Presentation on theme: "Nonqualified Deferred Compensation Plan"— Presentation transcript:
1 Nonqualified Deferred Compensation Plan The Executive Nonqualified “Excess” PlanSMToday we’re going to talk about an important benefit program that can help you reach your financial goals – our nonqualified deferred compensation plan.
2 What we’ll cover today… Why has your employer invited you to participate in the plan?Decisions you’ll need to make & information to help you make them.What is a nonqualified deferred compensation plan?During this session we will be discussing the importance of your nonqualified plan benefits, and the decisions you will need to make to participate in the plan. Whether you are newly eligible to participate in the plan or have participated in the past it is important to understand and revisit this unique opportunity.First, your employer has invited you to participate in the plan, why?What is a NQ deferred compensation plan?How can you use the plan to meet your retirement and other savings goals?What decisions do you need to make and what information will be available to help you make them?How can you use the plan to meet retirement & other savings goals?
3 Why have you been invited to participate in the plan? Read slide
4 You are being recognized…. Your employer values your contributionsOnly select employees eligible to participateKey employee benefit to help meet financial goalsWhy Are You Here?First and foremost, your employer values your contributions to the success of the organization and is offering this unique opportunity to YOU.And, please keep in mind that this benefit is only being offered to a small fraction of your company’s overall workforce.As a highly compensated employee, this benefit can help you meet your financial goals.4
5 Your retirement savings gap could be between 40% - 60% of your needs The retirement gapYour retirement savings gap could be between 40% - 60% of your needsLet’s talk about retirement savings. Experts suggest the need to replace at least 80% of your income in retirement in order to maintain your lifestyle. For non-highly compensated employees (toward the left side of the chart), qualified plans and Social Security can provide much of the income required to retire comfortably.As a highly compensated employee, however, you face a unique challenge in preparing for retirement. As you move to the right on the chart, a larger and larger gap appears due to limitations in qualified plans and Social Security benefits. For example, at $140,000 of annual compensation, on average only about 40% of income will be replaced at retirement by qualified plan and Social Security benefits.Your nonqualified deferred compensation plan can provide a solution to bridge the gap by allowing you to save more on a tax-deferred basis.
6 Different retirement concerns Question: “In thinking ahead to your financial well-being in retirement, which of the following keeps you awake at night?”All other employees3Q 20113Q 20103Q 2009Key employeesBeing able to enjoy the same quality of life that I live now35%45%41%52%48%54%Rising cost of inflation reducing purchasing power28%30%38%32%Another reason you’ve been invited to participate in this plan is that more highly compensated employees have different needs and issues related to retirement planning.Since 2000, The Principal Financial Group has conducted quarterly studies to identify and track changes among employees. The study also looks at the unique issues affecting highly compensated employees, or key employees, compared to the overall employee population.This slide shows 2 of the areas of differences in concerns or priorities for key employees compared to all other employees. These are identified in response to the question, “In thinking ahead to your financial well-being in retirement, which of the following keeps you awake at night?”In the orange shaded columns, you’ll see the 1st concern in the green shaded columns among key employees – being able to enjoy the same quality of living in retirement – is much higher than that of all other employees in the blue-green shaded columns. The 2nd concern is around the impact of inflation on purchasing power during retirement.This and other research points to the need to address the retirement planning needs of key employees with different benefit option.Source: The Principal Well Being Index, conducted by Harris Interactive, July/August 2011 results of1,150 small and medium-sized employees and 301 highly compensated employees
7 What is a nonqualified deferred compensation plan? As we’ve said, the company wants to reward you by offering you this benefit. But what is a nonqualified plan?
