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John Hancock and LPL in participant advice pact

Posted on July 2, 2015 by Editorial Staff -

Plan sponsors and participants served by John Hancock Retirement Plan Services (JHRPS) who have contracted with LPL Financial to use its Employee Advice Solution will receive administrative support from JHRPS, it was announced this week.

Launched by LPL in 2014, the EAS tool can deliver personalized participant advice through an online service that collects financial information about a participant. Participants can use that option—all the way through retirement, if they wish—or managed their accounts on their own, JHRPS said in a release.

EAS is part of LPL’s Worksite Financial Solutions, a website platform that provides financial education and planning tools. Participants can engage with a financial advisor either face-to-face, online, or over the phone. The platform is integrated with LPL’s reporting and monitoring tools for plan advisors.

“JHRPS provides a daily participant-level data feed when requested by plan sponsors, enabling LPL advisors to provide tailored financial advice and facilitate a closer relationship between advisors and plan participants,” the release said.

Bank of International Settlements expresses doubts about low rates

Posted on July 2, 2015 by Editorial Staff -

In its 85^th annual report, the Bank of International Settlements in Basel, Switzerland, strikes a cautionary note regarding the persistent low interest rate policy practiced by the world’s central bankers and its ambiguous impact on the global economy.

“There is something deeply troubling when the unthinkable threatens to become routine,” write the authors of the report. The BIS calls for a shift to a longer-term focus in policymaking, with the aim of restoring sustainable and balanced growth.

Below are summaries of the report’s chapters, with links to the further content:

I. Is the unthinkable becoming routine?

Globally, interest rates have been extraordinarily low for an exceptionally long time, in nominal and inflation-adjusted terms, against any benchmark. Such low rates are the most remarkable symptom of a broader malaise in the global economy: the economic expansion is unbalanced, debt burdens and financial risks are still too high, productivity growth too low, and the room for manoeuvre in macroeconomic policy too limited. The unthinkable risks becoming routine and being perceived as the new normal. More…

II. Global financial markets remain dependent on central banks

Accommodative monetary policies continued to lift prices in global asset markets in the past year, while diverging expectations about Federal Reserve and ECB policies sent the dollar and the euro in opposite directions. As the dollar soared, oil prices fell sharply, reflecting a mix of expected production and consumption, attitudes to risk and financing conditions. Bond yields in advanced economies continued to fall throughout much of the period under review and bond markets entered uncharted territory as nominal bond yields fell below zero in many markets. More…

III. When the financial becomes real

Plummeting oil prices and a surging US dollar shaped global activity in the year under review. These large changes in key markets caught economies at different stages of their business and financial cycles. The business cycle upswing in the advanced economies continued and growth returned to several of the crisis-hit economies in the euro area. At the same time, financial downswings are bottoming out in some of the economies hardest-hit by the Great Financial Crisis. But the resource misallocations stemming from the pre-crisis financial boom continue to hold back productivity growth. More…

IV. Another year of monetary policy accommodation

Monetary policy continued to be exceptionally accommodative, with many authorities easing or delaying tightening. For some central banks, the ultra-low policy rate environment was reinforced with large-scale asset purchase programmes. In the major advanced economies, central banks pursued significantly divergent policy trajectories, but all remained concerned about the dangers of inflation running well below inflation objectives. In most other economies, inflation rates deviated from targets, being surprisingly low for some and high for others. More…

V. The international monetary and financial system

The suitable design of international monetary and financial arrangements for the global economy is a long-standing issue. A key shortcoming of the existing system is that it tends to heighten the risk of financial imbalances, leading to booms and busts in credit and asset prices with serious macroeconomic consequences. These imbalances often occur simultaneously across countries, deriving strength from international spillovers of various types. The global use of the dollar and the euro allows monetary conditions to affect borrowers well beyond the respective issuing economies. More…

VI. Old and new risks in the financial landscape

Risks in the financial system have evolved against the backdrop of persistently low interest rates in advanced economies. Despite substantial efforts to strengthen their capital and liquidity positions, advanced economy banks still face market scepticism. As a result, they have lost some of their traditional funding advantage relative to potential customers. This adds to the challenges stemming from the gradual erosion of interest income and banks’ growing exposure to interest rate risk, which could weaken their resilience in the future. More…

The Bucket

Posted on July 2, 2015 by Editorial Staff -

Passive funds continue to dominate flows: Cerulli

ETF assets have grown for four consecutive months, ending May with more than $2.1 trillion, according to the June 2015 issue of The Cerulli Edge – U.S. Monthly Product Trends Edition.

At $13 billion, flows into the vehicle were positive but down slightly from April.

Mutual fund asset growth slowed to 0.2% during May after increasing more than 1% in April. Flows for the month were at $20.8 billion, with passive funds accounting for 64%.

New data tool lets asset managers track advisors

Broadridge Financial Solutions and Cogent Research, have introduced Advisor Intelligence, a tool that combines Broadridge’s fund and ETF data with Cogent’s advisor segmentation data to generate profiles of more than 250,000 advisors nationwide, the companies announced this week.

The tool “links three critical types of information not commonly available through a single source: product data, firm profiles, and attitudinal preferences—giving asset managers the ability to pinpoint their marketing and sales activities to support advisors,” according to a press release.

Advisor Intelligence enables “asset managers to understand what trades are occurring, where and how their products are being sold, and the communication preferences of advisors who are selling them,” the release said.

“Until now, approaches to advisor segmentation have tended to be quite broad in nature,” said John Meunier, managing director, Cogent Reports, a unit of Market Strategies International. “This partnership combines trading information in our behavior models to improve the predictability of key segments, to more efficiently build the bridge between asset managers and advisors.”

According to Broadridge and Cogent Reports data:

The RIA channel is the strongest user of ETFs, while the independent broker-dealer channel is the largest user of actively managed mutual funds.
76% of advisors are using ETFs, up from 68% two years ago.
Overall, ETF assets under management are up $167 billion year-to-date as of May 31.
New products such as “smart beta” ETFs are increasingly attractive to advisors, especially in the retail channels driven by advisors.
Advisors are increasingly brokering mutual fund sales for small and medium defined contribution plan business.

Transamerica in distribution partnership with Edward Jones

Transamerica has entered a partnership with Edward Jones to distribute corporate retirement plans to companies throughout the U.S., the San Francisco-based financial services company said this week.

Transamerica Retirement Solutions Corporation serves more than three million participants, and Edward Jones has nearly 14,000 financial advisors serving nearly seven million clients nationwide.

Introducing a new firm: Willis Towers Watson

In an $18 billion deal that signals the further consolidation of the pension consulting business, Towers Watson will merge with rival Willis to form a consultancy with 40,000 employees, the companies announced this week. Current Willis shareholders will own 50.1% of the new company—Willis Towers Watson—and Towers Watson 49.9%.

Towers Watson was formed in 2010 when Towers Perrin merged with Watson Wyatt.

Willis and Towers Watson plan to combine their current risk advisory and insurance-brokering services but also to eliminate redundancies and cut costs.

Towers Watson shareholders will receive 2.64 Willis shares in exchange for their stake, with an additional one-off dividend payment of $4.87 pre-closing. A similar deal will also be offered to Willis stakeholders. The final agreement will then see one share in Willis Towers Watson for each Towers Watson share.

John J. Haley, the Towers Watson chairman and CEO since 1999, will become chief executive of the new company. Willis chief executive Dominic Casserley will be named president and deputy chief executive. The deal should close by the end of 2015, subject to shareholder and regulatory approval.

New marketing chief at Prudential Annuities

Rodney Branch has been named senior vice president and Chief Marketing Officer for Prudential Annuities, the domestic annuity business for Prudential Financial, Inc. He will be responsible for Prudential Annuities’ marketing strategy and growth initiatives in the retirement income marketplace.

Prior to joining Prudential, Branch was vice president and lead for Nationwide Financial’s Annuity, Innovation and Competitive Intelligence Team, leading the variable and fixed annuity businesses. Earlier at Nationwide, he was vice president, Channel Marketing, with responsibility for marketing and sales support for all of Nationwide’s distribution channels from 2010 through 2012. He has also held marketing positions with Frito-Lay, Diageo and Branchout, L.P.

Branch holds an MBA in marketing from the University of North Carolina and a BBA in marketing from the University of Texas. Branch reports to Robert O’Donnell and is based in Shelton, Ct.

In New York, Hanging with Robos

Posted on June 25, 2015 by Kerry Pechter -

To glimpse of the future, I dropped by the InVest conference on “Innovations in investing, savings & advice” at the New York Hilton last week. It was a gathering of robo-advice entrepreneurs, the vulture capitalists who back them, and agile Wall Street firms who, as one speaker put it, are determined not to be the “next Kodak.”

