The collared index: A sane way to protect NQDC balances

In an unpredictable marketplace, is there a rational way to enjoy market gains while protecting NQDC balances?

Yes—and it doesn’t involve a crystal ball. What if, while allocating funds to an account that tracked the S&P 500 (excluding dividends), you could eliminate market losses with a minimum 0% return, in exchange for a cap in any one year’s growth at 9 percent; you’d be interested, right?

Using this modified approach (floor of 0%, cap of 9%) during the decade of the 2000’s, our executive with a $1 million dollar starting balance could have achieved a 4.17 percent return compounded annually, compared to a loss of .95% without the floor and cap.


This modified approach is possible by adding the “collared index” to your deferred compensation investment line‐up, or by rolling your account balance into this strategy at retirement to eliminate volatility in your retirement years.


When you add an Indexed Option with a Collar to the NQDC plan, participants can:

  • Enjoy growth potential based on performance of the S&P 500 (excluding dividends)
  • But with protection from investment losses (due to 0% minimum crediting rate)
  • In exchange for a cap on return: that is, 9% ‐ 12% annually

Importantly, the Collared Index Strategy helps reduce two investor fears:

  • 1. Fear of suffering significant losses from market declines
  • 2. Fear of being out of the market and missing upside returns

Executive Benefit Solutions can demonstrate for you how to incorporate a collared option into your NQDC plan, as well as how corporate finance can hedge the liability in order to eliminate P&L volatility and reduce cost.

Protecting NQDC balances: Why the usual tactics are insufficient

In our previous post, we addressed the recent history of the stock market and the way its volatility threatens retirement plans of executives with substantial nonqualified deferred compensation balances.

In this post, we look ahead. What can your executives (and other enrolled talent) expect from your benefit plans meant to support their retirement?

Let’s fast forward to the dilemma facing executives now in 2015. With five straight years of positive results, and some restoration of deferred compensation account balances, the question becomes: Will the market continue to grow? Will interest rates go up, leading to negative fixed income returns? Once thought as “safer” investments, money market yields are essentially zero percent. Ugh. What to do?

The chart below shows the recovery period since 2008:


Our goal is to capture the value of rising markets while minimizing exposure to the down side. But how? Traditional options include:

  • Market timing: Get in while the getting’s good, then get out when the market’s dropping. But realistically, this is almost impossible to do.
  • Fixed income: But in today’s low interest environment, with rates likely to go up at some time soon, this could be risky and unattractive.
  • Eliminate market losses: Again, this is more magic than serious management-no one has the secret sauce for avoiding losses. Money market funds have traditionally been very safe, but current yields are near 0%.

Fortunately, there is another way. In our next post, we’ll present a rational alternative that captures gains while avoiding damaging losses.