EXECUTIVE BENEFIT SURVEY - Prudential Financial BENEFIT SURVEY Summary of Results...
Transcript of EXECUTIVE BENEFIT SURVEY - Prudential Financial BENEFIT SURVEY Summary of Results...
PRUDENTIAL/PLANSPONSOR - 2017 EXECUTIVE BENEFIT SURVEY
Summary of Results
Prudential/PLANSPONSOR
EXECUTIVE BENEFIT SURVEY
For Plan Sponsor and Financial Professional Use Only
2017
— Page 1 —For Plan Sponsor and Financial Professional Use Only
In 2017, Prudential and PLANSPONSOR magazine co-sponsored our 11th annual executive benefits survey. In large part, the questions focused on nonqualified deferred compensation plans (NQDCPs), and over the years we have collected volumes of data that reflect current industry trends – what is prevalent, what is changing and how effectively these plans are meeting the needs of sponsoring companies and the employees who participate in them.
As we reflect on the last number of years, which saw plan sponsors and participants address market uncertainty and unpredictability following the economic downturn of 2008 and 2009, one observation is clear: regardless of the financial markets, NQDCPs remain a valuable benefit that provide participants a flexible opportunity for meeting their near- and long-term financial goals and helping create retirement income above and beyond what qualified plans and Social Security can offer. For plan sponsors, they recognize the important role nonqualified plan benefits can play in aligning executives’ interests with business objectives. In fact, just over 80% of survey respondents in 2017 ranked their NQDCP "effective" to "extremely effective" in accomplishing its main purposes of restoring deferral opportunities limited by qualified plan restrictions and providing a vehicle for meeting retirement income goals.
New to this year’s report, here’s a look at other nonqualified plan key themes from the past decade:
• NQDCPs remain the most common executive benefit, and most years were offered by more than 90% of responding companies. Larger companies (those with annual revenues in excess of $1 billion) skew the overall statistic, as they consistently score in the high 90% range.
• “Education and communication” tops what plan sponsors think is most important to potential NQDCP plan participants in making the decision whether to participate, and in-person, one-on-one meetings are far and away what our survey respondents believe is the most effective method or manner of communicating with eligible executives about their plans.
• Plan participation rates have remained relatively flat over the last five years – ranging from 43%-47% following the economic downturn, but have averaged more than nine percentage points higher in plans that offer a company match.
• The perceived effectiveness of NQDCPs continues to climb higher each year, with 2017 survey responses maintaining that over 80% of plan sponsors believe that their NQDCPs were effective or extremely effective (meaning that they assigned a ranking of a minimum 7 out of 10, or higher).
• An average of 44% of responding companies offered a company match, with the most common types including following the 401(k) match formula for compensation above IRS annual limits, replacing a lost 401(k) match, or calculating according to a fixed percentage.
INTRODUCTION
Regardless of the financial
markets, NQDCPs remain a
valuable benefit
The perceived effectiveness of
NQDCPs continues to climb
higher each year
— Page 2 —For Plan Sponsor and Financial Professional Use Only
• Market-based deemed investments have consistently been the most prevalent option for fund menus, offered on average by more than 80% of respondents.
• Informal funding continues to be a popular strategy for addressing NQDCP benefit obligations, and its prevalence has held steady over the years at an average of 58% of respondents choosing this approach.
• The prevalence of COLI funding bounced back in 2017 to 55%, and its usage has fluctuated between its most recent high and a low of 28% in 2006. And while the informal funding of NQDCPs with mutual funds outpaced COLI from 2006-2011 by an average of 8 percentage points, 2012 marked the tipping point when COLI took the lead as the financing vehicle of choice. Since then, mutual funds have ranked lower than COLI by anywhere from 2 to 12 percentage points; however, the gap was most significant this year, with utilization of mutual funds by 35% of survey respondents.
• Plan sponsors have consistently ranked “quality of service” as the most important criteria when selecting a nonqualified plan provider. “Consultative in NQDCP/409A” and “online user experience” round out the top three year after year.
Informal funding continues to be
a popular strategy for addressing
NQDCP benefit obligations
INTRODUCTION
— Page 3 —For Plan Sponsor and Financial Professional Use Only
NONQUALIFIED EXECUTIVE BENEFITS LANDSCAPE
1. Quality of service team2. Online user experience3. Consultative in NQDCP and 409A
58% informally fund their NQDCP
HOW?1. COLI–55%2. Taxable securities–35%
✔✔ 78% as a retirement savings vehicle
✔✔ 72% to attract and retain executive talent
✔✔ 71% to restore deferral opportunity limited by qualified plan restrictions
WHY OFFER NQDCP?
