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Are Annuity Buyers Smarter than Other People?

Posted on April 8, 2015 by Kerry Pechter -

In the first quarter of 2015, almost a quarter of a million people bought immediate or deferred single premium income annuities, according to CANNEX. More than half were ages 55 to 70, and 40% of their purchase payments were between $75,000 and $200,000.

Why those people? Were they different from their peers who didn’t buy income annuities? And if so, how were they different?

It’s possible that they were smarter, better educated or more financially literate than their peers, and therefore better able to appreciate the long-term value of annuities, according to a new paper by a panel of researchers that included Olivia Mitchell of the Wharton School and Jeff Brown of the University of Illinois.

Mitchell, Brown and co-authors Arie Kapteyn of USC and Erzo Luttmer of Dartmouth, tested the hypothesis that many ordinary people—like kids who don’t understand the potential long-term gains from eating the broccoli on their dinner plates—avoid annuities because they can’t tell whether the price is fair or not.

To find out if people have difficulty analyzing the present value of an annuity, they asked members of a survey group to tell them either how much they would pay to get an extra $100 a month in Social Security income or how much they would demand to compensate them for giving up $100 a month in Social Security income.

It turned out that the spread between asking and offering prices was very wide, suggesting that many people can’t easily evaluate an income stream. The spread was widest for people with the least cognitive ability (as measured by education level, financial literary and numerical ability).

“If valuing an annuity is difficult, research indicates that individuals will only be willing to buy or sell when the deal is clearly advantageous: the respondents would only be willing to buy an additional $100 a month at a low price, and would only sell $100 a month at a higher price. Thus, the gap between the two prices should be significant, and the gap should widen as cognitive ability declines,” the researchers wrote.

“The figure shows that most respondents were only willing to buy the $100 annuity when the price was very low. The median price they were willing to pay was $3,000 – an amount they would recoup in monthly payments in just two and a half years. And they were only willing to sell the $100 annuity at a much higher price: the median selling price was $13,750. As a point of reference, the actuarial value of $100 in Social Security benefits – using mortality and interest rate assumptions from the Social Security Administration’s Trustees – is $16,855.”

Through further experiments, the researchers ruled out the possibilities that other behavioral factors—the so-called “endowment” effect, “anchoring” effects, or mere lack of money—might account for wide range in ability to put an accurate present value on the incremental income.

“Many individuals, on their own, are unable to make good decisions about managing their money in retirement,” the researchers asserted, adding that “the observed lack of annuitization does not necessarily mean that people are better off without annuities.”

Other explanations have been suggested for the low demand for annuities, a phenomenon that has long baffled behavioral economists. It’s been noted that almost every American retiree already has a life annuity in the form of Social Security. It’s been noted that few investment advisors recommend income annuities, in part because they prefer to sell investment products.

It’s also been suggested that people who can accurately value annuities know that the price includes a premium of about 15% to cover the costs of distribution and adverse selection. And, clearly, annuities face a public relations headwind. Annuity purchasers might also be more risk-averse than others, or have been personally touched by someone’s decision to buy or not buy an annuity, or are especially wary of inflation.

A wide range of studies have shown that many if not most Americans are, in fact, financially illiterate. But the idea that most people aren’t equipped to manage their own retirement savings isn’t likely to be politically popular, even if it’s true.

In the U.K., ironically, the Tory government recently decided that people do know how to manage their own money, and they’ve ended the long-standing requirement that retired Britons buy annuities with their tax-deferred savings. The new policy went into effect this week.

Secrets of Tax-Efficient Drawdown

Posted on April 8, 2015 by Editorial Staff -

The well-known authors of a book on Social Security claiming strategies have turned their attention to a perennial financial problem for retirees: how to minimize the annual tax bill when drawing income from a hodgepodge of taxable and tax-deferred accounts.

In a paper in the March/April issue of the Financial Analysts Journal, William Meyer and William Reichenstein, authors of Social Security Strategies: How to Optimize Retirement Benefits, along with Kirsten Cook of Texas Tech University, depart from making the usual recommendation to drain taxable accounts first, then tax-deferred accounts, and then Roth IRAs.

Instead, they suggest tapping tax-deferred accounts early in retirement, but without taking out more than will fall within the 15% marginal tax rate. Their approaches, they claim, can add several years to the life of a retirement portfolio.

“The optimal strategy is substantially different from the strategy espoused by the conventional wisdom,” the authors write.

In their article, “Tax-Efficient Withdrawal Strategies,” they simulate a retiree with $916,500 in a tax-deferred IRA, $234,900 in a Roth IRA, and $550,000 in an after-tax account. The retiree has a spending goal of $81,400 a year, or an initial annual withdrawal rate of 4.8%, and will pay federal income taxes at the rate of 15% on the first $47,750 in taxable income.

[For the sake of simplicity, the authors assume the accounts are the retiree’s only sources of income; adjustments could be made to control the top marginal tax rate for retirees receiving Social Security.]

They then compare five different withdrawal strategies. In Strategy 1, the retiree spends down her Roth IRA first, then her traditional IRA, and then her after-tax money. In Strategy 2, the retiree follows conventional wisdom and spends after-tax money first, then the IRA assets, then the Roth IRA. These strategies lead to portfolio longevity of 30 years and 33.15 years, respectively.

The remaining strategies are more creative and more complex. In Strategy 3, the retiree each year spends up to the limit of the 15% tax bracket from the IRA ($47,750), and then meets additional spending needs ($38,641) by drawing first from the after-tax account and then, when that is exhausted, tapping the Roth IRA. That strategy lasts 34.37 years.

Strategies4 and 5 involve Roth conversions. In Strategy 4, the retiree moves $47,750 from the IRA to the Roth every year for the first seven years of retirement, and satisfies all of her spending needs plus the money needed to pay the tax on the conversions from her after-tax account. When her after-tax account is exhausted, she draws income from her Roth IRA. This method extends the portfolio life to 35.51 years.

Strategy 5 is more complicated, and perhaps not something our readers should try at home. It involves Roth conversions to traditional IRA. Every year for the first 27 years of retirement, the retiree creates two $47,750 Roth IRAs with money from the traditional IRA, holding a one-year bond in one Roth and stocks in the other. She covers her spending needs and taxes out of her after-tax account until she exhausts it.

Here’s the twist: At the end of each year, she converts the lower-valued of the two Roth IRAs back to an IRA. She will thus owe taxes on only one conversion and replenish the tax-deferred account. Beginning in year 28, she spends only up to the 10% tax bracket threshold from her IRA and taps the Roth IRA for the balance of her income needs. Strategy 5 last about seven months longer (for 36.17 years) than Strategy 4.

Tontine pensions: Where the annuity meets the lottery

The English government used tontines in the 17th century to fund its mammoth war debts, and U.S. Treasury Secretary Alexander Hamilton proposed using them to pay off America’s debts from the Revolutionary War. In “Tontine Pensions,” a University of Pennsylvania Law Review article by Jonathan Barry Forman, a University of Oklahoma law professor, and Barry J. Sabin, a consultant, proposes reviving the tontine in the form of pension annuities.

