Nonqualified Deferred Compensation (NQDC) plans are funded to create an asset to offset emerging liabilities. Funding NQDC plans can shift the burden of funding to current management and neutralize shareholders to the financial impact of emerging liabilities. It also provides a level of scrutiny that is close as possible to the security level available to qualified plan participants.
There are many important factors to consider when choosing an appropriate funding device, including the investments after tax yields and how well it tracks plan liabilities. Because of these factors, the most common vehicles used to fund NQDC plans are mutual funds and COLI.