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Fed hike will have “no immediate impact” on insurers: A.M. Best

Posted on December 23, 2015 by Editorial Staff -

In a new briefing, entitled “Insurers Hope Fed Move a Sign of Things to Come,” the rating agency A.M. Best said, “The Federal Reserve’s first interest rate increase in nearly a decade does not symbolize a ‘lift off’ scenario for interest rates. Subsequent moves by the Fed will involve an uncertain and measured approach with multi-year rate increases following what had been an unprecedented monetary easing.”

The briefing said:

“A.M. Best sees no immediate impact to its view of the U.S. property/casualty, life or health insurance industries, or any individual rating units as a result of the 0.25% increase in the Federal Funds Rate. While the overall industry has been juggling falling portfolio yields and limited reinvestment opportunities, life/annuity companies in particular have also been facing spread compression. In the short-term, the Fed’s rate hike will primarily impact the shorter end of the interest rate term structure, which doesn’t impact insurers with predominantly longer-term bond holdings. This initial move also doesn’t ease the pain for older spread-based products with higher guaranteed crediting rates.

“Although investment portfolio yields would eventually benefit from any increasing interest rate scenario, A.M. Best is more watchful of the increased credit risk accumulating for the industry from its effort to attain higher investment returns.

“Overall, however, a continued measured rise in rates is a net positive for the life/annuity industry as product spreads improve, investment portfolio yields increase, and other side benefits accrue to the industry, such as having a positive impact for those carriers with underfunded pension plans.”

In a second briefing, entitled “Rating Outlook Remains Stable For U.S. Life/Annuity Industry But Challenges Persist,“ said A.M. Best “is maintaining its stable outlook on the U.S. life/annuity industry for 2016, supported by the benign credit and interest rate environments and in the face of various challenges, in particular, the overall economic climate and its potential impact on interest rates, and, to a lesser extent, credit risk.”

“The life/annuity industry has seen absolute and risk-based levels of capitalization improve. In addition, asset impairments remain low and operating performance is up modestly as compared with 2014,” the briefing said.

But the assessment was mixed. “Slow premium growth for life products, driven in part by the industry’s inability to effectively access the middle market, remains an industry-wide dilemma, and when coupled with low interest rates, leads to moderate revenue and operating earnings,” A.M Best said.

“A shift to a negative outlook could result from an overall negative transition in the U.S. economy, which, for example, could drive a sudden spike in interest rates. In addition, a material increase in credit risk resulting in investment impairments would also potentially drive an unfavorable change in outlook.”

Seniors’ home equity reaches $5.76 trillion

Posted on December 23, 2015 by Editorial Staff -

An estimated $147 billion increase in the aggregate value of homes owned by seniors drove their share of home equity to $5.76 trillion, according to the National Reverse Mortgage Lenders Association.

The new figures boosted the NRMLA/RiskSpan Reverse Mortgage Market Index (RMMI) to a record in Q3 2015 of 200.19, from 195.42 in Q2, even though mortgage debt held by seniors increased slightly, to $1.46 trillion from $1.45 trillion during that period.

The Q3 numbers are based on data from the 2013 American Community Survey and the Federal Reserve’s Z.1 Release to estimate the value of aggregate senior home equity underlying the RMMI.

“The recalibrated index uncovered something we didn’t expect to see, which was that senior housing values outperformed the general population. In metro areas hard hit by the Great Recession, for example, senior home values were more resilient to declines. It’s great news for seniors who are considering tapping their housing wealth to support their retirement planning,” said NRMLA President and CEO Peter Bell in a release.

New ERISA Advisory Council members appointed

Posted on December 23, 2015 by Editorial Staff -

U.S. Secretary of Labor Thomas E. Perez has appointed five new members to the 2016 Advisory Council on Employee Welfare and Pension Benefit Plans, known as the ERISA Advisory Council. Perez also appointed current member Mark E. Schmidtke as incoming council chair and Jennifer Kamp Tretheway as the incoming council’s vice chair.

Schmidtke is a shareholder with the law firm Ogletree, Deakins, Nash, Smoak & Stewart, P.C. in Valparaiso, Indiana. Tretheway retired recently as a trust company executive with Northern Trust.

The 15-member council provides advice on policies and regulations affecting employee benefit plans governed by the Employee Retirement Income Security Act of 1974.

The newly appointed members and the constituencies they represent are:

Beth A. Almeida, representing the general public, is principal researcher with the Center on Aging at the American Institutes for Research, where she writes on employee benefits, transitions to retirement, and long-term care.

Patricia M. Haverland, representing employers, is vice president, Pension Fund Management for Siemens’ North American operations.

Tazewell V. Hurst III, representing employee organizations, is a senior research economist with the International Association of Machinists & Aerospace Workers.

Cynthia J. Levering, representing actuarial counseling retired from Aon Consulting as a senior vice president and consulting actuary in 2009.

Stacy R. Scapino, representing investment counseling, is a partner and global leader for Mercer Investments’ Multinational Corporate Consulting activities.

By law, council members serve for staggered three-year terms. Three members are representatives of employee organizations (at least one of whom represents participants in a multiemployer plan). Three members are representatives of employers (at least one of whom represents employers maintaining or contributing to multiemployer plans). Three members are representatives of the general public. There is one representative each from the fields of insurance, corporate trust, actuarial counseling, investment counseling, investment management and accounting.

Bob Pozen Knows Retirement

Posted on December 22, 2015 by Kerry Pechter -

Few people in the financial services industry have been as productive and influential in so many ways as Bob C. Pozen. The 69-year-old Harvard-and-Yale-educated lawyer has served as president of Fidelity Investments, as chairman of MFS Investments, as a presidential adviser and SEC official, as a research fellow at the Brookings Institution and, currently, as a lecturer at MIT. He has written books on topics both macro (the mutual fund business, the Global Financial Crisis) and micro (personal time management).

Back in October, Pozen moderated a panel on Innovative Retirement Products at the 2015 Fall Journal of Investment Management conference at the MIT Sloan School of Management. The panelists included Peggy MacDonald of Prudential Financial’s pension risk transfer business and Tom Reid of Sun Life Financial of Canada.

During the panel discussion, Pozen spoke favorably about the usefulness of annuities in mitigating longevity risk. In a recent phone conversation with RIJ, he expanded on some of his views regarding retirement.

RIJ: Greetings, Bob. Ten years ago, I bought your book, The Mutual Fund Business. And I know that the second edition of your book, The Fund Industry: How Your Money Is Managed, came out in early 2015. So it’s a privilege to talk with you in real time. Judging by your comments at the JOIM conference, you sounded like a fan of annuities.

Pozen: I didn’t say I liked all annuities. I said I like the concept of longevity annuities. What’s good about them is that payouts don’t start until you’re 80 or 85 years old, which makes them relatively inexpensive. They also serve a planning need. It’s easier to create a financial plan that stops at age 80 than to plan for an unknown lifespan. And, the way the Treasury rules work now, you can also get a pass on the RMD rules up to about $125,000 when you buy a longevity annuity with tax-deferred savings.

RIJ: You’re talking about the Qualified Longevity Annuity Contract, which the Treasury Department introduced in 2015. Some people think the cap on QLAC contributions of $125,000 doesn’t offer upper-income people a large enough tax incentive to give up so much liquidity, while the cap of 25% of qualified savings won’t let middle-income people buy a meaningful amount of income with their smaller IRA balances. What do you think of those concerns?

Pozen: Despite what economists may say about the high value that people place on optionality, putting 25% in a longevity annuity seems like a reasonable insurance policy while still leaving you with flexibility.

RIJ: There’s been a lot of debate over whether the U.S. is experiencing a retirement “crisis.” The Center for Retirement Research at Boston College says that 52% of American households are at risk of not being able to maintain their current lifestyle in retirement. But the Investment Company Institute and others say that income from 401(k)s has been underestimated or overlooked in official statistics, and that most retirees will do just fine. Do we have a crisis?

Pozen: There is a retirement-related set of problems. Whether there’s a crisis or not is a different question. For some income groups, there is not a crisis. There are others who will depend entirely on Social Security for their retirement income. Then there’s a middle ground made up of people who have not saved enough for retirement. It’s clear that some of them should save more. But how much more, we don’t know. We have all these people who say they want to save more but don’t.

