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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.

Symetra adds enhanced death benefit to Edge Pro FIA

Posted on November 6, 2014 by Editorial Staff -

Symetra Life Insurance Co. has added an optional enhanced death benefit rider to some of its fixed indexed annuity (FIA) products, including Symetra Edge ProFixed Indexed Annuity, the Bellevue, WA-based company announced this week.

The new rider is “designed to provide beneficiaries with a potentially larger death benefit than they would otherwise receive from an annuity contract,” said a Symetra release.

The enhanced death benefit rider may appeal to customers seeking the stability and safety of a fixed indexed annuity, but who want the potential to leave a little ‘extra’ to their beneficiaries. This may mean placing a higher priority on enhancing the wealth transfer ability of the FIA than maximizing the annuity’s value for the contract holder’s use.

“While not a substitute for life insurance, the enhanced death benefit rider does have the potential to add significant value for beneficiaries without answering any medical questions,” said Kevin Rabin, vice president of Retirement Products, in a release.

The enhanced death benefit rider highlights:

No extended waiting period; the benefit is effective and the rider charge is deducted at the end of the first interest term.
No annuitization requirement for beneficiaries. A full lump–sum death benefit is available.
The annual rollup percentage of 7% simple interest is available for the first 10 years.
The rider is available for issue from ages 0-75.
The annual rider charge is 0.90% of the enhanced death benefit amount.

Sold through banks and broker-dealers, Symetra Edge Pro features two index options, each with a choice of two interest-crediting methods. It offers a fixed account option and a guaranteed minimum value feature, and four no-cost options for liquidity during either the five-year or seven-year surrender charge period.

Life insurers grasp for yield, with mixed success: Conning

Posted on November 6, 2014 by Editorial Staff -

Although life insurers have tried to survive the Fed-induced low yield environment by taking on more credit risk, gross total returns for the industry turned negative in 2013 because of interest rate movements, according to a new study by Conning.

The Conning study, “Life Insurance Industry Investments: Added Risk in 2013,” analyzes life industry investments for the period 2009-2013, providing data for the industry as a whole, by insurer size, and for five peer groups. The study also discusses problems facing the life insurance industry.

“Insurers have responded to the continued low interest rate environment by adding credit risk to their portfolios,” said Conning analyst Mary Pat Campbell, in a release. “The spread between industry book yields and reference rates has been widening since 2009, which we believe reflects the increasing risk within the industry portfolio.

“The industry’s quest for yield began in 2010 and has only increased in 2013,” agreed Steve Webersen, director of research at Conning.

“The largest shifts have included greater allocation to NAIC-2 rated securities and to private placement bonds, and insurers are not dissuaded by the risk-reward tradeoff so far,” he added. “That said, investment strategies differ greatly for different sized firms, and our analysis shows that the larger insurers are more focused on higher-risk assets generally.”

MassMutual settles part of excessive fee lawsuit for $9.5 million

Posted on November 4, 2014 by Editorial Staff -

The parties in Goldenstar, Inc. v. MassMutual Life Insurance Co. filed a motion last Friday seeking court approval of a settlement of their lawsuit, in which plaintiffs challenged (among other practices) Mass Mutual’s receipt of revenue sharing payments from investment providers in connection with plan investments, Fiduciary Matters blog reported.

The settlement agreement allows for two settlement classes to be approved:

The Monetary Relief Class, which covers current and past retirement plan customers of MassMutual. This class will receive a payment of $9,475,000, which will be reduced by a claim for attorney’s fees up to 1/3 and costs up to $315,000.
The Structural Changes Class, which covers current and future retirement plan customers of MassMutual.

For the Structural Changes Class, the promised changes to be implemented over the next 12 months include:

MassMutual shall make the following changes to the menu(s) of investments it offers (“Product Menu(s)”):

Identify to plan sponsors any addition of any insurance company Separate Investment Account, Mutual Fund, Bank Collective Trust Fund or other investment option to the Product Menu(s).
Give 60 days notice and obtain Plan fiduciary’s consent (or failure to object) before deleting, changing or replacing any funds or classes of funds in a plan’s selected investment lineup, unless the fund is no longer available. A violation can result in termination of group contract without a surrender charge or penalty.
Notify plan sponsors on the MassMutual’s Plan Sponsor Website of any removal of a Fund from the Product Menu at least thirty (30) days prior to the removal, and state the effective date of the removal.
Inform current plan sponsors within 90 days of the effective date of any settlement and future plan sponsors at point of sale in writing that such deletions will be identified on the Plan Sponsor Website.
Provide on the Plan Sponsor Website for each fund made available by MassMutual a disclosure of the expense ratio for each Fund, including the amount, if any, of the SIA Management Fee or other direct fees specifically associated with each Fund.
Disclose for each Fund made available by MassMutual the revenue paid to MassMutual from a Fund, including disclosure of those Funds that make no revenue sharing payments to MassMutual.

MassMutual modify its written point of sale disclosure, so as to make the revenue sharing process, and the differences between fund share classes, and the significance of those differences, transparent, so that the Plan customers will know that they have the option of paying directly for plan services rather than indirectly through higher charges for certain fund share classes.

