retirement marketplace overall: Data from the 2015 PLANSPONSOR NQDC/457(f) Buyer’s Guide reveals there are
18,313 nonqualified plans with over 1. 3 million participants
and over $162 billion in assets.
Barry points out that an NQDC plan is a top-hat plan, so
any participant in one must meet the definition of highly
compensated employee found in the Employee Retirement
Income Security Act (ERISA).
Due to these restrictions, the plans cover only a small
percentage of the employees. As Dorton explains, under
ERISA, an NQDC plan is maintained by an employer
“primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees,” which typically will include no more
than 10% to 15% of the total employer work force. This is
commonly known as a top-hat group. “The DOL has never
issued regulations interpreting the meaning of this select
group requirement,” he notes.
Further, Dorton says, NQDC plans are not subject to
ERISA, Title 1, Parts 2, 3 and 4, which pertain to plan participation and anti-discrimination rules, vesting, funding and
fiduciary requirements. In addition, by filing a simple notification with the Department of Labor (DOL) at plan inception,
the employer also is exempt from Part 1, which addresses
plan reporting and disclosure requirements, including to
file an annual Form 5500. This leaves, in effect, only ERISA
Part 5, this part typically being covered in nonqualified plan
documents by including ERISA claims procedures.
Besides educating a plan sponsor client about its NQDC
plan, an adviser can also add value by performing an annual
review of the plan’s underlying investments, Barry says. The
adviser can monitor investment options against industry
standards. A third way is to consult with the sponsor about
the circumstance of the tax effect of the deferred compensation arrangement on the employer, he says. Are assets
being held in the most tax-efficient way possible to remove
adverse items on the balance sheet?
He explains: “When a company has a nonqualified plan,
it is accumulating the liability of what it will have to pay in
the future. There are three options to hedge against this: do
nothing and make payments from operational cash flow; use
a mutual fund portfolio to fund liabilities, which will incur
income tax liability during accumulation; or use corporate-owned life insurance [COLI] to reduce that tax effect.” Barry
says astute advisers will help model out the implications of
each option, so the client can make the best choice.
Getting Into the NQDC Business
According to Dorton, a nonqualified plan is a tool gaining in
popularity, but few advisers specialize in these plans. This
gives advisers an opportunity to differentiate themselves,
One way an adviser can add nonqualifed plans to his
book of business is to suggest the option to existing clients.
According to Barry, when a plan sponsor faces various challenges in how benefit arrangements underserve the firm’s