There is a growing trend among retirement plan service providers regarding solutions that were once separate and distinct. Qualified retirement plans and nonqualified executive benefit plans are now being packaged together by service providers and delivered to plan sponsors.
Underpinning this trend is the value perceived by clients and service providers. While it is attractive to bring these benefits together in a pretty package, the key is the value inside the box.
Let’s start by defining what this employer-sponsored total retirement solution includes. In the early stages of this trend, “total” often meant only defined contribution and defined benefit qualified plans. But today, the solution extends to broader needs of key employees, including the benefits of employee ownership.
A more comprehensive approach may include a 401(k) plan, a defined benefit qualified plan, a nonqualified deferred compensation plan, and even an employee stock purchase plan (“ESOP”). Packaging of these solutions generally includes all aspects from the plan design, financing options, record-keeping and administrative services for each.
Qualified plans are ERISA-protected benefits and are funded within the scope of ERISA. This means a myriad of rules and regulations about whom to cover, how to manage contributions under a defined contribution plan design and how to accrue benefits under a defined benefit formula.
Nonqualified plans are exempt from most of ERISA’s requirements and are unfunded plans within the scope of ERISA. This means fewer rules and regulations and that the plan contributions or benefit calculations are not protected or guaranteed by ERISA. Nonqualified retirement plan benefits are limited to a select group of managers and highly compensated individuals.
Why package qualified and nonqualified plans together?
If ERISA differences need to be maintained, how can you package these benefits together? The answer is with great care and attention to detail, but the result is compelling. Both the plan participant and plan sponsor gain when plan designs are integrated. Let’s examine this in detail.
Imagine that you are a key employee who enjoys both qualified and nonqualified retirement benefits. Most likely these are defined contribution plan designs, one a 401(k) and one a nonqualified deferred compensation plan.
As a participant, both benefits are important. But the most compelling benefit is having a single resource that provides a consolidated view of your entire retirement income picture, including the role of sources like Social Security.