The Importance of a Periodic Plan Review

by | Jan 19, 2022 | Blogs

periodic plan review

Most supplemental executive retirement plans will be in place for many years, and often, decades. While most of these plans will not require daily management, failure to review the plans regularly increases the chances that the plan will not meet its objectives. These objectives can be related to compliance, asset performance, and executive retention. Keep reading to understand more about the importance of periodic plan review.

There are several important matters that should be included in a periodic plan review. Structural review, target benefit shortfall, asset performance, financial statement impact, and compliance and reporting are all areas that should be reviewed in detail.

Once plans are implemented, executives and the board go back to their normal activities, frequently forgetting how plans work, along with important ongoing considerations. Revisiting the operation of the plan at each review will ensure all parties understand the structures, rationale, and the types of assets used in the design.

Almost all SERPs are designed to fill a shortfall between a targeted replacement of final compensation for the executive’s retirement and the current projected retirement income provided by the employer’s other plans. A key component of a Target Benefit Calculation is the assumed rate by which the executive’s compensation will grow over time. Frequently, the rate used in the original design proves to be more conservative than actual salary growth, or a promotion is accompanied by a significant increase in compensation. Revisiting the original Target Benefit Calculation ensures that the SERP remains appropriately designed to achieve the desired retirement income for the executive

SERP arrangements can include assets such as life insurance policies, annuities, or other investments. These investments can have a fixed return, variable return, or collared return tied to a market index. Regardless of how the SERP’s assets achieve their returns, these returns can fluctuate over time and should be reviewed to ensure that assumptions continue to align with the original plan. In plans like these, so much relies on reasonable assumptions. That is why it is critical to conduct periodic plan reviews to ensure that the assumptions made when the plan was implemented were and remain conservative. If returns are significantly behind the plan, adjustments should be made to ensure realistic expectations moving forward.

All plans require regular monitoring to ensure ongoing compliance with applicable regulations and reporting requirements. This can range from ensuring sufficient interest is repaid to the organization in split-dollar arrangements, to vesting and taxation-related matters in deferred compensation plans. If plans fall out of compliance, there can be significant consequences, but regular review makes this preventable.

While taking the time to review important matters related to a plan may not seem like a priority, periodic plan reviews can prevent the delivery of out-sized benefits, avoid surprises in retirement, and make sure the organization and the executive achieve their goals for the arrangement. To learn more about TriscendNP and how we help organizations and their executives keep plans on track and maintain compliance, contact us today.

For more information, call (972) 318-1110 or contact us.

About the Author: David Wright

Mr. Wright is a co-founder and serves as Chief Strategy Officer with primary responsibility for strategy and business development and has served in this capacity for 20 years. Areas of expertise include business development, compliance, business transactions, and financial and accounting topics. Contact or learn more about David >>