In other words, this was robo central, aka fintech central, aka digital advisory channel central. Think “TED Talk,” and you’ll have a sense of the tone of the presentations. It wasn’t the biggest robo-advice conference so far this year—Joel Bruckenstein’s T3 conference in Dallas was bigger—but Manhattan is the better location.

And InVest wasn’t just about tech. These disrupters believe they own the future. They trust, with a confidence bordering on the brash, in their own brilliance. They know that the path to the wallets of the Millennial generation runs through them.

The most interesting thing I learned at InVest was that the robo-advisors and the Department of Labor are in synch, if not in cahoots. I was told that the DOL waited until this year to unveil its new anti-conflicts-of-interest proposal because the robo-advice has just recently matured to the point of offering a legitimate alternative to traditional advice models.

That may or may not be true, but the robos clearly like what the DOL is doing, and vice-versa (as evidenced by the Secretary of Labor’s positive reference to Wealthfront during a House subcommittee hearing last week). Both aim to make retirement advice less expensive through automation, more transparent through open-architecture, and more objective through access to comparative data. The Millennials feel empowered by the Internet. As one presenter said, Millennials expect to “tap twice for further information” in every sphere of their lives.

The moves by Fidelity, Vanguard, Schwab and Northwestern Mutual to build or buy or strengthen their digital advisory channel capabilities suggest that robo-advisors will complement, not replace, human advisers, and lead to a hybrid advice model that combines web portals and call centers. This was a recurring theme at the conference.

“A lot of vested players will want this capability,” said Sebastian Dovey, co-founder of Scorpio Partnership, “a global market research and strategy consultancy to the global wealth industry” based in London. “They’ll do hybrid solutions in order to avoid ceding market share to other institutions.”

In this scenario, fee-based advisers may not lose customers, but they will lose pricing power. “There won’t be a landslide of dollars coming out of the financial advisor world,” Dovey said. “But the price shift will be significant.” Competition from robo-advisors will drive registered investment adviser fees down by “30 to 35%,” he said.

One of the answers that I had hoped to find at the InVest conference involved retirement income: Can robo-advisors do it? It’s relatively easy to automate risk-based asset allocations and choose mutual funds. But can a robot design a custom income plan for retirees, given the huge differences in their circumstances?

I saw only one presentation that described a robo-solution for retirement income. NextCapital, a provider of advice to defined contribution plan participants, is partnering with Russell Investments, wholesale fund company. Together, they will distribute the Russell Adaptive Retirement Accounts custom TDF glide path technology to Next Capital’s DC customers (and, later this year, to the retail market).

Russell Adaptive Retirement Accounts doesn’t exactly produce a retirement income plan. As Russell’s Jeff Eng described it, Russell uses individual participant data—age, salary, current savings rate—to establish a retirement income goal and, from that, works backwards to derive a retirement savings goal. Having established the goal, the software can recommend a different asset allocation, different investments or a higher deferral rate and then calculate a personal funded ratio.

Is that the same as showing a client how to turn savings into income, by creating a custom combination of specific insurance and investment products that will mitigate the unique market, inflation, health and longevity risks that retirees face? I wasn’t convinced.

Another misconception from which robo-advisers may suffer is the idea that the main function of most investment advisers is to give investment advice. Most registered reps and insurance agents get paid to distribute investments and insurance products—i.e., gather liabilities—for mutual fund firms and insurance companies.

Will the robo-advisers (or hybrids thereof) be able to gather liabilities—an arguably much more difficult and important societal function, in the grand scheme of things, than calculating asset allocations and recommending funds for individual investors? If you know the answer, please send it to me.

Public comments on DOL are now available; hearing to start August 10

Posted on June 25, 2015 by Editorial Staff -

The first wave of public comments on the DOL conflicts-of-interest proposal and related matters are now available online and a public hearing on the controversial matter will be held on August 10, 11, 12 and, if necessary, August 13, 2015, according to an announcement in the Federal Register last week.

The hearing, held by the DOL’s Employee Benefits Security Administration, will start at 9 a.m. EDT on those days in the Cesar E. Chavez Memorial Auditorium at the U.S. Department of Labor, Frances Perkins Building, 200 Constitution Avenue NW, Washington, DC 20210.

The deadline for public comments on the proposed conflicts of interest rule and proposed exemptions from prohibited transactions has been extended to July 21, 2015. Requests to testify must be received by 5 p.m. EDT, July 24, 2015.

Requests to testify at the hearing can be sent by email (to [email protected], subject line: Conflict of Interest Rule Hearing), by mail (Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: Conflict of Interest Rule Hearing, Room N–5655, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210.

A portion of the hearing will focus on the Department’s Regulatory Impact Analysis, which addresses the effects of conflicts of interest in the market for retirement investment advice and the need for regulation, the anticipated economic effects of the proposal, and the relative merits of certain regulatory alternatives.

“MACS” are poised to lead an active-management comeback: Citi

Posted on June 25, 2015 by Editorial Staff -

Maybe active managers are just whistling past the graveyard, but lately they’ve been predicting that the investors will soon outgrow their infatuation with low-cost index funds and ETFs and fall back in love with higher-cost actively managed funds.

Sales of bespoke funds will rebound on the wings of new three-pronged “dynamically managed multi-asset class solutions” (MACS), according to Citi’s just published 6th Annual Industry Evolution Survey. The three elements are: an unconstrained long core, liquid alternatives, and Smart Beta tools that hedge specific risks.

“These offerings will be seen as building blocks to create bespoke solutions for institutions and packaged solutions for retail clientele,” the survey said, citing recent interviews with investment managers, investors and intermediaries representing AUM of about $30 trillion.

The report projects AUM in the publicly traded fund space to expand from $40.8 trillion in 2014 to $56.9 trillion by the end of 2019, based on compounded annual growth rate estimates. Citi predicted that strategies tied to market indices would decline to 76% from 84% of that pool. The financial services giant also predicted that sales of the new three-component active funds will grow to about $15 trillion by 2020.

“The industry is likely to become more active in the next five years as asset managers’ reassert their trading skills away from market indices,” says Sandy Kaul, Global Head of Business Advisory Services within Citi’s Investor Sales unit.

“We see active long-only managers moving to strategies that will run between 80% and 120% net long, with this asset pool projected to grow from an estimated $6.8 trillion in 2014 to $14.9 trillion in the coming five years,” she said.

Unconstrained long strategies will eclipse passive benchmark fund growth to become the second largest asset pool in the publicly traded fund space by 2019, Citi’s survey suggested. Passive benchmark AUM (across separately managed accounts, mutual funds and ETFs) is seen rising from an estimated $6.7 trillion in 2014 to $10.7 trillion by the end of 2019. Actively managed long-only benchmark funds will continue as the largest asset pool, but is predicted to lose market share.

By the end of 2019, AUM in Smart Beta and actively managed ETF products is projected to nearly quadruple to $1.1 trillion, liquid alternative AUM is seen as more than doubling to $1.7 trillion, and privately offered funds (hedge funds, private debt and financing and private equity products) are expected to grow from $7.1 trillion to $10.0 trillion, according to Citi’s projections.

The full report, along with other industry analysis and reporting can be viewed at: Citi Sixth Annual Industry Evolution Survey June 2015.

SEC and FINRA publish study of sales to seniors at BDs

Posted on June 25, 2015 by Editorial Staff -

A review of broker-dealer sales practices with regard to senior investors 65 years old or older, along with recommendations to improve those practices, has just been published by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

The review, “National Senior Investor Initiative: A Coordinated Series of Examinations,” noted that, because safe investments offer historically slim yields, senior investors are especially vulnerable to recommendations to buy inappropriate products that appear to fulfill their need for steady income.

The examinations itself was conducted in 2013 by FINRA and the SEC’s Office of Compliance Inspections and Examinations, and involved inquiries at 44 broker-dealers as well as meetings with the Consumer Financial Protection Bureau; the AARP Education and Outreach Group; and state regulators from Florida, Colorado, California, Texas, and North Carolina.

The 44 examinations focused on:

The types of securities being sold to senior investors
Training of firm representatives with regard to senior specific issues
How firms address issues relating to aging (e.g., diminished capacity and elder financial abuse or exploitation)
Use of senior designations
Firms’ marketing and communications to senior investors
Types of customer account information required to open accounts for senior investors
Suitability of securities sold to senior investors
Disclosures provided to senior investors
Complaints filed by senior investors and the ways firms tracked those complaints
Supervision of registered representatives as they interact with senior investors

The reviews identified the products listed below as among the top five revenue-generating securities at the examined firms based on sales to senior investors (along with the approximate percentages of broker-dealers where the products were among the five most commonly sold to senior investors):

Open-end mutual funds (77%)
Variable annuities (68%)
Equities (66%)
Fixed income investments (25%)
Universal investment trusts and exchange-traded funds (20%)
Non-traded real estate investment trusts (20%)
Alternative investments such as options, business development companies, leveraged inverse ETFs (15%)
Structured products (11%)

With respect to variable annuities, the SEC and FINRA found evidence of potentially unsuitable sales to seniors at 34% of the 44 broker-dealers they examined. The report cited the possible unsuitability of recommendations to exchange existing variable annuities for new ones, to put a large percentage of a client’s net worth in a variable annuity, or to buy products inappropriate to clients’ ages and investment time horizons.

