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Another longevity reinsurance deal for Prudential Retirement

Posted on January 15, 2015 by Editorial Staff -

Prudential Retirement, a unit of Prudential Financial, announced this week that it will reinsure the longevity risk of eight pension plans managed by Rothesay Life Limited and its affiliates. The transaction marks Prudential Retirement’s fifth longevity reinsurance deal since 2011 with Rothesay Life and the second in the past six months, according to a release.

The transaction covers longevity risk associated with pension liabilities of $450 million (about 288 million Pounds Sterling) for some 25,000 retirees and deferred members in the U.K.

In August 2014, Prudential announced a $1.7 billion (about 1 billion Pounds Sterling) transaction covering 20,000 annuitants. The Rothesay transactions followed Prudential’s agreement in July to reinsure $27.7 billion of longevity risk associated with BT Pension Scheme liabilities.

Security Benefit adds high-dividend stock index to fixed indexed annuity

Posted on January 15, 2015 by Editorial Staff -

Security Benefit Life has added one-year and two-year interest crediting options based on the BNP Paribas High Dividend Plus Index (HD Plus Index) to its Total Value Annuity (TVA), the company announced this week.

The HD Plus Index is made up of high-dividend stocks, chosen through a “rules-based” strategy that adds “yield-enhancement” and “risk-reduction” overlays to a dividend-focused stock portfolio, according to Security Benefit.

Every month, the HD Plus Index tries to buy stocks it expects to pay strong, consistent dividends. On average, the HD Plus Index is comprised of 75 to 80 highly liquid, non-financial U.S. stocks. The Index also aims for a targeted volatility rate of 6%—about half the S&P500’s historical volatility—through actively adjusted cash exposure.

Illinois Mandates Workplace Retirement Plans

Posted on January 8, 2015 by Kerry Pechter -

After several years of fitful steps toward the establishment of mandatory state-sponsored IRAs by legislatures in a handful of “blue” states, one of those states—Illinois—has finally closed the deal. Its Secure Choice Savings Program was signed into law this week.

How the law will affect the market for retirement plan services in Illinois remains to be seen. Now that private-sector employers with 25 or more full-time employees must offer access to a retirement plan by June 1, 2017 (and workers must be defaulted into it), the question arises: Will employers comply by hiring private-sector service providers or simply use the new state-sponsored investment trust?

Brian Graff, head of the American Society of Pension Professionals and Actuaries, has expressed confidence, at least in reference to a similar program in Connecticut, that private sector providers will outcompete the state-sponsored program. “I guarantee that they will,” he told RIJ at the statehouse in Hartford, Conn., last March.

But it’s also possible that most employers will do the minimum that the new law obligates them to do, and merely tweak their payroll administration systems to allow automatic deferrals into the funds in the state-sponsored IRA. In that case, there would be little uptick in demand for private plan services.

That’s the business side of the story. On the policy side, state legislators Sen. Daniel Biss and Rep. Barbara Flynn Currie, who sponsored the Illinois Secure Choice Savings Program (SB2758), and lame-duck Governor Pat Quinn, the Democrat who signed it, will probably be satisfied if the bill achieves its goal of expanding retirement plan coverage in their state. Employers with fewer than 25 employers are encouraged but not required to use Secure Choice. Workers can opt-out of participation if they wish.

The Illinois Secure Choice Savings Program had support from some 60 labor-related and retirement-related groups in Illinois, including the Illinois Asset Building Group, the Heartland Alliance, the Woodstock Institute, the Sargent Shriver National Center on Poverty Law, SEIU Healthcare, and AARP Illinois.

Efforts to create similar state-sponsored retirement plans have been underway for some time in other Democratic-majority states, like California and Connecticut, where initiatives that help labor are most likely to get legislative traction. The federal government, with its MyRA and Auto-IRA programs, has made efforts of its own toward improving retirement plan coverage in the U.S., where only about half of full-time workers have access to a 401(k)-like program at any given time.

Retirement savings mandates, much like the employer mandates in the Affordable Health Care Act, have been controversial. Critics of such plans have variously said that they do too much or too little. Free marketers say they create redundant bureaucracies, crowd out private sector providers, and heap new costs on employers.

On the other side of the political divide, liberals say the plans’ default deferral rates are too low (3%, in Illinois’ case) to produce nest eggs big enough to generate adequate income in retirement and that they fall short by not requiring firms with less than 25 employees to offer plans. Despite the criticisms, the chronic low pension coverage in the U.S.—analogous to the incomplete health insurance coverage—has kept such efforts alive.

According to SB2758, all employers in Illinois must offer the program by June 1, 2017, if they have:

Operated for at least two years

At least 25 employees

No existing employer-based retirement plan

Unless their employers offer an employer-based plan, employees will be automatically enrolled in the state plan; however, they may opt out. All accounts will be pooled together and will be managed professionally.

There will be a 3% deduction from Secure Choice participants’ pay to be put into an IRA; however, participants will be able to adjust the percentage of their earnings that is set aside. Participants also can select an investment option from those the Illinois Secure Choice Savings Board makes available to them.

Employers participating in Secure Choice will be required to provide an open enrollment period at least once a year to allow employees who opted out of the program to enroll in it. This will be the only annual chance such employees have to do so, unless their employer allows them to do so earlier than that.

Employers that do not offer their own retirement plan and fail to offer Secure Choice will be subject to a penalty equal to either:

$250 for each employee for each calendar year or portion of a calendar year during which the employee neither was enrolled nor had opted out of it; or

For each calendar year beginning after the date a penalty has been assessed regarding an employee, $500 for any portion of that calendar year during which such an employee continues to be unenrolled without having opting out.

The Illinois Secure Choice Savings Board will oversee the program. Four of the board’s seven members will be appointed by the governor: two with expertise in retirement savings plan administration or investment, or both, and one each representing participating employers and enrollees.

Trial Date Set for “Excessive fee” Suit against Boeing

Posted on January 8, 2015 by Kerry Pechter -

Unless the parties settle before then, the lawsuit of Spano v. Boeing, one of the first “excessive fee” cases brought by retirement plan participants against a large American employer and retirement plan sponsor, will go to trial next spring—eight years after it was initially filed.

A May 20, 2015 trial date in U.S. District Court in East St. Louis was set after Boeing’s attorneys’ motions for summary judgments were either denied or partially denied last December 30, according to a report on The Fiduciary Matters blog by ERISA attorney Thomas E. Clark, Jr. this week.

“This decision reflects the pendulum that has clearly swung in the participants’ favor in recent years…,” Clark writes, noting that no one would have expected such a trend when Spano v. Boeing was filed. “Betting a dollar that a decision such as this would be likely someday would have been a waste of a perfectly good dollar.”

The fact that Spano v. Boeing has been allowed to proceed to trial is consistent, however, with a recent wave of legal judgments and decisions that have discredited common business practices in retirement plans—practices that in many cases resulted in participants paying high and in some cases even non-competitive prices for services they thought were free.

One of those practices is revenue sharing. It involves offering of mutual fund share classes with high fees in order to subsidize the cost of administering plans. In several class-action suits by participants against plan sponsors and plan providers in recent years, judges and juries have decided that sponsors and providers that practiced revenue sharing were violating the sponsors’ responsibilities to operate the plans solely in the interests of the participants.

The cases and related decisions haven’t outlawed revenue sharing. But they have shined light on it, showed that it is prone to conflicts of interest, and inspired plan sponsors to look for cheaper, more transparent and more fiduciary-minded ways to cover plan administration costs. That trend, in turn, has squeezed profit margins in the 401(k) service provider business and is said to be a factor in the recent decisions by some companies to sell their retirement plan services units.

In Spano v. Boeing, plan participants charged that:

Until 2006, Boeing selected and retained mutual funds as plan investment options that charged excessive investment management expenses and that Boeing used them to “funnel” excessive Plan recordkeeping and administrative fees to State Street/CitiStreet via revenue sharing.
The Small Cap Fund provided additional revenue sharing fees to State Street/CitiStreet and charged its investors 107 basis points per year in fees, which was grossly excessive, in order to benefit Boeing’s corporate relationship with State Street/CitiStreet.
Boeing failed to monitor and remove an imprudently risky concentrated sector fund, i.e. the Technology Fund, and instead retained this fund for the purpose of benefiting its corporate relationship, rather than for the sole benefit of the Plan Participants.
The Boeing Company Stock Fund incurred excessive fees and held excessive cash, impairing the value of the Plan assets. With regard to this fund, Plaintiffs also allege that Defendants failed to remedy the resulting transaction and institutional drag.

