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Scaling Retirement Solutions

Posted on March 3, 2016 by Kerry Pechter -

The term “mass customization” was in vogue 25 or 30 years ago, when U.S. manufacturers wanted to learn how to satisfy every customer’s desires while achieving economies of scale and raising quality levels to six-Sigma. They called it “agile manufacturing.”

Given the recent advent of robo-advice and “fintech,” the chief of a European financial think tank believes that it’s time to mass-customize retirement income solutions. His name is Lionel Martellini, and he’s presenting on that topic at a conference on Retirement Investing to be held at Oxford University next September.

The 48-year-old Martellini directs the EDHEC Risk Institute, a research arm of the prestigious international business school, EDHEC. Recently, he published an editorial and a March 2015 research report that should interest anybody who cares about retirement income planning or is affected by the robo-advice wave or both.

The two documents, respectively, have long titles: “Mass Customization versus Mass Production: How an Industrial Revolution is About to Take Place in Money Management and Why It Involves a Shift from Investment Products to Investment Solutions,” and “Introducing a Comprehensive Investment Framework for Goals-Based Wealth Management.”

In a recent conversation, Martellini (right) told RIJ, “We need to move to solutions, not products, and the client’s problem should always serve as the starting point for the discussion. We can already create custom solutions for pension funds or high net worth individuals, so the real challenge is to do customization on a large scale.” Lionel Martellini

Broadly speaking, Martellini advocates a two-bucket solution made up of a low-risk income-producing (“replicating”) portfolio, perhaps of TIPs, and a low-cost risky (“dynamic”) portfolio, perhaps of smart-beta exchange-traded funds, linked by rebalancing or hedging strategies that respond to changing conditions.

“The financial engineering is the easy part,” he said. “The hard question is, how do you communicate with the client? We’re starting an initiative to put together an algorithm for the end client, doing it in a nice communication way. Ultimately it’s an educational challenge.”

Martellini’s ideas about retirement saving and investing will sound familiar to anyone acquainted with goal-based investing, the household balance sheet approach, or the floor-and-upside principle. They also resemble the thinking that has gone into institutional solutions like Financial Engines’ Income Plus managed account program, and to Robert Merton’s ideas, which drive Dimensional Fund Advisors’ target-date funds.

But he recognizes that nobody has figured out an optimal way for individual advisors to deliver scalable solutions. “The missing component is in the distribution,” he told RIJ. “How do we take the clients’ inputs and turn them into solutions? That’s the feedback process. There’s a lot of inefficiency in this area now. The investment advisor has no tools to help people understand tradeoffs, you need a goal-based investing reporting tool.” He’s looking to robo-advisors to fill part of the gap, adding, “We can only hope that fintech initiatives are providing a strong push in the sense of reducing cost of distribution.”

Looking for upside

Martellini approaches the income challenge with special urgency, because low interest rates, risk aversion, and pressure on social security programs is a growing problem for retirement savers and retirees. “The whole French population is buying French bonds. They’re not generating any upside. The benefits coming from pay-as-you-go will decrease,” he said.

There was a time when many people might have described the variable annuity with lifetime income benefit as the perfect way to scale the retirement income challenge, because it combined all the necessary elements—a guaranteed income plus exposure to upside—in a single tidy package. Today, there are some who might say the same about the fixed indexed annuity with a living benefit. But he thinks those solutions, while profitable for manufacturers, are too expensive for mass consumers.

Income for life can be generated less expensively and almost as safely without an annuity, he believes. “You can basically replicate the payout by using tradable fixed income securities. During accumulation, if you’re dynamically trading between a performance-seeking portfolio and a replicating portfolio, you can do it in such a way as to generate a minimum of replacement income,” he told RIJ. That sounds something like the constant-proportion portfolio insurance method in Prudential’s discontinued Highest Daily variable annuity riders.

“You can’t replicate the longevity component, but that’s not a big uncertainty. It’s okay not to worry too much about longevity risk if you take care of the other risks. Later, when people are in decumulation, they can buy income annuities if that makes sense for them. But you’re not buying annuities for them,” Martellini added. Annuities, he implies, makes the complex challenge of mass customization all the more challenging.

If scaling customized retirement planning solutions is the general goal, it has two dimensions, he points out. There’s a “cross-sectional” dimension that addresses the needs of different investors entering at the same time and a “time-series” dimension that addresses the needs of different investors entering at different points in time.”

Some might argue that target date funds can already address those dimensions and that they are effectively distributed through retirement plans. But he and his colleagues don’t believe that TDFs have adequately solved the retirement savings problem.

Case-studies

The best illustrations of Martellini’s approach can be found in the hypothetical case studies that are described in the March 2015 report, “Introducing a Comprehensive Investment Framework for Goals-Based Wealth Management,” which he co-wrote with an EDHEC Risk Institute colleague and two members of the Investment Analytics Group at Merrill Lynch Wealth Management.

The report describes three hypothetical clients: an executive and spouse with $4.5 million who are transitioning into retirement and want to maintain a wealth level of at least $3 million; a just-retired couple, both age 67, with $2.75 million, who have no specific bequest motive and want to prepare for long-term care contingencies; a 45-year-old with $940,000 in investments and a $250,000 mortgage on a $300,000 home.

The EDHEC team approached each case by dividing the client’s assets into a personal bucket (home and ready cash), a market bucket (liquid investments), and an aspirational bucket of long-term illiquid assets. They also listed each client’s goals, noted the time-horizon for the achievement of those goals, and calculated the probability of achieving those goals with existing assets.

