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As UK’s annuity mandate ends, NEST weighs alternatives

Posted on March 19, 2015 by Editorial Staff -

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.

Many rich people are DIY investors: Cerulli

Posted on March 19, 2015 by Editorial Staff -

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.

The Bucket

Posted on March 19, 2015 by Editorial Staff -

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.

Vanguard Answers a Retirement Riddle

Posted on March 18, 2015 by Kerry Pechter -

“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.

Value Investing for Retirement

Posted on March 12, 2015 by Kerry Pechter -

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 Inker Sequence 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.”

Computers as Enablers—and Disablers

Posted on March 12, 2015 by Nicholas G. Carr -

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.

Daniel Kahneman on Intuition, Etc.

Posted on March 12, 2015 by Editorial Staff -

Schwab goes robo

Posted on March 12, 2015 by Editorial Staff -

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.

Symetra launches two new fixed indexed annuities

Posted on March 12, 2015 by Editorial Staff -

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.

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

Posted on March 12, 2015 by Editorial Staff -

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.”

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

Posted on March 12, 2015 by Editorial Staff -

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.

The Bucket

Posted on March 12, 2015 by Editorial Staff -

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.

Pension buy-out sales more than double in 2014

Posted on March 5, 2015 by Editorial Staff -

Group pension buy-out sales reached $8.5 billion in 2014, a 120% increase over the 2013 total of $3.8 billion, according to a survey by LIMRA Secure Retirement Institute.

“After many years of staying in the $1 to $2 billion range, sales in the pension risk transfer buy-out market have eclipsed $3.5 billion for three consecutive years,” said Michael Ericson, analyst for LIMRA Secure Retirement Institute.

Last year the number of buy-out contracts increased to 277, compared to 217 in 2013. The actual number of contracts doesn’t tell the whole story because a few large contracts can significantly affect sales in the market, he said. As a result of two large buy-out deals in the fourth quarter, total assets topped $128 billion in 2014, the highest ever reported.

In fourth quarter 2014 Bristol-Meyers Squibb and Motorola each transferred their group pension obligations to Prudential. The sales from these two deals represented more than half of the $8.5 billion total for the year.

Total buy-out sales in 2014 were the third highest since LIMRA began tracking this statistic in 1986. Sales in 2012 hit a record when General Motors and Verizon offloaded their group pension obligations to Prudential, causing sales to spike to $35.9 billion for the year. Sales in 2012 are seen as an anomaly because those two deals represented nearly all the sales that year.

“The growth in this market is also attracting new players,” Ericson said. “Two new companies entered the market in 2014 bringing the total to 11 companies.”

While a DB pension plan adds equity to a company, years of low interest rates and increasing Pension Benefit Guarantee Corporation premiums have encouraged more companies to consider transferring their risk to an insurer by purchasing a group annuity.

LIMRA Secure Retirement Institute administers the Group Annuity Risk Transfer Survey every quarter.

New living benefit rider from W&S has 7% (simple) 10-year roll-up

Posted on March 5, 2015 by Editorial Staff -

W&S Financial Group Distributors, Inc., wholesale distributor of annuities and life insurance from member companies of Western & Southern Financial Group (Western & Southern), has launched a new variable annuity living benefit rider, Guaranteed Lifetime Income Advantage (GLIA) Plus.

The rider has an aggressive roll-up that’s financed with a substantial rider charge and protected by the issuer’s right to raise the charge to 2% a year.

The new rider, which currently costs 1.35% a year for either single or joint contracts, offers a 7% annual increase in the benefit base during the first ten years for contract years when no withdrawal is taken, along with optional step-ups to new account value high-water marks on a contract anniversary.

In single contracts, the annual withdrawal percentages are 4% a year if the youngest annuitant is age 60 to 64 at first withdrawal, 4.5% for ages 64 to 69, 5% for ages 70 to 74, 5.5% for ages 75 to 79 and 6.25%, for ages 80 or older. In joint contracts, the payout is 90% of the individual payout. The owner must be the annuitant.

There are investment restrictions. Contract owners can choose their own funds, as long as 80% is in a combination of core equity and fixed income. They may also choose any of three managed-risk portfolios, or use either a 2015, 2020 or 2025 Fidelity VIP Freedom target-date fund.

The guaranteed lifetime withdrawal benefit rider is available with AnnuiChoice and Pinnacle variable annuities issued by Integrity Life Insurance Company and National Integrity Insurance Company. The minimum initial contribution is $25,000.

In 2008, Integrity Life and National Integrity Life launched Guaranteed Lifetime Income Advantage (GLIA), another guaranteed lifetime withdrawal benefit. It too remains available with AnnuiChoice and Pinnacle.

