Nearly three-quarters of newly hired corporate executives are now treated like their rank-and-file when it comes to retirement benefits, with few being offered the traditional “top-hat” defined benefit plan that used to be as common as a company car and stock options for senior managers. In making this transition away from DB plans, however, some Fortune 200 plan sponsors are opting for a hybrid approach combining elements of both types of plans.
Professional services consulting firm Towers Watson set out in an update report based on 2013 data to find out whether a hybrid offering resulted in a different outcome for executive retirement benefits. The answer: Companies that converted to hybrid plans for executives continued to sponsor executive DB plans, although some eliminated their DB Supplemental Executive Retirement Plans, which usually offer enhanced benefits beyond a qualified plan.
“[S]urvey data clearly indicate that organizations sponsoring only DC plans are less likely to provide any executive retirement plan (restoration or SERP),” according to the Towers Watson report from August titled “Executive Retirement Benefits in the Wake of Qualified Plan Changes.”
In 2011, Towers Watson examined Fortune 100 companies that had frozen or closed their qualified pensions to see what happened to their nonqualified retirement benefits, such as SERPs. The study found, in large measure, that executives at these companies were being given retirement plans much the same as other employees. “Most companies switched from DB to DC nonqualified retirement benefits for newly hired executives and used the same transition approaches for both executive and qualified DB plans,” Towers Watson said of the 2011 research.
When analyzing for 2013 the Fortune 200 companies that took a hybrid approach to cutting costs on executive retirement benefits, the following patterns emerged:
- Most of the Fortune 100 companies that closed or froze their qualified DB plans now provide DC-style retirement benefits to executives in the form of “restoration plans,” which are nonqualified plans that restore benefits lost under qualified plan limitations imposed by the federal tax Code such as annual compensation and contribution caps.
- While most of these employers still provide some form of employer-paid executive retirement plan, in most cases the plans are less generous than they were before the qualified programs were changed. The majority of companies now offer restoration plans in lieu of SERPs, Towers Watson said.
- Employers continue to offer executives elective deferral options regardless of changes made to the main retirement programs.
- Several companies switched from traditional pensions to hybrid plans, usually cash balance plans in which participants are typically allocated a percentage of their pay annually, which grows with interest credits (see October column). These plan sponsors followed a somewhat different transition approach toward SERPs than the other ones analyzed. SERPs offered declined by slightly more than one-third in the hybrid conversion group; they dropped by almost two-thirds in the group that adopted a DC-only approach. SERPs can be structured as DB or DC benefits.
“[T]he majority of executive benefit value now resides in DC restoration plans,” Towers Watson found in its analysis of 2013 data. In addition, changes to qualified plans did not materially affect elective deferral sponsorship, which continues to be prevalent, the consulting firm said.
Varied Transition Approaches
Towers Watson said in the report it had sufficient data to analyze 105 of 114 companies in the 2013 Fortune 200 that froze or closed a DB plan, or converted their traditional pensions to hybrid plans after 1998. Of these, two main approaches were taken to transitioning executives to the companies’ broad-based retirement plan after closing or freezing DB plans. They are:
- changing DB restoration plans; and
- changing DB SERPs.
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