Prudential/PLANSPONSOR

Prudential/PLANSPONSOR PRUDENTIAL/PLANSPONSOR - 2017 EXECUTIVE BENEFIT SURVEY 2017 EXECUTIVE BENEFIT SURVEY Summary of Results

INTRODUCTION In 2017, Prudential and PLANSPONSOR magazine co-sponsored our 11th annual executive benefits survey. In large part, the questions focused on nonqualified deferred compensation plans (NQDCPs), and over the years we have collected volumes of data that reflect current industry trends what is prevalent, what is changing and how effectively these plans are meeting the needs of sponsoring companies and the employees who participate in them. As we reflect on the last number of years, which saw plan sponsors and participants address market uncertainty and unpredictability following the Regardless of the financial markets, NQDCPs remain a economic downturn of 2008 and 2009, one observation is clear: regardless valuable benefit of the financial markets, NQDCPs remain a valuable benefit that provide participants a flexible opportunity for meeting their near- and long-term financial goals and helping create retirement income above and beyond what qualified plans and Social Security can offer. For plan sponsors, they recognize the important role nonqualified plan benefits can play in aligning executives interests with business objectives. In fact, just over 80% of survey respondents in 2017 ranked their NQDCP "effective" to "extremely effective" in accomplishing its main purposes of restoring deferral opportunities limited by qualified plan restrictions and providing a vehicle for meeting retirement income goals. New to this year s report, here s a look at other nonqualified plan key themes from the past decade: NQDCPs remain the most common executive benefit, and most years were offered by more than 90% of responding companies. Larger companies (those with annual revenues in excess of $1 billion) skew the overall statistic, as they consistently score in the high 90% range. Education and communication tops what plan sponsors think is most important to potential NQDCP plan participants in making the decision whether to participate, and in-person, one-on-one meetings are far and away what our survey respondents believe is the most effective method or manner of communicating with eligible executives about their plans. Plan participation rates have remained relatively flat over the last five years ranging from 43%-47% following the economic downturn, but have averaged more than nine percentage points higher in plans that offer a company match. The perceived effectiveness of NQDCPs continues to climb higher each year, with 2017 survey responses maintaining that over 80% of plan sponsors believe that their NQDCPs were effective or extremely effective (meaning that they assigned a ranking of a minimum 7 out of 10, or higher). The perceived effectiveness of NQDCPs continues to climb higher each year An average of 44% of responding companies offered a company match, with the most common types including following the 401(k) match formula for compensation above IRS annual limits, replacing a lost 401(k) match, or calculating according to a fixed percentage. Page 1

INTRODUCTION Market-based deemed investments have consistently been the most prevalent option for fund menus, offered on average by more than 80% of respondents. Informal funding continues to be a popular strategy for addressing NQDCP benefit obligations, and its prevalence has held steady over the years at an average of 58% of respondents choosing this approach. Informal funding continues to be a popular strategy for addressing NQDCP benefit obligations The prevalence of COLI funding bounced back in 2017 to 55%, and its usage has fluctuated between its most recent high and a low of 28% in 2006. And while the informal funding of NQDCPs with mutual funds outpaced COLI from 2006-2011 by an average of 8 percentage points, 2012 marked the tipping point when COLI took the lead as the financing vehicle of choice. Since then, mutual funds have ranked lower than COLI by anywhere from 2 to 12 percentage points; however, the gap was most significant this year, with utilization of mutual funds by 35% of survey respondents. Plan sponsors have consistently ranked quality of service as the most important criteria when selecting a nonqualified plan provider. Consultative in NQDCP/409A and online user experience round out the top three year after year. Page 2

NONQUALIFIED EXECUTIVE BENEFITS LANDSCAPE 85% offer NQDCPs 47% participation rate 47% 60% Provide company match Participation rates were higher for plans offering company match WHY OFFER NQDCP? 78% as a retirement savings vehicle 72% to attract and retain executive talent 71% to restore deferral opportunity limited by qualified plan restrictions Investment Options Menu 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 11. 12. 58% informally fund their NQDCP HOW? 1. COLI 55% 2. Taxable securities 35% MOST IMPORTANT ATTRIBUTE FOR NQDCP PROVIDER Quality 1 of service 2 3 team 1. Quality Online of user service team Consultative 2. Online experience user experience in NQDCP 3. Consultative in NQDCP and and 409A 409A 50% offer managed or model portfolios As in previous years, more than half of respondents favored providing participants between 11 and 20 choices. RESPONDENT DEMOGRAPHICS/RESEARCH OVERVIEW The number of usable responses to the Prudential-PLANSPONSOR survey increased to 274 respondents in 2017 from 255 in 2015. As in most prior years, there were more responses from large (revenues greater than $1 billion) vs. smaller companies, with 57% and 43% answering, respectively. Slightly more publicly traded companies (52%) responded than private firms (48%). Overall, respondents continue to represent a wide range of industries, and most are tax-paying C-Corps. Page 3

