Potential Funding Problems With Deferred Comp Plans

Katt, Peter C.
August 1997
Journal of Financial Planning;Aug1997, Vol. 10 Issue 4, p32
Academic Journal
This article discusses the potential funding problems with deferred compensation plans. Nonqualified salary protection plans (SPP), also commonly known as deferred compensation plans, are used by employers to reward key employees and encourage their continued employment. Life insurance is almost always recommended to fund such plans because the policy cash values grow tax-deferred and the death benefits provide immediate funding in the event of a plan participant's premature death. The commitment to provide SPP benefits far into the future is not generally in the best interest of employers for two reasons. Such a long time-horizon does not seem to motivate the plan's participants. Secondly, those once deemed key employees may become much less important, while newer employees whom the employer would like to motivate may not become part of such a plan because the funds available already are being used for the original plan participants. Potential SPP underfunding can be avoided by defining the contributions instead of the benefits. Under a defined-contribution SPP, new projections should be done periodically to inform the SPP participants what they might expect at current interest rates so their expectations can be properly managed.


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