October 18, 2019

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Employee Benefit Funding Trust

A Strategy to Recover the Cost for Employee Benefits

Understanding Alternative Investment Powers Under NCUA Part 701.19

NCUA Part 701.19 grants a Federal Credit Union the authority to make an investment that would otherwise be impermissible if the investment is directly related and intended to fund an employee benefit obligation. You may hold the investment for as long as the credit union has the actual or potential obligation. Upon discharge or termination of the obligation, the investment must be divested. Part 701.19 investments may be used to fund retirement plans as well as other employee benefits such as health care, disability protection and sick leave. To implement a liability-driven investment strategy to match earnings with future obligations, a 701.19 Investment would include allocation to stocks, corporate bonds and other asset classes, not permitted in your core investment portfolio to manage excess liquidity.

Why Consider Balance Sheet Allocation Outside U.S. Securities /Agencies

With decreasing loan to share ratios and declining investment yield, the interest margin for many credit unions is projected to be under stress this year and potentially over an extended period. Under Part 701.19, NCUA has given you the opportunity to allocate assets to investments which may improve interest margin and reduce the actual costs for employee benefit obligations. Proper utilization of this power will allow you to adopt a liability-driven investment strategy to recover the costs of employee benefits by matching investments to fund liabilities arising from employee benefits. With a 701.19 investment, you can reposition balance sheet assets to different asset classes, a core strategy for effective asset/liability management.

Ongoing Administration of the Employee Benefit Funding Trust

Annually, Members Trust Company will complete an analysis of the funding to verify the current balance is appropriate based on updated assumptions and investment returns. You will receive the necessary documentation each year to support that the funding in the Trust is in compliance with NCUA Part 701.19. Should the Trust be over or under funded by more than 10%, we will recommend either additional contributions or withdrawals to bring the funding to the proper level. In addition to this administration, we will conduct an annual Investment Review to verify the investment strategy and asset allocation for the trust investments remain prudent and appropriate to provide funding for the projected employee liability.

Investment Strategy for the Employee Benefit Funding Trust

Members Trust Company follows prudent investment standards and allocates assets across Exchange-Traded Funds (ETF) according to the objectives and guidelines established by you and documented in the Investment Policy Statement (IPS). Diversification of investments is a core practice in exercising our duty as an investment fiduciary under the prudent investment standard. For example, we diversify assets so that no more than 1% of the total portfolio is invested in any one stock. In addition to diversification, our strategy embraces transparency, low investment costs, and tactical asset allocation to manage long term investment risk. Our passive investment strategy coupled with tactical allocation has been adopted by many pensions and other large portfolio managers as this approach to investment, as opposed to active stock selection, has yielded optimum investment returns.