Two CUs describe the benefits they've received under NCUA's amendment to Regulation 701.19.
In 2003, the National Credit Union Administration amended Regulation 701.19, giving federally chartered credit unions the ability to purchase investments that would otherwise be impermissible under parts 703 and 704, so long as these investments directly relate to the credit unions’ obligation or future obligation to support employee benefit plans.
The change gave credit unions more investment options for increasing returns to help offset the cost of employee benefits. For example, credit unions could now purchase potentially higher yielding investments to help offset or pay for the costs of group health plans, 401(k) plans, and group life and disability insurance.
Pre-funding employee benefits can help offset rising costs and add to your bottom line. Over the last five years, employee benefit costs have increased an average of 27 percent according to Kaiser/HRET’s annual employer benefits survey. Over the same five-year period, CUs’ investment margins have declined 13 percent, according to NCUA call report data.
The process of benefits pre-funding starts with an annual estimate of a credit union’s obligations to employee benefit plans. With this information, the credit union can determine an investment to purchase.
Case in Point
Years ago, CUES member Scott VanZandt knew it was a good idea to pre-fund the increasing cost of employee benefit plans with the expanded selection of investments NCUA cleared in 2003. However, because credit unions are risk-averse by nature, he also knew that no matter how much the board of directors of $4.2 billion Hudson Valley Federal Credit Union, Poughkeepsie, N.Y., valued his opinion as chief financial officer, the board would require a great deal more information before committing to such a plan.
Following a comprehensive assessment of Hudson Valley FCU’s needs, it was “apparent that it made even more sense to try to improve [the] potential for long-term investment growth,” says VanZandt. In September 2013, the credit union began slowly dripping funds from cash into its benefits pre-funding investment portfolio. Over that first year, the account contributed $1.95 million to the credit union’s net income in spite of the volatile market late in 2014 and the intentionally gradual investment. In all, VanZandt has been pleased with the result of improved long-term investment growth potential and high return on investment.
After the Great Recession ended in 2010, General Manager George Isola of $132 million TruNorth Federal Credit Union, Ishpeming, Mich., encountered the same challenge credit union leaders across the nation were faced with: a slow lending market, incredibly small interest margins, and a resultant low return on assets that reflected the market situation.
Isola noted that TruNorth FCU’s “ROA had declined to 37 basis points in 2011, compared to 52 basis points for the NCUA peer group,” and earnings of 75 to 100 basis points “in the good old days.” He and his board looked for ways to improve ROA without increasing member fees or cutting back the credit union’s employee benefits package. Cutting back would have been an easy short-term solution, as the CU’s benefits package included competitive group health plans and a 401(k) in which TruNorth FCU contributed 9 percent of employees’ annual salaries, regardless of employee contributions.
However, Isola wanted to pursue a longer-term, sustainable solution that wouldn’t hurt employee morale and potentially increase turnover, which could ultimately have a negative effect on member service. In his search, he was intrigued by a benefits pre-funding seminar led by a CUNA Mutual Group representative and looked into various pre-funding options before settling on an investment portfolio.
Since 2011, the program has made an impact, and Isola says he wishes that he’d been able to start a benefits pre-funding program when he joined the credit union as general manager 22 years ago. Not only has benefits pre-funding prevented cuts to employee benefits and the risk of increased turnover that could affect member service, it is one of the reasons for an improved ROA of .67, which is .08 higher than peer average, according to the most recent NCUA statistics.
While ROA is an important number to Isola, he’s even more satisfied that TruNorth FCU has upheld its culture as a stable employer, where members are well taken care of by the same folks year after year.
John Pesh is director of Executive Benefits at CUNA Mutual Group. For more information about benefits pre-funding, contact him at 800.356.2644 800.356.2644 FREE, ext. 665.8223.