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‘Stretch match’ is the key to higher DC savings: LIMRA

Workers from for-profit and not-for-profit organizations will save only enough in their defined contribution (DC) plan to receive the full company match, according to new research from LIMRA Secure Retirement Institute.

“Plan providers can help employers increase their employee’s savings behavior by recommending a stretch match strategy, which would require an employee to save a higher percentage to attain the full company match,” said Institute analysts Michael Ericson in a release this week.

In describing a “stretch match” strategy, LIMRA noted that a 100% match of the first 3% of savings tends to promote savings rates of 6%, but a 50% match of the first 6% tends to promote savings rates of 9%. Both strategies cost the plan sponsor the same amount.

Only 4 in 10 workers from both non-profit and for-profit companies consider themselves “savers” and four in 10 working households have less than $25,000 saved for retirement, the LIMRA study showed. Of those who have access to a DC plan, 20% were not contributing to their employer’s DC plan. [Only about half of full-time U.S. workers have a tax-deferred savings plan at work.]

For-profit workers who don’t contribute to their workplace defined contribution plan were more likely to say they cannot afford to do so or they have competing saving priorities, compared with not-for-profit workers (67% vs. 53%).

In other findings: More than a third of Millennial workers in both the not-for-profit and for-profit sectors are saving 10% or more (34% and 35% respectively). Only 27% of Boomers and 28% of Gen X not-for-profit workers are saving at that rate. In the for-profit sector, Boomers and Gen X workers save a bit more than their Millennial counterparts—36% of Boomers and 35% of Gen X workers are saving 10% or more in their retirement plans.

Pre-retirees surveyed had no plan on how they will withdraw the assets from their DC plans once they retire—just one third have calculated their savings and expenses in retirement. Nearly half of pre-retirees said they plan to withdraw 9% or more of their assets each year in retirement—more than twice the rate recommended by most retirement experts.

© 2016 RIJ Publishing LLC. All rights reserved.

Indexed annuities post new sales records in 2015

Breaking previous quarterly sales records, indexed annuity sales totaled $16.1 billion in the fourth quarter of 2015, 32% higher than prior year, according to LIMRA Secure Retirement Institute’s fourth quarter U.S. Individual Annuities Sales Survey.

In 2015, indexed sales reached a record-breaking $54.5 billion – an increase of 13% from 2014. (See today’s RIJ “Data Connection” on the homepage for a chart.)

“Indexed annuity sales have experienced eight consecutive years of positive growth,” noted Todd Giesing, assistant research director, LIMRA Secure Retirement Research. “The growth was driven by many companies, rather than just the top players as we have seen in the past.  We also are seeing some companies who have traditionally been strong in the variable annuity market, focusing more attention on the indexed annuity market.” 

Overall, total annuity sales improved for the third consecutive quarter, driven by strong fixed annuity results. In fourth quarter, annuity sales were $61.4 billion, 5% higher than the prior year. In 2015 sales were $236.7 billion, recording no growth from 2014. 

Variable annuity (VA) sales dropped 7% in the fourth quarter to $31.7 billion, which is the lowest level seen since the first quarter of 2009.  2015 marked the fourth consecutive year of VA sales declines. For the year, VA sales fell 5% year over year, to $133 billion. 

Sales of fixed annuities jumped 23% in the fourth quarter, to $29.7 billion. In 2015, fixed annuity sales increased 7%, to $103.7 billion.  This is the first time fixed annuity sales have surpassed $100 billion since 2009.

Sales of fixed-rate deferred annuities, (Book Value and MVA) rose 16% in the fourth quarter and 4% for the year. 

Immediate income annuity sales were $2.6 billion in the fourth quarter, improving 13% from prior year.  However, low interest rates earlier in the year did impact annual immediate income annuity sales. Annual immediate income annuity sales fell 6%, totaling $9.1 billion in 2015.  

Deferred income annuity (DIA) sales continued its strong growth in the last half of 2015.  Fourth quarter DIAs were $821 million, 21% higher than the fourth quarter of 2014. For the year, DIA sales were $2.7 billion, equal to 2014 results. The Institute found market share more evenly spread out among the top ten writers and anticipate DIA sales to increase at a slow but steady pace for the foreseeable future.

“There are 11 companies offering QLAC products,” said Giesing. “While this is small and new part of the DIA market, we expect to an uptick in sales 2016.” LIMRA Secure Retirement Institute’s fourth quarter U.S. Individual Annuities Sales Survey represents data from 96% of the market.

The 2015 fourth quarter Annuities Industry Estimates can be found in LIMRA’s updated Data Bank. To view variable, fixed and total annuity sales over the past 10 years, please visit Annuity Sales 2006-2015. The top twenty rankings of total, variable and fixed annuity writers for 2015 will be available in mid-March.

© 2016 RIJ Publishing LLC. All rights reserved.

Jackson and Morningstar partner on tax demonstration tool

Jackson National Life Insurance Co. is working with Morningstar, Inc. to launch its new Tax Deferral Illustrator, a tool enabling financial professionals to visually demonstrate the impact that taxes and tax deferral can have on clients’ finances throughout the full investment cycle of accumulation and distribution.

 “Through simulated data, advisors will have the ability to educate clients about the effects tax deferral can have on their individual investment strategies,” said Justin Fitzpatrick, vice president of Advanced Strategies at Jackson National Life Distributors LLC (JNLD), the sales and marketing arm of Jackson, in a release.

“Taxes on investments can be much more complicated than just the long-term capital gains rate. The launch of the Tax Illustrator reinforces our commitment to providing advisors with the tools they need to create customizable outputs that can be representative of their clients’ unique portfolios.”

The illustrator is powered by Morningstar’s Wealth Forecasting Engine. This sophisticated simulation software allows advisors to demonstrate scenarios based on a client’s specific financial situation.

With the illustrator, advisors can:

  • Input personalized information including current age, retirement age, state-specific tax policies and investment data to create individualized representations of clients’ investments and their potential returns.
  • Demonstrate to clients the differences between taxable and tax-deferred accounts over a specified period of time.
  • Use returns specific to each asset class to illustrate tax drag.
  • Recognize long-term capital gains tax treatment in a taxable portfolio through accumulation, distribution and legacy planning on a pre- and post-tax basis.

This tool is available for wholesalers and advisors, and supported by Jackson’s Advanced Strategies team, a group of senior portfolio strategists and retirement and wealth strategy consultants who study the investment and tax landscape.

© 2016 RIJ Publishing LLC. All rights reserved.

Here’s how the Jetsons might save for retirement

MassMutual is introducing a new way to promote retirement savings: A video game for smartphones and tablets.

“FutureJet” game is available as a free download from the Apple App Store and Google Play app store. MassMutual’s RetireSmart website for retirement plan savers offers a YouTube-based demonstration video of the game.

FutureJet allows players to “fly characters with helmets and jetpacks through FutureJet City, whose lights are flickering out due to dwindling energy supplies.” Players must collect power pods while flying over, under and around obstacles as fast as possible. Collecting the pods models two savings goals: fueling the players’ jetpacks to continue flying in the short-term while conserving extra energy to power FutureCity in the long-term.

MassMutual emphasizes connecting with its customers in whatever medium wherever they prefer, including the Internet, email, direct mail, individual and group meetings, and now video games, a release said.

The Pew Research Center reported in December 2015 that 49% of American adults play video games on a computer, TV, game console, tablet or smartphone. The percentage of players is nearly identical for men (50%) as it is for women (48%), according to the Pew.

