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Trade Tantrum

The latest piece of news to rattle the market was the revelation that the trade deficit for goods widened to a record $900 billion last year. We believe that the focus on the magnitude of the trade deficit is misplaced.

First of all, we strongly believe that trade is good. When countries trade with each other there is a wider variety of goods and services available at lower prices than there would be in the absence of trade. Both countries win. A trade deficit simply means that one country bought more goods from other countries than those countries bought from it.

Thus, trade deficits are not necessarily bad. The problem with trade is that all countries do not play by the same rules. Some countries cheat. The Chinese, for example, steal trade secrets, they do not respect copyright or patent laws, and they require foreign firms that want to do business in China to share their technology.

Furthermore, the yawning trade gap perhaps indicates that current trade agreements like NAFTA, as well as trade agreements with Europe and Japan, were not well negotiated and allowed other countries to take advantage of the U.S. One can make a case that the U.S. has been subsiding growth in other countries at its own expense for years. So, while the magnitude of the trade deficit is not a concern, there are fairness issues that must be addressed.

The trade deficit for goods widened to a record $900 billion in 2018. But so what? The wider deficit reflects the fact that our economy was growing faster than others and, as a result, imports rose sharply. It also means that foreigners now have $900 billion dollars to invest in the U.S. Those foreign firms could start businesses here, hire American workers, and/or invest in our stock and bond markets. What is so bad about that?

Trade is a relatively small segment of the U.S. economy and accounts for a mere 10% of GDP. Thus, the rather impressive widening of the trade gap last year subtracted a mere 0.2% from GDP growth. It is hard to conclude that the wider trade gap had any major negative impact on the U.S. economy.

Nevertheless, Trump initiated a trade war because he was concerned about the size of the trade deficit. His goal was to shrink the trade deficit and bring back jobs to the U.S. But nearly one-half of the U.S. trade deficit is with one country—China. We do not have a trade deficit problem with Canada, Mexico, Europe, Japan, or OPEC. Just China. If Trump was truly concerned about the magnitude of the trade deficit, we believe that he should have targeted those countries where the trade gap is largest.

But Trump didn’t do that. He chose to impose tariffs across the board, which impacted our neighbors, friends and allies alike. Not surprisingly, the imposition of tariffs by the U.S. generated retaliation by many other countries and a trade war was underway.

While trade is a relatively small portion of the U.S. economy, it is roughly 50% elsewhere. Once the trade war began, investors scoured the globe to figure out which country might perform best. The answer they came up with was the U.S., because trade is such a small part of the U.S. economy. As a result, money flowed into the U.S. stock and bond markets and the dollar jumped 10% last year.

There are no winners in a trade war. Everybody loses. But not everybody loses equally. GDP growth in the U.S. was reduced by about 0.2% last year. But, given that trade plays a major role in everybody else’s economy, their growth rates have been reduced more sharply. In the past six months, for example, the IMF has cut its forecast for growth in emerging economies this year by 0.5%. Growth rates for developed countries have also been negatively impacted.

Given that growth rates everywhere around the globe are slowing, their currencies are weakening, and their stock markets have declined, the pain of tariffs is intense. As a result, many countries are rushing to complete trade deals with the U.S. New deals have already happened with Mexico and Canada. Deals with the E.U. and the U.K. seem to be relatively close (though Brexit may delay their completion). A deal with China seems imminent.

We expect to see all of these deals completed soon simply because it is in the best interest of both sides. If that happens, we could end up with freer trade and a more level playing field that what we had initially. The process was ugly, and it may not have been the optimal way to achieve the goal but, in our view, progress was made.

If, as part of those negotiations, there is an agreement for other countries to purchase more U.S. products, the trade deficit may well shrink in the months and quarters ahead.

Sit back. Breathe. The world did not end just because the trade deficit widened to a record level last year.

© 2019 RIJ Publishing LLC. All rights reserved.

Concord Coalition blasts Trump budget proposal

President Trump’s proposed 2020 budget “does not provide a realistic plan for the coming fiscal year and—even worse—fails to lay out a credible path to fiscal sustainability,” the Concord Coalition said in a statement released this week.

“The combination of deep spending cuts for non-defense programs and a large increase in defense spending, assisted by a blatant gimmick to avoid existing budget caps, has the potential to induce congressional gridlock on Fiscal Year 2020 appropriations,” said Robert L. Bixby, the Concord Coalition’s executive director, in the release.

“Over the longer term, the budget’s purported success at reining in the growing debt relies upon very rosy economic assumptions and improbable spending cuts, mostly targeted at portions of the budget that are not projected to see the fastest growth. Even with all of its favorable assumptions, the president’s plan would not produce a balanced budget until 2034.”

The budget is based on economic growth assumptions that are considerably higher than most other forecasts, with the administration projecting inflation-adjusted GDP growth at 3% or above through 2024. This substantially boosts assumed revenue. The administration is projecting individual income tax revenues higher than the Congressional Budget Office (CBO) baseline, which assumes that the individual income tax cuts from 2017 expire, the release said.

Non-defense appropriations, which make up roughly 16% of the budget, would be reduced by more than $1 trillion over 10 years. Nothing in recent experience would suggest that cuts of this magnitude are anywhere near likely to be enacted.

Trump’s budget calls for a boost in defense spending via the Overseas Contingency Operations (OCO) funding. The budget proposes to spend above defense spending caps over the next two years by increasing OCO funding from $69 billion this year to $165 billion in 2020 and $156 billion in 2021.

Such funding, which does not count against current spending caps, is supposed to be used for conflicts abroad. “OCO funding has long been used as a way to slip some extra money into the Pentagon, but Trump’s new budget plan takes this to an entirely new level. It is over the top. The administration’s bizarre explanation is that the ‘only fiscally responsible way’ to avoid ‘unaffordable’ increases in spending caps is to circumvent them,” Bixby wrote.

© 2019 RIJ Publishing LLC. All rights reserved.

Financial industry mobile apps don’t measure up: JD Power

Mobile phone applications for wealth management aren’t being used much by older, high net worth investors, according a preview of the J.D. Power 2019 U.S. Wealth Management Mobile App Satisfaction Study, released today.

“Concerns about security are likely affecting usage rates and result in negative influences on satisfaction and customer advocacy,” said a J.D. Power release.

Fifteen mobile apps, produced by the following 15 companies, were evaluated in the study:

  • Ameriprise Financial
  • myAXA
  • Schwab Mobile
  • P. Morgan Mobile
  • E*TRADE Mobile
  • Edward Jones Mobile
  • Fidelity Investments
  • Merrill Edge
  • MyMerrill
  • Morgan Stanley Wealth Management
  • Rowe Price Personal
  • TD Ameritrade Mobile
  • USAA Mobile
  • Vanguard
  • Wells Fargo Mobile

Key findings of the study preview include:

High net worth hold-ups: High net worth customers (those with $1 million or more in investable assets) are significantly less satisfied with their wealth mobile apps than other customer segments. Wealth management firms, more than other industries, need to ensure their mobile experience meets the needs of the high net worth segment as well as younger customers.

What, me worry?: Security matters. While more than half (55%) of respondents indicate they perceive the information on their mobile app is “very secure,” anything less than that rating is seen as failure in the eyes of customers. Notably, 45% of customers effectively give their app a failing grade. Satisfaction among customers who say their app is “very secure” averages 895 vs. 788 (on a 1,000-point scale) among those who say it is less than very secure. Among customers who perceive the app is very secure, 71% say they “definitely will” recommend it. Among customers who have any doubts, that percentage drops to 29%.

User interface is a stumbling block: Wealth management app users say that the apps are too text-heavy, lack visuals and look dated. Challenges with basic tasks materially reduce satisfaction and are likely contributors to reduced usage. By contrast, top-performing banking and credit card apps frequently update their interfaces updates and have clearer designs.

Advice still matters: A mobile app is a self-service experience, but customers who have a personal relationship with an advisors report average satisfaction levels of 857, while those who have no advisor relationship report lower overall satisfaction (817).

The full study will be released in November. It evaluates customer satisfaction with wealth management mobile apps based on five factors (in order of importance): range of services/activities; clarity of the information provided; ease of navigating; appearance; and speed of screens loading.

The preview of the 2019 U.S. Wealth Management Mobile App Satisfaction Study is based on responses from 2,478 full-service and self-directed wealth management firm customers. It was fielded in November-December 2018.

© 2019 RIJ Publishing LLC. All rights reserved.

Why So Many Blacks in Financial Ads?

Considering how frequently black actors and biracial couples appear in television and print advertising for financial products and services, a visitor to Earth from a distant galaxy might conclude that black Americans account for a significant portion of America’s moneyed class.

To cite one recent example: the Alliance for Lifetime Income, which mainly promotes deferred variable annuities with lifetime income riders, recently sent me an email illustrated by a photo of a young black advisor working at a desk in a New York office tower. There’s nothing wrong with referencing black advisors, but they represent less than four percent of America’s advisor corps and the Alliance’s target market is presumably affluent older whites. (See below.)

Since black Americans are, on average, worse-off financially than white Americans, you have to wonder why they’re overrepresented in ads. Despite ample reporting on the emergency in savings rates among blacks in recent years, the number of black actors appearing in financial ads seems to have increased. Casting decisions for major ads are never accidental, so there must be an explanation. So far, I haven’t found it.

