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The Bucket

Posted on May 28, 2015 by Editorial Staff -

John Hancock buys adviser software provider

John Hancock announced today that it has acquired Guide Financial, Inc., a San Francisco-based software provider for financial advisors. Guide Financial builds software that enables investors to make better financial decisions and build wealth, utilizing artificial intelligence, behavioral finance, and seamless advisor integration. Terms were not disclosed.

Guide Financial will continue to operate from their current offices in San Francisco as an independent group and report to Tim Ramza, Senior Vice President of Wealth Business Development and Strategy, John Hancock.

“This partnership brings together John Hancock’s resources and deep experience supporting financial professionals with Guide Financial’s innovative financial advisory technology, thought leadership and software development expertise,” said Ramza. “John Hancock is committed to driving ongoing innovation for advisors, and we are pleased to welcome the Guide Financial technology and management team into our family of companies as a part of that long-term commitment.”

“After years of continuous product and technology innovation, we could not be prouder that Guide Financial and John Hancock are joining forces,” added Uri Pomerantz, co-founder and CEO of Guide Financial. “We look forward to enhancing our support of independent advisors across the country who have responded so favorably to our product. We are also excited by the opportunity to explore how behavioral finance concepts and advanced technologies can be integrated with John Hancock’s current products and services.”

The partnership will provide Guide Financial with additional resources to fuel further development of their web-based software portal that independent financial advisors across the country have come to rely on.

Broadridge to buy data unit from Thomson Reuters Lipper

Broadridge Financial Solutions has agreed to buy the Fiduciary Services and Competitive Intelligence unit from Thomson Reuters Lipper. The agreement includes a long-term content and brand licensing services agreement in which Thomson Reuters Lipper will provide Broadridge with data on investment product classifications, pricing, performance, benchmarking, product asset positions, and product flows, ensuring continuity of underlying content and methodology.

The acquisition will expand Broadridge’s leading enterprise data and analytics solutions for mutual fund manufacturers, ETF issuers, and fund administrators, adding new global data and research capabilities, according to a Broadridge release.

Thomson Reuters Fiduciary Services and Competitive Intelligence business provides global market intelligence for fund industry flows by country and distribution channel. It is also the leading provider of 15(c) advisory contract renewal services for validating and benchmarking fee and expense agreements to more than 250 mutual fund families, including three-quarters of the world’s largest mutual fund organizations.

Broadridge will integrate the acquired capabilities within its well established mutual fund and retirement business, expanding its existing Access Data suite of market intelligence solutions. These include compliance and reporting tools that cover 90% of all U.S long-term mutual fund assets and 95% of all ETF assets.

The acquisition is expected to close during Broadridge’s fourth fiscal quarter and is subject to customary closing conditions, including the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

Prudential TDF series exceeds $1 billion in assets

Prudential’s suite of Day One Target Date Funds has recently surpassed $1 billion in assets after growing nearly 40% since December 31, 2014, the company announced today.

Prudential’s Day One Funds are available through eligible employer-sponsored retirement plans and designed to make it easier for plan participants to access funds with institutional-style investment attributes—including non-traditional asset classes like commodities and direct real estate—amid a growing individual responsibility to save for a retirement that could last 30 years or more.

Cerulli Associates estimates that target date funds, which employ an embedded glide path, could draw as much as 35% of all 401(k) assets by 2019, up from 13.5% at the end of 2013.

About 75 percent of respondents to a 2014 Prudential retirement preparedness survey affirmed that to “not run out of money” was their top financial goal—higher even than concerns about affording medical care. The same study found that only about a third of respondents felt confident they could meet that goal.

A recently released paper, Rethinking Target-Date Fund Design, outlines Prudential’s approach to building a target date suite to help manage the risks that hinder retirement readiness for retirement plan participants.

MassMutual promotes a vice president and hires another

MassMutual has promoted Brad Hoffman to Senior Vice President in its Enterprise Risk and Actuarial organization, effective immediately.

Hoffman, who has spent his entire 24-year career with MassMutual, will lead the company’s Operational and Strategic Risk teams and serve as MassMutual’s rating agency liaison. Based at the company’s Springfield, Mass., headquarters, he reports to Elizabeth Ward, MassMutual’s Chief Enterprise Risk Officer, who, effective May 29, will also assume the post of Chief Actuary.

Hoffman has been on MassMutual’s Enterprise Risk Management (ERM) team since 2009, helping to standardize the risk identification and management process across MassMutual. He also serves as Chief Risk Officer for broker-dealer MML Distributors, LLC. Hoffman previously held various compliance roles in support of MassMutual’s insurance and retirement businesses, including those in customer relations, distribution and the company’s broker-dealers. He began his career at MassMutual as an attorney in the company’s Law Division.

Hoffman received his Bachelor of Arts in Mathematical Economics from Colgate University, and earned his Juris Doctor from the Marshall Wythe School of Law at the College of William and Mary. He is an attorney admitted to practice in both Connecticut and Massachusetts.

MassMutual has also hired Michele Baldasarre as vice president of Institutional Markets to lead relationship management for the firm’s large retirement plan sponsors, according to Una Morabito, senior vice president, Relationship Management for MassMutual Retirement Services.

Baldasarre, who reports to Morabito, leads 30 relationship managers who support large retirement plan sponsors and their participants. Clients include corporations, government entities such as states, counties and municipalities, Taft-Hartley or labor unions, and not-for-profit organizations.

The institutional unit is part of a larger team of more than 100 relationship managers responsible for supporting sponsors of 401(k), 457 and 403(b) defined contribution retirement plans as well as defined benefit plans for employees. The relationship managers work with the employer’s investment advisors and consultants, TPAs, attorneys and accountants.

Baldasarre, who has more than 25 years’ experience in institutional investment and retirement services, most recently served as a channel manager for Aon Hewitt. Previously, she held leadership roles at Blackrock and Putnam. She holds a bachelor of science from Lesley College.

Stan the Annuity man QLAC Book

Posted on May 22, 2015 by Editorial Staff -

Stan the Annuity Man QLAC book

A Two-Headed Nightmare: The Robos and the DOL

Posted on May 21, 2015 by Kerry Pechter -

The conflict-of-interest proposal from the Department of Labor, posted April 20, won’t protect consumers, as the Obama administration hopes and declares. It won’t destroy the insurance industry or the broker-dealer industry, as the industries seem to fear.

It will, instead, buy those industries some time as they gradually adjust to a much more serious disruption of their traditional distribution and payment models. I’m talking about the same wave of automation and disintermediation that has already revolutionized the publishing industry, the travel industry and many others.

So-called robo-advice, or “the digital advisory channel,” is already here. It has already enabled 401(k) participants and direct investors to manage their own accounts. It has allowed cheap day trading on discount trading platforms. It has allowed advisors to transfer repetitive drudgery to “platforms.” It’s just the latest expression of the Internet’s power to vaporize the middleman.

The robo-advice threat and the DOL conflict-of-interest threat are two parts of the same threat to traditional distribution. Both aim to make the distribution of financial products and services less expensive, more objective and more transparent—i.e., more consumer-friendly. Of the two, you should be more worried about the digital threat. Consider the DOL its messenger.

The ‘best interest’ compromise

The most labor-intensive parts of the financial services industry—sales and distribution—are the last pockets of resistance to the digital channel. To give them time to adjust to the new reality, the DOL has compromised. Its proposal asks “advisers” (registered reps and insurance agents, not RIAs or CFPs) to pledge to act in the “best interest” of IRA customers. This standard of conduct is more demanding than the “suitability” standard (caveat emptor) now in effect. But it’s less stringent than a true fiduciary standard, which requires intermediaries to act in the “sole interest” of their clients (which for several reasons they couldn’t possibly meet).

This is not a serious effort to protect the consumer. First, the “best interest” standard won’t protect anybody from anything. It’s too vague and indefinable. Its ambiguity will only reduce transparency, and it will do nothing to foster trust in the industry. It dilutes the meaning of a fiduciary. As the Fiduciary News columnist Chris Carosa has written, anybody who swears to follow a best interest standard can now claim to be a fiduciary. (Disclosure may increase, but disclosure is a stale joke.)

Second, the DOL uses the word “adviser” as loosely as the industry does. By not drawing a bright line between advice and sales recommendations, it colludes with the deception that it should unmask: that sales recommendations are on a par with advice. The conflict-of-interest proposal’s main accomplishment, if enacted, will be to allow the administration to declare victory and pretend that it accomplished its mission, without causing sudden dislocations, of the type that Retail Distribution Review caused in the UK.

