Research,
The Savings Sweepstakes
Eighty-six-year-old Billie June Smith of tiny Lake, Michigan, was beaming last February 4 as she stepped forward to accept a check for $100,000 from Steve Winninger, CEO of the NuUnion Credit Union.
At the ceremony in Lansing, the state capital, she held a cardboard mock-up of her sweepstakes check. Measuring about 4' by 2', the check was nearly as wide as she was tall.
Luck and thrift had brought Ms. Smith to Lansing. She was one of more than 11,600 Michiganders who deposited over $8.6 million in accounts at one of eight credit unions around the state in 2009. Each depositor was eligible for small monthly cash drawings and an annual grand prize of $100,000.
And her ticket number was drawn for the big one.
A lottery? At a credit union? Bingo! No, this wasn't some maverick banker's update on 1950s toaster giveaways. It's part of a grassroots campaign based on the research of Peter Tufano of the Harvard Business School and a Boston-based nonprofit he chairs, the Doorways to Dreams Fund (D2D).
Life-altering prizes
As millions of Americans reel toward retirement without adequate savings, policymakers and 401(k) plan providers have conjured up lots of different strategies to encourage low- and middle-income people to start saving more.
This effort has produced carrot or stick solutions like auto-enrollment in retirement plans, the proposed Saver's Credit, tax breaks on saving for health care, college tuition, retirement and long-term care, and research into framing and choice architecture. Yet many Americans still lack the means, motive or opportunity to save adequately.
But they do buy lottery tickets, to the tune of about $60 billion a year in 42 states. So Tufano urges policymakers to channel that compulsion into thrift by linking savings accounts to irresistible, “life-altering” cash prizes.
Instead of buying chances to win, people get tickets for savings. The more money they sock away, the more tickets they get. The yields on savings are small, just like the chances of winning the grand prize. But to many people, the size of the prizes, psychologically, seems to make up for it in both cases. In prize-linked savings programs, participants at least get return of principal.
“Fifty percent of Americans say they can't lay their hands on $2,000 in 30 days—not from savings, from a bank loan, or from friends or family,” said Tufano, who presented a paper on prize-linked savings programs at the Pension Research Council's conference on financial literacy, held last week at the University of Pennsylvania' Wharton School of Business.
“But in 2008, Americans spent an average of more than $540 per household nationwide on state lotteries,” said Tufano, who co-authored the paper, “Making Savers Winners,” with Erick Hurst, Melissa S. Kearney and Jonathan Guryan. “In Massachusetts, people spent an average of $725 per person on lotteries. In the same year, American households spent $430 on all dairy products and $444 on alcohol. We buy more lottery tickets than milk or beer.”
"You have to go where the people are," he said, rather than try to persuade them to come to where you are.
Unfortunately, prize-linked savings programs are illegal in the United States—except in credit unions. That's where Doorways to Dreams has directed much of its effort, by organizing pilot prize-linked savings programs at credit unions in Michigan and elsewhere.
It's not too surprising that prize-linked savings programs are illegal, and not just because they'd break the monopoly on lotteries that state governments currently enjoy. Even if the programs help the masses save, does it make sense to enrich a tiny fraction of them with jackpots while depriving the rest of decent compound interest? And they can hardly be said to make people more financially literate.
But that may not matter. One of America's leading experts on financial literacy, Dartmouth's Annamaria Lusardi, is a fan of Tufano's work.
“What Peter is doing is combining what people like to do into a financial instrument,” said Lusardi, who co-organized last week's conference with Pension Research Council director Olivia Mitchell. “If low-income people think they only way to become rich is to play the lottery, why don't we offer an instrument that allows them to save and to play the lottery? I do not find anything paternalistic about it. Quite the opposite. The return may be low, but the objective is to make people save.”
Mentioned by Jethro Tull
Prize-linked savings programs do seem to have a productive track record. As Tufano's research shows, these schemes been used in various parts of the world since the 17th century. In Britain, a government agency called the National Savings & Investments has been marketing Premium Savings Bonds for over 50 years.
First sold in England in 1956 to encouraged savings after World War II, Premium Bonds are now owned by 26 million Britons with £26 billion ($39.4 billion) invested. Each month's prize fund—the top prize is £1 million ($1.5 million)—equals a month's interest (currently 1.5%) on the principal. The minimum single purchase is £100, which buys 100 chances to win. The maximum account balance is £30,000.
(Tufano's research shows that the premium bond has even appeared in the lyrics to a classic rock song. A line from Thick as a Brick, the title track of the 1972 Jethro Tull album, reads: “... how's your granny and good old Ernie: he coughed up a tenner on a premium bond win.”)
The first recorded prize-linked savings program was the “Million Adventure” in the UK in 1694. Intended to help pay off debt from the Nine Years' War (1689-97), the British government sold 100,000 tickets at £10 each. Lower-income people brought fractions of tickets through syndicates. As a savings program, it paid out £1 per year, and each year 2,500 of the tickets would win prizes of up to £1,000.