High Valuations Carry a Cost: Prudential

Posted on January 8, 2015 by Kerry Pechter -

The U.S. may be addicted to low interest rates, relying on them to prop up asset prices and feeling nervous about the potential pain of withdrawal. But at least industry executives are not entirely in denial about the problem. A new release from Prudential Financial speaks candidly—and soberly—about it.

The release reflected views expressed by panelists at the firm’s 2015 Global Economic and Retirement Outlook discussion. They expect “uneven” global growth, “prolonged volatility” and a continuation of the status quo in the stock and bond markets as long as interest rates stay low. (The quotes below come from the release.)

“Bond yields have stayed low after the end of quantitative easing for a simple reason: bond demand is very strong, and bond supply is modest. Strong demand and modest supply means high prices in any market, and leads to low yields for bonds,” said Ed Keon, managing director of Quantitative Management Associates, Prudential’s economic research unit.

“In the short run, stocks can continue to perform well as low interest rates support higher-than-normal valuations, but higher valuations carry a long-term cost,” he warned. “Eventually expected returns of stock and bond portfolios might be lower than historical norms, creating challenges for many investors.”

The chief investment officer of Prudential Fixed Income, Mike Lillard, agreed with the conventional wisdom that Fed chairperson Janet Yellen isn’t likely to raise rates suddenly or sharply and will be guided by data on the strength of the economy.

“June would be my liftoff date for a rate hike from the Fed, but they will do it very slowly and patiently. If the economy begins to soften, however, they will stop to avoid sending us into another recession,” said Lillard. “They are going to be highly data dependent, and at the end of the day, our expectation is that they won’t be able to get short term rates very high.”

Quincy Krosby, a Prudential market strategist, warned that the recent slide in oil may not be as beneficial as Fed members make it out to be. “While consumer spending may have increased in the United States, the Fed needs to worry more about what lower energy prices mean globally. It could be signaling a decrease in demand in places like China, Europe, and Japan, which could lead to decreased production and job cuts in the energy sector,” said Krosby.

“Taking that into account, the Fed also has to keep in mind that when rates rise, something always breaks. There’s no telling what asset class may start the ball rolling, but it can’t come as a surprise. That said, it has been the velocity of the oil price plunge that caught markets off guard. Consumers, however, are net beneficiaries of lower prices.”

John Praveen, chief investment strategist for Prudential International Investments, cautioned that divergent monetary policies from central banks are likely to lead to volatility in the coming year and that current and future geopolitical risk cannot be dismissed.

“The start of quantitative easing in Europe and possibly Japan will allow for greater expansion in those markets compared to the United States, yet any unforeseen risks could derail that proposition,” Praveen said. “Europe was supposed to be on an upswing in 2014, but [Russian President Vladimir] Putin’s actions held any potential rally in check. With such interconnected global economies, any geopolitical or major risk can hold everything back.”

Sri Reddy, head of full service investments with Prudential Retirement, suggested that a prolonged low-growth, low-yield environment might even present a silver lining for his division—if it encourages defined contribution participants to start thinking outside the box for retirement income solutions.

As participants look for new options, “things like automatic enrollment plans, auto escalation options, and enhanced defined contribution plans need to become more of an industry norm to secure retirement income for today’s workers,” he said. Prudential Retirement sells a product that would fill the bill: IncomeFlex, a series of target date funds for the defined contribution plan market that come pre-wrapped with lifetime income riders.

A 100-150 bps rise in rates would help life insurers: Fitch

Posted on January 8, 2015 by Editorial Staff -

The rating outlook for the U.S. life insurance industry is stable for 2015, according to Fitch Ratings. In addition, the fundamental sector outlook is stable. Fitch’s outlook considers the industry’s very strong balance sheet fundamentals, strong liability profile, and stable operating performance.

But Fitch also expressed “ongoing concerns” over the impact of persistent low interest rates that “will pressure interest margins and reserve adequacy in 2015.” Fitch expects relatively stagnant earnings growth in 2015 due to a moderate decline in interest margins, which will offset growth in fee and underwriting income.

Fitch forecasts “modest improvement” in the macroeconomic environment, which should allow life insurers to sustain recent improvement in industry balance sheet fundamentals and financial performance. Fitch expects credit-related investment losses in 2015 to remain below pricing assumptions and historical averages based on strong corporate bond fundamentals and further improvement in the real estate market.

Fitch expects reported statutory capitalization, which exceeds both pre-crisis levels and rating expectations, to be sustained over the coming year driven by retained earnings, various capital management initiatives, and modest growth in in-force business. Further, Fitch continues to view the industry’s liquidity profile as very strong.

Concern over equity market risk tied to legacy variable annuity (VA) guarantees has decreased due to improved equity market conditions in recent years, but is expected to remain a drag on profitability over the near term. Longer-term, Fitch remains concerned about tail risk associated with VA guarantees, which could cause a material hit to industry earnings and capital in unexpected, but still plausible, severe stress scenario.

Fitch believes that a rise in interest rates by 100 bps to 150 bps could have positive implications for our sector outlook for U.S. life insurers. Conversely, if interest rates decline to levels seen in 2012 and stay there much beyond 2015, Fitch would likely change the outlook to negative based on weakened earnings profile and anticipated capital impacts associated with reserve strengthening.

Year-end shift into ETFs is a ‘contrary indicator’: TrimTabs

Posted on January 8, 2015 by Editorial Staff -

Investors were pouring record sums into U.S. equity exchange-traded funds in the traditionally slow holiday season, according to TrimTabs Investment Research.

“The buying frenzy suggests the U.S. stock market will keep stumbling into the New Year,” said David Santschi, CEO of TrimTabs. “ETF investors tend to buy high and sell low, so their actions are generally an excellent contrary indicator.”

In a research note, TrimTabs explained that $45.4 billion went into U.S. equity ETFs in December, surpassing the previous monthly record of $44.6 billion in September 2008. The inflow of $90.1 billion in the fourth quarter smashed the previous quarterly record of $72.2 billion in the third quarter of 2008.

“U.S. equity ETF flows are not the only cautionary sign for the short term,” noted Santschi. “A wide range of sentiment measures suggests the bullish camp has become extremely crowded. We advise investors to be less aggressive on the long side now.”

U.S. seeks public comment on asset management risks

Posted on January 8, 2015 by Editorial Staff -

The Financial Stability Oversight Council voted unanimously in December to seek public comment regarding potential risks to U.S. financial stability from asset management products and activities. This document describes what the FSOC is looking for.

The Council seeks input from the public until February18, 2015 about potential risks to the U.S. financial system associated with liquidity and redemptions, leverage, operational functions, and resolution in the asset management industry.

“Asset management is a vital segment of the financial services sector, with a high degree of diversity in investment strategies, corporate structures, regulatory regimes, and customers,” the FSOC said in a release. “The Council is issuing this notice in connection with its ongoing evaluation of asset management products and activities, building on work carried out by the Council over the past year regarding potential risks to U.S. financial stability.”

Earlier in 2014, the Council’s Deputies Committee hosted a public conference on the asset management industry and its activities. At the conference, practitioners – including CEOs, treasurers, and risk officers – as well as academics and other stakeholders discussed a variety of topics related to the industry.

The Council subsequently directed staff to undertake a more focused analysis of industry-wide products and activities to assess potential risks associated with the asset management industry. Members of the public are encouraged to submit comments, and all comments provided to the Council will be available on www.regulations.gov.

Gene Steuerle wins TIAA-CREF’s Samuelson Award

Posted on January 8, 2015 by Editorial Staff -

C. Eugene Steuerle has won the 19th annual TIAA-CREF Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security, in recognition of his 2014 book, Dead Men Ruling: How to Restore Fiscal Freedom and Rescue Our Future.

The Samuelson Award is given each year “in recognition of an outstanding research publication containing ideas that the public and private sectors can use to maintain and improve Americans’ lifelong financial well-being,” a TIAA-CREF release said.

