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The Bucket

Posted on November 4, 2015 by Editorial Staff -

“SmartPlan” may increase participant engagement in DC plans

The developer of VMAX SmartPlan, vWise Inc. of Aliso Viejo, CA, has published survey results suggesting that its “digital participant engagement software” helps employees overcome inertia and engage more actively with their workplace retirement plans.

SmartPlan provides retirement education and plan information in “easily understood, bite-sized sequences that instill confidence and drive employees to take action in their plans,” according to a vWise release this week.

The vWise survey was measured the Retirement Readiness Confidence (RRC) scores of two groups of plan participants—“Experienced” and “Inexperienced” retirement investors—before and after they were introduced to SmartPlan. Each participant was asked a series of questions that produced a score from 0 to 25, with 25 showing the most confidence in “successfully planning for retirement.”

Before SmartPlan, Inexperienced investors’ RRC score was 15% lower than Experienced investors. After using SmartPlan, Inexperienced investors’ average RRC score increased by 18% (to 20.64 from 17.23) and was statistically the same as the Experienced investors’.

BlackRock’s new ‘iRetire’ tool measures retirement readiness

Echoing the new mantra that the goal of retirement savings should be expressed as income instead of accumulation, BlackRock has introduced “iRetire,” a tool to help advisors show clients how close they are to reaching their retirement income goals.

The new platform leverages the methodology that underlies BlackRock’s CoRI retirement income indices, as well as its Aladdin risk analytics technology, to “show investors where they stand today and how they could potentially get where they want to be at retirement.”

In surveys, BabyBoomers ages 55 to 65 have told BlackRock that they want $45,500 in annual retirement income—a long leap from the $9,129 a year that the average Boomer could generate from their savings (the individual average is $132,000), according to the CoRI Index 2025.

When using iRetire, advisors input the client’s age, current retirement savings and desired annual retirement income. Clients then see the gap between the desired income and the income that their current savings can generate. Advisors can then show clients how they might close the gap—by working longer, saving more, and perhaps re-allocating toward equities.

The iRetire tool can thus be used as a diagnostic tool, as a reason to bring clients or prospects into the advisor’s office for a regular “checkup,” as a segue into a new model portfolio, or as a stepping stone toward consolidating all of a client’s assets with a single advisor.

MassMutual declares dividend payout of $1.7 billion for 2016

The board of directors of MassMutual has approved an estimated dividend payout of $1.7 billion for 2016 to its eligible participating policyowners. The payout is nearly a $100 million increase over 2015, and the fourth year in a row it has reached a new record.

The 2016 payout also reflects a competitive dividend interest rate of 7.10% for eligible participating life and annuity blocks of business – maintaining the same rate as both 2014

Contributors to MassMutual’s record dividend payout are its retirement services business, international insurance businesses, and asset management subsidiaries, including Babson Capital Management LLC, Baring Asset Management Limited, Cornerstone Real Estate Advisers LLC, and OppenheimerFunds, Inc.

The company’s total adjusted capital as of June 30, 2015, surpassed $17 billion for the first time in the company’s history. Of the estimated $1.7 billion dividend payout, an estimated $1.65 billion will go to eligible participating policyowners who have purchased whole life insurance. MassMutual had its ninth consecutive record year of growth in whole life policy salesin 2014 with $418 million.

In addition to receiving the dividend payouts in cash, whole life insurance policyowners may receive the dividend payouts in cash or use to pay premiums, buy additional coverage, accumulate at interest, or repay policy loans and policy loan interest.

Robo-advice is more ally than competition for advisors: LIMRA

A consensus, accurate or not, seems to be accruing that “robo-advice” is more a tool than a channel—a tool that can help traditional financial services providers talk to and “on-board” Millennials and others who are reachable mainly by smartphone.

A release this week from LIMRA, the life insurance industry’s market research arm, reinforces that view. “While financial professionals might have initially seen robo-advisors as a threat, large investment firms are adopting the technology specifically to help advisors expand their markets” to include “consumers who want an omni-channel experience with financial services,” the release said.

At the same time, LIMRA reassured advisors that robo-advice is too superficial to supplant professional advisory services. “Currently, the robo-advisors available to consumers tend to handle straightforward investment decisions,” LIMRA said. “They are not used for more sophisticated transactions such as insurance, or retirement and estate planning. This presents an important opportunity for advisors.”

A new LIMRA survey shows that while 81% of consumers are unfamiliar with robo-advisors, they’re likely to grow. As evidence, LIMRA pointed to a statement by

Dan Egan, director of behavioral finance at Betterment, the large robo-advisor that recently announced a foray into the defined contribution space, that “… a blue ocean of consumers in front of us. People that have never had financial advice ever offered to them.” Egan spoke at last week’s LIMRA 2015 Annual Conference.

According to LIMRA’s survey of 1,000 retirement plan participants, early adopters of robo-advice tend to be younger and more comfortable with technology. But automated advice also is appealing to higher affluence investors (>$500,000) who are “test driving” the robo-advisors with smaller sums.

This finding is consistent with an earlier study by the LIMRA Secure Retirement Institute that revealed nearly 40% of affluent investors prefer to make investment decisions without help from a professional.

Prior LIMRA research also found that about half of Generation Y members want “professional advice on life insurance,” and 80% want to learn about “savings options and strategies,” and 60% “will talk with a financial professional who is recommended by their parents.”

Because Gen Y is more comfortable with technology, financial professionals can use a robo-advisor to help acquire new and emerging affluent clients. Use of the platform by advisors also provides a reason to engage with the adult children of existing clients.

On Background: An Insider Talks about the DOL Proposal

Posted on October 29, 2015 by Kerry Pechter -

A broker-dealer executive spoke with RIJ a few weeks ago about the Department of Labor’s fiduciary or “conflict of interest” proposal. He expects the proposal’s final version to resemble the current one, and that his industry will have only about eight months to comply with the terms of the proposal, starting after its publication in early 2016.

The executive believed that DOL officials might yet yield to some of the industry’s requests for changes in the current version. But he seemed resigned to the idea that the proposal’s most disruptive element—the Best Interest Contract Exemption (BICE), which stops advisors from taking commissions on sales involving IRA accounts unless they pledge to act in their clients’ best interest without regard to their own—will survive in some form.

Unless that “without regard” wording is massaged, the BICE could be costly for the broker-dealer business model. A good chunk of broker-dealer revenue, besides asset-based fees, consists of sales commissions paid by manufacturers of mutual funds and annuities. Signing a BICE would make it hard, if not impossible, for advisors and firms to protect and enhance that revenue stream. But if the advisor and firm don’t sign the BICE (in its current form), the $7 trillion rollover IRA market would be off-limits to many commission-sold products. This is what all the ruckus is about.

If advisors were denied third-party commissions, they’d probably sell a lot fewer load funds or B-share variable annuities. Product manufacturers would suffer. Broker-dealer revenue would drop by hundreds of millions of dollars. Advisors who couldn’t switch to salaries or asset-based compensation could lose their jobs. Advisors who currently earn both commissions and asset-based fees might lose the freedom to toggle back and forth between the two. The DOL proposal, intentionally or not, threatens to throw a major wrench in a complex multi-trillion dollar product distribution system.

Still, there’s hope in the broker-dealer world that the DOL will give in on some points. “There are elements of the proposal that are still in flux,” the executive told RIJ. “The DOL is still considering changes that might make the transition easier and the proposal more acceptable. They are giving consideration to further product exclusion under the BICE. And they are giving more thought to grandfathering existing positions. But they are definitely going to require a signed contract.

He thinks the contract might change in the final draft. “The DOL admits that the disclosures under the BICE are too extensive and they will try to confine them to what is meaningful and doable. They admit that they’ve been too strict about drawing a line between investment recommendations and education. They will clearly move the bar there. They have heard loud and clear that our paperwork can’t be done in eight months or even in several years. They hadn’t consider that at first.

“They’re more concerned about conflicts-of-interest at the advisor level than at the home office level. They’re okay with firms getting revenue-sharing (payments from mutual fund companies to distributors to help pay for fund marketing) if it’s disclosed and if the firms have procedures in place not to promote one product over another. They believe that it’s not worth it to try to stop proprietary products sales. That’s a fight they don’t want to take on, as long as they can manage the conflicts at the advisor level. They have said that their intention is not to say ‘You must sell the best investment and get rid of all conflicts.’ The intention is just, ‘Manage the conflicts.’”

The executive was asked if the DOL has been candid in saying that it wants broker-dealers to be able to maintain their current business models.

