Want to get a bunch of credit union executives to laugh? Ask them if they got into the credit union business to get rich. 

But even if personal wealth isn’t the greatest motivator for CU executives, offering them meaningful rewards—above and beyond their salary—is a worthwhile investment. It helps foster a credit union culture of excellence and leadership continuity. 

That’s a key reason Prospera Credit Union and AFLAC Federal Credit Union have implemented deferred compensation plans for their top executives. Together, their stories illustrate how non-qualified deferred compensation plans (see sidebar, “Qualified vs. Non-Qualified Compensation Plans”) can be tailored to supplement retirement income, retain an executive’s services over the long term or both.

Let’s break down how non-qualified deferred compensation plans were deployed at each of these CUs.

PROSPERA CREDIT UNION

Schinke Leads Recovery

CUES member Sheila Schinke, CCE, had been with Prospera CU for 20 years when she became CEO of $244 million Prospera CU, Appleton, Wis., in 2009. The Great Recession had hit the CU’s operating territory hard, and it was clear the credit union needed some restructuring before it could begin to grow again.

Schinke was a teller for the CU while she was in college and rose through the ranks on the accounting and finance side of the business. The board trusted her to make difficult decisions, and she did.

From the end of 2009 through the second quarter of 2017, Prospera CU’s net worth/total assets increased from 7.00 to 8.71, and its total assets increased from $146 million to $244 million. After a minor downsizing, the CU has added at least 10 employees over the last five years and will be adding another four or five in 2018.

While Schinke was leading the CU’s turnaround, its board of directors was considering various deferred compensation plans that would add strong incentives for her to stay for the long term.

Board Sifts Options and Data

Prospera CU VP/Operations Julie Van Vonderen became the liaison between the board and several preferred providers of non-qualified deferred compensation plans.

Each of the many possible non-qualified deferred compensation plan configurations needed to be explained, often multiple times over the three years this was studied, as board members turned over and regulations changed.

The volunteer board members at this credit union with roots in industrial SEGs came from a variety of backgrounds. Many had never encountered supplemental executive benefits of any type, much less complex non-qualified products.

“Our board was concerned that we were offering Sheila a fair plan that wasn’t exorbitant compared with plans for CEOs of other credit unions of our size in our market,” Van Vonderen says. She credits CUESolutions provider CUNA Mutual Group, Madison, Wis., with providing all the relevant data and details the credit union needed to make good decisions about the various deferred compensation plan options.

The Retirement Income Gap

Over three years, Prospera CU’s board met with CUNA Mutual Group several times, while working out details with Van Vonderen and Schinke.

The company conducted a thorough analysis of Schinke’s financial situation and retirement goals. The analysis showed that Schinke’s projected retirement income was seriously affected by Prospera CU’s recent transition from offering a defined benefit pension plan to a 401(k) plan.

The defined benefit pension plan alone could replace about 50 percent of Schinke’s working income. But even if she contributed the maximum percentage to the 401(k) that regulations allow, the analysis projected a significant gap between her final salary and her retirement income from the 401(k) and Social Security.

That’s a common outlook for highly paid employees in credit unions, which can’t offer stock options and other perks that for-profit, public corporations can offer to help make up the difference.

To help close some of the retirement income gap for Schinke, the Prospera CU board worked with CUNA Mutual Group to create a split-dollar life insurance arrangement. This type of agreement is built around a life insurance policy for which the benefits—the cash value and the death payout—are shared, or “split,” by the employer and the employee. Schinke and the board agreed on a “collateral assignment” split-dollar plan (also called a “loan regime” plan).

At a basic level, here’s how this type of plan works: The credit union loans the executive the amount required to pay a life insurance policy’s premiums. In return, the executive assigns a portion of the policy’s death benefit to the credit union to repay the loan. Any additional death benefit can be assigned by the executive to other beneficiaries, such as a spouse or other family member.

The policies are structured with the goal of generating cash value the executive can use to supplement retirement income.

An advantage of such a plan is that the cash value on the life insurance can grow tax-free. In addition, the death benefit payout is tax-free to the credit union and to the executive’s beneficiaries. Also, distributions from cash values are generally received tax-free—so this is an attractive complement to qualified retirement plans.

Incremental 457(f) Plan Payouts Provide Long-Term Incentives

Schinke was only in her early 40s when the credit union’s board began the process of setting up deferred compensation for her. The board recognized that the far-off retirement benefit—calculated to occur in 2030—might not be enough incentive to retain a successful young executive in today’s highly competitive market.

