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The Future and How to Survive It

The world’s biggest corporations have been riding a three-decade wave of profit growth, market expansion, and declining costs. Yet this unprecedented run may be coming to an end. Our new McKinsey Global Institute report, Playing to win: The new global competition for corporate profits, projects that the global corporate-profit pool, which currently stands at almost 10% of world GDP, could shrink to less than 8% by 2025—undoing in a single decade nearly all of the corporate gains achieved relative to the world economy during the past 30 years (see chart below).

From 1980 to 2013, vast markets opened around the world while corporate-tax rates, borrowing costs, and the price of labor, equipment, and technology all fell. The net profits posted by the world’s largest companies more than tripled in real terms from $2 trillion in 1980 to $7.2 trillion by 2013, pushing corporate profits as a share of global GDP from 7.6% to almost 10%.

Today, companies from advanced economies still earn more than two-thirds of global profits, and Western firms are the world’s most profitable. Multinationals have benefited from rising consumption and industrial investment, the availability of low-cost labor, and more globalized supply chains.

But there are indications of a very significant change in the nature of global competition and the economic environment. While global revenue could increase by some 40%, reaching $185 trillion by 2025, profit growth is coming under pressure. This could cause the real-growth rate for the corporate-profit pool to fall from around 5% to 1%, practically the same share as in 1980, before the boom began.

Part of the slowdown in profit growth will stem from the competitive forces unleashed by two groups of hard-charging competitors. On one side is an enormous wave of companies based in emerging economies. The most prominent have been operating as industrial giants for decades, but over the past 10 to 15 years, they have reached massive scale in their home markets. Now they are expanding globally, just as their predecessors from Japan and South Korea did before them.

On the other side, high-tech companies are introducing new business models and striking into new sectors. And the tech giants themselves are not the only threat. Powerful digital platforms such as Alibaba and Amazon serve as launching pads for thousands of small and midsize enterprises, giving them the reach and resources to challenge larger companies.

The competitive landscape has grown more complex, and the pace of change is accelerating. Profits are shifting from heavy industry to idea-intensive sectors that revolve around R&D, brands, software, and algorithms. Sectors such as finance, information technology, media, and pharmaceuticals—which have the highest margins—are developing a winner-take-all dynamic, with a wide gap between the most profitable companies and everyone else. Meanwhile, margins are being squeezed in capital-intensive industries, where operational efficiency has become critical.

New competitors are becoming more numerous, more formidable, and more global—and some destroy more value for incumbents than they create for themselves. Meanwhile, some of the external factors that helped to drive profit growth in the past three decades, such as global labor arbitrage and falling interest rates, are reaching their limits.

As profit growth slows, there will be more companies fighting for a smaller slice of the pie, and incumbent industry leaders cannot focus simply on defending their market niche. Our analysis of thousands of companies around the world shows that the top performers share three traits: they invest in intellectual assets, they play in fast-growing markets, and they have the most efficient operations.

Companies that adapt quickly to these new realities can capture enormous opportunities. Over the next decade, rising consumption in the emerging world will create new markets. Technology will spur new products and services. Start-ups will be able to tap global investors, suppliers, and customers with little up-front investment. But companies will face intense pressure to grow, innovate, and become more productive—not only to seize these opportunities but merely to survive.

© 2015 McKinsey Global Institute.

Maximum Withdrawal Rate: A Historical Perspective

Few topics are more important to retirees than determining (or estimating) the “safe withdrawal rate” from their investment portfolios. As human longevity increases, the demands placed on the retirement nest egg continue to escalate. This study takes a historical perspective on this issue of retirement portfolio withdrawal rate, as opposed to a Monte Carlo perspective.

Rather than estimate the safe withdrawal rate for a retirement portfolio based on hundreds or thousands of simulations, this analysis evaluated the maximum initial withdrawal rate for two different retirement portfolios using actual historical returns over rolling 25-year periods.

The time frame of this study is the 45-year period from 1970-2014. Over this 45-year period there were 21 rolling 25-year periods. A 25-year period simulates the experiences of those who retire at age 65 and draw upon retirement portfolio through the age of 90—assuming they live that long. The maximum initial withdrawal rate that was calculated for each 25-year period led to a 100% success rate in meeting the stipulated ending outcome.

Two investment portfolios were evaluated in this study using well-known market indexes: A 60/40 portfolio consisting of 60% large cap US stock and 40% US bonds and a diversified 7-asset portfolio consisting of large cap US stock, small cap US stock, non-US stock, real estate, commodities, US bonds, and cash. Each asset class in the 7-asset portfolio was equally weighted at 14.28% each. Both portfolios were rebalanced annually.

Taxes and fees (advisor fees and/or investment product fees) were not taken into account.  In actual practice, taxes will differ by type of retirement account and individual circumstances. Investment product fees can be held very low by using an ETF-based investment model (30-40 bps). Inflation was accounted for by use of a COLA (explained later) in the analysis.

Portfolio survival

The survivability of a retirement portfolio depends on the initial withdrawal rate in the first year of retirement. Unless changed in subsequent years, the initial withdrawal rate sets the pace of the portfolio depletion. This analysis assumes that a retiree’s pattern of annual withdrawals from their retirement portfolio is established by their initial withdrawal rate and then annually adjusted by the COLA (cost-of-living adjustment) they select.

Let’s assume an investor with a retirement portfolio of $500,000 by the time she is ready to retire. A 4% initial withdrawal rate the first year produces a cash withdrawal of $20,000. If that is not enough money, she may be inclined to withdraw 5%, or $25,000 the first year. In either case, she plans to increase the amount of cash withdrawn each year by a COLA of 3%. 

As much as we would like to believe that retirees govern their portfolio withdrawals based on research on the topic of sustainable withdrawal rates and Monte Carlo analysis, many don’t. Rather, they withdraw the amount of money needed to fund their first year of retirement. As a result of the cart-driving-the-horse (allowing the needed amount of first year retirement income to determine the initial withdrawal rate percentage) the initial withdrawal rate could be 6%, 8%, or even 12% of the account balance. 

Once the initial withdrawal amount (and therefore the initial withdrawal rate) has been established, the die has been cast. It’s unlikely that retirees will withdraw less money in the second or third year, and so on. In fact, they will likely add a COLA (cost of living adjustment) to their annual withdrawal so that they can keep pace with actual or perceived inflation. Thus, choosing the initial withdrawal amount/withdrawal percentage of account balance is a crucially important decision. It sets into motion a pattern that will dramatically impact how long the portfolio will last. 

Maximum initial withdrawal rate

This analysis takes a novel approach in the evaluation of retirement portfolio survival. Rather than impose a pre-determined withdrawal rate, this analysis determined the maximum initial withdrawal rate that could have been sustained by the portfolio over a 25-year period assuming a 3% annual COLA in the cash being withdrawn. The performances of the portfolios in the study were not estimated through a Monte Carlo simulation but reflected the historical returns of actual indexes.

Three ending outcomes for the retirement portfolios were imposed in this analysis:

(1) An ending account balance of zero dollars in the retirement portfolio after each rolling 25-year period.

(2) An ending balance equal to the starting balance at the end of each 25-year period.

(3) An ending balance twice (2x) as large as the starting balance after each 25-year period.  

Shown in Table 1 are the results for the maximum initial withdrawal rate analysis assuming a zero account balance at the end of each 25-year period. The first 25-year period was from 1970 to 1994. If the initial withdrawal rate was set at 9.70% (meaning that 9.70% of the account balance was withdrawn at the end of the first year) the diversified 7-asset retirement portfolio was exhausted at the end of year 25. The 60/40 portfolio was exhausted after 25 years assuming a maximum initial withdraw rate of 7.76%.

Israelsen chart 1

The next 25-year period was 1971-1995. In this period, the maximum initial withdrawal rate was 10.75% for the 7-asset portfolio and 7.80% for the 60/40 portfolio. Over all 21 rolling 25-year periods the maximum initial withdrawal rate for the 7-asset portfolio averaged 10.59% and 10.20% for the 60/40 portfolio—under the assumption that the portfolio was exhausted at the end of each 25-year period. It is worth noting that the maximum initial withdrawal rates for both portfolios have been smaller in recent years.

Table 2 summarizes the maximum initial withdrawal rate under the assumption that the ending balance in the account at the end of each 25-year period was equal to the starting balance in year 1. Understandably, the maximum withdrawal rate is lower in every case. The average maximum initial withdrawal rate for the 7-asset portfolio was 9.79% vs. 9.44% for the 60/40 portfolio.  Thus, if imposing a requirement that the retirement portfolio finish each 25-year period with an ending balance equal to the starting balance, the maximum initial withdrawal rate was reduced by 8o bps in the 7-asset portfolio and by 76 bps in the 60/40 portfolio.

Israelsen chart 2

Finally, in Table 3 we find the results of the analysis under the assumption that the ending account balance needed to be twice (2x) as large as the starting balance. The average maximum initial withdrawal rate for the 7-asset portfolio was 8.96% and 8.67% for a 60/40 portfolio. The smallest maximum initial withdrawal rate for the 7-asset portfolio over all 21 rolling 25-year periods was 4.94%—which was in the most recent 25-year period, from 1990-2014.

Israelsen chart 3

In summary, these results demonstrate that diversified retirement portfolios can sustain unusually high initial withdrawal rates—far higher than the typical “4% withdrawal rate” guideline.  Understandably, it is impossible to know at the start of any 25-year period what the maximum withdrawal rate can be set at. This analysis does not suggest that an initial withdrawal rate of 8% or 10% be employed, but it also suggests that imposing a very low initial withdrawal rate of 2% or 3% may be too conservative in light of actual index-based historical results.

Finally, this analysis is based on the last 45 years of actual performance, from 1970 to 2014.  Are the last 4.5 decades an anomaly? It is what it is. Or, rather—it was what it was.

Craig L. Israelsen, Ph.D. is an executive-in-residence in the Financial Planning Program at Utah Valley University in Orem, Utah.  He writes monthly for Financial Planning Magazine and is the developer of the 7Twelve® Portfolio

The 45-year historical performance of large-cap US stock was represented by the S&P 500 Index, while the performance of small-cap US stock was measured using the Ibbotson Small Companies Index from 1970-1978 and the Russell 2000 Index from 1979-2014. The performance of non-US stock was represented by the Morgan Stanley Capital International EAFE Index Index. U.S. bonds were represented by the Ibbotson Intermediate Term Bond Index from 1970-75 and the Barclays Capital Aggregate Bond Index from 1976-2014. As of late 2008, Lehman Brothers indexes became “Barclays Capital” indexes. The historical performance of cash was represented by three-month Treasury bills. The performance of real estate was measured by using the annual returns of the NAREIT Index (National Association of Real Estate Investment Trusts) from 1970-1977 (annual returns for 1970 and 1971 were regression-based estimates inasmuch as the NAREIT Index did not provide annual returns until 1972). From 1978-2014 the annual returns of the Dow Jones US Select REIT Index were used (prior to April 2009 it was the Dow Jones Wilshire REIT Index). Finally, the historical performance of commodities was measured by the Goldman Sachs Commodities Index (GSCI). As of February 6, 2007, the GSCI became S&P GSCI.

