Benefits June 8, 2017

PSNC 2017: Supplementary Savings Plans—Executive Benefit and NQDC

Data from the Boston Research Group finds that the average participant in an NQDC plan will receive 20% of retirement income from this plan alone, according to a panelist at the 2017 PLANSPONSOR National Conference.
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For executives, Social Security makes up less savings than for lower-income employees.

Speaking on a panel at the 2017 PLANSPONSOR National Conference in Washington, D.C., Jeff Roberts, regional channel manager at ADP, said executive benefit and nonqualified deferred compensation plans (NQDCs) are used by employers to attract and retain key employees.

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Jason Burlie, sales and strategic relationships – nonqualified practice leader at Prudential, added that the plans are used to make up for missed deferral opportunities for executives in the company’s qualified plan and to provide another retirement vehicle for executives.

Nonqualified plans are tax-deferred retirement vehicles that may be used by only a select group of highly compensated employees, Roberts explained. Some of their advantages: Nonqualified plans are exempt from Employee Retirement Income Security Act (ERISA) requirements that may be problematic; the Department of Labor( DOL) fiduciary rule is not a concern; and the plans are exempt from coverage and nondiscrimination testing and from Form 5500 filing.

Burlie added that NQDC plans offer unlimited deferral capability to executives. They are technically unfunded plans, even if the plan sponsor sets aside assets to help pay for future obligations. They are always subject to insolvency risk, and assets can go to creditors in bankruptcy.

Although they are exempt from many ERISA rules, NQDCs are subject to 409A regulations. But this doesn’t have to be complicated, Burlie said. In effect, in 2009, 409A set rules for NQDC plans, which previously came from case law. There are rules about when employees can make an election to defer to the plan, and 409A addresses how money can be taken out of the plan.

Roberts said data from the Boston Research Group found that the average participant in an NQDC plan will receive 20% of retirement income from this plan alone. “Some don’t participate because they don’t understand the plan. Creating communication that is simple and actionable is important. Just because they are executives doesn’t mean they understand,” he said.

Burlie said he sees a rapidly growing rate of plans bundling both defined contribution (DC) and NQDC retirement services. “For many years, NQDC was a niche market, and there were a few niche providers; now more DC providers are developing expertise,” he said. The industry has seen a 20% increase, year-over-year, in bundling of these services, he said. There has also been an increase in advisers and consultants getting into the NQDC market, mostly due to financial wellness efforts.

According to Roberts, the growth in the NQDC market is coming from midsize companies, which are attracting employees who left large firms that had these benefits. So there is an increase in plan creation. At privately held companies, the market is seeing more company money going into NQDC plans as a bonus, rather than using company equity, to appease those who came from publicly owned companies that provided equity compensation.

NEXT: What’s ahead for NQDC design and funding

Burlie noted that, in Fortune 1000 companies, one-third use corporate-owned life insurance (COLI) to fund their plan obligations; one-third use mutual funds; and one-third are not funded. But plan sponsors in the small market mostly use mutual funds.

Robert Massa, director, retirement, at Ascende Wealth Advisers Inc., and moderator of the panel, told conference attendees that President Donald Trump is talking about changing the tax structure of retirement plans, and this may affect the offering and funding of NQDC plans.

If the Trump tax plan is implemented as laid out, it calls for 10%, 25% and 35% tax brackets, Burlie said. Most participants in these plans will be in a higher tax bracket, so he didn’t expect a significant change in plan offerings; executives will still be interested in these plans because of the insufficiency of qualified plans. However, he observed, capital gains tax changes may be different. If corporate tax rates drop to 15%, the NQDC market will see less use of COLI—a tax shelter—because returns of this long-term investment will be too far out, and no one expects tax cuts to be permanent.

He pointed to one plan feature often overlooked in NQDC plans: a restoration match. When executives defer into a deferred compensation plan, that money comes out before the income that is subject to defined contribution (DC) plan deferrals, so executives in these plans can’t defer as much on total income as the lower-paid, he explained, adding that 47% of NQDC plan sponsors do a restoration match or some kind of match to help executives get the full match benefit of what they could have deferred to the DC plan if not for NQDC plan deferrals.

