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The Bucket

Posted on April 30, 2015 by -

“Stable two-timing” on the rise among affluent Americans

If you’re one of the big financial services firms, your best customers are probably two-timing you. Or maybe three-timing you. And unless two-thirds of your customers consider you their primary provider, you’re lagging the benchmark.

So says a new survey of Americans with household wealth between $100,000 and $5 million by Hearts & Wallets LLC. Fifty-five percent of those households worked with three or more financial services firms in 2014, up from 49% the year before.

Once investors pick their favorite two or three firms to work with, they tend to stick with those firms. Hearts & Wallets calls this phenomenon “stable two-timing.” Typically, investors work with at least one self-service firm and one full-service firm, searching for different advice perspectives, according to the study, “Market Measures: Reach, Share & Other ‘Store’ Success Measures.” The study measured usage of financial services firms by investors with between $100,000 and $5 million in investable assets.

For most firms in the study, 70% to 80% of their investors use at least one other financial services provider, and often several others. In the battle to converting all of their customer relationships to primary relationships, full-service firms perform better than employer, self-service, or banks.

“A best-practice benchmark is for two out of every three customers to consider a firm as their primary,” said Chris J. Brown, Hearts & Wallets partner and co-founder in a statement. “This ratio is only reached by small shops without national brand names.

“Among branded national stores, only Fidelity and Wells Fargo Advisors come close, with 60% of customers, or 1.8 of every three customers. The Wells Fargo enterprise is unusually successful as a one-stop shop and at developing primary relationships.”

Fidelity has the highest share of the assets of U.S. households with $100,000 to $5 million, at 10.9%. That figure is nearly double the percentage managed by the next closest firm. Bank of American is second with 6.3%, followed by Charles Schwab with 6.2%. Vanguard and Wells Fargo round out the top five with 4.9% and 4.2%, respectively.

TIAA-CREF buys global real estate firm

TIAA-CREF has acquired TIAA Henderson Real Estate, giving the firm full ownership of the $82 billion global real estate fund management platform.

TIAA-CREF bought Henderson’s 40% stake in the company for $122.5 million, less than two years after announcing it would launch a fund management joint venture with Henderson Global Investors. TH Real Estate will operate as a stand-alone subsidiary within TIAA-CREF’s asset management platform and TH Real Estate will have independent executive leadership and investment teams.

TIAA-CREF had yet to expand its third-party real estate fund management business into Europe and Asia, and this acquisition effectively brought together Henderson’s European and Asian real estate fund management business with TIAA-CREF’s existing investment activity and in-house capital.

Fidelity debuts investment app for Apple Watch

Fidelity has teamed with Apple to create an app specifically designed for the new Apple Watch, which became available this month. The app allows users to access real-time quotes and market data, instant notifications for all Fidelity orders and price triggers, and integration with an iPhone.

The app, available in the iTunes store, can be downloaded by anyone with an Apple Watch. A demo video can be viewed at www.fidelity.com/applewatch.

This app “is an unobtrusive portal to a wealth of information that we believe helps investors make strong, informed decisions,” said Velia Carboni, senior vice president of mobile channels at Fidelity. 

Competition weighs on earnings of fixed indexed annuity issuer

American Financial Group (AFG) this week reported 2015 first quarter net earnings of just $19 million ($0.21 per share) compared to $103 million ($1.13 per share) for year-ago quarter.  

AFG attributed the declines to competition from aggressive new entrants in the annuity industry—a possible reference to private equity firms that have bought fixed indexed annuity issuers—and to the lower overall interest rate environment, according to the firm.

“Based on the results through the first three months of 2015, assuming no significant change in interest rates or the stock market, we continue to expect full year 2015 core pretax annuity operating earnings will be flat compared to the $328 million reported for the full year of 2014,” S. Craig Lindner, co-CEO of AFG said in a statement.

AFG’s competition includes Security Benefit, the Guggenheim Partners-backed firm specializing in fixed indexed annuities that went from just $1 billion in sales in 2010 to $7 billion in 2013. Security Benefit now has a market share of about 12% in the FIA space.

For AFG’s annuity segment, the firm reported statutory premiums of $813 million in the first quarter of 2015, compared to $967 million in the first quarter of 2014, a decrease of 16%.

“Significant changes in market interest rates and/or the stock market could lead to significant positive or negative impacts on the Annuity segment’s results. Based on information currently available, we now expect that premiums for the full year of 2015 will be approximately 5% to 10% lower than the $3.7 billion achieved for the full year in 2014,” an AFG report said.

© 2015 RIJ Publishing LLC. All rights reserved.

FIA: Unofficial MVP of the LIMRA Conference

Posted on April 23, 2015 by -

The annual Retirement Industry Conference, held near Washington, DC, last week, covered many topics, including annuities, retirement plans, advisors, regulation, big data, economic forecasts, the affluent market and so forth.

Nothing unusual about that. It happens every spring, like the return of baseball. It was unusual, however, to see so much attention given to fixed indexed annuities at this year’s event, which was sponsored as always by LIMRA, LOMA and the Society of Actuaries.

FIAs are the most valuable products in the retirement league right now. Variable annuity sales keep trending down. Income annuities are still mainly a niche market, dominated by a handful of mutual insurers. Sales of in-plan annuities and CDAs (contingent deferred annuities) haven’t reached critical mass.   

That leaves FIAs. These hedged fixed income products tend to thrive in low interest climates, when their link to equity indexes allows them to out-yield CDs and fixed-rate annuities. Developed in the U.S. in the mid-1990s, the category sold well during the yield-droughts following the dot-com bust of 2000 and since the Financial Crisis of 2008.

FIA sales showed hockey-stick growth in 2014, according to data from the LIMRA Secure Retirement Institute. Sales for the industry as a whole jumped 23% in 2014, to $48.2 billion (including new sales and contributions to existing contracts).

FIA sales have nearly doubled since 2007, thanks in part to investments in the FIA business by private equity firms, notably Guggenheim Partners’ 2010 purchase of Security Benefit Life. FIAs with lifetime income guarantees have helped fill the sales vacuum left by receding VA sales in brokerage firms and banks.

The perennial FIA sales leader has been Allianz Life, which entered the market by purchasing FIA specialist Life USA Holdings in 1999. A unit of Allianz SE, Allianz Life has a 28% share of FIA sales, most of it in the independent agent channel. Excluding sales by Allianz Life, FIA sales overall would have increased only seven percent in 2014, not 23%, according to LIMRA.

VAs are still the overall annuity sales leader, with $140.1 billion in sales in 2014. But that figure, a five-year low, is 11.4% below the post-crisis peak of $157.9 billion in 2011, according to Joe Montminy, assistant vice president of the LIMRA Secure Retirement Institute. VA sales once reliably rose with the equity market, but the correlation ended after the financial crisis, as VA issuers made riders more conservative. Supply of VAs slumped as several issuers curtailed, halted or even reversed sales.  

Alternative indexes

In a conference breakout session, Milliman actuary Tim Hill talked about the hottest trend in FIA product design: the use of so-called “alternative” indexes. Most FIA product designs generate yield by buying options on the S&P500 with a bit of the interest earned on the contract’s bond holdings. An alternative index typically combines two or more other indices; it may be volatility-controlled, and often features a cash component. Contracts that uses alternative indexes now account for about 28% of the FIA market, according to Wink’s Sales and Market Report, 4Q2014.

The use of an alternative index can make an FIA look more attractive. As Hill explained, today’s low bond returns give issuers a smaller budget for purchasing options on equity indexes. Depending on the crediting method, that can reduce the degree to which the issuer can participate in index gains (if any) or it may result in a lower cap on the maximum interest that will be credited to the contract.  On most contracts, the cap is now historically low—between 2.5% and 4.5%.

