The 401k Plan’s Cousin
Over the years our firm has been carving out a bigger footprint in the Non Qualified Deferred Compensation market. We learned about this benefit primarily by mistake. About 7 years ago we were visiting one of our clients and they had failed their 401k testing and had some angry key executives that were forced to take a refund on the 401k plan. The plan record keeper was sitting with us listening to everyone and she suddenly said “I have a solution to this problem”. What was the solution? Attaching a Non Qualified plan to the 401k plan. Over the next few months the client implemented a Non Qualified plan and the issue was solved. We sat and observed the whole implementation process and our knowledge went from zero to a pretty high level in a short time.
As all plan sponsors know, 401k plans needs a tremendous amount of oversight and are very costly to run. Plan sponsors that we talk to for the first time usually are concern about how they can fulfill their qualified plans fiduciary responsibility. Most conversations eventually turns to plan costs and investment performance. We can sit in a plan sponsor’s office for a couple hours and talk about their 401k plan and how they run it and how they want to improve it.
At some point during the discussion we ask about how the key executives are saving for retirement. Are they being limited by the IRS deferral restrictions on their 401k plan. Or are they being limited by the non highly compensated folks who are not deferring enough and causing the testing to come back with a F. In most cases the answer is “yes” and “yes”.
Moving along, last year we spoke to a number of plan sponsors that have a Non Qualified plan as part of their benefit package. In one case 1 person out of 68 eligible deferred into the plan. In many other cases those same plan sponsors that can talk for a couple hours about their 401k plan told us that they really don’t promote their non qualified plan mostly due to lack of time on their part. In other cases the Non Qualified plan was put in place at the same time as the 401k plan was changing record keepers. Once the implementation process was completed that was the last anyone heard about the Non Qualified plan.
Ten years ago the Non Qualified plan benefit was mostly employed by S & P 500 companies. Now it is considered a corporate mainstream benefit. For those companies that do not have this benefit in place at some point in the future you will. The time to help everyone have a successful retirement is now.
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