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Test Your Reverse Mortgage IQ

Posted on June 2, 2016 by -

Whether it’s an urban brownstone, a tract-mansion in the suburbs or a rural trailer on cinder blocks, our homes are often our biggest financial assets and our biggest liabilities. For many older people, home equity outweighs their savings. Their mortgage payment, if they still have one, may also be their single largest expense.

Yet “seniors” as a group don’t know much about reverse mortgages. That’s ironic, because home equity conversion mortgages (HECMs), as they are officially known, could help a lot of retirees improve their standards of living by unlocking the equity in their homes.

Not long ago, The American College decided to address the issue of using home equity in retirement, and to make reverse mortgages part of the curriculum of its Retirement Income Certified Professional designation. To benchmark the public’s level of knowledge about HECMs, the College’s New York Life Center for Retirement Income also sponsored a survey.

The survey consisted of 10 true-or-false questions about HECMs. Pollsters Greenwald & Associates and Research Now administered it to about 1,000 Americans between ages 55 and 74 with at least $100,000 in investments and $100,000 in home equity.

If you’re an advisor, or if you think you might ever consider using a reverse mortgage, we invite you to take the quiz yourself. One of the survey’s findings was that people with financial advisors didn’t score any better or worse than respondents without advisors. You can jot down answers to the questions below or access an electronic version of the quiz. 

The test should be particularly useful for advisors with older clients, especially advisors who practice lifecycle planning and/or develop holistic financial plans for their clients. Such planners typically include the entire household balance sheet in the plan, including home equity and potential for earning income in retirement (human capital).

After you take the quiz, a link will take you to The American College report on the survey, where you can find out how well you did and compare your knowledge with that of others. 

The American College Reverse Mortgage Quiz

  1. The earliest age at which a person who is the sole owner of a home can enter a reverse mortgage is 62. (T/F)
  2. If the value of your home has grown since you bought it, entering into a reverse mortgage would result in a taxable gain. (T/F)
  3. Under a reverse mortgage the homeowner generally is not required to repay the loan until he/she stops using the home as the principal residence. (T/F)
  4. You cannot enter into a reverse mortgage unless your home is completely paid off and there is no outstanding mortgage balance. (T/F)
  5. One downside with a reverse mortgage is that if the home goes under water (the home is worth less than the amount owed to the lender), the homeowner, estate or heirs need to pay off the additional debt. (T/F)
  6. The only currently available form of payment from a reverse mortgage is a single lump sum distribution. (T/F)
  7. The amount of money that you can borrow as a reverse mortgage depends on the age of the younger borrower or eligible non-borrowing spouse, the current interest rate and the value of the home. (T/F)
  8. A reverse mortgage is different from a traditional mortgage in that the homeowner is not responsible for any property taxes or insurance payments. (T/F)
  9. Generally using a reverse mortgage early in retirement to support a retirement plan is better than as a last resort toward the end of retirement. (T/F)
  10. Because of concerns about poor money management and financial elder abuse, the Government has restricted the use of reverse mortgage proceeds to health care benefits, long-term care costs, home improvements and tax payments. (T/F)

To find out how well you did on the test compared to typical older investors, click here. If you got five or more correct, you beat the average. If you scored a seven or higher, you passed. The average score was 4.8 and only 30% of those surveyed passed the test. No one posted a perfect score.

Men’s average score (5.4) was the higher than women’s (4.1). Those ages 62 to 74 outperformed those ages 55 to 61. Those with more savings and home equity tended to know more about HECMs.

As you can see, Americans don’t know much about reverse mortgages. That’s not surprising. For reasons that were described in RIJ’s recent series on reverse mortgages, the loans have received lots of bad publicity over the past decade and the rules have changed more than once. HECMs are rarely recommended by advisors, who typically aren’t licensed to broker mortgage loans and have no clear financial incentive to learn about them or show their clients how to use them.

Besides the quiz, The American College gathered attitudinal information about the 1,005 people who took the survey. Although a majority of respondents wanted to stay in their homes during retirement, only 44% had ever considered tapping their home equity. Only 25%, including only 63% of the 14% who had considered a reverse mortgage, felt “comfortable” spending down home equity in retirement.

Older Americans clearly have enough home equity to spark a HECM boom. Collectively, retirees and near-retirees have some $5 trillion in home equity, according to one estimate. Eighty-one percent of Americans ages 60 and older own homes. The median net worth for people age 65 and older is about $194,000, of which about $150,000 is equity in their homes, according to the U.S. Census Bureau.

But home equity, like income and wealth in general, isn’t evenly distributed. The least wealthy half of Americans have an average of less than $100,000 in home equity, and even the next 40% have an average of only about $120,000 in home equity on average, according to the Federal Reserves’ 2016 Survey of Consumer Finances. The wealthiest 10% of Americans—those most likely to have advisors—had an average of more than $400,000 in home equity in 2013 (down from a peak of $600,000 in 2007).

While that imbalance might limit the size of the HECM market, reverse mortgages can still serve as important components in a holistic retirement income plan for certain people—those who want to wipe out an existing mortgage, get a chunk of cash, create a monthly income, or have a source of ready money that would remove the pressure to sell depressed stock during a market downturn. 

“Retirement income planning is extraordinarily challenging. Retirement income professionals are expected to manage a variety of client risks, legal changes, and ethical issues when developing a comprehensive plan,” wrote Jamie Hopkins, the co-director of the New York Life Center for Retirement Income and a professor of taxation at The American College.

“The survey responses show that many people moving into retirement with some home equity do not fully understand reverse mortgages, including those individuals that have reviewed reverse mortgages as a potential income source,” he added.

“While a reverse mortgage is not the right solution for every retiree, it can be a helpful retirement income tool. A reverse mortgage can diversify your home equity, build in a non-market correlated source of income to help offset market and sequence of returns risk, can be used to improve cash flow by turning off payments to a traditional mortgage, and be used for tax efficiency purposes during retirement.”

© 2016 RIJ Publishing LLC. All rights reserved.

Financial Groups Take DOL to Court—in Texas

Posted on June 2, 2016 by -

Leaving investors to wonder why anyone would oppose a rule requiring brokers to act in their clients’ best interests, financial trade groups and lobbying organizations sued the Department of Labor today for relief from the DOL’s conflict-of-interest or “fiduciary rule,” promulgated in early April.

Plaintiffs in the lawsuit are the Financial Services Institute, the Financial Services Roundtable, the Insured Retirement Institute, the Securities Industry and Financial Markets Association, the U.S. Chamber of Commerce, and a number of local Texas organizations. A law professor said today that the suit, if successful, might have force only in Texas.

The suit was filed in the United States District Court, Northern District of Texas, Dallas, rather than in the DOL’s home court of the District of Columbia. The Chief Judge of the Northern District is Barbara M.G. Lynn, a Clinton appointee who joined the court in November 1999. She assumed the chief judgeship only about a month ago.

For an analysis of a then-hypothetical lawsuit against the DOL, published by RIJ last February, click here. 

The plaintiffs ask the federal court to vacate and set aside the DOL rule and its prohibited transaction exemptions. In asking for relief, the plaintiffs named seven grounds for the lawsuit, or counts:

  • The Department has improperly exceeded its authority in violation of ERISA, the Internal Revenue Code, and the Administrative Procedure Act.  
  • The fiduciary rule violates the Administrative Procedure Act because it is arbitrary, capricious and irreconcilable with the language of ERISA and the Internal Revenue Code.   
  • The Department unlawfully created a private right of action.  
  • The Department failed to provide adequate notice and to sufficiently consider and respond to comments.
  • The Federal Arbitration Act prohibits the BIC and principal transactions exemptions’ regulation of class action waivers in arbitration agreements.
  • The Department’s regulation of fixed indexed annuities and group variable annuities is arbitrary, capricious, barred by the Dodd-Frank Act, and was not subject to proper notice and comment.
  • The Department arbitrarily and capriciously assessed the rule’s benefits, consequences and costs.
  • The Department’s Best Interest Contract Exemption impermissibly burdens speech in violation of the First Amendment. 

Editor’s note: RIJ believes that the federal government subsidizes the retirement industry through favorable tax treatment, and that the public therefore deserves the assurance that anyone advising them on their retirement investments will act in their best interest, and be held accountable for it.

