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The Bucket

Posted on December 3, 2015 by Editorial Staff -

Genworth launches uncapped FIA crediting strategy

Genworth announced today that it has launched a new uncapped volatility control spread index crediting strategy on select SecureLiving Fixed Index Annuity products. The strategy is based on the Barclays U.S. Low Volatility II Equity ER Risk Controlled Index (“Barclays U.S. Low Volatility Index”). The volatility control spread strategy is designed to deliver greater growth opportunity than a traditional cap strategy, with more stable spreads regardless of the interest rate environment.

Genworth selected the Barclays U.S. Low Volatility Index, which tracks 50 of the lowest volatility U.S. stocks on the New York Stock Exchange and NASDAQ, as the basis for the uncapped volatility control spread index crediting strategy. The Barclays U.S. Low Volatility Index, which is rebalanced monthly, includes many well-known stocks and the return includes reinvestment of any dividends. On a daily basis, it will increase or decrease the exposure to the 50 stocks, up to 100 percent, based on the stated target volatility level. It does not include any bond index or exotic components, which can cause a drag on performance when interest rates rise.

With the new volatility control spread strategy, interest is:

· Credited at the end of each 2-year term, and

· Calculated by using the percentage change over the 2-year term, less the term spread, and adjusted by the participation rate.

Because there is no cap on the performance of the strategy — only a spread and participation rate — credited interest can be significant when the Barclays Low Volatility Index returns positive performance over a 2-year term. For example, if the index sees 16 percent positive performance over two years and the annual spread is 1.5 percent (3 percent over the 2-year term) with a 100% participation rate, the interest credit is 13 percent. If the index decreases during a 2-year term, interest credited will never be less than zero percent, thereby protecting the contract value from market losses.

Whether a client’s goal is accumulation or income focused, when combined with other popular features available on Genworth’s SecureLiving Fixed Index Annuities, the uncapped volatility control spread strategy and Barclays U.S. Low Volatility Index and offers consumers a unique value proposition in terms of even greater growth potential and industry-leading flexibility.

For example, Genworth is the only carrier offering every index annuity contract owner renewal cap protection. This flexibility provides that, regardless of which crediting strategy their money is allocated into, a client may withdraw the entire accumulated contract value of the annuity without penalty if the declared renewal cap on the annual cap strategy falls below the contract’s bailout cap rate.

DTCC launches ‘Data as a Service’ (DaaS)

The Depository Trust & Clearing Corporation (DTCC), the provider of post-trade market infrastructure and data provisioning services for the global financial services industry, announces the launch of its Data as a Service (DaaS) offering.

The newest offering from DTCC Data Products “transforms the way data is accessed and presented from DTCC’s clearing, settlement, asset servicing and derivatives trade reporting solutions, providing firms with new insights on trading activities across multiple asset classes,” DTCC said in a release.

The DaaS offering provides subscribers access to their own firm-specific transaction data, as well as positions aggregate data along with tools to customize views. DaaS delivers asset class specific data, including transaction volumes, positions and exposure.

DTCC Data Products was created in response to client need for centralized on-demand access to multiple sources of market and reference data. DaaS enables clients to mitigate risk, enhance efficiencies and reduce costs, as well as to meet new regulatory requirements.

A client can access GSD (government securities division) data directly from DTCC’s Fixed Income Clearing Corporation (FICC) service, providing it with access to their GSD activity along with analytics and benchmarking against the overall industry and dealer activity.

Additional perspectives are available through DaaS based on the particular characteristics of a security type, such as by security duration (e.g. 10-year notes) and time until security maturity for U.S. government securities. Each category of aggregate data is available for the current analysis week, month and quarter in direct comparison to its base week, month and quarter.

Future DaaS capabilities, targeted for 2016, will include new query tools for on-demand results, client-configurable data feeds and access to historical data.

