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.
Today it’s not easy to compare how a target monthly benefit from Social Security plus a projected 401(k) accumulated value match in total to your personal retirement goals. A simplified presentation showing how all the pieces work together would indeed be a welcome gift for most of us concerned about building a successful and meaningful retirement.
Imagine the advantages to your retirement planning of having a consolidated benefit report that informs you of the value of each separately and then combined. Additional benefits also include the ability to access current reports on the benefits of each in a consolidated manner, whether by telephone or Internet. And who wouldn’t benefit from only having a single service provider to call to get access to specialists regarding either the qualified or nonqualified plan questions?
In 2003, the Principal Financial Group conducted market research with businesses regarding the interest in packaging qualified and nonqualified benefits. At that time, more than half of the companies interviewed indicated they were likely or very likely to select the same service provider to add another one of these benefits.
The most frequent reasons given for this included relief from administrative burden, satisfaction with the current service provider and convenience. More recent research has reinforced a strong level of interest among businesses for integrating these solutions.
There’s no doubt that in most companies, the human resources team is stretched thin. Integrated qualified and nonqualified retirement plans make life easier for these professionals. The plan sponsor benefits from ease of administration, ease of communication, and single-file uploads to a plan service provider who can consolidate records or separate what needs to be kept separate.
There’s another benefit: the potential cost savings that can be generated, both in terms of hard dollars through reduced fees; and in terms of productivity and time gains available through integration.
Delivering value inside the box
The ability to create successful, meaningful retirements for your clients’ key employees is powerful indeed. But what is in the box matters too. Plan sponsors need to consider how they integrate benefits and, more importantly, what aspects of those qualified and nonqualified plans cannot be integrated. Nonqualified plans impact the plan sponsor’s tax, cash flow, long- and short-term costs, as well as corporate objectives for key employees.
In my view, the recent pension reform legislation passed by Congress, along with the nonqualified deferred compensation guidance and regulations as part of the 2004 American Jobs Creation Act, will continue to increase the interest in retirement benefit packaging. Integrating qualified and nonqualified solutions also enable financial professionals to balance retirement accumulation and income management solutions. Those service providers and financial professionals who can deliver on the promise of this package will deliver true retirement planning value to plan sponsors and participants.