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Guiding Clients Through the Medicare Maze

Posted on September 15, 2016 by Kerry Pechter -

If you’re an advisor and you’re not helping guide your 65-year-old clients through the Medicare maze, maybe you should reconsider. Multi-licensed young retirement advisors like Ash Toumayants are only too happy to lever the Medicare opportunity to pry your clients away.

The 34-year-old founder of Strong Tower Associates in State College, Pa., Toumayants brings an outsider’s perspective to financial advice. Arriving in the U.S. from Cairo with his parents only 14 years ago, this grandson of refugees from the 1915 Armenian genocide appreciates entitlements like Social Security and Medicare as perhaps only an émigré can.

“Armenia is a poor country. So is Egypt,” he told RIJ recently. “Social benefits are meager. You have to pay for everything yourself. The strength of the public system here is incredible to me. You guys have it made, but you don’t give much thought to making the most of what you have.”

After graduating from Penn State with an industrial engineering degree and digressing into insurance and financial services through a temp job, Toumayants is now establishing himself. He’s affiliated with Retirement Wealth Advisors and FormulaFolios, two Michigan-based RIAs founded by Jason Wenk, who gained some renown a few years ago as an iconoclastic annuity blogger.

As we know, many traditional investment-focused advisors are aging out of the profession, and a new generation is emerging. If Toumayants is at all representative of them, they’re more holistic and more retirement-minded than their predecessors. In a telephone conversation, he talked with RIJ about Medicare, annuities, robo-advice, the Department of Labor’s fiduciary rule and his business model, among other things.

Panicky 64-year-olds

When Toumayants (at right) was temp-ing in college, making outcalls for a Medigap writer, he was dismayed not just by the level of panic that the Medicare decision inspires in 64-year-olds, but also by their ignorance of the program and the lack of support that investment advisors offered in that area. He smelled opportunity.

“Ask any 64-year-old and you’ll hear that every week they get 20 pounds of mail about Medicare supplements,” he said. “It makes them really panicky. There are Medicare supplements, Medicare Advantage plans, prescription drug plans—and people don’t know which is which. This decision is even more stressful than the rollover decision. You can always stay in your 401(k), but with Medicare you’re forced to make a decision.”

Investment advisors, perhaps because they didn’t have health insurance licenses and/or because there isn’t much money in it, didn’t seem to be helping these people much. This mystified Toumayants

“I was shocked by the number of people I met whose financial managers had no idea how Medicare worked,” he said. “How can you be sure that your clients will have enough income for life if you don’t know what arguably their biggest retirement expense will be? Medicare is its own animal. It’s hard to understand and most advisors don’t bother.”

What’s so hard about Medicare? For one thing, because neither Medicare A or B (hospital coverage and physician coverage) covers all health expenses. So new enrollees face the responsibility to top up their coverage by choosing either a Medigap plan or a Medicare Advantage Plan.

In theory, this decision should feel familiar to anyone who has ever had to choose between a fee-for-service health insurance plan (like Medicare supplement insurance or “Medigap” coverage), which lets them to visit any doctor, and an health maintenance organization or preferred provider network (like Medicare Advantage), which claims to offer lower costs for patients willing to use only doctors or hospitals in a given network.

In practice, 65-year-olds typically face a flurry of mail and telephone solicitations from insurance agents who work from lists, they often face a hodge-podge of familiar and unfamiliar insurers, and the pressure of an enrollment deadline booby-trapped with rare but scary penalties.

The dilemma is having to choosing between the monthly premiums of a government-standardized Medigap plan plus a separate drug plan—or yield to the seduction of a zero-premium bundled Advantage plan, usually with co-pays and an annual cap on out-of-pocket costs. (All Medicare recipients pay at least $121 a month for basic Medicare, usually as a deduction from their Social Security checks. If you choose a Medicare Advantage plan, Medicare pre-pays the insurer a fixed amount to cover you.)

Toumayants often recommends Medigap. “It’s more predictable,” he said. “You know what you will pay. There are no co-pays, no networks to worry about. They cover you anywhere in the country. Any hospital or doctor will accept them. If you’re someone who wants to travel in retirement and see all 50 states, you should get Medigap.”

Building a tower

Merely selling Medicare supplements isn’t a career—a trail commission might be $100 per year per in-force policy—but Medicare counseling, as a kind of loss leader, can be an excellent prospecting tool, especially for advisors who are positioning themselves as retirement specialists, Toumayants has learned. Medicare advice establishes his bona fides as a financial advisor, and bona fides, in the wake of the DOL rule, is gaining value.

Toumayants considered various business models before deciding to get his Series 65 license, become an investment advisor representative of an RIA, and start Strong Tower (whose name refers to Luke 14: 28-30). “I tried the brokerage model. I didn’t like it. It’s too expensive and too cumbersome. With the insurance model, you have to do product training and get new certification and pass a test to sell a new product. With the RIA model, I can charge an AUM fee or an hourly fee for planning,” he said. His annual AUM fee is one percent for the first $100,000 under management; the fee drops to 75 basis points for amounts above $1 million.

For guaranteed income, Toumayants recommends fixed indexed annuities with guaranteed lifetime withdrawal benefits and roll-ups rather than immediate or deferred income annuities.

“Even though the income stream is less than from a SPIA, The FIA roll-up creates predictability for a 55-year-old who wants to start income in 10 years. Even though the income stream may be less than you’d get from buying a SPIA in 10 years, that 20% haircut is worth it because people know exactly what they will get. I also like the death benefit feature,” he told RIJ.

“I’m not a big fan of longevity insurance. If you’ve structured your guaranteed income properly and set other assets aside, mainly for inflation protection, you shouldn’t need it. We also have to make sure, for people who still have money when they die, that that money will go to the kids. I know that there’s a shift under way, with Boomers saying, ‘I will take care of me first,’ but your kids are really going to need that money,” he said, given the high housing costs and low investment returns that the future appears to have in store for them.

As for investment management, Toumayants outsources that to the RIA, Retirement Wealth Advisors, which uses a managed account program called FormulaFolios, which in turn is monitored by a proprietary system called WealthGuard that automatically sells off risky assets when a client’s portfolio balance threatens to break through an agreed-upon floor.

“I tell clients, ‘I don’t have time to meet with you and manage your money,” he said. I could do that if I had 10 clients with $10 million each. Or if I simply did ‘buy and hold’ investing. But if that’s all I were doing, it would be hard to justify the AUM fee.”