In addition, according to Burlie, there is often confusion around FICA [Federal Insurance Contributions Act] taxes with nonqualified plans. Plan sponsors should know that they have to take FICA out when nonqualified balances vest. He suggested that plan sponsors engage in a conversation with plan providers about this.

“With more bundling and more advisers handling both DC and NQDC plans, there’s a concern that, if the provider or adviser is used to dealing with DC plans, they may not know the differences, and about FICA taxation,” Roberts said. “Plan sponsors should make sure they are working with NQDC plan experts.”

Participants June 8, 2017

PSNC 2017: Plan Design Elements of the Future

Starting off the 2017 PLANSPONSOR National Conference, the panel discussed key plan design features that can boost participant engagement.
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Among an array of first-day sessions at the 2017 PLANSPONSOR National Conference was one panel focused on plan design elements, including automatic enrollment features and online tools.

Kicking off the panel, live polling from plan sponsors disclosed that top industry concerns include low-rate participant saving and trouble retiring on time—or even at all. Other poll results found that just over half—51%—of sponsors do not offer a true-up match in their plan design, whereas 44% do, and 6% don’t know.

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While 69% of plan sponsors fail to stretch their matching contributions, live polling concluded that efforts at implementing wellness features are effective, as 47% revealed that both one-on-one and online participant advice are offered to workers. On automatic escalation and re-enrollment, the poll revealed that 17% of sponsors utilize both features on a one-time basis, and 15% do so on a recurring basis.

According to Nate Nevas, director of global financial benefits and administration at Pitney Bowes (PB), and a panelist for the session, however, re-enrollment has yet to be integrated into Pitney Bowes’ plan. Because we have a legacy defined benefit [DB] plan, for those not participating as fully, it’s because of the pension plan,” he said.

Pitney Bowes doesn’t necessarily need a re-enrollment option. At a participation rate of 86.5%, the global eCommerce solution company initially provided a 2% default automatic enrollment, then raised it to 3%. When PB introduced automatic increase, the default auto-enrollment jumped to 6%. Today, all workers receive auto-enrollment and auto-increase at the start of employment, in an effort to ensure maximum participant saving.

“Our philosophy is we’re getting at them when they come in the door,” Nevas said.

At Owens-Illinois (O-I), Etta Strong, director of N.A. compensation and benefits, and also a panelist for the session, revealed that, even with auto-enrollment set at 4%, most O-I employees neglected to participate, because of existing DB plans. In 2015, O-I implemented its first re-enrollment sweep, and had another this spring.

The reaction?

“Surprisingly, very minimal noise or reaction, and it’s obviously sticking,” she said. O-I now has a 97% participation rate. The company employs a mandatory auto-escalation feature, increased at 1% each year to a maximum of 20%.

On financial planning services, Nevas noted that internet-based tools can connect a widespread company into one tight-knit entity, while being easily accessible to all. PB’s tool, named PB Project Living, assists employees on a nationwide scale and offers information on benefits, 401(k), pension plans and even personal health.

“Financial health, emotional health, physical health, they’re all interconnected,” he said.

Unlike Pitney Bowes, O-I utilizes in-person or calling features, including one-on-one advice and group meetings for the 19 plans. “Using online tools isn’t quite as effective, so being able to utilize calls is important to us,” Strong says.

Additionally, the company provides on-site meetings at least once a year with advisers from Pearl Street Investment Management visiting monthly. In terms of demographics, new hires, including Millennial and younger workers, tend to engage in one-on-one, personal meetings, she observed.

Nevas stressed the value these latest plan features can offer. For plan sponsors, not implementing them  does workers a disservice, he suggested. “There’s this inertia that can work in so many different ways. When we don’t use auto features, it goes against our employees.”

 

 

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