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A Maserati for the Mo-ped market

Posted on June 23, 2016 by Editorial Staff -

Goldman Sachs, a company that’s been vilified as the Vampire Squid, that is said to call its customers Muppets (and not in a good way), and that seems to have its own revolving door with the U.S. Treasury, now has new businesses that “cater to the little saver,” the New York Times reported.

“This is somewhat like Maserati making a push into the motorized bicycle market,” the Times said.

An online bank, GS Bank, was started in April. It promises “peace-of-mind savings” and “no transaction fees” for ordinary Americans. “Over the last year, Goldman [has] been preparing to introduce 401(k) accounts, loans for people saddled with credit card debt and new investment funds that can be purchased by anyone with an E*Trade account. It will all be online only,” the Times report said.

Stephen Scherr, head of strategy at Goldman Sachs and CEO of its federally-insured bank, told the Times that the bank opened tens of thousands of new accounts in its first few weeks, adding to the 150,000 accounts (worth $16 billion) that Goldman acquired when it bought GE Capital earlier this year.

Goldman Sachs reportedly needs new sources of revenue. “Regulations rolled out since the 2008 financial crisis have put a crimp in deal-making, Wall Street’s traditional expertise. The high-powered bond trading desks that generated most of Goldman’s pre-crisis profits now make only a fraction of what they did before,” the Times said. Goldman expects its lack of traditional branches and tellers to be an advantage as it leapfrogs into online retail banking.

Later this year, Goldman will begin offering small personal loans of $15,000 to $25,000. Harit Talwar, an executive from the credit card company Discover, is overseeing that effort. He runs a team of 50 who are at work on the so-called Mosaic project on the 26th floor of Goldman’s Manhattan headquarters. The team is mostly coders, working on ways to gauge the credit quality of potential borrowers without human intervention.

Last fall, Goldman introduced its first low-cost exchange-traded funds. A few months ago, Goldman bought Honest Dollar, a start-up that offers cheap retirement accounts. It’s aimed at the millions of freelancers and other part-time workers who don’t belong to a workplace savings plan.

MassMutual settles suit over its own retirement plan for $30.9 million

Posted on June 23, 2016 by Editorial Staff -

MassMutual has agreed to pay $30.9 million to settle a class action lawsuit filed against it in 2013 by plaintiff’s attorney Jerry Schlichter on behalf of 14,000 participants in the insurer’s own employee retirement plan, who alleged that the plan was stocked with MassMutual’s own proprietary investments rather than less expensive options.

The $30.9 million will pay damages to the participants along with plaintiff’s attorney fees, administrative expenses, and compensation to the workers who brought the class action. The seven named plaintiffs in the case were designated to receive $15,000 each.

A MassMutual spokesman said, “While MassMutual denies the allegations within the complaint and admits no fault or liability, we are pleased to put this matter behind us, avoiding the expense, distraction and uncertainty associated with protracted litigation… Importantly, the amount of the settlement is not material to MassMutual’s financial strength, nor its 2016 financial results.”

The lawsuit alleged that MassMutual and its top executives, including the CFO and three MassMutual fund managers, violated their fiduciary duties to plan participants under ERISA by using MassMutual proprietary funds for 36 of 38 plan options. It was alleged that the executives acted in the company’s interest rather than the interests of the plan participants.

According to a report in NAPA Net, MassMutual agreed to (among other things):

Use an independent consultant who has specific expertise with stable value investments, and to, within one year of the effective date of the settlement will make recommendations regarding the investment structure of the plan’s fixed interest account, “including, but not limited to, considering a general account investment versus a separate account or synthetic model.”
Ensure that its plan participants were charged no more than $35 per participant for standard recordkeeping services (e.g., excluding charges for unique individual transactions such as loan processing) for a period of four years and beginning no later than six months after the settlement’s effective date.
Make sure that the fees paid to the plans’ recordkeeper will not be set or determined on a percentage-of-plan-assets basis.
Identify “those fiduciaries and their job titles shall be identified in an annual participant statement, such as a Summary Plan Description,” where plan committee members reported to MassMutual’s CEO.
See that its plan fiduciaries “attend a fiduciary responsibility presentation provided by experienced ERISA counsel and an independent investment consultant.”
Review and evaluate all investment options then offered in the plans, with the assistance of the independent consultant, and to consider “without limitation, (1) the lowest-cost share class available for any particular mutual fund considered for inclusion in the Plans; (2) collective investment trusts and single client separate account investments; and (3) passively managed funds for each category or fund offering that will be made available under the Plans.”
Consider at least three finalists for any style or class of investment, and if collective investment trusts or separately managed accounts are utilized, to secure most favored-nations treatment for the benefit of the plans.

Vanguard funds continue to dominate asset flows: Morningstar

Posted on June 23, 2016 by Editorial Staff -

Investors continued to allocate money to fixed income in May, with taxable bond funds and municipal bond funds attracting $15.4 billion and $8.2 billion, respectively, according to Morningstar Inc.’s monthly asset flow report for U.S. mutual funds and exchange-traded funds (ETF).

Concerns over “Brexit,” Britain’s potential exit from the European Union, sparked outflows from active and passive international equity funds, Morningstar’s report said. Four of BlackRock/iShares ETFs, three international ETFs and a high-yield corporate bond ETF, lost more than $1 billion each in May.

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. More highlights from Morningstar’s report about U.S. asset flows in May:

Fund assets continue to flow disproportionately to Vanguard funds, both active and passive. Active Vanguard funds saw net inflow of $2.84 billion in May and $18.47 billion in the year ending May 30. The next nine fund families had combined net negative flows of about $7.4 billion in May and net negative flows of about $131 billion for the year ending May 30.

Among passive funds, the results were equally lopsided. Including ETFs, Vanguard funds took in a net $18.94 billion in May and $205.3 billion in the year ending May 30. The closest competitor in May was Dimensional Fund Advisors with $2.12 billion and the closest competitor for the year ending May 30 was BlackRock/iShares with $89.9 billion.

Active U.S. equity funds suffered $18.7 billion in outflows and passive U.S. equity funds enjoyed inflows of $8.1 billion.

Passive commodities funds, especially precious metals funds, received inflows of $2.5 billion in May. Overall, commodities funds spiked in May after a downward trend since February.

BlackRock/iShares suffered outflows of $4.8 billion in May; both active and passive flows were in negative territory. American Funds had another strong month. Year to date, American and T. Rowe Price are the only active providers among the 10 largest fund firms with net inflows.

With $1.6 billion, PIMCO Income, which has a Morningstar Analyst Rating of Silver, had the highest inflows among active funds in May, outpacing Gold-rated Metropolitan West Total Return Bond. Templeton Global Bond, which has a Gold Analyst Rating, led active-fund outflows during the month with $1.2 billion.

European pension executives criticize quantitative easing

Posted on June 23, 2016 by Editorial Staff -

A board member of the Austrian insurer Uniqa said publicly that the European Central Bank’s policy of buying corporate debt is “destroying” the debt market and turning Europe’s funded pension systems into “collateral damage,” IPE.com reported this week.

Speaking at an institutional investor summit in Vienna, Peter Eichler said the “wipe-out of funded systems [seemed] to be an accepted risk” of the central bank’s amended quantitative-easing program. Uniqa owns a stake in the Austrian Pensionskasse Valida.

Olaf Keese, managing director at the S-Pensionskasse, the German pension fund for savings banks (Sparkassen), chimed in that the ECB was “distorting the market” for European corporate debt. The S-Pensionskasse has in recent years set up a Masterfonds to invest in international government bonds through a credit overlay. The Masterfonds accounts for 8% of the Pensionskassen’s €4bn in assets.

Keese said his fund could invest in longer-duration bonds of 15 years of maturity or more, thereby increasing duration, but the approach would increase risk without improving risk-adjusted return.

The overlay strategy was chosen “especially due to a higher degree of liquidity and granularity. At the moment, this approach is especially favorable since corporate [bonds] are getting less liquid and more expensive.”

A managing director at Allianz Austria, Martin Bruckner, criticized “inconsistencies” in institutional plans to increase investment in infrastructure. “Politicians say we should invest billions into infrastructure, but the supervisors seem to have different ideas. They should find a consensus on this important topic,” he said.

Christian Böhm, CEO at Austria’s €4.2bn APK Pensionskasse, noted problems stemming from the way European regulators treat certain asset classes. “All the stress tests are based on [value-at-risk] models and are always backward-looking, which means, for example, government bonds are extremely overvalued,” he said.

But Böhm also stressed the responsibility borne by pension funds in the current environment. “Pensions are not risk-free,” he said. “We have to manage the assets so that we have enough risks on the books to generate sufficient returns. If we do not achieve this over a rolling multiple-year period, we are obsolete as institutions for retirement provision.”

Robos Take Manhattan

Posted on June 22, 2016 by Kerry Pechter -

The brains of any financial advisors who attended the second annual IN|VEST conference on financial technology in midtown Manhattan last week probably seethed with one of these emotions: a) fear of redundancy, b) excitement at the new drudgery-reducing software, or c) relief that they will retire before robos obliterate their happy world.

Not that the conference/tradeshow, arranged by SourceMedia and sponsored by an army of tech firms (some with endearingly ominous names like Advizr), was aimed at individual advisors. It seemed pointed rather at broker-dealers and other firms that employ advisors, and who would like to raise productivity by serving more investors and managing more money with fewer human advisors.

