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The Bucket

Posted on October 14, 2015 by Editorial Staff -

Life settlements industry still not fully recovered: Conning

The life settlements market continues to draw investor interest, but is challenged by the shifting demand for smaller face amounts, according to a new study by Conning.

“We have seen continued investor interest in life settlements as they seek above average returns in this low interest rate environment,” said Scott Hawkins, vice president, Insurance Research at Conning, Inc.

“Investors purchased $1.7 billion worth of U.S. life insurance face value in 2014, bringing our estimate of the total face value of life settlements at year end to just over $32 billion. We project continued steady growth in the amount of face value available for life settlements, but the industry has a long way to go to re-attract capital to pre-2009 levels to meet that supply.”

The new study, “Life Settlements and Secondary Market Annuities: Opportunities and Challenges,” provides Conning’s annual Life Settlements Market Review and Forecast, along with market guidance. Beyond life settlements, the study covers secondary annuities, structured settlements markets and non-U.S. secondary markets for insurance. It is Conning’s twelfth such report on the market.

“One challenge in attracting higher capital is the availability of other alternative investments,” said Steve Webersen, head of Insurance Research at Conning, Inc. “To attract capital to the traditional life settlement market, providers will need to restructure their operations to more effectively address small-face business and more closely align their compensation models with investor interests.”

Conning is a investment management company for the global insurance industry. It manages $92 billion in assets as of June 30, 2015, through Conning, Inc., Conning Asset Management Ltd, Cathay Conning Asset Management Ltd, Goodwin Capital Advisers, Inc., and Conning Investment Products, Inc. All are subsidiaries of Conning Holdings Ltd, a unit of Cathay Life Insurance Co., Ltd., a Taiwanese company.

Pension funded status falls to 81.7% on weak equity returns: Milliman

The funded status of the 100 largest U.S. corporate pension plans declined $28 billion in September, according to the latest edition of the Pension Funding Index, a service of Millman Inc. Asset values declined $19 billion and pension liabilities rose $9 billion. The funded status fell to 81.7% from 83.3%.

“It will take a massive rally in the fourth quarter for these 100 pensions to sniff their annual expected return of 7.3%,” said John Ehrhardt, co-author of the Milliman 100 Pension Funding Index.

Milliman actuaries have established optimistic and pessimistic forecasts for the year ahead. Under the optimistic forecast, rising interest rates (reaching 4.34% by the end of 2015 and 4.94% by the end of 2016) and asset gains (11.3% annual returns) would boost the funded ratio to 85% by the end of 2015 and 97% by the end of 2016.

Under the pessimistic forecast (4.04% discount rate at the end of 2015 and 3.44% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 80% by the end of 2015 and 73% by the end of 2016.

Pan-European pension product proposed

A Europe-wide, standardized “third-pillar” personal pension product (PPP) run by private providers has been proposed by the European Insurance and Occupational Pensions Authority (EIOPA), but Dutch and German pension officials don’t think it’s such a good idea.

The third-pillar product—in other words, a personal savings vehicle outside of government and employer-based retirement savings plans—would require “default products to guarantee contributions” or “need to be based around a lifecycle fund,” according to proposals by the European Insurance and Occupational Pensions Authority (EIOPA).

“The goal of a Pan-European Personal Pension (PEPP) system would be to deliver value for money for consumers through economies of scale as providers operated across national borders,” said the EIOPA, according to an IPE.com news report.

The Dutch Pensions Federation has criticized the proposal, however, arguing that demand for such plans would come only from the “happy few”, and fail to encourage workers to save more for pensions.

It said the European Commission should focus instead on second-pillar pensions, which encourage “solidarity, risk-sharing and the participation of all participants in governance.” This, it said, has “clear advantages” over purely commercial products, which “place risk and the drive for accrual with the consumer”.

Representatives of Germany’s pension funds association (aba) agreed, arguing that “we need more funded pensions in Europe but with the focus on occupational pensions”, as this pillar offered “good value for money.” It said existing systems should be “further developed and enhanced” before new systems were set up. Aba described the PPP as “unconvincing” and arguing that many questions “remained unanswered.”

The Dutch Pensions Federation also expressed concerns that cross-border product providers would be unable to offer sufficient service locally. “It would be difficult for a Danish provider of a PEPP to advise a participant in Italy correctly about how to deal with his pension rights during a divorce, unless the provider has a local subsidiary,” it said.

Morningstar acquires “tax-efficient rebalancing” technology

Morningstar, Inc., has agreed to buy Total Rebalance Expert (tRx), an “automated, tax-efficient investment portfolio rebalancing platform” for financial advisors, from FNA, LLC for an undisclosed um. Morningstar expects to complete the transaction net month.

More than 500 financial advisors from 175 firms currently rely on tRx to rebalance more than $20 billion in client assets, a Morningstar release said. Advisors can use the software to minimize taxes, harvest losses, and rebalance at the account or household level. The tool can show clients exactly how much they saved them in taxes.

Sheryl Rowling, CEO of FNA and principal of independent advisory firm Rowling & Associates, created tRx in 2008 when she couldn’t find an affordable, tax-efficient, easy-to-use rebalancing system for her own practice.

According to Tricia Rothschild, head of global advisor solutions for Morningstar, the Chicago-based fund information firm will integrate tRx with its ByAllAccounts aggregation service, which advisors use for client acquisition and profiling, building and analyzing portfolios across all of their clients’ assets, and communicating performance.

In June 2015, Morningstar announced it was integrating the tRx rebalancing capabilities into Morningstar Office, the company’s practice and portfolio management system, which more than 4,000 independent financial advisors use.

“Morningstar plans to add other important metrics, such as its investment valuation, risk factors, and real-time pricing, to the rebalancing capability,” Rowling said in a release.

Rowling will continue to run her advisor practice and work for Morningstar on a part-time basis. Morningstar plans to incorporate the tRx capability into its advisor offerings and will also continue to offer it as a standalone platform.

More than half of U.S. financial advisors and the 25 largest U.S. broker-dealers have access to Morningstar’s software, data, and research. The company has three primary research and practice management platforms for advisors: Morningstar Advisor Workstation, Morningstar Office, and Morningstar Direct. In 2014, Morningstar acquired ByAllAccounts, an account aggregation provider that helps advisors deliver more complete advice to their clients. Morningstar also offers outsourced investment management services through Morningstar Investment Services, Inc.

Longevity growth begins to slow: Society of Actuaries

The Society of Actuaries this week released an updated mortality improvement scale for pensions that shows a trend toward “somewhat smaller improvement in longevity” than in the past. The new scale—MP-2015—includes just-released Social Security mortality data from 2010 and 2011.

Updating current defined benefit plans to the MP-2015 scale released today might reduce a plan’s liabilities by between zero and two percent, depending on each plan’s specific characteristics, SOA’s preliminary estimates suggest.

“People are living longer, but longevity is increasing at a slower rate than previously available data indicated,” said Dale Hall, managing director of research at SOA. The new scale will allow pension actuaries to measure private retirement plan obligations more accurately, he said.

In October 2014, the Society released the RP-2014 base mortality tables and MP-2014 improvement scale, the first update to the SOA’s pension plan mortality tables in more than a decade.

At that time, the SOA indicated the mortality improvement scale (used to project mortality rates) would be updated more frequently as new longevity data became available.

“Every plan is different, and it is important that professionals working in this field perform their own calculations on the impact to their plan,” Hall said in a release. “It is up to plan sponsors, working with their plan actuaries, to determine whether to incorporate MP-2015 into their plan valuations.”

The updated mortality improvement scale was developed by the SOA’s Retirement Plans Experience Committee (RPEC). A full version of the Mortality Improvement Scale MP-2015 report is available here.

Slower growth of withholdings indicates slowing economy: TrimTabs

TrimTabs Investment Research reports that the U.S. economy is slowing, based on declining growth in the withheld income and employment taxes that flow daily into the U.S. Treasury. Year-over-year real growth in income tax withholdings dropped to 4.0% in September from 5.5% in August.

“September’s growth rate was the lowest all year, and it suggests the U.S. economy is cooling off,” said David Santschi, chief executive officer at TrimTabs. “We believe turmoil in financial markets and emerging economies is having a negative impact on the U.S. economy.”

TrimTabs added that growth in withholdings has continued to decelerate into early October. Year-over-year real growth slipped to 3.9% in the four weeks ended Friday, October 9. TrimTabs’ analysis is based on daily income tax deposits to the U.S. Treasury from the paychecks of the 143 million U.S. workers subject to withholding.

“We’ve been writing for some time that the Fed will act later rather than sooner,” noted Santschi. “The Fed has demonstrated repeatedly that its foremost objective is to support asset prices, and recent market volatility and looming fiscal debates in Congress are likely to keep it on hold for the rest of this year.”

TrimTabs said another sign the economy is slowing is that the TrimTabs Macroeconomic Index fell to a three-month low last week and is down 0.7% this year after rising 4.5% last year. The index is a correlation weighted composite index of leading macroeconomic variables.

Eisenbach to run retirement marketing at Voya

Karen Eisenbach, the former executive director of Retirement Marketing at J.P. Morgan Asset Management, has joined Voya Financial Inc. as chief marketing officer for its Retirement business. Eisenbach will be based in Voya’s Windsor office and report to CEO of Retirement Charles P. Nelson.

Eisenbach will oversee the marketing strategy for Voya’s institutional and retail retirement segments while partnering with Corporate Marketing to drive engagement with distribution partners, plan sponsors and retirement plan participants, a Voya release said.

At J.P. Morgan Asset Management, Eisenbach helped develop and launch a retirement offering for small- and mid-sized plan sponsors. She has also managed her own consulting business and held prior leadership positions with Nationwide Financial and National City Bank.

Eisenbach received her undergraduate degree in finance from The Ohio State University. She also served as a past board member of the Bexley Education Foundation.

