Archives: Articles

IssueM Articles

How RIAs can stay ahead of the competition: Cerulli

Posted on March 3, 2022 by -

A confluence of competitive threats is eroding the registered investment adviser (RIA) channels’ key differentiating factors, according to the latest report from consulting firm Cerulli Associates: US RIA Marketplace 2021: Meeting the Demand for Advice. 

The threats to RIAs include an industry-wide shift away from brokerage, broader adoption of financial planning, and the popularity of independent business models. In response, more RIAs are considering whether to extend their service offerings to deepen their impact with existing and prospective clients. 

“To unlock the RIA channels’ success formula and protect against adviser movement to independence, broker/dealers (B/Ds) are increasingly developing independent affiliation options, promoting financial planning, and creating more opportunities for advisers to conduct fee-based or fee-only business,” a Cerull release said.

By 2023, 93% of advisers across all channels expect to generate at least 50% of their revenue from advisory fees. Likewise, over the past five years, the number of financial planning practices across all channels grew at a 5.3% compound annual growth rate (CAGR). As a result, B/Ds are impinging on what has historically been viewed as largely unique to the RIA channels—an independent, fee-based business centered on financial planning. 

In addition to this convergence of business models, investor influence, democratization of services, and client acquisition challenges are encouraging RIAs to reevaluate their position in the marketplace. For some, this means expanding their service offerings to combat value differentiation concerns and capture emerging opportunities.

According to the research, trust services (19%), digital advice platforms (17%), and concierge/lifestyle services (16%) rank as the top-three areas of anticipated service expansion for RIAs within the next two years. 

“While implementing these additional services may help RIA firms move upmarket and generate greater revenue, RIAs will need to reinvest in the business by hiring more staff, adding technology tools, producing marketing materials, or paying a third-party provider for outsourced support,” said Marina Shtyrkov, associate director, in a release. “These expenses typically lower the firm’s profit margins, so by expanding their purview, RIAs find themselves at risk of profit margin compression unless they are able to offset expenses with higher fees, new client acquisition, or additional revenue streams.”

To preserve profitability levels as they add services, advisers can either adjust their fees upward or implement alternative pricing structures. These nontraditional fees (e.g., fixed financial planning fees, monthly subscription fees) are not correlated to portfolio performance and can help RIAs offset the increased costs of delivering additional services, thereby reducing profit margin pressure. 

For RIAs that offer financial planning, nontraditional fees also ensure that the firm’s pricing is more closely aligned with its value proposition.

Ultimately, value differentiation challenges will become a question of firm economics—one that RIAs must be ready to answer. While Cerulli does not believe that all RIAs must expand their service set to remain competitive, under the right circumstances, additional offerings can help firms capture new opportunities and tackle competitive challenges. 

“Like any business decision, the addition of a service should allow advisers to better address their target market and achieve stronger alignment between that segment’s needs and the firm’s offerings,” wrote Shtyrkov. “RIAs will need to consult their strategic partners (e.g., RIA custodians, asset managers, service providers) to help them navigate these choices, weigh the tradeoffs of service expansion, and mitigate the risks of thinning profit margins.”

© 2022 RIJ Publishing LLC.  

Raising Social Security age may be necessary, actuaries say

Posted on March 3, 2022 by -

Raising the age at which Social Security recipients become eligible to receive unreduced retirement benefits—Social Security’s “normal retirement age”—will likely be among the reforms Congress considers for addressing the program’s long-term financial challenges, the American Academy of Actuaries explains in a new issue brief.

“Raising the normal retirement age may be considered as part of a reform package in addressing the increased costs to Social Security as a result of greater longevity,” said Amy Kemp, chairperson of the Academy’s Social Security Committee, which developed the issue brief, Raising the Social Security Retirement Age. 

The report says: 

“The fact that increased longevity is among the root causes of Social Security’s financial problems suggests that raising the normal retirement age is a likely—perhaps even necessary—component of any package of program changes that addresses them. The American Academy of Actuaries issued a public policy statement in 200810 advocating for an increase in Social Security’s normal retirement age as part of a package of reforms designed to restore the system’s long-term financial health.

“The Academy provides a necessary actuarial perspective for public policymakers in evaluating such an option, including discussion of important considerations when developing a reform package, such as variations in longevity increases across socioeconomic status.”

An increase in the normal retirement age would reduce benefits payable at any given claiming age while providing an incentive for delayed retirement and longer working lifetimes. It also has significant precedent as a public policy approach. 

In 1983, Congress enacted a series of phased increases in the normal retirement age, recognizing that life expectancy had increased substantially since the program’s inception. But while the age for collecting unreduced benefits thus increased by two years since Social Security began paying monthly benefits to retired workers in 1940, life expectancy at age 65 has increased by roughly 6½ years in that time. Social Security is currently projected to be able to pay only about 75% of scheduled benefits starting in 2034.

“This issue brief allows the unique expertise of the actuarial profession to assist in addressing Social Security’s financial condition, so the financial health of this vital public program is preserved for future generations,” said Kemp.

The Academy’s objective analysis presents actuarial rationales and potential approaches and challenges to raising the normal retirement age, including assessing a differential impact on lower-income beneficiaries whose longevity expectations differ from higher-income beneficiaries.

© 2022 RIJ Publishing. 

Our retirement system needs work: Morningstar

Posted on March 3, 2022 by -

The newly launched Morningstar Center for Retirement and Policy Studies has released a “Retirement Plan Landscape Report,” the first in a planned series of original reports on the status of the US defined contribution (DC) retirement plan system and the US retirement system as a whole.

The content and tone of Morningstar’s new Retirement Plan Landscape Report, from a new Morningstar retirement research group, reflects a crisp, business-like approach to the topic–one well-suited to Morningstar’s broad audience. Other resources in this space include the Employee Benefit Research Institute and the Vanguard, the Investment Company Institute, and Vanguard’s annual “How America Saves” reports.

The executive summary of the new report says quite bluntly that the domestic DC system needs help. It hemorrhages assets, and not all plans are equal. If you work at a big, profitable company, your DC plan is likely cheap and generous. The implication is that semi-skilled worker at small companies have expensive plans or none at all.  

The report explores four aspects of the US retirement system, including: trends across coverage, assets, and numbers of defined-contribution plans; costs to workers and retirees within these plans, as well as their investments; the kinds of investments held by these plans; and the continued role of defined-benefit plans for today’s retirees. Key takeaways include: 

  • Almost $5 trillion flowed out of defined-contribution plans from 2011 to 2020. These constant outflows, due mostly to rollovers and cash-outs, reduce plan assets. The US DC system relies on new employers to offer retirement plans every year to compensate for the more than 380,000 plans that closed over the period from 2011 to 2020. New contributions and strong returns have masked outflows of more than $400 billion a year since 2015. The decline reduces the leverage that plan sponsors might otherwise have to bargain for lower fees from asset managers and lower costs for participants.
  • The largest plans in the US today hold nearly 45% of their assets in collective investment trusts (CITs). These pooled vehicles resemble mutual funds but are less regulated and can be much less expensive for participants. Small and mid-sized plans continue to invest the majority of their assets in actively managed funds, with more assets in active strategies among smaller plans. 
  • People who work for smaller employers and participate in small plans pay around double the cost to invest as participants at larger plans, around 88 basis points (bps) in total compared with 41 bps, respectively. Small plans also feature a much wider range of fees between plans, with more than 30% of plans costing participants more than 100 bps in total.  
  • Defined benefit pension plans accounted for more than 30% of distributions paid to participants in 2019. About 12.8 million people, between family beneficiaries and retired participants, are collecting traditional pension benefits today. About 8.8 million people who are no longer working are still entitled to future benefits, and 11.7 million people who are still working will eventually receive benefits. 
  • US defined-contribution system in the aggregate tilted toward investments with more ESG risk—which is the degree to which companies fail to manage ESG risks, potentially imperiling their long-term economic value. Plan sponsors may wish to reexamine their investment choices using an ESG lens.

The Center’s primary research team includes Aron Szapiro, head of retirement studies and public policy at Morningstar, Jack VanDerhei, director of retirement studies for Morningstar Investment Management LLC, and Lia Mitchell, senior analyst of policy research for Morningstar, Inc.

VanDerhei joined Morningstar Investment Management LLC on March 1, 2022, after many years as research director of the Employee Benefit Research Institute. He’ll be responsible for modeling the impact policy changes and proposals might have on US retirement preparedness, as well as the effects of plan sponsors’ decisions on participants.  

The Center is planning to shed light on a range of topics in the coming year, including lifetime income in defined-contribution plans, the new anticipated fiduciary package, and the state of overall retirement preparedness among older workers. For more information about the Morningstar Center for Retirement and Policy Studies, please visit

© 2022 RIJ Publishing. 

Investment, Pension, or Annuity? This Fund Is a Hybrid

Posted on March 3, 2022 by -

Bob is 65 and wife Doreen is 66. They have $3 million in mutual funds and a home worth about $1.7 million. They’ll need an income of $140,000 a year or so in retirement. Social Security will provide about $28,000 of that. Where will the other $110,000 come from?