It bears repeating: There’s a Grand Canyon-sized gap between image and reality with respect to finances of black people in the US. According to the Federal Reserve’s Survey of Consumer Finances (SCF), median income in 2016 was $61,200 for white households but only $35,400 for blacks. Black families’ median net worth was less than 15% that of whites ($17,600 vs. $138,200).

In 2016, median non-Hispanic white net worth ($171,000) was ten times median black net worth ($17,000), according to the Tax Policy Center. According to the book, Financial Capability and Asset Holding in Later Life: A Life Course Perspective (Oxford, 2012), 70% of African Americans had saved less than $25,000 (compared to about 50% for all workers) and only 4% had saved more than $250,000, compared to 14% for all savers.

Only 9.4% of non-Hispanic African Americans had assets in an annuity or IRA, compared to 46% for non-Hispanic whites, according to the same source. In 2009, data showed that African Americans had median net worth of $37,100 if a home was included in the calculation and $5,000 if it was not. (From a chapter by Trina R. Williams Shanks and Wilhelmina A. Leigh.)

Industry studies

Two recent surveys by members of the retirement industry, one by New York Life and the other by LIMRA Secure Retirement Institute (SRI), approach the black/white differential through factors other than income or wealth and present their own pictures of the situation. (Prudential has also studied the African American retirement experience in depth.)

New York Life’s Life Insurance Gap study, reported a week ago, shows that African Americans report “more financial stress than the overall population.” According to the study, half of African Americans say that planning for the future causes a “high degree of stress,” versus 44% of all US adults. Three in 10 (31%) African Americans report not feeling financially secure, versus two in 10 (21%) overall.

Half of African Americans say “having enough saved” is a stressor, versus 42% of all adults; 42% of African Americans are concerned about debt levels versus 30% of all adults; 46% of African Americans report being concerned about maintaining their current income versus 34% of all adults.

Despite higher financial stress, African Americans are more likely to seek out expert guidance, with nearly 80% saying they would consider seeking professional help from a financial advisor. Of those who already work with an advisor, 65% say they meet with their advisors more than once per year, versus 49% of all US adults.


LIMRA SRI’s recent survey of black American showed that black Americans are less likely than the general U.S. population to work with a financial advisor (33% versus 37%), and that black Americans who do have financial advisors are less likely to consult their advisors before making financial decisions about retirement.

In general, according to LIMRA SRI, black Americans are more likely to consult immediate family members for financial advice. Financial advisors who want to increase their ethnic clientele should therefore include the entire household in the formal planning process for retirement.

LIMRA’s report, “Black Americans and Retirement Planning: Bridging the Advice Gap,” shows that black Americans prefer working with financial advisors who are involved in their communities and who have worked with ethnic minorities. Four in ten black Americans feel they don’t have enough money to work with a financial advisor.

Black American pre-retirees are less likely than other pre-retirees to have completed key retirement planning activities, such as calculating the amount of assets they’d have available to spend in retirement (29% versus 44% for the general population) or developing a specific plan or strategy for generating income from retirement savings (15% versus 28%). Prior LIMRA SRI research has found that pre-retirees who complete these activities are more confident in their retirement outcomes.

Sixty percent of black Americans own life insurance versus 59% of all Americans, according to the 2018 Barometer Insurance study. That study found that there was no difference (both 68%) between black Americans and all Americans when identifying with the sentence, “I personally need life insurance.”

LIMRA data also shows that black Americans own life insurance for the same top three reasons that all Americans do: to cover burial and other final expenses, to replace lost wages of a deceased wage earner, or to transfer wealth at death.

According to the New York Life study, nearly 80% of African Americans rank having life insurance as a priority financial goal, versus just 63% of all adults, and 93% say it helps future generations succeed.

African Americans told New York Life they purchase life insurance for these reasons:

  • 83% view it as a key way to take care of their families
  • 68% want their life insurance proceeds to pay for a child’s college education
  • 37% percent intend to leave a legacy
  • 28% use life insurance to transfer wealth

Many whites, anecdotally and in the media, blame low incomes and low wealth accumulation among blacks on a lack of saving or frugality—that is, on personal rather than social factors. A retirement industry executive once told me that if poor people paid more in taxes, instead of simply “taking” from tax-paying “makers,” then they might feel more of a stake in American society and would work harder.

From a Northwestern Mutual ad

That’s easy to assume, especially if you don’t know any poor Americans. It’s a lot than easier than trying to understand why blacks have so little income or wealth. A presentation by University of Georgia Law School professor Mehrsa Baradaran at last December’s “Money as a Democratic Medium” conference at Harvard Law School, shed a lot of sunshine on that topic.

Black Americans as a group, she demonstrated with ample documentation, have since 1865 been systematically denied access to mortgage loans and low-cost credit, to union jobs (outside of public services), to good schools, to infrastructure spending in their neighborhoods, to the ballot box and to equal treatment in the criminal justice system.

So, if all or even most of this research is true, then why do we see such a predominance of black actors (and biracial couples and families) in financial services ads—and in most TV ads? Maybe, as some have suggested, advertisers believe that white audiences will infer that where blacks can succeed, whites can succeed. Or maybe advertisers are sincerely trying to reach an untapped black audience. Or perhaps advertisers simply intend to reflect a changing world, one in which an event like the marriage of Meghan Markle and Prince Harry is commonplace.

Based on the incongruity between appearance and reality (in terms of wealth), I suspect that placing black actors in financial ads is an inoculation against the inquiries or accusations of racism that would likely follow if blacks were represented in ads only in proportion to their actual numbers within the financial services target market. The presence of blacks in financial ads may be increasing because news coverage of the financial gap between the races has increased. Only the people who commission or create the ads would know for sure.

© 2019 RIJ Publishing LLC. All rights reserved.

Talking Annuities with AIG’s Todd Solash

Although American International Group’s (AIG) property-casualty division withstood a big financial hit from natural disasters over the past year, the individual annuity segment of the global insurance company’s life and retirement business has continued to post strong sales. AIG has been pursuing a balanced product strategy, with competitive entries in the variable, fixed and index annuity categories.

For the fourth quarter of 2018, AIG’s Individual Retirement business reported $3.8 billion in total individual annuity sales (variable sales of $700 million, fixed sales of $1.7 billion and index sales of $1.4 billion). For all of 2018, the division reported $3.1 billion, $4.8 billion and $4.3 billion in those categories, respectively, for a total of $12.2 billion (See chart below right).

AIG’s entire Life and Retirement group, including Individual Retirement, Group Retirement, Life Insurance, and Institutional Markets, posted industry-leading combined sales of $18.4 billion, according to data released last week by the National Association of Insurance Commissioners (See chart at far right).

[AIG Life and Retirement encompasses American General Life; The Variable Annuity Life Insurance Company (VALIC); The United States Life Insurance Company in the City of New York (U.S. Life); Laya Healthcare Limited and AIG Life Limited.]

Even for AIG’s Life and Retirement business, last year wasn’t easy. It was buffeted by the slump in equity values last fall, industry-wide declines in variable annuity sales, lower reinvestment yields, and a high rate of surrenders and withdrawals, especially in its retail mutual fund business, according to AIG’s 10-K form for 2018. These factors led to a 17% decline in adjusted pre-tax income from Life and Retirement businesses in 2018, to $3.19 billion, compared to $3.83 billion in 2017.

For a closer look at AIG’s annuity business, RIJ spoke with Todd Solash, president of Individual Retirement at AIG. Solash joined AIG in February 2017 after serving as head of Individual Annuities at AXA for six and a half years—a period prior to AXA’s 2017 reorganization as AXA Equitable Holdings, when the firm pioneered the successful index-linked or “buffer” category of deferred variable annuities.

RIJ: What did you come over to AIG to do?

Solash: I came to AIG because of their extraordinary business and the exceptional people. I’ve known Jana Greer [president and CEO, Retirement at AIG] and Rob Scheinerman [president, Group Retirement at AIG] for a long time. I already had a sense of the team and the environment. But what was—and is— most exciting for me is that AIG has such a huge breadth of products and footprint. Being able to spread across all of those businesses is a powerful advantage. My mission is to drive AIG’s Individual Retirement business forward with a focus on serving customers, expanding market leadership and building for more profitable growth.

RIJ: Yes, it’s noteworthy that AIG is a market leader in annuity sales with strong positions across all three product lines. Lincoln Financial is also broad-based. Jackson National, Prudential, and Allianz Life tend to specialize a bit more.

Todd Solash

Solash: Our strategy is to work closely with our partners, listen to our customers and stay flexible with the products we offer. We think having that breadth of products is essential. We’re not beholden to any single product category. If ‘x’ category drops, we still have categories ‘y’ and ‘z’. For our distribution partners, it’s a form of differentiation. We’re a one-stop shop. That’s a service that we provide. It also requires a real commitment. We need to have staff development across all three categories—variable, index and fixed—and that has a higher degree of complexity than being a monoline company. We have to be great in all three areas. We make decisions around where to prioritize, how to sequence product choices, how to staff.

RIJ: AXA revived its annuity business with a registered index-linked annuity (RILA). Did you bring RILA expertise to AIG?

Solash: RILA has become a more competitive space with the arrival of Brighthouse and Allianz Life. The timing right now is interesting. AXA started growing the buffer business about the time when the people here at AIG got into the index business.

RIJ: But with buffered product selling so well, why not get into that game?

