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RetirePreneur: Lowell Aronoff

Posted on May 5, 2015 by Jenna Gottlieb -

What I do: I run a company that facilitates the sale of financial products. In the U.S. we have focused on the annuity markets. CANNEX provides a surveying service for immediate income annuities. Each participating carrier provides us with its unique pricing method. We re-program these algorithms onto our server and then provide distributors and advisors with apples-to-apples comparisons of prices. Each price is specific to the adviser’s customer, we show only those carriers that the advisor is licensed with, and each quoted carrier guarantees its annuity quote. We provide similar guaranteed surveys of the single-premium deferred income annuity market. We also provide a variety of analytical tools to help advisers calculate and explain retirement income needs. These include a product that calculates an optimal allocation between three classes of retirement income generators—managed accounts, annuities with guaranteed living benefit riders and income annuities. L Aronoff copy block

My clients are: Primarily insurance companies and distributors, – including broker-dealers, insurance marketing organizations and banks. We avoid working directly with consumers because we do not want to compete with our distributor clients who are in a better position to offer personalized advice.

Where I came from: I started my career in Montreal working in Prudential of England’s actuarial department. I found myself drawn to programming actuarial functions so I took a job with a start-up organization called CANNEX that was still a few months away from launching its first product—a method to instantly survey the income annuity market.

To me, entrepreneurship means: Pursuing an idea or dream. This involves trading some financial security for more control of your destiny.

What made me strike out on my own: At the time I had a fabulous opportunity. The concept/product was needed and I was confident that it would make a difference. I was young enough that I had no personal or financial commitments. I could put all my time and energy into the company without needing to draw a salary for more than two years.

Who owns CANNEX: The three principal owners are Alex Melvin, Moshe Milevsky and me. Most of the other shareholders are family and friends who helped us out when Alex and I bought the company from the founding shareholders. The rest are employees who have purchased shares over the years.

My business model: Fundamentally, we charge everyone who benefits from the service. Our flagship product is an income annuity exchange. Carriers pay to be included and distributors pay for the illustrations they receive from the service. By charging both carriers and distributors we can keep our fees lower.

My biggest obstacle at the beginning: CANNEX started before personal computers were popular and the World Wide Web had not yet been envisaged. At the time, getting technology into the hands of advisors to allow them to communicate with our mini-computer was an issue, as was gaining trust and getting acceptance for a start-up organization that changed the way annuities are sold.

How we changed the way annuities are sold: Before CANNEX, advisors would typically lug telephone-book-sized rate books to each client’s home where they would discuss the client’s need, and then do a different calculation by hand for each insurance company based on a few numbers found in each insurance company’s rate book in order to figure out how much each company was prepared to offer their client.

Why we expanded to the U.S.: It was working in Canada, and there was no U.S. competitor. The service was needed and we had experience expanding to Australia. We eventually sold our Australian operation because distance made management difficult. The U.S. was and is a natural market, with similar needs, the same time zones, and largely the same opportunity as our Canadian service.

Our biggest ongoing challenge: Keeping experienced, excellent staff happy, challenged and motivated. This involves absorbing the input of very capable individuals in setting the company’s priorities. When people become overworked, which happens when you grow quickly, it’s important to find creative ways to split the overworked person’s job in two. Another challenge in running a two-country company is determining priorities. Our software development resources are not split between the two countries. The same person will work on a U.S. project one week and a Canadian project the next.

My retirement philosophy: I don’t think retirement is a good idea for people who are healthy and thoroughly enjoy their work. I’m lucky enough to fall into both those categories. Like most people, I have a hard time planning more than five or 10 years out, so I have no plans to retire in the foreseeable future. If and when I do retire I would buy an income annuity—but not for the usual reasons. I am constitutionally a saver, so whether I buy an income annuity or not, there is no real danger that I would run out of money. However, there is a risk that I would spend far below my means. A guaranteed check that I know will be there every month for the rest of my life would help counter my natural tendency to avoid spending.

Who’s Doing What with QLACs Now

Posted on April 30, 2015 by Kerry Pechter -

Which of the following hashtags is trending on Twitter:

#awristwatchwhosetimehascome?

#weneverpromisedhillaryarosegarden?

#qualifyinglongevityannuitycontracts?

