Time to Read: 16 Minutes
At BWM Financial, we’ve helped executives, engineers, and scientists at San Diego companies with their financial affairs for over 20 years. This often involves navigating the complexities of employee benefits, such as company stock, options, retirement plans, and insurance benefits. Many executives are simply so focused on their career that they lack the bandwidth to spend their time and energy:
- Deciding between selling vested RSU and ESPP shares purchased at the same time.
- Knowing if they miss out on their full 401(k) match if they max out their contributions before December of each year.
- Understanding the circumstances under which they can/should consider adjusting the payout schedule for their deferred compensation plan.
- Considering whether they should list their kids on their trust as the contingent beneficiary on their retirement plan.
While the following isn’t an exhaustive list of benefits, they describe many of the areas where we’ve helped make a meaningful impact our clients’ financial lives.
TABLE OF CONTENTS
- Which investments to pick?
- Which type of contributions to make?
- When to roll over?
- How to get your 401(k) match
- How can I put up to $64,500 into my 401(k) this year?!
- Will my employer pay for professional financial advice?
- What is deferred compensation?
- Should you save and how much?
- How should I receive my deferred compensation payments?
- How to invest deferred compensation?
- Should I participate in ESPP?
- What are RSUs?
- Should I hold or sell my shares?
- How should I sell?
- Where can I invest if I sell my stock?
- Is my employer life insurance enough?
- Should you buy through my employer or my own policy?
- Do I need disability insurance?
- How much insurance should I buy?
- Is it better to purchase insurance at work or on my own?
- Should I contribute to a Health Savings Account?
- What should I do about health insurance coverage when it’s time to leave work?
Qualcomm 401k Retirement Plan
Which investments to pick?
Knowing the importance of 401k assets in a client’s financial plan (particularly when one is approaching retirement with a large portfolio and the stakes are high), BWM Financial provides 401(k) investment allocation recommendations as part of our service to clients. Fortunately, many 401(k)s do offer a quality, base list of investment choices and two additional options for accessing a larger variety of more specialized investments. These options are typically enough to allocate and manage even large retirement accounts.
Some 401(k) plans have a self-directed brokerage option. This allows employees to transfer money within the 401(k) to an account with a wide variety of investment choices. The employee is then responsible for selecting the best investments and putting them together into an allocation which matches their risk tolerance, objectives, and time horizon. For expert investors with a do-it-yourself attitude, this option may be appropriate. However, a larger menu of investment options which includes specialized funds can leave investors open to a greater number of potential investment mistakes. It can also require frequent management which may be difficult to execute while balancing a busy career. This option may not be a good fit for everyone.
Transferring to an IRA with more options
Additionally, employees over age 59.5 may have the option to roll their 401(k) funds into an IRA at the investment company of their choice through a process called in-service withdrawal. Investors should know that while rollovers have some significant potential benefits, they don’t always make sense and should be considered carefully with your financial and tax advisors. Hidden fees, creditor protections, and strategies such as “backdoor Roth” conversions should all be weighed against the tax-free transfer to an account with a large variety of investment options. Many BWM Financial clients do choose to roll over their 401(k) when they qualify at age 59.5. They enjoy knowing their retirement is being closely managed and monitored by a knowledgeable team without being limited by a small number of investment choices. Employees who choose to roll over a 401(k) to an IRA at age 59.5 can also continue to contribute to their 401(k) plan and receive the same tax benefits and matching they have always enjoyed.
Asset allocation education
Many wealth management firms simply focus on the investments they manage. We know it takes much more to help our clients be truly financially successful, so we strive to assist our clients with their overall balance sheet. For clients under age 59.5, we provide 401(k) allocation recommendations free of charge as part of our service. Using the list of investments available in your company’s 401(k), we build a portfolio which fits the client’s unique financial plan, time horizon, and tolerance for risk. In addition, our recommended mix is designed to complement/supplement the client’s other investments outside of the 401(k). Importantly, we provide 401(k) allocations which are intended not to require our clients to constantly manage or adjust unless their financial circumstances change materially. We make it easy by providing our clients with one page that shows which funds to buy and the percentage to own of each investment. The client simply needs to log into the custodian website and adjust his or her allocation to match our recommendations.
