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In the Fiduciary Fight, Key Players are Biting Off as Much as They Can Chew

Posted on July 23, 2015 by Will Trout -

Amidst the summer lull, the Department of Labor (DoL) has issued Field Assistance Bulletin 2015-02, a clarifying document that aims to open the door to the broader use of annuities within defined contribution (DC) plans.

While annuities have been allowed within DC plans for some years, a lack of guidance as to fiduciary obligations post-sale has tempered sponsor enthusiasm. The bulletin explains that while sponsors are considered under fiduciary obligation at the time of annuity selection and at each periodic review, they will not be held to this standard in the case of specific purchases by a participant or beneficiary.

This distinction is important in that it grants significant protection to sponsors, but the DoL leaves significant wiggle room as to the frequency of required reviews.

Clearly, published reports of the pending insolvency on an issuing insurer would trigger the need for a review. Otherwise, the degree of diligence that must be exercised by the sponsor post-selection will need to be evaluated on a case by case basis: First by the plan sponsor, presumably, and then by the DoL.

This may be a best-effort solution to an irreconcilable problem, but such a measured response by the DoL is unlikely to eliminate what it describes as “disincentives for plan sponsors to offer their employees an annuity as a lifetime income distribution.” Plan sponsors have little incentive, in any case, to assume the risks of offering annuities when these are readily available for purchase outside the pre-tax space, and so the DoL will need to aim higher.

What is noteworthy here is not so much the narrow scope of the little noticed bulletin, or its limited reach, but the degree to which it signals an acceleration of DoL efforts to clean up the DC business. To a large degree, this acceleration reflects a heightened jockeying for position among regulators and other industry actors with an interest in guiding reform. The recent Supreme Court case of Tibble vs. Edison International, which affirmed the nature of the fiduciary responsibility of plan sponsors to participants on an ongoing basis, appears to have brought issues of power and control to a head.

The latest guidance from DoL attempts to boost clarity around sponsor obligations pursuant to the sale of annuities. This guidance is important because to date, regulatory attention has fallen disproportionately on the accumulation side of the DC business. Helping participants to successfully manage the payout function is a noble and (as I discuss in my recent report on de-accumulation) challenging goal. Time is of the essence if the US is to forestall a doomsday scenario of retirees outliving their savings.

At the same time, it is important to keep in mind that economics are not the only consideration driving the DoL push. Rather, the newfound urgency underscores the Department’s desire to put its imprimatur on an issue that is being tackled by multiple actors (e.g. Treasury; the SEC, which announced last month its compliance-focused ReTIRE Initiative; and lobbying groups such as SIFMA and NAIFA) and from multiple standpoints. In particular, a torrent of litigation (the capstone of which was the Tibble vs. Edison verdict) appears to be shifting decision power to the courts.

Legal actions are also shining a spotlight on fees. This presents a cart-before-the-horse problem for DoL, in that excessive fees are an issue that a uniform fiduciary standard is supposed to address. Having assumed the mantle of defined contribution crusader, the DoL risks falling behind events. The pressure on DoL will only become more acute as we enter the twilight of the Obama administration.

The upshot? Look for a wave of bulletins and other forms of guidance from the DoL, particularly in the wake of the upcoming August hearings. While the fiduciary debate to date has gotten less attention than it deserves, it will rise to the top of the political agenda this fall, despite resistance from industry lobbyists. Indeed, given the weight of the government and private sector entities (among them the AARP) behind reform efforts, the end result may actually have teeth.

Today’s Dark Lords of Finance

Posted on July 23, 2015 by Alexander Friedman -

In his Pulitzer-Prize-winning book, Lords of Finance, the economist Liaquat Ahamad tells the story of how four central bankers, driven by staunch adherence to the gold standard, “broke the world” and triggered the Great Depression. Today’s central bankers largely share a new conventional wisdom – about the benefits of loose monetary policy. Are monetary policymakers poised to break the world again?

Orthodox monetary policy no longer enshrines the gold standard, which caused the central bankers of the 1920s to mismanage interest rates, triggering a global economic meltdown that ultimately set the stage for World War II. But the unprecedented period of coordinated loose monetary policy since the beginning of the financial crisis in 2008 could be just as problematic. Indeed, the discernible effect on financial markets has already been huge.

The first-order impact is clear. Institutional investors have found it difficult to achieve positive real yields in any of the traditional safe-haven investments. Life insurers, for example, have struggled to meet their guaranteed rates of return. According to a recent report by Swiss Re, had government bonds been trading closer to their “fair value,” insurers in America and Europe would have earned some $40-$80 billion from 2008 to 2013 (assuming a typical 50-60% allocation to fixed income). For public pension funds, an additional 1% yield during this period would have increased annual income by $40-50 billion.

Investors have responded to near-zero interest rates with unprecedented adjustments in the way they allocate assets. In most cases, they have taken on more risk. For starters, they have moved into riskier credit instruments, resulting in a compression of corporate-bond spreads. Once returns on commercial paper had been driven to all-time lows, investors continued to push into equities. Approximately 63% of global institutional investors increased allocations in developed-market equities in the six months prior to April 2015, according to data from a recent State Street survey – even though some 60% of them expect a market correction of 10-20%.

Even the world’s most conservative investors have taken on unprecedented risk. Japan’s public pension funds, which include the world’s largest, have dumped local bonds at record rates. In addition to boosting investments in foreign stocks and bonds, they have now raised their holdings of domestic stocks for the fifth consecutive quarter.

These allocation decisions are understandable, given the paltry yields available in fixed-income investments, but the resulting second-order impact could ultimately prove devastating.

The equity bull market is now six years old. Even after the market volatility following the crisis in Greece and the Chinese stock market’s plunge, valuations appear to be high. The S&P 500 has surpassed pre-2008 levels, with companies’ shares trading at 18 times their earnings.

As long as the tailwinds of global quantitative easing, cheap oil, and further institutional inflows keep blowing, equities could continue to rally. But at some point, a real market correction will arrive. And when it does, pension funds and insurance companies will be more exposed than ever before to volatility in the equity markets.

This overexposure comes at a time when demographic trends are working against pension funds. In Germany, for example, where 20% of the population is older than 65, the number of working-age adults will shrink from about 50 million today to as few as 34 million by 2060. Among emerging markets, rapidly rising life expectancy and plunging fertility are likely to double the share of China’s over-60 population by 2050 – adding roughly a half-billion people who require support in their unproductive years.

If the combined effect of steep losses in equity markets and rising dependency ratios cause pension funds to struggle to meet their obligations, it will be up to governments to provide safety nets – if they can. Government debt as a percentage of global GDP has increased at an annual rate of 9.3% since 2007.

In Europe, for example, Greece is not the only country drowning in debt. In 2014, debt levels throughout the eurozone continued to climb, reaching nearly 92% of GDP – the highest since the single currency’s introduction in 1999. If pensions and governments both prove unable to provide for the elderly, countries across the continent could experience rising social instability – a broader version of the saga playing out in Greece.

The new Lords of Finance have arguably been successful in many of their objectives since the financial crisis erupted seven years ago. For this, they deserve credit. But, when an emergency strikes, large-scale policy responses always produce unintended consequences typically sowing the seeds for the next full-blown crisis. Given recent market turmoil, the question now is whether the next crisis has already begun.

MetLife launches retail QLAC

Posted on July 23, 2015 by Editorial Staff -

MetLife’s Guaranteed Income Builder deferred income annuity (DIA) is now available as a qualifying longevity annuity contract (QLAC) for individual clients, the publicly-held insurance giant announced this week.

In late May, MetLife introduced a similar annuity, called Retirement Income Insurance, for the retirement plan market. The institutional product offers unisex pricing, while the retail product offers higher payouts for men than women because of women’s higher average life expectancy, all else being equal.

In an interview with RIJ, Elizabeth Forget, executive vice president of MetLife Retail Retirement & Wealth Solutions, said that the product would be distributed through MetLife’s affiliated Premier Client Group affiliated advisors as well as its “traditional third-party distributors,” such as broker-dealers.

The product isn’t planned to be distributed by insurance agents via state-regulated insurance marketing organizations, in part because, unlike the broker-dealers, they don’t necessarily assume responsibility for assuring the suitability of each sale, she told RIJ.

Asked if she thought that the Department of Labor’s fiduciary proposal, if enacted in its current form, might favor the sale of fixed annuities, Forget said, “The proposal differentiates between fixed and variable annuities, but it’s hard to translate what the proposed rule will mean in certain instances.” Under the current proposal, sellers of variable annuities would have to meet a new, more stringent standard of conduct by signing a “Best Interest Contract” (BIC) with the client.