John Hancock enhances mobile app, ‘MyLifeNow’

Employees of John Hancock Total Retirement Solutions plan sponsor clients can now use John Hancock’s mobile app, MyLifeNow to enroll in their 401(k) plans using their smartphones, the U.S. arm of ManuLife announced this week.

The MyLifeNow mobile app was launched in 2013 to give participants anywhere access to their 401(k) account balance, personal rate of return, estimated annual retirement income, year-to-date contributions, and investment allocations by asset class. Earlier this year, the company added transactional capabilities, including reviewing and changing contribution percentage rates and enrolling in a plan’s auto-increase capability.

Assets under management and administration by Manulife and its subsidiaries were C$888 billion(US$663 billion) as at September 30, 2015. Manulife Financial Corporation trades as ‘MFC’ on the TSX, NYSE and PSE, and under ‘945’ on the SEHK.

Witherow to lead Voya’s large plan DC business

Mary Witherow joined Voya Financial’s retirement business in early November as senior vice president and head of Relationship Management for the Large Corporate Market, taking responsibility for client satisfaction, retention and growth in Voya’s large employer-sponsored 401(k) defined contribution and benefit plans, Voya told RIJ.

Witherow, who replaces the retiring Sandy Tassinari, works in Voya’s Braintree, MA, office. She reports to Rich Linton, president of Large Market and Retail Wealth Management for Voya Retirement.

Over the past 15 years with Fidelity Investments, Witherow held several leadership positions in the retirement business, first in Large Corporate Relationship Management and later as the senior vice president and head of Relationship Management for the Advisor-distributed Market.

Prior to that, Witherow worked as an attorney for the U.S. Department of Labor where she served as counsel for ERISA. She holds a B.A. and a J.D. from the University of Oklahoma and is a registered representative with a Series 6, 7, 24, 26 and 63 licenses.

Vanguard captures 82.5% of 2015 fund flows through October

Posted on November 30, 2015 by Editorial Staff -

Vanguard has continued to gather up the lion’s share of net fund flows in the first ten months of 2015, with net flows of $191 billion, according to the most recent monthly Morningstar Direct Asset Flows Report, published Nov. 12.

As of the end of October, shares in Vanguard funds were worth about $2.9 trillion, or just over 20% of the market value of open-end mutual funds and ETFs, excluding money market funds and funds-of-funds. The numbers also do not include assets in retirement plans.

Of the $231.5 billion in net flows to such funds in the first 10 months of 2015, Vanguard accounted for 82.5%. The lopsided gain in assets was offset by significant outflows, especially from PIMCO, SPDR State Street Global Advisors, Franklin Templeton, Columbia and Oppenheimer Funds.

The ten largest fund families, out of hundreds of fund families, accounted for 57% or about $8 billion of the $14 trillion in assets held in these types of funds. The 50 largest fund families accounted for about 85% of the assets, or about $11.8 billion.

In October, BlackRock iShares had net flows of $14.96 billion while Vanguard’s passive funds had net flows of $14.74 billion. It was the second consecutive month in which flows to BlackRock iShares were slightly greater than flows to Vanguard passive funds.

In the year ending on October 31, 2015, PIMCO registered net outflows of about $114 billion, with about $79 billion of that coming out of the Newport Beach, CA-based firm’s big actively managed bond fund, PIMCO Total Return Fund.

Over that time period, Vanguard Total International Bond Index Fund, a passively managed fund, experienced net flows of $20.9 billion, while actively managed Metropolitan West Total Return Bond Fund collected a net $27.7 billion, for a remarkable one-year growth rate of 68%.

Morningstar analyst Alina Lamy noted in the report that investors returned to high-yield bonds in November after preferring government bonds for several months. “In a complete reversal from last month, high-yield and intermediate-term bond moved from the bottom to the top five categories—a drastic change in investors’ appetite for risk in the fixed-income space,” she wrote. “Investors might be trying to anticipate the potential December interest-rate raise.”