Their financial adviser, Sarah, suggests moving $1 million into a “Longevity Pension Fund.” It’s a kind of mutual fund that will pay Bob and Doreen $61,500 a year. If they squeeze $50,000 a year (2.5%) from their other $2 million in investments, they’ll have the desired $140,000. 

One more thing about Bob, Doreen and Sarah, besides the fact that they’re fictional: They live in Canada, where regulators have approved the Longevity Pension Fund. The fund was brought to market by Purpose Investments, a nine-year-old Toronto-based fintech that dabbles in several financial services. 

Sales of this tontine-like fund are still embryonic, and limited to Canada. But Purpose Investments has eyes on the US market. It has engaged an unnamed Chicago law firm to help hurdle regulatory barriers in the US.

The product is designed to work like a mutual fund and a pension fund and an individual annuity.

Fraser Stark

“We manage it like a defined benefit plan rather than an annuity,” Purpose Investments’ Fraser Stark told RIJ. He’s president of the firm’s Longevity Retirement Platform. “It’s an investment fund that offers longevity risk protection. Nothing is guaranteed, but there’s an options strategy to reduce risk. Annuities can be brilliant but at today’s interest rates, many investors struggle to justify annuitizing.”

Grandchild of CREF

Pension funds that act like annuities have been available in the US since 1952. That’s when TIAA created CREF, a big centralized equities fund that pays out a rising, sustainable, but not necessarily guaranteed lifetime income stream, mainly to professionals at ivy-clad colleges and universities. 

As RIJ reported last week, the basic DNA of the CREF variable income product resurfaced decades ago in the University of British Columbia’s Variable Payment Life Annuity (VPLA), and beats at the heart of Canada’s still-in-progress Dynamic Pension Pools. Purpose Unlimited’s Longevity Pension Fund brings the concept to a wider audience, but still in Canada.

“People have done it,” said Simon Barcelon, vice president to Stark. “It just hasn’t been done within a retail product. We have put the work in to make that happen. We’ve ‘democratized’ the solution to the income problem.”

If you buy and hold shares in this fund through retirement, you get the growth potential of investing in equities and alternative assets. You also get the “survivorship credits” that come from pooling longevity risk.

But what about liquidity? Investors have always balked at tying up big chunks of their money in illiquid income annuities. The variable annuity with guaranteed lifetime withdrawal benefit, so popular between 2005 and 2015, solved that problem, but not elegantly or cheaply. 

Current allocation of Longevity Pension Fund

The Purpose Unlimited mutual fund offers a compromise. Investors can cash out at any time. If they leave before retirement, they get their principal back, with earnings. If they leave after retirement, they get their principal  at 65 minus the income payments they’ve already received, effectively leaving their earnings post 65 in the pool as survivorship credits.

US securities law requires mutual funds to allow investors to cash out at the fund’s current price (the net asset value, or NAV, which is calculated each day after the market closes). That’s a legal obstacle to offering the Longevity Pension Fund as a mutual fund in the US. 

“If an investor wants to redeem shares, we can redeem the client at less than market value. That’s how we preserve the risk-pooling structure that’s embedded in the product,” Barcelon said.  Another obstacle to US distribution is more operational in nature. It involves capturing the date of birth (DOB) of the investors.

 “With annuities, a contract’s price is based on the individual’s life expectancy, and the issuer has to capture the DOB. But with a mutual fund, there’s no specific contract, so you don’t necessarily capture the information,” Barcelon added. “The challenge was to capture the right age. That was something we really needed operationally to provide the [longevity] risk-pooling structure.”

Law of large numbers 

As the Bob-and-Doreen example at the top of this story shows, Purpose Unlimited intends the Longevity Pension Fund to produce an initial retirement income of 6.15% in the first year, or $6,150 per $100,000 invested. 

The income won’t be fixed and is not guaranteed to hold at that level for their lifetime, because no insurance company is assuming that risk—or charges for it. Instead, the income rate will fluctuate, based on the performance and redemptions (mortality and voluntary) of the fund. Since the initial lifetime income rates are calculated using conservative assumptions for investment returns, mortality and redemptions, the income has a good chance of rising over time. 

What you get from the Longevity Pension Fund that you couldn’t have gotten from, say, one of the payout mutual funds that Vanguard and Fidelity offered in the first decade of this century, is “survivorship credits.” That’s the dividend that accrues to the surviving members of each of the fund’s age-cohorts when one of the members dies or redeems voluntarily. In old-fashioned tontines, the inevitable acceleration mortality rates at older ages meant that the payments usually grew huge toward the end. In this product, as in a fixed income annuity, the survivorship credits are anticipated; they’re spread more or less over the entire payout period. 

Simon Barcelon

Here’s how Barcelon put it:

In addition, similar to how a pension plan is managed, Purpose takes a funding-level approach that compares the Fund’s assets with the present value of all expected future liabilities. The long-term funding-level target is 100%; however, this may be higher in the earlier years of a cohort to provide additional stability in distribution levels. The distribution levels are adjusted annually to bring the funding level to its target, which ensures the cohorts are adequately funded to provide income for life.

Longevity risk pooling requires help from the law-of-large-numbers—but the numbers don’t have to be huge. “You need a group of people to do this, but what’s surprising is how low the number can go before there’s any negative effect on pooling,” said Barcelon. “We’ve modeled this extensively, and you can go down to as few as 100 to 300 people, which can be built over time. In building out a cohort, we take people within three years of a given age. The difference in life expectancies is small enough for the product design to work as intended. We accept new investment until the 80th birthday.” There’s no joint-and-survivor version of the fund, so couples planning retirement will want to split their investment in both their names.

Purpose Investments, a subsidiary of Purpose Unlimited, is the asset manager of the fund. There’s an annual management fee of 60 basis points, plus whatever advice fee an adviser charges his or client. In Canada, there’s also an Adviser series with an annual management fee of 1.10% to the investor; that includes the investment fee and a trailing commission of 50 basis points paid by the fund to the adviser’s broker-dealer.

“The fund can be sold through a bank, independent wealth adviser, or online account. Or we can put it on the platforms of companies that manage DC plans, as an option for employees. It can’t be sold as an ETF given the unique elements of the redemption structure,” Stark told RIJ.

Three pots of money

Purpose Unlimited appears to have the resources necessary to make this work. Last year, Allianz X, the venture capital arm of Allianz SA of Germany (parent of Allianz Life of North America), invested the equivalent of $38.37 million in the Toronto fintech, which has about 300 employees and manages about C$14 billion ($11 billion). Toronto-based CIBC Mellon Global Securities Services Company is the registrar and transfer agent for the units of the fund. 

Som Seif

The founder and CEO of Purpose Unlimited, Purpose Investments’ parent, is Som Seif, 46. An engineer by training who started his financial career at the Royal Bank of Canada, Seif made his first fortune founding Claymore Investments, building it to $7.5 billion in assets and selling it to BlackRock. 

The company has been endorsed by the Canadian Association of Retired Persons (C.A.R.P.), which offers investors a 15% fee discount. It currently distributes the Longevity Pension Fund through the Bank of Montreal and National Bank, but not yet through Canada’s four other major banks.

Advisers to Purpose Investments include Keith Ambachtsheer, emeritus director of Canada’s International Centre for Pension Management, Bonnie-Jeanne MacDonald, Director of Financial Security Research at Ryerson University’s National Institute on Aging, Fred Vettese, Former Chief Actuary of Morneau Shepell and personal finance author, and Jim Leech, Former President & CEO of Ontario Teachers’ Pension Plan and Chancellor of Queen’s University.   

“When we showed the Canadian regulators, they helped champion the concept. In Canada, the regulatory changes were in the retail investment product space, but also made the fund available to defined contribution (DC) plans. In the US we’re also hoping to put this product on the shelf inside DC plans. It will let DC plan sponsors offer their employees an income for life option,” Stark said.

Last week, Purpose Investments announced that the Toronto-based global human resource consultant LifeWorks (formerly Morneau Shepell) validated Purpose’s assertion that the Longevity Pension Fund “could achieve initial lifetime income rates starting at 6.15% for 65-year-old investors, and that Longevity’s distribution levels should increase over time in the majority of cases as a result of the Fund’s risk pooling structure and the conservative assumptions used to set the initial rates.”

So far, Longevity Pension Fund has fewer than 100 investors and assets in the “low millions,” Stark said. But Purpose Investments thinks the concept—already proven by TIAA in the 403(b) plan space—is an idea whose time has come.

“If the average investor thinks of three categories, balanced portfolio of traditional investments, annuities, and longevity risk pooling…this is money you’re not going to leave to your estate,” Stark said. “No one should totally move away from traditional investments. But many investors will believe that some money should go into the longevity risk pooling sleeve.”

© 2022 RIJ Publishing LLC. All rights reserved.

‘I Can’t Believe This’

Posted on March 3, 2022 by -

By now we’ve all see satellite pictures of the leaf-cutter file of green Russian trucks, tanks and Tygr armored cars crawling along Ukraine’s empty roads and highways toward Kyiv. We’ve also seen images of frantic Ukrainian women clutching toddlers and clawing their way toward Poland and safety. 

