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Cognitive assessment tool receives FDA approval

Posted on June 17, 2015 by Editorial Staff -

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

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

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

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

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

NJ Supreme Court sides with Gov. Christie on pension issues

Posted on June 17, 2015 by Editorial Staff -

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

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

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

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

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

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

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

In-Discretionary Accounts

Posted on June 11, 2015 by Kerry Pechter -

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

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

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

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

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

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

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

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

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

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

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

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

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

In FIA Arms Race, Hybrid Indexes are the Arms

Posted on June 11, 2015 by Kerry Pechter -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Quiet Revolution Begins

Posted on June 11, 2015 by Mohamed A. El-Erian -

Steadily and indisputably, the financial services industry – with which we all interact, whether as borrowers, savers, investors, or regulators – has embarked on a multiyear transformation. This process, slow at first, has been driven by the combined impact of two sets of durable forces.

On one hand, top-down factors – regulatory change, unusual pricing, and what Nouriel Roubini has cleverly termed the “liquidity paradox” – are at work. Then there are disruptive influences that percolate up from below: changing customer preferences and, even more important, outside visionaries seeking to transform and modernize the industry.

Beginning at the top, the regulatory pendulum is still swinging toward tighter supervision of traditional financial institutions, particularly large banks and insurance companies deemed “systemically important.” Moreover, re-designed regulatory frameworks, phased implementation, and stepped-up supervision will gradually extend to other segments, including asset management. This will contribute to further generalized de-risking within the regulated sectors, as part of a broader financial-sector movement toward a “utilities model” that emphasizes larger capital cushions, less leverage, greater disclosure, stricter operational guidelines, and a lot more oversight.

The pricing environment compounds the impact of tighter regulation. Like utilities, established financial institutions are facing external constraints on their pricing power, though not of the traditional form. Rather than being subjected to explicit price regulations and guidelines, these institutions operate in a “financial repression” regime in which key benchmark interest rates have been held at levels below what would otherwise prevail. This erodes net interest margins, puts pressure on certain fee structures, and makes certain providers more cautious about entering into long-term financial relationships.

As a result of these two factors, established institutions – particularly the large banks – will be inclined to do fewer things for fewer people, despite being flush with liquidity provided by central banks (the “liquidity paradox”). And banks and broker-dealers can be expected to provide only limited liquidity to their clients if a large number of them suddenly seek to realign their financial positioning at the same time. But this is not just about them. The fact is that providers of all long-term financial products, particularly life insurance and pensions, have no choice these days but to streamline their offerings, including a reduction of those that still provide longer-term guarantees to clients looking for greater financial security.

The impact on the financial-services industry of these top-down factors will gradually amplify the importance of the bottom-up forces. Over time, this second set of factors will fuel more direct and efficient provision of services to a broader set of consumers, contributing to a reconfiguration of the industry as a whole.

For starters, customer expectations will evolve as the millennial generation increasingly accounts for a larger portion of earning, spending, borrowing, saving, and investing. With many of these newer clients favoring “self-directed” lives, providers of financial services will be pressed to switch from a product-push mindset to offering more holistic solutions that allow for greater individual customization. Market-communication functions will also be forced to modernize as more clients expect more credible and substantive “any place, any time, and any way” interactions.

Then there is the influence of outside disruptors. Jamie Dimon, the CEO of JPMorgan Chase, expressed it well in his 2015 shareholder letter, observing that “Silicon Valley” is coming. These new entrants want to apply more advanced technological solutions and insights from behavioral science to an industry that is profitable but has tended to under-serve its clients.

Airbnb and Uber have demonstrated that disruption from another industry is particularly powerful, because it involves enabling efficiency-enhancing structural changes that draw on core competencies and strategies that the incumbent firms lack. Many other companies (for example, Rent the Runway, which provides short-term rentals of higher-end fashion) are in the process of doing the same thing. Be it peer-to-peer platforms or crowd-funding, outside disruptors already are having an impact at the margin of finance, particularly in serving those who were previously marginalized by traditional firms or had lost trust in them.

The end result will be an industry that serves people via a larger menu of customizable solutions. Though traditional firms will seek to adjust to maintain their dominance, many will be challenged to “self-disrupt” their thinking and operational approach. And, while emerging firms will offer better services, they will not find it easy to overcome immediately and decisively the institutional and regulatory inertia that anchors traditional firms’ market position. As a result, a proliferation of financial providers is likely, with particularly bright prospects for institutional partnerships that combine the more agile existing platforms with exciting new content and approaches.

How Vanguard participants save

Posted on June 11, 2015 by Editorial Staff -

How America Saves 2015, the newest iteration of Vanguard’s annual compilation of data on its own substantial defined contribution retirement business was made available for download by the public. You can find the 106-page pdf document here.

The press release that accompanied the report offered this takeaway: “Improved plan design will ultimately lead to better outcomes for retirement plan participants”—a suggestion that it might be easier to re-design a plan than to modify participants’ values and behaviors.

Here are a few statistical highlights from the annual survey:

Automatic investment. At year-end 2014, 45% of all Vanguard participants were solely invested in an automatic investment program— compared with 25% at the end of 2009. Thirty-nine percent of all participants were invested in a single target-date fund; another 2% held one other balanced fund; and 4% used a managed account program.

Use of target date funds. Eighty-eight percent of plan sponsors offered target-date funds at year-end 2014, up 17% compared with year-end 2009. Nearly all Vanguard participants (97%) are in plans offering target-date funds. Sixty-four percent of all participants use target- date funds. Sixty percent of participants owning target-date funds have their entire account invested in a single target-date fund. Four in 10 Vanguard participants are wholly invested in a single target-date fund, either by voluntary choice or by default.

Participation rate. The plan participation rate was 77% in 2014. The average deferral rate was 6.9% and the median was unchanged at 6.0%. However, average deferral rates have declined slightly from their peak of 7.3% in 2007. The decline in average contribution rates is attributable to increased adoption of automatic enrollment.

Contribution rate. Taking into account both employee and employer contributions, the average total participant contribution rate in 2014 was 10.4% and the median was 9.5%.

Use of automatic enrollment. At year-end 2014, 36% of Vanguard plans had adopted automatic enrollment, up two percentage points from 2013. In 2014, however, because larger plans were more likely to offer automatic enrollment, 60% of new plan entrants in 2014 were enrolled via automatic enrollment.

Roth 401(k). At year-end 2014, the Roth feature was adopted by 56% of Vanguard plans and 14% of participants within these plans had elected the option.

