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

Posted on September 3, 2015 by Editorial Staff -

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.

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

Posted on September 3, 2015 by Editorial Staff -

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.

Pensions should fear longevity gains more than low rates: Fitch

Posted on September 3, 2015 by Editorial Staff -

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.

The Bucket

Posted on September 3, 2015 by Editorial Staff -

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.

RetirePreneur: Edward Dressel

Posted on September 2, 2015 by Jenna Gottlieb -

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 block TRAK’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.

DOL Hearings: Wonkishly Stimulating

Posted on August 13, 2015 by Kerry Pechter -

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.”

RIJ Takes a Vacation

Posted on August 13, 2015 by Kerry Pechter -

Summer issue of Journal of Retirement is released

Posted on August 13, 2015 by Editorial Staff -

The Journal of Retirement, vol. 3, no. 1, Summer 2015, is now available online, according to the journal’s publisher, Institutional Investor Journals. The articles in the new issue include:

“Illustrating Retirement Income for Defined Contribution Plan Participants: A Critical Analysis of the Department of Labor,” by Mark J. Warshawsky.
“A Glide Path for Target Date Fund Annuitization,” by Moshe A. Milevsky, Huaxiong Huang, and Virginia R. Young.
“Dynamic Choice and Optimal Annuitization,” by David Blanchett.
“Social Security’s Individual Value and Aggregate Burden,” by Liqun Liu, Andrew J. Rettenmaier, and Thomas R. Saving.
“Minimizing the Risk of Opportunity Loss in the Social Security Claiming Decision,” by Brian J. Alleva.
“Retirement and the Great Recession,” by Alan L. Gustman, Thomas L. Steinmeier, and Nahid Tabatabai.
“Financial Literacy and Economic Outcomes: Evidence and Policy Implications,” by Olivia S. Mitchell and Annamaria Lusardi.
“Financial Planning and the Reality and Requirements of Retirees with Private Pensions,” by Liam Foster.

Sumitomo Life buys Symetra for $3.8 billion, a 32% premium

Posted on August 13, 2015 by Editorial Staff -

Sumitomo Life Insurance Co. will acquire all of the outstanding shares of Symetra Financial Corp., which is part owned by Warren Buffett’s Berkshire Hathaway and former Buffett company White Mountains Insurance Group, Symetra announced this week.

The total combined transaction consideration of $32.50 per share is approximately $3.8 billion in aggregate and represents a 32% premium over Symetra’s average stock price of $24.64 for the 30 days ending August 5, 2015. Symetra will give Sumitomo Life its first significant operational platform in the U.S.

Symetra’s President and Chief Executive Officer, Thomas M. Marra, and the current management team will continue to lead the business from Symetra’s headquarters in Bellevue, Washington. Symetra will maintain its current brand, employees, distribution channels and product mix.

Symetra shareholders will receive $32.00 per share in cash at closing, plus a previously announced special dividend of $0.50 per share in cash, payable on August 28, 2015 to Symetra shareholders of record as of August 10, 2015. The amount of the special dividend was established in connection with the determination of the total combined transaction consideration.

Sumitomo Life, founded in 1907, is a leading life insurer in Japan with multi-channel, multi-product life insurance businesses. It provides traditional mortality life insurance, nursing care, medical care and retirement plans through sales representatives, insurance outlets, the Internet and bancassurance.

As of March 31, 2015, Sumitomo Life had $229 billion in assets, approximately 6.8 million customers and 42,000 employees.

Symetra, founded in 1957 and based in Bellevue, Washington, provides employee benefits, annuities and life insurance through a national network of benefits consultants, financial institutions and independent agents and advisors. As of June 30, 2015, Symetra had $34 billion in assets, approximately 1.7 million customers, and 1,400 employees nationwide.

Symetra’s largest shareholders, White Mountains and Berkshire Hathaway, representing approximately 18% and 17% ownership of common shares, respectively, have agreed to vote in favor of the transaction.

Warren E. Buffett, Berkshire Hathaway chairman and CEO, said, “Tom and his management team have done a good job running the company and have executed a great deal for shareholders. I wish them the best for future success under their new owners.”

The transaction is expected to close late in the first quarter or early in the second quarter of 2016 and is subject to the approval of Symetra’s shareholders and regulators, and to other customary closing conditions. Morgan Stanley & Co. LLC is acting as financial advisor and Cravath, Swaine & Moore LLP is acting as legal advisor to Symetra.

Tax-efficient fund management pays off, study shows

Posted on August 13, 2015 by Editorial Staff -

Tax-efficient funds have tended to outperform other funds in before-tax and after-tax returns, according to “Tax-Efficient Asset Management: Evidence from Equity Mutual Funds,” a paper by Clemens Sialm of the McCombs School of Business at the University of Texas at Austin and Hanjiang Zhang of Nanyang Technological University in Singapore.

