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A VA with a little bit of everything, from Principal

Posted on November 27, 2014 by Editorial Staff -

The Principal Financial Group has introduced a series of Swiss Army-knife type of variable annuity that allows investors to accumulate through traditional and alternative investments and decumulate through a no-cost deferred income rider option.

The series is called Principal Pivot, and the name refers to ability of contract owners to “pivot” from accumulation to income. The contract owner can make periodic transfers from the mutual fund sleeve to an income sleeve ($5,000 minimum for first transfer, $1,000 each thereafter), and to set income to begin at a future date (by age 70½ for qualified contracts and age 95 for non-qualified).

The product has a current mortality and expense risk fee of 1%. Fund expense ratios range from a low of 0.65% to a high of 2.63%. There’s a return of premium death benefit rider available for an extra 20 basis points and an annual step-up death benefit rider for 35 basis points. A Liquidity Max rider exempts the contract owner from paying surrender fees. It currently costs 25 basis points. There’s also a 15-basis point administrative fee and a $30 annual fee.

Fund families offered under the contract include American Century, American, Calvert, Deutsche, Fidelity, Franklin Templeton, Goldman Sachs, Guggenheim Partners, Invesco, Janus, MFS, PIMCO, Principal, Rydex and Van Eck. Contract owners can get exposure to alternative assets like commodities and real estate, along with long/short strategies, hedge funds and managed volatility funds.

As an all-in-one package, the Pivot also includes built-in investment guidance systems. According to a press release, it offers clients “three investment approaches. There’s a personalized strategy for clients who prefer to create a fully-customizable investment portfolio based on their investment objectives; a guided strategy for those who want guidance on which investments to choose that meet their risk profile and investment objectives; and an asset allocation strategy for those who want a managed approach to investing and diversification that includes a mix of stocks, bonds and other investment options.”

The contract offers some flexibility around start dates and liquidity. Once contract owners moves money from the separate account to the deferred income account, they can’t move it back or access it in any way other than the annuity payment method they’ve chosen. But they can move their income start date once, and they can get accelerated lump sum payments (up to six months’ worth at a time) up to four times during the income period. If the start date is accelerated or delayed, the annuity payments decrease or increase accordingly.

Principal Pivot VA bears a resemblance to the two-sleeve VAs of the past, such as the Hartford Personal Retirement Manager. That product allowed contract owners to gradually move money from a separate account to a fixed-return account destined for income. The Pivot isn’t as flexible; the Hartford product allowed contract owners to reverse their contributions to the fixed account, subject to a market value adjustment. With the Pivot, contributions to the income account are irrevocable after the 10-day free look period.

Vanguard continues to dominate fund in-flows

Posted on November 27, 2014 by Editorial Staff -

Fixed income is the focus of the November issue of The Cerulli Edge – U.S. Monthly Product Trends. Its Monthly Spotlight feature takes a close look at product development in the area of managed volatility strategies.

The strong flow of assets into Vanguard funds, driven by the appeal of low-cost passive investing, was again reflected in the report. As of October, Vanguard has almost $2.2 trillion in mutual fund assets, an 18.5% market share. With 10.4% and 9.9% market shares, Fidelity and American Funds run a distant second and third, respectively.

Vanguard funds saw inflows of $17.45 billion in October and $165.4 billion for the first ten months of 2014. YTD, Dimensional Fund Advisors was second with $24.4 billion. PIMCO shed $43.8 billion in October and $109 billion through October 2014.

Among the top-ten fund families for equity fund flows in the first ten months of 2014, Vanguard occupied the top four spots, with its Total Stock Market Index, Five Hundred Index, Mid-Cap Index and Small Cap Index Funds. Vanguard Total International Stock Index Fund had the highest in-flows among international equity mutual funds for October and for 2014.

The mutual fund with the highest inflows in October 2014, however, was the Metropolitan West Total Return Bond Fund, with $6.7 billion. This intermediate-term, actively managed bond fund has returned 5.63% through November 25. It holds as much as 20% of its assets in below-investment grade securities, has more than 35% of assets in mortgage-backed securities and holds just 32.7% in U.S. government issues. The expense ratio of its non-institutional share class is 68 basis points.

Vanguard Total Bond Market Index Fund, by contrast, has 64% U.S. government securities and holds no bonds with a rating under Baa. The expense ratio of its Investor Shares is 20 basis points and for its Admiral Shares ($10,000 minimum) is eight basis points. It has also had a good year, with a return of 5.34% through November 25.

Other highlights from this month’s report included:

Total mutual fund flows were negative (-$6.7 billion) for the second month in a row. The taxable bond mutual fund asset class experienced redemptions for a second straight month. International equity mutual funds garnered the most flows in October ($3.4 billion).
ETF assets grew 2.9% in October, bringing total assets closer to $2 trillion. ETF flows reached their highest level thus far in 2014, reaping $29.9 billion in October.
Investors are increasingly considering unconstrained or absolute return fixed-income strategies. Asset managers feel compelled to position clients against volatility and future rate tightening.
Retail investors’ appetite for income and reduced tax exposure will persist as Baby Boomers shift into retirement. Most financial advisors (78%) surveyed currently use municipal bond funds, and generally have sufficient understanding of their role in a portfolio.

The staid world of Dutch pensions is evolving: ABP

Posted on November 27, 2014 by Editorial Staff -

Life expectancy in Europe could eventually break through the “120-year ceiling,” and Dutch pension plans must be prepared for it, according to a report by the €334bn Dutch pension fund ABP, which covers government, education and public employees. ABP’s findings were summarized at IPE.com.

“Pension funds must look at ways of spreading the effects of longevity evenly across the generations,” the report said.

ABP, which has 2.8 million participants in a country of less than 17 million, pointed to pension trends in the Netherlands that may sound familiar to American plan sponsors: The need among participants for “clear and tailor-made” information, downward pressure on asset management fees, and demand for greater transparency.

“Pension funds are already divesting from high-cost asset classes, such as hedge funds and private equity,” low-cost pension vehicles are emerging, and pension arrangements are likely to be simpler and more uniform, the report said.

Increasing “individualization” in Dutch society, combined with an aging population, is apparently putting pressure on the traditions of collectivity and solidarity that underpin defined benefit pensions. Partly because Europeans are changing jobs more often and more are self-employed, and participants are demanding more flexibility in managing their own retirement accounts, the report said.

In defense of the collective retirement system, ABP argued that “a thorough explanation of the material advantages of collectivity and solidarity could help reverse this trend, and that improved management of individuals’ data could help produce tailor-made pension products.”

ABP said it expected the government to “decrease tax-facilitated pensions accrual” in defined benefit plans, causing Dutch workers to look for other ways to save for retirement. This, in turn, will accelerate the development of defined contribution products, it said.

ABP said population aging would require an increasingly defensive investment mix, with lower expected returns, and warned that the growing mobility of capital would weaken the benefits of diversification.

Consolidation among Dutch pension funds will also continue, particularly among employer-sponsored plans, while cost-cutting on pension arrangements and the increase in the official retirement age will increase the “uniformity” of pension plans, ABP said, predicting that “there could be no more than 100 pension funds left in 2020.”

Canadians feel as insecure about retirement as we do

Posted on November 27, 2014 by Editorial Staff -

Nearly a third of Canadians aged 55 to 70 don’t know when they will retire, according to a survey by the LIMRA Security Retirement Institute. The oldest members of the survey group (ages 65 to 70) are the most undecided; about one in 10 don’t expect to retire all.

The report, Ready, Set, Retire? Not So Fast!… Revisited: A Canadian Consumer Retirement Study, is a follow-up to two previous studies that LIMRA conducted in Canada, one in 2010 and the other, 2012.

