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New York Life’s DIA surpasses total premiums of $2 billion

Posted on October 16, 2014 by Editorial Staff -

New York Life announced this week that its deferred income annuity, Guaranteed Future Income (GFI), has exceeded $2 billion in premiums since its July 2011 introduction. According to the mutual insurer, 20% of GFI policyholders have contributed more than one premium payment, which the company takes as a sign that pre-retirees want to invest in their retirements early and over time.

GFI allows policyholders to set a date in the future when they will begin receiving guaranteed income payments for the rest of their lives. Between the initial premium date and the income start date, they can purchase more future income by making additional premium payments, and can defer or accelerate their income start date if necessary, according to a New York Life release.

About 70% of purchasers use tax qualified IRA or 401(k) savings to fund GFI. The core audience for GFI is pre-retirees between the ages of 55 and 65 who plan to retire in five to 10 years. The current payout rate for a 60 year old male who defers for 10 years is about 12%. For example, with a $100,000 premium at purchase, a 60 year old male would receive more than $12,000 a year for the rest of his life starting at age 70. GFI is available from New York Life career agents and select investment firms nationwide.

New York Life’s financial strength ratings are: A.M. Best (A++), Fitch (AAA), Moody’s Investors Service (Aaa), Standard & Poor’s (AA+).

A one-person defined benefit plan? Who knew?

Posted on October 16, 2014 by Editorial Staff -

High-income self-employed taxpayers – as well as others who earn large incomes from side work such as consulting and speaking – can save on federal taxes and accumulate retirement savings by setting up an defined benefit retirement plan, according to the CEO of a “micro DB” plan administrator.

To take advantage of these plans for this tax year, taxpayers must set them up by December 31, 2014. But DB plans can be funded up to eight and a half months after the end of the tax year if the taxpayer files extensions, said Karen Shapiro of Dedicated Defined Benefit Services LLC, in a release.

As an example, she offered the hypothetical case of a 52-year-old marketing consultant who expects to earn $250,000 in 2014. If he only uses a SEP retirement account to lower his taxes, he can contribute up to $47,800 and save about $18,000 in taxes.

By opening a DB plan, he can contribute up to $108,000 for 2014, deferring $41,000 in taxes while accumulating an estimated $1.5 million in retirement savings if he keeps contributing until age 62, she said.

At retirement or plan termination, taxpayers can roll it over into an IRA, allowing the assets to keep growing tax-deferred until withdrawal. DB plans are a potential alternative for physicians, sole practitioners, small businesses and small companies with only a few employees. For more information about setting up a DB plan. To estimate potential tax and retirement savings, use the online calculator at www.onepersonplus.com/smallbusiness/pen.html.

Wells Fargo to distribute Allianz Life’s ‘Essential Income 7’ FIA

Posted on October 16, 2014 by Editorial Staff -

Allianz Life’s Essential Income 7Annuity is now available on the Wells Fargo enhanced Index Annuity Platform, Allianz Life Insurance Co. of North American announced this week. The new fixed indexed annuity and its income benefit were designed for Wells Fargo, the release said.

Essential Income 7 and its “Essential Income Benefit” offer income and tax management options, the company said. If customers are still saving for retirement, their lifetime withdrawal percentages are guaranteed to increase every year until lifetime withdrawals begin.Customers can choose either flat or potentially rising income payments.

Essential Income 7 can earn indexed interest through the S&P 500 and Barclays US Dynamic Balance Index allocations. Indexed interest is credited by an annual point-to-point with a cap method. Interest can also be accumulated at a fixed rate.

According to the release, the annual charge for the Essential Income Benefit is 0.85% for all contract years. The annual benefit charge percentage for the accumulation value is 0.85% for the first contract year; it can change each year during the next six contract years, but will not be more than 2.50%.

MassMutual relaunches small company 401(k) package

Posted on October 16, 2014 by Editorial Staff -

MassMutual Retirement Services is re-introducing Aviator, an enhanced 401(k) product designed for employers with less than $15 million in retirement assets. The product is “part of a broader initiative to capture leadership of the small or emerging retirement plan marketplace,” a company release said.

Aviator was initially available through The Hartford’s Retirement Service Group before MassMutual purchased it in 2013, Aviator is being reintroduced with several enhancements, including a new line up of investment options and money managers.

Aviator offers “ease of administration; reduction of fees as assets increase; educational tools and support to help employees save and prepare for retirement; and an expanded selection of highly rated investment options,” the release said.

MassMutual sees opportunity in the small plan market. “The U.S. General Accountability Office estimated in 2013 that only 14% of employers with fewer than 100 employees sponsored a retirement savings plan. That means many workers do not have access to an employer-sponsored retirement savings plan as the U.S. Census Bureau reports that 35% of the U.S. workforce is employed by small businesses,” according to the statement.

Aviator’s nonproprietary platform of investment options includes the MassMutual’s RetireSMART Funds, Premier Funds, and Select Funds, as well as a variety of stable value options and an expanded lineup of alternative investments.

In addition, Aviator includes several features designed to help small businesses provide employees with a comprehensive retirement savings and preparation program:

Fiduciary Assure, a co-fiduciary and investment selection service offered through Mesirow Financial.
MassMutual Lifetime Income, which allows plan participants to buy $10 units of monthly retirement income.
Five asset allocation models: conservative, moderate conservative, moderate, moderate aggressive and aggressive.
RetireSMARTretirement planning tools, including a website with income modeling tools.
Access to MassMutual’s network of 80 education specialists who help participants plan for retirement in one-on-one sessions, group meetings and webinars.

2014: ‘A Year of Cautious Optimism’

Posted on October 9, 2014 by Ron Surz -

Although 2014 isn’t quite over yet, it’s looking like the optimists are going to have an “I told you so” moment, especially when it comes to the U.S. stock and real estate markets.

Real estate, as measured by U.S. REITs, has earned 14% in the first nine months of 2014, and U.S. stocks, as measured by the S&P 500, have earned 8%. By contrast, foreign securities, gold, and commodities have struggled, due in large part to the strengthening U.S. dollar, which has appreciated 7.5%. (All returns are measured in $US.) In the following, I review what has been working, and not working, in both U.S. and foreign markets, with a look forward to the homestretch in the remaining three months of 2014.

U.S. stocks

This is one of those time periods where the stuff in the middle has surprised by not performing in-between the stuff on the ends. Large cap core stocks outperformed both large cap value and large cap growth, earning 11%. Core is defined as the stuff in-between value and growth. Small companies have suffered losses of 2%. (I use my own Surz Style Pure classifications throughout this commentary.)

Sector stocks

On the sector front, there has been a wide range of performance, with healthcare stocks earning 15% while consumer discretionary companies have lagged with a slight loss. Consumer discretionary and healthcare stocks both led last year’s rally with 45% returns. There have been both reversals and momentum in economic sector performance, which leads us to heat maps and clues to the homestretch of 2014.

The interesting details lie in the cross-sections of styles with sectors, as shown in the following heat map. The map shows shades of green for “good,” which in this case is good performance relative to the total market. By contrast, shades of red are bad, indicating underperformance. Yellow is neutral.

The best performing market segment in the first nine months of 2014 was comprised of mid-cap core companies in the materials sector, earning 23.9%. We also see that, with the exception of smaller companies, healthcare has done well across the style board. By contrast, the worst performing segment was small-cap core in the utilities sector, losing 18%.

Many quantitative managers employ momentum in their models, buying the “green” and selling the “red.” Non-quants, also known as fundamental managers, use heat maps as clues to segments of the market that are worth exploring, for both momentum and reversal potential.

Surz Heat Map A 10-9-2014

Foreign stocks

Looking outside the U.S., foreign markets earned 5%, lagging the U.S. stock market’s 6.4% return but outperforming EAFE’s 1.4% loss. For those with a broad foreign mandate, EAFE has been easy to beat because the better-performing regions are not included, namely Emerging Markets, Canada and Latin America. Emerging Markets have led year-to-date with a 17% return. By contrast, the U.K. has lost 2%. On the style front, value has led with an 8% return, while growth stocks earned less than half that amount.

Like the U.S., healthcare stocks in emerging markets have performed best, with a 36.6% return, while utilities in the U.K. have performed worst, with a 20.8% loss.

Surz Heat Map B 10-9-2014

As mentioned above, the strengthening U.S. dollar penalized investment performance in foreign countries, especially in the third quarter.