Deep-six the red herring

Still, you’ll be hearing a lot of sound and fury from the industry about the proposal. No public comments have been posted on the dol.gov/ebsa or regulations.gov websites as of May 15. But industry lawyers and trade association chairmen will undoubtedly make at least two arguments: that the costs of complying with the proposal outweigh its benefits and that the proposal, though well-intended, will backfire. That is, if the administration takes away the incentives (like high commissions) that motivate brokers and agents to pursue middle-class clients, no one will bother to advise those investors.

This populist-sounding piece of sophistry is 95% bunk. You might as well argue (and some undoubtedly do) that banning ads for high-sugar breakfast cereals and soft drinks on TV will deprive small children of useful video entertainment. This argument contains just enough truth (people need investments; financial inertia is widespread and harmful) to give it credibility among those who want to believe it. In my opinion, it insults the intelligence of the American public. The faster we deep-six this red herring, the better.

To repeat: the DOL proposal doesn’t ban anything. The DOL has already said that it won’t try to outlaw commissions. Although the new standard would force intermediaries to pledge to act in the best interest of clients, be more fee-transparent, and accept more legal accountability, its edges aren’t sharp enough to shut down the traditional distribution channels overnight.

Instead, it gives the financial industry some breathing room. It will give certain obsolete, labor-intensive parts of the industry time to adapt to the Internet-driven world, if they choose.

The future of financial advice for the middle-market is already here: a self-managed interface supported by an accredited or licensed adviser on a recorded line. To escape becoming a glorified phone rep, an intermediary will need to do something an algorithm can’t, and deliver something that can’t be delivered via a screen (on a watch, smartphone, tablet, laptop, desktop, ATM or back of an airliner seat) is doomed. (Retirement income planning can’t easily be automated; more on that in a future column.)

Amazon-ification

Registered reps and insurance agents, and their trade associations, will find the DOL proposal alarming. They, along with the asset managers and annuity issuers who rely on them for third-party distribution, will undoubtedly fight it. But the manufacturers must recognize that the digital advisory channel will be better for them, and for their customers, in the long run.

For those at the top of the financial industry food chain, the process of distributing products—i.e., gathering liabilities—is a necessary evil. On the one hand, liabilities are indispensable; they fund huge projects and they fuel the fun side of finance, which is buying and trading assets. But the task of selling retail products through human intermediaries to collect those liabilities is an expensive chore.

The DOL didn’t create the current situation. Millions of Boomers are unprepared to make sophisticated financial decisions about their IRA savings. The DOL arguably has an obligation to help them find impartial advice about retirement investing at economy-of-scale prices. The industry will fight the regulators in order to maintain unobstructed access to those IRA assets. But even if the DOL proposal goes nowhere, the Amazon-ification of financial services will eventually disintermediate tens of thousands of financial salespeople. Consider the conflict-of-interest proposal a wake-up call.

Inspiring Economic Growth

Posted on May 21, 2015 by Robert Shiller -

In his First Inaugural Address, during the depths of the Great Depression, US President Franklin Delano Roosevelt famously told Americans that, “The only thing we have to fear is fear itself.” Invoking the Book of Exodus, he went on to say that, “We are stricken by no plague of locusts.” Nothing tangible was causing the depression; the problem, in March 1933, was in people’s minds.

The same could be said today, seven years after the 2008 global financial crisis, about the world economy’s many remaining weak spots. Fear causes individuals to restrain their spending and firms to withhold investments; as a result, the economy weakens, confirming their fear and leading them to restrain spending further. The downturn deepens, and a vicious circle of despair takes hold. Though the 2008 financial crisis has passed, we remain stuck in the emotional cycle that it set in motion.

It is a bit like stage fright. Dwelling on performance anxiety may cause hesitation or a loss of inspiration. As fear turns into fact, the anxiety worsens – and so does the performance. Once such a cycle starts, it can be very difficult to stop.

According to Google Ngrams, it was during the Great Depression – around the late 1930s – that the term “feedback loop” began to appear frequently in books, often in relation to electronics. If a microphone is placed in front of a loudspeaker, eventually some disturbance will cause the system to produce a painful wail as sound loops from the loudspeaker to the microphone and back, over and over. Then, in 1948, the great sociologist Robert K. Merton popularized the phrase “self-fulfilling prophecy” in an essay with that title. Merton’s prime example was the Great Depression.

But the memory of the Great Depression is fading today, and many people probably do not imagine that such a thing could be happening now. Surely, they think, economic weakness must be due to something more tangible than a feedback loop. But it is not, and the most direct evidence of this is that, despite rock-bottom interest rates, investment is not booming.

In fact, real (inflation-adjusted) interest rates are hovering around zero throughout much of the world, and have been for more than five years. This is especially true for government borrowing, but corporate interest rates, too, are at record lows.

In such circumstances, governments considering a proposal to build, say, a new highway, should regard this as an ideal time. If the highway will cost $1 billion, last indefinitely with regular maintenance and repairs, and yield projected annual net benefits to society of $20 million, a long-term real interest rate of 3% would make it nonviable: the interest cost would exceed the benefit. But if the long-term real interest rate is 1%, the government should borrow the money and build it. That is just sound investing.

In fact, the 30-year inflation-indexed US government bond yield as of May 4 was only 0.86%, compared with more than 4% in the year 2000. Such rates are similarly low today in many countries.

Our need for better highways cannot have declined; on the contrary, given population growth, the need for investment can only have become more pronounced. So why are we not well into a highway-construction boom?

People’s weak appetite for economic risk may not be the result of pure fear, at least not in the sense of an anxiety like stage fright. It may stem from a perception that others are afraid, or that something is inexplicably wrong with the business environment, or a lack of inspiration (which can help overcome background fears).

It is worth noting that the US experienced its fastest economic growth since 1929 in the 1950s and 1960s, a time of high government expenditure on the Interstate Highway System, which was launched in 1956. As the system was completed, one could cross the country and reach its commercial hubs on high-speed expressways at 75 miles (120 kilometers) an hour.

Maybe the national highway system was more inspirational than the kinds of things that Roosevelt tried to stimulate the US out of the Great Depression. With his Civilian Conservation Corps, for example, young men were enlisted to clean up the wilderness and plant trees. That sounded like a pleasant experience – maybe a learning experience – for young men who would otherwise be idle and unemployed. But it was not a great inspiration for the future, which may help to explain why Roosevelt’s New Deal was unable to end America’s economic malaise.

By contrast, the apparent relative strength of the US economy today may reflect some highly visible recent inspirations. The fracking revolution, widely viewed as originating in the US, has helped to lower energy prices and has eliminated America’s dependency on foreign oil. Likewise, much of the rapid advance in communications in recent years reflects innovations – smartphone and tablet hardware and software, for example – that has been indigenous to the US.

Higher government spending could stimulate the economy further, assuming that it generates a level of inspiration like that of the Interstate Highway System. It is not true that governments are inherently unable to stimulate people’s imagination. What is called for is not little patches here and there, but something big and revolutionary.

Government-funded space-exploration programs around the world have been profound inspirations. Of course, it was scientists, not government bureaucrat, who led the charge. But such programs, whether publicly funded or not, have been psychologically transforming. People see in them a vision for a greater future. And with inspiration comes a decline in fear, which now, as in Roosevelt’s time, is the main obstacle to economic progress.

Question: Is ‘File and Suspend’ a Loophole?

Posted on May 21, 2015 by Editorial Staff -

Question: Was the “file and suspend” strategy intended by the original architects of Social Security?

Answer: No, it wasn’t. Steven Goss, the chief actuary of the Social Security Administration, told a National Public Radio Planet Money reporter last week that while “file and suspend,” which can yield a high-earning two-income couple as much as $48,000 extra, is legal, it is an unintentional consequence of Social Security rulemaking.

For some, file-and-suspend is unfair gaming. Other say it’s gaming an actuarially unfair system, and therefore not so terrible. It has been somewhat sensationalized in a recent book about Social Security benefits called, Get What’s Yours (Simon & Schuster, 2015). If widely used, file-and-suspend could cost the Social Security system an extra billion dollars a year, according to Alicia Munnell, director of the Center for Retirement Research at Boston College.

Here’s how file-and-suspend is described in Get What’s Yours: Take a dual income couple, the same age, both eligible for maximum Social Security benefits. He (in this case) files for his worker benefits at full retirement age (FRA), but chooses not to receive them until age 70, when they’ll be more than a third higher. She, at FRA, files for her spousal benefits (50% of his full benefit at FRA) and collects them until age 70, when she switches to her own worker benefits.

By then, she will receive about $48,000 in spousal benefits—$48,000 more than they couple would have received if both had merely filed for benefits at age 70. Whether or not you and your spouse can take advantage of this strategy will depend on your specific circumstances—your ages and incomes and your flexibility in choosing when to claim benefits. Single people, of course, can’t use it.

