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Qualified Support for Nonqualified Plans

Advisers recommend beefing up retirement benefits for top execs.

It’s hard to believe but, amidst the ongoing freezing of corporate pensions for the rank and file, one employee group is due for an increase in those benefits. At a time when shareholders are voting down executive pay packages in droves — at the Citigroup annual meeting this spring and at other companies last year — financial experts have been advocating richer retirement benefits for the top brass.

Officials at Prudential Retirement point to their most recent annual survey of executive benefits at some 300 companies, released in May, to assert that is exactly what’s happening. With balance sheets a bit recovered from the recession, and doubts about other sources of retirement income, companies are turning to these so-called nonqualified benefits as a key tool in the competition for executive talent, says George Castineiras, the senior vice president who heads Prudential Retirement’s total retirement solutions business.

“For the first time,” he says, “we’re seeing advisers sit down with employers and say, ‘Let’s take a look at how we manage qualified and nonqualified corporate plans together.’ If you focus on purely qualified plans” — that is, 401(k)s and other mass-market programs that qualify for tax deferrals — “you’re going to sell yourselves short in being able to cover all employees appropriately.”

Other compensation experts, however, are more skeptical. Especially since the 2010 Dodd-Frank Act, “shareholder groups are pushing for less guaranteed money and more equity-type payments that are tied to stock performance,” says Jack Abraham, a principal in PricewaterhouseCoopers’ human resources retirement practice.

Most attention centers on nonqualified deferred compensation plans, in which executives squirrel away a portion of their salary above the maximum that qualifies for tax deferrals under federal 401(k) nondiscrimination rules. Historically, according to Castineiras, companies have added matching contributions as high as 50 percent. Although no one seems to keep overall U.S. statistics, the accounts in the Prudential Retirement survey total about $13 billion.

However, these “accounts” are often just bookkeeping entries, rather than actual investment pools, and can be wiped out in a corporate bankruptcy.

The Prudential survey shows some signs that companies are sprucing up their nonqualified offerings. Nearly 45 percent of the respondents provide financial planning as a benefit, up from 40.2 percent in 2010. Of the few companies (13 percent) that expect to make changes in their plans, more than half will add or enhance investment options, and 41 percent will add or enhance distribution options.

In a backhanded way, there is also more support for the company match. While 21 percent of the respondents reduced or eliminated it in 2009, only 5.4 percent did so this time. And of those contemplating changes to the plan, 0.6 percent expects to enhance the match.

Countering Abraham of PwC, Castineiras claims that these trends are not really impacted by the rise in shareholder activism. “Shareholders for the most part are focused on annual bonuses and stock options,” not pensions, he says.

Claudia Poster, a senior executive compensation consultant at the Towers Watson consulting firm, agrees with Castineiras that shareholder ire is more directed at bonuses and stock grants — at least, until the executives retire. “When someone retires and gets a humongous package, that’s when shareholders will look,” she says.

Nevertheless, she and others say, companies are trimming back, not enhancing, these perks, partly to save money.

For instance, Poster and PwC’s Abraham say their clients are reducing their matches and investment options and limiting the number of executives who qualify. Businesses may restrict benefits to the C-suite or shut the door on newly hired or promoted managers. “Companies want to keep it simple and streamlined, such that the possibility of noncompliance is small,” Abraham says. He says they are particularly scared of violating Section 409a, which was added to the federal tax code in 2005 and sets more stringent rules on tax deferrals and payouts of deferred compensation.

Ironically, some skeptics and advocates agree on one point: They wish more companies would beef up these benefits. “If you look at what really aligns the executive with the shareholder over the long term, it’s not strictly making them an equity holder,” that is, basing pay on stock performance, Abraham says. “If the executive had a large retirement payment that stretched out 30 years after he retired, plus stock, that combination may lead the executive to consider both the short-term impact of the share price, as well as the long-term viability of the company.”

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