“If you were to go to DOL officials and ask them if they want to stop commissions, they will say, ‘No, we have no issues with people taking commissions. We wouldn’t have created the BICE if we didn’t want to allow commissions.’ But at end of day, they clearly don’t like commissions,” he said. “They believe that if you are paid a commission, then you’ll make the wrong recommendations. They say they’re not against commissions; but, of course, they have to say that. The only conclusion I can draw is that they want to make it difficult to sell any product with a commission.”

Broker-dealers are acutely worried that signing the BICE would expose them to suits from disgruntled clients who lose money in a downturn. So, even if advisors sign it, they’ll stop selling commissioned products. “If I decide as an advisor that I’ll take on the legal liability of the BICE, I will be careful to make investment recommendations that are least likely to get me sued down the road. Those will be the opposite of commissioned products. So I’ll make sure it’s all fee-based. Why take the risk? I won’t sell actively managed funds. I’ll sell index funds, and low cost ETFs and TDFs,” the executive said.

“I definitely agree that commissions cause advisors to recommend one product over another,” he conceded. “But I don’t agree with the conclusion that clients will end up doing worse.” On the contrary, he said, clients could end up worse-off in accounts with annual asset-based fees of one percent or more than if they bought products with one-time front-end loads.

The executive also conceded that many variable annuity sales are driven by the desire for commissions. After the financial crisis, when annuity manufacturers introduced low-load “client-friendly” VA contracts, registered reps widely declined to sell them. The products went nowhere.

The VA industry has long struggled with the problem that advisors prefer to sell mutual funds, which pay an attractive commission but are simpler and easier to sell than VAs. This has led, perversely, to upward pressure on commissions and, in a self-reinforcing spiral, makes VAs even more complex and expensive and therefore harder to sell. “It’s a chicken-and-egg thing,” the executive said. “Annuities started paying a higher commission because it was a longer sale, and advisors had to be paid more. That led to more oversight and more paperwork, which reinforced the problem.”

“No [broker-dealer] wants to be the first to lower commissions,” he added. “This might make the DOL’s case, but because VAs are commodities, if your firm is not in line, commission-wise, it will sell less. When I got into this business, VAs paid a 4% commission without a trail. The VA is the only product where commissions have almost doubled in the last 20 years. If the manufacturers could sell the same amount of VAs they sell now to fee-based accounts, and not have to carry the CDSC [contingent deferred sales charge] on their books, they would.

But it doesn’t make much sense to put a variable annuity in a fee-based account. “There’s a no-commission Pacific Life VA, on which the client saves 75 basis points a year. But the client is paying a one-percent management fee on a fee-based account. So there really is no savings.” In any case, he added, it’s difficult to justify charging a client to manage the money inside a variable annuity subaccount. In short, the DOL proposal won’t be good for variable annuities or load mutual funds.

“Clearly, the VA companies are worried,” he said. “The fixed annuity companies are fine. They can just use PTE 8424 [an exemption for such sales in the current regulations]. They realize that broker-dealer and bank sales will be impacted, however, and that’s where the growth happens to be coming from.”

The executive, like many of his peers, believes that the current system, though not always consumer-friendly, provides a lot of ordinary people with valuable financial products—products they wouldn’t seek out on their own and that they are better off owning. “This is a solution in search of a problem,” he said about the DOL proposal. “It involves a large amount of disruption to the system in return for a relatively small improvement.”

October rally shows markets’ addiction to low rates: OFR

Posted on October 29, 2015 by Editorial Staff -

Prices of global risk assets rebounded in October after the Federal Reserve decided not to raise the Federal Funds rate by even a quarter of a point, raising questions about the dependency of asset prices on Fed policy, according to a new report from the Department of Treasury’s Office of Financial Research.

“Extraordinarily accommodative monetary policy has supported risk asset prices since the global financial crisis and this month’s market reaction suggests that these prices may still be contingent on accommodative policy,” said the OFR report, entitled “Shift in Monetary Policy Expectations Supports Risk Assets.”

“It remains to be seen whether current U.S. asset price ranges can be sustained once the Federal Reserve begins to raise interest rates, broadly expected to occur between December and June,” the authors added. The report was released just ahead of the Fed’s meeting this week, when the Fed again declined to raise rates.

Low rates seem to be the primary support for prices of the S&P500 and of emerging market equities, because the economic signals haven’t been good, the report said:

“The rebound has occurred in the face of weaker U.S. equity fundamentals, such as the slowdown in global growth, negative effects of a stronger U.S. dollar on earnings, and continued weakness in the energy sector. For the third quarter, analysts continue to expect negative revenues and earnings for energy stocks, with modestly positive growth for non-energy S&P 500 stocks.”

The likelihood of an increase in rates before the end of the years has been slipping, the OFR report said. “The market-implied probability of a Federal Reserve rate hike in 2015 is now down to approximately 25% to 35%, with an implied probability of a rate hike at the October 27-28 FOMC meeting of less than 10%.”

Shadow of ERISA hangs over state-run retirement plans

Posted on October 29, 2015 by Editorial Staff -

Efforts by a half-dozen U.S. states to provide “public option” retirement savings plans to workers without access to such plans at work have encountered the classic American conflict between state and federal sovereignty—the same conflict that once sparked a bloody Civil War.

Nobody expects war to break out over the states’ rights to set up IRAs or defined contribution plans, but California, Illinois and at least four others have hesitated to implement these plans because of “uncertainty” about whether the plans would be considered pensions and therefore fall under the regulation of the U.S. Department of Labor’s Employee Retirement Income Security Act of 1974 (ERISA).

At the Senate’s request, the Government Accountability Office (GAO) has issued a new report, “Retirement Security: Federal Action Could Help State Efforts to Expand Private Sector Coverage,” that recommends steps federal legislators and regulators might take to allow states to customize their plans without fear of violating ERISA.

According to the report, “One solution might be a ‘safe harbor’ plan that, by design, would comply with ERISA. According to the GAO, Congress could direct or authorize the Secretaries of Labor and Treasury to:

(1) Promulgate regulations prescribing a limited safe harbor under which state workplace retirement savings programs with sufficient safeguards would not be preempted and would receive tax treatment comparable to that provided to private sector workplace retirement savings programs, or

(2) Create a pilot program under which DOL could select a limited number of states to establish workplace retirement savings programs subject to DOL and Treasury oversight.”

In addition, the report said, “the Secretary of Labor could direct the Employee Benefits Security Administration’s (EBSA) Assistant Secretary… to clarify whether states can offer payroll deduction Individual Retirement Accounts (IRAs) and, if so, whether features in relevant enacted state legislation—such as automatic enrollment and/or a requirement that employers offer a payroll deduction—would cause these programs to be treated as employee benefit plans.”

En route to these recommendations, the GAO report reviewed the current stage of development of the state plans. California, Illinois and Massachusetts have all enacted laws creating state-run plans. California is currently conducting feasibility studies in advance of implementation, while the other two states are “developing implementation.” Maryland, Washington, and West Virginia have introduced laws creating state-run plans but haven’t passed them yet.

The GAO also looked for lessons-learned from other countries that have introduced state-sponsored retirement plans. New Zealand has a Kiwi Saver plan, the United Kingdom has the National Employment Savings Trust, the province of Quebec has a voluntary national savings plan, and Canada as a whole offers optional Pooled Registered Pension Plans, all designed to expand access to savings plans or to increase overall retirement savings.

The state-run DC/IRA movement is driven by the fact that only about half of full-time private sector workers have access to retirement savings plans at work. The GAO found that lower-income workers and workers at the smallest companies are the least likely to have access to an employer-sponsored retirement savings option, but that they do use such plans when available.

Five more advisory firms pay restitution for overcharges

Posted on October 29, 2015 by Editorial Staff -

Five firms have been ordered by FINRA (the Financial Industry Regulatory Authority) to pay $18 million, including interest, in restitution to affected customers for failing to waive mutual fund sales charges for eligible charitable organizations and retirement accounts. The following firms were sanctioned:

Edward D. Jones & Co., L.P. – $13.5 million in restitution
Stifel Nicolaus & Company, Inc. – $2.9 million in restitution
Janney Montgomery Scott, LLC – $1.2 million in restitution
AXA Advisors, LLC – $600,000 in restitution
Stephens Inc. – $150,000 in restitution

In July 2015, FINRA had ordered Wells Fargo Advisors, LLC; Wells Fargo Advisors Financial Network, LLC; Raymond James & Associates, Inc.; Raymond James Financial Services, Inc.; and LPL Financial LLC to pay restitution for similarly failing to waive mutual fund sales charges for certain charitable and retirement accounts.