On the insurance side, he said, “I wish I could give people all the insurance guidance they need for a flat $300 a year and not take any commission on product sales. But in Pennsylvania that business model doesn’t exist. I can’t go to an insurance company and say, ‘I have these clients who want to sign up for your plan, can’t you give them commission-free pricing?’”

Strong opinions

Regarding the tectonic forces that are affecting advisors today—the DOL fiduciary rule and the rise of robo-advice—Toumayants doesn’t feel threatened by either. RIAs aren’t necessarily immune to the effects of the DOL rule—they need to sign a Best Interest Contract to sell indexed annuities, for instance—but they aren’t in the DOL’s cross hairs.

“I don’t know what will happen, or what the outcome will look like, but I’m not worried about it. I know that if I’m doing what’s right and fair for my clients, I’ll be fine,” he told RIJ. “Any time legislation passes, there are more documents to sign and the applications get a little bigger. That’s all. It’s hard to regulate something like this.”

As for robo-advisors, he doesn’t regard them as serious competition to his high-touch managed account services. “I’ve surveyed my clients and people over 50 don’t have any interest in it. Robo-advisors offer rigid fixed portfolios of index funds and a rebalancing service. There’s hardly any tactical management,” he said.

His managed account service delivers more, he said. “FormulaFolios is not just a rigid mixture of 60/40 through thick and thin. And we don’t need 100% percent of upside. All we want to capture is 80% of the market’s gains and absorb no more than 40% of the losses. We think it will deliver better average performance than you can get by riding the market up and down. Robo-advisors are only going to attract people over 50 who think they know more than I do.”

Toumayants believes he’s taking the long view—the view of a young advisor who may still be practicing in the year 2050. “I’m 34. I want to stay in business. I don’t want to be like the Blockbuster owner who wakes up one day and has no customers coming into his store,” he said. “I have strong opinions on this stuff,” he added, “and it aggravates me that most advisors don’t think about it and don’t sit down and develop a perspective on what they’re doing.”

The Cost of Retirement Age Uncertainty

Posted on September 15, 2016 by Kerry Pechter -

As if we didn’t have enough retirement-related risks to hedge against, a group of economists now point to a new one—uncertainty about one’s retirement date—and their findings point out a structural weakness of the Social Security system.

In a new paper, “The Welfare Cost of Retirement Uncertainty,” Frank N. Caliendo and Aspen Gorry of Utah State University, Maria Casanova of Cal State-Fullerton, and Sita Slavov of George Mason suggest that many Americans spend less and save more during their lifetimes in the belief that a layoff or illness might force them to retire a few years earlier than they expected.

Despite the advisability of thrift in general, the authors don’t believe such behavior is necessarily efficient. In other words, retirement timing uncertainty is a large enough risk to consider insuring, and the authors go so far as to put a rough price on it.

“Our conservative estimates of the standard deviation of the difference between retirement expectations and actual retirement dates range from 4.28 to 6.92 years,” the paper said. “This uncertainty implies large fluctuations in total wage income. We find that individuals would give up 2.6%-5.7% of total lifetime consumption to fully insure this risk and 1.9%-4.0% of lifetime consumption simply to know their actual retirement date at age 23.” I’m not sure how to translate that into dollars, but it sounds like equivalent of $1 out of every $25 to $50 of personal spending.

Precise knowledge of one’s retirement date, of course, is a luxury that vanished with defined benefit pensions, gold watches and retirement parties. You might suppose that Social Security buffers the risk of unexpected early retirement, because it offers enrollment across an eight-year age band (62 to 70). But the economists argue that the Social Security not only fails to take the sting out of this risk, it can make it worse.

That’s because Social Security exacts a price for early retirement, regardless of whether it’s voluntary or involuntary, according to the paper. If someone retires involuntarily at age 62 instead of age 65, for instance, they lose three years of earned income and the opportunity to make what might have been their biggest-ever payroll tax contributions. Whether they claim Social Security at 62 or wait until later, they are likely to have lower benefits than they otherwise would have.

“While current programs in the U.S. (Old Age and Survivors Insurance and Social Security Disability Insurance) may appear to offer protection against this risk, in fact they do not,” the paper said. “Social Security does just the opposite because of the positive relationship between benefits and earnings, making it ineffective at providing timing insurance: individuals who suffer early retirement shocks have low average earnings and benefits while individuals who retire late have high average earnings and benefits.”

The paper, which was published this month by the National Bureau of Economic Research, was based on data about 3,251 men who participated in the Health and Retirement Study, a biennial study of 7,700 U.S. households. The authors reviewed data from 11 waves of the study, between 1992 and 2012, and included men who were ages 51 to 61 during the first wave, 14 years ago.

There is a possible solution, the paper said. Adding a benefit to Social Security that isn’t earnings-dependent would make involuntary early retirement less of a lose-lose, the authors suggest. It seems to work in other countries.

“In some public pension systems such as Japan, the UK, Spain and other European countries, part of retirement benefits is independent of the individual’s earnings history. In other words, a component of retirement benefits is fixed regardless of when retirement occurs. This feature can mitigate up to one-third of the welfare costs of retirement timing uncertainty.”

The hazard of such a benefit is that it might encourage people to leave the workforce early by choice, the authors warned, and that would be counter-productive at a time when working longer may be more advisable. So it looks like Americans have another retirement risk that they need to hedge: the risk of starting retirement earlier than they thought because of a late-life layoff.

Positive Words about Negative Rates

Posted on September 15, 2016 by Ben Bernanke -

Nominal interest rates are very low, and in a world of excess global saving, low inflation, and high demand for safe assets like government debt, there’s a good chance that they will be low for a long time.

That fact poses a potential problem for the Federal Reserve and other central banks: When the next recession arrives, there may be limited room for the interest-rate cuts that have traditionally been central banks’ primary tool for sustaining employment and keeping inflation near target.

That concerning possibility has led to calls for a new monetary policy framework, including by Fed insiders like John Williams, president of the San Francisco Fed.

In particular, Williams has joined Olivier Blanchard and other prominent economists in proposing that the Fed consider raising its target for inflation, currently 2 percent.[1] If the Fed targeted a higher average level of inflation, the reasoning goes, nominal interest rates would also tend to be higher, leaving more room for rate cuts when needed.