 

Traits of “leading” life/annuity issuers: Conning

In its third annual review of insurance companies that specialize in issuing individual life and/or annuity products, Conning Inc., global research firm and institutional investment manager, identified 20 companies that demonstrate leadership in the field, as measured by public available sales and performance metrics.

The list of top performers (see table at right) includes eight well-known large companies and a dozen mid-sized and small insurance companies. To be included in the life/annuity category, a company has to receive half or more of its revenues from either life insurance or annuity products. Life Annuity Growth Leaders Conning

Many large, diversified insurance companies, such as AIG, MetLife, Prudential, MassMutual, John Hancock or Northwestern Mutual, are not included in the category because they are not considered life-annuity specialists or because they emphasize group life or group annuity products over individual products.

The list is not a ranking, according to Terence Martin, a Conning director and author of the review, “Individual Life-Annuity Growth and Profit Leaders.” Any number of companies can reach it, based on their fulfillment of the criteria, which include operating margin, return on surplus, premium growth, sales and others. This year’s report, which Conning sells, also reviews the social media capabilities of life/annuity companies.

In the executive summary of the report, Martin noted these characteristics of leading life/annuity specialists:

  • ‘The Leading Small and Leading Large companies both have a higher dependence on single premiums.’ “Size is not a limiting factor in being able to absorb any volatility introduced by single-premium products,” Martin wrote. He told RIJ that mutual companies typically include annual sales that result from dividend reinvestment as single-premium sales.
  • ‘The consistent element we have seen in this study and the prior two is the relative stability of the product mix (life vs. annuity) over time for the Leading companies.’ Martin said that the leading companies showed continuity in focusing primarily on life insurance or primarily on annuities over time.  
  • ‘A calculated increase in exposure to NAIC category 2 may be beneficial’ and ‘The leading groups, particularly the Leading Small and Leading Midsized groups, have more aggressive lengthened their portfolios after the financial crisis.’ The companies on Conning’s list were often able to outperform because they went up in average maturity and/or credit risk (to include bonds rated BBB by Standard & Poor’s and Fitch, the lowest investment grade).
  • ‘Leading companies had lower investment expense ratios than a respective overall groups.’ “This factor wasn’t big enough to have a huge effect on profitability, but it was a marker for excellence,” Martin said. 
  • ‘Success can be found issuing policies of a broad range of sizes and does not require chasing ever-larger policies.’ “The industry has seen the average size of policies creeping up for some time. This trend has been partly driven by the companies, and it has also been agent-driven. We found that companies have been able to make profit selling either large or small policies. Selling large policies isn’t something you have to do to be successful.”
  • ‘The Leading companies generally have higher distributor productivity than their overall corresponding group.’ “Distributor productivity refers to the amount of premium dollars the company gets for every dollar of commission they spend,” Martin said. The study doesn’t control for the fact that some companies tend to sell products, such as indexed annuities, that offer higher commissions than, for instance, fixed immediate income or fixed-rate deferred annuities.
  •  ‘There did not appear to be a clear link between success and capital measures, whether measured by growth, capital leverage, or RBC ratio.’

Conning, based in Hartford, CT, is owned by Aquiline Capital Partners but is in the process of being sold to Cathay Life Insurance Co., according to its website.

© 2015 RIJ Publishing LLC. All rights reserved.

New York Life offers dividend-paying income annuity and QLAC

New York Life has launched a new income annuity, Mutual Income, that pays annual dividends in addition to immediate or deferred income. New York Life is the leading issuer of income annuities in the U.S.

Separately, the firm has issued its deferred income annuity as a QLAC, or qualifying longevity annuity contract, which IRA owners can use to purchase deferred income annuities with income start dates between ages 70½ and 85, within certain premium limits.

A release by the Fortune 100 mutual insurer said that Mutual Income is “designed to offer clients the opportunity to directly participate in the company’s mutual structure.  Separately, New York Life has expanded its income annuity options available on tax-qualified savings,” the company said in a release this morning. 

The initial press release didn’t say whether or not the initial income payout from Mutual Income would be lower than the initial income payments of an annuity that does not offer dividends. Northwestern Mutual was the first mutual insurer to offer a dividend to deferred income annuity purchasers, but its dividend-paying contract has a much lower starting payment than a conventional income annuity from Northwestern Mutual.

A subsequent e-mail statement from New York Life to RIJ said, “Similar to NWM, the starting guarantee is lower than the conventional fully guaranteed version.”

The initial release also did not say whether New York Life would allow contract owners to choose between taking the dividend in cash and applying it to the purchase of additional lifetime income, as Northwestern Mutual does.

A subsequent e-mail statement from New York Life to RIJ said, “Mutual Income also has the same flexibility for dividends to be taken in cash, reinvested to purchase additional lifetime income or a combination of both.  However for qualified Future Mutual Income Annuity, any dividend payments received during deferral must be used to purchase additional income.

“In reality, for the DIA version, most policyholders will likely opt to reinvest the dividends during the deferral period (because they don’t need it) and take it as cash once income begins.  For the SPIA version, dividends will likely be taken as cash since they need income now.”

According to the release, which arrived just as RIJ was about to publish today,

“Mutual Income works much like a traditional income annuity, where income can begin immediately or be deferred until a future start date of the client’s choosing. 

“As with other income annuities, a client invests a lump sum with an insurer, and receives an income stream that’s guaranteed for life.  But unlike traditional income annuities, the total income amount is not capped at the guarantee. 

“As policy owners, New York Life’s Mutual Income clients will also be eligible for annual dividends that can be used to increase their retirement income beyond the guaranteed amount.”

New York Life managing director Dylan Huang said in a statement, “With the launch of Mutual Income, New York Life is, for the first time, expanding its dividend opportunity to our income annuity clients.” Dividends can provide inflation protection as well, Huang added.

Regarding the QLAC, the release said:

Approximately 70% of purchasers of New York Life’s deferred income annuity are using tax qualified retirement savings they already have in IRAs or 401(k)s—but until now, an individual’s ability to decide when to start income has been limited by Required Minimum Distribution (RMD) rules, which generally require retirees to begin withdrawing from their qualified accounts by age 70½. 

New York Life saw evidence of this limitation among its own customers: almost a third (31%) of purchasers using non-qualified money elect an income start date between the age of 70½ and 85, indicating a desire to defer income to a more advanced age. 

We believe the purchase pattern that we see in our non-qualified sales indicates that there will be even more interest in deferred income annuities now that the income start date is permitted beyond the age of 70½.  When pre-retirees have no restrictions around the income start date, they are using the flexibility that deferred income annuities afford to create retirement income tailored to their specific needs,” added Mr. Huang.  “Some will want to use other assets to fund the early years of their retirement, some will be looking to leverage the power of deferral to provide for expenses later in life and others may want to work into their 70s without having to tap into their retirement savings via an RMD.  All can benefit from learning about the benefits of QLACs.”

© 2015 RIJ Publishing LLC. All rights reserved.

Fitch publishes “US Life Insurance GAAP Results Dashboard”

Analysts at Fitch Ratings published the following summary of the first-half 2015 financial results for 17 financial services companies:

Fitch GAAP Results Sept 2015

Operating profitability relatively flat

During first-half 2015, pretax operating earnings increased 2% over the prior-year period for GAAP reporting companies in Fitch’s rating universe. Pretax operating income continued to benefit from higher fee income, which was offset by lower interest margins and unfavorable mortality. Operating profitability remained relatively flat with average operating ROE of 12.8% in first-half 2015 compared with 12.7% in the prior-year period.

Results vary by segment

Variable annuities, retirement plans and asset management segments continued to benefit from higher account values caused by strong equity markets and solid sales during first-half 2015.

Results in individual life and fixed annuities were adversely affected by unfavorable mortality and continued interest margin compression during the period. The group benefits business was aided by favorable claims experience but continues to face competitive pricing pressure.

Company results mixed

Operating results were almost evenly split between companies reporting better returns in first-half 2015 and those reporting worse returns during the period. Notable items affecting individual company results include a favorable impact from deferred acquisition cost unlocking and reserve releases at Prudential Financial, Inc. and more favorable claims experience in StanCorp Financial Group, Inc.’s primary products. Alternatively, Aflac Incorporated’s results were adversely affected by currency volatility while Protective Life Corporation’s results reflect accounting-related changes due to its acquisition by Dai-ichi Life Insurance Co., Ltd.

Declining investment yields

Investment yields declined in first-half 2015 due to low reinvestment rates and new money invested at lower market yields. Partially offsetting the low rates were prepayment fees and higher returns on Schedule BA assets. Credit impairments remain very low due to a continuous decline in corporate defaults, a trend that began in 2010.

However, interest margin compression on spread-based products remained modest in first-half 2015. Active management of crediting rates and hedging activity continue to mitigate the impact of low interest rates.

Derivative gains

The realized gains for Fitch’s rating universe nearly tripled during first-half 2015 to $2.4 billion from $813 million in the prior-year period. The increase was primarily driven by substantial hedging-related derivative gains from Prudential Financial, Inc.

© 2015 RIJ Publishing LLC. All rights reserved. 

Nationwide hands the ball to Peyton Manning again

Following the success of last year’s ‘Jingle’ ad featuring Peyton Manning, Nationwide unveiled its newest advertising featuring the Denver Broncos quarterback. This new ad will debut during the 2015 NFL Kickoff game on Sept. 10 on NBC and will run throughout the season.

“The original ‘Jingle’ ad was one of the highest performing television ads in the history of our brand,” said Nationwide chief marketing officer Terrance Williams. “People would speak to Peyton using the jingle when they would see him. We used those experiences to develop this new ‘Jingle’ themed advertising.”

Nationwide has been especially aggressive in brand promotion and advertising in the past couple of years. It retired its long-time ‘blue window’ logo, which was internally unliked, replacing it with an older eagle-based symbol. It hired torchy actress and country singer Jana Rae Kramer to star as a leather-clad cat burglar in 2013 commercials. In a 2015 Nationwide Super Bowl ad, actress Mindy Kaling tries to kiss Matt Damon in a restaurant because she thinks she’s invisible (right). Mindy Kaling and Matt Damon

The “invisibility” theme is intended to subtly highlight the idea that Nationwide, which took itself private after the financial crisis, has no shareholders and therefore, like a mutual insurance company or a cooperative like Vanguard, can focus on the needs of its customers, and recognize their individuality. 

“I joined Nationwide because they put members first,” says a headline quoting Manning at the introduction of the new ad.  

The Peyton Manning ad may be the most successful element of Nationwide’s ongoing ad push. Nationwide will refresh the ad with new Peyton “Jingle” moments throughout the season, the company said in a release. The new ad is one of several new enhancements Nationwide has incorporated into its marketing plan for the second of a three-year sponsorship agreement with the NFL.

Besides partnerships with the Dallas Cowboys and the Denver Broncos, Nationwide entered into new relationships this year with the Arizona Cardinals, Atlanta Falcons, Chicago Bears, Cincinnati Bengals, Oakland Raiders and Pittsburgh Steelers. Nationwide will be able to use each team’s branding and logos in advertising and marketing materials.

With these new deals, Nationwide has developed team specific advertising “to connect with the passion of the fans of those teams.” Those ads were released digitally at the end of August.

“Teaming with the NFL and its clubs allows us to spread our ‘On Your Side’ promise to fans everywhere,” said Williams. The company will also increase its efforts around the Walter Payton NFL Man of the Year Award, presented by Nationwide.

