The above quote from the classic movie Office Space portrays an infamous scene where “Peter Gibbons” speaks honestly to two corporate consultants. The movie Office Space is great at highlighting the struggles within a corporate environment in an engaging and humorous manner using irony that everyone from executives to new employees can relate to. Inside of this movie, there are multiple lessons that companies need to learn. There is no one size fits all approach to getting great employee engagement, loyalty, and retention within an organization. Leadership must empower employees to take control and help shape the future of the company. On the other hand, evidence continues to come both from surveys and independent research that the financial compensation and solid benefit plans help to provide loyalty and appreciation of the company.
The Community and Family Services International (CFSI) reported that employees spend about 13 hours per month handling personal money matters while at work. Shockingly they found evidence that financial struggles occur across all income ranges and responsibility levels in the organization. The PwC annual Employees Financial Wellness Survey shows similar findings around these issues. Each year the surveys are showing greater concern by the workforce for help with retirement savings and education around benefits.
Employers’ benefits packages have shifted away from lifetime pensions due to a range of factors, such as frequent miscalculations, increased life expectancy, and mismanagement of these benefits. Employers have placed the responsibility of saving for retirement on the employee. Multiple theories have suggested that there is a direct correlation showing employee loyalty (length of time working at a single company) has declined in line with this move, causing employers to compete for their employment in the short term. Job-hoppers have seen significant career advancement, while the majority of those that stay in the same position are often paid significantly less than their counterparts. As the labor market continues to favor outside hires, many employers are falling behind in keeping their key employees.
To combat this labor market trend, companies that foresee the importance of keeping talented, loyal employees have started a recent shift to pay for more and better employee benefits. Employee Stock Options Plan (ESOP), Restricted Stock Units (RSUs), various stock options, Deferred Compensation, Split Dollars Plans, and 162 Executive Bonus Plans are a few of the strategies that employers are turning to above and beyond the 401(k). However, employees ranging from executives, directors, vice presidents, and entry-level positions do not understand the best strategies to coordinate these with their personal finances. They often miss out on implementing these tools to build wealth. While each employer’s benefits package is different, below are the five most common missed opportunities for advanced benefits:
Shifting Income Into Retirement Using Deferred Compensation Plans:
Employers in the late ’80s and ‘90s utilized the Deferred Compensation plans as a way to provide another vehicle for their key employees to save above and beyond a traditional 401(k) plan. This trend has continued, and more mid to small-size companies are utilizing this strategy. For individuals with high income, especially those in a high-income tax state, utilizing this strategy to defer your compensation to spread distributions over 5-10 years in retirement can create significant tax savings in the present. To figure out if you should implement this strategy, carefully consider:
The first one can be completed by a Financial Planner or a CPA who can run an analysis based on current tax law. It is tricky trying to predict future tax laws, but this analysis should give you a great starting point to make a decision.
As for the credit risk of the company, this is difficult to judge. If companies default, non-qualified deferred compensation plans are subject to a company’s creditors. This could be a significant risk for smaller companies, and this is why it should not be your main investment (401k’s & IRAs avoid credit risk). Still, it is often underutilized by employees who do not realize the potential tax savings they would get if they are going to a lower income tax rate in retirement (even with the 5-10 year payout).
Deferring Restricted Stock Units (RSUs) inside of Deferred Compensation Plan:
One of the big negatives of an RSU is that as it is vested, it is taxed to the individual as ordinary income; this forces many people to cash out some of the RSUs to pay the taxes. Furthermore, in RSUs, you cannot use an 83(b) election which is discussed further below. One way to solve this is to use a Deferred Compensation Plan that can accept the RSUs as contributions. Typically, twelve months before the vesting period, employees can elect to put the RSUs into the Deferred Compensation Plan and diversify into mutual funds. Often this addresses two concerns:
If there are concerns for the risk of creditors, there are products that take on the risk of the deferred compensation plan. To review if this strategy makes sense, consider
83(b) Elections on Stock Options (ISO, RS, NSO, Phantom Stocks, SARs):
With the numerous types of stock options among publicly traded and private businesses, there are specific rules with each. The above list of Incentive Stock Options (ISOs), Non-Qualified Stock Options (NSOs), Phantom Stocks, and Stock Appreciation Right (SARs) all have unique characteristics. However, if you have some of these stock options, you can potentially utilize an 83(b) election option.
This election lets you pay taxes on the valuation of today versus the future valuation of when it vests or gets executed. In order to figure out if you should make this election, you should:
Purchasing Employer Stock Inside of Your Employer Stock Ownership Plan (ESOP):
One benefit that many large publicly traded companies have started implementing is offering an Employer Stock Ownership Plan. These plans have both benefits for the owners of the company as well as the other qualifying employees. Most employees can purchase the stock or receive employer stock of the company where they work. Income from the paycheck put into the ESOP is not taxed. There are two main options for distributions:
One huge benefit that employees might enjoy for publicly-traded companies that offer an ESOP is that the equity is sometimes provided at a 5%-15% discount on the lowest price of the stock throughout the quarter. For employees that put in a percentage of the income, company stock will be purchased at the end of the quarter and will very often be at a profit. To take advantage of this tool you want to review:
Using Cashless Exercise of Stock Options:
Traditionally, for many types of stock options, employees would have to come up with cash for taxes on gains as well as cash for purchase when exercising. However, most new stock option plans are now offering a cashless exercise option. This allows you to exercise and sell a number of the shares to come up with all the costs for the receipt of the shares.
This can be a huge win. If an employee has a large number of ISOs or NQSOs expiring, they may be under the impression that they have to come up with significant cash for the taxes or to purchase the stocks. Individuals have been known to leave many thousands of dollars on the table because they did not know about the option to do a cashless exercise to cover those costs. This is a shame as the stock may have appreciated significantly since the acquisition of the options.
Sometimes these stock options even start “In-The-Money” and could be exercised and cashed out for a profit. Other times it makes sense to hold onto them long-term. To figure out if you should do a cashless exercise:
These are the five most commonly missed opportunities for individuals to grow their wealth through their employer’s benefits. Working with a Financial Coach to help analyze how these benefits complement your finances can result in significant progress on your financial goals. Offering these competitive benefits in tandem with that Financial Coach not only drives engagement and retention but also allows the employer to better compete for talent in this challenging labor environment.
James Hargrave, MBA, CFPⓇ, CLUⓇ
Director of Financial Planning