A major component of a hospital's compensation program involves retirement benefits. For hospital executives, supplemental executive retirement plans, or SERPs, are a staple of compensation programs, and the benefits within retirement plans could be make-or-break for any person or institution.
Kevin Talbot, executive vice president and practice leader of total compensation and rewards at Integrated Healthcare Strategies, shares his insight on trends with hospital and health system executive retirement plans and the causes behind those trends.
Question: Before we talk about the trends in hospital executive retirement benefits, can you briefly explain the differences between qualified and non-qualified plans?
Kevin Talbot: A qualified plan is going to be, for example, your 401(k), 403(b) or a qualified pension plan. Those plans are typically provided to all employees, including executives, and the amount of compensation considered for benefits is limited.
Because of the limitations on qualified plans, many organizations offer non-qualified retirement benefits to their executives. Typically, a non-qualified plan at a hospital is going to be a 457(b) or 457(f) plan. It's going to require some type of substantial risk of forfeiture. The IRS has released preliminary guidelines, and most times, 457(f) plans require a cliff vest. That means if an executive leaves before a certain period of time, he/she forfeits the money. For example, let's say there's a three-year cliff vest. If an executive leaves within three years, he/she forfeits that money, but after three years, that money is vested and taxed.
Q: So what are some of the trends you've seen with these retirement plans, especially supplemental executive retirement plans?
KT: What we've seen for several years is a change from qualified defined benefit plans to qualified defined contribution plans. That's nothing new. During the recession beginning in 2008, we also observed some organizations reducing matching contributions to qualified plans. When it comes to qualified defined benefit plans, even though there are still a number of them in existence, our latest survey showed that 50 percent that are still in existence are frozen. That means there may still be a defined benefit qualified plan [at the hospital], but anyone new coming into the organization would be going into a DC plan.
Approximately 80 percent of CEOs receive some type of non-qualified retirement plan. SERPs are one of the most common with roughly 70 percent of CEOs being eligible for one. But just like qualified plans, there has been a trend to move away from DB plans to DC plans. Our most recent survey showed that of those receiving some sort of SERP, 33 percent are DB plans, and 54 percent are DC plans. It's much more common to have DC plan.
Q: What does this mean for newer/younger hospital executives and their retirement benefits?
KT: We estimate that a new executive, in this day and age, is going to get less in retirement — overall as percent of final salary — than an executive from five or 10 years ago. That's because of changes in tax law and a shift from DB plans to DC plans. The underlying qualified plans are also becoming more conservative in design and in contribution levels.
Q: Did the economic collapse of 2008 have something to do with this trend? It's pretty clear that salary raises of CEOs, CFOs and others went down from 2008 to 2009, so maybe this also is affecting retirement benefits?
KT: I think the economic downtown contributed to this trend, but it was already under way. It may have accelerated the trend, though, because organizations have been more conservative across the board in the past few years with all compensation decisions, not just executive ones.
Kevin Talbot, executive vice president and practice leader of total compensation and rewards at Integrated Healthcare Strategies, shares his insight on trends with hospital and health system executive retirement plans and the causes behind those trends.Question: Before we talk about the trends in hospital executive retirement benefits, can you briefly explain the differences between qualified and non-qualified plans?
Kevin Talbot: A qualified plan is going to be, for example, your 401(k), 403(b) or a qualified pension plan. Those plans are typically provided to all employees, including executives, and the amount of compensation considered for benefits is limited.
Because of the limitations on qualified plans, many organizations offer non-qualified retirement benefits to their executives. Typically, a non-qualified plan at a hospital is going to be a 457(b) or 457(f) plan. It's going to require some type of substantial risk of forfeiture. The IRS has released preliminary guidelines, and most times, 457(f) plans require a cliff vest. That means if an executive leaves before a certain period of time, he/she forfeits the money. For example, let's say there's a three-year cliff vest. If an executive leaves within three years, he/she forfeits that money, but after three years, that money is vested and taxed.
Q: So what are some of the trends you've seen with these retirement plans, especially supplemental executive retirement plans?
KT: What we've seen for several years is a change from qualified defined benefit plans to qualified defined contribution plans. That's nothing new. During the recession beginning in 2008, we also observed some organizations reducing matching contributions to qualified plans. When it comes to qualified defined benefit plans, even though there are still a number of them in existence, our latest survey showed that 50 percent that are still in existence are frozen. That means there may still be a defined benefit qualified plan [at the hospital], but anyone new coming into the organization would be going into a DC plan.
Approximately 80 percent of CEOs receive some type of non-qualified retirement plan. SERPs are one of the most common with roughly 70 percent of CEOs being eligible for one. But just like qualified plans, there has been a trend to move away from DB plans to DC plans. Our most recent survey showed that of those receiving some sort of SERP, 33 percent are DB plans, and 54 percent are DC plans. It's much more common to have DC plan.
Q: What does this mean for newer/younger hospital executives and their retirement benefits?
KT: We estimate that a new executive, in this day and age, is going to get less in retirement — overall as percent of final salary — than an executive from five or 10 years ago. That's because of changes in tax law and a shift from DB plans to DC plans. The underlying qualified plans are also becoming more conservative in design and in contribution levels.
Q: Did the economic collapse of 2008 have something to do with this trend? It's pretty clear that salary raises of CEOs, CFOs and others went down from 2008 to 2009, so maybe this also is affecting retirement benefits?
KT: I think the economic downtown contributed to this trend, but it was already under way. It may have accelerated the trend, though, because organizations have been more conservative across the board in the past few years with all compensation decisions, not just executive ones.
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