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Most plan providers expect DOL rule to help asset retention: LIMRA

Posted on July 28, 2016 by Editorial Staff -

The Department of Labor’s (DOL) fiduciary rule will have a “positive or neutral effect on their overall asset retention rate” over the next two years, say 64% of top retirement plan record-keepers and providers, according to a new LIMRA Secure Retirement Institute survey.

By making it a fiduciary act to solicit rollovers, the rule could dampen the ability of call center reps to recommend rollovers to separating or separated 401(k) plans participants. If so, more money might stay in the plans. The rollover market is still expected to exceed $400 billion in 2016, LIMRA said.

The new DOL fiduciary rule goes into effect in April 2017. “The [rule] impacts all qualified assets and will likely have a major impact on the rollover market, with some DC plan providers benefitting from increased in-plan retention due to a slowdown in IRA rollover activity,” said Matthew Drinkwater, Ph.D., assistant vice president, LIMRA Secure Retirement Institute, in a release.
According to the LIMRA SRI study:

28% of companies felt the rule would help them increase asset retention
36% felt it would have no impact on their current asset retention rate
36% expect the rule to result in a minor decline in their asset retention rate
75% of plan providers surveyed say they will change how their call centers respond to calls related to retirement plan distribution options. Many will also change procedures for calls unrelated to distribution options.

When the final rule was published, plan providers weren’t certain how to revise their call center scripts to make sure that phone reps didn’t cross the line from “education” to “advice.” The later would trigger a fiduciary standard; advice or recommendations would need to be in the client’s “best interest” or the rollover could be a “prohibited transaction.”

“Nearly three quarters of plan providers anticipate their call center staff will need training to be able to distinguish education from advice,” said Drinkwater. Earlier this month, LOMA Secure Retirement Institute launched DOL Fiduciary Basics for Employees, a short online course that explains what the rule means to industry organizations and their employees.

Net income of life/annuity industry down 73% in 1Q2016: A.M. Best

Posted on July 28, 2016 by Editorial Staff -

Despite higher overall revenue, the U.S. life/annuity insurance industry reported sharply lower statutory earnings in the first quarter of 2016 versus the same period in 2015, according to an A.M Best report.

Net income dropped to $3.7 billion in first-quarter 2016 compared with $13.7 billion in the prior-year period, on modest realized capital losses.

The new Best Special Report, titled, “Life/Annuity Industry First Quarter 2016 Statutory Earnings Impacted by Market Volatility,” also said:

“Industry capitalization remains favorable and continues to show modest increases in total capital. Although the combination of several general market conditions negatively impacted the industry as a whole, five insurance companies accounted for roughly $4 billion of pre-tax operating losses, related to one-time reinsurance transactions, reserve adjustments and derivative movements.”

Of the industry’s total assets, $2.4 trillion is held in separate accounts. That exposes sales volumes, earnings and the value of guaranteed benefits of variable products to equity market volatility. At the same time, the profitability of life insurance products has suffered from heightened mortality.

“It is still too early to determine if recent mortality results are a sign of a longer-term trend or just short-term incidence,” A.M. Best noted. In other comments from the report:

Industry premiums declined in 1Q2016 to $144.7 billion from $167.5 billion in the preceding quarter, but are generally in line with first-quarter results of previous years due to seasonality trends.
Individual annuities account for the majority of premiums. They represent one-third of total direct premiums for the first-quarter of 2016 up more than 10% from the same period in 2015.
First-quarter variable annuity sales declined 18% and a net $5.6 billion was transferred out of VA separate accounts. A.M. Best attributed the declines in part to anticipation of the Department of Labor’s fiduciary rule, whose final version was issued last April.
Ordinary and group life contributed 27.1% of direct premiums written, as of first-quarter 2016.

The industry’s total capital remained positive in the first quarter, but was constrained. The lack of capital growth is tied to capital deployment, acquisition activity, and share repurchases and dividends. A.M. Best views the industry as having adequate risk-adjusted capitalization, which is supported by the continued overall profitability.

Honorable Mention

Posted on July 28, 2016 by Editorial Staff -

Pet project: MassMutual leverages America’s love of animals

Dogs, cats and other pets can help people to lower their blood pressure, reduce anxiety and improve their social lives, studies have shown. MassMutual hopes to prove that pets can also help people save for retirement.

The big mutual insurer is encouraging retirement plan savers to increase their contributions to their employer’s 401(k) or other retirement plan through a direct marketing campaign that leverages the popularity of pets. Americans spent more than $60 billion on pets in 2015, according to the American Pet Products Association.

MassMutual’s pet campaign promotes the need for retirement savings by directing savers to RetireSmartPets.com. Visitors to the site are invited to post and share photos of their pets on social media, and are encouraged to increase their retirement plan contributions.

More than 1,700 photos of dogs, cats, rabbits, mice and horses have been uploaded and shared on social media. The photos also include a humming bird, chickens, parrots, turtles, a lizard and pet rocks.

The owner of the pet whose photo receives the most votes at the end of the year wins an Apple iPad. So far, the most popular pet is a chocolate Labrador Retriever puppy that resembles a stuffed toy, with more than 8,300 votes.

The email and direct mail campaign, which ran from March to May, is projected to generate $43 million in additional deposits in 2016. The campaign enjoyed MassMutual’s highest-ever response rate for those making additional savings.

Savers ages 18-34 had the highest response rate; retirement savers age 55 and older had the highest increase in salary contributions. The increase was attributable to both men and women.

Fidelity to offer another New York Life annuity

New York Life’s Clear Income Fixed Annuity–FP Series, a fixed deferred annuity with a flexible guaranteed lifetime withdrawal benefit, will be made available on Fidelity’s direct-sale annuity platform, Fidelity announced this week.

Fidelity already makes available New York Life’s single premium deferred annuities, deferred income annuities and single premium immediate annuities.

The New York Life Clear Income Fixed Annuity– FP Series features:

Lifetime Income: Through access to a guaranteed lifetime withdrawal benefit amount beginning on a date they select, investors can avoid outliving their assets. Individuals (or couples for joint contracts) also benefit from knowing how much annual income they will receive, based on any date they select.

Flexibility: If a person’s situation changes and the need may arise to take some or all of the money sooner, individuals have access to the contract’s accumulation value.

Stability: Individuals have the security of a guaranteed rate of return and cash flow regardless of market fluctuations and downturns.

Raymond James to partner with retirement plan advisors group

Raymond James Financial Services (RJFS), an independent broker/dealer, and Next Retirement Solutions, a team of plan consultants and advisors, will partner to establish a major retirement advisory program, according to Bill Counsman, Western regional director for RJFS.

Next Retirement Solutions (formerly Neuner Retirement Services) offers securities through Raymond James Financial Services, Inc. NRS was born in 1994 as a group of corporate retirement plan consultants working for then-A.G. Edwards & Sons Inc. Through acquisitions, NRS became the lead institutional retirement consulting group for Wells Fargo Advisors, managing some $7 billion in retirement plan assets. In June 2016, NRS established its own legal entity and partnered with Raymond James.

The NRS management team includes Paul Neuner, partner, Kevin McFarland, partner, Dominic Repetti, partner, Neelab Naibkhyl, Timothy Cronin, Damon DeLillo, Michael Rozovics, Bob Ortbals, Denise Ruiz, and Aryn LaFerrara.

