The Pentegra Executive Benefit
SMARTPATH
TM
Executive Retention Strategies Through Effective Retirement Plan Design
Attracting and retaining talented employees is one of the
biggest challenges facing banks today.
Benefits can be a game changer. For employers competing for job candidates, a comprehensive benefits package
may tip the scales for a candidate who’s considering multiple offers. Your total rewards package is also a key competitive resource for
employee retention.
Benefits are an
important component of that package.
In fact, employees cite that a retirement plan is one of the most
important benefits that a bank can provide.
Which is why today, retirement plans are an important part of
your bank’s success.
Today, Retirement Benefits are a Game Changer Financial institutions across the nation share similar goals and challenges, but ultimately they need to attract and retain valuable employees in order to provide a high level of customer service and to enhance the growth and profitability of the institution. Attracting and retaining talented employees is one of the biggest challenges facing banks today. Your total rewards package is a key competitive resource for employee recruitment and retention and benefits are an important component of that package. In fact, after health insurance, the most important benefit program cited by employees is a retirement plan. Today, with unemployment 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’s considering multiple offers. The bottom line— benefits can be a game changer. Competitive benefits not only help with recruitment but can also bolster retention. While a strong benefits package can become expensive, replacing an employee can be even more costly and time consuming if a company experiences regular turnover. Investing in a comprehensive benefits package can help mitigate the cost, time and effort involved in employee turnover and recruitment. Competition for new talent—and the need to retain one’s top talent—is fiercer than ever before and today, Executive Benefit plans are playing an ever increasing role. Retirement benefits offered by a prospective employer will be a major factor in decision to accept Strongly/Somewhat Agree (%)
77
All Ages
76
Twenties
81
78
77
70
Thirties
Forties
Fifties
Sixties
Source: Transamerica Center for Retirement Research, May 2015
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Pentegra Retirement Services
A key competitive resource for
employee retention.
Translating Business Objectives To Benefits Philosophy Designing an effective retirement program for your organization starts with a review of your management philosophy, compensation strategy, the different types of plans available, an analysis of what your peers offer, and considerations such as demographics and the maturity of your institution. Beyond these factors, what are your business objectives and how do they translate into a benefits philosophy? There are two basic approaches that a company should consider in developing a benefits philosophy.
Objective Approach Compensation and benefits are offered in order to fulfill a specific function; benefit adequacy involves an analysis of what level of compensation and benefits allow an employee to maintain a certain standard of living. Experts recommend that employees retiring in the next few years will need between 70% and 90% of their pre-retirement income to maintain a similar standard of living in retirement.
Competitive Approach Benefits and compensation packages are offered in order to attract and retain employees; benefit adequacy involves an analysis of wages and the level of benefits offered by competitors. Community banks that provide competitive benefit plans will generally experience lower turnover among middle and upper management positions. The cost associated with turnover or failure to attract and hire the professionals you need to run your business can be substantial. While these two approaches are different, they are not mutually exclusive; a successful benefits program will reflect a blend of both philosophies.
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Pentegra Retirement Services
A successful benefits program reflects a
blend of both philosophies.
Enhancing Your Competitive Position with an Executive Benefit Plan An Executive Benefit, or non-qualified plan is a type of tax-deferred, employer-sponsored retirement plan that falls outside of The Employee Retirement Income Security Act of 1974 (ERISA) guidelines. Today, Executive Benefit Plans are a critical component of any corporate benefits strategy and essential to positioning your organization competitively. Because nonqualified plans are not subject to the same regulatory requirements that apply to qualified plans, employers can provide benefits through non-qualified plans to recruit and retain key employees who cannot be fully compensated through a combination of salary and qualified plans due to the cost and compliance burdens that arise when similar benefits are provided to all employees. Executive Benefit plans offer broad flexibility in developing benefit compensation strategies, as they can be used to expand the scope of a benefits package beyond a qualified retirement plan solution. Executive benefit plans reward a select group of employees without impacting costs on an employee-wide basis. 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 can be used to replace benefits lost due to IRS limits on qualified plans, provide benefits in addition to those offered under qualified plans, as well as to defer compensation. Executive Benefit plans may also be used to provide enhanced benefits in the event of a change in control.
