Common Problems with Credit Union Executive Benefit Plans

Watch out for these three common issues and ask your provider these eight questions.

By: H. David Wright

The executive benefits landscape is changing rapidly. This was evident at the recently held 2024 CUES Symposium in Nassau, Bahamas, where roughly one in four sponsors were executive benefits providers. As the number of executive benefit firms targeting credit unions expands, it does make one wonder why.

CUES Symposium was a great place to network with current and prospective clients and learn about our new competitors. Most seemed happy with the firm that handles executive benefits for their credit union, but it begged the question, how do you know you are happy? More importantly, what are you basing your opinion on, and have you challenged that opinion lately?

For example, executive benefit arrangements are not meant to be static. They require consistent and transparent monitoring, reporting and potential adjustments as economic conditions, compensation or roles change. While this seems obvious, we see that plan maintenance is frequently ignored and redesign opportunities are missed in favor of the status quo.

With consolidation and credit unions evolving into increasingly sophisticated organizations with top talent, it is no longer sufficient to accept the status quo as the best course forward. Business as usual has a very strong pull as both executives and credit union boards are very busy with other responsibilities, and it is comfortable to stick with who you know.

If you feel your credit union, like many others, is in this situation, assessing your existing plans, if you have any, is the first step.

For Credit Unions with Existing Plans

We have found several recurring issues when asked to review existing arrangements.

1. A lack of transparency concerning the performance of financial products. Many executive benefit arrangements involve the use of indexed universal life insurance policies. For those that do, interest rates and market volatility have resulted in lower “cap” rates that reduce the crediting rate assumptions that can be used to project policy performance into the future. Even though this is simply a projection, clients need to be fully aware of the impact of this limitation on future projections. This level of transparency requires courage on the part of the executive benefits firm, as some clients may become alarmed. However, being able to address these and similar issues with projections proactively is the foundation of a productive relationship.
2. Agreement terms that are onerous (but not necessary) or incorrect. With the growth in the prevalence of split-dollar arrangements, we have started to see problematic terms in the documents we have been asked to review. For example, we commonly see that split-dollar arrangements are designed as “recourse” arrangements that involve the executive personally guaranteeing to make any shortfall due to the credit union and the value of the assets. While there may be several reasons to structure an arrangement like this, it is usually intended to improve the credit union’s accounting treatment and to disguise a life insurance design choice.
3. Financial reporting is lacking and commonly inaccurate. While financial reporting for some executive benefit structures is straightforward, others, such as split-dollar arrangements, can be more complicated. Accurate financial reporting for split-dollar arrangements requires a deep understanding of the accounting guidance and collaboration with the credit union’s accounting advisers. The accounting treatment is based on facts and circumstances, so credit unions should ensure it aligns with plan documentation.

Consider this the shortlist for credit unions with existing plans. However, you may also want an independent review of existing plans so these issues can be identified and addressed before the damage is irreparable.

For Credit Unions Considering New Implementations

Credit unions exploring new plans would be wise to have a disciplined process to evaluate firms based on their capabilities in the areas of plan design, structure and analysis, along with the ability to administer the plan with transparency concerning asset performance and other plan-related matters.

If credit unions don’t ask the tough questions, executive benefit firms may look the same. And they’re not. There are material differences in expertise and capabilities, and credit unions need to have a framework to evaluate the options and make a reasoned decision based on their circumstances. At a bare minimum, any potential executive benefits firm should be able to address the following areas:

1. Describe the firm’s overall experience, expertise and capabilities with executive benefit arrangements. In what other non-profit communities do they work, and how does this improve their capabilities? What is the firm’s longevity plan?
2. How does the firm approach the architecture of their plan design? Make sure that salient assumptions and calculations are disclosed.
3. What key plan agreement terms should the credit union and executive consider?
4. Would you be willing to disclose your firm’s compensation? Transparency is crucial to an ongoing productive relationship. Whether or not a credit union asks for disclosure, it is important to know if the firm is willing to provide both the amount and timing of compensation.
5. How does the firm assist the credit union in evaluating all potential plan alternatives on both quantitative and qualitative bases? Are opportunity costs considered as part of the analysis?
6. Are there any unique design features that help the credit union and executive manage risk?
7. Ask the firm to describe its post-implementation service model and associated capabilities for both the credit union and executive. Ask for a demonstration of the technology it uses to administer plans.
8. Has the firm demonstrated a commitment to the credit union movement and how do they give back in support of the credit union movement?

In a competitive market for senior executive talent, executive benefit arrangements are key components to the strategy of attracting and retaining key leaders. These plans can be complex and require significant funding. As a result, credit unions need to get this right.

A disciplined process can support good decision-making regarding the firm you partner with and the design and products chosen to achieve the objective. This is more important than ever with the new, seemingly indistinguishable firms entering the market.

Regardless of who you choose to work with, we believe in a good process. Contact us to receive an unbiased, data-driven RFP comparison toolkit.

David Wright is co-founder and principal of CUES Supplier member Triscend^NP, with primary responsibility for strategy and business development who has served in this capacity for 20 years. His areas of expertise include business development, compliance, business transactions, and financial and accounting topics. Additionally, he has over 12 years of previous experience in the healthcare field and has held executive positions ranging from operations to business development.