As a credit union executive, should you consider your personal financial success before the direction of your credit union? Yes and no. The reality of your position challenges you to lead your organization boldly into new initiatives, technology, and markets; however, every major decision you make comes with risk. Whether it will pose a financial risk to your credit union or cause political concerns with your board, your choices have the potential to affect your future employment and overall financial and retirement plan.

But with some preparation and planning, you can better gauge when it’s most appropriate to take those strategic risks to benefit both you and your credit union. In the episode, Doug welcomes ACT Advisors Wealth Specialist Paul Lloyd, CFP®. Paul shares new research and analysis in the recently published white paper, “When to Take Strategic Risk in Your Credit Union—Your ACTion Point.” The ACTion Point is defined as the point in time when your financial and retirement plan will still be successful even if your employment, income, or benefits change unexpectedly due to termination or changing jobs.

It’s not about thinking about yourself before your credit union; it’s about timing your most strategic moves so they align with the highest probability of your financial plan’s success. Here is more of what you can expect in the show:

  • A summary of the most common executive benefits available, including the 457(f) and the collateral assignment split-dollar, and their advantages in recruiting and retaining top talent 
  • How simulation planning and identifying your ACTion Point, such as the hypothetical examples found in the white paper, can help you better lead your credit union with an increased level of personal financial security
  • How your ACTion Point may determine how aggressive and time-sensitive your actions should be leading up to your retirement

Hear the full episode for complete details on identifying your ACTion Point, or read the white paper today.

Stream the episode now.

Doug (00:03)

With me today is Paul Lloyd. Paul is a Certified Financial Planner and member of the ACT Advisors team. Paul has been doing some substantial research into some ideas for credit union leaders we think are a little bit different. So that’s what we’re here to talk to Paul about. Paul, thanks for joining me today.

Paul (00:25)

Thanks for having me, Doug.

Doug (00:27)

The initial research paper that you’ve produced is on what we’re calling the ACTion Point, which is capital ACT-ion, ACTion Point. Tell me a bit about what the ACTion Point is, kind of a the short summary of what our outcome is, and then we’ll kind of get into the details behind that. 

Paul (00:51)

Well the ACTion point that we’ve determined is the point in time in a executive’s working career where we feel like they pass the threshold of financial plan success, where they’ve reached a point where even if the rich benefits that they have with a credit union were to go away, their financial plan will still be successful with a reasonable statistical level of confidence.

Doug  (01:20)

Are you telling credit union leaders that they need to be thinking about their own personal success before they decide how to lead the credit union?

Paul  (01:31)

Well, yes, and no. We’re not saying that you should put your personal financial plan above the needs of the credit union. But any bold initiative that a credit union leader takes in their career comes with some amount of risk, sometimes that’s a financial risk to their credit union. Sometimes it’s a political risk, with their board and their membership, but ultimately, that risk trickles down to them and their future employment. So you know, if you have really bold initiatives that you’d like to take, it’s nice to know, at least, to give you some level of confidence to know where your ACTion Point is to know if things were to go wrong right now would I be okay personally? Would I have to see a drastic change of lifestyle? So it is nice to have that information in mind so you can think about how that aligns with your credit union’s vision.

Doug  (02:30)

So maybe what you’re saying is that understanding some level of personal security is not where you start from, but it might enable you to sort of take it up a notch, instead of just trying to grow your traditional lending portfolio. Maybe you get into some more nontraditional things because you have a certain amount of comfort that you’re going to be okay. Is that what you’re saying?

Paul  (02:56)

That’s correct and knowing where that ACTion Point is on the horizon can help you plan ahead. I mean, any of these initiatives that you mentioned as examples, they take time to develop, they take time to come up with the resources and the talent to implement. So if you’re in year three, and you know that your ACTion Point is year five, it’s time to start moving, it’s time to start taking on those steps to meet the goals you’ve set out.

Doug  (03:25)

Interesting. All right, so let’s back up and start talking about what’s normal in your work with credit union executives. So talk to me about the typical planning needs you see for credit union executives.

Paul  (03:40)

Well, like any other financial institution, credit unions are faced constantly with the challenge of attracting, rewarding, and retaining their top executive talent. So another consideration, too, is it’s always difficult for highly compensated executives to save enough through traditional means to provide the kind of income replacement they need in retirement. So those two factors are always big on the minds of credit union executives. And so, as this executive benefit market has evolved over the last 30 years or so, we’ve seen quite a unique mix of benefits that are common amongst credit unions across the country. And there’s really not a lot of education out there for those executives. They’re aware of the resources they have, but are not really sure how to utilize them and all the timing implications, the tax implications. So you know, I think if you were to ask the average financial advisor out there about a collateral assignment split-dollar plan or a 457(f) plan, you probably wouldn’t find a lot of familiarity. 

Doug  (04:56)

Let’s start with that here. So I know the three  types of executive benefits that we commonly see are 457(b), 457(f), and collateral assignment. So talk to us just a little bit about each one of those plans.

