Data & Research March 31, 2014

NQDC Plans See Higher Participation in 2013

Thirty percent of respondents to a recent survey note a higher plan participation rate for nonqualified deferred compensation (NQDC) plans.
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According to the eighth annual MullinTBG/PLANSPONSOR Executive Benefits Survey, there was a 10.5% increase in enrollment figures. The survey also shows, for 2013, 19% of respondents noted higher deferral amounts, and similar to previous survey results, participation rates were highest (56%) for firms that offered a company match.

The survey also reveals almost all companies (95%) offer NQDC plans to their highly compensated employees, making it the most common executive benefit surveyed. In 2012, roughly 90% of responding companies said they offered a NQDC plan.

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“With NQDC plan prevalence at such a high, there is no doubt that these executive benefits are crucial to recruiting and retaining high-quality employees,” says George Castineiras, Prudential Retirement’s senior vice president of Total Retirement Solutions, based in Hartford, Connecticut.

The survey also found about 42% of responding companies aspire to make changes to their NQDC plans in the future, hoping to enhance plan education and communication programs. According to the survey authors, education and communications are important, and key stakeholders—such as plan sponsors, plan administrators, financial advisers and benefits consultants—should focus on conveying the more meaningful underlying benefits of the NQDC plan.

The survey report says participants need to be guided through the process of achieving their financial goals—whether it’s a short-term goal such as putting their child through college or a long-term goal such as retiring to a comfortable house on the golf course—in order to make the process of saving more tangible for them.

“Providing expert resources that can help participants validate their plan choices and create a financial plan that will enable them to achieve a successful, comfortable retirement is one way to take some of the guesswork out of decisionmaking and realize the potential of their executive benefit packages,” says Yong Lee, chief operating officer at MullinTBG, based in El Segundo, California.

Nearly half (45%) of companies reported offering a financial planning advice component for their plan participants. “In-plan offerings designed to support executives’ retirement readiness are a notable trend,” Lee adds. “Offering model or managed portfolios, retirement income-generating options and financial planning advice demonstrate that plan sponsors are responding to concerns about their employees’ retirement readiness.”

Nearly all (94.7%) of survey respondents note that voluntary NQDC plans remain a relevant and integral part of the executive benefits package. On related note, the survey also reveals an increase in the use of stock options as an executive benefit in 2013, up to 50% versus 41.5% in 2012. In addition, larger, public and tax-paying companies saw an increase in the use of restricted stock units as an executive benefit, up to 57.6% versus 43.4% in 2012.

In terms of the number of investment options, the survey finds that companies like to keep them at a “diverse but reasonable level,” with the majority of respondents (82.4%) saying their company offers up to 20 options in their NQDC plan.

Other survey findings include:

  • Criteria used for determining NQDC plan eligibility varied among categories, with title (23.5%) and job grade (23%) cited most often;
  • Informal funding continues to be a popular strategy for managing NQDCP asset-to-liabilities (57.2%), with companies primarily utilizing corporate-owned life insurance (46.2%) and mutual funds (44.7%);
  • Rabbi trusts (i.e., trusts created for supporting the nonqualified benefit obligations of employers to their employees) maintain their position as the top choice for a security vehicle, employed by 97% of respondents that have a security vehicle for their NQDC plan;
  • More than two-thirds of companies (70%) rely exclusively on a third-party recordkeeper to administer their NQDC plan;
  • About 70% of plan sponsors rated their plan as either “effective” or “extremely effective”; and
  • More than three-quarters (77.8%) of respondents reported their NQDC plan is offered to “provide a vehicle for retirement savings.”

MullinTBG is a Prudential Financial company and a provider of nonqualified executive benefits.

A summary of the survey findings can be downloaded here.

Compliance March 31, 2014

Retirement Plan Committees Need a Custom Charter

Many retirement plan committees do not have a charter, and often those that do find it fails to provide adequate guidance because it is not specific enough to the organization.
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According to an article in Sibson’s latest Perspectives newsletter, in the interest of sound organizational and plan governance, every retirement plan committee should have a custom charter that provides a framework for meeting its responsibilities.

Richard A. DeFrehn and John K. Graham, vice presidents at Sibson Consulting, say, among other things, a custom charter can help get new retirement plan committee members up to speed. A company with high turnover at senior levels may find its newly hired employees lack the necessary experience to take responsibility for the company’s retirement plans. A retirement committee with a plan charter would have clearly outlined duties and oversight responsibilities for committee members which would enable the company to arrange and carry out training quickly for new employees who will be performing key fiduciary and governance tasks.

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To further point out why retirement plan committees need a custom charter, DeFrehn and Graham point to the case of Tussey v. ABB, Inc., in which a court noted that the plan fiduciaries did not follow their investment policy statement, and as a result, paid excessive recordkeeping fees and failed to perform appropriate due diligence with respect to the costs associated with the plan’s investment fund offerings (see “Fidelity Wins Some in Appeal of Tussey Case”). A retirement committee with a plan charter would have defined roles and responsibilities for the plan’s fiduciaries, including the performance of the tasks delineated in the plan’s investment policy statement, they say.

In addition, a custom charter can help retirement plan committee’s avoid costly litigation, according to the article. DeFrehn and Graham bring up the recently filed case against Novant Health, in which the committee was accused of offering imprudent investment options and causing the participants in two defined contribution plans to pay third-party service providers millions of dollars in unnecessary recordkeeping and administrative fees (see “Health System and Plan Providers Sued Over Plan Fees”). “A retirement committee with a plan charter would have due diligence processes for selecting and managing vendors,” the authors say.

According to the article, a retirement plan committee’s charter should:

  • Establish the committee’s authority;
  • Define the committee’s purpose;
  • Determine the committee’s structure;
  • Formalize the committee’s procedures;
  • Delegate authority and assign responsibilities and duties;
  • Create processing for selecting and managing vendors;
  • Outline the committee’s reporting needs; and
  • Set procedures for performing updates and protecting committee members financially.

 

Establishing a charter is a complex process that requires input from within the organization and from trusted advisers who thoroughly understand what is required and have experience in this area, DeFrehn and Graham contend. The retirement plan committee will also need assistance from human resources and/or benefits staff who are responsible for the plan’s day-to-day administrative activities and duties to define the required elements for administrative oversight of the plan.

Once the charter is constructed, it must be reviewed by the organization’s legal counsel. The charter would need periodic review and maintenance and should be updated regularly, as needed.

Sibson Consulting’s Perspectives newsletter for March 2014 is here.

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