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Don’t Touch the Jenga Tower

Posted on November 20, 2015 by Kerry Pechter -

Arriving at the Society of Actuaries Equity-Based Insurance Guarantees conference in downtown Chicago last Sunday, I greeted the host, Ravi Ravindran of Annuity Systems, Inc. He asked me, in a gesture of cordiality, what I’m currently writing about.

When I mentioned interest rates (among other things), the person sitting next to Ravindran, an actuary at one of the top 10 annuity issuers, whom I had never met before, virtually leaped out of his chair. He said that, contrary to his employer’s official position on the subject (which is that mean-reversion will restore rates eventually), he’s sure that the Federal Reserve won’t raise short-term interest rates in December.

In fact, it’s unlikely that the Fed will raise rates at all in the foreseeable future, he said. As evidence, he didn’t cite feeble GDP growth or a strong dollar or our aging society. Instead he mentioned the towering Jenga-pile of leverage in the U.S. economy. Since this is what I tend to believe, and since validation is so gratifying, I leaned in and listened closely to what he had to say.

If interest rates go up, he said, the prices of existing bonds will be instantly adjusted downward. Eventually, so will the prices of things that are financed with borrowed money. A deflation in asset values will be more or less devastating for those who have borrowed against them. Inflation is a debtor’s friend; deflation is deadly. And deflation is what higher rates could produce.

“We’re stuck,” was the actuary’s verdict. The U.S. has backed itself into a corner. Low rates have made it possible for households to carry $12 trillion worth of debt, and to support the highest-ever prices for homes and for equities (which are backed by almost $500 billion in margin debt). Even a small rate hike, by signaling that the 23-year bull market in stocks and bonds is truly over, might therefore bring the Jenga pile down.

Judging by recent public comments at Project-Syndicate.com and the Financial Times’ website, my new friend isn’t alone in believing that a rate hike is unlikely this year. But most other observers think the Fed doesn’t need to raise rates. The actuary I met in Chicago was one of the few who believes that the Fed can’t raise rates. In his view, the current economy may look static—but only in the sense that, say, a spring-loaded bear trap looks static.

Indexed Annuity Sales Reach New Highs: LIMRA

Posted on November 20, 2015 by Editorial Staff -

U.S. annuity sales totaled $60.6 billion in the third quarter of 2015, up 4% percent compared with the prior year. For the first nine months of 2015, total annuity sales were $175.3 billion, down 2% from the prior year, according to LIMRA Secure Retirement Institute’s quarterly U.S. Individual Annuities Sales Survey.

Indexed annuity sales reached a record-breaking $14.3 billion, up 22% year-over-year and 10% above the previous quarterly best. Growth was driven by many companies, rather than concentrated among the leaders. YTD indexed annuity sales rose 7%, to $38.4 billion.

For the first three-quarters of 2015, Jackson National Life led all variable annuity issuers with $17.8 billion in sales and New York Life led all fixed annuity issuers with $6.7 billion in sales. AIG had the most balanced sales, with $14.5 billion overall ($8.8 billion variable and $5.7 billion fixed). For other sales results, click on chart below.

Variable annuity (VA) sales were hurt by the market volatility, falling 7% in the third quarter to $32.9 billion. Year-to-date VA sales dropped 4% from 2014, to $101.3 billion. Nineteen of the top 20 VA writers, representing about 93% of sales, reported quarter-over-quarter declines.

“Despite high volatility, a significant market correction and lower interest rates, total annuity sales—driven by substantially strong fixed-rate deferred and indexed annuity results—recorded positive growth in the third quarter,” said Todd Giesing, assistant research director, LIMRA Secure Retirement Research, in a release. “There was definitely a flight to safety with every fixed product except fixed immediate and structured settlement annuities recording positive growth.”

“There has been a significant shift in the VA market share over the past several years,” Giesing added. “Today, VA sales make up 54% of the overall annuity business, down from 67% just in 2012. This decline in VA market share has certainly contributed to the growth in the indexed annuity market.”

The VA election rate for GLB riders (when available) was 78% in the third quarter. This is one percentage point higher than prior quarter and prior year.

Sales of fixed annuities increased 21% in the quarter, to $27.7 billion. In the first nine months of 2015, fixed annuity sales increased 2%, to $74 billion.

“Despite the decline in rates, fixed annuity writers have been able to offer competitive rates. Coupled with the equity market volatility, we believe the safety of fixed products is being seen as a safe haven,” noted Giesing.

While all channels are seeing growth in indexed annuity market, the bank channel has experienced remarkable growth. Sales of indexed annuities in banks now represent 18% of sales, up from 6% in 2011. The Institute credits this growth to product innovation; companies have developed simpler products, without GLB riders, as an alternative to bank CDs.

The election rate for indexed annuity GLBs (when available) dropped eight percentage points from prior quarter to 60%. Institute researchers believe the increase of bank sales’ market share (which tend to be sold without GLB riders), as well as more consumers’ shifting priorities (from income generation to principal protection) seeking safety from recent market volatility contributed to the decline.

Sales of fixed-rate deferred annuities rebounded in the third quarter, improving 32% to $9.1 billion. YTD, fixed-rate deferred sales were nearly flat compared with prior year, totaling $23.1 billion.

Despite lower interest rates, single premium immediate annuity sales stayed steady in the third quarter at $2.3 billion. Total SPIA sales were $6.5 billion, down 12% for the first three quarters of 2015.

Deferred income annuity (DIA) were $683 million, growing two percent compared with third quarter of 2014. YTD, DIA sales were dropped 7% from prior year at $1.9 billion. “We are seeing market share spread out among the top ten writers and anticipate DIA sales to increase at a slow, steady pace for the foreseeable future,” Giesing commented.

Eleven companies are now offering QLAC products, the Institute reported. While this is a small part of the DIA market, the Institute predicts sales will see an uptick in 2016.

The 2015 third quarter Annuities Industry Estimates can be found in the updated Data Bank. To view the top twenty rankings of total, variable and fixed annuity writers for second quarter 2015, please visit 2015 Third Quarter Annuity Rankings. To view variable, fixed and total annuity sales over the past 10 years, please visit Annuity Sales 2005-2014. LIMRA Secure Retirement Institute’s third quarter U.S. Individual Annuities Sales Survey represents data from 96% of the market.

MassMutual’s new VA offers exposure to alternatives

Posted on November 20, 2015 by Editorial Staff -

MassMutual has launched a new investment-focused variable annuity, called Capital Vantage, which “allows individuals to invest in both traditional and non-traditional asset classes including hedged equity, alternatives and tactical allocation strategies,” the company said in a release.

The contract will be offered in a B-share with a mortality and expense risk fee of 85 basis points a year and a five-year surrender charge period (starting at 7%), and a C-share with an M&E fee of 130 basis points (which drops to 85 basis points after the fifth contract anniversary) and no surrender charge period.

There’s a 15 basis-point annual administrative fee and an optional return-of-premium death benefit for 35 basis points a year. Annual fund expense ratios start at 51 basis points.

Besides MassMutual funds, contract owners can invest in BlackRock, Fidelity, Ivy and Oppenheimer funds. They can choose a single risk-based asset allocation “fund-of-funds” or build their own portfolios with more than 50 funds in 12 asset classes, including money market, fixed income, balanced, large-cap value, small/mid cap growth and international/global funds.

