Peter Welsh: The best thing I can give to any client is a good night’s sleep. That’s what we all want at the end of the day. And if you could give an employee the ability to have a peaceful night’s sleep by not having to worry about the unexpected emergency, I think you’ve done a tremendous, tremendous good. And that employee is going to remember that as well.
Emily Larsen: The gravity of the situation became more clear last year, as the COVID-19 crisis devastated many families’ finances across the country. As a result, we’ve seen many advisors reemphasizing the importance of optionality and financial wellness to help their clients and communities properly prepare for unpredictable emergencies.
Ben Jones: Today, I’m joined by Peter Welsh, Senior Vice President and head of Retirement Services at Millennial Trust Company. Pete and the good folks at Millennium Trust are also taking action to prepare people for the unexpected, with the creation of a leading-edge wellness offering. Now, by applying many of the learnings from employer-sponsored retirement plans, they’ve developed an after-tax emergency savings plan that starts in the workplace through paycheck deduction. Now, before we discuss the specifics of how this type of plan might work in the workplace and how it can change behavior for the better, I want to start with the basics from Peter’s perspective about the concept of emergency savings and how that’s evolved over time. It’s interesting because I remember as a child, the emergency savings money was more of a form of mental accounting. In fact, I think my parents had like an envelope with their emergency savings in it. But today there’s actually designated accounts that have come to be. Tell me. Why do you think that that evolution has occurred?
Peter Welsh: Well, nowadays with so many things occurring on our financial lives, it does make good sense to have a separate place to save these dollars, almost like a … I’ve equated it a little bit with like a layaway plan back in the old days, where folks used to anticipate Christmas expenditures. And you could put that on a mental balance sheet. Right? But they were very popular with that. So this is that same concept in some ways, Ben, where folks are making a conscious effort to say, “Look, we’re going to put separate monies aside. They are going to be there. We’re not going to touch them for just weekend night out. They’re going to be there when we really, really need them.”
Ben Jones: And as you’ve surveyed the landscape, I’m curious. Tell me a little bit about how big this need is in the US, and some of the things that you’ve seen.
Peter Welsh: Many of your listeners are undoubtedly quite familiar with the stat you cited, 40% don’t have $400. It doesn’t mean 40% of the folks don’t cover $400, right? They charge it. They borrow it. They do other things. But the fact remains that if 40% of the country doesn’t have enough money in their savings account to provide for a broken water heater or a set of spare tires, that is a real problem. And that’s not even the enormity of it. Right? The $400 is not going to get anybody very far, particularly in a layoff situation or a medical situation. So when we talk about having a much larger account balance for emergency, the numbers are going to vastly exceed 40%. That’s for sure.
Ben Jones: Yeah. I can only imagine people having a health expense under $400 because I’ve never had that happen.
Peter Welsh: I know.
Ben Jones: And I’m just curious from your perspective. The advisors tend to work with people who are preparing for retirement and being disciplined about their finances for the future. I’m curious why you think emergency savings is an important topic for advisors to get familiar with.
Peter Welsh: Yeah. When you work with individuals one-on-one, yes, there are some high net worth folks where emergency funds is not the first topic of conversation. Right. But the vast majority of folks, particularly when you start working, as I did, with individuals within my 401(k) or 403(b) plans, the first thing we actually chatted about was emergency savings. Before we even got to the conversation of, “How much can you put away for retirement?,” our checklist, at least at the firm I was at, started off with emergency savings because that’s how critically important we believed it was, not that saving for retirement isn’t. But if you don’t have enough to get you through the next emergency in a week or a month or a few months from now, that whole retirement thing seems a long way off. So we actually spent time with that. And I’m sure many of your listeners as advisors certainly appreciate that, and probably in their own practice, take a very similar approach.
Ben Jones: Yeah. I remember doing participant education meetings. And that was always the number one topic. How much money do you recommend, or how much money is a good rule of thumb to have in emergency savings?