But, long before this war started, millions of able-bodied Ukrainians had already left the country and its black, distinctly fertile “chernozem” soil. Ukraine’s population was about 41 million when Russia invaded last week—down from about 52 million in 1991.  

The exodus drained Ukraine of many of the workers it needed to raise its standard of living closer to European Union levels. The loss of workers also drove up the “dependency ratio” of old people to working-age people, and wrecked an already threadbare state pension system. (My great-grandfather left western Ukraine, then Eastern Galicia, in the 1880s.)

A pensioner in Ukraine aims an assault rifle.

Ukraine’s traditional pay-as-you-go basic national pension operated on the “solidarity” principle. Young people supported their parents and grandparents. Of the ~11 million retirees in Ukraine (as of mid-2021), 65% received a pension below 3,000 hryvnia (€95, $105) per month. Only high-ranking former public officials (2.7% of the population) received a pension of over 10,000 hryvnia (€317, $351) a month. In one interview, a Ukrainian told a reporter that many men volunteered for dangerous industrial jobs in order to qualify for an earlier, larger pension.

After Ukraine declared independence from the Russian Federation in 1991, it tried to establish a three-legged pension system on the OECD (Organization of Economically Developed Countries) model. In addition to the Solidarity pension, a defined contribution plan with individual accounts funded by 7% of pay contributions, as well as private pensions, were proposed. They were either insufficient or incomplete. A period of high inflation in the 1990s didn’t help. Neither did the financial crisis of 2009.

But Ukraine’s fundamental pension problem is demographic. The population has been shrinking by an average of over 300,000 annually since 1993. As of 2007, the country’s rate of population decline was the fourth highest in the world. Environmental pollution (Ukraine is home to the 1986 Chernobyl reactor disaster), poor diets, smoking, alcoholism and deteriorating medical care also give Ukraine a high mortality rate. 

And Ukraine is impoverished. Despite the photographs we see on TV of historic Lviv (a time capsule of 19th century architecture, and a World Heritage preservation site) and the modern subway in Kyiv, Ukraine is the poorest country in Europe. It’s not only poorer than the countries of western Europe. It’s also poorer than the Balkan states of Albania, Serbia, Kosovo and Montenegro.

“With a per capita gross national income (GNI) of $3,540, Ukraine is the poorest country in Europe as of 2020. Ukraine once had the second-largest economy in the USSR. However, when the USSR collapsed, Ukraine had difficulty transitioning into a market economy, which sent much of the population into poverty. Some of Ukraine’s continuing issues contributing to its poverty are government corruption, Russian aggression (specifically Russia’s illegal seizure of Crimea in 2014), and weak infrastructure,” one source said.

In the vacuum after the fall of Communism, Ukraine seems to have retained the worst vestiges of the socialist era—with its centralized controls and stifling of enterprise—and entertained the most piratical strain of capitalism. As in Russia after 1991, a handful of insiders (the “red directors” who became “oligarchs”) took personal control of the former state monopolies on agriculture, natural gas, and other resources. They vastly enriched themselves at the expense of the nation.

Ordinary Ukrainians have been living in a kind of hell. But most of the urban Ukrainians we see on TV or online don’t seem very different from us. We’ve all seen interviews with rumpled but clearly 21st-century Ukrainian men and women who look and sound like Westerners—wearing bluejeans and parkas, holding cellphones or lidded go-cups of cold coffee, and speaking accented but flawless English—and who say the words that we would say if we were in their shoes: “I can’t believe this.”   

© 2020 RIJ Publishing LLC. All rights reserved. 

Lawsuits against DOL won’t change client strategy: Reish

Posted on February 24, 2022 by -

In a webinar this week, attorney Fred Reish of the law firm of Faegre-Drinker noted that his corporate clients are aware of the two federal lawsuits in Texas that are challenging the Biden Department of Labor’s efforts to regulate the way financial advisers can talk to 401(k) participants about rollovers.

Reish said his clients are proceeding with their compliance efforts on the assumption that the suits will not change the course of DOL policy.

“No one is ignoring the lawsuits,” Reish wrote in an email to RIJ. “And no outcomes are predictable regardless of where the lawsuits are filed. The insurance company clients I talked to believe the risk is too great to justify stopping compliance efforts with PTE 2020-02 and the fiduciary interpretation. 

“If they ‘bet’ that the plaintiffs will prevail in the litigation, but they lose, those companies could have enormous amounts at risk. Compliance takes that risk away. I am not aware of any major financial services company that is not fully committed to complying with these rules.”

On February 2, 2022, the Federation of Americans for Consumer Choice (“FACC”) filed suit against the US Department of Labor (“DOL”) in the United States District Court for the Northern District of Texas seeking to set aside the DOL’s latest attempt to define “investment advice fiduciary.”

In the second suit, filed in the Middle District of Florida, the American Securities Association objected to the Biden Labor Department’s “frequently asked questions,” issued in April 2021, because it said the guidance interpreted the Trump-era rule to mean that first-time advice to transfer retirement assets can constitute fiduciary advice, which the rule subjects to a strict standard of care.

Here are the Groom Law Group’s comments on the first suit:

FACC’s complaint seeks the court to declare that the DOL’s interpretation of the investment advice fiduciary regulation “five part test” articulated in the preamble to Prohibited Transaction Exemption 2020-02 (“PTE 2020-02”) exceeded the DOL’s statutory jurisdiction, authority, or limitations and is arbitrary, capricious, and contrary to law.  In addition, the FACC asked the district court to vacate the DOL’s interpretation in its entirety.  If the FACC’s complaint is ultimately successful some potential positive outcomes include: overturning some of the more controversial elements of the preamble to PTE 2020-02 including the DOL’s relatively new views on the regular basis prong and the mutual agreement prongs of the five part test; and overturning the DOL’s position that the advice to take a rollover is likely to be fiduciary advice.

For now, however, resolution of the case is a long way off.  It is anticipated that the DOL will move to dismiss the lawsuit, and even if the lawsuit survives dismissal, the DOL is expected to vigorously defend against it.

The FACC’s complaint is part of a larger trend of plaintiffs challenging regulators and legislation in federal courts in Texas prior to any governmental enforcement.  In 2016, for instance, in Chamber of Commerce v. US DOL, the Chamber successfully convinced the Fifth Circuit Court of Appeals to vacate the DOL’s 2016 fiduciary rulemaking package.  In 2020, Data Marketing Partnership convinced a district court judge in the Northern District of Texas to vacate a DOL Advisory Opinion in Data Marketing Partnership v. US Department of Labor.  Similarly, the US Supreme Court allowed a pre-enforcement review of legislation in Whole Woman’s Health v. Jackson.  These holdings show some willingness of federal courts to become involved in adjudicating challenges to laws, regulations, and other agency action before a government actor begins enforcement.

Substantively, the FACC’s complaint largely mirrors the Fifth Circuit’s reasoning in its decision in Chamber of Commerce v. US DOL.  It essentially argues that DOL has sought to avoid the court’s mandate by doing through the preamble of PTE 2020-02 what it was told it could not do through formal notice and comment rulemaking.  Again, the plaintiffs assert that DOL has sought to expand the scope of who is an ERISA fiduciary beyond those who have a “relationship of trust and confidence” with an ERISA plan or IRA holder, thereby sweeping back in functions like regular sales activities.

We expect the DOL to push back on the trend towards pre-enforcement judicial review and to argue that the plaintiffs should not be permitted to sue at this time.  The DOL will likely argue that until there is enforcement action by it or by a private litigant against someone for violating the preamble, the preamble has not caused the FACC and its members to have suffer judicable harm.  As described above, the trend towards pre-enforcement judicial review is new and there are strong arguments on both sides.  It will be important to watch the district court and ultimately whatever other courts weigh in on this dispute.  The outcome of the scope of pre-enforcement judicial review will likely have an impact, one way or the other, on the opportunity for members of the regulated community to challenge FAQs, Advisory Opinions, Prohibited Transaction Exemptions, preambles, and other formal and informal guidance that is issued by the DOL.

Should the FACC prevail in its effort to have a federal court resolve the case, the case will remain a blockbuster as it will either provide an opportunity for courts to decide that the DOL’s interpretation is consistent with the Fifth Circuit’s “relationship of trust and confidence” requirement or close off another route that the DOL had taken to attempt to further expand its regulatory authority.  While a victory for FACC in the case would not invalidate PTE 2020-02, it would likely mean the exemption wouldn’t be necessary for many transactions, including rollovers.  Should the DOL engage in any further “fiduciary” rulemaking, this case demonstrates that additional litigation would be likely to ensue.

Here are comments on the second suit, from Bloomberg Law:

Guidance the US Department of Labor issued last year clarifying its stance on investment advice under a 2020 fiduciary rule violates the Administrative Procedure Act, a trade organization calling itself the American Securities Association, representing financial services firms, said in a federal lawsuit filed Wednesday.

The group filed suit in the US District Court for the Middle District of Florida, marking the second time this month the Labor Department was sued over the fiduciary rule.