“My thesis is quite simple,” Steuerle writes in the book, which RIJ reviewed in June. “In recent decades, both parties have conspired to create and expand a series of public programs that automatically grow so fast that they claim every dollar of additional tax revenue that the government generates each year.

“They also have conspired to lock in tax cuts that leave the government unable to pay its bills. The resulting squeeze deprives current and future generations of the leeway to choose their own priorities, allocate their own resources, and reach for their own stars. Those generations are left largely to maintain yesterday’s priorities.”

The book, a pointed criticism of the policies of both Republican and Democratic administrations over the past three decades, prescribes a reallocation of resources toward investment in children and financial education, and a workforce strategy that recognizes the talent and potential of older workers.

The award is named after Nobel Prize winner Paul A. Samuelson in honor of his achievements in the field of economics, as well as for his service as a CREF trustee from 1974 to 1985. The Samuelson Award winner is selected by a panel of distinguished judges composed of TIAA-CREF Institute fellows and previous award winners. This year’s panel includes these professors of economics, finance or business:

James Choi, Yale University
Eric Johnson, Columbia University
Brigitte Madrian, Harvard University
Jonathan Reuter, Boston College
John Rust, Georgetown University

The TIAA-CREF Institute presented the award in Boston on January 3, 2015, during the annual meeting of the Allied Social Science Associations.

The Fed Sets Another Trap

Posted on January 8, 2015 by Stephen S. Roach -

America’s Federal Reserve is headed down a familiar – and highly dangerous – path. Steeped in denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the stage for the financial crisis of 2008-2009. The consequences could be similarly catastrophic.

Consider the December meeting of the Federal Open Market Committee (FOMC), where discussions of raising the benchmark federal funds rate were couched in adjectives, rather than explicit actions.

In line with prior forward guidance that the policy rate would be kept near zero for a “considerable” amount of time after the Fed stopped purchasing long-term assets in October, the FOMC declared that it can now afford to be “patient” in waiting for the right conditions to raise the rate. Add to that Fed Chair Janet Yellen’s declaration that at least a couple more FOMC meetings would need to take place before any such “lift-off” occurs, and the Fed seems to be telegraphing a protracted journey on the road to policy normalization.

This bears an eerie resemblance to the script of 2004-2006, when the Fed’s incremental approach led to the near-fatal mistake of condoning mounting excesses in financial markets and the real economy. After pushing the federal funds rate to a 45-year low of 1% following the collapse of the equity bubble of the early 2000s, the Fed delayed policy normalization for an inordinately long period. And when it finally began to raise the benchmark rate, it did so excruciatingly slowly.

In the 24 months from June 2004, the FOMC raised the federal funds rate from 1% to 5.25% in 17 increments of 25 basis points each. Meanwhile, housing and credit bubbles were rapidly expanding, fueling excessive household consumption, a sharp drop in personal savings, and a record current-account deficit – imbalances that set the stage for the meltdown that was soon to follow.

The Fed, of course, has absolved itself of any blame in setting up the US and the global economy for the Great Crisis. It was not monetary policy’s fault, argued both former Fed Chairmen Alan Greenspan and Ben Bernanke; if anything, they insisted, a lack of regulatory oversight was the culprit.

This argument has proved convincing in policy and political circles, leading officials to focus on a new approach centered on so-called macro-prudential tools, including capital requirements and leverage ratios, to curb excessive risk-taking by banks. While this approach has some merit, it is incomplete, as it fails to address the egregious mispricing of risk brought about by an overly accommodative monetary policy and the historically low interest rates that it generated. In this sense, the Fed’s incrementalism of 2004-2006 was a policy blunder of epic proportions.

The Fed seems poised to make a similar – and possibly even more serious – misstep in the current environment. For starters, given ongoing concerns about post-crisis vulnerabilities and deflation risk, today’s Fed seems likely to find any excuse to prolong its incremental normalization, taking a slower pace than it adopted a decade ago.

More important, the Fed’s $4.5 trillion balance sheet has since grown more than fivefold. Though the Fed has stopped purchasing new assets, it has shown no inclination to scale back its outsize holdings. Meanwhile it has passed the quantitative-easing baton to the Bank of Japan and the European Central Bank, both of which will create even more liquidity at a time of record-low interest rates.

In these days of froth, the persistence of extraordinary policy accommodation in a financial system flooded with liquidity poses a great danger. Indeed, that could well be the lesson of recent equity- and currency-market volatility and, of course, plummeting oil prices. With so much dry kindling, it will not take much to spark the next conflagration.

Central banking has lost its way. Trapped in a post-crisis quagmire of zero interest rates and swollen balance sheets, the world’s major central banks do not have an effective strategy for regaining control over financial markets or the real economies that they are supposed to manage. Policy levers – both benchmark interest rates and central banks’ balance sheets – remain at their emergency settings, even though the emergency ended long ago.

While this approach has succeeded in boosting financial markets, it has failed to cure bruised and battered developed economies, which remain mired in subpar recoveries and plagued with deflationary risks. Moreover, the longer central banks promote financial-market froth, the more dependent their economies become on these precarious markets and the weaker the incentives for politicians and fiscal authorities to address the need for balance-sheet repair and structural reform.

A new approach is needed. Central banks should normalize crisis-induced policies as soon as possible. Financial markets will, of course, object loudly. But what do independent central banks stand for if they are not prepared to face up to the markets and make the tough and disciplined choices that responsible economic stewardship demands?

The unprecedented financial engineering by central banks over the last six years has been decisive in setting asset prices in major markets worldwide. But now it is time for the Fed and its counterparts elsewhere to abandon financial engineering and begin marshaling the tools they will need to cope with the inevitable next crisis. With zero interest rates and outsize balance sheets, that is exactly what they are lacking.

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of the new book Unbalanced: The Codependency of America and China.

RIJ Takes a Vacation

Posted on December 17, 2014 by Kerry Pechter -

With Gibraltar Ventures, Prudential Retirement Aims to Be ‘Disruptive’

Posted on December 16, 2014 by Kerry Pechter -

A “skunkworks” is a small and loosely structured group of people who research and develop projects primarily for the sake of radical innovation. Gibraltar Ventures, a newly-created unit within Prudential Retirement whose name refers to Prudential’s corporate symbol, sounds a lot like a skunkworks.

But unlike famous skunkworks at Lockheed Martin and Apple, Gibraltar Ventures is neither clandestine nor low-profile. It will be run by George Castineiras, the current head of Total Retirement Solutions (Prudential Retirement’s defined benefit, defined contribution and nonqualified executive benefits business). Colleague James McInnes will succeed him, effective Jan. 1, 2015.

A brief press release about the project offered few details. The search phrase “Gibraltar Ventures” netted only an apparently unrelated Toronto-based private equity fund. So we emailed Prudential Retirement a list of questions. The following written responses arrived by email from the president of Prudential Retirement, Christine Marcks (right).

RIJ: What exactly is Gibraltar Ventures? Is it a private equity fund to invest in robo-advisors?

Marcks: Gibraltar Ventures is a new organization responsible for exploring, developing and investing in promising new strategies to advance retirement and financial security. The team will incubate new strategies as well as explore and invest in early-stage ideas from many different sources.

RIJ: Is it a profit-center or a support unit?

Marcks: While Gibraltar Ventures will be a cost center for the foreseeable future, it will incubate and invest in new ideas that will ultimately drive revenue and earnings for our business.

RIJ: What is its business goal?

Marcks: Gibraltar Ventures will explore disruptive strategies and business models, focus resources on those ideas that have the most potential to advance retirement and financial security, and complement our current innovation efforts.

RIJ: How is it funded?

Marcks: Gibraltar Ventures is internally funded by Prudential Retirement.

RIJ: How many people will it employ?

Marcks: Gibraltar Ventures will launch with a small dedicated team. It is too early to say specifically how many associates will work for Gibraltar Ventures.

RIJ: What benefits will it provide to Prudential Financial, Prudential Retirement, its customers or its shareholders?

Marcks: Prudential Retirement has a successful track record of growing our core portfolio of businesses and developing new sources of revenue ahead of market demand, as we did with IncomeFlex and Pension Risk Transfer strategies. Gibraltar Ventures will build on that foundation, and explore unique solutions that will help overcome behavioral and financial obstacles to long term savings and retirement security for our clients. We expect these efforts will contribute to Prudential Financial’s reputation and business results over time.