Paul Neuner began his career in institutional consulting in 1994 at A.G. Edwards, which ultimately became Wells Fargo. He is an Accredited Investment Fiduciary and Chartered Retirement Plans Specialist. He is a graduate of Trinity University in San Antonio, Texas, with degrees in economics, international finance and Spanish.

McFarland has been with the team since 1999 when he began his career in the financial services industry and is an Accredited Asset Management Specialist, a Chartered Retirement Plans Specialist and also won the Albert Gallatin award. Prior to becoming a financial industry professional he attended San Diego State University where he earned his Bachelor of Arts degree in economics.

Repetti joined the NRS team in 1999 focusing his efforts in the corporate retirement plan marketplace. Prior to becoming a financial industry professional, he earned a Bachelor of Arts degree from the University of San Diego, and is an Accredited Asset Management Specialist and a Chartered Retirement Plans Specialist.

Raymond James Financial Services, Inc., supports more than 3,600 independent financial advisors nationwide. Since 1974, it has provided investment and wealth planning services through Raymond James & Associates, Inc. Both entities are broker/dealers. The parent company, Raymond James Financial, Inc., has 6,800 financial advisors serving more than 2.8 million client accounts worth about $535 billion in more than 2,800 locations throughout the United States, Canada and overseas.

Income from the riders on our FIAs tends to rise each year: Allianz Life

Almost nine in ten (86%) Americans want financial products that provide rising guaranteed income in retirement, according to a new Allianz Life survey. Almost eight in ten (77%) preferred a product with a lower starting income rate and upside potential to a fixed-payout product with a higher starting income rate.

This finding appears to contradict the conventional wisdom that retirees prefer fixed to inflation-adjusted immediate annuities. But it reinforces the idea that variable annuities with lifetime income benefits owe part of their appeal to the upside potential of the separate accounts.

Half (50%) of the respondents to the Allianz Life survey believe it is “very” or “extremely important” for a product to offer the possibility for income increases over time.

More than two thirds (67%) said they received a pay raise at least half of the time during their working years. If faced with a frozen income, 53% said they would be “very worried or panicked” about meeting expenses.

Those surveyed expressed concern about inflation. Nearly three-tenths (28%) of those surveyed (and 41% of those earning less than $50,000) worried that they wouldn’t be able to pay for essentials like housing, food and medical care because of the rising cost of living.

Recent research by Allianz Life showed that the guaranteed income riders on its fixed index annuities helped mitigate the effects of inflation and increased purchasing power over time. The research found that 93% of clients receiving income from index annuities received an increase and 67% received a payment increase every year.

Improvements at Millennium Trust announced

Millennium Trust Company, which provides custody solutions for institutions, advisors, and individuals, this week announced an increase in custodial accounts to 458,000 and growth in assets under custody to $18.9 billion during the second quarter of 2016.

The Oak Brook, Illinois-based firm has also added two new platforms to its Millennium Alternative Investment Network (MAIN), bringing the total of participating companies to 11. The new platforms are 1000 Angels and Glide Capital.

1000 Angels is an investor network that allows its members “to build a venture portfolio of early-stage startups, free of management fees, carried interest, and large capital commitments,” according to a Millennium Trust release. Glide Capital offers access to multiple strategies within the private credit industry.

Millennium Trust has also launched a centralized online portal intended to speed up the custody portion of the process of investing in alternative assets. The firm said it has improved the tracking the flow of documents and forms between investment sponsors, making an end-to-end, digital custody solution for complex, documentation-heavy, non-traditional assets closer to reality.

Additionally in the last quarter, Millennium Trust introduced a new online search tool to help individuals find unclaimed retirement funds held at Millennium Trust that they may have forgotten about when changing jobs.

“We have “procedures in place to search for missing account holders and we find the correct address for the majority of the individuals who are missing or non-responsive at the time their account is rolled over from a previous retirement plan to us,” said Terry Dunne, managing director of the Rollover Solutions Group in a release.

“We work closely with retirement plans, recordkeepers and advisors who are putting appropriate processes and procedures in place to fully comply with the DOL’s new fiduciary rule that takes effect next April,” added Dunne.

Quote of the Week

Posted on July 28, 2016 by Editorial Staff -

The Least Bad Choice for President

Posted on July 21, 2016 by Kerry Pechter -

Having heard plenty of this kind of claptrap before, I won’t be listening much to the speakers at either the Republican or Democratic national conventions this week and next. The sound of the odious man with the golden comb-over or the sight of the ecstatic woman in pastel designer Mao suits could be unhealthy.

What a disheartening choice lies before us. On the one hand, Trump: a slippery real estate developer and classic opinionated New York City blowhard. These outer-borough blowhards will always try to shout you down with their insistence that the Yankees are the best ever and that your team, especially if it comes from Boston, sucks.

On the other hand, Clinton: the lifelong gold star achiever who is nonetheless glad to degrade herself by accepting millions of dollars in “speaking fees” from the shareholders of “publicly-held” companies—and brazen enough to subject us to reruns of her husband’s prime-time soap opera for the next four-to-eight years.

At a time when the country needs a smart young technocrat without baggage, we must choose between two oldsters who together carry more baggage than all the major airlines combined. As Democrats and Republicans, we chose them both. Now, as Americans, we must narrow the choice to one person. What a choice it is.

I wish they were stronger on finance. Nothing that either of them has said offers any reason to believe that they understand, in a comprehensive way, how Money, with a capital M, works. And I can’t think of anything more pressing right now than to make sure that the person in the White House from 2017 to 2021 (or 2025) understands it.

Most people don’t understand exactly how money works, me included. In truth, the financial system is probably too complex for any one person to understand. But very few understand even the basics. Most people don’t understand compound interest, surveys show. Many intelligent people don’t know that banks create new money when they lend.

Presidents don’t seem much better informed than the rest of us. Ronald Reagan told us that cutting taxes for the rich would enhance tax revenues. Not true. Bill Clinton allowed too much financial deregulation. George W. Bush told us that the United States is broke. Not true, and never will be true. Barack Obama told us that women and men should have equal pay, which is fine, except that he didn’t mention that men’s salaries or business profits might have to fall as a consequence.

Neither of the candidates has evidenced great sophistication about the financial system. I’d like to know that a future president recognizes that the stock market and the bond market and interest rates and taxes and the trade deficit and inequality and the central bank and the national debt are all connected. I’d like to hear him or her offer the bracing truth that the things we like and hate about our economy are very often two sides of the same coin, and that “having it both ways” is not a reasonable expectation.

In the next few years, unless various real or manufactured crises consume 100% of our leaders’ attention, the government will need to address important financial problems. There’s Social Security, the tax code, public sector pensions, Federal Reserve policy, interest rate policy, and so forth. It would be encouraging to believe that the candidates know how to approach these problems, or how to choose people who do.

What a choice. Yet each of us needs to choose (abstention is for dweebs) and only one choice is rational. It would be an act of craziness (whether committed out of misguided good faith or as a cynical gesture of protest) to vote for Trump. He’s flakey and arrogant. He’s impulsive and probably insecure. Instead of experience, he offers name-recognition.

No matter how awful her fashion choices, or how sordid the political ghosts she revives, or even how little we might feel in common with her or her beliefs, we need to choose Hillary Clinton for president this year.

