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Taxes in Retirement: Front-Load or Back-Load?

People seem to dislike taxes even more after they retire. The tax bite becomes painfully obvious when not simply withheld from a paycheck, and a required minimum distribution (RMD) often means nothing to wealthy retirees but a thankless tax bill. Taxes on Social Security benefits can feel like an unjust clawback of just deserts.

The ability to reduce a high net worth retiree’s tax burden—in the form of income tax, Medicare tax, Social Security tax, state tax, or taxes on bequests—therefore represents a rich opportunity for financial advisers to demonstrate their skills, bona fides and value.

In a presentation at Wealth2k’s IFLM 2019 adviser conference two weeks ago, Zach Parker, a vice president at Securities America demonstrated how an adviser could use the “bucketing” technique of retirement income generation to minimize federal taxes during the first 10 years of retirement for a 65-year-old couple.

In Parker’s hypothetical situation, the couple has $1 million in qualified accounts and $500,000 in non-qualified (taxable) accounts. They’ve expressed a need for $8,435 in gross real monthly income. Each will receive a Social Security of $18,000 a year, inflation adjusted, if they retire in the current year.

He offered two solutions. One of the solutions called for “back-loading” federal income taxes by minimizing them during the first ten years of retirement. That involved dipping into qualified savings as slowly as RMD obligations would permit. The second solution called for maximizing taxes in the first decade—front-loading taxes—by spending qualified assets or converting them to Roth IRAs within that period.

Back-loading federal taxes

To create the desired income for the couple during their first five years of retirement without triggering any federal tax, the hypothetical adviser recommends buying five-year period certain single premium immediate annuities (SPIAs).

In this case, the adviser uses $51,190 of the qualified money and $263,431 of the non-qualified money to purchase two single premium immediate annuities running concurrently for the first five years. The qualified SPIA will produce $10,500 in annual income, all of which will be taxable, and the non-qualified SPIA will produce $54,720 per year, of which only $2,025 will be taxable.

Using the Social Security tax formula, the adviser adds $10,500 + $2,025 + $18,000

(half the couple’s Social Security benefit). It equals $30,525, which is under the $32,000 threshold for taxing any of the Social Security benefit. Total annual income for each of the first five years will be $101,220 ($54,720 + $10,500 + $36,000). Only $12,525 will be taxable, which is under the standard deduction ($27,000) for those over age 65. The couple pays no federal taxes.

Investing for the second five-year term or “bucket,” the adviser uses income annuities again, but reverses the weight of qualified and non-qualified money in order to satisfy the couple’s RMDs. This time, $262,621 of qualified money goes to a period-certain SPIA paying $61,000 a year for five years and $68,300 goes into a deferred income annuity (DIA) for income of $16,592 per year for five years.

The annual income for the first year of the second term is $117,336 ($61,000 + $16,592 + $39,744 in Social Security). Of that amount, $70,719 is taxable. That includes $33,782 (85% of the Social Security benefit), $61,000 from the qualified annuity, and $2,937 from the non-qualified annuity—minus the $27,000 standard deduction. At current rates, the federal tax bill will be $8,098. The couple’s net income would be $109,238 ($117,336 – $8,098).

Front-loading federal taxes

The tax-delaying strategy described above would backfire, Parker pointed out, if federal income tax rates rise considerably over the next two or three decades in response to the higher national bills for Social Security and Medicare that will come with an aging society. So he proposed an alternate strategy that would frontload rather than backload the couple’s federal tax liability.

This alternative (“Option 2”) uses Roth conversions to bring taxes forward. A conversion of a traditional IRA to a Roth IRA means satisfying the tax liability on the IRA assets while allowing them to continue to grow tax-deferred.

Under this strategy, the clients fund their income for the first five years of retirement by applying $314,621 to the purchase of a period certain SPIA that would pay $65,220 a year. Simultaneously, they would convert $65,000 in qualified money to a Roth IRA. With a taxable income that high, 85% of their Social Security benefit ($30,600) would be taxed as ordinary income.

Their first-year federal tax would be $21,158 on taxable income of $133,820 ($65,220 + $65,000 + $30,600 minus $27,000 standard deduction), of which $65,000 would remain invested in the Roth IRA. Their after-tax first-year spending would be $80,062 minus the tax cost of the Roth conversion (about $10,000).

The couple would follow a similar strategy each year for each of the first ten years of retirement. Over those ten years, they would have paid about $200,000 in federal income taxes (compared with $49,000 in the tax-backloading strategy).

In the 11th year, their qualified assets would equal zero (instead of $1.235 million in the tax-backloading strategy), having either been spent as income or converted to Roth IRAs. Federal taxes after age 75 would be negligible, and beneficiaries would not receive qualified money, with its implicit tax bill.

In the second (tax-frontloading) strategy here, Parker said, one of the goals was to minimize Medicare taxes. For individuals with incomes under $170,000, the monthly Medicare premium is currently $135.50 per month. The Medicare premium rises with wealth, to a maximum of $460.50 per month for those with annual incomes of $750,000 and higher in retirement. Presumably $5,526 a year wouldn’t be onerous a premium for the rare person with a post-age-65 annual income of $750,000; that’s 4% of $18.75 million.

To download a copy of Parker’s PowerPoint slides, click here.

© 2019 RIJ Publishing LLC. All rights reserved.

Subscription-based planners sue SEC over Reg BI

XY Planning Network (XYPN) is filing a lawsuit in the Southern District of New York to challenge the Securities and Exchange Commission (SEC) over its new Regulation Best Interest (Reg BI), the co-founders of the subscription-based network of financial planners serving Gen X and Gen Y investors said in a release this week.

“Brokers and dual-registrants should not be able to use titles that connotes they are in the business of providing fiduciary advice unless they do so at all times, and that once a consumer engages a fiduciary advisor that advisor remains a fiduciary for the entirety of the advice relationship and such advisors cannot downgrade their fiduciary duty when implementing brokerage products pursuant to that fiduciary advice,” said Michael Kitces, co-founder and chief strategy officer of XYPN.

In the release, XYPN said “the SEC has exceeded its regulatory authority in the creation of Reg BI by permitting comprehensive financial planning services to be delivered in connection with the sale of brokerage products without requiring the financial planner to register as an investment adviser and/or without fully subjecting such financial planning advice itself to an RIA’s fiduciary duty.

“XYPN alleges that the SEC also exceeded its authority by reinterpreting the Investment Advisers Act of 1940, and the ‘solely incidental’ exemption for broker-dealers therein, to permit dual-registrants under Reg BI to use advisor-like titles and hold out as being in the business of providing financial planning advice while actually selling non-advisory brokerage services and products.”

The SEC’s creation of a “Best Interest” rule for broker-dealers that is not actually a full fiduciary rule… is anti-competitive to Registered Investment Advisers who differentiate in the marketplace by their actual Best Interests commitment to consumers (and are actually held to such a standard), the release said.

“With Reg BI, however, the SEC is permitting brokers and dual-registrants to provide financial planning advice, without being subject to full RIA registration and/or without being subjected to the fiduciary duty that Congress prescribed for such advice,” said XYPN’s co-founder and CEO Alan Moore, in the release.

© 2019 RIJ Publishing LLC. All rights reserved.

Pacific Life’s new 5-year VA/GMAB rider sets -10% floor

Pacific Life Insurance Company has introduced a new optional guaranteed minimum accumulation benefit (GMAB) on certain of its variable annuities that “can provide guaranteed lifetime income and unlimited growth potential,” the company said in a release.

The rider is called Protected Investment Benefit, and costs 0.85% per year (to a maximum of 2.50%) over a five-year term or 10-year term in addition to the variable annuity contract’s mortality and expense risk charges (0.95% to 1.35%, depending on share class), investment fees (0.28% and up), administrative fees (0.25%), and death benefit fees (0.25% extra for enhanced benefit).

By the end of the five-year option, policyholders can be assured of having at least 90% of their first-year premiums. By the end of the 10-year option, they can be assured of having at least 105% of their first-year premiums. At the end of five or 10 years, as the case may be, the rider and its fee automatically expires. Pacific Life offers additional GMAB riders that protect 100% of premium but has more limited investment options.