Solash: We don’t need to race in and be the sixth or seventh product on that shelf. It’s an interesting space but not having it isn’t a massive hole in our lineup. Many of AIG’s distributors have told us, ‘If you have a buffer product, we’d be really interested in it.’ But they haven’t said they need another product in that space. Besides, with higher rates, the relative value of an index to a buffered product changes. When interest rates are really low and the index caps are really low, the buffer caps look a lot better. But as rates go up, the gap between the two types of products narrows. The conventional index product becomes a more viable competitor.

RIJ: What about variable annuities?

Solash: In our world, there’s been a lot of convergence. Where variable annuity and fixed index annuity businesses used to be separate, the two products are now substitutes for one another in the minds of advisors and clients. The index products tend to be a little more differentiated, a little less comparable to each other. We can ‘pick our spots’ in the index business. The variable annuity space has become much more specific. We were constantly saying, ‘What’s your percentage payout at age 65?’ We went down that road in 2008. You’re really looking at very few variables with which you can differentiate yourself. Still, AIG is very much in the variable business, and we have been very successful.

RIJ: What other product areas is AIG exploring?

Solash: One of the products we are really excited about is a fixed annuity with a living benefit, Assured Edge, and it has done well. The product has the flexibility and the value proposition for guaranteed income that you would historically associate with Index and Variable annuities in a simpler, more streamlined package. This simplicity of the product appeals to the traditional fixed annuity buyer, and allows for a robust income guarantee. We wouldn’t have built the product if we weren’t in all three categories. We wouldn’t have had the expertise or the awareness.

RIJ: AIG has also made some significant organizational changes, hasn’t it?

Solash: After the financial crisis, AIG brought its annuity products together. That has worked really well. AIG has also moved from a set of businesses with a product-driven focus to a set of businesses built around customer needs.

RIJ: Some people have praised your distribution strategy.

Solash: In distribution, we went out and talked to customers. They said they wanted one relationship manager from AIG. They said, ‘You can bring in specialists, but we want one person who can serve as the face of the company.’ Our distribution strategy is built around serving our distribution partners the way they would like to be served. I already mentioned our product breadth, and we have that same flexibility with our sales support model. We have centralized distribution under AIG Financial Distributors, which means no matter what set of products a partner chooses to sell, there is a unified distribution strategy. We’ve also had proprietary bank products where we distribute white label fixed annuities. We have a proprietary fixed index annuity. That’s been really successful. We’re willing to offer a proprietary product under the right circumstances, where and if it makes sense.

RIJ: What about no-commission annuities for registered investment advisors, or RIAs?

Solash: We’re out with a couple of no-commission products on both VA and FIA. We view RIAs as a growth market. But it hasn’t happened in size yet. We don’t know which product will crack the code. The way you deliver it will mean as much as whether you have the dollar-best product. Process matters a lot for RIAs. You can have a good product. But you also have to fit the annuity purchase into their business process. We’re focusing on it and tailoring the product for RIAs. RIAs operate in a different ecosystem, and it is our job to find a way to integrate seamlessly with them, not the other way around. Our goal as a manufacturer is to be on any platform where there is an opportunity for scale. The RIA market checks that box, and we see the opportunity with RIAs as an exciting one in the years ahead.

RIJ: Thank you for speaking with us about AIG’s annuity business. Any final thoughts you’d like to add?

Solash: We’re in a space we really like. We’ve heavily invested in it, and the results have been positive. Our modus operandi is about balance, and about learning how to manage a network of high-quality distribution partners. As the environment becomes more chaotic—with regulatory uncertainty and stock market volatility—and where consumer needs shift, our ability to go across product will be an advantage.

© 2019 RIJ Publishing LLC. All rights reserved.

Risky Retirement Business

The challenges posed by an aging population are manifold, and they are neither new nor unique. The populations of Italy and Japan have been declining for some time, and in the US, numerous state governments’ large unfunded pension liabilities are a chronic problem.

While low interest rates in most advanced economies have held down governments’ borrowing costs, they pose significant challenges for pension asset management. In real (inflation-adjusted) terms, returns on Japanese, German, and other European sovereign bonds have been negative for some time.

Short-term interest rates on US Treasuries may have drifted higher as the Federal Reserve began to unwind its post-crisis stimulus policies (and may edge higher still after the Fed’s current pause), but longer-term US interest rates remain low by historical standards.

The two decades after World War II, as one of us has documented, were also characterized by low real returns on government bonds in both the US and elsewhere. Unlike now, however, that era boasted a much younger and faster-growing population. Furthermore, households had trivial debt levels by modern standards. The solvency of pension plans was not yet a concern.

Regardless of whether yields in advanced economies rise, fall, or stay the same, core demographic trends are unlikely to change in the coming years, implying that pension costs will continue to balloon. Since the creation of the US Social Security system in 1935, Americans’ life expectancy has risen by almost 17 years, while the retirement age has risen by less than two years. In 1946, the assets of pensions amounted to about 29% of US GDP; they have almost quadrupled since then.

Understandably, the search for higher yields has become a higher priority, even for fully-funded pension plans. When unfunded liabilities (which represent the assets that pension funds will have to purchase in the future to meet their obligations) are included, the magnitudes soar even higher.

The search for higher returns has led US pension plans (excluding that of the federal government) to tilt toward equity markets in recent years. This trend has been evident among other investors as well, including some of the world’s largest sovereign wealth funds.

But our recent work with Josefin Meyer suggests that another asset class can provide real long-term returns above those of “risk-free” US government securities. In our study, we focus on external sovereign bonds and compile a new database of 220,000 monthly prices of foreign-currency government bonds, covering 91 countries, traded in London and New York between 1815 and 2016.

Our main insight is that, as in equity markets, the returns on external sovereign bonds (largely bonds issued by emerging market countries and now-advanced economies) have been sufficiently high to compensate investors for risk.

Real ex post returns on external sovereign bonds averaged 7% annually across two centuries, including default episodes, major wars, and global crises. An investor entering this market in any given year received an average excess yearly return of around 4% above US or British government bonds, which is comparable to stocks and higher than corporate bonds.

The observed returns are difficult to reconcile with the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that cases of full repudiation of sovereign debt are relatively rare and mostly connected with major revolutions (Russia in the early twentieth century, China’s Maoist regime, Cuba, and the European countries that fell under Soviet control following World War II).

For the full asset class over two centuries, the typical haircut investors suffer in debt crises is below 50% – a smaller haircut than Moody’s estimates for US corporate bonds over the past century.

The main driver of the higher ex post real returns is the comparatively high coupon these sovereign bonds offer. Beyond the return history itself, there is the fact that emerging and developing economies now account for about two-thirds of global GDP, compared to just one-third 50 years ago, when portfolio diversification was almost entirely a domestic affair.

Adding to the attractiveness of a portfolio of emerging-market sovereign securities, its returns are not perfectly correlated with equity returns. Moreover, there is evidence that creditor rights and enforcement powers in external sovereign debt markets have increased in the wake of recent US court judgments.

These findings are not an invitation to embrace indiscriminate risk taking. Another wave of sovereign defaults may be ahead of us, and sovereign bonds can become highly illiquid in distress. Nonetheless, our results highlight the long-term gains from diversification into a growing but relatively under-studied asset class. And for pensions, the risks of relying on assets that offer negative or only very low long-term real returns are no less serious, especially as they compound over time.

Carmen Reinhart teaches at the Kennedy School of Government at Harvard. Christoph Trebesch is a macroeconomist at the Kiel Institute for the World Economy.

© 2019 Project-Syndicate.

Retail investors reach for income when interest rates fall

Standard theories in financial economics hold that Investors shouldn’t care whether they receive income from dividends or from capital gains, assuming that there are no tax differences and or capital market frictions that favor one over the other.

But that’s not how real people—retirees in particular—actually behave, according to “Monetary Policy and Reaching for Income,” a recent working paper from the National Bureau of Economic Research (NBER Working Paper No. 25344).

The paper shows that when interest rates fall, as they might after a relaxation I the federal funds rates, some interest-and-dividend investors adjust the amount of high dividend paying stocks in their portfolios.
Authors Kent Daniel and Kairong Xiao of Columbia and Lorenzo Garlappi of the University of British Columbia analyzed individual portfolio holdings at a large discount broker over the period 1991-96 for 19,394 households.

They merge the portfolio data with the CRSP (Center for Research in Security Prices) stock database, and determine income and pricing for the stocks in each individual portfolio. The average dividend yield of the stocks in the sample was 2.1%. “High income yield” stocks were defined as those with dividend yields above the 90th percentile, or 5.7%.

Using the CRSP Survivor-Bias-Free US Mutual Fund Database, which provides mutual fund income yields, asset flows, returns, size, expenses, and volatility from January 1991 to December 2016, the authors analyze rotations of fund flows following a decrease in the federal funds rate. The average yield of equity mutual funds was 1.3% and the yield at the 90th percentile was 2.8%.

In the six months after a one percentage point drop in the federal funds rate associated with accommodative monetary policy, households raise the share of their portfolio in stocks paying high dividends by 0.95 percentage points.

