In our latest Tier One interview, our CEO, Jay Judas, spoke to Kathy Bolton, Vice President, Plan Design and Administration at American Financial Systems, Inc. The pair chat about Kathy's path through the life insurance industry, non-qualified deferred compensation, Women in COLI, and Kathy's charitable work! Read the interview in full below.
JAY: Whenever I meet someone new in our industry, if I want to quickly establish credibility, I ask, “Do you know Kathy Bolton?” Of course, the answer is almost always “yes”, and then a game of who knows you better always follows! You have a stellar reputation as a leading expert in executive benefits and how life insurance plays a role in funding those benefits. If you could, tell me about your role with American Financial Systems, which is headquartered in Waltham, MA, but operates nationally. It is safe to say you are not the only industry legend at AFS.
KATHY: Industry legend!?! Well, I must say that the executive benefits industry has been incredibly good to me. Over my 30-plus year career I have worked both on the supply side with product providers and life insurance carriers as well as with consulting firms on the delivery side. I have held positions in marketing, sales, financial modeling, product wholesaling, relationship management, and plan administration. As I reflect, I have been privileged to have met and worked with many of the experts in this marketplace!
Before I talk about my role at AFS, let me set it up by sharing that over 15 years ago I established a personal Board of Directors. Over time, this group has consisted of two to four people in the life insurance and executive benefits industry who committed to speaking with me objectively whenever I faced a decision about a new career opportunity or challenge. I encouraged them to speak candidly and to help me clearly see all the factors to consider in deciding what to do.
I was truly fortunate that Dan Johnson, Founder, Chairman and CEO of AFS, agreed to be one of the original members of my Board of Directors. When I called him in early 2019 to speak about an opportunity I was considering, he hesitated as if he had something to say. Before long, we began discussing the possibility that I would join AFS. At the time, there was not a specific position for me but, given my diverse background in all areas of executive benefits, I could add expertise to their organization in any area that additional effort and support is needed. Dan consulted with the rest of the leadership team and I joined AFS in February 2019, working remotely in Dallas.
Given that AFS is a full-service firm, I am available to support marketing, plan design, sales, financial modeling or plan administration – whenever and wherever there is a specific need. Most importantly, I continue to grow professionally because I get to work with some of the best minds in the industry!
JAY: I am glad you mentioned Dan Johnson. He and I only recently got to know one another, and I wish I had met him decades ago. If is safe to say that Dan knows a thing or two about executive benefits?
KATHY: If you want to talk about an “industry legend”, Dan is that figure! While he was a graduate student at Harvard in East Asian Studies and Business Economics, Dan began working both on the optimal benefit funding problem generally, and how such principles of finance could be applied to the particular problem of finding the best asset mix for use in the informal funding of non-qualified benefit plans in the U.S. He started AFS in 1984 and developed the software needed to effectively deal with this problem. AFS has subsequently earned well over $100 million licensing its technology for others to use in the U.S. Corporate Owned Life Insurance (“COLI”) funding industry, seeing and loading over 350 of the most important COLI products and dealing with more than 35 COLI carriers or product providers over time.
In the last ten years or so, as products and techniques have grown ever more complex, Dan has focused his personal efforts on pushing AFS proprietary technology to find optimal nonqualified benefit funding solutions not only within the COLI world, but also across broad asset classes, developing algorithms that can find the optimal blend of product solutions based on a clients weighted goals and objectives. A legend indeed!
JAY: Today, you live in Dallas, but you are not a native Texan. I know you hail from Tennessee so walk me through your upbringing and what led you to Texas.
KATHY: I grew up in northeast Tennessee in a town bordering Virginia, Kingsport, TN, which is one of the “Tri-Cities” consisting of Bristol, Kingsport and Johnson City. I had a simple small-town upbringing. Some have fondly referenced my childhood environment as “hillbilly”. Which I am proud of, by the way!I have wonderful memories of the special people and the unique time there.Growing up in the Appalachian Mountains offered the opportunity to learn to trout fish in the small rivers flowing through the mountains.I am quite the trout fisherlady and have been called a “trout whisperer”.There is even one trout fishing spot on the Tellico River that is known as “Hartgrove Hole”, named after me since my maiden name is Hartgrove! It was tricky to wade the river to get to that exact spot to cast my line but, more times than not, it was worth it because I would catch a trout.