The authors hoped to find out whether or not tax-efficient fund management might in fact hurt after-tax returns by constraining the fund managers’ investment strategies. They found the opposite.

Shareholders of taxable mutual funds pay an average of about 1.12% of the value of their fund holding each year in dividend and capital gains taxes, the authors found. The annual tax burden rivals fund expenses and management fees, whose impact receives far more attention.

The authors examined U.S. equity mutual funds from 1990 through 2012, based largely on information from the CRSP Survivorship Bias Free Mutual Fund database that tracks fund returns, dividend and capital gains distributions, total net assets, fees, flows, and investment objectives.

On average, mutual funds that followed tax-efficient investment strategies generate better after-tax returns for taxable investors than funds that do not, the researchers found. Funds in the lowest tax-burden quintile over the prior three years exhibited excess returns net of taxes of -0.19% over the subsequent year. Funds in the highest tax-burden quintile, by comparison, exhibited excess returns of -2.29% after taxes. In other words, tax-efficient funds impose relatively less fee drag on the raw index returns.

The pre-tax return on funds in the lowest tax-burden quintile over the previous three years averaged 0.91 percentage points higher, in the subsequent year, than funds in the highest tax-burden quintile. Tax-efficient funds did not perform worse than their peers with regard to pre-tax returns.

An investment in 1990 of $10,000 in mutual funds in the highest tax burden decile would have compounded in 2012 to $55,800 before taxes and to just $37,800 after taxes. On the other hand, an equivalent investment in mutual funds in the lowest tax burden decile would have compounded to $58,900 before taxes and to $48,800 after taxes over the identical time period. Thus, investing in tax-efficient funds would have increased the final wealth of a typical taxable investor by more than $10,000.

Tax efficiency depends in part on the investment style of the fund. For example, small-cap funds may be forced to liquidate holdings in a company whose market capitalization gets too big, and vice-versa for a large-cap fund. Tax burdens also tend to be higher on funds that hold stocks paying high dividend yields and on funds that see high rates of redemptions and volatile investor flows.

Study alleges fund “favoritism” in bundled 401(k) plans

Posted on August 13, 2015 by Editorial Staff -

Do 401(k) participants sometimes get second-rate proprietary mutual funds from their bundled 401(k) providers, and does that hurt their ability to save enough for retirement? New research from the Center for Retirement Research at Boston College suggests as much.

“Where mutual fund companies serve as plan trustees—indicating their involvement in the management of the plan—additions and deletions from the menu of investment options often favor the company’s family of funds,” the August 2015 research brief said.

“This bias is especially pronounced in favor of affiliated funds that delivered sub-par returns over the preceding three years. And participants do not shift their savings to undo this favoritism, especially the favoritism shown to subpar affiliated funds. … [and] the lackluster performance of these sub-par funds usually persists.”

The study was based on plan data from 1998 to 2009, so the sample predates the possible reformative effect of recent federal class-action suit judgments against major plan providers and plan sponsors for failing to minimize fund expenses. It was written by Veronica Pool, Clemens Sialm and Irini Stefanescu of Indian University, the University of Texas and the Federal Reserve, respectively.

The data was culled from SEC Form 11-K filings and Form 5500 filings of 2,494 plans with about nine million participants. Three-quarters of the plans had trustees that were affiliated with mutual fund companies. Most of the plans offered proprietary funds as well as outside funds.

“The bias in favor of affiliated funds is particularly pronounced for poor performers,” the authors wrote. “Plans remove just 13.7% of affiliated funds in the lowest performance decile, dramatically less than the 25.5% deletion rate for unaffiliated funds in the lowest performance decile.”

BlackRock now manages $123 billion in Japanese savings

Posted on August 13, 2015 by Editorial Staff -

BlackRock, the world’s largest fund manager, was the biggest beneficiary of a move by Japan’s Y137tn ($1.14 trillion) Government Pension Investment Fund (GPIF) to ramp up its exposure to domestic and foreign equities, IPE.com reported.

Raising the assets it runs for GPIF and other public defined benefit pension plans in Japan to Y13.8tn from Y9.4tn, BlackRock became Japan’s second-largest manager of DB assets after Sumitomo Mitsui Trust, according to the Japan Pensions Industry Database.

The overhaul of the GPIF’s assets, announced last October, came after two years of pressure from Prime Minister Shinzo Abe, who wanted GPIF to take on more investment risk in hopes of meeting rising pension liabilities and to help end years of deflation.

