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RetirePreneur: Mark Warshawsky

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

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

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

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

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

‘Bermuda Triangle’

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

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

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

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

MassMutual’s version

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

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

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

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

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

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

Next steps for ReLIAS

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

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

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

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

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

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

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

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

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

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

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

Big life insurers boost gains with Schedule BA investments: Conning

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

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

Financial Engines acquires The Mutual Fund Store

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

TIPS for the Long Run?

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

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

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

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

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

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

Deja vu all over again

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

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

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

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

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

Chart for 11-5-2015 TDF story

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

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

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

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

Calculate this!

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

Social Security Spousal Benefits Still Unfair

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

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

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

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

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

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

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

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

Such a system causes innumerable inequities:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

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

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

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

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

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

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

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

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

Women are better savers, but men save more: Vanguard

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved. 

Spike in cash takeovers could be bad omen: TrimTabs

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

The Bucket

“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.

© 2015 RIJ Publishing LLC. All rights reserved.

On Background: An Insider Talks about the DOL Proposal

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.”

© 2015 RIJ Publishing LLC. All rights reserved.

October rally shows markets’ addiction to low rates: OFR

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%.” 

© 2015 RIJ Publishing LLC. All rights reserved.

Shadow of ERISA hangs over state-run retirement plans

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.

© 2015 RIJ Publishing LLC. All rights reserved.

Five more advisory firms pay restitution for overcharges

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.

© 2015 RIJ Publishing LLC. All rights reserved.

Fidelity partners with Envestnet on plan advisor platform

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.

© 2015 RIJ Publishing LLC. All rights reserved.

The Bucket

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.

© 2015 RIJ Publishing LLC. All rights reserved.

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

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. 

© 2015 RIJ Publishing LLC. All rights reserved.