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

Posted on March 27, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights reserved.

Ameriprise and Bank of New York Mellon settle ERISA suits

Posted on March 27, 2015 by -

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. 

© 2015 RIJ Publishing LLC. All rights reserved.

How much should your clients start saving now? EBRI knows

Posted on March 27, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights reserved.

New York City comptroller calls for statewide “fiduciary disclosure”

Posted on March 27, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights reserved.

RetirePreneur: Chad Parks

Posted on March 19, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights reserved.

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

Posted on March 19, 2015 by -

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.

 

© 2015 RIJ Publishing LLC. All rights reserved.

As UK’s annuity mandate ends, NEST weighs alternatives

Posted on March 19, 2015 by -

With Britain about to end its policy of forced annuitization of tax-deferred savings by age 75—the new policy was announced in 2014 and takes effect this April—the leaders of the National Employment Savings Trust (NEST) have concluded that “a need exists for a new default solution” for turning DC savings into pension income.

NEST is an auto-enrolled, nationwide, mandatory defined contribution plan designed for uncovered low- and middle-income workers. Its conclusion, it said, reflected a consensus based on six months of “consultation responses and external research.”

NEST, which is about to become the largest DC provider in the UK, said the general consensus among consultation respondents was that individuals “valued the choices provided” by the Budget that the Chancellor of the Exchequer revealed in May 2014, but “many would not want to make specific decisions.”

NEST drafted six principles that it believes default retirement solutions should encompass, although it accepted that “many of the principles cause tension with one another at different stages.”

A paper from NEST listed its concerns, including:

  • The tendency to underestimate longevity should be taken into account. It noted that future solutions must adapt to, and account for, changes to longevity.
  • Solutions should be designed to ensure DC savings are spent in their entirety, and provide incomes that are stable and sustainable, but still offer flexibility where possible.
  • The harmful nature of volatility in income-drawdown solutions needs to be addressed. 
  • Investment risk needs to be managed to reflect the DC savers desire for investment growth while minimizing the likelihood of running out of money in drawdown solutions.

Despite the expected decline of annuity conversion after 6 April, Mark Fawcett, chief investment officer at NEST, said the evidence indicated that mitigating the risk of outliving ones savings should be a key feature in its default solution.

“What we are seeing is a strong consensus emerging on good quality default retirement income solutions playing a central role in helping these savers achieve better retirement outcomes,” he added.

NEST said that, without a default solution, conservative savers might not use up their savings, which suggested that a relatively low-risk investment solution and then annutization would have value for them.

It also suggested the people might buy deferred income annuities so that they could avoid  handing over of a large sum of savings at once, a psychological barrier to annuity purchase.

NEST is also considering the possibilities of providing an in-house decumulation method to its members or offering them so-called collective DC solutions. NEST said it will publish its conclusions this summer. 

© 2015 RIJ Publishing LLC. All rights reserved.

Many rich people are DIY investors: Cerulli

Posted on March 19, 2015 by -

Nearly 30% of high-net-worth investors in the United States identify as “self-directed investors,” according to a new study from Cerulli Associates, entitled “High Net Worth and Ultra-High Net Worth Markets 2014: Addressing the Unique Needs of Wealth Families.”

That’s been good news for direct providers, but not for traditional asset managers, which are in danger of being disintermediated by the new digital advisory channel, especially among the younger folks who live on their smartphones and tablets.

The report analyzes the investors, service providers and asset managers who make up the U.S. high-net-worth (HNW) (investable assets greater than $5 million) and ultra-high-net-worth (UHNW) (investable assets greater than $20 million) marketplaces. 

The fact that almost a third of wealthy investors are self-directed “helps explain the dispersion of assets among providers,” said Donnie Ethier, the report’s author, in release.

To compete against direct providers, which have seen a surge of inflow over the past two years, and which continue to bolster their offerings to “younger, tech-savvy” wealth-builders, traditional wealth managers will have to demonstrate their “willingness, and aptitude, to adapt to next-generation investors.” 

