For many credit unions, balancing the need to offer competitive employee benefits with the responsibility of protecting member value is a constant challenge. Rising healthcare and retirement costs can strain budgets, making it difficult to sustain meaningful total rewards programs without eroding profitability.
Prefunded benefits offer a strategic way to bridge that gap, strengthening benefit programs, improving financial flexibility, and supporting the long-term health of the credit union.
What Are Prefunded Benefits?
Prefunded benefits allow a credit union to invest a portion of its assets, typically up to 25% of net worth, into what are called non-703 investments. These investments fall outside the standard credit-union investment policy and can include a broader range of asset types such as equities, bonds, real estate, managed accounts, annuities, or Guaranteed Investment Contracts (GICs).
The purpose of these investments is to generate additional income that can be used to offset employee benefit costs. In other words, rather than paying for benefits entirely from operating income, the credit union uses earnings from these designated investments to fund benefit expenses.
This structure provides more flexibility than traditional funding methods and allows credit unions to take on a measured degree of additional investment risk to enhance their long-term financial position.
Compliance and Regulatory Considerations
Prefunding strategies must always operate within regulatory boundaries. Federal credit unions follow National Credit Union Administration (NCUA) guidance, which applies uniformly across the country. State-chartered credit unions, however, must navigate individual state regulations that may differ in scope or limits.
Before implementing a program, it’s essential to conduct a comprehensive compliance review to ensure that investment selections, risk levels, and reporting practices align with both federal or state-specific requirements. An experienced advisor, like the team at Earnest Consulting Group, can help tailor a strategy that meets these obligations while optimizing financial performance.
Aligning Investments with Risk and Return Goals
The flexibility of prefunded benefits opens the door to a wide range of investment vehicles, but with that flexibility comes the need for discipline. Each program should be customized to reflect the credit union’s risk tolerance, income goals, and overall financial strategy.
Commonly used vehicles include:
- Managed accounts overseen by third-party investment professionals
- Variable or fixed annuities
- Corporate-owned life insurance (QOLI)
- GICs (Guaranteed Investment Contracts)
By aligning investment choices with the organization’s financial goals, credit unions can capture additional earnings potential without compromising safety and soundness.
Key Questions for Board Members
When evaluating whether to add a prefunded benefits program to the compensation toolkit, board members should ask:
- How does this strategy fit within our overall financial position and risk profile?
- What is the worst-case scenario, and how would it affect solvency or member value?
- Who will manage and monitor these investments, and how frequently will performance be reviewed?
- Are we comfortable with the range of potential outcomes, from downside risk to upside potential?
Thorough due diligence and vendor vetting are essential to ensuring that the program enhances, rather than endangers, financial stability.
Broad Organizational Impact
While prefunded benefits are often linked to executive or key employee programs, their impact extends across the organization. By generating additional non-interest income, the credit union strengthens its overall financial position, creating opportunities for competitive pay increases, expanded benefits, and greater long-term stability for all employees.
Stronger financial performance also benefits members, allowing the credit union to reinvest in improved products, services, and community programs.
Avoiding Common Pitfalls
One of the most common pitfalls is a lack of understanding about how prefunded benefits work. Because these investments must be marked to market each month, performance fluctuations will appear directly on the balance sheet. Credit unions should fully understand how this may affect their financial statements and risk exposure.
Education is key. At Earnest Consulting, we emphasize board and executive training sessions to ensure all stakeholders understand how the plan functions, how returns are tracked, and how results are reported.
The Future of Prefunded Benefits
The prefunded benefits landscape evolves alongside the economy and the financial markets. As new products emerge and regulations adapt, ongoing review is essential.
Working with an innovative partner ensures that your program remains compliant, optimized, and responsive to new opportunities. At Earnest Consulting, our team conducts regular annual (and semiannual) reviews, benchmarking results, exploring new investment options, and advising boards on adjustments that can enhance performance and reduce risk.
Why Partner with Earnest Consulting Group
Unlike firms that implement a plan and move on, Earnest Consulting takes a hands-on, continuous-improvement approach. We help credit unions design, monitor, and refine prefunded benefit strategies that align with mission, risk tolerance, and member value.
Our annual reviews, ongoing education, and proactive communication help ensure that every plan continues to serve the organization’s evolving goals, today and into the future.
Interested in exploring how a prefunded benefits strategy could strengthen your total rewards approach? Contact us to start the conversation.
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
CRN202812-10000170
