Take away my people but leave my factories, and soon grass will grow on the factory floors … take away my factories but leave my people, and soon we will have a new and better factory. – Andrew Carnegie
In today’s tight labor market, competition for top talent is an ongoing concern for successful and growing companies. Employee benefit plans (401k, medical benefits, etc.) are available and suitable for most employees. However, under current conditions, there is a need to provide something beyond basic plans for key employees.
Executive benefit planning offers a variety of tools that can help a company with the critical three Rs of management: recruit, retain and reward.
Executive plans are beneficial to the participants as well as the company. Key employees are often highly compensated but, due to limitations in 401k plan contributions, find themselves unable to save at the desired level. Executive plans can provide the opportunity for this select group to increase pretax retirement savings that are adequate to replace their income in retirement.
The majority of Fortune 1000 companies use some form of benefit planning for their executive management. In this competitive job market, it is becoming increasingly crucial for businesses of all sizes to familiarize themselves with the various planning strategies available. Some common motivators lead businesses to explore how they can benefit from planning. These include the following:
- They have lost a key employee to a competitor.
- They are growing and expanding.
- They have unhappy, highly compensated execs that received a refund from their 401k.
- They have a highly trained and skilled class of employees.
- They have a very loyal group of key employees deserving of a reward for their service.
The benefit plan design offers considerable flexibility. Options are available to customize each employee’s benefits, align the plan with the company’s objectives, and fulfill the retirement needs of the individual employee. One of the most common plan designs is a nonqualified deferred compensation plan (NQDC), sometimes referred to as a 401k look-alike.
In an NQDC, a group of executives, managers or highly compensated vital employees are selected to participate (permissible discrimination).
Features of this plan offer opportunities similar to those of a 401k plan, such as:
- Annual pretax election of income to defer into the plan.
- The company can offer a matching contribution.
- Account balances accumulate tax-deferred until withdrawn.
- An employee has investment choice and control over assets.
The following are some areas where an NQDC plan can differ from a 401k plan:
- The income deferral amount is unlimited.
- The employer match, if offered, can be customized to the individual.
- To avoid current taxation, it is permissible to contribute bonuses.
Executive benefit plans are a low-cost, high-value option that can be utilized by any size company to accomplish the three Rs. To summarize, the benefits for both parties include the following:
For the employer:
- A tool to recruit, retain and reward.
- Discretion as to which employees participate.
- Flexible plan designs, down to the individual employee, if desired.
- Less reporting and administration than with qualified plans.
For the employee:
- Supplements retirement savings as an offset to qualified plan limitations.
- No limit on annual contribution.
- Current tax savings and tax-deferred growth.
- Investment option choice and control.
The improving economy is creating a more competitive job market. In the search for top talent and in the battle to recruit, retain and reward leaders and key employees, it makes sense to learn more about powerful options available in the suite of executive benefits.
At Árachas Group we provide insurance planning, financial services and risk management solutions. Our unbiased consultative approach and vast selection of products and support make us unique in the marketplace to serve our businesses’ and individual clients’ planning needs.
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