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Schwab’s new TDFs sport ultra-low fees

Posted on September 7, 2016 by Editorial Staff -

Charles Schwab Investment Management (CSIM) has launched Schwab Target Index Funds, a series of index-based target date mutual funds with low-cost Schwab ETFs as underlying investments, according to a Schwab release.

The new funds, which are available to employer-sponsored retirement plans, have an across-the-board expense ratio of eight basis points (0.08%) and no minimum investment requirements regardless of plan size. In the past, such pricing on target date funds could require a $100 million minimum investment or more from retirement plans, the release said.

Schwab Target Index Funds are available to individual investors at 13 basis points (0.13%) with only a $100 minimum investment. The new series includes funds with target retirement dates between 2010 and 2060 in five-year increments.

Schwab Target Index Funds are an important addition to Schwab’s well-established TDF suite, first launched in 2002, which includes mutual funds and collective trust funds, open architecture construction and active and passive strategies.

The underlying assets in Schwab Target Index Funds are primarily Schwab’s market-cap index ETFs. The asset allocations are adjusted annually and become more conservative over time on a glidepath that continues through rather than the anticipated retirement date.

The Schwab Target 2060 Index Fund begins with an asset mix of approximately 95% equity, 5% fixed income, cash and cash equivalents. At their target retirement dates, each fund reaches approximately 40% equity, 60% fixed income, cash and cash equivalents. Each fund then continues reducing its equity allocation for an additional twenty years to reach its most conservative and final allocation of approximately 25% equity, 75% fixed income, cash and cash equivalents.

Schwab also offers TDFs as collective trust funds (CTFs) to 401(k) plans and other qualified retirement plans through Charles Schwab Bank. Among them are Schwab Indexed Retirement Trust Funds, which offer passive, index-based strategies. Effective November 1, 2016, plan sponsors also will be able to access the SIRT funds for eight basis points (0.08%) with no minimum investment required, which aligns with the pricing of the new mutual fund Schwab Target Index Funds.

Schwab Bank also offers collective trust TDFs that use both active and passive sub-advised strategies, the Schwab Managed Retirement Trust Funds.

Honorable Mention

Posted on September 7, 2016 by Editorial Staff -

Jamie Salafia promoted in TEM segment of Voya institutional

Voya has named Jamie Salafia its new director of Consultant Relations for the Tax-Exempt Markets (TEM) segment of Voya Financial’s Retirement business. He will be based in Windsor, CT, and report to Gregg Holgate, senior vice president, Institutional Clients, for Voya’s TEM sales team.

Salafia, who had been the TEM marketing segment director, will be responsible for developing relationships with consultants serving large state and municipal governments, school systems, hospitals, healthcare facilities and non-profits. He is a registered representative with Series 6, 26 and 63 licenses.

Before joining Voya in 2015, Salafia was a retirement education consultant at Prudential Retirement and an assistant vice president of marketing at Phoenix Wealth Management. He is a U.S. Air Force veteran.

MassMutual to gather data with Medallia software

Massachusetts Mutual Life Insurance Co. (MassMutual) has selected Medallia, a developer of customer experience management (CEM) software, to provide the insurer with new customer feedback and response program.

“Built on a data analytics platform, Medallia’s enterprise SaaS CEM solution enables MassMutual’s employees to gather, analyze and act on customer feedback in real time to continuously improve the company’s performance as well as the customer experience,” a MassMutual release said.

The new customer experience management system will allow MassMutual to gather feedback from its 35,000 retirement plan sponsors, three million participants and more than 5,100 advisors and third-party administrators (TPAs). Customers will be asked to evaluate their experiences.

Founded in 2001, Medallia has offices in Silicon Valley, New York, London, Paris, Hong Kong, Sydney and Buenos Aires.

Frustration expressed at aging summit

A big gap exists between what academics know about likely changes in global demographics over the next 35 years and the ability of governments, companies and individuals to prepare for those changes.

That was the concensus reached by 42 experts on population, economics, migration, geopolitics, financial planning, business strategy at the Tenth World Demographic and Ageing Forum, held in St. Gallen, Switzerland, from August 29 to 31.

The WDA Forum identified four priorities for change in preparation for declining fertility in developed countries and increasing fertility in sub-Saharan Africa:

Altering government, employer, individual behaviours, policies and practices for flexible retirement aligned with flexible working lives.
Improving the integration of new migrants in western societies
Rethinking education, at a personal level as well as in public policy, to facilitate life-long education
Investing in education in sub-Saharan Africa and South Asia, especially of women, not least to reduce fertility rates

A statement released after the conference said:

“We know that the share of populations in developed countries that is over 65 is rising rapidly, as we live longer lives and have fewer children, and that China, other emerging markets and virtually all nations as they modernize are following the same path.

“We know that the population of sub-Saharan Africa promises to double or even triple during this century unless fertility rates are brought down. We know that despite arguably more favorable demographics than other Western countries the US labor force is seeing millions of males give up looking for work.

“We know that civil wars and other political and economic instability are causing substantial flows of migrants. We know that in Europe, skilled immigrants are needed for economic reasons but not wanted by many voters.

“Action, to adjust our views of working lives, to alter business practices towards older people, to integrate migrants, to alter pension entitlements and retirement ages to make them affordable, to deal with the many trade-offs in public policy that favor short-term responses over longer term measures—all is proving surprisingly hard to achieve.

“The critical priority must be to accelerate action in response to and in preparation for the dramatic demographic changes that are arriving. Above all, the Forum concluded, we as individuals need to change the way in which we think about old age. When we are 75 or 80 years, will we be rebels? Or conservatives? Or try to control our ageing? Or will we try to be ageless, eternal?”

The WDA Forum is a think tank established in 2002 and based in St. Gallen. It works closely with the Institute of Insurance Economics at the University of St. Gallen as well as other educational and research institutions including the Harvard T.H. Chan School of Public Health in Boston, Stanford University in California and Fudan University in Shanghai.

Ameritas buys The Guardian’s 401(k) business

Ameritas Life has completed its purchase of the 401(k) plan business of The Guardian Insurance & Annuity Company, Inc. (GIAC), a unit of The Guardian Life Insurance Company of America, Lincoln, Nebraska-based Ameritas reported.

The transaction increases the assets under administration of Ameritas retirement plans division to more than $10 billion, serving 6,000 businesses and public entities that range from sole proprietorships to large corporate, non-profit and government employers.

