Plan Limits Drive CU Creativity With CEO Retirements
At a time when some companies are facing a shortage of executives to fill top positions and other firms are aggressively trying to lure talented managers away from their current jobs, credit unions may be at a disadvantage.
Unlike their bank counterparts, credit union executives have limits on how much they can contribute and receive from traditional qualified retirement plans, meaning many CEOs may retire at only 30% to 40% of their current salary, even after including Social Security and 401(k) plan savings, according to Bruce Bauer, CUNA Mutual Group senior executive benefits specialist.
“Jobs are opening up, executive talent is being aggressively wooed away from you, and your top talent is feeling financially vulnerable,” Bauer said. “Credit union executives who might retire at only 40% of their current salary may seek other employment options.”
Indeed, credit unions are likely facing a perfect storm when it comes to recruiting, retaining and compensating their executives, Bauer said. Nearly 50% of U.S. employers are challenged to fill critical positions, according to a 2012 Manpower Group Talent Shortage Survey, and 63% of organizations said other companies try to recruit their leadership, he added.
To level the playing field, credit unions might consider offering non-qualified compensation options, including supplemental executive retirement programs, Bauer suggested, noting the SERPs essentially provide benefits beyond qualified plans.
Popular SERP instruments include 457(b) and 457(f) plans, and split-dollar life insurance plans. SERPs can be set up for CEOs and top management tiers and can be designed to return the credit union's initial investment and avoid a net loss over time, according to CUNA Mutual.
Many CEOs may retire at only 30% to 40% of their current salary, even after including Social Security and 401(k) plan savings, said Bruce Bauer, CUNA Mutual Group senior executive benefits specialist.
Regulatory provisions allow credit unions to fund SERPs through formerly impermissible assets, Bauer said. With a well-defined investment allocation plan to help minimize risk, pre-funding helps overcome this challenge for credit unions, he pointed out. Investment and insurance options such as bank-owned life insurance, annuities and separately managed investments can also help fund SERPs.
“With all the CEO retirement, SERPs attract potential CEO candidates and keep [No. 2s] from leaving,” said David Hilton, president of D. Hilton Associates Inc., a credit union consulting and executive recruitment firm based in The Woodlands, Texas.
Still, some boards may still be reluctant to embrace SERPs, according to a D. Hilton Associates 2013 SERP survey that culled 708 responses from credit unions with $100 million or more in assets. Twenty-five percent said they were unwilling to consider them, up from 24% in 2011, the previous year tracked.
Nineteen percent believed their defined benefit programs offered an adequate retirement program and 5% thought SERP-related expenses were too great, the survey revealed. Instead of SERPs, 16% noted they had a substitute benefit or pension. Meanwhile, 94% of CEOs surveyed who did not have a SERP said they wanted one.
In addition, more than 85% of executives, compared to 80% in 2011, would not even consider a job move unless the new opportunity included a SERP as part of the initial employment offer, said Debbie Hilton, EVP, who manages a SERP portfolio of approximately $500 million in assets.
“While a SERP is often provided as a reward for leadership and performance success, (we) expect that the trend of including a SERP as part of the hiring negotiations will continue,” Hilton predicted.
Despite their potential benefits with recruitment and retention, SERPs may carry some risks. When developing compensation plans, Bauer suggested credit unions align compensation philosophy with their mission and organizational and financial goals. He also encouraged the use of peer compensation data to establish a desired level of competitiveness and include it in their overall succession plan. Overall, leadership continuity should be fostered by defining a scope that addresses the CEO and key executives.
With the talent drain in the marketplace due to the baby boomer exodus, retaining talent is more competitive and critical than ever before, said Michael Petti, board chair of the $363 million Nutmeg State Federal Credit Union in Rocky Hill, Conn.
It is up to the board to decide how much of a risk they want to take with their new-found CEO. In some cases, not offering a SERP makes the search non-competitive from the start, he suggested.
“Many SERP provisions provide a substantial payout to a CEO after say, 10 years, 15 years, 20 years and a sizeable payment upon the CEO's retirement,” Petti said. “A lot has to do with where the CEO is in his or her career.”
In addition to providing a competitive edge and retention tool SERPs also helps the credit union retain an asset base on the investment as the credit union generally designates assets to be used to fund the SERP and may see some earnings as well based on performance, Petti explained.
“It gives the CEO no real impetus to seek opportunities elsewhere and provides a substantial deterrent for other organizations in the recruiting process,” Petti said about SERPs. “Each credit union can decide a payout scheme, but the key is to provide the CEO with a financial roadmap that the CEO sees as having real value to his or her career path.”