Annuities, 401(k)/IRA, Company/Trade Group News,
Financial Engines' Secret Income Plan
Financial Engines, Inc., the provider of investment advice and managed account services to defined contribution plan participants, intends to begin offering an in-plan retirement income option to its clients starting in late 2010 or early 2011 and to offer it to as many as 4.2 million participants within three years.
Jeff Maggioncalda, CEO of the Palo Alto, Calif.-based firm, said in a recent conference call with security analysts that the “solution will be different from what’s offered today, and will address concerns that have caused employers to avoid embracing” in-plan income options so far, such as high costs and fiduciary issues.
While offering no details, Maggioncalda said the program would be an extension of the company’s Professional Management managed account services and would allow users of those services to draw a monthly income in retirement. He did not say whether a rollover IRA would be involved.
The program would not require plan sponsors “to add an annuity or change their investment lineups to offer our solution” and would “eliminate the counterparty risk associated with adding an annuity to their plan,” he said, noting that the program would work “with any open architecture combination of investment products."
Despite that disclaimer, there's reason to believe an annuity or annuity-like feature could be involved. Financial Engines offered a description of what it considered a viable in-plan income option in an eight-page written response last May 3 to the Department of Labor’s request for information regarding such plans, and a type of annuity was integral to it.
That hypothetical plan involved the purchase of longevity insurance—life-contingent deferred income annuities that can be purchased at a steep discount because they don’t pay out unless and until the contract owner reaches an advanced age, such as 80 or 85.
Longevity insurance has drawn serious attention from academics in recent years, but not from investors. PIMCO has recommended that investors combine its inflation-protected payout fund with a longevity insurance contract as a retirement income strategy. Annuity expert Moshe Milevsky of York University has written about the advantages of longevity insurance. MetLife, Hartford and Symetra offer quotes on longevity insurance, but the product is rarely purchased.
Currently, the most prominent in-plan income solution might be Prudential Retirement’s IncomeFlex program, which allows participants to add a guaranteed lifetime income benefit, like the ones offered on variable annuities, to target-date funds in a 401(k) account. Great-West also offers such an option. MetLife offers SponsorMatch, a program that allows participants to buy chunks of income far in advance of retirement with their employer match.
Financial Engines, which was co-founded in 1996 by Nobel Prize winner William Sharpe, started as a respected but fairly modest provider of online investment advice to 401(k) plan participants. Among other things, it gave participants access to a colorful Internet-based widget that enabled them to conduct their own Monte Carlo projections of hypothetical portfolio returns.
Over time, the company has come to offer Internet-mediated managed accounts to participants within 401(k) plans, and was recently identified as the largest Registered Investment Advisor in the U.S. The company reported $29.4 billion in 401(k) managed accounts as of June 30, 2010, and $300 billion in “assets under contract.” That number refers to the total assets in the 385 retirement plans whose 4.2 million participants can purchase Financial Engines’ managed account services.
In the DoL comments, Jason Scott, Ph.D., the managing director of the Retiree Research Center at Financial Engines, urged the Department of Labor to amend the tax laws to exempt assets in longevity insurance contracts from the calculation of required minimum distributions.
Though not specific, Scott's comments describe a managed “hybrid solution” in which participants would draw monthly income from a managed account early in retirement “while always maintaining sufficient assets to give participants the option of increasing the income payout through an annuity purchase.”
In addition, “The advantage of the hybrid approach is that as the insurance becomes compelling, the hybrid solution facilitates a shift from a highly liquid and flexible solution to one more focused on guaranteed lifetime income,” the comments said. Such a program sounds similar to the Retirement Management Account that MassMutual briefly marketed until the financial crisis.
Scott has written about longevity insurance for some time. In a 2009 research paper called, “What Makes a Better Annuity?” he and others suggested that the introduction of longevity insurance, because it protects the owner against longevity risk much more cheaply than immediate annuities, could greatly expand the annuity market.
In the DoL comments, Scott noted that an “allocation of 10 to 15% of wealth to a longevity annuity creates spending benefits comparable to an immediate annuity allocation of 60% or more.” The comments also recommend that any future DoL-approved qualified default income solution contain the following elements:
• Fee reversibility – In the accumulation phase, qualified default arrangements must be fully reversible at no cost for 90 days. A similar guideline should apply to retirement defaults.
• Liquidity – Some insurance products, such as an immediate annuity, exchange liquidity for additional retirement income. However, a default that involves the loss of liquidity could be a significant shock to unaware participants. To manage this concern, we recommend either an extended period where liquidity is retained or a requirement that loss of liquidity requires a proactive participant decision.
• Death benefit – Insurance that maximizes income will not pay a death benefit. However, in a default context, the lack of a death benefit could also be surprising to the heirs of DC plan participants. Similar to liquidity provisions, we recommend either an extended period where a death benefit is retained or a requirement that loss of a death benefit requires a proactive participant decision.
