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Insight on Plan Design & Investment Strategy
Updated: 8 hours 59 min ago

Brokers Being Asked to Do More to Cut Health Benefit Costs

Tue, 2020-02-18 13:53

Helping employees choose the right health benefit plan for their needs can result in cost savings for both employees and employers.

Findings of a DirectPath survey show benefits brokers are being relied on to help with the enrollment process, as 45% said their employer clients “highly rely” on them for help managing open enrollment. In particular, brokers said their employer clients are looking for more help with benefits communications (92% in 2020 versus 81% last year), engaging employees on benefits choices (87% vs. 80%), and selecting the right plans for employees (81% vs. 73%).

Brokers are also seeing an increased demand for personalized benefits education and enrollment and benefits communications services—97% and 96%, respectively, which are increases from last year.

“With benefits literacy at a low, it’s not surprising that benefits communications are a significant concern to employers. Benefits information needs to be conveyed using as much plain, easy to understand—which can be difficult when you consider all the technical jargon surrounding health insurance and other employee benefits language. And if benefits communications are confusing, it’s going to make it harder to engage employees on their benefits choices, since they won’t fully understand their coverage,” DirectPath says in its survey report.

But help with communications is not the only way employers are asking benefits brokers to help control costs. Eighty-three percent of brokers say clients “highly rely” on them to contain health care costs—an increase from 66% last year.

In addition, employers are demanding help from brokers in achieving better price transparency. Eighty-four percent of brokers are seeing moderate to high demand for transparency services, up from 74% last year. Sixty-two percent of brokers say they’re adding new product and service offerings to meet the increased demand for price transparency.

The survey results reflect a changing broker model. Seattle-based Dave Chase, co-founder of Health Rosetta, which promotes reforms for the U.S. health care system, says there is an ongoing move away from traditional benefits brokers to benefits consultants. He says employers should strive for a transparent broker relationship, high performance plan design and a good administrator of benefits, and he suggests questions employers should ask their benefits brokers.

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Categories: Industry News

Franklin Templeton Acquires Legg Mason

Tue, 2020-02-18 11:29

Franklin Resources Inc., a global investment management organization operating as Franklin Templeton, has entered into a definitive agreement to acquire Legg Mason Inc. for $50 per share of common stock in an all-cash transaction. The company will also assume approximately $2 billion of Legg Mason’s outstanding debt.

The acquisition of Legg Mason and its multiple investment affiliates, which collectively manage more than $806 billion in assets as of January 31, will establish Franklin Templeton as one of the world’s largest independent, specialized global investment managers with a combined $1.5 trillion in assets under management (AUM) across one of the broadest ranges of investment teams in the industry. The combined footprint of the organization will significantly deepen Franklin Templeton’s presence in key geographies and create an expansive investment platform that is well balanced between institutional and retail client AUM.

In addition, the combined platform creates a strong separately managed account business.

“This is a landmark acquisition for our organization that unlocks substantial value and growth opportunities driven by greater scale, diversity and balance across investment strategies, distribution channels and geographies,” says Greg Johnson, executive chairman of the board of Franklin Resources Inc. “Our complementary strengths will enhance our strategic positioning and long-term growth potential, while also delivering on our goal of creating a more balanced and diversified organization that is competitively positioned to serve more clients in more places.”

Jenny Johnson, president and CEO of Franklin Templeton, says, “This acquisition will add differentiated capabilities to our existing investment strategies with modest overlap across multiple world-class affiliates, investment teams and distribution channels, bringing notable added leadership and strength in core fixed income, active equities and alternatives. We will also expand our multi-asset solutions, a key growth area for the firm amid increasing client demand for comprehensive, outcome-oriented investment solutions.”

During a conference call, Jenny Johnson said Franklin Templeton spent a significant amount of time reviewing its options and determined Legg Mason was the best fit for its strategic plan. The company has been working with Legg Mason on the agreement for several months. It is part of a multiyear strategic plan for which Franklin Templeton identified key growth initiatives.

She added that the transaction brings together two especially complementary platforms. “We realized multiple strategic objectives in one transaction—acquiring several companies as well as a holding company,” Johnson said.

Joseph A. Sullivan, chairman and CEO of Legg Mason, says, “The incredibly strong fit between our two organizations gives me the utmost confidence that this transaction will create meaningful long-term benefits for our clients and provide our shareholders with a compelling valuation for their investment. By preserving the autonomy of each investment organization, the combination of Legg Mason and Franklin Templeton will quickly leverage our collective strengths, while minimizing the risk of disruption. Our clients will benefit from a shared vision, strong client-focused cultures, distinct investment capabilities and a broad distribution footprint in this powerful combination.”

With this acquisition, Franklin Templeton will preserve the autonomy of Legg Mason’s affiliates, ensuring that their investment philosophies, processes and brands remain unchanged. The company says it has spent significant time with the affiliates and there is strong alignment among all parties in this transaction and shared excitement about the future of the company.

For example, Terrence J. Murphy, CEO of ClearBridge Investments, a Legg Mason affiliate, says, “As part of Franklin Templeton, we are confident that we will retain the strong culture that has defined our success as a recognized market leader in active equities. Their commitment to investment autonomy, augmented by the scale and reach that the combined organization will provide, will allow us to deliver for our existing clients and expand our ability to deliver our investment capabilities in new channels and regions. We are very pleased to join the team at Franklin Templeton and excited about what we can do together.”

Western Asset Management Co. and Brandywine Global Investment Management, affiliates of Legg Mason, bring high assets in fixed income to the deal, and Clarion Partners brings real estate investments. “We are third overall in separately managed accounts,” Johnson said during the teleconference.

“Given all the strategic benefits and new capabilities, it makes the resulting company not only larger but far stronger. We will be a true leader in multiple asset categories,” she stated.

“We will have a wide range of strong performing strategies,” Johnson said, noting that 86% of Legg Mason assets under management have been beating their benchmarks. In addition, the deal transforms Franklin Templeton’s institutional business to meet the size of its retail business—creating a 50/50 institutional/retail mix. “Clients will have a broader range of investment choices,” she added.

As with any acquisition, the pending integration of Legg Mason’s parent company into Franklin Templeton’s, including the global distribution operations at the parent company level, will take time and will commence only after careful and deliberate consideration.

Johnson pointed out to teleconference attendees that Franklin Templeton has a history of large acquisitions, meaning it “understands the complexity involved in successful execution. She said Greg Johnson will play a key role in the execution of the deal.

Following the closing of the transaction, Johnson will continue to serve as president and CEO, and Greg Johnson will continue to serve as executive chairman of the Board of Franklin Resources Inc. There will be no changes to the senior management teams of Legg Mason’s investment affiliates. Global headquarters will remain in San Mateo, California, and the combined firm will operate as Franklin Templeton.

However, EnTrust Global, a Legg Mason affiliate that provides alternative investment solutions, and Franklin Templeton jointly agreed that it was in their best interest that EnTrust repurchase its business, which will be acquired by its management at closing. EnTrust will maintain an ongoing relationship with Franklin Templeton.

Franklin Templeton notes that while cost synergies have not been a strategic driver of the transaction, there are opportunities to realize efficiencies through parent company rationalization and global distribution optimization. These are expected to result in approximately $200 million in annual cost savings, net of significant growth investments Franklin Templeton expects to make in the combined business and in addition to Legg Mason’s previously announced cost savings. The majority of these savings are expected to be realized within a year, following the close of the transaction, with the remaining synergies being realized over the next one to two years.

The transaction has been unanimously approved by the boards of Franklin Resources Inc. and Legg Mason Inc. It is subject to customary closing conditions, including receipt of applicable regulatory approvals and approval by Legg Mason’s shareholders, and is expected to close no later than the third calendar quarter of 2020.

Johnson noted during the teleconference that the deal also offers growth in international markets, such as the UK, Japan and Australia. “Our focus is to grow for many years to come,” she said.

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Categories: Industry News

District Court Dismisses Fidelity FundsNetwork Revenue Sharing Challenge

Tue, 2020-02-18 10:55

The U.S. District Court for the District of Massachusetts has ruled in favor of Fidelity Investments’ motion to dismiss a consolidated lawsuit alleging it is receiving “secret” or “kickback” payments from mutual fund providers on its FundsNetwork platform.

The ruling comes about eight months after Fidelity filed its dismissal motion, which has successfully argued the firm is entitled to negotiate and collect revenue-sharing fees from mutual fund companies in exchange for access to its “mutual fund supermarket,” as well as for its administrative services. Plaintiffs in the case argued, unsuccessfully, that Fidelity’s ability to influence its own compensation collected via the FundsNetwork platform makes the firm a fiduciary to retirement plans investing in funds via the platform—which in turn would restrict the types of fees it could collect.

Several lawsuits filed against the firm in recent years have claimed revenue-sharing payments tied to the FundsNetwork platform violate the prohibited transaction rules of the Employee Retirement Income Security Act (ERISA), as well as the statute’s fiduciary rules. In its dismissal motion, Fidelity argued that it is entitled to negotiate and collect these fees, and that siding with the plaintiffs in the consolidated lawsuit would be detrimental to retirement savers because of the potential chilling effect on the vibrant mutual fund marketplace.