According to Cerulli’s research, more than half of high-net-worth investors have direct or online trading account balances between $500,000 and $1 million. These immense balances help explain where the flows to direct providers—especially to Vanguard—are coming from.

But there’s still a lot that the direct providers can’t do for the wealthy, which is good news for wealth managers who can pass due diligence screenings and justify their fees. 

“Logically, as assets increase, so does the complexity of portfolios, lending more credence to taking on an external advice sources and provider relationships,” Ethier said.

“Opportunities to capture additional wallet-share of these investors certainly exists for wealth managers and their advisor forces, although they should know going in that many high-net-worth investors use direct accounts to test their own investment ideas, provide liquidity, and even to shelter assets from their primary advisors,” the Cerulli release said.

© 2015 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on March 19, 2015 by -

MassMutual names new plan relationship managers  

MassMutual has appointed six new relationship managers (RMs) to increase support for retirement plan sponsors and their financial advisors. The new additions raise MassMutual’s total number of relationship managers supporting retirement plans to 103, according to a release.

Una Morabito, senior vice president, Relationship Management for MassMutual Retirement Services, announced these new appointees:  

Gregory Baran, for unbundled retirement plans in New England and New York. He reports to Jim Keating, Assistant Vice President, Client Relationship Management. Previously he held positions at John Hancock and The Hartford. He has a BA from Hobart and William Smith Colleges.

Joey Biggerstaff, for large retirement plans in California, Colorado, Kansas, Louisiana, Missouri, Oklahoma and Texas. He reports to Richard Cartier, assistant vice president, Client Relationship Management.  Biggerstaff was a regional director for relationship management with GuideStone Financial Resources. He has an undergraduate Business Administration degree from Texas A&M.

Jesus Herrera, for retirement plans in Houston, Texas. He reports to Hal Oberg, assistant vice president, Client Relationship Management. He last worked for Arthur Gallagher & Company.  He has an associate degree from Houston Community College and Series 7 and 63 licenses.

Douglas Morash was named as a relationship manager for unbundled plans in Georgia, Maryland, North Carolina, South Carolina and Virginia. He reports to Keating. Morash has a BA from the University of Massachusetts, an MBA from Boston College, and a Series 6 license.

Casey Sand, for retirement plans in Arizona, Colorado, New Mexico, Utah and Wyoming. He reports to Craig Haase, vice president, Relationship Management. He has a BA from Arizona State University.

Emily Totty, for unbundled retirement plans in Alabama, Arkansas, Florida, Kansas, Louisiana and Mississippi. She reports to Phil Maness, assistant vice president, Client Relationship Management. She earned an MBA from the University of Florida and a BA from the University of Central Florida, and has Series 7 and 63 licenses.

Investment trade group to host retirement ‘summit’ in April

Investment Company Institute (ICI) is hosting an invitation-only retirement summit where academics, plan sponsors, regulators, financial services providers, and industry experts will discuss ways to guide “plan participants to better outcomes during the accumulation, transition, and distribution phases,” according to an ICI release.

The meeting will be held April 8 from 9 a.m. to 4 p.m. at the National Press Club in Washington DC.  Annamaria Lusardi of the George Washington University School of Business will speak on the financial literacy landscape. Brigitte Madrian of the Harvard Kennedy School will talk about her work on behavioral economics and how it can influence plan design.

A panel moderated by Sarah Holden, ICI Senior Director of Retirement and Investor Research, will discuss ways to help retirement plan participants prepare for retirement. Panelists from the Securities and Exchange Commission, the Financial Industry Regulatory Authority’s Education Foundation, Hilton Worldwide; and T. Rowe Price will participate.

Brian Reid, ICI Chief Economist, will moderate a panel on innovations that help raise 401(k) account accumulations.  Panelists from BrightScope, Morningstar Investment Management, The Vanguard Group, and Transamerica Institute and Transamerica Center for Retirement Studies will participate.