As in previous years, more than half of respondents favored providing participants between 11 and 20 choices.
Objective Objective Objective Objective Objective
n SHORT-TERM/STABILITY 40 37 11 2 0T. Rowe Price Limited Term Bond 20 19 11 2 0PIMCO VIT Low Duration - Admin Class 20 18 0 0 0
n CORE BONDS 28 20 25 18 6PIMCO VIT Total Return - Admin Class 22 13 18 13 4PIMCO VIT Real Return - Admin Class 6 7 7 5 2
n SPECIALTY BONDS 19 14 14 11 4Ivy Funds VIP High Income 13 7 3 2 1Templeton VIP Global Bond - Class 2 6 7 11 9 3
n LARGE CAP 5 9 14 16 19MFS VIT Value - Service Class 1 2 3 4 4Dreyfus Stock Index - Initial Shares 3 5 8 8 11T. Rowe Price New America Growth 1 2 3 4 4
n MID CAP 0 1 5 8 12Janus Aspen Perkins Mid Value - Service Shares 0 0 1 2 3NVIT Mid Cap Index - Class I 0 1 3 4 6Ivy Funds VIP Mid Cap Growth 0 0 1 2 3
n SMALL CAP 1 2 3 4 4Delaware VIP Small Cap Value - Service Class 0 0 1 1 1Dreyfus Small Cap Stock Index - Service Shares 1 2 1 2 2Legg Mason Prt VP Small Cap Growth - Class I 0 0 1 1 1
n INTERNATIONAL 3 11 19 29 42MFS VIT II International Value - Service Class 1 4 8 12 17Invesco VI International Growth - Series 1 1 4 7 11 17Lazard Emerging Markets Equity - Service Class 1 3 4 6 8
n SECTOR FUNDS 4 6 9 12 13Morgan Stanley UIF Global Real Estate - Class 2 0 1 3 4 4Van Eck VIP Global Hard Assets - Class I 4 5 6 8 9
100 100 100 100 100Consider this mix if … Consider this mix if … Consider this mix if … Consider this mix if … Consider this mix if …You have a low tolerance for risk. Your primary goal is income. You have a short time horizon and are willing to accept risk of moderate price fluctuations.
You have a relatively low tolerance for risk. Your primary goal is income. You have a relatively short time horizon and are willing to accept some market volatility in exchange for greater potential income and growth.
You have a moderate tolerance for risk. You seek both growth and income. You have a relatively long time horizon and are willing to accept moderate volatility in exchange for potential long-term returns.
You are comfortable with risk, but seek slightly more diversification. You have a long time horizon and are willing to accept significant volatility in exchange for potential long-term returns.
You have a very high tolerance for risk. You have a long time horizon and are willing to accept a high degree of volatility in exchange for potential long-term returns.
Seeks primarily to earn high current income and, secondarily, to grow capital over the long term.
Seeks to earn high current income and to grow capital over the long term.
Seeks high total return through long-term growth of capital and income.
Seeks high total return primarily through long-term growth of capital and, secondarily, through income.
Seeks high total return through long-term growth of capital.
Allocation% Allocation% Allocation% Allocation% Allocation%
ADVISOR MANAGED PORTFOLIOS (AMP) - PORTFOLIO ALLOCATION■Conservative ■Moderate ■Moderate Growth ■Growth ■Aggressive
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Investment Options Menu
50% offer managed or model portfolios
11.
12.
The number of usable responses to the Prudential-PLANSPONSOR survey increased to 274 respondents in 2017 from 255 in 2015. As in most prior years, there were more responses from large (revenues greater than $1 billion) vs. smaller companies, with 57% and 43% answering, respectively. Slightly more publicly traded companies (52%) responded than private firms (48%). Overall, respondents continue to represent a wide range of industries, and most are tax-paying C-Corps.
RESPONDENT DEMOGRAPHICS/RESEARCH OVERVIEW
Participation rates were higher for plans offering company match
MOST IMPORTANT ATTRIBUTE FOR NQDCP PROVIDER
1 2 3Online user experience
Consultative in NQDCP and 409A
Quality of service team
47% Provide company match
60%47%participation
rate
85%offer NQDCPs
— Page 4 —For Plan Sponsor and Financial Professional Use Only
With large, publicly traded companies reclaiming the edge in the respondent pool this year, the overall rate of companies offering NQDCPs increased to 85.0% in 2017 from a survey low of 77.2% in 2015. Year over year, nearly all of large company respondents report they sponsor NQDCPs, and 2017 was no exception, with 96.8% offering this valuable benefit, as compared to just over two-thirds (68.9%) of smaller companies. The trend is similar with publicly traded vs. private companies, offered by 95.1% and 73.5%, respectively. Of these nonqualified plans, voluntary DCPs, 401(k) Mirror or Restoration plans and DC/DB SERPs were the most popular.
