…So in my (seemingly never-ending) quest to learn everything I can about employer sponsored non-annuity based savings vehicles, I have spent a lot of time reading about nonqualified deferred compensation plans.
To be sure, there are a ton of great articles out there that do a much better job of explaining the concept than I could in this space (you can start here, here, here, and here), but in short:
- Nonqualified Deferred Compensation Plans (NQDCPs) are offered by many employers to help highly compensated/executive employees save earnings for retirement over and beyond what is allowed through qualified plans (such as 401ks). This is important because qualified plans don’t allow high earners to put away a large enough percentage of their income to prepare for retirement.
- Because NQDCPs haven’t passed the tests required by the internal revenue code (e.g. non-discrimination testing), employers sponsoring such plans are subject to taxation even though they incur expenses to administer them.
- NQDCPs are generally risky for employees partaking in them – essentially taking the form of IOUs from the employer to the employee. As such, in most cases if the employer sponsoring the DCP becomes insolvent, those with money in the plan must stand in line like any other creditor to re-coup investments in it.
- The plans are generally restricted to a small number of employees (exceptionally high earners).
- You can’t take out loans on NQDCPs, and you can’t roll them over into IRAs when they are dispersed.
^That said, all things considered NQDCPs are a pretty sweet perk for the employees with access to them – particularly if the investment options are robust and said employees work for a financially secure, well established employer where the possibility of losing one’s savings in the event of the firm’s bankruptcy is low. This is because tax deferring a large percentage of one’s earnings and allowing them to compound over time generally yields returns that far outstrip what a return would be if those earnings were instead put after tax earnings in a conventional brokerage account, with only possibly IRAs (contribution limit of $5.5k with a phase out above $116k) representing better returns over time.
Unfortunately, the tax treatment of the plans makes opening them up to the widest possible subset of a workforce that could make use of them (after maxing 401k and Roth elections) non-viable for most large employers. Ergo, for most employees (that don’t have access to an employer sponsored NQDCP), employee 401(k) elections + non-annuity based pension plans + IRA + social security earnings + personal savings is still unlikely to create a big enough nest egg for retirement… or at least not the retired at 62-65 with replacement income that previous generations vested in annuity pension plans enjoyed.
…I still think that bigger employer matches + training employees on financial literacy is the answer to helping workforces of the future retire with dignity… but maybe I’m wrong?
If you’re in HR or consulting, what are you seeing in the market? Is there a trend amongst employers towards larger matches on employee elective contributions? Are greater investments being made in educating employees on what they need to put away?
As always, please share your thoughts in the comments section below.