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

Posted on October 8, 2014 by -

(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.

© 2014 RIJ Publishing LLC. All rights reserved.

A Sense that the Worst Is Over

Posted on October 2, 2014 by -

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.

© 2014 RIJ Publishing LLC. All rights reserved.   

 

The Fed Trap

Posted on October 2, 2014 by -

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 -

At the 12th 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.    

© 2014 RIJ Publishing LLC. All rights reserved.

Deniers of retirement savings crisis strike again

Posted on October 2, 2014 by -

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.  

© 2014 RIJ Publishing LLC. All rights reserved.

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

Posted on October 2, 2014 by -

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.

© 2014 RIJ Publishing LLC. All rights reserved.

Finns will link retirement age to longevity in 2028

Posted on October 2, 2014 by -

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.

© 2014 IPE.com.

RIAs recognize “robo-advisers” as threats: Scottrade

Posted on October 2, 2014 by -

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.

© 2014 RIJ Publishing LLC. All rights reserved. 

The Bucket

Posted on October 2, 2014 by -

New FIA from Integrity Life

Integrity Life Insurance has introduced a new single-premium fixed indexed annuity (FIA) called Indextra, according to W&S Financial Group Distributors, Inc., wholesale distributor of products from Western & Southern Financial Group companies. 

Indextra has four interest crediting options:

Three-year point-to-point based in part on the change in value of the Goldman Sachs Momentum Builder Multi-Asset Class Index. The index has a volatility control feature. A participation rate applies to the credited rate.

One-year point-to-point based in part on the change in value of the S&P 500 Index from the beginning to the end of a one-year period. A participation rate and an interest rate cap apply to the credited rate.

One-year monthly average based in part on the average value of the S&P 500 Index measured monthly over a one-year period. A participation rate and an interest rate cap apply to the credited rate.

Fixed interest option credits daily interest at a fixed rate declared in advance and guaranteed for an index year. The fixed option always credits at least 1%.

Guggenheim announces emerging markets real estate ETF

Guggenheim Investments, the wealth management unit of Guggenheim Partners LLC, has launched what it calls the first ETF “to focus exclusively on emerging markets real estate,” according to a release. The biggest investor in Guggenheim Partners is Sammons Enterprises[?].

The fund, Guggenheim Emerging Markets Real Estate ETF (EMRE) will invest mainly in publicly traded real estate securities in the countries of the S&P BMI Emerging Markets Index, benchmarking its results before fees and expenses to the AlphaShares Emerging Markets Real Estate Index.

At its launch, EMRE will invest in Brazil, Chile, China, Egypt, Hong Kong, India, Indonesia, Malaysia, Mexico, Morocco, Philippines, Poland, Russia, South Africa, Singapore, Taiwan, Thailand, and Turkey.

EMRE is the fifth ETF in Guggenheim’s product line affiliated with index provider AlphaShares, a firm led by chief investment officer Dr. Burton G. Malkiel, author of the widely read investment book, A Random Walk Down Wall Street.

AlphaShares also is the index provider for Guggenheim China Technology ETF (CQQQ), Guggenheim China Small Cap ETF (HAO), Guggenheim China Real Estate ETF (TAO), and Guggenheim China All-Cap ETF (YAO).

In the release, Malkiel said the fund would benefit from emerging markets’ “favorable geopolitical and demographic megatrends,” “low correlation to U.S. equities” and “potential protection from inflation in a rising interest rate environment.”

EMRE augments lineup of BulletShares defined-maturity corporate bond and high yield corporate bond ETFs, and strategic beta options such as Equal Weight and Pure Style ETFs.

Emerging markets real estate has expanded from just 2% to 11% of listed global real estate securities in the last 14 years. It is driven by urbanization, increasing consumerism of a growing middle class, rising foreign direct investment, and the creation of “investment-friendly vehicles that provide access to the local real estate industry.”

One billion people are expected to enter the global consuming class by 2025, boosting annual consumption in emerging markets to $30 trillion, up from $12 trillion in 2010.

TIAA-CREF acquires Nuveen Investments

TIAA-CREF announced that it has completed its acquisition of Nuveen Investments, a diversified investment management company.

The closing creates a diversified financial services organizations that manages about $844 billion in client assets, including approximately $111 billion in alternative investments, serves more than five million individuals and 16,000 institutions and includes retail mutual funds, closed-end funds and commodity exchange traded funds totaling $194 billion of assets.

Nuveen Investments will operate as a separate subsidiary within TIAA-CREF, retaining its brand and multi-boutique operating model. Nuveen Investments’ leadership and investment teams will remain intact, with John Amboian maintaining his role as chief executive officer. Carol Deckbar will continue to lead TIAA-CREF’s core asset management business as chief executive officer. Amboian and Deckbar will report to Rob Leary.

As of June 30, 2014, Nuveen Investments’ assets under management rose to $231 billion, an all-time high for the company. In the June quarter, Nuveen Investments’ mutual funds garnered $1.7 billion of net new inflows, driven by flows into a broad range of municipal and taxable fixed income strategies, representing a mutual fund organic growth rate of 12.3 percent from the prior quarter.  

TIAA-CREF acquired Nuveen Investments from an investor group led by Madison Dearborn Partners for an enterprise value of $6.25 billion, inclusive of Nuveen Investments’ outstanding debt. In connection with the transaction, Nuveen Investments’ outstanding term loans, totaling approximately $3.1 billion, were repaid in full. The transaction was financed using a combination of debt and equity. On September 18, 2014, TIAA issued an aggregate of $2 billion in surplus notes, the proceeds of which were used to fund a portion of the acquisition price and for general corporate purposes.

The completion of the Nuveen Investments acquisition follows the successful close of the TIAA Henderson Real Estate joint venture in April 2014, as well as several other TIAA-CREF acquisitions in recent years including Westchester Group Investment Management (2010) and GreenWood Resources (2012).