The Bucket

Posted on June 25, 2015 by Editorial Staff -

Millennials ‘defy stereotypes’: T. Rowe Price

“Millennials,” ages 18 to 35 or so, now represent about a third of the U.S. population. Partly because they now have economic clout, and are starting to save for retirement—and partly because they’re America’s first truly digital cohort—the financial services industry is keen to understand them.

That’s why we’re seeing more studies that compare and contrast the financial habits of the Milllennials and their parents, the Baby Boomers. T. Rowe Price, the no-load mutual fund company and retirement plan provider, for instance, has just issued a survey of 1,505 Millennials and 514 Boomers called the “Retirement Saving and Spending Study.”

“Millennials with 401(k)s have relatively good financial habits, particularly when compared with a national sample of 514 baby boomers with 401(k)s,” a release about the new report said. “While Millennials are not saving at least 15% of their annual salary for retirement, as T. Rowe Price recommends, they recognize that saving for retirement is important and are interested in saving more.”

Millennials, according to their own testimony, tend to track their expenses more than Boomers do (75% vs. 64%), are more likely to stick to a budget (67% to 55%), and were more likely to have increased their retirement savings within the past 12 months (40% vs. 21%), the T. Rowe Price survey showed. Millennials ranked contributing to a 401(k) but below the match and paying down debt equally as their top priority.

“They are exhibiting financial discipline in managing their spending and are defying stereotypes that this generation is prone to spend-thrift, short-sighted thinking,” said Anne Coveney, senior manager of Retirement Thought Leadership at T. Rowe Price.

In other survey findings:

Millennials are saving nearly as high a percentage of salary as baby boomers.
More millennials have increased their 401(k) savings this year than baby boomers.
More Millennials wish their employers auto-enrolled them in 401(k)s at a higher savings rate.
Millennials want advice and are more likely to use robo-advisors.
They fund emergencies differently.

Millennials profess to live within their means and to save by any means necessary.
They are more comfortable saving extra money than spending it.
Their employers’ 401(k) matches largely drive saving behavior.
Most are better off financially than their parents were at the same age.
Saving for retirement and paying down debt are equally important.
Most Millennials expect Social Security to go bankrupt before they retire.

Millennials are satisfied with auto-enrollment.
Auto-enrollment rates can be set higher.
Millennials want their employers’ full contribution match.
But some are reluctant to save at higher rates.

Millennials understand that target date funds hold a mix of asset classes.
But they may not have a full appreciation of all risks.
And they do not understand that these funds offer one-stop diversification.

Women are less likely to save in 401(k)s.
And when they do save, they save less than men.
Non-savers make less money and have more student debt.
Their educational attainment is the same as those who are saving.
It is difficult for non-savers to meet their monthly expenses.

The T. Rowe Price research was based on online interviews with 3,026 working adults age 18+ who are currently contributing to a 401(k) plan or are eligible to contribute and have a balance with their current employer of $1,000 or more. Additionally, 255 Millennials (ages 18–33) who are eligible for a 401(k) at their current employer but not contributing and do not have a balance in that 401(k) were surveyed. Retirees are represented by 1,027 adults who have retired in the past one to five years and who have a Rollover IRA or an account balance in a left-in-plan 401(k) plan. Interviewing was conducted during February 19 through March 25, 2015. All three samples are subject to a margin of error of just under 3%.

Interest rates will stay low for years: PIMCO

Institutional investors are likely to continue to have to search for alternatives to traditional bonds in the years to come, according to the results of PIMCO’s latest Secular meeting on the long-term economic outlook, held each May, IPE.com reported.

PIMCO’s analysts predicted that the neutral, real base rate for government bonds in developed countries would hover around 0% over the next 3-5 years, once central banks found the “right level” to balance out investments and savings.

“We have probably seen the bottom of the trough regarding interest rates in Europe now,” said Andrew Bosomworth, managing director, PIMCO Germany.

PIMCO’s analysts estimated that basic yield would only be increased by an inflation premium, most likely the 2% set by the European Central Bank as target inflation, and a duration premium of 0.5-1% for 10-year-bonds on average.

Nevertheless, Joachim Fels, managing director and global economic advisor at PIMCO, said he did not anticipate a “great rotation” from bonds into equities, predicted by many in the current low-interest-rate environment. “Some investors shifted a part of their portfolios into equities, but volatility remains a problem for many,” he said.

Bosomworth added that not all companies could “get money on the stock markets”, while governments had to continue to issue bonds. He pointed out that, even with low interest rates, there was still demand for government debt because of its safety.

Schwab introduces RIA version of its Intelligent Portfolios program

Charles Schwab has launched an automated investment management platform for registered investment advisors. Called Institutional Intelligent Portfolios and sponsored by Schwab Wealth Investment Advisory, Inc., it’s a white-label web-based platform that allows individual RIAs to leverage some of the digital capabilities that the robo-advisors have created.

“Institutional Intelligent Portfolios offers RIA firms flexibility across portfolio construction, ETF selection, and branding for their client experience,” a Schwab release said. RIAs can use the platform to build portfolios from more than 450 exchange-traded fund in 28 asset classes from all major fund families.

Once advisory clients establish accounts on the Schwab platform, the accounts can be automatically enrolled, with the advisor’s client’s agreement, for electronic delivery of trade confirmations, statements, communications and other documents, and advisors’ clients can access their account using Schwab Alliance or through a dedicated website and mobile app, Schwab’s release said.

Institutional Intelligent Portfolios accounts will be displayed in Schwab Advisor Center (Schwab’s desktop client management system for RIAs), alongside the advisor’s other client accounts. Data on Institutional Intelligent Portfolios accounts will be available for download through Schwab Data Delivery to use in advisors’ portfolio management systems, including those offered through Schwab Performance Technologies such as PortfolioCenter, Schwab’s portfolio management tool for advisors. Users of Schwab OpenView Gateway also will be able to access real-time information on these accounts through all participating third-party applications.

The program’s pricing structure is based on total assets custodied with Schwab outside of the Institutional Intelligent Portfolios program. For advisors with less than $100 million in assets under management (AUM) with Schwab, there will be a 10 basis point platform fee. For those firms who maintain more than $100 million in AUM at Schwab, there will be no fee. Schwab charges no account service fees, trading commissions or custody fees to advisors’ clients.

Today’s target-date funds are outdated: AllianceBernstein

AllianceBernstein, the investment management firm that is 62.7% owned by AXA, has released a whitepaper called “Designing the Future of Target-Date Funds: A New Blueprint for Improving Retirement Outcomes.”

“Today’s target-date funds fail to incorporate institutional-quality investment solutions and fiduciary best practices that are commonplace across most large, professionally managed portfolios,” AllianceBernstein said in a release. “Despite the new tools available to target-date funds, most retirement plans are still using traditional portfolio designs developed years ago.”

Many target-date strategies use a single-manager approach, focus only on stocks and bonds, have a limited static allocation strategy, and stick entirely with active or passive investing approaches rather than mixing the best of both, the whitepaper says.

“We’re looking to provide a target-date design of tomorrow that utilizes a multi-manager, open architecture structure, incorporates a broader collection of diversifying assets and that can dynamically adjust the glide path according to market conditions,” said Dan Loewy, chief investment officer and co-head of multi-asset solutions at AllianceBernstein, in the release.

Bank of America Merrill Lynch to sponsor RIIA webinars

The Retirement Income Industry Association has announced that Bank of America Merrill Lynch will underwrite the organization’s 2015-2016 calendar of adviser- and retirement industry-focused webinars as sole sponsor of its Virtual Learning Center.

The twice monthly webinars, offered free to the retirement industry, press and advisers, provide perspective from industry thought leaders on retirement income planning challenges, strategies, products and technologies. This is the third year that Bank of America Merrill Lynch has supported the Virtual Learning Center. Access to past webinars is available to RIIA corporate and individual members.

Launched in 2011, RIIA’s Virtual Learning Center (VLC) has been host to presentations from industry leaders including: Michael Kitces, Wade Pfau, Michael Finke, David Blanchett, Dirk Cotton, Jack Tatar, Dana Anspach, Sandra Timmermann, Mathew Greenwald, Howard Schneider, Dennis Gallant, Anna Rappaport, Milliman, New York Life Insurance Company, MassMutual, PwC, The Depository Trust & Clearing Corporation, and DST Systems, among others.