Over the following three years, the researchers find a 5.2 percentage point increase in inflows to equity mutual funds with high income-yields. An accommodative monetary policy appears to reduce portfolio diversification and increase the value of high dividend stocks relative to low dividend stocks.
To disentangle monetary policy changes from other economic changes, the researchers compare changes in holdings of individual stocks by households in different Metropolitan Statistical Areas. The demand for dividends was negatively related to local area bank deposit rates, suggesting that local bank deposit rates “provide a more accurate measure of available sources of income for local investors than the Fed Funds rate.”
The researchers suggest that reaching for income can be an optimal investment strategy if investors try to discipline themselves by restricting their spending to the income from their portfolios. The investors who reach for income are disproportionately those with low labor income, such as retirees.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Prudential promotes “sidecar” savings plan for emergencies

Prudential Financial, Inc., is asking employers to add an after-tax emergency savings feature to their 401(k) plans to help workers save for unexpected expenses.

The emergency savings feature, which is part of Prudential Retirement’s “financial wellness” offerings, gives workers an alternative to savings and investment accounts outside the workplace. It also helps stop the drain on pre-tax retirement contributions.

Linking emergency savings to an employer-sponsored retirement plan provides other benefits such as no minimum account balance and lower investment fees than a worker might pay at a brokerage, a Prudential release said.

The feature allows employees to withdraw their after-tax savings if an emergency arises, while preserving the before-tax retirement contributions. Any earnings that are withdrawn are subject to taxation as well as a 10% premature distribution tax, if withdrawn before age 59½.

Just 26% of Americans are on track toward building an emergency savings account, Prudential’s 2018 Financial Wellness Census found. Only an estimated 15% of millennial and Gen X veterans are on track toward building an emergency savings account.

During the partial government shutdown earlier this year, nearly half of affected federal workers fell behind in paying bills and 83% reported higher overall stress levels, a 2019 Prudential survey found. Earlier research found that most Americans cannot pay for a $500 emergency.

After-tax contributions are the least used of the three retirement savings options available to most private sector workers, including before-tax contributions and a Roth 401(k) option. Just 14.6% of employers offer an after-tax savings option within their 401(k) plan, according to 2016 Plan Sponsor Council of America data.

In 2018, Prudential Retirement introduced an emergency savings feature for workplace 401(k) plans to provide employees the opportunity to make after-tax payroll contributions alongside before-tax contributions.

Prudential has offered its own employees an after-tax savings feature through its 401(k) plan for many years, along with before-tax and Roth 401(k) contribution options.

Student loan payments are eligible for partial match in Travelers 401(k) plan

Under The Travelers’ “Paying It Forward Savings Program,” employees of The Travelers Companies, Inc., can make payments toward student loans that will qualify for the company’s 401(k) plan matching program.

As part of its benefits package, Travelers has a “matching” program for employee contributions to 401(k) accounts. Beginning in January 2020, when The Travelers Paying It Forward Savings Program takes effect, student loan payments will also be taken into account when determining the company’s 401(k) contribution.

“Employees, including those who are not in a position to contribute at all to their 401(k) accounts because of student loans, who participate in the new program could accumulate tens of thousands of dollars in their 401(k) accounts over a decade, which could be worth hundreds of thousands of dollars at retirement,” a Travelers release said.

According to the Federal Reserve, student loan debt in the United States reached more than $1.5 trillion at the end of 2018. The Fed’s latest Report on the Economic Well-Being of U.S. Households noted that 41% of 18-to 29-year-olds said they had no retirement savings and that 42% of those who had attended college, representing 30% of all adults, incurred debt for their education.

Athene attributes losses to adverse interest rate, equity market conditions

Athene Holding Ltd., a provider of retirement savings products, has reported a net loss of $104 million $(0.53) per diluted Class A share for the fourth quarter of 2018, down from net income of $439 million ($2.22 per share) for the fourth quarter of 2017, the company reported this week.

“The loss was driven by unfavorable changes in reinsurance embedded derivatives due to credit spread widening, as well as unfavorable changes in fixed indexed annuity derivatives due to equity market depreciation,” a release said.

Net income for the full year 2018 was $1.05 billion, or $5.32 per diluted share, compared to net income for the full year 2017 of $1.36 billion, or $6.91 per diluted share.

Adjusted operating income1 for the fourth quarter 2018 was $240 million, or $1.23 per adjusted operating share, compared to adjusted operating income for the fourth quarter 2017 of $313 million, or $1.60 per adjusted operating share. The decrease was driven by higher other liability costs resulting from equity market depreciation. Adjusted operating income for the full year 2018 was $1.14 billion, or $5.82 per adjusted operating share, compared to adjusted operating income for the full year 2017 of $1.06 billion, or $5.39 per adjusted operating share.

Highlights of Athene’s fourth quarter and EOY earnings report included:

ROE of 12.1%, Retirement Services adjusted operating ROE of 18.4%, and Consolidated adjusted operating ROE of 13.9% for the full year ended December 31, 2018

  • Book value per share of $42.45, a decrease of 9% for the year-over-year period ended December 31, 2018
  • Adjusted book value per share of $45.59, an increase of 19% for the year-over-year period ended December 31, 2018
  • Closed previously announced block reinsurance transaction with Lincoln Financial Group totaling $7.9 billion of liabilities, effective October 1, 2018
  • Total Deposits of $13.0 billion and $40.2 billion for the quarter and year ended December 31, 2018, respectively
  • Organic deposits of $5.2 billion and $13.2 billion for the quarter and year ended December 31, 2018, respectively
  • Inorganic deposits of $7.9 billion and $27.0 billion for the quarter and year ended December 31, 2018, respectively
  • Ranked #2 carrier in fixed indexed annuity (“FIA”) sales for the two years ended September 30, 20182
  • ALRe RBC of 405%3 and U.S. RBC of 421%, as of December 31, 2018
  • Repurchased $147 million of common stock from December 10, 2018 through February 22, 2019

“In 2018, we continued our disciplined strategy of capital stewardship and opportunistic deployment,” said Jim Belardi, CEO of Athene. “We grew invested assets by more than 45%4, marking 2018 as a year of acceleration for Athene. Our multi-channel distribution model generated record organic growth of more than $13 billion, and this was complemented by closing two inorganic transactions in a calendar year for the first time in our history, totaling an additional $27 billion. Importantly, we underwrote this new business to the same high return standards we have historically.

“In the current environment, it’s clear the market has not properly valued the growing earnings power of our business, so we commenced opportunistic share repurchases totaling $147 million,” Belardi added. “

Since these repurchases were executed at an average share price in line with our initial public offering price more than two years ago, when the size and earnings profile of Athene was significantly less than it is today, we believe this method of capital deployment will prove very accretive.”

© 2019 RIJ Publishing LLC. All rights reserved.

Surrender rates on some FIAs tick higher

Fixed indexed annuity (FIA) surrender rates climbed in 2017-18, after declining slowly from 2010 to 2016, according to Ruark Consulting LLC. Ruark released the results of its 2019 studies of FIA policyholder behavior this week.

Shock duration surrender rates in the most recent quarter rose to a level last seen in 2009, Ruark found.

“For a product with surrender charges at issue, the shock duration is the first year that the surrender charges are zero,” said Ruark CEO Tim Paris told RIJ. “For a typical seven-year product, the shock duration would be year eight. There tends to be a big uptick—a shock or spike—in surrenders at that time.”

The Ruark studies, which examine the factors driving surrenders, guaranteed lifetime income benefit (GLIB) utilization, and free partial withdrawals, were based on experience from 3.5 million policyholders from 2007 through September 2018.

Fifteen companies participated, with a combined $240 billion in current account values. Highlights of the studies include:

  • Surrenders are sensitive to interest rates: Contracts that are credited less than 2% interest per year exhibit sharply higher surrenders; and as market interest rates increase, so do surrenders.
  • GLIB (guaranteed lifetime income benefit) exposure beyond the surrender charge period increased 34% from last year’s study, providing a more credible basis for long-term behavioral assumption models.
  • Contracts with a GLIB have much lower surrender rates than those without, and rates for contracts that have commenced income are even lower.
  • GLIB commencement rates are influenced by age, tax status, and contract size, with a larger proportion commencing income at the first opportunity.
  • GLIB utilization increases and surrenders decrease when contracts are economically “in the money,” reflecting longevity and the time value of money.

By aggregating data from across the annuity industry, Ruark tries to achieve greater precision in identifying trends than companies could achieve by relying only on their own experience, Paris said in a release. Timothy Paris, Ruark’s CEO in a release.

Detailed study results, including company-level analytics and customized behavioral assumption models calibrated to the study data, are available for purchase by participating companies.

Ruark Consulting, LLC (, based in Simsbury, CT, is an actuarial consulting firm that provides a platform and industry benchmark for principles-based insurance data analytics and risk management. Ruark collaborates with the Goldenson Center for Actuarial Research at the University of Connecticut.

© 2019 RIJ Publishing LLC. All rights reserved.

Risks that Can Ruin a Retirement, Part II

The word “risk” means different things to different people. For an investment-oriented advisor, risk-taking is mainly positive: it’s a path to higher returns. If that’s your preference, you probably worry that your clients might take too little investment risk during retirement, or that they might rashly de-risk—by selling depressed assets—during a market correction.

To an advisor whose roots are in the insurance world, or who blends insurance and investment products in retirement, risk is less positive. From that advisor’s perspective, risks represent predictable hazards that clients need to anticipate and prepare for, especially if they want to sleep easily at night during retirement.

Both attitudes toward risk are valid, but I’m approaching it from the second perspective. In an article in last week’s edition of RIJ, I discussed the threat of longevity risk—the risk of outliving one’s savings—in detail. This week, I’ll focus on other, equally important risks: financial risks, health care risks, political risks, and others.


