PRE-FUNDING EMPLOYEE BENEFIT OBLIGATIONS (EBO's) PATHWAY TO SATISFIED EMPLOYEES AND HIGHER REVENUE FOR CREDIT UNlONS
By Dennis Child, Research Specialist, TCT Risk Solutions, LLC
Like most businesses, Credit Unions desire to retain valued employees and generate profits to remain viable for the long term. An investment concept gaining momentum over the past 5+ years to help Credit Unions achieve their financial goals and offset rising EBO expenses is called (EBO) Employee Benefit Obligation Pre-Funding. TCT Risk Solutions, LLC provides online tools and strategic partnerships necessary to assure compliant and efficient implementation of EBO investment programs.
This article discusses methods a Credit Union may utilize to pre-fund specific employee benefit obligations EBO's, (present benefit costs and estimated future benefit costs) by redirecting a percentage of a credit union's 'excess liquidity'. Traditional Credit Union investment and deposit activities authorized under NCUA code section 703, including recent changes to NCUA subsection 701.19 allow credit unions investment opportunities that were previously ‘impermissible' to offset EBO rising costs.
What investment authority does NCUA Part 701.19 provide a Credit Union? Code section 701.19 investment authority states, A federal credit union investing to fund an employee benefit plan obligation is not subject to the investment limitations of the Act and part 703 or, as applicable, part 704, of this chapter and may purchase an investment that would otherwise be impermissible if the investment is directly related to the federal credit union's obligation or potential obligation under the employee benefit plan and the federal credit union holds the investment only for as long as it has an actual or potential obligation under the employee benefit plan. Note, State credit unions are not left out so long as they have ‘federal parity'.
According to NCUA (as determined by USC (29 USC 1002), the definition of employee benefits that a Credit Union may offset thru investments under code section 701.19 includes: a plan, fund or program established or maintained for the purpose of providing for its participants or their beneficiaries ... employee benefits such as medical, hospital, accident, disability, death, unemployment, vacation, education, day care, scholarships, prepaid legal, and more. Furthermore, USC 1002 also covers a plan fund or program which is established or maintained by an employer to provide retirement income to employees or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond. These benefits would. include: Employee Health Insurance Premiums, Dental and Vision Premiums, 40 l(K) Match Contributions, Post-retirement Health Care, Employee Life Insurance Premiums, 457(f) Non-qualified Deferred Compensation Executive Arrangements, Pension Plan Investments, Deductible Long and Short Term Disability Premiums, and H S A Contributions. (Source NCUA Regs.
Pre-funding employee benefit costs for the benefits offered to your valued employees as required by law, and/or those voluntary benefits you choose to offer as employee recruitment or retention tools assures benefits will be there when needed. Since benefits to be pre-funded include current as well as projected costs, a significant portion of a credit union's investment portfolio may be redirected from historically low yielding Cds to alternative investments offering potentially higher yields.
EBO pre-funding investments available to credit unions as expanded thru NCUA code section 701 .19 include the following:
- Actively managed diversified accounts
- Equities and Bonds
- Mutual Funds
- Exchanged traded Funds (ETFS)
- Split-dollar life insurance
- Corporate - owned life insurance
EBO pre-funding investments cont.;
- Key person life insurance
- Variable, Indexed and FIXED ANNUITIES
Fixed annuities which include a 100% return of principal provision are considered by many financial experts to be low risk investments similar to FDIC/NCUA backed savings accounts (CD's) and treasury Bills, Bonds & Notes. Fixed annuities are CD like investments offered only by insurance companies Similar to CD's, annuities pay guaranteed rates of return that often exceed certificates of deposits.
Additionally, many annuity liquidity options are much more attractive than their CD counter parts. By utilizing an annuity ladder investment strategy (similar to CD or Bond ladders) and staggering maturity dates, a credit union can measure and control interest rate and liquidity risk while earning higher rates overall.
Using fixed annuities in its EBO investment strategy, a credit union can boost investment income by as much as 60% depending on the percentage of its portfolio management allocates to such investments (maintain regulatory limits). A credit union can improve profitability in a number of ways with EBO pre funding strategies:
- Improves Investment Yield
- Diversifies investment Portfolio
- Improves Capital Ration
- Reduces Concentration Risk
As with all earnings strategies, and EBO program must address safety and soundness concerns and be implemented in conjunction with a systematic and comprehensive ALM Management program that manages risk as defined by the NCUA:
- Interest Rate Risk
- Liquidity Risk
- Compliance Risk
- Credit Risk
- Transactional Risk
- Strategic Risk
- Reputational Risk
TCT Risk Solutions, LLC provides management tools and services that allow credit unions to effectively manage all risks as defined by the NCUA. TCT delivers lnterest Rate Risk (IRR) tools online including:
- Limits Calculation Tool - which helps credit unions establish IRR limits that are empirically linked to its current financial condition.
- IRR Simulation Tool - which allows credit unions to model EBO investments and measure their Impact on IRR.
An EBO pre-funding program should be integrated with comprehensive liquidity management. TCT Risk Solutions, LLC provides a Liquidity Shock Testing tool online which includes:
- Balance sheet cushion measurement and monitoring
- Contingent liquidity measurement and monitoring
- Modeling of EBO impact on liquidity
- Modeling of anticipated liquidity needs
TCT Risk Solution, LLC Compliance Solutions supports EBO programs by:
- Creating policies that meet regulatory expectations
- Assisting in setting appropriate EBO limits
- Implementing monitoring tools to support an EBO program
When used as described by regulations, EBO pre-funding improves credit unions' profitability and is a prudent investment strategy adopted and approved by NCUA.
TCT Risk Solutions, LLC strategically partners with a number of entities to help credit unions achieve their objectives. One such strategic partner is Mosel Financial and lnsurance Services owned by Anthony A. Mosel. Tony has become an expert in EBO Pre-Funding strategies and can help credit unions across the country with their EBO related questions and planning. Competent and experienced resources should always be utilized when it comes to EBO Pre-Funding programs. Tony can be reached directly at - (208)488-0274 or email address - amosel@signatorfn .com. Website - WWW.MOSELFINANCIAL.COM
Amy Rapp, Virtual Corps.