PREVALENCE OF NONQUALIFIED BENEFITS With large, publicly traded companies reclaiming the edge in the respondent pool this year, the overall rate of companies offering NQDCPs increased to 85.0% in 2017 from a survey low of 77.2% in 2015. Year over year, nearly all of large company respondents report they sponsor NQDCPs, and 2017 was no exception, with 96.8% offering this valuable benefit, as compared to just over two-thirds (68.9%) of smaller companies. The trend is similar with publicly traded vs. private companies, offered by 95.1% and 73.5%, respectively. Of these nonqualified plans, voluntary DCPs, 401(k) Mirror or Restoration plans and DC/DB SERPs were the most popular. 66.0% Voluntary DCP 28.6% Defined Contribution Supplemental Executive Retirement Plan (DC SERP) 22.3% 20.9% 401(k) Mirror (also known as 401(k) Restoration) Defined Benefit Supplemental Executive Retirement (DB SERP) 8.3% Section 457(b) or 457(f) Ultimately, employers continue to regard NQDCPs as a highly valued recruitment and retention tool that provides their top talent with a powerful performance incentive and financial benefit that enables them to reach retirement and other financial planning goals. And while 80.0% of responding companies don t offer any other type of executive benefit, those that do favor restricted stock units, stock options and incentive and other programs. Restricted stock units and stock options held steady overall in popularity with survey respondents as compared to 2015, indicating companies continuing to favor tying executive compensation to company performance. Restricted Stock Units Stock Options 57.6% 57.7% 56.3% 55.6% 50% 48.1% 45.8% 44.4% 2013 2014 2015 2017 2013 2014 2015 2017 Page 4

NQDCP LANDSCAPE CRITERIA FOR ELIGIBILITY Consistent with prior years, there were no predominant criteria for defining eligibility; however, for 2017, job grade and total compensation tied for most prevalent. Job Grade 21.6% Total Comp 21.6% 38.0% of all respondents cited a minimum base salary requirement between $115,000 and $124,999, and a notable 25.3% required a minimum of $200,000. A solid 25.3% set their minimums between $115,000 and $124,999. 38.0% 28.9% 25.3% 8.9% PAY TO ORDER OF: 00000 Minimum Base Salary < $125K 00/ 100 PAY TO ORDER OF: Minimum Base Salary $125K $175K 00000 00/ 100 PAY TO ORDER OF: 00000 Minimum Base Salary $175K $200K 00/ 100 PAY TO ORDER OF: 00000 Minimum Base Salary $200K + 00/ 100 Page 5

NQDCP LANDSCAPE IMPROVEMENTS TO NQDCP Although 87% of respondents don t plan on making any changes to their NQDCPs, of the few that are, the majority cited additions or enhancements to: Plan education & communication programs 52.6% PARTICIPATION Investment crediting options 42.1% Once again, average participation rates were effectively flat, reflecting little change over the last few years. Participation rates were notably higher in plans offering matching contributions. Plans NOT offering a company match had a lower participation rate at 38%. 60% 37% Distribution options 36.8% 47% A notable 21% of respondents plan to either offer or enhance the company match a key incentive for plan participation, as noted in year-over-year survey results or add deferral sources, which would provide plan participants with additional opportunities to meet financial planning goals and reduce their taxable income. As in 2015, whether a plan was informally funded (46.7%) or not (48.1%) made little impact on participation rates. And what do plan sponsors think is most important to eligible employees in making the decision whether or not to participate? Education/communication tops the rankings once again, followed by limitations on or lack of other pre-tax deferral opportunities and confidence in company performance. Education/communication about the NQDCP 7.68 Limitations on or lack of other pre-tax deferral opportunities 7.55 Confidence in company performance 7.30 General plan flexibility (e.g., distribution and deferral source options 6.81 Attractiveness/range of investment options 6.70 Company match 6.20 Use of Rabbi Trust to enhance participant benefit security 5.22 Offered with professional financial advisory benefits 4.96 Informal funding of plan liability 4.92 Page 6