“High-yield bonds are less sensitive to interest-rate changes and therefore tend to perform better in a rising-interest-rate environment,” Lamy explained in an email to RIJ. “[Their prices] tend to be more sensitive to factors such as the financial health of the issuer, the general economic outlook, and corporate earnings, than to fluctuations in interest rates.

“However, high-yield bonds also carry more credit risk than investment-grade bonds. So, in essence, investors are swapping interest-rate risk for credit risk. The fact they are doing that appears to indicate that investors are now willing to take on more credit risk in order to protect from interest-rate risk, which seems to me a move to position portfolios in anticipation of a potential rate increase (likely to happen in December).”

Fidelity and Betterment: From Collaborators to Competitors

Posted on November 30, 2015 by Kerry Pechter -

As you may have read elsewhere, Betterment Institutional is on its way out as the digital platform for Fidelity-affiliated registered investment advisors. “We have decided not to re-new our agreement with Betterment Institutional. We will wind-down the strategic alliance by the end of the year,” said Fidelity spokesperson Erica Birke in an email to RIJ this week.

“This strategic alliance was a practice management referral agreement for RIA clients of Fidelity Clearing & Custody, so the primary shift is that we will no longer actively promote and support the alliance. Fidelity clients that have formed a relationship with Betterment can continue to work with Betterment, and Fidelity will continue to support their needs.”

Given the fact that Betterment’s own online direct-to-consumer RIA business offers only exchange-traded funds from Vanguard (not Fidelity or iShares) to its 120,000 clients, the split between Fidelity and Betterment probably shouldn’t shock anybody.

In fact, giant Fidelity now competes with tiny Betterment in the direct digital advisory channel. Fidelity is currently testing a robo-advisory service called Fidelity Go. According to a disclosure document, Fidelity Go is a “discretionary investment management service designed for individual investors with accounts as small as $5,000. Clients of the Service are currently limited to employees of Fidelity (or select contractors providing services to Fidelity)” and Geode Capital Management, the third-party investment advisor that’s working with Fidelity on this.

Millennials—that’s the target market—who sign up for Fidelity Go will have their money invested for them in low-cost passively managed Fidelity ETFs or BlackRock iShares. Depending on the investors’ expressed risk appetites (or aversions) and investment goals, their money will go into portfolios containing between 20% and 85% equities. When the service goes live next year, Fidelity intends to charge an as-yet undisclosed asset-based fee.

An explanatory aside

These events are part of an evolution rather than a revolution, and would have been impossible ten or 12 years ago. Back then, most Millennials were still in school, and didn’t have any money to invest. Direct-sold fund companies like Vanguard and Fidelity were subsidizing small account holders, because fees on small accounts didn’t cover the cost of call centers or prospectus mailings.

Since then, there have been a couple of game-changing (but foreseen by some) demographic and technological changes. The first Millennials graduated from college and started earning money. The smartphone became modern humankind’s chosen universal interface with the world. The cost of computing fell dramatically. People acclimated to digital delivery of all their financial communications.

The advisor world also went digital. Traditional advisors began outsourcing their investment selection and account management chores to third-party platforms. It slowly became acceptable to admit—or even to brag—that cool-headed algorithms, and not human advisors, were creating asset allocations. The robo-advisors, being new and small, were nimbler than the established financial services firms in exploiting these changes.

Most importantly, the leaders of robo-advice firms came from the digital world, not the financial world. It was natural for them to transplant the simplified, disarming on-boarding process of an Uber or Airbnb to the financial services world. At a typical robo site, the visitor is invited to “Sign Up! Get the First Month Free!” with an irreverent informality that wouldn’t come naturally to members of the old guard. The simple-to-navigate robo websites are arguably better suited to their “do-it-for-me” investors than to the do-it-yourself audience that Fidelity, Vanguard and established discount trading platforms have long catered to.

