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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.

 

 

Pension buy-out sales more than double in 2014

Posted on March 5, 2015 by -

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. 

© 2015 RIJ Publishing LLC. All rights reserved.

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

Posted on March 5, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights reserved. 

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

Posted on March 4, 2015 by -

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. 

© 2015 RIJ Publishing LLC. All rights reserved.

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

Posted on March 3, 2015 by -

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.”

© 2015 RIJ Publishing LLC. All rights reserved.

With acquisition, Envestnet arms itself against robo-advice threat

Posted on March 3, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights reserved.

RetirePreneur: Brian Doherty

Posted on March 2, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights preserved.

In Denmark, interests of retirees and urban renters collide

Posted on March 2, 2015 by -

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 21st 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.”

Carlsberg City Project image

© 2015 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on February 26, 2015 by -

Fidelity offers bonuses for IRA contributions

In a stunt that echoes the $600 bonuses that TD Ameritrade and E*Trade offer for big-ticket IRA rollovers, Fidelity announced today that it will match a percentage of a person’s contributions to his or her IRA for three years after he or she opens a Fidelity IRA with a lump sum of $10,000 or more.

The matches on the three annual follow-on contributions range from as small as one percent if the new IRA is opened with a deposit of $10,000 to $50,000, to as large as 10% if the new IRA is opened with at least $500,000.

Here’s how a Fidelity release described the new offer:

  • The match is available to new or existing customers who transfer a Roth, Traditional or Rollover IRA to Fidelity.
  • When this occurs, and an individual makes contributions to the IRA over the next three years, Fidelity will match the annual contribution up to 10%.
  • Direct rollovers from a 401(k) or 403(b) plan are not eligible.
  • If a customer transfers $500,000, he or she will earn 10% on future contributions.
  • If a contribution of $5,500 is made in the first year, that customer will receive a $550 match.

There’s a 1.5% match for three annual contributions made after an initial deposit of $50,000 to $100,000, 2.5% for contributions made after a deposit of $100,000 to $250,000, and 5% for contributions made after a deposit of $250,000 to $500,000, Fidelity said in a release. 

DoL won’t ban commissions: Wagner Law

The Wagner Law Firm, which specializes in pension law, offered the following report this week:

The White House and the U.S. Department of Labor (“DOL”) have released new information concerning the DOL’s highly anticipated proposal to revise its fiduciary definition under ERISA.  The DOL proposal has not yet been published, but the Obama Administration has arranged this coordinated release of information as part of its ongoing efforts to promote the proposed rule change.

Broader Fiduciary Definition. Updated information concerning the DOL fiduciary proposal was circulated through a newly released fact sheet from the White House as well as FAQs posted on the DOL’s website.  As discussed in these releases, the DOL proposal would indeed broaden the definition of “investment advice,” which in turn would broaden the scope of advisors to plan clients who would be viewed as fiduciaries for ERISA purposes. 

New fiduciary standard and exemption.  Under the proposed rule, advisors under the new fiduciary definition would be required to put their client’s best interest first.  However, the proposed rule would not require advisors to eliminate their conflicts of interest.

Instead, the proposal would include a prohibited transaction exemption that would merely require advisors to mitigate their conflicts and also disclose them.  The new exemption would be “principles-based” (i.e. based on general principles rather than detailed “rules-based” requirements), providing advisors with the flexibility to adopt appropriate practices and adapt them over time. 

Although the applicable releases do not explicitly reference the Investment Advisers Act of 1940 (the “Advisers Act”), based on the description of the new fiduciary standard and exemption, it appears that the DOL fiduciary proposal would impose a set of principles-based requirements on advisors to plan sponsors and participants that would be analogous to those found under the Advisers Act.

No ban on commissions or non-fiduciary education. The applicable releases state that the DOL remains committed to ensuring that all common forms of compensation, including commissions and revenue sharing, would still be permitted under the proposal. Thus, it appears that the new exemption under the DOL proposal would permit the receipt of “variable compensation” so long as the conflict is mitigated under the advisor’s practices and fully disclosed. The releases also state that advisors would continue to be able to provide general education on retirement savings across plans and IRAs without triggering fiduciary status.  For example, when providing guidance on the mix of stocks and bonds that a person should have based on his or her expected retirement date, the advisor should be able to provide such guidance in a non-fiduciary capacity.