A caveat emptor, “buyer beware” or “suitability” standard of conduct is simply not appropriate in a publicly subsidized industry. No one should expect to benefit from the subsidy, estimated at more than $100 billion per year, without bearing the burden of fiduciary duty. Those who don’t like the rules are welcome to limit their sales activities to owners of after-tax accounts. 

A central floorboard of the industry’s argument also seems creaky. Commission-based brokers and agents say, in effect: My sales efforts are too valuable to impede because useful advice comes with it… but the advice is merely incidental, as the law provides, so you shouldn’t regulate me as a fiduciary. 

As we went to press: Secretary of Labor Tom Perez today issued the following statement regarding a lawsuit filed to stop the department from ensuring that retirement savers receive investment advice that is in their best interests.

“People saving for retirement have a legal right and a compelling economic need to receive retirement investment advice that is in their best interest. Today, a handful of industry groups and lobbyists are suing for the right to put their own financial self-interests ahead of the best interests of their customers. 

“Conflicted advice is eroding the savings of working Americans to the tune of $17 billion each year. The Conflict of Interest rule aims to address that problem by requiring retirement advisors to look out for the best interests of their clients. Many financial services professionals, from small town advisers to some of the nation’s largest firms, engaged constructively with the department throughout the rulemaking process and, after publication of the final rule, noted that they do put the interests of their clients first and are well positioned to comply. They recognize that putting their customers first is good for business.

“But there is a small, vocal minority who support the status quo that enables them to put their own interests first. This lawsuit seeks to vindicate their desire to put their own interests ahead of their clients’ best interests.

“This rulemaking was one of the most deliberate, open regulatory processes in recent memory. We had countless meetings and conversations with industry and stakeholders, considered thousands of comments from the public, held several days of public hearings and coordinated with our fellow federal agencies over the course of more than five years. We heard what stakeholders had to say, thoughtfully considered their comments and made improvements to the rule based on their feedback.

The department’s Conflict of Interest rule is built upon solid statutory and legal foundations, and we will defend it vigorously. 

© 2016 RIJ Publishing LLC. All rights reserved.  

The American College Is Keen on HECMs. Here’s Why

Posted on June 2, 2016 by -

Few financial advisors mention reverse mortgages when they talk to their 60-something clients, and few older clients consider these instruments. The American College, which sponsors the Retirement Income Certified Professional designation, would like to reverse that situation.

With its recent survey of upscale Americans over age 55 regarding these federally-insured loans against home equity (see today’s RIJ cover story), the Bryn Mawr, Pa-based academic institution deliberately took a public stand—not that they are good or bad but that they have a legitimate place in any retirement advisor’s financial toolkit.  

“Whether it’s for a legacy or for long-term care expenses or for use strategically at the beginning of retirement, a lot of people will have to consider using their home equity at some point. So we said, ‘Let’s try to lead that conversation,” said Jamie Hopkins, the co-director of the New York Life Center for Retirement Income at the College as well as an attorney and professor of taxation (below).Jamie Hopkins

“We’re not taking a particular stance on the product. But we thought it was very much in our wheelhouse to show people how reverse mortgages should be used and how they shouldn’t be used,” he told RIJ recently.

“Reverse mortgages aren’t right in every situation. But the changes in the last couple of years have made them worthy of a second look. The question is, how can we help the decisions around home equity become coordinated into retirement income planning better?” he added.

In a recent series on home equity conversion mortgages (HECMs) and lines of credit (HECM-LOCs), as reverse mortgages are also known, RIJ explored some of the reasons why these products aren’t more popular, given their potential benefits. They allow people over age 62 to borrow amounts equal to about half or more of their home equity (depending on the age of the youngest borrower, prevailing interest rates, etc.) while continuing to live in their homes. No payments on the loan are due until they die or move, and they pay only the usual taxes and maintenance in the meantime.

There were several reasons. Reverse mortgage pricing is not very transparent, which, coupled with the uncertainty of life expectancies, makes it hard for people to gauge the cost or the value of their loan. HECMs also lack a strong distribution network.  Broker-dealer advisors have little or nothing to gain by recommending them, and a lot to lose (questions from FINRA, their self-regulating body, which traditionally doesn’t approve of reverse mortgages).   

But when The American College was creating its RICP designation, Hopkins and others decided that retirement advisors should learn about reverse mortgages, that the school was the right institution to teach the subject, and that the inclusion of HECMs in the designation’s curriculum would be a distinguishing feature. 

“As we got further into the retirement income planning arena, and looked at the Baby Boomer assets and how to be strategic about it, you could see that people don’t have a lot saved. But they do have Social Security and home equity. Average Americans have twice as much wealth in their homes as they do in other assets. So making the right decisions about Social Security and about the home is important,” Hopkins told RIJ.

Yet few advisors think to leverage this wealth. “Nobody is giving advice in this area,” Hopkins said. “Rarely do I run into RIAs who plan for home equity or any other aspect of the home. It falls outside their planning process. But it’s ridiculous to ignore two-thirds of peoples’ wealth. People just assume that when they die the house will go to the kids. That’s the default plan. But a default plan is not a very good plan. So we said, as a college, shouldn’t we be involved in this topic?”

Changing trademark

“We’re a school that’s trying to change its trademark from life insurance to comprehensive planning. There are no other places that own the thought leadership in [the HECM] area. Social Security and qualified plans are huge topics, you can’t own those topics, but we thought we could make a big impact in this area. I said, ‘Let’s play to where the puck is going to be.’ As a group, the baby boomers won’t collectively make through retirement without using their homes. At some point, most of them will have to use it,” Hopkins said.

Several well-known academics have explored the use of home equity within a retirement income strategy, including economics Nobelist Robert Merton. “But it’s only one professor here or there. We are in the right space to do this. We have the RICP program, we have Wade Pfau (the head of the school’s doctoral program in retirement income) as a researcher on the topic, and we had the New York Life Center for Retirement Income,” he added.

When we created the RICP, “we knew we’d talk about housing decisions, and include descriptions of the basic reverse mortgage and the Saver’s HECM, going through all the features,” he said. “Then we made a more strategic decision. We said, how we pull all the ideas about the home—prepaying the mortgage, taking single-purpose or special purpose loans, home-sharing—and approach them systematically.”

That was a potentially risky move, given the poor reputation of the reverse mortgage industry. But “we haven’t seen pushback,” Hopkins said. “At the beginning we thought, Will companies ask us why we’re doing this? And sometimes an advisor in the RICP program asks why we’re talking about these things. But we get the same kinds of questions about variable products and mutual funds. Any product can be used poorly. But we think there is a spot for reverse mortgages in financial planning. We think it needs to be part of a comprehensive retirement plan.

“The state of reverse mortgage planning looks like the state of long-term care planning a decade ago. People didn’t discuss it. They just assumed that you’ll run out of money and end up on Medicaid and they didn’t buy the insurance. We’ve seen that begin to change, as more people begin planning for their long-term care needs and incorporating long-term care into their retirement plans,” he told RIJ.

“We have this incredibly silo-ed approach to reverse mortgages,” Hopkins added. “The advisor says it’s not his territory. People got to a broker and find that they just get products and not advice. You get a piecemeal approach to financial planning and that’s not how it should work, ideally. A planner should be able to say, here are x, y, z things, and here are the reasons to do them or not do them. Today we don’t get that. I like to say that retirement planning is like ‘shooting a moving target in the wind.’ That’s what makes it so hard.”  

© 2016 RIJ Publishing LLC. All rights reserved.

To make small advisory accounts cost-efficient, Voya uses white-label technology

Posted on June 2, 2016 by -

To serve small accounts more cost-efficiently, Voya Financial Advisors is partnering with FolioDynamix, which markets a white-label unified wealth management platform.

The new service, part of Voya Financial Advisors, will be called Voya Wealth Portfolios. As Voya transitions small-balance clients from commission-based accounts to fee-based accounts, the company will be able to offer them an automated unified managed account option.     

“We designed a solution that allows us to move commission-based accounts into advisory accounts with comparable funds,” said Andre Robinson, head of advisory services at Voya Financial Advisors, in a release. According to Voya, its advisory business grew 30% in 2015.

In an email to RIJ, Robinson wrote, “Wealth Portfolios is designed to enhance the service and associated delivery model for advisors and clients alike. With the product, advisors are able to access the most appropriate Wealth Solutions portfolio after completing the quick on-boarding process.

