Non-Qualified Exec Benefits Popular for Restoring Lost Savings

The fifth annual MullinTBG-PLANSPONSOR Executive Benefits Survey shows companies are using  nonqualified deferred compensation plans (NQDCPs) as a valuable tool for restoring weakened retirement savings.

Nine out of ten companies continue to offer an NQDCP, and over 80% indicate that their most important reason for doing so is to provide a vehicle for accumulating assets that can generate adequate retirement income. To this end, significantly more employers are offering financial planning services to help their executives maximize their nonqualified benefit opportunities and create sound investment strategies.   

For the first time since the economic crisis, survey results show signs of a shift in focus away from being reactive to volatility in financial markets and economic uncertainty toward finding solutions that will rebuild savings and generate income. Participants are favoring market-based options for allocating NQDCP balances over more stable alternatives, such as fixed crediting rates, and expressing dissatisfaction with benefit cuts implemented as a cost-cutting measure in the aftermath of 2008.   

They are also less likely to cite a lack of confidence in company performance as a reason to opt out of an NQDCP. These responses differ markedly from a year ago, when attention was primarily focused on economic uncertainty and risk.  

Participation rates in NQDCPs, which had held steady at 50% for several years, slipped slightly to 46.3%, but were at 57.6% for informally funded plans that provide a company match. Participation in larger plans - those with at least 250 participants - increased dramatically to 57% from just over 44% last year, nearly offsetting decreases in smaller plans.   

The survey found that overall, NQDCPs have held up remarkably well through the economic upheaval and slow recovery. While the retirement savings opportunity is their most prevalent rationale for offering a NQDCP (80%), employers also favor them for allowing tax-deferred savings opportunities limited under 401(k) plans and as a tool for attracting and retaining top talent. A majority of respondents reported that they informally fund their plans, though the number was down nearly 7% from the all-time high reported last year to 64.6%, but still greater than in prior years.

Guaranteed Lifetime Income Options  

When asked if they were interested in or actively considering offering a guaranteed lifetime income option as part of their NQDCP, 17.8% of plan sponsors surveyed for the fifth annual MullinTBG-PLANSPONSOR Executive Benefits Survey responded in the affirmative, indicating that while the vast majority seeks to provide executive benefits that will effectively retire their key employees, they are also slow to warm to the idea that an annuity-based offering may be a viable solution.   

Other survey highlights include:  

  • Companies continue to reduce or eliminate traditional defined benefit pension plans; 
  • Significantly fewer companies reduced or eliminated 401(k) matches, down from 21.1% in 2009 to 12.3% in 2010; 
  • The number of executives who opted out of an NQDCP due to concerns about higher future tax rates declined significantly to 26.2% in 2010; 
  • Mutual funds and corporate-owned life insurance continue to be the primary informal funding vehicles for companies to manage NQDCP asset-to-liability ratios and the popularity of both increased significantly in 2010 while the use of cash decreased; and  
  • The vast majority of companies find it more efficient to employ a third-party recordkeeper to administer their NQDCPs.