​That’s where an alternative index can help. All else being equal, if the alternative index is less volatile than the S&P500, the options will be cheaper (because the option seller has a lower risk of loss), and the result will be a higher maximum participation rate or a higher cap. (A participation rate method would offer a portion of the entire index gain, while a cap method would offer 100% of the gain up to a certain cap.)

But there’s an obvious tradeoff. The potential returns of an alternative, volatility-controlled index will be lower than the returns of the S&P500, so the two strategies may end up offering about the same value. (Ten percent of five is the same as five percent of ten, for example.) The higher rate sounds better, however, which makes the product more appealing to producers and clients. 

“When you dial back the volatility, you can have a higher cap or even go uncapped and use a spread,” Hill said. “That’s the driver of this space right now—the ability to offer a higher return than the pure S&P500 story. The cap levels are especially important for advisers in the broker-dealer channel.” Investment banks are now eager to create custom volatility-controlled indexes for FIA issuers, he added.

The future of FIAs

The use of alternative, and sometimes custom indexes by FIA issuers can cause headaches for broker-dealers. “We sell 26 products from 18 carriers. A lot of them look alike, but now the carriers are differentiating themselves with proprietary indexes. So it’s hard to compare the indexes,” said Johnna Chewning, a vice president of fixed annuity sales at Raymond James, the national broker-dealer.

Within Raymond James Insurance Group, fixed annuities now account for 40% of revenue, she said. Rising FIA sales are filling the revenue vacuum left by declining VA sales. She added that, because of today’s ultra-low crediting rates, advisers are selling most of their FIAs on the strength of the lifetime income benefit riders.

In his presentation on the future trajectory of the annuity business, independent actuary Timothy Pfeifer made several predictions about indexed annuities. Regardless of the interest rate environment or equity market returns, he said, they will “increase their dominant position in the individual U.S. annuity market” and “approach variable annuity sales levels over the next five years.”

Drivers of the growth include the competitiveness of the products, that fact that FIAs are not securities, the expansion of FIA distribution into the banks and broker-dealers, the entrance of new carriers into the business, the lower accounting volatility of FIAs, and the appeal of upside potential with principal protection, he said.

Pfeifer also predicted that an indexed version of a deferred income annuity would become a qualifying longevity annuity contract (QLAC), but the indexing will only be applied during the deferral period, not during the benefit period. He also expects to see indexing applied to single premium immediate annuities and non-QLAC deferred income annuities.

© 2015 RIJ Publishing LLC. All rights reserved.

Voya Hires New Retirement Chief

Posted on April 23, 2015 by -

Voya Financial, Inc., announced this week that it has hired Charles P. Nelson to be its CEO of Retirement, effective May 1. Nelson, 54, who spent the past 32 years with Great-West Financial, will oversee Voya’s workplace and individual retirement businesses.

Nelson will be head of Tax-Exempt and Corporate Markets and Retail Wealth Management, which includes the company’s 401(k), 403(b) and 457 plans, and IRAs, as well as its phone-based investor channel for individual IRA holder and its retail broker-dealer, Voya Financial Advisors. Jeff Becker will remain CEO of Voya Investment Management. 

Both men will report to Alain Karaoglan, Voya Financial’s chief operating officer, who is also serving as CEO of Voya Retirement and Investment Solutions. Karoglan reports to Rodney O. Martin Jr., Voya’s chairman and CEO.

In 2014, Voya’s retirement segment accounted for approximately 40% of the company’s operating earnings. Asked by RIJ to describe his accomplishments at Great-West, Nelson said, “In the mid-1990s we were the 38th largest retirement services provider. As I’m leaving, it’s now the number two provider.”

As CEO of Retirement at Voya, Nelson fills a management vacuum left by the sudden departure last fall of Maliz Beams, who had been chief executive of Voya Financial’s Retirement Solutions business. Nelson’s responsibilities will cover both individual and institutional retirement.

Voya’s U.S. retirement business is in the midst of a makeover, subsequent to its recent separation from Dutch parent ING and its rebranding as Voya Financial. Over the next four years, the company has announced, it plans a gradual $300 to $350 million investment in “digital and analytics capabilities and a cross-enterprise strategy.”

“The company’s Investment Management and Retirement businesses will become more closely aligned,” Voya said in a release. 

Voya is becoming a bigger contestant in the nascent in-plan annuity business. In February, Voya’s recordkeeping platform began offering the Alliance Bernstein multi-insurer lifetime income option to Voya-administered large retirement plans. That program allows participants to be defaulted into a target date fund with a guaranteed lifetime income wrapper.

Alliance Bernstein pioneered the concept at United Technologies. The guarantees are competitively underwritten by either AXA, Nationwide, Lincoln or Prudential, which compete to insure assets contributed to the target date funds by individual plan participants. Since early 2012, Voya (then ING US) has offered a similar Lifetime Income Protection program to participants in the smaller retirement plans that it administers. The insurers in that program are AXA, Nationwide and Voya Retirement Insurance and Annuity Company.

Nelson departs Great-West shortly after helping former Fidelity executive Robert Reynolds, the Great-West CEO since May 2014, combine JPMorgan’s retirement plan business, Putnam Investments, and Great-West Retirement into the umbrella of Empower Retirement. While Nelson was at Great-West, the  insurer had introduced a target date fund with a lifetime income rider for its retirement plan clients, similar to what Voya has done. Great-West is owned by Power, Inc., of Canada.

By merging its individual and institutional retirement businesses, Voya hopes to do what most full-service 401(k) providers are trying to do today: retain former plan participants as rollover clients and capture more of their assets. For Voya, the strategy includes the creation of My Orange Money, a digital channel where participants can find out if they are “on track” toward a financially secure retirement, and what to do if they aren’t.

Aside from investing internally, Voya bought back about $800 million in its own stock in 2014 and intends to buy back another $750 million, as part of a campaign to raise it adjusted operating return on equity to 13% to 14%.

“In 2014, we grew our Adjusted Operating ROE 180 basis points from year-end 2013 to reach our 2016 Adjusted Operating ROE target of 12% to 13% – two years ahead of our plan and despite the continued low interest rate environment,” said CEO Martin, in a release. “Since establishing our ROE target in 2012, we… have achieved 380 basis points of improvement in our Adjusted Operating ROE.”  

Nelson’s direct reports will include Carolyn Johnson, president of Tax-Exempt Markets; Richard Linton, president of Large Corporate Markets and Retail Wealth Management; and Richard Mason, president of Small/Mid Corporate and Institutional Investment Markets. Johnson will also report to COO Alain Karaoglan in her role as president of Annuities. Jeffrey Becker, CEO of Voya Investment Management, will continue to report to Karaoglan. 

© 2015 RIJ Publishing LLC. All rights reserved.

Question: Can the DOL regulate advice on IRAs?

Posted on April 23, 2015 by -

A. Two ERISA attorneys, Fred Reish of Drinker, Biddle & Reath, and Steven Saxon of Groom Law Firm, told RIJ that the DOL has the authority to regulate IRAs.

“Under a Presidential Order from 1978, the DOL has the responsibility to define the prohibited rules under Section 4975 of the Internal Revenue Code. The DOL also has the right to grant exemptions from the 4975 prohibited transactions.  Since IRAs are ‘plans’ for purposes of 4975, the DOL writes the prohibited transaction regulations and exemptions for IRAs,” Reish told RIJ in an email. Saxon wrote, “The DOL interprets 4975 as applied to IRAs and IRS imposes excise taxes.”

Both attorneys referred to the “Reorganization Plan No. 4 of 1978,” which the Carter administration intended to reduce redundancies in the regulation of retirement plans under the Employee Retirement Income Security Act of 1974 (ERISA). The plan states that “[The Department of] Labor will have statutory authority for fiduciary obligations. ERISA prohibits transactions in which self-interest or conflict of interest could occur, but allows certain exemptions from these prohibitions. Labor will be responsible for overseeing fiduciary conduct under these provisions.”

