How to Save for Retirement When the 401(k) Isn’t Enough
If you’re a senior manager or executive at a publicly traded company, chances are you’re regularly meeting the IRS contribution limit on your 401(k) early in the year and wondering later what’s next. For 2025, the 401(k) contribution limit is $23,000 and is $30,000 if you’re over age 50.
That’s helpful. But when your total compensation includes salary, bonus, equity, and other perks, it’s not nearly enough to replace the kind of income you’re used to living on. For high earners, the gap between what you can save in a traditional retirement account and what you'll actually need in retirement to maintain your standard of living can be enormous.
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When the 401(k) plan was first introduced in the late 1970s, the IRS set the maximum annual employee contribution at $7,000. That number was not indexed for inflation initially, so it remained flat for several years until inflation indexing was introduced for contribution limits in the 1990s. Thus, the 401(k) plan was designed with the typical worker in mind—not the executive earning hundreds of thousands in total comp every year.
Moreover, traditional 401(k) plans are subject to nondiscrimination testing. That means if your company’s lower-paid employees aren’t contributing enough, the highly compensated employees (HCEs) may be forced to accept a refund of “excess contributions,” further limiting the ability to save.
Thankfully, companies often offer additional executive retirement plans designed to bridge that gap. That’s where non-qualified deferred compensation (NQDC) plans and supplemental executive retirement plans (SERPs) come in. These plans, however, come with very different rules, risks, and planning opportunities compared to traditional 401(k)s.
Both plans are considered non-qualified, which means they are not subject to the same IRS contribution limits, rollover rules, or Employee Retirement Income Security Act (ERISA) protections as traditional retirement accounts like 401(k)s or IRAs. This gives employers more flexibility to reward and retain top talent by offering benefits that exceed what’s allowed under qualified plan limits. But it also means that these accounts don’t enjoy the same level of protection or portability.
An NQDC plan allows you to defer a portion of your salary, bonus, or commissions into a company-sponsored account and delay paying taxes on that income until a later date, typically at retirement. Unlike a 401(k), there’s no IRS-imposed cap on how much you can defer. Instead, the limits are set by your employer’s plan design, which means that executives can often defer hundreds of thousands of dollars each year.
The tradeoff is that your deferred compensation remains an unsecured promise from your employer to pay you later rather than being held in a separate account like a 401(k). That means if the company is declared insolvent, any amount you’ve deferred is at risk along with any of their other unsecured creditors.
Still, for executives confident in their employer’s financial stability, the opportunity to push income into future years—especially when you expect to be in a lower tax bracket—can make the NQDC plan a valuable part of your retirement strategy. Any contributions grow tax-deferred based on the investment options you choose within the plan, often mirroring the company’s 401(k) lineup.
A SERP, however, works differently. Rather than deferring your own income, a SERP is typically funded by your employer. It’s designed to be used as a reward for tenure, performance, or retention, and is expected to supplement or replace retirement income lost due to the IRS limits on 401(k) and pension contributions.
SERPs are often paired with a vesting schedule that encourages you to stay with the company for a certain number of years to receive the full benefit. Employers may either credit an account on your behalf each year or promise a specific income stream at retirement—similar to a pension.
In both cases, when you retire or separate from service, the funds cannot be rolled over to an IRA or other retirement account because these are non-qualified plans. Instead, your NQDC or SERP benefits are typically paid out as either a lump sum or a series of annual income payments. Those payouts are then taxed as ordinary income in the year they are received.
For executives and other highly compensated employees frustrated with the low limits placed on annual 401(k) contributions, non-qualified plans like NQDCs and SERPs can be the key to building a retirement income that actually matches your pre-retirement earnings. The timing of deferrals, the financial health of your employer, and your expected future tax bracket all play critical roles in determining whether these plans work in your favor. By understanding their complexities, you can turn these additional employer benefits into a powerful engine for long-term financial well-being.
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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
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