If you guessed the third one, you’re probably in the insurance business. By all accounts, few people outside the annuity industry have heard of QLACs. Fewer know what QLACs let retirees do: defer taxable distributions from up to $125,000 in qualified money until as late as age 85.

But a subset of the annuity world is fairly jazzed about QLACs, and for good reason: They could open up billions of rollover IRA dollars to sellers of deferred income annuities.

To date, seven life insurers have issued QLACs, with more to come. Home offices and IMOs (insurance marketing organizations) have begun acquainting agents and producers with this strange new acronym and the product behind it.

In this article, and in an article next week, we’ll tell you about:

Life insurers that issue QLACs.
Independent websites that promote them.
Strategies for selling them. (Coming next week in RIJ.)

Clearly, this product (which has also been cleared for use in 401(k)-type plans) is in its earliest stages. But many people feel that curiosity about the tax benefits of QLACs will open the door to broader conversations about other guaranteed lifetime income products with people who may not have known about any of them before. And the potential market—some $25 trillion in qualified savings—is irresistible.

Life insurers that issue QLACs

In July 2014, the Treasury Department announced specific guidelines for QLAC designs—e.g., no premium greater than 25% of qualified savings (up to $125,000) and a mandatory return of premium death benefit in the deferral period. So QLACs don’t vary much from issuer to issuer. Some contracts offer more income start-date flexibility than others. Prices will obviously fluctuate with interest rates and carrier appetite.

AIG. AIG’s American General unit issued its American Pathway QLAC last December. Contract owners who choose a cash refund option can accelerate or delay their income start date by up to five years, and have several inflation-adjustment options.

Americo Financial Life and Annuity. This final-expenses specialist filed an applied for approval to issue its DIA as a QLAC last September. “We have had a DIA for many years, and quickly made the adjustments to meet QLAC requirements,” said Todd Adrian, Americo’s senior marketing manager, product development. “Our DIA is pretty straight forward with no special features or flexibility beyond Treasury requirements.”

First Investors Life. Carol Springsteen, president of this unit of The Independent Order of Foresters, told RIJ recently,“We will be endorsing our current deferred income annuity contract to facilitate a QLAC version. We plan to endorse our new Flexible Pay Longevity Annuity product to be a QLAC as well.”

Lincoln Financial. “We launched our DIA in November 2013, and added the QLAC status in February 2015,” said Dan Herr, vice president, annuity product management. “We released it on a limited basis, in certain firms—mainly in the MGA (managing general agent) channel—where it was an easy rollout. The national rollout will be in mid-May. Our contract can be offered with or without the return of premium after the income start date.”

Pacific Life. The company with the humpback whale logo introduced its QLAC on April 6. Christine Tucker, vice president of marketing in Pacific Life’s Retirement Solutions Group, said in a release that the company is offering the resources of its Retirement Strategies Group and Advanced Marketing Group to help “financial professionals examine the application of QLACs in a variety of financial strategies.”

Principal Financial. The Principal announced its QLAC on February 3. The Principal’s DIA and its QLAC include a return-of-premium death benefit if the contract owner(s) die during the deferral period. A return of unpaid premium rider for the income period is optional.

Thrivent Financial. “We were able to launch on January 16,” vice president Wendy McCullough told RIJ. “It was a little bit onerous because we had to build processes for remedying excess contributions, among other things, in ways that the IRS would accept. Now we’re rolling it out to our captive force. We’ve noticed that the newer retirees have more qualified than non-qualified assets, and up until now they couldn’t get longevity protection at later age. With QLAC, they have that option.”

Issuers in the wings. The biggest DIA issuers haven’t announced QLACs yet. New York Life, which has a 42% share of the DIA market, and Northwestern Mutual, have each filed for state approval of their QLAC and expect to launch products this summer. A MassMutual spokesman said, “We continue to actively evaluate” as an option for IRA owners and retirement plan participants.”A Guardian Life spokesperson said “Guardian is planning to launch its first QLAC later this year.” MetLife “has yet to enter the market but we hope to soon,” a company spokesman told RIJ recently.

Websites that promote QLACs

So much for the manufacturers; what about the distributors? QLACs are insurance products, so captive (for the big mutual company QLACs) and independent agent channels will account for most sales. A number of insurance and annuity websites have begun offering calculators, educational material, FAQs, and quotes about QLACs, along with connections to live licensed agents via toll-free numbers.

