A new look at executive retirement plans.

• Author: Currie, Phil
• Position: PENSIONS - Report

For two decades, corporations have been freezing qualified defined-benefit pension plans. The 401(k) defined-contribution plan has now taken center stage as corporate America continues to move away from an entitlement mentality by placing more retirement responsibility directly onto employees.

Once, an ability to "fog the mirror" was enough to ensure an adequate retirement income. No longer. Further, the steady rise in benefit costs, proxy disclosures and prevalence of activist litigation underscores employer commitment to slowly shift investment risk to plan participants.

Understandably, few defined-benefit supplemental executive retirement plans (SERPs) are being put into action today because as a category, defined-benefit plans have plummeted. In 1980, 60 percent of workers Were covered by DB pension plans and just 17 percent relied on defined-contribution plans, such as 401(k)s, according to the Center for Retirement Research at Boston College.

By 2004, however, 11 percent of workers were covered by defined benefit plans and 61 percent were covered by DC plans. (See figure on next page.)

This reality compels revisiting a venerable standby in the benefit plan line up: DC SERPs. Nonqualified SERPs permit a firm to provide an additional retirement benefit to exec- utives. Generally, it is a promise by the corporation to pay a future retirement benefit to an executive, separate from any qualified retirement plans that the company may sponsor.

A SERP is a nonqualified benefit plan that doesn't defer an employee's current salary and/or bonuses; its cost and funding is carried by the plan sponsor. Typically, SERP benefits are selectively granted to key executives for the purpose of recruitment, retention and reward. Among the principal reasons to establish a SERF include the plan's ability to:

SERP PREVALENCE Have a SERP Not Currently Considering Currently Considering 2001 75% 24% 1% 2002 76% 23% 1% 2003 71% 28% 1% 2004 83% 16% 1% 2005 69% 31% - 2007 67% 33% - Note: Table made from bar graph. * Restore benefits lost by legislative or regulatory enactments;

* Provide a salary-continuation plan;

* Fulfill a particular income target at retirement; and/or

* Create an additional wealth-accumulation opportunity at retirement.

Defined Differences

The differences between a SERP in DB and DC plans are simple but far-reaching, The distribution amount is defined in a DB SERP; a contribution amount is defined in a DC SERP.

DB SERPS provide a fixed monthly...