Last season, Nationwide contributed more than $250,000 to the various charitable foundations represented by the 2014 nominees, including to the Thomas Davis Defending Dreams Foundation, represented by 2014 winner, Carolina Panthers linebacker Thomas Davis. This season, Nationwide will increase its contributions to the nominees’ foundations to nearly $300,000.

© 2015 RIJ Publishing LLC. All rights reserved.

Wink releases second quarter 2015 indexed annuity sales data

At $12.2 billion, sales of indexed annuities in the second quarter of 2015 were up nearly 8% from the previous quarter but down more than 2% from the same quarter in 2014, according to the seventy-second edition of Wink’s Sales and Market Report, released this week. Fifty-two indexed annuity carriers representing 99.8% of indexed annuity production participated in the survey.  

With a market share of 17.3%, Allianz Life was the top-selling carrier. American Equity Companies, Great American Insurance Group, American General Life Companies and Athene USA completed the top five sellers. The Allianz 222 Annuity repeated as the quarter’s top-selling indexed annuity.

The rate of election of a Guaranteed Lifetime Withdrawal Benefit (GLWB) declined for the third consecutive quarter, suffering the largest quarterly drop (6.5%, to 58.7%) in Wink’s tracking history. “I’m not surprised to see another drop in GLWB election rates. Income-driven sales continue to take a backseat to accumulation sales, due to the recent development of hybrid indices that allow distributors to promote ‘uncapped’ crediting methods,” said Sheryl Moore, president and CEO of Moore Market Intelligence and Wink, Inc., in a release.

Wink Indexed Annuity Sales by Qtr 2Q2015

Indexed life sales

For indexed life sales, 46 insurance carriers participated in Wink’s Sales & Market Report, representing 95.3% of production. Second quarter sales were $458.0 million, up more than 20% compared with the previous quarter, and up nearly 28% when compared to the same period last year.

Items of interest in the indexed life market this quarter include Transamerica maintaining the top-ranked company in indexed life sales, with a 15.3% market share. Pacific Life held the second-ranked position, followed by National Life Group, Minnesota Life, and Zurich American Life.

Transamerica Premier Financial Foundation IUL (formerly Western Reserve Life Assurance Company of Ohio’s WRL Financial Foundation) was the top-selling indexed life insurance product for the sixth consecutive quarter. The average indexed UL target premium reported for the quarter was $7,517, up more than 8.0% from the prior quarter.

© 2015 RIJ Publishing LLC. All rights reserved.

Putnam hires another senior executive from Fidelity

Putnam Investments announced that Sumedh Mehta has been named Chief Technology Officer, with responsibility for the company’s worldwide systems infrastructure and application development, as well as technology integration across business lines.

Robert Reynolds, the chief executive of Great-West Financial, which, like Putnam, is owned by Power Financial Corp., was chief operating officer at Fidelity until, after a brief retirement, he came to Putnam in 2008 to revive a sagging brand.

Reynolds subsequently added other former Fidelity executives, including Edward F. Murphy III, to his leadership team at Putnam. Murphy is now president of Empower Retirement, the new brand for Great-West’s institutional retirement businesses.

Mehta will be based in Boston and report to Putnam Chief Financial Officer Clare Richer. He will lead corporate-wide technology groups, including Software Engineering, Enterprise Computing and Telecommunications and Data. Mehta joins Putnam from Fidelity Investments, where he most recently served as senior vice president, Fidelity Investment Management Technology.  

Prior to joining Putnam, Mehta held a series of senior roles in financial services information technology, with a strong focus on asset management. Most recently, he served as Senior Vice President, Equity, High Income, Select Co., Pyramis and Research Technology for Fidelity Investments, where he developed solutions for portfolio managers, traders and research analysts.  

Previously, Mehta served as director of operational effectiveness for Marsh & McLennan Companies and as industry head for the financial services practice at Patni, Inc., a technology consultancy firm.  Earlier in his career, Mehta held positions at Mercer, The Reference, Inc., and The Mathworks.

Mehta holds an MBA degree from Babson College, an M.S. degree in electronic engineering from Columbia University and a BSc. degree in electronic engineering from the University of Southampton.

© 2015 RIJ Publishing LLC. All rights reserved.

GM Adds Hueler’s Income Solutions to its DC Plan

Three years after terminating its defined benefit pension, U.S. carmaker General Motors will offer its 401(k) participants a new way to convert their savings to lifetime income: through the Hueler Income Solutions Annuity Marketplace online rollover platform.

The relationship, announced Thursday, represents a significant win for Minneapolis-based Hueler. Its founder, Kelli Hueler (below right), has spent a decade criss-crossing the country to pitch her “institutionally-priced” income annuity sales platform to plan sponsors and providers. The platform’s other prominent users include plan sponsor IBM and plan provider Vanguard. Vanguard offers participants in all of its 401(k) plans online access to the platform. Kelli Hueler

The GM 401(k) and profit-sharing plan has 58,000 participants in the U.S., $11 billion in assets and an average account value of $190,000. The largest single holding is the GMAM Investment Holdings Trust. A GM spokesperson could not be reached for comment before deadline.

The agreement between the global carmaker and tiny founder-led Income Solutions, whereby GM will promote Income Solutions internally, is unrelated to GM’s relationship with Fidelity, GM’s full-service 401(k) provider. Fidelity has its own online retail annuity platform, where individual investors can shop for immediate and deferred income annuities provided by several insurance companies.

No value of the deal was announced. It may not have a value, in the usual sense. Hueler’s platform involves a 2% fee based on the value of the annuity purchase. That fee covers the costs of maintaining Hueler’s insurance-licensed call center and the internal promotion of the service by the plan sponsors. The annuity issuers bid whatever price they choose to bid for each potential contract. There are no revenue-sharing arrangements or cross-subsidies.

Individual retirement plan participants and retirees whose companies have a relationship with Hueler can surf to the Income Solutions website and solicit current annuity pricing data from AIG, the Integrity Companies, Lincoln Financial, MetLife, Mutual of Omaha and Principal Life Insurance. The site facilitates the sale of annuities through partial rollovers. Some life insurers choose not to put annuity products on the platform because of conflict with their other distribution channels.

The Income Solutions Annuity Marketplace offers single premium immediate annuities, deferred income annuities, longevity insurance, and qualified longevity annuity contracts (QLACs), which are deferred income annuities purchased with tax-deferred money and have income start dates after age 70½. Premiums on QLACs are limited to $125,000 or 25% of the client’s tax-deferred savings, whichever is less. Hueler doesn’t sell variable annuities or indexed annuities.

In 2012, General Motors closed its defined benefit plan and offered 42,000 white-collar retirees a lump sum settlement in lieu of monthly pension payments. GM transferred responsibility for the retirement benefits of 76,000 others to Prudential by purchasing a group annuity for between $2 billion and $3 billion. The deal was reported to reduce GM’s $134 billion global pension obligations by about $26 billion.  

Speaking with RIJ yesterday, Kelli Hueler said the deal was struck after a lengthy due diligence process involving GM’s corporate treasury, asset management and human resources departments. According to Hueler, her service’s simplicity and transparency are attractive to certain plan sponsors. These are typically sponsors who feel an obligation to offer income options to retirees but find the s0-called ‘in plan’ annuity options (where future income is purchased prior to retirement) too difficult to change if necessary, or fraught with potential legal risks and liabilities. Income Solutions is an ‘out of plan’ option—it involves a rollover—and asks little of plan sponsors beyond a commitment to a reasonable amount of internal promotion.  

“This agreement [with GM] makes a statement about our value proposition. It’s resonating with employers. They like the independence of Income Solutions, the full disclosure of compensation, the competitive bidding aspect, the level fees, the objective presentation,” Hueler said in an interview.  

Hueler’s main business contacts are on the institutional side of the retirement industry. Ten years ago, while running a stable value fund data business for retirement plans, she noticed that near-retirees were at a disadvantage in the marketplace because they couldn’t readily compare the prices of a broad range of annuities, whose prices by manufacturer and from month to month.

She knew that an unsavvy or ill-timed purchase by an individual could easily reduce monthly income benefits by as much as 10%. Captive agents promoted only their employers’ products. Open-architecture Internet platforms such as immediateannuities.com were available to individual purchasers, but not as retirement plan option. 

“In 2014 we revamped our delivery of the program, and required collaborative communication and ongoing communication. It’s very different from way we started the platform in the early days. The communication is key. We also service the plan participants. Our help center is able to assist the participants. Our goals in help center are to explain annuitization, to assist participants with purchasing as the need arises,” she told RIJ.

“We play a more active role today than organizations may remember us having. In the last five or six years, it’s become a more high touch program. There’s a lot of e-messaging. We have communications where they can use the income estimator right in the communication. Our approach focuses on partial annuitizations. If the plan sponsors don’t already allow partial annuitizations, we advocate for that. We also advocate for participants to keep the rest of their assets in the plan.”

Amid the current debate over the Department of Labor’s proposed fiduciary rule, which aims in part to shield participants from aggressive rollover marketing at the point of retirement, plan sponsors are sensitive about who they let approach their participants about rollovers. In such a climate, the Hueler model appeals to them.   

“We’re not a product manufacturer that might want to sell other products to the participant. It’s clear what our goal is,” Hueler told RIJ. “When we started this business, we structured the program so that it could fit any fiduciary process. We wanted to remove conflicts, ‘pay-to-play’ arrangements, and issuer selection objectives, and to provide level fees and full disclosure.

“If you keep the process opaque and you’re steering people to one product or another, you lose all credibility. We made strategic decisions early on that were unpopular at the time, and very different from the rest of the marketplace. All of that was self-imposed. But now the world around us has woken up to all of that. Those things are seen as the future.

© 2015 RIJ Publishing LLC. All rights reserved.

Managed-Payout Funds vs. Annuities: Who Wins?

Managed-payout funds promise to meet retirees’ need for sustainable lifetime income without relying on annuities. To see whether this promise can be fulfilled, I’ll answer three questions: What’s the best design for such funds? How do they compare to annuities? Can retirees do even better by combining managed-payout funds and annuities?

A managed-payout fund aims to provide sustainable retirement income, either over a fixed time horizon or over the lifetime of the investor. A handful of companies offer managed-payout funds and more are on the way. The funds have not gained much popularity because most were launched just before the financial crisis and immediately produced poor results.

PIMCO offers real-income funds based on TIPS ladders but with end dates, so the funds don’t offer longevity protection. Fidelity’s Retirement Income Series also uses target-liquidation dates. Vanguard’s Managed Payout Fund is more lifetime-focused with payouts targeted at 4% of fund balance. Schwab offers Monthly Income Funds that, like Vanguard, pay out a percentage of the fund balance.

However, Schwab varies the percentage payout to avoid dipping into principal, whereas Vanguard smoothes results over multiple years and aims to maintain the 4%. The latest entry in this category is the retirement spending account from Natixis. It is the most ambitious approach with a goal of providing inflation-adjusted retirement income for life but without an annuity.

Finding the best strategy

There is a natural question that arises from examining these different offerings: “Which strategy will work best?” By “working best,” we need to consider both the level of income produced and the risk that the strategy will fail. I’ll answer those questions by evaluating a few generic options and relate my results to specific fund offerings.