Wells Fargo launches retirement income tools

Wells Fargo Advisors, the brokerage unit of Wells Fargo & Company, has launched the Income Center, a suite of applications that “provides clients nearing or in retirement, a detailed view of their retirement income and offers them the ability to explore various The new features, which are intended for clients who have an Envision plan and are nearing retirement age, include:

  • Income Dashboard – Displays current retirement income situation
  • Income Strategies – Offers scenarios to add more income to the portfolio
  • Portfolio Withdrawal – Shows where additional income will come from in the current portfolio if there is a shortfall

Wells Fargo Advisors also launched ‘Income Generation’ – a program of tools and training materials – for advisors to work with clients on building a retirement income plan.

With $1.4 trillion in client assets as of June 30, 2014, Wells Fargo Advisors provides investment advice and guidance to clients through 15,189 full-service financial advisors and 3,472 licensed bankers.

© 2014 RIJ Publishing LLC. All rights reserved.

 

Fixing the 401(k)s’ Leakage Problem

Posted on September 25, 2014 by -

While plan sponsors, advisers, recordkeepers, asset managers and regulators were cooking up America’s defined contribution system over the past 35 years, they failed to foresee a crucial ingredient: connectivity. In an otherwise well-wired world, there’s still no frictionless protocol for whisking money from one plan to another when people change jobs. 

In plans as in plumbing, poor connections cause “leakage.” When people with small 401(k) accounts change jobs—and millions do every year—their plan assets are often spent, lost, forgotten or shunted to a so-called safe harbor IRA. Countless people—especially the young, low-income and minorities—fumble away a chance to start accumulating an adequate nest egg. 

Like many financial problems, leakage is also an opportunity. Driven by a combination of self-interest and public interest, a number of peope within the retirement industry have been pushing for a solution to at least a portion of the leakage problem. They envision a “clearinghouse” that would automatically route participants’ old 401(k) assets to their next 401(k) plan, if or when they have one. 

Don’t confuse the leakage problem with its wealthier cousin, the rollover IRA issue. The rollover issue focuses on the intense competition for larger DC accounts, including how firms can capture or retain them and how the process should be regulated. The leakage issue, in contrast, involves the millions of tiny accounts that fall through the cracks in the system.

As one observer put it, the rollover issue involves “the 50% of retirement accounts that have 96% of the assets,” while the clearinghouse involves “the 50% of accounts with 4% of the assets.”

The question is, can all the big players in the retirement industry agree to cooperate on a small-accounts clearinghouse? The success of “auto-portability” (or automatic roll-ins or “lifetime plan participation,” as the process has been called) depends on agreements between governmental players, who hope to increase retirement security, and industry players, who want to conserve assets under management, and technology firms, who can provide the digital switchboard that will serve as the missing link of the 401(k) system. 

Much of the energy behind auto-portability has come from Retirement Clearinghouse (RCH), a Charlotte, NC-based IRA custodian formerly called Rollover Systems. RCH executive Tom Johnson, formerly of MassMutual and New York Life, has spent the past year trying to drum up support for roll-ins and to clear away whatever legal or technical barriers might stand in its way.

Progress has been made. Twice this year, once on June 17 and again on August 21, the ERISA Advisory Council heard testimony on “Facilitating Lifetime Plan Participation.” A few months ago, the IRS issued a rule (2014-09) that would make it easier for 401(k) plan IT systems to certify the tax-deferred status of roll-ins.

Meanwhile, the Defined Contribution Institutional Investment Association (DCIIA), a trade group whose members include almost the entire retirement plan industry, supports the concept of auto-portability. (See today’s RIJ feature on Lew Minsky). RCH has sponsored analyses by Boston Research Technologies and by Steve Saxon, chair of the influential Groom Law Group, to build an intellectual and legal story around auto-portability.  

But the game is still in its early stages. Before recordkeepers can exchange personal participant account data freely, the DoL would need to bless the process with an advisory ruling. An industry software standard, perhaps based on RCH’s technology, would need to be shared and adopted across recordkeepers. Finally, if the $7 trillion rollover IRA industry perceives roll-ins as a threat, its opposition might be aroused.

Regarding that last point, the auto-portability enthusiasts are eager not to appear threatening. “I think this is an opportunity for a win-win-win,” Lew Minsky, executive director of DCIIA, told RIJ this week. “If you keep more people invested for retirement, all of the different players in the system ultimately benefit. You’re growing the system.”

The DC industry needs a win. It needs to stem the losses that it has experienced due to leakage, rollovers and decumulation. By 2016, for the first time, more money will leave 401(k) plans than goes in, according to Cerulli Associates. By 2019, the system’s net loss is estimated at $58 billion.

Interested parties

The common denominator for most of the discussions about auto-portability has been Retirement Clearinghouse, which changed its name from Rollover Systems in preparation for the development of roll-ins. (See earlier RIJ article on RCH.) Johnson, representing RCH CEO Spencer Williams, has solicited support for roll-ins from congressional aides, DoL officials, ERISA lawyers, the big full-service retirement plan providers, members of the DCIIA, and almost anyone else who will listen.  

RCH, according to Johnson, wants to do good and do well by slowing down leakage. “We would be the record mover—the transfer agent—between 401(k) plans. We would hold small balance IRAs for as short a period as possible, and then recycle the money into your active 401(k) plan. Our goal is to keep you invested in a plan,” Johnson told RIJ.

RCH envisions charging the account owner a $1.50 to $3 per month custodial fee during the holding period between plans and a one-time $49 fee for mediating an electronic transfer to a new plan. While small individual retirement accounts tend to create headaches for large retirement plan recordkeepers, their sheer volume makes them highly profitable for the proprietor of a clearinghouse.

