CFO Focus: How A Broken SERP Was Repaired

a broken dollar sign is being repaired
By Matthew Butler

6 minutes

When designed properly, an executive benefit plan should offer unique advantages tailored to the needs and expectations of the executive while flexibly providing incentives that align with personal and organizational objectives.

This is sponsored by CUES Supplier member Elite Capital Management Group.

I recently had a conversation with a credit union CEO who I’ll call “Sam” for the purposes of this article. Sam was concerned with the performance of his supplemental executive retirement plan. Sam explained how his plan had not been performing nearly as projected and how he and his board were at a standstill in terms of finding answers. During my 22-year career working with credit unions, I have seen the good, the bad and the ugly with respect to executive benefit plan designs, and I’ve seen my fair share of plans blow up as well.

Sam’s SERP happened to be a collateral assignment split dollar program, which involves the use of life insurance owned by the executive, and a loan arrangement between the executive and the credit union to pay policy premiums. It’s no secret that CASD plans have been struggling mightily throughout credit union land, due in no small part to interest rates reverting to their mean with a vengeance after having spent nearly a decade and a half at or near 0%.

The executive benefits battle cry is rooted in good intentions: To remain competitive in this everchanging landscape of modern business, attracting and retaining top-tier executive talent is paramount to your organization’s success. No disagreement here, and credit unions agree as well, as most have turned to executive benefit plans as a strategic tool to help achieve their goals. But by either poor product choice or faulty plan design, many SERPs are badly failing at this time, and that’s a problem.

If neglected, nearly any type of executive benefit plan runs the risk of not achieving its objective, or worse, as in Sam’s case, blowing up, and that’s a lose-lose-lose for all involved; the executive, the credit union and credit union membership who rely upon consistent and capable leadership.

Thankfully, Sam got some answers, but before discussing how his problem was solved, let’s back up a bit and briefly review the history of executive benefits in the credit union space.

Executive benefit plans started to gain traction in credit union land during the late 1990s early 2000s. Plan designs at that time were simple for the most part, yet generally effective. Plan types offered to credit unions in the early years were typically either 457(b) or 457(f) plans.

457(b) plans allow executives to defer a portion of their income to a later date, typically retirement, allowing them to benefit from tax-deferred growth much like a traditional qualified plan or retirement account. 457(b) plans can act as a supplement to an existing 401(K) plan and can be funded, within annual limits, by the executive, the credit union, or a combination of both.

457(f) plans have no contribution limits and are typically funded by the credit union. The grand-daddy of executive benefit plans, the 457(f) is often referred to as a “golden-handcuff” arrangement, whereby taxation of a future monetary benefit to the executive occurs when a substantial risk of forfeiture no longer exists. Earnings only 457(f) plans were popular back in the day, where investment earnings would pass to the executive at the time of payout while principal and cost of funds would revert to the credit union.

Over the past 15 years or so, things have gotten muddier and unnecessarily complicated with respect to executive benefit plans.

Around 2005, split dollar was introduced to the credit union space and was heavily marketed as a “no cost plan” that could avoid taxation to the executive. With these programs, credit unions offer life insurance-based plans to their key executives, which provide death benefits to beneficiaries while also offering potential cash value accumulation or access to policy loans for personal financial needs. These plans are typically designed as collateral assignment split dollar programs (loan regime), or less commonly as endorsement split dollar.

Split dollar plans involve many moving parts, as does any insurance-based plan. When one of these moving parts falls out of line, however, anticipated benefits, costs, and projections will veer off the mark geometrically, as in Sam’s case.

For Sam and his credit union, a simple solution existed to resurrect his SERP while also getting his credit union out of jam. A solution that didn’t even require a product to be purchased.

In short, Sam’s credit union wanted to provide Sam with a future monetary benefit that was equivalent to the projections of the original CASD plan. Let’s call this amount $500,000. Sam’s credit union had an existing employee benefits pre-funding portfolio, and they learned that the executive benefit they desired to provide Sam could be included as an eligible expense within their existing pre-funding portfolio.

As such, the credit union simply began to annually accrue the cost of Sam’s future benefit, and those accruals were offset by the earnings of the pre-funding portfolio. A one-page agreement between Sam and the credit union sealed the deal.

Sam is happy because he now has a known monetary benefit, a defined benefit if you will. The credit union is happy because they weren’t required to specifically fund Sam’s plan with any money. They used their existing pre-funding portfolio to offset any plan expense while retaining the freedom and flexibility to either accrue for the future payout to Sam or not.

Should Sam depart the credit union before vesting, the executive benefit would be forfeited. This would put the credit union in a strong position for recruiting purposes as a new executive could be seamlessly plugged into a similar arrangement should they choose to do so. Again, this is because Sam’s benefit was not tied to any specific investments, a truly creative and flexible solution.

Finally, and importantly, the board understands this plan. They get it. It’s simple and it works. Something that can’t be said about many plans that exist today.

In summary, when designed properly, an executive benefit plan should offer unique advantages tailored to the needs and expectations of the executive while flexibly providing incentives that align with personal and organizational objectives. Alas, there is also something to be said about simplicity. In Sam’s case, the fix was simple. The plan is simple. The plan is flexible, and most of all, it works.

Matthew Butler is the founder and managing principal of CUES Supplier member Elite Capital Management Group. He has dedicated over three decades of his career to finance, with a focus on working exclusively with credit unions. Butler established Elite Capital in March 2007 to fill a significant gap for credit unions—access to institutional money management free from the constraints of insurance-based products and retail investment expenses. Matthew believes the importance of providing these services to credit unions is greater than ever before, which continues to drive his passion and entrepreneurial spirit.

About Elite Capital Management Group: We pioneered the concept of employee benefits pre-funding in the credit union space more than a decade and a half ago. Originating from the idea that credit unions lacked access to institutional investments and that insurance policies written for banks were a poor solution for credit unions, we launched the Elite Yield Enhancement Pre-Funding Program® in 2007 and have grown to be one of the largest providers of non-insurance based §701.19C investment programs in the United States.

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