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Deniers of retirement savings crisis strike again

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

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

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

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

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

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

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’

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

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

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

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

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

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

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

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.

Cerulli publishes pointers on capturing IRA rollovers

A new research report from Cerulli Associates confirms most of the rules of thumb about the IRA rollover market that were shared by presenters at the “Winning in IRA Rollovers” conference in Boston this week. (See today’s RIJ feature on that conference, above.)

The new report, the Evolution of the Retirement Investor 2014: Understanding 401(k) Participant Behavior and Trends in IRAs, Rollovers, and Retirement Income,is designed to help firms develop strategies to capturing more retirement assets.

Like the presenters at the conference, Cerulli noted in a press release that about two-thirds of rollovers go to firms with which the client has an existing relationships and that financial advisors and recordkeepers always need to ask new prospects if they have old 401(k) plans that are eligible for rollover.   

IRA assets reached $6.5 trillion at the end of 2013 and rollover contributions were nearly $324 billion, Cerulli said, adding that both figures will grow over the next five years as Baby Boomer retire. Those rollovers were less than a third of the amount that was eligible for rollover, Cerulli observed.

In a comment that seemed to echo the concerns of regulators, Cerulli noted, “Assets had a tendency to move to places that had the primary influencers’ best interests in mind as well, which may not be the same as the clients’.”   

Other observations from the report include:

  • Rollovers are grabbing most of the attention, but about $720 billion of the $1.1 trillion in defined contribution assets that were eligible for distribution in 2013 remained in employer-sponsored plans. It represents potential rollover business.
  • About 28% of participants surveyed cited their 401(k) provider as their primary source of retirement advice.
  • If a firm does not have any existing relationship with a client, it will be challenging to capture that rollover.
  • It may be easier and more profitable for recordkeepers to acquire rollovers than to focus solely on increasing contribution rates.
  • Most of this money in plans will eventually move to an IRA.
  • Rising healthcare costs and debt service of participants will make it a challenge for recordkeepers to increase enrollment and contribution rates.
  • Industry attempts to market retirement income to those in their late fifties are often dismissed because they do not consider themselves pre-retirees.
  • Financial services firms are in the difficult position of having to offer personal financial services to a large number of participants who may suddenly face a job loss or health issue.  

© 2014 RIJ Publishing LLC. All rights reserved.

Many women minimize their Social Security checks: Nationwide

More than four in five women take their Social Security benefits before their full retirement age (FRA), which provides immediate income but locks in a lower payment for life, according a survey by Nationwide Retirement Institute. Only 15% of women waited until their FRA and only three percent took it later.

“Some [women] mistakenly believe taking it earlier will result in more money over the long run, while others may have been forced into retirement early and need the money,” said Shawn Britt, director of advanced consulting for Nationwide.

Women who took their benefit early reported an average monthly payment of $1,025. Those who collected it at their full retirement age had an average $1,270 monthly payment. Only ten of the 471 women surveyed by Harris Poll on behalf of Nationwide delayed collecting their benefit until 70. They reported an average monthly payment of $1,630, or 59% more than if they had taken it early.

“Many people are not aware of the different options available for taking Social Security income. For example, married women might think about having their husband file and suspend, which will still allow the wife to collect spousal benefits,” Britt said. “The husband will then wait to age 70 to take his. That way, if he dies, she ends up with a much higher payment as a widow.”

“Too many spouses think they can’t do this because they still work. That’s a huge mistake and you can’t go back to correct it later and get that money back,” she added.

Filing early also makes sense if you’re in poor health and don’t expect to live long. But more often than not, the decision is tied to an incorrect expectation about longevity or fear of Social Security running out of money.

“Many people file early because they think ‘Once I am in the system they can’t kick me out.’” Britt said. “Others miscalculate how long they have until they break even. Many think it’s 85, but for many people it is around 80.” Women’s average life expectancy at age 65 is 86, with one in four 65-year-old women reaching 92, Nationwide said.  