Two-thirds (67%) of adults ages 18 to 29 are the most likely to say they play video games, Pew reports. Three-quarters (77%) of young men and three out of five (57%) young women play, according to the study.

By comparison, only 47.6% of Americans participate in an employer-sponsored retirement plan—nearly two points below those who play video games, according to the U.S. Census Bureau’s 2014 Current Population Survey and the Employee Benefit Research Institute.

© 2016 RIJ Publishing LLC. All rights reserved.

Decline in tax withholdings bodes ill for economy: TrimTabs

Real-time tax data indicates the U.S. economy is stalling out, according to TrimTabs Investment Research.

“Real growth in income and employment taxes has been decelerating since last autumn, and it turned flat in recent weeks,” said TrimTabs CEO David Santschi in a release.  “If the trend persists, it would be consistent with a recession.”

TrimTabs uses the income and employment taxes withheld from the paychecks of 141 million U.S. workers as a proxy for wage and salary growth. The U.S. Treasury reports this data every business day on its website.

Withholdings fell 0.2% year-over-year in real terms in the past four weeks ended Thursday, February 18, TrimTabs found. This decline compares with growth of 2.0% year-over-year in December and 3.0% year-over-year in January.

“Withholdings can be volatile from month to month at this time of year due to the timing of year-end bonus payments, but the decelerating trend is clear,” said Santschi.

In another sign of economic weakness, the TrimTabs Macroeconomic Index, a correlation weighted composite index of weekly leading indicators, recently hit a 1½-year low. “Credit markets are flashing warning signals about growth, and a wide range of data points to contraction in manufacturing,” the release said.

© 2016 RIJ Publishing LLC. All rights reserved.

The RICP, as Seen By Three Graduates of the Program

About 10,000 financial professionals have enrolled in The American College’s Retirement Income Certified Professional designation program, and about 2,000 have graduated. As a supplement to today’s lead article about the program, we also include the following comments from graduates of the program.

David Smiley, Oxford Asset Management, Durango, Colorado

“I signed up for the classes at the end of 2012 with the thought that the curriculum would supplement what I learned in the CFP curriculum,” said David Smiley, an advisor in Durango, Colorado (right). “I wanted to focus my practice on helping folks with retirement planning, especially those who are five to ten years away from retirement, when you might still make a difference in their readiness. Also, I wanted to help guide people with all of the issues they face during retirement, like Social Security, healthcare/Medicare, aging, long-term care, and not outliving their money.David W. Smiley RICP

“There is no textbook, just PDF files of the course material for each of the modules. All the materials are up-to-date (and I assume they will continue to be updated). There are three modules and you go through each one, take a test and then start the next one. It took me all of 2013 to get through the online classes, including studying and taking tests.

“You can do it much more quickly if you have more time to devote to it. I was working full-time and my parents had some issues, so it took me longer to complete. I thought most of the online videos were excellent and up-to-date. The material was really well laid out and had excellent coverage of Social Security, Medicare and healthcare. It was all very thorough, with a lot of good speakers in addition to the thought-leaders at The American College.”

Troy Miller, Hilliard Lyons, Louisville, Kentucky

Troy MillerOne RICP graduate suggested that the program hasn’t reached its full potential. “The key challenge for advisors is, for instance, ‘What do I do when I have client X and he is x age and has x amount of money?’” said Troy Miller, vice president and manager of retirement products at Hilliard Lyons in Louisville (left). “Do I use an annuity or not? If so, which kind and how much of the portfolio do I put in it? Which type of LTC is best for this situation but not in that situation? Which portfolio withdrawal strategy makes the most sense?

“This is the hard part. I know there’s no silver bullet, but the program would ideally tell use how to combine all the choices and options into a particular retirement income plan for a particular client. Hypothetical situations and case studies would be very useful. We are all are trying to get our arms around this part of it. I’m not sure they could have done it at this time.”

Curtis Cloke, Thrive Income, Burlington IowaCurtis Cloke

“There are two programs I respect. One is the RICP and the other is the RMA with RIIA. They are equally good programs,” said Curtis Cloke, who is one of the program’s video presenters (right).
“The RICP combines the video with the academic syllabus, which makes it a bit easier for the average brokerage advisor to understand and complete. The American College also has good exposure to the CLU. Their program includes lecturers from all over the industry and who represent many different angles.”

© 2016 RIJ Publishing LLC. All rights reserved.

Where an Advisor Can Make a Big Difference

The decision about when to retire is one of the most important financial decisions that many people will ever make. Yet most people, oddly, do not look closely into their finances before they leap into retirement. And even if they did, most of them wouldn’t be able to crunch the numbers in a meaningful way.

That creates a big opportunity for financial advisors who have expertise in retirement income. Too many people blunder into retirement and make things up as they go along. 

You might expect prudent people not to retire until after they’ve assessed their post-retirement income and expenses, and determined that an early retirement won’t dangerously reduce their income in retirement or raise their risk of running out of money. Not so, according to Steve Sass, a researcher at the Center for Retirement Research at Boston College.

In a new Issue Brief, “How Do Non-Financial Factors Affect Retirement Decisions?,” Sass reviews the literature on the reasons why people retire when they do. The answer, “Because I knew I could afford to,” isn’t even on the list. Instead, most people retire when they feel like doing something else, or keep working after the normal retirement date because they’re happy doing whatever it is they do.

To be sure, disability and unpleasant working environments do increase the likelihood of early retirement. People who have “jobs that require physical effort or good eyesight,” or who are confronted with “age discrimination or inflexible schedules” at work are more likely than average to retire relatively early, studies like the Census Bureau’s Current Population Survey show.    

But those are not the biggest reasons for the decision to abandon the lifelong routine of rising with the sun each weekday, dressing in uncomfortably formal clothes, commuting alone in a vehicle that’s big enough for six, and toiling under a supervisor’s implacable eye for eight hours.  

“Far more prevalent than these factors pushing workers out of the labor force are factors pulling them into retirement—a desire to ‘do other things’ or ‘spend more time with family.’ This inclination is especially strong during the popular retirement ages of 62-67,” Sass writes.

That would be fine, except that they don’t necessarily check to see if they can afford to stop working.

Ironically, the people most likely to keep working are the ones with the least financial pressure to do so. “Those who enjoy going to work—reaping non-financial rewards from employment—are more likely to remain in full-time employment and less likely to retire,” according to Sass.

These folks are generally not at risk for running out of money in retirement. “Individuals most likely to be working at these older ages are those with the strongest finances—those with the most education, greatest wealth, and highest lifetime incomes. Such workers have higher labor force participation at all ages, as they have fewer health impairments and better employment opportunities,” he writes.

In the past, people were often told when to retire; corporations invented defined benefit pensions for 65-year-olds because they wanted to make a clean break with older employees and create opportunities for younger, lower-paid employees. Today, the goal posts have disappeared.  

“Retirement ages not so long ago were highly structured with strong financial incentives in both defined benefit plans and Social Security to retire no later than target retirement ages (65 in Social Security); augmented by national and employer expectations on when we retire,” Sass told RIJ in an email.

“That’s all (or largely) gone. When one retires now has a much greater effect on one’s retirement income, but workers lack cultural or clearly marked financial incentives to indicate when to retire, and are ill-equipped to estimate the financial implications.”