Few fans of negative rates

Interestingly, some advocates of a higher inflation target have been dismissive of the use of negative short-term interest rates, an alternative means of increasing “space” for monetary easing. For example, in a recent interview in which he advocated reconsideration of the Fed’s inflation target, Williams said: “Negative rates are still at the bottom of the stack in terms of net effectiveness.”

Williams’s colleague on the Federal Open Market Committee, Eric Rosengren, also has suggested that the Fed may need to set higher inflation targets in the future while asserting that negative rates should be viewed as a last resort. My sense is that Williams’s and Rosengren’s negative view of negative rates is broadly shared on the FOMC.

Outside the United States, Mark Carney, governor of the Bank of England, has expressed openness to targeting nominal GDP (which essentially involves targeting a higher inflation rate when GDP growth is low), but has also made clear that he is “not a fan” of negative interest rates.

As I explain below, negative rates and higher inflation targets can be viewed as alternative methods for pushing the real interest rate further below zero. In that context, I am puzzled by the apparently strong preference for a higher inflation target over negative rates, at least based on what we know now.

Yes, negative interest rates raise a variety of practical problems, as well as political and communications issues, but so does a higher inflation target. In this post, I argue that it’s premature for policymakers to emphasize the option of raising the inflation target over the use of negative rates. Pending further study about the costs and benefits of both approaches, we should remain agnostic about whether either or both should be part of the Fed’s policy framework.

Comparing a strategy based on a higher inflation target with the use of negative rates is natural because, as just mentioned, they work through the same channel. Economic theory suggests that aggregate demand (consumption and investment) responds to the real rate of interest, which is the nominal (market) interest rate minus the public’s expected rate of inflation.

As I noted in my earlier post on negative rates, the Fed has routinely set the real federal funds rate at negative levels (i.e., with the nominal funds rate below inflation) to fight recessions. However, with the inflation target at its current level of 2 percent, and assuming that the Fed does not set its policy rate lower than zero, the Fed cannot reduce the real policy rate below -2 percent, i.e. a zero nominal rate less 2 percent expected inflation.

History, including the experience of the past few years, suggests that—in the absence of a robust fiscal response—that may not be enough to deal with a bad recession. To reduce the real policy rate further, the Fed would either have to lower the nominal interest rate into negative territory, raise expected inflation (by raising the inflation target), or both.

Since negative nominal rates and a higher inflation target both serve to reduce the lower (negative) bound on the real interest rate achievable by monetary policy, they are to some extent substitutes.

The argument for negative rates

Which approach is preferable? Without trying to be exhaustive, I’ll briefly compare them on four counts: ease of implementation, costs and side effects, distributional effects, and political risks. I find that negative rates are not clearly inferior to a higher inflation target and may even be preferable on some dimensions.

Ease of implementation. Negative interest rates are easy to implement. In practice, central banks in Europe and Japan have imposed negative short-term rates by deciding to charge (rather than pay) interest on bank reserves, an action that is clear, concrete, and essentially instantaneous.

Experience suggests that the effects of imposing negative rates on reserves also spread fairly quickly to other interest rates and asset prices. Like other central banks, the Fed pays interest on bank reserves and presumably could use a similar approach—essentially charging banks to keep reserves at the Fed—to enforce a negative policy rate.

In contrast, while the Fed could announce at any time that it is raising its inflation target, the announcement would not increase the Fed’s ability to lower the real interest rate unless the public’s inflation expectations changed accordingly.[2] But, as the Japanese experience has shown, inflation expectations may adjust slowly or incompletely to announced changes in target, especially if actual inflation has been very low for some time.

The public might also have reasonable doubts about the Fed’s ability to reach the higher target or about the willingness of the Congress or future Fed policymakers to support a higher inflation goal, both of which would reduce the credibility of the new target and thus its ability to influence expectations.

Which approach provides, potentially, more policy “space” for the Fed? Some advocates of a higher inflation target, such as Blanchard, have proposed increasing the target to as much as 4%, which would allow a real policy rate as low as -4 percent, if the nominal rate is zero.

The extent to which rates can be pushed negative, in contrast, is constrained by the fact that households and businesses can always choose to hold cash, which pays a zero nominal interest rate, rather than securities. To date we have not seen policy rates below -0.75% (Switzerland), equivalent to a -2.75% real policy rate if expected inflation is 2%. That comparison favors a higher inflation target, obviously.

On the other hand, it is not clear that an inflation target as high as 4% would be politically tenable and hence credible in the U.S. or other advanced economies, whereas arguably feasible institutional changes, some as simple as eliminating or restricting the issuance of large-denomination currency, could expand the scope for negative rates. The question of which approach creates more policy “space” is thus still somewhat open. Of course, nothing rules out using some combination of the two strategies.

Costs and side effects. Negative rates and a higher inflation target both have costs and side effects. As I discussed in my earlier post, negative rates can create problems for money market funds, banks, and other financial institutions, costs that would have to be managed if rates remained negative for very long. These concerns are legitimate, since effective transmission of monetary policy requires a properly functioning banking and financial system.

For what it’s worth, the effects of negative rates on banks’ net interest margins in Europe appears to have been moderate thus far. There are also means by which central banks can limit the effects of negative rates on bank profits—by charging a negative rate only on a portion of bank reserves, for example, as the Bank of Japan has done.

Higher inflation has costs of its own, of course, including making economic planning more difficult and impeding the functioning of markets. Some recent research suggests that these costs are smaller than we thought, particularly at comparatively modest inflation rates. More work is needed on this issue.

Higher inflation may also bring with it financial stability risks, including distortions it creates in tax and accounting systems and the fact that an unexpected increase in inflation would impose capital losses on holders of long-term bonds, including banks, insurance companies, and pension funds.

In comparing the costs and side effects of the two tools, a difference worth keeping in mind is that negative rates would be in place only in periods when they were needed (i.e., when the zero lower bound on interest rates would otherwise be binding), while higher inflation (assuming it could be achieved) would be a permanent condition, affecting the economy in good times as well as bad.

Changing the inflation target also carries the risk of being perceived as opportunistic, which could result in inflation expectations becoming unstable. Less-anchored inflation expectations would make inflation harder to control and give the Fed less scope to use monetary policy to offset fluctuations in employment.

Distributional effects. Either policy would give the Fed more scope to fight recessions and keep inflation near target, potentially providing broad benefit. On the margin, though, the two approaches would differ in their distributional implications, with the net effects difficult to assess.