But even this triumph of transcendence over the coldness of computer interfaces was not invented by the robo-advice startups. A full 30 years ago, purchasers of Macintosh computers turned on their little taupe soon-to-be doorstops and were greeted by a cheerful chime and a screen that read, “Hello,” in computer-generated lowercase longhand. In terms of usability, the Macintosh did to the PC what robo-advice websites are currently doing to the traditional online financial interface: Humanizing it.

Back to Fidelity and Betterment

In addition to building its own robo-advice platform, Fidelity is also building an RIA portal that will do what Betterment Institutional has done for the past year: Provide Fidelity’s affiliated advisors with a digital service that could integrate client data into Fidelity’s clearing service.

“[The Betterment] agreement was forged as part of Fidelity Clearing & Custody’s larger practice management and consulting offering. It came at a time when many of Fidelity’s RIA clients and prospects had been following the digital advisor evolution and growth with great interest, and were coming to Fidelity for help in better understanding the landscape and learning about the options available to them,” Birke wrote in the recent email to RIJ.

“The alliance fit within our strategy to offer one-to-one engagement with our RIA clients and prospects, helping to educate them, assess opportunities and activate a strategy to drive growth. Fidelity is now building its own version of such a digital service. We determined that most of our clients are looking for a solution that is deeply integrated into our clearing and custody platform, customizable, and allows the investment advisor flexibility in investment decision-making and product selection.

“We are moving forward with a vision that meets those needs. We’ll announce our full technology strategy early next year, including our plans around digital advice, with timelines around key deliverables. The deliverables will happen over the course of 2016-2017. Like any technology build, different components will launch at different stages.”

Removing ‘Lapse Risk’ from Variable Annuities

Posted on November 29, 2015 by Kerry Pechter -

There’s a transatlantic search underway for “capital-efficient savings products” that can give retirement savers the upside potential and downside floors they crave without creating capital-intensive, unhedgeable risks for the life insurers who build them.

Munich Re Group has developed such a product in Europe, and one of its U.S.-based executives, Ari Lindner, introduced it to the 200 or so actuaries and asset managers who attended the Society of Actuaries’ EBIG 2015 conference in Chicago a few weeks ago.

In the separate account product he described, policyholders split their premiums into two, buying a risky asset—an equity mutual fund or balanced fund—and a long-dated put that ensures a return of premium at maturity, which could last as long as 40 years.

Like most variable annuities, the new product allows the contract owners to invest directly in equities or other risky assets. And like fixed indexed annuities, it offers an end-of-term principal guarantee. But it differs from both VAs and FIAs in that it relieves the issuer of “lapse risk” and other risks tied to unpredictable client behavior.

Lapse risk is the risk that policyholders won’t lapse (surrender) their contracts at the rate that insurer actuaries predicted. If experience differs from assumptions, the guarantee may generate economic losses for the insurer, and the mere possibility of this occurrence results in a higher capital requirement.

Lapse risk has created big headaches for European as well as U.S. life insurers. “Almost every major variable annuity writer has absorbed large write-downs on ‘policyholder behavior assumption updates,’” Lindner said. “We’re talking about major players. And the losses have been fairly substantial, if you read the quarterly earnings reports. So the question is, how do we take out that risk?”

A portfolio of puts

Assume a client who buys a 12-year version of the product with a $100,000 premium. The premium covers three components: the load; an investment into shares of a mutual fund; and the purchase of a terminal 12-year put (an option to sell the fund at a certain minimum price) from the insurer. Behind the scenes, the reinsurer (Munich Re, in this case) manages a portfolio of put options to finance the life insurer’s promise to keep the client whole.

[Technically the reinsurer does not physically trade options but synthetically replicates the insurance liability via a dynamic hedging program, “although this is irrelevant to both the primary insurer and the policyholder,” according to Alex Wolf, senior structurer, and Darryl Stewart, senior consultant, in Munich Re’s Life Financial Solutions unit.]

