During credit union budget discussions, you’re always looking for those big expense items you can cut or reduce. What are your top three expenses? Will you have enough money for everything you need? Or, will you cut corners?
One of those top three expenses are your employee benefits. If employee benefits are one of the largest expenses, how much of a cost reduction can make a meaningful impact on the credit union’s ROA? And, equally as important, what can you do with the additional cash flow?
Return on Assets (ROA) is calculated by dividing annualized net income by average total assets. National credit union average (as of year-end 2018): 0.92%.
ROA is an important gauge of a credit union’s profitability. It shows how efficiently management is running the credit union by revealing how much income is generated for each dollar of assets deployed. In general, a higher ROA reflects management’s success at utilizing its assets to generate income.
Let’s look at an example of an actual credit union:
NE Credit Union example 2018
Assets: $1,797,705,514
Net Income: $11,502,678
ROA = 0.64
Employee Benefits Cost
2019 Renewal Rate: $4,405,068
2019 Actual Cost: $3,211,000
Savings: $1,194,068
*Credit Union changed to new benefits strategy in 2019, recommended by CU Benefits Alliance. It reduced cost by $1,194,068, which increased ROA by 9% to 0.71
As you can see, reducing your largest expenses obviously affects your bottom line and ROA.
The big question is whether you can get the same results. An even bigger question you must ask yourself, “Can I afford not to?”
According to the CU Benefits Alliance, most credit unions are paying too much for their employee benefits. Approximately 25% too much to be exact. For example, a credit union with 100 employees might save over $200,000 per year by changing a couple of key funding mechanics.
That’s not exactly a chump change.
Journal of the American Medical Association (JAMA), researchers from Humana Inc. and the University of Pittsburgh School of Medicine estimated the cost of waste in the United States health system. The study found that approximately 25 percent of health care spending can be characterized as waste – between $760 billion and $935 billion annually. The findings can be accessed by clicking here.
For the past several years, CU Benefits Alliance has been focused on leveraging the buying power of bringing multiple credit unions together to lower costs. If you need help in this area, contact CU Benefits Alliance.