For too long, a dark cloud has covered the landscape of executive benefits. It is a cloud of change and uncertainty, regulations and tax notices, transition deadlines and severe tax penalties. It is one of the offspring of the American Jobs Creation Act of 2004. Has anyone besides me wondered how many jobs the American Jobs Creation Act actually created?
Industry reaction has been mostly "doom and gloom." Agents have retreated from the executive benefits business, believing that the new rules and regulations are too restrictive. New agents are hesitant to enter the executive benefits business for fear that the rules are too complicated.
But executives still need to accumulate assets for retirement and employers still need tools for recruiting and retaining quality executives. It is time to shine a light and step out from under the shadows. The truth is that now is the time for you to increase your business by serving the executive benefits market.
The "good news"
The good news is that nonqualified executive benefits using deferrals or salary continuation plans are still very much alive. Congress did not eliminate this area of planning for executives. Rather, it provided some much needed guidance and leveled the playing field for agents and clients.
Deferred compensation remains a viable planning technique for today's executives, and agents now have more certainty regarding what is and isn't permissible for such arrangements. The real effect of ?409A is to provide certainty in an area of planning that once was a quagmire.
It offers one set of rules for all executive benefits arrangements that fall within the meaning of a "non-qualified deferred compensation plan." While the rules create new restrictions they also may make it easier for new agents to get into the executive benefits business.
Opportunity knocks
Executive turnover today remains at somewhat lower levels than the workforce in general. However, the cost to replace an executive remains very high. Some estimates of the hard and soft costs of executive turnover are at 100% to 300%, respectively of annual salary. I would submit turnover in the executive suite is at the higher end of this range.
If you factor in the increase in executive salaries, the cost of turnover could be growing and significant. The cost to replace an executive with an annual salary of $250,000 could be between $400,000 and $600,000. Sound high to you? Consider not only the hard costs of a recruiter, signing bonus, relocation expenses, etc., but also the soft costs of vacancy, training, and down time of others. It adds up quickly and all of these are proportionately higher for executives.
Is an employer better off funding an executive benefit retention plan for an executive team or living with the costs of turnover? Looking at the numbers, it is clearly better to share the potential costs of turnover with the executive and give him or her incentives to stay. There is also anecdotal evidence suggesting that less turnover in the executive suite lessens overall turnover, thereby potentially increasing corporate profit.
Why not provide a nonqualified plan funded at $30,000 per year payable at age 65 for that 55-year-old CEO? The employer potentially saves costs and improves results; and the CEO has an incentive to stay. In addition, that CEO can plan for a high priority goal: a funded retirement.
