Time For Another Look At Benefits
In today's market the challenge to earn reasonable returns on savings and retirement funds have brought about a renewed interest in a time-tested benefit plan. Death Benefit Plans and Supplemental Retirement Plans (SERPs) have long been a staple in corporate benefit planning. When utilizing these approaches in the credit union world additional challenges are present as it relates to NCUA regulations and oversight.
Planning in this vein must meet the credit union's needs as they relate to their overall employee benefit plan, attraction and retention of key personnel, investment criteria and liquidity needs. In addition, changes in the design of these products over the past several years have made this planning more adaptable in the eyes of the regulators, as well as the enhancements to the competiveness of the funding vehicles that drive the plans benefits.
A quick review of some key points of Executive Benefit Planning is in order. Accumulation planning for key employees takes shape in one or both type of planning tools. Traditional retirement planning vehicles such as 401(k) plans and Defined Benefit Plans-called Qualified Plans-allow for pre-tax contributions from either the employer or employee but are fraught with rules and limitations imposed by the government. Non-Qualified Plans are those that are mostly established for the benefit of a selected group of employees-often considered the Highly Compensated Employees (HCE).
The challenge in supplying adequate retirement coverage for those HCE's is evident in the following example. An employee making $50,000 per year can easily defer 33% of their income using the current $16,500 contribution limit. However, an employee making $200,000 is able to save only 8.25% of their pay and will find it impossible to achieve the recommended 60% to 70% retirement check based on pre-retirement income using only traditional qualified plans.
Points To Consider
Within the non-qualified plan design world there are a few notable points to consider:
• Limited to the highly compensated employees, which afford the organization several testing methodologies.
• No limits on amounts contributed.
• Pre-tax contributions.
• In-service distributions.
• No funding requirements.
There are some minor drawbacks when considering a non-qualified deferred compensation plan-namely the plans are not eligible for IRA Rollovers and they are not offered the protection from ERISA.
Credit unions are utilizing typical Non-Qualified 401(k) Excess plans today to have access to several key planning benefits:
• Bypass Qualified Plan limitations for funding and IRS reporting.
• Decide eligibility.
• Pre-tax contributions and tax-deferred growth.
• Retention and attraction of key personnel.
• Vesting and performance triggers for participants.
Typically, excess benefit plans that are established for select employees have been called "golden handcuffs"-in so far as they "hold" the employee to the organization in return for the promised "pot of gold at the end of the rainbow"-in this example retirement. For those reasons credit unions are funding these plans to provide excellent benefits to selected executives while meeting regulatory reviews and guidelines. In addition, some credit unions are using such benefits to attract key personnel committing them to the organization for many years to come.
One CU Example
In a recent case study, a credit union wanted to enhance their employee benefit plan at little or no cost. During this process the credit union was able to replace their existing group term life insurance on its executives and offer them a plan with post-retirement death benefits.
In addition, they were able to establish key performance and service requirements for their executives. The executives would enjoy not only post retirement death benefits but also retirement funds which would provide 50% of their final compensation as retirement income for 10 years.
In this plan there was virtually no cost to the credit union due to the cost-recovery feature of the plan. These specialized plans have been designed not only to meet the demand of the credit union to specify the who, what, where and when but moreover to meet the regulatory requirements that the organization must comply with. Plan design included 100% access to all cash value in the plan from day one which equaled the sum of all contributions made to the plan.
In addition, the plan had to provide a minimum guaranteed crediting rate as well as to allow for equity indexed crediting returns on part of the plan assets. Cost recovery was a key element since member assets were used to fund plan benefits.
Regulatory oversight is a key element in making this type of planning work in the credit union environment. The NCUA states that life insurance, an otherwise impermissible investment, may be used to informally fund employee benefits for cost recovery. Therefore, in plans established for use in the world of credit unions, the preferable vehicle is institutional life insurance since it provides both cash values which can be used to pay Supplemental Retirement Benefits and Death Benefits for full cost recovery.
The key to creating a successful plan comes from the design which meets both the objectives of the credit union as well as the rules and regulations that are in place to protect members' assets.
Dan Reisinger is vice president of Mid-Atlantic Direct, Wilmington, Del. He can be reached at 610.389.1231 or email@example.com.