Sumitomo Mitsui Trust lost Y718bn of assets over the 12 months ending last March 30, but held the top spot in pension assets. BlackRock moved up to second spot from third position after increasing its total Japan assets to Y15.4tn ($123.1 billion). The other three top-five spots went to Mizuho Trust, State Street Global Advisors and Diam, respectively.

Edward Jones to pay $20 million SEC fine

Posted on August 13, 2015 by Editorial Staff -

St. Louis-based brokerage firm Edward Jones and the former head of its municipal underwriting desk have agreed to settle charges that they overcharged customers in new municipal bonds sales, the SEC announced this week.

In the SEC’s first case against an underwriter for pricing-related fraud in the primary market for municipal securities, the firm also was charged with separate misconduct related to supervisory failures in its review of certain secondary market municipal bond trades.

An SEC investigation found that instead of offering bonds to customers at the initial offering price, Edward Jones and Stina R. Wishman took new bonds into Edward Jones’ own inventory and improperly offered them to customers at higher prices. Municipal bond underwriters are required to offer new bonds to their customers at what is known as the “initial offering price,” which is negotiated with the issuer of the bonds.

In other instances, Edward Jones entirely refrained from offering the bonds to its customers until after trading commenced in the secondary market, and then offered the bonds at prices higher than the initial offering prices.

The firm’s customers paid at least $4.6 million more than they should have for new bonds. In one instance, the misconduct resulted in an adverse federal tax determination for an issuer and put it at risk of losing valuable federal tax subsidies.

Edward Jones agreed to settle the case by paying more than $20 million, which includes nearly $5.2 million in disgorgement and prejudgment interest that will be distributed to current and former customers who were overcharged for the bonds. Wishman agreed to pay $15,000 and will be barred from working in the securities industry for at least two years.

According to the SEC’s order instituting a settled administrative proceeding against Edward Jones, the firm’s supervisory failures related to dealer markups on secondary market trades that involved the firm purchasing municipal bonds from customers, placing them into its inventory, and selling them to other customers often within the same day. Because of the short holding periods, the firm faced little risk as a principal and almost never experienced losses on these intraday trades. The SEC’s investigation found that Edward Jones’ supervisory system was not designed to monitor whether the markups it charged customers for certain trades were reasonable.

Edward Jones consented to the SEC order without admitting or denying the findings and undertook a number of remedial efforts and now discloses the percentage and dollar amount of markups on all fixed income retail order trade confirmations in principal transactions. Wishman consented to a separate SEC order without admitting or denying the findings.

Conflict of Interests

Posted on August 6, 2015 by Kerry Pechter -

Three and a half days of hearings on the DOL’s controversial fiduciary proposal, which will be available to viewers worldwide through a live webcast, begin at 9 a.m. next Monday morning at the Francis Perkins Building, a stolid limestone cube on Capitol Hill.

I will watch from home on my laptop, hoping for spectacle but prepared for something more like a C-SPAN speech-athon. (Click here for a link to the schedule.)

Given the stakes, and the underlying emotion, this hearing would, in less polite society, turn into a melee. The DOL’s proposal, in its current form, would disrupt the funding mechanism of the sales and distribution of load mutual funds and variable annuities to rollover IRA owners. The industry that relies on that mechanism, and any intermediary who receives third-party compensation for advising retail clients, would suffer financially if it becomes the regulation of the land.

Brokers, agents and certain investment advisers would probably either have to accept a smothering new layer of recordkeeping tasks and compliance chores, or get out of the vendor-financed advice business. This way of delivering financial products and services, they believe, works better than any alternative. But it is now threatened by digital advice, fee compression and the Obama administration’s zeal to reform it.

It’s a turf war, and the turf is very valuable. The DOL believes that the $7.2 trillion in rollover IRAs is 401(k) money that went AWOL; in a perfect world, it should be treated with the same forbearance that applies to ERISA plans as long as it stays tax-deferred. Ideally, in the DOL’s world, it would be used to buy lifetime income.

The financial services industry believes that the rollover IRA money is, aside from the nuisance of tax deferral and required distributions, no different from the money in ordinary after-tax retail accounts. Neither side is right, and neither side is wrong. The status of rollover IRA money is ambiguous. Hence the struggle.

Neither side has a good solution to a very complicated problem with an ad hoc and opportunistic history. Both appear to be in denial. The DOL doesn’t recognize what a huge expensive mess that its proposal would create in the financial services world. The industry doesn’t admit to the deception that’s implicit in its third-party payment regime.

The saddest part is that both sides seem to think that it’s possible to “manage” conflicts-of-interest. It isn’t. The conflicts are embedded in the product designs, the compensation schemes and even in the business models of the financial service industry. Unless those change, the conflicts (and the effects of the conflicts) that the DOL frets over will still exist.

