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Morningstar issues quarterly VA survey

Posted on June 26, 2014 by -

Product development activity was very slow during the first quarter of 2014. Carriers filed 33 annuity product changes compared to 61 product changes in the fourth quarter of 2013 and 97 in the
first quarter last year. Despite the lower level of activity, we did see a wide variety of activity that continued the three main trends:

  • A focus on “investment only” VA offerings
  • Buybacks to restrict liability on the part of carriers
  • New living benefit structures with fluctuating features tied to a market factor that shifts risk to the contract owner

Annuity product development continues to push toward features that are not solely focused on standard-issue living benefits. The “hybrid” annuity territory was further explored this quarter with the release of a deferring income annuity rider. In addition, a withdrawal benefit with baked-in exclusion ratio was presented to further enhance the tax-preferential treatment inside a VA.

The trend toward offloading risk from carriers to contract owners took the form of additional “floating” benefit features tied to interest rates, versus set rate that does not change.

Carriers continued to slowly enhance benefit levels for new business, with some carriers offer withdrawals for a 65 year old that reached 6%, a rate we have not seen for some time.

Q1 Product Changes

In March 2014 AXA released an I-share version of the Investment Edge. The fee is 0.30%, and the contract offers 124 subaccounts in a variety of styles, including aggressive allocations. The contract carries an annuitization option (Income Edge) available on non-qualified contracts with a withdrawal percentage determined by the number of years remaining in the withdrawal period. The exclusion ratio is set at the time of the first withdrawal. There are no step ups.

Guardian released the Investor ProFreedom VA (B-share). The contract carries a unique income benefit at no charge that acts as a deferred income annuity, where the owner transfers funds into a payout option and receives a commitment for a deferred income intended to be turned on later. The contract offers 30 subaccounts, including some in alternative asset categories. Fee for the contract is 1.00% (B-share).

The Nationwide Lifetime Income Capture is a new lifetime withdrawal benefit costing 1.20% and offering a 5% withdrawal rate for a 65 year old (4.75% joint). Step ups include an HAV and an annual bump up based on the 10-year treasury rate, adjusted by the company for current conditions. This step up will always fall between 4% and 10%.

Principal made a voluntary exchange offer as of 1/20/2014. For owners of the Investment Plus contract, those who hold the Investor Protector Plus benefit (or no GMWB at all) may terminate the old contract, and a new contract is issued with either the Principal Income Builder 3 or Principal Income Builder 10 (further restrictions apply). 

Prudential released a new version of the Premier Retirement VA B-share, carrying the new HD Lifetime 3.0 guaranteed lifetime withdrawal benefit. The firm increased the withdrawal for the 65–69 age band from 4.5% to 5.0%. The spousal version also increased the withdrawal percent by 0.50% for the same age band. The spousal version offers a withdrawal percentage that is 0.50% lower for all age bands, with a 4.5% payout for a 65 year old. The surrender schedule was tweaked slightly, and fees and other main provisions stayed the same. The company files monthly rate sheets with current withdrawal percentages and step ups for newly issues benefits.

Prudential also updated its Defined Income Benefit rates. The Lifetime GMWB benefit guarantees lifetime withdrawals of the benefit base for the life of the owner with the withdrawal percentage determined by the owner’s age at contract issue. At the start of Q1 the with- drawal percentages ranged from 3.50% for age 45 to 7.50% for ages 85+. On February 15, 2014, the withdrawal percentages moved to 3.40% for age 45 ranging up to 7.40% for ages 85+.

In March 2014, SunAmerica raised the withdrawal percentage for the 65+ age band from 5.0% to 5.2% (single) and from 4.5% to 4.7% (joint) on the Polaris Income Builder. (Note the name also changed from SunAmerica Income Builder to Polaris Income Builder).

Thrivent changed the fee options for their guaranteed lifetime with- drawal benefit. The number of fee structures went from three to two. In addition, the fees increased: the benefit fee when using a conservative allocation increased from 0.50% to 0.75%; the benefit fee when using a moderate allocation increased from 0.80% to 1.00%. The moderately aggressive option was dropped.

Transamerica raised the withdrawal percentage by 0.50% for its Living Benefit (a Lifetime GMWB) attached to the Retirement Income Plus contract. Current lifetime withdrawal rate for a 65 year old is 6.0% (single life) or 5.50% (joint life). The New York versions are 5.8% (single life) or 5.30% (joint life), and the company added an age band to the New York version to make it comparable to the national version.

Pipeline

Forethought released the ForeRetirement II VA (B-, C-, and L-) shares. The contract offers two versions of a highest daily step up lifetime withdrawal benefit: one with a 6% step up and another with a 4% step up. Contract fees are 1.15% (B-share); 1.65% (C-share); and 1.60% (L-share). Forethought also released the ForeRetirement Foundation, which also offers two versions of a highest daily step up lifetime withdrawal benefit. Fees are 1.00% (B-share); 1.65% (C-share); and 1.60% (L-share) (which includes a 0.50% premium based sales charge).

Guardian released the Investor ProStrategies (I-share) and Investor ProFreedom (C-share). The contracts carry a unique income benefit at no charge that acts as a deferred income annuity, where the owner transfers funds into the payout option and receives a deferred income

amount intended to be turned on later. The contracts offers 30 subaccounts, including some in alternative asset categories. Fee for the contracts is 0.60% (I-share) and 1.70% (C-share).

In May, ING offered a special buy out for holders of their GMIB rider (called “MGIB Rider”). The offer automatically waives the 10-year waiting period on the benefit. In addition, for a sixty-day period starting in July, the company offers a one-time bump up to the benefit base (percentage to be determined) in exchange for surrendering the benefit and initiating annuitization payments based on the bumped up benefit base. The advantage to the contract holder is that benefits payments can start earlier. The down side is that the owner gives up potentially higher income later should the account value increase above the bumped up benefit base.

Nationwide released an L-share version of their Destination All American called the Gold 2.0 (Liquidity). The fee is 1.45% and the contract carries the existing suite of Nationwide living benefits. The contract offers 108 subaccounts, including alternatives.

Ohio National released the Oncore Lite III. The fee is 0.20% higher than the Lite II version and the surrender schedule was extended. Benefits and investment options remained the same.

Prudential released the Premier Investment VA (B- and C-shares). The contract carries an M&E fee (0.55% for B-share; 0.68% for C-share) as well as a premium-based sales fee of 0.55% charged quarterly against purchase payments. There are no living benefits, and the contract carries 50 subaccounts, including a host of alternative categories.

Prudential also updated its Defined Income Benefit withdrawal and step up rates. After May 15, 2014, the withdrawal percentages range from 3.25% for age 45 to 7.25% for ages 85+. he step up was also changed. On each day prior to beginning lifetime withdrawals, the benefit base is appreciated at a daily equivalent of 5.5% annually (down from 6%).

© 2014 Morningstar, Inc.

Northwestern Mutual to sell Russell Investments

Posted on June 26, 2014 by -

Northwestern Mutual has agreed to sell its Russell Investments unit to the London Stock Exchange Group plc for $2.7 billion. The sale will be finalized later this year, pending regulatory and LSEG shareholder approvals and satisfaction of other closing conditions.

Russell oversees almost $260 billion in assets, primarily for large, institutional investors such as pension funds. The firm also maintains stock indices such as the Russell 2000. Russell mutual funds are available to retail investors.

“The proceeds from the sale will cap off what has proven to be a good investment for Northwestern Mutual,” said John Schlifske, chairman and CEO of Northwestern Mutual, in a release.