When Social Security was created, the architects were concerned about the welfare of the stay-at-home wife and mother. So they gave her a spousal benefit (up to half of her husband’s full benefit) as well as a survivor’s benefit (100% of her husband’s benefit) if he died first. In creating these spousal benefits, the New Deal architects didn’t anticipate the rise of the two-income couple, or the possibility that a type of double dipping might occur.

Reasonable people disagree about the ethics of using file-and-suspend. Eugene Steuerle, a former Social Security economist now at the Urban Institute, and author of Dead Men Ruling: How to Restore Fiscal Freedom and Rescue Our Future (Century Foundation, 2014) has mixed feelings about the broader design of spousal and survivor benefits in Social Security; in his opinion, they often distribute money unfairly.

“The biggest losers of the spousal and survivor system are the couples with fairly equal earnings and single heads-of-households. Single heads of households essentially pay for spousal and survivor benefits that they’re not eligible for. In an actuarially fair system, you’d reduce the worker’s benefit if you added a survivor’s benefit for his spouse,” he told RIJ in an interview this week.

“But, back in the history of the program, they made it a freebie. When they decided to favor the then-stereotypical stay-at-home spouse, they didn’t add on any cost to the individual worker who generated the benefit. Even then, unlike in many countries, they designed it so that the biggest winner was the stay-at-home woman (or man) with the richest worker as a spouse.”

The more unequal the earnings, the more valuable the spousal benefit, Steuerle added. “If you have a two-income couple, both averaging $50,000 a year, and a one-income couple where the worker averages $100,000, they will both pay the same amount of tax. But the one-income couple gets a lot more than the two-income couple, particularly after one spouse dies,” he told RIJ.

Alicia Munnell would like to the file-and-suspend loophole closed, because it costs about $1 billion a year. Another loophole she was critical of, which allowed a “free” eight-year loan from Social Security, has already been closed. “The Social Security Administration did shut down, by administrative action, the ability to claim at 62, change your mind at age 70, repay the benefits received with no interest and then get the higher monthly benefit. Now people have only one year to change their minds, I believe,” she told RIJ in an email. But eliminating file-and-suspend would require legislation.

The takeaway: Get smart about your Social Security benefits or face the possibility of being a victim of the system’s oddities. (We haven’t even talked about the rules for divorced people: a working man could marry four non-working women, each for 10 years and a day, and create four spousal beneficiaries; a woman could marry four different men for only nine years each and never qualify for any spousal benefits.) The file-and-suspend strategy arguably has had one clear benefit: it has motivated more people to get acquainted with the Social Security rules.

First quarter annuity sales rankings, from LIMRA

Posted on May 21, 2015 by Editorial Staff -

Except for indexed annuities and structured settlements, every major annuity product line experienced sales declines in the first quarter of 2015, as total U.S. annuity sales slipped seven percent (7%), to $54.4 billion, according to LIMRA Secure Retirement Institute.

Low interest rates, market volatility and the time-of-year all help account for the numbers. “The first quarter is traditionally a slow quarter for annuity sales. Total annuity sales have been lower in the first quarter than the prior quarter eight out of the last nine years,” said Todd Giesing, senior business analyst at the Institute, in a release.

The Institute’s first quarter U.S. Individual Annuities Sales Survey represents data from 96% of the market.

Sales of indexed annuities increased three percent (3%) in the first quarter, to $11.6 billion. It was the eighth consecutive quarter of increased sales. Indexed annuity guaranteed living benefits (GLBs) election rates crept up slightly, with 68% electing a GLB when available.

Variable annuity sales fell five percent (5%) in the first quarter, to $32.4 billion—the lowest quarterly sales for VAs since the first quarter of 2010. Eight of the top 10 companies experienced declines. “Many of the top companies are still managing sales volumes closely, focusing on diversification of their VA GLB business,” the release said.

The election rate for living benefit riders when available was 77% in the first quarter, down from a peak of 90% in the first quarter of 2012.

Low interest rates in the first quarter drove total fixed annuity sales down by eight percent (8%), to $22 billion. Sales of fixed rate deferred annuities (Book Value and MVA) fell 24% in the first quarter, to $6.4 billion.

SPIA’s sales dropped 20% for the quarter to $2.0 billion. Deferred income annuity (DIAs) sales were $560 million in the first quarter, down 10% from the first quarter of 2014. This is the lowest quarterly sales since third quarter of 2013. Sixteen carriers now offer DIAs, up from nine in 2013. Six companies now offer Qualified Longevity Annuity Contracts (QLACs), which are the DIAs designed for IRAs.

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

U.S. DC plans are leakier than those abroad, study shows

Posted on May 21, 2015 by Editorial Staff -

The defined contribution retirement plan regime in the U.S. is a notably leaky vessel. Participants commonly borrow from their 401(k) plans. Job-changers can cash out their small balances or roll the money over to an IRA. In case of dire need, penalty-free early withdrawals can be arranged.

The impact is significant: For every dollar that goes into the DC accounts of savers under age 55 (not counting rollovers), 40 cents flows out (not counting loans or rollovers).

It’s not like that overseas. In a new paper, a group of researchers from the National Bureau of Economic Research point out that it’s a lot harder for plan participants in Australia, Canada, Germany, the United Kingdom, and Singapore to tap their accounts before they retire.

“The United States stands alone with respect to the high degree of liquidity in its DC system. Penalties for early withdrawals are relatively low, and early withdrawals are slightly subsidized as income falls transitorily,” they write.

“In Germany, Singapore, and the United Kingdom, withdrawals from general funds in employer-based DC plans are essentially banned no matter what kind of transitory income shock the household realizes,” the paper says.

“By contrast, in Canada and Australia, liquidity in employer-based DC plans [depends on the situation]. For a household that normally earns US$60,000, DC accounts are completely illiquid unless annual income falls substantially, at which point the DC assets may be accessed.”

Why is the U.S. so different? One theory, not mentioned in the paper, is that the U.S. system is entirely voluntary; the public might not be willing to participate at all if they couldn’t access their money.

Another possibility: in the U.K., a share of the government tax expenditure for the plan goes directly into each participants’ accounts. In the U.S., the tax expenditure shows up merely as a smaller tax liability at the end of the year. It might be easier to tolerate tighter government controls on liquidity if the government’s contribution to the account is clearly visible.

The U.S. system was allowed to be as leaky as it is, the authors speculated, because, 30 years ago, most people didn’t anticipate that DC plans to be more than a “top up” supplement to income from defined benefit plans. It’s only with the decline of DB, because of lack of portability and expense to sponsors, that DC emerged as the primary private source of retirement income—and that leakage from DC became a serious threat to retirement security.

Statute-of-limitations is flexible for ERISA suits: Supreme Court

Posted on May 21, 2015 by Thomas E. Clark, Jr. -

On May 18, 2015, the Supreme Court unanimously ruled in favor of the plaintiff plan participants in Tibble v. Edison. The decision reversed an earlier 9th Circuit ruling that under ERISA’s six year statute of limitations, a claim involving a plan investment that was initially chosen outside the 6-year window from when a lawsuit is brought could only be viable if there was a change in circumstances that would cause a fiduciary to reexamine the fund’s inclusion in the plan.

The Supreme Court rejected this interpretation, finding that under ERISA, there is a continuing duty to monitor and remove imprudent investments. Today’s decision also effectively reversed rulings in the 4th and 11th Circuits that were similar to the 9th Circuit’s.

The decision

Different Justices of the Supreme Court showed during oral arguments that they struggled with the question of exactly what this continuing duty to monitor looks like. Rather than resolve the question, they have remanded the case back to the 9th Circuit to decide what the duty to monitor requires and whether the plaintiffs here met that burden to have viable claims.

The decision then summarized its holding as follows:

In short, under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones. A plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones. In such a case, so long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely. The Ninth Circuit erred by applying a 6-year statutory bar based solely on the initial selection of the three funds without considering the contours of the alleged breach of fiduciary duty.

Finally, the Supreme Court made clear that it was not ruling on the scope of the duty to monitor:

We express no view on the scope of respondents’ fiduciary duty in this case. We remand for the Ninth Circuit to consider petitioners’ claims that respondents breached their duties within the relevant 6-year period under §1113, recognizing the importance of analogous trust law.

Our thoughts

This is obviously a significant victory for the plaintiffs in this case and plan participant lawsuits generally, as many lawsuits in the last 5 years had been dismissed citing the overly restrictive interpretation of ERISA’s six year statute of limitations.

In plain English, what this decision holds is that if a plaintiff can make a valid claim for a violation of the continuing duty to monitor, there is a effectively now a rolling 6-year window of liability. But of course, now the question is: what exactly is that duty and did the defendants violate it here?