Key Features of Executive Benefit Plans • • • • •
6
Provide replacement income at retirement based on total (non-limited) compensation Replace benefits lost due to IRS limits on qualified plans or due to historical formula changes Reward, attract and retain key executives and directors Defer compensation Provide enhanced benefits in the event of a change of control, disability and death
Pentegra Retirement Services
Expand the scope of a benefits package beyond a
qualified retirement plan.
Expanding the Scope of Your Benefits Package with an Executive Benefit Plan Determine the objectives you want to achieve with a non-qualified program by analyzing which employees are being impacted by IRS limits, and which key employees you might wish to reward with coverage under an executive benefit arrangement. Consider competitive benchmarking as well—how does your organization want to position its compensation and benefits programs relative to peers as well as competitors? What is the most effective way to apportion retirement benefit dollars among the various benefit plans—including qualified programs? Unlike qualified plans, which must be offered to a non-discriminatory group of employees, a non-qualified, or Executive Benefit plan may be offered to a prescribed group of employees. The Department of Labor (DOL) requires that the plan 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. Executive Benefit plans provide an excellent vehicle to reward a select group of employees for performance as well as provide an incentive retention tool for tenured employees. Individual agreements with each employee can specify interest crediting rates, vesting schedules, death benefits, disability benefits, early retirement benefits as well as change of control protection.
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Pentegra Retirement Services
Attract, retain and reward key employees with an
executive benefit plan.
Shortfall Analysis Summary Without Supplemental Benefits
Executive
Title
Employee 1 President/CEO
End of Year Age 53
Projected 50% Social Projected Final Retirement Total Security Total Age Compensation Compensation Benefit 65
$235,500
$326,082
$23,580
Employee 2 EVP/COO
59
65
$145,000
$168,144
$17,742
Employee 3 VP/CFO
56
65
$111,550
$141,349
$18,024
Employee 4 VP/CIO
44
65
$102,070
$184,403
$29,250
Employee 5 VP/Commercial Lending
54
65
$134,000
$180,137
$21,354
Employee 6 VP/Residential and Commercial Lending
49
65
$126,200
$196,673
$25,980
Employee 7 VP/Commercial Lending
52
65
$110,400
$157,450
$21,528
Employee 8 Assistant Treasurer
55
65
$48,806
$63,699
$11,586
Employee 9 Marketing Officer
58
65
$34,590
$41,314
$8,214
Employee 10 Assistant Branch Manager
49
65
$26,490
$41,283
$10,530
Employee 11 Operations Officer
36
65
$45,483
$104,092
$25,542
Employee 12 Assistant Branch Manager
29
65
$25,993
$73,162
$23,760
Social Security & Qualified Plan Assumptions: • 3% Total compensation and contribution inflation • 50% Social Security limit • 401(k) Safe Harbor match of 5% • 401(k) Pre and Post Retirement interest rate of 6%
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Projected
% 7.23%
401(k) Benefit $28,530
% 8.75%
Projected Frozen Pension Benefit
%
$16,485
5.06%
Projected Total Retirement Plan Benefits
%
$68,595
21.04%
$57,185
34.01%
$25,375
17.95%
$67,747
36.74%
10.55%
$12,326
12.75%
$7,351
15.86%
$31,147
7.33%
$27,117
16.13%
5.20% 16.89%
$7,350
3.99%
11.85%
$11,187
6.21%
$32,541
18.06%
13.21%
$20,679
10.51%
$46,659
23.72%
13.67%
$12,655
8.04%
$34,183
21.71%
18.19%
$9,488
36.37%
$23,168
36.37%
$44,242
69.45%
19.88%
$4,861
11.77%
$15,513
37.55%
$28,588
69.20%
25.51%
$6,713
16.26%
$9,173
22.22%
$26,416
63.99%
24.54%
$27,343
26.27%
$6,935
6.66%
$59,820
57.47%
32.48%
$21,188
28.96%
$44,948
61.44%
An executive benefit plan may be used for a
select group of employees.