Account balances. In 2014, the median participant account balance was $29,603 and the average was $102,682. Vanguard participants’ median account balances declined by 6% and average account balances rose by 1% during 2014.

Rates of return. Reflecting strong stock market performance in 2014, the median one-year participant total return was 7.2%. Five-year participant total returns averaged 9.9% per year.

Index funds. In 2014 half (52%) of Vanguard plans offered a set of options providing an index core. Over the past decade the number of plans offering an index core has grown by nearly 90%. Because large plans have adopted this approach more quickly, about two-thirds of all Vanguard participants were offered an index core as part of the overall plan investment menu. Factoring in passive target-date funds, 82% of participants hold equity index investments.

Equity allocation. The percentage of plan assets invested in equities rose to 72%, essentially unchanged from 71% in 2013.

Trading behavior. During 2014, only 10% of DC plan participants traded within their accounts, while 90% did not initiate any exchanges.

Company stock positions. Only 8% of all Vanguard participants held concentrated company stock positions in 2014, compared with 10% at the end of 2009.

Loans and in-service withdrawals. In 2014, 17% of participants had a loan outstanding (essentially no change from 2013) and the average loan balance was $9,700. During 2014, 4% of participants took an in-service withdrawal, withdrawing about 30% of their account balances.

Post-participation behavior. The majority of former participants (85%) continued to preserve their plan assets for retirement by either remaining in their employer’s plan or rolling over their savings to an IRA or new employer plan. In terms of assets, 97% of all plan assets available for distribution were preserved and only 3% were taken in cash.

Ruark reports “good news” on FIA policyholder behavior

Posted on June 11, 2015 by Editorial Staff -

Ruark Consulting today released the results of its 2015 Fixed Indexed Annuity Experience Studies, including qualitative and quantitative findings on policyholder behavior with respect to surrenders and partial withdrawals. Policyholder persistence can be a determining factor in the long-term profitability of annuity products.

Companies participating in the study including the major FIA issuers: AIG Life & Retirement, Allianz, American Equity, Athene, EquiTrust, Forethought, Midland National, Nationwide, OneAmerica, Pacific Life, Phoenix, and Security Benefit.

The critical observations from the Partial Withdrawal study were:

§ Complexity and dynamic behavior. Partial withdrawal rates vary between policies without a GLWB, those with a GLWB but before lifetime income commencement, and those with a GLWB but after lifetime income commencement. This complexity of emerging experience calls for careful monitoring and analysis.

§ Age and Tax Status. Withdrawal frequency tends to increase with age, with higher frequency for qualified policies. Above age 70, withdrawal frequency for qualified policies is very high, but withdrawal amounts are significantly lower than for nonqualified policies.

§ Policy Size. Large policies tend to have higher withdrawal frequencies, but lower withdrawal amounts.

§ Lower withdrawal frequency and amounts with GLWB. Policies with a GLWB have significantly lower withdrawal frequency before the commencement of lifetime income than those without a GLWB, likely fueled by deferral incentives. Once income starts, inefficiency is evident from the substantial cohorts taking well below and well above the GLWB maximum.

§ Low lifetime income commencement with GLWB. Of those policies eligible to commence lifetime income, only a small share have yet done so. However, continuation rates are very high in subsequent years.

The key observations from the Surrender study were:

§ Complexity and dynamic behavior. Surrender rates vary between products and cohorts, and change with time and markets, warranting continued vigilance.

§ Surrender Charge Period. As an aggregate baseline, surrender rates start low and increase throughout the surrender charge period, to a “shock rate” above 20%, and then revert to an intermediate level.

§ Living Benefit Rider. For products with lifetime income guarantees such as GLWBs, although early in their lifespan, surrender rates are materially lower.

§ Policy Size. Surrender rates are significantly higher for large policies.

§ Market Value Adjustment. For products with an MVA feature, during periods of decreasing interest rates and increasingly positive MVA to the policyholder, surrender rates tend to increase.

§ Imputed Credited Rate. Low annual interest credited rates are accompanied by higher surrender rates, suggesting that interest credited is a key measure of policyholder and/or agent satisfaction.

The study is Ruark’s latest in a series of experience studies of industry-wide policyholder behavior for fixed indexed annuities. Each company provided seriatim data files for the period January 2007 through September 2014. The 12 participating companies represent approximately 70% of the industry. They contributed 9.3 million policy years and 11.2 million policy years of data to the partial withdrawal and surrender studies respectively.

Wood you, could you, be my alternative investment?

Posted on June 11, 2015 by Editorial Staff -

TIAA-CREF and one of its majority-owned subsidiaries, GreenWood Resources, a global timber management firm, today announced the close of the window for institutional investing in Global Timber Resources LLC (GTRCo), a $667 million global timber company.

TIAA-CREF invests part of its insurance general fund in agriculture and timber as sources of returns that are not correlated with the equity or fixed income markets. The non-profit provider of retirement plans primarily to educational institutions, and its affiliates, manage over $11 billion in agriculture, timber, energy, infrastructure, and other related investments, according to a release.

GTRCo is a new company designed to invest in timberland assets in North America, Latin America, Europe, and Asia. “It is principally focused on the development and management of sustainable plantation forestry assets to supply growing worldwide demand for wood and forestry products,” TIAA-CREF said in a release.

Besides the TIAA General Account, GTRCo has capital commitments from international institutions such as Caisse de dépôt et placement du Québec (Caisse), AP2 and the Greater Manchester Pension Fund, among others.

“We believe the macroeconomic fundamentals for timber investment are strong and see great potential for direct investment in emerging economies where we can benefit from low cost production and better proximity to growing demand,” said Jose Minaya, senior managing director and Head of Private Markets Asset Management, TIAA-CREF Asset Management.

GreenWood Resources will manage the new company’s portfolio of timber assets. TIAA-CREF acquired majority ownership of GWR in 2012. GWR develops and manages sustainable tree farms in targeted regions and has a vertically integrated management group with professionals in investment and financial management, improved plant material strategies, and day-to-day forestry operations. The company, a holding of TIAA-CREF Asset Management, manages approximately $950 million in assets for institutional investors, which includes the $667 million of capital committed to GTRCo.

TIAA-CREF has been investing in timberland since 1998 and manages a portfolio of over $2 billion in timber assets around the world. Today’s announcement builds on TIAA-CREF Asset Management’s $124 billion alternative investment platform focused on real estate, farmland, timber, infrastructure, energy, private equity and commodities.

