The plans are also susceptible to uncertainty over the tax code. Many financial advisers expect taxes on their superrich clients to rise next year, through the expiration of the Bush-era tax cuts or in another way. In theory, higher tax rates in the future should make these plans less desirable, because participants are basically delaying paying taxes until they withdraw the assets. For that reason, Mr. Levin suggests that clients contribute only half as much as they did previously.
Other experts, however, say there are too many uncertainties to issue such blanket recommendations. If an executive’s income is significantly less in retirement, or he or she moves to a low-tax state from a high-tax one, the tax bill might still be smaller in the future than today, even if rates go up. High and compounded investment returns could also outpace tax increases.
The recession, the increase in bankruptcies, the reduced withdrawal flexibility and the uncertainty over taxes have prompted the financial services industry to come up with new ways to make the executive plans attractive.
The newest Prudential survey showed a small but clear trend in that direction. For instance, during the recession, about one-fifth of the businesses polled had reduced or eliminated their corporate matching contribution to nonqualified plans, just as they did with their 401(k)’s. This year, however, only 5.4 percent cut back, and a handful even expected to start or enhance a match. A further 6 percent said they would add more investment choices.
Sheryl Craun, senior vice president of operations in Fidelity Investments’ retirement plan business, said that about 5 percent of clients were adding investment options. The most popular is a self-directed brokerage account, which allows executives almost unlimited choices.
Ms. Craun has also noticed that lower-level managers, even those earning just $75,000, are now allowed in. “I think companies are becoming more loose, because they’re using this as part of their retention program,” she said. Still, businesses cannot spread the benefit too widely, or they risk losing the nonqualified status and all its privileges.
Employers are trying harder to persuade executives to participate and to invest more, using personalized meetings and online planning tools, said George Castineiras, the senior vice president who heads Prudential’s total retirement solutions business.
And financial experts are looking for solutions to the bankruptcy problem. These solutions usually involve creating asset pools that contain real cash in the executive’s name. This protects the money from corporate creditors but raises new tax problems.
A few businesses, particularly in industries like tobacco and technology, are taking a second look at so-called secular trusts, said Robert Barbetti, an executive compensation specialist at J. P. Morgan Private Bank. The assets do not have the full tax deferral of a standard nonqualified plan, Mr. Barbetti said, but the employer typically adds enough money to the trust — “grosses up” the executive, as he put it — to cover the extra liability.
The catch, he said, is this: “Once you start grossing up for the executives, that catches the shareholders’ attention.” And companies like Citigroup, whose shareholders this spring voted down a $15 million pay package for the chief executive, Vikram S. Pandit, have enough trouble on that score.
ING is marketing what it calls a Bonus 162 plan, based on section 162(a) of the tax code, which allows companies to deduct an unspecified amount of “ordinary and necessary” business expenses. Despite the name, executives can contribute any after-tax income, not just bonuses. If they invest the money in life insurance products, Ms. Mitchell said, the earnings are tax-free, although executives must pay taxes up front on their initial contributions.
With his own executive compensation plan, Mr. Barbetti said he had decided to extend his withdrawal date by two years, to 2024. (He would not reveal the size of his account.) “Because of not knowing where the tax rates are going to go,” he said, “I wanted to make sure I deferred long enough so that the interest-rate compounding would equal the taxes.