Executive Benefit Plan Design Options 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. Each executive has the ability to defer a percentage of their salary or a flat dollar amount annually. Deferred dollars are then credited interest equal to an index such as prime rate. The interest credited on each executive and director’s deferral account is adjusted annually (i.e. prime rate); the crediting rate is typically designed with a floor and ceiling rate. The accumulated account balance is typically paid out to the executive or director upon retirement over a 5, 10, or 15-year period (with interest), or in a lump sum, at the discretion of each participant.
Supplemental Executive Retirement Plans (SERP) A Supplemental Executive Retirement Plan (SERP) is an executive benefit program designed to reward officers and/or key employees. Plans 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. The annual benefit payment is paid out over a 5, 10, 15-year or lifetime period or in a lump sum, at the discretion of each participant.
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Pentegra Retirement Services
Defer compensation with an
executive benefit plan.
Executive Benefit Plan Design Options 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 plan maximum benefit limit, and various defined contribution plan limits including maximum 401(k) deferrals. The annual benefit payment is paid out over a 5, 10, 15-year or lifetime period or in a lump sum, at the discretion of each participant.
Executive Incentive Retirement Plans Executive Incentive Retirement Plans are also a 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. The annual benefit payment is paid out over a 5, 10, 15-year or lifetime period or in a lump sum, at the discretion of each participant.
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Pentegra Retirement Services
Reward employees based on a
variety of incentives.
Peer Group Analysis
Bank
Asset Size
Tier 1 Capital
401(k)
Pension Plan
ESOP
Stock Options
Bank 1 $152,703,000 $22,702,000 X-Match X
Employment Contracts
X X
Bank 2
$251,385,000
$22,427,000
Bank 3
$329,341,000
$30,943,000
Bank 4
$356,915,000
$34,528,000
Bank 5
$399,490,000
$52,522,000
X
Bank 6
$413,176,000
$38,488,000
X
X-Match X
Bank 8
$829,983,000
$78,702,000
X-Match
Bank 9
$158,107,000
$15,977,000
X-Safe Harbor
16
X X
X
X
X-Safe Harbor
Bank 7 $466,245,000 $63,205,000 X-Match
X-Frozen
X
X
X
X X X
X X X X
X-Frozen
Pentegra Retirement Services
Executive Non-Qualified
Defined Benefit Retirement Plan
Defined Contribution Retirement Plan
Deferred Comp
Life Insurance
Director Non-Qualified
Defined Defined Benefit Contribution Retirement Retirement Deferred Plan Plan Comp
Life Insurance
BOLI
Cash Value as of 12/31/2016
BOLI % of Tier 1 Capital
$300,000 X
1.32%
0
0.00%
X
X
$4,343,000 X
14.04%
X
$5,412,000 X
15.67%
$18,181,000 X
34.62%
$6,270,000 X
16.29%
$14,650,000
23.18%
X
X
$18,209,000 X
23.14%
0
0.00%
Competitive considerations.