Paul  (05:11)

Well, the 457(b) plan, I think, is the most common that we see. And that’s basically a non-qualified deferred compensation plan. And it’s a defined contribution plan, just like the 401(k). Contributions go in on a pretax basis that are taken out at  retirement; these contributions can be entirely from the executive or they can be entirely from the credit union or a combination of the two. 

Doug  (05:45)

How much can we put in there?

Paul  (05:47)

This year, you can put in $19,500, or $26,000 if you’re above age 50. Same limits that you have for 401(k), but it’s an additional limit so that the executive can save much more that way. One of the important considerations that comes into play with 457(b) plans is that those assets are technically assets of the credit union. So, we typically see executives like to get that money out of those plans as soon as possible in retirement, so it’s not at risk of forfeiture. But we have to weigh that along with their other benefits and how they work together.

Doug  (06:28)

When you put a 457(b) plan in can you pick and choose who has eligibility for that? 

Paul  (06:37)

Well, it’s typically your most highly compensated executives in the organization.

Doug  (06:45)

Let’s switch gears and do the 457(f). Talk to me about that one.

Paul  (06:50)

The f plan is much like the b plan; it is also a non-qualified deferred comp plan. They’re a little bit different in that the vesting is typically tied to a date in the future, usually retirement of the executive. So, it’s used more as a retention tool than the b plan is. So, contributions are typically from the credit union only in these plans and are set to pay out, like I said, at a date out in the future. They can be invested in the same ways that a b plan would be. 

Doug  (07:29)

You know, it’s interesting, I was working with an executive yesterday and he had a serial  f plan that was paying out in sort of waves. He had a payout last year, and he runs a large credit union, and so, his total comp was over, it was about $1.1 million last year. So, when that happens, talk to me about the excise tax.

Paul  (07:52)

Well, the Tax Cut and Jobs Act of 2017 brought in a 21% excise tax on compensation exceeding a million dollars in a year to any one of a credit unions’ top five executives. In 457(f) plans, the vesting and payout of those is counted in that calculation. So, it’s very easy for an executive to see that million-dollar threshold if you have a large f plan paying out in the year. So, on the flip side of that, collateral assignment split-dollar plans are not subject to this excise tax. So, we’ve seen those grow quite a bit in popularity in recent years.

Doug  (08:34)

The collateral assignment plan, obviously  that’s the one that we see the most of and has a lot of power. So, talk to me a little bit about how collateral assignment works. I know you’ve got a whole separate research paper going deep on collateral assignment, so we won’t go deep here. Just talk to me a little bit about how it works and thensome of those really interesting domino effects that you see in your financial planning work.

Paul  (09:02)

The split-dollar plan is basically just an agreement between a credit union and its executive that dictates how they will split the benefit dollars from a life insurance policy. And this is always a cash value life insurance policy, which can mean a whole-life policy, universal life, what have you. But in short, the credit union makes a loan to the executive to make premium payments on this large life insurance policy. And then it will build enough cash value over the years so that when the executive retires, they can take a pension-like income stream from that policy, which is entirely tax free. That’s something you just don’t see out there: tax-free income. So, it’s an enormous benefit which opens up a lot of doors to other planning opportunities that might not have otherwise been available to them. 

Doug  (10:04)

And is there a retention effect from collateral assignment?

Paul  (10:08)

Yes, in the same way that an f plan would define a date in the future for vesting, the split-dollar plan does as well. You typically have a defined access date in a split-dollar plan, which defines when the executive can start taking income payments. Those ages are typically set in your early 60s, kind of your typical retirement ages is what you normally see.

Doug  (10:36)

I don’t think I heard much about those domino effects. Tell me a little bit more about when you see these, you know, the executive has the collateral assignment, so she’s got this income stream coming in retirement. Tell me about the extra effects of having that tax-free income.

Paul  (12:00)

One of the biggest benefits is the tax-free income in retirement for the executive. Another one that I failed to mention earlier is a death benefit from that insurance policy. Part of the death benefit goes to pay back the credit union for its investment. But the executives’ heirs also receive some of that benefit, too. But there are also some opportunities that you don’t really think about that are on the surface that become available because of the low-income tax rates that these executives see in retirement. Many of these executives see effective tax rates in the mid 30% range in their later working career. And then all of a sudden, they turn 62, retire, and start receiving split- dollar income, it’s tax free and they see their effective rates drop down sometimes into the single digits. So, this opens up several really important financial planning opportunities. One of those is Roth conversions. That sometimes leaves the executive with many years until they start having to take required minimum distributions where they can convert some of those pre-tax assets to Roth. Also, health insurance is a major consideration for executives in early retirement before Medicare starts at age 65. So in many cases, executives can draw a really rich, tax-free benefit from the split-dollar plan but also have adjusted gross income in levels that qualify them for low- cost health insurance through Obamacare.