These hearings haven’t gotten much attention outside of the financial industry, even though the proposal’s impact would be huge. The New York Times’ Maureen Dowd didn’t even mention it in her recent review of President Obama’s campaign of regulatory activism. Most of the world finds the retirement business boring, I guess.

So, while I’m hoping for fireworks, the hearings will probably be sedate and bureaucratic. About 100 witnesses, most of them representing companies, institutions, and advocacy groups, will testify. Department of Labor panelists will ask questions. If the witnesses just read the comments that they posted on the EBSA website, I may surf over to C-SPAN for relief.

How to Build an ‘Income-Oriented’ Portfolio

Posted on August 5, 2015 by Editorial Staff -

Before the financial crisis, many affluent retirees relied on a “total return” approach to income generation. A diversified, age-adjusted and risk-adjusted stock-bond portfolio, they figured, could generate enough interest, dividends and/or capital gains to meet their needs.

But the income stream from a total return portfolio can be uneven, forcing retirees to tighten or loosen their belts unexpectedly. In the jittery post-crisis world, more risk-averse retirees are said to be looking for a portfolio that will give them income that’s both robust and predictable.

Writing in the Spring 2015 issue Journal of Portfolio Management, David Blanchett and Hal Ratner of Morningstar Inc. propose a framework for building what they call “income-oriented portfolios” to meet that demand. On paper, at least, they were able to create the desired portfolios by tapping the riskier regions of the bond universe.

To see how total-return and income-oriented portfolios differ at the extremes, check out the pie charts below, reprinted from the research paper (“Building Efficient Income Portfolios”). At left is the total-return portfolio. At right is the income-oriented portfolio. Both hypothetical portfolios are built to deliver a 7.5% expected average annual return (based on historical returns for the selected asset classes from 1997 to 2014). Both also use a fair amount of high-yield bonds to achieve it.

But in reaching for an ambitious overall return, the two portfolios use the rest of their risk budgets differently. The total return portfolio opts for small-cap value stocks and U.S. real estate, while the income-oriented portfolio looks for similar levels of risk and return in emerging market debt and long-term investment grade corporate bonds.

The payoff from using that particular all-bond asset allocation is a higher, more predictable income. “The income return for the total-return portfolio is 140 basis points below that of the income portfolio,” write Blanchett (head of retirement research at Morningstar) and Ratner (head of global research).

“When looked at from traditional efficiency metrics, such as Sharpe ratio or total return-to-CVaR ratio, the total-return portfolio is more attractive,” they write. “But in this case, the income investor is indifferent to total-return efficiency and more concerned with income predictability.”

What are the trade-offs? Less chance for capital gains, for one. Within limits, the income-oriented investor can ignore fluctuations in the prices of his bonds. The total return investor relies on opportunistic asset sales for part of his income. Taxes are another trade-off. The income-oriented investor faces a larger tax bill, mainly because interest is taxed as ordinary income at up to 35%.

Taxes being a bigger problem for wealthy retirees and income sufficiency being a relatively bigger problem for the middle class, Blanchett and Ratner’s conclusion that “less-wealthy investors in comparatively low income brackets with relatively little risk capacity will derive the greatest utility from an income-oriented strategy” comes as little surprise.

Annuities where annuitants share longevity risk

The prospect of longevity gains creates a significant financial risk to insurance companies that issue annuities. Here’s a suggested alternative for issuers: deferred life annuities that adjust to rising longevity by delaying the start of payments, according to an index of longevity gains in the larger population.

This is proposed in an article by European finance professors M. Denuit, S. Haberman and A.E. Renshaw, “Longevity-Contingent Deferred Life Annuities,” in The Journal of Pension Economics and Finance, 14 (3) 2015.

The article, heavy on equations, is aimed more at economists and actuaries than annuity product developers. But this concept for annuity redesign, which offers clients the benefit of lower premiums to compensate for uncertainty about the income start date, is already past the development stage. Some countries with aging populations, like Germany, have already applied it to their social security systems. “Considering the difficulties that have been experienced in issuing longevity-based financial instruments, this might well be an efficient alternative to help insurers to write annuity business,” the authors venture.

Comparisons of withdrawal strategies, from Wade Pfau

Retirement expert Wade Pfau of The American College, whose work we cite regularly in Retirement Income Journal, has three more articles that will interest advisers:

“Making Sense Out of Variable Spending Strategies for Retirees” (March 2015) compares 10 drawdown alternatives for spending wealth over the 30 remaining years of life, based on client’s preferences. He looks at everything from the Required Minimum Distribution schedule to an annuitized floor with aggressive discretionary spending to his own and other prominent decision rules.