QLACs help protect against the risk of outliving one’s savings. But, like several other insurers that market QLACs, MetLife is positioning its QLAC as a tax-reduction tactic. By purchasing a QLAC, IRA owners can exclude up to 25% of their tax-deferred savings (but no more than $125,000) from the calculation of their required minimum distributions until age 85, thus potentially lowering their annual tax bill by 25% for up to 14 years. Taxable annual distributions from the rest of their tax-deferred savings must begin in the year after the year the owners reach age 70½.

“By allowing clients to defer payments from their IRAs, Guaranteed Income Builder as a QLAC gives them a significant level of flexibility to manage both their assets and tax obligations—further enhancing their ability to retire with confidence,” Forget said in a release.

Lockheed Martin’s $62 million ERISA settlement approved

Posted on July 23, 2015 by Editorial Staff -

Chief U.S. Judge Michael Reagan of the Southern District of Illinois has given final approval for a $62 million settlement in favor of Lockheed Martin employees and retirees in their suit against their employer, the plaintiffs’ law firm said in a release this week.

The eight-year-old case, Abbott v. Lockheed Martin, alleged excessive fees in two of Lockheed Martin’s 401(k) plans, as well as imprudent management of certain investment options offered to employees, according to the St. Louis firm of Schlichter, Bogard & Denton.

Jerome Schlichter, the firm’s managing partner, specializes in leading class action suits against 401(k) plan sponsors and providers on behalf of plan participants and retirees, often focusing on their failure to protect participants from high investment or recordkeeping fees, in violation of their fiduciary duties under the Employee Retirement Income Security Act of 1974.

“The settlement is the largest ever for a case of this kind against a single employer,” observed Thomas E. Clark Jr. of the Wagner Law Group. Lockheed Martin’s plan, with over $27 billion in assets and 180,000 current and former employees, is the fifth largest 401(k) in the United States.

The plaintiffs had charged that Lockheed Martin, a defense contractor, invested plan participants’ retirement savings in funds that charged excessively high fees, diminishing returns. They also claimed that Lockheed Martin allowed excessive recordkeeping fees, and allowed too much of participants’ assets to be held in low-yielding money market funds.

Lockheed Martin denied the allegations and said it followed the law and that the fees were reasonable. The case was originally scheduled for trial in the Southern District of Illinois last December, but the parties reached a settlement just before then.

Schlichter said his firm also recently won a unanimous 9-0 decision in the United States Supreme Court on behalf of employees and retirees of Edison International in their 401(k) plan, which is the first 401(k) excessive fee case decided by the Supreme Court.

Fred Reish et al comment on DOL proposal’s impact

Posted on July 23, 2015 by Editorial Staff -

If enacted in its current form, the Department of Labor’s fiduciary (or “conflict-of-interest”) proposal would have “a significant impact on the sales practices of insurance agents and brokers, according to a new report from attorney Fred Reish and colleagues at the law firm of Drinker Biddle.

Under the current language of the proposal, insurance advisors would have to comply with the existing exemption (PTE 84-24) in order to be earn manufacturer-paid commissions on sales of fixed annuities to IRA owners and 401(k) plan participants, but must meet a new “best interest” or “BICE” standard on sales of variable annuities to IRA owners.

Sales of variable annuities, which are securities and insurance products, are regulated by the SEC and FINRA. Sales of fixed annuities—fixed deferred, fixed income, and fixed indexed annuities—are regulated by the states as insurance products.

One insurance company executive speculated at the recent IRI regulatory conference that, if the fiduciary bar is set higher for variable annuities, fixed annuities would have an advantage in the IRA market.

That could have a big impact on annuity sales. Recent estimates show that the amount of savings in IRAs, including traditional and rollover IRAs, now exceeds $7 trillion. Sales to IRA owners currently account for a large share—nearly half for some products—of overall annuity sales.

There’s some overlap between the BICE and PTE 84-24 standards, and some important differences. Under both standards, advisors have to act in the best interest of the client when selling to IRA owners. But the BICE rule requires advisors and clients to enter into a contract in which the advisors pledge to make their sales recommendations “without regard” to their own remuneration.

The phrase “without regard” is receiving particular scrutiny by critics of the proposal. In its public comment on the DOL proposal, the Insured Retirement Institute, which advocates for the interests of the annuity industry, said “the definition of the term “Best Interest” in the Proposed Amendment to PTE 84-24… should be revised to make clear that advisers and financial institutions must always put their clients’ interests first, but would not be required to completely disregard their own legitimate business interests.”

Participants still not focused on income: Cerulli

Posted on July 23, 2015 by Editorial Staff -

Systematic withdrawal products, provided by asset managers, are considered the “most attractive retirement income sales option during the next five years” in the retirement plan space, according to The Cerulli Edge (Retirement Edition), published by Cerulli Associates.

Cerulli asked asset managers, broker-dealers and insurance companies what income product they thought would sell best to plan sponsors and participants. Forty-one percent said “asset management-only” products, 18% named hybrid products such as variable annuities, and 14% said insurance-only products such as deferred income annuities.

The asset management products might include “dividend drawdown selections that involve the asset manager’s ability to create a product enabling the individual to withdraw a certain amount based on the investments of the underlying product,” Cerulli analysts observed.

“Instead of waiting for the request for a retirement income product, asset managers need to have their foot in the door with two types of products: one in which the insurance company manages a component and one without, in case opportunity knocks,” analysts suggested.

Behavioral issues, as opposed to financial or legal liability issues, may be the biggest obstacles to the introduction of income products in workplace retirement plans, Cerulli noted. Most participants have not yet made the conceptual leap from looking at the account balances in absolute terms to looking at them as the present value of a life annuity or annuity-like income stream.

“The movement away from defined benefit plans to defined contribution has placed a significant portion of the retirement savings burden on employees, without really transferring the investment knowledge, risk management, or know-how that should accompany it,” states Shaan Duggal, research analyst at Cerulli, in a release.

“Most plan participants lack basic information about what their account balance means in terms of retirement income. As more Baby Boomers approach retirement, the issue of ongoing income, especially to pay for healthcare, assumes added urgency.”

Approximately 80% of respondents to their annual plan participant survey indicate that when checking their account statements, they consider the investment performance or their account balance to be the most important information, Cerulli’s newsletter said.

“Those in the 60-69 age range appear to pay the most attention to projected retirement income, but in the aggregate, this is not the case,” the release said.

Cerulli research shows that the majority of 401(k) participants report checking their balances on a quarterly or monthly basis, indicating a reasonable level interest in the growth of their retirement account.

“There should be a concerted effort to change the mindset of the average saver. Accumulating a sizable balance and achieving high investment return on a yearly basis are beneficial, but if that balance doesn’t match the projected retirement expenses, there will likely be a shortfall,” Duggal said.

Financial Engines, Betterment will leverage new Social Security data

Posted on July 16, 2015 by Editorial Staff -

Financial Engines, the managed accounts provider will incorporate the Social Security Administration’s new Social Security data file in the Financial Engines Social Security planner. The data file was introduced at the White House Conference on Aging this week.

The transferable data file contains the information found in users’ Social Security benefit statements regarding the amount they can expect to receive in Social Security each month in retirement. Financial Engines introduced its Social Security planner to the public at no charge in June 2014.

Retirement plan participants with access to Financial Engines’ Social Security planner through their employer can generate a personalized retirement income plan, based on Financial Engines’ patented Income+ methodology.

The comprehensive plan includes multiple income sources, such as part-time work and pensions, and shows how retirement savings in a 401(k) or IRA can be converted into income to help defer claiming Social Security to maximize benefits.

Betterment, the automated investing service that manages $2.4 billion for 98,000 customers, said it too would update its advice engine to use newly available Social Security data, the robo-advice firm announced at the White House Conference on Aging this week.

Betterment will integrate the information—a digital version of the information in their monthly Social Security benefit statement—into RetireGuide, an advice engine that informs customers whether or not they are “invested correctly for a comfortable retirement.”

RetireGuide builds a savings and investing plan that encompasses all of an investor’s accounts, including those with other providers, and his or her spouse’s holdings. It uses Betterment’s globally diversified portfolio of index-tracking ETFs and asset allocation advice.

AXA’s UK pension fund uses longevity swap

Posted on July 16, 2015 by Editorial Staff -

In a swap deal with The Reinsurance Group of America (RGA), French insurance group AXA has insured the longevity risk on about half its UK defined benefit (DB) pension fund’s liabilities, IPE.com reported.

