NQDC Plan Sponsors Look to Improve Participant Education

Helping executives understand and better use their benefits can increase the likelihood that plans meet the sponsor’s goals.

The 2024 Newport/PLANSPONSOR Nonqualified Deferred Compensation Plan Trends Survey, fielded in March and April among a diverse group of organizations, found that attracting and retaining executives continues to be a top reason to offer nonqualified plans.

Nonqualified plans remain important for helping executives save for retirement above what is allowed in qualified plans such as 401(k)s or 403(b)s—it will take substantially more savings for these employees, vs. non-executive employees, to replace the recommended 70% to 80% of pre-retirement income.

An analysis from 2019 by PLANSPONSOR and Prudential showed that the combination of Social Security benefits and maximized contributions to a qualified plan will position a retired worker whose salary was $50,000 to draw nearly 95% of this amount in retirement annually. In contrast, Social Security benefits plus maximized qualified plan contributions will leave the worker who was earning $450,000 in compensation to draw in retirement less than 30% of his pre-retirement annual earnings. So, helping executives bridge that gap is important.

However, nonqualified plans can do more than help build an executive’s nest egg—they provide tax-efficient compensation and a vehicle to save for other financial needs such as a child’s higher education.

“Offering a nonqualified plan is a growing area of conversation with a lot of our clients,” says Erin Hall, managing director, Strategic Retirement Partners. She says she expects to see growth in nonqualified plan offerings in the coming years.

In general, respondents to the Newport/PLANSPONSOR NQDC Plan Trends Survey said they feel their plans are at least moderately effective at accomplishing sponsor goals. But their responses when asked what changes they’re contemplating for the next 12 to 18 months is telling. Nearly three-fourths of those considering making changes said they want to improve plan communications and education—the most selected change by a wide margin.

It’s difficult for executives to get the most value from their NQDC plans if they don’t understand all the benefits.

“I was on a call yesterday with an internal certified financial planner,” Hall says, “and he said he was on a call with an individual with $7 million net worth who didn’t understand [her] RSUs [restricted stock units]. This executive didn’t understand how [her] nonqualified plan worked. [She] had a basic understanding but not about how it could fit into not only [her] financial planning but [her] tax planning—which is a real hot button right now.”

Advisers who spoke with PLANSPONSOR stressed that individuals who need tax planning should seek the help of a certified public accountant or other tax expert.

It can be “eye-opening” when talking to executives to realize that the lack of financial understanding and acumen spans all salary levels and all levels of an organization, Hall says. “It’s not uncommon at all for people to not understand things we may take for granted as more basic financial concepts. They’re not taught in schools, and if someone is not taught by a parent or mentor, it’s very common to find people who make well above six figures living paycheck to paycheck.”

She makes a good point; a survey in 2022 by Bank of America found that 20% of Baby Boomers earning more than $250,000 annually reported that being their lifestyle.

“For the most part, executives we talk to need education and help thinking this through,” says Kristi Barens, principal in Mullin Barens Sanford Financial & Insurance Services. “The participants we see that are using the plan most effectively have a financial adviser and get [that person] involved in the process.”

She says that’s where firms such as hers come into play, offering one-on-one consultations during the enrollment period to help executives evaluate their options and understand their plan. “These [meetings] tend to be very effective for those executives who share with advisers about their entire financial picture,” Barens observes. “Offering a custom 15-minute session has become more popular over the years.”

According to Hall, meeting one-on-one with each employee who is eligible for a nonqualified plan—showing that individual how it works and what the benefits are—is not only becoming more popular but more important. “If you put one of these plans in place, and you have 40 eligible people and only 10 participate, that doesn’t fit a measurement of success,” she says, adding that it’s an area ripe for improvement, “because, if employees understand these benefits wholeheartedly and understand why it’s good for them, more will participate.”

Barens says she has yet to see financial wellness planning or distribution planning offered by NQDC plan recordkeepers. “They offer passive communications via a call center, answering basic questions about the plan and its website,” she says.

Third-party administrators often offer webinars during enrollment, though. “Usually, [executives] don’t fully understand their benefits. They really only think about it once a year during the enrollment cycle and tend to forget how things work over the interim,” she says. “TPAs have tried to send more regular communications throughout the year, but those haven’t been very effective.” There could be many reasons for this, Barens says, but her team has found the problem generally owes to executives being busy and having communications constantly bombarding them.

According to Barens, advisers or consultants usually will take the lead on communications and can customize them to the plan sponsor’s culture, using various media.

Educational resources exist, however, whether from a recordkeeper or plan consultant, Hall points out. If plan sponsors are not getting the level of engagement they want, it might be because the nonqualified plan was set up in a more traditional way. “A plan sponsor might have been sold a [corporate-owned life insurance] policy by an insurance agent, and the commission was paid upfront, so there’s no incentive for a consultant to have regular meetings with executives,” she explains. “If you’re not having regular reviews of the plan and participation, frankly, it’s time to take a fresh look at your service providers.”

Hall suggests that plan sponsors seeking services should understand “the transparent pricing that goes along with that. If you’re purchasing corporate-owned life insurance, understand how commissions get paid and how those offset fees. Just understand what you’re getting when you’re engaging with a service provider.”

Rodney Kauffman, retirement plan consultant at SageView Advisory Group, says most recordkeepers do have good educational resources available, but plan sponsors must be proactive in asking for them. Many clients ask his firm to communicate the benefits of the plan, he says. “Most of the [nonqualified plan] recordkeepers have good solutions [for education], but we find it more effective when there’s an adviser that can supplement [them],” he says.

“Executives are truly looking for an understanding of the plan,” Kauffman says. “Their elections are irrevocable, and they want to understand the implications of that and feel confident in their decisions.” NQDC plans are highly individualized, and each plan has different provisions, he says, adding that each executive has his own specific financial circumstances as well. “Start with open enrollment, helping executives understand plan options—what the plan offers—then follow up with one-on-ones so they can get advice for their specific situation,” he says.

“It's my belief that when you provide resources to employees to help them be better, not only in their job but in their life, and you can help solve some of their financial stress, then you turn employees into organizational citizens, and you want organizational citizens throughout the ranks of your organization up through the C-suite,” Hall says. “That drives profit; that drives results and the long-term sustainability of organizations.

“So investing in educating executives helps,” she continues. “It helps your nonqualified plan be successful, and you want these plans to be successful for the sustainability of your organization.”

—Rebecca Moore

For full research findings with commentary from Newport, visit this site.