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The Future of Robo-Advice

Posted on March 31, 2016 by -

Many people often ask me what I think of robo-advisors—the many automated investment management sites that have emerged over the past few years. On the investment side, robo-advisors aren’t breaking new ground. What impresses me, though, is what they have done with user engagement.

They’ve created compelling user interfaces that are written in a friendly, casual voice with clear explanations. They make investing more accessible and less intimidating. I’m a design fan, and many of these offerings have done an excellent job with it. They’ve made investing more enjoyable and easier to fit into your digital life.

Is this another instance of technological disruption that will render a profession (financial advisors) obsolete?

I don’t think so. Robo-solutions work well for those early in their careers when their financial affairs are often simpler. As people age, their financial lives inevitably become more complex—there may be a divorce, a special needs child, care of elderly parents, insurance needs, annuities, housing assets, social security, estate planning, and other factors to consider.

At that point, people highly value working with a financial advisor who can put together an appropriate financial plan. It’s hard for a computer algorithm to take into account the multitude of possible individual situations and create a plan in a way that engenders trust. By Morningstar estimates, the value of financial planning is significant—it can provide an additional 1.6% of return per year.

There’s also the emotional and behavioral aspect to investing. If the market plunges, investors often want to speak to someone. Logging on to a website and interacting with an online tool may not suffice. The future of the financial advisor is secure and arguably more important than ever. 

That said, robo-advisors are good for the investment industry and here to stay. They’ve put people into sensible portfolios that are low-cost and diversified with regular rebalancing. They should produce reasonable, index-like returns over time. It’s not revolutionary, but does fill a market need. Many investors who use these services have few alternatives. They have low account balances that are too small for financial advisors. Robo-advisors can step up to fill the advice gap and get people investing earlier in their careers.

Over time, robo-advisors may add financial planning capabilities with artificial intelligence features to enhance their appeal. We’ll see them evolve to hybrid solutions that incorporate licensed advisors into their solution via phone and video. One example of a robo-advisor doing this today is Personal Capital. 

We’ll also see financial advisors use robo-tools to manage their smaller accounts. Instead of being harmed by technology, financial advisors can turn the tables and leverage it to expand their practices. We’ll increasingly see robo-technology built into advisor platforms and asset management firms offering robo-solutions to their distribution partners.

Over time robo-advisors will add financial planning capabilities to move up to larger accounts, and financial advisors will add robo-tools to move down to smaller accounts. The sweet spot may well be the hybrid solution that integrates robo-tools with licensed financial advisors. 

I don’t think pure robo-advisors will replace financial advisors any time soon. It reminds me of the introduction of no-load (no sales commission) mutual funds in the 1980s. Common wisdom was that their cost advantage would enable them to take over the fund industry. But investors voted with their feet and sought to work with financial advisors. Funds sold through advisors became dominant while no-load funds sold direct to individuals languished. Robo-advice is also reminiscent of online banking in the 1990s. Many start-ups emerged. But who dominates online banking today? The big firms—Chase, Wells Fargo, Bank of America. Scale is a large advantage. 

You can see that pattern starting to form from the fourth-quarter 2015 asset levels of robo-advisors, according to Investment News:

  • Vanguard, $31.0 billion
  • Schwab, $5.3 billion
  • Betterment, $3.3 billion
  • Wealthfront, $2.8 billion
  • Personal Capital, $1.8 billion

Even though Vanguard and Schwab entered the market after the other three firms on the list, they quickly sprinted to the top of the charts. That gap will only widen in coming years.

Stand-alone robo-advisor firms face a challenging future. Morningstar equity analyst Michael Wong wrote an insightful research piece about robo-advisors last year and concluded that stand-alone firms will need $16 billion to $40 billion of net assets to break even. That’s far from today’s asset levels for these firms.

Moreover, Michael estimates that it will take tens, if not hundreds, of millions of marketing dollars to raise sufficient assets. He estimates a $1,000 cost to add a new account, after factoring in attrition, and up to a decade to recoup marketing costs. It will be hard for robo-firms to self-finance their growth.

Firms that already have large customer bases have an overwhelming advantage. Charles Schwab has $2.5 trillion in net assets, and TD Ameritrade has $700 billion. Converting a small fraction of these dollars to a fee-based account is far easier than the challenge of a stand-alone robo-firm spending millions to attract new clients.

So the long-term viability of most pure-play robo-advisors is in doubt—especially as Schwab and Vanguard enter the fray. Pure-play robo-advisors will need a large amount of assets under management to turn a profit with low fees. The marketing spend to get there may not make economic sense, though. I believe many hope to exit by selling to a strategic firm. We’ve seen Blackrock purchase FutureAdvisor, Invesco purchase Jemstep, and Interactive Brokers buying Covestor.

I am a big believer in automated advice—Morningstar’s been a “robo-advisor” for more than a decade, though one selling investment services through an employer’s retirement plan. Today, we manage more than one million retirement accounts with assets of more than $40 billion. So automated advice works, it scales well, and is a terrific way to service many smaller accounts. Our advantages are a trusted brand and lower distribution costs because we sell through retirement plan providers and plan sponsors. 

Morningstar has also invested in Sallie Krawcheck’s Ellevest, a start-up that focuses on meeting the investing needs of women through an automated investing offering. Sallie is an investment industry star with a large following among her women’s network, more than one million LinkedIn Influencer followers, and regular media appearances. The combination of Ellevest’s unique focus on women with Sallie’s stellar reputation should prove a winner. 

I’d love to see several of the start-up robo-advisors thrive in the coming years. But most face serious economic headwinds. They’ll need to evolve their offering to incorporate more financial-planning capabilities (either licensed advisors or automated financial planning) and find creative ways to lower client acquisition costs.

They’ll also need to find ways to develop an economic moat—or sustainable competitive advantage—to thrive in the long run. They must develop scale to drive cost advantages and create meaningful brands as intangible assets. 

If they can do these things, they’ll have a shot at success. While robo-advice may have a good future, the incumbent brokerage, advisory, and banking firms are much better positioned to reap its benefits.

This article first appeared on the Pulse channel of LinkedIn. 

Ruark shares results of FIA behavior study

Posted on March 31, 2016 by -

Ruark, the Connecticut-based actuarial consulting firm, has released the results of its Spring 2016 Fixed Indexed Annuity Experience Studies. The research looked at the behavior of indexed annuity contract owners, whose withdrawal or lapse behavior can determine the long-term profitability of the contracts.

Participants in the Ruark study included AIG Life & Retirement, American Equity, Athene, EquiTrust, Forethought, Genworth, Midland National, Nationwide, Pacific Life, Phoenix, Protective, and Security Benefit. The study covered eight years of experience.

Among Ruark’s findings:

Surrender rates spike after the surrender charge period ends. From single digit surrender rates during the surrender charge period, surrender rates rise by a factor of five in the first year after the surrender charge period.

Surrender rates have declined slowly but steadily. Over the eight years studied here, surrender rates have declined materially, during and after the surrender charge period. This seems due to increasing credited rates as stock markets have increased, along with higher election rates of living benefit GLWB riders which tend to have lower surrender rates.  

Surrender rates are low for Guaranteed Lifetime Withdrawal Benefit riders. Although the experience for these riders is still emerging, surrender rates are about half of those for contracts without riders.

Surrenders rates are higher when interest credits are low. We see little difference in surrender rates of contracts with higher levels of interest credits, but when annual interest credits drop below 2%, surrender rates are materially higher.  

Partial withdrawal utilization varies with GLWB riders. One in four owners of contracts with GLWB riders take withdrawals prior to turning on lifetime income, compared to one in three owners of contracts without riders. Partial withdrawal amounts also tend to be lower for contracts with GLWB riders. Lifetime income utilization rates are still very low.   

Partial withdrawal utilization varies strongly by attained age and tax status. This is evident with and without GLWB riders, and particularly for qualified contracts over age 70.

Dynamic moneyness effects are still difficult to discern. In contrast to mature market products such as variable annuities, the FIA experience does not show clear sensitivity to the relative value or “moneyness” of GLWB riders. The riders are “in the money” when the account balance has fallen below than the guaranteed benefit base.

© 2016 RIJ Publishing LLC. All rights reserved.

Security Benefit offers floating-rate fixed deferred annuity

Posted on March 31, 2016 by -

Anticipating upward movement in interest rates, Security Benefit Life has launched a floating-rate fixed annuity that allows clients to participate automatically in a rising interest rate environment instead of being locked into an uncompetitive rate for the term of the contract.

The single-premium deferred product, called RateTrack, is the industry’s first floating rate annuity, according to a Security Benefit release. Contract owners receive a guaranteed base rate of interest that is set for the contract’s guarantee period, plus the 3-month ICE LIBOR USD Rate (subject to a cap), which resets annually on the contract anniversary date.

ICE LIBOR stands for Intercontinental Exchange London Interbank Offered Rate.  

“Unlike a typical multi-year guarantee annuity, [RateTrack] offers an initial competitive interest rate and then the opportunity for higher interest rates over the life of the contract,” the release said. Like other fixed deferred annuities, RateTrack offers a guaranteed minimum rate, so that, unlike a bond or bond fund, the contract won’t experience a markdown in value if interest rates rise. 

“We’ve pioneered a new category of fixed annuities to help clients move off the sidelines and receive a competitive rate today without sacrificing the opportunity to benefit in the likelihood rates continue to rise over the next few years,” said Dave Byrnes, vice president and national sales director for Security Benefit.

© 2016 RIJ Publishing LLC. All rights reserved.