The complexity of the solutions to these cases suggests that it would be hard to mass-produce them. The EDHEC team admits that it would be impractical for information systems to devise a custom solution for every client. They are not the first to observe that while it might be relatively easy to mass-customize client’s investment strategies using existing theories, it will be harder to scale solutions that enable clients, or identifiable types of clients, to achieve individualized goals.

To even come close to managing the risks that endanger those goals, the solutions will have to be highly dynamic. That will require new and faster fintech, which Martellini et al describe as “an information technology system that can effectively process and update the key inputs of the framework at each point in time for each investor.” Stay tuned.

The Old Folks are Alright (More or Less)

Posted on March 3, 2016 by Kerry Pechter -

You don’t hear much about Americans who retire with tiny nest eggs and who rely mostly on Social Security in their old age. But, according to focus groups and interviews conducted for the Society of Actuaries, working class retirees in their mid-70s and older seem to be muddling through with little complaint.

“We don’t have a lot of money, but we never needed it,” one man in Dallas, Texas told an interviewer. “We never lived above our needs I guess. I take a couple of trips every year and my wife goes up and visits her brothers. We do basically what we want. We are happy.”

At a time when economists lament the inadequacy of savings among pre-retirees, the SoA’s findings, released in January under the title, “Post-Retirement Experiences of Individuals Retired 15 Years or More: A Report on 12 Focus Groups and 15 In-depth Interviews in the U.S. and Canada,” was encouraging.

In those in-depth interviews, retirees’ most common financial headaches were sudden expenses due to a leaky roof or expired furnace, to a grown child’s emergency or to a sudden out-of-pocket medical expense. And the specter of having to pay for long-term care costs seemed to hang over their heads (Americans, not Canadians).

“That I wouldn’t want to put on my children, and that is where my house will come into play, if they need to do something for me,” said one woman in Chicago. “Whether they use a reverse mortgage and bring someone in to take care of me in the house, that house is my nest egg at the very last, when there is a Hail Mary that has to be thrown somewhere. I mean I hope I fall off a cliff.”

The statements by middle- or lower-middle-class retirees confirmed certain truisms about retirement. Even though planning patently helps, most people do not have a plan for retirement. Most “focused their planning on spending in the first half of retirement. The majority did not have a financial plan when they entered retirement; nor do they have one now that they are in retirement.”

Yet many seem to have financial goals, in their minds if not on paper; they prefer to preserve principal and they often have so-called bequest motives. “Most state their financial plan going forward is to keep their asset levels where they are currently are,” the study said. “Many report that they want to leave something to their children.”

Divorce during retirement, the report makes clear, may be the single biggest threat to financial security. “Divorce is more costly than widowhood, and retirees typically cannot adjust or absorb the cost of divorce,” the report said. “Those who divorce after retirement report losing up to half of their assets or having to sell their home, either because it was part of their settlement or they could no longer afford it. Every retiree in the focus groups who divorced post-retirement reported a financial impact.”

Following are the key findings of the report:

The Society found in 2013 that near-term retirees do little planning and do not have a long-term goal for their assets. They essentially adapt and adjust to major expenses. The Society asked similar questions to longer-term retirees in 2015 and found that long-term retirees in this study for the most part had done the same thing. The strategy of absorbing and adapting seems to have worked reasonably well for both short-term and long-term retirees of the type represented in the focus groups.
Many focus group retirees note that their expenses have changed over the course of their retirement. Many say they pay more attention to what they need and try not to buy frivolous items or spend money lavishly. Most state they are frugal or thrifty.
Very few shocks financially devastate the long-term retirees participating in the focus groups. The expenses that financially devastate these long-term retirees are long-term care, divorce and providing major financial support to children. They report being able to mitigate other expenses with insurance coverage or by absorbing and adapting their spending.
The in-depth interviews conducted with children and spouses of those who need long-term care in an assisted living or skilled nursing facility reveal that this type of care is financially devastating unless that person has long-term care insurance. However, very few say their relative had this coverage, and even among those who did there were still out-of-pocket expenses. Many focus group participants express concern over long-term care costs, but only a small number have long- term care insurance. Most long-term care expenses are not covered by Medicare or the Canadian equivalent, although in the U.S. Medicaid covers substantial long-term care expenses for low-income individuals who have run out of assets.
Divorce in retirement is more financially devastating than widowhood. Divorced participants report losing half of their assets and often say they have to move out of their family home as a result of their divorce. Meanwhile, some widowed participants are better off financially as a result of being widowed. Often widows are living off pension incomes that were designed for two or are able to invest a large sum of money as a result of being widowed, thus making them financially better off as a result of their marital shock. Some lost some income as a result of being widowed but most report that they have adjusted to widowhood.
Two of the most common unexpected financial expenses for these long-term retirees are home maintenance costs and dental expenses. The cost for these items can be large. However, both of these types of costs can be anticipated. Many of these long-term retirees live in their own home so some home maintenance costs should be expected. Dental costs can also be expected as people age and could also be partially planned for in retirement by purchasing dental insurance.
Gifts and loans to family are another big expenditure for long-term retirees participating in the focus groups. Many who give gifts or loans to children do so because a child has a problem. They say that although they sometimes give or lend large sums of money to children they are able to absorb and adapt to these costs. Exceptions are costs associated with recently divorced children with children of their own and children with mental illness.
Very few report a major expense related to health care costs. This finding was expected in Canada but unexpected in the United States. American focus group participants cite Medicare supplemental insurance as the main reason they are able to avoid large health care costs in retirement. The few who report large medical expenses usually do not have a supplemental Medicare policy or fall into a gap in the policy.
Very few of these retirees use a financial advisor. Some say they do not use an advisor because they have lost money with an advisor previously or they cannot find an advisor they trust. Women are more likely than men to report working with a financial advisor than men.

