Retirement plan advisors can often miss opportunities to meet client needs, add revenue, and tighten relationships that are literally staring them in the face. While intent on designing and managing retirement plans for the benefit of plan sponsor clients and their workforce, 401(k) specialists may neglect the opportunity to help business owners and key executives in meeting their own personal retirement plan objectives and creating a strategy for recruiting and retaining key talent. The solution to both organizational and individual needs here may be strategically designed “non-qualified” plans (otherwise known as “executive benefits”).
As Joe Carpenter, President of NFP’s Executive Benefits division, so eloquently phrased it, being able to bring non-qualified plan solutions “puts you smack dab in the middle of the C-suite.” I recently spoke with Joe and Lisa Kottler, SVP - Retirement Services for NFP about how advisors normally focused on 401(k) might also successfully pursue these opportunities with existing clients and prospects.
A non-qualified (NQ) plan is essentially an agreement between an employer and an individual highly compensated employee for a portion of income to be deferred until a specified date. Think of money being put in a piggy bank for critical employees that the company wants to attract, retain and reward. But that piggy bank can look very different depending on the goals of the employer and the valued individual.
NQ plans came into favor following ERISA’s 1974 creation of the “qualified plans” we all know and love. ERISA allowed for qualified plan contributions to be tax-deferred up to a proscribed dollar amount annually ($18,500 for 401(k) plans in 2016). For people who are earning $200K+ annually, the 401(k) or IRA plan contribution limit may not be enough. NQ plans can supplement the retirement plan contribution for critical team members who might otherwise be recruited away, thereby helping your client avoid the costs and impact of replacing key individuals.
NQ plans typically take the form of a defined benefit or defined contribution plan but the design is limited only by the imagination. The company might agree to pay a percent of a 47 year-old COO’s salary for rest of her life if she stays for 15 years or offer the new 34 year-old Head of Software Design a fixed annual contribution vested in 10 years when his kids reach college age.
Warning! NQ plans are often (though not always) funded with insurance products, which can cause 401(k) advisors to throw up their hands and say, “I’m not a life insurance guy.” If this is you, please read on.
Just like 401(k) plans, NQ plans require considerable expertise and represent a very specialized field. The key point for 401(k) advisors is not to develop this expertise, but rather to learn to identify the opportunities and find a capable strategic partner with NQ plan expertise with whom you might share referrals and revenue.
Failure of a 401(k) to meet ADP testing which then requires corrective distributions of highly compensated employees is a loud warning bell. But short of that very unhappy scenario, you might ask your CFO or HR Director clients, “Are executives in the firm able to defer as much as they’d like into their 401(k) plan?” and “What would be the impact and costs if any of these key people were to suddenly resign?”
If you are not discussing these issues with plan sponsor clients, expect that someone else is and that someone may also present a threat to you being retained as advisor on the 401(k). There has been a surge in NQ plan creation in recent years, as talented execs and those with needed technical expertise change firms more frequently, are more familiar with non-traditional compensation methods and may sometimes insist on a NQ plan to supplement their retirement plan and insurance. For 401(k) advisors with firms or strategic partners who focus on individual wealth management, helping here can put you in a position to also help these highly compensated individuals with their estate planning, wealth transfer and investment management needs.
Retirement plan advisors who can also bring solutions for helping employers attract, retain and reward top executives and highly valued employees, may find themselves retained and rewarded.
NFP is the fifth largest NQ administrator in the US* with 140+ employees, national presence and experience in handling any situation from Fortune 100 to small businesses in your neighborhood. NFP can help advisors from initial client discussion to plan design, proposal generation, document preparation and plan administration.
To discuss ideas in this article and how NFP, RPAG and/or Kestra Investment Services, LLC might help you effectively support clients and scale your business, please email fred.greenstein@kestrafinancial.com or call 707-861-9272.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with any entity listed on this document. The opinion expressed in this article are those of the author and may not represent the views of Kestra IS or Kestra AS.
This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice.
* PlanSponsor 2014 based on info as of December 2013