Another robo—the “Robin Hood of fees”—takes aim at fund fees

Posted on March 31, 2016 by -

FeeX, a web-based robo-type financial service that describes itself as the “Robin Hood of fees,” this week announced the FeeX Investment Test Drive, a process that analyzes the funds in an investor’s portfolio and tries to find comparable but lower-cost funds. The tool displays alternative funds that have both the lowest fees and best past returns.

The tool also serves as a lead attractor, because the FeeX site evidently doubles as a 401(k) rollover processing site. Visitors to the FeeX site, whose simplicity of design resembles that of leading robo-advisor sites like Betterment, are urged to rollover their “old” 401(k)s to accounts at Wealthfront, E*Trade, TD Ameritrade, Scottrade or Betterment.

The Test Drive tool employs the FeeX Similarity Score, a major component of several other offerings including Fund Switch and the 401k Rollover Center that relies on FeeX’s proprietary technology to automatically identify better potential investment choices and visualize the estimated cost savings of switching a fund, or, in the case of the 401k Rollover Center, the holdings within an entire retirement account.

To calculate its Similarity Score results, FeeX analyzes hundreds of data points to determine which funds are most comparable and the level of similarity between funds. FeeX ranks each investment on a scale of similarity from 0 to 100%. Funds with a similarity ranking of 85% and higher are displayed as similar funds for the user to consider.

Americans currently pay $600 billion in investment-related fees each year, a FeeX release said.  “We’ve been shocked by some of our findings, which expose funds that are very close to others in most attributes — except for the fees,” said Yoav Zurel, CEO of FeeX, in a release.   

To help users switch to similar low-fee alternatives, FeeX presents alternative investments with better past returns (when possible) than their original investments. Users can either search for a fund to find alternatives or sign up to have all their accounts automatically and objectively analyzed to find lower-fee investment options.

“Put simply, fees matter,” said Michael Zeuner, long-time fiduciary advocate, managing partner of WE Family Offices in New York, and a founder of The Institute for the Fiduciary Standard, in the release. “The FeeX Investment Test Drive is an excellent way for investors to take matters into their own hands — even if they work with a broker or financial adviser.” 

© 2016 RIJ Publishing LLC. All rights reserved.

MetLife isn’t a SIFI, federal judge rules

Posted on March 31, 2016 by -

U.S. District Judge Rosemary Collyer on Wednesday rescinded, or struck down, the 2014 designation made by Financial Stability Oversight Council that major insurer MetLife Inc. is a Systemically Important Financial Institution (SIFI), or “too big to fail.” 

MetLife had argued in the U.S. District Court for the District of Columbia that the FSOC used a “secretive and flawed” process when it determined that a collapse of the insurer could hurt the U.S. financial system just as much as failure of a major bank such as Citigroup.

In a press release, MetLife CEO Steve Kandarian said: “Today’s ruling validates MetLife’s decision to seek judicial review of our SIFI designation. From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States. This decision is a win for MetLife’s customers, employees and shareholders.”

Collyer’s opinion is currently sealed, but parts may be made public next month, according to the order.

© 2016 RIJ Publishing LLC. All rights reserved.

Half-a-point rise in benchmark rates now expected in 2016

Posted on March 31, 2016 by -

Remarks by Federal Reserve chairwoman, Janet L. Yellen at the Economic Club of New York on Tuesday underscored the Fed’s caution in raising interest rates this year, the New York Times reported.

Although Yellen said that weak growth in other countries was being offset by lower borrowing costs, keeping the U.S. economy positive, her cautious tone suggested that the Fed would not raise rates at its April meeting. The Fed meets again in June.

“I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Ms. Yellen was quoted as saying.  

The Fed, which raised its benchmark rate in December for the first time since the financial crisis, continues to debate the timing of a second increase.

The Fed’s policy-making committee indicated after its most recent meeting, this month, that it now expected to raise rates by about half a percentage point this year, or half as much as the Fed had predicted at the beginning of the year.

“The committee in March did rethink to some extent the policy path that is appropriate to achieve an essentially unchanged outlook,” Ms. Yellen said.

© 2016 RIJ Publishing LLC. All rights reserved.

Bright Ideas from the SOA Investment Meeting

Posted on March 24, 2016 by -

What are the implications of negative short-term interest rates for insurance companies? What do current market valuations tell us about tomorrow’s asset prices? How can near-retirees protect their savings from a bear market?  

Every spring, the Society of Actuaries holds a conference for actuaries who help their companies manage assets. At this year’s meeting, held in New York last week, there was a lot of discussion around questions like the ones above, along with cautious predictions about the future and reminders about a few inconvenient tradeoffs that, collectively, we probably can’t avoid.

Last week’s meeting featured descriptions of several new product ideas from entrepreneurial actuaries, including a structured equity product for qualified plan participants, a psychological assessment tool that tells advisors how to communicate better with each client, and a mobile app that encourages 401(k) participants to rebalance their accounts every day just before the market closes.

De-risking 401(k)s with options

A risk protection product for the 401(k) market was suggested by Dan Cassidy, an actuary and financial analyst at P-Solve, a unit of River and Mercantile Group. P-Solve provides hedging advice and services, and Cassidy was promoting a structured equity product that near-retirement participants could use to de-risk their portfolios in the year or two before their retirement date.

The product establishes an options collar around the returns of an appreciated retirement account. It appears to provide protection similar to that provided by the structured variable annuities that MetLife, AXA, Allianz Life and Thrivent have created for individual investors since the financial crisis. Cassidy told RIJ that he was not familiar with those products.

For participants of jumbo plans whose money is in designated target-risk separate accounts and who are near retirement, P-Solve can provide the managers of those separate account with an options overlay that can establishes a floor under losses and a cap on the gains, Cassidy said.

The options portfolio is actively managed, with P-Solve trading puts and calls behind the scenes with counterparties that have less downside tolerance or more upside appetite than the separate account manager. (In a sense, it operates like an all-season heat pump.) The downside and upside limits, and the triggers for trading the options, are customized for each plan sponsor client.

The money that P-Solve makes by trading options is designed to pay for the overlay. This risk protection service is costless for the plan sponsor. The separate account gets billed an asset-based fee of 10 to 20 basis points a year, depending on the size of the account. Large defined contribution plans with long-tenured participants who have large, highly appreciated investment portfolios are P-Solve’s target clients.

Client psychology

Behavioral finance is an increasingly important topic in the investment world, and two of the conference presenters addressed it. Many advisors are required to assess their clients’ risk-tolerance levels prior to designing an investment plan, but Hugh Massie, president of DNABehavior, takes the assessment process much farther.

An accountant and former advisor originally from Australia, Massie has partnered with psychologists since 2001 to create and refine a battery of personality tests that give advisors a multi-dimensional understanding of their clients.

The results can be used to help advisors communicate with clients, understand their reactions to market events, and set goals for their retirement years. He offers the products to individual advisors for as little as $650 a year; enterprise-level licenses can cost much more. “Our sweet spot would be an advisory firm with about $50 million in assets under management” that have mastered the basics of running their business and want to take their game to a more polished level, he told RIJ.

[Massie administered an online 45-question test to RIJ’s editor and provided instant results. The test categorized me as an “Initiator” with is “creative” with a “take charge” but “reserved” nature.

“Initiators like to take bold, aggressive actions and create the rules. They will prefer to lead decision-making, setting the agenda for others to follow and monitoring the timely completion of tasks. They are goal-driven people who like their expectations managed and not to get caught up in unnecessary details. Their decision-making will typically be fast-paced and rational. They will not be afraid to take on challenging assignments or to accept a lot of risks to realize their ambition.”

The dnabehavior test put me in the third highest risk category (“Accumulation,” or medium to high risk). It also suggested the type of advisor that would be most compatible with me (“influencer,” “initiator,” strategist”).]

Daily rebalancing?

Rick Schmitt, an actuary who teaches retirement planning at Golden Gate University, gave a presentation plugging his “Rebalance app.” It’s designed to allow 401(k) participants to boost their long-term returns by rebalancing their retirement accounts every day, in response to a signal on their smartphones shortly before the closing of the equity markets and the daily valuation of mutual funds.

The system requires at least two 401(k)s, one containing a money market mutual fund and the other an S&P500 Index mutual fund. Each day, the participant rebalances by buying or selling an amount of the Index equal to one one-thousandth of his aggregate balance times the point change in the S&P500. Someone with $50,000 in stocks and $50,000 in cash would move $500 if the S&P500 moved by five points. 

Schmitt calls this “modified daily rebalancing.” It works best in choppy markets and worst in steadily rising markets, Schmitt said. According to his calculations, a 50/50 S&P500/cash fund with modified daily rebalancing would have beaten the pure S&P500 Index by 15 percentage points (about one percentage point per year) between January 1, 2000 and December 31, 2015.  

An audience member pointed out that such an inherently contrarian strategy could not be practiced by everyone and still maintain its effect. Another observed that Schmitt’s hypothetical participant seemed to be trying to profit by acting as a market maker, supplying liquidity or inventory as the market demanded. “I’m just trying to start a conversation,” Schmitt said. 

The macro view

Regarding the overall economy, the outlook from big-picture authors and consultants at the meeting was decidedly sober. Although the SOA held its meeting in a Marriott only two subway stops from the tourist-magnet of the big brass Wall Street bull, none of the sell-side’s irrepressible optimism was evident here.

