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Robo-advisors aren’t science fiction: Celent

Posted on September 11, 2014 by -

A new report, Automating Advice: How Online Firms are Disrupting the Market for Online Advice, by a senior analyst at Celent, warns traditional advice providers that hungry robo-advisers will eat their lunches unless they take aggressive action—soon.      

“Traditional providers of financial advice must change the way they do business or face radical disruption,” Celent said in a release about the report. According to Celent, traditional companies will either have to adapt or be overwhelmed by a trend that’s fed by a smorgasbord of data and a generation of Millennials—“digital natives”—who live on a data diet. The rise of passive investing, especially through ETFs, and the widening availability of high-speed broadband access have also been key drivers.

The report challenges the notion that investors will continue to want or need face-to-face contact with the person managing their money. That may be true for today’s middle-aged and elderly clients, but it not for future investors. Working across the proverbial kitchen table, even with an open laptop, won’t be enough. It also challenges the idea that only robo-advice will only appeal to small investors.

The potential threat posed to traditional advisors by the robots has been a major teething toy of the business press for much of this year. That question may be irrelevant: The simple passage of time—and the inevitable passing of Boomer investors and a whole generation of older, white, male advisers—will mean that robo-advisors won’t need to defeat the status quo, they just have to let it to fade naturally. But the Celent report asserts that significant change will happen within just five years or so, not in a generation.

The new wave of providers named in the report includes Advicent, Betterment, Garrett Advisors, Jemstep, Learnvest, Mint, MoneyDesktop, Motif, Personal Capital, PIETech (MoneyGuidePro), Wealthfront, Wisebanyan, and Yodlee. They vary in whether they handle personal budgeting, account data aggregation, savings recommendations, asset allocation models, or longer-term planning. There’s also FutureAdvisor in San Francisco and HelloWallet, which Morningstar bought in May for more than $50 million.

The report focuses on retail investors; it doesn’t mention Vanguard or Fidelity, which have a large do-it-yourself investor base, considerable experience working with institutional and rollover IRA clients via call centers and the Internet, and trusted brand names. Nor does Celent look at online advice in the 401(k) space, where online advice providers like Financial Engines, Guided Choice, Morningstar and startup Kivalia operate.

Only another financial crisis or a security breach that scares investors away from the digital channel will stop the trend, Celent said, calling online advice “an existential threat.”

“Over the last five years, online firms have gained significant market traction, most notably in the domain of investments (where the fragmentation of traditional delivery models and the adoption of passive investing strategies have created fertile ground for disruption), but also in the areas of personal financial management (PFM) and financial planning,” the Celent release said.

Traditional firms might get temporary relief by moving upmarket and serving wealthier clients, Celent said, but that strategy will only buy a short. The digital game is pervasive and they will eventually have to become experts at it.   

“The ubiquity of video and remote channels means that many real life advisors rarely see their clients in person, and in this sense they demonstrate little competitive differentiation from their online-only and hybrid competitors,” the report said.

“Traditional advisors and the financial institutions that employ them must put aside legacy practices to deliver digitized advice and, ultimately, digital relationships. In short, they need to take a page out the book being written by the automated providers.”

The 17-page report contains three figures, three tables and concludes with recommendations for real life advisors to address the challenges posed by the automated advice providers.

© 2014 RIJ Publishing LLC. All rights reserved.

Risk-reduction strategy pays off for UK fund

Posted on September 11, 2014 by -

Now Pensions, the unit of Denmark’s ATP pension fund that provides defined contribution plans in the UK, saw investment returns on its centrally-managed retirement fund of 14.2% for the year ending June 30, 2014, thanks in part to actions taken by the manager to buffer correlation risks, according to IPE.com.

The fund, which is nearing £50m (€62.4m) in assets and operates on a risk-allocation basis instead of asset allocation, said strong returns were helped by final quarter performance. The target 35% exposure to equity risk returned 4.3% in the three months from March, while its 10% exposure to commodity risk returned 6.6%.

Other risk factors – credit, rates and inflation – all performed positively, adding to the eventual 14.2% investment return over the year. The three factors are generally exposed to corporate bonds, global sovereign bonds and inflation-linked bonds, respectively.

Now Pensions said the return figure was well above its ‘cash +3%’ benchmark and well above the return from holding a basic 60% equity/40% UK Gilt portfolio.

The provider is wholly owned by Danish pensions organization ATP and operates a single investment fund for all of its 300,000-plus members. It runs investments through the DKK641bn (€86bn) fund’s in-house investment team in Denmark.

It said it implemented a correlation control mechanism in the early part of the year to protect the portfolio when asset performance became overly correlated.

Using a bespoke diversification measure, where 0 signifies absolute correlation and 1 no correlation, the manager adjusts its portfolio to stop unexpectedly correlated assets from bringing down overall performance.

When the measure falls below 0.45, it immediately re-distributes poorly performing assets to the top-performing classes, and it does not shift back to tactical holding levels until the measure rises above 0.5.

It used the mechanism six times up until the end of June, which chief executive, Morten Nilsson, described as more frequent than expected. “It has been a funny 12 months, with very atypical returns,” he told IPE.

“It is still not a healthy world, and the correlation control usage has been more frequent than you would expect in a normal environment.” The manager also implemented portfolio risk controls, which automatically de-risk investments in periods of falling performance.

Now Pensions said, for every 2% drop in overall fund value over a three-month period, the investment strategy will de-risk by 20%. As a result, a sudden 10% fall in value will see the entire fund de-risked and moved into cash and cash equivalents.

Nilsson said the single investment fund, unique in the UK, allowed the pensions manager to implement such mechanisms into its investment strategies.

“The new investment structures put in place are very difficult to do on an individual basis,” he said. “You can operate it across a single fund, but if you offer fund choices, it is difficult to get members to diversify the portfolio and manage risk efficiently, as there are not individual tools available.”

In July, the UK master trust announced it was overhauling its at-retirement investment strategy and would shift member assets into cash, as it expected members to use changes to legislation and withdraw pots entirely in cash. However, Nilsson said Now would evaluate its strategy as account sizes continued to grow and further innovations in at-retirement strategies were brought to market.

© 2014 IPE.com. 

Murphy to run Great-West retirement business

Posted on September 11, 2014 by -

Edmund F. Murphy III has been named president of the combined retirement organization of Great-West Financial, which was formed when Great-West merged its Putnam Investments’ retirement business and the recently acquired large-plan recordkeeping business of J.P. Morgan Retirement Plan Services.  

Murphy, age 52, will be based in Denver and report to Robert L. Reynolds, president and CEO of Great-West Financial. Murphy and Reynolds were colleagues at Fidelity Investments, and then at Putnam.

Edward Murphy III, previously the head of defined contribution at Putnam, will lead the second largest provider in the U.S. defined contribution market with nearly seven million participants and more than $400 billion in retirement plan assets. Great-West Financial serves small, mid and large-sized corporate 401(k) clients, government 457 plans and non-profit 403(b) entities, as well as private label recordkeeping clients.

The following executives will report directly to Murphy:

  • Charlie Nelson – Core, Government, and FASCore Institutional Markets
  • David Musto – Large, Mega and 403(b) Markets
  • Carol Waddell – Rollover
  • W. Van Harlow – Great-West Financial Institute and Strategic Solutions
  • Stephen Jenks – Marketing

© 2014 RIJ Publishing LLC. All rights reserved.

QLACs Take Flight, But Will They Soar?

Posted on September 3, 2014 by -

Providers of deferred income annuities (DIAs) expect a modest bump in sales from the Treasury Department’s new rule on Qualified Longevity Annuity Contracts, but executives agree that there’s a lot of work to be done in communicating the changes to distributors and the public.