Peter Welsh: Yeah. The pandemic, I think, shined a harsh light on the poor savings habits of many. Right. But I don’t think it’s fair to say we should have pandemic-like emergency savings because this is … A once-in-a-century event is very hard to prepare for. So to tell people, “Well, you should really have a year or two in emergency savings,” seems somewhat ridiculous to me, and probably unattainable for most. Right? So likewise, I would say $400 is probably not enough, either. That might get you that one water heater replacement that we talked about a few moments ago. But what do you do in a job loss situation where you might be out of work for a period of time? So what’s the right balance? Experts believe, and we subscribe to the concept of somewhere between three and six months of your expenses, and probably not your current expenses, right, although none of us are really going out and doing what we used to do in terms of dining and those kinds of things. But if we do get back to normal, it wouldn’t be just necessarily your run rate. It’s really your necessary expenses. You’re keeping a roof over your head, your utilities paid, real estate taxes, whatever that happens to be. So the number requires a little bit of a calculation in our mind, Ben, but somewhere between three to six months is what we’re recommending.
Ben Jones: Yeah. And I know I’ve heard many people reference the three to six months, and I think they’re right. Even three to six months for many individuals seems a high watermark for many people. And so, trying to get them over to the 6 to 12 months of savings, I could see that being somewhat deflating or unattainable for many people. We do hear people talking about that post-pandemic, and a lot of it’s related to the type of industry that you work in or the optionality or flexibility that you have in your work. And I think that’s a really difficult thing to say the next pandemic is going to be the same as this pandemic. So I think it makes a lot of sense to have this be really specific to individual circumstances. But as a general rule of thumb, that three to six months of expense run rate, I think makes a lot of sense for the majority of people.
Peter Welsh: Yeah. It’s a journey, right? So to say to somebody who may be has very limited savings or is dealing with multiple debt payments … a lot of the folks I worked with were younger folks, starting their careers, coming out of college with college debt, to say to them, “Oh,” that “Your first priority needs to be forget everything else and put away six months,” is not realistic. What you need to do is chart a course to solve for a number of different of those challenges. Right? So yes, you’ve got to pay that student loan debt. Yes, you still need that apartment, probably still need to start saving for retirement. And yes, we can still figure out a way to start with your journey to a fully funded emergency savings program. So it’s just taking bite-sized pieces. By definition, it means it’s going to take a little longer, but at least it doesn’t totally upend the house.
Ben Jones: Yeah. That makes a lot of sense. Now, traditionally, we talked about my parents using envelopes as a child. And then, I think my generation probably moved more to using bank accounts and that as the traditional place to set aside emergency funds. But I’m curious. One thing that 2020 did give us was a zero to low interest rate regime. And so, are you seeing a change in the location or instruments that people save those emergency funds, or is it still the traditional kind of savings account?
Peter Welsh: Yeah. So it’s helpful. And we have these conversations frequently with folks who start to think, well, this emergency savings has got three to six months. We ought to figure out how to get a good return on that. We caution against that. The market goes down. It goes up, but you can’t time either. And an emergency can’t be timed, either. So you need to have those funds available for you at the time of the emergency. Yes, rates are low. But when you start to think about the dollars involved here, let’s talk about your average worker. Maybe we’ll have, what, $3,000 to $4,000 in this account, something like that, maybe more than that, maybe $10,000, depending on where you’re at. But the amount of return anybody could get from a 1% or a 0% interest rate environment to a 1% or 2% is relatively minuscule. But the amount of risk one takes by saying, “Well, let’s just put all that in the S&P500 and see how it goes, when that emergency comes, you really need those dollars available. So the way we look at this is really a continuum, Ben, which is your retirement savings. That’s where you place your long-term bets. That’s where if you’re young, you go aggressive and stick out the ups and downs. And as you get older, you modify that, be it a target date or an asset allocation model, or what have you. That’s where you place your bets. You don’t want to bet with your emergency savings because by definition, you really are going to need those at the ready. So we still subscribe to the philosophy that a savings program, even in this low interest rate environment, is the place to be.