But as RCH tries to spark a fast break to the hoop on this initiative, at least one other observer thinks it should wait until the rest of the team, so to speak, can catch up. Although RCH appears ready to start implement automatic roll-ins at any time after a nod from the regulators, Mark Fortier, a retirement industry veteran who testified at the August 21 ERISA Advisor Council, suggested that addressing the leakage problem in a series of smaller steps might ultimately be more effective.

Fortier, formerly of AllianceBerstein and State Street Global Advisors, recommends that retirement plan providers collectively develop the technology and associated standards for implementing the DoL’s lifetime income calculation for inclusion on participant statements. Agreement on standards for those calculations, he said, could serve as a foundation for agreement on standards for automatic roll-ins and perhaps other transactions.   

“I’m taking Labor’s goal for disclosure around lifetime income, along with their proposed safe harbor assumptions for the calculations, and suggesting that the industry pursue a cooperative approach—not only to reduce costs but also pave the way for a true lifetime view of one’s retirement income. That way, people can do the same thing they do at Mysocialsecurity.gov. You see a single monthly retirement income number,” Fortier told RIJ.

“The Labor Department’s proposed requirements have left the industry divided over the approach and methodology. What we need is a cooperative that can facilitate the requirements and foster innovation,” he added. “As in nature, organisms are inherently competitive. But the ones that survived and thrived have done it through cooperation.” Johnson, for his part, said RCH would share the “essence of its intellectual property” with the rest of the industry.

A similar message is coming from DCIIA. “For something to be successful here, it needs to be a coalition effort,” Minsky told RIJ this week. “It has to be supported by and participated in by as broad a coalition of key industry players as possible. I would encourage them to think of something that looks like a co-op. There are other clearinghouses that you could use models. Like DTCC, for instance.”

The pro roll-in crowd is betting that the DoL wants to make progress on the issue of retirement readiness during the current administration. The financial industry has rebuffed the agency’s attempt to slow down the flood of money out of 401(k)s into rollover IRAs—which now have more assets than DC plans—by proposing that rollover recommendations become a fiduciary act. The clearinghouse idea would be another, less controversial way to enhance readiness.

Opposition might still come from Wall Street. Roll-ins might be seen as a threat to broker-dealers and advisers who want to capture more of the money in play when people change jobs. But as long as the roll-in folks stick to the goal of sweeping up accounts worth less than $5,000—the plankton of the rollover world, not the bluefin tuna—active resistance from retail distribution is considered less likely.

“We have a ‘red line,’” said Johnson. “If we exceed the $5,000 limit, we’ll be messing with other people’s business models.” Others, he said, think making accounts as large as $15,000—the level at which federal “MyRA” auto-IRAs would be transferred to the private sector—eligible for what Johnson called “managed portability” wouldn’t trigger a competitive immune response. “But the asset managers have already said that if we try to do auto-matching at the $250,000 level, no way,” he added.

According to August 21 testimony before the ERISA Advisory Council by Steve Saxon of Groom Law Group, 10 million American plan participants change jobs each year. Of those, about one in three have accounts worth less than $5,000. More than half of them take cash-outs; no one knows how they use the money. The remaining million or so small accounts are routinely “forced-out” to a safe harbor IRA.

What might plan participants say about all this? Auto-portability, like auto-enrollment and auto-escalation, works on the principle of the negative option. People who want to opt out can always opt out. Laurie Rowley, founder of the new National Association of Retirement Plan Participants, told RIJ, “The industry in general has to do a better job of helping participants at job transition with their retirement savings. Clearly, this is where a lot of problems happen.”

Millions of people, strangely, fail to do anything with their retirement accounts when they change jobs. Many abandon their accounts, leave no forwarding address, or forget to cash their distribution checks—leaving behind an administrative mess and disrupting their own progress toward retirement security. But there’s money to be made in cleaning up that mess, and there’s good to be done by bumping people back onto the path to security.

“Fixing this piece of the leakage issue first is good for everyone,” said Cindy Hounsell, president of WISER, the Women’s Institute for a Secure Retirement. It [answers] the critics who say that the 401(k) system doesn’t work because people cash out too much. It also solves the behavioral issue—that people do whatever is easiest.

“The rollover process for the average participant is a nightmare. It’s just easier to take the cash out. Spencer and Tom have figured out a ‘Look ma no hands’ way for people to continue to stay in the retirement system. It’s the best fix I’ve seen.”

© 2014 RIJ Publishing LLC. All rights reserved. 

RetirePreneur: Jack Sharry

Posted on September 25, 2014 by -

What we do: LifeYield is a technology company that provides financial advisors with solutions for managing a household’s multiple taxable and tax-advantaged accounts. We find that the typical investor/customer has multiple accounts—the average being five—and they usually have different tax treatments. There are ways to enjoy significant tax advantages by managing all the holdings in a household in a tax efficient way. LifeYield started more than six years ago. The founders and principals of the company all come from financial services companies. Sharry Preneur Info Block

Our “Coordinated Account and Income Management” tool is designed to help reduce the taxes an investor pays during the savings or accumulation phase and throughout retirement. And taxes are significant. They are the biggest expense a household will pay over an investment lifetime. Taxes are greater than housing, healthcare, food, and education combined, and they have a significant impact on investment returns.  As we like to say, “It’s not what you make, it’s what you keep.” We have also developed a simple yet comprehensive tool to help advisors help investors determine the optimal time to take Social Security benefits and how to file for those benefits.

Our business model: Our solutions are delivered on a “software as service” model where clients pay an annual per advisor fee.  Some firms pay us on an assets-under-administration basis.

Who our clients are: Our clients are broker-dealers, asset managers and insurance providers. We work business-to-business and make our software available through these institutions to advisors and their clients.

Why clients hire us: We haven’t heard anyone object to improving investor outcomes by 33%. Ernst & Young did a comparison survey on our methodology and found that LifeYield’s methodology can help provide up to 33% improved after-tax returns and retirement income. Clients respond to that.