RIJ: What prompted the creation of Gibraltar Ventures?

Marcks: As we look at the environment for our products and services, we see several trends that are opening new space for innovation – everything from demographics in the workforce and the ongoing shift toward defined contribution plans, to technological advancements, consumer empowerment and how plan sponsors are navigating the Affordable Care Act. And after the past couple of years of strong results, we’re operating from a position of strength where it makes sense now to launch a dedicated effort to explore more disruptive approaches and breakthroughs.

Watchdog group decries change in swaps regulation

Posted on December 16, 2014 by Editorial Staff -

A “policy rider” in the $1.1 trillion 2015 federal budget, passed last week by votes of 219-206 in the House and 56-40 in the Senate, eliminates Section 716 of the Dodd-Frank law—a provision that prevented banks that are protected by the Federal Deposit Insurance Corporation from trading in custom swaps, a type of derivative, news sources reported last week.

According to MapLight, a research group that tracks the influence of money in politics, the removal of the provision came after almost two years of intense lobbying by the four banks that account for 90% of the custom swaps market: Bank of America, Citigroup, J.P. Morgan Chase and Goldman Sachs. In 2013, according to a transcript of a roundtable discussion sponsored by the Commodities Futures Trading Commission, the size of the U.S. custom swaps market was estimated at “about [$]250 trillion notional open interest.”

A MapLight analysis of lobbying spending by those four banks during the 113th Congress, showed that, since January 1, 2013, they spent a combined $30.7 million lobbying Congress and federal agencies. According to MapLight, PACs of Citigroup, Goldman Sachs, Bank of America, and JPMorgan Chase gave:

3.9 times more to Democrats voting ‘YES’ ($12,956) than Democrats voting ‘NO’ ($3,293).
2.8 times more to legislators voting ‘YES’ ($9,979) than legislators voting ‘NO’ ($3,562).
2.2 times more to Republicans voting ‘YES’ ($8,932) than Republicans voting ‘NO’ ($4,119).
$29,000 to Rep. Kevin Yoder (R-KS), who first offered the Citigroup provision at a committee hearing in June as an amendment to the financial services appropriations bill.

The top recipients of campaign contributions from the top four banks, all receiving between $35,000 and $40,000, included John Boehner (R-OH), Joe Crowley (D-NY), Kevin McCarthy (R-CA), Patrick McHenry (R-NC), John Carney, Jr. (D-DE), Jim Himes (D-CT), Gary Peters (D-MI), Pat Tiberi (R-OH), Sean Maloney (D-NY) and Patrick Murphy (D-FL), according to MapLight.

Another provision in the bill would increase campaign contribution limits for donations to national political parties. Currently, individual donors cannot give more than $97,200 in total to the national party committees, MapLight’s release said. The budget bill would raise that limit to $777,600. According to the Center for Responsive Politics, 0.04% of Americans gave more than $2,600 in the 2014 election cycle.

Section 716 of Dodd-Frank “says that institutions that receive federal insurance through FDIC and the Federal Reserve can’t be dealers in the specialized derivatives market. Banks must instead ‘push out’ these dealers into separate subsidiaries with their own capital that don’t benefit from the government backstop. They can still trade in many standardized derivatives and hedge their own risks, however,” according to a report in the blog, Next New Deal.

2014 in Retrospect: The Best of RIJ

Posted on December 15, 2014 by Jenna Gottlieb -

RIJ published more than 120 cover or feature stories in 2014, all of them guided by our mission: to cover the “business of retirement” in a way that’s independent, eclectic, insightful and iconoclastic. And even with a bit of humor.

As a holiday feature, we decided to revisit some of our favorite stories. Below, you’ll find short clips from (and links to) a dozen cover stories from 2014 that we think embody our editorial ideals. If you missed any of them when they first appeared, here’s a second chance to read them.

Much of our activity in 2014 took place underneath the homepage, however, not on it. For instance, our forthcoming website improvements will make our registration and subscription process easier to navigate. To enhance the usefulness of the site, we added a new tool, the Social Security Maximizer, to our homepage. On the marketing front, the former circulation chief of Men’s Health magazine is currently helping us prepare ourselves for growth.

So we’re excited about the new year, and about the fresh set of timely articles that it will inevitably bring. But before 2015 arrives with its own urgent demands for our attention, we’ll revisit twelve of RIJ’s best articles of 2014.

A Physician Heals Himself [Financially] (January 23)

Dimitri Merine is a 56-year-old radiologist at a not-for-profit hospital near Baltimore. During the 2008-2009 financial crisis, he had the sobering experience of watching older colleagues wring their hands over their investment losses and their crumbling retirement dreams.

“A couple of my co-workers had to keep working because of the market meltdown. They didn’t feel that they’d saved enough, and they felt too old to implement the strategies that I’m using now. Some of these strategies need a long lead time,” he told RIJ recently. “That forced me to get moving so that I wouldn’t find myself in the same situation.”

At a time when most financial advisers are still learning how to combine insurance and investment products to maximize both income and safety in retirement, a few ambitious near-retirees like Dr. Merine aren’t waiting for the advice profession to discover the merits of guaranteed retirement income.

http://retirementincomejournal.com/issue/january-23-2014/article/a-physician-heals-himself-financially

Are You Being Served? (March 6)

“All the heirs hate it,” rued the paralegal at the law firm that represented the company that held the reverse mortgage on my late father’s two-story condo in a development in suburban Philadelphia. They hate getting sued, that is.

I certainly did. As I explained to the paralegal, I answered my doorbell a few weeks ago to find an officer of the law on the stoop—a stone-faced Lehigh County sheriff’s deputy wearing a Stetson and a brush moustache who, after I confirmed my identity, handed me a thin sheaf of papers, stapled in the upper left hand corner.

Underneath a cover sheet that was peppered with opaque words like “prothonotary,” I found a “Complaint in Mortgage Foreclosure.” The plaintiff was an Austin, Texas, bank that I’d never heard of. The defendant was myself, the executor of my dad’s estate.

Leafing through the “complaint,” I was momentarily transfixed when I saw the phrase, “Amount Due: $264,566.57,” but exhaled when I reached paragraph 12, which said: “Plaintiff does not hold the named Defendants personally liable to this cause of action and releases them from any personal liability.” So why was I being sued?

http://retirementincomejournal.com/issue/march-6-2014/article/are-you-being-served

Two Advisors, Two Strong Opinions of FIAs (March 13)

Do you want to know what really steams Howard Kaplan? It’s when the LPL-affiliated adviser watches CNBC and hears a talking head speak dismissively about fixed indexed annuities, a product he knows a lot about and likes a lot.

Recently, CNBC Shelly Schwartz financial reporter said, “In the context of bond alternatives, fixed index annuities also bear mentioning—if only to urge caution.” When Kaplan, a CPA and financial planner, hears such things, he jumps on the phone or starts typing protest letters.

Do you want to know what infuriates Philadelphia-area adviser Harry Keller? It’s when he turns on CBS radio and hears Phil Cannella, host of the “The Crash-Proof Retirement Show,” trash the securities industry and boast of an unnamed, zero-risk, no-fee product for retirees that eventually turns out to be an FIA.

“These products are still being mis-sold, and the sellers are still taking advantage of seniors,” Keller told RIJ. “There are more consumer protections for time-shares and gym memberships than there are for fixed indexed annuities.”

No financial product sold in the U.S. today triggers stronger emotions and opinions than fixed indexed annuities (or equity-indexed annuities, as they were called from 1995 to 2007). Annuities in general tend to provoke controversy, and FIAs are easily the most polarizing annuities.

http://retirementincomejournal.com/issue/april-3-2014/article/two-advisers-two-strong-opinions-of-fias

Bill Sharpe’s New Retirement Blog (April 23)

A few things you should know about Bill Sharpe: He’s fascinated by probabilities, he’s passionate about computer programming and he’s worried that millions of Baby Boomers are about to slam into retirement unprepared.

