Deferred compensation plan? risky?

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slimsol
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Deferred compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 12:43 pm

My employer ( A small software company with revenue of $25 mil and 130 employees) is offering deferred compensation plan for all employees. Employer doesnt match contribution. Employer gives 12% fixed annual interest rate plus LIBOR rate. Contribution will be returned to me in case of termination by company but not if i quit. I read about deferred comp plans and looks like there is a risk if company goes bankrupt. Do you guys think its a good idea to defer my comp while working in a small comapny? The company has been in business for 15 years.
Last edited by triceratop on Thu Aug 31, 2017 5:01 pm, edited 1 time in total.
Reason: fix spelling in title

aristotelian
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Re: Deffered compensation plan? risky?

Post by aristotelian » Wed Aug 30, 2017 12:46 pm

When do you get the money? 12% fixed rate seems to good to be true, and I would not trust a small, recently established company. What are your other choices, if any?

slimsol
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Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 12:53 pm

aristotelian wrote:
Wed Aug 30, 2017 12:46 pm
When do you get the money? 12% fixed rate seems to good to be true, and I would not trust a small, recently established company. What are your other choices, if any?
I get money back on dec 2021 or with in 30 days if I get terminated. Company is small but has been running since 15 years. There are no other choices. I can contribute in to 401k but they dont match 401k contribution. I am maxing out my 401k already.

retiredjg
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Re: Deffered compensation plan? risky?

Post by retiredjg » Wed Aug 30, 2017 12:56 pm

Too many questions for me to be comfortable with it.
  • -12% + interest seems impossible to me. How can they do that? Sounds like a Ponzi/Madoff scheme.

    -You don't get your money back if you move to another job? Are you sure? No way I'd agree to being a voluntary hostage. You may have a great boss today, but the next boss may just make you so miserable you'll have to quit. What an incentive!

    -And yes, there is the creditor problem.
If I were to do this, it would be a small amount of money ($1k a year?) that I'd be willing to lose if things went south.

renue74
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Re: Deffered compensation plan? risky?

Post by renue74 » Wed Aug 30, 2017 12:56 pm

How old are you? When do you plan to retire? If within 10 years....maybe it's a good deal.

But what happens if you get a bad boss or the projects you start getting you hate? What happens if your parents need you to come home to help with elder care and you have to quit? What happens if meet a wonderful Hawaiian girl and she wants to return home with you?

slimsol
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Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 1:01 pm

retiredjg wrote:
Wed Aug 30, 2017 12:56 pm
Too many questions for me to be comfortable with it.
  • -12% + interest seems impossible to me. How can they do that? Sounds like a Ponzi/Madoff scheme.

    I have no way to figure out if this is a scheme. I thought deferred comp is something that is approved by IRS
    -You don't get your money back if you move to another job? Are you sure? No way I'd agree to being a voluntary hostage. You may have a great boss today, but the next boss may just make you so miserable you'll have to quit. What an incentive!

    You DO get your money back if you move to another job but you have to wait till 12/2021. If you get fired then you get your money back right away
    -And yes, there is the creditor problem.
If I were to do this, it would be a small amount of money ($1k a year?) that I'd be willing to lose if things went south.

slimsol
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Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 1:03 pm

renue74 wrote:
Wed Aug 30, 2017 12:56 pm
How old are you? When do you plan to retire? If within 10 years....maybe it's a good deal.

But what happens if you get a bad boss or the projects you start getting you hate? What happens if your parents need you to come home to help with elder care and you have to quit? What happens if meet a wonderful Hawaiian girl and she wants to return home with you?
I am 36. I dont plans to retire for may be next 15 years.

dbr
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Re: Deffered compensation plan? risky?

Post by dbr » Wed Aug 30, 2017 1:04 pm

If there are only 120 employees you probably are personally acquainted with the CEO and the CFO and could sit down with them for a half hour or so to get more detail about how the plan works and how they can raise that amount of return.

In general it is risky to tie up your savings and investments with your job and income, but a controlled amount of investment would probably do no harm. It might be a good for image to be a participant.

aristotelian
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Re: Deffered compensation plan? risky?

Post by aristotelian » Wed Aug 30, 2017 1:10 pm

dbr wrote:
Wed Aug 30, 2017 1:04 pm
If there are only 120 employees you probably are personally acquainted with the CEO and the CFO and could sit down with them for a half hour or so to get more detail about how the plan works and how they can raise that amount of return.

In general it is risky to tie up your savings and investments with your job and income, but a controlled amount of investment would probably do no harm. It might be a good for image to be a participant.
Yeah, I am curious how they came up with this. Seems like they would be better off with a modest match rather than paying 11% interest. That said, it is a great payoff. Should be about a 50% return over 4 years. I would try a small amount.

slimsol
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Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 1:14 pm

dbr wrote:
Wed Aug 30, 2017 1:04 pm
If there are only 120 employees you probably are personally acquainted with the CEO and the CFO and could sit down with them for a half hour or so to get more detail about how the plan works and how they can raise that amount of return.

