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Gene Steuerle wins TIAA-CREF’s Samuelson Award

Posted on January 8, 2015 by -

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.

© 2015 RIJ Publishing LLC. All rights reserved.

The Fed Sets Another Trap

Posted on January 8, 2015 by -

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.
© 2015 Project Syndicate.

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

Posted on December 16, 2014 by -

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.

Christine Marcks Prudential

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.

© 2014 RIJ Publishing LLC. All rights reserved.

Watchdog group decries change in swaps regulation

Posted on December 16, 2014 by -

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 RIJ Publishing LLC. All rights reserved.

2014 in Retrospect: The Best of RIJ

Posted on December 15, 2014 by -

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

© 2014 RIJ Publishing LLC. All rights reserved.

 

Nationwide Settles 401k Fee Suit for $140M

Posted on December 15, 2014 by -

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 -

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 -

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.”

© IPE.com. 

The Hidden Gold in Mid-Size Rollovers

Posted on December 4, 2014 by -

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.

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.

© 2014 RIJ Publishing LLC. All rights reserved.

Ruark Publishes Biannual VA Usage Study

Posted on December 4, 2014 by -

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.   

© 2014 RIJ Publishing LLC. All rights reserved.

Mature Americans need retirement advice (desperately)

Posted on December 4, 2014 by -

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.

© 2014 RIJ Publishing LLC. All rights reserved.

Hungarians protest end of state-sponsored DC plan

Posted on December 4, 2014 by -

Hungary’s experiment with mandatory, privately managed individual retirement accounts, which began back in the bullish days of the late 1990s, appears to be almost over, IPE.com reported.

Under a bill submitted to the Hungarian Parliament, the government will shut down the four remaining funds in the mostly-dismantled “second-pillar” system unless they can prove that at least 70% of their 60,000-odd members have paid regular fees for at least two months over a six-month period. Membership peaked at three million in 2010.

On November 25, several thousand people, rallied by postings on Facebook, marched in protest from the Ministry of National Economy to the Parliament building in Budapest.

If passed, the law could go into effect as early as January 2015. The four funds still in operation are the Budapest Magánnyugdíjpénztár, Horizont Magánnyugdíjpénztár, MKB Nyugdíjpénztár and Szövetség Magánnyugdíjpénztár. Economic minister Mihaly Varga submitted the legislation.

Due to a lack of inflows, the second pillar funds haven’t been able to generate enough retirement income for members, who would be better off forwarding all their contributions to the country’s basic pay-as-you-go, earnings-related Social Security-style state pension, according to Varga.

In a 2011 paper, “The Mandatory Private Pension Pillar in Hungary: An Obituary” Andras Simonovitz, Institute of Economics, Hungarian Academy of Sciences, wrote:

In 1998, the left-of-center government of Hungary carved out a second pillar mandatory private pension system from the original mono-pillar public system. Participation in the mixed system was optional for those who were already working, but mandatory for new entrants to the workforce. About 50% of the workforce joined voluntarily and another 25% were mandated to do so by law between 1999 and 2010.

The private system has not produced miracles: either in terms of the financial stability of the social security system, or greatly improved social security in old age. Moreover, the international financial and economic crisis has highlighted the transition costs of pre-funding. Rather than rationalizing the system, the current conservative government de facto ‘nationalized’ the second pillar in 2011 and is to use part of the released capital to compensate for tax reductions.

Leaders of the four pension funds warned that a diversion of contributions back to the state pension would lead to the dissolution of the funds. If they were dissolved, the Hungarian government would acquire some HUF200bn (€651m) in assets, although this has not apparently been factored into the 2015 Budget.

Prime minister Viktor Orbán’s government first took aim at the mandatory pension funds in 1998 by freezing contributions. In 2001, membership of the system became voluntary. On his return to power in 2010, he threatened those who refused to opt back into the state system with the loss of their state pension. Although that move turned out to be unconstitutional, Hungarians began abandoning the funds.

According to data from the National Bank of Hungary, some €12bn of assets were transferred to the state, while the number of members shrank to some 100,600 in 2011 from more than three million in 2010. As of the end of September 2014, membership stood at 61,523 and assets at HUF205.4bn.

