Republic National Distributing Company used to have a nondiscrimination testing problem.
“We were failing, miserably, each year,” says Francie Purnell, corporate director, retirement plans, at Republic. She adds that the company noticed a lot of non-highly compensated employees (NHCEs) had been automatically enrolled in the plan and never increased their deferral rates, limiting the amount highly compensated employees (HCEs) could contribute.
In 2012, Republic decided to limit the percentage of salary HCEs could defer to the 401(k) plan to 5%, as its default deferral for automatic enrollment was 3%. But, while it worked to address the problem of NHCEs not increasing their savings rate, the company realized HCEs “are people who really want to save but are unable because of testing,” Purnell says.
So, the company worked with Vinings Management Corporation, a consultant for nonqualified retirement plans, to create a nonqualified deferred compensation (NQDC) plan. The plan was effective January 1, 2012, and not only allows HCEs to save for retirement, but offers in-service accounts as well to help employees save for things such as children’s college costs. For example, Purnell says, an HCE can designate 3% of salary to be deferred into an account to be withdrawn in five years for a child’s education expenses.
Limiting the deferrals for HCEs while offering a NQDC plan solved Republic’s nondiscrimination testing problem, while also allowing HCEs to save what they wanted.
Meanwhile, to solve for NHCEs not increasing their savings rates, the company decided to implement an automatic increase, which led them to discover another way to help HCEs save more for retirement. In June 2014, after bumping up the default deferral percent for automatic enrollment to 5% and coinciding with annual merit increases for employees, any 401(k) plan participant deferring less than 5%, had his or her deferral rate automatically increased to that percentage, with an opt-out feature. According to Purnell, Republic then conducted a preliminary nondiscrimination test, which showed now that 91% of NHCEs contribute 5%, Republic could increase HCEs’ maximum allowed deferral to 7% and pass the test. The company did so as of January 1, 2015.
Republic has increased the default deferral percent again this year to 6%. Purnell says the company considers whether to do an automatic increase each year because it is an additional cost to the company, but this year Republic plans to bump anyone deferring less than 6% up to 6%.
“I believe we focus more on non-highly compensated employees’ retirement readiness, but we want every employee to retire comfortably when they want to retire,” Purnell says.
She notes that since offering the NQDC plan, participation has been consistent at around 68%, and the median deferral into the plan is 8%. In addition, the plan allows HCEs to defer bonuses into the plan and many take advantage of this and defer 75% of their bonuses. “They are able to save well above the $18,000 limit [for qualified plan deferrals],” Purnell says. “It’s incredible the amount of money employees have been able to save in such a short period of time.”