Aging workforce means higher benefit costs: LIMRA

Even as waves of Millennials enter the workforce, millions of Boomers are still working. As a result, 73% of employers have planned for their benefit costs to go up as a consequence of having those older workers in their companies, according to a survey by the LIMRA Secure Retirement Institute.

Half of employers surveyed have said they will absorb the higher benefit costs while 41% will pass the costs on to employees. About a third of employers said they might reduce in benefits, salary growth and employer contributions to retirement plans to manage benefit costs.

Despite higher benefits costs, 9 in 10 employers told LIMRA that keeping older workers on the job is good for business. Eighty percent of employers said that older workers offer experience, leadership and institutional knowledge.

Many older employees prefer to keep working, often because they want to increase their retirement savings. Only 5% of workers in the study said they feel “extremely well prepared” for retirement, according to a previous LIMRA survey. Among pre-retirees (workers within 10 years of retirement), 30% say they intend to work until age 66, while one in five expects to retire at age 70 or older.

At the same time, 60% of employers worry that delayed retirements will slow the careers paths of younger workers. Nearly half said they “struggle to address the different retirement planning needs for workers of various ages.”

Seven in ten employers said they would like guidance from their plan provider on how to transition older workers into retirement. Half said they would use an advisor or consultant for this guidance.

UBS to pay $19.5 million for misleading U.S. investors

UBS AG has agreed to pay $19.5 million to settle charges that it made false or misleading statements and omissions in offering materials provided to U.S. investors in structured notes linked to its own foreign exchange trading strategy, the Securities and Exchange Commission announced this week.

Structured notes typically consist of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indices. The return depends on the performance of the derivative over the life of the note.

UBS agreed to cease any similar future violations, to pay disgorgement and prejudgment interest of $11.5 million, to distribute $5.5 million of those funds to V10 investors to cover their losses, and to pay a civil penalty of $8 million.

Between $40 billion to $50 billion of structure notes are registered with the SEC per year, with many of those notes sold to relatively unsophisticated retail investors, the SEC said in a release. UBS is one of the largest issuers of structured notes in the world.

UBS agreed to settle the SEC’s charges that it misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap. According to the charges, UBS falsely stated that the investment relied on a “transparent” and “systematic” currency trading strategy using “market prices” to calculate the financial instruments underlying the index, when in fact undisclosed hedging trades by UBS reduced the index price by about 5%.

According to the SEC’s order instituting a settled administrative proceeding:

• UBS perceived that investors looking to diversify their portfolios in the wake of the financial crisis were attracted to structured products so long as the underlying trading strategy was transparent. In registered offerings of the notes in the U.S., UBS depicted the V10 Currency Index as “transparent” and “systematic.”

• Between December 2009 and November 2010 approximately 1,900 U.S. investors bought approximately $190 million of structured notes linked to the V10 index.

• UBS lacked an effective policy, procedure, or process to make the individuals with primary responsibility for drafting, reviewing and revising the offering documents for the structured notes in the U.S. aware that UBS employees in Switzerland were engaging in hedging practices that had or could have a negative impact on the price inputs used to calculate the V10 index.

• UBS did not disclose that it took unjustified markups on hedging trades, engaged in hedging trades with non-systemic spreads, and traded in advance of certain hedging transactions.

• The unjustified markups on hedging trades resulted in market prices not being used consistently to calculate the V10 index. In addition, UBS did not disclose that certain of its traders added spreads to the prices of hedging trades largely at their discretion.

• As a result of the undisclosed markups and spreads on these hedging transactions, the V10 index was depressed by approximately five percent, causing investor losses of approximately $5.5 million.

Go Ahead, Buy the Harley

Posted on October 8, 2015 by Editorial Staff -

As an advisor, how do you react to a new retiree’s natural desire to splurge? What if he or she yens for a granite-countered kitchen? Or a Harley-Davidson Sportster? Or a three-week spree in France? Well, according to new research, you don’t necessarily have to play the spoiler.

Writing in the latest issue of the Journal of Personal Finance, James Welch Jr., a computer programmer at Dynaxys, shows that when you look at the way retirees actually spend their money, as opposed to focusing on portfolio survival over a 30-year retirement, retirees can justify spending about 20% more in early retirement than William Bengen’s classic 4% rule would allow.

Welch postulates a 65-year-old who started saving at age 30 and now has a $1 million portfolio ($400,000 in an IRA, $350,000 in a Roth IRA, and $250,000 in taxable accounts). The paper assumes a 27-year planning horizon, a 2.5% inflation rate, 5% annual returns, and zero assets at death. It combines that with the retirement spending patterns described in four different analyses (listed below) to arrive at a new (but still sustainable) estimated rate of early spending. For instance:

Reality Retirement Planning (29.4% more). This model, based on what actual spending by Americans at different ages (according to the Department of Labor’s Consumer Expenditure Survey) suggests that, starting at age 55, spending typically drops by about 15% every five years (2.86% to 4.44% per year) before leveling out at age 75. Average expenditure from ages 55 to 59 is about $45,000. At ages 70 to 74, it’s only $27,517. Under this scenario, our hypothetical retiree could spend 29.3% more in early retirement than orthodoxy prescribes.

The Lifecycle of Spending (24.6% more). This model, based on the spending patterns of 1.5 million retired customers of Chase Bank, asserts that people spend an average of 0.545% less each year in retirement (assuming 2.5% inflation). In this model, clients can spend about 5% of their assets in the first year of retirement (24.6% more than the 4% rule would allow).

Age Banding Model (18.6% more). This spend-down model tries to improve on Bengen by assigning different inflation rates to different categories of retirement spending (basic living; leisure; health care) and weighting them accordingly. By distributing the weights differently at age 65, 75 and 85, the method raises first-year spending by 18.6%.

Changing Consumption Model (10.2% more). Attributed to David Blanchett of Morningstar, this model reflects the fact (based on the Health and Retirement Study of older Americans) that consumption by retirees tends to be nominally flat year-to-year in mid-retirement before rising again (because of medical expenses) in real terms at the end. This method, which Welch describes as the one “closest to reality”) implies 10.2% more income in the initial year.

There’s always a catch, of course. In this case, higher spending early inevitably reduces the base on which the rest of the portfolio compounds. The longer the person lives, the bigger the potential loss of growth. But the loss isn’t prohibitive, and many people might agree that spending money while you can enjoy it is preferable to saving for a distant expense that may never materialize. This study buttresses that philosophy with math.

Investment mistakes: Who made them in 2008?

In the Global Financial Crisis, the investors who were most likely to pull out of the market were either averse to losing money or were over-confident, concluded West Texas A&M University professor Shan Lei and University of Missouri professor Rui Yao, also writing in the current issue of the Journal of Personal Finance.

You might be surprised by the types of people who made that timing mistake: They tended to be men, Asians, and business owners. The likelihood of making mistakes increased with investable wealth. Those with $25,000 to $99,000 were twice as likely to err and those with over $1 million 2.4 times as likely to err as those with less than $25,000.

The study analyzed survey data for nearly 2,800 investors from the 2008 Value of Financial Planning Research Study by the FPA and Ameriprise Financial. They controlled for education, income and other factors that influence investment behavior.

How to raise savings by 12%

“Present bias” (difficulty in planning ahead) and “exponential growth bias (an inability to understand compounding) are detrimental to retirement saving behavior, a new study led by Gopi Shah Goda of Stanford University’s Institute for Economic Policy Research found. If these biases were eliminated, the study showed, retirement savings would increase an estimated 12%.

The findings were based on surveys where subjects were asked to choose between having $100 now or more later, to compound the value of different assets, and to answer questions that gauged their confidence in their compounding estimates. More than 90% of those surveyed displayed one or both biases. People who are unaware of these biases were even less likely to save. The results persisted even when controlling for financial literacy, intelligence, and several demographic characteristics.

Low lifespan expectations and early Social Security claiming

Americans who claim Social Security before age 65 have an 80% higher self-assessed probability of dying before age 71 than those who wait until after they turn 65, according to a recent NBER working paper by Gopi Shah Goda and John Shoven of Stanford and Sita Nataraj Slavov of George Mason University.

The need for income, the researchers found, is not necessarily why so many people claim early. At least one-fourth of the sample population had enough IRA assets to provide them with sufficient income to fund a two- to four-year delay in claiming Social Security benefits.

A search for the fountain of age

Although people born in the late 1800s had much lower average life expectancies than people born today, some of them lived a very long time. A new study in the North American Actuarial Journal identifies the characteristics of people born at that time who lived to be 100 years old.

Those born into households in the western United States lived longer, possibly due to their distance from cities with high rates of infectious disease. Living on a family farm also contributed to longevity. In the northeast, men who grew up in larger households tended to live longer. Oddly enough, so did women who grew up in homes with radios. Siblings of centenarians also lived longer than average; researchers attributed that to environmental rather than genetic similarities.

The Bezzle Years

Posted on October 8, 2015 by John Kay -

More than a half-century ago, John Kenneth Galbraith presented a definitive depiction of the Wall Street Crash of 1929 in a slim, elegantly written volume. Embezzlement, Galbraith observed, has the property that “weeks, months, or years elapse between the commission of the crime and its discovery. This is the period, incidentally, when the embezzler has his gain and the man who has been embezzled feels no loss. There is a net increase in psychic wealth.” Galbraith described that increase in wealth as “the bezzle.”

In a delightful essay, Warren Buffett’s business partner, Charlie Munger, pointed out that the concept can be extended much more widely. This psychic wealth can be created without illegality: mistake or self-delusion is enough. Munger coined the term “febezzle,” or “functionally equivalent bezzle,” to describe the wealth that exists in the interval between the creation and the destruction of the illusion.

From this perspective, the critic who exposes a fake Rembrandt does the world no favor: The owner of the picture suffers a loss, as perhaps do potential viewers, and the owners of genuine Rembrandts gain little. The finance sector did not look kindly on those who pointed out that the New Economy bubble of the late 1990s, or the credit expansion that preceded the 2008 global financial crisis, had created a large febezzle.