A Case Study Using a Supplemental Executive Retirement Plan The following illustrates how a Supplemental Executive Retirement Plan (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 Proposed Retirement Benefits Executive
End of Year Age
Employee 1 Employee 2 Employee 3 Employee 4
53 59 56 44
Retirement Age
Proposed Annual Benefit
Proposed Lump Sum
65 65 65 65
$127,050 $26,895 $17,025 $ 0
$1,659,160 $370,876 $221,945 $0
Accounting considerations
The plan provides post-retirement benefits for pre-retirement services, therefore, benefit accruals are required under GAAP (APB 12/FAS 87), and the present value of benefit payments is recorded at retirement, via annual GAAP accruals. Based upon the projected benefits and a 34.00% tax bracket, the resulting projected GAAP expense is:
Plan Year 1 5 10 15 20
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Annual Net Benefit Expense
Cumulative Net Benefit Expense
$96,947 $96,947 $140,285 $589,197 $145,755 $1,315,826 $60,686 $1,776,667 $46,276 $2,038,272
A Case Study Using an Executive Incentive Retirement Plan The following illustrates how an Executive Incentive Retirement Plan (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 Proposed Retirement Benefits Executive Employee 1 Employee 2 Employee 3
End of Year Age
Retirement Age
Years In Plan
54 52 49
65 65 65
11 13 16
Award Level1
Proposed Annual Benefit
Proposed Lump Sum
$21,500 $13,050 $12,350
$295,568 $188,645 $179,556
19% 10% 6%
Assumptions: • 3.00% annual salary increase • 3.50% (Prime) crediting rate • All benefits to provide lifetime, guaranteed 15 years ¹Based on base salary
Accounting considerations
The plan provides post-retirement benefits for pre-retirement services, therefore, benefit accruals are required under GAAP (APB 12). In addition, the present value of benefit payments is recorded. Based upon the projected benefits and a 34.00% tax bracket, the resulting projected GAAP expense is:
Plan Year 1 5 10 15 20
Annual Net Benefit Expense
Cumulative Net Benefit Expense
$24,925 $24,925 $31,895 $141,637 $42,663 $332,416 $20,377 $475,201 $11,150 $544,230
Plan design considerations.
Shortfall Analysis Summary With Supplemental Benefits
Executive Employee 1
Title President/CEO
Date of Birth 1/16/1963
End of Year Retirement Total Age Age Compensation 53
65
$235,500
Projected Final 3 Year Average
Projected 50%
$326,082
$23,580
Employee 2
EVP/COO
11/13/1957
59
65
$145,000
$168,144
$17,742
Employee 3
VP/CFO
9/2/1960
56
65
$111,550
$141,349
$18,024
Employee 4
VP/CIO
9/2/1972
44
65
$102,070
$184,403
$29,250
Employee 5
VP/Commercial Lending
5/30/1962
54
65
$134,000
$180,137
$21,354
Employee 6
10/2/1967
49
65
$126,200
$196,673
$25,980
VP/Residential and Commercial Lending
Employee 7
VP/Commercial Lending
12/14/1964
52
65
$110,400
$157,450
$21,528
Employee 8
Assistant Treasurer
3/12/1961
55
65
$48,806
$63,699
$11,586
Employee 9
Marketing Officer
11/11/1958
58
65
$34,590
$41,314
$8,214
Employee 10 Assistant Branch Manager 10/23/1967
49
65
$26,490
$41,283
$10,530
Employee 11 Operations Officer
4/12/1980
36
65
$45,483
$104,092
$25,542
Employee 12 Assistant Branch Manager
2/16/1987
29
65
$25,993
$73,162
$23,760
Assumptions: • 3% Total compensation and contribution inflation • 50% Social Security limit • 401(k) Safe Harbor match of 5% • 401(k) Pre and Post Retirement interest rate of 6% • SERP Benefit to provide lifetime, guaranteed 15 years
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%
Projected 401(k)
%
Projected Frozen Pension Benefit
%
Projected SERP or EIRP
%
Projected Total Retirement Plan
%
$28,530
8.75%
$16,485
5.06%
127,050 38.96% $195,645
60.00%
10.55%
$12,326
7.33%
$27,117
16.13%
26,895 16.00%
$84,080
50.00%
12.75%
$7,351
17,025 12.04%
$42,400
30.00%
15.86%
$31,147
0%
$67,747
36.74%
11.85%
$11,187
6.21%
21,500 11.94%
$54,041
30.00%
13.21%
$20,679
10.51%
12,350
6.28%
$59,009
30.00%
13.67%
$12,655
8.04%
13,050
8.29%
$47,233
30.00%
18.19%
$9,488
14.89%
$23,168
36.37%
$44,242
69.45%
19.88%
$4,861
11.77%
$15,513
37.55%
$28,588
69.20%
25.51%
$6,713
16.26%
$9,173
22.22%
$26,416
63.99%
24.54%
$27,343
26.27%
$6,935
6.66%
$59,820
57.47%
32.48%
$21,188
28.96%
$44,948
61.44%
7.23%
5.20% 16.89%
$7,350
3.99%
0
A total compensation strategy.