In general it is risky to tie up your savings and investments with your job and income, but a controlled amount of investment would probably do no harm. It might be a good for image to be a participant.
Very good information. Yes I am acquainted with CEO and CFO and had a meeting with them. They are very good people. That's one of the reason i think they arent fraud. They have been running this small business for long time and babying this business. They said they pay 12% interest to any business load or funding they get so they would like to extend the offer to current employees. they Offer this differed comp only for 1 year. After one year employees wont be able to defer comp.

slimsol
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Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 1:17 pm

aristotelian wrote:
Wed Aug 30, 2017 1:10 pm
dbr wrote:
Wed Aug 30, 2017 1:04 pm
If there are only 120 employees you probably are personally acquainted with the CEO and the CFO and could sit down with them for a half hour or so to get more detail about how the plan works and how they can raise that amount of return.

In general it is risky to tie up your savings and investments with your job and income, but a controlled amount of investment would probably do no harm. It might be a good for image to be a participant.
Yeah, I am curious how they came up with this. Seems like they would be better off with a modest match rather than paying 11% interest. That said, it is a great payoff. Should be about a 50% return over 4 years. I would try a small amount.
They said they pay 12% interest to any business loan or funding they get so they would like to extend the offer to current employees.
Last edited by slimsol on Wed Aug 30, 2017 1:20 pm, edited 1 time in total.

retiredjg
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Re: Deffered compensation plan? risky?

Post by retiredjg » Wed Aug 30, 2017 1:19 pm

slimsol wrote:I have no way to figure out if this is a scheme. I thought deferred comp is something that is approved by IRS.
I did not mean to imply that it is an illegal set up. That seems unlikely. But when something is "too good to be true", there is probably something you don't know or understand.

Even 100% stocks do not return 12% a year every year. So whatever they are doing, it seems to me it is is out of the ordinary and potentially very risky. What happens to the money and the company if risk comes home to roost?

You DO get your money back if you move to another job but you have to wait till 12/2021.
I see you added that later.


This is making things look a little better, but I'd still be concerned with the "too good to be true" aspect. Do they give an explanation?

slimsol
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Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 1:22 pm

retiredjg wrote:
Wed Aug 30, 2017 1:19 pm
slimsol wrote:I have no way to figure out if this is a scheme. I thought deferred comp is something that is approved by IRS.
I did not mean to imply that it is an illegal set up. That seems unlikely. But when something is "too good to be true", there is probably something you don't know or understand.

Even 100% stocks do not return 12% a year every year. So whatever they are doing, it seems to me it is is out of the ordinary and potentially very risky. What happens to the money and the company if risk comes home to roost?

You DO get your money back if you move to another job but you have to wait till 12/2021.
I see you added that later.


This is making things look a little better, but I'd still be concerned with the "too good to be true" aspect. Do they give an explanation?
I didnt realize 12% interest rate is too much since sp500 offeres 10% on average. They said they pay 12% interest on every loan they get from market so they would rather pay employees

retiredjg
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Re: Deffered compensation plan? risky?

Post by retiredjg » Wed Aug 30, 2017 1:28 pm

slimsol wrote: They said they pay 12% interest to any business load or funding they get so they would like to extend the offer to current employees. they Offer this differed comp only for 1 year. After one year employees wont be able to defer comp.
This is an ever-evolving story. :happy

So this is just for one year. It seems to me they are asking the employees to loan the company some money for 4 to 5 years.

If they came to you and asked for a loan for 4 or 5 years, rather than offering you a deferred comp plan, would you do it?

Is this really a 457b plan? Will you get the taxes deferred on your contribution?

slimsol
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Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 2:02 pm

retiredjg wrote:
Wed Aug 30, 2017 1:28 pm
slimsol wrote: They said they pay 12% interest to any business load or funding they get so they would like to extend the offer to current employees. they Offer this differed comp only for 1 year. After one year employees wont be able to defer comp.
This is an ever-evolving story. :happy

So this is just for one year. It seems to me they are asking the employees to loan the company some money for 4 to 5 years.

If they came to you and asked for a loan for 4 or 5 years, rather than offering you a deferred comp plan, would you do it?

Is this really a 457b plan? Will you get the taxes deferred on your contribution?
yes this is a 457b plan. We can contribute either 10% or 50% for 1 year

dbr
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Re: Deffered compensation plan? risky?

Post by dbr » Wed Aug 30, 2017 2:07 pm

The whole thing is at risk to the financial success of the company. I doubt there is anything pernicious about this, but it should be considered a risky endeavor. A question apropos of loans would be where an employee with money in the plan stands in line relative to other creditors if the company should go bust.

I had an interesting experience at a similarly small company years ago. A couple of years in as things were not going so well I learned that we all had been the holders of privately issued stock in the company and that they had made a decision to buy everyone out. So anyway they gave us each a few tens of thousands of dollars we didn't know we had. Next we all got letters from some accounting firm somewhere that the buyout was actually at a capital loss of some kind. So we all took the money and wrote off a tax loss on our income taxes for a couple of years. To this day I still don't really understand what happened.

renue74
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Re: Deffered compensation plan? risky?

