Transcript Slide 1

Executive Benefit Trends
June 26, 2008
MullinTBG
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James M. Clary
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MullinTBG
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409A – History
 Enacted in October 2004 to impose significant restrictions on deferred
compensation (broadly defined)
 Intended to curb more aggressive plan features (particularly those that pushed
constructive receipt constraints) against which IRS had been unsuccessful in
litigating
 Failure to comply results in immediate income on deferrals, a 20% excise tax
and other penalties
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409A – A High-Level Look
 Deferral elections must be made in the calendar year before services are
performed
 Distribution events limited
– Separation of service
– Fixed schedule
– Change in control
– Death
– Disability
– Unforeseeable emergency
 Restrictions on re-deferrals and payment accelerations
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409A – Impact on Executive Benefit Arena
 MullinTBG and PLANSPONSOR conducted second annual executive
benefit survey in 2007
 Over 350 responses from broad range of American corporate landscape
– 70% publicly traded
– 93% tax payers
– 68% with annual revenue/sales in excess of $1 billion
 Survey highlights developing trends and emerging best practices post-409A
– What is prevalent?
– What is changing?
– How effectively are plans meeting company and executive needs?
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Qualified and Nonqualified Trends
 Majority of companies reported no changes to most of their qualified plans
 Prevalence of defined benefit pensions continued to decline
– Over 28% of respondents stated that they had reduced or eliminated DBs
over the past 5 years
 409A has had little impact on the willingness of employers to offer
nonqualified deferred compensation plans (NQDCP)
– Over 90% of companies offer NQDCPs
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NQDCP Landscape
 Two main rationales given for offering NQDCPs
– Provide executives with retirement planning opportunities
– Provide HR with a recruiting/retention tool
 80% feel NQDCP is effective in achieving objectives
 Those not satisfied cite:
– Unattractive plan features
– Undue complexity
– Lack of rabbi trust
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NQDCP Participation
 Confidence in company performance is most influential factor in choosing
whether or not to participate
 Education/communication and general plan flexibility also attract participants
 Overall, over half of eligible executives choose to participate
 Plans with company match see increased participation – 61% vs 41%
 Where informal funding is in place, average participation increases by 27%
(from 44% to 56%)
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NQDCP Design Options
 Wide variety in plan features among NQDCPs, especially with regard to
investment options and valuation frequency
– Almost 79% offer between 1 and 20 investment options
– Lifestyle/lifecycle funds continue to grow in popularity (offered in one
out of 5 plans)
– Daily valuation is by far the most-offered mode (79%)
 Over 90% of companies offer opportunities to defer base salary and bonus,
with other deferral sources being less prevalent
 Nearly half of all companies provide some type of company match
– 57% of those make up the match “lost” in the 401(k)
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NQDCP Funding and Security
 Informal funding continues to be utilized by more than two-thirds of
respondents
– Offset growing plan liabilities
– Create an asset-to-liability match to hedge the P&L
– Provide some measure of participant security
 Among companies with NQDCP liabilities in the $20 million to $100 million
range, 80% informally fund their plans
 Of those that fund, 82% fund the pre-tax liability
 Mutual funds and corporate owned life insurance (COLI) are employed by
public companies in equal measure
 Rabbi trusts maintained their position as the security vehicle of choice
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NQDCP Record Keeping
 69% of companies use a third party for NQDCP record keeping
– Access to enhanced online tools
– On-demand benefit statements
– Paperless, on-line enrollment
– Call centers
 Statement accuracy is ranked as most important when assessing record keeper
performance
 Experience, expertise and capabilities are given more consideration in
decision-making process than price
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Financial Planning and Advice
 Companies are feeling the pressure of the “silver tsunami” as baby boomer
executives approach and enter retirement
 General sense of unease about answering participants’ questions on topics
such as fund allocation and estate planning
– Confidence level at providing guidance at 5 or lower on 10-point scale
 Many large and publicly traded companies offer financial planning benefits
provided by outside advisers
– Most do so at no cost to the executives
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Other Benefits
 Group LTD and group life insurance are consistently offered
 About 50% of companies offer voluntary long-term care coverage
 Executive life insurance is offered by about 50% of companies, most often
for pre-retirement coverage only
 Supplemental disability insurance is offered by over 40% of companies, split
between voluntary and company-paid arrangements
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Summary
 NQDCPs remain an increasingly popular tool
– Attracting and retaining key executives
– Providing additional retirement savings vehicle to compensate for loss of
DB plan
 Irrespective of 409A, most companies continue to offer NQDCPs
 Executives appear to be growing more concerned with all aspects of benefit
security
 Majority of companies informally fund and use mutual funds and COLI
 Company match and clear communication/education are key drivers of plan
participation and satisfaction
 Most companies rely on experienced third-party vendors for specialized
knowledge required for NQDCP recordkeeping
– Vendors more highly regarded when delivering cost-effective, exceptional
service in plan deign, consulting, customer care and record keeping
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