When it comes to executive compensation, credit union boards are often tasked with evaluating complex benefit structures that carry significant long-term implications for both the executive and the institution. Among the most common retention tools are Split Dollar and 457(f) plans, two very different approaches that can support leadership stability when implemented thoughtfully.
But before signing off on either, board members should understand how these plans differ, what risks they present, and how to align them with both strategic and financial objectives.
Understanding the Differences
Although Split Dollar and 457(f) plans are often discussed together, they function in fundamentally different ways.
- Split Dollar Plans typically involve a life insurance policy shared between the executive and the credit union. These arrangements can provide significant tax-deferred growth for the executive while creating a recoverable asset for the credit union.
- 457(f) Plans, on the other hand, are non-qualified deferred compensation plans funded directly by the credit union. They are designed to reward tenure and performance but are subject to immediate taxation upon vesting.
From a governance standpoint, these plans differ not only in their tax treatment but also in their balance sheet impact and administrative complexity. The right choice depends heavily on the executive’s stage of career, retirement goals, and the credit union’s financial position.
Tailoring the Plan to the Executive and the Strategy
There’s no one-size-fits-all approach. What makes sense for a 55-year-old nearing retirement may not suit a younger executive still building their career.
Boards should evaluate:
- Tenure and timing of the executive’s planned service.
- Strategic objectives the credit union wants to accomplish during that tenure.
- Retention goals, such as ensuring continuity through major initiatives or leadership transitions.
A well-structured plan aligns timing, vesting, and payout schedules with both personal milestones and organizational priorities, encouraging executives to stay through key phases of growth or transformation.
Recognizing Red Flags
One of the most common pitfalls in plan design is a lack of education and transparency. Board members must fully understand what the credit union is investing in, how policies or accounts are structured, and what assumptions drive projected returns.
A key warning sign is overly optimistic rate-of-return projections, especially in Indexed Universal Life (IUL) products that have recently not performed as initially projected. Overstated assumptions can lead to shortfalls that require additional funding, create balance sheet strain, or even leave the executive’s benefit underdelivered.
Boards should insist on independent analysis and clear documentation of policy performance expectations, cost structures, and funding mechanisms before final approval.
Balancing Retention Value and Financial Impact
The goal of any executive benefit plan is to retain top talent while safeguarding institutional health. The ideal design should:
- Minimize long-term cost and balance sheet impact,
- Align with strategic retention priorities, and
- Offer competitive, sustainable value to the executive.
Working with experienced advisors, like the team at Earnest Consulting Group, can help model different plan scenarios, allowing boards to visualize how funding decisions today will affect future liabilities and liquidity.
The Importance of Stress Testing
Financial projections should always be tested against multiple scenarios. For Split Dollar plans in particular, that means modeling performance at lower-than-expected dividend or crediting rates to confirm the structure still functions as intended under conservative conditions.
Consistent stress testing helps credit unions make informed, data-driven decisions and avoid unpleasant surprises years down the road.
Timing and Vesting: The Levers of Retention
Vesting schedules and payout structures are powerful tools for shaping behavior. If an executive plans to retire at a specific age or after a key project is completed, the plan’s timeline should reflect that reality.
Boards can use milestone-based vesting, for example, tying vesting to the completion of a major technology upgrade, branch expansion, or membership growth initiative to ensure alignment between organizational outcomes and executive incentives.
These details can make the difference between a plan that simply compensates and one that strategically retains and motivates leadership.
The Role of Independent Advisors
Independent advisory firms like Earnest Consulting Group play a crucial role in helping credit union boards navigate these decisions.
Their value lies in:
- Education: Ensuring the board understands every component of the proposed plan.
- Benchmarking: Sharing insight into what comparable credit unions are doing to stay competitive.
- Objectivity: Presenting a full range of funding and design options, not just insurance-based products.
With broad market experience, independent advisors help boards make informed choices that balance compliance, competitiveness, and financial prudence.
The Value of Experience in Plan Design
Recent history has shown how easy it is for credit unions to find themselves in difficult positions due to underperforming policies or poorly designed plans. In many cases, those challenges stemmed from plans implemented by advisors whose expertise was limited to one product type.
Working with a firm that has deep experience in credit union-specific plan design and a broad toolkit beyond insurance products can prevent costly mistakes and create plans that stand the test of time.
Partner with Earnest Consulting Group
Executive benefit plans are powerful retention tools, but only when designed with foresight, flexibility, and a full understanding of the financial implications.
At Earnest Consulting Group, we help credit union boards build compensation strategies that are balanced, transparent, and tailored to their long-term goals.
Explore our executive benefits consulting services and contact us to learn how we can help your board make confident, informed decisions before you sign.
Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. www.SIPC.org Earnest Consulting Group is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies. Supervisory address: 280 Congress Street, Suite 1300 Boston, MA 02210 | Phone 617.439.4389. CRN202812-9999903
