PLANSPONSOR - August/September 2018 - 53

Generally, a given employer's eligible
group of employees ought not to exceed
10% to 12% of the total work force. The
work force " need not be U.S. based. "
According to Jeff Roberts, national
new business manager for ADP's executive
deferred compensation practice, in
Seattle, members of senior management
will generally be eligible, along with " select
members " of middle management such
as assistant vice presidents, directors or
managers with compensation at least twice
the average of the noneligible group's.
In the for-profit space, NQDC plans
are governed by ERISA Section 409A,
while nonprofit plans of this type are
governed by Section 457, " and there are
nuances and different flavors in each
area, " Roberts says.
The final group that will likely be
eligible, according to the Newport research,
is " non-management employees with
compensation in excess of the [Internal
Revenue Code (IRC)] Section 401(a)(17)
limit " and anyone else in the work force
with compensation at least three times
that of the average for all employees. This
year, for example, the 401(a)(17) limit is
$275,000, and a plan may not base allocations
for this current plan year on compensation
exceeding that limit.
Some additional context is provided
by the 2017 Prudential/PLANSPONSOR
Executive Benefit Survey. In that study,
based on 274 employers' responses, 38%
of plan sponsors cited a minimum base
salary requirement less than $125,000 for
NQDC plan participation; 28.9% cited a
minimum $125,000 through $175,000;
8.9% cited $175,00 through $200,000;
and 25.3% cited over $200,000.
The Challenge
It takes only some quick math to demonstrate
the strong benefits NQDC plans
can provide HCEs.
Roberts walks through some of the
main ones-which also include perks for
employers. " When the right plan design
is in place, these plans have no limit on
the amount of salary that can be deferred
by highly compensated employees. They
can save 100% of their salary, and, if the
company is matching, it can put in any
amount of money it wants, also without
limit, " he says. " The second benefit, more
for the employer, is the creation of 'golden
handcuffs.' You're putting company
money into the plan with some sort of
performance and tenure characteristics
associated with it-the executive won't get
this money just by keeping a seat warm. "
Despite these benefits, according to
the Prudential/PLANSPONSOR survey,
participation rates in NQDC plans have
remained flat over the last five years,
ranging from 43% to 47%, after a clear
dip following the economic downturn of
2008 and 2009. The findings suggest
a variety of reasons, including that
many employees are unaware of how
low the salary limit can be to participate.
Employees also may worry about
the average five-to-10-year wait to collect
their deferred-and unprotected-salary,
noting their fear of creditor risk after
high-profile bankruptcy cases leading
into and coming out of the recession.
The Solution
Wells Fargo recently published its own
research on NQDC plans: the Nonqualified
Plan Benchmarking Survey. The results
show that 37% of firms had 100%
participation among eligible officers and
managers. According to researchers,
there is a clear pattern of best-practice
behaviors among these plans: 79% offer
employer-only contributions, 71% use an
outside recordkeeper to complement and
KEY POINTS
* For a sizable percentage of the U.S. work force, access to a
nonqualified deferred compensation arrangement will be vital
to reaching the 70% or 80% retirement income replacement that
workers are advised to pursue.
* Several studies indicate that participation rates are much higher in
plans offering employer contributions and that one-on-one meetings
are the most effective method for communicating with eligible
executives about their plan.
PLANSPONSOR.com August-September 2018 53
expand on internal resources, 68% vest
on a clear and defined schedule, and 63%
use job-title-based eligibility.
The white paper notes that participation
rates varied considerably, even
among firms of a similar size, though the
average participation rate is much higher
in plans offering employer contributions.
According to the plan sponsors polled for
the Prudential/PLANSPONSOR survey,
" education and communication " are the
most important factors when HCEs are
deciding whether to participate. The
results also suggest one-on-one meetings
are far and away the most effective
method for communicating with eligible
executives about their plans.
This matches the experience of Corby
Dall, president and managing partner at
401k Advisors Intermountain in Salt Lake
City-a 2017 PLANSPONSOR Retirement
Plan Adviser of the Year. In his experience
running a growing NQDC plan practice,
in partnership with executive compensation
and benefits consulting firm Fulcrum
Partners, both employers and employees
have benefited greatly from implementing
effective nonqualified executive benefits.
" It's especially helpful when we can
bring together the 401(k) plan services and
the nonqualified program in a thoughtful
way, benefiting the whole work force, " he
says. " Previously, the executives had to put
their 401(k) savings and any nonqualified
benefits together on their own. They had
to figure out how their taxes would work,
how to optimize across savings buckets.
We can put all that together now, as a onepiece
strategy. " -John Manganaro
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