Top Wealth-Building Benefits for Allstate Directors and Executives

Allstate offers several attractive wealth-building and retirement planning benefits to its directors and executives. Getting the most from these benefits starts with an understanding of how each benefit works and what financial objectives they help the executive and their families achieve. To avoid unnecessary tax surprises, each benefit needs to be carefully planned for. In the article below, we cover the major benefits available to directors and executives, describing:

• How much control the employee has over the value of the benefit.
• The predictability of the benefit’s value.
• When the benefit’s value becomes realized.

This article educates you on potential planning strategies and uses for each of the benefits, although we are not recommending any specific strategy. You can also watch our webinar titled, “Maximizing Allstate Benefits and Stock Compensation,” recorded and published on YouTube.

Allstate 401(k) Plan

The 401(k) benefit at Allstate may not seem unique compared to what other companies offer. But Allstate’s 401(k) plan contains unique features and benefits that could act as powerful wealth-building tools for Allstate directors and executives. Here is a look at each of these features and how you can benefit from them.

401(k): Pre-tax and Roth Savings

Allstate employees have the option of saving money into their 401(k) on a pre-tax basis or by making Roth 401(k) deposits. Making deposits into the 401(k) on a pre-tax basis can help highly compensated executives save on current taxes, understanding that they will pay income tax on money withdrawn from the 401(k) in retirement. Employees make Roth 401(k) deposits on an after-tax basis. Meaning, the executive does not receive a current tax benefit from making Roth 401(k) deposits with the benefit of all future retirement withdrawals being tax free. 

Making 401(k) elections isn’t an “either/or” scenario. You can make contributions to both the pre-tax 401(k) and Roth 401(k) at the same time as long as total contributions don’t exceed the annual 401(k) contribution limit. For example, we’ve seen executives put 50% of their regular contributions into the pre-tax 401(k) with the other 50% into the Roth 401(k). It depends on each executive’s tax situation and expected retirement balances. 

401(k): Investment Choices

The investment choices in the Allstate 401(k) plan are basic, but in a good way. The plan provides Target Date retirement funds for employees of any age, allowing them to target an expected retirement date with the fund automatically de-risking their 401(k) investments as they near retirement. Target Date Funds (“TDFs”) are the ultimate “set-it-and-forget-it” investment for most employees. But we’ve found that TDFs can become too conservative with their investments for employees within 10 years of retirement. Listen to our podcast episode titled “Target Date Funds: Are They the Right Choice,” to learn more.

Besides TDFs, Allstate’s 401(k) offers a handful of “Single Asset Class” funds. These target major U.S. stock, bond, and international stock indexes. While the plan offers only a few fund choices, these low-cost options allow employees to construct a well-diversified portfolio.

Finally, Allstate has given employees the ability to open a self-directed brokerage account within their 401(k). This relatively new feature allows employees to invest their 401(k)s in an array of investments, much like personal investment accounts. This gives employees more investment choices but requires more hands-on work to select and maintain investments. 

401(k): In-plan Roth Conversions (“Mega Backdoor Roth”)

Allstate employees are fortunate that their 401(k) plan offers this powerful retirement savings feature. Many highly compensated directors and executives wonder about how they can save more for retirement beyond maxing out their 401(k) salary deferrals each year. This is one way to do it.

We’ve written a fuller description of the mechanics of the Mega Backdoor Roth strategy, but the key feature of the Allstate plan to consider is that employees may make after-tax contributions to their 401(k). Employees can make after-tax contributions to their 401(k)s and then convert them to a Roth 401(k). Let’s show how much additional saving an executive might add to their 401(k):

In this example, the executive is not just limited to “maxing out” their 401(k) at $23,500. They can make after-tax contributions of up to $34,750 and then convert them to a Roth 401(k). This is a powerful way to save additional funds for retirement AND build future tax-free Roth savings. 

The one limitation that Allstate’s 401(k) imposes on this strategy is that employees can only make up to four Roth conversions each year. This may create a timing issue whereby earnings on after-tax contributions are taxable to the employee that year. But that amount is usually small compared to the long-term benefit from pursuing the Mega Backdoor Roth strategy.