The panel of three 9th Circuit judges that previously rules in favor of the defendants will get the first chance to answer those questions. Additionally here for these plaintiffs, the defendants have raised an argument that amounts to a technicality that the plaintiffs failed to raise a duty to monitor claim in the lower courts. The Supreme Court again stated that they had no opinion on the matter and would let the 9th Circuit decide.

So what does this decision mean for the (quite probably) millions of ERISA fiduciaries out there? There is no longer any dispute that a fiduciary must have a process to monitor a plan’s investments. We think it is also fair to say that this duty to monitor extends to all other areas of plan administration and responsibility (e.g. fees paid to providers, quality of providers, whether services are necessary, etc…) However, the duty does depend on the circumstances as the Supreme Court pointed out by citing to ERISA’s statutory language.

But we suggest that if a fiduciary does not have a robust monitoring process in place, they do not wait for any further court decisions. Develop a process, document why you think it’s a prudent process, and execute that process.

Share buyback trend isn’t matched by insider purchases: TrimTabs

Posted on May 21, 2015 by Editorial Staff -

Stock buyback announcements have reached record levels early this year, but corporate insiders bought just $230 million in April, the lowest monthly volume since February 2013, according to TrimTabs Investment Research.

“There’s a huge disparity between what corporate insiders are doing with shareholders’ money and what they’re doing with their own money,” said David Santschi, chief executive officer of TrimTabs.

Companies announced plans to buy back $133.0 billion in April, the highest monthly volume on record, TrimTabs said in a research note. A pair of $50 billion repurchases for Apple and General Electric boosted last month’s total. In the latest earnings season, stock buyback announcements averaged a record $5.7 billion daily, smashing the previous record of $4.3 billion daily in the January/February 2007 earnings season.

Insider buying based on filings of Form 4 with the Securities and Exchange Commission fell to only $230 million last month, less than half of the monthly average of $620 million in the past year, TrimTabs said.

“Corporate America’s willingness to commit record sums to prop up share prices signals confidence in their businesses,” said Santschi. “But the unwillingness of insiders to buy much with their own cash suggests they think U.S. stocks are richly priced.”

The Bucket

Posted on May 21, 2015 by Editorial Staff -

Lincoln officially announces QLAC status on deferred income annuity

Lincoln Financial Group announced that it enhanced its Lincoln Deferred Income Solutionsannuity with Qualifying Longevity Annuity Contract (QLAC) status for IRA rollovers.

With QLAC status, qualified funds from an IRA used to purchase this annuity will be exempt from standard Required Minimum Distribution (RMD) rules. When opening a QLAC with a Lincoln Deferred Income Solutions Annuity, clients can invest the lesser of $125,000 or 25% of their total IRA assets in Lincoln’s QLAC and defer receiving income payments to a future date.

The dollar amount invested into a QLAC is excluded from the RMD calculation that determines the amount an individual must begin withdrawing from a qualified retirement account at 70½ , potentially at a time when a client does not have an income need. The QLAC can defer the impact of RMD-related income taxes and guarantee a future income.

With QLAC status on the Lincoln Deferred Income Solutionsannuity, payments may be deferred until age 85. Beneficiaries will receive the full return-of-premium death benefit if the policyholder passes away before receiving any QLAC distributions or, if the QLAC distributions have started, they receive a return of premium death benefit reduced by all previous payments.

New York Life announces executive movements

John Y. Kim, 54, the vice chairman of New York Life, has been elected president of the company, succeeding chairman of the board and chief executive officer Ted Mathas, 48, who has been president since 2007. Kim continues reporting to Mathas, who remains chairman and CEO.

Kim also retains the role of chief investment officer of New York Life, as well as overall responsibility for the Investments Group and enterprise-wide technology. The company’s largest business unit, the Insurance & Agency Group, has been added to his responsibilities.

Before joining New York Life, Kim had been president of Prudential Retirement, where he led its defined benefit, defined contribution and guaranteed products businesses, and before that he was president of CIGNA Retirement and Investment Services. Kim earned his Bachelor in Business Administration degree from the University of Michigan and holds an MBA degree from the University of Connecticut.

New York Life also announced that Chris Blunt, 53, will return to Investments to run the Group as its president, reporting to Kim. Blunt joined the company in 2004 as head of New York Life Investments’ Retail Investments strategy, where he was successful in growing Investments’ sales of mutual funds through all of its distribution partners. Blunt most recently headed the Insurance & Agency Group with co-president Mark Pfaff, who plans to retire at year-end after 30 years of service.

In a separate announcement, New York Life said that Yie-Hsin Hung, 52, has been named chief executive officer of New York Life’s asset management subsidiary, New York Life Investment Management LLC (NYLIM), effective immediately. Hung reports to Chris Blunt, president of the Investments Group, which includes all of New York Life’s asset management businesses, totaling more than $500 billion in assets under management.

Hung was previously co-president of NYLIM. As CEO, she replaces Drew Lawton, 56, who will retire at the end of this year. He is now a special advisor to Blunt. Stephen Fisher, formerly co-president of NYLIM, is now president of NYLIM and reports to Hung. Fisher continues as president of the MainStay Funds.

US and Canadian institutions look to Europe for illiquidity premiums

North American institutions are planning long-term investments in foreign infrastructure and are pumping billions of dollars into Europe, according to a new report from Armstrong International based on a survey of 305 North American institutional investors in the first quarter 2015.

The combination of low bond yields, high U.S. equities prices and the strong U.S. dollar, many investors are “embarking on what some economic commentators are describing as ‘a 21^st Century land-grab’ across Europe in an attempt to add value to their portfolios,” the report said. Investors were said to be increasing allocations to private equity, real estate, infrastructure and, to a lesser extent, hedge funds.

Four in five (78%) respondents said that they are actively investing or planning to increase their allocations in Europe. Of the remainder, three quarters said that they are actively considering European investments. They included public pension funds, public universities, private foundations and endowments in the U.S. and Canada with assets of $1 billion to $200+ billion.

“It feels very much like a land grab,” said Martin Armstrong, chairman of Armstrong International, in a release. “After a tepid decade, this level of investment enthusiasm implies that Europe is a re-emerging economy.”

The report finds that Institutional investors believe that illiquid assets can deliver a high income at a time when other traditional fixed income yields are at historic lows.

The government of China has been a substantial investor in infrastructure beyond its borders, including Europe. A rush to Europe by North American investors could be “a harbinger of future international bidding wars between the two trading superpowers,” according to one commentator who was surveyed.

Asia and Sub-Saharan Africa, respectively, are the second and third-place destinations for foreign investment, the Armstrong International survey showed. Two thirds of those investing in Asia are planning to add to their portfolios. Only 22% currently invest in Africa, but 37% of the respondents said they plan to increase their allocations to this region over the coming next three years.

DOL extends comment period on fiduciary definition

According to a DOL statement released Friday, May 16, 2015, a forthcoming issue of the Federal Register will announce the extension of the deadline for comments on the definition of a fiduciary with respect to IRAs to July 21, 2015 (i.e., or an additional 15 days). In accordance with its original plan, the DOL will hold a public hearing within 30 days of the close of this initial comment period, as so extended. After the hearing, the comment period will reopen for an additional 30 to 45 days.

New DTCC service processes liquid alt trades in days, not weeks

A new service from the Wealth Management Services unit of the Depository Trust & Clearing Corporation is designed to help broker-dealers process internal account transfers for alternative investments more quickly and easily, according to a release from DTCC, which manages data on the global financial industry’s trades.

The new Alternative Investment Products Service (AIP) service automates account transfers for non-traded real estate investment trusts (REITs) and business development corporations (BDCs), helping broker/dealers to re-register accounts and internally transfer investors’ shares between closing and opening accounts.

Currently, account transfer transactions often take broker/dealers several weeks to complete because operational processes are largely manual—incurring paper trails, multiple registrations and numerous inter-departmental hand-offs. The AIP enhancement processes transactions, straight-through, in a single day. Broker/dealers can transmit data over a secure network, reducing risk and increasing efficiency and scalability.

WMS and its AIP service are offerings of DTCC’s National Securities Clearing Corporation (NSCC) subsidiary. Today, there are 382 clients – representing fund administrators, funds, broker/dealers and custodians – benefitting from the AIP service.

Pershing introduces Subscribe Annuity Analytics Dashboard

Under the new Department of Labor conflict-of-interest proposal, brokers selling variable annuities and insurance agents selling fixed index annuities would have to ensure that purchases of those products are in the “best interest” of their clients.

If so, they and insurance carriers will have to monitor their sales more closely. A new service from Pershing, the BNY Mellon-owned clearinghouse and multi-function platform provider appears designed to help them do that.