If anything, investors are on the horns of a dilemma, consultants said.  “We need to accept low interest rates or accept defaults,” said David Ryan O’Meare of Willis Tower in describing the bond market. An increase in rates would make it harder for debtors to service the debt they roll over as well as reducing the value of existing bonds. “We can either write down assets today or write down future returns.”

The outlook for equities was equally gloomy. O’Meare and colleague William Rearden said that, historically, when the cyclically-adjusted price-to-earnings ratio—Robert Shiller’s CAPE ratio—is over 20, the S&P 500 is overvalued. Last June, the CAPE ratio was 27. (In 2000, it was 44.2.)

Investors can expect a real growth for equities of only 1.5% a year over the next decade, the consultants said. They projected the average PE ratio at 8.23 in 2025 and at 9.14 in 2030. Pensions fund managers who assume a 7% asset growth rate will be disappointed. They don’t have enough time to wait for a recovery, because a big chunk of their liabilities come due in the next 10 years.

Demographically, we appear to be victims of our own success. As common sense suggests, middle-aged people tend to buy stocks as they accumulate for retirement and older people tend to decumulate in retirement. Between 1954 and 2010, there was a strong correlation between the middle-to-older-age ratio and the PE ratio. But the ratio of middle-aged to older people peaked in the mid-2000s in the so-called G-7 wealthy countries.

© 2016 RIJ Publishing LLC. All rights reserved.

Where you work determines your retirement: EBRI

Posted on March 24, 2016 by -

America has a retirement crisis, and it seems to be concentrated among the half of full-time workers whose employers don’t sponsor retirement plans. If you have a retirement plan at work, you’re probably confident about retirement. If not, you’re probably worried. 

That’s one quick takeaway from the 2016 Retirement Confidence Survey (RCS) by the Employee Benefit Research Institute (EBRI) and Greenwald and Associates, which also shows that confidence about affording a comfortable retirement has stopped improving after climbing out a deep post-Great Recession slump. 

The percentage of workers who describe themselves as “very confident” about having enough money for a comfortable retirement leveled off at 21% this year, after rising to 22% in 2015 from only 13% in 2013. Those who are “somewhat” confident increased to 42% in 2016 from 36% in 2015. The percentage who are “not at all” confident fell to 19% in 2016 from 24% in 2015, the 26th annual RCS found.

As noted above, Americans with workplace retirement plans were more likely to be confident about retirement. Whether they have a plan at work depends on whether their employer decides to sponsor a plan or not—a problem that a few state legislators are trying to fix by mandating access to plans at all but the smallest employers.

Workers who reported that they or their spouses have money in a defined contribution (DC) plan or individual retirement account (IRA) or have benefits in a defined benefit (DB) plan from a current or previous employer are more than twice as likely as those without any of these plans to be very confident (26% with a plan vs. 10% without a plan).

Workers without a plan are more than three times as likely to say they are “not at all” confident about their financial security in retirement (11% with a plan vs. 38% without a plan).

“Even if you control for discrepancies in age and income, the likelihood that a respondent is somewhat or very confident [of a financially comfortable retirement] is 22 percentage points higher for those with an IRA, DC plan, and/or DB plan than [those] without a plan,” said Jack VanDerhei, EBRI research director and co-author of the 2016 RCS, in a release.

Those without enough savings say they plan to save more later or work longer—though many retirees can’t work longer because of health problems or disability. Among Americans who know they are saving too little, about 20% say they will have to save more later, 15% say they will have to work in retirement, and 14% say they will have to retire later.

Among the major findings of the 2016 RCS:

Workers

  • Assets: Among workers reporting zero or very little savings or investments, 83% estimated the value of their household’s savings and investments, excluding the value of primary home and DB plans, at under $10,000. In contrast, 35% of workers with a retirement plan say their value of these assets is $100,000 or more.
  • Saving: The percentage of workers who reported that they or their spouses had saved for retirement was 69% in 2016, down from 75% in 2009. 
  • Debt:  In 2016, among workers who describe debt as a “major problem,” about 50% were “not at all confident” about retirement and only 9% were “very confident.” Among workers without a debt problem, the numbers were 12% and 32%, respectively.   
  • Retirement planning:  Less than one-third (28%) of those surveyed lacked confidence in their financial preparations for retirement, while 28% were very confident and 43% were somewhat confident. Less than half (48%) of workers report they and/or their spouse have ever tried to calculate how much money they will need to have saved so that they can live comfortably in retirement, while 39% say they “guess” at how much they will need to save, rather than calculating their retirement income needs systematically. 

Retirees

  • Confidence: Retiree confidence in having enough money for a comfortable retirement (as distinct from “worker” confidence) reached 39% in 2016, up from 18% in 2013. The percentage “not at all” confident was 12% (statistically unchanged from 14% in 2013).
  • Debt: Fewer retirees than workers describe debt as a problem. Sixty-seven percent of retirees and 44% of workers say their level of debt isn’t a problem.
  • Leaving the workforce: As before, the RCS finds a considerable gap exists between workers’ expectations and retirees’ experience about leaving the workforce. The percentage of workers who expect to retire after age 65 has increased, to 37% in 2016 from 11% percent in 1991. But only 15% of retirees in 2016 said they said they retired after age 65 and many report they left the workforce for reasons beyond their control, such as poor health or changes at their company.

© 2016 RIJ Publishing LLC. All rights reserved.

Six ways to ease the global pension crisis: Citigroup

Posted on March 24, 2016 by -

A worldwide shift to non-government retirement savings plans—driven in part by expected shortfalls in government-sponsored pensions—should create opportunities for private insurers and asset managers over the next 10 to 30 years, according to “The Coming Pensions Crisis,” a new report from Citi.

One statistic in the report, that 55% of the world’s $26 trillion in “the global private pension pool” is in the United States, suggests that U.S. companies are in a good position to grab that opportunity.

“The total value of unfunded or underfunded government pension liabilities for twenty OECD countries is a staggering $78 trillion, or almost double the $44 trillion published national debt number. Corporations have also not consistently met their pension obligation and most US and UK corporate pension plans remain underfunded with an aggregate fund status in the US of just 82%,” the report said.

The authors of the report “offer a set of recommendations to policymakers, corporate and public pension plan sponsors and managers, and product providers to deal with the crisis,” including:  

  • Publicize the amount of underfunded government pension obligations.     
  • Raise the retirement age. 
  • Create “collective” defined contribution” plans in which plan sponsors and individuals share the risks and benefits.  
  • Create ‘soft compulsion’ incentives to ensure that people save more.
  • Encourage pension sponsors to make full pension contributions when due.
  • Encourage corporations with frozen plans to transfer their pension obligations to insurance companies.

“The silver lining of the pensions crisis is for product providers such as insurers and asset managers. Private pension assets are forecast to grow $5-$11 trillion over the next 10-30 years and strong growth is forecast in insurance pension buy-outs, private pension schemes, and asset and guaranteed retirement income solutions,” the report said.

© 2016 RIJ Publishing LLC. All rights reserved.

Senior home equity estimated at $5.83 trillion: NRMLA

Posted on March 24, 2016 by -

An estimated $140.2 billion increase in the aggregate value of homes owned by seniors drove their share of home equity to $5.83 trillion in 2015, according to the National Reverse Mortgage Lenders Association.

The increase sent the NRMLA/RiskSpan Reverse Mortgage Market Index (RMMI) to a record 203 in Q4 2015 from 198.53 in Q3, the NRMLA said in a release this week. Year-over-year, the index increased 8.1% in 2015, compared to increases of 7.8% in 2014 and 17.5% in 2013.

The Q4 senior equity value also represents a 16% increase from the pre-Recession peak, when senior equity levels hit an estimated $5.04 trillion in Q4 2006.

The RMMI in Q3 2015 was revised from 200.19 to 198.53 primarily due to the updated total housing value from Federal Reserve’s Z.1 release of historical data on March 10, 2016.

The RMMI is updated quarterly and tracks back to the start of 2000. Release dates for 2016 are: June 21 for Q1, September 20 for Q2, December 20 for Q3.

Reverse mortgages are allow homeowners over age 62 to borrow against the equity in their home without having to make monthly payments as with a traditional “forward” mortgage or a home equity loan. Funds are advanced to the borrower and interest accrues, but the outstanding balance is not due until the last borrower leaves the home, sells, or passes away.

To date, more than 970,000 senior households have used a FHA-insured reverse mortgage. More than 616,000 senior households currently use reverse mortgages, according to the NRMLA.

© 2016 RIJ Publishing LLC. All rights reserved.

Mutual fund and ETF flows sharply lower in 2015: Morningstar

Posted on March 24, 2016 by -

At $949 billion, total worldwide flows of mutual fund and exchange-traded products (ETP) in 2015 were sharply lower than the $1.4 trillion that flowed into funds globally in 2014, according to Morningstar, Inc.’s fourth annual Global Asset Flows Report.

The U.S. fund industry had new asset flows of $263 billion, or less than half of the $580 billion in 2014. Asia showed the strongest organic growth rate, at 18.6%.

“2015 brought growing uncertainty for markets worldwide, fueled by changes in monetary policies in the United States and Europe, slowing economic growth around the world, and slumping commodity prices, especially oil,” said Alina Lamy, senior markets analyst for Morningstar, in a release.

“Whereas U.S.-domiciled funds attracted the largest flows in 2014, we saw smaller and more evenly distributed flows across regions in 2015. Equity funds led category groups globally in terms of annual inflows, although 2015’s intake of $305 billion was smaller than the $476 billion these funds collected in 2014.”

