3 reasons it’s hard to save even when you’re highly paid.
By Van Landowski
Sponsored by CUNA Mutual Retirement Solutions
Even as highly paid employees, credit union executives can face three challenges to saving enough to fund their retirements:
- 401(k) limits. The IRS imposes a limit of $18,000 for 401(k) plans. This may prevent highly compensated employees from saving enough to have a retirement income near the 60 percent of their final salaries that is recommended to avoid a drop in their standard of living.
- Non-discrimination test failures. Non-safe harbor 401(k) plans require annual testing to prove they don’t unfairly favor highly compensated employees. Failing this non-discrimination test can result in higher income taxes and fewer retirement savings for affected employees. According to judydiamond.com, $820 million in 401(k) contributions had to be returned to highly compensated employees in 2015 when over 54,000 401(k) plans failed non-discrimination testing. The affected executives then had to pay income tax on their returned contributions.
- Plan design restrictions. Some new hires are required to finish a year of service before they become eligible to join the employer-sponsored 401(k) plan. According to Investment News, the U.S. Government Accountability Office estimated that being ineligible to save in a new employer’s plan for a year may result in $411,439 less in retirement savings.
While these obstacles to retirement savings can challenge credit union executives, they can be avoided. One solution is offering them a 457(b) plan. This is a non-qualified defined contribution plan that can be offered with an existing 401(k) plan. It provides an additional tax-deferred means to save for retirement. Participants can have contributed up to an annual limit of $18,000 in additional tax-deferred retirement savings. Contributions can be made by your credit union, the executive or both. Payouts are taxed the year they’re received and only on that year’s contribution amount.
This type of plan can significantly increase retirement savings on a before-tax basis for executives. Today, many large credit unions offer it. In fact, according to data from CUNA, 75 percent of credit unions with $100M+ in assets already offer one to their CEOs.
A 457(b) plan can also make a difference for your credit union beyond the CEO. You can use it as a tool for attracting and retaining top talent for your leadership team. This can help you stay competitive in recruiting the leadership team that supports and succeeds the CEO. In 2016, nearly 40 percent of non-CEO credit union executives were offered a 457(b).
So, how do you choose one? Be sure to work with a dedicated, experienced partner that can provide the support your credit union and your executives need as they plan for the future.
Van Landowski is retirement relationship manager for CUESolutions provider CUNA Mutual Retirement Solutions, Madison, Wis. To learn more about becoming a CUESolutions provider, please email Kari Sweeney. Learn more about the CUNA Mutual Retirement Solutions 457(b) plan.
Also from CUNA Mutual, read “Protect Your Investment in Top Execs.”