As in 2012, the majority of Canadian pre-retirees acknowledge a need for more guaranteed lifetime income in retirement than they’ll get from their government pension plans. Among the survey results:

More than a fifth of those surveyed say having guaranteed income for life is the most important feature when selecting products to create income in retirement.
Three in 10 pre-retirees do not have primary financial advisors to reach their financial goals.
Among those pre-retirees who have financial advisors, six in 10 consider the advice they receive to be very valuable.

LIMRA conducted the study in late 2013. The sample included 1,800 respondents polled by research vendor Greenwich Associates.

QLACs: The ‘Greek yogurt’ of Retirement Products?

Posted on November 20, 2014 by Kerry Pechter -

Broccoli is just cabbage with a college education, Mark Twain said. And for those of you who believe that deferred income annuities (DIAs) are just fancy immediate annuities and that qualifying longevity annuity contracts are just fancy DIAs—and that they’re all boring—then you’ve probably ignored QLACs altogether.

That might be doubly true if you’d never sell or even recommend an insurance product to a Boomer. Or if you don’t work at one of the mutual insurance companies, where most of the slow but steady SPIA/DIA/QLAC sales action inevitably takes place.

But for income wonks—you know who you are—who love to combine investment and insurance products (for tranquility and more freedom to get frisky with the rest of the retirement portfolio) then you probably thrill to QLACs the way a health nut thrills to cruciferous vegetables like broccoli or kale.

A little exposition: QLACs—Qualifying Longevity Annuity Contracts—are average-size (up to $125,000) DIAs, by definition purchased with pre-tax savings, from which income doesn’t have to flow until age 85. That’s well past the usual age 70½ commencement date for taxable distributions from qualified accounts. Importantly, a QLAC has tax-reducing potential, because during the deferral period the premium can be excluded from the calculation of required minimum taxable distributions from qualified accounts.

The long-awaited Treasury announcements about QLACs in July and October have triggered some interesting new discussions about longevity annuities. The Brookings Institute hosted a forum on QLACs in Washington on November 6. This week, New York Life sponsored a QLAC webinar, hosted by the Retirement Income Industry Association.

Three sales opportunities

The beauty part of the RIIA/New York Life webinar came, I thought, when Scott Bredikis, director, Guaranteed Income Annuities, at New York Life, described QLAC business opportunities. New York Life, of course, owns about half the small but rapidly growing DIA market, with over $1 billion a year in sales. More than three-quarters of DIAs are purchased with qualified money, he said. Almost all are purchased with a cash or installment refund at death.

QLACs potentially create three types of sales opportunities to three types of pre-retirees or retirees, New York Life believes. One scenario involves a person who buys a QLAC as pure longevity insurance, paying up to $125,000 (or 25% of qualified savings, if less) at age 65 for income at age 85.

A second anticipated scenario involves a 60-year-old who anticipates working part-time for another ten or 15 years, and who wants to set up a guaranteed income stream of $18,508 (at current rates) that starts at age 75, while reducing some of his RMD. He makes an initial purchase premium of $60,000 at age 60, and then makes partial payments of $6,500 a year for 10 years.

In the third scenario, a person would use a QLAC to fund a personal defined benefit pension. He or she might start contributing $5,000 a year for 20 years starting at age 50, to create an income stream of $36,558 a year at age 80.

Asked which of the three scenarios is likely to generate the most sales, Bredikis picked the second one. That made sense. Give the public’s resentment of RMDs, the QLACs’ ability to put a small dent in them is expected to enhance their appeal. Also, current DIA sales patterns do not suggest a widespread desire to use longevity annuities as DIY pensions or as pure longevity insurance.

All of the New York Life scenarios involved a single purchaser. Ron Mizrachi, a New York Life tax attorney, said that the QLAC regulations don’t, for instance, allow couples to pool their IRA savings to fund one joint-life QLAC. Either spouse could buy a joint-life QLAC, but the purchase premium would have to come from a single IRA.

QLACs as the next ‘Greek yogurt’

At the well-attended discussion at the Brooking Institution, the prominent liberal think tank in Washington, D.C., it was suggested that QLACs might create a spike in demand for income annuities, just as Greek yogurt created a surprise spike in demand for yogurt.

That comment marked one of the lighter moments of the two-hour meeting. At one of the more serious moments, the discussion turned to the issue of whether variable annuities or fixed indexed annuities with living benefits will ever be considered as QLACs.

Under the new QLAC rules, deferred income annuities are the only types of annuities where the RMD rules are suspended during the deferral period. But manufacturers of other types of annuities would love to have the same market-expanding privilege. Kim O’Brien, president of the National Association for Fixed Annuities (NAFA), told RIJ recently that she’s leading a contingent to Washington in December to make a case for her products.

At the Brookings meeting, Don Fuerst, an actuary, argued in favor of including variable and indexed annuities as QLACs because their exposure to equities or equities indices offers protection against inflation risk in retirement, which he suggested is as big a danger as longevity risk.

“It’s not really a predictable source of income you need, it’s purchasing power that you need,” he said. “If you have a predictable source of income and inflation is two percent over 20 years, you’re going to lose a third of your purchasing power. And if it happens to be three percent you’re going to lose almost half your purchasing power.

“Now if you can invest in a diversified portfolio you have a potential for exceeding those fixed income rate and having the income be higher. So we think that providing that kind of flexibility in what we might call a variable income annuity or an investment indexed annuity would protect people against another risk, and that’s the inflation risk. It’s not a guarantee, but a guarantee is—I’d like to make the point—are very expensive.”

J. Mark Iwry, the Treasury official responsible for shaping the QLAC tax benefits from which VAs and FIAs are at least temporarily excluded, responded by saying that longevity annuities were the right place to start, given their simplicity. He also noted that inflation-adjusted longevity annuities are allowed by the new regulations. In addition, he said that the growth potential of the non-annuitized assets in their retirement accounts offers the upside potential that fixed-rate longevity annuities don’t provide.

But he didn’t rule out the use of VAs and FIAs as QLACs. “We did very much leave the door open to other approaches that could be permitted in the lifetime income longevity annuity space,” he said. “… This is a final reg, but this is not a final step in this whole process of regulation. In no way is this intended to suggest that variable products or indexed annuities don’t have a potentially important and very constructive place to play, nor to suggest that they would not be part of similar guidance that’s issued in the future.”

Certainly, some policy wonks [though not all; some think Social Security reform is a bigger priority] hope that if enough people talk long enough and loudly enough about longevity annuities, America will embrace both DIAs and QLACs. It was Ben Harris, co-director of Brookings’ Retirement Security Project, who compared QLACs to Greek yogurt.

“People’s attitudes can change,” he said. “Right while I was sitting here I was trying to think of an example of something that went from being unpopular to being very popular: Greek yogurt. Overnight we decided as a country that we loved Greek yogurt. The sales of Greek yogurt went up 2500% in five years.

“I can see a tipping point where once you’ve become more familiar with the product, and once your neighbors start buying longevity annuities, and once your employer sort of implicitly endorses it by offering them in their [retirement plan]… once you get all these sort of implicit endorsements, [you’ll ask,] Is it at least worth considering? You might see an uptake in the consumer behavior.”

Going Dutch, with a DB-DC Hybrid

Posted on November 20, 2014 by Kerry Pechter -

A new plan for reforming the Dutch pension system would combine the best features of individual accounts and collective risk-sharing methods or “buffers,” according to Pensioen Pro, an affiliate of IPE.com.

The plan would take advantage of a new freedom that Dutch pension architects enjoy. They no longer have to adhere to a nominal funding rate, so they can create custom solutions that match the needs of their participants.