Collectively, an estimated $55 million in restitution will be paid to more than 75,000 eligible retirement accounts and charitable organizations as a result of those cases and the cases announced today.

Mutual funds offer several classes of shares, each with different sales charges and fees. Typically, Class A shares have lower fees than Class B and C shares, but charge customers an initial sales charge. Many mutual funds waive their upfront sales charges on Class A shares for certain types of retirement accounts, and some waive these charges for charities.

FINRA found that although the mutual funds available on the firms’ retail platforms offered these waivers to charitable and retirement plan accounts, at various times since at least July 2009, the firms did not waive the sales charges for affected customers when they offered Class A shares. As a result, more than 25,000 eligible retirement accounts and charitable organizations at these firms either paid sales charges when purchasing Class A shares, or purchased other share classes that unnecessarily subjected them to higher ongoing fees and expenses.

FINRA also found that Edward Jones, Stifel Nicolaus, Janney Montgomery, AXA and Stephens failed to adequately supervise the sale of mutual funds that offered sales charge waivers. The firms unreasonably relied on financial advisors to waive charges for retirement and eligible charitable organization accounts, without providing them with critical information and training.

In concluding these settlements, Edward Jones, Stifel Nicolaus, Janney Montgomery, AXA and Stephens neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Fidelity partners with Envestnet on plan advisor platform

Posted on October 29, 2015 by Editorial Staff -

Responding to what it called a 51% increase in the number of advisors who want to grow their retirement plan businesses, Fidelity Clearing & Custody, a division of Fidelity Investments, has teamed with Envestnet Retirement Solutions to offer those advisors a platform that will enable them to scale their businesses.

The new workstation which will provide advisory firms access to retirement plan data and service providers in one central location, will be accessible via single sign-on through Fidelity’s WealthCentral and Streetscape platforms starting in the first quarter of 2016.

“The industry has realized the opportunity that retirement plans present; now, many firms are focused on scale and asking how do we grow this side of the business efficiently?” said Meg Kelleher, senior vice president, retirement advisor and recordkeeper segment, Fidelity Clearing & Custody. “We see this workstation as the first important step in our open architecture platform which will drive efficiency for retirement plan advisors.”

New Fidelity research identified time and resources as top challenges among advisors offering retirement plan services. Only one-third of retirement advisors admit that they are leveraging technology to the fullest.

The Bucket

Posted on October 29, 2015 by Editorial Staff -

Northwestern Mutual pays $27 million in dividends to DIA owners; $5.6 billion overall

Northwestern Mutual will pay record dividends of about $5.6 billion to policyowners through its 2016 distribution, exceeding the estimated 2015 payout by $120 million, the Milwaukee-based mutual life insurer said in a release.

The company also expects to pay $55 million in dividends on its annuity product line, including nearly $27 million on its relatively new suite of Portfolio Income Annuities.
About 90% of the $5.6 billion will go to traditional permanent life insurance policyholders, most of whom are expected to spend their dividends on more life insurance. The 2016 payout includes:

$4.9 billion on traditional permanent life insurance
$340 million on disability income insurance
$155 million on term life insurance
$115 million on variable life insurance

Favorable mortality and expenses accounted for about two-thirds of the traditional permanent life insurance dividend payout, with interest from investment earnings producing the rest. In 2016, the company’s dividend scale interest rate on unborrowed funds for most traditional permanent life insurance will be 5.45%.

Courses available on using social media

LIMRA, LOMA and Mindset Digital today announced a new set of courses, called Leading in a Social World, to teach financial professionals how to use social media. The new courses will be offered in a series of 15-minute segments that can be viewed online 24/7.

The courses show leaders in insurance, banking and other financial institutions how to:

Enhance their personal and professional online reputation
Expand their networks
Showcase their thought leadership
Listen to key audiences
Grow their organization’s brand

According to LIMRA research, seven in 10 young advisors are using social media; yet more than two thirds believe they need more support. Only 60% of companies have social media programs to support their financial professionals, a release said.

How eight kinds of non-traditional families view personal finance: Allianz

Allianz’ new “Love-Family-Money” survey shows that older new parents worry about the challenge of saving for retirement and for their children’s educations at the same time. The survey of 4,500 Americans identified seven different family types, including the “older parent with first child under five years old.”

Nearly 80% of couples with one parent age 40 or over said they had “a great deal or some” stress about achieving both goals. They were more focused on saving for their children’s education (53% vs. 39% traditional families) and more likely to say they wouldn’t retire until after age 70 (27% vs. 13% of traditional families).

The number of first-time mothers in their 40s rose 35% between 2000 and 2012, according to an analysis of Census Bureau data by the Centers for Disease Control and Prevention. There were nine times more first-time births to women over 35 in 2012 than in 1972.

The older parent family-type was likely to have “invested” their money (58%), 73% were “proud of what they had accomplished financially,” and 48% rated themselves “excellent or above-average” financial planners. But 59% listed “stressed about how to invest their money” as a top worry. About 70% described themselves as “savers” and most (60%) described their spouses as savers.

A quarter of older parents said they “would not consider using a financial professional,” and only 45% had ever used one (vs. 53% of traditional families). One in six older parents (vs. one in 12 traditional families) said they lack time to create long-term financial plans. More than half of older parents (53%) said college costs would motivate them to create a long-term financial plan and 45% said retirement would.

The study was commissioned by Allianz and conducted by The Futures Company via an online panel in January 2014 with more than 4,500 panel respondents ages 35-65 with a household income of $50K+.

It included “Multi-Generational Families,” “Single-Parent Families,” “Same-Sex Couple Families,” Same-Sex Couple Families with Kids,” “Blended Families,” “Older Parent with Young Children Families,” “Older Parent Families with First Child under 5,” and “Boomerang Families.”

The study defined “traditional families” as those with married spouses of opposite sexes, where at least one child under 21 lives at home; no stepchildren, no adult child who returned home, and no one besides spouses or children living in the household.

Sales of active funds to DC plans suffer as advisors seek lower fees

Posted on October 29, 2015 by Editorial Staff -

In the first half of 2015, 70% of the 30 asset managers in the DCIO (Defined Contribution Investment-Only) market surveyed recorded positive net sales, according to the ninth edition of the Hearts & Wallets “The State of DCIO Distribution” research study.

Although that number represented an improvement over 2014, when 54% of managers had positive net flows, industry-wide DCIO sales success has not reached the levels seen prior to 2013, when 80% or more of managers regularly produced net sales, according to the Rye, NY-based research firm.

Hearts & Wallets projects the DCIO market will grow from $3 trillion (47% of the DC market) today to $4.1 trillion (51%) in 2020.

Participants in the DCIO market face ongoing threats from target-date funds and fee compression. According to Hearts & Wallets surveys, plan intermediaries favor replacing actively managed domestic equity offerings with index funds. One-third of midtier consultants say they intend to increase DC plan placements of Large Cap US equity index funds, while only 14% plan to increase placements of similar actively managed funds.

More than 60% of asset managers say downward pressure on management fees has negatively impacted DCIO sales at their firm in the past year; while fewer than 10% say the impact was positive. “Low expenses” are expense ratios in the lowest quartile for their category, according to nearly half of retirement advisors. About one in five advisors defined low expenses as expense ratios in the lowest decile—a price range that active funds can’t offer. Advisors in the survey work with an average of 33 DC plans, with almost $60 million in assets.

The fee compression trend favors target-date offerings, Hearts & Wallets said. Mid-tier consultants and retirement advisors cite low costs as one of their three primary requirements when choosing a target date fund. Midtier consultants who responded to this year’s DCIO survey manage more than 100 plans and $1 billion of DC assets, on average.

American Funds and Vanguard Group were by far the preferred TDF providers, followed by J.P. Morgan Asset Management’s Smart Retirement Target-Date Series.

Wisdom from Advisors to the ‘One Percent’

Posted on October 28, 2015 by Kerry Pechter -

The “one-percent” are not like you and me, F. Scott Fitzgerald might say if he were alive today. The very rich don’t worry much about running out of money in retirement. They worry more about lightening their tax burden, buying or selling prime real estate and training grandkids to be good stewards of their trust funds.

And the rich require a special type of advisor. As three prominent wealth managers explained at the recent Money Management Institute Fall Solutions conference in New York, advisors to the ultra-high net worth distinguish themselves by anticipating their clients’ wants and needs—the way Ray Croc, as one advisor put it, anticipated America’s previously undiscovered appetite for drive-in burgers.

