Nonqualified deferred compensation (NQDC) plans are once again emerging as a critical plan design opportunity that a growing number of advisors are focused on, including a majority of respondents to this week’s NAPA Net reader poll.
Nearly two-thirds (63%) of the respondents to this week’s reader poll work with NQDC plans, with about 26% saying they don’t work with those programs now, but had in the past (some indirectly, providing participant support, but with others in their firm handling the plan sponsor/plan design issues), and the rest noting that while they hadn’t done so yet, they had considered doing so.
Among those who had, most – 71% – had done so for five years or longer, with the rest scattered among shorter timeframes.
Regarding the plans they have worked with, just over 6 out of 10 said they had generally worked with plans with between 100 and 1,000 workers, though 12% had focused on those with fewer than 10 employees, 8% each focusing on 25-50 or 50-100, and the rest working with employers of more than 5,000 workers.
As for the spread of that, nearly 70% said they were working with fewer than 10 plans at present, with the remaining responses split nearly evenly (8-12%) among "10-25 plans," "25-50 plans" and "more than 50 plans."
Regarding trends in interest, a plurality of respondents (44%) said that interest levels in NQDC plan designs had remained pretty consistent, though nearly a third (31%) said that interest has increased. There were 17% who said that interest has increased, but primarily among smaller employers, with the rest citing an increase in interest, but primarily among larger employers.
Plan ‘Designs’
Of course, NQDC plans come in a variety of formats and designs: account based or non-account-based plans, the former sometimes with a company match, sometimes credited with a fixed or variable interest rate. Some plans will opt to offer various investment options not only unlike a 401(k) plan, but sometimes they actually mirror those options. Asked to identify the type(s) of plans they work with, readers noted (more than one response was permitted):
87% - Top-Hat Plans (aka Supplemental Executive Retirement Plans, or SERPs)
42% - Excess Benefit Plans
33% - Salary Reduction Arrangements
29% - Bonus Deferral Plans
21% - Section 162 Bonus and Split Dollar Plans
Also mentioned were work with 457(b) and 457(f) plans.
Reader Comments
Here’s a sampling of this week’s reader comments on the topic of NQDC plans:
- “I was in one and understand how great they are. Biggest problem is understanding where they work and where they don't. I spend a lot of time talking partnerships down from the NQ high.”
- “It's funny, just yesterday someone here was on a call and shot me an e-mail asking if we handle nonqualified plans. I said, it depends on what you mean by ‘handle.’ We can follow a plan document and do any calculation anyone wants, but we need to leave the designing to someone else. In contrast, we do plenty of design work on qualified plans.”
- “I find the sales cycle on a NQDC plan even longer than a typical qualified plan.”
- “Interest in NQDC has increased and so have the new plans we have been setting up. It seems that as the economy strengthens, employers are looking for ways to take advantage of these plans.”
- “Businesses are very interested in retaining, rewarding key people.”
- “Combating fee compression for the advisor and HCE planning make this an attractive market.”
- “NQDC seems to be the last stronghold of life insurance sales in large corporate employee benefits. The tax arguments are compelling, but tenuous, and the cost of the insurance is high. But because beneficiaries are the key executives, companies seem willing to spend on insurance in a manner they shy away from in other benefit contexts. We often see operational/administrative costs for NQDC of over $1,000/participant.”
- “Material difference in the COLI vs. mutual fund funding options.”
- “Finding a recordkeeping platform that is flexible enough to accommodate all of the variables in NQPs is difficult. There seems to be a lot of consolidation of recordkeeping at the larger end of the market as large recordkeepers do not want to spend the money on technology that is required and so are entering into strategic partnerships with companies like Newport.”
But my favorite came from the reader who simply observed, “They are not as easy to manage as they once were.”
Thanks to everyone who participated in our weekly NAPA Net Reader Poll!