In early July, Treasury announced that retirees could delay distributions from a QLAC—including the required minimum distributions that ordinarily must be taken at age 70½—until age 85. A QLAC is a DIA purchased with the pre-tax money in a retirement plan or IRA.  The maximum premium for a QLAC is $125,000 (or 25% of the purchaser’s pre-tax retirement savings, if less).

As more baby boomers begin to plan for retirement, insurers expect increasing demand for DIAs. The QLAC, by making it easier for people to buy long-dated DIAs with qualified money, should expand the DIA market. “This was a nice endorsement from the government. I think it’s good for all providers of income annuities,” said Ross Goldstein, managing director at New York Life, the first to market a DIA in 2011 and the leading issuer of them. DIAs now account for 25-30% of the insurer’s total income annuity sales, he said.

Removing a key barrier

But how big an impact will QLACs have on sales? That’s hard to say. Insurers feel hopeful, and distributors are getting lots of requests for information about QLACs from advisers and producers. A portion of the trillions of dollars currently held in rollover IRAs could well find its way into these products. On the other hand, the cap on premiums could limit their use.  

Client behavior has suggested to New York Life that there’s a demand for QLACs among near-retirees. “Since [the introduction of [GFIA, nearly 30% of policy owners who invested in [it] using qualified savings elected an income start date between the age of 70 and 70½,” New York Life’s Drew Lawton, an executive vice president of retirement income, wrote in a comment letter to Treasury. “This information indicates that extending the income start date beyond age of 70½ would be a helpful option for many retirees and that the RMD rules are a key barrier.”

Principal Financial, which introduced a DIA in 2013, reported that DIA sales represent a little over 10% of all its retail income annuity sales and anticipated this percentage to grow. “Since the Treasury’s announcement, we have received multiple inquiries from our distributors asking when we will have a QLAC solution available. We believe the new regulations are a positive move for the industry,” said Sara Wiener, an assistant vice president at Principal Financial Group. But because QLAC limits—the lesser of $125,000 or 25% of qualified savings—are somewhat low, Weiner said, it is unclear how much of a sales increase to expect. 

One distributor had similar concerns. At Gradient Insurance Brokerage Inc., in Topeka, Kansas, vice president of marketing Jeff Quick has been receiving lots of inquiries about QLACs from the firm’s affiliated advisors. But, like Wiener, Quick thinks the QLAC limits are too low. If the limits were higher, he said, then high net worth clients might readily use a QLAC to postpone RMDs and the tax bills that come with them. 

Quick, who recently co-authored the white paper, “Why QLACs May Not Matter,” is somewhat skeptical of them. “The advisor will most likely use it as a marketing tool. It’s a great way to get in front of clients and talk to them about reducing RMDs [required minimum distributions]. These will be mostly high net worth individuals,” he told RIJ.  

“People with $300,000 to $400,000 in qualified money aren’t going to buy QLACs that start at age 80. They’ll have to use that money to provide income between the ages of 71 and 80, when they need it most,” he added. High net worth clients might use QLACs to defer taxable RMDs until 85, so that more of their qualified money can grow tax-deferred for much longer, thus producing a larger legacy for their children. The $125,000 cap on QLAC premiums limits the value of that strategy, however.

Wiener believes that some clients will occupy a middle ground, where QLACs can be used for both tax relief and longevity risk protection. “There are people who do not want to receive required minimum distributions at age 70½,” she said. “For those who have access to other assets, the new regulations allow them to defer receiving income from a portion of their qualified assets to a later date when those dollars may be most needed.”

Funded by rollover IRAs

First Investors Life introduced its first deferred income annuity, the Single Pay Longevity Annuity, in February of this year. “We are very pleased with this product and its recent success, however, we welcomed the recent announcement by the Treasury Department concerning QLACs,” said Carol Springsteen, president of First Investors Life. “The Treasury Department, with this ruling, expands the appeal of this type of product.”

First Investors Life’s deferred income annuity is a small but growing component of the company’s overall suite of decumulation products, she said. “Current sales have exceeded our forecasts by more than double, and the product is currently outpacing our immediate annuity sales. We expect sales to grow as customers become more familiar with their benefits and features,” said Springsteen.

The increase in sales will depend upon the specific market, she added. “For example, we anticipate more rapid adoption in the IRA market, at least initially, than the 401(k) market, due to the portability issues raised in the 401(k) world. However, overall, we expect the increase to gain momentum as clients get more comfortable with the product concept and the remaining issues get clarified.”

In terms of how First Investors Life plans to respond, “We will be endorsing our current deferred income annuity contract to facilitate a QLAC version,” said Springsteen. “We also plan to endorse our new Flexible Pay Longevity Annuity product to be a QLAC as well. We believe that since we are already selling longevity annuities it gives us a head start in developing a QLAC version of the product.”

First Investors executives believe that clients are coming to better understand deferred income annuities in general, and QLACs in particular, and the potential role they can play in ensuring a secure retirement. “The speed of acceptance really depends on the specific market as there are many options: IRAs, 403(b)/457s, and 401(k)s,” said Springsteen.

“Each is a unique market with its own adoption challenges that are just beginning to be understood. We believe the IRA market will be the most accessible market first, with the 403(b) and 401(k) markets having higher hurdles and more complex adoption issues. But long term, there is a place for these products in each of the markets noted.”

Interest in QLACs is growing at the retail level, according to advisor and DIA enthusiast Joseph Signorella, CFP. (He designed the official-looking QLAC logo that appears with this article.) “I get two detailed quote requests a day for QLACs,” Signorella, who is the host of the website, www.qlacs.net, told RIJ. “It is frustrating for me to call the sales desks of the insurance carriers and find that the desk reps don’t know about the QLAC rules or when it will be available to sell. They say that we are looking at Q1 2015 at the earliest.

“The QLAC does give flexibility to IRA holders on when to turn on income,” he added. “About a third of my QLAC quote requests are for amounts under the $125,000 limit, and from people under age 85 who are not high net worth. Many of my QLAC quote requests are from people who are still working late in their 60s and don’t want to take RMD on their IRAs any time soon. QLACs give the middle class an option to defer RMDs while also addressing their longevity risk. It’s a win-win for the client. That’s probably what the Treasury Department wanted.”

Employer-sponsored retirement plans are another potential distribution channel for QLACs. Phil Michalowski, vice president, retirement income, at MassMutual, said the firm is considering launching new options in light of the growing interest in DIAs. “Currently, in addition to deferred income annuities within IRAs, lifetime income is an option available through MassMutual’s defined contribution plans,” he said. “This offering enables our retirement plan participants to turn a portion of their savings into guaranteed income, depending upon their needs.  And as a result of the newly introduced regulations, we are actively evaluating how best to make additional options available.”

Role of communication stressed

Few consumers are aware of the new Treasury rule on QLACs, and distributors have lots of questions about it. So communicating the new rule is now a priority for issuers. Some firms are further along in the process than others.

“We have provided our distributors a summary and talking points regarding the new regulations,” said Weiner at Principal Financial. “As we work through the specifics, we will provide more information on the details and timing of providing a QLAC solution.”

First Investors Life currently distributes its longevity annuity, and all its products, primarily through its affiliated broker/dealer, First Investors Corporation. “We communicate information on DIAs and QLACs to these representatives via in-person meetings, webinars, and conference calls,” said Springsteen. “These representatives then review the product and its benefits with their clients. Representatives review each client’s own unique financial situation, determining, on a case by case basis, what product works best for that particular situation.”

