PLANADVISER - March/April 2018 - 8

practice development
The
Value of
NQDC
Plans
C
onsidering the growing recognition
that one's income
replacement rate is key, what is
the answer for the high-income earner,
when the most he can defer to his
401(k) plan, pre-tax, is $18,500 a year?
If his employer is unacquainted with
nonqualified deferred compensation
(NQDC) plans, one could make all the
difference: letting the employee defer,
pretax, up to 100% of his earnings,
while helping the company retain his
talent and the adviser who suggested
the plan win or solidify the business.
Advisers have been catching onto
the value of these benefits. According
to the 2017 PLANSPONSOR DC Survey
Benchmarking Report, published this
January, 16% of adviser firms predicted
that NQDC plans would be their most
significant strategy and growth area
this year-an increase of 4 percentage
points since the 2016 report. And the
market looks fairly wide open. As of
last August, just 10.2% of plan sponsors
offered an NQDC plan.
Moreover, employers that sponsor
the plans report liking them. The
Prudential/PLANSPONSOR 2017 Executive
Benefit Survey found that the plans'
perceived effectiveness is climbing
annually. Last year, over 80% of plan
sponsor respondents called their plans
" effective or extremely effective. "
The reason may be the numbers.
John Iezzi, a principal with The Todd
Organization, in Richmond, Virginia,
cites one client who, earning $250,000
annually between salary and bonuses,
decided to save 90%. " [He's] deferring
an incredible amount of money, " Iezzi
says, noting that plan balances snowball,
sometimes reaching $1 million in
three or four years, compared with the
20 or 30 years needed to meet that scale
in a 401(k). This participant ultimately
deferred $2 million.
Before withdrawals are made, Iezzi
says, the adviser should supply good
education, to ensure an effective
drawdown. By spreading $2 million
over five to 10 years, this participant
could avoid several hundred thousand
dollars in taxes-a not uncommon
savings, Iezzi says.
As to that five-to-10-year time
frame, most executives today want to
accumulate their money, then get out.
" They [now] treat deferred compensation
as more of an early retirement
benefit, " Iezzi says, noting their fear of
creditor risk after high-profile bankruptcy
cases such as Enron. A plus
of the plans is that they need not be
saved as a nest egg, however. The
saver can defer money for a child's
college or other future expense and
take out money while still employed.
Along with employee contributions,
employers may add a match. That is
typically a recruiting and retention tool,
observes Warren May, national vice
president, life insurance, at Principal
Financial Group in Des Moines, Iowa.
Matches are becoming more prevalent
since last year's tax reform, he says.
Advisers stand to gain by adding
significant value for clients, as well as
through revenue opportunities. Those
come in two forms, says Jason Burlie,
senior vice president, nonqualified
practice leader at Prudential Retirement
in Dallas. One is consulting and/or
providing investment advisory services,
to support the plan, " taking on that feebased
role. The second is, if they act in
a broker capacity, they can participate
in being a broker on the asset that's set
aside to informally fund the plan, " -i.e.,
the mutual-fund or company-life-insurance
wrapper, he says.
" But the bigger opportunity for
them, " he adds, " may be thinking
about their strategic plan and how
{offering NQDCs] supports their business
goal. "
May thinks more advisers should
give NQDCs a chance and says the
plans are often misunderstood. " It's
not a fat-cat benefit, " he stresses.
" We're dealing with folks making
$125,000 and up; it has applications
across a broad spectrum of earnings. "
-Karen Wittwer
8 | planadviser.com march-april 2018 Art by Virginia Zamora
http://www.planadviser.com
PLANADVISER - March/April 2018

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