Next steps for DOL fiduciary proposal. Although the DOL proposal has not yet been published, Labor Secretary Thomas Perez has informally stated that the proposed rulemaking is being submitted to the Office of Management and Budget (“OMB”).  Following a standard interagency review at OMB, which is expected to be completed within 90 days, the DOL proposal would finally be made available to the public.  

CEA Report on Conflicted Advice.  In addition to the releases described above, the White House Council of Economic Advisers (“CEA”) released a report analyzing the economic cost of conflicts of interest.  The report makes the following conclusions:

  • Conflicted advice lowers investment returns by roughly 1 percent annually.
  • The aggregate annual cost of conflicted advice for IRA assets is roughly $17 billion each year.
  • A retiree receiving conflicted rollover advice will lose roughly 12 percent if the savings are drawn down over 30 years.

The focus of the CEA report suggests that the DOL fiduciary proposal will include significant restrictions on advisors seeking to provide rollover advice to participants. Presumably, the CEA report will be used to support the DOL’s required economic analysis for its proposed rulemaking, quantifying the costs of conflicts and the expected impact of the rule. 

Additional resources

http://www.whitehouse.gov/the-press-office/2015/02/23/fact-sheet-middle-class-economics-strengthening-retirement-security-crac

http://www.dol.gov/featured/protectYourSavings

http://www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf

Year-over-year changes in 401(k) fees are minimal, new book shows

The average total plan cost for a small retirement plan (50 participants/$2,500,000 assets) remained flat at 1.44% over the past year, while underlying investment fees declined, according to the newly released 15th Edition of the 401k Averages Book.

“Although total plan costs remained flat or increased by a basis point for the majority of plan sizes, we saw a year-over-year decline for eight of the nine investment categories we track,” said David Huntley, the book’s co-author.

“For example, Large US Equity fees declined from 1.40% to 1.38% and Target Date Funds from 1.35% to 1.32%,” he said, noting that participants’ exposure to equities and target date funds has grown as 401(k) balances reach new highs. “Traditionally US equities, target date funds and international have higher expenses than fixed income and stable asset so the shift from one to the other resulted in total plan costs remaining flat.”

For large retirement plans (1000 participants/$50,000,000 assets), total plan costs were flat at 1.03% and underlying investment fees declined. The study shows Large US Equity fees declined to 1.03% from 1.05% and Target Date Funds to .96% from 0.98% for large retirement plans.

“Plans have been successful at driving down investment expenses by changing share classes or prudence in the selection process,” said Joseph Valletta, Huntley’s co-author.  

Wide range between low- and high-cost providers

Total plan costs on a small plan range from .43% to 1.88%, while large plan costs range from 0.31% to 1.38%.   

The 15th Edition of the 401k Averages Book can be purchased for $95 by calling (888) 401-3089 or online at www.401ksource.com.

Plans offer automated advice to disengaged participants: Cerulli

Advice in defined contribution (DC) plans is mainly delivered automatically today and is often administered without any action from the plan participant, according to Cerulli Associates, the global analytics firm.

“Plan sponsors have increasingly embraced auto-features, which were once thought of as radical, in an attempt to boost plan participation and employee contributions,” said Jessica Sclafani, senior analyst at Cerulli, in a release. “This shift in perception is in response to the overall lack of participant engagement.” 

“Retirement advice begins with auto-enrollment, which informs employees they should save for retirement. Auto-enrollment is a crucial first step in auto-advice that captures the most vulnerable population of the workforce that isn’t saving at all,” the release said. 

According to Cerulli’s 2014 Plan Sponsor Survey, 73% of plan sponsors have incorporated automatic features into their plan design. Nearly 90% of plans use auto-enrollment, with the majority of flows directed toward target-date funds. 

