Imagine working for years, deferring a portion of your paycheck with the promise of a bigger payout down the road. Suddenly, you find out it’s gone, not because of market losses or bad investment decisions, but because your employer went bankrupt and the courts ruled that your retirement savings now belong to creditors.
That’s not a doomsday scenario. That’s exactly what’s happening at Steward Health Care.
According to a recent WBUR report, $60 million in deferred compensation has been redirected from employees’ savings to settle the company’s debts. It’s a brutal reminder of something I’ve advised clients in the past: if you’re offered a deferred compensation plan, make sure you understand the risks – and especially the role of a rabbi trust.
Deferred Compensation Isn’t Always Secure
Deferred compensation plans can be appealing. They let you delay income (and taxes), and they’re often offered as a high-level executive benefit. However, unlike 401(k)s or IRAs, these plans don’t always come with the same level of protection.
If a company goes under and your deferred compensation is held in a rabbi trust, those funds are still considered part of the company’s assets and can be taken to pay off creditors. That’s exactly what’s happening at Steward Health.
What Is a Rabbi Trust?
A rabbi trust is a non-qualified trust often used in deferred comp plans. It gives the appearance of separating your money from the company’s, but here’s the key: it doesn’t protect you in a bankruptcy situation.
In other words, you might think you’ve saved wisely, only to find that money was never truly yours to begin with if the company fails.
And here’s the kicker: it’s not always easy to spot this risk. The rabbi trust language is often buried deep in the plan documents, in a sea of legal fine print.
How to Protect Yourself
If you’re currently enrolled in – or being offered – a deferred compensation plan, take these steps:
- Ask HR if the plan includes a rabbi trust. Don’t assume anything.
- Find out what happens to your money if the company files for bankruptcy.
- Have a financial advisor review the documents. A second set of eyes can catch what might otherwise be missed.
- Consider your overall risk exposure. How stable is the company? Would you be okay if this money disappeared?
Let a Professional Help You Decode the Fine Print
Deferred compensation plans can be complex, and the stakes are high. Before you sign anything (or assume your retirement dollars are protected), work with a financial advisor who knows what to look for. From identifying rabbi trust provisions to assessing overall risk, we can help you make confident, informed decisions about your compensation.
If your retirement plan includes deferred compensation, let’s review it together before surprises hit your savings. CLICK HERE to make an appointment.