MetLife retail business will be Brighthouse Financial

Posted on July 21, 2016 by Editorial Staff -

MetLife will rebrand its U.S. retail business as Brighthouse Financial after it is separated from the Company. In January, MetLife announced plans to separate much of its U.S. retail business, but did not specify the structure and timing of the separation.

The separation will allow MetLife to focus “on our group business in the U.S… and our international operations,” said Steven A. Kandarian, MetLife chairman, president and CEO, in a release.

Current MetLife executive vice president Eric Steigerwalt will lead Brighthouse Financial.

The MetLife board would have to approve any separation transaction; certain insurance and other regulatory approvals would also be necessary. No shareholder approval is expected to be necessary.

The transaction would also need to comply with any U.S. Securities and Exchange Commission (SEC) requirements. “No assurance can be given regarding the form that a separation transaction may take or the specific terms thereof, or that a separation will in fact occur,” the MetLife release said.

Who has skin in the presidential race? Not insurers!

Posted on July 21, 2016 by Editorial Staff -

Only 2% of insurers believe that the outcome of this year’s presidential race between Democrat Hillary Clinton and Republican Donald Trump will matter much to the fortunes of their industry.

They’re much more worried about low interest rates, according to a new A.M. Best Special Report entitled “A.M. Best Spring 2016 Insurance Industry Survey.” The report assesses insurers’ opinions on market conditions, compliance costs, the Labor Department’s fiduciary rule, cyber risk, reinsurance trends and exposure to Puerto Rico’s municipal bonds.

Approximately three-fourths of insurers surveyed have lowered their target return-on-equity expectations to 10% or lower, a reflection of highly competitive market conditions remaining and the slow-growth economy, the report said.

Low interest rates were cited as the biggest industry threat (by 37.6% of insurers), followed by increased regulations (26.2%), competition (19.3%) and antiquated business models (12.4%).

In terms of competitive pressures, the health and life/annuity segments responded that they feel the most pressure from regulatory drivers, while the majority of property/casualty insurers reported facing pressure from product development, new entrants and external forces such as Amazon and Google.

On cyber risk, just over 30% of survey participants had been a target of data breach or cyber-attack. But just 10.4% reported investing more than $1 million to prevent such attacks and breaches, while about 43% have spent less than $100,000. Half of the insurers surveyed have invested more than $1 million to upgrade hardware and software systems in the past five years.

Regarding reinsurance, 43.9% of respondents have restructured their reinsurance program over the past 24 months. Of these companies, 71.4% said they found better protection for either less or the same cost. In addition, 52.7% of survey respondents said they had added and/or removed reinsurers from their panel in that 24-month timeframe.

Conning expects lower annuity sales in 2016-2017

Posted on July 21, 2016 by Editorial Staff -

A new study from Conning, “Life-Annuity Distribution & Marketing Annual: Confronting a Distribution Challenge,” analyzes individual life and annuity sales trends by product and channel for five years through 2015 and forecasts product-level sales through 2018.

The latest edition of the annual study also interprets the digital marketing trends of the top insurers in the market, presents advertising and related expense trends, and reviews the Department of Labor’s new Fiduciary Rule and its likely impact on insurers.

“The pace of distribution and marketing change in the life-annuity industry is accelerating, and insurers are scrambling to keep up,” said Scott Hawkins, a Director, Insurance Research at Conning. “Insurers have been retooling their systems to respond to the digital imperative that has driven consumer marketing and distribution strategy across all industries.

“These efforts are supportive of both traditional agent distribution channels and the potential for greater direct distribution. Now, adding to that complexity, the retirement market also must deal with the significant changes brought about by the Department of Labor’s proposed Fiduciary Rule,” he added.

“Insurers are actively planning for the impacts of the proposed DOL Fiduciary Rule, which would phase-in through this year and into the next,” said Steve Webersen, head of Insurance Research at Conning.

“The greatest disruption will be seen in midsized and large insurers with greater focus on indexed and variable annuities. Our analysis of the potential impact of the Rule industry-wide has caused us to reduce our forecast of individual annuity sales for both 2016 and 2017.”

“Life-Annuity Distribution & Marketing Annual: Confronting a Distribution Challenge” is available for purchase from Conning by calling (888) 707-1177 or by visitingwww.conningresearch.com.

Betterment reaches $5 billion in AUM

Posted on July 21, 2016 by Editorial Staff -

Betterment this week claimed to be the first independent robo-advisor to reach $5 billion in assets under management, up from $1 billion only 18 months ago. The Manhattan-based company serves 175,000 customers.

Betterment also announced this week that Amy Shapero has joined the company as Chief Financial Officer. Prior to joining Betterment, Shapero was Chief Financial Officer at Sailthru, a provider of personalized marketing communication technology.

Prior to joining Sailthru, Shapero was senior vice president, overseeing corporate strategy, M&A, and communications at DigitalGlobe, a data and analytics company. Prior to DigitalGlobe, Shapero served as chief financial officer of Spot Trading, a financial technology company. Earlier, Shapero was the chief financial officer of Standard & Poor’s.

Betterment offers customers a globally diversified portfolio of index-tracking exchange-traded funds (ETFs) with personalized advice in a goal-based investing framework. Customers can open and customize regular investment accounts, traditional/SEP/Roth IRAs, trust accounts, and accounts for retirement income. Betterment also has expanded its platform to serve the RIA and 401(k) markets.

It also offers RetireGuide, a retirement planning tool that lets people know how much they should save and if they are investing correctly.

Vanguard emeritus Jack Brennan to chair FINRA

Posted on July 21, 2016 by Editorial Staff -

John J. “Jack” Brennan, chairman emeritus and senior advisor of the Vanguard Group, has been unanimously elected chairman of the Financial Industry Regulatory Authority by FINRA’s board of governors, effective August 15, 2016. He succeeds Richard G. Ketchum, who is retiring.

Brennan has served as FINRA’s Lead Governor since 2011. In June, FINRA announced that Robert W. Cook will become FINRA’s new chief executive in the second half of 2016; his expected start date is also August 15, when FINRA will move to a non-executive chair structure for its board governance.

Brennan joined the Board of Governors of the National Association of Securities Dealers (NASD) and remained on the Board following the merger of the NASD and New York Stock Exchange Regulation in 2007, a combination that gave rise to FINRA as the largest independent regulator for all securities firms doing business in the United States.

Incomes, Cost-of-Living Higher in Blue States: LendingTree

Posted on July 14, 2016 by Editorial Staff -

How are Democrats and Republicans faring, socio-economically? To find out, LendingTree, a major online lender, polled a nationally representative sample of 1,616 respondents ages 18 and up last June.

Respondents were asked, “When voting, which party’s candidates do you generally vote for?” Respondents were also asked to gauge their own financial and economic knowledgeability.

Financial knowledge

24.26% of Republicans considered themselves very knowledgeable and 56.21% considered themselves somewhat knowledgeable.
22.80% of Democrats considered themselves very knowledgeable and 54.25% considered themselves somewhat knowledgeable.
58.28% of Republicans stated they were at least above average in their knowledge while 50.99 % of Democrats felt they were at least above average.

Financial responsibility

45.36% of Republicans considered themselves very financially responsible and another 41.81% considered themselves at least somewhat responsible.
42.21% of Democrats considered themselves very financially responsible and another 43.35% considered themselves at least somewhat responsible.
65.68% of Republicans considered themselves at least above average in terms of financial responsibility compared to the average American.
59.49% of Democrats considered themselves above average.