“While widespread adoption of auto-enrollment is a step in the right direction, a deferral rate of less than 5% salary is inadequate and will not translate to retirement security,” the release continued.

Because the participant bears the most responsibility for saving, Cerulli said, it views the implementation of auto-features as a “realistic versus paternalistic” approach to plan design.   

Betterment receives $60 million in new private equity

Betterment, the automated investing service, has announced the close of a $60 million round of growth funding. Private equity firm Francisco Partners led the financing, which includes investments from previous investors Bessemer Venture Partners, Menlo Ventures, and Northwestern Mutual Capital.

Launched in 2010, Betterment manages more than $1.4 billion of assets in tax-efficient, personalized portfolios for more than 65,000 customers and considers itself the largest automated investment service, by size of customer base.

Peter Christodoulo of Francisco Partners has joined Betterment’s board of directors, the company also announced. Francisco Partners has made previous investments in Prosper Marketplace, eFront, PayLease, Paymetric, Avangate and Hypercom, among others.

In the past year, Betterment has introduced new features, including Tax Loss Harvesting+ and Tax Impact Preview. The company also recently unveiled Betterment Institutional, a digital solution for financial advisors. 

Northwestern Mutual revenues reach record $26.7 billion

Northwestern Mutual posted record levels of revenue, assets and surplus for 2014, as well as a dividend payout to policyowners for 2015 that is expected to exceed $5.5 billion, a record, the company said in a release.

In 2014, Northwestern Mutual’s revenue ($26.7 billion), total assets ($230 billion), operating gain before dividends and taxes ($6.1 billion), and total surplus ($22.6 billion) all reached record high levels.

In addition, the company said it increased its life insurance in-force to $1.5 trillion (five percent over 2013) and managed more than $87 billion in client investment assets (12% over 2013).

The $5.5 billion of total dividends Northwestern Mutual expects to distribute to policyowners in 2015 includes record dividends on traditional permanent life insurance ($4.8 billion), disability income insurance ($320 million), term life insurance ($150 million), and variable life insurance ($105 million). “We also expect to pay $45 million on fixed and variable annuities,” the release said.

The company also expanded its Portfolio Income Annuities to the non-qualified market in 2014, fueling annuity sales. Total annuity sales reached a record $2.4 billion, up four percent over 2013. In 2015, the company plans to introduce the Accelerated Care Benefit, a new optional benefit available with its permanent life insurance to help meet long-term care needs.

A new 1.1 million sq. ft. expansion of Northwestern Mutual’s corporate headquarters in downtown Milwaukee, Wisconsin, is under construction. The company expects to add 1,900 jobs by 2030. In 2015, it expects to add more than 450 employees, many of them in information technology.  

© 2015 RIJ Publishing LLC. All rights reserved.

UBS Looks at Longevity and Annuities

Posted on February 25, 2015 by -

At the Investment Management Consultants Association’s annual conference, held in midtown Manhattan on a wet, windy day in early February, a UBS executive gave a presentation titled “Planning for Longevity Risk Certainty.” (The strikethrough was his, and it was intentional.)

Michael W. Crook’s slides weren’t exactly what you expect to see in that type of venue. The wealthy clients of IMCA members usually don’t run out of money in retirement, unless they’re reckless. And wealth managers at wirehouses like UBS aren’t known for their interest in things like longevity risk or annuities.      

Crook, the head of portfolio and planning research at UBS Financial Services, never did mention annuities in his IMCA presentation. But the fact that he addressed longevity risk at all, and that IMCA asked him to speak to its members about it, hints at a growing interest in lifetime income where it once hardly existed.

“Clients and prospects have been asking about it,” Crook told a few hundred investment managers, mostly men in business-casual. He spoke in a hotel ballroom just north of Times Square, where TV screens the size of tennis courts poured sensational images, colors and ad slogans down on phone-wielding tourists from Asia and Europe, like hot oil on barbarian invaders.