The Bucket

Posted on June 11, 2015 by Editorial Staff -

In coming year, 10% of plan sponsors will switch providers: Cogent Reports

Just over one in ten (11%) of 401(k) plan sponsors report they are very likely to replace their current recordkeeper sometime over the next 12 months, consistent with the 11% of sponsors who forecasted doing so and followed through in 2014, according to the annual Retirement Planscape, a Cogent Reports study by Market Strategies International.

The likelihood of switching is highest among mid-sized (13%), large (20%) and “mega” (18%) plans. The estimated number of current plans likely to turn over is 66,000, according to the report.

Plan fees and investment options are cited most often by sponsors as central reasons for their decision to switch plans, but among large and mega plans, concerns about service quality for both participants and sponsors are also paramount. To help them make the switch, smaller plan sponsors lean more heavily on financial advisors, their own independent research, and often, recordkeepers themselves, whereas larger plan sponsors are far more likely to employ the services of retirement specialists such as plan or employee benefits consultants.

“The factors driving the selection process vary significantly by plan size,” said Linda York, vice president at Cogent Reports, in a release. “Among micro plans, sponsors are looking for a good value and a partner that is easy to do business with, whereas strong recordkeeping, fiduciary support, and fee transparency are important considerations at the other end of the spectrum.”

Among sponsors indicating they are very likely to switch providers over the next 12 months, ten firms emerge as the overall most likely candidates for consideration:

1. Fidelity Investments
2. Charles Schwab
3. Bank of America Merrill Lynch
4. Vanguard
5. Wells Fargo
6. Merrill Lynch/Merrill Edge (specifically marketed to small businesses)
7. ADP Retirement Services
8. Prudential Retirement
9. New York Life (this business was acquired by John Hancock Financial Services in December 2014)
10. American Funds

According to Cogent Reports, most plan providers in the top 10 show strength across all plan sizes; however, several are weaker within certain segments. Likewise, there are providers that are not in the overall top 10 because their strength is more concentrated among plans of a particular size.

MassMutual offers tool to help employees choose benefits

MassMutual is launching a new employee benefits guidance tool, called MapMyBenefits, to help employees make decisions about their health care coverage, insurance protection and retirement savings.

Nearly one in four employees say personal financial problems distract them from their work, according to a 2014 PricewaterhouseCoopers survey of financial wellness issues cited by MassMutual.

Meanwhile, the task of selecting employee benefits has become more complicated as employers make benefits available on a voluntary rather than employer-paid basis, a MassMutual release said.

MapMyBenefits is a response to employer concerns about employees’ financial well-being. A recent Aon Hewitt survey found that nine out of 10 large employers want to introduce or expand financial wellness programs this year, MassMutual said.

The tool is available through financial advisors, third party administrators and benefits specialists.

Currently, MassMutual is making several employee benefits products available through MapMyBenefits, including 401(k) and other defined contribution retirement plans, and life insurance. Additional insurance products are in the planning stages.

To help an employee pick the right benefits,MapMyBenefits analyzes information about his or her personal financial situation, including income and expenses, as well as current insurance coverage and retirement savings. Information about existing employer-provided coverage and employer-sponsored retirement plans are preloaded by MassMutual into the tool’s data bank. Employees are also asked about other coverage and retirement savings they may have outside the workplace. If an employee chooses not to enter personal financial information, MapMyBenefits can provide projections on personal financial obligations such as mortgage costs, college tuition or retirement income.

Voya enters Fortune 500 at No. 268

Voya Financial, Inc. has been named to the 2015 Fortune 500 list. Voya Financial’s appearance on the 2015 Fortune 500 at No. 268 marks the company’s entrance to the list, which is Fortune magazine’s annual ranking of America’s largest companies by revenue. Voya Financial, which is the second-highest ranked new entrant to the Fortune 500, had $11 billion in total revenues in 2014. It went public in 2013 after separating from ING.

Voya Financial also announced today that it has been recognized as one of the Top Green Companies in the U.S. 2015 by Newsweek magazine, ranking as No. 78 of the 500 U.S. companies to earn the designation for corporate sustainability and environmental impact.

In March, Voya was recognized by the Ethisphere Institute as one of the World’s Most Ethical Companies for the second consecutive year.

Are Most Glide Paths Upside Down?

Posted on June 3, 2015 by Editorial Staff -

It’s an axiom of retirement advice: Allocate the lion’s share of an investment portfolio to equities early in one’s working life and gradually reduce that share on the approach to retirement. This strategy is baked into target date funds—the default investment for auto-enrolled 401(k) participants.

But axiom dissolves into myth in a new study, “Two Determinants of Lifecycle Investment Success,” published in the spring issue of The Journal of Retirement. Asset allocation doesn’t matter much early in life, the authors argue, because account balances are low. What matters is the amount you contribute.

The conventional wisdom of having a high equity allocation in your 20s and 30s “doesn’t make sense,” said the study’s co-author, Jason Hsu, a co-founder of Research Affiliates LLC in Newport Beach, Calif. “Under-contributing early on is so meaningful that you can’t really fix that later with [riskier] allocation.”

Monte Carlo results

To measure the importance of making larger contributions early, the researchers compared two hypothetical contribution patterns on a portfolio with 50-50 stock-bond allocations and average annual real returns of 4.6% on the stocks and 1.7% on the bonds. [Results for each scenario were based on one million Monte Carlo portfolio simulations.]

A participant who contributed $10,000 annually for the first 20 years and reduced it to $7,500 for the final 20 years would have, on average, a 22% larger nest egg—$734,000—than if he or she had contributed $7,500 for all 40 years, producing a $603,000 portfolio.

Flipping that strategy around didn’t work as well. A participant who started with a $7,500 contribution and raised it to $10,000 in the last 20 years would achieve only a 12% larger portfolio than one who made constant $7,500 contributions for 40 years.

To quantify the potential impact of asset allocation later in life, the authors analyzed two sets of hypothetical portfolios. In one set, they compared results from portfolios with either a high or a low equity allocation early in the life cycle. In a second set, they compared results from portfolios with either a high or a low equity allocation in the years just before retirement.

A high-risk strategy (70% stocks/30% bonds) used in the early years of investing generated only $16,000 more, on average, in the account’s final average balance at retirement than did a low-risk strategy (30%-70%) used early on. By contrast, the high-risk allocation at the end of the lifecycle generated a $66,000 larger ending balance than did the low-risk strategy in the final years.