Two Decisions The implementation of a non-qualified supplemental benefit program involves two separate, but related, decisions.
1. Benefit Decision
Additional Expense
2. Financing Decision
Additional Net Income to Offset Benefit Plan Expenses
Each of the two decisions will impact the financial statements of the bank. A sound asset/liability management strategy incorporating both decisions will enhance the overall net earnings to the bank. With the implementation of a financing strategy using Bank Owned Life Insurance (BOLI), the bank is able to provide meaningful benefits to attract, reward and retain key executives. Implementing a financing strategy using BOLI can also help offset expenses related to the bank’s employee benefit programs.
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Strategic financing decisions.
A Benefits Financing Strategy Designed to Improve Your Bottom Line The Pentegra Benefits Financing Advantage is a benefit financing tool that uses BOLI to enhance earnings and offset the costs of qualified and non-qualified retirement programs along with health and welfare and group life benefits. BOLI can be used to implement a more cost-effective strategy to offset some or all of the expenses related to a retirement plan and other employee benefit programs. BOLI offers a bank the opportunity to maintain a high quality and competitive retirement program without negatively impacting the bank’s bottom line. BOLI is often used by financial institutions to informally fund corporate obligations in connection with certain types of employee retirement benefit plans by purchasing life insurance policies for a group of eligible key employees. BOLI is a single premium life insurance policy which covers a select group of key employees and/or bank directors. The bank is the owner and beneficiary of the policy. Generally speaking, the top 35% most highly compensated employees and eligible directors may be insured. The bank’s objective is to use BOLI to earn more income by owning a tax-free asset. The tax-adjusted cash value growth typically produces a return greater than alternative investments. BOLI is a tax efficient investment, which brings additional income to the bottom line. BOLI should always be considered to be a long-term asset of the bank. Banks purchase BOLI not only to offset benefit expenses, but also to improve current earnings. BOLI, as a tax-free asset, will typically earn more net income than a taxable asset like a bond: For example a taxable bond earning 1.50% with a marginal tax rate of 40%, yields only 0.90%. BOLI first year net yields are approximately 3.30%, or 240 basis points more. BOLI is a long term asset so a bank should only buy an amount that they are comfortable with relative to their liquidity. Although BOLI can be surrendered and the cash value returned to the bank, it can take 4 to 6 weeks and there may be a tax penalty. Most banks have several forms of liquidity including retail and commercial deposits, amortization of loans, cash flow from the securities portfolio and other sources.
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Pentegra Retirement Services
Offset the cost of
retirement plan benefits.
Benefits Worksheet
YES
NO
Direct Cash (salary, bonus, incentive) ________ ________ Qualified Retirement Plans (covering all employees) • 401(k) ________ ________ • Defined Benefit ________ ________ • Profit Sharing ________ ________ • Life & Health Insurance ________ ________ Perquisites (Auto allowance, club dues) ________ ________ ESOP ________ ________ Stock Grants ________ ________ Stock Options ________ ________ Non-Qualified Plans • Supplemental Life Insurance ________ ________ • Supplemental Executive Retirement Plan (SERP)
________
________
• Deferred Compensation ________ ________ • Benefits Equalization Plan (BEP) ________ ________
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Pentegra Retirement Services
Maintain a competitive retirement program without
negatively impacting your bottom line.
Build a Competitive Advantage 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 BOLI solutions. Benefit from more than 70 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 Bank Owned Life Insurance (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.
Let us help you achieve your goals. For more information, contact us at 800.872.3473 or visit us at www.pentegra.com Follow our social media conversation.
2 Enterprise Drive, Suite 408, Shelton, CT 06484-4694
800•872•3473 tel 203•925•0674 fax www.pentegra.com © 2017 Pentegra Retirement Services All Rights Reserved