Time to Bundle Up?

How plan sponsors can evaluate the possibility of including NQDC options as part of an integrated platform.

Defined contribution recordkeepers are working to integrate nonqualified deferred compensation plans into their service offerings. Phillip Currie, a senior vice president with OneDigital Retirement + Wealth in Sandy, Utah, says that several years ago, there essentially was no such thing as bundling, but today’s market is evolving, with examples going back to Voya Financial Inc.’s June 2018 acquisition of Pen-Cal Administrators Inc., which provided NQDC plans and consulting services.

Other defined contribution plan recordkeepers have adopted a white-label approach to partner with established NQDC providers. In July, Schwab Retirement Plan Services announced plans to work with Newport (formerly Newport Group), an Ascensus company, in deferred compensation. The partnership will enable sponsors and participants to access their NQDC plans through Schwab’s websites, including plan information supplied by Newport, according to Schwab’s press release.

Bundled and white-label arrangements force plan advisers who work with sponsors offering both DC and NQDC plans to make choices. Should a plan work with a recordkeeper’s bundled solution if one is available, or is it more beneficial to separate the plans? In Currie’s opinion, advisers should consider multiple factors, and he cautions that only a few 401(k) plan recordkeepers have best-in-class deferred compensation administration programs, although several are working to improve.

Brian Dennen, a principal in benefits adviser Curcio Webb who is based in Scottsdale, Arizona, says data integration is another factor to consider. He notes that recordkeepers partnered with NQDC vendors have achieved different degrees of integration. “Not universally, but for the most part, they’re using separate systems, and there are varying degrees of integration between those systems,” Dennen explains. “If you are evaluating integrating your qualified and nonqualified (plans), you have to dive into how much integration is there to determine if it’s valuable.”

Benefits to Bundling

Matthew Compton a retirement solutions partner in Brio Benefits in New York City, which was recently acquired by Alera Group, believes bundling’s main benefit is an improved experience for plan participants. He cites the example of a highly compensated employee participating in the employer’s 401(k) and NQDC plans.

In a perfect world, that participant could access qualified and nonqualified accounts on the same platform using a single sign-on, says Compton. That creates a more pleasurable experience for participants who have balances in both plans, because the balance of a deferred compensation plan can frequently far exceed the balance of a 401(k), he says.

Dennen says bundling can lead to easier plan governance, data interfacing and vendor management. Still, he agrees that the primary motivation for bundling is to give participants a better view of their retirement assets and benefits with modeling capabilities that include both plans.

Currie adds that it can be easier for sponsors to implement a bundled solution. “Oftentimes, you’re going through procurement departments when you’re signing up a new vendor, so you’re just doing that one time, rather than twice,” he says.

Sponsors might not see significant cost savings by bundling. Compton says NQDC plans’ pricing can vary significantly based on provider selection and financing options. “However, if we are focused strictly on who is handling the plan administration costs, we have found that the pricing between bundled versus non-bundled arrangements is typically similar and is not a deciding factor in the selection process,” he says.

In Dennen’s experience, there is minimal impact on pricing for these services between bundled and unbundled arrangements. He explains that services to administer qualified and nonqualified plans are primarily on separate systems, so they require a more experienced service center representative. “They have their own plan rules and processing requirements, and the combined value is limited to data management, governance and maybe a few other factors that don’t generate financial savings," Dennen explains. "The primary factors to pricing are participant count, plan complexity and activity.”

Drawbacks to Bundling

The Newport/PLANSPONSOR 2022 Executive Benefits Survey found that 77% of NQDC plans used corporate-owned life insurance as a plan-funding vehicle; 74% used mutual funds. However, Currie says COLI has been a challenge for 401(k) recordkeepers whose platforms and plan lineups are limited to securities like mutual funds by creating an “asset rebalance problem.”

“They can easily administer plans with mutual funds because they’re in the business of buying mutual funds on their 401(k) platform,” Currie says. “But when it came time to administer and rebalance COLI assets, many failed—they said they couldn’t do it.”

The problem of administering and rebalancing COLI assets in NQDC plans largely explains why recordkeepers were slow to bundle, he continues.

There are still potential COLI-related drawbacks with bundled recordkeepers that can accommodate life insurance contracts, says Compton. He maintains that working with one bundled provider typically results in limited choice among insurance financing vehicles and investment options.

For example, one of the larger bundled deferred compensation providers requires NQDC plans to use the provider’s life insurance plans for its COLI arrangements. In contrast, advisers working with unbundled NQDC providers would likely have access to a broader range of insurance and investment options, Compton says.

What to Look for

When evaluating bundled providers, Dennen looks at two main points. From the participants’ perspective, does bundling provide genuine advantages? For sponsors, is the recordkeeper offering a genuinely integrated experience?

Compton says white-label solutions can work if the sponsor mainly wants to offer an interface with which participants can view both of their plans. Those arrangements may not suffice for sponsors seeking deeper plan integration. “It’s important that they go into it eyes wide open, recognizing that maybe this isn’t really a bundled platform or a bundled environment,” he cautions.

Compton suggests advisers should also review the plan’s funding-vehicle options and compare them with participants’ anticipated access to their NQDC balances. COLI is better suited for longer-term accumulation goals, such as saving for children’s education costs or retirement. Mutual funds are more appropriate than COLI for shorter-term goals; both options present pros and cons, depending on what the adviser wants to accommodate for the client. “In many cases, you may use split-funding for the program, where you’re using both mutual funds and corporate-owned life insurance as financing vehicles within the program,” says Compton.

According to Compton, an adviser’s understanding of the client’s goals, the program’s objectives and the timeframe for meeting participants’ distribution and payout requests can dictate financing decisions. “Different providers have different availability for those financing options, which is going to dictate your RFP search when you’re looking for a deferred compensation provider,” he says.

According to Currie, the bundling decisions for his clients come down to evaluating systems and staff: Does the recordkeeper have a genuinely integrated service? Do they offer NQDC experts, including attorneys and CPAs, to service advisers and sponsors? “I want my clients on a platform that can provide all of those services: capabilities and staff,” Currie says.

Currie cites a sponsor’s recent search that involved a review of a large 401(k) recordkeeper that had acquired an NQDC vendor. Currie’s research found that the recordkeeper was experiencing difficulties integrating the NQDC capabilities. Consequently, he recommended against the bundled solution.

“It depends on who the 401(k) provider is, if they have the capabilities that the standalone boutique deferred comp recordkeepers have and if they are that good,” he says. “Then I don’t mind bundling.” —Ed McCarthy