You may remember why you made this year’s deferred compensation election.
But will you remember why you made it four years from now?
Most executives do not participate in a nonqualified deferred compensation plan for only one year. They may make elections for five, ten or even fifteen years, and each deferral may have a different purpose.
One election may be intended to replace income immediately after retirement. Another may help fund a future purchase. Later elections may be designed to create a longer retirement-income stream or preserve room for Roth conversions.
Individually, each decision may make sense. Collectively, they can get messy.
After several years, an executive may have multiple distribution dates, lump sums, installment schedules and layers of deferred income arriving alongside bonuses, severance, equity awards, pension income or stock-option exercises.
Retirement dates also move. Compensation changes. Tax assumptions evolve. A distribution election designed four years ago may no longer fit the current plan.
That is why strategic deferred compensation planning cannot end when the annual election is submitted.
Someone needs to document:
- Why each deferral was made
- When the income is scheduled to return
- What the money is intended to fund
- What other income may arrive during the same period
- How the election fits with every election that came before it
That strategy should then be monitored and refreshed annually.
Otherwise, even a series of thoughtful elections can eventually become a collection of disconnected decisions. The executive may know how much has accumulated but no longer remember what each distribution was intended to accomplish.
Participating in a deferred compensation plan is not the same as having a deferred compensation strategy.
The better question is not simply, “How much should I defer this year?”
It is, “What do I need this money to accomplish, and who is helping me keep that plan on track?”