Times are changing.  In addition to tax minimization and estate planning, high-net-worth clients, especially those without pensions, recognize a need for guaranteed lifetime income. And even the wirehouses—UBS, BoA Merrill Lynch, Morgan Stanley Smith Barney and Wells Fargo—have begun talking the longevity talk.   

The wealthy have more longevity risk

The wealthy in particular should worry about longevity risk because they tend to live the longest, Crook pointed out. As couples, they live even longer. His father, a smoker, died in his 60s, he said, but his mother, a retired teacher, is still alive in her 90s. (The wealthiest 55-year-old Americans can expect to live about 10 years longer on average than the poorest, according to the Brookings Institute.) Major risks to wealth in retirement

“Keep in mind that the people you’re working with aren’t average,” Crook said.

People who live the longest, no matter how much rich or poor they are, can eventually face frailty and isolation. Recognizing this, Crook said, UBS urges its advisors to ask clients three simple non-financial questions: Who will change your light bulbs? Where will you get an ice cream cone? Who will you have lunch with?

These questions help clients focus on three major challenges in retirement: coping with physical limitations, relocating to a more convenient residence, and maintaining an adequate social network. While the questions don’t directly address finance, they all involve needs—home maintenance, transportation, and recreation—that could entail financial decisions.

Like other retirement experts, Crook talked about the threat of sequence of returns risk for retirees. This is the risk that a retiree will be forced to sell depressed assets in order to generate income, especially in the 10-year “red zone” that’s centered on the retirement date. One way to protect yourself from this type of volatility or market risk, he said, would be to “manage both sides” of the household balance sheet and to live on borrowed money if the market drops while you’re in the red zone.

In fact, UBS has created a “securities-based lending program” to facilitate such a strategy. Using creditworthy clients’ investments at UBS as collateral, the bank offers credit lines of $55,000 or more to clients at a maximum interest rate of LIBOR plus 5.5%. It would serve as an alternative to holding enough cash to cover a year or two worth of living expenses, or to securing a source of income, perhaps from an annuity, that’s immune to market volatility. 

Besides helping clients avoid losses during downturns, leverage can help increase returns during upturns, Crook said at the IMCA conference. “You can get a one percent larger return on your assets with the appropriate amount of leverage,” he said. “The prudent use of leverage is not that risky. There’s a clear tactical opportunity between the costs of the debt and the return on assets. It’s a simple way to take advantage of both sides of the balance sheet.”

Bucket list

“Bucketing” is a popular if somewhat controversial approach to investment management in retirement, and one of Crook’s slides showed his version of it. The slide referred to a conservative “liquidity” bucket “dedicated to preserving lifestyle over the next 3-5 years,” a balanced/growth “longevity” bucket “dedicated to achieving lifetime consumption goals,” and a growth or speculative “legacy” bucket with “excess assets not necessary for lifetime consumption.”

Michael CrookCrook (left) used “longevity” as the label for an income-generating bucket during retirement, as opposed to the label for a bucket whose assets are a hedge against longevity risk.  He showed a rough schematic of each bucket’s content at three different ages: 35, 65 and 85.

During the working years (age 35), the liquidity bucket would be tiny, the longevity bucket growing, and the legacy bucket empty. At age 65, the longevity bucket would be the largest of the three buckets. At age 85, the liquidity bucket would be the same size it was at age 65, the longevity bucket would have shrunken to roughly the size of the liquidity bucket, and the legacy bucket would dwarf the other two.

Asked after the conference where annuities might fit into this scheme, Crook said, “The annuity question is a tough one. There’s pretty conclusive evidence that they have a role to play for some households, and that people like annuitized income when it is endowed to them (pensions, etc). However, it’s a hurdle for many investors to purchase something with a negative expected value (like all insurance).”

But there are signs that UBS interest in individual retail annuities may be growing. Last fall, UBS advertised on LinkedIn for someone to fill a vacancy for an Annuity and Insurance Specialist to support financial advisors and promote the UBS Retirement Platform to financial advisors. Also last fall, the company’s CIO Wealth Management Research division dedicated the quarterly issue of its magazine, “Your Wealth & Life,” to “Navigating Longevity.”

