With Participation Rates Flat, Some NQDC Plan Sponsors to Make Changes

The overall rate of companies offering nonqualified deferred compensation plans (NQDCPs) increased to 85% in 2017 from a survey low of 77.2% in 2015, according to the annual Prudential/PLANSPONSOR Executive Benefit Survey.

Year over year, nearly all of large company respondents report they sponsor NQDCPs, and 2017 was no exception, with 96.8% offering this benefit, as compared to just over two-thirds (68.9%) of smaller companies.

Two-thirds of plan sponsors that offer a NQDCP offer a voluntary deferred compensation plan, 28.6% offer a defined contribution supplemental executive retirement plan (DC SERP), 22.3% offer a 401(k) Restoration Plan, 20.9% offer a defined benefit supplemental executive retirement plan (DB SERP) and 8.3% offer a 457(b) or 457(f) plan. While 80% of responding companies don’t offer any other type of executive benefit, those that do favor restricted stock units, stock options and incentive and other programs.

Consistent with prior years, there were no predominant criteria for defining eligibility; however, for 2017, job grade and total compensation tied for most prevalent, at 21.6% each. The survey reveals minimum base salary requirements for different respondents.

Although 87% of respondents don’t plan on making any changes to their NQDCPs, of the few that are, the majority cited additions or enhancements to plan education and communication programs (52.6%), investment crediting options (42.1%) and distribution options (36.8%).

Average participation rates were relatively flat at 47%. Plan sponsors think the most important thing to eligible employees in making the decision whether or not to participate is education/communication, followed by limitations on or lack of other pre-tax deferral opportunities and confidence in company performance.

Participation rates were notably higher in plans offering matching contributions (60%), while plans not offering a company contribution had an average participation rate of 37%. A notable 21% of respondents plan to either offer or enhance the company match—a key incentive for plan participation, as noted in year-over-year survey results—or add deferral sources, which would provide plan participants with additional opportunities to meet financial planning goals and reduce their taxable income. The survey reveals the most common deferral sources offered in NQDCPs, including for Board of Director plans.

Company match prevalence remained flat overall (46.8%), and as in prior years, was more commonly offered at larger organizations (49.6%) and public companies (64.0%). Following the 401(k) match formula for compensation above Internal Revenue Service (IRS) annual limits was once again the most prevalent type of company match among survey respondents (45.6%), and a percent deferral match (40.5%) and one to replace a lost 401(k) match (36.7%) were a close second and third.

Flexible options for scheduling and receiving plan payments are a key benefit and differentiator of nonqualified plans, and the vast majority of plan sponsors offer their eligible participants a range of distribution election choices that are permitted under IRS Code Section 409A. As in previous years, separation from service was the most common distribution election offered by survey respondents (96.4%), followed by death (80.5%) and scheduled in-service (65.6%).