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, according to the latest survey of nonqualified plans by the Plan Sponsor Council of America.
The 2022 NQDC Plan Survey, sponsored by Lincoln Financial and Principal Financial Group,® facilitates dialogue within the industry while providing insight into trends and best practices of nonqualified deferred compensation 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 respondent 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 NQDC 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. Moreover, 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:
1. 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.
2. 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.
3. 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.
4. Distributions Deferred: More than 60% of plans allow in-service distributions, though very few participants use them.
5. 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.
For more information, contact Hattie Greenan at [email protected]
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