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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.

Inside the Beltway, Disinformation Reigns

Posted on May 28, 2015 by Kerry Pechter -

Everyone who follows Washington closely presumably reads The Hill and relies on it to get the straight story. But an article published yesterday in that Beltway Bible about the Department of Labor’s conflict-of-interest proposal gave what I thought was a distorted view of the situation.

The first paragraph read:

“The Obama administration is forging ahead with new regulations for financial advisers, defying critics who warn the rules would make it harder for low-income people to obtain investment advice.”

Since the proposal is in a comment period, and will be subject to a public hearing and an additional comment period in the coming months, I don’t know what “forging ahead” is supposed to mean. Was the DOL supposed to have surrendered by now?

Sadly, the reporter has picked up the financial industry’s spin by suggesting that the conflicts-of-interest rule is about denying poor folk access to advice about their money. No matter how many times this talking-point gets repeated, it isn’t more than about two percent true. The robo-advisers and direct-providers like Fidelity, Schwab and Vanguard are going to fill the supposed advice gap. They already do. (A Fidelity vice president is quoted in The Hill’s story as favoring the DOL proposal. “Bring it on,” she said.)

The Hill article also perpetuates the fiction, which even the Department of Labor maintains for some reason, that this controversy concerns “advice.” The proposal isn’t really about advice. The rule, if passed in its current form, would have little or no effect on fee-based registered investment advisers and even less on fee-only certified financial planners.

The rule is about sales. It would discourage transaction-driven registered reps and insurance agents from accepting non-transparent third-party compensation for selling certain products. But even in its current form, the proposed rule isn’t very strict. It doesn’t ban commissions. It merely requires disclosure. (Does disclosing a conflict make it go away? I don’t think so.)

The Hill says advisers would have to disclose “how they receive payments off the sale of financial advice.” That’s not exactly true. They receive payments for selling products, not for selling advice.

Worst of all, the article omits any mention of IRA rollovers. This controversy is all about rollovers.

For years, the regulators and the financial services industry have watched a multi-trillion-dollar tsunami of Boomer savings move from cloistered 401(k) plans to retail rollover IRAs. The industry has been obsessed with “capturing” that money and exploiting the opportunity. The regulators is horrified at the idea of all that money, which it considers personal pension money, being lured into expensive products that will reduce retirees’ income.

A fog of disinformation continues to obscure the real issues—a fog that emanates from the administration, the industry and, evidently, The Hill.

The DOL is not the biggest threat to those who merely sell products. As I argued in last week’s issue of RIJ, the biggest threat to conflicted, labor-intensive, expensive distribution models is the emergence of cheap, objective competition from the digital advisory channel, aka robo-advice. The DOL, with its suggestions for timid half-measures like disclosure and “best interest” standards, seems relatively—relative to the Internet hordes, that is—sympathetic to the industry’s predicament.

That said, the government is messing things up. I don’t know why the president uses loaded expressions like “bilking” in his characterizations of the financial industry, even when referring only to its more predatory members. Why vilify or antagonize the people with whom you’re trying to negotiate? I guess that’s life inside the Beltway.

What happens when ‘the Fed yields’?

Posted on May 28, 2015 by Editorial Staff -

“The U.S. labor market is strengthening, inflation appears to have troughed and financial markets are looking frothy. What happens when the Federal Reserve (Fed) finally yields to this reality and raises short-term interest rates?”

So begins a whitepaper published this month by the BlackRock Investment Institute, entitled “When the Fed Yields: Dynamic as and Impact of U.S. Rate Rise.” It focuses on a topic of vital interest to the retirement industry, today and for years to come.

The conclusions reached by the BlackRock analysts are summarized below:

We expect the Fed to raise short-term interest rates in 2015—but probably not before September. Technological advances are set to keep dampening wage growth and inflation, reducing the need for the Fed to raise short-term rates as quickly and as high as in past tightening cycles.
The longer the Fed waits, the greater the risk of asset price bubbles—and subsequent crashes. Years of easy money have inflated asset valuations and encouraged look-alike yield-seeking trades. We would prefer to see the Fed depart from its zero interest rate policy (ZIRP) sooner rather than later.
A glut of excess bank reserves and the rise of non-bank financing mean the Fed’s traditional tools for targeting short-term rates have lost their potency. Overnight reverse repurchase agreements are part of the new playbook. We expect the Fed’s plan for ending zero rates to work, but do not rule out hiccups.
The impact of any U.S. rate hikes on long-maturity bonds is crucial. We suspect the Fed would prefer to see a gentle upward parallel shift in the yield curve, yet it has only a limited ability to influence longer-term rates. We detail how the absence of a steady buyer in the U.S. Treasury market will start to be felt in 2016.
QE has created asset shortages. This is feeding an appetite for lower-quality bonds, bond-like equities, real estate and private equity. Leverage is rising. The longer this lasts, the riskier. A sell-off triggered by an unwinding of leverage and magnified by poor liquidity could sink many boats. Think of it as a fruit market. A couple of people are buying up all the apples every day, irrespective of price. Other shoppers rush to buy pears, oranges and guavas to meet their vitamin C needs. Prices rise to record levels. Then one day the apple buyers disappear. The result: a rapid resetting of prices.
We see the yield curve flattening a bit more over time due to strong investor demand for long-term bonds. Demand for high-quality liquid fixed income assets from regulated asset owners alone (think insurers and central banks) is set to outstrip net issuance to the tune of $3.5 trillion in 2015 and $2.3 trillion next year.
The forces anchoring bond yields lower are here to stay—and their effects could last longer than people think. Yet yields may have fallen too far. Bonds today offer little reward for the risk of even modestly higher interest rates or inflation. A less predictable Fed, rising bond and equity correlations and a rebound in eurozone growth could trigger yield spikes.
Asset markets show rising correlations and low return for risk, our quantitative research suggests. We see correlations rising further as the Fed raises rates. We are now entering a period when both bonds and stocks could decline together. Poor trading liquidity could temporarily magnify any moves.
Overseas demand should underpin overall demand for U.S. fixed income, especially given negative nominal yields in much of Europe. Credit spreads look attractive—on a relative basis. U.S. inflation-linked debt should deliver better returns than nominal government bonds in the long run, we think, even if inflation only rises moderately.
Low-beta global equity sectors such as utilities and consumer staples have become bond proxies and look to be the biggest losers when U.S. yields rise. Cyclical sectors such as financials, technology and energy are potential winners.
Angst about Fed rate rises, a rising U.S. dollar and poor liquidity could roil emerging markets (EM). Yet EM dollar debt looks attractive given a global dearth of high-yielding assets. EM equities look cheap, but many companies are poor stewards of capital. We generally like economies with strong reform momentum.

Beware equity bubble in Europe: Cerulli

Posted on May 28, 2015 by Editorial Staff -

Asset managers need to take steps to avoid losing investors along with the exodus from European equity funds once the sugar-rush effect of quantitative easing (QE) has waned, warns the latest issue of The Cerulli Edge – European Monthly Product Trends Edition.

European equity funds are enjoying their strongest flows in several quarters, thanks in part to the European Central Bank’s monthly liquidity injections of €60 billion (US$66 billion) to bolster the eurozone. But asset managers should be gearing up for the inevitable end of the cycle, says Cerulli Associates, the global analytics firm.

“Once investors start sensing Europe has had its run, they will want to take out their money. To realize longer-lasting benefits, asset managers must convince clients to stick with the brand by offering strong products in another sector, such as emerging markets, which are now presenting buying opportunities,” says Barbara Wall, Europe research director at Cerulli Associates.

Cerulli notes that investors in countries such as Spain and Italy are once again keen on European equities, going through private banking channels. Asia is showing more interest, while funds are also flowing out of the United States after a strong run. U.S. investors who bought when the euro and dollar were nearing parity are enjoying a currency bonus.

Flows into long-term active European equity funds hit €14 billion for the first three months of 2015, the highest quarterly level since the first quarter of last year. Cerulli believes that further positive flows are likely to continue, but for months, rather than years.

“Asset managers should enjoy the QE bonus flows while they last. But the pattern is unlikely to be different from previous cycles, and the end may already be in sight. Positive developments such as the definitive U.K. election result are being offset by Greece remaining in crisis mode,” says Brian Gorman, an analyst at Cerulli.

Other Findings:

Italy, Germany, and Spain were the most successful European countries for the first quarter of 2015, gathering €12 billion, €14 billion, and a €3 billion respectively, driven in the main by investors’ demand for mixed assets and euro bonds, which attracted €12.2 billion and €8.5 billion.
European exchange-traded funds tracking Japanese equities saw net inflows rising to €1 billion in March from €370 million during February, as investors abandoned U.S. and U.K. equities in favor of opportunities in Japan.
Italian funds remain out in front for inflows among European markets, even if March did not quite match February’s stellar achievement. Mixed assets accounted for half the flows, and were slightly down on the previous month. Bond flow rates picked up. Money market funds, which have suffered outflows every month so far in 2015, were the only negative category.

FIAs on pace for record sales year: Wink

Posted on May 28, 2015 by Editorial Staff -

At $11.3 billion, first quarter 2015 indexed annuity sales were down nearly 5% from the previous quarter but up nearly 5% compared with the same period last year, according to the Wink’s Sales & Market Report, which represents 49 carriers and 99.8% of indexed annuity production.

“Indexed annuity sales began the year with sales greater than any other first quarter has in the history of the product line,” said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink, Inc., in a release.

Allianz Life maintained its sales leadership position with a market share of 20.3%. American Equity Companies was again the second-ranked carrier, while Security Benefit Life, Great American Insurance Group, and Athene USA again rounded out the top five. Allianz Life’s Allianz 222 Annuity was the best-selling contract for the third consecutive quarter.

Guaranteed Lifetime Withdrawal Benefit (GLWB) utilization declined for the second consecutive quarter, while experience data pointed to trends in rider elections and income commencement.

