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Bank of England’s rate cut draws criticism

Posted on August 11, 2016 by Editorial Staff -

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

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

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

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

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

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

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

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

Advisors: Give this ‘Tilt’ a Whirl

Posted on August 3, 2016 by Kerry Pechter -

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

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

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

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

Constant rate vs. mortgage method

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

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

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

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

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

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

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

Inside the Flight from Active Management

Posted on August 3, 2016 by Kerry Pechter -

What started as a trickle has turned into a flash-flood.

Indexing (aka passive management), which took decades to become established as a legitimate investment practice (and not just a timid way to “settle” for average market returns), has emerged as the dominant form of diversified investing in the 21st century.

Although active strategies still account for most existing invested assets, index-linked and multi-asset class (MACS) investment strategies attracted more than 90% of net new money worldwide last year, according to the 2016 Performance Intelligence Asset Management Benchmarking Survey, conducted by Casey Quirk by Deloitte, a strategy specialist for asset managers, and McLagan, a compensation consultant. The survey found:

The global professionally managed active investment management industry, which historically has relied on traditional active funds for most of its revenue and profits, got less than 10% of new money in 2015. Of the asset managers firms surveyed with more than $10 billion in AUM, only 56% reported positive net flows in 2015, compared with 60% one year earlier and 63% in 2013. By contrast, 44% reported net outflows last year, against 40% in 2014 and 37% in 2013. Vanguard, founded by, Jack Bogle, the champion of indexing, has been perhaps the biggest instigator and biggest beneficiary of this trend (see chart below).

One exception to the rule has been American Funds, a $1.22 trillion unit of the Capital Group. Until June, when the active fund family suffered outflows of $707 million, American Funds had experienced positive flows, with a net $6.84 billion for the first six months of 2016. according to Morningstar. Its American Balanced Fund was the most popular active fund in June, with an estimated net inflow of $1.17 billion.

Steve Deschenes, director of product management and analytics at American Funds, said that his firm has become the second largest fund family primarily by pricing its funds 20 to 30 basis points lower than comparable active funds and by hiring managers with good track records who put their own money in their funds. “We are the low cost active manager,” he told RIJ this week. “And all of our funds have a high degree of manager ownership. It’s amazing the differential that you can achieve with that.”

Chart for Flight from Active 8-4-2016

Is low cost the driver?

But American Funds and perhaps MFS are the exceptions. “We see massive change happening,” Jeffrey Levi, Casey Quirk by Deloitte, principal, Deloitte Consulting LLP, told RIJ this week. “Today the average investor pays many layers of fees to get advice. I would expect some of those layers to disappear over time, as players integrate more.

“Some asset managers will be using technology for efficiency, for automating routine functions, to reduce headcount, and to raise accuracy and lower costs. Others will use technology as a differentiator, with automated platforms and mobile asset allocation capability. Some firms will be slow to adopt direct-to-consumer technology because of channel conflict and the high cost of acquiring online customers.

“But you’ll see more to direct-to-consumer efforts among asset managers as they try to build a more scalable business. Most of the robos have aimed for the underserved mass affluent, but direct doesn’t have to be robo. Money managers own the direct-to-consumer high-net-worth private wealth management business. So more asset managers will go direct, but not necessarily pure robo.”

Individual investors, who are projected to generate 90% of all new money invested through 2020, are “increasingly skeptical of active management, fee-sensitive and outcome-oriented,” he added.

A prominent member of the Money Management Institute (MMI), an association of wealth management firms, told RIJ privately, “Low cost is the driver. I don’t think it’s a lot more complicated than that.”

“The asset management industry is now in an era of disruption and consolidation, similar to what Wall Street firms underwent in the late 1970s and 80s,” said Fred R. Bleakley, director of the U.S. Institute, in a release. “Surviving firms will be leaders in specialty active management, Smart Beta passive, and multi-asset class solutions.”

“Many traditional active managers must adapt,” said Levi (right). “Their business models are outdated in a world in which individual investors and their need for advice are the revenue generators. Fees are under increasing scrutiny, and regulatory pressures are on the rise. Jeff Levi This shifting marketplace will in turn drive greater convergence in the industry across wealth management, asset management, insurance and financial technology.”

