American Benefit Corporation
January 2011 Press Release - Non-Qualified Deferred Compensation American Benefit Corporation specializes in developing strategic solutions to executive benefit needs.
At American Benefit Corporation, we design, fund and manage executive non-qualified benefit plans for highly compensated corporate executives who wish to reduce current income taxes and form personal capital on a tax efficient basis. Established more than 30 years ago, we serve the unique needs of executives in numerous corporations with their personal capital formation objectives.
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Securities offered through M Holdings Securities, Inc. A Registered Broker/Dealer, member FINRA/SIPC. American Benefit Corporation is independently owned and operated.
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Deferring Income in an Uncertain Tax Environment
Asset Allocation and Your Deferred Compensation Account
American Benefit Corporation's Jim Herlihy has just released a new article citing the importance of an asset allocation strategy when investing the executive deferred compensation account.
An employer has implemented a deferred compensation plan and has selected a participant. Now what?
The first consideration is deciding how much to defer each year. This can be done by the defined contribution approach or the defined benefit approach. According to the defined contribution approach, determine what percentage of current compensation can be deferred. With the defined benefit approach, decide what value to create at some future date and then calculate the amount of annual deferral required, at an assumed interest rate, to reach that goal.
When the amount of annual deferral has been determined you then need to develop an asset allocation strategy. An asset allocation strategy is a plan to invest in assets in your deferred compensation plan which best meet your individual needs as an investor. Investors seeking the potential of high returns and the willingness to expose their investments to an elevated amount of risk will allocate to equity (stocks). Investors seeking stability and income will allocate to debt investments. Most deferred compensation participants will find a blend of equity and debt most desirable. The ratio of the equity to debt blend will depend on a number of factors, which include the investor's overall financial situation, family income, other investments, anticipated educational expenses, and the time horizon.*
Examples of asset classes that should be available in a well-designed deferred compensation plan are:
- Cash (money market funds)**- Bonds: Investment-grade or junk (high yield); government or corporate; short-term, immediate, and long-term; domestic, foreign, and emerging markets
- Stocks: Value and growth; large, medium, and small cap; domestic, foreign, and emerging markets
- Sector Funds: Real estate, energy, finance, etc.
Specimen asset allocation strategies are as follows:
- Conservative (40% Equities/60% Debt)
This strategy seeks primarily to earn high current income and, secondarily, to grow capital over the long term.
You should consider this mix if…You have a low tolerance for risk. Your primary goal is income. You have a short time horizon and are willing to accept the risk of moderate price fluctuations.
- Moderately Conservative (50% Equity/50% Debt)
This strategy seeks to earn high current income and to grow capital over the long term.
You should consider this mix if…You have a relatively low tolerance for risk. Your primary goal is income. You have a relatively short time horizon and are willing to accept some market volatility in exchange for greater potential income and growth.
- Moderate (70% Equities/30% Debt)This strategy seeks high total return through long-term growth of capital and income.
You should consider this mix if…You have a moderate tolerance for risk. You seek both growth and income. You have a relatively long time horizon and are willing to accept moderate volatility in exchange for potential long-term returns.
- Moderately Aggressive (80% Equities/20% Debt)
This strategy seeks high total return primarily through long-term growth of capital and, secondarily, through income.
You should consider this mix if…You are comfortable with risk, but you seek slightly more diversification. You have a long time horizon and are willing to accept significant volatility in exchange for potential long-term returns.
- Aggressive (90% Equities/10% Debt)
This strategy seeks high total return through long-term growth of capital.
You should consider this mix if…You have a very high tolerance for risk. You have a long time horizon and are willing to accept a high degree of volatility in exchange for potential long-term returns.
The importance of asset allocation has been demonstrated by numerous studies. The most famous of them shows that asset allocation accounts for more than 90% of a portfolio's performance.1 Attempts at market timing and individual investment selection account for only 1.7% and 2.5% of a portfolio's long-term performance, respectively.
1 Based on the study by Gary P. Brinson, Randolph L. Hood and Gilbert L. Beebower, "Determinants of Portfolio Performance II," Financial Analysts Journal, January/February 1995.* Investments in securities involve risks, including the possible loss of principal. When redeemed, an investment may be worth more or less than the original value.
** An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
This material is intended for informational purposes only and is not intended to replace the advice of a qualified tax advisor. Investments in securities involve risks, including the possible loss of principal. When redeemed, shares may be worth more or less than their original value. Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. American Benefit Corporation is independently owned and operated.