“These portfolios overall have proven to be suitable for both small and large dollar investors due to the quality of the investment mixture, offering straight-forward pricing and ease of implementation.”

The Department of Labor’s new conflict-of-interest rules create a dilemma for broker-dealers, motivating them to start charging small clients asset-based fees instead of selling them products and earning commissions. But these accounts often can’t generate enough in fees to support a traditional advisory relationship.

Voya also sees the new service as a way to keep small account holders from migrating to mutual fund complex platforms at Vanguard or Schwab.  

“We’ve been watching assets migrate to the mutual fund complexes and away from our broker dealer. We wanted to create a product to help capture those accounts,” Robinson told RIJ in an interview. He said that the DOL rule wasn’t the “driving force” behind the new service, but that Wealth Portfolios “will position Voya to be successful in the new regulatory environment.”

Wealth Portfolios gives clients access to funds from four different fund companies and five model portfolio design options, all managed by sub-advisor FolioDynamix.

In support of its expanding advisory business, Voya Financial Advisors also provides a “white glove” services team and suite of resources to assist affiliated advisors with all aspects of growing their advisory business, including support regarding best practices, case consultation, product and technology training, and conversion assistance.

“We’ve seen that most people are thinking of shifting to the advisory instead of sticking with the commission model. That’s a result of the BICE, and it’s right for the customer. But the industry has struggled with how to deliver on small accounts cost-effectively,” said Steve Dunlap, CEO of FolioDynamix, in an interview.

“Younger people want a relationship with a human being, but not in the traditional way. They want the advisor to be there if they need them, but it doesn’t have to be face-to-face every time,” he added.

“It used to be that you needed at least $50,000 to have an advisory account. The question now is whether, by creating different service models, you can keep clients who might otherwise go to a pure robo solution or to a self-directed brokerage account.

“We think the industry is making a mistake when it says, ‘Let’s take all of the accounts of $100,000 or less and put them in a robo solution.’

“We’re suggesting: ‘Let’s find a way to help advisors service smaller accounts, but on a different basis. They won’t have quarterly meetings with an advisor. But they’ll have access to their own accounts, they’ll be able to monitor them, and it can be low-touch enough to be cost-effective.”

© 2016 RIJ Publishing LLC. All rights reserved.

Chinese bid to acquire Fidelity & Guaranty Life delayed

Posted on June 2, 2016 by -

A large Chinese insurers bid to buy a U.S.-based issuer of indexed annuities has hit a snag, the New York Times reported this week.

The Chinese insurer, Anbang, has been purchasing hotels and financial firms in Europe, Asia and the U.S., and announced last year that it had agreed to buy Fidelity & Guaranteed Life, the Des Moines-based life insurer, for $1.57 billion.  

But this week Anbang withdrew its application to acquire the company with the New York State Department of Financial Services, Fidelity & Guaranty said in a filing on Tuesday with the Securities and Exchange Commission.

Fidelity said the withdrawal was not final and that it expected Anbang to refile in the “near future.” Neither F&G nor FTI Consulting in Hong Kong, which represents Anbang, said why Anbang withdrew its application.

The deal, announced in November, was cleared by the Committee on Foreign Investment in the United States, a government panel that checks acquisitions of American companies for potential national security concerns, Fidelity said in March.

Anbang must obtain regulatory approval for its takeover from states where Fidelity does business. It also has a pending application in Iowa, Fidelity said in its filing on Tuesday. Fidelity shares fell by more than 3.3% on Tuesday in New York, the biggest drop since August.

The Wall Street Journal reported that Anbang had failed to provide information requested by the Department of Financial Services about Anbang’s ownership structure and sources of funding for the takeover. In March, Anbang abruptly ended a $14 billion bid to buy Starwood Hotels and Resorts.  

Anbang, which owns insurance companies, a bank and a leasing company, says it has almost $300 billion in assets. It is owned by 39 corporate shareholders, According to China’s State Administration of Industry and Commerce, it has 39 corporate shareholders, including two state-owned companies that own 5% and 37 interconnected companies that own the rest. 

Anbang’s chairman, Wu Xiaohui, married a granddaughter of China’s former leader, Deng Xiaoping. One Anbang director is the son of Chen Yi, a former long-serving foreign minister and top army general who died in 1972. Another former director is the son of Zhu Rongji, China’s prime minister from 1998 to 2003.

© 2016 RIJ Publishing LLC. All rights reserved.

Indexed annuity industry sets sales record in 1Q2016: Wink

Posted on June 2, 2016 by -

Total first quarter sales for 55 indexed annuity carriers was $15.0 billion, the highest first-quarter sales in the history of the product, according to the 75th edition of Wink’s Sales and Marketing Report.

Though down more than 3% when compared to the fourth quarter of 2015, indexed sales in the first quarter were up nearly 33% when compared with the same period last year.

“While there is typically a huge drop in sales from the fourth to the first quarter, sales of these principal-protection products are down less than five percent,” said Wink CEO Sheryl Moore in a release. 

Allianz Life was the dominant carrier, with an 18.4% share of the indexed market. American Equity Companies were second, followed by Great American Insurance Group, AIG, Nationwide and Midland National Life. Allianz Life’s Allianz 222 Annuity was the top-selling indexed annuity for the fifth consecutive quarter.

© 2016 RIJ Publishing LLC. All rights reserved.

Pension buy-out volume up 21% in first quarter

Posted on June 2, 2016 by -

Quarterly group pension buy-out sales topped $1 billion for the fourth consecutive quarter in the first quarter of 2016, according to the latest U.S. Group Annuity Risk Transfer Survey from LIMRA Secure Retirement Institute

At  $1.084 billion, first quarter sales exceeded $1 billion for the first time since 2008, an SRI release said, on 68 transactions.
American General Life Companies, Legal & General America, MassMutual, MetLife, Mutual of Omaha, New York Life, OneAmerica, Pacific Life, Principal Financial, Prudential Financial, Transamerica, Voya Financial, and Western & Southern Financial Group participated in the survey.

Years of low interest rates and rising Pension Benefit Guarantee Corporation (PBGC) premiums have motivated more defined benefit plan sponsors to transfer all or part of their pension liabilities to an insurer by purchasing a group annuity contract with pension assets.

Historically, buy-out sales have been low in the first quarter, increasing slightly in the second and third quarters and peaking in the fourth quarter. But this year’s first quarter sales were up 21%, year-over-year, a spike that LIMRA SRI analysts attributed to PBGC premium increases and market volatility.

“Along with large increases in PBGC premiums, plan sponsors who try to increase funding for their group pensions face an uphill challenge with uncertain market returns and low interest rates,” said Michael Ericson, analyst for LIMRA Secure Retirement Institute, in the release. “Those factors are the main reason 68 companies purchased buy-out contracts in the first quarter.”

Increasing numbers of small and medium-size plans are transferring their pension risk, in addition to large ones, Ericson added.  Sales growth in pension buy-outs can be heavily influenced by jumbo (>$1 billion) contracts. 

LIMRA Secure Retirement Institute publishes the Group Annuity Risk Transfer Survey every quarter. To date, the 13 financial services companies that provide all the group annuity contracts for the U.S. market participate in the survey.  

© 2016 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on June 2, 2016 by -

Morningstar acquires fixed-income analytics firm

Morningstar, Inc., has acquired InvestSoft Technology, a provider of fixed-income analytics. Terms were not disclosed. Morningstar will gradually integrate the firm’s capabilities into its data processing systems and product functionality, rebranding it under the Morningstar name.

InvestSoft helps investment firms analyze fixed-income securities and portfolios, primarily through its BondPro Fixed-Income Calculation Engine, which provides more than 130 analytic and accounting calculations.

“Our asset management and advisor clients have been asking for more robust fixed-income capabilities, and InvestSoft’s analytics will help us create a more complete view of mutual fund and exchange-traded fund portfolios, providing investors with better transparency into bond funds,” said Frannie Besztery, head of data for Morningstar, in a release.

Based in Framingham, Massachusetts, InvestSoft was found by Al Roitfarb  in 1992 as Investment Technology. State Street acquired the firm in 2001, but Investment Technology re-acquired key software in 2005. In 2011, Al Roitfarb and his son, Todd Roitfarb, formed InvestSoft.  

