BENEFITS BUSINESS
Sales opportunities abound for agents and
brokers skilled in benefits products
By Len Strazewski
More executives than ever are demanding expanded benefits.
It's not just the flailing economy that frustrates top corporate executives. Retirement benefits that will never come close to matching their pre-retirement income have a growing number of highly compensated corporate employees grinding their teeth and wondering if they will ever be safely able to retire in the style they prefer.
However, while this situation poses problems to employers and their key executives, it can provide a sales opportunity for agents and brokers who understand deferred compensation, supplemental retirement plans and the corporate-owned life insurance (COLI) products that fund them.
Even though layoffs have become more prevalent than recruitment bidding wars, employers are still hard-pressed to provide retirement benefits that match top-level executive salaries, explains Sam Chiodo, vice president of the Corporate Strategies Group, MONY Life Insurance Company of America in New York. And more executives than ever are demanding the expanded benefits, he says.
Here's the problem: The Internal Revenue Service compensation limits that are used to calculate the accrual of benefits under defined benefit pension plans and the caps on employee contributions to 401(k) defined contribution plans often yield retirement benefits that fall far short of executive needs, Chiodo explains. Moreover, tax law penalizes highly compensated executives by reducing their contribution levels, if corporate tax-qualified plans attempt to discriminate in their favor.
For example, if a corporate executive earns more than $200,000 annually, standard qualified retirement plans will not provide comparable retirement income. Only about $170,000 of their compensation can be included in calculating pension benefits.
Tenure issues also compound the problem. Many senior executives are also short-term employees, hired late in their careers and unlikely to vest fully in traditional defined benefit pension plans. As a result, employers who want to recruit or retain the best senior executives need to design catch-up plans that bring their senior executives up to speed.
In the past, employers designed unfunded, non-qualified deferred compensation trust accounts that formalized a promise of additional benefits to selected employees. The employer and selected executives entered into a written agreement that specified how much compensation--often expressed as a deferred raise or bonus--would be held in trust and paid upon retirement or termination of employment, in addition to interest or other investment calculation. Taxes were deferred until the funds were received by the employee, and employers could not fund the trust in any tax-advantaged way.
However, these trusts were little more than promises--corporate debt that could be erased by a merger or acquisition or Chapter 11 bankruptcy reorganization. Or even a run of bad luck on the corporate balance sheet.
"Today, employers are judged by the promises made and the promises kept," Chiodo notes. "Unsecured promises need to be made secured, both to satisfy the concerns of the executives they were designed to cover, but also to provide some funding and tax benefits to employers."
Employers have been using corporate-owned life insurance (COLI) to informally fund supplemental retirement benefits for key executives for more than 20 years. The advantages of COLI are many, he says, and offset some of both the employer and employee problems.
COLI products accumulate a tax-deferred cash value that over time may compare favorably with other financial products and can be used to help the employer pay the promised retirement benefits. Proceeds, if paid as a death benefit, are also free from income tax to the beneficiary and can be used by the employer as beneficiary to recover the after-tax cost of paying the promised benefits as well as the premium cost.
Employers can also use COLI to create early payment options by accessing loan provisions or policy surrender provisions. Interest on policy loans may also be tax deductible.
Nearly all kinds of life insurance can be made into a COLI product: traditional whole life insurance, interest-rate-sensitive cash value products and universal or variable life insurance. By combining products, agents and their insurers can structure very flexible funding vehicles that combine death benefits with mutual fund investment options by using variable life insurance products, for example.
While the demand for supplemental benefits has created a boom market for COLI products, making the sale isn't easy, notes Kirk Penland, chief executive officer of Pen-Cal, Inc., in San Ramon, California, an employee benefits agency and brokerage that specializes in COLI products. Pen-Cal has 85 employees and additional offices in New York, Atlanta and Seattle.
Penland admits that supplemental retirement plans and related employee benefits products can be a lucrative source of new business for agents, but producers need to know much more than how to write a simple life insurance policy. They need to develop employee benefits and compensation expertise or team with a consultant or an attorney with Employee Retirement Income Security Act (ERISA) expertise who can design a program that uses COLI as a centerpiece.
Agents may also want to consider acquiring a securities license to provide mutual fund products that could be combined with life insurance to create more flexible deferred compensation packages, Penland says.
"Most of my clients do not come shopping for a corporate-owned life insurance product just to buy life insurance," he explains. "They come to us to develop an employee benefits plan design that meets their executive compensation needs. They don't come looking for funding vehicles; they are looking for a strategy that would include options for the best financial structure."
Plan designs are also becoming more complicated as executive expectations change, he adds.
"Previously, the executives who were covered by supplemental plans were in their 50s or early 60s, looking at near-term retirements," Penland explains. "The deferred compensation plans were relatively simple, calling for a payout in 10 or 15 years.
"Today, the average age of covered executives has dropped to the 40s, and these younger executives are looking for flexibility and portability. They are familiar with the broad range of choices available in many 401(k) retirement plans and expect to make decisions about the way their deferred compensation funds are invested. Flat rate accrual is unacceptable," he says.
As a result, Penland says employers are using COLI and variable life insurance investment options to design supplemental plans that not only flesh out 401(k) plans, but also look like 401(k) plans with investment options, daily valuations and other provisions.
"The non-qualified plans follow the lead of the qualified plans. Whatever choices and portability features become available for qualified plans, the same options are expected in non-qualified plans," according to Penland. "This complicates the sales process because producers need to be able to not only identify the appropriate life insurance products, but package the appropriate supplemental services."
Daily valuation and Web access to cash balances and investment options are hot new features for non-qualified plans, following their popularity in the qualified plans, he notes. Several insurers, including MONY, Prudential Life Insurance Co. and Northwestern Mutual Insurance Co. are testing online access services which can be purchased by employers for an administrative fee as an additional feature.
Third-party pension administrators can also provide daily valuation services, though their service will add substantially to the overall cost of providing the benefit.
Sound complicated? Making the leap from life insurance sales to deferred compensation plan design isn't easy, Penland says, but the access to senior executives and corporate employee benefits budgets may make acquiring the requisite skills and services worth the investment. *
The author
Len Strazewski has been covering employee benefits issues for more than 20 years and is employee benefits editor of Human Resource Executive magazine. He has an
MA in Industrial Relations
from Loyola University.