Life insurance: a top funding vehicle in executive comp plans

Company-owned life insurance (COLI) and mutual funds continue to be the primary asset types used to fund both NQDC plans and defined benefit SERPs," the report states. "While sponsors typically employ 'variable' COLI to hedge the variable benefits of deferral plans, plan sponsors of defined benefit SERPs often use 'general account' insurance (whole or universal life) when insurance is used to fund SERP benefit liabilities.

"This reflects the ability to match the predictable expense structure of defined benefit SERPs with the relatively predictable earnings and beneficial accounting treatment of an insurance company's general account investment portfolio," the report adds.

Of the companies surveyed, 71 percent report that their NQDC plans are informally funded (pre-funding the plans using life insurance or other investing vehicle, as opposed to paying benefits as they come due when formally funding). In respect to SERPs, 55 percent of survey respondents informally fund these plans.

To segregate informally funded assets, nearly nine in 10 companies (88 percent) use a grantor "rabbi" trust, a type of trust used to defer taxation of non-qualified compensation due an executive. This compares to 71 percent of SERPs that use such trusts.