For instance, only 31% of people ages 65 to 70 with at least $100,000 in investments know about the four percent rule, and only 37% know that they should dial down their investment risk during the “retirement red zone,” and only 30% know that working two years longer can substantially make up for undersaving, according to 2014 research by The American College (See “Data Connection” on today’s RIJ homepage). 

Advisors have the equipment needed to help them. Many brands of retirement planning software offer on-screen “sliders” that allow advisors and clients to raise or lower the retirement date and see the change ripple through their spreadsheets. The hard part is getting clients to take advantage of those resources. 

The decision about when to retire is a critical one, especially for middle-class people without big financial cushions. It will determine when they claim Social Security. It will increase or decrease the number of years their savings need to last. But most people don’t think about these things in detail. Optimizing the retirement date requires the kind of experience and technical expertise that only financial advisors can provide.

© 2016 RIJ Publishing LLC. All rights reserved.

Eight core ideas for retirement planning: Wade Pfau

In an article published this week in Advisor Perspectives, Wade Pfau, Ph.D., the director of the doctoral program in Financial and Retirement Planning at The American College in Bryn Mawr, Pa., describes what he calls “eight core ideas” to guide retirement income planning.

Here are those eight ideas, along with summaries of the explanations Pfau gave in his article:

Play the long game. Strategies that emphasize long-term planning over short-term expediencies include delaying the start of Social Security benefits, purchasing a single-premium immediate annuity (SPIA), paying a bit more taxes today to enjoy lower taxes in the future, making home renovations that support aging in place, setting up a plan that accounts for the risk of cognitive decline and opening a line of credit on a reverse mortgage.

Don’t leave money on the table. The holy grail of retirement income planning includes strategies that enhance retirement efficiency. If one strategy allows for more lifetime spending and/or a greater legacy than another strategy, then it is more efficient.

Use reasonable expectations for portfolio returns. You should not expect to earn the average historical market returns for your portfolio. Half the time returns will be more than average and half the time they’ll be less.

Avoid plans that assume high market returns. Stocks potentially offer a higher return than bonds as a reward for their additional risk. But this ”risk premium” is not guaranteed and may not materialize.

Build an integrated strategy to manage various retirement risks. Retirement risks include unpredictable longevity and an unknown planning horizon, market volatility and macroeconomic risks, inflation and spending shocks. Each of these risks must be managed by combining different income tools with different relative strengths and weaknesses.

Approach retirement income tools with an agnostic view. The most efficient retirement strategies require an integration of both investments and insurance.

Start with the household balance sheet. A retirement plan involves more than just financial assets. This has been a fundamental lesson from various retirement frameworks, such as Jason Branning and M. Ray Grubbs’ Modern Retirement Theory, Russell Investments’ Funded Ratio approach and the Household Balance Sheet view of the Retirement Income Industry Association.

Distinguish between “technical” and true liquidity. In a sense, an investment portfolio is a liquid asset, but some of its liquidity may be only an illusion. Assets must be matched to liabilities. Some, or even all, of the investment portfolio may be earmarked to meet future lifestyle spending goals, and is therefore less than fully liquid.

 © 2016 RIJ Publishing LLC. All rights reserved.

RetireUp can now illustrate Allianz Life and Great American annuities

RetireUp – Create A Retirement Plan in Minutes from Learn RetireUp on Vimeo.


RetireUp, maker of a web-based platform that advisors can use to demonstrate retirement planning scenarios in real time, announced this week that its platform can now illustrate fixed index annuities (FIAs) from Allianz Life Insurance Company of North America and Great American Life.

Advisors and producers can use RetireUp to incorporate the Allianz 222 and Allianz Core Income 7, as well as Great American’s American Legend III FIA with the IncomeSecure rider, in RetireUp’s Retirement Income Models.

The centerpiece of the RetireUp platform is its “Retirement Income Story,” which allows advisors to provide clients and prospects with real-time, web-mediated visual presentations of retirement income strategies that include Social Security, pensions and specific annuity contracts.

“No other planning software can take a product from an Allianz Life or a Great American Life and show the client how it will work in their personal retirement plan in real time. We designed it all around the client meeting,” RetireUp CEO Dan Santner told RIJ in a phone interview. “Usually if a client brings up something new in a meeting, you have to go back to the home office to see how it will affect the annuities in the plan. With this, you just tap a button.”

RetireUp is used by registered reps at broker-dealers, by producers associated with insurance marketing organizations, by independent financial advisors and by RIAs. The flat subscription fee ($99/month or $999/year) includes unlimited support from RetireUp coaches. Advisors who already use planning software like eMoneyAdvisor or MoneyGuidePro can use RetireUp to interface with clients. 

“Our software is used for prospecting as well as client meetings. You can create a robust plan right in the first meeting, using a feature called ‘Solve It.’ Or you can gather information before the meeting,” said Michael Roth, partner and executive vice president for business development at the software firm. RetireUp was founded in 2014 and is based in Mundelein, Illinois, a northern suburb of Chicago.   

The ability to run hypotheticals with specific products is a key feature of the software. In cooperation with annuity issuers, RetireUp duplicates the pricing mechanics of a given annuity product within its own system so that it can instantly generate new quotes as the client or advisor introduces new variables. “We do exactly on our side what the carrier does on the actuarial side,” Roth said.

The service is positioned as a way for traditional intermediaries to create the kind of direct web-mediated interfaces with prospects and clients that robo-advisors offer, but with the addition of personal guidance from a human advisor.

© 2016 RIJ Publishing LLC. All rights reserved.

Hybrid robo-advisors will eclipse pure robo: Swiss report

After the strong growth of the robo-advisory approach in recent years, promoted by numerous start-ups worldwide and adopted by a sizeable number of wealth managers, a new ‘sub-species’ has emerged: the hybrid robo/personal contact service, which adds a new software component to the client advisory process.

This is a key finding of a new report, “Hybrid Robos: how combining human and automated wealth advice delivers superior results and gains market share,”  from the Swiss research company MyPrivateBanking Research.

MyPrivateBanking Research estimates that assets managed by hybrid robo services will grow to $3.7 trillion assets worldwide by 2020 and to $16.3 trillion by 2025, or just over 10% of the world’s investable wealth. By comparison, “pure” robo-advisors (completely automated without personal service added on) will have an estimated market share of only 1.6% of the total global wealth at that point.

“Several major players have announced that they will reveal their hybrid offerings [during 2016] and many more wealth managers are currently working through the issues of hybrid robo adoption,” said Francis Groves, senior analyst of MyPrivateBanking Research, in a release.

Fueling the hybrid-robo trend, aside from the interest generated by the first-wave robo-advisors, will be “the launch of a substantial range of new B2B technology providers, some focused only on the banking and wealth management industries and others with a broader scope,” the report said.

“In the analysts’ view, the next 12 to 18 months will provide numerous demonstrations of the impact of the new (white label) technology providers and robo/conventional partnering on wealth management,” the release said. MyPrivateBanking Research also expects to see a surge in “quasi-wealth management services” from pension providers, fund managers and retail banks not usually involved in wealth management.

“The robo model of investment portfolio management will be good enough in the eyes of a larger proportion of investors than the wealth management industry itself yet seems ready to recognize,” Groves said in a statement. ”Hybrid robo-advisory services will increase the efficiency of advisors, in terms of numbers of clients served per professional, and the increasing numbers of hybrid solutions will also have a significant downwards effect on the client charges the market will bear.”

