3 Critical Stages of Third-Party Vendor Management

By Vanessa Stanfield, Insurance Solutions powered by Affinion

Did you know your credit union could be responsible for the performance of your vendors? No credit union wants to encounter regulatory trouble or face reputational risk; especially as a result of vendor activities. It’s because of that fact that vendor management due diligence is a topic of increasing importance.

But what is the right way to go about choosing  third party vendor? The National Credit Union Administration (NCUA) has provided clear direction regarding vendor due diligence. Additionally, the NCUA has deemed the following areas as critical in third-party vendor management: Risk Assessment & Planning, Due Diligence, and Risk Measurement, Monitoring and Control.

Risk Assessment & Planning

Risk Assessment

Prior to engaging a third-party relationship, assess the current risks and document how the vendor will relate to your credit union’s strategic plan. When conducting a comprehensive risk assessment, the key areas of focus are: credit, interest rate, liquidity, transaction, compliance, strategy, and reputational risk. In this discovery phase, your credit union can identify the current risks and establish expectations of the new relationship.

Due Diligence

There are four fundamental due diligence elements to consider when choosing a vendor: organizational, business model, financial health, and program risks. In these areas, your credit union can assess what degree of due diligence is required.

But remember- not all vendors are created equal. More complex vendor relationships with more risk will typically require increased due diligence; less complexity and risk means less rigorous due diligence. For a comprehensive report and the five key due diligence questions you need to ask your vendors, read the full whitepaper here.

Risk Measurement, Monitoring and Control

Credit unions must be able to continually measure performance and risk throughout the relationship with the vendor. To do this, your credit union should clearly outline the vendor’s responsibilities and policies before taking on the vendor. In the end, this will allow for proper vendor performance management so that you can ensure expectations are being met.

Credit unions should not think of vendors as a third party, but as an extension of their organization. Because of this, it is important to consider the three critical areas above when deciding on a vendor. As the NCUA has conveyed, the utilization of vendors does not in any way diminish the credit union’s level of responsibility and for that reason, credit unions should carefully select their vendors.

What Should We Ask Our Vendors?

To be confident that the vendor’s management programs are the right fit, credit unions must discuss the vendor in great detail and ask the hard questions. Failure to conduct thorough due diligence and effectively monitor these vendors place the credit union at risk. Again, not all vendor relationships call for the same level of due diligence and ongoing monitoring, but in order to determine what level is necessary there are key questions that your credit union must contemplate.

For an in-depth look at the five key due diligence questions that credit unions must ask when selecting a third-party vendor, read the full whitepaper here.

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InsuranceSolution_4CAffinion is the NAFCU Services Preferred Partner for AD&D Insurance

Executive Compensation: Making Sense of Fair and Reasonable

Written by Liz Santos, ‎Senior Vice President of Marketing and Business Development
Originally Published on CUInsight.com

BFB WebinarMy little brother recently celebrated his 40th birthday. We marked the occasion by thumbing through old pictures and making fun of each other’s unfortunate haircuts. That’s Herbie on the left, in one of our rare moments of peace, prompted only by the promise of a sugary reward.

Growing up, Herbie and I had the usual love-hate relationship, although probably more hate than love. The hate part was invariably fueled by the perception of fairness. “That’s not fair!” was a regular retort in our household, as if there was ever any room for our parents’ reconsideration. When you’re a kid, fairness is meted out by your parents, often based on gender, birth order, age, or by the almighty “Because I said so.”

For credit unions, however, it’s a different story. Fairness, especially in relation to credit union executive benefits, is more predictable and consistent than my parents’ household rules. Executive benefit plans are a critical tool in recruiting, rewarding, and retaining your leadership team. A key concept in designing these plans is “fair and reasonable.” As expected, the NCUA has rules regarding fair and reasonable compensation.

Why do credit unions need guidelines for executive compensation?

When it comes to executive compensation for credit unions, the concept of fair and reasonable serves an important purpose. Paying executives fair and reasonable compensation requires balancing the needs of the credit union (and its members and examiners) and the executives. Paying too much wastes vital resources, while paying too little risks depriving the credit union of key managerial talent. Careful attention to the process will assist the credit union in arriving at an executive compensation that is fair and reasonable and that attracts, retains, and rewards executive talent.

Do banks have the same guidelines for executive pay?

Executive compensation planning at credit unions is comparable to that at banks in terms of balancing organizational and individual needs. However, some key differences are:

  • Banks can offer stock and other equity compensation not available in credit unions, making it more difficult for credit unions to compete for the executive talent.
  • Banks are subject to different regulations that address issues such as clawbacks (e.g., repaying bonuses for restated financials), the employer’s ability to deduct the compensation for tax purposes, and golden parachute penalties.

Unless your leadership team thinks sugary birthday cake is an adequate performance incentive, I recommend viewing a recent BFB webinar, “Attracting and Retaining Executive Talent with Fair and Reasonable Compensation.” The presentation delves into what is fair and reasonable, and how to apply that concept to your executive compensation philosophy.