Stock Options
44.4%
2013
48.1%45.8%
50%
2014 2015 2017
Voluntary DCP66.0%
Defined Benefit Supplemental Executive Retirement (DB SERP)20.9%
Section 457(b) or 457(f)8.3%
401(k) Mirror (also known as 401(k) Restoration)22.3%
Defined Contribution Supplemental Executive Retirement Plan (DC SERP)28.6%
Restricted Stock Units
56.3%
2013
57.7%57.6%
2014 2015 2017
55.6%
PREVALENCE OF NONQUALIFIED BENEFITS
Ultimately, employers continue to regard NQDCPs as a highly valued recruitment and retention tool that provides their top talent with a powerful performance incentive and financial benefit that enables them to reach retirement and other financial planning goals. And while 80.0% of responding companies don’t offer any other type of executive benefit, those that do favor restricted stock units, stock options and incentive and other programs.
Restricted stock units and stock options held steady overall in popularity with survey respondents as compared to 2015, indicating companies’ continuing to favor tying executive compensation to company performance.
— Page 5 —For Plan Sponsor and Financial Professional Use Only
NQDCP LANDSCAPE
Job Grade 21.6%
Total Comp 21.6%
38.0% of all respondents cited a minimum base salary requirement between $115,000 and
$124,999, and a notable 25.3% required a minimum of $200,000. A solid 25.3% set their
minimums between $115,000 and $124,999.
00/ 100
38.0%
< $125K Minimum Base Salary
PAY TO ORDER OF: 00000
$200K +
25.3%
Minimum Base Salary
PAY TO ORDER OF: 00000
00/ 100
$175K–$200K
8.9%
Minimum Base Salary
PAY TO ORDER OF: 00000
00/ 100
$125K–$175K
00000
00/ 100
Minimum Base Salary
PAY TO ORDER OF:
28.9%
CRITERIA FOR ELIGIBILITY
Consistent with prior years, there were no predominant criteria for defining eligibility; however, for 2017, job grade and total compensation tied for most prevalent.
— Page 6 —For Plan Sponsor and Financial Professional Use Only
NQDCP LANDSCAPE
As in 2015, whether a plan was informally funded (46.7%) or not (48.1%) made little impact on participation rates.
A notable 21% of respondents plan to either offer or enhance the company match—a key incentive for plan participation, as noted in year-over-year survey results—or add deferral sources, which would provide plan participants with additional opportunities to meet financial planning goals and reduce their taxable income.
Distribution options
36.8%
Investment crediting options
42.1%
Plan education &
communication programs
52.6%
And what do plan sponsors think is most important to eligible employees in making the decision whether or not to participate? Education/communication tops the rankings once again, followed by limitations on or lack of other pre-tax deferral opportunities and confidence in company performance.
47%
60%
37%
Educ
atio
n/co
mm
unic
atio
n ab
out
the
NQ
DC
P
7.68
Lim
itatio
ns o
n or
lack
of o
ther
pre
-tax
de
ferr
al o
ppor
tuni
ties
7.55
Gen
eral
pla
n fle
xibi
lity
(e.g
., di
strib
utio
n an
d de
ferr
al s
ourc
e op
tions
6.81
Attr
activ
enes
s/ra
nge
of in
vest
men
t opt
ions
6.70
Com
pany
mat
ch
6.20
Use
of R
abbi
Tru
st to
enh
ance
pa
rtic
ipan
t ben
efit s
ecur
ity 5.22
Info
rmal
fund
ing
of p
lan
liabi
lity
4.92
Con
fiden
ce in
com
pany
per
form
ance 7.30
Offe
red
with
pro
fess
iona
l fina
ncia
l ad
viso
ry b
enefi
ts
4.96
IMPROVEMENTS TO NQDCP
Although 87% of respondents don’t plan on making any changes to their NQDCPs, of the few that are, the majority cited additions or enhancements to:
PARTICIPATION
Once again, average participation rates were effectively flat, reflecting little change over the last few years.
Participation rates were notably higher in plans offering matching contributions.
Plans NOT offering a company match had a lower participation rate at 38%.