8 A nonqualified plan offers… Pre-tax deferral of compensationTax-deferred earnings growthPersonalized investment strategyContributions in excess of qualified plan limitsFlexible contribution & distribution optionsAccounts for retirement & other needsThe company wants to reward you by offering you this benefit, but What is a nonqualified plan?Like a qualified 401(k) plan, it offers pre-tax deferral of compensation.The plan is designed for use by selected highly compensated employees like you.The plan allows you to save for both retirement and other savings needs.The plan allows you to save in excess of deferral and compensation limits in qualified plans.8
9 How a nonqualified plan compares to a 401(k) plan SimilaritiesDifferencesPre-tax contributionsEarnings accumulate tax-deferredMultiple investment options*Distribution options set by planElections continue unless modified*Not subject to 401(k) plan deferral & compensation limitsGreater distribution flexibilityNo tax penalty for distributions before age 59 ½No required minimum distributions at age 70 ½How does a Nonqualified Plan compare to a qualified 401(k) plan?As you can see, there are many similarities, such as pre-tax deferrals and earnings in the plan accumulating tax-deferred, multiple investment options and distribution options but we would also like to point out a few of the differences which make nonqualified plans attractive.NQ plans allows for greater potential pre-tax compensation deferrals and more flexible distribution options considering that there are no tax penalties for distributions prior to age 59 ½, and no minimum distribution requirements.To recap, there are many similarities between NQ and 401(k) plans but some important differences which make the NQ plan attractive.* Subject to plan provisions.
10 Nonqualified plan considerations Your employer is making a contractual promise to pay benefits shown in your account.Assets to informally finance plan owned by employerAssets to informally finance plan subject to creditors in the event of bankruptcyNonqualified plan “funding”Deferral elections: made annually before calendar year and generally irrevocableDistribution elections: required at enrollment and changed only with restrictionsDeferral & distribution electionsBalances not available for loans/rollovers to another plan or an IRARolloversYour employer is offering you this important benefit which has many advantages. In order to receive the benefits of a nonqualified plan, the tax code imposes requirements and limitations different than qualified plans that you will need to consider.First, nonqualified plans are unfunded plans, and your account represents a contractual promise to pay from your employer. Assets are owned by the employer and subject to company creditors in the event of bankruptcy.Elections to defer are made annually before the start of a calendar year, and are generally irrevocable. You will have the opportunity to make and/or change your deferral elections on an annual basis. Once made at enrollment, distribution elections may generally be changed only at least a year ahead of the distribution event, and unless for death or disability, subject to an additional five year delay.Finally, balances are not available for loans or rollovers to another plan or IRADue to these considerations, most participants will maximize contributions to their 401(k) plan before contributing to a nonqualified plan.
11 How can you use the plan to meet retirement and other savings goals? We’ve talked about why you’ve been invited to participate and what a nonqualified plan is. Now, let’s discuss how you can use the plan to meet your savings goals.
12 Nonqualified plan accounts Retirement accountIn-service account(s)Save for retirement/net worthPayable upon separation from servicePayable in lump sum or installments – you decide*Save for specific event/purchaseSave for college educationSet aside funds with no tax penalties for distributions prior to age 59 ½.Payable at predetermined date in lump sum or installments – you decide*Let’s talk about managing accounts in your nonqualified plan, and how the plan provides access to multiple strategies to meet your savings needs.Here is where you will see a major difference between a nonqualified plan and a 401(k) plan. Nonqualified plan participants can decide when they take distributions from the plan and, because income taxes are paid when accounts are distributed, when they pay tax. And, since there is no additional tax on early distributions from nonqualified plans, you have a lot more flexibility in deciding when to receive distributions from the plan.Your “retirement account’ can provide for long-term savings paid after separation from service and address the “retirement gap” experienced by many highly compensated employees.In addition, there may be other events you would like to save for including college education or a large planned expense. These accounts are commonly referred to as “in-service” accounts, since they can be paid from the plan before separation from service. Most In-Service accounts must be established for two years before the scheduled date of distribution.Dependent on plan provisions, for both types of accounts, distributions can be made in a lump sum or in installments – you decide.*Subject to specific plan provisions
13 Decisions you’ll need to make & information to help make them Now, let’s discuss the decisions you need to make to participate in the plan and the information available to help you make them.
14 Decisions you need to make 1. How much should I defer?2. How do I invest my contributions?3. When & how do I want to receive my benefits?Throughout this part of the presentation you will be asked important questions that should help frame the decisions you need to make. As you learn more about this benefit program, your plan summary will be an excellent resource. The plan summary details the specific provisions offered to you in the plan by your Employer, and we ask you to refer to it as you consider the options available to you, and while you make your decisions during enrollment. We recognize the criticality of the decisions you are going to make and encourage you to discuss this benefit with your advisors and family.We’ll discuss each question in turn.READ QUESTIONSReview your Plan Summary to understand plan-specific benefits offered by your employer.