Ameritas Life Insurance Corp. and its affiliated companies provide life insurance, annuities, group health insurance, individual disability income insurance, retirement plans, investments and public finance. Securities and investment advisory services offered through affiliate Ameritas Investment Corp., member FINRA/SIPC.

The Guardian Life, a mutual company founded in 1860, had $7.3 billion in capital and $1.5 billion in operating income (before taxes and dividends to policyholders) in 2015. The company employs about 8,000, including over 3,000 financial representatives in more than 70 agencies nationwide.

Address change for sponsor of RMEF, a retirement industry group

Diversified Services Group, Inc., which sponsors the twice-yearly Retirement Management Executive Forum, has a new address: 175 Strafford Avenue, Suite One, Wayne, Pa., 19087-3396.

DSG offers retirement market consulting, research, and business planning services to insurance companies, investment management firms and mutual funds, banks, and distributors of financial products.

Through a series of syndicated and proprietary retirement market research projects (RM2 Reports) and a partnership with Greenwald & Associates, DSG helps financial services companies better understand the needs of retirees. It is currently conducting its 4th annual syndicated “Retiree Insights” Study. A new multi-sponsor Retirement Income Products research initiative is planned for later this fall.

Established in 2003, DSG’s Retirement Management Executive Forum (RMEF) allows retirement market business executives to meet and discuss the retirement income market opportunity and relevant market issues. The next RMEF is scheduled for December 7th and 8th.

TIAA to replace passwords with voiceprints

In a technology upgrade that can eliminate traditional passwords, PINs and account numbers, TIAA has launched “voice biometric authentication,” a digital technology that lets TIAA clients create “voiceprints” to securely identify themselves when speaking to a customer representative, transferring funds or checking account balances.

When customers sign up for this service, the system will capture their unique voiceprint. By using their secure vocal password, customers will be able to skip many of the various authentication steps used today. The system can detect and safeguard against voice recordings, according to a TIAA (formerly TIAA-CREF) release.

Voice biometrics is now available to most TIAA retirement participants.

AIG Tops Annuity Sales Chart Again

Posted on August 18, 2016 by Kerry Pechter -

For the second consecutive quarter, AIG has reached the top of the list of annuity sellers in the U.S., with combined fixed and variable annuity sales of $9.78 billion in the first half of 2016, according to LIMRA Secure Retirement Institute, which published its Second Quarter U.S. Annuity Sales survey this week.

AIG-owned annuity issuers (including American General Life and SunAmerica) sold $4.12 billion worth of individual variable annuities (Portfolio Director and Polaris) and $5.66 billion worth of fixed annuities (including fixed rate, fixed indexed and both immediate and deferred income annuities and qualified longevity annuity contracts or QLACs) through June 30, 2016.

AIG was bailed out and acquired by the U.S. Treasury during the financial crisis of 2008, after massive losses on the sale of derivatives called credit default swaps, a form of insurance against the failure of fixed income investments, drove it to insolvency. It emerged from federal ownership in 2012. AIG recently announced a $3 billion increase in its stock buyback program.

Overall, sales of fixed annuities jumped 32% in the second quarter, to $31.5 billion. Year-to-date, fixed annuity sales totaled $63.8 billion, an increase of 39% compared with the same period in 2015. A continued drop in VA sales pulled the overall annuity sales results down, however. In the second quarter 2016, total U.S. annuity sales were $58.4 billion, three percent lower than the prior year.

The Institute forecasts VA sales to drop 15-20% in 2016 and another 25-30% drop in 2017 when the Department of Labor’s fiduciary rule goes into effect next April. It also expects the DOL rule to slow the momentum of indexed annuities, as wholesalers and broker-dealers adjust to the new regulatory environment.

In the meantime, total annuity sales in 2016 should be in line with 2015’s results, because the drop in VA sales should be offset by growth in the fixed annuity market, LIMRA said. LIMRA Secure Retirement Institute’s second quarter U.S. Individual Annuities Sales Survey represents data from 96% of the market.

Indexed annuities

Fixed indexed annuity (FIA) sales were $16.2 billion in the second quarter of 2016, LIMRA reported. That figure, a new quarterly sales record for indexed annuities, was 30% higher than the second quarter of 2015.

“The decline in interest rates benefited indexed annuity sales once again as consumers seek out ‘safe yield’,” said Todd Giesing, assistant research director, LIMRA Secure Retirement Institute, in a release. “The indexed market is extremely competitive at this time as indexed products remain an attractive alternative to variable annuity (VA) products. This has been beneficial for independent broker-dealers, and in fact, we expect this channel to post record indexed annuity sales this year.”

In the first half of the year, indexed annuity sales increased 32% to $31.9 billion, compared with the first six months of 2015. The Institute expects indexed annuity sales to exceed $60 billion by the end of the year.

“We expect the sales gains attained in 2016 to be erased in 2017 when the DOL fiduciary rule goes into effect,” said Todd Giesing, assistant research director, LIMRA Secure Retirement Institute.

Nearly two thirds of indexed annuity sales in 2015 ($34 billion) were funded through IRAs or rollovers from retirement accounts (qualified assets). Under the DOL fiduciary rule, financial professionals who sell indexed annuities purchased with qualified assets will need to sign a BIC [best interest contract] and pledge to act as fiduciaries for their clients to prevent these sales from being considered “prohibited transactions” under the Employee Retirement Income Security Act of 1974.

“The challenges of implementing the BIC exemption will have a negative impact on indexed annuity sales in 2017,” Giesing said in a release on August 2. “For that reason, we are projecting a 30-35% decline in indexed annuity sales in 2017, bringing sales totals down to 2013 levels (nearly $40 billion).”

The DOL fiduciary rule also will have a significant impact on independent agents who work through Independent Marketing Organizations (IMOs). This distribution channel accounted for two thirds of the indexed annuities sold in 2015.

Under the new DOL rule, IMOs are not recognized as financial institutions. As such, these organizations cannot execute the best interest contract with the policyholder on behalf of the agent.

While industry analysts expect many IMOs will eventually change their status and become broker-dealers, which are recognized as financial institutions by the DOL, there will likely be others who leave the market or consolidate with another organization, shrinking the overall channel’s reach.

Fixed annuities

Other fixed annuity sales continued to see strong sales growth in the first half of 2016. Sales of fixed-rate deferred annuities, (book value and market value adjusted) improved 46% in the second quarter to $10.5 billion. Year-to-date, fixed rate deferred annuity sales were $22.5 billion, or 67% higher than in the first six months of 2015.

