The New Imperative

The New Imperative: Protecting Nonqualified Deferred Compensation Plans Post ยง409A

How to Apply Benefit Security and Funding for Ultimate Protection

William L. MacDonald Chairman, President & CEO Retirement Capital Group

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he business of wealth accumulation and retirement planning for executives and other key people in your organization is becoming evermore difficult today due to the media and the folks in Washington who would have us all believe that it is executives who are at the core of the nation’s economic woes . Almost overnight, executives and employees are being thrust into the role of retirement planner for themselves and their families, and the rules have changed.

Even those companies that provide Nonqualified Deferred Compensation Plans (NQDC), which are integral to an executive’s total compensation package, there are still elements of self-directed responsibility and thus decision making required.

That’s why it is imperative that employer and executive alike become aware and informed about the new rules of engagement for NQDCs beginning in 2009.

As part of this effort, it is also essential to understand the core difficulty in balancing the interconnect between securing the benefit and funding the

benefit: you cannot formalize one without affecting the other. For example, a Rabbi Trust is a security mechanism, whereas mutual funds or life insurance in the trust is a funding device. Notably, mutual funds, life insurance, or other assets in the trust, represent informal funding.

Having said this, let’s lay the foundation for this discussion with a general review of NQDCs.

By Definition NQDCs permit an executive to save money on a pretax basis with none of the government limitations imposed on company 401(k) plans. NQDC arrangements typically represent the majority share of an individual executive’s retirement assets. In fact, 95 percent of Fortune 1000 company respondents provide nonqualified retirement benefits to senior executives, according to the widely read Clark Consulting 2007 Executive Benefits—A Survey of Current Trends.

By definition, nonqualified retirement and deferred compensation arrangements are “unsecured promises”

Chart I - Separation Wall

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realized by the company, while benefits are not taxdeductible until paid.

Lack of Security There are several challenges raised nowadays concerning NQDCS: lack of security, risk of future tax, and the integrity of plan design. First, nonqualified retirement and deferred compensation arrangements lack security for two basic reasons: 1. Unfunded nonqualified plans are designed only to provide benefits to a “select group of highlycompensated and/or management employees” and, therefore, may be exempt from Title I (filing, reporting, vesting and fiduciary requirements) under the Employee Retirement Income Security Act of 1974 (ERISA).

of the employer to the executive. As such, they are subject to the claims of the employer’s general creditors. By contrast, 401(k) plans are tax-qualified retirement plans which, under the law, require the immediate establishment of an irrevocable funded trust - to provide protection against claims of the employer’s general creditors.

Both security and funding of nonqualified plans are more complex than that of qualified plans because a “separation wall” (see Chart I) exists between the liability (the benefit owed to the participant), and the security and funding vehicle the company uses to hedge the liability.

Unlike qualified plans, nonqualified plans hold the assets at the company level on its balance sheet. Even though the company may establish a Rabbi Trust for benefit security protection, (discussed later), the assets remain a general asset of the company. Generally, the investment earnings are taxed and immediately 3

2. Nonqualified plans do not qualify for the favorable tax treatment afforded to salary deferral plans that meet the qualification requirements contained in Section 401(a) and related sections of the Internal Revenue Code (IRC). The favorable tax treatment in qualified plans includes a current deduction for the employer for his contributions to the plan, tax-deferred growth of investment income, and tax-free rollover opportunities for certain distributions from the plan.

Without the protection given qualified plans provided

by ERISA, nonqualified arrangements generally are regarded as “unsecured general obligations” of the employer. Although a general asset promise creates a contractual obligation, risk-averse plan participants seek a higher degree of security than is provided through a breach of contract lawsuit.

Risk of Future Tax Security uncertainties are further exacerbated by the possibility that income tax rates may rise in the future.

Naturally, one can never know what the future holds.

Nonetheless, executives seeking retirement adequacy must face tax issues head-on to avoid painful erosion of retirement dollars.

When nonqualified plan is designed under best practices, it provides the needed structure to confer benefits on highly compensated executives which, in part, may evolve as (see Chart III):

Unfortunately, devices like the Rabbi Trust and unfunded plans have failed to hedge against tax increases because the participant defers current taxes on amounts to be deferred, and ends up paying ordinary income on amounts to be distributed at some future date. The prevailing tax rate at the time will apply.

In our practice, every manner of plan has been presented to us for evaluation. At times, we have performed triage on plans to prevent participants from losing benefits due to poorly written documents.

Obviously, the smart option is to design a plan correctly from the outset. Then, proceed to a wellwritten trust and informal funding to increase benefit security.

What is the basic premise? First, you defer taxation until rates would presumably be lower. But, as a consequence, participants have assumed an over concentration of tax rate deferral risk. Now, combined marginal income and capital gain tax rates are close to an all time low. Thus, if rates increase in the future, it will likely render the strategy of deferring taxable income highly inefficient (see Chart II).

The question then is how can these general challenges of risk management in security and tax be alleviated?

It may seem obvious, but it has to begin with a sound plan design process.

Sound Design First Although the central focus of this booklet is plan security and funding, it is crucial to point out that the framework for security integrity begins with a well-structured, wellwritten plan document. In Best Practices design, this framework calls for a standard of planning and implementation that is above average with contingencies that underscore exceptional quality.

With the new rules under IRC Section 409A, plan participants have substantial flexibility to use shortterm deferrals and re-deferrals, which enables shortterm access to funds, and tightens plan security through benefit liquidity.

However, let’s not forget that nonqualified plan participants will still be classified as general creditors of the corporation; their benefits will always be subject to forfeiture in the event of bankruptcy.

For these reasons, we recommend that companies follow a well-conceived and systematic process in

Chart II - History of U.S. Top Income Tax Rates

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Chart III - Nonqualified Benefit Plans

plan design that meets both employer and executive objectives, and maximizes the potential for full benefit security. [Log onto www.retirementcapital.com for the RCG Process.]

Before we discuss specific approaches to security and funding, a comment or two about general considerations is in order.

General Assets Nonqualified plans backed by general assets (“unfunded” plans) are relatively low in prevalence.

Yet there are employers who purposefully select this “pay-as-you-go” approach. They have reasoned that the contractual promise between the company and participant provides sufficient security.

In doing so, the employer avoids costs of certain funding arrangements and preserves cash until funds are needed to pay benefits. In our experience, this approach is normally used with fixed interest rate obligations rather than 401(k) type investment plans.

Lower Risk Rabbi Trust The Rabbi Trust is the most common security device used today; it takes the form of an irrevocable employer-established grantor trust, where the employer determines how much money or assets to be transferred to the trust.

Trusts are quite prevalent because the IRS has established a model trust with tax guidance. The new §409A rules continue to allow these arrangements for “domestically” funded plans. Offshore arrangements are disallowed (more on Rabbi Trusts later).