Post by renue74 » Wed Aug 30, 2017 2:30 pm

I think hitching yourself to any employer in hopes of a high return on retirement savings in a long term fashion is too risky.

It's why the retirement system created "portable" retirement vehicles. I own a very small business....4 person web design firm. I know my people aren't going to retire at my firm....and I've setup a self-directed SIMPLE IRA for that reason. It's portable. It's not heavily managed on my part and my employees like that.

Life changes. The way your plan sounds, deferred compensation should be meant for stakeholders in the company.....people who plan to be there until they retire and are integral to the business vision.

You're basically providing a 12% hard money loan with no collateral.

retiredjg
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Re: Deffered compensation plan? risky?

Post by retiredjg » Wed Aug 30, 2017 2:33 pm

slimsol wrote: We can contribute either 10% or 50% for 1 year
This actually made me laugh. I sure hope nobody is loaning them 50% of a year's salary for 4 to 5 years (unless they can actually afford to lose it).

This could be a good deal. Or the company could be on shaky ground and trying to shore it up with loans from the employees. Keep in mind that this move is for the benefit of the company in some way. They are not doing this to benefit the employees. I'm not saying they are trying to ***** the employees, but company leaders do not sit around thinking about how to enrich the employees unless it also helps the company. This is a risky business deal, not from the goodness of their hearts.

Also keep in mind that 12%+ interest for each of 4 or 5 years is a very high payout. Great reward comes from great risk. But colossal failure can also come from great risk.

Tempting. But I'd be sure I could actually afford to lose the money.

WL2034
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Re: Deffered compensation plan? risky?

Post by WL2034 » Wed Aug 30, 2017 2:42 pm

slimsol wrote:
Wed Aug 30, 2017 1:14 pm


Yes I am acquainted with CEO and CFO and had a meeting with them. They are very good people. That's one of the reason i think they arent fraud.
These are the characteristics of almost every Ponzi schemer, con man, etc. By no means am I suggesting this means your CEO and CFO are scammers, at all. I am just suggesting that being nice, and a seemingly "good person" is basically a prerequisite to scam someone. Most of the stories I hear and see on TV involve very reputable and esteemed people, active in the church and/or community, friendly, type of people who would give you the shirt off of their back. That's the confidence part of "con man." Then the money runs dry and it all falls apart.

Again, this is not at all to suggest your CEO and CFO are running a scam--very unlikely! But just to say, I wouldn't put too much weight in them being "very good people."

slimsol
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Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 2:43 pm

retiredjg wrote:
Wed Aug 30, 2017 2:33 pm
slimsol wrote: We can contribute either 10% or 50% for 1 year
This actually made me laugh. I sure hope nobody is loaning them 50% of a year's salary for 4 to 5 years (unless they can actually afford to lose it).

This could be a good deal. Or the company could be on shaky ground and trying to shore it up with loans from the employees. Keep in mind that this move is for the benefit of the company in some way. They are not doing this to benefit the employees. I'm not saying they are trying to ***** the employees, but company leaders do not sit around thinking about how to enrich the employees unless it also helps the company. This is a risky business deal, not from the goodness of their hearts.

Also keep in mind that 12%+ interest for each of 4 or 5 years is a very high payout. Great reward comes from great risk. But colossal failure can also come from great risk.

Tempting. But I'd be sure I could actually afford to lose the money.
company is actually growing at rapid pace and one of the fastest growing small companies in america according to forbes. 50% of employee salary wont be more than couple million dollars (thats if all employees contribute 50%) which is not significant considering annual revenue is over 25 million. Employees get al contribution back if terminated. What if i contribute right now and if i sense company is shaking i get fired and get my contribution back? lol :D :D :D :D

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DanMahowny
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Re: Deffered compensation plan? risky?

Post by DanMahowny » Wed Aug 30, 2017 2:47 pm

When I saw "12% interest", I immediately thought Ponzi.

I can't figure out why a company would borrow money at 12% interest in today's low interest rate environment. Again, I think Ponzi.
Funding secured

renue74
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Re: Deffered compensation plan? risky?

Post by renue74 » Wed Aug 30, 2017 2:51 pm

slimsol wrote:
Wed Aug 30, 2017 2:43 pm
retiredjg wrote:
Wed Aug 30, 2017 2:33 pm
slimsol wrote: We can contribute either 10% or 50% for 1 year
This actually made me laugh. I sure hope nobody is loaning them 50% of a year's salary for 4 to 5 years (unless they can actually afford to lose it).

This could be a good deal. Or the company could be on shaky ground and trying to shore it up with loans from the employees. Keep in mind that this move is for the benefit of the company in some way. They are not doing this to benefit the employees. I'm not saying they are trying to ***** the employees, but company leaders do not sit around thinking about how to enrich the employees unless it also helps the company. This is a risky business deal, not from the goodness of their hearts.

Also keep in mind that 12%+ interest for each of 4 or 5 years is a very high payout. Great reward comes from great risk. But colossal failure can also come from great risk.