The product also offers hedged equity, alternatives, tactical allocation funds, and specialized equity funds. Along with these investment options, the product includes standard annuity features such as annuitization options, tax-deferral and death benefit options.

LIMRA launches AnnuityCompass database (for members only)

Posted on November 20, 2015 by Editorial Staff -

LIMRA, the life insurance industry’s research arm, has created a new database for its members, called AnnuityCompass, to furnish them with “contract and product detail on all new and in-force annuity contracts,” according to LIMRA’s website.

A LIMRA spokesperson declined to discuss the resource, which will provide life insurers with competitive intelligence at no cost beyond their LIMRA membership fees.

AnnuityCompass will allow LIMRA members to “query data via a state-of-the-art online system” in order to “mine, filter, and analyze the data anytime from anywhere,” the LIMRA website said. “Your teams in marketing, sales and distribution, product development and risk management can get detailed and strategic information to make intelligent decisions to grow sales, improve distribution strategies and help manage risks more effectively.”

“The data will support virtually all ongoing annuity tracking studies,” according to material on the website, and users of the service will be able to leverage LIMRA’s “extensive experience in relational data management,” “annuity market experts,” and “comprehensive data security policies.”

According to LIMRA’s online promotional material, marketing and sales professionals can use AnnuityCompass to identify sales growth opportunities, track their own company’s marketing and sales campaigns and penetrate new markets.

Product developers can use the service to “feed your product development process,” view profiles of customers purchasing specific products or features, and “be more nimble in making product decisions.”

In addition, AnnuityCompass can provide sales and distribution-related information based on unique identifiers for sales reps and distributors, allowing insurers to:

Determine channel penetration and areas for growth
Benchmark firm and rep productivity
Better communicate with distribution
More effectively deploy resources
Use regional results as benchmarks for performance

Risk managers, LIMRA said, can use AnnuityCompass to compare customer behavior for pricing and risk management, understand guaranteed living benefit risks relative to the industry, benchmark and monitor persistency and identify assets at risk for surrender.

Happy Thanksgiving!

Posted on November 20, 2015 by Editorial Staff -

Fidelity, Vanguard and Schwab are the top-of-mind ‘robo-advisors’

Posted on November 20, 2015 by Editorial Staff -

Nearly one-third (30%) of affluent Americans use some type of automated investment advice service—a “robo-advisor”—to manage a portion of their assets, according to the 2015 Investor Brandscape from Cogent Reports. Another 22% are thinking about placing money with a robo-advisor in the near future.

That doesn’t mean that startups have stolen the show. Seventeen percent of investors are using robo-advisor services from familiar direct providers like Fidelity, Vanguard or Charles Schwab while 10% are using one of nearly two dozen upstarts. (Another 7% of those surveyed couldn’t name their robo provider.)

Cogent Robo Chart 11-20-2015

The market is far from solidified. Of the 22% who expressed interest in robo-advice, only 51% could name a provider. The rest, about 10% of all affluent Americans, said they were “open to learning about automated investment advice solutions from well-known players and upstarts alike,” said Cogent Reports, the syndicated research division of Market Strategies International.

Most (76%) robo-advisor users have under $500,000 in total investable assets; however, money invested with a robo-advisor represents only 60% of users’ assets, on average. Most robo-advisor users are Millennials or Gen Xers, but, four in 10 users are first- or second-wave Boomers.

“The vast majority of near-term adoption of robo-advisors will come not from Millennials, but Gen Xers, the oldest of whom are turning 50 this year,” according to Cogent Reports. Gen Xers are the most interested in robo-advisors and the most likely to name an emerging provider for consideration.

Those most likely to embrace robo-advisors are more concerned about their ability to save for retirement, and a strong desire for better investment performance, York said. “Many pre-retirees see automated investment service solutions as a good way of getting to their retirement goals. …This could have huge implications for the IRA rollover marketplace as well as threaten the dominance of traditional target-date funds inside of DC plans,” she added.

Cogent Reports interviewed 3,889 affluent investors recruited from the Research Now, SSI and Usamp online panels. Respondents had to have at least $100,000 in investable assets (excluding real estate). Due to their opt-in nature, the online panels do not yield a random probability sample of the target population. Thus, target quotas and weighting are set around key demographic variables using the most recent data available from the Survey of Consumer Finances (SCF) conducted by the Federal Reserve Board.

The Bucket

Posted on November 20, 2015 by Editorial Staff -

MassMutual buys tool that shows impact of low savings rates on employers’ bottom lines

MassMutual has purchased the assets of Viability Advisory Group, including “a patent-pending analysis program to help companies evaluate the financial costs associated with employees being unprepared for retirement and the loss of productivity attributed to employees’ lack of financial security,” according to a release.

Hugh O’Toole founded Viability when he left MassMutual Retirement Services in April 2014 after seven years. As part of the acquisition, he will rejoin MassMutual to run the Viability business. Terms of the acquisition were not disclosed.

The insurer called the acquisition “part of a strategy to help financial advisors quantify the value of employee retirement readiness and appropriate benefits plans use to employers’ bottom lines.” The Viability program “calculates the hard-dollar cost of inappropriate or under-utilization of retirement savings and other employee benefits programs,” the release said.

The Viability suite of tools will be offered to MassMutual retirement plans and worksite insurance clients strictly through financial advisors, according to Eric Wietsma, head of Sales and Distribution for MassMutual Retirement Services. The new offering is designed to enhance retirement advisors’ practices and increase their value to employers.

“We believe it’s necessary for employers to engage a financial advisor when making today’s high-stakes benefits decisions,” Wietsma said. “Viability helps advisors demonstrate the economic value of their insights and guidance to their customers.”

Retirement readiness and financial wellness have become a growing concern of employers. Aging employee populations are more expensive for employers while employees’ personal financial problems are eroding workplace productivity.

Every day, approximately 8,000 Americans reach age 65, according to the U.S. Census Bureau. While 65 is the traditional retirement age, eight in 10 workers say they plan to delay retirement, the Employee Benefits Research Institute reports, and one in 10 say they expect never to retire.

One in four employees say personal financial problems have become a distraction at work, according to a 2014 survey of financial wellness issues conducted by PricewaterhouseCoopers. Money issues have consistently topped Americans’ list of biggest stressors since 2007, the American Psychological Association reports.

‘Family offices’ know what the ultra-wealthy want: Cerulli

Multi-family offices and wirehouse advisory teams have realized that HNW and UHNW investors require lots of complementary services, and this recognition has propelled some of them to “elite status, “ according to global analytics firm Cerulli Associates.

“As a channel, MFOs have not only adapted the best, but that they have also moved well ahead of their primary competitors—including the wirehouses—in many key aspects,” said Cerulli associate director Donnie Ethier.

“Other one-time market leaders are left somewhat disoriented and struggling to keep up” while “other firms determined that their expertise and resources are best suited for less wealthy investors.”

Ethier wrote Cerulli’s latest report, High-Net-Worth and Ultra-High-Net-Worth Markets 2015: Understanding and Addressing Family Offices. It focuses on the unique aspects of advising HNW and UHNW families, including their attitudes and behaviors regarding wealth managers.

The report also examines vehicle use, fees, and services provided by wealth managers in family offices, wirehouses, banks, direct providers, and RIAs.

“The industry-wide leaders by assets, the wirehouses, have generally acclimated; however, MFOs will continue to advance and threaten longtime grasps of HNW and UHNW families,” Ethier wrote.