The younger Roitfarb has been CEO since joining InvestSoft in 2011. He previously held roles at Fidelity Investments, Merrill Lynch, and Ernst & Young. Al Roitfarb will become head of architecture, fixed income, and Todd will become head of fixed-income products for Morningstar. The investment banking firm DGZ Associates, Inc. advised InvestSoft on the transaction.

NFP acquires ERISA Fiduciary Advisors

NFP, an insurance broker and consultant that provides employee benefits, property & casualty, retirement, and individual insurance and wealth management solutions, has acquired ERISA Fiduciary Advisors, Inc. (EFA). The transaction closed on March 1, 2016.

Founded in 2005, EFA is an independent, fee-based registered investment advisor and retirement plan consultant with offices in Weston and Stuart, Fla. It provides fiduciary management processes for plan sponsors and fiduciary oversight for wealth management services.

The firm’s principals, Thomas Bastin and Bradley Larsen, will both serve as managing director, Southeast, and report to Nick Della Vedova, president of the retirement division at NFP. 

vWise announces video and digital plan enrollment process

vWise, Inc., a provider of digital solutions for retirement plan providers and plan advisors in Aliso Viejo, Calif., has introduced an interactive video-enriched online enrollment solution that it calls SmartEnroll.

Designed for plan providers, advisors, and their plan sponsor clients, SmartEnroll is intended to make enrollment simpler, reduce print/mail costs, facilitate recordkeeper transitions and allow access from desktops, tablets and smartphones. 

According to a release, vWise solution “bite-sized content that can be watched, skipped, or watched again,” and to spur participants to specific actions, such as completing a risk questionnaire, selecting a deferral amount or choosing investments.  The experience can be delivered in English or Spanish, and customized to each plan sponsor’s brand and preferences.

SmartEnroll allows data-capture and on-demand reporting and reduces administrative and call center burdens, as well as lowering the costs associated with enrollment kit printing and distribution. When used with SmartConnect, vWise’s two-step, secure email capture tool, vWise solutions facilitate ongoing, targeted participant outreach, communication, and education.  

© 2016 RIJ Publishing LLC. All rights reserved.

Expect Sharp Drop in VA Sales: LIMRA

Posted on May 26, 2016 by -

Variable annuity sales in the U.S. are likely to drop 15-20% in 2016 and an additional 25% to 30% in 2017 as broker-dealers adjust to the requirements of the Department of Labor’s conflict-of-interest rule, and in particular to the rule’s “BIC” Exemption, which applies to variable and indexed annuities.

That prediction came this week from the LIMRA Secure Retirement Institute, which conducts market research for life insurers. “We foresee sales coming down in 2017, but we expect sales to rebound in the future. Growth levels should come up as companies get used to the new normal,” SRI director Todd Giesing told RIJ this week. 

The prediction followed the variable annuity industry’s worst sales quarter in almost 15 years. In the first quarter, total annuity sales were $58.9 billion, or 9% higher than in 1Q2015, but VA sales experienced their lowest level since 2001, at $26.6 billion, or 18% lower than in 1Q2015 and only 45% of the annuity market.

January 2016 sales were 28% lower than in December 2015, according to Morningstar’s quarterly Variable Annuity Sales and Asset Survey, which was released this week. “Looking at the top-ten issuers, they were all in negative territory for sales versus the previous quarter. Seven of the top ten had double-digit negative sales growth from the previous quarter. More broadly, nearly every issuer had negative growth for the quarter,” wrote Kevin Lofreddi, Senior Product Manager for variable annuities at Morningstar Inc.

“The equity markets had huge 10% drop in January, from which they’ve slowed rebounded,” Giesing (below right) said. “This was the second spike in volatility and drop in equities since August of 2015. We’ve seen variable sales drop when equities go down, but not this much. Even during the financial crisis, sales didn’t fall below $30 billion.” Todd Giesing

Lofreddi believes that DOL conflict-of-interest rule, which was issued April 6, 2016, did not affect first quarter variable annuity sales. “But the rule will have an impact in the future as firms ramp up for the changes that need to take place,” his report said.  

“In the first quarter, we were still pre-final DOL ruling,” Geising said. “Expectations were that variable annuities would be under the BICE, and indexed annuities under PTE 84-24. Some of the variable annuity players were already putting more focus on their indexed businesses, especially AIG and Nationwide. We don’t expect a huge drop-off in indexed sales over the next quarter or two, but we expect more impact in 2017.”

“The DOL will have its biggest impact on the rollover market,” Giesing told RIJ. “Out of the $236 billion in individual annuity sales in 2015, $120 billion was in IRAs. Of that, $67 billion was in variable and $34 billion indexed. Of $120 billion, $67 billion in variable and $34 billion in indexed. That’s roughly $100 billion in VA and indexed, which is 84% of IRA annuity sales.”

Variable annuities are largely vehicles for equity investments and tax-deferred trading, and VA watchers put the blame for weak first-quarter sales on the 10% drop in equity indexes in January, which created a flight to the safety of other annuity products, like indexed annuities and fixed-rate annuities, which can’t lose value.

In the first quarter, sales of fixed annuities jumped 48%, to $32.3 billion. \All retail fixed products experienced double-digit growth, compared with the prior year. Indexed annuity sales jumped 35%, to $15.7 billion, with all of the top 10 writers reporting increases. 

“Indexed annuity sales have experienced eight consecutive years of positive growth and we are forecasting that indexed annuities will continue to see strong growth throughout 2016,” the LIMRA release said. Sales of book value and market-value-adjusted fixed-rate deferred annuities, which often spikes when equity market volatility spikes, were up 90% in the first quarter.

First quarter fixed immediate annuity sales were $2.5 billion, up 25% y-o-y, LIMRA’s SRI said, even as higher demand pushed prices up and yields down to a 2016 low of 1.63% on February 11. Deferred income annuity (DIA) sales jumped 29% in the first quarter, to $729 million.  

Eleven companies are now offering qualified longevity annuity contracts (QLAC) products, and 12% of first quarter 2016 DIA sales were in QLAC compliant products. The Institute predicts QLAC sales will see an uptick in 2016. The growth of these products (SPIA and DIA) demonstrates the strong demand for guaranteed income, LIMRA said. 

There’s a stark difference between the top-line and bottom-line numbers for the VA industry. While total assets under contract, at $1.83 trillion, are close to their all time high ($1.88 in 2014), the industry overall is shrinking in terms of net new sales. Net flows in the first quarter of 2016 were negative 1.9%. Net flows were negative 3.3% in 2014 and negative 5.2% in 2015.

Overall sales have been falling since 2011, and have never returned to the peak year of 2007, when gross sales were $179.2 billion and net flows were $34 billion. But variable annuities are still the biggest-selling annuity product in the U.S. They remain the only retail product where an investor can put a virtually unlimited amount of after-tax (non-qualified) savings for tax-deferred growth. They are also the only annuity product that is sold through the securities-licensed broker-dealer channel. More than 70% of VAs in the first quarter were sold either by captive agents (38.7%) or by independent advisors affiliated with broker-dealers (33.2%).

But the VA share of the market has been shrinking, relative to sales of fixed indexed annuities, which continue to climb. “We are seeing a significant shift in the annuity market,” said Giesing. “In the first quarter, VA sales had a 45% market share, compared with a 60% market share just a year ago. We have to go back 20 years—to 1995—to find when the VA market share was 45% or lower.” 

All sectors of the VA market are soft, Giesing said. “When we talked to manufacturers, we found that three-quarters expected variable annuity sales to decline irrespective of whether the product has a guaranteed lifetime withdrawal benefit or if it’s investment-only,” he said in an interview. “And if you look at qualified versus the non-qualified markets, we still had over half of manufacturers expecting moderate to significant declines in non-qualified annuities.”

“When you look at why people turn to annuities, as the only source of guaranteed income, that need won’t go away. Half of annuity sales in 2015 had an income component. By 2021 there will be 11,000 people a day turning 65. Today there are 50 million retirees. We expect that number to reach 66 million by 2025. And as fewer people have the backstop of a defined benefit pension, and if Social Security still faces unknown questions, people will look to annuities. In the short-term, through the end of 2017, you’ll see the manufacturers taking a very conservative approach.”

© 2016 RIJ Publishing LLC. All rights reserved.

Marcia Wagner Explains the DOL Rule

Posted on May 26, 2016 by -

Now hiring: BICE Officer. Requirements: Command of the Best Interest Contract Exemption provision of the Department of Labor’s Conflict-of-Interest Rule, and its effect on broker-dealer and registered investment advisor compensation schemes. Starting date: ASAP. Salary potential: Unlimited.

