48 | planadviser.com may–june 2017
executives, an NQDC plan is one of just three possible solutions an adviser can recommend.
For example, if the plan sponsor periodically has testing
failures in its qualified plans, and highly compensated
employees are receiving refunds or are artificially limiting
contributions to avoid refunds, a nonqualified plan can let
the executives defer in a pre-tax arrangement in addition
to and in excess of the qualified
For plan advisers new to
the NQDC plan business, Barry
recommends studying the Dodd–
Frank Act, the Sarbanes–Oxley
Act, the Pension Protection Act
(PPA) and 409A rules.
Sam Henson, director of legislative and regulatory affairs in
Lockton’s Kansas City office,
observes that Dodd–Frank and
Sarbanes–Oxley include rules for
financial institutions and publicly
traded companies that could impact disclosures to both
participants in nonqualified plans and investors in the firms.
Section 409A—the primary concern for nonqualified plans
and reflecting Internal Revenue Service (IRS) regulations that
govern nonqualified plans—provides details about the taxation of deferred compensation. The PPA created distribution
rules for certain nonqualified plans.
Further, Barry says, the PPA codifies best practices for
uses of COLI [corporate-owned life insurance]—a common
financing tool in nonqualified plans.
According to Barry, NQDC plan providers can help share
this knowledge with their clients, “providing insight into
historical trends, information about products and services
and how they work, and explaining client case studies that
show how all of the pieces fit together.”
Dorton says providers that are committed to the NQDC
market typically have dedicated sales support teams to
supply advisers with the guidance, training—sometimes
via adviser seminars and presentations, but many times
individualized meetings and consultations—and resources
needed to begin identifying and qualifying NQDC sales
If plan advisers are not in the NQDC plan business, there
are many different NQDC providers that advisers can partner
with, Dorton says. Twenty-seven providers responded to the
2015 PLANSPONSOR NQDC/457(f) Buyer’s Guide.
Additional Components of Executive Benefits
Adviser revenue from an NQDC plan can be similar or
dissimilar to that made from qualified plans, Barry says.
Advisers may be compensated via a direct fee; they can
earn registered investment adviser (RIA) compensation or
trails from mutual fund investments; or they can receive
commissions from COLI sales.
Many different revenue models exist, so it is hard to say
what is typical, Dorton observes. “For some, everything
they do is fee-based, and others may charge a consulting
fee for what they provide,” he says. “Others just share
revenue for products. NQDC plans are priced separately
from qualified plans and differently. It depends on the
complexity and size of the plan.”
“When we talk about deferred compensation at Lockton,
we look at it in a holistic fashion,” Barry says. “Questions
become specific to supplemental savings for retirement,
but if executives become disabled, they will need more.
From a holistic standpoint, advisers need to look at group
life and group long-term disability, which are affecting the
same group of employees.”
In a Lockton article, “Executive Benefits as a Strategic
Advantage,” which Barry co-wrote, the company presents
four steps to building a competitive executive benefits
plan. Besides to implement an NQDC, the article suggests
equalizing group long-term disability and group life insur-
ance payout ratios, offering personal excess liability—or
umbrella—coverage and considering “key person” insurance.
Dorton concludes, “We hear the No. 1 reason for
providing NQDC plans is to help meet retirement goals.
Plan sponsors are concerned about it and focused on it.
NQDC plans are becoming a more routine part of retirement and financial wellness programs.” However, these
plans are not widely understood. Therefore, “if advisers
can say they understand them, they can differentiate
themselves.” —Rebecca Moore
• NQDC plans are a valuable resource for highly
compensated employees, who may contribute a
maximum of $18,000—$24,000 for those 50 and
older—to a qualified plan, whereas they may
contribute up to 100% of their compensation to an
• Advisers can help sponsors determine how to fund
the liabilities of what they will have to pay out of the
NQDC plan in the future.
• Few advisers are familiar with NQDC plans, but
those interested in pursuing this business can turn
to providers for education.
“Qualified retirement plans are great for
rank-and-file employees but disincentivizing
for highly compensated participants
because they are limited in the income
ratio they can contribute. Nonqualified plans
allow them to make up the difference.”