frequently asked questions

1. What can we afford regarding executive benefits? What are the cost components of a plan?

(A) The cost of retaining key people, recruiting for succession planning, rewarding those who have put in years of service to the credit union and fairness in providing benefits that help with retirement objectives are the responsibility of the board and an important part in the on-going management and continuity of the credit union.

In determining what benefits to offer key people, the credit union should determine what is reasonable and competitive.

1. Reasonableness of the Benefits is determined by several factors including:
1. Definition of regulatory reasonableness
2. Peer Group
3. Market area competition
4. Membership Standards (benefits)
5. Key Persons – Importance to the organization (replacement costs)
6. Limitations on qualified plan contributions (Retirement Gap)
7. Income replacement analysis – total compensation package

Once the credit union has decided on the benefit to offer that meets its goals and objectives then the actual cost can be determined.


2. Determining the actual costs.
1. The cost of benefits is a function of several factors based on the promise (legal contract) the CU makes to the Executive:

· The accounting expense that must be booked for a projected promise of payment in certain events

· The annual administration cost paid to a third party administrator for reporting on the accounting and other benefit expenses (FICA etc)

· The legal fees for documents in initiating the plan

Soft costs would also include use of funds in financing and negating contractual risks


2. What are the short, mid and long term costs of the program to the Credit Union. How will they affect the bottom line of our finances annually and over time?

(A) Ideally, the Credit Union should recover all costs and the use of its funds annually. With the use of wholesale financing, minimal impact to earnings and no balance sheet affect can be achieved while delivering significant benefits. The plan should be affordable and all costs should be recoverable.


3. What financial risks do we face in the program?

(A) There are two different types or sets of risk that the board must be aware of. The first and most important is the risk due to contractual promises to the executive the second are the risks due to funding. Both sets of risks are manageable and can be mitigated with proper planning and design.

- Risks due to the Contractual Promise by the Credit Union:

* Payment at Retirement (specified age)
* Payment at Specified Age in the event of Disability
* Payment of account value and additional death benefit to beneficiary in the event of death (before and after retirement)
* Payment due at Involuntary Termination (determined)
* Payment due to Change of Control

- Risks due to Funding:

* Market - Minimal with portfolio or hybrid products, returns similar to a 10 year T-Note
* Price - Minimal, guarantees in the product. Bids are obtained on products
* Liquidity - None, wholesale product. No surrender, no loads. Principal and interest available immediately
* Creditworthiness of the Insurance/Annuity Carrier – Minimal, bids only from AA and AAA S&P rated carrier, constant due diligence on carriers and products from vendors
* Compliance - Minimal, knowledge and experience with regulators, guaranteed compliance from vendor
* Transaction - Minimal, Credit Union should have an understanding of how the product works including costs and expenses that affect product performance; education for committee, transparency and disclosure of all elements involving the plan.
* Reputation: Minimal, Plans, benefits and funding should be similar to what other peer groups are doing.


4. What are the real costs of the program to the Credit Union?

(A) Bookable expenses for the promised benefits and use of the Credit Unions Funds (see first question). These expenses could include the accounting expense for the benefit, annual administration fees, legal fees for documents, FICA payments for vested benefits etc.

5. Do we have the best of both possible worlds? Will our up front single investment, for example, cover all cost and benefits of the program for our senior staff management staff over time?

(A) Yes, through annual earnings to the credit union in the form of fee income the costs of the plan will be covered annually.


6. What happens in the event of a corporate merger at a later date? What guarantees do we have that our investment is protected and we are not required to invest more.

In the event of a corporate merger the new entity owes the benefit and obligation originally promised to the executive (it may be accelerated if their positions are terminated). The new entity also owns the asset purchased to cover the costs of the benefits. The asset can be put in a special trust to protect it if the credit union feels this would be “safer”.


7. Are there any additional hidden costs to the Credit Union in this program? Are there additional monthly or yearly costs?

(A) Nothing is hidden. All fees, expenses and income are fully transparent. Annual administration fees are detailed on the Impact on Earnings (IOE). Legal fees are estimated but should not exceed the estimate unless some unusual circumstance or legal question arises.


8. Over the life of the investment is there a guaranteed minimum rate of return to the program.

(A) Depending on the insurance carrier there is a 2.5% to 3% guarantee written in each policy for the life of the contract.


9. What percent of credit unions within our peer group are involved in similar programs?

(A) According to a recent NAFCU survey on Non-Qualified benefits close to 70% of federal credit unions has some form of 457 or Welfare benefit plans in place.


10. Should we have an auditing firm and a lawyer look over the program before we make a decision to invest in such a program?

(A) The accounting for the proposed benefits can be reviewed with the Credit Union’s outside accounting firm for accuracy. An attorney will prepare the legal documents. We can use the Credit Union’s corporate attorney or one can be recommended. Our recommendations only included those who are highly experienced in plans for Credit Unions, thereby minimizing cost for time and research.


11. Does our investment in the program cover all future hires of senior management personnel as we replace current senior management position and expand the number senior management positions on our staff?

(A) The initial funding covers current expenses for the illustrated benefit. There is additional excess funding once the participants start to receive payments, this excess funding may cover some or all of the costs of new participants depending on the benefits promised.


12. To what extent does length of service of senior management individuals have a bearing on the benefits provided under the plan?

(A) Benefits can be designed to be a function of service (time) and position. Rewarding for length of service and according to level of position is typical of many benefit plans.



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