Peter Brady, ICI Senior Economist, will lead a panel on innovations and best practices involving the distribution phase for retirement plan participants. Executives from Fidelity Investments, Voya Financial Inc., and Lockheed Martin will participate.

For more information, go to www.ici.org or contact Olivia Caverly at 202-326-5945 or via e-mail at [email protected].

New group aims to organize, celebrate elder-power

A new organization called “Enrich Life Over 50” held a pilot meeting in the Research Triangle near Raleigh, NC, on March 14 and unveiled plans for the creation of chapters in Boston, New York and Denver in 2015 and an additional two dozen chapters in subsequent years.

“ELO50” is the creation of 88-year-old Bill Zinke, who identified himself in a press release as the co-author with Elliott Jaques of “The Evolution of Adulthood: A New Stage” This article that described the stage of life from ages 62 to 85 as where a period “people 50+ can continue to be productively engaged and can continue to add value.”

Each chapter, led by a paid chapter head, will hold ten meetings each year, focused on ELO50’s “Seven Pillars of Successful Aging.”

In a release, Zinke emphasized the human capital and financial capital of people over 50, who constitute a third of the U.S. population and own 70% of the nation’s private wealth. “Many of these people want or need to continue working,” he said in a statement. “They represent an enormous talent pool with what we call Double ESP; an acronym coined for Experience, Expertise, Seasoned Judgment and Proven Performance.”

Joining Zinke at the pilot meeting were William H. Webster, 91, chairman of the Homeland Security Advisory Council and former director of the FBI and the CIA, and Janice Wassell, assistant professor of gerontology at UNC Greensboro.  

German pension market evolves away from insurers 

Industry sector-wide pension plans, or those based on collective agreements, are slowly eroding insurers’ dominance in providing pensions to mid-sized German companies, according to a report in IPE.com.

In 2014, the number of companies in this segment having entered cooperation agreements with such collective schemes to provide occupational pensions increased to 23% from just 7% in 2012, according to a survey by the research institute of German news daily Frankfurter Allgemeine Zeitung.

The survey also showed that among a sample of 200 companies with 50 to 500 employees, the share of those with cooperation agreements with insurers had dropped to 70% from 78% in 2013-12.

The shift apparently began after the German government published the first draft of a proposal on introducing sector-wide pension plans.

Only one of the 200 companies in the sample ran its pension plans on its own; the rest used third-party providers. The survey also identified a trend toward the use of jointly financed pension plans, where both employers and employees pay contributions.

In 2013, this model became the most commonly used among medium-sized companies, overtaking pure employee-financed deferred-compensation models for the first time.

At present, 67% of companies in this segment—up from 59%—are offering jointly financed pension plans.

Occupational retirement provisions into which only the employer pays contributions have lost further ground and can only be found among 18% of German companies, down from 24% and 32% over the two years previous.

The authors of the survey argued that the “heightened interest” in occupational pensions among employees of medium-sized companies is “obviously a consequence of employers taking more money into their hands” for such projects.

One of the “weak spots” in occupational pensions in this segment of the German economy is “communication”, the researchers found. The survey found that relatively few employers comprehensively inform their employees about their pension plans and possible options.

© 2015 RIJ Publishing LLC. All rights reserved.

 

Vanguard Answers a Retirement Riddle

Posted on March 18, 2015 by -

“You can’t take it with you,” goes the old saying. So why do so many retirees die with so much unspent savings? Leaving too much is better than dying broke, for sure; but the hoarding tendency suggests that many retirees don’t enjoy their final years as much as they could.

It’s a tendency that infects the upper-middle class more than the rich or poor, and it may help explain the low demand for income annuities, which maximize guaranteed lifetime spending. It may also indicate that demand for some new form of insurance for long-term care (LTC) expenses might be greater than current LTC insurance sales indicate.

