NQDC Plan Prevalance Remains High

June 9, 2008 (PLANSPONSOR.com) - As of 2007, 95% of respondents to Clark Consulting's Executive Benefits survey offer some type of non-qualified deferred compensation (NQDC) plan to executives, up from 91% in 2005.

According to a report of the survey results,84% of respondents with NQDC plans determine eligibility entirely, or in part, by position level. The percentage of respondents that offer NQDC plans by specific position levels are:

  • executive and senior vice presidents – 90%,
  • president and CEOs – 89%,
  • vice presidents – 83%,
  • board of directors – 56%,
  • division of unit managers – 39%, and
  • highly-compensated sales personnel – 33%.

Of the respondents with NQDC plans, 57% determine eligibility using base salary compensation level as a criterion, with 14% allowing participants with compensation below $100,000 to participate. Of those who determine eligibility using total compensation, 8% allow participation by individuals earning less than $100,000.

On average, 48% of eligible participants in NQDC plans offered by respondents choose to participate in the plan. Participation was slightly higher for funded plans at 50%

The report said 88% allow executives to defer a portion of their base salary, up from 85% in 2005. In addition:

  • 95% allow executives to defer all or part of their short-term incentives, down from 97% in 2005.
  • 50% permit deferral of director’s fees/retainers, up from 44% in 2005.
  • 73% allow deferral of long-term compensation in cash and 88% in stock.

The survey also found more than half (56%) of plans also provide a matching contribution by the employer. Among those,51% offer a 401(k) plan restoration match and almost a third (32%) offer a match of a percent of employee contributions.

The rate at which interest is credited to the accounts of NQDC plan participants varies widely. Sixty-one percent of respondents with NQDC plans mirror the returns of a particular stock index or the investment options in their 401(k)/savings plan, up from 52% in 2005. Of respondents using 401(k)/stock index crediting rates, 80% allow plan participants to change their hypothetical investment elections on a daily basis.

Approximately 42% of respondents indicated that their NQDC plan contains some type of vesting requirements for deferral amounts, company contributions, matching contributions, or bonus interest.

All respondents said NQDC plan participants become eligible to receive benefits upon separation of service. Over half (58%) said their plans also allow hardship distributions.

Nearly all respondents (96%) offer a lump sum payment at the option of the executive. Of respondents that listed a form of distribution other than a lump sum, the most common option reported was an annual payment for a term of years specified by the participant.

NQDC Plan Funding and Administration

More than two-thirds (68%) of NQDC plans are informally funded, while 29% of surveyed plans remain unfunded. Three percent of respondents indicated they are considering informal funding within the next 12-24 months.

The funding vehicle most commonly used by NQDC plans is Corporate-Owned Life Insurance (COLI), reported by 72% of respondents, followed by Mutual Funds (37%).

Seventy-four percent of respondents use a Rabbi Trust to guarantee benefit funding, while 19% use a Springing Rabbi Trust. More than one quarter (26%) do not use any vehicle to protect participant benefits.

Fifteen percent of respondents administer NQDC plans in-house, and 49% administer through a third-party administrator. More than one third (35%) use a combination of in-house and third-party administrators.

Supplemental Executive Retirement Plans

Approximately 67% of respondents to Clark Consulting's Executive Benefits Survey have adopted a Supplemental Executive Retirement Plan (SERP) to provide benefits to executives in excess of amounts limited by qualified plan restrictions. The primary reason (cited by 73% of respondents) for adopting a SERP continues to be the Omnibus Budget Reconciliation Act (OBRA) of 1993 which lowered the limit on compensation used for qualified pension calculations to $150,000 (currently indexed to $225,000 in 2007).

More than half (54%) of respondents who use base salary to determine SERP eligibility require a minimum of $150,000 in base salary, and 70% of respondents who use total compensation to determine SERP eligibility require a minimum of $150,000 in total compensation.

Many respondents used some percentage of final compensation to calculate benefits or a percentage of compensation plus benefits. More than three-fourths (76%) offset SERP benefits by income from qualified plans.

Respondents also reduce SERP benefits based on amounts received from Social Security (58%), qualified retirement plans (17%), and matching contributions to 401(k) and NQDC plans (18% and 17%, respectively).

The vast majority (89%) of respondents have imposed a vesting schedule on SERP distributions, and 88% said the primary trigger of payment of SERP benefits is normal retirement.

More than half (57%) of respondents are informally funding their SERP, 42% remain unfunded, and 1% of respondents are considering informal funding within the next twelve months. Of the respondents that informally fund their SERP, 74% use Corporate-Owned Life Insurance (COLI).

More than two-thirds (67%) of respondents with SERPs are using Rabbi Trusts, 24% use Springing Rabbi Trusts, and 23% do not use any such device.

Thirty percent administer their SERPs in house, 29% use a third-party administrator, and 40% use a combination of in-house and third-party administration.

The Clark Consulting report said changes in the tax advantages of using Voluntary Employees' Beneficiary Association (VEBA) arrangements, policy benefit limitations, and time restrictions on benefit payments have caused severe limitations on the use of group disability plans to cover executives. Fifty-six percent of respondents to the Executive Benefits Survey offer supplemental disability plans to executives, down notably from 81% in 2005. Of those, 57% use a percentage of salary, while 30% use a percentage of total compensation to calculate supplemental disability benefits

Other perks available to executives of the companies surveyed include:

  • Financial planning services - 64%,
  • Cell phone or PDA - 64%,
  • Supplemental life insurance - 61%,
  • Car or car allowance - 46%,
  • Tax preparation services - 45%,
  • Supplemental limited disability insurance - 39%,
  • Long-term care insurance - 27%, and
  • Lunch or dining club membership - 26%.

Twenty-four percent of respondents indicated they provide executives working outside the United States with non-qualified retirement plan benefits. Of these, 56% cover only U.S. citizens, down from 61% last year. Of respondents permitting non-United States citizens to participate in United States executive benefit plans, 92% offer a NQDC plan and 54% offer a SERP.

The survey results reflect data compiled from nearly 18% of Fortune 1000 companies.

The 2007 Executive Benefit Survey results can be downloaded from here .