It is easier for both regulators and market participants to follow the crowd. Only a brave person would stand in the way of those expecting to become rich by trading Internet stocks with one another, or would deny people the opportunity to own their own homes because they could not afford them.

The joy of the bezzle is that two people – each ignorant of the other’s existence and role – can enjoy the same wealth. The champagne that Enron’s Jeff Skilling drank when the US Securities and Exchange Commission allowed him to mark long-term energy contracts to market was paid for by the company’s shareholders and creditors, but they would not know that until ten years later. Households in US cities received mortgages in 2006 that they could never hope to repay, while taxpayers never dreamed that they would be called on to bail out the lenders. Shareholders in banks could not have understood that the dividends they received before 2007 were actually money that they had borrowed from themselves.

Investors congratulated themselves on the profits they had earned from their vertiginously priced Internet stocks. They did not realize that the money they had made would melt away like snow in a warm spring. The stores of transitory wealth that were created seemed real enough to everyone at the time – real enough to spend, and real enough to hurt those who were obliged to pay them back.

Fair value accounting has multiplied opportunities for imaginary earnings, such as Skilling’s profits on gas trading. If you measure profit by marking to market, then profit is what the market thinks it will be. The information contained in the accounts of the business – the information that should shape the market’s views – is to be derived from the market itself.

And the market is prone to temporary fits of shared enthusiasm – for emerging-market debt, for Internet stocks, for residential mortgage-backed securities, for Greek government debt. Traders need not wait to see when or whether the profits materialize. IBGYBG, they say – I’ll be gone, you’ll be gone.

There are numerous routes to bezzle and febezzle. In a Ponzi scheme, early investors are handsomely rewarded at the expense of latecomers until the supply of participants is exhausted. Such practices, illegal as practiced by Bernard Madoff, are functionally equivalent to what happens during an asset-price bubble.

Tailgating, or picking up dimes in front of a steamroller, is another source of febezzle. Investors search for regular small gains punctuated by occasional large losses, an approach exemplified by the carry trade by which investors borrowed euros in Germany and France to lend in Greece and Portugal.

The “martingale” doubles up on losing bets until the trader wins – or the money runs out. The “rogue traders” escorted from their desks by security guards are typically unsuccessful exponents of the martingale. And the opportunity to switch between the trading book and the banking book creates ready opportunities for financial institutions to realize gains and park losses.

The essential story of the period from 2003 through 2007 is that banks announced large profits and paid a substantial share of them to their traders and senior employees. Then they discovered that it had all been a mistake, more or less wiped out their shareholders, and used taxpayer money to trade their way through to new levels of reported profit.

The essential story of the eurozone crisis is that banks in France and Germany reported profits on money they had lent to southern Europe and passed the bad loans to the European Central Bank. In both narratives, traders borrowed money from the future. And then the future came, as it always does, turning the bezzle into a bummer.

RetirePreneur: Paul Feldman

Posted on October 8, 2015 by Jenna Gottlieb -

What I do: I am the president and publisher of InsuranceNewsNet.com and InsuranceNewsNet Magazine, two news media companies for the insurance industry. We provide news for annuity, life, health and the property/casualty industries, as well as financial services. Our business model is based on advertising and subscriptions. Some recent stories we ran were ‘Why Single-Payer Health Coverage May Be the Nation’s Future,’ and ‘Three Ways to Nurture a Relationship with Your Clients’ Children.’

Where I came from: I am a third-generation insurance agent. I tagged along with my father on client visits. Soon after I started college, I was impatient to get going in what I knew would be my career. So I left Monmouth College at 19 years old and started selling insurance for my dad’s marketing organization. Paul Feldman copy block

My career switch: I was an early-adopter online. I loved the speed and reach that the Internet provided. In 1999, there wasn’t much online about insurance. With the industry knowledge I had, I thought I could do better than what was there. I’ve also always been fascinated by the media. It’s funny; I was young and naïve at the time. I had no skills, no degrees and no experience with journalism. I didn’t know anything about graphic design, programming, publishing or what it took to run a magazine. All I had was pig-headed determination and a willingness to learn.

Why we publish both print and online editions: People consume and prefer their information in different ways. I started InsuranceNewsNet as an online publication and then went to print, so I think I have a unique perspective. Companies have been shuttering print publications and focusing solely on digital. But print continues to be a strong part of our business and our brand, because people have a closer relationship with a printed magazine. They read and keep print magazines and newsletters for years. More than one reader has told us that ours is the only magazine they take with them on trips. Our average reader spends almost an hour with each issue, while online readers are there for minutes at a time. I’m a big digital reader, but I enjoy reading a magazine when I don’t want to be distracted by email, ads or even screens. When you look deeper at digital media and online content, you see that many readers will print good articles to either read, keep, comment on or share with colleagues. I think that people still like to have things in print.

Why print still makes sense: As far as an advertising effectiveness, we have advertisers that have generated twice as many leads in a year from our magazine than they did online. When done right with measurement tools, advertisers are seeing that print can sometimes deliver a better cost-per-lead and cost-per-action result than digital. We have also heard from numerous clients that the quality of leads from print far outweighs that of a typical online lead. I think print is seeing a resurgence in relevance and effectiveness for advertisers. In an over-communicated world it’s becoming more difficult and more expensive to make an impact if you are only in the digital world.

On advertising: We deal mostly direct with advertisers, but work with many ad agencies. Advertisers include Pacific Life Insurance, Prudential, Protective Life Insurance Company, Legal & General America, American Bankers Insurance Association, and John Hancock, among others.

On serving the Wild West of the insurance business: There are certainly a few rogues out there. But you find them in the fee-based world, where there are far more consumer complaints filed annually. The securities industry provides little, if any, legal recourse for consumer losses, but insurance has a well-regulated backstop to protect consumers from fraud and misrepresentation. I also don’t see a stark difference between commissions and fees, with the exception that fees are charged to the consumer’s assets under management and split with the rep every year and commissions are typically paid by an insurance company.

On insurance-related legislation: I am worried about the new DOL fiduciary rule. The underlying assumption is that sales with any indirect compensation leads to conflicted advice. The suitability standard already requires agents and advisors to do right by the client. Plenty of advisors have felt the wrath of state insurance and finance departments when they didn’t. If the federal government makes it difficult to earn a living with indirect compensation, more clients will have to pay fees out of the few dollars they already have.

Prudential buys a chunk of JCPenney pension

Posted on October 8, 2015 by Editorial Staff -

In another big pension buyout deal, Prudential Insurance has sold a group annuity to JCPenney that will settle 25 to 35% of the big retailer’s $5 billion U.S. retiree pension benefit obligation. Prudential, which dominates the U.S. pension buyout market, has done similar deals with Verizon, Motorola, General Motors and Bristol-Myers Squibb, worth some $40 billion.

A portion of plan assets and liabilities of some 43,000 retirees and beneficiaries will move to Prudential without a cash contribution from JCPenney, according to a release. The deal is expected to be completed by December 2015.

After the expected closing of these transactions in December, the rest of the pension plan is expected to remain over-funded on accounting as well as ERISA bases, and JCPenney said it doesn’t foresee needing to add more cash to the plan.

Up until September 18, 2015, JCPenney offered lump sums to retirees to settle its obligations to them. About 12,000 retirees and surviving beneficiaries took the voluntary buy-outs. Another 1,900 former employees of JCPenney who have deferred vested benefits took lump sums. Payments will be made in November.

Under JCPenney’s group annuity contract, Prudential will pay and administer future benefit payments to select retirees. The agreement provides for the Plan to transfer a portion of its obligations and assets to Prudential, and the transfer would leave the remaining Plan over-funded on both accounting and ERISA bases.

The transaction’s final size is subject to the condition that the Plan remains overfunded at closing. If market conditions warrant, closing may be extended to 2016. After closing, Prudential will assume financial responsibility for making the annuity payments as provided in the group annuity contract.

Retirees and beneficiaries whose benefit obligations are transferred to Prudential will receive individualized information packages with further details and answers to frequently asked questions.

Fiduciary Counselors Inc., represented the JCPenney pension plan and its participants and beneficiaries in the negotiation with Prudential. The group annuity contract segregates plan assets in a separate account dedicated to the payment of benefits to the JCPenney retirees and their beneficiaries.

“The actions announced today should reduce the pension obligation by 25-35% and the number of participants in the Plan by 25-35%. Although the Plan has been fully funded since 2009, owing to successful execution of the Company’s asset de-risking strategy, market conditions were favorable to reduce the obligation now,” a JCPenney release said.

“These transactions may result in a non-cash pension settlement charge with the impact to be determined at the closing of the transaction. This charge will be excluded from the Company’s 2015 adjusted results.

“These actions continue a series of steps taken to reduce pension volatility and further de-risk the pension while maintaining a competitive benefit for associates. Previous steps include changes to Plan design, past contributions to maintain a well-funded pension Plan status, matching the Plan’s asset allocation to the pension’s liability profile, and offering participants who separate from the Company the option of a lump-sum settlement payment,” the release said.

‘Robo’ assets grow 208% in 15 months: Corporate Insight

Posted on October 8, 2015 by Editorial Staff -

In a measure of their disruptive force in the investment industry, the 11 leading robo-advisors, or digital advice providers, saw assets under their discretionary control grow 208% from April 2014 to July 2015, according to a new report from Corporate Insight.

“Fintech firms offering online managed accounts are winning customers’ trust. They have established a model that will bring low-cost managed money to the masses,” said analyst Sean McDermott, who leads fintech research for Corporate Insight, in a release.

The new study, Next-Generation Investing 2015: Digital Advice Matures, evaluates some 60 investing-related startups as well as platforms launched by Schwab, TradeKing and Vanguard. It also analyzes robo evolution since 2012.

Eleven robo-advisors—AssetBuilder, Betterment, Covestor, Financial Guard, FutureAdvisor, Jemstep, MarketRiders, Personal Capital, Rebalance IRA, SigFig and Wealthfront—saw total assets increase from $11.5 billion to $21 billion, an 83% percent growth rate in the 15 months ending last July.