Which type of contributions to make?
Employees contributing to a 401(k) plan can choose between making traditional contributions, Roth contributions, and post-tax non-Roth contributions. The right option often depends on a variety of factors, such as one’s current tax rate, expected future tax rates, overall retirement savings strategy, tax rate diversification, and the current portfolio asset location (the distribution between non-retirement, traditional, and Roth accounts).
For example, consider a client with most retirement savings in a traditional 401(k) who needs to increase annual retirement savings to meet his or her goal of retirement by a certain age. He or she might benefit from allocating more money to Roth 401(k) for a couple reasons. A Roth allows for larger annual savings, and it can offer tax diversification. While the annual dollar limits for Roth and traditional 401(k) savings are identical, Roth savings are more valuable dollar for dollar because the money has already been taxed – so it grows tax-free and no taxes are due on withdrawal.
In addition, having accounts in retirement which are taxed in different ways can facilitate a lower lifetime tax bill in retirement. A retiree with only traditional pre-tax retirement investments would have one source of funds in retirement. Every dollar of spending in retirement would need to come from a portfolio which is taxed as income. In years when expenses are high, large distributions would need to come from the traditional retirement account. These would be taxable as income at high tax rates.
Alternatively, a client with assets in both traditional and Roth accounts could take some distributions in retirement from the traditional account to the extent those distributions fill up low-income tax brackets. Then, in years when expenses are relatively high, additional distributions could come from the Roth IRA funds without pushing up the client’s tax bracket. These decisions are highly dependent on each client’s unique circumstances, and this is just one hypothetical example. We regularly assist clients with determining the best way to save based on their individual circumstances.
When to roll over?
It’s important to understand the potential benefits and drawbacks associated with rolling the plan to an IRA, taking a distribution, or leaving money in the plan. Many people believe this only applies when they leave their employer or retire. However, the IRS grants employees over age 59.5 the ability initiate a tax-free rollover to an IRA while still contributing to their plan, receiving the tax benefits and company match. The active management and greater flexibility of an IRA may be advantageous to investors who are still working but close to retirement/financial independence. Rollovers can have drawbacks, such as the elimination of opportunities for backdoor Roth IRA contributions in some cases, or increased exposure to liability claims. At BWM Financial, we regularly help clients weigh these tradeoffs. When rollovers are appropriate, we assist clients with the process so it’s convenient and seamless.
How to get your 401(k) match
Some employers will match 401(k) contributions using specific formulas, which can be confusing to employees. For example, 100% on first $1,500, 50% on next $1,500, 33% on next $7,500 and 10% thereafter is much more complex than a typical matching formula. Understanding and taking advantage of the full match could mean an additional $5,625 employer contribution in your 401k for employees under age 50 (those over 50 would be a total of $6,275). In addition, some employers limit matching for employees who max out their retirement plans early in the year. If you save the maximum early in the calendar year, contact BWM Financial for help understanding how this might affect your matching.
How can I put up to $64,500 into my 401(k) this year?! Mega Backdoor Roth 401(k)
In addition to making the typical $19,500 (or $26,000 for those over 50 years old) 401(k) contributions, select 401k plans allows employees to contribute much more to a Roth 401(k), using a two-part strategy oftentimes call a mega backdoor roth 401(k). After maxing out the traditional or Roth contributions, one can contribute additional funds to an after-tax (non-Roth) account. Typically, this isn’t very tax-advantageous in and of itself. However, employees can instruct the custodian to execute an in-plan Roth conversion with the after-tax funds. Because these contributions were previously taxed, the conversion should not be a taxable event. Voila, the employee now has a way to route funds to the Roth 401(k) above the standard limits.
This is allowable because after-tax 401(k) contributions aren’t subject to the standard $19,500 (or $26,000 for those over age 50) annual contribution. Instead, they are subject to the IRS maximum that you and your employer combined can put into your 401(k) plan. This amount is $58,000, or $64,500 if you’re age 50 or older, in 2021. This means that you could save $37,500 (reduced by your employer match) into a Roth 401(k) through an in-plan conversion. The value of the Roth savings over the course of your career can be massive.