Emily Larsen: Other interesting turn of events is that for those fortunate enough to still be fully employed, savings rates have gone up during the crisis as opportunities to spend on a night out have been reduced. For more on navigating the changing landscape of the low interest rate environment, check out our last episode, that’s 117, for some ideas on long-term allocations. We’ll link to it in our show notes. Now, historically, some of the most successful retirement savings programs have been offered in the workplace through payroll deductions, which is really harnessing the employees’ inertia to drive positive outcomes for their financial future. But emergency savings in the workplace is a relatively new idea, which has just begun to enter the fray of discussion, particularly with the recent movement towards comprehensive financial wellness programs. So let’s say you’re an employer. Why should you be drawn to broad financial wellness offerings and emergency savings in the first place?
Peter Welsh: The awareness that has happened in the last … just a few years at the employer work site that, “Hey, my employees don’t leave their financial challenges in the parking lot when they come in or in their bedroom or wherever they’re working from home,” those financial issues are prevalent in the workspace. And the loss of productivity, the additional stress, not to mention if we’re talking about a construction or manufacturing environment, the potential risk on workplace, you can’t ignore it, is my point, if you’re an employer. So if you can’t ignore it and you still have limited resources to address it, what can you do? You can’t make the employees’ financial challenges go away. That’s just life. But what you can do is provide a comprehensive suite of financial wellness tools to help people. Some of that is just basic debt management techniques, right? That’s just understanding money in, money out, whatever that happens to be. But we believe the emergency savings at the workplace is just part of that overall continuum of services that an employer can offer. That is relatively low cost in lots of different ways to design these programs, almost zero cost in its lowest form, but can really provide that financial safety net to help relieve employee stress around their overall financial life. And it fits very nicely, we believe, in a comprehensive suite of financial wellness tools, not just a standalone solution.
Ben Jones: And so, Pete, do you know many employers that are offering these programs today, or do you know how many do?
Peter Welsh: We don’t. We think that we are on the cutting edge of being able to be one of the top providers as we launch our solutions. We launched initially with Mass Mutual last year. We would have had a little more experience, but that got put on hold for some obvious reasons. But we do have a number of folks that we’re going to be launching with this year. So we’ll have some indicative data. But as we speak today in mid-January, there’s not very many folks doing this, which is, it speaks to a tremendous opportunity in our mind, then.
Ben Jones: Yeah. No. So these are very new for employers to offer. I’m curious. As you’ve had conversations with employers, what have their attitudes been around these types of programs, or what’s their enthusiasm been like?
Peter Welsh: At first, it’s new. It’s like anything, right, until you get a chance to see it. It sounds like another expense at first. And to some extent, it can be, but it need not be a tremendous expense. But when you walk them through where this sits in the continuum of an overall financial profile for their employees and the benefits that it can provide relative to the cost, there’s been a great deal of interest in trying to learn more and get adoption with that. So they first need to be explained. It’s intuitive what an emergency savings is. But when you say how it works through the workplace, what their responsibilities are, and how they can financially put it in place affordably, then their ears tend to perk up.
Ben Jones: And so, maybe you can just kind of help us, like when you have that conversation. So I’m just trying to think through the incentives for the employer. And I could see them going exactly to where you went, which is, geez, this sounds like another expense for me to add another benefit, Pete. Tell me how this really works.
Peter Welsh: Yeah. So the offering through Millennium is at the work site. So it’s a payroll deduct. There’s an interesting little juxtaposition here between auto enroll, 401(k)s and emergency savings. You really have a difficult hurdle to overcome if you want to do auto enroll. So these need to be voluntary, and we can walk through how that works. But these are voluntary programs. We’re not making your employees do it. It is payroll deduct. So it’s just another slot on your payroll file, basically, that you would identify for emergency savings. It can be matched if you would like to do that. It can also, very much like an HSA … you can pre-fund on an annual basis if you want to give incentive. These are after tax. So there’s no real tax savings for you as the employer if you’re talking about FICA, FUTA, SUTA, those kind of things. But it’s just normal payroll that you’re running it through. But really the gain for you is not going to be borne out on an income statement necessarily. It’s really going to be more of that paternalistic approach to helping your employees get a greater handle on their financial lives, which brings you back to where I was a few moments ago. As a standalone, it makes sense to me. But it really gets powerful when you make it part of an overall financial wellness initiative that obviously many of your listeners as advisors are deeply entrenched with helping their employers understand.