“Most of this growth can be attributed to the managed account model, as the appeal of the algorithm-based advice approach seems to have plateaued,” a Corporate Insight release said. The research firm distinguished between assets under discretionary management (i.e., held in low-cost online managed accounts) and assets for which clients receive paid investment advice (i.e., algorithm-based investment advice services).

The paid investment advice growth rate steadily declined each time Corporate Insight collected data, dropping from a 35% increase between April and July 2014 to 16% between July and December. From there, advised assets declined six percent between December 2014and July 2015.

By contrast, managed account assets among 11 leading digital advice providers grew 208%, from $2.6 billion to $8 billion. These firms saw their highest six-month growth rate (57% from December 2014 to July 2015) when most major domestic indices were flat. New client assets drove most of the growth.

The next year to 18 months will see more incumbent firms acquiring a robo, Corporate Insights said. (BlackRock recently bought FutureAdvisor for a reported $150 million.) Since the first quarter of 2015, several firms—Morningstar, Fidelity and Northwestern Mutual, for instance—have bought a robo, partnered with one, or built their own.

Corporate Insight’s Next-Generation Investing 2015: Digital Advice Matures study is the third in a series where the company has tracked and reviewed the automated advice market.

The first study, Next Generation Investing: Online Startups and the Future of Financial Advice, was released in October 2013. The second, Transcending the Human Touch: Onboarding and Product Strategy for Automated Investment Advice, was published in August 2014.

Who says America doesn’t save for retirement?

Posted on October 8, 2015 by Editorial Staff -

Weighing in at a hefty $24.8 trillion as of mid-year 2015, total U.S. retirement assets were about unchanged from the end of March, according to the Investment Company Institute. By that measure, retirement assets accounted for 36% of all household financial assets.

The quarterly retirement data tables are available at “The U.S. Retirement Market, Second Quarter 2015.”

Assets in individual retirement accounts (IRAs) totaled $7.6 trillion at the end of the second quarter of 2015, up 0.4% from the end of the first quarter. Defined contribution (DC) plan assets rose 0.4% in the second quarter to $6.8 trillion. Federal, state, and local government defined benefit plans held $5.2 trillion in assets as of the end of June, a 0.3% percent decline from the end of March.

Private sector DB plans held $3.0 trillion in assets at the end of the second quarter of 2015. Annuity reserves outside of retirement accounts accounted for another $2.1 trillion.

Of the $6.8 trillion in all employer-based DC retirement plans on June 30, 2015, $4.7 trillion was held in 401(k) plans. In addition to 401(k) plans. At the end of the second quarter, $537 billion was held in other private-sector DC plans, $872 billion in 403(b) plans, $266 billion in 457 plans, and $441 billion in the Federal Employees Retirement System’s Thrift Savings Plan (TSP).

Mutual funds managed $3.8 trillion, or 56%, of assets held in DC plans at the end of June. Forty-eight percent of IRA assets, or $3.6 trillion, was invested in mutual funds.

As of June 30, 2015, target date mutual fund assets totaled $761 billion, an increase of 2.7% in the second quarter; 88% of target date mutual fund assets were held through DC plans and IRAs.

Industry-sponsored legal study attacks ‘robo-advisors’

Posted on October 8, 2015 by Editorial Staff -

In a brief commissioned by the Pittsburgh-based asset management firm Federated Investors, a Washington attorney with expertise in fiduciary matters has asserted that robo-advisors are not the populist panacea to conflicted investment advice that they present themselves to be.

In her June 30, 2015 paper, “Robo-Advisors: A Closer Look,” attorney Melanie L. Fein argues that the DOL has touted robo-advisors as investment alternatives for retirement investors based on “incorrect or misleading” assumptions that “robo-advisors are free or ‘lowcost’ and seek to minimize conflicts of interest.”

According to the paper, “robo-advisors do not provide personal investment advice, do not meet a high standard of care for fiduciary investing, and do not act in the client’s best interest.

“The robo-advisor agreements reviewed herein would not meet the DOL’s proposed ‘best interest’ contract exemption that requires investment advisers to acknowledge their fiduciary status, commit to give only advice that is in the customer’s best interest, and agree to receive no more than reasonable compensation.”

The Bucket

Posted on October 8, 2015 by Editorial Staff -

T. Rowe Price introduces less pricey TDFs

T. Rowe Price has launched 13 new Retirement I Funds, a series of target date funds for retirement plans and other institutional investors. They have the same glide paths, underlying funds and asset allocation targets as the firm’s current Retirement Fund TDFs, but lower shareholder servicing costs.

Financial intermediaries, retirement plans, other institutional investors, and individuals investing a minimum of $1 million can use Retirement I Fund series as a low-cost share class option. The Retirement I Fund series add to the 19 I Class offerings T. Rowe Price launched in September 2015.

There is a T. Rowe Price Retirement I Fund for each of 12 target dates from 2005 to 2060, plus a T. Rowe Price Retirement Balanced I Fund. The funds are available as of October 1, 2015.

A T. Rowe Price press release includes disclosures saying that the funds may not be appropriate for someone retiring long before or after age 65, that the underlying stock and bond funds will change over time, that the funds focus on supporting on supporting an income stream over a long-term postretirement withdrawal horizon, that they are not designed for a lump-sum redemption at the target date and do not guarantee a particular level of income, and that the funds maintain a substantial allocation to equities both prior to and after the target date.

The ‘UHNW’ of the Middle East control almost US$1 trillion: Wealth-X

There are 1,275 “ultra wealthy” individuals in the United Arab Emirates (UAE), representing 20% of the total ultra wealthy population in the Middle East, according to a new study from Wealth-X. The combined wealth of the UAE’s ultra high net worth ($30 million or more) population stands at US$255 billion.

More than half (57%) of the UAE’s UHNW population built their fortunes through entrepreneurship, the report said. Only 8% fully inherited their fortune; 35% partially inherited and grew their wealth. In other findings from the study:

Nearly a thousand UHNW individuals are based in the UAE capital Abu Dhabi (450 individuals) and Dubai (495).
Saudi Arabia and the UAE jointly account for over 45% of the UHNW population in the Middle East.
Only 3% of the UAE’s UHNW population acquired its wealth through oil, gas and consumable fuels.
Industrial conglomerates are the biggest source of wealth for the UAE’s UNHW population, at more than 20%.
The UAE is ranked twenty-secondth in Wealth-X’s global ranking of UHNW population by country, after Saudi Arabia(17) and ahead of Kuwait (32).

There are nearly 6,000 UHNW individuals in the Middle East with a combined net worth of US$995 billion. Saudi Arabia has the largest UHNW population (1,495 ultra wealthy individuals).

MassMutual rolls out benefits exchange platform

MassMutual is launching BeneClick!, a unique, integrated exchange featuring a guidance tool that helps employees prioritize their retirement savings, healthcare and insurance protection benefits based on their individual life stages and then take action.

The new exchange, an online marketplace where people can select their employer-sponsored benefits, is powered by Maxwell Health’s benefits technology platform. Maxwell Health built the first “Health as a Service” platform, an operating system for benefits that “engages employees, incentivizes a holistic view of health, and provides a centralized place to access health and benefits services,” a release said.

BeneClick! is being introduced through MassMutual’s distribution partners on a limited basis and will be available more broadly in mid-2016. Initially, through BeneClick!, MassMutual will offer access to retirement plan enrollment features and life insurance products. It expects to add additional insurance products such as critical illness and accident protection in 2016.

The exchange integrates MassMutual’s MapMyBenefits tool, which enables employees to prioritize their benefits choices. This approach combines retirement readiness, healthcare coverage and preparation for life’s unforeseen events. The tool is designed to help mitigate health and financial issues.

Employers are increasingly turning to benefit exchanges. Approximately 40 million Americans are expected to buy their health insurance coverage from exchanges by 2018, according to a 2015 study by Accenture Plc. Instead of offering a companywide health plan, more employers are asking workers to choose their own plans from a menu of options.

Voya to administer savings plan of CenterPoint Energy

Voya Financial, Inc. said its retirement business will administer the savings plan of CenterPoint Energy, Inc., a Houston-based Fortune 500 company list that delivers electricity and natural gas to customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas.

The plan, which transitioned to Voya’s administration platform October 1, 2015, represents nearly $1.7 billion in assets and approximately 9,300 plan participants as of September 28, 2015.

Voya will provide administrative and recordkeeping services for the CenterPoint Energy Savings Plan and offer Voya’s newly enhanced participant website, which features the myOrangeMoney retirement income planning capability.

AARP and JPMorgan to invest $40 million in aging-related startups

AARP and J.P. Morgan Asset Management have formed the “AARP Innovation Fund,” a $40 million vehicle designed to invest in healthcare-related startups “focusing on improving the lives of people 50-plus.” AARP is the only third-party investor in the fund.

The new venture capital fund will make direct investments in early- to late-stage companies with products in three areas:

Aging at home. The fund will encourage the development of products and services that leverage technology to enable older adults to continue living in their homes safely and affordably. These include home sensor activity tracking; hearing and vision health; mobility assistance; meal plan/delivery/cooking solutions; social communities; physical augmentation devices.

Convenience and access to healthcare. The fund will support the advancement of products and services that enable 50-plus consumers to adopt positive health behaviors, such as telemedicine; consumer diagnostics; consumer care transparency tools.

Preventative health. The fund will seek to expand the market for products and services that help 50-plus consumers prevent the onset of serious health conditions through diet and nutrition management; stress and emotion management/therapy; fitness apps and programs; integrated health engagement incentives; cognitive and brain health.

People 50-plus are responsible for at least $7.1 trillion in annual economic activity, a number that is expected to grow to $13.5 trillion by 2032, an AARP release said.

Recent market volatility hurts funded status of U.S. pensions

The funded status of the typical U.S. corporate pension plan declined in September for the third month in a row, dropping by 2.4 percentage points to 81.8%, and is now down year-to-date, according to BNY Mellon Fiduciary Solutions.