The most direct costs of higher inflation are borne by holders of cash, and, again, with a higher inflation target those costs would be experienced at all times, not just during recessions. More generally, less wealthy people may find it more difficult to protect themselves from inflation. In contrast, negative rates would probably most affect more financially sophisticated and market-sensitive firms and households. In particular, banks would probably not pass on negative rates to small depositors, with whom they want to maintain profitable long-run relationships, but instead would more likely impose negative rates on “hot money” investors who place less value on longer-term relationships.[3]

The transition to a higher level of inflation would hurt holders of bonds and other non-indexed assets while providing a windfall for debtors, including mortgage borrowers. In the medium term, nominal returns to saving (including the investments of pension funds, life insurance companies, etc.) would be higher with a higher inflation target, but the real (net of inflation) returns received by savers would be similar under either regime.

Political risks. Both negative rates and a higher inflation target would be politically unpopular, possibly leading to reduced support for the policies of the central bank and for its independence. In particular, as already noted, the credibility of a higher inflation target could be reduced if political support for it were seen to be tenuous. Political viability is thus an important concern in judging these policy options.

In the political sphere, the fact that negative rates would be temporary and deployed only during severely adverse economic conditions would be an advantage. Like quantitative easing, which was also unpopular in many quarters, a period of negative rates would probably be tolerated by politicians if properly motivated and explained.

We have some evidence on this point: Negative rates are disliked by many in Europe and Japan but central banks have been willing and able to use them without facing high political costs, at least so far.

In contrast, a higher inflation target would be a permanent, or at least very long-lasting change, not restricted to an emergency; and it would raise questions about the flexibility of the Fed’s legal mandate to achieve price stability. It thus might need explicit approval or at least some sort of review from Congress.

A possibility, recently proposed by a comprehensive study on monetary policy options, would be to set up a commission to assess potential changes in the Fed’s policy regime and to report to Congress and the public.

Although commissions can serve important public purposes, proponents of a higher inflation target should be careful what they ask for. In the United States, as in Europe, there is a substantial element of public opinion (well represented in legislatures and even in the central banks themselves) that holds that central banks should concern themselves only with inflation, and that efforts to use monetary policy to stabilize employment are illegitimate or impractical.

These views have manifested as opposition to the Fed’s accommodative policies in recent years, and even in legislative efforts to eliminate the employment part of the Fed’s dual mandate. Holders of this perspective would be unimpressed by the cost-benefit analyses of the Keynesian proponents of a higher inflation target.

To the contrary, they would strongly oppose choosing higher inflation in order to give the Fed more room to respond to employment fluctuations, and indeed might seek a lower target. In their efforts they would be aided by the public’s money illusion (the tendency to confuse general inflation in both wages and prices with changes in real wages). Whatever the abstract merits of a higher inflation target, if it is not politically achievable then it is of no benefit.

Conclusion. It would be extremely helpful if central banks could count on other policymakers, particularly fiscal policymakers, to take on some of the burden of stabilizing the economy during the next recession. Since that can’t be assured, and since the current low-interest-rate environment may persist, there are good reasons for the Fed and other central bankers to consider changes in their policy frameworks. The option of raising the inflation target should be part of that discussion. But, as I have argued in this post, it is premature to rule out alternative or potentially complementary approaches, including the possibility of using negative interest rates.

Financial Engines prepares to roar

Posted on September 15, 2016 by Editorial Staff -

When an executive from Financial Engines shared the stage with Department of Labor Secretary Tom Perez as he announced the publication of the DOL’s fiduciary or “conflict of interest” rule last April, many people understood the significance.

No other private sector company took direct part in that historic—skeptics might say infamous—moment in the history of U.S. pension regulation. The message seemed clear: The Obama administration’s DOL approves of the way Financial Engines delivers advice to people with tax-deferred savings.

This week, it was NASDAQ-listed Financial Engines’ turn to make a couple of announcements. The provider of online managed accounts and financial guidance at about 690 companies, said it would rebrand 120 former The Mutual Fund Store locations nationwide—purchased by Financial Engines in 2015 for $560 million—as “Financial Engines Advisor Centers.”

In a media blitz yesterday, Financial Engines executive vice president Kelly O’Donnell explained to reporters that the move involves than a superficial name-change. Financial Engines intends to begin offering in-person advice along with robo-advice, and it plans to begin serving not just the 401(k) market but also the rollover IRA market and the aggregated taxable and non-taxable accounts of families, both before and after retirement.

“We’re broadening our focus beyond retirement,” O’Donnell told RIJ in a phone interview yesterday. “We’ve learned that retirement isn’t the only financial goal that people have. People have told us loud and clear that they need help with the big picture. Not just retirement but also college savings and health care, and putting it all in perspective.

“So we’re bringing to market a new offer. We’ll provide a dedicated advisor to the workplace participants we serve. We’ll continue to have online service and professional managed accounts for 401(k) participants, but we’re also offering relationships with advisors who will focus on aggregated accounts—not just 401(k)s but also IRAs and spouse’s accounts. We’ll put all of it together in a comprehensive plan. These are services that used to be reserved for the high net worth clients.”

The DOL rule will, arguably, force some asset managers and distributors who are already in the rollover IRA space to lower their fees to DOL-friendly levels and add scalable robo-advice to their offerings. To move to the rollover IRA space and the broader advice space, Financial Engines already has those elements, but has only recently added the necessary human advisors by buying The Mutual Fund Store.

O’Donnell thinks that, of those two camps, Financial Engines is better positioned. “The DOL broadened 401(k) protections to the IRA, and we’re uniquely positioned to provide that help. We’re one of the only providers that can manage your 401(k), your IRA and your taxable accounts. And, unlike retail advisors who can only make money through the rollover, we’re agnostic [as to whether the client rolls over or not],” she said.

Financial Engines needs to be agnostic on rollovers, because otherwise conflict with some of its partners in the 401(k) business might occur. According to O’Donnell, her firm contracts directly with plan sponsors in about half of its 401(k) business and works with the recordkeepers on the other half. Some of those partners may prefer to see money stay in a plan when a participant leaves the company or retires, while others may prefer to encourage a rollover.

In any case, Financial Engines will not be necessarily competing with the wirehouses for high net worth rollovers. The wirehouses trawl for accounts worth $250,000 or more, but Financial Engines mainly serves the middle or affluent market.