Speakers at the conference bore the following un-shocking news: The world of financial advice (thanks to technology, regulation and the rise of web-weaned Millennials) is rapidly converging on a hybrid model. In the future, “advice” (whatever that means) will be neither “fully-delegated” or entirely “self-directed.”

Instead, a hybrid of human and digital (i.e., self-service) help will emerge. (The mantra, “high-tech, high-touch,” has been retrieved from the 1980s attic and put back in service.) According to consulting firm A.T. Kearney, 90% of 35-to-54-year-olds would gladly go to this “digital plus” model, especially if it saves them 25 to 50 basis points a year.

A little advice with that navigation

What does this mean for individual advisors? For high-end independent advisors, it may mean converting their websites into “client-facing portals” and leveraging new research tools that mine the growing mountain of client data for sophisticated marketing opportunities. It will require new investment, but it should raise productivity.

But the job descriptions of employee-advisors—those licensed folks who traditionally hold initial client meetings, gather information, meet again to present financial plans and perhaps a third time to obtain a wet signature—are likely to change. Millennials would rather deal with a licensed phone rep who will “help them navigate the site and give them some advice along the way,” as A.T. Kearney’s Bob Hedges put it.

That sounded a lot like the model that Fidelity, Vanguard and Charles Schwab have been perfecting since Y2K. For years, Vanguard investors have been able to noodle with their nest eggs online and then dial an 800-number if they get confused. Depending on the complexity or specificity of the clients’ needs, they get suitably specialized and/or credentialed reps on the phone or on Skype. Indeed, it often occurs (to me) that the majority of the retail financial world is just now catching up to what the direct providers have been doing pretty well for almost 20 years.

‘I don’t find that creepy’

Although presenters Robert Stanich and others from IBM at the conference firmly denied that their firm’s famous Watson artificial intelligence technology will ever produce a true robot-advisor (perhaps as savvy as Scarlett Johansson’s sultry portrayal of Apple’s Siri in the 2013 sci-fi movie Her), IBM’s luncheon presentation suggested that Watson is fast approaching the ability to do much of an advisor’s thinking for him or her.

Already, Watson can create 52-point personality evaluations of an advisor’s clients and detect when a client is unhappy and likely to jump to a competitor. “We can predict who will leave an advisor within 30 days with 94% accuracy,” said Stanich, IBM’s Global Wealth Management Offering Manager. He holds an MBA in finance from NYU’s Stern School.

Watson can quickly sift through data from the firm’s own client-relationship management (CRM) systems, as well as from comments on social media and credit transactions in ways that enable advisory firms to segment clients in new ways, design highly-specific micro-marketing campaigns and detect the occurrence of life events that merit an out-call by the advisor.

Stanich himself has been the subject of such tools. He told a story about tweeting to friends that he was about to surprise his son with a trip to Universal Studios in Orlando. He soon received an email from Universal Studios asking to use his tweet in its publicity. “I don’t find that creepy,” he told the IN|VEST audience.

There are few limitations to Watson can do, apparently. Its personality-analysis capability can help broker-dealers match the right advisor with the right client. It can tell companies which managers to keep and which to let go after an acquisition. It can scan essays by medical school applicants to identify those likeliest to make the school proud after graduation. It can pore through tens of thousands of articles in law journals to find the perfect precedent. “You’ll see vaporization of some roles” in the pursuit of higher productivity, Stanich conceded.

In 2018, Millennials pass Boomers in spending

During the conference, the word “advice” was probably uttered more than a million times. But no one bothered to define “advice.” As an example of valuable advice, several people referred to the reassurances that advisors classically give to panicky clients during market turndowns, thus preventing clients from selling depressed assets. But is that a core competency? And is it billable?

In the robo-world, advice seems to be synonymous with asset allocation recommendations and services such as automatic rebalancing and tax-loss harvesting. But those are services that, when performed by algorithms, don’t necessarily rise to the definition of “advice.” Before April 2016, “advice” often meant recommendations to buy a product. Even though a reasonable person could (and perhaps should) argue that products are in fact crystallized advice, the Department of Labor’s fiduciary rule is aimed at separating products from advice.

“Advice” may need to be evolve into something more concrete before most people will pay for it in the absence of a product sale. Good advice—e.g., save more, don’t use revolving credit, pay off your house before you retire, invest in low-cost index funds, follow your dreams, keep jumper cables in the trunk of your car—tends to be abundant and cheap. If generic advice becomes free, and electronic services (or self-services) keep getting cheaper, how does fintech raise profitability? From layoffs?

One final note: There was little sign at the IN|VEST conference that the robo-advisors have cracked the retirement income planning code. Other than Manish Malhotra of Income Discovery, no one seemed mobilized for decumulation. A possible reason: the attention of financial technologists has shifted to Millennials, whose retirements are a distant abstraction. Millennials are the new Boomers. As one presenter noted, sometime in 2018 Millennials will surpass Baby Boomers in generational spending power, with $3.39 trillion a year. Sic transit gloria mundi.

A Quiet Winter for Variable Annuities: Morningstar

Posted on June 22, 2016 by Kevin Loffredi -

Honorable Mention

Posted on June 22, 2016 by Editorial Staff -

Where has all the trust gone? EY wants to know

Less than half of full-time workers ages 19-68, in eight countries, place a “great deal of trust” in their employer, boss, or colleagues, according to Ernst & Young’s new Global Generations 3.0 research survey. Gen X was the generation least likely to place a “great deal of trust” in their current employers.

Respondents with a low level of trust in their company said it would majorly influence them to look for another job (42%), work only the minimum number of hours required (30%) and be less engaged/productive (28%).

Full-time workers in India, Mexico and Brazil are likelier to place “a great deal of trust” in their current employer than those in Japan, the UK and the US.

About a third of full-time workers don’t expect a raise or bonus this year, especially those in Germany, Japan, the UK and the US. In most countries more women than men do not expect a raise/bonus in 2016.

Among respondents ages 19-68 with “very little” or “no trust” in their current employer, the top four contributors to mistrust were tied to compensation. Globally, “delivers on promises” was the factor most frequently cited as “very important” in determining trust in an employer.

In a separate EY survey, members of Generation Z, ages 16-18, said that employers must provide “equal opportunity for pay and promotion” and “opportunities to learn and advance in my career” to win their trust

Over 9,800 full-time workers, ages 19 to 68, were surveyed at companies of varying sizes in eight countries. The EY study included a sidebar survey of 3,207 teens, ages 16 to 18. Harris Poll conducted both surveys for EY.

Nationwide hires ERISA lawyers to teach advisors about fiduciary rule

To help advisors navigate the new Department of Labor (DOL) Fiduciary Rule, Nationwide is teaming up with two leading experts to launch a DOL Education Series. The series is designed as a resource for firms and advisors wrestling with the complexities of the new fiduciary rule.
Nationwide’s Education Series will offer advisors access to experts from both Nationwide and the industry through local market events and webcasts. For the industry expertise, Nationwide has partnered with Fred Reish and Brad Campbell from Drinker Biddle & Reath.

Fred Reish is a partner at Drinker Biddle & Reath and a leading expert on the fiduciary rule. He routinely serves as a consultant and expert witness on the Employee Retirement Security Act of 1974 (ERISA) litigation and Financial Industry Regulatory Authority (FINRA) arbitration.

Brad Campbell works as counsel at Drinker Biddle & Reath and concentrates his practice in employee benefits advice. He specializes in ERISA Title I issues, including fiduciary conduct and prohibited transactions. He is the former Assistant Secretary of Labor for Employee Benefits and head of the Employee Benefits Security Administration.

Down to just $2.8 trillion, Social Security still needs help

The Social Security Board of Trustees this week released its annual report on the long-term financial status of the Social Security Trust Funds.

The combined asset reserves of the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds are projected to become depleted in 2034, the same as projected last year, with 79% of benefits payable at that time.

The Disability Insurance Trust Fund will become depleted in 2023, extended from last year’s estimate of 2016, with 89% of benefits still payable.

In the 2016 Annual Report to Congress, the Trustees announced:

The asset reserves of the combined OASDI Trust Funds increased by $23 billion in 2015 to a total of $2.81 trillion. The combined trust fund reserves are still growing and will continue to do so through 2019. Beginning in 2020, the total cost of the program is projected to exceed income.

Other highlights of the Trustees Report include:

Total income, including interest, to the combined OASDI Trust Funds amounted to $920 billion in 2015. ($795 billion in net contributions, $32 billion from taxation of benefits, and $93 billion in interest)
Total expenditures from the combined OASDI Trust Funds amounted to $897 billion in 2015.
Social Security paid benefits of $886 billion in calendar year 2015. There were about 60 million beneficiaries at the end of the calendar year.
Non-interest income fell below program costs in 2010 for the first time since 1983. Program costs are projected to exceed non-interest income throughout the remainder of the 75-year period.
The projected actuarial deficit over the 75-year long-range period is 2.66% of taxable payroll – 0.02 percentage point smaller than in last year’s report.
During 2015, an estimated 169 million people had earnings covered by Social Security and paid payroll taxes.
The cost of $6.2 billion to administer the Social Security program in 2015 was a very low 0.7% of total expenditures.
The combined Trust Fund asset reserves earned interest at an effective annual rate of 3.4 percent in 2015.