Go2income.com Jerry Golden, who created the world’s first guaranteed minimum income benefit rider while at Equitable Life in the late 1990s and sold a retirement income planning tool to MassMutual in the mid-2000s, has since launched a venture called Golden Retirement LLC. A beta version of its proprietary QLAC payout quote tool can be seen at go2income.com. “The QLAC is going to open up a lot of people’s eyes to the benefits of income annuities in general,” Golden told RIJ this week.

Immediateannuities.com. Through this site, insurance executive-turned-web- entrepreneur Hersh Stern and his licensed agents has been providing quotes and selling SPIAs directly to the public for many years. A couple of years ago, he added indexed annuities. He is now offering QLACs as well. There’s a QLAC education page on the website, a payout calculator, a QLAC FAQ page, and a video of Christina Benz, Morningstar’s director of personal finance, about QLACs.

IncomeSolutions.com. This website, created by the Hueler Companies, is an open-architecture platform where participants in certain retirement plans (Vanguard plans, for instance) and others can get competitive bids on immediate and deferred income annuities when they change jobs or retire. In April, Income Solutions started offering QLACs from The Principal and AIG, two publicly held insurers that use third-party distribution.

Myabaris.com. Matt Carey, a licensed insurance agent and MBA candidate at the Wharton School, who once worked on retirement issues at the Treasury Department, has started a business that specializes in the sale of DIAs and, starting in June, QLACs. “The QLACs we can sell right now are from AIG, Lincoln Financial, Pacific Life, and Principal,” Carey told RIJ. He and a partner are acting as agents for individuals and for advisers who otherwise don’t handle insurance sales. They hope to make buyer-behavior data available to the carriers they represent.

Safemoneysmart.com. Coeur d’Alene, Idaho insurance wholesaler Sean Ruggiero created this website for his business, but plans to convert it to a non-profit educational site to help insurance producers learn more about retirement income, including QLACs. “QLACs are a big deal. They will have a big impact on clients and advisers—but not immediately,” Ruggiero told RIJ.

Stantheannuityman.com. The sponsor of this site, Stan Haithcock, is well known in the insurance world as a speaker, a producer and a promoter of annuities as income products rather than accumulation products. He has also written an instant book about QLACs, which he makes available on his site.

Synergyannuity.com. “We love the QLAC. RMD planning is hugely overlooked,” said Eric Estrada, the product and marketing guru at this Houston-based IMO. “Right now, everyone is on the Social Security planning bandwagon. But clients have no idea about what to do with money on the sidelines in qualified accounts.”

Qlacs.com. Someone had to claim the “qlacs” domain. The owner is Alternative Brokerage, an IMO whose founder is Bob Phillips, a former chair of the National Association of Fixed Annuities.

Fidelity.com. The retirement giant, which has an online platform where consumers can compare and purchase deferred income annuities from Guardian, MassMutual, MetLife, New York Life and The Principal, will soon offer QLACs. (Only one of its DIA issuers—The Principal—has announced a QLAC yet.) “We don’t have them right now, but we anticipate offering them in the second half of the year,” a Fidelity phone rep told RIJ this week.

Next week: How to Market QLACs.

America’s Risky Recovery

Posted on April 30, 2015 by Martin Feldstein -

The United States’ economy is approaching full employment and may already be there. But America’s favorable employment trend is accompanied by a substantial increase in financial-sector risks, owing to the excessively easy monetary policy that was used to achieve the current economic recovery.

The overall unemployment rate is down to just 5.5%, and the unemployment rate among college graduates is just 2.5%. The increase in inflation that usually occurs when the economy reaches such employment levels has been temporarily postponed by the decline in the price of oil and by the 20% rise in the value of the dollar. The stronger dollar not only lowers the cost of imports, but also puts downward pressure on the prices of domestic products that compete with imports. Inflation is likely to begin rising in the year ahead.

The return to full employment reflects the Federal Reserve’s strategy of “unconventional monetary policy”—the combination of massive purchases of long-term assets known as quantitative easing and its promise to keep short-term interest rates close to zero. The low level of all interest rates that resulted from this policy drove investors to buy equities and to increase the prices of owner-occupied homes. As a result, the net worth of American households rose by $10 trillion in 2013, leading to increases in consumer spending and business investment.