RIJ: Why do you think they don’t save?

Pozen: A lot of them don’t have a 401(k) plan at work and they don’t set up their own IRAs. Roughly half of employees in the United States don’t have retirement plans at work and inertia seems to prevent them from saving on their own. We also know there are lots of employers choosing not to participate in that system. Some are small employers, some are in the agriculture and retail sectors.

RIJ: The Obama administration recently went live with its MyRA program of workplace IRAs that use existing payroll systems without requiring the employer to sponsor a full-blown retirement plan. And a few states, including California, are in the process of setting up state-sponsored retirement plans with mandatory participation by most employers and automatic enrollment of workers. What do you think about those state “public option” plans?

Pozen: I’m in favor of the automatic IRA. As for the state plans, I think it would be better to have a federal system than to have three states doing it.

RIJ: Another of today’s big public policy issues involves the Department of Labor’s proposed “conflict of interest rule” that will extend DOL jurisdiction to rollover IRAs and raise the standard of advice on IRA money to a fiduciary level. Have you looked at that issue?

Pozen: I’m not very familiar with the details of that, so I can’t comment.

RIJ: When George W. Bush was president, you advised his administration on Social Security policy. What were your ideas for reforming Social Security?

Pozen: I came up with a plan called “progressive indexing.” The thrust of it was that Social Security benefits are growing faster than the Consumer Price Index because they’re linked to wage growth. Wages on average rise about one percent faster than prices. My proposal was to link the growth of benefits of the upper third of earners to CPI growth while letting the benefits of the lower third of earners continue to rise with the wage index. This strategy would cut the program’s long-term deficit somewhere in half.

RIJ: Wouldn’t that introduce a form of “means-testing,” which might not be very popular?

Pozen: It’s not means-testing. Means-testing would mean that you’d get nothing from Social Security if you are among the high earners. My plan is more like “means-tilting.” I’d be reluctant to suggest that the people in the top third get nothing from Social Security. That would undermine popular support for the program.

RIJ: But your idea wasn’t incorporated into the Bush administration’s Social Security reform plan, right?

Pozen: For a while, my idea had a lot of traction. President Bush linked it to Social Security privatization, which became his administration’s main policy recommendation. But the ideas are separate, if by privatization you mean a carve-out of Social Security taxes where you divert, say, 5% of the FICA tax into private accounts. But if you diverted FICA taxes you’d have to put all of the money into Treasuries, or the program would be too risky. It’s hard to get good deals on investments.

RIJ: Some conservatives have recommended raising the full retirement age, or FRA, as a way to close the Social Security funding gap. What do you think of that type of reform?

Pozen: There are a lot of difficult issues associated with raising the FRA. There’s an issue involving people who can no longer do physical work. If they have to wait longer for Social Security benefits, will there be suitable jobs for them while they’re waiting? Another issue is that a lot of lower earners won’t get that much from Social Security anyway because of the big longevity gap between upper earners and lower earners. My proposal is more income-based than retirement age-based. To me, it goes to the heart of the problem. We’re already moving to age 67 for the FRA, but if we go to age 70 a lot of workers would get nothing. Raising the FRA may sound attractive at first but we have to be careful.

RIJ: Some liberals have recommended increasing in the level of income that’s subject to payroll taxes, currently set at $118,000. Do you think that’s a good idea?

Pozen: I’ve seen proposals to raise the FICA limit to $200,000, but that’s really whacking certain people. That’s putting a big new tax on people who don’t consider themselves wealthy. I would rather see a 2% surcharge on all income above the current FICA limit.

RIJ: The next time we have a public debate on the future of Social Security, the question of whether the “trust fund” is real will undoubtedly come up again. Is the trust fund “real”?

Pozen: That’s a false question. The Treasuries in the trust fund are IOUs from one part of the government to another. It’s a trust fund that’s filled with intra-governmental obligations. When it’s time to cash out those special Treasuries, the money will have to come from the federal budget. So Congress would need to appropriate the money but then probably have to borrow it. It’s kind of circular.

RIJ: Switching to another topic entirely, what do you think of the rise of the robo-advisors?

Pozen: I’ve had some experience with robo-advisors, and I think they do a good job with smaller amounts of money. From $50,000 to $100,000, say. But they don’t offer customization, at least not in the way that some people think they do. They do serve a purpose, however.

RIJ: Robo-advice seems to me to be just another name for an Internet-driven trend toward disintermediation of advisors and direct distribution of investment products and services. One survey showed that when people are asked which robo-advisors they know of, they mention direct providers like Fidelity, Vanguard and Schwab.

Pozen: Robo-advice is more than direct distribution. It’s direct distribution in a particular way. And I think Vanguard was very smart to start its own robo-advisor.

RIJ: You’ve worked in a Republican administration and you’ve been associated with the liberal-leaning Brookings Institution. You’ve also been a senior executive of large financial services companies. That makes it tough to place you on the political spectrum. Where would you place yourself?

Pozen: I’m a moderate Democrat, which means that I’m fiscally conservative and socially liberal.

RIJ: Thank you, Bob.

Fed raises target overnight rate by quarter-percent

Posted on December 17, 2015 by Editorial Staff -

Choosing to take minimal action before events force it to take drastic action, the Federal Open Market Committee “decided to raise the target range for the federal funds rate by one-quarter percentage point, bringing it to 0.25% to 0.50%,” Federal Reserve chairman Janet Yellen said at a press conference yesterday.

“This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression,” Yellen read from a prepared text.

The Fed Funds rate is the annual rate at which Federal Reserve member banks lend reserves to each other overnight. Yellen added that the Fed raised two other rates that it uses as tools to push the Fed Funds rate up into the target range.

“Specifically, the Board of Governors raised the interest rate paid on required and excess reserves to 0.5%, and the FOMC authorized overnight reverse repurchase operations at an offering rate of 0.25%. Both of these changes will be effective tomorrow,” she said.

As for the future, Yellen’s forward guidance wasn’t nearly as specific as Alan Greenspan’s when he began raising rates by predictable amounts and predictable intervals in 2004.

“The median projection for the federal funds rate rises gradually to nearly 1.5% percent in late 2016 and 2.5% in late 2017,” she said. “As the factors restraining economic growth continue to fade over time, the median rate rises to 3.25% by the end of 2018, close to its longer-run normal level.”

Anticipating questions about why the Fed had decided to raise rates even though it thinks the U.S. economy is relatively tepid, Yellen said:

“We recognize that it takes time for monetary policy actions to affect future economic outcomes. Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly at some point to keep the economy from overheating and inflation from significantly overshooting our objective. Such an abrupt tightening could increase the risk of pushing the economy into recession.”

A near-retirement breakup calls for financial advice: MacroMonitor

Posted on December 17, 2015 by Editorial Staff -

For older couples, marital stability may be the best predictor of financial security in retirement. That’s especially true for women. If two can live as cheap as one, going solo can cost double.

In short, divorce is highly disruptive of the finances of adults nearing retirement. And these autumnal, change-of-life, empty-nest-transition, loss-of-vitality divorces are occurring more often.

That spells opportunity for financial services providers, according to a new report in the MacroMonitor, a publication of the Princeton, NJ-based Consumer Financial Decisions Group of Strategic Business Insights, an international business consulting firm.

“In 1992, the number of divorced households with heads age 50 and older was lower than for younger heads (younger than age 50),” the report said. “In 2014, the number of divorced heads age 50 and older is three times that for households with younger divorced heads (12 million versus 4 million households),” the report said.

“Also notable is the significantly higher number of divorced women age 50 and older (7.1 million) than men of the same age (4.5 million).”

Men are more likely than women to remarry, according to MacroMonitor. Although incidences are small, men age 50 and older are twice as likely as women age 50 and older to expect to remarry in the next year.

There are about 20 million divorced or separated households in the U.S; about 15.5 million are divorced and 4.4 million are separated. Between 1992 and 2014, the overall proportion of US divorced households has remained at about 12%.

“The effects of divorce and separation on finances are immediate and often long lasting,” the report said. “Financial relationships, financial product and service ownership, and assets suffer effects, and changes in cash flow are immediate. The results of divorce may be more profound for mature households than for younger households because of impending retirement.”

