Is "Cache" Exchange Fund trustworthy? Seeking advice on a $1.5M concentrated position.

[William T]

Hi everyone,

I am preparing to retire in about six months. While my overall portfolio should support my family for the rest of my life, I am facing a major concentration risk: I hold roughly $1.5M in company stock from ESPP and RSU vestings.

If I sell it all at once, the capital gains tax hit will be massive. If I hold it, I am far too exposed to a single company right as I enter retirement. Because I don't yet meet the "Qualified Purchaser" threshold ($5M in investable assets), traditional legacy exchange funds like Eaton Vance are out of reach.

Gemini AI suggested a platform called Cache, which offers exchange funds for my condition. Their documentation states that all fund assets are securely held by BNY Mellon as the custodian, meaning Cache doesn't physically hold the shares. While that structural architecture sounds reliable, this is a life-changing amount of money for me, and I’ve never heard of this company before.

• Should I trust a newer fintech like Cache with this size of an asset?
• Are there other, better ways to mitigate the tax hit while diversifying out of a $1.5M concentrated position before I retire?

I would deeply appreciate any insights, experiences with Cache, or alternative strategy suggestions. Thanks!


Additional information.
I am 51 years old.
Own 2M ETFs. 1.1M concentrated stock. Will receive another 0.5M concentrated stock in few months.
620K USD in 401K
240K in Roth IRA
A house with no martgage.
3000 USD SSN income after 65 years old.

 

[RetiredHappy]

I don't know anything Cache or exchange funds. Can you not plan on liquidating the $1.5M in company stock over a period of 5 years to 10 years, depending on how profitable/safe the company is?

 

[Sunset]

You don't mention age, or other income.
Age come into play because if you are on Medicare, too high an income per year gets the IRMAA tax.

If you have little to no other income, then selling off over some years would eliminate the issue.

You could at the same time use options to protect yourself from a large drop. They cost money.
Put options give you the right to sell a stock at a predetermined price, providing insurance against a drop in value. If the stock falls below the strike price, you can exercise the option to sell at the higher price, limiting losses.

I would NOT trust a new fintech with this size of asset as they sometimes don't do what they say, especially as you are really only worried about the concentration, without knowing if the company will prosper instead of crash.
They can change the rules any time
Here is a story of people losing their money and others losing access to their money

Americans saved money in fintechs. When money went missing, FDIC was no where to be found

Tens of thousands of Americans saved money in fintechs that said their money was FDIC insured. When things went wrong, that wasn't exactly true.

www.usatoday.com

 

[William T]

Hi, @RetiredHappy,

Thanks for the suggestion. Spreading the sales out over 5 to 10 years is definitely a classic way to manage the tax hit.

My main concern is that because this is a tech company, the volatility is incredibly high. Five years from now, the stock could just as easily be worth 10x or 0.1x its current value. To me, the risk is a bit too high as a retiree.

 

[mrfeh]

Hi, @RetiredHappy,

Thanks for the suggestion. Spreading the sales out over 5 to 10 years is definitely a classic way to manage the tax hit.

My main concern is that because this is a tech company, the volatility is incredibly high. Five years from now, the stock could just as easily be worth 10x or 0.1x its current value. To me, the risk is a bit too high as a retiree.

Something in between all-at-once and 5-10 years?

Sell 25-33% first year and then reassess a year later?

 

[Slim11]

Other companies, probably all the big ones will offer exchange funds. I am not 100 perce t how they work, but I know you need about what you have over 1 million. I think they also vet the stock, so if everyone wants to get rid of say nividia, and your last, they may not accept you in. I am sure there are fees also. Call around and get some more info on it.

 

[Cassius King]

A managed collar option may be something to look into as well.

 

[ncbill]

Hi, @RetiredHappy,

Thanks for the suggestion. Spreading the sales out over 5 to 10 years is definitely a classic way to manage the tax hit.

My main concern is that because this is a tech company, the volatility is incredibly high. Five years from now, the stock could just as easily be worth 10x or 0.1x its current value. To me, the risk is a bit too high as a retiree.

I would ask this question over at Bogleheads as well.

