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Pre-funding employee benefits can help offset rising costs and add to your bottom line. Employee benefits costs have increased an average of 22 percent over the last five years, according to Kaiser/HRET's annual employee benefits survey. Meanwhile, interest margins for credit unions have declined 13 percent in the last five years, according to NCUA.
"You've got to pass those costs on to someone, but the last thing we want to do as credit unions is pass those costs on to our employees," said Scott Albraccio in the CUES Webinar "Pre-Funding Employee Benefits to Help the Bottom Line."
"When you look at total employee benefit pre-funding, you may not be able to entirely offset the increases, but you're definitely going to be able to decrease some of the expense to employees," continued Albraccio, executive benefits sales manager for CUES Supplier member and partner CUNA Mutual Group, Madison, Wis.
Total benefits pre-funding helps credit unions take advantage of NCUA regulation 701.19, which allows CUs to purchase investments that would otherwise be impermissible, as long as they’re directly related to the credit union's obligation or potential obligation to fund employee benefit plans.
The process of total benefits pre-funding begins with an annual estimate of employee benefit obligations. The credit union then purchases an investment. Albraccio outlined three investment options available to credit unions as they begin to build total benefit pre-funding programs.
Variable Annuities
Unlike the other two options, variable annuities are retail products. Corporate-owned life insurance and managed money are institutional and built for high-dollar amounts.
"The only down side of annuities is the high charges you're paying because it's a retail product stuck in an institutional marketplace," said Albraccio. "It has a low entry point, so if you're a smaller credit union and you can't afford a $1 million, this may be a very good investment. Just understand that it has a higher charge to it."
Many credit unions choose annuities for principal protection. “Coming out of the financial crisis …, we couldn't sell anything that didn't have a guarantee to it,” he noted. “The credit unions were so adverse to losing money because they just got hammered in the market; boards and ALM committees wanted a guarantee. Annuities provided that guarantee and they were willing to pay higher fees for that guarantee."
Corporate-Owned Life Insurance
Corporate-owned life insurance, which came from the banking industry, is an investment play for credit unions that insure the lives of several executives. The policy is bought for the rate of return the credit union can receive.
"The unique thing from the credit union perspective is that you're a non-taxable entity. … so the credit union would retain that earning, Albraccio said.
Depending on the group of executives the credit union is insuring, the initial rate could be 2.5 to 3 percent. These policies re-price annually, and credit unions are using them as a long-term investment, planning for 15 to 20 years.
"This is definitely an investment play where your executives’ lives are being insured and the proceeds go to the credit union upon the executive's death," explained Albraccio.
Managed Money
Managed money portfolios are customized portfolios professionally managed and built based on the credit union's investment philosophy. With the ALM or investment committee, Albraccio’s team helps the credit union evaluate its appetite for risk and works with the portfolio manager to create a portfolio to match.
"The unique thing about this is you're not going out and buying a [brand name] mutual fund. We are building a portfolio that may contain some mutual funds but contains stocks, bonds, REITS (real estate investment trusts), in addition to mutual funds. But really you're building an individualized investment portfolio."
This is a variable investment that goes up and down with market trends. But typical portfolios are designed to produce a a 3 percent yield along with 2 percent growth and appreciation. "We're looking to generate a monthly yield, cash flow that you can put back into the credit union," said Albraccio.
He noted that the accounting classification is critical and a bit more in depth. The money manager works to understand the risk/reward desires of the credit union and consider the accounting implications of a managed money portfolio.
"We all understand we’re in historically low interest rate environment and we need to explore other options for returns on portfolio," Albraccio said. "This (total benefits pre-funding) is the perfect opportunity."
