Using Corporate Owned Life Insurance (COLI) to Compete and Retain Talent

Kelly Coughlin:

Two horses were carrying two loads. The front horse went well, but the rear horse was lazy. The men began to pile the rear horse's load on the front horse. When they had transferred it all, the rear horse found it easygoing and he said to the front horse, "Toil and sweat. The more you try, the more you have to suffer." When they reached the tavern, the owner said, "Why should I feed two horses when one horse carries all? I'd better give the one all the food it wants and cut the throat of the other." And so he did.

Fables - Leo Tolstoy.

Narrator:

Kelly Coughlin is CEO of BankBosun, a management consultant firm, helping banks see level offices, navigate risk, and discover reward. He's the host of this indicated audio podcast, BankBosun.com. Kelly brings over 25 years of experience with companies like PWC, Lloyd's Bank, and Merrill Lynch. On the podcast, Kelly interviews key executives in the banking ecosystem; provides banks' C-Suite officers, risk management, technology, and investment ideas, and solutions to help them navigate risks and discover reward. Now your host, Kelly Coughlin.

 Kelly Coughlin:

Good morning, everybody. This is Kelly Coughlin, CEO of BankBosun. Helping bank C-Suite executives navigate risk and discover reward. Competing for and retaining high quality executive and senior management talent, requires a combination of a good fit between a company and the people in the following three areas. I call them the Three C's: Culture, Capabilities, and Compensation. Today is related to compensation.

Certainly, base cash salary, cash incentive compensations are the easy components. When you get into additional forms of compensation that begin to address the unique needs of both the company and the individual - and these needs could be tax planning from both the employer and employee perspective; cash management - again, from both perspectives in terms of cash disbursement needs and cash receipt needs, and long-term legacy in the state needs. You begin to get into a more complex world that requires the expertise of professionals to help create structure and implement suitable plans.

Frequently, these are referred to as non-qualified benefit plans and they address the needs of both the employers and the employees. In the previous podcast, I interviewed David Shoemaker, President of Equias Alliance, who talked about how banks can create non-qualified benefit plans to help the bank recruit and retain executives. And then they fund these plans with bank owned life insurers. Today I'm going to interview Greg Ochalek Greg is the National Director of Non-qualified Benefits Consulting at CBIZ Retirement Plan Services. He has over 25 years' of experience in the consulting expertise with Fortune 1000 companies.

The mission of CBIZ is to help the clients prosper by providing them with the professional business and individual services, products, and solutions to better manage their finances and employees. And to accomplish this, CBIZ has three operating practice groups. One of which is employee services and that's where Greg operates out of. Greg has got a degree in economics. He used to work at Arthur Andersen. I'm going to let Greg pick it up from there. Greg, are you on the line?

Greg Ochalek:

Yes I am, Kelly. Good morning.

Kelly Coughlin:

You're up in Cleveland. How's the weather today?

Greg Ochalek:

Well, that's another story. We're having some big storms up here, but it's pretty typical being this close to Lake Erie. Getting all that lake effect weather. We've actually had some huge car pileups on our shore way and that's something we're dealing with now.

Kelly Coughlin:

Greg, anything else you want to add to the short bio I presented there?

Greg Ochalek:

Sure. To correct it, I've been specializing in non-qualified executive benefits for over 25 years. I got my start and training at Arthur Andersen in their Los Angeles office, when I was asked to be a member of the Charter Executive Financial Planning team. Part of the Executive Financial Planning led me into dealing with the non-qualified benefits that were made available to the executive group. It was during that time at Arthur Andersen that I really started to focus on it and actually became the west coast specialist for Arthur Andersen for a number of years while I was there.

We helped clients in the design of non-qualified plans. We consulted with them on accounting issues, tax issues. We helped our clients in analyzing different funding strategies to consider what would be best for a particular company. The administration of non-qualified plans is a lot different than administration for qualified plans, so we had to become familiar with the different types of administrators who are in the marketplace, so that we could recommend the best type of administration for our clients based on their need.

For the past few years I've been working with CBIZ for two years, as an outside resource to them for their plan and for plans of their clients. It was just in April of this year that I was asked to come inside of CBIZ, be part of the team and I accepted the position as National Director of their Non-Qualified Benefits Consulting firms. That's where I am today and it's been a lot of fun.