Each of the Plans in the Settlement Classes will be deemed to have elected to reinvest all mutual fund dividends from the effective date of the Plan’s Group Contract. Defendant’s point of sale disclosures will now provide that, as a result of entering into a contractual relationship with Defendant through a Group Contract, each Plan is directing Defendant to reinvest any mutual fund dividends.

Defendant will include in its proposal an explanation of the option for Plan customers to pay all fees to Defendant through direct charges and, if requested by the plan sponsor or its advisor, will offer a menu of Funds for which Defendant does not receive revenue sharing payments.

Defendant shall not make any change in the compensation that it receives from the Plans, including the SIA Management Fees or the Funds without providing each affected Plan with sixty (60) days written notice and an opportunity to terminate its Group Contract without penalty if the changes are not acceptable.

The filings do not provide a monetary value to this affirmative relief.

The post MassMutual Settles Excessive Fee Lawsuit appeared first on Fiduciary Matters Blog.

The lawsuit brought by MassMutual’s own employees is not affected by this lawsuit.

Excluded from the classes are:

Defendant,
Any administrators of retirement plans (“Plans”) for which Defendant’s directors, officers or employees are beneficiaries
Any Plans for which the Judge(s) to whom this case is assigned or any other judicial officer having responsibility for this case is a beneficiary,
Any Plans that were former Hartford Plans (as that term is defined in the Settlement Agreement), and
Any Plans which are invested through registered products

“Neuromarketing” research can improve participant communications

Posted on November 2, 2014 by Editorial Staff -

Participant communications is becoming a bigger focus for retirement plans, not just in the U.S. but worldwide. To make its communications to plan participants more effective, the Dutch national pension fund ABP has carried out specially commissioned “neuromarketing” research, IPE.com reported.

Neuromarketing involves the study of subconscious and emotional reactions to external stimuli, such as written information or pictures, by monitoring brain activity. It can therefore be used to give advertising or marketing messages more impact.

“Around 95% of decisions people make are made subconsciously,” said Joyce Vonken, marketing intelligence specialist at ABP’s administration agency, APG. “We wanted to know how pension fund communication influences people’s subconscious emotions and associations, how effective the communication is and how we can improve it. Everything is changing in pensions, so we want members to be aware about it, recognize whether they need to take action, and what to do.”

Besides changes in pension rules made by regulators, members need to remember a number of legal practicalities in order to avoid unwanted outcomes, said Vonken.

For example, in the Netherlands, non-married couples need to nominate their partners as their pension beneficiaries by agreeing to a living-together contract and registering the partner in the pension plan. Otherwise, one partner can’t claim the other’s death benefits.

Similarly, when people change jobs and, consequently, their pension fund, they can choose to transfer the accrued value of their previous pension fund to their new fund.

In the ABP neuromarketing research, 40 volunteers were placed in a brain scanner and briefly shown 118 separate statements, each with an accompanying picture. The scan showed which parts of the brain showed activity in response to each piece of information. Emotional reactions ranged from the positive (desire, expectation and trust) to negative (fear, anger and disgust).

The research found that people will take action (read information, nominate someone or subscribe to a newsletter) when the balance of emotions is positive and when the stimuli are appealing.

“In general,” Vonken said, “the results showed that, “In their communications with members, pension funds have to focus on positive associations with pensions, ” Vonken said. “Rather than warn how important saving for a pension is, we should emphasize how people who save can enjoy their pension later on.”

Research subjects tended to perceive pensions as a whole negatively. But they perceived favorably the fact that all Dutch pension funds send members an annual uniform pension overview (UPO)—a standardized statement of expected retirement income and death benefits. ABP says this may be because it is personally applicable, uniform and regular.

People find information about their own pension relevant, said Vonken, but sometimes they need extra motivation to take action. The extra motivation can be based on positive associations with pensions and retirement and the right wording and imaging.

The research also highlighted the effects on people’s subconscious of intrinsic and extrinsic motivation. Intrinsic motivation, for instance, would come from feeling good about being well prepared for the future right now by subscribing to their fund’s newsletter. Extrinsic motivation could come from inducements such as receiving the chance to win an iPad in return for subscribing to a newsletter.

The results showed that the right intrinsic motivation was as effective as extrinsic motivation because it gave people a sense of wellbeing. Extrinsic motivations are also likely to wear off over time. And, according to Vonken, a lot of small changes can make a big difference.

For instance, the subject line in an email newsletter can increase the number of people who read it and go to the pension fund’s website, thus getting informed.

ABP’s marketing and communications teams are now being trained to convert the research results into practical improvements to the content, presentation and layout of their campaign documents.

Experts Assess the Latest on ‘QLACs’

Posted on October 30, 2014 by Kerry Pechter -

When Deputy Treasury Secretary J. Mark Iwry stood at the podium in Knight Theater in Charlotte, NC, last Friday, and broke the latest news about “QLACs” to a gathering of a hundred or so Retirement Income Industry Association members, he left no ambiguity on one point.

The government’s retirement security advocates clearly want to make 401(k) plan sponsors feel more legally secure about offering default annuity options to participants in defined contribution plans. And it has said it thinks a QLAC—a qualifying longevity annuity contract, or qualified deferred income annuity—would fill the bill.

To allay plan sponsors’ anxieties about putting annuities in their plans, the Treasury Department, IRS and Department of Labor all issued written or verbal communications last week saying that such an option could be added without necessarily creating new fiduciary liabilities and without violating federal rules (“nondiscrimination” rules) against plan designs that favor older, highly-paid workers.