The Retirement Income Industry Association (RIIA) is a not-for-profit industry association that was started in 2005 and launched publicly in February 2006 “to discover, validate and teach the new realities of retirement and to do so from the perspective of “The View Across the Silos”, with the goal of achieving better retirement outcomes.”

More information about RIIA can be found at www.riia-usa.org.

Fidelity’s biennial “couples” study published

Most couples (72%) say they communicate “exceptionally” or “very” well about money, 43% (up from 27% in 2013) couldn’t correctly identify how much their partner makes, and 10% of those were off by $25,000 or more, according to Fidelity Investments’ 2015 Couples Retirement Study.

The biennial survey, which has been conducted since 2007, identified a number of other critical misunderstandings and knowledge gaps between couples:

36% of couples disagreed on the amount of the household’s investible assets.
48% have “no idea” how much they will need to save to maintain their current lifestyle in retirement—and 47% percent are in disagreement about the amount needed.
60% of couples and 49% of Boomers don’t know how much their Social Security benefit might be.
One in three couples disagree about how comfortable their retirement lifestyle will be.

The Overlooked Income Vehicle, II

Posted on June 24, 2015 by Kerry Pechter -

Americans have transferred more than $7 trillion from employer-based retirement plans to rollover IRAs, and the private financial sector—asset managers, insurers, broker-dealers—is competing mightily to capture chunks of that tax-deferred treasure and show retirees how to invest it, spend it, bequeath it and/or minimize taxes on it.

So it’s easy to forget that millions of participants in 401(k) plans also have the option—at a much lower cost, potentially—to keep some or all their qualified savings in their 401(k) accounts after they retire, and draw down a regular income from those accounts through a so-called systematic withdrawal plan, or SWP.

SWPs aren’t a tool that many Americans use, or that all plans offer, even though big plan providers such as Vanguard and Fidelity make them available. Last week, RIJ showed that one reason for the low uptake is that only 55% of plan sponsors (and only about two-thirds of large plan sponsors) offer SWPs. This week, we’ll look at some of the causes of the shortfall in availability.

Given the current fight over the Department of Labor’s proposal to reform the treatment of qualified money in rollover IRAs, the low usage of SWPs seems like a timely issue. If 401(k) plans became more convenient as an income vehicle for retired participants—with universal access to SWPs, living benefits or the new QLACs (Qualified Longevity Annuity Contracts)—the consequences could be significant. More money might stay in 401(k)s, and the DOL might not need to attempt the difficult and divisive task of policing rollover IRAs.

‘Tethered’ to ex-employees

There’s one obvious reason for the low adoption rate of SWPs by plan sponsors. A lot of sponsors, evidently, don’t offer SWPs because they don’t want to maintain 10-, 20- or even 30-year financial relationships with former employees, many of whom may have worked at the company for only a few years and may have departed on less than amicable terms.

“I think the issue is that when you leave an employer, both you—and your employer—are ready to ‘move on,’ ” a retirement plan industry veteran told RIJ. “Systematic withdrawals keep you tethered. And do you want to pay for the privilege of doing something you’re not inclined to do anyway?

Only a minority of employers, frequently described as “paternalistic,” claim to worry sincerely about the future well-being of their retirees, especially the long-tenured ones. Companies that once offered defined benefit pensions, and where the tradition of lifelong ties to ex-workers is instilled, are most likely to fit that description.

Smaller, or more risk-averse employers are more likely to worry about potential fiduciary responsibility for people who don’t work for them anymore, or about the potential cost of providing SWPs. Some sponsors continue to fret about potential legal problems even though experts say that, under ERISA, employers are not responsible for the results of participants’ independent investment decisions. As for expense, the cost of regular electronic transfers from the plan to a retiree’s bank is said to be minimal.

Although all 401(k) plan sponsors must start sending required minimum distribution checks to retired participants who are age 70½ or older, most plans actively discourage distributions before that age by not allowing “ad hoc” partial withdrawals, according to Vanguard. Companies that don’t allow ad hoc withdrawals are unlikely even to consider SWPs.

“Ninety percent of Vanguard DC plans require terminated participants to take a distribution of their entire account balance if an ad hoc partial distribution is desired,” according to a Vanguard whitepaper. [[“Retirement distribution decisions among DC participants. “For example, if a terminated participant has $100,000 in savings, and wishes to make a one-time withdrawal of $100, he or she must withdraw all savings from the plan, For example, by rolling over the entire $100,000 to an IRA and withdrawing the $100 from the IRA, or by executing an IRA rollover of $99,900 and taking a $100 cash distribution.” This section seems to be disjointed and needs to be reworked. ]]

According to How America Saves 2015, Vanguard’s survey of its plans, 13% of plans, with 30% of participants, offer ad hoc distributions.

John Blossom, a registered plan fiduciary at the Alliance Benefit Group of Illinois, noted that plan sponsors do worry about the expense of ad hoc withdrawals, perhaps unnecessarily. “Most plans do not think that it would be a helpful option to allow partial withdrawals and most third-party administrators charge a substantial fee—like $90—to process a distribution. It doesn’t occur to them that partial withdrawals might be less expensive after the first one.

“There is a cost, however, involved with tax withholding, along with the cost of a check or ACH. Also, many plans are charged a per capita fee for accounts with balances, so employers, generally, have a disincentive to keep them in the plan after separation from service. Another disincentive applies to financial institutions and ‘advisors’ who profit by rolling account balances into an IRA. They want to get it all. The new [proposed DOL] regulations may reduce this playground for ‘advisors’ by reducing the push for an all-or-nothing withdrawal,” he noted.

Liability concerns

“The willingness to offer SWPs varies by sponsor and retirement committee, depending on whether they feel it’s needed or not,” said Douglas Conkel, a senior benefits consultant who specializes in defined contribution at Milliman, the global actuarial firm. “A lot are still in the mindset that former employers (employees??) can just use an IRA or some other outside vehicle, and that they don’t need to mess with it. But we’re seeing some renewed interest in SWPs from plan sponsors. The interest is typically generated by former employees who ask for them. The plan sponsors are starting to listen,” he added.

“There’s really no downside to SWPs. It’s a bit of a reversal of current practices, so any transition will be slow. It will start among companies that already feel obligated to take care of former employees. The employer might say, ‘Our retirees gave us 10 or 15 or 20 years, so let’s go ahead and offer this.’ There’s not as much liability these days with keeping the assets in the plan. The 404(c) rules limit the liability [for adverse investment outcomes in participant-directed accounts] for fiduciaries.”

One observer noted that plan sponsors do worry about legal liability on SWPs. “I’m surprised that the number of sponsors offering any type of SWP is as high as 50%,” said Robb Smith, an independent plan fiduciary based in Orlando. “SWP in the DC market is still a relatively new concept. There’s a lack of understanding and/or conviction among plan advisors regarding SWPs, and lack of clear direction from regulators and strong safe harbor protection for workplace fiduciaries.

“Sponsors are still hesitant about the types of SWP options that are acceptable, about participant pushback and heightened risk exposure. Most plan sponsors are still spooked by DOL fee disclosure and rhetoric about high fees on their core offerings, without the additional headache of monitoring SWPs. But the number one reason is a lack of clear training for workplace fiduciaries. They’re left in the dark on at least two-thirds of their fiduciary duties.”

More than one observer told RIJ that 401(k)s lack SWPs because the idea of using DC plans for income is relatively new. “Many DC plans were built off templates and were designed when defined benefit plans were still in place and no one anticipated that 401(k)s would be anything more than a supplemental source of retirement income,” said a member of the Defined Contribution Institutional Investment Association, who works for a major plan provider.

Some plans are old enough that no one at a company may know whether the plan document includes a provision for SWPs or not. “A lot of plan sponsors were not there when the plan document was written, and they haven’t necessarily familiarized themselves with all of the plan rules,” the DCIIA member added.

Another plan consultant who asked not to be identified told RIJ that many small plans are sold by registered reps who do not put great care into plan design and who may not want to take on the responsibility for providing the advice and support that an SWP program would inevitably entail.

“First, it requires work on behalf of the providers and professional advice which, unfortunately, a good many plans cannot currently get because they bought a product from a product pusher,” he said.

“Second, there are too many plans where the compensation for the recordkeeper or third-party administrator and broker are based on assets. If assets leave, compensation will go down. Third, designing the withdrawal program for the client would require ‘advising’ and ‘managing’ that process for the client, and too many brokers are woefully unqualified to do that.”