About my background: I started out in 1983. I’ve always been involved in investments, annuities and software solutions. I started in the industry as an annuity wholesaler. I went on to work for Morgan Stanley, where I was the national sales manager for insurance and annuities.  I was then national sales manager at Putnam Investments, and joined Phoenix Investment Partners as the president of retail distribution. Later, I was the CMO at The Phoenix Companies for investments, annuities and life insurance. I retired from Phoenix six years ago and joined LifeYield right away as a partner.

How do you spend your spare time? I chair the Retirement Solutions committee of the Money Management Institute. We have written a series of papers and hosted conferences around retirement income and household management. In fact, we’re expanding our purview by hosting a conference next month in New York on goals-based wealth management. I will chair the conference and we will have speakers from Merrill Lynch, SunTrust, Wealthcare Capital Management, Morgan Stanley, Ernst & Young and Hearts & Wallets. We are currently writing a paper on goals-based wealth management and unified managed households, which we will deliver at the conference. Last year, the MMI recognized me with the Chairman’s Award for thought leadership in retirement solutions.

What’s the source of your entrepreneurial spirit? I’ve been an entrepreneur the whole time I’ve worked in financial services. I have developed innovations at each of the firms where I’ve worked. While at Phoenix, we developed the first multi-manager wholesale distribution model for advisory platforms and we also developed a patent-pending income guarantee for managed money. When I retired from corporate life, I wanted to continue to work in product innovation. It started when Paul Samuelson [son of the economist, and a founder of LifeYield] showed me his idea for the company. My comment was, ‘I thought about this three years ago, but couldn’t figure out how to do it.’ Paul is a rocket scientist when it comes to financial technology and when I retired from Phoenix I was on board. I’ve always been drawn to product innovation. That’s what gets me excited and keeps me going professionally.

© 2014 RIJ Publishing LLC. All rights reserved.

Lew Minsky Talks about ‘Auto-Portability’

Posted on September 25, 2014 by -

To gain a high-level view of the industry effort to facilitate the automatic transfer of small qualified plan accounts to a new qualified plan when participants change jobs, RIJ reached out to Lew Minsky.

He’s the executive director of the Defined Contribution Institutional Investment Association, whose broad membership includes virtually all of the major retirement plan providers, including investment-only firms, full-service firms and recordkeeping specialists.

Here are excerpts of our conversation:

RIJ: How do you see this new campaign for ‘auto-portability’ of small retirement plan accounts, and what role, if any, does the DCIIA play in it?

Minsky: DCIIA has no official role; there’s no official role to play because we’re still at the early stages of what I think is an important and growing dialog in the industry. We’re participating in it and doing what we can to advance it.

RIJ: What’s sort of problem are you trying to solve?

Minsky: The question is, what can we do to keep people in the qualified plan system once we have them engaged? There’s a lack of connection within the system right now. Building some level of connectivity would help move things on. We don’t have the kind of connectivity that you’d expect in 2015. It’s more akin to 1974.

RIJ: How so? 

Minsky: The process is far too complicated. There are pitfalls all along the way. And the technology we use is so antiquated. How, in 2014, does it make sense that when you rollover or roll-in there’s a live check cut? Why doesn’t that happen electronically? My bias is that if we fix some of the drag in the system there will be a greater degree of account consolidation, and that will benefit [personal] decision-making and retirement security. 

RIJ: How do approach that sort of problem? 

Minsky: For something to be successful here, it needs to be a coalition effort. It has to be supported by and participated in by as broad a coalition of key industry players as possible. I would encourage them to think of something that looks like a co-op. There are other clearinghouses that you could use models. Like DTCC, for instance.

RIJ: How did we get where we are today?           

Minsky: Most of the regulatory framework has been built around the qualification rules, which start with a false premise. The overall concern has been around the [tax] status of the money. A lot of the process has evolved to ensure that the money that is coming from and going to a qualified source. That’s at cross-purposes with the goal of making it easy to keep money in the system. Brigitte Madrian of Harvard recently said, “If you want to make things happen, make them easy. To make sure they don’t happen, make them complex.” We’ve made the cash-out easy and the roll-in complex.

RIJ: What’s the payoff to keeping money in qualified plans?

Minsky: There’s no doubt that savings rates are much higher in the 401(k) system than in the rollover IRAs. The proportion of people who save is multiples higher. According to EBRI [the Employee Benefit Research Association], only two percent of the IRA owners who are eligible to contribute to IRAs contribute to them. The IRA system is not a sufficient accumulation system. It has become a rollover system.

RIJ: What do DCIIA’s members think about auto-portability?

Minsky: There’s broad support [among the DCIIA membership] for the idea of making it easier for participants to stay in the system and do things that combat leakage. At that basic level there’s widespread support. 

RIJ: Do you think other retirement industry players might see ‘roll-ins’ as a threat?

Minsky: I’d be surprised if there were segments of the industry that were all that concerned [about leakage and rollovers]. I think this is an opportunity for a win-win-win. If you keep more people invested for retirement, all of the different players in the system ultimately benefit. You’re growing the system.

© 2014 RIJ Publishing LLC. All rights reserved.

To exit DB plan, Motorola buys group annuity from Prudential

Posted on September 25, 2014 by -

Under an agreement between The Prudential Insurance Company of America, a unit of Prudential Financial, Inc., and Motorola Solutions, Inc., Prudential will assume responsibility for the monthly pension benefits for Motorola retirees, Motorola announced this week.

Motorola’s eligible U.S. pension plan participants will be able to apply for lump-sum pension payments. The actions are expected to reduce Motorola Solutions’ ongoing U.S. pension obligation by $4.2 billion. The company plans to contribute $1.1 billion in cash to its U.S. pension plans in 2014.