RGA will now take on £2.8bn ($3.9bn) worth of longevity in a swap deal arranged via the pension fund’s sponsoring insurer employer.

Reinsurance companies only deal with banks and insurance firms, with the pension fund able to leverage against its sponsor’s place in the market.

The longevity swap will now form part of the £3.6bn pension fund’s asset portfolio, with RGA providing income to the fund to protect it from the risk that its 11,000 participants will live longer than expected.

AXA becomes the fifth UK insurer to arrange longevity swaps for its own DB plan, as the UK market as a whole has hedged £53.4bn worth of longevity liabilities.

Insurers will be subject to additional capital requirements when Solvency II kicks in later this year, requiring companies to shore up longevity within their books and their own pension funds.

The AXA longevity swap is the first of 2015 after the £25.4bn record level of swaps seen in 2014. Last year also saw the first scheme access the reinsurance market without an intermediary firm – with Aviva aiding its pension fund to access the market directly.

This allows pension funds to save on costs and benefit from better pricing by avoiding price averaging, which occurs when intermediary insurers or banks engage with several reinsurers to spread credit and counterparty risks, as well as exposure limits. Four of the five deals in 2014 used this process.

Last July, the BT Pension Scheme dealt directly with the Prudential Insurance Company of America by setting up its own insurance company in a £16bn longevity swap.

Towers Watson, which advised the BT scheme and went on to create an insurance cell for smaller pension funds to access the market, also advised the AXA pension fund.

Conversions of pensions to lump sum payments are banned

Posted on July 16, 2015 by Editorial Staff -

In an unexpected move last week, the IRS and Treasury Department acted to ban the commutation of pension annuities into lump sums, asserting that a liquidity option would inevitably result in a reduction of the guaranteed monthly payout.

“If a participant has the ability to accelerate distributions at any time, then the actuarial cost associated with that acceleration right would result in smaller initial benefits, which contravenes the purpose of § 401(a)(9),” the agencies said in Notice 2015-49.

The new amendments to existing regulations “provide that qualified defined benefit plans generally are not permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution.”

As background, the agencies wrote: “A number of sponsors of defined benefit plans have amended their plans to provide a limited period during which certain retirees who are currently receiving joint and survivor, single life, or other life annuity payments from those plans may elect to convert that annuity into a lump sum that is payable immediately. These arrangements are sometimes referred to as lump sum risk-transferring programs because longevity risk and investment risk are transferred from the plan to the retirees.”

“Under the regulations, a defined benefit pension plan cannot permit a current annuitant to commute annuity payments to a lump sum or otherwise accelerate those payments, except in a narrow set of circumstances specified in the regulations, such as in the case of retirement, death, or plan termination.”

Risk-transfers that were arranged before July 9, 2015 would not be affected by the ruling.

Investments + Annuities = Healthy Retirement

Posted on July 15, 2015 by Kerry Pechter -

Some Americans have saved so much for retirement that they don’t need an annuity, while many others have saved so little that they can’t afford to tie up any of their money in an annuity. In between, however, are millions of retirees who could probably “maximize their utility” by holding a mix of investments and annuities.

Two recent articles by major retirement researchers offer fresh ammunition to advisers who believe that a combination of annuities and investments (sometimes separately, and sometimes within the same bundled product) could give many of their clients the most income and the most peace-of-mind in retirement.

Mark Warshawsky’s paper is called “Government Policy on Distribution Methods for Assets in Individual Accounts for Retirees Life Income Annuities and Withdrawal Rules.” Meanwhile, the prolific Wade Pfau and Michael Finke have co-authored an article, “Reduce Retirement Costs with Deferred Income Annuities Purchased Before Retirement” in the July issue of the Journal of Financial Planning.

Although they both advocate annuities, these two articles approach the retirement financing problem differently. Warshawsky think it would be good public policy to prescribe a ladder of immediate annuities, plus investments, to retirees in general. Pfau-Finke demonstrate that buying a deferred income annuity, up to 20 years before retirement, can buffer a retired couple’s longevity risk and market risk.

But both articles offer useful starting points for advisers who are curious about embedding a guaranteed income product into their clients’ retirement portfolios. The articles will appeal to advisers who aren’t satisfied with the 4% withdrawal rule, and who doesn’t want to fudge the risks of retirement by simply assuming that their clients will live to the average age and experience average market returns.

Annuity lamination plus investments

A blend of life annuities and withdrawals from an investment portfolio is recommended as the best policy not just for individual retirees but also as an exit strategy for participants in financially challenged public employee pensions, according to the paper by Warshawsky (right), which was published by the Mercatus Center at George Mason University.

Warshawsky’s name should be familiar to retirement mavens. A former Assistant Secretary of the Treasury official and director of retirement research at Towers Watson, he wrote Retirement Income: Risks and Strategies (MIT Press, 2011). He recently founded ReLIAS LLC, a retirement consulting firm. Mark Warshawsky

In the new paper, Warshawsky works toward his conclusions about the advisability of a hybrid annuity-systematic-withdrawal de-accumulation plan by first comparing Bengen’s famous 4% rule (perhaps the most-analyzed rule-of-thumb in financial history) with the purchase of a joint-life immediate annuity with a 50% continuation of the benefit for the surviving spouse.

In isolation, each method has significant drawbacks, Warshawsky found. The 4% solution fails to protect fully against longevity risk; the immediate annuity fails to protect against inflation risk. So he recommends a compromise: Retirees should put part of their money in a ladder of annuities and the rest in a diversified investment portfolio.

In an interview with RIJ, Warshawsky said he envisions the ladder as “a sequence of purchases of immediate life income annuities.” That, along with a “fixed percentage distribution from investment portfolio provide the flow of income to the retired household. The specifics of the sequencing and the percentage) would be customized to the preferences, goals and resources of each retired household.”

Warshawsky is aiming at public policy recommendations, not just for individuals but also for the legions of workers in underfunded local public pensions. He advises cash-strapped municipalities to resolve their crushing pension liabilities with lump-sum buyouts that would be invested for each participant in a “structured account.”

The lump sum would not be for the full present value of the pension, but something more affordable for the municipality. As for the structured account, it would be a “mix of systematic withdrawals from a dynamic portfolio of a mix of asset types, and gradual laddered purchases of immediate life annuities.”

Dedicate half your bond allocation to a DIA

While Warshawsky leans toward immediate annuities as the raw material for his partial annuitization strategy, other researchers have been looking at the use of a newer type of lifetime income generator: the deferred income annuity, or DIA.

Writing in the July issue of the Journal of Financial Planning, Pfau, a professor at The American College, and Finke (left), who teaches at Texas Tech University, try to calculate whether, or under what circumstances, a 65-year-old couple could lower their cost of retirement at age 65 by substituting a DIA for half of their portfolio’s bond allocation.

Michael Finke The authors use a lot of computing power to test this proposition under a wide range of possibilities: 50,000 different ages of death for the second-to-die; 50,000 sequences of asset returns; a DIA purchase date at age 45, 55 or 62; and 11 different overall stock allocations, from zero to 100%. The DIA is a joint-life contract with a 10-year period certain and a return-of-premium benefit if neither spouse survives to the income start date.

The tables they generated, which are reprinted in the journal, showed that the savings from using the DIA peaked when it was purchased at age 45, when the allocation to the DIA was 35% to 45% of the original assets, and when the total cost of retirement was high (i.e., when longevity was great and market returns were unfavorable). The maximum savings was about 11%.

In other words, the insurance did exactly what it was supposed to do: protect against calamity (long life, poor returns). It had the least value—in hindsight, as it were—when the owners had short lifespans, enjoyed bull markets, and maintained either a very high or very low allocation to stocks.

“A short-deferral DIA can be a valuable complement to a conventional portfolio withdrawal strategy,” Finke and Pfau conclude. “Similar to the benefit of allocating bonds to single premium immediate annuities, this analysis shows that a short deferral DIA that provides lifetime income can lower the cost of funding retirement by softening the financial blow of a long lifetime or poor market returns.

“The tradeoff is lower wealth for retirees who do not live as long; however, this loss is reduced by the return of premium if the client dies before income begins and the 10-year period certain feature.”

RetirePreneur: Laurence Kotlikoff

Posted on July 15, 2015 by Jenna Gottlieb -

What I do: I’m an economics professor at Boston University and I have conducted research on financial reform, personal finance, tax issues, Social Security, healthcare, pensions, saving, and insurance and other topics. I’m also the president of Economic Security Planning Inc., a company that makes and markets life-cycle personal financial planning software tools that determine how much households should spend and save and how they can safely raise their living standards in a host of ways, including optimizing Social Security benefit collection and retirement account contributions and withdrawals. Larry Kotlikoff preneur block

Who my clients are: Everyone in the country is a potential client. We target households directly and we also work with financial planners. We’re don’t market or advertise financial products. We license our software to individuals starting at $40 per license, and $200 for financial advisors.

