annual incentives. Long-term incentives are rarely included in the determination of the benefit.

In nonqualified defined benefit plans, the most common service period used for full benefit accrual is 30 years (used by 36% of respondents).

The majority of nonqualified defined benefit plans provide unreduced benefits at age 65. However, 48% have plans that will pay unreduced benefits at an earlier age. Most plans (76%) permit participants to receive a reduced benefit at age 55.

For more information, visit http://www.buckconsultants.com.

 

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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