I moved to Atlanta when I was in my mid-20s and started my career in life insurance a few years later. I took a position in Human Resources for Confederation Life Insurance’s U.S. headquarters shortly after it opened in Atlanta. After a year or so working in H.R., I decided that since I was employed with a life insurance company, it might be interesting to understand the life insurance business, so I applied for a job in the Marketing Services department. I will never forget that interview.
Gayle Lucas was the Manager of the department and one of the last questions she asked me during the interview was if I had experience in public speaking and I responded, “Yes, I have spoken in front of my son’s PTA many times”. She took a chance on me – someone with absolutely no experience – and gave me my first opportunity in this business. I owe my career to her decision in that moment and cannot thank her enough!
Eighteen months later, I became the Assistant Manager heading up product illustrations and financial modeling of Confed’s COLI products on the AFS Master System. I traveled around the country training COLI producers and their staff on informal funding techniques for nonqualified benefit plans and how to run financial illustrations and financial modeling on the AFS Illustration System.
Confed was growing market share in the US unbelievably fast, especially as one of the first carriers to offer COLI products. Then, something unthinkable happened -- Confederation Life was forced into liquidation in 1994. What a devastating event for so many employees! I had worked at Confed for almost 10 years but moved on to work for several different companies in Atlanta, all in the executive benefits and COLI space.
I left Atlanta in January of 2005 to join National Financial Partners (“NFP”) in Austin. NFP gave me the opportunity to lead the efforts of finalizing a turnkey package for the small and mid-market nonqualified area. After the package was finalized, I led the efforts to take it to market nationally. By the way, it probably does not come as a surprise, but NFP’s partner for COLI illustrations, financial modeling and nonqualified plan administration for the turnkey package was AFS!
JAY: It is time to put on your Emeritus Professor of Executive Benefits hat. I first met you more than twenty years ago when I was focused on promoting executive benefits for Nationwide Financial, mainly concepts like nonqualified deferred compensation, split-dollar arrangements and executive bonus plans. You, more than anyone, know how meaningful an executive benefit plan can be for a company. What are small and large companies missing out by overlooking this planning?
KATHY: Great question, Jay! Many people associate you with international life insurance or private placement and do not realize that your early career was in executive benefits, so I was looking forward to digging into your questions on the subject.
There are several executive benefit concepts which utilize life insurance as the funding vehicle. Some are more focused on the pure life insurance coverage, some are focused primarily on asset, or cash value, accumulation, and others have a dual focus. Split Dollar arrangements and Executive Bonus plans work well in any of those scenarios. Though, I have primarily marketed nonqualified deferred compensation plans (“NQDCP”) with COLI and/or mutual funds as the funding asset.
Over the years, I have engaged with companies in a discussion about executive compensation and executive benefits and how to reward key talent for their contributions to the overall success of the organization. When corporate leadership looks at its executive group and its broader management team, there are a few challenges:
Attracting quality talent;
Rewarding and retaining key people and top performers; and,
Aligning management behavior with corporate objectives.
When we look at these challenges, instead of limiting the solutions to the compensation package alone, we help companies think about and take into consideration the plan design opportunities that exist in a nonqualified deferred compensation plan to help address many of these key issues. By customizing the plan design features of a NQDCP to meet the specific objectives of the company, we help them recruit, reward, retain and retire their key employees.
Aside from health insurance, retirement income is a benefit that many employees indicate they want most. A nonqualified benefit plan can help highly compensated employees save more for retirement, restoring compensation deferral opportunities limited by the restrictions of qualified 401(k) plans.
Qualified plan regulations have restrictions around both contributions and distributions. There are a few key metrics to keep in mind for this year:
For 2020, the 401(k) contribution cap is $19,500 with another $6,500 for those over age 50.