Morningstar’s Global Asset Flows Report also found that:

Allocation funds registered the second-largest inflows, with $171 billion. They outpaced fixed income funds, which posted inflows of $132 billion.   

Alternative funds saw double-digit organic growth for the second consecutive year—the highest rate among global category groups. Investors sought diversification and consistent returns amid uncertainty in the equity and fixed income categories.

The ever-growing popularity of index strategies sent more flows to Vanguard. The majority of the firm’s $251 billion net inflow went to its passive funds. Its active funds gathered inflows of $15 billion. Among active fund providers, Fidelity and J.P. Morgan saw the highest 2015 inflows, with $57 billion and $23 billion, respectively.

For all major regions, the percentage of passive assets in equity funds was larger than the percentage of passive assets in fixed-income funds, and the U.S. had the highest percentage of passive assets of all regions. In the U.S., active funds suffered outflows in 2015 and passive funds attracted inflows of about $400 billion.

Global ETP assets were near $3 trillion at year-end. Equity ETPs hold the majority of assets, but fixed-income and alternative offerings have grown. The United States accounts for the largest volume of ETPs globally.

The report is based on data from some 3,800 fund groups across 82 domiciles, representing more than 92,000 fund portfolios and 220,000 share classes in the U.S., Europe, Australia, and Latin America. Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETPs by computing the change in shares outstanding.

© 2016 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on March 24, 2016 by -

Global aging will bring opportunities in real estate and health care: Prudential

Aging populations worldwide will create investment opportunities in real estate, healthcare, and technology, according to a new report from PGIM, Prudential Financial’s $963 billion global investment management businesses. A Silver Lining: The Investment Implications of an Aging World urges institutional investors to consider how a graying world could impact their portfolios.  

The report describes opportunities in real estate, healthcare and technology:

Real estate represents more than 40% of the gross assets of 65+ households in developed markets, and aging populations will create demand in the sector in at least three ways:

  • From homes to condos: In the U.S., Baby Boomers are buying centrally located condos in cities like Raleigh, N.C.; Nashville, Tenn.; Austin, Texas; and Atlanta.
  • Senior housing: Demand for senior housing in the U.S. will grow by 850,000 new units by 2030, up 75% from 2010, according to Senior Housing Analytics. The U.K., Japan, and China, also face rising demand.
  • Eds and Meds: The increase in age-related diseases will create opportunities to invest in the real estate required by biotech start-ups, established medical companies, and research centers near universities.

Healthcare and technology growth will be driven by people over 85, who spend four times as much on healthcare as those aged 45 to 64, leading to two key investment themes:

  • Pharmaceutical and biotech firms: Venture capital firms are financing companies that target dementia, stroke, cancer, Alzheimer’s, and Parkinson’s. Mid- and late-stage pharma-focused private equity also plays a role.
  • Silvertech: A new wave of businesses are creating, distributing, and using technology-enabled medical services and devices to help seniors live independently, including solutions for chronic care, mobility, and delivery of medical care.

The CFP Board to host new research conference in February 2017

The CFP Board Center for Financial Planning has put out a call for papers to be presented at the first- Academic Research Colloquium for Financial Planning and Related Disciplines, set for Washington, D.C. on February 7-9, 2017. Retirement planning will be one of the topics covered.

The Center, along with the Canadian-based Financial Planning Standards Council and the international association, Financial Planning Standards Board, host the meeting for researchers, graduate students and leaders of financial planning practice. The leading sponsor is TD Ameritrade Institutional, which is the lead founding sponsor of the CFP Board Center for Financial Planning.

The deadline for submitting an expression of interest to offer a paper or poster is April 30, 2016. The colloquium will be held at the Renaissance Arlington Capital View Hotel on February 7-9, 2017. More information can be found here.

The Center’s Academic Research Colloquium for Financial Planning and Related Disciplines will feature paper presentations; invited speakers; interviews for open financial planning faculty positions; and a focus on poster/concurrent sessions for doctoral students within financial planning programs as well as related research areas.  

The review committee welcomes papers on the following topics that relate or indirectly relate to financial planning practice/financial planning body of knowledge:

  • Retirement Planning
  • Financial Management
  • Psychology and Relationship-building
  • Taxation
  • Insurance/Risk Management
  • Sociology
  • Investments/Asset Management
  • Financial Planner Education/Pedagogy
  • Estate planning/Wealth Transfer
  • Marriage and Family Therapy
  • Communication and Counseling
  • Behavioral Finance
  • Other topics related to financial planning
  • Proposals for panel discussions devoted to research areas that affect financial planning practice or financial planner education will also be considered for inclusion in the program.

There will also opportunities for both Best Paper Awards as well as Student Best Paper Awards.

Best active large-cap equity funds beat average index counterparts: Fidelity

A certain group of actively managed U.S. large-cap equity fund—funds “with lower fees from the five largest fund families”—on average outperformed their benchmark in by 0.70% (70 basis points) after fees in 2015, according to a new report from Fidelity Investments.

The same subset of funds also outperformed their benchmarks by 0.18% per year from 1992 through 2015, while the average subset of passive index fund slightly trailed its benchmark by 0.04%.

The new report, “Some Active Funds Rise Above a Tough Year,” updates Fidelity’s previously released paper with 2015 performance data.

 “Industry-wide averages… may be doing investors a disservice by giving them the perception that all active funds cannot outperform passive funds, which is simply not true,” says Timothy Cohen, chief investment officer at Fidelity Investments.  

If a hypothetical retirement investor saved $5,000 per year in two different accounts, one with 0.18% of annual excess return and one with –0.04% of annual excess return (assuming returns are net of fees and a constant “benchmark” return of 7%), the balance for the account with 0.18% of excess return would be more than $64,000 or 6% higher than the other account after 40 years, or 6% more, Fidelity said.

Fidelity said that the best actively managed international large-cap funds outperformed their benchmarks by 0.85% per year and U.S. small-cap funds outperformed their benchmarks by 0.99% per year. The giant fund company also said that 81% of its equity funds managed by the same portfolio manager for at least five years have beaten their benchmark over the manager’s tenure.

TIAA “globalizes” the name of its asset management group  

Within weeks after shortening its brand name to a single four-letter acronym from a hyphenated pair of four-letter acronyms, TIAA this announced that its investment organization will henceforth be known as “TIAA Global Asset Management” and no longer as TIAA-CREF Asset Management.

“This name change is one of many steps in our journey to be recognized as a leading global asset manager,” said Robert Leary, the unit’s president, in a release.

TIAA Global Asset Management has investments in more than 40 countries and collectively manages $854 billion in assets. About $220 billion of those assets were acquired in April 2016 when TIAA bought Nuveen Investments for $6.25 billion from Madison Dearborn Partners.  

TIAA Global Asset Management investment teams, strategies, products and investment solutions will not change as a result of the new brand. The division offers equities and fixed income, as well as alternative and private investments such as commercial real estate, agriculture, timber, infrastructure and energy. The unit has about 2,500 employees, including more than 500 investment professionals.

© 2016 RIJ Publishing LLC. All rights reserved.  

Boundless Life Expectancy?

Posted on March 23, 2016 by -

Nature has given every species an intrinsic life span. Life span is a bit like an upper bound to life expectancy: If you got every member of a species healthier and healthier, life expectancy of that species would constantly increase, but eventually be bound by life span. And every species has a different life span: For flies, it’s just a couple of days; for bowhead whales it’s 200 years.

For humans, biologists have found that up until the 1960s, life span was around 89 years. This means that if we kept improving our health systems, the world population’s life expectancy would converge to our species’ life span of 89.

In public health, this development is called “compression of morbidity.” The idea is that our health systems improve and we live healthier and healthier. The time we spend in illness and infirmity, especially in the last years of our life, becomes shorter. Our population’s survival rate becomes more and more “rectangular,” having more people survive until old age and allowing for healthier life at old age.

However, life span acts as a fixed point beyond which no further gains in health are possible and survival rates of humans drop quickly to zero, owing to the “compensation effect of mortality.”

Theory versus practice

In practice, however, we do not observe a conversion of life expectancy to life span across countries and world regions. Sometime in the 1970s, human life span itself began to increase—a feat no other species has managed before us. Prior to the 1970s, biologists, using historic data on human survival rates, have found indeed that human life span was constant at about 89 years. Yet, since the 1970s, life span has increased markedly, pushing the limit of life expectancy.

Figure 1 illustrates this for Canadian males. It depicts the probability of surviving to a given age for different years, from 1925 to 2075. One can clearly observe the “rectangularization of survival rates,” with significantly more people surviving until high age in 2010 than in 1925. However, when comparing survival rates at age 90, one cannot observe any significant improvement between 1925 and 1975; survival was more or less constant at a level well below 10%. However, since then, the survival rate at age 90 jumped markedly to about 20% in 2010. Hence, although survival rates improved spectacularly for younger ages between 1925 and 1975, improvement in health systems did not make much of an impact on the very old during that time; increases in life-expectancy were bounded.

Since 1975, however, this seems to be untrue; the limits to increases in life expectancy were relaxed. And it’s believed that these limits will relax even more over the next 60 years.

Boundless life expectancy

Source: Mortality Projections for Social Security Programs in Canada (2014)

Breaking the limits

How did we break the limits of life expectancy? We don’t know exactly, but the prime candidates are the invention of regenerative medicine and organ replacements.

The biggest medical breakthroughs up to the 1960s were arguably the discovery of antibiotics, vaccines against diseases ranging from rabies to polio, and significant progress related to hygiene. These interventions helped to slow down the bodily decay of our vital organs—literally the “heart” of our physical health. However, overcoming the failure of human organs—like heart bypass or dialysis—or replacing them altogether had a profoundly different impact on the speed of bodily decay.