For those employees who regularly receive vesting of restricted stock units, we oftentimes recommend they pursue this Roth strategy, which reduces their take home pay. They simply spend the RSU proceeds to replace the lost after-tax income. The net result of the strategy is as if the RSUs simply vested, taxed, and were immediately contributed to a large Roth account.
Executive fee reimbursement
Will my employer pay for professional financial advice?
Some employers offer to cover part of the costs of professional financial advice as an employee benefit. Reimbursement can be thousands of dollars per year, and many employees fail to use this benefit. This benefit reduces the employee’s out-of-pocket cost for services like ours. Smart employers know the value of covering professional expenses for key employees. When an executive can rely on a professional wealth management service, he or she has more time and energy to dedicate to the organization for which he or she works. If you do qualify, we can make it easy. Just let us know and we’ll automatically email you documentation each year of your management fees, which you can provide to your employer for potential reimbursement.
Executive Deferred compensation
What is deferred compensation?
Executive deferred compensation is a benefit offered at some companies to highly valued executives which allows for deferral, savings, and investment of their pay. Executives choose whether to save into the plan each year, the amount to save, and how savings will be invested, and when they would like the funds distributed to them. Money saved into the plan is not currently taxable but becomes taxable when it is paid to the executive later. These payments generally begin upon his or her exit from the company and they can range from a single lump sum to payments over the course of 10 years, for example.
Should you save and how much?
Everyone’s financial circumstances are unique. The decision to save into a deferred compensation plan can be complex and involve many different factors. These include current and future tax rates, cash needs, company stability, investment choices inside of a plan, the existence of alternative savings vehicles, and whether the employer matches contributions. At BWM Financial we help clients understand the variables and distill them down so they can think clearly about how much to save.
First, we take time to educate clients, in plain English, about the plans and how they work. We then use a detailed model of the client’s financial affairs which incorporates many of the variables to consider. This model can be used to estimate the total amount of funds an executive can/should comfortably save on an annual basis. We then rank the client’s various savings opportunities. For example, many clients should first save into their 401(k) to receive a company matching contribution.
Examples of other highly advantageous savings opportunities are ESPP arbitrage and the potential triple tax benefits of Health Savings Accounts. Once we understand the total potential annual savings and the various options available to a client, we can efficiently allocate savings to the most optimal opportunities first and work our way down the list.
Because executives tend to be highly compensated, they may easily fill up other more tax advantaged savings “buckets” and have additional funds to allocate to deferred compensation plans. This can also be true in special circumstances. One example would be executives with non-qualified stock options, taxed as income, which they’d like to sell. Deferred compensation plans can be a good tool to exercise and sell options in tandem with deferring an equivalent amount of pay to offset the taxable income from options sales. The result can be a swap from highly risky stock options to a diversified portfolio of investments inside of the deferred compensation plan with no current taxation.
Again, everyone’s situation is different, and a good deferred compensation strategy should involve you, a qualified financial advisor from a firm such as BWM Financial, and your tax advisor.
How should I receive my deferred compensation payments?
Picking an appropriate payout plan is another area which requires thoughtful consideration. Saving a large amount into a deferred compensation plan with the intention of receiving a lump sum at retirement can be quite inefficient, as the large payment may be taxed at the highest possible rate in one year. Spreading smaller payments over 10 years may be unnecessary as well. Typically, the best strategies consider one’s other income sources and tax rates now compared to expected rates in the future.
It’s always best to plan ahead when making an annual election to save into deferred compensation, by contacting your financial advisor to arrange for a strategy discussion and a conference call to your plan sponsor to understand the plan’s specific rules. Occasionally there are ways to change payout dates if one plans ahead. In many cases, payouts are fixed and cannot be changed, or lump sum payments are unknowingly triggered upon early retirement. This can be especially frustrating in the case of a large lump sum payment. If you selected inefficient payout options which cannot be adjusted, talk to us to discuss income shifting ideas such as donor advised funds, or timing your last day of employment around the turn of the year.
How to invest deferred compensation?
Determining how to allocate funds inside of a deferred compensation plan is like investing other retirement accounts. One’s financial needs, time horizon/payout, tolerance for investment volatility, etc. are all important factors. Although we cannot manage clients’ deferred compensation plans at BWM Financial, we provide free individualized investment recommendations for deferred compensation plans for clients as part of our service.