© 2014 RIJ Publishing LLC. All rights reserved.

Genworth introduces FIA with income rider

Posted on December 4, 2014 by -

Genworth has introduced SecureLiving Growth+ with IncomeChoice, new fixed index annuity with a lifetime income rider for consumers “as young as 45” who want to build a source of retirement income that offers downside protection and growth potential. 

According to a release from from Lou Hensley, Genworth’s president of Life Insurance and Annuities, SecureLiving Growth+ with IncomeChoice offers:  

  • The potential for contract owners to double their income for up to five consecutive years when they are confined to a medical care facility.  
  • Access to “caregiver support advocates” who can help answer care-related questions, access care and help identify potential care facilities.
  • An IncomeChoice rider that provides a guaranteed lifetime withdrawal benefit, which offers a choice, at retirement, of increasing or level income options for a 1.10% annual charge.
  • 50% credit enhancements before income begins and while the rider is in effect.
  • Four index crediting strategies based on the S&P 500 Index, including a “new patent-pending two-year trigger crediting strategy”.
  • “Bailout renewal protection” that enables the contract owner to make full or partial withdrawals from their contract without surrender charge or market value adjustment.
  • A pro-rated reduction in the rider charge if, during the surrender charge period, the renewal cap for the annual cap strategy is below the bailout rate.
  • The ability to start income distributions anytime after the first contract year without being restricted by the contract anniversary window.
  • Competitive caps and rates.

© 2014 RIJ Publishing LLC. All rights reserved.

Income options in DC plans still rare: PSCA

Posted on December 4, 2014 by -

Fewer than 10% of the 613 profit-sharing and 401(k) plans surveyed by the Plan Sponsor Council of America (formerly the Profit-Sharing Council of America) offer a lifetime income option to their participants, according to the PSCA’s 57th Annual Survey of Profit Sharing and 401(k) Plans.

Regarding the use of target-date funds, the report showed that about two-thirds of the plans offered TDFs and that 16.7% of the assets in those plans was invested in those funds. The approximately eight million participants in PSCA plans held about $832 billion of the estimated $6.6 trillion in defined contribution plans in the U.S. in the second quarter of 2014. 

Key findings in the PSCA’s latest report includes data in four areas:

Participant Contributions

  • 21.8 % of companies suggest a rate to employees.
  • 18.8% suggest 6% and 46.5% suggest a rate higher than 6%.
  • Account balances increased by 18.2%.
  • 88.6% of eligible participants have an account balance.
  • 80.3% of eligible participants contributed to the plan.
  • 60% of plans offer a Roth 401(k) option to participants, up from 53.8% in 2012.

Company Contributions

  • Companies contributed an average of 4.7% of pay to the plan in 2013 (up from 4.5% in 2012 and 4.1% five years ago).
  • 80% of plans make a match on employee contributions and 98 % of those plans made the match in 2013.

Investments

  • Plans offer an average of 19 funds, the same as in 2011 and 2012.
  • 66% of plans offer a target-date fund (TDF) to employees with an average of 16.7% of assets invested in them.
  • 37.2% of plans offer an emerging markets fund.
  • Fewer than 10% of plans offer a lifetime income option to participants.

Automatic Enrollment

  • 50.2% of all plans have an automatic enrollment feature (up from 47.2% in 2012) and 44% of all plans have an auto-escalation feature.
  • 40% of plans that don’t offer auto-enrollment state that they are satisfied with their participation rates and a third (32.5%) cite “corporate philosophy” as the reason they don’t use it.
  • Plans with an auto-enroll feature have participation rates 10 percentage points higher than plans that do not.

Education

  • 16.7% of plans offer a comprehensive financial wellness program.
  • 80% of plans evaluate whether their plan is successful.
  • One-third of plans made changes to their plan in 2013 – including almost half of large plans.

© 2014 RIJ Publishing LLC. All rights reserved.

How Jackson National uses iPads to compete

Posted on December 4, 2014 by -

Jackson National Life has begun offering free apps that advisors with iPads can use to access information about Jackson products (the Jackson app) and educational materials about retirement (Retirement Hub). Both apps can be downloaded at the Apple iTunes App store, according to a Jackson release.

