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Poland’s experiment with private pension funds nears end

Posted on July 7, 2016 by -

The second-pillar of Poland’s pensions system (known as Open Pension Funds or by its Polish acronym, OFE), which consists of individual accounts in privately-run investment funds, is about to topple.  

The Polish government intends to transfer 75% of the savings held in the OFEs to the voluntary third pillar tax-advantaged system of individual savings accounts (IKEs), and 25% to a fund (the Demographic Reserve Fund, or FRD) that Poland set up in 2002 to cover shortfalls in the ZUS, the basic, first-pillar government pension.  

A government official said that the plan was not a “nationalization” of the OFE system. He described it rather as “a transfer of public funds to the Polish people themselves.”

The current OFE system, a once-mandatory private capital markets investment program, was introduced in 1999. Inspired by the exuberance of the late-90s equities boom, it helped Poland develop a capital market, centered on the Warsaw Stock Exchange.

But then came the financial crisis. Starting in 2010, various changes weakened the OFE program. The contribution rate was cut to 2.3% of pay from 7.3%. The program became voluntary, and workers began shifting their contributions to the ZUS.

In 2014 and 2015, much of the OFE assets were shifted, first in a lump sum and then in stages, to the ZUS, to satisfy the first pillar’s funding needs. Net outflows from the OFEs to the ZUS eventually exceeded OFE inflows.

Most Poles do not have an IKE, the private third-pillar vehicles that will receive three-quarters of the remaining OFE funds. IKEs are offered by Polish pension fund companies, insurance companies, banks, brokerages and investment fund companies. As of the end of 2015, Poles had set up only about 850,000 IKEs, compared with some 16.5 million OFE accounts at their peak. About 2.5 million OFE accounts are still active.   

Future pension reforms call for a new workplace savings system, called Workers’ Capital Plans (PPKs). Employers and employees would each contribute 2% of wages into the plans. If the participants are willing to add a further contribution (1% from employers and 2% from employees), their PPK will receive a bonus of PLN250,000 ($62,224).

© 2016 RIJ Publishing LLC. All rights reserved.

MassMutual completes purchase of MetLife’s U.S. retail advisor force

Posted on July 7, 2016 by -

Massachusetts Mutual Life Insurance Company (MassMutual) has completed its acquisition of the MetLife Premier Client Group (MPCG), MetLife’s U.S. retail advisor force, for $165 million. The purchase was announced last February 29.

The acquisition includes certain MetLife employees who support MPCG, along with MetLife’s affiliated broker-dealer, MSI Financial Services, Inc. (formerly MetLife Securities, Inc.), and certain assets associated with MPCG, including employee contracts.

The acquisition significantly expands MassMutual’s footprint in the U.S., which will grow to more than 9,200 financial professionals in more than 2,000 offices nationwide, increasing 60% and 45%, respectively.

The two firms also entered into a product development agreement under which MetLife’s U.S. retail business will develop certain annuity products to be issued by MassMutual.

© 2016 RIJ Publishing LLC. All rights reserved.

Advisors Excel invests in technology to integrate annuities and investments

Posted on July 7, 2016 by -

Advisors Excel, a registered investment advisor (RIA) and field marketing organization (FMO) for investment advisors and independent insurance agents based in Topeka, Kansas, will use Orion Advisor Services, LLC, a portfolio accounting service provider, to support its RIA, called AE Wealth Management.

Orion will provide back-office services related to reporting, billing and client statements. It will integrate the investment, annuity, and life insurance products on AE Wealth Management’s client relationship management (CRM) platform.

Orion’s “dashboards aggregate data [and] provide performance reporting, customized client statement and the fee billing structure,” said Cody Foster, Advisors Excel co-founder, in a release.

Orion Advisor Services was founded “for investment advisors by an investment advisor in 1999,” according to the release. The firm’s technology solutions are used by over 900 advisory firms with total assets under administration of more than $300 billion in more than one million individual accounts.  

© 2016 RIJ Publishing LLC. All rights reserved.

Vanguard reports on its services for small 401(k) plans

Posted on June 30, 2016 by -

Vanguard has issued the third annual “How America Saves: Small business edition,” a report detailing the plan design and participant savings trends of the small business 401(k) plans served by Vanguard Retirement Plan Access (VRPA).

VRPA was launched in 2011 to provide cost-effective 401(k) plans for small business owners with plans with up to about $20 million in assets. As of year-end 2015, VRPA served 4,500 plans and 200,000 participants, up from 445 plans and 16,000 participants at year-end 2012. Small businesses represent 99.7% of American employers.

