How Deferred Compensation Programs Can Be a Source of Liquidity and Cost Containment
David J. Marshall
Due to current market conditions, many of our clients are particularly concerned with liquidity and cost containment. The various tools and strategies that companies utilize to hedge their Deferred Compensation Plans can materially enhance a company’s position in both areas as outlined below.
Liquidity
Many companies segregate assets in a rabbi trust to hedge their plans– a potential source of liquidity. As an example, a number of our clients have suspended trust deposits for their Deferred Compensation Plans. Further, our Total Return Swap (TRS) clients are able to suspend both current and future contributions to their rabbi trusts as the TRS enables the optimal hedging of the plan liabilities. Obviously, for many companies, this can free up millions of dollars annually.
Cost Containment
Funding the plan with assets in a trust materially increases the cost of the plan, tying up in some cases tens or hundreds of millions of dollars at a company’s cost of capital. The investment gains are also frequently taxed currently. The use of a TRS can mitigate these issues.
Many companies are very focused right now, understandably so, on liquidity and cost containment. Hedging a company’s DCP with Total Return Swaps can provide material benefits to companies in both areas.
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