Divorce affects older women differently from men because women tend to live longer, have lower lifetime earnings, and serve as caregivers throughout their lives, the MacroMonitor said. Large numbers of women didn’t enter the work force until the 1970s, so many older women didn’t learn to manage finances on their own. As a result many lack experience and confidence.

Cash-outs, loans and rollovers fuel the flood from 401(k)s: Cerulli

Posted on December 17, 2015 by Editorial Staff -

Nearly $81 billion disappeared from retirement accounts in 2014 as a result of cash-outs and loan defaults, according to Cerulli Associates, a global analytics firm. Such events are the source of the so-called “leakage” that undermines retirement savings and will likely create financial shortfalls later in life.

In a new report, “Evolution of the Retirement Investor 2015: Insights into Investor Segmentation and the Retirement Income Landscape,” Cerulli examines retirement decisions made by individual investors, with emphasis on 401(k) plan participants, IRAs and rollovers, and retirement income.

Leakage is of great concern to 401(k) providers who hope to retain the assets, to IRA providers who want to capture more of the assets in motion, and to policymakers who worry about potential demand for government services from underfunded elderly Americans. Cash-outs, which become possible when individuals change jobs, are the biggest cause of leakage, with loans a distant second.

The U.S. may be the only developed country where individuals can tap a tax-deferred savings program before retirement. If the cash-out amounts are small, the prospects of a slightly higher tax bill or even a 10% penalty for early withdrawal don’t act as effective deterrents. “Outside of the interaction with their recordkeeper or IRA service provider, there is really nothing stopping anyone from accessing either a terminated DC or IRA account early,” said Shaan Duggal, a Cerulli research analyst.

“Nearly every Gen-Xer who completed a cash distribution from their 401(k) ended up paying an additional 10% penalty on top of regular taxes to the IRS. When a distribution is requested, recordkeepers should spring into action, conveying the benefits of preserving the tax-deferred nature of the assets.”

“Loans are also a source of 401(k) leakage, albeit smaller, but when they are defaulted on immediately they cause a taxed and penalized event for the already cash-strapped individual,” Duggal said in a release. “Removing the entire loan function from the plan may be extreme, but restricting the amount of outstanding loans to only one will slowly do away with the idea that the DC plan is meant to be a source of short-term liquidity.”

But leakage is a sideshow relative to the rollover story. Over the past decade, millions of plan participants have, one by one, moved their retirement plan money into rollover IRAs when they changed jobs. In 2014, those over age 50 represented almost 80% of the flow, according to Cerulli. Retirement providers want to stem the outflow, while advisors and IRA providers hope to capture it.

Full-service firms like Fidelity and Vanguard, which provide retirement plans, serve as IRA custodians and sell mutual funds direct to the public, are positioned to benefit regardless of the direction of the flow. In 2014, Fidelity led the IRA industry with 14.6% of total rollover flows. When people roll over their money, they often roll it over to their plan’s provider or to a brokerage advisor.

“Advisors received the majority of rollover assets ($220 billion), followed closely by self-directed IRAs at $162 billion. Plan-to-plan rollovers were a distant third at $27 billion,” the Cerulli report said. Cerulli speculated that the Department of Labor’s pending proposed “fiduciary rule” could, when it is issued, dampen the flow from 401(k) plans to IRAs. “The DOL viewpoint is that the DC plan is often the best place to leave assets,” Cerulli writes, but it’s still likely that most people will withdraw their retirement income from IRAs, not from 401(k) plans.

Social Security is still the No. 1 source of retirement income (33.9%) for middle-class participants. Defined contribution and personal savings combined provide 32.5% of participants’ income in retirement, Cerulli reported.

Significantly, pension risk-transfer goes Dutch

Posted on December 17, 2015 by Editorial Staff -

The UK’s Legal & General insurance company, which partnered with Prudential Financial on the recent conversion of part of Philips Electronics of North America’s defined benefit to a group annuity, will reinsure €200m of the Dutch firm ASR Nederland’s pension obligations, IPE.com reported this week.

The expansion of the pension risk-transfer business beyond US, UK and Canada pension funds for the first time is a “significant milestone,” Legal & General Re chief executive Manfred Maske said in a release. It was the first deal executed through L&G Re, set up in 2014.

Prudential, active in the de-risking market both in North America and the UK, has long predicted de-risking would spread across Continental Europe. The firm’s head of longevity insurance, Amy Kessler, addressed the topic at the International Longevity Risk and Capital Markets Solutions in Lyon in September.

“Globalization is just beginning, with activity spreading quickly from the US, the UK, Canada and the Netherlands to France, Germany, Switzerland, the Nordics, Australia and beyond,” Kessler said.

James Mullins, head of risk transfer at UK consultancy Hymans Robertson, the ASR deal confirmed there was now a global market for risk transfer.

“With more choice of markets, reinsurers that are taking on longevity risk may look to increase pricing over the longer term,” he said. “But that goes against the trend we have seen for some time now of reinsurers keeping prices low. Strong competition, intense interest in the sector and appetite for deals has kept it that way.”

“The potential market for pension risk transfer in the US, UK and Europe is huge and will play out over many decades.” Kerrigan Procter, managing director at Legal & General Retirement, told IPE.com.

Unsolved mystery: Where are the missing participants?

Posted on December 17, 2015 by Editorial Staff -

Is the percentage of Americans who participate in a workplace retirement savings plan dropping, or is the method used to measure participation faulty? The Employee Benefit Research Institute raises this question in a new Issue Brief.

It’s an important and timely question. If participation is dropping, it could add weight to the argument that state-sponsored, auto-enrolled retirement savings plans are needed to make up for the lack of coverage provided by the voluntary 401(k) system.

At issue is the accuracy of the Annual Social and Economic Supplement (fielded in March) to the Census Bureau’s CPS. It is one of the most-cited sources of income data for retirement-age Americans.

The Census Bureau redesigned the income-related questions starting in the 2014 survey in response to findings that this survey has misclassified and generally under-reported income (in particular, sources of retirement income).

While the redesign of the survey did capture more income (especially pension income), EBRI notes, it also significantly lowered the survey’s estimates of retirement plan participation among those most likely to participate. Furthermore, these new CPS participation results trended downward in contrast to other surveys on retirement plan participation.

Specifically, EBRI found:

In the 2014 CPS, which provides results for 2013, both survey designs were used. Under the traditional survey design, the percentage of all workers found to be working for an employer that sponsored a plan was 50.2%, compared with 47.6% from the redesigned questionnaire, a difference of 2.6 percentage points. For full-time, full-year wage and salary workers ages 21-64 (those most likely to participate in a plan), the difference was 3.7 percentage points (60.8% traditional vs. 57.1% redesigned) and for public-sector workers ages 21-64 the difference was 3.3 percentage points.
The 2015 survey used the redesigned questionnaire, and the percentages of workers working for an employer that sponsored a plan were found to have decreased among each work force. The percentage of full-time, full-year wage and salary workers ages 21-64 working for an employer that sponsored a plan fell 2.7 percentage points from 2013 to 2014.
The percentage of full-time, full year wage and salary workers ages 21-64 participating in a plan under the traditional survey design was 53.0%, compared with 49.5% under the redesigned questionnaire, a difference of 3.5 percentage points.

The decline contradicted the findings from the Bureau of Labor Statistics’ National Compensation Survey (NCS). It found that the percentage of private-sector wage and salary workers at establishments with 500 or more employees participating in an employment-based retirement plan increased in 2014 to 77% from 76% in 2013.

“While the redesign of the CPS questionnaire achieved one of its primary goals of capturing more income—especially pension income—it also resulted in sharp declines in the estimated retirement plan participation levels of current workers,” Copeland said. “Furthermore, those most affected were those groups with the highest likelihoods of participation—those older, with higher earnings, and working for larger employers.”

The full report, “The Effect of the Current Population Survey Redesign on Retirement-Plan Participation Estimates,” is published in the December 2015 EBRI Notes and online at www.ebri.org.