For 2020, the eligible income maximum is $285,000 and the Social Security wage base is $137,700.
There is a pre-age 59 ½ distribution penalty and then minimum distribution requirements on the other side.
Plus, discrimination testing may further limit the employee contribution cap.
A NQDC plan falls under IRS Section 409A, which governs most forms of nonqualified deferred compensation. By following the 409A rules, and deferring tax deductions, a company can allow eligible participants to defer, on a pre-tax basis, up to 100% of their compensation.
Let’s not forget about costs. A nonqualified deferred compensation plan can be very cost-effective for companies to offer as well as easy to implement and administer. Plus, there are a lot of discretionary features. Participation is discretionary, company contributions are discretionary, and the inclusion of a vesting schedule is discretionary.
Of particular note is that approval by the IRS is not required so the employer avoids most of the cost and administrative requirements associated with establishing a qualified plan under ERISA. Also, those administrative costs are most likely tax-deductible.
Certainly, all of the cost savings are important but having a comprehensive executive compensation package is attractive to companies of all sizes to dramatically enhance the recruiting and retention features of existing total rewards program.
JAY: As a recovering life insurance company executive, it was always frustrating to see sales volume from executive benefit sales not living up to its full potential when compared to individual life insurance sales. For instance, executive benefits might account for 15% of profitability when it could easily be half. There is definitely a distribution bottleneck in there someplace; albeit, one that is loosening up. Is there a lack of interest or training in the producer community? Is it a fear of commitment to the business line by carriers? Do the end clients considering benefits hear “life insurance” and run away? What are your impressions and how can we grow the space?
KATHY: Lots of questions here! (Laughing) You are not exactly “recovering” very quickly if you gravitated to the “how to grow the space” question. I have some thoughts on this.
First, nonqualified plans have been around for more than half of a century. In the early years, sales consultants focused on the upper end of the market where there were the large cases. This is what we call the jumbo market and where the sales consultants assisted huge companies with implementing executive benefit plans and funding them with COLI.
Today, based on recent surveys, approximately 75 to 85% of U.S. large companies offer a nonqualified plan. Contrary to what some might believe, the large market is saturated. That said, I believe there is still a tremendous opportunity to offer plans to the middle market.
Based on NAICS data as of Sept. 2019, there are approximately 117,000 mid-size companies in the U.S., companies with between 100 and 1,000 employees. The problem with reaching this middle market is that during the last 30 years or so, the industry did not attract younger producers along the way. As a result, there is a significant skills gap in the area of enough producers who have the expertise to consult with all of these potential mid-market nonqualified plan sponsors and offer plan design solutions and funding recommendations. If you had decided to remain in the executive benefits space instead of heading off to distribute insurance internationally, you might be an executive benefits mega producer!
The good news is that over the last couple of years, some executive benefit producer groups and firms have begun to hire younger staff and mentor them to help meet the needs of these mid-market companies. In doing so, the industry has seen an increase in COLI revenue for carriers COLI carriers whose life insurance products are used to fund the plans.
Next, a few COLI carriers awakened and recognized the opportunity in the mid-size market and made the decision to hire a team of “Point of Sale” wholesalers located across the country who help other financial services advisors when they have a potential client opportunity.
Now to answer this last question about end clients hearing the words “life insurance” and running away. Some clients do have an initial aversion to life insurance. But, once someone on a company’s financial team such as the CFO or Treasurer has the opportunity to review an objective financial analysis of funding options available, they quickly understand the tax efficiencies of COLI and can consider COLI a cost-efficient solution for funding and hedging the corporate benefit liability.
JAY: You and I had dinner in December and talked about how far diversity efforts in the life insurance industry have come. When I joined AALU (The Association for Advanced Life Underwriting) in 1998, you were only one of a handful of women members. What a lot of people might not realize or remember is that many of the women who were members, like you, came from executive benefit sales. In fact, this group of women really put COLI and BOLI on the map for the industry and earned the nickname, “The Women in COLI”. I hope I am not embarrassing you by pointing out that you and a few female colleagues energized life insurance and gave the industry a huge capital infusion. What do you remember about this time?
