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Financial Planning for Executives at Large Companies: Unique Opportunities

April 23, 2024 | By Joe Orff
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Many senior executives and professional partners at large companies have earned access to some unique retirement benefits, equity compensation, and other financial planning opportunities. 

In this Insight, I review the fundamentals of some exclusive options for corporate executives and their potential benefits. 

Financial Planning for Corporate Executives and Partners: Six Options to Evaluate

While not all of the options outlined below will make sense for every individual, it is important for senior executives and professionals to understand all the benefits they have worked hard to earn.

The sheer diversity of options outlined below demonstrates why the financial planning landscape is even more complex for senior corporate leaders. Working with a financial advisor is the best way to avoid leaving valuable opportunities on the table.

Deferred Compensation Plans

Deferred compensation plans provide options for saving beyond the 401k max. For employees who have the cash flow to spare and are currently in a higher tax bracket, deferring earnings to lower tax bracket years in retirement can be a great way to reduce long-term tax liabilities. These earnings can be invested and grow tax-deferred as well. Savings can be even more enticing if the employee currently lives in a state with a higher tax burden, but plans to retire to a low-tax state.

While deferred compensation plans can play a valuable role in your long-term plans, they are not a free lunch. These plans are unfunded and are a liability of your employer. In the event that the company goes bankrupt, employees will not be guaranteed access to the money “saved” as part of a deferred compensation plan.

Backdoor Roths and Roth 401(k)s

A backdoor Roth provides an alternative contribution option for employees who are above the income limit for contributing directly to a Roth IRA. A backdoor Roth involves making a non-deductible IRA contribution and then converting it into your Roth IRA. Please be aware that backdoor Roth conversions should only be completed if an investor has no traditional IRA assets. This is due to the pro-rata rule, which stipulates that Roth conversion will be taxed in proportion to pre-/post-tax percentages of all IRA assets.

A “mega backdoor Roth” is when executives can save above the normal employee 401(k) contribution limit of $23,000 ($30,5000 if over 50). Executives can save an additional $46,000 of after-tax dollars to their 401(k) account, assuming there is no employer match. If there is an employer contribution, the $46,000 figure needs to be reduced by that employer contribution. These numbers are the 2024 limits. 

Some plans then allow for conversions to a separate Roth 401(k) on a daily basis to keep all earnings tax-deferred; hence, the “mega backdoor Roth” name.

Cash Management Vehicles Within the Company

Some companies offer senior executives access to intra-company cash management vehicles, which provide options for relatively liquid, low-risk savings. These plans typically pay advantageous interest rates compared to publicly available savings accounts or money market accounts.

Like deferred compensation plans, these cash vehicles are the employer’s liability, and employees are not guaranteed to see these funds returned in the event of bankruptcy.

Equity Compensation

Equity compensation is a particularly important issue for senior executives, who may have accumulated a significant portion of their earnings through equity compensation over the years (in addition to future compensation).

For this reason, executives commonly have a significant concentration of their portfolio in stock with their employer’s company. While divesting from this concentrated position should be a priority to improve diversification and reduce risk, senior executives must move carefully to avoid trading during blackout periods and plan a wind-down strategy that minimizes capital gain taxes.

We provide a deeper look at the most important benefits and drawbacks concerning equity compensation in our guide here.

Executive Pension Plans

For executives who meet their requirements, pension plans can play a central role in meeting retirement expenses. 

While not every employer offers a pension, employees with those that do may earn a portion of their total compensation in pension payments. Pensions come with single life and joint life options. Single life pensions will pay more than a joint pension based on both lives; however, if the executive passes away prematurely a single life pension will no longer pay while a joint pension will continue paying.

Executives can maximize their pension through pension maximization, a strategy that seeks to maximize single-life pension payments while protecting surviving family members through a supplementary life insurance policy in case of premature death. Weighing the impact of these payments is critical for shaping your broader long-term financial plans, setting goals, and optimizing the remainder of your retirement assets accordingly. 

Private Insurance Options

Many companies may require executives to retain life insurance up to a certain amount. Beyond that amount, we recommend taking the time to compare pricing between the company’s private plan and marketplace alternatives. 

Additional life insurance is a particularly important option to review if one spouse makes most of the income and has many working years ahead. Disability coverage is an even more critical option to consider, as most executives are underinsured in this area, and the odds of being disabled are greater than a premature death.

Employers will likely offer some level of disability coverage, but default policies are hardly ever sufficient to cover the compensation of high-earning executives. While private disability is expensive, it can save you and your family from going through hardship if you are unable to work for an extended period of time.

Work with a Financial Advisor to Understand Potential Compliance Requirements

While senior executives and professionals benefit from a variety of unique opportunities, they are also subject to compliance and reporting requirements (often industry or seniority-level specific) that can limit what investments are available and add to portfolio management complexity. 

Restrictions will change over time, and you may even be forced to sell highly appreciated positions quickly. In this scenario, individuals who are charitably included could donate stock to a charitable gift fund to minimize capital gains tax.

We recommend working with a financial advisor to build a custom portfolio that is fully compliant, takes your full breadth of unique retirement options into account, and is tailored to your personal financial goals.

Interested in a deeper discussion of your retirement planning opportunities as a senior executive? Schedule a complimentary 30-minute consultation with one of our financial planners today.

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