• Conflicts – If the retirement default is an advisory relationship that helps participants with drawdown decisions, existing rules governing prohibited transactions should extend to lifetime income services. Participants should be protected from advice that could be influenced by conflicts of interest associated with the compensation of the advisor.
• Role of Fiduciary in Selecting Default– If a retirement income solution is made a plan default, we recommend that the plan sponsor still play a fiduciary role in the selection and monitoring of any such default.
© 2010 RIJ Publishing LLC. All rights reserved.
Annuities, Marketing/Advertising, Research,
Which Are the Hottest VA Brands?
The names “Prudential” and “MetLife,” in that order, come most quickly to the minds of investment advisers and registered reps when they’re asked to name a variable annuity provider, according to the 2010 Advisor Brandscape survey from Cogent Research.
That’s not surprising. Prudential and MetLife were the top two sellers of variable annuities in the U.S. in the first quarter, according to Morningstar, with over $4 billion in sales each and a combined market share of 28.5%.
In Prudential’s case, a relentless advertising push, a well-differentiated product with rich living benefits, and an enhanced wholesale force helped make it the most recognizable name in variable annuities. The company scored well in the two biggest drivers of adviser loyalty: range of products and long-term sub-account performance.
Newark, NJ-based Prudential spent $85 million on measured media in 2009 and $18 million in the first quarter of 2010, according to Kantar Media. MetLife, the second most recognizable annuity brand, spent $56 million on consumer and business-to-business advertising in 2009, according to Nielsen.
“Prudential does have very high ad awareness,” said Meredith Lloyd Rice, senior project director for the 2010 Advisor Brandscape report, which was based on a survey of 1,560 registered advisors—independents, brokers and RIAs—last spring. Non-subscribers to the report can purchase a copy from Cogent Research. In the past, VA issuers have used the Brandscape study to find out if their scores reflect their advertising, marketing and wholesaling efforts.
“The campaign for its HD6 [variable annuity living benefit] seemed to resonate with advisors. In a regression analysis of ‘loyalty drivers,’ we found that ‘range of variable annuity product features’ was the most important loyalty driver for Prudential,” she said.
In mid-June, Prudential signed a deal for two new image-building TV ads for telecast during morning shows, network news shows, and prime time syndicated shows, along with billboard ads in 15 major markets. The company also bought home-plate signage during television broadcasts for eight Major League Baseball teams.
Cogent’s study, which also gathered advisors’ opinions about mutual funds, exchange-traded funds (ETFs), and employer-sponsored retirement plans, added to evidence that some annuity providers have thrived in the “flight to strength” since the financial crisis while others have lost momentum. Companies that maintained rich living benefits, despite the high fees involved, have fared better. Companies that bet the crisis would spark demand for simpler, less expensive riders haven't done as well.
After Prudential and MetLife, Jackson National, Lincoln Financial, Nationwide, Pacific Life, and Sun Life received the highest combined ratings for awareness and “favorable impressions” from advisors. John Hancock and the Hartford also received high brand ratings, but both have lost ground because of unpopular product design (John Hancock) or questions about financial strength (Hartford).
Last January, Sun Life purchased naming rights to the Miami Dolphins stadium, in a five-year deal worth $7.5 million. That and other promotional moves appear to be paying off. "An impressive story is building for Sun Life Financial, which holds a position a bit further back in the pack. The firm enjoys stronger consideration and favorability, but has yet to translate this momentum into a deeper sense of advisor loyalty, despite best-in-class performance on several key client experience attributes," the Cogent report said.
Overall, however, allocation of assets to variable annuities by advisors dropped 20% in 2010, compared to the previous year, as average allocations declined to 8% from 10%. Among registered investment advisors (RIAs), allocations declined to only 2% in 2010 from 6% in 2009. Among those advisors who use variable annuities, the average allocation is 12% of assets.
“A two-year uptick in the use of and allocations to variable annuities has ended and some of the products recent ‘foul weather’ friends, particularly RIAs, appear to have already returned to their previous ambivalence toward these products,” Cogent Research said. Among RIAs the average assets under management (AUM) devoted to variable annuities fell by more than half, from $28.9 million in 2009 to $13.7 million today. When RIAs do buy variable annuities, some apparently do so only to exchange a client's high-cost contract to an ultra-low-cost contract, like Jefferson National's.
Variable annuities tend to be most popular in the independent channel, where 52% of advisors use them and allocate an average of 16% of client assets to the product. Advisors who manage less than $25 million in client assets are most likely to use them in their practice. Independent advisors represent 23% of all advisor-managed assets but 44% of advisor-managed variable annuity assets.
“What emerges across all these categories is a picture of an experienced Independent planner with a smaller book of business who is comfortable with the VA story and has found a niche for them within his or her practice,” Cogent said.
Advisors are not as nervous about the financial stability of issuers as during the depth of the crisis in 2009, nor are they talking as much about “splitting tickets” among providers to diversify risk. Instead, they are “once again seeking out those providers with a performance story to tell,” while also looking for guarantees that offer security “in the post-meltdown investment environment,” the Cogent researchers said.
