Deferred Compensation Protection Trust

Overview
Key Benefits
FAQ
Resources
Contact

Protect your Deferred Comp and Retire with Confidence

Overview

Unlike your 401(k), your non-qualified deferred compensation (NQDC) is an unsecured liability (i.e. “promise to pay”) of your employer. This means it is possible to lose your entire account balance in the event of bankruptcy of your employer. In the bankruptcy process, your NQDC claim is not a high priority for the court; NQDC participants are “general unsecured creditors.” While no one expects to experience a bankruptcy, it occurs more frequently than commonly thought.

Executives and retirees can now access a low-cost, long-term risk management solution that provides essential protection of their NQDC retirement savings and income. The Deferred Compensation Protection Trust (DCPT) offers substantially greater assurance and security that in a catastrophic event, like the sponsoring-employers’ bankruptcy, participants’ net worth will not be decimated.

Example of How It Works

Twenty (20) participants, each with a certain minimum balance in an NQDC plan sponsored by a different company in a different industry, deposit a small amount of cash (e.g. 1%) for each year of desired protection (minimum 5 years). The pooled cash is invested in U.S. Treasury Securities. At the end of the term of the trust, the assets pooled in the Trust are paid according to the number of bankruptcies.

Key Points

Employer bankruptcy can cause a total loss of non-qualified deferred compensation (NQDC) account balances
Risk pooling enables cost-effective spreading of similar financial risk across participants in a self-funded plan designed to protect against large losses
Lower cost than paying taxes on compensation and more feasible than implementing Credit Default Swaps (CDS)
Other benefit security devices, such as rabbi trusts, do not pay in the event of bankruptcy
Based on the time-tested principles of both Modern Portfolio Theory (MPT) and Risk Pooling, the Deferred Comp Protection Trust (DCPT) was developed from our Stock Protection Trust for concentrated stock positions
By combining the powerful benefits of MPT and Risk Pooling, the DCPT transforms single-account/single-company balance risk by enabling investors to “mutualize” and, therefore, substantially reduce downside risk, while retaining all future appreciation of their NQDC assets and income…all at an affordable cost

Key Benefits

Increased retirement security

Account balances in non-qualified deferred compensation plans are unfunded and unsecured. Bankruptcies often cause NQDC participants to lose their entire account balance. The Deferred Comp Protection Trust helps solve this problem by providing a large payment that can partially or fully offset the loss of retirement savings.

Full refund in the event of no bankruptcies

It is possible none of the protected companies will experience a bankruptcy. In this case, all pooled cash is refunded. The yield on the pooled cash covers all administrative expenses.

Lower cost than paying taxes

By deferring compensation over at least 10 years, executives can realize substantially higher after-tax income, especially if they collect their payments in states that do not charge income tax. The cost of protecting deferred comp is substantially lower than the cost of the state income taxes you would pay by not deferring your compensation.

Fully transparent and easy to understand

Unlike Credit Default Swaps (CDS), the Deferred Comp Protection Trust is fully transparent, easy to understand, and involves no counterparty risk (i.e. the pooled cash is invested exclusively in U.S. Treasury Securities).

Frequently Asked Questions

Unlike your 401(k), your deferred compensation is an unsecured liability of your employer. It is possible to lose your entire account balance if your employer files for bankruptcy.

Should your employer file for bankruptcy, the Deferred Comp Protection Trust can provide a large payment to help offset the loss of your retirement savings. Other benefit security devices, such as rabbi trusts, do not pay in the event of bankruptcy.

To maximize your after-tax compensation, it can make a lot of sense to defer. For example, if you spread payments over 20 years, you could realize nearly twice the amount of compensation versus electing a lump-sum payout. This is especially the case if you plan to retire in a state without income tax. If you do elect to defer, you’ll want to manage the risk of losing your retirement savings due to bankruptcy of your employer.

A diverse group of participants funds a series of the Deferred Compensation Protection Trust, a Delaware master statutory trust. Each participant’s deferral plan is sponsored by a different company in a different industry. At the end of the Protection Period (5 or 10 years), the cash in the trust is used to offset losses caused by any bankruptcies. In the event of no bankruptcies, trust assets are fully refunded less administrative expenses.

Approximately 95% of the cash will be invested in U.S. Treasury Securities (e.g. 10-year U.S. Treasury Bonds for 10-year Protection Trusts). The remaining 5% is invested in a money market fund that invests only in U.S. Treasury Securities.

Each trust protects the deferral plans of similar-risk "peer group" companies. For example, a trust could be comprised of companies each with the same credit rating as determined by an independent credit risk monitoring service.

Yes. If for any reason you are not comfortable with any of the companies, you may withdraw without penalty.

Payouts are made at the end of each trust's Protection Period, and the payouts are based on the total number of bankruptcies occurring during the Protection Period.

According to IRS Private Letter Ruling 9344038, "The sponsoring company may increase the participant's compensation in the amount of the premium payment, and the participant will include that increase in gross income." However, the Protection Trust is not connected to your company-sponsored deferral plan. It is a separate and independent vehicle for your wealth management and protection.