A tontine is a shared loan or common investment pool in which regular payments to surviving stakeholders—either lenders or investors—continue until the last survivor dies. Because the tontine payments would fluctuate, no life insurance company would be involved, vastly reducing the costs of the program and potentially leading to higher payouts.

The authors of this article believe tontines could form the basis of financial products to provide retirement income, whether directly to investors or through employers seeking to avoid the risk of traditional pensions. In their example, new investors could be recruited to perpetuate the annuity payments as earlier investors die.

Israelsen’s four flavors of diversification

The 2008 financial market collapse taught many older Americans that the sequence of their returns can determine their investment success and their level of retirement income. A good defense against market volatility is diversification, writes Craig Israelsen, an advisor and author of the 2010 book, 7Twelve: A Diversified Investment Portfolio with a Plan. In an article called “Retirement Crash Test” in the January issue of Financial Planning, Israelsen argues that diversifying a portfolio can “address each unique risk while maintaining adequate exposure to needed portfolio growth.”

As he demonstrates through historical back-testing, effective diversification can be achieved with familiar asset classes and doesn’t require the use of liquid alternatives or fancy volatility-management strategies. He compares the longevity of an all-U.S. bond portfolio with that of two other hypothetical portfolios—one whose U.S. bond allocation equals the retiree’s age and one that contains equal shares of U.S. bonds, large-cap stocks, small-cap stocks, and cash. The author simulates withdrawal rates from the portfolios of 3%, 4%, and 5% of assets. Even at 5%, the diversified portfolio has the highest probability of lasting into old age

The Great Recession: Permanent damage to retirees or not?

For people in their 50s who were lucky enough to hang onto their jobs and continued to work, the negative fallout of the Great Recession has turned out to be transitory, according to a new paper, “The Great Recession, Retirement and Related Outcomes,” published in February by the National Bureau of Economic Research.

The researchers studied baby boomers between the ages of 53 and 58 just before the recession hit. Although older workers with long tenures in the labor force are typically less vulnerable to economic downturns, they confirmed that boomers who did lose their jobs took nearly twice as long to find new employment during the recession.

But there is no evidence of a long-lasting negative effect, wrote Alan Gustman and Nahid Tabatabai of Dartmouth and Thomas Steinmeier of Texas Tech. Further, the recession also did not permanently depress wages for older workers beyond the reductions typically experienced by those who have suffered layoffs.

Other recent research paints a less hopeful picture for U.S. workers, however. Brooking Institution economist Barry Bosworth reported that there has been a “major slowdown in workers’ wages” resulting from lower labor force participation and lower productivity. This secular trend may be “only marginally related to the recession,” and there is “little room for a cyclical recovery,” he wrote in “Supply-side Costs of the Great Recession,” a paper prepared for the Nomura Foundations Macro Economy Research Conference, held last January 27.

A January 2015 report by Susan Urahn and Travis Plunkett of the Pew Charitable Trusts echoes his concerns: “Many families, even those with relatively high incomes, are walking a financial tightrope,” with few resources they can draw on in emergencies.

Historically low interest rates: how worrisome?

Federal Reserve chair Janet Yellen is expected to raise the Federal funds rate later this year and reverse the historically low rates that have propelled the U.S. economic recovery. A speech given by a U.K. central banker Kristin Forbes to London’s Institute of Economic Affairs in February provides another take on thinking among Western central bankers about the risks of a low-rate policy. Forbes, a member of Bank of England’s monetary committee, analyzes this policy in detail in a speech titled, “Low Interest Rates: King Midas’ Golden Touch?” Chief among her concerns are inflationary pressures, asset bubbles, and a lower savings rate. Although none is of great concern yet, she said, all three issues “merit close attention.”

What is the Indexed Annuity Leadership Council?

Posted on April 2, 2015 by Editorial Staff -

The Indexed Annuity Leadership Council was created in 2011 by five insurers, National Life Group, Midland National Life Insurance Company, American Equity Investment Life Insurance Company, North American Company for Life and Health, and Eagle Life Insurance Company, to educate, advocate and lobby on behalf of the indexed annuity industry. In contrast to the wholesaler-dominated National Association of Fixed Annuities (NAFA) the IALC represents indexed annuity manufacturers. Indexed annuity sales rose 23% in 2014, to $48.2 billion in 2014, and accounted for more than half of all fixed annuity sales for the first time, according to LIMRA.

The IALC’s executive director is Jim Poolman, a former Insurance Commissioner of North Dakota. “We want consumers and policymakers to understand the product,” Poolman told RIJ. “We’re active in getting product information out to members of the Hill and their staffs. There are also regulators that have not taken the time to understand the product and we want to impact that.” Asked if he’s part of the industry/regulatory revolving door, he said, “One thing I won’t do in the consulting business is to lose my moral compass as a former regulator.”

Seniors Weren’t ‘Thrown Under Bus’

Posted on April 2, 2015 by Ben Bernanke -

When I was chairman, more than one legislator accused me and my colleagues on the Fed’s policy-setting Federal Open Market Committee of “throwing seniors under the bus” (to use the words of one senator) by keeping interest rates low. The legislators were concerned about retirees living off their savings and able to obtain only very low rates of return on those savings.

I was concerned about those seniors as well. But if the goal was for retirees to enjoy sustainably higher real returns, then the Fed’s raising interest rates prematurely would have been exactly the wrong thing to do. In the weak (but recovering) economy of the past few years, all indications are that the equilibrium real interest rate has been exceptionally low, probably negative.

A premature increase in interest rates engineered by the Fed would therefore have likely led after a short time to an economic slowdown and, consequently, lower returns on capital investments. The slowing economy in turn would have forced the Fed to capitulate and reduce market interest rates again.

This is hardly a hypothetical scenario: In recent years, several major central banks have prematurely raised interest rates, only to be forced by a worsening economy to backpedal and retract the increases. Ultimately, the best way to improve the returns attainable by savers was to do what the Fed actually did: keep rates low (closer to the low equilibrium rate), so that the economy could recover and more quickly reach the point of producing healthier investment returns.

A similarly confused criticism often heard is that the Fed is somehow distorting financial markets and investment decisions by keeping interest rates “artificially low.” Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by “the markets.”

The Fed’s actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere. So where should that be? The best strategy for the Fed I can think of is to set rates at a level consistent with the healthy operation of the economy over the medium term, that is, at the (today, low) equilibrium rate. There is absolutely nothing artificial about that! Of course, it’s legitimate to argue about where the equilibrium rate actually is at a given time, a debate that Fed policymakers engage in at their every meeting. But that doesn’t seem to be the source of the criticism.

The state of the economy, not the Fed, is the ultimate determinant of the sustainable level of real returns. This helps explain why real interest rates are low throughout the industrialized world, not just in the United States. What features of the economic landscape are the ultimate sources of today’s low real rates? I’ll tackle that in later posts.

Pacific Life issues qualified longevity annuity

Posted on April 2, 2015 by Editorial Staff -

Pacific Life Insurance Company has joined AIG, The Principal, and First Investors in offering a Qualified Longevity Annuity Contract. In a press release issued this week, Pacific Life positioned the product more as a way to reduce taxes than as insurance against outliving savings.

