RFPs: throw out the cookie-cutter; There is no common formula for implementing a nonqualified deferred compensation plan. Companies shouldn't expect a standard RFP to give them the desired results.

An overwhelming majority of companies today recognize the advantages of providing their top managers with non-qualified deferred compensation (NQDC) plans. However, finding the right provider to handle the specialized arrangements surrounding these plans can be tricky.

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For their part, executive benefits experts are seeing an unsettling trend in the way companies go about finding the appropriate provider. Many benefit managers simply dust off their standard request for proposals (RFPs) used in selecting a 401(k) firm. After some minor edits, they distribute their RFP to qualified plan and nonqualified plan providers alike, often with only a one-week turnaround deadline. It is assumed that 401(k) providers are just as up-to-date on and experienced with NQDC plans as those companies specializing in this area. More often than not, this isn't the case.

With constant changes in regulations and the multiple moving parts contained in these plan designs, there is no cookie-cutter formula for implementing and maintaining a company's NQDC program. Further, any simplicity in designing a plan once meant for just a handful of top executives with incomes in the high six figures has been made more complicated as companies now offer these plans to top managers in multiple strategic business units.

The inherent problem with the standardized RFP that was originally geared toward qualifying a 401(k) provider is that it will do little to tease out the needed qualities of a provider that is highly trained in designing, implementing and maintaining a company's NQDC plan. Why is this important? As much as 95 percent of the total retirement savings for top-paid executives of large companies can come from NQDC benefits. Given how critical these plans are for executives, it is crucial that the right provider is selected to properly implement and oversee the plan.

To be sure, RFPs will continue to be the mainstay for companies searching the marketplace for this type of expertise. In an effort to help managers navigate away from some of the inherent complications in the RFP process, the following is a list of common mistakes or misconceptions benefits managers might want to avoid in their search for the ideal provider.

The 8 Common Pitfalls to Avoid With Nonqualified Plan RFPs

1. Treating the NQDC Like a 401(k). As stated earlier, approaching the search for a nonqualified plan provider in the same manner as one would in the search for 401(k) services can be problem for a number of reasons. First, this approach compromises the nonqualified plan's effectiveness, due to the differences between these plans and 401(k)s. Nonqualified plans are usually tendered only to top-level executives. Benefit managers need an expert provider who can be trusted to interact with a company's top executives and articulate the added flexibility/options associated with nonqualified plans (not just a "call center," where representatives are not required to be experts in any particular client's plan).

Second, nonqualified plans are less secure than 401(k) plans and therefore require a provider that understands funding/securitization alternatives and can help tailor those to a company's specific financing objectives. Providers vying for the job should be required to identify their expertise and know-how in these areas.

2. Not Recognizing the Differences in Oversight Functions. Qualified plans are governed primarily by the Employee Retirement Income Security Act of 1974 (ERISA), while the rules for nonqualified plans are often diffuse. Moreover, NQDCs are impacted by Sarbanes-Oxley, recent deferred compensation legislation (the 2004 American Jobs Creation Act) and other issues. A provider with expertise in this area should be able to demonstrate the capability to be up to date with the latest government regulations that now impact NQDCs.

Many managers seem to think it would be simple to piggyback on the qualified plan in order to provide nonqualified plan administration. However, because the plans address different needs for their participants and are subject to different regulatory measures, there are complexities that are typically missed by the untrained eye--until the hidden costs or missed benefits for the executive or the corporation ultimately become apparent.

The 2004 American Jobs Creation Act ("AJCA") alone has imposed significant changes on nonqualified deferred compensation plans. To properly address the impact of AJCA, most providers are tracking pre- and post-AJCA account balances separately, have carefully crafted communication materials to educate participants on the changes without overwhelming them with information and have added creative plan provisions to maximize the plan's value to participants under the new regulations. Given AJCA's stiff penalties for violations, the lack of an expert provider in this case could be devastating 

3. Basing the Selection of a Provider on Cost Alone. Nonqualified plans typically require a specialist to ensure they are implemented and administered properly. Many companies base their decision on a simple cost comparison. The cost decision should be based on a cost/benefit analysis, weighing the costs against capabilities, expertise, services, etc. of the provider.

A provider able to structure an effective plan funding strategy, for example, may end up saving the company a significant amount in taxes and other funding costs. However, if the provider selection is based solely on plan administration fees, this savings will not be factored into the decision-making process.

4. Ignoring the Key Audience. Quite often, nonqualified plans will have special features to handle key issues not addressed in qualified plans. For example, more and more, these specialized benefit packages are being used as a critical executive recruitment and retention vehicle.

Therefore, a solid RFP must require providers to demonstrate that they can design plan provisions and craft communications materials that effectively reach this sophisticated audience, not simply offer mass communications brochures designed for employees at all levels within the company.

5. Too Many Cooks Can Spoil the Soup. Some RFP requests (and the resulting responses) have become so lengthy that the deciding firm must dedicate significant amounts of time to reading through responses. This is often the result of a poor start and the involvement of too many people in the RFP-writing process. To rectify this situation, the benefits manager should simplify RFP requests by identifying the core objectives/needs and crafting questions around those specific needs. This will help avoid repetitive questions, and ensure that responses are more meaningful.

