Employers Look to Nonqualified Plans to Compete for Talent

Employers are focused on upgrading their nonqualified deferred compensation retirement plans in the ongoing tight labor market, to the benefit of key executives and higher-paid employees, according to a Willis Towers Watson survey released Wednesday.

Of 396 U.S. employers surveyed, three-quarters (75%) either made changes to their nonqualified defined contribution retirement plans in the last two years or plan to make changes in the next two years, the advisory and brokerage found. Employers with defined benefit plans clocked in a bit lower, with 55% either having made changes in the past two years or having plans to in the next two years.

Attracting and retaining key talent was the top reason given for offering a nonqualified retirement plan, according to WTW. More than one-third (37%) of respondents cited attraction and retention as the top reason for offering the plan, while 25% ranked it second.

“Employer interest in nonqualified retirement plans is at an all-time high. In fact, we have helped clients implement more new plans and redesign existing plans in the past two years than in prior years,” said Chris West, senior director and leader of WTW’s nonqualified plans specialty group, in a statement.

The majority of large U.S. employers are already offering nonqualified retirement plans to executives and high earners, according to WTW, with the plans allowing for advantages such as pre-tax deferral of compensation, employer contributions and/or compensation amounts that cannot be captured in a qualified plan due to IRS limits. Nonqualified plans are also typically not subject to rules governed by the Employee Retirement Income Security Act.  

Employers are looking to ramp up those offerings, according to West. The survey found that 72% of employees with DC plans are focused on “improving the participant experience” in their nonqualified plans, compared with 56% with DB plans.

“While employers have been investing time and effort into their nonqualified plans, many recognize they aren’t getting or providing the value intended,” West said. “As a result, employers are looking to improve the employee experience through more focused communication and education as part of their redesign strategy.”

DC plan sponsors cited communication (52%), education (47%) and financial counseling (28%) as key focus areas for their plans over the next two years. Meanwhile, more than half of respondents (56%) offer only a nonqualified DC retirement plan, while 35% provide both a nonqualified DC and DB plan.

Nearly one in four respondents (23%) with a nonqualified DB plan has either conducted de-risking actions in their DB nonqualified plan or intends to conduct de-risking.

The firm also found that 60% of DC respondents and 47% of DB respondents informally fund their nonqualified plans by setting aside an asset to provide a source for disbursements and to mitigate risk. Mutual funds are the most prevalent investment vehicle in those trusts, with 60% of respondents that fund their DC nonqualified plans utilizing mutual funds, and 43% of respondents funding their DB plans with mutual funds.

“We see that mutual funds have surpassed historical vehicles, such as corporate-owned life insurance, as being the most prevalent investment vehicle,” Beth Ashmore, WTW’s managing director of North American retirement, said in a statement.

In May and June, 396 U.S. employers that offer a nonqualified retirement plan participated in the WTW Nonqualified Retirement Benefit Survey. Respondents employed a total of 7.5 million workers and were a mix of for-profit and nonprofit organizations.