Non-Qualified Plans Spur More Education & Advice

Amidst an extraordinarily challenging work and economic environment, new research from the Plan Sponsor Council of America (part of the American Retirement Association) finds growing engagement in non-qualified deferred compensation (NQDC) plans.

Two-thirds of eligible employees participate in their organization’s NQDC plan, deferring an average of 10 percent of base pay, according to the Plan Sponsor Council of America’s 2021 Non-Qualified Plan Survey.  NQDC plans provide employers flexibility in focus and funding not typically found with programs subject to ERISA, ranging from designs that specifically offset contribution and benefit limits on tax-qualified retirement savings plans and defined benefit pension plans, to so-called “top hat” plans that limit eligibility to a select group of workers.  In so doing, they also provide flexibility to key employees, and serve as a valuable tool for attracting and retaining those workers. 

Indeed, asked why they offer NQDC benefits, plan sponsor respondents were most likely to respond, “have a competitive benefits package” and “retain eligible employees” among their top priorities, with “help employees accumulate assets” rounding out the top three, according to the industry-leading benchmark study of non-qualified deferred compensation (NQDC) plans.  The survey – which reflects the 2020 plan year experience of more than one hundred NQDC plans – facilitates dialogue within the industry while providing insight into common and best practices of deferred compensation plans.   

“Employers have long provided access to NQDC plans to their management team and key employees to help attract and retain top talent,” said Nevin Adams, Head of Research and Chief Content Officer for ARA. “This year’s survey also found a significant increase in the education and advice provided to enhance appreciation and effective utilization of these programs. The flexibility options in design of these programs – and the benchmarking insights in this year’s survey – provide tremendous opportunity for employers, advisors, and key workers alike.”

Key Findings:

1. Eligibility: On average, 6.1 percent of total employees are eligible to participate in respondent NQDC plans (up from 5.2 percent in 2018); position/job title remains the most common eligibility criteria, used in nearly two-thirds of plans.
2. Participation: Two-thirds of eligible employees participate in the NQDC plan, deferring an average of 10 percent of base pay, up from about half in the 2019 survey.
3. Employer Contributions: The most common employer contribution formula (30 percent of plans) remains a restoration match designed to fill the gap from the match excluded from the 401(k) plan due to IRS limits.
4. Plan Financing: Three-fourths of plans set funds aside to cover future obligations. Of those that do, plans have an average of 93 percent of future obligations set aside.
5. Education: More than 70 percent of organizations now provide NQDC-specific plan education to eligible employees, and nearly 40 percent of organizations provide investment advice regarding their NQDC plan.

The full survey is available for purchase at https://www.psca.org/research/nqdc/2021AR. For more information, contact Hattie Greenan at [email protected].