Ben Jones: Yeah. No, I like that. Now, do you ever have the employer say, “What’s in it for me?”
Peter Welsh: Well, we haven’t had any yet because there’s a … Yeah, it’s after tax. So there’s not a whole lot of incentive. And even in the smaller business owner world, there’s not much. The business owner himself or herself probably has the wherewithal to withstand these kinds of emergencies. So it really is a focus on their staff, helping them get into a better financial place. And then, again, it fits really nicely between the HSA world, the 401(k) retirement world. It has a lot of crossover familiarity that it is different, but it’s not so different that they don’t have an immediate sense of how it might work.
Ben Jones: Many employers have become more paternalistic over the last decade. And many are deeply committed to the financial wellness of their employees for everyone’s benefit, even if that comes with some additional expense. Now, we’re going to talk more about the priorities and the importance of financial wellness a little bit later. But first, how does this work from the perspective of a participant? I ask, Pete, what to expect from the employee’s perspective when they have this option offered to them. When you offer a program like this, do you have any idea or expectation as to what participation might be like, what pickup rates might be in a voluntary program like this?
Peter Welsh: Well, a lot of it’s around positioning, right, if the employer gets behind it and supports it. But we’re targeting in that 50%. We know it’s not going to be for everybody. And quite honestly, some employees are already in a spot where they may not need this, right? So it’s not going to be a universal take-up rate, which is probably one reason why you wouldn’t want to do an auto enrollment and those kind of things, even if you could overcome some of the legal challenges of doing that. So we’re thinking probably depending upon the workforce, more blue collar. They would probably have a greater attraction to it than a white collar, but yeah, somewhere around 40 to 50%.
Ben Jones: Okay. What is the average contribution per paycheck? Is it percentage? Is a dollar amounts? Tell me a little bit about what you’re seeing there.
Peter Welsh: Yeah. We can do either, but we’re putting it more in dollar terms because it is pretty hard to say, “Put away 40% for an emergency.” What’s that mean? But if you say to somebody, “You need three months of salary. And how much do you make after tax a month?,” most folks know that, or per paycheck. “What do you make per paycheck?” So that’s an immediately grounding conversation with folks for this. They can immediately relate to it and say, “Okay. Well, yeah. I need to have …,” … again, I’m making up numbers … “$6,000 put away.” Okay. Well, we’re not going to do that overnight. So let’s start to map a strategy on how we do that. We can’t really use, like we do in the 401(k) space, compound earnings because we’re talking about savings accounts at this point. So basically that $6,000 is probably going to be pretty close to $6,000 out of your paycheck. What’s that look like on a payroll by payroll basis?
Ben Jones: And so, then, do you see most people saying, “Okay. I divide 6,000 by 12 months to get there. So I’m there in a year,” or do you see them saying, “You know what? I can’t do that. What if I divide it by 24 or 36 months?” So what are you seeing?
Peter Welsh: Yeah, it’s generally more than a year. 24 to 36 is kind of what we’re doing. If you make it a five-year, that’s pretty far out, as that you’re probably going to be in an emergency before then. One year, to have three months’ worth of savings put away in a 12-month period of time is a pretty heady task for most of these folks. But if you divide that out over three years or so, it’s basically one month a year. Then you’re at that lower end of what we talked about. It is a minimum level of emergency savings, then.
Ben Jones: Oh, that’s great. And I’m curious. Doing it through workplace payroll deduction, from a discipline perspective of, say, an individual that takes their paycheck home and sets aside 1/36 of their emergency savings versus having it just come out of their paycheck, do you know which one’s more effective? Or I can take a guess, but I’m curious if you have any hard data.
Peter Welsh: Yeah. I think the very fact that we’re having this conversation shows you that it doesn’t really work at the household, if you will, right, going back to the 40% don’t have $400. And it’s the same thing with IRAs, right? We’ve known for decades now that the workplace is the best place to divert funds for other purposes like retirement. Absent of an employer match, there’s no reason an employee couldn’t be just as successful, maybe saving via a Roth kind of way out of their home. But we know that won’t happen. And certainly the data supports that from an emergency savings standpoint. So if it’s taken at the work site, it’s efficient. You get scale, which brings costs down, which is great. But also, the employee never has to worry about taking it out of his paycheck and the household. It’s already done. So we all know the human nature. Once it’s out of sight, it’s out of mind. And we’ll just live on what we have left.