Low-return risk. Even if life spans were completely predictable, investing at any age is fraught with risk. This is particularly the case today, given the decline in interest rates. With 10-year Treasury bond rates around 2½ percent, their return after inflation and taxes is negative for most investors. A decent rate of return on average requires risk-taking. A portfolio with an investment of 60% in S&P500 index fund and 40% in a bond index fund has a much lower rate of return than it used to.

There is no obvious solution to this basic change in the financial landscape, except perhaps making an extra effort to improve the risk-return tradeoff by lowering investment fees and more importantly, saving more.

Sequence-of-returns risk. Apart from the woefully low rates of return on safe investments, the problem of sequence of returns risk arises with portfolios with variable rates of return. Of two portfolios with the same geometric average return over some given number of years from which a specified stream of withdrawals is being made, the portfolio whose good years occur early will run out less quickly than the portfolio whose bad years occur early.

Sequence-of-returns risk can be reduced by choosing a portfolio with a less variable rate of return, but that will lower the expected rate of return. Sequence-of-return risk does not arise when no withdrawals are being made, as with some endowment funds.

Inflation risk. Inflation risk arises because future rates of inflation are not predictable. It can be seen as a form of financial risk, because it affects the real rate of return on any financial asset whose return is not indexed to inflation. It also creates a risk for recipients of sources of nominally fixed income, like pensions.

Interest rate risk. Even with risk-free assets, interest rate risk arises when the assets are redeemed, and the proceeds have to be reinvested at a lower than expected rate of interest. This problem can be minimized by a laddering strategy: matching the maturity of an asset like a Treasury or bullet bond, to the extent possible, with the year when their proceeds will be spent. Thus, the proceeds of a bond maturing in 15 years should be matched with a reasonable estimate of expenditures expected fifteen years hence. Perhaps the estimate should be conservative, so that any expenditure exceeding it would be financed in other ways. Interest rate risk can be reduced, but not eliminated, in this way.

Perhaps the most basic issue with financial risk is the investor’s attitude toward it. The level of risk of a portfolio should not be so high as to cause the investor sleepless nights. Peace of mind may well require sacrificing high expected returns; but that in turn will require higher saving rates prior to retirement to achieve a given target for retirement income.

For clients who are no longer working or have limited ways of achieving expenditure economies, boosting saving significantly may not be possible. However, advisors of clients who still have some years of work in front of them need to emphasize that shrewd investing alone will not a secure retirement make. They should also recognize that putting in extra years of work to boost income in retirement may not be an option for everyone, particularly for people who have disabilities.

Health care risk. Most Americans aged 65 years and older enjoy a reasonable degree of protection from health care cost risk. Medicare alone provides a fair amount of protection, and the gaps in its coverage can be covered mostly by acquiring a supplementary policy. About six of seven older Americans have this additional coverage. Nonetheless, even this combined coverage does not ensure that all expensive or experimental coverage of prescription medicines or treatment will be covered.

Older Americans not yet eligible for Medicare can be at risk for health care costs that are large enough to force bankruptcy. Employer-provided health care tends to be a feature of larger corporations. Even so, the loss of even a well-paying job can (and usually does) entail the loss of employer-provided health insurance.

While the unemployment rate for older American is lower than the average for all ages, unemployment spells are longer for them. Finding another job, particularly one with comparable salary and benefits, can be a challenge, and individual health insurance is typically very expensive if it is available at all.

Job loss at a relatively advanced age can affect households at all income levels. Medicaid, the poor household’s Medicare, may be available to some households whose members are all less than 65 years of age even if household income exceeds the poverty line, but it is not a universal safety net. The issue of the effects on retirement security of job loss and other non-medical contingencies is taken up again below.

Long-term care cost risk. Most Americans think that Medicare covers long-term care (LTC) costs, but Medicare in fact only covers nursing home stays, post-surgical and the like, for a relatively short period. Medicaid covers the cost of nursing homes and other facilities needed by people who have difficulty coping with daily living requirements. But, unlike the care covered by Medicare, Medicaid coverage requires that participants satisfy certain income and asset tests.

Medicaid’s coverage was initially limited to the very poor. Its coverage subsequently expanded considerably. Under the Supplemental Security Income (SSI) assistance program, most states now offer coverage to people with incomes up to $2,300 a month, or three times the poverty rate for individuals.

However, 33 states offer another “pathway” to Medicaid coverage known as the medically needy program. To be eligible for this program, candidates must finance out of their own pocket expenses equal to the difference between their monthly incomes and a floor set by their state of residence, over a period ranging from one to six months, also set by the state. For example, a state might set an income threshold of $500.

If a candidate for the program had monthly income of $10,000, and the period set for the test was six months, eligibility would require an outlay of 6 x ($10,000 – $500) or $57,000. This is certainly a tidy sum, although not beyond the means of many better-off Americans. Unlike the other tests, even an individual with a high income can become eligible for Medicaid, although the higher the income, the larger the up-front payment.

Certainly, for the poor, and even for many better off families, these financial arrangements make private LTC insurance look unattractive compared to its publicly-provided alternative. Private insurance, if an individual can afford it, has two important advantages, however. First, policyholders are not expected to devote a large chunk of whatever income they may have toward defraying nursing home costs when they become a resident. Second, someone with private insurance will have more control and a wider range of choice of facility. LTC insurance can be a good deal for the better off, particularly if it is offered as a group policy. Investing in a policy while still relatively young is also a good move.

Political risk. The recent annual reports of the Trustees of the Social Security system make clear that the current level of benefits cannot be sustained. Some combination of benefit reductions and/or payroll tax increases must sooner or later take place. The combination of measures that could in principle address the current financial imbalance is virtually without limit, but all would face political headwinds—strong headwinds, in many cases.

Congress cannot continue to kick the can down the road forever. It will have to act sooner or later. What will it do? Politically and morally, reducing the benefits of those already retired is a non-starter, particularly for older retirees, with high-income households a possible exception. The role of the Social Security benefit in the retirement income of wealthy households is rarely great.

Reducing the benefits and/or increasing taxes on workers approaching retirement also seems like a tall order politically. It basically leaves young workers, and young Americans who have yet to earn their first pay check, to take the hit. Consequently, the clients who patronize the RIJ’s advisor-readers may not have much to fear. However, anyone advising younger investors should alert them to the possibility that the implicit rate of return on their payroll tax contributions is sooner or later going to decline.

Of more concern to older Americans may be the parlous state of the finances of Medicare and Medicaid. Cuts in coverage and increases in co-insurance and copayments are not simply remote possibilities. The part of the payroll tax that finances Medicare could also increase. There may be no strategy that advisors could offer their clients to deal with the consequences of political risk, but to be forewarned is at least to be (a little) forearmed.

Other risks. Surveys of retirement confidence by both the Employee Benefit Research Institute (EBRI) and the Society of Actuaries (SOA) reveal a disquieting tendency for older Americans to be uncertain of their ability to deal with unforeseen financial contingencies. Those include not just the big ticket items we have been reviewing, but even comparatively small contingencies, like an unexpected car repair bill.

A recent survey by the Federal Reserve Board found that this is a problem for all ages. Some 40% of survey participants would be hard pressed to meet an unexpected expenditure of $400. The habit of living from paycheck to paycheck is not confined to the poor, however, as the experience of many middle-income federal workers affected by the recent partial shutdown attests.

Regardless of their clients’ income levels, advisors should impress on them the need for a contingency reserve and the importance of saving. Higher rates of saving would allow older Americans to take advantage of formal insurance mechanisms (such as private LTC insurance) and would prevent comparatively minor contingencies from having major financial consequences. Finally, and not to belabor the point: no investment strategy, however brilliant, can make up for an inadequate saving rate.

George A. (Sandy) Mackenzie is a Washington, DC-based economist. After more than 25 years as a staff member of the International Monetary Fund, Mackenzie began to specialize in the economics and finances of retirement. From 2013 – 2018, he was the first editor of the Journal of Retirement. He is the author of Annuity Markets and Pension Reform (Cambridge, 2006) and The Decline of the Traditional Pension: A Comparative Study of Threats to Retirement Security (Cambridge 2015).


© 2019 RIJ Publishing LLC. All rights reserved.

The Incredible Shrinking Income Rider

The variable annuity (VA) with a lifetime income rider is a versatile product category that suits our times. It deals with several major risks—market risk, longevity risk, and perhaps even inflation risk—in ways that seem to satisfy the needs of many retirees, distributors and issuers.

With the help of dynamic hedging programs and risk management strategies, it also appears to deliver profit margins that can meet the requirements of life insurers. Certain regulators and Wall Street analysts with memories of the 2008 equity market crash—and its immense cost to many VA issuers—remain wary, however.

One relatively minor but interesting rider design pushes the limits of the flexibility of the VA. These are guaranteed lifetime withdrawal benefits (GLWBs) where the annual payout rate (the maximum income the contract owner may withdraw each year without reducing the guarantee) falls if the account value falls to zero during the owner’s lifetime. Any combination of withdrawals, fees or market depreciation can zero out the account.

Both Pacific Life and Lincoln Financial announced updated versions of these riders in February. RIJ reported on Lincoln’s product two weeks ago. This week we’re looking at the Pacific Life version, a slightly more generous version of a contract that the insurer introduced in 2016.