Tempting. But I'd be sure I could actually afford to lose the money.
company is actually growing at rapid pace and one of the fastest growing small companies in america according to forbes. 50% of employee salary wont be more than couple million dollars (thats if all employees contribute 50%) which is not significant considering annual revenue is over 25 million. Employees get al contribution back if terminated. What if i contribute right now and if i sense company is shaking i get fired and get my contribution back? lol :D :D :D :D
What if the company get's shaky and go across the board with pay cuts and cuts your compensation down to $12K/year? (Their expectation would be for you to quit.)

If you work in an "At Will" State, employers have a lot of flexibility in their HR practices.

slimsol
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Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 2:55 pm

DanMahowny wrote:
Wed Aug 30, 2017 2:47 pm
When I saw "12% interest", I immediately thought Ponzi.

I can't figure out why a company would borrow money at 12% interest in today's low interest rate environment. Again, I think Ponzi.
Yeah I am really confused. Lot of employees asked if they can loan their personal money to company and get 12% interest rate and they said they cant. it has to be salary deferral only. Dont you think if they were ponzi they will accept money from everywhere?

barnaclebob
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Re: Deffered compensation plan? risky?

Post by barnaclebob » Wed Aug 30, 2017 3:14 pm

The fewer people between you and your money, the better.

retiredjg
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Re: Deffered compensation plan? risky?

Post by retiredjg » Wed Aug 30, 2017 3:24 pm

slimsol wrote: Yeah I am really confused. Lot of employees asked if they can loan their personal money to company and get 12% interest rate and they said they cant. it has to be salary deferral only. Dont you think if they were ponzi they will accept money from everywhere?
If this is an illegal scheme, they will have an answer for everything, including how it can only be by salary deferral. That is actually one way they can legally take your money and keep it!

If these guys are conning you, you absolutely will think they are good solid wonderful people who would NEVER do something like that. That's how a con scheme works.

I'd be very surprised if this is a scam. But I also know if it is a scam, the victims will never expect it, for all the reasons you have outlined in your post.

With that kind of payout, there has to be high risk involved. That does not mean the plan is sketchy or illegal. It means it is risky.

Do not be blind to the fact that is is a risky offer. That is exactly why the payout is so huge. Proceed according to your willingness and ability to take risk. And don't risk anything that will ruin you (or cause a divorce) if you lose.

CantPassAgain
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Re: Deffered compensation plan? risky?

Post by CantPassAgain » Wed Aug 30, 2017 3:26 pm

Why in the world can this company not get cheaper financing than 12%? That alone is enough to make run, not walk away.

552BB
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Re: Deffered compensation plan? risky?

Post by 552BB » Wed Aug 30, 2017 3:42 pm

Good afternoon BH,



Hello slimsol.


slimsol wrote:
Wed Aug 30, 2017 12:43 pm
My employer ( A small software company with revenue of $25 mil and 130 employees) is offering deferred compensation plan for all employees. Employer doesnt match contribution. Employer gives 12% fixed annual interest rate plus LIBOR rate. Contribution will be returned to me in case of termination by company but not if i quit. I read about deferred comp plans and looks like there is a risk if company goes bankrupt. Do you guys think its a good idea to defer my comp while working in a small comapny? The company has been in business for 15 years.


You have asked an important question.

You clearly have a gut feeling about this, that all may not be as it seems in regards to this offer from your company.

You should be leary of this offer. 12% plus LIBOR is a great deal. I don't think Bernie Madoff even offered this kind of return.

There are red flags here.

Many posters have already offered there cautions on this.



I will add these important points.

First, this is a deferred compensation.

This is not unusual.

I will also guess that this is not a 'rabbi' account. That means that this 'account' will only exsist on the accounting books of the company, not an actual account at some fund company like Vanguard. This is important!!! It is an accounting rule driven by the Dodd - Frank rules that came about during the last economic down turn, not by your company.

This is important!!!

What does all this mean.

Two things.

First, it means that you do not have ownership of this money, unlike your 401k. (Big clue - why do you think they don't offer this GREAT DEAL in your 401k).

Second, what do you think will happen to that defered compensation money if they go out of business, or have a hostile takover of the business, or even a friendly takeover. There are no real good protections for you on these accounts under these cases. With a 401k, these accounts are, by law, under your name at a brokerage in an account.

So why would a company offer this!!! The same reason corporate pensions looked soo good decades ago. It allowed the companies to defer employee pay into the future, thus making their current accounts look better (ie they are more profitable currently).

How did those private/corporate pensions work out for the employee? Not too well I would say.





This is the case.



But if you don't believe that, then ask them to just give you a 12% + LIBOR pay raise, or have them just put that into your 401k.

Another hint: If you do that, it may not go over too well with your company.



I hope that I did not over step my bounds with this advice.



I hope this helps.



:sharebeer
Last edited by 552BB on Wed Aug 30, 2017 5:56 pm, edited 1 time in total.

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sergeant
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Re: Deffered compensation plan? risky?

