State of the Industry
An NQDC Market Evolution
Plan sponsors and recordkeepers are moving to expand participation eligibility and increase the availability of funds for financial needs other than retirement.
ssets in nonqualified deferred compensation (NQDC) plans have hit $183 billion in 2021, growing 130% from $80 billion in 2015, according to the 2021 PLANSPONSOR NQDC Market Survey. As assets have more than doubled, the NQDC market is shifting in several ways, with trends including increasing the availability of funds for participants’ financial needs other than retirement.
We spoke to experts at three top nonqualified plan recordkeepers about current trends.
The NQDC market has shifted toward mid-size and larger plans. Looking at growth based on assets, nonqualified plans with more than $25 million jumped from 6% of NQDC assets to 24% between 2015 and 2021, the 2021 PLANSPONSOR NQDC Market Survey finds. Viewing growth based on number of plan participants, the plans with five to 25 participants have grown from 32% of total plans to 37%. Nonqualified plans with 11 to 25 participants gained the most ground in the past six years, rising from 13% of the market to 18%.
Expanded eligibility explains some of the growth. At companies competing intensely to recruit and retain executives, offering a larger number of executives a chance to participate in the NQDC plan—with a meaningful employer contribution—has become part of their strategy, says John Baergen, senior director of nonqualified plans at Des Moines, Iowa-based Principal Financial Group. The current prevalence of remote work has intensified the issue, he says, as executives become more mobile.
“It is a ‘buyer’s market’ for the employee,” Baergen says. “There are more jobs available than executives, so people can extrapolate from that, ‘I can work where I want to work.’”
Recent talk in Washington, D.C., of increasing taxes paid by higher-income earners also has motivated some employers competing for talent to expand NQDC plan eligibility, says Ashley Heck, a vice president at Boston-based Fidelity Investments’ Workplace Consulting group. “They’re looking to enhance their nonqualified plan offering,” she says. “Many plan sponsors are looking to expand the employee population eligible to defer money into their nonqualified plan.”
In recent months, there’s also been a rise in smaller and mid-sized employers starting a nonqualified plan, says Mike Shannon, senior vice president, nonqualified consulting at Walnut Creek, California-based Newport retirement services. Startup plans typically make up 15% to 20% of new clients onboarded at Newport, he says, but that has doubled to 40% in the past year.
“Employers are finding it’s a challenge to keep their senior management in place during this unprecedented time, so they are asking themselves the question, ‘What benefits are we not providing that larger companies or our peers are providing?’” Shannon says. “For many firms, that’s a nonqualified plan.” These employers most often want to add a 409A plan, he says, because it’s relatively inexpensive to implement and not too time-consuming to oversee for the plan sponsor.
Four Search Keys
Sources point to these as key factors in current NQDC recordkeeper searches:
Differing provider NQDC expertise levels: Two recordkeepers currently have a big lead in NQDC assets, the NQDC Market Survey finds. Fidelity Investments ranks first, followed by Newport. Looking at NQDC market share based on the number of plans a recordkeeper has, Principal Financial Group ranks a clear first, followed by Fidelity in second and Newport in third.
Sponsors’ concentration of NQDC assets with a small group of recordkeepers speaks to the reality that recordkeepers have wide-ranging differences in their nonqualified plan capabilities, says Deba Sahoo, senior vice president and head of product for customer journeys at Fidelity.
“The top five recordkeepers in the space have grown in terms of the percentage of industry assets they capture, and the percentage of industry assets captured by others has significantly reduced over the past five to six years,” he says. “Plan sponsors are looking for specific nonqualified plan expertise in a recordkeeper. They also want a recordkeeper with the scale to provide the right participant experience and to fulfill their plan’s compliance needs.”
The bulk of the assets are with the providers that truly have the bandwidth to work with nonqualified plans, Shannon says. “You’re seeing a lot of providers offer nonqualified plan services as an ancillary service to their 401(k) plan services, but not a lot of them really focus on the nonqualified space,” he says. “If you’re a nonqualified plan sponsor, you have a fundamental question to ask: ‘Does the recordkeeper we’re looking at have the resources and capabilities to make the nonqualified plan a great experience for my executives, and to ensure that the plan won’t be an administrative burden on my staff?’”
• Amount of design flexibility: How much choice a sponsor has in its decisions varies by recordkeeper, Baergen says. “There are large qualified plan providers that will do administration of a nonqualified plan, too—as long as you fit in their ‘box,’” he says. “These providers do not give sponsors a ton of [plan design] flexibility.”
For example, distribution flexibility has become a crucial issue, Baergen says. Does a recordkeeper allow an NQDC plan to have both in-service distributions and separation-of-service distributions? And does a recordkeeper’s system let a participant choose between a lump-sum payment and other distribution options such as installment payments?
“The biggest driver of participation in nonqualified plans is, ‘How can I incorporate this plan into my larger financial plan, based on my future usage of the distribution options in the plan?’” Baergen says. For instance, can an executive who wants to pay for his or her child’s college education arrange to take an in-service distribution in four annual installments, to pay the yearly college expenses? Principal has seen that’s currently one of the most common goals for nonqualified plan participants, he says.
“Some plan sponsors are looking for more flexible distribution options available to NQDC participants, for example allowing in-service distributions,” Heck says. “These plans are no longer seen only as a retirement-savings vehicle, but also as a mechanism to defer and spread income across future years, allowing participants to make decisions about distributions and taxation based on their individual situation.”
• Bundled vs. unbundled services: Bundling is becoming increasingly uncommon among employers offering nonqualified plans, the 2021 PLANSPONSOR NQDC Market Survey finds: Roughly 85% of NQDC clients were serviced as part of unbundled relationships, and the percentage of clients that bundle nonqualified plan administration with another retirement benefit has fallen from 38% in 2015 to just 15% as of year-end 2020.
“Bundling was kind of a knee-jerk reaction for a lot of plan sponsors, in that they wanted their participants to have one login credential” for both their qualified and nonqualified accounts, Shannon says. Technology has since improved so that a participant can use a single login to access qualified and nonqualified participant sites from two different providers, he says. “I think more sponsors are now saying, ‘Wouldn’t I rather have the best qualified plan recordkeeper and the best nonqualified plan recordkeeper, rather than settle for something sub-optimal for my participants?’”
But Sahoo says it’s not unusual for qualified plan sponsors to choose Fidelity to also do the recordkeeping for their nonqualified plan. “The need for looking at an employer’s overall benefits structure is important,” he says. Bundling, he adds, “allows us to support those offerings much more holistically. We can provide guidance to participants across all retirement plans, so the guidance is much more integrated for the participant.”
• Fee variations: Nonqualified plan fees can vary a lot, depending on the recordkeeper, Baergen says.
“The large recordkeepers that are going to put your nonqualified plan ‘in the box’ (on plan design parameters) are probably not going to be that expensive, if they get a substantial qualified plan in the deal,” he says. “Then there are boutique organizations with a lot of expertise in nonqualified plans that are going to be more expensive, because they’re getting paid for all the work they’re doing. There are even, I would argue, some very inexpensive ‘self-service’ administrators, and, with them, the sponsor is doing a lot of the plan administrative work like entering data. Finding a recordkeeper with world-class nonqualified plan expertise, for a reasonable cost, is the sweet spot.” —Judy Ward
2021 NQDC Market
Reported NQDC Liabilities, by Plan Type
Distribution of NQDC Plans, by Plan Participant Size
Client Servicing Strategies for §409A Plan Providers