Should Execs Have Less Risk In Their Retirement Plans?

In a recent WSJ article, "For Executives, Sure-Thing Retirement Plans," revealed the disparity between realized returns for execs versus non-execs in their retirement plan vehicle structures.

Jacqueline D'Andrea, a former Wal-Mart Stores, Inc. manager, lost more than 60% of her 401K savings plan during 2009. Wal-Mart employees' 401K account balances declined 18% in comparison. Yet top executives at Wal-Mart didn't experience the same decline in their retirement account balances. Instead, they realized a pre-negotiated, guaranteed 6.6% rate of return.

Wal-Mart's CEO, H. Lee Scott Jr., had gains of $2.3 million in a supplemental retirement-savings plan, bringing its total savings to $46.7 million. "We're proud of the benefits we offer to our hourly associates, which include 401K and profit sharing contributions, merchandise discounts and bonuses," said a Wal-Mart spokesman, who confirmed the return on the plan's figures.

The practice of guaranteeing fixed returns on executive savings and deferred compensation plans isn't new. But it's been largely unreported, under the radar, and generally unknown to the general population outside of business executives, human resource professionals, and brokerages who sell these plans to companies. Companies set up supplemental plans so higher paid employees can set aside more money for retirement.

These executive supplemental retirement plans generally provide investment options that mirror the returns on mutual funds available in their employees' 401K plan. Because of this, many managers and execs who participated in the supplemental retirement plans also suffered losses to their account balances in 2008.

To be fair, executives enrolled in these fixed rate return retirement plans realize a reduced rate of return when the stock market goes up more than their pre-determined, guaranteed rate of return.

Executives at Illinois Tool Works, Inc., a manufacturer of fasteners and adhesives, received returns of 6.1% to 8.4% in 2008, yet employee 401K plans lost 25%. A spokeswoman said that in 2009, the average return of employees' 401K plans has been 23% while the return on the exec's deferred compensation plan was just 5.6%.

Yet, a gain of 12 to 14.5% over 2 years beats a loss of 2% over the same time period any day in my book! As most of us know, leveraged steady gains over the long term create larger account balances. And the sheer differences between exec and non-exec average accounts balances in these retirement accounts boggles the mind.....

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Becky Regan, M.A., CCP began her own consulting practice in 1995, Regan HR, Inc. to provide human resources consulting services to businesses in California. She has been successful in growing her business through reputation and client referrals. Her work as a consultant includes the full spectrum of HR technical expertise, including C-level recruitment, compensation studies (design, market and executive pay studies, sales compensation plans), training & teaching, interim assignments as a HR Director for organizations, and employee relations, including workplace investigations and written responses to formal complaints. For more HR tips and to receive my FREE "The Top 5 Secrets to Building a Better Organization that Every HR Pro Must Know" go to www.ReganHR.com.