Employers using 'top hat' plans to sweeten exec comp packages

In a bid to attract and retain elite professionals, employers are increasingly incorporating non-qualified deferred compensation plans into their benefits offerings.

The Plan Sponsor Council of America's 2023 Non-Qualified Plan Survey, supported by Lincoln Financial and Principal Financial Group, draws from an October survey of 135 organizations that offer a NQDC plan to their employees.

Unlike qualified plans such as 401(k)s, which must adhere to the Employee Retirement Income Security Act guidelines, NQDC plans offer several advantages, including the ability to defer taxes, freedom from contribution limits set by the IRS, and the flexibility to incorporate a broader range of investment options.

Underscoring the strategic use of NQDC plans to enhance executive compensation packages, PSCA's study found that 80% of employers acknowledge the significance of NQDC plans in making their benefits packages more appealing for key recruits. And more than half of the respondents pointed to employee retention as a primary objective of their NQDC plans.

The results are in line with data from leading benefits consultant NFP. Among employers it polled for its inaugural Executive Benefits Trends Study last year, 92% said offering such plans help in their efforts to retain top executive talent.

PSCA also found a rising trend toward "helping employees accumulate assets" as a goal – from 43.5% in 2022 to 61.2% last year – reflecting a shift toward prioritizing financial wellness and retirement readiness among high-earning employees.

"NQDC plans have traditionally been leveraged to attract the best talent," said Will Hansen, PSCA's executive director and chief government affairs officer for the American Retirement Association. "However, enriching these plans with dedicated educational resources and integrating them into a comprehensive financial strategy not only augments their perceived value among employees but also bolsters their effectiveness in employee retention."

On average, 7% of employees across participating organizations are reportedly eligible for NQDC plans, with eligibility most commonly based on position or job title. Among those eligible, around two-thirds (63%) choose to participate, deferring an average of 10% of their base salary and 30% of their bonus pay into NQDC plans.

The survey also showed a rise in adoption of NQDC-specific educational programs, with nearly three-quarters of organizations now providing such guidance, up from 60% in the preceding year.

In 2022, the National Association of Plan Advisors announced its Nonqualified Plan Advisor credential. which certifies an advisor's expertise with NQDC plans.

"Attracting and retaining the unique talent sets of the C-Suite require programs that go beyond profit-sharing and 401(k) programs," Jeff Acheson, certified private wealth advisor at Advanced Strategies Group and one of the NQPA program's authors, said at the time.