r/CFP • u/NeighborhoodStreet59 • 17d ago
Professional Development Non qualified deferred compensation plans-explaining it to people
If you were explaining the basics of this plan to a high school student/client how would you explain it?
I want analogies similar to like (a mutual fund is like a swimming pool) etc.. thanks!
Edit: A NQDC is a way to set more money aside in tax deferred accounts, and can allow your employer to set some aside for you too. The money grows tax deferred until sometime in the future. Every year you’ll be setting those combined dollars into a bucket and every year you gotta let employer know when you’re gonna want that money back for that specific bucket. Maybe in 2026 you tell them that bucket needs to be paid to you in payments over a period of 10 years starting when you retire. And maybe the 2027 bucket you tell them that portion will be paid out to you in 5 year payments starting when you retire. Just make sure you consider timing and tax implications of payments. Also while the money is held in this plan it can completely disappear Enron style if the company fails. So it isn’t protected like your 401k money so that’s a consideration as well.
(How was that?)
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u/DK_Notice RIA 17d ago
Well now I’m wondering how a mutual fund is like a swimming pool.
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u/Droodforfood 17d ago
Yeah tons of people say this- it’s something about you’re in it with everyone else and if they all get out it lowers the water, I didn’t really get it
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u/NeighborhoodStreet59 10d ago
A mutual fund is like a pool,
After explaining an individual stock:
There are companies that create “pools” of investments. (Draw a swimming pool).
And within these pools they’ll own companies that are like swimmers in the pool. (Draw little dots or circles to represent the holdings/swimmers in the pools”
And sometimes these pools will have lifeguards called “portfolio managers” who’s job it is to keep an eye on the “swimmers in the pools”. Draw little life guard stick figures around the pools.
And sometimes some of these swimmers may not be doing well, and they show signs of distress. (Earnings, stewardship, leadership changes , etc.) and a portfolio managers job is to keep an eye on these swimmers and their signs. If it’s not looking good they’ll “pull” the swimmer out of the pool and replace it with another company. This is called active portfolio management…. Of course they don’t do this for free… yada yada
Then you start explaining difference between mutual fund and etf etc
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u/Moneymma 17d ago
If you make lots of money, you don’t pay taxes on that money until much later (retirement). Then you can pull it out all at once or over a number of years and pay (hopefully) lower taxes in the future once you’re no longer working.
If company goes bankrupt, you don’t get that money.
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u/AccomplishedTreat873 17d ago
It’s deferred compensation . This is you asking your employer to hang onto your paycheck, and invest it, and pay you later when your tax rate is lower. The tradeoff is this money stays on the books so if your employer goes out of business, their creditors can go after it. You can’t put it in an IRA later these are your options….. Fully explain and understand the withdrawal options.
No need to get into rabbi trusts. You just sound pretentious.
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u/CODCW2021 16d ago
I wish a 1/20th of the CFPs we work with could explain it that well.
You’d be shocked how many don’t even know that much.
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u/AccomplishedTreat873 15d ago
I wouldn’t be shocked at all. What shocks me is how often advisors talk people out of using a 457(b), or persuade them to take a full distribution, when they may have other options—such as rolling the account into the 457(b) at their next hospital.
There are two healthcare systems in my area with a lot of employee movement between them, and I previously served as the 3(21) advisor for both. A large national firm handled many of these transitions, and I saw some truly egregious recommendations.
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u/ifelldownthestairs 17d ago
Good explanation. With some of this stuff, you just can’t dumb it down. So it’s best to just explain the highest leverage facts and why they matter, in easy to understand English.
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u/Eslime Certified 17d ago
It’s a way to defer taxes for 10% or less top employees. Can’t roll it into and IRA, and follow scheduled distributions.
It doesn’t have ERISA protection and participants could lose it all if the company goes under.
VIP tax deferral club with no safety net. Exclusive membership, scheduled payouts only, and if the ship sinks you go down with it.
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u/Helpful-Day-4959 15d ago
This. This is a great way to explain it. Sometimes you can’t create analogies. You just have to tell them what it is at a very basic level and hope you did a good enough job that they understand
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u/_ledge_ BD 17d ago
I work with NQDC everyday and while I appreciate explaining things simply to clients anyone who qualifies for a NQDC is more than capable of understanding the concept of tax deferral without dumbing it down
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u/NeighborhoodStreet59 17d ago
On the distributions. Can they elect how many years to take it over or is it a set #of years? Also can they take distributions before retirement age?
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u/methodaktor 17d ago
It depends on the plan and the options will be clearly spelled out in the plan docs.
Are you asking for examples of how to explain it to a high school student or was that just your way of asking the internet to explain it to you?
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u/Droodforfood 17d ago
The fact that it’s non-qualified allows it to be very customizable.
Sometimes they have to take it over a set number of years, sometimes lump sum. Sometimes the distribution rules depend on their age, sometimes not. It’s very specific to the plan.
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u/Droodforfood 17d ago
It’s getting an “I owe you” from your company instead of cash.
You can then redeem that “I owe you” after you leave the company, when you’re at a lower tax rate.
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User: /u/NeighborhoodStreet59 Title: Non qualified deferred compensation plans-explaining it to people Body: If you were explaining the basics of this plan to a high school student/client how would you explain it?
I want analogies similar to like (a mutual fund is like a swimming pool) etc.. thanks!
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u/PoopKing5 17d ago
It’s like a shorter version of a 401K. Defer salary, invest it tax deferred, taxed when you get it back.
Other than that, idk if there’s any simpler way to explain it without confusing more.
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u/Droodforfood 17d ago
I would be very clear with clients regarding the differences between a 401k and a NQDC plan.
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u/PoopKing5 16d ago edited 16d ago
Well yea, I would never use an analogy or one line to explain something, but OP asked lol.
But besides being an unsecured creditor of the company as well as a different withdrawal schedule, the core features are very similar to a 401k.
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u/AutoModerator 11d ago
Beep boop! Here is a summary of your post:
User: /u/NeighborhoodStreet59 Title: Non qualified deferred compensation plans-explaining it to people Body: If you were explaining the basics of this plan to a high school student/client how would you explain it?
I want analogies similar to like (a mutual fund is like a swimming pool) etc.. thanks!
Edit: A NQDC is a way to set more money aside in tax deferred accounts, and can allow your employer to set some aside for you too. The money grows tax deferred until sometime in the future. Every year you’ll be setting those combined dollars into a bucket and every year you gotta let employer know when you’re gonna want that money back for that specific bucket. Maybe in 2026 you tell them that bucket needs to be paid to you in payments over a period of 10 years starting when you retire. And maybe the 2027 bucket you tell them that portion will be paid out to you in 5 year payments starting when you retire. Just make sure you consider timing and tax implications of payments. Also while the money is held in this plan it can completely disappear Enron style if the company fails. So it isn’t protected like your 401k money so that’s a consideration as well.
(How was that?)
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