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CUNA Regulatory Comment Call

September 26, 2002

EXECUTIVE SUMMARY

• The NCUA Board unanimously approved the issuance of a revised proposal amending its rule that permits a federal credit union (FCU) to provide reasonable retirement benefits to its employees and officers. In the proposed rule, NCUA clarifies that the scope of the rule is not limited only to retirement benefits but is more broadly applicable to other employee benefit plans. The intent of the proposed rule is to provide FCUs with flexibility to use safe, reasonable and efficient methods to fund their employee benefit obligations. The revised proposal is substantially similar to the proposal issued by NCUA in December 2001.
• The following are the main provisions of the revised proposal:
  
  

  • Under the proposal, the rule would be renamed "Benefits for Employees of Federal Credit Unions" to reflect current employee benefits terminology.
  • Where a FCU is the benefit plan trustee or custodian, the plan must be authorized and maintained in accordance with Part 724 (Trustees and Custodians of Pension Plans) of NCUA’s rules. Where the benefit plan trustee or custodian is a party other than a FCU, the benefit plan must be maintained in accordance with applicable laws governing employee benefit plans, including any applicable rules and regulations issued by the Secretary of Labor, the Secretary of the Treasury, or any other federal or state authority authorizing jurisdiction over the plan.
  • The FCU must comply with safety and soundness standards by ensuring that the kind and value of employee benefits it offers are reasonable given its size, financial condition, and the duties of its employees.
  • An FCU’s authority to offer and fund an employee benefit plan does not guarantee the permissibility of the plan under other laws, such as the Employee Retirement Income Security Act (ERISA) or the Internal Revenue Code.
  • The proposal incorporates positions taken by NCUA’s Office of General Counsel on FCU investments to fund employee benefit obligations. An FCU investing to fund an employee benefit plan obligation may purchase an investment that would otherwise be impermissible if the investment is directly related to the FCU’s obligation or potential obligation under the employee benefit plan and the FCU holds the investment only for as long as it has an actual or potential obligation under the employee benefit plan.
  • An FCU acting as a fiduciary of the plan must obtain appropriate liability insurance coverage according to ERISA. NCUA clarifies that Section 410(b) of ERISA describes certain kinds of insurance coverage but does not require any party to purchase insurance.
  • NCUA reminds FCUs with assets over $10 million that they are required to account for their employee benefit plans in accordance with generally accepted accounting principles (GAAP). FCUs with assets under $10 million are not required to follow GAAP for their employee benefit plans but are encouraged to do so.
  • Unlike the 2001 proposal, the revised proposal would allow FCUs to make investments, otherwise impermissible by statute and regulation, to fund a 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. An FCU 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, an FCU should consider sufficiently diversifying its investments to control the risk of loss.
  • As recommended in CUNA’s comment letter on the 2001 proposal, the revised proposal clarifies that the rule also applies to corporate credit unions.

• NCUA has extended the deadline for comments. Comments on this proposal are due to NCUA by December 26, 2002. Comments should be sent to Becky Baker, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. You may fax your comments to NCUA to (703) 518-6319 or e-mail them to regcomments@NCUA.gov. Please feel free to fax your responses by December 13, 2002 to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Senior Regulatory Counsel Catherine Orr at corr@cuna.com; or mail them to Mary or Catherine in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, N.W., South Building, Suite 600, Washington, DC 20004. You may also contact us if you would like a copy of the proposal or click here.

1. The proposal notes that as competition to attract and retain qualified employees has increased and the employee benefits marketplace has become more sophisticated, FCUs are increasingly providing more diverse and less traditional forms of employee benefits (such as deferred compensation plans and stock option plans). NCUA intends this proposal to provide needed flexibility to credit unions to fund their employee benefit obligations. Do you agree the proposal provides enough flexibility for your credit union to adequately fund employee benefit obligations given the competitive marketplace?
   
   Yes ______ No ______
   
   If not, what other modifications would you like to see incorporated into the rule to make it more flexible?
   
   

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2. Do you agree with the new proposed provision to allow credit unions to make investments, otherwise impermissible by statute and regulation, to fund a defined benefit plan not covered by ERISA fiduciary requirements?
   
   Yes ______ No ______
   
   If not, why not?
   
   

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3. Are there any other changes NCUA could adopt to make it easier for credit unions to manage their employee benefit plans?
   
   Yes ______ No ______
   
   If so, what are those changes?
   
   

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4. Are there any other things NCUA could do to assist credit unions in attracting and retaining highly qualified employees?
   
   Yes ______ No ______
   
   If so, what are they?
   
   

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5. Subsection (d) of the revised proposal 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 50 federal credit unions offer these plans. They have used these types of plans (including 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. Do you believe the subsection’s provisions would have the effect of limiting of the ability of credit unions to attract and retain talented executives?
   
   Yes ______ No ______
   
   Please elaborate. (Does your credit union offer such non-qualified defined benefit deferred compensation plans?)
   
   

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6. Other comments?
   
   

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