That’s a purely hypothetical job posting, but according to Boston-based ERISA attorney Marcia Wagner, it may not be hypothetical for long. “’BIC officers’ are going to become a cottage industry unto themselves. You heard it here first, folks,” she said during a webinar yesterday.

Wagner, a popular speaker who combines an authentic Boston accent with the authority of a Harvard Law degree, held forth about the impact the DOL’s new conflict of interest rule or “fiduciary rule” for 90 minutes in the webcast, the latest in a series of four events on the same topic hosted by advisor software maker MoneyGuidePro.

Each webcast has attracted hundreds of attendees, demonstrating the appetite for information about the 1,030-page DOL rule—and insights in how to adapt to it. Between now and next April, when the DOL rule goes into effect, broker-dealers will be scrambling to figure out how to align their current compensation practices with the terms of the Best Interest Contract Exemption, a key element of rule.

Under the DOL rule, the sale of a financial product for variable compensation (such as a third-party commission) to an IRA account owner will be a “prohibited transaction” unless the seller—a registered rep, insurance agent, and sometimes a registered investment advisor—signs a contract pledging to act in the client’s “best interest.” Here are highlights from the webinar:

One-off sales will be suspect; financial plans show good faith. Wagner stressed that financial plans “by their nature” can help demonstrate prudence of advice, and can ensure that recommendations are in best interest of client. Sales proposals should be made within the context of a holistic financial plan.

Similar commissions for similar products. Differential compensation paid by a broker-dealer to a registered rep must be based on neutral factors that are directly tied to the services provided, such as a requirement for extra time or expertise. “Payouts to the rep DOL may vary for different investment, but not for similar investments in the same category, such as variable annuities,” Wagner said.

Deadlines for compliance. Under “transition” BIC, firms must have disclosures ready and must appoint a BICE officer by April 17, 2017. “Full-blown” BIC means having contracts (negative consent is permissible) ready by January 1, 2018.   

No need to wait for DOL to acknowledge your filing. “Thousands of firms will have to notify DOL when instituting BIC. DOL won’t respond, but it will compile this information for future investigation and enforcement purposes,” she said.

Registered Investment Advisors (RIAs) aren’t immune to the BIC. “RIAs have assumed incorrectly that they don’t need BIC at all,” Wagner said. “If they are offering rollover advice to participants, or to an off-the-street participant, where the rollover will mean higher fees than were in the plan, they will need to sign a BIC. They will also need a BIC when recommending a transition from a commission-based to a fee-based arrangement.”

Fee levelization is a de facto exemption. “There’s been a lot of buzz about it lately,” she said. “Fee levelizing is a way to comply with the prohibited transaction rule. Instead of using the BIC or Prohibited Transaction Exemption 84-24, a firm can levelize its compensation. Levelizing is not an official exemption. I think of it as a de facto exemption. It prevents a prohibited transaction.”

How to levelize fees. “The first step is to identify all forms of variable compensation in your firm, such as commissions and ticket charges and revenue sharing from mutual fund families and annuity providers—that’s compensation to either firms or their financial advisors that varies with sales volume, but not the custodial fees or fees for sweep vehicles that the firm may charge—and restructure them to make sure that the amount of compensation doesn’t vary depending on which product is sold.”

‘Hire them’ is fiduciary advice. “Some advisors thought recommending investment managers wasn’t fiduciary, but now investment management recommendations are ‘covered’ advice under the rule.”

‘Hire me’ isn’t fiduciary advice. While recommendations to hire third parties are fiduciary, self-promotion is not. In other words, an advisor may make a ‘hire me’ recommendation without being viewed as offering fiduciary advice.

Robo-advice. “Many firms are considering ‘robo’ for small IRA accounts. This is of particular interest because there’s an exemption for robos from the prohibited transaction rules,” Wagner said. Government rulings since 1997 have protected recommendations, including recommendations of proprietary products, that are generated by an independent expert or a computer program. “The computer program can’t favor proprietary products if they generate higher income for the advisor, however,” she added.

This won’t necessarily be easy. Firms can expect conflicts to occur between the need to incentivize advisors and the need to act in the client’s best interest, she said. “It will be hard to design a compensation program that eliminates all incentives to provide improper advice.”

The final DOL rule is ‘full strength.’ “It’s not watered down,” Wagner said in response to an listener’s suggestion to that effect. “It’s been made workable and practicable, but I wouldn’t call it watered-down. The enforcement will be done by DOL with respect to ERISA plans. For non-ERISA plans and IRA, owners themselves and the tort or plaintiff bar will do the enforcement. While the IRS has oversight of IRAs, it’s not interested in enforcement. But that could change. There’s also FINRA and the SEC. They might get involved in this.”

Could the presidential election eliminate the rule? “A president Clinton would likely expand the rule. She has said she is in favor of it and that it addresses abuses that need to be curtailed. Trump hasn’t said much about issues related to retirement so it’s hard to know what his positions are. But it’s true that these rules are a creature of the executive branch and whoever is the head of executive branch will have a big say in how they work in the future.”

Can the rule be overturned by Congress or the courts? Wagner didn’t think so. “I think this is a done deal,” she said. “There’s nothing that Congress can do legislatively, because of the president’s veto. With respect to the courts, yes, the financial industry will bring it to court, but I don’t think it will succeed. In the past, the Supreme Court has bent over backwards not to reverse executive branch actions like this, and I doubt that they will want to change a six-year-long regulatory initiative.”

© 2016 RIJ Publishing LLC. All rights reserved.

Donald Trump Believes What?!

Posted on May 26, 2016 by -

If you’ve played Jenga, the wooden tower game, you know that if you remove one of the finger-length timbers from the top of the tower, you’re safe. But if you remove a timber from the lowest, most fundamental layer, the tower collapses. Game over.

Over the past week or so, a comment by Donald Trump about offering to buy back U.S. Treasuries from supposedly anxious debt holders has sparked a fresh round of debate about the federal debt and deficit. (I’m not sure what Trump said; often, instead of Trump’s own words, we hear a reporter’s riff on something that the presumptive Republican presidential nominee said.)   

Distortions notwithstanding, the comment seemed to refer to printing dollars to buy back Treasuries at a discount. Trump was said to have suggested that the U.S. should offer debt holders less than 100 cents on the dollar for Treasuries—a partial default that creditors would presumably prefer to a complete default.Jenga Tower

The media treated it like a real possibility. A Bloomberg TV reporter asked Randall Wray of Bard College, a noted Post-Keynesian economist and interpreter of the work of Hyman Minsky, if such a move could lead to hyper-inflation a la the Weimar Republic of the 1920s, when it took wheelbarrows full of Reichsmarks to buy a loaf of bread. Wray started to explain, but ran out of time.

Let me count the ways that these reports about a Treasury default, and what Trump said (if he said it), don’t make sense.

The owners of Treasuries, foreign and domestic, obtained them with dollars. The dollars were spent into the U.S. economy. Presumably the money was put to good use, and generated profits at a rate higher than the Treasury coupon. (If it didn’t, we wasted an opportunity.) As a country, we can afford to buy back our debt.   

Treasuries are among the world’s most liquid paper, almost the same as cash. Anyone who holds Treasuries today can easily convert them to cash. The prices of Treasuries are at an all-time high; their actual and perceived risk is at an all-time low. If Treasuries were hard to sell—if they were illiquid, like mortgage-backed securities during the financial crisis—the government might in theory have to intervene and bail itself out by exchanging one kind of Federal Reserve Note (cash) for another (bills and bonds). But that’s not a big problem. A country whose debt is denominated in its own currency can always do that. 

Donald Trump U.S. money, and U.S. bonds, which is U.S. money that pays interest, will be popular for as long as people all over the world want to buy stuff that dollars buy. And they will, for a very long time. Among the expensive things that Chinese families want to buy, for instance, are college educations for their young people in places like Cambridge, Mass. and Palo Alto, Calif. They also want our equities, and McMansions in Texas, and lots of other dollar-denominated assets. Like oil.

Now, back to the Jenga analogy. Treasuries are the bottom row of the financial Jenga pile. If Treasuries somehow became risky—if the price fell and the yield rose—then the prices of all of the other securities that are by definition riskier than Treasuries would lose even more of their value. Any sort of debt that’s collateralized or backed by U.S. Treasuries—including the currencies of other countries—would drop in value and require fresh capital.