The cost of education

SWPs might be more common if participants clamored for them, but they aren’t. “There’s no significant participant demand to justify the investment to build this functionality within the plan,” Jack Towarnicky, a Columbus, Ohio employee benefits attorney who has worked at Willis North America and at Nationwide, commented in a LinkedIn discussion initiated by RIJ. “And until recently, there’s been no significant initiatives or innovative designs by product or service providers.

“There’s been a shortage of service provider effort, especially among third-party administrators, in ‘adoption of 21st century banking functionality’ such as ACH (Automated Clearing House), electronic billing and payments and asset transfers into plans, that would facilitate and encourage low-cost, adjustable installment payout features,” he said.

The biggest cost associated with SWPs might be the participant education required to do it right. A SWPs candidate would need to decide not only how much to withdraw—what amount or percentage—but also which funds to draw money from in what proportions and in what order. Retirees might need customized advice in order to get it right, especially if they don’t have the option to alter their chosen SWP program.

“Once you give people choice, you have a tremendous education component,” Towarnicky said. Meghan Murphy, a director at Fidelity, told RIJ that this challenge arises even if the clients merely want ad hoc distributions. “If people say, ‘Can I get payments every so often?’ then big decisions come into play, and that can be overwhelming for them.”

Next week: Experts contemplate the future of SWPs.

Swiss Re’s solution for the macro-economy: Infrastructure

Posted on June 24, 2015 by Editorial Staff -

“Financial repression: The unintended consequences” is the title of Swiss Re’s latest assessment of the impact of the low-interest rate policy practiced by the U.S. Federal Reserve and the European Central Bank since the 2008-2009 financial crisis.

Neither alarmist or sanguine, and containing few surprises for anybody who follows central bank maneuvers, the global re-insurer’s report nonetheless makes good reading—because of the authority of the source and because of its relevance to the retirement industry.

The report offers some historical perspective for the Fed’s exit from zero-interest rate policy, a consideration of the interplay between global aging and the financial markets, and a blueprint for a “Global Project Bond Market” for financing trillions of dollars in new infrastructure projects. Here are a few excerpts from the report:

$1 trillion more per year on infrastructure

“Some USD 50–70 trillion will be needed to finance infrastructure globally through 2030,” the report says. “Thereby, we estimate that the current spending of roughly USD 2.6 trillion annually will have to increase to around USD 4 trillion by 2030. This emerging financing gap, estimated at roughly USD 1 trillion annually will have to be met in order to support economic growth.”
To help banks, insurance companies and governments finance infrastructure projects, Swiss Re recommends that “private market participants [should] work together with the public sector in creating a ‘Global Project Bond Market’” and “a tradable asset class [that] would unlock the long-term investor asset base.”
“A recent S&P study estimated that a USD $1.3 billion infrastructure investment would likely add 29,000 jobs to the construction sector and USD $2 billion to US real economic growth.”

A baby-steps exit from ZIRP

“With growth below the long-term trend and inflation tame, the Fed’s rate hikes are likely to be gradual. A repeat of the 1994 bond market collapse, when the Fed’s policy rate increased by 300 basis points in a single year, seems unlikely.

Chart with Swiss Re article 6-25-2015

“The hiking cycles in 1990–2000 and 2004–2006 are better comparisons. In 1999–2000, the Fed raised rates by 1.5 percentage points. The Barclays Aggregate U.S. Bond Index19 lost just 0.8% in 1999 before rebounding 11.6% in 2000. In 2004–2006, the Fed raised rates 17 times, from 1.0% to 5.25%. During those three years, the Barclays index delivered positive returns.
“An important difference, however, is that yields were higher in the two previous episodes noted than they are today (though investment grade spreads were fairly similar to today), offering more income to offset potential price declines.

“The equity market’s initial reaction in all three instances was a sell-off, with the S&P 500 Index ending down by an average of 3.2% after a one-month period. The average price rise over six-month periods after the start of each rate-hiking cycle was still positive at 2.6%. After 12 months, the average return was 6.2%, 200 basis points below the long-term average annual price change…
“Market volatility is likely to pick up, and central bank policy errors have the potential to be more detrimental. There is a good case for seeing a different equity reaction to the eventual tightening of rates in the current cycle.” (See chart above for average historical S&P 500 Index responses to interest rate hikes and cuts. Source: Swiss Re and S&P equity research.)

Boomers will “disinvest”

“Population aging is likely to become a bigger focus for financial market developments in the coming years, especially as the dependency ratios in many major economies are to rise significantly. The available labor force will decrease, and the elderly will increasingly make up a larger proportion of the population.
“With most governments already facing unsustainable debt, rising age-related spending only aggravates the problem. Moreover, there is a risk that the financing need will further create incentives for governments to implement even more expansionary policies.
“Putting this aside, several question marks emerge related to current financial repression policies: According to the life-cycle hypothesis of consumption and saving, during retirement an aging population reduces its savings and disinvests its asset holdings in order to support consumption. This means that the “wealth effect”, as reflected by policies to support the equity market for fuelling consumption growth, will be even less effective.
“At lower interest rates, more needs to be saved on aggregate for an aging population in order to maintain the consumption level post-retirement when the accumulated savings are spent.”

The DOL and the Robo-Advisors

Posted on June 18, 2015 by Kerry Pechter -

The Secretary of the Labor Department, Tom Perez, said something remarkable while being grilled by lawmakers during yesterday’s live internet broadcast of a hearing of the House subcommittee on Health, Employment, Labor and Pensions on the topic of the DOL’s pending conflict-of-interest proposal.

Perez pointed out that, if the proposal and its “best interest” standard of conduct does in fact discourage or stop some brokers from advising IRA owners, those owners will be served—and served more objectively and inexpensively—by the growing army robo-advisors who are entering the advice marketplace. The DOL proposal and robo-advice are convergent trends!

“Technology is a huge ally,” said Perez, who exhibited a fair amount of grace under the pressure of House members’ rhetorical questions. “A company out of California, Wealthfront, a startup that already has $2 billion in assets under management. They have a platform that enables them to significantly lower fees, and allows them to operate as a fiduciary. They do well by doing good.”

In his inoffensive but persistent way, Perez articulated what should be obvious by now. While the DOL conflict-of-interest proposal may threaten the broker-dealers’ and IMOs’ profitable, labor-intensive grip on the distribution of annuities and mutual funds, the robo-advisors embody the very doom of the old model. The DOL proposal will not make investment advice a commodity; it has become a commodity. The DOL hasn’t made thousands of financial salespeople obsolete; the digital advisory channel has. The DOL seems willing to compromise, but the Internet is a Grim Reaper.

Not that any of the legislators, Republican or Democratic, appeared interested what Perez said. Most were busy indicting the DOL proposal as costly, complex and confusing. That is, they tried their best to divert America’s attention (actually, fewer than 600 people watched the webcast) from the fact that the existing market for financial advice is too costly, complex and confusing.

And they’ve done a pretty good job of obfuscation. Opponents of the proposal have succeeded in planting the untruth that the proposal will do more harm than good—to small investors. Commissioned salespeople, they insist, won’t agree to sign a binding pledge to act in their clients’ best interest (as the current proposal would require). Therefore, the argument goes, they can’t or won’t try to sell them load mutual funds and fixed indexed annuities.

Small investors, according to this hollow assertion, will have no other source of advice, because their balances aren’t big enough to attract fee-based advisors. But that’s exactly where robo-advice (a combination of online content and phone support) can and will enter the equation. And it neglects the availability of fee-only advice.

Not that I’m a fan of the current version of the DOL proposal. It’s too full of gaps and ambiguities. Most observers have focused on what it says; I’ve been focusing on what I think are three critical omissions.

First, there’s no requirement that a financial intermediary know anything about de-accumulation when advising an IRA owner. There’s no requirement for attainment of a retirement income-related designation, like those offered by The American College or the Retirement Income Industry Association. This is a serious flaw, especially if the DOL hopes the IRA money will generate lifelong retirement income. We should make IRAs the special preserve of retirement income specialists.

Second, the DOL doesn’t tell its side of the story. If I were the DOL, I would tell the American people that it makes perfect sense to ring-fence IRA money from retail-priced products and services. Otherwise tax-favored 401(k)s serve merely as incubators for future retail IRA accounts. Which means that taxpayers, in effect, subsidize the profits of the financial services industry. The DOL should say, “If you want us out of your hair, get a Roth!” Instead, we bicker about the meaning of “best interest.”

Third, the proposal plays along with the fiction that the industry provides advice, pretending that brokers and agents can choose to give objective advice or conflicted advice. This is ridiculous. This is not about “advice.” It’s about the sale and distribution of securities and insurance products, and whether or not the DOL can or should isolate the $7.4 trillion in IRA money from the retail financial distribution network, or at least demand that IRA money receive special (i.e., impartial, inexpensive) treatment. Both sides seem to enjoy using “advice” as a smokescreen, perhaps to bore the public into turning its eyes away.

