Taking a holistic approach to designing any member’s retirement plan is a goal well worth trying to attain. This is especially true when it comes to credit unions, where many of the same factors facing banks today – ever-proliferating technology, competition, and consumer demands – are being felt just as strongly.
Developing an effective and flexible retirement program involves creating a plan that not only assists employees in meeting their retirement goals but that also addresses a credit union’s business needs. Designing the right retirement program requires a keen understanding of an organization’s management philosophy; compensation strategy; competitive considerations and analysis; demographic considerations; the maturity of the institution; and – of critical importance in today’s shifting landscape – the different types of retirement plans available.
We have identified two basic approaches to developing a business’s employee benefits program. First is the objective approach, wherein one takes into consideration what kind of balancing of benefits is needed for employees; after all, a 50-year-old employee’s needs are vastly different than a 25-year-old’s.
With the second – the competitive approach – benefits and compensation packages are offered in order to attract and retain employees; benefit adequacy involves an analysis of wages and the level of benefits offered by one’s peers. Again, the state of play in the credit union space in Washington, D.C. will be vastly different than that in Boise, Idaho, or Peoria, Illinois. An ideal plan will include both the objective and the competitive approaches.
What we call the “cross-tested plan” seems to be one of the most effective tools in plan design today. Such plans are being used more frequently as a way to reward longer tenured employees; reward and incent by job category; restore benefits lost due to a defined benefit (DB)/pension plan freeze or cutback; and/or provide additional benefits in lieu of a supplemental executive retirement plan (SERP) or non-qualified plan.
While DB pension plans tend to favor older employees, a cross-tested plan is a type of 401(k) or profit sharing plan that can be designed to allow a credit union to allocate contributions to specific groups of employees, who can be sorted by a number of categories including age, tenure, job category, management vs. non-management.
Furthermore, cross-tested plans focus on benefits at retirement rather than on regular contributions, enabling employers to provide higher contribution amounts (expressed as either a percentage of compensation or a dollar amount) to older employees, employees with more years of service, and/or employees who are performing the most important functions for the business. Because younger employees have a longer time horizon in which to grow their assets, cross-tested plans effectively permit employers to contribute more for their older employees.
In a cross-tested plan, each subset of employees receives a different level of contributions, and must be defined in the plan document. The actual contribution percentages can be decided at the end of each plan year and can change from year to year. What’s more, a company that already has a traditional 401(k) can overlay a cross-tested plan or establish a separate profit-sharing plan.
Keep in mind that every cross-tested plan has its own individually designed formula, allowing a given organization the ability to control its own destiny in terms of total contributions made on a year-by-year basis.
With an age-weighted plan, employer contributions are allocated among eligible employees based on both age and salary. Again, since a participant’s time horizon to retirement is factored into the allocation, older, more highly compensated employees tend to receive a larger share of the overall contributions:
There are, of course, other factors to think about when considering a cross-tested plan. But these are the broad strokes; I encourage you to investigate further on your own, or contact a reputable retirement planning provider to learn more.
Pentegra Retirement Services is the NAFCU Services Preferred Partner for Qualified Retirement Plans for Credit Union Employees. More educational resources can be found at www.nafcu.org/pentegra.