Resources

Additional Information

Solving for Insolvency October 2020 Download PDF
Tim Kochis on Mitigating the Risks of Non-Qualified Deferred Compensation Plans September 2020 Download PDF
6 Strategies for Protecting Non-Qualified Plan Accounts from Bankruptcy Risk August 2020 Download PDF
New Strategy to Protect Deferred Compensation Balances from Bankruptcy (MBS Financial) June 2020 Download PDF
Mitigating Risk for Participants in NQDC Plans June 2020 Download PDF
Bankruptcy and Non-Qualified Deferred Compensation Plans (MBS Financial) August 2019 Download PDF
Investment and Risk Management Strategies for Nonqualified Deferred Compensation June 2019 Download PDF
IRS Private Letter Ruling April 2018 Download PDF

Protecting Your Nonqualified Deferred Compensation Account September 2018 View Article
Protecting Nonqualified Deferred Compensation Assets April 2018 View Article

Find out more

For more information on the valuable protection provided by the Deferred Compensation Protection Trust, please contact us.

Companies that have filed for bankruptcy

American Airlines
Blockbuster
Borders
Brookstone
Caesars Entertainment
Chrysler
CIT Group
Circuit City
Calpine
Conseco
Colonial Bank Group
Delta Airlines
Enron
Friedman’s
General Motors
General Growth Properties
General Atlantic & Pacific
Global Crossing
IndyMac
Lehman Brothers
Lyondell Chemical
Linens N Things
Marvel
New Century Financial
PG&E
Radio Shack
Six Flags
Sports Authority
Sbarro
Trump Entertainment
Thornburg Mortgage
United Airlines
Washington Mutual
WorldCom

Keeping Your Information Safe

Guiding Principles

StockShield, LLC strives to maintain your trust and confidence in our firm, an essential aspect of which is our commitment to protect your personal information to the best of our ability. We believe that each of our clients and anyone who contacts our firm values his or her privacy. As a result, we will not disclose your personal information to anyone unless it is required by law, at your direction, or is necessary to provide you with the services you request. We have not and will not sell your personal information to anyone.

This Privacy Notice outlines our policy regarding information we may collect about you and our use of that information. We therefore strongly encourage you to review it and to ask questions if you do not understand any of the following. This policy may change as we modify or expand our services and/or as legally required.

Information we collect

StockShield, LLC, does not collect any personal information about you unless you contact us and voluntarily provide it. When appropriate, we maintain the information to provide such services to you as you request and to comply with applicable laws and regulations. The types and categories of information we may collect and maintain about you include:

Information we receive to determine your eligibility and suitability to invest in a Stock Protection Trust
Information we receive to accept you as a client of our firm
Information we generate by sponsoring a Stock Protection Trust (such as performance and tax reporting information)
Information we receive from third parties with respect to a Stock Protection Trust (such as account statements from escrow agents).

Use of Information

If you or your agent provides information to us, we may use that information to determine your eligibility and suitability to invest in a Stock Protection Trust. If we determine you are not eligible or suitable, we will maintain and disclose your information only as required to comply with applicable laws and regulations. If we determine you are eligible and suitable to invest in a Stock Protection Trust, in order for us to provide services to you, we disclose your information in very limited instances, including:

Disclosures to unaffiliated third parties (subject to strict confidentiality agreements) that perform services on our behalf or on behalf of a Stock Protection Trust (such as trustees, escrow agents, accountants, auditors, and attorneys).

Disclosures to unaffiliated third parties as required by law in order to comply with government agency regulations, respond to a subpoena or court order, or to prevent money laundering and fraud

Responding to the Unpredictable

StockShield, LLC has developed a Business Continuity Plan on how we will respond to events that significantly disrupt our business. Because the timing and impact of disasters and disruptions is unpredictable, we will have to be flexible in responding to actual events as they occur. With that in mind, we are providing you with the following information on our Business Continuity Plan.

If after a significant business disruption you cannot contact us as you usually do at 310.203.8844, you should visit our web site at www.stockshield.com. If you cannot access us through either of these means, you should contact the trustee of your Stock Protection Trust.

Significant business disruptions can vary in their scope, such as only our firm, a single building housing our firm, the business district where our firm is located, the city where we are located, the state where we are located, or the whole West Coast region. Within each of these, the severity of the disruption can also vary from minimal to severe. In a disruption to only our firm or a building housing our firm, we plan to transfer our operations to a local site when needed and expect to recover and resume business within 24 hours. In a disruption affecting our business district, city, state, or region, we plan to transfer our operations to a site outside of the affected area, and recover and resume business within 48 hours. In either situation, we plan to continue in business, transfer operations to outside parties if necessary, and notify you through our web site (www.stockshield.com) how to contact us.

We plan to quickly recover and resume operations after a significant business disruption and respond by safeguarding our employees and property, making a financial and operational assessment, and protecting our firm’s books and records. In short, our Business Continuity Plan is designed to permit our firm to resume operations as quickly as possible, given the scope and severity of the significant business disruption.

Our Business Continuity Plan addresses: alternate physical location of employees; data back-up and recovery (hard copy and electronic); financial and operational assessments; mission critical systems; alternative communications with clients, employees, and regulators; critical service providers; banking relationships; regulatory reporting; and assuring our clients prompt access to information relating to their Stock Protection Trust.

Our firm does not maintain custody of clients’ funds or securities. These funds are custodied at institutional trustees that also maintain Business Continuity Plans.

In addition, our firm backs up our important hard copy documents in a secure location. In the event that a significant business disruption causes both our primary and backup records to be inaccessible, we will go directly to the trustee of your Stock Protection Trust to obtain copies of client records.

If you have questions about our business continuity planning, please call us at 310.203.8844.