That would require the liquidation of other securities, which would cause the Mother of All Financial Crises. Soft Treasury prices would be the least of our problems. In fact, you’d see a flight to Treasuries, as we saw in 2008.  To talk about U.S. Treasury bonds as casually as if they were the dispensable top-timbers on a Jenga pile, when they actually comprise the indispensable bottom tier, is ridiculous. A president who indulges in such fantasies would be dangerous.

© 2016 RIJ Publishing LLC. All rights reserved.

First quarter annuity sales: Better for fixed than variable

Posted on May 26, 2016 by -

Despite a 20% drop in sales from the previous quarter, Jackson National Life maintained its leadership in the variable annuity market in the first quarter of 2016, with $4.27 billion in sales. Sales in the fourth quarter of 2015 were $5.34 billion.

The top 10 VA sellers accounted for about 80% of sales. All of the top 25 sellers saw declines in first quarter sales from 4Q2015, as the overall industry took in about 16% less premium. Both LIMRA Secure Retirement Institute and Morningstar Inc. reported first quarter annuity sales statistics this week.

While it was grim for VAs, the first quarter was the best ever for fixed indexed annuities. With $15.7 billion in FIA sales for the quarter, the industry was on track to break the $60 billion mark in 2016. Total FIA sales in 2015 were $54.5 billion.

With $2.79 billion in first quarter sales, Allianz Life again dominated FIA sales. The other two issuers with billion-dollar quarters were American Equity Investment Life  ($1.69 billion) and Great American ($1.11 billion).  In the fixed rate annuity category, New York Life again led in quarterly sales with $3.2 billion; its total fixed annuity sales in 2015 were $8.64 billion.

The same equity volatility that hurt variable annuities in January also helped sales of fixed deferred annuities. They were up 90%, to $12 billion, in the first quarter of 2016 compared with the year-ago quarter. Sales of market value-adjusted fixed annuities, which share interest rate risk with the contract owner, rose 165% year-over-year, to $5.3 billion.

AIG was the largest overall seller of annuities, with variable sales of $2.08 billion and fixed sales of $3.05 billion. Two of its variable annuity contracts, the Portfolio Director (Plus & 2) and the Polaris Platinum IIIB contract, were among the ten best-selling contracts in the first quarter.

In variable annuity sales, there was a slight shake up in the top-10 rankings in the first quarter of this year. AXA jumped to third place from seventh place, on sales of $2.33 billion, down five percent from the previous quarter. AEGON/Transamerica dropped to eight place from fifth place on sales of $1.21 billion, down 25% from 4Q2015.

Several of AXA’s contracts enjoyed leapfrog-jumps in sales rankings. Its Structured Capital Strategies B Share contract enjoyed a 270% year-over-year sales increase, with sales of $666 million in the first quarter of 2016, and moved up to ninth place from No. 24 in the past year. Over the same period, AXA’s Retirement Cornerstone contract moved up to No. 11 in the rankings from No. 47

Structured Capital Strategies is an indexed variable annuity; it works like an indexed annuity, but contract owners get more upside participation in return for limited downside participation. A conventional indexed annuity protects contract owners from any market loss.

Retirement Cornerstone has two-sleeves: an investment sleeve and a sleeve that’s protected by a Guaranteed Minimum Income Benefit rider. If contract owners want to de-risk as they age and lock in ever-larger amounts of guaranteed lifetime income, they can gradually move money from the investment sleeve to the protected sleeve. 

© 2016 RIJ Publishing LLC. All rights reserved.

In UK, Aegon shifts focus from annuities to web-mediated advice

Posted on May 26, 2016 by -

Aiming to free up capital from non-core businesses, Aegon announced the sale of £3 billion in annuity liabilities to Legal & General. The transaction, along with the recent sale of Aegon’s £6 billion UK annuity portfolio, completes the divestment of the insurer’s annuity portfolio, IPE.com reported.

In 2010, Aegon decided to start withdrawing from the UK annuity market, believing that annuities wouldn’t meet its long-term risk adjusted return requirements. The divestment reduces Aegon’s exposure to longevity and credit risk and fits the company’s continued shift to capital-light businesses.

The divestment of the annuity portfolio enables Aegon to focus on its internet platform, which helps plan participants and consumers to build their savings across their working lives, and then manage an income in retirement with the support of a financial adviser or directly online. The UK platform-based pension market is said to be growing fast.  

Under the terms of the agreement, Aegon will initially reinsure £3 billion of liabilities to Legal & General followed by a Part VII transfer. Aegon will administer the annuity portfolio until the completion of the transfer.  

The Solvency II ratio of Aegon’s operations in the United Kingdom is expected to increase by about 15 percentage points following the reinsurance transaction with Legal & General, and another five percentage points following the Part VII transfer.

Aegon now has approximately £1 billion annuity liabilities remaining through an inward reinsurance transaction. The expected Solvency II capital release following the completion of the transaction announced today is approximately £275 million.

Aegon expects annual capital generation from its UK operations to be reduced by approximately £30 million (€38 million) as a result of the transaction announced today. Underlying earnings before tax are expected to fall by about £16 million (€20 million) per annum. The reinsurance transaction is expected to result in an IFRS loss of approximately £215 million  (€273 million), which will be reported in other charges in the second quarter of 2016.

© 2016 RIJ Publishing LLC. All rights reserved.

Pace of share buybacks, a plus for equity prices, slows

Posted on May 26, 2016 by -

Corporate America is committing much less cash to repurchase shares this year, reports TrimTabs Investment Research. 

“Buybacks in earnings season were disappointing,” said David Santschi, chief executive officer of TrimTabs. “While the volume of $91 billion was respectable, buybacks for just two companies accounted for half of the volume.”

In a research note, TrimTabs reports that stock buyback announcements have totaled $261.5 billion this year through Thursday, May 19. This volume is down 35% from $399.4 billion in the same period last year.

“Not only has the volume declined, but the number of companies rolling out big repurchases has fallen sharply,” said Santschi.  “By this time last year, 45 companies had announced buybacks of at least $2 billion, but only 23 have done so this year.”

TrimTabs explained that the decline in buyback activity does not augur well for U.S. equities in the longer term.

“Stock buybacks—many of them funded with borrowed money—have been a key source of fuel for the bull market,” said Santschi.  “This source of support for stock prices is likely to be weaker than in the past.”

© 2016 RIJ Publishing LLC. All rights reserved.

Former AARP brand strategist moves to Jackson National Life

Posted on May 26, 2016 by -

Emilio Pardo has been appointed senior vice president, chief marketing and communications officer responsible for branding, marketing and communications across the North American Business Unit (NABU) of Prudential plc.

The NABU includes Jackson National Life Insurance Co., the biggest seller of variable annuities in the U.S. in 2015, and its subsidiaries Jackson National Life Distributors LLC, and Jackson National Asset Management, LLC, and its U.S. affiliates National Planning Holdings, Inc. (NPH) and PPM America, Inc.

Pardo will be based in Nashville, reporting to Barry Stowe, chairman and chief executive officer of Prudential plc’s North American Business Unit. He will join the Prudential plc Leadership Team, which consists of key senior managers across various business units of Prudential plc worldwide.

Most recently, Pardo served as the chief brand officer and a member of the executive team of AARP. He was responsible for strategy, management and integration of the brand throughout the organization, including more than 50 offices nationwide and 70 direct reports.

At AARP, Pardo was credited with a major brand transformation, including the creation of a new corporate identity for the organization and its affiliates. He also led the development of an enhanced social media and business partnership strategy to improve AARP’s operational, service and value proposition.

For instance, Pardo conceived and launched the “Drive To End Hunger,” “Divided We Fail,” and “Create The Good” campaigns. recently, he led “Life Reimagined,” an innovative financial, health and lifestyle platform designed to help individuals navigate life transitions. Pardo also facilitated partnerships with Uber, Google and Optum/United Health.

Before joining AARP in 2005, Pardo was senior vice president for Discovery Communications, Inc. Previously, he co-founded and served as chief executive officer and director of CityNet, a broadband network company. From 1990 to 2000, he worked at FleishmanHillard International Communications. From 1986 to 1990, Pardo served as press secretary for U.S. Senator Ernest F. Hollings.

