Page 348 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

334 The Complete Guide to Executive Compensation

with an annual percentage each year and the numbers are totaled at time of retirement to
determine the payment. The formula may be tilted in favor of length of service and expressed
as a percentage of the average final pay. For example, the formula might call for 5 percent for
each of the first 10 years of service, 10 percent for each of the next 10, and 15 percent for all
years after 20. With this formula, a person with 10 years’ service would receive a lump-sum
payment equal to 50 percent of final pay, whereas a 20-year employee would receive a lump
sum equal to 150 percent of average final pay.

Profit Sharing (Age or Service Adjusted). Under a profit-sharing plan that adjusts for age
or service, the employer contribution (based on employee compensation) is weighted in favor
of older or longer-service employees. The rationale is that the future value of contributions
by younger individuals will be greater because of the longer period for interest compound-
ing to take place. Shown in Table 6-35 are example age-/service-adjusted profit-sharing
formulas. With this formula, a person age 55 would have a 6 percent contribution made by
the employer, and the next year the amount would rise to 8 percent.

Annual
Age Years of Service Contribution
as % of Pay
Up through 35 1–10 2%

36–45 11–20 4%
46–55 21–30 6%

56–up 31–40 8%
Table 6-35. Age-/service-adjusted profit-sharing contributions

One must be careful in the design of such a plan not to run afoul of age discrimination
laws. Clearly, the plan is counter to “equal costs” and therefore must pass a test of “equivalent
benefits.”
Target Benefit. A target-benefit plan begins looking like a defined-benefit plan but ends up
a defined-contribution plan. A “target” or desirable retirement benefit for a stated age and
number of years of service is determined. It might be stated as 1.5 percent of final average
pay times years of credited service. Based on the person’s life expectancy as well as actual and
investment assumptions, a contribution rate is calculated to provide the targeted benefit. The
rate may differ by employee. At this point, it has become a defined-benefit plan. Individual
accounts are set up for each employee, with various investment opportunities available.
There is no guarantee the target will be met. Investment gains and losses, plus the employer
contribution, will determine the actual retirement benefit.

Reverse Mortgage
For those with inadequate traditional pensions, the house may provide a needed supplement.
Instead of monthly payments to retire a mortgage, it may be possible to take a loan against
the house that will not require repayments during their lifetime.