One-sixth of VRPA plans have adopted automatic enrollment. “In VRPA plans with automatic enrollment, researchers reported participation rates that were nearly 50% higher than voluntary enrollment plans,” said a Vanguard release. More than one-third of these plans have instituted automatic annual escalation of contributions. 

As of year-end 2015, average deferral and median deferral rates were reported at 6.7% and 5.0%, respectively. Twelve percent of VRPA participants saved to the maximum of $18,000 ($24,000 for participants age 50+). Nearly one in five participants saved 10% or more of their annual income.

As of year-end, 75% of participants used a target-date fund when offered. In aggregate, more than 6 in 10 VRPA participants were invested in a professionally managed allocation—most of them in a single target-date option.  

Vanguard manages more than $800 billion in defined contribution plan assets as of March 31, 2016. It record-keeps for more than 5,900 plan sponsors and 4.1 million participants, including the 4,500 plans and nearly 200,000 participants served by VRPA (as of December 31, 2015).

© 2016 RIJ Publishing LLC. All rights reserved.

‘Live to 100? We can’t afford it’: Allianz Life survey

Posted on June 30, 2016 by -

“Everyone wants to live a long life, but nobody wants to get old.” So goes the adage. One might add that few people know how they would cover cost of living to 100, if they were so lucky.

The Gift of Time, a new study from Allianz Life Insurance Company of North America, shows that while Americans are optimistic about the prospect of living an average of 30 extra years, 70% feel financially unprepared to live to 100 and beyond.

The study found that fears surrounding money and a lack of planning keep people from taking risks and following their dreams. Nonetheless, Americans understand that preparation, self-discipline and a longevity plan are essential to a sense of fulfillment. 

More than three-quarters (79%) of the Gen Xers surveyed say they feel financially unprepared for a longer life, compared with 74% of Millennials and 57% of Baby boomers. 

When respondents were asked to finish the sentence, “Following your dreams is all well and good, but you need to have—-,” the top two prerequisites named were “enough money” (57%) and “a good financial plan” (50%). The biggest regrets reported (or potential future regrets for Millennials) were not saving more money (52%), not traveling more (38%), and not spending more time with their kids (32%).

  • For 45% of those surveyed, “uncertainty” best described their outlook. More than half (51%) identified “having enough money to last my whole life” as a very big problem when they thought about living to age 100. In contrast, the study also showed people’s awareness of solutions that could help.
  • 51% of respondents believed they would need to better plan their spending and saving, or live more modestly; 37% acknowledged that they might need to work longer or retire later.
  • Respondents who had a financial professional reported being happier (79%) with their major life choices; 64% of those who were happy with their major life decisions did not have a financial professional.  
  • 72% of respondents reported not having a financial professional. But 47% of these respondents would be more willing to seek one if he or she helped them create guaranteed income for life (47%), helped them plan for and fund a longer life (34%), and helped them with finances throughout life stages (31%).
  • When asked what stopped them from following a less conventional path in life, 46% blamed “worries about money, ” 33% said “life events” got in the way, and 22% cited “lack of a clear plan for how to go about it” or “fear of failure.”
  • 65% admitted that it was better to explore, experiment and travel earlier in life by changing when and how they attended school, worked, married or raised kids.
  • The Gift of Time found that almost half (49%) of respondents were open to a non-traditional model that was unique to their interests, instead of taking a traditional sequence of school, work, marriage, parenthood and retirement.

© 2016 RIJ Publishing LLC. All rights reserved.

Bank customers welcome “robo” solutions: Accenture

Posted on June 30, 2016 by -

Nearly one-half (46%) of bank customers are open to using robo-advice for banking services, according to a new report on the banking industry by Accenture. Consumers in the U.S. are slightly more open to robo-advice (46%) than Canadian consumers (43%).

The report, titled “Banking on Value: Rewards, Robo-Advice and Relevance,” is based on a survey of more than 4,000 retail bank customers in the United States and Canada, and is the most recent report in Accenture’s multi-year research on consumer banking attitudes and behaviors.

The report said that 79% of consumers welcome robo-advice from banks to determine how to allocate investments, what type of bank account to open (74%) and for retirement planning (69%).

This year’s survey found that speed and convenience (50%) and lower costs (29%) were cited by respondents as the primary benefits of robo-advice, with millennials and mass-affluent consumers expressing the most interest in the service.