Fixed immediate annuities. Fixed immediate annuity sales totaled $2.5 billion in the second quarter, up 14% from the prior year. In the first half of 2016, immediate annuity sales increased 19% to $5 billion. “Many of the top companies have put more of an emphasis on their income annuity sales, with seven of the top ten writers experienced growth of 25% or higher,” the LIMRA release said. The Institute expects fixed immediate annuity sales to exceed $10 billion in 2016, or 10-15% higher than 2015 totals.

Deferred income annuities. In the second quarter, deferred income annuity (DIA) sales jumped 43% in the second quarter, to $870 million. This is the highest quarterly sales total for DIA products since the Institute started reporting DIA sales results. Nine of the top ten writers experienced growth of 25% or more. In the first half of 2016, DIA sales rose 37% to $1.6 billion. Institute analysts expect DIA sales to have an upward trajectory in the second half of the year driving DIAs to a record sales year in 2016, exceeding $3 billion.

Variable annuities

In the second quarter, VA sales totaled $26.9 billion, down 25%. VA sales fell 22% in the first six months of 2016 to $53.5 billion. This is lowest first half of the year for VA sales since 1998 and the first time VA sales have been below $30 billion for two consecutive quarters since 2002.

“Low interest rates and a focus on implementing the DOL fiduciary rule have hampered product innovation, [where] we usually see strong activity in the second quarter,” noted Giesing.

Links

The second quarter 2016 Annuities Industry Estimates can be found in LIMRA’s updated Data Bank. To view the top twenty rankings of total, variable and fixed annuity writers for second quarter 2016, please visit Second Quarter 2016 Annuity Rankings. To view the breakout of indexed and fixed-rate annuity sales rankings, please visit: Second Quarter Fixed Annuity Breakout Rankings. To view variable, fixed and total annuity sales over the past 10 years, please visit Annuity Sales 2006-2015.

Demand for retail “institutional” funds to accelerate: Strategic Insight

Posted on August 18, 2016 by Editorial Staff -

The Department of Labor’s fiduciary (conflict of interest) rule will accelerate the movement toward the use of low-cost institutional mutual fund share classes by fee-based advisors, and the impact of the DOL rule will extend beyond merely tax-deferred accounts but also taxable accounts, according to a new report by Strategic Insights, an Asset International company.

The report, “Fund Sales Benchmarking 2016: Perspectives on Intermediary Share Class and by Distribution Channel,” is based on a survey of advisors and is intended to help asset managers that distribute their funds through broker-dealers understand how the DOL rule, which begins to take effect next April, will affect their ability to price their products and, ultimately, their profitability going forward.

RIJ has written in the past that one of the DOL rule’s aims was to extend the standards, for prices and advice, of the ERISA institutional world to the rollover IRA world, largely so that the financial benefit of tax deferral would not be consumed by the higher pricing that prevails in the retail advisor space. But that leaves asset managers wondering how to promote the sale of their funds.

The findings of the Strategic Insight report show that the broker-dealer space is in fact moving toward institutionally priced funds, which would not carry loads, revenue-sharing expenses or 12b-1 fees through which investors indirectly subsidize the costs of distribution. The report did not reveal any downward pressure on the wrap fees that fee-based advisors charge, which range from 1.0% to 1.5% per year.

“We focused on share class pricing, which is near the top of the list of concerns among asset managers,” said Dennis Bowden, the lead author of the report. “The DOL rule will accelerate the existing trend to lower-priced share classes, such as institutional share classes. We’re seeing that in fee-based accounts; so far demand is shifting away from share classes that include 12b-1 fees. We think the use of 12b-1 fees in fee-based accounts will be rare in a few years.”

“One of the important factors for distributors as they think about DOL rule is the need to equalize payment streams across the funds on their platform. The DOL rule has an overall halo of emphasizing ‘low costs,’ but the bigger impetus for changes in share class pricing will be [fee] equitization. To that end, you may see externalization of fees, resulting in lower fund expense ratios and separate distribution fees that would be paid either by the investors or the fund managers,” Bowden added.

Distributors also told SI that they will apply the standards of the DOL to all client money, not just qualified money. “Clearly, the rule directly impacts qualified assets, such as IRAs,” he told RIJ. “But we’re also finding that distributors are not looking at the rule as affecting IRA assets in isolation. Those assets sit side by side with taxable assets on a fee-based platform. So we think the changes that distributors will be making, which will affect fund managers, will be more holistic. And that’s where this DOL rule becomes really impactful.”

Strategic Insight conducted its survey in the first quarter of 2016. It approached fund firms that sell primarily through financial intermediaries and requested 2015 sales data (along with 2014 data from those firms who had not participated in last year’s survey), broken out by share class pricing structure and distribution channel. SI analyzed this data alongside previous years’ survey results, which encompass annual sales data from 2006 through 2014.

The 2016 Fund Sales Benchmarking analysis uses results provided by 35 mutual fund companies that sell primarily through financial intermediaries. The 35 participants include most of the large companies distributing primarily through financial advisers, as well as many small- and mid-sized firms.

Survey participants managed a total of $5.2 trillion in long-term fund assets (as of the end of 2015), representing 45% of total industry long-term assets and more than one-half of actively managed holdings. The median sized firm controlled more than $65 billion in fund assets. Participants reported in aggregate over $1 trillion in open-end stock and bond mutual fund sales during 2015.

In a separate but related report on the DOL rule’s impact on distribution, a new report from Cogent Reports, called “The Advisor of Tomorrow,” said:

Advisors lament that the DOL fiduciary ruling casts an overall negative industry gloom and is fueling investors’ focus on fees. Perhaps even more importantly, advisors believe that the DOL action forces them toward a fee-based compensation structure and limits their product selection.
Two camps are emerging: Fee-based advisors who see the DOL action as formalizing an inevitable market shift, and commission-based advisors who fear that their services are being commoditized, leaving them vulnerable to competition from automated advice services.
Many advisors feel monitored rather than supported by their firms. The growing volume and scope of internal and external regulations heightens their concerns about personal liability.

Vanguard continues to dominate mutual fund flows: Morningstar

Posted on August 18, 2016 by Editorial Staff -

With $32.9 billion exiting in July, outflows from actively-managed U.S. equity funds surpassed the estimated $21.7 billion in outflows in June, according to Morningstar’s monthly asset flow report on U.S. mutual funds and exchange-traded funds (ETFs) for July 2016. All passive category groups saw net inflows during the month, led by $33.8 billion in inflows to passive U.S. equity funds.