“We’re targeting and working with different customer than most other companies,” O’Donnell said. “Our average balance is $123,000 and our median balance is only $55,000. “Our founding mission was to work with people who don’t otherwise have access to professional financial services. We use scale to reach people who aren’t typical financial service customers.”

The Mutual Fund Stores’ median client account balance was $223,000, O’Donnell said, describing the stores as modest offices without the “mahogany desks” or high-rent urban locations of large financial institutions. As for pricing and products, O’Donnell said that Financial Engines will be offering non-proprietary, institutionally-priced funds and modest advisory fees.

“At this point, we’re not getting into specifics on pricing, because we’re still testing. But we will be coming to market with something that’s one-third or one-half of the 150 to 200 basis points that you might see elsewhere. There will be no account balance minimums,” she said.

Income Plus, which is Financial Engines’ systematic withdrawal service for retirees, will be available to clients in 401(k) plans and clients of The Mutual Fund Store,” she added. About 10 years ago, Financial Engines emerged as an advocate of using systematic withdrawals for retirement income between the ages of about 65 and 85, and then relying on a longevity annuity for subsequent income, if needed.

But when Income Plus was rolled out in 2011, the annuity was left out except as an out-of-plan option. That was mainly because plan sponsors in general resisted the inclusion of annuities in workplace plans, and still do. Going forward, “we will advise on life insurance,” O’Donnell said, “but otherwise we won’t have sales capability on insurance products.” Annuities don’t appear to be in the picture.

A.M. Best report defines VA issuers’ dilemma

Posted on September 15, 2016 by Editorial Staff -

Although marketplace demand for variable annuities continues as near-retirees look for lifetime income products, many VA issuers may not necessarily able to take advantage of that demand, according to the ratings agency A.M. Best.

According to “Variable Annuity Sales Decrease Amid Regulatory Changes,” a new Best’s Special Report, “The continued low interest rate environment and recent equity market volatility have pressured policyholders’ VA returns. This has also pressured insurers’ ability to manage large blocks of in-force VA business, many of which have richer guarantees than are currently underwritten.

“Risk management strategies, including the use of hedges, have helped mitigate these concerns, yet A.M. Best continues to see some market-driven volatility in earnings stemming from Statutory VA reserving requirements, including Actuarial Guideline 43, as well as some recent GAAP charges related to policyholder behavior.”

VA sales were down 18% in the first quarter of 2016 compared with the same prior-year period and down 16% from the fourth quarter of 2015. Decreases in VA sales have not been uncommon in recent years, as companies have looked to de-emphasize market-sensitive products and reduce the generous guarantees seen in prior years, Best said.

However, the decrease in the first quarter of 2016 also relates to equity market volatility and the looming U.S. Department of Labor (DOL) fiduciary rules changes. While equity markets are up in the second quarter of 2016, it is possible the industry will continue to see VA sales wane as policyholders look toward more stable returns from fixed and indexed products.

A.M. Best said it has already seen more money going toward equity-indexed products, including fixed-indexed annuities. Overall, there continues to be a strong and increasing need in the market for retirement and wealth management products as the U.S. population ages. Prudent investment returns have also been harder to come by.

Going forward, qualified VA’s will be affected by the DOL fiduciary rule changes, which will include additional fee disclosures and more level compensation structures. Approximately 58% of separate account direct premium written in 2014 was related to qualified business. A.M. Best does not expect this allocation to change significantly as there is a great need in the marketplace for tax-advantaged products.

A.M. Best also expects that companies could apply the new DOL fiduciary rule changes to both their qualified and non-qualified businesses. The rule changes will also greatly impact companies that utilize the Independent Marketing Organization for sales as they look to update systems and products for these changes.

Overall sales and separate account value growth have slowed for the industry. While there was strong growth in separate account individual annuity reserves from 2011 to 2013, this growth slowed from 2014 to 2015 as companies scaled back their VA sales and the equity market volatility for the period negatively affected account values.

Separate account individual annuity premiums and deposits also decreased 5% from 2014 to 2015, and withdrawals remained relatively high compared to historical amounts after increasing for five straight years from 2010-2014. Furthermore, surrenders and withdrawals outpaced premiums and deposits in each year from 2011 to 2014. Given the current environment for 2016, A.M. Best expects the trend would continue.

Jackson National and the Rolling Stones. Of course.

Posted on September 15, 2016 by Editorial Staff -

Jackson National Life will serve as the official U.S. sponsor of “Exhibitionism — The Rolling Stones,” a traveling exhibit that offers comprehensive insight into the Rolling Stones through an immersive and interactive tour highlighting the band’s iconic artistic legacy.

According to a Jackson release, “Exhibitionism” is “the largest touring experience of its kind and the first time in history the band has unlocked their vast private archives. Previously housed at the Saatchi Gallery in London, Exhibitionism will make its North American debut in New York City in November at the iconic Industria, West Village.”

Barry Stowe, chief executive officer and chairman of Prudential plc’s North American Business Unit, said the sponsorship is “a natural fit for the company, and a defining project in enhancing Jackson’s brand identity.”

“Exhibitionism is a once-in-a-lifetime celebration of the history of true rock ‘n’ roll legends,” Stowe said in the release. “Like the Stones, Jackson’s history began in the early ‘60s, a time that brought the onset of an era of dramatic change. Focused on helping the generation that led this change plan for the next phase of their lives, Jackson is pleased to be able to sponsor a world-class exhibition focused on an artistic and cultural phenomenon that helped define and shape the baby boomers and generations to come.”

Rolling Stones

The exhibition will include 500 unseen artifacts from the band’s personal archives and take visitors through the band’s 50-year history, from living together in a small apartment to headlining stadium concerts, and embracing “all aspects of art and design, film, video, fashion, performance and rare sound” associated with the band.

The exhibition includes original stage designs, dressing room and backstage paraphernalia, guitars and instruments, iconic costumes, rare audio tracks and unseen video clips, personal diaries and correspondence, original poster and album cover artwork and unique cinematic presentations.

Exhibitionism is promoted and presented by Australian company International Entertainment Consulting (iEC) with the participation of Mick Jagger, Keith Richards, Charlie Watts and Ronnie Wood. Collaborations and work by Andy Warhol, Shepard Fairey, Alexander McQueen, and Ossie Clark to Tom Stoppard and Martin Scorsese will be included.