The idea of reducing the size of the income stream could make sense for retirees who plan to spend more during their initial “go-go” years than during their more advanced “slow-go” and “no go” years. But it also seems somewhat counter-intuitive.

Annuities, in the purest sense, transfer longevity risk from individuals or couples onto life insurance companies. Pooling and the law of large numbers equip insurers to handle that risk. The rider featured here appears to throw a chunk of longevity risk back at the retiree and even suggests a potential conflict of interest for the issuer.

Enhanced Income Select

The Pacific Life rider, Enhanced Income Select, allows contract owners to withdraw up to 8% a year of their contract value (which locks in as the minimum basis for future payouts, barring positive market adjustments or excess withdrawals later on) if they start taking income at age 70 or later. But if the account value drops to zero, the annual withdrawal rate falls back to 3% for the remainder of the contract.

“We have sold this product since May 2016, but we just raised the withdrawal percentages,” Steve Goldberg, associate vice president for annuity product management at Pacific Life, told RIJ this week. “There are three age bands. We raised the withdrawal percentages by 50 basis points each.”

For individuals ages 59½ to 64 the withdrawal rate is now 5.6%. It’s 7.6% for those ages 65 to 69 and 8% for those age 70 or older. “We were able to do that partly because Treasury rates are going up, and it’s cheaper to hedge [the risks],” Goldberg told RIJ in an interview.

Pacific Life designed this product for people age 70 or over who want immediate income at a high initial rate and who may have other sources of income to rely on in case the balance drops to zero and the payout rate drops to 3%. There’s no annual deferral bonus, so clients have no incentive to postpone the income stream. [I’m assuming here that readers know how the benefit base differs the account value, and how the guaranteed payout rate differs from the growth rate of the underlying assets.]

“It’s a rider that’s designed for those looking for higher income earlier,” Goldberg said. “Many people are afraid of running out of money, but it can be more fulfilling for them to have higher income while they are young and active. If the account does run out of money, we assume that the contract owners and their advisors have a plan for that. Also, clients don’t have to take 8%. They can take 6%. There are a lot of options.”

Fees are an important factor here, and Goldberg said that Pacific Life has tried to keep them low. The current rider fee is 1.05% per year for single lives and 1.40% for joint contracts. The so-called mortality and expense risk fee depends on the length of the surrender period: 0.95% for a five-year period, 1.25% for a three-year period and 1.35% for no surrender period.

There’s also a 0.25% annual administration fee. The contract comes with a standard return of premium (adjusted for fees and withdrawals) death benefit. Investment options are restricted [see box] but Goldberg said there are several that cost 59 basis points per year. If a contract owner selects those investments, the all-in annual costs for a three-year joint life version of the rider would be 3.49% of the benefit base per year.

Potential conflict?

But there’s the rub. If a healthy couple’s income stream starts when the younger spouse is 70 years old, and 11.49% of initial account value is coming out every year via withdrawals and fees, the potential for the account balance to drop to 3% before the surviving spouse dies seems fairly large.

By that time, the surviving spouse would also have lost the lesser of the pair’s two Social Security benefits. In addition, late-life medical expenses might have started to mount. The pinch seems even sharper if you consider the fact that the fees, which helps reduce the issuer’s risk, help trigger the markdown to 3%, which also reduces the issuer’s risk.

The Pacific Life rider also shares interest rate risk with the contract owner. The minimum rider fee is 70 basis points a year for a single life and 90 basis points for a joint life contract. If 10-year Treasury rates reach 4% a year, the rider fee will be capped at 1.50% per year. If rates fall below 2%, the fee for single life contracts will be capped at 2.25%. If rates are 2% to 3.99%, the rider fee will be capped at 2%. Joint life rider fees are 50 basis points higher in all three cases.

If retirees looking to annuities for income certainty, peace of mind in retirement, and fewer potential surprises as they get older, then this product appears not to fit the bill. On the other hand, Goldberg told RIJ that Pacific Life’s market research shows a demand for it.

For the target market for this product—retired clients of advisors who take commissions—a single-premium immediate annuity (SPIA) would probably not be proposed. At age 70, this type of VA rider would produce more initial income than a SPIA purchased with an identical premium, but the SPIA would provide much more longevity insurance.

If retirees look to annuities for income certainty, peace of mind, and protection from unpleasant surprises as they age, then this product may not fit the bill. Historically, advisors, unlike issuers, welcomed the idea of zeroing out the account value on a living benefit rider. It meant that their clients had “won” the longevity bet. With this type of rider, only issuers will feel good about the reduction in income (or not as bad as if they were still paying out 8%). Clients, however, may complain to their advisors about it.

(I could be wrong about rate-reduction riders. I’ve been wrong before. When index-linked variable annuities came out in 2011, I doubted that investors would want to absorb unlimited downside risk beyond the buffer zone. But those products have been successful.)

Pacific Life’s market research evidently shows a demand for Enhanced Income Select, however. “Our research is partly advisor-based, and partly based on our experience with selling a SPIA that offers an adjustment option that allows the payment to go up or down in the future. Depending on the situation, many advisors liked that feature. Every situation is different of course,” Goldberg said, adding that product-line extension is now the name of the game in annuities for both mutual and publicly held life insurers. “Everybody is changing. All of the carriers are trying to diversify their product mixes.”

An advisor who follows VA riders closely gave us a reality-check about this design. Its value “depends on the client’s situation,” he told RIJ. “If the clients have outsized expenses for a finite period and then expect relief from the sale of a vacation house, for instance, they might not need the higher income at age 80. But it has limited use. It would be very important to remind the client about the feature and provide detailed disclosure up front. This is just one more complexity that can be misrepresented or misunderstood.”

© 2019 RIJ Publishing LLC. All rights reserved.

A Textbook Way to Sell Annuities

If David Macchia didn’t have a native talent for selling insurance, and for selling ways to sell annuities, he might have been a professor or minister. The owner of Boston-based Wealth2k likes to teach. He believes in what he teaches, so he can be very persuasive.

For almost two decades, Wealth2k has been promoting a proprietary retirement income planning product called the Income for Life Model, or IFLM. It’s a web-based, turn-key, multi-media marketing/planning package for advisors. It shows them how to use the “time-segmentation” or “bucketing” method to generate income for retirees.

There’s no Nobel Prize-winning academic research proving that time-segmentation method works better than other decumulation strategies. But it fuses behavioral finance, the equity premium, and asset liability matching in a logical way. Most importantly for annuity sellers, it provides an open-architecture framework for cobbling together almost any combination of annuities and investments.

Paperback writer

Now Macchia has become, like John Lennon, a paperback writer. If you’ve ever heard Macchia speak, you’ll probably recognize his voice coming through the text of his new book. Called Lucky Retiree, it teaches people about retirement risks and time-segmentation while selling IFLM.

The choice of the title is a good one. Insurance is always about risk mitigation, but risk is a negative word. The word “lucky” is its glass-half-full counter-part. Pro forma, Lucky Retiree methodically identifies the risks that retirees face: timing risk, longevity risk, market risk, inflation risk, etc. Commendably, Macchia also introduces the important concept of “constrained retirees” (whose assets are just shy of their income needs and who are a prime source of annuity prospects) and “flooring” (the principle of generating enough guaranteed monthly income to cover necessary, as opposed to discretionary, expenses in retirement).

After defining the challenge, the book offers time-segmentation as the solution. In a case study, Macchia describes Sue, a 65-year-old newly-retired telecom company manager with a small pension from her long-term employer. She declares that she absolutely must have an income no less than $6,000 a month in retirement. Her investments, worth $925,000, must provide $2,700 to top off the $3,300 per month she receives from Social Security and a pension.

Many if not most advisors might tell Sue to spend 4% of $900,000 per year, thus netting $36,000 a year or $3,000 a month. But, in this instance, her advisor, James, takes her at her word that she values protection over growth. So, using IFLM, James sets up a seven-segment bucketing plan for her instead:

Segment I: $157,973 in cash equivalents for years 1 through 5.

Segment II: $164,037 in a short-term bond fund, five-year fixed deferred annuity or structured CD for income in years 6 through 10.

Segment III: $70,201 in a 50% stocks/50% bonds portfolio for years 11 through 15.

Segment IV: $65,616 in a 60% stocks/40% bonds portfolio for years 16 through 20.

Segment V: $52,763 in a 70% stocks/30% bonds portfolio for years 21 through 25.

Segment VI: $115,968 invested in a risky-enough unspecified portfolio that aims for a 9% average return over 25 years, aiming for a balance of about $1 million at age 92.

Segment VII: About $300,000 invested in an annuity with an income start date at the beginning in year 11, providing at least $2,000 a month for life.

As each bucket of assets matures—and, ideally, has grown at the expected rate—its purpose changes from accumulation to distribution. The investments are liquidated and turned into cash equivalents that will provide worry-free income for the next five-year segment.

How to sell annuities

This is an extremely conservative plan. It puts about a third of Sue’s money in cash equivalents or short-term bonds, a third in an variable annuity, and only about $200,000 in stocks. An investment-driven advisor would probably, for better or worse, have put up to two-thirds of her money ($600,000+) in stocks.

But, given Sue’s preference for safety, this might be the very plan she’d buy. The advisor can assure her, as a closing comment, that she’s covered both ways. If her investments pay off, she’ll be a rich 92-year-old. But even if none of her risky investments appreciate, she’ll always receive enough monthly income to cover her basic expenses.