Comparison of traditionally red vs. traditionally blue states

LendingTree compared the financial differences between voters in traditionally blue states to those in traditionally red states, based on which party’s presidential candidate carried the state in at least three of the last four quadrennial elections. States where the parties split the last four elections were considered “swing states.”

By credit score

Democrats took nearly every top 10 slot for having the highest credit scores in the nation. Red states took every bottom 10 spot for average credit scores.

Colorado, which had the nation’s 5thhighest credit score, is a swing state and the only non-blue state in the top 10.
Washington D.C. had the highest average credit score in the nation, with an average of 696.
Hawaii and California (both traditionally blue) came in 2nd and 3rd respectively with average scores of 691 and 687.
Mississippi had the worst average credit score in the nation with an average of 632.

By credit card debt and utilization

Incomes and costs of living are generally higher among blue states. Credit utilization is therefore a better indicator of financial health. Generally, the lower the utilization, the better.

Mississippi had the lowest average credit card debt while D.C. had the highest. Alabama (traditionally red) had the lowest credit utilization in the nation with an average of 26.9% of credit used.
West Virginia (also traditionally red) was second with an average utilization of 27.2%, and Florida (swing state) came in third with 27.2% average utilization.
North Dakota (traditionally red) had the highest credit utilization with 42.3% average utilization.

By financial stability

59.67% of Clinton supporters, 55.82% of Trump supporters, and 49.87% of Sanders supporters considered themselves stable or very stable
15.84% of Clinton supporters felt they were unstable or very unstable, 22.63% of Trump supporters felt they were unstable, and 28.23% of Bernie supporters felt they were unstable

By financial happiness

51.03% of Clinton supporters, 46.34% of Trump supporters and 37.73% of Sanders supporters considered themselves happy or very happy
Clinton supporters were almost twice as likely to say they were financially very happy, with 18.31% stating they were very happy. Only 9.27% of Trump supporters were very happy
35.36% of Sanders supporters said they were financially unhappy or very unhappy.

A total of 1,616 completed responses were collected between June 9th, 2016 and June 14th, 2016.Republican (Red) voters accounted for 31.94% of respondents while Democratic (Blue) voters accounted for 44.21% of survey respondents. Remaining respondents were independent voters (4.87%), rarely voted based on party lines (12.95%), or don’t vote or have never voted (6.03%).

A new topic for Brits to argue about: Decumulation

Posted on July 14, 2016 by Editorial Staff -

In the U.K., private defined contribution plan providers are protesting the possibility that the National Employment Savings Trust (NEST), which is Britain’s public workplace DC option, might introduce retirement income products and thereby “distort the decumulation market.”

The UK “pensions industry warned against allowing NEST to compete with, or replace, private sector providers,” IPE.com reported this week. Private companies like the People’s Pension and Now Pensions are afraid that the NEST might crowd them out of the business of helping retirees spend down their savings.

The conflict is happening in the context of huge changes in the way Britons spend down their tax-deferred retirement savings. Until 2015, most of them were required to buy life annuities with their savings by age 75. The now-departed David Cameron government dismissed that long-standing policy—and decimated the individual annuity business in the UK—with the stroke of a pen.

Now the British people face a different rule: All workers must be auto-enrolled into a DC savings plan in 2017. NEST was created so that small companies not attractive to private DC providers would have a low-cost public plan option into which their employees could be auto-enrolled. It’s a situation not unlike the efforts to create public-option DC plans for small companies in Connecticut and California.

But private companies don’t want any more competition from NEST than they already have. Darren Philp, the director of policy for the People’s Pension, the largest private DC plan (or “master trust” in Brit-speak), said that NEST shouldn’t be allowed to compete with private drawdown providers while it continues to operate with the help of government loans.

“It is far from clear why we should be using a heavily subsidized government-backed scheme to provide services and products the market is well-equipped to provide in its own right,” Philp reasoned.

NEST’s entry into the decumulation market would “significantly distort competition in an already distorted market,” agreed Morten Nilsson, CEO of the £192m master trust Now Pensions. “Its role was to be a provider of last resort with the intention that it should complement, not compete or replace, private sector providers.”

NEST has more than 3.3m members and assets under management of £970m as of the beginning of June. While some of its costs are met through a 0.3% annual management charge, additional costs are met by drawing on a government loan.

Gregg McClymont, head of retirement savings at Aberdeen Asset Management, suggested however that private providers take a chill pill. NEST would only offer drawdown solutions to existing NEST members, not to Now Pensions or the People’s Pension’s participants.

Given the fact that NEST draws its participants from lower-income earners with marginal financial literacy, McClymont said, direct competition between NEST and private providers isn’t likely.

“Given NEST’s track record in the accumulation space, given the characteristics of the immature decumulation market, and given NEST’s need to serve its target market more widely, a knee-jerk reaction is probably not the right way to proceed,” he said.

In the wake of the “pensions freedom reforms,” which lifted the annuitization requirement, NEST has been allowing those members wishing to access savings to take one or more lump-sum payments.

In 2015, NEST entertained the idea of offering its retirees a combination of investments and deferred annuities in retirement, thus balancing the need for liquidity and growth with the need for protection against longevity risk.

McClymont, previously the Labour party’s opposition spokesman on pensions, praised NEST’s work on drawdown products.

“This is a market crying out for some sort of innovation, and we’re all trying to provide it,” he said. “But, actually, it’s difficult because usually you respond to consumer demand in the market – and it’s unclear what the demand is.”

Here’s the decumulation strategy that NEST tentatively proposed a year ago:

At retirement, the system will transfer 90% of a member’s savings into the income drawdown fund, with the remaining 10% transferred into an accessible cash fund.
The drawdown fund will invest in an income-generating portfolio, which would provide a monthly retirement income.
The 10% cash fund is to run separately from the drawdown and will be invested in money market instruments to allow savers to take out lump sums without having to sell other assets. Members could access 10% of their savings without undermining the sustainability of the monthly income provided by the drawdown fund.
After retirement, around 2% of the income drawdown fund will be used annually to finance an eventual annuity purchase. The deferred annuity will be bought after 10 years in retirement and kick-in after an additional 10 years—at about age 85. The UK deferred annuity market has not yet fully developed however.
NEST had not ruled out a collective DC (CDC) system, whereby members pooled mortality risk, and annuities were provided from a central fund, but had reservations about it.

Brexit a “negative” for US life insurers: Fitch Ratings

Posted on July 14, 2016 by Editorial Staff -

The UK vote to withdraw from the European Union (EU), known as “Brexit,” will increase economic uncertainty and likely affect monetary policy in the US, making it a negative credit development for US life insurers, according to Fitch Ratings.

“The near-term impact on interest rates and financial market volatility exacerbates an already challenging operating environment for US life insurers,” Fitch said, adding however that there are no immediate implications for US life insurer ratings.

The Brexit vote will negatively affect GDP growth in the UK and elsewhere, which will likely prompt central banks around the world to extend their monetary easing policies, Fitch said in a release.

“For US life insurers, expected delays in further Fed rate increases and flight-to-safety buying of US government bonds has pushed Treasury yields to near-record lows. The macroeconomic volatility likely will force the Fed to delay further rate hikes and increases the likelihood of a ‘lower for longer’ interest rate scenario,” Fitch analysts said.