Mission Improbable

Posted on March 3, 2016 by Kerry Pechter -

In the U.S., there are more than a few highly articulate, liberal female advocates for the economic interests of under-paid, under-saved middle and lower-middle class workers. Senator Elizabeth Warren (D-Mass) is perhaps the best known (or, depending on your politics, most notorious).

At the risk of leaving out many worthy people, I’ll mention only a few (in alphabetical order, with specialties): Anna Maria Lusardi (financial literacy), Teresa Ghilarducci (retirement plans), Cindy Hounsell (women), Alicia Munnell (retirement preparedness), and Barbara Roper (consumer protections).

Of this group, Dr. Ghilarducci (right) has been making news lately with a book, How to Retire With Enough Money (Workman, 2015), a recent New York Times op-ed piece and, this week, a report co-authored with Hamilton “Tony” James of The Blackstone Group called “A Comprehensive Plan to Confront the Retirement Savings Crisis.” Teresa Ghilarducci

As I understand her proposal, Ghilarducci, an economist who runs the Schwartz Center for Economic Policy Analysis at the New School in Manhattan, proposes a mandatory defined contribution savings plan with individual accounts, a choice of pension-style asset managers, and delivering a life annuity at retirement.

According to the report description of her Guaranteed Retirement Account:

Each account would be funded by an annual contribution of 3% of income (half from employer, half from participant).
The required contribution would be applied to income up to $250,000 a year.
Those earning under $40,000 a year would have their contributions offset by a $600 tax credit.
To smooth investment outcomes and reduce sequence risk, the U.S. government would guarantee a minimum return of 2% on each participant’s contributions.
Like Social Security, invested assets would be available only as annuities, not as lump sums or prior to the retirement date.
Contributions would be invested and managed by a variety of private asset managers using defined benefit pension principles and taking advantage of the higher returns possible through alternative investments.
Survivors would receive a death benefit during the accumulation period but not during the income period.
The plan would replace the voluntary system of ERISA-regulated 401(k) plans in the U.S., eliminate the $100 billion+ annual tax expenditure for retirement savings, eliminate the overhead of DC plans for plan sponsors, and use the savings to pay for the tax credit for those earning under $40,000 and the employer contribution.
The Social Security Administration would administer the payout of the annuity.

Dr. Ghilarducci believes that this type of plan is needed because, in her opinion, the current DC system doesn’t adequately fill the retirement security vacuum left by the slow death of the defined benefit system, doesn’t reach more than half of full-time U.S. workers at any given time, and whose tax benefits are highly regressive.

In private, many people agree that the status quo is a mess—either because of its needless complexities, inconsistencies and inequities or because of the ambiguities of its regulation by the Department of Labor, or all of the above. One of the 401(k)’s principal private-sector spokespersons once joked publicly that ERISA stands not for Employee Retirement Income Security Administration but for “Every Ridiculous Idea Since Adam.”

Jokes and complaints notwithstanding, the many people whose livelihoods depend on the DC system (and its byzantine nature) are sure to defend it to their deaths. The opposition to the DOL’s fiduciary proposal would be nothing compared with the opposition to ending the DC system.

I agree with Dr. Ghilarducci that the DC system has serious shortcomings. The popularity of Roth conversions and Roth 401(k)s seems to me like a strong hint that tax-deferral creates more problems than it solves. But you have to pick your battles. I would rather see political energies spent on reforming Social Security and removing the cloud over its future. If we wait much longer to fix the proverbial third rail of American politics, it might be too late.

ETFs suffer outflows for first time in over two years

Posted on March 3, 2016 by Editorial Staff -

Highlights of the February 2016 issue of The Cerulli Edge–U.S. Monthly Product Trends Edition include:

Mutual fund assets sank for the third straight month, slipping 4.7% to $11.3 trillion in January. Flows were net negative ($12 billion) for the month.
ETFs bled $1.8 billion in January flows. Combined with poor market returns, that led to a 4.7% drop in assets. The vehicle still maintained more than $2 trillion in total assets, however.
Institutional investors have seen value in liquid alternative products given their favorable fee structures, increased transparency, and greater liquidity. Many of these benefits are not available in traditional private placement or LLC structures.
Alternatives are still under-utilized across client types. Cerulli data from 2015 illustrates that allocations range from 5% for conservative investors to about 7% for aggressive investors. Almost two-thirds of asset managers cite a lack of knowledge among sales force/employees as at least a moderate challenge to the distribution of liquid alternatives.
Vanguard continued to dominate mutual fund charts. Of the $6.64 trillion in assets managed by the top 10 fund managers as of January 2016, Vanguard managed more than one-third, with $2.34 trillion. Fidelity and American Funds combined for another third. The top 10’s share of the total was 58.5%.
In January 2016, Vanguard’s net inflows were $18.31 billion. That surpassed the combined flow of the next nine mutual fund managers, and more than five times the flow of the second-ranked firm, Dimensional Fund Advisors, at $3.27 billion.

Group annuity risk transfer sales top $14 billion in 2015: LIMRA

Posted on March 3, 2016 by Editorial Staff -

With five plan sponsors reporting jumbo ($1 billion+) buy-outs, the volume of group annuity risk transfer sales rose 54% in 2015, to $14.4 billion, according to LIMRA Secure Retirement Institute’s U.S. Quarterly Group Annuity Risk Transfer Survey.