Public plans, foundations and endowments also failed to meet targets due to declining asset values, according to a BNY Mellon release.

For the typical U.S. corporate plan, funded status peaked at 85.5% on September 16 before falling 3.7% in the second half of the month, driven by an overall 1.9% decline in assets since August.

Meanwhile, liabilities increased 1.1% as the Aa Corporate discount rate fell by six basis points. Plan liabilities are calculated using the yields of long-term investment grade bonds. Lower yields on these bonds result in higher liabilities.

Public defined benefit plans in September missed their return target by 2.8% as assets declined 2.2%, according to the September BNY Mellon Institutional Scorecard. Public plans have missed year-to-date and one-year return targets by 9.4% and 10.1%, respectively.

Endowments and foundations missed their spending plus inflation target by 2.8%. According to the monthly report, asset returns for the typical endowment and foundation fell 3.5 percent over the past year, which is behind the spending plus inflation target by 8.6 percent.

“High Yield securities and equities continued to struggle, leading to the decline in asset values that hit typical public defined benefit plans, endowments and foundations,” said the release. “Fixed income ex-High Yield and REITs were the exception, performing well over the month as investors moved away from risk.”

Takeaways from the FPA Conference in Boston

Posted on October 1, 2015 by Kerry Pechter -

With evidently more passion to learn than they may ever have shown as students, several hundred financial planners packed a double-wide hotel meeting room last week to hear William Reichenstein talk about tax-efficient withdrawal strategies at the Financial Planning Association’s annual conference in Boston.

Reichenstein spoke rapidly at the podium; he has given this slide show before. But the audiences are always fresh, and this one was rapt. Affluent retirees hate taxes, of course (perhaps because taxes can be their single biggest expense). And lowering clients’ taxes is a good way for advisors to earn their asset-based fees.

A professor at Baylor University, Reichenstein is well known in retirement circles. Many of the advisors seated in chairs or at tables or parked along the walls of the room in the Boston Convention and Exhibition Center knew his 2011 book, “Social Security Strategies” (with William Meyer), and some had no doubt read his recent article in the Financial Analysts Journal (with Meyer and Kirsten Cook) on which this day’s presentation was based.

His presentation compared five different withdrawal strategies: i.e., five sequence patterns in which to draw a client’s income in retirement from a combination taxable accounts, tax-deferred accounts (e.g. rollover IRAs) and tax-exempt accounts (e.g., Roth IRAs).

The punch line: The fifth strategy can increase the life of a hypothetical portfolio to 36.17 years, or about three years longer than the “conventional” strategy of drawing income from taxable accounts first, then traditional IRAs/401ks, then Roth IRAs, and 20% longer than withdrawing Roth IRA first, then traditional IRAs, then taxable money.

The fifth strategy is a bit complicated, so pay close attention (or read the academic paper). First, assume a 65-year-old woman who needs $81,400 in after-tax income each year, has an $11,500 standard deduction/personal exemption, and who can withdraw $47,750 from her tax-deferred accounts each year without breaching the ceiling of the 15% tax bracket. Also assume a 50/50 stock/bond portfolio with an average bond return of 4% and stocks returning a 4% geometric average. She withdraws once a year.

At the beginning of each year, the retiree makes two separate Roth conversions of $47,750, which takes her income to top of 15% bracket. She also withdraws funds from her taxable account until exhausted and then from her tax-exempt Roth IRA.

One Roth will contain short-term bonds and the other US stocks (with repeating returns sequence of – 12.6%, 22.6%, and 5%). At the end of the year, she re-characterizes the Roth (back to a traditional IRA) with the lower value and retains the other. In late retirement years, she withdraws funds from tax-deferred account and tax-exempt account.

“A key to a tax-efficient withdrawal strategy is to withdraw funds from [tax-deferred accounts] such that the investor minimizes the average of the marginal tax rates on these withdrawals,” write Cook, Meyer and Reichenstein in their 2015 FAJ article. “Contrary to the conventional wisdom, the TEA is not more tax advantaged than the TDA.”

Americans Funds as decumulation tools

Purveyors of index funds no longer need to prove that their investment methodology has value, as they once did. Today, sellers of actively managed funds bear that burden. At the FPA convention, Steve Deschenes of the Capital Group (formerly of Sun Life and, before that, MassMutual) made the case for active management in a talk about his firm’s American Funds.

Certain American Funds perform especially well, relative to their benchmarks, during the withdrawal stage (i.e., retirement), Deschenes said. His calculations showed that, all else being equal, a portfolio of A-share American funds (half “moderate allocation” and half “world allocation”) delivered hypothetical ending balances after 20 years of annual withdrawals that were two to almost three times larger than a portfolio consisting of the comparable index fund.

The results included the annual expenses of the American funds but not the initial sales charge, which can reach as high as 5.75%. The case study assumed a starting balance of $500,000 and either 4%, 5% or 6% withdrawal rate (plus annual inflation increases of 3% the previous year’s withdrawal) over a 20-year period ending in December 31, 2014.

Three key fund attributes drove the outperformance of selected American funds and others with the same characteristics, Deschenes said. The success factors were high rates of manager ownership in the fund, relatively low expense ratios, and low “downside capture” ratios. (In a down market where an index registered a loss, a comparable active fund that registered a much smaller loss would have a low downside capture ratio.)

The “true cost” of retirement

Fee-based (who earn AUM fee and commissions) and fee-only (AUM fees) financial planners tend not to use annuities to mitigate their clients’ risk of running out of money in retirement. Traditionally, they rely on rules of thumb about income replacement ratios and safe withdrawal rates.

But what if those rules of thumb are based on unfounded assumptions? David Blanchett, Morningstar’s retirement guru and one of the FPA conference headliners, gave a presentation in which he argued that each retiree household has its own specific income and spending needs that vary over the course of retirement. As a result, the rules of thumb don’t necessarily apply.

The “true cost” of retirement for most people will probably be lower, as much as 20% lower, Blanchett argues. For instance, he believes that most people won’t need income in retirement that’s 70% to 80% of their pretax income. In many cases, that number will be closer to 50%.

Why? Because most people won’t live until age 95. In the old days, advisors thought it was rational for retirees to plan on reaching the average life expectancy. Then they were urged to plan for a very long life. Now, Blanchett seems to be saying, it’s OK to plan on average life expectancy.

Blanchett offers a similar insight about the safe withdrawal rate, long assumed to be 4% of the original balance per year, increased slightly each year to account for inflation. For most people—i.e., those who live only 15 or 20 years in retirement—a 5% payout rate will offer enough safety. Using the higher payment rate means either of two things: You’ll be able to spend 20% more each year or you can save 20% less.

The moral of Blanchett’s story: “The true cost of retirement is highly personalized based on each household’s unique facts and circumstances, and is likely to be lower than amounts determined using more traditional models.”

The Chinese Economy and Fed Policy

Posted on October 1, 2015 by Martin Feldstein -

Janet Yellen’s speech on September 24 at the University of Massachusetts clearly indicated that she and the majority of the members of the Federal Reserve’s Federal Open Market Committee intend to raise the short-term interest rate by the end of 2015. It was particularly important that she explicitly included her own view, unlike when she spoke on behalf of the entire FOMC after its September meeting. Nonetheless, given the Fed’s recent history of revising its policy position, markets remain skeptical about the likelihood of a rate increase this year.

The Fed had been saying for several months that it would raise the federal funds rate when the labor market approached full employment and when FOMC members could anticipate that annual inflation would reach 2%. But, although both conditions were met earlier in September, the FOMC decided to leave the rate unchanged, explaining that it was concerned about global economic conditions and about events in China in particular.

I was unconvinced. I have believed for some months that the Fed should start tightening monetary policy to reduce the risks of financial instability caused by the behavior of investors and lenders in response to the prolonged period of exceptionally low interest rates since the 2008 financial crisis. Events in China are no reason for further delay.

Consider, first, domestic economic conditions, starting with the employment picture. By the time the FOMC met on September 16, the unemployment rate had fallen to 5.1%, the level that the Fed had earlier identified as full employment. Although there are still people who cannot find full-time jobs, driving the unemployment rate below 5.1% would, according to the Fed, eventually lead to unwanted increases in inflation.

The current inflation picture is more confusing. The annual headline rate over the past 12 months was only 0.2%, far short of the Fed’s 2% target. This reflected the dramatic fall in energy prices during the previous year, with the energy component of the consumer price index down 13%. The rate of so-called core inflation (which excludes energy purchases) was 1.8%. Even that understates the impact of energy on measured inflation, because lower gasoline prices reduce shipping costs, lowering a wide range of prices.

The point is simple: When energy prices stop falling, the overall price index will rise close to 2%. And the FOMC members’ own median forecast puts inflation at 1.8% in 2017 and 2% in 2018.

So if the Fed, for whatever reason, wanted to leave the interest rate unchanged, it needed an explanation that went beyond economic conditions in the United States. It turned to China, which had been much in the news in recent weeks. China was reducing its global imports, potentially reducing demand for exports from the US. The Chinese stock market had fallen sharply, declining some 40% from its recent high. And China had abruptly devalued the renminbi, potentially contributing to lower import prices – and therefore lower inflation – for the US.

But when it comes to the impact of China’s troubles on the US economy, there is less than meets the eye. China’s import demand is slowing in line with its economic structure’s shift away from industry and toward services and household consumption. This means that China needs less of the iron ore and other raw materials that it imports from Australia and South America and less of the specialized manufacturing equipment that it imports from Germany and Japan. The US accounts for only 8% of China’s imports, and its exports to China represent less than 1% of its GDP. So China’s cut in imports could not shave more than a few tenths of a percentage point from US GDP, and even that would be spread over several years.

As for the stock market – widely viewed as a kind of casino for a small fraction of Chinese households – only about 6% of China’s population own shares. The Shanghai stock market index soared from 2,200 a year ago to a peak of 5,100 in mid-summer and then dropped sharply, to about 3,000 now. So, despite the sharp drop that made headlines recently, Chinese shares are up more than 30% from a year ago. More important, wealth and consumption in China are closely related to real-estate values, not equity values.

