Fileting RFPs When It Comes To Benes

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The Request for Proposal (RFP) is sometimes like the proverbial Sacred Cow. It is revered as the traditional way to move through a diligence process, but it often gets in the way of good decisions.

Many credit unions have used an RFP in selecting a provider of executive benefits, a complex business that requires specific and detailed knowledge, especially for a tax-exempt organization. But dusting off an old RFP that was used to select a software vendor or a 401(k) provider simply won't work.

Rewriting and distributing the RFP will not assure that your selection process includes the due-diligence necessary to find a consultant who specializes in non-qualified executive benefits. Answering a set of questions won't necessarily identify a trustworthy advisor that is current on all aspects of design, structure, documentation, funding and administration of customized non-qualified plans. Additionally, the regulatory environment has changed drastically in the last decade, so it's important to find an advisor who knows about implementing and maintaining CU executive plans.

Certainly, the RFP is a way to compare and contrast potential providers, but the RFP has to elicit info that is most relevant to the project. Defining the project and what constitutes a successful completion is important from the outset. A recognized advisor can also help structure the RFP and define the ultimate outcome of the project. A well-versed consultant in the long-term elements of executive compensation can help avoid the pitfalls of a complicated process and the mistakes that denigrate the effectiveness of the RFP.

Important Differences
The differences between qualified plans and non-qualified plans are stark. Non-qualified plans for credit unions are subject to IRC Section 457. Plans designed for executives are limited to a select group of highly paid individuals. It takes a different level of knowledge to interact with a company's top executives and articulate the regulations that govern non-qualified benefits in tax -exempt entities.

Benefits from non-qualified plans at credit unions are taxed differently. This may have an influence on the plan design, the magnitude of the benefit and the payout timing. The accounting rules for non-qualified plans are also different. Actuarial gains and losses are often treated differently and your consultant should understand the accounting implications of your plan.

Cost Should Be Defined
The selection of a provider should not be based solely on cost. Most RFPs do not specify a definition of cost. The most important cost element is the measurement of the benefit promised and earned. The consultant should provide ways to mitigate the actual earnings impact to the credit union, either through design applications or redeploying assets to benefit funding. The "cost" part of the selection decision should be focused on a cost/benefit analysis, which weighs the costs against the results produced.

Non-qualified plans will often have special features that address important issues not addressed in qualified plans. Longer-term executive benefits are linked to performance measures. Tying benefit delivery to sustainable and relevant performance measures that are aligned with the interest of the credit union and its members is paramount.

Since these benefit plans are increasingly used as critical executive recruitment and retention tools, you will need a consultant that is able to demonstrate an ability to communicate plan concepts to auditors and regulators, lawyers and accountants.

Simplify the RFP
Involving too many people in the structure and decision process for the RFP can overcomplicate things. What you are really trying to do is pick a trustworthy firm based on its competence and character. Having a lot of questions or a targeted number of respondents is not the answer; common sense is. Simplify the RFP by identifying the core objectives and crafting questions around those specific objectives.

Be sure that your consultant's primary objective is to find you the most qualified provider (and not just to become your provider). However, if you are comfortable with the firm you are working with, don't waste your time talking to other firms.

If the decision is to be made by the compensation committee (or other designated committee), don't change the destination in the middle of the process. Designated decision makers tend to be more focused on efficiency, performance and financial impact and less focused on managing the nuances of benefit delivery and artificial savings. Whomever you pick should regularly reeducate the board on the environment in which the plan operates.

Sound Advice
For many credit union executives, the dollars accumulated over time in a non-qualified plan will be their largest single source of retirement income. Performance linked plans are a big part of the executive compensation package. Tying what the executive receives to the well-being of the credit union is in everyone's best interest.

The RFP is a major tool in selecting the right firm, but the process should be strategic, well thought out and well executed. Otherwise, the RFP process can simply cloud the selection decision. It is about finding a firm you trust rather than a firm that is just good at responding to RFPs.

Alec Berkman is principal and CEO with Executive Compensation Solutions, Covina, Calif. For info:

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