After a very slow initial recovery, real GDP began growing at annual rates of more than 4% in the second half of 2013. Consumer spending and business investment continued at that rate in 2014 (except for the first quarter, owing to the weather-related effects of an exceptionally harsh winter). That strong growth raised employment and brought the economy to full employment.

But the Fed’s unconventional monetary policies have also created dangerous risks to the financial sector and the economy as a whole. The very low interest rates that now prevail have driven investors to take excessive risks in order to achieve a higher current yield on their portfolios, often to meet return obligations set by pension and insurance contracts.

This reaching for yield has driven up the prices of all long-term bonds to unsustainable levels, narrowed credit spreads on corporate bonds and emerging-market debt, raised the relative prices of commercial real estate, and pushed up the stock market’s price-earnings ratio to more than 25% higher than its historic average.

The low-interest-rate environment has also caused lenders to take extra risks in order to sustain profits. Banks and other lenders are extending credit to lower-quality borrowers, to borrowers with large quantities of existing debt, and as loans with fewer conditions on borrowers (so-called “covenant-lite loans”).

Moreover, low interest rates have created a new problem: liquidity mismatch. Favorable borrowing costs have fueled an enormous increase in the issuance of corporate bonds, many of which are held in bond mutual funds or exchange-traded funds (ETFs). These funds’ investors believe – correctly – that they have complete liquidity. They can demand cash on a day’s notice. But, in that case, the mutual funds and ETFs have to sell those corporate bonds. It is not clear who the buyers will be, especially since the 2010 Dodd-Frank financial-reform legislation restricted what banks can do and increased their capital requirements, which has raised the cost of holding bonds.

Although there is talk about offsetting these risks with macroprudential policies, no such policies exist in the US, except for the increased capital requirements that have been imposed on commercial banks. There are no policies to reduce risks in shadow banks, insurance companies, or mutual funds.

So that is the situation that the Fed now faces as it considers “normalizing” monetary policy. Some members of the Federal Open Market Committee (FOMC, the Fed’s policymaking body) therefore fear that raising the short-term federal funds rate will trigger a substantial rise in longer-term rates, creating losses for investors and lenders, with adverse effects on the economy. Others fear that, even without such financial shocks, the economy’s current strong performance will not continue when interest rates are raised. And still other FOMC members want to hold down interest rates in order to drive the unemployment rate even lower, despite the prospects of accelerating inflation and further financial-sector risks.

But, in the end, the FOMC members must recognize that they cannot postpone the increase in interest rates indefinitely, and that once they begin to raise the rates, they must get the real (inflation-adjusted) federal funds rate to 2% relatively quickly. My own best guess is that they will start to raise rates in September, and that the federal funds rate will reach 3% by some point in 2017.

Martin Feldstein is a professor of economics at Harvard University and president emeritus of the National Bureau of Economic Research.

On the Road with RIJ: Penn’s Archaeology Museum

Posted on April 30, 2015 by Kerry Pechter -

RIJ is reporting this week from the Museum of Archaeology at the University of Pennsylvania, where the Wharton School’s Pension Research Council is holding its annual symposium. Right now, David Tuesta, chief economist of BBVA Research in Madrid, Spain, is presenting slides on the pros and cons of investments in infrastructure by pension funds worldwide.

This event’s attendees perennially include a high concentration of pension experts who are well known in the retirement field, especially in the academic wing of the business. There’s no red carpet here, but the luminaries I’ve spotted so far include Stacy Schaus of PIMCO, Amy Kessler of Prudential, Raymond Maurer of Goethe University in Frankfurt, Gary Mottola of FINRA (formerly of Vanguard), consultant Jodi Strakosch (formerly of MetLife Retirement) David John of AARP and, of course, Olivia Mitchell, the director of the Pension Research Council—just to name the ones I saw while grabbing a croissant, coffee and cantaloupe slices at the breakfast buffet.

The speaker who follows Tuesta is Peter Fisher of Tapestry Networks, a corporate governance consulting firm. He’s describing an international organization, the Insurance Governance Leadership Network, where non-executive directors from global insurance companies talk with regulators about high-level insurance and accounting issues. It’s something I probably should have known about already. Its members, according to one slide, include Liberty Mutual, Lincoln Financial Group, MetLife, the National Association of Insurance Commissioners, Moody’s Investors Services, Travelers, and the Federal Reserve System. Heavy, stratospheric stuff; it will require further investigation. (At right, a Greek coin from the museum’s collection.)