Advisor Brandscape showed that, for the first time, more than half (54%) of all advisors describe their compensation as “fee-based.” Because of that, Cogent said “VA providers should build solutions that are simple, low-cost, and priced to “fit” into the growing advisor asset-based platforms.” The average advisor client is 57.7 years old has about $690,000 in investable assets.
© 2010 RIJ Publishing LLC. All rights reserved.
The Downside of Upping the Retirement Age
Ratcheting up the Social Security claiming age is one of the proposed patches to the Old Age & Survivors’ Insurance program’s long-term funding challenges. But such a remedy could also create pain for many Americans nearing retirement.
Even the affluent would need to save tens of thousands more to offset the lifelong financial loss inflicted by a benefit delay, according to a recent New York Times interview with economist Larry Kotlikoff. A delay would be even more painful for members of what the Senate Aging Committee calls “vulnerable groups.”
As described by a procession of distinguished academics at the 12th annual Retirement Research Consortium in Washington, D.C., last week, those groups include workers without college training, certain ethnic groups, the disabled and, of course, the aged. According to one pair of researchers, they also include the un-conscientious, the overly agreeable and the neurotic.
The Retirement Research Consortium is made up of three organizations, the Retirement Research Centers at Boston College and the University of Michigan and the National Bureau of Economic Research, which are funded by the Social Security Administration.
Social Security, which Franklin Roosevelt signed into law 75 years ago this coming Saturday, was naturally the focus of the meeting, whose title was “Retirement Planning and Social Security in Interesting Times.” Clearly, no one was there to attack it, least of all luncheon speaker James Roosevelt, Jr., FDR’s grandson and CEO of Tufts Health Plan.
But, aside from Roosevelt’s spirited stem-winder of a defense of his grandfather’s legacy, the proceedings were less a birthday celebration for Social Security than an examination of the interplay of many factors that help determine how financially well-fixed a person or household will be by retirement age (and how sensitive they might be to changes in Social Security, like raising the retirement age).
Those variables include education, intelligence, race, sex, personality, health status in old age, employment practices, market disruptions as well as financial incentives and disincentives—whose effects can only be inferred from masses of survey data. As Matthew Shapiro of the University of Michigan said, “It’s complicated.”
Healthy life expectancy
Any proposal to raise the retirement age raises a new set of questions. For instance, are most people healthy enough to work longer? Some are and some aren’t, and a hike in the retirement age would be especially tough on those who aren’t.
“People could work longer if they were forced to,” said Ellen Meara of Dartmouth, who presented a paper called “Healthy Life Expectancy: Estimates and Implications for Retirement Age Policy,” co-written with David M. Cutler of Harvard and Seth Richards-Shubik of Carnegie Mellon.
People tend to report only a slow decline in health between the ages of 50 and 70, suggesting that many people are capable of working longer. “If we raised the early retirement age in Social Security, people ages 62 to 64 would go up 15% in labor force participation,” Meara said.
But healthy life expectancy, like life expectancy, varies by sex, race, and educational level. College education adds up to 3.5 years of healthy life, being white adds up to 2.8 years, and being female adds up to 2.7 years. At the extremes, a college-educated, 62-year-old white woman can expect 18 more years of healthy life while a 62-year-old black male with a high school degree or less has only 10.3 years.
A reduction in the Social Security claiming age could therefore discriminate against certain people—especially those with less education, many of whom may have worked for decades in physically demanding jobs.
If they’re unable to work at age 62, and can’t get Social Security benefits, they might file for Social Security disability benefits instead. A higher claiming age would raise disability rates by three percent overall, Meara predicted, and by twice that amount among those with a high school education or less.
Employment and older workers
The willingness of employers to retain or hire people who would be forced to work throughout their 60s by a higher claiming age is another factor in the debate over Social Security rules.
There’s evidence that older men with five years or more of tenure at their job are less likely to lose their jobs than younger men, but older men without much seniority have weaker job security, according to Richard W. Johnson and Corina Mommaerts of the Urban Institute.
The past two recessions were apparently tough on men in their 50s and 60s. “The 2001 recession disproportionately increased layoffs for men aged 50 to 61, relative to younger workers, and that pattern might be recurring today,” Johnson and Mommaerts wrote. “Unemployment rates increased substantially for older workers in 2009, and rates for those age 65 and older increased much more rapidly during the Great Recession than in previous downturns.”
Exposed to the job market, older workers have a tougher time finding jobs, especially jobs that pay as much as they’re used to earning. Male job seekers ages 51 to 60 are 39% less likely to become re-employed each month than those ages 25 to 34, and men age 62 or older are 51% less likely. Women ages 51 to 60 fared better than men, but women age 62 and older fared about the same.
