Plan Design: Best Practices

This framework is designed to help evaluate the effectiveness, competitiveness, and financial alignment of a Deferred Compensation Plan (DCP) across three key dimensions:

1. Plan Design
2. Plan Funding and Financial Management
3. Plan Administration and Compliance

1. Plan Design Best Practices

A. Eligibility and Participation

Best Practice: Align eligibility with strategic workforce goals (not just title-based thresholds).

What to Look For: Narrow eligibility or low participation rates.

Enhancements:

• Expand to highly compensated employees or key employees
• Consider short-term DCPs for retention

B. Deferral Flexibility

Best Practice: Provide multiple deferral methods and automation features.

What to Look For:

• Limited to percentage elections onlyAccount-Based vs. Class-Year

Enhancements:

• Percentage + fixed dollar + tiered elections
• Evergreen elections
• Auto-escalation (i.e., automatic increases)
• No maximum deferral limit

C. Investment Menu and Portfolio Construction

Best Practice: Offer diversified, institutional-quality investment options.

What to Look For:

• Over-reliance on 401(k) lineup
• Missing asset classes

Enhancements:

• Broader asset classes
• Risk / return portfolios
• Ongoing benchmarking (ensuring best-in-class funds are being utilized)
• Fixed Rate (company’s discretion for crediting rate)

D. Equity Deferrals and Diversification

Best Practice: Allow deferral and diversification of compensation types.

What to Look For:

• No RSU / PSU deferral
• Concentration in company stock

Enhancements:

• Enable equity deferrals
• Allow diversification

E. Distribution Flexibility

Best Practice: Provide flexible payout structures.

What to Look For:

• Limited elections
• Forced distributions
• Single vs. separate payment handling

Enhancements:

• Extend installment periods
• Allow fixed dollar amount payouts until the account is exhausted
• Preserve elections post-termination
• Survivor Benefit

F. Employer Contributions and Incentives

Best Practice: Use contributions for retention and behavior alignment.

What to Look For:

• Employer contributions that are limited to basic match restoration only
• No discretionary contribution feature
• No performance-based contribution opportunity
• Vesting schedules that do not support retention goals

Enhancements:

• Discretionary contributions
• Performance-based contributions
• Custom vesting
• Lost 401(k) match
• Protective claw back language dependent on form of separation of service

G. Plan Security

Best Practice: Provide participant protection.

What to Look For:

• No sources of informal funding
• No Rabbi Trust

Enhancements:

• Informal funding
• Utilize Rabbi Trust
• Broader asset backing

2. Plan Funding and Financial Management Best Practices

A. Asset / Liability Alignment

Best Practice: Maintain alignment between liabilities and assets.

What to Look For:

• Multiple carriers
• Mismatch of assets and liabilities
• Blend of taxable securities and/or corporate-owned life insurance (COLI)

Enhancements:

• Conduct regular asset / liability reconciliation to ensure alignment between plan liabilities and funding assets
• Align investment structure of plan assets with participant allocation elections to minimize profit and loss (P&L) mismatch
• Consolidate or streamline funding vehicles where appropriate to reduce complexity and improve tracking
• Implement processes or technology that monitor and manage P&L impact from asset / liability differences
• Establish guidelines for rebalancing and ongoing alignment between assets and liabilities

B. Funding Structure Optimization

Best Practice: Use efficient funding structures.

What to Look For:

• Legacy pricing
• Use of taxable securities for informal funding

Enhancements:

• Re-price or 1035 exchange assets
• Consolidate carriers
• Value of COLI over taxable securities

C. Cost Management

Best Practice: Continuously evaluate funding costs.

What to Look For:

• Funding costs that have not been reviewed recently
• Legacy COLI pricing or older policy structures
• Excess insurance cost relative to current market alternatives
• Cost drag that may be reducing long-term cash value growth

Enhancements:

• Benchmark pricing
• Reduce cost drag

D. Liquidity and Reallocation Constraints

Best Practice: Align participant flexibility with asset capabilities.

What to Look For:

• Reallocation mismatches

Enhancements:

• Evaluate carrier rules
• Synchronize timing
• Periodic correlation analysis

E. Financial Reporting and Transparency

Best Practice: Maintain clear reporting.

What to Look For:

• Limited visibility into asset and liability positions
• Infrequent or incomplete reconciliation reporting
• Lack of clear projections showing financial impact over time
• Reporting that does not support timely decision-making by finance or plan sponsors

Enhancements:

• Regular reconciliation
• Plan asset / liability projections

3. Plan Administration and Compliance Best Practices

A. Administrative Efficiency

Best Practice: Minimize internal burden.

What to Look For:

• Manual processes
• Self-administration

Enhancements:

• Use mapbenefits as the administration platform
• Automate workflows

B. Participant Experience and Engagement

Best Practice: Drive engagement through tools and education.

What to Look For:

• Low participation

Enhancements:

• Webinars and education materials
• Real-time access
• Mobile access
• Modeling and planning tools

C. Timeliness and Accuracy of Transactions

Best Practice: Ensure timely processing.

What to Look For:

• Delays in distributions

Enhancements:

• Implement administrative processes and technology that support timely transaction processing
• Reduce lag between valuation, approval, and distribution processing
• Establish clear service standards for payouts, reallocations, and participant requests
• Regularly review transaction workflows to improve accuracy and turnaround time

D. Compliance and Regulatory Requirements

Best Practice: Ensure compliance.

What to Look For:

• Missing filings

Enhancements:

• Confirm Top Hat filing
• Ensure 409A compliance

E. Reporting and Accessibility

Best Practice: Provide on-demand access.

What to Look For:

• Participants who must request statements manually
• Limited or delayed access to account information
• Reporting that is not available on-demand
• Lack of user-friendly tools for participants and plan sponsors

Enhancements:

• Quarterly participant statements
• 24/7 access statements
• Real-time dashboards
• Access to Live Chat