NQ Plan Mission Now Focuses on ‘Mission Critical’ Workers

Executive comp was once the focus of nonqualified plans, but these days the emphasis is on “mission critical” workers.

Nonqualified plan designs offer a unique opportunity for collaborative discussions with decision-makers that can be lucrative – and open doors to other opportunities – and NAPA’s inaugural Nonqualified Plan Conference got off to a quick start with a panel discussion focused on business development and prospecting.

“Similarities don’t sell, differences do,” noted Independent Financial Partners’ Jeff Acheson, President of the National Association of Plan Advisors (NAPA) in kicking off the session. Moreover, Acheson stated that nonqualified plans are sold, and that in doing so, an advisor’s practice is perceived as more of a consultative business model than the traditional 401(k) sale. Not only do nonqualified plans create a personal planning opportunity with a plan sponsor’s key decision makers, Acheson explained that they provide an “antidote for fee compression in today’s ‘race to the bottom’ marketplace.”

‘Key’ Keepers

Nationwide’s Jesse Allen noted that it was important to find out what the employer was trying to accomplish with their program – were they looking to reward those “mission critical” workers, retain them, help them achieve retirement readiness – or perhaps all of the above? Pose the question, “How important are your key people to your business success?” Allen said – “Ask and listen. That creates a collaborative environment,” he explained.

As for working with existing clients, Chuck Williams of Sheridan Road explained that with existing 401(k) clients, he establishes an 18-month schedule which he revisits every quarter. Second quarter review includes plan testing, which he noted provides an opportunity to discuss nonqualified plan options, particularly if there are discrimination testing refunds. At the annual provider review Williams noted that it’s common to break down the data, and to ask if the non-highly compensated individuals are contributing enough. But he suggested a focus on things like tenure, age – a “deeper conversation” regarding the overall corporate retirement plan strategy, not just the 401(k). “What’s your philosophy in rewarding HCEs?” he posed. Another alternative; when considering plan design benchmarking he noted that the plan sponsors he worked with were often surprised at how many of their peers didn’t have a nonqualified plan.

Decumulation Data

Another point of focus was target-date funds, particularly those with near-term target dates (2010, 2015, 2020, 2025). Williams noted that this can lead to a discussion about distributions in the past year, decumulation trends, who those individuals are, and a plan for keeping those individuals. And these programs can help offset declining revenues during a plan’s decumulation phase.

Acheson noted that 401(k) nondiscrimination designs work against highly compensated individuals, who are limited in how much they can save. “HCEs often can’t accumulate enough in their 401(k) to fund their retirement,” he explained.

Prospecting Prospects

As for prospecting, Prudential’s Lorraine Grod suggested public or private C-Corp (not an S-Corp or LLC or other pass-through entity, since in that structure, any deferrals to the plan come back as taxable income – while they can offer the plans, there isn’t any real tax benefit), firms that are profitable, and that have been a corporate income taxpayer for at least 3 of last 5 years. “You want them to be around a long time,” Grod noted, going on to explain that nonqualified participants have the unique risk of becoming a creditor if company fails. “You want participants to feel good about the program,” she said.

Getting to the heart of the firm’s financials is part of that consultative process, Williams explained.

Allen commented that there were no specific industries that were better prospects than others, though he noted that the odds were better with employers where there were at least 10 participants who would qualify for the program. He outlined several criteria to consider: First, if they were not a safe harbor plan, there is a good chance that that HCE contributions are limited, making them a good candidate for a benefit restoration plan. Second, if they are a current client with $10 million or more in qualified plan assets, Allen noted that they likely already have a nonqualified plan, or they have more than 10 HCEs. Finally, he noted that it matters who your primary contact is. If HR, he said they might not be so excited about the prospects of a nonqualified plan, since it would likely mean more work, and they’re not as likely to benefit. On the other hand, conversations that are CFO-driven or CEO-driven have much higher odds.

‘Target’ Practices

Grod explained that it was important to target companies motivated by the benefits nonqualified plans can offer. Specifically, she said it was important to look for companies that want to:

  • Create “golden handcuffs” to recruit and retain executives
  • Provide additional discretionary benefit opportunities
  • Offer makeup contributions and related company matches or contributions limited in 401(k) or other plans

Regarding prospects who do not currently have a nonqualfied plan, Williams suggested:

  • Emerging growth companies with stock options offered as the primary wealth accumulator
  • Companies whose stock has been particularly hard hit and need to provide a valuable additional benefit that effectively rewards key employees
  • Organizations freezing their defined benefit plan
  • Companies that have a driving need to retain and reward top talent

Allen noted that firms that had recently undertaken a merger were another great opportunity.

Williams recounted discussions with three prospects about a nonqualified plan. All three had good advisor support on their 401(k) plan but they were only reviewing investments. Those discussions opened the door to those clients becoming 401(k) customers because of the door provided by that nonqualified plan discussion, he said. Williams also commented that sometimes plan sponsors don’t know their nonqualified plan isa nonqualified plan, and so it’s usually better to just refer to it as a retirement plan.

As for prospects with an existing nonqualified plan, Grod suggested the following questions:

  • Are they dissatisfied with their current plan and provider?
  • Would they be interested in upgrading their plan or adding to their investment options? Also, have they asked the participants what they might like, as often they haven’t?
  • Are they looking to expand the distribution options available to their participants? This is probably the most complicated part, Grod noted – and where most participants stop short of enrolling.
  • Do they want to increase plan flexibility? Remembering that the demographics of those “mission critical” employees have changed, and in many cases gotten younger.

Other questions include:

  • Are they concerned about compliance issues related to 409A?
  • If their plan is informally funded with taxable securities, are they concerned about the impact of taxes on the earnings?
  • If the plan is COLI-funded, do they need assistance reviewing costs?
  • Are they concerned with current participation rates?

Takeaways

As for the final takeaways from the session, the panelists offered the following:

  • Allen: Know your audience. Each will require a tailored conversation.
  • Grod: Be curious. Ask the open-ended question as to how they are looking to be more successful in attracting retaining those mission-critical workers.
  • Williams: Don’t think you have to be the expert. Ask the questions, know where to get answers.
  • Acheson: Know your partners.

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