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The Bucket

Posted on October 23, 2015 by -

Voya renews its $500 ‘Born to Save’ campaign

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

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

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

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

TIAA-CREF expands in Europe

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

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

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

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

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

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

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

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

Fouche´succeeds O’Donnell as chief of Prudential Annuities

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

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

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

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

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

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

More large DB plan sponsors contemplate de-risking: MetLife

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

‘De-Risky’ Business

Posted on October 15, 2015 by -

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

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

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

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

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

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

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

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

How Prudential does it

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

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

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

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

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

Cash not accepted

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

The Link between Inequality and ‘Retirement Readiness’

Posted on October 15, 2015 by -

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

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

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

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

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

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

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

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

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

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

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

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

© 2015 RIJ Publishing LLC. All rights reserved.

Stock Market Volatility and Investors’ Trust

Posted on October 14, 2015 by -

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

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

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

Macromonitor Chart

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

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

Macromonitor Chart 2

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

© 2015 SRI. Reprinted by permission.

Longevity growth begins to slow: Society of Actuaries

Posted on October 14, 2015 by -

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 added.

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). Click here for a full version of the Mortality Improvement Scale MP-2015 report.

 

Financial Engines offers call center support to rank-and-file participants

Posted on October 14, 2015 by -

In a sign of the ongoing convergence of web-mediated advice and human advice into a single hybrid form of investment guidance for middle-class investors, Financial Engines said it will open up its phones to any participant in any plan that offers its online service—not just to its managed account customers.

“Now, all 401(k) participants with direct access to Financial Engines can pick up the phone and talk with a Financial Engines advisor at no additional charge—whether they use the company’s investment advisory services or not,” said a Financial Engines release. Founded in 1996 by Nobel Prize winner Bill Sharpe and others, the Sunnyvale, CA-based fintech company was among the first of what would later be called robo-advisors. Its managed account service has helped it grow into the largest registered investment advisor (RIA) in the U.S.

Plan participants can use phone, webcam or “live chat” to discuss their finances with licensed Financial Engines counselors. They can get help with their retirement plan accounts, income planning and other financial topics. Advisors are non-commissioned and do not sell investment products.

Financial Engines’ advisors can talk with participants about assets in side and outside retirement accounts, savings rates and Social Security claiming strategies. They can also help participants with responding to market volatility, appropriate use of target date funds, budgeting, creating a rainy day fund and deciding between Roth vs. traditional IRA programs.

According to a new survey of over 1,000 401(k) participants by Financial Engines, employees want “a person in their corner.” The surveyshows that 54% of 401(k) investors not currently working with a financial advisor would like to work with one in the future.

  • 69% of participants said that it was “very important” that their financial advisor be legally required to act in their best interest, 18% said that it was “somewhat important.”
  • 76% of investors who use target date funds said that an advisor’s fiduciary status was very important, as did 73% of investors not currently working with an advisor but interested in doing so, 72% of those with assets between $100,000 and $500,000, and 70% of investors who already work with an advisor.

Commonly cited barriers to using an advisor included: affordability (46%), believing they didn’t have enough assets to get an advisor’s attention (36%) or uncertainty how an advisor could help them (26%). Twenty-three percent of investors said that they preferred a do-it-yourself approach to handling their investments.

While interest in online advisory services was strong (60%), interest in services that included access to financial advisors was even stronger (68%).

According to respondents, the top reasons people use financial advisors included the ability to avoid costly mistakes (44%), greater peace of mind or more confidence (28%) and the ability to further personalize financial plans and strategies (25%).

The financial topics of most interest to participants went beyond traditional retirement planning. According to the report, 401(k) participants are most interested in receiving help with:

  • Determining the appropriate savings rate  
  • Turning their savings into reliable retirement income
  • Evaluating their overall financial wellness
  • Assessing individual risk tolerance
  • Optimizing Social Security claiming strategies

© 2015 RIJ Publishing LLC. All rights reserved.

 

Bank annuity fee income dips 4.1% in first half of 2015

Posted on October 14, 2015 by -

Income earned from the sale of annuities at bank holding companies hit $1.74 billion, down 4.1% from the first-half record of $1.81 billion in 2014, according to the Michael White Bank Annuity Fee Income Report.

Second-quarter 2015 annuity commissions slipped to $898.9 million. It was down 2% from $916.8 million earned in second quarter 2014, but up 7.0% from $840.1 million in first quarter 2015 and the third-highest quarterly mark on record.

Wells Fargo & Company (CA), Morgan Stanley (NY), and Raymond James Financial, Inc. (FL) led all bank holding companies in annuity commission income in first half 2015. Among BHCs with assets between $1 billion and $10 billion, leaders included Santander Bancorp (PR), Wesbanco, Inc. (WV), and National Penn Bancshares, Inc. (PA).

The report is based on data from all 6,656 commercial banks, savings banks and savings associations (thrifts), and 648 large top-tier bank and savings and loan holding companies (collectively, BHCs) with over $1 billion in consolidated assets operating on June 30, 2015. Several BHCs that are historically and traditionally insurance companies have been excluded from the report.

