Nonqualified deferred compensation takes over at the 401(k) ceiling

The 401(k) has a ceiling, and the people who run the businesses that sponsor them hit it first. At a certain income level, a highly compensated employee who once put 15 percent of pay into the qualified plan gets “limited out,” in the phrase of Jeff Cheshier, vice president of institutional relationships at MyDeferral. That is the moment nonqualified deferred compensation enters the conversation.

NQDC plans are employer-sponsored arrangements that sit on top of a 401(k) and give key people a way to keep saving. They do not meet the Internal Revenue Code’s requirements for the special tax benefits that ERISA provides, and they are typically designed as supplemental benefits for the employees a business most depends on, according to NAPA Net’s report. For an advisor, the appeal is simple: this is a service with no menu price.

Timing helps. NAPA Net calls nonqualified plans a once-obscure corner of the industry that is drawing attention as advisory fees compress and services turn into commodities. Owners and executives carry retirement needs that 401(k) plans and traditional group benefits are not built to solve, Cheshier said. Advisors looking for a new product to sell are running out of easy answers. This one has a defined buyer.

The niche is older than its new audience. MyDeferral’s recordkeeping system is more than three decades old, Cheshier told NAPA Net, and it was custom-built for nonqualified plans. The mechanics are not the same as qualified-plan recordkeeping. “Behind the scenes, nonqualified recordkeeping is much more complicated than for qualified plans,” he said. Many national recordkeepers run this business on systems built for qualified plans and modified afterward; a native system, he argued, gives a plan designer more flexibility when creating something custom.

The platform’s history explains where it sits. It began inside a regionally owned nonqualified shop that NFP acquired and rebranded as MyDeferral; NFP is an Aon company. Cheshier casts the firm as one of the few genuinely independent recordkeepers in the niche, by which he means it does not use the plan as a way to sell more mutual funds, life insurance, or 401(k) plans. “We exist to do nonqualified plans, and that’s all,” he said. He describes his own job as helping advisors tell the story; the gap, in his view, is awareness, not demand.

For a practice, the opening is dividing the client list. The clients who hit those income limits are not obscure; they own the businesses, run the divisions, and carry the firm’s key-person risk. Cheshier says the plan answers a need that no other retirement vehicle touches. The conversation starts with the 15 percent problem: once the qualified plan stops accepting contributions, what is the plan for the next decade of pay?

The design work is where the advisor earns the fee. Cheshier’s point about flexibility applies to the advisor’s role, too: a custom plan requires a custom conversation, and someone has to start it. The natural opening is the owner or executive whose own 401(k) contributions have stopped. The natural next question is which other key people at the company are in the same position.

The plan is, in Cheshier’s telling, a retention tool as much as a savings vehicle. The employees covered are the ones “really responsible for making the business run.” A business owner who has watched a key operator walk out the door understands why a benefit aimed at those people is worth discussing.

The recordkeeping complexity goes beyond the back office. It is the reason the product resists comparison shopping. A plan that has to be designed around the client cannot be shopped the way a 401(k) can. That makes it a durable conversation for a practice trying to move up-market.

The firms that pick up this business will be the ones that can explain, in plain language, why the plan on top of the 401(k) exists. The buyers are not hard to find. They are the clients whose 15 percent retirement savings hit the 401(k) ceiling.