Northwestern Mutual manages more than $184 billion in invested assets as part of its general account investment portfolio, which backs its insurance and annuity products.

Goldman, Sachs & Co. and J.P. Morgan Securities LLC acted as financial advisors to Northwestern Mutual on this transaction.

© 2014 RIJ Publishing LLC. All rights reserved.

What’s In Their Wallets?

Posted on June 25, 2014 by -

Income from defined benefit plans, like rays of light from distant, dying stars, is still streaming into the households of older Americans. Despite the conventional wisdom about the end of DB, most affluent retiree households are still receiving a substantial amount of their income from DB pensions.      

That was one of the key findings of a just-published 2012 survey by the Vanguard Center for Retirement Research, and it may help explain why more people aren’t buying income products.

The Vanguard survey was more detailed than most. It involved interviews with retired or semi-retired people ages 60 to 79 in about 2,600 U.S. households about their sources of retirement income. The households had to have at least $100,000 in financial wealth. They were asked to identify the precise locations and amounts of their bank, brokerage and retirement accounts.   

 “We were able to get very high-resolution data on a granular scale,” said Steve Utkus, who co-authored a report on the survey with Anna Madamba and John Ameriks. “That’s quite novel.” 

Vanguard has an obvious interest in this type of information. The Malvern, Pa-based financial services firm manages some $2.72 trillion in assets through varied retail and institutional businesses. It’s one of the largest full-service retirement plan providers and a leading direct marketer of no-load mutual funds and ETFs.   

The more it knows about its customers’ sources of retirement income and how they intend to draw down their money (the subject of a forthcoming report based on the same survey), the better able it will be to develop the products and services—systematic withdrawal plans, guided income programs, annuities, payout mutual funds—that they’re going to need. 

Pension prevalence

In sorting out the result of the survey, Vanguard identified eight categories of affluent U.S. retiree households by their primary source of retirement income. The categories (and the sources) were Social Security, Pensions, Retirement accounts, Taxable accounts, Annuities, Liquid assets, Real Estate and Businesses.

Of these, the biggest groups were those who relied mainly on Social Security (26% of the sample) or Pensions (24%). The richest and smallest groups were those who got most of their income from Real Estate (3%) or Businesses (3%). The groups with the most financial assets were the ones who depended mainly on Retirement (18%) or Taxable (17%) accounts. The two most conservative groups were the Annuity owners (4.5% of the sample) and Liquidity investors (4.5%).

Representing about one-third of older American households, those surveyed had median financial assets of $395,000. Their median total non-housing wealth was $1.1 million, but only when the lump sum values of Social Security benefits and pensions were counted as wealth. 

The most striking finding of the study “was the fact that half of the population of even this affluent group still has most of its wealth tied up in Social Security and defined benefit pensions,” Utkus told RIJ in a recent interview.

“The idea that retirees have no pension assets—that will occur down the road,” he said. But it’s not true yet. About 71% of the households in the study, which was conducted with the help of Ipsos, a Paris-based market research firm, had pension income. About one in four got more than half (53%) of their income from pensions. The median annual pension was $20,000.

Vanguard Eight Types

“Our gut feeling that it will take 10 to 15 years, at least a decade, for pension income to drop significantly,” Utkus added. “Most of the phase-out in defined benefit plans has been in freezes for new hires or freezes on accruals. A decade from now it may look very different. But there are still a lot of people who are getting meaningful benefits from DB pensions.”

Another surprising finding: affluent older Americans still have a lot of their money tied up in ultra-conservative assets. “We found a high degree of conservatism. A lot of households have their wealth concentrated in either Social Security, pensions, certificates of deposits and variable annuities. That shows a very high level of risk aversion,” Utkus said. A deeply risk-averse fraction (4.5%) of those surveyed, whom Vanguard identified as “Liquidity” investors, held 69% of the invested assets in liquid accounts.

Only 4.5% of those surveyed held the largest chunk of their savings in annuities. These “Annuity” investors held almost half (45%) of their total non-housing financial wealth ($848,000) up in annuities—primarily variable annuities with living benefits, Utkus said. Of the eight types of affluent investors that Vanguard identified, only this group had more than 4% of their wealth in annuities.

Lessons for advisers

Advisers who are looking for likely clients might concentrate on the 35% of the study group that had the highest levels of financial wealth: the Taxable investors, whose median financial assets were $934,000, and the Retirement investors, who had about $750,000. Business owners and Real estate investors had the highest income and the most total non-housing wealth, but most of their wealth was illiquid.      

The more affluent the retiree, the more sources of retirement income they will have, Utkus said. This fact will tend to make decumulation more complex and more individualized. “Those who work with affluent clients should realize that there’s incredible complexity here,” he said.

Taxable, Retirement and Annuity investors were the most likely to have worked with a financial intermediary, the study showed. Taxable investors were strong planners, were more likely than average to have an estate plan, long-term care insurance and a high bequest motive. Retirement investors had the highest likelihood of having created a spending plan before retirement. Both of those latter groups were likely to be well educated and in good health. 

These were the results of the first part of a two-part study. The second part assesses the various ways in which retirees spend down their retirement savings.

 “Our goal with the first study was to understand who this group is. The second study, still in progress, will look at drawdown behavior,” Utkus said. “For that we somewhat arbitrarily chose 100 people. We’re looking for deeper lessons about drawdown strategies. We’re looking to see how drawdown from IRAs might differ from drawdown from 401(k)s and from drawdown from non-retirement taxable accounts. We’ll look at who is doing systematic withdrawals and who is making ad hoc withdrawals.”

© 2014 RIJ Publishing LLC. All rights reserved.

Getting the Exclusion Ratio (Without Annuitizing)

Posted on June 25, 2014 by -

Thirty-some years ago, the IRS decided to change the tax treatment of partial withdrawals from non-qualified deferred variable annuities from FIFO (first-in-first-out) to LIFO (last-in-first-out). Unless they annuitized, generally, the owners of contracts issued after August 13, 1982 have had to withdraw all of their taxable gains before they could withdraw any of their after-tax principal.

If they annuitized, they could withdraw a blend of gains and principal, and exclude the return-of-principal portion from their taxable income. Annuitization was thus a way to spread the tax on the accumulated gains over a person’s remaining lifetime.

There was a method to the IRS’ madness. It wanted to reserve the tax advantages of deferred annuity contracts to long-term investors (especially those seeking retirement income security) and to frustrate the merry pranksters who were using VAs to shelter the gains on freely-withdrawable short-term investments.    

But at least two large annuity manufacturers—Lincoln Financial in 2000 and, more recently, AXA—have obtained private letter rulings from the IRS that allow some of their VA clients to get the exclusion ratio without formally annuitizing. What’s newsworthy is that this feature is being combined with the sale of new VA contracts that are being marketed for tax-advantaged investing.    

Investor Advantage  

Last month, Lincoln Financial introduced the Investor Advantage contract, thus joining the trend, started by Jackson National’s Elite Access, of appealing to investors who want tax-deferred investing in an almost unconstrained range of funds, including alternatives. Investor Advantage offers 125 fund options—significantly more than the number offered in Lincoln’s popular ChoicePlus VA suite of contracts.    

If and when owners of Investor Advantage want to draw down those assets tax-efficiently (but without annuitizing), they can opt for Lincoln’s long-standing patented i4Life Advantage income rider. During this rider’s “Access Period,” which must be at least five years in length and can last to at least age 115 for non-qualified owners, the owner can receive regular variable payments with an exclusion ratio—while maintaining access to the assets.

The Access Period of Lincoln’s i4Life Advantage can be thought of as the term-certain portion of a life-with-period-certain contract, with variable payments, according to Dan Herr, vice president of annuity product management at Lincoln Financial. 