Michael White Oct 2015 Bank Annuity Sales

Of the 648 BHCs, 305 or 47.1% participated in annuity sales activities during first half 2015. Their $1.74 billion in annuity commissions and fees constituted 18.7% of their total mutual fund and annuity income of $11.24 billion and 36.0% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $4.83 billion. Of the 6,348 banks, 861 or 13.6% participated in first-half annuity sales activities. Those participating banks earned $389 million in annuity commissions or 28.6% of the banking industry’s total annuity fee income; their annuity income production was down 10.7% from $435.4 million in first half 2014.

“Of 305 large top-tier BHCs reporting annuity fee income in first half 2015, 189 or 62.0% are on track to earn at least $250,000 this year. Of those 189, 63 BHCs or 33.3% achieved double-digit growth in annuity fee income for the quarter,” said Michael White, president of Michael White Associates (MWA), in a release.

“That’s more than a halving from first half 2014, when 127 institutions or 58.3% of 218 BHCs on track to earn at least $250,000 in annuity fee income achieved double-digit growth. However, the number and percentage of BHCs with double-digit growth is more typical in past years. The best news is the strength of annuity revenue in second quarter 2015, which is one of the best quarters in history and up 7.0% from first quarter.”

Two-thirds (67.7%) of BHCs with over $10 billion in assets earned first-half annuity commissions of $1.66 billion, constituting 95.2% of total annuity commissions reported by BHCs. This revenue represented a decrease of 2.0% from $1.69 billion in annuity fee income in first half 2014.

Within this asset class of largest BHCs in the first half, annuity commissions made up 27.7% of their total mutual fund and annuity income of $9.10 billion and 38.0% of their total insurance sales volume of $4.36 billion.

Annuity fee income at BHCs with assets between $1 billion and $10 billion fell 28.9%, from $108.3 million in first half 2014 to $77.0 million in first half 2015 and accounting for 19.1% of their total insurance sales income of $403.1 million.

The smallest community banks, those with assets less than $1 billion, were used as “proxies” for the smallest BHCs, which are not required to report annuity fee income. Leaders among bank proxies for small BHCs were Sturgis Bank & Trust Company (MI), The Oneida Savings Bank (NY), and FNB Bank, N.A. (PA). These banks with less than $1 billion in assets generated $33.89 million in annuity commissions in first half 2015, down 4.9% from $35.63 million in first half 2014.

Only 10.3% of banks this size engaged in annuity sales activities, which was the lowest participation rate among all asset classes. Among these proxy banks, annuity commissions constituted the smallest proportion (19.0%) of total insurance sales volume of $178.7 million.

Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the median Annuity Concentration Ratio was 6.2% in first half 2015. Among the top 50 small banks in annuity concentration that are serving as proxies for small BHCs, the median Annuity Concentration Ratio was 15.4% of noninterest income.

© 2015 RIJ Publishing LLC. All rights reserved.

RIIA’s RMA designation goes online

Posted on October 14, 2015 by -

The Retirement Income Industry Association (RIIA) and Salem State University near Boston are launching a new online course for financial advisors who want to pursue RIIA’s Retirement Management Analyst (RMA) designation.    

The new program combines classroom-based teaching with web-based “distance learning.” The first nine-week program runs from October 26 through December 18.  The program will incorporate live and recorded expert presentations, discussion groups and interactive engagement around the RMA curriculum and case studies. Michael Lonier, RMA, CEO of Lonier Financial Advisor LLC, is the principal instructor.

The course is designed for financial advisors with at least three years’ experience who want to master RIIA’s retirement planning advisory process and “View Across the Silos” approach to serving clients. 

The course covers the RMA’s methods for:

  • Implementing a four-part planning framework that starts with a Client Diagnostic Kit that generates Retirement Allocations that are built using the RMA Toolbox within the RMA Practice Management context.
  • Comprehensive retirement planning based on the household balance sheet.
  • Using the client’s cash flow and balance sheet to determine the appropriate application of investment-based planning, goals-based planning, and product-based planning.
  • Generating secure retirement income allocations protected by four broad risk-management techniques to build Upside, Floor, Longevity, and Reserves.
  • Focusing on goals and successful outcomes, in addition to investment returns and performance.
  • A cross-silo approach that embraces products across the investment, banking and insurance spectrum.

The completion of this and other programs will prepare advisors to take the RMA exams for the two RMA designation levels.  For more information and to apply click here. 

© 2015 RIJ Publishing LLC. All rights reserved. 

The Bucket

Posted on October 14, 2015 by -

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.   

© 2015 RIJ Publishing LLC. All rights reserved.

 

 

Go Ahead, Buy the Harley

Posted on October 8, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights reserved.

 

The Bezzle Years

Posted on October 8, 2015 by -

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.

© 2015 Project Syndicate.

 

RetirePreneur: Paul Feldman

Posted on October 8, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights reserved.

Prudential buys a chunk of JCPenney pension

Posted on October 8, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights reserved.

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

Posted on October 8, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights reserved.

Who says America doesn’t save for retirement?

Posted on October 8, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights reserved.

Industry-sponsored legal study attacks ‘robo-advisors’

Posted on October 8, 2015 by -

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.”

© 2015 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on October 8, 2015 by -

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.”

© 2015 RIJ Publishing LLC. All rights reserved.

 

Takeaways from the FPA Conference in Boston

Posted on October 1, 2015 by -

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.”

© 2015 RIJ Publishing LLC. All rights reserved.

The Chinese Economy and Fed Policy

Posted on October 1, 2015 by -

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.

© 2015 Project Syndicate.