KATHY: Wow, that brings back a lot of memories! Yes, you have me looking back on a remarkably interesting and fun time in my career and in our industry. I know it may not seem like it but here were many women in the life insurance industry when I began my career in the 1980’s and specifically in the COLI world. At that time, though, we were almost always behind the scenes and not forward facing.
It was such a thrill to be part of the first wave of women to break the glass ceiling in the COLI industry. In fact, I believe it was in 1990 or 1991 – I was one of the first women to “man” a vendor booth at the annual AALU meeting! Since then, women have come a long way. I recently served on AALU’s Professional Development Committee from 2016 to 2019 and, today, there are five women on the AALU Board. Plus, the most exciting development of all, for the first time in our history, a woman is the Chair-Elect for AALU!
Moving on to the “Women in COLI”. It started out around the turn of the century at the AALU annual meeting, which is always held in Washington, D.C. A group of women friends who worked in the COLI world would informally get together and have dinner one night of the meeting. After a few years of continuing this tradition, we were given a nickname by some of the guys in the COLI world – “COLI Chicks”. Think about that! We were some of the most influential and powerful women in the business so, as you can imagine, we did not think that name did us justice! Ha!
We informally re-named ourselves “Women in COLI” which is a little more mature and professional. As a matter of fact, a small group of us ladies in the COLI industry who continue to be involved in AALU still get together for a dinner at the annual meeting. We would have done so again this year but, sadly, the meeting was canceled due to the COVID-19 pandemic.
JAY: I know AFS has a number of projects going on at the moment and I want you to have an opportunity to unabashedly promote them.
KATHY: Thank you! Let me give a little bit more background on AFS so our project list makes sense. As many know, AFS is a recognized leader in providing innovative supplemental executive benefit solutions and services for employers of all sizes and industries. We work in tandem with plan consultants and advisors to deliver highly effective nonqualified executive benefit programs which play a key role in an employer’s efforts to recruit, retain and reward their most valuable employees.
Before I forget, I should mention that AFS is an Owner in the Lion Street producer group; though, this does not prevent us from providing services via producers of other affiliations.
The AFS nonqualified plan recordkeeping platform, Deferral.com, was launched in June of 2001 and is considered an industry staple. It was developed specifically to manage the unique requirements of customized nonqualified deferred compensation plans. Our dedicated and experienced professionals take full responsibility for the implementation of the benefit plan as well as its ongoing administration.
Our full-service plan offerings include both administering the benefit plan and arranging the informal funding. The administration aspect covers recordkeeping, asset and liability management and client management. These services are paid for by the plan sponsor. Then, when it comes to arranging the informal plan funding, AFS conducts an optimal funding analysis, implements the funding asset and administers the asset along with the plan. Where the informal funding asset is life insurance, AFS shares in the commission as part of the implementation.
What is an important differentiator for AFS is that these services are provided together or independently, depending upon the needs of the specific case and the advisor. By leveraging both our proprietary technologies and the experience of the AFS team, we offer exceptional value through high-quality services that are also very cost-effective.
A few of our projects come to mind:
First, we are thrilled to partner with Pacific Life to support their new turnkey nonqualified plan solution, Key Executive Advantage Program (“KEAP”). They have created a new registered variable product for the mid-market, hired Point-of-Sale Wholesalers, and partnered with us for all of our full-service offerings mentioned above but, without the commission split with the producer! KEAP has just been introduced to the market and will be a game-changer in the mid-size market.
JAY: Sorry to interrupt but I recently heard about Pacific Life’s KEAP offering and am amazed by the all-star Point-Of-Sale team the carrier is leveraging. Pac has moved over 15-year employee, Joanne Troischt Gagnon, from her M Financial Group distribution responsibilities and added two other industry rock stars, John Gatesman and Matt Veatch. When I heard AFS, especially you, were involved, I knew this distribution was going to be hugely successful.