The digital tools are part of a new Jackson educational campaign for advisers and clients. The company wants to make it easy for advisors to download Jackson product information and general investing information to tablet computers for presentations.

An app is more than just a shortcut from an iPad to a website; it allows for downloadable content that can be used when there’s no internet connection. And that’s apparently a significant difference.

“There’s definite value to having the publication reside on the iPad versus having to rely on WIFI,” Luis Gomez, vice president of Marketing Strategy for Jackson National Life Distributors, told RIJ. “You can’t always rely on the WIFI. If you’re in the middle of a presentation, you don’t want skips. You want reliability.” Once an app is built, he added, it’s easy to change the content or add animation without going through the process of building an entirely new app.

Not all advisors are equally adept with tablet computers, but Jackson’s own adoption of iPads has evidently sparked advisor usage. “At the beginning of this year we started giving our wholesalers iPads instead of laptops,” Gomez said. “As they visited advisors and went through their stories on the iPads, the advisors started asking, ‘Is that available for me?’

“So we started making the apps available to advisors. From a marketing perspective, it helps reduce time to market. We can update materials and launch in real time, instead of having to go to print. We look at this as a competitive advantage. Other industries already have this, but the financial services industry overall is still playing catch-up. We’re trying to stay ahead of the competition.”

According to a release, Jackson is making the information in the apps “easily digestible” and tailoring it to each client’s “specific knowledge level” and “unique investment goals.”

The Retirement Hub will be refreshed with new educational content each quarter, the release said. The first installment will cover bonds and interest rates, and how bond investors can adapt to rising interest rates. This quarter, the Retirement Hub will also explain portfolio volatility, and the role of correlations between asset types in controlling volatility.

Jackson also recently launched a redesign of the Performance Center on Jackson.com, where users can find current data from Morningstar, Inc. on the performance of the subaccounts in Jackson’s variable annuities.

© 2014 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on December 4, 2014 by -

New York Life acquires ETF company

New York Life Investment Management, the third party global asset management business of New York Life, announced this week that it had agreed to buy IndexIQ, a specialist in the liquid alternative exchange-traded fund (ETF) industry. Terms were not disclosed.

IndexIQ, which will be marketed through New York Life’s MainStay Investments platform, will add an estimated $1.5 billion to MainStay’s $101 billion in assets under management.

Among its 12 fund offerings, IndexIQ is best known for IQ Hedge Multi-Strategy Tracker ETF (QAI), introduced almost six years ago. It tries to “replicate the risk-adjusted return characteristics of hedge funds using strategies that include long/short equity, global macro, market neutral, event-driven, fixed income arbitrage, emerging markets and other strategies commonly used by hedge fund managers,” according to a release.

IndexIQ also offers a mutual fund version of QAI (Ticker: IQHIX/IQHOX) and is a leading “ETF Strategist” offering ETF Models and Separately Managed Accounts.

The transaction is expected to close in the first half of 2015.  

Fidelity partners with LearnVest and Betterment

Fidelity Institutional, the division of Fidelity Investments, that provides clearing, custody and investment management products to registered investment advisors (RIAs), retirement recordkeepers, broker-dealers, family offices and banks, has announced a new collaboration with LearnVest, as well as providing additional resources to help advisors explore options to digitize their practices.

New Fidelity research confirms a need for advisors to begin integrating digital strategies: 55% plan to target emerging and mass affluent investors1 in the next five years, a segment of investors who are comfortable transacting online and craving more clarity and simplicity in their finances. This is a shift for many advisors, considering that seven in 10 firms report that investors over the age of 49 or with more than $1 million in assets drive their current strategy. 

 “The relationship with LearnVest will help advisors offer clients access to an educational ‘financial wellness’ microsite powered by LearnVest’s original content, as well as preferred pricing to LearnVest’s technology-enabled financial planning program,” according to a Fidelity release.

“The collaboration will be particularly useful for advisors consulting on workplace retirement plans. It adds to Fidelity Institutional Wealth Services’ collaboration with Betterment Institutional, through which RIAs may consider adding a client-facing digital platform to engage growing investor segments, like the emerging affluent, while still delivering the advice for which they are highly valued.”

