Gramm Financial Center Deferred Compensation in the New Millennium Gramm Financial Center .

Gramm Financial Center

Deferred Compensation in the

New Millennium

Gramm Financial Centerhttp://gfc.pfyfn.com

NON-QUALIFIED EXECUTIVE BENEFIT PLANS

In Recent years, Corporations have implemented Non-Qualified Plans to:

1. Entice the best leadership and technical talent to their companies,

2. Reward senior staff members for performance in a highly competitive environment,

3. Retain key employees from being lured away by the competition, and

4. Overcome the government limits imposed on Key Executive's participation in corporate pension and 410-(k) type plans.

The 3 CAN'TS:

•We can't allow you to defer the desired amount of pre-tax compensation (LEGISLATIVE LIMITS).

•We can't provide retirement income commensurate with your final salary (90-100% of final salary).

•We can't provide an adequate level of Survivorship Benefits to protect your family (ERISA requirements).

Companies have been forced to say to their executives...

SUPPLEMENTAL RETIREMENT INCOME

Issues

• Qualified Plan restrictions:• Must be employee to participate; director not eligible.• Limits on benefits and contributions.• $160,000 (as indexed for COLA) Compensation cap in determining qualified pension benefits• Changes in discrimination rules.

• Incentive compensation excluded from pension formulas• Lower income replacement ratios- reduced standard of living after retirement for key employees.• No linkage between benefit level and corporate performance measures.

Copyright © 2000 Gramm Financial Center

SUPPLEMENTAL SURVIVOR BENEFITS

Typical Group Term Issues

• Benefit often less than targeted because:• incentive compensation not used to determine benefit

• Few collect; most deaths occur after retirement when coverage is terminated or substantially reduced.• Poor cost/ benefit ratio:

• High cost to employer with low collection ratio by employees.• Not a retention tool for management• Excessive imputed income to employee

• Government restrictions and compliance requirements on eligibility and benefit amounts.


THE NEED FOR AN ADDITIONAL BENEFIT PLAN GROWSAS COMPENSATION INCREASESExample: Current Age - 45 - Retirement at Age - 65

PROBLEMEconomists say you need 75%-85% of income during your retirement.

1The maximum amount that can be deposited into a 401(k) plan for 2000 is $10,500.2 Benefits from the 401(k) plan assume deposits increase by 8% annually and those benefits are based on a life annuity.3 Social Security benefits are determined based on the 2000-benefit scale.* Inequity in benefits begins at salary levels above $60,000.

SOLUTION85% of Income-Your current plan

in conjunction with our supplemental plan-eliminates the government legislated inequity.


DEFERRED COMPENSATION ILLUSTRATED


Issues•Quality of Promise- nonqualified plan participants are unsecured creditors exposed to benefit security risks:

-Change in control-Change of heart-Change in Financial condition-Regulatory invasion-Insolvency bankruptcy

Security Alternatives•Funded rabbi trust•Callable funded rabbi trust•Joint-security contract•Secular COLI•Secular annuity•Indemnification agreement•Multiple trusts

Benefit Security

Tax deferred compounding not only greatly increases the value of today's dollar, it also puts the executive back in control of his/her retirement planning. If a 45-year-old defers $1,000 today and begins receiving a benefit at age 65 over a 10-year period, the after-tax return greatly outpaces any outside investment made:

DEFERRAL PLAN VS OUTSIDE INVESTMENT

Non-Qualified Plans allow companies to say to their executives

THE 3 CANS:

•We can allow an unlimited amount of pre-tax compensation deferrals

•We can restore the lost retirement benefits commensurate with your final salary

•We can provide Supplemental Survivorship Benefits to protect your family

What are the basic NON-QUALIFIED Plans that can provide these added benefits?

•Deferred Compensation•Elective Deferral / Supplemental 401-K Mirror Plan•Management Security Contract™•Joint Security Trust™•Leveraged Compensation Plan™

•Supplemental Executive Retirement Plan (S.E.R.P.)•Deferred Contribution S.E.R.P.•Deferred Benefit S.E.R.P.•Forfeitable Executive Bonus Plan (83-B)

•Group Term Carve-Out Plans•Split Dollar•162 Bonus

Financial Modeling

Gramm Financial Centerhttp://gfc.pfyfn.com

PLAN DESIGN & INFORMAL FUNDING COMPARISON SAMPLE COMPANY

PLAN


PLAN DESIGN & INFORMAL FUNDING COMPARISON SAMPLE COMPANY

INFORMAL FUNDING ALTERNATIVES





Gramm Financial Center Deferred Compensation in the New Millennium Gramm Financial Center .

Documents

benefit level

benefit amounts

benefit scale

supplemental plan

current plan

incentive compensation

retirement income commensurate

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