PLANSPONSOR - December 2017/January 2018 - 30

increase year over year.
The owner of a smaller company, too, might find a better
funding option-especially if he is older. He might, for example,
sell the company in five years and consequently see no assets
from life insurance. In this case, mutual funds would make
more sense, Pesh says.
According to Burlie, participants in NQDC plans may be
offered a menu of plan investments to choose from that the plan
sponsor does not fund. Even if sponsors are not funding the
plan, they may still offer a range of investment choices to participants
that may not show up in corporate assets-meaning the
sponsor is not actually investing assets in the funds but using
their investment return rate to apply interest to the NQDC plan
participants' accounts.
The Prudential/PLANSPONSOR survey found that marketbased
investment crediting options continue to be the most prevalent
(84.2%) design for NQDC plan fund menus.
Holton says companies are increasingly using corporateowned
life insurance (COLI), which employs a variable universal
life contract that can invest in the same or similar investments as
those within the plan lineup. The advantage is that, as the value
of a COLI goes up and down with the account balance, assets
inside the COLI are growing tax-deferred. As participant money
goes up and down, it is free and clear of taxes, and there is no tax
impact to the company.
Bank-owned life insurance (BOLI) and now ICOLI [insurance-company-owned
life insurance] may also be used, Holton
says. COLI and BOLI are generally the same thing, with COLI
being aimed at businesses and BOLI at financial institutions,
he says. Bank and insurance company assets are cash, so there
is an incentive to use them as a tax-advantaged strategy. BOLI,
he adds, is generally a fixed-rate insurance product concerned
with attracting yield, whereas a COLI tries to hedge a liability
and does not focus on generating income.
Finally, if NQDC plan assets are not invested, Holton says,
plan sponsors can use a fixed rate of return to determine the
account growth, based, for example, on Moody's Corporate
Bond return.
For an NQDC plan sponsor, Burlie says, ultimately the
right funding strategy depends on the size of the liability and
what kind of volatility it will create on the sponsor's profit and
loss statement. Providers can consult with plan sponsors about
what it will mean to their balance sheets and tax structure, then
decide whether to leave the plan unfunded or use a combination
of taxable investments, mutual funds and/or life insurance.
-Rebecca Moore
What to Look for in an NQDC Plan Provider
W
hether a search turns up the
best nonqualified deferred
compensation (NQDC) plan
provider for a plan depends, says John Pesh
of CUNA Mutual Retirement Solutions, on
the knowledge base of the adviser or plan
sponsor doing the search. " If the sponsor
has staff with deep knowledge of the rules
and design of nonqualified plans or if its
adviser is a nonqualified plan administrator
looking for help with administrative
functions, the sponsor may work with
the qualified plan provider without a back
office for nonqualified plans, " he says.
" Other plans need more specialized providers
that not only provide administration
services but can consult about nonqualified
plan types and costs. "
Jason Burlie of Prudential Financial
has been seeing a trend toward plan sponsors
wanting a bundled experience for
their defined contribution (DC), NQDC
and defined benefit (DB) plans. " They
want a provider that can both be strategic
and deliver on experience, " he says.
More than half (55.3%) of respondents
to the Prudential/PLANSPONSOR 2017
Executive Benefit Survey bundled plan
services with the same recordkeeper.
But Harry Dalessio, senior vice
president and head of full service solutions
at Prudential Financial in Hartford,
Connecticut, notes that NQDC plans
are much different than qualified plans.
Providing consulting, plan design, participant
engagement, fund monitoring and a
participant website and call center for both
types of plans requires an equal level of
expertise for each.
Scott Holton of The Todd Organization
says plan sponsors should seek a
provider that has a clear understanding of
the regulations for NQDC plans, and that
the most important ability the provider
can offer is recordkeeping in a compliant
manner. " Penalties under a 409A plan are
borne by the participant and not the plan
sponsor, " he says. " If distribution rules are
not followed, the sponsor has to go back to
executives with an onerous and expensive
30 PLANSPONSOR.com December 2017-January 2018
corrections process. "
The second important thing is technology,
Holton says. Are participants able
to use the plan's website to move money?
Does the provider have the capability for
plan participants to take advantage of flexibilities
allowed in NQDC plans?
Further, he says, sponsors want to look
for a provider with experience in all funding
options and knowledge of the tax implications
for each. " A qualified plan recordkeeper
might be limited in managing a
tax-advantaged COLI [corporate-owned life
insurance] funded strategy-one transfer
may cancel out another and result in a
tax impact to the sponsor, " he says. " Or if
a company goes inside a trust and buys a
mutual fund, the provider would want to
make sure assets the sponsor purchased
and plan liability match. If not, there'll be
a tax cost when trading mutual funds. "
He adds, " Nonspecialists can recordkeep
nonqualified plans to supplement their
main business, but they don't offer all that
a specialist does. " -RM
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