“Reduce Retirement Costs with Deferred Income Annuities Purchased before Retirement” (Journal of Financial Planning, July 2015) examines annuities with a short-term deferral to hedge against bear markets and longevity risk. A short-term deferral, if the annuity is purchased prior to retirement, can be used to fund retirement spending at a lower cost.

“The Cost of Retirement with Different Income Tools” (Journal of Financial Planning, April 2015) compares sustainable spending rates under various portfolio designs.

Stepping stones to bigger Social Security checks

It’s smart to delay claiming Social Security benefits until age 70. The monthly payout, after all, is 75% higher than at age 62. And if you want to retire before age 70, use your investment portfolio to bridge the income gap.

In his paper, “Bridges to Social Security” (Journal of Financial Planning, April 2015), Jonathan Guyton shows how to fund this gap at the beginning of retirement without increasing longevity risk at the other end of retirement.

The client, he says, should take a lump sum from savings that’s equal to the cumulative amount she would have received from Social Security during the delay period (from age 66 to age 70 in this example). That money should be invested conservatively, and then liquidated in a manner that replaces the foregone income from Social Security (including cost of living adjustments).

Over those four years, she can supplement that income by withdrawing from her remaining savings at the rate of 4.5% per year. Then, when she reaches age 70, she can live on the higher payments from Social Security and 4.5% a year from savings. This segmentation strategy works better, on an after-tax basis, than simply spending 6.5% a year from savings starting at age 66 (to meet 100% of income needs) and reducing that rate (to make room for full benefits from Social Security) at age 70. Guyton describes all this in a brief, not a full journal article, so not all of his assumptions are visible.

Aging aside, retirement can be good for your health

Is retirement good for your health or bad for your health? Of course, it depends on a lot of variables. In studying unhealthy retirees, researchers have had difficulty determining if they’re unhealthy because they retired or if they retired because they weren’t healthy enough to work.

Aspen and Devon Gorry of Utah State University and Sita Slavov of George Mason University tackle that question in a new study, “Does Retirement Improve Health and Life Satisfaction?”

Their answer: Retirement doesn’t make you unhealthy. On the contrary. The researchers use data from a survey of Americans over age 50 that asks people questions about their health and daily activities (Sample question: Do you agree or disagree with the statement, “In most ways my life is close to ideal”). They conclude that retirement does improve life satisfaction. Over time, it even improves health, they posit, which can help reduce health care expenditures.

How much does America spend on medical care for those age 65 and over?

Not long ago, the Employee Benefit Research Institute and Fidelity Investments released estimates that Americans should be saving at least $250,000 just for expected medical expenses in retirement.

Fear over the possibility of high medical bills, especially the expense of long-term residential care, is known to drive a lot of saving behavior, especially by those too wealthy to qualify for coverage by Medicaid.

Given the natural infirmities of old age, older Americans use much more health care than younger people. In 2010, medical bills for those aged 65 or older were 2.6 times the national average, according to government data, and accounted for over one third of all U.S. medical spending.

A new report, “Medical Spending of the U.S. Elderly,” takes a closer look at these costs. Written by Mariacristina De Nardi of the Federal Reserve Bank of Chicago, Eric French and Jeremy McCauley of University College London and John Bailey Jones of the University of Albany, it’s based on an analysis of government data for the period from 1995 to 2010.

Among their findings:

Medical expenses more than double for those between ages 70 and 90, with most of the increase coming from nursing home spending.
The top 10% of all spenders are responsible for 52% of medical spending in a given year.
Those currently experiencing either very low or very high medical expenses are likely to find themselves in the same position in the future.
The government pays for 65% of the elderly’s medical expenses; the expenses that remain after government transfers are even more concentrated among a small group of people.
The poor on average consume more medical goods and services than the rich, but are responsible for a much smaller share of their costs.
While medical expenses before death can be large, on average they constitute only a small fraction of total spending, both in the aggregate and over the life cycle.
Medicare covers well over half of the elderly’s medical expenditures. Private health insurance, Medicaid, and out-of-pocket expenditures each cover between 11 and 13% of the total.
In 2013 personal health care expenditures in the U.S. amounted to $2.5 trillion in 2014 dollars, representing 14.7% of GDP.
Low-income people consume more medical resources per year. The higher spending on the poor consists mostly of greater expenditure on nursing homes. When nursing home care is excluded, the income gradient is much less pronounced.

RetirePreneur: Bo Lu

Posted on August 5, 2015 by Jenna Gottlieb -

What I do: I am the co-founder and CEO of FutureAdvisor, an investment advisory firm based in San Francisco that helps people manage their long term investments. We manage multiple goals for individuals including retirement planning and college saving. Our software helps those that are looking at how to set everything up correctly as they enter their retirement phase, and also to assist saving for college on behalf of their grandchildren.

