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Chuck Coldwell: Enhancing a bank’s competitive position with an executive benefit plan

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With unemployment rates trending lower, wage growth increasing and employers with positions to fill, 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. 

Chuck Coldwell

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. 

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 — those who cannot be fully compensated through a combination of salary and qualified plans due both to the cost and compliance burdens that arise when similar benefits are provided to all employees, and IRS benefit limitations. 

Unlike qualified plans, nonqualified plans may be offered to a select group of management and/or highly compensated employees. Certain job titles generally meet this description — president, CEO, senior or executive vice president, etc. — while 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; and

• Provide enhanced benefits in the event of an acquisition or other change of control.

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. These can include:

Executive and Director Deferred Compensation Plans

These 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, allowing greater tax deferred dollars than can be made on an individual basis.

Supplemental Executive Retirement Plans (SERP)

These are typically 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. SERPs may be used to provide benefits based on a more generous formula than used in a qualified plan; 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. 

Executive Incentive Retirement Plans (EIRPs)

Another type of SERP, EIRPs are designed to provide a reward to a select group of participants if the organization exceeds key performance metrics, such as Return on Equity, Return on Assets, Net Income, Quality of Loan Portfolio, Growth in Fee Income or Cross-Selling Achievements. 

Your total rewards package is a key competitive resource for employee recruitment and retention and retirement benefits are an important component of that package. For banks competing for top talent, non-qualified retirement plans can be a game changer. 

Chuck Coldwell is vice president-national director, consulting, marketing and Bank-Owned Life Insurance (BOLI) services at Pentegra, a retirement services provider with offices in White Plains and Shelton. He can be reached at chuck.coldwell@pentegra.com.

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