The survey found that consumers are increasingly willing to bank with non-traditional players, closing the gap with those switching to large regional or national banks. Eleven percent of North American consumers (11% in U.S. vs. nine percent in Canada) switched banks in the past year. Among those respondents who have switched, 33% joined a non-traditional provider (online-only bank, payments providers, retailer or insurer), versus 23% who switched to a large regional or national bank.

Of those who switched, 15% of consumers ages 55+ joined an online-only bank, up from only five percent who said they did the same a year ago. Millennial switchers increased the move to online-only or payments providers from 24% in 2015 to 27% this year. Consumers ages 35-54 had a reverse trend; 30% moved to online-only or payments providers in 2015, down to 24% in 2016.

One-fourth of consumers in the U.S. said they would consider switching to a bank with no branch locations, up three percentage points from last year. Among Canadians, 23% would consider switching to a branchless bank, which is up eight percentage points from last year. Across North America, 26% of Millennials would consider switching to a branchless bank (up three percentage points from last year), and 34% of mass affluent consumers would do so, up ten percentage points from 2015.

While nearly one-quarter of North American consumers would consider switching to a branchless bank, the survey found that the branch remains popular. Today, one-fourth of survey respondents use the branch at least weekly, and it remains the second most preferred channel, after online.

By a wide margin, those who use the branch prefer “full service branches,” which include extended office hours and full sales support, over all other formats (61%). However, 19% of Millennials prefer “light branches” – highly automated with videoconferencing access to remote specialists.

According to the survey, the vast majority (87%) of consumers say that they will use the branch in the future. Respondents said they anticipate using the branch two years from now because “I trust my bank more when speaking to someone in person” (49%), and “I receive more value from my bank when speaking to someone in person” (47%).

Nearly one-fourth (23%) of respondents have experienced at least one incident of their financial data being hacked online over the past two years, including 25% in the U.S. and only 16% in Canada.

Despite this, consumers are willing to share their data in order to receive better service from their bank. Nearly two-thirds (63%) of respondents are willing to give their banks direct access to personal information, such as mortgage, credit card and student loan data, so their bank can use it to present them with suitable products and services.

Respondents want banks to use their data to provide access to lower prices, faster service (such as rapid loan approval), more relevant advice, and personalized offers based on location.

© 2016 RIJ Publishing LLC. All rights reserved.

Surrender to Lapse Risk? Not These Insurers

Posted on June 29, 2016 by -

The variable annuity with a guaranteed lifetime income benefit (VA/GLWB) was and remains a masterpiece of flexibility. It lets contract owners keep their investment and income options open indefinitely. Since the early 2000s, that formula has helped close over a trillion dollars in sales.

But by giving clients lots of options, insurers made it harder for their own actuaries to predict how policyholders would use their contracts. That in turn, made it difficult to set prices and anticipate reserve requirements. Overestimates in surrender rates, for example, have led to sudden, expensive and unwelcome calls for extra reserves.     

Moody’s red-flagged this danger three years ago. Insurers “misestimated and underpriced the lapse rates on this product, as policyholders held on to their policies at a greater rate than the insurance companies anticipated,” a Moody’s analyst wrote in mid-2013.

“This miscalculation forced insurers to take significant, unexpected earnings charges and write-downs over the past year and a half,” he noted. In November 2013, to name one instance, lower-than-expected lapse rates forced Prudential to take a $1.7 billion charge.  

To better understand the factors that have driven their contract surrender rates in the past and to help them predict those rates more accurately in the future, a group of 18 large VA issuers, ranging from AIG to Voya, has been sharing anonymous client data with Ruark Consulting, a Simsbury, Conn., actuarial firm that specializes in this specific topic.

For several years, Ruark has been producing a series of “experiential” studies of actual VA contract owner behavior. This year, the firm and its “advisory council” of annuity issuers turned to the relatively new discipline of predictive analytics to build models that can predict policyholder behavior and help each company’s actuaries make more accurate assumptions. That project, now being implemented at several of Ruark’s client companies, could help annuity issuers hit their targets and meet the expectations of senior management, regulators, analysts and investors.

Predictive analytics

“Policyholder behavior assumptions used to be a relatively quiet corner of these products. They weren’t reviewed or challenged all that often,” Ruark president Tim Paris told actuaries from VA issuers during a recent webinar. “But income utilization behavior, and partial withdrawal behavior on GLWBs, are big question marks hanging over this line of business. How we answer them will help determine the profitability of the business over the next couple of years.”Participants in Ruark

Predictive analytics has been used, variously, to forecast the effects of global warming, to infer the creditworthiness of new loan applicants from a few bits of personal data, or to complete the URLs that you begin typing into your browser’s address bar. IBM is using its Watson technology to help broker-dealers predict which advisor will be most compatible with a new client, or to identify clients who are dissatisfied and likely to jump to another firm.