Too risky, too soon

If losses occurred, a high equity allocation might even harm savers in their 20s, the authors (Hsu and Research Affiliates colleagues Lillian Wu, Vivek Viswanathan and Jonathan Treussard) concluded. They advised plan sponsors to recommend high contributions for young participants, and educate older participants about the potentially high impact of asset allocation on big balances.

“The importance of incentives and education motivating young workers to contribute to their DC plan completely swamps any benefit that might arise from selecting a higher-returning early-stage allocation scheme,” the authors wrote. “In fact, considering the documented psychology and behavior of younger plan participants, we think the volatility associated with a higher-returning scheme might prove harmful to the eventual welfare of the participant.”

Don’t reduce equity allocation after retirement

Not everyone agrees with Research Affiliates’ advice for young investors. In another article in the same issue of The Journal of Retirement, two BlackRock analysts recommend that target date funds should start with a high equity allocation and reduce equity allocation over time—but only until the retirement date. They see no logical reason for anything for a constant equity allocation during retirement.

In “Reexamining ‘To vs. Through’: What New Research Tells Us about an Old Debate,” BlackRock’s Matthew O’Hara and Ted Daverman assert that the glide path should flatten at retirement, based on the human capital theory that is used to justify TDFs in the first place.

Young workers by definition have lots of potential human capital, which provides them a regular paycheck for decades; this human capital is similar to a bond. To neutralize their implicit overweighting in fixed income, it’s assumed that young people should invest heavily in equities. But when they fully retire and their human capital flattens out at zero, “the rationale for evolving the glide path [also] ceases,” the authors contend.

The retiree should settle on whatever level of equity exposure he or she feels comfortable with, they write, citing the 1969 work of Nobel laureates as evidence: “Robert Merton and Paul Samuelson each independently demonstrated that… in the absence of labor income… the optimal strategic asset allocation is constant, with the amount of risk reflecting individual risk aversion.”

‘Boomerang effect’ of peer information

A new paper in The Journal of Finance refutes prevailing academic beliefs about the way people behave in response to information about other people’s behavior.

Older studies have shown that people who obtain information about the financial behavior of their peers tend to adapt similar behaviors. That isn’t always so when it comes to 401(k) enrollment, according to “The Effect of Providing Peer Information on Retirement Savings Decisions,” by Ivy League researchers John Beshears, James Choi, David Laibson, Brigitte Madrian, and Katherine Milkman.

In their case study at a manufacturing company, they found that only about 6% of the firm’s union workers who didn’t participate in their employer’s retirement plan (and weren’t eligible for automatic enrollment) enrolled after receiving information about their coworkers’ savings habits. By comparison, there was a nearly 10% enrollment rate among union workers who didn’t see the peer information.

But this “boomerang effect” wasn’t universal. It was limited to the lower-paid employees, the researchers found. While workers with relatively high incomes were more likely to enroll after receiving the peer information, low-income workers were less likely to do so. They may have been “discouraged by the reminder of their low economic status,” the researchers wrote.

Why the Swiss like their annuities

Americans don’t seem to understand annuities, and they certainly don’t buy them to the extent that academics believe they should. The Swiss, on the other hand, seem to love annuities.

Nearly two-thirds of Swiss workers convert the savings in their employer-sponsored retirement accounts into annuities at retirement, writes Benjamin Avanzi, a senior lecturer in the business school at the University of New South Wales, in a paper published in the Australian Actuarial Journal.

The reason can be found in the structure of the country’s retirement system, he explains. The Swiss typically buy their annuities within their retirement plans, where they benefit from institutional pricing and the implied endorsement by employers they generally trust.

Also, because the Swiss can use retirement plan funds to buy a house or start a business as well as save for retirement, they tend to consolidate much of their savings in the plans and therefore accumulate large balances. This leads them to ask, “Why not annuitize at least some of this big sum?”

Switzerland’s tax law also encourages its citizens to hold mortgages for life, and annuities can help pay that mortgage throughout retirement. Finally, the Swiss government provides survivor and disability benefits to children, which minimizes the bequest motive that can make Americans avoid annuities.

Bequests: IRA vs Roths

In The Journal of Personal Finance, Baylor University professors Tom Potts and William Reichenstein challenge the assertion, made last year in The Wall Street Journal, that “Roth IRAs are good accounts to leave to loved ones.” The paper demonstrates that it may depend on who has the lower tax rate, parent or beneficiary.

The authors consider a hypothetical elderly widow with $100 in a Roth IRA and $100 in a traditional IRA. Her average income tax rate is 40% and her son’s is 15%. If the widow requires $60 for consumption, she can take it a) from her Roth IRA (leaving $40 in the Roth for her son when she dies) or b) she can empty out her traditional IRA to net her $60 in spending money, after taxes). But which would be best for her son?

Counter-intuitively, her son would be better off if she had spent down the Roth IRA, say Potts and Reichenstein. In the first scenario, the son would inherit the $40 left in the Roth IRA plus $85 (after paying his 15% taxes) from the traditional IRA, netting $125. In the second scenario, he would inherit only the $100 in the Roth IRA. (Reichenstein is co-author, with William Meyer, of Social Security Strategies, self-published in 2011.)

The cost of poverty? Six years of life expectancy

A well-paid 25-year-old American can expect to live six years longer on average than a 25-year-old living in poverty, according to a new study from the Urban Institute and the Center on Society and Health entitled “How are Income and Wealth Linked to Health and Longevity?”

The study attributes the shorter life spans to higher rates of heart disease, diabetes, stroke, emphysema, depression and hunger. Health may be harmed by such factors as a lack of access to nutritious food and well-stocked grocery stores, high crime rates in their neighborhoods, fewer screenings for cancer and other diseases, overcrowded schools, polluting industries close to home and longer commutes to work.

Only 10% of Americans ‘very satisfied’ with financial situation

Posted on June 3, 2015 by Jenna Gottlieb -

Americans of all ages and income levels have trouble with long-term financial planning and instead focus on day-to-day needs, according to a new research brief from the Center for Retirement Research at Boston College.

Not surprising, you might say. But the authors of the study, in exploring the psychological roots of financial myopia, also found evidence that:

Day-to-day financial problems (difficulty paying expenses, unemployment, having no savings, and carrying too much debt) have much more bearing on a person’s level of satisfaction with their financial situation than do long-dated challenges, like a lack of retirement savings.
Wealth doesn’t change the dynamic. The impact of day-to-day problems on financial satisfaction remains strong even in working households where expenses are consistently met.
Financial literacy doesn’t matter much either. The correlation between satisfaction with one’s financial situation and one’s day-to-day problems remains strong even among individuals who are relatively financially literate.