The plan reflected a compromise among pension experts who don’t normally agree: academics, a political activist, regulators and representatives of APG and PGGM, two giant Dutch workplace pensions.

Netspar, the pension think tank, had encouraged the experts to work on a compromise. Their proposal will become part of a ‘national pensions dialogue’ organized by the Dutch Department of Social Affairs and Labor.

Under the proposal, the guarantees that are typical of defined benefit arrangements are replaced by transparent information regarding the pension benefits that participants might expect—but without the guarantees.

Individual retirement accounts would show each individual’s savings, including contributions and investment returns. The individual accounts would also reflect any insurance premiums paid, such as disability insurance.

Collective capital buffers would offer protection from market shocks. The buffers would be funded during times of high investment returns, while participants would receive payments from the collective during times of negative investment returns.

Participants would replenish depleted buffers over time through ‘recovery contributions,’ allowing shocks to be spread over generations. Other collective features would be retained, including shared investment and benefits administration. Each pension fund would be able to decide which risks participants should share.

Macro longevity risks and inflation risks might be shared, for instance, and, in extraordinary circumstances, pension fund trustee boards may be given the authority to effect a wealth transfer. The use of individual retirement accounts, meanwhile, would show each participant exactly how much these forms of solidarity would cost.

Contribution levels would remain constant throughout a participant’s lifetime, while investments would be tailored according to lifecycle principles, with the important option to continue allocating to risk-bearing investments after retirement.

Other specifics of the proposal include:

Investments would be organized collectively for benefits of scale, but allowing for some individual choice, particularly concerning risk profile.
Because pension funds are no longer bound by the need to maintain a set nominal funding rate, schemes would be able to cater to their participants’ investment needs.
Plans would work toward a target benefit level.
Premium contribution levels would consider expected returns.
Participants would be offered a choice in terms of benefits – receiving higher benefits initially and then tapering off, for instance.
During the payout phase, participants may buy annuities from the fund, while the fund itself invests to fund these annuities.
As the scheme remains invested in equities, the risk level will be a bit higher, so annuities are not 100% guaranteed.
Alternatively, participants may choose to pay out their own benefits from their individual account.
If they should die prematurely, their savings account will be absorbed by the collective, which uses the money to fund benefits for those who live longer than expected.

The academics have published their proposal ahead of a nationwide review of the existing pensions system.

Indexed and deferred income annuity sales shine in 3Q2014: LIMRA

Posted on November 20, 2014 by Editorial Staff -

Total U.S. annuity sales reached $58.2 billion in the third quarter of 2014, off 2% from the same period in 2013. In the first nine months of 2014, total U.S. annuity sales rose 6%, compared with 2013, to reach $177.7 billion.

“The 50 basis-point drop in interest rates since the start of the year has dampened interest in fixed products, pulling down third quarter sales,” explained Todd Giesing senior analyst, LIMRA Secure Retirement Institute Annuity Research, in a release.

But indexed annuities and deferred income annuities have done well.

Index annuity sales grew 15% in the third quarter, to $11.7 billion. YTD, indexed annuity sales grew 31%, totaling $36 billion. The indexed annuity guaranteed living benefits (GLBs) election rate was 69% (when available) in the third quarter 2014.

Deferred income annuity (DIA) sales reached $670 million in the third quarter, 21% higher than the prior year. In the first nine months of 2014, DIA salesjumped 35%, totaling $2.0 billion. The top three writers continue to drive most of the DIA sales, accounting for 75% of third quarter DIA sales. They are New York Life, MassMutual, and Northwestern Mutual Life.

Total fixed annuity sales were $22.7 billion in the third quarter, down five percent versus prior year. Year-to-date (YTD), fixed annuity sales reached $71.8 billion, a 21% increase from 2013.

Sales of fixed-rate deferred annuities (Book Value and MVA) fell 32% in the third quarter, compared with prior year. Fixed-rate deferred annuities reached $22.4 billion in the first nine months, an 8% increase compared to last year.

Single premium immediate annuity sales were up 10% in the third quarter to reach $2.3 billion. YTD, SPIA sales jumped 30% to reach $7.4 billion. LIMRA Secure Retirement Institute predicts SPIA sales will exceed current annual sales records.

Variable annuity (VA) sales fell 1% in the third quarter, to $35.5 billion. YTD, VAs reached $105.9 billion, a 3% drop from 2013. LIMRA Secure Retirement Institute researchers noted many of the top VA sellers are focusing on diversification of their VA GLB business. In the second quarter, a few of the top companies entered the market with accumulation-focused product without a GLB rider. Election rates for VA GLB riders, when available, were 76% in the third quarter of 2014.

The third quarter Annuities Industry Estimates can be found in the updated LIMRA Data Bank. To view variable, fixed and total annuity sales over the past 10 years, please visit Annuity Sales 2004-2013. LIMRA Secure Retirement Institute’s second quarter U.S. Individual Annuities Sales Survey represents data from 94% of the market.

Life/annuity stocks struggle as low interest rates persist: A.M. Best

Posted on November 20, 2014 by Editorial Staff -

The major publicly traded life and annuity stocks underperformed the broad-based S&P 500 index during the third quarter of 2014—posting a 1.3% loss versus a 1.1% gain—according to a new Best’s Special Report from A.M. Best.

Of the 24 stocks reviewed in the report, eight had positive performance during the third quarter, while 16 declined. A big part of the reason: the expected rise in interest rates did not materialize, and earnings guidance and outlooks moved toward a more tempered interest rate forecast for an extended period.

“Previous quarters had been positive as companies strengthened their balance sheets, and combined with consolidations through mergers and acquisitions, this positioned them to take advantage of the anticipated rising rate environment,” A.M. Best said in a release.

With an appreciation of 7.6%, Voya Financial, Inc. was the best performing of the stocks in the third quarter of 2014. With solid second quarter results, Voya “continues to be well capitalized, and management has decided to increase the company’s stock repurchase program by USD 500 million, which investors viewed favorably,” the release said.

With a share price decline of 24.7%, GenworthFinancial, Inc. was the worst-performing stock in the third quarter. “Despite its promising mortgage insurance business, Genworth continues to struggle in its long-term care segment with elevated and persistent claims,” the release said.

MetLife, Fidelity partner on new VA with return-of-premium guarantee

Posted on November 20, 2014 by Editorial Staff -

MetLife and Fidelity Investments have launched a new deferred variable annuity product that provides investors with growth potential through Fidelity funds and protection against loss by MetLife if held for a minimum of 10 years. The product, called the MetLife Accumulation Annuity is distributed only through Fidelity.

The product’s Preservation and Growth Rider resembles what used to be called “guaranteed minimum account balance” rider, or GMAB. The guarantee is designed to give investors the confidence to wait out market downturns with the knowledge that, assuming they don’t take withdrawals for ten years, they’ll get at least their original investment back.

But the overall product is expensive. A contract owner would pay 2.68% per year for the fund and the insurance wrapper, according to the product prospectus. The annual mortality and expense risk charge for the product is 0.70% and the rider fee is 1.15%. The contract owners also pay 0.83% per year for the underlying Fidelity fund. If the contract owner takes advantage of a step-up to a higher guaranteed account value, the rider fees may go up.

In other words, on a $100,000 investment in the product, the contract owner would pay more than $25,000 over 10 years in fees for protection against the chance that a relatively low-risk portfolio will be worth less in a decade than it is today.

According to Fidelity’s website, the underlying investment is the Fidelity VIP FundsManager 60% portfolio, which aims for a 42% allocation to domestic equities, and 18% allocation to international equities, 35% bonds and five percent cash.