Clients who choose either option can choose from a variety of asset allocation options with up to 80% equity exposure. According to the product fact sheet, the investments aren’t subject to volatility controls or asset-transfer programs (which might include automatic rebalancing toward bonds during equity downturns). This GMAB can be combined with other living benefits to generate lifetime income. The contract can also be converted to a life annuity.

Unlike a structured variable annuity, there’s no cap on investment returns, so their earning potential is unlimited,” said Brian Woolfolk, FSA, MAAA, senior vice president of sales and chief marketing officer for Pacific Life’s Retirement Solutions Division.

© 2019 RIJ Publishing LLC. All rights reserved.

40% of life insurers’ bank loans below investment grade: AM Best

About three-quarters of the $40.6 billion in bank loans owned by the U.S. life/annuity companies are rated below investment grade, according to a new AM Best report.

The Best’s Special Report, titled, “Bank Loans: Low Credit Quality, But Manageable Exposure,” notes that bank loans are not yet widely held throughout the industry.

Bank loan holdings totaled over $54 billion in par value for the insurance industry as of year-end 2018. Life/annuity insurers own nearly three-quarters, at 74%, with property/casualty and health insurers owning 23% and 3%, respectively.

More than 90% of bank loans in the property/casualty and health segments are below investment grade, but they are concentrated primarily with the largest holders, who generally have a strong expertise in this asset class.

Most insurers that own bank loans below investment grade have exposure of less than 10% of capital and surplus. In the life/annuity segment, the top 10 bank loan holders owned 79% of the total bank loans as of year-end 2018.

Most of these companies are large, with over $7 billion in capital and surplus, and bank loans make up just a small percentage of their bond portfolios, typically less than 4%.

Insurers use bank loans primarily for diversification, as well as for gaining floating rate exposure and additional yield. Returns from loans have been generally high due to the lower credit quality and illiquidity.

Additionally, the overwhelming majority of these loans are senior debt, indicating that nearly all of these loans are in a favorable position for repayment in the event of a default.

“However, with even marginal borrowers able to access loans in a strong economy, the risk of loan defaults will rise as the economy turns,” said Jason Hopper, an associate director on AM Best’s industry research and analytics team.

The report adds that the benefit of floating interest rates on bank loans, which somewhat protects insurers from rapidly rising interest rates, is further diminished in a continued low interest rate environment.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Lincoln’s Fuller wins IRI award

Will Fuller, executive vice president and president of Annuities, Lincoln Financial Distributors and Lincoln Financial Network, was recognized by the Insured Retirement Institute (IRI) as the recipient of their 2019 Industry Champion of Retirement Security award.

The award recognizes the contributions of individuals to the enhancement of retirement security in the United States through advocacy, communication, education and other initiatives. Fuller is the first industry recipient of the annual award.

Fuller “has been an industry advocate for best interest regulation, with agencies including the Department of Labor (DOL), and Securities and Exchange Commission (SEC), to ensure the best possible outcome for the benefit of customers. In addition, he has played a leadership role in the Alliance for Lifetime Income, a non-profit organization focused on raising awareness on the importance of retirement income planning and protected income in retirement,” a Lincoln release said this week.

A former board member of IRI and LL Global, Inc., the parent organization of LIMRA and LOMA, Fuller was the recipient of IRI’s 2014 Leadership Award for his contributions to the retirement income planning industry.

IRI created the Champions of Retirement Security Award in 2013 to recognize policymakers who have contributed to retirement security in America. IRI broadened the program in 2019 to recognize private sector individuals.

JP Morgan offers tool for plan advisors

J.P. Morgan Asset Management has launched Price Smart, a digital tool that lets plan advisors generate custom 401(k) pricing proposals for clients. Price Smart is available through Retirement Link, J.P Morgan’s bundled defined contribution plan offering.

Price Smart enables advisors to:

Identify potential cost savings

  • View three pricing options per plan, in flat dollars and percentages
  • Compare Retirement Link pricing proposal vs. current 401(k) fees

Tailor proposals to each plan

  • Present bundled or TPA pricing for multiple scenarios
  • Help clients make informed decisions by customizing additional services

Get instant results

  • Gain secure, 24/7 access to plan quotes on demand
  • Save and manage proposals online
Scholten to retire from Principal

Gary Scholten, executive vice president, chief information officer, chief digital officer, and direct report to Principal chairman, president and CEO Dan Houston, will retire effective Dec. 31, 2019, the company reported.

Scholten joined Principal in 1980 and has overseen the company’s use of information technology since 2002. He was named executive vice president in 2014 and became the chief digital officer in 2017. Scholten also oversees global sourcing and leads our offshore resourcing, Principal Global Services in Pune, India.

Scholten was part of Principal’s African America/Black Employee Resource Group for 10 years and chaired its Diversity Council for the past seven years. He has also served as the chairman of the board for the Technology Association of Iowa.

An internal and external global search for Scholten’s replacement is currently underway.

Principal absorbs Wells Fargo plan services

As part of its absorption of the Wells Fargo Institutional Retirement & Trust (IRT) business, Principal Financial Group is incorporating capabilities from the Wells Fargo IRT platform into its own proprietary recordkeeping platform. The enhanced Principal platform will serve both defined contribution and defined benefit participants.

Principal has accelerated investments in the Principal Total Retirement Suite (TRS) and its retirement recordkeeping system—launching financial wellness resources such as Principal Milestones, Principal Real Start, and a chat feature. Principal plan sponsors and participants will have access to a single source for plan benchmarking, performance monitoring, and feedback on plan health, regardless of plan type.

Plan sponsor benefits:

Flexible to fit various plan sizes and needs. Robust plan health assessment, benchmarking and reporting plus with a strategy dashboard.

Easy-to-administer plans. Plan sponsors have key decision-making and time-saving tools and resources to manage payroll processing, loans, and participant notices, etc. The chat feature for retirement plan sponsors gives them with answers to administrative questions.

Simplicity. Customizable, all-in-one retirement solutions for all major types of retirement plans, as well as risk management support.

Participant benefits:

Personalization​. Provides tailored education and communications, including the Principal Real Start on-boarding experience, Retirement Wellness Score, and Retirement Wellness Planner, all capabilities. Customizable features on the website enable participants to build a retirement savings dashboard.

Simplicity. Interactive tools and resources such as contribution slider with easy button, My Virtual Coach annual check-up and account aggregation.

Confidence enhancement​. Participants receive congratulatory messages when they take progress. The Principal Milestones platform facilitates will preparation, budgeting and applying for scholarships.

The enhancements to the Principal platform are expected to be available in 2020 and coincide with the transition of Wells Fargo IRT clients to the Principal platform.

11% of Gen Xers still paying off their own student loans: Schwab

Many 401(k) participants in Generation X struggle with credit card and other debt, according to research from Schwab Retirement Plan Services. About 40% of this group, ages 39 to 54, said they focus more on debt repayment than saving for retirement.

The nationwide survey of 1,000 401(k) plan participants included 368 Gen Xers, 315 Millennials and 317 Baby Boomers. Among Gen Xers, 70% feel “on top” of their 401(k) investments but “still face obstacles and experience financial stress.”

When asked what prevents them from saving more for retirement, Gen Xers named:

  • Unexpected expenses like home repairs (38%)
  • Credit card debt (31%)
  • Monthly bills (29%)

In addition, 22% are paying for children’s education/tuition, and 11% are still paying off their own student loans. Saving for retirement is Gen Xers’ top source of money-related stress (40%), followed by credit card debt (27%), and keeping up with monthly expenses (23%).

Genworth’s U.S. life insurance units suffer ratings downgrade

AM Best has downgraded the Financial Strength Rating (FSR) to B (Fair) from B+ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bb+” from “bbb-” of Genworth Life and Annuity Insurance Company (GLAIC) (Richmond, VA).

“The ratings of GLAIC reflect its balance sheet strength, which AM Best categorizes as strong, as well as its weak operating performance, limited business profile and appropriate enterprise risk management (ERM),” AM Best said in a release.