The study, “Dog Bites Man: Americans Are Shortsighted About Their Finances,” incorporates data from the FINRA Investor Education Foundation’s 2012 State-by-State Financial Capability Survey, which gathered information from 25,500 Americans. Researchers Steven Sass and Jorge Ramos-Mercado wrote the report.

The authors defined immediate financial problems as heavy debt, unemployment, trouble covering expenses, and an inability to access $2,000 on short notice. They defined long-term problems as having no retirement plan, no medical coverage or life insurance.

This news helps explain why so many surveys show that Americans are poorly prepared for retirement. One recent report, “Are U.S. Workers Ready for Retirement?” from the Schwartz Center for Economic Policy Analysis at the New School, showed that 68% of adults aged 25-64 do not participate in an employer-sponsored plan. The report arrived at that figure by combining the number of unemployed with the number of people who do not participate in plans offered to them and the number of workers without access to a workplace plan.

In CRR’s study, immediate problems had 10 times as much impact on the variation in levels of financial satisfaction than challenges that lay far off in the future. People with adequate cash flow were just as sensitive to short-term financial problems, and as insensitive to long-term problems, as people without adequate cash flow.

How can these findings be applied in the real world? The authors concluded that the lack of attention given to long-term needs, such as retirement planning, suggests that people need behavioral “nudges,” like automatic enrollment in 401(k) plans.

“With the shift in financial responsibility to households, it is important to make saving easy and automatic for households at all ages and income levels, so that they can set aside enough to secure a basic level of financial well-being in retirement,” the authors wrote in the study.

Financial satisfaction doesn’t exhibit a normal distribution curve, the authors found. About 10% of Americans are evidently very satisfied, almost 40% are more satisfied than not, 10% are sort of satisfied, 25% are less satisfied than not, and 15% are very dissatisfied, the study showed.

RetirePreneur: Matt Carey

Posted on June 3, 2015 by Jenna Gottlieb -

What I do: I’m the CEO of Abaris Financial. Co-founders Nimish Shukla, Adam Colombo and I have created a direct-to-consumer online platform for income annuities. Our initial focus has been on non-qualified deferred income annuities. We’ll be expanding soon into QLACs, the kind of qualified deferred income annuities that recently received RMD [required minimum distribution] exemption from the Treasury Department. We want to make it easier for an individual or couple to compare the carriers’ products and determine what’s best for them, based on each insurer’s credit rating and payout rate, among other Matt Carey Copy block factors. We allow clients to see all the quotes in one place. Often times you get a quote from an insurance agent or wealth advisor on an insurer’s product, and it can be complicated to get a quote on the same product from another carrier. We put it all together. Our tool also minimizes the complicated financial terms and industry jargon traditionally used in selling annuities. Finally, forms can be onerous. More and more people prefer to fill out paperwork online. Our site enables people to make the purchase in a simple and secure way.

Who my clients are: We’re targeting a slightly younger demographic than most people who sell annuities. Most of our clients are between 45 and 60 years old and many are women. In terms of assets, $250,000 to $5 million is our sweet spot. Our market research shows that women value certainty a lot more than men do and seem to be more risk averse. They’re the kind of buyers for whom longevity insurance makes the most sense. They expect to live a long and happy retirement and are looking for an income stream that lasts as long as they do. Most of the financial industry to date has been dominated by men, both in terms of who has sold these products and which person in a household made large financial decisions. We see women as historically underserved by financial advisors and believe they are increasingly important financial decision-makers. As we expand, we’ll be looking to build out partnerships with CPAs, fee-only advisors and eldercare lawyers who see QLACs fulfilling an otherwise unmet need, but who don’t have the time to get quotes from each insurer and aren’t experts on the products themselves.

Where I come from: I graduated from the University of Pennsylvania and started my career in financial services at Lazard, the independent investment bank. In 2011, I went from the private sector to the US Treasury where I worked on retirement policy and other issues that utilized my finance background. I left the Treasury in 2013 to pursue a Wharton MBA with the specific intent of launching this company. We incorporated the business last year and launched our platform a couple of months ago.

Why I’m an entrepreneur: If you had asked me five years ago if I’d be an entrepreneur now, I’d probably have said the chances were low. But I realized from my time at Treasury that retirement security will increasingly be provided by individuals themselves and there is a lot of opportunity to improve the way that happens. People are looking for more certainty in retirement, but it’s been a challenge to match consumers’ fear of outliving money with the product that can best provide it. Like other Millennials, I’ve been very influenced by technology and I see a clear path of using tech to improve the buying process for both insurers and consumers.

What’s my business model: We have two business lines. First, we represent a new sales channel for insurers. We act as an insurance producer and work on a commission basis. We have relationships with seven insurance carriers in this market. As the largest fixed annuity underwriters (such as New York Life, Metlife, MassMutual, and Northwestern Mutual) unveil their QLAC products later this year, we hope they will also join our platform.

Our second business line is analytics. We’re building out a data-driven platform that will enable carriers to make more informed underwriting, marketing and new product development decisions. You glean a lot more about potential customers when they are researching and getting quotes online than when they are being sold a product offline. We think this shift to online research and purchasing represents an exciting opportunity for the carriers to harness data to make better decisions.

On the Department of Labor’s conflict-of-interest proposal: There’s been a lot of handwringing in the industry about the DOL proposal and what it means for advisors. As people who follow the industry closely have noted, the “best interest” rule is not as stringent as the fiduciary rule. So the reality is that the proposal may create even more confusion among consumers, who still in most cases don’t understand the difference between the suitability test and acting as a fiduciary. At the end of the day, better technology that creates a more intuitive sales process is what’s going to change the industry, in my opinion. The DOL rules are nudging the industry to change, but my expectation is that many will continue doing things the old-school way. And they will be able to subsist for some amount of time. It’s probably not a long time though.

My biggest obstacles: The market is changing quickly and consumers are demanding more simplicity and transparency. I think it’s pretty clear to most market participants that in order to find new segments and grow the retirement income market you have to look for new channels using better technology and a more tailored marketing message. We are out in front of these trends. But not everyone is going to jump on board right at once. It’s not like a switch flips. It’s a gradual process that takes a bit of time. In some pretty significant ways, we’re changing the way the market functions. That change won’t happen overnight.

