Is it Time to Evaluate Your Non‑Qualified Plans?
Companies with non-qualified plans typically put them in place to retain and reward key talent, provide retirement income, and to attract new key executives.
These long-term benefit plans can be designed to fill the gap created by limits to traditional qualified retirement plan contributions and benefits. It is critical to periodically measure both the benefits provided by existing non-qualified plans as well as the informal funding structures in place.
The following questions should be considered:
Are the plan benefits competitive with those offered by other companies in our industry?
- Benefit structures that may have been extremely competitive at plan inception may not have kept pace with current trends in compensation and long-term rewards. Compensation levels and trends in benefit delivery vary by industry and region.
- The goal of a total long-term benefit package should be to provide meaningful replacement of pre-retirement income during retirement. Sources of company-provided retirement income that might be considered include benefits from: 401(k) match, Social Security (either in total or the employer’s portion), employee pension plans, and existing non-qualified plans.
Is the company properly accruing for the benefits promised to each executive?
- Long-term benefit obligations should be measured and accrued on the financials of the company.
- Systematic and regular accruals build the liability accounts and avoid large, unexpected financial statement impacts when benefit payments are made.
Is the non-qualified plan informally funded, and is the funding performance adequate?
- Non-qualified benefit plans can be informally funded to generate asset growth to offset benefit liabilities. Informal funding should provide efficient asset-liability matching and ideally, cost recovery to provide repayment of the cost of the benefits, the cost of funding, and a reasonable cost of money on both.
- The evaluation of funding should consider the performance projected at the time of purchase relative to actual performance and identify gaps in performance.
- It is important to review the character of the funding relative to the character of the benefit, and assure that an investment subject to interest rate volatility is carefully tracked.
Is there an opportunity to enhance long-term benefits using different benefit structures?
- If the current plan has a defined contribution structure, a look at a defined benefit plan to provide retirement income certainty might be appropriate.
- Benefits linked to performance can provide significant rewards, but only if warranted by company performance.