Your provider should be actively monitoring the market for your Supplemental Executive Retirement Plan and talk with you as soon as any change might be needed.
By Chris Jones, ChFC®, CLU®
Because we continuously monitor the market for our clients’ Supplemental Executive Retirement Plans (SERPs), we were able to help a large number of them update their SERPs in 2020 during two periods of historically low interest rates that occurred in June and September. These updates made their split dollar SERPs even more durable, that is, better able to perform as expected, or better, for these executives and their credit unions.
This is a great example of why an annual SERP review, while definitely a best practice, isn’t enough. The annual SERP review should never surface a surprise in projected plan performance. No surprises is the norm when your SERP provider is actively monitoring the market and communicating with you in a timely way about any needed action.
This article describes the three key priorities of a successful SERP, why a whole life-based SERP is significantly easier to monitor and manage than a SERP based on indexed universal life, and questions you can ask your provider about their SERP monitoring and client communication practices.
3 Priorities of a Successful SERP[1]
To perform well, a SERP must be designed, monitored, and adjusted as needed to fulfill these three priorities:
1. Repay the credit union for the loan that’s used to pay the plan premiums.
When the SERP is established, this loan is made by the credit union to the executive who owns the policy. The cash value of the policy and the policy’s death benefit, which the executive collaterally assigns to the credit union, act as collateral for the original loan.
2. Provide the executive with the originally projected benefit or more at retirement.
We hate it when plans fail (don’t meet their original projections), which can result in the executive getting a “bad news letter.” That’s a letter letting them know they won’t be getting the originally planned benefit when they retire. Getting a bad news letter is especially problematic the closer the executive is to retirement.
3. Enable the credit union to earn interest on the executive’s loan payments.
While this is a tertiary priority, it’s certainly a positive benefit for the credit union that’s well within reach for well-designed plans.
Why Whole Life Is a Great Choice for Your SERP
It’s important to build “downside protection” into every SERP to protect the executive and the credit union if things don’t go as expected. That’s a lot easier to do for plans based on whole life. While not guaranteed, the stability of the whole life dividend enables solid plan design and monitoring than what is possible for IUL-based plans that can experience such significant and rapid cap changes.
In addition, policies based on whole life don’t face “sequence of returns risk” like IUL plans do. In simple terms, the presence of sequence of returns risk means the timing can decimate the plan’s ability to deliver the promised retirement benefit. We call this the luck factor.
Sequence of returns risk is a more significant risk for IUL policies than for whole life policies. You can read more about this in our detailed whitepaper, Why Indexed Universal Life Is Attractive (and Detrimental) for Executive Retirement Plans and learn more in our 201: A Deep Dive Into Split Dollar Life Insurance Options and Risks webinar.
According to this 2023 article, stochastic analysis, also known as “Monte Carlo” analysis, can deepen understanding of the dynamics of flexible premium products like indexed universal life. A 2023 LinkedIn article explains that analyzing a life insurance illustration is imperative because it assumes a constant growth rate even when the crediting strategy is subject to market volatility. This, the article says, “creates an illusion of future projections and an expectation of policy performance” that is too optimistic.
Our whitepaper explains all the math behind our decision to only implement SERPs based on whole life insurance from a mutual insurance company, which provides added benefits because policyholders become owners of a company with a long track record of success that’s dedicated to serving their interests.
In addition, the cash value of a whole life policy is guaranteed to go up year after year[4].
Building a SERP with whole life insurance can create a more durable SERP, one that keeps its value better over time.
Questions to Ask Your Provider About SERP Monitoring
Your provider should know the details of how your particular SERP works, what market situations create an opportunity or a necessity for plan adjustment, and the market context for your plan on an ongoing basis. In addition, they should be able to explain all of this to you in a way that you can fully understand.
Ask them questions like these:
- What is sequence of returns risk, and how can it impact my plan, both positively and negatively?
- What analysis tools do you use to evaluate and illustrate the future performance of IUL life insurance if it’s foundational to my plan?
- What downside protection have you built into my plan?
- What market situations would point to the need to adjust my plan? What is the current market context for my plan or the one I’m considering?
- What is your track record for having ongoing conversations with clients about plan status in between annual reviews? May I talk with some of your clients about their experience with you on this?
When it comes to their retirement benefit, no one likes surprises. While we absolutely hold annual reviews with each of our clients, we don’t wait a year to consider how our clients’ plans are doing. We review the market conditions every month and aim to keep the distance between “we know” and “you know” as short as possible. The moment we know something could be better or worse, we tell our clients. Reactive servicing likely won’t be sufficient when it comes to ensuring SERPs achieve their intended outcome. If you have a plan you’d like to check up on or are looking to establish a new one, we’re here to help you sort through the options.
- Internal Equity Issues: Significant compensation disparities can erode trust and morale among existing executives. Long-term, dedicated leaders may feel undervalued or overlooked, potentially creating internal tensions and damaging team cohesion.
- Retention Risks: Seasoned executives witnessing substantial gaps between their compensation and that of newly hired peers are more likely to explore external opportunities themselves. Attrition growth can exacerbate leadership gaps and disrupt organizational continuity.
- Cultural Disruption: The sudden arrival of external hires at substantially higher pay levels can send unintended messages about organizational priorities. The perception of diminished appreciation for loyalty and internal development can challenge the credit union’s cultural integrity.
This article was originally featured on CUInsight.com
[1] Keep in mind that other factors, such as regulatory compliance, tax considerations, and administrative efficiency, may also be important depending on the specific circumstances of the plan.
[2] Dividends are not guaranteed.
[3] Whole Life Dividend and Indexed Universal Life Cap Rate Inforce History.pdf
[4] This will occur provided required premium are paid and subject to terms and conditions of the policy.
CRN202902-9966088
About the Author
Chris J. Jones, CLU®, ChFC®
Partner & Senior Benefits Consultant
Known for his analytical mindset and mathematical precision, Chris works closely with credit unions to design Supplemental Executive Retirement Plans (SERPs) that are not only durable and compliant but also grounded in data that supports long-term performance. With more than three decades in financial services, he has built a reputation for ensuring that every plan rests on solid numbers and delivers on its promise to executives and boards.
Since 2014, Chris and his team have implemented more than 200 split-dollar SERPs for credit unions and nonprofits, each one on track or exceeding its original performance projections.