The service is an annuity data, reporting and presentation tool called the Subscribe Annuity Analytics Dashboard. According to Pershing release, the dashboard will provide Pershing clients with “an integrated, efficient solution for managing annuity sales flows and more transparency of new and existing business.”

“Annuities contracts and purchases are being examined more closely. As a result, monitoring of these products has become increasingly important for firms,” said Rob Cirrotti, head of retirement solutions at Pershing.

The dashboard is available through Pershing’s Subscribe service, which carries firm-specific annuity business information, and can be accessed through NetX360, Pershing’s technology platform. The dashboard technology is provided by Albridge Analytics, an affiliate of Pershing.

Using information from more than 50 individual insurance carriers, the Subscribe Annuity Analytics Dashboard allows distributors to evaluate the annuity business of their financial advisors using a number of factors, including annuity type, transaction type, IRS qualification and detailed attributes about the annuity owner. The dashboard can also assist firm management and marketing professionals identify offices or advisors that may need additional support.

The dashboard includes information on both networked and non-networked positions across two modules:

A positions module, sortable by carrier, plan type, issue and surrender date, owner or advisor. It is available for both networked and non-networked positions sent to Pershing by carriers. Data includes date of issuance, surrender date, current value, owner/annuitant demographic information and all advisor information.
An order module, containing data associated with new and subsequent premium transactions, which can help firms better understand carrier concentrations, monitor exchange activities and regulatory detail in the event of a FINRA audit or regulatory visit. Detail in this module includes identifying 1035 exchanges and qualified transfers, product type, issuing carrier, state of solicitation, qualified vs. non‐qualified and advisor information.

Data from both modules can be filtered, sorted and exported to Excel.

Gen X: More vulnerable than proactive

Gen X’ers (Americans ages 35-49) worry about their finances but don’t take much action to improve them, according to the 2015 Northwestern Mutual Planning and Progress Study.
“Of four generations surveyed, Gen X was found to have the poorest financial habits. In addition to comprising the majority of ‘informal’ planners, Gen X has more spenders than savers compared to other generations and is the least likely to have more savings than debt,” the study found.

Among the study’s findings:

37% of Gen Xers say they do not “at all feel financially secure.” This is more than any other generation, including Millennials.
23% are “not at all confident” that they will achieve their financial goals.
66% expect to have to work past traditional retirement age due to necessity, with 2 in 10 (18%) believing they will never retire.
82% of Gen Xers who anticipate needing to work past the age of 65 feel they will need to do so because they didn’t save enough.
44% live with children under 18 and over a quarter have a parent or other relative in the household. Balancing personal financial priorities with the added demands of dependent care is likely to have implications on decision-making.
66% of Gen X respondents acknowledge that their financial planning needs improvement and less than one in 10 (9%) consider their generation “very financially responsible.”
Gen X’ers are the generation most likely to say they would pay down debt if they had a windfall of $10,000, the least likely to have sought guidance from an adviser.
34% do not know how much income they need to retire.
47% have not discussed retirement planning with anyone.

The 2015 Northwestern Mutual Planning & Progress Study was conducted by Harris Poll on behalf of Northwestern Mutual and included 5,474 American adults aged 18 or older (including 813 Gen Xs age 35-49) who participated in an online survey between January 12, 2015 and January 30, 2015.

England Swings (Away from Annuities)

Posted on May 14, 2015 by Kerry Pechter -

You think you know England, don’t you? Well, you don’t know Union Jack. There’s more to the merry olde UK than lurid tabloids, Downton Abbey, heavy food, the ForEx market and royal babies. At the moment, its £3.9 trillion ($6.16 trillion) retirement market is in a state of disruption.

As of April 6, defined contribution participants in the U.K. are no longer under any pressure to buy life annuities at retirement or any other time. Because of that, McKinsey & Co. expects the percentage of DC savings going into life annuities to drop from 75% to between 30% and 40%. An estimated £10 billion leaves DC plans each year.

The impact: an opportunity for global asset managers to step in and offer non-annuity alternatives that provide volatility control and systematic payouts. So far, Barclays and AllianceBernstein have responded. A spokesperson for indexing giant Vanguard, which is currently an investment-only DC provider in the UK, said her company is watching the situation but not responding yet.

McKinsey, the consulting firm, has been tracking the evolution of the U.K. retirement market, which “is undergoing profound change across all dimensions: regulations, technology, competitive dynamics and customer preferences,” according to a report the firm released in April, In the Eye of the Storm: Transformation in the UK Retirement Market.

“The result is an opportunity for capturing market share that is unique in the broader European asset management landscape, and which has prompted an unprecedented level of strategic debate among the asset managers, insurers, pension providers, platforms and distributors that operate in the sector,” the report said.

But McKinsey also noted that “the time window for action is limited – strategic initiatives launched in the next six to twelve months will likely set the course for years to come.

Last fall, AllianceBernstein, which manages about $1.6 billion in target date funds for DC plan participants in the UK, introduced a new non-annuity, non-guaranteed lifetime income product for retirees called “Retirement Bridge.” Designed to create a seamless transition for retirees from DC plans, it measures out a monthly income from a TDF.

The income amount matches the payout the retiree would have received from a single-premium immediate annuity, drawing on principal if necessary. At age 75, the retiree can buy a life annuity or stay in the TDF. Income from the TDF from that point onward would consist only of earnings, while preserving principal.

The cost of Retirement Bridge would “depend on the administration provider,” said Sebastian Kadritzke, an AllianceBernstein spokesperson, in an interview. One provider currently offers it for a combined annual investment and administration fee of 85 basis points.

BlackRock, the $4.8 trillion asset manager that administers DC plans in the UK, has just begun offering its 300,000 British participants in 195 workplace plans a systematic withdrawal plan. While SWPs are offered by about half of U.S. 401(k) plans, according to PlanSponsor magazine, they’re relatively new to England.

On April 27, the BlackRock Retirement Income Account was announced. The firm characterized it as an “income alternative to annuities” that “aims to provide a low-cost and straightforward option for retirees… following new pensions freedoms introduced on 6 April.

“We have seen a raft of new fund launches within the industry to cater to new pensions freedoms, but we believe this innovation provides our members with a simple, flexible and cost-effective way of moving from the accumulation phase of workplace pension saving to decumulation,” said Paul Bucksey, head of UK Defined Contribution at BlackRock, in a press release.

According to the release, “Account holders will be able to access a multi-asset core fund, LifePath Flexi, but can also create their own personal portfolio from a range of around 100 investment funds from BlackRock and other leading managers… The annual management charge to use the core fund, LifePath Flexi, is 0.41% of funds under management.” The all-in cost is 50 basis points a year, a BlackRock spokesperson told RIJ.

In 2013, BlackRock introduced a new retirement income concept in the U.S. called the CoRI Index, a benchmark based on current prices for single-premium immediate annuities that shows pre-retirees the estimated cost of a dollar of lifetime income starting at age 65.

By investing in corresponding BlackRock CoRI long-term bond funds that are based on the CoRI Index, a near-retiree can build predictable retirement income but not guaranteed, lifetime or mortality-pooled income. The CoRI funds have an annual expense ratio of 2.04%, compared to 0.12% for Admiral shares of the Vanguard Long-Term Government Bond Index Fund.

The end of compulsory annuitization in the UK, effected by the Cameron administration, has been a disaster for UK annuity issuers. The old law gave many Britons, especially those not at risk of running out of money in retirement, some flexibility in spending their tax-deferred savings.

Annual withdrawals were subject to a cap, but annuitization could be postponed until age 75 and they could take out up to 25% of their savings tax-free. Most middle-class workers bought single-premium immediate annuities with their DC savings when they retired, to avoid the significant tax costs of doing otherwise.

Those days are over. This week, Just Retirement, a British private-equity-backed annuity issuer, reported a 59% drop in sales of “medically underwritten annuities,” which are sold to people with medical problems and priced lower than typical life annuities, and a 22% drop in overall sales in the nine months after June 30, 2014. But the company has seen a big increase in its purchases of pension liabilities from corporations.

Total retirement assets in the UK are estimated at £3.9 trillion, according to McKinsey, compared with about $24.7 trillion in the U.S., which is the latest estimate from the Investment Company Institute.

“Annual assets in motion [in the UK are] about £155 billion currently, including contributions to workplace and personal pensions, and assets moving from pensions into decumulation products,” McKinsey’s report said. “Given the various market changes (e.g., auto-enrolment, pension freedom, shifts in customer preferences), this value is expected to grow to about £180 billion by 2020.”