With Van Vonderen coordinating exchanges of information between CUNA Mutual Group, Schinke and the board, all parties agreed to set up three lump-sum payments that Schinke would receive in five-year increments if she remained with Prospera CU.

The credit union’s board chose a 457(f) plan as the vehicle for the lump-sum payments. A 457(f) plan is an non-qualified deferred compensation plan available to governmental and tax-exempt employers, including federal and state CUs. Unlike a 401(k) plan, the CU owns it, not the employee, and there are no contribution limits.

A 457(f) can be funded by a variety of financial instruments, and the Prospera CU board chose corporate-owned life insurance.

Corporated-owned life insurance is different than the split-dollar life insurance used for Schinke’s supplemental retirement plan. The corporate-owned life insurance policies funding the 457(f) are owned by the credit union, not by the executive. Their purpose is to generate the cash value needed to meet the obligation to the employee.

Schinke’s deferred compensation plan was finalized in 2014.

“It was a relief,” she says. “It felt good to finally put it behind us, and to know that the board had the faith and trust in me to offer the plan. And it takes some stress out of thinking about retirement.”

AFLAC FEDERAL CREDIT UNION

AFLAC Board Rewards McLeod

$192 million AFLAC FCU, Columbus, Ga., is an industry outlier these days. The CU’s board chose not to expand into a community field of membership, deliberately remaining a single-sponsor CU offering only savings and share draft accounts and consumer loans. And yet, during Roy McLeod’s 30 years as CEO—with a full-time staff of only eight employees—AFLAC FCU’s assets have grown almost tenfold.

In 2012, the AFLAC FCU board began to field proposals from NQDC plan providers.

A CUES member, McLeod says his board wanted him to be able to replace about 80 percent of his final salary in case he wanted to retire at age 65, which was less than five years away at the time.

Transparent Reporting for Examiners

CUNA Mutual Group gathered information from McLeod and the AFLAC FCU board, and presented several potential solutions. The board’s investment committee screened the options and made recommendations to the full board.

McLeod says that he recused himself from his regular seat on the investment committee during deliberations and votes regarding the deferred compensation plans. He notes that the board is loaded with CPAs and finance expertise from AFLAC Inc. and its affiliates, so they had a solid grasp of the available options.

“We carefully documented every step of the decision-making process in the board minutes so everything was transparent and clearly presented for any examinations or audits,” McLeod says. “We actually called the NCUA and our accounting firm, to make sure we had the right accounting.”

The board eventually chose a 457(f) plan for McLeod, funded by a managed investment portfolio.

An outside attorney was hired to draft the 457(f) agreement (get more on this at cues.org/121117skybox), and the credit union’s regular legal counsel reviewed and approved it. Once the plan was put in place, the board managed its progress with monthly reports from the portfolio manager and frequent check-ins from CUNA Mutual Group.

McLeod says the board’s transparency and oversight turned out to be critical when examiners had extensive questions about AFLAC FCU’s accounting for the 457(f).

It’s not unusual for examiners and auditors to have questions about NQDC plans. Although about 36 percent of CU CEOs have 457(f) plans, according to the 2016 and 2017 installments of the CUES Executive Compensation Survey, not all examiners have experience with the plans and their opinions about accounting methods for the plans sometimes differ.

McLeod points out that this type of deferred compensation plan uses investments the National Credit Union Administration allows only in limited circumstances, which was another reason that due diligence up front and careful documentation was important.

Plans for Next Generation of Leaders

Prospera CU’s Schinke and AFLAC FCU’s McLeod both say non-qualified plans can motivate not only current CEOs but future leaders.

At Prospera CU, where Schinke potentially has at least another dozen years ahead of her as CEO, the board has moved to keep three of its other top executives in place by setting up 457(f) plans for them.

McLeod says the NQDC plan set up for him will show his chosen successor, currently in her mid-30s, that the board is serious about retaining high-performing leaders. “You’ve got to be competitive in compensating people and making sure that benefit programs are up to market standards,” he says.

McLeod echoes Schinke’s comments about being relieved when the process of setting up his non-qualified deferred compensation plan was over—and about being very grateful for the CU’s support.

“It’s one of the most humbling things that has ever happened to me,” McLeod says. “I was part of this [success], but the board, our employees and I did this as a team. And when they come to you and express their genuine gratitude, it’s an extremely rewarding time in your life. Honestly, the payment could have been 50 cents—their recognition and sincere comments…priceless.”

Scott Albraccio manages the executive benefits specialists for CUESolutions Platinum provider CUNA Mutual Group, Madison, Wis. For more information about becoming a CUESolutions provider, email kari@cues.org