My retirement philosophy: The goal of retirement is to not have to think about your money. There’s a lot of value that’s derived from getting a paycheck every month and knowing how much money you have available to spend. A lot of research has shown the value of a guaranteed retirement income stream. My opinion is that good financial planning results in the alignment of your personal objectives, such as living a long and happy life, with your financial objectives.

Lincoln’s new FIA links to risk-controlled S&P500 Index

Posted on June 3, 2015 by Editorial Staff -

Lincoln Financial Group has launched a new deferred fixed indexed annuity, called OptiBlend, that offers four interest crediting strategies, including exposure to a “risk-controlled” version of the S&P 500 Index, the Radnor, Pa.-based firm said this week.

The four crediting options are:

A fixed account
A one-year point-to-point cap indexed account linked to the S&P 500
A performance-triggered indexed account linked the S&P 500 Index
OptiBlend, which has a spread.

The interest credited on the new OptiBlend option is based on the performance of the S&P 500 Daily Risk Control 5% Index. A spread will be applied to the return of the S&P 500 Daily Risk Control 5% Index to determine the interest credit a client will receive.

The spread acts as a hurdle rate with all index performance over the spread credited to the client’s account. Since volatility is managed within this Index, a lower spread can be offered than one based on the S&P 500 without risk control.

Lincoln’s new FIA also offers a seven-year and a 10-year surrender charge period and an optional guaranteed lifetime withdrawal benefit, Lifetime Income Edge. It offers income bonuses at five and 10 years if the client has not turned on income. It also offers an income enhancement if nursing home care is needed (not available in all states).

Decumulation? Most Americans don’t know the concept

Posted on June 3, 2015 by Editorial Staff -

Most Americans who are not yet retired give little thought to how they will de-accumulate their savings in retirement, according to the results of an online survey of over 1,000 working adults commissioned by Pentegra Retirement Services and conducted by Harris Poll.

The survey showed that:

The average anticipated retirement age among working Americans is 66. One in five plan not to retire at all.
On average, working Americans who plan to retire expect to need only $3,200 per month to live on when they retire; 19% said they will need at least $5,000.
On average, working Americans who plan to take Social Security benefits expect to claim them at age 67.
56% of those with retirement savings have no distribution plan for how they will access or stretch their money once they retire, with one in five not giving this any thought at all.

“The retirement industry has spent the last 20 years advising people how to accumulate retirement savings and reach a magic number. We must shift some of the focus to helping educate people on what to do with their savings when they retire,” said Rich Rausser, senior vice president of client services at Pentegra, said in a release.

Regarding the average estimate of $3,200 for required retirement income, Rausser said, “Based on the average household income of $52,000, this number may seem practical at first glance. But many people do not factor in having to pay for health coverage and cost-of-living increases when estimating how much they will realistically need.”

The survey also revealed a lack of understanding and awareness of options for accessing retirement savings, including:

Lump-sum payouts (with only 24% very familiar with this option);
Routine quarterly or monthly payments (only 29% very familiar);
Annuities for themselves (guaranteed monthly payment payable over their lifetime) (just 23% very familiar);
An annuity for themselves for life and the life of their beneficiaries (only 17% very familiar), with one in four employed U.S. adults (not already retired) not even aware that this option exists.

“More people need to know about these annuities,” he said. “They take the stress and guesswork out of distribution, stretching your savings as far as possible. We call it ‘pension-izing.’”

A new type of risk tolerance assessment, from FinMason

Posted on June 3, 2015 by Editorial Staff -

FinMason, a financial education company that provides free, unbiased, web-based investment tools for retail investors, has launched FinScore, a risk-tolerance assessment tool for individual investors, retirement plan participants and financial advisors.

FinScore determines risk tolerance by showing people two portfolios and letting them decide which one they like more, not unlike the way an optometrist measures a person’s vision. The risk tolerance tool then repeats the process with sample portfolios that are more or less risky, until there’s no further improvement.

A person’s FinScore can range from one (very conservative) to 100 (very aggressive). Investors and advisers can then use the score to find appropriate investment portfolios.

This method is made possible by FinMason’s innovative analytics, which allow investors to make a confident decision between two portfolios, even if the investor has little or no financial training.

FinMason is a Boston, Mass.-based financial technology firm dedicated to providing financial education to consumers. FinMason’s leading product, Finspector, is a free, unbiased, web-based investment research tool for all retail investors.

Stowe succeeds Wells at Jackson National Life

Posted on June 3, 2015 by Editorial Staff -

Barry Stowe has been appointed chairman and chief executive officer of the North American Business Unit (NABU) of Prudential plc, which includes Jackson National Life Insurance Co. and its affiliated and subsidiary companies.

Stowe succeeds Mike Wells, who assumes the role of group chief executive of Prudential plc. The British firm is not related to Prudential Financial, which is based in Newark, NJ.

Stowe had been chief executive of Prudential Corporation Asia and remains on the Board of Prudential plc representing the NABU. As CEO, he is responsible for Jackson, its subsidiaries Jackson National Life Distributors LLC, Curian Capital LLC and Jackson National Asset Management, and its U.S. affiliates National Planning Holdings, Inc. and PPM America, Inc.

Before joining Prudential, Stowe served as president of Accident & Health Worldwide for AIG Life Companies. Prior to this role, he held the position of president and chief executive officer of Nisus, a subsidiary of Pan-American Life, from 1992 to 1995.

Before joining Nisus, he spent 12 years at Willis Corroon. From 2008 to 2011, Stowe was a director of the Life Insurance Marketing Research Association (LIMRA) and the Life Office Management Association (LOMA). He is also a board member at the International Insurance Society.

Jim Sopha, chief operating officer, will assume the role of president of Jackson, reporting to Stowe. Sopha is a 13-year veteran of Jackson who previously led Jackson’s corporate development office before becoming chief operating officer in 2010.

Quote of the Week

Posted on June 3, 2015 by Editorial Staff -

MetLife launches QLAC as plan distribution option

Posted on May 28, 2015 by Kerry Pechter -

MetLife, which pioneered a longevity insurance contract that was slightly ahead of its time back in 2004, broke new ground again this week by offering a qualified longevity annuity contract (QLAC) as a distribution option for participants in defined contribution plans.

The product, called MetLife Retirement Income Insurance, will be offered to participants in as many as 10,000 U.S. workplace retirement plans that have group annuity contracts with MetLife.

