The 401k vs. The Supplemental Executive Retirement Plan... Which is Better???
When you think about it, the title of this article would be useful information to know. First, let’s look at what is a Supplemental Executive Retirement Plan (SERP) and what is a 401k plan both have in common. Both types of plans are supplemental retirement plans. Yes, you read that correctly, that means a 401k is a SUPPLEMENTAL retirement plan. Most people think that a 401k is a retirement plan. Contrary to popular belief, a 401k is not a full retirement plan. It was never intended to be anything but a supplemental plan when Congress dreamed it up. The fact is, the 401k is a supplemental retirement savings vehicle. Back in the late ‘70s, Congress decided that Americans should supplement their pension plans and social security by saving more of their own money for retirement. To give Americans an incentive to save more money, Congress gave Americans a tax break and called it the 401k. They also put many restrictions on the 401k, and it is those restrictions that make it a disaster. The 401k restrictions including taxing distributions, penalties for early distribution, penalties for not taking distributions, and limits on how much can be put into the plan. All of these restrictions are bad for the employee, but let’s not forget about the employer. Congress forces 401k sponsoring employers to offer the 401k to all of their employees. This one feature makes the plan very expensive for employers, not to mention the administrative fees that employers must pay. Now let’s take a look at a SERP. So far, the only thing the two plans have in common is the fact that both programs are supplemental retirement plans. A Side by Side Comparison 1) The 401k income is taxable, and the SERP is tax-free income.
2) The 401k has IRS penalties for early withdrawals, and the SERP has no penalties for early withdrawals.
3) The 401k has IRS penalties for not taking, and the SERP has required minimum distributions.
4) The 401k has strict contribution limitations, and the SERP has none of the same restrictions.
5) The 401k requires sponsoring employers to offer the plan to all of their full-time employees and the SERP enables employers to select which employees are eligible. There are more differences to the two plans, but as you can see, when compared side-by-side, the SERP is the clear winner.