President Carter added at the end of Reorganization Plan No. 4:

“ERISA was an essential step in the protection of worker pension rights. Its administrative provisions, however, have resulted in bureaucratic confusion and have been justifiably criticized by employers and unions alike. The biggest problem has been overlapping jurisdictional authority. Under current ERISA provisions, the Departments of Treasury and Labor both have authority to issue regulations and decisions.

“This dual jurisdiction has delayed a good many important rulings and, more importantly, produced bureaucratic runarounds and burdensome reporting requirements. The new plan will significantly reduce these problems. In addition, both Departments are trying to cut red tape and paperwork, to eliminate unnecessary reporting requirements, and to streamline forms wherever possible.”

© 2015 RIJ Publishing LLC. All rights reserved.

Wealth protects health—but not permanently: EBRI

Posted on April 23, 2015 by -

Thanks to Social Security and private pensions, few people in American die without a monthly income. But what percentage of Americans die without any assets, or with no assets, financial or otherwise, except the roofs over their heads?

“Not much is known about the actual percentages of current retirees that ran out of money,” observes a new research paper from the Employee Benefit Research Institute. [But] this information is crucial to benchmark the relative success or failure of future retirees.”

It turns out that about one in five people who died at age 85 or later had no non-housing assets. Among single people, the percentage was close to one in four, according to data on about 1,200 participants in the University of Michigan’s ongoing Health and Retirement Study who were alive for the 2010 survey but not for the 2012 follow-up. 

People who died at younger ages were even more likely to be in this situation.

“Households which lost family members at relatively younger ages were also the households with lower asset holdings and lower income. Singles who died relatively early were in much worse financial condition than couples,” an EBRI release said.

Given the fact that 20% or more of Americans tend to accumulate few if any financial assets during their lifetimes, it might be expected that even more than 20% would have no financial assets at death.    

The data also showed that people who die at younger ages tend to have significantly lower incomes than those who live longer. But either because wealth differences between survivors gradually shrink or because wealth eventually loses its protective effect, the gap in income between survivors and decedents is narrower at later ages. 

Among the major findings published in the EBRI report (The full report, “A Look at the End-of-Life Financial Situation in America,” is published in the April 2015 EBRI Notes, online at www.ebri.org):

  • For those who died at or above age 85, 20.6% had no non-housing assets and 12.2% had no remaining assets.
  • Among singles who died at or above age 85, 24.6% had no non-housing assets left and 16.7% had no assets left.
  • 29.8% of households that lost a member between ages 50 and 64 had no assets left.
  • People who died earlier also had significantly lower household income than households with all surviving members.
  • Among singles who died at ages 85 or above, 9.1% had outstanding debt (other than mortgage debt) and the average debt amount was $6,368.
  • The average net equity left in their primary residence for those who died at ages 85 or above was $141,147 and $83,471 for couple and single households, respectively.

The EBRI report looks at the financial situation of older Americans at the end of their lives and documents their income, debt, home-ownership rates, net home equity, and dependency on Social Security. The data for this study came from the University of Michigan’s Health and Retirement Study (HRS).

The study sample included 1,189 individuals who responded to the 2010 surveys and died before the 2012 surveys. All the asset and debt numbers reported here are from 2010, when the participants were last interviewed before death. The income reported in 2010 corresponds to the 2009 calendar year income.

© 2015 RIJ Publishing LLC. All rights reserved.

Grasshoppers know they should act more like ants

Posted on April 23, 2015 by -

Just as most Americans know that they should eat oatmeal and no-hormone chicken instead of Pop-Tarts and McNuggets, most of them also know that they should save more and plan for the future rather than fritter their money away on stuff that triggers a fleeting  spike in dopamine levels.   

In other words, Americans know they should act like Aesop’s famous Ant but behave like his infamous Grasshopper instead. If you still doubt your intuitions about that, we give you the 2015 Northwestern Mutual Planning & Progress Study, an annual research project commissioned by Northwestern Mutual.

The research, conducted in January among over 5,000 U.S. adults aged 18 and older, showed the following discrepancies between the subjects’ good intentions and their actual behavior:

  • 58% of Americans believe their financial planning needs improvement, and 21% are “not at all confident” they’ll be able to reach their financial goals. But only 34% said they’ve taken steps to change.  
  • 67% of adults expect more financial crises such as what we experienced in 2008, yet only 38% are confident their financial plans can withstand market cycles. Almost one-fourth (23%) do not believe their plans can weather economic volatility.
  • 67% consider themselves “savers,” but 54% have no net savings.
  • Despite serious concerns about retirement, 43% have not spoken to anyone about retirement planning.

“An unplanned financial emergency” was far and away the most common financial fear among those surveyed. A “cash windfall” was the most likely reason to decide to seek the advice of a financial planner. 

The situation isn’t improving. Over the last four years, the number of Americans age 25 and older who identify themselves as “non-planners” and having no established financial goals has doubled to 14% in 2015 from 7% in 2012.

Harris Poll conducted the survey on behalf of Northwestern Mutual. The study included 5,474 American adults aged 18 or older who participated in an online survey between January 12, 2015 and January 30, 2015. 

© 2015 RIJ Publishing LLC. All rights reserved.

BlackRock fined $12 million for fund manager conflict of interest

Posted on April 23, 2015 by -

As BlackRock promotes its CORI retirement income product, and at a time when the Labor Department is trying to remove conflicts of interest in the sale of retirement products, BlackRock has been fined for a conflict of interest on the part of one of its top portfolio managers.   

BlackRock Advisors LLC has agreed to pay $12 million to settle federal charges that it failed to disclose that one its top portfolio managers had a $50 million interest in one of his funds’ largest holdings, the Securities and Exchange Administration announced this week.

Daniel J. Rice III was managing energy-focused funds and separately managed accounts at BlackRock when he founded Rice Energy, a family-owned and operated oil-and-natural gas company, according to the SEC’s order instituting a settled administrative proceeding. As general partner of Rice Energy, Rice personally invested about $50 million in the company. 

Rice Energy later formed a joint venture with a publicly-traded coal company that eventually became the largest holding (almost 10%) in the $1.7 billion BlackRock Energy & Resources Portfolio, the largest Rice-managed fund.

The SEC’s order finds that BlackRock knew and approved of Rice’s investment and involvement with Rice Energy as well as the joint venture, but failed to disclose this conflict of interest to either the boards of the BlackRock registered funds or its advisory clients.   

According to the SEC, BlackRock and its then-chief compliance officer Bartholomew A. Battista failed to report Rice’s violations of BlackRock’s private investment policy—a “material compliance matter”—to their boards of directors. Battista agreed to pay a $60,000 penalty to settle the charges against him.

“This is the first SEC case to charge violations of Rule 38a-1 for failing to report a material compliance matter such as violations of the adviser’s policies and procedures to a fund board,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. BlackRock and Battista neither admitted nor denied the findings.

© 2015 RIJ Publishing LLC. All rights reserved.

DOL to Advisors: ‘Take the Pledge’

Posted on April 17, 2015 by -

Almost five years after the Department of Labor began work on it, the federal agency’s re-proposal of its 2010 fiduciary proposal, made public this week, would “allow advisers to continue to receive payments that could create conflicts of interest” as long as they agree contractually to act in the client’s “best interest.”

The DOL is accepting public comments on the new proposal from now until mid-July. At that point, it will schedule a public hearing on the matter, and then issue a final ruling. Click here for FAQs about the proposal.

The most significant regulatory aspect of the re-proposal may be its assertion that individual IRA accounts—collectively, the largest single pool of retirement savings in the U.S. today—are more like ERISA-regulated retirement plans than like other retail accounts, and therefore deserve and require similar government oversight.   