For those born from 1941-50, old age really is golden: NYT

Posted on June 18, 2015 by Editorial Staff -

Certain American seniors, especially those between the ages of 65 and 74 (which includes some Boomers), are faring quite well despite the Great Recession, the New York Times reported this week.

Among the 25 million people born between 1941 and 1950—“war babies” and early Boomers—some are in a sweet spot where they have both defined benefit pensions and defined contribution savings, dual incomes, appreciated homes, and full Social Security benefits.

Serendipitously, their adulthood has coincided with the biggest stock and biggest bond rallies in the history of the known universe, as well as a huge run-up in real estate values—all partly floated with trillions in government debt issuance and accompanied by overall price inflation, but that’s another story.

“These are people who have been blessed with good economic circumstances, especially those who were able to ride the wave of postwar economic growth,” Gary V. Engelhardt, an economist at Syracuse University, told the Times.

This demographic state of affairs is unprecedented. The elderly used to be less financially secure than other age groups in America. Income levels have also risen for people 75 years and older.

But it’s all relative, according to Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “It’s not so much that older people are experiencing unseemly gains in income,” she told the Times. “It’s more that middle-aged people are not seeing income growing or even keeping pace with inflation.”

Social Security benefits make up more than half the total income for a majority of America’s seniors—52% of married people and 74% of unmarried people, according to the federal government.

Life expectancy and working longer is also a factor. “The whole meaning of retirement is changing,” said Gary Koenig, vice president for economic and consumer security at the AARP Public Policy Institute. “People are living longer; they have to fund more years of retirement.” Today, almost one in three seniors are still working, and more women are working than in previous generations.

The Overlooked Income Vehicle

Posted on June 17, 2015 by Kerry Pechter -

At a recent convention in San Diego, the CEO of the American Retirement Association, Brian Graff, told a ballroom full of plan advisers that only 52% of the 401(k) plans in the U.S. allow retired participants to take systematic withdrawals from their accounts.

His point: A lack of distribution options in plans forces millions of retirees to roll their plan assets to IRAs. And that fact makes the DOL’s pending conflicts-of-interest proposal, which could make it harder for some advisers to serve IRA owners, counter-productive and, in his eyes, ridiculous.

The DOL proposal aside, Graff’s statistic about systematic withdrawals was striking. Hundreds of thousands of plan sponsors don’t offer regular electronic transfers from plans to retiree bank accounts. If they do, oddly, they often don’t know they do. And even when they know it, sponsors rarely promote this service. Not surprisingly, few retired participants use them.

At a time when the industry and the government and Baby Boomers are devoting a lot of attention to retirement income, the SWPs solution seems to be hiding in plain sight. But by neglecting the obvious, we may have overlooked one of the simplest, most flexible and least expensive ways to generate retirement income from DC plans, one that retirees can easily integrate with risk-reduction strategies, like income annuities.

Over three consecutive issues, RIJ will focus on systematic withdrawals as a retirement income solution. This week we’ll look at the dimensions of SWP coverage in the retirement plan universe. Next week, we’ll ask the experts why SWPs are so neglected. Then we’ll hear about some recent recommendations for changing the status quo.

SWPs (not just for chimneys)

What are “systematic withdrawals,” exactly? SWPs are recurring electronic ACH (automated clearinghouse) transfers of money from defined contribution plans to the bank accounts of retirees for the purpose of providing predictable income—not to be confused with cash-outs, “ad hoc” withdrawals, partial distributions or required minimum distributions at age 70½.

Overall, only 55.7% of the 600,000-plus DC plans in the U.S. offer systematic withdrawals, according to a 2014 survey by PlanSponsor magazine. The biggest plans are almost twice as likely to offer SWPs as the smallest plans. But only 64.7% of DC plans with $1 billion or more in assets offer SWPs. Plans with less than $1 million in assets offer them just 38.6% of the time.

Tellingly, more than one sponsor in five (20.3%) was “unsure” if its plan included a SWP option or not. (One reason for that: A lot of plans were designed decades ago, long before anyone dreamed that DC plans would replace defined benefit plans as a primary source of retirement income.)

“I’ll get a call from a client who wants to talk about in-plan annuities,” said one recordkeeper executive, who asked not to be identified. “But when I ask if they offer a systematic withdrawal, they say, ‘I don’t know.’”

Ironically, some plan sponsors who are getting on the annuity bandwagon have policies that force former participants to choose between leaving the money in the plan or taking all of their money out. “They’re enamored with the in-plan annuity, but meanwhile they’re pushing people out of their plan,” said the executive, who was speaking as a member of the Defined Contribution Institutional Investment Association, a trade group for large asset management firms and others. In May, DCIIA published a whitepaper, “Defined Contribution Plan Success Factors,” which advises plan sponsors to explore income options for their participants.

But even a plan that includes a provision that allows its service providers to offer SWPs, there’s not much take-up by participants. It’s not clear how aware participants are of the service, but big plan providers like Vanguard and Fidelity say that, while they offer free or near-free SWPs services, they don’t get much traction.

“We do offer a systematic withdrawal program for our retirement plans. We call it Guided Installments. The offer is available on all plans, but for certain Vanguard plan sponsor clients the existing plan provisions do limit the adoption of this program,” a Vanguard spokesperson told RIJ.

“There is no added fee to sponsors or participants. It is our simplest solution for DIY [do-it-yourself] participants, with personalized income/expense scenarios and a web-based modeling tool. It facilitates systematic withdrawals from plan accounts, and offers help with inflation and RMDs.”

Few active SWP-ers

But according to “How America Saves 2015,” Vanguard’s just-published annual review of its full-service retirement plan business, SWPs aren’t popular. Just six out 10 (59%) plan sponsors allow retired participants to establish installment payment programs (other than required minimum distributions starting at age 70½). About 13% of sponsors covering about 30% of all participants allow ad hoc partial distributions. (About one-third of large plan sponsors offer this type of distribution, making it available to about 35% of all participants.)

In 2013, the Vanguard Center for Retirement Research analyzed participant distribution behavior. The company wanted to know whether it made sense, in an age when most people seemed inclined to use rollover IRAs as their eventual retirement income platform, to introduce annuities or maintain customizable installment distribution plans for former participants.

Demand for SWPs was low. In a survey of participants over age 60 who left their Vanguard-administered plans between 2004 and 2011, no more than nine percent of those terminating in any given year were in the plan and taking installments from their accounts. Most separated participants over age 60 opted for a rollover. Within a year after leaving the plan, for instance, 56% had executed a rollover; within seven years of separation, 72% had.

At Fidelity Investments, the largest retirement plan provider in the U.S., the pattern is much the same, with fewer than 10% of retirees using SWPs. “The vast majority of our large employers, those with 5,000 or more participants, tend to offer SWPs,” said Meghan Murphy, a Fidelity director, in an interview with RIJ. “But out of more than one million retirees in our plans, we have only about 60,000 SWPs set up on our system.”

That’s unfortunate, because Fidelity has designed a highly flexible SWPs program. “There are a lot of options on how you can do SWPs,” Murphy said. “There are fixed dollar distributions; for instance, someone will say, ‘Pay me $5,000 a year.’ There are fixed percentage distributions. Some people say, ‘Just pay me what I earn in the market. There are requests for distributions from specific sources, such as Roth IRAs. We are able to accommodate all of those preferences. Some employers will say, ‘I only want to do annual distributions or quarterly distributions.’ Others will let the employees decide.”

At The Principal’s retirement plans, retirees can set up non-guaranteed, annuity-like income. “All of our plans are eligible for systematic distribution—the plan sponsor elects which distribution options are offered under the plan,” Jaime Naig, a Principal spokesperson, told RIJ. “We have a $10 distribution fee per quarter for installment distributions, paid by the participant.

“The participant, depending on plan provisions, elects fixed payments or fixed-period installments. With fixed payments, the participant chooses the amount and frequency of the payments, and receives them until the account balance equals zero. With the fixed period, the participant chooses the period and frequency of payments. The amount is re-determined each year based on the number of years remaining in the period.”

Why has the installment option been so neglected? We’ll try to answer that question in next week’s issue of RIJ.

RetirePreneur: David Macchia

Posted on June 17, 2015 by Jenna Gottlieb -

What I do: I head up Wealth2k. We’re a retirement income company, which means that we deliver everything our customers need to succeed in retirement income distribution. Wealth2k provides a broad range of services that include financial advisor training, an income-generation philosophy and process, technology integrations, educational tools, income-planning software and a formal written income plan.