“The wirehouses have encouraged the majority of their advisory teams to focus on clients possessing a minimum of $250,000, which has resulted in advisor productivity that is unrivaled by their largest scalable competitors, the banks. Many private banks continue to set asset minimums at $2 million to $10 million, with family-office services beginning at $25 million to $100 million; still, even these elite global brands are battling larger trends.”

MFOs may never overthrow the wirehouses’ and banks’ rule over the broad HNW market, the report said, but the past and future gains will certainly shift marketshare. If the traditional leaders do not adapt to larger consumer and advisor trends, projections that favor growth of MFOs could actually prove conservative.

“Providing asset management searches, selections, and asset allocation are, for all intents and purposes, no longer the greatest competitive advantage in the HNW and UHNW marketplaces,” continued Ethier.

What is the purpose of money, Thrivent asks

Sixty-one percent of Americans said they would “rather be called generous than financially successful” and more than one-third think that “the purpose of the money they make is to give back,” according to Thrivent Financial’s inaugural 2015 Money Mindset Report.

But the report also found that most Americans, at every income level, lack long-term financial strategies, advice and tools, and many are financially unprepared for the future.

Only 27% of Americans are very confident they are making the right decisions with their money and 27% say they live above their financial means. Thrivent partnered with Wakefield Research for the 2015 Money Mindset Report. It is based on a survey of 1,001 U.S. adults ages 18+ conducted last July.

Millennials: On the cusp of big financial decisions

Using primitive but proven genetic replication technology that was readily at hand, the BabyBoomers cloned themselves in the 1980s and 1990s, thus producing the 77 million 18- to 34-year-olds collectively tagged as “Millennials.”

(Marketing gurus don’t seem to talk much about the Boomers anymore. It’s all about the Millennials and their mobile electronic devices.

Millennials now constitute the largest age cohort in the United States today, according to the latest edition of MacroMonitor, a regular demographic report from Strategic Business Insights. But only 25% of all US households are headed by people who identify as Millennials.

That’s probably because “coming of age during difficult economic times constrains the ability of many Millennials to form their own independent households,” the report said.

Of the Millennials who have formed households, 18.4 million households still have no children and another 11.8 million have dependent children ages 12 or younger, leading SBI to conclude that most Millennials “have the majority of their financial goals still ahead: career, home and family.”

“In the next 10 to 15 years, Millennials’ need for most financial products and services will be high—especially for credit and protection from income loss,” the report said. “To achieve their financial goals (such as a home purchase, funding children’s educations, and successful retirement), they need to implement savings and investment strategies early; time is the most important resource Millennials’ have to achieve their goals.”

Affluent Millennials, not surprisingly, tend to be more satisfied with their household’s financial situation and are more likely to have a financial plan than non-affluent Millennials. Affluent Millennials also feel confident “they are on track to meet their goals.”

Because Millennials are relatively less trustful of financial providers and intermediaries, winning them over will take awhile. About one-third of Millennial households (those with incomes between $50K and $100K) are viable targets for financial-services providers, SBI said. They have enough cash flow to save and invest and their needs and assets will grow as they mature. The same is true for 38% of non-affluent Millennial households.

3Q2015 U.S pension buy-out sales again top $3 billion: LIMRA

In the third quarter of 2015 U.S. group pension buy-out sales reached $3.2 billion, according to a LIMRA Secure Retirement Institute sales survey. Following second quarter sales of $3.8 billion, this marks the first time consecutive quarters experienced $3 billion in sales.

Traditionally, pension buy-out sales tend to spike in the fourth quarter with far less activity in the first three quarters. In 2015, however, pension buy-out sales have eclipsed $8 billion for the first nine months of the year. This represents a 415% increase over the $1.53 billion in sales for the first nine months of 2014.

“For the last five years the number of pension buy-out contracts sold in the first three quarters has steadily increased,” said Michael Ericson, research analyst for LIMRA Secure Retirement Institute. “We’ve seen 195 new contracts so far in 2015, compared to 159 contracts in the first nine months of 2014.”

While the trends show more small and medium sized companies seeking pension buy-outs, a single “jumbo” deal by a corporate giant can significantly influence sales. For a recent example, Kimberly-Clark’s pension conversion in June contributed to the $3.8 billion quarterly sales — a record for second quarter sales.

Years of low interest rates and increasing premiums charged by the Pension Benefit Guarantee Corporation has compelled more organizations to consider transferring their pension risk to a group annuity. To date, 13 financial services companies provide group annuity contracts for this market.

“Fourth quarter usually sees a large increase in pension buy-out sales,” said Ericson. “Based on our tracking, we think fourth quarter and full-year sales in 2015 will finish strong.” LIMRA Secure Retirement Institute publishes the Group Annuity Risk Transfer Survey every quarter.

Warren Whitepaper Missed the Mark

Posted on November 12, 2015 by Kerry Pechter -

A stock character of certain gothic novels is the crazy aunt locked in the attic of a sprawling manor—a noble clan’s guilty secret. Sometimes, in an ironic twist, the aunt turns out to be the only sane and rich one in the family, who’s been victimized by her scheming relatives.

In the family of annuities, the “crazy aunt” is the indexed annuity. Its “attic” is the state-regulated insurance marketing organizations and the agents they run. Its craziness involves its “Wild West” sales culture and predatory 7% commissions. But it’s tolerated because it generates a lot of revenue. It’s also an easy target for consumerists.

Senator Elizabeth Warren of Massachusetts, the scourge of the financial services industry, recently exposed the tawdriest side of the indexed annuity business in a well-intended but repetitive and somewhat misdirected white paper whose cover drawing, incidentally, depicts an English castle with a crenellated tower—tailor-made for a crazy aunt.

I won’t bash Warren here—the world needs a few crusaders—but I do think she missed the mark.

First, she indiscriminately smeared all annuities, which doesn’t serve the public well. Second, she obsessed about the trinkets (e.g., NFL Super Bowl-type rings) and junkets (e.g., to the Ritz-Carlton Aruba) that annuity manufacturers use to incent and reward producers.

Warren (right) sent letters to the CEOs of 15 top annuity manufacturers and asked them to enumerate the items of non-cash compensation that they offer distributors and agents to get them to sell their products, typically indexed annuities. Only two of the manufacturers offer no prizes; the other 13 listed their Bahamian golf outings, Tag Heuer watches and other premiums.

The availability of these non-cash incentives seems to shock the senator. Perhaps she’s not familiar with sales cultures. A sales career is not for the squeamish. It may be best suited to the young. (The incentives remind me of the Schwinn bicycles and Daisy air rifles that, at age 11, I tried to win by flogging Wallace Brown greeting cards and tins of White Cloverine brand salve door-to-door.) Yes, these incentives are an embarrassment to an industry that wants to appear high-minded and public-spirited. Warren would like to see them disclosed.

But the junkets are a sideshow. If Warren had dug deeper into compensation practices in the annuity distribution channels, she might have discovered more complex problems. She would have learned that annuity manufacturers and distributors have a long history of cooperating in ways that minimize competition between products and channels and keep clients from seeing all their options in one place.

Academics claim, and I agree, that a combination of income annuities and investments can deliver the most efficient blend of downside protection and upside potential for many retirees. But these types of solutions, validated by countless research studies, continue to fall through the cracks between existing advisory channels—channels whose walls are made rigid by engrained (and ripe for disruption) compensation practices. Warren thinks advisors should disclose their non-cash incentives. I wish more clients could see the powerful solutions that, in the status quo, few advisors have any incentive to show them.