In what are known as “rollovers,” federally regulated retirement assets are transferred into self-directed retirement vehicles, and financial advisers usually earn a commission on such transactions. The department’s updated guidance threatens to sap those resources from the industry, because a fiduciary under the rule is legally obligated to act solely in a client’s interest and can’t receive increased compensation because of their advice.

The Trump rule broadened the kinds of retirement plan investments from which financial advisers can profit by reinstating a five-part test establishing the definition of a fiduciary. The test includes a caveat limiting fiduciary advice to the kind made “on a regular basis to the plan.” The Biden Labor Department allowed parts of the rule to take effect, using the guidance to flesh out the regulation.

The department said in the guidance that first-time advice can qualify as fiduciary advice if the financial professional and investor later establish an “ongoing advice relationship” or intend to do so.

In its suit, the American Securities Association alleged that the department’s guidance “rewrote” the rule altogether. In so doing, the group said, the department imposed burdensome documentation and investigation requirements on businesses—changes that it believes should have been subject to public comment according to the regulatory process outlined in the Administrative Procedure Act.

“If the Department wanted to change its rules, it needed to do so through the required notice-and-comment process—not through guidance documents,” the suit states.

Earlier this month, the Federation of Americans for Consumer Choice Inc. filed a similar suit against the DOL, arguing the fiduciary rule itself was a violation of the Administrative Procedure Act for expanding the definition of a fiduciary in violation of federal law. The group, which represents insurance and annuity distributors, said Congress never gave the department the authority to change the definition of a fiduciary under the Employee Retirement Income Security Act of 1974.

© 2022 RIJ Publishing LLC. 

Will Buy-Out Firms Buy Out Medicare?

Posted on February 24, 2022 by -

A friend recently sent me a heads-up about the “direct contracting” of Medicare services. Some Medicare recipients had been auto-enrolled into a federally sponsored pilot program, he said. The program was testing a new approach to privatizing Medicare. 

As a Medicare beneficiary, he was concerned. And not without reason. “Direct Contracting,” as the new approach is called, could put private equity (PE) firms between doctors and patients.  

I had assumed that Medicare Advantage plans represented the future of health insurance for older Americans. (Bernie Sanders’ Medicare-for-All idea notwithstanding). By the end of 2022, more than half of all Americans over age 65 are expected to use Medicare Advantage plans instead of traditional Medicare. 

But some health care policy experts don’t think that Medicare Advantage plans—HMOs and Preferred Provider Organizations that bundle traditional Medicare with non-Medicare services like dental and vision insurance for the aged—have delivered on their promises to “contain costs” and produce better “patient outcomes.”

So the government has been entertaining alternative ideas for slowing the growth of Medicare and Medicaid expenditures as Boomers begin to line up for more hip replacements, more dialysis  treatments, more MRIs and more nursing home beds as they age into their 80s, 90s, and 100s.

A Center for Medicare and Medicaid Innovation (CMMI) was created by the Obama administration. It was tasked with finding ways to bend the upward curve of medical costs, especially as Boomers age. A five-year pilot program to test one of the models, Direct Contracting Entities (DCE), was launched in 2020 by the Trump administration, and the Biden administration is letting it run. Fifty-three companies are participating. 

A DCE might be a group of physician practices or a managed care company, owned perhaps by investors. The DCE would receive a steady stream of money from the government; it would accept—but manage—the chance that costs would be more or less than revenue. If they took all the risk, they could get all the upside.

That’s a scenario that investors in private equity funds love, and PE firms are showing interest in aggregating physician groups and other health care providers that could become DCEs. The same appetite for higher yields and large asset pools that attracted PE firms to the life insurance/annuity business in recent years also attracts them to the health insurance business.

Here’s what health policy experts wrote in HealthAffairs magazine last September:

Four main business realities drive the interest in Medicare-related acquisitions. First is the expected doubling of Medicare spending from $800 billion in 2019 to $1.6 trillion in 2028 as Baby Boomers age. Second is the reality that Medicare Advantage (MA)  harbors an arbitrage game in which [Medicare] consistently overpays MA Plans with no demonstrable clinical benefit to patients. Third is the heavily subsidized and distorted market dynamics that result from these overpayments. Fourth is the Trump administration’s creation of the Direct Contracting Model as a vehicle for privatizing Medicare’s projected 2028 $1.6 trillion spend. 

One of the authors of that article (and a follow-up article) was Donald Berwick, MD, a Harvard lecturer and former administrator of the Center for Medicare and Medicaid Services. Berwick told RIJ this week, “The auto enrollment under Direct Contracting was part of proposal under the Trump administration. We haven’t seen the next generation of rules from the Biden administration yet, but I doubt that there will be auto-enrollment. There’s a lot of debate on the future of that project.”  

I asked Berwick which was true: the research showing that MedicareAdvantage plans saves the government money or the research that shows that it drives up the cost of health care for all Americans.  

“It has a lot to do with how you assess the costs,” Berwick said. “But research by MedPAC (Medicare Payment Advisory Committee) has found over and over that when you adjust for the severity of the illness, that the cost goes up under MedicareAdvantage plans, not down. The research is solid on that point.”

As the Direct Contracting pilot program reaches its conclusion and the results become public, we’re bound to hear PE companies promise that they will make the delivery of health care less expensive for the government, more responsive to elderly patients, and highly profitable for their risk-hungry investors.  

To me, hiring for-profit foxes to guard the health insurance henhouse may look good on paper, but it hasn’t worked in practice. My friend has reason to be concerned. 

© 2022 RIJ Publishing LLC. All rights reserved.

A Policy Dynamo Touts ‘Dynamic Pensions’

Posted on February 24, 2022 by -

We first met Bonnie-Jeanne MacDonald four years ago in Manhattan. The Canadian actuary was in New York to tell the gathered members of the Defined Contribution Institutional Investors Association about her retirement research and, in a sidebar, we talked about her “LIFE” plans.  

LIFE, in this case, stood for Lifetime Income for the Elderly, a type of personal pension that MacDonald and others had developed for the Canadian market. Retirees would invest in an irrevocable LIFE contract at age 65. At age 85, they would draw a variable stream of income that was managed, though not guaranteed, to last until they died. 

If LIFE sounds familiar, it should. It has elements of tontines, of TIAA’s CREF variable income annuity, and of deferred income annuities (DIAs). Those are niche products; the positive reception that LIFE got from Canada’s regulators and legislators gave MacDonald a feeling that her version of an old idea could find a bigger audience.

Bonnie-Jeanne MacDonald

“Everybody bought into the idea that Canadian retirees needed something more than annuities and drawdowns (i.e., system withdrawals) to produce retirement income,” she told RIJ. “They needed a third option.”

Prodded by MacDonald and others, the Canadian government eventually revised its tax laws, opening the door to something larger than LIFE. Now Canada’s defined contribution (DC) plan sponsors and Pooled Registered Pension Plans—savings plans for those without DC plan coverage—can offer income starting at age 65 and lasting for life. 

As the lead actuary on the project, MacDonald picked out a name for the latest iteration of the program: Dynamic Pensions. “We put a new white paper out, it’s been fully circulated, and we just did presentations on Dynamic Pensions across Canada,” she said in an interview. “This time, we hit the bull’s eye.”

Two nations, similar challenges

Canada’s retirement industry, like that of the US, is playing catch-up with demographic imperatives. Canadian boomers are retiring from DC plans with big chunks of tax-deferred savings but with no direct mechanism for turning the nest eggs into what most people say they want: a pension-like income.

Like Americans, Canada’s DC participants tend to roll their money into tax-deferred brokerage accounts at retirement. But Canadian plan sponsors and asset managers, like their American counterparts, would like to retain more of those fee-generating assets and maintain economies of scale.

In the US, insurers are trying to integrate annuities into DC plans, and Congress, with its SECURE Act, has helped. Just last week, it was announced that Morningstar would link its 401(k) managed accounts to Hueler’s online annuity platform. But few Americans buy income annuities. 

MacDonald’s Dynamic Pensions would be cheaper than annuities, which means they’d produce bigger monthly checks for retirees. They’d be cheaper because, as in the LIFE program, participants would bear their own investment and longevity risks instead of hiring life insurers to do it for them.  

How Dynamic Pensions work

Like Americans, most Canadians who aren’t covered by defined benefit pensions save for retirement in a variety of tax-deferred savings vehicles. These include employer-sponsored defined contribution plans and, for individuals, Registered Retirement Savings Plans (RRSPs), which resemble IRAs.

At retirement, Canadians who want lifetime income can buy a life annuity from an insurance company or move their tax-deferred savings into a Registered Retirement Income Fund (RRIF), or a Life Income Fund (LIF), from which they can draw down a taxable income. (Distribution rules can vary from one province to another.)
Under MacDonald’s plan, at retirement Canadians could roll all or part of their tax-deferred savings into a large, professionally managed fund composed of stocks, bonds, and sophisticated alternatives. Depending on their age and the amount of their contribution, they’d be credited with a certain number of income units. 

