How to Make SERPs Work for Your Employees and Your Bank

Key Points

  • Supplemental Executive Retirement Plans, commonly referred to as SERPs, are valuable compensation tools that banks can use to attract and retain executive talent.
  • Today, the majority of non-qualified deferred compensation plans (56.1%) being utilized are 457(f) SERP plans.
  • Although a properly structured SERP can demonstrate a bank’s long-term commitment to its key executives and employees, improper design can result in significant expenses for banks without providing the intended retention value.

A SERP is a non-qualified retirement plan, typically offered to an executive as a long-term incentive. Unlike in a 401(k) or other qualified plans, this deferred compensation arrangement is non-elective, meaning the bank is responsible for contributions to the plan. Here’s how to make SERPs work for you and your bank.

Keys to Well-Designed SERPs

A SERP isn’t the answer to all of your bank’s retention or recruitment issues, but it is a tool that can be used to complement the other components of compensation. With careful structuring, your SERPs can provide substantial benefits for your key employees and your bank.

Elements of a well-designed SERP include:

  • Clarity around all costs and expenses
  • Understanding the potential M&A 280G impact
  • Explore all financing options, BOLI is a powerful tool for financing employee benefits
  • Keeping alignment with competitive standards for compensation packages
  • Reducing risk and optimizing returns

Look at your current SERP plan design and evaluate the continued validity of its structure. It may be time to review your compensation package structures across the board. 


Common SERP Challenges to Understand and Avoid

Improper design of any deferred benefit plan can result in significant expenses for banks without providing the intended retention value. Here are some common issues that arise with SERPs that are not well-designed.

  • Not paying attention to hidden costs
  • Accelerated vesting schedules (in the event of early retirement)
  • Change of control issues (see IRC Section 280G (which deals with golden parachutes)
  • Acquisition or merger issues (280G excise tax concerns)

The majority (56.1%) of non-qualified deferred compensation plans being utilized today are 457(f) SERP plans.

Banks and credit unions of all asset sizes are utilizing these deferred compensation plans to offer enticing retirement benefits for their key executives. A well-designed 457(f) plan also allows the bank to be fiscally responsible while offsetting employee retention and benefit costs. More recently, financial institutions are moving toward 457(f) rather than 457(b) in favor of their design flexibility.

Although IRC 409A (which regulates the tax treatment for nonqualified deferred compensation plans) imposes limitations on plan design changes, there are strategies that still allow for adjustments.  Those strategies address ways to help reduce the general plan expense, mortality risk concerns, 280G exposure, and other issues, all without violating IRC 409A. 

Explore Your Options and Plan-Design Carefully

By partnering with Newcleus, you will have access to all the traditional funding options offered in the marketplace, in addition to unique capabilities offered nowhere else. As we like to say, if you’re not talking to Newcleus, you’re not getting the whole story.

By properly structuring a SERP, your bank can show its commitment to working with key executives and employees for the long haul while adding investment value on a schedule aligned with bank goals.

Newcleus’ approach is holistic. By working through a sound process rooted in transparency, we help guide stakeholders through the entire compensation process:

  • Development of the plan objective
  • Agreement on assumptions to be used in plan design
  • Crafting terms of the agreement
  • Integration into credit union risk management
  • Implementation and ongoing service, administration, and reporting of the plan

Newcleus currently services over 750 financial institutions, representing over 45,000 individual policies with $12 billion in cash value assets under administration.

When you explore all available tools to ensure your bank is getting the most efficient plan design, your bank will be in an excellent position to accomplish its investment retention and talent acquisition goals.