Post by sergeant » Wed Aug 30, 2017 4:34 pm

Run. Fast. Away. This is way too risky. Either 10% or 50%. LOL! So they won't allow a 25% deferral? :shock:
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BolderBoy
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Re: Deffered compensation plan? risky?

Post by BolderBoy » Wed Aug 30, 2017 4:44 pm

slimsol wrote:
Wed Aug 30, 2017 1:22 pm
I didnt realize 12% interest rate is too much since sp500 offeres 10% on average. They said they pay 12% interest on every loan they get from market so they would rather pay employees
12% seems very high to me for business loan interest rates. Interest rates are usually linked directly to risk.

Can others weigh in on what typical business loan rates are nowadays?

(my guts are telling me that this is very risky)
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

dbr
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Re: Deffered compensation plan? risky?

Post by dbr » Wed Aug 30, 2017 4:51 pm

The OP says the plan is a (non-governmental) 457b. More information here: https://www.irs.gov/retirement-plans/no ... tion-plans.

An important consideration is this one: "Non-governmental 457(b) plans commonly use “rabbi trusts” to hold employee deferrals. The rabbi trust is funded, but the trust assets remain available to creditors. Employees are lower in priority than general creditors in the event of legal claims against the employer."

I think this is too risky to put in enough assets to make it worthwhile.

PugetSoundguy
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Re: Deffered compensation plan? risky?

Post by PugetSoundguy » Wed Aug 30, 2017 6:05 pm

You would basically be making an unsecured loan to a company that, according to its executives, cannot borrow money elsewhere for less than 12 percent. Meaning banks or other potential lenders are concerned about the company's creditworthiness. And, unlike a bank loan officer, you don't have the advantage of requiring detailed company financials before making a decision. And, unlike a conventional loan, you won't get periodic interest and principal payments. Instead, everything is paid back if all goes well at some future date. Would you make such a loan to any other company under similar circumstances? Perhaps your intimate knowledge of this company gives some you reassurance.

I echo several other respondents in concluding that you should participate only if you feel it is worth the very substantial risk and you can afford to lose the money.

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Re: Deffered compensation plan? risky?

Post by JBTX » Wed Aug 30, 2017 6:23 pm

I recently worked for a company that paid 13% interest on their revolving bank loans. They were bankrupt within 2 years, which was not at all a surprise to me. If your company is paying 12% for debt then the financial status of your company is shaky. This is beyond "junk".

I have no way to evaluate what your company is doing and why it is doing it, but my best guess is they are offering speculative employee financing because they need cash and there is a serious risk you'll never see it.

Ask to look at company audited financial statements. I doubt they will honor that request. You can be damn sure the bank requires audited financial statements every month or quarter when they make such loans.

nervouscorps
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Re: Deffered compensation plan? risky?

Post by nervouscorps » Wed Aug 30, 2017 6:53 pm

I own a small business with about 20 employees. If I paid 12% on my loans I certainly wouldn't advertise it.

slimsol
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Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 7:02 pm

JBTX wrote:
Wed Aug 30, 2017 6:23 pm
I recently worked for a company that paid 13% interest on their revolving bank loans. They were bankrupt within 2 years, which was not at all a surprise to me. If your company is paying 12% for debt then the financial status of your company is shaky. This is beyond "junk".

I have no way to evaluate what your company is doing and why it is doing it, but my best guess is they are offering speculative employee financing because they need cash and there is a serious risk you'll never see it.

Ask to look at company audited financial statements. I doubt they will honor that request. You can be damn sure the bank requires audited financial statements every month or quarter when they make such loans.
Actually this company has open book financials since it started 15 years ago. Employees can view monthly income statements, expenses, revenue, profit etc. You can view everything except individual employees salary .

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Re: Deffered compensation plan? risky?

Post by KyleAAA » Wed Aug 30, 2017 7:14 pm

12% for a bank loan sounds high, but a 12% weighted average cost of capital for a business of that size is well within the realm of what's reasonable. Maybe that's what the CEO meant? But yeah, it does sound a bit fishy.

JBTX
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Re: Deffered compensation plan? risky?

Post by JBTX » Wed Aug 30, 2017 7:17 pm

slimsol wrote:
Wed Aug 30, 2017 7:02 pm
JBTX wrote:
Wed Aug 30, 2017 6:23 pm
I recently worked for a company that paid 13% interest on their revolving bank loans. They were bankrupt within 2 years, which was not at all a surprise to me. If your company is paying 12% for debt then the financial status of your company is shaky. This is beyond "junk".

I have no way to evaluate what your company is doing and why it is doing it, but my best guess is they are offering speculative employee financing because they need cash and there is a serious risk you'll never see it.

Ask to look at company audited financial statements. I doubt they will honor that request. You can be damn sure the bank requires audited financial statements every month or quarter when they make such loans.
Actually this company has open book financials since it started 15 years ago. Employees can view monthly income statements, expenses, revenue, profit etc. You can view everything except individual employees salary .

No financially sound company pays 12% interest on their obligations.

CCC junk yields 10.5%.

http://online.wsj.com/mdc/public/page/2 ... chmrk.html

Good luck.