The announcements were also evidently intended to relieve any concerns that the government wants to impose a mandate on plan sponsors to offer annuity options in DC plans. In his comments in Charlotte, Iwry, Treasury’s chief advisor on retirement and health care policy, assured the audience that market-based solutions, not government mandates, can best fill the retirement income vacuum left by the disappearance of pensions and the absence of income features in most defined contribution plans.

Those market-based solutions, Iwry told RIIA, could take any of several forms, including a deferred group annuity inside a target-date fund or a managed account. It could be either an immediate annuity whose income stream starts at retirement or a deferred income annuity (DIA) whose stream begins as late as age 85. It would be voluntary, not mandatory, for the plan sponsor and for each participant.

“It’s a strong message that lifetime income is an important outcome for plan design, and clearly says annuities can be part of a qualified default investment alternative, and specifically, part of a target date fund. It’s great news,” said Jodi Strakosch, a former MetLife retirement executive who ran that firm’s since-abandoned experiment with in-plan annuities, called SponsorMatch.

Others agree. “It’s clear that the government is promoting retirement income in DC plans,” said Steve Shepherd, partner, Institutional Annuities and Life Insurance Solutions at Hewitt EnnisKnupp, a part of Aon. “We’re trying to help plan sponsors think through implementing the QLAC. When we saw the DOL letter and the IRS notice, we thought it was another step in the right direction.”

Watershed, or feel-good

But any certainty arising from the carefully worded announcements ended there, according to institutional retirement income experts who spoke with RIJ this week. They aren’t sure how broad or narrow the application of the government’s statement. It’s not clear if Iwry’s announcement represented a watershed for in-plan annuities, or an incremental advance in a long campaign, or just a feel-good moment for the relatively small subculture of in-plan annuity advocates.

Mark Fortier, the former AllianceBernstein executive who led the design of an in-plan annuity, underwritten by three life insurers, in target date funds at United Technologies Corp. in 2011, had some questions.

“Everybody was waiting for Treasury and the DoL to tell the world that they advocate lifetime income in DC plans. This tells plan fiduciaries that they want that to happen. That’s all positive,” he told RIJ this week.

But, in reading Notice 2014-66 from the IRS and the letter about QLACs from Phyllis Borzi of the DoL, Fortier found that they didn’t address many of the devilish details associated with putting an annuity in a plan, like liquidity options, or whether the pre-annuitized allocations will be held in an insurer’s general account or in a separate account.

“Certain items in [the announcement] create ambiguity as much as they clarify ambiguity. But it’s good news. My hope is that industry will help them fill in the missing pieces. They’ve opened the door of opportunity for some of those who’ve been sitting on the sidelines.”

Meanwhile, the director of the Defined Contribution Institutional Investment Association has sent out an email inviting members of DCIIA, a trade group of plan providers, to join a discussion about the announcement. “We are putting together a task force to review the guidance, share insights with our membership and provide feedback to Treasury,” said Lew Minsky, DCIIA’s director.

The type of in-plan annuity that appeared to be blessed—or at least unshackled—by last week’s announcement has been proposed and even launched in the past, but it hasn’t gotten traction. Whether the latest clarifications will be sufficient to jump-start that product is impossible to predict, but they were widely believed to be necessary.

Besides the AllianceBernstein product, there has been SponsorMatch, a program from MetLife and Barclay Global Investors where participants could buy future income units, BlackRock’s LifePath project, unveiled in 2013, and an initiative by Mutual of Omaha in 2010 for the micro-plan market. In 2004, Retirement Income Industry Association chairman Francois Gadenne and a colleague patented a related product called Pension Shares. (Gadenne’s interest in their patents, which include the illustration below at right, has been in a blind trust, Gadenne said.) All of these efforts involved giving plan participants the option to buy discrete amounts of future income before retirement.

None of these has gotten as much traction as programs that offered a guaranteed minimum withdrawal benefit in a target date fund. Prudential’s IncomeFlex and Great-West’s SecureFoundation defined contribution annuities represent this type of product. Srinivas Reddy, head of investments for Prudential Retirement, said that about 100,000 plan participants are using IncomeFlex—still only a fraction of what his company hopes the market will be.

What about GMWBs?

But this type of product was not directly addressed in last week’s announcements, leaving Reddy a bit perplexed. “When I look at a regulatory announcement, I want to know if the guidance adds clarity and if it’s broad enough to apply to multiple varieties of solutions and will foster innovation. But this applies only to a particular type of product,” he told RIJ.

“That product is the one that uses QLACs. But that design type has gotten no traction at all. If you look at [the GLWB] solutions, we know they resonate. So, while the announcement acknowledges that retirement income is important, it was very specific to one product type,” Reddy added. A Treasury spokesman said that any specifics in the announcement were meant to address specific legal concerns voiced by plan sponsors and providers, and not to be interpreted as excluding or restricting

But guidance on the living benefit design could be forthcoming, according to ERISA attorney Fred Reish of Drinker Biddle & Reath. “My sense is that Treasury is also working on GMWB guidance, which they feel presents different issues,” he said in an interview yesterday. “So, the fact that GMWB wasn’t included wasn’t a negative statement, just an indication that materially different products will have different pieces of guidance.”

