NQDCs Becoming ‘Key Tool for Talent Management’

Some plan sponsors are increasing eligibility for existing nonqualified deferred compensation plans, while others are considering offering one for the first time.

Over the past few years, plan sponsors have worked to overhaul and expand retirement plan offerings for all types of participants. Often, benefits like emergency savings accounts or student loan matching come up as headline additions. However, nonqualified deferred compensation plans are also increasingly a part of that mix.

Data from the 2024 PLANSPONSOR NQDC Market Survey show that to be the case. The latest survey found that the total assets in NQDC plans grew to $198.8 billion from $172.6 billion one year earlier, nearly doubled from $104.5 billion in 2017.

Historically, NQDCs have primarily been used to support executive compensation. Because 401(k) plans have to pass so-called discrimination testing to ensure that plan benefits are being utilized equally among all types of plan participants, highly paid employees can run into limits on their 401(k) contributions before others because they are paid more. NQDCs help offset that by being a vehicle for highly paid employees to contribute to their retirement savings at a rate more in line with their total compensation.

A Competitive Advantage

That trend is beginning to shift. Plan sponsors are recognizing that saving for retirement requires more than it has in the past, both in real dollar terms and in benefits offered to plan participants. As a result, more plan sponsors are opting to increase the eligibility for their existing NQDC plans or may consider offering them for the first time.

According to a recent survey from Principal Financial Group, plan sponsors hope that by expanding or including an NQDC option, they can improve their talent retention and recruitment efforts. Of the plan sponsors surveyed by Principal, 89% said offering an NQDC was a competitive advantage. A further 88% of respondents said offering an NQDC could help plan participants save more for retirement once they hit their annual 401(k) contribution limits.

“Many of the plan sponsors we work with see nonqualified plans as a key tool for talent management,” says Nate Schelhaas, a senior vice president in the benefits and protection group at Principal. “NQDCs can help restore benefits to employees that are limited in what they can save as a result of discrimination testing. Obviously, you want to max out the 401(k) contribution limits first, but there are situations where being eligible for a nonqualified plan can expand the savings options available to a participant.”

Kevin Mitchell, a vice president of workplace consulting at Fidelity Investments, agrees and says Fidelity has seen a growing number of small and midsize businesses offering NQDCs to stay competitive.

“We’re seeing the biggest shifts happening outside of the Fortune 500 because the reality is: Many of these smaller companies are competing for the same executive talent, they’re competing for the same managerial talent and employees are asking about these plans,” he says. “If someone is coming over from a large company where they have an NQDC, they are more likely to ask if their new employer has one or would consider offering one.”

Mitchell adds that more than half of the startup plans Fidelity has worked on this year are smaller companies setting up NQDCs for the first time.

No Longer Just Voluntary

Plan sponsors are also changing how NQDCs are being used. More employers are beginning to offer matching contributions, a move which Mike Shannon, a senior vice president for nonqualified strategic development at Newport, says is increasing the popularity of NQDCs with plan participants.

“What we’ve seen is an expansion of nonqualified plans that include a company contribution component, not just volunteer deferrals,” he explains. “In many cases, that includes a vesting schedule. Usually, it’s a three-to-five-year vesting schedule. Something like that can improve employee retention.”

Fidelity’s Mitchell adds the customization component of NQDCs can be beneficial to plan sponsors.

“Nonqualified plans can be used on a facts-and-circumstances-type basis,” he says. “If an employer has a group of employees they want to retain, this is a benefit that can be used to improve retention.”

Reworking and Rethinking

Mitchell says he has also noticed that more plan sponsors are taking a look under the hood of their entire plan and choosing to add NQDCs in an effort to be more comprehensive.

“Over the past few years, we’ve seen more clients that want to integrate all of their benefits so that everything works together,” Mitchell says. “That doesn’t necessarily mean we’re going to see shifts in the core structure of a nonqualified plan, but we might see more plan sponsors opt to bring everything together a bit more.”

Newport’s Shannon says plan sponsors have more options for plan design, which can make integration easier.

“Smaller companies can offer what we’d call a plain vanilla nonqualified plan,” Shannon says. “There is less work on the plan design side with something like that, startup costs are lower and there isn’t much ramp-up time. So we’re seeing that more. It wasn’t as easy to do something like that five or 10 years ago. That’s one area where the industry has evolved: The tools are getting better.”