For NQDCs to Meet Growth Potential, Experts Turn to Customization

Less than half of recordkeepers currently offer “top hat service” for highly compensated employees.

Art by Anja Susanj

Nonqualified deferred compensation plans remain popular in drawing and retaining top talent by offering a savings program that goes beyond the limits of qualified retirement saving plans. But for the employee benefit offering to gain wider use, industry players are continuing to broaden the offering to meet the needs of a wider swath of employees.

“I think the gating factor right now is there are not as many providers as we probably need,” says Tony Greene, senior vice president of business development for group benefits broker NFP. “It’s been a small market, smallish market, and as the need for consulting goes up, my concern is always finding qualified people to do the work. This is not a business on the consulting side that you can automate.”

In 2015, the NQDC market accounted for $80 billion. By 2022, it had ballooned to $191 billion, according to PLANSPONSOR (which, like PLANADVISER, is owned by Institutional Shareholder Services Inc.) The leading firms by participants are retirement service providers Fidelity Investments, Newport Group and Empower, the research showed. That said, among the 40 recordkeepers that PLANSPONSOR reached out to, only 17 reported having NQDC clients.

According to industry players, continued growth in the space will come from being able to offer the service to a wider range of employees, with the ability to customize to an employer’s needs.

“Anything that we can think up, or the consultant can take up at an organization, we can put it on our platform and do the administration for that particular plan design,” says John Baergen, senior director of nonqualified plans at Principal Financial Group. “So that gives us a lot more flexibility, which allows plan sponsors to really dial in exactly the kind of features that they want in their plan.”

Meeting Needs

Specializing in nonqualified services, Principal has a consulting team with a dozen staff that average 25 years of experience. Notably, the firm has an administrative platform that can perform anything that 409A plans provide for, according to Baergen.

Principal also provides all model documents, accounting features and trust services. Baergen says the latter is known as a “rabbi trust,” because its first usage was by a synagogue for a rabbi, but it is technically a grantor trust, which is a way to add some additional security to a nonqualified plan.

Greene of NFP says his firm is not only focused on retirement saving add-ons, but also on addressing the areas where qualified plans tend to leave the highly compensated employee group disadvantaged: executive disability and executive life insurance. Greene says the firm is reasonably unique in that there are not very many independent providers, meaning not owned by a 401(k) or qualified plan provider, in the marketplace.

“We’ve stayed independent, because we feel like it’s a good place to be. We’re carrier agnostic,” says Greene. “We can work with anybody that’s important to us. We think that sort of freedom to always be making an informed decision for plan sponsors is critical to our long-term success, our plan sponsors’ long-term success.”

Customization is key, but there are challenges of both service, regulation, and communication that may stymie growth in the space.

Plans can also be designed to include an employer match, or to have employer-paid benefits without the employee deferring his or her own compensation, according to Alex Watson, business solutions group director for Nationwide, wrote via email.

“Employers have a great deal of flexibility in the design of a NQDC plan and can tailor each agreement to meet the needs of key employees,” he writes.

Nationwide also notes that NQDCs are not subject to ERISA rules, allowing for fewer restrictions on customization and fewer reporting requirements.

Top Hat Service

Greene says the biggest challenge is that an NQDC is a “top hat plan” only available for higher-paid employees, so providers must, by statute, limit who has access.

“Let’s say you’re a company of 300 employees: You’re picking out the 15 people that are most critical, and that can be challenging,” Greene says. “You’re figuring out, ‘What do we got to do that’s different to keep them here as long as we want them to stay?’”

Greater use of NQDC plans will depend upon them being offered easily to a wide range of people (currently they are typically offered to employees making at least $150,000 per year), but companies are not allowed to offer them to all employees, lest they violate the Employee Retirement Income Security Act.

Firms receive an exemption from ERISA to be able to offer the plans, and Baergen says the rule of thumb is making NQDC plans available to about 10% to 15% of the employee population.

“If you allow 40% of an organization to participate in this plan, then it’s too much, and you risk the Department of Labor [investigating] or risk a lawsuit from the [other] employees,” says Baergen. “These plans have a different level of risk associated with them.”

Baergen says another challenge he has come across is communicating NQDC features to clients. They often do not take time to understand the features that can be customized to their financial situation.

“It’s funny: Sometimes we have HR staff that will come back to us and say, ‘So my CIO is upset because he didn’t realize that we had the nonqualified plan, and you could do all this stuff,’” Baergen says. “We’re like, ‘Well, you sent him the material, you told him when the thing was, and [he] just didn’t take the time to just stop and really take enough time to really understand what the features are.’”

Future of NQDCs

Baergen and Greene are both confident in the expansion of NQDC plans. Principal had a record year in 2022, says Baergen, as the firm put in more plans each year in the last three years than ever before. He cites the “historic turnover” in the labor market as a driving force for NQDC plans.

“What happens is: Executives over at this company have a nonqualified and goes over to another company that doesn’t, and they’re like, ‘Wait a minute, nonqualified is valuable, we’ve got to add one here,’” Baergen says. “I think that drives additional implementation of plans, especially in organizations that don’t already have one.”

Greene says there were many more providers when he first entered the business, but many of his competitors from 10 years ago have been bought by insurance carriers and qualified plan providers. He tries to seek out opportunities to educate more people about the industry.

“I think our challenge as an industry is educating and bringing that next generation of consultants and folks in the business along,” he says.