The investor is guaranteed at least a return of the initial investment at the end of a ten-year period, with proportionate adjustment for any withdrawals. That is, if the account value starts at $100,000 and goes down to $80,000, a $5,000 withdrawal would reduce the guaranteed amount not to $95,000 but to $93,750.

If the account is worth more than the initial investment on any contract anniversary, the contract owner can step up the floor amount to the new higher amount, but a new 10-year guarantee period will begin.

Fidelity already offers several MetLife annuity products, including the MetLife Growth and Incomedeferred variable annuity and the MetLife Guaranteed Income Builder fixed deferred income annuity.

Wink reports on 3Q2014 indexed annuity, indexed life sales

Posted on November 20, 2014 by Editorial Staff -

Total third quarter sales of fixed indexed annuities were $11.4 billion, according to the 69^th edition of Wink’s Sales & Market Report, which includes 47 issuers representing 99.8% of indexed annuity production, according to Wink president and CEO Sheryl Moore.

FIA sales were down 8.58% compared to the previous quarter, but up 14.28% when compared with the third quarter in 2013. Year-to-date 2014 sales were $34,942. Full-year sales in 2013 were $38,660.

“Third quarter year-to-date sales of indexed annuities are greater than they have been in any full year with the exception of 2013’s record-setting sales,” Moore said in a release.

Allianz Life led FIA sales with a market share of 26.80%, followed by American Equity Companies, Security Benefit Life, Great American Insurance Group, and Athene USA. Allianz Life’s Allianz 222 Annuity was the top-selling FIA for the quarter.

For indexed life sales, 47 insurance carriers participated in Wink’s Sales & Market Report, representing 95.2% of production. Third quarter sales were $3.72.8 million. Results were up 4.46% when compared with the previous quarter, and up 18.73% when compared to the same period last year.

Pacific Life Companies maintained their lead in indexed life sales, with an 11.61% market share, followed by Aegon, National Life Group, Minnesota Life, and Zurich American Life. Western Reserve Life Assurance Company of Ohio’s WRL Financial Foundation was top-selling indexed life insurance product for the third consecutive quarter. The average indexed UL target premium reported for the quarter was $7,119, an increase of nearly 12% from the prior quarter.

The Bucket

Posted on November 20, 2014 by Editorial Staff -

Private equity’s thrust into insurance will slow: Fitch

US private equity firms and their funds have grown investments in the life insurance sector over the past several years. However, that growth is expected to moderate as the high-value opportunities in the sector that manifested themselves the aftermath of the financial crisis have largely dried up, says Fitch Ratings. Heightened scrutiny by state insurance regulators will also be a headwind on private equity’s further penetration in the life sector, at least over the short term.

Private equity’s expansion into the life sector has helped certain European and Canadian insurers in their efforts to exit or pull back from the US life insurance and fixed-annuity market. Transactions completed over the past year include the acquisition of British insurer Aviva’s US life and annuity business by Apollo’s (Apollo, IDR ‘A-‘, Stable Outlook) insurance-focused affiliate, Athene Holding Ltd. (Athene), and Guggenheim’s acquisition of Canadian insurer Sun Life’s US life and annuity business. Other private equity firms that have completed acquisitions in the life sector include Harbinger, Global Atlantic and Resolution Life.

Apollo’s Athene has demonstrated an added rationale for private equity’s investment in the life space—the potential to manage acquired businesses’ investment holdings. Apollo earns a 40 bps fee on Athene’s overall investment portfolio, totaling $60.1 billion of AUM, and also earns fund-level private equity fees on the $11.8 billion of sub-advised assets invested across Apollo’s funds.

Regulatory risk has long been a curb on private equity’s interest in the insurance sector, as individual state regulators must approve matters such as changes in ownership and special dividends.

State insurance regulators’ concerns about private equity control typically center on the private equity’s potential prioritization of short-term profits over the long-term health of the insurance company and its policyholders. Fitch sees this concern as especially important when a fund purchases the insurance company, given the limited fund life and need for an exit strategy.

Recent tightening in state regulators’ powers is exemplified by the New York Department of Financial Services proposing amendments to its regulations that would require insurance company acquirers to file additional information (and, potentially, establish keepwell trusts in the event capital is needed) in an attempt to address their concerns related to private equity ownership. The need to establish keepwell trusts would be considered by Fitch as a contingent obligation of the private equity fund and/or manager.

U.S. household investments grow 11%, to $33.5 trillion: Cerulli

New research from global analytics firm Cerulli Associates shows that at the end of 2013, U.S. households controlled $33.5 trillion in investable assets – up from $29.9 trillion in 2012.

“Thanks to another strong year in the stock market, U.S. household wealth was lifted significantly on an aggregate basis,” Roger Stamper, senior analyst explains. “The mass-affluent market has the highest concentration of total financial assets.”

Cerulli’s latest report, U.S. Retail Investor Advice Relationships 2014: Evolving Roles in Client Relationships, provides perspective on the relationship between financial providers and retail investors. It covers the provider-client relationship from end to end, starting with client acquisition, progressing through advice delivery, investment management, pricing, and client retention strategies.

“Among the 122 million U.S. households that reached $33.5 trillion in 2013, 27 million are occupied by individuals under the age of 40 with investable assets of less than $100,000,” Stamper continues. “These households have years of accumulation ahead of them, not to mention the expected wealth transfer from their Baby Boomer parents in the years to come.”

Managed volatility funds surpass $350 billion in assets: Strategic Insight

As asset managers and investors realize the usefulness of managed volatility strategies, assets continue to rise according to Strategic Insight’s newest in-depth research report, “Managed Volatility: Shifts in a Growing Market.” Strategic Insight reports a rise in assets from $30.9 billion at the end of 2006 to $360.9 billion in June 2014, an annualized growth rate of 36%.

With $260.8 billion in Q2’14, variable annuity (VA) assets constituted 72% of managed volatility funds. Mutual funds amounted to $100.1 billion, or 28%. By contrast, there are many more mutual funds, a total of 293, compared with 200 VA funds. The widespread use of managed volatility funds in association with VA guarantees accounts for their rapid growth there, but the trend is also catching on in the mutual fund space.

“We attribute the growth of managed volatility to the effects of the financial crisis” said Tamiko Toland, Managing Director of Retirement Income Solutions at Strategic Insight. “However, given the strength of asset growth and the breadth and depth of offerings, managed volatility is evolving into an important investment category.”

Strategic Insight splits managed volatility into two categories: tail risk managed and low volatility. The former includes a population of 258 funds and $265.4 billion in assets and the latter has 235 funds and $95.5 billion in assets. Generally speaking, tail risk managed funds are strongly represented among VA funds—in both assets and number of funds, while mutual funds have a great presence with low volatility funds.

Managed Volatility funds from Canada, Australia and Europe are also featured in the study. Exhibits track managed volatility assets by country/region and provide lists of managed volatility funds from each country/region.

The new research from Strategic Insight has identified almost 500 funds from over 100 different advisors. With so many players, there are a wide variety of approaches, all classified and identified within the report. “This report presents unique analysis of the managed volatility opportunity, from managers to investment styles,” Toland commented. “Because the trend is both new and fast spreading, we’ve also seen a lot of interest from mutual fund boards for data.”

Will a Robo-Advisor Eat Your Lunch?

Posted on November 13, 2014 by Kerry Pechter -

Computers, software and the Internet are modern-day Trojan horses. You welcome them into your office and admire their economies. Then, one day, you find an algorithm sitting at your desk, downing the chicken-on-chibatta that you ordered (online, perhaps) for lunch.

Which raises the subject of robo-advisors.