The Board of Trustees usually comprises six members. Four serve by virtue of their positions with the federal government: Jacob J. Lew, Secretary of the Treasury and Managing Trustee; Carolyn W. Colvin, Acting Commissioner of Social Security; Sylvia M. Burwell, Secretary of Health and Human Services; and Thomas E. Perez, Secretary of Labor. The two public trustee positions are currently vacant.

View the 2016 Trustees Report at www.socialsecurity.gov/OACT/TR/2016/.

Capital One offers hybrid human-robo ETF-based managed accounts online

Capital One Investing, the full-service brokerage affiliate of the credit card firm represented in ads by Jennifer Garner, Samuel L. Jackson and hordes of Vikings and Visigoths, has announced Capital One Investing Advisor Connect. The new service offered access to “unbiased advice” and a new set of “managed portfolios.”

Capital One already offers advised and self-directed digital accounts. Advisor Connect, is intended to provide a “conflict-free and transparent” experience. None of the funds are proprietary and the advisors are “not compensated based on the products they sell,” according to the Capital One release. Investors can speak to an Advisor Connect financial advisor for free at 1-844-804-9842.

For an advisory fee of 90 basis points per year and an initial minimum investment of $25,000, Advisor Connect clients can choose among several managed portfolios made up of third-party exchange-traded funds. The portfolios, which vary by time horizon and risk tolerance, are automatically rebalanced.

“Auto-portability” gains bipartisan endorsement

Retirement Clearinghouse, LLC, the Charlotte-based firm whose “auto-portability” technology enables 401(k) accounts to follow their owners from plan to plan automatically, said it welcomed the Bipartisan Policy Center’s endorsement of processes that seamlessly transfer retirement savings between defined contribution plans when participants change jobs.

The endorsement was made in the report, “Securing Our Financial Future,” issued by the Center’s Commission on Retirement Security and Personal Savings earlier this month. The report noted that these “roll-in” solutions could reduce so-called leakage from retirement savings plans, which often occurs when participants with small-balance accounts change jobs.

Retirement Clearinghouse introduced version 1.0 of its Auto Portability Simulation (APS) last month to compare different scenarios over time for the approximately five million Americans who change jobs each year and have retirement savings accounts with less than $5,000.

The APS demonstrates that, if auto-portability were widely adopted over a 10-year period and remained in force for a generation, cash-outs among accountholders with balances below $5,000 would decrease by two-thirds (to less than $2.5 billion per year from $7 billion per year today) and more than $115 billion in savings would be added to the retirement system.

Poor health can influence Social Security decisions: Nationwide

About one in four recent retirees (23%) would change when they started drawing Social Security to a later age, according to the third annual Nationwide Retirement Institute survey, conducted for Nationwide by Harris Poll among 909 U.S. adults ages 50 and older in retirement or planning to retire within 10 years.

Of those recent retirees who wouldn’t postpone their claiming date, 39% said a life event forced them to claim when they did. More than a third of current retirees (37%) said health problems keep them from living the retirement they expected, and 80% of recent retirees say those health problems came earlier than expected.

Health care expenses specifically keep one in four current retirees from living the retirement they expected, Nationwide found. “Americans claiming at 62 will spend about 61% of their monthly Social Security benefits on health care costs,” said Dave Giertz, Nationwide’s president of sales and distribution. The Nationwide Social Security 360 Analyzer evaluates Social Security filing strategies for any individual or family’s circumstances and retirement income needs.

Almost one-fourth (23%)of future retirees expecting to receive Social Security either guess or don’t know how much their benefit will be. Nearly three in 10 current retirees (29%) say their Social Security benefit is less than they expected.

In the new Nationwide survey, future retirees say they expect $1,610 per month in benefits. Recent retirees say their actual monthly benefit is $1,378. Those who have been retired longer reported receiving $1,185 per month, on average.

Most future retirees (86%) can’t identify the factors that determine their Social Security benefit amount. Many retirees don’t know how to maximize their Social Security and can’t accurately determine their benefit amount.
Only 11% of current retirees used an online calculator to estimate their benefit. But those approaching retirement now use the tools more often. Over four in 10 (42%) future retirees used a Social Security calculator to estimate their benefit.

Those nearing retirement are more likely to have the Social Security discussion. While 32% work with a financial advisor, only 52% of those say their advisor provided advice on Social Security. Most future retirees (76%) who work with or plan to work with a financial advisor say they are likely to switch to one that could show them how to maximize their Social Security benefits.

Retirees who work with an advisor are much less likely than those who don’t to say health problems keep them from living the retirement they expected (25% vs. 41%) and also are much less likely to say health care costs keep them from living the retirement they expected (11% vs. 29%). Only 36% of the future retirees surveyed have pensions, compared to 54% of recent retirees, and 60% of the oldest retirees, Nationwide has found.

The Cinderella Annuity

Posted on June 16, 2016 by Kerry Pechter -

Variable income annuities. I first encountered them while writing annuity product literature for Vanguard clients in the late 1990s. People weren’t as focused on retirement income back then, and Vanguard didn’t sell much of its white-label version of those contracts.

The more I learned about the VIA (and as I struggled to describe its “Assumed Interest Rate” or AIR mechanism to lay readers), the better it looked. Here was a income annuity that offered equity exposure, mortality credits, and period certain options for those afraid of the proverbial “bus” that stalks life-only annuitants.

My respect for this design increased at an annuity conference in 2008, where Peng Chen (then of Morningstar) demonstrated that the VIA blew all other income vehicles away in terms of risk/return efficiency. The presentation was meant to showcase the deferred variable annuity with a guaranteed lifetime withdrawal benefit (VA/GLWB), but the VIA somehow snuck into the slides.

Last month, the TIAA Institute, the thought-leadership arm of the $854 billion retirement plan for higher-ed professionals, produced new evidence of the VIA advantage. TIAA’s David P. Richardson (below), Ph.D., and actuary Benjamin Goodman published a white paper showing that a VIA combined with a mutual fund portfolio outperforms a 100% allocation to a VA/GLWB with a 5% lifetime payout in terms of safety, adequacy, inflation protection and estate value when both are subjected to back-testing against historical market returns.

The paper is part of the TIAA Institute’s joint research partnership with the Pension Research Council at the University of Pennsylvania’s Wharton School of Business. According to Richardson, the project will focus on behavioral finance tools that might melt or at least soften the public’s resistance to irrevocable income products and help solve the “annuity puzzle.”

How a VIA works

If you’re unfamiliar with VIAs (aka IVAs or SPIVAs), here’s a 10-second primer. When designing the product, actuaries calculate a first-year payment based on the contract owner’s life expectancy, the premium size, and an “assumed interest rate” (AIR) that proxies for the future rate of return of the underlying investments. In practice, the AIR ranges from 3.5% to 5%.

The AIR also acts as an anchor for determining future variable payouts. Suppose for example that a life-only VIA with a $100,000 premium and a 4% AIR generates a first-year payment of $6,550 for a 65-year-old man. In subsequent years, if the underlying portfolio’s annual returns are exactly 4%, the following year’s payout will be $6,550. When the return is 8%, however, the subsequent payout rate will be 4% higher, or $6,812. When the return is 0%, the payout rate is 4% lower, or $6,288.

What happens if you chose a higher or lower AIR at purchase? A client who chose a 5% AIR, for instance, would receive a higher first-year payout than one who chose a 4% AIR, but he or she would be less likely to see annual increases because of the higher trigger rate. Conversely, a client who chose a more conservative 3.5% AIR would see less income in the first year, but he or she would be more likely to see an annual increase in the future.

Two simulations

The TIAA Institute paper contains a lot of detail and includes comparisons between the VA/GLWB and both the VIA/mutual fund combination and a 5% systematic withdrawal from a balanced portfolio. For brevity, we’ll focus on the simulation that compares the benefits of a VA/GLWB investment and a portfolio with equal parts VIA and mutual funds. Each portfolio has a starting value of $100,000.

The VA/GLWB in this case offers a 5% annual lifetime payout from a portfolio of half stocks and half bonds. It costs 140 basis points a year (100 for the income rider and 40 for the investments). The first year payment is $5,000. The other portfolio is comprised of a $50,000 VIA (life with 20 years certain) and a $50,000 half-stock, half-bond mutual fund portfolio with all-in fees of 40 basis points. The starting VIA payment, based on a 4% AIR, is $3,132. The VIA owner draws an additional $1,868 from the $50,000 mutual fund portfolio, which is intended to provide liquidity and legacy potential.

The performances of the two portfolios are compared over 709 different 30-year retirement periods, beginning in 1933. One big takeaway: the VIA-plus-funds solution is more likely to provide rising income that matches inflation over the retirement period. Why? Because the 1% insurance drag on the VA/GLWB pushes the hurdle rate for income increases to 6.26%—much higher than the VIA’s 4% AIR hurdle rate or the 40-bps drag on the accompanying investments—and makes it hard for the GLWB to grow the initial $5,000 payout, all else being equal.

“For all simulated runs over the last eight decades (1933 to 2015), if the 65-year old retiree lived at least 10 years, then the partial VIA strategy produced the same or more annual income, provided better inflation protection, provided greater liquidity, and provided a larger estate relative to the GLWB strategy,” the authors wrote. “Overall, the historical results favor the partial VIA strategy. While the GLWB strategy provided the best income floor protection, it was at a substantial cost to other objectives.”