For Lincoln Financial Group: “We will be working closely with our distribution partners as we solidify timeframes for the availability of offering QLAC status on our deferred income annuity,” said Brian Wilson, assistant vice president of fixed annuity product development.

New York Life’s marketing reps, however, are not at the communication stage yet. “There’s a lot that goes into new regulations,” said Goldstein. “Once you go past the headlines, there’s a lot to do. You have to compare regulations to contracts and determine what steps need to be taken. There’s also updating the system and everything in the back end. We don’t have a timeframe in place. It will be awhile.”

Treasury’s new rule also took awhile; it was more than two years in the making. The Treasury Department solicited comments from about 50 insurance companies, nonprofit groups and other organizations. Some were more involved in the process than others.

Treasury minimally engaged Principal Financial in the drafting of the new regulations, said Wiener. “However, we are pleased the new regulations allow a Return of Premium Death Benefit provision. One of the complaints surrounding DIA products is that there is no death benefit provided upon the owner’s death prior to the income start date. The Principal’s DIA product, along with many other products in the industry, returns the premium upon death, therefore negating this public concern,” she said.

The Treasury Department did not ask for First Investors Life’s input when drafting the new rule, but they were actively working with its outside tax counsel in obtaining feedback to craft an approach, said Springsteen.

There was a lot of back and forth and it took a few years to get here, but in the end, is the new rule truly responsive to the markets’ needs? Executives who spoke to RIJ seemed confident that the new rule represents a clear endorsement from the government. They believe that investors will respond positively.   

© 2014 RIJ Publishing LLC. 

DTCC Publishes first-half 2014 Annuity Flow Report

Posted on September 3, 2014 by -

First-half annuity inflows were 21% higher in 2014 compared with the same period in 2013. But a 22% increase in outflows offset that gain, resulting in a minimal increase in net cash flows for the period, according to the latest Annuity Market Activity Report from the Analytic Reporting for Annuities Service of the Insurance and Retirement Services unit of National Securities Clearing Corp., a unit of DTCC.

The report analyzed almost $104 billion in annuity transactions involving 120 insurance companies (44 parent/holding companies), 583 distributors, and 3,463 annuity products.

DTCC annuity cash flows bar chart 2014

Over the past 18 months, annuity inflows peaked in March and April 2014, climbing to $9.7 billion, or 34% more than in March 2013 and 20% more than in April 2014. At $2.7 billion, net flows in the second quarter of 2014 were 150% higher than the $1 billion recording in the first quarter of 2014. Increased sales of fixed annuity products are driving the numbers.  

Fixed annuity inflows and net flows in the first half of 2014 were up 130% and 150% compared to the same period in 2013.Variable annuity inflows increased 3% but net flows fell 74%.

More sales are funded by qualified than after-tax money. Net flows in non-qualified accounts remained in negative territory, while net flows in qualified accounts saw a dramatic increase in the first half of 2014 after declining from August to December 2013.

Good new is concentrated in a few distributors

Inflows and net flows were not spread evenly among distributors. Of 583 distributors in the study, only one unidentified distributor had stellar results (Net flows of about $3.8 billion on inflows of about $8.2 billion) and only three others had at least $500 million in net flows. Seven firms with significant inflows had negative net flows. The top ten distributors in terms of sales accounted for 66% of sales in the first half of this year, down from 68% in 2013.

Top ten carriers command the majority of inflows and net flows
Comparing first half 2014 with first half 2013, Prudential dropped from the third to seventh place, MetLife dropped to thirteenth from eighth and AXA fell to twelfth. Jackson National and Lincoln remained at the first and second spots, respectively, and Allianz and NY Life joined the top 10.

Despite the reordering, the top 10 carriers captured 78% of total inflows in the first half of both 2014 and 2013. H113 and H114. The top 10 carriers accounted for almost 90% of total positive net cash flows.

Top products continue to dominate inflows and net flows

The top ten products captured about a third of all inflows. Jackson National’s Perspective and Elite Access products continue to dominate the annuity product market in terms of inflows and net flows.

© 2014 RIJ Publishing LLC. All rights reserved.

RetirePreneur: Sheryl J. Moore

Posted on September 3, 2014 by -

What I do: I own two firms. The first, Moore Market Intelligence, assists with the product development of indexed annuities. The second is Wink, Inc., which provides competitive intelligence tools to life insurance and annuity product home offices, distributors, sales professionals, and consulting firms. My grandmother would say that I’m the president of an insurance company, but that’s not quite what I do. Sheryl Moore RetirePreneur text box

Where I came from: I started working at a small insurance company that was the industry’s top seller of indexed insurance products. I left to develop indexed products for a very large insurance company, but after about eight months I knew that what I needed to do was start my own company. I was 28 years old and a single mom of three babies. I knew it wasn’t going to be easy to start my own company, but I wanted to do whatever I could to educate the public on annuity products.

Why I focused on annuities: I bought my first annuity before I turned 25, over 13 years ago. There’s an interesting story behind that. While working at the smaller insurance company, I invested in the 401(k) plan. The company had a 4% match and there was a lot of pressure to participate. I didn’t understand where I should allocate my money. People at the company said to go to the plan website and just pick something. Well, I wound up losing a ton of money when the Dot-Com bubble burst.

I had no idea that you could lose money in a 401(k) plan and I complained to my boss, whom I trusted. I told him that I didn’t want to lose any more money. He suggested that I buy an indexed annuity. I didn’t know what it was, but when he explained it to me, I thought it sounded awesome. The company we worked for was the largest indexed annuity provider in the country. That made me angry. It didn’t dawn on them to educate their employees so that they could make better investment choices based on their risk tolerance. This motivated me to start my company. I wanted to help people make informed decisions. Now, I think of myself as an indexed annuity cheerleader. I own four annuities.

Who my clients are: We’re paid by insurance professionals: the people who work for home offices, broker-dealers, and banks; by marketing representatives and registered reps. We don’t make money from the advocacy work we do for customers. I’d say that 80% of what we do we’re not paid for. Every day we provide advocacy work and serve as a fact-checking agency for annuity issuers. We work with Congress on legislation that impacts life insurance and annuity issues. We also have educational videos to help people like “Joe the Plumber” understand how annuities work. We don’t endorse any firm or product.

Where I get my entrepreneurial spirit: I’ve always been very hardheaded and driven to change things when they’re not right. I don’t find myself to be a particularly smart business owner. I’m just good at what I know and I put a lot of work into the businesses.

Why I’m committed to corporate giving: We’ve been very active in giving back to our community. We support a number of nonprofits including The March of Dimes, Shriners Hospitals for Children, American Red Cross, Big Brothers Big Sisters, and others. In any given year, up to 40% of our revenues go to charity. We believe in paying-it-forward. This belief has only been strengthened by the death of my son. He was 16 years old when he passed, almost a year ago. He was born with birth defects and health problems and identified himself as gay. As a result, he was the target of bullying and he committed suicide in response to the teasing. The past year was the hardest of my life. But it has only strengthened my commitment to give back.  

My retirement philosophy: I hope that because I started saving early for my retirement, I’ll be able to live comfortably without having to worry about money. But there’s not a snowball’s chance in hell that I’ll ever stop working. 

© 2015 RIJ Publishing LLC. All rights reserved.

CBO predicts 3.8% fed funds rate by 2019

Posted on September 3, 2014 by -

Higher interest rates are evidently on their way—but not soon.

In a blog post this week, the Congressional Budget Office predicts that over the next five years, the interest rate on three-month Treasury bills will rise to 3.5% from 0.1% and the rate on 10-year Treasury notes will rise from to 4.7% from 2.8%. The CBO projects both rates to remain at about those levels through 2024.

