Non-qualified deferred compensation plans used to draw top talent, survey says

In their battle for talent, employers are beefing up ancillary retirement plans they call non-qualified deferred compensation plans for their high-level executives, according to a survey from the Plan Sponsor Council of America released on Jan. 11.

In 2022, more than 3 in 4 employers (77.3%) made contributions to the NQDC plans they offered their senior employees, up from 74.2% that did so in 2020.

Five to 10 years ago, the bulk of employers did not make contributions to NQDC plans, with employees solely contributing to their accounts, said Scott Heidesch, national vice president at Principal Financial, during a webcast on the PSCA’s survey on Wednesday.

Today’s tight labor market, however, has pushed more employers to contribute to NQDC plans to make the plans more attractive, Mr. Heidesch said.

NQDC plans allow senior-level employees to sock away retirement money beyond what they’re allowed to with their 401(k) plans. The plans give them the ability to defer a portion — or even all — of their compensation and avoid having to pay taxes on it until they actually receive it. In the meantime, the deferred compensation is invested in a lineup of funds often mirroring that of their employers’ 401(k) offerings.

The most popular contribution that employers are making is a “restoration match,” which ensures that executives receive the full match they would get in their 401(k) plans were it not for caps on 401(k) company matches.

In 2022, more than 2 in 5 employers (42.2%) gave their executives restoration matches, up from 27.5% in 2020.

“Non-qualified deferred compensation plans represent as much as 70% to 80% of total retirement benefits for key employees,” said Matthew Maier, vice president and senior consultant with Lockton Companies, during the webinar.

The plans are used by employers to either create “golden handcuffs” to retain key employees or “simply to allow these individuals to save above and beyond qualified plan limits, so they’re saving commensurate with their income,” Mr. Maier said.

About half (45%) of eligible employees made contributions to their NQDC plans in 2022, deferring an average of 11.6% of their base pay and 28.4% of their bonus pay, up from 10.5% and 24.2%, respectively, in 2020.

The survey, which was conducted in October 2022, reflects the responses from 135 organizations that offer an NQDC plan to employees.