© 2016 RIJ Publishing LLC. All rights reserved. 

Changes to reverse mortgage rules proposed

Posted on May 26, 2016 by -

The Federal Housing Administration has proposed a set of new rules aimed at strengthening the Home Equity Conversion Mortgage (HECM) program, including changes to the origination and servicing process and protections for the Mutual Mortgage Insurance Fund (MMIF).

FHA plans to take several actions to ensure that reverse mortgages remain a viable and sustainable resource for senior homeowners who wish to remain in their homes and age in place, while also protecting the Mutual Mortgage Insurance Fund (MMIF).

The proposed rule will reinforce and codify recent HECM reforms that FHA has implemented in the past several years, and will also add new consumer protections.

The proposed changes include making certain that required HECM counseling occurs before a mortgage contract is signed; requiring lenders to fully disclose all HECM loan features; capping lifetime interest rate increases on all HECM adjustable rate mortgages (ARMs) at 5%; reducing the cap on annual interest rate increases on HECM ARMs from 2% to 1%.

FHA is also proposing to require lenders to pay mortgage insurance premiums until the HECM is paid in full, foreclosed on, or a Deed-in-Lieu (DIL) is executed rather than until when the mortgage contract is terminated.

Additionally, the proposal would include utility payments in the property charge assessment; and create a “cash for keys” program to encourage borrowers to complete a (DIL) and “gracefully” exit the property versus enduring a lengthy foreclosure process.

The policies outlined in its proposal may reduce HECM endorsements by $1.9 billion per year, “representing transfers from potential HECM borrowers to other debtors,” the FHA said.

Also, FHA anticipates its rule will reduce the MMIF credit subsidy for the HECM portfolio by $42 million per year; reduce foreclosures due to tax and insurance default by up to 6,000 cases each year, totaling about $1.5 billion in loan amount.

The proposal follows the most recent program changes the agency has made to the HECM program over the past several years, including the introduction of the Financial Assessment, upfront draw limitations, as well as updates to the non-borrowing spouse policy.

FHA is inviting interested persons to submit comments regarding this proposed rule to the Regulations Division, Office of the General Counsel at the Department of Housing and Urban Development. Comments may be submitted electronically through the Federal eRulemaking Portal.

© 2016 RIJ Publishing LLC. All rights reserved.

No Retirement Account Left Behind

Posted on May 19, 2016 by -

Fintech, aka robo-finance, is scaring the bejeezus out of the financial industry’s old guard. Barbarians from Silicon Valley, with their gleaming algorithms, have disrupted traditional business models. The mice are scaring the elephants—at least until the elephants acquire the mice outright.

But fintech doesn’t always originate in California, and it doesn’t always threaten the status quo. Sometimes it sprouts from within, and aids, the retirement business, especially when it’s applied to one of the retirement industry’s inefficiencies—like the “leakage” from 401(k) and other qualified plans, for instance.   

Spencer Williams, the president and CEO of Retirement Clearinghouse (RCH), was in Washington, DC, last week to explain his company’s proposed technology solution to leakage—most of which occurs when people liquidate their tax-deferred accounts in the course of changing jobs.

The solution is called “auto-portability.” When a worker with a small retirement account quits a job at a company in the auto-portability network, RCH will try to find them at their next employer’s plan and consolidate their old account with their new account. RCH and similar companies perform this “roll in” service today, but on a manual, piecemeal basis; auto-portability would robo-ize and scale it.

The technology for auto-portability involves “electronic records matching.” That’s the identification and verification process that facilitates the use of credit cards in retail transactions. But the success of auto-portability will need more than financial technology.

“First, you have to get all the recordkeepers onboard. That’s no mean feat,” Williams told about 130 professionals who gathered for the Employee Benefit Research Institute (EBRI) Policy Forum on May 12. “The other requirement for a clear path forward is assistance from the Department of Labor.”  [To watch a video of the presentation, click here.]Spencer Williams

Auto-portability needs the DOL’s blessing, because it will work only if plan participants can be auto-enrolled by default—by not actively refusing to be included in the system. RCH has asked the DOL for an Advisory Opinion confirming the legal basis for default enrollment in an auto-portability program.

RIJ has reported several times on RCH’s auto-portability initiative since 2013. Since then, Williams and Tom Johnson, both of whom worked as retirement executives at MassMutual in the mid-2000s, have met with plan sponsors, recordkeepers, Washington officials and trade association reps to assemble the cross-industry cooperation that auto-portability will require.

If auto-portability takes off, RCH will run the technology, charging $59 for each account that passes through the system. (RCH charges $79 per account to do this manually today, and will continue to be in that business.) “When people look at the damage done by leakage and understand the benefits of auto-portability,” Williams told RIJ this week, “they become engaged.”

The leakage problem

If you were designing an employer-sponsored retirement savings system from scratch, you’d probably build in a method that allows people to transfer money from their previous plans to their new ones when they change jobs, so that the nest egg keeps growing and compounding tax-deferred. Indeed, it’s said that rollover IRAs were created in anticipation of this need.     

But merely allowing rollover IRAs didn’t solve the leakage problem, in part because the system has generated so many tiny accounts. Given the high rate of job turnover in the U.S., millions of people aren’t in a 401(k) plan long enough to develop large balances. When they change jobs, they tend to cash out those accounts (“leakage”) or abandon them.

About 53% of job changers take the cash. Of those, “37% take the money because they need it for an emergency. The other 63% take it because it’s much simpler to say, ‘ Send me money,’ and to pay the taxes and penalties on the withdrawal,” rather than execute a do-it-yourself transfer of assets to an IRA or to their next plan, said Williams: “We take the DIY out of it, and put in a mechanism where we do it for them.”

Pension law allows plan sponsors to transfer orphaned accounts that are worth less than $5,000 to safe harbor IRAs, or SHIRAs. The biggest 401(k) plan providers, like Fidelity and Vanguard, operate their own SHIRAs. Independent SHIRAs absorb the rest of the flow. SHIRAs try to find the missing owners, but the process, as noted above, is slow.

System-wide, leakage starts as tiny drips but swells into a flood of dissipated savings. According to EBRI data, 12.5 million leave DC plans each year. Of those, five million have accounts worth $5,000 or less. People with accounts of that size have a 28% job turnover rate, changing employers once every 3.5 years on average.

An estimated $8.8 billion in small account balances falls out of the DC system this way each year; the total annual leakage, according to EBRI, could be 10 times that amount. While these losses represent a tiny percentage of the multi-trillion-dollar DC industry, they compound over a 35- or 40-year career cycle into a significant sum. According to the Center for Retirement Research at Boston College, leakage reduces the aggregate DC savings of the nation’s 60-year-olds by 25%. 

How auto-portability works

Williams said that his firm’s version of auto-portability works by “push” rather than “pull.” The process begins when the employee’s account gets pushed out of the old plan. This may occur long after the former participant has changed jobs. Then the system tries to match the participant with the new plan. In a “pull process,” the new plan sponsor’s recordkeeper would initiate the process after a new employee joins the plan.    

Auto portability chart

Here’s a step-by-step explanation of the auto-portability process:

  1. A participant who has been defaulted into the auto-portability program leaves his or her job and leaves behind a DC account.
  2. The plan sponsor informs the participant that he’s eligible for the auto-portability roll-in process. After an initial notice and waiting period, the account goes to a safe-harbor IRA, or SHIRA. After the SHIRA account is opened, the records are sent to Retirement Clearinghouse.  
  3. Using the “electronic record matching” technology, Retirement Clearinghouse looks for matches between the owners of accounts in the SHIRAs and the millions of participants in plans whose recordkeepers use the auto-portability program. 
  4. When a match is confirmed, RCH completes the forms required for rolling the account assets into the participant’s new plan account. These participants will receive a postcard notifying them of the transaction. 
  5. The safe-harbor IRA account is closed and the balance is rolled-in to the participant’s new employer plan. The money is automatically invested according the participant’s current investment elections, or in the retirement plan’s default investment option. The participant receives a final notice.  

‘Ah-hah’ moment
Williams, a US Naval Academy graduate, became more interested in auto-portability relatively recently. Back in 2007, he was headhunted away from MassMutual to help turn around Rollover Systems, a Charlotte, NC-based SHIRA owned by Robert Johnson, the founder of Black Entertainment Television, or BET.