When it comes to applying predictive analytics to annuity policyholder behavior, insurers can’t do it—or can’t do it very effectively—on their own. Though each VA issuer has its own actuaries, and some insurers even have their own predictive analytics teams, their data is limited to their own experience, and some of their products are too new (and contract owners too young) to have established behavior patterns around withdrawals and income rider utilization. That’s why issuers have reached outside their walls to collaborate with Ruark and their peers.   

“Even large companies have holes in their data and can’t make statistically credible assumptions,” Paris told RIJ. “We can bring our tools to bear on a very large data set.” Ruark says it now has 50 million contract years of monthly data going back to 2007, provided by 20 VA/GLWB issuers. For a separate study, it has compiled 10 million contract years of data from a dozen providers of indexed annuities with GLWBs. 

Four factors drive surrenders

During a webinar in April, Ruark presented its plans for creating a predictive model for annuity surrender rates. Creating a model is both an art and a science. It involves choosing from among several existing techniques of statistical analysis, which, in laymen’s terms, means deciding which equations to use. Once those choices are made, the analysts must decide which types of data to plug into the equations.

From ten years’ worth of industry experience studies, Ruark has learned that a contract owner’s likelihood to surrender a contract is determined primarily by four factors: The number of years left in the contract’s surrender period; the type of living benefit rider on the contract; the “in-the-moneyness” of the contract (i.e., the extent to which the guaranteed benefit base exceeds the current market value of the contract assets), and the size of the policy.

Interpreting the exact roles of these factors isn’t easy, however. “We understand intuitively that surrender rates will spike as people come out of the surrender period and level off,” Paris (below left) said. “But we now know that the surrender rate also depends on the value of the guarantee, which goes up and down with the markets,” he added. “When we saw surrender rates go down after the financial crisis, we assumed it was an in-the-moneyness effect. Then the equity market recovered and the guarantees weren’t so deep in-the-money, but surrender rates stayed low.”

Tim ParisNow that Ruark has established its predictive model and settled on the four most important factors to run through it, the actuarial firm hopes to apply the analytic tool to creating benchmarks. Going forward, the benchmarks will reveal the accuracy of each company’s forecasts and show each issuer whether its experience falls within industry norms or not.   

“The results will vary by company because each company has a different mix of living benefits types, different ages of policyholders, and a different history of actual-to-expected results. The benchmark will show every company’s position relative to its peers,” Paris told RIJ, noting that the results are blind—each firm’s data remains confidential.

“Each company will then be able to explain to their analysts and stakeholders why their experience is different and to ask themselves if they want it to be different,” he added. The benchmark results can also give companies early warning signs, which will enable them to change their product distribution, for example, sooner rather than later.

“If you have more data and better analysis, then you won’t have to be as conservative in your use of capital,” Paris said. “You could also weed out products that are being used in undesirable ways. It brings clarity to the business. We’re talking about products that could be in force for as long as 40 or 50 years but have been around for only about ten years. So we try to squeeze as much insight out of the existing data as we can.”

© 2016 RIJ Publishing LLC. All rights reserved.

PwC to Wealth Managers: Go Digital or Drown

Posted on June 29, 2016 by -

At a recent fintech conference, several people spoke highly of a new whitepaper from PriceWaterhouse Cooper called, “Sink or Swim.” The paper’s authors make a strong case for the idea that big wealth management firms don’t fully appreciate the size of the competitive threat they face from the so-called robo-advisors and from the digital revolution generally.

For instance, wealth managers are kidding themselves, PwC says, in their much-too-common belief that merely having websites makes them “digital,” or that rich people will only deal with advisors face-to-face, or that the wealthy are too secretive to share personal financial data with a website, no matter how secure. 

As a group, they’re just whistling past the proverbial graveyard. “Across the wealth management industry, current levels of digital adoption are chronically low,” the paper says. “This is indicative of a sector that’s been focused on human capital, of assuring individual clients high levels of discretion, and where there has been little or no internal impetus to change existing business models.” 

Three key misconceptions are driving wealth managers’ complacency in the face of digital disruption, according to PwC consultants. The first one is that the rich don’t want to put their personal information on the Internet, where hackers, swindlers or hucksters might find it. PwC’s research shows that that’s increasingly untrue.