Concurrently, AM Best downgraded the FSR to C++ (Marginal) from B- (Fair) and the Long-Term ICRs to “b” from “bb-” of Genworth Life Insurance Company (GLIC) (Wilmington, DE) and Genworth Life Insurance Company of New York (GLICNY) (New York, NY).

Additionally, AM Best affirmed the Long-Term ICRs of “b” of Genworth Financial, Inc. (Genworth) [NYSE: GNW] and Genworth Holdings, Inc. (both domiciled in Delaware), as well as their Long-Term Issue Credit Ratings (Long-Term IR). The outlook of these Credit Ratings (ratings) is stable.

The rating downgrades of GLAIC follow a deterioration in its operating performance, in AM Best’s view. There has been history of negative profitability in aggregate and in most lines of businesses. Uncertainty around the potential for future reserve increases and other write-downs decreases credibility of future earnings projections.

Absolute and risk-adjusted capital, as measured by Best’s Capital Adequacy Ratio (BCAR), has decreased steadily over the past few years, driven by poor operating performance, although the overall balance sheet is assessed as strong. GLAIC calculated its risk-based capital (RBC) level at 422% at the end of 2018, a decrease from the prior year’s RBC score of 427%.

The ratings of GLIC and GLICNY reflect the group’s balance sheet strength, which AM Best categorizes as weak, as well as its weak operating performance, limited business profile and appropriate ERM.

The rating downgrades of GLIC and GLICNY follow a deterioration in AM Best’s view of its balance sheet strength and its operating performance. Risk-adjusted capitalization, as measured by BCAR and other capital metrics, deteriorated significantly.

An offsetting factor is management’s focused strategy of garnering actuarially supported premium rate increases on in-force long-term care policies.

“Management identified the need for these increases in 2012, took corrective action and has achieved meaningful results, although the ability to gain sufficient premium increases across all states will take a number of years.

“While GNW has had some success at achieving these increases in the past, operating losses continue to persist and the impact and timing of the approval and receipt of those rate increases continue to be uncertain,” the release said.

The rating affirmations of the two holding companies, Genworth and Genworth Holdings, Inc., as well as its associated debt, reflect the impact of the recently announced the sale of Genworth’s 57% stake in Genworth MI Canada, Inc. to Brookfield Business Partners.

Net proceeds are expected to be approximately $1.8 billion, strengthening the balance sheet flexibility and liquidity of the holding company as the proceeds are expected mainly to be used to reduce upcoming debt.

Military is adapting to new retirement savings system: Survey

A survey conducted by First Command Financial Services, which provides banking and financial coaching services to members of U.S. military forces, shows that middle-class military families who are covered by the new Blended Retirement System (BRS)—which combines the traditional military pension with a defined contribution plan—are more likely that those in the traditional military pension program to:

Invest conservatively. The Index reveals that their most frequent investment choice is the government securities fund (“G Fund”) which offers protection from loss of principal but delivers returns that may be below the rate of inflation. The G Fund was selected by 43% of BRS participants versus 25% of those in the traditional pension.

Contribute to the government’s tax-advantaged savings program. Families covered under the BRS are significantly more likely than those covered under the traditional military pension to contribute to the Thrift Savings Plan (TSP), the government’s 401(k)-style defined contribution plan for service members and federal employees. The Index reveals that the TSP participation rate is 81% for those in the BRS versus 56% for those in the traditional pension system.

Invest 5% or more of their paychecks in TSP. Among those participating in TSP, 82% of BRS participants are contributing 5% or more of their pay to the savings plan. That compares to just 51% for those in the traditional system.

Feel confident about retirement. Eighty-four percent of BRS participants say they feel extremely or very confident in their ability to retire comfortably. That compares to 56% for those in the traditional system.

Benefit from working with an adviser. TSP participation is particularly high among career military families who seek out professional financial assistance. The First Command Financial Behaviors Index reveals that the participation rate is 70% for those who work with a financial advisor versus 45% for their do-it-yourself colleagues.

The survey was conducted among commissioned officers and senior NCOs in pay grades E-5 and above with household incomes of at least $50,000.

© 2019 RIJ Publishing LLC. All rights reserved.


Voya rolls out risk-adjusted TDFs

Voya Financial’s MyCompass Index, a new target date fund series designed by flexPATH Strategies Inc., is now available to all of Voya’s retirement plan customers, according to a release this week.

Target date funds (TDFs) have reached $2.1 trillion in assets under management in employer-sponsored defined contribution plan accounts as of the end of 2017, up from $1.3 trillion in 2015, according to industry data cited by Voya. Of the $2.1 trillion, so-called custom TDFs have an estimated $430 billion.

MyCompass Index includes the following key features and benefits:

Multiple participant glide paths. MyCompass Index offers three glide paths (conservative, moderate and aggressive) to address individual needs and risk tolerances.

Fund name transparency. In addition to selecting the year in which a participant plans to retire (as one does with a traditional TDF), participants will add the risk level to the name of his or her fund. For example: “MyCompass Index Aggressive 2025.”

Fiduciary Protection. MyCompass Index offers increased support and protection around TDFs, shielding the fiduciary responsibility for plan sponsors to select and monitor investment funds for participants.

The new MyCompass Index solution complements Voya’s current TDF solutions, which are offered by Voya Investment Management. Assets in these funds have increased from $10.5 billion to $16.5 billion over the past five years (as of June 30, 2019). Voya’s data shows that approximately 80% of participants in its new Small-Mid Corporate Market 401(k) plans select Voya TDFs.

Voya continues to invest in its suite of digital retirement planning services including a digital financial wellness experience, special needs planning tools and personalized account videos, the release said.

© 2019 RIJ Publishing LLC. All rights reserved.

Why Eight States Are Suing Over ‘Reg BI’

Which is greater: The SEC’s cynicism in using its sacred powers to protect the brokerage industry instead of the investing public, or the naïveté of eight state attorneys general in believing that they can bring the powerful brokerage industry to heel?

A U.S. District Court judge in the Southern District of New York has been asked to sort things out.

On Monday, the attorneys general of New York, California, Delaware, Maine, Oregon, New Mexico, Connecticut and the District of Columbia—all pro-Clinton in 2016—sued the SEC and asked the court to set aside the SEC’s recently passed Regulation Best Interest or “Reg BI.”

According to the complaint, Reg BI is wrong because it merely requires dually-registered financial advisers (who can sell securities on commission and give advice for an asset-based fee) not to put their own interests ahead of their clients’ when recommending products and doling out advice.

Instead, the suit says, the SEC should have carried out the directive of the 2010 Dodd-Frank legislation and created a regulation that required everyone selling securities or doling out financial advice to act as true “fiduciaries” and advise clients without regard to their own interests.

Wall Street is happy with Reg BI, as it should be. SEC chairman Walter “Jay” Clayton III, a 2017 Trump appointee, gave brokers and asset managers a best interest rule that understands their needs. In the Final Rule, Clayton wrote, “We have declined to subject broker-dealers to a wholesale and complete application of the existing fiduciary standard under the Advisers Act because it is not appropriately tailored to the structure and characteristics of the broker-dealer business model.” [Emphasis added.]

The ‘Merrill rule’ reclaimed

Reg BI affirms the status quo, which has been in place since before the Great Recession. In 2007, a federal appeals court panel reversed the so-called “Merrill rule,” which since 1999 had allowed brokers to earn asset-based fees from clients without registering as advisers or accepting a fiduciary responsibility—selflessness—toward their clients.

In response, “tens of thousands of brokers registered as Investment Adviser Representatives,” Ron Rhoades, a professor of finance at Western Kentucky and close observer of fiduciary legislation, told RIJ in an email this week. But many of them maintained their broker-dealer affiliations.

Their new “dual registration” allows them to accept asset-based fees under the selfless fiduciary standard and to accept commissions under the more self-interested suitability standard of conduct (akin to caveat emptor or “buyer beware”). In this way, brokers recovered the flexibility the 1999 Merrill rule had provided them.

