Defined Benefit SERP

[Guest TBippen]

I am working with a Defined Benefit SERP established about 10-15 years ago. The payout formula of 2% of final salary for each year worked for up to 30 years is reduced for early retirement. The reduction results in the individual receiving 75% of the benefit formula if he/she leaves before age 65. Does this sound like a normal preretirement reduction formula? What other preretirement reductions have you see imposed?

[david rigby]

It is harder to generalize about SERP plan design than it is about qualified plans. Very often, the SERP is designed (or should be) with very specific targets in mind for very specific individuals. (Not that qualified plans are not designed that way, just not as often.) This is true with respect to Early Retirement features also.

Some SERPs do not have any early retirement. Some contain a very high subsidy. The correct answer is to determine what you want to accomplish with the SERP, and evolve the plan from there. It may also be that issues such as early retirement or death benefits are not clear; in that case, you may design the SERP to ignore those issues, with the intention of revisiting them in a few years.

For example, if your SERP is for the purpose of making up any limits umposed by 401(a)(17) and 415, then the SERP design might be an exact mirror of the qualified plan at early, normal, death, disability, etc. Alternatively, if the purpose of the SERP is to create a target of total benefit s at age 65, then you design that target (such as 60%). But what early retirement provisions you include will be driven by what early retirement incentives you want, or don't want.