Premium bonds became popular all over Europe at the end of the 19th century. Today, they're offered in 20 countries from Brazil to Germany to Sri Lanka. Prizes include gold bars, DVDs, apartments, cars and motorcycles, encyclopedias and, of course, large and small cash prizes. In early 2009, JP Morgan Chase ran a no-purchase-necessary, “Double Your Deposit” sweepstakes that paid up to $10,000 to savers.
The unlikelihood that prize-linked savings will ever become a huge phenomenon in the U.S. has apparently not stopped Tufano and the Doorways to Dreams Fund from continuing to pursue programs at credit unions or from pursuing fundamental research into the psychology of non-saving.
D2D has partnered with Olson Zaltman Associates, a Pittsburgh-based consulting firm that uses the ZMET, or Zaltman Metaphor Elicitation Technique. It requires individuals who are not highly verbal to describe their feelings or attitudes with a collage of digitized visual images.
In the process, they claim to be “probing the minds of lower income consumers in order to bring innovation to the marketing of savings." D2D says it "hopes to dramatically strengthen the storehouse of consumer data and insight from which financial service vendors, policymakers and non-profit providers may draw.”
© 2010 RIJ Publishing. All rights reserved.
News, Company/Trade Group News,
US Mutual Fund Inflows On Record Pace
US mutual fund investors have put nearly $200 billion into stock and bond mutual funds so far in 2010, making it likely that full-year net inflows would top $450 billion. That would make 2010 a record year, according to Strategic Insight.
The previous record was set last year, when just over $400 billion went into long-term funds, according to Strategic Insight's Simfund database. These figures include open- and closed-end mutual funds and funds underlying variable annuities, but exclude ETFs.
Inflows have been this high this early in only one previous year—in 2007, when net inflows to stock and bond funds totaled more than $210 billion.
“Lately we are observing the early signs of thawing of investors' reluctance to get back on the stock market train,” said Avi Nachmany, SI's Director of Research. “Assuming further economic and employment improvements in the coming months, more such investors should inch higher in their risk curve. But turmoil in Europe and the fragility of the US recovery are just a few of the many concerns still on investors' minds.”
For all of 2010, Strategic Insight projects that US stock and bond fund new sales are on track to rise 20% (or more) from their 2009 pace. Net inflows are new sales minus investors' redemptions out of funds.
Worldwide, mutual fund investors have added nearly $1.4 trillion of net flows to bond and stock funds since March 2009's market bottom, according to Strategic Insight's Simfund databases, which track more than $20 trillion of fund assets globally. About half of these gains occurred in the US. This year through early May, global inflows to stock and bond funds are nearing $400 billion.
© 2010 RIJ Publishing. All rights reserved.
Industry Views,
Annuity Issuers Slowly Enter The Digital Age
It is no secret that annuity issuers have trailed the rest of the financial services industry in terms of online account opening and management functionalities. The inefficient nature of the annuity account opening process is legendary, as is the lack of online transactional capabilities. Login security has also been a longstanding shortcoming that we've touched on in earlier articles.
Their past failures to swiftly adopt new technologies notwithstanding, annuity issuers have recently stepped up efforts to implement and actively market paperless document delivery services to clients. Although annuity issuers are years behind banks and brokerage firms in pushing these services, the hope here is that this trend signals a broader change in how business is conducted throughout the annuity industry.
The most progressive contribution among the companies we cover comes from AXA Equitable. In February, the firm's annuity policyholders were mailed annual reports that, for the first time, were contained entirely on a CD-ROM in digital format. Previous annual reports were mailed exclusively in paper format.
The digital documents offer two key advantages over paper. First, clients no longer have to find space to keep the bulky, hundred-plus page annual report booklets. Documents can simply be downloaded onto the computer for easy storage. Second, a handy search feature makes it easier than ever to navigate the information-intensive documents, which can be difficult to read.
An accompanying letter from the firm's customer service department provides the rationale for the move to digital document delivery of annual reports. The firm estimates that digital delivery will reduce operating expenses by nearly $11.5 million annually and eliminate over 2,000 tons of paper waste a year. In short, digital documents are the more practical and Earth-friendly option.
Although AXA Equitable is currently the only annuity issuer we cover that offers digital document delivery, a number of firms have been expanding and promoting their electronic delivery services in a more aggressive manner over the past year. Most of our firms have offered electronic delivery for years; however, the additions of privacy, compliance and policy renewal documents to the service have further enhanced the user experience.
In terms of marketing, the vast majority of electronic delivery promotions target clients and focus on the environmental advantages of the service. The promotional imagery generally links to a registration page with additional information about the service in an effort to make new user enrollment as easy as possible.
AXA Equitable, Jackson National and John Hancock have been the most active firms online, posting engaging promotional imagery throughout both the public and client websites. Jackson National has been particularly impressive with its public marketing campaigns. Multiple linked images on the homepage, including the vibrant Flash image below, lead to electronic delivery information and enrollment pages.
Jackson National Public Homepage Green Delivery Promotional Image
Jackson National Green Delivery Promotional Page
It's encouraging to see that annuity issuers are beginning to put a greater emphasis on online services that cut costs and are eco-friendly. Hopefully, the recent advancement by AXA Equitable and the added industry-wide emphasis on paperless delivery will entice more firms to expand their online resources and services.