“Our retirees’ benefits are not changing, just who provides them,” said Gino Bonanotte, Motorola Solutions chief financial officer, in a release.

Prudential will pay and administer future benefits to the approximately 30,000 retirees who currently receive payments. The parties expect the transaction to be completed in 2014, with Prudential assuming responsibility for making the benefit payments beginning in early 2015.

In addition, approximately 32,000 pension plan participants will be able to apply to receive a lump-sum payment of their accrued, vested pension benefit. To be eligible, participants must have left the company before June 30, 2014, and accrued a pension benefit but have not yet started receiving benefit payments. The application period runs from Oct. 2, 2014 to Nov. 7, 2014. Total lump-sum payments will be capped at $1 billion, with the smallest amounts qualifying first.

There are no changes for active employees who participate in the plan. Motorola offered the pension plans to U.S. employees hired before Jan. 1, 2005, with no additional benefits accrued for participants as of March 1, 2009.

Overall, Prudential manages the pension benefits of 1.6 million participants at more than 5,700 companies. 

© 2014 RIJ Publishing LLC. All rights reserved. 

A robo-advisor aims at the 401(k) market

Posted on September 25, 2014 by -

“Blooom,” a new robo-advisory firm, has launched what it calls “the country’s first low-cost online tool created exclusively to help improve the way average Americans manage their 401(k) retirement plans.”

“Our goal is to ‘fix’ the epidemic of inappropriately invested 401(k) plans we see every day with a simple, scalable, professional service,” said Chris Costello, co-founder of blooom, in a release.

Blooom was one of 71 companies to present recently at Finovate New York, a financial technology conference. Any plan participant can access blooom, regardless of their plan’s investment line-up, employer, or 401(k) custodian.

Blooom is an online Registered Investment Advisory (RIA) firm co-founded by Costello, Kevin Conard and Randy Auf Der Heide. Costello and Conard co-manage another traditional RIA firm that manages over $500 million of client portfolios.

According to the release, “In five minutes, the prospective blooom client can access the patent-pending user interface to assess the 401(k) options available in their 401(k) plan.” Blooom’s algorithm runs more than 100,000 calculations to identify the ideal dollar amount to invest in each fund. The cost is $1/month for those with less than $5,000 invested and $10/month for accounts more than $5,000.

Blooom is also announcing a partnership with voluntary benefits-exchange company Connected Benefits, a private benefits marketplace.

© 2014 RIJ Publishing LLC. All rights reserved.

Mailings of paper Social Security statements to resume

Posted on September 25, 2014 by -

The periodic snail-mailing of paper Social Security Statements will resume—at five-year intervals for most workers—alongside the agency’s campaign to urge Americans to access the same information online by creating a personal account at www.socialsecurity.gov/myaccount, the Social Security Administration announced this week.

The paper statements, evidently brought back by popular demand, provide workers age 18 and older with individualized information regarding their earnings, tax contributions, and estimates for future retirement, disability, and survivors benefits. The agency expects to send nearly 48 million statements each year.

Beginning this month, workers attaining ages 25, 30, 35, 40, 45, 50, 55, and 60 who are not receiving Social Security benefits and who are not registered for a “my Social Security” account will receive the statement in the mail about three months before their birthday. After age 60, people will receive a statement every year. 

Besides providing future benefit estimates, the statement highlights a person’s complete earnings history, allowing workers to verify the accuracy of their earnings. An individual’s future benefit amount is determined by the amount of their earnings over their lifetime.  To date, more than 14 million people have established a personalized mySocialSecurity account.

Individuals who currently receive benefits should sign up for a mySocialSecurity account to manage their benefit payments online and, when the need arises, get an instant benefit verification letter, change their address and phone number, or start or change direct deposit of their benefit payment.

© 2014 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on September 24, 2014 by -

Consulting leads overall Deloitte growth

In their fifth consecutive year of growth, the Deloitte member firms reported aggregate revenues this week of $34.2 billion for the fiscal year ending May 31, 2014. Growth stemmed from worldwide demand for the firm’s services, according to a release. The organization’s aggregate revenues grew 6.5% percent in local currency, or 5.7% in U.S. dollars.

Growth was led by the Consulting segment (10.3% growth in local currency), followed by Tax & Legal (7.7%). Financial Advisory and Enterprise Risk Services grew 6.8% and 4.2%, respectively. Audit experienced growth of 2.5% despite significant investment in quality around its audit service.

Voya wants to run insurance company money

Voya Investment Management, the asset management business of Voya Financial, Inc. (NYSE: VOYA), said it is “expanding its efforts and investment offerings to meet the long-term investment needs of insurance companies.”

Voya Investment Management (IM) intends to provide insurers with “guidance on private placements, commercial real estate, structured credit, bank loans, high-yield debt, private and public equity, and several other asset classes,” according to a Voya release.

Voya also announced that John D. Simone, CFA, has joined Voya IM in the new role of head of insurance investment management sales and solutions. Simone comes to Voya IM from J.P. Morgan Asset Management, where he was most recently executive director, global insurance solutions. He will report to Bas NieuweWeme, head of institutional distribution for Voya IM.

“The challenges of the low interest rate environment have created an opening for us to help insurers identify opportunities for yield beyond high-grade public bonds, which have traditionally made up a significant portion of general account portfolios,” said NieuweWeme.  

Simone holds the Chartered Financial Analyst designation as well as Series 3, 7, 63 and 24 licenses from FINRA. He earned an MBA from Fordham and a bachelor’s degree in economics from Rutgers. 

Leckey joins Lincoln as distribution strategist

Kathy Leckey has joined Lincoln Financial Distributors, the wholesale distribution business of Lincoln Financial Group, as vice president and head of Strategy for its Retirement Solutions Distribution business.