Buyer archetypes

Four buyer archetypes are emerging—outcome-oriented, cost-conscious, those influenced by gatekeepers, or those interested in investment quality. Each has a distinct set of preferences and behaviors, according to the Casey Quirk by Deloitte report. The largest group, which includes those who favor traditional investment quality, account for roughly half of industry assets under management, but are projected to shrink in the future. The other three groups will see the majority of growth.

Despite the shift in flows, active asset managers still have a lot of money. Global assets under management rose slightly, to an estimated $69 trillion in 2015, from $68 trillion in 2014. Industry revenue fell less than one percent to an estimated $344 billion from $346 billion in 2014.

Aggregate average fees declined to 50.1 basis points, or 0.501%, from 51.4 basis points, or 0.514%, in 2014. Operating margins also fell to an estimated 32% from 34% in 2014. Negative returns from capital markets contributed to low growth overall, according to the survey, now in its 15th edition.

Inequality effect

Financial inequality could help put a floor under the active asset managers’ losses of market share, however. About half of American households owns stocks, but the richest one percent of U.S. households owned more than 40% of all non-home financial wealth in the U.S. in 2010. The richest 20% owned over 95% of financial wealth.

If the richest 20% decide that they prefer to have premium financial services, including active management, there might be a natural limit to the level of growth of the low-cost, automated, indexing sector of the financial services industry.

The Casey Quirk by Deloitte study included more than 100 investment management firms headquartered in North America, Europe, and Asia Pacific, investing more than $20 trillion for institutions and individuals.

The firms surveyed included privately held, publicly traded, and wholly or partly owned enterprises with assets under management ranging from below $5 billion to more than $1 trillion. Survey participants included the executive teams of leading asset management firms as well as senior leaders at investment management firms who belong to the U.S. Institute and European Institute.

The Great Woodstock Festival in the Sky

Posted on August 3, 2016 by Kerry Pechter -

The health care industry in the U.S. is likely to benefit from a big uptick in federal spending in coming decades, as Baby Boomers become eligible for Medicare benefits, according to a July 16 report from the Congressional Budget Office.

Such spending, combined with Social Security outlays, is often framed as an unsustainable burden on the U.S. economy and on future generations. But it can also be perceived as a boost to consumer spending and a boon to all the businesses that sell consumer goods or medical care to the elderly.

Call me a cockeyed optometrist, but that’s how I choose to see it.

In 2015, Social Security spending alone added about $886 billion to the economy, not counting so-called multiplier effects, according to the latest Social Security Trustees’ report. Some economists argue that payroll taxes also reduce the spending power of the nation’s workers by that amount, producing no net benefit. I’m not an economist, but I don’t feel compelled to view Social Security as a zero-sum game. Workers who pay FICA taxes aren’t fleeced; they acquire an asset—future OASI benefits—that they will tap in their own old age.

I’ve asked economists how they account for Social Security’s undeniable contribution to local economies and none of them has ever had an answer, other than to repeat the mantra that Social Security spending comes at the expense of spending by wage earners.

When framed as a pure expense, entitlement spending can certainly appear threatening. Here’s a scary factoid: By 2046, spending for Social Security and the major health care programs (primarily Medicare) for people 65 or older is projected to account for about half of all federal noninterest spending.

Social Security is also on track to increase as a share of the U.S. economy—from 4.9% of gross domestic product (GDP) in 2016 to 6.3% in 2046. Assuming that current laws aren’t changed, gross spending on Social Security and the major health care programs is projected to reach 16.3% of GDP in 2046.

But if you accept that all Social Security and federal health care spending goes directly back into the U.S. economy, and helps every community where the elderly buy groceries and visit doctors, and relieves grown children of the financial burden their frail parents might otherwise impose, then it’s difficult to believe the doomsayers who act as though Social Security spending is an expense that goes to Jupiter in a rocket ship and never comes back.

Sure, there will be stresses to federal and state budgets as the Boomers—with their titanium hips, Van Morrison CDs and organic green tea supplements—push the envelope of human longevity. But that’s just demographics. And it’s temporary.

Eventually the Boomer age-wave will pass. Sometime in the 2060s, the last Boomers will ascend to that great Woodstock Festival in the Sky. Those lacking tickets will duck under or jump over Max Yasgur’s fence, as they did during that heady summer of 1969 when men landed on the moon and Hair opened on Broadway. They will be stardust. They will be golden. They will get themselves back to the Garden.

