CUNA Comment Letter

NCUA’s Proposed Rule on Benefits for Employees of Federal Credit Unions

December 26, 2002

Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428

Dear Ms. Baker:

The Credit Union National Association appreciates this opportunity to comment on the National Credit Union Administration Board’s revised proposal regarding the authority of federal credit unions to engage in investments that are otherwise impermissible to fund employee benefit programs. CUNA represents over 90% of our nation’s more than 10,000 state and federal credit unions.

Summary of CUNA’s Position

Discussion of Key Points

This second proposal is a revision of the one issued in December 2001 and would clarify, as CUNA supported in our previous comment letter, that federal credit unions may provide employee benefit plans, such as deferred compensation and stock option plans, in addition to retirement benefits. We believe it is extremely important for credit unions to have the added flexibility to create benefit packages that are competitive in order to attract and retain talented employees and officers. Having funding options for benefit plans allows federal credit union boards to develop benefit plans that are rewarding for employees while consistent with prudent management and legal constraints. We believe credit unions and their employees will benefit from a wider range of options as the proposal provides. We also appreciate NCUA’s clarification that the added section on investments (Section 701.19(b)) applies to corporate credit unions as well as natural person federal credit unions.

While we support the Board’s efforts to provide reasonable investment options for federal credit unions to fund employee benefit plans that reflect the employee benefits marketplace, we have some concerns with the provisions in the revised proposal.

Section 701.19(c) of the proposal would allow a federal credit union investing to fund an employee benefit plan to purchase an investment that would otherwise be impermissible if the investment is directly related to the federal credit union’s obligation or potential obligation under the employee benefit plan and the federal credit holds the investment only for as long as it has such obligation under the employee benefit plan. We are concerned that this approach could result in limiting credit union options, rather than enhancing them. In previous legal opinion letters, NCUA has utilized its long-standing test that examines “whether a federal credit union is acting pursuant to its authority to provide retirement benefits to employees.-- We urge NCUA to revitalize this standard and substitute it for the “directly related-- test in the final rule. For example, this issue could be important in the context of Sec. 457(b) deferred compensation plans, in which the benefit is typically determined by contributions to the employee’s account, adjusted by investment earnings. In such plans, earnings do not always coincide with a particular investment product and thus may not be permissible under a “directly related test-- as provided in NCUA’s proposal. If NCUA retains the “directly related-- test, we request that it clarify that such plans would be permissible.

Unlike the 2001, the revised proposal would allow federal credit unions to make investments otherwise impermissible under statute or regulation to fund defined benefit plan not covered by ERISA fiduciary requirements. (Under defined benefit plans, a credit union typically promises to pay a specified dollar amount to an employee at a specified time.) However, those defined benefit plan investments must meet the following additional criteria: have a fixed rate of return, mature on or before the date of the employee benefit obligation and be rated by a nationally recognized statistical rating organization in one of the four highest rating categories. A federal credit union investing to fund a defined benefit plan that is not covered by ERISA may invest in a registered investment company or collective investment fund that restricts investments to those permitted by the rule, except for the maturity restriction. Although not included as a requirement for defined benefit plans not covered by ERISA, the revised proposal states that a federal should consider sufficiently diversifying its investments to control the risk of loss. Some of our member credit unions have expressed concern with Section(d) of the revised proposal that would prohibit the use of variable funding arrangements (arrangements that have exposure to the stock market, such as mutual funds) to fund non-qualified defined benefit deferred compensation plans. We understand that about fifty federal credit unions offer these plans. They have used these types of plans (including Sect. 457(f) discounted option plans under which they grant executives options to purchase certain property such as mutual fund shares at discounted prices at a future date) to supplement retirement income for their executives. There is concern that the subsection’s provisions would limit the ability of credit unions to attract and retain talented executives when they compete against other organizations for employees that are not subject to such restrictions.

In the revised proposal, the agency distinguishes between two types of employee benefit plans – “defined contribution-- employee benefit plans and “defined benefit-- employee benefit plans. As defined in the revised proposal’s Supplementary Information section, the difference between the two types of employee benefit plans appears to be that the risk of investment performance is on the employee under a defined contribution plan, whereas the risk is on the credit union under a defined benefit plan. In our view, the agency has not articulated a sufficiently compelling reason to make such a distinction in the rule and we do not believe it is necessary for reasons of safety and soundness or legal requirements. We believe that under either type of benefit plan, federal credit unions will continue to be vigilant in their compliance with safety and soundness standards to ensure that the investments they make on behalf of all employee benefit plans will be appropriate and secure and thus, the distinction between the two types of plans is not necessary.

If NCUA decides to retain the additional restrictions in the proposal as discussed above, CUNA strong recommends that they should only apply to such investments implemented on or after the effective date of the final rule. Regarding the restriction of a fixed rate of return to fund non-qualified defined benefit deferred compensation plans, if NCUA feels this limitation is necessary, then we urge that it consider permitting credit unions to offer variable funding arrangements under a pilot basis or allow credit unions that qualify for Reg-Flex status to offer such arrangements.

In summary, CUNA urges NCUA to incorporate into the final rule the changes we are recommending, which we believe are fully consistent with NCUA’s past legal interpretations and safety and soundness considerations. NCUA’s revised proposal contains several improvements and important clarifications for federal credit unions. Additional modifications as we are suggesting with enhance the ability of federal credit unions to offer employee benefit packages even further.

Thank, you for the opportunity to share our views on the proposal. If you have further questions or comments about our letter, please contact me at 202-508-6736.


Mary Mitchell Dunn
Senior Vice President and Associate General Counsel

cc: NCUA Board Chairman Dennis Dollar
NCUA Board Member Deborah Matz
NCUA Board Member JoAnn Johnson