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Why Executives Don’t Take Full Advantage of Employer Benefits. Do You?

My Financial Coach > Know-More Blog > Retirement > Why Executives Don’t Take Full Advantage of Employer Benefits. Do You?

According to the 2017 Prudential/PlanSponsor Executive Benefits Survey, the overall rate of companies offering nonqualified deferred compensation plans (NQDCPs) increased to 85 percent in 2017 from a survey low of 77.2 percent in 2015.

And why should you care?

NQDCPs represent an extremely attractive tax-deferral vehicle to help highly compensated employees save for retirement or life-stage events, like college tuition for young adult children.

According to the survey, average participation rates were relatively flat at 47 percent. Importantly, plan sponsors believe education and communication influence eligible employees most when deciding whether to participate in plans, followed by limitations on or lack of other pre-tax deferral opportunities, as well as weak confidence in company performance.

Trevor Lattin, a managing director and executive benefits specialist from Executive Benefit Solutions (EBS) said:

The plan sponsors’ responses didn’t surprise me. At EBS, when we see low plan participation levels in NQDC plans, we use our online survey tool to try and determine the cause. We want to find out if it’s a matter of no discretionary income, or the investment line-up, employer security concerns, or the flexibility of the plan that’s causing low participation. We find in most surveys we conduct, the reason for low participation is a lack of understanding. In fact, when we present a wish list of plan options for participants, many cite features already in their plan.

The Prudential/PlanSponsor survey stated that 87 percent of respondents do not plan to make any changes to their NQDCPs. Of the few planning a change, most cited additions or enhancements to plan: education and communication programs (52.6%), investment crediting options (42.1%) and distribution options (36.8%).

According to Don Curristan, another EBS managing director, a second factor strongly influences outcomes:

Executives receive poor advice from outside advisors. They discourage executive and other high-income earners from deferring compensation into their employer’s plans. We served a client, who uses financial planners for its most senior executives, experience zero participation in a new deferred compensation plan, even though all were in the maximum tax bracket.

The advisors informed these executives they should pay California income taxes at 13.6% and the max federal rate and invest after tax. One could easily see the math doesn’t work. I could see the advice as sound if their argument was benefit security. However, they should have informed the executives that they could use a new trust that protects assets against corporate bankruptcy. A Los Angeles-based firm, StockShield, created the Deferred Compensation Protection Trust®, which provides executives with full benefit protection in the event their employer goes bankrupt.

Executives Don’t Understand Benefits

At My Financial Coach, we see this situation in other plans, too. Executives do not fully understand their equity compensation plans either. In a national survey of 1,000 stock plan participants, Schwab Stock Plan Services found that while half of the respondents understand the long-term value of their equity compensation, many hesitate to exercise stock options or sell shares because they fear a costly mistake.

The Schwab survey stated that only 24 percent of plan participants surveyed have exercised employee stock options or sold shares acquired from equity plans. Among the rest, 34 percent admit to worrying about selling in adverse market conditions; another 34 percent say they fear the tax consequences of an uninformed or bad decision.

As the survey indicates, equity compensation can serve many important functions in participants’ overall financial strategies. While employees use their benefits in multiple ways, most likely they do so to secure needed cash (35%), make a large purchase (28%) or help prepare for retirement (11%). The average total value of their equity compensation is $72,245, and employees are an average of 63 percent vested in their equity compensation.  

Notice the chart below indicating the extent to which executives want guidance on their equity compensation plans:

As the survey demonstrates, many equity compensation participants want help, while half of the respondents are confident in their ability to make the right plan decisions on their own.

Further, respondents would like advice on the tax implications of their decisions (50%), using the benefit to help prepare for retirement (44%) and knowing when to exercise or sell their equity awards (35%).

Millennials report the highest level of confidence in plan decisions (58%) versus 44 percent of Gen Xers and 39 percent of Boomers. Meanwhile, 80 percent of all respondents said they would be extremely or very confident in making equity compensation decisions with the help of a financial advisor. 

Additionally, survey respondents claim they’d take advantage of a financial wellness program for education, tools, and resources to help with their overall financial health if offered by their employer.

Of interest, two-thirds of respondents with access to a financial wellness benefit take advantage of it. And, most participants (96%) find it helpful when making equity compensation decisions.

However, a wide access gap opens when the survey queried on wellness programs. Only 43 percent of respondents’ employers currently offer a workplace financial wellness plan. Note the chart below:

When we studied examples of deferred compensation and equity plans, we found that many employers do offer planning options which are, unfortunately, underutilized. For example, with the proper advice, an employee could defer his/her restricted stock units (RSUs) in the company’s nonqualified deferred compensation plan, eliminating the taxation at vesting. Once the employee defers the amount, he or she could diversify the company’s stock into a balanced investment portfolio and plan distributions for short-term needs or retirement.

What Executives Value

When considering the highest value components of a financial wellness program, respondents in the Schwab survey claim they want a holistic plan which goes beyond equity compensation advice only. They seek resources to help with planning for retirement (65%); a free or discounted consultation with a financial advisor (51%); help with personal wealth building (45%) and help with developing savings goals (44%).

Increasingly, it is becoming more difficult to secure objective advice from advisors, as many financial planners recommend and sell the precise products and services embedded in their advisory work.

Thanks to technological advances and increasing competition, the average American already has access to financial planning tools and resources once available only to the rich, if at all.

A truly objective advisor does not receive commissions on sales of investments or insurance. Instead, you pay only for the advice, like working with an attorney or tax professional. This arrangement is called “fee-only” or “fee-for-service” advice.

Since the financial planner does not benefit financially beyond the fee you pay, you can feel confident in the objectivity of the recommendations. Again, objectivity is questionable when an advisor sells products and receives commissions.

Many experts recommend working with a CERTIFIED FINANCIAL PLANNER™ , one who is fee-only and operates as a fiduciarya professional who must put your interests first, 100 percent of the time.

Such a planner can help you with a wide array of financial decisions. And finally, when your planner fully understands your compensation plan and corporate benefits program, he or she can play a pivotal role in ensuring your retirement planning reaches full potential.

To your workplace wealth,


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