KATHY: That’s kind of you to say and I am also very bullish on the KEAP product, too.
Another item on our plate at AFS if our commitment to ensuring that the users of our Deferral.com recordkeeping platform have a great experience using the website to manage their benefit plans. We’ve had a team of experts working to improve the experience of all our users and I am excited to announce that over the next several months we will be rolling out a complete redesign of our website interface that modernizes the look and feel and improves user experience and efficiency. Stay tuned!
Next, we are also working on proprietary projects with several executive benefit firms to assist them with their ability to satisfy their distribution channels’ abilities to informally fund nonqualified benefit liabilities for companies of all sizes. This consists of packaging all of our services and “white-labeling” the marketing, financial modeling, and administration collateral.
As if that were not enough to keep us busy at AFS, we are in conversations with a few COLI carriers to upload their COLI product specifications so we can do all of our magic with our funding optimization analysis. This analysis permits AFS to significantly improve product efficiency and financial performance, making COLI products more competitive in the marketplace. We do this through our proprietary technology which allows us to construct comprehensive life-of-plan asset management. No other producer, broker or consulting firm has this dynamic and flexible technology capability.
Using our funding optimization approach and our proprietary financial modeling technology, we objectively determine the appropriate initial blend of the different asset classes of mutual funds, cash and, of course, COLI, and then select the best performing mix over all the other alternatives. This process is systematized and repeated annually so that each client goes through the same process to ensure that the plan continues to work effectively.
JAY: You have done so much for the life insurance industry and I know outside of business, you are the same way—doing things for others. Talk about some of your personal pursuits and feel free to do some humble bragging.
KATHY: I have volunteered my time for many organizations over the years. In the past, I have volunteered as an advocate and counselor for a 24-hour crisis hotline for victims and survivors of domestic violence. We provided the hotline, emergency shelter, individual and group counseling, and educational programs. The organization’s mission is to end domestic violence for women, children and men in our community.
Additionally, Roger, my significant other, and I wanted to do something unique in the area of “giving”. At the beginning of our relationship almost 10 years ago we decided that we would not spend money on each other by exchanging gifts for occasions like birthdays, Christmas, and anniversaries. Instead, we each donate to a charity of our choice.
Approximately 85% of the time, my charity of choice has been The Wounded Warrior Project which helps change the lives for the better for injured veterans, caregivers, and family members and who just announced would be providing $10 million for COVID-19 relief. Another popular charity I enjoy supporting is the Dallas chapter of the SPCA which is focused on animal rescue and protection. Increasingly, I have been giving to event-based charities like those providing support after the massive flooding in Houston caused by Hurricane Harvey..
JAY: Our General Counsel at Life Insurance Strategies Group, Pete Dziedzic, points out you are our fourth Texan to be interviewed and that really puts the pressure on our candidates to try their best not to mention steak or to name a steakhouse for my restaurant question. Fortunately, you are a frequent flyer….so tell me your favorite restaurant and dish for a life insurance industry business meal.
KATHY: I have had the good fortune of eating at some of the most amazing restaurants over the years while traveling on business. Of course, I could not settle on just one spot so I picked a favorite for lunch and one for dinner…and they just happen to be on opposite ends of the country!
For lunch, I love Nick’s Restaurant in Laguna Beach, CA. The pan-seared Chilean sea bass is excellent. I would not leave before having their warm butter cake for dessert.
As for dinner, the Occidental in downtown Washington, D.C. is an iconic landmark restaurant and an incredible dining experience. In fact, many of our Women in COLI dinners over the years have been held in one of their private dining rooms. Lot’s of good memories there!
But I also have to mention that one of my favorite restaurants is in Dallas, Gorji Restaurant. Chef Gorji’s mediterranean cuisine is served in an intimate upscale dining atmosphere with the emphasis on food, flavors and fine wine. You have to try the Gnocchi Gorgonzola!
Read our companion Tier One blog by clicking here.
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.