How to use this information

It just keeps getting better—until it doesn’t. U.S. stocks and real estate are up this year, while metals and commodities are down. Will these trends continue? Which asset classes will continue to deliver strong returns (momentum) and which will not (reversal, aka regression to the mean)?

We all have our own outlooks on the economy and the stock market, and adjust our thinking as results roll in. I personally remain surprised and grateful that stocks have performed so well in the past five years, following the 2008-2009 meltdown; it’s been a long-term reversal. You can use the information above to test your personal outlooks, to see which are unfolding as you think they should and which are not, with the intention to clear the haze from those crystal balls.

Half a Trillion is Still a Big Deficit

Posted on October 9, 2014 by Martin Hutchinson -

The latest estimate by the Congressional Budget Office of the federal deficit in the year to last Tuesday was $506 billion. The deficit is expected to improve marginally this year, then jump back above $500 billion next year and worsen steadily for the next decade and thereafter. Given that we are five years into an economic “recovery,” this won’t do. Fourteen years of sloppy fiscal policies have left the U.S. fiscal position in a parlous state, only partly disguised by two decades of cheap money. Drastic action needs to be taken.

Probably the largest currently hidden danger to the federal budget is the Affordable Care Act’s long-delayed implementation. We are hearing currently about how the premium increases that had been expected for Obamacare’s second year of operation in 2015 don’t appear to be occurring, but that several of the more popular insurance offerings through the federal and state websites are being cancelled.

This almost certainly means that insurance companies and healthcare providers have now figured out how to game the immensely complex system of subsidies included in the legislation and are successfully unloading more and more of those costs onto the federal budget. By doing this, they can present spuriously attractive offerings to the public, capturing a greater share of the business, while reimbursing themselves with a larger rebate from taxpayers.

Given the rate at which the Feds do their accounting, it’s likely we will not know about the increased costs from this until the new budget is presented in February 2015. Even then, the additional subsidies will be buried in the fine print, with only an unexpected increase in the ever-growing costs of the federal government being presented as a post-election surprise.

Obamacare costs merely add to worries over the fiscally unsustainable cost of the U.S. medical system. While its cost increases have tapered off recently, it still represents close to 18% of U.S. GDP, a percentage that is steadily increasing. Remarkably, the government share of U.S. medical costs, in terms of GDP, is now higher than the cost of the British National Health System, without of course offering anything like its near-universal free coverage, albeit of spotty quality. The CBO estimates that the on-budget costs of healthcare will increase by 87% in the next decade, to $1.8 trillion. Given the likely cost overruns from insurance companies and healthcare providers “gaming” Obamacare, that is almost certainly a gross underestimate.

Not all the time-bombs sitting under the federal budget are medical. Defense costs also are about to soar. We can argue all day about the correct strategy to pursue in the Middle East, but China is showing itself by no means entirely friendly and is ramping up its economic power to surpass the U.S. in 2017 or so. Meanwhile Vladimir Putin’s Russia, admittedly an economic midget, is using its complete lack of scruple and greatly superior tactical sense to re-establish the Soviet empire and destabilize NATO. The Middle East itself represents a considerable terrorist threat to U.S. citizens if groups such as ISIS are not properly contained, even though we can perhaps agree that full-scale intervention in that unstable, unfriendly region would be exceptionally foolish.

Therefore, the U.S. simply must rebuild its defense spending from the current 3.4% of GDP to something like the 5% of GDP at which it stood in the late 1980s (after the Reagan defense build-up had ended and far below the peak peacetime level of 10% of GDP in the late 1950s). That additional 1.5% of GDP, perhaps an additional $300 billion in current dollars, will have to come from somewhere; it is no longer possible simply to whang it onto the national credit card.

Social Security is another factor making the budget problem worse. For the last three decades, it had been running at a surplus, as the trust funds built up to finance baby-boomer retirements. From 2016, the net effect of these off-budget items (including the Social Security Trust Fund, the Medicare Trust Fund and the Disability Insurance Trust Fund) will turn into a deficit, a small one at first but widening inexorably as the boomers grow older, reaching $238 billion in 2024 and causing bankruptcy of the Social Security trust fund in 2033.

In a sense this doesn’t matter much. Even by standard bookkeeping, the only effect of the Social Security Trust Fund’s bankruptcy will be to reduce the pensions that can be paid out by 23% from 2034 onwards. That sounds severe, but bear in mind that Social Security entitlements are indexed to incomes not prices, so that if we have enjoyed a decent rise in real incomes between 2014 and 2033, the pensions payable from 2034 on may still be higher than those payable today.

The problem comes down to getting the economy right. If the next 20 years are similar to the last five, with very slow growth and median incomes declining, then the budget deficit will grow inexorably larger and Social Security payments after 2033 will be far lower than they are at present. The CBO’s economic estimates look to me optimistic on all three factors affecting the budget balance: growth, inflation and interest rates. If in reality growth is lower, inflation higher and interest rates higher than the CBO projects, the budget deficit will widen far beyond the ability of any reasonable policies to balance it.

The CBO is highly optimistic on outlays as a whole. While “mandatory” outlays are forecast to increase 72%, probably a realistic actuarial estimate if inflation remains low, “discretionary” outlays are expected to increase only 18%, and to decline from 6.8% of GDP to 5.2%. Apart from the need to increase defense spending discussed above, this assumes an altogether unrealistic austerity among legislators never noted for such austerity in the past. The CBO also assumes no further financial-sector bailouts or hidden losses from the FHA’s expansionary home-mortgage guarantees of the past decade or from the $1 trillion student loan mess, all highly implausible assumptions.

The final potential hole in the CBO’s budget projections is debt interest. The CBO has net debt held by the public increasing only from 74% of GDP to 77% in the next decade, but even under its favorable assumptions net interest payable trebles from $231 billion to $799 billion. In other words, the CBO can only make the numbers add up by assuming an outbreak of peace for the next ten years, an altogether unlikely austerity in discretionary spending and implausibly favorable economic assumptions in all directions. Even then it is running a deficit of close to a trillion dollars annually by the end of the period. In reality, the CBO’s sums don’t add up and, whether or not we suffer another recession as a result of Fed over-expansionism in the past six years, we are going to suffer a budget funding crisis well within the next decade.

There are three potential avenues to improving the budget picture sufficiently to make it sustainable: tax increases, spending cuts and structural improvements to the U.S. economy that raise its long-term growth rate.

Tax increases are the favorite vehicle of the left, advocated at every possible opportunity along with bursts of Keynesian “stimulus” spending (the latter being a large part of what got us into this mess). They have already been implemented in substantial measure, by the “fiscal cliff” deal of 2013, which had the merit of significantly improving the budget picture. However on income tax rates, with state taxes in many jurisdictions having also been raised in the last few years, we are close to the limit at which the Laffer Curve takes over and tax increases reduce revenues.

Corporate taxes need to be reformed, to eliminate foolish loopholes like those surrounding Master Limited Partnerships and offshore cash. But in order for such loophole-elimination to work, the top nominal rate must be brought down from its current 35% to a level closer to 25%; thus corporate tax loophole-closing will produce only modest additional revenue.

However, individual tax loopholes are egregious and expensive, and eliminating many of them could have a substantial effect on the deficit without significantly dinging growth. The tax-deduction for health insurance, a favorite target of “reformers,” should probably be replaced with a health insurance tax credit as part of an overall revamping of the healthcare system, so that replacement won’t raise much revenue. But the home mortgage tax deduction, which costs $74 billion annually, and above all the charitable donation tax deduction, which costs $59 billion annually and flows almost entirely to the very rich are over-ripe for pruning, as are other charity tax benefits. The latter change at least would probably improve the economy’s performance as the dampening effect on economic spirits of the non-profit miasma would be reduced.

On the expenditure side, Governor Rick Perry, when asked in a 2011 debate which three federal agencies he would eliminate, could not remember the third, in spite of helpful suggestions from fellow-candidate Ron Paul. This time around, his response should be “All of the above, except for Treasury, some of State and small portions of the Defense Department.” It’s not that the other agencies, such as education, commerce, energy and environment, are in themselves so expensive, but that eliminating them all would make only a modest, though useful dent in federal discretionary spending. However, their true purpose is to introduce economically damaging regulation at all levels, over-ruling state systems of regulations and to hand out special crony-capitalist benefits to favored sectors, all of which the U.S. economy would be better off without.