In the survey of 471 women aged 50 or older who were either already retired or plan to retire in the next 10 years, only 29% said life was better than before retirement and 28% said life is worse. For those who said it’s worse, most said it’s due to lack of income in retirement and higher-than-expected expenses.

Since Social Security benefits are based on average earnings over the best 35 years of a career, women are often penalized for leaving the workforce to raise children or care for a parent.

“Some women have to retire early to care for an elderly parent who has no long-term care coverage,” Britt said. “Women caregivers are two-and-a-half times more likely to end up in poverty and five times more likely to depend primarily on Social Security for income.

“Having children and being a caregiver can cost women $565,000 in lifetime earnings; plus $25,400 in Social Security benefits and $67,000 in pension benefits,” she added. More than 2.6 million women over the age of 65 lived in poverty in 2012, according to an analysis from the National Women’s Law Center.

Women not working with a financial advisor are nearly three times as likely than those who do to say their Social Security payment was less or much less than expected (37% vs. 13%), the surveyed showed. Yet, only 33% of women work with a financial advisor.

The 2014 Social Security Study was conducted online within the U.S. by Harris Poll on behalf of Nationwide Financial between Feb. 27 and March 4, 2014. The respondents comprised a representative sample of 471 U.S. women aged 50 or older who are either retired or plan to retire in the next 10 years. Results were weighted to the U.S. General Online Population of adults by race/ethnicity, education and region.

© 2014 RIJ Publishing LLC. All rights reserved. 

Don’t fall in love with “Inge”

Nuance Communications, Inc., of Burlington, Mass., announced that ING Netherlands will use Nuance’s voice and artificial intelligence (AI) technologies to power “Inge,” the new voice feature of ING Netherlands’ mobile banking app.

(Anyone who has seen the set-in-the-near-future movie, “Her,” starring Joaquin Phoenix and the voice of Scarlett Johansen, will recall that it portrayed the romance between a man and the voice of the operating system inside his smartphone.)

Using Inge, ING customers will be able to speak via a “human-like conversational interface” to control the mobile banking app. ING Netherlands is the first bank to offer such a voice-controlled mobile app in Europe, with a release this month.

Inge uses the capabilities in Nuance Nina, a platform that enables intelligent natural language understanding (NLU) and text-to-speech interfaces for mobile apps. ING Netherlands mobile customers will be able to check their balance or enter an account number by voice instead of tapping through multiple menus and screens.   

Following the initial release, ING will update the app to also include Nuance voice biometrics to allow users to securely access the app through the unique sound of their voice. Nuance secure voice biometrics technologies replace PINs, making the mobile banking experience completely hands-free.

© 2014 RIJ Publishing LLC. All rights reserved.

Oregon gets closer to sponsoring a statewide retirement plan

Oregon’s Retirement Security Task Force issued a report this week that recommends a structure for a state-sponsored retirement plan, to be made available to Oregonians who don’t have access to a retirement account through their employer. Employees will be automatically enrolled but can “opt-out” if they choose.

The savings program recommended by the Task Force includes the following key elements:

  • The program will be easy for employers to implement — employee savings contributions will be automatically deducted from existing payroll and employers will not be required to make a contribution.
  • The plan will be portable for employees, following them from job to job throughout their career.
  • As directed by the legislature, the plan will not incur any liability for the state.

“Treasurer Wheeler and the Task Force have conducted thorough analysis of the barriers Oregonians face in saving for retirement and made thoughtful recommendations for a path forward,” said Edward Brewington, AARP Oregon executive council member. “The next step is for the legislature to settle on details and create a savings program. This needs to get done in the 2015 legislative session – working Oregonians can’t wait any longer to save for their future.” 

Save Today, Secure Tomorrow is a broad coalition of organizations, including AARP Oregon, Family Forward Oregon, Main Street Alliance of Oregon, Urban League of Portland, Elders in Action Commission, Oregon Nurses Association, AFSCME, Oregon Action, Oregon Education Association, SEIU Local 503, Neighborhood Partnerships, Oregon AFL-CIO, Oregon State Firefighters Council, Community Action Partnerships of Oregon, United Seniors of Oregon, PCUN and Causa.

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