The software takes less than two minutes to get started and there is free portfolio analysis for users and recommendations. The software also helps minimize investment fees. We work with Fidelity and TD Ameritrade in managing accounts. We have a relatively straightforward custodian relationship with Fidelity and TD—very similar to what they have with thousands of advisors. Bo Lu copyblock

Who my clients are: Our average client is 42 years old and has $150,000 in assets being managed by us. That number represents the majority of their liquid net worth, so we would define clients as middle class, middle America families who are looking for investment help.

My business model: Just like every other investment advisor, we are fee-based. We charge half a percentage point on the assets we manage annually, not including college savings assets, which are managed for free. We change half or less than half of what a local advisor would charge and we start at a minimum of $10,000 in investable assets, which is much lower than many other advisors.

Where I came from: I’m the lead investment advisor for FutureAdvisor and I hold a Series 65 license. Before co-founding this company, I earned a degree in computer science from the University of Illinois Urbana-Champaign with a minor in technology and management. Jon Xu, FutureAdvisor’s other co-founder, is the chief technology officer who previously worked at Microsoft.

My entrepreneurial spirit: For me, the major motivation to solve this problem was that it was a problem worth solving. I saw a problem that was so stark. Rich families have financial advisors and that’s it, many in the middle class and poor families don’t have that same opportunity. I felt that my duty to the world was to fix this problem. It’s so obvious that every single person in the country deserves access to quality, unbiased financial management. The poor care just as much, but they don’t have the tools or money.

The most challenging part of starting and growing a business: When you have something you’re truly passionate about, the actual work and execution of that idea are a pleasure and exciting. At the start, the most challenging part was the things you don’t go into it thinking about – things like incorporating, and getting registered with the SEC. Things like finding office space and accounting and setting up phones. At the start, it was surprising how much more time the operational aspects of the business took than I expected. As you continue to grow the biggest challenge becomes finding the right people. Especially early stage, the people you choose to work with are paramount to your success – finding those people in a crowded marketplace can be a challenge.

What I see ahead for retirement income: I think that there’s good news ahead. What I see for the future of retirement income is that everyone will have a team managing their assets for them. Quality, unbiased, affordable retirement planning will not be reserved for only the wealthy. There are people who rather than spend their time looking at the markets, want some help, but may not be able to afford pricier advisory services. I hope, and our mission is, that more people will be able to go out and enjoy their lives, and worry less about the future, because a team is managing retirement assets for them.

The best retirement income plan for most people: The reason why this company was started was because the best financial income plan does not exist for most people. People have different situations and varying degrees of risk tolerance. It’s so different for each person. The problems are personal therefore the solutions must be personal.

My view on the robo-advisor label: We have been called a robo-advisor. But it’s really bigger than the term. Software has an ability to help those who do not qualify for high-quality expensive financial management. That said, we couldn’t imagine that in 10 years time, that software will play a smaller role. Software is here to stay and we believe in a mix of licensed CFPs to answer questions and the use of software. It’s reasonable to incorporate software into retirement planning. Advisors who don’t incorporate software will get left behind.

How we train our algorithms to think more like people: Computers are completely logical. They take the most mathematically correct actions, even when those actions aren’t particularly intuitive. When the impact of those actions is relatively small, and where an investor might assume something is broken/wrong when seeing them, we have trained our algorithm to not make them.

For example, the algorithm might want to sell a particular ETF in your IRA and then buying the same ETF in your taxable account. Even to the saviest investor, this might seem like an error, and cause distrust or even fear that the system is broken. Causing that type of alarm just isn’t worth the .0001% extra efficiency that the algorithm is capable of. There are a lot of little things like that, which don’t have a measurable impact on performance, but which could cause undue stress or unnecessary churn in users’ portfolios.

What the retirement income industry can do better: Help needs to be more accessible to the masses. If you look at what the industry’s impact has been as a percentage of the country it’s embarrassing. Incentives are misaligned, and the people who need help the most are precisely the ones who have been viewed as “too small to spend time on.” It’s why we are focusing so heavily on providing more advice digitally. It lets us throw the status quo on its head, and give everyone the attention and advice they deserve.

My retirement philosophy: I think the thing we think about is that people should not worry, but be cognizant of their financial future earlier rather than later. I would encourage people who are younger to do that. Our median client is not 50 but in their early 40s and are actively engaged in planning for their own future. If you are actively engaged and planning, you would be a person well served.

John Hancock Retirement to offer HelloWallet robo-advisor

Posted on August 5, 2015 by Editorial Staff -

Starting in the fourth quarter of 2015, John Hancock Retirement Plan Services intends to offer Morningstar, Inc.’s HelloWallet financial wellness tool to its plan sponsors, for use by plan participants through John Hancock’s Total Retirement Solution platform.