“The SEC allows a person and firm to be both a salesperson (broker-dealer) and a fiduciary (investment adviser) at the same time, for the same client,” Rhoades said. “Typically the dual registrant has an ‘investment advisory’ account for part of the client’s assets on which AUM [assets under management] fees are assessed, while separate brokerage accounts exist for other assets of the client,” he said. “The SEC’s view is contrary to state common law, which generally holds that fiduciary status, once assumed, extends to the entirety of the relationship.”

Fred Reish, of the law firm of Drinker Biddle, told RIJ that this state of affairs will continue under Reg BI beginning on June 30, 2020, “except that ‘suitability’ will be replaced by ‘best interest.’

“Also, Reg BI will require that a dually registered adviser must select the account type through a best interest process when those rules apply. For example, the advisor would need to consider the account types at the broker dealer and those at the RIA and recommend the ‘best interest’ one,” Reish added.

“In theory that means that if an investor wants to buy-and-hold certain mutual funds, the advisor would use the broker-dealer. But if that same investor had a part of his investments that is advised and monitored on a continuous basis, the advisor would use the RIA,” he said.

“The dual registrants are supposed to make clear what role they are undertaking, and when they ‘switch hats,’ so to speak,” Rhoades told RIJ. “The reality is that clients think that their dual registrant represents their best interests and acting under a fiduciary duty of loyalty at all times.

“In two instances over the past year, I’ve heard from clients that they asked their dual registrant ‘Are you a fiduciary to me?’ Both replied ‘yes.’ But, in both instances, only a small amount was in investment advisory accounts.” The majority of their money was in brokerage accounts.

For the attorneys general who are suing the SEC, such ambiguity  only confuses investors, who don’t know which shell the fiduciary pea might be under at any given moment, or even that such a pea exists. While the SEC now requires all advisers to act in the best interest of clients—an apparent tightening of consumer protection—it leaves the definition of “best interest” up to the adviser—a loosening of consumer protection. The sum of that do-si-do is  zero; almost nothing has changed except that, in the view of the states, the expression “best interest” now means something closer to “suitable” than to “fiduciary.” They’d prefer that BI be closer to “fiduciary.”

Consumers betrayed

Most investors don’t want mere advice from their advisers. Advice is as common as cough drops. They can get advice from a brother-in-law, a neighbor or a robo-adviser. If truth be told, they pay advisers to protect them. How? By not letting them take on too much risk, by screening the fine print of contracts for them, and—ideally—by warning them before a crash. That’s what they hope they’ll get for the fees they pay.

That’s an unrealistic but natural expectation. Advisers have a more pragmatic view of their occupation. Whether they work for a financial services firm or own their own businesses, they’re trying to maximize their personal revenue. They want to grow their list of “A” clients ($1 million+), encourage their “B” clients, and minimize time spent with “C” clients.

I don’t think dually registered advisers try to deceive anyone by switching hats within or between clients. Rather, they believe they’re more productive if they can work on a fee-basis with high net worth clients, sell products on commission to mass-affluent clients, and mix the two strategies with clients who are in between.

In wording Reg BI as it did, the Clayton SEC supported that point of view. That’s the problem. Instead of protecting consumers, the SEC chose to keep them at a disadvantage in situations where, as the ones bringing the cash to the table, they deserve more control. The state attorney generals are suing the SEC over that betrayal.

© 2019 RIJ Publishing LLC. All rights reserved.

What active funds must do to survive: Cerulli

Active mutual fund families have faced headwinds in recent years as a broad-based bull market has limited fund managers’ ability to outperform and both advisors and clients have demanded lower costs. From 2014 through 2Q 2019, active funds saw nearly $900 billion in net outflows, while passive funds brought in more than $1 trillion.

But new research from Cerulli Associates, the Boston-based global consulting firm, suggests that while asset classes may fall in and out of favor, active managers that emphasize their good reputations and provide support for top advisers should succeed.

Despite low-cost investment products waging a war of attrition on active mutual funds’ share of advisor assets, 37% of active mutual fund families with $5 billion or more in assets under management (AUM) experienced positive organic growth during the preceding five-year period ending 2Q 2019.

“Active fund families that have grown organically have shown that there is, in fact, a viable path to success,” said Ed Louis, senior analyst at Cerulli, in a release.

Cerulli divided the universe of active open-end fund families with $5 billion or more in AUM and segmented each into four tiers:

  • Giant Managers ($200 billion or greater in active mutual fund AUM)
  • Large Managers ($50 billion to <$200 billion in active mutual fund AUM)
  • Mid-Sized Managers ($20 billion to <$50 billion in active mutual fund AUM)
  • Boutique Managers ($5 billion to <$20 billion in active mutual fund AUM)

The 12 Giant managers control $6.9 trillion in active mutual fund assets; half grew organically over the past five years. One of the fundamental ways that successful Giant managers gained market share relative to their tier has been by pursuing a brand-forward strategy.

Brand-forward firms are those that have solidly entrenched themselves in the minds of advisors and end-investors as indispensable partners. This has been especially important following the financial crisis, which rocked the faith of investors—and consequently of advisors—in active management.

“Firm reputation is very important to advisors when choosing an asset manager —in fact, nearly half (46%) of advisors build firm reputation into their selection process,” said Louis. “Successful managers lean heavily on the loyalty they’ve fostered among advisors and rely on it as a core pillar to drive growth.”

Meanwhile, Large fund families averaged a five-year compound annual growth rate (CAGR) of nearly 2%. Like the Giant managers, these firms tend to offer diversified product lines. They often have the resources to provide advisors and broker/dealers (B/Ds) with value outside of solely investment management. While nearly 40% of Large managers experienced net inflows, the segment’s growth was largely driven by a few top performers.

Only one-third of Mid-Sized and Boutique managers experienced positive organic growth over the trailing five years. Those able to generate positive flows effectively segmented advisor opportunities in the independent channels and equipped wholesalers with resources to interface with the more sophisticated investment process that top advisor teams employ.

“Effectiveness in both these areas is crucial for smaller fund families as top teams control the majority of the assets in this highly fragmented space,” Louis said.

Cerulli’s newly released report, U.S. Intermediary Distribution 2019: Capitalizing on Specialization, covers the distribution of retail asset management products through U.S.-based financial advisors.

© 2019 Cerulli Associates.

Mr. President, Please Stop Tweeting!

Trump’s tweets are preventing him from achieving the 3.0% GDP growth he hoped for.  Their random nature is unsettling to business leaders whose confidence has been shaken.  As a result, investment spending has slowed.  Productivity growth should soon follow.

It is now hard to envision potential GDP growth quickening to 2.8%. A 2.3-2.5% pace seems more likely. That is not bad, but it could have been so much better.

To us, the issue is no longer about tariffs and trade and their possible impact on the economy. They might shave a couple of tenths of a percent from GDP growth next year, but they are not going to turn an otherwise healthy economy into a recession.

The issue is about Trump and his relentless tweeting. We have tried hard to separate our views about Trump, the man, from his economic policies. We wholeheartedly supported his tax cuts and his enthusiastic support of de-regulation. That action boosted business confidence, increased the willingness to invest, and seemed likely to raise potential GDP growth from 1.8% a couple of years ago to 2.8% by the end of this decade.

But his trade policy this past year and recent Fed-bashing are undoing some of the benefits from the tax cuts and the focus on de-regulation which boosted business confidence.

While we were not enamored with his initiation of a trade war with China, if the goal was to force China to change its business practices and play by the same rules as other countries then perhaps it was worthwhile.  But that goal came with a price – tariffs would reduce U.S. GDP growth slightly.

But the way he has chosen to implement trade policy has unnerved the business community. The haphazard imposition of tariffs one day followed by their removal or delay a day or two later is disquieting. Business leaders have no idea what to expect next.

A once high level of business confidence is beginning to fade, which means corporate willingness to invest is less now than it was a year ago. If investment slows, productivity growth (which has accelerated considerably) is likely to slow, which means that a pickup in potential growth to 2.8% will be difficult to achieve

Then there is Trump’s unprecedented Fed bashing. He has been pressuring the Fed to cut rates since the beginning of the year. He expected his tax cuts to produce GDP growth of 3.0%. Because that has not happened, he lays the blame squarely on the Fed.