Not a slam dunk yet

This research paper is new, but the VIA concept at TIAA (“TIAA-CREF” until rebranding a few months ago) is about 65 years old. TIAA introduced the first group variable annuity (the College Retirement Equities Fund, or CREF) in the early 1950s. Until the late 1980s, Ben Goodman told RIJ, participants had to distribute the employer-paid portions of their TIAA account as fixed annuities and their CREF accounts as VIAs. Today, between 30% and 40% of the non-profit firm’s participants annuitize part of their savings. That’s historically low for TIAA, but much higher than most other defined contribution plans.

The paper tends to be a bit academic, but offers red meat for annuity junkies. Perhaps because it emerged from a life insurer’s thought-leadership shop, it focuses not on returns, which advisors typically want to hear about, but on insurance value, which is dear to actuaries. Note, for instance, that the study holds income from the two strategies constant, and looks at the relative legacy values they produce.

“We wanted to make sure that each strategy had to generate the same amount of income, because then it becomes more of a risk management exercise or, rather, a cost of risk management exercise. In the literature, there’s been a focus on income generation without considering risk, and this paper examines that,” Richardson told RIJ.

TIAA and the Pension Research Council want to use their research to change hearts and minds (and wallets) in favor of partial annuitization. “From a purely financial standpoint, these products look like a slam dunk,” he said. “But when it comes to annuities, people also have psychological barriers. They view the pricing as opaque, for instance.

“Our hope is that this paper will help people overcome the psychological bias. We find that a lot of people are open to the idea of partial annuitization as an alternative to the simple 4% withdrawal rule. But the question is not simply, ‘Do I annuitize?’ It’s ‘How or when do I annuitize?’ People get stuck on those questions and then end up not annuitizing at all. We think this paper will help people in those situations.”

Voya Launches Quest Indexed Annuities

Posted on June 16, 2016 by Kerry Pechter -

In a sign that major insurers don’t intend to let the DOL fiduciary rule scare them out of the fixed indexed annuity (FIA) business, Voya Financial, Inc. has introduced a new Quest series of FIAs: Voya Quest 5, Quest 7 and Quest Plus.

The new Voya FIAs are aimed at the independent broker-dealer channel, an increasingly fertile space for FIAs. The Quest series also features capped as well as uncapped “spread” crediting methods. It offers a guaranteed lifetime withdrawal benefit option, which is popular among advisors in that channel.

In the bank channel, FIAs are mainly seen as a higher-yielding alternative to certificates of deposit, for safe accumulation purposes. In the independent broker-dealer channel, FIAs are seen rather as a safe way to gain limited exposure to the equity markets, and as the basis for a guaranteed lifetime income stream.

“We’re positioning the Quest series as an upgrade of our Secure Index Opportunities Plus product,” Chad Tope (below), Voya Financial’s president of Annuity and Asset Sales, told RIJ this week. “We’ve always been in the broker-dealer and bank channels. But we saw limits on surrender charges dropping to 9% in the broker-dealer channel, so we took this opportunity to enhance that product. [The drop in surrender charges] was one of the reasons, but not the only reason. The big reason was the opportunity to do a refresh on our Secure series.”

The Secure FIA, which will gradually transition to Quest, had a 10-year surrender period and a five-percent premium bonus option. The Quest series offers contracts with five-year and seven-year options. Only the Quest Plus, which offers a 6% premium bonus, has a 10-year surrender period. Longer surrender periods are typical of bonus products.

The Quest series also has a new lifetime income rider, with annual instead of five-year “age bands” for determining payout rates.

“Instead of the typical age bands, each age has its own maximum annual withdrawal (MAW) percentage,” Tope said in an interview. “Our Wealth Builder series of FIAs was an accumulation vehicle with higher caps, targeted at banks. The Quest series, which offers spread-based crediting methods, including a monthly-average spread, and a volatility-controlled index, is targeted at the independent broker-dealers. In our experience, the banks tend to sell more of the cap and trigger products. In the independent broker-dealer channel, though caps are still widely sold, they’re more apt to use the spread design.” Voya products are also available in the independent agent channel.

[Note: In a trigger product, any positive index performance will trigger a certain minimum payout. As 3.5% trigger will produce a flat 3.5% payout any time the index rises.]

“In broker-dealers, the advisors aren’t in favor of capping out an opportunity. When we went into the field and gathered the voice of the customer, that’s consistently what we heard. They were more inclined to look for something that doesn’t limit upside,” he added.

At the close of 2015, Voya was ranked twelfth in indexed annuity sales, with 2015 sales of $1.67 billion, Tope said. At the end of the first quarter of 2016, year-to-date sales were $534 million, and the company was ranked ninth. Sales in 2015 were 8.7% higher than in 2014, as the whole indexed annuity category improved—benefiting from investor caution in an environment of low interest rates and uncertain equity markets. “We started this year much stronger than we started 2015,” Tope told RIJ.

Like other index annuity manufacturers, the Voya Quest series allocates the bulk of the FIA premium to the insurer’s general account and divides the remaining five to 10 percent of premium between the purchase of options on an equity index (the S&P500 or, in the case of Voya’s optional volatility-managed index, Deutsche Bank’s CROCI (Cash Return on Capital Invested) US 5% Volatility Control Index, and costs (home office and distribution).

Contract owners can realize gains through either a capped or spread crediting strategy. That is, the owner might receive all gains above a certain hurdle rate or “spread”—for example, above the first two percent of index gains—or all of the gains up to a specific cap, with any gains beyond the cap accruing to the issuer. Negative index performance doesn’t affect the value of the contract.

The Quest series offers three surrender-period lengths: five, seven, or 10-year contracts. Indexed annuities typically guarantee that if the contract owners keep their contracts through the end of the surrender schedule, they will get back no less than their original premiums, less the value of any withdrawals.

The DOL fiduciary rule, issued in early April, would require sellers of FIAs or their sponsoring institutions to agree to work solely in their clients “best interest.” This switch from a buyer-beware to a trusted-advisor standard of conduct is expected to reduce the number of commission-earning insurance agents who sell FIAs and to encourage the creation of FIAs for advisors who charge clients an asset-based fee rather than take commissions from manufacturers. But that’s not necessarily an easy transition.

“We’ve had conversations about a product for the fee-only advisor, and as more advisors switch to the fee-based model, we’re trying to figure out a way to make that work. We have products on our shelf today that have a zero percent commission. But the low interest rate environment isn’t favorable for a short duration product. It’s too tough to price that type of product right now.”

To be able to promise attractive returns, FIA issuers need to extend the durations of their investments, which requires products with longer surrender periods. Longer surrender periods also allow the insurer to pay large commissions by giving them more time to earn back the value of the commission from the growth of the assets. FIAs traditionally offer higher commissions than other types of annuities.

The Voya Quest Plus is a bonus contract. People who buy the Voya Quest Plus contract will have an additional 6% of the premium added to their contract value at purchase. Like many bonus annuities, it has a long surrender period—10 years in this case—along with a $15,000 minimum. Age of issue is capped at 80.

The advantage of the bonus is offset by relatively lower crediting rates, in the form of higher spreads and lower caps. The spread (index gains above which go to the contract owner) for the Quest Plus monthly average index strategy is 8.5% for Quest Plus but only 5% for the Quest 7 (seven-year surrender period). Similarly, the point-to-point cap for Quest Plus is 1.25% but 2.75% for the Quest 7.
For an added annual fee equal to one percent (1.0%) of the benefit base, contract owners can buy a lifetime income rider, which Voya calls the myIncome Withdrawal Benefit. This rider comes with a 6.5% compound annual “rollup” for up to 10 years before the income benefit is switched on.

For every one of the first 10 years in which the contract owner withdraws no more than 10% of the account value, the income benefit isn’t activated and the benefit base goes up 6.5%. After income starts, clients can turn their income streams off and then back on as needed.

The maximum annual withdrawal rate at age 65 is 4.75%. Instead of traditional age-bands that go up every five years, Voya’s payout rate goes up 10 basis points every year, starting at age 61. (Payouts can start as early as age 50.) If interest rates rise, Tope said, Voya expects to be able to pass along higher payout rates to new purchasers more easily than in the past.

A 55-year-old person investing $100,000 in a Voya Quest 7 would have a minimum benefit base of about $187,700 at age 65. If he begins taking income at that age, the first-year income will be at least 0.0475 times $187,000, or about $8,916.

For comparison sake, a $100,000 premium would provide the same 55-year-old male a deferred income annuity that would pay almost the same income ($8,880 per year, according to immediateannuities.com) after 10 years, with a refund of the premium upon death during the deferral period and a refund of unpaid premium, if any, upon death after income period begins.

The obvious advantages of the GLWB, on an indexed or a variable annuity, are the liquidity throughout the life of the contract (though withdrawals reduce the guaranteed annual income amount) and the chance at growing the account value and adding to the benefit base.

U.S. life insurers saw stocks decline in first quarter: A.M. Best

Posted on June 16, 2016 by Editorial Staff -

After a moderate increase of 2.0% in the fourth quarter of 2015, the stock prices of publicly traded U.S. life/annuity (L/A) insurers saw their stock prices decline 6.4% in the first quarter of 2016, according to a new A.M. Best report.

