Apr 24, 2014
Given that 401(k) plans and other qualified plans have been legislated and regulated to show total transparency, attention has now turned to nonqualified plans. For decades, NQDC plans were regarded “black box” of benefits for many company sponsors and executive participants. But now, sponsors and participants are expected to pay much closer attention to the fees and other costs associated with their NQDC plans. How do you do that?
At BFG, we believe the only logical approach to improve NQDC plan results is through independent advice—separate from the firm that provides plan administration or investment and funding services such as corporate-owned life insurance (COLI) and mutual funds.
We recommend a simple, three-step analysis, review and planning exercise to address these concerns and put your executive’s retirement plan back on the right track.
1. ASK THE RIGHT QUESTIONS
- What arrangement is used to provide services under your plan? For example, are any or all of the services and funding solution provided by a single provider?
- Do you have a full cost breakdown including fees, commissions, service fees by investment fund and hard dollar fees?
- If a consultant brought you the plan administration provider, how is he sharing fees, commissions and such?
- What investment options are offered under your company’s NQDC plan? Do you use the 401(k) menu? Executive menu? Offer company stock as an alternative? Use COLI menu?
More key questions. If your plan uses COLI as the funding vehicle, are you optimizing the policies? Many contracts are not performing as originally designed due to changes in deferral elections. Let there be a big red flag if your plan administrator suggests replacing existing contracts with new, more efficient policies.
With very few exceptions, it is not possible to replace existing contracts. The only motivation for not restructuring your current policy is to earn new commission income. In 2013, seventy-five percent (75%) of new COLI sales represented replacement transactions. Frankly, policies have not undergone sufficient change to warrant full replacement—optimization, yes, but not replacement.
Do any investment options under your plan include sales charges such as loads or commissions? Be sure to review the cost of your 401(k) manager’s fees and index funds as a benchmark. A 100 basis point differences could make a difference in your participant’s retirement income ($220,000 additional cost for a $1 million account balance over 20 years).
Do investment options track an established market index? Is there a higher level of investment management services provided? Offering index funds and Exchange Traded funds (ETFs) could lower cost and improve performance.
Do you really know what you are spending for your NQDC plan? Adding up commissions, fees and investment fund subsidies will determine your true cost.
2. GET INDEPENDENT ADVICE
Plan sponsors should have access to independent NQDC advice (an advisor not affiliated with the company that provides services to the NQDC plan or its investments). Unaffiliated advisors may be hard to identify. If an advisor is compensated by the investment funds or earns fees from administration, he/she can’t truly claim independence. Be aware of hidden agendas.
An independent advisor typically compares the fees, commissions and services of your plan to similar fees and services on similar plans; in this way, he can arrive at recommendations designed to lower fees and boost performance for participants. Equally important, an independent advisor works diligently to help plan participants focus on the “big picture” assessment of whether current accounts are on target to meet participants’ overall expectations of a secure retirement.
3. MEASURE YOUR PROGRESS
Periodically, it is important to re-evaluate your NQDC planning in light of overall life changes. Benefit Funding Group offers individual consultations that delve into these issues in great detail. We incorporate into our approach a simple yet highly effective interactive process called The Optimizer™ to drive better performance of NQDC plans.
As discussed in our case study , The Optimizer™ process drives efficiency in your plan for a win-win-win between plan participants, company sponsors and their shareholders.
So allow me to restate these three simple steps to improve NQDC plan performance:
- Ask the right questions about NQDC fees, commissions and performance
- Access an independent advisor to get your plan on track
- Commit to participate in a full NQDC evaluation
What you do today will make all the difference in your retirement security tomorrow.
See you on the upside, Bill