The dismissal ruling explains that in January 2017, Fidelity began charging mutual funds “infrastructure fees,” which are calculated based on the assets of the plans invested in the mutual funds. Case documents show Fidelity negotiates these fees with mutual fund managers, and that Fidelity has tripled the amount of the infrastructure fees charged to mutual funds since January 1, 2017—first by doubling them effective January 1, 2018, and then increasing them by another 50% effective January 1, 2019.

Plaintiffs in the case argued that mutual fund companies pass on the additional costs of the infrastructure fees to retirement plan clients through their investment fees, with the result that the plans and their participants ultimately pay more (via higher expense ratios) than they agreed to pay in their investment contracts. The Fidelity defendants, on the other hand, argued the case should be dismissed for a failure to state a claim upon which relief can be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6).

In the ruling, the District Court explains that the essence of the plaintiffs’ first theory of liability is that by requiring the payment of infrastructure fees from mutual funds that participate in FundsNetwork after the plans have entered into their contracts with Fidelity defendants, these defendants have unilaterally increased the amount of their compensation from the plans. As such, the plaintiffs contend that Fidelity is a fiduciary under ERISA “by virtue of its discretion and exercise of discretion in negotiating/establishing its own compensation by and through its setting of the amount and receipt of the infrastructure fee payments.”

“Plaintiffs’ first theory fails because they concede that defendants negotiate the payment of infrastructure fees with the mutual funds,” the ruling states. “Plaintiffs’ theory also fails because the complaint does not plausibly allege that the mutual fund managers who pay the infrastructure fees to Fidelity are required to pass on the costs of the fees to the plans or to the participants who invest in their mutual funds. Rather, the decision of whether to pass on those costs is made independently by the mutual fund managers, not by Fidelity. Plaintiffs have therefore failed plausibly to allege that defendants unilaterally control the terms of the compensation they receive from the plans. Without such control, defendants are not fiduciaries with respect to the compensation they receive from the plans.”

The decision notes that the plaintiffs’ second theory (also unsuccessful) is that the defendants are fiduciaries with respect to their use of omnibus accounts through which plan investments are made.

“This theory also fails because plaintiffs do not allege that, as directed trustees of the omnibus accounts, defendants fail to follow the instructions they receive from plan sponsors and participants as to which mutual funds are selected for investment, or how the investments should be allocated,” the ruling states. “Nor do they allege that defendants improperly redirect the investments of plan participants, like plaintiffs, through the omnibus accounts from mutual funds managed by companies that do not pay infrastructure fees to mutual funds managed by companies that do. The court therefore rejects plaintiffs’ second theory of defendants’ fiduciary status.”

The plaintiffs’ third theory is that the Fidelity defendants are plan fiduciaries because they control the menu of investment options available to the plans. This theory also fails, because the relevant contracts make clear that it is the plan sponsors—not the defendants—who select which investment options are made available to the plans’ participants from the FundsNetwork.

“Selecting the funds available on the FundsNetwork Platform does not, without more, transform Fidelity into a fiduciary,” the ruling concludes. “As several other courts have held, having control over the broad menu of investment options from which plan sponsors may choose their plan’s investment options does not transform a platform provider into a functional fiduciary.”

The full text of the dismissal ruling is available here.

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Categories: Industry News

SURVEY SAYS Rejuvenating Yourself at Work

Tue, 2020-02-18 03:30

Last week, I asked NewsDash readers, “Do you hit a slump during your work day, and if so, what do you do to rejuvenate yourself?”

The vast majority (91.7%) of responding readers said they do hit a slump during their workday. The most popular way to rejuvenate themselves, according to the survey, is to take a walk (78.8%). Nearly four in 10 (39.4%) said they drink coffee and one-third take time to socialize with coworkers.

Nearly two in 10 (18.2%) said they listen to music to rejuvenate themselves at work, 15.1% take an actual out-of-the-office lunch break, 12.1% each selected take a short nap during lunch and drink a soda or energy drink, and 6.1% said they rest their eyes.

Asked to share other ways they rejuvenate themselves during the work day, responding readers shared:

  • Drink a cup of tea or have a piece of chocolate
  • Getting up and moving around is the best solution for a workday slump.
  • I run three flights of stairs on the way back from every restroom break.
  • Hide the lobster. We have a few office ‘left behind or found ‘ toys including a rubbery red lobster. Always a fun mental break to hide the lobster somewhere unexpected or somewhere that JUMPS out at a coworker.
  • I take a walk to the kitchen and look out the window for a few minutes.
  • Take a short nap in the mid-afternoon.
  • Some days, just moving my desk to the standing position and standing while working will rejuvenate me.
  • Getting out of the building at lunch
  • Looking at my to-do list and goals always puts me right back to work!
  • Stretch, breathe deeply, stand, walk
  • I just need to get up & walk around to refresh & wake up!
  • Drink a lot of water

A big thank you to the readers who said in verbatim comments that they take time to read the NewsDash to rejuvenate themselves. Other ideas for rejuvenating were also left in the comments. A couple of readers talked about how “resting your eyes” can end up being a longer pick-me-up than planned. Editor’s Choice goes to the reader who said: “Getting out of the building at lunch is priceless.”

Thank you to all who participated in our survey!


I tend to hit a slump around 3:00 in the afternoon. A little walk, chatting with colleagues, or a shot of ice water all can be rejuvenating. The better solution would be to get adequate sleep at night. Easier said than done of course.

I usually read the summary of recent benefits-related lawsuits in NewsDash. The descriptions of the ridiculous “reasoning” used in these suits (by both lawyers and judges) usually gets me so disgusted and angry that I am quite alert for the remainder of the day.

Completely switch gears, work on a different topic, read NewsDash.


To make me laugh and stay alert, I play the “Hump day” commercial with the camel.

A healthy lunch goes a long way to keeping you alert in the afternoon!

I take a walk around the building a couple of times during the day to break things up and get the blood flowing again.

Inevitably the slump hits after lunch, usually around 2:00.

Some people view naps negatively as a sign of laziness, but I find a 15-minute nap totally rejuvenates me and makes me much more productive for the rest of the day. Better to have 15 minutes of downtime than 60 minutes of lethargy.

I usually get a second wind around 5pm and end up working until 7pm (after arriving between 7:30a and 8:00a).

I found during my college years that I can either fight the mid-day slump and be unproductive for an hour or take a 20-minute power nap, have some coffee, and refresh my productivity.

It’s not easy. Some days I can’t rest my eyes because if I close them I’ll be out in 30 seconds.

I have “rested my eyes” during a meeting or training class that was longer than needed in a room that was slightly dark where the material was dull or stretched to fill a timeslot that was longer than necessary. Back then I was not confident enough to get up and leave the room for a walk. Today I would indeed, leave the meeting/training and take a quick walk…. and perhaps not return if the discussion or training material is not beneficial to my role. I would also complete the survey that is sent out following the meeting to create awareness that if the presentation/training can be covered in 20 minutes…. Don’t stretch it to an hour.

Get up and move! We all sit at our desks way too much, just a couple minute stroll around the office works or up and down a flight of stairs wonders and is great for your health.

When I am on a deadline, I don’t experience a work day slump. But on those days when work is slower and there are no pressing deadlines is when I feel a work day slump after lunch in the afternoon. One way to deal with the work day slump is to change which project I am working on.

Getting out of the building at lunch is priceless, a bit of reading and a 10 minute nap, I’m a new person in the afternoon

Wellness rooms are popular, yet I do not see employers rushing to allow them to be used to rejuvenate when you hit that slump. What about other cultures – doesn’t the siesta help to rejuvenate??

I eat a light snack of mixed nuts. I avoid caffeine and sugar.

Coffee doesn’t do it for me! But my co-worker gets 3 lattes a day at the Starbucks kiosk in our cafeteria.


NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Institutional Shareholder Services (ISS) or its affiliates.

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Categories: Industry News

Retirement Industry People Moves

Fri, 2020-02-14 12:38
Thompson Hine LLP Hires Attorney to EBEC Practice

Thompson Hine LLP has added Dominic DeMatties to the firm’s Employee Benefits & Executive Compensation (EBEC) practice, based in Washington D.C.

In addition to private practice experience, he previously worked at the U.S. Department of the Treasury’s Office of the Benefits Tax Counsel.

“Dominic was at the center of significant rulemaking and policy discussions related to retirement plans, employee stock ownership plans [ESOPs] and executive compensation at the U.S. Department of the Treasury’s Office of the Benefits Tax Counsel,” says Washington D.C. Partner in Charge David Wilson. “He has a unique expertise in ESOPs and multiemployer plans, which complements the firm’s industry leading EBEC practice. Our clients will benefit from his deep knowledge of policy, legislation and regulation for practical advice on crucial benefits and compensation issues.”

DeMatties focuses on providing legal consultation regarding the design, implementation and administration of a wide range of employee benefit programs, with an emphasis on tax-qualified and nonqualified deferred compensation (NQDC) arrangements. As an attorney-adviser in the U.S. Treasury’s Office of the Benefits Tax Counsel, he has helped develop and implement retirement plan policy and guidance. His work concentrated on ESOPs, hybrid pension plans, governmental plans, 409A, 457(f), nondiscrimination, multiemployer plans and defined benefit (DB) plans generally. His work included close collaboration with attorneys from the Office of Chief Counsel at the IRS and IRS actuaries, as well as professionals at the Pension Benefit Guaranty Corporation (PBGC) and the Department of Labor (DOL).