Fidelity is also launching a new report on the digital landscape in addition to the collaborations with LearnVest and Betterment Institutional. 

Northwestern Mutual completes sale of Russell Investments

Northwestern Mutual has completed the $2.7 billion sale of its subsidiary Frank Russell Company (Russell Investments) to the London Stock Exchange Group plc. Proceeds from the sale, which closed today, will further boost the 2014 financial results of the Milwaukee-based mutual company.

“Russell has been a good investment for us,” said John Schlifske, chairman and CEO of Northwestern Mutual. “Russell’s operating results have made significant contributions to our financial results over the years. When you look at this sale price and the income produced for us since we bought Russell in 1999, you get a rate of return well in excess of equity indices over that period.”

Northwestern Mutual manages more than $184 billion (YE 2013) in invested assets as part of its general account investment portfolio, which backs its insurance and annuity products.

Goldman, Sachs & Co. and J.P. Morgan Securities LLC acted as financial advisors to Northwestern Mutual on this transaction.

Aviva buys Friends Life to become Britain’s biggest insurer 

The life insurance industry continues to consolidate.

In a deal that will create the largest life insurer in Britain, Aviva has agreed to buy rival Friends Life for about $8.8 billion in stock, according to an Aviva release. The resulting insurance and asset management business will be worth about £20.7 billion ($32.4 billion) and manage over £300 billion. 

Under the agreement, 0.74 shares of Aviva were swapped for each share of Friends Life. Friends Life shareholders would also receive a dividend of 24.1 pence a share, for a full-year dividend of 31.15 pence a share. They would own about 26% percent of the combined company, which would have around 16 million customers.

The offer price, with the dividend, represented a 27% premium over the average trading price of Friends Life shares for the three months that ended Nov. 20. At Monday’s closing prices, including the additional dividend, Friends Life was worth about £3.94 a share or about £5.6 billion in total.

The transaction requires shareholder and regulatory approval, and it is expected to close in the second quarter. Aviva sold Aviva USA, its life insurance and annuities business in the U.S., for $2.6 billion in 2013. 

Aviva’s stock has risen about 37% since Mark Wilson joined as chief executive at the beginning of 2013, and its profit has improved. For the first half of 2014, operating profit rose four percent to £1.05 billion. On Tuesday, investors sent shares of Friends Life up 1.9% to £3.73 in early trading in London, while shares of Aviva were up less than on percent to £4.99. The combined company is expected to continue to list its shares in London after the deal.

The deal is expected to result in about £225 million of annual cost savings by the end of 2017, the companies said. After the transaction, Andy Briggs, the chief executive of Friends Life, would become chief of Aviva’s life insurance business in Britain and would join the combined company’s board as an executive director.  

Illinois House passes statewide retirement savings program bill

State lawmakers passed another mandate on businesses Tuesday. Employers with more than 25 employees would have to enroll employees in a retirement savings program, the Illinois News Network reported this week. Employees would be given the option to voluntarily opt-out.

Employers are mandated to participate unless they already provide employees a savings option. Chief sponsor in the house, Barbara Flynn Currie, says employers are already required to withhold things like income taxes and child support from employee’s paychecks. “This is very little different,” she said.

Representative Ron Sandack said the issue should have more investigation before another mandate is levied against small business.

“Yes, people aren’t saving up for retirement, yes we ought to do more to incentivize that,” he said. “No, we shouldn’t mandate a program that we don’t know a thing about. We shouldn’t mandate small business and encumber small business, yet again, with an expense and a burden that we really don’t know anything about.

After having passed the Senate in April, the measure passed the House Tuesday 67-45.

© 2014 RIJ Publishing LLC. All rights reserved. 

 

Fidelity & Guaranty Life’s FIA sales doubled in fiscal 2014

Posted on November 27, 2014 by -

The holding company Harbinger Group Inc. has announced its consolidated results for the fourth quarter and full year of fiscal 2014 ended last Sept. 30, including results for Fidelity & Guaranty Life, which issues fixed indexed annuities.

FGL more than doubled its annuity sales in both the quarter and the year, and continues to increased its GAAP book value by 45% over the year, according to the Harbinger end-of-year report. The insurance segment, which includes Front Street Re Inc., had about $18.8 billion of assets under management as of Sept. 30. 