These new medical procedures, in particular organ transplants, meant extending the functions of our body beyond what nature had foreseen and therefore affected the life span of the human species and removing the natural limits to life expectancy. In fact, now biologists believe that our life span has increased to 97 years, a gain of eight years in the course of 40 years.

Bounded versus boundless life expectancy

What does all this mean for aging societies? The policy implications of bounded life expectancy are indeed quite different from unbounded life expectancy. In a world of bounded life expectancy, we would continue compressing morbidity, living healthier and healthier lives, but facing rapid aging in the last years of our life.

Our life cycle decisions, like how much education to get and when to retire, would in fact become much more plan-able, knowing that the likelihood of living up to 89 is rather high, but living beyond it is rather improbable. One could even argue that, as we get healthier in the future, we would also get more productive, earning more income during work life; but knowing that we are likely to die at an age of around 89 (give or take), we could actually work less long and retire earlier.

Not so in the case of boundless life expectancy: We’d never be sure what new medical inventions, especially in the field of genetics, could extend our lives beyond our wildest imagination—maybe even to the age of 150, and possibly within our lifetime.

In such a world, the question on what money to live off during old age becomes a very different one: Living to 150, but retiring at age 65 or even earlier will not be an option. Longer work lives and lifelong investments in education, training, and skills become a must that will ultimately lead to higher lifetime income, wealth, and savings for old age.

Surely, public pensions can, should, and will also play an important role in securing old-age income. However, during times of rapid expansion of life-expectancy, pay-as-you-go systems will come under strain, exerting a heavy toll on younger generations—and older generations risking to overstay their welcome.

If, though, societies get the balance between work and retirement right, nothing is in the way of an era of golden aging, even during times of shifting limits of life expectancy.

© 2016 Brookings Institution.

NCAA Financial Ads, in Black and White

Posted on March 23, 2016 by -

During the broadcast of the NCAA men’s basketball tournament last weekend, Northwestern Mutual Life aired commercials in which two pairs of actors portrayed bi-racial couples: a Caucasian man with an African-American wife, and an African-American man with an Asian or Caucasian wife.

The tagline on the screen at the end of one commercial read: “Live Life Differently.” The spot emphasized the idea—explicit in the messaging and perhaps reinforced by the imagery—that Americans need to integrate investments and their insurance when they make their financial plans.   

Since few inadvertent decisions ever occur within the creative content of advertising—the advertiser needs to control every aspect of the message—it’s tempting to try to deconstruct the commercial and its apparently deliberate mixture of race and financial planning.NWML Biracial couple ad 

Northwestern Mutual isn’t the only financial services company to break new racial ground. A recent ad by Merrill Lynch Asset Management on the back cover of the Journal of Retirement shows an African-American man, perhaps in his 50s, and a blonde woman laughing over mugs of coffee while seated on the steps to a rustic cabin. (In the hazy background, you can see a padlock in a hasp on the cabin door, perhaps symbolizing security or safety.)

The headline of this ad says, “Navigate retirement toward the things that matter to you most.” The first line of the body copy says, “We understand that retirement is a unique situation for everyone.”

I have no idea what to make of these advertisements. Perhaps they represent a more evolved America. We have our first African-American president. “Mixed marriage” no longer shocks the way it once did. It’s been almost half a century since the Supreme Court ruled, in Loving v. Virginia, that state “anti-miscegenation” laws were unconstitutional.     

But the ads can hardly be described as trailing indicators. De facto segregation persists. Recent police shootings triggered the birth of Black Lives Matter. On average, African-Americans still earn, save and invest at a much lower rate than average white Americans—lower even than the white Americans who themselves are angry enough about inequality to have fueled the candidacy of Donald Trump.  

It would be unfair to suggest or pretend that blacks have reached financial parity with whites. In 2013, only 41% of blacks between ages 31 and 62 had retirement account savings (compared with 65% of non-Hispanic whites), according to the Economic Policy Institute. Among blacks with retirement account savings, the median account balance was only $22,000 (compared with $73,000 for non-Hispanic whites).

And, despite what you’re starting to see on TV, black/white marriages are still rare in America. In 2010, only seven-tenths of one percent of U.S. marriages were between non-Hispanic whites and non-Hispanic blacks, according to the Census Bureau. Mixed couples are most likely to live in Virginia, Maryland and the District of Columbia, and near military bases in Kansas, Georgia, Texas and Oklahoma.

So what’s motivating the choice of actors in the Northwestern Mutual ads? Here are some guesses, in roughly my estimates of probability:

  1. The use of blended couples reflects the theme of blending insurance and investments and/or the theme of sensitivity to unique planning situations. 
  2. The NCAA basketball tournament attracts a broad audience of African-Americans, whites, Latinos and Asians, and advertisers want to appeal to the entire audience.
  3. A company that uses bi-racial couples in its ads will be seen as inclusive and progressive.
  4. Other tournament advertisers—Buffalo Hot Wings, Michelob brewers—routinely depict social events where Asians, Caucasians, Latinos and African-Americans mingle in more or less equal proportions. It would be conspicuous not to do the same.
  5. The use of bi-racial couples in ads is unusual and eye-catching. In an age of media saturation, advertisers have to take risks in order to be noticed.
  6. Advertisers naturally want to immunize themselves against any accusation that they are not progressive or inclusive.  

In the interest of providing context as well as transparency, I should disclose that a member of my family is in a bi-racial relationship. As someone who grew up when even a bi-religion relationship could fracture family relations, I have to admit that I experienced an interval—not a long interval, but an interval nonetheless—of adjustment to the idea. It required personal growth and change. I can’t imagine that an insurance or asset management company would take even a tacit position on such a sensitive matter without giving it careful thought, and without having a specific goal. If you know what they are thinking, please tell me in an email ([email protected]).

© 2016 RIJ Publishing LLC. All rights reserved.       

Proof that SPIAs Still Make Sense

Posted on March 17, 2016 by -

Today’s near-retirees face not only the usual risks associated with market volatility and longevity but also a lower average savings rate than previous generations and the reduced availability of traditional pensions. To ensure that they can sustain an acceptable standard of living in retirement and not run short of funds, they need new solutions.

One option is to add a source of income that they cannot outlive. In their landmark 2001 article in The Journal of Financial Planning (“Making Retirement Income Last a Lifetime”) John Ameriks, Bob Veres and Mark Warshawsky found that adding a life-contingent income annuity to a retirement portfolio reduces the rate that the portfolio will “fail” or go to zero.[1]

We ask if the benefits of lifetime income annuities persist today, when low interest rates have made annuity payout rates significantly lower than in 2001. Using annuity price quotes from CANNEX,[2] we measure the effects of annuitizing between zero and 30% of a retirement portfolio. We create a conceptual “retirement income frontier” that traces the trade-off between the sustainability of retirement income and expected financial legacy, using a framework established by Moshe Milevsky of Toronto’s York University.[3]

We’ll show that the 2001 results are in fact still valid: When a client buys an annuity with part of her savings, the sustainability of her income improves. While this improvement comes at a cost to her financial legacy, that cost can be overcome if she rebalances the rest of her portfolio to match her overall risk profile (i.e, with a shift toward equities).   

These results are produced for three reasons: the annuity income stream can’t be outlived; the pooling of longevity risk through the annuity enhances the retiree’s income (via “mortality credits”); and the retiree offsets the conservative effect of the annuity by taking more risk with the balance of her savings. The results hold true whether she’s a conservative, balanced or aggressive investor.

“Annuitizing a portfolio:” What and how?

First, let’s review what is meant by “annuitizing” (part of) a portfolio. In this article, we mean using a portion of retirement savings to purchase a single premium income annuity, or SPIA. While the SPIA is often overlooked in retirement income planning, it can provide a tremendous boost to the overall sustainability of a client’s retirement: For a one-time premium, the SPIA provides a lifetime of income. (Thus it functions like a workplace defined benefit pension.)

Despite the benefits it can offer, the SPIA is frequently shunned by clients and advisors alike. Why? The purchase decision is irreversible and thus the asset, although it produces income, is illiquid. This point of view, however, overlooks both the mortality credits that retirees acquire from pooling their assets, which provide a greater yield than products with similar levels of guarantee; and the lifetime nature of the SPIA income, which provides a hedge against an unknown and potentially longer-than-expected lifetime.

Ultimately, while a reliable source of retirement income may be replicated with investments in fixed income products, a SPIA provides a higher income than  other non-pooled, non-life-contingent assets or products do. Given the SPIA’s relative advantages, the low take-up of lifetime income annuities by retirees is known as the “annuity puzzle”– a riddle that academics and practitioners have pondered for decades. 

Portfolio sustainability: Do SPIAs still help?

In this article, we will explore the impact of adding a SPIA on our client’s Retirement Sustainability Quotient (on one hand) and her Expected Financial Legacy (on the other). Our conceptual retirement income frontier will trace out the trade-off between these competing outcomes—increased sustainability or increased financial legacy.

We assume that the client has her financial assets consolidated in either a managed account (a portfolio of stocks, bond, ETFs, mutual funds or any combination thereof) or some combination of managed account and a SPIA, in which the annuitized portion provides a pension-like lifetime income starting at retirement. We further assume that our client understands what her inflation-adjusted (assuming 2% inflation) future income needs will be and that she buys a cost of living-adjusted SPIA. In our analysis, the client coordinates withdrawals from her managed account with her annuity payment to match her desired spending amount.