“Joining Thompson Hine allows me the opportunity be a part of a strong cohesive, well-respected employee benefits practice group with a leading ESOP practice,” says DeMatties of his decision to move to the firm. “Another major attraction was the firm’s culture and its focus on innovation in changing the delivery of the legal services model, particularly the focus on efficiency, transparency and predictability. My clients will benefit greatly from this platform.”

This announcement falls on the heels of other recent additions to the Washington office who also have significant government experience. Thompson Hine recently announced the additions of White-Collar partner Joan Meyer, a former federal prosecutor; and a transportation safety team made of Timothy H. Goodman, former National Highway Traffic Safety Administration (NHTSA) assistant chief counsel for litigation and enforcement; and  William L. Godfrey, former NHTSA division chief.

DeMatties received his juris doctor degree from Georgetown University, his master’s from Rochester Institute of Technology and his bachelor’s from State University of New York at Geneseo.

HealthSavings Appoints Senior Sales VP

HealthSavings Administrators (HealthSavings) has appointed Britt Trumbower as senior vice president of sales. His appointment comes as the company continues to expand its customer base, reaching a critical milestone of more than $900 million in assets under management.

“With account balances that are five times higher than the industry average, HealthSavings has an unmatched offering for accountholders at every stage of their health savings journey,” Trumbower says. “Education is a critical factor in helping brokers, consultants and employer groups take a more nuanced view of how an HSA can be put to work for people at all ages, stages and income levels.”  

As senior vice president of sales, he will be responsible for cultivating deeper relationships with strategic partners and growing the company’s market reach.  

Prior to joining HealthSavings, Trumbower served as a regional sales director at HealthEquity, where he established and grew health savings account (HSA) adoption with brokers, partners and large employers in the New York region.

“The market is ready for a more nuanced approach to HSAs that will help all Americans realize the advantage of using HSA tax breaks to pay for health care needs both now and in the future,” says E. Craig Keohan, chief revenue officer at HealthSavings. “Britt Trumbower will fuel growth momentum at HealthSavings through his intrinsic knowledge of the overall benefits landscape and his tenacity for cultivating sales territories, leading sales teams and delivering effective educational tools will help cement our market leadership for years to come.”

Trumbower resides in Bear Creek, Pennsylvania, and earned his bachelor’s degree in business administration from Bloomsburg University. 

AllianceBernstein Appoints Senior Officials to Responsible Investing

AllianceBernstein L.P. (AB) has announced two senior appointments to the firm’s Responsible Investing platform.  

Michelle Dunstan has been appointed global head of Responsible Investing and Sharon Fay will assume the role of chief responsibility officer. The appointments of the two established senior investors further demonstrate AB’s commitment to building the firm’s capabilities in this important area and will help to drive its responsible investing efforts forward.

As global head of Responsible Investing, Dunstan will partner with Fay, overseeing AB’s responsible investing strategy, including driving the firm’s research and stewardship activities. Dunstan joined AB in 2004 and has nearly 25 years of industry experience. She is currently a portfolio manager for the Global ESG Improvers portfolio, as well as a senior research analyst for the Value portfolios.

As chief responsibility officer, Fay will lead and oversee the firm’s responsible investing strategy, while working closely with senior leadership to ingrain responsible investing into the everyday global activities of the firm. She has spent three decades at AB and has served in a number of leadership roles, including CIO of Equities and her current role as co-head of Equities.

Both leaders have served the firm as established senior investors for decades and will transition into their new roles in mid-2020.

”Responsible investing is key to our long-term strategy, both as a corporation and as an investor. Being a responsible corporation and a responsible investor go hand in hand. Under Sharon’s and Michelle’s leadership, I am confident we will continue our efforts in identifying new and better ways to respond to the evolving needs of our clients, colleagues and communities,” says Seth Bernstein, president and CEO of AB.

Top ERISA Attorney Joins Jackson Lewis P.C.

Jackson Lewis P.C. has announced that Howard Shapiro has joined the firm’s New Orleans office as a principal.

Shapiro has almost 40 years of experience in the employee benefits litigation space. He joins the firm from Proskauer, where he was co-leader of the firm’s national ERISA [Employee Retirement Income Security Act] Litigation practice and the office managing partner in New Orleans. Shapiro will serve as co-leader of Jackson Lewis’ ERISA Complex Litigation Group alongside René E. Thorne.

“Howard is a first-rate, nationally acclaimed ERISA litigator and we are excited that he has joined Jackson Lewis,” say Firm Co-Chairs William J. Anthony and Kevin G. Lauri in a joint statement. “His arrival at the firm elevates the firm’s national ERISA litigation capabilities and was the key factor in our decision to augment our existing ERISA litigation team by creating the ERISA Complex Litigation Group. René and Howard worked together closely in other firms for more than a decade, honing their complex ERISA litigation skills. The firm is dedicating significant resources to the newly formed ERISA Complex Litigation Group.”

The ERISA Complex Litigation Group has immediate and ready access to the firm’s entire Employee Benefits Practice Group and the Class Actions and Complex Litigation Practice Group to address comprehensive client needs in the ERISA litigation space.

Shapiro’s practice focuses on the defense of large, sophisticated ERISA class actions. He defends “bet-the-company” litigation where damages are potentially material. His cases involve the defense of defined benefit (DB) plans, 401(k) plans and 403(b) plans, and also he has also defended litigation involving health and welfare plan issues. He has defended cases involving:  breach of fiduciary duty; breach of the duty of loyalty; prohibited transactions; 401(k) plan asset performance, fees and expense issues; 403(b) plan asset performance, fees and expense issues; defined benefit plan asset issues, accrual issues and cut-back issues; cash balance plan issues; ESOP [employee stock ownership plan] litigation; fiduciary misrepresentation claims; preemption issues; executive compensation litigation, both pension and welfare claims; directed trustee claims; retiree rights litigation; severance plan class actions;  Section 510 cases; and complex benefit claim cases. 

“When I retired from Proskauer, I considered a wide range of options and quickly decided that Jackson Lewis was the right firm to continue my national ERISA litigation practice,” Shapiro says. “I have worked with René, Office Managing Principal Charles Seemann and several other attorneys in the New Orleans office, at various law firms since the 1990s. The opportunity to ‘put the band back together’ was outcome determinative as the firm now has among the finest collection of ERISA litigation talent in the country. I am delighted to reunite with my former colleagues as we launch Jackson Lewis’ ERISA Complex Litigation Group.”

Shapiro received his juris doctor degree from Loyola University New Orleans College of Law, his master’s from McGill University and his bachelor’s from Tulane University. 

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Categories: Industry News

Trump’s 2021 Budget Proposes Increasing Multiemployer PBGC Premiums

Fri, 2020-02-14 10:58

The 2021 federal budget that President Donald Trump has proposed includes a measure that would improve the solvency of the Pension Benefit Guaranty Corporation (PBGC) by increasing the insurance premiums paid by underfunded multiemployer pension plans by $26 billion over 10 years.

The Department of Labor (DOL) says PBGC premiums are currently far lower than what private financial institutions would charge for insuring the same risk. If the premiums were increased, DOL says, PBGC would be able to fund the multiemployer program for the next 20 years.

DOL notes that the multiemployer program covers 10 million participants and is in dire financial condition. Its deficit in 2019 was $65.2 billion, with only $2.9 billion in assets and $68 billion in liabilities. If nothing is done to repair the program, it will become insolvent by the end of 2025, DOL says.

Currently, multiemployer plans are paying a flat rate of $30 per participant. The budget proposes creating a variable rate premium (VRP), as exists in the single-employer program, and an exit premium

The multiemployer VRP would require plans to pay an additional premium based on their level of underfunding, up to a cap that would be indexed to national average wages. An exit premium, equal to 10 times the VRP cap, would be assessed on employers that withdraw from a plan to compensate the insurance program for the additional risk imposed on it when employers leave the system and cease making plan contributions.

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Categories: Industry News

DB Plan Sponsors Turn to Private Markets for Return

Fri, 2020-02-14 05:00

Although the headlines on defined benefit (DB) pensions often depict a shrinking universe, as sponsors de-risk their plans through liability-driven investing and pension risk transfers, plenty of DB plans remain open and add new layers to their benefit liabilities each year. Accordingly, sponsors continue their contributions and need portfolio destinations offering growth through risk in the markets.

For years, DB plans have unwound their exposures to public equities, and diverted some of their risk investments into alternative assets such as private equity, real estate and hedge funds, among others. These can offer not only diversification away from volatile equities, but risk-adjusted returns that are superior to public market counterparts.

The listed equity cutback continues, especially in reaction to several years of stellar returns pushing the U.S. stock market to great heights. But sponsors’ attraction to alternatives has driven their valuations higher, too, leading investors to rethink prospective returns and investment approaches. “Market valuations are high across the board, and we’re hard-pressed to see a repeat of strong recent returns,” says Jon Pliner, senior director of investments in the New York office of Willis Towers Watson. “So we think owning a robust portfolio of alternatives, where one or two assets aren’t dominating the risk, gives a plan the best opportunity to succeed.”

