CFO Focus: How can we manage volatility in our pre-funded benefits portfolio?
A separately managed account with a stable value annuity ‘wrapper’ can help make these earnings more predictable over a longer period.
Total investments in pre-funded employee benefits programs have increased drastically as credit unions continue to navigate challenges in attracting and retaining talent amid rising benefits costs and tight labor market conditions.
In 2021, total assets in pre-funded benefits programs increased by over 24% from $21.92 billion to $27.25 billion and have continued to grow throughout 2022. As non-traditional investment allocations increase with the intent to offset the rising cost of hiring, retaining and rewarding talent, the potential for return variability and financial statement volatility also grows. While increasing your institution’s direct exposure to alternative securities may potentially provide higher returns, certain non-section 703 investments can also cause income statement volatility due to GAAP-required accounting designations.
Understanding your pre-funding investment authority
Since 2003, federal credit unions have had expanded investment authority to pre-fund employee benefit plan obligations under National Credit Union Administration regulation 701.19(c). Many states mirror this language, which allows credit unions to invest in otherwise impermissible asset classes and build a portfolio with a return profile more likely to keep pace with their rising benefits costs. There are two broad categories that credit union pre-funded benefits investments fall under: insurance assets and securities.
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