The report recommends 20 different steps wealth managers can take to prepare for the hybrid revolution, including:

  • Wealth managers should be wary of assuming that one or more robo-advisory elements can be just ‘added on’ to an existing service.
  • Especially in the retail and affluent segments, ties with non-financial retail services of various kinds will be of increasing importance for the success of robo-advisory client recruitment.
  • For most wealth managers the path to a hybrid solution will have several stages; but clients’ awareness of the capabilities of automation will be increasing rapidly in the next few years.
  • In the higher wealth segments, wealth managers who automate ‘behind the scenes’ processes will be in the best position to introduce client-facing robo elements when they’ve established their client-base is ready.

The report shows how various robo-advisor developments can be combined with personal contact from professionals. It offers five case studies of hybrid robo innovators, each showing a different pathway to a hybrid solution. The report also projects the growth of hybrid robo advice over the next nine years with a breakdown between North America and the rest of the world and between client wealth segments.

© 2016 RIJ Publishing LLC. All rights reserved.

‘No time for complacency,’ A.M. Best warns annuity issuers

Although most U.S. life and annuity insurance companies will face challenges in 2016 like the ones they faced in 2015, there’s a “heightened sense of urgency” for owners, shareholders and policyholders to ensure companies are not “continually increasing risks,” according to the 2016 Review & Preview Best’s Special Report.

The report, titled “Challenges Look Similar for U.S. Life & Annuity Industry But No Time for Complacency,” cites such familiar problems as historically low interest rates, marginal to declining premium growth and regulatory uncertainty.

The report notes that, in addition, life and annuity companies will face the aggregation of longevity exposure from increasing life expectancy trends, the rise of cyber risk as a life “catastrophic” event and increasing investment risk from traditional and non-traditional asset classes.

A.M. Best’s 2016 outlook for the life and annuity industry for 2016 remains stable. Most insurers have “ample levels” of risk-based capital, improved underlying financial results, improved asset/liability management capabilities and modest product features with few signs of a renewed “arms race” among competitors.

“The economy continues to pressure not only investment portfolio returns, but the profitability of many products, both spread-based and those with underlying long-term interest rate assumptions,” said an A.M. Best release.

“In addition, although the industry maintains minimal investment exposure to equities, such products with equity components are either less popular or are increasingly costly to hedge, especially in light of increased market volatility. For many legacy blocks to improve, most need either a significant return to higher rates and/or continued improvement in equity performance to support past underwriting mispricing.”

A.M. Best expects the U.S. economy to grow modestly in 2016, driven largely by domestic demand in contrast with many emerging and mature economies.

Non-traditional, or alternative capital, “patiently stands by waiting for a possible entry into the space,” the release said. “On the merger and acquisition front, the pace in 2016 should remain similar to that seen in 2015; however, while 2015 saw increased activity from foreign insurers entering the market, primarily Japanese life insurers, 2016 may be more represented by nontraditional players entering the space.”

© 2016 RIJ Publishing LLC. All rights reserved.

Insurance U. Becomes Retirement U.

Elite colleges and universities are easy to find in the leafy suburbs of Philadelphia. There’s Villanova, of hoops fame, and the Quaker trinity of Swarthmore, Haverford and Bryn Mawr. Then there’s The American College, a kind of grad school where adults study taxation and insurance and add credentials like the CFP and CLU to their business cards.     

The American College of Financial Services, to use its full name, is fast becoming known for another acronym: RICP. Since 2013, more than 10,000 advisors have enrolled in its Retirement Income Certified Professional designation program and some 2,000 have graduated. The RCIP recently passed the CLU (Chartered Life Underwriter) as the college’s biggest revenue source.

The American College wasn’t the first to market a retirement income-focused designation. InFRE’s Certified Retirement Counselor (CRC) and the Retirement Income Industry Association’s Retirement Management Analyst (RMA) preceded it. But the College’s reputation and resources, along with some strategic staffing, are making the RICP the most popular ornament for advisors who want to position themselves as retirement experts.

Far from the din of the DOL rule, these programs are fomenting a modest revolution in financial advice. Most advisors still specialize either in investments or insurance, but these programs are predicated on the idea that a combination of the two product types can give retirees the best financial results—and the most fiduciary results. The revolution is taking longer than some people hoped and expected, but not for lack of effort by these designation-shops. 

The main courses

The RICP program is self-directed and based on distance-learning. It provides what David Littell, J.D., ChFC, the 1988 Olympic fencer who teaches taxation and holds the Joseph E. Boettner Chair in Research at the College, calls an “asynchronous experience.” Enrollees in New York, California, Colorado or Florida, for example, can study remotely and on their own schedules. 

The curriculum consists of three learning objectives, each covered by a single course. “The first course is about process,” Littell told RIJ during a recent interview at the college. “That’s where we identify the elements of the retirement income planning process. In courses 2 and 3 we go deeper into specifics. The second course covers Social Security claiming strategies, flooring with annuities or investments, and other portfolio building issues.

“The third course looks at reverse mortgages. We use Harold Evensky’s strategy for tapping home equity conversion mortgage lines of credit (HECM LOCs) for current income instead of selling depressed assets, and then paying them down later. We also look at long-term care insurance and Medicare choices. It ends with retirement income portfolios.”RICP Sidebar

These courses are delivered via the Internet, using reading material, recorded videos and the Blackboard interface between school and student. “There’s an online lecture and a Power-Point presentation for each course. For each course we have a detailed outline and practice questions. The outline is like a book; it has all the points that are in the lecture,” Littell said.

Open architecture

The RICP videos are produced in the College’s own video production center. The talent in these televised presentations, interviews and roundtable discussions is provided either by members of the College faculty or by a growing pool of retirement experts who make guest appearances.

The faculty who appear in the videos include, besides Littell, Wade Pfau, Ph.D., and Jamie Hopkins, J.D.. Pfau is a professor of Retirement Income at the College and one of the country’s most widely-published retirement authorities. Hopkins teaches taxation and serves as co-director of The American College New York Life Center for Retirement Income.

Dozens of other videos feature a growing list of retirement experts who make cameo appearances as presenters or interviewees. “So far it’s grown to include 40 experts. [In terms of investment philosophy], they range from Michael Kitces and Jonathan Guyton, who don’t like annuities, to Tom Hegan,” the ex-Marine, pro-annuity motivational speaker and author of Paychecks and Playchecks (Acanthus 2012), Littell said.

Other experts include, for example, Curtis Cloke, the Burlington, Iowa, advisor who created the THRIVE system of optimizing the tax benefits of combing investments and insurance products, Brent Burns (co-author of Asset Dedication, McGraw-Hill 2004), who advocates bond laddering for income flooring, and journalist Mary Beth Franklin, an expert on Social Security claiming strategies. 

The cost of the each of the three required courses is $950. The combined cost is $2,450 when all three are purchased at once. There are no requirements or prerequisites for enrolling in the program. Many candidates are making the RICP their first designation—something that The American College had not expected, Littell said.

As an added benefit, students earn continuing education credits while studying for the RICP. “If you take the quizzes at the end of each course you can get insurance or CFP continuing-education courses,” Littell told RIJ. “That adds to the value of the designation and it saves money. Getting CE credit from us means one less conference they have to travel to.”

The college draws its students from the ranks of independent advisors as well as from broker-dealers. “We have approval from Merrill Lynch, and we just got approval of the designation from Raymond James. There are now about 40 distribution firms where the designation is approved for use on the advisors’ business cards,” Littell said.