Managers of alternative assets have raised capital in prodigious amounts from investors globally—for the three years that ended December 2019, totals reached $1.9 trillion in private equity, $438 billion in private real estate, $272 billion in infrastructure and $359 billion in private credit, all according to Preqin, a firm researching alternative assets. U.S. DB plans have taken their share. Since the passage of the Pension Protection Act of 2006, a watershed for funding rules and asset allocation, U.S. DB plans have raised their allocations to private equity from less than 3% to nearly 6%, and in private real estate from 4% to 5%, as reported by consultants CEM Benchmarking, Toronto (through year end 2017, its most recent tally).

Hedge funds are a contrary example: Owing to several years of disappointing returns, DB funds’ hedge fund allocations slipped from a peak of 8.4% in 2014 to 6.6% in 2017. Hedge fund analytics firm HFR reports that hedge funds as a group suffered net capital outflows of over $100 billion from 2016 through 2019, the first since the financial crisis.  

Still, “The marginal dollar going into DB plans is most likely being invested in the private markets,” observes Andrew McCulloch, portfolio analyst and partner at Albourne Partners in Norwalk, Connecticut. “For institutions overall, a lot is devoted to private equity, while for DB plans in particular, more is going to private credit. And infrastructure in particular is attractive, given its ability to lock in long-duration assets, with links to inflation.”

“There’s no obvious place to invest in the private markets, in that nothing is screamingly cheap,” says Sona Menon, head of the North American Pension Practice at Cambridge Associates in Boston. “That said, there is more room for excess return. The difference between the return of the average manager and the first quartile can be several hundred basis points, so the premium for private market illiquidity can be quite high. But getting into the right investment and manager is probably more critical now than ever before.”

All the adoration for alternative strategies brings consequences. One is a rising price of investments. “Private equity managers today are paying twice the valuations they were in 2007,” notes David Lindberg, managing director in the Pittsburgh office of consultants Wilshire Associates. That means forward return expectations may be marked down, he adds, but, “Investors may still think they can get more from private equity than public equity.”

Second is a buildup of private asset capital waiting for investment, or “dry powder” in the industry’s argot. Preqin reports a mountain of dry powder in the private equity market of $1.4 trillion, or more than twice the amount managers were able put to work in 2019. “There is an unlimited amount of capacity,” Pliner observes.

Notwithstanding all the attention paid to alternative assets, the largest risk-seeking allocation for DB plans as a group, and for many individual plans, is still listed equities. CEM Benchmarking reports that at year end 2017, the large U.S. DB plans in its survey held about 42% of assets in public equity, well down from 60% in 2007. Within public DB plans, public equities made up 40% of assets, according to the database of the Center for Retirement Research at Boston College, versus 60% in 2007.

Investors’ disappointment over actively-managed equity strategies has been well publicized, and it’s the active group that has suffered nearly all the outflows, say researchers at eVestment, an investment data firm. Net flows to passive strategies, however, have hovered around breakeven for the past several years.

“Funds are more than 50% passive in large cap stocks, and for good reason,” observes Alex Beath, senior research analyst at CEM Benchmarking. “Over the very longest term, those portfolios have earned under two basis points in annual return, and net of fees, lost 37 basis points.” Small caps have fared far better, returning 53 basis points net of fees over time.

Recent performance letdowns notwithstanding, consultants continue to advise DB clients to stay the course with active managers, and allocate broadly across growth, value, quality and momentum styles. “Active management continues to be a key tool for generating returns, particularly in a time when many expect future market returns to be lower than those of the past,” Pliner says. “Value won’t be out of favor forever, and we think owning a broader range of fundamental factors offers a better opportunity to outperform.”

“We lean toward public equity portfolios that are largely active,”  Menon says. “We don’t think of the large cap market as more efficient, because there are plenty of large cap managers who can beat their benchmarks. The managers we choose invest with a high active share and run portfolios that are truly different from the indexes.” She adds: “In 2019, equity performance was concentrated in a few technology stocks, and that makes a strong argument for not wanting to own the entire market—just the attractive parts.”

Bridging the public and private markets are strategies constructed from academically robust risk premia, or factors, such as value, momentum and volatility exploited across the equity, fixed income, credit, currency and commodity markets. “Managers can build strategies that earn absolute returns that are modest, but uncorrelated with other markets,” says McCulloch. “DB plans like them for their liquidity, and that they charge low fees.”

McCulloch also points to additional private markets that are outside the mainstream, such as aviation leasing, insurance or pharmaceutical royalties. These out-of-the-way markets might call for even more education to make investment committees comfortable but are notable for the low volatility and correlation in their returns to public equities. “Although there’s still a lot of interest in conventional private equity, we’re having more conversations with sponsors on these ‘esoteric’ private market strategies that offer higher returns than many public market strategies.”

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Categories: Industry News

Why Nonprofits May Prefer a 403(b) Plan Over a 401(k)

Thu, 2020-02-13 22:00

Cammack Retirement Group was founded in the 1960s specifically to specialize in 403(b) plans for nonprofits and, today, while the practice has expanded to cover 401(k) plans, many of the advisory practice’s clients are still nonprofits.

A common question that comes up is whether clients should offer a 403(b) plan, a 401(k) plan or both, says Mike Webb, a vice president with Cammack.

The question typically comes up because another practice has solicited Cammack’s clients to offer a 401(k) plan, Webb says. Cammack will then sit down with the client to go through the pros and cons of both offerings.

The biggest driver of offering a 403(b) plan is the fact that such plans are not subject to nondiscrimination testing, he says. For nonprofit hospitals with highly paid physicians, nonprofit museums with highly paid directors and nonprofit institutions of higher learning with highly paid professors, a 403(b) plan is the better choice. 401(k) plans, on the other hand, are subject to nondiscrimination testing and even if the sponsor offers a match, that leads to yet another test, the average contribution percentage test, he notes.

Large, more complex nonprofits are a different story, however, Webb says, because they are likely to have a for-profit affiliate. For instance, many hospitals acquire physician groups. Churches commonly have publishing houses, and museums have gift shops. Because employees of a for-profit entity cannot participate in a 403(b) plan, the only retirement savings option for these entities is a 401(k), so in these cases, Cammack will recommend that the nonprofit division have a 403(b) plan, while the for-profit division be served with a 401(k).

However, there is one other consideration to keep in mind when having the 403(b) versus 401(k) debate, and that is the fact that, except for 403(b)(9) church plans, 403(b)s can only invest in fixed and variable annuities and mutual funds. Physicians and professors, in particular, are often keen on investing in individual stocks and bonds, Webb notes. In addition, “401(k) pricing can be very attractive,” he says.

Inevitably, Webb concludes, this is a question that comes up every year, and it is a consideration those who advise nonprofits need to be familiar with.

A blog that Webb has written about this subject can be found here.

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Categories: Industry News

Friday Files – February 14, 2020

Thu, 2020-02-13 15:08

Fixing a zipper with a fork, a dog picture illusion, and more.

In Clearwater, Florida, a 73-year-old man told his wife, 68, he wanted a separation from marriage. You might say the wife’s reaction was over the top. As the couple argued over the separation, the wife “pulled out a taser and drive stunned him several times,” according to a criminal complaint charging her with aggravated domestic battery, the Smoking Gun reports. The court filing does not indicate whether Carr’s husband was injured as a result of the tasing.

In Marshfield, Wisconsin, a woman driving along a street crashed into a toilet left in the middle of the lane. She told police she was distracted by another toilet left in the opposite lane when she crashed. According to ONFOCUS, the investigating officer indicated he believed the two toilets were left in the road deliberately, as both were upright and intact prior to the collision.

Fix a broken zipper with a fork. If you can’t view the below video, try

A dog with a pig snout, or an oddly turned head?

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Categories: Industry News

Reasons to Consider a QSEHRA for Small Business Health Benefits

Thu, 2020-02-13 14:16

In 2020, the IRS implemented increases in allowance caps for the qualified small employer health reimbursement arrangement (QSEHRA) for both single employees and employees with a family. Companies are allowed to reimburse single employees $5,250 per year and employees with families $10,600 per year in 2020.

According to PeopleKeep’s 2020 QSEHRA Annual Report, one of the most powerful benefits of a QSEHRA is the ability employers have to set an allowance cap that fits their budget. As a result, they never have to worry about exceeding it. And as long as they are in line with, or below the government-regulated allowance cap, the QSEHRA allows small businesses to compete with larger employers with robust benefits packages.

The report shows that employers have a low chance of paying out the full budgeted allowance amount. Only 18% of single employees and 19% of employees with a family used their entire allowance.

In 2019, the average allowance amount for single employees was $280/month and $514/month for employees with a family. And in 2019, each HRA participant averaged at least one reimbursement per month, totaling 12 average reimbursements, per employee, for the entire year.

QSEHRAs permit employees to use their allowances for both premium and non-premium expenses, which is not possible under a group health benefit. According to the PeopleKeep report, the five most common non-premium reimbursements employees submitted were for prescription drugs, medical office visits, chiropractic care, dental care and mental health counseling. “These expenses speak well to the unique appeal that an HRA has for employees. Since individual health insurance covers a broad range of medical care, it is important that small business owners have resources like the qualified small employer HRA to offer a way for employees to make their health care affordable,” the company says.