According to the Best Special Report, “Pressures Remain for Publicly Traded Life/Annuity Insurers,” the quarterly decline was far below the 0.8% gain posted by the broader market. The report notes the reasons for the underperformance, which are likely to persist in future quarters, includes the following:

Continued regulatory uncertainty, including the eventual requirements of the Systemically Important Financial Institution designation and the Department of Labor fiduciary ruling;
Continued low rates and equity volatility impacting the marketability of traditional L/A products; however, the Federal Reserve has insinuated potential rate hikes later this year;
Declining returns-on-equity that will likely continue to decline amid a modest increase in rates and the reinvestment of portfolios into lower-yielding investments;
Continued drag and subpar performance from legacy lines of business, particularly in long-term care and variable annuity segments (with living benefits); and
High valuations relative to premium growth and returns on equity.

However, for the 21 publicly traded companies included in this report, revenue increased 6.5% in the first quarter of 2016 compared to the same period in 2015. More than half of the companies reported an increase in revenues in 2016, largely driven by the two larger Canadian companies, Manulife Financial and Sun Life, which reported revenue increases of 38.2% and 19.8%, respectively.

Conversely, Prudential Financial reported the largest decline in terms of dollars, decreasing $1.2 billion, or 7.9%, due to a combination of fewer premiums, mainly from its retirement business, and lower realized investment gains.

The average operating return-on-equity for the first quarter of 2016 was 14.4%, relatively even to the 14.5% experienced for the same period in 2015.

Given the continued low interest rate environment, A.M. Best notes the increasing pressures on spread-based businesses. Interest-sensitive liabilities such as fixed annuities are pretty much at guaranteed minimum crediting rates, so there is less flexibility in adjusting crediting rates downward as had been in the past. In addition, some interest rate guarantees, or floors, remain in the 3% to 4% range, creating additional pressure on this business.

Security Benefit offers floating-rate fixed annuity

Posted on June 16, 2016 by Editorial Staff -

Security Benefit Life Insurance Company has launched what it calls the fixed annuity industry’s first floating-rate product, designed to fit a world where interest rates seem to have only one direction in which to go.

Called RateTrack, the single premium deferred fixed annuity allows clients to participate “automatically” at the beginning of each contract year in a rising interest rate environment, as opposed to being locked into a fixed rate for the life of the contract. Contract owners receive a guaranteed base rate of interest that is set for the contract’s Guarantee Period, plus the 3-Month ICE LIBOR USD Rate (subject to a cap), which resets annually on the contract anniversary date.

Unlike a typical multi-year guarantee annuity, RateTrack offers the opportunity for higher interest rates over the life of the contract without the risk of a loss of principal, as is the case with bond funds when rates go up.

The RateTrack annuity joins Security Benefit’s Total Value and Secure Income indexed annuities and EliteDesigns variable annuities.

Robert W. Cook, attorney and former SEC official, to lead FINRA

Posted on June 16, 2016 by Editorial Staff -

Former SEC official Robert W. Cook will be the new president and CEO of the Financial Industry Regulatory Authority (FINRA), effective in the second half of 2016. He will succeed Richard G. Ketchum, chairman and CEO since 2009. The board of FINRA, which is the self-regulatory body of the securities industry, said it will name a new chairman this year.

Cook has been a partner in the Washington, D.C., law firm Cleary Gottlieb Steen & Hamilton LLP, where he focused on the regulation of securities markets and market intermediaries, including broker-dealers, exchanges, alternative trading systems and clearing agencies. He joined the firm in 1992.

From 2010 to 2013, Cook served as the director of the Trading and Markets Division of the U.S. Securities and Exchange Commission (SEC). Under his direction, the Division’s 250 professionals were responsible for regulatory policy and oversight with respect to broker-dealers, securities exchanges and markets, clearing agencies and FINRA.

Cook directed the staff’s review of equity market structure and its analysis of the Flash Crash of May 6, 2010.

Cook graduated magna cum laude with an A.B. in Social Studies in 1988 from Harvard College, received his Master of Science with distinction in Industrial Relations and Personnel Management from the London School of Economics in 1989, and received his J.D. cum laude from Harvard Law School in 1992.

Honorable Mention

Posted on June 16, 2016 by Editorial Staff -

AIG hires Eric Taylor to run annuity distribution

American International Group, Inc. has named Eric Taylor to be its senior vice president, Independent Annuity and A & H (accident and health) Distribution, with responsibility for annuity sales through brokerage general agencies and independent marketing organizations for AIG Financial Distributors.

Taylor is also responsible for providing accident and health (A & H) solutions through the distribution channel. He will report to John Deremo, executive vice president, AIG Financial Distributors.

Taylor joined AIG from Genworth Financial, where he served as sales operations leader, marketing strategy leader and, most recently, national sales manager, annuities.

Mr. Taylor earned his bachelor’s degree from University of California, San Diego and his MBA from the Kellogg School of Management at Northwestern University. He is a board member of the National Association for Fixed Annuities (NAFA) and a member of the NAFA Education Committee.

No mandatory retirement for MetLife CEO

MetLife announced this week that its Board of Directors has elected to waive the company’s age-65 retirement policy for Chairman, President and CEO Steven A. Kandarian.

The Board retains the option to do so when it concludes such a move would be in the company’s best interest. Kandarian, 64, has been MetLife’s president and CEO since May 2011. He added the title of Chairman in January 2012.

“From his first day as CEO, Steve has had an unwavering focus on maximizing long-term shareholder value,” said Cheryl W. Grisé, MetLife’s independent Lead Director, in a release. “In the face of unprecedented regulatory and macroeconomic challenges, he has taken bold action to position the company for profitable growth and strong cash generation.”

Pete Constant to lead Retirement Security Initiative

The Retirement Security Initiative (RSI) board of directors has named Pete Constant as the organization’s new executive director, effective June 16, 2016. He replaces the retiring Peter Furman, who helped launch RSI in July 2015 and has since led its advocacy efforts and day-to-day operations.

From 2015 to present, Constant was director of the Pension Integrity Project and Senior Fellow at the Reason Foundation. He led a team that designed, drafted and negotiated the successful public safety pension reform plan for the state of Arizona, which was passed in both the Arizona Senate and House of Representatives and was signed into law by Arizona Governor Doug Ducey.

Earlier, Constant served as councilmember for the City of San Jose from 2007-2014. He championed efforts to successfully balance the budget in the face of a cumulative deficit of nearly $650 million.

From 2007-2014, he served as trustee of the $1.9 billion San Jose Federated City Employees’ Retirement System. From 2011-2014, he served as board member of the $2.8 billion San Jose Police and Fire Retirement Plan. His policy recommendations led to structural changes of the boards’ composition to include both stakeholders and financial experts.

Constant began his career in law enforcement as a police officer for the City of San Jose, where he served for 11 years until an on-duty injury forced his early retirement.

At IRI Legal Conference, Lawyers Parse the “Fiduciary Rule”

Posted on June 9, 2016 by Kerry Pechter -

Two unexpected things happened on the first morning of the Insured Retirement Institute’s Government, Legal and Regulatory Conference on Monday in Washington, D.C., which focused on the DOL’s controversial, freshly issued (April 6) fiduciary or “conflict of interest” rule.

First, it was clear that neither Tim Hauser or Judy Mares would be in attendance. They are two Labor Department officials who had, earlier, at different times, been named (with Mark Iwry from Treasury) in the IRI meeting’s preliminary agendas as members of a panel discussion on the Obama administration’s retirement policy.

That was unexpected, but not surprising. The IRI is a plaintiff in week-old lawsuit asking a federal court in Dallas to “vacate and set aside the [fiduciary] Rule,” which the DOL spent six years writing and revising. An IRI spokesperson couldn’t explain their absence, but maybe the DOL felt less than welcome in that venue. Seth Harris, a former Deputy Secretary of Labor, took Hauser’s place.

Direct opposition to the DOL’s initiative by a major retirement industry group has the potential to create confusion within the industry about whether to begin adjusting to the rule. News of the DOL’s absence from the IRI event was contrasted however by a sanguine word from Steve Saxon, a leading ERISA lawyer at the Groom Law Group who participated in a separate panel discussion at the IRI conference.

Only weeks ago Saxon appeared fit to be tied at the terms of the fiduciary rule. But Monday he acknowledged that his law firm was not representing any of the plaintiffs in the two federal suits filed so far against the DOL, in Dallas and in the District of Columbia. Instead, he told RIJ, “We’re going to work with them.”

By “them,” Saxon meant the DOL. By “we,” he meant a group of “seventeen [401(k)] recordkeepers.” Recordkeepers, it should be said, have less conflict with the DOL than, say, annuity distributors; the new rule will ripple, but not disrupt, the recordkeepers’ business model. Saxon’s comment represented a trace of hope that some of the remaining ambiguities of the new rule might be resolved through negotiation instead the more expensive and time-consuming route of ligitation.

Criminalizing high commissions?

If you’re new to this controversy, here’s a synopsis. The Obama Administration a few years ago became alarmed about the rollover (when defined contribution plan participants change jobs or retire) of trillions of dollars in tax-deferred savings from tightly regulated institutional 401(k) accounts to loosely regulated retail rollover IRA accounts.

Regulators worried that inexperienced, bred-in-captivity IRA owners might be exposed to sales of investment products and services with much higher prices than could be charged in the 401(k) plans, and to predatory sales practices. So, in 2010, the DOL drafted a “fiduciary” rule requiring advisors to IRA accounts to adhere to the same rules as advisors to 401(k) plans. That is, to act “without regard to” their own financial interests and only in the “best interest” of their clients.