There are a variety of strategic choices for those designing managed payout funds:

  • Income generated – fixed at inception or varying with investment performance
  • Stock/bond allocation
  • Use of additional asset classes
  • Investment glide path – level or with increasing or decreasing stock allocation
  • Annual withdrawal percentages – level or varying with age

I’ll use an example to compare the impacts of various choices with the objective of identifying the best ways to produce as much income as possible without taking undue risk.

The example

This example is based on a 65-year-old female with a remaining life expectancy of 25 years. She has $1 million in savings and will be receiving $20,000 per year in Social Security. Her essential expenses are $50,000 per year increasing with inflation, so she needs to generate at least $30,000 per year in real terms to pay for essentials. I assume that she has sufficient insurance for contingencies such as long-term care and a separate emergency fund, so she can devote the full $1 million to generating retirement income.

In designing generic options for this example, I assume that stocks will earn a real return averaging 5.15% with a standard deviation of 20.5% and bond real returns will average 0.5% with a 7% standard deviation. These assumed returns are significantly below historical averages, reflecting current interest rates and a lower-than-historical equity risk premium. I deduct 0.15% as a base level for investment expenses and discuss the implications of higher expenses for actual product offerings. Monte Carlo simulations are used to generate yearly returns, and the year of death is also modeled stochastically. The analysis is pre-tax and future dollar figures are stated in real terms without inflation.

A Natixis strategy based on the 4% rule

I’ll start with a strategy based on the classic 4% rule, where the first year’s withdrawal equals 4% of savings and withdrawals increase each year for inflation. Withdrawals do not adjust for good or bad investment performance. This is a generalization of the strategy that Natixis uses for its retirement spending accounts, which are set up as separate accounts and include Natixis’s affiliate mutual funds and ETFs. They offer distinct strategies for investors starting retirement around years 2000, 2005, 2010 or 2015 and also offer a 5% rule option. The separate accounts are offered through advisors.

The chart below shows projected outcomes, first based on a simple 50/50 stock/bond allocation and then adjusted to incorporate strategic options aimed at improving the outcomes.Tomlinson Nataxis chart

First, some definitions. The average consumption combines the $20,000 in Social Security income and withdrawals from savings. The certainty equivalent consumption uses utility analysis and the assumption of diminishing marginal utility to recognize that the gain in psychological wellbeing from an additional dollar of consumption is less than the psychological diminishment from a dollar decrease. So for non-level consumption, the certainty equivalent will be less than the average consumption. For this particular analysis, I assume a risk-averse individual to recognize the potentially disruptive impact of depleting savings and not being able to pay for essential expenses.

Failure percent is the percentage of Monte Carlo simulations where consumption drops to a level that fails to meet essential expenses, and average shortfall is a measure that combines the probability, magnitude, and duration of failure. I also show median bequests.

The first line of the chart shows results with a 50/50 stock/bond allocation under a straightforward application of the 4% rule, and I will use this as a base case in comparing strategies. This withdrawal approach is likely to result in significant disruption to retirement plans. So we need to look for ways to improve things.

I’ll test an approach that mimics parts of the Natixis strategy. They indicate in their press release and marketing materials that they utilize a wide variety of asset classes, so I’ll first analyze how much outcomes can be improved by bringing in additional asset classes and fine-tuning the allocations. Natixis doesn’t provide asset class details, so I’ll use a generic approach based on return, risk and correlation assumptions from Sungard’s AllocationMaster software.

Sungard’s optimal portfolios include a significant weighting for international stocks and small-cap value. With a 50/50 stock/bond mix, gross average real portfolio returns increase from 2.83% for the base case to 3.75% with the fine-tuned asset allocation, and the standard deviation decreases from 10.83% to 10.66%. These changes are a result of optimizing the mix of asset classes; I have not added anything for investment selection skill.

I’ve also made an adjustment to reflect the Natixis annual expense charge of 1% versus 0.15% for the base case. The results are shown in the second line of the chart, and they are essentially the same as the base case. The improvements from the asset allocation are offset by the increased expenses.

The Natixis product features a trademarked Adaptive Retirement Income Glidepath, starting with a low stock allocation at retirement, rising until mid-retirement and then declining. To model the glide path, I start with the same expense and asset class return assumptions as in line 2 and replace the level 50/50 allocation with one that starts at 35% stocks rising to 65% at age 80 and falling back to 35% for age 95 and thereafter.

The primary purpose of such a glide path is to avoid sequence of return risk early in retirement. This is a similar approach to the rising equity glide path proposed a few years ago by Wade Pfau and Michael Kitces and described in this paper. The outcome of applying this glide path is shown in the third line of the chart, and the perhaps surprising result is that there is little effect on results.

This becomes less of a surprise if one goes back and examines the actual charts in the Kitces and Pfau paper. They show improvement using the rising glide path strategy, but the improvement is marginal. My view of what’s happening is that one can avoid volatility and bad return scenarios with a low stock allocation early in retirement, but a heavy investment in bonds with low returns locks in mediocre portfolio returns.

So what does all of this tell us about the Natixis product and other similar approaches to retirement withdrawals? Attempting to generate a withdrawal pattern that is set at inception and doesn’t adjust for investment performance is a big challenge. The Natixis patented glide path may have marketing appeal, but it does little to help performance. Asset allocation fine-tuning shows potential to help but is offset by expense charges. So success for this product will require significant additional returns generated though investment selection.

My rough calculation indicates that bringing the failure percentage down from over 25% to 10% would require an additional 1.70% of average portfolio return. Generating higher returns will be the big challenge for Natixis. They are offering a new product with an ambitious objective for meeting retirement needs, and their efforts will bear watching. I’ll now turn to other approaches.

Changing the withdrawal method

The Vanguard Managed Payout Fund (VPGDX) described here uses an approach where withdrawals are targeted at 4% of the ongoing fund balance rather than being set at inception. To reduce the volatility of withdrawals, Vanguard uses a three-year-average fund balance. In the chart below the top line is again the base case using the 4% rule and a 50/50 stock/bond portfolio, and the second line is my simulation of the Vanguard strategy.

Tomlinson Vanguard chart

Vanguard runs its Managed Payout Fund with a heavy concentration in stocks, so I have raised the assumed stock allocation to 75% in the second line above. I’ve also reflected Vanguard’s expense charges of 0.42% compared to 0.15% for the base case. Similar to Natixis, Vanguard fine-tunes its asset allocation, so I have used the same gross return assumptions I used for the Natixis analysis.

The Vanguard approach shows significant improvement over the base case in terms of income produced, risk measures and bequests. The main driver of these improved results is a withdrawal strategy that responds to investment results.

The Vanguard strategy beats the Natixis approach unless Natixis can produce dramatically superior investment performance. Unlike many Vanguard products, the Vanguard Managed Payout Fund relies heavily on active managers and a few uncommon asset classes (e.g., market neutral), so they are also betting on investment selection to a certain degree. I have not included any extra assumed return from investment selection.

For the final line of the chart I switched the Vanguard 4% approach to required minimum distributions (RMDs) that increase the withdrawal percentage as a function of age, but I kept all the other parameters the same. RMDs can be thought of as an economist’s life-cycle approach in that withdrawals are recalculated each year to smooth consumption over the remainder of one’s life.

With RMDs we are able to generate more average consumption but with more variability, so the certainty equivalent declines more. Whether this approach is superior to Vanguard’s or not depends on the individual tolerance for volatility of consumption and emphasis on consumption versus bequests. Either the Vanguard approach or RMDs can work well because withdrawals respond to investment performance. I’m not aware of any managed payout products built on this RMD approach, but it is worth considering.

Tomlinson annuity chart

For the full annuitization strategy, I assume the entire $1 million of savings is invested in an inflation- adjusted single-premium immediate annuity (SPIA) that pays $47,600 annually based on current market rates. Because the income doesn’t vary, the average consumption and certainty equivalent are the same. Also, because this strategy produces $67,600 of consumption per year for life, there are no shortfalls in relation to the $50,000 of essential expenses. However, there is also no bequest, regardless of length of life and no liquidity.

The third line of the chart above shows partial annuitization with $630,252 of savings used to purchase an inflation-adjusted SPIA, producing $30,000 of annual income to fill in the essential expense gap and the remaining $369,748 invested in an RMD strategy. This approach, which combines a SPIA and managed payouts, is attractive on all measures.

Conclusion

We can expect continued efforts from investment companies to develop managed-payout products. Those that vary withdrawals as a function of investment performance show the most promise. However, unless withdrawals are set at extremely conservative levels, such an approach will fail if investment performance is subpar or if the client lives a long time. SPIAs overcome these problems, but they are inflexible. The best results can be obtained by combining SPIAs and flexible withdrawals.

Joe Tomlinson, an actuary, financial planner, researcher and writer, is managing director of Tomlinson Financial Planning, LLC in Greenville, Maine. This article first appeared at AdvisorPerspectives.com.

The People’s Retirement Industry Group

Ten years after the Retirement Income Industry Association appeared on the financial services scene, some people still wonder exactly what RIIA stands for, whom it represents, or where its French-born founder and chairman, Francois Gadenne, will take it next.

Relatively small in terms of membership or war chest, RIIA is unlike other financial trade groups. It doesn’t lobby for regulatory change. It doesn’t organize splashy trade exhibitions. Distinct from other groups in its space—the acronyms include IRI, ARA, SOA, LIMRA, DCIIA, FPA, NAPFA, SPARK—it doesn’t cheerlead for any particular industry sector or profession.  

RIIA’s contributions have largely been conceptual. It introduced the cross-disciplinary perspective of the “View Across the Silos.” It elevated a familiar annuity sales proposition (“First build a floor, then expose to upside”) to a guiding principle. It created a new advisor designation, the Retirement Management Analyst, and a curriculum for achieving it.

Founder-led organizations tend to be idiosyncratic, and so it is with RIIA. If its meetings have an unscripted academic vibe, if the guest and speaker lists are eclectic, if the tone is more entrepreneurial than corporate, if RIIA seems oddly consumer-centric for a trade group, and if some of the ideas are heretical, that’s because they reflect Gadenne’s own interests, values and personal history.

RIIA is preparing to mark its 10th year with its annual conference and an anniversary gala in Indianapolis on September 16-18. Gadenne recently spoke with RIJ about the organization’s past, present and future. (For transparency’s sake: RIJ has no formal ties to RIIA, but I helped edit drafts of early RIIA publications, attended many of its annual meetings, its webinars, and two of its advisor boot camps, and am an individual member of the organization.)

No solo silo

RIIA is primarily an educational organization. Its “Body of Knowledge” is a voluminous paperback textbook that advisors and individuals can use to create safe-money retirement income plans. The book is based on ideas about risk and return. Household economics and demographics come from economists Zvi Bodie and Robert Merton, Andrew Rudd of Advisor Software Inc., researchers at Strategic Business Insights and others.  

One of RIIA’s founding concepts, the View Across the Silos, gave the “retirement industry” a name and provided a map of its components. These included manufacturers (annuity issuers and mutual fund firms), distributors (wirehouses, independent advisors and insurance agents) and consumers (rich, poor and in-between). RIIA called this map the “opportunity matrix.” It showed the elements of the industry as well as their relationships, relative strengths and potential synergies. No one else had ever done this.