The cost of Lincoln’s Investor Advantage contract is 1.50%, which includes the M&E, administrative charge and 40 basis points for the i4Life Advantage rider. Contract owners don’t pay the rider fee unless or until they turn on the rider.

Lincoln does bear mortality risk, because at the end of the Access Period, the remaining account value converts into a life-only income annuity with variable payments. But Lincoln doesn’t bear investment risk, because the payouts fluctuate with the markets. 

Investment Edge

Only about eight months old is AXA’s Investment Edge, which offers a rider called Income Edge. This rider, which carries no added cost and is available only on non-qualified contracts worth at least $25,000, allows contract owners to withdraw their money over a fixed number of years while enjoying the exclusion ratio and retaining the option to take lump sum redemptions.

The income period can range from 10 years to as many as 30 years or more. After the payments begin, the owner can still redeem part or all of the account value. Those redemptions are fully taxable as ordinary income.

AXA sought and obtained an IRS private letter ruling (PLR) for Investment Edge in mid-2013 and got verbal approval before year-end. (The IRS posted the PLR on its website this month. Lincoln obtained its own private letter ruling over a decade ago when it created i4Life Advantage.) AXA’s PLR describes the rider as a “term certain annuity option with variable payments.”

The AXA Investment Edge prospectus offers an example of how Income Edge might work. If an 80-year-old contract owner—that’s the oldest age permitted for a 15-year payout period—elected to receive variable income over 15 years from a contract valued at $150,000, he or she would receive $10,000 the first year or one fifteenth of the account value. At the start of each succeeding contract year, the account value would be divided by 14, 13 and so on, to calculate the annual payout.

The B-share of AXA’s Investment Edge carries annual separate account fees of 1.20%. There is no specified mortality & expense risk fee or income rider fee; AXA bears neither market risk nor mortality risk. Fund fees, of course, are extra.

As befits investment-oriented annuities, both of these contracts offer lots of funds, including trendy alternative investments, including real estate, commodities and emerging market debt. Most investors don’t understand alternatives, but advisors seem to think they offer a chance for higher returns and greater diversification at a time when yields are low and non-correlated investments can be hard to identify.

In addition to the funds offered by other Lincoln contracts, Investor Advantage offers funds from AQR, First Trust Portfolios, Goldman Sachs Asset Management, and Ivy Funds. AXA Investment Edge offers over 100 funds, including three Alternative funds from AXA’s Charter Portfolios. 

Depending on the success of these two products, and the IRS’ apparently willingness to bless the tax treatment of the payouts, we could see more of this type of contract. They are designed for relatively younger retirement savers who want to invest actively in mutual funds on a tax-deferred basis and who, when the time comes to take income, may like the exclusion ratio and be able to tolerate the fluctuating payments.   

Although several annuity issuers are using anxiety over potentially rising federal tax rates to generate interest in VAs that offer tax-deferred trading, manufacturers have other reasons for promoting them. They’re cheaper and safer to issue than VAs with guaranteed lifetime withdrawal benefits, which helps manufacturers increase capacity without going up in cost or capital requirements. Either way, the addition of a low-cost income solution could very well broaden their appeal.  

© 2014 RIJ Publishing LLC. All rights reserved. 

IRA rollovers in 2013 totaled $324 billion; $720 billion stayed behind

Posted on June 25, 2014 by -

A combination of retiring Baby Boomers and a rising stock market helped total IRA assets rise by 17% or $324 billion in 2013, to $6.5 trillion, according to a new report from Cerulli Associates, the Boston-based global research firm.   

In the “Evolution of the Retirement Investor 2014: Understanding 401(k) Participant Behavior and Trends in IRAs, Rollovers, and Retirement Income,” Cerulli examined the migration of assets and came up with observations designed to help financial services companies compete for this “money in motion.”

“We anticipate that IRA asset growth will continue through the remainder of the decade as defined contribution assets continue to roll into individual accounts,” said Shaan Duggal, analyst at Cerulli, in a release.

About 70% of the rollover money went to firms with whom the participant already had a financial relationship, though not necessarily to a 401(k) provider. Despite all the talk about rollovers, Cerulli pointed out, inertia still has a powerful effect. About two-thirds of the 401(k) money that was eligible for a rollover stayed in the plan in 2013. There was $720 billion that could have moved but did not.  

 “While asset values are climbing, so is the level of competition and noise surrounding rollovers,” added Chris Nadai, a senior analyst at Cerulli. “Firms must be creative with their marketing and adapt quickly as new sales program such as rollover cash incentives grab consumer attention.”

Nadai apparently referred to the offers by E*Trade and TD Ameritrade of “up to $600” to people who roll qualified money to their firms. Those ads have been shown to be highly misleading however. An investor must park hundreds of thousands of dollars in a brokerage account in order to qualify for a trivial bonus.

Regulators have told RIJ in the past that those firms can offer such ethics-bending come-on ads because they sell a service, not a registered security, as fund companies do. 

Retirement plan recordkeepers are in a good position to compete for the assets. Cerulli suggests that recordkeepers need to invest in technology and market research that facilitate a positive customer experience.

“Outbound communication to participants who are changing jobs or retiring should use relevant data from their account information whenever possible, because participants are more likely to respond to a personalized approach,” Duggal said. “Customer service both online and by phone is of critical importance as complex concepts such as retirement income do not resonate well with individuals as they think about their finances and lifestyles.”

Job changers in their 50s evidently are not yet receptive to marketing messages that emphasize retirement income. “They do not consider themselves pre-retirees,” Cerulli noted. Therefore firms’ attempts to present themselves as the “retirement” company might not connect well with rollover candidates.

In rollovers, as in other businesses, it’s easier to keep a customer than to win a new customer. A recordkeeper’s investment in building a strong relationship with participants, and positioning itself as the most logical financial partner when participants separate, can be more cost-effective than trying to convince participants to save more. “This strategy can grow assets faster than trying to increase contribution rates,” the Cerulli report said.

© 2014 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on June 25, 2014 by -

Stock buybacks slower in 2Q 2014: TrimTabs

Announced stock buybacks have slowed to $92.7 billion in the second quarter, down from $138.5 billion in the first quarter, according to TrimTabs Investment Research..

“Stock buyback announcements in the second quarter are on track to be the lowest in seven quarters,” said David Santschi, CEO of TrimTabs, in a release.  “Buybacks in June have sunk to just $11.5 billion, the lowest level since May 2012.”

The decline in share repurchase announcements began in May, when they fell to $24.8 billion, and has persisted into June. Only four companies have announced buybacks of at least $1 billion so far this month.

“The sharp slowdown in buybacks is a negative sign for the U.S. stock market,” Santschi said.  “Share repurchases are the main way companies reduce the float of shares. Perhaps fewer companies like what they see when they look into the future.”

The decline in buybacks is not the only cautionary sign for U.S. equity investors, TrimTabs said. Merger activity has skyrocketed, while companies are selling new shares at the fastest pace since last autumn.

“Our liquidity indicators aren’t as positive for U.S. equities as they were a month ago,” said Santschi.  “While the bull market isn’t necessarily ending, investors should be more cautious on the long side.”

E*Trade investors expect to rely little on Social Security

Results of E*Trade’s quarterly investor tracking study, Streetwise, indicate investors will not depend solely on employer-sponsored plans and Social Security to reach their retirement goals.

The latest wave of the Streetwise survey was conducted last spring among 900 self-directed investors who manage $10,000 or more in an online brokerage account.