The ongoing flight to index funds continues to benefit The Vanguard Group, which pioneered the use of retail index funds 40 years ago and offers a long list of index mutual funds and ETFs. Vanguard passive funds gathered $21.1 billion in July, or about 62% of the total net flow into index funds, even though its European Stock Index Fund lost $1.5 billion, one of the highest outflows. Vanguard and State Street were the only top-10 U.S. fund families to see positive flows into active strategies for the second consecutive month.

In 2015 (about $220 billion) and so far in 2016 (about $160 billion), Vanguard’s flows are positive while the rest of the fund industry, collectively, has net outflows of about $60 billion. Actively managed funds, though battered in recent years, still dominate the broker-dealer channels and account for almost twice as much in total assets under management as passive funds, by $9.75 trillion to $5.09 trillion.

The Vanguard index funds cost as little as 10 basis points (0.1%), but low cost is not the firm’s only advantage, according to Morningstar. “Cost definitely plays an important part [in Vanguard’s success], but it’s not the only reason,” Morningstar’s Alina Lamy told RIJ. “A lot of it has to do with quality and transparency, as well—building a reputation and living up to it.

“Many investors saw their savings wiped out almost overnight during the crisis and lost trust in money managers who had promised stellar returns. Vanguard didn’t over-promise and didn’t disappoint. All they promise is market returns at low cost, and this is something transparent and reasonable that resonates with investors.

“Also, in their own words from their website: “Vanguard is client-owned. As a client owner, you own the funds that own Vanguard.” This keeps them free from potential conflicts of interest that might arise for a fund company that’s affiliated with other institutions, such as big banks, etc.

Invesco Diversified Dividend Fund, which has a Morningstar Analyst Rating of Silver, led flows into active funds in July, garnering nearly $1.3 billion. The highest inflow to a passive fund went to SPDR S&P 500 ETF, which took in more than $11 billion in July, representing the fund’s highest monthly inflow since December 2014.

The data in the flows report only includes open-end and exchange-traded funds, Morningstar said. Target date funds or funds of funds are excluded in order to avoid double counting. The data doesn’t include defined contribution investment options, retirement accounts or variable annuity subaccounts.

Taxable bonds offer high returns

When bond yields fall, bond prices rise. That’s good for current bond fund owners and it attracts new money. In the first half of 2016, international bonds returned 17.3% and emerging market bonds returned 10.9%. Long-term government and corporate bonds returned 11.9% and 11.7%, respectively. Overall, active and passive funds in the taxable bond category group garnered $34.0 billion in July.

The intermediate-term bond fund category garnered the most flows for the fifth month in a row, taking in nearly $15.0 billion in July. The diversified emerging markets and emerging-markets bond categories joined the top five categories in July, in terms of inflows, collecting $6.5 billion and $4.6 billion, respectively.

Investors continued to withdraw assets from funds in the large growth, Europe stock, and world allocation categories. Fidelity and Franklin Templeton led active outflows in July, experiencing $8.9 billion and $3.8 billion in outflows, respectively. Total outflows in the allocation category group were $3.5 billion.

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 ETFs by computing the change in shares outstanding.

RIJ Takes a Two-Week Vacation

Posted on August 18, 2016 by Editorial Staff -

Advisors in limbo regarding DOL rule

Posted on August 18, 2016 by Editorial Staff -

Most advisors are considering changes to their business model as they wait to learn their firm’s new compliance procedures under the Department of Labor fiduciary rule, according to a new survey sponsored by the Nationwide Retirement Institute.

Nationwide’s “Countdown to Implementation” advisor survey is intended to provide a quarterly snapshot of the progress the industry is making to implement the new rule standards.

“Firms are taking this seriously, but still have a lot to work through. As we move through the next 18 months, we anticipate shifts in product mix and levels of understanding and concern,” said Kevin McGarry, director of the Nationwide Retirement Institute, in a release.

Almost nine in ten (87%) of advisors are considering changes to how they do business, according to the survey of 622 financial advisors commissioned in May by Nationwide.

More than four in ten advisors (43%) said they may plan to expand services offered to more holistic planning and 26% may plan to focus on non-qualified accounts. “Advisors are considering a shift from a transaction-based business model to more of a service-oriented model,” McGarry said.

Among the survey findings:

Only 42% of advisors say they are aware of their firm’s timeline for implementation or what training or support the firm will provide.
Only 33% are aware of their firm’s new compliance procedures.
Only 23% of advisors are aware of their firms’ plans with respect to adoption of the BICE to sell variable compensation products.
78% identified the BICE as one of the greatest areas of impact to their business.

The advisors Nationwide surveyed consider themselves at least somewhat knowledgeable about:

Fiduciary requirements (82%)
Products subject to fiduciary standards (76%)
Fee/compensation disclosure requirements (76%)
BICE (73%)
The difference between advice vs. education (69%)
Grandfathering provisions/conditions (64%)
Levelized compensation requirements (64%)

The Nationwide Retirement Institute’s new DOL website provides resources for firms and advisors wrestling with the complexities of the new fiduciary rule. In addition to the website, Nationwide is holding webcasts and local market events to provide resources and tools on practice management, best-in-class fiduciary practices and how advisors can build and grow their business.

Lull in “fintech” funding observed

Posted on August 18, 2016 by Editorial Staff -

Investment in venture capital-backed financial technology or “fintech” companies fell 24% in the U.S and nearly 50% globally during the second quarter of 2016, according to the Pulse of Fintech, a quarterly global report published jointly by KPMG International and CB Insights.

The report attributed the drop to “a tougher climate for marketplace lenders and a drop in mega-round activity,” according to a release this week.

U.S. fintech companies saw funding of $1.3 billion in the second quarter, down from $1.7 billion in the first quarter and from $2.4 billion in the year-ago quarter. Deal activity to venture-backed fintech companies in the U.S. also experienced a five-quarter low with just 90 deals.

Corporate venture funds played a larger role in deals to North American VC-backed fintech companies in the second quarter, participating in 30% of all fintech deals, up from 23% last quarter.

Over the last five quarters, Goldman Sachs, Citigroup and Banco Santander or their venture arms (excluding independent VC firms associated with these banks) have invested in 25 VC-backed fintech companies. Other banks making investments globally across the fintech landscape include HSBC, JPMorgan Chase, and Mitsubishi UFJ Financial Group.

“We see more partnering with fintechs by traditional financial services companies to help develop new business models, while also enabling fintechs to expand their customer base and get the support they need to become sustainable,” said Brian Hughes, partner, KPMG LLP’s Venture Capital Practice.