After 2014, the projected three-month Treasury rate is a bit below the projected federal funds rate—the interest rate on overnight lending among banks, which is adjusted by the central bank as one of its principal tools for conducting monetary policy—which rises to 3.8% by 2019 and remains there through 2024.

Continuing slack in the U.S. labor market leads the CBO to believe that monetary support for the economy will continue for the next few years and that inflation will stay below the Federal Reserve’s goal.

CBO Projections of 10-year T rate 9/2014

CBO projects that the federal funds rate will remain near zero until the second half of 2015 and then “rise considerably.” The three-month Treasury bill rate is projected to increase in a similar fashion. Those projections are broadly consistent with expectations for short-term interest rates as indicated by prices in financial markets.

The 10-year Treasury rate began rising from very low levels in 2012 and is currently close to 2.4%, still low by historical standards. Investors’ expectations of an improving economy, the rise in short-term interest rates, and an end to the Fed’s purchases of long-term Treasuries and mortgage-backed securities will push that rate up over time, CBO anticipates.

The projected increase in market interest rates would affect the government’s borrowing costs. CBO projects that, under current law, the average interest rate on debt held by the public—calculated as net interest divided by debt held by the public—will more than double, to 3.9% in 2024 from 1.8% this year.

© 2014 RIJ Publishing LLC. All rights reserved.

Do ETFs Increase Stock Volatility?

Posted on September 3, 2014 by -

Money has flooded into exchange-traded funds (ETFs) over the past decade, but there’s been little analysis of whether or how this development may affect the performance of securities markets.

In a new paper, “Do ETFs Increase Volatility?” (NBER Working Paper No. 20071), authors Itzhak Ben-David, Francesco Franzoni, and Rabih Moussawi discover that the stocks that are held within such funds experience substantially higher intraday and daily volatility than stocks without substantial ETF holdings.

The authors suggest that the arbitrage between ETFs and their underlying securities adds a whole new layer of trading to stocks that are held within ETFs, and fosters the propagation of trading shocks that occur in the ETF market. As a result, the non-fundamental volatility of the underlying securities increases.

ETFs, which are low-cost index funds that can be traded like stocks (and change price throughout the trading day, instead of being priced once a day, like traditional mutual funds) were first introduced in the 1980s. They began to gain popularity in the 1990s.

Since the turn of the century, ETFs have experienced explosive growth. By 2012, there were more than 1,600 ETFs worldwide, and at the end of 2013 these funds had more than $2.5 trillion of assets under management. At one point in 2010, exchange-traded products accounted for 40% of all trading volume in U.S. securities markets.

To study how ETFs affect securities markets, the authors combine data from the Center for Research in Security Prices, Compustat, Bloomberg, OptionMetrics, and Form 13F filings. They focus on a sample of ETFs that hold U.S. stocks and that were listed on U.S. exchanges over the period 2000 to 2012.

The researchers explore the effects of ETF ownership on volatility by examining variations in ETF ownership of different stocks, and variation in the divergence between the prices of ETFs and their associated baskets of underlying securities, as well as associated fund flows.

Exploiting the fact that ETF ownership of a stock changes if that stock switches between being included in the Russell 2000 and Russell 1000 indexes, they found that a one-standard-deviation increase in ETF ownership of a stock raises daily volatility and turnover by about 16%. Since much of the variation they study in ETF ownership of stocks is arguably independent of the inherent volatility of the stocks, the authors conclude that rising ETF ownership affects volatility.

The research suggests that the more the prices of ETFs and the prices of their underlying component securities diverge, and hence the greater the arbitrage opportunity, the greater the turnover and volatility of the stocks held in the ETF. The authors also find that increased stock volatility results from the flows into and out of ETFs. The price impact of ETF arbitrage appears to decay after a few days, which is consistent with claims that ETFs add noise to security prices.

© 2014 RIJ Publishing LLC. All rights reserved.

Nationwide’s ‘blue frame’ goes out the window

Posted on September 3, 2014 by -

Nationwide Mutual Insurance Company is replacing its “blue frame” brand mark—a mark whose meaning and logic escaped even Nationwide employees at times—with a refreshed version of its longstanding “N and Eagle” brand mark and will apply the new mark across all its businesses, the company said in a release. 

The company currently operates under multiple brand names, including Nationwide Insurance, Allied Insurance, Harleysville Insurance, Nationwide Financial, Scottsdale Insurance, Crestbrook Insurance and Veterinary Pet Insurance.

The change will begin this week and continue over the next 18 months. It will affect advertising assets, branding on and in company-owned real estate, digital platforms like Nationwide.com, sales collateral, agency signage and other communications channels.

“Customers in many areas aren’t aware of our strength, offerings and size because we feature so many brands that can appear to be unrelated,” said Nationwide CEO Steve Rasmussen, in a release. 

The updated version of the Nationwide N and Eagle brand mark “harkens back to the company’s heritage and the famous 50-year-old tag line, ‘Nationwide is on your side,’” the release said. The new logo is a freshed version of a logo that Nationwide adopted in 1955. According to a Nationwide spokesperson, it was replaced in 1999 with the blue picture frame, which was intended to “symbolize ease of access and customization,” thus inviting customers to picture themselves in the frame, much as they might buy Time magazine “Person of the Year” frames and put their own pictures in it.

On Sept. 4, Nationwide’s new NFL advertising, featuring Denver Broncos quarterback Peyton Manning, airs and will include the new brand mark. The company will also feature the refreshed brand mark on Dale Earnhardt Jr.’s No. 88 car at the Richmond International Raceway NASCAR Sprint Cup Series race on Sept. 6.

© 2014 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on September 3, 2014 by -

Hancock assumes top job at AIG, as expected

American International Group, Inc., announced that, in accordance with its succession plan, disclosed last June 10, Peter D. Hancock has assumed the role of president and Chief Executive Officer of AIG, and has joined AIG’s Board of Directors. He succeeds Robert H. Benmosche, who retired and now serves as an advisor to AIG.

Mr. Hancock, 56, joined AIG in 2010 and was named Chief Executive Officer of AIG Property Casualty in March 2011, when the division was reorganized into two major global groups: Commercial and Consumer. He had previously served as Executive Vice President, Finance, Risk, and Investments, AIG.

Before joining AIG, Hancock was vice chairman at KeyCorp. He spent 20 years at J.P. Morgan, where he established the Global Derivatives Group, ran the Global Fixed Income business and Global Credit portfolio, and served as the firm’s Chief Financial Officer and Chief Risk Officer.   

Hancock is a member of the International Advisory Board of BritishAmerican Business. He is a William Pitt Fellow of Pembroke College, Cambridge. Raised in Hong Kong, Hancock earned his bachelor’s degree from Oxford University. 

Plan Strategies introduces three new model portfolios for 401(k) plans

Plan Strategies, Inc. (PSI), a retirement plan investment advisor serving 401(k) plan sponsors, advisors and participants, has launched three new portfolio allocation offerings: the Allo(k)ation Plan, Allo(k)ation Plus and Tailored Solution.

The Allo(k)ation Plan offers five portfolio models, ranging from aggressive to conservative, corresponding to varying levels of risk tolerance, which participants determine by completing a questionnaire. The plan models are rebalanced and monitored quarterly.

The model portfolios offer at least ten broad asset classes and feature low-cost investment options from Vanguard, DFA and PIMCO, among others. PSI serves as an ERISA 2(38) Fiduciary on the Allo(k)ation Plan models, assuming fiduciary liability associated with the selection, monitoring and replacement of funds.