“One of our clients has a vacation home in New Zealand,” said Ted Cronin (below, right), CEO of Manchester Capital Management, a family office where 33 staff members attend to the needs of 45 UHNW families. “They visit there every winter. Now they want to leave the property as a legacy for future generations. We take care of the details—Who will fix the roof of the house? Who will arrange the international flights for family members? That’s the kind of ‘15-cent hamburger’ idea that most advisors don’t think about.”

Cronin was one of three ultra-HNW managers who participated in a panel discussion moderated by Sterling Shea, the head of Barron’s Advisor and Wealth Management Programs, at the MMI conference, held in the Grand Hyatt Hotel at Grand Central Terminal last week. Joining him were Rachel Gottlieb, a senior vice president at UBS Financial Services, and Patrick Dwyer, a managing director at Merrill Lynch Wealth Management. Ted Cronin

When working with the stratospherically wealthy, advisors evidently need to find ways to remove mental clutter from their clients’ complicated lives. (Deft money management is a given.) According to these experts, advisors to the very rich should anticipate the “little things” that help their clients relax and enjoy their money—and that will make the advisory firms indispensable to the clients and their descendents.

‘Whatever makes your life easier’

Remembering to send a computer technician to a somebody’s mansion to set up an online bill-paying process, for instance, may not be part of the Certified Financial Analyst curriculum. But older clients who travel a lot appreciate the gesture. They’re usually relieved not to have to spend several hours setting up passwords, usernames and answers to questions about the names of their first pets or high school mascots.

A smart wealth manager will get it done for them. “If you give me $20 million, I’ll do whatever makes your life easier,” said Dwyer, 46, who has reached rainmaker status at Merrill Lynch. “We taught the wife of one client how to pay all her bills by phone, because she and her husband spend half the year traveling. We’ll send someone to the house to program all the bill-pay stuff. We’ll load all everything they own onto our online system, which is like Mint.com but better, and do a personal financial statement for the family, so they don’t always need an accountant or an attorney. We just do these things for people. And it’s a big deal to them.”

Cronin of Manchester Capital Management, which has offices in Manhattan, in Vermont and elsewhere, agrees. At a time when algorithms are replacing advisors, he said, “The little things make a bigger impact, because the investments are straightforward.”

“How to allocate assets, when to use indexing or active management—these things are getting more and more straightforward. There are lots of allocation models available on the web. There are wonderful solutions everywhere. If Google can create a car that drives without a person, AI [artificial intelligence] will develop solutions that are hard to improve upon. So the human touch will matter most going forward.”

Managing time as well as finances

Since time and money amount to the same thing, advisors-to-the-very-wealthy try to conserve both. Rachel Gottlieb of UBS (left) told the MMI audience of about 400 managed account specialists that instead of calling her clients out of the blue with new ideas, she schedules regular monthly calls. It makes the phone meetings more productive for client and advisor.

Rachel Gottlieb, UBS “All of my clients know I will call them once a month,” said. “For instance, at 9 a.m. on the first Monday of every month, one client knows he’ll get a call from me. My assistant will confirm it a week in advance. The client and I will have a list of prepared questions for each other. We make the most of our time. I don’t want her calling me and me calling her back. We focus on efficiency.”

Having discretion to trade on the clients’ managed accounts also adds to the efficiency; urgent trades can get down before the market moves and opportunities are lost. “Having that model and those capabilities has helped me to free up time,” she said.

Dwyer said he saves time by sending out performance reports to clients by email on a fixed schedule. “No clients should be calling us for their performance reviews. The reviews go out every Sunday night in an email,” he said, adding that even clients in their mid-70s now want data delivered electronically.

Prospecting never ends

The workday of a UHNW advisor isn’t always different from the workday of an advisor to the merely affluent. While Cronin and Dwyer gave the impression that money flows easily to them—Dwyer boasted of five new clients worth $590 million in the past two years and Cronin spoke of turning new business away—not everyone has that kind of critical mass. Gottlieb, who seemed to be at an earlier career stage, admitted that she’s, as they say, always selling.

“I did a Moms’ Night Out, where I could get in front of young successful moms and position myself as someone who could help them build and protect their wealth,” she said. “Tonight I’m going to Parents’ Night at my child’s school. I know that the room will be full of prospects. You’re always presenting yourself and looking for opportunities. We’re all always building our brands.” Patrick Dwyer

There’s obviously no place for conflict-of-interests in relationships with UHNW families. That’s something that Merrill Lynch learned at about the time of the financial crisis, according to Dwyer (right). “We started embracing the fiduciary standard seven years ago, when we moved to no commissions, no proprietary products,” he said. “We knew it was coming. So rather than wait for it to happen, we acted. With commissions, unfortunately there are some natural biases. You find yourself talking about things that may help you but may not help the client. If you’re not commissioned, you don’t think that way.”

Presumably it takes a fairly rare combination of emotional and financial intelligence, not to mention loyalty, discretion and ample bench strength, to gain and maintain the trust of rich clients. And elbow grease, of course. “The secret is to work your ass off, and when the client is concerned about something, you need to be concerned about it,” Dwyer said. “If you do what’s in their best interests and care about service, then people will find their way to you.”

Congress Shuts $50,000 Social Security ‘Loophole’

Posted on October 28, 2015 by Kerry Pechter -

Under a section called “Closure of Unintended Loopholes,” the just-published Bipartisan Budget Act of 2015 has ended the so-called “file-and-suspend” Social Security claiming strategy that, perhaps more in theory than in practice, enabled some couples to receive up to $50,000 in extra benefits between ages 66 and 70.

No one knows how many people took advantage of the strategy. But the so-called loophole gave countless financial advisors an excuse to call older clients and prospects with the glad news of a potential windfall. “File and suspend” also catalyzed the publication of several popular books, notably “Get What’s Yours,” co-authored by Boston University economist Larry Kotlikoff.

Here’s how file-and-suspend worked: The spouse with the higher expected benefit—typically the husband—filed for benefits at his full retirement age (66), then filed a notice to suspend those payments. The wife then filed for spousal benefits—half the husband’s benefit.

That brought about $1,000 in found-money into the household per month. Four years later, when the husband reached age 70—the age at which benefits hit their high-water mark—the husband “unsuspended” and started receiving monthly checks. His wife could choose to go on receiving spousal benefits or (assuming she had reached age 66 before claiming the spousal benefit and had her own work record) switch to her own earned benefits, if higher.

Section 831 of the new budget nixes this switching strategy for couples turning age 62 after 2015 by saying:

“If an individual is eligible for a wife’s or husband’s insurance benefit in any month for which the individual is entitled to an old-age insurance benefit, such individual shall be deemed to have filed an application for wife’s or husband’s insurance benefits for such month.

“If an individual is eligible for an old-age insurance benefit in any month for which the individual is entitled to a wife’s or husband’s insurance benefit such individual shall be deemed to have filed an application for old-age insurance benefits.”

According to Steve Sass, a researcher at the Center for Retirement Research at Boston College, “The ‘deeming’ language means the beneficiary is given the higher of the two benefits and is not allowed to choose to collect one benefit (i.e., the spousal benefit) and allow the other (i.e., the worker benefit) to grow and be claimed later at a higher monthly rate. This rule had already applied in the period before people reached Full Retirement Age. This legislation will make it the rule after.”

The problem with file-and-suspend was that it threatened to bleed billions of dollars from a system already suffering from financing issues. According to a 2009 research paper by the Center for Retirement Research, the “’Claim Now, Claim More Later’ strategy, [in which] a married individual claims a spousal benefit while delaying claiming his own retired worker benefit in order to build up delayed retirement credits… could potentially cost Social Security $10 billion a year.”

Eugene Steuerle, a former Social Security economist now at the Urban Institute, told RIJ that the new budget legislation still does not end Social Security’s long-standing preferential treatment of non-working wives, whose spousal benefits can be higher than the benefits paid to women who have worked their whole lives.

Principal Adds ‘In-Plan’ Deferred Income Annuity Option

Posted on October 23, 2015 by Kerry Pechter -

Principal Financial, the full-service provider of 35,000 mostly small to mid-sized defined contribution (DC) retirement plans, this week introduced a flexible-premium, unisex-priced deferred income annuity (DIA) as a stand-alone investment option for plan participants.

Called Pension Builder, the new institutional DIA is now being offered to plan sponsors for participant contributions next March, according to Principal. Contributions to the DIA purchase a set amount of guaranteed income for life, backed by Principal’s general fund. Contributions aren’t irrevocable; participants can transfer their contributions out of Principal Pension Builder and surrender the annuity, subject to certain restrictions and a potential surrender charge.