My business model: Worry first about quality, second about glitz, and third about sales. Fortunately, I’m well paid by Boston University, so I’ve never had to rush products to market to meet personal bills.

Where I came from: I received my B.A. in Economics from the University of Pennsylvania in 1973 and my Ph.D. in Economics from Harvard University in 1977. From 1977 through 1983, I served on the faculties of economics of the University of California, Los Angeles and Yale University and spent a year working for the President’s Council of Economic Advisors. I joined BU in 1984.

My latest book: My 17^th book is “Get What’s Yours—the Secrets to Maxing Out Your Social Security Benefits.” It’s co-authored with personal financial columnist Philip Moeller and PBS NewsHour correspondent Paul Solman. Social Security is incredibly complicated and playing your cards right can mean tens of thousands of extra dollars. The book is a guide to getting every dollar of benefits you’ve paid for, while avoiding Social Security’s myriad gotchas.

My run for president: Politicians from both parties are slowly but surely driving our country broke. Our bureaucracy rivals that in Russia. We need to fix, for real and for good, our healthcare, Social Security, tax, and banking systems. In 2012, I laid out postcard length reforms at www.thepurpleplans.org hoping the presidential candidates would consider them. When politics-as-usual prevailed, I ran for president on the online Americans Elect platform. Unfortunately, after five months, the sponsors of this third party movement called it quits, which ended my candidacy. Running for president was a big step for an academic with little name recognition. I felt I owed it to my kids and all of our country’s children to reveal our nation’s true and truly desperate fiscal condition and how I and other economists think things should be fixed.

My entrepreneurial spirit: I got into economics because it uses theory and data to resolve real-world economic problems, whether at the level of the globe, the country, the household or the individual. My entrepreneurial spirit comes from a lot of places. But it’s primarily from the desire to help people and make economics relevant. Most economists spend their lives describing economic mistakes. I think my profession needs to prescribe economic solutions.

What I see ahead for retirement income: The baby boom generation is woefully ill-prepared for what may be tremendously long retirements. This is thanks to the demise of defined benefit plans, failure to join and contribute to defined contribution plans, the failure to save enough on one’s own, and the fact that Social Security, Medicare, and Medicaid are all broke on any reasonable present value calculation.

For its part, the financial industry is far too focused on selling expensive risky financial products. It sets replacement-rate saving targets that are miles too high and then lures people into buying high-yield, but also high-risk and high-fee, securities to make “their” target. There is little real interest in helping people safely raise their living standards. This is why I started my company and produce, with my dedicated colleagues, the software we sell.

The best retirement income plan for most people: Economists have worked on personal financial planning for over a century, starting with Yale’s Irving Fisher. Fisher properly explained that people want to smooth their spending power over time—good times and bad times. We economists call this consumption smoothing. It underlies every aspect of the theories of saving, investment, and insurance. In the retirement area, people need spending targets that are sustainable and ways to raise their living standards with no risk. These include working longer, downsizing homes, moving to states with lower taxes, getting Social Security’s best deal, considering Roth conversions, timing retirement account withdrawals—and the list goes on.

My view on robo-advisors: I obviously believe in the power of expert financial planning software to do enormous good. But quick and easy software is generally quick and dirty. People need to take planning their finances as seriously as dealing with their health. No one is looking for a three-minute annual health checkup; we need to be equally wary of quick software programs that are simply fancy sales tools. There is a huge conflict of interest in selling financial products and offering financial advice. This is why my company sells no products, recommends no one’s products, and takes no advertising. Our software also provides no investment advice. Instead, we do what I think all financial software should do, namely show clients how different types of investments and current spending behaviors will affect the level and spread of their future living standards and then let the client decide how to invest. Robo-advisors don’t solicit the large numbers of the inputs needed to produce intertemporal living standard risk-reward frontiers. Nor do they have the consumption-smoothing technology to make these calculations. I’d personally be very wary of anyone or anything telling me how to invest if they can’t show me the possible living standard implications—upside and downside with all factors, including all future taxes, taken into account.

My thoughts on the DoL fiduciary proposal: I think it’s appropriate—especially if the conveyor of investment advice is also selling financial products or otherwise benefiting from the amount and type of his/her client’s investments. In my view, there is financial advice/education/suggestions and then there are product sales. Providing both involves a huge conflict of interest; if you are going to do so, better you should do so in the role of a fiduciary.

My retirement philosophy: I think people should work as long as possible, smooth their living standard through time, take advantage of the many safe ways to raise their living standard, and not count on their risky investments paying off. This is the basis for my company’s product line.

Britain’s Exchequer Mulls an End to Tax Deferred Savings

Posted on July 15, 2015 by Kerry Pechter -

Britain’s Tory government got rid of one of the relics of the English “nanny state” when it ended mandatory annuitization of tax-deferred savings, effective last April. But apparently that was just one of its ideas for shaking up the retirement system like a dice cup.

In his summer budget, released last week, Britain’s chancellor of the exchequer said that the government would study the possibility of taxing most retirement contributions and allowing retirees to withdraw their incomes tax-free.

That’s how Individual Savings Accounts (ISAs) currently work in the UK, and it’s the way savings are taxed in another part of the old British Empire—in Australia’s “Superannuation” plan. It’s similar to the way Roth IRAs and Roth 401(k)s work in the U.S.

Ironically, in the U.K. a conservative wants to roll back tax deferral, while only the liberal Obama administration has dared to mention it in the U.S. In both countries, most of the tax subsidy for savings, which amounts to about $100 billion a year, goes to the highly-compensated, who can afford to take full advantage of it. Some of that money comes back to the government later, when distributions are taxed.

Chancellor of the Exchequer George Osborne said that any changes to the tax system “would aim to encourage people to save more for retirement,” the Financial Times reported. Advocates of the changes say that it would simplify an overcomplicated system.

A Times columnist, Chris Giles, praised the idea in today’s paper, but raised concerns. “A switch would add some complications to the tax treatment of employer contributions to the remaining defined benefit pension schemes,” he wrote.

“A switch would also take years to implement because pension savings which have already attracted tax relief would still be liable to taxation when it is received. More importantly, the move to abolish tax relief on pension contributions would bring forward huge amounts of tax revenues, flattering the public finances by possibly in excess of £40bn ($60bn) a year.”

According to the 2015 Budget document:

Possible Roth-style savings. “The government is… consulting on whether there is a case for reforming pensions tax relief to strengthen incentives to save, offering savers greater simplicity and transparency, or whether it would be best to keep the current system. The government is interested in views on the various options [ranging] from a fundamental reform of the system (for example moving to a system which is “Taxed-Exempt-Exempt” like ISAs and providing a government top-up on pension contributions) to less radical changes (such as retaining the current system and altering the lifetime and annual allowances).”

Easier transfers. “The government will consult before the summer on options aimed at making the process for transferring pensions from one scheme to another quicker and smoother, including in relation to any excessive early exit penalties. If there is evidence of such penalties, the government will consider imposing a legislative cap on these charges for those aged 55 or over.”

Secondary market for annuities. “The government wants existing annuity holders to have the freedom to sell their annuity income. The government will set out plans for a secondary annuities market in the autumn, and agrees with respondents to the recent consultation that implementation should be delayed until 2017 to ensure there is an in-depth package to support consumers in making their decision.”

Fixed tax-break on savings. “The government is committed to supporting savers at every stage of their life. From April 2016 the government will deliver a major reduction in the level of tax on savings with the introduction of the Personal Savings Allowance, which will exempt the first £1,000 of savings income from tax for basic rate taxpayers and the first £500 for higher rate taxpayers.”

Reaction from UK pensions sector

A shift in the taxation of pensions could have far-reaching effects on the British retirement industry, according to media reports. “By treating pensions more like ISAs, the changes would further erode the distinction between retirement savings and regular investments,” the Times reported.

“That could open the market up to investment houses including BlackRock and digital platforms such as Hargreaves Lansdown, which are already set to benefit from new pensions freedoms.”

The UK pensions industry expressed alarm over the news of the possible change. In an article in The Actuary, benefits consultant Hymans Robertson warned that “such a move would increase costs for defined benefit schemes, resulting in up to 250 closing in the next nine months, cut defined contribution pension pot sizes and ‘potentially lead to a collapse in retirement savings.’”