RIIA’s slogan, “First build a Floor, then Expose to Upside,” refers to the idea, not original to RIIA, that retirees need a foundation of safe income plus growth potential through risky investments. It was shorthand for a sophisticated recognition, which Gadenne attributes to Bodie and Merton, that while accumulating wealth involves risk-taking, retirement planning involves taking certain risks off the table. 

The Society of Actuaries had already done a good job of cataloging the risks of retirement—longevity risk (the risk of outliving your money), inflation risk, market risk, sequence risk and others—but RIIA has helped raise awareness of them. “There are only four ways of dealing with risk,” Gadenne likes to say. “You can diversify it away, pool it, hedge it or reserve against it.”   

This’ll floor you

The two concepts—the “silos” and the “flooring”—are linked. RIIA’s philosophy is that the path to retirement income security leads through numerous combinations of products and advice channels on the opportunity matrix. Flooring can consist of bonds, bond ladders, income annuities, variable or fixed annuities with living benefits; upside exposure can come from any risky asset. The methodology embraces almost the entire universe. That explains the RIIA big-tent membership philosophy. RIIA Institutional members

The open architecture idea gave RIIA no natural constituency, however. In RIIA’s first three years, Gadenne and his Boston-based team reached out to the 401(k) industry to secure their membership base. When that industry retrenched after the financial crisis, RIIA received support from the life insurance companies. Over the past few years, RIIA has found an audience among independent advisors, to whom it offers a philosophy, a planning process, and one-week “boot camps” leading to an exam and a Retirement Management Analyst designation. Last June, The Wall Street Journal endorsed the RMA as one of the three best retirement designations in the U.S.

A journalist recently asked Gadenne if he thought the training for the other two designations (from The American College and the CFA Institute) was necessarily wrong. “The others weren’t wrong, we said. They’re incomplete. One measure of their incompleteness is that they only use asset allocation for risk management in retirement,” Gadenne said.

“The RMA uses all four risk management techniques. They don’t use risk management or risk avoidance. And, from what I know, they have no process. All the other offerings are toolboxes. With the RMA, you have a procedural flow chart and a framework. Having a framework is more than just having a laundry list.”

Client-centricity

The RIIA message defies conventional wisdom about retirement planning. Traditional retirement investing has been similar to accumulation investing, but with a shift toward bonds. Where most retirement planning still relies on probabilities about market performance, longevity and inflation, RIIA’s method aims to achieve outcomes with a degree of certainty.

Where mainstream retirement planning still focuses on investable assets and the products they buy—Gadenne calls this the “market view”—the RIIA method considers all of the assets and liabilities on each household’s “balance sheet.” That includes home equity, human capital (education and earning power), insurance, social capital (e.g., Social Security and Medicare) and debt. 

RIIA procedural prudence mapRIIA may also be the only financial trade group that takes the client’s point of view. It’s eclectic because there are lots of methods for generating retirement income, and because most retirees will eventually use several of them, at different times or in various combinations. In the brave new defined-contribution, serial-employment world, more Americans and advisors need to know this stuff.     

The client whose eyes RIIA first looked through was Gadenne. Ten years ago, while still in his 40s, he found himself in a position to retire. Having just been a purveyor of retirement services, he became an unusually well informed, motivated, inquisitive high-net-worth consumer of them.

That helps explain RIIA’s counter-intuitive character. “I am patient zero,” he told RIJ recently. “The view of the client is the view across the silos. It’s the same idea, except that one is expressed in industry view. As a client, I’m not interested in your silos. I’m interested in my household balance sheet. The client wants to buy a whole planning pizza and [financial services] companies want to sell him slices.”

French connection

Gadenne, who is 59, grew up in Lille, a small French industrial city near the Belgium border. His father was a notions wholesaler. Across a narrow street, his family’s home faced the wall of a factory that brewed Coq Hardi lager. Educated through high school by Jesuits, he received a business degree from the Ecole Superieure de Commerce de Paris. America beckoned; he took the GMAT and got an MBA at Northwestern’s Kellogg School of Management in Evanston, Ill.

Stints at Abbott Laboratories and Arthur D. Little consulting followed, but it was during his 10-year employment at the Bank of Boston that he became involved in three major components of the retirement business: mutual fund manufacturing, fund distribution, and the new field of technology-driven, web-mediated advice. He led a team that developed the “Wizard,” a client-server application for selling funds and servicing clients.  

This being the mid-1990s, he left big business and became an entrepreneur. In 1996, he and his partners created Rational Investors, Inc. and patented a technology that would allow 401(k) participants to create their own risk-based investment portfolios on the Internet—something akin to Financial Engines, which now dominates the market for automated 401(k) advice. 

Dot-com tycoon

Gadenne, as president and CEO of Rational Investors, became a wealthy man when, at the peak of the dot-com boom in 1999, he and his partners sold the company to Standard & Poor’s. S&P used the technology to drive its “401(k) Advisor,” a vehicle for putting S&P’s vast database to work in the burgeoning defined contribution industry. At 45, Gadenne suddenly faced the challenge of managing a big chunk of money over a period of four or five decades.

The path from there to RIIA was somewhat accidental. In 2004, Gadenne and partners, under the name Retirement Engineering, Inc., applied for a patent on a process for enabling 401(k) participants to build a pension—that is, create a defined benefit plan inside a defined contribution plan—that they could take as a lump sum or as an annuity when they retired. (A similar concept was the basis for the unsuccessful MetLife/BlackRock “SponsorMatch” program of the mid-2000s, and it underlies the Treasury Department’s QLAC deferred income annuity regulation.) 

During this pre-crisis, repressed interest rate period after the dot-com bust, Gadenne shopped his firm’s “DB in DC” technology to major asset managers. He peddled the notions that “retirement” was a discrete new business opportunity and that retirement planning was distinct from and unlike pre-retirement “accumulation” investing. He exchanged ideas with academics and authors such as Bodie, of Boston University and Moshe Milevsky of York University in Toronto. At Bodie’s urging, Gadenne became a part-time faculty member at the BU Questrom School of Business.

A trade group is born

While guest-speaking at industry conferences, Gadenne realized that no trade association yet existed that could distill intellectual and financial support for these ideas, codify and communicate them, and achieve a self-perpetuating critical mass. None of the existing trade groups bridged the cultural, informational and regulatory boundaries that divided the insurers and asset managers, the manufacturers and distributors, the brokers and planners, or the corporations and the entrepreneurs.

In 2005, the Institute for International Research, the organizer of the conferences where Gadenne spoke, suggested that he lead a retirement conference. “They said, ‘Would you like to be the chairman?’ I said, ‘Yes, but it will be done in the name of the Retirement Income Industry Association,’ ” he told RIJ. “We held the first RIIA conference at the Lafayette Hotel in Boston. The trigger was that IIR asked me to do a conference. During that conference, the ‘View Across the Silos’ emerged.” To eliminate conflicts of interest, Gadenne said, he put his patent-based business interests into a blind trust.

RIIA started with 28 institutional members, many of whom still support the association. (See list of current institutional members below.) Its website lists 1,138 individual members, including employees of institutional members, executives of other companies in the retirement industry, industry vendors and consultants, several dozen financial advisors who have achieved the RMA designation, and others.

As the retirement industry has convulsed over the past decade, RIIA’s base has evolved. As mentioned above, DC plan providers, then annuity manufacturers and then distributors have emerged as RIIA’s primary constituency. The writings of retirement researcher Wade Pfau, Ph.D., helped attract advisors to RIIA when he was aligned with the organization; he is now a professor at The American College. Indianapolis-based OneAmerica, whose affiliated agents and advisors sell American United Life Insurance products, is the primary sponsor of RIIA’s fall conference in that city.

To keep in touch with its members, to spread the RIIA message and to burnish its own thought-leadership credentials, RIIA has published a seasonal academic journal, the Retirement Management Journal, since 2012. Robert Powell, who writes the Retirement Weekly column at Marketwatch.com, edits the RMJ as well as a periodic supplement, Between the Issues, for RIIA. Issues of the RMJ, as well as the textbook for the RMA designation, are available on Amazon.

The future

Asked about the future of RIIA and of the retirement industry, Gadenne said, “My crystal ball is as bad as the next guy’s.” As for the industry’s future, “Two things are likely to become bigger stories. How big, I don’t know,” he said. The first was the growth of what he calls the “client-centric view” and the weakening of the “market-centric view” in retirement planning. “This notion of product allocation is a market point of view. “By market-centric I mean financial market-centric. This notion of product allocation, for instance, is a market point of view. ‘60-30-10’ is a market-centric view. The client-centric view is to look at the entire household balance sheet.”

The other major phenomenon, he predicted, will be the growth of robo-advice technology as tools for advisors more than for consumers. “The algorithm alone can do input, processing and output. And we can argue about whether or not it functions well enough to handle exceptions. But you need to sell me first. Something has to happen upstream of the tool. That the robos can do retirement planning, I have no doubt. But they will leverage something that involves interaction with a human.”

As for RIIA’s future, he’s excited about getting more advisors to use RIIA’s new RMA “Procedural Prudence Map” (at left above; click on graphic) which offers retirement advisors a checklist that can guide their work with clients. He hopes to raise awareness of PwC’s (PricewaterhouseCoopers) Retirement Income Model (RIM), which uses agent-based predictive modeling to help advisors customize plans for individual clients. 

 “I don’t have specific goals for increasing the membership, or increasing the number of RMAs,” Gadenne told RIJ. “The most important goal is to find something that moves the needle and that works to the good. ‘Tell me your clients are better off because of what you’ve learned as an RMA.’ We could get lifted by a big wave; or only a small number of people may become interested in it. Our measure of success is, ‘Are we doing good?’ I’m hoping we will.”

© 2015 RIJ Publishing LLC. All rights reserved.

Of Fly-Fishing and Financial Advice

In late August, not long after watching the four-day webcast on the Department of Labor’s proposed fiduciary rule for IRA advice, I went fly-fishing for trout in southwestern Montana. Brown trout, brook, cutthroat, grayling or rainbow—any old trout would do. I needed a break.

They say it takes a lifetime to learn how to fly-fish, and I started late. My knowledge of the fishable waters south of Bozeman is also limited. So I hired a guide. On a Google search, I picked one of the three guide services in Big Sky, MT, put down a deposit for a half-day wade and prayed for luck.

Hiring a fly-fishing guide can be a gamble. A professional guide costs at least $250 and easily much more. It depends on the length of your trip and whether you travel by foot, in a drift boat or on horseback. Success isn’t guaranteed. But once you see the image of a gleaming 20-pound fish on the outfitter’s webpage, of course, you tend to forget the odds—and the expense.

I’ve found it worthwhile to hire a guide, especially as someone new to this sport. Even if you catch nothing, you’re likely to learn a lot. Mark, my guide at Big Sky, was a bearded 28-year-old who spends his summers in Montana and his winters in Patagonia. We met at the fly shop, then climbed into his pickup and headed up Route 191 alongside the rocky, north-flowing Gallatin River. It was 9 a.m. Other anglers had already staked out positions on the well-known stream.

