This year, the IRS raised the limit on annual compensation deferrals to 401(k) plans a bit, from a $17,500 cap to $18,000. Pre-retirees, those age 50 and over, have the benefit of an extra $6,000, the so-called catch-up deferral.

Younger executives and higher-compensated employees likely are going to need that catch-up allowance one day if they plan to replace 85 percent of their income in retirement, a rate often recommended by retirement advocates.

The quick math shows that a higher-compensated employee earning $225,000 who contributes the limit of $18,000 to a qualified 401(k) plan would be deferring 8 percent of his or her income.

While not a desperately low rate, it is below the 10 percent that many retirement advocates recommend. Others insist deferrals of up to 15 percent of salary are necessary to transition a workplace lifestyle into retirement.

What about the 401(k) deferral cap for a person making $500,000? While that’s an enviable level of compensation for most, an employee or principal of a business making that much would be restricted to deferring less than 4 percent of their salary into the qualified defined-contribution plan.

A long-standing and proven solution exists for that type of retirement-gap risk among higher earners. Nonqualified deferred compensation plans, or NQDCs, have been a staple retirement savings strategy for executives at big companies for some time.

But questions remain as to whether or not NQDCs, which allow some participants to save more than they ever could under a qualified 401(k) plan, are being adequately utilized to address the savings needs of higher-compensated managers and employees in larger, and even smaller companies.

Talented workers in the technology, financial, legal and medical sectors often command salaries approaching $200,000 a couple of years out of school, long before they are ever considered executives, or even middle management.

The growing prevalence of those types of highly compensated employees occurs in firms much smaller than publicly traded companies. A partner in a profitable boutique Midwestern law firm or the leading salesperson at a commercial insurance agency can commonly command that level of compensation.

For the uninitiated, NQDC plans have considerably fewer limitations on the amount of income that can be deferred into a tax-advantaged savings strategy. Some NQDC plans can be designed to have no restrictions.

Nonqualified plans can also be designed to accommodate in-service distributions, or payouts to participants before retirement age, that are not penalized the way that early withdrawals from 401(k) accounts are.

That latter characteristic makes a NQDC potentially a more holistic savings plan, proponents of the strategy argue, one that can distribute resources for costs outside of retirement, such as a child’s college education.

According to the IRS, NQDCs fall into four types of plans. A salary reduction arrangement is a simple deduction of salary, while bonus deferral plans enable participants to defer bonuses. So-called top hat plans, or supplemental executive retirement plans, are maintained for executive management, or the highest compensated members of an organization. And excess benefit plans provide benefits to employees whose deferrals are limited under a qualified defined-contribution plan.

Data on how widely adopted the plans are or where they may be underutilized are not easy to come by.

Last month, the Principal Financial Group released a study of both sponsor and participant trends based on a survey of NQDCs the company administers.

Almost all of the more than 200 sponsors surveyed said they use the plans to facilitate savings beyond the limits in qualified 401(k) plans. But 83 percent also said they use the augmented savings vehicles to retain valued employees, and 78 percent said they use them to recruit the best talent.

The survey showed that 61 percent of sponsors of NQDC plans contribute to the plans as well.

Principal’s survey of participants in NQDC plans also showed the option offered more than just an improved strategy for higher earners’ reaching retirement goals: 67 percent said the featured benefit was a deciding factor in whether or not to take a new job, and 55 percent said it was a factor in determining whether to stay with their current employer.

Macroeconomists often suggest that there’s a concern about a shrinking talent pool among the country’s most competitive industries. In Silicon Valley, for instance, the best developer talent is said to be at a premium.

If those assessments are accurate, it could mean a further differentiation of income at the higher end of the country’s earning scale.

That trend is likely to continue to drive the value proposition of nonqualified deferred compensation plans, not only as a tool to get the best-paid workers ready for retirement, but as a way for sponsors to make sure they can attract and retain such workers.

Instant Insights /

Sponsors using NQDC plans for more than retirement readiness

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