Leckey will direct business development, advanced sales strategies and strategic planning for Retirement Solutions Distribution, which includes the annuities and small-market retirement plan services businesses, according to a release.

Previously, Leckey served as senior vice president for business development at Realty Capital Securities, LLC. She previously held positions at Metlife Investors, AXA Distributors, and Hartford Financial Distributors (formerly PLANCO).

Leckey holds a master of business administration degree from St. Joseph’s University and a bachelor of science degree in business administration from LaSalle University.

The divorce rate for older couples has gone up

Divorce and separation divide accumulated assets, often resulting in two households unable to retire comfortably. Unfortunately, the divorce rate for couples nearing retirement has been going up, according to the MacroMonitor Market Trends Newsletter, a publication of the Consumer Financial Decisions group of Strategic Business Insights.

According to the newsletter:

“In the 1980s, the nationwide focus changed from ‘us’ to ‘me.’ ‘Greed is good’ (Gordon Gekko in the film Wall Street) became an acceptable mantra, conspicuous consumption became a national pastime, and US divorce rates peaked at 23 per 1000 married women (according to the National Center for Family & Marriage Research at Bowling Green State University, using American Community Survey data).

MacroMonitor data following that decade indicate the incidence of divorced or separated household heads was flat (between 1992 and 2012—15% and 16%, respectively). Although the data show that the divorce rate has declined from 17% in 2000 to 13% in 2008, the rates for household heads younger than [age 50] and for household heads older than age 50 diverged. Since 2008, the incidence of divorce for household heads age 50 and older has risen from 15% to 22%.

The decline in divorce rates for household heads younger than age 50 may be attributable to the fact that the average age when men and women marry has increased in the past several decades; family formation occurs later now than previously. In 2011, the average age for men to marry was 29 and for women, 27, in comparison with age 23 for men and age 21 for women in 1970, according to the US Census Bureau; 42% of women younger than age 20 were married in 1970.

“The increase in divorce for households older than age 50 is especially troubling, because the event occurs during peak earning years—a time when households need to focus on retirement seriously,” the report said.

“Newly single-headed households present financial-services providers with a potential opportunity to meet new and different financial needs. For example, the majority of current retirement products by design provide for dual-headed households. Separation and divorce do not mean that responsibilities for others—parents, peers, or children—have disappeared.” 

Morningstar leases office space in lower Manhattan

Morningstar, the independent investment research provider, has signed a 10-year, 30,000 square foot lease at 4 World Trade Center in Manhattan. The company expects to move to the 48th floor of 4 World Trade Center in mid-2015, Silverstein Properties announced this week.

Lease negotiations for Morningstar were handled by a CBRE team headed by Michael Liss. Jeremy Moss, Director of World Trade Center Leasing for Silverstein Properties, led the negotiations for the landlord, together with the CBRE agency team including Steve Siegel, Mary Ann Tighe, Adam Foster, Steve Eynon, Evan Haskell,Ken Meyerson and David Caperna.

According to the Downtown Alliance, 511 firms have moved to Lower Manhattan since 2005, leasing a total of 12.3 million sq.ft. (1.14 million sq.m). Over 225 of those companies have been in creative or professional services, taking 51% of the space leased.

© 2014 RIJ Publishing LLC. All rights reserved.

The Tailwinds in Vanguard’s Sails

Posted on September 18, 2014 by -

Lots of fund companies and investment firms claim that the costs of their active funds or their advisory services are justified by their results. At one recent conference, for instance, presenters from several companies insisted that job changers should choose a rollover provider that offers value, not just low fees.

But, judging by the torrent of money flowing into low-cost Vanguard funds, investors don’t seem to be listening to that argument. Investor behavior suggests that, like Vanguard founder Jack Bogle, they believe that low costs are value.

“Vanguard has been absolutely dominant in the flows. No one is a close second,” Morningstar analyst Michael Rawson told RIJ recently. “It’s almost scary. It would be scary if Morningstar didn’t have such a high opinion of Vanguard. The trend toward accepting index investing has helped them. Active management has continued to struggle against the indexes.”

In July 2014, a month when investors withdrew a net $11.4 billion from U.S. equity mutual funds, Vanguard Total Stock Market Index, Vanguard Institutional Index, and Vanguard Total International Stock Index recorded inflows of $2.6 billion, $2.2 billion, and $1.8 billion, respectively.

As of last July 31, according to Morningstar data, net flows to Vanguard open-end mutual funds (except money market funds and funds of funds and including “obsolete” funds) in the previous twelve months was $102.1 billion.

Net flows into Vanguard exchange-traded funds (ETFs) for the year ending last July 31 was $58.3 billion. The combined one-year net flow for these two categories was $160.5 billion, which brought Vanguard’s outstanding mutual fund AUM to $2.49 trillion, up from $2.07 trillion on July 31, 2013.

In the coveted and growing IRA space, Vanguard is one of five big IRA custodians that together account for 45% of the $6.6 trillion that’s in traditional IRA assets, according to Boston-based Cerulli Associates, which declined to disclose more precise data.  

[Full disclosure: I worked at Vanguard from 1997 to 2006 as a writer in the retirement area.]

A big lead

At $64.8 billion, net flows into Vanguard funds in the first half of 2014 were greater than the flows of the next five fund families combined, according to Morningstar’s mid-year analysis, which covered more than 750 fund families. Vanguard’s net flow was more than four times greater than the net flows of its closest rival, JP Morgan, which took in $14.7 billion. 

Moreover, Vanguard immense positive flows contrasted with the large net outflows from some of its largest competitors. PIMCO, the actively managed bond fund specialist that rode the long bond bull to fortune and glory, saw net outflows of $32.3 billion in the first half of this year.

Long-standing Vanguard rival Fidelity saw net open-end and ETF fund outflows of $3.5 billion in the first half of this year. (In the corner of a vast wall mosaic in Vanguard’s main cafeteria in Malvern, Pa., the three-masted man o’war “Vanguard” fires its cannons at the frigate “Fidelity.”)