While most (59%) high net worth individuals over age 45 are in fact still squeamish about data-sharing, two-thirds of those under age 45 don’t mind using apps that gather personal information—such as purchasing histories—if the information is used to customize their online experience in ways that they like. In short, young people are ready to trade privacy for better service, PwC asserts.

“The world’s wealthy are integrating digital technology into their day-to-day lives as rapidly as everyone else,” the paper says. “Although they may have reservations about technology that draws on their personal data, ceding information is seen as a necessary price for enjoying the convenience that personalized digital services can bring.”

Secondly, wealth managers vastly underestimate the scope of the digital revolution, PwC says. The consulting firm foresees the approach of a Third Wave of digital evolution, where trusted “digital infomediaries” will have access to fully-aggregated, continuously updated financial information and will push out recommendations to buy both financial and consumer products. 

Many in the wealth management industry think they’re on third base in this game, PwC argues, when they’re still standing on first. Evidently, only a quarter of wealth management firms use digital channels beyond phone and email, very few have automated their back office and administrative functions and many are only now investing in web portals and mobile apps.

“Many relationship managers dangerously overestimate their firm’s digital capabilities. Some rate their business as digitally advanced when the only service offered to clients is a website. Low digital literacy throughout the sector means that most relationship managers cannot perceive their adoption of technology extending beyond tools to reduce their administrative burden,” the paper said.

Thirdly, PwC says, wealth managers don’t realize the fragility of their client relationships. Only 37% of wealth management clients strongly believe that their advisor “takes their life goals into consideration.” Only a third of wealth management clients claim to be “very satisfied with their chosen firm’s service.” And only 39% are likely to recommend their wealth managers to others. Of clients with more than $10 million, only 22% were very satisfied and only 23% would recommend their wealth managers. 

“Sink or Swim” goes on to describe the steps that wealth management firms should take to avoid being left behind. These steps include: buying a robo-advisor instead of building one in-house; digitizing their entire organizations, from back to front; and recognizing that “bolted-on” (i.e., superficial) fixes won’t be adequate.

“Rather than just an add-on, digital has the potential to completely transform every stage of the wealth management journey, from how existing clients are advised and serviced to how prospective clients are identified and marketed to,” the whitepaper said.

In sum, PwC sees a future where wealth managers create a digitized, scalable version of the services that a typical family office currently offers high-net-worth individuals. “By capturing and interrogating client data digitally, wealth managers may eventually be able to consider offering this highly personalized life guidance to families with lower levels of assets.”

The report, from a consumer’s perspective, is actually a bit scary. It takes for granted that the financial industry will follow Amazon, Netflix and other digital pioneers into a Big Data era (the “Third Wave”) where firms will know almost everything about their clients—their portfolio details, mental attitudes, day-to-day purchasing habits, life-event schedules and even their real-time geographic locations—and use this information to anticipate sales opportunities and recommend specific products.

Sounds like hell to me. “Sink or Swim” doesn’t address the possibility that consumers, at every wealth level, might turn around and ask for as much transparency from wealth managers as wealth managers ask from them. Personal data-sharing will, arguably, require a lot more public trust in the financial industry than currently exists. PwC therefore takes a big leap in assuming that just because clients are embracing the First Wave of the digital revolution—the convenience of mobile apps and the low cost of robo-advice—they will accept the loss of privacy that arrives with the Third Wave. Or at least I’d like to think so.

© 2016 RIJ Publishing LLC. All rights reserved.

‘Live to 100? We can’t afford it’: Allianz Life survey

Posted on June 29, 2016 by -

“Everyone wants to live a long life, but nobody wants to get old.” So goes the adage. One might add that few people know how they would cover cost of living to 100, if they were so lucky.

The Gift of Time, a new study from Allianz Life Insurance Company of North America, shows that while Americans are optimistic about the prospect of living an average of 30 extra years, 70% feel financially unprepared to live to 100 and beyond.

The study found that fears surrounding money and a lack of planning keep people from taking risks and following their dreams. Nonetheless, Americans understand that preparation, self-discipline and a longevity plan are essential to a sense of fulfillment. 

More than three-quarters (79%) of the Gen Xers surveyed say they feel financially unprepared for a longer life, compared with 74% of Millennials and 57% of Baby boomers. 

When respondents were asked to finish the sentence, “Following your dreams is all well and good, but you need to have—-,” the top two prerequisites named were “enough money” (57%) and “a good financial plan” (50%). The biggest regrets reported (or potential future regrets for Millennials) were not saving more money (52%), not traveling more (38%), and not spending more time with their kids (32%).