“Here’s the challenge,” the goateed Stanford emeritus professors of economics, who created the Capital Asset Pricing Model, co-founded Financial Engines, and, yes, nabbed the Nobel Prize in 1990, told RIJ recently. “What should people do when they hit retirement? Ordinary people don’t have the foggiest idea.”

Sharpe, who lives in Carmel, California and will turn 80 in June, has responded to this challenge, most recently, in a modern way: he started a blog. It’s called RetirementIncomeScenarios, and he’s posted there intermittently since last August. The posts describe his progress toward writing an easily accessible software tool for testing decumulation strategies.

When he finishes the tool, he said, advisers and their clients will be able to input their own personal data and market assumptions and so forth, and determine the sustainability of a particular income or spending rate.

http://retirementincomejournal.com/issue/april-25-2014/article/bill-sharpe-s-new-retirement-blog

Ten Images That Explain Retirement (May 22)

Longevity risk, Social Security maximization, diversification—these concepts are fundamental to conversations between advisers and their older clients. But they can be hard to explain in words alone, without an illustration or diagram.

You’d think it would be easy to find such images. Tons of relevant charts and graphs can be found on most financial services company websites. And financial planning software can generate multitudes of colorful retirement projections in a flash.

But just as the department stores are filled with beautiful clothes but no one looks especially well dressed, images that produce a shock of financial recognition in clients’ brains evidently aren’t so plentiful. A while ago, we asked retirement advisers to share some of their most effective visual aids with us. The most common response: “When you find some, let us know!”

So we searched for some, and we found ten examples that you and your clients might find useful and entertaining. There’s no magic pill here to banish client confusion; adviser input will still be needed. But, according to Catherine Mulbrandon, author of An Illustrated Guide to Income in the United States and founder of Visualizingeconomics.com, that’s the most you can hope for.

http://retirementincomejournal.com/issue/may-22-2014/article/ten-images-that-explain-retirement

Short on Shares, Women Share Homes (June 20)

The idea of widows and divorcees cohabiting to save money was a novelty in the late ‘80s, when it served as the premise for NBC’s hit comedy, The Golden Girls. It turns out that those girls—saucy Blanche, dizzy Rose, crusty Dorothy and wise Sophia—were ahead of their time.

Today there’s a website, Roommates4Boomers.com, built specifically to facilitate matchmaking between unattached women over age 50 who want to reduce their housing costs by doubling up or tripling up in a home or apartment with women like themselves.

Roommates4Boomers was founded in 2013 by Karen Venable, who was living alone at age 55 and thinking about the importance of her women friends “to my well-being.” She searched online for a service that could help her locate a compatible, reliable roommate but didn’t find much.

http://retirementincomejournal.com/issue/june-20-2014/article/short-on-shares-women-share-homes

An Algorithm that Loves Annuities (June 26)

Decumulationistas, to coin a term, tend to believe that a lot of Americans could probably spend more money with less risk during retirement if they allocated their savings to a blend of annuity and investment products rather than to investments or annuities alone.

Such a product allocation, the theory goes, pays off in at least three ways. It uses mortality risk pooling to boost income; it reduces the need to hoard against uncertain future expenses, and it lets people gamble a little with their liquid investments without losing sleep.

But how do you optimize such a strategy? And how can you do it in an intellectually rigorous way that:

Incorporates the major knowns (income needs, existing resources, legacy desires)
Adjusts for the major variables (product fees and features; broker-dealer suitability restrictions) and
Doesn’t fudge the major uncertainties (market risk, sequence risk and longevity risk) by assuming average values

In 2008, Moshe Milevsky’s QWeMA Group in Toronto tackled this multidimensional problem. Using partial differential equations, they developed a calculator to generate custom allocations within a portfolio with three types of products: mutual funds, variable annuities with lifetime income riders, and fixed income annuities.

The calculator’s acronym is PrARI, or Product Allocation for Retirement Income.

http://retirementincomejournal.com/issue/june-26-2014/article/an-algorithm-that-loves-annuities

What’s Your Zip Code’s Annuity Potential? (September 11)

If you ever read or watched Moneyball, the book and movie about the Oakland Athletics, you know that the application of statistical analysis to the chore of identifying under-valued ballplayers helped turn a mediocre club into a contender, if not a champion.

Bill Poll, co-founder of a New Jersey-based market research firm called Information Asset Partners, wants to help annuity producers, wholesalers and manufacturers sell more annuities with less wasted effort by using a similarly data-driven approach.

As Poll explained it to RIJ recently, his company uses data from a massive biennial survey of household finances, called MacroMonitor, to create a profile of likely annuity buyers. Then it grades U.S. ZIP codes on their annuity sales potential, as indicated by their density of such people.

That’s Step One. In Step Two, his firm uses regularly updated annuity sales information, from DTCC, the giant securities clearinghouse, to grade U.S. ZIP codes on their actual level of sales. By cross-referencing sales potential with actual sales, he can tell if a territory is saturated, underdeveloped, concentrated or diffuse.

IAP’s product is the Annuity Market Assessment, and Poll, a former Dun & Bradstreet marketer with an MBA from Columbia, has been pitching it to prospective customers—insurance companies, insurance marketing organizations (IMOs), broker-dealers, individual producers and journalists—since last February.

http://retirementincomejournal.com/issue/september-11-2014/article/what-s-your-zip-code-s-annuity-potential

Anatomy of a Success: Elite Access (September 18)

The story behind Jackson National Life’s success with the Elite Access variable annuity contract is an interesting one. It’s a business strategy story in which a quiet, foreign-owned life insurer created not just a top-selling new product but also a new product category, and injected much-needed new energy into a flagging industry.

Launched in March 2012, Elite Access B was ranked fifth in sales among all VA contracts in the U.S. at the end of the first quarter of this year. Now attracting over $1 billion in premia every quarter, it’s the dominant contract in the so-called “investment only” segment of the VA market

The contract started out as a way to leverage the growing interest in “liquid alts,” to give retail investors a convenient, tax-efficient way to get exposure to institutional-style assets like commodities, hedge funds and long/short strategies through actively managed mutual funds. Since then, Elite Access has been repositioned as a versatile, one-stop platform for investing in a volatile market where alts, not bonds, are expected to be the best diversifiers of equity risk.

We were curious about the effort and the strategy behind this successful launch. So we started calling broker-dealers and advisers who have and haven’t sold Elite Access, including a few who were flown to Jackson’s Denver headquarters for all-day immersions in the benefits of Elite Access. We also talked to the heads of annuity sales and of overall marketing at Jackson, which is a unit of UK insurance giant Prudential plc.

http://retirementincomejournal.com/issue/september-18-2014/article/anatomy-of-a-success-elite-access

A New Robo-Advisor Eyes the 401(k) Space (October 30)

Not long ago, a few retirement industry mavens were pondering the robo-advisor phenomenon. “If they break into the 401(k) space, it could be disruptive,” one said. “That won’t happen,” answered another. “Financial Engines, GuidedChoice and Morningstar… they’ve got too big a lead.”

The discussion was timely. Only days later, a suburban Kansas City startup named blooom—like the flower, but with three o’s and a lowercase b—put out a press release. It had just won an award at the FinovateFall trade show in New York. Its business objective, the founders said, is to bring low-cost ($10/mo. or less), high-value investment advice to post-Boomer 401(k) participants.

The mid-life brainchild of a CFP with a $525 million RIA practice, and others, blooom aims to turn participant accounts into discretionary accounts, without necessarily going through the existing plan sponsor or recordkeeper. blooom isn’t designed to be a broker-dealer, an aggregator, or a managed account provider. It simply plans to obtain usernames and passwords from its clients and to re-allocate and re-balance their accounts for them.

http://retirementincomejournal.com/issue/october-30-2014/article/a-new-robo-advisor-eyes-the-401-k-space

Two Robo-Advisors, Two Income Strategies (December 4)

While the greybeards of the retirement industry struggle to migrate from product cultures to planning cultures, the new generation of so-called robo-advisers has cherry-picked their best practices and focused on the process—the web-mediated delivery system. And their growth has alarmed the incumbents.

So far, robo-advisers have been lacking in the area of retirement income planning. Perhaps because retirement isn’t yet a top-of-mind concern for their target market, or because income plans can be too complex or idiosyncratic to automate, the robos have fed mainly on the lower-hanging fruit of aggregation and asset allocation services.

