By David Hauptman and Heather Garbers
Many organizations think they’re “good to go” with their executive benefit packages until a few basic facts are laid out that suggest…they’re not. Here are three to think about:
- Your 401(k) plan? It only replaces 15 percent to 35 percent of the income for top executives.
- Working past planned retirement? Senior executives discover they cannot afford to retire on 401(k) and Social Security income and are forced to work until age 70 (or older).
- Disability? If an executive becomes disabled, the compensation provided through the typical group disability plan falls short. Such plans pay 60 percent of the individual’s salary, with a coverage limit of $10,000 to $12,000 a month. That’s some $120,000 annually – inadequate for the executive used to earning at least $300,000 annually, plus bonus, commissions and other incentive and/or deferred income.
The reality is that your retirement plans and group benefits like disability may be perfectly adequate – superior, even – for your rank-and-file employees. But they likely fall short for higher paid senior management. Moreover, if you’re not taking a strategic view of your executive benefits packages by addressing these shortfalls while adding other value-add benefits into the mix, you’re putting your organization at a distinct disadvantage in the battle for executive talent.
Here are some ways to ensure your executive benefit packages really are good to go:
- Put money on top of money. One of the most attractive ways to enhance an executive’s retirement savings is through nonqualified defined contribution or defined benefit plans that supplement qualified plans. Under the former, the employer contributes a percentage of salary each year. In addition, the company can offer a voluntary nonqualified deferred compensation plan, into which the executive voluntarily contributes pretax compensation to build supplemental wealth for retirement. Taxes are not paid until distributions are received, typically post-retirement.
- When disability is more likely than death. That’s the reality, unfortunately, since a quarter of workers will likely become disabled before reaching the age of 67 . For executives, this has made individual disability insurance (IDI) a critical add-on to the group disability program, and well worth emphasizing during recruitment as they are typically unaware of the limitations of group plans. It’s important to insure the financial wellness of all your employees through insurance that’s adequate to their income level.
- Not just any old life insurance policy will do. Disability’s importance doesn’t negate the importance of life insurance as an executive benefit, and it might be worth exploring product types and carriers with your broker. Business owners, CEOs and others with very high compensation levels, for example, will need high levels of coverage calling for specialized underwriting that’s spread among carriers. And if there’s interest in long-term care as an executive benefit, one option might be a policy where the premium goes toward long-term care if it’s needed. But if the holder dies before that’s needed, the plan pays a death benefit to their beneficiaries.
- Planning for the long term. Long-term care coverage is another good executive benefit. Never mind that 74 percent of us that reach 65 will need it (at annual costs of $50,000 to $100,000 ). There are tax advantages for employer and employee; employer funded premiums are 100 percent deductible as a business expense, and the premium paid by the business is excluded from the employee’s adjusted gross income.
- Perk-like benefits protect everyone’s interests. It’s a good idea to round-out your executive packages with benefits that will help alleviate sources of stress, and better yet for everyone if you follow the trend and cover their costs. Legal coverage can be important to higher net worth employees, helping them out for planning needs for wills, trusts and estates. Identity theft protection is also smart as executives, with higher disposable incomes and positions of authority in the company, are attractive targets of hackers. Their personal assets as well as the employer’s may be at risk.
When the competition for top talent is fierce, employers who fail to offer more than basic group and retirement plans put themselves at a serious disadvantage. Strategically designed executive benefits can be the critical differentiator to hire and keep the talent that will take your organization to the next level.
HUB International’s specialists in retirement and benefits strategies are available to consult with your organization on ways to enhance your executive benefits packages.