Risk-Avoidance— Fund Under ERISA* Normally, most nonqualified plans are designed to avoid the implications of ERISA. However, if benefit security is the foremost objective, a properly structured nonqualified plan under ERISA merits close consideration.

Two dominant funded trusts are the Secular Trust and the Management Security Plan (MSP), designed to be “funded” plans under ERISA. Both the Secular Trust and the Executive Roth are similar to a Rabbi Trust with two significant differences: 1. The assets contained within the trust are not subject to the claims of a company’s general creditors in bankruptcy; 2. The liability is removed from the balance sheet of the company. * Employee Retirement Income Security Act.

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Both arrangements involve immediate taxation to the executive which, on the surface, does not seem desirable. But the MSP has a special mechanism to help defer the impact of the taxes as discussed later in this report.

Other Arrangements Another common arrangement is the use of employeeowned annuities. Similar to the Secular Trust and MSP, these arrangements are currently taxable to the executive. Several other approaches—Retention Trust, Offshore Trusts, Executive Indemnity Insurance, Rabbicular Trust, Mutual Fund Option Plan, and Letter of Credit—have been introduced over the last ten years, With the arrival of §409A, these arrangements are now disallowed.

For tax purposes, funded can also define those amounts set aside without a “risk of forfeiture,*” resulting in constructive receipt or economic benefit, causing, immediate taxation of benefits to participants.

When using a Rabbi Trust, funded actually means “informal funding,” as technically assets cannot be set aside specifically to offset a company’s liabilities under nonqualified plans.

Security devices (such as the establishment of a trust) are not effective unless assets are actually set aside. In the review of various alternatives to secure nonqualified plans, a company needs to clarify whether the arrangement will be considered funded for purposes of tax and/or ERISA rules, or whether funded means informally funded.

Evaluate Alternatives Numerous devices have been created to decrease inherent risk in nonqualified arrangements, Of course, no perfect approach has emerged. A review of different approaches reveals that each has unique advantages and drawbacks that must be weighed carefully before deciding on the appropriate benefit security.

Similarly, funding can have multiple meanings.

For ERISA purposes, funded generally means that contributions are made irrevocably for the benefit of a plan participant with the sponsor (employer) conforming to Title I under ERISA. This meaning applies to the Management Security Plan, Secular Trust, and the Executive Severance Trust. The MSP can also be structured to be a nonERISA plan. * Risk of Forfeiture is a standard applied by the Internal Revenue Service (IRS) to determine whether deferred compensation and transfers of property should be taxed currently to the payee. Generally, a substantial Risk of Forfeiture exists if an employee’s right to deferred compensation on transferred property is contingent on the performance of substantial services in the future or on the occurrence (or nonoccurrence) of a given event.

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As discussed earlier, certain concepts such as the Secular Trust, Executive Severance Trust, MSP, and employee-owned annuities are funded for tax and/or ERISA purposes. Under these arrangements, assets are placed in the trust and the company usually has no liability on its balance sheet and the assests are not reachable by the company’s creditors.

Compare Closely An “apples-to-apples” comparison is very difficult to illustrate because no ideal benefit security vehicle exists. Each alternative involves trade-offs between risk, tax, and financial issues that must be weighed carefully. Briefly, here are some trade-offs to be considered. Your answers will guide the direction you take: How does the benefit plan help with retention?

How complex will the benefit plan make the plan administration?

What are the implications?

current

and

future

tax

How does the security and funding impact our current plan design?

What is the overall cost of funding and securing these benefits?

How is the security and funding impact disclosed in the proxy statement?

Are the plan assets protected in the event of bankruptcy?

Is the benefit plan protected in the event of change in control?

Is the benefit plan protected in the event of a change of heart?

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Securing the Benefits In benefit security, one of the best examples of the complexity between funding and securing the benefit is the Pay-As-You-Go method.

Pay-As-You-Go Although not as prevalent today, some companies take the position not to fund or to fund informally NQDCs. The “pay-as-you-go” arrangement makes an unsecured contractual promise to pay future benefits out of general corporate assets. Alternatively, a company could set aside a “sinking fund”; that is, informally earmark assets to pay future obligations from the general assets of the company.

From corporate perspective, the sinking fund approach carries a low cost on cash flow. From a total cost perspective, however, costs can rise dramatically compared to funded or informally funded alternatives.

From a participant’s perspective, NQDCs with no funding are viewed as less valuable than funded plans, even if only informally.

Security Exposure With a pay-as-you-go approach to benefit funding, plan participants’ benefits are subject to the claims of their company’s general creditors in the event of corporate insolvency. Even though other forms of security such as Rabbi Trusts do not protect participants against employer insolvency, the absence of set aside assets in the general asset account exposes participants to many risks, including change in control, change of heart and change in financial condition of the employer or Board.

Statistically speaking, these three risks are actually greater than risk from the company’s general creditors.

That’s why the pay-as-you-go approach to benefit funding is far less secure than the Rabbi Trust.

Taxation Triggers From a federal income tax standpoint, an executive does not incur taxable income on the benefits until those benefits are received. Likewise, the organization does not receive a tax deduction until payment occurs. The employer may pay tax on any asset it earmarks to informally fund the benefit. Chart IV summarizes the advantages and disadvantages of a “general assets” approach.

Specific Security Devices Rabbi Trusts The term Rabbi Trust generally refers to a trust an employer establishes as a source of funds for the future payment of benefits to participants.

Chart IV - General Assets Approach

Advantages

Disadvantages

Plan is simple to administer.

No security exists if company is unable or unwilling to pay.

Could be a problem in the event of change in control.

Income is not taxable to Future management will employee until benefits have to meet cash flow are paid. needs of the plan.

Company assets are not tied up.

Company receives no tax-deduction until benefits are paid.

Executive has ability to tax defer compensation.

Company is required to disclose full account balance (deferrals and interest earned) in proxy.

In the early 1980s, a synagogue received a watershed IRS ruling that confirmed tax deferral for a Rabbi who was the beneficiary of a trust established to pay him retirement benefits; hence, the name Rabbi Trust.

In its typical form, a Rabbi Trust is structured as an irrevocable employer-established grantor trust, which means items of annual income and expenses flow back to and are reportable by the employer for accounting and tax purposes.

The employer controls how much money or how assets are placed in the trust. The employer also determines if benefits are to be paid from the trust in all events, or only in the event they are not paid from general assets of the company.

Caution should be used in constructing an irrevocable trust. A recent RCG survey found that a number of trusts intended to be irrevocable were actually structured as revocable, often against the intent of those who designed them. Someone must have checked the wrong box on the IRS Model Rabbi Trust form.

Fiduciary Status Rabbi Trusts engage an independent trustee, usually a major bank. A “trustee” is designated to distribute assets as interpreted by the fiduciary, though the trustee has no plan fiduciary responsibility itself. As a result, Rabbi Trusts will usually designate a third party, possibly the same institution as the trustee, to assume responsibility as plan fiduciary.