RetirePreneur: Mark Warshawsky

Posted on November 11, 2015 by Kerry Pechter -

Mark Warshawsky was one of the earliest explorers of the retirement income space. In 2001, when today’s robo-advisors were still in high school, he, John Ameriks and Bob Veres published “Making Retirement Income Last a Lifetime,” an ahead-of-its-time article in the Journal of Financial Planning.

Now, after a lofty, peripatetic career in government (G.W. Bush Treasury Dept.), consulting (Towers Watson) and academia (e.g., MIT Center for Finance and Policy), the much-published, Harvard-trained economist (now with the libertarian Mercatus Center at George Mason U.) intends to monetize his retirement income ideas through an entrepreneurial venture. Mark Warshawsky

Warshawsky’s startup is called ReLIAS, which stands for Retirement Lifetime Income and Asset Strategies. The intellectual property at the core of ReLIAS is an algorithm that automates the sequential purchase of a ladder of immediate income annuities. Retirees would be able to annuitize a little at a time, rather than part with a big lump sum all at once.

That’s harder than it sounds. The timing and the dollar amounts of the partial annuitizations have to be customized for each retiree or retired couple, based on their ages of retirement, risk appetites, other financial resources, health status, bequest or charitable motives and other factors unique to each household, as well as current market conditions.

“That’s the secret sauce,” Warshawsky (at right) told RIJ in an interview. “It’s not just an algorithm. It’s a way of collecting information from retired households that, in a rigorous way, helps me translate their answers into parameters—to collect information in a way produces the optimal retirement strategy out of the literally tens of thousands of ways in which that can be done. It’s a new angle, very much based on the research, with a capital R, and on some of my own research that hasn’t been published yet.” (Warshawsky has published a paper referencing the product in the latest issue of the Journal of Retirement.)

‘Bermuda Triangle’

This conceptual territory has been a kind of Bermuda Triangle for retirement income innovators. Many studies point to the potential benefits of using a combination of investments and annuities to mitigate the inflation risk, longevity risk, market risk, interest rate risk that retirees face. Variable and indexed annuities are ways to package this concept into a product. But attempts to popularize a customizable process involving income annuities haven’t gotten far.

Distributional biases have been a problem. Financial intermediaries (planners, advisors, reps, and agents) tend to specialize in either investments or insurance products, and the compensation models that go with them. For lack of a natural distribution channel, hybrid solutions have tended to vanish, like ships and planes into the legendarily risky zone in the Atlantic Ocean’s Sargasso Sea.

Recently, deferred income annuities have emerged as a potential insurance adjunct to a balanced investment portfolio in retirement. Also known as “longevity insurance” or “advanced life deferred annuities,” these are contracts that start paying a regular income at age 80, leaving retirees and their advisors with the relatively simple chore of managing a risky portfolio over the 15 or so years before then. Only New York Life, with its short-lived 2006 LifeStages Longevity Protection Variable Annuity, has yet fused the risky portfolio and the DIA into one product.

Warshawsky isn’t a devotee of DIAs, and ReLIAS doesn’t make use of them. “I do think laddering immediate annuities is a better way to go than the deferred income annuities,” he said. “It’s still the case that immediate annuities are priced more efficiently than longevity insurance. LI has a higher load because there’s more adverse selection. It isn’t a complete strategy either. It just takes care of the end stage. It doesn’t tell you what to do in the middle. Other people have come up with different types of solutions, but they haven’t been entirely satisfactory. I’ve yet to see anyone solve the problem in a holistic way with a due consideration of the realistic risks.”

MassMutual’s version

While Warshawsky’s algorithm is new, the laddered annuity idea is not. Others have recognized that you can mitigate interest rate risk by dollar-cost averaging into an annuity, and seen the wisdom of being able to buy opportunistically, or to halt the process of annuitization if the retiree’s financial circumstances change. And at least one product has been based on this approach.

In 2005, Jerry Golden, who is often credited with inventing the guaranteed lifetime withdrawal benefit in the 1990s, brought a new process that he called the RetireMentor to MassMutual. They developed it into a tool that MassMutual-affiliated advisors could use to help their clients create ladders of immediate annuities. MassMutual patented the process under the name, Retirement Management Account, and introduced it in 2006.

MassMutual described it as a way to produce a stream of pension-like income, typically from a rollover IRA, by seamlessly blending systematic withdrawals from a portfolio of Oppenheimer Funds with the monthly income from an inflation-adjusted flexible-premium immediate annuity contract from MassMutual. The process called for any excess annuity income to be reinvested in the funds.

The product brought in $100 million in its first year, according to Golden, now an independent entrepreneur who is promoting a similar concept under the name Savings2Income. MassMutual eventually set the product aside in favor of the then-hot VA with a GLWB, and the whole RMA team left MassMutual.

“There are certain solutions that are difficult, though not impossible, to find a distribution channel for,” Golden told RIJ. “This is not an easily wholesale-able product because it involves the intersection of insurance and investments. There’s not enough juice in this product, in terms of commissions, to afford an expensive wholesaler. They’d rather be wholesaling an indexed annuity or a variable annuity.”

Spencer Williams, who managed the RMA program at MassMutual a decade ago, advises anyone going down a similar road to “Keep it simple.” “The concept of gradual annuitization over time remains quite compelling,” said Williams, who is now president and CEO of Retirement Clearinghouse in Charlotte, NC. “But it is still difficult for the average person to grasp. Unless and until some clear picture of it takes hold, the challenges will remain. But financial engineering and highly sophisticated solutions—seeking the perfect instead of the good—are often the path taken by the really smart people.”

Next steps for ReLIAS

ReLIAS is currently looking for distribution partners. “The most likely way [to distribute it] would be through an insurance company or financial organization or brokerage house that can give it their imprimatur,” Warshawsky told RIJ. That would be a way to reach the most people.” He knows it won’t necessarily be easy.

“The algorithm involves the use of immediate annuities, and there’s still some resistance to that product in the advisor community. There may be second-tier or relatively new organizations, or those who see difficulties with the current approach, who want to have something new,” he added.

Warshawsky thinks it may even fit into a digital advisory channel solution. But, given the need for individualization in retirement income planning, he expects that even a robo-advice version will require human intervention. “It could be developed in the direction of ‘robo,’ but if you’re talking to people approaching retirement, some intermediation and explanation may be needed. No matter how clear the technology, there is a need for intermediation. But I won’t rule out robo. Let’s see what the market wants.”

Key Factors to Consider When Buying a Deferred Income Annuity

Posted on November 11, 2015 by LIMRA Industry Trends Blog -

Two settlements of 401(k) excessive fee cases, for a combined $89 million

Posted on November 11, 2015 by Editorial Staff -

Broker-dealers are worried, perhaps with good reason, that the Department of Labor’s fiduciary proposal will make them vulnerable to federal class action lawsuits like the two that have just been settled by Boeing (for $57 million) and Novant Health (for $32 million).

The terms of the settlement agreement between Boeing, Seattle-based aircraft giant, and participants in its retirement plan were announced November 5. The defendants agreed to pay $57 million payment. The law firm of Schlichter, Bogard, & Denton will receive $19 million and $1,845,000 in costs.