On average, investors surveyed planned to receive:

  • 42% of income from an employer-sponsored plan (27% from 401(k); 15% from pension)
  • 25% of income from personal savings or an IRA
  • 16% from Social Security
  • 17% from other sources

The survey was fielded and administered by ResearchNow. The survey sample was 61% male and 39% female with an even distribution across online brokerages, geographic regions and age bands.

Transamerica promotes small-company retirement plan service

A new white paper, prepared by a prominent ERISA law firm, promote Transamerica Retirement Solutions’ Retirement Plan Exchange as a resource for small businesses that want to adopt a retirement plan that has light administrative burdens and little exposure to fiduciary liability.

Over one-quarter of small businesses currently do not offer a 401(k) or similar plan to their employees, Transamerica said in a release.  

The white paper, “Minimizing an Employer’s Fiduciary Risk Through the Retirement Plan Exchange,” was produced by The Wagner Law Group in Boston and touts the advantages of Transamerica’s offering. 

With Retirement Plan Exchange, the release said, the employer delegates primary responsibility for managing certain aspects of the retirement plan operation to the administrative fiduciary, which serves as the plan administrator 3(16), along with an investment manager 3(38) or 3(21) to manage the investment menu offered to plan participants. The numbers refer to sections of the ERISA code that define fiduciary responsibilities.

The Retirement Plan Exchange also handles important tasks like Form 5500 filing, non-discrimination testing, contribution limits tracking, distribution processing, and hardship requests, according to Transamerica.

Under the program, eligible workers are auto-enrolled at a 6% contribution rate with a two percent auto-increase in each of the next two years, leading to a minimum annual savings rate of 10%. 

According to Simpkins & Associates, a Dallas-based retirement consultant, the Retirement Plan Exchange is best-suited plans with less than about $3 million in assets, with a low participation rate, open multi-employer plans, plans with inattentive sponsors and plans where the investment professional doesn’t wish to be a fiduciary.   

Bimbo re-embraces Fidelity

Fidelity Investments announced that it now provides 401(k) retirement plan services to Bimbo Bakeries USA, the U.S. business unit of $13.8 billion, Mexican-owned baking company, Grupo Bimbo. It is the world’s largest bakery.

In the U.S., the company operates more than 65 bakeries and distributes Arnold, Oroweat, Entenmann’s, Sara Lee, Thomas’ products, among others. Bimbo’s 401(k) plan has approximately 14,000 participants with assets of $860 million.

The move represents Bimbo’s reengagement of Fidelity. Three years ago, after a merger, the baking company selected another 401(k) provider. That provider was not named in the release. 

Guardian and LPL Financial in participant support pact

LPL Financial’s Worksite Financial Solutions platform will be adapted for use with the Guardian Choice and Guardian Advantage products, Guardian Insurance & Annuity Co., a unit of Guardian Life, announced this week.

GIAC’s plan sponsor clients who with LPL Financial will now have access to LPL’s Worksite Financial Solutions platform’s Employee Transition and Engagement Solutions.

Components of the program include customized financial education support services, asset roll over assistance, education and support for separating and terminated participants, and personalized strategies to meet retirement goals. 

© 2014 RIJ Publishing LLC. All rights reserved.

 

Zombie Politics

Posted on June 24, 2014 by -

Patient Zero in American’s long-standing financial and political malaise, according to an earnest new book by economist Eugene Steuerle of the Urban Institute, was Jude Wanniski, the late conservative journalist, gold bug and evangelizer of supply-side economics.

In “Dead Men Ruling: How to Restore Fiscal Freedom and Rescue our Future” (Century Foundation, 2014), Steuerle suggests that Wanniski’s 1976 column in The Wall Street Journal planted the germ of an idea that proved infectious: that Republicans should neutralize the Democrats’ appeal as the benevolent “spending Santa” by becoming the benevolent “tax cut Santa.”

Wanniski’s “two Santas” idea went viral among Republicans, and the rest is history. Subsequent years brought the Reagan Revolution, the Laffer Curve and Dick Cheney’s famous remark that “deficits don’t matter.” Soon, almost nobody was left in Washington to stand up for fiscal responsibility. And why should they? A vote against entitlements, tax expenditures or tax cuts meant political suicide.

Eugene Steuerle

That wasn’t good for the country, writes Steuerle (right), a liberal-leaning pragmatist who served in  the Ford, Reagan and H.W. Bush Treasury departments. It led to huge levels of entitlement spending, huge budget deficits and a huge national debt. It has led to over-spending on the old and  under-spending on the young. Perhaps worst of all, mandatory spending now dominates the annual budget, leaving today’s politicians with few resources to address new problems, like declining educational levels and decaying infrastructure.

 “My thesis is quite simple,” he writes. “In recent decades, both parties have conspired to create and expand a series of public programs that automatically grow so fast that they claim every dollar of additional tax revenue that the government generates each year. “They also have conspired to lock in tax cuts that leave the government unable to pay its bills. The resulting squeeze deprives current and future generations of the leeway to choose their own priorities, allocate their own resources, and reach for their own stars. Those generations are left largely to maintain yesterday’s priorities.”

In one of the charts in his book, Steuerle shows how little of the expected $1.2 trillion growth in federal outlays over the next 10 years will go to children. Social Security, Medicare, Medicaid and interest on the national debt will capture virtually all of it. Only 2% is earmarked for programs for children. Military spending will shrink by $106 billion.

“Historically, a country ran a deficit because a particular king or government was profligate somehow,” Steuerle told RIJ in an interview this week. “It’s a very different situation when governments commit to spending programs that last indefinitely into the future. That may sound like a trivial difference, but it’s crucial to solving the problem.

“I use the metaphor of leaving the window open and letting a lot of critters crawl in. You can start setting more and more traps around the house to catch the critters, or you can shut the window.” In our case, however, the window seems to have been propped open.

Steuerle chart

As for today’s elected officials, “I think they’re trapped,” Steuerle continued. “Once they started competing not only for control of the present but also for control of the future, they got in a box. Now they’re in a classic prisoner’s dilemma. Both sides believe that if they lead [in recommending entitlement or tax reform], they will lose. They know the public will punish them.”

The potentially tragic consequence of lavishing benefits on Boomers ad infinitum, Steuerle says, is that there’s not much money left over to invest in the future. Instead of giving wealthy Boomers more retirement and health benefits, we should be directing that money toward education and other future-oriented initiatives instead, he believes.

On the question of Social Security, Steuerle wants to strengthen it, but not in its current form. The retirement age should rise along with life expectancies, he believes. At the same time, he’d like to make the program more progressive.  He favors higher minimum benefits for low-income Americans and lower maximum benefits for the wealthy. (Thanks to longer retirements, upper middle-class couples stand to receive $300,000 more over their lifetimes than the system anticipated, he said.) He also advocates more equitable benefits for single working moms (as opposed to dependent spouses) and more credit for women who were never married to the same person for at least 10 years. 

“My friends, like Henry Aaron [of the Brookings Institution], say we can raise tax rates to fully fund Social Security. I say, ‘Yes, but if we raise taxes, why spend the money on people like you and me?’ Let’s spend the taxes where we can make meaningful improvements. If the best we can do is to create a budget that barely gets entitlements under control, that’s a budget for a declining economy.”

Given the inflexible partisanship and “incivility” that makes today’s political scene seem especially hopeless, the book is refreshingly evenhanded. “Dead Men Ruling” is an important wake up call to the living. It’s a warning that each generation needs the freedom to establish its own budgets for its own needs, and not be chained to the past.