So even if they are healthy and capable of working, and despite laws and policies against age discrimination, many unemployed people who are in their 60s may be left without any source of income if the claiming age is raised.
It hurts to be neurotic
People who are relatively less intelligence, less conscientious or more neurotic tend to arrive at retirement age with less money than their smarter, more fastidious and more emotionally stable fellows, and might presumably be less able to adjust comfortably to an increase in the retirement age and/or a cut in Social Security benefits.
Although many smart people lost a lot of money in the bear market of 2008-2009, they also tend to have more money than other people, and can afford the losses, said Matthew Shapiro, an expert in "cognitive economics," which is similar to but not the same as behavioral finance.
People with no financial wealth had no exposure to the stock market, and therefore no stock losses. But they were five times more likely to experience financial distress from the crisis as people with money, Shapiro found, because of tighter credit conditions.
Personality factors, as distinct from educational achievement and intelligence, may also have something to do with how much money people accumulate during their lifetimes and how well prepared they will be for retirement in a world with less support from government.
For instance, self-descriptions of “conscientiousness” were associated with additional average annual earnings of $1,536, according to psychologists Angela Duckworth of the University of Pennsylvania and David Weir of the University of Michigan, as well as more years in the labor force. “Neuroticism” was associated a reduction in average earnings of $698 per year.
Conscientious people were “organized,” “thorough,” “responsible” and “hardworking.” “Agreeableness” and “extraversion” also had negative associations with average earnings in the study. “Openness,” which includes intelligence, curiosity and sophistication, was slightly negatively correlated with annual earnings.
Teaching Americans how to be conscientious may be just as important to their financial security in old age as teaching them math skills (“numeracy”) or other elements of financial literacy, Duckworth and Weir concluded.
© 2010 RIJ Publishing LLC. All rights reserved.
Annuities, Company/Trade Group News, News,
Record Sales for Indexed, Income Annuities in 2Q: Beacon
U.S. sales of fixed annuities were an estimated $19.4 billion in second quarter 2010, according to the Beacon Research Fixed Annuity Premium Study. Sales were up 18% from first quarter 2010. Compared to the unusually strong second quarter of 2009, results fell 30%.
Estimated year-to-date sales of $35.9 billion were 43% below those of first half 2009, which were the largest since the Study began in 2003. Sales figures do not include structured settlements or employer-sponsored retirement plans.
Estimated second quarter 2010 sales of indexed and income annuities were the highest in the Study’s 8-year history. Results for all four product types improved relative to the previous quarter. Income annuities advanced 31%, MVAs were up 29%, indexed annuities increased 25%, and book value annuities grew 6%. Compared to second quarter 2009, income and indexed annuities also were ahead – by 10% and 0.4%, respectively. But MVA sales fell 57%, and book value results dropped 48%.
Estimated second quarter and year-to-date sales, by product type:
Product Type 2Q Sales YTD Sales
Indexed $8.2 billion $14.9 billion
Book value $7.2 billion $14.1 billion
Fixed income $2.4 billion $4.2 billion
MVA $1.5 billion $2.7 billion
Relative to first half 2009, income annuity results improved 2%. Sales of the other product types declined. MVAs fell 73%. Book value annuities were down 57%. Indexed annuities dropped 3%.
Credited rates fell during second quarter, with top rates on multi-year guarantee annuities dropping from more than 4% to 3.75%. However, the fixed annuity advantage over Treasury rates increased, and the market apparently was expecting lower rates in the future. Both factors boosted fixed annuity sales quarter-to-quarter. But although the yield curve flattened, fixed annuity sales by guarantee period changed surprisingly little.
“The spread between fixed annuity and Treasury rates has widened since second quarter, and the flight to safety has intensified. These conditions suggest a potential quarter-to-quarter sales increase of about 10%,” said Jeremy Alexander, CEO of Beacon Research.
“Actual results will depend on the capacity and willingness of issuers to write new business, of course. Longer term, we also expect rising demand to support growth in fixed annuity sales. The public will be more risk-averse for some time to come, there is wide recognition of the need to save for retirement, and the value of tax deferral seems likely to increase.”
There were no quarter-to-quarter quarter changes in top five company rankings, which were as follows:
Total Fixed Annuity Sales (in $thousands)
New York Life 1,740,520
Allianz Life 1,680,253
Aviva USA 1,613,045
Western National Life (AIG) 1,293,876
American Equity Investment Life 1,046,737
By product type, Western National replaced New York Life as the quarter’s dominant issuer of book value annuities. American National led in MVA sales, replacing Hartford. New York Life remained number one in income annuities, and Allianz continued as the leading indexed annuity issuer.
Four of second quarter’s top five products were also bestsellers in first quarter, though some rankings shifted. The Allianz MasterDex X, an indexed annuity, continued as the leading product. The New York Life Lifetime Income Annuity rose from fifth to second place. American Equity’s top indexed annuity, Retirement Gold, came in third again. The New York Life Preferred Fixed Annuity moved from second to fourth place. New Directions, an indexed annuity issued by Lincoln Financial Group, joined the top five in fifth place. Second quarter results include sales of some 425 products.