— Page 7 —For Plan Sponsor and Financial Professional Use Only
NQDCP DESIGN OPTIONS
DEFERRAL SOURCES
Base salary (96.5%) and annual bonuses (90.0%) were deferral sources offered by nearly all
survey respondents. Less common but otherwise notable compensation allowed in an NQDCP were
commissions as well as short- and long-term incentives.
Board of Directors (BOD) Plans
Overall, 21.9% of respondents offer a separate nonqualified plan for their Board of Directors. Large companies were the most likely to sponsor a BOD plan (25.7%), as were publicly traded (24.0%) and tax-paying organizations (21.8%).
Meeting fees were the most prominent type of deferrable compensation allowed in the BOD plan (75.7%), followed closely by cash retainers (67.6%). Equity awards (restricted stock/units, deferred stock units, grants, etc.) were in a distant third place as deferral sources in BOD plans, offered by 27.0% of respondents, down significantly from 2015's 45.7%.
75.7%
Meeting fees
67.6%
Cash retainers
27.0%
Equity awards
Types of Deferrable Compensation Allowed in the Board of Directors Plan
Sources of Deferrable Compensation Allowed in NQDCP96.5%
Base salary
90.0%
Annual bonus
20.7%
Short-term incentives
20.1%
Long-term incentives
4.1%
Other
5.9%
Company special/ad hoc contributions
24.9%
Commissions
5.3%
Restricted stock/RSUs
— Page 8 —For Plan Sponsor and Financial Professional Use Only
What are the most common vesting requirements applied to the match?
• Immediate (43.0%)
• Same as 401(k) (39.2%)
• Years of service (22.8%)
46.8% offer a company match
COMPANY MATCHING CONTRIBUTIONS
Company match prevalence remained flat overall, and as in prior years, was more commonly
offered at larger organizations (49.6%) and public
companies (64.0%).
Following the 401(k) match formula for compensation above IRS annual limits was once again the most prevalent type of company match among survey respondents, and a percent deferral match and one to replace a lost 401(k) match were a close second and third, respectively.
NQDCP DESIGN OPTIONS
Type of Matching Contribution
40.5%
Percent deferral match (independent of qualified plans)
45.6%
Supplements 401(k) match (follows 401(k)
match formula for compensation above
IRS annual limits)
36.7%
Replaces lost 401(k) match (due to participation in nonqualified DCP)
20.3%5.1%
Supplements profit sharing contribution
(follows profit sharing formula for compensation above IRS annual limits)
Tied to company performance
(independent of qualified plans)
1.3%Flat dollar amount
(independent of qualified plans)
— Page 9 —For Plan Sponsor and Financial Professional Use Only
PARTICIPANT INVESTMENT CREDITING OPTIONS
Market-based investment crediting options continue to be the most prevalent design for NQDCP fund menus, ticking up a few percentage points from 79.2% in 2015. Fixed rates have remained relatively flat over the last number of years, with Moody’s, Treasuries, S&P and "other" indexes topping the rankings of these stable alternatives.
NQDCP DESIGN OPTIONS
Investment Options Menu1.
2.
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Market-Based84.2%
Fixed Rate15.8%
Stock7.1%
Other6.6%
Moody’s17%
Treasuries20%
S&P23%
Prime Rate
27%Survey results show year after year that the majority of respondents (77.5%) prefer limiting their investment crediting options to 20 or fewer—a moderate amount that can typically cover all major asset classes for diversification purposes while helping participants avoid “choice overload.” Offering between 11 and 20 choices continues to be the most popular range, with half favoring this amount for the deemed investment menu.
Half of our responding plan sponsors include pre-mixed portfolios as part of their plan’s deemed investment menus. Of those that offer these investment
crediting options, the majority prefer managed portfolios (60%) to model
portfolios (40%). These portfolios, designed for a range of risk profiles and allocation strategies, are a diverse mix of automatically rebalanced deemed investments either built from the standard menu offered (“model”) or professionally constructed and monitored and may include other deemed investments not otherwise available inside the plan. Either way, these portfolios—typically ranging from “conservative” to “aggressive”—offer participants a way of simplifying their allocation decisions by aligning with their tolerance for risk and particular time horizon.
— Page 10 —For Plan Sponsor and Financial Professional Use Only
NQDCP DESIGN OPTIONS
BENEFIT DISTRIBUTIONS & EVENTS
Flexible options for scheduling and receiving plan payments are a key benefit and differentiator of nonqualified plans, and the vast majority of plan sponsors offer their eligible participants a range of distribution election choices that are permitted under 409A. As in previous years, Separation from Service was the most common distribution election offered by survey respondents (96.4%), followed by Death (80.5%) and Scheduled In-Service (65.6%).