Studiously agnostic

Founded in 1927 as The American College of Life Underwriters by Solomon Huebner, the first insurance professor at the University of Pennsylvania’s Wharton School, the school later added training for the Certified Financial Professional and Chartered Financial Consultant designations, as well as programs leading to masters of science degrees in Financial Services and in Management. The doctoral program in Financial and Retirement Planning was started in 2012 with a $5 million grant from New York Life.

In 2008, The American College started its New York Life Center for Retirement Income with a $2 million grant from the mutual insurance giant. Today, Littell and Jamie Hopkins are co-directors of the center. The center has a video library, accessible to the public on the college’s website, with some 60 videos on different topics within the field of retirement income. 

“New York Life told us at the time that the coming business would be huge, and that they wanted to improve the field. Since then we’ve started the video project and the website. Eventually we asked ourselves, ‘Won’t it make sense for this to become credentialized?’

“Early on, we talked to Francois Gadenne (founder of RIIA) about combining forces behind RIIA’s designation—the Retirement Management Analyst—and I even took the course myself. But ultimately we couldn’t see how it would work. They had the ‘flooring’ approach, but we wanted our designation to be broader than that, to include long-term care insurance and housing wealth. We didn’t think that the right designation existed yet.”

Less than two weeks ago, the College further cemented its claim to thought-leadership in retirement planning when it hired Michael Finke, Ph.D. to be its dean and Chief Academic Officer, starting this summer. Finke has been Director of Retirement Planning and Living at Texas Tech University. Like Pfau, he’s a well-known and widely published expert on retirement income planning. (Before Pfau was hired by The American College in 2013, he served as volunteer curriculum director for RIIA’s RMA designation.)

The RICP program tries to be ideologically agnostic, promoting neither one type of financial product over another or one business model—commission, fee-based, fee-only, or hourly—over another. One of the principal problems in financial advice today, arguably, is the tendency of advisors to use products and processes that fit their business models—and to ignore others, even if they might suit the client as well or better.    

The American College made a strategic decision to remain above that fray. “We intentionally have no commitment to any particular philosophy, Littell said. “We think that’s attractive to advisors. On the issue of business models, that’s been a concern of ours from the beginning.We decided just to teach people the right ways to do [retirement income planning] it and assume that there’s no bias in their business models one way or the other. Our answer is to just keep telling them how to do it right.”

© 2016 RIJ Publishing LLC. All rights reserved.

Advisors: How to Outsmart the Smartphone

Digital disruption has human voices, and I am listening to one.

“My firm has lost three clients to Vanguard’s financial planning service this year,” said the successful, Wharton-educated registered investment advisor sitting next to me, with just a trace of bitterness. “But Vanguard isn’t telling the truth about its service. That’s not real financial planning. It’s just asset allocation.”

But Vanguard may be feeling the heat too. Its programmers are probably coding as fast as they can.

The RIA and I both attended the “T3” advisor conference in Fort Lauderdale this week, where 500 or so RIAs gathered in a beachside Marriott to learn why the latest in direct-to-consumer financial technology, or fintech, is a must-have for them and not a nice-to-have.

The news at the conference, organized for the eleventh consecutive year by fintech analyst Joel Bruckenstein, is that the future is not coming, it’s already here. Even for advisors, financial services is increasingly customer services. [Editor’s note: I’m in a beachfront Starbucks, and at every table a 75-year-old is on a smartphone or tablet.]

RIAs are already using technology in their back offices and middle offices, to outsource or automate whatever chores can be outsourced or automated. But they were told at T3 that they need much better client-facing interactive technology, especially if they hope to inherit their current clients’ tech-savvy Millennial children.

The 79 tech companies with exhibits at the conference were there to fill that need. Companies like Morningstar, Fidelity, eMoneyAdvisor, MoneyGuidePro and Redtail, as well as Oranj, Riskalyze and Intelliflo pitched, demonstrated or announced the arrival of their newest software or platforms or mobile apps. There are enough options to make even a computer-literate advisor’s head spin—but nobody wants to end up as a Yellow Cab in an Über-driven world.

Morningstar, the robo

Morningstar, Inc., a sponsor of T3, is determined to be a leader of the fintech parade. The Chicago-based fund-rating juggernaut, has been building and buying software and robo-advice firms. Morningstar serves institutions, advisory firms and even individuals, and relies on technology to distribute its vast storehouse of investment data.

Morningstar bought robo-advisor HelloWallet, for instance, in mid-2014, and plans to expand its reach beyond 401(k) plans. “HelloWallet was mainly a workplace product,” said Tricia Rothschild, Morningstar’s head of global advisory solutions and a speaker at the conference. “But we’ll be bringing it out of the workplace and into the broader retail market in the next year or so.”

In 2014, Morningstar also acquired account aggregation tool, ByAllAccounts. Last fall, 2015, it bought Sheryl Rowling’s tax-rebalancing software, Total Rebalance Expert (tRx). Rothschild said Morningstar will be partnering a ByAllAccounts partner, WealthAccess, which provides digital client interfaces. Morningstar also has a relationship with Sustainalytics, a Europe-based firm that which assigns ratings to funds on the basis of their sensitivity to the environmental, social and governance issues.

Rothschild described the next-gen RIA’s role as more data-hub for clients than investment guru. “It’s not your data or my data; it’s the client’s data, and the client has a right to data that’s current, portable, secure, and rich with insight,” she said. “Job One is to make sure the data flows and meets the client’s needs. Job Two is to create an open information ecosystem that’s not vertically integrated.” Within this framework, she said, the advisor’s proper role is to “provide context, overcome emotional hurdles, and to motivate clients to act when necessary.”    

Amazon as financial planner?

Bob Curtis, founder of MoneyGuidePro, appeared at the conference to introduce a forthcoming version of his product, G4, and to emphasize the low-friction “on-boarding” strategies that robo-advisors learned from firms like Netflix and Airbnb and transferred to the financial services game.

“The most important contribution of the robo-advisors is that they created a technology bridge to the client,” Curtis said. More than 70% of consumers are afraid to go to a financial advisor, he said, in part because they don’t want to share confidential data. With the robo-advisors, they like the ability to control how much they reveal.

Upstart robo-advisors are not advisors’ biggest threats, in his opinion. The threat to RIAs is more likely to come from big fund companies or banks, he said which already have millions of customers.

“Vanguard is a much bigger competitor for you than the other robo-advisors,” he told the RIAs. Vanguard, traditionally a minimalist with a do-it-yourself client base, now offers more phone assistance from certified financial planners than in the past, in addition to assistance from trained call center operators.

“And what happens if the banks get good at planning?” he asked. “It’s starting. They see the stress on their business models. Big firms are coming to us for new products, and now your clients have the banks pursuing them.” [At this point, a small, buzzing propeller-driven drone hovered toward Curtis, who retrieved a paper scroll that was attached to it.] “It’s a message from Amazon,” he joked. “Amazon isn’t doing financial advice yet, but there’s nothing stopping them. The idea of Amazon and the big banks getting into financial planning keeps me up at night.”   

Coming to a screen near you

The general consensus on the future of financial planning at T3 seemed to be something like this: Clients will want to access all of their financial information on the screens of their smartphones. Advisors will ask some clients to input essential information about themselves through these portals. They will be able to upload images of important documents to a lockbox via their portals, which will be as personalized and almost as image-rich as a Facebook page. And, to an unprecedented extent, they will build their own plans.

“You can let the client do the plan entirely on their own, and then review it for them,” said Kevin Krull, president of MoneyGuidePro.

