Saturday, February 16, 2002

Savvy Strategies

At 401(k) limit? Try a SERP account

        Problem: Even though the contribution limit to my 401(k) has increased, I want to save more. Any ideas?

        Strategy: Try a supplemental executive retirement plan, an increasingly popular method to enhance the retirement income of highly paid executives.

        The Financial Planning Association says that a SERP is a nonqualified retirement plan, which in general doesn't have the same restrictions and limitations imposed on 401(k) and profit-sharing plans.

        A SERP is a contractual agreement in which the employer agrees either to pay in a certain amount annually based on a percentage of the executive's pay, or to pay out a certain amount (such as 75 percent of salary) upon termination, retirement or death.

        In a defined-contribution approach, the amount set aside is credited with tax-deferred earnings based on either a fixed return or on corporate performance, or perhaps on the performance of the mutual-fund investments mirrored in the employer's 401(k) plan. How much the company agrees to contribute or the executive decides to defer is up to the employer and the executive. The law imposes no limits and filing regulations are minimal.

        A SERP can be offered only to a select group of highly compensated employees, typically not to exceed 5 percent of the company's workforce.

        Employers can pay for the plans in a number of ways. About half buy corporate-owned life insurance. The employer also can set aside cash, company stock or bonds on an ongoing basis, though it has to pay taxes annually on the income. Or the employer simply agrees to pay the benefits out of company earnings at the time the payments are due.

        Readers: Consider Savvy Strategies as general information only and seek the help of professionals because circumstances might vary.

        Planners: Share your unique tips with Enquirer readers. Send your Savvy Strategies to Amy Higgins, 312 Elm St., Cincinnati 45202 or e-mail


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