No-Nonsense Income Planning

Posted on December 16, 2015 by Kerry Pechter -

If you’re a registered investment advisor you may feel compelled to steer retirees away from annuities. If you’re an insurance agent you may naturally want to sell your clients annuities with ample commissions. Jim Otar, a Toronto-area advisor, prefers to let the his clients’ funded status—green, yellow or red—dictate his recommendations.

For almost two decades, Otar has presented his commonsense, no-nonsense “Zone” method of retirement income planning to thousands of advisors at countless events. Although he claims to be “slowing down,” he gave yet another of those presentations at the recent IMCA retirement conference in Scottsdale.

A mechanical engineer by training, Otar designs retirement plans the way engineers design bridges: To bear the peak stress, not just the average stress. Bengen’s 4% rule does much the same thing, but Otar has added nuance, detail and flexibility to that hoary heuristic. He readily shares his methods, and doesn’t give a hoot if you buy into them or not. That’s part of what makes him so credible.

“Zone” theory

At 20, Otar emigrated to Canada from Istanbul. He earned BS and MS engineering degrees at the University of Toronto. In the 70s, he started managing his own money. Then he managed money for his relatives, and by the mid-1990s had become a CFP. He’s also licensed to sell insurance in Ontario. He documented his methods in the 2009 book, “Unveiling the Retirement Myth.”

Otar may be known best for his “Zone” matrix, which serves planning as well as practice management purposes. He categorizes clients as Green, Yellow and Red. Green zoners have enough money to fund their spending needs indefinitely; they and their advisors can afford to focus on estate planning. Red zone clients need (or want) more income than their savings can safely muster. Yellow clients fall in between.

These definitions help guide Otar’s annuity recommendations. Clients who start out in the red zone, for instance, can move to yellow or green, for example, by reducing their spending rate or buying guaranteed income. Otar says that red clients buy income annuities “for insurance reasons,” as protection from longevity risk. Green clients, on the other hand, buy income annuities for “investment reasons”: to take more risk with their other assets.

The zone strategy also helps frame the annuity discussion. “It gives you a precise guideline about when risk must be exported to create a lifelong income,” Otar said. For instance, an advisor and client can easily see that a $500,000 life annuity that pays out $30,000 a year would benefit someone who needs $30,000 but can only withdraw $20,000 safely from investments. On the other hand, someone who needs only $18,000 a year from $500,000 can take or leave the annuity. Otar Safe Withdrawal rates

Withdrawal rates should vary depending on how the income will be used, Otar believes. Other advisors might divide a retiree’s assets into risky, low-risk and risk-free buckets, or they might segment savings into one-year, five-year and ten-year buckets, and then use a uniform 4% withdrawal rate. Otar uses a different prism in his approach.

The more indispensable the income, the lower the safe withdrawal rate. Otar divides expenss into “essential” (survival), “basic” (lifestyle) and “discretionary” (aspirational). While a retiree could prudently spend 4.7% a year from a discretionary account (in an example Otar uses), he might be prudent spending only 3.9% a year from a lifestyle account and only 3.2% and calculates a different withdrawal rate (based on different risk tolerances) for each spending category. (See chart at right.)

Factors like age, market levels at the time of retirement, sequence risk and inflation also guide Otar’s withdrawal rate recommendations. Someone who retires at age 60 and/or when the equity price-to-earnings ratio is 25, for instance, should spend much more cautiously than someone who retires at age 70 when the P/E ratio is seven. Assuming a 30-year retirement, which Otar does, means that inflation can blow up the best-laid plan. “A bad sequence of inflation, he said, “can cut portfolio life up to 40%.”

Fat tails and discontinuities

As a third insight, Otar (after reading William Bernstein) recognized the limits of Monte Carlo simulations. “Many in our business think that Monte Carlo simulations adequately represent the luck factor. But Monte Carlo assumes random fluctuations around an average growth rate. It assumes a Gaussian distribution. Markets don’t work that way. Even if you add ‘fat tails,’ Monte Carlo doesn’t simulate black swans efficiently,” he says. (For more on the non-Gaussian behavior of stocks, see the late Benoit Mandelbrot’s “The (Mis)Behavior of Markets.” Basic Books, 2002.)

Instead of using Monte Carlo simulations, Otar created a method he calls “aftcasting” to test the adequacy of a retirement portfolio. In an aftcast, he can see how each portfolio would have behaved starting in every year since 1900. His method incorporates actual performance sequences over 30-year periods, which reflect the interdependencies and feedback effects of various market variables. Aftcasting reveals the true frequency of market “discontinuities,” Otar has written.

If you’re an advisor, you may find yourself agreeing with Otar’s approach but unable to implement it. Your business model may not allow it. Advisors in fee-only practices, for instance, may never be able to recommend an income annuity, no matter how deep in the red zone a client may be, because it would reduce their AUM.

On the other hand, an advisor who relies on commissions, such as an insurance agent or a fledging broker-dealer advisor, might naturally lean toward recommending a large annuity purchase , no matter how deep in the green zone a client may be; it’s the only way he or she is rewarded. Otar makes a point of not putting himself, or his clients, into either of those boxes.

Quartzite’s Most Famous Pianist

Posted on December 16, 2015 by Kerry Pechter -

What happens if you don’t save enough for your retirement?

You might spend your golden years in the desert, nearly naked but deeply tanned, living hand-to-mouth, peddling plastic-wrapped pulp fiction, and banging out boogie-woogie on an old piano for curious French video-bloggers.

In short, you could be 72-year-old Paul Winer, aka Sweet Pie, the retired musician and current proprietor of the Reader’s Oasis Bookstore in Quartzite, Arizona, a sun-bleached pit stop on I-10, mid-way between Phoenix and Los Angeles.

Earlier this month, a friend and I were motoring west from Phoenix on I-10 en route to Joshua Tree National Park, where we planned to hike and camp before I attended the IMCA 2015 Retirement & Decumulation conference in Scottsdale later in the week.

We stopped for gas in Quartzite, a tiny town that blossoms in January and February when regiments of rock hounds arrive in RVs for one of the nation’s largest rock and gem fairs. We passed Sweet Darlene’s Restaurant & Bakery, an open-air junk-and-rock shop, and a used bookstore with, curiously, a parking lot big enough for tour busses.

As red flowers attract hummingbirds, used bookstores attract me. Kim, a friendly, honey-haired clerk, welcomed me into the dark, non-climate-controlled store, which was as much Bedouin tent as conventional four-walled structure. When my pupils adjusted from the outside glare to the inner shade, I noticed a small framed photograph of a thin, brown, half-naked man seated at a piano. A moment later, that same man scurried by me between two tables stacked with books, each one protected by plastic wrapping from the invasive desert sand.

“Is that you in the picture?” I superfluously asked. He confessed that it was. He wore a black wool sweater, a black hat covered with buttons, a thong, sunglasses and sandals. The hat, sunglasses, and a free-range moustache and beard hid most of his face, but his thin beef-jerky legs were fully exposed. He appeared to have no buttocks or body fat.

Paul Winer (pronounced with a long “i”), it turned out, is not shy about revealing either his body or his personal history. “I’ve had 68 court cases filed against me and I won every one of them,” he told me. Really? I asked. For nudity? For obscenity? “Yes, for all them,” he said. I soon learned that he hails from New England, that he knew Johnny Winter but not Paul Butterfield and that his home is the only one in Quartzite with a mezuzah on the doorjamb.

As “Sweet Pie,” Winer performed barrelhouse piano on the college concert circuit in the U.S. and Canada during the Blues Revival of the late 60s and early 70s. His specialty: Performing naked but for a codpiece. Later, he moved to Arizona to be near his aging parents. His father died recently at age 90-something. His daughter, he mentioned in passing, died when she was eight years old.

“Count Basie told me that I had the best left hand on the piano that he had ever heard, beside himself. But I never studied music,” Winer told me, as he tells hundreds of people who pass this way each year. We stood outside in the unusually cool December sunshine.

“I invented the phrase, ‘F— ‘em if they can’t take a joke,’ he continued. “Everyone thinks Bette Midler invented it. But I used it first at Brown University and she used it for the first time a month later. I’m famous on the Internet but we’re just making room and board here.” Two women in down parkas approached us from the parking lot. “Excuse me for a moment,” he said.