How Are Life Insurers Coping? A.M. Best Counts the Ways

Posted on March 4, 2015 by Kerry Pechter -

As long as the stock market doesn’t melt down and interest rates don’t spike, the economic outlook for life and health insurance companies for 2015 is generally benign, according to a special report from the ratings agency A.M. Best released February 24.

The Fed’s quantitative easing policy has been bad and good for life insurers. While it reduces income from bonds and raises the prices of income annuities, it has allowed companies to refinance their debt at lower rates.

By funding a bull market, it has also boosted asset-based fee income from variable annuities, mutual funds and wealth management services for insurers with stakes in those businesses, according to the report, “U.S. Life/Annuity Writers Manage Through a Lower for Longer Reality.”

Life insurers still face headwinds like “marginal to declining premium growth,” an “aging agent and adviser channel,” and “regulatory uncertainty.” But they are also enjoying the benefits of an improving economy, a “benign credit environment,” and smarter risk management.

The report suggests that life insurers are generally weak in the area of technology. While other sectors of the financial service industry are investing in the “digital advisory channel”—aka, robo-advice—insurers “have [relatively] finite resources to harness technology to improve the customer experience,” the report said.

Additional highlights from the 24-page report include:

Share repurchases. Insurers [are managing] capital efficiently through refinancing of their debt, utilization of captives and reinsurance, share repurchases and cash dividends, which continue to contribute meaningfully to improving returns on equity (ROE). Stock companies continue to use share repurchases as an alternative to deploying capital for M&A and organic growth.

Stable companies. Company watch lists, “which sometimes rivaled the Manhattan phone book in size” after the financial crisis, have dwindled to levels not seen for many years.

FIA sales. Indexed annuities with living benefit features now comprise roughly three-quarters of indexed annuity sales. A.M. Best expects more companies to begin introducing gender-based pricing on indexed annuities.

VA evolution. The risk profile of VA sales is changing, with some companies recording as much as 30% to 40% of their new sales in investment-only VA products. Market concentration remains roughly in line with prior years, with the top 20 companies holding more than 90% of the VA market. VA sales have been moderating somewhat as a result of companies exiting the market or dialing down their sales targets to better balance their risk profiles.

Growth opportunities. Overall growth within the United States remains “challenged,” the report said. But niche opportunities exist in Asia and Latin America, the pension risk transfer business, and sales of both retail and institutional deferred income annuities.

Explained: The fall and rise in the average retirement age since 1880

Posted on March 3, 2015 by Editorial Staff -

The average retirement age—based on the age when labor force participation among older workers drops below 50%—was about 64 for men and about 62 for women in the U.S. in 2013, according to a new research brief from the Center for Retirement Research at Boston College.

From about 1880 to about 1980, according to the paper written by CRR director Alicia Munnell, percentage of older adults who were working steadily declined. The decline began as a result of the availability of pensions for Civil War veterans and continued through the development of private pensions and the passage of Social Security.

That “downward trajectory stopped around the mid-1980s and, since then, the labor force participation of men 55-64 and men 65 and over has gradually increased,” writes Munnell, whose research has identified working longer as an important hedge against longevity risk. The following factors, the paper says, account for the turnaround since the mid-1980s:

Social Security. The liberalization, and for some the elimination, of the earnings test removed a perceived impediment to continued work. The significant increase in benefits for each year that claiming is delayed between the Full Retirement Age and age 70, has also improved incentives to keep working.

Pension type. The shift from defined benefit to 401(k) plans eliminated built-in incentives to retire. Studies show that workers covered by 401(k) plans retire a year or two later on average than similarly situated workers covered by a defined benefit plan.

Improved health and longevity. Average life expectancy for men at 65 has increased about four years since 1980, and evidence suggests that people may be healthier as well, particularly the affluent and wealthy. Healthy people tend to work longer.

Education. People with more education work longer. The movement of large numbers of men up the educational ladder helps explain the increase in participation rates of older men.

Less physically demanding jobs. The shift away from manufacturing to knowledge-based jobs activities puts less strain on older bodies.

Joint decision-making. More women are working, wives on average are three years younger than their husbands, and husbands and wives like to coordinate their retirement. If wives wait to retire until age 62 to qualify for Social Security, that pattern would push their husbands’ retirement age towards 65.

Decline of retiree health insurance. Combine the decline of employer-provided retiree health insurance with the rapid rise in health care costs, and workers have a strong incentive to keep working to maintain their employer’s health coverage until they qualify for Medicare at 65.

Non-pecuniary factors. Older workers tend to be among the more educated, the healthiest, and the wealthiest. Until recently at least, their wages have been lower than those earned by their younger counterparts and lower than their own past earnings. This pattern suggests that money may not be the only motivator.

