The Importance of Third Party Administrators for Banks with Non-Qualified Benefit Plans and BOLI Programs
The banking industry has seen its fair share of consolidation over the past few years. It has certainly been an unprecedented era of mergers and acquisitions, not only for banks, but also for the vendors that serve the community banking marketplace. This is particularly significant when a bank’s non-qualified benefit and bank-owned life insurance (BOLI) administrator and/or service provider changes.
The number of U.S. banks having purchased BOLI continues to rise — 62.2% had BOLI policies in 2016, up from 60.5% the year before. The continued growth underscores the importance to review key aspects of this type of insurance.
One of Pentegra’s primary concerns is helping banks understand the significant benefits of having a separate BOLI administrator and BOLI service provider. It is a critical component when considering vendor risk management and regulatory oversight in this space.
The Office of the Comptroller of the Currency (OCC) — an independent bureau within the U.S. Treasury Department that charters, regulates and supervises all national banks and thrift institutions – said in its OCC 2004-56 bulletin:
“An institution should be aware that the vendor’s financial benefit from the sale of insurance may provide the vendor with an incentive to emphasize the benefits of a BOLI purchase to the institution without a commensurate explanation of the associated risks. Therefore, reliance solely upon pre-packaged, vendor-supplied compliance information does NOT demonstrate prudence with respect to the purchase of insurance. An institution should NOT delegate its selection of product design features to its vendors. An institution that is unable to demonstrate a thorough understanding of BOLI products it has purchased and the associated risks may be subject to supervisory action.”
What this means – although falling short of mandating it – is that the OCC strongly recommends that when it comes to BOLI purchases, banks use a third party to supply the verification and prudence necessary to ensure compliance with regulatory guidelines.
It is for this reason that Pentegra, which acts as a BOLI service provider, uses a Third Party Administrator (TPA); in our case, The Pangburn Group (Pangburn). Independently owned and operated, Pangburn services more than 25% percent of the nation’s banks with BOLI and, as a privately owned, fee-for-service provider, it does not participate, directly or indirectly, in the sale of life insurance products, annuities, mutual funds, or other financial products.
Other firms operating in the BOLI space perform both administrative and service functions in what they call a “turnkey” approach, indicating that by doing both “in-house,” they are saving a client time and money and reducing the number of vendors that the bank must engage.
That may sound good on paper, but in reality we are living in a booming era of merger and acquisition (M&A) activity. This has, and will continue to, adversely impact “turnkey” administrator/service providers. Due to fewer and fewer banks, a BOLI administrator/service provider that is solely reliant on the sale of new BOLI to generate commissions and ongoing trail revenue will have difficulty sustaining a model to support the infrastructure of its company and its administrative platform. This makes them susceptible to acquisition. And, whenever a company has gone through several rebranding or renaming iterations or has been acquired – then the concern is how it performs its administrative duties, among a host of other issues that tend to follow.
The lack of independent TPAs when everything is done “in-house,” tends to mean one thing for non-qualified benefit and BOLI clients: Disruption. And that is the last word a financial institution wants to hear or be concerned with amid a climate that is already heavily burdened with regulatory issues.
In this regard, the benefit of using a TPA is that if a bank’s current non-qualified benefit or BOLI administrator is acquired – or even if the actual staff member of the BOLI service provider leaves the company – no disruption occurs.
Additional advantages of using a TPA are: they often have proprietary software, making them independent of all commercial providers; they regularly meet with federal regulators to stay abreast of regulatory developments; the separation of duties is more aligned with OCC guidance and, perhaps most importantly for our discussion here, complements rather than competes with service providers.
Working with BOLI specialists – both in the administrative and service areas – cuts down on the time needed for direct involvement by a bank’s financial staff (of course, oversight and regular meetings are recommended).
We encourage banks that have not explored BOLI to do so; it is, after all, the rule much more than the exception in today’s climate. We further encourage banks that have BOLI, but via a “turnkey” provider of sales, administration and service, to rethink that approach.
The difference can be eye-opening.
About the Author