There’s been a long-running debate about the tendency to hoard. Some experts believe that retirees hoard wealth for “bequest motives”—so they can leave more money to their heirs and beneficiaries. Others believe that retirees hoard to self-insure against the chance that they’ll require years of nursing home care.

A new academic study, initiated by Vanguard, entitled “Long Term Care Utility and Late in Life Savings,” may provide a tie-breaking answer: It’s most likely a fear of potential long-term care costs that drives retirees to clip coupons, dine out at 4 p.m. to catch the “Early Bird Special” and forego those once-in-lifetime vacations to wherever.

 “It’s not that they don’t care about their families,” said economist Andrew Caplin of New York University, who was one of the authors of the Vanguard study. “But if it comes down to it in the last year, and they had to choose between uncomfortable year versus comfortable year, they would choose to spend the money on making it more comfortable.”

The study confirms the common sense intuition that, for people who can pay for one or the other but not for both, that personal medical care takes precedence over bequests, Caplin told RIJ. “For people in the upper middle class, 75th percentile of wealth, health care was regarded as a necessity and bequests as a luxury,” the study said.

Aside from its headline findings, several aspects of this research are noteworthy:

  • It was conducted at the behest and with financing by the Vanguard Group, a company that specializes in low-cost, direct-sold mutual funds. It does not own a life insurance company or emphasize the sale of annuities or long-term care insurance. But it is one of the country’s largest retirement plan providers and rollover IRA custodians. Over the past 18 months it has experienced far larger fund flows than any other investment company, according to Morningstar data.
  • Second, the research is based on a survey of almost 8,000 affluent Vanguard clients—a group whose attitudes and responses the researchers considered more indicative of the potential behaviors of the wealthiest 50% of older Americans than the Federal Reserve’s Survey of Consumer Finances or the University of Michigan/National Institute on Aging’s Health and Retirement Study (HRS), which have been used for similar research in the past.
  • Perhaps most significant, the researchers concluded that a large market may exist for what they call Activities of Daily Living Insurance (ADLI). Unlike traditional long-term care insurance (LTCI), which pays nursing home bills, ADLI would provide income, to be spent on in-home care or for general needs, when a person needs chronic care.
  • The research may also help solve the so-called “annuity puzzle” by explaining why people would rather hoard lump sums than maximize their monthly income in retirement. “LTC and the utility derived from expenditures when in need of LTC contribute substantially to the lack of demand for annuities in a large fraction of the population,” the researchers wrote.

The study was conducted by John Ameriks of The Vanguard Group, Inc., and economists Joseph S. Briggs and Andrew Caplin of the New York University, Matthew D. Shapiro of the University of Michigan and Christopher Tonetti of Stanford University’s graduate school of business.

© 2015 RIJ Publishing LLC. All rights reserved. “You

 

Value Investing for Retirement

Posted on March 12, 2015 by -

The saguaro cacti near Phoenix lifted their stubby, prickly arms in motionless gratitude last week, thankful for the recent spring rain. And at a well-watered golf oasis on the north edge of Scottsdale, Morningstar hosted its annual Institutional Conference.

A talk by Ben Inker, co-head of asset allocation at GMO, the money management firm known for “value” investing, was one of the conference highlights. This unfashionable-by-definition style of investing, he claimed, should suit retirement savers just fine.   

Inker’s message in a dice-cup: Retirement savers will have to save more in the future to accumulate the same nest egg as in the past. In other words, funding a retirement will be more expensive.   

And conventional wisdom won’t help, Inker said. While the efficient market hypothesis and Modern Portfolio Theory may have their place, their use of risk-return optimization, faith in average long-term returns, and use of buy-and-hold strategies don’t necessarily work for investors who get only one series of returns per lifetime, he said.

That’s where Inker believes that GMO’s style of value investing can be useful. It assumes that today’s stock valuations and bond yields are predictive of future equity and fixed income returns, and that buying what’s cheap while avoiding what’s expensive is, over the long run, the best way to ensure a safe retirement.