The retirement industry in the UK is still digesting the termination of mandatory annuitization, a move that has halved the sale of individual income annuities in half. The investment industry, meanwhile, is dealing with the impact of Retail Distribution Review, which capped fund management charges and banned commissions on many products sales.

Phil Loney, chief executive of Royal London, Britain’s biggest mutual life and pensions group, questions the plan. “Long-term saving is better served by giving people tax relief upfront,” he told the Times.

He suspected that Osborne budget was an attempt to bring in a windfall of tax revenues now instead of later. “You kick tax relief 30 years hence and you make a significant impact on the budget today,” he said.

The 2015 budget proposal also raised taxes on dividend income, treating it as ordinary income. It would also reduce the amount of money that high earners could defer to retirement accounts by one pound for every two pounds they earn over £150,000. The maximum deferral is currently £40,000 ($62,526). The deferral would drop to a minimum of £10,000 for those earning £210,000.

On another front, the Association for British Insurers reported that British retirees are exercising the new access to their money that the end of mandatory annuitization has given them. Almost a quarter of a million payments worth £1.8 billion were made to about 85,000 customers from retirement accounts in April and May, according to new figures published today by the Association of British Insurers.

In the same period £1.3 billion was put in to buying nearly 22,000 regular income products, with over 50% of this going into income drawdown (systematic withdrawal) products rather than annuities. In 2012, when annuity sales were at their peak, over 90% of the total value of sales were annuities. Less than 10% of total sales were income drawdown sales.

In a press release, Huw Evans, director general of ABI, said this week: “We strongly welcome a full review of how to strengthen the tax incentives to help people save more for their retirement. Pension providers share the Chancellor’s concern that Britain isn’t currently saving enough and have been calling for this review for some time. We will be keen to actively contribute to this consultation, including highlighting the risks of a workplace ISA replacing pensions.”

Northwestern Mutual offers dividend-paying QLAC

Posted on July 15, 2015 by Editorial Staff -

Northwestern Mutual has launched a QLAC (qualified version) of its deferred income annuity, which gives policyholders a chance of rising income in retirement through the accrual of dividends—the same steady dividend that the mutual insurer has been paying its life insurance policyholders since 1872.

The new product is the QLAC version of the insurer’s Select Portfolio Deferred Income Annuity (Portfolio DIA). It works the same way the non-QLAC version works: In exchange for a lower guaranteed payout than a conventional DIA would offer, the policyholder benefits from Northwestern Mutual’s dividend, which will be 5.6% in 2015. The dividend accrual is the key to this product.

The annuity owner gets a partial dividend at first, but it rises during the deferral period, eventually reaching the full amount. Each year, the owner can choose either to use the dividend to buy more income or he or she can take it in cash. The dividend is paid out every year, eventually diminishing in amount because income distributions gradually reduce the base on which the dividend payout is calculated.

“You get prorated into the dividend,” said Greg Jaeck, director of Annuity Product Development at Northwestern Mutual. We try to protect our existing policyholders. If we were to give new policyholders the full dividend from the start, the current policyholders would be subsidizing the new policyholders.”

What you get, surprisingly, is a contract that reproduces some of the features—and a bit of the complexity—of the variable-annuity-with-guaranteed-lifetime-withdrawal-benefit rider that was so popular between 2006 and 2011, but one that uses a fixed income annuity chassis instead of a mutual fund chassis.

Instead of a roll-up in the benefit base and step-ups in the account value, the Select Portfolio DIA offers the dividend. Where the VAs, in some cases, allowed optional cash distributions (up to a point) that didn’t necessarily affect the guaranteed minimum payout, the Select Portfolio allows the policyholder to spend or reinvest take any portion of the dividend. Policyholders who choose the deferral period death benefit option can also change the terms of their contract if they wish.

All this flexibility is great, but it makes it difficult to assess this product’s value proposition without very close study. Essentially, it entails a bet that Northwestern Mutual will keep paying a healthy dividend, that the dividend will grow as prevailing interest rates rise, and that this product will produce more lifetime income, with more liquidity, than a straight fixed-payment DIA would.

Let’s consider a hypothetical. Northwestern Mutual’s product literature (see illustration below; click to enlarge) offers the example of a 50-year-old man who pays a $250,000 premium (the minimum is $10,000) for a life contract with a 10-year period certain and a return-of-principal death benefit during the deferral period. He plans to retire at age 65. [For a QLAC, maximum premium would be $125,000; assume that all the numbers in the example are halved.]

In this hypothetical, the policyholder has a guaranteed minimum annual income at age 65 of $14,720. That’s about half of the guaranteed rate he would receive if he bought a straight deferred income annuity with the same specs, according to the calculator at immediateannuities.com. Not so great, you might say.

But the picture looks better when you include the dividends. According to the illustration, the compounding of principal, interest and dividends over a 15-year deferral period would generate an estimated income of $31,465 at age 65. In this case, the policyholder has chosen to take $10,000 in cash and $21,465 as guaranteed income. Total income peaks between ages 85 and 90.

The liquidity of the product is quite unusual. “If the policyholders need access to some or all of the dividend, they can take 100% in cash, prior to cash date,” Jaeck told RIJ in a phone interview. He added that the dividend, which could be expected to grow if interest rates grow and the insurer’s profits rise, also provides protection from interest rate risk. “We often hear the question, ‘Do I have to lock in a rate?’ With this product, you’re not locking in a rate.”

Northwestern Mutual’s first DIA, issued in 2012, was only for qualified money, so a QLAC fits into its business plan. So far, about 75% of the company’s deferred income annuity sales were made with qualified money and 25% with non-qualified. “We have a 19% market share, and we’re second in DIA sales in the career channel,” Jaeck said. “According to LIMRA, we did $113 million in the first quarter of 2015 and $146 million in the fourth quarter of 2014. MassMutual did $53 million in the first quarter of this year and $95 million in fourth quarter of last year.”

QLACs were made possible by Treasury Department rulings in 2014 that resolved an obstacle to the use of tax-deferred money to purchase a deferred income annuity with an income start date after age 70½. The problem was that owners of qualified accounts have to start taking annual distributions from those accounts at that age.

But, a year ago, Mark Iwry, an assistant Treasury Secretary, announced that people could buy deferred income annuities with a start date after age 70½ and defer required distributions (and the taxes due on them) on the premium amount until they began receiving the money. They could wait to begin receiving the money until as late as age 85. Treasury restricted the purchase premium of a QLAC to the lesser of $125,000 or 25% of an individual’s tax-deferred savings.

The Bucket

Posted on July 15, 2015 by Editorial Staff -

MassMutual’s PlanALYTICS program boosts DC contributions

As of year-end 2014, 45% of retirement plan savers weren’t saving enough to maintain their lifestyles in retirement, according to an analysis of 401(k)s and other retirement plans served by MassMutual. But plan improvements like automatic enrollment would produce more retirement-ready savers, the analysis showed.

The data for the analysis was generated by MassMutual’s PlanALYTICSprogram, launched in 2013, which MassMutual uses to measure the relative effectiveness of retirement plans and the retirement-readiness of participants.

The analysis is based on a benchmark of replacing at least 75% of pre-retirement income at 67, the age most people qualify for full Social Security benefits. The benchmark takes into account retirement savings, Social Security and pension income, if any.

A book that reports on the theory behind the approach will be available to plan sponsors and financial advisors to encourage improved outcomes for retirement plans and their participants. The book is also available to the public at massmutual.com/planalytics.

Among sponsors enrolled in PlanALYTICS, those that offered both automatic enrollment and automatic deferral increases reported that the percentage of income contributed by participants to their retirement plan was twice as high as sponsors that did not offer those automatic features. The average participant account balance for plans with automatic features was 61.4 percent higher than those without automatic features.

Prudential Retirement retains $9.1bn public pension client

The North Carolina Retirement Systems, a retirement plan for public employees in North Carolina, has recommitted its NC 457 and NC 401(k) plans totaling $9.1 billion in assets to Prudential Retirement, a unit of Prudential Financial, Inc.

The North Carolina Retirement Systems has 52,637 participants in its NC 457 plan with more than $1.1 billion in assets as of March 31. Its NC 401(k) plan has 249,314 participants with more than $8 billion in assets. The plans serve more than 1,100 state and local government employers in North Carolina. Prudential Retirement became the plan’s recordkeeper in 2003.

The Request for Proposal was awarded to Prudential Retirement on March 19. The current contract will expire in December 2015, with the new contract becoming effective in January 2016. Mercer Investments will continue to serve as the advisor to the plans.

