DCAP for Cash?

Discussion of the Cash portion of the Permanent Portfolio

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Storm
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DCAP for Cash?

Post by Storm » Mon Nov 08, 2010 11:17 am

I wanted to know if participating in my company's DCAP (deferred compensation) plan would be useful as a partial substitute for cash.  I am not able to take withdrawals from this fund unless I quit my job or retire, however, the interest rate is pretty good (4.375%) and it seems to have some tax advantages.  If I were to use the DCAP as a portion of my cash, keeping enough liquid to rebalance effectively, would this be acceptable to the PP strategy?
"I came here for financial advice, but I've ended up with a bunch of shave soaps and apparently am about to start eating sardines.  Not that I'm complaining, of course." -ZedThou
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Re: DCAP for Cash?

Post by MediumTex » Mon Nov 08, 2010 11:37 am

Is this a 401(k) plan or a non-qualified plan?

The stable value funds in 401(k) plans are probably going to see a significant reduction in yield after the first of the year.

In general, I think a stable value fund in a 401(k) plan is fine for cash.  It's not ideal, but if it's what you've got, I think it works well enough.
Only strength can cooperate. Weakness can only beg.
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Re: DCAP for Cash?

Post by Storm » Mon Nov 08, 2010 1:31 pm

I believe this is a non-qualified plan.  It is basically offered to executives as a way to defer anywhere from 4%-80% of their current earnings.  You can't choose how the money is invested, as it really isn't invested anywhere.  It is merely money that the company doesn't have to pay you in salary, and it accumulates interest.  There is some small default risk in that if the company goes out of business, you stand in line with bond holders to receive your deferred salary.  I don't consider this very likely since the company I work for has been around 175 years and is very successful and stable in the marketplace.

I guess to the company it is just like a corporate bond, although rather than borrowing from investors they are borrowing from employees to finance growth.

I already use my 401k for LT bonds and part of TSM (couldn't fit anything else in there), so that leaves a mixture of standard savings accounts, iBonds, and hopefully DCAP to round out my cash positions.
"I came here for financial advice, but I've ended up with a bunch of shave soaps and apparently am about to start eating sardines.  Not that I'm complaining, of course." -ZedThou
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Re: DCAP for Cash?

Post by MediumTex » Mon Nov 08, 2010 2:26 pm

If it's a non-qualified plan, that is definitely VP territory.

What you are describing is an unfunded and unsecured promise to pay you at some point in the future.

Your "account" is normally entirely notional and is simply a bookkeeping entry.

The PP is for money you can't afford to lose.  A non-qualified deferred comp plan benefit is money that you never had in the first place (though you will probably have it at some point in the future).

Deferred comp plans are part of my practice area.  I would never think of a benefit under one of these plans for PP purposes.
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Re: DCAP for Cash?

Post by Storm » Mon Nov 08, 2010 2:52 pm

Thanks for the advice.  I will consider it as a VP option.
"I came here for financial advice, but I've ended up with a bunch of shave soaps and apparently am about to start eating sardines.  Not that I'm complaining, of course." -ZedThou
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