A major concern for executive benefit plan sponsors is their exposure to financial risk, as these plans directly impact corporate balance sheets and earnings. These financial risks are due to multiple factors:
- Participant reallocations/market volatility—these actions create fluctuations in participants’ accounts and the aggregate plan liabilities. As a result, plan sponsors are required to “mark to market” these fluctuations in plan liabilities, which can have a negative impact on corporate earnings.
- Hedge effectiveness—any variance between plan assets and plan liabilities creates a P&L “mismatch,” which impacts corporate earnings. An effective hedge will result in a high correlation between the underlying investments on the participant “menu” and the investments funding or hedging plan liabilities—optimizing corporate earnings.
- Corporate tax—frequent trading to mitigate the variance between plan assets and plan liabilities can result in substantial income tax liabilities for a plan sponsor. Proactive tax mitigation strategies should be employed to reduce tax exposure.
We specialize in developing, implementing and managing comprehensive mitigation strategies to address these risks.