Most British pre-retirees don’t realize exactly what has happened in the retirement space or what it will mean to them, surveys show. But sooner or later they’ll need systematic ways to draw down their money in retirement, either direct from their DC plan or from Self-Invested Personal Pensions (SIPPs), which are similar to traditional IRAs, as well as for financial advice (including “robo”) that meets recently-established UK standards for low cost and transparency.

Offer Life Annuity and Whole Life in Tandem: Pfau

Posted on May 14, 2015 by Kerry Pechter -

Does whole life insurance make sense for income-hungry retirees? In a paper written for mutual life insurer OneAmerica and released this week, retirement planning expert Wade Pfau (below left) claims that it can—not just for the sake of producing a big legacy but also to enhance income.

Thanks to its tax advantages, life insurance has long served as an estate-planning tool for wealthy investors. But most contemporary heads-of-households elect to “buy-term-and-invest-the-rest,” and then drop their term coverage at retirement, when the parental nest is empty and there’s not much human capital left to replace.

In the past, a few advisers, notably Burlington, Iowa-based Curtis Cloke, have designed custom retirement solutions that combine income annuities, life insurance and investments. Now comes Pfau, a co-editor of the Journal of Personal Finance and professor at The American College, to test the desirability of such a strategy.

His conclusion is that a household’s breadwinner can, starting at age 35, increase his family’s income at age 65 by a median 40% and increase his legacy by as much as 228% by using a combination of investments, a whole life policy and a single-premium immediate annuity, relative to the income and legacy accruing from investments and term life insurance coverage alone.

To find out how he arrives at those numbers, you’ll have to read the whitepaper that he produced for OneAmerica. But we’ll try to summarize his two hypotheticals: one involving 35-year-old Steve and Susie, and the other involving 50-year-old James and Julie.

In the first case, Steve is working and Susie is a homemaker. They have $65,000 in their 401(k) and they can afford to save $15,000 a year. Steve has three options:

Scenario 1. He can buy term-life and invest $14,281 a year in his 401(k) with the intention of taking 3.5% inflation-adjusted systematic withdrawals at age 65 or
Scenario 2. He can buy term-life and invest $14,281 a year in his 401(k) with the intention of buying a single-premium, joint-and-survivor life income annuity with $738,000 of his 401(k) accumulation, dropping his term coverage, and taking 3.5% inflation-adjusted systematic withdrawals at age 65 or
Scenario 3. He can buy whole-life for a taxable $6,000 per year and invest $9,000 a year in his 401(k) with the intention of buying a single-premium single-life income annuity with $738,000 at age 65 and taking 3.5% inflation-adjusted systematic withdrawals at age 65.

Pfau ran Monte Carlo simulations and found that the strategy in Scenario 1 would produce median income of $58,556 from SWPs at age 65 while Scenarios 2 and 3 would produce median income of $81,434 and $82,034, respectively, through a combination of SWPs and income annuity payments.

Looking at the median legacies under the three strategies, Pfau found, not surprisingly, that Scenario 2, where the term insurance was dropped at retirement, lagged. If Steve were to die at age 66, he would leave $1.69 million under Scenario 1, $940,551 under Scenario 2 and $1.46 million under Scenario 3. If he were to live to 100, those numbers would be $649,780, $217,897 and $2.13 million, respectively.

In a second hypothetical, Pfau considers James and Julie, two 50-year-olds who plan to retire in 15 years. Even though their time horizon is shorter than Steve and Suzie’s, they experience the same benefits—higher income thanks to the SPIA, and higher legacy thanks to the life insurance.

Much of this is intuitive. Life annuities characteristically enhance annual income, relative to SWPs with average returns. Whole life insurance enhances legacy values, especially compared to a legacy without life insurance. But don’t the cost of whole life and the slow growth of the cash value combine to create a lot of drag on the potential investment accumulation?

Not as much as you might think, Pfau explains. That’s because the investor rebalances his 401(k) in favor of equities to offset the bond-like character of the whole life cash value. “The 401k piece is more aggressive when whole life is used,” he told RIJ. “This is explained in the article because it is an important point.” Therefore the median accumulation, based on Monte Carlo projections, is higher. Perhaps more importantly, the presence of the whole life policy allows Steve to buy a single life instead of a joint-life SPIA at age 65, thus raising the payout rate for the same premium by 17%.

Pfau suggests that the inclusion of whole life in a retirement income plan has psychological value: it can make the purchase of a single premium immediate annuity more palatable.

“Behaviorally, Scenario 2 presents a difficult strategy for many retirees to accept. Despite potential improvements to their retirement income, retirees generally do not like to annuitize their assets in such a way. Meanwhile, Scenario 3 uses a single-life SPIA and maintains a death benefit with life insurance, which can essentially protect or “refund” the assets used for the annuity purchase,” Pfau writes.

“This combination should be more palatable for retirees. And when we compare Scenarios 2 and 3, we can observe that the available income is similar, while the legacy value is substantially different. The lack of a death benefit with Scenario 2 means that legacy assets are substantially less. Psychologically, many retirees will find it easier to contemplate adopting Scenario 3 over Scenario 2.”

Fee-based advisers who are not accustomed to selling insurance products may not even consider this type of strategy. If nothing else, it would deprive them of billable assets. But that doesn’t mean the strategy isn’t smart, says Curtis Cloke. “When you are not biased to a product type or to how financial professionals are paid (fee vs. commission),” he told RIJ, “it becomes obvious that the true “best in class” planning solutions cannot be created efficiently without the inclusion of both insurance based and traditional investment product allocations.”

The next-gen adviser: Half person, half machine

Posted on May 14, 2015 by Kerry Pechter -

The traditional broker-dealer/adviser business model continues to come under pressure. Zealous regulators and disruptive robo-advisers are compressing fees. The old rationale for personalized fee-based advice—“the advisor makes money when you make money”—makes less sense when people are spending down assets.

Many advisors have been able to gain economies of scale and accommodate low-margin middle-income clients by outsourcing more and more chores to platforms and software. But there are clear signs that the balance is starting to tip—with advisors supporting the digital channel rather the digital channel supporting the advisors.

This is the brave new world of hybrid advice that’s described in a new report, Gold at the End of the Rainbow: Using Automation to Profitably Serve the De-Accumulating Investor, from Celent, the Boston-based research firm. The report, according to a Celent release, “examines the degree and form to which automated forms of delivery might be used to profitably serve the de-accumulation needs of retirement investors.”

The insight that the spectrum of paid financial advice will range from packaged products, algorithms and do-it-yourself online tools for the mass affluent, lavish hand-holding for the very wealthiest (and a combination of the two for people in between) was made in the middle of the past decade by a number of observers, notably Francois Gadenne at the Retirement Income Industry Association.

Celent validates that forecast, offering a map of the “The De-accumulation Opportunity by Delivery Channel (see below). It reassures advisers, arguing that, if anything, retirement income clients need custom solutions that no robo-adviser seems to be able to handle—at least not yet. But Celent points out that adviser have been slow to recognize the import of these demographic and technical trends.

“De-accumulation, which encompasses downside protection and wealth transfer as well as the drawdown of assets, is a topic advisors have tended to avoid in light of its inherent sensitivity and the challenge of monetizing advice around it,” said a summary of the report, released this week.

“Today, however, considerations are evolving under the weight of demographic trends as well as economic and regulatory imperatives… Denial and resistance to automation already are ceding ground to understanding and acceptance. In fact, the scope of the de-accumulation opportunity suggests that it will not be long before the advisor becomes a flag carrier for the blended model.”

“Although automated delivery is disruptive to the standard advisory model, its impact should not be measured in terms of the disintermediation of the real life advisor,” the report said. “Decisions around de-accumulation are sufficiently complex (How best to transfer money to my children?) and emotionally freighted (Will I have enough to live on for the rest of my life?) as to demand face-to-face counsel, at least for the foreseeable future.”

Clients, too, are increasingly preoccupied with the challenges of funding a multi-decade retirement period (with its attendant healthcare costs), especially given systemic risks to longstanding retirement programs such as Social Security, corporate pensions, and even 401(k) plans.

“Advisors and the brokerage, advisory, and insurance firms that employ them are starting to explore the automated delivery of advice as a way to rationalize their high-cost sales structures,” Celent said in a release. “As such, automated delivery tools geared toward serving the post-work investor (and the investor planning for retirement) will be deployed at the service of the advisor, and not in his stead.

“Celent believes that this blending of virtual and physical distribution models increasingly will take place with the tacit support (if not the encouragement) of advisors eager to reach an expanding pool of mass affluent and Millennial clients.”

Worth the Wait? More Delaying Social Security Past 62

Posted on May 14, 2015 by Jenna Gottlieb -

More U.S. retirees are waiting to claim Social Security benefits past the year they become eligible. The reasons: lower Social Security replacement rates, longer lifespans, and disappearing defined benefit plans, according to a new report by the Center for Retirement Research at Boston College.