  • For 45% of those surveyed, “uncertainty” best described their outlook. More than half (51%) identified “having enough money to last my whole life” as a very big problem when they thought about living to age 100. In contrast, the study also showed people’s awareness of solutions that could help.
  • 51% of respondents believed they would need to better plan their spending and saving, or live more modestly; 37% acknowledged that they might need to work longer or retire later.
  • Respondents who had a financial professional reported being happier (79%) with their major life choices; 64% of those who were happy with their major life decisions did not have a financial professional.  
  • 72% of respondents reported not having a financial professional. But 47% of these respondents would be more willing to seek one if he or she helped them create guaranteed income for life (47%), helped them plan for and fund a longer life (34%), and helped them with finances throughout life stages (31%).
  • When asked what stopped them from following a less conventional path in life, 46% blamed “worries about money,” 33% said “life events” got in the way, and 22% cited “lack of a clear plan for how to go about it” or “fear of failure.”
  • 65% admitted that it was better to explore, experiment and travel earlier in life by changing when and how they attended school, worked, married or raised kids.
  • The Gift of Time found that almost half (49%) of respondents were open to a non-traditional model that was unique to their interests, instead of taking a traditional sequence of school, work, marriage, parenthood and retirement).

© 2016 RIJ Publishing LLC. All rights reserved.

 

Pace of stock buybacks slows: TrimTabs

Posted on June 29, 2016 by -

Stock buyback announcements by U.S. companies have fallen sharply this year, sending a longer-term negative signal for U.S. equities, according to TrimTabs Investment Research.

“Corporate America announced $2.8 trillion in stock buybacks in the past five years, and these buybacks have provided a key source of fuel for the bull market,” said David Santschi, CEO of TrimTabs, in a release.  “Corporate actions this year suggest this support is going to diminish.”

U.S. companies have announced only $11.8 billion in stock buybacks in June through Friday, June 24, according to TrimTabs. It is the lowest monthly pace this year. Buyback announcements by U.S. companies have totaled $291.7 billion this year, or 32% lower than the $432.0 billion in the same period last year. Only four companies have announced plans to repurchase at least $1 billion this month.

 “The sharp decline in buyback announcements suggests corporate leaders are becoming more cautious, and it doesn’t bode well for the U.S. stock market,” said Santschi. “Even if some of the too-big-to-fails roll out buybacks after the release of the second part of the Fed’s stress test results, this month’s volume is likely to be among the lowest in the past three years.” 

© 2016 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on June 29, 2016 by -

PacLife acquires Genworth’s term life new business platform

Pacific Life Insurance Company has acquired Genworth Financial’s term life new business platform, saying that the transaction will allow it to “extend its ability to fulfill the financial protection needs of a broader consumer market without disruption to Pacific Life’s current business platforms and sales channels.”

The new term life business will offer a separate product suite of low-cost life insurance protection products for the mass market. No financial details of the transaction were disclosed. The business will be located in Lynchburg, Va., and will begin operations in the fourth quarter of this year.

The acquisition “will allow us to accelerate our growth into the protection business without sacrificing our focus and responsibility to our core markets of highly affluent individuals and businesses,” said Rick Schindler, Executive Vice President of Pacific Life’s Life Insurance Division, in a release.  

As part of the transaction, Pacific Life hired certain Genworth staff, as agreed upon by the parties. Dawn Trautman, senior vice president of Product and Strategy Management for Pacific Life’s Life Insurance Division said her company expects to create at least 300 jobs in Lynchburg in the next three years.

Indiana Public Retirement System taps MetLife for annuities

The Indiana Public Retirement System (INPRS) selected MetLife as its future provider of member annuities. The change is expected to be effective April 1, 2017, with a contract finalized by next Jan. 31.

The decision by INPRS’ board of trustees, at its June 24 meeting, follows four years of public discussion regarding the financial risk of INPRS providing annuities internally.  In 2014, the Indiana General Assembly passed House Bill 1075 which set a glide path toward market-rate annuities and allowed the INPRS board to move to a third party provider in January 2017.

“MetLife will provide our members a similar benefit while protecting employers and taxpayers from the risks of managing this program internally,” said INPRS’ Executive Director Steve Russo. “They manage a more diversified line-up of businesses that uniquely positions them to accept more risk and potential reward than INPRS can.”

MetLife serves over 3,000 public sector organizations across the country. Over one-third of state governments across the U.S. offer MetLife group insurance or annuity benefits.