Our major product is called The Income for Life Model. It’s a complete retirement income solution that combines the technology to illustrate income plans with video and interactive tools that vault the advisor into the digital age. DMacchia copy block

Our clients focus on a particular type of retail investor whom we refer to as the constrained investor, a term often used by RIIA*. This kind of person reaches retirement with savings, but the amount of savings is not great relative to the amount of sustainable monthly income that’s needed. These investors need an outcome-focused investing strategy that incorporates a strong element of downside protection combined with a structure that helps keep them invested in equities. Over the past 13 years I’ve learned that, in the constrained investor market, no single deliverable is sufficient to succeed.

Who my clients are: Our customers range from sole-practitioner financial advisors to regional banks, to insurance company broker-dealers, and independent broker-dealers. Increasingly, we are focused on delivering enterprise retirement income solutions. So, banks like KeyBank and Citizens Bank, an independent broker-dealer like Securities America, or an insurer broker-dealer such as Mutual of Omaha, would all be examples of clients.

Why they hire me: Wealth2k is chosen because we create speed-to-solution and we focus on the key end-result: investment asset consolidation. One has to understand how disruptive a business retirement income is today. It’s a zero-sum game. When assets consolidate, one advisor will emerge as the complete victor and one or more advisors will be marginalized.

My business model: Our primary revenue source is the licensing fees that customers pay to access our solutions. We frequently receive development fees associated with branding other customizations that our customers may seek.

Where I came from: For 20-plus years I had two careers that ran in parallel. Half my time was spent in wholesale product distribution, primarily annuities and life insurance. The other half was spent in marketing consulting, focused on developing sales and marketing solutions. My clients for consulting services were primarily insurance companies, and a lesser amount of asset managers. My role was to help these companies make their complex products more understandable and appealing to customers. Many of the programs I developed were successful and helped clients achieve billions of dollars in sales growth. Wealth2k began working on retirement income in 2003. Our first version of The Income for Life Model was introduced in 2004. It was not until 2010 that I focused Wealth2k exclusively on retirement income.

What made me strike out on my own: I’m a creative person and I wanted opportunities for my creativity to flow where they could be useful. The entrepreneur lifestyle appealed to me because I’m not afraid of taking risks. A career with a strong financial upside given the risk-taking nature of my personality made a lot of sense.

What I see ahead in the retirement income space: Well, for sure, the customers aren’t going away, and the need for income planning solutions will only expand. What is likely to change is the ground rules. The application of a universal fiduciary standard as it relates to retirement income is likely to cause dramatic upheaval for distribution organizations. Retirement income is already a disruptive business. We can put an exponent on the disruption. Advisors will have to demonstrate unambiguous professionalism and clear, communicable income planning skills. In the post-fiduciary environment, the urgency to win the consolidation of assets will accelerate to previously unseen levels. The DoL fiduciary proposal, if implemented, is going to create a tremendous amount of disruption. Its effect will be to commoditize products and advisors. Commoditization is never your friend.

My view on robo-advisors: Robo-advisors will have a significant impact. In a post-fiduciary environment, that impact will accelerate. There is a segment of the market that are do-it-yourselfers. That’s a space that will continue to grow and flourish.

What the annuity business could do better: To simplify and embrace greater transparency. Also, to convey the value proposition more clearly and concisely. Annuities have an important role to play in retirement income and many consumers need an annuity. For me, it’s a moral issue, not economical one. How can you deny an annuity to a consumer who can’t tolerate the risk of not meeting essential expenses? There are advisors who shun annuities, and others who are inclined to like them. It’s best to use them when the client needs it.

My retirement philosophy: My personal retirement philosophy is to stay engaged and keep contributing. I’m not a believer in slowing down, or stopping learning. A friend of mine was recently admitted to Columbia University at the age of 63 to study mathematics. I love that. Let’s go to Columbia; let’s move onto a new challenge. Don’t acknowledge limits, and never stop achieving.

*Retirement Income Industry Association.

Cerulli: Institutions are switching to strategic beta ETFs

Posted on June 17, 2015 by Editorial Staff -

It’s well known that an increasing number of institutional firms have started investing in strategic beta ETFs. Companies like PowerShares and WisdomTree have attracted billions of dollars by offering these types of funds. Even fund behemoth BlackRock, has taken notice. It just hired smart beta expert Andrew Ang, a finance professor at Columbia Business School, to manage a new strategies group that will oversee $125 billion in assets.

A new report from Cerulli Associates, Exchange-Traded Fund Markets 2015: Opportunities in the Face of Changing Dynamics, focuses on the ETF market’s development and distribution trends, including active and strategic beta ETFs, institutional distribution, marketing and staffing, and the rapidly growing ETF strategist space.

Cerulli found that different firms have different approaches to strategic beta—which some believe is just a fancy new term for value investing. Some institutions are interested in strategic beta replacing active strategies, since strategic beta is a rules-based approach that provides risk-adjusted returns in excess of a benchmark. The report also stated that other institutions view strategic beta as a replacement for a core position.

“As the concept of strategic beta and systematic factor exposure develops, the number of ways to implement these strategies in portfolios continues to grow,” said Jennifer Muzerall, senior analyst at Cerulli, in a statement. “Sponsors are now seeing institutional firms implement strategic beta as the third pillar to their portfolio in combination with their active and passive strategies. Consultants feel that using strategic beta is an efficient way to diversify a portfolio while reducing overall volatility.”

Cognitive assessment tool receives FDA approval

Posted on June 17, 2015 by Editorial Staff -

Wondering if your client is still mentally (and mathematically) spry? A new, non-invasive diagnostic test promises to take the guesswork out of that question.

Determining an elderly person’s mental competency can be a bit tricky and always delicate. A Pittsford, N.Y. company has received FDA approval for a cognitive assessment tool that might help advisors assess the mental health of their older clients—and perhaps prevent an unsuitable product sale.

Cerebral Assessment Systems Inc. has developed a computer-based tool designed to assess, measure and monitor brain function. The new tool, called Cognivue, involves a 10-minute test. The person being tested only needs to grasp the “response device,” a kind of joystick called a manipulandum. Patients watch an automated presentation of computer-generated displays with varying features and turn the manipulandum to indicate the location of the designated feature.

Dealing with elderly clients appropriately is serious business. A case from California shows what could go wrong. California advisor Glenn Neasham was convicted of felony theft for selling a $175,000 fixed indexed annuity to an 83-year old woman who was found to suffer from dementia.

Neasham lost his license due to his conviction in 2011. The California Appeals Court in San Francisco later overturned the conviction in 2013, but the situation that taking client competency for granted can be hazardous to one’s professional health.

NJ Supreme Court sides with Gov. Christie on pension issues

Posted on June 17, 2015 by Editorial Staff -

The New Jersey State Supreme Court on June 9 reversed a lower state court’s rejection of Gov. Chris Christie’s planned pension cuts, which means that he won’t have to allocate more money into the state’s pension fund.

“The Court recognizes that the present level of the pension systems’ funding is of increasing concern,” the court wrote. “But this is a constitutional controversy that has been brought to the Judiciary’s doorstep, and the Court’s obligation is to enforce the State Constitution’s limitations on legislative power.”

Last year, Gov. Christie cut $1.6 billion from the state’s fiscal 2015 public pension contribution, claiming that the state could not afford it. Unions said that the governor was bound by a law that he himself had signed. Lawsuits followed.

Unions won in a lower court when a state judge decided that the 2011 pension reforms obligated the state to pay its fair share into the retirement system, which has unfunded liabilities of about $83 billion and was only 44% funded in 2014.

However, the Supreme Court’s handed the unions a loss this month when it ruled 5-2 that there wasn’t a contract to force the full pension payment. One of the dissenting judges argued that the state is obligated to pay individual retirees their pensions. Union leaders are concerned that the funds could be insolvent in as few as 10 years.

Christie’s 2011 deal required public employees to contribute more, have their cost-of living increases frozen and their retirement ages raised. Meanwhile, the state agreed to make up for years of reduced or skipped contributions, with escalating payments over seven years.

However, a wrench was thrown into the plan last year, when state tax revenue came in short of projections. Christie reduced the planned contributions by more than $2.5 billion across the 2014 and 2015 budgets. His budget for 2016 proposes a $1.3 billion contribution.

In-Discretionary Accounts

Posted on June 11, 2015 by Kerry Pechter -

After the financial crisis, when many of their clients lost money, some fee-based financial advisers switched to a “rep-as-portfolio-manager” style of managed accounts, which gave reps discretion to trade for clients.

In theory, the change would enable them to respond more nimbly to volatility, or be less prone than clients to panic selling.

But two industry analysts now say that the switch to so-called RPM has yielded lower returns for clients, as well as unnecessary trading and higher profits for advisers, relative to managed accounts designed by broker-dealer home offices.