If that sticks—and the securities industry is sure to fight it—then financial intermediaries who advise IRA clients, even those who have had nothing to do with workplace retirement plans or with recommending a specific rollover from a plan, would be held to the same high ethical standards as advisers to retirement plans. 

The new proposal addresses all “investment advisers,” but variable annuity sellers may be forgiven if they feel in the DOL’s cross-hairs. At a Labor Department website, the poster children for bad adviser practices are Phil and Carol Ashburn, IRA owners who share an audio testimonial about abuse from an adviser who put their $350,000 in a variable annuity.   

Poison pill?

Any advisor who makes specific recommendations on the disposition of IRA assets will be affected by the re-proposal, as it is currently written. “More advisors will be held to a fiduciary standard, but they will have considerable flexibility in how they get paid. Our rule is that advisors that are paid to provide advice to qualified plans and IRAs are required to put clients first, but our intent is to provide guard rails, not a strait jacket,” said Labor Secretary Tom Perez—who, in an expansive gesture, noted in the press conference that he and his wife rely on an adviser who takes commissions.   

At this point, it’s difficult to determine from the proposal’s legalese how restrictive it might be in pracice. The document is full of exemptions and “carve-outs” that, depending on their interpretation by ERISA lawyers, may allow much of the business of advising 401(k) plan sponsors, educating plan participants, and recommending ways to invest individual IRA assets, to go on as usual. 

As a key mechanism for reform, the proposal calls for a “legally-binding,” “best-interest contract” between advisers and clients. To accept commissions, revenue-sharing or 12b-1 marketing fees—the non-transparent payments that the government has criticized —advisers would have to sign such a contract.

“People who provide advice tell me that they want to put the client’s interests first, Perez told reporters during a phone-in meeting. “This rule will codify what they are already doing. This is a vehicle through which we can install guardrails for consumers while providing flexibility for advisors in carrying out their fiduciary obligations. The proposal doesn’t end or bar commissions. It would not apply to brokers who merely take orders and don’t provide advice. It will not limit access to education” by call center personnel.

The definition of “best interest” will undoubtedly be a focus of much discussion during the next 10 weeks. At this point, “best interest” is undefined, and so is the exact type of written disclosure that might be required to receive commissions. “Without a clear definition of ‘best interest’ and a strict protocol for disclosing ‘conflicts of interest’, it’s going to be near impossible to enforce these new standards,” said independent fiduciary specialist Chris Carosa, a writer for Fiduciary News.

Cynics might wonder if the DOL’s insistence on a legally binding contract might be a kind of poison pill—a demand that the DOL knows that advisers can’t agree to, perhaps because of the open-ended legal liability it could entail. For its part, the brokerage industry might try to go around the DOL, and work through Congress or the courts to challenge the DOL’s assertion that it has jurisdiction over individual IRAs.

Jurisdiction over IRAs

The proposal, if it goes live, would likely have its greatest impact in the individual IRA arena. Americans hold some $7 trillion in tax-deferred savings in IRAs, most of it rolled over at some point from a DOL-regulated employer-based 401(k) plan. Most financial services firms are currently caught up in a “capture more rollovers” gold rush, and, at conferences and privately, they express the belief that rollover money is just like other retail money.

But the government appears to fundamentally disagree with this view. The proposal makes clear that it considers advisers to IRAs to be fiduciaries. “The primary impact of the ‘best interest’ standard is on the IRA market,” the DOL re-proposal says. “IRAs are more like [401(k)] plans than like other retail accounts.” Here is some of the pertinent language in the proposal:

Some commenters additionally suggested that the application of special fiduciary rules in the retail investment market to IRA accounts, but not savings outside of tax-preferred retirement accounts, is inappropriate and could lead to confusion among investors and service providers. The distinction between IRAs and other retail accounts, however, is a direct result of a statutory structure that draws a sensible distinction between tax-favored IRAs and other retail investment accounts. The Code itself treats IRAs differently, bestowing uniquely favorable tax treatment on such accounts and prohibiting self-dealing by persons providing investment advice for a fee. In these respects, and in light of the special public interest in retirement security, IRAs are more like plans than like other retail accounts…

The vast majority of IRA assets today are attributable to rollovers from plans. In addition, IRA owners may be at even greater risk from conflicted advice than plan participants. Unlike ERISA plan participants, IRA owners do not have the benefit of an independent plan fiduciary to represent their interests in selecting a menu of investment options or structuring advice arrangements. They cannot sue fiduciary advisers under ERISA for losses arising from fiduciary breaches, nor can the Department sue on their behalf. Compared to participants with ERISA plan accounts, IRA owners often have larger account balances and are more likely to be elderly. Thus, limiting the harms to IRA investors resulting from conflicts of interest of advisers is at least as important as protecting ERISA plans and plan participants from such harms.

Responding to a question during the news conference, Perez said that clients who feel that they’ve been misused by a broker or advisor will be able to sue them. “If you are in the context of a relationship governed by the best interest contract exemption, the most frequent avenue [of redress] will be private action for breach of contract,” he said. The IRS also has authority to levy an excise tax on advisors who engage in prohibited transactions without meeting any of the exemptions.    

In addition to the best interest contract exemption, the proposal updates some existing exemptions that govern the provision of investment advice to plan sponsors and participants. In addition, it “carves out” or excludes general investment education, sales pitches to large plan fiduciaries who are financial experts, and appraisals or valuations of the stock held by employee-stock ownership plans, from accountability to a fiduciary standard.

The proposal asks for comment on a new “low-fee exemption” that would allow firms to accept conflicted payments when recommending the lowest-fee products in a given product class, with even fewer requirements than the best interest contract exemption. This could mean that no-load, direct-sold fund firms like Fidelity and Vanguard, or robo-advisers that recommend all ETF-portfolios to IRA owners, might incur relatively light compliance costs.

© 2015 RIJ Publishing. All rights reserved.

AXA’s have-your-cake-and-eat-it-too approach to RMDs

Posted on April 17, 2015 by -

People who are still earning income at 70½, or who would prefer to let all their tax-deferred savings keep growing, or who don’t need their retirement accounts for current income, often hate taking the minimum distributions from 401(k)s and traditional IRAs that become mandatory after that age. 

Many resent the compulsion and the inconvenience. Or they may simply dislike the bump in taxable income that the RMD entails.

The annuities team at AXA Equitable Life believes that some retirees also see RMDs as a drain on the value of an account that the retirees would rather earmark for a bequest. So AXA created a variable annuity death benefit rider that can protect that specific account from erosion by RMDs, taxes and market volatility.

The new benefit is called the RMD Wealth Guard GMDB (Guaranteed Minimum Death Benefit). It is available on AXA’s two-sleeve Retirement Cornerstone variable annuity, for use by contract owners who aren’t using the VA for its lifetime income benefit, and costs 90 basis points a year in addition to the insurance, investment and distribution costs of the product.  

Investors in Retirement Cornerstone can allocate money either to an investment account or a “protected benefit” sleeve that has less aggressive investments. It can be used to provide guaranteed lifetime income or guaranteed death benefits. The RMD Wealth Guard rider is designed for contract owners who would rather use it for a bequest.

As long as the investor doesn’t instruct AXA to take an amount greater than the RMD from the protected benefit sleeve each year (starting in the year in which the investor turns age 70½, the lump sum bequest value of the protected benefit account won’t go down. If the value of the underlying investments goes up in a contract year, the bequest value can even go up (until age 85 or until the first RMD is taken).

For example, as AXA Lead Director Steve Mabry told RIJ this week, an investor might put a pre-tax $500,000 into a Retirement Cornerstone VA, allocating $250,000 to the investment account and $250,000 to the protected benefit account. Each year after age 70½, the RMD on the entire $500,000 (initially about $18,000) can be taken out of the $250,000 investment account, leaving the legacy account whole and growing.