Let’s not fish your usual spots, I said to Mark as we drove. Let’s go someplace you don’t usually go, away from people and traffic. He suggested that we hike up Swan Creek, which was nearby. The fish won’t be as large as in the Gallatin, he said, but we’ll avoid the road noise and the crowds. Perfect, I said. Montana flyfishing art

Aside from the specialized rod and reel, fly-fishing involves patience, intelligence and an endless amount of lore. It starts with reading the streams. You look for flat, glassy pools or for stretches of braided water, known as riffles. Then you cast your fly lightly into the hole or let it float along the edge of the riffle, waiting for an unseen fish to take it.      

Your guide’s duties, meanwhile, resemble those of an expert golf caddy. The guide himself does not fish. He studies the stream. He hunkers down and peers through polarized lenses across the surface of the water, noting spots where trout like to hide. Where in golf a caddy interprets a lie and recommends a club, a flyfishing guide interprets a stream and recommends an imitation bug.

My guide and I had a successful morning. The clear bright stream looked like a vintage ad for Coors. The pink-and-green brook trout were gullible. A better fisherman would surely have caught two dozen; given my early stage of apprenticeship, I was happy to land four. They included as large a brookie, my guide kindly said, as one could hope to pull from a small Montana creek in August.

Later, back at the fly shop, I settled my bill. When the guides operate as agents of an outfitter, it is customary to pay the outfitter a pre-arranged fee and to offer the guide a discretionary tip. In this case, I paid $260 to the outfitter and offered $120 to my guide. Having paid more for less on previous trips, I had no quarrel with it.    

While writing this, and recalling the DOL hearings, it occurred to me that I and most other people would hope that our investment advisors or financial planners would render us the same quality of service, at least in spirit, that I received from my Montana fishing guide last week.

That service, I imagine, would include receptivity to our concerns, a degree of expertise and experience that we lacked, and a method of compensation that linked his (or her) success with ours. As it happened, Mark told me that one of his parents, a Certified Financial Planner, wants him to follow her into the business. I told him that he already possessed several of the most important skills.

© 2015 RIJ Publishing LLC. All rights reserved.

Jackson National adds income rider to indexed annuity

Jackson National Life, the U.S. life insurance unit of Britain’s Prudential plc, has added a lifetime income benefit called LifePay to its AscenderPlus Select line of fixed indexed annuities (FIAs). The new contract replaces the current AscenderPlus Select contract and is available in all states but New York.

Jackson may be trying to balance out its big book of annuity business. While Jackson dominated the variable annuity business in the first half of this year, with $11.8 billion in sales and an 18.4% market share, it isn’t among the 20 largest sellers of fixed annuities, according to LIMRA.

FIAs have been the main driver of sales growth in the annuity industry in recent years, with steady sales increases in 2012, 2013 and 2014. Rising FIA sales have compensated for declines in VA sales, which have slowed despite strong equity markets. This year, however, total annuity sales are headed for their first YOY decline since 2011.

Now, even FIAs have lost their momentum. Sales in the second quarter of 2015 were down 4%, to $12.5 billion, compared to the same period a year earlier. The second quarter drop pulled FIA sales for the first half of the year down by one percent, to $24.1 billion, according to LIMRA, whose quarterly sales survey covers 62 issuers representing 97% of the market.

The LifePay rider costs 50 basis points for single life and 80 basis points for joint life contracts. It features a guaranteed 5% roll-up in the benefit base for every year a withdrawal isn’t taken during the first 10 contract years, plus the potential for “step-ups” on the contract anniversaries if the account value exceeds the benefit base.

The payout rate, based on the age of the youngest annuitant, starts at 3% for those ages 45 to 54 and climbs in 50-basis point increments to 7.5% at age 85 and older. The surrender period lasts 10 years, starting at 8.5% (or nine years, starting at 8.25% in California).

In addition to the living benefit option, Jackson said it has added a new proprietary index, the Strategic4 Index, to AscenderPlus Select’s index options. “Strategic4 is exclusive to the Jackson AscenderPlus Select FIA and provides contract-holders the opportunity to further diversify their income through a U.S.-focused market index composed of 120 companies within the S&P 500 Index,” the company said in a release. “The index is designed for broad diversification across each of its four pre-determined and weighted selection criteria.”

Each year, Jackson re-stocks the Strategic4 Index with equal investments in:

  • Each of the 30 companies in the S&P500 that have the strongest return-on-invested-capital and best price-to-book ratios.
  • Each of the 30 that have the highest free cash flow yields.
  • Each of the 30 that “generate positive cash flow and provide high total yield to shareholders.”
  • The three companies with the highest dividend yields in each of the ten industry sectors of the S&P500. 

The contract offers two other indexes, the S&P 500 Index and Jackson’s proprietary Multi-Strategy Index. This index represents equal investments in five categories: the 10 companies in the DJIA with the highest dividend yields, 10 select large-cap stocks, 100 select small-cap stocks, 15 global stocks and 25 value stocks. Contract-holders can allocate their premiums to any combination of indexes, in whole percentages.

© 2015 RIJ Publishing LLC. All rights reserved.

Annuity sales up in second quarter, but down for first half of 2015: LIMRA

U.S. annuity sales totaled $60.2 billion in the second quarter 2015, three percent lower than sales recorded prior year, according to LIMRA Secure Retirement Institute’s second quarter U.S. Individual Annuities Sales Survey.

“Second quarter annuity sales results were 10% higher than in the first quarter. Annuity sales were strong—since 2010, quarterly annuity sales have only reached $60 billion five times,” noted Todd Giesing, senior business analyst, LIMRA Secure Retirement Research. “However, last year’s sales were particularly strong and lower interest rates played a role in undercutting this year’s growth.”

In the first half of the year, total annuity sales reached $114.6 billion, 5% lower than prior year. LIMRA Secure Retirement Institute’s second quarter U.S. Individual Annuities Sales Survey represents data from 97% of the market.

The Institute’s research shows variable annuity (VA) sales have been stronger in the second quarter than in the first quarter for the past 11 years.  This was the case this quarter as well. VA sales jumped 11% from first quarter. But VA sales were $36 billion, one percent lower than prior year. Year-to-date, VA sales were down three percent, to $68.4 billion. 

Preliminary results indicate that election rates for guaranteed living benefit (GLB) riders when available will be slightly higher than prior quarter (77%).

While interest rates have risen throughout the year, they still are below the rates enjoyed at the same time of 2014.  As a result, total sales of fixed annuities were down six percent in the second quarter, to $24.2 billion.  In the first six months of 2015, fixed sales were down seven percent, to $46.2 billion. 

Fixed rate deferred annuities declined five percent in the second quarter, totaling $7.5 billion.  In the first six months of 2015, fixed-rate deferred sales were $14.0 billion, 14% lower than last year. 

Indexed annuity sales were $12.5 billion, the second strongest quarter in history.  However, the best sales quarter for indexed annuities occurred in the same period of last year, resulting in a four percent decline for the second quarter 2015.

“We are seeing a purposeful shift in market share among the top indexed annuity companies. LIMRA Secure Retirement Institute predicts total indexed annuity sales in 2015 to be level to slightly less than 2014 results,” Giesing said. 

Year to date, indexed annuities sales equaled $24.1 billion, down one percent compared to prior year.

Preliminary results for indexed annuity GLBs election rates (when available) are 68% (level with prior quarter). 

Low interest rates impacted single premium income annuity (SPIA) sales in the second quarter. SPIA sales were off 15% for the quarter to $2.2 billion. In the first six months of 2015, SPIA sales were $4.2 billion, down 18%. 

Deferred income annuity (DIA) sales were $551 million, 23% lower than second quarter of 2014. This is the lowest quarterly sales level since second quarter of 2013. 

LIMRA Secure Retirement Institute reports there are now 16 carriers offering DIAs, up from nine in 2013. Nine companies are now offering the QLAC, a DIA for qualified (tax-deferred) money.

The 2015 second quarter Annuities Industry Estimates can be found in the updated Data Bank. To view the top twenty rankings of total, variable and fixed annuity writers for second quarter 2015, please visit 2015 Second Quarter Annuity Rankings. To view variable, fixed and total annuity sales over the past 10 years, please visit Annuity Sales 2005-2014

© 2015 RIJ Publishing LLC. All rights reserved.

After nine years, Boeing settles 401(k) fiduciary suit

Boeing, the Seattle-based airplane manufacturer, has settled Spano v. Boeing, the class action federal law suit brought against it nine years ago by Schlichter, Bogard & Denton, the St. Louis law firm that specializes in filing such suits against large 401(k) plan providers and plan sponsors for breach of fiduciary duty toward participants.   

The suit, filed on behalf of 190,000 Boeing employees and retirees, had accused the aircraft builder of charging excessive investment fees to participants in the $44 billion Boeing Voluntary Investment Plan, the nation’s second largest 401(k) plan. Despite the settlement, Boeing denied the allegations and said it complied in all respects with the law.

In a complaint originally filed in September 2006, the plaintiffs alleged that Boeing breached its fiduciary duties under the Employee Retirement Income Security Act (ERISA). Plaintiffs alleged that Boeing mismanaged the 401(k) plan to the detriment of its employees in violation of its fiduciary obligations.

Specifically, plaintiffs alleged Boeing knowingly allowed the recordkeeper, CitiStreet, to charge employees and retirees excessive fees. In addition, plaintiffs alleged Boeing kept expensive and unduly risky investment options in the plan, leading to a loss of retirement assets to employees and retirees.

A notice of the settlement was filed by the parties in the Court of Chief Judge Nancy J. Rosenstengel of the U.S. District Court for the Southern District of Illinois.

© 2015 RIJ Publishing LLC. All rights reserved.

Pensions should fear longevity gains more than low rates: Fitch

Defined benefit (DB) plan deficits are more vulnerable than to longevity risk than to the low interest rates, Fitch Ratings has warned German and UK financial companies, according to a report in IPE.com.

While a fall in the discount rates used by DB plans had recently driven up liabilities, its impact was not a serious as long-term increases in longevity, Fitch said.

According to the ratings agency’s analyses, pension deficits rose 38% in 19 UK listed companies and 44% in 14 German listed companies over the course of 2014 as a result of low rates.

For the UK schemes, however, Fitch suggested that an increase in longevity assumptions by two years would immediately add £1.3bn, or 9.2%, to average deficits in its sample, with little chance of a reversal.

By contrast, the agency said, yields for corporate bonds used in International Financial Reporting Standards (IFRS) would eventually rise and reduce liabilities on that front.

“It would take discount rates to move from the current 3.5% to 4.7% to wipe out the current average deficit of £2.7bn based on our sample of UK corporates,” Fitch said.

“Low rates have been the main factor behind big increases in corporate pension deficits in the UK and Germany. But interest rates are expected to increase in the medium term, which will eventually at least partially reverse the deteriorating deficits.

“An increase in longevity beyond what has already been factored into expected pension obligations, however, would lead to an increase in deficits and would be highly unlikely to be reversed. Historically, pension schemes have tended to underestimate these improvements, suggesting their longevity assumptions may have to be revised up,” Fitch’s report added.

Fitch said there were few significant changes in longevity assumptions used in company pension scheme accounting in 2014 compared to 2013.

The ratings agency said expected increases in interest rates and longevity could offset each other, with its impact on funding depending on the timing of the change, the discount rate and investment returns.

“If the longevity assumption improves further in future – the pension deficits will follow suit,” it added.

