The Executive Compensation Threat to Retirement

Abstract

In recent years a new phenomenon has appeared on the retirement savings landscape: the expansion into middle management ranks of a traditional tool of executive compensation, the so-called “top hat” pension plan. Top hat plans are unfunded deferred compensation programs for a “select group of management or highly compensated employees.” Properly structured, top hat plans amass retirement resources that are taxed to employee-participants only when distributed. From the participant’s viewpoint, that delayed inclusion appears comparable to the tax deferral accorded qualified retirement plan savings, yet top hat plans are exempt from all of the Code’s qualification conditions. They are likewise excused from virtually all of ERISA’s pension plan participant protections, including vesting, funding, and fiduciary responsibilities. This regulatory immunity licenses three interconnected pathologies that undermine core retirement policy objectives. The inapplicability of ERISA’s worker protections, combined with preemption of state law, relegates top hat plan participants to a uniquely precarious position: their retirement savings are more exposed to depredation and vulnerable to loss than if ERISA had never been enacted. The inapplicability of the Code’s qualified plan nondiscrimination requirements allows employers to offer additional retirement savings to highly-paid managerial, technical, and professional employees without having to pay comparable benefits to rank-and-file workers. And the dramatic disparity, post-2017, between income tax rates applicable to corporations and high-income individuals incentivizes that favoritism with a substantial tax subsidy that’s unmeasured and generally overlooked. This article explores the unresolved ambiguity that has enabled top hat plan metastasis into upper-middle compensation ranges. It documents the sources of the pathologies associated with the expansion of top hat pensions and traces their consequences. And it surveys the leading responses to these developments, some of which offer only partial solutions, while others could be accomplished only by legislation.