Maximizing Your 457(f) Plan
π˜—π˜Άπ˜£π˜­π˜ͺ𝘴𝘩𝘦π˜₯ 𝘣𝘺 π˜Šπ˜œπ˜•π˜ˆ 𝘊𝘰𝘢𝘯𝘀π˜ͺ𝘭𝘴, 𝘚𝘦𝘱𝘡. 11, 2017

Maximizing Your 457(f) Plan
π˜—π˜Άπ˜£π˜­π˜ͺ𝘴𝘩𝘦π˜₯ 𝘣𝘺 π˜Šπ˜œπ˜•π˜ˆ 𝘊𝘰𝘢𝘯𝘀π˜ͺ𝘭𝘴, 𝘚𝘦𝘱𝘡. 11, 2017

As a key executive, you know that the success of any credit union is determined by the quality of the people who work there. Credit unions, like other organizations, loathe turnover among key people because it leads to a reduction in the quality of customer service, creates a slowdown in business, and diverts precious resources to train new employees. In fact, a 2015 survey conducted by Payscale found that, for the third year in a row, business owners across the United States ranked employee retention as their top concern.

Attracting and retaining key executives can be a tough challenge for any company, especially for a credit union. Your credit union probably provides you with a Supplemental Executive Retirement Plan (SERP) as its primary solution to retain you, as well as to attract other top performers.

One of the most popular SERP designs for credit unions and their executives is a 457(f) plan, named after the applicable Internal Revenue Code section. If your credit union is offering you a 457(f) plan, or if you are already participating in one, it is imperative that you read on.

What Is a 457(f) Plan?

A 457(f) plan will pay out a benefit or a series of benefits according to a pre-determined scheduleβ€”so long as you remain with the organization up until an agreed-upon date.

Are You Maximizing Your 457(f) Plan?

457(f) plans can be complicated, and the benefits to you and your family under your plan are based on various assumptions that may or may not occur. 457(f) plans typical include the following assumptions:

  • Projected salary increase percentage
  • Projected salary replacement percentage
  • Pre-retirement investment return percentage
  • Post-retirement investment return percentage
  • Credit union funding discount rate percentage
  • Lump sum tax rate on distributions
  • Retirement income tax rate percentage

The credit union knows what it’s doing when it sets these assumptionsβ€”but do you? You and your family may be negatively impacted if those assumptions are unrealistic or not met. So, if you have an existing 457(f) plan or if you expect to be offered one in the near future, ask yourself these questions:

  • Is anyone providing you with guidance on the type of SERP that your credit union is proposing for you, or has already installed for you?
  • Is anyone helping you analyze your existing or proposed 457(f) plan and its assumptions to make sure you will be able to get the most out of your agreement?
  • Are you aware of how program assumptions can negatively impact your 457(f) plan?
  • Does your 457(f) plan have a β€œself-completing feature” for your family if you pass away before you retire?
  • Will your 457(f) plan assets be distributed in vehicle that has asset-protection features?
  • Will you pay tax each year on the post-retirement earnings from your 457(f) plan, or will it grow tax-free?

You and your family are likely baring the risk when it comes to meeting 457(f) plan assumptions, and you will be responsible for paying any taxes due. Therefore, it is incumbent upon you understand your existing or proposed 457(f) plan arrangement and recognize what options might be available to you that will provide greater financial protections, tax-efficiency, and flexibility for you and your family.

Next Steps

Contacting a qualified compensation expert to guide youβ€”one who has the experience working with SERPs and credit unionsβ€”is the first place to start. A professional analysis and advice on how to proceed could be invaluable to you and your family.

David Jacobs is a partner with Grant Hinkle and Jacobs, a consulting firm that specializes in executive compensation, succession planning, and employee retention for credit unions and nonprofits.