In its first state-by-state analysis, PeopleKeep compared the top five states by the highest average allowance amounts with the highest individual health plan premium costs. The company says this is important to review because businesses in states with high health expenses should increase allowance amounts as a result. Results of the comparison show that businesses in Rhode Island, North Dakota and Connecticut are doing well to correlate the allowances they offer with the cost of health insurance in their states.

The company says its report shows the QSEHRA enables small businesses to effectively compete with larger businesses offering group health insurance.

The report may be downloaded here.

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Categories: Industry News

Investment Product and Service Launches

Thu, 2020-02-13 14:07
iShares Expands ESG Initiatives

iShares announced it will expand its environmental, social and governance (ESG) ETF lineup and enhance its existing ESG funds.

“Sustainable investing has reached an inflection point as investors better understand the increasing impact that ESG-related risks have on asset pricing, and account for these risks in their portfolios,” says Armando Senra, head of Americas iShares at BlackRock. “That has translated into growing demand for iShares sustainable ETFs and the need to offer greater choice to make sustainability our standard for investing.” 

iShares plans to debut three fossil fuel-screened ETFs under a new “advanced” product range that seek to track indices with extensive screens, including palm oil, for-profit prisons, controversial weapons and increased controversy score requirements. These proposed funds will apply the most screens of any iShares ESG ETFs in the United States and will offer exposure to U.S., developed and emerging markets companies.

Additionally, iShares is rebranding its Sustainable Core ETFs as “aware.” Aware ETFs seek to track indices that include companies that exhibit favorable ESG characteristics and are then optimized to offer a similar risk and return profile to broad market indices. The aware range was introduced in October 2018 with seven ESG ETFs across equities and fixed income and was designed to offer low-cost building blocks for investors to construct broad, diversified and sustainable portfolios.

MSCI will also be implementing, to the indices of these funds, additional screens to exclude companies with thermal coal and oil sands revenue exposure, iShares says. The new screens will be effective on March 2.

T. Rowe Price Announces Enhancements to TDFs

T. Rowe Price will enhance its target-date portfolios to help improve retirement outcomes and address the headwinds investors face in achieving retirement security, including longevity risk, inflation risk and market risk.

Over a two-year period, T. Rowe Price will gradually increase equity exposure in the Retirement and Target portfolios’ glide paths early in the accumulation years and post-retirement and add emerging markets and U.S. large-cap core equity strategies to further diversify the underlying investments.

Based on T. Rowe Price’s research, the company will raise the equity allocation of the retirement glide path at the start of the investing lifecycle to 98% equity, from the current 90% equity. The 98% equity allocation will be held constant until 30 years from retirement and maintain a 55% equity allocation at retirement. Additionally, the company will raise the equity allocation after retirement, reaching a final 30% equity allocation 30 years past retirement, an increase from the current 20% allocation.

The target glide path will also see an increase to 98% and hold that equity allocation constant until 35 years from retirement. It will maintain a 42.5% equity allocation at retirement and then raise the allocation after, reaching a final 30% equity allocation 30 years past retirement.

The transition will occur over a two year period starting in April. Portfolios closest to retirement will not experience an increase in equity from their current levels, while other vintages/dates will adjust their equity allocations gradually each quarter. As a result, many investors will see no change to their current equity allocation.

T. Rowe Price has also announced the addition of two investment strategies to the underlying building blocks of several target-date products; Emerging Markets Discovery Stock will be added to all the firm’s target-date strategies and U.S. Large-Cap Core will be added primarily to actively managed strategies (Retirement Funds, Retirement I Class Funds, Retirement Income 2020 Fund, Retirement Trusts, Target Funds, and Target Trusts).

For its Retirement and Target mutual funds, T. Rowe Price is moving to a top-level fee structure in which expense ratios will no longer vary depending on the management fees and expenses of the underlying funds. The new fee structure will be implemented in April.

As a result of this change, none of the firm’s target-date portfolios will experience an increase in expense ratios, and some will see their expense ratios decrease.

Swan Global Investments Reduces CIT Fees

Swan Global Investments (Swan) has announced a reduction in fees for Class 1 & Class 2 of the collective investment trusts (CITs) within the Swan Defined Risk Collective Investment Trust, effective as of February 1.

The net management and trustee fee reductions are 47 basis points for Class 1 and 32 basis points for Class 2. That is approximately 49% savings and a 45% savings in trustee and management fees in Class 1 and Class 2, respectively.

The defined risk strategy (DRS) investment approach, behind the Swan Defined Risk Collective Investment Trust strategies, actively seeks to mitigate downside risk and create a gentler investor experience when markets are in turmoil. Swan Defined Risk CITs also seek to smooth returns over market cycles. Consistency of rolling returns helps to address timing risk associated with different enrollment and retirement dates, as well as limiting “statement shock,” encouraging participants to remain invested and on track to meet their goals.

“Loss aversion and protecting investors’ irreplaceable capital is really important for fiduciaries, plan sponsors and retirement advisers alike,” says Gib Watson, chief strategy officer at Swan. The company follows a three-pronged approach to the investment strategy, matching the different investment objectives of plan participants, then providing a defined risk strategy to enable protection and applying it to major equity asset classes, Watson adds.

Effective February 1, the following fees will be reduced as follows in Class 1:

Fund Name

Prior Trustee/Manager Fees

Current Trustee/Manager Fees

Fee Reductions

SWAN Defined Risk Income




SWAN Defined Risk Conservative




SWAN Defined Risk Moderate




SWAN Defined Risk Moderate Growth




SWAN Defined Risk Aggressive Growth




Effective February 1, 2020 the following fees will be reduced as follows in Class 2:

Fund Name

Prior Trustee/Manager Fees

Current Trustee/Manager Fees

Fee Reductions

SWAN Defined Risk Income




SWAN Defined Risk Conservative




SWAN Defined Risk Moderate




SWAN Defined Risk Moderate Growth




SWAN Defined Risk Aggressive Growth




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Categories: Industry News

Record Balances Raise the Stakes for DC Plan Investors

Thu, 2020-02-13 13:44

Fidelity Investments has released its quarterly analysis of retirement plan savings trends, showing that positive savings behaviors among employees, enhancements to workplace savings plans and strong market conditions in the closing quarter of 2019 caused average account balances to reach record levels yet again.

Fidelity’s data also shows significant balance increases during the 2010 to 2020 decade, reflecting the fact that people who have either entered the market after or remained invested since the Great Recession have been handsomely rewarded.

As of the end of Q4 2019, the average 401(k) balance in Fidelity’s book of business rose to $112,300, a new record high and a 7% increase from the previous quarter’s balance of $105,200. The year-over-year average balance increased 17% from $95,600 in Q4 2018, Fidelity reports.

Also notable is that the average individual retirement account (IRA) balance also rose to a record $115,400, a 5% increase from last quarter and 17% higher than the $98,400 balance one year ago. The average 403(b)/tax exempt account balance increased to $93,100, up 6% from last quarter and an increase of 18% from Q4 2018.

Positive Behaviors Add to Strong Market Gains

The account growth figures are heartening, says Kevin Barry, president of workplace investing at Fidelity Investments, but even more impressive is the fact that employees’ positive savings behaviors are driving the record growth essentially in equal measure as the stock market’s momentum.

“The growth in savings levels over the last 10 years demonstrates the positive impact of taking a long-term approach to retirement, and recent Fidelity research demonstrates workers who do so have reason to feel increasingly confident about their retirement readiness,” Barry says. “However, as we enter a new decade and continue to see markets rise and fall, it’s more important than ever to remember some of the important elements of a successful retirement strategy.”

Barry says these important elements include maintaining consistent savings habits and avoiding the temptation to time the markets; ensuring one’s account has the right balance of stocks, bonds and cash; and continuing to focus on and refine one’s long-term savings goals.

Fidelity’s data shows the average employee savings rate reached a record 8.9% in Q4 2019, while the average total savings rate (i.e., employee contributions plus company match) reached 13.5%, tying the record level last reached in Q2 of last year. Over the course of 2019, 33% of plan participants increased the amount they are saving, with the average increase just over 3%.

The data further shows that, of the workers who increased their savings rates, 40% proactively took steps to do so on their own, while 60% had their savings rate automatically increased through a service within their employer’s retirement savings plan.

Long-Term Savers Shine

Fidelity’s quarterly updates consistently underscore the power of long-term investing, even for those who can only contribute modest amounts on a monthly basis.

In Q4 2019, among individuals who have been in their 401(k) plan for 10 years straight, the average balance reached a record $328,200, topping the previous high of $306,500 from last quarter. Among women in the data set, the average 10-year 401(k) balance grew to $261,000, an increase of 21% from a year ago and the first time the average balance for this group passed the quarter million-dollar mark.

The average 401(k) balance for Millennials who have been in their 401(k) plan for 10 years straight reached $149,800, another record high. Among individuals saving in 403(b)s (or other plans offered by not-for-profit employers) for 10 years straight, the average balance increased to $191,700, nearly five times the average balance for this group in Q4 2009.

No Time for Complacency

While Fidelity’s data gives industry stakeholders reason to celebrate, the promotion of positive savings behaviors among participants remains essential. This is especially true as the equity markets experience bouts of volatility, as was the case last month.

According to the Alight Solutions 401(k) index, a volatile January on Wall Street prompted 401(k) investors to increase ill-timed day-trading activities. There were five days of above-normal activity during the month, which was three more than the combined total of the last four months of 2019.

