By Lisa Beyer
Oct. 11, 2011
When spirits maker Brown-Forman started to recruit senior talent externally two years ago, it found a competitive gap in the wealth building vehicles the company offered to those executives.
“We didn’t provide enough self-directed programs for senior executives and were worried this would negatively impact our recruiting ability,” says Andrew Simon, vice president and director, global compensation, for Louisville, Kentucky-based Brown-Forman, which produces Jack Daniel’s and Southern Comfort, among other brands, and employs 4,000 people worldwide. “About a year ago, we implemented a nonqualified plan for approximately 200 senior executives, and it’s been very well received.”
Brown-Forman worked with MullinTBG, an executive-benefits specialist, to develop the plan, which offers the same tax-deferred savings and investment opportunities as the company’s 401(k) plan, but without an annual contribution limit. About 80 executives participate in the plan. The company doesn’t provide a matching contribution, which keeps costs low, says Simon.
A nonqualified plan is “any type of tax-deferred, employer-sponsored retirement plan that falls outside” of Employee Retirement Income Security Act guidelines, according to the definition on Investopedia.com. The plans “are designed to meet specialized retirement needs for key executives and other select employees. These plans also are exempt from the discriminatory and top-heavy testing that qualified plans are subject to,” the website says.
Nonqualified plans (IRC 457(b) Deferred Compensation Plans) are more common among large companies, shows a June 2011 survey of 385 plan sponsors of varying sizes and industries by the Profit-Sharing/401(k) Council of America in partnership with the Boston Research Group. Less than 10 percent of companies with 500 employees or fewer offer these types of savings plans; 70 percent of companies with 25,000 or more employees do.
The survey reports that the majority of nonqualified plans are cash balance plans similar to a qualified defined contribution plan, and about 40 percent of the plans match the employee’s contribution. About 45 percent, the survey shows, offer a nonmatching contribution.
Though a volatile stock market has turned off some investors—especially those in the millennial generation—that doesn’t seem to be the case with senior management.
MullinTBG, which represents 400 clients, 700 nonqualified plans, and $22 billion in assets under management, is starting to see requests for guaranteed-income products to hedge against market volatility, says Mark Maizel, a senior vice president based in Chicago. He says the firm, which offers risk-based managed portfolios, recently began to provide the guaranteed income, or annuity-based, options for its nonqualified plans.
Brown-Forman’s Simon says market volatility has not been an issue with his participants, because they face the same issues in their 401(k) plans.
“We do ask them to work with a qualified financial planner before they make any investing decisions,” he says.
Nonqualified plans are more popular today than ever, says Dyanne Ross-Hanson, president of Woodbury, Minnesota-based Exit Planning Strategies, which helps business owners develop succession and transition plans.
“We’re seeing interest in NQ plans across all companies and all industries, because every company is looking to provide flexible pre-tax financial tools that allow employees to save for short- or long-term goals,” he says. “They are putting in new plans, enhancing existing plans, and providing more education and investment advice.”
Ross-Hanson believes economic conditions are driving interest in nonqualified plans.
“What can a company do to retain and reward its key people when cash flow is limited?” she asks. “Rather than give raises, they can offer additional opportunities for those people to save on a tax-advantaged basis. And now that so many employers are not offering matching contributions to qualified plans, this is another way to reward key people on a selective basis.”
Ross-Hanson cites three critical features for a nonqualified plan: If the company plans to match contributions or contribute other amounts, some part of that award must be deferred for retention purposes; the plan must have the potential for yielding a significant payout as a percentage of the executive’s salary; and the plan must be clearly communicated to the executive.
“These plans are value drivers for a company, and if properly designed, they will increase profits—if the company realizes that a handful of people drive profits,” says Ross-Hanson. “And for smaller employers, these plans can deter entrepreneurial workers from leaving and becoming the competition.”
Its nonqualified plan has received positive feedback at Brown-Forman, and makes its recruitment discussions easier, says Simon.
“The lack of an NQ plan is no longer a barrier when we are competing with other employers,” he says. “It’s an attractive benefit that gives high actual and perceived value to our executives for a modest cost, and helps our senior executives get to where they need to be with their savings.”
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