The exhibition includes nine different rooms, each with its own distinctly designed environment. Starting with an introductory “Experience,” visitors will look back at the high points of the band’s career through a new film, with a high-octane soundtrack. Visitors will then be taken back to the Stones’ beginnings and on the remarkable journey that made them one of the most successful rock ‘n’ roll bands in the world.

Lincoln Financial enhances VA income rider

Posted on September 15, 2016 by Editorial Staff -

Lincoln Financial Distributors (LFD), the wholesale distributor of Lincoln Financial Group, said it has enhanced the Lincoln Market Select Advantage, an optional living benefit rider available for a fee of 1.25% (1.50% for joint and survivor policies) with Lincoln’s American Legacy and Lincoln ChoicePlus Assurance variable annuities.

The “enhanced option features five percent guaranteed growth to the Income Base during accumulation, flexible income alternatives and access to asset allocation funds, including risk managed options,” according to an LFD release.

“Before we launched this rider, we had Linc 2.0,” Dan Herr, vice president, annuity product management, told RIJ in an interview this week. Consistent with what was in market at the time, it required the use managed-risk investment options. Then we introduced Market Select Advantage, which didn’t have the managed-risk requirement but offered a lesser benefit. You had to delay your first withdrawal for at least five years.

“The latest enhancement brings together both features,” Herr said. “This version allows the use of some asset allocation funds that are not managed-risk, and if you wait three years—or reach age 70, if that’s in less than three years—before taking a withdrawal, you get a higher withdrawal percentage. The 5% rollup starts at purchase and runs for 10 years. It applies only in years when there’s no withdrawal and there’s a hard stop at 10 years from purchase. It’s geared for someone who wants to start income in three years or more.

“For those who want income right away, we have i4Life, our flagship income rider. That’s geared to immediate and rising income,” he added. [i4Life is a immediate variable annuity; when the value of the assets in the separate account appreciate, monthly payouts rise and vice-versa.]

“We’ve enhanced the investment flexibility of that rider and made some product tweaks that bolster the upside story. With the earlier version of i4Life, there was a 4% Assumed Interest Rate,” Herr told RIJ. [With a variable income annuity, the company calculates the size of the first payment by assuming that the account earns 4% in the first period.]

“We lowered the AIR to 3%, which increases the likelihood that there will be a rising income. We also have a managed risk version of i4Life, where the AIR stays at 4%. Our deferred variable annuities offer i4Life as a payout option. A contract owner could choose to take part of the assets as immediate variable income and keep the rest liquid. We’re the only commercially available immediate variable annuity that is liquid. “

Herr was asked why Lincoln was sharpening its variable annuity value proposition at a time when VA sales continue on a downward trend—for reasons described in today’s RIJ article on the latest A.M. Best annuity report.

“As we think about the value proposition of annuities, especially around guaranteed income, we’re looking at what the investment world will look like over the next five to 10 years,” he said. “We’ve had a great bull market. Stocks are at an all time high. Analysts say we’re likely to see muted investment returns over the next 10 years, in the 4% to 6% range for equities and 2% for fixed income, and we ask, ‘How could it not be in the best interests of clients to offer a guaranteed income stream?’ A small segment of producers already understands this. We have to make sure we reach the rest of the advisor world with the message that there’s a product that can help their clients offset the risk of running out of money.”

The Essence of Goal-Based Investing

Posted on September 7, 2016 by Kerry Pechter -

It was July 15, only a day after the horrific truck attack on a crowded seaside esplanade in Nice, France. Lionel Martellini, the director of the EDHEC Risk Institute in Nice, appeared slightly uncertain as he approached the lectern in a conference room on the mezzanine of the Grand Hyatt in midtown Manhattan.

The 48-year-old Martellini admitted that he was shaken by the terroristic event in his hometown. But, after assuring the audience of two-dozen or so pension economists that his family and friends in southern France were safe, he plunged into the third session of a three-day seminar blandly called “Advances in Asset Allocation.”

RIJ first reported on Martellini’s work, which is far from bland, last March. Since then, he’s been campaigning for a financial services “revolution” that will make the management of individual retirement accounts more like managing pensions: More goal-based, reliant on the sophisticated risk management tools, and focused on delivering retirement income.

That revolution is necessary, he believes, because the shift from defined benefit to defined contribution plans makes middle-class people responsible for creating their own pensions. So, even though Martellini’s audience at the Grand Hyatt consisted of pension wonks, his work is relevant to investors and their advisors.

If you’re an advisor who’s familiar with the curriculum of the Retirement Management Analyst or the Retirement Income Certified Professional, the following may sound familiar. If you’re a more traditional investment advisor who’s curious about goal-based investing, this report on Martellini’s recent seminar may reveal a new way to look at saving for retirement.

What ‘goal-based’ means

Listening to Martellini, a contrast emerges between conventional and “goal-based” investing (“liability-driven” investing, in the language of pensions). Goal-based investing is more than just a form of mental accounting that assigns labels like “house,” “college” or “retirement” to different pots of money.

A switch to goal-based investing, for instance, changes the way advisors assess their clients’ risk capacity. Instead of asking new clients how far they could stand to watch the value of their accounts drop without panicking, a goal-based advisor measures a client’s risk “capacity” or risk “budget” by calculating how much of their savings clients can afford to put into risky assets without jeopardizing the achievement of their savings goals.

“Risk aversion is irrelevant,” Martellini said. “We need to understand loss aversion, relative to goals, not risk aversion.”

In practice, different clients will have different risk capacities. It won’t depend on their fortitude in the face a market downturn. It will depend on the differences between their savings rates, their time horizons, and the amount of savings they’ll need to fund their retirements.

“You can’t decide what the client’s essential goals will be. But with your help, the client will be able to calculate his floor. After that, your job will be to show clients the different opportunity costs”—what you might miss by being too conservative, for instance, or how much more you might have to save—“between different routes to his goals,” Martellini said.

Establishing a “floor” is central to goal-based investing. A traditional investor hopes or expects that his advisor or fund manager will outperform a market benchmark using stocks and bonds. A goal-based investor relies on his advisor to act more like a pension fund manager—using a conservative “goal-seeking” portfolio to fund an essential level of income in retirement and a “performance-seeking” portfolio of risky assets with upside potential that will finance discretionary spending in retirement.

