With the typical qualified 401k plan, the plan's assets equal its liabilities. Funding is really not a major concern.
In contrast, funding is a major concern for the sponsors of nonqualified deferral plans. Plan assets and liabilities must be kept separate in order for the plan participants' deferrals to remain tax-deferred. Deferrals and their investment return under a nonqualified plan only drive the plan's benefits – which are a corporate liability. Although a plan sponsor could elect simply to pay the benefits when and as they come due ("pay as you go"), given the substantial amounts of benefits these plans can generate, most sponsors prefer to build up a pool of assets. This helps to reassure plan participants that the benefit can be funded, reduces the risk of disruption to the plan sponsor's cash flow and helps to reduce any negative impact of plan liabilities on a sponsor's balance sheet.
Whether and how a corporation chooses to build up a reserve of its own assets will depend on many factors, including the anticipated life of the plan, the demographics of the participant population, the plan sponsor's tax circumstances and the potential impact of plan liabilities on the sponsor's financial condition. Options include life insurance, mutual funds, employer stock and other securities.
With Deferral.com, creative plan designs can be supported with a variety of funding solutions, including mixes of corporate owned life insurance, aggregate funding and mutual funds, to address such problems as uninsurable plan participants and participants who may be too close to a distribution event to warrant the use of life insurance as a funding vehicle. Sophisticated nonqualified plan designs require sophisticated administrative tools. Deferral.com brings these tools to your browser, anywhere, anytime, with a simple Internet connection.