The product is “for IRA owners who are looking to save on taxes earlier in retirement and would like to increase their guaranteed lifetime income payments at a later time,” the Pacific Life release said.

In conversations with RIJ, financial advisors have mainly expressed interest in the QLAC as a tax reduction tool for high net worth clients. One advisor calculated that a husband and wife, each with an IRA worth $500,000 or more, could cut their combined taxes between ages 71 and 85 by tens of thousands of dollars by buying QLACs.

A QLAC is a deferred income annuity (DIA) purchased most often with rollover IRA assets. Under the QLAC regulations, issued in July 2014, an investor can spend up to 25% of his or her IRA assets (the current maximum premium is $125,000) on the purchase of a DIA. Taxable distributions can begin as late as age 85, rather than age 70½ for all other tax-deferred savings. Most DIAs are sold with cash refund provisions.

According to the Pacific Life release:

“It can be a source of frustration for clients who would prefer the option to take a smaller distribution, because they may not need to take as much income as required early in retirement,” says Christine Tucker, vice president of marketing for Pacific Life’s Retirement Solutions Division. “Greater required minimum distribution amounts may bump retirees into a higher tax bracket. It can also affect the percentage of Social Security benefits exposed to taxation. For some, it may even increase the premiums they pay for Medicare Part B and D. This is why Pacific Life’s Pacific Secure Income as a QLAC may make sense for certain clients.”

Others have talked about positioning QLACs as a way to provide late life income for the medical expenses that typically arise in a person’s 80s, or as a way for retirees who have already decided to take Social Security at age 62 to supplement their Social Security benefits later in life.

Because so many annuities are sold through advisors, and because advisors’ clients typically are affluent enough to be more concerned about reducing taxes in retirement than about running out of money, it makes sense for issuers to position QLACs as tax management tools than as pure longevity insurance.

The annuity-buying public has shown less interest in deferred income annuities, qualified or non-qualified, as pure longevity insurance—insurance that is by definition inexpensive because it only pays out if only a person lives beyond age 84 or so, which is roughly the average age of death for people who reach age 65.

“Pacific Life is an early entrant in the QLAC market. To assist advisors, Pacific Life offers unique educational resources through its Retirement Strategies Group and Advanced Marketing Group. These home-office and field specialists can help financial professionals examine the application of QLACs in a variety of financial strategies,” the Pacific Life release said.

Hueler’s Income Solutions now offers QLACs

Posted on April 2, 2015 by Editorial Staff -

The Income Solutions platform, a website where retirement plan participants can solicit competitive bids for institutionally-priced income annuities, has added Qualified Longevity Annuity Contracts to its menu of offerings.

“The Income Solutionsautomated platform is the first to offer real-time QLAC quotes in a transparent, comparable format from multiple insurance companies,” a Hueler release said.

The U.S. Treasury Department announced last summer that retirement savers could apply up to 25% of their tax-deferred savings (but not more than $125,000 of the total) to the purchase of a QLAC, which is simply a deferred income annuity purchased with qualified money.

Before the rule change, people could not as a practical matter use qualified money to buy a deferred income annuity with an income start date after age 70½, because the tax law demands taxable annual required minimum distributions (RMDs) to begin at that time. Under the new rule, people can exclude the amount contributed to their QLAC from their RMD calculations until age 85.

A pioneer in offering so-called “out-of-plan” immediate annuity options through the internet to 401(k) plan participants or IRA owners near or at the point of retirement, Hueler put deferred income annuities and longevity insurance to the platform in 2013.

Vanguard, Alliance Benefit Group, Beneplace and several large plan sponsors offer the Hueler platform to their plan participants. Participants or IRA owners can use the Hueler platform to solicit competitive bids from insurance companies for products.

Hueler Companies, Inc. and its affiliates are located in Minneapolis, Minnesota. It was founded in 1987 as consulting/data research firm specializing in information about stable value funds, and later expanded to include annuities. The Income Solutions platform was launched in 2004.

AIG, BofA Merrill Lynch collaborate on index annuity option

Posted on April 2, 2015 by Editorial Staff -

American General Life Insurance Company, an AIG company, has added a new managed-volatility indexing option, the ML Strategic Balanced Index, to certain of its Power Series index annuities, which also offer lifetime withdrawal benefits.

The new option is a blend of the S&P 500 Index (without dividends), a proxy for equities, and the Merrill Lynch 10-Year Treasury Futures Total Return Index, a proxy for fixed income investments.

Through a daily “non-discretionary process [that] eliminates the impact that emotions may have on allocation decisions,” AIG said in a release, the contract moves money into cash when short-term volatility rises above a certain level and out of cash when volatility falls. In times of extreme volatility, 100% of the assets in ML Strategic Balanced Index may go to cash.

Like almost all fixed indexed annuities only more so, the new option is aimed at “individuals who want more growth potential than traditional fixed income investments, but don’t want to take on the risk of investing directly in the equity market,” said Mike Treske, executive vice president and chief distribution officer at AIG Financial Distributors, in the release.

“Indices that blend multiple asset classes are increasingly popular in the index annuity space,” Treske added. “We think this new index will help us increase our share of the growing index annuity market.”

The new option can earn interest in two different ways, the release said. Instead of a cap on the annual interest that contract owners can ear, the accounts will have “spreads” or declared percentages. Investors earn the gain in the index minus the spread.

The ML Strategic Balanced Index was developed by Bank of America Merrill Lynch (BofA Merrill). AGL currently has an exclusive license to use the index for U.S. fixed index annuities and life products.

The Bucket

Posted on April 2, 2015 by Editorial Staff -

Bank of the West wealth managers to offer Vanguard ETFs

Bank of the West’s Retirement & Investment team has the Vanguard ETF Core Series to its Investment Advisory Solutions platform, where the exchange-traded funds will be available to investors through Bank of the West financial advisors.

As part of its investment advisory offering, the Retirement & Investment team offers a targeted line-up of fund strategist portfolios (FSPs), including Bank of the West, Envestnet | PMC, and Russell Investments strategies, and more than 300 separately managed accounts (SMAs) through third-party asset managers.

In addition to investment advisory solutions, the team provides a broad range of retirement and goal planning services, growth and income investments as well as insurance products, according to a release from Dale Niemi, head of the Retirement & Investment team.

Vanguard, based in Malvern, Pa., manages approximately $3 trillion in U.S. mutual fund assets, including more than $434 billion in ETF assets, as of January 31, 2015. Bank of the West, chartered in California and headquartered in San Francisco, has $71.7 billion in assets.

A subsidiary of BNP Paribas, it provides individual, commercial, wealth management and international banking services through more than 600 offices in 22 states and digital channels.

Retirement & Investment is a team within the bank’s Wealth Management Group, which provides wealth planning, investment management, personal banking and trust services. The bank’s Retirement & Investment team is part of its Wealth Management Group, which manages over $10 billion in the United States and €305 billion ($345 billion) globally, as of December 2014.