“Retirement is not a returns problem; it’s a wealth problem,” Inker (below left) told a Marriott ballroom of 325 or so investment managers. “A wealth problem is different from a return problem. It has a different distribution. Hypothetically, if you invest $1, the expected value after 40 years is $12. But that’s irrelevant to a retirement investor, because the returns come from the few times when you were really lucky.”

Ben InkerSequence of returns risk isn’t just a problem for people in the so-called retirement red zone, when nest eggs are considered most fragile, he said. According to his slides, a saver who worked from 1955 to 1995 could contribute the same amounts and experience the same average returns and volatility as someone who worked from 1965 to 2005 and end up with 40% less money.

The difference in accumulation arose from the simple fact that they had different balances at different times. This observation has profound implications for the design of, say, target date funds. A glide path that worked for one period won’t necessarily work for another.

Though their average return will be the same, person who experiences a bull market when her balance is new and small will retire with a very different amount compared with the person who experiences a bull market later in his career, when his account is large.

“If you have good returns when you have more money in the account, it matters much more,” he said. So we think that even if things average out over 40 years, that’s not a good-enough reason to assume that you’ll be OK. Traditional glidepaths ignore sequence of returns risk, and this is a crucial risk from long-term investors.”

Inker also took issue with the practice, based on the belief that equities have an inherent risk premium and unpredictable forward returns, of allocating investors’ assets to stocks and bonds according to their risk tolerance, without adjusting for current valuations.  

“In 1981, stock prices were eight times earnings. In 2000, they were forty times earnings. Starting at those two points, it would absurd to assume that you would have the same returns,” he said. “Today stocks are in the most expensive quintile in history. So you can’t assume 5% real return from stocks. It’s even more absurd that you’ll get ‘normal’ returns from bonds. Starting yields tell you a lot about expected returns of bonds.”

That doesn’t mean things will stay the same, Inker said. “Embedded in bond yields is assumption of continued stagnation and low volatility. That’s silly. Stagnation will cause a political response. Voters are getting tired of stagnation, and if things don’t get better, they’ll change. It’s hard to see how you get to 5% real saving for retirement. Timber isn’t feasible in retirement plans. High quality large stable blue chips should make you something above nothing.  We like emerging markets value. You should own as much as you can stomach.”

Value investing would be more popular, he said, if advisors and investors weren’t so focused on short-term goals. “The problem of career risk has made professionals think shorter and shorter term,” he noted. “So you try never to look like an idiot. You know that if you buy assets that everybody hates, you’ll run the risk of looking stupid. But if you are looking for a group of people that stays put, it is retirement investors. They’ve got 40 years to save money and 30 years to spend it down. That means you can really harness the long term.”

© 2015 RIJ Publishing LLC. All rights reserved.

Computers as Enablers—and Disablers

Posted on March 12, 2015 by -

In a speech delivered back in 1969, when the Net was in its infancy, the social scientist and future Nobel laureate Herbert Simon posited that a glut of information would produce a dearth of attention. Since then, psychologists and neuroscientists have learned a great deal about how our brains respond to distractions, interruptions, and incessant multitasking.

What they’ve discovered proves how right Simon was—and underscores why we should be worried about the new digital environment we’ve created for ourselves. When it comes to thinking, we’re trading depth for breadth. We’re so focused on the immediate that we’re losing the ability to think more deeply about the long-term implications of complex problems.

Why would we allow ourselves to become so reliant on a technology that ends up hampering our thinking and foreclosing our opportunities to excel? One reason appears to be biological.

Experiments suggest that we have a deep, primitive inclination toward distraction. We want to know everything going on around us, a trait that probably helped keep us alive when we lived in the wilds. The very act of seeking out new information has been found to trigger the release of the pleasure-producing chemical dopamine in our brains. We’re rewarded, in other words, for hunting and gathering data, even if the data are trivial, and so we become compulsive in checking the networked gadgets we carry around with us all day.

