Data & Research August 17, 2023

WTW: Employers Ramping Up Nonqualified Saving Options to Draw Key Execs

75% of employers made changes or plan to make improvements to their nonqualified deferred compensation plans, according to a survey.

Reported by


Employers are focused on upgrading their nonqualified deferred compensation plans in the ongoing tight labor market, to the benefit of key executives and higher-paid employees, according to a Willis Towers Watson survey released Wednesday.

Of 396 U.S. employers, three-quarters (75%) either made changes to their nonqualified defined contribution retirement plans in the last two years or plan to make changes in the next two years, the advisory and brokerage found. Employers with nonqualified defined benefit plans clocked in a bit lower, with 55% either having made changes in the past two years or having plans to in the next two years.

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Attracting and retaining key talent was the top reason given for offering a nonqualified retirement plan, according to WTW. More than one-third (37%) of respondents cited attraction and retention as the top reason for offering the plan, while 25% ranked it second.

“Employer interest in nonqualified retirement plans is at an all-time high. In fact, we have helped clients implement more new plans and redesign existing plans in the past two years than in prior years,” Chris West, senior director and leader of WTW’s nonqualified plans specialty group, said in a statement.

The majority of large U.S. employers are already offering nonqualified retirement plans to executives and high earners, according to WTW, with the plans allowing for advantages such as pre-tax deferral of compensation, employer contributions and/or compensation amounts that cannot be captured in a qualified plan due to IRS limits. Nonqualified plans are also typically not subject to rules governed by the Employee Retirement Income Security Act.  

Employers are looking to ramp up those offerings, according to West. The survey found that 72% of employees with DC plans are focused on “improving the participant experience” in their nonqualified plans, compared with 56% with DB plans.

“While employers have been investing time and effort into their nonqualified plans, many recognize they aren’t getting or providing the value intended,” West said. “As a result, employers are looking to improve the employee experience through more focused communication and education as part of their redesign strategy.”

DC plan sponsors cited communication (52%), education (47%) and financial counseling (28%) as key focus areas for their plans over the next two years. Meanwhile, more than half of respondents (56%) offer only a nonqualified DC retirement plan, while 35% provide both a nonqualified DC and DB plan.

Nearly one in four respondents (23%) with a nonqualified DB plan has either conducted de-risking actions in their DB nonqualified plan or intends to conduct de-risking.

The firm also found that 60% of DC respondents and 47% of DB respondents informally fund their nonqualified plans by setting aside an asset to provide a source for disbursements and to mitigate risk. Mutual funds are the most prevalent investment vehicle in those trusts, with 60% of respondents that fund their DC nonqualified plans utilizing mutual funds, and 43% of respondents funding their DB plans with mutual funds.

“We see that mutual funds have surpassed historical vehicles, such as corporate-owned life insurance, as being the most prevalent investment vehicle,” Beth Ashmore, WTW’s managing director of North American retirement, said in a statement.

In May and June, 396 U.S. employers that offer a nonqualified retirement plan participated in the WTW Nonqualified Retirement Benefit Survey. Respondents employed a total of 7.5 million workers and were a mix of for-profit and nonprofit organizations.

Data & Research August 17, 2023

Fidelity: Auto Default Contribution Rate Hits All-Time High of 4.1%

The recordkeeper’s Q2 participant report also finds third-consecutive boost in average retirement account balances on strengthened markets.

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Fidelity Investments reports the average default contribution rate for auto-enrolled employees hit an all-time high of 4.1% in the second quarter, according to analysis drawing on its participant pool released Thursday.

In Q2, 39% of employers offered auto-enrollment, which was relatively steady from Q1, and shows a continued commitment to automatic retirement savings as a mechanism to get, and keep participants contributing, according to the country’s largest recordkeeper. The data “shows that when participants are automatically enrolled in a plan and begin to see their savings grow, they are especially likely to remain enrolled in the plan,” Fidelity wrote in the report.

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The SECURE 2.0 retirement law leans heavily on auto enrollment to help reduce the workplace retirement savings gap. Starting in 2025, newly created retirement plans will be required to auomatically enroll their qualified employees at a contribution rate between 3% and 10% of pay, and plan sponsors must escalate the contribution rate by 1percentage point annually until it reaches either 10% or a maximum of 15%.

Overall, retirement balances increased for the third straight quarter due in part to improving market conditions, according to the report. Average 401(k) balances were up 4% quarter-on-quarter, the average IRA was up 5%, and the average 403(b) account balance increased 5%. Average retirement account balances for the sample group of participants quarter-over-quarter, and year-over-year, were:

Q2 2023

Q1 2023

Q2 2022

IRA

$113,800

$109,000

$110,800

401(k)

$112,400

$108,200

$103,800

403(b)

$102,400

$97,900

$93,300


The recordkeeper also reported a jump in both IRA account openings and asset levels. The total number of IRA accounts rose to 14.3 million, an 11% increase over Q2 2022, while total assets grew 14.3%, according to Fidelity.

Roth IRAs were the most popular option, making up 59.1% of all IRA contributions in the quarter, a trend that appears to be spreading among consumers, says Rita Assaf, vice president of retirement and college products for Fidelity.

“We’re seeing a general increase in Roth IRA interest,” Assaf says, noting that her team has been tracking Google search trends for the savings vehicle. “Roth IRA search terms over the last five years have increased a lot across all age groups.”

Assaf says consumer interest in personal finance and investing has increased generally, as well, as technology and resources become more “democratized.” She attributes the trend to online savings and brokerage options that don’t require an in-person meeting with an adviser, as well as a surge in social media content focused on financial wellness.

Younger investors (ages 18-35) were one of the drivers of IRA growth, Assaf notes, with Fidelity seeing a 34.4% increase of that age cohort in IRA accounts year-over-year.

“Those [younger investors] that have dipped their toes into Roth, when we ask why, they say they really like the control of it,” she says. They also say they hear about it “from parents, or friends, or social.”

In recent quarters, the data has also shown that women are becoming more engaged, and saving more, in both workplace and IRA savings, Assaf says.

“Just in general, women have become more engaged with their overall financial well-being, which is different than previous generations,” she notes. “Millennial women may have seen their mothers in the workplace, and been exposed to workplace plans when they became live in ‘70s, but it’s a relatively a new concept to own your financial wellness, and own your retirement savings….I think it’s encouraging, that young women as well are taking an active role in their finances.”

In less positive news, outstanding 401(k) loans increased slightly, with the percentage of participants with a loan outstanding rising to 17.1% in Q2, compared to 16.6% last quarter. Those rates were still higher than during the COVID-19 pandemic, Fidelity noted.

Fidelity also noted that total 401(k) savings rates were slightly lower than the prior quarter, clocking in at 13.9% when including employer contributions, as compared to 14%. That rate is still higher than Q4 2022 (13.7%) and Q3 2022 (13.8%), but not yet at Fidelity’s suggested rate of 15%.

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