At the start of this year, Vanguard had already surpassed Fidelity as the largest manager of 401(k) assets. As of December 31, 2013, Vanguard had $613.5 billion in 401(k) assets and Fidelity had $612.4 billion, according to Morningstar. (Fidelity remained the qualified plan recordkeeping leader, with some $1.4 trillion in assets.)

In the target date fund market, where Vanguard has benefited from the swing toward funds-of-index-funds—a trend driven in part by regulatory scrutiny and class-action suits against plans with high fund fees—Vanguard runs an increasingly close second to Fidelity. Vanguard’s TDF assets grew almost 15% in 2013, to $166.1 billion, while Fidelity’s grew by less than 2%, to $185.6 billion, according to Morningstar.

Tailwinds

A number of factors have been cited for Vanguard’s success, besides its low costs. These include the company’s brand strength, presence in both the institutional and retail markets, and appeal to fee-only advisors—who rely on Vanguard’s low costs to create room for their own layer of asset management fees.

Such strengths evidently make up for the fact that Vanguard doesn’t spend much on advertising or marketing, doesn’t pay for distribution (not even 12b-1 fees), and sticks to the direct channel, which represents only a fraction of the total financial services industry.

“There are a couple of things going on,” Rawson told RIJ. “First, Vanguard’s reputation has only grown over time. And it never hurts when Warren Buffett says he likes the [Vanguard] 500 Index fund, which he did in his annual letter. More importantly, the whole ethos and practice of low-cost investing comes to the fore in a low interest environment. They have the lowest cost, so they’re winning that battle.”

Vanguard’s average fund expense ratio is just 19 basis points. That average expense ratio is about four basis points, or more than 16%, less than Vanguard charged 15 years ago. According to the late Robert Slater’s 1997 book, “Jack Bogle and the Vanguard Experiment,” the flight from mutual funds during the deep 1974-75 recession convinced Bogle that retail investors wouldn’t start buying funds again unless transaction costs and management fees were exceptionally low. 

The markets have also vindicated Bogle’s faith in index investing. “Personally, I’m a big believer in active management,” Rawson said. “But if you look at the average returns of active funds, they’ve done horribly.”

The exodus of top producers from wirehouses during and after the financial crisis, and the consequent growth of the registered investment advisor channel, has also helped Vanguard, he added.

“A lot of former wirehouse advisers have set up their own shops,” he said. “At a wirehouse, they would never have done business with Vanguard, because they worked on commission and Vanguard doesn’t pay for distribution. But now, as RIAs, instead of getting a commission, those advisors are charging their one percent management fee and using Vanguard funds.”

Other firms may have difficulty imitating Vanguard’s successful formula, for a couple of reasons. The firm’s zero transaction costs and low fund expense ratios, for instance, are a result of its cooperative ownership structure and its direct marketing model. There are no private owners or shareholders to reward, and no distributors to incentivize.

That model eliminates conflicts of interest between the company and its customers. The   lack of conflict has, over time, engendered a high level of consumer trust in the firm—and numerous surveys have shown that trust is the first consideration among consumers when choosing a financial services provider.

© 2014 RIJ Publishing LLC. All rights reserved.  

Goin’ to Kansas City

Posted on September 18, 2014 by -

When you ride the Amtrak between Boston and Washington, as I frequently do, you see countless abandoned brick warehouses and factories. Long ago, those structures, with their private rail sidings and spurs, were profit centers. Now they sit vacant and worthless, canvases for graffiti artists or shelters for homeless tramps. 

Observing those buildings from a seat on the Northeast Regional, I try to fathom the economics of urban renewal (or the lack of thereof). Abandoned factoryWith so many idle workers, and with so much idle money in the economy, why aren’t more of these relics of nineteenth-century industrialism either torn down… or fixed up?

The answer to that type of question eludes me. When I try to figure out where the capital or appropriations or grants or loans to pay for the demolition or restoration of these strangely beautiful brick-and-mortar ruins might come from—and how the money might eventually be repaid or regenerated—I just get confused.

They’re a slippery slope, these thoughts, and before I know it, I’m wondering about the national debt and the federal budget deficit. The debt is considered horrible, but Treasury bonds are in great demand. Is it because every debt an asset? And what about Social Security benefits for Boomers? How can they bankrupt the country if they add a dollar of demand to the economy for every dollar they remove in taxes? 

Next week, I’ll meet economists who love this type of question. A passel of them will be at the 12th International Post-Keynesian Conference, to be held on the University of Missouri’s Kansas City campus. If you’ve ever read anything by so-called heterodox economists like L. Randall Wray, or Stephanie Kelton, James Galbraith (son of John Kenneth) or the late Hyman Minsky, you’ll know what I mean.  

These folks practice a type of economics known as Modern Monetary Theory. MMT has sadly gotten much less respect than supply-side economics (which George W.H. Bush called “voodoo” economics), but I’ve found that its practitioners are the only ones who truly try to interpret the convoluted financial system we all live in. One of the conference panels is entitled, “Money and the Real World.”

Abandoned Hartley Tool & Die factory

You’ve probably never heard the heterodox ideas that the MMT crowd has written, spoken or inspired. That the private sector enjoys a surplus when the federal government runs a deficit; that Uncle Sam can no more run out of dollars than a scoreboard can run out of points; that when the Chinese buy Treasuries, it’s more like a bank deposit than a loan.

Our unmoored paper money system never made much sense to me until I discovered MMT. The very fact that these economists have been so marginalized convinces me that they must be on to something.

So it’s off to Kansas City, Mo., next week, and then on to Williamsburg, Va., for the Insured Retirement Institute conference on the following Monday. In future issues of RIJ, I’ll report on what I’ve learned at those meetings. The contrast between the portrayals of economic and political reality at the two conferences should be stark, and that’s exactly what I’m hoping for. 

