Designed by Public Agency Retirement Planning, Inc.
The Need for Supplemental Retirement Plans
Public agencies are finding it increasingly difficult to attract and retain the high quality employees needed to meet the
challenges they face. One important aspect of this problem is the need to provide appropriate levels
of compensation. Because of recent changes in the federal law a supplemental retirement plan can be adopted to meet this need.
Both federal and state law currently permit the establishment of a retirement plan covering only one or more key employee. The agency
can act to establish a tax qualified retirement plan solely for one or more key employees. It will also establish a trust, with a bank trustee
to hold the assets of the plan.
Contributions are then made by the agency. In addition, pre-tax employee contributions may also be made. The investments of the trust
assets can be delegated to a professional investment manager, to an insurance company or the plan's investments can be self
directed. If it is self directed the key employee personally directs each investment or personally works with an investment advisor.
Quality and Quantity of Supplemental Benefits
In some cases the agency will decide on a benefit, for example, a retirement allowance of an additional 2% of pay
beginning at age 57. The amount of contribution required to fund the benefit is then determined. If it is more than the
agency is prepared to budget then the benefit can be scaled back to fit its financial requirements. In addition, the
employee may make pre tax contributions. These contributions and the earnings on them compound tax free and will
be used to buy additional retirement benefit.
The following is a plan we implemented for one agency: The key employee was age 55 and planned to retire at 62. It
was determined that the agency would contribute $20,000 annually for seven years. In addition, the key employee
took a reduction in compensation of $15,000 a year from the amount he would have received as salary under the
contract. At age 62 a fund of $370,000 would be available to buy an additional annuity of $3,000 a month or as a
lump sum. It the lump sum was elected, the key employee could (if he chose) roll all or part of the assets over into an
IRA and withdraw as needed.
Option 1: Defined Benefit Supplemental Retirement Plan
A defined benefit plan is one in which the benefit is fixed and promised. For example, the plan will pay the retiring key
employee an additional $2,000 a month for life. With this type of plan the agency is committed to providing the
benefit. Practically speaking, the amount of required contribution is also known, since the size of the fund needed at
retirement to purchase an annuity for the promised benefit can be determined.
Contributions, with an assumed rate of return, are then made to the plan annually up to retirement. Contributions may
also be made over a shorter period e.g., five years to fully fund the benefit.
Option 2: Defined Contribution Supplemental Retirement Plan
A defined contribution plan is one in which the contribution, instead of the benefit, is fixed and promised. For example,
the agency might contract with the key employee to contribute $22,000 annually to the plan. At retirement he would
be entitled to whatever amount is in the plan. This will depend, of course, on the investment results.
Employee Contributions
With either plan option, the employee may make pre-tax contributions for additional benefits.
Investment Options
There are a number of investment options. The investment is dictated by the type of plan and the objectives of the
key employee. Assets can be invested with an insurance company that will guarantee the rate of return. Other
investments include equities such as mutual funds. Some key employees want to personally invest the assets of their
plans. In this case, a self directed arrangement is structured so that the key employee personally selects the plan’s
investments, perhaps in conjunction with his/her personal financial advisor.
Plan Distributions
At retirement, there is a high degree of flexibility as to the form in which the plan’s assets will be received. In a defined
benefit plan the commitment is to purchase an annuity to pay the benefits. Alternatively, the plan may give the
employee the option to have the value of the annuity distributed to him in a lump sum. With a defined contribution
plan the entire amount is payable to the employee. In either case, part or all of the distribution may be used to:
A supplemental retirement plan is a highly flexible approach to enhancing key employee compensation.