That case was settled in early August but the terms were not announced until last week. This settlement “is second in gross amount only to the settlement of the Lockheed Martin excessive fee case earlier this year,” according to Fiduciary Matters Blog.

In the second settlement agreement filed in less than a week by Schlichter, Bogard & Denton, the parties in Kruger v. Novant Health agreed to settle their case for $32 million, including up to $10,666,666 in attorney’s fees and $95,000 in costs.

The plaintiffs filed their federal lawsuit in March of 2014, accusing the fiduciaries of the multiple plans run by Novant Health, a non-profit North Carolina hospital system, of breaching their fiduciary duties by allowing excessive fees to be paid to the plans’ broker, D.L. Davis & Co., Inc., to the recordkeeper, Great West, and including more expensive share classes for all of the plans’ mutual funds.

The complaint also alleged that the broker, in just a few short years, saw its compensation rise from about $800,000 to as much as $6 million as the assets of the plans drastically increased.

The plaintiffs alleged that Davis had an extensive business and land development relationship with Novant Health, including companies owned, controlled, or substantially invested in by Mr. Davis, which entered into land development projects and office building leasing arrangements in the greater-Winston-Salem area with Novant Health.

A Davis-owned development company, East Coast Capital, was also accused of giving Novant Health a gift of more than $5 million just as East Coast Capital announced the plans of a large business development known as the Southeast Gateway, in which Novant Health would occupy 40,000 square feet for a call center.

The content for this story was drawn from Fiduciary Matters Blog.

Big life insurers boost gains with Schedule BA investments: Conning

Posted on November 11, 2015 by Editorial Staff -

With the Fed-induced interest rate drought showing little sign of ending, the life insurance industry continued to focus its investment decisions around the search for yield in 2014 and 2015, according to a new study by Conning, Inc.

“From 2010 to 2014, insurers have shifted away from stocks… and increased their allocation in Schedule BA assets as well as lower-rated bonds,” said Mary Pat Campbell, vice president, Insurance Research at Conning.

The Conning study, “Life Insurance Industry Investments: The Search for Yield Runs Dry,” analyzes life industry investments for the period 2010-2014. It looks at trends for the industry as a whole, by insurer size, and for five peer groups. The study discusses strategic issues facing the industry and examines its investment profile.

Investments in Schedule BA assets are a big source of yield. These assets, which include private equity and hedge funds, mineral rights, aircraft leases, surplus notes, secured and unsecured loans to corporations and individuals, and housing tax credits, had yields more than 200 basis points great than insurers’ overall portfolios.

But special expertise is required to buy and manage Schedule BA assets, ownership of them is concentrated among mid- to large-size insurers. While the life industry’s average allocation to Schedule AB is only 2.7%, more than 60% are in the hands of seven large insurers. All but 9% percent of Schedule AB assets were held by insurers with at least $20 billion in assets.

“Insurers of all sizes have been adding credit risk in their investment grade bond portfolios,” said Steve Webersen, head of Insurance Research at Conning, Inc. “This is especially true of midsized insurers that are invested overwhelmingly in bonds. Some of the largest insurers [are] adding risk with below investment grade bonds and investments in Schedule BA assets.”

But, despite gains in certain areas, the overall direction in yields has been downward. The 2013 to 2014 return on investable assets was 4.98%, down from 5.06% in 2013. Between 2012 and 2013, the return fell 38 basis points, according to Conning.

Investable assets for the life industry rose by $130 billion in 2014, to $3.4 trillion, the report said. That was a growth rate of 4%, or almost double the average growth rate from 2010 to 2014. Over that five-year span, allocations to mortgages rose to 11.3% from 10.1% of investments. Allocations to bonds fell by 100 basis points.

Declining interest rates in 2014 increased the value of insurers’ bond portfolios, however, and generated a gross total return

“Life Insurance Industry Investments: The Search for Yield Runs Dry” is available for purchase from Conning by calling (888) 707-1177 or by visiting the company’s web site at www.conningresearch.com.

‘myRA.gov’ steals its webpage design from the robo’s

Posted on November 11, 2015 by Editorial Staff -

The people who designed the myRA.gov website must have studied the robo-advisors. Check out the website, and you’ll see the same airy zero-intimidation informality that characterizes sites of successful robo-advisors like Betterment.com and FutureAdvisor.com, now owned by BlackRock.

Unveiled in President Obama’s last State of the Union address, the Treasury Department’s public retirement savings option, the myRA (“my Retirement Account”) is now available to workers in companies who have no other access to an employer-sponsored savings plan.

The myRA is a Roth IRA where automatic direct deposits from payroll or automatic transfers from checking or saving accounts are invested in government bonds, up to the current IRA contribution limits. A myRA has no fees, no market risk and no minimum balance or contribution requirements. Savers can direct all or a portion of their federal tax refund to myRA.

The 50% or so of American workers with no 401(k), 403(b) or other retirement plan can get information about myRA and sign up for an account at myRA.gov. A Social Security number, ID (driver’s license, passport or military ID) and named beneficiary is required for sign-up.

myRA is designed as a starter retirement account for first-time savers. Once participants reach the maximum myRA balance of $15,000 in Treasury bills, they have the option to transfer to a private sector Roth IRA.

myRA is a Roth IRA and follows the same eligibility requirements. To participate in myRA, savers (or their spouses, if married filing jointly) must have taxable compensation to be eligible to contribute to a myRA account and be within the Roth IRA income guidelines. Savers can contribute to their myRA accounts as little as a few dollars up to $5,500 per year (or $6,500 per year for individuals who will be 50 years of age or older at the end of the year).

Savers can also withdraw money they put into their myRA accounts tax-free and without penalty at any time. Roth IRA requirements apply to the tax free withdrawal of any earnings.

According to a 2015 Federal Reserve Report, 31% of non-retired people said they have no retirement savings or pension. A 2013 report by the National Institute on Retirement Savings found that near-retirement households had only $12,000 in retirement savings, on average. Among workers who don’t participate in a defined contribution plan, 42% say it’s because their employer does not offer one, and 62% of part time workers don’t have access to a retirement plan at work, according to a 2015 Bureau of Labor Statistics release.

Financial Engines acquires The Mutual Fund Store

Posted on November 11, 2015 by Editorial Staff -

At a time when a digital/human hybrid is emerging as the financial advice delivery model of the future, Financial Engines, one of the big-three providers of online managed accounts to 401(k) participants, announced plans to buy The Mutual Fund Store LLC for $560 million and get the human advisor capability it lacked.

“The acquisition will enable Financial Engines to expand its independent advisory services to 401(k) participants through comprehensive financial planning and the option to meet face-to-face with a dedicated financial advisor at one of more than 125 national locations,” the company said in a release.

The Mutual Fund Store, owned by Warburg Pincus, is, like Financial Engines, a registered investment advisor. It has about 345 employees and 84,000 accounts at about 39,000 households. It manages $9.8 billion, as of October 31, 2015.

Financial Engines has been an innovator in the retirement income space. According to the company’s website, its Income+ service “is designed to manage your investments to create [non-guaranteed] payouts that can last into your early 1990s.” Each year in retirement, “some stocks are converted into bonds so that payouts can go up over time.”

If retirees using Income+ wants further protection against longevity risk, they can apply their bond fund assets to the purchase of an income annuity from a third-party insurance company. RIJ was unable to confirm whether or not Income+ would be offered direct to consumers through Financial Engines’ newly-acquired retail outlets.