In the fourth quarter, group annuity risk transfer sales were $5.8 billion or almost 19% lower than the previous year. Total assets of buy-out products increased 10%, to $90 billion at the end of the fourth quarter 2015.

In such deals, a defined benefit pension sponsor transfers all or part of its plan assets and liabilities to a life insurer in exchange for a group annuity contract, thus removing a liability from its balance sheet and reducing the volatility of the funded status. In 2015, the pension risk transfer business was characterized by lots of small deals rather than a couple of jumbo deals. “Companies reported selling more than 300 separate contracts under $100 million,” noted Michael Ericson, LIMRA Secure Retirement Institute analyst.

In the fourth quarter, single premium buy-out sales were $5.6 billion. It was the first time sales exceeded $3 billion in three consecutive quarters (chart). For the year, buy-out products accounted for more than 95% of the total group annuity risk transfer market, totaling $13.6 billion, a 61% increase from 2014. Annual buyout sales have only eclipsed $10 billion one other time (in 2012).

Single-premium buy-in product sales were $7.2 million, down 95% from 2014. To date, only five single-premium buy-in contracts have been sold. “With PBGC premium increases, market volatility and continued low interest rates, employers are becoming more interested in transferring their pension risk to an insurer, said Ericson. “The Institute expects this trend to accelerate in the next few years.”

MassMutual pays $165 million for MetLife’s captive agent force and retail operation

Posted on March 3, 2016 by Editorial Staff -

MassMutual has agreed to acquire MetLife’s U.S. retail advisor force, the MetLife Premier Client Group, a retail distribution operation with more than 40 local sales and advisory operations and approximately 4,000 advisors across the country, for $165 million. The transaction is expected to close in mid-2016.

The two firms announced their discussions around this transaction last week. The transaction follows MetLife’s previously announced plan to pursue the separation of a substantial portion of its U.S. retail segment.

A.M. Best did not change either firm’s financial strength or credit ratings. The ratings agency said in a release that “it views the acquisition favorably, as it brings additional scale to MassMutual’s existing captive distribution sales force and increased opportunities to expand their product portfolio. Following some one-time integration and infrastructure expenses, the acquisition is expected to be accretive to earnings.”

With an expanded distribution network, MassMutual said it is better positioned to become the top individual life insurance—and whole life insurance–provider in the marketplace. The acquisition adds to MassMutual’s existing force of over 5,600 career agents, broadens the company’s geographic reach and expands its product line, according to a release.

As part of the transaction, MassMutual and MetLife also entered into a product development agreement under which MetLife’s U.S. retail business will be the exclusive developer of certain annuity products to be issued by MassMutual.

“This transaction will enable our U.S. Retail business to focus on product manufacturing while also providing a broader distribution network through the partnership with MassMutual,” said Steven A. Kandarian, MetLife Chairman, President and CEO, in a prepared statement.

In addition to MetLife’s retail advisor firms, the transaction includes certain MetLife employees who support the MetLife Premier Client Group; MetLife’s affiliated broker-dealer, MetLife Securities, Inc.; and certain assets associated with the MetLife Premier Client Group, including employee contracts.

On a combined basis, MSI and MassMutual’s existing broker-dealer, MML Investors Services, LLC, will be among the nation’s largest insurance company-owned broker-dealers. Additionally, as part of the agreement, approved MassMutual financial professionals will provide individual life insurance and annuity products through the MetLife PlanSmart Financial Education Series.

Other transaction highlights:

The transaction is expected to close by mid-2016, and is subject to certain closing conditions, including regulatory approval.
The purchase price is not material to MassMutual’s capital and surplus.
Sandler O’Neill + Partners, LP served as financial advisor and Willkie Farr & Gallagher LLP served as legal counsel to MetLife. Barclays Capital, Inc. served as financial advisor and Sutherland Asbill & Brennan LLP served as legal counsel to MassMutual.

Job anemia puts interest rate hikes into doubt: TrimTabs

Posted on March 3, 2016 by Editorial Staff -

Based on real-time income tax withholdings, the U.S. economy added between 55,000 and 85,000 jobs in February, the lowest monthly job growth since July 2013, TrimTabs Investment Research estimates.

“The labor market is not nearly as robust as the conventional wisdom believes,” said David Santschi, chief executive officer of TrimTabs. “Employment growth has been below 200,000 for six consecutive months. Given the weakness in real-time tax data as well as the market volatility early this year, the Fed isn’t likely to raise interest rates again anytime soon.”

TrimTabs reported last week that real growth in withholdings has been decelerating since last autumn and turned negative in February on a year-over-year basis.

TrimTabs’ employment estimates are based on analysis of real-time daily income tax deposits to the U.S. Treasury from the paychecks of the 141 million U.S. workers subject to withholding. Unlike the monthly estimates from the BLS, TrimTabs figures are not subject to revision long after their initial release. TrimTabs uses a range rather than a single figure for its February estimate because the timing of year-end bonus payments can skew the data at this time of year.

Honorable Mention

Posted on March 3, 2016 by Editorial Staff -

Vanguard introduces two high dividend-focused international funds

Vanguard this week introduced its first two dividend-oriented international equity index funds: the Vanguard International High Dividend Yield Index Fund and Vanguard International Dividend Appreciation Index Fund.

The International High Dividend Yield Index Fund will seek to track the FTSE All-World ex-US High Dividend Yield Index, a benchmark of more than 800 of the highest yielding large- and mid-cap developed and emerging markets securities.