© RIJ Publishing LLC. All rights reserved.

The Bucket

Annuity sales improve in 2Q2015: IRI

Industry-wide annuity sales in the second quarter of 2015 reached $58.4 billion, a 10.8% increase from $52.7 billion in the first quarter of 2015, but a 2.5% percent decline from $59.9 billion in the second quarter of 2014, according to the second-quarter 2015 sales survey by the Insured Retirement Institute, Morningstar and Beacon Research.

Variable annuity total sales rose sharply in the second quarter of 2015 to $35.6 billion, according to Morningstar. This was an 11.7% increase from $31.8 billion in the first quarter of 2015 and virtually unchanged from the second quarter of 2014. Meanwhile fixed annuity sales totaled $22.8 billion in the second quarter of 2015, according to Beacon Research. This was a 9.5% increase from $20.9 billion during the previous quarter, but a 5.9% decline from $24.3 billion in the second quarter of 2014, when sales reached their highest level in five years. 

According to Morningstar, variable annuity net sales were estimated to be $2.9 billion, returning to positive territory, as sales and additional premiums outpaced redemption activity. Variable annuity net assets also were up at the end of the second quarter of 2015. Variable annuity net assets were $1.98 trillion, a 1.8% increase from $1.95 trillion at the end of the first quarter of 2015 and a 2.5% increase from $1.93 trillion at the end of the second quarter of 2014. Within the variable annuity market, there were $23.2 billion in qualified sales and $12.4 billion in non-qualified sales during the second quarter of 2015.

“The second quarter jump in variable annuity sales was consistent across the board, with eight of the top 10 insurers posting sales gains in the second quarter compared with the first quarter,” said John McCarthy, Senior Product Manager, Annuity Products, for Morningstar. “While demand appears to be picking up, year-to-date sales are tracking slightly below last year’s levels, largely because of weaker equity market performance and historically low interest rates.”

[Click here to access complete variable annuity sales data in the PDF version of this release.] 

According to Beacon Research, sales of all types of fixed annuities increased from the previous quarter, with fixed indexed annuities leading the way in terms of overall sales. Sales of fixed indexed annuities recorded their second best quarter of all time, totaling $12.6 billion. This was an 8.3% increase from first-quarter sales of $11.6 billion, and down just 2.7% from the all-time high of $12.9 billion set in the second quarter of 2014. For the entire fixed annuity market, there were approximately $13 billion in qualified sales and $9.8 billion in non-qualified sales during the second quarter of 2015.

“Overall sales were strong in Q2, with gains in all fixed product types,” Beacon Research President Jeremy Alexander said. “Fixed indexed sales led the pack, with close to a billion dollar increase from Q1. The growth in fixed indexed sales was strong across all distribution channels. Captive agents, wirehouses, independent broker-dealers, as well as banks and savings and loans reported record indexed sales with quarterly increases of 29%, 30%, 38%, and 12%, respectively.”

[Click here to access complete fixed annuity sales data in the PDF version of this release.]

Illness, unemployment drive early SS claims: Nationwide

More than four in five recent retirees (83%) started taking their benefits before their full retirement age (FRA) and received 49% income less than those who claim benefits later, according to a new survey conducted by Harris Poll and sponsored by the Nationwide Retirement Institute.

The survey of more than 900 adults aged 50 or older who are retired or plan to be in the next 10 years showed that 76% of recent retirees who are currently collecting Social Security benefits would not change the decision to claim early. More than half (61%) said a life event forced them to file.

Of the 76% who would not change their decision, 38% said they filed early because they needed the money, 30% said they had health problems, ad 24% said they had lost their jobs. Retirees who started getting Social Security early reported an average monthly payment of $1,174, compared with $1,590 for those who started at the FRA and $1,752 for those who started later.

According to the survey:

  • More than a third of future retirees (36%) plan to work in retirement, but just one percent of those who are retired actually do.
  • One in four retirees who plan to draw benefits early (24%) say they will do so because they worry Social Security funding will run out before their FRA.
  • One in five future retirees (21%) say Social Security should be enough on its own to help them live comfortably in retirement. One in four recent retirees have no other source of retirement income (26%).
  • Future retirees expect Social Security to cover 52% of their retirement expenses when in reality it’s closer to 40%. 
  • One in five (22%) future retirees who plan to draw benefits early say they plan to do so because they don’t think they will live long enough to make it worth optimizing.
  • Only two percent of future retirees expect to get divorced in retirement, but 18% of current retirees actually did.

Northern Trust expands retirement business

Northern Trust Corp., which custodies $6.2 trillion and manages almost $1 trillion, is expanding its Defined Contribution Solutions team with key hires, the company has announced.

Sabrina Bailey has joined Northern Trust Asset Management as Global Head of Defined Contribution, a new position. Bailey had been head of the U.S. defined contribution segment for Mercer Investment Consulting.

Prior to working at Mercer, Bailey held senior consulting, client service and management roles at Towers Watson and two other firms. She earned B.A. and M.B.A. degrees from George Fox University in Newberg, Oregon.

Northern Trust also hired Gaobo Pang, Ph.D, as Senior Behavioral Finance Specialist. Pang is known for his work at consultant Towers Watson and the World Bank, where he dealt with macroeconomic and policy research, statistical and econometric analysis of workers’ labor behavior, savings adequacy and investment choices, and developing and evaluating optimal strategies, particularly about qualified default investment alternatives and retirement income solutions.

He has published extensively in periodicals including the Journal of Retirement, Journal of Pension Economics and Finance and Financial Analysts Journal. Pang earned a Ph.D. in Economics from the University of Maryland, College Park, master’s degrees from Tsingua University in Beijing, China, and the University of Maryland, and a B.A. in International Economics at Fudan University in Shanghai, China.

In addition to the external hires, Brian Bursua and Patrick Gaskin have also joined the DC Solutions group in sales and service roles from within Northern Trust, to serve the recordkeeper channel.

Defined contribution assets under management at Northern Trust have grown to approximately $120 billion as of June 30, 2015, including more than $7.5 billion in target date investments, the company said in a release. Northern Trust also administers about $290 billion in defined contribution assets. 

Asset managers intend to change share class offerings: Cerulli

Close to 60% of investment management firms plans to modify their class offerings, according to the findings of Cerulli Associates’ 2015 Business Strategy Survey, which were reported in the August 2105 of The Cerulli Edge – U.S. Monthly Products Edition.

Of those 60%, about one in four (24%) plan to add share classes, primarily cited as R6 or some zero revenue share class. Another 24% plans to move away from B-shares and higher 12b-1 share classes. The remaining 12% plan to consolidate share classes or make other changes. 

Other findings of The Cerulli Edge:

Overall, asset figures increased in July, with mutual funds ending the month up 0.1% at $12.5 trillion and ETFs up 1.4% to $2.1 trillion. While mutual funds bled nearly $11 billion during July, reducing the YTD total flow to $113.7 billion, ETFs rebounded from a June dip to reap flows of $25.3 billion. 

Low-fee passive institutional strategies experienced significant outflows in 2Q 2015. Cerulli believes that the framework of the active/passive debate will change from an either/or proposition to how both approaches can be used in more customized, objectives-based multi-asset-class strategies (MACS).

Independent advisory firm aligns with Lincoln Financial

Wealth Advisors Group, an independent financial services firm, said it has realigned its broker-dealer affiliation with Lincoln Financial Advisors (LFA), one of Lincoln Financial Network’s two broker-dealers.

According to Stefan Lambert, managing director of LFA’s Greater Washington, D.C., office, Wealth Advisors Group president David Urovsky and his team will be affiliated with LFA’s Washington, D.C. regional planning office. The office includes a local planning department, local operations department and local technology team.   

In other news, Lincoln Financial Group’s Retirement Plan Services business named Javier Obando as director of business development on its Institutional Retirement Distribution (IRD) team.

Obando, based in Los Angeles, will work with government plan sponsors, national and regional independent registered advisor and consulting firms in the western region of the country, helping plan sponsors and advisors address fiduciary governance and plan design issues. He reports to Jason Key, IRD head of business development for Lincoln’s Retirement Plan Services business.

Prior to joining Lincoln, Obando was regional sales director for Empower (formerly Great-West Retirement Services), where he focused on the government sector. Obando was also a retirement consultant with Benefit Funding Services Group and a regional director at Prudential Retirement.

Obando received a B.S. degree in business administration from California State Polytechnic University. He holds series 6 and 63 FINRA registrations and California Life and Disability licenses.

Allianz Life appoints new CIO

Allianz Life Insurance Co. of North America has promoted Todd Hedtke to senior vice president and chief investment officer for Allianz Investment Management (AIM) US, reporting to Allianz Life president and CEO Walter White.

Hedtke succeeds Carsten Quitter as head of the AIM investment leadership team and joins the company’s Executive Leadership Group. Quitter will join Allianz S.p.A. in Italy as chief investment officer.

As CIO, Hedtke is responsible for investment management, liquidity planning, hedging, and trading of more than $100 billion of insurance assets for Allianz Life Insurance Company of North America, Allianz Global Corporate & Specialty and San Francisco Reinsurance. He is also a member of the global AIM Board, which services the Allianz Group insurance companies.

A 15-year veteran at Allianz Life, Hedtke previously led the General Account Investment Management function within the AIM division. Before coming to Allianz Life, Hedtke held various investment and finance positions at Cargill, EBF & Associates, and American Express Financial Advisors. He has a BA in Management from Hamline University and an MBA from the University of Minnesota. He holds the chartered financial analyst (CFA), financial risk manager, and FLMI designations.

The Principal acquires AXA’s Hong Kong pension business

The Principal Financial Group, Inc. has completed its acquisition of AXA’s Mandatory Provident Fund (MPF) and Occupational Retirement Schemes Ordinance (ORSO) pension business in Hong Kong.

On Nov. 7, 2014, The Principal announced a definitive agreement to acquire AXA’s MPF and ORSO business in Hong Kong. The deal includes an exclusive 15-year distribution agreement to provide pension products through AXA’s extensive agency network in Hong Kong.

With this acquisition, The Principal becomes the fifth largest MPF provider in the market, increasing assets under management of its Hong Kong pension business to more than US $6 billion. The transaction is expected to be accretive to EPS and ROE in the first full year.

© 2015 RIJ Publishing. All rights reserved.

RetirePreneur: Edward Dressel

What I do: I’m the president and owner of Trust Builders, Inc. We provide retirement planning software for retirement advisors who serve the 401(k), 403(b) and federal spaces. Our software, The Retirement Analysis Kit (TRAK) offers financial planning retirement calculators including: Pension Maximization, Paycheck Analysis, Gap Calculators (with the ability to illustrate over 600 public pension plans), Tax Wise Distribution Strategy, Roth Conversion, Split Annuity, and Participant Benchmark reports. Our purpose is to keep it simple enough for individuals to understand. 

How we keep it simple: For example, when advisors use Paycheck Analysis, they don’t focus on increasing a person’s contribution from 3% to 8%. They ask participants, ‘By how much could you afford to reduce your take-home pay?’ Then the calculator illustrates the effect of an increased contribution to their qualified plan. Ed Dressel copy blockTRAK’s software might show their current paycheck and then a proposal that suggests a new take-home pay of, say, $2,000 versus $2,233. It makes it simple and easy to understand.