The rule was reproposed in 2015, and finalized two months ago. It all but criminalizes the sale of high-commission or high-cost products to IRA owners. It strikes particularly hard at variable and fixed indexed annuities (FIAs), as well as load mutual funds, whose sales by registered reps and insurance agents are driven by the lure of high commissions. Last week’s lawsuits by the IRI et al, and by the National Association of Fixed Annuities, were the financial industry’s attempt to block the rule from taking effect.

Variable versus level compensation

Because this was a legal conference, discussions focused on unresolved ambiguities in the fiduciary rule, and on aspects of the law that might make industry players vulnerable either to DOL scrutiny or, more importantly, to class action lawsuits from opportunistic plaintiffs’ attorneys.

One area of ambiguity, according to Harris, involves “differential compensation.” Compensation inevitably varies for selling different products and services. But, under the rule, advisors who choose to sell products that earn more income for them (and cost clients more) will bear the burden of justifying their choices.

In its rule, the DOL says that differences in compensation on sales of products to IRA owners must be based on “neutral factors,” such as differences in the amount of time or expertise that’s required to sell a product, and not based on a desire to incentivize advisors to recommend one product or type of product over another.

This raises new hair-splitting questions, such as: Is compensation allowed to vary by product category, or by each product within a category? How can anyone objectively compare a one-time commission with an annual asset-based fee? Why do advisors who charge “level fees”—fees based on assets under management—get lighter treatment under the new rule, especially when a one-time commission might be cheaper for the client in the long run, or when asset-based fee structures bias advisors against recommending annuities, which remove assets from direct billable management?

“The DOL prefers level fees, but that doesn’t work for everybody’s business model,” Harris said. “It’s clear that the DOL disapproves of the old system, where the amount of money you brought into the firm decides your compensation. If at the end of the day we see a lot of advisors saying, ‘It’s not worth it,’ and exiting the distribution system, that will cause a lot of trouble for a lot of folks. I think these issues are solvable. But they are complex, and will be different for each company.”

Asked during a panel discussion whether or not the DOL rule would put downward pressure on FIA commissions, Kansas City compliance consultant Kevin W. Mechtley said, “Today, if you have three contracts with similar features and the same surrender period paying commissions of 5%, 6% and 8%, the 8% product will outsell the others all the time. In the future, it will be hard to keep selling at 8%. A push toward like-commissions for like-products will be the immediate effect of the rule. Over the long-term, it will depend on the results of litigation.”

Who signs the BIC for insurance agents?

Another much-discussed area involves the sale of indexed annuities and the Best Interest Contract. To accept commissions on the sale of products to IRA owners, an advisor, broker or agent must work for a regulated financial institution that will sign a contract pledging that all of its salespersons will work solely in the clients’ interests, and that it will establish procedures for monitoring and documenting their sales activity, and that it will bear the legal liability for their conduct.

For registered representatives, broker-dealers will sign the BIC. But insurance agents who sell indexed annuities fall into a grey area. They are generally affiliated with insurance (or field) marketing organizations (IMOs or FMOs). But IMOs are not, strictly speaking, financial institutions, and it’s not clear whether they want to take on that responsibility.

The DOL rule, in section II, J-3, allows non-financial institutions like IMOs to apply to “individual exemptions” that will allow them to serve as signatories to the BIC for their agents. Steve Saxon of Groom Law Firm said he believes one or more of the IMOs will take advantage of that because it will give them a competitive advantage over other IMOs and allow them to remain in competition with broker-dealers in the sale of indexed annuities.

“There’s going to be an FMO or group of FMOs who will talk to the Labor Department and say, ‘We want to stay in this business. What do we need to do to be the institution that signs the BIC?” Saxon said during a Q&A with the IRI audience. “The FMO will do it because they’ll see it as a business opportunity. But it can take as long as two years to qualify for such an exemption.”

Vanguard publishes ‘How America Saves,’ its 401(k) almanac

Posted on June 9, 2016 by Editorial Staff -

The Vanguard Group, the full-service retirement plan provider that manages about 12% of the nation’s $6.7 trillion in defined contribution plan assets, has released the 2016 version of its annual report, How America Saves: A report on 2015 Vanguard defined contribution plan data.

First published in 2000, the report is based on the investments of 4.1 million participants in 5,900 plans. This year’s report represents a special edition marking the tenth anniversary of the 2006 Pension Protection Act, which included provisions that allowed for auto-enrollment of participants and auto-escalation of contribution amounts, Vanguard said in a release.

The auto-enrollment feature, which entails enrolling all new employees who don’t actively opt out, has gradually spreading through the DC industry. At year-end 2015, 41% of Vanguard plans used it, up from 10% a decade ago. Of those plans, 70% also featured automatic annual increases. Last year, 63% of new Vanguard participants were hired under automatic enrollment, up from 12% in 2006.

At year-end 2015, about half of all Vanguard participants were solely invested in an automatic investment program, up from 29% at the end of 2010; 42% of all participants were invested in a single target-date fund (TDF); another 2% held one other balanced fund; and 4% used a managed account program. Among participants entering Vanguard plans for the first time in 2015, about 80% were invested entirely in a professionally managed allocation. By 2020, the average will be about 68% for all participants, Vanguard predicts.

Nine in 10 plan sponsors offered TDFs at year-end 2015, up 14% at year-end 2010. Nearly all Vanguard plans offer TDFs and 69% of all participants use TDFs. Sixty-two percent of participants who own TDFs have their entire account invested in a single TDF. Four in 10 Vanguard participants are wholly invested in a single TDF, either by voluntary choice or by default.

The plan participation rate was 78% in 2015. The average deferral rate was 6.8% and the median was 5.9%. However, average deferral rates have declined slightly from their peak of 7.3% in 2007. Average contribution rates declined because of automatic enrollment, which leads to lower average when default deferral rates are set at low levels, such as 3% or lower. The average total participant contribution rate in 2015, including employer and employee contributions, was 9.5% and the median was 8.8%.

At year-end 2015, the Roth feature was adopted by 60% of Vanguard plans and 15% of participants within these plans had elected the option.
In 2015, the average account balance for Vanguard participants was $96,288; the median balance was $26,405. In 2015, Vanguard participants’ average account balances declined by 6% and median account balances fell by 11%. Two factors drove the decline in balances: New plans converting to Vanguard in 2015 had lower account balances, and automatic enrollment, which results in more savers with smaller balances.
The average one-year participant total return was –0.4%. Five-year participant total returns averaged 7.3% per year. Among participants with a balance at year-end 2010 and 2015, the median account balance rose by 105% over five years, reflecting the effect of ongoing contributions and rising markets.
The percentage of plan assets invested in equities declined to 71%, essentially unchanged from 72% in 2014. Equity allocations continue to vary dramatically among participants. One in 8 participants has taken an extreme position, holding either
100% in equities (7% of participants) or no equities (5% of participants),
During 2015, only 9% of participants traded within their accounts, while 91% did not initiate any exchanges. On a net basis, there was a shift of 0.8% of assets to fixed income in 2015, with most traders making small changes to their portfolios. Only 2% of participants holding a single TDF traded in 2015.
The number of plans actively offering company stock declined to 10% in 2015 from 11% in 2010. Only 7% of all Vanguard participants held concentrated company stock positions in 2015, down from 10% at the end of 2010.
In 2015, 16% of participants had a loan outstanding compared with 17% of participants in 2014. The average loan balance was $9,900. Participants borrowed only about 2% of aggregate plan assets.
During 2015, 4% of participants took an in-service withdrawal, withdrawing about 30% of their account balances. All in-service withdrawals during 2015 amounted to 1% of aggregate plan assets.
During 2015, about 30% of all participants could have withdrawn their savings because they had separated from service. Most (85%) either remained in their employer’s plan or rolled over their savings to an IRA or new employer plan. Three percent of assets ($24 billion) was withdrawn in the form of cash distributions.

Where the Fiduciary Puck is Headed

Posted on June 9, 2016 by Kerry Pechter -

A native of New England hockey land, David Macchia long ago knew where the retirement puck was headed. Years before digital platforms for advisors or floor-and-upside retirement income plans became conventional, he championed those concepts.

This week, the founder of Wealth2K and marketer of a bucketing strategy called the Income for Life Model held a webinar called “How to Prosper after DOL.” He and colleague Jason Ray interpreted the Department of Labor’s new Fiduciary Rule, which will make commissioned-based sales to retirement (IRA) investors problematic.

To be clear: This was a sponsored webinar. Just as we know that Ralphie’s secret decoder ring in Jean Shepherd’s A Christmas Story will tell him to drink more Ovaltine, we know Macchia’s advice will, at some point, involve his product. But insights preceded the pitch. Here are some of the highlights of the one-hour interactive presentation.