Winer’s international fame then became evident. The two women, a videographer and sound technician, said they worked for a French TV station. Like many Europeans, they knew about Winer from the “Roadside America” website, and knew that he was one of the few tourist attractions between Taliesen West (Frank Lloyd Wright’s former home and architectural studio in Scottsdale, AZ) and posh Palm Springs, CA.

On the one hand, there’s only one conventional way to prepare for a secure retirement: You amass a big pile of securities or real property in advance. On the other hand, there’s no limit to the range of inventions that older Americans will employ that will allow them to at least muddle through—and perhaps even enjoy—their final decades even when they haven’t saved “enough.”

Let’s count the ways: Some people move to cheap digs in places like Nicaragua or Portugal; some share homes with people they meet through the Green House Project; some take to the road in Airstream trailers; some earn $10 an hour handing out canapes to shoppers at Wegman’s Markets; some move in with their adult children; some offer their children’s bedrooms on Airbnb. There will always be a “retirement savings gap,” and older people will always build bridges across it—even if it means going naked and opening a bookstore in the desert.

The French journalists had asked Winer to sing and play the piano for them while they videotaped and recorded him. To prepare for his photo op, Winer mounted an adult-sized tricycle and pedaled out of sight. He returned in a new outfit: a red holiday sweater, red socks and a seasonal codpiece: a small, red, upside-down Santa’s cap with a white pom-pom at the tip. Then he led the French women to a baby grand piano inside the store. He sat down and played an original composition, “A Little Nothing.” You can listen to it here. (Video courtesy of Jeffrey Schell.)

Before my friend and I departed for Joshua Tree, I bought a copy of Winer’s 1971 “Lost Tapes” CD for $15. It seemed like the least I should spend in return for an hour’s amusement. As we drove west, however, I remembered his comment about the daughter he’d lost. An under-funded retirement can test a person’s resourcefulness, but some things are almost beyond endurance.

Waiting on the Fed

Posted on December 10, 2015 by Kerry Pechter -

Barring a sudden sell-off on Wall Street, higher short-term interest rates are coming soon. But don’t expect more than a tiny hike. And don’t expect long-term rates to budge. That kink in the life insurance industry’s air hose isn’t going away soon.

According to the Treasury Department’s own Office of Financial Research, movements in foreign equity and fixed income markets imply a 75% chance of a 25-basis point increase in the Fed Funds rate (currently about 0.12%) at the Fed’s December 15-16 meeting. The perceived likelihood of a hike was 40% after the September Fed meeting and 60% after the October meeting.

Because emerging markets are sensitive to U.S. interest rates and exchange rates, their movements can indicate expectations of changes in those rates. Since early November, broad emerging market equity indexes have fallen about 3%, sovereign and corporate bond spreads have widened by 20-to-30 basis points, and oil-linked currencies have depreciated by between 4% and 8%, said the OFR report. Mutual fund investors have resumed selling emerging market equities and bonds.

While there’s now a consensus that the Janet Yellen-led Fed will make a cautious move next week, a return to historically “normal” interest rates in the foreseeable future is not predicted. (In point of fact, there may be no normal rate. As this St. Louis Fed chart shows, rates trended generally up from 0.83% in 1954 to 19.10 in 1981, and then generally back down to 0.12% last month, with intermittent spikes before recessions.)

Any inclination toward higher rates is expected to be “very gradual.” “Recent Fed communications also focused on the path of policy following liftoff and reinforced expectations for a gradual pace of rate increases over the next year. The market is currently pricing in two-to-three 25 basis point rate hikes in the 12 months after the first increase,” said the OFR report.

So much for short-term rates. But what about yields on 10-year Treasury bonds, which give insurance companies fuel for income annuity payout rates and variable annuity hedging strategies? Philippe Combescot, managing director, Global Equity and Commodity Derivatives, BNP Paribas, predicted recently that the yield curve in the near future will be flat, with long-term rates not moving much in response to several small hikes in short-term rates.

“Our prediction is that the long end of the curve will stay stable but the front end of the curve will go up, so that we’ll have eventually have 2.5% at the short end and a long end between 2.5% and 3%,” Combescot said in a presentation at the Society of Actuaries EBIG (Equity-Based Insurance Guarantees) Conference in Chicago last month.

“Some analysts are saying that the period of low rates might stay for longer than we thought, and as long as globalization keeps a lid on wages, that situation could remain for a long time In Japan, they’ve had one-percent rates on 20-year bonds for 25 years,” he added, noting that the Fed might decide to raise short-term rates to 1.5% and stop there for awhile.

Long-term rates will stay low because investors are “more worried about low inflation outcomes than high inflation outcomes,” Combescot said. He noted that the 10-year Treasury prices have produced a negative yield for the past three years, but that investors pay those prices on the chance that a future flight to Treasuries might drive prices even higher. “Investors and some economists are pricing in a 25% chance of recession. The Fed is not,” he added.

“When the Fed raised rates in 1994, the GDP growth rate was 5%. Today we are talking about something closer to 2%,” he said. “Financial conditions have tightened and that has done most of the work that the Fed is supposed to do. Zero [short-term interest rates] may not be far from where it should be.”

The equity markets are pricing in a “very benign” hiking cycle, because the sluggishness of the economy and the lack of inflation doesn’t warrant anything more. Historically, the stock market has fallen 10.5% on average in response to every one percent increase in interest rates. according to W. Michael Cox, director of Southern Methodist University’s O’Neil Center for Global Markets and Freedom.

Cox told advisors at the IMCA 2015 Winter Institute Conference on Retirement and Decumulation in Phoenix last week that, there’s been a significant sell-off in stocks within three to six months of the beginning a hiking cycle. He blamed the current high valuation of the stock market on the Fed’s “methamphetamine” interest rate policy.

Not everyone believes the Fed dictates interest rates today. Also speaking at the IMCA retirement conference, Michael Finke of Texas Tech argued that the aging-related global savings glut has pumped up demand for, and prices of, both stocks and bonds. The supply of bonds has actually risen, Finke said, but the demand for bonds has risen even more, driving high bond prices and low yields.

Historically, low current bond yields presage low future total bond returns, Finke said, and high CAPE ratios (or Shiller ratios) presage low equity returns. When the CAPE or Shiller ratio is high—yesterday it was 25.88—future 10-year annualized equity returns have been about 6%, he said. The future will be characterized by below average returns on financial assets, which Finke believes will make the supposedly “safe” withdrawal rate of 4% per year from savings during retirement too aggressive.

Why Roofers Retire Earlier than Professors

Posted on December 10, 2015 by Kerry Pechter -

The terms “blue collar” and “white collar” have lost their once-literal significance in the workplace, but it’s still true that certain occupations are more physically taxing than others and that workers in those jobs tend to retire earlier—and claim Social Security earlier—than people in less strenuous jobs.

Awareness of the link between occupation and retirement age tends to grow during the country’s periodic public debates over the health of the Social Security program. Raising the full retirement age (FRA), for instance, has been suggested as a way to improve the program’s finances. But a higher FRA could harm people who must retire early because their jobs require younger minds or bodies.

In an attempt to add more precision to the conventional wisdom about physically demanding jobs and early retirement, a team of researchers at the Center for Retirement Research at Boston College has developed a “Susceptibility Index” that assigns ratings, on a scale of one to 100, to different occupations. The ratings, based on research data, indicate the susceptibilities of people in those occupations to age-related impairments that can lead to early retirement. (See chart on today’s RIJ homepage.)

The researchers, Anek Belbase, Geoffrey T. Sanzenbacher, and Christopher M. Gillis, found that physical and cognitive skills required for historically blue-collar occupations, such as food service work, do not decline with age, while abilities required for others, like roofing, do decline. By the same token, certain white-collar occupations, such as detective work or licensed practical nursing, require skills that often decline with age.

Certain physical attributes, such as flexibility and “explosive strength” (the ability to jump, for instance), decline rapidly, according to the paper, but physically active individuals tend to experience relatively slow declines in stamina and endurance with age.

“Active individuals in their 60s have similar stamina as inactive individuals in their 30s,” the researchers wrote. “Workers who use stamina in their jobs on a daily basis (e.g., dancers, firefighters) are unlikely to experience the declines with age that may be common for less active individuals,” the researchers wrote.

