The Pros & Cons of a Supplemental Executive Retirement Plan

As the business world evolves, so must the strategies and incentives it employs to attract, retain, and motivate top talent. One such tool in the executive compensation toolkit is a supplemental executive retirement plan (SERP). SERPs have pros and cons like any other investment plan.

The disadvantages of any benefit or investment plan shouldn’t, in themselves, be deterrents. But, it is beneficial to work with a qualified professional to develop the right plans for your company. They can help you navigate the laws and regulations to minimize the risk of wasting time and money when setting up SERPs for your top-level executives. 

Understanding Supplemental Executive Retirement Plans

A SERP is a non-qualified retirement plan that provides an additional retirement benefit for key executives. It operates beside a company’s existing qualified retirement plans, like RRSPs and pension plans, and is not subject to the same laws around funding, vesting, and taxation.

Designed with flexibility in mind, SERPs serve as a strong pull factor for ambitious leaders while being adaptable to the unique requirements of each organization. 

The decision to implement a SERP is not a light one, as it comes with a share of both advantages and limitations.

What Are the Advantages of SERPs?

A SERP can be a great addition to the benefits your company offers its top-performing team members.

Enhanced Retirement Benefits

SERPs can offer benefits beyond the limits of traditional retirement plans. They allow organizations to ensure executives receive the retirement plan benefits they expect, often in the form of a pre-established formula that calculates the executive’s final pay and years of service.

Attraction & Retention of Top Talent

A SERP can significantly bolster your company’s executive compensation package, serving as a powerful lure for seasoned professionals. Such a promise of a secure financial future can be an irresistible proposition for top talent and can also serve as a retention strategy.

Tax Advantages

Some elements of a SERP can be structured to provide tax benefits to the organization. For example, you can fund SERP benefits with life insurance policies, which often offer tax-deductible premiums for the company.

Flexibility in Plan Design

SERPs are flexible, allowing companies to tailor benefit amounts to individual executives, vary vesting schedules, and structure payouts in various ways to meet the needs of the executive and the long-term interests of the company.

Disadvantages of SERPs

While the advantages can be significant, offering a SERP may not be right for every organization.

Cost & Financial Risk

The open-ended nature of SERP liability means that the costs and risks associated with funding the plan can be hard to predict. The company could be on the hook for funding the future benefit, which can be a substantial financial commitment.

Complexity & Administration Requirements

Setting up and maintaining a SERP is complicated. It requires detailed legal and financial coordination, which can be a significant administrative burden, especially for smaller organizations with limited resources.

Limited Access for Lower-Level Employees

A SERP typically benefits a select group of management or highly compensated employees. This exclusivity could lead to a perception of inequality among lower-level staff, potentially affecting morale.

Regulatory & Compliance Challenges

Navigating the legal and regulatory framework surrounding SERPs can be a minefield. Non-qualified plans are subject to specific laws and require careful documentation and adherence to compliance standards.

Putting Together a SERP

With the right approach, a SERP can be a powerful addition to your executive compensation strategy. Here are some things to consider when structuring this beneficial tool.

Assess the Company’s Financial Situation

Determining the financial health of your organization is a crucial first step. Understanding what your company can afford to contribute over the long term can help avoid financial strain down the line.

Balance the Needs of Executives & Employees

While the primary objective of a SERP is to attract and retain top executives, it is also important to consider how the broader employee base will view such plans. Balancing inclusive compensation strategies with targeted executive benefits can help maintain a harmonious workplace.

Engaging Professional Advisors

It’s imperative to enlist the help of experienced professionals specializing in non-qualified benefit plans to navigate the complexities of financial planning, actuarial assumptions, and tax compliance.

Communication & Transparency

Introducing a SERP requires clear and effective communication with all stakeholders, especially employees and shareholders. Transparency is vital to ensuring that everyone understands the plan’s purpose, how it works, and why it benefits the organization as a whole.

Learn More About SERPs & If They’re Right for Your Company

The decision to incorporate a SERP into your company’s compensation package should ultimately be driven by a thorough understanding of its benefits and risks. When properly executed, a SERP can be a significant boon for executives and the organization. 

Call our team of experienced professionals at Qopia Financial today. We’re happy to sit down with you and determine whether offering a SERP is a good step for your company, and if so, we can help you get the ball rolling. Otherwise, we can help you come up with alternative plans.