“The product we launched today is not meant to be purchased over time. You could buy a few sleeves over time if you like. But it’s meant to be purchased with a single premium at the point of retirement,” Roberta Rafaloff, vice president, Institutional Income Annuities, in MetLife’s Corporate Benefit Funding group, told RIJ this week.

The product, unlike retail annuities, would have unisex pricing, which means that men and women of the same age would receive the same payout rates. According to MetLife, the purchase premium would move from a 401(k) to the MetLife general account without requiring a rollover. Rafaloff said that, all else being equal, the product would cost less than a comparable retail product because of the institutional pricing. Later this year, MetLife intends to offer a QLAC for the rollover market. That product will be available on the Hueler Income Solutions platform, and will not have unisex pricing.

QLACs are deferred income annuities that can be purchased with up to $125,000 (or 25% of qualified savings, if less) in qualified money, whose income start date can be delayed until age 85, and whose premium can be excluded from calculations of the required minimum distributions that otherwise must be withdrawn from tax-deferred savings starting at age 70½.

Payment options for the MetLife Retirement Income Insurance QLAC include both Lifelong Income for One, which guarantees the participant will receive fixed payments for as long as he or she lives, and Lifelong Income for Two, which guarantees that the participant and his or her spouse will receive fixed payments for as long as at least one of them lives.

The MetLife Retirement Income Insurance QLAC also offers an optional inflation protection feature, which increases a participant’s income payments each year. In an effort to protect a participant’s payments from an increased cost of living, he or she can choose to have them increase by 1%, 2% or 3% each year.

The chart below, provided to RIJ by MetLife today, shows current payout rates for a single life MetLife Retirement Income Insurance QLAC with unisex pricing. The return of premium death benefit applies if the contract owner dies before the income start date.

The QLAC product category was created in July 2014 by a Treasury ruling. Until MetLife’s announcement yesterday, all of the QLACs created since then have been retail products for the IRA rollover market. AIG, Americo, First Investors, Lincoln Financial, Pacific Life, The Principal and Thrivent have already issued QLACs. Other companies have rollover QLACs in the works.

MetLife characterized its new product as the first in-plan QLAC. But no fixed deferred income annuity (DIA) products are yet available in the retirement plan market that would allow participants to accumulate chunks of future income with each contribution and thereby avoid the behavioral problem of parting with a large lump sum all at once at or during retirement.

The regulatory path to a DIA like that—though not necessarily a QLAC—was cleared by the Treasury Department and the Department of Labor last fall when the agencies announced that a fixed deferred income annuity sleeve could be created in a target date fund as a qualified default investment alternative, or QDIA.

Presumably, some participants who are offered the MetLife QLAC as a distribution option in their plan would want to compare the price of the MetLife Retirement Income Insurance product with the prices of QLACs from other companies, which they could purchase with a rollover. At any given time, annuity payout rates can vary by as much as 10% from one carrier to another, so it makes sense to shop around.

A rollover QLAC without unisex pricing might in fact offer men a better price than a unisex product, even if the unisex product was available at a low institutional or wholesale price. It is unclear whether MetLife would have to advise plan participants, especially men, that they should explore the retail market.

But the MetLife product is clearly a venture into new territory in terms of providing longevity risk protection to plan participants. It presents a potential alternative to the optional lifetime income riders offered by Prudential, Empower (formerly Great-West) and John Hancock on their target date funds in the retirement plans they manage.

Their product type, similar to a variable annuity with a lifetime income rider, typically offers a smaller guaranteed payout than a comparable income annuity in exchange for upside potential and greater flexibility. A consortium of insurance companies offers a similar type of guarantee on target date funds in Voya retirement plans and the United Technologies defined contribution plan.

VA Issuers Show Optimism: Morningstar

Posted on May 28, 2015 by John McCarthy -

Variable annuity contract changes during the first quarter of 2015 offered something for everyone: The investment-only VA (IOVA) trend continued; a new hybrid VA is out and running; a few major carriers issues new living benefit guarantees; and we saw a contract buyback offer, something not seen since the financial crisis a few years back.

More specifically, we saw a smattering of IOVA activity with Sammons releasing a B-share version of their investment-only product. TIAA-CREF, the largest VA issuer by AUM, rolled out two low-cost VAs with no benefits and a short but fundamental list of subaccount offerings.

Voya issued a hybrid VA with growth tied to four equity indexes. We also saw a pick up in living benefit activity with a batch of age-banded Lifetime GMWB issues. And Transamerica offered to buy back selected contracts with certain living benefits attached. (See below for details.)

In the pipeline (see below), we see a pick-up in activity as carriers appear to be using the April and May filing season to actively adjust contract and benefit levels, perhaps a sign of more optimism on their part.

Overall, product development activity in the first quarter of 2015 was moderate. Carriers filed 49 product changes compared to 33 in the same period last year. In Q4 of 2014 there were 31 product changes.

First quarter product changes

AXA has updated the Retirement Cornerstone series. The new Retirement Cornerstone 15.0 includes 110 investment options, down from 114 in the 13.0 version. The GMIB rider contains an additional step-up option, a multi-year lock which compounds by 3% annually for the length of the surrender period. The contract free withdrawal amount is also tied to the GMIB benefit base. The fees are 1.55%, 1.65%, and 1.70% (B, Bonus and L shares, respectively).

Great West released a Lifetime GMWB (Fixed GMWB) with a 5.00% lifetime guaranteed for a 65-year-old (4.5% joint) and includes a highest anniversary value step-up which continues through the withdrawal period. Only amounts allocated to the covered fund apply to the benefit base. Fee is 0.90%.

Integrity released a new Lifetime GMWB. The benefit offers an age- banded withdrawal structure with a 4.5% lifetime withdrawal for a 65 year old (4.05% joint version) and a 7% step up for ten years. Fee is 1.35%.

Jackson National released a death benefit that is available only with the LifeGuard Freedom Flex GMWB with the 6% fixed percentage increase (Income Stream Levels 1 to 3). Fee ranges from 0.60% to 0.70%. Death benefit is the greatest of account value; adjusted purchase payments; or highest anniversary value on the seventh contract anniversary.

Lincoln re-opened the i4Life Advantage with Guaranteed Income Benefit in January. It was unavailable from 8/26/2013 to 1/19/2015. The benefit offers immediate variable annuitization with an access period of at least 20 years and a guaranteed income payment floor of 4.0% (single) or 3.5% (joint). The benefit costs 1.05% (single; 1.25% joint).