“No matter to what level the cash in these segments grows, the monthly income that will be created by each segment will be safe income that Sue can count on,” Macchia writes. That statement can be made (I infer this, because Macchia doesn’t make it explicit) because Sue paid $300,000 for a deferred indexed (FIA) or deferred variable annuity (VA) with a living benefit rider in year 1. The annuity pays her $2,000 a month for life starting in year 11. (The book provides few details, but Macchia might have been thinking of a income rider with a 6% payout at age 75 and a deferral bonus that could lift the benefit base to at least $400,000 over 10 years.)

This, in short, is how you sell annuities: Within the context of a larger plan that addresses the key concerns of the client while minimizing the mention of “annuities.” Macchia handles the topic of annuities gingerly, sparely, without much detail, and mainly towards the end of the book. If James, the advisor, had told Sue initially that she should buy a VA with a living benefit with a third of her savings, she probably would have bolted.

Over the course of his narrative, Macchia has demonstrated the proper, and perhaps necessary, progression from teaching to persuading to selling that advisors can (must?) take when trying to lead people to blend investments and annuities in a retirement income plan. The persuasion part gives me pause, but no one ever said that selling these products was easy.

© 2019 RIJ Publishing LLC. All rights reserved.

Investors fond of bonds so far in 2019

After experiencing a record outflow in December 2018, bond funds have rebounded in 2019. Taxable and municipal bond funds alone had net inflows of $39 billion in January, according to Morningstar. Of that amount, passive taxable bond funds received a record $27.6 billion in the first month of 2019.

The tilt to fixed income continued in February. Bond mutual funds received an estimated $28.1 billion through February 26. The category was on track for its second-largest monthly inflow in five years, according to a release from TrimTabs Investment Research.

“Retail investors remain skeptical of the ferocious stock market rally early this year,” said David Santschi, director of liquidity research for TrimTabs, which is based in Los Angeles. “While bond mutual funds are drawing big inflows, all equity mutual funds have lost an estimated $14.9 billion in February.”

U.S. equity funds and sector equity funds had a combined outflow of $12.1 billion in January, in a month when all long-term funds had net inflows of $39.1 billion. Almost equal amounts flowed in and out of active U.S. equity funds during January. Passive U.S. equity funds had an outflow of $3.8 billion.

January was the first time since March 2018 that open-end funds enjoyed stronger inflows than ETFs. The $34.1 billion advantage in flows was the greatest since March 2014. Over the 12 months ending January 31, open-end funds had $184 billion in outflows versus ETFs’ $240 billion in inflows. Active long-term funds lost $325 billion while passive long-term funds gained $391 billion.

Because of January’s strong equity returns, managed portfolios, such as target-date funds, with fixed allocations to individual funds may have been forced to trim their U.S. equity funds, Morningstar analysts Kevin McDevitt and Michael Schramm commented.

On the one hand, two S&P500 funds—Fidelity’s and Vanguard’s—were among the ten biggest gainers in the month. But two S&P500 ETFs—SPDR S&P500 and iShares Core S&P500—were among the ten biggest losers of flow in January.

One consistent story-line has been investors’ endless pilgrimage to Vanguard funds. You could attribute that to Vanguard’s low costs and passive investing, but those can be found elsewhere. Vanguard’s brand strength, which reflects trust, may be the driving factor there.

Highlights from Morningstar’s fund flow report for January included:

  • Overall, long-term flows recovered in January, with $39.0 billion in inflows after $83.0 billion of volatility-induced flight in December. Previous years saw much higher January inflows, however, with $132.0 billion in 2018 (following the passage of tax cuts) and $63.0 billion in 2017 (following the presidential election). Over the past 12 months, long-term flows have remained weak with only about $56 billion in net inflows.
  • Taxable bond funds, as a Morningstar Category, netted $31.5 billion in January 2019, the group’s best performance since January 2018. Passive taxable-bond funds, as mentioned above, received a record $27.6 billion.
  • Ultra-short bond funds received only $2.3 billion, their weakest month since September 2017. “Investor enthusiasm for ultrashort bond funds waned significantly,” wrote McDevitt and Schramm. “This may have owed to the Fed’s announcement that further rate increases are on hold.”
  • Diversified emerging-markets funds led Morningstar Categories in January with $10.9 billion in inflows, the category’s best month since January 2018.
  • International equity funds bounced back with $14.2 billion of inflows in January after a reciprocal amount of outflows in December, most likely driven by tax-loss selling.
  • Among the largest U.S. fund families, Vanguard dominated with $19.7 billion in inflows. Specifically, Vanguard Total Bond Market II Index saw $6.9 billion inflows this month, January’s greatest inflows for a vehicle.
  • The mild surprise from U.S. fund families in January was the weak performance of iShares, which collected just $400 million, the firm’s worst showing since June 2018.

Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund, and net flow for U.S. ETFs shares outstanding and reported net assets.

© 2019 RIJ Publishing LLC. All rights reserved.

Assets are concentrated among ‘mega’ advisors

Mega teams—those with $500 million or more in assets under management (AUM)— make up just 11% of advisor practices, but they service nearly two-thirds of total advisor-managed assets, according to global research and consulting firm, Cerulli Associates.

These teams are concentrated in wirehouses and hybrid registered investment advisors (RIAs), but their influence is steadily growing beyond those channels and throughout the industry. The asset growth of independent RIA mega firms over the past five years (2012-2017) has surpassed that of their smaller peers in the channel. Similarly, among wirehouse practices, mega teams have expanded their collective AUM by 19% over the past five years, while all other AUM tiers ceded assets.

Cerulli anticipates that mega teams will continue to win opportunities for both organic (e.g., client referrals) and inorganic growth (e.g., acquisitions, tuck-in advisors) as advisors seek to reap the advantages of teaming. Currently, more than half (54%) of all advisors operate in a team structure.

“Teaming allows advisors to build specialized roles and responsibilities, thereby delivering broader and deeper advice to clients with more complex financial needs,” said Marina Shtyrkov, a research analyst at Cerulli, in a release.

Teaming also enriches the end-client experience because it helps advisors pool resources, integrate next-generation advisors, and support one another’s client relationships. Nearly three-quarters (73%) of advisors believe that teaming improves the client experience.

“As advisors begin to think more holistically about the nonfinancial, intangible impact they can have on their clients, they will increasingly compete on the quality of their client experience, and mega teams are well positioned to compete in this experience-centric model,” Shtyrkov said.

For asset managers, mega teams represent attractive distribution opportunities. They commonly retain investment decisions and use diverse products and services. At the same time, they are blurring traditional channel lines, causing managers to reassess advisor coverage. Asset managers need to understand the main point of influence and assess advisor personas to ensure success with this segment.

Also included in Cerulli’s latest report, The Cerulli Report—U.S. Advisor Metrics 2018: Reinventing the Client Experience, are detailed analyses of advisor market sizing, attributes, client relationships, broker/dealer support, investment decisions and product use, and practice challenges and growth opportunities.

© 2019 RIJ Publishing LLC. All rights reserved.

Envestnet Insurance Exchange aims for June 2019 launch

Envestnet Insurance Exchange, which integrates insurance products into the Envestnet wealth management platform, will soon provide advisors with access to products from six major insurance carriers, it was announced this week.

“Envestnet is working to onboard advisors to the pilot program and plans a broad-market release of the Insurance Exchange in June 2019,” said an Envestnet release from Bill Crager, chief executive of Envestnet Wealth Solutions.

The carriers, Allianz Life, Brighthouse Financial, Global Atlantic Financial Group, Jackson National Life Insurance Company, Nationwide and Prudential Financial, will offer variable, structured, fixed and indexed annuities to advisors through the Envestnet Insurance Exchange.

Envestnet Insurance Exchange is powered by Fiduciary Exchange, LLC (FIDx), whose software integrates the brokerage, insurance and advisory ecosystems. The partnership was initially announced at the Envestnet Advisor Summit in May 2018.

Since then, Envestnet and FIDx have added prominent carriers and annuity products. FIDx’s technology unites insurance carriers and wealth management platform, allowing advisors to bring annuities into clients’ portfolios, either for long-term investing, tax deferral, guaranteed income or principal protection. Through Envestnet Insurance Exchange, advisors and their clients will benefit from the following:

  • Industry-recognized selection of carriers and annuity products.
  • Daily annuity performance reporting aligning with traditional asset classes.
  • Integration of annuities into asset allocation models.
  • Simplified account opening, processing and management of annuities on platform.
  • Ability to advise on annuities within the managed account and to conduct in-force transactions on platform.
  • Fee-based and commission-based annuity offerings.

Envestnet Insurance Exchange will be available through the sponsor and advisor portals on the Envestnet platform.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Nick Lane appointed president, AXA Equitable Life

Nick Lane has assumed his previously announced position as president of AXA Equitable Life with responsibilities for the company’s Retirement, Wealth Management and Protection Solutions businesses as well as its Marketing and Digital functions, according to a release this week from AXA Equitable Life.

Lane reports to AXA Equitable Holdings, Inc., president and CEO Mark Pearson, and joins the firm’s management Committee. Most recently, Lane served as CEO and President of AXA Japan, where he was responsible for a business with $5.4 billion in annual revenue  and led a team of 9,000 employees and distributors.