Together with a monetary policy that rewards savings properly, allowing the U.S. savings to be rebuilt, this bonfire of government departments is the true key to reviving growth in the economy and returning its productivity growth to the levels of the 1950s and 1960s (possibly with some interim catch-up). It would allow the system to generate sufficient revenues without tax increases to fund the pruned government that remains. Any dispassionate observer looking at a chart of U.S. economic outcomes sees downward kinks in 1973, caused by the tsunami of regulation; in 2000, caused by newly sloppy monetary policy; and in 2008, caused by a pernicious combination of both. We need to make those curves bend upward again, to avoid progressively worse impoverishment and eventual bankruptcy. Half-measures and moderation will no longer do the job.

Guaranteed Lifetime Income Appeal Index created

Posted on October 9, 2014 by Editorial Staff -

Do Americans value their Social Security benefits? Of course. Do retirees who have private pensions value their monthly checks? Duh. But do Americans know that annuities can provide benefits similar to these other sources of guaranteed lifetime income? Uh, no.

A new study, sponsored by CANNEX, the independent provider of annuity prices and other financial data, and conducted by Greenwald & Associates, confirms Americans’ ignorance of annuities.

To publicize this knowledge deficit and to track its variability in the future, CANNEX is sponsoring a Guaranteed Lifetime Income (GLI) Appeal Index, a new measurement derived from the study. The index measures the likelihood that consumers will consider a future annuity purchase and tracks consumers’ attitudes toward annuities over time. At present, according to the CANNEX-Greenwald study, only 16% of consumers score highly on the GLI Appeal Index.

The study surveyed consumers ages 55 to 75 with at least $100,000 of investable assets and found that they highly value sources of guaranteed lifetime income to supplement their Social Security benefits. Consumers also believe that having guaranteed lifetime income provides peace of mind and helps them manage spending and financial planning.

Of those who are currently retired, many already rely on annuitized wealth—income from pensions and Social Security—to meet most of their living expenses and conserve their liquid wealth. For this group, GLI sources cover 79% of retiree expenses.

But the study further revealed that consumers have a very low understanding of other sources of GLI, such as retail annuities, and how to obtain them. This was true even though the gradual disappearance of defined benefit pensions will inevitably force more people to purchase their own “pensions,” in the form of private annuities, if they hope to enjoy the same benefits as traditional pensioners.

“The significant reduction of people who will enter retirement with the right to guaranteed income from employer pensions, coupled with increasing age of entitlement for full benefits from Social Security, places an increased burden on consumers to solve for their own sources of sustainable income, especially in the face of growing healthcare, longevity and living expenses,” said Mathew Greenwald, president & CEO of Greenwald & Associates, in a release.

“For more than half a century, retirement security in this country has been mainly provided by guaranteed lifetime income from pensions and Social Security,” he added. “As these sources are reduced, a key question is whether or not pre-retirees and retirees replace these sources with other sources of guaranteed lifetime income or use other strategies. Currently, many are not aware of how to generate guaranteed lifetime income on their own.”

The findings of The Guaranteed Lifetime Income Study included:

78% of consumers consider sources of guaranteed lifetime income other than Social Security to be very valuable. Those who expressed the greatest appreciation for guaranteed lifetime income’s value included women, those with less than $1 million in assets, those who rely on others for investment decisions, and those who remember an advisor discussing annuities with them.
Current retirees depend on guaranteed lifetime income sources to cover most of their living expenses (79% on average). More than 40% say they rely entirely on guaranteed lifetime income sources and do not tap their investments.
Few consumers understand the role of a guaranteed lifetime income product in a retirement portfolio. They don’t know, for example, that it can allow them to take greater risks with non-annuitized wealth, thus giving them more opportunity for long-term portfolio growth.
Most consumers don’t understand the differences between the many types of annuities. While two-thirds of consumers say they are highly familiar with mutual funds, for instance, only about 30% of consumers say they are highly familiar with fixed annuities.

Chinese insurer buys Waldorf-Astoria

Posted on October 9, 2014 by Editorial Staff -

A second-tier but fast-growing Chinese insurance company, which only recently entered the life insurance market, has bought the iconic Waldorf-Astoria Hotel building on Park Avenue in Manhattan from Hilton Worldwide Holdings for $1.95 billion, according to news reports this week.

The buyer is Anbang Insurance. The seller will continue to operate the art deco hotel, which adjoins a 47-story office tower. The landmark was built in 1931, replacing the original grandiose Waldorf Astoria Hotel at 34th St. and Fifth Ave., where the Empire State Building now stands.

At almost $2 billion, the purchase price for the Waldorf-Astoria would be the highest paid for a single existing hotel in the U.S. and would raise to $2.7 billion the amount that Chinese buyers have spent on New York real estate this year, Bloomberg News reported.

Chinese conglomerate Fosun International paid $725 million for a downtown Manhattan office tower, and Shanghai-based Greenland Hong Kong Holdings bought control of the Atlantic Yards project in Brooklyn (except the Barclays Center), according to BusinessWeek.

Founded in 2004, Anbang originally sold auto policies and other types of property and casualty insurance. It began selling life insurance in 2010 and its share of life insurance premiums in China was 0.1% as recently as 2013. Anbang has since risen to No. 8 among domestic insurers, with a market share of 3.6%, according to Bloomberg News.

Anbang’s growth has reportedly been driven by policies paying an aggressive 5% annually, a point above competitors. The insurer collected 3.4 billion yuan in property and casualty premiums through August, and its life business in the same eight months collected 33.2 billion yuan.

Overall, Chinese insurance companies had assets worth nearly 7.7 trillion yuan ($1.25 trillion) in 2013. The China Insurance Regulatory Commission said last month that the assets may top 20 trillion yuan by 2020. That would equal 35% of China’s gross domestic product last year—or 20% larger than the economy of France, BusinessWeek reported.

Does end-of-life family care ‘crowd out’ annuities?

Posted on October 9, 2014 by Editorial Staff -

Puzzled by conflicting data about the way that healthier, wealthier Americans dispose of their money in retirement, a team of three economists has proposed that, when these retirees become ill or disabled, many of them spend down their liquid savings to pay relatives for care.

In their study, “Annuitized Wealth and Post-Retirement Savings,” John Laitner and Dmitriy Stolyarov of the University of Michigan and Daniel Silverman of Arizona State call these late-life inter-family transfers “non-market annuities.”

“The presence of non-market annuities can reconcile evidence of apparently thin annuitization with the relative paucity of bequests observed in inheritance surveys,” they write, concluding that:

“Informal arrangements in which elderly households in poor health status exchange liquid assets, perhaps inter vivos, for in-kind assistance from grown children and other relatives provide implicit annuity protection that may have substantial value and be widespread in practice.”

En route to this conclusion, the economists tried to reconcile several pieces of evidence about retirees who are healthy and have ample income from a combination of Social Security benefits and defined benefit pensions—two characteristics that statistically tend to go together.

These individuals tend to increase their hoard of liquid assets in retirement rather than spend it down or buy retail annuities with. Yet, when they die, fewer members of this group provide bequests to family members than you might expect.

So where does the hoarded money go? To pay relatives for late-life informal medical care, according to this paper.

The economists go so far as to call these payments “implicit” annuities. The implied annuities, according to this model, consume all or most of the retirees’ liquid assets. They present a kind of shadow annuitization that doesn’t show up in any statistical record.

“We might expect to see almost 100% of households leaving (accidental) bequests…. Yet only 20-40% of households report an inheritance,” the authors write. “Non-market annuities can provide the reason, as follows: a household that contracts with relatives for care obtains an implicit annuity; therefore, annuitization can, by the last stage of life, be far more widespread than purchases of market annuity instruments suggest.”

The authors suggest that these implied annuities crowd out the purchase of retail annuities, and would do so even if retail annuities were cheaper.

“When household portfolio options include standard annuities at retirement, non-market annuities at the last stage of life, and liquid assets at all ages, we find that non-market annuities tend to dominate standard annuities (even if the latter have zero load),” they write.

A.M. Best takes pulse of insurance industry

Posted on October 9, 2014 by Editorial Staff -

What worries insurance companies most today? The persistent low interest rate environment, according to the A.M. Best Summer 2014 Insurance Industry Survey, a Best’s Special Report. Single copies of the report are available online for $55 each.

According to the report, companies employ a wide array of asset allocation strategies to protect portfolio yields in the event of a rate increase. Most of those strategies involve some trade-off of liquidity and credit quality. The survey also asked companies to identify how they planned to invest new money in 2015, and alternative assets also were viewed in terms of investment perspective and ownership impact.

