The workplace is an often overlooked, but powerful channel for financial advisors to grow their practice. And especially for retirement-focused advisors working with (or interested in working with) high net-worth or the emerging wealthy clients, it may be time to brush up on the trend of nonqualified deferred compensation (NQDC) plans. Here are four questions to consider and help prepare you for conversations with clients:
What is an NQDC Plan?
To really understand what an NQDC plan is, let’s take a step back and look at how they fit within a workplace benefits system.
Think of it as three tiers: A 401(k) plan is usually designed for all eligible employees. One step up from there, many companies will also offer an equity compensation program which is a little more selective in terms of eligibility to participate and typically focuses on rewarding and retaining top talent. Click up from there, and an NQDC plan will usually be available only to those high earners who receive equity compensation and who may benefit from additional choices and support in retirement planning.
An NQDC plan essentially serves as a bridge between retirement benefits provided under a 401(k) plan and equity compensation programs, and aims to provide high earners with an avenue for income deferment—which may offer eligible participants in a NQDC plan with potential tax advantages. When these three levels of workplace benefits—401(k) plans, equity compensation programs, and NQDC plans—are employed by a plan sponsor, these benefits can be a powerful tool for individual financial planning needs.
Why are NQDC Plans trending?
We’re seeing that NQDC plans are growing more popular as workplace plan sponsors search for new ways to round out their compensation structures and recruit and retain high-performing talent. In fact, our research shows that providing additional tax deferred savings options beyond any existing 401(k) plan to those highly compensated employees is one of the most popular reasons for offering a NQDC plan.
Advisors are an important resource to help connect the dots and help high-earning executives maximize their overall benefits package as a part of their holistic financial planning strategy. This is a huge area of opportunity: We’ve found that employees who participate in equity compensation programs are more interested in connecting their holdings to their retirement plan, than learning about anything else.1
How can qualified plans and NQDC plans work together?
There are some fundamental differences in the design and application of a NQDC plan vs. a 401(k) plan, and you can help your clients get the best of both worlds.
For example, high earners who receive equity compensation might max out their 401(k) plan contribution limits more quickly, and then may benefit from using an NQDC plan to further invest in their retirement strategy.
Unlike a 401(k) plan, most NQDC plans are generally not subject to statutory contribution limits—meaning executives can contribute as much as they want each year (subject to any limits under the NQDC plan). High earners can use these accounts to help reduce their current-year income taxes and take advantage of tax-deferred savings opportunities.
How does an NQDC Plan fit with your value proposition as an advisor?
Helping your clients take advantage of any retirement, equity or NQDC plan benefits available through the workplace is a logical way to enhance and differentiate your value proposition, especially as more companies are adding NQDC plans to their roster of financial benefits for highly compensated talent and executives. Position yourself to play a central role in liaising between high-performing employees and their workplace benefits to combine it all into a comprehensive financial strategy.
That means not just maximizing your client’s participation in an employer-sponsored qualified retirement plan, but understanding how the contribution limits, company matches and automatic features, plus any retirement savings plans outside the workplace—such as a personal IRA account—can all work together. Take every opportunity to discuss educational content with plan sponsors and employees. By encouraging plan participant clients to think about retirement with every equity compensation payout they receive, retirement-focused advisors can gain a potential competitive advantage by harnessing the potential of NQDC plans.
- Stock Plan Participant Survey, E*TRADE Corporate Services, 2020
SEE ALSO:
- Helping Key Employees Build Retirement Assets a Growing Priority for NQDC Plans
- Ohtani’s ‘Retirement’ Strategy, NQDC Plans and 2024 Stock Trends with ‘401(k) Lady’ Jeanne Sutton
- Offering NQDC Plans to Retain Top Talent
Anthony Bunnell is a managing director and head of retirement plan solutions, part of the Morgan Stanley at Work suite of financial solutions in wealth management.
Good list of core questions to ask and know about nonqualified deferred comp plans. An eduational resource for them is http://www.myNQDC.com. I’ve been involved with editing it.