They’re eager to eat the lunches of overpaid investment managers and wealth management consultants. And they will. If your job as an advisor is mainly to meet clients, gather their personal data and present them with a computer-generated asset allocation plan, you might want to read What Color Is My Parachute. It’s available on Amazon.

Automation isn’t fair. It never has been. And the robos do have unfair advantages. Unlike established players, they’re not married to legacy IT systems or distribution partners or Wall Street analysts. Heck, many of the young Next-Gens and Millennials who run robo-advice firms aren’t married at all.

Still, you’ve got to give them credit. When the 2008 crisis exposed the costs of financial products and services, they recognized that distribution (i.e., sales) accounted for much of the expense. By using web-based platforms instead of salespeople and exchange-traded funds, they’ve been able to under-price established asset managers by 50-100 basis points or more a year.

A search for the best mousetrap

It’s difficult to generalize about robo-advice and its impact on the financial services industry. So much of financial services has already been automated that no bright line exists between, say, a web-driven direct provider like Vanguard and a robo-adviser. Some robos seem built for do-it-yourself investors, while others cater to do-it-for-me investors.

The two dozen or so robo-companies (see Data Connection on today’s RIJ homepage) have a wide range of specialties. Some aggregate and others allocate. Some advise and some auto-rebalance. Others auto-tax-harvest. To bring the evolution of advice full-circle, some now even offer live phone support. Some, like Betterment, offer a nearly full-service package.

“We are able to control the entire experience,” a Betterment project manager told RIJ. “We are the broker dealer, the investment adviser, and for IRAs we provide the custodian. We create statements, tax forms—we want to own all of that. Vertical integration allows us to let you sign up and open an account in minutes with zero paperwork. It’s literally two clicks.”

There are certain tasks robo-advisors can’t do well or may simple choose not to do, however. Building highly customized retirement income plans out of a combination of investment (for upside potential) and insurance products (for downside protection against longevity risk and health risk).

While researching today’s cover story (“Two Robo-Advisors, Two Income Strategies”), I talked with people who’ve been watching the growth of the robo-advisor phenomenon. One of them was Jack Waymire, who runs a website, iwd.paladinregistry.com. It’s an iconoclastic platform where prospective clients can meet advisors whom he has evaluated and blessed.

Waymire doesn’t think the retirement market will ever get a lot of attention from robo-advisors. “If you’re a robo-adviser, what do you care about trying to crack that market? It might sound good to the venture capitalists that are backing you, but I doubt that Boomers are going to put billions of dollars of retirement money on their platform. It’s not a big threat anytime soon,” he told RIJ.

At the same time, Waymire suggested, the robo-advisors may be inherently weak in the area of product sales, where much of retirement income planning takes place. “The robo-advisers are limited to the RIA side of the business,” he said. “If they were to try to approach financial services from a broker-dealer or insurance point of view”—i.e., if they were selling complex products—“they’d have to ask themselves, ‘Do I really want to be registered in 50 different states?’ or ‘Do I want oversight from FINRA?’ The complexity of operating on the b/d or insurance side, just from a compliance standpoint, would be huge.” Betterment is a broker-dealer, but it may be the exception among robo-advisors.

Bob Lonier, a retirement income-focused advisor who has created software for like-minded advisors (rmap-planner.com), gave a darkly humorous presentation about robo-advisors at the Retirement Income Industry Conference in Charlotte, NC, in October. He believes that robo-advisors could automate retirement income, but probably won’t.

That’s because building a floor income out of safe or guaranteed products and adding risky investments for growth—his understanding of retirement income planning—simply isn’t all that popular to begin with. It flies underneath the robos’ radar, so to speak.

“It would take about a year to develop a sophisticated income solution based on the flooring and upside approach—if the founder of the company and the technology guy and perhaps the marketing person are even aware that such an approach exists. I would be that they are not,” Lonier told RIJ.

“There are lots of finance people who are entrenched in this business and have important jobs who know nothing about retirement income generation other than risk tolerance questionnaires and 60-40 portfolios,” he added. “They think everything beyond that involves an annuity contract. But if the robo-advisers don’t understand that, then they won’t be developing any tools around it.”

Celent, a global research unit of Oliver Wyman, has done a couple of studies of the robo-advisor phenomenon. One of the authors, Will Trout, notes that Betterment has already entered the retirement space with a systematic withdrawal method, and expects others to follow that path.

“The robo-advisers’ client-set, because it’s young, and mass-affluent, is not to a great degree focused on retirement income distribution yet, so the robos have focused more on planning for retirement, more than retirement distribution per se,” he said in an interview. “Betterment has a retirement solution that focuses on a systematic withdrawal plan, but as far as focusing on income distribution specifically and on any customized level, that’s not happening right now. But I think it will eventually happen.”

Waymire, whose earns his bread from the personal advisor business, thinks that the robo-advisors’ main competitive advantage—low cost—may not be decisive in the end. Their arrival may signal the beginning of the end for load funds and high managed-account fees, but a close relationship with a thoughtful planner will always have value.

“On the one hand you have the robo-advisors, and on the other hand you have the local advisers,” he said. “And there are multiple shades of grey between. Everyone is trying to come up with the best mousetrap. Faced with each option, consumers will have to ask, ‘What will I get from this service? What will it cost me?’ It comes down to this: ‘How much personalized service am I willing to give up to save 75 basis points a year?’”

AIG Offers First Qualified Longevity Annuity Contract

Posted on November 13, 2014 by Kerry Pechter -

Asserting that it is “committed to be a leader in QLAC sales,” AIG is now issuing what appears to be the first-to-market qualified longevity annuity contract. A QLAC is a deferred income annuity that Americans can buy with up to $125,000 in tax-deferred savings and whose premiums they can exclude from required minimum distribution (RMD) calculations until as late as age 85.

The potential demand for such products, which were impracticable before a U.S. Treasury announcement last July 2, has been a topic of vigorous debate within advisor, annuity, and public policy circles for months. Longevity annuities were the subject of a lively two-hour colloquium at the Brookings Institution in Washington, D.C., last week.

The fact that QLACs offer retirees the possibility of substantially delaying a portion of their RMDs, and thereby delaying a portion of their income taxes, on up to $125,000 in qualified savings, has fueled speculation that longevity annuities may now have enhanced appeal.

Besides AIG, other insurers are expected to offer QLACs. Lincoln Financial Group told RIJ this week that it will be requesting regulatory approval for a QLAC version of its Lincoln Deferred Income Solutions annuity. Lincoln has just announced changes to that product, shortening the minimum deferral period to 13 months from 24 months and allowing multiple premiums.

“Our current product cannot be used as a QLAC, but we will be filing endorsements to allow this status on our DIA contracts,” said Jay Russo, a Lincoln Financial spokesperson.

“[The QLAC] will take a while to get going,” said Stan Haithcock, creator of the Stantheannuityman.com website, “but once people realize that it lets them reduce their RMDs, and that it will be good for their spouses, I think they will flock to it.”

There has been chatter among advisors about the value of QLACs, with some demurring that the $125,000 limit on QLAC premiums makes the value of the enhanced tax deferral too small—or at least not large enough to overcome their clients’ objections to the product’s inherent illiquidity and low average internal rate of return, relative to risky assets.

But Haithcock believes that RMDs are so widely disliked that any chance to reduce them will prove irresistible for many middle-class retirees. “It will be more of an emotional buy than the industry currently recognizes,” he told RIJ.

AIG’s QLAC, issued by American General Life Insurance Co., is a straightforward version of the product type. According to a product snapshot of the company’s American Pathway DIA, the QLAC version of product can be purchased with a minimum premium of $10,000 in tax-deferred savings. All versions of the product feature optional annual inflation adjustments of 1% to 5%, and a lump sum death benefit equal to the purchase premium. The minimum deferral period is five years. There are single, joint and survivor, and joint and contingent payout options.