We define retirement income sustainability as a function of first, the fraction of income annuitized and secondly, the “lifetime ruin probability” of the managed account.  The lifetime ruin probability, in turn, is the probability that the investment portfolio will be fully depleted while the retiree is living.

Mathematically, the Retirement Sustainability Quotient (RSQ) takes the following form:

RSQ = (1 – p) (1- fSPIA) + fSPIA = 1 – p (1 – fSPIA)

where p represents the ruin probability and fSPIA represents the ratio of the annuitized income to the client’s desired income. 

In the above equation, we measure retirement sustainability as the weighted average of the success probabilities (“success” defined as the cases in which the retirement income portfolio supports the desired withdrawals during the client’s lifetime). The annuity, by its very nature, has a ruin probability of zero (assuming no default risk of the insurance company); while the investment account has a “non-zero” ruin probability.[4]

As always in finance, there is an economic trade-off. If an annuity has no death benefit or refund feature, the added retirement sustainability it produces can come at the cost of a smaller “Expected Financial Legacy,” which is the wealth that the client will be able to leave to heirs.

We define Expected Financial Legacy (EFL) more formally as the expected value of the funds left over upon the retiree’s death, measured in today’s dollars. Technically, we calculate our client’s EFL by aggregating the present value of the probability-of-death-weighted account balances over time.*

Together, the two concepts of Retirement Sustainability and Financial Legacy form a frontier that helps us to better understand and model the trade-off between income sustainability and financial legacy introduced by the inclusion of life annuities.

Modelling legacy and sustainability along the Retirement Income Frontier

Now, on to our model. In our case study, given the illiquidity of the SPIA, and the irreversibility of the SPIA purchasing decision, we limit the allocation to SPIAs to 30% of our client’s initial wealth. With the remaining (non-annuitized) portfolio, we consider three kinds of asset allocation models: conservative, balanced, and aggressive.

We also consider two approaches:

First Approach: SPIA + No Change to Asset Allocation (“SPIA + No Change”)

In approach one, we assume our client maintains their asset allocation (whether conservative, balanced or aggressive) even after purchasing the annuity. That is, we do not adjust the allocation of the managed assets in response to the annuity purchase. 

Second Approach: SPIA + Modified Asset Allocation (“SPIA + Modified Portfolio”)

In our second approach, we proportionally adjust asset allocations within the client’s managed account, taking the allocation to the SPIA into account. The entire retirement portfolio then conforms to the original risk profile of our retiree (conservative, balanced or aggressive). That is, we change the asset allocation of our client’s investments once the client has purchased an annuity, viewing the annuity purchase as a bond-like allocation on the balance sheet.

In our analysis, we use a stochastic modelling approach. It incorporates two separate sources of uncertainty (namely, market returns and remaining lifetime) to explore how adding a single premium income annuity to a range of “traditional” investment portfolios affects both retirement income sustainability and financial legacy. (A similar analysis could be carried out with other types of income annuities, such as deferred income annuities, or even variable or fixed indexed annuities.)

While the Retirement Sustainability and Financial Legacy calculations can be carried out using Monte Carlo simulations, we chose to use the numerical and analytic methods that are available in QWeMA NumeRIcs®, a set of analytic tools which equip financial specialists to explore and solve questions in retirement income planning.[5]

From a technical point of view, for our analysis, market dynamics are stochastically modelled and we assume that asset returns are normally distributed so that asset prices follow a lognormal distribution. Finally, in modelling our client’s remaining lifetime, we use the Gompertz-Makeham Mortality model calibrated to RP2000 actuarial tables for calculating retiree life expectancy that are readily available from the Society of Actuaries.[6]

In our case study, the client is a 65-year old healthy female retiring immediately. She desires to spend 5% of her initial wealth annually, adjusted in subsequent years for inflation, which we assume is 2%. We consider three asset allocation models to perform our analysis, namely:

  • Conservative portfolio: 30% equity and 70% fixed income
  • Balanced portfolio: 60% equity and 40% fixed income
  • Aggressive portfolio: 70% equity and 30% fixed income 

All calculations are performed on an initial wealth value of $1 which allows us to scale the client’s legacy value by her initial wealth.

Our model’s capital market parameters are based on J.P. Morgan Asset Management’s 2016 Long Term Capital Market Assumptions.[7] We chose U.S. Large Cap equity returns and U.S. investment-grade corporate bonds for the equity and fixed income returns, respectively. We assumed the long-term borrowing cost was 2.5%. 

Tables 1 and 2 summarize the capital market assumptions used in the case study and the return and volatility assumptions for our three (conservative, balanced and aggressive) portfolios.

Table 1. Capital Market Assumptions

 Asset Returns & Volatility Assumptions

 Fixed Income

 Return

   4.5 %

 Volatility

   6.5 %

 Equity

 Return

   8.1 %

 Volatility

 15.5 %

 Correlation Coefficient

 26.0 %

 Portfolio Management Fees

    1.0%

 Long Term Discount Rate

    2.5%

 

Table 2. Portfolio Return (Net of Fees) & Volatility of Returns Assumptions 

 

 Annual  Return

 Volatility of Returns

 Conservative  Portfolio

   4.6 %

     7.3 %

 Balanced  Portfolio

    5.7 %

   10.3 %

 Aggressive  Portfolio

    6.0 %

    11.5 %

 

We consider the impact of an annuity purchase on the client’s retirement sustainability and financial legacy if she annuitizes up to 30% of her initial wealth – and we calculate and display the outcomes for no annuitization and annuity purchases using 5%, 10%, 15%, 20%, 25% and 30% of her initial wealth. For the annuity purchase, we used the average of the A.M. Best’s A++ rated quotes, obtained from CANNEX, for a healthy 65-year-old female annuitant. This gives us a quote of $410 per month ($4,920 annually or 4.92% on the $100,000 purchase) for a $100,000 purchase, indexed at 2%.[8]

We’ll start with the SPIA’s impact on the sustainability and legacy of a conservative portfolio, then move on to the balanced and aggressive portfolios.

Table 3. Results for a Conservative Portfolio 

 

 Allocations to  Investment  Account &  SPIA

 SPIA + No Change

 SPIA + Modified  Portfolio 

 Investment
 Account

 SPIA

 Retirement
 Sustainability

 Financial
 Legacy 

 Retirement
 Sustainability

 Financial
 Legacy

 1

100 %

   0 %

 74.0 %

 0.214

 74.0 %

 0.214

 2

 95 %

   5 %

 75.2 %

 0.203

 75.6 %

 0.206

 3

 90 %

 10 %

 76.4 %

 0.191

 77.3 %

 0.197

 4

 85 %

 15 %

 77.6 %

 0.180

 78.9 %

 0.189

 5

 80 %

 20 %

 78.8 %

 0.169

 80.4 %

 0.180

 6 

 75 %

 25 %

 80.0 %

 0.157 

 82.0 %

 0.172

 7

 70 %

 30 %

 81.2 %

 0.146

 83.5 %

 0.163

 

Figures 1 and 2. Comparison of SPIA + No Change vs. SPIA + Modified Portfolio: Conservative Allocation; Sustainability & Legacy vs. Annuity Allocation (Conservative).

Table 4. Results for a Balanced Portfolio

 

 Allocations to  Investment Account & SPIA

 SPIA + No Change

 SPIA + Modified Portfolio

 Investment Acc’t

 SPIA

 Retirement
 Sustainability

 Financial
 Legacy

 Retirement
 Sustainability

 Financial
 Legacy

 1

 100 %

   0 %

 79.4 %

 0.260

 79.4 %

 0.260

 2

   95 %

   5 %

 80.4 %

 0.247

 80.6 %

 0.250

 3

   90 %

 10 %

 81.3 %

 0.233

 81.7 %

 0.239

 4

   85 %

 15 %

 82.3 %

 0.219

 82.8 %

 0.227

 5

   80 %

 20 %

 83.3 %

 0.206

 83.8 %

 0.216

 6

   75 %

 25 %

 84.2 %

 0.192

 84.7 %

 0.203

 7

  70 %

 30 %

 85.2 %

 0.178 

 85.6 %

 0.191

 

Figures 3 and 4. Comparison of SPIA + No Change vs. SPIA + Modified Portfolio: Balanced Allocation; Sustainability & Legacy vs. Annuity Allocation (Balanced). 

Table 5. Results for an Aggressive Portfolio

 

 Allocations to Investment  Account & SPIA

 SPIA + No Change

 SPIA + Modified Portfolio

 Investment Account

 SPIA

 Retirement
 Sustainability

 Financial
 Legacy

 Retirement
 Sustainability

 Financial
 Legacy

 1

 100 %

   0 %

 80.0 %

 0.269

 80.0 %

 0.269

 2

   95 %

   5 %

 80.9 %

 0.255

 81.0 %

 0.257

 3

   90 %

 10 %

 81.8 %

 0.241

 82.0 %

 0.245

 4

   85 %

 15 %

 82.8 %

 0.227

 82.9 %

 0.233

 5

   80 %

 20 %

 83.7 %

 0.213

 83.7 %

 0.220

 6 

   75 %

 25 %

 84.6 %

 0.199

 84.5 %

 0.207

 7

   70 %

 30 %

 85.6 %

 0.185

 85.3 %

 0.193

 

Figures 5 and 6. Comparison of SPIA + No Change vs. SPIA + Modified Portfolio for an Aggressive Allocation; Sustainability and Legacy vs. Annuity Allocation (Aggressive).