552BB
Posts: 154
Joined: Wed Mar 31, 2010 9:15 pm

Re: Deffered compensation plan? risky?

Post by 552BB » Wed Aug 30, 2017 7:17 pm

Hello again slimsol,


slimsol wrote:
Wed Aug 30, 2017 7:02 pm
JBTX wrote:
Wed Aug 30, 2017 6:23 pm
I recently worked for a company that paid 13% interest on their revolving bank loans. They were bankrupt within 2 years, which was not at all a surprise to me. If your company is paying 12% for debt then the financial status of your company is shaky. This is beyond "junk".

I have no way to evaluate what your company is doing and why it is doing it, but my best guess is they are offering speculative employee financing because they need cash and there is a serious risk you'll never see it.

Ask to look at company audited financial statements. I doubt they will honor that request. You can be damn sure the bank requires audited financial statements every month or quarter when they make such loans.
Actually this company has open book financials since it started 15 years ago. Employees can view monthly income statements, expenses, revenue, profit etc. You can view everything except individual employees salary .


I hope I am not being to harsh here. And I hope you have read my comments earlier.

And please don't take these comments as being facetious or sarcastic.

But, old Bernie Madoff also had an open book policy. In fact, the SEC came in and looked at his books. "Nothing to see here".

And unlike your company, Madoff had a record at least twice as long!!!



I would tread with caution, and heed the warnings.



Best of luck to you.



I hope this helps.



:sharebeer

Grt2bOutdoors
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Location: New York

Re: Deffered compensation plan? risky?

Post by Grt2bOutdoors » Wed Aug 30, 2017 7:48 pm

slimsol wrote:
Wed Aug 30, 2017 1:17 pm
aristotelian wrote:
Wed Aug 30, 2017 1:10 pm
dbr wrote:
Wed Aug 30, 2017 1:04 pm
If there are only 120 employees you probably are personally acquainted with the CEO and the CFO and could sit down with them for a half hour or so to get more detail about how the plan works and how they can raise that amount of return.

In general it is risky to tie up your savings and investments with your job and income, but a controlled amount of investment would probably do no harm. It might be a good for image to be a participant.
Yeah, I am curious how they came up with this. Seems like they would be better off with a modest match rather than paying 11% interest. That said, it is a great payoff. Should be about a 50% return over 4 years. I would try a small amount.
They said they pay 12% interest to any business loan or funding they get so they would like to extend the offer to current employees.
Junk bonds yield 6-7%, they are paying 500-600 bps above that for funding? That speaks volumes about just how risky lenders believe this company is. Tread cautiously.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
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Location: New York

Re: Deffered compensation plan? risky?

Post by Grt2bOutdoors » Wed Aug 30, 2017 7:55 pm

JBTX wrote:
Wed Aug 30, 2017 7:17 pm
slimsol wrote:
Wed Aug 30, 2017 7:02 pm
JBTX wrote:
Wed Aug 30, 2017 6:23 pm
I recently worked for a company that paid 13% interest on their revolving bank loans. They were bankrupt within 2 years, which was not at all a surprise to me. If your company is paying 12% for debt then the financial status of your company is shaky. This is beyond "junk".

I have no way to evaluate what your company is doing and why it is doing it, but my best guess is they are offering speculative employee financing because they need cash and there is a serious risk you'll never see it.

Ask to look at company audited financial statements. I doubt they will honor that request. You can be damn sure the bank requires audited financial statements every month or quarter when they make such loans.
Actually this company has open book financials since it started 15 years ago. Employees can view monthly income statements, expenses, revenue, profit etc. You can view everything except individual employees salary .

No financially sound company pays 12% interest on their obligations.

CCC junk yields 10.5%.

http://online.wsj.com/mdc/public/page/2 ... chmrk.html

Good luck.
I did not read your comment before i posted, but i wholeheartedly agree. The types of lenders who demand these rates are not typical banks, banks would not lend to a speculative business. A mezzanine financier on the other hand would have no problem demanding such a rate, nor would an "angel" or "vc". I would pass because the restrictions are beyond what a normal deferred comp plan would have, the most suspect of statements - if terminated you get your money, if you leave voluntarily, you don't? It's the second coming of Madoff.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

ThrustVectoring
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Re: Deffered compensation plan? risky?

Post by ThrustVectoring » Wed Aug 30, 2017 8:02 pm

That looks like a terrible deal to me. The loans that the company gets are at fair market rates, so you're not getting ahead any by participating. Plus, you'd forfeit the contribution entirely if you leave. Which means that every dollar you put in reduces the value of all job offers you get until the loan matures.
Current portfolio: 60% VTI / 40% VXUS

slimsol
Posts: 23
Joined: Mon Feb 23, 2015 1:36 pm

Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 8:03 pm

Grt2bOutdoors wrote:
Wed Aug 30, 2017 7:55 pm
JBTX wrote:
Wed Aug 30, 2017 7:17 pm
slimsol wrote:
Wed Aug 30, 2017 7:02 pm
JBTX wrote:
Wed Aug 30, 2017 6:23 pm
I recently worked for a company that paid 13% interest on their revolving bank loans. They were bankrupt within 2 years, which was not at all a surprise to me. If your company is paying 12% for debt then the financial status of your company is shaky. This is beyond "junk".