401(k): Net Unrealized Appreciation (“NUA”) Opportunity

As financial planners, we rarely recommend employees buy company stock in their employer’s 401(k). Allstate executives already receive equity compensation through stock options and restricted stock units, so purchasing more Allstate stock in their 401(k) introduces concentration risk with their investments.

However, Allstate offers employees the opportunity to purchase Allstate stock within their 401(k) and we recognize some have taken advantage of this. The good news is that there is an interesting tax-savings strategy that may help employees who’ve accumulated a large unrealized investment gain in their 401(k) Allstate stock. It’s called Net Unrealized Appreciation, or “NUA,” for short.

The linked article explains this strategy in-depth. But the key tax-savings feature of NUA is that it allows gains in 401(k) company stock to be taxed at long-term capital gains tax rates instead of ordinary income tax rates, which are often higher. Normally, the IRS taxes all contributions and investment gains withdrawn from a pre-tax 401(k) during retirement at ordinary income rates. But gains in (Allstate) company stock are tax-advantaged under NUA.

There are other financial planning considerations when evaluating company stock in a 401(k). Namely, investment concentration risk. But potential NUA tax benefits may argue in favor of keeping some company stock in the employee’s 401(k).

Annual Incentive Plan Bonus

Allstate offers non-officer executives an Annual Incentive Plan Bonus (AIP) each year, paid in the first quarter of the calendar year. The AIP bonus usually has a “target” amount of, say, 20% of Base Salary, with adjustments up or down depending on employee and company performance. 

AIP bonuses are attractive because they are generally predictable and are cash. Executives have total flexibility for what to do with AIP bonuses. Some executives like to fund additional retirement savings. But others may use AIP bonuses to fund annual vacations with their families, save for their kid’s college education, or stash money away for other goals such as buying a new home, paying down existing mortgages, or saving for early retirement. 

As financial planners working with Allstate executives, we help clients identify specific goals that AIP bonuses can help fund. The risk of not having a plan for AIP bonuses is that they’re spent on everyday living needs. This may fund ‘lifestyle creep’ that becomes difficult to sustain if Allstate reduces bonus levels in future years.

Allstate Stock Options

Allstate provides equity compensation to directors and executives in two forms: stock options and restricted stock units (“RSUs”). Much like the AIP bonus, Allstate ties the value of equity compensation awards to a percentage of Base Salary. After determining the total value of equity compensation, Allstate typically splits the award between stock options and RSUs, with a greater emphasis on RSUs.

Stock options present unique financial planning challenges because their ultimate value is highly uncertain, depending on the future performance of Allstate stock. When Allstate grants the executive options, it sets the ‘grant price’ to Allstate’s stock price on the grant date. One-third of the options granted vest each year over the following three years and expire 10 years from the date of grant.

Once the employee’s stock options vest, they have the option to exercise the option. To show how unpredictable the future value of Allstate options may be, we can look at an example. 

For options to have any value, the stock price has to be above the grant price at exercise. Since employees have 10 years to exercise before expiration, it’s usually the case that there’s some value to the options. But as we see here, the ultimate value of the options can range anywhere from $0 to tens of thousands of dollars. 

The uncertain value poses a financial planning challenge. Typically, as we guide clients over the years, we identify ‘what if’ goals that they can finance with elevated stock options values. These may include college education for kids, home improvements, or special vacations. 

Stock options present another important challenge: taxes. If the executive exercises and sell shares right away, Allstate will automatically withhold state and federal income taxes, much like a paycheck. This is called a “cashless exercise.” The problem is that Allstate will only withhold 22% of the options value for federal taxes. If the executive earns high compensation from Allstate, they may be in a higher tax bracket, facing the risk of owing taxes when filing the next year.

At Financial Design Studio, we provide tax planning. In house investment management and tax planning is something you can’t find at many other financial firms. This allows us to estimate potential taxes for clients before we help clients exercise stock options. You can’t avoid taxes, but we can help you plan for them so there are no surprises later on.