Of course, the young have always had difficulty escaping the shadows of the old. “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood,” John M. Keynes famously said, and this oft-used quote seems particularly apt. “Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

© 2014 RIJ Publishing LLC. All rights reserved. 

Is Time Running Out on the Fiduciary Proposal?

Posted on June 20, 2014 by -

At the SPARK Conference in Washington, DC on Monday, a prominent employee benefits lawyer said that the prospects are growing dimmer that the Department of Labor will re-propose any new fiduciary rule for advisers to 401(k) plans or participants by the end of the Obama administration. 

“The major question is whether we will have a new reg,” Steven Saxon of Groom Law Group (below) told members of SPARK Institute, which advocates for the retirement plan industry. “It was supposed to be issued in August, and now it’s put off to January 2015. After talking to a lot of folks, I have to wonder whether if it will get done by January, or if at all.

Steven Saxon

“If it takes six months for a comment period and another six months to get through hearings, and then more time to develop a final rule, by then we’re running into 2016, an election year,” he added. “There’s going to be a lot of political pressure on the White House and the OMB [Office of Management and Budget]. It’s questionable whether they will spring a controversial regulation in an election year.”

Saxon pointed to a May 29 editorial in the Wall Street Journal by Mary Kissel as an indication of how nasty the debate might get—i.e., that the so-called race card has already been played.

In the editorial, Kissel asserted that the DoL’s original proposal—intended to insulate participants from salespeople posturing as objective advisers—would “particularly hurt low-income Hispanics and African-Americans” who can’t afford to pay directly for impartial professional financial advice.   

“That’s what the DoL, the White House, and the OMB will have to deal with,” Saxon said.

The line between sales and advice

A fiduciary standard for interactions between advisers and 401(k) sponsors or participants could infuse previously business-as-usual sales and compensation practices with new legal and regulatory ambiguity, unless the new rules include specific exemptions from the rules.

“The question is, when I’m making a sales presentation, when do I become a fiduciary? And does that raise the possibility of prohibited transactions and does that affect the way I get paid?” Saxon said.

“There are two levels of concern,” he told RIJ in an interview. “One involves presentations to plan sponsors. Let’s say I’m an adviser who’s selling a 401(k) product. I’m meeting with plan sponsors and they ask me questions about the fund lineup. What if I start to talk about the performance of various funds, and the plan sponsor says, ‘What would you recommend?’

“Does the sales presentation become a recommendation? If the plan sponsor relies on that information and subsequently buys the recommended plan, does the sales person become a fiduciary” even though the sale hasn’t yet taken place? Saxon said.

“The second concern is about conversations with participants about financial education,” he added. “Let’s say I’m engaged to talk to retiring employees about rollovers. The sponsor isn’t paying me. I’m just using their conference room. What if I know that a certain employee has $600,000, and that he can either leave it in the 401(k) plan or roll it over to my firm’s IRA. If he rolls it over, I make a lot of money. If they leave in the plan, I don’t. At what point in time do I become a fiduciary? That’s what this whole fight is about.”

Understandable frustration

On the one hand, companies sponsor 401(k) plans voluntarily. They might be expected to be sophisticated enough to distinguish sales presentations (which are typically free) from impartial advice (which rarely comes free). But in interviews, deputy DoL secretary Phyllis Borzi, the champion of the fiduciary proposal, has emphasized that the caveat emptor standard and the implicit blurring of the sales/advice boundary is not appropriate when tax-deferred retirement savings are at stake.

Saxon acknowledged the DoL’s concern. What’s driving the Borzi initiative, he conceded, is regulators’ frustration over the fact that upwards of $6.5 trillion in tax-deferred savings has already migrated from low-cost, ERISA-regulated defined contribution plans to the rollover IRA arena, where the costs are sometimes much higher and oversight usually comes from SEC and FINRA.      

“If I were a public servant and I wanted to do good by retirement programs and participants, I’d want to make sure I could wrap my arms around the biggest pool of savings in the United States,” he said. “The DoL feels that they need to exercise some control over the IRA space. FINRA and the SEC are doing some of the same things. There will be a lot more scrutiny of IRAs in the months to come.”

Saxon suggested that there might not be a need for a fiduciary regulation at all, because providers of advice are already, by definition, fiduciaries. Even if the fiduciary definition were expanded, the investment industry would certainly lobby for exemptions that would allow certain salespeople to provide certain kinds of advice without running afoul of the regulations.

Several such exemptions already exist, he said: “So, you have to ask, is all this really needed?”

© 2014 RIJ Publishing LLC. All rights reserved.

Conning appraises the invasion of the life insurance company snatchers

Posted on June 20, 2014 by -

Conning Research has published a new research paper on the private equity and investment management firms that have recently entered the annuity market by purchasing life insurance companies that were divested in the wake of the 2008-2009 financial crisis.

The proprietary study, “The Retirement Market Attracts New Entrants: Alternative Capital Moves In,” “recaps and analyzes the market moves of the key alternative market players and their performance to date, and explores some possible strategies that may be driving this change. Further, the study provides profiles of the alternative capital players and their development to date,” a Conning release said.

In an interview with RIJ this week, Conning annuity specialist Scott Hawkins said:

“We tried to understand why these investment firms are in this space and what their entrances mean for established insurers.

“We looked at Athene, Harbinger, Guggenheim, and Global Atlantic. Global Atlantic we saw as moving to create a broad insurance platform and even expanding into life insurance. That’s a bit different from Harbinger, which has traditionally targeted distressed companies and then looked to sell them.

“And that’s different from Apollo and Guggenheim. They are investment companies, and owning an annuity business gives them access to a whole new pool of assets and a new type of client—the retail annuity client. That also enables them to manufacture GICs [guaranteed investment contracts] and stable value funds. It also gives them access to inexpensive capital to fund other investment products that they might want to create.”

Shorter bond maturities

Conning also looked into the business and investment strategies of those companies. “We found that they are offering higher credit ratings to rebuild sales,” Hawkins continued. “We did a study comparing their investments and returns with the investments and returns of similar insurance companies—net investment income over assets, and total returns including unrealized gains and losses—and there was not a lot of difference.

“In terms of investment strategies, however, there was some difference in asset allocation. The new entrants are shorter in their bond maturities. We took a look at the potential effects of rising interest rates and found that, all else being equal, the new entrants would capture more of the benefit of that because they have a shorter investment horizon on their existing investments.

“They also tended to invest more in ‘Schedule AB’ or alternative assets. Of course, the higher capital charges on those assets will serve as a natural limit on the allocations.”

Conning believes that the recent acquisitions are good for the retirement industry as a whole. “We’ve talked and written about the need for more capital in the life insurance industry so that the insurers have the capacity to capture more business in the retirement space,” Hawkins said.

“We’re just at the start of the process, but if the new entrants are successful they could attract more capital into the insurance marketplace. And if new capital does come in and pursues similar strategies, that could raise the value of the established players.”

© 2014 RIJ Publishing LLC. All rights reserved.

RetirePreneur: Mathew Greenwald

Posted on June 20, 2014 by -

What I do: We specialize in market research for financial service companies, with a focus on retirement. We also conduct research on life insurance, employee benefits, health insurance and long-term care. What we do is to try to help companies make better decisions to serve consumers.

Where I came from: I received a Ph.D in sociology from Rutgers University and taught sociology for a few years. Through a series of coincidences, I began working for the American Council of Life Insurers and stayed there for 12 years. I eventually became their senior research person on staff and realized that I had to either give up on opportunities for promotion or be promoted out of research. I thought there was something very special about creating a company and continuing to do research and serve clients. In 1985, Mathew Greenwald & Associates was born.