Global Retirement Partners acquired by plan advisor consortium

A group of retirement plan advisory firms today announced its intention to acquire Global Retirement Partners, LLC (GRP), a retirement plan consulting firm servicing over 100 advisors across the US. GRP will retain its name and GRP’s management team will continue to manage day-to-day activities, according to a release.

The acquiring firms include EPIC Retirement Services Consulting, Heffernan Financial Services, MRP, Oswald Financial, Inc., Perennial Pension & Wealth, Retirement and Benefits Partners, StoneStreet Advisor Group, and Washington Financial Group.

Established in 2014 as part of GRP’s acquisition of Financial Telesis, Inc. (FTI), GRP provides turnkey retirement plan infrastructure, compliance, commissioning, and personnel to advisors who specialize in the retirement space.

Firms in this group have access to an in-house former ERISA attorney, out-sourced quarterly due diligence reporting, and the eGRP Advisor Alliance – a turnkey retirement plan advisor affiliate offering marketing, advertising, conferences, tools, financial wellness programs, and investments.

LPL Financial extends platform to CWP advisors

The Center for Wealth Planning, Inc. (CWP), a nationwide network of independent advisors, has joined the RIA (Registered Investment Advisor) custodial platform of LPL Financial, the large independent broker-dealer announced this week.

CWP advisors have used LPL’s corporate RIA and broker-dealer platforms since its inception in 2005. Based in Troy, Mich., CWP serves 65 independent financial advisors nationwide that collectively serve approximately $2 billion in brokerage and advisory client assets, as of Feb. 28, 2015.

Joseph Ruzycki, founder and CEO of the Center for Wealth Planning, said the arrangement would give “our advisors the option to work through our own RIA—Center for Wealth Planning Advisors, Inc.—or to continue to affiliate with LPL Financial’s corporate RIA.”

Launched in 2008, LPL’s RIA offering grown to manage $90.8 billion, as of Dec. 31, 2014.

Who Knew? Actuaries Have Two-Sided Brains

Posted on April 1, 2015 by Vanessa Drucker -

While everyone knows that actuarial science relies mainly on the left side of the human brain, it turns out that some actuaries are evenly gifted. Consider this: there’s an international short-story writing contest just for the more verbally inclined members of this math-driven profession.

Held every other year, the Society of Actuaries’ Actuarial Speculative Fiction Contest is open to any actuary who has passed at least one of the exams set by the SoA or the Casualty Actuary Society. The deadline for this year’s contest was January 31. Winners were announced on April Fool’s Day. (See below. You can find the stories here.)

This literary tradition started over 20 years ago, when actuary Jim Toole was hosting his former English literature professor, Bob Mielke, during Mielke’s sabbatical break. Toole and his fiancée, a poetess in her own right, hatched the concept for an actuarial fiction contest, and invited Professor Mielke to be its judge.

Mielke judged all general categories at first, but he now chooses only the first ($200) and second ($100) prizes, which are based on overall literary merit. Awards of $50 each are also sponsored by three sections of the Society, in the categories of “most unique use of technology,” the “best forecasting or futurism methods” and the “most creative actuarial career of the future,” as well as one for the readers’ favorite story. SoA story winners 2015

The contest aims to “encourage creativity,” even if it is “a little goofy,” said Gary Lange, an actuary at CUNA Mutual Group in Madison, Wisconsin. He manages the solicitation of entrees, collection of submissions, and editorial traffic. He said he feels a responsibility to allow the authors’ own opinions of the future of actuarial science to emerge.

What are the criteria for a winning entry? Judges look for quality of characterization, scene-setting, plot, dialogue and other standard elements of prose fiction. “A poor story may still be based on a good idea,” Lange said.

Mielke said he looks for “good story-telling, some action, and some conflict.” He keeps a wary eye out for anachronistic gender representation, such as stereotyping women as secretaries. He gives high marks for clarity, and to those who “patiently unpack ideas.” He penalizes those who “throw jargon around.”

Though not required, humorous self-deprecation often turns up in the manuscripts. Some of the works push it to the edge of parody, poking fun at actuaries’ sedentary lifestyles, junk food habits and shyness. “We stared at each other’s shoes in silence for a respectful break of time, before I opened up,” says the hero in Ken Feng’s Life After Death, one of this year’s entries. His manager confronts him: “We both know you have a lot of fear and anxiety – you fear for your job, you fear adverse market conditions that will hurt your investment portfolio, you fear women.”

Each story includes some specifically actuarial idea, most often developed in a futuristic setting. “Very few stories go off-planet, and they rarely take place in the distant future. And not many involve aliens,” Mielke told RIJ. The authors tend to focus more on subjects like artificial intelligence or genetics, where microscopic anomalies can lead to unpredictable outcomes.

The doom of humanity is a favorite trope. Two of this year’s entries treat the fate of civilization, but from different angles and time periods. In The Ares Conjecture, Jerry Levy’s young actuary protagonist is running a computer program that predicts global conflict on the basis of population density and diversity. When he sees both values rising fast, the outcome looks bleak.

By contrast, Melvyn Windham’s story, The First Actuary, imagines a precocious caveman who invents a base-25 number system for his tribe, none of whom yet know how to count the fingers on their hands. After calculating the tribe’s dwindling fertility rate, he concludes that his people’s survival depends on their ability to make love, not war, with neighboring tribes.

The authors enter the contest in search of editorial advice, bragging rights, prize money and recognition. “Word spreads in actuarial chatrooms,” Lange reports. About 15 to 25 actuaries submit stories in contest years, he said, with about half of the stories coming from first-timers and half from veterans. Mielke said, “They aren’t sore losers. They focus more on becoming better writers than on why judges might have failed to appreciate their masterpieces.” About one in four authors even asks him for further criticism, and some have asked him to recommend them for summer workshops in creative writing.

Third-time contender Nate Worrell submitted The Twenty Three this year, a yarn based on gene splicing. He described his need for a creative outlet to balance the rest of his day’s work, which exercises the logical, analytical side of his brain: “It’s like a breath of fresh air to tap into other faculties,” he said.

Worrell remembers how, as a recent college graduate, he saw an ad for an essay competition in a local Minnesota magazine. His entry, a tongue-in-cheek piece on the “nuttiness” of Minnesotans, garnered a suitable price: a five-pound Minnesota nut roll. Since 2009, he’s entered over a hundred writing competitions.

For a decade, Worrell worked at Ameriprise Financial in Minneapolis, becoming fully certified in 2010. His daily bus ride to work often took 30 minutes or more, and he used the travel time to write and sketch out ideas on a laptop or notebook. He’d like to publish his fiction someday, but he’s not quitting his quantitative day job.

The SoA fiction contest was a springboard to publication for Alice Underwood and Victoria Grossack, who met in Zurich, Switzerland when they were studying for their final actuarial exam. Each entered a story in the competition, and they ended up sharing first prize. Their mutual interest in Greek mythology led to a collaboration on a series of classical novels, including a version in Greek solicited by an Athenian publisher.

Underwood, who is now a senior insurance executive, told RIJ that she snatches what time she can for writing, on weekends and during long airplane flights. “It’s transformative to work on fiction,” she mused, “and a privilege to create an imaginary world.”

