3 minutes
More than 10 years ago, National Credit Union Administration Rule 701.19 went into effect. It gave federally chartered credit unions the ability to purchase investments that would otherwise be impermissible under parts 703 and 704 of NCUA’s rules and regulations, as long as these investments directly relate to the credit unions’ obligation or future obligation to support employee benefit plans, including such things as health insurance and 401(k) plans.
Over the years, there hasn’t been much discussion about the regulatory expectations, which include board oversight and approval of a credit union’s associated investment policy used to fund the pre-funding plan. This is due in large part to the Great Recession, which occurred shortly after 701.19’s implementation. At the time, the financial crisis dampened credit unions’ interest in new types of investments.
Now, with the improving economic environment and the increasing need to retain and attract top talent, credit union interest in investments with higher yields to help improve employee benefits has grown. So has regulator interest. Examiner directives related to lack of due diligence and/or board and management oversight on pre-funding arrangements are now much more prevalent.
In the current environment, we suggest credit unions take three steps:
First, determine whether a pre-funding program is needed, based on your credit union’s specific financial situation. Being able to demonstrate to examiners that you have a need for a program is where you build the foundation of a successful safety and soundness discussion. Once you’ve determined that a program is necessary for the long-term strategic success of your credit union, create an investment policy with the board and management team involved in its oversight. Documentation of your research and analysis in developing the policy will provide further support and justification to the examiners.
The program’s investment policy should include, at a minimum, concentration limits, required due diligence, qualified obligations and exit strategies. Due diligence may include the following:
- independent legal opinion on the policy;
- complete asset/liability management and cost-benefit analyses;
- research and evaluation criteria of the different investment vehicles, products and vendors;
- assessment of how the investments could affect reputation risk.
An important next step to satisfy your examiners is to demonstrate a direct relationship between the benefit obligations and the investments. Obligations can include a credit union’s expenses for such benefits as life, health and disability insurance, as well as retirement plans and executive benefits. A way to tie the benefit obligations to the investment amount is the expense-offset method, which is a formula whereby the credit union directly compares the actual benefits expenses to the actual earnings generated through the plan’s investments on an annual basis.
Finally, you need to demonstrate a thorough understanding of the risks associated with your entire pre-funding arrangement – ranging from the program structure to the investments used to fund it – in the context of your credit union’s particular circumstance. This means understanding the due diligence process and maintaining documentation that can be provided to the examiners. This documentation will show that not only did you conduct appropriate due diligence upon plan inception, but that you are maintaining your due diligence and oversight on an ongoing basis.
Some credit unions will use a third-party vendor to educate and counsel them along the way. Be advised that working with a vendor does not exempt you from any fiduciary responsibility.
Rob Rusch is associate general counsel for CUES Supplier member and strategic provider CUNA Mutual Group, Madison, Wis. Fill out an online interest form to learn more about Executive Benefits Program and CUNA Mutual Retirement Solutions, in partnership with CUES.