Vanguard International Dividend Appreciation Index Fund seeks to track the Nasdaq International Dividend Achievers Select Index, which comprises more than 200 all-cap developed and emerging markets stocks with a track record of increasing annual dividend payments.

The expense ratio of Investor-class shares ($3,000 minimum) for the International High Dividend Yield Index Fund is 40 basis points and 35 basis points for the International Dividend Appreciation Index Fund. Expense ratios for Admiral-class shares ($10,000 minimum) is 30 basis points and 25 basis points, respectively. Expenses for ETFs (no minimum investment) are the same as for Admiral-class shares.

The two new funds complement Vanguard’s existing domestic dividend-oriented index funds: The $16 billion Vanguard High Dividend Yield Index Fund and the $23 billion Vanguard Dividend Appreciation Index Fund.

Of Vanguard’s record $236 billion in cash flow in 2015, more than 90% was directed to an index product, according to a Vanguard release. Vanguard introduced its first ETF in 2001 and now manages more than $507 billion in global ETF assets. Investors invested more than $82 billion to Vanguard ETFs in 2015. The firm’s ETFs include the $54 billion Vanguard Total Stock Market ETF, $40 billion Vanguard S&P 500 ETF and $32 billion Vanguard FTSE Emerging Markets ETF.

Morningstar to hold free webcast on range of financial topics

In a free webcast, Morningstar will hold an Individual Investor Conference at the company’s individual investor on April 2, 2016 at 9 a.m. Central Time.

The company’s analysts and investment specialists will discuss the current economic landscape; retirement security (including the ‘bucket approach’ to retirement income); fixed-income; and tax-efficient investing.

Conference schedule:

9 a.m. “Taking the Market’s Temperature.” Robert Johnson, CFA, Morningstar’s director of economic analysis, Michael Fredericks, managing director, portfolio manager, and head of U.S. retail asset allocation for BlackRock’s Portfolio Strategies group, and Northern Trust Chief Economist Carl Tannenbaum will discuss the current economic and market environment.
10 a.m. “Securing Your Retirement.” Christine Benz, director of personal finance, Morningstar, and Harold Evensky, financial planner and chairman, Evensky & Katz Wealth Management, will discuss the key pillars of retirement security for investors at every life stage—from early-career savers to those already in retirement.
11 a.m. “What’s Next for My Bonds?” Sarah Bush, Morningstar’s director of manager research for fixed-income strategies, Dario Castagna, CFA, associate portfolio manager for Morningstar’s Investment Management group, and Mary Ellen Stanek, CFA, managing director and chief investment officer for Baird Advisors and president of Baird Funds, will discuss the effect of rising interest rates on core bonds, the outlook for high-yield and international bonds, and the merits of active and passive fixed-income funds.
12 p.m. “What It Takes to Make Our Picks List.” In this video, viewers can learn how Morningstar vets stocks and funds before recommending them and how Morningstar’s proprietary ratings and research can help investors identify the best of the best.
12:30 p.m. “The Picks Panel: Best Ideas from Morningstar Analysts.” Morningstar’s Elizabeth Collins, director of equity research, North America; Ben Johnson, director of global ETF research and editor of Morningstar ETFInvestor; and Russ Kinnel, director of manager research and editor of Morningstar FundInvestor will discuss some of Morningstar’s best stock and fund ideas for long-term investors.
1:30 p.m. “Portfolio Planning: Make a Lean, Mean, Tax-Efficient Machine.”Benz will offer guidance on crafting a tax efficient portfolio tax, including how to maximize tax shelters, optimize taxable portfolios, find the best tax-smart investments, and build a tax-savvy retirement-drawdown plan.

Register for the free Morningstar Individual Investor Conference at http://www.morningstar.com/conference. Follow the conference conversation on Twitter or with the hashtag #MIIC2016. Speakers will answer questions from participants live during the conference; to submit questions in advance, email [email protected]. Replays of conference sessions will be available on Morningstar.com in the weeks following the event.

PIMCO Tactical Balanced Index Allocation added to two Allianz Life FIAs

The PIMCO Tactical Balanced Index is now an allocation option on the Allianz 360 and Allianz 222 fixed indexed annuity contracts, Allianz Life Insurance Co. of North America reported this week.

The new index manages volatility by dynamically allocating daily between the S&P 500 Index, a bond component comprised of the PIMCO Synthetic Bond Index with a duration overlay, and cash. It is available with annual point-to-point crediting with either a cap on index gains or a spread (index gains beyond a fixed fee spread).

During volatile markets, the PIMCO Tactical Balanced Index reallocates to less-volatile assets. Generally, when equity volatility is low, the balance will shift to equities; when equity volatility is high, the balance will shift to bonds. If the volatility is high in both of those markets, the balance will shift a portion to cash.

To mitigate interest rate risk, the bond component of the PIMCO Tactical Balanced Index uses a “duration overlay.” It adjusts its interest rate exposure based on underlying trends in the bond markets, potentially benefiting as interest rates rise.

Retirement Clearinghouse owner praises Clinton position on auto-portability

In a press release, Robert L. Johnson, founder and chairman of The RLJ Companies and majority investor in Retirement Clearinghouse, LLC applauded Democratic Presidential candidate Hillary Clinton’s policy statement, Breaking Barriers for African American Financial Health.

“In America today, we have a racial wealth gap – really more like a wealth gulf, when it comes to African Americans,” the Clinton document said. To address that gap, she called for measures including the automatic transfer of small 401(k) accounts to participants’ new 401(k) plans, a business that Retirement Clearinghouse has pioneered.