But it’s not just biology. It’s also society. Businesses and other organizations have been complicit in encouraging shallow and distracted thinking. Tacitly or explicitly, executives and managers send signals that they expect employees to be constantly connected, constantly monitoring streams of messages and other information.

As a result, people come to fear that disconnecting, even briefly, may damage their careers, not to mention their social lives. Organizations gain the benefits of rapid communication and swift exchanges of data. But what they sacrifice is the deepest forms of analytical and critical thinking—the kinds of thinking that require a calm, attentive mind. The most important work can’t be done, or at least can’t be done well, in a state of distractedness, and yet that’s the state companies today have come to promote.

What’s more, we’re at the dawn of a new era in automation. Thanks to advances in robotics, machine learning, and predictive analytics, computers are becoming adept at jobs requiring sophisticated psychomotor and cognitive skills—tasks that until recently we assumed would remain the exclusive preserve of human beings. Computers are flying planes and driving cars. They’re making medical diagnoses, pricing and trading complex financial instruments, plotting legal strategies, and running marketing campaigns. All around us, computers are making judgments and decisions on our behalf.

There has been much discussion about the effects of rampant automation on the economy and on the labor market in particular. There has been much less attention paid to its effects on human talent and motivation. But what decades of human-factors research tell us is that when computers and other machines take challenging tasks away from us, we turn into observers rather than actors.

Distanced from our work, we lose our focus and become even more susceptible to distraction. And that ends up dulling our existing skills and hampering our ability to learn new ones. If you’ve ever gotten lost while following the step-by-step directions of a GPS device, you’ve had a small lesson in the way that computer automation erodes awareness of our surroundings and dulls our perceptions and talents.

If computers were able to do everything that people can do, this might not be such a problem. But the speed and precision of computers mask their fundamental mindlessness. Software can do only what it’s told. Human beings, blessed with imagination and foresight, can do the unexpected. We can think and act creatively, and we can conceive of a future that is different from and better than the present.

But we can only fulfill our potential if we’re engaged in the kind of difficult and subtle work that builds talents and generates insights. Unfortunately, that’s exactly the kind of work that software programmers have been taking away from us to deliver short-term efficiency gains and to indulge our sometimes self-defeating yearning for convenience.

Nicholas G. Carr is author of  The Glass Cage: Automation and Us (W. W. Norton, 2014). This essay is excerpted from “Perspectives on the long term: What will it take to shift markets and companies away from a short-term way of thinking?” at McKinsey.com.

 

Schwab goes robo

Posted on March 12, 2015 by -

After many years in the making, the provision of low-cost, automated, unconflicted financial advice for the masses (and for the rich, if they want it) seems to have achieved oversight success.

What yesterday was called “robo-advice,” and which today some are calling the “digital advisory channel,” seems to have passed a tipping point. Yet another big company (after Fidelity and Vanguard) in the direct provider segment of the financial services business has adopted such technology, and that firm is offering it to its wholesale as well as retail customers.

To wit: Charles Schwab this week announced a free, fully automated managed account service, Schwab Intelligent Portfolios. The new service uses proprietary software to “build, monitor, and rebalance” diversified portfolios based on investors’ answers to traditional questions about their goals, time horizon and risk tolerance.

The software (or algorithms), created by the Charles Schwab Investment Advisory (CSIA) team, will build client portfolios from combinations of 54 exchange traded funds (ETFs) in 27 asset classes, plus an FDIC-insured cash account. The minimum starting account balance is $5,000, Schwab said in a release. Account holders will get online and phone support from Schwab representatives.