These allocations are built using the choices available to clients in their deferred compensation plan and they are designed to mirror or complement their other investments so their overall investment portfolio is allocated efficiently. Clients simply provide us with their investment choices, and we provide a detailed allocation which they can use to invest their deferred compensation account.
Employee Stock Purchase Plans
Should I participate in ESPP?
Some companies give employees the option to purchase company shares at a discount through their employee stock purchase plan. Even if you’re not interested in owning more of your employer’s stock, there can be reasons to participate. Because many employees own large holdings of stock, options, and Restricted Stock Units already, purchasing additional shares through an ESPP, may add to a highly concentrated investment in your company’s stock.
When one’s portfolio of investments is largely reliant on the performance of one single company, investment risks can be elevated. In addition, it may not be prudent to allocate too much to the company which also pays your salary. With that said, there is one simple ESPP strategy we like to implement, even for clients with concerns about concentration risk. You can read about this ESPP arbitrage strategy here.
Restricted Stock Units
What are RSUs?
Restricted stock units are simply a bonus paid in company stock (instead of cash) at some point in the future. Employers are always trying to find new ways to reward and retain employees. One way to do this is to give them shares of company stock, but only if the employee waits for the shares to vest. When shares vest, they are taxed just like income to the employee, based on the value of the shares. The employee then simply owns company shares with a cost basis equal to the fair market value of the shares at vesting. The employee is free to sell shares immediately and pay no additional tax or hold the shares.
Deciding whether to hold or sell shares depends on your individual financial circumstances. First, ask yourself the following, “If my company paid me this bonus in cash, would I immediately use it to buy shares of my employer’s stock?” If not, it is important to remember that there is no difference between vested RSUs and a cash bonus! One bonus is paid in stock and the other is paid in cash. Both have identical tax treatment. Cash can be easily used to buy stock, and stock can be easily sold for cash.
If you do have a favorable outlook for your employer’s stock or you would like to use vested RSUs to add to your investment portfolio, consider how much of your current portfolio is already allocated to your employer’s stock. Amounts over 10-15% in any single company can create significant risks to a financial plan and should be evaluated carefully.
At BWM Financial, we can easily show clients the effect on their financial life if their company stock dropped or increased significantly. This could mean understanding potential impacts on lifestyle if the price declines significantly, such as delayed retirement or reduced spending. Many BWM Financial clients like us to show them the amount of money they’ll need invested in a diversified portfolio to be financially independent.
When clients come to us with large holdings in RSUs, company stock, options, and ESPP shares, we oftentimes show them how much they need to sell to have a high probability of retiring on time and maintaining their lifestyle. If they have additional funds left over, they might choose to continue owning their employer stock if they have a favorable opinion of it.
How should I sell?
If you do decide to sell shares of company stock, there are several considerations. First, identify the amount to be sold. This should be done in consultation with a detailed financial plan and an experienced financial advisor at a firm like BWM Financial.
Next, outline a systematic strategy to diversify timing of sales and remove emotion from the equation. We have had great success drafting sales plans which call for certain numbers of shares each week or month, depending on price targets. These plans mimic 10B5-1 executive sales plans used by insiders at large public companies to sell their shares.
Taxes play a key role. We can work with your tax advisor to identify which shares should be sold first. Highest basis shares, shares which qualify for long-term capital gains, and RSUs (as compared to ESPP shares) are typically best to consider. This process is complex and involves many considerations. It can be overwhelming to individual employees without the help of an experienced advisor to cut through the noise, work with your tax advisor, and formulate a smart plan.
Where can I invest if I sell my stock?
We build diversified, low cost, tax aware portfolios for clients who have proceeds to invest from company stock sales. Your portfolio will be designed to match your need for potential growth, income, and your anticipated time horizon before you need to access the funds.
Each portfolio is actively managed by BWM Financial and monitored daily. Changes are made based on objective and independent market research and our rules-based investment process. We don’t rely on research from companies which also sell investments.
Most importantly, your portfolio is built to meet the needs of your unique financial plan. For example, we stress test client portfolios using sophisticated statistical simulations of different market environments. This helps ensure a client’s portfolio has a high likelihood of meeting his or her long-term needs without running out of funds.