“We see two purchasing scenarios,” said Jerry Patterson, senior vice president of retirement and investor services. “One scenario might involve a lump sum purchase of the DIA by, for instance, a 58-year-old who’s retiring in two years. The other scenario might involve someone aged 50 or even younger, who purchases a chunk of income with each contribution.”

As of June 30, 2015, Principal plans included some 4.2 million participants with more than $156 billion in assets. In the individual annuity market, Principal posted variable annuity sales of about $542 million (ranked #20) and fixed annuity sales of about $930 million (ranked #16) in the first half of 2015, according to the LIMRA Secure Retirement Institute.

For the past decade, large life insurers have tried in various ways to bring the essence of a defined benefit plan—guaranteed lifetime income—to DC plans. In 2004, MetLife introduced the Personal Pension Builder, which was similar to Principal Pension Builder. It was that marketed to participants in retirement plans administered by Bank of America/Merrill Lynch.

A variety of income delivery structures have been developed and/or brought to market. Prudential, Empower, and John Hancock offer guaranteed lifetime withdrawal benefit wrappers around their proprietary target date funds. Participants in Vanguard-administered plans can easily roll 401(k) balances to an immediate or deferred income annuity at the Hueler “Income Solutions” web platform.

Alliance Bernstein and three insurers offer a DIA option as a sleeve inside a target date fund. Voya has a similar option in its plans. Last May, MetLife introduced Retirement Income Insurance, which allows participants in 10,000 MetLife plans to buy an institutionally priced MetLife QLAC (Qualified Longevity Annuity Contract) at the point of retirement but without a rollover. MassMutual has a program that allows participants to buy retirement income in $10 per month increments.

Patterson said that Principal decided to offer a stand-alone DIA because it was “simpler” than the VA/GLWB. “I’m very familiar with that benefit [the GLWB] in the advisor-driven world, and there’s a lot of complexity in those designs. When the DIA emerged, we saw that it’s easy for people to get their heads around. We sell the GLWB in the retail world, but we would have a hard time deploying it in the institutional world,” he told RIJ.

“The next step after a stand-alone DIA,” Patterson told RIJ, “would be to integrate the DIA with a TDF offering. Principal is a large purveyor of TDFs, and we’re developing toward a TDF solution next year. Participants could be defaulted into that, and they could opt out if they want to.”

While many employers have shown an interest in in-plan deferred annuities, the market has been slow to develop. Certainly the financial crisis and low interest rates (which mean high prices for annuities) haven’t helped. But there’s also a regulatory hurdle. Employers are hesitant to maintain lifelong ties to former employees and they’re afraid that they might end up liable for annuity payments if the annuity issuer went broke. The Obama Administration has been an advocate of turning the DC into a true income vehicle. The Treasury Department last year announced that a qualified DIA called a QLAC could be offered as a default option when included in a TDF.

“Washington, plan sponsors, providers, and participants increasingly agree on the objective of greater retirement security and the role of DIAs as means of securing greater income,” said Mark Fortier, director and co-head of the DC business at NISA Investment Advisors. At Alliance Bernstein, he served as the architect for an in-plan annuity option in a TDF at United Technologies. “The strategic question is how to weave the DIA into the fabric of a DC participant’s lifecycle and reframe savings as an outcome—in the form of retirement income they can’t outlive.”

In-plan deferred annuities could also help solve one of the key behavioral obstacles to buying annuities. “It’s much easier to move small amounts of money over time rather than lump sums all at once,” said Jody Strakosch, a Minneapolis-based retirement consultant, board member of the Defined Contribution Institutional Investment Association.

“You also need to display the amount of future income that has been purchased.” As for the lack of demand for annuities from plan participants, Strakosch said, “Participants don’t know to ask for something that’s not there yet. Was anyone demanding an iPhone before Steve Jobs invented it?” said Strakosch, a former MetLife executive who ran an innovative DIA program for 401(k) participants, now called LifePath Retirement Income, in concert with BlackRock (then BGI) prior to the financial crisis.

When DIAs are offered in retirement plans, they’re priced differently from retail DIAs. Institutional products are, in theory, cheaper than retail, because they don’t involve the cost of a selling agent. Annuities in ERISA plans must use gender-neutral (“unisex”) pricing, which makes them cheaper for women and more expensive for men than retail annuities, where the price accounts for the shorter average life expectancies of men. A big benefit of the flexible premium DIA is that plan participants could “dollar cost average” into their annuity, thus diversifying their interest rate risk–and letting them benefit if interest rates rise.

With Principal Pension Builder, participants can transfer up to 50% of their plan account balances (minus outstanding loans) and direct up to 50% of contributions to the DIA. The minimum contribution is $10 per transfer. The higher the prevailing interest rate and the younger the participant at the time of each contribution, the more future income each contribution will buy. Regarding portability, as long as at least $5,000 has been contributed to the DIA, employees who leave the plan “can retain their guaranteed income through a deferred annuity certificate,” a Principal spokesperson said.

In calculating future income, Principal assumes that participants will elect a single life annuity with a 10-year period certain and will start income at age 65. In practice, however, participants have flexibility. They can choose from a variety of annuity forms, including life-only, joint and survivor, and cost-of-living-adjusted, for instance. Income must begin no earlier than age 59½ and no later than April 1 following the date the client reaches age 70½.

If the participant dies before the income date begins, the sum of the contributions to Principal Pension Builder minus any previous distributions or surrenders or applicable surrender charges is distributed to beneficiaries, like any other retirement account at death. A spousal beneficiary may instead elect to receive the guaranteed income payments as an annuity based on his or her own age.

“We’ve been getting lots of positive feedback from plan sponsors on it,” Patterson told RIJ. “But until the rubber actually meets the road, you never know.”

DOL “delouses” socially responsible investments

Posted on October 23, 2015 by Kerry Pechter -

“Economically targeted investments” no longer “have cooties,” Secretary of Labor Thomas Perez announced during a press conference yesterday in an ornate inner chamber of the Alexander Hamilton U.S. Customs House in downtown Manhattan, a block from the bronze “Bowling Green bull” that stands for a booming stock market.

By that, the Secretary meant that the Department of Labor has reversed its position that for the last seven years has discouraged defined benefit plans from holding, and defined contribution plans from offering investments, “socially responsible” investments. The position was based on the idea that these investments too often sacrificed return for ethical purity.

But a new interpretive ruling from the DOL ruling removes “the cloud” over such investments, opening the way for retirement plans and their participants to invest in such securities as “green” bonds and mutual funds that includes stocks of companies engaged in socially beneficial activities, as long as those choices don’t violate the fiduciary obligation “not to accept lower expected returns or take on greater risks in order to secure collateral [non-financial] benefits.”

[At the press conference, Secretary Perez was asked to respond to public charges by Raymond James CEO Paul Reilly that the Department of Labor doesn’t understand the securities business, or how much damage the DOL’s still-pending “conflicts of interest” or “fiduciary” proposal, would harm the broker-dealer industry. Perez cited the long comment period on the proposal and the competence of his chief advisor on the industry, Judy Mares, as evidence that the DOL had done its homework. The rule, in its current form, could disrupt the current brokerage advisory model, where intermediaries freely mix objective investment advice with sales recommendations from which they profit.]

Among the beneficiaries of the change on ETIs will be Morgan Stanley, a leading underwrite of green bonds. Last June 8, Morgan Stanley issued a $500 million green bond to raise funds “for the development of renewable energy and energy efficiency projects which are anticipated, once fully completed, to help avoid and reduce greenhouse gas emissions.”

Audrey Choi, CEO of Morgan Stanley’s Institute for Sustainable Investing, and Lisa Woll, chairman of The Forum for Sustainable and Responsible Investing, of which Morgan Stanley is one of scores of member, were present at the press conference, as were Matthew Patsky of Trillium Asset Management, which specializes in socially responsible investing, and Bill Dempsey, CFO of the $2 billion Service Employees International Union.

In the past, the DOL’s ambivalence toward ETIs arose in part from the fact that socially responsible mutual funds often passed up higher returns when they avoided “sin stocks” such as those issued by, for instance, highly profitable tobacco and alcohol companies.

But since 2008, when the DOL last ruled on the issue, there’s been an explosion in investments that seek high profits in the environmental and infrastructure fields that can be categorize as “economically targeted.” The 77 million-member Millennial generation has shown strong interest in such investments, and they are expected to drive demand for ETIs as they enter the workforce and being saving through ERISA plans.

“The issue is return,” Secretary Perez said, adding that “If a socially responsible investment has a proven track record” there’s no reason for fiduciaries to be “gun shy” about including it in an ERISA plan. He said there’s been “an explosion of interest” in ETIs since 2008, especially among Millennials who are now coming of age.