Participants would receive a guaranteed number of units of income each year. But the dollar-value of the units would not be guaranteed. Instead, the units would fluctuate in value from year to year, depending on the performance of the underlying fund. As years go by and participants die, their assets would stay in the fund. 

Like an annuity, a Dynamic Pension would have to be illiquid and irrevocable. That’s the only way to maximize income. An optional death benefit or guaranteed period might be added, but payouts would be smaller. But illiquidity might be more palatable in a Dynamic Pension than in an annuity because—without the expense of a life insurer guarantee— the income would be significantly higher.  

Sounds familiar

The DP idea isn’t new. In fact, it will turn 70 years old this year. In 1952, the leaders of TIAA, then the not-for-profit Teachers Insurance and Annuity Association, invented CREF, the College Retirement Equities Fund. CREF was the first deferred variable annuity and, at retirement, it can be converted to a variable income annuity.  

CREF is still a pillar of TIAA’s offering, available at colleges and universities in the US and abroad. It has even been cloned. The University of British Columbia has replicated a CREF-like plan since it broke with TIAA some 40 years ago. UBC calls its version of CREF a Variable Payment Life Annuity. 

The CREF/DP idea was adopted in 2021 by QSuper, a former non-profit public employee’s retirement savings plan that was opened in 2017 to all Australians. At retirement, participants can put all or part of their savings into the QSuper Lifetime Pension, which works just like CREF or a Dynamic Pension. 

Dynamic Pensions are a lot like tontines, which were investment pools that paid out income to their members for as long as members were alive—or as long as a designated annuitant was alive. A Dynamic Pension would produce a more level income than a tontine, because early payments would anticipate the impact of future mortality. Moshe Milevsky, a tontine expert and professor at York University in Toronto, has advised MacDonald on Dynamic Pensions. 

Not quite there yet

Even though some of the legal barriers to Dynamic Pensions have been cleared away, hurdles remain. DC plans can offer Dynamic Pensions, but DC plans cover only a small minority of Canadians. Also, there aren’t many DC plans in Canada that, by themselves, have large enough participant pools to make Dynamic Pensions work. 

Insurance companies could use their recordkeeping and asset management skills to run Dynamic Pensions, but at the risk of undercutting their retail annuity businesses. MacDonald herself would like to see stand-alone not-for-profit entities offer Dynamic Pensions to any Canadian who wants one. 

“Canadians won’t buy into something like this without trust,” MacDonald told RIJ. She thinks it’s just a matter of time before her vision for Canadian retirees comes true. “A lot of thought leaders in government and industry believe Dynamic Pensions are the right thing to do. There’s a lot of good will toward making it work.”

© 2022 RIJ Publishing LLC. All rights reserved.

Assets in TIAA’s custom RetirePlus TDFs cross $10 billion milestone 

Posted on February 24, 2022 by -

TIAA’s RetirePlus Series of customizable target date funds (TDFs) has surpassed $10 billion in assets, with year over year growth of 45%, thanks to “dozens of new institutional clients, additional individual client contributions, and consistent investment performance,” TIAA announced this week.

“Over 40% of all US households are expected to run out of money in retirement with an average shortfall projected at $100,000 per household,” said Bill Griesser, head of Institutional Managed Solutions at TIAA, in a release.

“TIAA RetirePlus Series helps plan sponsors better prepare their employees for a confident retirement by allowing them to create a ‘personal pension.’ It brings the lifetime income provisions of the Secure Act into practical reality for plan participants.”

© 2022 RIJ Publishing LLC. All rights reserved.

Breaking News

Posted on February 24, 2022 by -

Labor Department investigates Alight, a major recordkeeper

On July 30, 2019, the department’s Employee Benefits Security Administration opened an investigation of Alight, a healthcare and retirement benefits administration and cloud-based human resources services company. 

Alight appealed to the Seventh Circuit, and the Solicitor of Labor’s Office, Plan Benefits Security Division, filed an appellee brief on February 18, 2022, responding to Alight’s brief.

Alight provides recordkeeping service to over 750 ERISA-covered employee benefits plans that serve over 20.3 million plan participants. EBSA began investigating Alight, which provides cybersecurity services to Employee Retirement Income Security Act plans, when EBSA discovered that Alight processed unauthorized distributions of ERISA plan benefits due to cybersecurity breaches in its ERISA plan clients’ accounts and failed to disclose those breaches and unauthorized distributions to those plan clients for months. 

Alight failed to produce most documents sought by EBSA’s subpoena, and after attempting to negotiate, EBSA moved for subpoena enforcement in the Northern District of Illinois. The district court granted subpoena enforcement and denied Alight’s request for a protective order.

Timber Operators transfer $245 million in pension risks to Prudential 

Prudential Financial, Inc., announced a new pension risk transfer (PRT) this week. Timber Operators Council Retirement Plan (TOCRP) purchased a $245 million group annuity from Prudential, replacing its pension obligations to about 3,000 retirees, beneficiaries and deferred participants.

A unit of Prudential, the Prudential Insurance Company of America (PICA) is expected to assume responsibility for paying these benefits beginning April 1, 2022. The TOCRP is a defined-benefit pension plan that was established by a group of Western wood products employers in 1961 to provide retirement benefits for their non-union employees. 

Brentwood Companies is the plan fiduciary for the TOCRP and served as consultant for the transaction. Stoel Rives LLP represents TOCRP and served as legal counsel in connection with the termination of the TOCRP and the related pension risk transfer transaction.

Prudential’s PRT business began in 2012 when it bought out General Motors and Verizon’s defined benefit plan assets and liabilities. Other PRTs following, including the buy-out of HP, Inc.’s pension in 2021, the fourth largest PRT recorded.

Lincoln enhances its flagship FIA

Lincoln Financial Group is expanding its flagship fixed indexed annuity, Lincoln OptiBlend, to include the 1-Year BlackRock Dynamic Allocation Participation Plus account. By paying an added fee, investors will be eligible for higher potential year-over-year returns. 

Two of OptiBlend’s indexed accounts will link to the BlackRock Dynamic Allocation Index, which launched in August 2021. The index gives  investors exposure to global and diversified multi-asset securities. Lincoln’s new Participation Plus account enable investors a chance to, in effect, buy more upside potential.

Fixed indexed annuities (FIAs) involve the purchase of options on an equity index. If the options have appreciated by a certain strike date, the contract owner can lock in gains. The index might be a pure equity index, like the S&P 500. It could also be a balanced stock/bond index, a customized hybrid index, or a volatility-controlled index. 

“The new Participation Plus account in Lincoln OptiBlend is yet another option that can empower clients to tailor-fit their financial strategy, with the opportunity to boost their long-term return,” said Tad Fifer, VP and head of Fixed Annuity Sales, Lincoln Financial Distributors, in a release.

Price of pension risk transfer is 99.9% of liabilities: Milliman

Milliman, Inc., the global consulting and actuarial firm, today announced the latest results of its Milliman Pension Buyout Index (MPBI). “As the Pension Risk Transfer (PRT) market continues to grow, it has become increasingly important to monitor the annuity market for plan sponsors that are considering transferring retiree pension obligations to an insurer,” a Milliman release said.

During January, the estimated cost to transfer retiree pension risk to an insurer in a competitive bidding process increased from 99.3% of a plan’s total liabilities to 99.9% of those liabilities. For these plan sponsors, the estimated retiree PRT cost is roughly the same as plans’ retiree accumulated benefit obligation (ABO). 

Meanwhile, the average annuity purchase costs across all insurers also increased, from 102.8% to 103.5%. This means that the competitive bidding process is estimated to save plan sponsors on average around 3.6% of PRT costs as of January 31.

“The US pension risk transfer market set records in 2021, with nearly $40 billion in transactions,” said Mary Leong, a consulting actuary with Milliman and co-author of the MPBI. “We’re expecting to see similar high volume in 2022 given recent funded status improvements and the potential for interest rates to rise as the year progresses.”

The MPBI uses the FTSE Above Median AA Curve, along with annuity purchase composite interest rates from eight insurers, to estimate the competitive and average costs of a PRT annuity de-risking strategy. Individual plan annuity buyouts can vary based on plan size, complexity, and competitive landscape.

© 2022 RIJ Publishing LLC. All rights reserved.

RetireOne partners with DFA, Midland National Life on stand-alone living benefit

Posted on February 17, 2022 by -

RetireOne, an independent distribution platform for fee-based annuities and other insurance products, is partnering with Dimensional Fund Advisors (DFA) and Midland National Life Insurance Company to offer three asset allocation models and 38 institutional-class mutual funds and exchange-traded funds (ETFs) covered by “Constance,” a zero-commission contingent deferred annuity (CDA) designed for RIAs.

Launched in October of 2021, Constance allows RIAs to protect client brokerage accounts, IRAs, or Roth IRAs with a lifetime income rider. As clients enter retirement and begin the “decumulation phase,” RIAs would still oversee client assets. 

“In working with DFA and gaining access to its asset allocation models and funds, advisors can benefit from value added fund and investment options that can be protected by an annuity, providing greater flexibility and choice for advisors and clients alike,” a RetireOne release said.

