Do nonqualified deferred compensation (NQDC) plans make a difference in attracting and retaining key talent?
It sure does, according to the latest survey—released today—of nonqualified plans by the Plan Sponsor Council of America.
“Nonqualified deferred compensation programs provide both the flexibility in design and funding to attract key talent—and to help ensure that those individuals are committed to their employer.”
Nevin Adams
The survey finds employers looking to differentiate themselves and their benefit offerings—particularly in a tight labor market—continue to rely on nonqualified deferred compensation (NQDC) plans to make their benefits package more competitive.
The 2022 NQDC Plan Survey, sponsored by Lincoln Financial and Principal Financial Group, provides insight into trends and best practices of NQDC plans.
While a desire to have a competitive benefits package (87.9% of respondents) and to retain eligible employees (83.6% of respondents) remain the top motivations underlying these programs, 30% of respondents offer a NQDC plan to help eligible employees raise their income replacement ratio and 30% did so to allow highly compensated employees to defer the same portion of income as other workers—both of which support those primary motivations.
The survey—which reflects the plan design of 135 different plans—also found an increase in the percentage of employers making contributions to their NQDC plans this year, as well as a shift in the formulas used. In fact, more than three-fourths of employers make contributions (77.3%), most commonly a “restoration match” that makes up for the missed match due to qualified plan contributions limits (42.2% of plans, up from 27.5% in 2020).
Additionally, half of employees make contributions when offered the opportunity, deferring an average of 10% of pay to their accounts. And nearly one-in-five (19.7%) note that participation in their NQDC plan has increased compared to a year ago.
In addition to leveraging the NQDC plan to attract talent, the program designs also have ways to emphasize retention of key workers. Nearly 40% of plans have a bad actor forfeiture clause, and nearly 30% have a non-compete provision that forfeits the NQDC benefit if the employee leaves to work for a competitor.
“In an increasingly competitive market, employers are looking for new and creative ways to differentiate themselves, and their benefit programs are an integral part of that positioning,” said Nevin Adams, Head of Research and Chief Content Officer for the American Retirement Association. “Nonqualified deferred compensation programs provide both the flexibility in design and funding to attract key talent—and to help ensure that those individuals are committed to their employer.”
Other key findings from the research:
• Eligible Assessments: On average, 5.6% of total employees are eligible to participate in a NQDC plan. More than two-thirds of employers use job position/title as the main criteria for NQDC plan eligibility.
• Participation Profile: More than 60% of employees eligible for these programs participate, deferring an average of 10% of base pay and 25% of bonus pay.
• Funding Factors: Two-thirds of plans set funds aside to cover future obligations. Of those that do, more than 85% put it in a Rabbi trust. Half of organizations use the same investment options in the NQDC plan as in their qualified plan.
• Distributions Deferred: More than 60% of plans allow in-service distributions, though very few participants use them.
• Education Emphasis: More than half of organizations provide NQDC-specific plan education to eligible employees. Nearly 40% of large organizations, and 20% of organizations overall, include NQDC education as part of their financial wellness program.
PSCA’s 2022 NQDC Plan Survey was conducted in October 2022 and reflects the responses from 135 organizations that offer a NQDC plan to employees. The full survey is available for purchase at https://www.psca.org/research/nqdc/2022AR.
SEE ALSO:
• NQDC Proves Impactful for Employers and Employees Alike
• Voya Includes Private Equity Investment Option in NQDC Offering