Prudential Retirement has $365.3 billion in retirement account values as of March 31, 2015. Prudential Financial, Inc., had more than $1 trillion of global assets under management as of March 31, 2015.

To economize, pensions of Dutch financial firms may merge

Several financial companies in the Netherlands are discussing the possibility of combining their pension funds into a “general pension fund,” or APF, for the financial sector, IPE.com reported.

The four pensions cover employees of custodian KAS Bank, pay firm Equens, the now-shuttered GE Artesia Bank and Van Lanschot Bankiers. The Dutch pension fund of Royal Bank of Scotland previously showed an interest in joining an APF.

If created, the new general pension fund would have about 10,000 participants and more than €2bn in assets. There would have a single independent board, but the assets would not be commingled.

All of the funds are looking to cut costs by achieving economies of scale that they currently lack. Something similar has been tried before. In 2012, several companies tried unsuccessfully to establish Pecunia, an industry-wide pension fund for the financial sector.

The €615m pension fund of Equens told IPE.com that its falling number of participants and rising costs per participant are driving its interest in a general pension fund. “The APF is the only right option for the future,” said Equens chairman Ben Haasdijk, adding that it would be cheaper than hiring a commercial pension provider.

Tamis Stuker, board member of the €288m KAS pension fund, said all participating companies could have an “individual ring” within the APF, providing economies of scale without totally giving up independence.

A trustee of the pension fund of GE Artesia Bank, a division of US-based General Electric that ceased operations in 2013, confirmed that her fund was participating in the working groups, but was still undecided.

The Dutch pension fund of Royal Bank of Scotland previously showed an interest in the APF and recently announced that it was also weighing its options for the future.

British official becomes BlackRock’s U.K. retirement strategist

BlackRock, the $5 trillion asset management firm, has hired Rupert Harrison, the British official who was “the brains behind” the UK’s decision to drop mandatory annuitization of tax-deferred savings.

Harrison, 36, will be “chief macro-strategist for funds investing in equities, bonds and cash,” IPE.com reported. “Given his experience shaping the recent pensions reforms in the UK, he is uniquely placed to help develop our retirement proposition,” BlackRock said in a release.

The deal was approved by the Advisory Committee on Business Appointments, which monitors such hirings, on the basis that Harrison doesn’t lobby the British government for two years.

Harrison’s move prompted criticism from John Mann, a Labour MP, who said the “revolving doors” move was “completely inappropriate. It is far too soon. It is the kind of behavior that gives politics a bad reputation.”

At ‘Spirit on Lake,’ Gay Retirees Find Community

Posted on July 9, 2015 by Sheila Eldred -

Minneapolis, MN—Lucretia Kirby, 60, was celebrating Minnesota’s same-sex marriage amendment in 2013 at the state Capitol when she met the woman who helped her find the place she calls home.

Now, thanks to that chance meeting with LGBT activist Barbara Satin, Kirby lives in a one-bedroom apartment at Spirit on Lake, a 46-unit affordable housing complex marketed to the older gay, lesbian, bisexual and transgender community.

Kirby’s rainbow flag flies from her window, which faces the city’s renowned Lake Street. Of the 46 units in the building, 19 are rented to LGBT residents. Five units are reserved for previously homeless seniors living with HIV/AIDS.

Many of the other residents are Somali, a reflection of the neighborhood in which Spirit on Lake resides. But the tinted windows that form a rainbow along the building’s exterior indicate that it’s a gay-friendly place, one of the first of its kind in the United States.

For a generation of openly gay people now reaching retirement age, it’s a welcome development. Many face isolation and economic woes because of alienation from family and because laws were rarely in their favor during their lifetime.

“Fifteen years ago, this place would not exist,” Kirby says. “We’re the pioneers. We will be models to the future gay people as they retire. As we become more tolerant of one another in this country, we’re going to have very diverse ways of retiring, and this is one of them.”

For Kirby, a former nun and Catholic school teacher, the move was critical for her financial and emotional health. She doesn’t receive a pension from her time in the convent, and her partner died in 2010 after a bad fall on the ice. Because the two could not legally marry in Minnesota at the time, Kirby was left without death benefits and forced to live on half of what she had been used to.

Kirby’s economic status is typical of many LGBT singles her age: Lesbian seniors are twice as likely to be poor as heterosexual married couples, according to a 2009 study by The Williams Institute. Many stayed single and closeted, afraid of being alienated by family or losing a job.

Now semi-retired, Kirby says she “gets by” working part-time for a local United Church of Christ for retreats and spiritual direction, grateful that she can afford her $718-a-month rent. Because it contributes to both her financial and personal well-being, she plans on working for as long as she can.

LGBT residents at Spirit on Lake understand both the emotional and financial impact isolation from family brings. “The glue that holds us together is that we all know what isolation is and what it feels like to be disconnected,” she says. “Here, we’re not disconnected. That’s what keeps people here.”

Estranged from both her own family and her former partner’s family because of their sexual orientation, Kirby faced the grief of her partner’s death alone. The family of her partner still refuses to tell Kirby where they buried her ashes.

In lieu of family support, members of the community at Spirit on Lake look after each other and have formed a kind of familial bond. At the end of the month, word will go out if people don’t have enough money to make ends meet.

“I’ll go to a food shelf and get groceries and give them to people who need them,” says Kirby, who has a car. “Or if I have extra, we kind of pool resources. Word will go out that so-and-so needs silverware or sheets. No one will go hungry here. The bottom line in here is hey, we’re human, we’ll take care of each other.”

In her apartment, Kirby’s dog, cat and fish keep her company. The quilt she made for her former partner hangs on the wall. It’s clearly home, and it’s helped her come to peace with who she is.

“It’s OK to be a senior lesbian single,” she says. “Senior lesbian single — that used to be a swear word. Spirit on Lake is a beautiful place to come to, especially at my age. I’m going to stay here as long as I can.”

For B-Ds, Independence May Prove Confining

Posted on July 9, 2015 by David Macchia -

One of my enduring regrets is not challenging the head of an independent broker-dealer several years ago when he told me that “Retirement income is nothing new for financial advisors. They’ve been doing it for many years.”

From my hands-on experience in the then-emerging retirement income business I knew he was wrong. But I was reluctant to challenge the gentlemen. A mistake. I regret it. I believed then—and continue to believe—that independent broker-dealers (IBDs) will be severely challenged by the retirement income opportunity. Ironically, IBDs’ core strength, not a weakness, will cause them to stumble. More on that later. First, some background.

As early as 2004, it was clear that the advice industry had moved into a quite new and different era. My firm would hear frequently from our advisor-customers about their successes at consolidating retirees’ assets.

They confirmed our thesis about investors’ willingness to switch the management of their retirement assets to a new advisor: Once a retiring investor’s concerns shift from accumulation toward the provision of stable, monthly income, it becomes relatively easy for almost any accumulation-focused advisory relationship—no matter how long-standing and successful—to be upended by a new advisor who appears in the role of income planning expert.

In 2005, when the Retirement Income Industry Association was formed, I first heard the term, asset consolidation. Executives from the member companies talked about the urgency to unite their corporate silos with new “cross-silo” retirement income businesses. Many of them began to understand the link between income planning expertise and asset consolidation.

But, ten years later, many people still don’t understand this. Most independent financial advisors are not yet experts at income planning. Therefore, their business relationships with their current clients are vulnerable. There’s a lot at stake here because, as I like to say, retirement income is a zero-sum game. It will create winners and losers in the extreme.

If you’d like to hear an advisor describe a real-world example of asset consolidation through income planning, download this excerpt from my interview with advisor John Geenan. John’s experience illustrates how, even under conditions highly favorable to the incumbent advisor, the new advisor with income planning skills can capture the retirement assets.

So, what does this portend for IBDs? Unless their advisors learn more about income planning, the future isn’t bright. Most Boomer retirees will be “constrained”—that is, their retirement nest eggs won’t be large relative to the amount of monthly income they want. Consequently, they’ll need outcome-focused income-generation strategies that protect them against sequence-, inflation- and longevity-risk and help them avoid emotional decisions.

But, the fact is, most accumulation-focused advisors don’t know how to build, illustrate and present such risk-mitigating strategies. That’s where the IBD’s core strength will hurt them.

Most advisors need education and guidance in order to acquire the income-planning skills necessary for success. But the IBDs’ own cultures, which emphasize independence, prevent them from leading their flocks to the promised land of asset consolidation. It’s just not part of their DNA.