Finally, the renminbi’s recent decline against the dollar was only 2.5%, from CN¥6.2 to CN¥6.35 – far below the double-digit declines of the Japanese yen, the euro, and the British pound. So, on an overall trade-weighted basis, the renminbi is substantially higher relative to the currencies with which it competes.

Even more relevant, the decline of the renminbi and other currencies in the past year has had very little impact on US import prices, because Chinese and other exporters price their goods in dollars and do not adjust them when the exchange rate changes. While official US data show overall import prices down 11% in the 12 months through August, this is almost entirely due to lower energy costs. When energy products are excluded, import prices are down only 3%.

So the Fed is right to say that inflation is low because of the sharp drop in energy prices; but it need not worry about the effect of major trading partners’ lower currency values. And, again, when the price of energy stops declining, the inflation rate will rise close to the core rate of 1.8%.

So, unless there are surprising changes in the US economy, we can expect the Fed to start raising interest rates later this year, as Janet Yellen has proposed, and to continue raising them in 2016 and beyond. I only hope that it raises them enough over the next 18 months to avoid the financial instability and longer-term inflation that could result from the long era of excessively easy monetary policy.

Questions for the DOL’s Tim Hauser

Posted on October 1, 2015 by Kerry Pechter -

Hubert A. Ross, a tall, 53-year-old CFP from Destin, Florida who clears his trades through LPL, was almost pleading for a simple answer to what he considered a simple question: Couldn’t the combatants in the battle over Department of Labor’s fiduciary proposal lock themselves in a room for a day or two, negotiate a settlement, and end the five-year standoff over the DOL’s attempt to start regulating rollover IRAs like mini ERISA plans?

“You’re all intelligent people,” Ross said, to anyone nearby, which included panelists David Blass of the Investment Company Institute, Steve Hall of Better Markets, Bonnie Treichel of the Retirement Law Group, and David Certner of AARP, who had just finished debating the proposal at the National Press Club in Washington, DC. “Shouldn’t you all be able to solve this?”

Ross was right: the DOL proposal is simple. It would bar the dodgy “suitability” standard of conduct for sellers of mutual funds and annuities to IRA owners, which allows them to make self-serving recommendations. But, like Nancy Reagan’s “Just Say No” anti-drug campaign, it’s not just simple—it’s simplistic.

Like Ross, I was at the symposium on the proposal hosted by the Investment Management Consultants Association on Tuesday. The luncheon speaker and main drawing card was deputy assistant Labor Secretary Tim Hauser (right), who in mid-August chaired four days of public hearings on the proposal.

IMCA has a stake in all this. Its members could be affected by the final proposal when it is published in early 2016. If they are “fee-based,” like Hubert Ross, and earn both asset-based fees and commissions on the sales of securities, they may no longer be able to sell commission-based products to IRA owners without signing a pledge to act solely in the client’s “best interest.”

This requirement, known as the Best Interest Contract (BIC) Exemption, rankles broker-dealers. It entails both a legally binding pledge of good faith and a fresh layer of red tape. Broker-dealer trade groups have warned that they will cease selling commissioned products —such as variable annuities and load mutual funds—to IRA owners just to avoid the BIC. Broker-dealers say the BIC will force them to abandon those consumers, since commissions on packaged products are the compensation-model-of-choice for middle-market clients. (Some believe the industry is bluffing.)

I attended the meeting mainly because Hauser was speaking and welcoming questions from members of the audience, which numbered about 150. Handed a wireless microphone, I was able to ask him: “After what you heard at the hearings, do you now think that the DOL was in fact naive to think that broker-dealers could ever accept the terms of the BIC?”

This question was not as unfairly loaded as it sounds, because during the August hearings Hauser twice asked industry attorneys in just those words: Are we naïve to think that this compromise can work? (One lawyer murmured No and one said frankly Yes.)

Watching the webcast of the hearings at home, I nodded Yes, yes, yes. For one thing, the DOL had not adequately defined “best,” as a legal definition. Also, the agency seemed to offer a paradox: Advisers can accept conflicted compensation if they pledge to provide unconflicted advice.

To me, conflicts of interest are not mere temptations, which an intermediary can choose to ignore if he or she is sufficiently self-disciplined. They are dark masses whose gravity curves the ethical space around them. They reduce transparency and limit the available range of options. Even when disclosed, they can work to the disadvantage of consumers. So when I first read the DOL proposal, I thought: This can’t work.

Of course, it would have been naïve to believe that Hauser might confess that the DOL had woken up to the impracticability of the BIC exemption, and he didn’t. “I didn’t ask that question several times,” he demurred, and went on to explain that most of the witnesses at the hearing had assured him that the DOL wasn’t naïve and that the BIC was in fact workable. He politely, and at length, turned my loaded question aside.

After his address, Hauser paused in the adjoining hallway to field a few more questions. Hundreds of portraits of newsmakers, from Eliot Spitzer to Sharon Stone, cover the length of one wall. Hauser, who worked as a Legal Aid attorney in rural Missouri for six years after graduating from Harvard Law School in 1985, is tall and lanky with tousled light brown hair. He wore wire-rimmed glasses, a grey suit and soft black walking shoes—not the glossy cap-toe Oxfords or tasseled loafers popular on Wall Street or K Street.

I asked Hauser if the DOL was targeting variable annuities with its proposal. The proposal would require VA sellers to meet the BIC exemption and pledge to act solely in the IRA client’s interest. Under the status quo, advisors can sell VAs for a commission as long as they meet the requirements of so-called PTE 84-24, which does not require such a promise.

Hauser said, “The proposal isn’t intended to favor one product over another.” He noted that variable annuities are complicated, but that they also offer some beneficial guarantees. No, he said, the DOL is not targeting VAs.

That wasn’t a satisfying answer. VAs, about a third of which are sold through independent broker-dealers, have been under attack in the mass media. Journalists often use VAs as an example of sales predation. Jill Schlesinger, the well-known CBS financial reporter, made VAs the butt of a joke at a recent robo-advice conference in New York. Ironically, sales of VAs have already leveled off or dropped. Some broker-dealers now hesitate to sell investment-only VAs to IRA owners because they duplicate the tax deferral that IRA owners already have.

Finally, I asked Hauser if the DOL distinguishes between different types of commissions. After all, not all commissions are equal. Annuity commissions can be especially opaque. The average purchaser of a B-share VA probably doesn’t know how the contingent deferred sales charge regime works. The commissions that purchasers pay on fixed annuities are built into the prices of the contracts. FIAs are sometimes even advertised as “no-fee” products. But he said, “No we treat all commissions the same.”

That gave me pause. The agency either doesn’t fully understand the many different business models in the financial services industry, or it doesn’t care. Hauser and his boss, EBSA chief Phyllis Borzi, may believe that, by establishing a blanket “Best Interest” principle, they can protect the consumer without picking winners and losers in the marketplace. But they can’t avoid picking winners and losers. A one-size solution never fits all.

Hauser assured the audience on Tuesday that the DOL staff will read all 2500-plus public comments and tweak the final draft of the proposal accordingly. We’ll know more in a few months.

Will DOL proposal trigger “ratings events”? Too soon to say: A.M. Best

Posted on October 1, 2015 by Editorial Staff -

The Department of Labor’s fiduciary proposal isn’t considered damaging enough to trigger “rating events” for life insurance companies—at least not until “there is more clarity on the fiduciary guidelines,” the ratings agency A.M. Best said in a release this week.

“According to the public comments by insurance executives, the DOL has been receptive to insurers’ concerns and the next proposal could have significant changes,” A.M. Best analysts wrote. A final draft of the proposal is expected in late 2015 or early 2016.

After reviewing comments posted by insurance groups on the website of the DOL’s Employee Benefit Security Administration, A.M. Best summarized industry sentiment as follows:

The insurance industry believes the DOL proposal needs significant changes to make it workable.
The insurance industry is concerned the regulation, as originally drafted, could limit advice available to small investors, further confuse potential investors and adversely impact the advisor-client relationship.
Costs associated with making changes to products, pricing and compliance practices including greater systems capabilities and additional staffing, would impact future revenues and further increase compliance costs.
The proposed definition of a fiduciary is seen as too broad.
The DOL should narrow the proposed definition of fiduciary investment advice to exclude routine sales activity, including IRA rollovers.
Insurance companies are recommending a time frame of twenty-four to thirty-six months to comply with the DOL proposal instead of the eight months suggested by the DOL. Compliance will require new disclosures, new marketing materials, new support infrastructure and new advisor training programs.

The Best Interest Contract Exemption part of the proposal has drawn strong objections. The BIC allows brokers to continue to receive commissions on sales to IRA owners, but only if brokers pledge to act solely in the best interest of the client. Today, brokers’ recommendations to IRA owners can be self-serving and need only be “suitable” for a client.

A.M. Best analysts wrote, “Some companies have stated that the BIC Exemption creates uncertainty while adding unnecessary cost complexity for financial institutions. Primerica classified the BIC Exemption as ‘unworkable,’ finding the exception ‘being so complex and burdensome that it is not administratively or operationally feasible.’ There is also concern that the BIC Exemption could expose brokerage firms and investment firms to increased exposure to significant litigation risk.”

Voya adds volatility-controlled index to its FIAs

Posted on October 1, 2015 by Editorial Staff -

A new index crediting strategy, called the Point-to-Point Volatility Control Strategy, is now available on the Voya Secure Index series and Retirement Index Select series of fixed index annuities (FIAs), Voya Financial announced this week.

The Point-to-Point Volatility Control Strategy tracks Deutsche Bank’s proprietary CROCI (Cash Return on Capital Invested) US 5% Volatility Control Index, Voya said. CROCI is designed to reduce volatility to 5% by moving money between select U.S. equities and cash in response to changes in market volatility.

