SERP Benefit Funding

Both traditional pensions and nonqualified pension-style SERPs are entirely funded by the employer.

Meeting employee retirement benefit obligations is important. Nonqualified SERP benefits should provide the same security as any other benefit.

A liability is booked each year an executive's SERP exists. At retirement, the total accrued liability equals the future retirement benefits owed to the executive. If assets are not reserved during the executive's working years to meet the future liability, the company will be faced with a substantial expense when the executive leaves the company, and is no longer contributing to its success day to day.

Generally life insurance is the preferred approach to informal SERP funding due to its low acquisition costs and other benefits. However, mutual funds and other securities are used as well. By setting aside an asset for the specific purpose of paying future SERP obligations, management will not pay the SERP out of its operating capital.