If set up as a QLAC, as distinct from a conventional DIA, the tax-deferred purchase premium can be no more than $125,000 or 25% of the contract owner’s qualified savings. The premium is excluded from the contract owner’s RMD calculations until payments begin, but no later than a month after the contract owner reaches age 85.

A non-QLAC DIA can be purchased with much larger amounts of tax-deferred savings. In that case, however, contract owners must begin receiving taxable payments by age 70½. AIG has issued a white paper on QLACs for those who are unfamiliar with them.

Haithcock has calculated that someone with $500,000 in IRA savings would ordinarily have an initial required minimum distribution of $18,250. If he or she used 25% of the $500,000, or $125,000, to buy a QLAC, the initial RMD would drop to $13,687.50, or $4,562.50 less. If the individual’s tax bracket was 20%, the immediate tax bill would drop by about $912.

QLACs were created by the U.S. Treasury Department to encourage the use of deferred income annuities, which are seen by Obama administration policymakers as one way to help increase the retirement security of Americans. Existing tax law, which requires distributions from tax-deferred retirement accounts to begin no later than the year after the year in which a taxpayer reaches age 70½, was perceived as an impediment to the sale of qualified DIAs. DIA prices become more attractive when payouts are deferred until age 80 or 85.

By providing an exemption of up to $125,000 (or 25% of qualified savings, if less) from RMDs until age 85, the QLAC regulation thus removes a major stumbling block to the purchase of DIAs. On October 23, the U.S. Treasury, the IRS and the Department of Labor released notices that QLACs can also be offered to 401(k) plan participants as investment options inside target date funds or managed accounts.

Lincoln Financial enhances its deferred income annuity

Posted on November 13, 2014 by Editorial Staff -

The Lincoln Deferred Income Solutions deferred income annuity (DIA)has been enhanced to include flexible premium options and a shorter minimum deferral period, Lincoln Financial Group announced this week.

Investors can now make multiple purchase payments into DIA contracts over a period of several years leading up to retirement, with income starting as early as 13 months after the last purchase payment. (Immediate annuities offer an income start date within 13 months after purchase.)

The enhancements to the contract do not include any features made possible by the federal government’s Qualifying Longevity Annuity Contract announcements this year, a Lincoln spokesman said.

The new QLAC rules allow Americans to buy DIAs with tax-deferred retirement savings (but no more than $125,000 or 25% of qualified savings, whichever is less) and exclude the premium from the calculation of their required minimum distributions from qualified savings. Ordinarily, RMDs start at age 70½. RMDs from assets spent on DIAs can be delayed until age 85.

Lincoln Deferred Income Solutions Annuity allows clients to select when they begin receiving income payments. The exact amount of income payments is determined at the beginning of the contract and is adjusted with each additional premium payment made at least 13 months prior to the income start date, Lincoln said. The product also offers optional death benefit protection during the deferral and income phases, providing a legacy for heirs.

The Lincoln Deferred Income Solutions also allows clients to accelerate or delay the payment start date by up to five years during the deferral period and (for non-qualified contracts only) to receive up to six months of payments at one time during the income period, if circumstances require it.

Eaton Vance gets SEC approval for ‘managed ETFs’

Posted on November 13, 2014 by Editorial Staff -

Eaton Vance Management, unit of Eaton Vance Corp., has been working to introduce an investment product it calls NextShares, a type of open-end mutual fund that combines active management with the low costs and tax advantages of exchange-traded funds. But the launch has been waiting for action from the Security and Exchange Commission.

That wait is now over, according to Eaton Vance. This past week, firm announced the SEC’s approval of the NASDAQ Stock Market’s request to adopt a new rule governing the listing and trading of exchange-traded managed funds, and the SEC’s intention to grant an exemption from certain parts of the Investment Company Act of 1940 to permit Eaton Vance Management to offer such funds.

Eaton Vance described NextShares and its benefits as:

A new type of open-end fund that will list and trade shares on a national exchange at prices directly linked to the fund’s next-determined daily net asset value (NAV), using a new trading protocol called “NAV-based trading.”
All orders to buy and sell NextShares will be executed at NAV plus or minus a market-determined trading cost (for example, -$0.01, +$0.02). All bids and offers for shares are quoted as a premium or discount to NAV, and trading prices may be above, at or below NAV.
Because NextShares will let market makers earn reliable, low-risk profits without intraday hedging of their fund positions, they can be expected to trade at prices close to NAV in the absence of daily portfolio holdings disclosure.
Because the trading cost to buy and sell NextShares (premium or discount to NAV) is explicitly stated, NextShares will provide investors with more transparency of entry and exit costs than exchange-traded products do.
Sponsors of actively managed funds have to date largely avoided introducing their leading strategies as ETFs because the required daily holdings disclosures can facilitate front-running of portfolio trades and enable other investors to replicate the fund’s portfolio positioning and exploit its research insights.
By removing the requirement for daily holdings disclosures, NextShares could allow investors to access active strategies in a structure that provides the performance and tax advantages of an exchange-traded fund.

Annuity owners are more confident: LIMRA

Posted on November 13, 2014 by Editorial Staff -

Nearly nine out of 10 annuity owners are confident about their lifestyle in retirement, according to a recent LIMRA Secure Retirement Institute study. It’s not the first or only such research survey finding, but annuity marketers wholesalers should welcome it.

Mass-affluent households ($100,000 to $499,000 in investable assets) and affluent households ($500,000 to $999,000) households showed the highest confidence.

Those two categories account for 79% of the households in the survey. One third of mass-affluent households own an annuity and 38% of affluent households report annuity ownership.

While people often feel good about a financial product they own, said Jafor Iqbal, associate managing director, LIMRA Secure Retirement Institute, with annuities there is a twist.

“Our findings challenge the adage that annuities are ‘sold not bought,’” he said in a release. “Investors know about annuity features and go into the process with a positive attitude which directly influences the purchase decision.”

Among households with more than $1 million in assets, 44% percent of annuity owners say they are “very confident” of a secure retirement compared to 35% of non-annuity owners. The survey was conducted among 2,000 consumers age 50 and older with at least $100,000 in investible assets.

Two Robo-Advisors, Two Income Strategies

Posted on November 10, 2014 by Kerry Pechter -

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.

Income and wealth preservation

San Francisco-based SigFig, launched in May 2012, added a retirement payout function to its asset allocation and portfolio tracking functions this month. To access it, just go to the site and click on the Diversified Income button. If you answer a question or two about yourself, SigFig provides a model portfolio.

For a hypothetical 62-year-old retiree, SigFig’s wizard recommended an all exchange traded funds (ETFs) portfolio of BlackRock iShares (see chart). Built for income, it has an equity-to-fixed income ratio of about 35:65. The equity ETFs focus on dividend-paying stocks. The bond ETFs reach for yield through higher-risk bonds, longer-maturity bonds, or attractively priced mortgage-backed securities.

That fund is intended to provide income while preserving principal. That’s a worthy objective, but it may not help clients who need to maximize income from savings or fill gaps between income and expenses. Interestingly, the similarity between SigFig’s 4% target and William Bengen’s famous 4% safe withdrawal rate is coincidental, SigFig founder Michael Sha told RIJ. SigFig clients can choose to receive regular checks in any amount they wish.

SigFig sees its Dividend Income portfolio as a big improvement on the imbalanced, high-cost portfolios that many of its new clients arrive with. “Healthy portfolios need proper diversification across asset classes, and retirees need portfolios that are risk-appropriate and that keep fees as low as possible,” Sha said.