 

[dunkelblau]

I'm in a similar boat, ESPP/RSU account was tiny when I retired in late 2022, but it has blown up over the past year due to the AI bubble. My brother mentioned Cache recently, but I think he was just digging around and has no personal experience with them. One question I'd have is how Cache gets around the Qualified Purchaser standard spelled out on page #9 footnote #6 here:
https://advisor.morganstanley.com/t.../field/h/ho/horizons-group/Exchange_Funds.pdf
and whether the difference in rules may affect the risk of an unexpected outcome. Since it appears you're very close to the QP standard, perhaps in light of footnote #8, ask for a review and see if they're willing?

Some of the features I disliked about exchange funds are the ~1.25% annual fee, the 7-year lockup, and being required to include something like 20% in illiquid real estate. Your invested assets outside this concentrated position are large, so a Section 351 ETF conversion may be a possibility, but it has a distribution requirement that would cover maybe just half of your ESPP/RSU position.

If you do sell a chunk of it, you may be able to partly mitigate the tax hit with a direct indexing or long/short hedge strategy. Your broker may have package deals to do this if you don't want to self-manage. Last month I sold a portion of my ESPP/RSU position and since I'm used to shotgunning large numbers of small positions, I'll tax loss harvest what I can by year end. I don't plan to do any short selling. Yesterday's 1040ES and 540ES payments were by far the biggest I've ever made.

 

[William T]

You don't mention age, or other income.
Age come into play because if you are on Medicare, too high an income per year gets the IRMAA tax.

If you have little to no other income, then selling off over some years would eliminate the issue.

You could at the same time use options to protect yourself from a large drop. They cost money.
Put options give you the right to sell a stock at a predetermined price, providing insurance against a drop in value. If the stock falls below the strike price, you can exercise the option to sell at the higher price, limiting losses.

Thanks @Sunset, that's a great idea. I never do Put options, but google say it is ranging from just a single day to up to 2.5 years. I have not done my home work. If I can have a 2.5 year Put options, I could sell those thocks in 3 tax years with no risk. I don't know how much this 2.5 years put options cost, but I am certainly willing to pay a reasonable amount of money to reduce my risk.

By the way, I added few information as you mentioned in my first post in this thread.

 

[William T]

A managed collar option may be something to look into as well.

@Cassius King, It is Cool. I deeply love this web site because there are so many knowledgable guys like you. AI said something below about managed collar option and this is exact the goal I am aimming.

The Good:​

• Sleep-at-Night Protection: You are completely insulated from a catastrophic tech sector crash right as you enter retirement.
• Tax Deferral: ...

The Catch:​

• FOMO (Capped Upside): If your tech company releases a revolutionary product and the stock triples, you miss out on all gains above your ceiling.

 

[pb4uski]

Have you talked to your brokerage firm about this? Protective puts or a collar come to mind to protect yourself against a sharp decline in the stock's value.

 

[dobig]

..................

The Catch:​

• FOMO (Capped Upside): If your tech company releases a revolutionary product and the stock triples, you miss out on all gains above your ceiling.

That sounds like a gambler's attitude when risk mitigation before retirement should be top of the list.

No way I'd be holding a concentrated position like this before pulling the plug. I'd keep a third if I very strongly believed in the company and the rest would be sold. Yeah you'll have to pay some LTCG tax but so what? You made a killing. As my old CPA use to tell me when I complained about taxes, "would you rather have made less so you paid less taxes?". It always made me shut up.

 

[William T]

That sounds like a gambler's attitude when risk mitigation before retirement should be top of the list.

No way I'd be holding a concentrated position like this before pulling the plug. I'd keep a third if I very strongly believed in the company and the rest would be sold. Yeah you'll have to pay some LTCG tax but so what? You made a killing. As my old CPA use to tell me when I complained about taxes, "would you rather have made less so you paid less taxes?". It always made me shut up.

I completely agree with your point—risk mitigation should absolutely be the top priority.

The real issue is current $1.1M position, as well as the upcoming $0.5M tranche, are entirely short-term capital gains. Selling them today means facing an immediate ~50% ordinary income tax hit (Federal + CA state). That massive tax is making me a gambler.