15 1. How much should I defer?Deferral amountHow much do I need to meet my retirement and other savings goals?How much can I currently afford to defer?How much compensation should I defer? The answer depends on two factors – how much do I need to save to meet my goals, and how much can I afford to defer based on my current cash flow needs.Remember, however, that deferrals are pre-tax, so the actual impact on net take-home pay will be less than the amount deferred into the plan. How much less will depend on your federal and state income tax brackets.Think about how much money you will need at retirement & for other personal financial goals.
16 Online tools that can help 1. How much should I defer?Online tools that can helpRetirement Savings WorksheetCalculates percentage of current compensation savings needed to meet retirement goalsDeferral CalculatorShows the differences between tax-deferred and after-tax investingShows expected distribution amounts based on your assumptionsThe Retirement Savings Worksheet is a good tool to use to see how you are meeting your retirement savings goals. It calculates an annual savings goal converted into a percentage of compensation that you will need to save in order to fill the retirement Gap. Use this worksheet to begin to think about how much you would like to try to defer into your retirement account. The worksheet is available at this meeting, and also online. This worksheet is based on fixed assumptions regarding inflation, replacement ratios and investment earnings. You should consult with your financial advisor for more detailed analysis of your personal situation.Another great tool to help you see how much your tax-deferred savings will grow is the Deferral Calculator. It is available on-line and can help you see both the advantages of saving in a tax-deferred manner, and also give you an idea of how much your accounts may grow based on the set of assumptions entered.
17 Investing contributions 2. How do I invest my contributions?Investing contributionsWhat type of investor are you?What is your short-term & long-term investment philosophy?Let’s talk about investment strategy. NQ plans are similar to 401(k) plans in that they offer a variety of investment options.Which investments are appropriate for you depend on your time horizon and risk tolerance. And, remember, you may have different investment strategies for your in-service vs. your retirement accounts.Review your Plan Summary and investment options available to understand plan-specific options offered by your employer.
18 Online tools that can help 2. How do I invest my contributions?Online tools that can helpInvestor Profile QuizAnswer questions to help determine your risk tolerance.Use risk tolerance results and time horizon to help choose an appropriate investor profile.Using profile, choose from available reference investments that best suit your needs.There is extensive information in your enrollment materials regarding the investment options available in your plan.Another helpful tool is the Investor Profile Quiz, which is designed to help evaluate what kind of investor you are. This quiz should only take you 6-8 minutes to complete.The quiz focuses on your risk tolerance. Risk is actually defined as the possibility of loss or injury. When it comes to investing, there is always risk. But think about it this way – you deal with risk every day in your life. So when you take the quiz, consider how much risk you take every day, and equate that to the amount of risk you’re willing to take in your investment selections.
19 Online tools that can help 2. How do I invest my contributions?Online tools that can helpFund Fact SheetsSummary information on investment options:Long-term returnsComparison by benchmarks and peer groupsRisk and return statsMorningstar categoryOperations informationPortfolio managerAlso available online are fund fact sheets. These are condensed, printable versions of the investment options available for your specific plan. The information summarized on these sheets includes: <Read slide>*Sample sheet for illustrative purposes only. Specific investment options available will be determined by your employer.
20 Receiving plan benefits 3. When & how do I want to receive my benefits?Receiving plan benefitsFor what events will you receive distributions from the plan?What distribution options would be best for you in each event?When and how do I want to receive my benefits?Take some time to review your plan’s summary and look at each of the qualifying distribution elections. Once you have decided to begin deferring into the plan it is important to then decide what financial needs you anticipate and when you will want to take distributions from the plan.Remember that in addition to having an account that pays when you separate from service, you can also choose to take distributions while still in-service for education and other needs. That election must be made as part of the enrollment process.** Note - Distribution elections must be made at the time of enrollment. Changes can be made later subject to certain restrictions. **Review your Plan Summary to understand plan-specific qualifying distribution events and distribution options offered by your employer.