If the transaction closes as expected late in the first quarter of 2016, it is expected to produce 2016 earnings per share accretion of approximately 25%. Warburg Pincus will become Financial Engines’ largest stockholder with a 12.5% stake, and Warburg Pincus managing director Michael Martin will join the Financial Engines’ board.

For the company, post-acquisition, based on financial markets remaining at November 2, 2015 levels, through all of 2016, and taking into account an anticipated closing of the acquisition of The Mutual Fund Store in the first quarter of 2016, Financial Engines estimates its 2016 revenue will be in the range of $403 million and $410 million and 2016 non-GAAP adjusted EBITDA will be in the range of $125 million to $130 million.

Under typical market conditions, Financial Engines estimates that 2016 revenue will be in the range of $419 million to $426 million and non-GAAP adjusted EBITDA will be in the range of $137 million to $142 million.

The total transaction purchase consideration includes approximately $250 million in cash and 10 million shares of Financial Engines common stock. The combined company will be debt free following the transaction. Based on the common stock portion of the transaction.

TIPS for the Long Run?

Posted on November 5, 2015 by Kerry Pechter -

To Robert Merton, the Nobel economist, Treasury Inflation-Protected Securities, or TIPS, have long seemed like the right foundation for any defined contribution account whose goal, at retirement, is to produce safe, adequate, predictable post-employment income for the next 25 years or so.

Merton’s efforts to monetize this idea—to create a product that puts a “defined benefit” back into DC plans, and to reposition DC plans as personal pension in the minds of participants—started as long ago as 2001, when he, Zvi Bodie, and former JPMorgan executives Peter Hancock and Roberto Mendoza formed a partnership called Integrated Finance Limited. In 2007, they were granted a patent on their savings-to-income process, which they called SmartNest.

Their idea is now back in the news. Its latest incarnation appeared this week with the announcement of a new series of low-cost Target Date Retirement Income Funds, managed by Dimensional Fund Advisors, which acquired the SmartNest patent in 2014. (For background on how SmartNest came to be owned by DFA, click here and here.)

Like other TDFs, the DFA funds use a dynamic asset allocation or “glidepath” that gradually makes the portfolio more conservative over time. DFA’s TDF allocation starts as risky as any other TDF (95% equities for a 30-year-old) but ends much more conservative than most (75% short-, medium- and long-term TIPS) at retirement. The annual cost is 21 to 29 basis points, depending on the vintage.

The funds do not promise a certain level of income in retirement (that depends on the participant’s savings rate) or guarantee that the income will last a lifetime (that depends on the withdrawal rate). But if the participant sticks to a recommended spending rate, DFA expects that the stream will last a lifetime (with something left over) and maintain its anticipated purchasing power. If the participants have done their part and saved the recommended amount, income from the 401(k) account (and from Social Security and perhaps —as Merton emphasized at a recent symposium in Boston—from the proceeds of a reverse mortgage on their homes) would be expected to cover their basic expenses in retirement.

“Each fund matches the duration of a stream of cash flows starting at retirement and lasting for life expectancy, plus a buffer,” said Gerard O’Reilly, the TDF investment manager and an 11-year DFA executive who, like DFA CEO Eduardo Repetto, has a PhD in aeronautical engineering from Cal-Tech. (See interview with O’Reilly in today’s RIJ.)

Deja vu all over again

If you’re getting a sense of deja vu, it’s because the DFA TDFs are a revival of a fizzled 2012 DFA product called Dimensional ManagedDC, which was also based on SmartNest and was also aimed at gathering assets in the DC channel. All three initiatives have been built on a backbone of target date funds.

The TDFs “use many of the same concepts and ideas on which ManagedDC was built,” DFA told RIJ in an email this week. “ManagedDC used the same risk framework as the funds. The target date funds are a commingled solution, a series of 40-Act mutual funds, which allows scalability, portability and low costs. Similar to Managed DC, the funds employ an LDI [liability-driven investing] strategy, using a duration-matched TIPS strategy to manage in-retirement income risks, so that estimates of affordable income or consumption in retirement are less volatile.”

The huge and growing market for TDFs has attracted a lot of entrants, even though it is dominated by Fidelity Investments, Vanguard and T.Rowe Price. Those fund companies, which are also large full-service retirement plan providers, share a TDF philosophy that is very different from DFA’s, as the chart below shows.

The TDFs of the big three have much larger ending equity allocations than DFA’s, and significantly higher costs. They differ from DFAs in theory too. The glidepaths of the big three assume that stocks pay off if you hold them long enough, and that bonds don’t provide enough upside to sustain a portfolio over a 30-year retirement. The DFA/Merton TDF is predicated on the idea that the perceived long-run safety of stocks is a statistical illusion that masks the wide diversity of outcomes for equity investors. (They do include a 20% allocation to risky assets throughout retirement.)

One fund manager whose beliefs overlap with, but also differ from, DFA’s, is Ron Surz, president of Target Date Solutions in San Clemente, CA. He has long been trying to popularize his own TDF series, which uses his patented Safe Landing Glide Path formula.

As the chart shows, the Surz 2020 TDF Builder holds almost 68% bonds (including allocations of 32% to TIPS and 22% to T-bills). But, unlike the DFA product, Surz’ TDFs are so-called “To” rather than “Through” funds. They’re designed only to be held until retirement, a decision he believes is justified by participant behavior.

“I don’t expect folks to stay in my funds when they reach the target date, so SMART Funds end at the target date,” Surz told RIJ. “They end in safe money—57% TIPS, 38% T-bills, and 5% US stocks. In 2012 we lowered the TIP duration to less than three years. We’ll increase it again when the Fed is through manipulating. Of course, I can’t stop folks from staying in SMART, but the fact sheets clearly tell them that it’s very conservative, and not intended as a retirement investment. We say it’s a true “To” fund.”

Surz thinks it’s inappropriate for TDF manufacturers to represent their funds as protection against longevity risk, in part because the rate at which people save is the biggest determinant of their retirement income security. He also expects most most participants to liquidate their shares in their TDFs, which are “Qualified Default Investment Alternatives” into which plan sponsors can default auto-enrolled participants into, after they leave their plans.

“I think of the fund companies who market their TDFs as managing longevity risk are being disingenuous, for two reasons: Saving enough is the key for this objective, and attempts to serve people beyond the target date are thwarted because most people withdraw,” Surz said. “I’d recommend that they acknowledge reality.”

Calculate this!

To help plan participants set income goals, decide how much to save, track their progress toward sustainable income and then draw down that income in retirement, DFA provides a calculator (during the accumulation period) and an automatic payment plan (during the income period) that helps retirees save and spend at a sustainable rate. The maturing TIPS in the fund ensure that the payments maintain their purchasing power.

“A retiree in our target date funds would own shares of a mutual fund,” DFA said in a statement. “They would use distributions and/or sell these shares to consume in retirement. The value of a share is expected to move like the cost of in-retirement consumption.

“We decided not to have a pay-out schedule as investors can set up automatic redemptions in their accounts at their desired frequency—we prefer to give that flexibility to the investors in the funds. Those automatic redemption can fund a retiree’s consumption from retirement until their last days in retirement. As mentioned above, our target date funds are designed to manage uncertainty of affordable in-retirement consumption. We expect this to provide a “smoother” and more certain level of consumption for retirees. We feel managing this risk is critical for retirees, not only for investors saving for retirement.”