The percentage of claims at age 62 has dropped dramatically in the last 28 years. In 2013, 35.6% of men and 39.5% of women claimed Social Security benefits the year they turned 62, according to CRR. That’s down from 51.9% of men and 63.6% of women who claimed at age 62 in 1985, according to the report Trends in Social Security Claiming.

“The good news is that more people are claiming retired-worker benefits at later ages, and this pattern is consistent with increased labor force participation at older ages and the rise in the average retirement age,” CRR director Alicia Munnell wrote in the report.

“Nevertheless, in 2013 more than a third of insured workers still claimed Social Security benefits as soon as they became eligible. The question is whether this decision appropriately reflects the individual and family circumstances of these individuals or whether they are making a mistake.”

This news should not surprise many advisers, because more of their clients are asking about the benefits of waiting to claim—so they can get the 8% increase in benefits for every year they delay until age 70.

“Over 66% of today’s beneficiaries are critically or totally dependent on Social Security to maintain their retirement lifestyle,” Brian Doherty, president of Filtech, told RIJ. “With people living longer and longer, it’s important to make the right claiming decision.”

Two to four million people make an irrevocable claiming decision every year. While the increase of defined contribution plans replacing defined benefit plans and the rising costs of healthcare play a role in claiming decisions, other factors also help explain why more people are waiting to claim.

“One factor, for example, is the cost of living adjustment (COLA) feature on Social Security,” said Doherty. “While everyone receives the same annual COLA on their benefits, when you apply that percentage to a larger amount it results in a bigger increase. “So by delaying to age 70, you not only maximize your Social Security benefit, you also lock in the biggest dollar increases possible for the rest of your life. This is something people rarely consider and it’s the only pay raise most retirees receive in retirement.”

Perhaps the message is getting through to more retirees that delaying might make sense for them and their family.

Nationwide Life fined $8 million for pricing violations

Posted on May 14, 2015 by Editorial Staff -

The Securities and Exchange Commission today charged Nationwide Life Insurance Company with routinely violating pricing rules in its daily processing of purchase and redemption orders for variable insurance contracts and underlying mutual funds.

Nationwide agreed to settle the charges and pay an $8 million penalty.

Pricing rules for mutual fund shares require an investment company to compute the value of its shares at least once daily at a specific time set by its board of directors and disclosed to investors. According to the SEC’s order instituting a settled administrative proceeding, Nationwide’s prospectuses stated that mutual fund orders received before 4 p.m. at its home office in Columbus, Ohio, would receive the current day’s price. Orders received after 4 p.m. would receive the next day’s price.

An SEC investigation found that when regular postage mail became available for retrieval early each morning from its P.O. boxes, Nationwide arranged for the pickup and delivery of mail directed to other business units but intentionally delayed the retrieval of mail related to its variable contracts business.

Therefore, in spite of receiving customer orders and other variable contract mail in its P.O. boxes at least several hours before the 4 p.m. cut-off time, Nationwide sought to avoid its requirement to process the orders contained in this mail using the current day’s price by ensuring this mail wasn’t delivered to its offices until after 4 p.m.

Meanwhile, Nationwide did arrange for prompt pickup and delivery of U.S. Postal Service Priority Mail or Priority Express Mail that enabled contract owners to track an order’s time of delivery to the P.O. boxes. Those orders were assigned the current day’s price.

“For more than a 15-year period, Nationwide intentionally delayed the delivery of untracked mail containing orders from customers and processed them at the next day’s prices in violation of the law,” said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office.

The SEC’s order finds that Nationwide instructed the post office to divide mail directed to the P.O. Box for its variable contract business from mail directed to P.O. boxes for other lines of business, and to maintain it in separate areas of the post office loading dock.

Nationwide typically hired a private courier to collect and deliver the mail from the loading dock to its offices. Nationwide arranged for its courier to travel to the post office at 3 a.m., 5 a.m., and 7 a.m. each business day to retrieve mail for the other lines of business, but specifically instructed the courier not to retrieve variable contract mail at these times.

Nationwide instead instructed the courier to deliver variable contract mail no earlier than 4:01 p.m. in order to deem it received when it arrived “in the building.” If the courier arrived in Nationwide’s parking lot before 4 p.m., the instructions were to wait until 4:01 p.m. to enter the building.

Therefore, some couriers intentionally delayed their arrival time at Nationwide by stopping to purchase meals or fuel. By contrast, priority mail related to the variable contract business was promptly retrieved by the courier and processed by Nationwide before 4 p.m. for pricing at the current day’s price.

The SEC’s order further finds that Nationwide employees complained to post office staff when portions of the variable contract mail were inadvertently mixed together with the other mail and therefore delivered to Nationwide’s offices before 4 p.m. After one such incident, Nationwide requested a meeting with the post office and stressed that it needed “late delivery” of variable contract mail “due to regulations that require Nationwide to process any mail received by 4 p.m. the same day.”

Nationwide consented to the entry of the SEC’s order finding that the firm willfully violated Rule 22c-1 under the Investment Company Act of 1940. Nationwide neither admits nor denies the findings, and must cease and desist from committing future violations of the rule and pay the $8 million penalty.

A.M. Best comments on insurer stock buybacks and dividend payments

Posted on May 14, 2015 by Editorial Staff -

In a report issued this week, the ratings agency A.M. Best noted the trend among publicly held insurance companies of returning cash to shareholders through stock repurchases and dividends. The report is titled, “Insurance Industry Buybacks: Stocks Undervalued or Opportunities Scarce?”

“Insurance companies are holding onto a much smaller portion of their net income as they returned 76% of total net income to shareholders in the form of dividends and buybacks, with buybacks representing 70% of money returned to shareholders,” the report said.

AIG completed the largest repurchase of shares in 2014, buying back over USD 4.9 billion. In terms of a total return of cash to shareholders, AIG was also the largest, with USD 5.6 billion being returned to shareholders from both dividends and repurchases.

Life insurers listed in the A.M. Best report, along with their 2014 buybacks and dividends (in millions of dollars), included (in descending order of market capitalization):

AIG: $4,903 in value of buybacks; $712 in dividends paid.
MetLife: $1,001; $1,621.
Prudential: $1,000; $1,027.
Ameriprise Financial: $1,372; $426.
Sun Life Financial: $0; $886.
Lincoln National: $650; $170.
Principal Financial: $205; $410.

“Insurance companies have not been particularly good at timing share repurchases. Management has been increasing repurchase activity just [when] price-to-book multiples have made this capital management activity more expensive.

“Had the companies in this review used the same amount of money spent in 2014 to buy back stock during the lows of 2008, they would have repurchased 27% more stock then they could have been purchased in 2014,” the report said.

“It would seem difficult to rationalize that in the current environment management would believe their stock prices are trading at a substantial fundamental discount, and would warrant almost 50% of net income to be spent on repurchases as it was in 2014.

“However, in an environment in which companies are faced with a combination of low interest rates and low industry premium growth, those with substantial cashflow may find they have little other choice of deploying that capital besides returning it to shareholders,” A.M. Best noted.

Managed accounts gain ground against TDFs as default investment: Cogent

Posted on May 14, 2015 by Editorial Staff -

The proportion of “mega” 401(k) plans ($500 million or more in assets) offering managed accounts instead of target date funds as their plan default investment option increased to 18% in 2015 from 5% in 2014, according to the annual DC Investment Manager Brandscape, a Cogent Reports study by Market Strategies International.

According to the report, mega plan sponsors indicated a strong interest in offering ETFs within managed accounts to their plan participants and cited “retirement income product offerings” as a reason for selecting a managed account provider. Cogent Brandscape 2015

“While target date funds continue to serve as the most widely preferred default investment option among most plans, this increased usage of managed accounts among Mega plans signals a growing desire in the industry to offer a more personalized solution for plan participants,” says Linda York, vice president of Cogent Reports.

“This shift echoes the rise in popularity of these robo-advice retirement vehicles that are customized for each individual investor and highlights new opportunity for investment managers to secure a place on the investment lineups of these larger plans as managed account providers.”

The report identifies the top investment managers that plan sponsors would likely consider for managed accounts and target date funds as well as other investment products. Among the larger plan segments, eight firms rank in the top ten for both managed accounts and target date funds.

Within this competitive set, Vanguard earns the greatest consideration potential as a target date fund provider, while Charles Schwab Investment Management claims the lead position for managed accounts.

LPL to pay at least $11.7 million for range of abuses

Posted on May 7, 2015 by Editorial Staff -

LPL Financial LLC, America’s largest independent broker-dealer, has been censured and fined $10 million by the Financial Industry Regulatory Authority (FINRA), the self-policing agency for broker-dealers.