Fiduciary duties of the trustee can be confusing and seemingly contradictory: trustees protect trust assets for the benefit of the participant, but not for the plan itself. As has happened many times, benefits are lost in a change of control situation unless there is a provision to protect trust assets for the participant— even if the Rabbi Trust is fully funded.

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The Rabbi Trust is governed by a legal document that typically restricts the employer’s ability to suspend benefit payments at will, to amend the trust vehicle, or to cancel benefits which it informally funds.

Safe Harbor In IRS Revenue Procedure 92-64, the IRS established a model Rabbi Trust. The use of the IRS model Rabbi Trust form provides a safe harbor for taxpayers who adopt and maintain the grantor trust in connection with unfunded or informally funded deferred compensation arrangements.

Most companies go beyond the model trust language and rely on best practices based on approximately 300 private letter rulings. One such provision is the establishment of a legal reserve fund.

Springing vs. Funded Rabbi Trust A Springing Rabbi Trust receives only minimal assets at the time it is established. When a specifically defined contingency occurs such as change in control, the employer is immediately required to contribute sufficient assets to the trust to enable it to satisfy all benefit promises in existence at that time.

Interestingly, these arrangements are less prevalent today because companies in hostile takeovers have

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had difficulty producing the necessary cash to secure the benefit at the time of the event.

Most companies using Rabbi Trusts today are informally funding their benefit obligations with assets in the trust. With a grantor trust, the assets are carried on the balance sheet as company assets.

The Informal funding of a previously unfunded trust can create special challenges for a company. For example, depending on the size of the benefit liabilities, and the desire to balance cash flow and earnings impact, a company may choose to informally fund the plan over a period of time such as five or seven years. See Chart V for an illustration of a Springing Rabbi Trust versus a funded Rabbi Trust.

Benefit Security Assets set aside in a Rabbi Trust must be subject specifically to the claims of an employer’s general creditors in the event of bankruptcy or insolvency.

If a company enters bankruptcy, participants’ rights to their benefits are no greater than those of other general creditors. Note that in Bank of America, N.A. v. Moglia, 330 F.3d 942 (7th Cir. 2003) executives with assets in a Rabbi Trust prevailed against secured creditors.

Chart V - Springing vs. Funded Rabbi Trust

Because the assets set aside in a Rabbi Trust are subject to the claims of creditors, participants are not currently taxed because they are not in constructive receipt of the benefits, nor have they received an economic benefit. The participants will only be taxed when their benefits are actually paid.

Fiduciary Alert The lack of a Fiduciary Provision in a trust document could be a costly mistake. Since the trustee of the Rabbi Trust is not the plan fiduciary, a change of control could create a situation where the assets of the trust may be diverted from the payment of benefits to executives. An example underscores the problem: Under Supplemental Retirement Income Plan: “Administrative Committee means a committee consisting of the Senior Executive Vice President Human Resources and two or more other members designated by the Senior Executive Vice President Human Resources who shall administer the Plan.”

“Administration Committee means a committee of three or more members, at least one of whom is a senior manager, who shall be designated by the Vice President - Human Resources to administer the Plan pursuant to Section 3.”

If this “committee” represented the new company in the change of control, it is easy to see how interpretation of benefit security could flow to new management, which may not have the interest of the former owner’s employees at heart.

Let us emphasize: Without clear direction from an appointed fiduciary, participants are leaving retirement benefits in the hands of people unfamiliar with their situation. This provision should name individuals in a third party to act in the capacity of fiduciary in the event of a change in control of the company. In short, a trustee is not a fiduciary.

The search for the right security/funding device continues to be a critical aspect of plan design. What are some of the other options available?

Moglia Rabbi Trust The Moglia case (supra) may be a major breakthrough in nonqualified plan benefit security. In Moglia, Outboard Marine Corporation declared bankruptcy while $14 million was held in its Rabbi Trust. The Rabbi Trust contained the standard language that its

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assets were subject to the claims of the company’s “general creditors.”

Bank of America was the agent for Outboard’s “secured” creditors, and the language of its security agreement was broad enough to describe the assets of the Rabbi Trust.

The Bankruptcy Court held that Bank of America and the other secured creditors could not reach the assets in the Rabbi Trust. As a result, the $14 million in the Rabbi Trust was available for distribution to Outboard’s “unsecured creditors,” including the executives in the nonqualified deferred compensation plan.

With a Moglia Rabbi Trust, the assets inside the Rabbi Trust should only be available to the company’s “unsecured creditors,” which includes participants in the nonqualified plans. We encourage you to read your Rabbi Trust document. Does it state that assets are subject to the claims of “creditors,” or—like the Moglia variety—“unsecured general creditors”?

Be advised that three key steps must be followed to create an effective Moglia Rabbi Trust: Timing. Fund Rabbi Trust “before the security agreement gets executed.”

Documents. Trust corpus . . . Shall remain at all times subject to the “claims of the general creditors” of the company.

State in which Trust is held. Moglia was decided by the Seventh Circuit court of appeals (which covers Illinois, Indiana, and Wisconsin).

Taxation Executives are not taxed at the time assets are placed in the trust, and are not taxed annually on the trust’s 11

earnings. Plan participants are taxed upon receiving distribution from the trust or when the trust assets are no longer subject to a substantial risk of forfeiture.

On the employer’s side, the organization does not receive a deduction on trust contributions. The deduction comes only when benefits are paid. The trust earnings are taxable to the employer on an annual basis as earned, unless they are invested in tax-exempt vehicles such as life insurance or taxexempt bonds.

The Department of Labor has indicated that a compliant Rabbi Trust will be considered unfunded Chart VI - Rabbi Trust

Advantages

Disadvantages

To the extent the plan is informally funded it provides security in all cases except company bankruptcy.

Plan is subject to claims of creditors in bankruptcy.

Participant does not pay tax on income until benefits are actually paid.

Company does not receive a tax-deduction until benefits are actually paid.

Participant may be given the choice between investment options.

Trust earnings are taxable to the company (unless earnings are invested in tax-sheltered assets).

Plan is not considered to be a funded plan for ERISA purposes.

Company assets are tied up.

Executive has the ability to tax defer compensation.

Company is required to disclose full account balance (deferrals and earnings) in proxy.

for purposes of Title I of ERISA, even though assets have been set aside.

A funded Rabbi Trust can provide participants with protection against a change in control, change of heart and change in financial condition (short of bankruptcy). Chart VI provides a closer look at the advantages and disadvantages of a Rabbi Trust.

Securing the Rabbi As you develop your Rabbi Trust security checklist, please do not overlook the following areas of concern: Irrevocability: After many reviews, RCG still finds trusts drafted as “Revocable.”

Funding Speed: What does the trust state about funding?

When and how fast does it “spring”?