“It’s bad for investors,” said L. Neil Bothan of Fuse Research. “Coming out of 2008, clients were upset that no one intervened to cut their losses, so advisers, who had presented themselves as investment experts, were feeling pressure. Investing was supposed to be their value-add.”

Reps turned out to be better at sales than at tactical management, however—even when they worked in teams and one focus full-time to the portfolio. “I don’t believe that advisers are experts at investment management,” Bothan told RIJ. “They should leave it to the home office. In making tactical moves, they end up susceptible to the same emotional swings as the client. And with the current technology, the velocity of churn is amazing. They just push a button and a portfolio change goes through all their accounts.”

A new report from Cerulli Associates finds that direct-sold managed accounts, where the portfolios are centrally managed, have outperformed advisor-driven discretionary portfolios over the past five years, because the managers of packaged portfolios are more likely to stay invested through downturns and recoveries.

In Managed Accounts 2015: Battle for Discretion, the 13^thin a series of annual reports on the topic, the Boston-based research firm analyzes the market for fee-based packaged portfolios. The report uses surveys of asset managers, broker/dealers, and third-party vendors and covers most of the $900 billion in managed account assets.

“Hybrid programs underperformed packaged programs by 2.96 percentage points over the five-year period and advisor-driven programs underperformed by 3.15 percentage points. While three percentage points over five years may not seem substantial, if the outperformance is projected onto the AUM of an advisor’s entire practice, it can amount to hundreds of thousands of dollars of “lost” production revenues,” Cerulli’s new report said.

Cerulli has been tracking the flow of money into direct-sold managed portfolios. “Much of the success of packaged portfolios has been driven by a new business model, with direct platforms gathering significant assets without having a traditional advisor force,” said Frederick Pickering, research analyst at Cerulli, in a release.

Advisors [who use packaged portfolios] spend only about one-sixth of their time on investment management, and they are more swayed toward changing funds by “qualitative factors such as a fund company’s reputation or wholesaler relationships,” Cerulli noted. “Home office teams are more quantitative in their approach to [fund] manager selection.”

“We believe the outperformance is primarily driven by qualified home-office teams dedicating their time to asset allocation, manager selection, and staying invested in the market during downturns,” Cerulli said. “Advisors have a lot of hats to wear, and while advisors value flexibility, they must remember that portfolio construction is not a part-time job. On average, advisors spend 60% of their time on client-facing activities, 18% on administrative activities, and only 17% on investment management.”

According to the report, it’s widely agreed that fee-based advisors have gravitated to rep-as-portfolio manager platforms for greater flexibility and control. But more than half of the asset managers—who sell funds and ETFs to the managed account market—in the Cerulli survey said that they believe advisors are using RPM because it is more profitable for the advisor rather than good for the client.

“None of the asset managers surveyed believe that advisors are passing cost savings on to clients. It would appear, therefore, that advisors may be choosing to use RPM not only for the flexibility that it gives them but also for the economic benefits that accrue to the advisor,” the report said.

In FIA Arms Race, Hybrid Indexes are the Arms

Posted on June 11, 2015 by Kerry Pechter -

In a year when fixed indexed annuity sales are on pace to pass $40 billion again—that figure is still a fraction of variable annuity sales but it’s indicative of the busiest sector of the annuity space—issuers continue to add new contract features. Notably, they’ve added volatility-controlled indexing options.

Nationwide furthered that trend this week when it began offering the J.P. Morgan MOZAIC Index (USD), a managed-vol, multi-asset balanced global index, as the third of three index options (with the S&P 500 and MSCI EAFE indices) on its series of four New Heights fixed indexed annuity contracts.

By giving an investor exposure to a gains of balanced index, especially one that’s also volatility-controlled, an FIA issuer can, without danger of over-promising, offer investors more participation in the index gains than it can when investors link to an all-equity index like the S&P 500—precisely because the upside won’t be as great. For the investor, it has the potential to deliver a larger piece of a smaller pie. In that respect, it resembles the managed-vol options in VAs that allow issuers to offer five-percent annual roll-ups while still controlling their risks.

For background: Though an FIA mainly holds bonds, a small percentage of the contract owner’s premium in spent on options on one or more indexes. The price of the options typically varies with the volatility of the underlying index. Options on diversified indexes, because of their lower volatility, tend to cost less, so the issuer can afford to buy more options. That can translate into potentially larger gains.

FIAs come with a variety of crediting methods, alternately offering clients all of the index upside beyond a “spread,” or all of the upside up to a “cap.” With interest rates so low, insurers have had to put establish very modest caps; as a result, uncapped spread products, which appear more generous, have gained popularity.

More than a quarter (26.7%) of all first-year indexed annuity allocations went to such hybrid indices in the first quarter of 2015, said Sheryl Moore, founder of Wink, an FIA data aggregator. “The use of these ‘hybrid’ indices is growing because they give the annuity marketers an opportunity to promote ‘uncapped’ potential for gains. They are frequently volatility-controlled or have a cash component to the index.”

“Nationwide has introduced 8-, 9-, 10-, and 12-year surrender charge versions of [the New Heights FIAs],” Moore told RIJ in an interview. “The eight and 10-year versions use a two-year term end point crediting method with a forced asset allocation,” she added. “The nine and 12-year versions use a three-year term end-point crediting method with a forced asset allocation.”

Nationwide said it selected MOZAIC because it adds a balanced index to the two existing equity indexes, and because it has established a six-year track record. It was created in late April 2009, and has returned a 4.9% annualized return since then. According to J.P. Morgan, if you include back-testing, it has produced a 5.53% annualized compound return (before fees and transaction costs) since the end of 1999, compared to 3.28% for the S&P500.

“The New Heights FIAs offer principal protection and earning potential beyond what’s offered by traditional fixed indexed annuities,” said Eric Henderson, senior vice president of life insurance and annuities at Nationwide, in a release.

MOZAIC “rebalances a diverse range of asset classes and geographic regions each month to create positive returns with low volatility,” the Nationwide release said. There are three U.S. asset classes, three German asset classes, two Japanese asset classes, and four commodities, encompassing equities, bonds and commodities. There’s a maximum issue age of 80 and a minimum purchase premium of $25,000.

For those who want the gnarly details, Nationwide offers this description of MOZAIC’s “stop-loss” volatility control method, which favors asset classes with the most momentum:

“Asset classes are evaluated, selected and weighted monthly. If on any day the overall index’s weekly return is less than -3%, all allocations are removed for one week (the index is effectively uninvested). After one week, the Index re-establishes allocations based on the monthly selection and weighting described above. To the extent the week following the triggering of the ‘stop-loss’ feature sees an additional 3% decline, allocations will be removed for an additional week. This may reduce the risk of potential short-term loss in the index during a period of significant market distress, but may also cause the index to miss a potential recovery in the underlying asset classes.”

For additional fees, contract owners can add the High Point 365Lifetime Income Benefit rider and/or the High Point Enhanced Death Benefit rider. Both riders offer clients the greater of the growth of their contract value (to new high-water marks, if any) or a fixed rate roll-up. Only one of the riders can be purchased per contract.

The High Point 365 Lifetime Income Benefit rider costs 95 basis points per year. It offers the larger of a two percent annual roll-up for the first 10 contract years or until the date the lifetime income payments begin. There’s an optional 3% contract bonus that, if elected, raises the rider cost to 1.25% per year. The bonus is gradually vested over 10 years, at the rate of 10% per year.

In a product illustration provided by Nationwide, a hypothetical couple invests $100,000 in a joint-life New Heights FIA at age 50 and qualifies for a higher payout percentage with every year they delay taking benefits. The payout rate in the illustration is 5.50% at age 63, gradually rising to 12.3% at age 75. But a note to the illustration says that the “payout percentages illustrated are a hypothetical model.”

The Enhanced Death Benefit rider costs 50 basis points per year (rising to 80 basis points if a 3% contract bonus is elected) and guarantees at least a four percent per year appreciation in the death benefit, up to 200% or age 80, whichever comes first, minus withdrawals and fees.

New Heights will be distributed by Annexus, an FIA product designer and distributor of FIAs through independent marketing organizations, or IMOs. Annexus also contributed to the creation of the New Heights investment lineup. New Heights will also be broadly available through Nationwide’s affiliated agency force, to independent distributors and in the bank and wirehouse channels.

Passive funds continue to dominate flows: Cerulli

New data tool lets asset managers track advisors

Transamerica in distribution partnership with Edward Jones

New marketing chief at Prudential Annuities

Millennials ‘defy stereotypes’: T. Rowe Price

Interest rates will stay low for years: PIMCO

Schwab introduces RIA version of its Intelligent Portfolios program

Today’s target-date funds are outdated: AllianceBernstein

Bank of America Merrill Lynch to sponsor RIIA webinars

Fidelity’s biennial “couples” study published

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