The end of one-off product sales

“As a practical matter, the DOL rule killed the business of single product sales, and ushered in an era based on process,” Macchia (at right) said. “Process will drive the business. In the future, all product sales will need a context and a process around them. If you recommend a product, you will need to link that recommendation to a specific type of risk mitigation within an overall strategy. Choosing products on the basis of risk mitigation will be really important.” David Macchia

Emphasize risk mitigation, not returns

“The three biggest retirement risks are sequence of returns risk—the risk that a person will retire just before or after a market downturn—inflation risk, and longevity risk. If you handle these three risks, the client will have a great chance of success in retirement.” Avoid high-risk strategies for people who can’t afford them, he added. “Don’t recommend a systematic withdrawal plan (SWP) for constrained investors who have low savings relative to the amount of income they need. They don’t have much margin for error. They’re safer with an outcome-based strategy, not a probability-based strategy.”

Income expertise as a competitive advantage

The DOL rule “is a massive gift to people who specialize in retirement income distribution,” Macchia said. “Retirement specialists, especially those who have one of the professional designations (such as the RMA, RICP, or CRC), will be able to make a compelling case for clients to aggregate their retirement assets with them, and aggregation will be the best way to grow assets under management as a way to offset the impact of fee compression.

“The easiest new market to penetrate will be income planning. In the income market, you’ll find the greatest client needs, the most assets, and the opportunity to differentiate yourself from the crowd.

“The methodology for choosing a retirement income strategy has got to be transparent and understandable. If clients understand it, and have a sense of confidence in it, then it’s much less likely that you’ll encounter problems down the road.”

IMOs, broker-dealers and banks will all fare differently

“The DOL will boost the business model of the independent broker-dealers. But it will alter the dynamics between the advisors and the firms. The broker-dealers will start providing roadmaps for advisors to follow. The banks still do a lot of transaction-based business, and moving past that may be difficult. On the other hand, bank advisors are employees. It will be easy for a bank to define a new top-down corporate policy,” he said.

“Insurance marketing organizations (IMOs) face the greatest disruption. Under their business model, they are unregulated entities. So they aren’t ‘financial institutions’ under the rule [and can’t, without an individual exemption from the DOL, sign a Best Interest Contract so that their agents can sell products on commission]. It will be interesting to see how IMOs respond to this.”

Distributors will lead product design

“I think you’ll see the power over product design shifting to the distributors. Products will be simpler and more transparent. They will look more alike. I believe that we will eventually see individual product ratings. If a product doesn’t get a certain minimum rating, large distributors won’t be able to sell it,” he said.

“Life insurance companies are now incentivized to reduce compensation. This is a huge reversal, and it will lead to a commoditization of products and standardized fees. It will affect product development. Ron Rhoades has predicted that high-cost mutual funds will see a sales decline. Many variable annuities will see a decline in sales. And fixed indexed annuities will see much more scrutiny.”

A de facto universal standard of conduct

The new fiduciary standard for retirement accounts will inevitably extend to after-tax accounts, Macchia believes. “Can two regimes co-exist in the same household? If Mr. Smith has a retirement account and Mrs. Smith has a taxable account, does one type of account deserve a different level of care? The DOL has given us a universal standard.”

Assume that the DOL rule will take effect

A webinar attendee asked if the lawsuits against DOL are likely to stop the rule from taking effect. “The general consensus is ‘No,’” Macchia said. “The suit filed by NAFA [the National Association of Fixed Annuities] suit might be stronger [than the Financial Services Institute, Securities and Investment Firm Marketing Association, and Insured Retirement Institute], because the courts have ruled that indexed annuities are fixed products [and not variable products, as the DOL inferred]. But if you’re wondering whether to take steps to comply with the rule, yes, start preparing for it. Don’t focus on the 10% chance that it won’t go into effect.”

Here’s your copy of NAFA’s suit against the DOL

Posted on June 9, 2016 by Editorial Staff -

The National Association of Fixed Annuities, which represents primarily manufacturers and distributors of fixed indexed annuities, filed a complaint against the Department of Labor in U.S. District Court, District of Columbia, on June 2, only hours after a similar suit was filed in federal court in Dallas, Texas, by financial services trade groups, the U.S. Chamber of Commerce and the Insured Retirement Institute.

With more than $15 billion in sales in the first quarter of 2016, indexed annuities are the strongest-selling product category in the annuity industry. The new rule threatens to regulate the sale of indexed annuities to IRA owners, who represent a multi-trillion-dollar potential market for FIAs, more tightly.

Like the IRI suit, the NAFA suit asks the court to vacate the DOL’s new fiduciary or conflict-of-interest rule, which extends the type of regulation that governs 401(k) plans to IRAs for the first time, thus turning the sale of commissioned products, such as annuities, to IRA owners into transactions that are prohibited except by special exemption.

Unlike the IRI suit, the NAFA suit asks the court for an injunction to halt the implementation of the DOL rule. Among other things, the complaint claims that the DOL changed the rules for selling indexed annuities without warning and without offering the indexed annuity industry a chance to respond, that the DOL didn’t consider the economic impact of its new rule on that industry, and that the DOL failed to adequately define the meaning of “reasonable compensation.”

In drafting the final version of its new rule, the DOL unexpectedly changed the rule under which indexed annuities can be sold to IRA owners from the “Prohibited Transaction Exemption 84-24” to the new “Best Interest Contract Exemption,” or BICE. The BICE requires those sales to be made solely in the clients’ interest, “without regard to” the seller’s compensation, and carries a greater burden of legal accountability for not doing so.

Social Security, still designed for ladies who’ve vanished

Posted on June 9, 2016 by Editorial Staff -

The rules for Social Security weren’t handed down on a stone tablet from the top of Capitol Hill. They were deliberately structured in 1935 to fit the needs of a society and an era where most men worked eight hours a day and most women “kept house” and raised children (and eventually outlived their husbands).

Women still outlive their husbands, but much else has changed since then. Many more women are divorced, have never married, and/or have raised children alone. Little surprise then that Social Security’s original rules don’t fit their needs very well and, in fact, leave them relatively short of benefits in retirement.

In a new research brief from the Center for Retirement Research at Boston College, economist Steven Sass reviews the literature regarding Social Security’s outdated benefit configuration and describes two proposals for adapting it to current conditions. Those two proposals are:

“Earnings sharing.” This proposal would raise all workers’ benefits by 4.5%, but eliminate the “spousal and survivor” benefits that are typically drawn by women who have never worked or have earned far less than their husbands. It would credit each spouse with half of the couple’s earnings when calculating Social Security benefits; at retirement, it would reduce each spouse’s benefit at retirement to fund a survivor benefit equal to two-thirds of the couple’s combined benefit. This change would help divorced women, widows and widowers but wouldn’t help never-married women. It would mean a reduction in benefits for retired married couples.

Care-giving credits. This proposal would help single mothers who had never been married. Instead of today’s spousal benefits, it would offer credits for care-giving. Individuals who care for a child, age six or under, would see their average wage when calculating Social Security to half the average wage (caregivers earning more than half the average wage would receive no extra credit). The credit would be provided for up to seven years of care-giving. This credit would significantly enhance the benefits available to single-mothers whose care-giving duties keep them out of the workforce for extended periods.

The United States may be the only country in the world whose old age insurance system is designed to allow a never-employed woman to receive 100% of her husband’s state pension, and those who this benefit most—couples where one spouse’s income alone is large enough to support the family—are likely to resist any attempts to reduce or eliminate it.

Sass observes that “altering Social Security to address these concerns would need to overcome significant political and administrative challenges. But it is worth considering whether other designs would more effectively provide today’s families a basic old-age income after a lifetime of work.”

Was that a zig (or a zag) on interest rate policy?

Posted on June 9, 2016 by Editorial Staff -

As if anyone still has the patience to follow her zigs and zags, the Federal Reserve chairwoman, Janet L. Yellen, is no longer offering any hint that the Fed will raise short-term interest rates at its meeting this month, the New York Times reported this week.

The likelihood of a rate increase has therefore been widely discounted. A few weeks ago, before the recent report on weak job growth in May, Yellen suggested that rates might go up slightly this month. Any future hike is now considered more likely to occur in the second half of 2016. “Fed officials now say they are still thinking seriously about raising rates in July or September,” the Times said.

“Investors have all but written off the chances the Fed will increase rates at its next meeting on June 14 and 15, and Ms. Yellen did not try to change their minds” in her speech this week at the World Affairs Council in Philadelphia, the Times said. The speech was the last public appearance by a Fed official before the June meeting.

But Yellen did say that she still expects economic growth to accelerate — and she still expects to raise rates at some point. “If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate,” she was quote as saying.

“I know market participants really want to know exactly what’s going to happen,” she said in her speech in Philadelphia. “There is, as I said about 18 times, no preset plan.”

Honorable Mention

Posted on June 8, 2016 by Editorial Staff -

E-Trade offers Adaptive Portfolio, robo-advice for 30 basis points

E*Trade Financial, the self-directed online discount brokerage firm that helped create and appease Americans’ appetite for risky day-trading, said it will introduce a robo-advisory service. E*Trade will compete for the client money flowing into robo solutions. Assets under management by robos like Betterment reached $53 billion at the end of 2015, according to Aite Group, up from $2 billion at the end of 2013.

This week, E-Trade introduced Adaptive Portfolio, a product line that uses a combination of stock and bond exchange-traded funds and actively managed mutual funds to create baskets that are weighted according to an investor’s risk preferences and investment goals. People entering through E-Trade’s website answer a series of questions and are sorted into one of six risk categories and corresponding model portfolios based on their answers.