The CROCI valuation methodology selects 40 of the most undervalued stocks from among approximately the 250 largest companies (by market capitalization) of the S&P 500 Index and groups them together in a propriety index.

Only a small fraction of FIA premiums is used to buy options on the performance of (typically) equity indexes, so FIAs can deliver only a fraction of index gains. They may credit investors with equity returns below a designated “cap” percentage or the gains above a “spread.” Or, especially recently, they can offer nominally unlimited (“uncapped”) credits that are internally limited by volatility control strategies. (FIA owners do not receive dividends, because they do not invest directly in equities.

These uncapped strategies have been successful in boosting FIA sales, and have created new business for the investment banks that design the custom indices for the issuers. According to a Voya release, the Point-to-Point Volatility Control Strategy uses both volatility controls and a spread to arrive at the percentage gain that it pays investors. “Point-to-point” means that the gains are locked in on each contract anniversary date.

Voya Secure Index series and the Retirement Index Select fixed index annuity are issued by Voya Insurance and Annuity Company and ReliaStar Life Insurance Company, respectively.

Kehrer Bielan releases bank annuity sales study for 2014

Posted on October 1, 2015 by Editorial Staff -

The 25 largest bank broker-dealers produced almost $22 billion in fixed and variable annuity premium in 2014, accounting for 57% of the total sold by all banks and credit unions, according to new research from Kehrer Bielan.

The ten largest third-party broker dealers, which support annuity and investment sales in 2,559 banks and credit unions, accounted for 38% of the total annuity premium sold through financial institutions. (See chart below, provided by Kehrer Bielan.)

The remaining 3% was sold in the smaller bank broker-dealers or the community banks and credit unions that work with the smaller third party broker dealers.

The large bank BDs produced $11.7 billion in fixed annuity premium (58.0% of the financial institutions channel total) compared to $10.2 billion in variable annuities (56.5%).

BD Annuity Sales Kehrer Bielan

“Many large bank broker-dealers supplement their financial advisors with licensed platform bankers, whose sales are skewed toward fixed annuities,” said Tim Kehrer, senior research analyst at Kehrer Bielan. “The banks and credit unions affiliated with the third-party BDs are much less likely to license customer-facing bank and credit union staff to sell annuities.”

The ten largest TPMs (third-party broker-dealers) accounted for 36% of all fixed annuity premium sold in financial institutions, but 41.2% of variable annuity premium. “Even as firms take steps towards more financial planning and advisory activities, a significant amount of fixed and variable annuities are distributed to their client base,” said Peter Bielan, a principal of the firm. “We find that variable annuities are more popular in banks and credit unions that still do mostly transaction business.”

Life insurers will take ‘manageable’ GAAP charges in 3Q2015: Fitch

Posted on October 1, 2015 by Editorial Staff -

Fitch Ratings issued the following alert this week:

US life insurers will be under increased pressure to rationalize long-term rate assumptions used to establish reserves given the market’s revised expectations for low rates, says Fitch Ratings. We see a heightening risk that life insurers could take charges in third-quarter 2015 due to rate expectations.

With last week’s Fed decision reinforcing expectations for a very prolonged return to higher interest rates, the probability dimmed for near-term low rate relief. Low interest rates mean lower average investment yields for fixed-income investments, which pressures life insurers’ earnings and reserve-adequacy projections.

In the third quarter, life insurers typically conduct a comprehensive review of assumptions underlying GAAP policy reserves. We believe that the Fed’s position increases the likelihood that life insurers will take GAAP charges in third-quarter 2015 tied to a revision in long-term rate assumptions.

While the probably of GAAP charges have increased, Fitch expects that potential charges tied to any assumption updates are expected to be very manageable in the context of life insurers’ earnings and capital. As a result, we believe that the impact of low interest rates on ratings assigned to life insurers to be limited over the near term.

The life insurance industry’s exposure to “interest-sensitive” liabilities that provide investment guarantees, deposit flexibility and liquidity options has increased over time and exacerbated the low-yield issue.

As industry sales have shifted away from traditional protection products involving mortality and/or morbidity (e.g. term-life policies are not considered “interest-sensitive”), products such as annuities and universal life insurance incorporating no-lapse guarantees, have increased. Insurers fund these interest-sensitive liabilities through general account assets.

Over the past several years the spread between investment returns on assets in the general accounts and the minimum rate guarantees (on products such as fixed annuities) has compressed, putting reserve margins at risk.

Envestment managed accounts to be offered in MassMutual 401(k)s

Posted on October 1, 2015 by Editorial Staff -

In what sounds like the introduction of in-plan robo-advice, MassMutual and the registered investment advisor Envestnet Retirement Solutions, LLC are partnering to offer custom managed accounts to participants in MassMutual’s 401(k)s and similar qualified plans.

The service is called “RetireSmart Ready Managed Path.” The asset allocations use investment options already offered by the plan. The service is available to MassMutual plans with at least $5 million in assets.

MassMutual also uses BlackRock managed accounts and CustomChoice Strategies, an asset allocation methodology created by Morningstar, a spokesman for the insurer told RIJ. “But those products are customized at the plan level whereas RetireSmart Ready is customized at the participant level,” he said.

Employers who sponsor MassMutual-administered plans can offer RetireSmart Ready Managed Path either as an actively chosen option for participants or as a Qualified Deferred Investment Alternative (a default option) for automatically enrolled participants. The option is currently available and the QDIA will be available this fall, a MassMutual release said. The RetireSmart QDIA won’t be a target date fund, MassMutual said.

MassMutual’s recordkeeping data shows that the percentage of assets within asset allocation strategies increased by 26.2% in the last five years. Participants can enroll in RetireSmart Ready Managed Path online through the MassMutual RetireSMART Ready Tool after establishing a separate advisory account with ERS.

MassMutual’s PlanALYTICs tool, launched in 2013, will be used to measure each participant’s progress toward the goal of replacing 75% of pre-retirement income, including full Social Security benefits. The tool uses each participant’s “current age, target retirement age, risk tolerance, existing savings and future retirement needs, including whether or not he or she has a defined benefit plan,” according to a release.

Will the ‘BIC’ Affect QLAC Sales?

Posted on September 24, 2015 by Kerry Pechter -

Is an element of the DOL fiduciary proposal at odds with the Treasury Department’s QLAC provision? During the House Finance Committee hearing on the DOL proposal earlier this month and in written testimony, a financial services industry executive suggested that it is.

Caleb Callahan, chief operating officer (below right) at ValMark Securities in Akron, Ohio, argued that the DOL’s proposed amendment to “PTE [Prohibited Transaction Exemption] 84-24” contains language that would discourage his firm and other firms from selling Qualifying Longevity Annuity Contracts to IRA owners because it raises questions of fiduciary liability. He says that the amendment leaves open the possible interpretation that sellers of QLACs might have to meet the new “BIC” (Best Interest Contract) exemption, which involves pledging to act purely in a client’s best interest.

“The DOL proposed rule would make it difficult, if not impossible, for our business to offer these critical retirement savings products to our clients, contradicting this Treasury Department initiative and sending a conflicting message to Americans,” Callahan wrote in testimony submitted to the DOL. He testified as chairman of the Association of Advanced Life Underwriters’ Retirement Planning Committee.

Reish: QLACs fall under 84-24

QLACs are deferred income annuity contracts (DIAs), sold to IRA owners, whose income payments don’t begin until after the owner reaches age 70½. Before action by the Treasury Department in July 2014, sales of DIAs were problematic because their terms conflicted with rules requiring that distributions from tax-favored accounts begin at age 70½.

The Treasury Department capped QLAC premiums at the lesser of $125,000 or 25% of tax-favored savings, and required that income from a QLAC start by age 85.

But prominent pension law attorney Fred Reish told RIJ that the amendment won’t affect advisors who want to recommend QLACs to their clients. “As I look at it from a purely legal perspective, I don’t think it will be that big a change for QLACs. That’s because QLACs, as far as I know, are fixed annuities (from the general accounts of insurance companies) and therefore fall under 84-24,” Reish told RIJ in an email.

The language of the proposed amendment seems clear on this point. It says that the DOL wants to deprive only sellers of variable annuities and certain sellers of mutual funds of the existing exemption from fiduciary liability when earning a commission on such sales to IRA owners. According to the DOL/Employee Benefits Security Administration website:

“The amendment would revoke relief for insurance agents, insurance brokers and pension consultants to receive a commission in connection with the purchase by IRAs of variable annuity contracts and other annuity contracts that are securities under federal securities laws and for mutual fund principal underwriters to receive a commission in connection with the purchase by IRAs of mutual fund shares.”

Instead, sellers of variable annuities to IRA owners and mutual fund underwriters would need to sign a contract pledging that their sales were in the client’s “best interest.” “A new exemption for the receipt of compensation by fiduciaries that provide investment advice to IRA owners is proposed elsewhere in this issue of the Federal Register in the ‘Best Interest Contract Exemption,’” the proposal reads.

A cloud remains over QLACs

Whichever prohibited transaction exemption DOL offers to commission-earning sellers of QLACs, Callahan says, the DOL still considers a QLAC sale to be prohibited transaction by fiduciary, and therefore puts it under a legal cloud. And, regardless of what the DOL intends, if its amendment makes broker-dealers hesitant to sell QLACs for fear violating the regulations, it will effectively frustrate Treasury’s QLAC initiative.

“Each business will need to make a decision on its own basis,” Callahan told RIJ in an email. “But it is pretty clear these are prohibited and you would need to choose an exemption to avoid the prohibition. (That’s why you need an exemption…because it’s prohibited). I’m suggesting for many businesses, including ours—we would choose not to take this risk.”

Callahan added that, even if selling QLACs is safe, recommending the sale of IRA assets to fund a QLAC might not be. “In addition, while the actual sale of the QLAC… could be exempted under 84-24—although it is unclear—the act of advising on how much and when to take [money] out of other plan funds and put [it] into the QLAC is not able to be exempted. In practice, most firms will just pass on this uncertainty and risk when you look at the typical account size and risk/reward. The fact is, it is unclear. And all that matters is what businesses actually do.”

