Rising benefit costs, tightening margins, and growing competition for talent are pushing credit unions to think differently about how they fund employee benefits. For many, benefits prefunding has become a powerful tool to strengthen financial sustainability while supporting their mission to serve members and communities.
But like any investment strategy, prefunding is most effective when it’s aligned with long-term strategic goals, not treated as a one-time financial maneuver.
How Prefunding Supports Financial Sustainability and Mission
Prefunding allows credit unions to use a portion of their assets to invest in otherwise impermissible instruments under NCUA 703 regulations, with the goal of generating higher yields to offset employee benefit expenses.
This approach directly supports long-term financial sustainability by helping credit unions:
- Offset rising healthcare and benefit costs that can increase by double-digit percentages annually.
- Maintain or enhance employee benefit packages that attract and retain talent across all levels, not just executives.
- Strengthen overall member experience by ensuring stability in staffing, service, and operations.
When managed effectively, prefunding connects the dots between employee well-being, operational strength, and member impact, allowing the credit union to reinvest in its mission.
Connecting Prefunding to Strategic Priorities
A sound prefunding strategy doesn’t exist in isolation. It should align with the credit union’s broader objectives, whether that’s expanding membership, improving member value, retaining leadership, or planning for succession.
By generating additional income, prefunding can free up capital to:
- Fund richer employee benefits or maintain existing plans without financial strain.
- Support executive retention and succession initiatives.
- Advance strategic growth projects or community investments.
When tied directly to mission and measurable goals, prefunding becomes more than a financial instrument, it becomes an enabler of strategic progress.
Balancing Risk, Liquidity, and Return
There’s no single “best” investment for a prefunding portfolio. Each credit union must assess its risk tolerance, liquidity needs, and return expectations to find the right balance.
Boards should evaluate each investment option by asking:
- What is the expected rate of return?
- How much volatility can the credit union tolerate?
- What level of liquidity is available if circumstances change?
- How will market performance translate to the income statement?
Understanding the tradeoffs between stability and yield is key. Prefunding should support (not stress) the institution’s financial foundation.
Common Mistakes and How to Avoid Them
The most frequent issue with underperforming prefunding programs isn’t poor market performance, it’s inattention. Some credit unions set up programs years ago and never revisited them, even as market conditions changed.
Common missteps include:
- Relying on low-yield insurance products that no longer provide competitive returns.
- Failing to reassess portfolio performance and alignment with current objectives.
- Overlooking diversification opportunities that could enhance yield or reduce volatility.
Regular evaluation is essential. In many cases, updating outdated portfolios can triple or quadruple yield, unlocking significant income potential without increasing risk.
How Often to Review and When to Adjust
While prefunding portfolios are designed for long-term performance, they still require consistent oversight. A best practice includes:
- Quarterly reviews to monitor performance and make tactical adjustments based on economic or geopolitical shifts.
- Annual comprehensive evaluations to ensure the strategy remains aligned with balance sheet goals, liquidity needs, and benefit obligations.
Certain events, like major market volatility, leadership transitions, or regulatory changes, should also prompt a mid-cycle reassessment. Prefunding isn’t a “set it and forget it” investment; it’s a living component of a credit union’s financial ecosystem.
When Prefunding Becomes a Long-Term Advantage
Credit unions that view prefunding as a sustained strategic initiative, rather than a short-term financial tactic, see the strongest results.
The most successful programs:
- Anticipate long-term liabilities such as rising healthcare costs.
- Establish investment timelines that match those obligations.
- Continuously reinvest to keep performance and mission aligned.
By treating prefunding as a permanent mechanism to balance expenses and income, credit unions can maintain financial strength, offer competitive benefits, and deliver greater value to members year after year.
Partnering with the Right Advisor
A well-designed prefunding strategy requires expertise that spans investments, regulatory compliance, and credit union operations.
Independent advisors like the experienced team at Earnest Consulting Group help boards and leadership teams:
- Evaluate investment options that align with their specific risk and liquidity profile.
- Conduct stress tests and performance reviews to validate portfolio resilience.
- Ensure ongoing compliance and transparency with NCUA guidelines.
With an experienced partner, credit unions can confidently manage prefunding programs that generate consistent value and advance their long-term goals.
Build a Prefunding Strategy That Strengthens Your Mission
Prefunding is more than an income tool, it’s a strategic asset that allows credit unions to invest in their people, their stability, and their future.
Earnest Consulting Group helps boards align prefunding strategies with organizational vision and financial health, ensuring every dollar contributes to sustainable growth and stronger member outcomes.
Contact us to learn more about how we help credit unions design and manage effective prefunding programs.
Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. Earnest Consulting Group is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies. Supervisory address: 280 Congress Street, Suite 1300 Boston, MA 02210 | Phone 617.439.4389. CRN202811-9918896
