Archives: Articles

IssueM Articles

Social Security Spousal Benefits Still Unfair

Posted on November 5, 2015 by -

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

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

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

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

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

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

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

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

Such a system causes innumerable inequities:

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

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

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

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

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

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

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

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

Posted on November 5, 2015 by -

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

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

Posted on November 4, 2015 by -

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

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

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

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

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

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

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

Women are better savers, but men save more: Vanguard

Posted on November 4, 2015 by -

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved. 

Spike in cash takeovers could be bad omen: TrimTabs

Posted on November 4, 2015 by -

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on November 4, 2015 by -

“SmartPlan” may increase participant engagement in DC plans

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

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

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

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

BlackRock’s new ‘iRetire’ tool measures retirement readiness

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

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

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

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

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

MassMutual declares dividend payout of $1.7 billion for 2016  

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

On Background: An Insider Talks about the DOL Proposal

Posted on October 29, 2015 by -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

October rally shows markets’ addiction to low rates: OFR

Posted on October 29, 2015 by -

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

Shadow of ERISA hangs over state-run retirement plans

Posted on October 29, 2015 by -

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

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

Five more advisory firms pay restitution for overcharges

Posted on October 29, 2015 by -

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

Fidelity partners with Envestnet on plan advisor platform

Posted on October 29, 2015 by -

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on October 29, 2015 by -

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

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

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

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

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

Courses available on using social media

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

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

Posted on October 29, 2015 by -

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

Wisdom from Advisors to the ‘One Percent’

Posted on October 28, 2015 by -

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

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

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

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

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

‘Whatever makes your life easier’

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

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

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

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

Managing time as well as finances

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

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

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

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

Prospecting never ends

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

Congress Shuts $50,000 Social Security ‘Loophole’

Posted on October 28, 2015 by -

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

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

Principal Adds ‘In-Plan’ Deferred Income Annuity Option

Posted on October 23, 2015 by -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

DOL “delouses” socially responsible investments

Posted on October 23, 2015 by -

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

RetirePreneur: Cindy Hounsell

Posted on October 23, 2015 by -

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved. 

As DOL ponders fiduciary proposal, retail channel assets grow

Posted on October 23, 2015 by -

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

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

Posted on October 23, 2015 by -

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.