Asked if participants are likely to embrace in-plan annuities, Reish pointed to TIAA-CREF’s defined contribution plans, where academics can allocate any part of their savings to a fixed income investment that turns into a life- and/or period certain annuity after retirement. “TIAA CREF has had relatively good uptake on annuities,” Reish said. “It is a role model for what can be done. For any type of guaranteed product, though, I think the key is for it to be accumulated or acquired over years of participation in a plan.”

Not a tsunami

The appeal of contributing to an annuity before retirement is based on the idea that guaranteed income costs less when you buy it in advance, and the earlier you buy a dollar of future income, the less it is likely to cost.

“If I went out at age 65 to buy an annuity with money from a regular TDF, it would cost me more than if I bought it with units from a TDF with an in-plan annuity option,” said Strakosch. “Any time you buy income on a deferred basis, you allow the insurance company the gift of time. We don’t typically call it a discount. But there’s a price difference.”

In providing the guarantee, the insurer assumes the risk that the underlying assets won’t grow enough to cover the cost of making all the income payments before the participant dies. In last week’s government announcement, 55 was the suggested age at which participants would begin allocating money to the annuity option in the TDF. But, according to Treasury, that was not intended to mean that contributions to an annuity couldn’t begin earlier.

Aon’s Shepherd said his firm looks at this year’s government announcements about QLACs to be an incremental advance. “Our position is that this is an evolutionary type of development, not a watershed event,” he told RIJ.

“Plan sponsors are with more frequency looking to adopt these products over the next few years,” he said. The trends are directionally there. But we have told every industry leader that this won’t be a tsunamic event. Plan sponsors will have to approach this carefully and consciously.

“We don’t see this as a product evolution. We don’t think that plan sponsors will just drop in a product and feel that they have met the retirement income needs of the participants. Plan sponsors need to understand the demographics of their plans and the communication needs of their individual participants, and they may need to adopt multiple income options. They will need to figure the right approach for their plans, and that’s going to take time.”

Fall Issue of The Journal of Retirement Appears

Posted on October 29, 2014 by Editorial Staff -

The Fall 2014 issue of The Journal of Retirement, released this week, includes eight timely articles on a variety of retirement topics, written by David Blanchett, Alan Gustman, Moshe Milevsky, Larry Siegel and other well-known authors and researchers in the field.

One article analyses the risks and benefits of variable annuities with lifetime income benefits, while another calls for a national private defined contribution plan system that would take employers out of the pension business. Other articles examine the tradeoffs involved in retirement investing, the pricing of deferred income annuities and the role of alterative assets in retirement plans.

Here are the titles of the articles in the fall issue of JoR, and corresponding abstracts:

Let’s Save Retirement: Repairing America’s Broken System of Funding Workers’ Retirement

By Russell L. Olson and Douglas W. Phillips

This article presents a comprehensive set of recommendations for a unified private DC pension system to cover all working Americans, with a single set of rules and without cost to the government.

A key part is the creation of broadly diversified trusteed retirement funds (TRFs), whose sponsors are trustees, with fiduciary responsibilities. TRFs will relieve employers from fiduciary responsibility for all future DC contributions.

Employee contributions will automatically go into a broadly diversified TRF unless the employee either opts out or selects a preferred TRF or the employer already sponsors a defined benefit (DB) pension plan.

Retirees will be encouraged to use their TRF savings to buy either an immediate or deferred indexed annuity. A new government agency, the Federal Longevity Insurance Administration, will enable private insurance companies to provide low-cost annuities.

The Great Recession, Decline, and Rebound in Household Wealth for the Near-Retirement Population

By Alan L. Gustman, Thomas L. Steinmeier, and Nahid Tabatabai

Despite a severe decline in asset values during the Great Recession, the wealth of early Baby Boomers (ages 51 to 56 in 2004), fell by only 3.6%. Much of the decline was cushioned by the wealth represented by Social Security and defined benefit (DB) pensions.

The rebound in asset values observed between 2010 and 2012 mitigated, but did not erase, the losses experienced earlier. Those in the highest wealth deciles, with a larger share of financial assets, were hurt most severely. Unlike those in lower wealth deciles, they have yet to regain the wealth lost during the recession.

Although the losses in assets imposed by the Great Recession were relatively modest, the failure of assets to grow above their initial levels has imposed a cost on recent retirees.

Alternative Investments in Defined-Contribution Retirement Plans: Opportunities and Concerns

By Stephen C. Sexauer, and Laurence B. Siegel

The authors ask whether the inclusion of alternative assets—assets other than stocks, bonds and cash—in defined contribution retirement savings plans is a good idea. They conclude:

Risk estimates for alternative assets need to be adjusted upward and expected return estimates downward.
The liquidity needs of the fund and of the plan participants should be carefully considered when investing some of the participants’ money in alternatives.
The total invested in alternatives on behalf of plan participants should not be large.

The Role of Variable Annuities in Addressing Retirement Risks

By Nevenka Vrdoljak, David Laster, and Anil Suri

This article examines how adding a variable annuity with a guaranteed lifetime withdrawal benefit (VA + GLWB) to a balanced portfolio can help reduce the risk of running out of money in retirement. It quantifies, through simulation analysis, the degree to which an allocation to a VA + GLWB can help mitigate longevity and sequence of returns risk.