Use of an outside annuity provider has no impact on the pension benefits of current or future retirees. It affects only retiring members who choose to annuitize the money they’ve saved in INPRS annuity savings accounts (ASAs).

Members of the Teachers’ Retirement Fund (TRF) and Public Employees’ Retirement Fund (PERF) participate in a “hybrid” pension plan that includes both a pension plan and a separate ASA.

While TRF and PERF pensions provide a specified lifetime monthly benefit, members may choose what to do with their ASA funds. Some opt to take the money in a lump sum, while others leave it invested with INPRS. About 40% convert their ASA funds to a monthly benefit payment called an annuity.
With approximately $29.9 billion in assets under management at fiscal year-end 2015, the Indiana Public Retirement System (INPRS) is one of the largest 100 pension funds in the U.S., serving about 450,000 members and retirees and representing more than 1,100 public universities, school corporations, municipalities and state agencies. 

LPL advisors gain access to BlackRock’s iRetire platform

BlackRock’s iRetire retirement investment framework, iRetire, is now available to LPL Financial 14,000 independent advisors The platform uses on CoRI, BlackRock’s series of retirement income indexes, and the risk analytics of Aladdin. 

According to a BlackRock release, iRetire “enables advisors to initiate an income-focused discussion and then move clients to take action to help manage their income situation… [It] lets advisors show clients how much income their current savings could provide annually in retirement and how changes in behavior (e.g., working longer, saving more, changing their investment strategy) could help close the income gap.

Advisors can also use iRetire insights to build various portfolio scenarios for clients to consider, based on their retirement income goals.

BlackRock launched iRetire in November 2015 to help reframe the retirement planning problem and provide new solutions using BlackRock’s proprietary technology and support. Currently, the iRetire offering is available to 18,000 advisors on the wealth management platform powered by Envestnet, Inc., a provider of unified wealth management technology and services to investment advisors.

Prudential surveys financial concerns of LGBT community

In its first survey of LGBT Americans since the U.S. Supreme Court legalized same-sex marriages, Prudential Financial, Inc., found the LGBT community more worried about the threats that market volatility or low interest rates pose to their financial security than about gay rights issues. 

LGBT Americans, in other words, share the same concerns about saving for retirement as the general population. That finding departs from Prudential’s 2012 survey, when basic rights issues were top of mind. 

The 2016/2017 LGBT Financial Experience, explores changes following the U.S. Supreme Court’s year-ago landmark Obergefell decision and is the result of interviews with LGBT Americans in all 50 states during April and May.

“Having the fundamental right to marry has begun to simplify financial lives within the LGBT community,” said Kent Sluyter, CEO of Individual Life Insurance and Prudential Advisors. “Unfortunately, wage inequality, workplace insecurity and pension survivor benefits issues still cast a shadow on the ability to attain true financial security.”

Those surveyed say the right to marry has given them the ability to file joint tax returns, pay for health benefits with pre-tax earnings, list same-sex partners on health insurance, and ensure that a loved one’s interests are protected in the event of death.

But only a third say the Obergefell decision affected future financial plans. Among key findings:

  • The LGBT marriage rate has more than tripled since 2012, to 30% from just 8% in 2012’s survey. Most of the newly wedded said they married a longtime partner.
  • Half surveyed said being in a legally recognized same-sex partnership has simplified their finances, up from 13% four years ago.
  • Lesbian women reported an average annual salary of $45,606 vs. $51,461 for hetersexual women. Gay men reported average earnings of $56,936, compared with $83,469 for heterosexual men.
  • Concerns over legal and institutional barriers to achieving financial goals are strongest among same-sex partners.
  • Financial needs for the LGBT community are the same as for the general population, said 46% of those survey, but 45% said they need to follow a different path to meet their needs.

For more information about The 2016/2017 LGBT Financial Experience, please visit:http://www.prudential.com/lgbt. 

FidelityConnect, a portal for plan sponsor advisors, to roll out in early 2017

FidelityConnect, a new website for the more than 5,000 retirement advisors and consultants who manage workplace plans with Fidelity, is being piloted with a number of Fidelity advisor clients and is expected to be fully available during the first quarter of 2017, Fidelity said in a release this week.

Fidelity’s User Experience Design (UXD) team has met with more than 150 retirement advisors to find out how much time they spend researching investments, compiling reports and navigating the existing site. Retirement advisors and consultants said they wanted a single view into their entire book of business with Fidelity.