Funding Level: Most trusts do not specify how much value should be funded.

Investigate:

Professional fees Maximum asset level Trustee’s use of fiduciary consultant Loans against and substitution of assets Powers passed to successor management Trustee experience?

Secular Trusts

Chart VII - Secular Trust

Advantages

Disadvantages

To the extent the plan is funded, it provides security from the company’s inability and unwillingness to pay benefits as they are incurred including bankruptcy.

Vested company contributions and annual earnings by participants are immediately considered to be taxable income.

Company receives tax deduction on contributions.

Company assets are paid out to participant.

Company has reduce or offset liability on company’s financial statements.

ERISA requirements apply.

Participant pays taxes on contributions, setting tax basis for benefit payments.

Once funded and vested, participant can walk away (no golden handcuffs).

It is wise to distinguish Secular Trusts from Rabbi Trusts because an employer’s bankruptcy creditors cannot reach the money held in Secular Trusts. The good news is that Secular Trusts provide benefit payment security somewhat similar to what is provided under a tax-qualified retirement plan trust.

In general, employers receive a tax deduction for amounts contributed to the trust when the amount is taxed to the executive, or to both, depending on the specifics of the trust arrangement. Chart VII outlines the advantages and disadvantages of the Secular Trust.

Private letter rulings released in 1992 and 1993 cause significant changes in the Secular Trust area.

In essence, the rulings cause a double taxation on the investment earnings. As a result, to avoid double taxation, when using a “employer” sponsored Secular Trust, you should make sure the trust is using a nontaxable asset such as life insurance or tax-exempt bonds. Another alternative is to design the trust as an “Employee Grantor” Trust.

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follows current laws governing life insurance which gives participants the ability to withdraw payments (principal) and earnings tax-free. This ability is fueled first by withdrawing cash value up to the policy tax basis, then taking policy loans against the remaining balance.

Employee Grantor Secular Trust This approach avoids the double taxation of annual trust earnings by having participants establish trusts for themselves, which could also be subtrusts. The employer still funds the nonqualified obligations with tax-deductible payments; however, the employer payments technically are offered first to each participant, who in turn authorizes payment directly to the trust. This slight modification results in an “employee grantor trust” status. Earnings on trust assets are annually taxed to the participant, as the grantor, but not to the trust because it is not a taxpaying entity.

Of all the security options discussed thus far—Pay-asyou-Go; Rabbi Trust; Springing Rabbi Trust; Moglia Rabbi Trust; and Secular Trust—the next strategy redefines benefit security for the new realities of business.

Management Security Plan The new Management Security Plan (MSP) can be used to secure deferred compensation and supplemental retirement arrangements, similar to a Secular Trust.

Chart VIII discusses the advantages and disadvantages of the Management Security Plan.

Chart VIII - Management Security Plan

Advantages

Disadvantages

Company receives tax deduction on contributions to the trust.

Income is immediately taxable (impact is deferred).

The most prevalent funding strategy in an Employee Grantor Secular Trust is variable universal life (VUL) insurance. VUL provides flexibility on contributions and the ability to allocate trust assets among funds, similar to 401(k) investments, and without current taxation on gains.

Participant may defer the impact of taxes through an MSP loan.

Requires more communication than traditional deferred compensation.

To the extent the MSP is funded, it provides security from the company and personal creditors.

Once funded, there are no golden handcuffs.

Employers qualify for the purchase of institutionally priced contracts not normally available to individuals. When properly structured, the Trust

Company’s financial statements reflect reduced or offset liability.

Administration of the plan may be more complex.

The employee is also taxed on trust contributions as they are made by the employer. To avoid the current taxation of trust asset earnings, many employees elect to have trust assets invested in tax-sheltered strategies (life insurance, tax-exempt bonds) or a strategy to minimize taxes on earnings.

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The MSP is an employee grantor trust structured similarly to the secular employee grantor trust, with one major economic exception: Unlike the Secular Trust, the MSP “defers the impact of the taxes to the employee,” enabling tax-deferred accumulation similar to pre-tax contribution amount, and delivers full creditor protection as with a Secular Trust and taxqualified plan.

Like the Secular Trust, the MSP is an after-tax approach in which contributions to the trust are immediately taxable to plan participants when vested, and taxdeductible to the employer. Add to this tax advantage the fact that the underlying nonqualified vehicle can be designed as ERISA-compliant or non-ERISA. Regardless, MSP provides the participant with full benefit security.

Investment Options For the trust asset to emulate the tax-deferred aspects of a qualified plan (grow tax deferred), the MSP uses a specially designed life insurance contract, which allows the participants to select a number of investment options.

To defer the impact of taxes, the employee’s insurance policy has a tax restoration feature that allows him to elect to take out a non-recourse loan (not a loan to the individual or the company, but to the sub-trust) equal to taxes paid on plan contributions, let’s say, 40 percent.

The loan is made by the insurance company from the policy itself. Then, the employee/participant accrues loan interest, equal to LIBOR plus one and a half percent (1.5%) or the Moody’s rate, capped at the Moody’s rate (4.10% as of 1/09).

Wealth Accumulator What makes the Management Security Plan particularly powerful as a wealth accumulation vehicle, and superior in performance to a Secular Trust, is the policy loan feature: A participant is permitted to take a non-recourse “tax restoration” policy loan to restore taxes paid on the amount of any after-tax deposit.

Assume the participant wants to contribute $50,000 to the Management Security Plan. After paying all applicable taxes, there is approximately $30,000 to invest, assuming a 40 percent tax rate. However, due to the “tax restoration” loan, the amount returns

Chart IX - Tax Restoration Concept

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to the original $50,000. restoration.

Chart IX illustrates this

Best of all, this plan carries lower administrative expenses for a company than a tax gross-up Secular Trust, and it is less expensive than traditional Rabbi Trust-funded plans.

Chart X - Cash Value Enhancement

Cash Value Enhancement

This insurance policy has an Enhanced Surrender Value Rider (ESVR), which may enhance the cash surrender value if you surrender the policy in the first 10 years for any reason. An Enhanced Surrender Value Rider is not found in most Maximum Enhancement individual contracts. The enhancement Rate starts with targeting an annual return as 16.0% outlined in the Chart X.

Year

Target Annual Return on Premium

1

7.0%

2

7.0%

15.0%

3

7.0%

15.0%

4

6.0%

12.0%

5

5.5%

9.0%

6

5.0%

7.0%

7

4.0%

5.0%

8

3.0%

3.0%

9

2.0%

2.0%

10

1.0%

1.0%

Full Security Employer contributions to an MSP are made on an irrevocable basis and are not subject to the claims of bankruptcy creditors.

Therefore, employees have what approximates total security with an MSP because they have full control over their benefits, strengthen with the flexibility to draw down benefits at retirement, based on their financial needs.

