By Ray Birch
DALLAS—As healthcare and other employee benefit costs continue to rise faster than inflation, more credit unions are taking a closer look at a little-discussed tool tucked into federal rules: employee benefit pre-funding accounts that can be invested more broadly than a traditional credit union bond portfolio.
But according to Robert Perry, principal at ALM First, the bigger story may not be that more institutions are exploring the strategy—it’s that some are being shown structures that may be too costly, too complicated or too opaque for what should be a long-term institutional portfolio.
“These are institutional investors,” Perry said. “If you can’t get your hands around something that’s being shown to you that might be invested in that portfolio, it’s probably better to stay away. If it’s too good to be true, there’s probably a reason.”
Under NCUA rules, employee benefit pre-funding programs give credit unions expanded investment authority beyond what is normally allowed in a regular core bond portfolio, allowing them to hold portfolios that can include investment-grade credit, securitized credit and even some equity exposure. Perry said the idea is to give credit unions a way to build portfolios with higher expected returns than a standard bond book in order to help offset rising employee benefit costs, especially at a time when healthcare and other expenses are often climbing far faster than inflation.
Business Management
For Perry, that makes the issue less about investing and more about business management.
“You’re not just a banker, but you’re also running a business,” he said. “You have employees, you have staff, you have to give back not just to the member, but give back to the employees.”
In Perry’s view, that is one reason more institutions are looking harder at these programs now: CEOs are under pressure to preserve competitive benefit packages even as margins tighten and medical renewals arrive with double-digit increases.
The same broader investment framework can also apply to charitable donation accounts, or CDAs, though Perry noted those are generally smaller and more constrained, capped at 5% of net worth and intended to support community giving. In practice, he said, the two types of portfolios often resemble institutional models already familiar in other corners of finance: employee benefit pre-funding accounts can look more like pension-style portfolios, while charitable donation accounts may resemble endowment-style structures.
What worries Perry is not the existence of the tools themselves, but what sometimes gets wrapped around them. He said some strategies pitched into the space rely on insurance or annuity-style structures that can layer in fees, reduce transparency or create liquidity tradeoffs that may not make sense for a tax-exempt institution.
Perry said credit unions should be wary of what he called the “shiny objects” that sometimes get pitched into these portfolios.
“Some of them are sold a bill of goods,” he said, adding that if an asset manager cannot clearly model expected returns or explain the structure in plain terms, “we tend to stay away from those things.”
Practical Advice
He also questioned why some credit unions are being sold products modeled after bank-owned life insurance concepts, noting that banks may enjoy tax advantages from those structures that do not translate the same way for credit unions. Perry said that has long made it seem odd to him when insurance-heavy products are pitched to tax-exempt institutions, especially when some offerings also resemble retail-style annuities that may carry higher fees and less flexibility than a more traditional institutional portfolio approach.
For Perry, the practical advice is less about chasing a specific product than applying basic portfolio discipline: keep fees low, understand the expected return assumptions, favor transparent structures and avoid solutions that are difficult to explain to a board.
Over decades, he noted, even seemingly small extra fees can materially erode results in portfolios designed to sit on the balance sheet for years.
“Have a clear vision, understand what’s going on in the portfolios, seek transparency into how it’s working, minimize the fees and build reasonable structures inside of these portfolios—that’s my best advice,” Perry said.