On August 23 at the Kansas City Fed’s annual retreat Fed Chair Powell did not explicitly state that the Fed would initiate a series of interest rate cuts. Trump lashed out with, “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”

Seriously? For years monetary policy has been based on the Fed’s assessment of the future path of GDP growth, inflation, and the unemployment rate.  In other words Fed policy should be “data dependent.” And it has worked well.  But that concept has been tossed into the garbage.

The current Fed story is that Trump’s tariffs are so likely to slow the pace of economic activity that there is a compelling case for lower rates now. The Fed claims that in a low-interest rate environment it must act sooner than in the past to prevent the economy from weakening.

Thus, the Fed springs into action to head off something that may or may not occur, despite any compelling evidence to suggest that a slowdown lies ahead.

First quarter GDP growth was 3.1%, second quarter growth was 2.0%, third quarter growth seems on track to be 2.3%, the unemployment rate is at a 50-year low of 3.7%, jobs creation is steady at 170,000 per month, consumer confidence is near a 15-year high, consumer spending is steady at a 2.7% pace, and the stock market reached a record high level on July 26.

Despite all of those signs of solid economic growth the Fed not only cut rates 0.25% on July 31, it hinted strongly that further rate cuts were likely by year-end. This makes no sense.

On March 20 not a single Fed official anticipated a cut in the funds rate by year-end. By June 19, eight of 17 FOMC committee members expected the funds rate to be cut by the end of the year, and seven of the eight anticipated two cuts rather than one.

What happened? Trump’s tweets. Trump significantly ramped up his anti-Fed rhetoric in June and the Fed has apparently capitulated to the political pressure. We never thought that would happen.

Once the Fed started talking about significantly slower GDP growth, the markets raised the recession flag. Short-term interest rates began to anticipate a 1.0% drop in the funds rate. In a slow growth environment inflation was likely to slow so long-term interest rates also declined.

Now, almost everybody seems to expect economic weakness and/or a recession in the months ahead. Trump started it by telling the Fed that it needed to cut rates by 1.0%. The Fed surrendered and started talking about how trade could significantly slow growth by year-end. The markets believed the Fed and began to price in substantially lower short-term and long-term interest rates.

It has become a self-reinforcing negative feedback loop – started by Trump. While that may be the consensus view, we still do not buy it.

What we don’t understand is his relentless Fed bashing. It is unwarranted. Prudent monetary policy has successfully guided the U.S. economy to the two longest expansions on record. The record-breaking expansion of the 1990’s lasted exactly 10 years. That record has now been shattered by the current expansion, which has surpassed the 10-year mark and is still going strong. That is no accident. The Fed has done a great job of producing steady growth.

But well-run monetary policy is now being threatened by Trump. If, as appears, Fed policy is truly being influenced by pressure from Trump, then we will have reckless monetary policy combined with fiscal policy that is out of control. Policy makers in Washington still pay no attention to a steady diet of $1.0 trillion per year budget deficits and an outstanding level of debt that is rising rapidly. In the long run that is a dangerous combo.

None of this suggests that a recession is imminent. It is not. But without some stability in monetary and fiscal policy, a pick-up in potential GDP growth to 2.8% – which was once within our grasp – will be difficult to achieve. Going forward, a potential growth rate of 2.3-2.5% seems more likely. That is still acceptable, but we could have done better. Mr. President, please stop tweeting!

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Sullivan to succeed Pelletier at Prudential

Prudential Financial announced this week that Andrew Sullivan will succeed Stephen Pelletier as executive vice president and head of U.S. Businesses, reporting to chairman and CEO Charles Lowrey, effective December 1.

Pelletier, 66, will retire after a 27-year career with the company, in which he led Group Insurance and Prudential Annuities, and founded Prudential’s international asset management businesses, now PGIM Global Partners. He will remain in an advisory role until April 1, 2020.

Kent Sluyter, current president of Prudential Annuities, will retire, following a 38-year career at Prudential, during which he has held various leadership positions, including president and CEO of Individual Life Insurance and Prudential Advisors.

The company also announced today three new appointments, effective December 1, to its U.S. Businesses executive team:

  • Phil Waldeck, current president of Prudential Retirement and pioneer of Prudential’s Pension Risk Transfer business, will succeed Andy Sullivan as head of the Workplace Solutions Group.
  • Yanela Frias, current head of Investment and Pension Solutions within the Retirement business, which surpassed $100 billion in pension and longevity risk transfer sales under her leadership, will be elevated to president of Prudential Retirement.
  • Scott Gaul, current senior vice president, Sales and Strategic Relationships, Prudential Retirement, will succeed Frias as head of Investment and Pension Solutions.
  • Dylan Tyson, current CEO of Prudential of Taiwan who, in a prior role, led the General Motors pension risk buyout transaction for Prudential, will become president of Prudential Annuities. His successor will be named upon receiving regulatory approval.

Continuing in their current roles will be:

  • David Hunt, president and CEO of PGIM
  • Caroline Feeney, CEO of Individual Solutions Group
  • Jamie Kalamarides, president, Prudential Group Insurance
  • Salene Hitchcock-Gear, president, Individual Life Insurance and Prudential Advisors
  • Naveen Agarwal, senior vice president and chief marketing officer
  • Caroline Faulkner, senior vice president, Enabling Solutions
Three Jackson fee-based annuities join RetireOne platform

RetireOne, the web platform where Registered Investment Advisors (RIAs) who don’t take commissions or have insurance licenses can purchase annuities and life insurance, said this week that three of Jackson National Life’s fee-based annuities are now available on the platform.

The Jackson products are the Perspective Advisory II and Elite Access Advisory II variable annuities (VA) and the MarketProtector Advisory fixed index annuity (FIA). Elite Access Advisor is a flat-fee investment-only variable annuity and MarketProtector Advisory has no surrender penalties.

Perspective Advisory II, a no-commission version of the top-selling variable annuity contract in the US, offers a popular selection of lifetime income riders that have few restrictions on the advisor’s investment options, relative to other variable annuities with guaranteed lifetime withdrawal benefits.

Jackson’s operations team will support RetireOne’s advisors and their clients, complementing RetireOne’s Advisor Solutions Team.

Ascensus publishes ‘Inside America’s Savings Plans’

Ascensus, the large independent recordkeeper that partners with Vanguard to manage thousands of small and medium-sized 401(k) plans, health savings plans and college savings plans, has released a new report on how Americans are saving.

The report is available at the Inside America’s Savings Plans microsite.

Ascensus analyzed data from over 88,000 retirement plans, 4.6 million 529 college savings accounts, more than 280,000 consumer-directed healthcare accounts, and 20 ABLE (Achieving a Better Life Experience) plans for which it provided recordkeeping and administrative services as of 2018 year-end.

The firm also highlighted health savings account (HSA) industry data from Devenir, a provider of customized investment solutions for HSAs and the consumer-directed healthcare market. The report identifies the following patterns in tax-advantaged saving behavior:

Plan sponsors and savers see the value in automatic savings models:

401(k) plans with automatic enrollment and automatic escalation features saw an average plan-weighted participation rate of 81%, which was 10 percentage points higher than that in plans without automatic enrollment.

In 2018, 35% of 529 account owners had scheduled recurring bank contributions and 20% of ABLE accounts leveraged automatic savings methods. Approximately 6% of 529 account owners use payroll direct deposit.

According to Devenir, 26% of all HSA contributions came directly from an employer and 56% came from an employee through their workplace in 2018.

Digital tools have a positive influence:

Ascensus’ Retirement Outlook Tool allows savers to refine retirement savings goals. In 2018, 26% of first-time tool users were saving at an average rate of 8% within a few weeks of engaging with it. According to Ascensus’ partner Financial Finesse, people must save at the rate of 9% or more to be financial prepared for retirement.

The firm’s Ugift platform allows secure gifting to beneficiaries’ 529 accounts. The Ugift website allows users to establish gift-giver profiles and schedule recurring gifts to streamline the process. As of 2018 year-end, gift givers had established 26,284 online profiles and 10,438 recurring gifts. Overall, the Ugift program saw a 345% year-over-year increase in dollars gifted to 529 accounts.

