Employers rolling out ‘supercharged 401(k) plans'

As employers battle for talent, many are doing more than sweetening their 401(k) plans with better matches, faster vesting schedules and easier eligibility requirements. Many are taking the extra step of adding — or sprucing up existing — plans that help their senior-level employees save even more for their retirement.

In a bid to lure top executives and keep the ones they have from leaving, employers are rolling out non-qualified deferred compensation plans, arrangements that allow executives to sock away retirement money beyond what they're allowed to with their 401(k) plans.

These shadow 401(k) plans give executives the ability to defer a portion — or even all — of their compensation and avoid having to pay taxes on it until they actually receive it. In the meantime, the deferred compensation is invested in a lineup of funds often mirroring that of their employers' 401(k) offerings.

They're like a "supercharged 401(k) plan," said Kirk Penland, senior vice president of non-qualified markets at Voya Financial Inc. in Livermore, Calif., referring to non-qualified deferred compensation plans.

Many executives who contribute the maximum annual $20,500 to their 401(k) accounts often feel that they're still not going to achieve "the kind of retirement that they would like," he said, adding that non-qualified plans "are a great way" to help them boost their retirement savings to where they'd like it to be.

It's an executive perk that's in high demand in today's competitive labor market, Mr. Penland and other industry experts said. Voya, for example, has seen a 33% increase from last year in the number of plan sponsors implementing non-qualified plans. Through the end of June, the record keeper had helped employers implement some 50 plans for their senior executives with another 60 implementations underway. Mr. Penland expects even more business as the firm approaches the last three months of the year, which he says are the "biggest" months for the record keeper as employers rush to make the plans available in time for open enrollment.

Companies want to recruit, reward and retain talent, Mr. Penland said, citing Labor Department statistics showing managers and professionals at near full employment.

"It's staggering," he said, referring to the 1.6% unemployment rate among managers.

With intense competition for leadership talent, plan sponsors are implementing non-qualified plans for the first time or dusting off old ones to make sure they're still competitive. Many are venturing outside their industries in their search for talent, making non-qualified plans a requirement if sourcing from industries where such plans are the norm, according to industry experts.

AVANGRID Inc., an energy services and delivery company, in June 2020 consolidated its multiple non-qualified plans into one "harmonized" plan to be more competitive and have a better program for its executives, said Paul Visconti, the company's Orange, Conn.-based director of retirement programs and investments.

"It makes things easier for participants if it's a consolidated centralized plan and everybody has the same eligibility criteria," Mr. Visconti said of the move.

The plan is open to directors making $200,000 or more and currently has 50 executives participating in it, or 25% of the 200 eligible to participate. The plan has $23 million in assets.

Mr. Visconti sees non-qualified plans as "absolutely crucial" in recruiting and retaining senior executives. "It's the best financial vehicle on earth for executives," he said. "With a 401(k), you can only put $20,500 in. With a deferred compensation plan, you can put your whole salary in there."

AVANGRID will make the non-qualified plan even more competitive by adding an annual company contribution ranging from 5% to 15% of an executive's total compensation beginning in April 2023. The company's 401(k) plan matches 150% of an employee's contribution up to 8%.

Employers that make contributions to non-qualified plans have a "huge competitive edge" in the war for talent, Mr. Visconti said.

Employers often get creative in designing company matches for their non-qualified plans. Some, for example, will use the plans to make sure that executives receive the full match they would get in their 401(k) plans were it not for caps on 401(k) company matches. Under ERISA law, 401(k) plan sponsors can only provide a match on up to $305,000 of compensation. If an executive makes $400,000 and the employer matches 3% of compensation, that executive can receive only a 3% match on $305,000, Voya's Mr. Penland explained.

What some employers will do is match the 3% on the remaining $95,000 of compensation in the non-qualified plan, Mr. Penland said.

Chris West, a Dallas-based senior director in the benefits advisory and compliance group at Willis Towers Watson PLC and the firm's non-qualified specialty solutions leader, attributes the significant spike that her firm has seen in plan sponsor interest in non-qualified plans to what the tight labor market is pushing employers to do: recruit people outside their industries where non-qualified plans are often expected.

"They're not just looking for and hiring individuals within their own industry, but they're hiring and recruiting people across industries," she said.

An employer looking to recruit someone whose organization already has a non-qualified plan will have little luck in attracting that person because he or she will by law have to cash out their plan before they leave. Unlike 401(k) plans, employees cannot roll over their non-qualified plan balances to their new employers, Ms. West said.

Executives who expect to receive a distribution from their current employers will often ask their potential new employers whether they have a non-qualified plan. This way the new executive recruits would be able to increase their salary deferrals into the new non-qualified plan to offset the additional compensation on which they're going to pay taxes, Ms. West said.

The deferred compensation plan remains a "wonderful resource and tool" for companies to provide higher-income earners who need to continue to find avenues to defer tax on a pretax basis, she said.

As a result of the recruiting dynamics, Willis Towers Watson has helped clients implement more new non-qualified plans in the past 12 to 18 months than it has in the past six years, Ms. West said.

TIAA-CREF, too, has experienced a strong surge in new plan implementations, a fact that Elena Zanussi, TIAA's Chicago-based director of executive benefit solutions, attributes to "an incredibly competitive and tight market for recruiting and retaining top talent."

"It's a really different hiring environment than what we've seen in 30 years," Ms. Zanussi said.

Ms. Zanussi reports an 80% year-over-year increase in new plan implementations.

Like Willis Towers Watson's Ms. West, Ms. Zanussi is seeing organizations look for talent outside their industries. TIAA's not-for-profit clients, for example, are recruiting outside of educational institutions and hospitals, where they have traditionally looked for talent, Ms. Zanussi said.

Not-for-profits now are competing with corporate employers for top talent, a difficult feat given the stock options and other perks corporations give their executives, she said.

Fidelity Investments, another record keeper that has seen a robust upswing in the number of new plan implementations, also cites competition as the key driver of the trend.

"We're seeing increased competition for key talent across all industries and companies of all sizes," said Andrew Eldredge, Fidelity's Orlando, Fla.-based product area leader of non-qualified strategy.

About half of Fidelity's new business so far this year in non-qualified plans has come from new plans, up from about 40% in 2021 and 30% in the years prior to that, he said.

Mr. Eldredge reports that the greatest demand for new plans comes from small and midsize businesses though there is some demand even among large employers, where non-qualified plans are already prevalent.

In 2021, roughly 82% of companies with more than 5,000 employees offered non-qualified deferred compensation plans, according to the Plan Sponsor Council of America's latest annual survey of profit-sharing and 401(k) plans. Among smaller employers with less than 1,000 employees, the percentage was 26.1%, and among those with fewer than 200 employees, the percentage was 13.4%.

While still the province of the largest of companies, non-qualified plans are going down market, Voya's Mr. Penland said.

"It used to be non-qualified plans were only for the very largest of companies, but that mentality has really changed," he said.