Investors transferred 0.17% of their balances as a percentage of starting balances. In what seem to be ill-timed trades, they favored fixed income on 12 of the trading days, or 57% of the trading days. Overall, asset classes with the most trading inflows in January included bond funds, which took in 77% of the inflows, followed by target-date funds (TDFs) and international equity funds.

While it makes sense that investors want to purchase safer assets when the equity markets grow volatile, the middle of such a volatility spike is often the worst time to make such trades. Indeed, U.S. bonds were up 1.9% during January—meaning many investors have presumably purchased more expensive bonds that have recently gone up in price. On the other hand, many 401(k) traders seemingly missed a chance to purchase discounted equities, as U.S. small cap equities were down 3.2% during the month, and international equities dropped 2.7%.

What Comes Next

Looking ahead, asset managers seem to agree that they do not expect a recession in the coming year, but they do expect more modest growth in the markets paired with increased volatility—which could shift opportunities to small caps, value stocks and cyclical sectors.

For example, BMO Global Asset Management says that the economic expansion of the past two decades is unlikely to be repeated and that central banks are running out of monetary policy options for the next global economic showdown. The firm’s leaders say that while the U.S. economy has slowed, they do not foresee a recession in the coming year. In fact, given the dovish shift of central banks and reasonable corporate earnings, BMO remains broadly positive on equities and neutral on government bonds due to stretch valuations and ultra-low yields, the firm says in its annual Global Investment Forum outlook report.

In its Solving for 2020 report, Neuberger Berman says it expects increased market volatility in the coming year and the possibility for a recession in 2021 and beyond. Like BMO and many others, Neuberger Berman expects modest economic growth in 2020, and that this will shift investors’ attention to focus on fundamentals and to look more favorably on smaller companies, value stocks and cyclical sectors.

Analysts agree volatility could lead to vast opportunities for liquid alternative strategies, and full equity market valuations could make private market investing more attractive. In fixed income markets, Federal Reserve and European Central Bank rate convergence may make U.S. bonds more attractive and hedging U.S. dollar risk less costly.

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Categories: Industry News

Bank of America Rolls Out Financial Life Benefits Suite

Wed, 2020-02-12 14:34

Bank of America has introduced what it calls “Financial Life Benefits” for corporate client employees, including 401(k) and health savings accounts, equity compensation and nonqualified deferred compensation plans.

The suite is designed to help employees achieve financial control and plan for retirement, says Lorna Sabbia, head of Retirement and Personal Wealth Solutions at Bank of America. “Too often, day-to-day financial challenges hinder long-term financial success,” she says. “Financial Life Benefits is a powerful solution for employers to help their employees plan, save and take control of their future. With this new solution, retirement and health care savings can be addressed alongside short-term financial needs, guided by financial education and professional guidance.”

The Financial Life Benefits solution will be available to large and midsize companies and will offer financial education and personalized wealth management; discounts on mortgages and checking and savings accounts; in-person guidance; one-on-on consultations; local financial centers to meet with Merrill advisers; call centers; and more. Employees who bank with the company and have participating employer payroll direct deposits may also collect waivers on the account if they are enrolled. Those who have a checking or savings account and are receiving participating employer direct deposits also will be able to automatically enroll. Participants in the employee mortgage program will not require a direct deposit and will have access to lending specialists.

Additionally, the company will be testing a new financial wellness tracker, designed to access employees’ financial wellness and suggest actions to change financial behavior and improve wellness. According to Bank of America, the tracker will be rolled out in the coming months.

“By the summer, we will be offering these to clients. This will be an optional service, but we expect there to be a lot of demand,” says Stephen Ulian, head of Institutional Distribution at Bank of America.

In an effort to expand, Bank of America is adding as many as 150 new salespeople, with 50 of those focusing on small or midsize plans with $100 million or less in assets, Ulian says. The company will have hired 25 salespersons by the end of the first quarter and plans on bringing on up to 75 more by year-end, according to a Bank of America spokesperson. While the bank’s financial advisers were traditionally used to issue institutional retirement products, the new specialists will partner with adviser teams and work with the company’s commercial banking relationship managers, Bank of America says.

More information about Financial Life Benefits can be found here.

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Categories: Industry News

Outdated Mortality Assumptions Case Survives Motion to Dismiss

Wed, 2020-02-12 13:40

A new decision issued by the U.S. District Court for the Eastern District of Wisconsin denies dismissal of a would-be class action compliant, rejecting Rockwell Automation’s allegation that a retired pension plan participant failed to adequately state a claim.

The plaintiff in the lawsuit alleged Rockwell has harmed participants, in violation of the Employee Retirement Income Security Act (ERISA), by incorporating outdated actuarial assumptions that resulted in certain alternative pension payments being less than the actuarial equivalent of the normal default pension benefit.

As is essentially standard procedure in such cases, Rockwell moved to have the complaint dismissed for failing to state a claim, but the District Court has now sided with participants and has agreed to at least allow the case to move forward to the discovery phase.

Background in case documents shows the Rockwell pension plan allows participants to choose from a variety of annuity types once they claim their pension benefit. One such optional annuity is a “certain and life” annuity, under which payments are made for the life of the participant or for at least a specified number of years. If the participant dies before receiving payments for the specified period, the remaining payments are made to the participant’s beneficiary.

According to case documents, when the lead plaintiff in this case, referred to as “Smith,” retired some years ago, he elected to receive his pension in the form of a 10-year certain-and-life annuity, with his son as the beneficiary.

Case documents show the Rockwell plan’s governing documents specify that, to calculate actuarial equivalence for the annuity that Smith elected to receive, the plan must use a specific mortality table, known as the 1971 Group Annuity Mortality (GAM) Table for Males. The governing documents further detail that the applicable discount interest rate is 7%.

According to the complaint, the 1971 GAM is nearly 50 years old and reflects life expectancies of retirees in 1970. In 1970, a 65-year-old had a life expectancy of 15.2 years, the plaintiffs suggest. However, in 2010, a 65-year-old had a life expectancy of 19.1 years, a 26% increase.

“Thus, in 2010, the average retiree receiving a single life annuity would have expected to receive more payments than a retiree in 1970,” the complaint states. “By using the 1971 GAM to calculate actuarial equivalence, the plan’s optional annuities assume that the annuitant will die sooner than average and thus receive fewer payments than is likely. This, in turn, causes the value of the optional annuity to be less than the actuarial equivalent of a single life annuity, in violation of ERISA.”

In its motion to dismiss, Rockwell contended that a plan pays actuarially equivalent benefits so long as it calculates actuarial equivalence using actuarial assumptions that were reasonable at the time they were written into the plan. “The conclusion that the defendants would like me to draw from these provisions is that Congress could not have intended to require that plans periodically review their actuarial assumptions to ensure that they are reasonable at the time benefit calculations are made,” U.S. District Judge Lynn Adelman wrote in his opinion. He decided that nothing in the provisions of law the company pointed to suggests that the term “actuarial equivalent” means “actuarial equivalent as of the date the plan adopted its actuarial assumptions.”

For example, Adelman pointed out that Section 401(a)(25) does not prohibit employers from amending a plan’s actuarial assumptions to bring them up to date. It places no constraint whatsoever on an employer’s discretion to amend the plan for any reason. “And it is easy to draft an amendment that incorporates updated actuarial assumptions but does not also grant the employer discretion to manipulate those assumptions,” he wrote.

Adelman suggested that “the plan could adopt a variable standard that is self-updating, such as one of the variable standards identified in Revenue Ruling 79-90.”

Adelman also noted that plans can minimize conflict between the actuarial-equivalence requirement and ERISA’s anti-cutback rule by adopting variable actuarial assumptions that self-adjust to reflect changes in mortality and interest rates. Under Revenue Ruling 81-12, “in the case of a variable standard, any variation in accordance with the plan standard is not subject to” the anti-cutback rule. He agreed with the defendants’ contention that nothing in ERISA requires plans to use a variable standard. However, he said the point is that a plan that is concerned about having to “continually increase benefits” has the option of adopting a variable standard. Once the variable standard is adopted, the plan will not have to continually increase benefits to comply with the anti-cutback rule—only those employees who accrued benefits under the old, fixed standard would potentially be entitled to increased benefits.

The defendants also contended that, to accept the plaintiff’s interpretation of “actuarial equivalent,” the court “would have to legislate a detailed set of rules … specifying when a plan must change the actuarial assumptions it used to determine its contractually promised annuity benefits, how a plan should decide which mortality tables and interest rates to use and for which plan participants.” But Adelman disagreed, saying ERISA already contains the relevant rule: Plans must ensure that any optional annuity forms are actuarially equivalent to a single life annuity.

“This means that plans must use the kind of actuarial assumptions that a reasonable actuary would use at the time of the benefit determination. A court does not have to specify further details to enable plans to comply with the rule. They may comply by periodically consulting with professional actuaries who will review the plan’s actuarial assumptions for reasonableness and recommend whether changes to mortality tables or interest rates are needed,” Adelman wrote.

In rejecting the motion to dismiss, he found that the Rockwell plan’s actuarial assumptions do not provide actuarial equivalence and that the complaint adequately alleges that the plan did not provide Smith with an actuarially equivalent annuity.