In July, U.S. equity ETFs received biggest inflow of 2016

Posted on August 3, 2016 by Editorial Staff -

Bond, commodity, and equity exchange-traded funds (ETFs) received $43.0 billion in July, their biggest monthly inflow since December 2014, when these funds hauled in $50.7 billion, according to TrimTabs Investment Research.

It’s a sign that “market participants are as confident as ever that central bank intervention will keep inflating asset prices,” said David Santschi, CEO at TrimTabs. “The only major asset class with significant outflows last month was European equities.”

July’s inflow into ETFs was equal to almost half of the year-to-date inflow of $103.2 billion, TrimTabs reported. U.S. equity ETFs alone took in $27.9 billion, equal to 2.0% of their assets, the biggest monthly inflow since December 2014.

Going against the trend, Europe-focused equity ETFs shed a record $4.5 billion, equal to 10.5% of their assets.

“Several of the riskiest areas of the market, including emerging markets stocks and foreign bonds, had massive inflows,” said Santschi, in the TrimTabs release. “Such enthusiasm is a cautionary sign from a contrarian perspective.”

DC plans still slow to embrace lifetime income: Willis Towers Watson

Posted on August 3, 2016 by Editorial Staff -

Sponsors of defined contribution (DC) retirement plans are slowly embracing lifetime income solutions to help employees improve their financial security in retirement, according to a new survey by Willis Towers Watson, the global advisory company.

The consulting firm described lifetime income solutions generally as the “education and tools necessary to help plan participants determine how to spend down accumulated savings in retirement as well as in-plan and out-of-plan options that create streams of income from employer-sponsored retirement plans.”

According to a release from the firm, most employers currently prefer lifetime income education and planning tools, and partial or systematic withdrawals during retirement to insurance-backed products, annuities or other managed payout options, which Willis Towers Watson described as “more effective solutions.”

The survey also found that almost one-quarter of employers (23%) have adopted one or more of these lifetime income solutions, while another 18% will implement a solution this year or consider solutions for next year and beyond.

The most prevalent lifetime income solutions are systematic withdrawals during retirement (73%), followed by income planning tools (64%) and education (60%). The more effective solutions designed to help plan participants develop a steady flow of income in retirement are much less common, even though 71% of respondents cited the primary reason for adopting a lifetime income solution was to help participants convert DC plan balances into lifetime income.

The survey found less than one-fifth (19%) offer out-of-plan annuities at the time of retirement, although 21% are considering these options for 2017. One-third provides in-plan managed account services with a non-guaranteed payout, and 22% offer an in-plan asset allocation option with a guaranteed minimum withdrawal or annuity component. Less than one in 10 offer an in-plan deferred annuity investment option.

Just over half (53%) of respondents that haven’t adopted a solution say they may do so in the future. When asked why they had not adopted a solution, 81% cited fiduciary risk as a very or extremely important barrier, while two-thirds cited cost. Six in 10 respondents said the market offerings and products were not satisfactory or were too new.

The survey also found low participant usage of available lifetime income solutions. Sixty-one percent of sponsors reported that a quarter or less of their participants used in-plan managed account services with a non-guaranteed payout service, while just over half reported a similar usage of lifetime income education.

Less than a quarter of employees capitalized on lifetime income planning tools, or used partial or systematic withdrawals during retirement at roughly half of the companies.

The Willis Towers Watson Lifetime Income Solutions Survey is based on responses from 196 large and midsize U.S. employers that sponsor a retirement plan. The survey was conducted online in March and April 2016.

Quote of the Week

Posted on August 3, 2016 by Editorial Staff -

With ‘Fidelity Go,’ Fido Goes Robo

Posted on July 28, 2016 by Kerry Pechter -

Emphasizing features that it believes young Americans look for in a digitized financial service—transparency, simplicity and low cost—Fidelity Investments introduced its “Fidelity Go” hybrid human-and-robo retail managed account platform to the public this week.

Fidelity Go is an “advisory solution for investors seeking a trusted team to manage their money through a simple and efficient digital experience,” according to a Fidelity release. The service is aimed at the growing number of “digital first” investors who function primarily online.

