As NQDC Plans Grow, Informal Funding Support Is a Must

Providers can support sponsors’ plan governance efforts with informal funding vehicles.

Assets in nonqualified defined contribution plans have grown to $235.4 billion in 2025 from $195.8 billion last year, according to the PLANSPONSOR 2025 NQDC Market Survey.

As assets grow, “informally funding the plan is simply good financial governance,” says Douglas Stalter, a vice president of retirement plan services at Oswald Financial Inc. He recalls that completely unfunded plans that existed only as a bookkeeping entry were far more common years ago, but that practice is becoming more rare, especially among public and larger private companies.

“The primary reason for the shift is executive demand for benefit security. Top talent is more sophisticated and understands that an unfunded promise is only as good as the company’s future financial health,” Stalter explains. “A ‘phantom account’ is subject to the company’s creditors in a bankruptcy, a risk many key employees are no longer willing to take.”

Data supplied by 17 NQDC plan providers as part of their response to the annual PLANSPONSOR Recordkeeping Survey showed support for informal funding vehicles is common in the market. Insurance vehicles, such as corporate-owned life insurance or bank-owned life insurance, are the most commonly supported, according to more than 80% of respondents.

“For most of our corporate clients, COLI remains the gold standard for informally funding NQDC plans. The primary drivers are its significant tax advantages—specifically, the tax-deferred growth of the cash value and the tax-free death benefit, which allows the company to recover its costs and often even generate income,” Stalter says. “It’s the only vehicle that pairs a competitive investment return with a distinct tax benefit that can turn the plan from a pure liability into a potential asset on the balance sheet.”

Less commonly supported informal funding vehicles, according to the PLANSPONSOR 2025 NQDC Market Survey, are annuities (29%) and letters of credit (12%). These are also less commonly used by NQDC plan sponsors, according to Stalter.

“Commercial annuities often come with higher fees and less favorable tax treatment for the corporation compared to COLI, and letters of credit are purely a cost center—they provide benefit security but offer no investment return to help offset the plan’s liability,” he explains.

Stalter suggests that NQDC plan providers “should be able to model and stress-test various funding strategies (e.g., COLI vs. mutual funds) and design a custom plan that aligns with the company’s specific financial goals.”

He adds that sponsors should look for a provider with deep, demonstrated expertise across plan design, funding analytics and administrative compliance, and one that offers a seamless, high-touch experience for participants.

“A great recordkeeper is important, but an elite provider acts as a strategic partner,” he says.

—Rebecca Moore