Credit union boards collectively have many talents. With the NCUA mandate to diversify skill sets within the board more than ever, many areas of board responsibilities require directors to learn and seek consultation. One such subject that usually calls for extra help due to its complexity is CEO long-term benefits.
The CEO's long-term benefit is just one piece of the total compensation package, which also includes base pay, short-term bonus, qualified retirement plans and perquisites. However, the CEO's long-term retirement plan is a major part of total compensation. A long-term benefit plan that is designed and implemented proactively will benefit both the CEO and the credit union members.
A board or compensation committee without experience in this field should consider hiring a consultant who is an expert in credit union long-term benefits to assist them through a request for proposal process. By calling on such expertise, the board will become educated about these plans, fulfill their fiduciary responsibility and complete the appropriate due diligence. Additionally, good guidance should result in a plan that is reasonable, affordable and effective.
An RFP can be developed within the context of the credit union's culture and goals, particularly as they pertain to compensation philosophy. If the credit union does not have a written compensation philosophy, the board will want to consider the advantages to establishing one. The RFP will allow the prospective vendors to explain their pricing, capacity, methodology and knowledge.
The credit union will be entering into a long-term relationship with the selected firm, so succession is also an important concern. The RFP will reveal the level of expertise a prospective vendor has within the credit union, not-for-profit and financial institution arenas.
There are various ways to deliver the CEO's long-term benefit including a 457(f) defined benefit, a 457(f) defined contribution, a 451 bonus plan, a collateral assignment agreement and others. The RFP will seek to learn of each vendor's approach and their reasoning for taking that approach. Too often I have seen poorly designed RFPs that lack the proper questions to truly measure the experience and knowledge of potential vendors. An experienced consultant can help the board develop the right questions and understand the responses to the RFP. For example, the board will want to know what methodology or platform a vendor uses to provide an executive benefit. Others areas that an RFP will explore include the vendors' abilities with respect to compensation, benefits (qualified and nonqualified), documentation, compliance, administration and funding.
Through a properly designed RFP, the board will learn about the experience, expertise and capacities of each vendor and be able to make a sound selection.
Failure to develop a well-structured RFP can result in significant financial losses to both the credit union and the executive. This can be caused by excessive overfunding, excessive benefits, nonexisting or incomplete documentation, improper funding vehicles, misrepresented interest crediting projections and even bad administration. Many times a vendor will fail to perform sensitivity testing that includes a myriad of what-if scenarios.
Unless the credit union board is well versed in the intricacies of long-term benefit plans, it is in their best interest to seek the guidance of a knowledgeable consultant to develop the RFP. A good consultant can help the board design a well-structure and thorough RFP, and continue to oversee the process through implementation. Good information will save the credit union significant time and money and avoid future headaches arising from issues that might otherwise be overlooked.
The preferred consultant is a firm that does not receive commissions from funding placements. A consultant whose sole interest is to serve the board and members can take the board through the CEO long-term benefit process from RFP through implementation in a manner that will not only help to provide the best benefit scenario possible, but also will provide the proper due diligence necessary for a board to do the right job.
Kevin W. Mahan is the president/actuary at CUBED.
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