The Need for NQDC Support
Art by Anja Susanj
In 2015, the nonqualified deferred compensation plan market accounted for $80 billion. By 2022, it had ballooned to $191 billion, says the PLANSPONSOR NQDC Market Survey for that year (PLANSPONSOR, like PLANADVISER, is owned by Institutional Shareholder Services Inc.). The current leading firms by number of participants are retirement plan service providers Fidelity Investments, Newport Group and Empower, respectively, the research showed.
NQDC plans remain popular in drawing and retaining highly compensated employees by offering a savings program that goes beyond the limits of qualified retirement saving plans. But, for the benefit to gain wider use, sources say, the industry must see more providers, advisers and consultants that know the plans step forward to meet the needs of a growing number of potential participants.
“I think our challenge as an industry is to educate and bring that next generation of consultants and folks who are in the business along,” says Tony Greene, senior vice president of business development for group benefits broker NFP in New York City. He notes that NFP is taking part in industry conferences and events that address NQDC advancement.
“I think that’s probably the most important thing we can do—just to continue to educate and get more people comfortable with the concepts and how it works,” Greene says. “Some of those will find that they like it, like I do, and lean into this career, and we’ll have the people we need to continue to grow our business.”
According to industry experts, continued growth in the space will come from being able to offer the service to a wider range of employees, as more companies seek out NQDC plans, and to customize a plan 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 in Addison, Texas. “So that gives us a lot more flexibility, which allows plan sponsors to really dial in exactly the kind of features they want in their plan.”
“… our challenge as an industry is to educate and bring that next generation of consultants and folks who are in the business along.”
Meeting Needs
With a specialty in nonqualified services, Principal has a consulting team composed of a dozen staff who average 25 years of experience. The firm has an administrative platform that can perform anything these 409A plans provide for, Baergen says.
Principal also supplies all model documents, accounting features and trust services to these plans. Baergen says one of the offered services is known as a “rabbi trust,” because its first usage was by a synagogue for its rabbi, but it is technically a grantor trust, which is a way to add further security to a nonqualified plan.
Greene says NFP is not only focused on retirement saving add-ons for nonqualified plans, but also on addressing the areas where qualified plans tend to leave the HCE group disadvantaged: executive disability and executive life insurance. NFP is unique, he says, in that there are few independent providers of NQDCs—most are housed by 401(k) or qualified plan providers.
“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 and our plan sponsors’ long-term success.”
Customization is crucial to making the NQDC work, says Jessica Dowdy, vice president of Nationwide business group solutions, a provider of NQDC plans, in Columbus, Ohio. Plans can be customized to include an employer match, or to allow for employer-paid benefits without employees deferring their own compensation, according to Nationwide. The key is for a plan sponsor to have a conversation with experts to get the correct setup for the employee base, Dowdy says.
“Every situation will be different and a one-size-fits-all approach is not likely to produce the best outcome for the wide array of needs and circumstances each company will encounter,” she says. “That’s why it’s critical to work with an experienced adviser, consultant, recordkeeper and administration company to help weigh out the short- and long-term impact of each strategy and find a solution that will fit the needs of each company.”
In recent years, executive-level turnover has been a disrupter for many small and midsize companies, Dowdy notes, and NQDCs can both help to reward the executive and provide good cash management for the firm.
“Corporate bonuses going into these plans can make a significant difference for executives and will not increase short-term cash flows of the company like paying out additional cash bonuses will,” she says.
Nationwide further notes in its NQDC materials that the benefit is not subject to Employee Retirement Income Security Act rules, allowing for less restriction on customization and fewer reporting requirements.
Top Hat Pros and Cons
Greene says the biggest challenge is that an NQDC is a “top hat plan,” available only 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 who are most critical, and that can be challenging,” Greene says. “You’re figuring out, ‘What do we have to do [in our plan] that’s different to keep them here as long as we want them to stay?’”
Broadening the use of NQDC plans will depend upon their being offered, easily, to a wide range of employees—vs., as now, typically just to those making at least $150,000 a year—but not to all employees, lest the company violate ERISA, Greene says.
Firms receive an exemption from the act to be able to offer an NQDC plan. The rule of thumb, Baergen says, is to make the plan 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,” he says. “These plans have a different level of risk associated with them.”
He says another challenge he has encountered is communicating about these plans’ features to a client. The client often neglects to examine the features and how they can be customized to the company’s financial situation.
“It’s funny—sometimes we have human resource staff that will come back to us and say, ‘My chief investment officer is upset because he didn’t realize we had the nonqualified plan and you could do all this,’” Baergen says. “We’re like, ‘You sent him the material; you told him what the thing was, and [he] just didn’t stop and take time to understand what the features are.’”
The Future of NQDCs
Baergen and Greene are both confident that the NQDC market will expand. 2022 set a record for NQDC plans at Principal, Baergen says. The firm, in fact, implemented more plans with each consecutive year over the past three than ever before. He cites the “historic turnover” in the labor market as spurring interest in the plans.
A typical scenario, he says, is where an executive at a company that offered an NQDC plan moves to a company that does not. This person will say, “‘Nonqualified is valuable, we’ve got to add one here,’” Baergen says. “I think that drives additional implementation of plans.”
Greene says there were many more providers when he first entered the business, such as Newport, Pen-Cal and TBG, but a great percentage of his competitors from 10 years ago have been bought by insurance carriers and qualified plan providers.
“The gating factor now is there are not as many providers as we need,” says Greene. “It’s been a 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.”