Right now, I am staring down four imperfect plans:

1. Bite the tax bullet: Sell 2/3 of the position immediately, accept the ~50% short-term tax hit on that portion, and safely diversify these 2/3.
2. The Exchange Fund route: Transition the shares into an exchange fund like Cache to achieve instant tax-deferred diversification. I am perfectly fine with the 7-year lockup, but I share the skepticism here about trusting a relatively young fintech platform with a life-changing amount of money.
3. The Options Hedge (Collar/Puts): Lock in a multi-year floor. But, my company restricts employees from put option, and that policy extends 3 to 6 months post-retirement. This means I would have to ride out the tech volatility completely unhedged for roughly a year.
4. Maybe I should retire soon and give up the next 0.5M purchase. The more I think about it, this might be a plan. Then, I could execute put option 6 months later. Allowing me to protect the $1.1M. I got badly burned by the tech crash back in 2000. Chasing that extra money might just be a dangerous form of greed.

 

[William T]

One question I'd have is how Cache gets around the Qualified Purchaser standard spelled out on page #9 footnote #6 here:
https://advisor.morganstanley.com/t.../field/h/ho/horizons-group/Exchange_Funds.pdf
and whether the difference in rules may affect the risk of an unexpected outcome. Since it appears you're very close to the QP standard, perhaps in light of footnote #8, ask for a review and see if they're willing?

@dunkelblau, thank you for digging into that PDF and pointing out those specific details.

It looks like a bit of a mixed signal—Page 9, Morgan Stanley may impose aqualification standard that is higher than those required tomeet SEC/state standards. But Page 9 Footnote 8 says eligibility is reviewed on a case-by-case basis and is subject change. It's a bit of a roller coaster.

Yes, you're absolutely right. I should ask them directly. It can't hurt to ask.

 

[copyright1997reloaded]

I completely agree with your point—risk mitigation should absolutely be the top priority.

The real issue is current $1.1M position, as well as the upcoming $0.5M tranche, are entirely short-term capital gains. Selling them today means facing an immediate ~50% ordinary income tax hit (Federal + CA state). That massive tax is making me a gambler.

Right now, I am staring down four imperfect plans:

The Options Hedge (Collar/Puts): Lock in a multi-year floor. But, my company restricts employees from put option, and that policy extends 3 to 6 months post-retirement. This means I would have to ride out the tech volatility completely unhedged for roughly a year.

Is your concentrated position in something where there are similar companies/ETFs/leveraged plays? If so, the put part of the collar might be constructed on one of those things?

 

[pb4uski]

....

1. The Options Hedge (Collar/Puts): Lock in a multi-year floor. But, my company restricts employees from put option, and that policy extends 3 to 6 months post-retirement. This means I would have to ride out the tech volatility completely unhedged for roughly a year.
2. Maybe I should retire soon and give up the next 0.5M purchase. The more I think about it, this might be a plan. Then, I could execute put option 6 months later. Allowing me to protect the $1.1M. I got badly burned by the tech crash back in 2000. Chasing that extra money might just be a dangerous form of greed.

A brokerage firm or options specialist might be able to provide advice... if you can't buy a put option on that specific employer ticker then perhaps there are other tickers that are highly correleated with your employer ticker that you can buy put options on that will provide some protection until you can buy put options on your ticker. Have any of your work colleagues found ways to hedge the risk?

 

[dobig]

I completely agree with your point—risk mitigation should absolutely be the top priority.

The real issue is current $1.1M position, as well as the upcoming $0.5M tranche, are entirely short-term capital gains. Selling them today means facing an immediate ~50% ordinary income tax hit (Federal + CA state). That massive tax is making me a gambler.

Right now, I am staring down four imperfect plans:

1. Bite the tax bullet: Sell 2/3 of the position immediately, accept the ~50% short-term tax hit on that portion, and safely diversify these 2/3.
2. The Exchange Fund route: Transition the shares into an exchange fund like Cache to achieve instant tax-deferred diversification. I am perfectly fine with the 7-year lockup, but I share the skepticism here about trusting a relatively young fintech platform with a life-changing amount of money.
3. The Options Hedge (Collar/Puts): Lock in a multi-year floor. But, my company restricts employees from put option, and that policy extends 3 to 6 months post-retirement. This means I would have to ride out the tech volatility completely unhedged for roughly a year.
4. Maybe I should retire soon and give up the next 0.5M purchase. The more I think about it, this might be a plan. Then, I could execute put option 6 months later. Allowing me to protect the $1.1M. I got badly burned by the tech crash back in 2000. Chasing that extra money might just be a dangerous form of greed.