In response, Fidelity designed a personalized executive summary with three tabs: plans, investments and compensation. This view offers advisors instant, high-level analysis of all their plans with Fidelity, with the ability to drill down for details.

Behind the homepage, plan-level information helps advisors view and evaluate individual plan statistics and design, investments held, compensation, and contact information for sponsor clients.

These pages leverage Fidelity’s Executive Insights to offer advisors the same intelligence and benchmarking that sponsors receive. An advisor can easily see all the plans and participants invested in a single fund across their book of business, plus their performance and assets.

New regulations from the Department of Labor’s (DOL) Fiduciary Investment Advice Rule could put even more pressure on an advisor’s time with retirement plan clients. FidelityConnect is intended to give them greater access and control over a client’s plan design and investments.

DC plan participants crave lifetime income guarantee options: Prudential

Partly because many plan sponsors assume that participants aren’t interested in guaranteed lifetime income options with their plans, only about 4% (35,500) of defined contribution plans offer guaranteed lifetime income solutions.

But Prudential Retirement, which offers an optional guaranteed lifetime withdrawal benefit on target date fund portfolios in its plans, believes that most participants are in fact interested in so-called in-plan annuities. Prudential’s findings, based on a 2015 survey of 1,000 employees, are outlined in a report called The Ease of Automation and Guaranteed Lifetime Income. 

The report, the fourth in a series of reports examining how plan sponsors can help American workers save for retirement, shows that employees have a keen interest in auto-enrollment, auto-escalation and guaranteed lifetime income options as part of DC plans such as 401(k) or 403(b) plans. 
Of plan participants who said they were familiar with guaranteed lifetime income options, 78% believe it’s “very important” to include them in workplace savings plans and 77% said they would choose such an option, Prudential found. Among other findings: 

  • 54% of participants say they believe guaranteed lifetime options offered as a default investment option would provide better-than-average retirement outcomes.
  • 80% of plan participants plan to rely on their workplace plans as a source of lifetime income more than any other source—including Social Security. 
  • 71% say auto-enrollment is an importance feature of DC plans. 
  • 45% worry they won’t meet their retirement goals through their current plans. 
  • Millennials are more enthusiastic about automatic plan features and guaranteed income solutions than any other age group. 

Software maker sees opportunity in DOL ruling

Anticipating rising demand among advisors for more holistic financial plans and better documentation systems under the DOL fiduciary rule, Advicent, a software-as-a-service (SaaS) provider to financial institutions, has launched two new tools, called Narrator Clients and Narrator Advisor.

“Financial planning software was often regarded as ‘nice to have,’ but the DOL is now driving it to be a ‘need to have,’” said an Advicent release. “If advisors want to remain relevant in the digital world and remain compliant to new legislation, they need to re-think the way they work.”

According to Advicent’s website, Narrator Clients is an interactive client portal that “offers advisors and their clients insight into their personal financial plan anytime, anywhere with transparency and security…  with 24/7 accessibility and actionable analytics.” Narrator Advisor gives advisors a dashboard where they can see and analyze their clients’ holdings.

“Holistic financial planning will play a key role when creating compliance strategies for the impending DOL fiduciary rule for many financial services professionals,” said an Advicent release. “Advisors will need to deliver proof that they are providing credible advice that is in the best interest of their clients. Planning software and other FinTech tools will make this easier to accomplish and keep these records if they are needed in the future.”

Advicent provides SaaS technology solutions for the financial services industry. Its products include the NaviPlan, Figlo, and Profiles financial planning applications (which power the Narrator Advisor and Narrator Clients portals); the Advisor Briefcase marketing communications tool; and the Narrator Connect application builder, which drives Advicent APIs.   

© 2016 RIJ Publishing LLC. All rights reserved.

A Maserati for the Mo-ped market

Posted on June 23, 2016 by -

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.

© 2016 RIJ Publishing LLC. All rights reserved.

 

 

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

Posted on June 23, 2016 by -

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.

© 2016 RIJ Publishing LLC. All rights reserved.

Vanguard funds continue to dominate asset flows: Morningstar

Posted on June 23, 2016 by -

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.

© RIJ Publishing LLC. All rights reserved.

European pension executives criticize quantitative easing

Posted on June 23, 2016 by -

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.” 

© 2016 IPE.com. 

Robos Take Manhattan

Posted on June 22, 2016 by -

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.

© 2016 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on June 22, 2016 by -

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.  

© 2016 RIJ Publishing LLC. All rights reserved.

The Cinderella Annuity

Posted on June 16, 2016 by -

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.   David Richardson  

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.”

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