Proprietary Methodologies-Based
Combined Investment and Taxation
Optimization Service for Rabbi
Trusts
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
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 misconsiderations 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 volumebased 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
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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
• Tax on dividends and
income
• Tax on realized gains from:
-Participant reallocations
-Fund turnover/rebalancing
-Fund distributions
• No cross-fund tax
management
• Substandard investment
performance per
benchmarks
• Retail asset management
fees
• Reduced yields for munis
vs. taxable bonds
• High transaction costs
from participant
rebalancing
Case Study of COLI Policy Audit Results within Rabbi Trust
Policy issued 2005
Current Cash Value = $234,987M
Carrier Projected Crediting Rate = 7%
Internal Rate of Return = - 0.827%
Cash on Cash Return
Years:
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Actual After Tax
Internal Rate of Return
Ranges from 2% to3%
vs. 7% projected
Death at Age 83
Death at Age 86
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
Model for Optimization of Investments and Taxes
Tax Overlay
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Separately Managed Accounts
ETFs
Company Stock
Alternative Investments
Tactical Integration
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High Turnover Equities
Optional COLI Portfolio
Fixed Income
Other Highly-Taxed Classes
Proprietary Process Followed to Achieve the Results
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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