Ben Jones: Well, that makes a lot of sense. So are there periods of time when offering these programs can jump start savings, for example, like bonus time tax time, et cetera? Are you finding that the timing of implementing these programs matters for jump-starting the savings for these individuals?
Peter Welsh: It would seem intuitive that you would be correct. We don’t have the data yet. And a year from now, maybe we’ll get together again and have a little fireside chat, and I’ll have some more data for you. But where we sit right now, in terms of our launch, we don’t have too much around that to report back. I think, like I said, you’re intuitively right, if you were to launch this around bonus time or around salary increase time, right, or in my mind, to thinking around other open enrollment times where it’s, you’re already in the mindset of, “Oh, I’ve got to make a decision here. I’ve got to make a decision there.” Wanting these off cycle, of course, it can be done. And there’s probably maybe some reason to do that if you’re the HR department, one less thing to worry about during open enrollment time. But there are certainly going to be some learnings over the next year or so that will help us inform our future clients when would be the best time.
Ben Jones: That would be great. If you’d be willing, we’d love to have you back at our end of the year episode and just provide us a quick update on stats here.
Peter Welsh: You betcha.
Ben Jones: That would be great. That would be super fun.
Emily Larsen: To hear more on leveraging behavior to help clients save, check out episode 90 with Wendy De La Rosa, Co-Founder of the Common Cents Lab. By the way, in case you missed it, remember that these plans will be easier to understand if you frame them in terms of dollars and not percentages. Participants will need to decide how long and at how large of a contribution it will take to reach their emergency savings goal. We suggest you provide them with a simple framework, starting with the end in mind. What is their savings goal? According to Pete, the ideal length is somewhere between 24 and 36 months, or two to three years. So a participant would divide their goal amount by the contribution size they can afford, and voila. Now they know how many months it will take to achieve their funded status.
Ben Jones: One point Pete has repeatedly emphasized is that implementing an emergency savings plan is one component of a larger, more holistic financial wellness movement. Now, we’ve had other episodes where we talked about financial wellness before with other guests. But I asked Pete to give me his insight on where emergency savings fits into the bigger picture. Financial wellness includes things like HSA and college debt repayment plans, and these new emergency savings accounts, and retirement. There’s a lot of different programs that combine together. What is the correct order of funding?
Peter Welsh: Well, most people would have to go with health first. It’s hard to enjoy life if you’re not healthy. And this is just Pete Welsh’s opinion. This is not a Millennium Trust sanctioned answer here. I don’t even know what that would be necessarily. But for me, I’ve always had a tough time arguing that with myself or with anybody, that health should take a back seat. Right? So if you can do that, and certainly with HSA accounts and the triple tax benefits there, that makes really, really good sense. After that, though, I would argue that the emergency savings program is either neck-and-neck or slightly above a long-term retirement program for the reasons we’ve already talked about. If you’ve got a nest egg out there that’s tax advantage and can’t be touched or shouldn’t be touched until retirement, what do you do in the interim when emergencies pop up, or heaven forbid, a job loss occurs and you’re out of work for three months or so? But as I mentioned earlier as well, I don’t think you can just totally focus on the emergency savings program. I do think there is an argument to be made, and a valid one at that, that says, “Hey, we can do more than one thing here. Let’s make sure our health is taken care of. But then, let’s tackle the dual challenge of saving for an emergency and retirement together,” because particularly if there is an employer match on the table, to argue it with good faith that you should just completely ignore a long-term retirement program and give up that free money in exchange for pre-funding your emergency savings account is a bit tenuous, in my opinion.
Ben Jones: Now, let’s just say that I’m a participant, and I unfortunately have one of those big emergencies, and I wrecked my car. And I need some money out of my emergency savings account. How hard is it to get that money, or is it as easy as a savings account?