As millions of Americans reach age 65 and begin to think about income, it will be interesting to see whether or not IBDs take a genuine leadership role in that specialty. I argue that they should try, even though it might cross their cultural grain. If the sheer scale of the retirement income opportunity doesn’t motivate them, the fee-compressing impact of the DOL’s fiduciary proposal certainly should. When every dollar yields less compensation, the only way to survive or grow will be to manage more dollars. Consolidation, anyone?

DOL proposal could “revamp” advisor business practices: Fitch

Posted on July 9, 2015 by Editorial Staff -

Many registered investment advisors (RIA) and the financial advisors of broker dealers are likely to experience “significant revamps of business practices” if the DOL conflict-of-interest proposal takes effect in its current form, analysts at Fitch Ratings reported this week.

“The proposed rules raise the risk of regulatory enforcement and/or trial bar litigation, and will likely force RIAs to do more to prove that a client’s product choices indeed meet the individual’s best interests,” the Fitch analysts wrote.

But Fitch did not suggest that the proposal’s impact on the distribution and sales of annuities would be so great as to hurt the financial strength ratings of insurers who issue them.

“For it to start affecting the ratings of insurance companies, you would have to see adoption of best interest standard across a broader range of products,” said Doug Meyer, managing director, insurance, at Fitch Ratings in Chicago, in an interview with RIJ this week.

Meyer added that insurers might even be better off not selling as many variable annuities, a product whose at-times underpriced lifetime income guarantees may pose potential long-term risks for some of the insurers who have sold large numbers of them.

The Labor Department’s April 21 fiduciary proposals promote the proposal’s new “best-interest” standards that provide protections to investors for retirement accounts and annuities.

As proposed, the new standards would greatly expand the universe of individuals and corporations covered under the 1974 Employee Retirement Income Security Act (ERISA). That is, the $7 trillion rollover IRA market and, potentially, any producer who sells or manufactures products to or for that market, would be treated as if it were part of the highly-regulated 401(k) world.

The Fitch analysts were unsure how, in the real world, advisors or agents could promote specific products while simultaneously telling clients about the merits of competing investment or insurance options. “The precise extent to which an advisor would be required to explain product solutions not offered in order to demonstrate serving a client’s best interest is not yet entirely clear,” they wrote.

Fitch suggested that the DOL proposals “could curb the willingness of agents to promote complex and higher fee products to that market,” an apparent reference to fixed indexed annuities and some variable annuities.

Since an estimated 40% or more of current FIA sales are financed with qualified money, such a curb might have a big impact on FIA sales, which now run at about $11 billion per quarter.

With variable annuity sales softening and sales of income annuities still relatively small, fixed indexed annuities have become the most vibrant part of the annuity business—in part because of the appeal of their safety and their lifetime income riders but also because they pay some of the most aggressive sales incentives to agents and brokers.

Regarding the potential liability associated with selling complex products, “asset managers and insurance companies would also bear responsibility for examining distribution policies and commission structures paid to independent and affiliated distributors that sell many of the investment products reaching retirement accounts,” Fitch analysts wrote.

“Annuity products, arguably viewed by some investors as costly relative to lower priced products, could see fees pressured and/or commissions reduced under greater scrutiny,” their report said. The rest of the report read as follows:

“Adding to the challenge is the complexity of annuities, with guarantees that are difficult to value. Obtaining affirmations from clients that all features of any complex product are understood could become more common, but also burden the sales process and hurt volumes.

“ERISA rules were designed to ensure that trustees and plan sponsors were acting with prudence and not self-dealing. While investment advice to individuals planning for retirement has avoided being covered under ERISA, the proposals sweep general wealth and retail advisors under the rule in the interest of ensuring they are acting in client’s best interest.

“Meanwhile, life insurance companies and asset managers would be contractually bound to enhance conflict risk management, publicly disclose fee practices and provide enhanced disclosures of compliance to regulators.

“Under current fiduciary rules, a person responsible for serving in a fiduciary’s best interests (such as a trustee) may not receive compensation for selling to the fiduciary and may not self-deal in the same investment scheme for which he or she oversees as a fiduciary.

“Limitations on commission structures could have a disproportionate impact on the sale or fee structures of investment and retirement products sold in the middle market, which generally tends to have more fee-sensitive customers.

“Effectively, the rules may encourage some brokers to adopt advice-for-fee models for their advisors as a means of compensating them for the compression (or elimination) of their commissions.

“In an effort to preserve commissions while retaining certain established sales structures, the Labor department has established multiple levels of exemptions that could keep many practices in place, provided that compliance with the principles of rules is met.

“Overhauls over the past years to the UK, German and Australian retirement markets have included complete bans on commissions without resulting in significant curbs to dollar sales of the products, although there have been indications of the middle-market customer being less targeted. Higher-end customers have been offered and generally accepted moving to fee-for-advice models.

“In a sign of the political sensitivity of the issue, earlier in June, the House of Representatives’ 2016 appropriation bill for the department included a provision that would block the agency from spending any of the annual funds on finalizing, implementing, administering or enforcing the proposed rules.

“Full implementation is not envisioned until third-quarter 2016 at the earliest, giving all affected parties meaningful time to prepare for and respond to the changes. A comment period on the proposals closes on July 21.”

Offshore AUM to exceed US AUM by 2019: Cerulli

Posted on July 9, 2015 by Editorial Staff -

By 2019, more than half of the world’s assets under management (AUM) will be managed outside the U.S., according to the 14th iteration of Global Markets 2015: Key Insights into a Dynamic Landscape, from Cerulli Associates.

Global AUM is expected reach US$106 trillion by 2019, but “managers need to be realistic about the efforts required to win business in high-growth markets,” said a Cerulli release this week.

While China is too big an opportunity for Western asset managers to ignore, “regulation continues to favor local managers,” said Ken F. Yap, director of global analytics at Cerulli. And “with the local market firing on all cylinders, appetite to invest overseas is minimal,” he added.

Meanwhile, in Taiwan, where bond funds led a 21.8% increase in offshore AUM, Taiwanese authorities plan to favor local managers by requiring foreign managers to boost onshore business to obtain fund approvals.

In Brazil, “positive regulatory changes and the establishment of a truly independent distribution network will further open the market to cross-border managers and fuel demand for global products” in 2015, Cerulli’s analyst said.

Cerulli noted that despite the tiny asset base of Chile’s retail investment segment, that long, narrow, Pacific-facing country has high growth potential. “The fast-growing pension market in Mexico is [also] looking increasingly attractive for cross-border managers,” the report said.

Regarding Spain, Cerulli Europe research director Barbara Wall wrote, “The market will continue to grow at a healthy pace, yet slower than the one seen over the past couple of years. Fund-of-funds vehicles are the cross-border asset managers’ favorite point of entry and this segment is booming—total assets in 2014 more than doubled to €30.6bn ($33.5bn) from €15bn (US$16.4bn).” Almost all of those vehicles, 96%, are “ex-house,” the report said, meaning that they invest primarily in non-proprietary funds.

New whitepaper attacks DOL conflict-of-interest proposal

Posted on July 9, 2015 by Editorial Staff -

Two well-known fixed index annuity advocates, Jack Marrion and Kim O’Brien, have published a white paper criticizing the rationale behind the Department of Labor’s conflict of interest proposal, whose public comment period comes to an end on July 21.

The white paper, entitled “The Flawed Arguments of the Fiduciary-Only Rule,” was produced for an organization called Americans for Annuity Protection. O’Brien, the former director of the National Association for Fixed Annuities (see today’s RIJ cover story), is AAP’s vice chairman and CEO.

Although the DOL proposal, in its current form, allows the payment of commissions to sellers of annuities if they pledge to act in the client’s “best interest,” Marrion and O’Brien argue that the proposal would nonetheless have a “devastating” effect on the entire annuity business.

“If the rule is enacted as written,” the authors write, “it will cause a severe disruption for many securities brokers and dealers but will be devastating for those who sell annuities and those who want to buy annuities. The disruption will negatively affect the 50%-plus of consumers who purchase an annuity as their Individual Retirement Account (IRA).”

In addition, they say, “it sets in motion a process that will more than likely eliminate all traditional forms of compensation other than fee-based and, consequently, eliminate thousands of small and medium-sized businesses who rely on commissionable and asset-based compensation in addition to the fee-for-advice model. It will also likely pull in non-qualified retirement annuities under the guise of ‘harmonization.’”

The 26-page white paper also makes assertions that FIA advocates have used previously when threatened with federal regulation: that state insurance laws are adequate to ensure consumer protections; that more complaints are filed against securities brokers than annuity sellers; that asset-based fees cost the consumer more in the long run than one-time sales commissions do; that suppression of commission-based sales will hurt members of minority groups disproportionately.