MSP Taxation As discussed above, the employer receives a current tax deduction for contributions and the employee participant is currently taxed. The participant is not taxed on the loan contribution as it will be paid back upon termination or death. To avoid the taxation of assets, like those in the Secular Trust, participants 15

invest assets in a tax-exempt investment life insurance policy with flexibility of 60 investment choices.

The Enhancement Surrender Value Rider will pay, “upon surrender of the policy” the current cash value (minus any withdrawals or loans) on the targeted return (i.e. 7% during years 1-3).

However, the Enhancement Surrender Value Rider will cap the payout (i.e.

16% in year 1) to that percentage of the cumulative premium in the policy.

Chart XI outlines the use of the ESVR through three different examples.

Example #1 – Individual has experienced a gain greater than the ESVR targeted value. Therefore, the ESVR provides no enhancement to the Net Cash Surrender Value.

Example #2 – Individual has experienced a loss.

ESVR of $13,000 is applied to gross up to the ESVR Target Value. If this individual was to surrender at the end of year one, a gain of about 9% cash on cash ($5,400 on $60,000) would be realized.

Without the ESVR, a loss of about 13% ($7,600 on $60,000) would be realized.

Example #3 – Individual has experienced a loss.

ESVR is applied at its maximum. If this individual

Chart XI - Cash Value Enhancement Examples Policy Year 1

Example #1

Example #2

Example #3

Cash Premium (Participant Contribution)

$60,000

$60,000

$60,000

ALR (Tax Restoration) Premium

$40,000

$40,000

$40,000

Cumulative Premium

$100,000

$100,000

$100,000

Account Value

$108,000

$94,000

$82,000

ESVR Target Return (107% of Cumulative Premium)

$107,000

$107,000

$107,000

ESVR Amount (Up to 16% of Cumulative Premium)

$0.00*

$13,000*

$16,000*

ALR (Tax Restoration Loan) Balance

$41,600

$41,600

$41,600

Net Cash Surrender Value

$66,400

$65,400

$56,400

* If the Account Value is less than the ESVR Target Value, then the ESVR Amount equals ESVR Target Value minus Account Value up to a maximum of 16% of Cumulative Premium.

was to surrender at the end of year one, a loss of only about 6% cash on cash ($3,600 on $60,000) would be realized. Without the ESVR the loss realized would have been about 33% ($19,600 on $60,000).

Employee-Owned Annuities There is a wide range of annuity products available on the market. Many offer the flexibility to structure an appropriate payout schedule, combined with an attractive range of investment choices. For these reasons, we saw an uptick in usage with Fortune 1000 companies in 2008 as they chose to fund nonqualified arrangements with annuities. Chart XII outlines the advantages and disadvantages of employee-owned annuities.

In certain respects, employee-owned annuities are similar to a Secular Trust, and they can help secure nonqualified deferred compensation and supplemental retirement arrangements.

Under this approach, an employer typically pays the cost for an annuity benefit in the name of each participant, generating a tax obligation to participants.

The amount of the annuity benefit purchased is based on the participant’s vested deferred compensation or retirement benefit, and is projected to provide an amount of cash after taxes equal to the vested benefit paid from general assets.

As the participant’s vested benefit grows, the employer may need to pay for additional annuities or simply add to existing annuities by paying additional 16

Chart XII - Employee-Owned Annuity

Advantages

Disadvantages

Considerable security is provided.

Administration is somewhat more complex.

Guaranteed retirement benefit can be provided, with the obligation shifted to the insurance company.

Insurance company does not provide complete creditor protection.

Participant is subject to Tax-deferred inside immediate tax on build-up is allowed with purchase price, but can certain products. be tax-equalized.

Company receives immediate tax deduction for the purchase of annuity.

ERISA requirements may apply.

Liability is eliminated from company financial statements.

Once funded, the plan has no golden handcuffs.

premiums on behalf of the participant. In most cases, the participant ultimately will receive all benefit payments from the annuities rather than from the employer.

Full Security Like the Management Security Plan and Secular Trust, the participant in an employee-owned annuity receives benefits with full security similar to a taxqualified plan. This provision protects the participant against an employer’s unwillingness or inability to pay.

As the owner of the annuity, the employee/participant can walk away from his employer at any time without 17

losing his benefits. The participant also has the right to surrender the annuity at any time, although he may be subject to an excise tax and a penalty upon surrender of the annuity.

In our experience, the majority of companies that have adopted employee-owned annuities view them as a current benefit because they lack the golden handcuff aspects of Rabbi Trusts. Usually, these types of plans are not subject to ERISA, nor is ERISA protection extended.

In effect, the employer is simply transfers the risk of creditor status from the employer to the insurance company. When buying an annuity, the agency rating of the issuing insurance company is a key element in the plan’s success. The higher rating, the higher the assurance of financial strength and protection.

Importantly, employee-owned annuities actually fulfill deferred compensation obligations as compared to merely funding them. As a result, the employer eliminates the liability, and removes the risk of the contingent liability from the books.

With life expectancy on the rise, participants can select a lifetime income for ten, 15 years guaranteed.

Employers are impacted because nonqualified plans, especially supplemental retirement plans, create a contingent liability based on the life expectancy of its participants.

Taxation Executives are taxed on the purchase price of an annuity when it is purchased. However, the annual inside build-up of the annuity is not taxed until the participant receives it. When benefits are paid, the participant is taxed only on a portion of the benefits received.

In part, each payment is considered to be earnings that have not been previously taxed and a return of the purchase amount that already has been taxed.

What is more, the IRS also imposes an additional ten percent (10%) excise tax on taxable withdrawals (earnings) taken before age 59½ for reasons other than death or disability.

The employer receives a tax deduction for the purchase price of the annuity. Similar to the Secular Trust concept, a tax gross-up payment can be made to participants for the tax liability arising from the annuity purchase.

Unlike the Secular Trust concept (unless invested in tax-exempt vehicles), annual earnings on employeeowned annuities are not taxable to the individuals until the earnings are distributed from the annuity.

As a result of the tax-deferred build-up, the employer does not have to gross-up taxes on the earnings with an employee-owned annuity as he does with a Secular Trust.

Based on changes in the 1986 Tax Act, annuities held by corporations or Rabbi Trusts do not qualify for the benefit of tax-deferred earnings. Earnings on annuities held by corporations and certain corporate grantor trusts are taxed annually. For this reason, it is not common for corporations to invest in annuities directly.

Executive Severance Trust The Executive Severance Trust (EST) was designed to offer organizations, for the benefit of their key executives and selected employees, a secured severance benefit of up to two years final pay.

The EST can be offered as a standalone benefit or can work in concert as an offset against deferred compensation on SERP benefits.

The EST is an ERISA protected benefit that is not subject to the claims of creditors. The employer would prefund the plan by depositing money in a third party trust. ERISA specifically prohibits any reversion Chart XIII - Executive Severance Trust

Advantages

Disadvantages

Secured against company creditors.