The 30 largest fintech funding rounds during the first half of 2016 totaled over $4.6 billion in aggregate funding. North America accounted for 19 of these rounds. Fintech early stage deal share in the U.S. fell to a five quarter low in Q2. Seed deal share fell to 21% after taking almost one-third of all U.S. VC-backed fintech deals in the first quarter of this year.

InsurTech is coming into its own as an area of fintech for venture capital investment, hitting $1 billion across 47 deals in the first half of 2016, KPMG said. Health insurance-related companies claimed the three largest deals of 2016 to date, but companies in life insurance are also seeing an increasing amount of investment, the release said.

TIAA creates fund to invest in ‘super-regional’ malls

Posted on August 18, 2016 by Editorial Staff -

TIAA Global Asset Management has raised $1.25bn (€1.11bn) for a real estate fund specializing in US regional shopping malls. The T-C Super Regional Mall Fund will be backed by domestic and foreign institutions as well as TIAA’s general account, IPE.com reported this week.

The TIAA fund has invested around $685 million so far. With leverage, the commitments give the fund $2.5bn to invest in the sector. APG, the Netherlands’ largest pension fund investor, has invested in super regional malls with TIAA for several years, but it was not clear if APG is an investor in this fund.

Super regional’ malls are those with over 800,000 sq. ft. of gross leasable area, three or more anchor tenants and a primary trade radius of five to 25 miles, according to the International Council of Shopping Centers in the US.

They are “a distinctly strong and stable performer throughout multiple cycles,” said Suzan Amato, managing director of TIAA Global Asset Management. “They have demonstrated high net-operating-income growth, low volatility compared to other property sectors, and a history of outperforming the NCREIF Property Index.”

“Given the current lack of mall construction and the shift towards consumers seeking entertainment experiences outside the home,” US super-regional malls present a sound long-term investment, said Scott Kempton, managing director and portfolio manager for the fund.

“These assets are unique, hands-on environments, often offering extensive food hall and fine dining options, as well as movie theatres and other attractions that can ultimately help drive traffic and sales,” he added.

T. Rowe Price reports on trends in its retirement plans

Posted on August 18, 2016 by Editorial Staff -

T. Rowe Price Retirement Plan Services, which serves nearly 1.9 million retirement plan participants across more than 3,500 plans, has released the latest version of Reference Point, an annual benchmarking report based on T. Rowe Price’s full service recordkeeping client data.

The report provides plan sponsors the ability to review retirement plan trends and plan participant behavior patterns to help them make more informed plan decisions. Here’s a summary of the report’s findings:

Auto-services trends

Among T. Rowe Price clients, the use of auto-enrollment has increased every year since the enactment of the Pension Protection Act in 2006. T. Rowe Price found that as of year-end 2015:

About half (51%) of the plans it administers have adopted an auto-enrollment feature, up 28% since 2011.
30% of plans have auto-enrolled participants at 6% or more, compared with just 17% in 2011.
Participation rates continue to be strongly tied to the adoption of auto-enrollment. Plans with an auto-enrollment feature have a participation rate of 88%, while those that do not have this feature have a participation rate of just 48%.
Target-date investments continue to be the default of choice for 96% of plan sponsors.

Contribution trends

By the end of 2015, the option to make Roth contributions was available to particpants in half of the 401(k) plans record-kept by T. Rowe Price, an increase of nearly 49% since 2011. Roth contributions among participants increased for the eighth consecutive year. In terms of matching contributions, 40% of plan sponsors are now matching at a threshold of 6%.

The average deferral rate among T. Rowe Price plan participants was 7%, far below the recommended level of 15% (which includes the employer match). About one-third of participants are not deferring any money to their retirement account.

Generational findings

Generational differences often exist when it comes to saving behaviors and attitudes that plan sponsors should consider. Of the T. Rowe Price plan participant base:

Of all age groups, participants between ages 20 and 29 have the widest difference in participation rates when auto-enrolled (84%) versus not auto-enrolled (30%).
Younger participants invested in target date funds at higher rates (70%) than other age groups (36%).
Younger participants save 5% of pay, considerably lower than the rate of older participants (between 7-10%).
The 40-59 and 50-59 age groups continue to maintain the highest outstanding loan balances, which have increased each of the past two years.

Manufacturers lead in adoption of auto-increase

Significant industry-specific findings include:

Only 35% of plans in the retail industry have adopted an auto-enrollment feature, compared with 51% of plans across all industries.
Only 14% of participants in the finance and insurance industries have an outstanding loan, compared with 24% of participants across all industries.
77% of the manufacturing industry plans have adopted an auto-increase feature, compared with 69% of plans across all industries.
In the utilities industry, plans with auto-enrollment have a 92% participation rate, compared with 78% for non-auto-enrollment plans. The all-industry average is a 88% participation rate with auto-enrollment and a 46% participation rate without.

Methodology

Data are based on the large-market, full-service universe—TRP Total—of T. Rowe Price Retirement Plan Services, Inc., retirement plans (401(k) and 457 plans), consisting of 662 plans and over 1.6 million participants.

For plan-level analysis (e.g., averages by industry), a plan-weighted average is shown. This process takes the average from each plan and averages them together. A plan-weighted average assigns plans with a smaller number of participants the same weight as plans with a larger number of participants.

For participant-level analysis (e.g., averages by age and tenure), a participant-weighted average is shown. This process adds up all participants for all plans and takes one overall average. A participant weighted average assigns plans with a smaller number of participants less weight than plans with a larger number of participants.

Data and analysis cover the time periods spanning calendar years ended December 31, 2007, through December 31, 2015.

Yale, MIT and NYU Sued over Retirement Plan Fees

Posted on August 11, 2016 by Kerry Pechter -

To the countless American workers without access to a retirement plan at work, and to the millions with plans whose employers don’t contribute to their accounts, participants in the retirement plans at Yale, MIT and New York University would surely be objects of envy.

After all, the faculty, staff, administrators who participate in these multi-billion-dollar plans receive pre-tax contributions from their universities of between 5% and 12.5% of salary if they themselves contribute at least five percent.

Brightscope, the compiler of retirement plan data and rater of plans, currently ranks the NYU plan in the top 15% of its peer group, with a rating of 80. MIT’s plan also has a Brightscope rating of 80. Brightscope gives the Yale plan a rating of 87, the highest score in its peer group.