Fredrik Axsater of State Street Global Advisors, followed up these two speakers with a commentary on their presentations. He observed that there are obvious conflict-of-interests associated with investments by a national pension plan in the same country’s infrastructure projects. (In the U.S., much of the local infrastructure is financed with municipal bonds or federal dollars.)

Investments in infrastructure also tend to be illiquid, he noted, so they will be hard to offer within defined contribution plans as long as those plans involve daily valuations and trading. Those issues aside, he favored pension investments in infrastructure. (During a Q&A period, there was some debate about whether the biggest barriers to pension fund investment in infrastructure is regulation, or the high fees associated with private equity firms that often broker big infrastructure deals, or the complexity of infrastructure projects, or the risk-averse nature of pension fund boards. The answer is probably, “All of the above.”)

The low-yield environment is perhaps the biggest danger for retirement savers, Axsater said. According to State Street calculations back in 2007, Americans who saved and invested 11% of their income per year would be able to replace 65% to 80% of their final incomes in retirement.

Given the latest predictions for lower investment returns in the future, however, State Street now believes that an 11% savings rate would only produce a 45% replacement rate. “I call that a shock to the system,” he said. To close that gap, his firm believes that people may have to retire a few years later, somehow squeeze an extra 50 more basis points of yield from their portfolios, and/or buy a life annuity that starts paying income at age 80.

Webinar on DOL proposal

Yesterday at 4 p.m., ERISA super-lawyer Marcia Wagner presented a webinar on the new DOL conflict-of-interest proposal. The webinar was mainly a recitation of the major points of the proposal, but Wagner also provided some of expert commentary—which is what we were all waiting for. You can find a copy of the slides here.

In brief, Wagner believes that the “DOL proposal will affect substantially all advisors because of reach to IRA assets,” that it will be “costly for broker-dealers and insurance agencies,” that the so-called Best Interest exemption disclosures “appear to significantly exceed 408(b)(2) fee disclosures,” and that the proposal will have “little or no impact on RIAs, but certain advisors may decide to join or become RIAs.”

Annuity CEOs receive disclosure demands from Sen. Warren

Posted on April 30, 2015 by Editorial Staff -

U.S. Senator Elizabeth Warren (D-MA), the crusader for consumer financial protection and scourge of the financial services industry, has sent identical letters to executives at 15 different life insurance company executives asking for an inventory of their annuity sales incentives, if any.

A ranking member of the Senate subcommittee on Economic Policy and at one time a candidate to lead the Consumer Financial Protection Bureau, Warren asked the executives to provide the information by May 11, less than two weeks from now.

Chief executive officers at AIG, Allianz Life, AXA Equitable, AVIVA [now Athene], American Equity Investment Life, Transamerica, TIAA-CREF, AIG, RiverSource Life, Prudential Annuities, Pacific Life, New York Life, Nationwide Financial, MetLife, Lincoln Financial Group, and Jackson National Life received the letters.

Spring 2015 issue of The Journal of Retirement appears

Posted on April 30, 2015 by Editorial Staff -

The Spring 2015 issue of the Journal of Retirement (Vol. 2, No.4) has just been published. The magazine’s current contents include:

“Two Determinants of Lifecycle Investment Success,” by Jason C. Hsu, Jonathan Treussard, Vivek Viswanathan and Lillian Wu.

“Investor Sophistication and Target-Date Fund Investing,” by Michael A. Guillemette, Terrance K. Martin, and Philip Gibson.

“Re-examining ‘To vs. Through’: What New Research Tells US about an Old Debate,” by Matthew O’Hara and Ted Daverman.

“Individuals Approaching Retirement Have Options (Literally) to Secure a Comfortable Retirement,” by Brian Foltice.

“Allocating to a Deferred Income Annuity in a Defined Contribution Plan,” by David Blanchett.

“Measuring and Communicating Social Security Earnings Replacement Rates,” by Andrew G. Biggs, Gaobo Pang and Sylvester J. Schieber.

“The Impact of Employment and Earnings Shocks on Contribution Behavior in Defined Contribution Plans, 2005-2009,” by Irena Dushi and Howard M. Iams.

A review of Moshe Milevsky’s new book, “King William’s Tontine: Why the Retirement Annuity of the Future Should Resemble Its Past,” by Journal of Retirement editor George A. (Sandy) Mackenzie.