RetirePreneur: Cindy Hounsell

Posted on October 23, 2015 by Jenna Gottlieb -

What I do: I’m the president of WISER, the Women’s Institute for a Secure Retirement. We are a nonprofit organization that aims to improve opportunities for women to secure retirement income and to educate the public about the inequities that disadvantage women in retirement. Our programs are geared around educating women to take action. WISER was founded in 1996 through a grant from the Heinz Family Philanthropies to provide low and moderate-income women, ages 18 to 65, with basic financial information aimed at helping them take financial control over their lives.

Why I do what I do: Most elderly women in America are living in poverty. When you look at why this happens, women were ill-informed and woefully unprepared for retirement. For these older women, there were no 401(k) plans, education was not widespread and retirement planning was not something that women were engaged in. Today, benefits are getting cut. It’s a scary world without a lot of safety nets. The financial well-being of many women is not improving. We are working to change that through education and policy efforts primarily for women under the age of 65. I started WISER to help people get information and take action. Remember, started this before the Internet. It was a different time and there weren’t a lot of places where women could get this information. Cindy Hounsell Copy Block

Where I came from: I was working for Pan American World Airways and they froze the retirement benefit. That’s when I became interested in retirement issues. I went to law school because I wanted to be an arbitrator. I sat on a board for the company and the union and the issues really were interesting. Georgetown Law Center awarded me a fellowship in Women’s Law and Public Policy to work on women’s issues in Washington D.C., and I wound up working at the Pension Rights Center. I was really pulled into these issues and how they affect people’s lives. We won a number of exciting cases for older women. Before we started WISER, I came up with a checklist for the Department of Labor on retirement issues for women. Parade magazine wound up mentioning the checklist on why women should think about retirement income.

On serving on the ERISA council: I was appointed in 2011 by Secretary of Labor Hilda Solis to the ERISA Advisory Council, and in 2008 by the Bush Administration to the Advisory Panel on Medicare Education representing the field of retirement and financial planning. It was a wonderful experience. Everyone brings their own wealth of knowledge. Mine was mainly about participants, but then I got to see the problems on the other side. I learned so much.

My claim to fame: In 2012, Money magazine named me one of its ‘Money Heroes.’ The feature celebrated 40 people who had made ‘extraordinary efforts’ to improve the financial well being of others.

On testifying before Congress: Making your point in front of a group of policymakers is important. A lot more people are aware of the issues and many policymakers know there are big retirement issues for women. But I don’t see a lot of change.

What the retirement income business can do better: Educate! I think it’s really hard because of the new healthcare law. That’s where a lot of the information and action is concentrated at the moment. If anything, we hope employers get more involved in retirement income issues. People trust their plan sponsors.

On my writing: I have written several book chapters, columns, articles, op-eds, papers and booklets on women and retirement. Two booklets, ‘What Every Woman Needs to Know about Money and Retirement: A Simple Guide,’ and ‘What Everyone Needs to Know About Money and Retirement,’ appeared as inserts in Good Housekeeping magazine. They’re available on our website.

My retirement philosophy: After a lifetime of hard work, no one should have to sit at home biting their nails over severe money problems. We focus on women because of their longevity and because there are about six million more women than men at age 65. Think about the nightmare of the 96-year old woman getting thrown out of a nursing home because there’s no money left. We need to educate people in their communities, help them plan for retirement, and get ready for an aging world.

As DOL ponders fiduciary proposal, retail channel assets grow

Posted on October 23, 2015 by Editorial Staff -

Retail assets now account for nearly half of the assets in the asset management industry in the United States, according to the latest research from global analytics firm Cerulli Associates.

Much of the growth in retail assets has come through rollovers from 401(k) plans, and this is precisely the money targeted by the current Department of Labor proposal for reducing conflicted advice to IRA owners by requiring commissioned brokers to sign a pledge to act in their clients’ “best interest.”

“U.S. retail channels have exhibited strong growth in recent years, driven primarily by Baby Boomers transitioning assets out of traditional institutional channels, such as 401(k) plans, in preparation for retirement,” said Jennifer Muzerall, senior analyst at Cerulli, in a release.

“The narrowing gap between retail and institutional assets is the result of a myriad of factors,” Muzerall continues. “Since the financial crisis, retail investors typically have had more exposure to equities as compared to institutions, which has paid off given strong equity market returns over the past few years.

“Diminishing asset pools within certain institutional channels may also be reducing the gap. Fund managers’ focus on making historically institutional strategies (i.e., alternatives) available to retail investors through mutual funds and ETFs is also driving growth of retail assets.”

As of year-end 2014, the size of the U.S. professionally managed market reached $38.6 trillion, showing 6.5% growth year over year. Continued strength in U.S. financial markets has contributed to an increase in assets across all retail and institutional channels. If you include individual stocks and federal defined benefit plan assets, the total U.S. asset size is $50.5 trillion. The ten channels noted in the chart on today’s RIJ home page account for about $26.4 trillion of the total.

U.S. ranked 15th in pension excellence: Mercer

Posted on October 23, 2015 by Editorial Staff -

The Netherlands has leapfrogged Australia in the 2015 Melbourne Mercer Global Pensions Index, coming second only to Denmark in the global ranking of pension systems, IPE.com reported this week. The U.S. was ranked 15 out of 25 countries with a score of 56.3.

Both the Dutch and Danish systems were highlighted as “first class” in the seventh edition of the survey, while Sweden rose from sixth place to tie for fifth with Switzerland. Though Finland fell to sixth, it retained the highest overall sustainability ranking of 92.4 – an increase over the record 91.1 calculated in 2014.

The 25 countries’ scores were calculated by assessing a pension system’s adequacy, sustainability and integrity, with each of the three categories given a weighting of 40%, 35% and 25%.

The UK, which ended mandatory annuitization, narrowly retained its ninth-place ranking, nearly dropping out of the group of six countries deemed to have a sound system.

Unlike 2014, which saw Ireland and Germany tied for 12^th place, Ireland pulled ahead to claim 11^th, increasing its score by less than 1 point, while Germany’s score dropped 0.2 points to 62.

France came 13^th, improving on its 2014 ranking, while Poland remained 15^th. Austria, meanwhile, slipped one spot to 18^th, ahead of Italy, the last-ranking European country at 20^th. Italy saw its ranking decline by one, despite its score increasing to 50.9.

The report once again urged the country to increase participation in workplace plans and the level of contributions by participants.

Top-ranking Denmark was also presented with a number of reform suggestions, with the report proposing changes that would better protect accrued benefits in the event of fraud at a pension provider.

The report, which has added two countries to its index in recent years, is likely to resume the practice next year, author David Knox told IPE. Knox, a senior partner at Mercer in Australia, cited Spain as one of next year’s potential European entrants. He added that Latin American countries could join as well in the coming years.

For the first time, the report examined data gathered over the past seven years, investigating how the systems improved key areas, including time spent in retirement, since the first report was published in 2009.

“During this six-year period, five countries – namely Australia, Germany, Japan, Singapore and the UK – have increased their current pension age, which acted to offset the increase that would have otherwise occurred from increasing life expectancies,” the report said.

“Despite these increases, life expectancy has increased at a faster rate, thereby lengthening the period of retirement.” The report also examined the level of government debt built up by all participating countries, noting that a number of countries had sought to cut expenditure.

“Such developments may improve the sustainability of the pension system,” the report said, “but, inevitably, some of these changes also affect the adequacy of the pension itself. This highlights the natural tension in all retirement income arrangements between adequacy and sustainability.”

The Bucket

Posted on October 23, 2015 by Editorial Staff -

Voya renews its $500 ‘Born to Save’ campaign

For the second consecutive year, Voya Financial is offering a $500 mutual investment to every one of the approximately 10,000 babies born in the U.S. on the first working day of National Save for Retirement Week, the company announced this week. This year, the day is October 19.

Last year, about 1,000 parents enrolled in the program and claimed the prize for their newborns. Those children, born October 20, 2014, will receive a $50 contribution to their Voya accounts.

A Voya press release said that most parents of newborns can afford to contribute $500 to a savings fund for their children, as evidenced by the amount of money they spend on things they and their children don’t need. According to a Voya survey in September of more than 1,000 new parents, about 40% spent at least $500 on baby-related items in the first year that they later determined were nonessential or they never used.

Almost 20% spent over $1,000 on items like clothing, toys, baby entertainment, strollers, baby carriers, and nursery furniture or décor. http://voya.com/borntosave. Parents and guardians of eligible babies must register for this offer at the Voya Financial website by December 18, 2015, Voya said.