This risk reduction comes at the cost of a decrease in the expected future bequest. The article also explores how the timing of withdrawals and the asset allocation within a VA + GLWB impacts retirement outcomes.

Addressing Key Retirement Risks

By David Blanchett

This article introduces a new model to determine the optimal allocation to equities, real assets, and annuities for a retiree with a given set of preferences. This model directly incorporates a cost associated with deviating from the investor’s target risk preference, jointly testing the effects of four preference variables—aversion to volatility, strength of a bequest motive, preference for sustainable expenditure, and sensitivity to the risk of future inflation—using a dynamic withdrawal strategy and taking a probabilistic approach to mortality.

Return Sequence and Volatility: Their Impact on Sustainable Withdrawal Rates

By Matthew B. Kenigsberg, Prasenjit Dey Mazumdar, and Steven Feinschreiber

Using historical analysis, the article explores the implications of sequence of returns risk and suggests strategies for countering it, including annuitization and adaptive withdrawal strategies.

The article also explores volatility risk, separated as much as possible from sequence risk, and finds that the relationship between volatility, return, and SWR (sustainable withdrawal rates) is not linear. In fact, for a given horizon and degree of confidence, the relationship between the Sharpe ratio and the rate of return displays an inflection point, where the level of return required per unit of risk reaches a minimum.

Mortality Plateaus and the Pricing of Longevity Insurance

By Moshe A. Milevsky

The article examines the implications for the pricing of longevity insurance and life annuities of a plateauing in the instantaneous force of mortality (IFM) at advanced ages. Given the increasing popularity of advanced life delayed annuities (ALDAs, or deferred-income annuities) and the current low-interest-rate environment, the present-value cost of misestimating the dynamics of late-life mortality can be substantial. The article also offers some comments about the possibility of using ALDA prices to imply market expectations of mortality dynamics and plateaus in a manner similar to implied volatility in the options market. All this has obvious implications for annuity buyouts, buy-ins, and other forms of longevity risk transfer as well the most pressing retirement problem for individuals—how to make their money last for the remainder of their lives.

Increasing Defined Contribution Plan Participation: A California Pilot Project

By Jon D. Kanemasu, Stacie Sormano Walker, and Valerie Wong

The State of California is a multi-agency employer, with more than 200,000 employees. State employees participate in a defined benefit (DB) retirement plan and most have access to a voluntary state-sponsored supplemental defined contribution (DC) plan.

Three State of California agencies recently launched a campaign pilot project to evaluate the effectiveness of different outreach strategies in increasing supplemental DC enrollment and contributions.

The campaign results suggest that outreach efforts are effective in increasing enrollment and existing enrollee contributions, although their effectiveness may vary depending on the intensity of outreach applied.

RetirePreneur: Steven Saltzman

Posted on October 29, 2014 by Jenna Gottlieb -

What I do: Saltzman Associates provides consulting services and solutions to institutional distributors, marketers and underwriters of insurance and investment products. We provide market intelligence and business development services. Besides traditional consulting work, we conduct industry roundtable discussion groups where clients can engage with peers, clients and prospective clients. We find that having open discussions where clients can share non-proprietary information is an easy way to help our clients improve their results. Saltzman copy block

Often, firms don’t know how a tactical aspect of their business performance compares to that of similar organizations. For example, two broker-dealers may both be up 10% in a certain line of business. At first glance, it might seem that they are performing equally well and that 10% is a “validated” rate of growth. But after talking, managers from the two firms may find they achieved the same results with different tactics! If both firms leverage what they learned about the other, then their potential growth rate should be more than 10%. Our roundtable meetings show us what our clients are concerned about, and what tactics make them successful.

Who our roundtable sponsors and subject-matter experts are: The sponsors are usually product-providers. They could also be a technology providers or general agencies. The attendees are usually executives who have responsibility for a specific line of business. Participants might talk about planning for healthcare costs in retirement, or annuity distribution issues and opportunities, or regulatory risk management issues, or product management changes.

Who my clients are: Our clients are broker-dealers, banks, credit unions, insurance companies and related financial services companies that support the delivery of investment and insurance products through all types of broker dealers. It’s a varied group.

Why clients hire our company: The short answer is because ‘we get it.’ Having been in their shoes myself, I understand what our clients are tasked with achieving. Over my career, I have worked for broker dealer/distributors and product/service providers in the financial services industry. That give us an important perspective on what’s important to clients as well as their constraints. You could say I speak both languages.

Where I came from: I started as a salesman in the insurance business in 1992, working for First Union bank in Charlotte. I quickly learned that I was not going to set the world on fire as a producer. Instead, I was often tasked with helping the organization tackle a new opportunity or improve a process that had broad impact across the organization. After seven years at First Union, I left to join JP Morgan Chase as its director of Retail Insurance, where my responsibilities, in addition to managing the traditional insurance business, also included the managing the proprietary annuity underwriting business and the third-party annuity providers. I spent six years at JP Morgan Chase. After a short stint running distribution for a start-up insurer based in Bermuda, I founded Saltzman Associates in 2009.

My business model: Our clients pay an hourly rate or set fee for our consulting services. Much of our work relates to roundtables, reports or studies. We use a sponsorship model where underwriters and service providers provide financial support for projects or events that broker-dealers can leverage to improve their business.

