Attracting and retaining top talent has never been more challenging for credit unions, especially as the costs of employee benefits, from health insurance to retirement contributions, continue to rise. To stay competitive as employers while keeping long-term finances in check, many credit unions are turning to benefits prefunding strategies. By expanding investment options, prefunding creates opportunities to generate additional returns that help offset rising benefit costs, allowing credit unions to maintain or even enhance employee benefit packages while strengthening financial stability for the future.
What Benefits Prefunding Means
Benefits prefunding allows credit unions to invest in vehicles that would otherwise be off-limits, with the specific goal of offsetting staff-wide benefit expenses. Unlike supplemental executive retirement plans (SERPs), benefits prefunding does not apply to a single individual, it benefits the entire staff.
The concept was introduced more than 20 years ago when the NCUA provided regulatory language enabling credit unions to broaden their investment platforms for this purpose. The intent was simple: give credit unions more ways to grow income, so they could better cover rising benefit costs and remain competitive in attracting and retaining talent.
The excess earnings from these investments flow through the income statement and help cover expenses such as health insurance, dental, life insurance, or 401(k) matches. In practice, this means a credit union can offset a meaningful portion of benefit costs without drawing directly from operating income.
Offsetting Future Liabilities
With prefunding, the additional investment income provides flexibility in managing current and future liabilities. While the earnings are not tracked dollar-for-dollar against benefit expenses, the requirement is that the credit union’s benefit costs always exceed what is earned on the investments. This safeguard ensures that prefunding remains tied to its intended purpose—supporting benefit obligations.
The result is greater capacity to manage rising healthcare premiums, retirement plan contributions, and other benefits that impact the financial outlook of the entire institution. By strategically deploying prefunding, credit unions create a buffer that helps offset these long-term liabilities.
Enhancing Financial Stability and Risk Management
Prefunding also plays a vital role in strengthening financial stability. By accessing investments that offer higher yields than traditional permissible options, credit unions can generate returns that improve the bottom line while helping to offset employee benefit costs. Importantly, these investments remain an asset of the credit union, providing long-term flexibility and control over how resources are deployed in the future.
At the same time, risk management must remain central to the strategy. Each board should adopt an investment policy statement that clearly defines acceptable investment types, concentration limits, and the overall approach to managing risk. Liquidity is another key consideration. While prefunding strategies can provide attractive returns, boards must ensure that investment choices align with the credit union’s need to fund loans and respond to changing cash flow demands.
Determining How Much to Prefund
A common best practice is for credit unions to fund up to 25% of net worth through benefits prefunding. While exceeding this threshold is not prohibited, it often draws greater scrutiny during regulatory exams. Other factors, such as a credit union’s loan-to-share ratio, may also influence the amount of prefunding possible, since high loan activity may reduce available liquidity.
For state-chartered credit unions, it’s important to note that requirements may differ. Each credit union should review its state’s specific regulations to ensure compliance before establishing or expanding a prefunding program.
Accounting Considerations That Matter
From an accounting standpoint, investment structure matters. It’s also essential to understand the credit union’s risk tolerances, as investment options can range from fixed-returning products to structured or buffered products to marketable securities. Selecting the right mix requires balancing yield opportunities with the credit union’s appetite for risk and long-term financial objectives.
Many CFOs want to avoid income statement volatility, which can arise when certain investments—such as ETFs—must be marked to market through the income statement. A more stable approach is to use individual securities with defined maturity dates. These can be classified as “available for sale,” meaning price fluctuations are adjusted on the balance sheet rather than the income statement. Interest payments, however, still flow into the income statement, providing positive cash flow without introducing unnecessary volatility.
This flexibility allows boards to demonstrate that they are expanding the investment platform in a prudent way: generating more income without adding undue risk.
Emerging Trends in Prefunding
Over the past several years, there has been a clear shift away from ETFs and toward individual securities to reduce volatility. Boards also increasingly emphasize liquidity in their prefunding strategies, ensuring that investments can be accessed if lending or operating needs change quickly. At the same time, some credit unions are exploring buffered and structured products, which allow participation in market growth while providing guardrails to help manage downside risk.
These trends reflect a broader focus on aligning prefunding with both financial performance and operational agility.
Why Earnest Consulting Group
As with any investment-driven strategy, prefunding is only as effective as the planning and execution behind it. At Earnest Consulting Group, we bring one of the most comprehensive investment platforms available to credit unions, enabling boards to tailor prefunding strategies to their unique risk tolerance and financial objectives.
Beyond the platform itself, we conduct extensive due diligence on investment partners and individual securities, reducing risk for the credit union and saving boards the burden of evaluating options on their own. Our focus on credit union investments means we can act with the nimbleness and expertise required to keep strategies aligned with both regulatory expectations and long-term stability.
Position Your Credit Union for Long-Term Stability
Benefits prefunding isn’t just about offsetting today’s expenses; it’s about ensuring tomorrow’s liabilities don’t limit your credit union’s growth. By expanding investment options and carefully managing risk, prefunding empowers credit unions to stay competitive as employers, helping them offer strong, competitive benefit packages that attract and retain great employees, while also protecting their financial future.
Is your credit union exploring prefunding strategies? Connect with Earnest Consulting Group to discuss how we can design an approach tailored to your institution’s needs.
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. | CRN202809-9538299
