NQDC plans: Solutions in search of a problem

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In this roaring economy, much has been written about employers reinvesting tax breaks to sweeten benefit packages and take-home pay, but what about the nonqualified deferred compensation (NQDC) area? Kirk Wolf, managing regional VP of nonqualified plans and principal securities for Principal Financial Group, explains to EBA how these plans fit into the war on talent and the importance of periodic benchmarking, as well as applying their inherent flexibility to commonly faced issues and communicating their value.

Given the tight labor market, what role is NQDC playing in helping employers attract and retain top talent in the executive ranks?

Now more than ever, NQDC plans are critical to the successful recruitment of new executive talent and retention of existing staff. There are really three key issues facing both employers and employees that the NQDC plans can help solve.

First, the limitations on retirement savings by key employees in a qualified plan. Under the rules governing qualified plans, HCEs [highly compensated employees] are limited as to how much they can individually defer into any 401(k) offered through their employer. As a result, most HCEs can’t save enough in their qualified plans to ensure a sufficient income stream in retirement. The NQDC plan can help solve that.

Second, because of the higher tax rates on a state and federal level faced by many HCEs, the need to shelter income today and avoid that higher tax rate becomes even more compelling. The NQDC plan also can help solve that.

Finally, as employers seek more creative ways to reward HCEs, the use of individualized and targeted employer contributions with vesting schedules can provide the employer a unique vehicle in the war for executive talent.

What sort of best practices do you recommend in this area?

It’s critical that an employer benchmark the compensation and benefit package being offered to their key or HCE employees at least every two years.

In addition, conducting internal surveys among key employees specifically regarding retirement and benefit concerns will help the employer maintain awareness of what drives their employees. It is ultimately less expensive to keep a key employee than to replace one, especially in this tight employment market. However, tax avoidance and increased retirement savings tend to be the biggest issues concerning the HCEs and are the easiest areas for an employer to address.

How can employers, along with their consultants or financial advisers, apply the unique benefits and flexibility inherent in NQDC plans to issues commonly faced by employers and key employees?

I’ve always said that NQDC plans are solutions in search of a problem. Because of the flexibility and potential for specificity in plan design, each employer can design their plan to address the needs that are most pressing for them. And, because of the structure of the NQDC plan, the employer can amend their NQDC plan prospectively as their situation changes and their company or workforce evolves. In other words, a properly designed NQDC plan can fix the issues that plague most employers today and into the future.

How should employee benefit advisers communicate NQDC solutions to their clients and prospects?

Given the specialized and unique nature of NQDC plan solutions, my suggestion is that the adviser, unless they have extensive experience in the NQDC space, team up with an experienced NQDC consultant. This allows the adviser to continue to serve as the advocate for their client, while taking advantage of the knowledge and expertise of the subject matter expert with whom they choose to work.

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Financial planning Retirement income Retirement planning Retirement benefits Retirement readiness