Yet all three prestigious universities were named as defendants in federal class action suits filed in New York, Connecticut and Massachusetts this week by the St. Louis law firm of Schlichter, Bogard and Denton, which has filed more than dozen lawsuits of this type against deep-pocketed plan sponsors and providers over the past decade.

Generally, the suits charge that the schools, as sponsors of so-called jumbo retirement plans, failed to use their plan size to bargain for lower fund expenses and administrative fees for the participants, thus breaching their fiduciary duties under the Employee Retirement Income Security Act of 1974.

Even though the expense ratios of the TIAA and Vanguard funds in the NYU and Yale plans were relatively low—mostly below 50 basis points a year—the suits assert that the plans could have negotiated much lower fees from the fund companies.

The suit against the MIT plan, unlike the other two, targets close ties between MIT and Fidelity, including the presence of Abigail Johnson, the CEO of Fidelity, on MIT’s board of trustees, as a reason why the MIT plan included scores of high-cost actively managed Fidelity funds until July 2015, when MIT cut its fund lineup to 37 from 340 and eliminated all but one of its Fidelity funds in favor of a lineup heavy on Vanguard index funds.

The suits, the first that Schlichter has filed against universities, may also reflect a generalized discontent within higher education today. One of the NYU plaintiffs is Mark Crispin Miller, a professor of Media, Culture and Communication and prominent author whose books explore the border between media and politics.

“As faculty members we find ourselves ripped off in a breathtaking range of ways,” Miller told RIJ yesterday. “We’ve had our benefits slashed, we’ve had rent raised on university housing, and our pay raises have been below the cost of living. So we are not surprised by the law firm’s demonstration of breach of fiduciary duty by the retirement plan.”

Regarding the lawsuit, Miller said that a lawyer from Schlichter’s firm had approached NYU’s plan participants, not the other way around. “We were persuaded that the management of the plan was inadequate, that we were paying higher fees than we ought to be paying, and that the investments were not optimal,” Miller said regarding the participants’ decision to work with the law firm.

None of the complaints name TIAA, Vanguard, or Fidelity, as defendants. Since 2006, the Schlichter law firm has filed over a dozen such lawsuits against plan sponsors and plan providers, winning one suit in court, settling several others and in some cases winning awards as large as $30 million.

The MIT 401(k) plan has over 23,300 active participants and over $3.9 billion in plan assets, according to Brightscope. Until recently it offered 342 different investment options, according to Brightscope, which gives it a rating of 80 and places it in the top 15% of plans in its peer group.

The Yale University Retirement Account Plan, which has over 16,400 participants and $3.6 in assets, has a Brightscope rating of 87, the highest in its peer group. It offers 114 investment options. A quarter of plan assets are in the TIAA Traditional Annuity, whose 2.5% surrender fee and 10-year minimum drawdown period—features that allow it to achieve higher yields—are criticized in Schlichter’s suit as unfiduciary.

The NYU Retirement Plan for faculty, research staff and administrators has a Brightscope rating of 80, 16,400 active participants and $2.4 billion in assets. It offers 103 investments, and 27% of assets are in the TIAA-CREF Traditional Annuity and 21% in the TIAA-CREF Stock fund. The NYU School of Medicine’s plan has over 7,700 active participants, over $1.6 billion in assets and a Brightscope rating of 76.

The suit against NYU and the NYU Medical School charges, among other things, that:

The plan offered too many mutual fund options, thereby causing “decision paralysis.”
Because there were so many funds, participants’ contributions were fragmented so that so that they didn’t enjoy the economies of scale they might have gained from putting larger amounts in fewer funds.
The plan relied on two recordkeepers, TIAA and Vanguard, when using one would have been more efficient. “A reasonable recordkeeping fee for the Plans would be approximately $840,000 in the aggregate for both Plans combined (or a flat fee based on $35 per participant)… the Faculty Plan paid between $3.1 and $3.8 million (or approximately $230 to $270 per participant) per year from 2010 to 2014, over 670% higher than a reasonable fee for these services,” the suit said.

The suit against Yale makes similar claims, while acknowledging that the school acted over a year ago to change its plan:

Only in April 2015 did Defendants consolidate the Plan’s recordkeeping and administrative services with a single recordkeeper, TIAA-CREF. Also for many years, the Plan had higher-cost share classes of mutual funds despite the Plan’s tremendous size and bargaining power to demand low-cost investments.
In April 2015, Defendants moved some of the Plan’s investments to lower-cost share classes of the same investments. These lower-cost share classes, identical in every respect except for lower fees, had been available since 2010. Plan participants could have and should have been paying far less for the same investment since that time.

The suit against MIT also acknowledge changes in the plan:

“Effective July 20, 2015, Defendants eliminated hundreds of investment options provided in the Plan, including over 180 Fidelity funds. Only the Fidelity Growth Fund remained. The new investment lineup includes 37 investment options, of which 19 were previously offered. The consolidated investment options include Vanguard collective trust target date funds, two custom funds (Bond Oriented Balanced Fund and Diversified Stock Fund), twelve Vanguard funds, and nine actively managed funds offered by non-Vanguard investment managers. The assets of the funds removed from the Plan were transferred or ‘mapped’ to low-cost Vanguard funds, and for some investments, to the Wellington High Yield Bond Fund.”

Great American Offers No-Commission Indexed Annuity

Posted on August 11, 2016 by Kerry Pechter -

Fee-based advisors say they’ve been waiting for annuities that offer customer value instead of performance-draining commissions. Insurers have been listening—and are now acting.

Great American Life, the third-ranked seller of fixed indexed annuities after Allianz Life and American Equity, has introduced a zero-commission FIA with a living benefit rider that’s intended for distributor to retirement clients of fee-based broker-dealer advisors and registered investment advisors.

Called the Index Protector 7, the product offers higher caps on its point-to-point index crediting method—up to six percent compared with the 3% to 4% cap on similar products. The fee for the “stacked” guaranteed lifetime withdrawal benefit is 50 basis points.

“The real appeal is the strong rates,” Malott Nyhart, senior vice president of the annuity group at Cincinnati-based Great American, told RIJ today. “We think that’s pretty strong for a seven-year product. There are 14 to 16 year products that might have a 5% cap, but broker dealers don’t want to sell those long-duration products.”

According to a press report in July, other FIA manufacturers—Allianz Life, Voya, Symetra and Lincoln—have no-commission FIAs in the works.

The Great American call center was swamped today with calls from broker-dealers and RIAs, Nyhart said. “Their only question they have is how much advisors will charge for this. I think it will be in the 20 to 40 basis point range”—between the amount they charge for managing fixed income money and the amount they charge for managing equities,” he told RIJ.