Prior to maturity, the put gains value when the mutual fund loses market value and vice-versa. The overall account value is stabilized because it is comprised of the sum of the mutual fund value and the value of the put (updated daily). At maturity, if the value of the mutual fund equals or exceeds the terminal guarantee (e.g. the initial premium), the put expires with no value. If the mutual fund doesn’t satisfy the guarantee, the put value would make up the shortfall.

“The policyholder invests in a guarantee asset rather than paying for a guarantee on a running basis,” said one of Lindner’s presentation slides. The initial allocation between load, hedge and investment depends on interest rates and market volatility at the time of purchase. In addition to the load, a policyholder pays an annual mortality and expense risk fee.

How the design conserves capital

The product conserves capital, as noted above, by eliminating lapse risk. The timing of a surrender doesn’t affect the insurer because, at any given point in the life of the contract, the surrender value and the value of the separate account are the same. The product pricing doesn’t depend on an assumption about lapse rates, so there’s no risk of a mismatch between the value of assets that support the guarantee and the guarantee, and therefore no chance of a desperate call for more capital.

In a more sophisticated version of the product, the total premium could be split into the following pieces: a front-end load, an investment budget that’s allocated to a mixed income fund (50% volatility-controlled equity fund and 50% Treasuries), a money market fund and a put for each of the two investment sleeves. Under favorable market conditions, all of the premium could go into the mixed income fund and its put.

For the past two years, brokers and both independent and captive agents of ERGO, the direct writer of life insurance policies within Munich Re group, have sold a product like the one just described, called ERGO Rente Garantie, in Germany. The number of in-force policies is in “the five digits” according to Stewart. The front end load for such a product would be about 5% and the budget for the put would be no more than 15% of the premium.

Would it fly in the US?

Would such a product transplant successfully to the United States? According to Lindner, if life insurers in the U.S. can sell GMAB products, then the Munich Re design should be marketable here—unless regulators object to the fact that the guarantee is part of the policyholder’s account.

The product’s only insurance feature at the moment is its death benefit. It can be configured to accept either single or flexible premiums; a guaranteed minimum withdrawal benefit can be added; roll-ups could be offered; the put could guarantee less than 100% of the premium.

One aspect of the product that might appeal to advisors: transparency. “On a variable annuity in the U.S., you can see the value of the risky asset, and you know there’s a guarantee under certain circumstances. But you can’t see what the guarantee is worth or collect it if you choose to terminate the contract prior to taking the guaranteed pay-out,” said Wolf.

As for the sales force, Lindner raised a couple of questions. How would policy illustrations be handled? (In Europe, Munich Re intends to simplify the current version of its product to make it easier for agents to explain and prospects to understand.) And, would the Department of Labor deem the design to be in what the pending fiduciary proposal calls the “best interest of the client.” As for administrative chores, the value of the put would have to be updated on a regular basis (e.g. daily) and reported to the client.

But there’s no question that life insurers are looking for a new kind of annuity product that can sell in the broker-dealer channel, satisfy the investor’s desire for upside potential and downside protection, and, most importantly, not have a large appetite for capital.

Deep in the Data Mines

Posted on November 20, 2015 by Kerry Pechter -

Predictions are always dangerous to make, it is said, especially when they’re about the future. So the search for better prediction tools goes on. One such tool is “predictive modeling,” one of the topics covered at the Society of Actuaries’ Equity-Based Insurance Guarantees (EBIG) conference in Chicago this week.

In many industries, predictive modeling is old news. The health care, finance, Internet, law enforcement and other sectors have long used it to draw conclusions about past events and measure the probability of future ones. It’s a kind of universal drill bit for mining Big Data. But applications in the annuity industry are apparently only a couple of years old.

One driver of interest in predictive modeling among annuity issuers has been its potential for predicting the behavior of policyholders. The profitability (or toxicity) of blocks of in-force contracts with income riders will depend partly on how policyholders use them and how well insurers can anticipate that behavior. Predictive modeling might give insurers a better handle on that problem.