The Fine Madness of the 401(k) Business

Posted on March 27, 2015 by Kerry Pechter -

The only cloud over the NAPA Summit this week—San Diego’s bluebird sky was unblemished—was uncertainty over the havoc the Department of Labor’s still undisclosed “fiduciary rule” might wreak on the 401(k) industry and the way it handles rollover IRAs.

In his welcoming address on Sunday, American Retirement Association (ARA) Brian Graff noted that Labor Secretary Tom Perez’s recent political blitz on Capitol Hill, backed by the President’s own harsh characterization of the industry, is unprecedented.

Mr. Perez “has had over 50 meetings with Senators on this issue” said Graff, whose job is to lobby the same Senators in the other direction. “No sitting Secretary of Labor has ever done that. [The administration] is painting the assumption that we’re all bad.”

The headline message was dire, to be sure. But, judging by the 1,000+ attendees and hundreds of vendor booths at the conference (the first since the National Association of Plan Advisors and the American Society of Pension Professionals and Actuaries merged under the umbrella of the ARA), the 401(k) industry is thriving. This is a multi-trillion-dollar business, after all, to which tens of millions of Americans send money every payday.

A few interviews with conference attendees—mostly advisors who sell and service retirement plans—showed a wide range of sentiment about the President’s accusation that certain plan advisors are “bilking hard-working Americans” by steering their IRA rollovers out of 401(k) and into investments that cost far more than 401(k) investments do.

One insurance company employee, manning one of the booths, told RIJ with dismay that “it seems like the government just wants to take over this whole business.” But others conceded that a problem does exist. Over coffee, muffins and yogurt parfaits on Monday morning, an industry veteran and conference speaker acknowledged that the government’s concerns were not groundless.

Speaking privately, he told RIJ that “more than a few” registered reps, insurance agents and in particular advisors from the big banks or “wirehouses” enter the 401(k) business mainly to capture assets when participants, especially large-balance participants, leave their plans and roll their tax-deferred money into individual IRAs, where profit margins are potentially much greater.

Vague rules

Most of the workshops and discussions in San Diego were devoted however not to the still-secret DoL proposal (which the Office of Management and Budget is now reviewing, and which may or may not be as aggressive as some hope and others fear) but to potential solutions to the problems that plan advisors grapple with every working day.

For instance, a perennial challenge for many of them is to stay compliant with the regulations that govern retirement plans, which are often vague. For instance, the rules offer little specific guidance on how to divide the costs of administering a plan among the plan participants, only that the method be prudent and reasonable.

Questions abound. Should the employer pay the ongoing costs of the plan, or should the participants pay individually? Should each participant pay the same fee for plan administration, or should the payment vary with the size of the account balance? If the employer pays, can he be reimbursed by the plan recordkeeper out of the money—revenue-sharing—that it receives from the investment companies, who pay it out of what the participants pay its funds? The regulations don’t say.

Here’s an example of how easy it is to go wrong. During the Q&A after a presentation by ERISA attorney Fred Reish and fiduciary consultant Philip Chao, an advisor asked ingenuously if it was OK for all of the plan fees to come out of the fees paid on investments in the guaranteed investment certificate (GIC). The GIC was so profitable for the investment company that it could afford to share its fees with the plan. No, said Reish. Such a method would shift all of the costs onto the GIC investors and give other participants a free ride.

But the vagueness of the regulations also gives plan advisors room for creativity, and competitive pressures can inspire advisors to test the limits of the regs to please the plan sponsors who hire them. One speaker, for instance, showed advisors how they can differentiate themselves and win more business in the small plan market by knowing how to design plans that maximize a company owner’s tax benefits and minimize his costs.

Attorney Ken Marblestone, of the Philadelphia-based MandMarblestone Group, demonstrated a technique by which a hypothetical small business owner could steer 85% of his plan contributions to four highly-compensated employees—himself, his wife, his son and his father—and only 15% to ten lower-level employees, while still meeting the Labor Department’s fairness requirements.

[In an interview, Marblestone told RIJ that, while the small business owner as plan sponsor is a fiduciary to the plan, the process of designing and setting up a plan is not a fiduciary function. Therefore, the owner can design a plan that favors his own interests as much as possible without violating his or her fiduciary obligations under ERISA.]

The rollover conundrum

A critical area for advisors revolves around the issue of advice, and its relation to rollovers. The ARA, which lobbies for NAPA members, worries that the DoL’s forthcoming proposal—whose specifics are still unknown—might stop or discourage plan advisors from serving as (and reaping the benefits of being) individual advisors to participants who leave the plan.

The ARA has even started a lobbying campaign, complete with humorous online video that satirizes government bureaucrats, urging legislators to “Stop the No Advice Rule” and arguing that it’s nonsensical to prevent people from continuing with the same advisor on their IRA that they had on their 401(k) account.

The DoL, however, believes that advisors who give investment advice directly to plan participants too often abuse their privileged, trusted position by encouraging participants to roll their 401(k) balances (upon retirement or separation) into retail IRA accounts where they will most likely pay higher prices for products and services than if they just left their money in the plan.

But, as noted above, it’s an open secret that some plan advisors (or the firms they work for) are pure asset-gatherers who enter the low-margin retirement plan business specifically to capture big-ticket rollovers, either for themselves or the firms they work for. One executive for Morgan Stanley’s wealth management business, a conference panelist, said that his company, which provides financial education to plan participants, is interested in identifying opportunities for rollovers of a million dollars or more. It provides education, he said, so that people will think of Morgan Stanley first when they retire or change jobs.

The DoL has said that it would prefer that 401(k) participants keep their money in their plans until they retire and need income. But that’s as impractical as expecting children to live with their parents (and stay chaste) until they get married. Rollovers are all but inevitable. People can’t always get the products or services they need inside their 401(k) plans. And it’s difficult to provide products or services at the individual retail level as cheaply as providing them at the group or wholesale level. In some cases, ironically, the funds in a 401(k) plan might even be more expensive than the funds available in a rollover IRA.

Meanwhile, serious flaws in the 401(k) system remain unaddressed. For instance, even if people wanted to stay in their 401(k) plans indefinitely, about half of 401(k) plans don’t offer retired participants the option of taking systematic withdrawals. As one advisor pointed out to RIJ during a refreshment break on the trade show floor, many plan administrators still arbitrarily charge the same price for making a recurring electronic transfer from the plan to a retiree’s bank account that they charge for issuing of a one-off distribution check to a terminated employee. That tends to make the price of offering systematic withdrawals prohibitive to the sponsor, but lucrative for the provider.

Surge of fixed indexed annuity sales at independent broker-dealers in 2014

Posted on March 27, 2015 by Editorial Staff -

Industry-wide annuity sales in the fourth quarter of 2014 reached $56.6 billion, a 0.5% decrease from $56.9 billion in the previous quarter and a 4.6% dip from $59.3 billion in the fourth quarter of 2013, according to data reported by Beacon Research and Morningstar Inc. and released by the Insured Retirement Institute.