Regarding the lifetime income benefit, “It’s a 2% stacked rider which pays 2% on top of any or all growth of the FIA annuity value,” he said. It has 5% payout for single contracts beginning at age 65 (4% for joint contracts). The contract has a seven-year duration with a 7% surrender charge for each of the first three years.

The introduction of the new product, which the closely-held Great American discussed with its major distribution partners at a retreat in South Carolina last April, was spurred in part by the DOL’s fiduciary rule, which is expected to discourage the sale of FIAs and variable annuities that pay third-party commissions.

“The DOL gave it some impetus, but the real issue is that the markets are pretty much topping out,” he said. FIAs offer investors a combination of zero risk of downside losses with limited exposure, through options on equity indices, to equity market gains.

Nyhart said that Great American has been building its ties to broker-dealers, the channel where more of its FIA sales come from. “We saw a 30% increase of sales from b/ds in 2015,” he told RIJ, “and 50% of our sales came out of b/ds in first half of this year. We assume that, because of the rider, a lot of the sales will be to qualified accounts.”

Great American’s ability to bring out a fee-based FIA ahead of its competitors may have something to do with its ownership structure. The company is publicly-traded but closely-held by billionaire brothers S. Craig Lindner and Carl Lindner III. There’s a lean management structure that reviews new ideas and makes decisions relatively quickly.

“Our process is faster-to-market. We changed the whole make-up of product development,” Nyhart said in an interview. “We have a system where I look at new ideas and then every two weeks we score them. Then we look at what is the simplest version and drive it from simplest to most complicated. We don’t have to go through committees. We can talk about it over lunch and make a decision.”

Great American intends to review all of its products to determine whether to roll out a no-commission version of others. “This is the first of many,” Nyhart said.

Variable annuity fee income boosts Jackson’s performance

Posted on August 11, 2016 by Editorial Staff -

Benefiting from fee income on a record $138.9 billion in variable annuity separate account assets, Jackson National Life Insurance Co. generated IFRS pretax operating income of $1.3 billion in first half 2016, slightly over the same period a year ago.

Sales and deposits of $11.2 billion in the first half of the year were down 14% from the same period in 2015, however, as reduced VA sales more than offset higher sales of fixed and fixed index annuities, as well as institutional products.

“Despite the headwinds we faced in the first half of 2016, Jackson experienced positive variable annuity net flows of $3.6 billion,” said Barry Stowe, chairman and chief executive officer of the North American Business Unit of Prudential plc, which owns Jackson.

“However, consistent with the rest of the industry, variable annuity sales have slowed due to market volatility and activity surrounding the U.S. Department of Labor fiduciary rule.”

Jackson’s first half performance allowed the company to remit a $450 million dividend to its parent company while continuing to hold capital in excess of regulatory requirements, according to a release.

TIAA buys Everbank

Posted on August 11, 2016 by Editorial Staff -

TIAA (formerly TIAA-CREF) has agreed to buy EverBank, a nationwide consumer and commercial bank with $27.4 billion in assets. The acquisition, expected to close in the first half of 2017, expands TIAA’s banking and lending products and complements its retirement, investment and advisory services.

EverBank stockholders will receive $19.50 per share in cash, or an approximate total of $2.5 billion. “The combination of TIAA’s existing banking operations and EverBank will significantly bolster TIAA’s banking capabilities and form a full-service banking company uniquely positioned to help both companies’ customers succeed,” said a TIAA release.

TIAA currently offers a variety of savings and lending products to its customers. EverBank’s established banking operations will enable TIAA to provide a wider range of services to those customers. The acquisition gives TIAA an employee base and significant business operations in Jacksonville, Florida, and other key markets.

EverBank’s board of directors has approved the transaction, as have the insiders who control 22% of Everbank’s outstanding common stock. The deal is subject to approval from the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and EverBank’s common stockholders.

The holders of the EverBank’s Series A 6.75% Non-Cumulative Perpetual Preferred Stock will have the right to receive the liquidation preference of $25,000 plus accrued and unpaid dividends on a share in cash at closing.

Lazard acted as lead financial advisor and Davis Polk & Wardwell LLP served as legal counsel to TIAA. J.P. Morgan Securities LLC also acted as financial advisor to TIAA. UBS Investment Bank advised EverBank and Sullivan & Cromwell LLP served as its legal counsel.

Lincoln Financial Distributors enhances annuity sales demonstrator

Posted on August 11, 2016 by Editorial Staff -

The Lincoln Investor Advantage Visualizer—which illustrates the potential benefits of incorporating the i4Life variable annuity income rider into a client’s retirement plan, now includes a Tax Deferral Illustrator created by Morningstar, according to Lincoln Financial Distributors.

The enhancement “helps advisors address the impact taxes have on retirement planning and the need for income in retirement,” said John Kennedy, head of Retirement Solutions Distribution, Lincoln Financial Distributors.

“We believe our proprietary Wealth Forecasting Engine (WFE) is a sophisticated way to illustrate the power of tax deferral,” stated John McCarthy, senior product manager at Morningstar.

i4LIFE Advantage is a patented income distribution method, offered only with Lincoln variable annuities. Available for an additional charge, i4LIFE provides tax-efficient income when investing with nonqualified money.

Scalable Capital, a German robo, enters UK market

Posted on August 11, 2016 by Editorial Staff -

Already established in Germany and Austria, digital investment manager Scalable Capital has become the latest robo-advisor to enter the UK market, opening its portfolio management business with portfolios built of exchange-traded funds, ETFstrategy.co.uk reported.

Scalable Capital currently manages more than 1,200 client portfolios, according to Adam French, its managing director and co-founder.

After a risk tolerance assessment, the firm’s algorithm builds a custom globally diversified portfolio of ETFs to offer exposure to equities, government and corporate bonds, covered bonds, commodities, real estate and cash. Average ETF fee is 25 basis points per year.

The average total expense ratio of ETFs used by the firm is 0.25% per annum), while also maintaining high liquidity and transparency.

The firm said it ensures risk preferences of its investors at all times, “including during abnormal ‘stressed’ market conditions.” Accounting for “all previous market conditions,” its “value-at-risk analysis” tells investors each year what amount or percentage of their portfolio for a given probability (usually 5%) over the following year.

In addition to the average ETF fee of 25 basis points, Scalable Capital charges an all-in annual fee of 75 basis points, for an approximate annual expense ratio of 100 basis points (one percent).