“Over the near term, the impact of sustained low interest rates will limit US life insurers’ earnings growth but not have a meaningful impact on statutory capital.”

Life insurers with exposure to equity markets through general account equity investments and/or large variable annuity and asset management businesses, will be negatively affected by financial market volatility in the wake of Brexit, Fitch said. While existing ratings already consider these equity exposures, a significant unexpected decline in the equity markets could affect ratings.

Positively, most US life insurers aren’t directly exposed to the insurance markets in the UK and EU, or have only minor exposure. For those with direct exposure to those markets, those operations represent a relatively small proportion of the group’s overall business. The ratings on US life insurers that are wholly owned by European insurers, most of which have a Stable Rating Outlook, are more vulnerable to a downgrade.

The short goodbye… it’s linked to retirement readiness

Posted on July 14, 2016 by Editorial Staff -

Historically, corporations used pensions for “workforce management.” A pension paid for itself, in theory, by incentivizing the departure of “dead wood” to make room for “fresh blood.” In this fashion, firms molted, continuously shedding their superannuated personnel.

By now, most companies have switched from defined benefit pensions to defined contribution plans. But, while the DC model shifts the responsibility for saving for away from the employer, it doesn’t solve the original problem: How to prepare older, venerable, long-tenured workers to retire on a timely, predictable schedule?

A new whitepaper from the Defined Contribution Institutional Investors Association (DCIIA), a trade group that advocates for the interests major retirement plan providers, urges more employers adopt auto-enrollment and auto-escalation procedures to help their employees save.

Even though it might take 20 to 40 years for a new auto-enrolled employee to reach retirement age—and even though high turnover rates, few new hires are likely to actually retire from a firm—DCIIA asserts that workforce management will be among the benefits of default programs.

Employers who use defaults this will see more enrollment, better economies of scale, more productive employees—and, ultimately, more employees who can afford to retire when the company wants to replace them, DCIIA claims. DCIIA’s members have a stake in this: they benefit from growth in plan participation and in assets under management.

The whitepaper does a good job of explaining how plan sponsors might benefit from auto-escalation and auto-enrollment. Indirectly, it also reveals why senior managers might resist those default programs. For instance:

Auto-enrollment and auto-escalation plans typically aren’t free. They cost money to implement and maintain. Ongoing financial education may also require significant expense.
If the employer matches part of each employee’s contribution, or all of the contribution up to a certain percentage, higher enrollment and higher savings rates will require bigger contributions to more employees.
Auto-enrollment without auto-escalation can actually depress contribution rates, because auto-enrolled employees tend to get stuck at the default contribution rate (typically 3%) while employees who enroll on their own tend to contribute more.

But it’s worth adopting default programs, DCIAA argues, because:

Auto features can improve Millennial employee engagement and satisfaction and potentially their workplace productivity and loyalty to their employer.
Higher plan participation and/or contribution rates among non-highly compensated employees reduce the probability of the employer having to make unexpected qualified non-elective contributions (QNEC).
Implementation of automatic features can increase DC plan participation and/or contribution rates among non-highly compensated employees, potentially reducing the need for a non-discrimination testing safe harbor.
Make employees want to extend themselves to the degree that corporations need today: to be more flexible, concerned, and willing to go out of their way to help out.
Productivity may improve when employees believe they will have retirement security.

The biggest impact of a more robust retirement plan, the report asserts, stems from the likelihood that it will enable older employees to look forward to retiring rather than cling to their jobs because they can’t afford to retire. For instance:

Allowing for the planned retirement of employees can create advancement and career diversification opportunities for others, which can help a company retain and attract a talented workforce.
Facilitating the timely retirement of employees not only allows for improved succession but also provides more flexibility to implement career development programs.
By making it easier for those approaching retirement to retire according to plan, a company creates the opportunity for talent to be continuously deployed optimally across the organization.
This is likely to result in a more efficient operation and superior execution, and may well also serve to increase satisfaction among high-value employees, which in turn may decrease the probability of employee turnover. Delayed retirements may also reduce the employer’s ability to hire new employees, reducing the flow of new ideas and talent into the organization.

Honorable Mention

Posted on July 14, 2016 by Editorial Staff -

Hugh O’Toole promoted at MassMutual

Massachusetts Mutual Life Insurance Co. (MassMutual) has named Hugh O’Toole as senior vice president, Head of Workplace Distribution. He leads all distribution and customer acquisition functions for MassMutual’s retirement plans and workplace insurance businesses, reporting to Eric Wietsma, head of Workplace Solutions.

O’Toole is a veteran of MassMutual, having served in a variety of leadership roles for the retirement plans business. Most recently, O’Toole headed the Viability Advisory Group, which MassMutual purchased in November 2015. Previously, O’Toole served as head of sales for retirement plans for seven years, leaving in July 2014 to form Viability.

Milliman enhances participant website

Milliman, Inc., the global employee benefits consulting and actuarial firm, has launched a series of website enhancements for its defined contribution clients and their plan participants.

New features on MillimanBenefits.com include an interactive “It’s Your Move” dashboard with tools that support successful retirement behaviors, such as saving enough to get the company match, diversifying investments, and utilizing automatic increase and automatic rebalance features. The site enhancements build on Milliman’s “PlanAhead for Retirement” projection tool, educational Financial Resources Center, and mobile application.

Men and women think about retirement differently: OneAmerica

Men think about retirement more often than women, talk about it more frequently with work colleagues and believe they are more educated about tools needed to prosper in their golden years, according to OneAmerica’s second poll in three years on the role of gender in retirement readiness.

Men self-scored themselves as having a significantly higher level of knowledge than women across 10 personal finance and retirement topics, including student loans and taxation on Social Security benefits.

Regarding pre-retirement debt, men and women showed the same propensity to avoid taking loans or hardship withdrawals at about 71%.

Regarding retirement plan features, men and women both placed the highest priority on an employer match on the employee’s contribution to the 401(k) or other retirement plan. It was ranked first in importance by both sexes, followed by having investment options.

Women were more likely to place higher importance on the employer match (64% vs. 61% of men. Men were more likely to place importance on investment options (29% of men vs. 21% of women). Sixty-nine percent of men but only 55% of women say they think about retirement at least monthly.

Other highlights:

Men are more likely to discuss retirement with work colleagues (29%) compared to women (22% percent) and to cite a story in the news or media (16% vs. 11% of women) about retirement.

Men monitor their retirement plans more frequently than women. More than half of men do so monthly (53%) compared to 36% of women. Both men and women say it’s important to know their current status relative to retirement savings goals, men are more likely to describe it as “very important” (54% vs. 48%).

OneAmerica conducted an online survey of 5,424 women and 5,331 men. More results of the OneAmerica survey will be released later this summer.

Off the Grid

Posted on July 13, 2016 by Kerry Pechter -

Incentives matter. Compensation shapes behavior and vice-versa. And, where retirement accounts are involved, the compensation system that banks and brokerages have used for decades to pay advisors could change dramatically because of the DOL fiduciary rule, which begins to kick in next year.

Indeed, some believe that the DOL rule could have the biggest impact on the economics of the brokerage business since May Day 1975, when the SEC banned fixed commissions and opened the gates to disruptors like Charles Schwab and The Vanguard Group.