Someone long familiar with the Merton-Bodie approach to retirement security is Francois Gadenne, founder of the Retirement Income Industry Association. RIIA sponsors the Retirement Management Analyst designation, whose curriculum also focuses on the twin needs of safe income, from bonds or annuities, and upside potential from risky assets.

Gadenne told RIJ that the DFA approach is one way to skin the retirement income cat, but that the right income tool depends on each client’s specific needs.

“This new product offering by DFA seems to fall in the category of products that wrap a bond ladder, as a risk management device to move the client discussion from an asset focus to an income focus,” he said. “Other categories of products that seek to move the client discussion from an asset focus to an income focus include products that ‘wrap the mortality credit’ and use annuities instead of TIPS.

“In a Zero Interest Rate Policy environment, there are different cost/benefit advantages to these various categories of products. We think the results of The Client Diagnostic Kit, which is the first signpost in our RMA curriculum, should drive the appropriate choice of a specific product for a specific client.” With 10-year TIPS currently yielding a real 0.65%, it might be hard to make a case for them.

Social Security Spousal Benefits Still Unfair

Posted on November 5, 2015 by Eugene Steuerle -

The budget compromise forged by Congress and the Obama administration at the end of last month makes two fundamental changes in Social Security. First, it denies a worker the opportunity to take a spousal benefit and simultaneously delay his or her own worker benefit. Second, it stops the “file and suspend” technique, where a worker files for retirement benefits then suspends them in order to generate a spousal benefit.

Unfortunately, neither of these changes gets to the root issue: that spousal and survivor benefits are unfair, although the reform redefines who wins and who loses. Social Security spousal and survivor benefits are so peculiarly designed that they would be judged illegal and discriminatory if private pension or retirement plans tried to implement them. They violate the simple notion of equal justice under the law. And as far as the benefits are meant to adequately support spouses and dependents in retirement, they are badly and regressively targeted.

As designed, spousal and survivor benefits are “free” add-ons: a worker pays no additional taxes for them. Imagine you and I earn the same salary and have the same life expectancy, but I have a non-working spouse and you are unmarried. We pay the same Social Security taxes, but while I am alive and retired, my family’s annual benefits will be 50 percent higher than yours because of my non-working spouse’s benefits. If I die first, she’ll get years of my full worker benefit as survivor benefits.

Today, spousal and survivor benefits are often worth hundreds of thousands of dollars for the non-working spouse. If both spouses work, on the other hand, the add-on is reduced by any benefit the second worker earns in his or her own right.

An historical artifact, spousal and survivor benefits were based on the notion that the stereotypical woman staying home and taking care of children needed additional support. That stereotype was never very accurate. And today a much larger share of the population, including those with children, is single or divorced. Plus, many people have been married more than once, and most married couples have two earners who pay Social Security taxes.

Where does the money for spousal and survivor benefits come from? In the private sector, a worker pays for survivor or spousal benefits by taking an actuarially fair reduction in his or her own benefit. In the Social Security system, single individuals and married couples with roughly equal earnings pay the most:

Single people and individuals who have not been married for 10 years to any one person pay for spousal and survivor benefits, but don’t get them. This group includes many single heads of households raising children.
Couples with roughly equal earnings usually gain little or nothing from spousal and survivor benefits. Their worker benefit is higher than any spousal benefit, and their survivor benefit is roughly the same as their worker benefit.

The vast majority of couples with unequal earnings fall between the big winners and big losers.

Such a system causes innumerable inequities:

A poor or middle-income single head of household raising children will pay tens of thousands of dollars more in taxes and often receive tens of thousands of dollars fewer in benefits than a high-income spouse who doesn’t work, doesn’t pay taxes and doesn’t raise children.
A one-worker couple earning $80,000 annually gets tens of thousands of dollars more in expected benefits than a two-worker couple with each spouse earning $40,000, even though the two-worker couple pays the same amount of taxes and typically has higher work expenses.
A person divorcing after nine years and 11 months of marriage gets no spousal or survivor benefits, while one divorcing at 10 years and one month gets the same full benefit as one divorcing after 40 years.
In many European countries that created benefit systems around the same stereotypical stay-at-home woman, the spousal benefits are more equal among classes. In the United States, spouses who marry the richest workers get the most.
One worker can generate multiple spousal and survivor benefits through several marriages, yet not pay a dime extra.
Because of the lack of fair actuarial adjustment by age, a man with a much younger wife will receive much higher family benefits than one with a wife roughly the same age as him.

When Social Security reform eliminated the earnings test in 2000 and provided a delayed retirement credit after the normal retirement age, some couples figured out ways to get some extra spousal benefits (and sometimes child benefits) for a few years. After the normal retirement age (today, age 66), they weren’t “deemed” to apply for worker and spousal benefits at the same time, allowing them to build up retirement credits even while receiving spousal benefits. Other couples, through “file and suspend,” got spousal benefits for a few years while neither spouse received worker benefits.

These games were played by a select few, although the numbers were increasing. Social Security personnel almost never alerted people to these opportunities and often led them to make disadvantageous choices. Over the years, I’ve met many highly educated people who are totally surprised by this structure. Larry Kotlikoff, in particular, has formally provided advice through multiple venues.

So is tightening the screws on one leak among many fair? It penalizes both those who already have unfairly high benefits and those who get less than a fair share. It reduces the reward for game playing, but like all transitions, it penalizes those who laid out retirement plans based on this game being available. It cuts back only modestly and haphazardly on the long-term deficit. As for the single parents raising children — perhaps the most sympathetic group in this whole affair — they got no free spousal and survivor benefits before, and they get none after.

The right way to reform this part of Social Security would be to first design spousal and survivor benefits in an actuarially fair way. Then, we need better target any additional redistributions on those with lower incomes or higher needs in retirement, through minimum benefits and other adjustments that would apply to all workers, whether single or married, not just to spouses and survivors.

As long as we keep reforming Social Security ad hoc, we can expect these benefit inequities to continue. I fear that the much larger reform required to restore some long-term sustainability to the system will simply consolidate a bunch of ad hoc reforms and maintain these inequities for generations.

This column originally appeared on PBS Newshour’s Making Sen$e.

DFA’s Gerard O’Reilly Explains His Firm’s New TDFs

Posted on November 5, 2015 by Kerry Pechter -

Dimensional Fund Advisors, the 30-year-old, $376 billion asset management based in Austin, Texas, launched a series of 13 target dates funds this week. DFA co-Chief Investment Officer and research director Gerard O’Reilly explained how the funds work. (For more on the new TDF series, see today’s RIJ cover story, “TIPS for the Long Run?”)

“Each fund matches the duration of a stream of cash flows starting at retirement and lasting for life expectancy plus a buffer,” said Gerard O’Reilly, the TDF investment manager and an 11-year DFA executive who, like DFA CEO Eduardo Repetto, has a PhD in aeronautical engineering from Cal-Tech. “These are ’40 Act’ funds, and each fund is fund of funds. The investments are in U.S., developed countries and emerging markets equities, in global investment grade fixed income, and in three underlying TIPS funds—long-duration, medium-duration and short-duration.