Harbinger also announced that its CEO and chairman, Philip Falcone, will resign from both positions, effective this Monday, Dec. 1, 2014, to focus on HC2 Holdings Inc. and Harbinger Capital Partners. Falcone will receive a bonus of $20.5 million at departure. Harbinger’s market capitalization grew from $140 million in 2009 to today’s $2.6 billion.  

Fiscal year results

Annuity sales increased 114% in fiscal 2014, to $2.16 billion. Additionally, during the fiscal 2014 quarter, FGL grew fixed indexed annuities by 91% over the fiscal 2013 quarter and 20% on a sequential basis.  The increase in annuity sales and fixed indexed annuities in both periods is attributable to ongoing marketing initiatives with existing distribution partners as well as the launch of new products.

But the insurance segment’s revenues fell 12.3%, to $283.0 million from $322.8 million, in the fiscal 2014 quarter due to lower net investment gains driven by the segment’s portfolio repositioning activity in fiscal 2013. FGL implemented a tax planning strategy to use certain net operating losses, which resulted in certain non-recurring capital gains.

Operating income for the insurance segment in the fiscal 2014 quarter decreased by $103.4 million, or 61.5%, to $64.6 million from $168.0 million for the fiscal 2013 quarter due to the same factors that affected revenue, the release said. The segment’s adjusted operating income fell 65%, decreased to $31.3 million from $89.3 million in income for the fiscal 2013 quarter.

The insurance segment recorded annuity sales, which are recorded as deposit liabilities (i.e. contract holder funds) in accordance with generally accepted U.S. accounting principles, of $501.6 million for the fiscal 2014 Quarter as compared to $246.9 million in the fiscal 2013 quarter, an increase of $254.9 million, or 103%. 

© 2014 RIJ Publishing LLC. All rights reserved.

Competitiveness of U.S. public equity markets called ‘weak’

Posted on November 27, 2014 by -

Despite the record-breaking initial public offering of the Alibaba Group, U.S. capital market competitiveness showed continued historical weakness through the third quarter of 2014, according to the Committee on Capital Markets Regulation, a 35-member group directed by Hal Scott of Harvard.

“While the U.S. capital markets have strengthened in terms of domestic IPOs, the overall competitive landscape internationally continues to disappoint,” said Scott, the Nomura Professor and director of the Program on International Financial Systems at Harvard Law School. “Putting aside Alibaba, the competitiveness of our public markets is significantly worse.”

According to the CCMR release, “Alibaba’s choice of New York over Hong Kong was driven primarily by a desire for a dual share class structure, which could not be achieved in Hong Kong, rather than a judgment about the appeal of the U.S. regulatory framework and liability rules, i.e. securities class actions. Moreover, ‘bonding’ to a lower standard of governance is not the way to restore the competitiveness of the public market. Excluding Alibaba’s historic listing, a number of additional key measures of market competitiveness showed continued weakness.” They included:

  • U.S. share of global IPOs by foreign companies sits at 9.0%, continuing the trend of foreign companies avoiding U.S. equity markets.  This measure remains far below the historical average of 26.8% (1996-2007).
  • Foreign companies that did raise equity capital in the United States through the third quarter of 2014 did so overwhelmingly via private rather than public markets. Approximately 84% of initial offerings of foreign equity in the United States were conducted through private Rule 144A offerings rather than public offerings. This measure of aversion to U.S. public equity markets stands significantly higher than the historical average of 66.1% (1996-2007).
  • Cross-listing activity in the U.S. by foreign companies for non-capital raising purposes remained low. Activity through the third quarter of 2014 suggests only 3 foreign companies will cross-list in the U.S. this year for purposes other than capital raising (such as bonding to U.S. standards), fewer than in any year since 2008, and well below the historical average of 17 cross-listings per year.

The CCMR believes that the policy recommendations in its 2006 Interim Report remain essential to the restoration of U.S. competitiveness. “In addition, we urge regulators implementing the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act to minimize the adverse competitive effects of new regulations, particularly in areas where the U.S. regulatory approach differs significantly from competitor markets,” said Scott, in a release.

© 2014 RIJ Publishing LLC.