After a Series-A funding round of £5.6m in March 2016, taking the firm’s total funding to £8.8m, Scalable Capital has announced plans to build out Scalable Capital’s UK client base, as well as to fund expansion into selected new markets.

Manweb Group and Abbey Life complete £1bn pension risk transfer

Posted on August 11, 2016 by Editorial Staff -

In a pension risk transfer deal, Manweb Group, an electric power company in the UK and a participant in the £32bn Electricity Supply Pension Scheme (ESPS), has agreed to pay Abbey Life, a subsidiary of Deutsche Bank, £1bn, to assume the longevity risk of 4,000 of its members.

The deal is structured as a tri-partite insurance policy between Electricity Pension Trustee Limited, Manweb (a unit of Scottish Power, which is a unit of Iberdrola) and Abbey Life, according to IPE.com. Mercer acted as the lead advisor on the transaction.

The deal was announced days after Legal & General transferred some of the longevity risk associated with its bulk annuity business to Prudential Retirement Insurance and Annuity Company, citing uncertainties created by the Brexit vote.

Prudential said its ability to transfer risk was “unaffected” by the vote to stay out of the European Union.

Bank of England’s rate cut draws criticism

Posted on August 11, 2016 by Editorial Staff -

UK pension experts have protested the Bank of England’s announcement that it will cut interest rates, saying that it will hurt the funding status of already-ailing pensions.

The UK central bank said it would reduce interest rates to 0.25% from 0.50%, expand its quantitative easing (QE) program by £70bn (€81.9bn) via £10bn in corporate bonds and £60bn in UK “gilt” bonds and launch a “term funding scheme” to ensure banks pass the rate cut to borrowers.

Pension consultant Hymans Robertson estimated deficits of UK final salary-type schemes post-Brexit had grown to £935bn.

“A further fall in interest rates as a result of (yesterday’s) Bank of England announcement will see this figure increase further towards the £1trn mark,” said former pensions minister Ros Altmann. “Employers struggling to support these schemes face pressure to put in more money.”

Amlan Roy, of the London School of Economics (LSE) and London Business School (LBS), said fiscal policy measures, as well as structural reforms, were necessary to tackle economic weakness. All three “arrows”—fiscal stimulus, monetary easing and structural reforms—are needed all over the world, he said.

“Trustees of pension schemes, whose deficits keep rising, are facing almost impossible investment dilemmas,” she said. “If the employer has already put huge sums in or cannot afford to do more at the moment, then trustees ideally need to find other ways to reduce the deficit.”

Nigel Green, chief executive of financial consultancy deVere, said the Bank of England’s package of measures designed to cushion the UK from recession won’t solve the country’s economic troubles.

Slashing the key interest rate to historic lows and extending the QE program to £435bn in total was going to unleash more “catastrophic damage on pensions, pension funds and, potentially, the UK’s long-term sustainable economic growth,” he said. “A different solution – a more direct way of boosting growth – rather than forcing Gilt yields lower, has to be found by the Bank of England.”

Advisors: Give this ‘Tilt’ a Whirl

Posted on August 3, 2016 by Kerry Pechter -

A combination of annuities, modulated withdrawals from an investment portfolio and monthly Social Security benefits is emerging as a way—especially for clients who can’t afford to self-insure against longevity risk—to generate safe, sustainable income in retirement.

Flexibility is one of the benefits of this method. By adjusting a) the type, timing and size of annuity purchases, b) the level of spending each year, and c) the Social Security benefit start date, advisors can re-size the legs of this three-legged strategy to suit the needs of virtually any retiree or retired couple.

New research confirms the value of this technique. In the third in a series of articles at AdvisorPerspectives.com, University of Texas at El Paso engineer John Walton (at right), simulates the outcomes of income-generating strategies that employ what he calls a “constant rate” or “mortgage” systematic withdrawal strategy, his “tilt” method of increasing or reducing annual spending in response to market performance, and the purchase of a single premium income annuity at retirement.

“None of the recommended methods ever go broke, and the remaining capital never cascades irreversibly toward zero,” Walton writes. “There is no sequence-of-returns risk and very little longevity risk. The tradeoff is income stability. Income varies each year, and if returns are poor, income will suffer unless stabilized with annuities.”

Constant rate vs. mortgage method

To provide a bit of background from Walton’s earlier articles on this topic: His constant rate strategies are based on the classic 4% rule. Annual spending is fine-tuned by applying a tilt each year with the tilt ranging from -1 (i.e., liquidating 4% of the original account balance each year irrespective of market returns), through +0 (i.e., liquidating 4% of the current account balance), up to +1 (i.e., liquidating less than 4% of current account balance when the market underperforms and greater than 4% when the market over performs).

Alternately, Walton recommends a “mortgage” strategy. It takes advantage of declining longevity to increase the withdrawal rate as the retiree ages. At retirement, the withdrawal rate is pegged to the payout from a hypothetical (unpurchased) period-certain annuity. The premium is equal to the account value and the contract expires at an estimated age of death (e.g., age 85 or 90). Each year, as the period shrinks and the hypothetical annuity payout grows, the retiree can spend an incrementally higher percentage of the remaining portfolio.

In his most recent article, Walton combines these methods with the actual purchase of a single premium inflation-adjusted income annuity (SPIA) that pays out 4.5% starting at age 65, purchased at retirement.

His hypothetical case involves a 65-year-old woman with a starting portfolio of $1 million who expects to receive an inflation-adjusted $25,000 from Social Security each year for life and buys a SPIA with $750,000, $500,000, $250,000 or none of her savings.

The best combination of income and safety resulted when the retiree used 25% to 50% of her initial capital to buy the inflation-adjusted SPIA at age 65, Walton found. The more money dedicated to the annuity, the higher the client’s income floor and the lower the amount left to heirs. Strategies with annuities work best in low-return environments, and can be superfluous in high-return environments.

For the investment portfolio, Walton noted that the income annuities provide a margin of safety that allows clients to allocate 80% of their non-annuitized saving to equities. In the event of market volatility, the advisor conserves the portfolio by adjusting annual liquidation according to the tilt—i.e., spending less in downturns and more in upturns.

“When combined with guaranteed income, the positive tilts provide a very robust combination of high stable income and capital security over a broad range of market conditions,” Walton wrote. “They combine the statistical advantages of annuities—safe return of capital and mortality credits—with the statistical advantages of positive tilts—providing income that adaptively matches market returns while preserving capital.”

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