Is the entire position vested within the past year? I ask because if some of those vested RSU's were from the previous year you should be able to sell just those shares and pay the LTCG tax rate. I'm also surpised your employer isn't withholding taxes on vested RSU's. You might want to double check that. Simply look at your grant award and vesting schedule and compare what you were granted to what you actually received.

My wife worked at 3 different companies where she received RSU's. If she was granted 200, she received around 150+/- when they vested and it was the same at all three companies. There was no option to receive the full grant amount and pay taxes yourself.

 

[William T]

Is your concentrated position in something where there are similar companies/ETFs/leveraged plays? If so, the put part of the collar might be constructed on one of those things?

@copyright1997reloaded, My ETF is highly diversified 60% US large and small cap. 40% ExUS large and small cap.

 

[William T]

there are other tickers that are highly correleated with your employer ticker that you can buy put options on that will provide some protection

@pb4uski
Wow. This is the coolest idea I heard. I can not think about this by myself. Thanks, and yes, there are highly correleated ticker in the market.

 

[William T]

Is the entire position vested within the past year? I ask because if some of those vested RSU's were from the previous year you should be able to sell just those shares and pay the LTCG tax rate. I'm also surpised your employer isn't withholding taxes on vested RSU's. You might want to double check that. Simply look at your grant award and vesting schedule and compare what you were granted to what you actually received.

My wife worked at 3 different companies where she received RSU's. If she was granted 200, she received around 150+/- when they vested and it was the same at all three companies. There was no option to receive the full grant amount and pay taxes yourself.

@dobig
Thanks for asking. Yes, my employer withholds taxes on vested RSU. Actually I can only receive ~2/3 of RSU.

Just saying. If I hold them 1 year + 1 day, in tax's point of view, I am selling them evenly in 2 years. AI said my LTCG tax rate is 24.7% in this case. If I sell them evenly in 4 years, my LTCG tax rate is 19.5%. Holding 2 more years could only earn 5.2%.

24.7% is not too bad to me. In the end of the day, Uncle Sam do help me on this earning. He should take his share. I probably will selling all of them evenly in 2 years.

 

[dobig]

@dobig
Thanks for asking. Yes, my employer withholds taxes on vested RSU. Actually I can only receive ~2/3 of RSU.

Just saying. If I hold them 1 year + 1 day, in tax's point of view, I am selling them evenly in 2 years. AI said my LTCG tax rate is 24.7% in this case. If I sell them evenly in 4 years, my LTCG tax rate is 19.5%. Holding 2 more years could only earn 5.2%.

24.7% is not too bad to me. In the end of the day, Uncle Sam do help me on this earning. He should take his share. I probably will selling all of them evenly in 2 years.

That's what I would do for the least complicated way. I would probably error on selling more as soon as you hit that more favorable tax rate and diversying those funds. A few extra percent one way or another when your portfolio is this large is nothing I'd lose sleep over. I'd be far more concerned waking up one morning and reading bad news about a company stock I have a concentrated position in.

The closer to retirement we get the more I want to mitigate risk.

 

[threeonesix]

If your ESPP offers shares at below market value during the purchase rounds, don't forget that you have to pay income tax (google "espp income tax qualifying vs disqualifying") when you sell shares.

 

[pb4uski]

@pb4uski
Wow. This is the coolest idea I heard. I can not think about this by myself. Thanks, and yes, there are highly correleated ticker in the market.

Talk with your broker. They should be able to protect your employer holdings from price erosion by hedging those highly correlated tickers for you in a way that doesn't violate your employer's prohibition on buying puts on employer stock.

 

[copyright1997reloaded]

@pb4uski
Wow. This is the coolest idea I heard. I can not think about this by myself. Thanks, and yes, there are highly correleated ticker in the market.

This is what I was referring to in my post, including the use of an ETF that might be close enough in terms of correlation to your security. As an example, let's say I was trying to hedge Apple exposure. XLK is approximately 11.5% AAPL and has a correlation around 0.90 - 0.98. However, that doesn't mean it will remain that way or will be anywhere close on a short term basis.

In the case of AAPL, there are also 2x and 1x inverse ETF's, but using these would likely fail an audit, i.e. be considered a "constructive sale".