TIAA-CREF expands in Europe

TIAA-CREF is set to grow its European institutional presence following the launch of three new UCITS fund strategies.

Managed by Nuveen Investments, a subsidiary of the US financial services company, the funds will invest in bonds and global equity with an environmental, social and governance (ESG) focus, and give investors access to emerging market debt.

Amy Muska O’Brien, head of TIAA-CREF’s responsible investment team, said the ESG funds would focus on companies deemed “best in class” under its screening procedures.

Speaking about the ESG equity strategy, O’Brien said: “The strategy has been offered in the US for some time, and the same [portfolio management] team will be running the strategy as well.”

The ESG bond fund will focus on US holdings, aiming to achieve an exposure to holdings with a “measurable” social or environmental outcome, she added.

O’Brien said the ESG bond fund was likely to be of interest to those seeking exposure to impact investing.

Asked whether the new fund launches marked an attempt by TIAA-CREF to further establish itself in the European market, she noted that the company was already known to a number of large asset owners through its agricultural funds.

She declined to state the company’s expectations for investments over the first year of each fund’s lifetime, saying only that “strong” demand was expected.

Fouche´succeeds O’Donnell as chief of Prudential Annuities

Bob O’Donnell, currently head of Prudential Annuities, has been tapped to lead a new organization that will focus on innovation and development of new growth opportunities across all of Prudential’s U.S. business operations. The change will take effect December 7, according to a Prudential release.

Lori Fouché, currently head of Prudential’s Group Insurance operation, will succeed O’Donnell as president of Prudential Annuities. Andrew Sullivan, currently chief operations officer for Prudential Group Insurance, will succeed Fouché as that business unit’s president.

O’Donnell joined Prudential in 2003, following the company’s acquisition of American Skandia, where he had been a member of the Product Development Department since 1997. Prior to becoming president of Prudential Annuities in 2012, he was the operation’s vice president of product, investments, and marketing, and was responsible for its strategic development. He is also one of the founders of the Annuities Innovation Team.

Prior to joining American Skandia, O’Donnell was with Travelers Insurance Company and Mass Mutual in finance and asset management roles. He earned his bachelor’s degree in Economics from Fairfield University and an MBA in Finance from Rensselaer Polytechnic Institute.

Fouché joined Prudential as head of its Group Insurance operation in 2013. Previously, she served as president and CEO of Fireman’s Fund Insurance Company, and held several other senior leadership positions in its commercial and specialty insurance divisions. Fouché earned an MBA from Harvard Business School and a Bachelor of Arts degree in History from Princeton University, with a certificate in American Studies.

Sullivan joined Prudential in 2011 and has been responsible for the underwriting, claims and service organizations within the Group business. He earned an Executive MBA from the University of Delaware and a Bachelor of Science degree in mechanical engineering from the United States Naval Academy.

More large DB plan sponsors contemplate de-risking: MetLife

MetLife’s new 2015 Pension Risk Transfer Poll, released this week, found that nearly half of large plan sponsors (45%) have taken steps to prepare for an eventual pension risk transfer. Among those plan sponsors who are very or somewhat likely to engage in pension risk transfer, the percentage who have taken preparatory steps rises to 72%.

“Of those plan sponsors who have taken preparatory steps, approximately two-thirds have evaluated the financial impact of a pension risk transfer (65%); explored the pension risk transfer solutions available in the market place (62%); and/or, engaged in data review and cleanup (62%),” said Wayne Daniel, senior vice president and head of U.S. Pensions at MetLife.

According to the survey, plan sponsors identify key stakeholders as members of their company’s C-suite (including the CEO, CFO, etc.) (87%); plan actuaries (72%); attorneys/legal counsel (68%); ERISA/plan governance committee members (62%); and, outside consultants/advisors (45%).

The top catalysts for a pension risk transfer to an insurance company are additional Pension Benefit Guaranty Corporation (PBGC) premium increases (51%), the impact of the new mortality tables issued by the Society of Actuaries in 2014 (45%) and the funded status of their plans reaching a predetermined level (34%).

Quote of the Week

Posted on October 23, 2015 by Editorial Staff -

‘De-Risky’ Business

Posted on October 15, 2015 by Kerry Pechter -

Over the past few years, the sponsors of underfunded jumbo pensions have come to realize that interest rates won’t be rising very soon (or by very much). And any hope they may have had that rising rates would lift the funded ratios of their plans (now only about 80%) has pretty much vanished.

“A few years ago they were sure that rates were about to go up,” said Robert Pozen, the former Fidelity Investments president, during a retirement-focused conference sponsored by the Journal of Investment Management at MIT recently. “Now it’s a bit like Waiting for Godot.”

Many of those Fortune 500 sponsors have already closed their defined benefit plans to new hires, offered individual lump-sum buyouts, or increased their allocations to bonds. Now they’re taking the next step and doing deals that transfer at least part of their remaining DB obligations to life insurance companies through “pension buyouts.”

This fairly recent development has created opportunity for the handful of life insurers that are big enough to sell a multi-billion-dollar group annuity and that have the requisite amount of in-house actuarial and portfolio analysis expertise to price such a product. No life insurer has seized this opportunity as aggressively as Prudential, the second biggest life insurer in the U.S., after MetLife.

“We saw this wave coming,” said Peggy McDonald, a senior vice president at Prudential and member of its pension risk transfer team, who participated in the same panel discussion at the JOIM conference as Pozen. “The focus of thinking about defined benefit plans has shifted from the HR departments to the finance departments at large sponsors, and now it’s a legacy liability for them,” she added. “So they’re asking, ‘How can I move this off my balance sheet in a way that keeps the promises we made to the people who worked for us?’”

Prudential has been involved in about $40 billion worth of large deals—a majority of the total volume of mega-deals in recent years—with General Motors, Verizon, Motorola, Bristol-Myers Squibb and others. On October 9, only days before the JOIM meeting, Prudential had announced two separate multi-billion group annuity deals. JC Penney, the long-time clothier of middle-class American women, bought a group annuity that will move an estimated 25% to 35% of its $5 billion in pension assets and liabilities, covering some 43,000 workers, to Prudential.

In the second deal, Prudential, in combination with Banner Life (a unit of Legal & General America) and American United Life (a unit of OneAmerica) relieved the North American subsidiary of Philips Electronics of about €1 billion in pension assets and liabilities affecting about 17,000 workers—reducing Philips U.S. pension liabilities to about €2.7 billion and global pension liabilities to about €8.5 billion. The deals are expected to close in December.

In this new jumbo pension buyout market, Prudential is the clear leader. “Prudential has been the winner of most if not all of the [jumbo pension risk transfer] business,” said Ari Jacobs, senior partner and Global Retirement Solutions leader for AonHewitt, which advises plan sponsors. “MassMutual and Voya are also in the business. Hundreds of pension buyout deals of less than $1 billion are closed each year, but only a handful of companies can work in the mega-market. Prudential has won most of the largest bids in that market.”

How Prudential does it

Watching the number of Prudential’s deals in this space, some observers have wondered how one company could safely take on so much apparent longevity risk and investment risk. To be sure, these deals are vetted by consultants to make sure the plan sponsors fulfill their ERISA fiduciary responsibilities and choose the “safest” available insurance partner. Still, a lot of risk seems to be accumulating in one place.

At the JOIM conference, and in a subsequent phone interview with RIJ, McDonald explained that Prudential and its plan sponsor clients bring these deals to fruition by taking great care in their selection of retirees to include in the group annuity, by closely analyzing the risks of those pools, and by carefully selecting the assets that will accompany those liabilities over to the insurer.

In many cases, that means focusing on the oldest plan members, whose benefits are the least risky to transfer. “We addressed the cost issue by focusing on the retiree populations,” McDonald said at the conference. “About 50% of the pension obligation is obligations to retirees, those are the most efficient to transfer. Their average ages will be 70 or 72. It can be too expensive to do the buyout for non-retirees. There’s behavioral risk, interest rate risk, and longevity risk. With retirees, the duration of liabilities is relatively short. So there’s not as much longevity risk or investment risk as we would see with younger participants.”

It also involves a close analysis of the longevity risks of that group, and the variables that affect the longevity of sub-groups within it. “We have a longevity team that does a really deep dive and finely tunes our assumptions, based on certain variables. Geography, gender, current age and benefit size are the big ones,” McDonald told RIJ. “We know from Society of Actuaries tables, for instance, that people with bigger benefits have better longevity. As a company, we have mortality history in our very large block of annuity business going back to 1928. We rely on what we’ve learned from that book of business and tweak it for what we know about each specific group.”

