As organizations compete for executive talent, nonqualified deferred compensation (NQDC) plans have become increasingly important. The key question is not whether to fund these obligations, but what funding strategy best supports the organization's long-term objectives.  

Many employers have traditionally used Corporate-Owned Life Insurance (COLI) to help informally finance future benefit obligations. But today's business environment looks very different than it did twenty years ago: 

• Finance leaders are placing greater emphasis on predictable financial planning 
• Treasury departments are evaluating liquidity and capital preservation more carefully 
• HR leaders are seeking solutions that reduce administrative burden 
• Executive benefit committees are looking for funding strategies that better align with enterprise risk management objectives

Key questions to lead with strategy 

Before recommending any funding vehicle, retirement professionals should begin by asking about an employer’s objectives, including: 

1. What is the organization's primary objective for informally funding the plan? 
2. Is the priority maximizing returns or managing future liabilities? 
3. How important is predictable accumulation? 
4. Does the employer need life insurance, or simply assets to offset future obligations? 
5. How much administrative complexity is acceptable? 
6. Will underwriting create challenges for covered executives? 
7. What concerns does Finance have regarding earnings or balance sheet management? 
8. How does the funding strategy align with the organization's broader treasury and capital management objectives?

A changing conversation 

If the answers to these questions reveal an employer primarily focused on managing future liabilities rather than obtaining life insurance benefits, funding agreements are another option to help offset future NQDC liabilities. Their mechanics work differently than COLI and can help address evolving business priorities.  

COLI combines asset accumulation with life insurance protection, making it well suited for employers seeking long-term tax-advantaged growth and death benefit proceeds. Funding agreements, by contrast, focus on predictable accumulation through a contractually-defined crediting rate backed by the issuing insurer's claims-paying ability. They offer several advantages, including: