PSNC 2017: Supplementary Savings Plans—Executive Benefit and NQDC

Data from the Boston Research Group finds that the average participant in an NQDC plan will receive 20% of retirement income from this plan alone, according to a panelist at the 2017 PLANSPONSOR National Conference.

By Rebecca Moore | June 08, 2017
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For executives, Social Security makes up less savings than for lower-income employees.

Speaking on a panel at the 2017 PLANSPONSOR National Conference in Washington, D.C., Jeff Roberts, regional channel manager at ADP, said executive benefit and nonqualified deferred compensation plans (NQDCs) are used by employers to attract and retain key employees.

Jason Burlie, sales and strategic relationships – nonqualified practice leader at Prudential, added that the plans are used to make up for missed deferral opportunities for executives in the company’s qualified plan and to provide another retirement vehicle for executives.

Nonqualified plans are tax-deferred retirement vehicles that may be used by only a select group of highly compensated employees, Roberts explained. Some of their advantages: Nonqualified plans are exempt from Employee Retirement Income Security Act (ERISA) requirements that may be problematic; the Department of Labor( DOL) fiduciary rule is not a concern; and the plans are exempt from coverage and nondiscrimination testing and from Form 5500 filing.

Burlie added that NQDC plans offer unlimited deferral capability to executives. They are technically unfunded plans, even if the plan sponsor sets aside assets to help pay for future obligations. They are always subject to insolvency risk, and assets can go to creditors in bankruptcy.

Although they are exempt from many ERISA rules, NQDCs are subject to 409A regulations. But this doesn’t have to be complicated, Burlie said. In effect, in 2009, 409A set rules for NQDC plans, which previously came from case law. There are rules about when employees can make an election to defer to the plan, and 409A addresses how money can be taken out of the plan.

Roberts said data from the Boston Research Group found that the average participant in an NQDC plan will receive 20% of retirement income from this plan alone. “Some don’t participate because they don’t understand the plan. Creating communication that is simple and actionable is important. Just because they are executives doesn’t mean they understand,” he said.

Burlie said he sees a rapidly growing rate of plans bundling both defined contribution (DC) and NQDC retirement services. “For many years, NQDC was a niche market, and there were a few niche providers; now more DC providers are developing expertise,” he said. The industry has seen a 20% increase, year-over-year, in bundling of these services, he said. There has also been an increase in advisers and consultants getting into the NQDC market, mostly due to financial wellness efforts.

According to Roberts, the growth in the NQDC market is coming from midsize companies, which are attracting employees who left large firms that had these benefits. So there is an increase in plan creation. At privately held companies, the market is seeing more company money going into NQDC plans as a bonus, rather than using company equity, to appease those who came from publicly owned companies that provided equity compensation.

NEXT: What’s ahead for NQDC design and funding