The Todd Organization estimates that an executive earning $300,000 annually who plans to retire in 20 years will receive less than 30% of final pay from Social Security and maximum participation in a qualified 401(k) plan.
The retirement planning gap is daunting for many executives, particularly those affected by the Internal Revenue Service’s (IRS) $17,000 annual limit on individual contributions to a qualified 401(k) plan, The Todd Organization said in “Executive Benefit Plans: Has the Pendulum Swung Too Far,” its first in a series of thought leadership pieces. The report suggests executives strive to have retirement income that will replace 80% of their final pay, adjusted for inflation, over a period of 20 years or so.
Amid today’s shareholder activism, it is crucial that executive benefits be strategically and effectively structured so they retain and attract quality executives, the organization said. Executive compensation does not just refer to the chief executive or other top leaders—anyone who makes more than $115,000 a year is a highly compensated employee, Rich DeVita, principal at The Todd Organization, told PLANADVISER.
“We’re all living longer, we’re living healthier, that’s a good thing,” DeVita said. “But it comes with the challenge of stretching our money. Participants need a place to save on a pre-taxed basis.”
The 401(k) by itself is an inadequate tool to replace the levels of income that “rank-and-file” executives will need in retirement, he said. In sponsoring an executive deferred compensation plan, employers must recognize that they are giving these executives a chance to save their own money. So how do they go about helping executives reach their retirement goals?
DeVita said employers should determine whether the 401(k) match and limit are adequate to help participants save enough for retirement. Many deferred compensation plans do not offer a match, for example, so he suggests companies mirror the 401(k) match.
“Employers can also extend the match past the [IRS’s] considered compensation limit of $250,000,” he added.