In addition to identifying the liabilities carefully, Prudential and the jumbo plan sponsors had to identify the assets backing the liabilities with great care. Jumbo plan buy-outs require in-kind transfers of assets. In the run-up to the deal, the sponsor may have to change the plan’s asset mix to fit the insurer’s requirements. Those assets also need to remain equal to the liabilities during the period between the announcement of the transfer and the closing of the deal.

Cash not accepted

One big difference between the jumbo pension buyouts and those of under a billion dollars is that plan sponsors can’t pay for big group annuities with cash. It has to be done with assets, and those assets have to be tailored to the liabilities. Certain assets may even have to be purchased to fit the pricing of the deal.

“In a small plan buy-out, the insurer hands over the group annuity contract and the plan sponsor hands over cash,” McDonald said. “That wouldn’t have worked for the General Motors deal. If they gave us $25 billion in cash it would have taken us a long time to invest that.So we generally take high quality corporate bonds. It’s an in-kind exchange. We take some private equity. We give excruciating instructions on duration, sector, and quality of the bond. We say, here’s the perfect portfolio you can give us and here’s the price we can give.”

While the mega-buyouts create new business for Prudential, they are watched with some anxiety (and much chagrin) by advocates for DB participants. “We’re concerned about insurers taking on so many obligations,” said Nancy Hwa, a spokesperson for the Pension Rights Center. “It’s unlikely that a company like Prudential would go under, but we want to make sure they don’t mess up. These transfers are another opportunity for people to fall through the cracks. We’re also concerned about transfers of [personal] information. Generally, we don’t dislike these transfers as much as we disliked the [now restricted] lump-sum offers to retirees.”

If anything, the number of large pension buy-outs appears destined to grow. “When rates go up you’ll see tons more of these transactions,” McDonald said. “Plan sponsors won’t miss the boat a second time. The last time they were overfunded, they were too slow to act. There were plan sponsors looking to exit, but they weren’t ready. Now they’re better educated and they have a stronger desire to get the liabilities off their balance sheets. It’s not a matter of if, but when. Plan sponsors are coming to us. Their boards are asking them, ‘Why aren’t we doing this?’”

The Link between Inequality and ‘Retirement Readiness’

Posted on October 15, 2015 by Kerry Pechter -

If you’ve ever wondered how the United States can have $24 trillion in total retirement savings and still suffer from a retirement “crisis,” you might want to take a look at the 2015 edition of the Global Wealth Databook, just published by the Research Institute at Credit Suisse.

The Credit Suisse report shows that those trillions are concentrated in only a handful of hands, and that while the middle class in the U.S.—those with between $50k and $500k—represents about 38% of the population it has only about 20% of the nation’s financial wealth. In a country with an egalitarian self-image, that’s surprising. Shocking, even.

“In North America – alone among regions – the population share of the middle class exceeds their share of wealth: in other words, the middle class as a group have less than average wealth. In fact the average wealth of middle class adults in North America is barely half the average for all adults,” the report says.

“In contrast, middle class wealth per adult in Europe is 130% of the regional average; the middle class in China are three times better off in wealth terms than the country as a whole; and the average wealth of the middle class in both India and Africa is ten times the level of those in the rest of the population.”

The middle class in the U.S., at 38% of the population, is also smaller than the middle class elsewhere, the report said. Proportionate to the total, the middle class is smallest in crowded, impoverished India (3% of the population) and largest in sparsely populated, resource-rich Australia (66%). In most high-income countries, the middle class includes 50% to 60% of the population.

The shrinkage of our middle class is not entirely a bad thing, the authors of the report observe. Between 2000 and 2015, some middle class Americans evidently migrated to the uppermost 12% of the population, while others dropped into the 50% of the population with less than $50,000 in wealth. (The report didn’t examine age-specific wealth levels.) The wealth of our middle class is dwarfed by the wealth of our upper class.

In the U.S., the wealthiest 10% of families have 75% of the wealth, and the top one percent has 35% of the wealth. The top 25% have 90% of the wealth. In the U.K, by comparison, the top one percent of adults has 12.5% of the wealth and the top 10% has 44%.

What does this “inequality” in the U.S. have to do with the retirement crisis? That’s hard to say. Is the distribution of wealth a zero-sum game? Or is it a game where each family determines their own wealth or poverty, independent of the others? Or would the bottom 88% be poorer if not for the industry of the top 12%? Is there a cause-and-effect relationship between retirement readiness and the distribution of wealth, or just a correlation? Or a combination of the two.

When faced with difficult questions, I call on people who are better informed than I am. In this case, I reached out to Steven Sass of the Center for Retirement Research at Boston College, who wrote “The Promise of Private Pensions” (Harvard University Press, 1997). Sass, whose organization publishes a retirement readiness index, doesn’t think that retirement readiness is a finite resource.

“Rising ‘inequality’ per se, however, seems orthogonal to [i.e., statistically independent of] notions of a ‘retirement crisis,’” Sass told RIJ. “If fewer retirees were at risk of poverty or of being unable to sustain their pre-retirement standard of living (or some such measure), the ‘crisis’ would diminish even if the rich retirees got fabulously richer. I doubt that the rich got richer at the expense of the middle, unless one has a rather robust definition of ‘at the expense of.’”

The authors of the Credit Suisse report noted that a couple of their procedural decisions may have contributed to their small estimate of the small size of the U.S. middle class. First, young people with less than $50,000 in wealth were not included in the middle class, when their incomes may have justified inclusion. Second, state pensions (such as Social Security) weren’t counted as personal wealth; that would have pushed more people up into the middle class. On the other hand, the same rules were applied to all countries, and the U.S. middle class was at least relatively small.

Given those limitations, the study may not tell us a lot about the link between distribution and wealth and retirement readiness. The most worrisome part of the report may be the fact that about 50% of Americans have virtually no wealth. According to the Credit Suisse report, the wealthiest 12% of Americans have 79.1% of the country’s wealth, the 38% who belong to the middle class have 19.6%, and the indigent half of Americans owns only 1.3%.

Stock Market Volatility and Investors’ Trust

Posted on October 14, 2015 by Larry Cohen -

Recently, volatility in the stock market has returned to levels last evident in September 2008 at the start of the past recession. Repeated market volatility produces more changes than simply in the amount of a household’s invested assets; it changes how investors think, feel, and behave about their investments.

The two most recent recessions (2000–01 and 2008–09) show clearly that even when the US stock markets recover, investors’ trust in financial institutions and professionals rarely returns to prerecession levels—investor mistrust simply increases with time.

Households mistrust discount brokerages the most. However, full-service brokerages and banks are not immune to an increasing lack of trust; financial-planning companies and mutual fund companies fare only marginally better. Brokerages and banks, in particular, focus on households with high investable assets. From the consumer point of view, this single focus (which does not consider the households’ total financial picture) engenders only greater mistrust. (Charts courtesy of The Macromonitor. Based on households with $100,000 or more in investable assets, adjusted for inflation.)

The prevailing view in the investment community has been that most investors will blindly follow their financial professional to another institution should their broker switch, should the institution fail to meet portfolio expectations, or should the institution participate in a bothersome scandal.

In fact, a growing number of investors do not share this view. Because of the industry’s focus on those with the most investable assets, many lower-net-worth investor households no longer have a personal relationship with a single financial professional or may not have a designated financial professional at all: They use call centers, online portals, and—most recently—robo-advisors. The result is that more households mistrust financial professionals than mistrust financial institutions. Financial planners are the exception because their recommendations and services build personal relationships with their customers through a review of—and suggestions for—the household’s complete financial needs.

Current market volatility reminds investors daily of the recent recessions. Consequently, investment firms—if they continue to behave as if nothing is different and do not alter their approach to investors to consider the complete needs of these desirable households—run the risk of further alienating their customers and losing their business forever.

“SmartPlan” may increase participant engagement in DC plans

BlackRock’s new ‘iRetire’ tool measures retirement readiness

MassMutual declares dividend payout of $1.7 billion for 2016

Robo-advice is more ally than competition for advisors: LIMRA

Northwestern Mutual pays $27 million in dividends to DIA owners; $5.6 billion overall

Courses available on using social media

How eight kinds of non-traditional families view personal finance: Allianz

Voya renews its $500 ‘Born to Save’ campaign

TIAA-CREF expands in Europe

Fouche´succeeds O’Donnell as chief of Prudential Annuities

More large DB plan sponsors contemplate de-risking: MetLife

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