Doug  (13:45)

Okay, Paul, so these tools, the 457(b), 457(f), collateral assignment, are used to kind of fill in the ability of a credit union executive to replace a reasonable portion of their income and for a sort of golden handcuffs plan because the war for talent is real, right? And you need to keep your top leaders in the credit union, so that you have that continuity for long-term strategic decision- making. So, if you understand your ACTion Point, which you defined is the point at which you have a some level of personal financial surety even if you had a change in employment situation, can you kind of walk us through an example of how you would sort of test that and show how that works? Without too many details, since we’re on an audio-only recording. 

Paul  (14:42)

In our paper, we use the example of a fictitious credit union executive who has kind of an average level of retirement savings and assets that we would see. This is a 50-year-old executive who’s been given a split-dollar plan payable at age 62. So, there’s basically a 12-year vesting schedule. So, this person becomes vested in their benefits 1/12 per year over that 12-year period. So basically, we stress-tested this plan, just like we would a financial plan for any other unexpected occurrence like death or disability, that’s something you see all the time in financial planning. But I think in many cases, we take a situation like this executive and say, all right, they’re given this 12-year vesting period on a split-dollar plan, their financial plan is set, we look at the benefits it’s going to provide, and we look at that as a given and we call their plan a success, but 12 years is a long time. While the benefits are extremely rich, sometimes in the split-dollar plans, they’re certainly not without risk, that’s a long time to have to wait. So, things can go wrong between a credit union and an executive. So, we’ve basically looked at what would be the effect if termination of employment happened after each year in that vesting schedule. The planning tool that we use is a cash flow-based tool that uses a Monte Carlo analysis, which is a fancy way of saying it’s a probability tool that takes all possibilities of stock market return into account to come up with the probability of success of your plan. So, we look at what is the probability of success after every year in that 12-year period if the executive were to be terminated from his position and lose the benefits that are unique to the credit union-lose the ability to save into a 457 plan and lose at least partial benefits of the split-dollar plan. 

Doug  (17:07)

So, you analyze the percentage success that they would have toward their retirement income each year? And so, you’re looking at an increasing percentage; I would assume over time that vesting increases? So where is the ACTion Point in that continuum? And how do you behave differently if you’re past that point?

Paul  (17:32)

Well, in the example we use year five as the ACTion Point and this is the point in time where the Monte Carlo probability of success exceeded 85%. And in the financial planning world, that’s generally considered a very strong probability. But they can also be subjective and be up to the executive how they feel about risk. One executive might think 90% is a better number to shoot for, but whatever number you have determined as your ACTion Point, we feel like this is the point in time where you can feel a little bit more comfortable in your own plan success and use that to drive a more ambitious agenda for your credit union.

Doug  (18:29)

And I know from the work that you’ve done that you could use a statistical ACTion Point, or you can kind of back it into a dollar ACTion Point, right, where instead of saying, all right, it looks like you have an above 85% chance of being able to replace let’s say 60% of your final average salary, well, that’s a very typical goal. Instead of that you might be able to say you could produce X amount of dollars with a reasonable statistical likelihood right you could switch it to dollars if that was more tangible to the executive and say all right, here you can produce this amount of retirement income at this point and maybe the executive has some comfort with that figure, and then can work back into all right, you’re safe enough now to change jobs or to really get aggressive in some of those things that can drive the credit union forward.

Paul  (19:26)

That’s true. I really think that the biggest factors about this is just coming up with your base financial plan to begin with. That’s the most important first step in all this is laying out your financial life as the way you see it will happen. And that’s your baseline goal that you’re aiming for. And then we can do this year-by-year testing analysis to find out you know where that ACTion Point is, and many times when we start working with clients, they are already past thatt point, which is great. It’s nice to know that you’re already there and can take the action that you need without hesitation.

Doug  (20:11)

So Paul, I know you spent a lot of time working with credit union leaders and thinking about what’s going on in the movement and of course, the intersection of tax policy with what’s going on in the market. Tell me about any kind of new ideas, what you see coming forward or other research items that you would direct our listeners to? 

Paul  (20:32)

We have already created in the past year some webinar content that is out there about the potential impact of President Biden’s new tax policies that has evolved some over the last several months. So, as we see that coming closer to some finality, we will update some of that content with what has actually been implemented. You know, we also have some other content out there that involves Roth conversions and Obamacare access that results from some of these split-dollar situations. One thing that we’re constantly working on is collecting data on the executives that we work with to try to find trends in their own personal finances that we can identify, but it takes a lot of data points, and that’s something that is kind of an ongoing project for us.

Doug  (21:33)

Awesome, Paul. Well, thanks for joining us on “CU on the Show” today and thank you for your work helping the leaders of the credit union movement. 


Thanks, good to be here.


Listeners, you can read our latest research paper on the ACTion Point at our website, You can find it on our blog, along with all of the other educational content mentioned in this episode.

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