Despite a global pandemic, a changing political landscape and an economic climate in flux, nonqualified deferred comp plans remain a powerful tool to help Highly Compensated Employees (HCEs) bridge the retirement savings gap, while positioning organizations to reward and retain the key talent critical for their success.
The charts that follow provide insights from this year’s Newport/PLANSPONSOR Executive Benefits Survey. As the 2020 Newport report points out, “For many of us, the world looks very different today than it did a year ago.” And it goes without saying that 2021 may look even more different still. Nevertheless, the data presented here, courtesy of Newport Group, provides valuable insights on the motivations and decision-making of plan sponsors and plan participants, which is always critical information for guiding our industry.
In the weeks ahead, expect to find further in-depth findings from the Newport 2020 report, here on Deferred Compensation News. For more details on the survey criteria and participant demographics, please refer to the full report.
The following charts explore the report’s questions and survey results regarding the prevalence and plan design considerations of nonqualified deferred compensation (NQDC) plans.
Goals and Satisfaction
Rank each of the goals below in their order of importance for your NQDC program.
|Allow executives to accumulate assets for their financial planning needs||42%||15%||16%||17%||8%||2%||1|
|Offer a compensation program that is competitive with peers||22%||23%||22%||14%||15%||5%||2|
|Compensate executives in a more tax-efficient manner||9%||22%||18%||17%||30%||5%||5|
|Increase stock ownership of the firm by eligible executives||00%||2%||5%||3%||9%||80%||6|
How effective has your program been in accomplishing the following goals?
|Allow executives to accumulate assets for their financial||47%||40%||9%||4%||0%||1|
|Offer a compensation program that is competitive with peers||28%||40%||25%||6%||1%||2|
|Compensate executives in a more tax-efficient manner||28%||49%||23%||7%||3%||3|
|Increase stock ownership of the firm by eligible executives||7%||20%||24%||10%||39%||6|
The two most important goals for plan sponsors continue to be 1) to ensure that key employees are receiving a valuable tool for their retirement planning and 2) that the plan is competitive with its peers. Plan sponsors reported that their NQDC programs have been particularly effective in achieving these two goals. However, the attraction and retention aspects of NQDC plans is not as effective as plan sponsors hoped, which leads us to believe that more can be done with regards to communication and education. Stock ownership has been less of a priority and, for those that do consider this to be a goal, the NQDC plan has not been all that effective.
The fact that “attracting key employees” didn’t score higher may indicate that there is a market perception that a key employee terminating will cause a large NQDC payout—and a taxable event—thereby creating the incorrect perception that the plans are more of a retention vehicle than a vehicle to recruit key employees. Attracting key employees who have an NQDC balance at a competing company can be accomplished by allowing those associates to defer a large percentage of their upcoming salary and bonus, for multiple years if necessary, while they live off their prior NQDC distribution. This distribution/deferral combination creates an effective “virtual rollover” from one plan to another.
Goals and Satisfaction
How satisfied do you think PARTICIPANTS are with the following aspects of your NQDC plan?
|Impact on participants’ retirement preparedness||39%||41%||15%||6%||0%||1|
|Valuable component of participants’ overall benefit package||26%||47%||22%||4%||1%||3|
|Impact on participants’ tax planning||24%||42%||29%||5%||1%||4|
|Website experience delivered by service provider||25%||38%||28%||7%||3%||5|
|Plan education and materials||12%||48%||30%||7%||3%||6|
|Their understanding of the plan||8%||32%||44%||14%||2%||7|
Are you planning any enhancements or changes to your NQDC plan in the next 12-18 months?
Plan sponsors consider their NQDC participants to be very satisfied with the ability for the plan to meet their individual needs for retirement/financial planning and with the investment choices offered. The areas where the NQDC plans fall a little short of expectations according to plan sponsors are in the plan delivery and “participant experience”—website, plan communications, and education. To that end, the top two enhancements or changes that plan sponsors intend to do in the coming year are 1) improve plan communication and 2) offer better online tools.
The primary NQDC challenge facing plan sponsors, advisors and TPAs continues to be educating and communicating effectively to senior management and key employees. There is an increasing demand on the time of senior management, so these critical messages need to be rethought, repackaged and delivered in better and more creative ways.
Nonqualified Deferred Comp Plans: Further Insights
We’ve got a lot more information to share with you regarding what’s working well for plan sponsors and where improvements can follow. Watch for it here on our blog or subscribe to receive Deferred Compensation News via email and you’ll never miss an update.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.
Securities offered through Lion Street Financial, LLC (LSF) and Valmark Securities, Inc. (VSI), each a member of FINRA and SIPC. Investment advisory services offered through CapAcuity, LLC; Lion Street Advisors, LLC (LSF) and Valmark Advisers, Inc. (VAI), each an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI, LSF and BDO Alliance USA are non-affiliated entities and separate entities from Fulcrum Partners and CapAcuity, LLC. Unless otherwise noted, VAI/VSI, LSF and BDO Alliance USA are not affiliated, associated, authorized, endorsed by, or in any way officially connected with any other company, agency or government agency identified or referenced in this document.