Changing financial and market landscapes are influencing individuals’ savings strategies:

Ascensus’ 401(k) platform data highlights that individuals under 25 years old are saving at lower savings rates than those in older age groups. Of all retirement savers on our platform who are “on track” to meet their goals, 20% of them are between 25 and 34 (versus 3% for the under-25 age group).

The market downturn in 2018 had a minor impact on overall 529 account balances across all demographics, but this average balance still reached nearly $23,000 as of 2018 year-end. Account owners ages 55 to 64 and over 65, with average beneficiary ages of 17 and 13 respectively, had the second- and third-largest average balances of all age groups, both exceeding $22,000.

Healthcare expenses continue to increase exponentially, with the Employee Benefit Research Institute (EBRI) reporting that the average couple will now cumulatively need $399,000 for a 90% chance to cover their healthcare expenses in retirement. There are currently over 25 million HSAs held by savers across the U.S. with a combined $53 billion in assets.

Fidelity publishes 10th annual plan sponsor survey

Many plan sponsors believe their employees are falling short in their retirement savings, according to the 10th edition of Fidelity Investments’ Plan Sponsor Attitudes Study, whose results were announced this week.

While 62% of sponsors said their employees expect the plan to meet all of their funding needs in retirement, only 55% said they believe their plan participants are actually saving enough in the plan to retire. The study, which began in 2008, surveyed employers who offer retirement plans that use a wide variety of recordkeepers.

Nine in 10 plan sponsors reported that they have had employees work past their desired retirement date, according to the study, and 73% of sponsors acknowledged costs associated with those delays, including increased benefit costs (37%), reduced mobility for younger employees (33%), obstacles to strategic workforce planning (31%), and lower productivity (27%).

The top two reasons plan sponsors gave for hiring plan advisors were (1) to understand how well the plan is working for employees and how to improve it (27%), and (2) for help with the increasingly complicated process of managing a retirement plan (26%).
This year, the report said, three-fourths of sponsors reported making a change to their plan design or investment menu in the past two years. The top plan design changes were to increase the match (26%) or add a match (24%). The top menu change was to increase the number of investment options, consistent with last year’s study.

Sponsors appear to be reviewing plan performance more often, with a shift away from annual reviews (14% in 2019 versus 27% in 2018) to quarterly reviews (45% in 2019 versus 38% in 2018).
Fidelity research found that 36% of employees have less than three months of income saved in case of emergency and that absenteeism is 29% higher among employees who do not have enough emergency savings.

This year’s Plan Sponsor Attitudes Study found that more than half (56%) of sponsors said they offer financial wellness programs, and 59% saw them as very impactful for employees. Two-thirds of sponsors said that advisors discussed financial wellness programs with them, and plans with advisors were more likely to have them in place than those without advisors (57% versus 43% respectively).

Vanguard releases fund voting records

Vanguard has released its global 2019 Investment Stewardship Annual Report, which details company engagements and voting records of its mutual funds for the 12 months ended June 30, 2019.

In the report, Vanguard calls for greater diversity among boards of directors at public companies. Vanguard believes that diverse boards make better decisions, which can lead to better results over the long term.

Vanguard is asking boards of directors to publish their views on board diversity, disclose their board diversity measures, broaden their search for director candidates, and report progress against those outcomes. The report also addresses sustainability’s role in long-term investing and the importance of standardized risk disclosure frameworks.

Over the last year, Vanguard’s investment stewardship team voted on nearly 170,000 matters at 13,225 companies. The team also held discussions, known as engagements, with the boards and management teams of almost 900 companies representing 59% of Vanguard funds’ equity assets under management.

While all portfolio companies have the opportunity to engage with Vanguard, similar to previous years, the team primarily held engagements with companies that represent Vanguard funds’ largest holdings, as well as corporations facing governance issues. A full list of all of the companies Vanguard engaged with during the 2018-2019 proxy year is available on page 36 of the report.

Fleming moves to Lincoln Financial

Christopher Fleming has joined Lincoln Financial Group as senior vice president and head of Life & Annuity Operations, with a focus on enhancing the customer experience and improving internal operating efficiency. He will report to Jamie Ohl, executive vice president, president Retirement Plan Services, head of Life & Annuity Operations.

Fleming has more than 25 years’ industry experience. He joins Lincoln Financial from Fidelity & Guaranty Life, where he served as senior vice president, Operations and IT since 2011. Prior to that role, he was with ING for seven years, at AIG and at GE. Fleming earned a Bachelor of Science in Business Administration from the Ohio State University and is based in Greensboro, NC.

© 2019 RIJ Publishing LLC. All rights reserved.

We Deserve Better

Welcome back from the Labor Day holiday.

Autumn is upon us, and more than leaves are falling. Since the Fed’s July 31 quarter-point interest rate cut, the payout from single premium income annuities has dropped significantly.

A contract paying $25,000 a year only months ago now pays $22,000. That’s frustrating; we (I’m speaking for the life insurance industry) were led to expect a return to pre-crisis rates by 2020. The president now wants rates to go lower to extend the expansion.

It’s true that rising rates could trigger a recession. But the president seems unconcerned that a falling rate has downsides too.

The behavior of the White House is characteristically brash. Tariffs were invented to protect specific domestic industries from cheap imports, not to intimidate a trade partner generally or to come at the unintended expense of domestic industries (like soybean farming). So his trade policy makes little sense.

Like Richard Nixon’s when he took the US off the gold standard in 1971, the president’s moves seem intended to improve his reelection chances. But even if luck favors us in the end, the country, and the annuity industry, needs and deserves better reasons than that from its leader.

© 2017 RIJ Publishing LLC. All rights reserved.

Be a ‘Succession Planter’ of Lifetime Income

Every farmer or gardener appreciates the value of “succession planting.” That’s a cultivation method where plants are sown in staggered intervals, mature in orderly succession, and supply a continuous harvest. It’s a form of just-in-time food propagation.

Succession planting has a counterpart in the retirement income realm: the time-segmentation or “bucketing” method. Assets are purchased at retirement, assigned to a series of multi-year intervals, and “harvested” for income when each interval begins.

Last week, about 100 advisers, either fans of bucketing or curious about it, gathered in downtown Boston for Wealth2k’s annual IFLM (Income for Life Model) conference, sponsored by Securities America, WisdomTree, UpSellerate and Delaware Life.


IFLM is a soup-to-nuts client management platform built around a bucketing tool. Wealth2k CEO David Macchia calls IFLM “a solution that provides everything a financial advisor needs to enter and succeed in the retirement income planning business.”

As an income-generation method, time-segmentation competes with the systematic withdrawal program (the “4%” rule) and the flooring method (using guaranteed income sources to cover all essential expenses) for advisers’ attention. It’s been called gimmicky, but some advisers swear by it, especially as a context for introducing annuities.

Simple and complex

The main attractions of the conference, for RIJ, were two time-segmentation case-studies presented by Zach Parker, first vice president of income distribution and product strategy at Securities America, a registered investment advisor (RIA) and broker-dealer that licenses IFLM under the name NextPhase.

In Parker’s first case study, he prescribed a hybrid of bucketing and flooring to create growth and income for a hypothetical 65-year-old newly-retired couple with $1.6 million in savings, an estate goal of $1.5 million and a first-year income need of $8,000 per month ($4,850 from investments plus $3,150 from Social Security and a small pension).

Following Securities America’s version of IFLM, called NextPhase, Parker advised the clients to put $500,000 into an income-generating annuity and to divvy up their remaining $1.1 million among six five-year segments—with a big chunk in the sixth bucket for bequests or long-term care. (See chart below, where we call this couple “Will and Amy.”)

In this particular plan—before filling the buckets—Securities America calls on these fictional clients to make two important decisions. The couple’s first decision requires picking a lifetime guaranteed income-generation vehicle. It can be a single premium income annuity, a deferred income annuity, a variable annuity with a guaranteed lifetime income benefit (GLWB) or a fixed index annuity with a GLWB.