HelloWallet is a web-based and mobile application. It helps people manage their finances by integrating financial information, thus making it potentially easy to “create budgets, analyze spending and savings trends, and track progress toward goals,” John Hancock said in a release.

The technology engine uses findings from behavioral finance and industry experts to help guide people toward making smart financial choices in easy and incremental steps,” the release said.

“Financial stress is a major factor in many people’s lives, and retirement is almost an irrelevant topic if people have too much debt and not enough savings,” said Patrick Murphy, president of John Hancock Retirement Plan Services, in a prepared statement. “By offering HelloWallet, we’re helping people figure out how to alleviate their immediate financial stresses and enable them to save for a comfortable retirement.

Morningstar, Inc. is a global provider of independent investment research, and a leader in managed account solutions for plan participants. Morningstar acquired HelloWallet Holdings, Inc. in 2014. HelloWallet, LLC, a subsidiary of HelloWallet Holdings, is the provider of the HelloWallet software tool noted here.

John Hancock Financial is a division of Manulife, a Canada-based financial services group with principal operations in Asia, Canada and the United States. Assets under management by Manulife and its subsidiaries were C$821 billion (US$648 billion) on March 31, 2015.

Symetra rides new FIAs to record quarterly sales

Posted on August 5, 2015 by Editorial Staff -

Symetra Life Insurance Company exceeded $1 billion in quarterly annuity sales for the first time during the second quarter 2015. Symetra’s fixed indexed annuities (FIAs) posted the highest quarterly production figures since the product launched in April 2011.

Sales were driven by the March 2015 introduction of the Symetra Edge Plus Fixed Indexed Annuity and the Symetra Edge PremierFixed Indexed Annuity.

“New product launches and our continued expansion and increased penetration of the bank and broker-dealer distribution network” accounted for the record sales,” said Dan Guilbert, executive vice president of Symetra’s Retirement Division, in a release. “Indexed annuities were the quarter’s growth engine.”

The Symetra Edge Premier FIA’s indexed account options include the JPMorgan ETF Efficiente 5 Index, which provides interest crediting options based on indexes composed of diverse asset classes, including domestic and foreign equities and others. Symetra’s Retirement Sales team has added six wholesalers since January 2015, four of whom are focused on broker-dealers as part of the division’s ongoing expansion in the channel.

Guardian enhances 401(k) portal

Posted on August 5, 2015 by Editorial Staff -

The Guardian Insurance & Annuity Company, Inc., has enhanced its website, 401k.guardianlife.com, to allow small businesses, third-party administrators and participants to better administer and manage their Guardian defined contribution plans.

New features include a dashboard with access to key retirement plan performance statistics, enhanced reporting options, easier navigation and a resource library.

A key enhancement is the Guardian IncomeConnect Calculator. It projects current savings into retirement income and provides a real-time gap analysis. If it detects a shortfall in savings, the calculator will suggest educational tools and resources to help the plan participant close the gap.

Individuals are likely to contribute more to their 401(k)s if they know how much their current contributions will provide in future retirement income, according to the recently released Guardian Small Plan 401(k) RetireWell Study 2.0: “What’s Working and Not Working for Small Plan Participants.”

The new website is intended to reduce the administrative burden on financial professionals, TPAs and plan sponsors by allowing them to review plan data and indicators for a snapshot of the plan at any point in time. The website also offers eDelivery for plan sponsor summary statements and participant quarterly statements.

If It Ain’t Fixed Indexed, It’s Broken

Posted on July 30, 2015 by Kerry Pechter -

Except for fixed indexed annuities, sales of all annuities declined in the first quarter of this year. You might say that, if it ain’t an FIA, it’s broken.

A survey of 15 broker-dealers by the Insured Retirement Institute shows that fixed indexed annuities remain a niche product, representing only about 10% of annual annuity sales, but that the niche has grown, with the equity-linked insurance products finding a home at independent broker-dealers.

To be sure, sales of variable annuities still dominate. They account for two-thirds of total annuities sales, the survey showed, and about two-thirds of those are sold lifetime income guarantees. But sales of variable annuities fell to a five-year low in the first quarter of 2015.

FIAs are the only annuity category that grew in 1Q2015 (by 3%). They have helped fill the VA vacuum for registered reps who, too new to have developed a large enough book of business to support a fee-based revenue model, rely heavily on commissions.

The retreat of variable annuities has puzzled some observers. Rising equity prices have provided a reliable tailwind for VA sales in the past. But not this time, for several reasons:

A number of once-major issuers have stopped making VAs, and fewer contracts are 1035-exchanged (because new contracts aren’t as rich as the older ones). More than a few advisers say they still feel betrayed by the contract buyback offers tendered by a few insurers, who were desperate to shrink their exposure to the unknown-unknown liabilities lurking in their VA books.

