Benefits Prefunding - the Holy Grail for Credit Union Employee Benefits
Every
credit union leader is on the lookout for that game-changing strategy – the one
move that could elevate their organization to the next level. Is there a unique
advantage credit unions hold over banks? Can we maintain financial prudence and
still thrive?
This paper explores a powerful yet often overlooked opportunity: a shift in mindset around corporate investments that will enable credit unions to provide highly valued employee benefits without burdening operating capital.
Historically, credit unions have been limited to conservative investment options like CDs and bonds. When it comes to executive benefits, many rely on COLI (corporate-owned life insurance) plans, which are capped at 25% of net income and often takes decades to realize returns through death benefits.
However, a pivotal change occurred at the onset of the COVID-19 pandemic. Amid the chaos, a revised NCUA regulation – NCUA 701.19 – quietly reshaped the investment landscape for credit unions. Unfortunately, many leaders were too focused on navigating the pandemic to fully grasp its implications.
This regulation now
permits credit unions to invest in previously non-permissible vehicles – such
as annuities, mutual funds, EFTs, and managed funds – as long as the returns
are used to benefit employees. While salaries are excluded, one of the
largest employee-related expenses – health insurance – is fair game.Most credit unions currently earn modest returns of 2-3% after fees and liquidity requirements. In contrast, investment options allowed under the new regulation can yield a minimum of 6-8% annually, with some offering upfront bonuses of 13-23% to offset penalties from surrendering underperforming assets.
By partnering with a certified financial planner (CFP) who specializes in credit unions, leaders can design a strategy that:
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