Rank Company Product Product Type
1 Allianz Life MasterDex X Indexed
2 New York Life NYL Lifetime Income Annuity Income
3 American Equity Retirement Gold Indexed
4 New York Life NYL Preferred Fixed Annuity Book Value
5 Lincoln Financial New Directions Indexed
Three of these annuities also led distribution channel sales. All three were repeat performers, with MasterDex X the top independent producer product, the New York Life Preferred Fixed Annuity the bestseller in banks, and the New York Life Lifetime Income Annuity the leader in captive agent sales. In wirehouses, Pacific Life’s Pacific Explorer was the new sales leader. The NYL Select Five Fixed Annuity replaced another New York Life product in the large/regional broker-dealer channel. Among independent broker-dealers, MassMutual’s RetireEase income annuity led sales for the second quarter in a row.
Channel Company Product Product Type
Banks and S&Ls New York Life NYL Preferred Fixed Annuity Book Value
Captive Agents New York Life NYL Lifetime Income Annuity Income
Independent B-Ds MassMutual RetireEase Income
Ind. Producers Allianz Life MasterDex X Indexed
Large/Regional B-Ds New York Life NYL Select 5 Fixed Annuity Book Value
Wirehouses Pacific Life Pacific Explorer Book Value
© 2010 RIJ Publishing LLC. All rights reserved.
401(k)/IRA, Regulations/Legal , News,
All-Star Cast Expected for DoL Hearing on In-Plan Income
The U. S. Department of Labor’s Employee Benefits Security Administration (EBSA) has released the agenda for the upcoming joint hearing with the Department of the Treasury on lifetime income options for retirement plans.
So far, 44 organizations, including major insurance companies, asset managers, consulting firms and trade groups, have asked to have their representatives testify. Scheduled to appear are several well-known figures in the retirement income industry, including David Wray of the Profit Sharing Council of America, Mark Warshawsky of Towers Watson, Kelli Hueler of Income Solutions, Vanguard's Steve Utkus, Christine Marcks of Prudential Financial and many others.
Accompanying the agenda are copies of the witnesses’ requests to testify and testimony outlines. The hearing will begin at 9 a.m. (EST) on September 14 and 15, 2010 in the Labor Department’s main auditorium, 200 Constitution Avenue, NW in Washington, D.C.
A live webcast of the hearing will be available on EBSA’s Web site at www.dol.gov/ebsa.
The agenda and requests to testify are available on EBSA’s Web site at www.dol.gov/ebsa. Individuals planning to attend the hearing should provide contact information by email to e-ORI@dol.gov and arrive at least 15 minutes prior to the start of the hearing to expedite entrance into the building.
© 2010 RIJ Publishing LLC. All rights reserved.
Marketing/Advertising, Company/Trade Group News, News,
ING Launches Newest Phase of its ‘Numbers’ Campaign
ING has rolled out ‘Life in Numbers,’ a new television commercial that represents the next phase of a two-year-old marketing campaign focused on motivating consumers to prepare for retirement and their financial future. The August 30 launch also coincides with ING’s elevation of a redesigned public website.
The ad will air on major broadcast and cable outlets during coverage of professional Grand Slam tennis in the U.S. In addition, the spot will run along with ‘Gazillion,’ a previous ad, on financial news stations and during network coverage of high-profile sporting events throughout the fall season, including professional golf and professional and collegiate football.
To complement the television commercial, ING will run targeted digital display ads on popular web sites. The media effort will include banners ads on finance sites, a paid search campaign and custom retirement planning news feeds on the www.INGYourNumber.com web tool.
Both television and digital advertising will drive interest to ING's recently transformed public website, www.ing.com/us. The redesigned site provides a streamlined experience for all audiences seeking customized life stage products and services. Consumers starting out, raising a family or preparing for retirement can follow a simple and clear path to desired information, such as customer accounts, products offerings and ING's self-service tools and calculators.
To view the commercial, visit http://ing.us/about-ing/newsroom/tv-commercials/life-numbers-tv-ad.
The ‘Life in Numbers’ spot portrays a series of key moments in one man’s life. As upbeat music plays, the main character rapidly enters and exits through doors to several different scenes in his life, stopping briefly to interact with someone or something along the way—at his job; on his wedding day; after the birth of a child; in his family's new home; with his adult kids and their children.
Much of the commercial is filmed from an overhead perspective, offering only a glimpse of the framework within which these scenes are playing out—an oddly shaped hallway here, a curved partition there, and an occasional wall with the color orange.
In the final shot, the camera pulls back to reveal that all these events have taken place within the character's retirement number, which has been on his desk at work all along. The young man looks down with satisfaction, and then caps the number with an orange lid. A narrator explains how life is full of little twists and turns, but that ING can help and that the first step is finding your number.