After that, they need to make an even more important decision: whether to start income from the product immediately or in 10 years. Their choice will affect the amount of liquidity they enjoy in retirement, the fees they’ll pay, and how much money they’ll allocate to each bucket, and what their overall equity allocation will be throughout retirement. It won’t, however, affect their monthly income or their estimated legacy value.

The first two (of many) decisions

Regarding the first decision, Securities America recommends the FIA with GLWB. It generates the most income—either about $2,400 a month for life starting immediately or about $5,200 a month starting in 10 years. For several years now, FIAs have been beating VAs and SPIAs on income production. VA issuers have become risk-averse and offer conservative payouts. SPIAs still suffer from low interest rates and illiquidity. That leaves an FIA with a GLWB, with its generous commission, as the safest, obvious choice.

Regarding the second decision, the clients face a fork in the road. Either fork will lead them to same place, but one route will be more volatile than the other. If they start lifetime income right away, they’ll get $2,400 from the GLWB to go with their $3,150 in Social Security and pension income. Assets in the first two buckets will have to produce only $2,450 a month to boost their guaranteed monthly income to the desired $8,000.


If the couple delays annuity income until year 11, on the other hand, they’ll have no annuity income at all for the first 10 years. That will force them to draw about $5,000 a month ($60,000 a year) from their investments in each of the first 10 years (See Segments One and Two in the chart).

From an investment standpoint, the couple will end up with a much higher equity allocation over their lifetime if they choose to tap the GLWB at the beginning of retirement. During the first 10 years, in fact, they can allocate about $300,000 more in equities if they take immediate income from the FIA, while generating the same real $8,000 monthly income.

Here’s the computation. To produce a real $2,450 per month during the first 10 years, they’ll only have to put about $145,000 in the first bucket and $176,000 in the second bucket. The rest of money—$474,590—can go into the equity-rich third, fourth and fifth buckets.

To produce a real $5,000 per month during the first 10 years, they’ll need to put about $275,000 in the first bucket and $285,000 in the second bucket. That leaves only $272, 194 for the equity-rich third, fourth and fifth buckets—more than $200,000 less in equities. (Either way, about $276,000 goes into the sixth, most aggressive bucket.)

Funding the segments

What kinds of products are used to fund the segments? Securities America recommends either a five-year period-certain single premium immediate annuity or a ladder of bonds or certificates of deposit (CDs) for the first five-year segment. Of those options, he noted that a SPIA would be least time-intensive for the adviser.

For Segment Two, Parker suggested CDs, a bond ladder, a fixed-rate annuity, an FIA, a structured or “buffer” registered annuity, principal protected structured CDs, or an investment portfolio. Again, packaged annuities were deemed by Securities America to be the least time-intensive for the adviser. Efficiency and commissions become important for advisers working with mass-affluent retirees whose assets generate less fee income.

For Segment Six, which starts at age 90, Parker suggested either a variable annuity with a death benefit for legacy planning purposes, or an investment portfolio. By holding individual stocks in an after-tax account, the couple would minimize their beneficiaries’ capital gains tax exposure via the “step up” in basis at death. The $276,374 in this segment will have 25 years to grow. Over that time, at a 7% average growth rate, the couple’s legacy would reach a value of almost exactly $1,500,000.

Next week: A look at Zach Parker’s presentation of a bucketing plan for someone whose priority is to minimize taxes in retirement and at death.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Most RICP clients delay Social Security benefits

Two-thirds of financial advisers holding the Retirement Income Certified Professional (RICP) designation from The American College of Financial Services say their older clients are “moderately worried that the Social Security program will drastically cut benefits in the future,” the College said in a release this week.

Among those advisers, 46% are worried about the Social Security program drastically cutting their older clients’ benefits and 54% are not.

More than 8 in 10 (84%) of RICP-holding financial advisers with older clients say cutting Social Security benefits by 20% today would “drastically alter their clients’ lifestyles.” The majority of financial advisers surveyed believe there will be a change in the Social Security program for their older clients, the College said.

“On average, 81% of advisers’ clients are taking Social Security after age 65 with only 9% of their clients taking it at the earliest age,” said Colin Slabach, the new assistant professor of retirement planning and assistant director of The American College New York Life Center for Retirement Income. “This is drastically different from the national average, with 35% of men and 40% of women claiming their benefits at the age of 62.”

MassMutual boosts support for third-party administrators

Massachusetts Mutual Life Insurance Company (MassMutual) this week announced that it will enhance its field support and provide new digital tools for third party administrators (TPAs) that support 401(k)s and other defined contribution retirement plans.

The enhancements include the appointment of three TPA field support staff and the launch of a new website to provide tools and information for TPAs that work with MassMutual.

The website provides TPAs with information about MassMutual’s TPASmart program and how it supports their efforts, materials for TPAs to promote their capabilities, a fiduciary calendar for administering retirement plan regulatory requirements, and information about MassMutual’s TPA incentive program.

TPAs provide a wide range of support for retirement plans, including plan design, participant enrollment, administration and regulatory guidance. TPAs provide support for 66% of MassMutual’s retirement plans.

MassMutual’s three new appointments are:

Kathy Lake is TPA Market Director for the Southern Division. Previously, Lake was a Client Engagement Manager for MassMutual retirement plans. She has more than 20 years of experience in retirement education, sales and service center operations and has held management positions at Jackson National Life and The Hartford.

Lynette Golly is TPA Market Director for the Central Division. She joined MassMutual in 2015 after owning her own TPA firm for nearly 25 years.  Most recently, Golly served as Client Engagement Manager for MassMutual, supporting retirement plans and voluntary benefits.

Rob Ayers is TPA Champion, responsible for deepening and enhancing MassMutual’s relationships with payroll providers.  Ayers most recently was Managing Director of Benefits in MassMutual’s Worksite Solutions.  His experience also includes TPA Market Development and Managing Director in MassMutual’s Emerging Markets and more than 10 years in various sales roles, including with Merrill Lynch.

The new additions join Kellen Craig, who is based in Arizona and covers the Western Division, and Sean Miller, based in Enfield, Conn., who covers the Northeast Division.

DC plan participants ‘stay the course’: ICI

Only 0.9% of defined contribution (DC) plan participants stopped contributing to their accounts in the first quarter of 2019, according to the Investment Company Institute’s “Defined Contribution Plan Participants’ Activities, First Quarter 2019” report. The study tracks contributions, withdrawals, and other activity, based on DC plan recordkeeper data for more than 30 million participant accounts.

Other findings include:

  • 2% of DC plan participants changed the asset allocation of their account balances in the first quarter of this year, down from 5.1% in the first quarter of 2018.
  • 9% of participants changed the asset allocation of their contributions in the first quarter of 2019, down from 3.5% in first quarter of 2018.
  • 4% of DC plan participants took withdrawals in the first quarter of 2019, similar to the share in the first quarter of 2018.
  • 5% of DC plan participants took hardship withdrawals during the first quarter of 2019, the same share as in the first quarter of 2018.
  • 9% of DC plan participants had loans outstanding at the end of March 2019, down from 16.7% at the end of 2018.

ICI has been tracking DC plan participant activity through recordkeeper surveys since 2008. This update provides results from ICI’s survey of a cross-section of recordkeeping firms representing a broad range of DC plans.

© 2019 RIJ Publishing LLC. All rights reserved.

Deferred annuity sales up 6% in 2Q2019: Wink

Total deferred annuity sales rose 6% in the second quarter of 2019 compared with the prior quarter, according to a preliminary version of the 88th edition of Wink’s Sales & Market Report. Highlights of the report included:

  • Indexed annuity sales were up 11% over the first quarter of 2019 and up nearly 14% over the second quarter of 2018.
  • Sales of traditional fixed annuities were down nearly 10% from the prior quarter but up more than 21% over the second quarter last year.
  • Multi-year guaranteed annuity (MYGA) sales were up 15% over the prior quarter and up 20% over the second quarter last year.
  • Structured annuity sales declined by 15% over the prior quarter but were up nearly 20% over the second quarter last year.
  • Aggregated non-variable annuity sales for the second quarter were down just over 1% from the prior quarter, and up over 16% from the year-ago quarter.