6. Using a Third Party to Craft the RFP. If a third-party consultant is brought in to facilitate the RFP process, make sure it's a firm with expertise in nonqualified plans--and that you are using the consultant within that firm that specializes in nonqualified plans. Even the large, national consulting firms are often staffed with just a handful of dedicated nonqualified plan specialists. Ensure that the firm's primary objective is to find your company the most qualified provider (and not just to become your company's provider).

7. Having the Procurement Department as Sole Decision-Maker. Procurement departments tend to be more focused on cost and less focused on managing the nuances of nonqualified plans. Decision-makers must include those in the company who will be dealing with the resulting benefit plan and the provider on an ongoing basis.

8. Underestimating the Importance of the Day-to-Day Staff. In the end, it comes down to hiring the people rather the systems. What type of people, in terms of education, expertise, etc., does the prospective firm hire for the key positions that will administer your plan and communicate with your executives? What is their individual level of experience? What type of training does the provider give? Does its staff "live the plan," or do they only read answers off a computer screen?

Nonqualified deferred compensation plans are an increasingly critical part of executives' retirement income--and for many executives these benefits are the single largest source of retirement income. Given their importance, the complexities unique to NQDC plans and the ever-changing legislative environment, it is more critical than ever to choose the right provider with the appropriate level of expertise. Finding this level of guidance is possible via the RFP process if a benefits manager has a greater understanding of what to ask and what to look for when engaging a firm.

Mary Beth Barrett-Newman ([e-mail]) is Executive Vice President at Mullin Consulting Inc., a firm that specializes in designing, funding, implementing and administering tailored executive benefit plans.

RELATED ARTICLE: Tips on Ensuring a Quality RFP Process

* Crafting the Right Questions. An RFP is only as good as its questions. Once your RFP team has submitted the questions it would like to include, review them and then take the time to organize them into various logical subject areas (technology, consulting expertise, cost, reporting). Ask yourself what you are trying to determine from each question, then think ahead about how the answer will help you reach a decision.

* Determining Who's in Charge. Who is the decision maker(s) in your organization? Is it a team, a person or key members? Make sure in all instances that you have set in motion a process that has taken into consideration the following: How will the decision maker(s) come to a decision? Who will evaluate the RFP, and who will decide the criteria that will be used? Planning and having answers for these steps in advance will help ensure a successful outcome.

* Including All of Your Company's Service Issues. Have the team members submit the issues that are important to them; then have the whole team rank these. This will differentiate the important criteria from the "nice-to-haves." Some examples include: cost, expertise, online capabilities, years of experience (organization and key players), local presence, personal touch (having identified contacts to call versus an 800 number). Additionally, if are you looking for specific types of expertise (HR, finance) or companies (in your industry, geographic area), now is the time to bring this up.

* Getting Consensus on Response Expectations. Determine the RFP team's results expectations in advance. How will site visits and finalists presentations be incorporated and/or impact the final decision? How and when will they happen, who will attend and what do you expect to get from them? Also, allow sufficient time for firms to respond to the RFP. The best candidate may choose not to respond to a tight time frame.

Remember, the good firms are always busy, and the others, well ... they may have more time on their hands. Allow a minimum of two weeks, including holidays, for example, to enable firms to give you their best work.

Another element to consider in advance is how you want to receive the information. Do you want electronic or hard copy, or both? Do you want an executive summary from each respondent to include certain information? Do you want it in a specific format that allows you to easily compare answers? Make it clear to the respondents just what you want.

RELATED ARTICLE: conference schedule

Spring Private Company Forum

May 4-5, 2006

Atlanta | Ritz-Carlton Hotel

For reservation information, visit www.fei.org/events/conferences/privateco_may06.cfm.

Agenda items include: Congressional and FEI Update; The Fiscally-Fit Health Plan; Accounting Update: What's Affecting Private Companies; The Basics of Thinking Lean; Strategies for Fraud Detection.

The Board's Expanding Expectations of the CFO 

Presented by FEI and the National Association of Corporate Directors

June 7, 2006

San Diego | Hotel Del Coronado 

For information, agenda and to make a reservation, visit www.fei.org/events/conferences/nacd.cfm.

The program aims to deepen the CFO's understanding of the expectations of the Audit Committee and the board.

SAVE THE DATE:

Current Financial Reporting Issues: Shaping the Future of Financial Reporting

November 16-17, 2006

New York | Marriott Marquis

For information, agenda and registration, visit FEI's website: www.fei.orgleventsl

Speakers to include FASB Chairman Robert H. Herz and SEC participants Carol A. Stacey, Chief Accountant of the Division of Corporation Finance and Scott A. Taub, Acting Chief Accountant.

RELATED ARTICLE: takeaways

* Companies too often assume that 401(k) providers are just as up-to-date on and experienced with NQDC plans as those companies that specialize in this area. More often than not, this isn't so.

* There is no cookie-cutter formula for these plans, and the area has been made more complicated by companies offering these programs to top managers in multiple business units.

* As much as 95 percent of total retirement savings for top executives can come from NQDC plans.

* Understanding eight common pitfalls can go a long way toward ensuring a positive outcome on a NQDC plan.