Baseball’s biggest star Shohei Ohtani made headlines recently by signing the largest individual contract in the history of sports when he inked a 10-year, $700 million deal with the Los Angeles Dodgers.
Interestingly, he deferred $68 of the $70 million per year in a move that could save him nine figures in California state income tax down the road.
We’ll talk about that unique contract and the power of non-qualified deferred compensation plans with Strategic Retirement Partners Managing Director Jeanne Sutton, known as “The 401(k) Lady” in her popular social media videos. We’ll also talk about her stock market trends to watch in 2024, as well as what’s on her industry travel and speaking agenda this year.
SEE ALSO:
• Jeanne Sutton: How Ohtani’s Contract Could Save Millions (NQDC)
• Jeanne Sutton: Stock Market 2024 – What to Watch For
• Shohei Ohtani’s New ‘Retirement Plan’ Dwarfs Bobby Bonilla’s
Click to read the audio transcript here.
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Brian Anderson: [00:00:00] This is 401k Specialist Editor in Chief Brian Anderson and this is the 401k Specialist Podcast. In one of our recent social media posts, the 401k lady Jeannie Sutton, Managing Director at Strategic Retirement Partners, brought up some really interesting points about baseball star Shohei Ohtani’s record setting 10 year, 700 million contract with the Los Angeles Dodgers.
As you might have heard, baseball’s biggest star is deferring the vast majority of his salary during those 10 years in a move that could end up saving him north of nine figures in California state income taxes. While many details about the Otani contract are fascinating in and of itself, Jeannie kind of made her post even more interesting for the retirement community by expanding again on it, to also talk about, non qualified deferred compensation plans and how they can be important and valuable benefit for highly compensated employees.
We wanted to have the 401k lady on the 401k specialist podcast to talk about all this. And we’re also going to ask her about another recent social [00:01:00] media posts that kind of went viral after making its way to Yahoo finance, where she talks about seven factors that may potentially affect stock market returns throughout 2024.
Welcome back to the 401k specialist podcast, Jeannie, and thanks for joining us to cover these topics.
Jeanne Sutton: I’m so happy to be back. Thanks for having me.
Brian Anderson: All right. Well, first off, let’s talk about that Shohei Otani contract with the Dodgers and what makes it so unique? This is something I also wrote about for 401k specialists back in December because it was so out of the ordinary and because it absolutely dwarfs Bobby Bonilla’s deferred compensation deal where he still gets paid over a million dollars from the New York Mets every July 1st, even though he’s been retired from playing baseball for about 25 years.
Can you run us quickly through some of the details about the Otani contract?
Jeanne Sutton: So from what I know, and I think the reason it just made such a big news headline is the sheer size of the contract. I mean, it’s, it’s huge, right? It’s the biggest, you know, to my knowledge, I believe it’s the biggest in history, [00:02:00] the deferred comp, especially though in baseball, as you referenced is not that rare.
So I’m in Cincinnati reds country and Ken Griffey jr. Hadn’t played a game since 2010. And I think this year is his final deferred comp. payout. So I think the size of Otani’s contract is what really stood out, you know, in addition to just the location being California,
Brian Anderson: Right? By deferring his salary until a time when he very well might be retired from baseball and not living in notoriously tax crazy California.
You did some estimating about how much that might save him in state income taxes. Can you tell us about that? And by the way, I, I kind of love how in your video you said, don’t hate the player, hate the game, but you can’t really blame him for finding a way to game the system.
Jeanne Sutton: Yeah. So I had an old colleague that used to say, you know, There, there’s two tax codes, one for the informed and one for the uninformed.
And he’s just, you know, I’m sure with, consultants all around him, he’s an informed [00:03:00] taxpayer. Uh, tax law is complicated and I don’t want to simplify it and I don’t want to make blanket statements when other variables could come into play. But generally speaking, you know, it’s understood that this deferred comp would be taxed in the state He is living when it is collected not the state.
He is living when it is earned So by deferring it and one would assume moving to a low tax or a no tax state Um, he could potentially avoid a really high tax rate which in california when you add it all together It’s like 14 and so that’s where people are getting, you know, these millions of dollars in savings.
Brian Anderson: Yeah, if I understand it correctly, of the 700 million contract, he’s deferring, all but million a year.
Jeanne Sutton: All but 2 million a year. Yeah. You know, I mean, I know California is a high cost of living state, but proportionally, you know, he’s made the decision to defer a significant. amount, [00:04:00] um, to, I, I would assume a point in time where he lives in a low cost or a no, no cost, you know, state.
Brian Anderson: Right, right. Or out of the country back in Japan.
Jeanne Sutton: That’s where the tax law gets complicated.
Brian Anderson: Yeah, exactly. Well, this all seems pretty ingenious and I thought it was interesting, that the idea that at first so much of his salary may Otani himself. But, uh, now let’s talk a little bit more about, how you don’t have to be worth 700 million to reap the benefits of a non qualified deferred compensation plan.
What are some of the big advantages of these plans and, and who would they work best for?
Jeanne Sutton: Well, we touched on state taxes, right? And so that’s going to be relevant to anybody, no matter how much you earn, uh, what your current state taxes are. Um, deferred compensation gives you control over timing of compensation.
