Interview | Published in July 2012

Why Nonqualified Plans Matter More Than Ever

Key employees now think very differently about retirement

By PLANSPONSOR staff | July 2012
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Hiring, rewarding and retaining key talent is vital in today’s economy. As organizations review their benefit offerings to meet this challenge, research shows that key employees are highly concerned about retirement and expect their employers to address those concerns. PLANSPONSOR spoke to Gary Dorton, vice president of the Principal Financial Group® in charge of Nonqualified Deferred Compensation, about these key employees’ attitudes toward retirement, and what it takes to create a best-in-class total retirement benefits program.

PS: Why are key and highly compensated employees different when it comes to planning for retirement? 

Dorton: As a leader in the retirement industry, The Principal continuously conducts research with plan sponsors and participants. That research tells us key employees think very differently about retirement. They worry more than other employees about the ability to enjoy the same quality of life in retirement that they enjoy today. They also understand the impact of inflation and recognize the limitations in the amount they can contribute to traditional plans offered by their employer. There’s also a lack of confidence in Social Security.

Finally, key and highly compensated employees recognize the importance of saving but also realize that they’ll need a variety of ways to save. These employees have a better idea of what they’ll need to achieve their retirement goals. They’ve worked with advisers and done projections to understand how much they’ll need. The bottom line is that key employees say they want more for their retirement—and intend to do more and save more to make it happen.

PS: So how should employers adapt their benefit programs to cater to this more demanding group? 

Dorton: We hear loud and clear from employers that they really value this group of individuals. Regardless of what the national unemployment rate is, employers tell us the unemployment rate of key employees is at or near zero. With the skill, experience and knowledge they have, key employees are exceptionally hard to replace.

We also know that many benefit packages have changed. Employers have had to reduce or eliminate benefits due to economic volatility and budget constraints. And, in many cases, bonuses, raises and performance-based compensation have not returned to pre-crisis levels. When you factor all that in, employers need to step back and recognize that if they want to retain and reward their top talent, a competitive benefits package is essential. It also makes the company more attractive should the business need to add key employees in the future.

PS: Let’s talk specifically about nonqualified deferred compensation plans: How do these fit into an optimal benefits package? 

Dorton: These key individuals have a more holistic view of their retirement needs, and they tend to have multiple ingredients in the mix, including real estate and outside savings. They are looking for more workplace savings than their fellow employees, and, as a result, they’re very often intensely interested in how a nonqualified plan works and how it can supplement their ability to save. These tend to be educated financial consumers, often with financial advisers, so they recognize when a plan is up to date and well-designed. Years ago, it wasn’t uncommon to see just a single-fund, fixed-interest, crediting type of plan—very straightforward but very limited. Those types of nonqualified plans are not going to give the key employees enough flexibility to accommodate their specific planning needs today.

From an employer standpoint, they need a nonqualified plan design that meets their needs and works within their benefits structure. They also want their key employees to recognize that the company has provided them a valuable benefit that they can feel good about and that can help them meet their goals.