Other survey results include:

Interest Rate Outlook: Using the 10-year Treasury bond as a proxy, nearly half of the respondents predicted interest rate yields would rise to 2.50% or higher in the final quarter of 2014; however, for 2015, there is a fall-off in insurers that think the 10-year yield will remain below 2.50% and a significant increase in those expecting it to exceed 2.75%.
Asset Allocations: For investing in 2015, overall, 17.2% said they favor securities rated investment grade (NAIC 2), with common stock the preference for property/casualty companies and commercial mortgage loans the preference for life/annuity companies. Interest in alternatives continues to grow for all segments as well.
Liquidity Positions: On companies’ liquidity positions today compared with the financial crisis of 2007-2008, 48.6% of all respondents believe that they have more liquidity today while 45.2% believe they have the same amount.
Enterprise Risk Management (ERM): With just 28.2% of respondents subject to Own Risk Solvency Assessment filing requirements, the survey asked the remaining respondents what other form of ERM processes they were implementing. Just less than 7% acknowledged that they perform no formal ERM at all.

Which older workers will cling to their jobs?

Posted on October 9, 2014 by Editorial Staff -

Recent shifts in career timing are posing challenges for many employers in the U.S. and other developed economies, according to a Towers Watson’s 2013/2014 Global Benefit Attitudes Survey.

Older workers are retiring later, while many younger people are struggling to find work or positions that fit their skill sets. In part, older workers’ delayed retirements are blocking younger workers’ entries into the workforce and limiting their opportunities. A growing number of older employees fear that if they retire “on time,” they won’t be able to afford a comfortable retirement.

Perhaps disturbingly for employers, the trend of delayed retirement is becoming increasingly common among employees who are “disengaged, unhealthy and/or stressed,” all of which pose productivity challenges for employers. Furthermore, many of those postponing retirement and planning to retire at older ages fear they are not saving enough for a secure retirement.

Because of this, employers need “to stay on top of retirement patterns and determine whether their retirement programs are inadvertently encouraging unproductive workers to stay on the job longer,” Towers Watson recommends. Offering DB plans gives employers considerably more control over who continues to work and who retires “on time” or early. But generous defined contribution arrangements can achieve similar outcomes if employees make good choices throughout their working careers in terms of their contribution amounts and investments.

“In the end, employers should consider rewards in terms of the appropriate mix between security for all workers and incentives that reward the behaviors needed to deliver on the business strategy. Offering employees greater retirement security can prove to be a financial advantage for employers by cultivating a less stressed, healthier and more engaged workforce. Employers who can find the right mix of security and short-term incentives are in the best position to effectively manage their human capital risks/ opportunities and get the greatest value out of their programs,” Towers Watson suggests.

Towers Watson’s 2013/2014 Global Benefit Attitudes Survey is a nationally representative survey fielded in 12 countries. The U.S. survey includes 5,070 respondents employed by nongovernment organizations with 1,000 or more employees. All respondents currently participate in a DB and/or DC retirement plan. Respondents with only a DC plan include both those who contribute to the plan and those who decline to participate.

The Bucket

Posted on October 9, 2014 by Editorial Staff -

Lincoln Retirement Plan Services launches in-plan income option

Lincoln Financial Group’s Retirement Plan Services business has introduced the Lincoln Secured Retirement Income investment option, a guaranteed withdrawal benefit designed to provide plan participants with downside investment protection and guaranteed income for life.

The investment option is available as a Qualified Default Investment Alternative (QDIA), a custom target date solution within Lincoln’s LifeSpanadministrative platform or as a standalone investment.

With the introduction of this product, which works like the guaranteed lifetime withdrawal benefit of a retail variable annuity, Lincoln joins Prudential Retirement (IncomeFlex) and Great-West Life & Annuity (SecureFoundation Smart Future) as providers of so-called “in-plan” lifetime income options.

Participant contributions in the Lincoln Secured Retirement Income option are invested in Lincoln’s LVIP Managed Risk Profile Moderate Fund, a balanced fund that employs a risk management strategy and seeks to lower the volatility of returns and provide capital protection in down markets, according to a Lincoln release.

Through this guarantee, the SecuredRetirementIncome option determines a participant’s guaranteed lifetime retirement income by the participant’s Income Base. The Income Base is reset annually and equals the higher of the market value of the account or the previous year’s Income Base plus contributions less withdrawals. The Income Base also provides a level of protection against market declines while allowing participation in rising markets. At any time, participants have access to the market value and can withdraw, transfer, take a loan or execute other transactions from the balanced fund as allowed by the plan.

The Secured Retirement Incomeoption includes fiduciary support for plan sponsors, a competitive benefit to employees and a way to transition employees more easily into retirement, according to a Lincoln release. The solution is available to participants of any age.

“When combined with automatic enrollment, automatic increase and professionally managed portfolios, SRI can complete the automatic suite of solutions while providing growth potential that can act as a hedge against inflation, reduce the risk to downturns in the market, and offer a steady income stream in retirement,” said Eric Levy, Head of Product and Solutions Management, Retirement Plan Services, Lincoln Financial Group, in a statement.

Jackson’s Elite Access VA to include Boston Partners long/short fund

Boston Partners, a provider of value equity investment products, has received a $320 million mandate from Jackson National Life Insurance Company for the new JNL/Boston Partners Global Long Short Equity Fund. Jackson has made the fund available on its Elite Access variable annuity investment platform.

The long/short fund will invest at least 40% of assets in undervalued international stocks, with the portfolio’s long positions ranging from 90% to 100%, and short positions of 30% to 60%. The portfolio will be comprised of over 200 stock positions spread across industries.

Boston Partners launched a version of the fund available to the public, the Robeco Boston Partners Global Long/Short Fund, earlier this year. The Fund’s investment process is similar to that of Robeco Boston Partners Long/Short Research Fund, a U.S. stock version launched in 2010.

Jay Feeney, Boston Partners’ co-CEO and chief investment officer, will co-manage the Fund with Boston Partners Portfolio Manager Christopher Hart and Associate Portfolio Manager Josh Jones.

Boston Partners began its long/short investing in 1998, with introduction of the firm’s Boston Partners Long/Short Equity Fund, an all-cap strategy focused on small and micro cap investing. The fund was closed to new investors in 2010 upon reaching $500 million in assets under management. Boston Partners currently manages about $7.6 billion across its long/short strategies and approximately $67 billion in value equities overall.

Boston Partners was founded in 1995. In 2002, the firm was acquired by Robeco Group N.V., a Netherlands-based asset management firm, and joined Robeco Investment Management, Inc., the Group’s U.S.-based investment operation.

E-signatures are slowly becoming the norm for insurance products

Sixty percent of insurers that sell their products through agents and advisers use e-signatures, according to LIMRA, and 58% of companies use e-signatures with e-applications. An additional 20% of companies plan to add this tool within a year.

In a survey of 55 U.S. and Canadian companies, LIMRA looked at website capabilities, e-applications and e-signatures and other technology sales tools to see if they successfully increased efficiency and sales.

Consumers, particularly Gen X and Gen Y consumers, expect more of the process to be digital, prior LIMRA research has shown. To encourage adoption among financial professionals, insurers rely on training, ease of use, and increasing comfort level with the technology.

The most common e-signature in use at 52% is “click wrap,” which refers to the “I Accept” or “I Agree” buttons that consumers click in the presence of a financial professional. The second most common e-signature, used 49% of the time, is a click wrap sent by email to the customer.

In terms of effectiveness, 78% of the companies said their use of e-signatures was very or somewhat successful.

John Hancock Investments reduces TDF fees

John Hancock Investments has reduced the expenses of its Retirement Living Portfolios by between 20 and 26 basis points in an effort to make the products more competitive in the crowded target-date fund market, the company said in a release.

The Retirement Living Suite comprises ten portfolios with target retirement dates from 2010 to 2055. Each portfolio eligible to be rated by Morningstar carries a 4- or 5-star rating on its R6 share class as of August 31, 2014.

John Hancock Retirement Living Portfolios combine up to 50 strategies from 20 specialized managers worldwide. The global asset allocation team at John Hancock Asset Management, which manages over $118 billion in multi-asset strategies, manages the portfolios.

Target-date funds are on track to receive 63% of all 401(k) contributions and could make up 35% of all 401(k) assets by 2018, according to Cerulli Associates. TDFs took off after they were designated as qualified default investment alternatives for retirement plans with auto-enrollment under the Pension Protection Act of 2006.