According to the Schwab release, Intelligent Portfolios will draw from:

  • Low-cost ETFs from Schwab and third party providers including Vanguard, iShares and PowerShares which are selected based on quantitative criteria such as size, bid-ask spread, tracking consistency, and operating expense ratio
  • Up to 20 globally diversified asset classes, including equities, fixed income, real estate, and commodities across U.S., international and emerging markets
  • Automatic portfolio monitoring and rebalancing to keep portfolios aligned to clients’ chosen investment strategies
  • Automated tax loss harvesting available at no cost for portfolios starting at $50,000
  • A combination of fundamentally weighted and market cap-weighted ETFs
  • Access from any desktop or mobile device
  • The ability to automatically fund accounts on a recurring basis
  • The ability to fund accounts using mobile check deposit
  • Fully paperless account open and account management
  • Live help from Schwab investment professionals every day, around the clock.
  • No commissions, advisory fees or account service fees charged

A version of Intelligent Portfolios for independent registered investment advisors (RIAs) who custody their client assets with Schwab will be available in Q2, Schwab said. The advisor solution will allow RIA firms to modify asset allocations and customize portfolios from a pool of eligible ETFs. Advisor pricing options will be available including a version with no program management fee, and advisors will be able to incorporate their firms’ branding.

© 2015 RIJ Publishing LLC. All rights reserved.

Symetra launches two new fixed indexed annuities

Posted on March 12, 2015 by -

Symetra Life Insurance Company has rolled out two new fixed indexed annuities— Symetra Edge Plus and Symetra Edge Premier.

Product features include the option for customers to choose from five indexed accounts and a fixed account; and the purchase payment and any previously credited interest are protected from market losses by an interest rate floor of 0%. Symetra Edge Plus offers five- and seven-year surrender periods, while Symetra Edge Premier has a 10-year surrender schedule.

Symetra customers have several options for accessing their money during the surrender charge period including free annual withdrawals of up to 10% of the contract value; nursing home and hospitalization waivers; and the ability to annuitize any time after the first 12 months of the contract.

Also available in both annuities is the JPMorgan ETF Efficiente 5 Index, which generates returns by utilizing an array of exchange-traded funds and a cash index.

© 2015 RIJ Publishing LLC. All right reserved.

Cerulli: 30% of U.S. HNW investors identify as ‘self-directed’

Posted on March 12, 2015 by -

Nearly 30% of high-net-worth investors in the United States defined themselves as self-directed investors, according a recent report from Cerulli Associates.

“This helps explain the dispersion of assets among providers, and although the direct channel’s surge in the high-net-worth market share gains have stemmed in more recent years, providers continue to boost their high-net-worth capabilities and presence among younger, tech-savvy wealth creators,” said Donnie Ethier, an associate director at Cerulli. “For wealth managers, they represent increasingly worthy competitors that will likely test traditional managers’ willingness, and aptitude, to adapt to next-generation investors.”

The report, High-Net-Worth and Ultra-High-Net-Worth Markets 2014: Addressing the Unique Needs of Wealthy Families, analyzed high net worth investors with more than $5 million in assets and “ultra” high net worth investors with more than $20 million in assets.

The high balances help explain where assets have flowed as investors have expanded their provider relationships. According to Cerulli, more than half of high-net-worth investors have direct or online trading account balances between $500,000 and $1 million.

“High-net-worth and ultra-high-net-worth clients that are using a self-directed model represent a significant opportunity for asset managers that pass due diligence screenings,” said Ethier. “In the end, direct providers are yet another avenue for external managers to reach the pool of high-net-worth assets.”

© 2015 RIJ Publishing LLC. All rights reserved.

Jackson National Life income up 17% in 2014, a record

Posted on March 12, 2015 by -

Jackson National Life Insurance Company generated a record $2.3 billion in pretax operating income during 2014, an increase of 17% over 2013. The increase was driven by increased fee income on higher separate account assets under management, according to the firm. The separate account growth resulted from both strong net flows and positive market appreciation during 2014.

Jackson’s net income was impacted by the increase in accounting reserves related to movements in interest rates, which were not fully offset by hedging gains, according to the firm. IFRS accounting for variable annuity liabilities is not necessarily consistent with the expected future cash flows of these liabilities.