An annuity executive at UBS confirmed to RIJ that his company is encouraging its advisors to become more familiar with indexed annuities—an insurance product whose strong sales in the insurance channel many broker-dealers and wirehouses are no longer able to ignore.

“They recognize that, on the whole, there’s value in that type of product,” Steven Saltzman, of Saltzman Associates, which conducts roundtable discussions where distributors from many different companies can talk frankly about product trends.

“They see indexed annuities as effective vehicles for income riders, and they see a need to educate and inform their advisors about them. Only a few years ago, these advisors were selling against indexed annuities. Now that there are better product choices available, they feel that it’s incumbent on them to provide education.”Three questions from UBS

In an email to RIJ, Crook expressed interest in CDAs, or contingent deferred annuities. These products are a lifetime income rider, sold by an insurance company, which registered investment advisors can wrap around portfolios of mutual funds. If the value of the portfolio goes to zero as a result of withdrawals or market depreciation, the insurer pays a monthly income for life. In essence, the product (sometimes known as stand-alone living benefit or SALB) is a variable annuity guaranteed withdrawal benefit that’s unbundled from the variable annuity.

But the product, championed by Prudential as a way for insurers to sell a product to the annuity-resistant RIA channel but descried by MetLife as a source of uncontrollable risk, has been slow in coming to market. (See ARIA Retirement Solutions, as an exception.) The National Association of Insurance Commissioners has been studying the product to determine whether it is or isn’t an insurance product, and how it should be regulated. 

© 2015 RIJ Publishing LLC. All rights reserved.

Are the Bears Crying Wolf?

Posted on February 25, 2015 by -

Remember protractors? Those six-inch plastic half-moons that helped you pass high school geometry? I still have one, and it helps me decide if stocks are overvalued. That’s right. When the angle of the rise in the S&P 500 Index exceeds 67.5%, I back away from equities.  

Call it “poor man’s technical analysis.”

When this homespun methodology starts telling me that equities are no longer a bargain, I don’t necessarily sell shares; I just stop buying more. To be sure, I’ve missed more than half of the current rally. But I don’t feel terribly alone, because serious technical analysts seem to share my belief that stocks are too dear.   

Chart watcher Brad Lamendorf, for instance, is chief information officer at the Lamendorf Market Timing Report and sub-advisor to the Advisor Shares Ranger Equity Bear Exchange Traded Fund. In the February issue of his report, he writes, “At the present time EVERYTHING is overvalued.” Protractor

“From a historical perspective,” Lamendorf concludes, “equity markets are exceedingly expensive. Investors have become far too over-confident, as evidenced by the sentiment gauges highlighted in this issue of LMTR.”

Of course, bear fund advisors like Lamendorf, John Hussman and others have been calling for a crash for many months or even years. But when I showed Lamendorf’s charts to Doug Short, a technical analyst who writes the Financial Life Cycle blog at AdvisorPerspectives.com, he didn’t dismiss Lamendorf as just another bear crying wolf.

“[Lamensdorf’s] conclusions match spot-on the conclusions I reach in the indicators I track monthly,” Short told RIJ this week. “An amplifying concern I have is the magnitude of margin debt. The concern is that we could potentially see a sudden liquidity problem in the event of a major downside shock.”

Jim Otar, a Toronto-area advisor, writer and creator of the Retirement Optimizer, takes it for granted that we are headed for a setback, but he doesn’t know when it will occur. “I think [equities are] a little bit overvalued but not stratospheric considering where bond yields are and current, excessive political/social risk present throughout the rest of the world,” Otar told RIJ. “I am sure there will be some correction of 20%-40% some time during the next three years, but that is nothing unusual.”

Lamensdorf’s lament is based on his observations of three ratios: the equity-price-to-sales ratio, the ratio of enterprise-value-to-EBITDA (earnings before interest, taxes, depreciation and amortization), and “Tobin’s q,” the ratio of the market value of a company’s productive assets to the cost of replacing those assets at current prices.