Kelly Coughlin:

Great. Well, let's get right into it here. Is there a typical company profile, bank profile, that you think they should begin to look at some sort of non-qualified benefit plan? Is there a profile based on assets, or business lines, or revenue size? Is there anything that strikes you as being kind of a trigger point that a bank would look at?

Greg Ochalek:

I think it's a very good question. The answer really is, that a bank is still a corporation or a business that has similar needs as companies in other industries. As it applies to non-qualified benefit plans, specifically volunteering deferral plans and supplemental executive retirement plans, banks really are not any different than other companies and other industries. These types of plans are really suited for mostly public companies or at least companies that are for-profit companies, that are paying taxes, because the benefits of the non-qualified plans really is heavily weighted for tax benefits.

If you're a company that's not paying taxes, then a lot of these qualified plans may not be as suitable for those types of companies. We like to deal with banks and companies that have at least ten to 15 highly compensated or management people that would be considered participants for the plan.

Kelly Coughlin:

Okay. Why public companies?

Greg Ochalek:

Because public companies are owned by a wide variety of shareholders. The corporation really is an entity that stands on its own. When you have companies that are privately owned, you may have only one or two owners of those companies and a lot of times, those companies are set up as pass-through entities so, all the tax benefits, the deferred tax savings, would end up flowing into individual tax returns. And it's a heavier burden for companies that are private, that are owned by a few people, to carry those deferred tax savings over a period of time. As opposed to a corporation that have a long life ahead and can carry the burden of deferring their tax savings.

Kelly Coughlin:

Okay. So I'm going to summarize what I heard you say. No, there's no typical bank in terms of assets, business revenues, but ideally, profitable. Ideally, it's not a sub S bank, but a C corporation that's held by more than the executive management of the company.

Greg Ochalek:

Yeah, that's correct. Let me clarify one point on non-qualified plans. That is that when a non-qualified plan is put together and participants are deferring dollars into the plan, or if the company is promising to pay a benefit in the future, that benefit or those monies that are being deferred, are not taxed currently to the planned participant. At the same time, the company does not get a tax deduction like it does with a qualified plan.

An example is, a 401(k) plan, people can defer money into it but the company gets a tax deduction in the current year. In a non-qualified plan, the company does not get that tax deduction, it defers that tax savings into the future and that's what I was referring to.

Kelly Coughlin:

What is your business model there at CBIZ? What's your business process? How does it work?

Greg Ochalek:

Well, first of all, I'd like to discuss the events that would trigger a reason why people would create these plans for their bank and for their company. That usually is when you have a company or a bank that you may be losing some of your key people to your competitors, or if you are going to be increasing your executive talent internally and you're trying to attract key talent into your company. These types of plans are very good for doing that because there are benefits that could help them personally, financially. It's just a way of helping them manage their compensation to benefit their families and them personally.

Also, there are companies that have discrimination testing issues with their qualified plan. Where a plan participant may not be able to put in the full amount into the qualified plans because of the discrimination testing issues, or you may have executives that are putting the maximum they can into their 401(k) plans and they have other dollars that they'd like to put away on a deferred basis. It's these reasons that are the main triggers for putting these plans in.

Now, when companies identify these events and are looking for solutions, that's when we can step in and help them. The way that we're set up as a company and what our platform is, is that we really try to have an unbiased approach to designing these plans and recommending things for our clients. We have what we call an open architecture platform. The open architecture performs on two levels. The first level is with the plan administrator of the non-qualified plan we have eight, nine, maybe ten different administrators that we work with across the country.

Now, each of those administrators have designed their platforms for certain markets. Depending on the size of the bank; where it is in the country; what it's trying to achieve one administrator might be better than another. We actually help our clients select a plan administrator and going through an interviewing process to determine which would be the best plan administrator.

Kelly Coughlin:

In the interest of full disclosure, the company I do work with, Equias Alliance, could potentially be one of those administrators.

Greg Ochalek:

Yes, absolutely. Especially in certain areas more than others. Equias has a great reputation in the BOLI market and accessing those types of investing products. We would work with Equias for those types of situations. Part of our platform is to help banks and companies go through an investment analysis, so that they would have the information, be able to make a decision on whether they should even fund these plans at all. Some companies have these plans and they go unfunded. Most companies will actually fund the plans, but they have to make a decision what they're going to fund using managed funds or using a tax advantaged vehicle like a bank owned, or a corporate owned life insurance policy to provide benefits for the company or the bank.

