From board room to chess boards

Designing a SERP (Supplemental Executive Retirement Plan) isn’t a cookie-cutter process; every credit union is different. Twenty years ago, these plans were a new concept in the credit union industry. Today, SERPs are common, and most people have a general knowledge about what they are and why they are used, even if they don’t have one themselves.

In 2018, experts projected that almost half of all CEOs would retire in the next 10 years, with about a quarter retiring in the next 5. Here we are, 5 years later, and we are seeing that prediction come to fruition. As the baby boomer generation reaches retirement, more and more boards are finding that when their CEO retires, new candidates are looking for a SERP plan as part of the employment benefit package. This is also pushing credit unions that have a plan for their CEO to consider implementing plans for other C-suite positions to maintain executive team continuity, which will ensure the success of their strategic planning goals.

There are 3 types of plans available for credit unions:

• 457(F)
  • Credit union promises to pay a retention benefit in the future if the executive stays employed to specific date(s).
  • Credit union books an annual expense.
  • Executives are taxed at a specified payment distribution date.
• Collateral Assignment Split Dollar
  • Credit union makes a loan to the executive to purchase a life insurance policy.
  • Credit union accrues interest on the loan and is repaid loan plus interest from the policy death proceeds.
  • Executives borrow against the policy’s values annually to supplement retirement income. Money received is tax free.
• 162 Bonus
  • The credit union agrees to pay annual premiums on a life insurance policy owned by the executive.
  • The executive is taxed each year a premium payment is made; the credit union bonuses the executive an amount to cover the taxes.
  • At retirement, the policy cash value may be accessed tax free at the executive’s discretion.

Instead of delving into more detail about the plans, I thought it would be more meaningful to hear from someone who has received one. Lynette Smith recently retired in 2021 as the President/CEO of TruEnergy Federal Credit Union in Virginia and has shared some thoughts about her SERP:

SERPs are a valuable tool for the Board. They are essential for retaining their CEO if the CEO is valued and important to the Board. They also provide an extra layer of protection for continuity of business and succession planning.

Today, SERPs are usually part of the offer letter, but when I was hired as CEO after about a year my then chairman and board concluded that they wanted me to end my CEO career with TruEnergy FCU. The Board then did their due diligence on several executive benefit business consultants in the credit union industry. They formed a compensation committee, which performed all the research and due diligence on the different plans. Our committee attended several educational sessions to learn about the types of plans and the benefits to the credit union’s financial business plan if properly structured.

 After doing due diligence, the committee collaborated with a firm to design a plan that was meaningful to me but also appropriate for the credit union. Every year the board reviewed the plan and as time went on adjustments were made. As I got closer to retirement, the board converted part of my plan to one that was tax advantaged. It also allowed the board to offer a plan to retain our then Vice President of Operations to ensure the continuity of business through my transition.

Around four years prior to my retirement and before I received my benefit I collaborated with a financial planner and CPA. Annually the executive benefits firm the Board worked with explained the tax implications of the plan payments, but they did not have all my personal financial information. My financial planner and CPA helped with calculating and navigating the appropriate withholding for my 457(F) benefits but also made sure I was prepared for the social security taxable wages and the effect on my Medicare part B.

I was fortunate to have a Board that cared about my wellbeing. The SERPs changed me, and my family’s lives! My advice for anyone within 5 to 10 years of retirement is to find an attorney, financial advisor, and tax accountant today—people who see the whole picture, not just one-piece chessman. CHECK MATE!

Executive benefit firms work for the Board but should also be willing to review plan information with the participant’s personal financial advisors. From a participant standpoint, engaging with your own financial experts about the effects of the plan on your personal finances is important. Taking the initiative, like Lynette did, having your own financial planner and CPA at least 5 years before you retire will help you make the most out of your retirement benefits.

In summary, these plans can help boards achieve their strategic and financial goals. I cannot stress enough the importance of due diligence and choosing an executive benefits firm that listens to your unique goals. Just as all credit unions are different, so can their SERP plans be. Your executive benefit advisor should work with you not only in the initial design and implementation of your plan but also throughout the years as the industry grows and evolves.

Co-author: Lynette Smith, retired CEO of TruEnergy Federal Credit Union and AACUC Board Emeritus