The full text of the ruling is available here.

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Categories: Industry News

Low Interest Rates, Coronavirus Deal Blow to DB Plan Funded Status

Wed, 2020-02-12 12:18

Legal & General Investment Management America (LGIMA) estimates that pension funding ratios decreased throughout January, with changes attributed to decreasing Treasury yields.

LGIMA’s calculations indicate the discount rate’s Treasury component fell by 38 basis points while the credit component widened 10 basis points, resulting in a net decrease of 28 basis points. Overall, liabilities for the average plan increased 4.56%, while plan assets with a traditional “60/40” asset allocation increased by approximately 0.12%.

River and Mercantile says in its monthly Retirement Update that discount rates for the typical pension plan fell 30 basis points in January. The FTSE Pension Discount Rate Index ended the month at all-time lows (2.8% for an average duration plan).

However, in addition, equity markets started the month strong but took a dive in the final week of January as investors worried about the potential economic impacts of the coronavirus outbreak, River and Mercantile notes. High quality fixed income investments posted the highest returns for the month.

The company says funded status movements will depend on equity allocations, and plans with the greatest exposure to equities will generally see the largest funded status declines. Allocations which are largely liability matched should see a relatively stable funded status for the month.

“January was shaped by the effects of the coronavirus, which caused markets to fall, and a flight to safety, which pushed interest rates towards historic lows the latter half of the month. Currently, equity markets are starting to shrug off the coronavirus, but fixed income markets are still showing signs of caution. Both sides won’t be right, so we expect to see some volatility as the effects of the virus continue to play out,” says Michael Clark, managing director at River and Mercantile.

“Pensions got clobbered in January, as stock markets mostly lost ground while interest rates reached new all-time lows,” says Brian Donohue, partner at October Three Consulting. Both model plans it tracks saw funded status declines last month, with Plan A dropping 4% while the more conservative Plan B lost 1%. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.

According to Wilshire Consulting, the aggregate funded ratio for U.S. corporate pension plans decreased by 2.3 percentage points in January to end the month at 86.3%. “January’s decrease in funded ratio ended four consecutive months of funded ratio increases and began 2020 with the largest monthly decline in funding levels since August’s four percentage-point decline,” says Ned McGuire, managing director and a member of the Investment Management & Research Group at the firm.

He explains: “January’s decrease in funded ratio was driven by the increase in liability value resulting from a nearly 40 basis point decrease in Treasury yields partially offset by a low double digit basis point increase in credit spreads.”

The aggregate funded ratio for pension plans in the S&P 500 has decreased from 86.6% to 85.5%, according to the Aon Pension Risk Tracker. Aon says pension asset returns were positive throughout January, ending the month with a 1.6% return. The month-end 10-year Treasury rate decreased by 41 basis points relative to the December month-end rate and credit spreads widened by 19 basis points. This combination resulted in a decrease in the interest rates used to value pension liabilities from 2.86% to 2.64%.

“Given a majority of the plans in the U.S. are still exposed to interest rate risk, the increase in pension liability caused by decreasing interest rates offset the positive effect of asset returns on the funded status of the plans,” Aon says.

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies decreased by 4% in January to 84% as a result of a decrease in discount rates and equity markets, according to Mercer. As of January 31, the estimated aggregate deficit of $402 billion increased by $101 billion, compared with $301 billion measured at the end of December.

“January saw a decline in pension funded status, mainly due to underperforming equity markets, lower interest rates and high-quality corporate bond yields dropping to an all-time low,” says Scott Jarboe, a partner in Mercer’s wealth business. “If low rates persist, risk transfer activities such as lump sum windows may be attractive during 2020. As we continue into the new year, plan sponsors should review their pension risk toolkit and explore all of their options.”

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Categories: Industry News

403(b) Plans Get Lifetime Income, Help With Education Expenses Right

Wed, 2020-02-12 10:23
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Student loan debt skyrocketed in the past decade, topping $1.5 trillion among millions of Americans. The crisis has prompted U.S. employers to address it in their benefits programs.

Offering help with the cost of higher education can assist in reducing the amount of student loan debt individuals have.

An analysis of the 403(b) plans industry report from the PLANSPONSOR 2019 Defined Contribution (DC) Survey suggests these plan sponsors, more so than defined contribution (DC) plan sponsors overall, are stepping up to aid employees with education expenses, an important component of financial wellness.

More than two in 10 403(b) plan sponsors (21.3%) offer payroll deductions to a 529 college savings plan, versus 8.7% of respondents overall. Seven percent provide tuition assistance (i.e., an employer contribution to a 529 plan), compared with 3% of DC plans overall. Sixty percent offer a tuition reimbursement program, versus 47.8% of respondents overall.

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And 8.5% offer a student loan repayment/reimbursement program, compared with 3.2% of DC plans overall.

More than two in 10 (21.7%) provide formal education/guidance to participants about managing student loan debt, compared with less than 14.7% of DC plan sponsors overall. More than one-quarter (27.2%) offer formal education/guidance about saving for college, versus 22.8% of respondents overall.

Retirement plan sponsors recognize that participants who take loans from their plan accounts to address financial issues such as paying for college education face a potentially large setback to their retirement savings. According to a Deloitte study, a typical borrower who defaults on his loan because of separation of service could lose $300,000 in retirement savings over his career.

The 2019 PLANSPONSOR DC Survey finds 403(b) plan sponsors are ahead of the game in protecting plan participants from this setback as well. Nearly half (49%) are allowing or said they would soon be allowing separated employees to continue to make loan repayments after termination. Less than one-third (32.5%) of respondents overall said the same.

Providing Lifetime Income

Concerned about participants’ retirement readiness and longevity, more plan sponsors are adopting lifetime income solutions, according to the 2019 Lifetime Income Solutions Survey by Willis Towers Watson.

Most are offering systematic withdrawals, lifetime education and planning tools, and in-plan managed account services. The Willis Towers Watson survey suggests plan sponsors are still leery of offering guaranteed income solutions such as annuities.

But 403(b) plans have a history of being a source of lifetime income for participants.

According to the most recent PLANSPONSOR DC Survey, two-thirds of 403(b) plans offer systematic withdrawals to retiring participants, compared with 44.3% of respondents overall. One-third provide in-plan insurance-based products that guarantee monthly future income, versus 9.2% of respondents overall, and 8.6% offer an out-of-plan annuity purchase/bidding service, versus 5.2%.

Thirty-four percent offer an in-plan managed account solution that also helps with retirement income, and 26.4% provide in-plan managed payout fund(s) (i.e., traditional mutual funds offering monthly, non-guaranteed income). These solutions are offered by 24.4% and 10%, respectively, of DC plans overall.

Results may be different in the future as the Setting Every Community Up for Retirement Enhancement (SECURE) Act includes several provisions related to lifetime income.

PLANSPONSOR 2019 DC Survey industry reports may be purchased by contacting Brian O’Keefe at

The post 403(b) Plans Get Lifetime Income, Help With Education Expenses Right appeared first on PLANSPONSOR.

Categories: Industry News

What’s Proper in the Workplace Is Changing

Tue, 2020-02-11 12:56

While nearly all senior managers surveyed by Accountemps (91%) said organizations have loosened up over the past decade, certain behaviors are still taboo, the most common being using foul language (54%), bringing pets to the office (51%) and displaying political signs or messages (48%).

However, about one-third of companies now see no problem with employees donning visible tattoos (35%), casual attire (34%) and non-traditional hair colors (34%). Managers who said the workplace has become more relaxed cited looser societal standards (59%) and companies catering to younger professionals (52%) as the top reasons for the shift.

One in three employers said having nontraditional piercings (33%) and using casual language or emojis in emails (30%) were problematic in the past but are now acceptable.

Still, approximately 40% of respondents reported that playing music without headphones (41%) and streaming sports events (39%) remain office no-nos. In addition to exhibiting political signs or messages at work, senior managers said streaming political events (44%) and talking about politics (33%) are inappropriate.

“Workplace policies today are designed to attract and retain employees, and that often means they’re more relaxed,” says Mike Steinitz, executive director of Accountemps. “There can also be unwritten rules of behavior or dress that are specific to a particular company or industry.”

He added, “Staff shouldn’t feel like they’re walking on eggshells at work, but it’s important to be respectful of others and ensure your actions don’t cause a distraction or compromise your professional reputation.”

The online survey included responses from more than 2,800 senior managers at companies with 20 or more employees in 28 major U.S. cities.

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Categories: Industry News

Pacific Life Introduces Retirement Income Translator

Tue, 2020-02-11 11:32

Pacific Life Insurance Co. has introduced the Retirement Income Translator, an online tool to help individuals understand what their retirement savings can mean when translated to retirement income.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act requires defined contribution (DC) plan sponsors to provide plan participants with an annual statement reflecting monthly lifetime income. Pacific Life says the Retirement Income Translator tool can be a great resource to help educate individuals about the projected monthly value of their retirement savings.

Some sources believe that if retirement plan participants see a paltry “retirement paycheck” estimate, it could prompt them into making greater contributions to their retirement accounts.

Pacific Life’s tool creates a two-minute personalized video that aims to illustrate the potential benefits of protected lifetime retirement income through an annuity. The company says the tool also can encourage individuals to start the retirement income conversation with a financial professional.