Allstate Restricted Stock Units

The other half of Allstate equity compensation given to directors and executives is Restricted Stock Units, or “RSUs.” These equity grants – whose value is still variable – are easier to calculate and more predictable than stock options. Similar to stock options, Allstate grants a certain number of RSUs to employees each year. The RSUs then vest in equal amounts over the following three years, at which point the employee automatically receives Allstate stock. 

In the example above, we can see how a theoretical value of Allstate RSUs may progress over each of the three years they vest. We assume the executive immediately sells the shares they receive. The value depends on the price of Allstate stock on each vesting date in Year 1, Year 2, and Year 3, when the employee ultimatley sells the shares. And we know that Allstate’s stock can be volatile from year-to-year. 

The good thing with RSUs relative to stock options is that there will almost always be value to the RSUs when they vest. Unlike stock options, which may have $0 value. This makes future financial planning for vesting RSUs a little easier. We will have a good idea of what the executive will receive each year. We’ve found college savings goals for kids are a good use for vesting RSUs. The amounts are impactful and relatively predictable. 

Like stock options, however, there is a risk that Allstate won’t withhold enough money for federal income taxes from vesting RSUs. That’s where our in-house tax planning comes into play as we’ll factor in all sources of income and guide the executive through the tax implications.

Allstate Retirement Plan (Pension)

Allstate directors and executives are fortunate in that Allstate still offers its cash balance pension plan. Many Fortune 500 companies have frozen or closed these plans in recent years. Accumulated pension benefits can be significant for long-term Allstate employees. 

Employees who’ve accumulated significant pension benefits eventually face a choice: take the pension as a lump sum payment all at once, or spread the payment out over their lifetime. This second option is called the “annuity option” and can apply to their spouse’s life as well. 

The decision to take a lump sum pension payment from the Allstate Retirement Plan or to take annuity payments depends highly on employee’s financial situation. Employees that elect a lump sum option receive something like an “IRA” from Allstate, that the employee didn’t have to contribute to. This lump sum account would be treated just like their pre-tax 401(k). They would pay income taxes on amounts that are withdrawn in retirement.

The annuity option provides a fixed amount of pension income each month over the remainder of the employee’s life. In a sense, this is like Social Security without annual payment increases for inflation. Some employees and spouses prefer the idea of a steady “paycheck” coming in each month during retirement. When we work with Allstate directors and executives, we evaluate pension options on a personalized basis. 

Summarizing Wealth Building with Allstate Benefits

As a company leader at Allstate with benefits, you have unique opportunities for wealth-building. We’ve walked through the different types of benefits you might have, the value they offer, and the planning they need. The chart below summarizes this information. 

Benefit	Predictability of Value	Timing of Benefit Realization	Planning Considerations
Allstate 401(k)	Moderate; investment returns determine final value	Long-term, for retirement	Pre-tax vs. Roth 401(k) Standard Investment Choices or Self-directed Brokerage Mega Backdoor Roth strategy Net Unrealized Appreciation for Allstate stock
Annual Incentive Plan Bonus	Moderate; target percentage of base salary adjusted for performance	Short-term annual payouts in the first quarter of each year	Prioritize non-retirement savings goals, such as college education funding
Allstate Stock Options	Low; can be highly variable depending on price of Allstate stock	Annual grants vest over 3 years, in the first quarter of each year	Prioritize “nice to have” planning goals, such as special vacations, a second home, boat, or savings for early retirement
Restricted Stock Units	Medium; value depends on Allstate stock price but normally has some value	Annual grants that vest over 3 years, in the first quarter of each year	Prioritize super-funding retirement through Mega Backdoor Roth strategy or other non-retirement savings goals
Allstate Retirement Plan (Pension)	High, with value accumulated with each year of service	Upon retirement from Allstate	Take a lump sum payment versus a monthly annuity payment

As you start to consider your own benefits and goals, comprehensive planning is key. Financial success rarely happens by accident. Tax surprises, mistakes, and missed opportunities can set your goals off track. So if you are tired of wondering if you are “getting it right,” our team is here to help. 

We specialize in using executive compensation to help you reach your goals in a tax efficient way. Schedule a free consultation with our team by clicking “get started.” 

Bonus: Our Retirement Planning Guide