I have no way to evaluate what your company is doing and why it is doing it, but my best guess is they are offering speculative employee financing because they need cash and there is a serious risk you'll never see it.

Ask to look at company audited financial statements. I doubt they will honor that request. You can be damn sure the bank requires audited financial statements every month or quarter when they make such loans.
Actually this company has open book financials since it started 15 years ago. Employees can view monthly income statements, expenses, revenue, profit etc. You can view everything except individual employees salary .

No financially sound company pays 12% interest on their obligations.

CCC junk yields 10.5%.

http://online.wsj.com/mdc/public/page/2 ... chmrk.html

Good luck.
I did not read your comment before i posted, but i wholeheartedly agree. The types of lenders who demand these rates are not typical banks, banks would not lend to a speculative business. A mezzanine financier on the other hand would have no problem demanding such a rate, nor would an "angel" or "vc". I would pass because the restrictions are beyond what a normal deferred comp plan would have, the most suspect of statements - if terminated you get your money, if you leave voluntarily, you don't? It's the second coming of Madoff.
I misspoke earliar. We get our money back even if we quit. But we have to wait till 12/2021. Anyway I would pass. I dont want to be worried about my money in the company after I quit.

slimsol
Posts: 23
Joined: Mon Feb 23, 2015 1:36 pm

Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 8:05 pm

ThrustVectoring wrote:
Wed Aug 30, 2017 8:02 pm
That looks like a terrible deal to me. The loans that the company gets are at fair market rates, so you're not getting ahead any by participating. Plus, you'd forfeit the contribution entirely if you leave. Which means that every dollar you put in reduces the value of all job offers you get until the loan matures.
We do get money if we quit the job. We just have to wait till 12/2021. I believe thats how all deferred comp works

Grt2bOutdoors
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Location: New York

Re: Deffered compensation plan? risky?

Post by Grt2bOutdoors » Wed Aug 30, 2017 8:07 pm

BolderBoy wrote:
Wed Aug 30, 2017 4:44 pm
slimsol wrote:
Wed Aug 30, 2017 1:22 pm
I didnt realize 12% interest rate is too much since sp500 offeres 10% on average. They said they pay 12% interest on every loan they get from market so they would rather pay employees
12% seems very high to me for business loan interest rates. Interest rates are usually linked directly to risk.

Can others weigh in on what typical business loan rates are nowadays?

(my guts are telling me that this is very risky)
Unsecured financing depending on credit rating of company by a major credit rating agency with a cutoff of BBB+ might be priced at Libor + 1-2% (let's call it 1.5% to 2.5%) for one year funding fully borrowed, undrawn might cost 1/2%. The better the rating, the lower the cost. There could also be an upfront fee for the financing. Alot of these financing arrangements can be found buried in financial statements of public companies.

12% is a D equivalent or worse company. A better description is "highly speculative".
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
Posts: 19497
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Location: New York

Re: Deffered compensation plan? risky?

Post by Grt2bOutdoors » Wed Aug 30, 2017 8:11 pm

slimsol wrote:
Wed Aug 30, 2017 8:03 pm
Grt2bOutdoors wrote:
Wed Aug 30, 2017 7:55 pm
JBTX wrote:
Wed Aug 30, 2017 7:17 pm
slimsol wrote:
Wed Aug 30, 2017 7:02 pm
JBTX wrote:
Wed Aug 30, 2017 6:23 pm
I recently worked for a company that paid 13% interest on their revolving bank loans. They were bankrupt within 2 years, which was not at all a surprise to me. If your company is paying 12% for debt then the financial status of your company is shaky. This is beyond "junk".

I have no way to evaluate what your company is doing and why it is doing it, but my best guess is they are offering speculative employee financing because they need cash and there is a serious risk you'll never see it.

Ask to look at company audited financial statements. I doubt they will honor that request. You can be damn sure the bank requires audited financial statements every month or quarter when they make such loans.
Actually this company has open book financials since it started 15 years ago. Employees can view monthly income statements, expenses, revenue, profit etc. You can view everything except individual employees salary .

No financially sound company pays 12% interest on their obligations.