“This is a once-in-a-business-generation change,” said Peter Bielan, a principal at Kehrer Bielan consulting in Chapel Hill. “The degree of difficulty just went up for the advisor job and the pay went down.”

Last spring, not long after the DOL issued its controversial rule—which in essence requires the financial industry to treat rollover-IRA accounts more like 401(k) accounts and less like after-tax retail accounts—Kehrer Bielan sponsored a webcast for its banking clients. The firm expects that:

The traditional compensation “grid” for new or low-producing advisors could be modified to include a salary-plus-bonus compensation option, especially for new or low-producing employee-advisors;
Banks and brokerages will begin to look for future advisors who are more consultative and less sales-driven than the current cohort;
Sales of commissioned insurance products to retirement clients will decline but not disappear. Up-front commissions will be smaller and trail commissions will become more common, to reduce the incentive to favor, and the appearance of favoring, higher-compensation products.
Top-producers who have flourished in the advisory side of the business—as opposed to selling lots of commissioned products—will be increasingly valuable, especially if the overall advisor population continues to shrink.
To reduce costs, firms may consider paying advisors less for servicing existing assets-under-management than for bringing in new assets.

The DOL rule, in effect, pressures advisory firms to emphasize service over sales and to charge less for their services. With compensation still based on the grid system, which appears to favor quantity of sales over quality of advice, it’s clear that something has to give. (A sample grid from a large brokerage firm is shown below.)

Raymond James compensation grid

Compensation disruption

The Kehrer Bielan webcast was aimed primarily at banks and their advisory businesses. A bank or brokerage firm earns fees on assets under management and commissions on product sales. Advisors receive 20% to 50% of the fee and commission revenue they produce, as determined by the grid. The more revenue, the greater the advisor’s percentage. Here are some of the takeaways from the webinar. (The quotes are mainly attributable to Bielan, below right):

The grid is in question

“Traditional grids will not meet the needs of all advisors going forward. If you think about the mix of business today, you have some advisory, some commission. A one-size-fits-all grid that just looks at production will be difficult to sustain. You’ll be paying some of your advisors what you paid them last year, but not the ones who do a high level of commission business. And think about the ramp-up time for new advisors. If they can’t get the revenue they did in the past, you can’t put them on 12-to-18 month ramp-up and expect them to cover their compensation and commission costs and be profitable.” Peter Bielan

Salary-plus-bonuses for new or lower-producing advisors

“We need new methods of compensation. Let’s start with a base salary and a bonus or profit-sharing. Lower-producing or new advisors would get paid this way until they achieve a certain production threshold. Then they might move to a different plan. This is an opportunity to get the modestly producing advisor off the grid. It also means that advisors would be paid more like other individuals in the institution.”

The DOL’s Best Interest Contract Exemption has limited usefulness

The BICE allows commissioned sales to retirement clients if the advisor pledges that the sales will be solely in the clients’ best interest. But advisors shouldn’t make a habit of using it, Bielan said:

“A business model based mainly on getting exemptions from prohibited transactions wouldn’t pass regulatory muster. Some firms will decide to operate with the BICE, but it’s very difficult to implement, it involves transactions that are prohibited to begin with, and it opens you to class action litigation. The DOL has no enforcement power so it will rely on class action litigation to solve problems. That’s very troubling. Some firms will abandon business that requires a BICE.

“The cost of that business—driven by implementation and defense costs—will go up. Profitability will go down. Revenue in that area won’t be as valuable. There will be little impact on purely advisory business. The biggest impact will be on packaged insurance products. That are will see the most change.”

A different personality may be needed

“As for bringing new advisors into the business, you may have to look at a different type of individual. When we examine what makes advisors succeed, we foresee a different profile, especially in terms of organizational and technical skills. Among the best sales people of today, that may not be their strong suit. It will be require listening better and communicating better with high-net-worth clients, who will be even more in demand than they are today. It may be a different kind of person, someone not as financially motivated.”

Top producers will be in higher demand

“The demand for higher-producing advisors will increase. You’ll be at higher risk for losing them and it will be harder to get those individuals in the future. They’re in an envious position, especially if their book is advisory-based production. Those that can operate in the new environment will be the most valuable.

Off the grid call out “At the same time, the net new number of advisors is very flat. We are stagnant in the last five years. I worry that, with the new headwinds, we’ll go backward in number of advisors. We don’t have enough advisors, and that’s one of the best revenue growth opportunities around.”

RIA firms will poach top producers

“RIA firms are saying that the DOL rule is great news for them. They believe there will be a two-year window while advisors from brokerage firms become accustomed to the new changes, and there will be disarray. It will be an ideal time to poach some of your best advisors, and an even better time to tell clients that they’ve done business this way all along.”

‘Robo’ capability will be essential

“That’s what the industry is being priced towards. Besides, letting advisors pick the clients’ investments—you can’t afford the risk of letting that happen,” Bielan said, noting that Labor Secretary Tom Perez implicitly blessed robo-advice by putting a Financial Engines executive on the dais with him at the press conference to announce the fiduciary rule last April.

“After the announcement, the DOL did a roundtable with four government officials and someone from Financial Engines. That’s four officials and someone offering a robo-solution. If Secretary Tom Perez chose that moment to interview the guy from Financial Engines, I have to believe the intention is to move people toward automated advice. It sounds like a hint. And with the promotion of robo-advice I think in time it will be difficult to justify 125 basis points on investment management only. You can’t earn the same revenue off the same assets.”

‘We have to embrace it’

“The message is that we charge too much. We have to address that,” Bielan said. “If there’s a product that can do the job at a lower cost, that’s what we have to provide. The financial metrics behind that are difficult: $17 billion [the DOL’s estimate of excessive annual fees on retail retirement accounts] will come from advisory firms and go to consumers. As a consumer, you can’t fault that. That’s why we have to embrace it.”

Great Hopes Ride on Great-West’s New Annuity

Posted on July 8, 2016 by Kerry Pechter -

Although Empower Retirement is a powerhouse in the retirement plan industry, its corporate sibling, Great-West Financial, has never issued a lot of individual annuities. Ranked 26th in VA sales ($71 million) and 31st in VA assets ($2.55 billion) in the first quarter of 2016 by Morningstar, the firm has no more than a toe in the market.

But Robert Reynolds (below left), the former Fidelity COO who became Great-West’s CEO in 2014, has given his minions the big hairy aggressive goal of becoming a top-five retirement income company within the next three to five years. Selling a lot more variable annuities is on the agenda.

To that end, Great-West has headhunted a new team of annuity sales managers from top issuers. Michael McCarthy (at right) arrived from AXA in April as senior vice president of national sales. He has hired annuity executives from AIG, MetLife and Transamerica. He also doubled the number of life/annuity wholesalers, to 32; 27 are assigned full-time to annuities.

The company is also launching new products. Last week, Great-West announced Smart Track II − 5 Year Variable Annuity, a B-share contract with a surrender period of only five years instead of the usual six to eight. The surrender penalty in the first two years is 7%, then 6%, 5% and 4% in the remaining three years.

The product is aimed at commission-earning investment advisors, especially in the bank channel (where Great-West is a top seller of life insurance) and at Wells Fargo, one of four remaining full-service brokerages. Great-West may also try to market the product through the Allstate and State Farm sales networks, McCarthy told RIJ this week.

