Ensuring Best Practices for NQDC Plans

Yong Lee, chief operating officer for retirement plan services provider MullinTBG, tells PLANSPONSOR that there are four main areas that non-qualified deferred compensation (NQDC) plan sponsors should consider in examining their plans: “First, plan sponsors should make sure that they understand the regulatory components of such a plan. Second, how do they want to design their plan, based on such an understanding of these regulations? Third, how do they want to finance their plan? Fourth, plan sponsors need to educate their participants to ensure that they understand how the plan works and how it will benefit them.”

Plan sponsors need to be aware of relevant legislation such as Internal Revenue Code Section 409(a) and the American Jobs Creation Act of 2004, says Lee, who is based in El Segundo, California. He explains that participants need to be made aware that the language of such regulations requires participants to wait a certain length of time, six months for example, before being granted their NQDC distribution once they have left their employer for another company. Participants also need to understand that they must make elective deferral changes before they start earning for that plan year.

With plan design, Lee says, “Plan sponsors need to understand what their main reason is for offering the plan. Some offer these plans just to stay competitive in the recruiting game. Others may need to ask what are the short- and long-term goals of the plan, and tailor the plan design to suit those needs.” Plan sponsors may want to examine employer contributions and whether participants need to be kept on a strict schedule, with penalties imposed for voluntary terminations (i.e., the participant decides to leave the company). In addition, plan sponsors may want to consider whether the offering of signing bonuses or other types of compensation is the right move for them. Lee adds that it is also important to consider what types of investments are being offered to participants.

For financing the plan, Lee says the two most common strategies are using taxable securities, such as mutual funds, and through company-owned life insurance. He says plan sponsors need to determine which approach fits in best with the primarily goals and objectives of the plan.

Education for and communication with participants about the plan is important, Lee says, adding that it is also important to choose the right provider to help with or carry out such education and communication efforts. If participants are not aware of the benefits of the plan and do not fully utilize the plan, then the company is not getting a good return on its investment in the plan, he says.

Plan sponsors, either on their own or through a provider, need to determine what method of information delivery works best for their participants, says Lee. This may sometimes be dictated by age, with older participants preferring paper materials and in-person meetings, either group or one-on-one, and younger participants preferring online delivery methods.

The delivery method may also be dictated by the participants’ comfort level with technology. Lee points out that webinars have been very commonly used and are liked by young and old alike.

Regardless of delivery method, Lee recommends, “You need to use straightforward language in these participant materials, not legal mumbo jumbo. Tailor the content to a more-general population.”