An ability to scale is becoming essential, he said, because the typical advisor will need four times as more customers than they now have to earn the same income. Unprecedented fee compression is coming, thanks to the anticipated DOL fiduciary rule and competition from large institutions. Advisors will need to shift their attention from numbers to clients, and to adopt goal-based instead of performance-based planning styles. Metrics will highlight progress toward client goals, not just performance.

That may not be easy, because the two are hard to separate. One of the speakers noted that when markets go down and clients need to spend less, advisors usually tell them to eliminate goals on their ‘wish list,’ and to leave items on their ‘necessity’ list alone. That’s apparently a mistake. “Don’t cut the wishes first,” Krull said. “Clients want you to show them how they can still get their wishes.” Good luck with that.

© 2016  RIJ Publishing LLC. All rights reserved.

What’s Holding Back the World Economy?

Seven years after the global financial crisis erupted in 2008, the world economy continued to stumble in 2015. According to the United Nations’ report World Economic Situation and Prospects 2016, average growth rate in developed economies has declined by more than 54% since the crisis. An estimated 44 million people are unemployed in developed countries, about 12 million more than in 2007, while inflation has reached its lowest level since the crisis.

More worryingly, advanced countries’ growth rates have also become more volatile. This is surprising, because, as developed economies with fully open capital accounts, they should have benefited from the free flow of capital and international risk sharing – and thus experienced little macroeconomic volatility. Furthermore, social transfers, including unemployment benefits, should have allowed households to stabilize their consumption.

But the dominant policies during the post-crisis period – fiscal retrenchment and quantitative easing (QE) by major central banks – have offered little support to stimulate household consumption, investment, and growth. On the contrary, they have tended to make matters worse.

In the US, quantitative easing did not boost consumption and investment partly because most of the additional liquidity returned to central banks’ coffers in the form of excess reserves. The Financial Services Regulatory Relief Act of 2006, which authorized the Federal Reserve to pay interest on required and excess reserves, thus undermined the key objective of QE.

Indeed, with the US financial sector on the brink of collapse, the Emergency Economic Stabilization Act of 2008 moved up the effective date for offering interest on reserves by three years, to October 1, 2008. As a result, excess reserves held at the Fed soared, from an average of $200 billion during 2000-2008 to $1.6 trillion during 2009-2015. Financial institutions chose to keep their money with the Fed instead of lending to the real economy, earning nearly $30 billion – completely risk-free – during the last five years.

This amounts to a generous – and largely hidden – subsidy from the Fed to the financial sector. And, as a consequence of the Fed’s interest-rate hike last month, the subsidy will increase by $13 billion this year.

Perverse incentives are only one reason that many of the hoped-for benefits of low interest rates did not materialize. Given that QE managed to sustain near-zero interest rates for almost seven years, it should have encouraged governments in developed countries to borrow and invest in infrastructure, education, and social sectors. Increasing social transfers during the post-crisis period would have boosted aggregate demand and smoothed out consumption patterns.

Moreover, the UN report clearly shows that, throughout the developed world, private investment did not grow as one might have expected, given ultra-low interest rates. In 17 of the 20 largest developed economies, investment growth remained lower during the post-2008 period than in the years prior to the crisis; five experienced a decline in investment during 2010-2015.

Globally, debt securities issued by non-financial corporations – which are supposed to undertake fixed investments – increased significantly during the same period. Consistent with other evidence, this implies that many non-financial corporations borrowed, taking advantage of the low interest rates. But, rather than investing, they used the borrowed money to buy back their own equities or purchase other financial assets. QE thus stimulated sharp increases in leverage, market capitalization, and financial-sector profitability.

But, again, none of this was of much help to the real economy. Clearly, keeping interest rates at the near zero level does not necessarily lead to higher levels of credit or investment. When banks are given the freedom to choose, they choose riskless profit or even financial speculation over lending that would support the broader objective of economic growth.

By contrast, when the World Bank or the International Monetary Fund lends cheap money to developing countries, it imposes conditions on what they can do with it. To have the desired effect, QE should have been accompanied not only by official efforts to restore impaired lending channels (especially those directed at small- and medium-size enterprises), but also by specific lending targets for banks. Instead of effectively encouraging banks not to lend, the Fed should have been penalizing banks for holding excess reserves.

While ultra-low interest rates yielded few benefits for developed countries, they imposed significant costs on developing and emerging-market economies. An unintended, but not unexpected, consequence of monetary easing has been sharp increases in cross-border capital flows. Total capital inflows to developing countries increased from about $20 billion in 2008 to over $600 billion in 2010.

At the time, many emerging markets had a hard time managing the sudden surge of capital flows. Very little of it went to fixed investment. In fact, investment growth in developing countries slowed significantly during the post crisis period. This year, developing countries, taken together, are expected to record their first net capital outflow – totaling $615 billion – since 2006.

Neither monetary policy nor the financial sector is doing what it’s supposed to do. It appears that the flood of liquidity has disproportionately gone toward creating financial wealth and inflating asset bubbles, rather than strengthening the real economy. Despite sharp declines in equity prices worldwide, market capitalization as a share of world GDP remains high. The risk of another financial crisis cannot be ignored.

There are other policies that hold out the promise of restoring sustainable and inclusive growth. These begin with rewriting the rules of the market economy to ensure greater equality, more long-term thinking, and reining in the financial market with effective regulation and appropriate incentive structures.

But large increases in public investment in infrastructure, education, and technology will also be needed. These will have to be financed, at least in part, by the imposition of environmental taxes, including carbon taxes, and taxes on the monopoly and other rents that have become pervasive in the market economy – and contribute enormously to inequality and slow growth.

© 2016 Project-Syndicate.  

The Prodigal Daughter (and the Annuity)

Would it make sense to use a life annuity to protect an old woman’s income and prevent her feckless daughter and granddaughter from consuming her $2 million estate—and endangering a son’s inheritance?  

As we hiked along a snow-and-ice encrusted trail through a state park last week, an advisor-friend told me about a dilemma that one of his clients faced. She was 88 years old, in relatively good health, and had recently paid $500,000 for a sunny unit in an assisted living facility in Florida. (At her death, the facility would buy back the unit from her heirs for the same price). The facility charged an additional $6,000 a month for meals, housekeeping and support.

The widow of a successful attorney, the woman was fairly well fixed. There was $250,000 in an IRA and roughly $1.5 million in a revocable trust. The trust’s primary beneficiaries were her 56-year-old son and 51-year-old daughter. Her son served as trustee. The money was invested in a diverse mix of domestic and international equity ETFs and bond funds.

There was just one problem. To put it bluntly, the daughter was spending her mother’s money at an alarming rate.  Divorced from a man who had had a nervous breakdown and lost his business, the daughter depended on her mother for income. In addition, her daughter, a 23-year-old unable to work because of an autoimmune disease of unknown origin, was receiving $3,000 a month to cover her living expenses. 

The mother was unable to say no to her daughter’s requests for money, and the son had been disbursing the money from the trust accordingly. But now the son was worried. If his mother lived long enough and if his sister and niece continued to spend at their current rate, his inheritance might be paltry. 

“Sounds messy, but not uncommon,” I said. He had called me because he thought he might solve their problem by recommending an immediate income annuity for the mother. The annuity would protect the income she required for life. For a $500,000 premium, he said, he could buy a life-only contract paying $83,000 a year. Did that make sense? [The quote is from memory, so please don’t hold me to it.]

