In the area of benefits for highly paid executives, many financial advisors are finding that non-qualified deferred compensation plans hold particular promise and pay handsome rewards. But agents new to this market face a number of different challenges, experts say, beginning with learning the basics.
Non-qualified deferred compensation plans can be very complicated and difficult to explain to a prospect. While agents can gain the expertise they need to get started in this market through industry courses, professional associations and study groups, many experts agree that the most effective way to learn the concept is being mentored by a specialist.
One of the initial obstacles agents face is learning all the terminology, says Andrew Shapiro, national manager for the Nationwide corporate incentive program, Nationwide Financial, Columbus, Ohio. His first recommendation to agents is to read “Comprehensive Deferred Compensation,” published by The National Underwriter Company.
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“Then theyll know the terminology and the questions to ask,” Shapiro says.
Once an agent has a grasp of the fundamental concept behind non-qualified deferred compensation plans, working with another agent on cases will help him understand the entire sales process.
“Im a believer in joint work. I think for someone whos not familiar with any particular concept, if you can get an expert to work with you by giving up a percentage of the case, thats relatively cheap tuition,” says Thomas Monti, vice president of distribution services for MassMutual, Hartford, Conn.
“Buddy up with somebody whos experienced in the marketplace,” adds Terrence Kral of Kral, Goodenough and Kral, Inverness, Ill. “It wont take long to get up to speed.”
Some agents are successful building alliances with these specialists and referring prospects for some type of shared commission or fee, says John Oliver, vice president, strategic marketing services for Transamerica, Los Angeles, Calif. “If an agent can educate himself to identify prospects and then form an alliance with an expert, thats a pretty powerful relationship.”
Generally speaking, a deferred compensation plan allows the executive an opportunity to avoid immediate taxation on income earned today. That income is deferred until some future time, usually around retirement age.
A company implementing a supplemental deferred compensation plan makes a promise to pay a highly paid key executive an additional retirement benefit at some point in the future. “The promise is an unsecured promise,” explains Kral.
Larger companies usually have assets that can be repositioned to fund this future liability, but smaller companies will typically fund this executive benefit on an annual basis, making periodic deposits into different investment vehicles. Since this is a non-qualified plan, there are no ERISA requirements; the employer is free to choose whichever executives it wishes to participate, and there are no funding requirements of the employer.
This future benefit to the executive acts as a “golden handcuff,” keeping him or her tied to the company until a future point in time, which can vary by plan design. “The design of the plan can be whatever the employer wants,” continues Kral. “You can design the plan so theres no benefit whatsoever until the person reaches age 65.”
The money set aside to fund this future liability to the company generally is considered an asset of the company. In the event the company needs to access these dollars, it usually can. This may be tempting for small- to mid-sized business owners who fall on difficult economic times.