Among cognitive skills, “fluid” skills, such as acquisition of new information and reaction time, tend to deteriorate in mid-life. But “crystallized” knowledge, based on education or experience, can persist into old age. Exercise, it was noted, slows the decline of cognitive skills while cardiovascular diseases such as diabetes and strokes can accelerate cognitive decline.

The researchers looked at the percentages of different groups (by ethnicity, sex, occupation and years of schooling) that fell into either the top or bottom half of the Susceptibility distribution.

People in the top half of the distribution, for instance, were almost twice as likely as those in the bottom half of the distribution (9.5% vs. 5.4%) to claim disability benefits. About 70% of those in the top half of the distribution were retired before age 65, while only about 65% of those in the bottom half were retired by then.

Men, not surprising, made up about 60% of the upper half of the distribution and about 40% of the bottom half of the distribution, with reverse results for women. In terms of education, 58% of those in the bottom half of the distribution had at least a college degree, while about two-thirds of those in the top half of the distribution had a high school degree or less.

African-Americans were about twice as likely to be in the more-susceptible half of the distribution than the less-susceptible half (21% vs. 10.7%), as were Hispanic Americans (10.8% vs. 4.6%). Average earnings for those in the top half of the distribution was $35,000, compared with $49,800 for those in the bottom half.

Among the overall conclusions of the paper:

Some white-collar occupations, such as police detective and designer, are as susceptible to declines in the abilities required for work as are blue-collar occupations and may have similar difficulty responding to FRA increases.
The Susceptibility Index is a significant predictor of early retirement. Workers in occupations in the 90th percentile of the Index are 5.7 percentage points more likely to retire by age 65 than workers in the 10th percentile.
While the commonly used categorization of blue- or white-collar has no additional explanatory power in a model of early retirement, blue-collar occupations are especially susceptible to early ability declines, so workers in these occupations are less likely to be able to work to the FRA as it increases to 67.

Jackson National Has a Growing Share of a Shrinking VA Market

Posted on December 9, 2015 by Editorial Staff -

Variable annuity sales fell by almost 10% in the third quarter of 2015 from the prior quarter, to $31.2 billion from $34.7 billion, as all of the top ten carriers experienced a drop in sales, according to Morningstar’s quarterly VA sales analysis. Industry net sales dropped 10% in the third quarter of 2015 versus the third quarter of 2014.

The VA industry overall (excluding Lincoln) experienced a net outflow of $7.124 billion in 3Q2015, as TIAA-CREF, Hartford, Genworth and others experienced significant outflows.

Jackson National led all other issuers in the third quarter of 2015 with $6.01 billion in sales, down from $6.5 billion in the previous quarter. A unit of British insurance giant Prudential plc, Jackson issued three of the four best-selling individual contracts: Perspective II (7-year), the Elite Access B and the Perspective L-share. The Perspective contracts offer living benefits while the Elite Access B is an investment-only VA that offers investors broad access to liquid alternative investments. Jackson had a 19.2% market share, or more than double its closest competitor’s.

Looking at sales channels, Jackson National was by large margins the top VA seller in the bank/credit union channel, the independent broker-dealer channel and the wirehouse channel, while TIAA-CREF dominated the captive-agency channel. About two-thirds of VA sales go through either the independent b/d channel or the captive channel.

TIAA-CREF rose to second place (from fourth in 3Q2014) with $3.1 billion and 9.8% share, leapfrogging AIG and Lincoln. AIG booked a strong $2.9 billion and 9.2% share for third place, just ahead of Lincoln’s $2.8 billion and 9.1% fourth place result. AXA jumped from seventh position (in 3Q2014) to fifth with $2.3 billion and a 7.4% share. (Lincoln National reported net sales for 3Q2015 but not assets under management or net flows.)

Historically, third-quarter sales have been soft for variable annuities. Declines from the second quarter have occurred in each of the last ten years and declines from the previous third quarter have occurred in each of the last four years. Among the top ten issuers, only Jackson National and MetLife experienced year-over-year sales gains. TIAA-CREF and AXA sales were flat while the remaining six experienced drops in net sales. The top ten sellers accounted for almost 81% of total VA sales in 3Q2015.

Several contracts made notable leaps in sales. Ameriprise Financial’s RVS RAVAS Advantage (10-year) contract rose to fourth place from eighth, Prudential Defined Income jumped to position 13 from 18, AXA’s Structured Capital Strategies-B to 16 from 42, MetLife’s Preference Premier-B to 17 from 34, ING Multiple-Sponsored to 18 from 25, AXA’s EQUI-VEST 201 to 30 from 45, Guardian Investor III-B to 32 from 58 and MassMutual’s Transition Select (7-year) to 40 from 55.

In terms of total variable annuity AUM, several companies in the top 15 have registered significant gains in market share, year-over-year. Market share for Jackson National has grown by 18.27%, Thrivent Financial by 17.99%, AEGON/Transamerica by 15.36%, AIG by 14.14%, and Fidelity Investments Life (FILI) by 13.06%. Year-over-year AUM fell 3.4% industry-wide; the S&P 500’s total return for the rolling twelve months ended September 30, 2015 was 0.61%.

While issuance of VA contracts is concentrated among a relative handful of insurance companies, management of the $1.68 trillion in variable annuity assets is widely dispersed among many asset managers, none of which has more than 2.2% ($37 billion) of the market, as of the end of 3Q2015.

The ten leading VA fund sub-advisors are T. Rowe Price, Quantitative Management Associates (Prudential Financial), Wellington Management, AllianceBernstein, PIMCO, Voya, Mellon Capital, Standard & Poor’s, BlackRock and Milliman Financial Risk Management.

“In the moneyness” drives VA policyholder behavior: Ruark

Posted on December 9, 2015 by Editorial Staff -

Ruark, the actuarial consulting firm based near Hartford, CT, has issued the highlights of its Fall 2015 Variable Annuity Experience Study, which analyzes policyholders’ usage of their variable annuity benefits. Because insurers assume certain lapse rates when pricing their contracts, client behavior that deviates from those assumptions can significantly affect profitability.

Participants in the Ruark study included AIG Life & Retirement, Allianz, AXA, Commonwealth, Genworth, Guardian, John Hancock, MassMutual, MetLife, Nationwide, New York Life, Ohio National, Pacific Life, Penn Mutual, Phoenix, Protective, Prudential, Security Benefit and Voya. The complete results are available only to data participants who have purchased them.

Highlights of the study include:

Fairly stable surrender rates over the past six years. Surrenders at the shock duration (the year following the end of the CDSC period) have remained fairly stable since the beginning of 2009. This stability followed a steep decline from nearly 30% at the onset of the economic recession. As the VA industry retrenched its product offerings in the wake of market volatility and low interest rates, contract owners no longer had ever-richer guarantee options within VAs or attractive vehicles outside of VAs to move to.

Effect of the “moneyness” and the presence of a living benefit is notable. Contracts that are in the money on an actuarial or nominal basis with a GMIB or lifetime GMWB GLWB have much better persistency than those out of the money or with other types of guarantees. GMIBs have surpassed GLWBs in this regard only in the past several years, with rates now a point and a half lower at the shock and nearly a point lower post-shock.

What is less important? Factors that are less significant for assumptions include attained age, gender and contract size. Even when surrender rate differences by these measures appear, they are explained away once the more significant factors of surrender charge and living benefit presence and value are accounted for.

Annual withdrawal frequency rates have been increasing over the past several years. Some of this change is due to demographics: Frequencies go up with age. However, even rates within age buckets have increased. GLWB riders are riskiest to the writing companies when contract owners take the full maximum annual withdrawal amount. Utilization of the withdrawal feature continues to be less efficient in this way than initially expected, although efficiency is slowly increasing. Overall, a bit less than half of annual withdrawals are at this maximum amount, while a third take less than that. The remaining 20% of withdrawals are in excess of the maximum, which degrades the guarantee for future years.

Principal drivers of GMIB annuitization are the relative value of the rider (“in the moneyness”) and attained age. Rider forms that allow partial dollar-for-dollar withdrawals have much lower exercise rates than those that reduce the benefit in a pro-rata fashion. The latter form emphasizes the availability of guaranteed income while retaining control of the account value, and so is more akin to a lifetime GMWB rider than a traditional GMIB.