Johnson said in the release:

“Secretary Clinton has shown to the African American community and to working class Americans, in general, that she is committed to closing the income gap and the wealth gap. She understands the fact that most African Americans drastically lack retirement savings.

“Her call for auto-portability cures the twin issues of leakage and loss/missing accounts that plague the small balance segment of the mobile workforce, particularly the younger and lower income workers.

“The Secretary clearly recognizes as outlined in her policy statement that ‘Our country’s current savings system has too many barriers that disproportionately hold African American families back.’

“By embracing auto portability, as an innovative solution to help minority employees plan for future retirement, the Secretary has put forward a policy proposal that I hope will encourage the U.S. Department of Labor, as President Obama did recently, to evaluate and hopefully implement 401(k) auto portability, as soon as possible.”

What Social Media Can Teach Retirement Marketers

Posted on February 25, 2016 by Kerry Pechter -

Understanding your audience is essential to effective communications, including all manner of marketing. But the retirement industry doesn’t understand its audience nearly as well as it could, according to the young Canadians at a research startup called MotivIndex.

For example, most Americans don’t respond well to the word “retirement;” it makes them anxious, says Ujwal Arkalgud, an MBA and self-described cultural anthropologist who co-founded MotivIndex eight months ago with adman Jason Partridge. The concept itself is a burden or an unwelcome buzzkill.

“That word is associated with stress and debt and the end of all the fun,” Arkalgud (right) told RIJ in a recent call from his Toronto office. “Imagine that you’re running a marathon and halfway through, when you’re feeling beaten up, someone says, ‘Let’s talk about how you’ll feel at the finish line!’ Financial institutions need to talk about retirement differently. Ujwal Arkalgud

“When you tell people to focus on tomorrow, it doesn’t speak to their main emotional trigger, which is to feel in control today,” he added. “Everybody knows they should save. So if you ask most parents if they’re saving, they won’t admit that they’re not being responsible. It makes them feel like they’re not good parents. It’s a scary question.”

MotivIndex’ broader lesson for the field of market research is its founders’ belief that traditional surveys, with their scripted and sometimes leading questions, fall short. “What became clear to us is that people say one thing [to pollsters] and do another. That’s why there’s so much confusion. Telephone research is okay when people are already engaged with you, and when you just want to know how to serve them better. But it doesn’t help you understand their intent.”

If you want to understand intent and motivation in a compressed span of time, he said, you have to listen in to personal, self-revelatory conversations. With the explosion in social media, where MotivIndex focuses its attention, the opportunity to do that has been growing exponentially. To find out what people really think about money and retirement, they study Facebook threads, Instagram posts, and LinkedIn group comments.

“In most projects we’re looking at between six and 12 social media platforms,” Partridge told RIJ. “We use technology to grab the data, but teams of Ph.D.-level researchers do the analysis.” Because of the rising volume of social media, their projects run faster than ever. “Five years ago, it took six months to get rock solid results using this methodology. We can do that in four weeks now.”

Three types of consumers

“On Instagram, for instance, you might see a photo of a woman with a Coach bag visible in the background,” Arkalgud said. “Then you notice that there’s a luxury item in almost one of her photos, and that every other post mentions a purchase decision. Luxury brands define this person. But, when you look to see where she lives, you find that she isn’t rich.” Such contradictions lead to questions, which can lead to productive answers.

MotivIndex believes that most American adults fall into one of three “belief-based segments.” In a recently release, “Why People Won’t Save in 2016,” they report the results of their December 2015 study of attitudes toward retirement and long-term savings. The three segments are:

Life Planners. This group, representing about 19% of the adult population under age 60, is the most receptive to messages about saving for retirement. Believers in delayed gratification, they “attain financial independence as early as possible, through the right choices and sacrifices made today. They “maximize return on investments so ‘retired’ life can be highly fulfilling and rewarding.” They’re financially motivated, knowledgeable; they trust themselves and their advisors. On social and political issues, they tend to be conservative.
Competing Priorities. An estimated 43% of American adults, mainly ages 30 to 60, are harried middle-aged parents with less time and money than their hectic lives require. They are “motivated by emotional gains in the short-term.” They “have a vision for their lives and loved ones and want to make ‘it’ happen.” They want to save for retirement and they do—but pre-retirement needs come first.
Procrastinators. Members of the remaining 39% of adults, primarily under 40 and urban-dwelling, know they should save for retirement but prefer “living life in the now.” They are in denial about the future. Their financial knowledge is low. They often take refuge in magical thinking, believing that “it will all work out somehow.” They’re more socially progressive than the other two groups.

MotivIndex believes that the members of these groups will maintain their attitudes toward money throughout their lives. Despite the apparent progression in age and wealth from one group to the next, Arkalgud doesn’t think that the three categories represent stages of development. In any case, the current members of these groups have three distinct hot buttons, MotivIndex thinks, that marketers should understand:

Safety nets. In the realm of financial products, Procrastinators are looking for “short-term safety-nets” that will “allow them to continue living life on their own terms, in the pursuit of inspiration and experiences that last a lifetime.”
Validation. Members of the fiscally conservative Competing Priorities group “need someone to help them simplify and prioritize.” They want less clutter in their lives, and they need validation that they are “good providers.” Owning life insurance, for instance, would appeal them.
Freedom. Life Planners already own investments; the challenge is to convince them to switch products or providers. They need to be engaged in product or strategy discussions. Ultimately, they want the freedom to pursue what will give them joy in the years they have left.

