Tag Archive for: SERP

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Amanda Rogers

How Credit Unions Can Improve 457(f) Plans for Executives

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Competition for key talent has never been more prevalent than it is today

Providing a supplemental executive retirement plan (SERP) to key executives significantly enhances an organization’s ability to attract, reward, and retain its most important people.

One of the most popular SERP designs used by credit unions is a 457(f) plan. Before your organization considers installing a traditional 457(f) or if it already has one in place, please consider the following:

What is a 457(f) Plan?

457(f) plans are tax-advantaged retirement savings plans available to certain executives of tax-exempt organizations, including credit unions.

457(f) plans allow executive participants to contribute a portion of their compensation on a pretax basis, up to the annual IRS limit and receive matching or other employer contributions. Employers may also make discretionary contributions to 457(f) plans on behalf of their executive participants.

These plans can be funded with amounts necessary to provide a defined benefit to the executive upon retirement or with periodic contributions over time in agreed-upon amounts.

Upon retirement, the executive is responsible for paying all of the taxes, in a lump sum, at ordinary income rates. In some states, that can mean that more than half of an executive’s retirement benefit will end up going to the government.

The Benefits of 457(f) Plans

457(f) plans offer a number of benefits to credit unions and their executive participants, including:

  • The ability to attract and retain top talent,
  • Tax-deferred growth of investments, and
  • Flexible withdrawal options

Traditional 457(f) Plan Designs

Traditional 457(f) plans can be effective executive retention tools but they have significant drawbacks, including:

  • Offering the organization inferior rates of return on dollars invested
  • Requiring the retiring executive to reinvest remaining post-tax assets in a taxable environment
  • Lack of a death benefit for the executive’s heirs at his/her demise; rather, they receive only what has accumulated in the plan up to that date

Moreover, credit unions should be aware of the potential pitfalls associated with 457(f) plans, such as compliance with IRS rules and regulations, high administrative costs, and the risk of participant litigation.

How Credit Unions Can Improve 457(f) Plans

Credit unions can take steps to improve their 457(f) plans in order to maximize the benefits for both the organization and its executive participants. These steps include:

  • Selecting the right 457(f) plan provider
  • Designing a 457(f) plan that is compliant with IRS rules and regulations, and
  • Implementing 457(f) plan administration and participant communication best practices

By taking these steps, credit unions can ensure that their 457(f) plans are well-designed and well-managed, providing maximum benefits for all involved.

Acumen Insurance Solutions 457(f) Plan Designs

Acumen’s plan designs provide a death benefit or self-completing feature equal to the full value of the executive’s projected retirement benefit. In addition, these designs:

  • Offer a more tax-efficient solution for the executive to receive retirement benefits resulting in 30-40% more, after-tax income
  • Include an investment vehicle for the retiring executive that has historically provided both a competitive return and a principal guarantee
  • Can be implemented with no additional cost or burden on the organization

If your organization is thinking about installing a 457(f) plan, let’s talk! We can help you decide if our customized plan designs are worthwhile, considering your situation.

Moreover, if you already have a 457(f) plan in place, we’re happy to review your current plan and see where you may be able to improve them. Reach out to us!

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The Acumen Team

CUOLI: How to Earn More Safely

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Credit unions typically keep significant liquid, short-term assets on their balance sheets, but the yield on these assets is minimal in today’s low interest rate environment and fails to provide a meaningful impact on current income.

Credit union-owned life insurance (COLI/CUOLI) is an important strategy that can help your credit union earn high yields safely. 

Let’s discuss.

What is Credit Union-Owned Life Insurance?

Firstly, what is credit union-owned life insurance?

COLI or CUOLI is a single premium life insurance contract where the credit union is both the owner and beneficiary of the policy.

Credit unions use this life insurance strategy to offset the cost of employee benefits and executive compensation plans, as well as generate higher current yields compared to other options while preserving safety and liquidity.  

COLI policies insure the lives of your executives and/or key employees. Similar policies, called bank-owned life insurance (BOLI), have been used by commercial banks for over 40 years.

Why Do CUs Purchase COLI/CUOLI?

Credit unions are in search of higher yields without taking unnecessary risk — and have been for decades.

Historically low interest rates have put pressure on credit unions to find yield. However, excess funds and liquidity make finding yield difficult for credit unions. While life insurance has always been a popular asset for banks to have on their balance sheets, credit unions have also been drawn to this asset for CUOLI’s safety, stability, and yield.

So, what’s the solution? Credit union-owned life insurance.

As an asset class, CUOLI can help mitigate interest rate and price risk, providing a less volatile return to the credit union. Additionally, credit unions are finding that returns on CUOLI are higher than other, more traditional options.

Let’s illustrate what this looks like in action.

COLI/CUOLI in Action

Situation: A $4 billion credit union wants to earn more on its cash and short-term investments, and protect itself from the unexpected passing of its key executives.

Action Steps: After considering several options, the board decides to fund institutionally-designed credit union-owned life insurance (CUOLI/COLI) policies, issued by top-quality carriers.

Designed and placed by Acumen Insurance Solutions, the policies hold high cash values while insuring the lives of the credit union’s executives. The program this credit union selected uses two different types of life insurance policies – one with a fixed rate and the other with a floating rate. Both have principal guarantees.

The Results: As a result of implementing a COLI policy, the credit union is now receiving:

  • A 4% annual net rate of return from the fixed policy and a 5% (average) return from the floating rate policy, while preserving safety or liquidity
  • Yields that increase as interest rates rise
  • Additional key-person death benefit protection on the CEO, CFO, and CCO that will be paid to the organization
  • The ability to contribute more in the future to these policies, if desired
  • Compliance with FASB ASU 2016-01

A Final Word

At Acumen Insurance Solutions, we have pioneered “institutional” designs that maximize performance while minimizing the out-of-pocket expenses associated with the acquisition of “retail” life insurance.

We recognize that credit union-owned life insurance is a great way to earn a higher current yield without sacrificing safety or liquidity while acquiring life insurance protection on key people.

Read on for more benefits of credit union-owned life insurance.