A goal-based advisor’s job

It’s the synergy between those two portfolios that makes goal-based investing interesting. Martellini likes to use automotive analogies. As he puts it, clients face different routes to their retirement savings goal—straight and smooth, uphill and down, or carved by hidden curves. Goal-based dvisors apply the only three risk management techniques at their disposal—diversification, hedging or insurance—to help clients reach their goals safely, on time, and fuel-efficiently (i.e., with the least contributions).

When it comes to managing risk (i.e., volatility) during the accumulation period, traditional advisors and goal-based advisors take very different approaches. A traditional advisor might periodically rebalance a client’s portfolio by selling winners and restoring the original asset allocation. Goal-based advisors (or their fund managers), are more inclined to do the opposite, with a kind of stop-loss strategy.

Using what’s known as dynamic asset allocation, they might practice daily rebalancing between the client’s goal-seeking portfolio and the performance-seeking portfolio. Instead of selling risky assets that have appreciated, they might sell losers before the losses can break through the client’s pre-determined floor. Somewhat counter-intuitively, they buy back risky assets as their value recovers.

That particular type of dynamic asset allocation is called Constant Proportion Portfolio Insurance (CPPI). It protects the goal-seeking portfolio to fulfill its mission. It’s more momentum-based than contrarian, and it’s more defensive than aggressive. Like other forms of goal-based investing, it values accuracy over distance.

“Dynamic asset allocation reacts to changes in market conditions,” Martellini said. “It lets you go faster when the road is straight and slows you down when the road is windy. You’ll never reach your goals if you go too slowly. The question is, how much of the portfolio can the client afford to allocate to risky assets and still be safe?

“The client is in the driver’s seat,” he added. “But advisors have to be smart about how they spend the client’s risk budget. Their skill is all about implementing the efficient use of diversification, hedging, and insurance. The client makes his own decisions, the market does what it will, and the advisor tries to get the best possible outcome.”

Putting GBI into practice

Many advisors and investors already use products to practice goal-based investing, perhaps without being aware of it. When people buy a fixed index annuity, for instance, 95% of their money goes into a goal-seeking portfolio of bonds that preserves the principal and 5% goes into a performance-seeking portfolio of options on an equity index that will appreciate if the index goes up.

Similarly, when people buy the Even Keel managed-risk mutual funds, part of their investment pays for a Milliman short-futures strategy; the futures gain value if and when the underlying equities lose value. When people bought Prudential’s variable annuity with the Highest Daily living benefit a few years ago, most didn’t realize that Prudential was practicing CPPI with their money.

In an interview, Martellini had admiring things to say about Dimensional Fund Advisors’ target date funds, which emphasize the funding of an income-generating portfolio of Treasury Inflation-Protected Securities (TIPS) by the retirement date. He also likes BlackRock’s CoRI Index, which shows people how much inflation-adjusted lifetime income their savings would produce starting at age 65, based on their current age, current level of savings and prevailing bond prices.

Martellini and his colleagues at the EDHEC Risk Institute, which was founded at France’s School of Advanced Business Studies (EDHEC) in 2001 to do research on pension risk management, have their own project underway. They want to “encourage the adoption of cost-efficient retirement solution that would have defined benefit-like qualities,” he told RIJ.

Their solution would involve dynamic asset allocation between two low-cost, high-liquidity exchange-traded funds (ETFs): a bond ETF leading to a bond ladder that would provide income from about age 65 to age 85, and a balanced ETF invested in EDHEC’s proprietary smart-factor indices that would provide upside potential. Martellini believes that smart-beta or smart factor indices provide better risk-adjusted returns than conventional capital-weighted indices. Income after age 85 might be provided by a longevity annuity.

Ultimately, Martellini envisions the “mass-customization” of such a solution. (Within the next few days, he’ll be presenting a paper on the topic at a Retirement Investing conference in Oxford, England, co-sponsored by Oxford University, EDHEC Risk Institute and the Journal of Investment Management.)

He feels strongly that millions of defined contribution participants worldwide will need customized, goal-based savings strategies in order to enjoy a secure retirement. But he knows it won’t necessarily be easy. “Mass customization is made harder by the facts that people have different ages and different dates of retirement as well as different amounts of savings,” he told RIJ. “They also have different streams of future contributions and different essential and aspirational goals. We know how to do it. We just have to make it happen.”

Chile’s Pension Crunch

Posted on September 7, 2016 by Andrés Velasco -

Defined benefit pension plans are under pressure. Changing demographics spell trouble for so-called pay-as-you-go (PAYG) systems, in which contributions from current workers finance pensions. And record low interest rates are putting pressure on funded systems, in which the return from earlier investments pays for retirement benefits. The Financial Times recently called this pensions crunch a “creeping social and political crisis.”

Defined contribution, fully-funded systems are often lauded as the feasible alternative. Chile, which since 1981 has required citizens to save for retirement in individual accounts, managed by private administrators, is supposed to be the poster child in this regard. Yet hundreds of thousands of Chileans have taken to the streets to protest against low pensions. (The average monthly benefit paid by Chile’s private system is around $300, less than Chile’s minimum wage.)

Chile’s government, feeling the heat, has vowed to change the system that countries like Peru, Colombia, and Mexico have imitated, and that George W. Bush once described as a “great example” for Social Security reform in the United States. What is going on?

The blame lies partially with the labor market. Chile’s is more formal than that of its neighbors, but many people—especially women and the young—either have no job or work without a contract. High job rotation makes it difficult to contribute regularly. And it has proven difficult to enforce regulations requiring self-employed workers to put money aside in their own accounts.

Moreover, the legally mandated savings rate is only 10% of the monthly wage, and men and women can retire at 65 and 60, respectively—figures that are much lower than the OECD average. The result is that Chileans save too little for retirement. No wonder pensions are low.

But that is not the end of the story. Some of the same problems plaguing defined-benefit systems are also troubling defined contribution, private account systems like Chile’s. Take changes in life expectancy. A woman retiring at age 60 today can expect to reach 90. So a fund accumulated over 15 years of contributions (the average for Chilean women) must finance pensions for an expected 30 years. That combination could yield decent pensions only if the returns on savings were astronomical.

They are not. On the contrary, since the 2008–2009 global financial crisis, interest rates have been collapsing worldwide. Chile is no exception. This affects all funded pension systems, regardless of whether they are defined benefit or defined contribution schemes.

Lower returns mean lower pensions—or larger deficits. The shock and its effect are large. In the case of a worker who at retirement uses his fund to buy an annuity, a drop in the long interest rate from 4% to 2% cuts his pension by nearly 20%.