“A good retirement is a comfortable standard of living, which is measured by the amount of sustainable lifetime income received, and not by the size of the accumulated ‘pot.’ Significant numbers of Americans retire today without the reassurance of an adequate pension,” said Robert C. Merton, Nobel Laureate in Economic Sciences and Resident Scientist at Dimensional Holdings. 

“New and innovative lifetime-income solutions will be critical for addressing the looming retirement planning crisis. A well-designed Contingent Deferred Annuity offers new and flexible ways to create guaranteed lifetime income directly from IRAs, Roth IRAs, and brokerage accounts.”

DFA identifies securities based on a set of proven shared characteristics, or “dimensions.” To be considered a dimension, the characteristics must be sensible, persistent over time, pervasive across markets, and cost-effective to capture.

Through Constance, exclusive to the RetireOne platform clients, investors can access DFA mutual funds and ETFs with a lifetime income guarantee powered by a CDA.

© 2022 RIJ Publishing LLC. All rights reserved.

It’s Back: The Norcross-Walberg Bill to Make Annuities a 401(k) Default

Posted on February 17, 2022 by -

Bipartisan legislation has been reintroduced that would allow retirement plan sponsors to default participants into annuities, either for guaranteed returns during the accumulation period or for lifetime income in retirement.  

The legislation, which was first introduced in December 2020, endorses annuities without specifying any particular type of annuity. Any deferred annuity includes the option to convert the contract assets to a lifetime income stream. But only certain annuities are sold or used specifically for lifetime income. The legislation doesn’t appear to recognize that distinction. 

Also it remains to be seen whether plan sponsors will be comfortable defaulting their clients into an irrevocable or illiquid product. So far, they have not been, despite their general inclination to show participants a path to pension-izing their savings.

The Lifetime Income for Employees Act, introduced by Rep. Donald Norcross (D-N.J.) and Rep. Tim Walberg (R-Mich.), would allow retirement plan sponsors to use lifetime income solutions as qualified default investment alternatives (QDIA) for a portion of contributions made by participants who have not made investment selections. The Insured Retirement Institute (IRI) supports the legislation.

QDIAs, created by the Pension Protection Act of 2006, have proven to be an essential tool to enhance retirement security by providing retirement savers with the ability to accumulate assets without needing to make underlying investment selections inside of their workplace retirement savings plan.

Under the bill, the current QDIA safe harbor regulations would be amended to allow, but not require, a QDIA to include a limited investment in a non-liquid annuity component, which provides a guaranteed return on investment. Plan sponsors would not need to make any changes to their current QDIA.

The Department of Labor issued an information letter in 2016 that makes clear an investment with an annuity component can be offered consistent with a plan sponsor’s fiduciary duty. However, the current QDIA safe harbor regulation would not allow the investment to serve as a QDIA.

“This legislation would simply update regulations to reflect innovations in retirement security investment products,” Richman added. “The solution provided by the Lifetime Income for Employees Act will significantly increase access to and the use of protected lifetime income products to help retirement savers produce sustainable income during their retirement years.”

The legislation

Here is an edited text of the bill:

This Act may be cited as the “Lifetime Income For Employees Act”.

Section 404(c)(5) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1104(c) is amended by adding at the end the following: “Default investments made under this subparagraph may include a covered annuity contract.”

The term ‘covered annuity contract’ means an investment in an annuity contract that meets the following requirements:

The annuity contract does not impose a liquidity restriction on the transfer of invested amounts during the 180-day period beginning on the date of the initial investment in such contract by the participant or beneficiary.

The fiduciary ensures that each participant or beneficiary is provided (not later than 30 days before the date of the imposition of a liquidity restriction described above) written notice in a manner that is reasonably designed to be understood by the average plan participant, that includes:

  • An explanation of the circumstances under which assets in the account may be invested on behalf of the participant or beneficiary in the annuity contract, including an explanation of the targeted range and maximum amount or percentage of such assets to be invested
  • An explanation of the rights, and any limitations or restrictions thereon, of a participant or beneficiary to direct or transfer amounts invested, or to be invested, in an annuity contract to other investment alternatives available under the plan
  • A general description of the annuity contract, including the duration of guaranteed payments and identification of the insurer
    An explanation of how a participant or beneficiary may obtain additional information, in writing or electronically, about their investment alternatives
  • A copy of the annuity contract

The fiduciary cannot allocate more than 50% of any periodic contribution or, immediately after a rebalancing of account investments, 50% of the value of the assets of the account, to the annuity contract (or, as applicable, to the portion thereof to which a liquidity restriction applies after the 180-day period mentioned above.

The term ‘annuity contract’ means a contract (or provision or feature thereof) that is issued by an insurer qualified to do business in a State; and provides for the payment of guaranteed benefits annually (or more frequently) for a fixed term or for the remainder of the life of the participant or beneficiary or the joint lives of the participant and the participant’s designated beneficiary.

The amendments made by subsection (a) shall take effect on the date of the enactment of the Lifetime Income For Employees Act.

© 2022 RIJ Publishing LLC. All rights reserved.

‘Creeping inflation’ could hurt life insurers: AM Best

Posted on February 17, 2022 by -

Life/annuity insurance companies are actively implementing improvements in distribution techniques given changing customer expectations and an evolving distribution landscape exacerbated by the COVID-19 pandemic, an AM Best survey shows.

Highlights of the survey of 78 U.S life/annuity companies rated by AM Best are detailed in the Best’s Special Report, titled, Life/Annuity Insurers Adjust Distribution Strategies to Reach Consumers. 

Life insurers are focusing on the “elusive middle market,” the report says. More than 80% of survey respondents said they believe the middle market is extremely or very important to future growth. In a similar 2018 AM Best survey, 70% agreed with that statement.

But questions remain about the potential for sales in that segment. “Creeping inflation could increase skepticism of a potential customer’s ability to afford life and annuity products, especially in the middle market,” said Jason Hopper, associate director, industry research and analytics, AM Best, in this week’s release.

Other survey highlights include:

  • Nearly 60% of life/annuity companies surveyed believe that reducing the time it takes to apply for a life insurance policy, underwrite the application and issue a contract is the key to penetrating the middle market.
  • As the pandemic reduced in-person interaction and created internal process and communication hurdles, managing general agents (MGA) have attained more authority.
  • A majority of surveyed companies are moderately satisfied with innovation efforts related to distribution, while 10% are very satisfied and 4% are not satisfied.
  • Top-line growth has challenged the life/annuity segment for a number of years, the report states, particularly amid the pandemic, as punctuated by declines in 2020 direct premiums written across all lines except group annuities. 
  • Digitalization and technological investments required to improve the customer experience are among the biggest challenges to modernizing distribution and growing sales, according to the survey results; however, new customer approaches are being tested for growth opportunities.

Despite the pandemic’s drain on life/annuity insurers’ budgets, “many still found ways to invest in their distribution capabilities to keep up with the changing environment,” said Michael Adams, associate director, AM Best. 

“A significant majority of respondents said that they are at least midway to reaching their goals and are moderately or very satisfied with innovation efforts related to distribution,” Adams added, suggesting that carriers are reassessing and refining their overall distribution strategies.  

© 2022 RIJ Publishing LLC. All rights reserved.

Athene launches new RILA: Amplify 2.0

Posted on February 17, 2022 by -

Athene USA has introduced a new registered index-linked annuity (RILA). It’s called Athene Amplify 2.0 and will be issued by Athene Annuity and Life Company, a subsidiary of Athene, which is part of the Apollo Global Management.

“By offering participation rate strategies in addition to the cap rate strategies offered on most RILA products, Amplify 2.0 gives investors the potential for index-linked interest earnings that may even exceed index returns,” the release said.

Currently, investors choosing the product’s six-year term and a 10% downside buffer with a 0.95% annual segment fee can earn uncapped returns equal to 140% of any growth in the S&P 500, an Athene release said. 

Amplify 2.0 includes these features:

  • Two buffer options that protect contract owners from the first 10% or 20% of index losses 
  • Three term periods to manage market volatility
  • Five indices to track and two unique crediting options to select, Milestone Lock and Performance Blend.
  • An additional product option, Athene Amplify 2.0 NF, offers the same features with competitive rates and no annual segment fee.

RILAs, also called registered index-linked variable annuities, buffered annuities or structured annuities, are frequently described as a cross between fixed indexed annuities and variable annuities.

Like fixed indexed annuities, registered index-linked annuities provide the opportunity for growth based on the performance of a stock market index. Unlike variable annuities are not stock market investments and do not directly participate in any stock or equity investments. RILAs differ from fixed indexed annuities in that investors are eligible for higher growth potential but do assume responsibility for a portion of any index decline.

© 2022 RIJ Publishing LLC. All rights reserved.

RIAs, 401(k)s, and Annuities: Is This the Future?

Posted on February 17, 2022 by -

Looking to add a pension dimension to 401(k) plans, Morningstar will bundle the Hueler Income Solutions annuity purchasing platform into its managed account services for defined contribution (DC) plans: Retirement Manager and, for advisers, Advisor Managed Accounts.  