The vast majority of respondents offer both lump sum and installment options (83.6%), a figure that has remained consistent year after year.
96.4%
Upon separationfrom service
44.6%
Upon change of control
53.3%
Upon disability
50.8%
Upon qualified hardship
22.1%
At a specified number of years after deferred
65.6%
In-service/scheduled distribution at specified date
80.5%
Upon death
16.9%
At specific age
Distribution Events
6.1%
Installment
10.3%
Lump Sum
83.6%
Combination
Distribution Payment Options
— Page 11 —For Plan Sponsor and Financial Professional Use Only
NQDCP FUNDING AND SECURITY
INFORMAL FUNDING
The number of respondents setting aside assets to informally fund NQDCP liabilities held steady at 2015 levels at 57.5%. As has been the case for many years, companies’ primary reason for informally funding their NQDCPs is to manage their asset-to-liability ratios. The percentage choosing COLI as an informal funding vehicle continues to occupy the leading position with 55.3%—rebounding from 47.3% in 2015. Taxable securities declined 10 percentage points—from 45.1% in 2015 to 35.1% in 2017—and cash stayed in steady at third place with 27.2%.
WHY?1. Manage asset/liability ratio2. Mitigate P&L impact3. Improve employee benefit security
HOW?1. COLI–55.3%2. Taxable securities–35.1%3. Cash–27.2%
57.5% of companies
informally fund their NQDCP
WHY DON’T COMPANIES INFORMALLY FUND?
• Corporate philosophy of “pay as you go” (43.4%)
• Don’t know (31.3%)
• Plan liability was so small as to be immaterial (15.7%)
As was the case in 2015, nearly a third of respondents “don't know” why their companies don't
informally fund their plan liabilities. And while the real reasons could be that the company otherwise
does employ a "pay as you go" approach or has a small plan liability, it bears repeating that unfunded
plans can cause volatility to the income statement, as well as a negative drag on earnings. When
companies set aside assets for future distribution with the intention of having available cash to pay
benefits as they come due, they can help secure the incentive value of the plan to attract and retain key
executives, and preserve the value of the benefit as a financial planning tool.
• 46.4% have a security vehicle for their NQDCP
• 96.1% of security vehicles utilized are Rabbi Trusts
HOW DETERMINED?1. Based on pre-tax liabilities = 86.2%2. Based on after-tax liabilities = 13.8%
— Page 12 —For Plan Sponsor and Financial Professional Use Only
BUNDLING BENEFITS
For the first time, the survey asked whether plan sponsors used the same recordkeeper for their NQDCP as their qualified plan(s) to get a sense for the prevalence of bundling benefits.
More than half (55.3%) of survey respondents bundled plan services with the same recordkeeper. Whether multiple retirement benefits providers are employed by companies to recordkeep their various plans may depend on the complexity of their offerings to employees, but the instances of one vs. multiple provider situations does not appear to vary based on company size, whether they are publicly traded or a tax payer.
NQDCP RECORDKEEPING
RECORDKEEPING AND SERVICE PROVIDERS
Third-party recordkeeping continues to be the predominant trend, utilized exclusively by 74% of companies and entirely or in part by 94% of companies. The percentage of large, publicly traded and tax-paying companies outsourcing their NQDCP administrative tasks is largely the same, and the consistently high rate year-over-year of engaging outside providers may be due to the need for specific and comprehensive nonqualified capabilities from a technological, consultative and legislative/regulatory perspective that could be too challenging to provide in-house.
55% use the same
recordkeeper for NQDCPs and
qualified plans
Quality of service
teamConsultative in NQDCP/
409A
Online user
experience
74% of companies rely exclusively on a
third-party recordkeeper
Quality of service team topped the rankings once
again as the main deciding factor companies use for choosing a recordkeeper.
For NQDCPs that mirror the 401(k) and are simpler in design, having the 401(k) recordkeeper handle both plans may make sense from the perspective of dealing with a single vendor relationship, a single website and cost containment.
— Page 13 —For Plan Sponsor and Financial Professional Use Only
NQDCP RECORDKEEPING
For NQDCPs that require more system flexibility to accommodate complex features (such as those for multiple distribution options, pre- vs. post-409A rules or different vesting schedules) or have extensive or ad hoc reporting needs, a provider with robust technology, consultative expertise and a dedicated service team would be the ideal choice. If the 401(k) administrator doesn’t already have industry-leading capabilities in NQDCP recordkeeping, a separate specialist may be engaged.
Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or its affiliates. PRIAC is a Prudential Financial company.
© 2017 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.
0301138-00002-00 NQFLRE35 11/2017