Williams replaced Reggie Bowser, a former Lending Tree executive who started the firm in 2001 to capitalize on the provision in the first Bush tax cut (“EGTRRA”) that allowed and encouraged plan sponsors to force the small 401(k) accounts of separated employees into safe-harbor IRAs, and spawned the assisted rollover business.

In 2010, a Rollover Systems client, a 250,000-employee company that Williams declined to identify, asked Williams if Rollover Systems could, in addition to transferring the small accounts of departed employees to safe harbor IRAs, also help its new employees merge previous retirement accounts into their new plan. Williams had an epiphany.   

“It was an ah-ha moment. We asked ourselves, ‘If we can do an assisted rollover for job changers, could we do an automatic roll-in?’ The answer is yes. We find that there are all kinds of circumstances for consolidation. There are plans that are terminated. There are companies that are sold. Every job change turns into a series of consolidations. Our mission is to create a new automatic path to consolidation,” he told RIJ in 2013.

Flash forward to 2016: “This is not just a concept,” Williams said this week. “This is in practice in our client base today, with the ERM technology already at work. We’re working with a very large employer and its recordkeeper. We find that the average account balance in the employer plan increases by about 45% when we do this. We have about 1,500 people whose old accounts we have matched up and moved into their new accounts. The account value almost doubles, proving the utility of the process.”

Not all of the issues have been resolved. One objection: A person’s new 401(k) plan may have higher fees or worse investments than their old one. Companies that solicit IRA rollovers from job changers might not like auto-portability, but rollover companies aren’t likely to care about the tiny accounts that RCH is talking about.   

If they build it, will participants buy into it? Research by Warren Cormier of Boston Research Technologies, using auto-enrollment behavior as a proxy, has given RCH a glimpse of how people would respond to auto-portability, Williams said.

“As people get used to using this mechanism, as it gets into their heads that this will be done for me, there’ll be an ever-decreasing number of cash-outs,” he told RIJ. “With the status quo, we estimate there will be $320 billion in cash-outs over the next generation. If we eliminate leakage, we can cut that number in half.” He’s hoping to receive DOL’s blessing this summer.

© 2016 RIJ Publishing LLC. All rights reserved.

How The British Save More for Retirement

Posted on May 19, 2016 by -

RIJ’s cover story this week describes “auto-portability.” This is a newly conceived process, based on a repurposed bit of financial technology, that would automatically consolidate your old “stranded” 401(k) accounts into your active 401(k) account, assuming you have one. 

If it were practiced universally, auto-portability could rescue old accounts from the dead letter office of the retirement system and forward them to a participant’s latest address. This would improve the current non-system, which encourages people to cash-out small accounts and squander the money on, stereotypically, flat-screen smart TVs.  

The UK has taken a stab at DC account consolidation, but the effort has been a victim of politics and industry opposition. Last year the British authorities proposed instituting a policy called “pot-follows-member.” It would make sure retirement accounts follow people from job to job. But there’s no British counterpart to our rollover IRA, which is essential to the process.

The British out-do the US in one aspect of their defined contribution system, in my opinion. Their form of tax-deferral is arguably better than ours. When a DC plan participant in the UK contributes to a tax-deferred plan, the government adds the participant’s “tax relief” to his retirement account.

To understand this, you have to look inside a paycheck. Assume that a hypothetical Briton has a £5,000 monthly salary and a 25% income tax rate. The government withholds £1,250 in taxes each month. If he contributes 10% of pay (£500) to a DC plan, the government credits 10% of his tax (£125) to his plan account. His plan balance after one month is £625. His take-home pay is £3,250.

In the U.S.—please correct me if I’m wrong about this—it works differently. Assume that a hypothetical American has a $5,000 monthly salary and a 25% income tax rate. If he contributes 10% of pay ($500) to a DC plan, the federal government withholds $1,125 in tax on the remaining $4,500 in his paycheck. His savings balance after one month is $500. His take home pay is $3,375.

The Briton saves 25% more each month than the American. The difference in savings adds up to a lot over the hundreds of months in a work-life. Ignoring investment gains or losses, the Briton in my example saves £7,500 in the first year;  the American saves $6,000. Over a lifetime of tax-deferred saving and compounded returns, the Briton will end up with a lot more savings than the American.

How much more? I consulted two well-known retirement experts about the best way to calculate the difference in long-term results. It’s not very complicated, said Wade Pfau of The American College.  If the U.S. DC system switched to the British method of tax-deferral, participants in American would save 1 x (1 + 0.25 tax rate) as much as they do now, or an additional 25%. In my hypothetical, that would mean an extra $110,000 or so for the American retiree if he saves for 35 years and has a 4% rate of return. (For simplicity, we’re ignoring inflation, etc.)

Alternatively, Moshe Milevsky of York University suggested that if Americans kept their current system but chose to invest their tax savings in their tax-deferred accounts (and invested the tax savings on the reinvestment of the initial savings), they would save 1/(1 – 0.25 tax rate) as much as they do now, or an additional 33%.

Somewhere, the gods of behavioral finance must be howling with laughter, or in frustration. Both participants chose to contribute 10% of pay to their DC accounts, but one of them has significantly more savings at retirement. It means that changing the design of our system could, without asking participants to change their habits or preferences, make millions of Americans much more secure in retirement.

As a nation, the Britons are at different stage in their transition from defined benefit pensions to defined contribution pensions. And the process isn’t going very smoothly, according to what I read at IPE.com. But I admire the way they designed their tax-deferred savings system. By comparison, our method endows us with tax-deferred growth, but lets the tax savings on contributions slip away. (Another attractive feature of their system: retirees can withdraw 25% of their tax-deferred savings tax-free.)

The British system may have another advantage, although it’s difficult to quantify. Their policies might produce a greater sense of shared purpose between the public and the government regarding retirement savings. If Americans saw their government, in effect, contributing directly to their retirement accounts, the government’s demands for minimum taxable distributions at age 70½ might not seem so perplexingly intrusive. 

I think we can agree that our retirement system offers many opportunities for improvement. We change jobs frequently and cash-out or leave unvested employer matches on the table; we may drop out of the system entirely for a few years here and there; our employers don’t always offer plans, let alone matching contributions; fees can reduce our rate of return by 25% or more over a lifetime; volatility slows down the accumulation process; taxes come due during retirement; and we’re prone to dumb investing mistakes along the way. With so many pitfalls along the road to a well-funded retirement, it might help if the system defaulted us into saving, not spending, the tax break on contributions. 

© 2016 RIJ Publishing LLC. All rights reserved. 

UBS to partner with SigFig, a robo-advisor

Posted on May 19, 2016 by -

In the latest partnership between a major asset manager or wirehouse and a robo-advisor, UBS Wealth Management Americas announced this week that it has formed a strategic alliance with SigFig, an independent San Francisco-based digital advisory service.

UBS is taking an undisclosed equity stake in SigFig and will develop investing technology alongside it, according to news reports.

UBS said in a release that it will use SigFig’s technology to automate some of the middle-office chores of its 7,000 wealth managers (“B2B” robo) rather than using SigFig to create a digital advisory channel with individual clients (“B2C” robo), as direct providers like Vanguard and Schwab have done. B2C works either by itself or with the support of a financial advisor via phone or Skype.

The SigFig “digital platform will improve the ability of UBS advisors to efficiently provide advice on assets held at UBS and other institutions, a critical factor in providing truly personalized financial advice across the complete range of client needs,” UBS said.

According to the release, UBS and SigFig will create a joint Advisor Technology Research and Innovation Lab, where “UBS financial advisors, product experts and technologists” can work with SigFig’s experts on new wealth management tools. 

In the first quarter, UBS’s average financial adviser had $147 million of invested assets and $1.06 million in revenue, according to the New York Times. What follows appeared in the Times this week:

The technology will allow the advisers to spend more time talking to clients and less time constructing investment portfolios and other activities that lend themselves to automation, said Tom Naratil, the president of UBS Americas. “It’ll make them more effective in helping clients to make better choices,” he said.

But unlike some other brokerage firms, which are developing products for retail customers, UBS will not take a robo-adviser service directly to its wealthy customers, Mr. Naratil said in an interview. “We’ll give them some tools, but we’re not going down the self-serve route,” he said.

Last month, SigFig announced its first agreement with a bank, the $3.2 billion Cambridge Savings Bank outside Boston.

© 2016 RIJ Publishing LLC. All rights reserved.