The deal is between the Workplace Solutions unit of Morningstar Investment Management and Hueler, which sells individual income annuities online, mainly to participants when they leave plans. Run by Kelli Hueler, Hueler is a boutique operation, but it works with clients as big as Vanguard, General Motors and Boeing.  

Participants who use either of Morningstar’s managed account services will get messaging about retirement income as they near their separation dates. About a year before they retire, the service may encourage them to buy a single premium immediate annuity (SPIA) with part of their savings.

Participants who like the idea will navigate to Hueler’s platform. Hueler will gather annuity quotes from participating life insurers, based on the participant’s premium size. Once Hueler’s insurance-licensed phone reps make sure the annuity shoe, in effect, fits the retiree, Morningstar puts the purchase process in motion.

“Using the data provided by individual participants, we make a recommendation on the percentage of savings they should allocate to an annuity,” said James Smith, who runs Morningstar’s managed account services. “That’s where we step in and provide concierge level service,” Kelli Hueler, CEO of Income Solutions, told RIJ. “We make sure they get a contract that has the benefits they need.”

The Hueler platform gives Morningstar’s managed account services the pathway to an annuity purchase that it lacked in the past. Morningstar provides an accredited tool for estimating the optimal amount of money a participant should spend on an income annuity, which Hueler lacked.

DB-in-DC

Managed accounts and target date funds (TDFs) are the two Qualified Default Investment Alternatives that plan sponsors can auto-enroll their plan participants into. With TDFs, an algorithm re-allocates the participants’ assets as they age. A managed account works like a robo-adviser, soliciting essential data from participants and making financial recommendations.

Kelli Hueler

Each of these two services provides a vehicle for offering an annuity to a plan participant. An optional lifetime income wrapper could be added to a TDF, at an extra fee. This would be an “in-plan” annuity. A managed account provider can steer participants toward the purchase of an annuity when they retire. This would be an “out-of-plan” annuity. It’s the Morningstar-Hueler approach.

In 2019, the federal SECURE Act relieved plan sponsors of part of the legal burden of offering annuities. That unleashed a tide of innovation in this area. A number of life insurers want an opportunity to market individual annuities to 401(k) participants. Asset managers that currently sell mutual funds through 401(k) plans think that plan participants who buy annuities might keep the rest of their money in the plans indefinitely. 

There are some potentially misaligned interests here. An annuity purchase would, inevitably, drain some of a retired participant’s money from the mutual funds in the plan and send it to a life insurer’s general account. But some asset managers will accept that sacrifice as the price of holding on to the balance of the participants’ savings. As it is, asset managers helplessly watch millions of participants “roll over” trillions of dollars of savings out of their funds and into IRAs at brokerage firms at retirement. 

Americans held $10.4 trillion in all employer-based DC retirement plans on September 30, 2021, of which $7.3 trillion was held in 401(k) plans, according to the Investment Company Institute. According to the most recent figures from the Employee Benefit Research Institute, target date fund assets represent about 27% of 401(k) plan assets.  

Competition

The managed account business is highly concentrated. Morningstar’s main competitors in the space are Edelman Financial Engines and Fidelity. Edelman Financial Engines’ “Income+” service aims at managing a plan retiree’s money to last into their “early 90s,” according to a corporate disclosure. Participants have the option of buying an annuity to provide lifelong income starting at age 85, but no annuity purchase is woven into the program.

Last November, Fidelity announced its new Guaranteed Income Direct program, which is scheduled to become available to participants in Fidelity-administered plans this year. As Fidelity describes it, the program will give workers “a straightforward option of an immediate income annuity, with institutional pricing and offered by the insurer of their choice.” That sounds close to the Morningstar-Hueler model.

Together, Edelman Financial Engines, Fidelity and Morningstar control about 90% of the $500 billion managed account industry. At mid-2021, Edelman had $234 billion in managed account assets, followed by Morningstar Retirement Advice with $105.1 billion and Fidelity with $87.5 billion, according to Cerulli Associates. Smith put the latest figure at about $110 billion, with Retirement Manager offered at 60,000 plans and Morningstar managed account services used at another 50,000 Empower plans. 

In-plan or out-of-plan? 

The Morningstar-Hueler arrangement provides for an “out-of-plan” annuity purchase, which plan sponsors generally prefer to “in-plan” annuities. Out of plan purchases mean that the money comes out of the plan before it goes to a life insurer. Since the participant chooses the life insurer and the annuity, the plan sponsor’s legal liability is negligible. If the annuity is in-plan, the plan sponsor chooses the life insurer, and bears at least some responsibility for that choice if the life insurer fails. 

James Smith

“The majority of plan fiduciaries are more comfortable with letting the individual participant make an election and own it,” Hueler told RIJ. “But if the sponsor wanted to make our annuity a plan option, we could make it a plan option.” But few sponsors are likely to do that.

“We’ve offered annuity products for insurance company recordkeepers for years,” Morningstar’s Smith said. “But we haven’t seen wide traction in that area. Very few plan sponsors who are not life insurance companies embrace in-plan annuities. Our managed accounts service allows the plan sponsor to say, ‘I don’t want an in-plan option, but I care about delivering an income option to my employees, and here’s an institutionally priced annuity.” 

‘Income Solutions’

Morningstar is well known for its mutual fund research and sprawling array of investment services, but Hueler Income Solution has a low profile. It started in the early 2000s when Hueler, who owned a stable value fund data service for institutional investors, created a web platform where 401(k) plan participants could request a single premium immediate or deferred income annuity and then choose from among several competitive bids from life/annuity insurance companies. Kelli Hueler wanted to empower consumers in a realm where they’d been at a distinct informational disadvantage.  

Hueler spent years successfully pitching the service to large plan providers and plan sponsors, some of whom had been clients of her stable value fund business. At one point, Vanguard offered all of the participants in all of its 401(k) plans privileged access to the Income Solutions service. Vanguard got out of the annuity business in 2019, but is still making the service available to its plan participants, according to a Vanguard spokesperson.

Morningstar bought Hueler’s stable value fund business, Hueler Analytics, in early 2020. Then, last year, Smith told RIJ, Morningstar launched Advisor Managed Accounts, a variation of its Retirement Manager service. The new service would be used by advisers who sell and set up retirement plans for companies and, in many cases, design their investment line-ups.

Hueler has adapted its business model for this new role. The Income Solutions platform traditionally served as an online insurance agent, and earned a percentage of each annuity premium. In its arrangement with Morningstar, Hueler will earn an asset-based fee. The arrangement applies mainly to future business, and not Morningstar’s or Hueler’s existing relationships with plan sponsors and advisers. 

Traditionally, plan participants have paid as much as an extra 65 basis points (0.65%) a year for a managed account service as a kind of built-in robo-adviser for their savings. But litigation, regulation and competition have compressed managed account fees as low as 40 basis points (0.40%). In Morningstar’s Advisor Managed Accounts program, the fee will be divided primarily between Morningstar and the plan adviser, with a sliver for Hueler in future plans.

Counting on RIAs

In 2020, CAPTRUST Financial Advisors, one of the largest registered investment advisers (RIAs) in the US with a reported $450 billion under management, became one of the first RIAs to adopt Advisor Managed Accounts. CAPTRUST partnered with Milliman, a retirement plan administrator as well as a global actuarial consulting firm, to introduce the service to their joint clients under the white-label brand, “Blueprint Managed Advice.” 

Smith expects the RIA channel to be the biggest source of growth for Morningstar’s overall managed account business. RIA aggregators—companies that intend to survive the ongoing consolidation of RIA firms—“like Advisor Managed Accounts,” he told RIJ.

That’s a bit counter-intuitive; RIAs specialize in wealthy clients and historically they rarely recommended income annuities. Platforms like DPL Financial Partners and RetireOne have been able to serve annuities to fee-based RIAs, but only about 4% of annuities are sold without commissions to the adviser market, according to LIMRA Secure Retirement Institute.

RIAs also sell and advise retirement plans, and Smith thinks they’ll like a managed account solution that includes the Hueler option. The managed account gives RIAs an avenue for broadening their relationships with vast numbers of participants, especially at the point of retirement, when people face big financial decisions. “It’s an easy segue for RIAs to say, ‘Let’s take care of the whole family,’” Smith said. “It’s a scalable way for an RIA to deliver retirement advice to a mass market.”

A big question remains: Are  Americans hungry for SPIAs? Judging by retail sales history, their appetite is modest. Of the $130 billion in annuity sales in the first half of 2021, only about $6 billion involved payout annuities (SPIAs and deferred income annuities, or DIAs). But that’s not discouraging certain fund companies, life insurers, and plan advisers from pitching them to participants before they retire—and before they roll over their DC savings into brokerage IRAs. 

© 2022 RIJ Publishing LLC. All rights reserved.

Breaking News

Posted on February 10, 2022 by -

American Life & Security receives B++ rating from AM Best

American Life & Security Corp., a subsidiary of Midwest Holdings that issues indexed annuities, has received a “Good” rating from AM Best.  According to previous announcements, Midwest Holdings also has a reinsurance subsidiary in Vermont, Seneca Re, and relies on alternative asset management expertise from another affiliate,1505 Capital. 