Most robos offer only exchange-traded funds, but E-Trade digital advice clients will be able to mix ETF portfolios with mutual funds if they wish. The account charge on Adaptive Portfolio is 0.3% of assets (30 basis points) annually on a minimum investment of $10,000 plus fund fees. All of the portfolios have a position of one percent cash, and human advisers will be available for investors who want to communicate with one by telephone or instant message.

Personal Capital helps NBA players with financial game plans

To help young pro basketball players avoid careless turnovers when handling their $4.7 million average first-year salaries (often rising to $6 million by their fourth year), Personal Capital, the online financial advisory firm, has become a provider of digital financial tools for the National Basketball Players Association (NBPA).

The NBPA offers education in-person seminars on varied financial topics to players, including pre-draft and rookie players, to prepare them for the 40 or 50 years when they are no longer in the game. Players can now use Personal Capital’s mobile phone-mediated tools to monitor their finances and learn how not to double-dribble their money away.

“Personal Capital’s tools show players where their money is coming from and going to, their net worth, their investment strategies, the account fees they pay, and their plans for retirement,” said an NBPA release.

“Players have short careers, have complicated taxes and make fast financial decisions that can result in spending money too quickly. Education is only half the battle. It really comes down to behavior and habits,” said former Golden State Warrior and NBAPA director of Player Programs Purvis Short, in the release.

NBA Players have access to these digital tools from Personal Capital:

Cash Flow Analyzer. Offers insights into weekly, monthly and yearly income, spending and savings trends.

Net Worth Calculator. Shows assets and liabilities and overview of all financial accounts.

Retirement Planner. Calculates impact of current investments, savings rate, and future income and spending rates, on retirement readiness.

Investment Checkup. This portfolio analysis tool presents a target investment allocation based on user profile data and shows potential concentrations of risk in stocks or asset classes.

Fee Analyzer. Displays fund fees and costs over time.

Dashboard. A summary of accounts, net worth, cash flow, portfolio performance, investment “gainers and losers,” and asset allocation.

MassMutual to offer lending service that spares plan assets

To help plan participants obtain emergency loans without tapping their retirement plans, Massachusetts Mutual Life Insurance Co. is making fast-track online credit services available through its BeneClick! employee benefits exchange.

The credit services are provided by Kashable, which allows plan participants to apply online and take low-cost loans instantly, then repay them automatically through equal installment payroll deductions or direct deposits, according to a MassMutual release.

Employees are prequalified for credit based on their employment and the amount of credit they qualify for is based on their ability to repay. The program provides credit at rates starting at 6% APR with a 6-12 month term.

The service is designed to help prevent the stress associated with financial problems from hurting productivity. The 2015 MassMutual Employee Benefits Security Study found that 37% of workers find managing their personal finances “somewhat” or “very” difficult and 40% say personal financial problems distract them during work hours.

Many working Americans lack a cash buffer. According to Bankrate.com’s 2016 Financial Security Index, 29% of Americans have no emergency savings and 21% don’t have enough to cover three months’ expenses.

BeneClick!, powered by Maxwell Health’s benefits technology platform, includes MassMutual’s “MapMyBenefits” tool, which helps employees choose among retirement, healthcare and insurance protection benefits based on their personal life stages. Maxwell Health owns the underlying technology, but MassMutual owns the differentiated features on BeneClick!, a MassMutual spokesman told RIJ. MassMutual also owns the platform’s distribution relationships with intermediaries and controls what products and carriers are distributed through it.

Fear of unexpected expenses haunts Americans: Northwestern Mutual

Most Americans (85%) report feeling financial anxiety, 36% say their anxiety has increased in the last three years, and 28% worry about their finances every day, according to a new survey sponsored by Northwestern Mutual. Only 14% of Americans say their financial anxiety is decreasing.

When people were asked to name the source of their financial anxiety 55% said “unexpected expenses.” When asked to name for the single top benefit that financial security would bring, 52% said “Peace of mind that I never have to worry about day-to-day expenses.”

These findings come from the 2016 Northwestern Mutual Planning & Progress Study. The research was conducted in February among over 2,000 U.S. adults aged 18 and older.

Among those feeling financial anxiety:

67% say it negatively impacts their health
70% say it negatively impacts their happiness
61% say it negatively impacts their home life
70% say it negatively impacts their moods
69% say it negatively impacts their ability to pursue dreams/passions/interests
51% say it negatively impacts their social life
41% say it negatively impacts their career

The most common cause of anxiety is “unexpected expenses.” More than losing a job, being unemployed or running out of money in retirement, American adults fear:

Having an unplanned financial emergency (38%); and
Having an unplanned medical expense due to an illness (34%)

When asked to name the first two things they would do if they had the financial security to live their lives differently:

9% said they would change careers
12% said they would purchase a boat, car, second home or other luxury
15% said they would stop working
29% said they would pursue a dream/passion
29% said they would work on their own personal health and well-being
34% said they would relocate or buy a home
32% said they would leave money to loved ones to help them feel financially secure

Harris Poll conducted the survey on behalf of Northwestern Mutual. It included 2,646 American adults aged 18 or older who participated in an online survey between February 1 and February 10, 2016.

CEO of State Street Global Advisors calls for universal workplace savings

The president and CEO of State Street Global Advisors (SSGA), the asset management arm of State Street Corp., called on Congress this week to enact a national framework that ensures workplace coverage for all private-sector working Americans.

In an open letter to Congress, Ron O’Hanley proposed a framework that expands access to workplace retirement savings plans and ensures coverage through auto-enrollment, auto-escalation, tax incentives for small employers, eliminates barriers to open Multiple Employer Plans (MEPs).

The framework could reduce the expected retirement savings shortfall by up to $740 billion, he said in a release. “Today we face an access imperative,” O’Hanley said. “The Government Accountability Office report on retirement security finds that nearly 40% of working households lack access to, or are not eligible to participate in, an employer-sponsored defined contribution (DC) plan.

“We applaud efforts by the White House, Congress, and many states to expand workplace retirement savings opportunities through auto-IRAs and open MEPs. However, discrete initiatives will lead to a complex and inefficient set of retirement savings programs that perversely could lead to lower savings levels. It’s time for a national, bipartisan solution that guarantees workplace coverage in a retirement savings plan.”

The full text of O’Hanley’s letter and policy proposal is available here.

Pershing offers digital solutions, plus help for reps adapting to DOL rule

As part of its “ongoing digital enablement strategy,” Pershing LLC, a BNY Mellon company, has launched a suite of technology enhancements that provide wealth management firms “with greater flexibility to digitally transform their business.”

Announced during Pershing’s annual INSITE 2016 conference, “The new enhancements aim to make integration easier and improve investor and advisor experiences,” Pershing said in a release. The new initiative was announced during Pershing’s INSITE 2016 conference.

Pershing’s clients will now have the choice to leverage available services via the new API store or they can select tools from third-party providers integrated with NetX360, Pershing’s technology for broker-dealers, wealth managers and advisors.
The new NetXServices API Store, powered by NEXEN, provides firms with self-service access to BNY Mellon’s library of APIs. In the store, clients will find digital services for account opening and funding, asset allocation and automated rebalancing. The API store facilitates integration by providing inline documentation, code samples and “sandbox testing.”

A number of digital advice providers currently use Pershing as a custodian and leverage its ecosystem to scale their businesses, including Motif, NextCapital, and Personal Capital, Pershing’s release said. Jemstep, Marstone, SigFig, and Vanare are among the digital advice providers available for integration. Pershing selected the firms based on their user experience design, flexibility and their ability to integrate with NetX360 and NetXInvestor.

In the areas of customer relationship management (CRM), financial planning, wealth reporting and other services on both NetX360 and NetXInvestor, Pershing said it has already integrated the fourth generation of MoneyGuidePro and NaviPlan.
In another announcement, Pershing said it would help financial services firms comply with the Department of Labor’s (DOL) Conflict of Interest rule.

Pershing said it will launch the following new advisory capabilities to assist registered reps with the transition from a commission-based sales model to a fee-based advisory model:

New mutual fund and/ETF wrap solutions designed to serve emerging investors. Pershing clients will be able to access expanded managed account solutions to help them serve a broad spectrum of investors from emerging to mass affluent investors. The solutions feature mutual fund/exchange traded fund (ETF) models from industry leading firms designed to provide a diversified risk-based portfolio with lower account minimums.

Enhanced versions of Pershing’s practice management materials supporting the shift to advisory. Pershing also plans to roll out third-party tools to facilitate conversations between registered reps and their clients on transitioning accounts. Pershing is currently examining planning tools and other resources that advisors may use to help with the transition of client accounts where appropriate.

Where has all the trust gone? EY wants to know

Nationwide hires ERISA lawyers to teach advisors about fiduciary rule

Down to just $2.8 trillion, Social Security still needs help

Capital One offers hybrid human-robo ETF-based managed accounts online

“Auto-portability” gains bipartisan endorsement

Poor health can influence Social Security decisions: Nationwide

AIG hires Eric Taylor to run annuity distribution

No mandatory retirement for MetLife CEO

Pete Constant to lead Retirement Security Initiative

E-Trade offers Adaptive Portfolio, robo-advice for 30 basis points

Personal Capital helps NBA players with financial game plans

MassMutual to offer lending service that spares plan assets

Fear of unexpected expenses haunts Americans: Northwestern Mutual

CEO of State Street Global Advisors calls for universal workplace savings

Pershing offers digital solutions, plus help for reps adapting to DOL rule

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