“We’re trying to support the younger investor,” said Rich Compson, the head of Fidelity’s existing $200 retail managed account business, in an interview with RIJ.

“The product has a digital interface but in the background, managing the money, we have a portfolio manager [Geode Capital Management] who’s driving all the trading. If the investor wants help beyond the digital experience, we have over 300 registered phone reps available to assist,” he said.

The disarming homepage greeting, minimally-invasive questions and instant sample portfolio generation process is as frictionless and informal as the one that robo-advisors like Future Advisor, SigFig and Betterment use. The introductory webpage offers a brief video (see above) of a young woman with the type of Eurasian features that since the 1990s has served advertisers as a universal representation of a multi-cultural society.

(In a year-long partnership that ended last November, Fidelity’s advisors used some of Betterment’s technology. Fidelity Go does not, however, use Betterment’s process of following up on visitors who start but don’t complete the online sign-up process, according to Fidelity.)

The service, whose minimum investment is $5,000, costs an all-inclusive 35 to 40 basis points a year. It includes the instant construction, based on each client’s stated age, goals, and risk tolerance, of a balanced portfolio made up of low-cost iShare ETFs and Fidelity mutual funds. “We’re pushing an all-in cost focus,” Compson told RIJ. “These investors are focused on transparency, our research shows. Our costs are among the lowest in the industry and state annual fees in simple dollar terms. To get the lowest cost in the marketplace on ETFs, we partnered with BlackRock.”

Different approaches

In the direct-to-consumer digital advisory channel, Fidelity Go will challenge Vanguard’s Personal Advisor hybrid service and Charles Schwab’s automated Intelligent Portfolios. Each service is positioned a bit differently. Vanguard’s service costs only 30 basis points a year, and includes phone and Skype contact with a personal financial advisor and mobile account access. But the minimum initial balance is $50,000. The service is aimed more at Gen X, Y, Boomers and current Vanguard clients than at shallow-pocketed Millennials. Fidelity Go sidebar

Schwab’s portfolio construction service, launched in March 2015, is the only one of the three that includes both proprietary and a wide range of outside investment options, but it is pure robo—there’s access to Schwab phone reps but not to advisors. It has a $5,000 minimum and charges nothing—no advisory fees, commissions or account services fees—above the fees on the 20 ETFs available for investment.

Although Schwab and Vanguard arrived first in this market, “I don’t think Fidelity has lost anything by waiting,” William Boland, an analyst with Aite Group, told RIJ. As a group, he added, “the self-directed firms have had a head start in that they were initially discount brokerage firms. They’ve always provided technology direct to clients and have an early-mover advantage in that respect. Fidelity has also launched before any of the wirehouses have gotten traction.”

None of the wirehouses—Bank of America Merrill Lynch, Wells Fargo, UBS and Morgan Stanley—has yet launched a robo, Boland said. “UBS has partnered with SigFig, but that’s not in the market yet. How the wirehouses price their robo services relative to full-service brokerage is still to be determined. But they have advantages. Wells Fargo and Merrill Lynch have thousands of bank customers they tap into.”

A two-way street

Boland added that the wirehouses, with their emphasis on full-service wealth management, can be expected to offer a client experience that’s different from that offered by the direct robo providers. “While there’s an industry-wide moved to empower clients to interact digitally, the direct players may give the greatest degree of empowerment,” he said.

The digital channel, it’s worth emphasizing, is a two-way highway whose commercial potential is huge—and perhaps alarming to privacy hawks. It allows marketers to push out messages to clients’ smartphones. Large financial services companies will be able to use internal or acquired “big data” to fashion highly customized, unsolicited thought-leadership and marketing messages and send them to clients who don’t opt out of receiving them.

“We want to maximize the digital platform. We will send messages to talk about how well clients are making progress to their goals. We can push out event-based messages and timely updates on our point of view. When Brexit happened, we pushed out a ‘stay the course’ message. We also have an application with the [Apple] iWatch to do push-notifications.” At a minimum, Fidelity Go investors will receive “regular communications on Fidelity’s perspectives on the market, and educational content including Fidelity Viewpoints,” Fidelity said in its release.

“There will be ‘push,’” Boland told RIJ. He added that companies, not only in the financial world but in the broader retail world, “walk a fine line” in terms of how aggressively they can take advantage of the digital two-way street to push new products and services.