In addition, the shift by some life insurers toward selling low-cost IOVAs (investment-only VAs) has made some broker-dealers skittish. They say it’s difficult to demonstrate to their in-house watchdogs that it’s suitable to sell an insurance product without insurance features. (IOVAs are built for tax-deferred trading, and typically have no death or living benefit.)

B/D FIA sales growing

An FIA is a structured insurance product. Most of the purchase premium is used to buy bonds, but a small percentage used to buy options on equity indexes. If equity indexes rise, the value of the options rises and the gains are credited to the contract. If equity indexes fall, the options are worth nothing but the underlying bonds grow enough to support a principal guarantee.

Despite their indirect exposure to equity risk, FIAs are not securities; the courts established that in 2009 after SEC commissioner Chris Cox, alarmed by media reports of predatory sales practices, tried to put them under federal jurisdiction. As insurance products, they’ve been distributed mainly through state-regulated insurance marketing organizations and sold by insurance agents.

But FIA sales through b/ds have been growing. Some b/ds, such as Edward Jones and Ameriprise, continue to keep FIAs off their product shelves. Others, like Commonwealth Financial Network, have embraced them.

In 2012, independent insurance agents accounted for 84% of $32 billion in FIA sales, while b/ds sold only 4%. In 2013, those numbers were 78%, 4% and $36 billion, and in 2014 independents agents sold 66% and b/ds sold 15% of $48 billion.

Almost all of the growth in the b/d channel has been among the independent b/ds, according to the Saltzman Associates, a Charlotte, NC-based consultant. In the first quarter of 2015, 87% of the $1.52 billion in FIAs sold in the b/d channel was at independent b/ds, with only $67 million at the national and regional broker dealers and $164 million at the wirehouses (Morgan Stanley, Merrill Lynch, UBS and Wells Fargo).

Of the 15 b/ds polled by IRI, six said sales were growing “significantly” and six said sales were growing “modestly.” The remaining three said sales were “steady.” About one in three expected sales to grow significantly in the future, and seven of 15 expected FIA sales to represent a higher percentage of their annuity sales in the future.

FIAs were found to displace sales of other annuities at b/ds—mainly cannibalizing VAs with lifetime income benefits and traditional fixed annuities. According to the survey (see chart below), executives at four of 15 b/ds said that FIA sales “significantly” displaced sales of each of those two products. Three b/ds said FIAs significantly displaced sales of certificates of deposit.

Of the many crediting strategies that FIAs offer—and which make the product confusing to some people—the b/ds clearly preferred some to others. Asked to consider 13 different strategies, b/ds ranked “annual point-to-point,” “monthly point-to-point,” “monthly averaging,” “multiple index strategies,” and “fixed with multi-year” as the most popular.

The least widely used crediting strategies were “daily averaging,” “inverse annual point-to-point,” “term end-point,” “multiple point-to-point” and “fixed with an equity kicker,” according to the survey.

Most b/ds work with five or more FIA suppliers. Some work directly through FIA issuers, some through IMOs and some with both IMOs and issuers. The top manufacturer of FIAs has historically been Allianz Life, with Security Benefit Life rising into second place since its purchase by Guggenheim Partners, the private equity firm.

A product for all interest rate climates

IRI asked b/ds what factors they believe would drive FIA sales in the future. The factors most frequently mentioned were higher interest rates, the availability of lifetime income riders, “concern that lifetime income benefits might be less generous in the future,” “value of principal protection with some upside potential,” and, ironically, “persistent low interest rates.”

“Both higher interest rates and persistent low interest rates were cited as potential sales drivers, which seems paradoxical but in fact is simply viewing the product from two different perspectives,” the IRI survey said.

“In a persistent low interest rate environment, sales are boosted by the product being an attractive alternative to low interest products such as CDs. As rates rise, index options become less expensive and FIAs are able to provide more upside potential, making the product more attractive from a growth standpoint.”

Part of the appeal of selling FIAs has traditionally been the high commissions paid by manufacturers. According to the IRI survey, 64% of FIAs pay gross up-front commissions of 5% or less, but 36% pay 6% or 7%. Invented at Keyport Life in 1995, FIAs were marketed aggressively during the low-interest period after the 2000 dot-com crash by Allianz Life of North America, under then-CEO Robert W. MacDonald.

The products have thrived during the two periods of historically low interest rates since 2000. At such times, they can provide safety with more upside potential than fixed deferred annuities or certificates of deposit. The addition of lifetime income riders to FIAs has helped boost their appeal and their sales in recent years.

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