Smart Track II is a two-sleeve variable annuity. As seen in similar products from AXA and Hartford in the past, the first sleeve is built for accumulation. Contract owners can invest in dozens of funds from well-known families, with annual expense ratios starting at 0.46%. The mortality & expense risk fee is 1.20%.

The second sleeve is earmarked for lifetime income. Contract owners can transfer money from the first sleeve to this sleeve (and back again, with constraints) to gradually build up an income base. Any of four guaranteed lifetime withdrawal benefit (GLWB) riders can be applied to the second-sleeve assets, at an annual cost of 0.65% to 1.30% of the second-sleeve account value. Second-sleeve assets must be invested in asset allocation funds (with equity exposure ranging from 35% to 65%) at an annual cost of 0.88% to 1.10% of the account value.

A chance for age-related gains

The catchiest aspect of this product is the potential, under all four GLWB riders, for contract owners to get higher payout rates as they reach new age thresholds. If the account value is high enough (see explanation below), there’s a step-up in withdrawal rates from 4% (for single life starting at age 59½) to 5% at 65, to 6% at age 70 and to 7% at age 80. (The withdrawal rates for joint contracts are based on the age of the younger spouse and are 50 basis points lower at each threshold than rates for single life policies.)

The riders are:

Secure Income Foundation (0.90% of benefit base). This rider provides potential increases in income as the contract owner crosses the age thresholds of age 65, age 70 and age 80. If a client invests $100,000 at age 65 and begins taking $5,000 a year in income, his or her income at age 70 would be the greater of 6% of the account value or 5% of the benefit base ($5,000).
Secure Income Plus (1.30%). This rider is similar to Foundation but provides a 5% simple interest annual “roll-up” to the benefit base for the first ten years of the contract. If a contract owner invested $100,000 at age 60, the benefit base would be at least $150,000 after ten years, assuming no transfers from the second sleeve back to the first sleeve.
Secure Income Max (1.20%). This rider raises the withdrawal rate by an additional 1% for any contributions older than five years. If a 60-year-old invested $100,000 and took no excess withdrawals for five years, he or she could withdraw at least $6,000 a year at age 65, $7,000 at age 70 and $8,000 at age 80. (Or $5,500, $6,500 and $7,500 for couples, respectively.)

Some explanation is called for here. The payout rate doesn’t always rise at the threshold ages of 65, 70 and 80. The increase is conditional on the size of the account value. If the current account value, multiplied by the new rate, is not greater than the current payout (the existing rate times the existing benefit base), the new rate doesn’t apply. The payout rate and benefit base stay where they are.

For example, consider a single contract owner who reaches age 70 and has a benefit base of $100,000. If the account value has declined (because of withdrawals, fees and/or poor market returns) to, in this particular example, less than $83,333, then that new 6% rate doesn’t kick in. That’s because 6% of $83,333 is $4,998.98, which is less than the current annual payout of $5,000. The benefit base stays at $100,000 and the payout rate remains 5%.

What triggers the rate increase? If the account value at age 70 was, say, $90,000 and the new payout is $5,400 (6% of $90,000, and higher than $5,000), then the client’s payout rate jumps to 6%. The client’s payout rate going forward will be 6% and the minimum payment will be $5,400. But, in that case, the benefit base would drop—this is unusual for a GLWB—back to $90,000. As a consolation to the policyholder, the rider fee would also fall, because it is a multiple of the benefit base.

In short, there’s a trade-off. Unless market appreciation (or new premia) overcome the natural decline in the account value (as a result of income payments and annual fees), the age-related hikes in payout rates may not apply. The same calculation is repeated each year, so the contract owner can get a second chance at a higher rate.

Smart Track II offers an additional income rider, called the T-Note Tracker (0.65%), where the withdrawal rates increase with a rising 10-year Treasury rate. But that product has gotten little traction because rates are still infinitesimal and don’t appear ready to rise significantly in the near future.

“Most variable annuities will allow the contract owner only one way to get a raise. That’s through a step-up in the benefit base, and the only way to get that is through market performance. But the odds of getting a pay raise during the income stage are almost nil if you get a down market and you’re still withdrawing five percent,” McCarthy told RIJ. “We offer several ways to get a pay raise.”

The Secure Income Max is expected to appeal to couples, McCarthy said. Industry-wide, couples often buy single-life annuity contracts because the payout rate is higher. Secure Income Max, which provides an additional one-percentage-point hike in the withdrawal rate for premia that’s left untouched for at least five years, gives couples who don’t need income right away the opportunity to buy joint contracts without suffering a “marriage penalty.”

To build an annuity sales team, McCarthy has recruited Lance Carlson, a former head of distribution at MetLife; Brett Ford, a former divisional sales manager at Transamerica; Barbara Dare, a former vice president of third-party distribution at MetLife; and Greg Alberti, a former head of strategic accounts at AIG. They report to McCarthy, who reports to Bob Shaw, president of individual markets for Great-West Financial, which is based in Greenwood Village, Colorado.

Great-West currently markets the low-cost, investment-only, no-surrender-fee Smart Track variable annuity through TD Ameritrade and Charles Schwab. Last month, that product was named one of the top 50 annuities of 2016 by Barron’s magazine.

Great-West recently filed a prospectus with the Securities & Exchange Commission for a no-commission version of Smart Track II that is tailored to the needs of fee-based independent financial advisors affiliated with broker-dealers who will be operating under the terms of the Department of Labor’s fiduciary rule starting next April.

Under the new rules, advisors who sell B-share contracts and accept commissions must sign (or rather, their broker-dealers must sign) a contract (the so-called Best Interest Contract or BIC) promising that the sale is not merely suitable for a client but also in the client’s “best interest.” Many advisors are expected to avoid the BIC by switching to fee-based compensation, which means they’ll need to sell no-commission versions of their favorite variable annuity contracts. The new version of Smart Track II would fill such a need.

Neither Great-West Life & Annuity Insurance Company nor any of its subsidiaries have reviewed or approved these materials or are responsible for the materials or for providing updated information with respect to the materials.

A Hydrologist’s View of Cash Flows in Retirement

Posted on July 7, 2016 by Kerry Pechter -

Calculations of “safe withdrawal rates” from retirement portfolios often feel like exercises in false precision. Their assumptions are, well, assumptions. Historical performance, the basis for testing withdrawal rates, has limited value. And clients don’t necessarily follow the financial diets that advisors cook up for them.

Yet an advisor arguably must take a position on withdrawal rates, if only to answer the retiree’s inevitable question: “How much can I afford to spend every year?” While the traditional answer—4% of savings, adjusted for inflation—still serves as a starting point, advisors and academics keep trying to improve on it.

Writing in this week’s issue of Advisor Perspectives, John Walton (below right), a hydrologist and chemical engineer at the University of Texas at El Paso, shares the history of his personal search for a withdrawal rate that can deliver what he and everybody else naturally wants: the most income with the least risk of running out of money.