NQDCP DESIGN OPTIONS DEFERRAL SOURCES Base salary (96.5%) and annual bonuses (90.0%) were deferral sources offered by nearly all survey respondents. Less common but otherwise notable compensation allowed in an NQDCP were commissions as well as short- and long-term incentives. 96.5% 90.0% Sources of Deferrable Compensation Allowed in NQDCP 24.9% 20.7% 20.1% 5.9% 5.3% 4.1% Base salary Annual bonus Commissions Short-term incentives Long-term incentives Company special/ad hoc contributions Restricted stock/rsus Other Board of Directors (BOD) Plans Overall, 21.9% of respondents offer a separate nonqualified plan for their Board of Directors. Large companies were the most likely to sponsor a BOD plan (25.7%), as were publicly traded (24.0%) and tax-paying organizations (21.8%). Meeting fees were the most prominent type of deferrable compensation allowed in the BOD plan (75.7%), followed closely by cash retainers (67.6%). Equity awards (restricted stock/units, deferred stock units, grants, etc.) were in a distant third place as deferral sources in BOD plans, offered by 27.0% of respondents, down significantly from 2015's 45.7%. Types of Deferrable Compensation Allowed in the Board of Directors Plan 75.7% 67.6% 27.0% Meeting fees Cash retainers Equity awards Page 7

NQDCP DESIGN OPTIONS COMPANY MATCHING CONTRIBUTIONS Company match prevalence remained flat overall, and as in prior years, was more commonly offered at larger organizations (49.6%) and public companies (64.0%). 46.8% offer a company match Following the 401(k) match formula for compensation above IRS annual limits was once again the most prevalent type of company match among survey respondents, and a percent deferral match and one to replace a lost 401(k) match were a close second and third, respectively. Type of Matching Contribution 45.6% 40.5% 36.7% 20.3% 5.1% 1.3% Supplements 401(k) match (follows 401(k) match formula for compensation above IRS annual limits) Percent deferral match (independent of qualified plans) Replaces lost 401(k) match (due to participation in nonqualified DCP) Supplements profit sharing contribution (follows profit sharing formula for compensation above IRS annual limits) Tied to company performance (independent of qualified plans) Flat dollar amount (independent of qualified plans) What are the most common vesting requirements applied to the match? Immediate (43.0%) Same as 401(k) (39.2%) Years of service (22.8%) Page 8

NQDCP DESIGN OPTIONS PARTICIPANT INVESTMENT CREDITING OPTIONS Market-based investment crediting options continue to be the most prevalent design for NQDCP fund menus, ticking up a few percentage points from 79.2% in 2015. Fixed rates have remained relatively flat over the last number of years, with Moody s, Treasuries, S&P and "other" indexes topping the rankings of these stable alternatives. Survey results show year after year that the majority of respondents (77.5%) prefer limiting their investment crediting options to 20 or fewer a moderate amount that can typically cover all major asset classes for diversification purposes while helping participants avoid choice overload. Offering between 11 and 20 choices continues to be the most popular range, 84.2% Market-Based 17% Moody s with half favoring this amount for the deemed investment menu. 7.1% Stock 15.8% Fixed Rate 20% Treasuries 6.6% Other 23% S&P 27% Prime Rate Half of our responding plan sponsors include pre-mixed portfolios as part of their plan s deemed investment menus. Of those that offer these investment crediting options, the majority prefer managed portfolios (60%) to model portfolios (40%). These portfolios, designed for a range of risk profiles and allocation strategies, are a diverse mix of automatically rebalanced deemed investments either built from the standard menu offered ( model ) or professionally constructed and monitored and may include other deemed investments not otherwise available inside the plan. Either way, these portfolios typically ranging from conservative to aggressive offer participants a way of simplifying their allocation decisions by aligning with their tolerance for risk and particular time horizon. Investment Options Menu 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Page 9