By the same token, the recent leveling off of the average retirement age suggests that some of the factors listed above are no longer having a substantial impact:

Social Security’s delayed retirement credit is fully phased in
The shift from defined benefit to defined contribution plans is nearly complete in the private sector
Delay due to the availability of Medicare has played its role
Education is no longer increasing
Improvements in health may have stabilized
Increases in longevity may not be salient

Munnell’s bottom-line is that people should work longer if they possibly can, especially if they haven’t saved enough yet to maintain an acceptable standard of living in retirement. “Working longer is the key to a secure retirement, she writes. “Monthly Social Security benefits claimed at age 70 are 76% higher than those claimed at 62. The fact that people are always amazed when presented with this information suggests that a major educational initiative may be warranted.”

With acquisition, Envestnet arms itself against robo-advice threat

Posted on March 3, 2015 by Editorial Staff -

Only weeks after Fidelity bought eMoney Advisor, in part to avoid conceding the “digital advisory channel” to “robo-advisors,” Envestnet, the big Chicago-based advisor technology platform provider, has bought a digital advice company.

Envestnet, Inc., which serves about 40,000 financial advisors, has acquired Upside, a technology company providing digital advice solutions to financial advisors. Terms of the acquisition were not disclosed.

“Upside helps financial advisors compete against other digital advisors, or ‘robo advisors,’ by leveraging technology and algorithms to advise, manage, and serve clients…” an Envestnet release said.

The acquisition combines Upside’s advisor-labeled, investor-facing financial planning and investment management platform with Envestnet’s suite of investment solutions, portfolio analytics, account servicing infrastructure and reporting capabilities.

“Advisors leverage our technology today to automate operations and effectively deploy many elements of a robo or digital advisor offering,” said Stuart DePina, Group President Envestnet | Tamarac. “While many see robo offerings as serving the mass affluent, advisors know a growing percentage of their high net worth clients are demanding to access their financial portfolios and interact with their advisor online.”

“The investment advisory market is undergoing a period of significant change through the adoption of technology,” said Tom Kimberly, co-founder and CEO of Upside.

“By providing access to managed portfolios from some of the world’s leading investment strategists through Upside’s platform design, we can extend the automated advice delivery model in a way that further increases the relevance of the financial advisor,” said Bill Crager, president of Envestnet.

Mr. Kimberly and Juney Ham, co-founder and president of Upside, will join Envestnet as senior vice presidents.

RetirePreneur: Brian Doherty

Posted on March 2, 2015 by Jenna Gottlieb -

What I do: Currently, I am a Social Security author, speaker and consultant and my company is Filtech. I am presenting to different companies across the country, to the general public and financial advisor groups. Over 66% of today’s beneficiaries are critically or totally dependent on Social Security to maintain their retirement lifestyle. With people living longer and longer, it’s important to make the right claiming decision. My workshops aim to make it easy for Americans to delay claiming Social Security to age 70, and maximize their benefits, by showing them how they can get paid to wait. Doherty copyblock

Where I come from: I began my career as a financial advisor with Dean Witter and worked for 25 years in the financial services industry. I served as president and CEO of Key Bank’s investment subsidiary, Key Investments, and vice president and national sales manager for New York Life’s Retirement Income Security Division. While working for New York Life, I became increasingly focused on the importance of Social Security income in retirement. I retired to do speaking and Social Security workshops full time and to write mybook.

On owning a business: I left New York Life in September 2010. There’s a freedom in being on your own. While New York Life still sponsors some of my presentations, it’s kind of neat that they don’t try to push me in any one direction. And while it’s exciting being on your own, being able to finance it all can be challenging. It’s been four years and I’ve spent more money that I thought I would. It’s a more expensive venture than I anticipated.

My clients: There are two to four million people who make the decision of when to take Social Security every year. My clients are anyone who will be making a Social Security claiming decision in the future. I also work with advisors and financial institutions.

My new book: My book, Getting Paid to Wait, has just come out this January, and I will be launching my Paid to Wait Calculator on my website soon too. The first half of the book addresses a series of nine “Why Wait Factors.” One factor, for example, is the cost of living adjustment (COLA) feature on Social Security. While everyone receives the same annual COLA on their benefits, when you apply that percentage to a larger amount it results in a bigger increase. So by delaying to age 70, you not only maximize your Social Security benefit, you also lock in the biggest dollar increases possible for the rest of your life. This is something people rarely consider and it’s the only pay raise most retirees receive in retirement. Over the course of a 15, 20, or 25 year retirement, this can make a huge difference.