MetLife released two versions of a Lifetime GMWB. The FlexChoice Level version offers an age-banded lifetime withdrawal (5.0% for a 65 year old) with a 5% step up. The FlexChoice Expedite offers an age- banded withdrawal (6% initial withdrawal for a 65 year old, dropping to 4% of remaining benefit base if the account value goes to zero. Joint version drops to 3%). Alternatively, the benefit can operate as a GMAB that restores the value of purchase payments after 10 years. Fee is 1.20%.

Midland National released a version of the Sammons LiveWell as a B-share with 141 subaccounts. The contract has an optional value endorsement, which reduces the fee by 0.20% in exchange for a surrender charge schedule of five years. Fee is 1.15%.

Transamerica filed a contract buyback offer (Alternative Lump Sum Offer 1.2). The one-time buyout applies to an existing policy with an eligible living benefit elected (Family Income Protector, Managed Annuity Program, Managed Annuity Program II, or Guaranteed Minimum Income Benefit rider). Owners have three options: 1) surrender existing contract; 2) trade in existing contract for the Transamerica Freedom Variable Annuity; or 3) exchange existing contract for an annuity product issued by an unaffiliated company.

The buyout amount is equal to the cash surrender value plus the greater of:

– 90% of the benefit base applicable to the eligible benefit minus the cash surrender value, or

– 10% of the benefit base applicable to the eligible benefit minus premium payments.

Voya (formerly ING) released the PotentialPlus contract, a B-share with a 1.50% contract fee and an account value only death benefit. The product is a hybrid VA that offers Indexed Segments, or investment options that provide performance tied to an equity index. All or part of the account value may be allocated to one or more index-linked options.

The growth is capped by a percentage defined when the segment is chosen. Losses are buffered by 10%; any loss beyond that is absorbed by the contract owner’s maturity value. Results are calculated annually, and segments are re-upped at that time; the segments are re-upped automatically, though the owner has flexibility in how the segments are re-established. Four indexes are available: S&P 500; Russell 2000; NASDAQ 100, and MSCI EAFE. There is also a fixed account and a money market subaccount.

Changes in the VA pipeline

Allianz raised the fee from 1.20% to 1.40% on the Income Protector Lifetime GMWB.

Forethought is releasing its Daily Step-Up Lifetime GMWB benefit. The age-banded withdrawal percentage is 5% for a 65-year-old (4.5% for the joint version). Step-ups are either the benefit base compounded at between 4% and 7% for the first 15 years, or highest daily value before age 95. Must allocate to models. Fees range from 1.10% to 1.25%.

MetLife is releasing the Accumulation Annuity with a low 0.70% fee as a B-share. The contract carries one subaccount, the Fidelity VIP FundsManager 60% moderate allocation fund. The previously released GMAB benefit, the Preservation and Growth Rider, is available at a fee of 1.40%, up from 1.15%.

New York Life releases seven new contracts on May 1st:

– The NYL Complete Access II is a C-share priced at 1.60% with an HAV (highest anniversary value) death benefit. It carries the Future Income Rider, a deferred income annuity that is standard at issue. The benefit provides guaranteed annuity payments based on transfers from the variable account to the funded account. The income start date is determined by the owner on the application. Transfers are voluntary but irrevocable. The deferred payments are based primarily on the amount of premium payment, guaranteed rates at the time of transfer, and the age of the annuitant. The initially set income start date can be accelerated to any date at least 13 months from the policy issue date, or deferred by up to five years or the year the oldest annuitant is age 85.

– The NYL Premier II offers two base contract fee structures: Owners may elect to have charges assessed against the premiums (Level) or against the account balance (Traditional). These contracts also carry the Future Income rider as well as a suite of existing death benefits and GMAB benefits.

– The NYL Flexible Premium III also offers two base contract fee structures as above. The contract also carries the Future Income rider as well as standard and HAV death benefits.

– NYL new contract fees:

NYL Flex Premium III: 1.35% on account value; 1.55% on premiums
NYL Premier II: 1.30% on account value; 1.50% on premiums
NYL Premier Plus II: 1.60% on account value; 1.70% on premiums
All fees drop 0.20% after the surrender period except the Premier II Account value

RiverSource is issuing a new Lifetime GMWB suite. The SecureSource 4 offers an age-banded guaranteed income of 5% for a 65-year old (4.75% joint). There are two step-ups: an HAV and a fixed 6% simple step up for 10 years. At the time of the first withdrawal each contract year a 1% increase to the withdrawal percentage applies unless the account value is at least 20% less than the benefit base reduced proportionately for withdrawals. Must allocate to models. The benefit also includes the “Principal Back” component which allows beneficiaries to access to the annual withdrawal payments until purchase payments (adjusted) are returned. Fee is 1.25% (1.35% joint). The SecureSource 4 Plus offers a 5.0% lifetime withdrawal (4.65% joint) and the same step-ups and 1% withdrawal increase. Fee is 1.50% (single) and 1.65% (joint). Benefit is available on the RAVA 5 suite of contracts.

SunAmerica is issuing a C-share version of Polaris Select Investor C, an IOVA (investment-only variable annuity) offering. The fee is 1.35%.

TIAA-CREF is releasing two new contracts: Retirement and Supplemental Annuity R2 and R3. They charge no M&E and instead assess fees via the eight subaccounts ranging in fee from 0.29% to 0.46%.

All fees are charged at the fund level as a percentage of net assets annually. Certain subaccount choices incur an M&E charge of 0.005% to 0.05%. Administrative charges are 0.185% and 0.245%, respectively. Distribution charge is 0.07% and 0.10% respectively. There is a standard death benefit.

Transamerica filed an update to their Lifetime GMWB. The Retirement Choice 2.0 offers an age-banded 5% withdrawal (4.75% joint) with a 5.5% step up for ten years; an HAV step-up; and a manual step up at the five-year mark that resets the withdrawal, fee and growth rates. Must allocate to model portfolios; fee is .07%.

VALIC issues the Polaris Platinum Elite (B-share) and Polaris Choice Elite (L-share) contracts. They carry the existing Income Plus Dynamic suite of Lifetime GMWB benefits. Fees are 1.30% and 1.65%, respectively.

In coming year, 10% of plan sponsors will switch providers: Cogent Reports

MassMutual offers tool to help employees choose benefits

Voya enters Fortune 500 at No. 268

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