We help them with that process. And with that process there's various insurance companies that provide these types of polices or managed investments. We're very agnostic as to which company they use, but we have access to all of them and can help a bank or a company decide which of those products may be the best to help fund in on a qualified plan.

Kelly Coughlin:

Right. To summarize that, you helped the company fine-tune their needs requirements and then secondly, you helped them fulfill that need with - you say you're agnostic, but you have your open architecture, that is limited to high quality providers. You don’t open it to everybody, but you've done some due diligence and vetting of the providers that you will recommend to fulfill that need. Correct?

Greg Ochalek:

Yeah, that's absolutely correct. But I also want to just make a point that before we do those two things, is that we do a lot of consulting in the design of plan with the different features that are available, so that the planned design meets the objectives of the company. This whole thing starts with clarifying: What is the company trying to accomplish? Who are they trying to attract? Who are they trying to retain… or other objectives that the company may have by offering these benefits to their select group of management or highly compensated people? So that's where it starts. Then part of the process is the administration and then part of it is the funding and security, and that's what we had just talked about.

Kelly Coughlin:

Right. If I use the metaphor of building a house. You help them design the blueprint for the house, the architectural part of it, so you're like, what do you need? You want granite counter-tops, do you want this type of wood? Windows? You help them on the design and then you create the blueprint based on what they told you they need. Then you get the OK on that, and then you go out and get it fulfilled with subs and that sort of thing. Is that how you look at it?

Greg Ochalek:

I've never heard that analogy. It's a good analogy. I like that. I think to understand the power of non-qualified plans, why they attract key talent and attain key talent – and that goes all the way back to the beginning of studying non-qualified plans and how they work within corporations or banks.

Kelly Coughlin:

Greg, why don’t you talk for just a couple minutes about the difference between corporate owned life insurance and bank owned life insurance.

Greg Ochalek:

There's a funding vehicle the banks use called bank owned life insurance or BOLI. I think that it's fair to define really what BOLI is and I think there's a couple definitions. You've got bank owned life insurance that most banks are very familiar with, that they use to fund a wide variety of employee benefits. The bank owned life insurance by OCC regulations, they really have to be put in place to help the bank finance these benefits. You're really talking about benefits that would include post-retirement benefits, perhaps financial planning, maybe legal benefits, disability, other group benefits.

The typical BOLI type of product that banks are familiar with, they'll invest in that type of a product in addition to other things in their investment portfolio, to help pay for those benefits. They usually purchase it in single blocks of premium and it's designed as a modified endowment contract, which is a variation of a life insurance contract according to the Internal Revenue Regulations on Life Insurance. But then there is a different type of BOLI that is sometimes referred to as COLI, which stands for Corporate Owned Life Insurance, which is designed differently and would be more specific of a funding vehicle for the types of plans I discussed today.

Those are actually non-modified endowment contracts and the banks would be funding those with deferrals that they're getting from executives, or money that's coming from their operations that they're contributing to individual executives. Those premium payments into that type of a funding vehicle are paid on an annual basis. And the tax advantages are different between a modified endowment contract or what something would be referred to as a MEC compared to a non-MEC In most of the work that we do to fund non-qualified plans, we use the non-MEC approach.

Part of our business is working with companies like Equias to help place the other type of BOLI that I originally discussed, which would be the modified endowment contracts. We work very closely with a company like Equias and yourself, Kelly. But I do want to make the distinction that the funding vehicle for the types of non-qualified plans that I'm talking about and that we've talked about today are different. And it takes a different type of expertise and CBIZ provides that expertise to help companies make the right decision on how to fund these types of plans.

One of my very first clients was a cornerstone client of Arthur Andersen and as the person in charge of all the financial planning for the executives, I had to go in and understand all the non-qualified plans. Then when it came to retire, I got to see the benefits that the non-qualified plans provided for these executives. The one thing that just was startling, that jumped out, was that the participants were the executives that utilized the non-qualified plans to the maximum were actually retiring on incredible sums of money and in this case it was about $1.2 to $1.4 million a year for 15 years. I was struck to see how these non-qualified benefits were able to provide such a large amount of supplemental income in their retirement, in addition to the other benefits that the companies had.

Now, I compared that with those executives that did not participate in the non-qualified plans and those executives were retiring on $240,000 a year for 15 years. So you can see that the huge difference in how the non-qualified benefit plans affected the lives of the executives that took advantage of it. It helped them financially. They were able to help their children buy homes; set up education trusts for their grandchildren. It helped them socially with things that they wanted to do for their community. I saw them be philanthropic to the community and participating, things like their church, museums, other charities that they wanted to participate in.

