Pub. 7 2017-2018 Issue 3

14 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S Reward Key Officers with a 401(k) Look-Alike Plan FEATURE ARTICLE TREY DEUPREE CONSULTANT EQUIAS ALLIANCE Knowing that retirement security is a primary concern of your executives, it may be time for your bank to rethink its approach to executive compensation. C ompensat ion i s one of t he mos t effective tools in motivating executives to h igher level s of per formance . However, i n today ’s ma rke t , t he compensat ion commi t tee and t he boa rd have a variety of alternative compensation approaches to select from to most effectively attract, motivate and retain executive talent. Banks are seeking maximum per formance from executives while executives are seeking income and, especially, retirement security. Althoughmost banks do a fully satisfactory job retaining solid performers by paying com- petitive salaries andbonuses, they areuncertain what todowhen it comes toprovidingsomething truly special for their top executives while, at the same time, prudently managing expenses to protect the interests of shareholders. Saving for Retirement According to the trade association the In- sured Retirement Institute, baby boomers are turning age 65 at a pace of roughly 10,000 per day, and if you’re a baby boomer who is fast ap- proaching retirement, you might be wondering if you’re on target with your retirement savings goals. Compounding the problem are IRS rules requiring no discrimination in favor of higher paidemployees. Amounts that canbe contribut- ed to qualified retirement plans, such as 401(k) plans, are subject to statutory limits. The 2017 maximumpre-tax contribution is$18,000,with a catch-upcontribution limit for employees aged 50or older of anadditional at $6,000. Therefore, qualified benefit plans do not fully meet the financial needs of executives because of their low limit on annual deferrals. Today, financial planners, advisors, and consultants all seemtoagree that retirees should plan for replacing 60 percent to 80 percent of preretirement income during the retirement period. While the right income-replacement ratio is highlydependent onanumber of factors, most bank executives will not reach this level without help from nonqualified benefit plans. 401(k) Look-Alike Plan Onewaybanks canaddress these limitations is by offering a 401(k) look-alike plan. This non- qualified deferred compensation plan allows a select group of executives to make voluntary deferrals on a pre-tax basis with a matching contribution from the bank. Interest may also be credited to the executives account. Executives deferpaying income taxesonmoney contributed now until retirement, a time when they may be in a lower tax bracket. By tying the matching contributions to performance benchmarks, such as department andindividualcriteria,theexecutiveismotivated to achieve higher results. When such plans are properlydesigned, if the shareholdersdowell, so will the executives. Note: Aswith any incentive- based compensation, matching contributions