The Allo(k)ation Plus Plan offers the same models as Allo(k)ation with the addition of an individual core fund lineup. This allows flexibility for plan sponsors who would like to offer the simplicity of models for some participants and a diversified, low-cost fund menu for others.

PSI also offers the Tailored Solution for companies who want a more customized plan. PSI’s 401(k) investment advisor will work with plan sponsors to develop a list of investment options that aren’t in the standard retirement plan fund lineup. PSI can also create a unique Investment Policy Statement (IPS) that addresses the plan’s goals, selection criteria, investment philosophy and other elements specific to the plan. 

Great-West Financial completes purchase of J.P. Morgan’s retirement business

Great-West Financial has completed its acquisition of the J.P. Morgan Retirement Plan Services large-market recordkeeping business. The combined Great-West Financial retirement organization becomes the second largest provider in the U.S. defined contribution market with nearly seven million participants. It also record-keeps more than $400 billion in retirement plan assets. Terms of the transaction, which was originally announced in April, were not disclosed.

This development follows an announcement in March that the retirement business of Putnam Investments, which specializes in the large-plan corporate segment, is combining with Great-West Financial.

Great-West Financial now serves every segment of the employer-sponsored retirement plan market: small, mid and large-sized corporate 401(k) clients, government 457 plans and non-profit 403(b) entities as well as the private label recordkeeping business, Reynolds said in a release.

Great-West Financial expects to make a series of key organizational and leadership announcements related to the combined retirement organization, the release said.

OneAmerica completes purchase of City National Bank’s recordkeeping business

OneAmerica has completed the acquisition of City National Bank’s retirement services recordkeeping business. Business operations will remain in San Diego. Terms of the agreement, announced in June, were not disclosed.

The acquisition follows 13% year-over-year sales growth (as of midyear) by the retirement services division of the companies of OneAmerica and four consecutive years of record-breaking results for the enterprise. Combined, OneAmerica’s retirement services businesses now serve over 11,000 plans with more than 600,000 participants and hold more than $30 billion in defined contribution retirement assets under administration.

ING Group’s stake in Voya to drop to 32%

ING Group and a syndicate of underwriters have agreed to sell Voya Financial common stock in a public offering, according to a Voya release. Voya won’t be issuing or selling common stock, and won’t receive any proceeds from the offering. 

In connection with the public offering, however, Voya Financial has entered into a share repurchase agreement with ING Group pursuant to which Voya Financial will repurchase directly from ING Group shares of Voya Financial common stock for an aggregate purchase price of $300 million. 

Completion of the public offering and the direct share repurchase is estimated to reduce ING Group’s stake in Voya Financial from approximately 43% to approximately 32%.

The per-share purchase price to be paid by Voya Financial in the direct share repurchase will be equal to the per-share purchase price paid by the underwriters in the public offering. The direct share repurchase is subject to a number of conditions, including the successful completion of the public offering. Voya Financial expects to fund the direct share repurchase using cash on hand.

The total number of shares of Voya Financial common stock to be sold by ING Group, including both the underwritten public offering and shares repurchased by Voya Financial, is expected to equal 30,000,000 shares.

The underwriters for the offering may offer the shares for sale from time to time in one or more transactions on the NYSE, in the over-the-counter market, through negotiated transactions or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices.

Stuart Parker to succeed CEO Joe Robles at USAA

USAA’s Chief Operating Officer Stuart Parker has been named to succeed current CEO Joe Robles when he retires at the end of February 2015, USAA board chairman Gen. Lester Lyles, USAF (Ret.) announced this week. USAA Capital Corporation President Carl Liebert will succeed Parker as COO.     

Parker served as USAA’s chief financial officer from 2012 to 2014 before becoming COO in May 2014. From 2007 to 2012, he led USAA’s Property and Casualty Insurance Group (P&C). During that time, P&C net written premiums grew from $8.7 billion to $12.5 billion.

Parker joined USAA in 1998 after completing his MBA at St. Mary’s University and earning a Certified Financial Planner designation. He is a graduate of Georgia’s Valdosta State University and the Air Force ROTC program. He entered the EURO-NATO Joint Jet Pilot Training Program at Sheppard Air Force Base in Wichita Falls, Texas and became an instructor pilot flying T-38 aircraft. While at Sheppard, he also became a Wing Flight Examiner. Parker went on to graduate from aircraft commander school for the C-141 Starlifter and was stationed at Charleston, S.C. He flew the C-141 in combat missions during Operation Desert Shield/Desert Storm.

Effective immediately, USAA’s bank, investment, life and property and casualty companies, real estate company and member experience operations will report to Liebert. Before joining USAA in 2013, he served as CEO of 24 Hour Fitness from 2006 to 2013, where he oversaw strategy, operations and financial performance. Liebert is a former U.S. Navy officer, 27-year USAA member and, from 2011 to 2013, served on USAA’s Board of Directors. He graduated from the United States Naval Academy and obtained his MBA from Vanderbilt University, Owen Graduate School of Management.

Franklin Templeton will use LifeYield’s Social Security calculator 

LifeYield, LLC has agreed to develop a customized version of LifeYield’s Social Security Optimizer for Franklin Templeton Investments, which will make it available to financial advisors later this year. 

As Baby Boomers move into retirement, maximizing Social Security benefits has become increasingly important to investors and their advisors. LifeYield’s solution is comprehensive and easy for advisors to use with investors in helping to determine the optimal time to file for Social Security benefits, and it also provides suggested actionable guidance on how make the filing.

“This new tool will enhance the suite of resources we offer through our Income for What’s Next program,” said Michael Doshier, vice president of Retirement Marketing for Franklin Templeton Investments. 

TIAA-CREF to handle Swedish pension fund investments

The second Swedish National Pension Fund, known as AP2, has committed $750 million to the purchase of agriculture real estate in three countries and $265 million to the purchase of US real estate, according to the fund’s half-year report.

The commitments follow AP2’s 2013 decision to increase its investment in unlisted real estate from 10% to 15%.

The larger of the two commitments was made to US fund manager TIAA-CREF, with Australia, Brazil and the US targeted for investment. In 2011, AP2 invested $250 million with TIAA-CREF in a purpose-built venture, buying and managing agricultural assets and focusing primarily on grain production.

At the time, AP2 said it made the decision to invest in agricultural real estate to provide stable returns with low correlation to its existing investments.

The following year, AP2 and TIAA-CREF increased their commitments to the venture to $2 billion, with Canadian investors also joining the Global Agriculture company.

AP2’s second, smaller investment, meanwhile, is part of a joint venture with South Korean pension fund NPS and Tishman Speyer. In late 2012, AP2 bought a 41% stake in property company US Office Holdings, jointly owned by NPS and Tishman Speyer.

© 2014 RIJ Publishing LLC. All rights reserved.

 

 

 

Nominal SPIAs Beat Nominal DIAs—But Perhaps Not for Long

Posted on August 28, 2014 by -

Retirement income planning is difficult and fascinating because it defies easy solutions. Although all retirees seem to want downside protection and upside potential, the right strategy for each particular retiree inevitably varies according to individual circumstances and preferences, not to mention changing market conditions.

Nonetheless, retirement researchers and academics have logged a lot of scuperomputer time trying to create useful planning heuristics—aka rules of thumb—for retirees and their advisers. One of the latest efforts was published by Morningstar’s David Blanchett, CFP, in the August issue of  Journal of Financial Planning.

The article documents Blanchett’s comparison of nominal and inflation-adjusted single premium immediate annuities (SPIAs), which produce income within about a year of purchase, with deferred income annuities (DIAs), which produce income several or many years after purchase.

