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Deferred Compensation Savings Plan
Old 05-01-2014, 09:34 AM   #1
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Deferred Compensation Savings Plan

I've been offered the opportunity to participate in a deferred comp plan. In a nutshell, the rules of the plan allow up to 50% of salary to be deferred and invested in the plan. Distribution happens upon retirement (defined as 60), disability, job separation, or death.

In reviewing the documents and researching these online I understand that this is basically a "promise" of payment and isn't vested in any way so it does depend on the health of the company, which I would consider to be about average (long-time company, currently some profitability issues).

The tax benefits are attractive since our income with drop significantly in retirement, but I know there is no free lunch. Has anyone out there participated in one of these? If so, did you experience any negative outcomes, surprises, etc?

Thanks!
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Old 05-01-2014, 12:53 PM   #2
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I participate in a deferred comp plan where I w**k. The pre-tax money goes into a fund and I can control how it is invested.

When you retire or quit, you can roll everything into a tIRA. Very secure. Not tied to company performance.

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Old 05-01-2014, 01:53 PM   #3
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My DW particpates in one as well. Even though the plan docs say it's a "promise of payment" her employer actually deposits the money into an account where she can make the investment decisions. So it seems that the payment risk is very small.

We're using this to reduce our tax burden short term while socking away $$ in the sprint to the finish. We think it's a wonderful opportunity and we're very grateful to the employer.
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Old 05-01-2014, 02:53 PM   #4
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Thanks for the info on your experiences. My HR rep did say that if the company went under that I'd be considered a creditor and the dollars could be at risk. I consider that a low probability in the time I have remaining.

Seems like a great deal...
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Old 05-01-2014, 03:55 PM   #5
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I participate in a deferred comp plan (457). I could have taken the funds out or rolled over when I left work but chose to leave them in as it has a few options I like that aren't available to me elsewhere: Columbia Acorn Z, Vanguard Total Bond Institutional Plus, and Invesco Stable Return.

(not recommendations - just my choice!)
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Old 05-01-2014, 04:07 PM   #6
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It can lower your company's 401k match. YMMV based on the matching percentage.
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Old 05-02-2014, 01:40 PM   #7
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It can lower your company's 401k match. YMMV based on the matching percentage.
Thanks. I didn't think about that.
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Old 05-02-2014, 01:42 PM   #8
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Quote:
Originally Posted by steelyman View Post
I participate in a deferred comp plan (457). I could have taken the funds out or rolled over when I left work but chose to leave them in as it has a few options I like that aren't available to me elsewhere: Columbia Acorn Z, Vanguard Total Bond Institutional Plus, and Invesco Stable Return.

(not recommendations - just my choice!)
We have a similar situation in my wife's 401k. We'll likely not roll that into an IRA because it gives me access to a two closed funds I really like.

It will be interesting to see what investment options are offered. I haven't seen the list yet.
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Old 05-02-2014, 03:16 PM   #9
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Sounds like an unqualified deferred comp plan where the deferred comp is a general obligation of the company. I'm not keen on such plans only due to the credit risk, but if the tax savings are significant it might be worth considering.
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Old 05-02-2014, 04:16 PM   #10
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I participated in one for several years before ER. We did not have the option of rolling it into any type of other deferred plan (401k, IRA)

If you separate before 'retirement' it was a lump sum payout which could drive you into a higher tax bracket than you were in before the deferral.
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Old 05-02-2014, 04:21 PM   #11
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That's what I was thinking also. It would make no sense that they would allow you to roll it into an IRA since it would effectively be violating IRA contribution limits. Same with 401k.
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Old 05-02-2014, 04:22 PM   #12
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I participated in one for several years before ER. We did not have the option of rolling it into any type of other deferred plan (401k, IRA)

If you separate before 'retirement' it was a lump sum payout which could drive you into a higher tax bracket than you were in before the deferral.
Companies have different rules on payout. My megacorp will pay it out a fixed amount quarterly. The only exception is that it will be a lump sum payout if the total amount is less than $10k. Op's mileage may vary on this.
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Old 05-02-2014, 04:40 PM   #13
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As mentioned, this can't be rolled to a 401k/IRA. It will be paid out and treated as compensation when I leave.

