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401(k) Investment Plan
We can provide analysis and recommendations for Corning Investment Plan mutual funds such as the Vanguard Index 500, Stable Value Fund, Fidelity Equity-Income Fund others.* This service can be provided as part of our Wealth Managment Services, as part of our Financial Planning services, or via an hourly consultative basis.
In addition to providing analysis and recommendations for participants in the Corning 401(k) Investment Plan, we also work with Company Sponsored Retirement Plans from a variety of employers.
If you would like to learn more about our 401(k) plan analysis, please contact us here.
* Please note: Burns Matteson Capital Management is not affiliated with Corning Incorporated and the information presented on our web site has not been reviewed or endorsed by Corning Incorporated.
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Equity Hedging
The long running bull market, intergenerational transfers of stock, and the increased use of stock options and restricted stock for employee compensation have produced an abundant number of investors who have large concentrated equity positions in their portfolios.
Many of our clients have accumulated a sizable amount of Corning stock within their 401(k) Investment Plan and/or WESPP. These clients are excited about the future growth prospects of Corning Incorporated, but at the same time they are very concerned about having such a large portion of their net worth allocated to a single security. If you have more than $1.5 million allocated to Corning stock, you may be a candidate for some equity hedging strategies utilizing derivative instruments such as Equity Collars and Prepaid Variable Forwards.
Many high-net-worth investors with concentrated equity positions seek alternatives to the outright sale of their stock. These investors may desire to retain voting rights in the company, or they may simply be prohibited from selling their stock due to SEC restricted stock rules.
An Equity Collar is a hedging strategy that is comprised of two options - a short call and a long put utilized for a specific time period (such as 1 or 2 years). When implemented against a long stock position, a collar provides the investor with a minimum and maximum value for his or her concentrated equity position. The most widely used equity collar is known as a "zero-cost-collar". In a zero-cost-collar, the investor sells a call option against their stock, and with the premium received from the sale of the call option, the investor purchases a put option. The net cost to the investor is $0.
For example, a common equity collar strategy might provide the investor an upside "ceiling" of 120% of the current stock price, while limiting the investor's downside "floor" to 90% of the current stock price. If an investor owned $2 million of Corning stock and employed this hypothetical equity collar, the investor would participate in all of the upside growth of Corning up to a ceiling of $2.4 million, and would only participate in downside price movements of Corning to a floor of $1.8 million.
Whenever an equity collar is utilized, we must be mindful of potential tax problems. If an equity collar eliminates virtually all of the downside risk and/or upside potential of holding the stock position, the IRS constructive sales rules may be triggered. If a constructive sale is determined to have occurred, any built-in gain on the stock is recognized for tax purposes as if the stock was actually sold. In addition, equity collars trigger the tax straddle rules which may limit the investor's ability to take losses, and limit the investor's income tax deduction for any investment interest paid. The tax straddle rules also may prevent holding period accrual for the stock in situations where the stock has not already been held for a year (as in the case of newly exercised employee stock option shares).
A Prepaid Variable Forward contract is very similar to the equity collar strategy. The prepaid variable forward allows the investor to protect their concentrated equity position while still participating in potential future price appreciation of the security. The primary difference between the prepaid variable forward and the equity collar is that the financial institution that is entering into the prepaid variable forward contract with the investor will typically lend the investor an amount up to the downside "floor" of the prepaid variable forward contract. If the floor of the contract is 90% of the current market value of the stock, an investor with $2 million of Corning stock could immediately receive $1.8 million in cash at the time the prepaid variable forward contract was written. This cash could then be used to invest in a diversified portfolio to further hedge the concentrated equity position, or for other cash needs of the investor.
If you think that any of these Equity Hedging Strategies may be appropriate for you, feel free to contact us with your questions or to request a complimentary, no-obligation consultation.
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