3 Key Decisions for Your Walmart Deferred Compensation Matching Plan (DCMP)

The Walmart Deferred Compensation Matching Plan (DCMP) is a unique and critical piece to a Walmart executive's financial plan. This Non-Qualified Plan has the potential to be a fantastic retirement savings tool from tax and cash flow perspectives, BUT it comes with some nuanced risk including lack of liquidity, credit risk, and less control over your savings.

While it is prudent to consider participating in the Walmart DCMP, it is clearly not the right decision for everyone. The goal of this article is to educate and get you to start thinking about what the best decision for you is in the upcoming election window (because either way you are making a decision.)

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First Things First: What is the Walmart DCMP?

The Walmart Deferred Compensation Matching Plan (DCMP) allows eligible employees to defer a portion of their salary and/or Management Incentive Plan (MIP) to future years. The concept is somewhat like the 401(K) Plan in that you contribute pre-tax income, the contributions earn investment-like returns and the funds are distributed and taxed in future years.

The potential benefit is that you trade paying a high tax rate on income today in exchange for paying a lower tax rate on that income in the future. Today, you are a high earning corporate executive likely in a high tax bracket, but in the future perhaps you are a lower earner in a lower tax bracket (e.g. retirement, passion career.)

When considering the Walmart DCMP, the key decisions you have are:

1. How Much to Contribute.

2. When to Receive the Income (and Pay Taxes)

3. How to Invest the Funds.

So, let's discuss these decisions and some of the nuances of the Walmart DCMP.

1.) Contributions - I Don't Need This Money Right Now

The maximum amount you can contribute to the DCMP is determined by your level. Senior Directors are allowed to defer up to 80% of their Management Incentive Plan (MIP). Officers can defer up to 100% of their MIP and 80% of base salary.

Here are 3 factors to consider when deciding how much to contribute:

1. Make Sure to Cover Living Expenses: The decision to contribute to the DCMP is irrevocable once the window closes. It is important to consider your expenses for the upcoming year to ensure that you will have enough cash to cover them.

2. Pay Less Taxes: The Walmart DCMP gives you some control over your taxable income. A general rule of thumb is to keep taxable income below $383,900 for Married Couples for 2024 ($191,950 for Single Filers.) The logic here is that the Federal tax rates jump from 24% to 32% at these thresholds. That is an expensive jump.

3. Walmart Match (Free Money!): Walmart offers a 6% match on eligible contributions. For the DCMP, you are eligible to receive a 6% match on cash income (Base Salary and MIP) above $345,000 for 2024.

Technical: To determine your eligible match for the DCMP 1.) Combine your base salary and MIP 2.) Subtract the IRS Limit of $345,000 3.) Multiply the remainder by 6%.

It is important to note that the match vests 3 years following your initial contribution to the Plan. So, for Sr. Directors it may make sense to contribute to start the clock even if it is a relatively small amount.

2.) Distribution Schedule - I'll Tell You When I Want My Money

During the election window, you choose when you wish to receive payment. Your options are:

1. Lump-Sum: One-time payment soon after you leave Walmart.

2. Annual Installments: Annual payments spread over a number of years. Payments typically start the year after you leave Walmart but you can opt for payments to start later.

3. In-Service Distributions: Choose a date during your Walmart career for a payout. If you leave before the scheduled payment, you will receive it as a lump sum.

More times than not the annual installment option makes the most sense, but there are certainly scenarios for the lump sum and in-service distribution options.

Here are 3 factors to consider when deciding the timeline of payments:

1. Credit Risk (Very Important): The dollars you contribute to the DCMP have credit risk. If Walmart declares bankruptcy before you receive payment, you become a creditor along with vendors and bondholders. A common risk mitigation strategy is to take higher distributions in the earlier years with smaller distributions occurring in the later years. Of course, from a credit risk perspective it makes sense to view Walmart much differently than a smaller, riskier company.

2. The 5 + 1 Rule (Also, Very Important): You are allowed to change your mind on when you wish to receive the payments, but there are restrictions. The 5 + 1 rule states that a change must be made at least 1 year before you leave the Company AND you must delay distributions by at least 5 years.

3. Pay Less Taxes: Similar to the income threshold above, a general rule of thumb is to keep taxable income in a lower tax bracket during the distribution phase. Of course, we have no idea what the future tax brackets will be but the goal is to take enough distributions to cover living expenses and small enough to avoid a high tax bracket. You will also need to consider other taxable income such as social security, required minimum distributions and earned income from a post-Walmart job.

3.) Investment Selection - Earn Some Juice

Your deferrals are a loan to Walmart and you are entitled to earn a return. Your investment selection determines the probability and range of returns you will receive. Similar to the 401(k) Plan at Merrill, you choose your investments from a list of equity, bond, real estate and money market funds. Note that the Walmart DCMP is administered by Fidelity, not Merrill.

This is clearly not investment advice, but there are some factors to consider beyond the typical investment goals of diversification, low expense ratios and investing in line with your risk tolerance.

1. Time Horizon: The funds in the Walmart DCMP will likely be the first accounts you liquidate post-Walmart (unless you proactively delay distributions to specified number of years post-Walmart.) Depending on when you expect to receive the distributions and the degree of pain you will feel if the distributions are lower than expected, you may opt to invest in more stable, less risky investments. This should increase the probability that you'll receive the amount you expect.

2. The Grandfathered Investment Option: Before the switch to Fidelity, there was a single fixed rate investment option. Walmart agreed to pay a rate equal to the 10 Year T-Bill plus 2.7%.

Wrap-Up

Big Picture: The Walmart DCMP has the potential to help participants build wealth faster and accelerate retirement. While the decision to participate is a no-brainer for some, it certainly does NOT make sense for everyone and for others it makes sense to just contribute a small amount. Like most financial planning topics, best practice is to consider your options and make an informed and active decision.

As always, I hope that some of this information is helpful. If you have any questions or have a topic you'd like discussed, please send me an email.

If you are interested in scheduling a free consultation to discuss the Walmart Deferred Compensation Matching Plan, use the below button to schedule time on my calendar. It'd be great to connect!

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Mark Chisenhall, CFA is the founder of Taurus Financial Planning, a Fee-Only Wealth Management firm based in Bentonville, AR. The firm offers comprehensive financial planning, tax planning and investment management to corporate executives across the country.

Taurus Financial Planning is a Registered Investment Advisor with the State of Arkansas. This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation. If there is any error or inconsistency between this document and the official company plan documents, your company plan documents will govern.

This publication is for informational purposes only and is not intended as tax, accounting or legal advice or as an offer or solicitation of an offer to buy or sell or as an endorsement of any company security fund or other securities or non securities offering. This publication should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this publication.