“The objective of this paper is not to determine whether or not a retiree should annuitize some portion of wealth, but rather, to provide insight as to whether a DIA or SPIA is the better choice,” Blanchett wrote. 

Blanchett’s artticle is timely. Only two months ago, the U.S. Treasury Department expanded the potential market for DIAs by issuing new guidelines related to required minimum distributions. Under the new rule, people who buy DIAs with qualified (tax-deferred) money may delay the income start date until age 85. During the deferral period, they do not have to take the required minimum distributions (RMDs) that normally starting at age 70½. This type of DIA is known officially as a Qualified Longevity Annuity Contract. It may cost no more than $125,000 (or 25% of a person’s tax-deferred savings, whichever is less).

Blanchett considered several variations of SPIAs and DIAs (life-only, life with period certain, nominal, real) and simulated their performance under eight different sets of assumptions or retiree preferences. These included a retiree’s initial withdrawal rate, equity allocation, percentage of income need covered by Social Security, nominal returns, inflation rates, life expectancy, aversion to experiencing a financial shortfall, and desire to leave money to children.  

Blanchett found that nominal SPIAs with a 20-year period certain (age 65 to 85) ranked the highest, with the ranking for each type of SPIA or DIA based on its performance in each of 6,561 hypothetical scenarios. In defining the criteria, Blanchett wrote, “The key objective of this preference model is to weigh the potential benefits of a given annuity type by way of a decreased likelihood of being destitute later in retirement, compared to the potential loss of wealth for the retiree from the purchase of that annuity.” 

To people familiar with annuities, the victory by the nominal SPIA with 20 years certain may not be surprising. This type of annuity satisfies income for life without the risk of losing principal; the period certain guarantees that all or almost all of the premium will be returned to the client or the client’s beneficiaries. When TIAA-CREF participants annuitize all or part of their plan savings, for instance, this is the type of income annuity they often choose.

The study also showed that this type of SPIA performed especially well, relative to SPIAs with other contract options, for clients with low equity allocations and low mortality risk, in periods when nominal returns and inflation were low, and when bequest risk was low. (People with short life expectancies and/or big appetites for market risk obviously aren’t good candidates for SPIAs.)

The nominal DIA (without a period certain and without a cash refund of unpaid premium) performed almost as well as the SPIA. “If DIA rates were five percent higher, they would have been the most attractive annuity type, on average, in this study,” Blanchett wrote. In his hypothetical scenario, the DIAs were purchased at age 65 and produced income at age 85.

“DIAs may also represent a more palatable hedge against longevity risk for retirees than traditional annuities, because they are considerably cheaper and therefore provide significantly more liquidity to retirees.” He expects average DIA payout rates to rise as the DIA market matures and becomes more competitive.

© 2014 RIJ Publishing LLC. All rights reserved. 

‘Changing of the Guard’ Continues in VA Sales

Posted on August 27, 2014 by -

New sales of variable annuities rose 6.3% in the second quarter of 2014, to $35.1 billion vs. $33.0 billion in the first quarter of 2014. The quarter-to-quarter bump up is no surprise, given that second quarter VA sales generally increase over first quarter, as they have for the last ten years. Compared to last year’s second quarter sales of $36.9 billion, this quarter’s sales were down 4.6%. Ignoring seasonality, this quarter’s sales were right at the average of the last eight quarters.

Jackson National garnered an 18.1% market share in the second quarter, down slightly from last quarter but almost double the level of each of the next three carriers individually, who are all closely bunched from 9.0% to 9.3% market share. Continuing a trend, past “big three” VA issuers MetLife and Prudential are managing sales at levels well below prior years. For example, MetLife is selling one-third of what it was two years ago. Prudential is selling half of what it did in the first two quarters of 2012. The biggest gainers during that period include Transamerica, SunAmerica, and Lincoln.

Net asset flows landed in positive territory, with a $1.61 billion positive inflow. Net flows have remained basically flat for the last six quarters, with continued hits due to drawdowns of aged 403(b) business, outflows from companies that have exited the industry and an uptick in tactical offers where carriers trade cash payments for reductions in liability.

Assets under management increased to a record $1.93 billion, up 2.7% compared with last quarter, and up more than 12.6% compared with second quarter 2013. Note once again that the net flow survey was discontinued at the beginning of this year (though the sales survey continues). We have moved to a calculated estimate derived from all reported assets in VA products. Using calculated estimates aligns the VA methodology with others like mutual funds and ETFs. It also ensures a consistent methodology is applied across all VA companies, products, and subaccounts.

© 2014 Morningstar, Inc.

M&A speculation drove life/annuity stocks in 2Q2014

Posted on August 27, 2014 by -

Life/annuity (L/A) stocks rose 4.3% in the second quarter of 2014 versus a 4.7% rise in the S&P 500 stock index, according to a new report from A.M. Best. The gain followed a 2.5% decline in the first quarter of the year.

Seventeen of the 24 stocks tracked for the A.M. Best analysis rose in the quarter, eight of which increased by 5% or more. The best performers were Protective Life Corp., Symetra Financial Corp. and Principal Financial Group, Inc., rising 31.8%, 14.7% and 9.8%, respectively. Kansas City Life Insurance Co. and StanCorp Financial Group, Inc. were the weakest stocks, falling 5.6% and 4.2%, respectively, according to the report.  

A.M. Best attributed much of the quarterly gains for L/A stocks to the enthusiasm that merger and acquisition (M&A) activity injected in the sector following the $5.7 billion proposed acquisition of Protective Life by Dai-ichi Life Insurance Co., Ltd.

L/A stocks, which were roughly flat before the announcement on June 3, 2014, rose 4.1% in less than a month after the proposal was made public. In fact, 23 of the 24 companies A.M. Best is tracking saw their share prices rise through quarter-end after the announcement.

An acquisition of this size and magnitude is significant for the global L/A industry, as it confirms Japanese insurers are looking at international opportunities to grow in the face of a shrinking domestic population. Large-scale M&A deals of this type typically pique investors’ interest in a sector. 

© 2014 RIJ Publishing LLC. All rights reserved.

Debt service can crowd out savings: LIMRA

Posted on August 27, 2014 by -

American households in the 41-45 age group have an average of $158,887 in financial assets, while those in the 46-49 age group average $167,556, according to the LIMRA Secure Retirement Institute’s Fact Book on Retirement Income 2014.

LIMRA tracked the liabilities as well as the assets of these groups. Among the 41-45 age group:

  • 97% have a mortgage and an average mortgage debt of $166,921.
  • Beyond mortgage and credit card debt, 65% have on average $26,384 of other types of debt (car loans, student loans, personal loans, etc.).

Among ages 46-49:

  • 84% have a mortgage with an average mortgage debt of $209,342.
  • 71% have on average $50,654 of other debt, as defined above.

Advisors with clients in their 40s need to know what kind of debt load they are carrying, LIMRA said in a release.  If these key saving years are dedicated to servicing high debt, clients will lose a significant opportunity for long-term growth in their retirement accounts.

© 2014 RIJ Publishing LLC. All rights reserved.

Deloitte publishes annual DC benchmarking survey

Posted on August 27, 2014 by -

In 2013 and early 2014, Deloitte conducted an online DC plan survey of 401(k) and 403(b) plans, collecting data from 265 plan sponsors. The report on the survey provides an overview of the plan features, policies, objectives, and attitudes of the DC plan sponsors participating in the survey.  