“Income sales continue to take a backseat to accumulation sales, due to recent development of hybrid indices that give distributors the ability to promote ‘uncapped’ crediting methods,” Moore said.

For indexed life sales, 47 insurance carriers participated in Wink’s Sales & Market Report, representing 95.3% of production. First quarter sales were $380.3 million. When evaluating first quarter indexed life sales, results were down nearly 24.0% when compared with the previous quarter, and up over 15.0% when compared to the same period last year. Ms. Moore stated, “Indexed life also produced a strong kick-off to 2015 sales as this quarter was greater than any other first quarter in the history of this product line. As we saw with the previous year sales, indexed life sales remain strong, despite the on-going regulatory controversy regarding illustrated rates.”

Items of interest in the indexed life market this quarter include Aegon obtaining the #1 position in indexed life sales, with a 13.7% market share. Pacific Life finished as second-ranked company in the market; National Life Group, Minnesota Life, and Nationwide rounded-out the top five companies, respectively. Western Reserve Life Assurance Company of Ohio’s WRL Financial Foundation was the #1 selling indexed life insurance product for the fifth consecutive quarter. The average indexed UL target premium reported for the quarter was $6,936, a decline of more than 10% from the prior quarter.

Cannex releases new version of its product allocation software

Posted on May 28, 2015 by Editorial Staff -

CANNEX, the Toronto-based provider of retirement product pricing data and other services to U.S. and Canadian financial firms, has released PrARI 4.0, the latest version of its trademarked Product Allocation for Retirement Income service, the company announced today.

Platform enhancements include the support of Qualified Longevity Annuity Contracts (QLACs) and deferred income annuity (DIA) allocations, living benefit options, fixed income and equity investments, as well as pension analysis.

The allocation service is configured to support proprietary retirement income programs as well as model portfolios offered by financial institutions in the retirement industry.

The enhanced service includes QLAC products that have been available and supported on the CANNEX Income Annuity Exchange since the first quarter of 2015. The recent QLAC Ruling by the U.S. Treasury represents another incentive for retirees to consider the allocation of guaranteed income products as part of their portfolio in retirement.

Real time pricing from the Income Annuity Exchange are integrated into the allocation process.

The enhanced service has also been configured to support a wider variety of guaranteed living benefit options that are offered with both variable and fixed indexed annuities. Web service support allows firms to incorporate the PrARI process into their existing retirement platforms and services.

“With an increase in the number of retiring baby boomers and the constant evolution of guaranteed income products, financial advisors and their clients need to understand what is currently available to help in determining the appropriate mix of investment and insured products in support of their financial plan in retirement,” said Faisal Habib, President of the QWeMA Group, a division of CANNEX, in a release.

“The PrARI methodology and service helps both product manufacturers and distributors provide the necessary information and guidance to make an informed decision about the purchase of annuities and other investments,” he said.

Moshe Milevsky and the QWeMA group developed the PrARI service in 2008. It is used by a variety of financial institutions in support of their retirement income programs and practices.

CANNEX Financial Exchanges Ltd. compiles data and calculations about a variety of financial products and distributes it to financial service providers and the media through a central service across North America. In the U.S., this includes comparative pricing, illustration and valuation tools for guaranteed lifetime income products such as income annuities and deferred annuities with guaranteed living benefits.

The Bucket

Posted on May 28, 2015 by Editorial Staff -

John Hancock buys adviser software provider

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

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

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

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

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

Broadridge to buy data unit from Thomson Reuters Lipper

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

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

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

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

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

Prudential TDF series exceeds $1 billion in assets

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

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

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

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

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

MassMutual promotes a vice president and hires another

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

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

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

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

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

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

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

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

Stan the Annuity man QLAC Book

Posted on May 22, 2015 by Editorial Staff -

Stan the Annuity Man QLAC book

A Two-Headed Nightmare: The Robos and the DOL

Posted on May 21, 2015 by Kerry Pechter -

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

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

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

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

The ‘best interest’ compromise

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

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

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

Deep-six the red herring

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

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

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

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

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

Amazon-ification

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

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

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

Inspiring Economic Growth

Posted on May 21, 2015 by Robert Shiller -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question: Is ‘File and Suspend’ a Loophole?

Posted on May 21, 2015 by Editorial Staff -

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

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

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

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

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

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

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

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

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

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

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

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

First quarter annuity sales rankings, from LIMRA

Posted on May 21, 2015 by Editorial Staff -

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

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

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

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

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

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

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

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

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

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

Posted on May 21, 2015 by Editorial Staff -

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

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

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

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

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

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

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

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

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

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

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

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

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

The decision

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

The decision then summarized its holding as follows:

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

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

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

Our thoughts

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

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

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

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

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

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

Posted on May 21, 2015 by Editorial Staff -

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

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

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

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

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

John Hancock buys adviser software provider

Broadridge to buy data unit from Thomson Reuters Lipper

Prudential TDF series exceeds $1 billion in assets

MassMutual promotes a vice president and hires another

Data Connection