Only covers up to two times total compensation.

Participant does not pay tax on benefit until paid.

Company does not receive tax deduction until paid.

Trust is pre-funded and secured.

Company assets are tied up.

of plan assets to sponsoring employer. Once the employer contributes to the trust, all monies must be used to provide benefits only to eligible employees.

The employees may find that their needs change over time and may wish to discontinue participation in the trust or otherwise discontinue the severance pay plan. They have the ability to add new participants or use unclaimed assets for paying other health and welfare cost.

Benefits are taxable to the participant when paid.

The employer would realize its deduction at the same time. Chart XIII discusses the advantages and disadvantages of an Executive Severance Trust.

Post-Retirement Security Most executive participants, especially those running companies, may not be too concerned with the security of their nonqualified benefit arrangement while still employed. However, it is not uncommon for an executive to take a lump sum payment at retirement to avoid the unsecured creditor status post-retirement.

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Consider this example: a retired executive from Enron, WorldCom, Singer, Arthur Andersen, Bear Stearns, Washington Mutual or another failed company, would have lost his retirement income had the executive not elected a lump sum distribution at retirement. Don’t forget— lump sum payment will likely trigger tax payments at a higher tax percentage.

As mentioned earlier, the security strategies of Secular Trust, Executive Roth and the employee-owned

annuity address this problem through a tax expense today versus the Rabbi Trust which provides no postretirement protection.

Fortunately, there are several strategies today that can mitigate concerns over post-retirement protection and, simultaneously, defer taxes. While helpful, most are based on legal opinion and may not pass the test under §409A.

Executive Roth in Concert with Rabbi Trust

Chart XIV - Tax Economic Impact

Net Lump Sum at Age 60 Long-Term Portfolio Assumption Blended Income Tax/ Capital Gains Rate After Tax Retirement Benefit for 15 Years Net Asset Value At Age 75 At Age 85

Traditional Distribution: To Taxable Portfolio

Executive Roth Distribution

$5 Million

$5 Million

7.0%

7.0%

36.5%

36.5%

$441,101

$441,101

$0 $0

$3.5 Million $7.5 Million

As discussed earlier, being an unsecured creditor of a company while your still there in the thick of it, may not be perceived as a lot of risk to bear. However, when you hang up your spikes and retire, you may not want to look over your shoulder for 10, 15 or 20 years counting on new management, or the private equity firm that acquired your employer for these benefits. Just ask those who were in retirement status at organizations like Arthur Andersen and Washington Mutual how it feels to have those payments stop.

As discussed above, the prevalence in many pre-tax deferral plans today has been to take a lump sum at retirement which could be the most tax inefficient strategy.

By pre-funding the Management Security Plan inside the Rabbi Trust, the participant can elect to take a lump sum at retirement (putting the asset in their control)

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by electing the cash payout amount “in kind” by taking the MSP policy with them. Chart XIV shows the tax economic impact to the executive vs. personal investing the after tax lump sum.

Nonqualified plans cannot provide a tax-free rollover at retirement. Thus, emphasis on nonqualified plans has been on refining and improving pre-retirement issues with no attention to post-retirement efficiency (see Chart XV).

A new trend is to swap a portion of tax-deferred dollars for a paid long-term care insurance policy.

The employer receives a current tax deduction when the swap is made, and the executive participant is not currently taxed. The long-term care swap is a tax-efficient way to purchase critical long-term care insurance for the executive or family members.

Executive Indemnity Insurance

Executive indemnity insurance protects the executive by transferring the risk of Chart XV - Progression of Nonqualified Plan Best Practices the loss of benefits through bankruptcy to an insurance company. The policy is issued up to a five (5) year period of time and is non-cancelable.

The price of the policy is based on the rating of the company, and the value of the benefit.

Long-Term Care Swap No one wants to outlive their money. Like anyone with a nest egg, executives fear that nonqualified benefits could be wiped out if retirement requires nursing home care. In New York state alone, longterm care can cost up to $121,000 per year, according to the state’s insurance department. Given that the average stay is estimated at 2.5 years, that’s a stunning $300,000 out of retirement monies, excluding the cost of insurance premiums.

By example, let’s assume a five-year term on a $1,000,000 limit. Your premium would be between 3% and 5% of that value, depending of the financial shape of your employer. This contracts, however are hard to come by in today’s environment, but they seem to pop up every three to five years.

The IRS places limitations on the employer’s involvement so policy structure must be carefully considered. Premium payment may be required in advance, depending on the program, and most policies can be coordinated with funded and unfunded plans.

See Chart XVI for a look at Indemnity Insurance: Company ratings vs. Premiums.

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Chart XVI - Pricing of Indemnity Insurance

S&P Rating

Annual Premium ($)

Banking

A+

8,500

Energy

A-

8,500

Hotel & Gaming

BB+

25,000

Media

BBB

11,000

Pharmaceutical

AA-

7,500

Retailer

AA

7,000

Technology

A-

8,500

A+

10,000

BBB+

11,000

Company

Telecom Utility

Note: Estimated figure for illustrative purposes only.

Other Security Arrangements Up to now, we have discussed highlights of the most prevalent devices used today to secure nonqualified benefits. We should point out that there are a handful of devices not discussed in detail because their structures are either similar or they have limited use.

For instance, split-dollar life insurance was once used by a number of companies, but new rules limited its usefulness in securing nonqualified benefits. Also, indemnity insurance was active, but has been limited to AAA and AA credits. Consequently, it is very difficult to obtain a policy at reasonable prices.

Let’s move on now to a more detailed discussion of funding the benefit of your NQDC plan

Funding the Benefit Once security of the benefit has been determined, best practices calls for sound finance of the deferral plan.

Every company has different benefit and financing objectives which correlate to their specific tax and financial circumstances.

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In a few steady steps, you can develop a financing strategy that best serves your profile: Formulate clear financial objectives; Project realistic cash flows and liabilities; Select one or more investments; Implement the strategy Maintain a continuous evaluation process Let’s zero in on investments used when an informal funding strategy is used. There are five types typically used by companies for funding: 1. Mutual Funds 2. Corporate/Trust-Owned Life Insurance COLI/ TOLI) 3. Company Stock 4. Exchange & Traded Funds 5. Management Security Plan with Rabbi Trust Funding a nonqualified plan can be the most important aspect of design because it determines the corporate cost of benefits and, eventually, the investment outcomes in the participants’ account balances.

Alternatives and Issues Given the dramatic increase in 401(k)-type investments in NQDC, the selection of vehicles to adequately fund the resulting liabilities is a critical factor. Even though thirty percent (30%) of surveyed companies purchase the same mutual funds as those in their 401(k) plans, the decision is not so straightforward.

