Data & Research January 4, 2008

Firms Keeping Non-qualified Plans

A majority of employers have no intention of terminating their non-qualified executive retirement plans due to final Internal Revenue Code rules governing these arrangements, according to a survey released by Buck Consultants.
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The survey found 95% of respondents will retain their executive defined contribution plans and 89% will continue their executive defined benefit plans, according to a press release. However, in response to grandfathering provisions of Section 409A regulations, approximately 30% of these non-qualified plans have been split into two parts.

Under the regulations, benefits vested as of December 31, 2004 are grandfathered under prior deferred compensation rules (See Final Deferred Compensation Regulations Issued).

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Non-qualified Plan Design

Seventy-three percent of respondents said they permit executives to choose from a menu of investments in their non-qualified defined contribution plans. Of those, 73% offer the same investment choices as offered in the company’s 401(k) plan or a subset of those options.

A majority (62%) of plan sponsors indicated they informally fund their executive defined contribution plans at 100% of pre-tax accrued liability using a rabbi trust. Only 19% reported similar funding of executive defined benefit obligations.

The primary reasons given for not funding non-qualified benefits were “finding better uses for corporate cash” (69%), and “the size of obligation does not justify funding” (41%).

Among executive defined contribution plan sponsors, 47% favor mutual funds as funding mechanisms, while sponsors of funded executive defined benefit plans generally prefer life insurance. The expected pre-tax return on funding assets is used as the primary metric for making funding decisions, Buck said in the release.

Fifty-two percent of sponsors said they have written policy statements governing the funding of executive defined contribution plan obligations, while 33% of executive defined benefit plan sponsors have documented their funding policies. Twenty percent of sponsors have never conducted a performance review of their funding programs for non-qualified plans.

The majority of non-qualified defined benefit plans (89%) use a final average pay formula. Pay is usually defined as base salary plus annual incentive and long-term incentives are rarely included in benefit determinations.

The most common service period used for full benefit accrual is 30 years (36%). The majority of non-qualified defined benefit plans provide unreduced benefits at age 65, but 48% of sponsors indicated their plans will pay unreduced benefits at an earlier age. Most plans (76%) permit participants to receive a reduced benefit at age 55.

Eighty organizations participated in the survey. Forty-four percent of respondents sponsor at least one non-qualified executive plan, and 14% offer five or more such arrangements. Respondents represent a broad range of industries and employer size.

Data & Research January 4, 2008

Getting, Keeping Clients Priority for Financial Services Firms

Financial services firms rank the ability to acquire and retain clients as their number one business challenge in 2008, according to a survey by Cerulli Associates.
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Forty-nine percent of respondents expressed concern about getting and keeping clients, according to the subscriber survey published in The Cerulli Edge – U.S. Asset Management Edition December 2007 Year-end Issue. Salesforce issues (15%) and product rationalization (10%) were a distant second and third on the list of business concerns.

As the industry matures and advisers and investors alike become more sophisticated, having an effective salesforce that is targeted appropriately presents a challenge, Cerulli said.

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With client acquisition and retention as the number one business challenge cited by survey respondents, it is understandable that the top two firm watchwords chosen by poll participants were sales (39%) and relationships (38%). Those were followed by brand awareness and retirement (26% each).

Advice – last year’s top firm buzzword – dropped to fifth place in the 2008 survey.

Coverage/economics was chosen by 21% of survey participants as the salesforce issue they anticipate will be their most complicated in 2008. Consistent customer experience and integration between institutional and retail sales were each chosen by 20% of firms.

Open-end mutual funds remain the primary product focus in 2008, the survey found. About 79% of respondents chose open-end funds as the major focus, and 53% gave it the highest priority. To meet investor demands and stand out from the competition, fund firms have refined their product lines by consolidating funds with similar objectives, acquiring funds with attractive track records, developing innovative products, and hiring managers specialized in a particular asset style as subadvisers.

The survey showed the growing popularity of alternative investments, as 77% of financial services firms chose hedge funds/private equity to be their main product focus for 2008. “These vehicles, previously used by high-net-worth investors or institutional investors, have moved downmarket, which creates more opportunities for firms interested in this arena,’ Cerulli said in the article.

Survey participants are subscribers of The Cerulli Edge – U.S. Asset Management Edition, Managed Accounts Edition, or Advisor Edition. They represent a variety of financial services firms, including asset managers, distributors, insurance companies, banks, and vendors.

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