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Enhancing Your Bank’s Competitive Position with an Executive Benefit Plan

Enhancing Your Bank’s Competitive Position with an Executive Benefit Plan

What is one of the keys to creating a lasting competitive advantage for any community bank? Attracting, retaining and rewarding the employees you need in order to ensure your success.

Today, with unemployment rates trending lower, wage growth is picking up. This is good news for job candidates. Employers have positions to fill, which also means that workers now have leverage, confidence and options.  For banks competing for job candidates, a comprehensive benefits package may tip the scales for a candidate who is considering multiple offers. The bottom line: benefits, especially retirement benefits, can be a game changer.

What are your top three compensation challenges?

Source: Bank Director 2017 Compensation Survey

A tighter job market requires that an organization present itself as an employer of choice, a situation that is leading many banks to offer benefit programs that include executive benefit plans as a way of garnering a strategic advantage.

Reward Employees Without Impacting Costs on an Organization-Wide Basis

Under the Employee Retirement Income Security Act of 1974 (ERISA), qualified plans must be offered to all employees at a company. An executive benefit or nonqualified plan, however, is a type of tax-deferred, employer-sponsored retirement plan that falls outside of most ERISA guidelines.

Since nonqualified plans are not subject to the same regulatory requirements that apply to qualified plans, employers can provide benefits through nonqualified plans to recruit and retain key employees who cannot be fully compensated through a combination of salary and qualified plans due to (i) the cost and compliance burdens that arise when similar benefits are provided to all employees, and (ii) Internal Revenue Service (IRS) benefit limitations. Unlike qualified plans, nonqualified plans may be offered to a select group of employees.

The Department of Labor (DOL) requires that nonqualified plans be designed to cover a select group of management and/or highly compensated employees. Certain job titles generally meet this description, such as president, chief executive officer, chief financial officer, senior or executive vice president, general counsel, and treasurer. Other employees may be eligible based on their level of compensation and responsibilities. These plans are often used to address the retirement income shortfalls resulting from qualified benefit plan limitations, while incorporating rewards based on targeted performance or other benchmarks.

Executive benefit plans provide flexibility in developing benefit compensation strategies, as they can be used to:

  • Provide replacement income at retirement based on total (non-limited) compensation
  • Reward, attract and retain key executives
  • Replace benefits lost due to IRS limits on qualified plans
  • Provide benefits in addition to those under qualified plans
  • Defer compensation
  • Provide enhanced benefits in the event of an acquisition or other change of control

 Nonqualified retirement plans are a growing trend in the banking industry. According to a 2017 survey in Bank Director, 62% of banks offer a nonqualified plan.

Source: Bank Director 2017 Compensation Survey

Understanding the Executive Benefit Plan Design Options

What is the best way to approach Executive and Director Benefit plan design? The first consideration is to determine the objectives you want to achieve with a nonqualified program by analyzing which employees are being impacted by IRS limits, and which key employees you might wish to reward with coverage under a nonqualified arrangement. The organization should analyze how it wishes to position its compensation and benefits programs relative to its competitors and how to best apportion its retirement benefit dollars among various benefit vehicles—pension, savings and nonqualified plans. Once these parameters have been established, the next step is to determine which type of nonqualified plan best suits the organization’s needs.

Executive and Director Deferred Compensation Plans

Executive and Director Deferred Compensation Plans are typically established in order to provide a vehicle for key employees, highly compensated employees and directors to defer compensation until retirement. Arrangements can include deferred salary and bonuses as well as director fees—including board meeting and retainer fees—allowing greater tax deferred dollars than can be made on an individual basis.

Supplemental Executive Retirement Plans (SERP)

A Supplemental Executive Retirement Plan (SERP) is an executive benefit program designed to reward officers and/or key employees. SERPs may be entirely discretionary and designed to provide rewards arbitrarily or based on specific performance factors.

SERPs can be constructed in a variety of ways, including as “defined contribution” or “defined benefit” plans. Benefits provided through these arrangements are over and above those provided by qualified plans. SERPs may be used to provide benefits based on a more generous formula than used in a qualified plan, or may credit more years of service than under a defined benefit pension plan, or may even restore retirement plan benefits lost due to the various limits placed on IRS qualified plans.

Benefit Equalization Plans

Benefit Equalization Plans or (BEPs), are a type of SERP typically designed to restore or supplement retirement plan benefits lost due to the various salary and benefit limits placed on IRS qualified plans. BEPs may also be used to restore benefits due to plan “freezes” or formula changes. A BEP can “correct” the plan salary limit, the defined benefit maximum benefit limit, and various defined contribution plan limits including maximum 401(k) deferrals.

Executive Incentive Retirement Plans

Executive Incentive Retirement Plans (EIRPs) are another type of SERP. These plans are designed to provide a reward to a select group of participants if the organization exceeds key performance metrics, such as Return on Equity (ROE), Return on Assets (ROA), Net Income, Quality of Loan Portfolio, Growth in Fee Income or Cross-Selling Achievements. SERPs are one of the more popular examples of a nonqualified plan as they can be used to supplement a company’s pension, 401(k), and/or other profit-sharing plans, both as a way of retaining and rewarding key executives and attracting new employees.

 A Case Study Using a Supplemental Executive Retirement Plan

 The following illustrates how a SERP can be designed to provide an executive benefit plan for two distinct tiers of employees. Benefits are provided for the employee’s lifetime and guaranteed for 15 years.

 Defined Benefit SERP

  • Percent of final or average compensation
  • Benefit can be offset by bank’s qualified plan benefits
  • Excellent plan design to reward for past performance and incentive to stay for the future

 

 A Case Study Using an Executive Incentive Retirement Plan

The following illustrates how an EIRP can be designed for a select group of individuals. Benefits are provided for the employee’s lifetime and guaranteed for 15 years.

Defined Contribution SERP

  • Provide an annual deferred award based upon the bank’s performance
  • Annual awards can grow based upon a crediting rate such as prime rate or total return of bank stock
  • Excellent plan design for the 2nd tier of your management team

As a trusted partner to banks nationwide, Pentegra is dedicated to helping banks achieve their benefit and cost objectives, manage risk and enhance shareholder value with our bank benefit plan expertise and Bank Owned Life Insurance (BOLI) solutions. Benefit from more than 75 years of retirement plan expertise and the advantage of working with a single provider to create a total retirement benefits and compensation strategy that helps your bank attract, reward and retain key employees and build a competitive advantage.

Pentegra offers a comprehensive platform of executive benefit solutions and benefit consulting services along with strategic financing solutions. Take advantage of BOLI to enhance earnings, restore existing retirement program shortfalls, and offset the costs of qualified retirement programs along with health and welfare and group life benefits.

 

About the Author

Chuck Coldwell

Chuck Coldwell is Vice President – National Director, Consulting and BOLI Services at Pentegra. He oversees Pentegra’s retirement services consulting, marketing and communications business development practice areas. In these roles, he works closely with Pentegra’s teams to develop strategic initiatives designed to enrich the client and participant experience and meet the ongoing needs of clients. He also leads Pentegra’s BOLI business development efforts, working with clients to design customized strategies for benefit financing using BOLI. A Qualified Pension Administrator (QPA), he holds a B.A. in Economics and Psychology.