“Older investors who are seeking income, they’re not getting those things right. So we created a mixed portfolio. We think it will generate a yield that’s twice as high as bonds with only a little more volatility.”

The portfolio requires a minimum deposit of $100,000 and costs 50 basis points a year in addition to average ETF fees of under 20 basis points a year, and uses a dynamic asset allocation technique that buffers volatility by moving money into bonds as volatility increases and into stocks as volatility drops.

A SigFig phone rep pointed out that retirees would pay as much as 1.10% a year for the same portfolio, plus underlying ETF expenses, if they buy it from BlackRock through Fidelity Investment’s online platform. For that service, BlackRock requires a $200,000 minimum investment, double SigFig’s requirement.

“A lot of firms focus on Millennials and other younger segments of the industry, but we have a healthy chunk of users who are older,” Sha told RIJ. “Over half of our clients are over 40 and lots are in their 50s and 60s.”

A fluctuating income stream

Betterment.com, an online broker-dealer and registered investment advisor with about 50,000 registered users, offers retirees a balanced portfolio from which they can draw a fluctuating income that has a 99% chance of lasting, not for life, but for however many years the client chooses.

Like SigFig, Betterment isn’t trying to win medals for customized income generation. “This is not a soup-to-nuts retirement income plan at all,” said Alex Benke, CFP, product manager at Betterment. “This is about delivering on a need that we hear about from our retirement customers. They always ask us, ‘I have x amount of money. How much should I take out each year?’ We had no good answer to that question, so we built this model.” More than 20% of Betterment’s assets come from people who are over 50, he told RIJ.

At the Betterment website, a new client indicates his or her age and retirement status (Yes or No) and the underlying software generates an asset allocation. For a hypothetical retired 62-year-old, the algorithm recommended a 56% stock/44% bond portfolio. “Our typical recommended asset allocation for people in their mid-60s is about 50% to 55% stocks and 50% to 45% bonds,” Benke said.

To learn their safe withdrawal rate, clients enter their specific account balance and the number of years they want to plan to receive income. Using a stock/bond slider, they can also indicate their equity risk appetite. Betterment then calculates a payout rate with a supposed 99% chance of lasting for the period. Alternately, if client chooses his or her own withdrawal rate, Betterment will estimate its sustainability.

Betterment uses a customized version of the 4% rule. In one example on the Betterment website (see “Margaret” at left), 4% is the initial withdrawal rate for an anticipated 20-year payout period. Each year, however, the income payment is adjusted up or down, depending on changing market factors and the client’s rising age. Betterment credits Vanguard and J.P. Morgan as the sources of its dynamic adjustment method, but claims to be the only place where an investor can apply that method to a live portfolio.

“Our strategy is to take a total return approach. The income from dividends will be about 2.5%. The most of the rest of the withdrawals will come from interest or growth. We’re also minimizing taxes through tax-harvesting,” Benke said. “Using an automated selection algorithm, we check the accounts every day. If we see anything in a loss, we sell it and buy an equivalent ticker in order to avoid violating the wash sales rules.” Tax harvesting alone adds an estimated 77 basis points to Betterment’s returns, he added.

Betterment’s prices are even lower than SigFig’s. Investors who bring $100,000 or more pay 15 basis points per year, plus another 17 basis points or so for the underlying ETFs in the recommended portfolio. There’s no extra charge for using the retirement income service. Prices are a bit higher for smaller accounts: 25 basis points a year for deposits between $10,000 and $100,000, and 35 basis points for people with less money who agree to contribute at least $100 per month.

What’s In a Brand Name? Great-West Will Find Out

Posted on November 6, 2014 by Jenna Gottlieb -

Robert Reynolds, who as president and CEO of Great-West Financial is wielding the type of executive power that his lack of Johnson-genes denied him when he worked at family-owned Fidelity, has rebranded Great-West’s U.S. retirement plan recordkeeping businesses as “Empower Retirement” or simply “Empower,” the company has announced.

The name change process could help resolve an identity crisis at Great-West as it digested the acquisitions of other recordkeeping businesses—including Putnam’s and J.P. Morgan Retirement Plan Services—that had brands as strong or even stronger in the U.S. than its own. (Putnam’s asset management business will continue to operate as Putnam Investments.)

It’s not clear exactly what inspired the new name. But “Empower” echoes Montreal-based Power Financial Corporation, the global holding company which owns Great-West Lifeco, Great-West Financial’s parent. Power Financial has long been led by the billionaire Desmarais family, one of Canada’s wealthiest, most well regarded and most influential. (An Empower spokesman said that the similarity in names was coincidental.)

The rebranding process started last spring. “Back in March we announced that the retirement businesses of Great-West Financial and Putnam Investments were coming together, and then in April, announced the acquisition of J.P. Morgan’s large plan recordkeeping business,” Reynolds (below right) told RIJ. In October, Edmund Murphy III, a colleague of Reynolds at Fidelity and later at Putnam, was recently named president of what is now Empower.

“Each of the businesses served different clients and each of them had a separate brand. We wanted to make a statement to the marketplace that this is a new venture and not a rehash. That’s what led us to [the name] ‘Empower.’ It captures what we want to do: empower plan sponsors, their participants as well as advisors and consultants.”

Robert Reynolds

Great-West, which is now the second largest U.S. record keeper of defined contribution plans, with more than $430 billion in assets and about 7.5 million participants, will use the name Empower for what had been the its own, Putnam’s and the acquired J.P. Morgan recordkeeping businesses.

“We will keep the Great-West Financial name for the insurance and investment sides of the business and we’ll keep Putnam, which operates as a completely separate company, for the investment-only and mutual fund businesses. This allows for the three brands to do different things.” Great-West will drop all use of the J.P. Morgan brand.

An Empower spokesman said Great-West Financial was strong in the small company recordkeeping market, Putnam was stronger in the mid- to large company market and J.P. Morgan was strong in the large to mega company market.

Rebranding is a strenuous process that, in an era of frequent life insurance mergers and acquisitions, a growing number of retirement-related firms, including ING U.S., which transitioned to the name Voya Financial in 2013, are undertaking either voluntarily or not. Voya needed a new brand after separating from Dutch bank ING in the wake of the financial crisis.

There are a lot of reasons why a company decides to rebrand. “For Great-West, this is big news and could be a catalyst for wanting to increase brand awareness or change the perception of their brand,” said Claire Taylor, a senior strategist with Carpenter Group, a New York agency that has worked with Lincoln Financial Group, TIAA-CREF, Lehman Brothers and Prudential Financial on various campaigns.

“Particular to retirement income, they are one of a long list of firms that have gotten on this bandwagon. Most have focused on the accumulation phase, but Baby Boomers are starting to retire and they need to manage their income, their savings. A lot of firms are putting out a lot of new messages,” she said.

“Because of the merger/acquisition, Great-West wanted to take a proactive approach,” said Bhawna Johar, a strategist at New York-based Carpenter Group, explaining that with Great-West’s acquisitions there’s a fragmented audience. Great-West likely wants to get out in front of any changes and put a new message out there, he said.

A rebranding campaign is a huge undertaking with scores of moving parts, including an extensive media campaign. “This is a major rollout for us, so we foresee a large campaign—print, web, and social media,” Reynolds told RIJ.

“It’s a large undertaking and it will continue. We’re putting together plans for 2015 as we speak to continue the message of what this means for the marketplace. You can call yourself whatever you want to call yourself, but your brand is only what it means to the marketplace.

“We’ve been very pleased with the reception we have received from existing clients and prospective clients. Since we announced the joining of Great-West and Putnam in the spring, we have signed up a number of new clients.” Reynolds also foresees additional lobbying efforts in Washington.