There continued to be limited interest in in-plan annuities, with 6% of plans offering this option in 2013, up from 4% in 2012. (See chart from report at right.) Four percent of plans offered exchange-traded funds (ETFs), a two percentage-point increase from 2012. Ten percent of plan sponsors indicated they are looking into adding an accumulation annuity to their current plan with 12% looking into adding an annuity purchase option and/or annuity selection software for final plan distributions.  

Deloitte DC Survey Chart on Income 2014

The 2013–2014 survey revealed that only 54% believe employees are informed of plan features and investment options. Eighty-two percent said that their record keeper/plan administrator offers valuable tools to educate employees and 65% indicated that an employee education campaign would be highly utilized and valuable to employees.

With the economic recovery having taken hold and market performance stabilized, the percentage of plan sponsors who chose “uncertain economy/job market” as the key reason for lack of employee participation in the DC plan fell sharply to 14% in 2013 from 24% in 2012. Thirty-percent of respondents in 2013 cited “lack of awareness or understanding,” compared to 21% in 2012. Of those plan sponsors citing “other” as the primary reason (20%), the most common write-in responses related to prioritizing other financial goals and obligations ahead of retirement, and a perception by employees that they cannot afford to contribute.   

The 2013–2014 survey showed little change in average deferral percentages (ADP). For non-highly compensated employees (NHCEs), the median ADP was 5.2% (compared to 5.6% in 2012), while the median ADP for highly compensated employees (HCEs) was 6.9% (compared to 7.0% in 2012).

Fourteen percent of plan sponsors have different contribution limits for HCEs and NHCEs, while 50% have the same limits and 36% do not limit employee contributions other than the regulatory limits (compared to 34% in 2012). Four percent of organizations increased maximum contribution percentages for participants in the past year.   

In terms of core investment options, there are few surprises at the top of the list with DC plans:

  • 85% offer actively managed domestic equity
  • 81% offer general/core bond
  • 80% offer actively managed global/international equity
  • 77% offer stable value/Guaranteed Investment Contract (GIC)
  • 77% offer lifecycle funds (time based)
  • 73% offer passively managed domestic equity

Survey findings revealed some upward trends in options for a DC portfolio with 2013 results compared to 2012, with:

  • 37% offering real estate funds compared to 31%
  • 28% offering self-directed brokerage compared to 22% — this option is more common among plans with more than 10,000 employees at 44%
  • 26% offering lifestyle funds (risk based) compared to 23%
  • 14% offering socially responsible funds compared to 6% — this option is more common among plans with fewer than 1,000 employees at 30%
  • 14% offering custom/hybrid funds compared to 9%

Proprietary funds make up a high portion (76%-100%) of a fund lineup in 9% of plans, ramping down to a moderate portion of the lineup (26%-75%) in 33% of plans then dropping to a lower portion of the lineup (0%-25%) in 58% of plans. Surprisingly, there was no clear difference in proprietary fund usage based on plan size. Fund lineups were composed of more than 75% proprietary funds for 9% of plan sponsors with fewer than 5,000 employees and for 9% with more than 5,000 employees. 

The most common arrangement sponsors have for payment of administration and recordkeeping fees is through investment revenue with no additional fees, with 47% of respondents indicating this arrangement. The number of plan sponsors reporting this arrangement, however, continued to decline from 55% in 2011, to 51% in 2012, and to 47% in 2013.

From a plan size perspective, 57% of plans with under 5,000 employees pay no additional fees, while only 33% of plans with more than 5,000 employees use this arrangement. Approximately 30% of respondents report being charged a direct fee by their record keeper, a slight decrease from last year, but nearly equal to 2011 levels. Other fee arrangements, cited by 14% of plan sponsors, included combinations of per-participant and/or asset-based fees with revenue sharing.

Overall, most plan sponsors (71%) continue to use a single vendor to coordinate all services and funds with a bundled recordkeeping structure. Based on survey data, 403(b) plans are more likely to have a bundled recordkeeping structure at 88%. The story changes when looking at plan size. For the largest plans (more than 10,000 participants), only 57% utilize a single vendor. Just over half of survey respondents (54%) report vendor service agreements of three years or less.

A noteworthy decline in importance was seen in fee disclosure regulations from 73% in 2012 to 60% in 2013, likely attributable to the fact that the new requirements are fully implemented and have a year’s experience behind them. Similar to last year, eight out of 10 respondents (82%) characterized participant response to fee disclosures as neutral. On the employer side, approximately half of sponsors (55%) reported a neutral response.

Significant shifts were also recorded in 2013 with respect to the level of participant activity with their DC plans. Respondents reported the number of employees performing a significant level of activity jumped to 27% compared to 14% in 2012. This suggests that the level of interaction is growing for participants, possibly fueled by the ease-of-access via mobile devices as noted above.

© 2014 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on August 27, 2014 by -

New investment options for customers of Lincoln Retirement Plan Services

The Lincoln Director employer-sponsored retirement plan program has enhanced its Ibbotson Insight Series investment lineup, Lincoln Financial Group’s Retirement Plan Services business announced. Ibbotson can provide fiduciary services to plans that follow all or most of its fund recommendations.  

The Ibbotson Insight Series now offers three preset lineups and, for plans looking to select their own funds, more than twice as many investment options. The investment lineups address the individual investment preferences of participants based on an employer’s workforce demographics. The lineups can also include target date funds (TDFs) and Qualified Deferred Investment Alternative (QDIA) investment options.

“The new lineups are designed to provide small market plan sponsors and their advisors with more flexibility in both fund and lineup selection, help small market plan sponsors meet their fiduciary responsibilities, and offer their participant population a valuable retirement plan benefit,” Lincoln said in a release.

The three enhanced workforce fund lineups vary by complexity and investment preference and are distinguished by the number of investment options, percentage of equity options, number of alternative strategies and investment mandates. Workforce profiles are used to help plan sponsors and advisors determine the investment lineup that best matches their organization’s workforce characteristics, including financial literacy, investment experience, sponsor-driven education efforts, participant engagement, time horizon and investment preferences.

The types of investment approaches now available through the Lincoln Director program include:

  • “Workforce” – An option constructed of three investment lineups – Ibbotson Fundamental, Ibbotson Standard and Ibbotson Extended–that includes a predetermined set of investment options based on workforce profile characteristics, and is designed to meet the needs of varying employee populations while offering 3(21) or 3(38) fiduciary services for the plan sponsor.
  • “Choice” – An option that allows the plan sponsor and advisor to select investment options from predetermined asset categories defined by Ibbotson. This lineup closely models the Workforce lineup, but allows the plan sponsor additional flexibility to select specific funds while still receiving fiduciary services.
  • “Custom” – These lineups are available for plan sponsors who would like to select their own investment options from the full investment universe without any limitations. Ibbotson fiduciary services are not available with this lineup.

With the Workforce and Choice options, Ibbotson, a registered investment advisor and wholly owned subsidiary of Morningstar, Inc., can act as a 3(21) or 3(38) fiduciary in selecting and monitoring investment lineups.

Milligan retires from Ariel Holdings

Global Atlantic Financial Group Limited (Global Atlantic) has announced that Tom Milligan, Co-CEO of its Ariel Holdings Limited subsidiary, will retire upon the closing of the planned sale of Ariel Re companies to Banco BTG Pactual S.A. (BTG Pactual). Milligan has been with Global Atlantic for nine years, predating the company’s separation from Goldman Sachs in 2013. Tom Hulst, currently Co-CEO overseeing all underwriting and business operations, will remain in the role of CEO at the close of the transaction, which is currently pending regulatory approvals.

“When the sale of Ariel Re to BTG Pactual closes, the time will be right for me to step down,” Milligan said in a release. “Ariel has an outstanding team and track record and the business will be in great hands with Ariel Re leadership team and its new owners.” 

