Make sure future leadership can manage assets in keeping with the original intent.
Split-dollar plans and other supplemental executive benefit arrangements involving otherwise impermissible investments can be in place for decades. This may go beyond the tenure of many executives and board members. Further, the employer’s interests in these plans can be worth millions, making consistent and prudent asset management a key consideration. As a result, it is crucial to ensure that institutional knowledge as to the type, purpose, and management of the assets associated with these plan types is documented. This ensures that future leadership can manage these assets in a manner that is consistent with the original intent.
Given the magnitude of these assets, we recommend that our clients implement an asset management policy. This will provide the basis for decisions related to the employer’s interest in plan assets.
A comprehensive asset management policy and an executive benefits philosophy are key components to an employer’s approach to supplemental benefits for its senior executive team. In our view, asset management policies should, at a minimum, include the following components:
Asset Description and Purpose
While obvious to current leadership, the reasoning behind the investment may not be so clear to future leaders. Future leaders will benefit from a description of the asset and what it is intended to accomplish. This background will prove valuable as executive and board leadership changes over time and plan-related decisions are made.
Decisions about the asset will need to be made from time to time. It is important to clearly establish the person or people who are responsible for making these determinations. Due to the value of these assets, it is common for decision responsibility to rest with the board of directors or a committee of the board. The continual nature of the board allows for consistency and efficient transfer of institutional knowledge.
When attached to employee (including executive) benefit plans, it is common for assumptions to be made about the anticipated rates of return achieved by the investments. The type of investment selected will also play a role in setting return expectations. Therefore, this section of the policy should be specific about the return objective so future leadership can evaluate the alternatives with that in mind.
Risk Tolerance and Time Horizon
While achieving desired rates of return is important, employers may have limitations on the amount of risk they are willing to assume in pursuit of those returns. Credit unions may have varying levels of risk tolerance based on the type and purpose of the asset, and it is wise to be specific so future leadership can make prudent investment decisions. In addition, the investment’s time horizon frequently influences the level of risk the credit union is willing to accept. That is, longer time horizons can allow greater levels of risk. Finally, depending upon the plan type, the executive may bear some or all of this risk.
Constraints and Asset Allocation
The very nature of the plan can limit the types of investments that can be made with respect to assets tied to executive benefit arrangements. For example, if a split-dollar plan or executive bonus plan is implemented, the investment alternatives will be tied to the options available in the life insurance policy or policies. As a result, the asset management policy should be clear about limitations in investment alternatives and why they exist.
Benchmarking and Monitoring
Being able to judge the performance of an asset against a benchmark can be valuable in determining the quality of the investment decision. It is common for the performance of an investment to be benchmarked against a major market index such as the S&P 500, Russell 2000, or similar. That said, there is not necessarily a wrong answer, as long as the benchmark consists of components similar to the asset to which it is being compared.
It is desirable to have a policy in place that is durable, but economic and other conditions change over time, so it is sensible to have a process in place that allows the policy to be updated to reflect those changes. It is common to see changes in the policy requiring a Board or committee vote and a concurrent resolution by the body responsible for the investment.
Given the important nature of these assets/investments, it is essential for credit unions to have a detailed framework for their management. Taking time to think through and develop a policy proactively will pay dividends in the future. Doing so will ensure that future leadership understands the reasoning and intent behind these plans and associated assets. It also avoids the pitfalls of inefficient transfer of institutional knowledge.
H. David Wright is a co-founder and serves as chief strategy officer of CUES Supplier member TriscendNP, located in Flower Mound, Texas, and which helps nonprofit organizations retain key leadership, make informed decisions, and rest easy. Wright has primary responsibility for strategy and business development and has served in this capacity for 20 years. His areas of expertise include business development, compliance, business transactions, and financial and accounting topics. Reach Wright at 972.410-3740 or 214.995.9022.