LPL, which had revenues of $1.1 billion in the first quarter of 2015, was charged with “broad supervisory failures in a number of key areas.” The broker-dealer consented to the entry of FINRA’s findings without admitting or denying the charges.

A FINRA release said LPL didn’t properly supervise the sale of complex products. LPL also failed to monitor and report trades and deliver to customers more than 14 million trade confirmations, the release said.

LPL will also be required to pay about $1.7 million in restitution to certain customers who purchased non-traditional ETFs. The firm may pay additional compensation to ETF purchasers pending a review of its ETF systems and procedures.

FINRA found that, at various times spanning multiple years:

LPL failed to supervise sales of certain complex structured products, including ETFs, variable annuities and non-traded REITs.
With regard to non-traditional ETFs, the firm did not monitor the length of time that customers held these products in their accounts, did not enforce its limits on the concentration of those products in customer accounts, and failed to ensure that all of its registered representatives were adequately trained on the risks of the products.
LPL failed to supervise its sales of variable annuities, in some instances permitting sales without disclosing surrender fees.
In connection with certain mutual fund “switch” transactions, LPL used an automated surveillance system that excluded these trades from supervisory review.
LPL also failed to supervise non-traded REITs by, among other things, failing to identify accounts eligible for volume sales charge discounts.

According to FINRA, LPL’s systems to review trading activity in customer accounts were plagued by multiple deficiencies. For example, LPL’s surveillance system failed to generate alerts for certain high-risk activity, including low-priced equity transactions, actively traded securities and potential employee front-running.

The firm used a separate, but flawed, automated system to review its trade blotter that failed to provide trading activity past due for supervisory review, FINRA said, and the firm failed to deliver over 14 million confirmations for trades in 67,000 customer accounts.

According to other FINRA charges:

Due to coding defects that remained undetected for nearly six weeks, LPL’s anti-money laundering surveillance system failed to generate alerts for excessive ATM withdrawals and ATM withdrawals in foreign jurisdictions.
LPL failed to report certain trades to FINRA and the MSRB, and failed to ensure it provided complete and accurate information to FINRA and to federal and state regulators concerning certain variable annuity transactions.
LPL failed to reasonably supervise its advertising and other communications, including its registered representatives’ use of consolidated reports. LPL did not monitor the creation or use of consolidated reports, and failed to ensure that these reports reflected complete and accurate information.

Wells Fargo used “pernicious” and “illegal” sales tactics: LA city attorney

Posted on May 7, 2015 by Editorial Staff -

The Los Angeles city attorney filed a civil complaint this week against Wells Fargo & Co., charging one of America’s largest full-service financial services firms with coercing its employees to drum up new business and, in the process, defrauding an untold number of Wells Fargo retail customers.

Wells Fargo sent RIJ the following statement: “We will vigorously defend ourselves against these allegations. Wells Fargo’s culture is focused on the best interests of its customers and creating a supportive, caring and ethical environment for our team members. This includes training, audits and processes that work together to support our Vision & Values and our commitment to customers receiving only the products and services they need and will benefit from.”

The complaint, initiated after a Los Angeles Times investigation, claims that Wells Fargo units “victimized their customers by using pernicious and often illegal sales tactics to maintain high levels of sales of their banking and financial products.”

The company, as part of its “Gr-eight” growth initiative, put extreme pressure on its employees to sell each Wells Fargo customer eight “solutions” or financial products, ranging from credit card services to savings accounts to insurance products, the complaint said.

Wells Fargo bank logos are a familiar site in many parts of the U.S. According to its website, the company’s 265,000 employees serve 70 million customers at more than 8,700 locations with more than 12,500 ATMs.

The company considers itself the top retail mortgage lender in the U.S., the top minority and low-income mortgage provider, the top new and used car loan provider, and the largest provider of student loans among banks.

Various surveys have ranked the company #2 in annuity sales in 2014, #3 in providing full-service retail brokerage services, #4 in 2014 in providing wealth management services to accounts of $5 million or more, and #6 in providing IRAs in the U.S. in the third quarter of 2014.

Wells Fargo was charged with engaging in at least three types of conduct that the prosecutor called “gaming.” These included:

“Sandbagging,” the practice of failing to open accounts when requested by customers, and instead accumulating a number of account applications to be opened at a later date. Specifically, Wells Fargo employees collect manual applications for various products, stockpile them in an unsecured fashion and belatedly open up the accounts (often with additional, unauthorized accounts) in the next sales reporting period.
“Pinning,” the practice of assigning, without customer authorization, Personal Identification Numbers to customer ATM card numbers with the intention of… impersonating customers on Wells Fargo computers, and enrolling those customers in online banking and online bill paying without their consent.
“Bundling,” the practice of incorrectly informing customers that certain products are available only in packages with other products such as additional accounts, insurance, annuities and retirement plans.

Wells Fargo, which has about $1.7 trillion in assets under management, made no secret of its ambition to win a bigger share of its clients’ wallets, and to take advantage of its diverse product lines to cross-sell and up-sell.

At its website, the company said it would pursue these opportunities:

Investments, brokerage, trust and insurance. We want to be the nation’s most respected provider of wealth, brokerage and retirement services. Only seven of every 100 of our retail banking customers have purchased an IRA through Wells Fargo or have a brokerage relationship with us. Only eight of every 100 buy insurance through Wells Fargo. We want all our wealth management, brokerage and retirement customers to bank with Wells Fargo. We want all our banking customers to think of us first for all their wealth management needs.
“Going for gr-eight.” Our average retail banking household has about six products with us. We want to get to eight . . . and beyond. One of every four already has eight or more. Four of every 10 have six or more. The average banking household, for example, has about 16 products. Our average wholesale bank relationship has six products with us and our average commercial bank relationship, eight. Our wealth management, brokerage and retirement customers lead the pack with an average of 10 products per customer.
Commercial bank of choice. We want to satisfy every financial need of commercial customers, large and small (including working capital, insurance, real estate financing, equipment leasing, trade finance, investment banking and international banking), and have more lead relationships than any competitor in every market we serve.
Banking with a mortgage. We want all our mortgage customers to bank with us and all our banking customers who need a mortgage to buy it from us. We have some real opportunities here. Only about one of five of our banking households that has a mortgage has it with us, and only about a third of our mortgage households have a banking relationship with us.
Wells Fargo cards in every Wells Fargo wallet. Every one of our creditworthy customers should have a Wells Fargo credit card and debit card. Only one of every three of our banking customers has a credit card with Wells Fargo. Nine of every 10 have a Wells Fargo debit card.
Be our customers’ payment processor. We must be our customers’ first choice for payment processing.

Dutch gov’t to drop forced DC annuitization—but not this year

Posted on May 7, 2015 by Editorial Staff -

While life insurers in the U.S. promote the idea of defaulting 401(k) participants into an annuity, the Dutch government is moving in the other direction—preparing to follow the UK’s lead by lifting its annuitization requirements for defined contribution (DC) plan participants.

But the Dutch aren’t going to relax their rules right away. Legal proposals to allow Dutch DC plan participants to postpone the purchase of an annuity have been put on hold, IPE.com reported this week. Today, the Dutch must convert their entire DC savings to a life annuity when they reach the official state pension age.

The Dutch government was expected to allow savings to remain invested beyond the pension age. But Jetta Klijnsma, state secretary for the Social Affairs Ministry, said the government needed more time to work out the responsibilities of pensions providers towards DC members who opted for such arrangements.

Both Parliament and the pensions industry urged the state secretary to introduce legislation as soon as possible, as low interest rates are leading to low pension incomes for retiring workers as they convert to an annuity.

But adjusting the framework for DC plans raised complicated questions about the implementation of some legal aspects, including asset managers’ scope of duty towards members, and who would be responsible for investments, Klijnsma said

She added that standardization would be needed to prevent volatility in pension outcomes, and that the government would focus on elaborating DC contracts that allowed for variable benefits, in order to limit complexity and speed up implementation.

However, she did not specify whether the new alternatives would or wouldn’t feature “collective risk sharing” for pensioners. The planned introduction of new legislation would be postponed by six months to July 1, 2016, she said, and another round of consultation was a possibility.

The UK recently removed restrictions on DC savers, scrapping the need to force an annuity purchase entirely. Before April 6, 2015, UK DC savers had to purchase an annuity if their savings fell between £18,000 (€24,000) and £310,000, with the average size around £25,000, or about $38,111 at current rats.

However, unlike the Netherlands, Britain allowed savers to postpone an annuity purchase with the balance of their DC assets until they reached age 75; they could remain invested until then.

Since April, UK savers have been able to access their DC savings in a variety of ways including drawing down cash or investing in income drawdown products.

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