Takeaways

Annuities can increase the sustainability of a client’s retirement portfolio, both when the asset allocation within the investment portfolio is unchanged (i.e., when the addition of the bond-like annuity makes the overall portfolio more conservative), and when the asset allocation is rebalanced so that, with the annuity, it matches the client’s original risk profile.

Additionally, when the client purchases an annuity and modifies her portfolio to match her overall risk profile (the “SPIA + Modified Portfolio” cases), the legacy and sustainability of her strategy both improve—regardless of whether the investment allocation is conservative, balanced or aggressive. The annuity allocation, as an addition to the portfolio’s fixed income allocation, allows our client to take more upside exposure (more equities) within her managed account without changing her original risk exposure.**

The analysis presented so far is for a female aged 65. How do the results change at earlier or later ages? In Table 6 (click on link below), we show values for a female age 60, and age 70; compared to our original 65-year-old client.

Table 6. Results for additional ages (Monthly SPIA income F60 = $353.60 and F70 = $472.05)

We’ve shown that including a SPIA into an individual’s retirement portfolio improves retirement sustainability. The annuity reduces the lifetime ruin probability of the investment account (increasing its sustainability) because the portfolio isn’t burdened with higher withdrawals. While this improvement reduces the client’s financial legacy, the reduction can be offset by rebalancing the portfolio to take the annuity purchase into account and allocating more to equities. This result persists even when interest rates (and annuity payout rates) are lower than in earlier periods, such as when Ameriks, Veres and Warshawsky conducted their study. (See Figure 7.)

When designing retirement solutions, it helps to focus on the client’s retirement goals. Is the client looking for a sustainable income, or is she interested in maximizing a potential legacy? Given that both market returns and longevity are random, we propose the use of the Retirement Sustainability Quotient and Expected Financial Legacy (RSQ and EFL) concepts to help advisors evaluate the costs and benefits of including annuities within a retirement income portfolio. 

© 2016 RIJ Publishing LLC. All rights reserved. 

 

*Portfolio account balances may veer below zero; implying that the client, instead of leaving a financial legacy, is instead borrowing funds in retirement (possibly from the people who would otherwise be heirs!). In our examples, when borrowing is required we assume the cost is equal to the long-term interest rate—but we caution the reader that in the extreme (and in real-world scenarios), borrowing may not be available or the cost may be higher than our assumptions.

**When the client has an aggressive investment portfolio, beyond a certain annuity allocation the “Modified Portfolio” strategy does not provide any additional benefit over the “No Change” strategy. (See the allocation of 10% to annuities in portfolios three and four on Table 5, and note the sustainability and legacy scores for these two portfolios.) At a certain point, taking additional risk within the investment account exposes the client to more downside than can be overcome by further annuity purchases (not without moving the client away from an overall aggressive investment profile). Our hypothetical client obtains her highest sustainability scores in either of two ways: By annuitizing 30% of the initial portfolio while adopting a balanced portfolio allocation and modifying the portfolio to take the annuity allocation into account (Table 4), and by annuitizing 30% of the portfolio while adopting a conservative portfolio allocation without modifications (Table 5). Both strategies produce an RSQ score of 85.6%.

Footnotes

[1]  Ameriks, John and Veres, Robert and Warshawsky, Mark J., “Making Retirement Income Last a Lifetime,” Journal of Financial Planning, December 2001. Available at SSRN: http://ssrn.com/abstract=292259

[2] CANNEX specializes in gathering, compiling and redistributing comparative information and calculations about products and services offered by financial institutions, including, in the U.S., guaranteed lifetime income products such as income annuities. Go to www.cannex.com for more information.

[3] See, for example, Peng Chen, Moshe Milevsky, “Merging Asset Allocation and Longevity Insurance:  An Optimal Perspective on Payout Annuities,”  Journal of Financial Planning, June 2003.  See http://www.ifid.ca/pdf_workingpapers/WP2003JUN.pdf.

[4] We note that our model could incorporate insurer credit ratings, or assume diversification via the purchase of annuities from various issuers. We have not included either of these as they are not central to our main message.

[5] More information on QWeMA NumeRIcs is available from CANNEX at www.qwema.ca

[6] See https://www.soa.org/research/experience-study/pension/research-rp-2000-mortality-tables.aspx.

[7] Available at https://am.jpmorgan.com/us/institutional/library/ltcma-2016

[8] Quotes obtained on December 30, 2015 from www.cannex.com.

 

 

 

Phyllis Borzi, Savior of Tax Deferral

Posted on March 17, 2016 by -

Like a rain delay in the middle of a close baseball game, the DOL fiduciary rule’s stopover at the Office of Management and Budget gives us all a chance to exhale, grab a hot one and a cold one, and ponder the meaning of what Phyllis Borzi and her legal team are trying to do.  

Just for the sake of argument, let’s imagine that she’s trying, perhaps even without knowing it, to save the tax-deferred retirement savings system from itself. That may sound ridiculous, but please hear me out. [According to latest rumors, the new rule will emerge from OMB as early as this week but no later than April 1.] 

The apparent aim and effect of the DOL rule is to expand the perimeter of the regulatory fence around 401(k) plans to include retail rollover IRAs. I think the DOL wants the investing experience of IRA rollover owners to look and feel like the experience that IRA rollover owners knew when they were participants—an online, low-cost, education-oriented, no-hard-sell, group experience.

I think the government has concluded that the rollover IRA itself is an unintended consequence of the tax code, and that tax-deferred retirement savings shouldn’t have been allowed to slip out of the pension world and into the retail brokerage world in the first place. The fiduciary rule is an attempt to put the toothpaste back in the tube.

And no wonder the brokerage industry hates it. Such a sudden expansion of the ERISA perimeter naturally seems like a radical asset grab. It’s as if the government decided to re-nationalize the country’s telecom sector. Or as if the Interior Department tried to extend the borders of Yellowstone Park to include Wyoming, and to establish a state-wide ban antelope hunting.

Although the DOL may merely want to ensure that IRA rollover clients enjoy the same protected environment that qualified plan participants enjoy, the effect will be to take pricing control away from private companies who want to sell to products and services to retail IRA owners. Because there’s more than $7 trillion (and growing) in rollover IRAs, any form of direct or de facto price suppression is going to hurt broker-dealers.

One less basis point in annual fees on $7 trillion is $700 million in lost revenue. That’s a lot of antelope.

This is what we’re talking about when we talk about the impact of the DOL rule. No abstract legal principle is at stake. It’s not about ethics per se. It’s not about the “definition” of a fiduciary. It’s not about depriving IRA rollover owners of access to advice.

If anything, it’s about depriving the sellers of retail financial products access to rollover IRA owners. It’s about taking bread off their tables, bonuses away from their Christmases, and sources of college tuition away from their gifted children—so that fewer retirees end up broke, on public assistance, or spending their final years at Medicaid-funded nursing homes.

Hybrid robo-advice is hot right now, in part, because hybrid robo is what participants in qualified plans experience. That’s why the robo companies are cheering on the DOL, and vice-versa. That’s why incumbent 401(k) providers like Vanguard and Schwab are also the best-known robos. That’s why Financial Engines, the so-called granddaddy of today’s robos, is well-positioned to benefit from the DOL trends. (Annuities, which have difficulty fitting into much of the 401(k) space, may not fit easily into the DOL’s vision of the rollover IRA space. The rule requires sellers of variable annuities to sign a Best Interest Contract.)

So what makes Phyllis Borzi the savior of tax-deferral? If rollover IRAs are not pulled under the ERISA umbrella, then people will see the 401(k) system for what it threatens to become: An incubator for high-cost, retail rollover IRA accounts. If you allow brokerages to charge IRA owners whatever the market will bear, then tax deferral begins to help brokers as much as or more than it helps retirees.

Taxpayers won’t tolerate that forever. If enough people become convinced that tax deferral helps brokers at the expense of savers, then budget hawks will regard the $100 billion-a-year cost of tax deferral as fair game for elimination.     

Don’t get me wrong. I think the DOL could have done a much better job with this initiative. It’s “Just Say No” approach to deceptive sales practices looked like a one-size-fits-all solution to a highly nuanced problem, and it did not seem to demonstrate a clear appreciation for those nuances.     

But the sober truth is that tax deferral isn’t free. Intrusions like a no-conflict-of-interest rule for rollover IRAs are part of the price you pay for it. A subsidized market has to be regulated. Hoping for the “gain” of tax deferral without the “pain” of lower fees and higher ethical standards is hoping for too much. 

© 2016 RIJ Publishing LLC. All rights reserved.   

LPL announces adaptations to impending DOL fiduciary rule

Posted on March 17, 2016 by -

Independent broker-dealer and retail investment advisor LPL Financial will reduce prices, lower account minimums, simplify its mutual-fund only brokerage IRA offering and institute “operational enhancements to drive efficiency” in anticipation of the impending release of the final version of the Department of Labor’s fiduciary or “conflict of interest” rule.

According to an LPL release yesterday, the planned changes include:

Price reductions: LPL plans to reduce the pricing of its centrally managed platforms in order to help advisors provide their services more cost-effectively and grow their practices by reaching more investors. In addition to the previously-announced elimination of the LPL Research strategist fee and annual IRA maintenance fee in its Model Wealth Portfolios (MWP) advisory platform earlier this year, the firm plans to further reduce MWP pricing in 2017. The change is expected to lower the total cost of accessing quality financial advice for investors in some cases by nearly 30% compared to current pricing.