In 2013, the Department of Labor issued guidance to plan fiduciaries choosing among target-date strategies that highlighted the diversification benefits of portfolios populated with multiple managers.

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

Posted on October 8, 2014 by Kerry Pechter -

(Video no longer available)

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

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

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

Here’s what blooom co-founder Chris Costello said at the FinovateFall conference in New York in late September:

“blooom places the trades for the client. A number of other companies in this space offer advice on 401(k)s; blooom is unique in that we actually invest the account for our clients. blooom is like a dietician who doesn’t just give you advice on how to eat. It’s like a dietician who actually drives to your store, does your grocery shopping for you and comes back to your house and cooks all your meals for you.”

Once the blooom engine gets inside a participant’s account, it establishes an age-based asset allocation using the plan’s investment options. Using an on-screen slider, the client can fine-tune the allocation to fit his or her risk tolerance. blooom re-balances the account each quarter.

The all-in cost for the service, billed to the participant’s credit or debit card, is $1 a month for balances of $10,000 or less, and $10 a month for larger accounts. If you do the math, that’s not necessarily cheap. It’s only 12 basis points a year for someone with a $10,000 balance, but it’s 100 basis points a year—on top of regular plan expenses—for someone with $12,000.

As of this week, blooom says it has signed up its first 100 participants. Costello and his co-founder, Kevin Conard, a Chartered Retirement Planning Counselor, have been splitting their time between their RIA practice, Retirement Planning Group, in Overland Park, Kansas, and blooom. On Tuesday, Costello took time out for an interview with RIJ. Here’s an edited transcript of our conversation:

RIJ: What was the inspiration for blooom?

Costello: I’m 41, and during my 19 years in this business, there have been a hundred times when a friend or an acquaintance, or one of my clients’ children, has come to me and said, ‘I realize that I’m not your typical RIA client, but I have this ‘four-oh-one’ thing at work. Can you tell me what I’m supposed to do with it?’ Then they send me a pdf of their quarterly statement and, nine times out of ten, they’ve messed it all up. They might be in a target date fund that doesn’t match their retirement date, or they’re 100% invested in one fund, or something else.

So blooom was inspired by years of seeing people my age doing inappropriate things with their retirement accounts. It’s an epidemic that’s been festering, and it’s going to take more than blooom to change it. It’s going to take a consortium of companies to stem the tide. Otherwise, in 30 years, a generation of people who are my age and younger will reach age 62 or 65 and try to retire on two or three thousand dollars a month in Social Security benefits and $97,000 in their 401(k). As a country, we need to do a better job of getting this right. With blooom, we’re saying, ‘Let’s at least give these people a decent asset allocation.’

According to the Department of Labor, there are 88 million people in DC plans. So the potential market is huge and the problem is enormous. As an industry, we’ve not done a good job in giving people quality advice about their largest investment, which is their retirement account.

RIJ: How would you describe your target client?

Costello: In our presentation at Finovate, I told the story of my sister Annie. After we started blooom, about a year ago, I asked her for the log-in credentials to her 401(k). Now, she’s a much smarter person than I am. She’s 37, and she was the valedictorian of her high school class. But when I looked at her account, I saw that 100% of her money was in a money market fund. And she’s been invested that way since 2009. It made no sense. She told me, ‘I know I should have called you, but I didn’t.’

I think she represents 60 or 70 million of the people in 401(k) plans. These are people who have ignored the advice they’ve been given, or have procrastinated, or who tried to get into their plan’s website but have been overwhelmed or confused by the complexity. That was the reason we decided to start blooom. We saw that while companies like Betterment and FutureAdvisor built phenomenal platforms, they weren’t attempting to tackle the DC channel beyond scraping some data and telling people how to reallocate. We’re not merely giving advice. We are actually placing the trades. We’re basically doing with $5,000 401(k) accounts what RPG does for its $5 million clients.

RIJ: There are already a lot of players in the robo-advice space, inside and outside 401(k) plans. Do you think you can challenge an established giant like Financial Engines?

Costello: Yes, we will be trying to compete with Financial Engines, GuidedChoice, and Morningstar. They’re entrenched, but a lot of people aren’t using them. When average people try to use that kind of service, they get intimidated. Also, Financial Engines goes after the employers. To have access to Financial Engines, you have to be lucky enough to work at a Fortune 500 company. Our market is everybody else. If you work at a Boeing or a Coca-Cola, you can still use blooom. But we’re not going to call on companies to pick blooom for their employees. We will be trying to get blooom offered on [benefits] exchanges. We just signed a deal with Connected Benefits, and they have relationships with tens of thousands of employees.

RIJ: How are you financing blooom?

Costello: We’ve bootstrapped it. We’ve put about $450,000 of our own into blooom in the last year and a half. Now we’re at a point where we’re looking for venture capital. It’s not that we need new sources of money. We have plenty of clients and friends who could provide it. But we’re looking to partner with a VC firm that has experience in scaling up a business. Retirement Planning Group serves 700 families, but neither Kevin nor I know how to grow to a million clients. So now we’re talking to VC partners. Since we presented at Finovate, a lot of people have reached out to us.

RIJ: What makes you confident that participants will share their usernames and passwords?

Costello: This is an issue that Mint ran into. The core concept of Mint is that it can link all your accounts. You provide all your usernames and passwords, and Mint does the data aggregation. When Mint started in 2007, the big objection was that people wouldn’t share their passwords. But nine million people did. The SEC says that if you maintain log-in credentials for clients, you must check a box that says you have custody of the assets. Then you must hire a third party accounting firm that does an annual independent audit of your books and operations. That costs $7,000 to $10,000 a year. It’s a cost of doing business.

RIJ: But gaining access to a recordkeeping platform has to be more complicated than just sharing usernames and passwords. How do avoid setting off all kinds of security alarms?

Costello: We’re using Yodlee,which already has relationships with firms like Fidelityand 18,000 other companies. If a person with a Fidelity 401(k) signs up with us, for instance, we would ordinarily have to jump through what’s called an MFA (multi-factor authentication) portal. If the portal doesn’t recognize us, it sends a text to the client. Then we’d have to get on the phone to the client, and tell her, ‘You’ll be getting a test message with a code that will allow Fidelity to recognize our computer.’ Yodlee gets to bypass MFA. We need Yodlee for that. But Yodlee merely shows us the data. To access the account, we use a discretionary authorization that the client has signed, giving us power of attorney.

RIJ: Once you’re in there, is there any particular theory behind your asset allocation strategy? Financial Engines can point to Nobel Prize winner Bill Sharpe as the architect of their strategy. GuidedChoice has Harry Markowitz. Dimensional Fund Advisors has Robert Merton.

Costello: We’re not saying that our asset allocation beats all others. But it’s going to be better for people than ignoring their accounts. It just has to be delivered in such a way that people won’t turn away from it. You don’t need a Nobel Prize winner designing your investments, as long as people understand and use it.

RIJ: So what happens next for blooom?

Costello: Right now we’re gearing up for an ‘all hands on deck’ situation. We’re meeting tomorrow with twenty stay-at-home moms who have some available time now that their kids have gone back to school. Once blooom hits the [benefits] exchanges, we could have a thousand people or more sign up overnight. So far Kevin and I are handling the investment-related questions by email. We’re looking for partnerships with CFPs, so that if people are pinging blooom and asking for planning services, I can refer them to a planner.

RIJ: How about your exit strategy? Venture-backed firms are designed to be sold in seven to 10 years. Morningstar recently paid $52 million for HelloWallet. Is that what you envision for blooom?

Costello: We didn’t start this for the exit strategy. The genesis of blooom was the recognition that we have an opportunity to make a significant dent in a big problem in a big way. At our brick and mortar firm, we feel like we already make a difference for clients. But truthfully, most of [RPG’s] clients have arrived at retirement and they’re doing OK. With blooom we have a chance to really move the needle and make a difference for a lot more people—people like my sister. For just $10 a month we can put people in an asset allocation that gives them a chance at retirement security.

A Sense that the Worst Is Over

Posted on October 2, 2014 by Kerry Pechter -

Back in 2008, before the Crisis broke, the National Association of Variable Annuities realized it had to represent the interests of distributors as well as manufacturers—i.e., broker-dealers and advisors as well as life insurers–in order to reach its goals.