© 2010 Corporate Insight, Inc. All rights reserved.
Industry Views are special reports that are sponsored and independent from RIJ's editorial content.
Industry Views,
401(k)s: They’re Not (Necessarily) Just for Employees Any More
Among the things that a retiring employee could traditionally expect from his or her employer - gold watch, cakes, cards, and golf- or gardening-related gifts - they could also be pretty sure they'd soon be booted from the company 401(k) plan.
Since these retirement savings plans were introduced in 1978, companies generally haven't allowed non-employees to hitch a free ride, since the cost of keeping them in the plan outweighed the advantages of keeping their dollars in the plan.
More recently, however, the tide has begun to turn among employers, retirees, record keepers and regulators that could keep more retirees in their 401(k) plans well into, or even straight through, their retirement.
Anecdotal evidence certainly supports the notion that this will become a trend. At recent meetings PIMCO had with 18 large plan sponsors, a show of hands indicated that a decade ago, none of the plans would have considered keeping retirees. But today, all 18 say they want to keep retirees on the plan, and 16 said they are actively developing plans to retain them.
Though it's hard to know exactly how strong the trend will be, the stage is certainly being set for an increasing number of retirees to stick with their 401(k) plans. And it's nearly certain that at least some plans will start to do whatever they can to retain retirees' assets in the years to come, and that many savers will likely be attracted to the benefits of staying in a plan.
The Employer's View
Companies have traditionally wanted to get retirees out of the plan as fast as possible because they didn't want to foot the bill for administrative tasks, answering questions and dealing with ad hoc withdrawals for people who were no longer with the company. Compounding this was the even larger problem that they simply didn't have the administrative capability to write the regular checks that retirees often need to meet their day-to-day spending needs.
In recent years, however, record keepers have started developing technologies that can help 401(k) plan sponsors more economically meet retirees' needs, including installment plan methodologies that can efficiently make regular monthly payments. It's clear that all the economies and efficiencies aren't built in yet, but as the processes improve and become more prevalent, it will likely continue to diminish employers' aversion to keeping retirees.
As recordkeeping improves, other potential advantages of retaining retirees start to emerge, particularly the benefit of keeping assets - usually the largest balances in the plan - on the plan's books. The more assets in the plan, the more administrative costs are spread out, and the more economical it may be for all participants. Many plans are also finding that not all retirees start drawing money from their plans in the early years, as they rely on other funds such as Social Security or money they've already paid taxes on. So not only do the big balances often stick around longer than the employer might expect, but the retirees do not necessarily require much service beyond simple administration.
The Retiree's View
Just as plans have historically wanted retirees out, there is a whole industry made up of brokers, advisers, planners and certain mutual fund companies that are eager to acquire retirees by rolling over their 401(k) savings. PIMCO estimates that assets eligible for rollover out of defined contribution plans will be almost $400 billion this year alone, and it's clear there will be lots of players competing to manage that money.
For a retiree, this means the options are growing, and each has trade-offs that warrant consideration. On one side of the equation are retirees who don't have, or care to have a full-service financial advisor, whether for cost savings or other reasons. Typically the investment choices inside 401(k)s often have institutional pricing, which can carry lower expense ratios than share classes on other platforms. In an effort to retain retirees, some companies have also begun to build programs aimed at helping savers plan for retirement and offering guidance on how they can meet their goals.
On the other side of the coin, we feel it's abundantly clear why some retirees would want to leave the plan in favor of a full-service adviser relationship. While employers are offering guidance and other services, they are unlikely to completely capture the retiree's total financial condition and therefore are not likely to offer a comprehensive financial plan as a full-service adviser would.
Potential Policy Tailwinds
There also seems to be some political wind blowing in support of policy that makes it easier or more attractive for plan sponsors to retain retirees. Recently, the Treasury Department and the Department of Labor sent a request for information to a broad swath of the financial services industry, looking for feedback on the variety of methods of offering guaranteed lifetime income benefits inside 401(k) plans. Since this was simply a request, it's hard to know if it will lead to regulatory or legislative outcomes. Nonetheless, by canvassing the industry on the subject, the government is showing a clear interest in finding new ways for retirees to get guaranteed lifetime income options, including within employers' 401(k) plans.
A Changing Perception
Since their introduction more than three decades ago, 401(k) plans have been almost exclusively a tool for the accumulation phase of retirement savings, but there is growing momentum towards efforts to make them a credible choice for the decumulation phase as well. As employers make efforts to push the trend forward, advantages are emerging for both the retiree and the plan. With defined benefit plans and Social Security unlikely to be primary sources of retirement income in the future, policymakers are also taking measures to determine whether 401(k)s present a potential platform for distributing lifetime guarantee benefits to retirees.
It's unlikely that plan sponsors will supplant the holistic advice offered by the financial advisory industry, but they do represent an emerging alternative for delivering retirement income.
© 2010 PIMCO, Inc. All rights reserved.
This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626.©2010, PIMCO.
Industry Views are special reports that are sponsored and independent from RIJ's editorial content.