Who my clients are: We conduct surveys and focus groups for many financial services companies, including Prudential, John Hancock, Pacific Life, Lincoln Financial, Morgan Stanley, the American Council of Life Insurers, and AARP, among others.

What has been one of our most interesting research projects: We’re working a project right now in which we are gathering insights on retiree preferences for managing their assets. It’s called Retiree Insights, and it will be out soon. Behavioral finance professionals have found that people don’t always decide in their own best interest. Many companies make plans and assumptions based on an overly rational model of people that does not often exist. These types of plans often do not resonate with retirees, and they don’t really address their emotional needs.

For example, some models define success for retirees as having assets above zero before death. But most people have a strong need for a financial cushion. They don’t want to be 90 years old and have $5,000 in the bank. A Monte Carlo analysis that states success is anything above zero will not be reassuring.  Retiree Insights aims to really understand the preferences of pre-retirees and retirees so companies will develop products and services that will be most effective. We have 19 companies participating, and it’s been a great project for us.

Why people hire me: We combine subject-matter expertise with research expertise and the ability to interpret and communicate research findings. I think our strong subject-matter expertise really sets us apart.

Why I testified in Congress: It was fun. I was a Congress-appointed delegate to the 1998 and 2002 National Summits on Retirement Savings and was also asked to testify before the U.S. Senate Committee on Aging and the Securities Exchange Commission on retirement and retirement-oriented products. Charles Grassley of Iowa was the head of the Committee on Aging at the time. They give you five minutes for an opening statement and there are three lights (green, orange and red) to keep your time in check. I testified about long-term care and the need to encourage people to use long-term care insurance.

Where I get my entrepreneurial spirit from: It started in the Bronx, where I’m from. In some ways, the interest in retirement started with my father. He never made a lot of money and he did not enjoy his job as a poultry salesman. He wanted to be able to retire at 65, and talked about it a lot and about his strategies for accumulating enough money to retire. I think he wanted to own his own business, but never got a chance to do that. I think I absorbed his interest in retirement and, in a way through starting my business, accomplished something he didn’t have a chance to do.

My retirement philosophy: I have spent a lot of thinking about how I want to live my life in retirement. I have a detailed budget ranging from household expenses to travel and have done the calculations of how much I need to fund the lifestyle I want. I’m now 67 years old and I really enjoy working. I’m not that eager to retire. I plan on working to beyond age 70. I think a lot of people think about age and retirement improperly. It’s about life expectancy. I would like to retire with about eight years of remaining life expectancy. My father had a 27-year retirement since he lived to 92. I’m aiming for less time in retirement. The decision to retire is about how much time you are likely to have left and how you want to spend that time.

© 2014 RIJ Publishing LLC. All rights reserved.

Merrill Lynch overcharged 41,000 small business retirement plans: FINRA

Posted on June 20, 2014 by -

The Financial Industry Regulatory Authority (FINRA) has fined Merrill Lynch $8 million for failing to waive mutual fund sales charges for certain charities and retirement accounts.

FINRA also ordered Merrill Lynch to pay $24.4 million in restitution to affected customers, in addition to $64.8 million the firm has already repaid to harmed investors.

Mutual funds offer several classes of shares, each with different sales charges and fees. Typically, Class A shares have lower fees than Class B and C shares, but charge customers an initial sales charge. Many mutual funds waive their upfront sales charges for retirement accounts and some waive these charges for charities.

Most of the mutual funds available on Merrill Lynch’s retail platform offered such waivers to retirement plan accounts and disclosed those waivers in their prospectuses. However, at various times since at least January 2006, Merrill Lynch did not waive the sales charges for affected customers when it offered Class A shares.

As a result, approximately 41,000 small business retirement plans, and approximately 6,800 charities and 403(b) retirement plan accounts available to ministers and employees of public schools, either paid sales charges when purchasing Class A shares, or purchased other share classes that unnecessarily subjected them to higher ongoing fees and expenses.

Merrill Lynch learned in 2006 that its small business retirement plan customers were overpaying, but continued to sell them more costly shares and failed to report the issue to FINRA for more than five years.

Merrill Lynch’s written supervisory procedures provided little information or guidance on mutual fund sales charge waivers. Even after the firm learned that it was not providing sales charge waivers to eligible accounts, Merrill Lynch relied on its financial advisors to waive the charges, but failed to adequately supervise the sale of these products or properly train or notify its financial advisors about lower-cost alternatives.

In concluding this settlement, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

© 2014 RIJ Publishing LLC. All rights reserved.

Social Security a “screamingly good” deal: Financial Engines

Posted on June 20, 2014 by -

Surveys show that millions of Americans have given up hope that Social Security will “be there” for them. Meanwhile, lots of people in the financial advice industry are celebrating the bounty of the allegedly near-bankrupt program, and rushing to remind their clients that big benefits lie in store for those who claim later.      

Yet, ironically, there’s little evidence that a majority in Congress would be amenable to the higher payroll taxes that will probably be needed to make those generous, inflation-indexed Social Security checks a reality.

The latest advisory firm to find hidden virtue in Social Security is Financial Engines. The provider of financial advice and managed accounts to millions of participants at large defined contribution plans announced this week that it will educate large numbers of plan participants on the benefits of delaying Social Security benefits, and how they might live on their qualified savings during the interim.   

The new integrated offering is available online and through Financial Engines’ advisor representatives to participants at Akzo Nobel, HD Supply, Motorola Solutions, Sargent & Lundy, Teradyne, UL and other firms, the company said in a release. Financial Engines will also make a free interactive Social Security planner available to the public at www.financialengines.com.

Financial Engines is making the services available to employers offering Income+, its program for helping 401(k) participants take systematic withdrawals from their plan accounts after they retire. Record keepers currently or committed to supporting Income+ with Social Security and income planning services include Aon Hewitt, Mercer and Xerox. The cost of Income+ is included in what employees pay in managed account fees.   

Over the past three months in limited release, the services have identified more than $500 million in additional Social Security benefits available for near-retirees2. The median amount of additional benefits found for a typical married couple is well over $100,000.

It’s becoming more widely recognized that by claiming at age 70, the higher-earning and shorter-lived spouse—most often the husband—can significantly augment his widow’s income, thanks to the 100% spousal benefit that Social Security provides.

Users can consider different strategies and receive a clear, personalized retirement income plan based on Financial Engines’ patented Income+ methodology. The comprehensive plan includes multiple income sources, including part-time work and pensions, and shows how retirement savings in a 401(k) or IRA can be converted into income to help defer Social Security.

“Delaying Social Security is a screamingly good deal, especially in today’s low interest rate environment,” said the Financial Engines’ release. 

Participants with access to the new services through their employers can talk with a Financial Engines advisor certified by the National Social Security Advisor program at no additional cost. The advisors can create Social Security and income plans, answer questions and even share their screens so individuals can see the plans take shape in real time.

(c) 2014 RIJ Publishing LLC. All rights reserved.

Limit participants to three loans: TIAA-CREF

Posted on June 20, 2014 by -

Nearly one-third (29%) of Americans who participate in a retirement plan say they have taken out a loan from the savings in their plan. Of those, 43% have taken out two or more loans and 44% of borrowers regret the decision, according to a new study by TIAA-CREF of 1,000 randomly chosen plan participants.   

Paying off debt was cited as the top reason for borrowing from retirement plan savings (46%), yet only 26% of respondents said that paying off debt justified a loan.

Emergency expenditures was the next largest reason for borrowing, cited by 35%. Women were more likely than men (52% vs. 41%) to borrow to pay off debt. Men were more likely (40% vs. 29%) to borrow to cover emergency expenditure.