The purchase of an annuity often calls for a serious family decision. Here was a case where a serious family decision seemed to call for an annuity. As the advisor saw it, the $250,000 IRA and $250,000 from the trust could go into the annuity. Then, after an additional $250,000 was set aside for the mother’s unexpected needs, a fair one-time payment of $500,000 could be made to the daughter, giving her responsibility for managing the money for herself and the ailing granddaughter. The son would receive the remaining $500,000, and the two siblings would share the reimbursement of the $500,000 from the assisted living facility equally.

This was his plan, but it was still fluid. My advisor friend, who charges by the hour, would gain nothing from an annuity purchase nor lose any fees from “annuicide.” So compensation was not an issue. But he found himself a bit bewildered by all the contract options, and needed my help sorting them out.

We debated the pros and cons of various strategies for an hour or two. Would a life annuity make more or less sense than a period certain contract with a cash refund? What if the elderly woman were hit by a jitney while crossing Collins Avenue in Miami Beach? But wouldn’t the son be drawn to the larger rate of implied return offered by the life-only annuity? (The woman’s life expectancy was about five years.)

I could see that analysis paralysis, a common side effect of the annuity purchase process, was eroding his original enthusiasm for the guaranteed solution. I tried to think of something concrete, some sort of heuristic, to prevent him from retreating into the comfort zone of a balanced investment solution. It was like seeing someone bitten by a viper and trying to think of an antidote in time to save his life.

Finally, I suggested that, instead of picking a target premium and comparing payouts from different types of contracts, it might be more useful to pick a target payout and then compare the prices of different types of contracts. He and his client could eyeball the prices and—using the common sense that most people use when weighing the purchases of vacation insurance or appliance insurance—decide if the peace of mind of a refund seemed worth the higher price.

That notion didn’t seem to galvanize him, so I tried something else. “Look,” I said. “Don’t agonize about a difference of a few tens of thousands of dollars. A person should buy an annuity to solve a problem, not to make a financial bet. You buy an annuity to take certain kinds of risk off the table. And this annuity can stop the family from drifting and bring some clarity to the situation. Isn’t that what they want?” He didn’t reply, but after we had scraped the mud off our shoes, climbed into his Subaru, and started driving back toward the city, I thought I could see the serum working.

© 2016 RIJ Publishing LLC. All rights reserved.    

New fintech solutions from ASI, BondView and Envestnet

A new white-label robo-advisory platform, ASI Digital Advisor, was introduced this week by Advisor Software Inc., which said advisors can use the platform “to quickly enter the automated digital advice marketplace.”

In a release, ASI described its Digital Advisor as “a complete solution for on-boarding and managing investment advice clients” that includes a lead-generation component (deployable from the advisory firm’s existing website) and a “mobile-responsive investor portal” accessible from any web-enabled device. 

The new tool is built on the ASI Wealth Management Cloud platform. ASI used APIs to build it in “modular fashion” for flexibility and scalability. APIs, or Application Program Interfaces, are replacing EDI (Electronic Data Interface) for real-time data transfer between devices.  

Advisory firms that use ASI Digital Advisor can customize the interface with their own brands, their own investment options, and either a goal-based or risk-based approach to model selection.

In a goal-based configuration, clients can create multiple financial goals, track goal progress, and run Monte Carlo simulations on their portfolios. ASI Digital Advisor’s administrative features allow firms to create any number of model portfolios and to monitor and rebalance any number of accounts. 

Advisors can also customize client-profiling questionnaires and scoring rules, and use their own capital market assumptions. ASI Digital Advisor’s integration with DocuSign enables clients and advisors to e-sign account-opening paperwork.

“With this release, we believe we have set new standards for usability, scalability and flexibility in the digital advice space,” said Andrew Rudd, Chairman and CEO of Advisor Software Inc.

Advisor Software, Inc. (ASI) provides wealth management cloud platforms for financial advisors and institutions. ASI’s products address advisors’ functional needs, including Planning, Proposal Generation, Portfolio Construction, Rebalancing, and Investment Analytics. The company’s solutions serve asset management firms, broker-dealers, banks, insurance companies, online brokerages, custodians and other providers of investment services and products.  

BondView

BondView, a provider of municipal bond information and analytics, today launched the first fintech platform that analyzes municipal bond funds and their underlying bond holdings within one application.

“Now it’s easy to drill down into the details of every municipal bond fund and access previously unavailable data,” said a BondView release. The firm’s platform tracks

more than 2,000 municipal bond funds and two million individual municipal bonds from over 50,000 issuers.

Municipal bond fund managers and investors will be able to use the service to identify funds “that could outperform their peers and avoid those with troubled holdings,” according to BondView CEO Robert Kane.

BondView’s suite of applications allows:

  • Real-time trading data on the holdings of 2,000+ municipal bond funds
  • Peer group evaluation tools to compare funds with members of their peer groups at the holdings, income, liquidity and volatility levels.
  • Stress testing, monitoring and other analytics on funds and individual holdings.
  • Alerts to fund portfolio changes and investment trends.
  • The ability to cross-reference fund ownership with the universe of muni bonds.
  • Institutional ownership on individual muni bonds.
  • Detailed fund maturity schedule on all bond holdings and alerts for when new cash is available.
  • Analysis of fund holdings overlap to assess diversification and concentration across portfolios.

To access BondView Fund product free beta release, go to https://bondview.com/bond-funds

BondView offers real-time data, including estimated prices, alerts, ratings, financial filings, rich/cheap analysis, stress-testing and trade history on more than two million municipal bonds from more than 50,000 issuers.

Envestnet and TDAmeritrade

Envestnet | Tamarac has implemented the first phase of integration between its web-based Advisor Xi suite for independent RIAs and TD Ameritrade Institutional’s the Veo custodial platform.

The integration allows advisors to obtain real-time account and cash balances, addresses, beneficiaries, contacts, account alerts, trade warnings, and cost basis data for realized gains from TD Ameritrade Institutional, according to Stuart DePina, Group President of Envestnet | Tamarac.   

Later this year, Tamarac expects to complete additional integrations with the Veo platform to facilitate the straight-through processing of trades within the Advisor Rebalancing application. That will enable advisors to use TD Ameritrade Institutional as their data source for Holdings, Unrealized Gains/Losses, and Transactions reports in Advisor View.

© 2016 RIJ Publishing LLC. All rights reserved.

New York City eyes public savings plan for private sector workers

Noting that fewer than half of New Yorkers have access to a retirement savings plan, New York Mayor Bill de Blasio proposed a city-sponsored retirement savings program for private-sector workers in his State of the City address on February 4.

The mayor said that he, New York City Council Speaker Melissa Mark-Viverito and Public Advocate Letitia James will draft legislation that would enable any New Yorker working at a business with 10 or more employees to automatically enroll in an employee-funded retirement plan.

Contributions would be made exclusively by employees and their accounts would be portable from job to job. The city would create a board to oversee and manage the program.

“This proposal places New York at the vanguard of the many cities, counties, and states that are working to secure a brighter retirement for their citizens,” said Hank Kim, Esq., executive director and counsel of NCPERS.

© 2016 RIJ Publishing LLC. All rights reserved. 

401(k) and IRA balances reflect market volatility: Fidelity

Fidelity Investments reported this week that released its clients’ overall 401(k) and Individual Retirement Account (IRA) 401(k) and IRA account balances increased in Q4 2015, but were down year over year. After decreasing in Q3 2015 due to market volatility, average retirement account balances recovered in Q4 2015, but were still below the averages from Q4 2014.