Three broad classes

Walton compares three broad classes of withdrawal rates: constant rate methods (e.g., variations on the 4% rule), mortality methods (which use life expectancy as a guide to spending), and mortgage methods, which “increase withdrawal rates over time based on a maximum lifetime rather than expected lifetime.” He divides each class into sub-classes, and tests their effectiveness in good, bad and median markets. John Walton

The best withdrawal methods, he finds, are the constant-rate and mortgage methods. The mortality-based methods, for reasons described below, are in his opinion inferior. Both the constant rate and the mortgage rate can be improved by “tilting,” Walton says. By that he means tweaking the withdrawal rate up or down in response to portfolio returns. (Walton also discussed tilting in a May 17, 2016 Advisor Perspectives column.)

ISO the optimal withdrawal rate

Walton compares nine different withdrawal methods:

Four versions of the constant rate (4%) method, using four different degrees of tilt—zero tilt, which means spending 4% of current account balance each year; +1, which means spending 4% of the original principal every year; -1/3 tilt (slightly favoring higher income over capital preservation); +1/3 tilt (slightly favoring capital preservation over higher income).
Three mortality-based methods: (1/the number of years of remaining life expectancy plus seven years); the IRS Required Minimum Distribution withdrawal rates; or an average of expected and maximum longevity.
Two “mortgage methods;” one is based on tilting the withdrawal rate back each year toward the payout from a fixed-term annuity based on a maximum life expectancy. In the other, the rising withdrawal rate is “analogous to the fraction of a mortgage payment going to principal.”

Walton uses Monte Carlo simulations to approximate the likely performance of each withdrawal method. He uses a single female life expectancy as a compromise between single male and couple’s life expectancies. As the investment, he assumes an 80%/20% stock/bond portfolio.

And the winners are…

Walton dismissed three of the methods—constant dollar amount, the IRS/RMD percentage, and the 1/life expectancy-plus-seven-years method—as too risky for the average person. He also disqualified the three mortality-based methods on the grounds that they shifted spending toward the later ages, when most people actually tend to spend less, and because they suffer from “the subtle error of applying concepts that work only for groups to the isolated individual.”

The most successful methods in Walton’s study, as far as achieving the best balance between income and final capital under moderate market conditions, were the two mortgage-based methods and the two constant rate methods with a modest (plus or minus 1/3) tilt. “They eliminate sequence-of-returns risk and minimize longevity risk,” Walton writes. Sequence risk, of course, refers to the losses associated with having to sell depressed assets for income during a downturn; longevity risk refers to the risk of running uncomfortably low on savings during one’s lifetime.

“Tilting” without windmills

The concept and calculation of tilt seems to be the Walton’s main contribution to withdrawal rate science. As noted above, the tilt factor can range from minus one (-1), which means spending exactly 4% of the original savings each year, to zero (which means withdrawing exactly 4% of the account balance each year) to infinity, which means using the portfolio return as the withdrawal rate.

The appropriate tilt is calculated “by taking a ratio of current capital divided by the capital that would keep the client on track and then raising the ratio by an exponent. A positive exponent preserves capital at the expense of income stability, and a negative exponent preserves income at the expense of capital,” Walton writes.

The tilt, in short, defines the degree of income volatility that the retiree is willing to accept. A tilt factor can be applied to any of the three withdrawal methods—constant rate, mortality, and mortgage. All of Walton’s calculations are based on real dollars, so inflation is considered implicitly.

Add a SPIA?

Choosing the best withdrawal rate method is never easy, Walton concedes, because different clients have different risk tolerances, different personal goals and legacy ambitions, different tolerances for income fluctuations, and different tendencies toward longer or shorter lifespans.

Walton notes in the article that annuities are preferable to bonds in a retirement portfolio, and promises to explore the benefits of adding an annuity to the income strategy in a future article. That article, he writes, “will illustrate how different amounts of tilt and single premium immediate annuity (SPIA) can be used to place clients anywhere desired along the capital preservation versus income stability continuum.”

Now accessible on all platforms: DOL fiduciary training from LIMRA

Posted on July 7, 2016 by Editorial Staff -

The LIMRA LOMA Secure Retirement Institute has launched a new short online course called “DOL Fiduciary Basics for Employees” that explains the rule’s meaning to industry organizations and their employees.

Almost three-quarters of retirement plan providers anticipate that their call center staff will need training about the implications of this rule, new research by the Institute shows.

“Call center employees aren’t the only ones who will need to understand the DOL fiduciary rule,” said Kathy Milligan, FLMI, ACS, senior vice president of LOMA’s Education and Training Division, in a release. “This rule touches almost every part of the business, so it’s vitally important for financial services organizations to prepare employees as they transition to this new regulatory environment.”

DOL Fiduciary Basics for Employees is presented in 13 multimedia vignettes, each several minutes long. The vignettes are accessible through mobile devices, tablets, or personal computers and can be integrated with company-specific training and education.

Lapse rates of ordinary life products near two-decade low: A.M. Best

Posted on July 7, 2016 by Editorial Staff -

Running between 5.3% and 5.9% in the years 2012 to 2015, lapse rates on ordinary life insurance products have fallen to their lowest level in nearly two decades, according to a new A.M. Best report.

The Best Special Report, titled, “Anemic Yields Put Spotlight on Retention,” asserts that ordinary life persistency has been relatively steady, fluctuating between 81.1% and 86.5% in 1997-2015. The trend appears to be somewhat correlated to the U.S. unemployment rate. The last two years have seen the highest persistency rates in nearly 20 years, around 86%.

Lapse and persistency rates remain important issues for U.S. life/annuity (L/A) insurers, the report said. They can suppress revenue and reduce profitability. New policy sales can be a relatively costly and time-consuming process; if more policies remain in force, as measured by the persistency rate, acquisition costs decline and profitability rises.

Reducing lapses (policy terminations by nonpayment of premium, insufficient cash values, or full surrenders) isn’t necessarily easy. Lapse rates result from a complex combination of enterprise-wide risk management (ERM) strategies and macroeconomic factors.

Total ordinary life DPW (direct premiums written) has generally risen since 2009, with a slight decline in 2013. At $140.0 billion in 2015, DPW reached its highest level since 2008. However, several factors have shifted the composition of total life premiums written.

Renewal premiums, for example, which accounted for 65.3% of ordinary life DPW in 2005, accounted for 72.6% in 2015. During this shift, single premium DPW declined to $18 billion in 2009 from $40.3 billion in 2007. Allocations of single premium ordinary life policies as a percentage of total life premiums have declined as well, to 14% of DPW in 2015 from 27.7% in 2007.

Generally, A.M. Best said it “views more favorably those companies that have an increased percentage of higher creditworthy and less risky products, which can positively impact business profile. Unless it is a lapse-supported product, persistency generally benefits a company’s profitability; however, it is noted that even lapse-supported products need to persist for a good number of years to become profitable.

“Higher profit margins can be attained on renewal business, since acquisition expenses are recorded at the time of sale. Nevertheless, operating performance is also impacted by low interest rates, which may cause spread compression on interest-sensitive life products, such as universal life. Balance sheet strength is also impacted by strong persistency, as profitability from renewal business contributes to capital and surplus.”

Pet project: MassMutual leverages America’s love of animals

Fidelity to offer another New York Life annuity

Raymond James to partner with retirement plan advisors group

Income from the riders on our FIAs tends to rise each year: Allianz Life

Improvements at Millennium Trust announced

Hugh O’Toole promoted at MassMutual

Milliman enhances participant website

Men and women think about retirement differently: OneAmerica

Compensation disruption

A chance for age-related gains

Data Connection

Lists*