The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 32. Supplemental Plans

OVER THE PAST SEVERAL YEARS, employers have been scrambling to set up supplemental pension plans for employees because of the growing limits on regular pension plans that we have been discussing. Even those employees happy to be covered in the new plans, though, might get unpleasant surprises at retirement. The supplemental plans do not offer the same security or tax advantages as traditional plans.

Regular pension plans, including both defined benefit plans and 401(k) plans, are called "qualified plans" because they meet certain rules and receive special tax treatment. The company, or plan sponsor, gets a deduction for any contribution it makes and employees do not pay any tax until they receive the benefit. Even when they retire, employees can roll the money over into an Individual Retirement Account (IRA) and continue to defer taxes. As discussed earlier, the government tries to maintain a delicate balance between encouraging Americans to save for their own retirement and preserving tax revenue.

Over the years, qualified plans have been cut back for upper-income employees to help bolster tax revenue. Recruiting top people for corporate and Wall Street jobs has been a tough business. Many companies try to make up for lost benefits by setting up supplemental executive retirement plans, called SERPs, which are non-qualified plans. SERPS represent a portion of the promised retirement benefit for many employees, but that is not portion guaranteed.

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