Lane joined AXA in 2005 and held a variety of leadership roles. He launched fee-based versions of the company’s flagship variable annuity products to meet evolving financial advisor and customer needs.

Lane also led global strategy for AXA Group, oversaw its asset management business and served on the boards of AllianceBernstein, AXA Investment Managers, AXA Private Equity and AXA Real Estate Management.

Prior to joining the company, Lane was a leader in the sales and marketing practice of the global management consulting firm McKinsey & Co. He received an MBA from Harvard Business School and a bachelor of arts from Princeton University. Lane also served as a Captain in the U.S. Marine Corps.

MassMutual reports record revenues for 2018

Strong demand for life insurance and annuities, coupled with strong investment income, enabled MassMutual to achieve record revenue of $32.5 billion for 2018, a 24% increase over 2017, the company reported this week. Total adjusted capital also remained at an all-time high.

Total sales by MassMutual’s advisor network was $30.8 billion, up 20% over 2017. The company also announced or completed several strategic transactions in 2018. The statutory surplus was $15.6 billion at year-end. Total adjusted capital was a record $19.9 billion, or more than double the amount 10 years ago.

The company approved an estimated $1.72 billion dividend payout to eligible participating policyowners for 2019, its all-time highest payout and the 151st consecutive year it has paid a dividend.

MassMutual proves nearly $715 billion worth of insurance coverage, and was the top writer of whole life insurance for the third consecutive year. The company paid more than $5.3 billion in insurance and annuity benefits to its policyowners and customers.

MassMutual’s net gain from operations before policyowner dividends and taxes was $1.86 billion, up slightly over 2017. That is the company’s primary earnings measure for a mutual company.

After factoring in policyowner dividends and other items, the company realized a statutory net loss related to its sale of the majority interest of MassMutual Japan to Nippon Life last year. Excluding this one-time impact, the company would have realized a statutory profit of approximately $500 million.

MassMutual also took several steps in 2018 to bolster its international insurance and asset management businesses. The ownership structure for some of these companies evolved from wholly-owned operating subsidiaries to mutually beneficial partnerships around the globe.

The sale of MassMutual Asia to Yunfeng Financial Group and several Asia-based investors was an example of this strategy.

MassMutual expects to reap similar advantages from the merger of Oppenheimer Funds, Inc., the company’s retail asset management affiliate, and Invesco Ltd., which will create one of the world’s largest asset managers.

Expected to close in 2019, the transaction will give MassMutual the largest ownership position in the combined firm – approximately 15.5% – along with expanded global scale, diversity of offerings and additional capital.

‘Alexa, What’s my Principal Flash Briefing?’

In an effort to encourage individuals to build financial knowledge, Principal Financial Group has introduced a voice-activated financial wellness and retirement readiness education tool.

When individuals enable the “Principal Flash Briefing” skill and say, “Hey Alexa, what’s my Flash Briefing?” they’ll hear quick retirement planning and financial tips. Listeners will then be directed to for information from their financial wellness platform, Principal Milestones.

When consulted, Alexa will give tips like, “10%. What’s so special about that number? Saving at least 10% of your income plus other contributions toward retirement could help you get closer to setting you up for the retirement you want.

“And if that seems overwhelming right now, consider ticking up your contribution by 1% each year to get closer to your goal. It’s never too early, or too late, to master your money.”

eMoney launches Foundational Planning

eMoney, a leading provider of wealth management solutions, today launched Foundational Planning, the newest planning solution available on the eMoney platform. Foundational Planning is designed to help advisors introduce planning to clients and scale planning across their organizations through a single platform.

Foundational Planning starts with a streamlined data gathering process using step-by-step workflows and modular planning focused on retirement, education and spending goals that, when combined, build a holistic plan. It also provides an interactive and engaging client experience with side-by-side scenario planning, including Monte Carlo-based results.

As client relationships mature and their needs change, advisors can seamlessly transition to using an even more comprehensive planning solution built on the same engine that powers eMoney’s Advanced Planning tools, eliminating the need for multiple planning technologies.

Planning continues to be a differentiator for today’s most forward-thinking, tech-savvy and nimble advisors, otherwise known as FlexGen Advisors. According to the 2018 FlexGen Advisor Research Study, these advisors cite planning as a viable way to differentiate their practice (91%) versus their peers (69%) and more frequently provide clients with an interactive experience (82%) than their peers (47%). And they are seeing results. FlexGen Advisors reported, on average, a 24% annual increase in AUM in compared to their peers who saw a 14% increase.

Brad Arends, co-founder and CEO of intellicents, a financial services firm dedicated to helping the “other 99% of Americans,” will be one of the first eMoney clients to use Foundational Planning.

For more information about Foundational Planning or to sign up for demo, visit

Ricki Ingalls joins Retirement Clearinghouse

Retirement Clearinghouse, the North Carolina-based company that markets an “auto-portability” process for forwarding abandoned 401(k) accounts to the participant’s next plan after a job change, announced that Ricki G. Ingalls, Ph.D., has joined its team as Chief Operating Officer.

Ingalls was previously an associate professor, and chair of the Department of Computer Information Systems and Quantitative Methods, at Texas State University’s McCoy College of Business Administration.

Ingalls was also an associate professor in Oklahoma State University’s School of Industrial Engineering and Management, and president of Entero Technologies, LLC, where he developed algorithms and process improvements for clients such as Brivo Systems, Frito-Lay, and Royal Dutch Shell.

Earlier in his career, he was senior manager of Global Integrated Logistics at Compaq Computer Corp.

Ingalls received his Ph.D. in Management Science from the University of Texas at Austin. He also holds a master of science in Industrial Engineering from Texas A&M University, and a bachelor of science in mathematics from East Texas Baptist College.

2019 RIJ Publishing LLC. All rights reserved.

Record sales for indexed annuities in 2018

Rising supply, competitive yields, compelling commissions, deregulation (post-fiduciary rule), flight to safety from equity market volatility, and rising demand from retiring baby boomers for safe lifetime income are among the many possible explanations for record-breaking sales of fixed annuity products last quarter.

Fourth quarter 2018 indexed annuity sales set an all-time quarterly record at $19.5 billion, a 40% increase, compared with fourth quarter 2017 results, according to a quarterly annuity report from LIMRA Secure Retirement Institute (SRI).

For the year, fixed indexed annuity sales rose 27% to $69.6 billion, compared with the prior year. This exceeded the previous annual fixed indexed annuity sales record by $10 billion.

“Total fixed annuities had a record-breaking fourth quarter, achieving the highest level of sales for fixed annuities in a quarter—ever,” said Todd Giesing, director, Annuity Research, LIMRA SRI, in a release this week.

“This jump in quarterly sales can be attributed to higher interest rates and increased equity market volatility. This is the fourth consecutive year where annual fixed annuity sales surpassed $100 billion. This is the first time it has occurred since LIMRA SRI began tracking sales.”

At 4.10%, 5-year fixed deferred annuities with a minimum investment of $10,000 currently offer yields that are about 80 basis points higher than current annual yields for certificates of deposits, according to a cursory scrape of data from and On a $1,000,000 investment, the difference in yield after five years would be about $40,000.

Total annuity sales were $232.1 billion for 2018, up 14% from 2017 results, according to LIMRA Secure Retirement quarterly annuity retail sales survey. Sales were $62.1 billion in the final quarter of 2018, up 22% over 2017.

Driven by fixed annuity products, the fourth quarter of 2018 saw the highest quarterly total annuity sales since the first quarter of 2009, and the first time annuity sales have exceeded $60 billion since the fourth quarter of 2015.

“Individual annuity sales for 2018 finished the year strong, particularly sales of fixed annuity products,” Giesing said. “Fixed annuity sales accounted for nearly 60% of overall individual annuity sales, a significant change from just five years ago.”
Total fixed annuity sales increased 47% in the fourth quarter, to $37.4 billion. For the year, fixed annuity sales rose 25% to $132 billion. That’s an all-time high for fixed annuity sales.

Fixed rate deferred annuities (book value and market value-adjusted) sales increased 74% in the fourth quarter to $12.9 billion. Full year fixed-rate deferred annuity sales for 2018 were $44.2 billion, 29% higher than 2017 results. This is the first time annual fixed-rate deferred sales have exceeded $40 billion since 2009.

Fixed immediate annuity sales rose 29% in the fourth quarter to $2.7 billion, which represents the highest quarterly sales recorded for immediate income annuities. For the year, income annuity sales increased 17%, to $9.7 billion.

Sales of deferred income annuities (DIA) increased 20% in the fourth quarter, to $655 million. For 2018, DIA sales were 4% higher than 2017 results, reaching $2.3 billion.
U.S. variable annuity (VA) sales were $24.7 billion in the fourth quarter, down 3% compared with prior year results. Total VA sales for 2018 were $100.1 billion, a two-percent increase over 2017 results. Fixed annuity sales have exceeded VA sales in 10 of the last 12 quarters.

Registered indexed-linked annuity sales (RILAs) topped $3 billion this quarter, an increase of more than 10%. For the year, RILA sales will near $11 billion and represent more than 10% of total VA sales.

The fourth quarter 2018 Annuities Industry Estimates can be found in LIMRA’s Data Bank. To view variable, fixed and total annuity sales over the past 10 years, please visit Annuity Sales 2008-2017. Top 20 annuity rankings will be available in mid-March.

© 2019 RIJ Publishing LLC. All rights reserved.