Insider selling contrasts with share buybacks: TrimTabs

Posted on December 9, 2015 by Editorial Staff -

TrimTabs Investment Research reported today that corporate insiders sold $7.6 billion in November, the second-highest monthly volume this year.

“Insiders aggressively ramped up their selling in the wake of the big October rally, which is a cautionary longer-term sign for U.S. equities,” said David Santschi, TrimTabs’ CEO. “The last time insider selling was higher was back in May, and the S&P 500 fell 6.4% in the following three months.”

TrimTabs tracks insider transactions based on filings of Form 4 with the Securities and Exchange Commission. Last month’s volume was the fourth highest in the past three years.

In a research note, TrimTabs explained that insiders are selling heavily with their own money even as they lay out huge amounts of shareholders’ money to buy shares. A staggering $1.37 trillion in cash has been committed to buy U.S. public companies and repurchase shares in U.S. public companies this year, smashing the previous annual record of $1.26 trillion in 2007.

“Amid a slow-growth economy, insiders are spending loads of shareholders’ money on takeovers and buybacks to boost revenue as well as earnings per share, but they’re selling hard with their own money,” said Santschi.

The Bucket

Posted on December 9, 2015 by Editorial Staff -

MetLife survey elicits plan sponsor views on stable value funds

Most (82%) of defined contribution (DC) plan sponsors who are familiar with the U.S. Securities & Exchange Commission’s (SEC) amendments to the rules governing money market funds (MMF) feel that stable value is a more attractive capital preservation option for plan participants than money market funds, according to MetLife’s 2015 Stable Value Study, released this week.

Most of the stable value fund providers and advisors who were interviewed for the study and are familiar with MMF reforms predicted that the use of money market funds in defined contribution plans would decline over the next few years. A full report examining these findings is available at www.metlife.com/stablevaluestudy2015.

MetLife Stable Value Fund has a one-year return of 2.51%, an annual expense ratio of 62 basis points, an average duration of 4.2 years and an average credit quality of AA-. Its assets are invested primarily in corporate bonds (34%), mortgage-backed securities (22%) and Treasuries (21%).

In the survey, plan sponsors gave several reasons for offering stable value funds: to provide a capital preservation option (65%); a guaranteed rate of return (50%); better returns than money market and other capital preservation options (49%).

Among plans with more than 100 participants that added stable value in the past two years, 77% offer stable value because it offers better returns than money market and other capital preservation options, up significantly from 38% in the MetLife 2013 Stable Value Study. Only 17% of plan sponsors and 23% of plan advisors knew that stable value returns have exceed inflation over the past 25 years, however.

The study found that almost half of sponsors (47%) are unaware that stable value returns have outperformed money market returns: 22% believe that stable value and money market returns have been about equal and 21% don’t know how the returns compare. Additionally, 4% actually believe that money market funds have performed better than stable value over this time period.

In addition to these reforms, recent litigation would also likely affect plan sponsors’ decisions about which capital preservation products to make available to DC plan participants, the MetLife release said.

Six months after a $62 million class action settlement, followed by a recent U.S. Supreme Court ruling in Tibble v. Edison, 20% of plan sponsors said they are considering alternatives to money market, according to the study.

To conduct the research, MetLife engaged Greenwald & Associates and Asset International, Inc., publishers of PLANSPONSOR and PLANADVISER magazines. Three separate studies were conducted: An online survey of 205 plan sponsors conducted in June 2015, as well as in-depth phone interviews with 20 stable value fund providers and nine advisors during July 14 to August 28, 2015. Assets under management for plans included in the study ranged from under $10 million to $2.5 billion or more.

New Genworth tool prevents “NIGO” applications

Time is money, of course, and contract applications that contain fatal errors—so-called “Not In Good Order” or NIGO applications—can eat up time. Often requiring resubmissions, they can sap the productivity of insurers and brokers as they try to put new business on the books.

To reduce the frequency of NIGOs, Genworth has launched a free electronic platform “designed to help financial professionals improve the accuracy of fixed annuity applications, boost productivity and improve the customer experience,” according to a Genworth release.

The platform, called the Annuity Smart Application Process, or ASAP, is designed for use with Genworth’s SecureLiving Index 10 Plus, SecureLiving Index 7, SecureLiving Index 5, and SecureLiving Growth+ with Income Choice rider.

The forms used in the electronic platform are identical to the paper application process, eliminating any potential learning curve for financial professionals already familiar with the traditional forms.

ASAP reduces application errors with these functions:

Numbers Check: An auto-fill component that checks users’ math as they navigate the application, especially when they use different crediting strategies that require multiple calculations.
Help Bubbles: Explanatory pop-ups provide guidance in the most complex sections of the application.
Form Rules: Based on form entry, fields will be opened (or closed) for completion, and the correct form package will be added to the application.

Mark Madgett to lead New York Life agency division

New York Life has appointed Mark Madgett, a senior vice president, to its executive management committee, which assists CEO Ted Mathas in setting company policy.

Madgett will succeed the retiring Mark Pfaff as head of the insurer’s 12,000-agent Agency Department on January 1, 2016, reporting to New York Life president John Kim.

Madgett, 54, joined New York Life as an agent in Colorado in 1986. He moved into sales management in Denver in 1992, becoming managing partner of New York Life general offices in the state of Washington in 1998 and moving to the home office in 2014. He holds a B.S. in business from Saint Mary’s College of California.

TIAA-CREF survey shows impact of advisors

Only 58% of the men and just 37% of the women in New York State feel confident that they are saving enough money to last throughout their retirement, according to TIAA-CREF’s annual Advice Matters survey.

Overall, 52% of state residents say they have never sought professional financial advice, compared to a national average of 47%. TIAA-CREF conducted identical surveys in New York State and at a national level.

More than a third (36%) of New York residents who haven’t worked with a professional financial advisor say they don’t think they have enough money to do so. Overall, more 51% of New York residents and 45% of Americans believe they need at least $50,000 in savings to justify meeting with an advisor.

The survey found that New York respondents who have met with a financial advisor are significantly more confident in their retirement savings planning than those who haven’t (79% versus 52%).

New York residents who received professional financial advice reported they subsequently re-allocated their retirement accounts (39%), saved more (31%), spent less (27%), or checked their accounts more frequently (30%).

New Yorkers who have discussed retirement with an advisor are much more likely to have calculated how much income they will need in retirement (74% versus only 39% of those who have not met with an advisor). Eighty percent of those who have met with an advisor have discussed ways to turn their savings into monthly income upon retirement, and 47% have acted on those recommendations.

About half (51%) of New Yorkers said they believe they will need less than 75% of their current income in retirement, TIAA-CREF found.

AARP and friends fight move to tax retirement income in Illinois

A bill filed this week in the Illinois House would block taxation of retirement income, which has been proposed as a revenue solutions for the state’s budget crisis—part of which comes, ironically, from inadequate public pension funding.

House Resolution 890 was filed by state representative David McSweeney (R-Barrington Hills) and endorsed by AARP Illinois, which has 1.7 million members.

Illinois has the second-highest average property taxes in the nation, at $3,939, second only to New Jersey’s $3,971, according to an AARP release.

Different folks want different (benefit) strokes: MassMutual

Preferences for workplace benefits such as 401(k) plan matches, health insurance coverage and paid vacation days vary by age and gender, according to a new study by MassMutual.

Overall, 47% of American workers age 18 and older prefer more vacation time, while 44% preferring better 401(k) matches, according to the 2015 MassMutual Generations@Work Study. Men tend to prefer more time off while women focus on health-related benefits.

Half of all Boomers surveyed (50%) and 48% of Millennials said they would opt for more vacation days if they could, according to the study. Nearly half of Gen Xers (47%) prefer better 401(k) matches, with more vacation days coming in a close second (44%), MassMutual found.

Generational preferences

Forty-three percent of Boomers want better 401(k) matches, 38% want free healthcare coverage, and 24% want more investment choices in their retirement plans, according to the study. Four in 10 (43%) want expanded healthcare benefits.

Unlike Boomers, Millennials would like flexible work schedules (43%) and reimbursements for education and tuition (30%). Gen-Xers and Boomers want better 401(k) matches.

