ALEXANDRIA, Va. – Federal credit unions have the authority to invest in a mutual fund as the underlying investment for a 457(f) plan, NCUA recently reminded. In an April 26 opinion letter, the regulator addressed the inquiry from Matadors Community Credit Union, which is a federally-insured, state-chartered credit union. NCUA used the context for FCUs for this particular FISCU. An FCU has statutory and regulatory authority to compensate its officers and employees and under this authority, investments made by an FCU to fund an employee benefit obligation are not subject to the investment limitations stated in the Federal Credit Union Act and NCUA regulations, the regulator said.

Consequently, an FCU can invest in instruments that are otherwise impermissible provided the investment directly relates to the FCU's employee benefit obligation. NCUA does limit investments by federally-insured corporate credit unions, including state-chartered corporate credit unions. The regulator's analysis for a natural person FISCU differs slightly from the analysis for an FCU and a federally-insured corporate in that if state law authorizes a FISCU to make an investment beyond what is authorized under FCUA or NCUA, the FISCU must establish and maintain a special reserve for nonconforming investments. Since FCUA and NCUA regulations authorize investments for employee benefit purposes, the special reserve requirement does not apply, the regulator said. “While corporate credit unions are subject to restrictions on investments made on their own behalf, we determined these restrictions did not apply to investments made for employee benefit purposes,” wrote NCUA Associate General Counsel Sheila Albin. “Additionally, we expressed the view that this analysis applies to state-chartered corporate credit unions assuming state law confers an analogous authority to provide employee benefits.” Albin cited two previous, related instances including permitting the use of a split dollar life insurance fund in a Jan. 13, 2005 opinion letter and allowing investment in a mutual fund in a May 11, 2000 correspondence. She also deferred the credit union to its state supervisory authority regarding the permissibility of the investment under state law and to other federal and state authorities concerning the applicability of laws such as the Employee Retirement Income Security Act and the Internal Revenue Code to the credit union's investment.