Here’s the prepared text that AXA provided regarding RMD Wealth Guard:

After age 70½, any RMD withdrawal from the Protected Benefit Account of the Retirement Cornerstone variable annuity will not decrease the amount left for beneficiaries. That way, you can take the distributions required by law without decreasing the money you want to leave for your family.

The RMD Wealth Guard GMDB allows savers to participate in market performance to potentially increase their legacy. Each year, until you take your first RMD or reach age 85, if market increases have grown your Protected Benefit Account, the locked-in amount that will be given to beneficiaries also increases to match the higher value.

In the years thereafter, even if your Protected Benefit Account Value decreases, your beneficiaries are guaranteed the locked-in amount, as long as you never take more than your RMD. In addition, if poor market performance and RMD withdrawals cause the account value to go to zero before you pass away, the RMD Wealth Guard offers a refund feature.

© 2015 RIJ Publishing LLC. All rights reserved.

What time is it? Time for you to build an app for the Apple Watch

Posted on April 17, 2015 by -

New ramps keep opening on the digital advisory highway.

E*TRADE Financial Corporation has launched an app for the Apple Watch, set for April 24, 2015. The app will deliver market data “in an engaging and simple format” to help investors and traders monitor markets and portfolios. Features include:

  • Visual snapshots of market indices such as Dow, NASDAQ and S&P, as well as core metrics such as volume and performance.
  • Easy-to-glance summary of accounts, portfolios and watch lists, including positions and daily gains or losses.
  • Customizable notifications alerting users when relevant market, account or position-related actions happen, such as when a security hits a price target or when an order is filled.
  • Handoff functionality delivering a seamless transition from watch to phone for more in-depth research and additional information.

“It builds upon our leading iPhone app, re-envisioned for the Apple Watch, and makes the iPhone and Watch experience seamless,” said Kunal Vaed of E*Trade’s Digital Transformation and Active Traders unit, in a release.

E*TRADE says it offers human guidance behind its digital platforms. E*TRADE’s mobile offerings include investing applications for the iPhone, iPad, Android Phone and Tablet, WindowsPhone, Kindle Fire Tablet and Amazon Fire Phone.

© 2015 RIJ Publishing LLC. All rights reserved.

Public pensions aren’t falling behind in mortality expectations: CRR

Posted on April 17, 2015 by -

The California Public Employees Retirement System—CalPERS—recently revised its funded ratio downward by 5% after adopting a mortality table that reflected longer expected lifespans for its members. Observers of public pensions wondered if other public pensions would soon face a similar jolt.  

No, not necessarily, is the answer from the Center for Retirement Research (CRR) at Boston College. Analysts there ran some numbers to see what would happen to public plan liabilities if they 1) used the new mortality table that private sector plans use; and 2) fully incorporated expected future mortality improvements into their funded-ratio projections.

Their calculations, documented in a new CRR Issue Brief, showed that if public plans used the private sector mortality tables, they would have to increase their life expectancy estimate by only about six months, and reduce their funded ratios by about one percent, to 72%.

If they fully incorporated future mortality improvements into their projections, it “would increase life expectancy by 2.3 years and reduce the funded ratio of public plans from 73% to 67%,” the brief said. The impacts would be much larger for small public plans than for large ones.   

Not even private sector plans feel the need to use future mortality improvements in calculating their funded ratios, the CRR analysts wrote. They concluded that public sector plans “seem to be making a serious effort to keep their life expectancy assumptions up to date. The big increase in 2013 of CalPERS’ liability and decline in funding was reflective of an effort to better incorporate future mortality improvements when estimating mortality, not a sign of a serious problem.”

© 2015 RIJ Publishing LLC. All rights reserved.

Quantitative easing in Europe entices equity investors: TrimTabs

Posted on April 17, 2015 by -

Inflows into global equity mutual funds and exchange-traded funds have totaled $81.5 billion so far this year, putting them on track to surpass the previous four-month record of $86.0 billion from December 2005 through March 2006, according to TrimTabs Investment Research.

“U.S. investors continue to follow the printing presses into European and Japanese equities,” said David Santschi, TrimTabs CEO. “A record that has been held for nine years is almost sure to fall.”

In March alone, flows into global equity mutual funds and exchange-traded funds rose to a record $34.8 billion, exceeding the previous monthly record of $34.4 billion in January 2013, TrimTabs said in a release. These funds have taken in $14.8 billion this month through Friday, April 10.

Buying has been heaviest among European funds, TrimTabs said. Europe equity ETFs issued a record $7.8 billion (14.8% of assets) in March, and they have issued $2.6 billion (4.6% of assets) this month through April 10.

“The performance of European funds has improved of late, which is helping drive inflows,” said Santschi.  “Although these funds dropped 1.9% in March, massive buying persisted, and they are up 3.0% so far this month.”

© 2015 RIJ Publishing LLC. All rights reserved.

RetirePreneur: Marcia Wagner

Posted on April 16, 2015 by -

What I do:  I am an ERISA lawyer, and the founder and principal of The Wagner Law Group, a boutique law firm focusing on ERISA, employment law, labor and human resources, employee benefits, welfare benefits, privacy and security, corporate law, tax, estate planning and administration, real estate and litigation.

Who my clients are:  We represent financial institutions, money managers, closely held corporations, publicly traded corporations, tax exempt entities, financial advisors, plan administrators and trustees. Marcia Wagner text box

Why clients hire me: We have expertise in dealing with tax qualified plans that are under stress, or get into trouble, through IRS, DOL or PBGC audit, that have various form or operational defects, that have not filed Forms 5500, or are underfunded. We also routinely deal with amending plans and providing advice and consultation concerning health care issues under the Affordable Care Act and all matters regarding the implementation and operation of fringe benefit plans. Executive compensation, including equity and non-equity based compensation arrangements and negotiations, is also an area where our expertise is routinely sought.

Where I came from: Initially, I learned the ropes in the big law firms, beginning as a junior associate and eventually moving up to partner and head of the ERISA practice.  Then, almost 20 years ago, I had an epiphany, opened up The Wagner Law Group and have never looked back.

Why start my own firm: Entrepreneurs are born, not made. I’m someone who can’t not be his or her own boss. After a decade in the large firms, and after much thought and internal struggle, I felt I could be a better lawyer, a happier person and deliver better legal advice and consultation in a firm I created from the ground up.

My view on the conflict of interest proposal from the DoL: The government and industry have a hard time understanding one another. The government doesn’t quite get that the small retirement plan industry isn’t very profitable. The concept of commissions and 12B-1 fees is the lifeblood to survival. The industry doesn’t quite get that a few bad apples really do ruin things, and that there are a few who take actions to destabilize the industry. Both sides need to work harder to understand the other side.

My view on Jerry Schlichter’s fee lawsuits: The lawsuits have been an overall plus. For a long time the industry pooh-poohed Jerry. But he has been a forceful voice for change and he has brought about change. Some people put him down and say he’s just a tort lawyer, but the fact that there was no fee transparency in plans led to unfair results. Fees are now much more transparent and there’s greater understanding on the part of participants. Jerry is a very significant player in the industry and brought about real change.

My retirement philosophy:  I will never retire. I absolutely love the practice of ERISA law. I love being at the forefront of many significant developments in this area. We have created a village of excellence and integrity and my life’s work fills me with gratitude beyond description.

© 2015 RIJ Publishing LLC. All rights reserved.

The Case for Working Longer

Posted on April 16, 2015 by -

At the World Bank, we have seen many colleagues who retired on a Friday only to come back as consultants the following Monday. They don’t do it for the money, but rather because they enjoy working. There is now ample evidence that seniors who remain active beyond the official retirement age are on average happier and healthier than those who don’t.