But the firm, which appears to be replicating the increasingly popular strategy of using indexed annuities as a source of stable, long-term financing and reinsurance to manage capital, has seen its share price drop by half since last November 11. Its co-CEO resigned that month.

AM Best said it has affirmed the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb+” (Good) of American Life & Security Corp. (American Life) (headquartered in Lincoln, NE). The outlook of these Credit Ratings (ratings) is positive. According to a release this week:

The ratings reflect American Life’s balance sheet strength, which AM Best assesses as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

The positive outlooks reflect a continued further improvement in American Life’s balance sheet strength metrics, especially financial flexibility, along with AM Best’s expectation that the company’s risk-adjusted capitalization will remain at the strongest level in the near term, as measured by Best’s Capital Adequacy Ratio (BCAR). AM Best also expects that the company will continue its upward trajectory in operating performance, supported by strong internal capital generation, and further enhance its domestic market position as it executes its strategic business plan.

The balance sheet strength assessment of strong also takes into account American Life’s conservative investment strategy and the high use of reinsurance agreements, even though there is a collateralized trust to support the reinsurance arrangements. 

For the most part, the technology–enabled life/annuity carrier has outperformed its financial targets over the past two years, except for 2020 when it fell a bit short; the early trends are still considered fairly modest as the company continues to obtain additional dedicated reinsurance partners as planned. 

AM Best believes that American Life will continue to focus on the execution of the company’s previously announced strategy despite the senior management changes, and expects the company to have, as planned, an upward trajectory in operating performance, supported by strong internal capital generation. AM Best will continue to monitor results closely against future growth projections.

SEC proposes more sunlight on private funds

The Securities and Exchange Commission voted this week to propose amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds. The proposed amendments are designed to enhance the Financial Stability Oversight Council’s (FSOC) ability to assess systemic risk as well as to bolster the Commission’s regulatory oversight of private fund advisers and its investor protection efforts in light of the growth of the private fund industry.

“Since the adoption of Form PF in 2011, a lot has changed,” said SEC Chair Gary Gensler. “The private fund industry has grown in size to $11 trillion and evolved in terms of business practices, complexity of fund structures, and investment strategies and exposures. The Commission and Financial Stability Oversight Council now have almost a decade of experience analyzing the information collected on Form PF. We have identified significant information gaps and situations where we would benefit from additional information. Among other things, today’s proposal would require certain advisers to hedge funds and private equity funds to provide current reporting of events that could be relevant to financial stability and investor protection, such as extraordinary investment losses or significant margin and counterparty default events. I am pleased to support it.”

The proposed amendments would require current reporting for large hedge fund advisers and advisers to private equity funds. These advisers would file reports within one business day of events that indicate significant stress at a fund that could harm investors or signal risk in the broader financial system. The proposed amendments would provide the Commission and FSOC with more timely information to analyze and assess risks to investors and the markets more broadly.

The proposal also would decrease the reporting threshold for large private equity advisers from $2 billion to $1.5 billion in private equity fund assets under management. Lowering the threshold would result in reporting on Form PF that continues to provide robust data on a sizable portion of the private equity industry. Finally, the proposal would require more information regarding large private equity funds and large liquidity funds to enhance the information used for risk assessment and the Commission’s regulatory programs.

The proposal will be published on SEC.gov and in the Federal Register. The public comment period will remain open for 30 days after publication in the Federal Register.

Fidelity is accused of lax oversight of options and margins traders 

A Massachusetts regulator claims that Fidelity Brokerage Services (FBS) has not made enough effort to vet investors’ applications to engage in options and margin trading, and that investors have lost money as a result. 

William Galvin, head of the Massachusetts Securities Division, has filed an administrative complaint against FBS. The complaint accuses the broker-dealer of having a “halfhearted and lackadaisical attitude” toward investor protection and of failing to “reasonably perform due diligence related to approving customers’ accounts—a violation of Massachusetts securities laws,” according to a press release.

The complaint noted that as of September 30, 2021, Fidelity Brokerage Services had 30.9 million retail brokerage accounts, 22% higher than during the third quarter of 2020.

According to Galvin’s complaint, Fidelity’s application review system for options and margin trading has allowed customers to complete multiple applications, which enables them to modify information until they were approved. One customer applied 13 times in a month, providing inflated financials (among other changed details) that reviewers at the broker-dealer failed to detect.  

Galvin also accused the firm of not adequately reviewing customer information, not reasonably training its agents, and neglecting to monitor and enforce its own policies to ensure compliance with Massachusetts securities regulations.

Because of Fidelity Brokerage Service’s allegedly inadequate supervisory compliance policies and lack of safeguarding, the brokerage firm exposed retail customers to the hazards involving options and margin trading, posing a threat not just to these investors’ financial health but also to the securities markets. 

Often involving highly leveraged investments, options trading provides the chance of high returns. But it also provides the risk of significant losses. Smartphones make it easier to trade in the securities market and many retail investors attempt to get involved in options trading while not fully comprehending the risks.

William Galvin wants Fidelity Brokerage Services to pay a civil fine, retain an independent compliance consultant, and avoid making these same violations in the future. Our broker-dealer negligence lawyers are investigating claims of losses by Fidelity customers who may have been unsuitably approved to participate in options and margin trading.

Principal requests use of Fidelity ETF methodology 

Principal Global Investors today announced its plan to add its first semi-transparent ETF to its growing line-up of ETFs, filing for an exemptive order to use Fidelity’s active equity ETF methodology. This approach complements the active management capabilities of Principal and will help deliver stronger investment outcomes for clients.

When approved and launched, the first semi-transparent ETF offered by Principal will target real estate assets.

Principal currently offers 14 ETFs – six strategic beta and eight actively managed – that are designed to enhance investor returns, mitigate risk, and improve portfolio diversification. Combined, they represent approximately $5 billion in assets under management1.

Fidelity’s active equity ETF model employs an innovative “tracking basket” methodology, which maintains the benefits of the ETF structure, provides information to market participants to promote efficient trading of shares, and preserves the ability to add value through active management.

Pacific Life and BNY Mellon-Pershing partner on fee-only annuities

Pacific Life today announced a new collaboration with BNY Mellon’s Pershing to make its fee-only annuities available to registered investment advisors (RIAs) and their fee-only advisors while providing a streamlined portfolio-management experience. 

Products included are Pacific Advisory Variable Annuity, Pacific Odyssey, Pacific Index Advisory, and Pacific Harbor—all designed to help RIAs meet a variety of clients’ needs.

Pacific Life’s dedicated RIA team, Pacific Life Advisory, is focused on creating competitive, fee-only annuities and helping fee-only advisors incorporate them into their practices. Simplified technology integrations are a priority, and the company continues to team up with new custodians and insurance-licensing firms to make it as easy as possible to include annuities in clients’ portfolios.

© 2022 RIJ Publishing LLC. All rights reserved.

Rising interest rates will have diverse effects: Cerulli

Posted on February 10, 2022 by -

Different types of institutional investors face dramatically different effects from a trend toward higher inflation and lower capital market returns, according to a new Cerulli Associates report, North American Institutional Markets 2021: Inflation’s Impact on Return and Liability-Oriented Investors. 

That’s important to understand, because this year institutional investors may need to choose whether to incorporate higher inflation assumptions into their portfolios or to position their portfolios for a return to low inflation and low interest rates, Cerulli said.

Cerulli estimates the US institutional market at $29 trillion. The market grew at a rate of 7.9% in 2020. Corporate and public defined benefit (DB) and defined contribution (DC) plans accounted for about 68% while insurance general accounts made up about 25%. Nonprofits (endowments and foundations) make up only 7% of institutional assets.

For nonprofits—return-oriented investors—inflation works as a tax on nominal returns, forcing them to target higher returns to offset an expected loss of purchasing power. “Low interest rates have been positive for absolute return, risk-oriented investors such as endowments and foundations,” said James Tamposi, associate director, in the report. 

“As inflation increases, however, these investors will have to increase their required returns to incorporate an expected loss of purchasing power. If incremental returns do not offset inflation, these investors will rely more on long-term endowment funds [i.e., principal] to support normal operations,” he added.

The impact of higher inflation, and higher discount rates, will be less severe on insurance company general accounts. Insurers surveyed prior to inflationary pressure expressed three great concerns: generating return/yield (81%), selecting appropriate investments from a risk-based capital perspective (47%), and asset/liability matching (33%). 

“The low-rate environment has presented obstacles for insurers on the asset side. Low yields mean they have had to move up the risk spectrum to match liabilities,” said Tamposi.

Institutional investors have experienced a low-rate, low-inflation environment for over a decade. Following the recent spate of high inflation levels, those investors will need to consider potential consequences for their existing portfolios as well as strategic adjustments they will need to make if this trend continues. 

“While both expected and unexpected inflation hamper investors’ returns, investors are able to reposition their portfolios more effectively in cases where inflation is expected,” concluded Tamposi.