“When you consider a participant’s economic lifecycle, there are multiple phases. You have a period of accumulation in early working life, and then in the last 15 or 20 years before retirement, a need develops for greater clarity about retirement consumption, and consumption of savings. Your own balance sheet looks different at different parts of the life cycle. At the beginning you have lots of human capital, and as you get closer to retirement you have less human capital and more financial capital, and finally at retirement you have only financial capital. When you think about why people save, the goal is to have a smooth transition into retirement. In the future, more and more people will rely on their own savings to provide income to life expectancy, with some buffer.”

“If you held this fund, you could set up automatic redemptions, and we’d manage it behind the scenes. You have complete control over how you spend your assets. We think these funds represent the ‘next generation’ in terms of target date funds, because they’re reducing the uncertainty regarding how much you can spend in retirement. Because that is the focus, we have a different way of managing risk. That’s a game changer. It allows you to take your defined contribution savings and turn it into a low-cost source of retirement income. We’re solving the right problem. We’re managing the right risks. We’re saying, ‘Here’s an estimate of how much retirement income you can afford.”

“For example, imagine that you know you will need $100 ten years from now. Ten-year Treasury rates are about 2.2% right now. You could buy a 10-year zero-coupon Treasury today for about $80, and eliminate interest rate risk, or you could invest over and over in one-month Treasuries,” and leave interest rate risk and inflation risk on the table.” What about income estimates? “We’ve been in communication with recordkeepers about that. They can provide income estimates in their reports to participants. They can say, ‘Here’s an income estimate given your current balance.’

“But that’s a communication question, and I’m a money manager. The funds manage the uncertainty about how much a given balance can afford. But DFA isn’t the right person to be telling them that. We’re providing an integrated solution across the life cycle. It’s low cost—21 bps to 29 bps per year—and very transparent. It enables plan sponsors, advisors and recordkeepers to communicate more meaningfully about how much retirement income each participants’ balance can afford.”

Third quarter for S&P500 was worst in four years: fi360

Posted on November 4, 2015 by Editorial Staff -

Global equity markets were down and volatility was up during the third quarter, and the large-cap S&P 500 Index suffered its largest quarterly decline in four years, and the MSCI Emerging Index ending at its lowest closing level since 2009, according to fi360.

Primary factors were interest rate uncertainty with the U.S. Federal Reserve Bank maintaining their policy, the economic slowdown in China, and commodity prices substantial drop.

The S&P 500 had a return of minus 6.44% in the quarter and is minus 5.29% year-to-date. That was better than global equity performance, as the MSCI All Country World ex-US returned minus 12.1% in the quarter and is minus 8.28% year-to-date.

Emerging market equities performance was worse, as the MSCI Emerging Markets Index was down 17.78% for the quarter and is off 15.22% YTD. The bond market as measured by the Barclays US Aggregate Bond Index was up 1.23% in the quarter and 1.13% YTD; while the broad international market via the Barclays Global Aggregate Ex USD Government Bond Index was up .64% in the quarter but is minus 4.82% YTD.

For volatility, the CBOE Volatility Index increased in the quarter from 18.23 to 24.50, and the Bloomberg Commodity Index was minus 14.47% in the quarter and is down 15.8% YTD.

Every sector in the EAFE index declined during the quarter, while small-cap stocks outperformed large-caps, and growth stocks outperformed value stocks. In the US market, energy (-18.71% in the quarter, -21.89% YTD) and basic materials (-16.93% quarter, -17.03 YTD) were the worst-performing Morningstar stock sectors while utilities (+4.75% for the quarter, -6.38% YTD) and Real Estate (+0.3% for the third quarter; -4.96 YTD) were the only positive returns.

Small-cap underperformed mid and large, large growth outperformed large value. But mid and small value outperformed mid and small growth (although all were negative performers for the quarter).

Women are better savers, but men save more: Vanguard

Posted on November 4, 2015 by Editorial Staff -

Women are more likely to save in DC plans than men but men have significantly higher account balances than female participants, a new research study from the Vanguard Center for Retirement Research shows. The probable reasons: Men have higher average wages and hold more senior, longer-tenured positions.

The average account balance of Vanguard participants in the study was $123,262 (median $36,875) among men and $79,572 (median $24,446) among women. “The difference is not due to savings behavior but the higher wages of men,” Vanguard said. Male participants earn 25% to 33% more than female.

In its investigation of the “substantial imbalance” in wealth accumulation for men and women in Vanguard-administered retirement plans, Vanguard reviewed participation rates, savings rates and investment choices. Some of the findings:

Female Vanguard participants are 14% more likely than men to participate in their workplace savings plans.
Women earning less than $100,000 have participation rates that are about 20% higher than those of their male counterparts.
Once enrolled, women save at higher rates. Across all income levels, women save at rates that are between 7% and 16% higher than men’s savings rates.

Looking only at plans with automatic enrollment, men and women participate at the same rate, suggesting that men are benefit more from auto features. On the other hand, lower-wage individuals typically see the largest improvements from auto enrollment—and about 60% more women fall into the lower-income bands than men.

“Women absolutely demonstrate a conscious inclination towards savings and, even with a higher proportion of women earning lower wages, the tailwind of auto-enroll has maintained that savings lead,” said Jean Young, senior research analyst in the Vanguard Center for Retirement Research and the author of the report. In voluntary enrollment plans, women save at rates that are 6% higher than men.

Over the last five years, male participant returns only slightly edged out those of women, Vanguard research shows. Median returns for men were 10.9%, compared with 10.6% for women.

Contrary to the view that women are more risk-averse, their equity exposure is similar to men’s in Vanguard plans. Female participants are less likely to hold employer stock and more likely to hold balanced investment allocations. Nearly half of Vanguard female participants adopted a managed account program, target date fund, or traditional balanced fund.

Women are also far more likely than men to hold a target-date fund. As of year-end 2014, 42% of women held a single target-date fund and, on average, held 52% of account balances in target date funds (TDF). In aggregate, 17% more women than men held a single TDF in their retirement plan accounts. Women also traded about one-third less than men, with only 7% of female participants trading in 2014.

Spike in cash takeovers could be bad omen: TrimTabs

Posted on November 4, 2015 by Editorial Staff -

Cash takeovers of U.S. public companies have been occurring at a pace not seen since shortly before the global financial crisis, according to TrimTabs Investment Research. For the six-months ended on October 31, cash takeovers hit a record value of $457.8 billion, about 12% higher than the previous six-month record of $406.5 billion set from February 2007 through July 2007, according to the Sausalito, CA financial research firm.

“The merger boom is being fueled by a combination of extraordinarily easy credit and stagnant revenue,” said David Santschi, TrimTabs’ CEO. “It’s a lot easier to buy growth with cash or borrowed money than it is to grow a company organically, particularly when the economy isn’t expanding much.”

In October, cash takeovers hit a monthly record of $97.5 billion, TrimTabs said. Cash mergers topped $50 billion in five of the past six months.

TrimTabs sees this trend as a “cautionary sign” for U.S. equities. “Merger activity tends to swell around market tops as confident corporate leaders turn to deal-making to boost earnings and revenue late in the economic cycle,” said Santschi.

Twelve deals used at least $10 billion in cash in the past six months, including four in the Information Technology sector. The largest were Dell’s agreement to buy EMC using $46.2 billion in cash, Anthem’s $45.0 billion bid for Cigna, Berkshire Hathaway’s $32.4 billion offer for Precision Castparts, and Charter Communications’ $28.3 billion bid for Time Warner.

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