Jun 2, 2015

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.