But how common is the phenomenon of post-retirement work (beyond anecdotal evidence from the World Bank)? Is there evidence that most workers in developed countries would actually elect to work longer if they could? And if so, do retirement systems allow for such choices?

Over the last 125 years, ever since Germany under Chancellor Bismarck introduced the institution of “old age insurance,” the nature of retirement and its financing have changed substantially. Bismarck’s original idea was essentially a disability insurance meant to protect those who had become too old to work and earn an income.

The pension eligibility age was set at 70 years, but the benefit was paid only if the person retained no more than one-third of normal working capacity. Moreover, at the time, very few even lived long enough to become eligible, which also meant that the pension system was well funded. Bismarck’s system was effectively insurance, not an entitlement.

Today, retirees live longer and retire earlier. For example, in Austria, Ireland, and Spain, since 1965, the effective retirement age declined by almost a decade, while life expectancy increased by 10 years over the same period. Economic and demographic growth meant that people could retire earlier, live longer, and enjoy old age in prosperity rather than poverty.

Germany is also an interesting case because its population is aging and shrinking, which makes it a case in point to study retirement policies. Germany was one of the few countries that resisted an expansion of retirement years and even increased the effective retirement age for men by two years since 1965. However, recently, the government made a policy U-turn introducing partial retirement at the age of 63 (after 45 years of contributing to the pension system).

Does this make sense given the big shifts in how societies and economies operate, the changing nature of work, and dramatic improvements in the longevity and quality of “senior life”?

First, the world is undergoing a momentous demographic shift. In 2000, the world had less than half a billion people at the age of 65 or above; by 2050, the number will have more than tripled to 15 billion, or 15% of the world’s population. In Germany seniors overtook juniors as a share of the population at the turn of the century and the number of retirees (65+) will increase further from 17 million today to 24 million in 20 years, while the potential workforce (age 16-64) is declining rapidly (see Figure 1).

These trends are shaped by longer life expectancies and lower fertility. A child born today in Europe, especially if it is a girl, has a good chance to live 100 years. If you take the principle of 45 workings years, this person would be able to benefit from public contributions—first as a child, later as a retiree—for more than half of his or her life. This is not sustainable.

Second, the nature of work has also changed: from predominantly blue-collar jobs (many of which are getting automated) to increasingly white-collar occupations, which are less taxing physically. What has also changed, then, is the fundamental hypothesis upon which pension debates were premised, that work is an unpleasant necessity and only the prelude to happier times.

In that old “assembly line” narrative, the span of one’s work-life is calibrated to years of peak physical strength and workers perceived as interchangeable. To some extent it remains relevant for workers still engaged in physically straining or routine activities (in manufacturing or service jobs) and those should have the opportunity to retire at an age that allows them to enjoy retirement. But a large and growing share of the workforce no longer fits in that box: they find self-fulfillment in their jobs and should have the opportunity to work beyond pre-set retirement ages, including through flexible working arrangements.

Third, the assumed correlation between age and productivity is weaker in the new economy. Skills—and hence productivity—are not necessarily declining with age, but rather shifting. In fact many skills improve with age, mostly those related to oral and written comprehension and expression and soft skills like emotional stability, conscientiousness, and agreeableness. We call these “age-appreciating” skills.

Not surprisingly, there are some occupations that use these skills more intensively than other and in which older people might actually do better than younger folks, including sales representatives, HR managers, or editors. Recent neuro-scientific research shows that well-performing seniors activate both brain hemispheres when solving tasks whereas young people rely only on the brain hemisphere that processes new information. Older people also use the second hemisphere to extrapolate, based on experience; in other words, they compensate for a decline in one ability by activating a new strength.

All of this points to the fact that we not only live longer and healthier lives, but we also have the potential to work longer. The changing nature of the labor market also provides an opportunity for seniors to stay engaged, and for many more women to join the labor market resulting in a double demographic dividend. A binary system of working 100 percent until retirement and then suddenly moving to zero percent at an arbitrary age of around 65 is one of the great anachronisms of today’s labor market in many OECD countries.

This article builds on a forthcoming World Bank book, “Golden Aging. Prospects for Healthy, Active, and Prosperous Aging in Europe and Central Asia,” by Maurizio Bussolo, Johannes Koettl and Emily Sinnott. 

IRS relaxes penalty that discouraged auto-enrollment

Posted on April 9, 2015 by -

The Internal Revenue Service will no longer levy a 50% penalty on employers who accidentally miss making payroll deferrals to the retirement accounts of employees who had been automatically enrolled into their plans and were eligible for deferrals, as long as they correct the mistake in a timely manner.

In announcing the new policy at a meeting of the Defined Contribution Institutional Investors Association meeting in Washington, D.C. on April 2, deputy Treasury secretary Mark Iwry explained that the penalty was causing some employers not to adopt auto-enrollment—and was therefore counterproductive.

“The rules for correcting slip-ups will be less costly, burdensome, and address the perception of a windfall [to the employee],” Iwry said. “We still think the employees have lost something value in the way of tax-free buildup. But we agree that an added 50% employer contribution sounds disproportionate.”

Auto-enrollment itself is considered essential by the government and private industry to the goal of expanding participation in workplace retirement plans and increasing American workers’ financial preparedness for retirement. Auto-enrollment of new employers (with optional disenrollment) has been shown to dramatically increase participation rates.

This type of ruling is known as a “safe harbor,” because it defines a procedure, which, if followed, will not result in a violation of the Employee Retirement Income Security Act of 1974 (ERISA).

“With respect to auto-enrollment, the main advantage of the new safe harbor is not having to pay the 50% QNEC (Qualified Non-elective Contribution) (QNEC) or any QNEC at all,” Bill Evans of the IRS told the DCIAA audience. “But you’d still have to make up for lost matches and the lost earnings on the match. There is also a requirement to issue a notice about the failure to make deferrals and the correction,” so that employees can make catch-up deferrals if they choose.

The original penalty was created in 2006 when the Pension Protection Act allowed auto-enrollment. It applied to employers who failed to make a required deferral into an auto-enrolled employee’s retirement account. As a penalty, the employer had to make an extra payment to the account equal to 50% of the unmade deferrals.      

The “principle underlying the 50% make-up corrective contribution was that corrective contributions should make up for the value of the lost opportunity for an employee to have a portion of his or her compensation accumulate with earnings tax deferred in the future,” a recent IRS release said.

The employer would still have to make up for any lost matching contributions. And, for full relief from penalties, the correction would have to be made no later than 9½ months into the year after the year of the mistake. 

Employers objected to the 50% corrective contribution on the grounds that it represented a “windfall” for employees and that the errors were usually corrected after a few months—thus giving employees many years to catch-up on lost tax-deferred growth. The IRS noted the employer complaint that, ironically, “errors are more common for plans with automatic contribution features (particularly automatic escalation features).   

The new relief will expire in 2021. “It’s a little bit of a pilot,” Iwry told a crowd of several hundred defined contribution industry executives at the Mandarin Oriental Hotel in Washington last week. “Having no employer contribution is stepping out a bit relative to the past. We want to make sure it’s workable and has the intended effect of encouraging the spread of auto-enrollment.”

The IRS also announced that, for failures to make deferrals in plans that do not involve auto-enrollment, the QNEC will be zero if the failure is corrected within 90 days. It will be 25% if the failure is corrected by the end of the year after the year of the failure, and 50% thereafter, an IRS spokesperson told RIJ.

© 2015 RIJ Publishing LLC. All rights reserved.

Britain invaded! By robo-advice!

Posted on April 9, 2015 by -

Given the rough similarity between the U.K. and U.S. retirement markets—especially now that the U.K. no longer requires annuitization of tax-deferred savings—trends in investor behavior in the U.K. often mirror trends in investor behavior here. 

