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jjjjjj24 writes:

My company offers a deferred compensation plan that offers several mutual fund options. What criteria should be used in determining the amount of compensation to defer, on an annual basis, and which funds should be selected - the options are pretty standard?

Usually, deferred compensation plans are a general obligation of the employer. That means that unlike with a 401k, the money you leave with your employer is not required by law to be funded. If the company goes bankrupt, you get in line with all the other claiments. So, take your company's financial health into careful consideration. The terms of the deferral are essentially a contractural agreement between you and your employer. Although, I'm sure the IRS has something to say about it.

SCullum writes:

I have been in deferred compensation for ten years. Your question is complicated but I will try to answer in brief. The amount that you can defer is no more than 8000 per year or 33 1/3 % of includible compensation which ever is less. 401K ,403b and SEP plans count twards those limits. The longer the time horizon you have choose more agressive options. The shorter choose a mix of agressive and conservative options. In my opinion 5 years or longer is a long time horizon. Look at the funds long range and intermediate returns and the internal cost of the fund, even in the same deferred comp. plan some funds are cheaper than others. A good plan can offer 50 or more choices.

I'm a participant in a deffered compensation plan myself. My employer is cash rich, so I don't worry much about their ability to pay.

Unlike in SCullum's case, I'm not limited in the amount I'm allowed to deposit. I put in 50% of my salary in addition to the 401k.

Both state and federal taxes are deferred until I begin withdrawing the cash. I'm required, either by law or company policy, to begin taking the salary in equal payments as soon as I leave the company's employ. Since I will retire soon, and will have several years before I wish to dip into my IRA and until I begin receiving SS, that works perfectly for me. My tax bracket will be significantly lower than it is now, another big plus.

We are offered a full spectrum of mutual funds, very much like in our 401k plan. Just recently they have added an index fund to the mix (hurrah!); As soon as I've checked it out, I will probably transfer 100% of my holdings into that.

I do not feel the need to diversify among mutual funds. An S&P500 index fund offers more than enough diversification for me.


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