Those goals were political as well as commercial. The trade group wanted to become an advocacy—lobbying—group for the retirement industry. And to wield influence in Washington, it needed to grow in size and breadth, like a boxer eager to fight in a higher weight class.

And that is what has happened in the six years since NAVA changed its name to the Insured Retirement Institute. Under the leadership of former Kansas insurance regulator Cathy Weatherford, her staff says, IRI’s biggest accomplishment has been to bring more advisors and distributors into the fold.

At the IRI’s well-attended and relaxed annual conference in quaint and relatively deserted colonial Williamsburg, Va., earlier this week, evidence of the organization’s ongoing makeover was subtle, with only a few obvious changes to distinguish it from NAVA meetings.

NAVA meetings typically featured carnival-like exhibit halls; partly for lack of space, IRI had no booths at all this year. NAVA had lots of lively internal bickering; IRI presents a unified front. IRI has a political action committee and 11 standing committees; NAVA had no PAC and two committees. But many of the same companies are still in attendance, and even some of the same faces.

Eight years ago, NAVA listed 85 distributor members, or 17% of the total. Of the nearly 1,000 members currently listed on IRI’s website, some 700 are listed as “distributors and bankers.” (According to IRI, the membership includes only 48 “parent” broker-dealers, distributors and banks; the rest are affiliates.) Many of those appear to be small wealth management firms. Through all of its distributor members, IRI boasts that it now reaches some 150,000 advisors.

Glass three-quarters full

A mild vibe went through this meeting that, after several years of hell, the worst may be over for the annuity industry. Dennis Glass, CEO of Lincoln Financial Group, started off the conference with a sort of rambling no-prompter keynote address about the economy and his company. As someone in his position should be, he was circumspect but confident about the immediate future.

“A recent article by Goldman Sachs said the 10-year Treasury rate will go to 4% in the near future. But with the German government note paying only one percent, and with the free flow of capital around the world, it’s hard to imagine the U.S. being much different from that. [Lincoln] is planning for an increase in the 10-year rate of 25 basis points a year going forward, and rising equities markets—though not as big a rise as in 2013. I don’t buy into the idea, ‘This is the longest bull market in history so the market can’t keep going up.’ Stocks are tethered to profits and economic growth, and the economics are positive.”

The annuities industry had a lot of bad news for consumers after the financial crisis, with discontinued products, higher costs, weaker benefits and so forth, Glass suggested, but the situation has bottomed out and there’s nowhere to go but up.

“We re-priced our products when rates were at their lowest, so the major shift toward sharing of risk with the consumer is now behind us,” he said. “There are no more significant price increases on the horizon. As rates rise, the next move will be to reduce prices so more people can take advantage of our products. But if we’re not careful about our next steps, we’ll lose market share to disruptive companies. The life industry has been terrible at demonstrating value to consumers. Five years ago, nobody was asking consumers what they wanted. Actuaries were developing products they thought the consumers would be interested in. As we move forward, pure research and conversations with consumers will be hugely important.”

Glass mentioned several ongoing irritants for life insurers: the government’s failure to recognize fundamental differences between banks and insurance companies in their push to classify MetLife and Prudential as systemically important financial institutions (SIFIs). He railed against details of Congressman David Camp’s early-2014 tax reform proposal that would reduce life insurer profits. On the other hand, he welcomed the arrival of new capital in the U.S. life insurance business from Japan and from private equity companies. He also celebrated his own company’s reinsurance deal last fall, in which Union Hamilton Re agreed to provide 50% coinsurance on up to $8 billion of new living benefit guarantee sales on Lincoln variable annuities.

Traction on the Hill

As a lobbying force, the IRI has been a source of information and donations for key legislators, a partner with other groups on protecting existing benefits for retirement products (like tax deferral) and creating new ones (like the Qualified Longevity Annuity Contract, or QLACs), and an overall cheerleader (leading the National Retirement Planning Coalition, which created National Retirement Planning Week). It has also worked on issues like NARAB II, which involves simplification of agent licensing in the balkanized regulation of insurance product sales and sellers at the state level.

It’s hard to tell exactly how big a difference IRI has made in Washington over the past six years. The wheels of government turn slowly, especially today. The fact that the IRI, an inherently conservative group, has been fated to deal with the liberal Obama administration since its inception, has not been helpful. But that’s probably less a factor than the overall red/blue gridlock that has frozen Washington—a gridlock that history may show to be a symptom of the conflicts baked into our Constitution.

Regarding the regulatory change that enabled above-mentioned QLACs, it is not easy to tell how much influence the IRI had in bringing it about. An IRI lobbyist this week seemed to downplay the IRI’s role in the change, which allows Americans to delay required minimum distributions on up to $125,000 (or 25%, if less) of their pre-tax savings until as late as age 85 by buying a deferred income annuity. But Mark Iwry, the deputy assistant Treasury secretary who steered the new regulation to reality, honored the IRI by announcing the accomplishment at IRI’s regulatory conference in July.

As for protecting the favorable tax treatment of retirement products, the threat has probably been that great. Although President Obama himself had proposed capping the benefits of tax deferral for higher-income taxpayers, and capping the size of rollover IRAs, the administration never showed much appetite for shrinking the $110 billion-a-year annual retirement savings tax expenditure. There was talk, but little or no chance that it would happen.

Political contributions

Unlike NAVA, IRI has a PAC, which has been funded by individual contributions from senior executives of member companies and the PACs of member companies. Between January 1, 2013 and August 31, 2014, the IRI PAC took in $59,200 in individual contributions and $66,750 from PACs of life insurance companies, according to the Federal Election Commission. The IRI PAC disbursed $109,800 to the campaign committees of candidates, donating about $60,000 to Republican and $40,000 to Democratic candidates.

In this election cycle, IRI has donated $7,500 to the U.S. Senate campaign of Shelley Moore Capito, Republican congresswoman of West Virginia and chair of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, according www.fec.gov. The daughter of former West Virginia governor Arch Moore, she’s running for the seat vacated by Democrat Jay Rockefeller, who is retiring. The Federal Election Commission lists 68 other recipients of IRI PAC donations in 2013-2014.

Even though IRI describes the assembly of manufacturers and distributors under one roof as a means toward the goal of wielding greater political heft, that union of inter-dependent insurers and advisers has significance of its own. Since the 1990s, annuity issuers have become increasingly reliant on third-party distributors. Annuity issuers regard distributors, not investors, as their primary audience. The insurance company wholesalers compete for broker-dealer shelf space and advisor mind-share. Their products are arguably tailored as much to broker-dealer needs as to the consumer/investors’.

With the coming of the Boomer retirement wave and the explosion in variable annuity sales in the mid-2000s, the relationship became just as important for the broker-dealers. Anecdotally, a significant portion of the revenues of some broker-dealers came from VA sales. VA commissions are said to be particularly important in the compensation of younger advisers who don’t yet have a large enough book of business to generate sufficient asset-based fee revenue. Even if the IRI’s political accomplishments turn out to be modest or hard to quantify, the long-term benefits of cementing insurer-distributor relationships and understanding may alone turn out to have made the whole transition from NAVA worthwhile.

The Fed Trap

Posted on October 2, 2014 by Stephen S. Roach -

As the US Federal Reserve attempts to exit from its unconventional monetary policy, it is grappling with the disparity between the policy’s success in preventing economic disaster and its failure to foster a robust recovery.

To the extent that this disconnect has led to mounting financial-market excesses, the exit will be all the more problematic for markets—and for America’s market-fixated monetary authority.

The Fed’s current quandary is rooted in a radical change in the art and practice of central banking. Conventional monetary policies, designed to fulfill the Fed’s dual mandate of price stability and full employment, are ill-equipped to cope with the systemic risks of asset and credit bubbles, to say nothing of the balance-sheet recessions that ensue after such bubbles burst.

This became painfully apparent in recent years, as central banks, confronted by the global financial crisis of 2008-2009, turned to unconventional policies—in particular, massive liquidity injections through quantitative easing (QE).

The theory behind this move—as espoused by Ben Bernanke, first as an academic, then as a Fed governor, and eventually as Fed Chairman—is that operating on the quantity dimension of the credit cycle is the functional equivalent of acting on the price side of the equation.

That supposition liberated the Fed from fear of the dreaded “zero bound” that it was approaching in 2003-2004, when, in response to the collapse of the equity bubble, it lowered its benchmark policy rate to 1%. If the Fed ran out of basis points, the argument went, it would still have plenty of tools at its disposal for supporting and guiding the real economy.