The ‘Save Our Social Security Act of 2016’: A Major Step Toward Reform

Posted on July 28, 2016 by Eugene Steuerle -

Without fanfare, a bipartisan group of Representatives has introduced a bill that could bring Social Security’s finances close to long-term balance. Labeled the “Save Our Social Security Act of 2016,” the proposal also recognizes an important fact: that the longer we delay reform, the more it will cost post-babyboom generations.

Gen X and Y and Millennials are already scheduled to pay more for their benefits than boomers and older generations no matter what path we take to reform. Whether we raise payroll taxes, use more income taxes to pay off Social Security obligations, or cut benefits, someone must pay. Delaying reform only increases the burden on the young.

The “SOS Act,” as it is called, was introduced by five Republican and one Democratic member of the House. Co-sponsors Reid Ribble (R–WI) and Dan Benishek (R–MI) were joined by Jim Cooper (D–TN), Cynthia Lummis (R–WY), Scott Rigell (R–VA), and Todd Rokita (R–IN). They pieced together the proposal using an interactive tool offered by the Committee for a Responsible Federal Budget. (Disclosure: I serve on the committee’s board of directors).

The bill contains these primary features (listed in order of their ability to shrink Social Security deficits; the last two would raise deficits):

Increase the “normal retirement age” (NRA) by two months per year until it reaches 69 for those turning 62 in 2034. Thereafter, it indexes the NRA to increases in longevity, so that the fraction of a lifetime spent in retirement stops growing.
Levy the OASDI tax on 90% of covered earnings.
Use a more accurate measure of inflation to determine Social Security’s cost-of-living adjustment (COLA), so that benefits fall by about one-third of one percent per year.
When calculating average Social Security earnings, count a few more years than the 35 top-earning years, thereby creating a more accurate (and usually lower) measure of the share of a worker’s average lifetime earnings that will be replaced under the Social Security benefit formula.
Under Social Security’s current design, the first dollars of average lifetime earnings are replaced at a 90% rate, the next dollars at a 32% rate, and the last dollars at a 15% rate; under the proposal, the 15% rate would drop to 5% for those in that top earnings bracket.
Raise annual benefits by roughly $1,000 a year for those with more than 20 years of coverage, and let that amount grow at the average wage growth rate.
Set a special minimum benefit so that, for instance, workers with 20 years of coverage would receive a benefit no lower than the poverty level, and increase the minimum benefit by the average wage growth rate instead of the inflation rate.

These changes would bring the Social Security system close to long-term solvency. Enough taxes would accrue to pay full benefits not only for 75 years, but also to roughly cover benefits in the 75th and later years. By contrast, the last major reform (in 1983) didn’t close the long-term gap.

Almost as soon as that Reagan-era bill was passed and signed, its failure to cover the period after 75 years led Social Security actuaries to declare the system’s finances out of balance. The solvency issue would pop up again under subsequent presidents. The SOS Act, however, would restore balance, and do so equitably: by closing one-third of the funding gap through tax increases, one-third through progressive rate changes, and one-third through adjustments in the retirement age.

The bill can still be improved. It could do more, at a fairly moderate cost, to help those with below-median lifetime incomes. (As a member of the bipartisan 1999 National Commission on Retirement Policy, I was among the first to propose higher minimum benefits as a way to address distributional issues and improve benefits for low and moderate-income elderly.) The bill could also address the structure of survivor and spousal benefits, which is built on the notion of a stereotypical mid-20th century household with a male breadwinner and a stay-at-home wife. It could also address the negative economic consequences of keeping the early retirement age at 62 no matter how long people live.

For those who are interested, Social Security’s assessment of the bill’s consequences is helpful to read but it can also be misleading. The assessment implies that future retirees’ income replacement rates will fall relative to those of current retirees. That’s true only if Americans keep retiring as early as they currently do. In fact, many people (except those with the highest incomes) could enjoy an increase in replacement rates simply by working an additional year for every year the average life expectancy improves.

Summer Issue of the Journal of Retirement Appears

Posted on July 28, 2016 by Editorial Staff -

The Journal of Retirement (an academic journal; its editor, Sandy Mackenzie, is pictured at left) has just issued its Summer 2016 issue. The titles of the articles, along with synopses, can be found below.

