4 tips for creating highly effective nonqualified deferred compensation plans
In today's competitive job market, employers need tools that ensure they attract and retain talent. And when it comes to employees at the highest level of the company, the offering must go beyond your standard benefits package. This is where nonqualified retirement plans make all the difference.
Nonqualified deferred compensation (NQDC) plans provide executive-level employees with a tax-efficient way to increase their total compensation package.1 The plans allow employees to earn and then defer additional salary and bonuses. They can then receive those funds later, usually in retirement, when they are in a lower income-tax bracket.
The appeal of NQDC plans is understandable. They're flexible, customizable and provide benefits to executives and the company alike. But what makes one plan good and another great? Knowing the answer is key to creating effective NQDC plans that stand out. Here are four ways to develop nonqualified retirement plans that are irresistible to your top employees—and benefit your organization.
1. Provide NQDC plan investment options that differ from your workplace retirement plan.
The employees that qualify for nonqualified deferred compensation plans have most likely maxed out their contributions to their employer-sponsored workplace retirement plans. To create a plan that captures their attention and adds value to their overall financial plan, offer investment options that are different from those included in your standard employer-sponsored retirement plan. For example, you might provide an alternative to the fixed-income options in your workplace retirement plan or additional high-growth investment products that aren't available to the rest of your employees. The options differentiate your NQDC plan as a benefit and help participants diversify their retirement holdings. The latter makes NQDC plans that much more enticing.
2. Informally fund your NQDC plan—and let participants know about it.
Deferred compensation is—as the name denotes—deferred. In the simplest terms, the compensation becomes an IOU from an employer to the employee. The plans create a formal framework that allows the employer to pay the employee the deferred compensation and returns that the funds earned while they were invested. An important note: NQDC plans don't invest employee funds. Instead, employees select benchmark investment options, and the plans match the returns of those options. Given all this, using the compensation that employees earned to fund or partially fund the plan from the beginning gives employees much comfort. Informally funding the plan signals to employees that you're committed to the NQDC plan, and you're preparing for the future distributions.
3. Leverage the flexibility to create tailored NQDC plans.
Did we mention that NQDC plans are flexible?2 They are not covered by ERISA and provide numerous options for creating plans to meet your unique objectives. The key is understanding what you need a plan to accomplish. For example, perhaps it’s retaining C-suite executives who are close to retirement, or maybe it's attracting mid-career phenoms who can take your company to the next level. Either way, the right plan can help. You may want to design a plan that offers immediate vesting of company stock—a perk that can differentiate your plan from competitors who have longer vesting schedules. In another example, you might build a plan that allows participants to defer up to 80% of their salary. That's a strong incentive for older executives who are interested in rapidly increasing their retirement savings. The bottom line—leverage the flexibility of your NQDC plans to meet your specific employee and business needs.
4. Prioritize education as part of the plan.
Only half of the employers that offer nonqualified retirement plans also provide education to the plan participants. This is a significant missed opportunity for employers and employees.3 Education and plan participation go hand-in-hand. The more your employees know about your NQDC offering, the more apt they are to understand its benefits and value. If you don't take the time to educate your executives about how the plans work and why they matter, then the thoughtful details of the plan you've created may be overlooked. As you establish your nonqualified retirement plans, consider best practices for proactively communicating the plan's advantages and risks to your executives. For example, NQDC plan communications should be year-round and not tied to your annual enrollment period.
You’ve got the right people in your corner
If all this sounds complicated, don't worry. Creating an NQDC plan that helps you attract top talent and meet your company objectives starts with having the right people in your corner. At Voya, we have more than 50 years of experience in creating nonqualified retirement plans. Along the way, we've also been innovating plan designs to make them easier to administer and more effective for everyone involved.
For instance, we recently launched new distribution portfolios for NQDC plans.4 We designed these first-of-a-kind investment models for individuals who want to closely align their NQDC distribution dates with the investments in their plan. It's just one more way we help companies and employees achieve their financial goals.
NQDC plans aren't for everyone—in fact, that's the point. Let Voya help you create a differentiated NQDC offering that meets your business's unique goals and helps your compensation packages stand out from the crowd.
2 Voya. (2020, August 27). The pros and cons of nonqualified deferred compensation. https://voyainsights.voya.com/insights/pros-and-cons-nonqualified-deferred-compensation-nc
3 Plan Sponsor Council of America. Date accessed (2021, June 5). Best Practices for NQDC Plan Education. https://www.psca.org/industry-intel/defined-contribution-insights/best-practices-nqdc-plan-education
4 Voya. (2021, April 13). Voya offers first-of-its-kind nonqualified deferred compensation distribution portfolios for workplace clients https://www.voya.com/news/2021/04/voya-offers-first-its-kind-nonqualified-deferred-compensation-distribution-portfolios
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