Despite the slight drop during the quarter, industry-wide sales were up for the full year, according to the release. Industry-wide annuity sales reached $229.4 billion in 2014, a 3.8% increase from $220.9 billion in 2013 and an 8.2% increase from $212 billion in 2012.

Fixed annuity sales totaled $23 billion in the fourth quarter of 2014, according to Beacon Research. This was a 6.3% increase from just under $21.7 billion during the previous quarter but a 2% drop from $23.5 billion in the fourth quarter of 2013. For the full-year 2014, fixed annuity sales closed out their best year since 2009, surpassing the $91.5 billion mark. This was a 17.2% jump from sales of $78.1 billion in 2013. This strong growth was supported by record sales years for fixed indexed annuities and income annuities.

“Overall, fixed annuities were extremely robust with 2014 recording the third highest sales total ever,” Beacon Research president Jeremy Alexander said. “The big story in 2014 was the $4.8 billion surge in fixed indexed annuity sales through independent broker-dealers. Much of this 411% increase was due to the popularity of living benefit riders. In addition, for the first time since Q3 2013, quarterly sales of fixed annuities experienced a rise in sales across all product types.”

Variable annuity total sales in the fourth quarter of 2014 were $33.6 billion, according to Morningstar. This was a 4.6% drop from $35.2 in the third quarter of 2014 and a 6.2% decline from $35.8 billion in the fourth quarter of 2013. For the full-year 2014, variable annuity total sales were $137.9 billion, a 3.4% drop from $142.8 billion in 2013.

Quarterly and year-end fixed annuity sales were supported by strong sales of fixed indexed and income annuities, according to Beacon Research. Fixed indexed annuity sales reached $12.2 billion in the fourth quarter of 2014, a 4.4% increase from sales of $11.7 billion in the third quarter of 2014 and a 3.5% increase from sales of $11.8 in the fourth quarter of 2013.

For the full-year 2014, fixed indexed annuity sales surged to a record $48 billion, a 23.9% increase from sales of $38.7 billion in 2013. Income annuity sales also closed out a record year. Sales of income annuities reached $3.2 billion during the fourth quarter, pushing full-year sales above the $13 billion mark – an 18% increase from $11 billion in 2013.

For the entire fixed annuity market, there were approximately $13 billion in qualified sales and $10 billion in non-qualified sales during the fourth quarter of 2014. For the full year, there were approximately $50.9 billion in qualified sales and $40.6 billion in non-qualified sales.

According to Morningstar, as a result of redemption activity, variable annuity net sales were negative for the quarter, estimated to be -$3.3 billion. Variable annuity net assets closed the year at $1.92 trillion. This is a 2.7% increase from $1.87 trillion at the close of 2013.

Within the variable annuity market, there were $22 billion in qualified sales and $11.5 billion in non-qualified sales during the fourth quarter of 2014. For the full year, there were $89.9 billion in qualified sales and $47.9 billion in non-qualified sales.

“Sales were affected by strategy shifts and product line rationalization among the major carriers,” said John McCarthy, Senior Product Manager, Annuity Products, for Morningstar. “While sales were down overall, half of the top 10 issuers experienced increased sales and half experienced a decline.

“Overall, assets under management continued to grow as strong financial market performance buoyed the industry. Most carriers continue to offer lifetime income guarantees, for which there is strong demand, despite continued low interest rates.”

Voya enters the structured variable annuity game

Posted on March 27, 2015 by Editorial Staff -

Voya Financial has announced a new flexible premium deferred index-linked variable annuity, Voya PotentialPLUS. The contract, issued by Voyal Financial Insurance and Annuity Co., offers exposure to the performance of up to four major market indexes, with a buffer against downside losses.

The product resembles other structured variable annuities in the marketplace, issued by MetLife, AXA, CUNA Mutual and Allianz Life. These products offer more upside potential than fixed indexed annuities because the owner assumes some risk of loss.

Owners of PotentialPLUS can allocate their premium over a stated time period across any combination of the S&P 500, NASDAQ 100, Russell 2000 and MSCI EAFE indices, or to a variable account. During the period, investors benefit from index gains, if any, up to a cap rate, and they are also protected against a drop in index performance, up to a certain level.

According to a prospectus dated December 12, 2014, the product currently offers only one-year investment terms and 10% downside buffers, but the company may offer segments of one, 3, 5, and 7-year terms and other buffer options in the future. There’s an eight-year surrender period with an 8% maximum surrender charge. There is an annual separate account charge of 1.50% and an annual expense ratio of 28 basis points on assets held in the Voya Liquid Assets Portfolio, a variable account, but there are no fees assessed on investments tied to the indices.

The cap rate on the amount credited to the account will vary with the markets. According to the prospectus, “On each Segment Start Date, we will declare a new Cap Rate that is guaranteed for the Segment Term. The Cap Rate may vary by Indexed Segment. Because you will not know the Cap Rate in advance of the Segment Start Date, you should set a Rate Threshold if you do not wish to invest in an Indexed Segment with a Cap Rate below a certain rate.”

According to a Voya release, “If an index goes up during the stated time period, the value associated with the indexed segment is credited by an amount up to the cap rate. If an index goes down during that period, the indexed segment does not lose any value if the drop is 10% or less. If the drop is greater than 10%, the value is reduced — but only by the amount in excess of 10%.” The MetLife, AXA, and Allianz products use this type of buffer, which requires the client to assume the tail risk . In the CUNA Mutual product, the issuer assumes the tail risk.

Value of U.S. pension and retirement accounts exceeds $21 trillion

Posted on March 27, 2015 by Editorial Staff -

Public sector retirement plan assets have exceeded $4 trillion for the first time, according to Spectrem’s annual Retirement Market Insights report, which examines the affluent investor market size in the U.S., the retirement market, and the public and private accounts investors use to save for retirement.

The total assets held in employer-sponsored retirement plans were $11.3 trillion at the end of 2014, an increase of 11.5% percent from the $10.1 trillion one year earlier, according to the report. Individual retirement accounts (IRAs) hold another $5.4 trillion.

Total retirement assets, including public, private, 403(b) plans and IRAs are about $21.5 trillion. In addition to the estimated $3.537 trillion in public sector defined benefit accounts, there is $458 billion in defined contribution accounts and $241 billion in 457 plans, the report said.

In the last five years, the defined benefit amount has grown by almost $1 trillion, and both the defined contribution and 457 plans have grown by more than $100 billion.

Public sector defined benefit plan assets have almost fully recovered from losses suffered in the 2008 financial crisis, while defined contribution plans, including employee-funded 457 plans, have grown beyond the pre-recession amounts.

Among corporate sector retirement assets, defined contribution plans accounts for two-thirds of the total amount, at an estimated $8.53 trillion. Almost three-quarters of union assets are held in defined benefit plans ($458 billion). Private sector defined benefit assets have been slowest to recover from the 2008 financial crisis, and are at $2.6 trillion in 2014.