Lower account minimums: To help ensure that investors continue to have access to financial advice, LPL plans to lower the account minimums in its Optimum Market Portfolios (OMP) advisory platform from $15,000 to $10,000 later this year. As previously announced, LPL eliminated the IRA maintenance fee for OMP at the start of this year. 

Simplified mutual-fund only brokerage IRA offering: In anticipation of the additional operational requirements the firm expects for direct business, LPL is planning to create a simplified mutual fund-only brokerage IRA offering to support the continued use of mutual funds in a brokerage relationship as an option for IRA business. This offering would allow LPL to support mutual funds previously held directly with manufacturers. The new offering is not expected to have an annual IRA maintenance fee. 

Enhanced practice management capabilities to manage change: The firm plans to provide specialized practice management support to help advisors manage through changes in their practices, including licensing assistance and business analysis. 

Operational enhancements to drive efficiency: The firm is also planning simplified operational processes—such as keeping account numbers unchanged when accounts are transitioned from brokerage to advisory accounts—that will allow investors who want to convert their accounts to do so in a more streamlined way.      

“While much uncertainty remains as to what the final DOL rule will look like, LPL is taking a proactive approach by making changes to our platform and capabilities that we believe will help advisors grow their practices and support more investors in need of financial advice,” said Dan Arnold, LPL president, in a release.  

“Regardless of the final outcome, we expect demand for advisory services to increase going forward,” continued Arnold. “We also believe that retirement investors will continue to benefit from a brokerage relationship and that the need for a brokerage offering will continue if these relationships can be supported under the DOL rule. The changes announced today position both LPL and our advisors for growth and increased market share, while offering choice and flexibility to serve a range of investors seeking both ongoing and occasional advice.”

© 2016 RIJ Publishing LLC. All rights reserved.

Lower annuity prices will likely follow DOL fiduciary rule: Cerulli

Posted on March 17, 2016 by -

The Department of Labor’s (DOL’s) anticipated “Conflict of Interest” Rule will force a period of product and platform innovation in the United States, according to the first quarter 2016 edition of The Cerulli Edge–Retirement Edition.

“The requirements of the DOL’s proposed Conflict of Interest Rule will ultimately lead to evolution of products and platforms,” said Bing Waldert, managing director at Cerulli, in a release.

“Large broker/dealers (B/Ds) will use developing technology to serve smaller accounts on an at-fee basis. Insurance companies will be forced to lower variable annuity expenses and commissions to be in line with other financial products.”

“The true impact of the DOL’s proposed Conflict of Interest Rule may not be immediately felt, but will lead to a period of product and platform innovation at B/Ds and manufacturers,” the release said.

“The primary concern of the DOL’s proposal is to expand the definition of fiduciary to cover more instances of providing advice. This expansion, in turn, is designed to protect consumers from sales practices that may be tainted by a conflict
of interest.”

“Cerulli expects there will be unexpected changes to the retirement and wealth management industries, and, to a degree, this cultural evolution is what the proposed rule is hoping to effect,” the release said.

The latest issue of The Cerulli Edge–Retirement Edition explores how asset managers, B/Ds, and plan sponsors confront an evolving retirement industry.

“The DOL’s April 2015 proposal creates a new type of prohibited transaction exemption (PTE), referred to as the Best Interest Contract Exemption (BICE), which is a contract that the investment advice provider must present to a potential client,” the release said. “Specifically, the financial institution must disclose any variable compensation that the advisor receives for the advice and resultant product sale, and comparative examples of compensation they would have received for other products.”

© 2016 RIJ Publishing LLC. All rights reserved.

With 14.5% market share, Allianz Life led FIA sellers in 2015

Posted on March 17, 2016 by -

Expecting the final version of the DOL conflict of interest rule to allow sellers of indexed annuities to avoid signing a Best Interest Contract with IRA clients, LIMRA Secure Retirement Income Institute assistant research direct Todd Giesing said this week that he expects indexed annuities to do well again in 2016.

“We expect indexed annuity products will retain their current exemption status under the proposed DOL fiduciary rule, and that more companies will enter or increase their focus on this market. As a result, indexed annuity sales will see double-digit growth in 2016.” said Giesing.

A number of companies that have traditionally been strong in the variable annuity market are now increasing their attention on the indexed annuity market, the LIMRA release said. 

But indexed annuity expert Sheryl Moore, CEO of Wink, Inc., told RIJ this week, “I believe that the DOL’s rule would negatively impact indexed annuity sales, at least initially. After all, 65% of [FIA] sales involve qualified funds. It would take some time for companies, marketers and salespeople to adjust to the ‘new normal,’ and whether that favors fee-based products, commission disclosure, or more.” 

Below: Variable, fixed and total annuity sales by to 20 issuers in 2015, according to LIMRA Secure Retirement Institute.

LIMRA annuity sales 2015 full year

Both LIMRA and Wink Inc. reported fourth quarter and full-year 2015 indexed annuity results this year, arriving at different totals based on the companies that report to them. According to the 74th edition of Wink’s Sales & Market Report, fourth quarter 2015 sales of indexed annuities were $15.5 billion, more than 12.0% higher than the previous quarter and over 30.0% higher than the fourth quarter of 2015. Wink claims to represents 55 carriers and 99.9% of indexed annuity production.

LIMRA Secure Retirement Institute reported indexed annuity sales of $16.1 billion in the fourth quarter of 2015 and $54.5 billion for all of 2015. “Indexed annuities have broken sales records for the past seven years and now represent nearly a quarter of the total annuity market,” said Giesing, in a release.

Allianz Life was the top-selling indexed annuity issuer in the fourth quarter, with a 14.5% market share, according to Wink. Its Allianz 222 Annuity was the top-seller for the fourth quarter in a row. According to LIMRA, Allianz Life FIA sales were $8.75 billion for all of 2015. American Equity Companies again was ranked second, followed by Nationwide, AIG, Great American, and Midland National, Wink said.

For indexed life sales, 46 insurance carriers participated in Wink’s Sales & Market Report, representing 94.9% of production. Fourth quarter sales were $541.5 million. Results were up over 13.0% when compared with the previous quarter, and up nearly 9.0% when compared to the same period last year. “Like indexed annuities, indexed life hit a record for the quarter and the year! It looks like AG49 pushed indexed life more than 4.0% over their prior record sales,” exclaimed Ms. Moore.

Transamerica maintained its top ranking in indexed life sales, with a 14.1% market share. Its Premier Financial Foundation IUL was the top-selling indexed life insurance product for the eighth consecutive quarter. Pacific Life continued in second place, followed by National Life Group, Minnesota Life, and Lincoln National Life. The average indexed UL target premium reported for the quarter was $8,640. That was more than 11% higher than the prior quarter.

© 2015 RIJ Publishing LLC. All rights reserved.

Shift to index funds reduces average equity fund expenses: ICI

Posted on March 17, 2016 by -

Because of competition and a shift toward index funds, the average costs of equity, hybrid, and bond mutual funds continued to drop in 2015, reaching 20-year lows, while money market fund fees remained at their 2014 low, according to data released this week by the Investment Company Institute (ICI).  

“Expense ratios for both actively managed and index funds have seen substantial declines,” said Sean Collins, ICI’s senior director of industry and financial analysis. Expense ratios are fund costs expressed as a percentage of net fund assets.

Weighted by assets, average equity fund expense ratios fell two basis points to 68 basis points (0.68% of assets) in 2015. This follows a four-basis-point decline in 2014 and marks the sixth year in a row of falling equity fund expense ratios.

The percentage of long-term equity mutual fund assets held in index funds, not counting exchange-traded funds, has risen to about 22%, Collins told RIJ in a telephone interview. The shift to indexing has been fueled in part by the growing diversity of index funds, which 10-12 years ago were mainly large-cap funds, he said. Actively managed equity fund assets fell by $275 billion in 2015, while passive equity fund assets rose by $109 billion.

Share of assets in costly-to-manage categories of bond funds declines
Bond fund expense ratios averaged 54 basis points in 2015. In 2015, bond fund expense ratios fell three basis points—a sign of the decline in the assets of high-yield bond funds, which tend to have higher-than-average costs and which underperformed in 2015.

The average expense ratio of hybrid mutual funds, which hold equities and bonds, fell only one basis point to 0.77% in 2015, a smaller decline than stock and bond funds experienced. Hybrid fund assets have increased substantially in recent years, thanks in part to the growth of “alternative strategy” funds, which now account for 8% of the assets of all hybrid funds. The average expense ratio for other types of more conventional hybrid funds fell 2 basis points in 2015.

Money market fund expense ratios remained stable in 2015
Money market fund expense ratios averaged 13 basis points in 2015, unchanged from 2014. Squeezed by low interest rates, these funds have waived portions of their fees in recent years to prevent net yields falling below zero. In 2015, 98% of money market fund share classes waived a portion of their fees. Fund advisers and their distributors absorb these waivers, which totaled an estimated $5.5 billion in 2015.

Actively managed equity and bond fund expense ratios continued steady decline 
The average expense ratios for actively managed equity and bond funds fell by two and three basis points, respectively, in 2015, though the expense ratios of index funds have leveled out in the past two years.   

Among both active and passive funds, assets have been migrating to the very lowest cost funds. In 2015, 57% of the assets of actively managed equity funds were in the 10% percent of such funds with the lowest expense ratios. In 2015, 69% of index equity fund assets were held in the 10% of index equity funds with the lowest expense ratios. 

© 2015 RIJ Publishing LLC. All rights reserved.