Nearly half (47%) of those who have borrowed from their retirement plan savings borrowed more than 20% of their savings, with 9% of respondents borrowing more than 50%.

In addition to borrowing funds from retirement savings plans, many Americans are also contributing less to their plans while they pay back the loan. More than half of respondents (57%) who took out loans decreased their contribution rate during the payback period.

Those ages 18-34 were the most likely to decrease their contribution amount (81%). Forty-eight percent of women kept the same contribution rate while paying back the loan, compared to only 39% of men.

Plan sponsors should consider limiting participants to three loans each from their retirement savings, TIAA-CREF said. These loans should come from participant contributions rather than employer contributions. Fewer loans can mean lower plan expenses and have a positive impact on plan fees.

© 2014 RIJ Publishing LLC. All rights reserved.

Connecticut funds the creation of a public IRA by 2016

Posted on June 20, 2014 by -

Legislation to spend $400,000 to develop a public IRA plan for all of Connecticut’s 740,000 private sector workers who lack retirement plan coverage was signed into law this week by Governor Dannel Malloy. The Democratic-controlled legislature approved the expenditure as part of the FY 2014-2015 budget last May 3.

State budget implementer H.B. 5597 establishes the Connecticut Retirement Security Board within the State Comptroller’s office. The Board, chaired by the State Treasurer and State Comptroller, will be charged with assessing the feasibility and development of a state-administered Public Retirement Plan.

The Plan is mandated to:

  • Provide a guaranteed rate of return
  • Offer universal access and portability
  • Have low-administrative costs
  • Be administered transparently   

The Board will be expected to report their findings and a plan for implementation to the General Assembly by April 1, 2016.  Other Board members will include the Secretary of the Office of Policy and Management, the Commissioner of the Department of Labor, employees, employers, and investment experts. 

© 2014 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on June 20, 2014 by -

Michael McLaughlin joins NFP Advisor Services

Michael McLaughlin has joined NFP Advisor Services as the managing director of Fusion Advisor Network and senior vice president of Business Consulting. He will support and develop business consulting functions for Fusion Advisor Network and Advisor Services. McLaughlin joins NFP after earlier stints at Gerstein Fisher, SEI and Lord Abbett. He holds Series 7, 24, 63, 65 license and earned a B.A. from Bucknell University.

Behavioral finance drives Prudential’s new website tools

Prudential Retirement, a unit of Prudential Financial, Inc, has introduced several technology tools designed to help participants, plan sponsors and intermediaries take more positive steps toward improving retirement savings, according to a press release this week.

The new tools, which leverage behavioral research, include an update to Prudential Retirement’s Retirement Income Calculator (RIC) and the introduction of the “Day One Achievement Meter,” “Quick Join” and “Plan Health.”

Both Prudential Investments and Prudential Retirement also launched “Experience Day One,” an interactive web site designed to educate participants about the effects of life events or milestones on retirement savings goals.

Retirement Income Calculator (RIC)

The new RIC offers a personalized report and action plan for participants, with specific savings recommendations and a “Do It” button, making it easy to implement those recommendations. The images portrayed throughout the experience help participants visualize their life in retirement based on the pleasurable activities they imagine themselves enjoying.   

Day One Achievement Meter

Using the techniques of “gamification,” this tool encourages users are encouraged to take positive actions such as repaying loans or increasing contributions.   

Quick Join

Quick Join is a mobile-ready web site that allows users to join their employer’s defined contribution retirement plan within minutes. The web site eliminates the need to register and offers participants the chance to enroll with one click, allowing them to join with pre-selected options from their employer or choose their contribution percentage and investment style on their own, based on their risk tolerance

Plan Health

Plan Health is a web tool that gives plan sponsors and advisors quick access to information that can diagnose the health of their retirement plan, such as cash-flow details and how long a participant has been enrolled in the plan. It also includes industry benchmarks for key metrics such as participation rate and average account balance, and allows plan sponsors and intermediaries to gauge the effectiveness of a plan and make appropriate changes to better prepare participants for retirement.

Experience Day One Funds

Experience Day One Funds is an interactive web site designed to help people visualize their life in retirement. Animations featuring two fictitious characters show their different paths to retirement beginning during the year they enrolled in the Day One Funds. The animations illustrate such life events as repaying college loans, marriage, starting a family, buying a home, becoming a caregiver for a parent, starting a business, and receiving an inheritance. Experience Day One Funds is a joint effort of Prudential Retirement and Prudential Investments.

Retirement… It beats working: Northwestern Mutual

The retirement attitudes and expectations of Americans who are still working versus those already retired differ significantly, according to Northwestern Mutual’s 2014 Planning and Progress Study.

The research suggests that many people will work longer by choice rather than necessity.  Others – and there are plenty of them – aren’t as fortunate and don’t feel they’ll have the luxury of choice.

Among retirees:

  • The average age they retired was 59
  • 72% say they are completely retired from working  

Among those still working:

  • The average age they expect to retire is 68 (nearly a decade longer than the retirees in the study)
  • 45% say they will continue to work in retirement because they want to
  • 21% are not sure how many years he or she will spend in retirement
  • 13% think they’ll never be able to retire
  • 38% aged 60 and over estimate that they will have to work until age 75 or older

Working adults are pessimistic; retirees happy

Working adults describe their own future retirement as “bad/poor,” “bleak/dismal” and “nonexistent.” Retired Americans describe their retired life as “fun/cheerful” and “good/pleasant.”  

  • 37% of working adults expect they to be happier in retirement than today
  • 84% of current retirees say they are happy in retirement
  • 60% say they’re happier now than when they were working
  • 70% of retirees describe life as ‘fulfilling’ 

Half of retirees saw health care costs increase significantly in retirement, and among them 45% didn’t anticipate these expenses.

Retirees who call themselves as “highly disciplined” planners are much likelier than non-planners to say that they are “happy in retirement” (91% vs. 63%). The study found that 42% of adults have never had a conversation with anyone about retirement. 
The 2014 Planning and Progress Study was conducted by Harris Poll on behalf of Northwestern Mutual and included 2,092 American adults aged 18 or older who participated in an online survey between January 21, 2014 and February 5, 2014. 

‘Esoteric ABS’ specialist joins Guggenheim Securities

Guggenheim Securities, the investment banking and capital markets division of Guggenheim Partners, has hired Matt Bissonette as a managing director in the fixed income division, effective in August, the firm announced this week. He will work on structured products transactions with a focus on Esoteric Asset-Backed Securities (ABS).

Bissonette had been co-head of the Special Situations sector within Structured Credit at Deutsche Bank, where he focused on Esoteric ABS and related financing products. He has structured and led securitizations for wireless cell towers, ground leases, rooftop leases, broadcast towers, distributed antenna systems (DAS) and non-US assets.

He holds a B.S. in economics from the Wharton School of the University of Pennsylvania.

Allianz Life sees “2020” in alliance with Barclays

Allianz Life’s exclusive agreement with Barclays on the use of Barclays US Dynamic Balanced Index, which began in 2013, will extend through 2020, the Minneapolis-based Insurer announced this week.

This agreement includes the index on Allianz Life Fixed Index Annuity (FIA) and Fixed Index Universal Life (FIUL) products. Depending on realized market volatility, the Barclays US Dynamic Balance Index provides shifts weight daily between the S&P 500 Index and the Barclays U.S. Aggregate Bond Index.

