5 Ways nonqualified deferred compensation retirement plans can improve competitiveness
The explosion of remote work opportunities has effectively created a global talent pool. The upside—your immediate geography is no longer a limiting factor in finding key employees. However, the catch is that your top executives may have exponentially more prospects than they've ever had before.
Nonqualified deferred compensation (NQDC) retirement plans are a key way to differentiate your employment offers from others and improve your ability to recruit, reward and retain key executive talent. NQDC plans provide executives with pre-tax deferred compensation that they receive at a later date, usually after they're retired. NQDC plans enable organizations to spend more on operations in the near term and allow employees to receive income when they're potentially in a lower tax bracket.
Their features and flexibility make it a common resource for creating more attractive compensation plans. In fact, 80% of plan sponsors say that NQDC plans are a valuable recruiting and retention tool.1
Consider the following five ways nonqualified deferred compensation plans can improve your organization's hiring competitiveness and retention.
1. NQDC plans complement employer-sponsored retirement plans
Nonqualified deferred compensation plans enable participants to save far more than the contribution limits set by traditional, employer-sponsored retirement plans. But for many, the appeal isn't just the ability to save more; it's also the ability to save via investment options that are different from the employer-sponsored retirement plan. Employers recognize this demand, and they're meeting it.
In fact, more than three-quarters of plan sponsors say they are considering offering different investment options in their NQDC plan.2 NQDC plans help participants diversify their retirement holdings, giving them the opportunity to both mitigate risks and capitalize on additional opportunities. It's a benefit that makes working for—and staying with—your company that much more valuable.
For employers, NQDC plans are relatively low-cost to administer—and they free up cash that your organization can use for other more pressing goals. Regarding the first, the plans aren't subject to ERISA rules and have limited reporting and filing requirements. This can help address discrimintation testing challenges associated with traditional plans while acting as an efficient way to add to your key executives total compensation package.
2. Nonqualified retirement plans help experienced executives reach their retirement goals
A traditional employer-sponsored retirement plan provides employees with a tax-advantaged way to save for their future. For executives, an NQDC plan can boost their efforts even further. NQDC plans don't have contribution limits. So high-earning executives can leverage the plans to save a significant amount beyond what's in their workplace retirement plan. And because the compensation is deferred, they don't have to claim the income at a point when their income is already likely very high. Instead, they can draw on the funds post-retirement, when the participants will likely be in a lower tax bracket. For these reasons, 92% of NQDC participants said the benefit was essential in helping them reach their retirement goals.3 In addition, the same percentage reported that they were confident they'd have enough funds to meet their needs in retirement.4
3. Nonqualified deferred compensation plans improve retention
Finding the best talent is only part of the equation. You also want to ensure that your top executives stay around for as long as possible. In today's highly-competitive job market, your top executives are not limited by geographic boundaries and have several options. Creating an NQDC plan can help your organization retain key leaders who are critical to your success and difficult to replace. A well-designed NQDC plan provides added incentives for company leaders to commit to long-term objectives and stay the course. Since these plans are not governed by ERISA plan sponsors often use employer contributions with longer vesting schedules to create a golden handcuff for their top executives. Consider that 77% of NQDC plan participants cite the plans as a reason for staying with their current employer.5
4. NQDC plans have flexible funding strategies
All NQDC plans are technically unfunded obligations which plan sponsors can then choose to informally fund or not. This gives companies a lot of flexibility when deciding how or if they want to fund their NQDC plan. For example you could choose not to fund the plan at all and instead use the participant deferrals to facilitate other hires and more growth.
Another option is to fund the plan using Corporate Owned Life Insurance (COLI) which provides a tax efficient funding vehicle as well as key person insurance. A third option is to fund your plan with traditional mutual funds. The great news is you do not have to pick just one type of funding and can mix and match different vehicles to tailor a plan that fits your organizations specific needs.
5. You can customize nonqualified retirement plans to make them more effective
The flexibility of NQDC plans means that you can use them to address the specific needs of a small subset of your employees. The plans can include stock options, various vesting schedules, and different investment options. Your organization can also tailor the size and scope of the nonqualified deferred compensation plan to the individual. For instance, a CEO may require a more considerable sum of deferred compensation than other executives. The distribution schedules can also vary by employee, enabling employees to plan for the income in a way that works best with their long-term retirement and tax strategy. With nonqualified retirement plans, your company can make the decisions that makes the most sense for your plan participants and organization. The result is more competitive compensation packages that help recruit and retain the people you need most.
Nonqualified deferred compensation plans can help give your company an edge
The right NQDC plan can help improve your company's competitiveness in the job market, and provide financial advantages along the way. However, creating a plan that works for your company objectives and employee needs requires a partner experienced with NQDC plans.
At Voya, we've been helping employers provide NQDC plans for more than 50 years. We've discovered what it takes to make plans effective, and innovated on the model to make them better for employees and employers alike. For example, we've introduced new distribution portfolios for NQDC plans. These first-of-a-kind investment models are for individuals who want to closely align their NQDC distribution dates with the investments in their plan. To win in today's market takes more than traditional compensation. Leverage NQDC plans to give your company an edge in attracting the talent that takes you to the next level.
Visit VoyaNQplans.com for more information, or talk to your Voya Representative.
1-5 NQDC Plans Give 401(k) Sponsors a Competitive Edge, 401(k) Specialist, December 2020
This information is provided by Voya for your education only. Neither Voya nor its representatives offer tax or legal advice. Please consult your tax or legal advisor before making a tax-related investment/ insurance decision.
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