21 Distribution scenarios to consider 3. When & how do I want to receive my benefits?Distribution scenarios to considerWhen do you plan to retire?Will you have other funds available on your retirement date?Should you use nonqualified benefits to help “bridge” your retirement while you await availability of Social Security or qualified plan benefits?Do you have in-service savings needs such as college savings or savings for a major purchase?Do you want to receive benefits in a lump sum or in installments*?Here are some questions to consider as you are deciding when to take distributions from the plan, and in what form.When do you plan to retire?Will you have other funds available at your retirement date?Should you use NQ benefits to “bridge” your retirement while you await availability of SS or qualified plan benefits? For example, are you planning to retire at 55 and take social security at 65.Do you have in-service savings needs such as college savings or savings for a major purchase? Do you want to set aside money for use at a later date for other reasons?Do you want your benefits in a lump sum or in installments.*Subject to specific plan provisions
22 Managing accounts & distributions An example of a participant deferral decisionParticipant Base Salary $120,000 and Bonus $40,000Participant elects to defer 10% of Base Salary and 50% of BonusSavings ObjectivesCollege needs for childVacation homeBuild retirement savingsAnnual Deferral AmountsBase = $12,000 (10% of $120,000)Bonus = $20,000 (50% of $40,000)Total = $32,000This slide summarizes the flexibility of the nonqualified plan, and the decisions you need to make regarding deferrals, accounts and distribution elections.Let’s think about a participant who has the need to fill the “Retirement Gap”, but also has a child who is graduating from high school in 2013 and is anticipating buying a vacation home in 2020.First, the participant decides how much to defer, in this case 10% of base salary and 50% of bonus. Based on anticipated compensation, these deferrals will generate $32,000 in deferred compensation.Pay June 2016Pay At Separation
23 Managing accounts & distributions 20% College20% Vacation home60% Retirement$6,400August 2016April 2020$19,200Pay at separation4 annual installmentsAn example of allocating the deferral amountsLump sum payment7 annual installmentsIncome taxes payable in year $ receivedAll the information from example in the previously slide is identical, just carried over to now describe how the total deferral amount will be allocated to address the savings objectives.In this example, the participant decides to allocate 20% of that amount into each of the in-service accounts for college and the vacation home, with the remainder going to their retirement account.Thinking of their needs when the accounts are ready to pay out, they determine the best methods are 4 annual installments for the college account, a lump sum for the vacation home account and 7 annual installments for the retirement account. Once these elections are made, in order to change them, our participant must elect to do so at least 12 months before the event, and delay the payments for at least 5 years.It is important to remember that you have the opportunity to review the deferral elections on an annual basis and make changes to the percentage allocated toward each.Asset Allocation Strategy/TimingConservative/Short-termModerate/Middle-termMore aggressive/Long-term2323
24 What are your next steps? Five items to do next:Review enrollment & investment materials provided.Assess your retirement & other savings needs.Consult with your advisors.Finalize decisions on deferral, distribution & investment elections.Enroll in the plan.We recognize this unique benefit will require thought and consultation with family and your investment and tax advisors.The steps you need to take include:First, we have found that to really understand and take the best advantage of the plan you will need to read through all the enrollment and investment materials providedSecond, think through the entire mix of long-term and in-service financial needsDon’t forget to consult your personal financial and/or tax advisorReview the on-line tools available to help with your decision making, andEnroll in the plan
25 How to enrollAccess the Nonqualified Plan Enrollment Center atFollow the step-by-step instructions provided in your Online Enrollment Guide.If you need assistance, callWhen you’re ready, log on and enroll at principal.com.And, remember, we’re only a phone call away if you need assistance.Begin taking advantage of this unique benefit to meet your retirement goals!
26 Thank you for joining us to learn about this important benefit! Congratulations!Thank you for joining us to learn about this important benefit!Your employer values your service and hopes you’ll take advantage of this opportunity.Read slide
27 While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.Insurance issued and plan administrative services provided by Principal Life Insurance Company. Securities offered through Princor Financial Services Corporation, , member SIPC, and/or independent broker/dealers. Securities sold by a Princor Registered Representative are offered through Princor®. Principal Life and Princor are members of the Principal Financial Group®, Des Moines, IowaNo part of this presentation may be reproduced or used in any form or by any means, electronic or mechanical, including photocopying or recording, or by any information storage and retrieval system, without prior written permission from the Principal Financial Group.DC | 09/2012 | t eRead slide