Ameriprise and Bank of New York Mellon settle ERISA suits

Posted on March 27, 2015 by Editorial Staff -

Ameriprise Financial Inc. has agreed to pay $27.5 million to settle a 2011 class-action lawsuit, one of several filed over the past decade by St. Louis attorney Jerome Schlichter’s law firm, over the operation of its 401(k) plan for the company’s own employees and retirees, the Minneapolis Star-Tribune reported this week.

The suit had accused Minneapolis-based Ameriprise of offering proprietary, high-fee, and underperforming mutual funds in the company 401(k), thus violating its fiduciary responsibility as a plan sponsor under the Employee Retirement Income Security Act of 1974, or ERISA.

A joint motion for approval of the settlement was filed Thursday by the parties for consideration and approval by U.S. District Judge Susan Richard Nelson in St. Paul. The proposed settlement would cover about 24,000 current and former employees. The 401(k) plan currently covers about 12,000 Ameriprise participants and has about $1.5 billion in assets, according to Ameriprise.

In a statement, Ameriprise said, “The settlement does not require any changes to our plan, which will maintain the existing broad and competitive selection of investment options and features. The plan has always included funds we manage, as well as funds from other companies.”

In 2012, Nelson declined to dismiss the lawsuit, allowing it to proceed based on charges ranging from failure to monitor fiduciaries, to prohibited transactions and excessive record-keeping fees. One count of unjust enrichment was dismissed.

The Schlichter firm has achieved similar settlements with several of those employers in recent years. The most recent and largest was a $62 million settlement reached in February with Lockheed Martin.

In an unrelated case, the Bank of New York Mellon has agreed to repay $84 million to employee benefit plan customers victimized by the bank’s “standing instruction” foreign exchange trading program, as part of a larger settlement of private, state, and federal lawsuits against the bank.

An investigation by the U.S. Department of Labor found that the bank violated its ERISA fiduciary obligations by assigning “nearly the worst prices” at which currencies had traded in the market during all or part of a day in most of its “standing instruction” foreign currency exchange transactions with customers, including retirement plans.

The bank also led its clients to believe that it was pricing their transactions in a more favorable manner, the DOL found, “misrepresented and failed to disclose to clients how it was pricing the transactions,” and “engaged in a deliberate, prolonged effort to conceal its pricing methods.”

The “standing instruction” foreign currency exchange program is a service that the bank offered to customers who exchanged currencies regularly. The bank automatically exchanged the currencies at a rate and time that the bank, in its sole discretion, determined.

The department’s investigation found that the bank habitually assigned its “standing instruction” customers rates that were close to the worst rates that the currencies had traded earlier in the day, and that the bank favored certain clients with better rates than “virtually all of its other plan customers,” in violation of ERISA.

How much should your clients start saving now? EBRI knows

Posted on March 27, 2015 by Editorial Staff -

New research from the Employee Benefit Research Institute (EBRI) tells workers how much they need to have saved for retirement at different ages and how much, at a given age and income level, they should contribute to their defined contribution plans to achieve financially successful retirements.

The EBRI analysis presents the required contribution rates for those starting to save at ages 25, 40, or 55. It also presents the minimum account balances required for those contributing to their plans at 4.5%, 9%, and 15% of salary, and shows how much they should have saved at a particular age threshold to be “on track” for a successful retirement. For instance, the EBRI found the following savings rates and probability of success for people starting with zero savings:

For a 25-year-old single male earning $40,000 a year, with a total (employee and employer combined) contribution rate of 3% of his salary until age 65 would result in a 50/50 chance of retirement income adequacy.
By saving 6.4% of salary, he would boost his chances of success to 75%. Women that age would need more because of their longer average life expectancies.
A 40-year-old male earning $40,000 would need a total contribution rate of 6.5% of salary to have a 50/50 shot at a financially successful retirement. Saving 16.5% of salary would produce a 75% chance of success.
A 55-year-old male making $40,000 would need to save 24.5% of his salary each year to have a 50/50 chance of a successful retirement.

EBRI also estimated how much a worker should have saved by a particular age for a successful retirement, depending on salary, contribution amounts, and desired odds of success. The analysis yielded the following answers for a single male age 40 contributing 9% of salary each year:

At a salary of $20,000 a year, he would need to have already saved $14,619 for a 50% chance of retirement success.
At a salary of $40,000 a year, he’d need a minimum balance of $47,493 in savings for a 75% chance of success.
At a salary of $65,000 a year, he’d need $4,616 of pre-existing savings for a 90% chance of success.

For those who are younger and have higher savings rates, the required pre-existing savings level goes down, EBRI noted.

“This analysis answers two key questions: How much do I need to save each year for a ‘successful’ retirement? How large do I need my account balance to be after saving for several years to be ‘on-track’ for a successful retirement given my future contribution rate?” said EBRI research director Jack VanDerhei, the report’s author, in a release.

These questions cannot be answered by the commonly used “replacement rate” planning tool, which uses a percentage of income as an optimal savings goal. The replacement rate method ignores the risk of outliving one’s savings (longevity risk), post-retirement investment risk, and nursing home costs. The RSPM model includes those factors in its simulations.

EBRI used its proprietary Retirement Security Projection Model to calculate the savings amounts needed at different contribution rates, salary levels, and ages for both genders, for a successful retirement. EBRI measured success in retirement by the probability of not running out of money to cover average expenses and uninsured health care costs.

For simplification, the modeling excludes net home equity and traditional pension income. It does not factor in pre-retirement leakages or periods of non-participation.

The full report, “How Much Needs to be Saved For Retirement After Factoring in Post-Retirement Risks: Evidence from the EBRI Retirement Security Projection Model,” is published in the March 2015 EBRI Notes, online at www.ebri.org.

New York City comptroller calls for statewide “fiduciary disclosure”

Posted on March 27, 2015 by Editorial Staff -

A proposal to enact a new New York state law requiring financial advisors to disclose “whether they put their own financial interests above those of their clients” was announced this week by New York City Comptroller Scott M. Stringer.

The Comptroller also released a new report examining the history of the “fiduciary standard,” expressing his support for enacting the standard nationwide and detailing his state proposal, which echoes a proposal that the Department of Labor made in 2010. The DoL’s reproposal is expected to be made public soon, after an Office of Management and Budget review.

“Billions of dollars in savings are lost each year because of hidden fees and conflicted financial advice,” Stringer said, borrowing a theme from the Obama administration, which has made this issue a policy priority for 2015. According to a release from the comptroller’s office:

“Most New Yorkers assume that their financial advisors provide objective advice that is to their benefit. However, under current law, most financial advisors are not required to provide advice that is in the client’s best interest—a legal standard of care known as the fiduciary standard.

“Instead, many brokers, financial planners, and retirement advisors are allowed to operate under a more permissive ethical code known as the suitability standard, which allows advisors to push investments that yield high fees or commissions, provided those investments are suitable for their clients.”

Comptroller Stringer is calling for a state law that will require all financial advisors to disclose—in plain language—whether they abide by the fiduciary standard. The measure would require all advisors operating under the suitability standard to state at the outset of any financial relationship:

“I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks, and expected returns for you.” This language is similar to the language required for exemption from a prohibited transaction under the 2010 fiduciary proposal by the U.S. Department of Labor.