“It’s a great time to be offering annuities with growth based on an outside benchmark,” said Sheryl J. Moore, author of Wink’s Sales & Market Report, in a release. “Indexed annuity sales in the second quarter beat their previous record in 4Q2018 by nearly 3%. Sales of variable annuities and structured annuities increased nearly 20% each.”

Indexed annuities have a floor of no less than zero percent and limited excess interest that is determined by the performance of an external index, such as Standard and Poor’s 500.

Traditional fixed annuities have a fixed rate that is guaranteed for one year. MYGAs have a fixed rate that is guaranteed for more than a year.

Structured annuities have a limited negative floor and limited excess interest that is determined by the performance of an external index or sub-account. Variable annuities have no floor; their potential for gains or losses is determined by the performance of the sub-accounts. Subaccounts may be invested in an external index, stocks, bonds, commodities, or other investments.

Wink’s preliminary results are based on 94% of industry participation in Wink’s quarterly sales survey, representing 97% of the total sales.

© 2019 RIJ Publishing LLC. All rights reserved.

FIA sales break quarterly sales record (again): LIMRA SRI

Fixed indexed annuity (FIA) sales were $20 billion in the second quarter of 2019, 14% higher than in the same period a year ago, according to the LIMRA Secure Retirement Institute (LIMRA SRI) Second Quarter U.S. Annuity Sales Survey.

“Despite declining interest rates, we are forecasting the current momentum of FIA sales to continue through the end of the year and expect sales of FIAs to exceed $70 billion for 2019,” said Todd Giesing, annuity research director, LIMRA SRI.

In the first six months of 2019, FIA sales were $38 billion, an increase of 18%, compared with the first six months of 2018. Fee-based FIA sales were $193 million in the second quarter. While this marks major growth for this market (188% over prior year), fee-based FIAs still represent less than 1% of the total FIA market, according to LIMRA’s release this week.

Total annuity sales were $63.9 billion in the second quarter, up 7% compared with the prior year results. This is the highest quarterly sales recorded since the first quarter 2009, and the third consecutive quarter where total annuity sales surpassed $60 billion, the survey showed. Year-to-date, total annuity sales were $124.8 billion, an increase of 11%, compared with results from the first half of 2018.

Fixed annuities represented 60% of the total annuity market in the second quarter. Fixed annuity sales have outperformed VAs sales in 12 of the last 14 quarters.

After two consecutive quarters of declines, VA sales were $25.8 billion, level with second quarter 2018 results. For the first six months of the year, VA sales were $48.6 billion, down 4%, compared with prior year results. Traditionally, VA sales are the strongest in the second quarter, the report said. LIMRA SRI expects increasing market volatility and falling interest rates to dampen VA sales for the remainder of the year. It forecasts total VA sales of under $100 billion for 2019.

Fee-based VA sales were $725 million in the second quarter. While this is down 15% from prior year, it is 10% higher than first quarter 2019 results. Fee-based VA sales represented 2.8% of the total VA market in the second quarter.

In the second quarter, registered index-linked annuity (RILA) sales were $4.14 billion, up 66% from prior year results. Year to date, RILA sales were $7.7 billion, 63% higher than results from the first half of 2018.

“While RILA sales have been driving overall VA sales growth recently – representing 16% of the total VA market – after two consecutive quarters in the $3.5 billion range, sales vaulted up,” Giesing said. “Heightened equity market volatility and the fact that major distributors have RILA products on the shelves helped RILA sales break through this plateau.”

Another record quarter for fixed annuities

Despite the decline in interest rates this quarter, fixed-rate deferred annuity sales rose 10% in the second quarter to $13.1 billion. In the first six months of 2019, fixed-rate deferred annuity sales totaled $28.2 billion, 35% higher than prior year results. But the impact of falling rates may simply be delayed.

“The 10-year treasury rate dropped nearly 50 basis points from the start of the second quarter,” said Giesing. “While we didn’t see significant impact on the fixed-rate deferred annuity market during the second quarter, there is usually a lag between interest-rate drops and sales declines. We anticipate sales to substantially drop in the third and fourth quarters.”

Single premium immediate annuities (SPIA) sales totaled $2.7 billion in the second quarter of 2019, up 8% from prior year. Year to date, SPIA sales were $5.5 billion, 20% higher than 2018.

“Traditionally, SPIA sales are strongly linked to interest rates. However, we see another dynamic coming into play,” Giesing said. “Over the past year, a growing portion of the assets invested in SPIAs are qualified assets. This is likely due to the rise in the number of individuals who are reaching the age for taking required minimum distributions, and choosing to convert a portion of their qualified assets into guaranteed income.”

Deferred income annuities (DIA) sales grew 26% in the second quarter, to $727 million. In the first six months of the year, DIA sales totaled $1.4 billion, 25% higher than prior year.

© RIJ Publishing LLC. All rights reserved.


Wide variation seen in British target date funds

There are “huge” variations in outcomes between the default funds offered by leading British defined contribution (DC) providers, according to a report in, citing research from the UK workplace savings company Punter Southall Aspire.

The firm’s findings were based on an analysis of the growth and consolidation phases of the standard default investment options of nine leading providers in the market as at 31 March:

  • Aegon Asset Management
  • Aviva Investors
  • Fidelity
  • Legal & General
  • Royal London
  • Scottish Widows
  • Standard Life Investments
  • Zurich

For the growth and consolidation phases, the funds analyzed by Punter Southall Aspire varied across many elements: design and construction, investment risk and volatility, asset allocation strategy, return benchmarks, management, “glidepaths” towards retirement, and performance.

Christos Bakas, DC investment consultant at Punter Southall Aspire, said: “We urge employers to monitor the performance of their pension funds more closely, as default doesn’t mean standard, and not all funds are created equally.”

In the growth phase, allocations to equities, bonds and other asset classes varied “dramatically” between the default funds, depending mainly on the targeted risk levels and the range of investment tools used, the survey showed.

Over the last three years, the Zurich Passive MultiAsset fund performed best (11.3%), although with higher volatility risk (8.4%) than the other defaults. The Standard Life default fund performed worst (5.4%), but with volatility (5.2%) than the other funds analysed.

Punter Southall Aspire also found that providers with their own asset management arm – Royal London, Standard Life, Fidelity, Aviva, Legal & General – tended to develop more diversified and sophisticated default offerings. But diversity and sophistication also brought higher costs.

With respect to equity allocations, the initial allocations, the changes to allocation and the at-retirement allocation are different for almost every default strategy and depend mainly on the risk levels being targeted and the range of investment tools used,” said Punter Southall Aspire, noting that Legal & General did not implement a risk-reducing strategy as members approach retirement and “would argue that it’s difficult to predict when members will retire and in fact many members don’t know when they will retire.”

© 2019 RIJ Publishing LLC. All rights reserved.

Kitces’ XY Planning Network adds its 1000th adviser

XY Planning Network (XYPN), the registered investment advisor (RIA) and third-party asset management platform (TAMP) whose advisers offer financial planning services to Gen X and Gen Y investors for a monthly subscription fee, announced its 1,000th advisor-member this week.

Luis Rosa, who was recently featured on the cover of InvestmentNews’ 2019 “40 Under 40,” is the founder of Build a Better Financial Future. Rosa immigrated to the US from the Dominican Republic in 1991, joined the financial services industry in 2001, and recently opened his own fee-only planning practice.

The 1,000 members in the Network, whose median age is 39, comprise more than 5% of all state-registered RIAs delivering financial planning services across the country. XYPN claims that its new advisor lapse rate is less than 6% in the first year (and decreases further in subsequent years as their businesses grow), compared with an industry-wide attrition rate of 70% over the first three years.

“Our turnkey financial planning platform now provides more than 1,000 advisors the support they need to start, run, and grow their own advisory firms, from the technology tools to the compliance support needed to do real financial planning for their clients, with a real community of fellow fiduciary financial planners, while allowing them to maintain real independence…with a focus that allows us to charge a fraction of what broker-dealers cost to provide similar services,” said Michael Kitces, co-founder of XY Planning Network, in the release.

© RIJ Publishing LLC. All rights reserved.