But this argument’s intellectual foundations—first laid out in a 2002 paper by 13 members of the Fed’s Washington, DC, research staff—are shaky, at best.

The paper’s seemingly innocuous title, “Preventing Deflation: Lessons from Japan’s Experience in the 1990s,” makes the fundamental assertion that Japan’s struggles were rooted in a serious policy blunder: the Bank of Japan’s failure to recognize soon enough and act strongly enough on the peril of incipient deflation.

(Not coincidentally, this view coincided with a similar conclusion professed by Bernanke in a scathing attack on the BOJ in the late 1990s.) The implication was clear: substantial monetary and fiscal stimulus is critical for economies that risk approaching the zero bound.

Any doubt as to what form that “substantial stimulus” might take were dispelled a few months later, when then Fed-Governor Bernanke delivered a speech stressing the need for a central bank to deploy unconventional measures to mitigate deflationary risks in an economy that was approaching the zero bound. Such measures could include buying up public debt, providing subsidized credit to banks, targeting longer-term interest rates, or even intervening to reduce the dollar’s value in foreign-exchange markets.

A few years later, the global financial crisis erupted, and these statements, once idle conjecture, became the basis for an urgent action plan. But one vital caveat was lost in the commotion: What works during a crisis will not necessarily provide sufficient traction for the post-crisis recovery—especially if the crisis has left the real economy mired in a balance-sheet recession.

Indeed, given that such recessions clog the monetary-policy transmission mechanism, neither conventional interest-rate adjustments nor unconventional liquidity injections have much impact in the wake of a crisis, when deleveraging and balance-sheet repair are urgent.

That is certainly the case in the US today. QE may have been a resounding success in some ways—namely, arresting the riskiest phase of the crisis. But it did little to revive household consumption, which accounts for about 70% of the US economy. In fact, since early 2008, annualized growth in real consumer expenditure has averaged a mere 1.3%–the most anemic period of consumption growth on record.

This is corroborated by a glaring shortfall in the “GDP dividend” from Fed liquidity injections. Though $3.6 trillion of incremental liquidity has been added to the Fed’s balance sheet since late 2008, nominal GDP was up by just $2.5 trillion from the third quarter of 2008 to the second quarter of this year.

As John Maynard Keynes famously pointed out after the Great Depression, when an economy is locked in a “liquidity trap,” with low interest rates unable to induce investment or consumption, attempting to use monetary policy to spur demand is like pushing on a string.

This approach also has serious financial-market consequences. Having more than doubled since its crisis-induced trough, the US equity market—not to mention its amply rewarded upper-income shareholders—has been the principal beneficiary of the Fed’s unconventional policy gambit. The same is true for a variety of once-risky fixed-income instruments—from high-yield corporate “junk” bonds to sovereign debt in crisis-torn Europe.

The operative view in central-banking circles has been that the so-called “wealth effect”—when asset appreciation spurs real economic activity—would square the circle for a lagging post-crisis recovery. The persistently anemic recovery and its attendant headwinds in the US labor market belie this assumption.

Nonetheless, the Fed remains fixated on financial-market feedback—and thus ensnared in a potentially deadly trap. Fearful of market disruptions, the Fed has embraced a slow-motion exit from QE. By splitting hairs over the meaning of the words “considerable time” in describing the expected timeline for policy normalization, Fed Chair Janet Yellen is falling into the same trap. Such a fruitless debate borrows a page from the Bernanke-Greenspan incremental normalization script of 2004-2006. Sadly, we know all too well how that story ended.

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

What’s Up, Heterodox?

Posted on October 2, 2014 by Kerry Pechter -

At the 12^th annual Post-Keynesian Economics Conference last week in sunny Kansas City (on the Missouri side of town), one of the older attendees recalled a federal welfare-to-work program during the Nixon administration called “Operation Mainstream.”

Under this initiative, the Department of Labor funded Community Action Programs in rural Ohio and elsewhere. The CAPs then hired outreach workers to find idle welfare recipients in their mobile homes or farmhouses and “place” them in minimum-wage jobs in school cafeterias, Head Start centers and such.

Operation Mainstream, whose name matched its goal of bringing economic drop-outs back into the main stream of society, was the type of federally-led employment program that was the subject of presentations by the “heterodox economists” who attended the conference.

You may never have heard of this brand of economics; it’s outside the so-called mainstream of economics. Hence the name heterodox: these academic reject the ideas established at temples of economic orthodoxy, especially the University of Chicago.

The patron saints of this sect include, above all, the late economists John Maynard Keynes, Hyman Minsky and Abba Lerner. Its elder statesmen are Lord Robert Skidelsky, Paul Davidson and Fred Lee. Its active proselytizers include L. Randall Wray and Stephanie Kelton of the University of Missouri at Kansas City, where last week’s conference was held.

These folks wear their rebel status proudly and stubbornly—they do claim a sixth sense that lets them see phenomena that others can’t or won’t—but with irony and humor. As one speaker put it, American economics includes the Saltwater School (Harvard and MIT), the Freshwater School (Chicago) and the “Backwater” School (i.e., heterodox).

Demand-side economics

Heterodox economists place much more importance on the labor and resource aspects of production than on the capital aspect. You could call them “demand-side” economists. An economy’s greatest evil, in their Keynesian view, is unemployment, which saps demand. They do not regard money or credit as an end in itself, but mainly as a catalyst to production and employment. Finance, financial markets, financial engineering or the financial system have rarely been mentioned at the conference, except in reference to their roles in fostering the risk-taking that led to the Great Recession.

One of the most heretical (and illuminating, for some) ideas within heterodox economics is known as Modern Monetary Theory. MMT disputes the common perception that entrepreneurs in the private sector create wealth, government confiscates some of that wealth through its taxing power, and deficit spending saps the economy and puts us all on the road to serfdom, as Friedrich Hayek put it.

In the MMT model, this is an upside down, outdated view of reality in a post-gold standard world. For the MMTers, central banks create bank reserves with keystrokes, governments can spend money into existence if they choose, and the private financial sector has the right to create credit through fractional lending and leverage.

Taxes (at the federal level, not at the state or local levels) are simply a method for draining excess money from the system. The federal government does not need to collect taxes or borrow money from the Chinese to meet its obligations. Federal tax policy (tax deferral on retirement savings and life insurance products, for instance) is simply a way to encourage or discourage certain desirable or undesirable behaviors.

Shocking and seditious—and loopy—as this view may be to many people (Ron Paul comes to mind), most heterodox economists come by it honestly. That is, they have not selected these ideas to serve some pre-conceived left-leaning ideology. Instead, they arrived at them after frustration with the failure of mainstream economics to explain what happens in real life.

It was the financial crisis, which was very real to many people, that has helped bring heterodox economics into the spotlight. If you recall, some people were calling the crisis a “Minsky moment.” For many, including myself, only heterodox economics could explain how the financial sector was able to manufacture trillions of dollars in credit to pump up the economy. Or how the central bank was able to create trillions of dollars to prevent massive price deflation after it became apparent that too much credit had been created. (Heterodox economists do not believe that either the Chinese or an over-zealous exploitation of the Community Redevelopment Act of 1977 by liberals caused the crisis.)

Underestimating politics

I think that heterodox economists get the big picture right. But they tend to discount or underestimate of the centrality of partisan politics in U.S. economic life and the huge role of the private financial sector in politics. In his presentation on MMT last week, Wray mentioned political factors as an obstacle to assertive Keynesian fiscal policy almost as an aside. As realistic as they are about economics, the heterodox economists seem overly idealistic, and even naïve, about politics.

MMTers believe that, in a democracy, the federal government should use its more or less unrestrained fiscal muscle to solve problems, as identified and chosen through democratic processes. Uncle Sam does so to build weapon systems during wartime, the argument goes. Why shouldn’t it do so to improve the national passenger rail system and put millions of people to work in the process?

The conventional answer is that the mob would vote themselves a guaranteed income. But, of course, they couldn’t; the political resistance would be insurmountable. Too many people are justifiably afraid of letting the government wield such power (or even of openly acknowledging the existence of that power), except perhaps in wartime. More important, the private financial sector, using its political power, will never let itself be dis-intermediated or crowded out or circumvented by government.

That’s where the fate of that obscure Nixon-era program, “Operation Mainstream,” can be instructive. The program succeeded in rescuing a few people from poverty and isolation by getting them a job when they most needed it. Despite Ronald Reagan’s quip, the outreach worker who arrived at the door of an Appalachian mobile home and said, “I’m from the federal government and I’m here to help you,” actually did help some people get back on their feet.

