3 tips to enhance talent management & boost margins
Offering competitive employee benefits is essential to attracting and retaining a great team. Now more than ever, it’s vital for credit unions to extract the maximum value possible from their investment portfolios to keep pace with growing employee benefits expenses. NCUA regulation 701.19(c) permits federal credit unions expanded investment authority to pre-fund employee benefit plan obligations. Many states mirror this language, which allows credit unions to invest in otherwise impermissible asset classes and build a portfolio with a return profile more likely to keep pace with their rising benefits costs.
Here are a few tips to help you get the most from employee benefits pre-funding plans:
- Evaluate Your Options
There are two broad categories that credit union pre-funded benefits investments fall under: insurance assets and securities. Insurance products have long been used by financial institutions, mainly in the form of institution-owned life insurance (COLI/BOLI/CUOLI). Most purchasers of these products are attracted by “guaranteed” returns and accounting friendliness, but a deeper dive might leave you thinking otherwise.
Policies can be structured in a variety of ways, generally with complex administrative and legal architecture. Life insurance products are tax shelters, which is a strong selling point for taxable entities such as banks. However, this feature is often misaligned with the needs of credit unions, raising the question: Is traditional institution-owned life insurance the best investment vehicle for employee benefits pre-funding?
- Define Your Risk Appetite
Separately managed investment portfolios have seen increasing popularity in recent years as an alternative to insurance products, offering more transparency, simplicity, and customization at lower overall costs. There is no regulatory cap on the aggregate size of 701.19(c) investments for federal charters, and nearly unlimited strategy options based on risk appetite and return objectives. As such, preliminary conversations between the Board of Directors and executive management team should center around risk preferences and education before defining and implementing a strategy.
- Establish a Direct Relationship
According to regulations, a direct relationship between the benefit obligation and investment must be established, meaning that the portfolio return cannot exceed the current or potential benefit expense obligation. Once a strategic direction is determined and guidelines established, the maximum portfolio size by strategy is dictated by the benefit expense divided by the anticipated investment return. Strategies with lower risk exposure, and therefore lower anticipated returns, will warrant a larger maximum portfolio size to extinguish the benefit obligation as compared to a higher risk, higher anticipated return strategy. It is best practice to right size the portfolio based on risk preferences rather than take on added risk to limit the footprint of the portfolio.
No matter your risk appetite, strategy selection, or investing approach, non-traditional investment portfolios require prudent policy development, risk management, reporting, and education. As your institution ventures to establish or expand your prefunded benefits strategy, working with a knowledgeable partner to explore your unique needs, evaluate your options, and build a safe and sound program is always a best practice.
Want to learn more? Contact ALM First.
