Beyond 401(k): Retention Benefits Aimed at Executives
Workspan Daily
July 22, 2022
Executive Benefits
Key Takeaways

  • An alternative benefit for a new generation. Millennials are more inclined to job hop, which makes traditional retirement plans less attractive.  
  • Non-qualified deferred compensation plans. Alternative benefit plans allow executives to defer compensation that they have a legally binding right to receive at a later date that is arranged with the employer with intended tax benefits. 
  • Retaining a new wave of executives. While retirement benefits remain a staple for most organizations, non-qualified deferred compensation plans could serve as an alternative solution to retain high-performing talent and executives to navigate the upcoming economic terrain.  

Despite continued concerns over inflation and an economic downturn, the U.S. economy remains in a tight labor market. Thus, employers are deploying various compensation strategies such as retention bonuses to keep coveted talent on board.  

However, several large employers have sounded the signal that they will be slowing hiring or even trimming staff in anticipation of a recession. Therefore, organizations might shift their focus away from compensation and consider leaning on their existing and potential benefits options to retain talent.  

This same mentality extends to the highest-ranking employees in the organization, and standard retirement benefits might not hold the same weight they did for a previous generation of executives, said Todd Carpenter, senior vice president at NFP Executive Benefits.  

Millions of Baby Boomers retired or were incentivized to retire since the onset of the pandemic, with a younger generation of workers transitioning into many of those vacant executive positions. Millennials are more inclined to job hop, according to a Gallup study, which changes the math on what benefits might entice them to stay at an organization. Thus, a 401(k) retirement plan that can’t be accessed without penalty for another 30 years might not have the appeal to this new breed of leadership.  

“Telling [younger executives] that if they stay for another 30 years at the company then they will be taken care of in retirement doesn’t really fly for them,” Carpenter said. “Younger executives today are looking for more immediate or mid-term benefits in their package.” 

Therefore, some organizations are turning to non-qualified deferred compensation designs as an alternative for executives, more commonly referred to as supplemental executive retirement plans (SERPs). WorldatWork’s Total Rewards Inventory Programs and Practices survey found that 36% of organizations offered these plans in 2021 compared to 97% that offer defined contribution plans with pre-tax deferrals such as a 401(k).  

These plans allow executives to defer compensation that they have a legally binding right to receive at a later date that is arranged with the employer with intended tax benefits.  

Some of the most common benefits within these plans, according to Carpenter, include:  

  • College funding alternatives for families of executives  
  • Sabbaticals  
  • Flexible retirement alternatives to qualified plans   
  • Choice funding for life events such as turning age 50 and purchasing a vacation home  
  • Phantom equity arrangements when stock is not available to share  
  • In-service payments above annual bonuses for short term retention subject to restriction 

The appeal to younger executives is a shorter commitment to realize the benefit, with some plans triggered in as little as five years. For the organization, it increases the likelihood of retaining valuable high-level talent in the organization in an era of increased employee movement.  

“What companies are doing is trying to use the flexibility in non-qualified deferred comp plans to structure benefits and/or payments to come out at certain dates for executives to reward them for their service, but also accomplish goals such as providing for a child’s education, a second home, or even putting in a pool when they turn 40,” Carpenter said.  

Given the relative novelty of non-qualified deferred compensation plans, it’s too early to tell whether they are achieving the goal of retaining executive talent longer, Carpenter said. However, organizations considering the plan design typically consult their talent about what benefits would entice them to stay longer with the company, increasing the likelihood of it resonating.  

While retirement benefits remain a staple for most organizations, non-qualified deferred compensation plans could serve as an alternative solution to retain high-performing talent and executives to navigate the upcoming economic terrain.  

“There’s a lot of focus on retention right now,” Carpenter said. “So, companies have to find creative ways to incentivize new talent to not only come on board but retain the talent they have in place.”  

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