But that’s changing. Last spring, Betterment.com, the online broker-dealer and registered investment adviser that now partners with Fidelity, has a payout function. Just this month, SigFig.com, a smaller firm, also announced a payout function markedly different from Betterment’s.

RIJ recently visited these firms’ websites and talked with their principals. The big-picture takeaway: Advisors who are glorified salespeople have a lot to fear from robo-advisers. Serious retirement specialists who know how construct custom plans out of combinations of safe income sources and risky investments will be far less vulnerable.

http://retirementincomejournal.com/issue/december-4-2014/article/two-robo-advisors-two-income-strategies

The Hidden Gold in Mid-Sized Rollovers (December 11)

When 401(k) participants change jobs, they’re not the only ones thinking about where their accounts might go next. Recordkeepers, asset managers, registered investment advisors, automatic rollover specialists, and rollover magnets like Fidelity and E*Trade, to name a few, all take an interest.

The intensity of their interest, of course, depends on the size of the account. The largest accounts are the most sought-after. The smaller ones get cashed out or gobbled up by automatic rollover specialists. The mid-sized pots—worth $5,000 to $50,000— are like odd-sized fish: too small to keep, too big to ignore.

Too often, says Pete Littlejohn, the director of strategic partnerships at Inspira, a $20 million closely held IRA recordkeeper based in Pittsburgh, the owners of those accounts wind up in steerage on titanic asset management platforms, generating minimal or even negative revenue and receiving barebones yet over-priced service in return.

Littlejohn (right) thinks those investors deserve better. In fact, he thinks the whole IRA food chain would be more efficient if recordkeepers and others farmed out their $5,000-to-$50,000 accounts to white-label IRAs at Inspira—at least until the accounts got bigger. Meanwhile, the account owners would get first-class advice from GuidedChoice and everybody—investor, recordkeeper, asset manager, Inspira and GuidedChoice—would see upside.

http://retirementincomejournal.com/issue/december-11-2014/article/the-hidden-gold-in-mid-size-rollovers

Nationwide Settles 401k Fee Suit for $140M

Posted on December 15, 2014 by Editorial Staff -

On Friday December 12, 2014, the parties in Haddock v. Nationwide filed a motion for the court to approve a settlement worth $140,000,000. Originally filed in 2001, the lawsuit concerned the plaintiffs’ allegation that Nationwide received undisclosed revenue sharing payments from non-proprietary mutual funds in violation of ERISA.

The procedural history is extensive with six published orders from the court and multiple trips to the 2nd Circuit Court of Appeals. A more thorough background of the case is included in the motion seeking settlement.

As noted above, the $140,000,000 is split between two different certified classes, with $110,000,000 for one and $30,000,000 for the other. The plaintiffs’ will seek up to 35% of the settlement amount in attorney’s fees or $49,000,000 and up to $2,000,000 in costs.

The settlement also calls for extensive non-monetary relief:

Defendants will supplement the disclosures for its new group variable annuity customer proposals, its new group variable annuity contracts, and its plan sponsor website that relate to Mutual Fund-related fees and expenses in connection with group variable annuity products.

Defendants will also add language in new customer proposals or plan sponsor website(s) informing trustees of Plans holding group variable annuity contracts of the opportunity to be transferred to a product where Mutual Fund Payments are credited to the Plan in the form of reduced asset fees in an amount equivalent to the disclosed reimbursement rate received for each Mutual Fund investment option.

Defendants will also supplement the disclosures for its new individual variable annuity customer proposals and its new product prospectuses that relate to Mutual Fund-related fees and expenses in connection with individual variable annuity products with specific language in these disclosures that Nationwide shall provide, upon Plan Trustees’ written request, its best estimate of plan-specific, aggregate data regarding the Mutual Fund Payments received in connection with the Plan’s investments for the previous calendar year.

Defendants will also supplement the disclosures for its trust customer proposals, new trust, custodial, services or program agreements, and plan sponsor website that relate to Mutual Fund-related fees and expenses in connection with trust products. Defendants will also add language to the new customer proposals; trust, custodial, service or program agreements; or plan sponsor website(s) informing trustees of Plans holding group variable annuity contracts of the opportunity to be transferred to a product where Mutual Fund Payments are credited to the Plan in the form of reduced asset fees in an amount equivalent to the disclosed reimbursement rate received for each Mutual Fund investment option.

Defendants will enhance the procedures for certain future changes to the Product Menus in connection with Annuity Contracts and the Program Menus for the Trust Platforms as follows:

For group variable annuity products and Trust Platforms, Defendants will specifically identify to Plan Trustees, via mail, electronic delivery, or Defendants’ plan sponsor website, any addition of a Mutual Fund investment option to a Product Menu or Program Menu at the time of the addition. Defendants will update the new customer proposals; trust, custodial, service or program agreements; or plan sponsor website(s), as applicable, to inform Plan trustees that such Product and Program Menu additions are identified on the plan sponsor websites.

For group variable annuity products and Trust Platforms, Defendants will provide to Plan trustees written notice of any removal or substitution of a Mutual Fund investment option from the Product and Program Menus that is initiated solely by Defendants, and will not remove or substitute that fund from the Product or Program Menu for a particular Plan until it has received affirmative consent from that Plan’s trustee(s). Such notice shall be provided via mail, electronic delivery, or published on the plan sponsor websites at least thirty (30) days prior to the removal or substitution of a Mutual Fund investment option, and shall state the effective date of such removal or substitution. Defendants will update their new customer proposals; trust, custodial, service or program agreements; or plan sponsor website(s), as applicable, to inform Plan trustees that such removals or substitutions from the Product and Program Menus are identified on the plan sponsor websites.

For group variable annuity products and Trust Platforms, Defendants generally will not substitute one fund for another or otherwise unilaterally remove or substitute a fund from a Plan Menu. Defendants will confirm this change in their business practices by modifying their contracts and Trust Platforms to eliminate any authority to unilaterally remove or substitute a fund from a Menu (the group variable annuity modifications will be subject to State insurance department approval).

For group variable annuity products, in those circumstances where a substitution or removal is necessitated by the actions of Mutual Funds (such as decisions by Mutual Funds or corresponding separate accounts to liquidate a fund, merge funds, change investment advisers or sub-advisers, or make other changes that prevent Nationwide Life from offering an investment option on the Plan Menu, or otherwise require Nationwide Life to change the Plan Menu), where administratively feasible, Nationwide Life will provide sixty (60) days written notice to the trustee of each Plan affected by the change via notice sent by first class mail, fax, or email. The notice will: (1) explain the proposed modification to the Plan Menu; (2) fully disclose any resulting changes in the Mutual Fund Payment rate received by Nationwide; (3) identify the effective date of the change; (4) explain the Plan trustee’s right to terminate the Annuity Contract; and (5) reiterate that, pursuant to the contract provisions agreed to by the Plan trustee, failure to object or otherwise respond shall be deemed to be consent to the proposed change. Nationwide Life will confirm this change in their business practice by modifying their existing and future Annuity Contracts to reflect this notice process (the Annuity Contract modifications will be subject to State insurance department approval).

For Trust Platforms, NFS has enhanced its notification procedures in those circumstances where a substitution or removal is necessitated by the actions of Mutual Funds (such as decisions by Mutual Funds or corresponding separate accounts to liquidate a fund, merge funds, change investment advisers or sub-advisers, make other changes that prevent NFS from offering an investment option on the Plan Menu, or otherwise require NFS to change the Plan Menu). These notification enhancements are substantially the same as the proposed enhancements to the group variable annuity products’ notification procedures.

For Individual Variable Annuities, Nationwide Life agrees to follow applicable U.S. Securities and Exchange Commission regulations, including notice requirements, with regard to the addition, substitution or removal of any investment option.

As part of the Settlement, current and future group variable annuity contract holders and those holding trust, custodial, services or program agreements, shall be offered the opportunity to be transferred to a product or Trust Platform where Mutual Fund Payments are credited to the Plan in the form of reduced asset fees in an amount equivalent to the disclosed reimbursement rate received for each Mutual Fund investment option. Defendants agree that they will continue to make available at least one Trust Platform offering for which Mutual Fund Payments are passed through in their entirety and/or the Mutual Fund Payment amounts are disclosed, subject to the restrictions on Defendants’ ability to substitute one fund for another as set forth in the Stipulation.