Take robo-advice, for example. The digital channel is having as disruptive an impact in the U.K. as in the U.S. According to Cerulli’s European Distribution Dynamics 2015 report, in the U.K. “the low-margin business of fund distribution is being standardized, innovative digital propositions are flourishing, and layers of distribution are being removed.”

More than 82% of the international asset managers say that the market share of direct-to-consumer and D2C platform distribution in the United Kingdom will grow over the next five years, according to a Cerulli survey. “Fifty-four percent of them think that it will grow significantly. But they are also optimistic about the outlook of these channels in the rest of the continent,” a Cerulli release this week said.

“Roughly half of asset managers said their marketshare will grow in Germany, France, Italy, Spain, and Sweden. The rest stated that the marketshare will stay roughly the same and only a tiny minority thinks that it will fall. Managers were less bullish about Switzerland, though. Only one-third of those surveyed anticipated that marketshare will ‘grow somewhat,’” the release said.

Cerulli advises European firms to take the kinds of steps that Vanguard, Fidelity, Schwab and Northwestern Mutual have taken in their development or acquisition of digital advisory and distribution capabilities.

Angelos Gousios, associate director with Cerulli in London, and co-author of European Distribution Dynamics 2015: Preparing for a New Era, said, “Managers can benefit from the digital revolution in various ways: by renovating their proprietary D2C distribution facilities, by becoming a key partner of an online distributor or taking a financial stake in one, or finally go it alone and try selling their funds directly to the general public themselves.”

In the release, Barbara Wall, Europe research director, said, “There’s a global trend toward robo-advice that should not go unnoticed. It started in the United States, with companies like Wealthfront gaining traction and it is spreading in Europe—Nutmeg in the United Kingdom and MoneyFarm in Italy—and also in Asia, with 8 Securities in Hong Kong.”

© 2015 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on April 9, 2015 by -

New York Life posts record earnings for fifth consecutive year

New York Life announced record operating earnings of $2.02 billion in 2014, 14.7% over 2013 and the fifth consecutive record year, and a record surplus and asset valuation reserve of $21.9 billion for the year, the company reported this week.

New York Life’s held a 22% share of the fixed immediate annuities market and a 42% share of the deferred income annuities market, according to industry sources. The annuities group also sells fixed deferred annuities and variable annuities. 

The dividend paid to participating policyholders in 2015 increased by more than 9% over 2014 and by 30% since 2011. Benefits and dividends paid out in 2014 totaled $9.1 billion, according to the company, which is the largest mutual life insurance company in the U.S.

In 2014 the company’s 12,000-plus career agent force, its primary distribution model, sold a record $1.2 billion worth of life insurance.  

New York Life Direct, the company’s direct response business in Tampa, FL, which is the leading direct marketer of life insurance in the U.S. through an endorsed program with AARP geared to its membership; insurance programs in the U.S., covering members of more than 500 associations across the country.

The Insurance and Agency Group also includes New York Life’s life insurance operation in Mexico, Seguros Monterrey New York Life, one of the country’s largest life insurers.  

As of December 31, 2014, the Investments Group managed $526 billion for institutional and retail clients, providing annuities and guaranteed products to both the qualified and non-qualified markets. New York Life’s general account stood at $197 billion in cash and invested assets at year end. The Investments Group reported sales of MainStay mutual funds totaling $25.9 billion for 2014, the second-highest sales number in MainStay’s history.

The insurer’s financial strength ratings were the highest possible from the four major crediting rating agencies: A.M. Best (A++), Fitch (AAA), Moody’s Investors Service (Aaa), Standard & Poor’s (AA+).

Northwestern Mutual examines the ‘Millennial’ market

Generation Y or “Millennials” (aged 18-34) are conservative, risk-averse, and realistic about setting goals and taking responsibility. But they’re also that they’ll reach their financial goals, more optimistic that their financial situation is improving, and they bring a “joie de vivre” to their careers.  

Those were among the first set of findings from the 2015 Northwestern Mutual Planning & Progress Study, an annual research project commissioned by Northwestern Mutual that explores Americans’ attitudes and behaviors toward finances and planning.  

Responses by Millennials to the survey indicated the following:

  • 64% classify themselves as more inclined to save than spend
  • 53% have set financial goals, compared with 38% of Americans age 35 and older.
  • 73% expect to need to work past age 65 doing so because Social Security won’t take care of their needs.
  • 36% say their generation is not at all responsible when it comes to finances, versus 17% who say their generation is responsible.  
  • 33% cite a lack of planning as the greatest obstacle to achieving financial security in retirement, versus only about one in four of the general population.
  • Almost 50% have spoken to their partner, friends, family or an advisor about retirement.
  • 59% expect their financial situation to improve this year, compared to only 41% of the general public. 
  • 71% report feeling secure that they will achieve their financial goals.
  • 46% of those who expect to work past traditional retirement age say it would be by choice.

Harris Poll conducted the poll on behalf of Northwestern Mutual. It included 5,474 American adults aged 18 or older (including 1,081 aged 18-34) who participated in an online survey between January 12 and 30, 2015. Results were weighted to Census targets for education, age/gender, race/ethnicity, region and household income.

Vanguard publishes survey of global DC plan sponsors

Global DC plan sponsors hope to combine the best elements of defined contribution and defined benefit plans in their plans, and they’re taking steps toward implementing more transparent, less expensive fee structures, according to a survey, “Global Trends in DB and DC Plans,” sponsored by Vanguard.

“The push for fee transparency will continue, leading to structural changes for DC plans, including more unbundling of services and greater use of passive mandates, especially in default options, which will lead to lower overall plan costs,” said Steve Utkus, head of the Vanguard Center for Retirement Research, in a release.

“We were a bit surprised, frankly, that passive-only default funds did not emerge as more of a preference, as our experience suggests that more sponsors are recognizing the advantages that come with passive strategies, including lower costs and the elimination of manager risk from the outcome. In contrast to the survey results, the marketplace trend indicates that passive-only defaults will grow over time.” 

The survey was conducted in the second half of 2014 among more than 90 multi-national client companies, with an aggregate $650 billion in DB and DC plan assets. Participating companies are based around the world and administer retirement plans in at least three countries. 

The survey showed: 

Expections of an increase in employer contributions. 71% of respondents expect to increase employer contributions to their DC plan either “dramatically” or “somewhat.”

More use of target-date funds in U.S. than abroad. 66% of respondents prefer to use a target-date fund (TDF) as their plan’s default investment option, but adoption is lagging overseas. Nearly two-thirds of respondents use TDFs for their U.S. DC plans and another 13% use custom TDFs. For DC plans outside the US, only 30% of respondents use off-the-shelf or custom TDFs. Structural and regulatory differences outside the US have slowed the adoption rate. 

A combination of active and passive investment default options. 57% of respondents blend active and passive strategies in their default fund structure, while 38% prefer all-passive default funds. Only 5% would prefer an all-active lineup for their DC default fund. 

Rising importance of fee transparency. 79% of respondents say they consider fee transparency when choosing whether to use a bundled or unbundled service approach.

In the bundled approach, the plan administrator and investment manager are the same and the fees for both are bundled into one asset-based fee. In the unbundled approach, the extent to which higher asset-based fees may be subsidizing plan administration costs is easier to see. Many sponsors are more aware of overall costs and are seeking lower-cost service and investment options. 

Additional findings of the survey: 

  • The switch to liability-driven investing (LDI) in defined benefit (DB) plans will continue; 73% of organizations prefer LDI strategies over total return strategies for managing DB assets, especially among European DB plan sponsors. 
  • Legacy DB plans continue to require significant oversight, but plan sponsors expect to spend more resources on DC plans in the future, reflecting the expectation that DC plans will become more prevalent. 
  • While most global retirement plans are managed with a combination of local and corporate governance, there’s a trend toward a greater centralization. 

