What is Supplemental Executive Retirement Plan?

957 reads · Last updated: December 5, 2024

A supplemental executive retirement plan (SERP) is a set of benefits that may be made available to top-level employees in addition to those covered in the company's standard retirement savings plan.A SERP is a form of a deferred-compensation plan. It is not a qualified plan. That is, there is no special tax treatment for the company or the employee, such as is available through a 401(k) plan.

Definition

A Supplemental Executive Retirement Plan (SERP) refers to a set of benefits provided to senior employees in addition to the company's standard retirement savings plan. SERP is a deferred compensation plan that is not a qualified plan, meaning the company and employees do not enjoy the special tax benefits offered by 401(k) plans.

Origin

The concept of SERPs originated in the mid-20th century as companies faced increasing competition for executive talent. To attract and retain executives, companies began offering additional retirement benefits. Initially, these plans were implemented mainly in large multinational corporations but later expanded to small and medium-sized enterprises.

Categories and Features

SERP plans are typically customized based on the specific needs of the company and the personal circumstances of the executives. They are characterized by high flexibility, the ability to adjust based on executive performance, and freedom from government restrictions on qualified plans. Although they lack tax benefits, the additional benefits they provide are highly attractive to executives.

Case Studies

For example, General Electric (GE) offers a comprehensive SERP plan to its executives to ensure they maintain a high standard of living post-retirement. Another example is IBM, which uses SERPs to attract and retain top technical and managerial talent.

Common Issues

Investors might worry about the cost of SERPs impacting the company's finances and whether these plans could lead to executives becoming overly reliant on the company. Typically, companies manage these risks through carefully designed terms.

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