Past commercials have featured people carrying bright orange retirement numbers as they go about their daily lives. An interactive web tool, www.INGYourNumber.com, enables consumers to calculate their number. In 2009, the advertising evolved to reflect the volatile market conditions and emphasized the importance of protecting that number. This past February, ING unveiled a spot called ‘Gazillion,’ which communicated the importance of proactive planning and using your number as a strategy to prepare for future goals.
© 2010 RIJ Publishing LLC. All rights reserved.
401(k)/IRA, Company/Trade Group News, News,
The Hartford Aims for Bigger Share of Mid-Sized DB, DC Market
The Hartford Financial Services Group, Inc. announced new sales and marketing initiatives, led by Denise Diana, aimed at capturing more of the mid-size 401(k) defined contribution and defined benefit retirement plan market—plans with $10 million to $100 million in assets.
As vice president, Retirement Plans Mid-Market, Diana will create a new team of middle market specialists to support financial advisors, Registered Investment Advisors and consultants, and identify mid-market development opportunities, the company said in a release.
“The Hartford has been building its considerable capabilities to serve the middle market for some time, including three strategic acquisitions that expanded our scale and core competencies,” said Sharon Ritchey, executive vice president and director of The Hartford’s Retirement Plans Group.
In September, The Hartford is launching a series of forums for advisors that will unveil new research on retirement plan sponsors’ and participants’ evolving needs, and new approaches in meeting them.
The forums, “A Dose of Reality: Strong, No Sugar,” will consist of practice management modules and insights into The Hartford’s new middle-market initiatives. The seminars will take place in Boston, Atlanta, Irving, Texas, and San Francisco. Diana and other executives from The Hartford’s Retirement Plans Group will be on hand.
Diana has 20 years of experience in the insurance industry, most recently from Transamerica where she was vice president of business development. She has also held key leadership positions at Prudential Retirement and CIGNA. She is a graduate of Bryant College where she earned a BS with a concentration in marketing, and holds FINRA series 26, 7 and 66 licenses, and a Connecticut Life and Health Producer license.
© 2010 RIJ Publishing LLC. All rights reserved.
News,
Response to Last Week's FIA Article
David Babbel writes to comment on RIJ's article in the August 25 issue on fixed income annuities, which reviewed a paper that he co-authored with Jack Marrion and Geoffrey VanDerPal:
I appreciated your thoughtful review of our recent article on "Real World Index
Annuity Returns" in your August 25th, 2010 edition of the Retirement Income Journal.
It was accurate and expressed a healthy skepticism in your final paragraph, that
referenced the final paragraph in our article about the levers included in index
annuities, which can be changed by the insurer at its discretion.
[We] should have added to that sentence that although the insurer does have discretion
to change certain contract parameters, such as the
cap levels or participation rates, it does not have unfettered discretion to alter
them, because the contracts themselves have minimum guaranteed levels for both, as
well as state minimum nonforfeiture value schedules, that will always ensure a
return of zero or greater.
Moreover, and more importantly, the insurers face the
discipline of the market. If they try and credit less than a competitive and fair
rate for FIA writers, they will face the dissatisfaction of their consumers, the
rancor of the agents, the cost of lapsation, and the hesitancy of agents to ever put
future clients in such products. This would essentially be the death knell of their
future business.
Therefore, consumers have at least three layers of protection—
contractual minimums, state minimum nonforfeiture values, and competition enforced
by both consumers and, more importantly, agents (because they are more aware of what
other companies are offering)—which should assuage the risk aversion of many.
Annuities, News, International,
Britain’s Annuity Muddle
In the United Kingdom, an estimated six out of ten people are settling for retirement income that is up to 30% lower than possible because they don’t shop around for the best annuity rate when they retire and convert their savings to income. The situation sheds light on the decisions U.S. consumers might face if 401(k) companies were to offer competing income options.
The financial secretary to the British Treasury, Mark Hoban, is reported to have asked the Association of British Insurers (ABI) to explain why so few people use the ‘open market option,’ which allows new retirees to transfer their money from the asset management company where they accumulated their savings to another provider with a higher annuity rate.
In the first half of this year, only around 40% of retirees took advantage of the open market option. The rest settled for the annuities offered by the companies with which they had built up their “pension pots,” potentially missing out on hundreds of pounds of extra pension.
Douglas Baillie, a Perth-based adviser who this year launched the online service comparemyannuity.co.uk, believes there are several reasons why more people do not shop around for a better annuity. “There is a lack of awareness generally about the open market option and pension companies are not as forthright about it as they should be. Although they are obliged to mention it to policyholders as they approach retirement, they tend to bury it in the small print at the end of a six-page letter.
“Also when companies spell out the choices under their policy, they only write down the pension which they offer, or the alternative of a tax-free cash lump sum plus a reduced pension. What they really should be doing is including a third choice telling policyholders they can buy a possibly better pension elsewhere and how they can go about it.”