“We’re the second largest recordkeeper and we want to be a strong voice in Washington,” he said. “We’ve been active in the past, but these three businesses give us geographical exposure that we did not previously have. With headquarters in Denver, Kansas City and Boston, that gives us exposure to more politicians and a greater voice.

“The way I’ve always worked is that you try to be the best at what you do. There are many pieces to the defined contribution business and we’re trying to be the best at retirement income solutions, at getting desired outcomes for participants and at being a partner with advisors and consultants in the industry.”

Reynolds retired from the positions of vice chairman and chief operating officer at Fidelity Investments in April 2007, after it became apparent that Abigail Johnson would succeed her father Edward Johnson III as chairman and chief executive of the family-owned company.

Only about a year later, Great-West hired Reynolds, a high school quarterback who was once a candidate for NFL commissioner and has been a benefactor of the football program at his alma mater, West Virginia University, to rebuild Putnam Investments. Great-West Lifeco bought Putnam in 2007 to bolster its presence in the U.S., where Putnam funds were distributed through 401(k) plans and financial advisors. Other top-tier Fidelity executives, including Edmund Murphy, now the president of Empower, subsequently followed Reynolds to Putnam. (See RIJ, June 23, 2009: “Under Putnam’s Hood, a Fidelity Engine Roars.”)

Carpenter Group’s Johar notes that rebranding is always a gamble, but that the gamble can pay off. “It’s risky to change names,” she told RIJ. “There’s no substitute for established brand name recognition, but rebranding is a way to get new messages out and excite the marketplace.”

Banks Earn Record First-Half Annuity Income

Posted on November 6, 2014 by Editorial Staff -

Bank holding companies (BHCs) earned a record $1.81 billion from the sale of annuities in the first half of 2014, up 11.5% from the $1.63 billion earned in first half 2013, according to the Michael White Bank Annuity Fee Income Report.

Second-quarter 2014 annuity commissions reached $916.8 million, the second-highest quarterly mark on record. That was 9.6% higher than the $836.4 million earned in second quarter 2013 and up 2.2% from $897.0 million in first quarter 2014.

Compiled by Michael White Associates (MWA), the report tracks annuity fee income of all 6,656 commercial banks, savings banks and savings associations (thrifts), and 1,063 large top-tier bank and savings and loan holding companies operating on June 30, 2014. Several BHCs that are considered insurance companies were excluded from the report.

MWA Bank Annuity Fee 1H2014

Of the 1,063 BHCs, 422 or 39.7% participated in annuity sales activities during first half 2014. Their $1.81 billion in annuity commissions and fees constituted 16.1% of their total mutual fund and annuity income of $11.24 billion and 37.1% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $5.47 billion.

Of the 6,656 banks, 900 or 13.5% participated in first-half annuity sales activities. Those participating banks earned $435.4 million in annuity commissions or 19.7% of the banking industry’s total annuity fee income; their annuity income production was up 22.0% from $356.9 million in first half 2013.

“Of 422 large top-tier BHCs reporting annuity fee income in first half 2014, 218 or 51.7% were on track to earn at least $250,000 this year,” said Michael White, president of MWA, in a release.

“Of those 218, 127 BHCs or 58.3% achieved double-digit growth in annuity fee income for the quarter. That’s more than a doubling from first half 2013, when 61 institutions or 38.9% of 157 BHCs on track to earn at least $250,000 in annuity fee income achieved double-digit growth.

“Along with a 39% increase in BHCs that experienced increases in annuity commissions and fees, these findings of more growth in year-to-date banking industry annuity revenue and more increases in banks on track to earn at least $250,000 in annual annuity revenue are very positive.”

Two-thirds (68.4%) of BHCs with over $10 billion in assets earned first-half annuity commissions of $1.69 billion, constituting 93.2% of total annuity commissions reported by the banking industry. This revenue represented an increase of 11.7% from $1.51 billion in annuity fee income in first half 2013.
Among these largest BHCs in the first half, annuity commissions made up 15.5% of their total mutual fund and annuity income of $10.93 billion and 39.6% of their total insurance sales volume of $4.27 billion.
BHCs with assets of $1 billion to $10 billion recorded an increase of 9.5% in annuity fee income, rising to $108.3 million in first half 2014 from $98.9 million in first half 2013 and accounting for 22.6% of their total insurance sales income of $480.0 million.
BHCs with $500 million to $1 billion in assets generated $15.37 million in annuity commissions in first half 2014, down 0.1% from $15.38 million in first half 2013. Only 28.8% of BHCs this size engaged in annuity sales activities, which was the lowest participation rate among all BHC asset classes. Among these BHCs, annuity commissions constituted the smallest proportion (11.3%) of total insurance sales volume of $136.4 million.

Wells Fargo & Company (CA), Morgan Stanley (NY), and Raymond James Financial, Inc. (FL) led all bank holding companies in annuity commission income in first half 2014.

Among BHCs with assets between $1 billion and $10 billion, leaders included Santander Bancorp (PR), Stifel Financial Corp. (MO), and SWS Group, Inc. (TX).

Among BHCs with assets between $500 million and $1 billion, leaders were First Command Financial Services, Inc. (TX), Platte Valley Financial Service Companies, Inc. (NE), and Goodenow Bancorporation (IA).

The smallest community banks, those with assets less than $500 million, were used as “proxies” for the smallest BHCs, which are not required to report annuity fee income. Leaders among bank proxies for small BHCs were Sturgis Bank & Trust Company (MI), FNB bank, N.A. (PA), and Jacksonville Savings Bank (IL).

Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the median Annuity Concentration Ratio was 9.0% in the first half of 2014. Among the top 50 small banks in annuity concentration that are serving as proxies for small BHCs, the median Annuity Concentration Ratio was 16.4% of noninterest income.

American Funds, Vanguard popular among DC asset managers

Posted on November 6, 2014 by Editorial Staff -

Under pressure to reduce plan costs, including internal management fees, retirement plan advisors are bringing more index funds into their defined contribution (DC) plan lineups, according to Retirement Plan Advisor Trends, an annual Cogent Reports study from Market Strategies International.

The report, first conducted in 2011, evaluates the competitive positions of 47 leading DC investment managers on a variety of metrics, including identifying those that plan sponsor advisors have recently started or stopped recommending to clients. For an infographic of the results, see Data Connection on today’s RIJ homepage.

Two-thirds (64%) of advisors with at least $10 million in plan assets now include passive investments on their “recommend” list, up from 54% last year, the study found. DC plan advisors, on average, now use 5.7 investment managers in the plans they service, compared with an average of 3.9 managers last year.

“Open architecture platforms in the DC plan market are facilitating the expansion of investment offerings, enabling advisors to respond to market demands and client requests with more options, especially choices that provide better value for their plan participants,” said Linda York, vice president of the syndicated research division at Market Strategies International and lead author of the report, in a release.

“Increasingly, this is resulting in growing use of indexed funds and heightened competition for actively-managed strategies and target date solutions as advisors pursue the best-in-class providers in each category.”

American Funds ranked first with 22% of advisors planning to add the firm’s funds, but Vanguard (19%) experienced the most significant year over year increase in momentum.

“The surge for Vanguard is a clear result of the increasing prevalence and preference among DC advisors for recommending passive investments within DC plans. At the same time, it’s important to note that American Funds has long been recognized as a low-cost active manager, which is helping to insulate the firm from competitors in today’s cost-conscious environment,” York said in a release.

Private equity’s thrust into insurance will slow: Fitch

U.S. household investments grow 11%, to $33.5 trillion: Cerulli

Managed volatility funds surpass $350 billion in assets: Strategic Insight

Data Connection

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