NQDCP DESIGN OPTIONS BENEFIT DISTRIBUTIONS & EVENTS Flexible options for scheduling and receiving plan payments are a key benefit and differentiator of nonqualified plans, and the vast majority of plan sponsors offer their eligible participants a range of distribution election choices that are permitted under 409A. As in previous years, Separation from Service was the most common distribution election offered by survey respondents (96.4%), followed by Death (80.5%) and Scheduled In-Service (65.6%). 96.4% 80.5% Distribution Events 65.6% 53.3% 50.8% 44.6% 22.1% 16.9% Upon separation from service Upon death In-service/scheduled distribution at specified date Upon disability Upon qualified hardship Upon change of control At a specified number of years after deferred At specific age The vast majority of respondents offer both lump sum and installment options (83.6%), a figure that has remained consistent year after year. Distribution Payment Options 83.6% 6.1% 10.3% Installment Lump Sum Combination Page 10

NQDCP FUNDING AND SECURITY INFORMAL FUNDING The number of respondents setting aside assets to informally fund NQDCP liabilities held steady at 2015 levels at 57.5%. As has been the case for many years, companies primary reason for informally funding their NQDCPs is to manage their asset-to-liability ratios. The percentage choosing COLI as an informal funding vehicle continues to occupy the leading position with 55.3% rebounding from 47.3% in 2015. Taxable securities declined 10 percentage points from 45.1% in 2015 to 35.1% in 2017 and cash stayed in steady at third place with 27.2%. WHY? 1. Manage asset/liability ratio 2. Mitigate P&L impact 3. Improve employee benefit security HOW DETERMINED? 1. Based on pre-tax liabilities = 86.2% 2. Based on after-tax liabilities = 13.8% HOW? 1. COLI 55.3% 2. Taxable securities 35.1% 3. Cash 27.2% 57.5% of companies informally fund their NQDCP 46.4% have a security vehicle for their NQDCP 96.1% of security vehicles utilized are Rabbi Trusts WHY DON T COMPANIES INFORMALLY FUND? Corporate philosophy of pay as you go (43.4%) Don t know (31.3%) Plan liability was so small as to be immaterial (15.7%) As was the case in 2015, nearly a third of respondents don't know why their companies don't informally fund their plan liabilities. And while the real reasons could be that the company otherwise does employ a "pay as you go" approach or has a small plan liability, it bears repeating that unfunded plans can cause volatility to the income statement, as well as a negative drag on earnings. When companies set aside assets for future distribution with the intention of having available cash to pay benefits as they come due, they can help secure the incentive value of the plan to attract and retain key executives, and preserve the value of the benefit as a financial planning tool. Page 11

NQDCP RECORDKEEPING RECORDKEEPING AND SERVICE PROVIDERS Third-party recordkeeping continues to be the predominant trend, utilized exclusively by 74% of companies and entirely or in part by 94% of companies. The percentage of large, publicly traded and tax-paying companies outsourcing their NQDCP administrative tasks is largely the same, and the consistently high rate year-over-year of engaging outside providers may 74% of companies rely exclusively on a third-party recordkeeper be due to the need for specific and comprehensive nonqualified capabilities from a technological, consultative and legislative/regulatory perspective that could be too challenging to provide in-house. Online user experience Quality of service team Consultative in NQDCP/ 409A Quality of service team topped the rankings once again as the main deciding factor companies use for choosing a recordkeeper. BUNDLING BENEFITS For the first time, the survey asked whether plan sponsors used the same recordkeeper for their NQDCP as their qualified plan(s) to get a sense for the prevalence of bundling benefits. More than half (55.3%) of survey respondents bundled plan services with the same recordkeeper. Whether multiple retirement benefits providers are employed by companies to recordkeep their various plans may depend on the complexity of their offerings to employees, but the instances of one vs. multiple provider situations does not appear to vary based on company size, whether they are publicly traded or a tax payer. For NQDCPs that mirror the 401(k) and are simpler in design, having the 401(k) recordkeeper handle both plans may make sense from the perspective of dealing with a single vendor relationship, a single website and cost containment. 55% use the same recordkeeper for NQDCPs and qualified plans Page 12

NQDCP RECORDKEEPING For NQDCPs that require more system flexibility to accommodate complex features (such as those for multiple distribution options, pre- vs. post-409a rules or different vesting schedules) or have extensive or ad hoc reporting needs, a provider with robust technology, consultative expertise and a dedicated service team would be the ideal choice. If the 401(k) administrator doesn t already have industryleading capabilities in NQDCP recordkeeping, a separate specialist may be engaged. Page 13

Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or its affiliates. PRIAC is a Prudential Financial company. 2017 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide. 0301138-00002-00 NQFLRE35 11/2017