These investment portfolios are also designed to match each client’s comfort level with regards to investment volatility. We first use modern risk-profiling software to determine how each client feels about various levels of investment risk and to identify their threshold for pain during times of market turbulence. We then use the results of this risk profile to find the appropriate balance between risk and potential reward. This process allows us to show clients how our recommended portfolio has behaved in a variety of historical periods and how it is likely to behave in different market environments, with a 95% confidence level.
When we show clients an investment mix which checks all the “boxes” mentioned above, they can be more confident in diversifying their company stock.
Is my employer life insurance enough?
Many companies provide free life insurance to employees as a benefit. Typically, these amounts are structured as a multiple of an employee’s compensation. Additional coverage is oftentimes needed, but how can one know the right amount needed?
Everyone’s financial situation is unique. At BWM Financial, we maintain a model of each client’s financial life. This model is our starting point which informs financial decisions in an objective and clear way. For example, we can model a client’s plan to see the financial effects of the death of a primary breadwinner. Using the impacts as inputs to a sophisticated financial simulation, we then determine the amount of life insurance needed to keep a family’s financial affairs in good shape. The life insurance need might be surprisingly large, or non-existent.
Showing clients a clear picture of what life might look like for survivors can be tremendously helpful in understanding how much insurance is enough. If a breadwinner dies, a surviving spouse might want to pay off a mortgage, and no longer work, for example. He or she might choose to spend more time with children and have the option to no longer work for a paycheck. With the right level of life insurance, we can provide clients with the ability to do these things, collect a monthly “paycheck” from their investments, and not worry about their financial affairs so they can focus on what is most important after the loss of a family member.
Should you buy through your company or buy your own policy?
If your family does need additional life insurance coverage, it can be difficult to determine which type to purchase. You may also wonder if it makes sense to buy more insurance through your employer or to apply for coverage on your own. Because we do not sell life insurance, we’re able to help our clients with objective advice. Our job is to educate clients on the benefits, costs, and drawbacks of different insurance arrangements and to help them make fully informed decisions.
Some employers may allow employees to purchase additional coverage each year without the need for medical exams or underwriting. This may be appropriate for employees nearing retirement, those with medical conditions, or those simply too busy to apply for insurance elsewhere. However, the premiums may be a bit high, costs may increase over time, and benefits might not be portable if one leaves his or her employer. Lastly, coverage levels might be capped at insufficient amounts to make one’s financial plan work well in the event of an untimely death.
Buying a policy separate from one’s employer may be a good option. We assist clients in making the right choice between buying employer insurance or shopping for a policy on your own. In general, we favor low-cost term life insurance coverage for those without permanent insurance needs. In many cases it makes sense to purchase a term policy which expires around the time one expects to retire or become financially independent. Most employees need higher levels of coverage through their early and mid-career, but the amount needed declines as they approach retirement. In these cases, it is possible to buy two smaller policies with different but overlapping terms to ensure adequate coverage without spending unnecessary premiums.
Lastly, we can assist clients with avoiding unnecessarily expensive policies with benefits they do not need. Having a neutral advocate at BWM Financial who understands the different costs, benefits, and drawbacks to various approaches can be indispensable.
Do I need disability insurance?
Disability insurance pays you income if you are unable to work due to injury, illness, etc. Most employees are not yet fully financially independent. Put simply, this means they cannot afford to retire and live comfortably forever if they suddenly lose their salary, bonus, and future savings today. At BWM Financial, we keep a detailed model of each client’s finances, and we can demonstrate the effect of a long-term disability on their financial life. This might mean outliving your assets or needing to make dramatic changes to spending/lifestyle. When this is the case, we advise clients to consider purchasing disability insurance.
How much insurance should I buy?
The amount of monthly income you need, the length of time it’s needed, and other considerations are highly individualized. As explained above, we can use our clients’ detailed financial plans to evaluate these different options. For example, younger clients with long careers ahead of them may benefit from purchasing larger benefit amounts compared to their current compensation, as they need to replace expected higher salary and bonuses far into the future. They may also choose to purchase a policy which lasts until their expected retirement age and which will keep pace with inflation. An employee nearing the end of their working career may only require a modest benefit with no inflation protection. We help determine the right level or coverage to fit their needs, so they are well insured without wasting unnecessary premiums on coverage that’s unnecessary.
