How Holes Appear in Executive Benefits Plans
Sponsored by CUNA Mutual Group
Supplemental executive compensation plans can have a bad reputation, mostly because of the “golden parachutes” bestowed on some controversial Wall Street executives. But in the credit union world, deferred compensation plans and other supplemental executive retirement/recruitment plans are designed to reward long-term prudent management and good service to members.
Credit unions can’t employ the most lucrative supplemental benefits that banks and other commercial financial institutions use to recruit, retain and reward executives. So, to compete for the best talent, many credit union boards have turned to SERPs. This requires the board’s research and other due diligence to create properly scaled, legally compliant plans.
SERPs: Not Just for Soon-to-Retire Execs
Common SERP elements include 457(b) and 457(f) plans and a variety of split-dollar life insurance plans. The funds backing these plans can be invested in myriad ways, including managed stock and bond funds, mutual funds, exchange-traded funds, insurance policies and many other options.
In addition to rewarding retiring executives, SERPs have been designed to give top performers incentives to stay with their credit unions. They can also smooth out the succession process, helping credit unions maintain their momentum through crucial leadership transitions.
But for credit unions and executives to fully reap the rewards of SERPs, the board must stay engaged during the planning, execution and ongoing maintenance phases. Otherwise, these plans can develop holes that could make them less effective and expose credit unions to unnecessary risk.
Here a few of the most common causes of holes in SERPs:
1. The Economy
The Great Recession is an extreme example of an economic event that affected executives’ deferred compensation plans. Many SERPs had to be adjusted in the wake of that downturn. Some credit unions diverted more funding into faltering plans and others added additional deferred compensation, such as a 457(b) or split-dollar insurance plan to augment an underperforming 457(f) plan.
More commonly, SERP investment vehicles are adjusted moderately over time to rebalance a portfolio, without requiring more funding from the credit union.
In either case, the board should stay informed by communicating with product vendors and investment managers—and be able to explain to examiners why specific adjustments were made.
The IRS, NCUA, state insurance departments and other regulatory bodies regularly propose rule changes that affect SERPs. These changes are generally manageable, as long as credit unions—with help from product providers and independent consultants, when necessary—keep up to date.
A couple of recent examples:
- The U.S. Department of the Treasury has proposed final rules adjusting and clarifying Internal Revenue Codes 457 and 409A that directly affect some credit union SERPs. (These changes are detailed in a recorded CUES webinar, “Proposed 457(f)Regulations Offer Clarity/Opportunities,” hosted by CUNA Mutual Group’s John Pesh.)
- In October 2016, NCUA issued an updated Examiner’s Guide, formatting it for the Web so it can be more easily updated going forward. NCUA clearly emphasizes in the guide that credit unions demonstrate a thorough pre-purchase analysis for supplemental executive benefits. Credit unions should be able to show a justifiable, quantifiable relationship between the investments and the plans being funded.
Although the new guidance doesn’t prescribe a statutory limit on investments funding employee benefits, it specifies that anything over 25 percent of net worth is considered a material concentration subject to additional scrutiny.
Depending on your credit union’s market, competitors may be moving toward more enhanced executive compensation packages to recruit your top leadership talent. Engaging an executive benefits consultant to help keep your board up to date on these trends can guide your SERP strategy.
Many other factors can create potential holes in executive benefits plans over time. The best tool for identifying and preventing these vulnerabilities is an annual review involving the board, executive compensation committee, executive plan participants, vendors and legal counsel.
Andy Roquet is an executive benefits specialist for CUESolutions Platinum provider CUNA Mutual Group, Madison, Wis. Reach him at email@example.com. For more information about becoming a CUESolutions provider, please email firstname.lastname@example.org.
On Tuesday, Nov. 14, 2017, 11:00 a.m.–12 p.m. CST, CUNA Mutual Group Executive Benefits Specialist Andy Roquet will host a free CUES webinar “Signs There May Be Holes in Your Executive Benefits Plan” to provide more background on this evolving topic and specific management tactics. The webinar will feature an overview of SERP construction and risk management, updates on rule changes, and details on performing due diligence to protect credit unions from competitive and legal challenges.