Deferred Compensation Investment Monitoring

Nonqualified deferred compensation (NQDC) plans can play an important role in an organization’s executive compensation strategy. Yet the investment options associated with these plans sometimes receive less attention from the plan sponsor than plan design, eligibility and distribution provisions.

A thoughtful investment menu involves more than offering a range of funds as notional investment options. Organizations may also consider how the available options relate to plan objectives, participant decision-making and broader financial priorities.

Q. How often should employers review the investment options in an NQDC plan?

 

A. No single review schedule is appropriate for every organization. Because investment managers, strategies, fees and performance characteristics can change over time, a consistent review process may help plan sponsors evaluate whether their NQDC plan’s notional investment options continue to align with and provide meaningful choices for plan participants. A consistent review process can bring greater clarity to these considerations.

A Distinct Investment Environment

NQDC plans operate differently from qualified retirement plans.

NQDC plan participants typically select from notional investment options or reference funds used to calculate gains and losses credited to their accounts. These selections generally do not provide direct ownership of the underlying investments, and plan benefits usually remain an unfunded, unsecured promise of the employer until paid.

Investment considerations may extend beyond the participant-facing menu. Some organizations also evaluate how notional investment options relate to financial priorities and any informal funding strategy used to help manage future benefit obligations.

Corporate owned life insurance, or COLI, is one example of an informal funding approach. Although employer-owned assets do not need to mirror participant elections, understanding how the different elements relate may provide useful context.

Evaluating the Investment Menu

An NQDC investment menu often seeks to balance meaningful choice with an understandable structure.

The appropriate lineup will vary based on the organization, plan population and platform. Options may include:

• Capital preservation-oriented options
• Fixed-income strategies
• Multi-asset or target-risk options
• Domestic and international equity strategies
• Specialty investment categories

Some plans may also offer model portfolios or reference allocations that illustrate different risk approaches.

Organizations reviewing a menu may consider diversification, asset class coverage, fees, manager capabilities and the role each option serves within the overall lineup.

The Role of Ongoing Review

Investment managers, strategies, fees and performance characteristics can change over time. Periodic review may help identify changes in personnel, process, ownership, risk profile or relative performance.

Depending on the organization and plan, the review process may include:

• Performance and risk analysis
• Manager due diligence
• Benchmark and peer comparisons
• Fee and expense review
• Style consistency evaluation
• Watch list monitoring
• Written recommendations

A consistent framework may also help organizations assess short-term results within a broader context.

Governance and Documentation

Investment guidelines can provide a useful reference point for evaluating and monitoring an NQDC investment menu. Some organizations develop guidelines specifically for the plan, while others incorporate NQDC considerations into an existing investment policy framework.

Committee materials, review summaries and written change recommendations may also help document the information considered when an option is added, monitored, retained or replaced.

Documentation does not remove investment risk, but it may support greater consistency and transparency in the review process.

Connecting Menu Design and Participant Education

An investment menu may be more useful when participants can understand how the available options are organized.

Tiered or goal-based groupings and plain-language descriptions may help explain the role of each investment category. Participant materials can also clarify the notional nature of the options and avoid suggesting direct ownership of underlying assets.

Considering menu design and participant communication together may help make the available choices easier to navigate without providing individualized investment advice.

How an Institutional Investment Advisor May Help

An institutional investment advisor can provide a research-driven framework for constructing, reviewing and maintaining an NQDC investment menu.

Guidance may include:

• Investment menu architecture
• Fund and investment vehicle due diligence
• Asset allocation and diversification review
• Fee and expense analysis
• Manager monitoring and watch list support
• Investment guidelines development
• Committee reporting and documentation
• Participant communication alignment

An engagement may begin with a review of the current investment lineup, platform limitations, utilization patterns, organizational objectives and any related informal funding strategy.

Based on that review, the advisor may provide recommendations and help plan for approved changes, including fund mapping, blackout considerations and participant communications.

Questions to Consider

Organizations assessing their current approach may find it helpful to ask:

• Does the menu offer meaningful diversification without unnecessary overlap?
• Does each option serve a clear role within the lineup?
• How frequently are fees, performance and manager changes reviewed?
• Are investment decisions supported by written guidelines and documentation?
• Do participant materials clearly explain the available notional investment options?

How does the investment approach relate to the organization’s compensation objectives and financial priorities?

These questions may help highlight areas that are working well and areas that warrant further review.

An Informed Approach to NQDC Investment Decisions

NQDC investment monitoring can provide a useful perspective on menu design, investment options, documentation and participant communication.

OneDigital Executive Benefits’ Institutional Investment Advisory services offer research-driven guidance designed to integrate with an organization’s existing executive benefits platform. The process may help plan sponsors evaluate their current approach and bring greater clarity and consistency to investment decisions supporting nonqualified deferred compensation plans.

To learn more about institutional investment advisory for institutional stewards, contact OneDigital Executive Benefits at executivebenefitssolutions@onedigital.com.

 

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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein. The examples shown are for illustrative purposes only. The material in this report may contain financial illustrations, which may reflect hypothetical dividends, interest, rates of return, and/or expense and mortality assumptions, none of which are guaranteed.

Daniel Mercer is affiliated with Valmark Securities, Inc. and Valmark Advisers, Inc. Securities offered through Valmark Securities, Inc., member FINRA & SIPC. Investment Advisory Services offered through Valmark Advisers, Inc., a SEC Registered Investment Adviser. Registration as an Investment Adviser does not imply any certain level of skill or training. 130 Springside Drive, Suite 300, Akron, Ohio 44333. 800-765-5201. Valmark Securities, Inc. and Valmark Advisers, Inc. are independent of and unaffiliated with ODIA. 

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