Defendants shall begin to implement these changes within six (6) months of the Settlement Effective Date, and will make diligent and good faith efforts to ensure that the implementation of these changes is concluded within twelve (12) months of the Settlement Effective Date, unless there is a change in applicable law or regulatory policy that renders any change or practice unlawful or impracticable or imposes different disclosure or other substantive requirements.

Our Thoughts

Needless to say, this is the most substantial settlement ever in an ERISA fiduciary breach case involving the receipt of revenue sharing by a service provider. It is unclear from the settlement how much of the conduct at issue in the lawsuit is still being done by Nationwide. Nonetheless, this settlement is nearly 10 times greater than recent settlements against ING and MassMutual.

Assets keep flowing toward index and exchange-traded funds

Posted on December 15, 2014 by Editorial Staff -

The pattern of outflows for actively managed funds and inflows for passive funds continued in November 2014, according to Morningstar’s monthly report on U.S. mutual fund and exchange-traded fund [ETF] asset flows.

Over the trailing one-year period, active U.S. equity funds lost $91.9 billion, and passive U.S. equity funds gathered $156.1 billion. (Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETFs by computing the change in shares outstanding.)

Active taxable-bond funds collected $5.6 billion in November after outflows of $18.7 billion in September and $23.1 billion in October. Most of those outflows were attributable to redemptions from PIMCO Total Return. Passive taxable-bond funds had inflows for the 12th consecutive month.
Highest inflows: Metropolitan West Total Return Bond and Dodge & Cox Income were the two actively managed funds with the highest inflows for the second straight month. SPDR S&P 500 ETF and three Vanguard funds topped the list of passive funds by November inflows.
Highest outflows: IMCO Total Return and PIMCO Low Duration were among the five active funds with the highest outflows in November. MainStay Marketfield also had significant redemptions for the second consecutive month.
Vanguard and iShares led inflows at the provider level, collecting $20.7 billion and $13.5 billion, respectively.
PIMCO’s firm-level outflows slowed to $12.8 billion after much larger redemptions in September and October. Janus, with Bill Gross on board, experienced its second positive month in November after 36 consecutive months of outflows. Gross’ new fund, Janus Global Unconstrained Bond, with inflows of $0.8 billion compared with the firm’s overall inflows of $0.7 billion, singlehandedly kept Janus in positive territory.

To view the complete report, please visit http://www.global.morningstar.com/novflows14. For more information about Morningstar Asset Flows, please visit http://global.morningstar.com/assetflows.

Towers Watson cuts out middleman in longevity risk transfer deals

Posted on December 15, 2014 by Editorial Staff -

Towers Watson has launched a service aimed at removing the need for insurance intermediaries when UK defined benefit (DB) funds transfer longevity risk, IPE.com reported.

The consultancy has set up ready-made “insurance cells,” which allow pension funds to deal with reinsurance companies directly in longevity swap arrangements.

Reinsurers only transact with insurance companies or banks, meaning DB funds wishing to hedge longevity risk have to access the market via an intermediary firm. Longevity swap deals have reached £32bn in 2014 as DB schemes continue to use the insurance market as a prime source of de-risking.

The move by the consultancy comes after its involvement in advising the trustees in BT Pension Scheme’s (BTPS) mammoth £16bn (€20bn) longevity swap. In that deal, BTPS transferred its longevity risk to a newly created and wholly owned insurer, which then transferred the risk to US-based Prudential Insurance Company of America, avoiding significant intermediary fees.

Towers Watson’s service, Longevity Direct, will give pension funds access to a “ready made insurance cell,” which it said could write insurance and reinsurance contracts for longevity swap transactions.

This, Towers Watson said, would reduce the costs of entering a longevity swap arrangement by cutting the intermediary fee and removing the need for price averaging.

It said the costs of a typical transaction of £2bn in liabilities could come close to £30m in intermediary costs, with Longevity Direct having the potential to save “several million pounds”.

Shelly Beard, senior consultant at the firm, said DB schemes not being charged price averaging would lead to significant savings. Price averaging occurs when insurers or banks typically engage with several reinsurers to spread credit and counterparty risks, and exposure limits.

This means pension funds end up paying several levels of fees, which deteriorate as the intermediary engages each additional reinsurer. However, via a single transaction and where the pension fund is comfortable with a single counterparty, it could select the best pricing in the market.

Beard also said the offering was much more stripped out in terms of intermediary costs charged to pension funds, allowing for further savings. Keith Ashton, head of risk solutions at Towers Watson, said: “Pension scheme and reinsurer interests are typically very aligned. A direct agreement can be much less complex than the longevity swaps we have seen in the past.”

The Hidden Gold in Mid-Size Rollovers

Posted on December 4, 2014 by Kerry Pechter -

Too often, says Pete Littlejohn, the director of strategic partnerships at Inspira, a $20 million closely held IRA recordkeeper based in Pittsburgh, the owners of those accounts wind up in steerage on titanic asset management platforms, generating minimal or even negative revenue and receiving barebones yet over-priced service in return.

Pete Littlejohn

“We’re building a mechanism for any firm that wants to outsource its most expensive clients,” Littlejohn, who gets excited when he describes the potential for Inspira’s idea, explained to RIJ recently. “We can give them first-class treatment for a quarter to a third of what Wall Street charges. We tell the recordkeeper, ‘You can quit saying either yes or no to a rollover and instead say yes to all of them. If the account balance is below the bar, take it off your expensive legacy based technology chassis and kick it out to us.’”

Inspira can’t go down this road alone; it needs a managed account provider. So it has teamed up with GuidedChoice, the advice firm powered by CEO Sherrie Grabot and Nobelist Harry Markowitz, to provide the same type of managed account to IRA customers that the firm provides to 401(k) participants.

For GuidedChoice, whose direct customers are plan sponsors, the partnership represents a chance to participate, if indirectly, in the rollover business. IRA custodians had apparently been proposing such partnerships to GuidedChoice for some time, and Inspira had a business plan that matched GuidedChoice’s low-cost culture.

“The business kept coming to our doors, from existing clients who wanted to broaden their relationship with us and others,” Ashley Avaregan, a senior vice president at GuidedChoice, told RIJ this week. Its relationship with Inspira is non-exclusive; Inspira is also talking to Georgia-based Financial Soundings about a partnership.

Perceiving an opportunity

Inspira’s opportunity is predicated on the idea that large, established financial firms that handle rollover IRAs and the 401(k) accounts of separated workers are in a bind over mid-sized accounts. They don’t want to lose the assets but the accounts barely generate enough revenue to cover their maintenance costs. Most of them don’t ideally want to handle accounts below a certain bar, usually about $50,000.

Inspira, a backoffice IRA recordkeeping firm founded in 2002 by Lowell Smith Jr., decided to reach out to those firms—plan recordkeepers, third-party administrators (TPAs), insurance companies and banks—with an offer to take on the management of their below-the-bar accounts.

A 401(k) recordkeeper, for instance, could offer departing employees with smaller accounts the option of rolling over to a white-label IRA at Inspira, under the original company’s logo, or through Inspira‘s own Pinnacle IRA brand. The recordkeeper would incur no further costs, and could even reabsorb the account if and when its value exceeded their bar. In the meantime, Inspira would pay the recordkeeper a modest asset-based income.

The incoming assets would go into a managed account run by GuidedChoice or another low-cost provider. GuidedChoice would put the money into its own menu of low-cost institutional index funds or ETFs. If the recordkeeper had its own proprietary funds, assuming they were no-load and institutionally priced, GuidedChoice could build a managed account out of those.

Shifting the administration of mid-sized rollovers from large companies to Inspira would end up as savings and/or profits for everyone in the chain, including the investor, Littlejohn claims. “It’s 50 to 80 basis points, all in, if we use an institutional investment lineup,” he told RIJ. That would include about 20 basis points for index funds, plus GuidedChoice’s managed account fee, plus Inspira’s fee, plus perhaps 20 basis points for the outsourcer of the account.

If the outsourcer wanted GuidedChoice to build managed accounts out of its proprietary funds, the all-in cost might range from 75 to 110 basis points, he said. Whatever the price, he added, it will cost the underlying client only 25% to 33% of what he or she would have been charged on a large recordkeeper or wirehouse platform.