Peter Welsh: Pretty much as easy as a savings account. So one of the things that’s, I think, interesting about Millennium Trust, we have about 75% or so of the auto rollover market today with the majority of the large record-keepers, as I mentioned. And part of that comes with a large infrastructure. So we have a contact center in Chicagoland that fields anywhere between 35 and 40,000 calls a month, believe it or not, from our auto rollover accounts. So leveraging that, we can help a person experiencing that emergency you referenced a couple of different ways. One, they can go online. So they go online. And during the opening process, they just need to link their bank account so that they can go online and say they need … I don’t know what your car rent costs. Let’s say it was $500 for the deductible. So you want $500. We can just ACH that directly into your bank account. Conversely, the contact center is always available so they can call. And we have all the information on file. The account’s right there in front of the customer service rep. And depending on what they want, it’s their money after all, no tax consequence for getting it out. So they just need to tell us what they want, and we can ACH it right over.
Ben Jones: And I’m assuming that it also doesn’t have to be an emergency. At the end of the day, someone could just say they want the money.
Peter Welsh: Correct. That’s why it also needs to be part of an overall strategy, right? People need to understand what these buckets are for because the last thing we want to do is turn this into a weekend entertainment fund, right?
Ben Jones: Yeah. And that actually is a great segue into a question I did have, which is, when you put this against the retirement savings plan, there has been long discussed the problem of leakage from retirement plans. And this comes in the form of hardship withdrawals and people taking out the money when they change employers. And there’s a lot of things that lead to leakage. But with respect to hardship withdrawals, is your expectation that having these emergency savings programs might actually lower the hardship withdrawals for employers?
Peter Welsh: Oh, absolutely, no question about it. The hardship by definition is a financial stressor, right? So by having this, we can avoid a number of the leakage issues related to the qualified plan space and the unfortunate tax consequences that many of these folks incur.
Ben Jones: Recall that if a participant needs to make a hardship withdrawal from their 401(k), they’re liable to pay income tax on that withdrawal, plus an additional penalty on the amount withdrawn. So besides peace of mind, helping your clients be prepared can actually save them taxes, too.
Emily Larsen: As our conversation comes to a close, we want to thank Pete for all his time and expertise. We have provided links to more information on Millennium Trust’s work on our topics in the show notes at www.bmogam.com/betterconversations. We’ll wrap up this episode with Pete’s thoughts on how you as an advisor can begin to have better conversations with the employers you work with about this type of emergency savings plan.
Ben Jones: For advisors that are working with plan sponsors, do you have any recommendations on how they might reach this topic or approach their clients to discuss emergency savings plans?
Peter Welsh: Yeah. Oh absolutely. I hate to sound like a broken record, but I’m sure many, if not the vast majority of your listeners, are already talking to their plan sponsors about financial wellness programs. And hey, this is just a new twist, a new offering, relatively new at the work site, anyway, something you should be considering for all the aforesaid reasons that we don’t need to go into at the moment, on why you want to be invested, so to speak, in your employees’ financial wellness overall. So this is just an easy way to slide in something that’s kind of familiar in terms of how it works, does a tremendous amount of good. You can’t argue with the facts on just how precarious the average American worker’s financial picture is. And if you could do something, Mr. Employer, to help alleviate that, which would only help them be that much more productive for you when they’re at the workplace, why wouldn’t you want to do that? It just makes good sense.
Ben Jones: Excellent. Last question is, what does it feel like to be an advisor and help their clients get their emergency savings funded?
Peter Welsh: Oh, it’s huge. It opens the door in many respects for those other richer conversations, right? There are some basic ones. “Hey, do you have your wills and trusts in place? Are your insurance coverages in place?” But it’s really hard to have those longer-term financial planning conversations if before you get there, you’re like, “Oh, my gosh. If the guy has a car wreck, they’re not going to have enough money to cover it.” Right? So I think having these conversations as an advisor with employees inside your retirement plans or otherwise, well, it begins to give you the permission slip to have that deeper longer-term conversation.
Ben Jones: Thank you for listening to Better Conversations, Better Outcomes. This podcast is presented by BMO Global Asset Management. To access the resources discussed in today’s show, please visit us at www.bmogam.com/betterconversations.
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