Is it better to purchase insurance at work or on my own?
Many employers offer some form of disability insurance as part of their benefits package to workers. These offerings can take many forms. Some provide relatively small monthly payments, and some replace a larger portion of one’s income. Some are paid for by one’s employer and some are an optional expense an employee can choose to purchase through a company sponsored disability plan. They may offer short-term payments or longer-term benefits.
It’s best to first determine your needs using your financial plan and then enlist the assistance of an experienced advisor to help you evaluate the various tradeoffs. For example, enrolling in a group policy may be easy and convenient. You may avoid medical exams or questions and payment of premiums may be directly deducted from your pay. However, a group policy may not be portable. This means you may not be able to keep your policy if you leave your employer for a new position with another company.
Addressing short-term disability by boosting savings
Generally, short term disability risks are better addressed by affluent clients with an emergency cash reserve, as opposed to purchasing short-term disability insurance. These are just a few examples of common considerations which need to be carefully considered, after you’ve determined if/how much disability insurance you might need. BWM Financial can also put clients in touch with providers of disability insurance or additional experts in this area to assist them in making educated and fully informed decisions.
Should I contribute to a Health Savings Account?
Employees should always pick the healthcare insurance which best meets their medical needs. However, for those with a healthcare plan that happens to be compatible with a Health Savings Account, there are significant opportunities for tax advantaged savings. Many employees overlook these accounts. They are commonly confused with Flexible Spending Accounts. Flexible Spending Accounts are much less advantageous. They have lower annual contribution limits, cannot be invested, and funds need to be spent each year or the money is lost! Health Savings Accounts, on the other hand, can provide a way to save and invest for medical costs in retirement, receive an annual tax deduction, and receive tax free investment growth on savings. Read HERE about how these accounts can be turned into amplified retirement savings.
What should I do about health insurance coverage when it’s time to leave work?
At BWM Financial, we help our clients navigate healthcare options as they approach retirement. First, we help clients determine if they might need private insurance, COBRA, or Medicare. We then estimate their cost of insurance in their financial plan and retirement budget. Oftentimes the cost of care changes early in retirement. For example, we may need to budget for expensive private health insurance for a couples under age 65, or those with dependents early in retirement. Once couples are over 65 and their kids are grown, healthcare expenses may drop significantly as they enroll in Medicare.
Although we don’t recommend specific healthcare plans for clients, we do help clients understand Medicare benefits. This includes education on when to enroll, traditional Medicare, Medicare Advantage, popular supplements, etc. For clients who need assistance choosing the right Medicare option and supplemental insurance, we can provide referrals to experts who can assist with specific questions.
Putting it All Together
Personal financial matters can also be interconnected and highly individualized in some cases. Decisions with regards to benefits can have tax, legal, financial, and other impacts so it’s wise to consult Human Resources reps, financial, and tax advisors in many cases. This takes time and effort so many people choose to hire a wealth manager to act as a personal Chief Financial Officer to oversee their affairs and help coordinate everything. If you might benefit from this type of service, let’s meet. Our introductory process consists of several meetings free of charge and with no obligation. We’ll take the time to understand your values, intentions, and financial details. You’ll get a detailed test drive of the service before committing to hire us. CLICK HERE to schedule an introduction today.
It’s important to note that while we’ve assisted many employees with their financial affairs over the years, we aren’t affiliated with company benefits in any way and benefits can/will change over time. Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
BWM Financial (“BWM”) offers investment advisory services through Stratos Wealth Partners, LLC, an SEC registered investment adviser. BWM does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. We cannot guarantee that the information herein is accurate, complete, or timely. BWM Financial makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
Investment adviser representatives of BWM are also separately licensed as independent insurance agents. Certain insurance products available through BWM are issued by third-party insurance companies, which are unaffiliated with BWM or SWP. Clients are under no obligation to purchase insurance products investment adviser representatives affiliated with through BWM or SWP. Estate taxes may apply to insurance proceeds.