State of the Industry
NQDC Plans Are About More Than the Design and Administration
Financial wellness is important for executives too, and a good NQDC provider can offer services beyond just the retirement plan.
Kirk Penland, SVP, Non-Qualified Markets at Voya near San Francisco, says reasons for offering nonqualified deferred compensation (NQDC) plans to a select group of management or highly compensated employees (a Top Hat group) hasn’t changed much over the years. “Historically, they’ve been offered to recruit, retain and reward top talent,” he says.
However, he notes that when unemployment is low—as it is now—retaining and rewarding talent are top factors. During the Great Recession of 2008/2009, recruiting played a bigger part. Also, Penland says, in the small and midmarket, NQDC plans have more of a reward-type design, while in large market they are more a retention tool.
While there are a variety of nonqualified plan designs in the market, Kathleen Souhrada, vice president of NQ & life administration at Principal in DesMoines, Iowa, says the most common types are corporate NQDC plans governed by Section 409A of the Internal Revenue Code, 457(f) plans in the government and nonprofit market, and Incentive Bonus programs.
She explains that many NQDC plans are used to restore lost qualified plan benefits due to qualified compensation limits as well as to provide retention incentives with custom vesting schedules. A 457(f) plan is primarily an employer contribution plan with a vest-and-pay design, typically used as a retention tool by the plan sponsor. An Incentive Bonus program is a nonqualified plan the can be used with a non-Top-Hat group. It is an employer-only contribution plan with a specific vest-and-pay design. “The key with this design is it cannot be a retirement based plan. Typically the longest vesting period should be no longer than 10 years from the date of contribution,” she says.
Penland explains that sponsors in the small market generally don’t have stock they can award to participants like larger corporations do, so long-term incentive plans that allow deferral of the incentive into a NQDC plan are becoming more popular.
According to Phillip L. Currie, Jr., managing director of Fulcrum Partners in Newport Beach, California, NQDC plans may include a company contribution or a company match on deferrals contribution. Participation in the plan tends to be greater when there is a company contribution than when there isn’t.
He says in the large and mega NQDC plan market, 90% are voluntary deferral plans and 10% include company contributions. On the other end of the market—micro to small plans, it is the opposite. “One reason is the company wants to retain key executives by contributing to a NQDC plan with a vesting schedule.”
Services beyond the NQDC plan
Currie says financial wellness is definitely needed for nonqualified plan participants, and he only sees some plan sponsors offering financial wellness programs. “People assume that those who make a lot of money have their financial house in order, but that is not true at all,” he says. “We do one-on-one enrollment. An employee may have had access in a NQDC plan for years, but didn’t participate because he didn’t understand it. Participant education and communication is extremely critical to the success of a plan.”
According to Penland, the financial wellness trend has moved from just offerings for rank-and-file employees to everyone in an organization. The expertise that providers are putting toward NQDC plans has increased, and as plan sponsors combine their DC plans and NQDC plans with one provider, providers can deliver more information to executives and be able to pull in their qualified plan data. “Financial wellness is driving more services to executives. They may be financially astute but busy, so if they can look on a participant website [for financial education] generally their financial outcomes are better,” he says.
Souhrada agrees that if the plan sponsor has all of its retirement plans at one provider, the provider can offer a more holistic view of and planning for retirement for the participant. But, she says, providers are offering other services and education.
“Examples of plan education can include interactive education, participant testimonials, and planning tools to help participants understand the program and make decisions,” Souhrada says. “Services beyond the retirement plan can include access to financial planners or consultants, free will and legal document preparation services, access to information to help participants understand their credit score and how to create a budget.”
Penland says expertise in NQDC plans is increasing among providers. He explains that historically NQDC plan recordkeepers were independent shops. Plan sponsors’ qualified and nonqualified plans were recordkept by two different providers. But, most NQDC plan recordkeepers have been acquired by qualified plan providers to help drive a more holistic experience.
Penland says this consolidation was mostly driven by the complexity of NQDC plans. “Historically, qualified plan providers would try to fit NQDC plans on a [defined contribution] plan platform, but most nonqualified plan accounts are tracked individually by year. Each year there may be changes in the form and timing of distributions—this is an outcome of 409A. Now, almost in the 15th year of that regulation passing, NQDC plan participants could have 15 different buckets of money with 15 different distribution options. So qualified plan providers said, ‘We can either build it, rent it or purchase it.’ Most did the latter,” he says.
Plan sponsors should look for providers that can offer tracking of contributions and tracking of distributions correctly, as well as a platform that allows participants and their financial consultants to manage distributions and integrate that with other plans the participant may have, according to Penland.
Souhrada says, “Key characteristics of a good NQDC provider include the knowledge and expertise of the staff on appropriate regulations; the ability to consult with the plan sponsor, and/or its adviser, on what design is best to meet the sponsor’s needs; systems and technology to support the sponsor’s design; and the ability to provide a first class experience to the sponsor and its participants, as well as adhere to pertinent regulations.”
In addition, according to Currie, the provider should be able to offer funding vehicles and investments if the plan sponsors chooses to fund the NQDC plans. And, a provider should be able to provide asset-liability balancing, whether the plan is unfunded or funded.
“A good NQDC plan provider is going to provide resources to participants to help them understand the importance of financial wellness and, more importantly, how to achieve it. And above all, show that it cares about the plan sponsor and participants, and have the tools, resources, people, and knowledge to support them throughout their NQDC experience,” Souhrada concludes.