© 2014 RIJ Publishing LLC. All rights reserved.

 

Older, wealthier U.S. households grew more so in 2000s: Census

Posted on August 26, 2014 by -

Older, wealthier Americans—people who tend to have the most investments and the most home equity—grew significantly wealthier in real terms during the first decade of the 21st century, according to a new report from the U.S. Census Bureau.

The country as a whole got poorer. Median household net worth, or household wealth, an important barometer of economic well-being in the United States, declined by $5,046, or 6.8%, between 2000 and 2011, according to the Census Bureau. (All figures are in constant 2011 dollars.)

But some demographic segments gained wealth. For Americans ages 65 and older, the real median household net worth increased between 2000 and 2011, with the age 65-to-69 subgroup seeing the largest increase ($40,000 or 25.9%).  

Most of the gains in the age 65+ category went to those in the higher wealth quintiles. (One-fifth of the population is in each quintile). Median net worth decreased for those in the first quintile and showed no significant change for those in the second quintile. But net worth increased by $57,423 (19.9%) for the fourth quintile and by $158,398 (21.4%) for the highest quintile.

For in the 44-to-54 and the 54-to-64 age groups, real median wealth fell in every quintile from 2000 to 2011. There were clear declines for those in the bottom three quintiles of this age group and statistically insignificant declines in the top two quintiles. 

Twenty percent of Americans had little or no household wealth in 2011. All of those in the lowest wealth quintile—regardless of age—saw their median household wealth decline in the 2000s. The youngest members of this quintile (under age 35) saw their median wealth drop from to negative $22,646 from negative $11,971. Median wealth among those ages 34 and 44 fell to minus $14,700 from minus $2,683.

In percentage terms, the wealthiest African-Americans experienced the greatest relative gain in household wealth during the 2000s. The real median household wealth of blacks in the highest wealth quintile rose 62.8% in that period, with an absolute increase of $88,353. 

Net household wealth is the difference between household assets and liabilities. Assets include the value of homes and rental property, savings and investments inside and outside retirement plans, vehicles, and checking accounts. Liabilities include mortgage debt, vehicle loans, credit card debt, educational loans and medical debt not covered by insurance.

© 2014 RIJ Publishing LLC. All rights reserved.

This is your brain on money

Posted on August 26, 2014 by -

On October 16, 2014, public television stations will take a light-hearted but ambitious look at the topic of behavioral finance when they broadcast “Thinking Money: The Psychology Behind Our Best and Worst Financial Decisions.”    

The show “uses a mix of humor, on-the-street interviews and provocative insights from innovative thinkers to explore why we spend, save (or don’t), and how we think about money,” according to producers Rocket Media Group, the FINRA Investor Education Foundation and Maryland Public Television.

In the program, host/reporter Dave Coyne—no pun intended, apparently—travels with a video crew “from Wall Street to Main Street” to find out how “our brains — and the marketplace — maneuver to get us to spend money we shouldn’t.”  

Behavioral economists have found “We all have a natural desire to buy things even though our long-term futures depend on saving, not spending,” the show’s advance publicity said. “An unrealistic optimism about our future wealth — a bias towards overconfidence — combined with an illusion of invulnerability make us not just poor savers, but more susceptible to fraud and risky investments.”

The documentary shows how natural biases affect our ability to make complex, long-term decisions. “The rational brain simply rationalizes what the emotional brain has already decided to do,” says noted Stanford neuro-economist Dr. Baba Shiv. “The only long-term solution for this is to make saving more sexy . . . for the brain.”

“Thinking Money” will explore these aspects of behavioral finance: 

  • How Americans’ increasing financial fragility has led to a boom in “downmarket” and predatory lending. Payday loan stores now outnumber all the McDonald’s, Starbucks and Targets in the U.S. combined;
  • Why too many choices can be paralyzing when it comes to small and large decisions;
  • How having a good “nudge” can help you achieve your financial goals;
  • How “confirmation bias,” our tendency to focus on evidence that confirms our beliefs and ignore evidence that doesn’t, impacts our financial decisions;
  • How employers use “choice architecture” and “the power of defaults” to encourage saving.

Rocket Media Group, LLC, is a Washington, DC-area Emmy Award-winning production company. It teamed with former Dateline NBC producer John Greco to write and produce the documentary. The FINRA Investor Education Foundation “supports innovative research and educational projects that give underserved Americans the knowledge, skills and tools necessary for financial success throughout life.” Maryland Public Television is a nonprofit, state-licensed public television network and member of the Public Broadcasting Service (PBS).

© 2014 RIJ Publishing LLC. All rights reserved.

FIA sales could reach $50 bn in 2014: LIMRA

Posted on August 20, 2014 by -

Fixed indexed annuity sales reached a record $13 billion in the second quarter of 2014, according to the LIMRA Secure Retirement Research Institute. Total U.S. annuity sales reached $61.4 billion in the quarter, up 8% over the same period in 2013. Total U.S. annuity sales were up 10% for the first half of the year.

Jackson National was again the overall annuities leader, with $13.5 billion in sales in the second quarter, of which $12.7 billion was in variable annuity sales. The AIG Companies were next with $6.2 billion in variable annuity sales and $9.3 billion overall.  

“This is only the second time we have seen quarterly sales over $60 billion since the third quarter of 2011,” said Todd Giesing senior analyst, LIMRA Secure Retirement Institute Annuity Research. “Despite declining interest rates during the first six months of this year, fixed annuity sales continue to drive overall annuity sales growth.”

Total fixed annuity sales were $25.2 billion in the second quarter, up 34% versus the prior year. Year-to-date (YTD), fixed annuity sales equaled $49.1 billion, a 39% increase from 2013.

Annuity Sales Estimate 2Q 2014 LIMRA

Sales of fixed rate deferred annuities (Book Value and MVA) grew 30% in the second quarter, compared with prior year. Fixed-rate deferred annuities reached $15.8 billion in the first half of the year, a 42% increase compared to last year.

Index annuity sales grew 40% in the second quarter, setting a new quarterly record of $13 billion.  This is the first time that quarterly index annuity sales have accounted for more than 50% of total fixed annuity sales, with second quarter sales accounting for 52% of total fixed sales. YTD, indexed annuity sales grew 41%, totaling $24.3 billion. 

“With a record quarter of index annuity sales driven by product innovation and expansion of distribution, sales may be pushing $50 billion for 2014. There is nothing to indicate that sales will significantly drop in the near future,” Giesing said.

Indexed annuity guaranteed living benefits (GLBs) election rates continue to be strong, with 72% electing a GLB when available (four percentage points higher than in the first quarter).

Deferred income annuity (DIA) sales reached $710 million in the second quarter, 33% higher than prior year.  In the first six months of 2014, DIA sales jumped 43%, totaling $1.3 billion.  The top three writers continue to drive most of the DIA sales, accounting for 85% of sales.

Single premium immediate annuity sales were up 37% in the second quarter to reach a record-matching $2.6 billion. LIMRA Secure Retirement Institute research shows that this is industry-wide growth — not coming from just one carrier.

Variable annuity sales fell five percent in the second quarter, totaling $36.2 billion.  YTD, VAs reached $70.4 billion, a four percent drop from 2013.  Many of the top VA sellers are focusing on diversification of their VA GLB business, LIMRA Secure Retirement Institute researchers said. In the second quarter, a few of the top companies entered the market with accumulation products without a GLB rider. Election rates for GLB riders, when available, were 78% in the second quarter of 2014.

LIMRA Secure Retirement Institute’s second quarter U.S. Individual Annuities Sales Survey represents data from 95% of the market.

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