© 2014 RIJ Publishing LLC. All rights reserved.  

A ‘Babysitter’ for Immature Rollovers

Posted on September 18, 2014 by -

During the “Winning in IRA Rollovers” conference this week at the venerable Harvard Club of Boston, GuidedChoice Inc. and InspiraFS Inc. unveiled a partnership that they say will create a new kind of niche in the coveted $6.6 trillion rollover IRA space.

GuidedChoice, as you probably know, is the San Diego-based 401(k) advice provider run by Sherrie Grabot and co-founded by Nobelist Harry Markowitz. InspiraFS is a Pittsburgh-based recordkeeper that specializes in all types of IRAs—SEP-IRAs, SIMPLE-IRAs, auto-IRAs and low-balance automatic rollover IRAs.  

The two firms were represented in Boston by Pete Littlejohn of InspiraFS (see photo above) and Ashley Avaregan of GuidedChoice. As they described the venture, InspiraFS will aggregate small automatic rollovers from retirement plan providers and GuidedChoice will serve as the RIA and “3(38)” fiduciary to the accounts. When the accounts are larger and presumably more profitable, InspiraFS will return them to the original providers.  

“We’ll babysit them for you with GuidedChoice’s help,” Littlejohn said. “When they’re ready, you can take them back.” The service can be branded in the name of the original provider, and the client will have a seamless customer experience, ending with an “upgrade” back to the larger recordkeeper.

“It’s a way for you to say yes to any rollover, regardless of size,” added Littlejohn, meaning that plan providers will no longer have to send small accounts of departing employees on one-way trips to IRA “landfills,” where the money will sit in a money market account, merely satisfying the regulatory requirement that they don’t lose money.

For its part, GuidedChoice will create a managed account for each IRA owner. “Everything is customized,” said Avaregan, an attorney and senior vice president at GuidedChoice. “A managed account allows each client to have a personalized target date fund. Our approach lets an institution take advantage of what’s happening in the culture,” where consumers expect to personalize their mass-produced products. 

RIJ will have more to report in the future about this partnership and its significance for the IRA rollover market.

A robust conference

IRA rollovers are on everyone’s mind these days, so the conference, organized by Financial Research Associates LLC, was timely. Although a handful of large retirement plan providers and asset managers—including Vanguard and Fidelity—custody almost half of the $6.6 trillion in traditional IRAs in the U.S, $350 to $400 billion becomes more or less up for grabs every year when job changers roll their “old” 401(k)s into IRAs.

The main hall of the Harvard Club of Boston, where the conference was held, was not packed with attendees. About 70 people reportedly signed up but an informal headcount revealed only about 50. One financial advisor, Robert Klein, founder of the Retirement Income Center website, flew in from the wealthy Orange County community of Newport Beach, Calif.

The presenters and panelists, however, represented highly respected companies in the rollover arena. The rollover market has become advertising-intensive, and two of the biggest IRA advertisers talked about their strategies. Lauren Brouhard, senior vice president of Retirement Solutions at Fidelity, talked about her firm’s highly successful “Green Line” campaign. Its theme has evolved from “rebuilding” after the financial crisis to “getting more” in today’s more expansive environment. Lena Haas and Diane Young, senior vice president of Retirement and vice president of marketing, respectively, at E*Trade, explained the retirement of the discount broker’s spokes-baby and its newer ad campaign aimed at what it calls “Type E” people. Haas and Young were interviewed by Matthew Drinkwater, associate managing director, LIMRA Secure Retirement Institute Research.

Great-West Financial, the Canadian-domiciled, Colorado-based firm that has grown through the acquisition of JP Morgan’s retirement business and Putnam Investments into a major player in the U.S. financial services market, was represented by vice president of Retirement Solutions Christopher Silvaggi.

Great-West’s approach to rollovers, Silvaggi explained, involves forging partnerships with the plans’ financial advisors. More specifically, he said, Great-West leverages its participant data to help advisors identify potential rollover clients. Great-West had made a decision, Silvaggi told RIJ, to avoid competition between its Putnam Investments arm and the advisors to Great-West retirement plans. 

In other presentations:

  • Tom Modestino, director of Retirement Research at Ignites, chaired a panel in which Dale Kalman, vice president, Acquisition Delivery & Specialty Sales at Charles Schwab, Stephen Deschenes, senior vice president, product development, The Capital Group Companies, and James Nichols IV, president of Voya Retirement Solutions, discussed the trends, threats and opportunities of the rollover market for advisory firms, asset managers and recordkeepers, respectively.
  • Laura Varas, co-founder of the Hearts & Wallets consulting firm, talked about the needs of Gen-X and Gen-Y investors, and how they differ from the needs and preferences of Baby Boomers.
  • Peter Geismar, founder and president of Confident Choice, LLC, discussed the role of behavioral economists in the rollover IRA market.
  • Jacqueline Shoback, senior vice president and head of Retail & Consumer Marketing at TIAA-CREF, talked about her firm’s approach to attracting and retaining assets, including rollover assets.
  • A panel led by J. Lynette DeWitt, research manager at Deloitte Services, Robert Glovsky, vice chair and principal at The Colony Group, Susan Kaplan, president of Kaplan Financial Services, Inc., and Charles S. Bean III, president and director of wealth management at Heritage Financial Services, LLC, discussed their perspectives on client decision-making.
  • Rick Nersesian, CEO of Rick Nersesian Consulting, gave advice to financial advisers trying to attract rollover clients.
  • Sean Cuniff, research leader, Deloitte Services, recounted his firm’s research in the rollover market and described the advice his firm gives to companies seeking to increase their rollover business.

© 2014 RIJ Publishing LLC. All rights reserved.