Most of what I heard about predictive modeling in Chicago, frankly, flew past me—a flurry of major league liners over a Little Leaguer’s head. But while the equations and terminology were mysteries, the implications were fairly clear. Predictive modeling has multiple applications in the annuity business, and beats some of the modeling techniques that failed in the financial crisis. It is expensive, hard to do right, and not always successful. But the possibility that it might free up capital has captured life insurers’ attention: Some 200 actuaries and consultants from virtually all the major life insurers and several large asset managers attended the meetings, some from overseas.

What is predictive modeling?

In laymen’s terms, predictive modeling is a way to extract lessons from the past or to predict the probability of events in the future, based on what has happened in the past. Since the dawn of the Internet Age, its applications have been large, small, and pervasive. When Google auto-completes a search term or URL based on the first few letters you type into your browser’s address bar, it uses predictive modeling. It’s how your e-mail spam filter works.

Actuaries and statisticians have been using various methods to calculate risks and probabilities for a long time. But predictive modeling, a child of high-speed computing and big data, is a new twist. At the EBIG conference, it was variously described it as a better way to reveal a distribution of outcomes, as opposed to an expected outcome; or to add context to results; or, generally, to simplify what Nationwide actuary Dan Heyer called problems of “frightening” complexity.

Property and casualty actuaries like Heyer have been using predictive modeling for years to reveal, for instance, the shrinkage of gender differences in collision probabilities as drivers age. But since the Financial Crisis, actuaries at some large annuity issuers have started using predictive models to forecast policyholder behavior. Contract surrender rates and usage rates of income options can determine whether a large block of in-force business will generate a profit or a loss.

“Both for variable annuities and fixed indexed annuities, the more dynamic they become, the harder it is to analyze policyholder behavior with traditional techniques,” said Guillaume Briere-Giroux, a consulting actuary at Oliver Wyman who advises life insurers on predictive modeling.

What can PM do for you?

Predictive modeling can be applied to a wide variety of business problems. In 2015, with variable annuity sales down 20% from the previous year, Lincoln Financial Group wanted to rebalance its wholesaling effort toward indexed annuities, whose sales are flourishing, according to Craig Dealmeida, assistant vice president of Annuity Risk Management at Lincoln.

Through advanced modeling techniques, Dealmeida said, Lincoln was able to distinguish between advisors who would probably be willing to switch from selling VAs to selling FIAs, and advisors who wouldn’t be as flexible. As a result, its FIA wholesalers were able to schedule more visits to high-probability advisors.

In another case, predictive modeling was used to challenge existing interpretations of lapse behavior, said Briere-Giroux. During the financial crisis, annuity issuers noticed that more surrenders were coming from owners of variable annuity contracts with “at-the-money” income riders (where the account values and guaranteed benefit values were about the same) rather than owners of “deep-in-the-money” riders (the account values were much lower than the guaranteed benefit values).

Insurers tended to assume that owners of deep-in-the-money contracts recognized the value of what they owned. But, predictive modeling suggested the alternative possibility that advisors, not owners, were driving the trend. Suitability standards barred advisors from pitching 1035-exchanges to owners of deep-in-the-money contracts, so the advisors limited their exchange transactions—which account for about 85% of annual VA sales—to the owners of less valuable contracts.

Nationwide began examining lapse rates on its fixed deferred annuity contracts in 2013, Heyer said. The number of variables that were involved in predicting lapse behavior was daunting. Variables included the attained age of the contract owner, policy size, crediting rate, guaranteed floor rates, difference between market rate and crediting rate, and whether the contract was qualified on non-qualified. A predictive model that considered the variables one at a time, instead of all at once, produced better lapse estimates, he said.