The source of my entrepreneurial spirit: I figured out early in my career that I was better at the ‘build’ side of business than being a ‘producer.’ If I look back at my career, there have been entrepreneurial elements in each assignment. Each job or project has been focused on helping a business that was establishing its place in the market or taking a product or service into a market that did not exist before. So starting Saltzman Associates was part of a natural progression.

How I spend my spare time: My wife, Jennifer, is an active partner in the business, so we do our best to have a life outside of work. We have two children, ages 10 and 12, who are both active in travel sports. Watching them progress in their sports while learning about the importance of teamwork has been a tremendous source of joy for us. Our schedule allows us some flexibility to be active in our local schools. Jennifer has done a lot of work with First Book Charlotte, whose mission is to help children from low-income families read and own their own books.

My retirement philosophy: In the end it’s about taking control of what you spend your time doing, whether it’s another type of work, or philanthropy or family or travel. I believe that people increasingly view retirement through a different lens than previous generations.

All skewed up: Most IRA owners hold extreme asset allocations

Posted on October 29, 2014 by Editorial Staff -

In 2012, almost 60% of individual retirement account (IRA) owners had less than 10% or more than 90% of their savings in a particular investment category, according to the Employee Benefit Research Institute (EBRI).

The full report, “IRA Asset Allocation, 2012, and Longitudinal Results, 2010‒2012,” is published in the October EBRI Notes, online at www.ebri.org.

Based on the latest results from the unique EBRI IRA Database, EBRI found that 23.7% of IRA owners had less than 10% in equities and 35.5% had more than 90% in equities. Furthermore, almost one in five IRA owners (18.5%) had more than 90% of their assets in bonds and money.

Roth IRA owners were the most likely to hold more than 90% in equities, EBRI said, but that likelihood gradually declined after age 55. Those age 85 or older had a higher average share of their assets in bonds or money funds, a finding driven by the large share of owners in that age category with more than 90% in bonds.

Looking at all the assets in the EBRI IRA Database in 2012, 52.1% were in equities, 9.5% in balanced funds, 15.1% in bonds, 12.8% in money and 10.6% in “other” assets. When the equity allocation of balanced funds was to added to the equity funds, IRA owners had a total equity exposure of 57.8% of assets.

Male and female IRA owners had similar average allocations to bonds, equities, and money. Males were more likely to have assets in the “other” category, while females had a higher percentage of assets in balanced funds. Those older or owning a traditional IRA had, on average, lower allocations to equities. Individuals with the largest balances had the lowest combined exposure to equities (including the equity share of balanced funds).

The EBRI IRA Database collects data from IRA plan administrators. For 2012, it contains information on 25.3 million accounts with total assets of $2.09 trillion. For each account within the database, the IRA type, the account balance, any contributions during the year, the asset allocation, and certain demographic characteristics of the account owner are included (among other items). Furthermore, the accounts can be linked by the account owner to aggregate the accounts to the individual level both across and within data providers, which allows for behavioral studies at both the individual and account levels.

EBRI’s analysis study includes the first look at asset allocation longitudinally from 2010‒2012 and finds that equity allocations in 2010 were very similar to those of 2012. This result appears to be driven by the almost 60% of accounts that remained at either a 0% allocation or a 100% allocation in both years.

A 23.8-year average retirement for female DB pensioners: SoA

Posted on October 29, 2014 by Editorial Staff -

Longevity in the U.S. is increasing and private pension plan sponsors will need newly-revised mortality tables in order to estimate their plans’ financial obligations, according to the Society of Actuaries, which released new mortality tables and an updated mortality improvement scale this week.

Among males age 65, overall longevity rose 2.0 years from age 84.6 in 2000 to age 86.6 in 2014. For women age 65, overall longevity rose 2.4 years from age 86.4 in 2000 to age 88.8 in 2014, according to the new tables.

Those improvements could raise a private pension plan’s liabilities by four to eight percent, depending on the design and demographics of the plan, the SOA release said.

The new tables are updates to the RP-2000 mortality tables (published in 2000) and the mortality projection scale (published in 2012). Developed by the SoA’s Retirement Plans Experience Committee (RPEC) over a period of five years, the new tables were reviewed by two independent committees and several expert peer reviewers. They were also subjected to a four-month comment period.

The updated mortality tables were based on data from private, uninsured pension plans. They reflect about 10.5 million life-years and 220,000 deaths between 2004 and 2008, comparable to the data set used in 2000 to develop the SoA’s previous mortality tables. The new study includes a mortality table (RP-2014) that details actual death rates observed by private pension plans, and an improvement scale (MP-2014).

LIMRA links undersaving by Boomers to spending on family cellphone plans

Posted on October 29, 2014 by Editorial Staff -

Six in 10 American parents provide financial support to their adult children, according to a new LIMRA Secure Retirement Institute study, potentially hurting their own retirement readiness.

More than one-third (36%) of parents help pay for adult childrens’ cellphones/mobile service, perhaps because of the prevalence and economies of family telecom plans. About one-fourth of parents help with college expenses, student loan debt, rent or mortgage expenses. Thirty-seven percent of parents provide no financial support to adult children.

The LIMRA-SRI study also found that 7 in 10 U.S. households with adult children have at least one adult child living at home. Nearly three quarters of households with adult children ages 18-22 have at least one adult child residing in their home.