The rate-of-return problem is compounded in Chile by the high fees charged by fund managers, which are set as a percentage of the saver’s monthly wage. Until the government forced fund managers to participate in auctions, there was little market competition (surveys reveal that most people are not aware of the fees they pay). A government-appointed commission recently concluded that managers have generated high gross real returns on investments: from 1981 to 2013, the annual average was 8.6%; but high fees cut net returns to savers to around 3% per year over that period.

Those high fees have also meant hefty profits for fund managers. And it is precisely the disparity between scrawny pension checks and managers’ fat profits that fuels protest. So, more challenging than any technical problem with Chile’s pension system is its legitimacy deficit.

To address that problem, it helps to think of any pension system as a way of managing risks—of unemployment, illness, volatile interest rates, sudden death, or a very long life span. Different principles for organizing a pension system—defined benefit versus defined contribution, fully-funded versus PAYG, plus all the points in between—allocate those risks differently across workers, taxpayers, retirees and the government.

The key lesson from Chile is that a defined contribution, funded system with individual accounts has some advantages: it can stimulate savings, provide a large and growing stock of investible funds (over $170 billion in Chile), and spur economic growth. But it also leaves individual citizens too exposed to too many risks. A successful reform must improve the labor market and devise better risk-sharing mechanisms, while preserving incentives to save. It is a tall order.

Chile’s system already shares risks between low income workers and taxpayers, via a minimum non-contributory pension and a set of pension top-ups introduced in 2008 (as Minister of Finance, I helped design that reform). Subsequent experience suggests that those benefits should be enlarged and made available to more retirees. But the Chilean government has little money left, having committed the revenues from a sizeable tax increase two years ago to the ill-conceived policy of free university education, even for high-income students.

In response to the recent protests, the government has proposed an additional risk-sharing scheme: some (thus far undecided) part of a five percentage-point increase in the mandatory retirement savings rate, to be paid by employers, will go to a “solidarity fund” that can finance transfers to people receiving low pensions.

The goal is correct, but, as usual, the devil is in the details. In the medium to long run, it seems likely that wages will adjust, so that the effective burden of the additional savings will be borne by employees, not employers. One study estimates that workers treat half of the compulsory savings as a tax on labor income, so too-large an increase (especially in the funds that do not go to the worker’s individual account) could cause a drop in labor-force participation, a shift from formal to informal employment, or both. Chile’s economy does not need that.

There are no easy answers to the pensions conundrum, whether in Chile or elsewhere. Chilean legislators will have to make difficult choices with hard-to-quantify tradeoffs. Whatever they decide, irate pensioners and pensioners-to-be will be watching closely.

Labor Department acts on state-sponsored workplace IRAs

Posted on September 7, 2016 by Editorial Staff -

The Department of Labor’s Employee Benefits Security Administration has published a final rule that will make it easier for states to create IRA programs for workers who don’t otherwise have access to tax-deferred savings plans at work, the DOL reported.

The agency said it has also published a proposed rule that would, by clarifying federal labor laws, help some cities and local governments establish similar payroll-deduction IRA programs.

So far, eight states have passed legislation requiring private-sector employers that don’t offer retirement plans to auto-enroll their workers in state-administered, payroll-deduction IRAs. Other states have created marketplaces where employers can buy plans from private plan providers.

But uncertainty over the application of the Employee Retirement Income Security Act’s “preemption provisions”—which establishes ERISA’s authority over all retirement plans in the U.S.–has discouraged more states from creating such programs.

To remove that obstacle, the DOL has issued a final rule providing a safe harbor that would reduce the risk that state IRA plans would be subject to ERISA rather than to state laws. The rule also allows workers to opt out of state auto-enrollment arrangements. The rule will go into effect 60 days after its publication in the Federal Register.

The proposal to expand the safe harbor to include a limited number of larger cities and counties in response to comments received from members of the public will be open for 30 days of public comment after its publication in the Federal Register.

Publicly-traded U.S. life insurers see 19% income decline: Fitch

Posted on September 7, 2016 by Editorial Staff -

The 15 publicly traded U.S. life insurers rated by Fitch Ratings saw their pretax operating income decline 19% in the first half of 2016, the result of “declining interest rates, volatile equity markets and unfavorable macroeconomic headwinds,” a Fitch release said.

“Unfavorable mortality and competitive pricing continue to hurt individual and group life insurance segments while volatile financial markets impacting the variable annuity, retirement plan and asset management segments,” said Dafina Dunmore, director, Fitch Ratings, in a statement.

Industry results were also adversely affected by large reserve adjustments, particularly for MetLife, Inc., and Prudential Financial, Inc. Average aggregate operating return on equity declined to 10.4% in first-half 2016 compared with 13.0% in the prior-year period for Fitch’s rated universe.

The likelihood of interest rates remaining lower for longer was enhanced by the UK vote to withdraw from the European Union (EU), Fitch said, noting that the “Brexit” vote led to a material decline in interest rates in the second quarter of this year. Fitch expects low reinvestment rates to continue to be an earnings headwind in the second half of 2016.

AXA wins excessive fee litigation suit

Posted on September 7, 2016 by Editorial Staff -

After five years of litigation and a 25-day trial in New Jersey federal court, AXA US has been found not guilty of receiving excessive compensation for managing and administering certain of its mutual funds, as alleged in Mary Ann Sivolella v. AXA Equitable Life Insurance Company and AXA Equitable Funds Management Group, LLC and Sanford et al. v. AXA Equitable Funds Management Group, LLC (Civil Action No. 3:11-cv-04194 (D.N.J.).

In a 159-page opinion, Judge Peter G. Sheridan ruled that the plaintiffs failed to prove that AXA Equitable’s Fund Management Group had charged “exorbitant fees” while delegating “all of the services” to sub-advisers or a sub-administrator for a “nominal amount.”

According to an AXA release, the decision “vindicates FMG LLC’s ‘manager-of-managers” structure, whereby FMG LLC provides essential services to the funds and at its own expense and engages third-party service providers to provide certain limited investment and administrative services.”

The AXA US case is the first Section 36(b) excessive case to go to trial since 2009 and is the first of the numerous cases that recently have been filed challenging the manager-of-managers structure, the release said.

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.

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Ameritas buys The Guardian’s 401(k) business

Address change for sponsor of RMEF, a retirement industry group

TIAA to replace passwords with voiceprints

Indexed annuities

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Variable annuities

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