Employer Satisfaction Slows for ‘Key Employee’ Retirement Plan

Fewer employers using nonqualified deferred compensation plans were very satisfied with the current structure of their plan, data from the Plan Sponsor Council of America shows.

The research found 20% of employers that offered an NQDC plan did not make any plan changes in the last year and that 25% planned to make changes in 2023. Employer satisfaction with the retirement plans declined, shown by 28.2% of employer respondents that were very satisfied, compared to 38.2% in 2020, according to PSCA data published earlier this month.

The PSCA survey showed the percentage of employers making contributions to their NQDC plans increased to 77.3% in 2022, up from 74.2% in 2020, the last year for which data is available. Employer contributions often indicate a restoration match to compensate for a match missed due to qualified plan contribution limits, and those were offered by 42.2% of employers, an increase from 27.5% in 2020. Meanwhile, 19.7% of employers noted participation in their NQDC plan has increased compared to a year ago.

Often used by employers to attract and retain talent—specifically highly compensated corporate executives—NQDC plans allow an agreement between the employee and plan sponsor to defer a portion of their annual income until a future date.

Among plan sponsor respondents, the most common reason they offered NQDC benefits was to “have a competitive benefits package,” at 87.9%. Among respondents, 83.6% said the deferred compensation plan is used to retain eligible employees, according to PSCA research.

Additionally, half of employees have made contributions to the plan when offered the opportunity, deferring an average of 10% of pay to their accounts, the PSCA found.

The percentage of eligible employees with plan balances has fluctuated: it was 61.1% in 2022, compared to 66.1% in 2020 and 60.4% in 2016, PSCA’s research found.

Although employers are using NQDC plans to attract talent, the plan designs increasingly include tactics to retain key workers, as almost 40%—up from 23.7% in 2021—have a bad actor forfeiture clause, and nearly 30% have a non-compete provision that forfeits the NQDC benefit if the employee leaves to work for a competitor, PSCA research found.

The forfeiture rules governing NQDC plans allow companies to recoup compensation from “bad actors,” such as executives that have participated in bribery, according to law firm Shearman & Sterling.

The PSCA report surveyed companies that offer NQDC plans, but data from a different survey show that the likelihood of a company offering an NQDC plan tends to correspond directly to number of employees. According to the PSCA, 81.3% of companies with at least 5,000 employees and 54.8% of companies with between 1,000 and 4,999 employees offer such plans. For all plans, including those larger ones, the rate was 32.7%.

The PSCA 2022 NQDC Plan Survey was conducted in October 2022 and includes responses from 135 organizations offering an NQDC plan to employees. The full survey is available for purchase from the PSCA.