He said, she said

Men want more vacation time (50%), better 401(k) matches (43%) and flexible work schedules (39%). Women want more vacation (44%), better 401(k) matches and flexible work schedules (40%), expanded healthcare premiums (37%). Men and women diverged regarding free gym memberships (men: 20%; women: 31%), education/tuition reimbursement (men: 18%, women: 27%), and more investment choices for retirement (men: 18%, women: 11%).

Study specifics

According to the study, the benefits Americans would most like to receive from their employer were as follows:

New benefits tool

Earlier this year, MassMutual launched MapMyBenefits, an online tool that enables employees to prioritize their benefits choices. More recently, the insurer introduced BeneClick!, a benefits exchange that allows online enrollment in an employer’s retirement plan, healthcare coverage, insurance protection products and others.

KRC Research conducted the study for MassMutual as part of an employee benefits education initiative. KRC surveyed 1,517 working Americans who were at least age 18 in a wide variety of jobs and industries.

Public pensions still recovering from Great Recession

Average one-year investment returns of 11%, lower amortization periods, and gradual recovery from the 2008 market crash have all contributed to an increase in the average funding level of state local and provincial government pension funds, according to the 2015 NCPERS Public Retirement System Study.

The study, conducted by the National Conference on Public Employee Retirement Systems and Cobalt Community Research, covered 179 state, local and provincial government pension funds with more than 13.5 million active and retired members and with assets exceeding $2.0 trillion. Two-thirds of the plans (68%) were local pension funds and the rest were state pension funds.

Funds had an average funded level of 74.1%, up from 71.5% in 2014. (Fitch Ratings considers 70% funding to be adequate.) Respondents’ overall confidence rating was 8.0 on a 10-point scale, up from 7.9 in 2014 and 7.4 in 2011.

As of the summer of 2015, funds saw average 11.2% for one-year investments (down from14.5% in 2014); 10.7% for three-year investments (up from 10.3% last year); 11.2% for five-year investments (up from 9.8% last year); 7.0% for 10-year investments (versus 7.6%), and 8.5% for 20-year investments (up from 8.1% last year.)

The total average cost to administer funds and pay investment managers declined to 60 basis points from 61 a year earlier. Public pension funding came from member contributions (7%), employer/government contributions (19%) and investment returns (75%). The totals exceed 100% due to rounding.

Third-quarter FIA sales up 13%

Posted on December 3, 2015 by Editorial Staff -

Sales of traditional fixed annuities and MYGA (multi-year guaranteed rate annuity) contracts were $3.09 billion and $6.14 billion, respectively, in the third quarter of 2015, according to the latest edition of Wink’s Sales & Market Report. Sixty-one carriers participated in the survey.

AIG led traditional fixed sales with a 32% market share. New York Life led in MYGA sales, with a 29% market share. The top traditional fixed annuity in overall sales is Jackson National Life’s MAX One XL, for the second consecutive quarter.

New York Life’s Secure Term contract led overall MYGA sales in the third quarter. The average fixed annuity premium was $109,753, up 53% from the previous quarter. The average MYGA premium was $103.554.

Total third quarter sales of indexed annuities were $13.8 billion, up 13% from the previous quarter, and up nearly 21% from the same period last year. “Typically, the third quarter is a down quarter for sales; especially for indexed annuities,” said Sheryl J. Moore, President and CEO of both Moore Market Intelligence and Wink, Inc., in a release. Fifty-five indexed annuity carriers participated in the indexed annuity survey, representing 99.8% of production.

Allianz Life led with a market share of 14.7% and American Equity Companies was ranked second. Rounding out the top five carriers in the market are Great American Insurance Group, AIG, and Nationwide. Allianz Life’s Allianz 222 Annuity was the top-selling indexed annuity for the third consecutive quarter.

ICI releases first-half DC participant activity study

Posted on December 3, 2015 by Editorial Staff -

The Investment Company Institute has released its study, “Defined Contribution Plan Participants’ Activities, First Half 2015,” which is based on DC plan recordkeeper data for more than 26 million participant accounts at employer-based DC plans.

Among the study’s findings:

The majority of DC plan participants continued contributing to their plans. Only 1.8% of DC plan participants stopped contributing in the first half of 2015, compared with 2.1% in the first half of 2014.
Most DC plan participants stayed the course in their asset allocations, as stock values increased slightly. In the first half of 2015, 6.6% of DC plan participants changed the asset allocation of their account balances, the same share as in the first half of 2014. Nearly 6% changed the asset allocation of their contributions, a small increase from 5.1% in the first six months of 2014.
DC plan withdrawal activity remained low and was in line with the prior year’s first half activity. Only 2.2% of DC plan participants took withdrawals in the first half of 2015, compared with 2.3% percent in the first half of 2014. Only 0.9% took hardship withdrawals during the first six months of this year, the same share as in comparable periods over the past three years.
Loan activity was flat at the end of June 2015, despite a seasonal pattern observed over the past several years. Historically, the share of participants with loans outstanding tends to increase after the first quarter of each year. Nevertheless, at the end of June 2015, 17.5% of DC plan participants had loans outstanding, compared with 17.4% at the end of March 2015.

EY releases ‘ US life-annuity insurance outlook’

Posted on December 3, 2015 by Editorial Staff -

US life-annuity insurers will enter 2016 in relatively good financial condition, though rapid advances in technology, rising customer expectations and increasing competition will require insurers to reinvent their strategies, services and processes, according to the 2016 EY US life-annuity insurance outlook.

“Global economic conditions, regulatory and monetary policies, and the political landscape will are still concerns for the industry, which means taking decisive action is important for life-annuity insurers to stay ahead of the curve,” said Doug French, Principal, Financial Services and Insurance and Actuarial Services at Ernst & Young LLP. “After years of bolstering their balance sheets, life-annuity firms are in a strong position to invest in the innovations and technologies needed to fuel growth.”

EY believes US life-annuity insurers should focus on the following six areas in 2016 to remain industry leaders.

Increase the pace of business transformation and innovation. The convergence of technological, regulatory and customer trends can disrupt the industry. Insurers need to rethink their business approach to cope. Insurers should create a company-wide culture of innovation, drive innovation through cross-functional teams and share information openly across departments.
Reinvent products and services for the new digital customer. Failure to respond to customer demands for greater digital access, better information and quicker service will make it difficult for insurers to acquire and retain customers. Priorities for insurers in 2016 include offering anytime, anywhere, any-device access for customers; providing clearer product information and pricing transparency; delivering more flexible solutions; building ongoing customer engagement; and moving from focusing on products to serving as a trusted advisor.
Adjust distribution strategies for technological and regulatory shifts. Life and annuity insurers may find themselves losing market share if they fail to adapt to an omni-channel world. Insurers should adapt services for new distribution models and explore the use of robo-advisors. Insurers also will need to prepare for new fiduciary standards, as the US Department of Labor’s proposed fiduciary rule could upend existing distribution models in 2016.
Reengineer processes to drive efficiency and market growth. Insurers should determine whether their systems are ready for rapid market change, as the current assembly-line approach to policy quoting, issuance and administration can slow application turnaround and detract from the customer and distributor experience. Companies also should ensure their systems meet new regulatory standards, invest in next-generation processes and analytics, revamp IT systems built for simpler times, and consider partnerships that will facilitate technology transformation.
Hire the right talent to lead innovation. Insurers will want to attract young, diverse workers to match emerging customer demographics and help drive innovation. Priorities for 2016 should include competing for the talent required to build the next-generation insurance company, offer greater flexibility in work locations, find creative ways to motivate and reward employees, and make diversity a strategic imperative.
Place cybersecurity high on the corporate agenda. Leveraging social media, the cloud and other digital technologies will expose life and annuity insurers to greater cyber risks in 2016. To protect their businesses and clients, insurers will need to take strong measures to keep their technical platforms secure. Companies will need to take a broad view of potential risks, such as cyber-attacks and reputational risks through social media. Insurers also will want to establish processes to monitor changing data regulations around the world, as their data could reside in multiple jurisdictions and be subject to a variety of laws.

Read the complete 2016 EY US life-annuity insurance outlook at www.ey.com/insurance.

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