“While Millennials are the most educated generation in history, nearly four in 10 are unemployed and many more are underemployed,” said Deb Dupont, associate managing director, LIMRA Secure Retirement Institute, citing Pew Research data.

“Parents of Millennials, even those over the age of 22, are providing considerable support to their children at a time in their lives when saving from retirement should be a priority,” she added. While “only 45% of parents who have financially supported their adult children in the past year say it has negatively impacted their retirement savings… we believe people are likely to underestimate the collective impact of incremental costs.”

Prior LIMRA Secure Retirement Institute research found that more than half of pre-retirees have less than $100,000 in financial assets. The findings are based on a nationally representative survey of 1,009 Americans. The survey was fielded in July 2014.

The Bucket

Posted on October 29, 2014 by Editorial Staff -

Ringquist moves to Retirement Clearinghouse

Neal Ringquist has joined Retirement Clearinghouse, the provider of automatic and managed portfolio solutions, as executive vice president of sales and marketing with responsibility for the company’s marketing strategy and plan sponsor sales channel.

Ringquist joins RCH from Advisor Software, Inc., where he was president and chief operating officer for nine years. Previously he was vice president of sales and marketing for Morningstar Associates and executive vice president of sales, marketing, and client service for mPower.

Ringquist will use his background in retirement-oriented financial services, advisor relations, and financial technology to help grow adoption of RCH’s services that facilitate the portability of qualified retirement savings and in-plan account consolidation, RCH said in a release.

Allianz Life posts a new consumer video about Social Security

A two-minute video about factors that people should consider when planning their Social Security benefits is now available at www.allianzlife.com/socialsecurity, the Minneapolis-based insurer announced this week.

Titled “What you don’t know about Social Security could cost you,” the video is part of an Allianz Life Social Security education program, which includes other planning resources and a web tool. The two-minute video highlights situations that may impact Social Security benefits and urges integration of Social Security benefits into a complete retirement portfoli

According to the video, the amount of Social Security income a retiree receives will vary, depending on when and what options are chosen. The video highlights some of these scenarios, such as having a disabled child, obtaining a benefit as a divorced spouse, or understanding how Medicare may impact Social Security income.

Prudential to reinsure longevity risk of UK insurer

Prudential Retirement Insurance and Annuity Company (PRIAC) has agreed to reinsure the longevity risk of a portion of the pension bulk annuity business of UK-based insurer Legal & General Group plc, according to a release from PRIAC, a unit of Prudential Financial Inc.

Legal & General holds £24.6 billion ($39 billion) in bulk annuity assets as of June 30, 2014 and has completed £3.1 billion ($4.9 billion) in new transactions in the half-year to June 30, 2014, the release said. PRIAC is providing longevity reinsurance on approximately £1.35 billion ($ 2.2 billion) of Legal & General’s bulk annuity portfolio.

PFI has completed the largest known pension and longevity risk transfer transactions in the UK and North America. It has completed the General Motors, Verizon and BTPS transactions and recently entered into agreements with Motorola and Bristol-Myers Squibb to settle pension liabilities.

Higher annuity sales brighten down quarter for Symetra

Symetra Financial Corp. reported third quarter 2014 adjusted operating income of $45.5 million, or $0.39 per diluted share, down from $48.8 million, or $0.41 per diluted share, for the third quarter of 2013.

For the third quarter of 2014, net income was $36.0 million, or $0.31 per diluted share, down from $45.3 million, or $0.38 per diluted share, in the same period a year ago.

Annuity sales were as follows:

Deferred Annuities

Pretax adjusted operating income was $30.7 million for the quarter, up from $23.8 million in the previous period. Growth in fixed indexed annuity (FIA) account values drove the increase, contributing $6.5 million more to interest margin than in the prior period, and solid base interest spreads were maintained on higher traditional deferred annuity account values.
Total account values were $14.8 billion at quarter-end, up from $12.9 billion a year ago. FIA account values more than doubled to $2.9 billion, from $1.3 billion a year ago.
Sales for the quarter were $759.3 million, up from $747.1 million in the year-ago quarter. Strong sales of both traditional fixed annuities and FIA were achieved through continued expansion and improved penetration of Symetra’s bank and broker-dealer distribution network.

Income Annuities

Pretax adjusted operating income was $2.1 million for the quarter, down from $7.1 million in the prior-year period, due primarily to lower investment margin. This included $1.9 million of mark-to-market losses on alternative investments.
Mortality gains were $0.2 million for the quarter, compared with mortality gains of $1.1 million in the previous period. Mortality experience can fluctuate from period to period.
Sales were $62.3 million for the quarter, up from $38.9 million in the prior period.

Johnny RetirementSeed

Posted on October 24, 2014 by Kerry Pechter -

Steve Vernon shares a simple message as he criss-crosses the USA, addressing audiences large and small and promoting his financial self-help books, his MarketWatch column, his website, restoflife.com, and his research projects at the Stanford Center for Longevity.

Work longer, says the actuary-turned-retirement-guru. Delay Social Security. Use guaranteed income to cover your essential expenses. Invest in dividend-paying stocks. Exercise and eat right. And get your investment advice from unconflicted advisers.

At 61, Vernon preaches what he practices. After retiring from Wyatt Watson in 2006 after 25 years as a pension consultant, the southern California native looked in the mirror and saw a person still too energetic to be idle and, despite a nice pension, not rich enough to stop working altogether.