“That middle 40% is made up of people who define themselves as being good mothers, fathers, friends or partners,” Arkalgud told RIJ. They think, ‘If I save I should be able to reap the rewards and validate my role as an amazing parent or son or daughter.’

“We call them ‘the overwhelmed.’ They tend to lead busy lives and have competing priorities. They feel overwhelmed by conversations about finance and money. They want financial institutions to take their stress away. Education only adds to the stress. It doesn’t take it away. Financial institutions don’t understand this. That’s why they’re struggling to get their attention.

“The other 40% thinks that money will somehow work out in their lives. They’ll have a business success, an inheritance, or make a killing on the house. The mindset is such that they are not stressed about money and they spend a lot. The ‘future self’ concept doesn’t work for them, unless you’re talking about saving to start a business in six months.”

The three groups share two traits, MotivIndex found. First, they want to feel accepted, not judged. To lower the barrier to engagement, financial institutions need to show that they “understand people and their priorities.” They need to tell platforms need to tell consumers that “there’s still time,” and that “there is no one way of doing things and no one way to save.”

Second, people want to feel that they’re being “enabled” and not being asked to change. It’s “important to make audiences feel that financial institutions are not looking to get them to change their way of life, but rather enable it and make it sustainable, by providing incremental advice and value,” the report said.

“Consumers consider the messages used by financial institutions to be more like finger wagging,” said Partridge. “To truly resonate with individuals, the financial community should start with programs that provides individuals with a reason to save short term by connecting it to important events in their lives. The bottom line is that financial institutions must build trust before trying to get people to think about the future.”

Mining social media

The explosion in the usage rate and volume of social media has provided MotivIndex with the raw material to create a field of study that it calls Digital Motivation Research. MotivIndex was founded on the premise that the presence of human interviewers and the use of prepared questions inevitably corrupt the responses.

“The net result is that you miss out on the depth that we can get with observational research,” said Arkalgud, who has degrees in engineering and business (his MBA is from York University in Toronto. A few years ago, when he was working in market research, he noticed that ethnographers had begun to study the social media phenomenon. An informal student of sociology and anthropology himself, he saw the potential application to marketing.

“The first test of our methodology was five years ago, in a project for Hewlett-Packard and Microsoft. The coding method is the magic behind our formula, and that took five years to build,” he said. Eight months ago, he teamed up with Partridge to start MotivIndex. They brought on Boston-based political consultant Beth Lindstrom to develop new business and Ph.D. sociologist Elinor Bray-Collins to oversee research.

“We grew from there,” Arkalgud added. “We didn’t use seed capital; we’re self-funded in that sense. The market is responding. Companies tell us, ‘We already know what our customers do and how they do it. We want to know why.’ And we find out. Every company wants to build better bridges and connections with their customers today.”

Mobile Imperative Drives TIAA Re-Branding

Posted on February 25, 2016 by Editorial Staff -

Opting for brevity and simplicity in a world driven by small-screen mobile devices, the $854 billion non-profit provider of 403(b) savings plans and other services to employees of colleges and universities, research facilities, hospitals and other non-profits has shortened its name and simplified its website.

The originator of the group variable annuity is eliminating the half of its acronymic name that stood for “College Retirement Equities Fund.” Its new website use the big blocks of color, minimal verbiage, and the kind of simplified navigational structure that robo-advisors like Betterment and other businesses have had success with.

Henceforth the company will call itself TIAA—short for Teachers Insurance and Annuity Association). “The name leverages TIAA’s esteemed heritage as a mission-driven organization while becoming easier to say, type and remember,” the organization said in a release this week.

“We approached the design challenge as if the only interface we had was the mobile phone, and then we worked back to design the other channels,” said Ed Moslander, head of TIAA institutional relationship management, who is communicating the changes to the 403(b) market.

TIAA’s design partners were the Martin Agency, Frog, Weber Shandwick and Firstborn. A national advertising campaign will launch Feb. 29 across print, radio, television and digital media, according to a TIAA release. The campaign introduces the redesigned “window” logo, a metaphor for “endless possibilities.”

TIAA was the group’s first acronym—the one it acquired in 1918 when it was created by the Carnegie Foundation for the Advancement of Teaching, which had provided free pensions for professors. The Foundation was created in 1905 with a grant from Pittsburgh steel magnate Andrew Carnegie, who had sold his company to J.P. Morgan in 1900 for $480 million, according to the Columbia University library.

The “CREF” moniker was added in 1952, after the organization’s actuaries created the world’s first variable annuity, a group insurance contract for employees of colleges and universities.

The rebranding and new website, said to be years in the planning, is accompanied by the launch of a new logo and a marketing blitz. The new blue logo adds flair to the old logo, and is leveraged on the site as a template for topical icons.

According to the release:

“The redesigned TIAA.org is easier to use, with faster access to information, and simple, direct language complemented by clear, illustrative images. Content and tools geared toward different life stages are front and center, so visitors are quickly directed to the information they need the most and encouraged to learn more.” There’s also a new emphasis on customer stories.

Although many other companies followed TIAA-CREF in issuing variable annuities, few if any have imitated its guaranteed annuity fund, which Moshe Milevsky compared to a “tontine” in his recent book, King William’s Tontine (Cambridge, 2015).

“Annuitants in TIAA-CREF are part of a large co-operative pool… If these annuitants end up living longer than planned or expected, TIAA-CREF can protect itself and future generations by reducing income from one year to the next. It calls this a participant annuity and again is one of the very few companies in the U.S. to offer them,” wrote Milevsky, a retirement income expert, financial historian and York University professor.