Who my clients are: We work with advisors in the retirement planning world who work with ‘middle America.’ Many middle-class Americans don’t get adequate retirement planning help. Participant education isn’t always enough. Plan sponsors are told to educate, but participants aren’t engaged. It’s more effective to say, ‘Here’s your statement and here’s what retirement will look like for you,’ based on your plan assets, outside assets and marital status. The DOL wants people to think about retirement planning when they come home from work, but that generally doesn’t happen. This software engages individuals about their retirement in a way that gets them to make decisions.

My business model: We license the software to advisors and to retirement plan providers like Metlife and MassMutual.

Where I came from: I have held various software development and marketing positions with the company since 1988.  

My entrepreneurial spirit: I’ve been an entrepreneur since I was a kid. I had a paper route, sold Kool-Aid as a kid. As an adult I did contract work for programming. I’ve always had the passion to go out on my own. Sometimes I miss the security of working for a company, but the advantages of having my own business—setting the goals, leading a team, developing long term relationships with customers—has been a lot of fun.

The most challenging part of growing a business: Federal regulations. That is absolutely the most challenging part. We’ve been through six rounds with FINRA on the same report, just trying to get their compliance approval. And then there is the challenge of finding personnel in small-town America. We are based in Dallas, Oregon, a town of only 15,000 people.

On operating from a small town: I like the quality-of-life here. I’m three minutes from home. There’s one stoplight between my home and the office. But, as we feel the pressure to hire more high-quality employees, we will eventually need to move to Salem, a city of several hundred thousand. That’s part of the growth process.   

How my values affect my business goals: I’m a faith-based person, and I see poverty as a real problem. Our company helps people retire and, the way I see it, that helps alleviate poverty. It’s hard to see people working in their 70s because they need the resources. There are bigger problems in the world, but I am passionate about this issue.

On volunteering with the local fire department:  I volunteer as a fire and medic chaplain. I work with men and women in my community who, when the alarm sounds, drop whatever they are doing and race to the emergency. As a chaplain, I work with the people affected by the event. After a house fire, I will help bring in the Red Cross in, or sit with someone while the medics assist a loved one. Some of those experiences have been difficult, but I like to bring comfort to those experiencing the brokenness of this world.

What I see ahead for retirement income: I see more use of online tools by advisors. People may try to do their own retirement planning on a website, and that model is being pushed on people. But it hasn’t been successful. I find the downplaying of the advisor’s role to be disappointing. People are intimidated by the task of retirement planning and an advisor can help them tremendously.

My view of robo-advisors: To create an asset allocation, one robo-advisor I know asks only three questions, including ‘What is your name?’ How does that help the client?   

The best retirement income plan for most people: The best plan is to be personally engaged. Most people need to be saving more now. Delays have a significant impact. As for annuities, there are all sorts of ways to fit them into retirement. Some people can’t sleep when they’re invested in equities. Also, when people understand the difference between needs (a place to live) and wishes (an annual European vacation), it helps them allocate their assets between guaranteed sources of income and risky investments.

What the retirement income industry can do better: A lot of software that advisors use is overly complex. Then there’s Monte Carlo analysis, which many people associate with gambling. By the time you explain what it really is, they’re disengaged. Even the concept of asset allocation is too academic for many people. The message, and the tools, should emphasize saving more today.

My view on the DOL fiduciary proposal: The DOL’s proposals will decrease the service that individuals get. The result will be to reduce retirement savings overall.  

My retirement philosophy: I would like to see people retire and not live in poverty or see a significant decline in quality of lifestyle. I don’t see myself retiring. I enjoy working and helping people succeed.  

© 2015 RIJ Publishing LLC. All rights reserved.

DOL Hearings: Wonkishly Stimulating

There was conflict, and it was interesting.

Although not as entertaining as, say, Megyn Kelly and the first Republican presidential debate, the three days of testimony and debate on the Department of  Labor’s conflict-of-interest proposal this week proved to be much more absorbing than your average C-SPAN broadcast.

And why not. The terms and conditions of managing $7.2 trillion in rollover IRA money are getting hashed out.

The webcast hearings, which end at mid-day today, have involved the testimony of over 100 witnesses, including financial industry advocates, attorneys, law and finance professors, consumer rights activists, at least one martyred whistleblower and a couple of just-folks insurance agents from the farm-and-ranch belt. 

The DOL grouped the witnesses into 25 panels of three or four each, often pairing natural antagonists in a way that prevented imbalance and monotony. There were boring patches where witnesses simply read written statements. But these patches were typically followed by a wonkishly stimulating Q&A period in which a panel of DOL officials, led by Deputy Assistant Secretary of Labor Tim Hauser, probed, prodded and sometimes provoked the witnesses. 

The hearings made one thing clear: The DOL specifically wants its proposal to close a 40-year-old “loophole,” written before the invention of 401(k)s and IRAs, that allows advisers considerable discretion in deciding when the legally-binding burden of “fiduciary” conduct applies to their conversations with and recommendations to clients. It was equally clear that advisers don’t want to surrender that discretion.

Overall, the DOL maintains that its proposal—now more than five years in the making—aims to lower costs and raise transparency in transactions involving tax-deferred savings, without unnecessarily restraining trade. Those likely to be most affected by the proposal—those who earn commissions on selling variable annuities and mutual funds to IRA owners—say it won’t work. 

Is the DOL naïve?

Will the proposal accomplish the DOL’s goal? It depends on the workability of the compromise at the heart of the regulation, which would allow brokers and agents to keep using the third-party commission compensation model as long as they sign a pledge to act “in the best interest” of the client “without regard” to their own compensation.

At the hearing, even the DOL seemed to have doubts whether such a compromise is practicable. At one point, Hauser asked Mark Smith of the Sutherland Asbill law firm if the DOL was “naïve” to believe that such a compromise could work. Smith said, “No.”

Yet most of the industry representatives who testified said brokers and agents couldn’t operate within the confines of this compromise. Tom Roberts of the Groom Law Group said, “The best interest standard is incompatible with any selling model that I have seen. It is exclusively in the interest of the [advice] recipient.”

Steve Saxon, also of Groom Law Group, said, as he has said before, that the proposal’s “without regard” clause, which requires advisers to promise to turn a blind eye to their own compensation when formulating advice, was too absolute, and would create too much legal liability for advisers.

One after another, industry representatives called the proposal “unworkable.” The changes in reporting responsibilities necessitated by compliance with the proposal would break their IT budgets, they said, and having a different standard of conduct for managing IRA money and taxable retail money would just confuse clients.

Addressing that last point, the DOL’s Hauser said,  “Congress created a statute that said there should be a special regulatory regime created for tax-preferred accounts, and we’re it. We do not want to make the broker model impossible. We agree that not everyone needs an ongoing advisory or RIA relationship. We just want to tamp down the conflicts.”

As for the accusation implicit in the DOL proposal that the industry has problems that require new regulation, no industry witness acknowledged the existence of problems. Indeed, the industry advocates and attorneys offered no direct response to the assertions by consumer activists and academics who, in their testimony, claimed that brokers’ recommendations are often determined more by a desire to enhance their own or their firms’ compensation than by the clients’ needs or interests.   

There was, in fact, considerable evidence to that effect. Mercer Bullard of the Business Law Institute at the University of Mississippi described in detail the way compensation dominates sales behavior in broker-dealers. His testimony was unique in laying bare brokerage compensation practices that appear designed to maximize sales. 

Arthur Raby of Rutgers, Jonathan Reuter of Boston College, Michael Finke of Texas Tech and others cited various studies that showed that commissions lead advisors to recommend sub-optimal investments or insurance products.

“Economic incentives matter. When a person or firm has chance to get much higher compensation, the allure of the higher compensation nearly always wins, to the disadvantage of consumers,” said Ron Rhoades of Western Kentucky University. Antoinette Schoar of MIT described a 2012 study where mystery shoppers sent to brokerages were steered away from index funds and encouraged to believe in the wisdom of chasing returns.

Several consumer advocates opposed the plank of the DOL proposal that sends client-broker disputes into mandatory binding arbitration. Joe Peiffer, president of the Public Investors Arbitration Bar Association, argued that the arbitration system is biased in favor of advisers. Consumer advocates also pointed to the ineffectiveness of disclosures in providing the transparency that clients need from brokers and financial advisers. 

Variable annuities as lightning rod

In the hearings, variable annuities received special attention. At least two consumer advocates cited instances where an adviser recommended that clients roll over 401(k) assets from low-cost institutional funds to high-fee variable annuities, to their detriment. At the same time, several industry advocates cited instances where buying a VA protected clients from market volatility and longevity risk.

VAs, perhaps because of their opaque fees, multiple moving parts and high commissions, have been singled out for special treatment in the DOL proposal. The proposal selectively requires commissioned sellers of VAs to take the “best interest” pledge that the industry finds unacceptable, while allowing fixed annuities to continue being sold under the long-standing and more flexible Prohibited Transaction Exemption 84-24.

Another contentious area involved the question of whether the proposal would backfire by reducing the access of small investors to advisory services. From the industry’s perspective, third-party commissions incentivize brokers to serve people who don’t have enough assets to interest fee-based advisers or who are unwilling to pay out-of-pocket for advice. In other words, these low-balance clients benefit from what might be called vendor financing.  

Consumer advocates rejected this as illogical. Since clients pay indirectly for such vendor financing without knowing it, they said, they clearly can afford to pay for advice in a more transparent framework. Sheryl Garrett of the Garrett Planning Network dismissed the idea that the proposal would deprive the middle-market of advice, pointing to advisors in her network who currently provide conflict-free advice to thousands of middle-income clients. 

She and others refuted arguments that taking away brokers’ incentives to advise the middle market meant the middle market would go without advice, or pay much more because the only alternative was wrap accounts. “We would categorically reject the idea that conflicted commission-based advice is always cheaper than non-conflicted fee-based advice,” said Christopher Jones, chief investment officer of Financial Engines, which provides web-based managed account services to retirement plan participants and retirees.

What happens next? After the hearings, the DOL will invite further comment, and then incorporate the new comments into the next draft—perhaps the final draft—of the proposal. Although Hauser said that the DOL wants to accommodate industry concerns, one witness, Caleb Callahan, representing the Association for Advanced Life Underwriting, made a surprise comment that the DOL’s mind is already made up about what it will do next.

Callahan referred to a letter from Secretary of Labor Tom Perez to Missouri Congresswoman Ann Wagner stating that the DOL is ready to move to a Final Rule. RIJ obtained a copy of the letter from a Wagner staff member. At one point, the letter says: “We will move forward towards issuing a Final Rule that balances the input we have received.”

The letter concludes, “We continue to welcome input on how to refine and streamline this Proposal so that when we publish a Final Rule, we can all be sure it is reflective of relevant input and achieves its desired goals.”

Two advisors have suggested to RIJ, somewhat darkly, that the Obama administration is deliberately circumventing Congress with the DOL proposal in order to achieve some narrow or partisan gain.

“The idea of using the Department of Labor to regulate our entire industry is a strong-arm tactic by the current administration,” one advisor told RIJ in an email yesterday. “I can’t stand this overreach of government regulation, just because some people are angry about how other people get paid. That’s honestly what this entire thing is about.”

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