Pub. 5 2014 Issue 1

www.wvbankers.org 22 West Virginia Banker R etirement plans represent a substantial financial investment for employers— likely among the largest investment a financial institution can make in its peo- ple. Maximizing that investment means designing a retirement program that meets your organization’s business as well as benefit objectives. Designing an effective retirement program for your organization starts with a review of your management philosophy, com- pensation strategy, the different types of plans available, an analysis of what your peers offer, and considerations such as demographics and the maturity of your institution. Successful plan design also means differ- ent things to different types of institutions. Stock institutions will typically integrate company stock with retirement plans. Mutual institutions, without the ability to offer company stock based capital accumulation programs, will generally Designing the Right Retirement Plan for Your Organization Retirement programs are a critical element in designing total compensation programs for today’s financial institutions. In a highly competitive employment market, benefits and compensation are critical tools in attracting and recruiting quality professionals. provide somewhat richer defined benefit and 401(k) plans. In the final analysis, however, all commu- nity based financial institutions share a similar goal—to attract and retain valuable employees in order to provide a high level of customer service and to enhance the growth and profitability of the institution. Designing a retirement program that accomplishes these goals begins with understanding an organization's busi- ness objectives and how those objectives translate into a benefits philosophy. There are two basic approaches that a company should consider in developing a benefits philosophy. The first centers on an "Objective" Ap- proach—that compensation and benefits are offered in order to fulfill a specific function, (i.e., to provide employees with sufficient retirement benefits). The ade- quacy of the benefits involves an analysis of what level of compensation and benefits allow an employee to maintain a certain standard of living. The other is a "Competitive" approach — that attractive benefits and compensation packages are offered in order to attract and retain employees. Benefit programs should be viewed as an important compo- nent of total compensation. Adequacy of total compensation involves an analysis of wages and the level of benefits offered by competitors. It is important to recognize that while these two approaches are different, they are not exclusive. The successful bene- fits program will reflect a blend of both philosophies. THE OBJECTIVE APPROACH The objective approach involves examin- ing the level of income needed in order to retire comfortably. We use replacement ratios as a tool in determining how much income a retirement program should pro- vide when viewing these programs from an objective perspective. A replacement ratio is the percentage of gross pay prior to retirement that one needs after retirement to maintain the pre-retirement standard of living. It takes into consideration the fact that the post-retirement standard of living will reflect lower taxes and other fixed costs. By Mark Hogan