CCC junk yields 10.5%.

http://online.wsj.com/mdc/public/page/2 ... chmrk.html

Good luck.
I did not read your comment before i posted, but i wholeheartedly agree. The types of lenders who demand these rates are not typical banks, banks would not lend to a speculative business. A mezzanine financier on the other hand would have no problem demanding such a rate, nor would an "angel" or "vc". I would pass because the restrictions are beyond what a normal deferred comp plan would have, the most suspect of statements - if terminated you get your money, if you leave voluntarily, you don't? It's the second coming of Madoff.
I misspoke earliar. We get our money back even if we quit. But we have to wait till 12/2021. Anyway I would pass. I dont want to be worried about my money in the company after I quit.
If you do it, consider it as an investment in a small cap growth fund. You can make a significant amount, you can also lose a significant amount. Good Luck.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

slimsol
Posts: 23
Joined: Mon Feb 23, 2015 1:36 pm

Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 8:15 pm

Grt2bOutdoors wrote:
Wed Aug 30, 2017 8:11 pm
slimsol wrote:
Wed Aug 30, 2017 8:03 pm
Grt2bOutdoors wrote:
Wed Aug 30, 2017 7:55 pm
JBTX wrote:
Wed Aug 30, 2017 7:17 pm
slimsol wrote:
Wed Aug 30, 2017 7:02 pm


Actually this company has open book financials since it started 15 years ago. Employees can view monthly income statements, expenses, revenue, profit etc. You can view everything except individual employees salary .

No financially sound company pays 12% interest on their obligations.

CCC junk yields 10.5%.

http://online.wsj.com/mdc/public/page/2 ... chmrk.html

Good luck.
I did not read your comment before i posted, but i wholeheartedly agree. The types of lenders who demand these rates are not typical banks, banks would not lend to a speculative business. A mezzanine financier on the other hand would have no problem demanding such a rate, nor would an "angel" or "vc". I would pass because the restrictions are beyond what a normal deferred comp plan would have, the most suspect of statements - if terminated you get your money, if you leave voluntarily, you don't? It's the second coming of Madoff.
I misspoke earliar. We get our money back even if we quit. But we have to wait till 12/2021. Anyway I would pass. I dont want to be worried about my money in the company after I quit.
If you do it, consider it as an investment in a small cap growth fund. You can make a significant amount, you can also lose a significant amount. Good Luck.
I was thinking about putting $1k but looks like its pointless since i wont get any significant return. I would have to defer atleaast 10k in order to see gains

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sergeant
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Re: Deffered compensation plan? risky?

Post by sergeant » Wed Aug 30, 2017 9:14 pm

slimsol wrote:
Wed Aug 30, 2017 8:05 pm
ThrustVectoring wrote:
Wed Aug 30, 2017 8:02 pm
That looks like a terrible deal to me. The loans that the company gets are at fair market rates, so you're not getting ahead any by participating. Plus, you'd forfeit the contribution entirely if you leave. Which means that every dollar you put in reduces the value of all job offers you get until the loan matures.
We do get money if we quit the job. We just have to wait till 12/2021. I believe thats how all deferred comp works
No, that's not how all deferred comp works. This is a huge red flag.
Lincoln 3 EOW!

slimsol
Posts: 23
Joined: Mon Feb 23, 2015 1:36 pm

Re: Deffered compensation plan? risky?

Post by slimsol » Wed Aug 30, 2017 9:21 pm

sergeant wrote:
Wed Aug 30, 2017 9:14 pm
slimsol wrote:
Wed Aug 30, 2017 8:05 pm
ThrustVectoring wrote:
Wed Aug 30, 2017 8:02 pm
That looks like a terrible deal to me. The loans that the company gets are at fair market rates, so you're not getting ahead any by participating. Plus, you'd forfeit the contribution entirely if you leave. Which means that every dollar you put in reduces the value of all job offers you get until the loan matures.
We do get money if we quit the job. We just have to wait till 12/2021. I believe thats how all deferred comp works
No, that's not how all deferred comp works. This is a huge red flag.
How does a regular deferred comp work in event of employee quiting job

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Steelersfan
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Re: Deffered compensation plan? risky?

Post by Steelersfan » Wed Aug 30, 2017 9:27 pm

Not a comment on the worthiness of this plan or choosing to use it, but the company I worked for had a fixed income option that payed well above either prevailing rates or their cost of capital. I think they viewed as a perk to reward their top officials. I stayed in it until I retired, and well glad they offered it.

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sergeant
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Re: Deffered compensation plan? risky?

Post by sergeant » Thu Aug 31, 2017 12:54 am

slimsol wrote:
Wed Aug 30, 2017 9:21 pm
sergeant wrote:
Wed Aug 30, 2017 9:14 pm
slimsol wrote:
Wed Aug 30, 2017 8:05 pm
ThrustVectoring wrote:
Wed Aug 30, 2017 8:02 pm
That looks like a terrible deal to me. The loans that the company gets are at fair market rates, so you're not getting ahead any by participating. Plus, you'd forfeit the contribution entirely if you leave. Which means that every dollar you put in reduces the value of all job offers you get until the loan matures.
We do get money if we quit the job. We just have to wait till 12/2021. I believe thats how all deferred comp works
No, that's not how all deferred comp works. This is a huge red flag.
How does a regular deferred comp work in event of employee quiting job
You stated this is a 457b account twice. I don't think it is. It may be a 457 account but not a 457b. In any event, with a 457b account you get access to the funds when you leave employment. There are different rules based on your classification on when you can use the funds penalty free. Google is your friend.
Lincoln 3 EOW!

edge
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Location: Great Falls VA

Re: Deffered compensation plan? risky?

Post by edge » Thu Aug 31, 2017 3:11 am

Seems fishy.

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