Beyond defining the credit union’s objectives, executive benefits plans should also consider the stakeholder objectives, including executives’ personal goals and how to best complement the organization’s compensation philosophy.

Increasingly, Supplemental Executive Retirement Plans (SERPs) are an expectation of C-suite candidates.
The most common types of SERPs are 457(b) plans, 457(f) plans and Split Dollar. Designed strategically, these can be effective retention and recruitment tools.

For example, a cooperative that has just hired a younger CEO may want to consider a multi-staged approach starting with the mid-term using 457(f) benefits in years that have meaning to the organization and individual, following the fact pattern of time-based needs, such as paying for college. The executive and board can then discuss the strategy and timing for creating the next stages of the overall benefit plan, such as utilizing split dollar when the executive is about 10-15 years from retirement.

Holistic executive compensation planning can be a key factor in recruiting and retaining top talent. Depending on your cooperative’s strategic goals, choosing a single approach, a mix of several or even individualizing plans for key leadership roles may make the most sense. Whatever the path forward, the benefits side of the equation should be a key part of your overall talent retention strategy.

2. Take time to fully understand plan options and costs.

If your cooperative is working with a benefits plan consultant, they should be providing educational opportunities to ensure that your board members fully understand the universe of plan options available to the institution. After identifying the needs of all key stakeholders, align the organizational and individual needs with the best possible plan solutions.

A key element when considering collateral assignment Split Dollar plans is the relationship between the loan rate for the plan and the Applicable Federal Rate (AFR). Given today’s AFR, plan designs utilize strategies to mitigate the high interest cost, including plans with below-market interest rates, non-equity approaches or future applicable federal rate assumptions. Within a split dollar plan design there are various levers that can be used to accommodate these traditional plans in the modern environment.

Here are some common plan design levers used to mitigate the impact of a high AFR environment:

• Type of arrangement;
• Timing of loans;
• Loan repayment timing;
• Loan interest rate (below-market or Applicable Federal Rate); and
• When loans begin to accrue interest.

Consider a cooperative that wishes to implement a split dollar plan on a key executive immediately and is exploring ways to manage the long-term effects of compounding interest and minimize imputing additional income to the executive. A strategy that could be considered is a type of split dollar referred to as switch dollar. Under this arrangement the insurance policy is issued today with a non-equity arrangement offering death benefit coverage to the executive. This arrangement changes when a loan is recorded at a future date and the plan then provides death benefit as well as access to policy values for future retirement income.

When it comes to funding 457(f) and other employee benefits, cooperatives have financing options that assist with cash flow planning or can be used to offset the costs of the benefit on a P&L basis. The investing authority outlined in the NCUA’s guidance Section 701.19 allows credit unions to hold investments that would otherwise be impermissible to finance employee benefit expenses.

Among the options are dedicated investment portfolios designed to extinguish the benefit expense. This approach uses investments that closely maturity-match plan distributions for cash flow planning or target expected returns to offset annual benefit plan expense. Portfolios can be sized to meet the benefit liability with minimal investment or with a larger portfolio where the portfolio size is determined using the expected return over the yearly benefit expense.

3. As with any long-term strategy, conduct due diligence and understand contingency scenarios.

Along with understanding the plan costs, it’s vital for key stakeholders to understand the potential risks, accounting treatments, and other elements of their executive benefits plans and associated funding strategies. This is especially important when exploring new strategies with limited historical information available.

Boards should evaluate the plan versus alternative options. They should understand the contingency scenarios, such as separation from service prior to retirement age and changes resulting from the economic environment (AFR, crediting rates, investment rates of return).

Taking the time to fully understand all the various pros and cons is critical for any investment.

Remaining Attractive to Today’s Leaders

Keeping pace with the industry and remaining attractive to both current and future leaders, who are vital to the long-term success of any credit union, should begin with your institution’s strategy. Start by defining your objectives before you jump into evaluating specific plans.

Remember, retirement plans and their financing strategies can be customized to meet the unique objectives of a credit union. Employers have the discretion to structure the plans in ways that align with the organization’s goals and the needs of the executives.