Under $100K is paid out in a lump sum. If over $100K it's paid in installments. The savings is compelling given our current and future tax situations but, as pb4uski pointed out, it is a general obligation and 100% at risk. That risk is probably my biggest concern at this point since 2 VP's just got walked out (after I started this thread) because of the earnings outlook. Oh well, so much for a stable family business.

I'll likely only be around for 12-18 months so I'm trying to judge the risk/reward on this one. I guess it may come down to a gut feel on the business health over the next two years. I've always said that every financial question could be answered with a spreadsheet. I might have found the exception.

Thanks everybody for your input.
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Old 05-02-2014, 07:54 PM   #14
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If you're only talking a couple years then the credit risk is probably not very high assuming that the company's short term debt (if it has some) has reasonable credit ratings.
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Old 05-03-2014, 09:43 AM   #15
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I participate in a deferred comp plan and have thought this through A LOT. Our company pays a high fixed interest rate on the deferred money.

It's the best thing ever for wealth creation, but you have to watch your asset allocation as this is definitely at-risk money. You are an unsecured debt holder of the company. Should catastrophe strike and your company go bankrupt you are in-line behind every bond holder and should be paid out alongside unpaid vendors.

In that regard, deferred comp is a private, illiquid junk bond issued by your company.

If you come home and say to your spouse "I'm putting 50% of my income into a deferred comp plan that let's me duck the highest tax bracket," you sound like a genius.

If you come home and say "I'm putting 50% of my income into a totally illiquid, unsecured bond of a single company," you sound like you've gone off your meds.

Like a bond, you have to look at the time to maturity, credit rating of the issuer and risk. But mostly keep and eye on asset allocation. It's easy to look up and suddenly have 20% of your assets in this debt instrument because all of the near term incentives are aligned to encourage maximum deferral.

When I do my AA, I score this like a bond and have adjusted the rest of my portfolio to account for this.

Feel free to ping me with any questions publicly or via private message.

Deferred comp rocks. Good luck.
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Old 05-03-2014, 10:09 AM   #16
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It can lower your company's 401k match. YMMV based on the matching percentage.

Why can it lower match AFAIK, the two are completely separate... one does not affect the other....
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Old 05-03-2014, 10:29 AM   #17
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Why can it lower match AFAIK, the two are completely separate... one does not affect the other....
Our company matched 3% of our base/bonus so if I defer 50% my assumption is that the comp would go down and correspondingly, the match. The % wouldn't change, but the $'s would. One more factor to consider.
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Old 05-03-2014, 10:35 AM   #18
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Thanks krotoole. I just had that conversation with my wife and we discussed both the genius and loon scenarios. I agree that is a lot like a short-term junk bond... AA will be OK, but looking at this as part of the high-yield/junk slice is a good way to look at risk assessment.

I was just thinking that it would be funny to call the owner and ask "so, any plans to fold the company in the next two years"
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Old 05-03-2014, 10:39 AM   #19
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My HR rep did say that if the company went under that I'd be considered a creditor and the dollars could be at risk…. Seems like a great deal.
I wouldn't even consider making an unsecured loan to a family business (especially one currently facing "some profitability issues"), merely to save a bit on taxes.

Keep things simple and transparent, and don't be greedy. Take your regular pay, save as much as you can and invest it in a diversified portfolio of your choice and under your full control.
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Old 05-03-2014, 02:12 PM   #20
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I was just thinking that it would be funny to call the owner and ask "so, any plans to fold the company in the next two years"
That would be funny...unless they stutter when answering!

Would be good to sniff out, if possible, how much money other senior execs have in the plan. If the head honchos are well exposed, at least they have the same incentives you do. At our company, the execs have huge exposure, the company is very well run financially, and has a stellar credit rating so I feel pretty good about my investment. But its still a big part of my AA so I manage the time-to-maturity like a hawk. (We can defer for a set period of years.)
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