And when you are preparing a financial plan or a tax plan, timing is everything, right? We know we’re in marginal tax brackets. We know huge [00:05:00] sums of money in a specific year can spike your effective tax rate. Um, so even if, you know, we’re not talking 700 million, right? I mean, we’re talking just normal pay, right?
Having control over the timing of the taxation is a huge planning strategy, but above and beyond that, high income earners in the current 401k environment do not have enough wiggle room to save as much as they really need to save. And I did the math in the video, you know, Fidelity says you should be saving 15%.
Well, for those under the age of 50, they’re going to cap out at an income of 153, 000. Based on the 401k limits, right? So it’s not, that’s not a super high income earner. That’s not 700 million. We’re talking about 150, 000 a year in income. You quickly reach a point where the 401k doesn’t give you enough room to say what you should be saving.
And so these non qualified plans can do that.
Brian Anderson: All right. We’ve [00:06:00] covered some of the advantages. Now, what are some of the drawbacks you see with these arrangements? I know they’re kind of complex plans. They’re technically unfunded and a promise to pay, but. What are some of those disadvantages?
Jeanne Sutton: That’s it.
That’s number one. It’s a promise to pay. And there are things done behind the scenes to reduce the risk that it won’t be funded in the future. But I mean, the first thing you have to tell a client is this is a promise to pay. There is a risk that if you choose to defer some of this income, your organization won’t be able to fund it.
That’s the biggest. The other thing too is, you know, a 401k, you can conceivably spread your payments out over over life, right? Over retirement. Uh, you could take 20, 30 years to wind down a 401k and really reduce the income hitting a tax return every year. These deferred comp plans aren’t that way. They normally have a stated payout period, five, maybe 10 years.
And it’s not always at retirement. [00:07:00] So for Otani, you know, I think I did the math. I think he’s in his thirties. When these payments start hitting, right? So you can only defer it for so long and then you’re likely to have concentrated payments over a short period of time.
Brian Anderson: Right. Okay. Well now I’d like to shift gears a little bit and talk about one of your other recent social media posts.
The one where you talk about the factors that may potentially impact the stock market returns this year. Can you tell us about, uh, how you came up with that list and perhaps run us through some highlights?
Jeanne Sutton: I can. Yeah. Well, you know, kudos to my partner, Brian Peebles. He’s our investment specialist and he contributed to that.
But what I do anytime I prepare for a video or, you know, one like this, I’m just absorbing information and asking questions. And I like to go to all different sources, articles online. I like to look at other YouTube videos. I like to listen to podcasts and I’m looking for. Facts, research and opinions that I think would resonate [00:08:00] with the average investor.
Um, you know, in this industry, you can quickly get into technicalities that are just going to bounce right off of somebody. So I’m sourcing all sorts of information and ideas from others. And I’m saying, what, what’s going to resonate, what’s going to make sense. And. And for most people this year, presidential election, right?
I mean, it’s on top of everybody’s mind. I made the comment, you know, in history, if there’s a known candidate, we haven’t had a down market regardless of who it is on the ticket. Consumer spending is another one that, that you can take home. You can take home, you know, okay. What am I, what is my family spending?
Are we spending on credit cards? You know, that’s relevant. And another thing I touched on is just the magnificent seven. And that may not be like an average investor thing. I mean, everybody’s going to recognize those company names, right? But historically, market concentration in those top seven companies, I’m not going to say it’s an [00:09:00] anomaly, but I am going to say it’s a defining factor, right?
It’s super relevant as we look at projections forward. So it’s It appears to be good news, right? I don’t like to look in a crystal ball. I don’t like to tell people what I think the market’s going to do because invariably it’s going to be wrong, but I like to coach clients through here’s the headlines that you want to pay attention to, right?
Brian Anderson: Makes sense. All right. But before we let you go, tell us what, what’s on your agenda this year in terms of what you’re up to at strategic retirement partners and some industry events you might be attending or any other speaking engagements on the books. And are there any other topics you plan on posting about in the coming weeks that we should keep an eye out for?
Jeanne Sutton: I mean, we got to talk Napa summit, right? The 401k conference, the industry conference. So that’s in April. Yeah. Anyone in anybody and everybody in the industry is going to be at Napa summit. So you got to be there and I’ll, I’ll be sharing the stage with Don Barden and Josh Itso. We’re going to be talking about [00:10:00] finalists presentations, which is always fun.
So Napa for sure. You know, as far as. Topics and trends, right? Secure 2. 0 is always going to bubble in the background. We’re always going to have to be addressing that, but I, you know, I am, uh, I’m all in on guaranteed retirement income in the 401k. I am all in on how our industry is going to address the decumulation challenges that our participants face and coming up with really good and sound solutions for that. So that’s, that’s going to be a theme I’ll be addressing.
Brian Anderson: Were going to include some links to Jeannie, the 401k ladies posts that we talked about today on our podcast page. And Jeannie, thank you so much for sharing your insights on the 401k specialist podcast.
Jeanne Sutton: Thank you so much.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.