Executive leadership is one of the most important factors in a credit union’s long-term success. Boards are tasked with not only finding talented executives, but also ensuring those leaders remain in place to guide the institution through growth, market challenges, and succession transitions. One of the most common tools credit unions use to achieve this balance is the 457(f) plan.
The Retention-First Purpose of 457(f) Plans
At their core, 457(f) plans are designed to retain key executives. A credit union board identifies leaders who are critical to the institution’s stability and growth and promises them a future distribution – essentially, a taxable payout triggered by a vesting schedule. The 457(f) vesting schedule can be structured anyway the board prefers, including graded vesting or Cliff vesting. While the plans can also serve as a recruiting incentive or a way to
reward high performance, their primary role is to promote continuity of leadership by way of retention.
Why They’re Especially Common in Credit Unions
Unlike corporate stock options, 457(f) plans align naturally with the nonprofit and tax exempt structure of credit unions. Their popularity stems from flexibility: the IRS requires only that the payout occurs in a different tax year than the year the plan was created. This means plans can be as short as one year, making them well-suited for executives nearing retirement, or extended over decades for rising leaders. That adaptability has made 457(f)
plans, sometimes referred to as Supplemental Executive Retirement Plan (SERP), almost a given for executives the credit union wants to develop and retain in today’s competitive market.
Recruitment and Retention in a Competitive Market
As these plans have become prevalent in credit unions, executives increasingly expect them as part of a competitive benefits package. Boards may use them as a recruiting tool, either introduced in the initial offer, or added after a probationary period. For executives, the presence of a 457(f) signals long-term commitment from the institution. For the board and membership, it can help with management stability and help reduce the risk of
turnover at critical moments. These types of plans have the purpose of allowing the executive to focus on credit union growth and increased lending, verses looking for a new position at a different organization.
Rewards (and Risks) for Credit Unions
When structured properly, 457(f) plans offer a compelling reward for credit unions: the ability to retain proven leaders while ensuring long-term management continuity. These plans are also highly flexible and can be designed as either a defined contribution or defined benefit arrangement. When implemented thoughtfully, a 457(f) plan can be structured at little to no net cost to the credit union.
That said, successful outcomes depend heavily on experienced guidance. Working with an executive benefits professional – one with deep expertise in plan design, implementation, ongoing service, and accounting considerations – is critical to ensuring the plan delivers its intended value.
If designed or managed incorrectly, however, 457(f) plans can introduce risk. Credit unions often invest assets to offset the plan’s cost, and poor investment performance can reduce returns and diminish the plan’s effectiveness. Investment options may range from fixed, guaranteed vehicles to strategies that carry varying levels of risk. For this reason, ongoing executive and board education is essential – not only during plan design and implementation, but throughout the life of the plan – to ensure informed decision-making and long-term success.
Tax Considerations and Common Misconceptions
Executives sometimes underestimate the tax implications of 457(f) plans. Distributions are fully taxable as ordinary income – much like a bonus – and are processed through payroll as W-2 income for the executive. From the institution’s perspective, if an executive’s total compensation in a given year, including a 457(f) payout, exceeds $1 million, the credit union may be subject to a 21% excise tax on the excess amount. To help potentially
mitigate this risk, plans can be designed with multiple vesting dates, allowing payouts to remain below the threshold while still effectively supporting long-term retention, provided the design complies with applicable IRS rules.
Supporting Succession and Leadership Stability
457(f) plans are also valuable tools for succession planning. For executives approaching retirement, short-term vesting can assist with loyalty and a smooth transition. For younger leaders, boards may design multiple payouts over time, delivering retention value earlier in their careers while pairing the 457(f) with longer-term strategies like Split Dollar plans. This flexibility ensures that leadership continuity aligns with the credit union’s evolving needs and supports the long-term retention of key executives.
Compliance and Governance Best Practices
Strong governance is critical when implementing a 457(f) plan. The NCUA evaluates these plans through a safety-and-soundness lens and generally recommends that total plan funding not exceed 25% of a credit union’s net worth. For state-chartered credit unions, regulatory requirements may align with NCUA guidance, or differ entirely, depending on the state.
Given this complexity, it is essential to partner with a provider who has deep knowledge of both NCUA and state-specific regulations and can tailor recommendations accordingly. Beginning with a non-compliant plan can create significant regulatory and operational challenges that may persist for years, underscoring the importance of getting the design right from the start.
An Evolving Standard in the Industry
Over the past two decades, 457(f) plans have evolved from being CEO-only arrangements to broader leadership tools. Today, many credit unions extend them to multiple executives, ensuring not just a strong CEO pipeline but overall organizational resilience. In this way, 457(f) plans have become a cornerstone of modern credit union executive compensation strategy.
Earnest Consulting Group’s Approach
We design 457(f) plans with flexibility, governance, and alignment in mind. Our broad investment platform accommodates all levels of risk tolerance, and our focus on credit union executive benefits allows us to be nimble and responsive. Every plan is tailored to the unique needs of the credit union, the board, and the executives it seeks to retain. Ready to explore how a 457(f) plan could strengthen your executive compensation strategy? Contact Earnest Consulting Group to start the conversation.
Any discussion of taxes is for general information purposes only and is not intended as legal, tax or accounting advice. Clients should consult their own qualified legal, tax, and accounting advisors
Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 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. CRN202901-10129769