That's really where I got sold and why I dedicated my whole career to non-qualified plans because of the difference that participating in these plans can affect peoples' lives. It was a good thing to see. That's one of my favorite stories to tell because it's very meaningful. Just another quick story. We had a bank in the Midwest that has been having some of their people being taken away by other banks in the area, just through competition. And this particular bank not only needed to keep their executives, but they were trying to add to them. They came to us, CBIZ, and talked to us about looking at their compensation package and the one thing that we did talk about was to add a non-qualified deferred compensation plan and possibly a supplemental executive retirement plan.

Then we helped them design a plan to keep it within their budgets, but to give their executives a way to defer dollars in addition to the monies that they were putting into the qualified plan. Then we helped promote that plan with their executives, so that they knew that their company was concerned about them personally and not just professionally. And then there was a group of people that they really wanted to keep around, so we created a plan through a supplemental executive retirement approach. That really was a way to put golden handcuffs on these people, so the bank had set aside funds into an account. The account could be managed by the executive. The executive could go online and see the value of that account.

But then that account would vest at certain points in their career. They saw that if they stayed with a bank, that they had this huge benefit that was waiting for them. If they left the bank, they would leave it on the table and have to walk away from it.

Kelly Coughlin:

That's great. You've been doing this a long time. You must like your job. What is it about your job that you like? Why do you like it? What gets you up in the morning? What makes you smile when you work?

Greg Ochalek:

Well, Kelly, I am very fortunate that I am able to deal with different types of companies and different industries, different sizes. I get to work with some incredibly talented people that are clients. I work with people in the C-Suite. Get a chance to observe CEOs to see how their minds work and how they take a look at these things. The CFOs who look at the economics of these plans, to be able to wrap their minds around it very quickly. That's fascinating to me. I've worked with some creative human resource people that really see the benefits of these plans. And that's all stimulating as far as working with all these people and learning about different industries and different companies.

I think that even beyond that, when I see executives that have worked in their career and are getting ready to unwind, and take things a little bit slower, the benefits that these non-qualified plans provide to them and their families really takes them up a notch or two, as to where they are and what they can do with their families and retirement. And that's just very satisfying for me. Those are the reasons why this has just been a lot of fun for 25 years.

Kelly Coughlin:

That's true. I like to hear people who like their job. How do people get a hold of you? I know that CBIZ has over 100 offices and 4,400 associates or so. If a company wants to explore this, should they talk to one of these associates or offices, or can they just get on the phone and call you?

Greg Ochalek:

Probably the best thing to do would be to contact me directly. We have offices all around the country. I actually travel quite a bit to our clients. My email is GOCHALEK @CBIZ, which is C-B-I-Z.com. My direct line is area code (440) 591-8581.

Kelly Coughlin:

Okay, that's great. We'll post up your notes, so listeners can access that and get the written form of that as well. I want to finish with either one of your favorite quotes, or sayings, or a funny thing you've done in your career to add some levity to a very exciting interview on non-qualified plans.

Greg Ochalek:

In light of the political season we just went through, I think the first thing that comes to my mind is that, “We're here to help your bank be great again.”

Kelly Coughlin:

Oh, good one. All right, we'll leave it at that. Thanks for your time, Greg. I appreciate it. We'll be in touch soon.

Greg Ochalek:

Thanks, Kelly. It's been a pleasure. Thank you very much.

Narrator:

We want to thank you for listening to this indicated audio program, BankBosun.com. The audio content is produced and syndicated by Seth Greene, market domination with the help of Kevin Boyle. Video content is produced by the The Guildmaster Studio, Keenan Bobson Boyle. Voice introduction is me, Karim Kronfil. We want to thank you for listening to the syndicated audio program bankbosun.com.  The audio content is produced and syndicated by Seth Green, market domination with the help of Kevin Boyle.  Video content is produced by The Guildmaster Studio, Keenan Bobson Boyle.  Voice introduction is me, Karim Kronfil. The program is hosted by Kelly Coughlin.  If you like this program, please tell us. If you don’t, please tell us how we can improve it.  Now, some disclaimers.  Kelly is licensed with the Minnesota State Board of Accountancy as a Certified Public Accountant.  The views expressed here are solely those of Kelly Coughlin and his guests in their private capacity and do not in any way, represent the views of any other agent, principal, employer, employee, vendor, or supplier.