Jun 22, 2015

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.

COLLARED INDEX STRATEGY

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.

HOW IT WORKS

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.