My business model: My former employer, New York Life, has sponsored the majority of the presentations I have given over the last three years. Now that my book is available, I will be working with some other financial institutions as a speaker. I fully expect to sell a lot of books within the financial services industry, but my ultimate goal is to market my book to the general public. Over time, I expect to sell ten million books. My Social Security calculator will also be available on my website and there will be a nominal charge to use my calculator.

My biggest obstacles and how I overcome them: The Social Security space is very crowded. There are a lot of calculators and books currently available on the topic. I believe most of them have a similar message by focusing on the advantages of delaying benefits if you think you will live a long time, into your late 80s or 90s. They tell the consumer that there are many Social Security strategies available to them, some even state that a married couple may have tens of thousands of different claiming combinations to choose from and the best strategy depends upon how long they think they are going to live. During workshops and in my book, I give a few reasons why they should delay claiming their benefits as long as possible, ideally until age 70. Then I make it easier for them to do that, by showing them the one strategy that will pay them the most amount of Social Security income while they delay. So instead of telling them that there are literally thousands of different claiming combinations, I tell them the one strategy that will pay them the most amount of money while they wait.

My retirement philosophy: I have had a unique opportunity to get a real life glimpse of what retirement will be like. Over the last four years I really haven’t done much but focus on writing my book. Outside of some occasional public speaking, many times during those few years it felt like I was retired. Over this period of time, I realized two things about retirement. First, the day still goes by very fast. And, second, you still spend a lot of money.

I am a big believer in guaranteed lifetime income and plan on having multiple sources of it in retirement. I am fortunate because I receive a monthly pension check from New York Life. I also plan on taking my own advice and waiting until age 70 to claim my Social Security benefits, thereby maximizing that source of guaranteed lifetime income. I also plan on purchasing an immediate annuity. My plan is to cover most of my expenses in retirement with guaranteed sources of lifetime income. There have been a number of studies done on what makes retirees happy. It turns out that retirees with the largest amount of guaranteed lifetime income are much happier in their retirement. If you want to be happier in retirement then get some more guaranteed lifetime income.

On shoring up Social Security: I think higher taxes would be the easiest way to go. Increasing the payroll tax from 6.2% to 7.7% for employers and employees would shore up Social Security for the next 75-100 years. We could also raise the earnings cap, which is currently at $118,000. Only 6% of all wage earners in this country exceed the earnings cap and it would make a big difference to increase it to $300,000 or $400,000. Making the full retirement age older would be a type of benefit cut. Right now it’s 67 for those born 1960 or later. I don’t know if they need to do that, but if they do, it might provide a big savings. There might have to be trade-offs in fixing the system. It’s important to remember that Social Security is the greatest anti-poverty program in the country and it needs to be preserved.

In Denmark, interests of retirees and urban renters collide

Posted on March 2, 2015 by Editorial Staff -

Urban planners and architects worldwide have been jazzed by the prospect of turning the site of the old Carlsberg Brewery, two kilometers from the center of Copenhagen, Denmark, into a 140-acre, carbon-neutral, people-friendly, multi-use 21^st century cityscape.

Danish pension provider PFA, labor-market fund PenSam and insurer Topdanmark are financing half of what’s called the Carlsberg City Project (see project layout below). But their hopes for significant gains—and more secure incomes for future retirees—may be jeopardized by a new law requiring a big chunk of the site to be reserved for not-for-profit or “social” housing.

The Danish pensions and insurance industry association, Forsikring & Pension (F&P) has warned that the new law requiring 25% of construction land in Denmark to be used for “social housing” will hurt the value of real estate investments by the pension funds and disrupt existing projects.

In Denmark, social housing is rental housing offered at at-cost prices by not-for-profit housing associations, according to HousingEurope.com. Based on the principle of “tenants’ democracy,” it involves management of the housing by the tenants themselves. Not-for-profit housing currently accounts for about 20% of Denmark’s housing stock.

The new planning law could lead to lower returns on investment in urban development and, potentially, to lower incomes for current and future pensioners, said F&P. The new law “cast doubt on whether the government wholeheartedly wanted the insurance and pensions sector to participate in solving Denmark’s growth challenges,” said F&P’s CEO, Per Bremer Rasmussen, according to a IPE.com report.

Despite his “great respect” for the political desire for more mixed residential composition, he said the new law would have a cost. “If 25% of construction stock is now suddenly reserved for public housing, the price will be lower than the market value that was the original condition for the investment.”

The retroactive nature of the law was “unacceptable,” he added. “It is totally unacceptable that the law also applies to current residential projects,” Bremer Rasmussen said. “Pension companies went into projects with full confidence in the existing detailed local planning frameworks.”