DTCC enhancement will allow settlement of 1035 exchanges in one day

Posted on April 30, 2015 by Editorial Staff -

The Depository Trust & Clearing Corporation (DTCC), which processes millions of trades each night for the global financial services industry, has enhanced its “Settlement Processing for Insurance” (STL) functionality to automate the 1035 exchange process and allow settlement to take place within one day.

The asset transfers that are known as 1035 exchanges, or replacements, allow investors to move funds from one life insurance, annuity or endowment to another, without triggering an immediate tax obligation. They also often create an operational burden for insurance carriers.

“Industry representatives approached DTCC in mid-2014 for an automated 1035 exchange transaction solution to lower the costs and risks associated with manual processes,” DTCC said in a release this week. “Currently, carriers administer manual, costly and potentially error-prone processes, including the issuance of checks and wire transfers, which can create misrouted money risk.”

In response, DTCC’s Insurance & Retirement Services (I&RS) unit led an industry working group, which included members of the Insured Retirement Institute’s Replacement Automation work group. The result of their analysis was the “Settlement for Replacements” expansion. The new enhancement automates the 1035 exchange process, allowing settlement to take place within one day.

STL automates settlement processing for the movement of life insurance premiums, systemic withdrawals, full and partial surrenders, and mandatory distributions within the suite of Insurance and Retirement Processing Services of National Securities Clearing Corporation, a DTCC subsidiary.

Allianz Life adds new managed risk options on VA

Posted on April 30, 2015 by Editorial Staff -

Allianz Life Insurance Company of North America has launched two new investment options for its Allianz Vision Variable Annuity and Allianz Connections Variable Annuity options.

Managed risk options are part of an ongoing trend among variable annuity issues to reduce risk. In January, Lincoln Financial launched similar riders for variable annuity products.

Allianz’s AZL MVP DFA Multi-Strategy Fund and its RCM Dynamic Multi-Asset Plus VIT Portfolio are now available on contracts that either have no additional optional benefits or have the optional Income Protector rider. These investment options offer clients an additional asset allocation option and Allianz can better manage risk.

The AZL MVP DFA Multi-Strategy Fund combines strategies into an asset allocation composed of U.S. large and small-cap, international and emerging markets equity, and global fixed income asset classes through the MVP risk management process, which is in place to manage the risk of market exposure.

When overall market volatility is generally moderate or low, the MVP risk management process participates with the market equal to the risk of the investment option thus minimizing its protection aspect. During periods of higher market volatility, the MVP risk management process seeks to reduce volatility with the goal of minimizing extreme negative outcomes.

The RCM Dynamic Multi-Asset Plus VIT Portfolio (DMAP) strategy seeks capital appreciation and risk mitigation relative to a global 60% equities/40% fixed-income benchmark. The DMAP strategy favors riskier asset classes when trends and fundamentals are positive and becomes more defensive in its positioning when they are not, according to the firm.

The investment team has the ability to dynamically adjust the equity allocation up to 65% when markets are favorable and down to 10% in times of market stress offering opportunity for enhanced returns and risk control for investors through active asset allocation.

The Bucket

Posted on April 30, 2015 by Editorial Staff -

“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.

FIA: Unofficial MVP of the LIMRA Conference

Posted on April 23, 2015 by Kerry Pechter -

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.

Voya Hires New Retirement Chief

Posted on April 23, 2015 by Kerry Pechter -

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.

Question: Can the DOL regulate advice on IRAs?

Posted on April 23, 2015 by Editorial Staff -

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.”

Wealth protects health—but not permanently: EBRI

Posted on April 23, 2015 by Editorial Staff -

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.

Grasshoppers know they should act more like ants

Posted on April 23, 2015 by Editorial Staff -

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.

BlackRock fined $12 million for fund manager conflict of interest

Posted on April 23, 2015 by Editorial Staff -

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.

Video: Elizabeth Warren at the National Press Club

Posted on April 23, 2015 by Editorial Staff -

DOL to Advisors: ‘Take the Pledge’

Posted on April 17, 2015 by Kerry Pechter -

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.

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

Posted on April 17, 2015 by Editorial Staff -

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.

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

Posted on April 17, 2015 by Editorial Staff -

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.

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

Posted on April 17, 2015 by Editorial Staff -

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.”

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