Significant events in the executive benefit marketplace have negatively impacted the effectiveness of traditional approaches to the funding and hedging of benefit plan liabilities.
We examine each factor impacting the plan, the plan sponsor, and plan participants, including:
- materially reduced corporate tax rates
- significant reductions in investment expenses
- market volatility affecting plan liabilities, and the resulting impact on corporate earnings
- increased life expectancies and their impact on benefit obligations
- the material growth of plan liabilities and their impact on earnings, the balance sheet and plan funding
We have developed proprietary financial models to evaluate any funding or hedging approach. This allows us to develop alternative strategies customized to each plan sponsor.
Corporate-Owned Life Insurance (COLI). We optimize COLI funding by evaluating:
- product loads
- mortality/cost of insurance – pooled or experience rated
- investment expenses and performance
- asset/liability correlation and “tracking error”
- accounting geography — plan liabilities (and “mark to market” fluctuations) flow through Operating Income, while plan assets (investment income) flow through Other Income
Mutual Funds or Other Non-COLI Assets. We conduct a comprehensive analysis—evaluating investment expense, manager performance, accounting geography, and tax efficiency. We employ proprietary tax mitigation strategies, which include:
- identifying tax-efficient fund managers and investments
- designing and implementing tax-efficient asset/liability management (ALM) through our proprietary system
- tax optimization to enhance portfolio returns (“tax alpha”)
Benefit liabilities that are unfunded or poorly correlated to plan assets create P&L volatility—which can have a material and negative impact on corporate earnings. We conduct a thorough analysis to assess the feasibility and cost/benefit of hedging market exposures and mitigating P&L volatility with a total return swap (TRS). We assist the plan sponsor in negotiating pricing and terms with the swap counterparties and execute appropriate tax elections. Working with our strategic partner Atlas Financial Partners, we provide comprehensive financial and tax reporting—while managing and optimizing the plan liability and TRS correlations through our proprietary ALM system.
We implement our recommendations by collaborating closely with each client’s trustees, custodians, insurance carriers, TRS counterparties, and plan recordkeepers.