Of the eight new articles, the one called “Strategies for Managing Retirement Risks” might be the most relevant for financial planners and advisors. For plan providers and sponsors, David Blanchett’s article sounds intriguing.

The contents of Vol. 4, No. 1 are:

Editor’s Letter, by Sandy Mackenzie

Strategies for Managing Retirement Risks, by David Laster, Nevenka Vrdoljak and Anil Suri.

This article shows retirees how to deal with the biggest retirement risks (longevity, health care, sequence of returns, and inflation) by claiming Social Security at the best time, allocating assets to lifetime income annuities, adopting a systematic withdrawal strategy, and planning for long-term care.

Governance: The Sine Qua Non of Retirement Security, by Michael E. Drew and Adam N. Walk.

In the defined contribution system, where pooling or risk-sharing is rarely possible, achieving retirement security for all plan participants is a challenge. The authors suggest changing the governance and regulatory framework of DC plans to better meet this challenge.

Mandated Retirement Systems and Implied Benefits and Costs for Workers from Various Generations in Selected Countries, by Sylvester J. Schieber.

This article considers the relative costs and benefits of participation in mandatory retirement systems for workers at three earnings levels in Australia, Canada, the UK and the US. The author estimates how the systems treat workers retiring today and in 2025, 2035, and 2045, if current policies persist. The article also discusses the possible effects of different reforms of Social Security on workers.

Defaulting Participants in Defined Contribution Plans into Annuities: Are the Potential Benefits Worth the Costs? by David Blanchett.

Adding annuities as part of the investment default in defined contribution plans is likely to benefit DC plan participants as long as the decision is “well calibrated to the demographics and financial position of the participant population, the author writes. Ideally, the plan’s default investment would provide personalized recommendations, e.g, managed accounts instead of target date funds.

Declining Wealth and Work among Male Veterans in the Health and Retirement Study: An Approach to Financial Planning of Retirement Pensions with Scenario-Dependent Correlation Matrixes and Convex Risk Measures, by Alan L. Gustman, Thomas L. Steinmeier and Nahid Tabatabai.

Veterans who reached the ages of 51 to 56 in 1992 were better educated, healthier, wealthier, and more likely to be working than their nonveteran peers, the authors found. But veterans who reached the ages of 51 to 56 in 2010 (and who served in an all-volunteer army) were less prosperous than non-veterans. The findings were based on an analysis of four cohorts from the Health and Retirement Study (HRS), those aged 51–56 in 1992, 1998, 2004, and 2010.

Ethical Issues in Retirement Income Planning: An Advisor’s Perspective. Jamie P. Hopkins, Julie A. Ragatz and Chuck Galli.

The Ethical Issues in Retirement Income Planning study gathered the perceptions of expert retirement income planners. Among the findings:

64% of respondents believed that the overall ethical culture in the retirement income industry was solid.
36% that expressed some concern. However, advisors were not without concerns.
Financial elder abuse was the top ethical concern identified by respondents. Respondents worried about the industry’s ability to identify cases of financial elder abuse and exploitation.
Retirement advisors often lack enough knowledge of Social Security, Medicare, and tax planning to make recommendations in the best interest of their clients.
Consumers lack the financial literacy to understand the complex products or plans offered to them.

Hopkins is co-director of the New York Center for Retirement Income at The American College. Ragatz is director of the Center for Ethics in Financial Services at The American College. Galli was until recently a Securian Research Fellow at The American College.

An Approach to Financial Planning of Retirement Pensions with Scenario-Dependent Correlation Matrixes and Convex Risk Measures. William T. Ziemba

The article describes an approach to asset–liability modeling using discrete time stochastic linear programming. Applicable to insurance companies, bank trading departments, overall bank asset–liability management, and other financial institutions, the model uses future scenarios and optimizes the asset–liability mix subject to various constraints. Use of the model by the Siemens Austria pension fund is described.

Enhancing U.S. Retirement Security through Coordinated Reform of Social Security Disability and Retirement Insurance Programs. Jason J. Fichtner and Jason S. Seligman.

Most OASDI (Old Age, Survivor and Disability Insurance) reform proposals recommend reforming disability insurance separately, after reforming the retirement system. This article recommends considering reforms to disability and old age insurance in tandem.

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.

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

Data Connection