SERPs: funded plans challenge the unfunded.

• Author: Biggins, Peter
• Position: Supplemental Executive Retirement Plans

SERPs: funded plans challenge the unfunded

With recent changes in benefits regulation, executives must reexamine some of their steadfast policies on financing executive retirement benefits. Should companies consider funding their unfunded plans and thus buy some security--even if that may mean incurring an extra cost?

To fund or not to fund? This question is being addressed by more and more board members and compensation executives in light of the growing security concerns and escalating liabilities associated with supplemental executive retirement plans (SERPs).

Historically, the nonqualified plans that provide the benefits--including ERISA excess and supplemental executive retirement--have been unfunded. Thus, most employers today pay such benefits from general assets when payments become due. Although this approach puts executives in the position of being long-term unsecured creditors, the practice has prevailed for two reasons: 1) executives avoid current taxation, and 2) companies retain use of plan assets in the business.

Now, however, these priorities may be changing. Recent developments are producing large unfunded benefit liabilities and greater sensitivity about the security of these benefits. Employers are starting to reassess their basic philosophy on financing these arrangements. Some employers have adopted "pseudo" funded approaches, such as earmarked assets, corporate-owned life insurance, and "rabbi" trusts. But while these assets are invested or held in trust for the purpose of paying nonqualified plan benefits, they remain assets of the employer. By legal definition, such plans are unfunded.

A growing number of employers are examining other vehicles that allow an employer to set aside assets exclusively for nonqualified plan benefits. They did not consider such funded plans in the past because of tax and other financial implications. But with today's heightened concern over unfunded benefit liabilities, both employers and executives may find that the "price tag" for security is worth paying, especially in light of the lower individual top tax rates enacted in the 1986 Tax Reform Act.

Recent developments that impact funding

What developments are creating interest in funded plans? One factor is the current business environment. In an unfunded plan, executive benefits are not protected in the event of bankruptcy or insolvency, so the promise of future retirement income has become less certain. The wave of merger activity also has created psychological fears among executives about...