The Bucket

Posted on July 9, 2015 by Editorial Staff -

Cetera picks Broadridge as mobile platform provider

Cetera Financial Institutions, a self-clearing broker-dealer, has chosen Broadridge Financial Solutions, Inc., as its mobile solution provider, it was announced this week.

Broadridge Mobile provides market, portfolio and account information and trading tools for funds, equities and options.

The Broadridge Mobile platform is intended to “increase collaboration, optimize data management and deliver an integrated experience to financial advisors and investors on a single global platform,” a Broadridge release said.

The solution offers document-sharing between advisors and clients, client search and reporting, account inquiry, and book-of-business analysis in multiple languages and currencies.

Broker-dealers, banks, mutual funds and corporate issuers outsource investor communications, securities processing and business process solutions to Broadridge, which employs about 6,700 people in 14 countries and processes more than $5 trillion in fixed income and equity trades per day.

Cetera Financial Group includes Cetera Investment Services LLC and Cetera Investment Advisers LLC. All are part of RCS Capital Corporation, a provider of retail advice, wholesale distribution, investment banking, capital markets, investment research, investment management and crowdfunding services.

Four myths about marketing to RIAs

Asset managers make four erroneous assumptions when trying to distribute their investment products to the fragmented registered investment advisor channel, according to a new study from kasina, a DST company that provides distribution intelligence technologies, advanced analytics and research, and strategic advisory services,

The study, “Debunking 4 Myths of Selling to RIAs—Strategies to Prospect and Serve them More Effectively,” is based on a survey of 150 RIAs and interviews with distribution executives at asset management firms.

“Diversity within the RIA channel has long made it a challenge to prospect, and the disparities continue to increase,” said Tracy Needham, senior research analyst for kasina, in a release.

“Practices now range from one-man shops to firms large enough to rival the wirehouses while investment approaches run the gamut. Meanwhile, there’s no home office to serve as a conduit and the ranks of breakaway and dually-registered advisors continue to swell.”

According to kasina, asset manager distribution teams wrongly assume that:

Models are not a driving force with RIAs
Multi-asset funds are the best antidote for active managers
Meeting with RIAs equals investments from RIAs
RIAs don’t want to hear a product pitch

kasina’s RIA study shows:

The average RIA sales team is 11 people (internal and external), and growing.
When asked what asset managers could do to increase the likelihood of the RIA choosing their products, suggestions overwhelmingly (40%) focused on providing more detailed information on the investment process and fund management.
31% of RIAs cited some action a wholesaler had taken, like offering helpful info or a service or meeting them at an event, as the reason they granted a meeting.
40% of RIAs suggested that more detailed information on the investment process and fund management could increase the likelihood of an asset manager’s products being selected.

Kansas City, MO-based DST Systems, Inc. is a global provider of information processing and servicing solutions to companies around the world.

New York Life and John Hancock complete $25 billion reinsurance deal

New York Life has completed its acquisition, through reinsurance, of a net 60% interest in John Hancock Financial’s closed block, consisting mainly of participating whole life insurance policies. The transaction, initially announced in December 2014, has received all necessary regulatory approvals.

The closed block of 1.3 million in-force policies with a face amount of more than $25 billion was established in connection with John Hancock’s demutualization in 2000. Through reinsurance arrangements, New York Life has assumed $7 billion of statutory reserves.

New York Life’s NYL Investors, LLC unit, which oversees the company’s general account investments, manages approximately $12 billion in new assets as a result of the deal.

New York Life’s general account assets (cash and invested assets on a consolidated basis) have risen by about $16 billion this year and now exceed $213 billion, a record high for the company.

John Hancock, the U.S. division of Manulife Financial Corporation, will continue to administer the closed block policies, including paying claims and dividends. Terms of the transaction were not disclosed.

Prudential sponsors webcasts aimed at African-American investors

Weekly 10-minute video features on personal finance are appearing in the current 16-week season of The Root Live: Bring It To The Table. The features are co-produced by Prudential Financial and The Root, an online news and commentary service at African-Americans.

The new videos feature “thought leaders discussing a range of financial, career and family issues, including Stop Being the Family Bank, The High Cost of Depression, Learning to Live with Debt, Selling My House and Eldercare, according to a release. Programming for the new season resumed in May and continues through August, with new installments airing on Wednesdays via www.theroot.com/therootlive.

In the videos, The Root’s contributing editor, Harriette Cole, interviews experts such as Derrick McDaniel, author of “Eldercare: The Essential Guide to Caring for Your Loved One and Yourself,” Patrice Washington, a personal finance columnist and commentator, and Mandi Woodruff, a personal finance expert with Yahoo Finance.

Some of the episodes of The Root Live: Bring It to the Table include:

“Living the Fabulous but Broke Lifestyle,” with Gayle Hawkins, financial professional, Prudential Advisors
‘Being the only one: How to find mentors to advance my career,” with Marshall Alston, vice president, Human Resources for Prudential Advisors
“Should I Marry if My Partner has Tax Problems?” with Tiffany “The Budgetnista” Aliche
“Do You have a Legacy Plan?” with ShirleyAnn, Robertson, a Prudential financial professional

Founded in 2008 under the leadership of Prof. Henry Louis Gates Jr. of Harvard University, The Root is owned by the Washington Post Company.

Big Dutch pension funds receive SIFI-like designations

Pension funds in the Netherlands with at least €4bn ($4.38bn) in assets will be designated as OOBs or “organizations of public interest,” IPE.com reported this week after Dutch finance minister, Jeroen Dijsselbloem, announced the new policy in a letter to Parliament.

Managers of power, water and gas grids, as well as housing corporations, would also be designated as organizations of public interest, Dijsselbloem said. Non-listed banks and insurers already have such a designation.

The OOBs must comply with stricter accounting rules. An OOB must first consult the Financial Markets Authority before hiring an accountant to check an annual account. An OOB’s audit certificate will also require an additional quality approval, given by an independent accountant.

Pension funds are comparable with other financial institutions because they value their assets in similar ways, Dijsselbloem said, and they discount their liabilities in ways similar to the ways insurers establish their financial obligations. Several Dutch pension funds, accountants already provided the extensive certificates required for an OOB, the report said.

Broker/dealers to pay $30 million in restitution

Wells Fargo, Raymond James and LPL Financial have been ordered by the Financial Industry Regulatory Authority (FINRA) to pay more than $30 million in restitution, with interest, to affected customers for not waiving mutual fund sales charges for certain charitable and retirement accounts.

Financial advisors working for those firms failed to fulfill company promises to waive certain sales charges on transactions with more than 50,000 accounts that were eligible for the waivers. The companies reported the problems to FINRA.

Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network LLC will pay an estimated $15 million. Raymond James & Associates, Inc., and Raymond James Financial Services, Inc., will pay about $8.7 million. The firms agreed to the entry of FINRA’s findings without admitting or denying the charges.

LPL Financial LLC will pay about $6.3 million, plus restitution to eligible customers who purchase or purchased mutual funds without an appropriate sales charge waiver from January 1, 2015, through the date that the firm fully implements training, systems and procedures related to the supervision of mutual fund sales waivers.

“FINRA’s sanctions acknowledge that the firms detected and self-reported these errors, and will provide full restitution to customers,” said Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement.

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

Mutual funds available on the retail platforms of Wells Fargo, Raymond James, and LPL offered these waivers to charitable and retirement plan accounts under limited circumstances and disclosed them in their prospectuses.

However, at various times since at least July 2009, Wells Fargo, Raymond James and LPL did not waive the sales charges for affected customers when they offered Class A shares. As a result, more than 50,000 eligible retirement accounts and charitable organizations at these firms either paid sales charges when purchasing Class A shares, or purchased other share classes that unnecessarily subjected them to higher ongoing fees and expenses.

Wells Fargo, Raymond James and LPL failed to adequately supervise the sale of mutual funds that offered sales charge waivers. The firms unreasonably relied on financial advisors to waive charges for retirement and eligible charitable organization accounts, without providing them with critical information and training.

MassMutual’s PlanALYTICS program boosts DC contributions

Prudential Retirement retains $9.1bn public pension client

To economize, pensions of Dutch financial firms may merge

British official becomes BlackRock’s U.K. retirement strategist

Cetera picks Broadridge as mobile platform provider

Four myths about marketing to RIAs

New York Life and John Hancock complete $25 billion reinsurance deal

Prudential sponsors webcasts aimed at African-American investors

Big Dutch pension funds receive SIFI-like designations

Broker/dealers to pay $30 million in restitution

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