In the past, when small to mid-sized companies tried to effectively compete with larger businesses for top talent, nonqualified deferred compensation plans (NQDC) were off the table or very expensive to implement and informally fund.
This made recruiting and retaining executives all the more difficult. Larger companies had a two-fold advantage. Their benefit packages typically remained more attractive to employees and the NQDC portion of their benefit offerings also allowed large employers to informally fund the plan through tax-efficient corporate-owned life insurance (COLI).
Enter turn-key solutions
Today, the landscape for “the smaller guy” may be changing with the advent of affordably packaged, “turn-key” NQDC solutions informally funded with COLI.
To understand why packaged, turn-key NQDC solutions can be an attractive tool for smaller companies, one needs to understand the complexities of implementing nonqualified plans, what funding options are available, and why deferring income still makes sense for executives today.
Recovering the plan costs
As the average cost of funding employee benefit plans rises, companies of every size are increasingly concerned about the significant effect such liabilities can have on their balance sheets. Because COLI is reported as an asset, it is often a cost-effective method utilized to offset employee benefit liabilities and to provide funds to meet future plan obligations.
According to a 2009 Clark Consulting survey of Fortune 1000 companies, 61% of respondents used COLI as the preferred informal funding vehicle of NQDC plan obligations. In general, COLI grows tax-deferred; and when structured appropriately, this funding approach can provide a tax-efficient asset/liability match, plus positive economic and financial results.
The power of compounding interest
In addition to their ability to assist companies in retaining and recruiting top talent, NQDC plans also give participating executives a powerful way to supplement qualified plan shortfalls with pre-tax savings that compound on a tax-deferred basis. And, if taxes rise in the years ahead, the accumulated savings under a NQDC plan should be greater than what could be achieved through after-tax investing in a personal investment account, according to a Clark Consulting study.
In addition to appropriate informal funding, NQDC plan sponsors look to providers to meet their needs with specialized resources and breadth of experience. Plan sponsors also depend on the providers to assure record-keeping accuracy, participant access to plan information and provide assistance with regulatory compliance. This reliance is all the more critical when companies with smaller budgets and less in-house expertise attempt to implement a NQDC plan.
A more streamlined process for a more cost-effective solution
While traditional NQDC plans let companies customize in a variety of areas, including plan design, investment funding and carrier selection, this customization can be prohibitively costly.
Typically, with a turn-key product, a company will have to trade some flexibility in plan design for cost savings and easy administration. But when done properly, a turn-key solution can satisfy the needs of the small to mid-size corporate market, without sacrificing quality.
What is critical, though, is having the experience and knowledge of the best-in-class elements of the nonqualified market; and in particular, knowing which insurance products can satisfy clients’ funding requirements.
By streamlining the NQDC plan process, bundling some of the best features of more customized NQDC plans with the preferred informal funding vehicle of COLI, and by reducing the number of insurance carriers available, small companies can create a viable recruitment and retention vehicle that can easily fit into their corporate budgets.
It’s an exciting time to work for an industry in which innovation is creating products and services that can provide small companies with a level playing field in recruitment and retention. The fact that consultants and distribution partners receive an additional source of return is pretty terrific, too.
Anthony Laudato, FSA, MAAA, is vice president of product development and innovation at Clark Consulting, LLC, Dallas, Tex. You can e-mail him at [email protected]