Those three ratios are at their second-highest levels ever—second only to levels seen just before the millennial tech crash, he writes. The price to sales ratio is 1.7, which is second only to the 2.1 registered in 2000, the enterprise value to EBITDA ratio is also at its second highest level, after 2000, at 11.5. Tobin’s q is 1.09—its highest level since peaking at more than 1.6 in 2000.

All of which tells him that the market is overripe. Short’s measurements point to the same conclusion. “Based on the latest S&P 500 monthly data, the market is overvalued somewhere in the range of 60% to 94%, depending on the indicator, down slightly from the previous month’s 61% to 96%,” he wrote on February 4.

“Overvaluation would be in the range of 73% to 105%, little changed from last month’s 74% to 106%. At the end of last month, the average of the four [indicators I use] is 77%, off its 80% average last month, which topped two standard deviations above the mean and was the highest average outside 46 months during the Tech Bubble from September 1997 to July 2001.”

Margin debt is one of the things that Short looks at, and his charts show that it is at all-time highs, in real terms. It spiked in March 2000 at about 280% of its 1995 value, at about 330% of its 1995 value in July 2008, and it peaked at about 360% of its 1995 value in February 2014. In current dollars, New York Stock Exchange margin debt is now just below its February 2014 zenith, at about $450 billion. 

“Leverage on the NYSE continues to hit daily highs, reinforcing the complacent nature of the market,” Short told RIJ in an email. “In our opinion, when the market turns downward its force will be swift.”

Technical analysis may or may not be valid, but it’s difficult to rely on fundamentals at a time when, as Short writes, “the markets [are] largely driven by the… Federal Reserve,” or when stock buybacks may be distorting the market indices.

Writes Lamendorf, “Earnings are being artificially manufactured rather than growing organically. Instead of funding [rising pension] liabilities, corporations have been manipulating their balance sheets by creating corporate buybacks to bolster earnings-per-share, thereby directly manipulating the PE.”

Another keen market watcher is Charles Biderman, chairman of TrimTabs Investment Research and portfolio manager of the TrimTabs Float Shrink ETF. He has been keeping track of stock buybacks.

“A lot of people think there’s a relationship between the market and the economy. But in the stock market, there’s just shares,” Biderman told RIJ. “Since 2011, the share count has been falling. As the total number of shares goes down, there’s more money chasing fewer shares. Share prices go up. There is no sustainable economic growth absent all of these tweaks and twinges.”

Biderman brushed aside suggestions that cheap money might be fueling stock buybacks or contributing to the near-record amount of margin debt, but he believes that low rates have fostered bubbles in, say, commodities. “When you cut interest rates to zero, products that you have to borrow money to buy become cheaper, and demand is pulled forward by the price cut. If Janet Yellen raises rates, the economy will crater,” he said.

We all know that market timing is a loser’s game and that the market is theoretically efficient. But if you’re a Boomer on the cusp of retirement and your vulnerability to sequence-of-returns risk is at or near its peak, statistics and statements like this can’t help but give you pause.

If stocks are in fact highly over-valued, this might be the right time to sell some long-held shares and start funding, say, a flexible-premium deferred income annuity. Annuity yields may be low, but you’ll be paying for your contract with arguably over-valued equities. 

This just in: The Treasury Department’s Office of Financial Research issued a bulletin on February 26 entitled, “Volatility Returns Amid Oil Price Declines, European Developments.” It said in part: 

“In Q3 2014, analysts had forecast 2015 earnings growth of approximately 12%; the current consensus estimate is 4%, while revenues are expected to remain flat. The principal cause of this change is the decline in oil prices, and its sizable impact on energy firm earnings. The other main cause is the stronger U.S. dollar, as roughly one-third of U.S. corporate profits are earned overseas. Meanwhile, earnings results from Q4 2014 have been mixed.

“Despite the markdown in expected earnings, broad U.S. equity prices remain near all-time highs. The forward price-to-earnings ratio is at 17, the highest since 2002 (Figure 6), while the cyclically-adjusted price-to-earnings ratio is highly elevated at 27.

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