Impact on VA sales

If any annuity appears to be in the DOL’s cross-hairs, it would be variable annuities, not QLACs. Advisors sells tens of billions of dollars worth of VAs each year, and the market for QLACs is undeveloped. The DOL proposal to amend 84-24 is clearly aimed at making sure that the sale of a variable annuity is in the IRA owner’s best interest.

“[PTE] 84-24 was first issued in 1979 and then updated in 1984 (hence the 84 in the name),” Reish wrote in an email. “A number of broker-dealers and insurance companies have successfully used that exemption for many years. … It has some proposed changes–mainly the fiduciary standard (the “best interest” requirement) and the prohibition on misleading statements. But I think that, for quality agents and advisors, that will be manageable.

“For other types of annuities—meaning variable annuities—sold to IRA owners, the changes will be much more material,” he added. “That’s because those sales, or recommendations, will be under BICE, which will be better than largely anticipated, but more burdensome than 84-24.”

A Conservative Retirement Portfolio in 3 Buckets

Posted on September 24, 2015 by Christine Benz -

Many retired investors are comfortable embracing a healthy equity stake in their portfolios. That’s a sensible tack for retirees with longer time horizons or those who know that they want to leave money behind for their children, other loved ones or charity.

This conservative bucket portfolio has a more modest goal: preserving purchasing power and delivering living expenses for the retiree who has an approximately 15-year time horizon (that is, life expectancy).

This portfolio does stake more than 30% in equities, but it also holds about 55% of its assets in bonds and another 12% in cash. The remainder of the portfolio is in commodities and other securities, such as convertibles and preferred stock.

Let time horizon lead the way
The main idea behind the bucket approach is to segment the portfolio by the spending time horizon: Assets that will be tapped sooner are parked in short-term holdings, and longer-term monies are stashed in higher-returning, higher-volatility asset types, mainly stocks.

To construct a bucket portfolio, the retiree starts with anticipated income needs for a given year, then subtracts certain sources of income such as Social Security and a pension. What’s left over is the amount of cash flow that the portfolio will need to supply each year.

In the case of the conservative portfolio, one to two years’ worth of living expenses (those not covered by Social Security, and so on) are housed in cash instruments (Bucket One), and another 10 years’ worth of living expenses are housed in bonds (Bucket Two). The remainder of the portfolio is invested in stocks and other more volatile assets, such as commodities and a high-risk bond fund. Income and rebalancing proceeds from Buckets Two and Three are used to replenish Bucket One as it becomes depleted.

As noted earlier, the conservative portfolio’s focus is on capital/purchasing power preservation and income production, so it stakes roughly 70% in bonds and cash. That will likely strike many retirees and pre-retirees as overly bond-heavy.

After all, starting yields are minuscule, and the next few decades are unlikely to be as kind to bonds as the previous three were. Yields will go up, but they’ll hurt bond prices in the process. In recognition of that fact, I’ve generally aimed to steer the portfolio away from the most interest-rate-sensitive bonds.

Moreover, as with the Moderate and Aggressive portfolios, the specific parameters of the Conservative portfolio can be altered to suit a retiree’s own goals and preferences. For example, a more risk-tolerant, growth-oriented retiree may choose to hold just one year’s worth of cash in bucket one while also shrinking the number of years’ worth of assets in bonds, thereby enlarging the equity stake as a percentage of assets.

And though I’ve supplied specific fund recommendations in my model portfolios, a retiree needn’t reinvent the wheel to put the bucket approach to work: Many of the key ingredients likely already appear in well-diversified retiree and pre-retiree portfolios.

A total stock market index fund or a portfolio of individual dividend-paying equities could stand in for Vanguard Dividend Growth (VDIGX), for example. Meanwhile, a retiree in search of simplification could use an all-in-one-type investment such as T. Rowe Price Spectrum Income (RPSIX) to supplant the individual holdings that make up Bucket Two.

The portfolio includes three buckets, one each for short-, intermediate-, and longer-term spending needs.

Bucket One: Years 1-2

12%: Cash (certificates of deposit, money market accounts, and so on)

This portion of the portfolio is geared toward meeting near-term spending needs. Because of this role, it sticks with true cash instruments, as noncash alternatives like ultrashort bond funds have lower yields and more risk than CDs right now.

Bucket Two: Years 3-10

12%: Fidelity Short-Term Bond (FSHBX)
5%: Fidelity Floating Rate High Income (FFRHX)
20%: Harbor Bond (HABDX)
6%: Vanguard Short-Term Inflation-Protected Securities (VTIPX)
5%: Vanguard Wellesley Income (VWINX)

Bucket Two is designed, in aggregate, to preserve purchasing power and deliver income with a dash of capital appreciation. Fidelity Short-Term Bond serves as the portfolio’s next-line reserves in case Bucket One were depleted and bond and dividend income and/or rebalancing proceeds were insufficient to refill it.

Fidelity Floating Rate High Income, one of the most conservative bank-loan vehicles, provides both a cushion against rising bond yields (bank-loan yields adjust upward along with lending rates) and a measure of inflation protection (yields are often heading up at the same time inflation is).

Harbor Bond is the portfolio’s core fixed-income holding; the PIMCO-managed bond fund has a good deal of flexibility to adjust duration (a measure of interest-rate sensitivity), invest in foreign bonds, and range across bond-market sectors.

I also used Vanguard Short-Term Inflation-Protected Securities to provide a measure of inflation protection; it owns bonds whose principal values adjust upward to keep pace with the Consumer Price Index, but it’s less sensitive to interest-rate-related volatility than intermediate- and long-term Treasury Inflation-Protected Securities vehicles.

Finally, bucket two includes the conservatively allocated Vanguard Wellesley Income, which is anchored in fixed-income investments but also holds roughly 40% in stocks, both U.S. and foreign.

Bucket 3: Years 11 and Beyond

23%: Vanguard Dividend Growth (VDIGX)
7%: Harbor International (HIINX)
5%: Harbor Commodity Real Return (HCMRX)
5%: Loomis Sayles Bond (LSBRX)

As the long-term portion of the portfolio, Bucket Three holds primarily stocks. Its anchor holding, as in the Aggressive and Moderate portfolios, is Vanguard Dividend Growth, an ultra-cheap equity fund that skews toward high-quality mega-cap stocks. I’ve also included a healthy stake in Harbor International. The equity portion of the portfolio includes limited exposure to small- and mid-cap stocks; investors who would like more exposure to that area might consider a fund such as Vanguard Small Cap Index (NAESX) or Royce Special Equity (RYSEX).

In addition to two equity holdings, the portfolio also includes a small stake in a commodities investment as well as a position in Loomis Sayles Bond. The former is in place to provide an additional layer of inflation protection, whereas the latter supplies exposure to more aggressive bond types (and even stocks) that are not well represented in Bucket Two.

The DOL’s Missed Opportunity

Posted on September 24, 2015 by Kerry Pechter -

The Department of Labor missed an opportunity by not recommending in its fiduciary proposal that advisors to IRA owners should have training in retirement income or perhaps even a retirement designation, such as the RICP, RMA, CRC or CRCP.

As many people have pointed out, the “best interest” standard is idealist but unworkable. It’s impossible to define and it doesn’t address the most important issue. Retirement income planning is fundamentally different from “accumulation” planning. If the DOL wants people to turn their 401(k)/IRA savings into lifetime income, it should point them to professionals who are trained to do that.

Retirement income advice requires skills that most investment advisors don’t have. Income planning demands an understanding of the risks of retirement (longevity risk, health care risk, inflation risk, etc.) and how to mitigate them. It calls for a familiarity with products (like income annuities), processes (like flooring or bucketing) and benefits (like Social Security and Medicare) that don’t matter before retirement.

The right training has been getting easier to find. The American College has trained thousands of Retirement Income Certified Professionals. The Retirement Income Industry Association runs bootcamps for its Retirement Management Analyst designation. For years, InFRE has offered the Certified Retirement Counselor degree to bank advisors and others. The College for Financial Planning offers the Chartered Retirement Planning Counselor program.

Requiring advisors to hold one of these designations before advising an IRA owner might address the DOL’s primary concern—that too many elderly Boomers will run out of money and end up on public assistance—more directly than merely requiring advisors to act in their clients’ “best interest,” whatever that may be.

Yes, it would be time-consuming and expensive to retrain enough advisors to meet the demand for retirement counseling. But probably no more expensive than complying with a best interest standard. And it would move the advice industry in a useful direction. New layers of disclosure and reporting won’t.

Instead of taking that approach, the DOL focused on the conflicts-of-interest that third-party commissions can create for advisor/distributors. The DOL is right in believing that these conflicts distort the advice that IRA owners receive. Many of the distortions are common knowledge in the financial industry. But eradicating them through a “pledge” is quixotic. A positive approach might have worked better.

By proposing a solution that would disrupt the distribution of financial products and deny broker-dealers a major source of revenue, the DOL guaranteed a wall of resistance. Instead, it might have encouraged or required IRA advisors to demonstrate retirement planning expertise. A number of financial firms, who already recognize that retirement expertise can be a competitive advantage, might even have embraced it.

Life settlements industry still not fully recovered: Conning

Pension funded status falls to 81.7% on weak equity returns: Milliman

Pan-European pension product proposed

Morningstar acquires “tax-efficient rebalancing” technology

Longevity growth begins to slow: Society of Actuaries

Slower growth of withholdings indicates slowing economy: TrimTabs

Eisenbach to run retirement marketing at Voya

Aging workforce means higher benefit costs: LIMRA

UBS to pay $19.5 million for misleading U.S. investors

T. Rowe Price introduces less pricey TDFs

The ‘UHNW’ of the Middle East control almost US$1 trillion: Wealth-X

MassMutual rolls out benefits exchange platform

Voya to administer savings plan of CenterPoint Energy

AARP and JPMorgan to invest $40 million in aging-related startups

Recent market volatility hurts funded status of U.S. pensions

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