Leveraging Executive Retirement Plans to Attract & Retain Top Talent
By Cody Howard, CPA – Senior Audit Manager, Financial Institutions Group
In today’s uncertain times, retaining top talent in management positions is a challenge many employers face. While many organizations explore various ways to preserve and attract their key executives, providing retirement plans is one highly desirable element to consider.
According to Pearl Meyer’s Top 200 Credit Union CEO and Senior Executive Total Compensation Survey, 89% of participants reported they offered a supplemental executive retirement plan (SERP) to the CEO. Additionally, most respondents noted there were additional executives beyond the CEO who were offered SERP benefits as a whole.
Doeren Mayhew’s credit union pros explore the three major types of SERP plans, advantages and disadvantages to consider and more.
457(f)/457(b) Plans
A 457(f) plan is a non-qualified retirement plan funded by the employer to supplement an executive’s retirement income to be paid out at a specific point in time based on a signed contract. The credit union can then purchase investment assets to generate revenue to fund the deferred compensation plan. Alternatively, a 457(b) plan is a non-qualified retirement plan funded by the employee (and potentially the employer) to supplement an executive’s retirement income to be paid out at retirement. This plan allows the executive to contribute additional amounts to retirement over the traditional 401(k) amount allowable under federal law. Employers have the option to make matching contributions to the plan, but are not required. Below are some advantages and disadvantages to consider when exploring these types of plans.
Advantages
457(f) | 457(b) |
| Supplemental retirement income that is taxed when withdrawn. | Supplemental retirement income is taxed when withdrawn. There is an option to contribute post-tax dollars. |
| Employer funded – no cost to the employee. | Ability to withdraw funds before age 60 penalty-free. |
Disadvantages
457(f) | 457(b) |
| Potentially subject to a risk of forfeiture. | Employer contributions count toward the maximum limit annually. |
| Employer contributions are subject to a vesting agreement, per the contract. | Employer contributions are subject to a vesting agreement, per the contract. |
Credit Union-Owned Life Insurance (COLI)
COLI plans are defined as a life insurance product offered to top executives that pays a benefit to the credit union upon the insured employee's death. In the event of the death of one of these individuals, the credit union, as a beneficiary of the policies, would receive a specified cash payment equal to the face value of the policy. Generally, there is no benefit to the executive unless the policy states the executive’s beneficiaries will share the payout with the credit union. It is imperative the executive and credit union carefully review the plan if the goal is to compensate the executive’s beneficiaries. However, the credit union can only provide this to the top 35% of the employees, based on compensation. Additionally, they must notify the executive in writing of the policy and obtain their written consent before purchasing the policies.
Advantages | Disadvantages |
| The credit union can have profits covering other employee benefit expenses. | Due diligence is required on the credit quality of the insurer. These types of policies are not government-backed and could potentially lose value if the insurance company goes bankrupt. |
| Employer funded – no cost to the employee. | Can take many years to mature, based on the age of the insurer at the date of policy purchase. |
Split-Dollar Life Insurance (SDLI) Plan
SDLI plans are defined as a contract between the credit union and the executive outlining the cost structure, ownership and benefits of a permanent life insurance policy. The agreement involves the executives acquiring a loan from the credit union and using the loan proceeds to purchase a life insurance policy. The executive is taxed on the value of the economic benefit of the policy, or the value of the value of a similar term life policy with an equivalent death benefit. The executive is the owner of the policy and makes a collateral assignment to the credit union. Generally, the executive is not personally responsible for repayment of the loan. There are several ways this plan can be structured, so it is imperative the executive and credit union carefully review it to achieve the intended goals. At the time of the executive’s death, the credit union will be paid the loan amount plus accrued interest and the balance of the insurance benefit will be paid to the executive’s designated beneficiary.
Advantages | Disadvantages |
| The loan is usually priced at the applicable federal rate, which is the minimum rate the credit union can charge, typically below market rate. | Potential disputes over who owns the insurance policy in the event of a default. |
| Not subject to Employee Retirement Income Security Act (ERISA) rules, therefore there is potential for differentiation in how agreements can be written. | Potential limitations on employees’ access to the cash value of the proceeds, should they be needed before death. |
Here to Help
It’s never too late for your credit union to start exploring options to ensure the longevity of your top executives. To implement a well-structured plan aligned with your business objectives, we encourage you to work with a trusted insurance advisor, like those from our insurance affiliate, Doeren Mayhew Insurance Group.
Whether you’re looking to evaluate your options or need assistance in understanding the accounting practices involved, Doeren Mayhew’s credit union pros stand ready to help. If you already have one of the plans above and you would like to understand the accounting and validate it is being accounted for properly, Doeren Mayhew's CPAs and advisors are here to show you the way.
