Nonqualified Plan Optimization
The nonqualified plan marketplace has seen significant change in recent years, materially impacting plans across the Fortune 1000.
These changes have prompted companies to adapt, to improve outcomes for plan participants and mitigate any negative impact to corporate earnings. Atlas Benefit Finance, established more than two decades ago, utilizes proprietary tools and extensive knowledge from working with the world’s largest companies to support clients in managing these trends, and the costs and risks of their plans more broadly.
Our team has more than 100 years of combined industry experience and includes seasoned experts in tax, accounting, capital markets, insurance, consulting and asset management, from best-in-class firms like Goldman, Sachs & Co, JPMorgan, PriceWaterhouseCoopers, and The Newport Group.
Working with our strategic partner CapAcuity, we provide a variety of services:
Quantitative and qualitative evaluation of all hedging/funding strategies
Transition management to alternative strategies
Ongoing administration of hedging strategies, including total return swaps
Asset and liability management
Vendor fee benchmarking/evaluation
Plan Investment Menu
Menu construction to reduce taxes and fees for plan sponsors and participants
Clients include many of the world’s largest companies, as well as mid-size companies with relatively large deferred compensation plans. Current select clients are listed here.
Fortune 30 company
Successfully implemented plan funding/hedging strategy
$10 million (50%) annual cost savings compared to leading alternative strategies
Global consumer product company
Successfully identified annual cost savings of $2.5 million
Includes savings for plan participants of $550k (32%) per year in investment fees
Additional cost reductions in taxes and vendor fees
Total Return Swap Hedge Facilitation
Among Atlas’s greatest value propositions is its patented, fully-outsourced solution for administering a total return swap hedge of nonqualified deferred compensation (NQDC) plans.
NQDC plans create volatility in a company’s income statement. Participants generally choose from a menu of market-based “notional” investments similar to those offered in the company’s 401(k) plan. As the notional investments rise or fall, the company’s compensation expense is directly impacted. This may require detailed explanations of unbudgeted compensation expense in financial statements to the company’s analysts. It can also result in missed earnings projections.
To manage this market risk, companies have traditionally purchased taxable investments (mutual funds) or corporate-owned life insurance. These strategies, however, can add significant costs to the plan. They tie up capital at the company’s cost of capital and mutual fund earnings are taxed currently. In addition, neither strategy directly eliminates the volatility in compensation expense, where plan expenses are recorded (gains/losses on these assets are generally booked in other income).
Recently, many companies, including Microsoft, Cisco, Bank of New York Mellon, Abbott, Viacom, and many others, have instead utilized total return swaps to hedge their plans:
Company pays bank a fee (LIBOR plus a spread)
Bank pays company the weighted average return of its deferred compensation plan
Example: if plan participant allocates $100 to an S&P ETF, rather than buying the ETF, the company can enter into a TRS with a bank. If the S&P increases 10%, bank pays the company $10.
A Columbia Business School study found that a total return swap can reduce a company’s costs by as much as two thirds of the total size of the hedged liability. This is because the swap can free up capital that earns higher returns in the core business and the swap gains, losses, and expenses are tax-deferred.
This strategy also enhances risk management of the plan, eliminating volatility in compensation expense, operating income, and net income (swap gains are recorded in compensation expense, directly offsetting plan expenses). In addition, no changes are required to plan benefits, administration, or design.
While this strategy can provide significant benefits, the execution involves many complex moving pieces. Atlas assists clients in executing every aspect of the Total Return Swap Hedge.