The Comptroller’s report follows two recent actions at the federal level that signaled movement toward stricter standards for financial advice. President Obama recently called for the Department of Labor to issue a new rule requiring all retirement advisors to abide by the fiduciary standard. Last week, Securities and Exchange Commission Chairwoman Mary Jo White commented that her personal view was that a “uniform standard” for financial advisors was needed.

Quote of the Week

Posted on March 27, 2015 by Editorial Staff -

RetirePreneur: Chad Parks

Posted on March 19, 2015 by Jenna Gottlieb -

What I do: I’m the CEO and founder of Ubiquity Retirement + Savings. As an organization, we’re continuing what we started 15 years ago as The Online 401k. We work for small business owners and their employees, who have largely been ignored. When we started, products for small businesses were abusive and expensive. We provide a combination of high customer service and web features.

Who my clients are: In the early years, we said under 100 employees was our sweet spot. As we got to know the market better, we started thinking in terms of 50-100 employees. But, the companies with fewer than 50 employees are where you see the drop off in service. That’s whom we best serve and where the biggest opportunity is. There are almost four million businesses with two to 20 employees and 92% don’t offer any workplace savings program. Forty million Americans aren’t able to save in the workplace. We serve high-tech firms, pizza parlors, construction companies, architects, dentists and other businesses.

Why clients hire me: Every year we do a client satisfaction survey and the three reasons that ranks highest are cost, ease of use and friendliness. Those are always in the top three.

Where I came from: You jump in the river and see where it takes you. I tell a joke that when I was in high school playing soccer, I dreamed of being in the 401(k) business. The truth is I’ve always been an entrepreneur. When I was a kid I had a paper route and mowed lawns. At 15, I got a real job. In my hometown in Florida, I worked for a restaurant. I washed dishes, peeled garlic, scrubbed floors, threw out the garbage, and did whatever needed to be done. I stayed with them for eight years, working my way up. Chad Parks copy block

I got an undergraduate degree in hospitality and continued working with them. I burned out and decided that a graduate degree would be a good move. I moved out to San Francisco, went to graduate school and got a finance degree. I chose to focus on personal finance instead of corporate finance. While in school, I was still working jobs, like bookkeeping, but I couldn’t let go of my hospitality roots. So I wrote a book about the local restaurant scene in San Francisco. Three editions were published. After grad school, I sent my resume to the top 25 investment banks and landed a job as a retail stockbroker for a firm in San Francisco. I didn’t want to be a stockbroker. In the mid- to late 90s, there was nothing out there for small businesses in terms of retirement plan services. There were insurance companies offering plans that paid huge commissions. The Internet came along and in ’99 we started The Online 401k. That has been my focus ever since.

On the company’s rebrand: In 1999, being online was a novel concept. That’s not the case today. We wanted a brand that had a name that reflected our mission and also include other retirement plans that might be of interest, such as payroll deduction IRAs.

My business model: Ubiquity offers three types of 401(k) plans. The Single(k) plan starts at $215 per year and is designed for a business owner with no full-time employees. The Custom(k) costs $175 per month and includes web features, a network of independent investment advisors to work with, customizable investment options, and online education tools. The budget-friendly Express(k) costs $105 per month with fewer investment choices than the Custom(k) plan. We really beat the drum on fee disclosure. We have championed disclosure from inception. Plan participants can choose among thousands of mutual funds and ETFs including options from Fidelity Investments, The Vanguard Group, T. Rowe Price and others.

On the retirement crisis in America: We tried to give a voice to this issue—the looming retirement crisis in America. To bring attention to the crisis, we produced a documentary. You can found it at www.brokeneggsfilm.com. We took a six-week, 7,000-mile journey across America, talking to people about retirement. There are a lot of man on the street interviews. It shares stories of every day Americans. It cost us a lot, but it got the conversation going.

My retirement philosophy: My backup plan is a beach in Thailand. In other words, you’ve just got to live life. You shouldn’t hoard your money. At the root is—do you have a budget? Once you’ve saved X amount of money, go ahead and spend some of it.

New York Life’s new fixed deferred annuity has a GLWB

Posted on March 19, 2015 by Editorial Staff -

New York Life, which created and dominates the deferred income annuity space, has just launched a new fixed deferred annuity contract with a guaranteed lifetime withdrawal benefit product. It’s aimed at people who need future income but want more liquidity than a DIA (“longevity insurance”) offers.

The new product is The New York Life Clear Income Fixed Annuity. It features a 5% compound annual increase in the benefit base in the first 10 years (provided no withdrawals are taken), a guaranteed 2.1% increase in the account value for the first seven years, and a 75-basis-point annual rider fee that’s assessed on the account value, not the higher benefit base, which is higher.

Ross Goldstein, a New York Life managing director, said the product is the company’s first GLWB product. In December 2013, Pacific Life introduced a fixed deferred annuity with a GLWB, a 6% simple annual roll-up and a 75-basis-point rider charge. The product will be distributed by New York Life’s agent force and select broker-dealers.

“The DIA, and especially the life-only DIA, is still the most efficient way to get deferred income in retirement. But we’ve done consumer research and found that a lot of people still value control of their assets and liquidity and are willing sacrifice part of the income for it,” Goldstein told RIJ.

“We see three major markets for [Clear Income],” he added. “Ten to 20 percent of the assets in variable annuities today is in fixed-return or cash subaccounts. We also think it compares favorably with the fixed indexed annuities with GLWBs. It’s much, much simpler. Third, there’s a lot of safe money in the marketplace. Trillions of dollars are earning very low rates of return. [Clear Income] can give them potentially more accumulation value and income if they decide to use it.”

The withdrawal rates for a single annuitant are 4.75% from ages 59½ to 64, 5.25% from ages 64 to 69, 5.75% for ages 70 to 79 and 6.75% for ages 80 and over. For a joint-life contract, the payout rates are 50 basis points less for each age bracket.

According to the hypothetical in New York Life’s Clear Income brochure, a $100,000 premium would, after ten years, lead to a $162,889 benefit base and an account value of $110,753, assuming to withdrawals. The annual payout for a single person ages 65 to 69 would be $8,552. The annual payout for a single person ages 70 to 79 would be $9,336.

For comparison purposes, the annual payout from New York Life DIA purchased by a 60-year-old today for income starting in 10 years would be 10,171.80, or $847.65 per month, according to New York Life.

According to a New York Life release, “Clear Income was designed based on market research that revealed that retirement-age consumers primarily want control of their money, safety of principal, and lifetime income payments from their retirement income products.” Consumers ranked growth of assets eighth.The top five most important attributes by percent of respondents:

Control of money, 76%
Safety of principal, 73%
Keeps pace with inflation, 72%
Easy access to my money, 67%
Income payments cannot be outlived, 55%

High growth potential ranked eighth with only 36% percent indicating that this was important.

Senate hearing on retirement

Posted on March 19, 2015 by Editorial Staff -

Bank of the West wealth managers to offer Vanguard ETFs

Global Retirement Partners acquired by plan advisor consortium

LPL Financial extends platform to CWP advisors

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