Jackson, a wholly owned subsidiary of Prudential Plc, recorded sales and deposits of $28.3 billion in 2014, up 3% over 2013.

Jackson increased total IFRS assets to $212.2 billion at the end of 2014, up from $191.5 billion at the end of 2013. As of December 31, 2014, Jackson had $4.9 billion of regulatory adjusted capital, more than nine times the minimum regulatory requirement.

© 2015 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on March 12, 2015 by -

New brand, ‘American Retirement Association,’ replaces NAPA and ASPPA

The “American Retirement Association” is the new name of an umbrella organization  that includes the American Society of Pension Professionals & Actuaries (ASPPA), the ASPPA College of Pension Actuaries (ACOPA), the National Association of Plan Advisors (NAPA), and the National Tax-deferred Savings Association (NTSA), Brian Graff, the organization’s CEO, announced today. In a release, Graff said:

“As such, the American Retirement Association steps into the role of coordinator, overall industry advocate and provider of services like advocacy, media relations, conference support, communications, membership services, etc. And when the retirement industry as a whole needs a single voice speaking out for its interests, it now has that voice. Each sister organization will continue to be in the public limelight, of course, but associated primarily with those issues that affect its core membership. Each will also continue to set its own membership standards and classifications, and to have its own governance structure.

“In the weeks since the adoption of this new structure, we have been working with the leadership of each of the individual associations, as well as the new American Retirement Association board, to develop branding and logos, and to obtain a new web address, www.usaretirement.org, to accompany our new name and consistent mission: to educate all retirement plan and benefits professionals, and to create a framework of policy that gives every working American the ability to have a comfortable retirement.”

Plans using Financial Engines have $1 trillion in assets

Financial Engines announced that assets in employer retirement plans offering the company’s advisory services now exceed $1 trillion. The company offers independent advisory services to more than 600 companies with more than nine million employees.

The Sunnyvale, Calif., company, founded by Nobel laureate William Sharpe, provides online investment advice, managed accounts and education services for near-retirees. Clients include Delta, Ford, Microsoft and Northrop Grumman.

In the last five years, the company has experienced 245% growth in the aggregate assets of retirement plans where its services are available.

Separately, Financial Engines announced that its Social Security planner program has identified more than six billion dollars in additional Social Security benefits for users. The program was launched last year. 

Scott Kaplan to lead Prudential’s pension risk transfer team

Prudential Retirement has named Scott Kaplan as the head of its Pension Risk Transfer Business team. Kaplan replaces Dylan Tyson, who will join the senior leadership team at Prudential of Korea, based in Seoul. He will focus on retirement strategies for the Korean market.

Kaplan, an 18-year Prudential veteran, most recently led risk transfer and risk management strategies for pension plan sponsors as senior vice president and head of Global Product and Market Solutions in Prudential’s Pension & Structured Solutions business. He previously served as the senior finance leader for Prudential’s individual life insurance business and as managing director within Prudential’s Treasurer’s Department, where he co-headed the Corporate Finance Group and served as Prudential’s liaison with rating agencies.

Kaplan will continue to report to Phil Waldeck, the group head of Pension & Structured Solutions. The rest of the team remains the same, including Amy Kessler, who will continue to serve as the head of the longevity reinsurance team.

Transamerica implements FireLight, new annuity processing program

Transamerica has recently implemented FireLight as its new platform for processing the firm’s annuity products. FireLight, a back office service provided by Insurance Technologies, replaces Transamerica’s in-house data system.

FireLight allows users to quickly validate the accuracy of annuity applications. The system automatically prompts with reminders and confirms the accuracy of the information. The new system also allows Transamerica to offer their distribution partners, including partners who haven’t had access to e-applications in the past, a mobile solution that simplifies the processing of Transamerica products.

© 2015 RIJ Publishing LLC. All rights reserved.