Employers eyeing enhancements to nonqualified retirement plans, WTW survey finds

Rhea-AI Summary

U.S. employers are enhancing their nonqualified retirement plans for key executives and highly paid employees, according to a survey by WTW. The majority of large U.S. employers offer nonqualified retirement plans, allowing for pre-tax deferral of compensation. Over half of respondents made changes to their nonqualified DB and DC plans in the past two years or plan to do so in the next two years. Employers are focused on improving participant experience and are utilizing mutual funds as the most prevalent investment vehicle.

Positive

• Employer interest in nonqualified retirement plans is at an all-time high
• Over half of respondents made changes to their nonqualified DB and DC plans in the past two years or plan to do so in the next two years
• Employers are focused on improving participant experience with their DC and DB plans
• Mutual funds have surpassed corporate-owned life insurance as the most prevalent investment vehicle

Negative

• None.

Improving participant experience cited as top area of focus while investment options and risk mitigation strategies evolve

ARLINGTON, Va., Aug. 16, 2023 (GLOBE NEWSWIRE) -- As part of the seemingly endless battle to attract and retain talent, U.S. employers are making enhancements to their nonqualified retirement plans for key executives and highly paid employees, according to a new survey by leading global advisory, broking and solutions company WTW (NASDAQ: WTW).  

The vast majority of large U.S. employers currently offer nonqualified retirement plans to executives and high-income earners. These plans allow for pre-tax deferral of compensation, employer contributions and/or compensation amounts that cannot be captured in the qualified plan due to IRS limits. Nonqualified plans are typically not subject to rules governed by the Employee Retirement Income Security Act.

“Employer interest in nonqualified retirement plans is at an all-time high. In fact, we have helped clients implement more new plans and redesign existing plans in the past two years than in prior years,” said Chris West, senior director, head of Dallas Retirement, and leader of WTW’s Nonqualified Plans Specialty Group. “While employers have been investing time and effort into their nonqualified plans, many recognize they aren’t getting or providing the value intended. As a result, employers are looking to improve the employee experience through more focused communication and education as part of their redesign strategy."

The WTW Nonqualified Retirement Benefit Survey found over half of respondents (55%) either made changes to their nonqualified defined benefit (DB) retirement plans in the past two years or plan to make changes in the next two years. Even more (75%) changed their nonqualified defined contribution (DC) retirement plans in the past two years or plan to do so in the next two years. The majority of employers are focused on improving participant experience with their DC plans (72%) and DB plans (56%). DC plan sponsors cited communication (52%), education (47%) and financial counseling (28%) as their key focus over the next two years. 

Six in 10 (60%) DC respondents and nearly half (47%) of DB respondents indicate they informally fund their nonqualified plan by setting aside an asset, often held in a Rabbi Trust, to provide a source for disbursements and to mitigate risk. Mutual funds are now the most prevalent investment vehicle; 60% of respondents that fund their DC nonqualified plans utilize mutual funds, while 43% of respondents that fund their DB plans utilize mutual funds.

“There is an important link between plan design, investment strategy, and organizational capital and tax structure that affects the financial management of nonqualified retirement plans. We see that mutual funds have surpassed historical vehicles, such as corporate-owned life insurance, as being the most prevalent investment vehicle. An independent assessment of any existing funding or potential new funding should be performed to reduce frictional fees and to manage financial risk from these programs,” said Beth Ashmore, managing director, Retirement, WTW.

Other key findings from the survey include:

• Sponsorship: More than half of respondents (56%) offer only a nonqualified DC retirement plan, while 35% sponsor both a nonqualified DC and DB plan.
  
• Key objective: Attracting and retaining key talent was the top reason for offering a nonqualified retirement plan. More than one-third (37%) cited attraction and retention as the most important reason, while 25% ranked it the second most important.
  
• Derisking: Nearly one in four respondents (23%) with a nonqualified DB plan either have conducted de-risking actions in their DB nonqualified plan or intend to conduct de-risking it in the future.
  

About the survey

A total of 396 U.S. employers that offer a nonqualified retirement plan participated in the WTW Nonqualified Retirement Benefit Survey, conducted during May and June 2023. Respondents employ 7.5 million workers and include for-profit and nonprofit organizations.

About WTW

At WTW (NASDAQ: WTW), we provide data-driven, insight-led solutions in the areas of people, risk and capital. Leveraging the global view and local expertise of our colleagues serving 140 countries and markets, we help organizations sharpen their strategy, enhance organizational resilience, motivate their workforce and maximize performance.

Working shoulder to shoulder with our clients, we uncover opportunities for sustainable success—and provide perspective that moves you.

Learn more at wtwco.com. 

FAQ

What did the survey by WTW reveal about nonqualified retirement plans?

The survey revealed that U.S. employers are enhancing their nonqualified retirement plans for key executives and highly paid employees.

What do nonqualified retirement plans allow for?

Nonqualified retirement plans allow for pre-tax deferral of compensation, employer contributions, and/or compensation amounts that cannot be captured in the qualified plan due to IRS limits.

What percentage of respondents made changes to their nonqualified DB and DC plans?

Over half of respondents (55%) made changes to their nonqualified defined benefit (DB) retirement plans in the past two years or plan to make changes in the next two years. Even more (75%) changed their nonqualified defined contribution (DC) retirement plans in the past two years or plan to do so in the next two years.

What are employers focused on improving?

Employers are focused on improving participant experience with their DC plans (72%) and DB plans (56%). They prioritize communication, education, and financial counseling.

What is the most prevalent investment vehicle for nonqualified retirement plans?

Mutual funds are now the most prevalent investment vehicle. 60% of respondents that fund their DC nonqualified plans utilize mutual funds, while 43% of respondents that fund their DB plans utilize mutual funds.