Imagine you are a Millennial or Gen X credit union executive. You have spent 10–20 years honing your impeccable tech and financial industry skills. You understand ACH, routing numbers, loan participations, Asset and Liability Management, and Reg D/E. You love credit unions and the industry. Sure, sometimes we are a little slow to make decisions, but you are raising a family, enjoying your career, and believe in the mission and values of credit unions. Things are comfortable and good. You like the stability, the career growth, and the fair pay.
At the same time, you see lots of fintech unicorns hiring. Fintechs are innovative and solving real problems. One day, a LinkedIn recruiting message comes in for one of these high growth, exciting fintechs. You take a quick look and decide to submit your resume… why not?
An hour later, you have an interview set up. Then an offer comes, and it is 40% more than your credit union job, and it includes stock options. The fintech isn’t a public company yet, but it sure looks like they might get there. Suddenly, you say let’s go for it, and the 10–20-year investment the credit union made in you is gone, and they have a leadership crisis.
How does a credit union compete?
For many credit union executives, this problem is all too real. More and more fintechs are growing, and they are looking for domain expertise with specific financial institution knowledge. Consequently, they are targeting credit union management. To cap it all off, they can pay a lot more, feature flexible schedules and remote work, and… offer stock options.
Credit unions are owned by their members and can’t offer stock options. The credit union grows a bit every year and sees financial and community success, but it is hard to know where things are going to be in 20 years. The credit union used to offer a pension or defined benefit, but now everything is a 401k or employee-directed plan. They might offer a 457b or some form of deferred compensation, but you are 35–45-years old, and that doesn’t help much.
A SERP might just be your solution.
What is a SERP? It is a Supplemental Executive Retirement Plan (SERP), which is a deferred compensation agreement between the company and the key executive, whereby the company agrees to provide supplemental retirement income to the executive and his family if certain pre-agreed eligibility and vesting conditions are met by the executive.
That probably isn’t too helpful—but that is the definition.
With a SERP, the credit union buys an insurance policy from a mutual insurance company. This policy earns 5%-6% per year (more than most credit union assets and loans) over time. The policy adjusts upwards with rates too. Each year, the credit union makes a cash contribution to the plan over a 5-, 10-, or 20-year time frame. At the end of the period, the policy has a solid compounding rate and return that create a significant cash value for the credit union and the employee. If the employee leaves early, the credit union’s assets grew. If the employee stays, the credit union had defined compensation contributions and benefited from a growing asset that delivers the value, instead of having to earn the additional yield to make up the gap.
This solution has been used by lots of mid to larger credit unions as a keyway to retain executives, providing more upside while avoiding the risk of traditional defined benefit programs. In addition, the added yield means the asset appreciates regardless of the credit unions performance.
One more thing: the employee doesn’t just have to use it for retirement—in some cases smaller withdrawals are possible for college etc.