NQDC Plans: An Opportunity for Improving Retention, but Underutilized by Participants

A key factor in retaining top executive talent is offering a nonqualified deferred compensation plan, according to 92% of employers who participated in NFP’s recent Executive Benefits Trend Study. 

However, NFP, a benefits consultant, wealth manager and retirement plan adviser, found that while NQDC plans are appealing to companies of all sizes, they appear to be underutilized, with eligibility rates outpacing population and few companies planning to make near-term changes. 

An NQDC plan essentially allows an employee to earn wages, bonuses or other compensation in one year but receive the earnings—and defer income tax on them—in a later year. With any type of deferral, the plan sponsor can design the plan to specify whether the participants’ money is available to them before retirement or at separation of service. 

Out of the 98 executive benefits employers who partner with NFP for executive compensation packages, only 32% said participation in their NQDC plan had increased since 2020, and 75% said they do not plan to make any changes to their NQDC plan. Meanwhile 45% said eligibility has increased since 2020; NFP argued that increased communication can help close the gap between eligibility and participation. 

“Nonqualified deferred compensation is an essential lever in creating executive benefits programs that enhance retention of top talent, but the plans are being underutilized,” said Joe Carpenter, head of executive benefits at NFP, in a press release. “Companies need to tailor their plans to the unique needs of their executives and untangle the complicated plan details for them. Continuous plan communication and knowledge-sharing also matters as it helps drive how executives perceive the value of the benefit.” 

The majority of employers surveyed (79%) allow participants to defer their base salary, and a little more than half (58%) allow participants to defer annual bonuses. Almost 60% of employers contribute a discretionary and/or percentage of the employee contribution on top of that.  

Carpenter added that there are several untapped benefits that employers can offer to their executives, such as supplemental executive medical insurance and college tuition for children, that can set them apart from others. 

However, 85% of employers said they feel remaining competitive in the executive benefits market is “more expensive than ever,” and many businesses are resorting to creative offers to keep their executives satisfied at a manageable cost.  

According to PLANSPONSOR’s 2023 Defined Contribution Plan Benchmarking Report, which surveyed 2,562 plan sponsors from a variety of industries, 7.9% of plan sponsors reported offering an NQDC plan. Plan sponsors that had greater than $1 billion in DC plan assets were the most likely to have an NQDC plan, with 42.9% offering one.  

NFP also found that executive retirement behaviors are evolving in opposite directions, with one-third retiring later and one-quarter retiring sooner. But regardless of when these executives plan to retire, most feel behind in preparation.  

“Businesses have found deferred compensation plans to be highly effective in preparing their executives for retirement, and many offer NQDC plans primarily for this purpose, but they need to go a step further by tailoring plans to the unique needs of executives,” the report stated. 

NFP recommended that plan sponsors revisit their executive benefits early and often, look beyond traditional offerings to come up with more creative benefits that will set them apart and optimize their executive benefits package to counter rising costs in an unsettled economy.