How can Inspira do that? With low overhead and the zero marginal costs per customer, Littlejohn says. Inspira doesn’t have the legacy IT systems, the investments bricks-and-mortar, or the army of employees. In short, Inspira brings to the rollover business the kinds of advantages that robo-advisors are bringing to the advice business.

“We don’t have skyscrapers or corporate jets. We don’t build our own IT systems, so they’re never outdated. Software in the 401(k) space is more and more customized. We’re reinventing the IRA delivery system. We’ll give people the same experience that large account owners get at a much lower price.”

‘Begging for reinvention’

Not so coincidentally, all this is taking place at a time when regulators are scrutinizing the rollover process. Phyllis Borzi, director of the Employee Benefit Security Administration, wants to raise the standard for advice-giving on IRA rollovers to the fiduciary level, and to protect qualified account owners from the higher fees they’ll encounter when they roll over to a retail IRA.

“That’s why price was the biggest factor for us out of the gate,” Littlejohn said. “We wanted to beat the DoL to the punch in terms of making management of IRAs a fiduciary act. We’re already where Phyllis wants to go.”

Given the trillions of dollars in the rollover IRA space, and the fact that a large percentage of the account values are in the $5,000 to $50,000 range, Littlejohn sees a huge opportunity. He expects mid-market IRA business not just from recordkeepers and TPAs, but also from DCIO (defined contribution investment-only) asset managers who want to get an oar in the rollover business, from “affinity” groups like AARP who want to establish white-label rollover IRA programs for their members and perhaps from future state-sponsored DC plans in Illinois, California and Connecticut. “This industry is begging for reinvention,” he said.

Ruark Publishes Biannual VA Usage Study

Posted on December 4, 2014 by Editorial Staff -

Ruark Consulting, the Simsbury, Conn., actuarial firm, has published a summary of the results of its latest analyses of full surrender, partial withdrawal and GMIB annuitization behavior among variable annuity contract owners.

Ruark found that:

Surrender rates continue to trend downward, but not as steeply. As the number of years left in the surrender periods (and the penalty) goes down, contract owners become more likely to surrender.
GMIB (guaranteed minimum income benefit) contracts now have slightly lower surrender rates (higher persistency) than lifetime GMWB contracts, which historically have had the lowest surrenders of all the living benefit types in the Ruark study.
Among contracts with living benefits, lapse rates are lower when the guarantee value is high relative to account value. This is true regardless of whether the guarantee is valued nominally or on an actuarial basis (using discount and mortality rates).
Excess withdrawals predict a greater chance of surrender. In other words, there’s a markedly higher surrender rate among owners of GLWB contracts who have taken excess withdrawals (amount higher than the maximum allowable) in the past.

Partial withdrawal study

Ruark analyzed over 16 million contract years of lifetime withdrawal (GLWB), non-lifetime withdrawal (GMWB), and withdrawal-oriented (“hybrid”) GMIB rider experience. Almost four million of those contract years included withdrawals, and RCL identified factors that might have affected partial withdrawal behavior:

Across the industry, the frequency of withdrawals is up slightly from last year. Most of the marginal bump is at the annual maximum withdrawal amount.
The rate of excess withdrawals (withdrawals above the policy’s annual maximum) has not increased over the same period.
The level of overall industry withdrawals has not been at what product designers would consider efficient. Some policyholders take withdrawals, which eliminate an annual deferral bonus, that are smaller than the maximum the contract permits, thus under-using the benefit of the income rider. Others withdraw more than their full income percentage, thus degrading the rider’s guarantee.
GLWB policyholders, once they do begin taking withdrawals, continue to do so in subsequent years at very high frequencies.

GMIB annuitization study

In a separate analysis, Ruark looked at GMIBs with 7-year and 10-year waiting periods. Experience is now emerging on the behavior of owners of the 10-year contracts, which predominated during the past decade. The 30,000 annuitizations in the study provide adequate credibility overall, though reliability declines when the data is finely sub-divided, Ruark said in its release.

Among the findings:

GMIB exercise (for all contracts) remains in the single digits and lower than in RCL’s previous study.
Age and relative value of the rider (moneyness) drive behavior. The moneyness effect is evident on both a nominal and actuarial (which reflects the rider’s guaranteed income rates) basis.
GMIB riders that allow partial dollar-for-dollar withdrawals have lower exercise rates than those that reduce the benefit proportionately.
There is only a slight effect of duration (time since end of waiting period) on annuitization rates. Exercise is slightly higher at first opportunity than in subsequent years.

Ruark Consulting (RCL) conducts biannual variable annuity experience studies of full surrender, partial withdrawal, and GMIB annuitization behavior. Full results are available only to the study’s 18 participants, including:

AIG Life & Retirement
Allianz
AXA
Commonwealth Annuity & Life
Delaware Life
Guardian
John Hancock
Massachusetts Mutual
MetLife
Nationwide
New York Life
Ohio National Life
Pacific Life
Phoenix
Protective
Prudential
Security Benefit
Voya (ING)

RCL’s surrender study includes over 44 million contract years of exposure, with 2.6 million surrenders. RCL said it believes that this large sample size, up nearly 20% from last year, allows it to accurately assess the effects of duration, surrender charge period, owner age, distribution channel, commission level, contract size, and inclusion and value of guaranteed benefits on VA surrender rates.

Mature Americans need retirement advice (desperately)

Posted on December 4, 2014 by Editorial Staff -

Growing wiser is supposed to be one of the consolations of growing older. But there’s new evidence that even older Americans are still toddlers when it comes to understanding retirement finance. (Advisors, please note: This means opportunity.)

According to a fresh survey from The American College, most people ages 60 to 75 with $100,000 or more in assets “lack the knowledge they need for a financially secure retirement in areas such as life expectancy, Social Security, long-term care needs, investment risk and more.”

Indeed, only 20% of older Americans passed a basic test given to them as part of the RICP Retirement Income Literacy Survey, sponsored by The American College in Bryn Mawr, Pa., which offers the Retirement Income Certified Professional certification for advisors. Less than one percent scored 91 or better on the test component of the survey, which was designed by Greenwald & Associates.

Many Americans were nonetheless blithe about retirement. More than half (55%) consider themselves “well prepared” to meet their income needs in retirement, and almost all (91%) are at least “moderately confident” in their ability to achieve a secure retirement.

Respondents know little about preserving their assets in retirement. The oft-cited “four percent rule” for a safe withdrawal rate in retirement is unfamiliar to seven in ten Americans (69%). Sixteen percent thought it would be safe to withdraw 6% or even 8% per year. Twenty percent estimated two percent to be the safest rate.

Most people are also perplexed about when to claim Social Security and how to maximize their benefits. Only half of respondents (53%) knew that someone with a long life expectancy should ideally wait until age 70 to claim benefits.
A “disturbing” number of these older respondents showed a lack of knowledge when it comes to understanding the risks associated with stocks or bonds.

Only 39% understood that when prevailing interest rates rise, the prices of existing bonds and the net asset values of bond funds will decrease.
Only 7% understand that small cap stock funds have historically offered higher long-term returns than large cap stock funds, dividend-paying stock funds, or high-yield bond funds.

Managing longevity risk is apparently a problem for many Americans. More than half (51%)underestimated the average life expectancy of a 65-year-old man, which is about 18 years.

Most Americans were also unsure about how to protect themselves from sequence-of-returns risk during the years directly before and after retirement, when their portfolios are especially vulnerable to downside volatility.

Only 37% know that someone who intends to retire at age 65 should take less risk at age 65 than earlier or later.
Only 30% recognize that working two years longer or deferring Social Security for two years has a bigger impact on retirement readiness than increasing retirement contributions by 3% for five years.
Only 27% report having a written retirement plan in place.
63% say they have a relationship with a financial advisor.
52% are at least “moderately concerned” about running out of money in retirement.
33% have never tried to figure out how much they need to accumulate to retire securely.

Survey responses were gathered through online interviews conducted between July 17-25, 2014. A total of 1,019 Americans were interviewed. To qualify for participation in the study, respondents had to be ages 60-75 and have at least $100,000 in household assets, not including their primary residence.

Data Connection

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