Another specialist comparison service was launched this week by fairinvestment.co.uk.
Questioned by The Herald, the ABI refused to comment beyond saying: “The ABI and its members are committed to making the process of shopping round for an annuity as straightforward as possible.”
However, David Trenner of Intelligent Pensions in Glasgow is skeptical. He says: “Why is it that the ABI even allows companies which don’t want to sell competitive annuities to continue doing so, even though they are clearly in breach of their duty to treat customers fairly? The answer is that the ABI is a trade body so it can hardly turn round to the likes of companies such as Scottish Widows or Friends Provident and tell them what to do.”
“Take the example of a 65-year-old woman who may have saved for 30 years with the Scottish Widows and built up a pension fund of £60,000,” Trenner said. “If she was retiring today she could be offered an annuity of £3300 per annum, when she could get £3748 just by switching to Aviva. Why would she want to take a lower pension for the rest of her life just because she has saved with a particular company?
People with health problems or lifestyle issues, such as smoking, may be able to get even better annuity rates, but not all pension companies offer specially enhanced annuities so their customers may be even more disadvantaged. Baillie recently managed to improve the pension of one of his customers, who was in poor health, by a massive 60%, though the normal uplift is more in the region of 20%.
Advisers receive a 1% commission when they arrange an annuity on your behalf, or they may ask for a fee. If you have only a small pension pot, it may be uneconomic for an adviser to put in the work required and the fee may be disproportionate. However, you can do some shopping around for free by visiting the Financial Services Authority’s annuity comparison tables at www.moneymadeclear.org.uk.
© 2010 RIJ Publishing LLC. All rights reserved.
Industry Views,
Found in Translation
The U.S. Census Bureau projects that minorities—all people other than non-Hispanic, single-race whites—will account for roughly 54% of the U.S. population by the year 2050. If financial services firms hope to be relevant in these growing circles of the population, they must diversify the languages in which they communicate.
To this end, a number of annuity issuers have introduced alternative language websites. In most cases, these are fully translated versions of the firms’ English-language public sites. Thirty percent of the firms we cover now provide access to alternative language websites. That’s twice the number of firms offering such resources in 2008.
Spanish is presently the language most frequently offered. This comes as no surprise, given that Hispanics are the nation’s largest minority group and continue to grow in terms of both population and influence. Chinese-language websites are a distant second in terms of availability, followed by Korean and Vietnamese sites, respectively.
TIAA-CREF’s Spanish-language website is the most unusual and engaging among the firms we cover. Its design differs from that of the English-speaking version and it offers fresh investment education and marketing content tailored to Spanish-speaking investors. Four life events-focused promotional images appear prominently on the homepage. Product information and retirement education are easily accessible via a menu bar at the top of the screen.
New York Life, the nation’s largest mutual insurer, offers the most comprehensive alternative language website offerings. The public homepage provides links to independent websites in Spanish, Chinese, Korean and Vietnamese. The four websites have a similar homepage design, which features a large promotional image at the top, a left-side main navigation menu and a variety of information in the body.
As in TIAA-CREF’s Spanish-language site, the investment content and marketing promotions on New York Life’s sites are customized for their respective audiences. Although the quality and quantity of the content varies across the websites, New York Life has implemented a consistent but flexible online infrastructure that should allow the firm to effectively market its products and services to numerous demographics of non-English speaking investors in the U.S.
Given the potential for adding new business, many more firms are likely to expand and upgrade their public alternative-language websites in the coming years.
New York Life Spanish Language Public Website
© 2010 Corporate Insight, Inc. All rights reserved.
Industry Views,
Behavioral Economics and Retirement Investing
PIMCO and its affiliates in the Allianz Family recently sponsored “Behavioral Finance and the Post-Retirement Crisis,” a landmark study of behavioral economics as it applies to retirement decision-making. It was published in April in response to the U.S. Treasury and Labor Departments’ Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Income Plans.
Allianz and PIMCO tapped leaders in the field of behavioral finance, led by Shlomo Benartzi, Ph.D., of UCLA, to conduct the study. Below, PIMCO Retirement Product Manager Tom Streiff explains how the study’s findings can foster the development of successful retirement income products.
Q: One major issue for retirees is the risk that they take with their investments. What did the behavioral finance study reveal about risk-taking and risk aversion among older adults?
Streiff: As part of the behavioral finance study, Columbia University professor Eric Johnson built on earlier studies of loss aversion and found that retirees as a group display “hyper loss-aversion.”
It’s not surprising that retirees are more concerned about loss than younger folks. But what was surprising in the study was the magnitude of their concern. For instance, retirees wouldn’t accept a “coin flip” equivalent bet unless they could expect to win $100 on heads for every $10 lost on tails. Earlier studies have shown that the average investor needs to expect to win $20 for every $10 lost in order to feel, on an emotional level, that he or she will “break even.”