But the outreach workers soon learned that many people don’t work because they can’t work (often because of mental illness). Their goal was unachievable with the means at their disposal. More importantly, the CAPs ran into political resistance.

The state departments of public welfare didn’t like the fact that the Nixon administration had created a parallel, overlapping and rival effort to combat rural poverty. Nor did they like the insinuation that their bureaucracies were ineffective or obstructive. More importantly, they coveted the money that the Department of Labor was channeling through the CAPs.

Eventually, the states got their way and federal block grants replaced much CAP funding. The moral of the story: Heterodox economics, though more coherent and arguably more intellectually honest than orthodox economics, has lost its political battles, and that has made all the difference.

Deniers of retirement savings crisis strike again

Posted on October 2, 2014 by Editorial Staff -

Statistics indicating that 53% to 92% of Americans are under-saved for retirement “are vast overstatements, generated by methods that range from flawed to bogus,” according to Andrew Biggs and Sylvester Schieber, writing in the Wall Street Journal this week.

The authors accuse the sources of these estimates—whom they identify as “progressives” like Sen. Maria Cantwell (D-WA), the New America Foundation and unidentified “special interests”—of exaggerating or inventing an alleged savings shortage as part of a broader campaign to increase Social Security benefits and/or curtail the tax incentives for private retirement plans.

Denying that a retirement savings crisis exists, Biggs and Schieber cite a 2013 Organization for Economic Cooperation and Development (OECD) study showing that the average U.S. retiree has an income equal to 92% of the average American income. In the past, both authors have written that Social Security benefits replace a significantly higher percentage of pre-retirement income than is commonly believed or warranted.

The OECD data doesn’t exactly support the writers’ argument, however. It shows that an average of only 37.6% of the average U.S. retiree income comes from government transfers like Social Security. In other words, Social Security replaces only about 40% of the average U.S. wage—a proportion that Social Security data has long shown.

The authors agree that “Social Security does need reform, both to ensure solvency and to better serve low-income retirees. And we should improve access to and the use of private saving plans.”

But they suggest, without offering evidence, that any increase in Social Security benefits, for any portion of the population, would discourage savings and job creation. They do not appear to regard payroll taxes as a legitimate form of forced saving, or to distinguish between social insurance and pure government transfers.

The article cites figures for all current retirees, but people who claim that a large number of Americans are underprepared for retirement are referring to the situation for future retirees, not current retirees. The authors also use averages, and averages can mask wide disparities between actual experiences.

Other, widely-accepted data has shown that about 20% of Americans are well-prepared for retirement, about 30% will get by, and about 50% have almost no savings and will rely on Social Security for most or all of their retirement income.

Although U.S. financial markets are demonstrably awash in retirement savings, about 96% of the assets are held by half the population and only 4% are held by the other half, according to figures cited during a recent meeting of the ERISA Advisory Council. Therein lies the retirement savings crisis.

U.S. paper assets are $198 trillion: Fed flow of funds report

Posted on October 2, 2014 by Editorial Staff -

Is America broke? Hardly.

A random walk through the Financial Accounts of the United States for the Second Quarter of 2014 (aka the Fed’s flow of funds report), suggests that Americans, as a nation are sitting on a mountain of wealth. On paper, at least.

According to the report, the country’s total identified assets were $198.25 trillion. Of that amount, $146.99 trillion, was held in the form of credit market debt.

The largest other assets were $35.8 trillion in corporate equities, $20.4 trillion in pension entitlements, $17.4 trillion in miscellaneous, $12.3 trillion in mutual fund shares, $9.2 trillion in household equity in noncorporate businesses and $8.3 trillion in small time and savings deposits.

The net worth of households and nonprofits rose $1.4 trillion to $81.5 trillion during the second quarter of 2014. The value of directly and indirectly held corporate equities increased $1.0 trillion and the value of real estate expanded $230 billion.

Domestic nonfinancial debt outstanding was $40.5 trillion at the end of the second quarter of 2014, of which household debt was $13.3 trillion, nonfinancial business debt was $11.7 trillion, and total government debt was $15.6 trillion.

Domestic nonfinancial debt growth was 3.8% at a seasonally adjusted annual rate in the second quarter of 2014, slightly lower than the previous quarter.

Household debt increased an annual rate of 3.6% in the second quarter (excluding charge-offs of home mortgages). Net originations of home mortgages continued to be weak, while consumer credit grew steadily.

Nonfinancial business debt rose at an annual rate of 6.3% in the second quarter, about in line with the increase in the first quarter. As in recent years, corporate bonds accounted for most of the increase.

State and local government debt rose at an annual rate of 1.2% in the second quarter, after decreasing at a 1.3% annual rate in the first quarter. Federal government debt rose at an annual rate of 2.5% in the second quarter, slower than the pace of growth in the first quarter.

Finns will link retirement age to longevity in 2028

Posted on October 2, 2014 by Editorial Staff -

The details of Finland’s pension reform, which will raise the retirement age to age 65 in fixed three-month increments and link it to longevity after 2027, have been agreed to by the nation’s leading unions, IPE.com reported this week.

The Ministry of Social Affairs and Health will now start the process of amending legislation according to the proposal agreed by the social partners.

Under the agreed proposal, starting in 2018 the earliest age of eligibility for an old-age pension, now 63, will rise by three months per birth-year cohort until it reaches 65. The upper age limit for accruing old-age pensions will be five years higher than the earliest retirement age.

Between 2016 and 2019, the combined pension contribution for workers and employers will be 24.4% (with a temporary reduction by 0.4% in 2016). Those who have had a strenuous and extensive working life can retire at age 65, according the Finnish Centre for Pensions.

Pension accrual rates will be standardized to make the annual rate for individuals of all ages 1.5% of wages, and working after the earliest pensionable age will be rewarded with a monthly increment of 0.4% for deferred retirement.

The pension reform, which will come into force at the beginning of 2017, aims to extend working life and narrow the sustainability gap of the whole public economy by 1% of GDP, according to the Finnish Centre for Pensions, and TELA, which represents insurance companies that offer earnings-related pensions.

Starting in 2028, the eligibility age for old-age retirement will be linked to life expectancy to ensure the time spent working in relation to time in retirement remains at the 2025 level, according to the Finnish Centre for Pensions.

The Central Organization of Finnish Trade Unions (SAK), the Confederation of Finnish Industries (EK), the Local Government Employees (KT), and the Finnish Confederation of Salaried Employees (STTK) signed an agreement on Friday on the content of the pension reform that will change to the earnings-related pension scheme.

TELA, which represents insurers providing earnings-related pensions, said the fact the agreement had been reached meant there would be no strikes or employer resistance to the reform.

But not all parties are pleased with the agreement. “The trade unions of people with academic education could not accept the agreement. Their argument was that people with long education do not have enough time to accrue a proper pension,” said Reijo Vanne, director at TELA. The academics wanted higher accrual rates at older ages.

The current part-time pension is to be abolished and replaced with a partial early old-age retirement, with certain new conditions.

After 2017, pension contributions will accrue from the full wage, according to the reform, since the earnings-related pension contribution will no longer be deducted from the pensionable wage.

RIAs recognize “robo-advisers” as threats: Scottrade

Posted on October 2, 2014 by Editorial Staff -

A large majority (88%) of RIAs believe that “robo-advising” will transform the financial advice and wealth management industries, according to a new survey by Scottrade Advisor Services.

Of those 88%, nearly 60% say robo-advice will put downward pressure on fees, nearly half believe it will force RIAs to appeal to younger investors, and 46% believe investors will “expect newer ways of interacting with advisers.”

Robo-advising was defined as online services that use analytical tools to create financial plans or investment portfolios for investors.

But two out of every three RIAs polled said these online tools lack obvious benefits. Eighty percent believed the “lack of human interaction” is the biggest issue for robo-advisors, while 46% said they lack “knowledge transfer” and 46% said they lack “service.”

When asked about the benefits of working with a financial advisor, 95% percent of the respondents said “investors would say their advisor has their best interests at heart,” followed by “clients reach their financial goals” at 84%.

The Scottrade RIA Study polled 224 registered investment advisors in a proprietary online survey from May 30 to June 30, 2014. ScottradeAdvisor Services is a unit of brokerage Scottrade, Inc.

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