FEATURE Nonqualified Benefit Plans
ONE SIZE DOES NOT FIT ALL Randy Kohls, CPA-inactive, Senior Consultant, NFP Executive Benefits
Banks are often challenged with the ability to recruit, retain and/ or reward their key employees. Government restrictions limit the amount of compensation that may be contributed toward quali- fied retirement plans, such as the popular 401(k) plan which is the predominant retirement vehicle for most employees today. These restrictions often leave the bank’s higher paid talent without suffi- cient retirement income to sustain their current standard of living. A supplemental executive retirement plan (SERP) is the most
common solution used by banks to address this issue. This defined benefit plan typically restores that income shortfall by paying the
retired employee a set benefit amount for a fixed period of years after retirement. For employees over the age of 50, a traditional SERP design is
usually the ideal solution. The financial focus for a person that age is gradually shifting from paying the mortgage and/or child college tuition expenses to planning for a secure financial retirement. A properly structured SERP is a perfect supplemental benefit to help accomplish this objective. Knowing that their employer is an active partner in their financial future, the employee’s long-term focus aligns even more closely with the bank’s retention goals.
Example 1: Senior Officer with Financial Focus on Retirement
Employee A is 55 years old. He is married with adult children that live on their own. He is now beginning to maximize his deferrals into the bank’s 401(k) plan, but is concerned this still might not be enough to maintain his current standard of living upon retirement. His employer agrees to provide him with a benefit equal to 25 percent of his final pay, with payments beginning at age 65 and continuing for 10 years. A customized vesting schedule significantly reduces the benefit paid if the employee leaves before age 65. This supplemental benefit solves the potential gap in the employee’s retirement income, with the employee now committed to work another 10 years. In addition, since the benefit is only paid if the bank is financially solvent, the employee now has a long-term vested interest in the bank’s financial success.
Example 2: Younger Key Employee with Varying Financial Goals
Employee B is 35 years old. He is married with two children, ages 5 and 8. He is contributing a small amount to his 401(k), but mortgage and family living expenses limit what he is able to save. The bank could offer him the same retirement-focused SERP plan, but retirement planning is simply not a primary focus for this person yet, and may not be a strong motivating factor in retaining his services. This younger employee is probably more concerned about other priorities:
This is where an experienced consultant can be invaluable during the benefit design process. An employer needs to know the available options and the right questions to ask during benefit implementation.
A supplemental executive retirement plan (SERP) is the most common solution used by banks... This defined benefit plan typically restores that income shortfall by paying the retired employee a set benefit amount for a fixed period of years after retirement.
8 MIDWEST INDEPENDENT BANK
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