In reality, the selection of an investment to fund a NQDC plan should be based on a careful screening or due diligence process that takes into consideration the company’s needs and goals with respect to:

Economic Cost measured by the net present value (NPV) of funding cash flow and the internal rate of return (IRR). This analysis helps to determine the overall financial impact to the company.

Liquidity Cost is measured to determine if accessing cash from the assets to meet benefit payments will create additional cost for the company.

Chart XVII outlines an evaluation process for choosing the right investment to be used in concert with the company’s security device.

Investment Fund Selection for NQDC plans may differ from those selected for the 401(k). Since ninety-three percent (93%) of investment returns come from proper asset allocation modeling, it is important to get this part right.

Prevalent Vehicles The three most prevalent funding vehicles for nonqualified benefits are COLI, mutual funds, and Exchange Traded Funds. In both cases, the company or the trust such as a Rabbi Trust purchases an asset (mutual funds or COLI), the amount of which parallels

Tax Cost is critical since the company will hold the assets. Any taxes resulting from realized dividends, capital gains, or ordinary income will be paid by the company.

Chart XVII - Investment Alternatives Investment Issue

Investment Characteristics of Investment for Benefit Funding Purposes

Mutual Funds/ Managed Portfolio

CorporateOwned Life Insurance

Exchange Traded Funds

MSP w/ Rabbi Trust

Security

Can be deposited into Rabbi Trust with asset matching liability, with favorable IRS ruling

X

X

X

X

Asset/Liability Matching

Value of asset tracks emerging benefit cost

X

X

X

X

High liquidity

X

X

X

X

Flexible deposits options

X

X

X

X

Flexibility

Ability to change asset mix without adverse tax consequences Ability to distribute cash coincident with timing of benefit payments Ease of distribution (e.g., in “small pieces”)

After-Tax Return

Above-standard, after-tax return*

Up-Front Cash Required

Relatively little up-front cash required Total Score

*

Assuming “standard” is tax-exempt bond

X

Total Return Swap

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X X

7

8

7

8

5

X = Strongest candidates for funding Trust

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the approximate investment return to be credited to the deferred compensation account balance.

can liquidate the funds as needed to pay benefits; c) administration can be simplified, particularly if the company is using its 401(k) provider.

Mutual Funds If the company sponsoring the NQDC is a full taxpayer, the investment earnings on mutual funds are taxed as realized to the company. To hedge the liability with mutual funds, the company must purchase the funds in an amount equal to the pre-tax liability, and then finance the difference between the pre-tax and aftertax deferrals. Additionally, the company must pay the taxes on realized earnings.

Evaluate the selection of fund manager carefully. If funds have high turnover and dividend income, and produces realized gains, the company must incur an additional cost in taxes on those realized gains, which leads to additional cash flow to compensate for the taxes paid, or inefficient asset/liability matching, if the company pays taxes out of the plan assets.

Despite the cost of financing, important advantages in using mutual funds to informally fund a NQDC plan include a) the company can directly hedge the liability; b) the company (or a trust sponsored by the company) 23

Exchange Traded Funds While corporate owned life insurance (COLI) and mutual funds are likely to play a dominant role in informally funding nonqualified deferred compensation arrangements, we are likely to see significant inroads made by alternative investments, including Exchange Traded Funds (ETFs).

Employers are looking for attractive investment options, transparency, and low fees, while allowing their consultants to participate in the process.

ETFs, like mutual funds, can be traded as easily as stock. Their cost may be a little different. First, management fees are generally lower for ETFs because the fund is not responsible. For the fund accounting, the brokerage company incurs these costs for ETF holders. This is not the case with index funds as an example. Second, shareholder transaction costs are usually zero for index funds, but this is not the case for ETFs. In fact, shareholder transaction costs are the biggest factor in determining whether or not ETFs are right for your plan. With ETFs, shareholder transaction costs can be broken down into commissions and bidask spreads. The liquidity of the ETF, which in some cases can be material, will determine the bid-ask spread.

Finally, the taxation of these two investment vehicles favor ETFs. In nearly all cases, the creation/ redemption in-kind feature of ETFs eliminates the need to sell securities - with index mutual funds - that triggers tax events. ETFs can also rid themselves of capital gains inherent in the fund by transferring out the securities with the highest unrealized gains as part of the redemption in-kind process.

Chart XVIII - COLI Policy Expenses

Corporate Owned Life Insurance (COLI)

7% Gross Return Cost Breakdown

In COLI, the cash value (separate accounts in mutual funds) accumulates tax-deferred. When the NQDC participant changes his election, no tax occurs on the movement from fund to fund. Also, unlike the mutual funds, no tax is incurred on gains realized within the contract. If the policy is held until death, which is typically the case, the full accumulation is received tax-free.

7.0% Gross Return and 40% Tax Rate 8.00%

7.00%

0.50%

0.50%

0.90% 6.00%

0.15%

2.80%

When using COLI instead of mutual funds on Exchange Traded Funds to informally fund its NQDC liability, a company purchases life insurance on its key employees and owns the policies; it is also the beneficiary. Unlike traditional insurance, a company holds advantage in paying the highest premium for maximum cash values for the lowest death benefits.

5.00%

4.00%

5.95%

3.00%

2.00%

4.20%

1.00%

0.00% Unspecified Mutual Funds

Unspecified COLI

Net Investment Return

Other Insurance Costs

Mortality Expense & COIs

Taxes

Fund Management Fees

7% Gross Return Cost Breakdown

Gross Investment Return Other Insurance Costs Mortality Expense & COIs Taxes Fund Management Fees Net Investment Return

Unspecified Mutual

Unspecified COLI

7.00% 0.00% 0.00% 2.80% 0.50% 4.20%

7.00% 0.15% 0.90% 0.00% 0.50% 5.95%

This hypothetical illustration shows how the performance of underlying accounts could potentially affect account balances. It may not be used to predict or project investment results. Fees and charges vary between different policies; refer to the policy prospectus for complete information on fees, charges or expenses. Mutual funds and Variable COLI are available by prospectus only.

Compare the COLI policy expense loads against the taxes the company would pay with mutual funds (taxes on realized gains). Chart XVIII illustrates COLI policy expenses.

Be sure that in the due diligence process, the consultant or broker is required disclose all of the costs involved. You need a clear understanding of expense ratios to determine comparable value.

Further, require the company accounting firm to confirm the numbers. Most major accounting firms maintain a specialized unit, national in scope, to examine these transactions. For referrals to reliable firms, contact RCG headquarters.

More competitive pricing can be negotiated on a number of COLI expense components. For instance, if you wish to cut cost in the early years, ask for a cash value enhancement rider, designed to spread out policy cost, and offered by most major carriers.

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Chart XVIV - What are the Investment Risks of COLI and How Can the Risk Be Mitigated?

Risk

Mitigate Risk

P o l i c y P e r f o r m a n c e - This risk is often found in “general account” products where interest rate is determined by the insurance company.

