The never-ending battle to attract and retain key executives and high-level talent has U.S. employers looking to make enhancements to their nonqualified retirement plans, a new survey finds.
The WTW Nonqualified Retirement Benefit Survey of nearly 400 U.S. employers found that more than half of employer respondents (55%) either made changes to their nonqualified defined benefit (DB) retirement plans in the past two years or plan to make changes in the next two years. Even more employers (75%) changed their nonqualified defined contribution (DC) retirement plans in the past two years or plan to do so in the next two years.
“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,” says Chris West, senior director, head of Dallas Retirement, and leader of WTW’s Nonqualified Plans Specialty Group.
West observes that, while employers have been investing time and effort into their nonqualified plans, many recognize they aren’t getting or providing the value intended. “As a result, employers are looking to improve the employee experience through more focused communication and education as part of their redesign strategy,” she says.
To that end, the survey found that most employers are focused on improving the participant experience with their nonqualified DC plans (72%) and DB plans (56%). DC plan sponsors cited communication (52%), education (47%) and financial counseling (28%) as their key focus over the next two years.
Additional findings show that 6 in 10 (60%) DC respondents and nearly half (47%) of DB respondents indicate they informally fund their nonqualified plan by setting aside an asset—often held in a Rabbi Trust—to provide a source for disbursements and to mitigate risk.
Mutual funds are now the most prevalent investment vehicle; 60% of respondents that fund their DC nonqualified plans utilize mutual funds, while 43% of respondents that fund their DB plans utilize mutual funds.
Other key findings include the following.
Sponsorship: More than half of respondents (56%) offer only a nonqualified DC retirement plan, while 35% sponsor both a nonqualified DC and DB plan.
Key objective: Attracting and retaining key talent was the top reason for offering a nonqualified retirement plan. More than a third (37%) cited attraction and retention as the most important reason, while 25% ranked it the second most important. Having a competitive benefits package and providing an avenue for eligible employees to accumulate wealth (in addition to qualified plans) were also cited as important reasons.
Derisking: Nearly one in four respondents (23%) with a nonqualified DB plan either have conducted de-risking actions in their DB nonqualified plan or intend to conduct de-risking in the future. While NQDB de-risking activities remain in the early stages, interest may increase as sponsors continue to de-risk qualified plans.
“There is an important link between plan design, investment strategy, and organizational capital and tax structure that affects the financial management of nonqualified retirement plans,” observes Beth Ashmore, managing director, Retirement, WTW. “We see that mutual funds have surpassed historical vehicles, such as corporate-owned life insurance, as being the most prevalent investment vehicle.” As such, Ashmore advises that an independent assessment of any existing funding or potential new funding should be performed to “reduce frictional fees and to manage financial risk from these programs.”
Most large U.S. employers currently offer nonqualified retirement plans to executives and high-income earners. These plans allow for pre-tax deferral of compensation, employer contributions and/or compensation amounts that cannot be captured in the qualified plan due to IRS limits. Nonqualified plans are typically not subject to rules governed by ERISA.
A total of 396 U.S. employers that offer a nonqualified retirement plan participated in the WTW survey conducted during May and June 2023. Respondents employ 7.5 million workers and include for-profit and nonprofit organizations.
