Make programs that offset benefits costs—and therefore qualify for non-703 investments—part of your overall income strategy.
Employee benefits pre-funding programs can do more for your credit union than simply offset future benefits expenses. The credit unions that get the most value from pre-funding programs use the expanded array of allowable investments to balance their overall investment portfolio—and, at the same time, they actively manage the program as they would any other potential income stream.
Pre-funding programs make use of expanded investment options allowed by the National Credit Union Administration and by many states. Investments that credit unions otherwise aren’t allowed to make under the Code of Federal Regulations, Part 703 (and Part 704 in some circumstances)—such as certain corporate bonds, securities and insurance products—are allowable to offset expenses for, among other things:
- health insurance plans;
- supplemental executive compensation; and
- group life and disability insurance.
When I work with credit unions that are considering employee benefits pre-funding programs, I often come across some misconceptions that are holding executives and boards back from using this strategy.
Misconception #1: Benefits pre-funding programs require a large initial allotment of capital.
Reality: You can, and in many cases should, start small.
NCUA and the states that mirror its regulations and associated guidance recommend credit unions invest no more than 25% of their net worth in non-703 investments, and a maximum of 15% for any single non-government obligor.
Some credit unions see this suggested limit and assume it means that benefits pre-funding programs are designed to get you as close to that limit as possible. On the contrary, in many cases, it’s a better strategy to start relatively small.
Perhaps allocate a modest portion of your annual investment budget to a managed money portfolio, and/or to an insurance product such as credit-union-owned life insurance, a.k.a. business-owned life insurance or corporate-owned life insurance.
Beyond simply monitoring the bottom line of these investments, your executive team and board of directors can see how they are managed, how they are impacting your financial statements and how regulators respond.
As your credit union gains institutional knowledge of pre-funding program options and practices, you can gradually increase your commitment and broaden your investment strategy if and when you’re ready.
Misconception #2: We’ll tie up too much capital that we may need on short notice for other purposes.
Reality: A properly designed program will address current and potential liquidity needs.
Credit unions must plan for unforeseen capital requirements. For example, say an opportunity arises to expand into new communities if you can build and staff several branches relatively quickly. Non-703 investments should be designed to address potential liquidity needs.
In fact, many credit unions that use this investment strategy ensure their programs are completely liquid, so they have the flexibility to redirect that capital if needed.
Even the types of permanent life insurance and annuities most often used to fund these programs can be liquidated quickly. The policies are booked on your balance sheet at their surrender value, so you should be able to redeem your reported investment value without hurting your bottom line.
Misconception #3: Non-703 investments will leave us too exposed to stock market fluctuations.
Reality: You can manage benefits pre-funding program investments according to your customary risk tolerance
Non-703 investments can include securities and other instruments that generally have the potential to earn higher returns—and therefore present higher risks—than more traditional credit union investments. However, you can manage pre-funding programs to suit any risk tolerance.
The advantage of portfolios containing equities within a benefits pre-funding program is that the portfolio is managed by professionals specifically for your credit union, in contrast with mutual funds, which are managed for mass markets. Your appetite for risk will be baked into the investment strategy, which can be adjusted as your credit union’s needs change.
You can choose not to include managed money at all among your non-703 investments. Or you could use more conservative investment instruments to balance any market risk you take on.
Make Management/Oversight as Active as for Other Income Streams
To get the most leverage from a benefits pre-funding program, don’t think of it as a product you buy and put on shelf. Instead, treat it as you would any other income stream, such as lending and selling loan protection or other non-interest income products.
Actively work with your pre-funding program provider, portfolio manager, insurance carrier, etc., by reviewing investment performance and projections quarterly or at least annually. Make a board committee and/or executive accountable for oversight, adjustments and results.
Your benefits pre-funding investments shouldn’t get a pass on these basic income-stream management tactics, because unfortunately, the cost of the benefits these earnings offset isn’t likely to go down anytime soon.
Proprietary insurance is underwritten by CMFG Life Insurance Company. Proprietary and brokered insurance is sold by CUNA Mutual Insurance Agency, Inc., a wholly owned subsidiary. This insurance is not a deposit and is not federally insured or guaranteed by your credit union. For more information, contact your Executive Benefits Specialist at 800.356.2644. Representatives are registered through, and securities are sold through, CUNA Brokerage Services, Inc. (CBSI), member, FINRA/SIPC, 2000 Heritage Way, Waverly, Iowa 50677, toll-free 866.512.6109. Insurance and annuity products are sold through CMFG Life Insurance Company. Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the credit union.