Most COLI products use “separate accounts” with investment performance tied to managed portfolios.

Insurance Carrier Solvency

Separate account COLI holds assets (cash values) outside the general creditor status of the insurance company. Also, policy holder has the ability to 1035 tax-free exchange the policy.

Legislative Risk

Historically, COLI has experienced “grandfathering.”

However, your analysis should calculate cost of surrendering policies and paying taxes on gains, etc.

Corporate Buyer Subject

COLI does not perform well for companies in AMT tax status. If company is expected to be in this status for a long period, a surrender analysis must be performed (same as Legislative Risk).

COLI

is a

to

L o n g -T e r m A s s e t

AMT

Most COLI products are held until death of the insured (maximum performance). However, getting cash out of the policies may be required. A review of policy provisions will determine the cost of borrowing. Most policies have a small policy loan spread (i.e. charge 5% and credit 4.75%).

This hypothetical illustration shows how the performance of underlying accounts could potentially affect a policy’s cash values and death benefits. It may not be used to predict or project investment results. Fees and charges vary between different policies; must refer to the policy prospectus for complete information on fees, charges or expenses. Variable COLI is available by prospectus only.

Carriers created this rider to minimize impact on initial earnings and to deliver maximum possible cash surrender value (CSV). This outcome presumes the policy perform well over the first seven years. If not, the rider will not reduce earnings impact.

Life insurance is accounted for in accordance with FASB Technical Bulletin 85-4 stipulates life insurance guidelines. In short, the CSV is recorded as an asset, and the incremental growth of the CSV during any given year represents non-taxable income.

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Recognize that risks exist with COLI; however, most institutionally priced contracts have been designed to mitigate much of the downside (see Chart XVIV).

Total Return Swap As discussed in this report, nonqualified deferred compensation plan liabilities are typically tied to the performance of underlying investments (i.e., mutual funds, equity indices (SLP 500), company stock, bond indices, etc.). GAAP accounting requires the recognition of mark-to-market changes in plan liabilities with offset being recorded to compensation

expense. Any increase in the mark-to-market exposure resulting for an increase in plan liabilities and compensation expense results in an equal offsetting drop in earnings.

As a result, unhedged liabilities can create significant earnings volatility for the corporation sponsor and potentially a rapidly growing liability. If, for example, the liability was tied to the SLP 500, the cost of borrowing in 2003 would have exceeded 25%. Of course, in 2008, we had the reverse.

Total Return Swaps can be used to structure an economic hedge that mirrors the performance of the liabilities over its natural life, obtain the most favorable tax and accounting results as well as minimize on avoid earnings volatility.

The hedge will not provide any asset for benefit protections; however, it could be a good funding alternative for those trying to minimize cash flow.

Many companies are using the Total Return Swap in concert with other assets (i.e. Mutual Funds, COLI) to hedge the tax portion (40% of deferrals).

Uncertainties Ahead Unsecured benefit obligations nationwide should be of major concern to both plan sponsors and participants. At $3.3 trillion, the financial assets in defined contribution plans for 2006 is more than the gross national product of China, calculates the Federal Reserve Board. Little wonder, then, that benefit liabilities have reached higher ground, and their proper security and funding is the engine of change.

What’s more, the coming generation of retiring executives face a caravan of influences not faced by previous generations—longevity, income risk and rising healthcare costs, to name a few.

Despite all this, we can end on an optimistic note.

The security and funding solutions presented in this overview give employers and executives workable strategies to fortify their retirement prospects for the future. No one solution is a panacea, but a thoughtful mixture of strategies will bring greater assurance of a positive outcome.

Based in San Diego, California, Retirement Capital Group is a full-service executive benefits firm structured and committed to enable companies to attract, retain and appropriately compensate and reward their talented executives. For more information, please contact RCG at (866) 724.4877 or visit www.retirementcapital.com.

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William L. MacDonald Chairman, President & CEO Retirement Capital Group, Inc.

Mr. MacDonald founded Retirement Capital Group, Inc. (RCG) in San Diego in 2003, where he serves as Chief Executive Officer, and Chairman of the Company’s Board of Directors. He also founded Compensation Resource Group (CRG) in 1978. CRG was acquired by a NYSE company in 2000; Mr. MacDonald then presided as President and Chief Executive Officer of the executive benefits division until 2003.

Mr. MacDonald has consulted on executive compensation and benefit issues for more than 25 years for numerous public and privately-held firms across a variety of industries, including a large number of Fortune 500 companies. He wrote a book, Retain Key Executives, published by CCH and has authored numerous articles on the subject of executive compensation and benefits. In addition, Mr. MacDonald has been quoted frequently in The Wall Street Journal, The New York Times, and Bloomberg, as well as in a number of industry trade journals.

A frequent lecturer, Mr. MacDonald has spoken on the subject of compensation and benefit planning to various organizations, including The Conference Board, World-at-Work, Forbes CEO Forum, and the Young Presidents’ Organization.

Mr. MacDonald serves on the Board of Directors for the San Gabriel Boy Scouts of America, National Association of Corporate Directors, and the Board of Visitors for the Graziadio School of Business at Pepperdine University. He is also a member of the World Presidents’ Organization, San Diego Harvard Alumni Club, and Financial Executives International.

Mr. MacDonald graduated from Northeastern University, and The President’s Program on Leadership from Harvard Business School.

Securities Offered Through Retirement Capital Group Securities, a Registered Broker/Dealer, Member FINRA/SIPC William L. MacDonald, Registered Representative - California Insurance License #0556980 Retirement Capital Group Securities, Inc. Is a wholly-owned subsidiary of Retirement Capital Group, Inc.

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Retirement Capital Group, Inc. 12340 El Camino Real, Suite 400 San Diego, CA 92130 Toll-Free: 866.724.4877 Fax: 858.677.5915 Regional Offices Retirement Capital Group, Inc. - Atlanta 351 Atlanta Street Marietta, GA 44122 Phone: 770.422.4800 Fax: 770.422.4815 •••• Retirement Capital Group, Inc. - Boston 275 Grove Street, Suite 2-400 Newton, MA 02466 Phone: 617.663.4881 Fax: 617.663.4801 •••• Retirement Capital Group, Inc. - Milwaukee 12080 Corporate Parkway, Suite 140 Mequon, WI 53092 Phone: 262.478.2015 / 262.478.2005 Fax: 262.478.2016 / 262.478.2006 •••• Retirement Capital Group, Inc. - Palm Desert Professional Firm Executive Benefits Practice 75-153 Merle Drive, Suite H Palm Desert, CA 92211 Phone: 760.836.0100 Fax: 760.836.0106 •••• Retirement Capital Group, Inc. - Southeast Executive Benefits Practice 11465 Johns Creek Parkway, Suite 330 Duluth, GA 30097 Phone: 770.232.0303 Fax: 770.232.0302

www.retirementcapital.com