Another insight into the value of predictive modeling was suggested during Briere-Giroux’ presentation. Insurance actuaries are familiar with hedge-able market risks, like interest rate risk, longevity risk, credit risk and volatility, he said. But, to predict the future, they also have to make assumptions about future lapse rates, annuitization rates and withdrawal rates. Predictive modeling can help them do that.

Predictive modeling techniques also help actuaries refine their analyses of policyholder behavior, the Oliver Wyman consultant said. Without predictive modeling, actuaries might look at all owners of Guaranteed Lifetime Withdrawal Benefit riders as a single group. But predictive modeling techniques make it possible to segment owners into four sub-groups—those who take 100% of their guaranteed monthly income benefit, those who take less or more than 100% of their benefit, and those who haven’t taken a withdrawal yet–each of which has its own characteristic lapse rate.

Freeing up capital

While Lincoln Financial and Nationwide are clearly employing predictive modeling, the adoption rate by other carriers isn’t clear. At the conference, actuaries noted that creating a predictive modeling program can be expensive, partly because it often involves the hiring of Ph.D.-level statisticians to complement the skills of actuaries. But senior executives have difficulty approving an investment in what they don’t fully understand. “Sometimes it’s harder to persuade people to let you do predictive modeling than to do predictive modeling,” Dealmeida said. Actuaries can be more persuasive if they remember to tie their cryptic equations to a business “story,” he added, and to emphasize predictive modeling’s potential to free up capital.

In addition, the process of building predictive models isn’t foolproof. Heyer said he likes to create problems with known answers to see if his models will ferret them out. Conversely, he sometimes assigns nonsense problems to his models to see if they produce an answer that isn’t there. Given the difficulty of making predictions, actuaries should “use the models to inform their decision-making,” he said, “but not to rely on them.”

Don’t Touch the Jenga Tower

Posted on November 20, 2015 by Kerry Pechter -

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

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

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

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

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

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

Indexed Annuity Sales Reach New Highs: LIMRA

Posted on November 20, 2015 by Editorial Staff -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MassMutual’s new VA offers exposure to alternatives

Posted on November 20, 2015 by Editorial Staff -

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

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

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

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

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

LIMRA launches AnnuityCompass database (for members only)

Posted on November 20, 2015 by Editorial Staff -

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

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

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

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

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

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

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

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

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

Happy Thanksgiving!

Posted on November 20, 2015 by Editorial Staff -

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

Posted on November 20, 2015 by Editorial Staff -

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

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

Cogent Robo Chart 11-20-2015

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

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

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

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

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

The Bucket

Posted on November 20, 2015 by Editorial Staff -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is the purpose of money, Thrivent asks

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

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

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

Millennials: On the cusp of big financial decisions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Warren Whitepaper Missed the Mark

Posted on November 12, 2015 by Kerry Pechter -

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

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

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

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

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

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

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

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

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

RetirePreneur: Mark Warshawsky

Posted on November 11, 2015 by Kerry Pechter -

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

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

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

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

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

‘Bermuda Triangle’

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

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

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

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

MassMutual’s version

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

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

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

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

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

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

Next steps for ReLIAS

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

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

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

Key Factors to Consider When Buying a Deferred Income Annuity

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

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

Posted on November 11, 2015 by Editorial Staff -

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

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

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

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

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

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

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

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

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

Big life insurers boost gains with Schedule BA investments: Conning

Posted on November 11, 2015 by Editorial Staff -

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

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

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

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

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

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

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

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

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

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

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

Posted on November 11, 2015 by Editorial Staff -

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

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

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

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

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

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

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

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

Financial Engines acquires The Mutual Fund Store

Posted on November 11, 2015 by Editorial Staff -

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

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

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

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

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

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

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

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

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

TIPS for the Long Run?

Posted on November 5, 2015 by Kerry Pechter -

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

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

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

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

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

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

Deja vu all over again

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

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

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

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

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

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

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

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

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

Calculate this!

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

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

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

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

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

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

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

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