It was also interesting that retirees generally respond unfavorably to financial products that offer substantial protection and guarantees. Johnson concluded that retirees view the purchase of certain insured investments as a form of sacrificing control of their money, and perceive it a loss.
This is where “hyper loss-aversion” can inhibit their ability to make what we believe would be more sensible financial decisions. For instance, even if a product offers a future stream of income or can cushion retirees against a large drop in the stock market, they may not buy it if they can’t withdraw their money whenever they want.
Q: How can providers of income-oriented investment products break through this “hyper loss-aversion” mindset and reach retirees? Is it a matter of product design, outreach to advisors and investors, or both?
Streiff: The research highlights the challenges that investment firms face in designing new products and in positioning them as tools for increasing control.
Take inflation, for example. It is the “silent killer” of retirement savings. Over time, inflation can inflict more damage on a portfolio than bear markets or financial crises. Investment firms and planners need to build products and solutions that defuse this inflation threat. They also need to communicate the value of directly hedging inflation and preserving purchasing-power over time. If retirees believe that they are reducing the threats to their wealth, their hyper risk-aversion can be channeled into better decisions.
Eliminating or reducing the chance of default in the portion of a retiree’s assets that provides their basic living expenses can also alleviate loss-aversion. Once retirees’ essential spending needs are taken care of, they may feel better about pursuing higher returns with the rest of their savings.
Q: Why is it so hard for people to perceive the threat of inflation?
Streiff: Most people—especially older people—think in nominal dollars, and overlook the corrosive effect of inflation. Consider that an annual inflation rate of 3% compounded over 20 years can erode purchasing power by nearly 50%. People find it hard to comprehend that they could lose almost half of their savings in real (inflation-adjusted) dollars without losing a single penny in nominal dollars.
In our behavioral study, Eldar Shafir of Princeton University looked at the psychological basis of the “money illusion,” which refers to the dominance of nominal dollars in decision-making. When the future value of savings was stated in nominal dollars, a non-indexed contract was preferred. But when the future value of saving was stated in real dollars, reflecting the loss of purchasing power, they tended to favor an inflation-indexed contract. Moreover, when contract information was presented in a neutral way, preferences were similar to those when nominal dollars were presented.
While the findings confirm that most people think about risk in terms of nominal dollars, they also show that a clear demonstration of the risk of inflation can help minimize the “money illusion.”
Q: What does this result tell us about how to market inflation hedging to individuals?
Streiff: Shafir’s study highlights the critical gap that still exists between the actual threat that inflation poses for retirees and their perception of the threat. More starkly, it shows that their failure to recognize the impact of inflation could harm the sustainability of their finances and cause a material erosion of their purchasing power and standard-of-living.
However, the results also suggest that proper education and presentation, including the use of real dollars instead of nominal dollars to describe future account values or future income streams, can correct this major financial misperception. Not only should financial firms offer products that hedge inflation risk, but they should also present financial information in a way that overcomes the all-too-common intuitive dismissal of inflation threats.
Q: The report also found that products characterized as “income solutions” are more attractive than those positioned as investments. Does this imply that all retirement investment discussions be presented in terms of income?
Streiff: Several key behavioral studies have established that “framing” decisions can have a huge impact on transactions. Consider the difference between advising a person to spend about 70% of their current income in retirement or to plan on eliminating 30% of their current expenditures during retirement. Even though these two proposals are mathematically equivalent, most people find the 30% rule unpalatable and the 70% rule appealing.
As part of the behavioral finance study, Professor Jeffrey Brown of the University of Illinois applied this logic to retirement income, asking more than 1300 individuals over the age of 50 whether they’d choose a life annuity paying $650 each month until death or a savings account of $100,000 bearing 4% interest. Half of the respondents were presented the annuity choice in a "consumption" frame—a monthly income of $650 for life—and half were presented in an "investment" frame—a monthly return of $650 for life.
That simple change caused a major difference in the response to the savings accounts versus the life annuity question. Seventy percent of the respondents chose the annuity when it was presented in the consumption frame (as monthly income) while only 21% of the respondents chose the annuity when it was presented in the investments frame (as monthly return).
Q: How can the results of the “framing” study be built into marketing and product design strategy for income products?
Streiff: The study tells us that the respondents have a far more favorable perception of an annuity when it is presented as a consumption plan that guarantees lifetime income. When an annuity is presented as an investment plan, the owner perceives a greater risk of dying early and relinquishing the wealth to the insurer.
Most of life’s routine expenses—mortgage payments, electric bills, etc.—must be paid monthly, and guaranteed income can cover those expenses. Investment returns, on the other hand, are typically irregular and feel more abstract with regard to expenses.
Clearly, the most useful result of this study is that retirement income products will get far more traction if they are marketed on the basis of the monthly income they can provide for the retiree than on the basis of their “returns.”
All investments contain risk and may lose value. PIMCO does not offer insurance products, including guaranteed income products, or products that offer investments containing both securities and insurance features. This material contains the current opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. 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.