The average IRA contribution was $1,500 in Q4 2015, up from $1,260 in Q3 but down from $1,660 in Q4 2014. The average total 401(k) contribution, which includes both employee and employer contributions, was $2,540 in Q4 2015, down slightly from $2,610 in Q3 but up from $2,440 in Q4 2014. During 2015, employers contributed an average of $3,610 to 401(k) accounts through profit sharing or company match.

As of the end of Q4 2015, 25% of total 401(k) assets on Fidelity’s platform were held in target date funds, and 67% of Fidelity 401(k) account holders had at least some of their savings in a target date fund. Among Millennials, 63% had all of their retirement assets in a target date fund at the end of Q4. The use of Fidelity’s professionally managed account portfolios continued to increase in 2015, growing by 19% since 2014.

In early January, Fidelity responded to six million customer contacts in a single day, one of the busiest days on record. Shareholder anxiety related to market volatility generated the high call volume, Fidelity said in a release.

© 2016 RIJ Publishing LLC. All rights reserved.

‘American Savings Account’ proposed

Legislation that would create for certain private sector workers a portable retirement savings arrangement to be known as the “American Savings Account” (ASA) has been introduced by Sen. Jeff Merkley (D-OR). 

The “American Savings Account Act of 2016” calls for arrangements similar to IRA-based plans and to the federal Thrift Savings Plan (TSP) for governmental employees. 

The bill is aimed at employees of businesses that offer no retirement plan and at self-employed individuals. It has provisions similar in some ways to automatic IRA programs that have been proposed at the federal level, and—owing to the absence of congressional action—are now being pursued by a number of states.

Following is a brief summary of the ASA Act provisions:

  • Part-time and full-time workers of firms not offering a defined contribution retirement plan would be automatically enrolled.
  • The self-employed could affirmatively choose to enroll.
  • Independent contractors could request that those who employ them withhold and remit ASA contributions on their behalf.
  • Church employers could optionally elect to enroll their employees, but would not be required to.
  • Employees covered by a collective bargaining agreement (union employees) would not be covered as “qualified employees.”
  • Contributions would begin at 3%, and can be maintained, increased, reduced, or halted.
  • Amounts automatically withheld could be recovered as permissible withdrawals, up to the employee’s tax filing deadline.
  • Maximum annual contributions, which would be excludable from taxable income, would equal the deferral limit that applies to 401(k), 403(b), governmental 457(b), and TSP plans (currently $18,000).
  • Annual automatic increases of 0.5% of compensation would apply to employees with affirmative deferral rates less than 5 percent, and employee can opt out.
  • Contributions would be made to a Traditional IRA (similar in concept to SEP or SAR-SEP contributions made to Traditional IRAs), and would be eligible for conversion to Roth IRAs.
  • The contribution deadline would be no less frequent than monthly and no later than 30 days after the end of a pay period.
  • ASAs could accept rollovers of any amount eligible to be rolled over to a Traditional or (if converted) a Roth IRA.
  • Distributions from ASAs would not be aggregated with the taxpayer’s Traditional or Roth IRAs for purposes of basis recovery or ordering rules.
  • Investments offered would mirror those of the federal TSP program (the default investment being an age-appropriate target date fund).
  • A participant’s spouse would be the account beneficiary in the absence of a spousal waiver.
  • States sponsoring certain retirement plans for private sector workers could prohibit their state employers’ participation in the ASA program.
  • ASA contributions would be authorized as of January 1 of the third calendar year following the year of enactment.
  • An ASA Board of Directors would establish policies for the investment and management of the fund to which contributions would be made.

The bill’s introduction coincided with the Senate Finance Committee hearing on enhancing access to retirement saving options, and with retirement initiatives in President Obama’s 2017 fiscal year budget proposal.

© 2016 RIJ Publishing LLC. All rights reserved.

Road to “ruin” should be less traveled: Milevsky

In a forthcoming “Viewpoint” column in the Financial Analysts Journal, Moshe Milvesky reconsiders his former positions on using probabilities of ruin to evaluate a retirement income strategy and offers a more direct way for retirement advisors to talk to clients about reducing the risk of ever running out of money.

In the opinion piece, “It’s Time to Retire Ruin (Probabilities),” the York University finance professor and well-known author revisits and questions the belief, now embedded in the algorithms of numerous retirement planning software products, that it’s possible to establish a precise probability that someone will run out of money in retirement, or that any investment plan in retirement that minimizes that number must be good.

After apologizing for helping popularize that belief, Milevsky points out that “this approach can get out of hand and is subject to abuse.” One problem is that, if many different investment strategies can produce the same probability of ruin—and they may—how does an advisor or a client choose among those strategies?

Assigning a probability of ruin at all, Milevsky says (in one of the metaphors that are trademarks of both his popular and scholarly writing), assumes that clients won’t take measures to avoid it, but “continue driving blindly at the same speed until they run out of gas in the middle of the desert.”

That can happen, but Milevsky doesn’t expect it to be the norm. “The presumption that a client will adhere to a deterministic spending schedule, wake up one morning, go to an ATM, and discover that the ‘money process’ has reached zero is silly and naïve,” writes the author of The Calculus of Retirement, Are You a Stock or a Bond?, and the recent King William’s Tontine: Why the Retirement Annuity of the Future Should Resemble its Past (Cambridge, 2015).   

Milevsky’s articles typically cite colorful anecdotes or legends from financial history, and this one is true to form. To illustrate the point that our planning tools themselves can be biased, he describes the Harvard professor whose students threw dice thousands of times and found that the numbers five and six came up surprisingly often. Instead of heading for the craps tables in Las Vegas, they wisely examined the dice and found that the extra dimples on those sides had skewed the distribution. They had neglected to use professional-grade dice.

Instead of relying on high probabilities of ruin to jolt clients into an awareness of longevity risk (or relying on low probabilities of ruin to lull them into complacency), Milevsky suggests using an equation, populated with numbers that the clients themselves provide, “to introduce the idea of longevity of the portfolio (his italics).” 

The equation was created by Leonardo Fibonacci (1170-1250). It can be used to show how many years a sum of money will last if subjected to a constant rate of withdrawal and a constant rate of growth. Advisors can plug in best-estimates of a client’s withdrawal amount (not percentage), his or her estimated number of years of life expectancy (based on health and average life expectancy at retirement), current savings, and estimated future real investment returns, after fees, taxes and inflation. 

The equation generates the number of years that the client’s savings can be expected to last. If it’s less than the expected life expectancy, the client hopefully hears a wake-up call. “It’s a conversation starter,” Milevsky writes. “The doctor gave you 20 years of longevity, and your portfolio has only 14 years of longevity. There is a mismatch. Tell your client to do something about it.”

In short, Why beat around the bush with probabilities? They are always questionable and can easily be massaged into any shape that makes the client or advisor happy. Better to bring clients face to face with their dilemmas, and show them why they need to consider strategies—working longer, delaying Social Security, reducing expenses, buying annuities or getting a reverse mortgage—that will help their savings last longer.

Of course, not all advisors will prefer this “tough love” approach to retirement planning. Those who have predetermined goals (either self-imposed or externally-imposed) may continue to embrace the use of probabilities. A low probability of ruin can help justify almost any strategy.   

© 2016 RIJ Publishing LLC. All rights reserved.