Non-Qual Plans Blossoming In Popularity
Clark Consulting’s 2003 Executive Benefits Survey found that NQDC plan prevalence among companies surveyed has increased to 95% from 86% in 2002. Plan prevalence is now at 100% of surveyed financial institutions – compared to 94% in 2002.
Among responding firms with annual revenues above $2.5 billion, 92% reported offering NQDC plans, as did 88% of companies with revenues below that amount. In addition, 72% of all respondents indicated their NQDC plan had been adopted since 1990, with 28% of plans in place before then, demonstrating the continued growth of these plans over the past decade.
The survey’s most dramatic finding was the continued trend toward making NQDC plan benefits – long reserved for senior executives, company directors, and highly compensated sales personnel – more available to middle management. In fact, this year’s survey indicated that of employees eligible to participate in NQDC plans, only 21% earned $150,000 or more, while 79% earned under $150,000.
“It is very clear that in the wake of lower limits on compensation for qualified pension calculations and higher limits on annual 401(k) contributions, companies have responded by offering NQDC benefits further down the corporate ladder,” noted Les Brockhurst, president of Clark Consulting’s Executive Benefits Practice. Nonetheless, “86% of responding firms said they still determine plan eligibility entirely, or in part, by position levels, while 53% use base compensation as a criterion.”
Plan Funding
The survey found that among companies offering NQDC plans, 69% overall are informally funded, while 31% of surveyed plans remain unfunded. Of those plans that are informally funded, the vehicle most commonly used is Corporate-Owned or Trust-Owned Life Insurance (COLI/TOLI), with 55% of plans relying on this method. Other common informal funding vehicles include mutual funds (30%), company stock (10%), a managed portfolio (2%), and corporate assets (1%). The survey also revealed that among companies using COLI/TOLI to fund their plans, 38% choose whole life/universal life policies, while 62% use variable life insurance.
Rabbi Trusts continue to be popular with survey respondents, with 71% of surveyed firms reporting this feature. Additionally, 16% of respondents indicated they use a Springing Rabbi Trust, 5% use a split-dollar arrangement, and 3% use executive indemnity insurance.
Some 61% of companies provide their executives with corporate financial planning benefits, an increase from last year; seven of 10 (72%) eligible executives take advantage of this benefit.
A third (32%) of survey respondents allow executives to defer long-term incentive compensation awards into NQDC plans, up from 29% last year. Some 12% and 14% of survey respondents allow stock-option gains and restricted stock, respectively, to be deferred into NQDC plans, about even with last year.
Types of deferrable compensation among responding companies
included:
- short-term incentives – 93%
- base salary – 85%
- directors’ fees and retainers – 38%
- long-term incentives – 32%
- restricted stock – 14%
- stock-option gains – 12%.
In addition, the survey found that 41% of firms with
NQDC plans offer corporate matching contributions (compared
to 96% that make matching contributions to their employees’
401(k) plan.) Only 5% of respondents allowed transfers of
funds from NQDC plans to 401(k) plans.
The survey also revealed that the rate at which interest is credited to the accounts of NQDC plan participants can vary widely, with 37% of respondents’ plans mirroring the returns of a particular stock index or the investment options available in the firm’s 401(k) plan. Other methods named by survey respondents were, in order of prevalence, Company Stock (23%), Moody’s Corporate Bond Index Rate (12%), Treasury Notes/T-Bill (9%), Fixed Rate (7%), Prime Rate (9%), and other (5%). Among respondents relying on 401(k)/stock index-crediting rates, 74% allow plan participants to change their investment alternative elections on a daily basis.
The survey was based on an evaluation of the Nonqualified
Deferred Compensation (NQDC) plans and Supplemental
Executive Retirement Plans (SERPs) at 227 Fortune 1000
companies. A full copy is available at