HCE Parity Restoration – Whose advice do you value more?

[Mark Whitelaw]

Which resource do you value more in discussing plan / parity restoration alternatives for your HCE class employees?

1. Qualified plan administrator.

2. Qualified plan advisor.

3. CPA – IQPA auditor.

4. HCE plan TPA.

5. HCE class product issuer.

6. Executive benefits advisor / compensation consultant.

7. Executive benefits TPA.

8. Other – please specify.

Appreciate your opinions.

[BG5150]

Are you getting 8 different answers?

[Mark Whitelaw]

No - simply identifying the different parties that interact with plan sponsors - looking for input from the 401(k) community on which they rely on most to help them with benefits parity issues.

Put another way - Plan Sponsor - If you would provide your HCEs unlimited financial parity with no added costs, no liabilities, no ERISA considerations and no HR hassles, who would you prefer delivering this "good news" message?

[Mike Preston]

Maybe you could give an example of what "plan / parity restoration alternatives" are so that you get more responses.

[Mark Whitelaw]

Sure Mike, and I’ll throw in a little plan evolution that gets us to today.

In the late 20th century addressing qualified plan caps was an unsecured non-qualified executive benefit limited to the corner offices and larger employers.

By 2002 the leading institutionally priced funding vehicles for those executive benefits became more effective as a secure personal cash management asset than the unsecured plan they were funding. Enter employer sponsored individually owned HCE parity restoration plans, 10 life minimum – Equal Financial Opportunity Workplace’s IF the employer was willing to sponsor a supplemental welfare benefit plan to provide HCE’s individual product access.

But as a specialty HCE TPA (#4 on the list) I negotiated moving the institutional plan “sponsor” and "aggregation" point from the employer to the TPA – employer’s role is merely to validate the individual’s employment / HCE status for access to an external program and product – same as validating employment for a car loan or mortgage - no minimums. We’re not the only HCE TPA that has been granted this authorization, but we were the first and have been coordinating this external parity restoration program for employers for ten years.

Making HCE plan caps “irrelevant” is now a workplace culture and optics question. Employer – Do you want to offer an equal financial opportunity workplace, or not?

Hence – my question. Who do you think is best positioned to deliver this “good news” message?

Positioned as a qualified plan complement.

Positioned as an audit service complement.

Positioned as an executive benefits alternative - NQDC complement.

As I said – I’m #4 on the list – I'm the outsourced back-room supporting those with the sponsor contact. Looking for insight on where to focus the expansion of our services.

Thanks.

[Belgarath]

Correct me if I'm wrong, but if I cut through the fog, you're talking about Section 79 welfare benefit plans, right? "Group term" life insurance plans BUT the HC's get permanent cash value insurance paid by the corporation (ususually a C-corp 'cause the owners in an S-corp can't get the permanent cash value insurance) and the rank and file opt out of the permanent 'cause they can't afford (or don't want to afford) the current income, (approx. 2/3 of the permanent insurance premium) so they get the term up to 50,000 only? I think there are only a very few TPA's in the country that handle these.

I'm not sure what you mean by who would be "valued more." Do you mean who is best qualified to explain it to a client? I suspect this is done generally by the insurance agent. I don't think that I, for example, as a TPA for qualified plans, would be an appropriate resource to discuss this with a client, although I suppose I could if I became expert in them. That ain't gonna happen! In general, I think CPA's tend to have the most influence, but I suppose anyone who is truly knowledgeable and trustworthy about the program could be appropriate. I'd lean toward CPA and/or attorney. As far as who is "best positioned" I guess it might be the qualified plan TPA. Really hard to say - depends upon which advisor the client trusts the most.

[Mark Whitelaw]

No - this is not Section 79 - this is individual access to institutionally priced life insurance (ILI) - the product CFO's invest through for cash management purposes - balance sheet improvement - funding NQDC cash obligations. I say cash management as ILI is not bought because of the death benefit - it's bought for its fund / cash / tax management - these are the people expected to live the longest, the DB is secondary, a $0 added cost perk. Only a handful of issuers allow individuals to own one of their ILI policies.

Yes - there is no expectation that someone on the outside like you would get schooled on the details - this is a plan complement and baton pass to us. Not an asset that retail agents have any clue about.

Yes - CPA's are our most active awareness partners - IQPA's. Also, CPA's have been supporting CFO's for 25 years in making the ILI Total Cash Management decision - understand best how ILI and retail life insurance are 180 degree opposites.

Second most active awareness partners are qualified plan administrators - again, plan sponsor awareness and a baton pass. Turning discimination testing and refund checks into a "bad news - good news" event.

I mentioned this is an evolutionary value. By 2002 HCE's were living so long, reducing ILI costs so low, that the ILI policy evolved into a more efficient fund investment "structure" than the NQDC plan it was funding - no longer made sense for an individual to put their paycheck at risk in an unsecured benefit plan - better to use ILI like an uncapped Roth alternative with an incidental death benefit. Continued healthcare advancements have further enhanced the longevity driven ILI cash management structure.

HCE's have evolved into a separate and distinct risk / product class and financial services sector. A value-added that can only be facilitated in the worklace - only an employer can validate the HCE's employment and HCE classification.

Look forward to your questions.

[Mike Preston]

It seems obvious to me that the best positioned would be those a rational employer would look to for confirmation that the program holds water. In some areas that might be accountants and in others it might be attorneys. Insurance agents are out because they have a conflict of interest.

I can't imagine a rational employer looking to a TPA of any kind for confirmation of a program like this.

In the interest of full disclosure I should point out that the baton hasn't been passed to me so if one of my clients came looking for validation that the program works I would have three comments:

1) The more jargon that is used the less likely the program will stand up to scrutiny

2) Have your attorney confirm that the company is not bearing an unintended risk by offering access to this product

3) Provide your potential plan participants with access to financial planning software that can compare the results of ILI to other vehicles and can simulate results based on varying interest rates in the future (which is based in part on the general belief that inflation will, at some point, rear its head in this country again).

[Mark Whitelaw]

Thanks Mike. I agree.

Retail life agents have not been an outlet – ILI products pay too low a compensation and most issuers require external ILI TPA coordination.

The CPA’s are the most collaborative advisors because our participant report includes a “net accessible cash” comparison to the five other most popular fund management structures – individual automatically is provided a level of financial disclosure not available in retail financial planning software.

Attorney interaction is very interesting. This program is simple and quick to get the sponsor liability comfort you mentioned. Where it gets interesting is if the plan sponsor is larger the attorney’s want the sponsor to hire them to prepare a detailed NQDC / 409A comparative analysis. Or, if the plan sponsor already has a NQDC plan the attorney wants to be hired to prepare a detailed NQDC / 409A exit strategy analysis.

Our limited interaction with qualified plan advisors depends on if the advisor’s background is tax-qualified benefits or retail life insurance.

Our work with qualified plan administrators has mostly been on a reactive basis – HCEs will be getting refund checks – can we help? Once they see the positive reaction they get more pro-active.

So – very interesting evolving financial marketplace. The discrimination against retail cash value life insurance often freezes people like a deer in the headlights when you mentioned this is institutional life insurance – apples and shampoo different. That’s a 3 minute conversation to get past. You also have mixed reaction the financial services community – many do not want to see a more efficient institutionally priced alternative made available to HCEs.

Most have not been exposed to the ILI structure and its fit in today’s financial marketplace. People can find / google me in Edwardsville, IL if they would like the link to our IQPA overview package.

Take care - Mark