HR Specialty Products & Services Catalogue Executive Summary

A No Frills Distillation of Vendor’s Marketing Collateral

Thomas A Ference

President & CEO

Human Resources Mining & Distribution Co

Locating, Validating and Accelerating HR  Innovation

 

Office: 219-662-0201

Cell: 630-240-2583

Fax: 219-661-0236

e-mail: tference@hrmdco.com

Website: www.hrmdco.com

Proprietary Methodologies-Based Combined Investment

and Taxation Optimization Service for Rabbi Trusts

Combined Investment and Taxation Optimization Service for Rabbi Trusts

• Typical “funding” approaches for Rabbi trust-funded NQP’s that deploy life insurance and /or off-the-shelf mutual funds can be rife with cost and tax inefficiencies caused by the inadequate matching of assets and liabilities and the mis-considerations of corporate tax implications.

• This service combines the extensive modeling and monitoring capabilities of a renowned NQP consultancy with the sophisticated tax analytics, portfolio optimization and volume-based separate account purchasing capabilities of a large, brand name financial institution.

• The model first analyzes all current trust investments to determine the true after tax rate of return by asset class while considering all sources of expense plus the taxation / ”tax drag” factors.

Combined Investment and Taxation Optimization Service for Rabbi Trusts

• Newly-established employer financial and funding objectives are used to drive asset and liability modeling / matching with overlaid tax analyses in order to optimize current funding of the Rabbi trust.

• Ongoing performance monitoring assures ongoing NQP trust optimization.

• Results include improved after-tax rates of return and thus, improved financial statement results.

Typical NQP Funding Inadequacies

• Cost-ineffective COLI funding• Tax-inefficient mutual funds• Lack of integrated liability assessment. Little or no:

-duration analysis,

-liquidity planning,

-sensitivity testing,

-asset class tax-attribution analysis, etc.• Lack of advanced “tax overlay” capabilities• Inadequate coordination between HR, finance and

treasury for prudent plan / funding management

Problems with COLI

Frictional Costs

• Mortality Charges• Carrier Profit• Commissions• M&E Expenses• Premium Tax• DAC Tax

Investment Drains

• Substandard investment performance per benchmarks

• Retail (or higher) asset management fees

• Neglected asset/liability matching and inappropriate asset allocation policy

Problems with Mutual Funds

Tax Drains Investment Drains

• Substandard investment performance per benchmarks

• Retail asset management fees

• Reduced yields for munis vs. taxable bonds

• High transaction costs from participant rebalancing

• Tax on dividends and income

• Tax on realized gains from:

-Participant reallocations

-Fund turnover/rebalancing

-Fund distributions• No cross-fund tax

management

Case Study of COLI Policy Audit Results within Rabbi Trust

Policy issued 2005Current Cash Value = $234,987M

Cash on Cash ReturnYears:

20102011201220132014

20152016201720182019

Death at Age 83Death at Age 86

Carrier Projected Crediting Rate = 7%Internal Rate of Return = - 0.827%

Notes:-Although policy had market losses, the key problem was excessive loads. -Expense “drain” from a 7% crediting rate produced a 2-3% actual IRR-Analysis of mutual funds can produce similar results

Actual After Tax Internal Rate of Return Ranges from 2% to3%vs. 7% projected

Model for Optimization of Investments and Taxes

Separately Managed Accounts ETFs Company Stock Alternative Investments

Tactical Integration

High Turnover Equities Optional COLI Portfolio Fixed Income Other Highly-Taxed Classes

Tax Overlay

Proprietary Process Followed to Achieve the Results

• Actuarial liability analysis/sensitivity testing• Liquidity and liability duration analysis • Asset/liability studies• Investment policy/asset allocation recommendations • Investment-manager research/selection• COLI audit, analysis and performance optimization

services• Tax-overlay analytics • Global market analyses• Disciplined ongoing rebalancing services• In-depth, after-tax, ongoing performance review

Next Steps• This product/service is contained in the HR Specialty

Products & Services Catalogue™ • Operational level details about this particular service

provider can be obtained in conference with the vendor• The HR Mining &Distribution Co. is an independent and

contracted representative of the vendor• Upon your request, we will arrange for an introduction

that can range from a simple, quick conference call to a services overview / system demo

• Tom Ference 219-662-0201 (Chicagoland area) or tference@hrmdco.com

• Thank you for your potential interest in this fresh thinking