“There is an information gap,” says Christine Tucker, vice president of marketing for Pacific Life’s Retirement Solutions Division. “Many consumers don’t know what their savings mean when it comes to retirement income, nor do they know if or how an annuity can help them. The Retirement Income Translator aims to bridge that gap by providing a simple, palatable, personalized experience introducing protected lifetime income.”

For more information, visit

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Categories: Industry News

Considering Digital Health Solutions to Reduce Benefits Spend

Tue, 2020-02-11 10:27

Health and well-being programs are important for employers to retain and attract talent in a competitive labor market.

Survey results from Mercer indicate that corporate investment in workforce health will grow over the next five years. More than half of the surveyed U.S. senior decision makers say health and well-being investment will be a greater priority for their organization in the future compared to where it is today, while just 6% expect it to be a lower priority.

Employers believe that these investment plans have a clear justification. The survey asked senior decision makers to rank their objectives for their organizations’ health and well-being programs. The top three all have a direct impact on business results: (1) improving productivity, (2) attracting and retaining workers, and (3) improving worker morale and engagement. By comparison, those surveyed rank cost containment far lower among objectives for investing in health and well-being programs.

Employers believe that digital health solutions will help advance their objectives for health and well-being programs. When asked specifically about digital health solutions, more than seven in 10 U.S. senior decision makers surveyed believe they will have a lot of or some impact on staff energy levels, and four out of 10 believe they will help them retain staff.

Though cost containment was not ranked high on employers’ objectives for investing more in employee health and well-being, digital health solutions can create cost savings—for both employees and employers.

The global survey found employees in the U.S. are less interested in digital solutions that employ AI (artificial intelligence) or virtual solutions than employees globally. However, nearly one-third or more expressed interest in a number of digital health solutions.

Nearly four in 10 (39%) said they would value an app that helps people find the right doctor or medical care when and where they need it. Kate Brown, Center for Health Innovation leader with Mercer in Houston, Texas, says apps for steering people to the right level of care provide a direct cost savings for employers and employees. “It could mean that instead of going to the emergency room, an employee is steered to a lower level acuity of care for which the claim cost would be lower,” she explains.

Brown says there is an emergence of apps that not only direct employees to the right doctor or level of care but offer guidance about symptoms and what the care solution is. For example, she says, rather than spending money on a medical appointment for a sprained ankle, an employee could act on an app’s recommendation to elevate it and ice it.

Thirty-six percent of U.S. respondents indicated they would value telemedicine—a remote video-chat or text with a doctor or nurse—for a simple health issue like a rash or a cold. “The financial benefit to an employee is clear, especially if he is enrolled in a high-deductible health plan (HDHP)—because the copay is lower for telemedicine than going into a doctor’s office, urgent care or emergency room,” Brown says. It seems logical that employers will see lower claim costs as well.

Another 36% of U.S. respondents to Mercer’s survey said they would value self-managing health conditions using wearable technology. “Employers can put this in the bucket of long-term cost avoidance,” Brown says. “It’s about creating and promoting a culture of health and engaging employees in health. They get healthy and avoid later medical costs. It’s harder to measure the return on investment [ROI] for this one, but the benefit is keeping employees healthy.”

Further down the list, 32% of U.S. respondents indicated they would value customized treatment and medicines using algorithms based on a person’s genetic sequence. Thirty percent said they would value tools that predict the likelihood of certain illnesses based on data automatically collected about a person.

Brown says, theoretically, there are companies that use large data sets to make inferences about treatment paths and what goes into different treatment pathways. “It will be interesting to see where those will go and whether they can deliver the best treatment plan for an individual that has gotten them to the right clinical outcomes,” she says. “There is the potential to treat an individual the right way the first time and offer them the correct maintenance care, which would save them money on multiple doctor visits or medicines, and reduce claim costs for employers.”

However, Brown notes, there is still a question of who pays for individual treatments—would it be employers? “Is there a way to do so at scale so it doesn’t create a huge cost burden? We haven’t yet seen the impacts to cost,” she says.

As for tools to predict the likelihood of illness, Brown says, “If there is data to deliver more personalized treatment, or treat a disease earlier in its progression, employees would avoid unnecessary care.”

Brown notes that the collection of individual data in an employee population can be used for strategic purposes by employers to select proper health plans for their employees. “It can help employers make better decisions about how to deploy their benefit dollars on programs that are best for employees,” she says.

Brown found it interesting that the top three reasons employers are investigating digital health are improving productivity; employee attraction and retention; and engagement. “It is interesting that cost is not first. It speaks to the fact that digital health has the potential to impact cost but employers are not yet counting on it or underestimating digital health’s play in cost,” she says.

But, if offering digital health solutions will reduce employee turnover, that is a cost savings in itself.

Mercer’s Health on Demand study surveyed more than 16,500 workers and 1,300 senior decision makers in seven mature and six growth markets across North America, Europe, Latin America and Asia. To download the U.S. report, visit

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Categories: Industry News

Roth is Not Just a Young Man’s Game

Tue, 2020-02-11 09:55

At 26 years old, I often hear about how making Roth after-tax contributions to my retirement plan will aid in my retirement savings.

I have frequently been told how fortunate I am to have multiple decades to accumulate tax-free earnings on my Roth contributions. And I agree. Roth contributions will play a significant role in my retirement savings, and I am fortunate to make Roth contributions at such a young age.

What I do not understand is why Roth is considered to be almost exclusively beneficial for young workers, when those who are midway, or even well into their careers, may benefit as well. I frequently hear mature workers lament about how they missed out on Roth contributions. Since Roth contributions only became available at a time when they were in a high tax bracket, they decided Roth cannot benefit them. Once, when advising a client to add a Roth option to her firm’s 401(k) plan, she said, “Most of our employees are older than 45. Roth wouldn’t help them.” I disagree.

For example, a $10,000 Roth contribution made by a 50-year-old taxed at 35% will generate $3,500 in taxes today. Assume that the contribution grows at 5% each year for 20 years, up to $26,532.98, and the individual is now in a 20% tax bracket. If the contribution had been made on a pre-tax basis, this individual would pay $5,306.60 in taxes at the time of distribution. The individual would realize an overall tax savings of $1,806.60 by instead making a Roth contribution at 50. Even with a significantly lower tax bracket, Roth contributions would produce overall tax savings.

The math gets even more favorable if we consider Roth contributions growing through retirement instead of just to retirement. Using the previous example, assume the 50-year-old did not touch the $10,000 contribution until age 80 and that they were in the same 20% tax bracket. Growing at an average of 5% for 30 years, this contribution would now be worth $43,219.42. Had the contribution been made on a pre-tax basis, this individual would pay $8,643.88 in taxes at age 80. If they made Roth contributions, they would realize $5,143.88 in tax savings by paying 35% in taxes at age 50.

In fact, using the same figures as the previous example, it takes only 12 years before paying the 35% tax upfront costs less than paying a 20% tax later. That makes Roth contributions beneficial to a far more wide-reaching group than those who are lucky enough to have several decades until retirement.

There is also a common misunderstanding about who qualifies to make Roth contributions in a 401(k) plan. Many individuals believe that if they are not able to make Roth IRA contributions, they are also not able to make Roth 401(k) or 403(b) contributions. That’s not accurate. In 2020, anyone younger than 50 can make up to $19,500 in Roth contributions to a 401(k) or 403(b) plan, and those older than 50 can contribute up to $26,000.

A devastating reality once hit a client of mine when I confirmed that he was eligible to make Roth contributions—including catch-up contributions—into his 401(k) plan. “I wish I would have known” he said quietly. As part of his 401(k) plan, he had invested $100,000 in a lucrative investment which appreciated significantly in 10 years. Had the initial investment been made using Roth contributions instead of pre-tax contributions, the property he sold for more than $700,000 would have been tax free.

This is an extreme example that shows the need for each individual to consider whether their retirement plan contributions should be made as pre-tax or Roth contributions. There is no cutoff age for Roth contributions. Roth contributions may benefit you even if you have been saving longer than some of us new workers have been alive.


Erica K. Johnson is a Qualified 401(k) Administrator and an account manager with BOK Financial. Erica maintains a book of retirement plans, managing all aspects of ERISA compliance, recordkeeping, and investment management for institutional clients.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.


About BOK Financial Corporation

BOK Financial Corporation is a more than $40 billion regional financial services company headquartered in Tulsa, Oklahoma with more than $80 billion in assets under management and administration. The company’s stock is publicly traded on NASDAQ under the Global Select market listings (BOKF). BOK Financial Corporation’s holdings include BOKF, NA; BOK Financial Securities, Inc., BOK Financial Private Wealth, Inc., and BOK Financial Insurance, Inc. BOKF, NA operates TransFund, Cavanal Hill Investment Management, Inc. and BOK Financial Asset Management, Inc. BOKF, NA operates banking divisions across eight states as: Bank of Albuquerque; Bank of Oklahoma; Bank of Texas and BOK Financial (in Arizona, Arkansas, Colorado, Kansas and Missouri); as well as having limited purpose offices Nebraska, Milwaukee and Connecticut. Through its subsidiaries, BOK Financial Corporation provides commercial and consumer banking, brokerage trading, investment, trust and insurance services, mortgage origination and servicing, and an electronic funds transfer network. For more information, visit

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Categories: Industry News