Burns-Fazzi, Brock (BFB) LogoBurns-Fazzi, Brock (BFB) is the NAFCU Services Preferred Partner for Executive Compensation and Benefit Consulting. Burns-Fazzi, Brock engages the law firm of Sherman & Patterson to advise on regulatory and tax compliance matters. Sherman & Patterson, located in Minneapolis, MN, has consulted with and represented tax-exempt organizations with their executive compensation needs for the past 30 years. They work closely with NCUA and state credit union regulators, and frequently write and present on these topics.

For more information and educational resources, visit http://www.nafcu.org/BFB.

Compensation and Severance Plan Rule Changes May Impact Your Credit Union

By Kirk D. Sherman and James S. Patterson, Sherman & Patterson, Ltd.

457(f) Compensation RegulationsAfter almost eight years and several false alarms, the IRS may finally issue the new Section 457(f) regulations addressing nonqualified deferred compensation plans and severance plans. Two IRS attorneys speaking at separate events have expressed hope that the regulations will be released by this summer.

Credit unions at greatest risk of having to modify their plans are those that sponsor:

  • Nonqualified deferral plans (other than 457(b) eligible plans) that allow elective deferrals,
  • Nonqualified deferral plans that use noncompete restrictions as substantial risks of forfeiture, and
  • Severance plans providing severance benefits greater than two times compensation.

For other credit unions, the new regulations may be a non-event.

What Should Your Credit Union Do Now?

  • While awaiting the new 457(f) regulations, credit union boards and management can determine whether the credit union sponsors 457(f) plans that use noncompetes or elective deferrals, and whether it has promised severance greater than the two-times limit.
  • Having identified such plans, the credit union (and its advisers) will quickly be able to determine if and how the new rules impact the credit union’s arrangements and what, if any, changes are required.

Understanding the Tax Implications of 457(f) Rule Changes

In 2007, the IRS first announced its intent to change the 457(f) rules.  If the rules are issued as the IRS anticipated, elective deferrals and deferrals subject to noncompete restrictions would no longer defer taxes.  Instead, taxes would be deferred only if the deferrals were non-elective and subject to cliff vesting (i.e., the benefit is forfeited if the executive quits before the specified vesting date).

  • Most credit union 457(f) plans already use cliff vesting, and elective 457(f) deferrals are rare.  Therefore, we expect few credit unions to have to modify their 457(f) plans.
  • The guidance is also expected to address what qualifies as a bona fide severance benefit for purposes of 457(f). Compensation paid under a bona fide severance plan would be taxed as received. Compensation in excess of the bona fide severance limits would be taxed in a lump sum at termination.
  • We expect the bona fide plan limit to be the lesser of two times the executive’s annual total compensation or two times the qualified plan compensation limit (two times $265,000 in 2015).  Credit unions can still pay severance in excess of the two times limit, if fair and reasonable, but the taxation may be different.
  • As with 457(f) plans, we expect that few changes to severance plans will be required to comply with the new rules.
  • For noncompliant 457(f) or severance plans, we expect the new rules to provide a process for transitioning to compliant designs.  Grandfathering of noncompliant arrangements seems unlikely.

What Should Your Credit Union Do When the IRS Issues the Guidance?

After the IRS issues the new 457(f) guidance, and especially if it expands the guidance beyond what is expected, your credit union should check with its advisors to make sure you address any modifications to your nonqualified deferral or severance plans that may be required at that time.

Watch the recent webinar, “Attracting and Retaining Executive Talent with Fair and Reasonable Compensation,” presented by Kirk Sherman, Dr. Loretta Dodgen of Human Capital Solutions Group, and Chris Burns-Fazzi of Burns-Fazzi, Brock to learn more about executive compensation trends and challenges.

Burns-Fazzi, Brock (BFB) LogoBurns-Fazzi, Brock (BFB) is the NAFCU Services Preferred Partner for Executive Compensation and Benefit Consulting. Burns-Fazzi, Brock engages the law firm of Sherman & Patterson to advise on regulatory and tax compliance matters. Sherman & Patterson, located in Minneapolis, MN, has consulted with and represented tax-exempt organizations with their executive compensation needs for the past 30 years. They work closely with NCUA and state credit union regulators, and frequently write and present on these topics.

For more information and educational resources, visit http://www.nafcu.org/BFB.

New Perspectives on Vendor Due Diligence

Guest post written by Vanessa Stanfield, Client Program Director, Vendor Management, Affinion Group.

headshot_blogNow that I’m fully immersed in the world of credit unions, I’m so impressed by the incredible emphasis on members and the cooperative spirit.  The majority of my prior experience was spent working in the insurance division of a major national bank.  My roles varied from vendor management to product management – hot topics for financial institutions of all sorts.  I’m very grateful for the perspectives I gained elsewhere now that I dig into my new responsibilities with Affinion Benefits Group.  Affinion has built the culture, infrastructure, and systems to support and serve our credit union clients in many proven and innovative ways.

On any given day, my work presents me with a few key areas of focus:

1. Facilitating the completion of client due diligence requests in an efficient, thorough, and streamlined manner

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