The Importance of IRAs; More Credit Unions Like the Share Stability They Provide in Any Economic Environment

WASHINGTON – The percentage of credit unions offering members the option of opening an individual retirement account has steadily risen over the last five years, contributing to an increase in average share balances and potentially providing more leverage during slow growth periods. Over the last five years, credit unions offering IRAs have risen from 55% to 60%, said Casey Connelly, vice president of industry analysis for Callahan & Associates Inc. The average balance of an IRA account is $10,577 compared to an “average member” holding $6,429 in their savings account. “Without these account balances, which provide longer terms and generate larger deposits, average share balances at credit unions would be almost $600 less, a decrease of 8.7%,” Connelly said. Connelly also said “having high average share balances can help promote internal share growth during slower periods, increase operational efficiencies through economies of scale and provide longer-term funds for innovative lending strategies.” “One way credit unions grow total share balances is through the dividends paid on existing share accounts,” Connelly said. “High average share balances, especially in longer-term, higher-yielding accounts (like IRA accounts) will increase the amount paid in dividends, which lead to the growth of that specific account.” In the early 1990s, Boston Edison Co., the parent company of $210 million Members Plus Credit Union in Boston, began offering its employees lump sum retirement packages, said Cathy Boucher, vice president of savings and electronic payments. As a result, the credit union – then known as Boston Edison Employees Credit Union – received a number of direct rollovers from its members. “A lot of that retirement money has stayed with us since then,” Boucher said. “Prior to the 1990s, members could take annuities from a pension. Members like the IRA because we can create a monthly income stream that mimics an annuity.” According to Callahan, Members Plus is ranked first in the nation for highest percentage of IRA balances at 48.26%. With 2,000 IRA accounts, the average balance is $40,150, the smallest being $75 (“a brand new payroll deduction” signee who is contributing $15 per week) and the highest at $887,240. Boucher said many of its members had worked for Boston Edison “for a bazillion years” and saw the credit union as reliable and a non-volatile outlet to pass some of their retirement money on to their heirs. The bulk of IRA growth at $100 million EMSBLA Credit Union in Milwaukee came through IRA rollovers from retired employees at its sponsor company, the Wisconsin Electric Power Co. during the mid 1980s, said Cindy Hildebrandt, IRA manager. EMSBLA was originally chartered as a savings and loan association in 1914 and converted to a state-chartered credit union in 1997. The EMSBLA acronym, which stands for Employees’ Mutual Saving, Building and Loan Association, was kept after the conversion because members traditionally referred to the S&L as `EMSBLA,’ Hildebrandt said. “We also obtained many contributory IRA accounts, beginning in the 80s, when you could contribute to IRAs with no income restrictions,” Hildebrandt said. EMSBLA is ranked third in the nation in highest IRA percentage of share balances for credit unions with more than $50 million in assets at 29.95% as of Dec. 31, 2003, the most recent data from Callahan. Hildebrandt said as of March 31, the credit union has 1,102 IRA accounts with the average balance being $20,5000, the smallest at $25 and the largest at $306,000. “In the past our rates have been a bit higher but we’re still pretty competitive within the marketplace,” Hildebrandt said. “I’m sure with technology, for some, it might be their choice (to open IRAs) at other places but I think there’s a sense of familiarity and reliability that members get from us. They feel comfortable knowing their funds are here.” Increasing the amount that the average member holds at the credit union can increase the size of share balances without necessarily increasing the amount spent to service the member, Connelly said, adding it does not cost twice as much to service a member who has $10,000 at the credit union versus a member who has $5,000. “That additional $5,000 can be used by the credit union to fund either investments or loans,” he said. “If that $5,000 is in a checking account, the credit union does not know how long those funds will be available since a member can withdraw it immediately. In an IRA account, the goal is to accumulate retirement wealth, so those funds are more stable and more likely to be available for use by the credit union for a long period of time, thus po10tially earning a higher yield and positively impacting the net interest margin.” Enticing interest rebates have been the lure for the past six years at $50 million Heritage South Federal Credit Union in Sylacauga, Ala, said Holly Calfee, marketing coordinator. Last year’s IRA interest rebate was 12%. Callahan ranks Heritage South seventh on its top 10 list of IRA balances with the accounts comprising 27.18% of total share balances. Of the 8,636 share accounts, 384 are IRA accounts, Calfee said. They currently offer a 2.96% dividend rate and 3% annual percentage yield. The average balance was $4,761 as of Dec. 31, 2003, according to Callahan. Callahan’s top 10 ranking of highest IRA balance holders lists credit unions from a range of asset sizes -from $50 million Heritage South to $1 billion Rahway, N.J.-based Merck Employees Federal Credit Union but overall, the fastest growth is coming from mid-size credit unions, Connelly pointed out. “Looking to become a viable option as their members’ primary financial institution, many credit unions have expanded their service offerings to provide a complete spectrum of financial services and products – including IRAs,” Connelly said. [email protected]