Retirement Planning Considerations for P&G Employees
Most P&G employees enjoy long and satisfying careers at one of the world’s leading CPG companies. This is in part because P&G’s multi-faceted compensation package rewards individuals for extended tenures. The components, however, are complicated, tempting employees to put their financial plans on “autopilot”— trusting in the default options.
At Truepoint, we tailor our expertise to each of our P&G clients by sifting through the plan’s complexity, resulting in recommendations to make the most of these opportunities in the context of long-term financial goals.
But first, a few definitions.
- Restricted stock units (RSUs): Compensation issued in the form of company stock with a vesting period.
- Nonqualified stock options (NSOs): Stock options subject to income tax based on the difference between the grant price and the exercise price.
- Profit Sharing Trust: P&G’s company-funded retirement plan.
- Savings Plan: P&G’s employee retirement plan
- Short-Term Achievement Reward (STAR): A mix of NSOs and cash offered to employees at Band 3 and above.
- Long-Term Incentive Plan (LTIP): A mix of RSUs and NSOs offered to employees at Band 4 and above (with a select percentage of Band 3 employees).
- Performance Stock Program (PSP): A mix of common shares and RSUs offered to employees at Band 7 and above (employees at Band 6 receive stock only) .
1. Lowering your concentration risk by selling vested RSUs
Concentration risk means that, as a P&G employee, you have considerable personal financial stake in the company. First — and most importantly — you rely on it for your salary and benefits. Second, you are invested in P&G stock through your retirement plans (PST and Savings Plan), as well as through any RSUs and NSOs.
That means a lot of your financial well-being is tied to one company. To put it plainly, you may not be as diversified as you should be. For this reason, we typically counsel clients who are offered the LTIP to sell RSUs upon vesting. The proceeds may be invested in a more diversified portfolio, thereby reducing their concentration risk.
2. Developing a coordinated NSO exercise strategy
In contrast to RSUs, NSOs vest after three years and have a longer time period until the 10-year expiration. We take a broad view when it comes to exercising these options by considering cash flow needs, tax strategy and projected impact on the overall financial plan. By utilizing a mathematical ratio (what we call the “Truepoint Ratio”), we can determine the remaining value of the options based on time until expiration.
Each situation is unique, and a truly integrated and holistic approach to wealth management can help you achieve those longer-terms goals. And remember: both NSOs and RSUs involve different tax consequences. If, like Truepoint, your financial advisor provides comprehensive services, including tax preparation, they can help you determine when to exercise your options.
3. Consider reducing your P&G common stock within the PST
The PST provides employees with a significant number of P&G shares. This helps bolster retirement savings, but it, too, increases your concentration risk. Therefore, even if you sell your RSUs or exercise NSOs, you may still be significantly invested in P&G stock.
Prior to turning 50, you can diversify your plan assets through fixed income options. Once you turn 50, you can invest your plan assets into a wider variety of equity investment choices, though 40% of their plan assets must remain in P&G shares. Participants can then craft a more diversified portfolio within the plan, thus lowering concentration risk.
One note on P&G preferred shares. Embedded in this stock is an incredibly powerful tax opportunity involving trustees’ cost and net unrealized appreciation. Planning for this opportunity is complicated and should be a part of a comprehensive financial planning strategy. Preserving your ability to execute this strategy is critical, and therefore, we typically advise clients to reduce their P&G common stock but not the preferred shares.
4. Carefully review the annual savings plan contribution limit letter
While the company makes contributions on your behalf into the PST, you defer part of your salary to the Savings Plan. Each summer, participants receive a letter indicating how much they can defer.
Be sure to review the annual letter carefully and see if you can contribute the maximum. This will help you increase your retirement savings and your tax benefits as well.
We strongly believe in viewing a compensation package not as a separate silo, but as a critical piece of a larger, cohesive financial strategy. The effective integration of financial planning, investment and tax can create a comprehensive framework to prepare for a fun and lasting retirement.