“Also, this company has the highest of credit ratings from agencies such as Moody’s and Standard and Poor’s, precisely because it takes so little risk on its corporate balance sheet. To me, this is tontine thinking in practice.”

Genworth’s “Medically Underwritten” SPIA Offers Higher Payouts

Posted on February 25, 2016 by Editorial Staff -

Life-contingent annuities are typically sought by healthy people who expect to live longer than average. So the idea of a life annuity for people who don’t expect to live very long is a bit counterintuitive, even if you account for the higher payout rates that people with higher mortality risk could expect to receive.

But Genworth, the Richmond-based, publicly-traded life insurer, sees a substantial market for just such a product among older Baby Boomers who become ill and face an open-ended period of elevated medical expenses but who do not own long-term care insurance.

Genworth calls its new product, announced this week, the IncomeAssurance Immediate Need Annuity.

“Medically underwritten” annuities, as this type of product is called, are fairly rare in the United States. A few years ago in England, at a time when most Britons were still required to annuitize at least part of their tax-deferred savings by age 75, medically underwritten or “impaired” annuities were fairly heavily advertised. They offered less healthy Britons, who needed to comply with the annuitization requirement, the consolation of higher annuity payments.

Such products have not been widely offered or used in the U.S. The market for medically underwritten annuities “is very small right now,” independent actuary Tim Pfeiffer, who did not work with Genworth on the design of this product, told RIJ this week. “Only a few carriers have played in that space over the past five years. The key is making the determination of impairment non-invasive, but yet accurate and able to translate to a meaningful benefit pick-up. It is a product probably best suited to an insurer who is not writing a lot of standard SPIAs/DIAs right now.

“That’s because an impaired product could bifurcate the risk pool, sending those in poor health to the impaired product, and leaving more healthy lives in the standard product—resulting in lower profitability or the need to reduce payouts on the standard product,” Pfeiffer added. “Personally, I like the concept, but it needs to be positioned very carefully.”

The new Genworth product is aimed at people over ages 70 to 95 who probably wish they’d purchased long-term care insurance, but who now, given their impaired health, could not qualify for it. According to a Genworth release this week:

“This is a strong solution for what Genworth calls “the other half” of the retiree market, referring to those who may not qualify for long-term care but are still in need of care. Notably, the product allows those who are sicker to pay an equal or in some cases lower premium for the same amount of coverage, creating a stronger stream of retirement income.”

The product also fits Genworth’s corporate-level decision to focus providing insurance for the medical expenses associated with old age.

“During our fourth quarter earnings call [earlier this month], we announced that we’re going to focus our U.S. life insurance division on long-term care insurance and other aging products” and this product reflects that strategy, said Kristi McGivern, director of product marketing for the life division.

“This is a medically underwritten single premium immediate annuity that allows us to write contracts for people who are over age 70, who are in immediate need of care,” she told RIJ. “There are no lab tests, no blood or urine samples taken. It’s not like life or long-term care insurance underwriting. We send out a nurse, review the medical records, and we determine a custom income stream. There’s a one-time assessment of health. No one is denied this product because of a health condition.”

The typical payout for the Genworth product will be 20% to 50% higher than that of a non-underwritten SPIA, McGivern said. So, if a conventional SPIA purchased with $100,000 paid out $7,000, the new Genworth product might pay out $8,400 to $10,500 a year for life.

The ideal client for this product would be someone who has a serious medical condition but is not terminally ill. “They’re at risk of outliving their savings while they still need care,” McGivern said. “You don’t need to be on your way to the hospital to use this product.”

This product, unlike long-term care insurance, provides income that can be used for any purpose, medical or non-medical. The annuitant receives regular income and pay for health-related services without having to file claims for reimbursement.

“We’re positioning it as a new way to pay for care medical care that’s not covered by Medicare for people whose families are going through the process of how they’re going to pay for someone’s care,” she told RIJ.

“Our market research uncovered the fact that rising medical costs was a concern, so we built in a cost-of-living adjustment that ranges from zero to eight percent, compounded annually, that increases the guaranteed monthly income,” she added.

“A second concern was, ‘What if my mother passes away shortly after she purchases this?’ So we include a six-month death benefit in the basic product and an optional enhanced benefit that can protect a portion of the premium for up to five years.”

McGivern said that this product isn’t as hard to price as long-term care insurance. LTCI is often purchased decades before a claim is submitted. By contrast, there’s a relatively brief period—sometimes only two or three years—between the purchase of the medically underwritten annuity and the death of the insured, so the issuer has a much smaller window of exposure to changes in interest rates or mortality rates.

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

Posted on February 25, 2016 by Editorial Staff -

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.

Indexed annuities post new sales records in 2015

Posted on February 25, 2016 by Editorial Staff -

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.

Jackson and Morningstar partner on tax demonstration tool

Posted on February 25, 2016 by Editorial Staff -

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.

Here’s how the Jetsons might save for retirement

Posted on February 25, 2016 by Editorial Staff -

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.

Decline in tax withholdings bodes ill for economy: TrimTabs

Posted on February 25, 2016 by Editorial Staff -

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.

The RICP, as Seen By Three Graduates of the Program

Posted on February 18, 2016 by Editorial Staff -

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.

“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

One 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 Iowa

“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.”

Where an Advisor Can Make a Big Difference

Posted on February 18, 2016 by Kerry Pechter -

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.

Eight core ideas for retirement planning: Wade Pfau

Posted on February 18, 2016 by Editorial Staff -

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.

RetireUp can now illustrate Allianz Life and Great American annuities

Posted on February 18, 2016 by Editorial Staff -

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.