“I’d paid for my kids’ education, I had enough savings and I didn’t need to make the salary I used to make,” he told RIJ recently. “I just needed to cover my living expenses. I tell people to think about retirement this way, because retiring too early is too expensive. I joke that I’m a ‘one-rat’ experiment. I’m living the lifestyle I advocate. And then I write about it.”

Vernon spotted the Boomer retirement opportunity early. He published his first book on the topic, Don’t Work Forever: Simple Steps Baby Boomers Must Take to Ever Retire, almost 20 years ago. He followed that with Live Long and Prosper! In 2012, he published Money for Life: Turn Your IRA and 401(k) into a Lifetime Retirement Paycheck.

This year Vernon published Recession-Proof Your Retirement Years: Simple Retirement Strategies That Work Through Thick or Thin (Rest-of-Life Communications, 2014). It’s aimed at educated, affluent Boomers not unlike himself.

“I’m talking to people who are not millionaires but who have savings,” he told RIJ. “If you have a few million and a good adviser, you don’t need me. And if you don’t have any savings at all, I can’t help you, because I’m teaching people how to use their savings.”

Although Recession-Proof Your Retirement Years is written for near-retirees, retirement advisers should read it too. Vernon’s holistic approach—an overused phrase but an accurate one—will remind you that retirement planning means much more than managing money. The retirement income challenge requires a 360-degree treatment, and this book touches all or most of the essential compass points.

Grounded advice

Vernon’s advice about retirement income turns out to be quite traditional; the book’s greatest value of the book lies in the amiable asides and observations, all grounded in Vernon’s personal experience.

Here’s an example of the traditional. His three basic “Retirement Income Generation” (RIG) strategies, for instance, are unsurprising: 1) Just spend your investment income; 2) just spend 4% of your principal each year; or 3) buy an income annuity.

But Vernon (below) customizes the conventional wisdom with practical suggestions. For example, he suggests following RIG #1 in your 60s (while still working part-time), RIG #2 in your 70s (when, as life expectancy shrinks, it’s safer to increase the withdrawal percentage), and using RIG#3 in your 80s and beyond. He likes the idea of time-segmentation—a bucketing strategy based on linking risky assets to longer time horizons. He calls it “age-banding,” and notes astutely that choosing the right time to transfer assets from bucket to bucket won’t necessarily be easy.

Annuity sellers and broker-dealer reps probably won’t love this book. Like many do-it-yourself investors, Vernon has a Bogle-ish aversion to fees. He warns his readers away from all but the cheapest no-load deferred annuities and against whole life insurance. For professional advice, he prefers guidance from fee-only advisers.

Steve Vernon

But he’s not risk-averse. He advises people over 50 to put no less than one-third (but no more than two-thirds) of their investable assets in equity funds. He attributes this rule of thumb to his stockbroker grandfather: Don’t invest more in stocks than you can afford to lose 50% or more of.

Recognizing that many Boomers fear the risk of incurring large medical bills in retirement, Vernon devotes ample space to buying health and long-term care insurance. He advises all near-retirees to shop for long-term care insurance, even if they don’t end up buying it, because the search will acquaint them with the challenges they face.

But buying LTC insurance is not his first choice as a hedge against late-life medical expenses. The best lines of defense, he suggests, are to stay fit and get home-care from family members. The next-best lines of defense are to self-insure by setting up a side fund or by reserving home equity for medical expenses.

Personal meets professional

Vernon’s book benefits from his credibility as a pension actuary, his amiable writing style, his lack of a sales motive and, perhaps most of all, the fact that the advice is grounded in personal experience. When RIJ asked him whether he would advise paying off one’s house with a lump sum from savings, he knew what it felt like to make such a decision.

“I can argue this both ways,” he said, and gave the usual reasoning that you should keep the mortgage if you’re paying less in interest than you can earn in the market. But his own preference would be to live mortgage-free whenever possible. “When I first retired in 2006, I took a chunk of savings and paid off the mortgage. Emotionally, you just feel better if you pay off the house,” he said.

Vernon’s writing is also informed by his position as a researcher in financial issues at the Stanford Center for Longevity, where last May he and Nobel laureate Bill Sharpe organized a conference on retirement funding. The Center “has three areas of focus,” Vernon said. “One is financial, one is physical, and one involves the brain. I like what the founder of the Center [Laura Carstensen] has said, ‘If you arrive at older ages physically fit, financially secure and mentally sharp, you’re in pretty good shape.’”

On the public policy front, Vernon favors shoring up Social Security. “Privatizing it would be a disaster. The vast majority of people don’t know how to manage money,” he told RIJ. “The question is, how do you make it financially viable? I’d prefer a combination of raising revenues and making modest benefit reductions. We’ve done that in the past and we could do that again.”

We asked Vernon if thinks there’s a retirement crisis or not. “Not in the sense that Ebola or Syria is a crisis,” he said. “On one hand, I think we overuse the word ‘crisis’. Lots of people will be able to work until they’re 70. And if they work and save until then, they’ll be OK. But Webster’s describes a crisis as ‘a serious issue that demands attention.’ I think retirement is a serious issue that demands attention.”

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Higher annuity sales brighten down quarter for Symetra

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