AIG partners with Primerica to market index annuities

American International Group, Inc. (NYSE: AIG) said its American General Life Insurance Company (AGL) subsidiary will partner with Primerica, one of North America’s largest independent financial services marketing organizations, to market AIG’s Power Series of fixed index annuities.

The Power Advantage 7 and Power Advantage 10 index annuities, tailored for Primerica and issued by AGL, provide principal protection, potential credits through exposure to equity indices, tax deferral and an optional lifetime income guarantee with a roll-up in the benefit base over the first 10 contract years.

According to a release, Primerica has more than 98,000 licensed insurance representatives nationwide. The company markets primarily to middle-income families. 

© 2015 RIJ Publishing LLC. All rights reserved.

In 1799, They Said ‘No’ to Taxes

Posted on April 8, 2015 by -

Tax season always reminds me of the Fries Rebellion of 1799, when, among the woods, hills, taverns, farms, fields and back roads near where I live, a group of German-speaking farmers resisted the first direct tax levied by the U.S. government and were nearly hanged for their trouble.   

John Fries, the leader of the protest, was a 48-year-old auctioneer—a ‘vendue crier’ in 18th century parlance—who lived with his wife and six children in a tiny cottage, still standing, along the road that led from Philadelphia, the nation’s capital, to Allentown, Pa., about 50 thinly settled miles to the north.

Fries (pronounced “freeze”) was no traitor, as a grand jury would call him. A veteran of the Revolution, he rode with President Washington to help suppress an earlier tax revolt in Pennsylvania—the Whiskey Rebellion of 1794—and had voted for the Federalist Party in local elections.

But because Fries spoke both German and English, and was widely known and trusted, he found himself the de facto leader of a loose band of agitated, lightly-armed and at times inebriated immigrant landowners. They shared a common fear that the Adams administration’s decision to tax their homes (to finance the “Quasi War” with France) was a step back to pre-1776 oppression and tyranny.     

The Fries Rebellion, also called the “Hot-Water War,” the “Milford Rebellion” (for the township where it started) and the “House-Tax War” is mostly forgotten today, even in the increasingly suburbanized region where it happened. But at the time, combatants on both sides believed that the nation’s future hinged on its outcome.

Strong drink and stronger words

The Fries affair occurred over just a few days in the second week of March 1799, in east central Pennsylvania’s Bucks, Lehigh and Northampton Counties. After local homesteaders thwarted tax assessors from measuring their log and stone residences, a U.S. marshal and posse traveled from Philadelphia to arrest a handful of supposed ringleaders in Macungie, Pa.

The marshal, posse and prisoners had stopped at a tavern in Bethlehem, and were preparing to return to Philadelphia, when Fries and about 100 men on horses, variously armed with pistols, muskets and swords but mainly barrel staves and clubs, appeared and demanded the release of the prisoners on bail. When the marshal refused, Fries freed them anyway.Fries Cottage  

Within days, news of the event reached President John Adams and Secretary Hamilton, who decided to crush the armed insurrection, as the Federalist press described it. A small Federal army rode north, captured Fries after a brief chase (they followed his dog, Whisky, to his hiding place), and escorted him and others to Philadelphia to be tried for treason, a capital offense. Hamilton, in particular, intended him to hang, as a warning to anyone else who was tempted to defy the central government.    

The most recent, the most thorough, and probably the most sympathetic account of this affair is Paul D. Newman’s “Fries’s Rebellion: The Enduring Struggle for the American Revolution” (University of Pennsylvania, 2004). In his retelling, the rebellion was characterized less by violence than by drunkenness and verbal threats, and some of those threats may sound funny to modern ears.

When the tax assessors first approached the houses in northern Bucks County, a homeowner threatened to “commit him to an old stable and there feed him on rotten corn.” In a confrontation in nearby Quakertown, one of the local residents cried out to an assessor, “Damn you Roderick, we have got you now, you shall go to the liberty pole and dance around it!” The government in Philadelphia was denounced as a parcel of “spitz-bube”—a local German epithet for thieves.

Vast amounts of alcohol were evidently consumed during the brief rebellion. It was natural for the protesters to meet at local taverns and public houses, and publicans uncorked quarts of whiskey and tapped barrels of beer for them and the crowds of onlookers they attracted. A few inebriated tax resisters tried to fire small weapons at the tax assessors, but according to Newman they were either too drunk to aim accurately or to load their weapons correctly.  In short, nothing as organized or as serious as the earlier Shay’s Rebellion in western Massachusetts or the Whiskey Rebellion was under way.

Four taverns survive

Yet serious issues were at stake. The “house tax” that the Federalist administration attempted to assess was America’s first direct tax. The tax was small (a mere $1 on the smallest houses) and progressive, but it was the first tax assessed directly on people and their possessions, and not on transactions. It was also a tax that defined houses in an arbitrary new way: personal wealth rather than as a personal expense. The tax fell more severely on yeoman farmers, who had improved their land, than on land speculators, who were merely waiting for prices to rise. It reminded farmers of the British Stamp Act, which helped trigger the American Revolution.

And bitter feelings already existed between the Federalists in Philadelphia and the farmers to the north. There were class barriers, language barriers, and cultural barriers, as well as deeply held prejudices, between the wealthy, English-speaking urban Quaker assessors and the largely poor, recently immigrated German-speaking Lutheran and German Reform farmers, who knew each other as “kirchenleute.”

Fries historical marker QuakertownThe political divide was just as deep. The farmers were mainly “republicans” (Jeffersonians) who had fought in the revolution 15 years earlier and valued personal liberty above all. The assessors, often Quaker pacifists who sat out the war, were Hamiltonians who favored a strong central government led by elites. The farmers, moreover, sympathized with the recent French revolution, and resented a tax that they knew would help finance a war against the French. The tax was also linked to the policy behind the repressive, anti-democratic Alien & Sedition Acts.

Fries was tried twice and convicted twice for treason (the first trial was declared a mistrial) and sentenced to hang. But Adams, who had known almost from the start that the so-called rebellion was nothing more than an overheated tax protest, pardoned him and sent him back to Bucks County, where he lived until his death in 1820. Fries’ nemesis, Hamilton, would die in 1804 in his famous duel with Aaron Burr in Weehawken, NJ, near what is now the west entrance to the Lincoln Tunnel.

You can find several reminders of the Fries Rebellion in my area, if you know where to look for them. A section of Rt. 663 between Quakertown and Pottstown has been designated the John Fries Highway. Just outside McCoole’s Red Lion Inn in Quakertown, a large historical plaque succinctly describes the rebellion. There’s also a small marker on Allentown Rd. pointing out John Fries’ cottage, which is in poor repair but still stands, visible from the road.

At least four of the taverns where the Fries protesters or tax assessors met, conspired and drank are still in active use. Besides the busy Red Lion Inn, there’s the restored Sun Inn in Bethlehem (a tony restaurant that’s currently between tenants). Also still in use are the Trum Tavern in Trumbauersville (formerly the Jacob Fries Tavern), where two of the tax assessors stopped for dinner, and the Commix Hotel (formerly Jacob Ritter’s Tavern), where the protesters watered their mounts en route from Macungie to Bethlehem.

The Trum Tavern and the Commix Hotels are lively, low-ceiling dive bars where locals go to smoke, drink Yuengling Lager, eat fried oysters and shoot pool. The two establishments are almost indistinguishable from dozens of other 18th and 19th century fieldstone taverns in this corner of Pennsylvania, where original surnames are still common and where, until the late 1980s, a few older people still spoke English with a “Dutch” (Deutsch) accent. After inhaling a pint of Yuengling (and a lot of secondhand smoke) at the Commix one recent evening, I stopped to read a historical plaque nailed to the wall outside. It said, “On This Spot in 1897, Nothing Happened.”    

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