Since late 2013, the Barclays US Dynamic Balance Index has been added to several index allocation options available on Allianz Life FIA and FIUL products including:

  • Allianz 222 Annuity
  • Allianz 360 Annuity
  • Allianz 365i Annuity
  • Core Income 7Annuity
  • Signature 7 Annuity
  • Allianz Life Pro+ Fixed Index Universal Life Insurance Policy

The Barclays US Dynamic Balance Index shifts weight toward the S&P 500 Index when volatility is low and towards the Barclays bond index when volatility is high, reducing the issuer’s risk exposure. and allowing it to increase the potential crediting rate. the client more upside potential. Currently, FIA index allocations using the Barclays US Dynamic Balance Index apply a spread, and Life Pro+ index allocations apply a participation rate, the company said. 

Retirement income “barometer” is rising: MetLife 

“Keep it simple and avoid over-complication” when designing retirement plans.

That’s what executives at almost 90% of companies that offer defined benefit and defined contribution plans and 77% of DC-only plan sponsors say, according to the 2014 MetLife Qualified Retirement Plan Barometer (QRPB).

The Barometer was created by MetLife to assess the prevalence of a “new culture” among plans sponsors at FORTUNE 1000 companies that emphasizes on retirement savings and retirement income equally. As it was in 2011, the highest score this year was 89. But the lowest score in 2014 was 30, up from 19 in 2011.     

Most companies that only offer a DC plan are talking to all or most of their participants about retirement income, such as the effects of longevity (56%), the importance of establishing target retirement income levels in relation to current pay (56%). DC-only plan sponsors are also “exploring” guaranteed lifetime income options, the release said.

According to the QRPB, Over half (57%) of DC-only plan sponsors who do not include an income annuity have discussed this option with their record keeper, according to the study. Over a third (34%) have reviewed lifetime income solutions available in the marketplace and 11% have conducted due diligence about the providers of income solutions.

The Barometer score across all plan types was 58 out of a possible 100. Companies that offer broad access to DB and DC plans outpace their peers with a Barometer score of 71, indicating a much stronger retirement income culture. DC-only plan sponsors were more than twice as likely (58% to 28%) to believe that their workers will reach retirement age with inadequate retirement savings.    

Matthew Greenwald & Associates and Asset International, Inc., publisher of PLANSPONSOR and PLANADVISER magazines, conducted the online survey of Fortune 1000companies for MetLife.   

Seniors will spend $4.7 trillion: Zillner

Stocks, bonds and REIT shares aren’t the only things that older folks will be buying in the years ahead.

Spending in the age 50+ consumer market, which includes about 104 million current retirees and Boomers of diverse races, religions and lifestylce, is estimated at $3.1 trillion across all industries, except health care, which is estimated at an additional $1.6 trillion, according to Zillner, an agency providing research, strategic and marketing services focused on Senior consumers.
The 50+ group includes people in second careers, traditional retirees, parents of children and teens, divorcees, widows and widowers, grandparents, empty nesters and caregivers. “Two consumers of the same age may be experiencing very different lifestages, creating complexity in effectively reaching and communicating,” the release said. Adults often become more individuated and “comfortable in their own skin” as they age, so marketers must make messages targeted and personalized.

By 2025 the population will be: 20.5% Hispanic; 5.8% Asian; 12.6% Black; and 57.6% White.  Boomers will be America’s most culturally and racially diverse older generation. They include the first generation of fully acculturated Asian and Hispanic matures, raised by foreign-born parents.

To help marketers, Zillner has produced All the Wiser-Senior Consumer Insights and Outlook is a four-part research and insight series focusing on senior:

  • Buying power and marketing
  • Technology
  • Lifestyle — Mind, Body and Spirit
  • Influence

Part one of All the Wiser – Senior Consumer Insights and Outlook, is available now at zillner.com/wiser. 

 

(c) 2014 RIJ Publishing LLC. All rights reserved.

With ‘Daily+4,’ Forethought VA gets creative

Posted on June 12, 2014 by -

A new addition to the ForeRetirement variable annuity suite from Forethought Life Insurance Company, a subsidiary of Global Atlantic Financial Group Ltd, offers an income benefit with two roll-up options and three death benefit options.

The “Daily 6” income option, which Forethought launched under the name Daily Lock on its first ForeRetirement VA contract in early 2013, features a 6% annual deferral bonus to the benefit base or, if larger, the highest daily step-up in the value of the benefit base, in each of the first 10 contract years (or until the first withdrawal, if earlier).

The “Daily +4” income option, which is new, features a 4% simple annual deferral bonus to the benefit base and a daily market-driven step-up, if the growth of the account value generates one. The step-up is dollar-for-dollar and gains are credited even if the account value high doesn’t exceed the benefit base.

For example, if the purchase premium was $100,000 and the account value hits a high water market of $105,000 in the first year, the new benefit base would be $109,000 ($100,000 plus $5,000 plus a $4,000 deferral bonus). In year two, if the account value hits a new daily high of $107,000, the benefit base at the end of the year would be $115,000 ($109,000 plus $2,000–the change from $105,000 to $107,000–plus a $4,000 deferral bonus).

“That’s unique, and it’s been incredibly well-received,” said Robert Arena, president of Forethought’s annuity business, in an interview yesterday. [Two years ago, the income rider of a Security Benefit fixed index annuity used a “stacking” strategy that provided a 4% annual roll-up plus whatever the contract earned from fixed income investments or options on an equity index.]    

With the Daily 6 option, every day that the contract value exceeds the current benefit base, the benefit base locks in to the new high. If the markets drive the benefit base up by more than 6%, the benefit base will lock in the higher amount. But the benefit base goes up by at least 6% per year for the first 10 years, barring withdrawals.

With the Daily +4 option, each day that the contract value reaches a new high, the withdrawal base steps up to capture the new value. At the end of the year, a 4% bonus is added to the current withdrawal base on top of the growth achieved by the daily step-ups.

“Instead of applying either a fixed deferral credit or performance-based increases, Daily +4 credits both,” the company said in a release. “A 4% annual deferral credit applies on top of daily, performance-driven growth potential, or step-ups, for income purposes.”

“Daily 6 offers more downside protection with a higher deferral credit while the additive nature of Daily +4 provides greater growth potential when performance is strong,” said Paula Nelson, president of Forethought Distributors, LLC, the underwriting broker/dealer, in the release.

Contract owners who elect either income rider must invest in the available managed-volatility investment options, said Arena. There are nine managed-risk funds, eight offered through Forethought Variable Insurance Trusts and one from American Funds. All volatility overlays are provided by Milliman. The contract offers more than 50 investment choices in all. Fund expense ratios range from 0.58% to 2.84% per year, according to the prospectus. There’s currently an additional five to 15 basis point charge for investments in certain investment options.  

ForeRetirement variable annuities are offered in B shares (seven-year surrender period with 8.5% charge in first year), C shares (no surrender charges) and L shares (four-year surrender period with 8% charge in first year). They’re sold through over 100 national and regional financial institutions, including wirehouses, banks and independent broker-dealers. ForeRetirement variable annuities are available in all states except New York.

The combined mortality and expense risk and administrative fee is 0.65% for the B share, 1.65% for the C share and 1.10% for the L share contract. On the B and L shares, there’s a 0.50% annual fee for premium invested in options other than the fixed account. The minimum initial premiums are $5,000 for qualified contracts and $10,000 for non-qualified. There’s a $50 per year maintenance fee for contracts valued at $50,000 or less on a contract anniversary.

The annual expense ratio for either income rider is 1.25%. The annual percentage payout rates of the benefit base for the income riders (single life) are 4% from age 59½ to age 64, 5% from 65 to 84 and 6% from 85 onward. The rates for joint life contracts are a half-percent lower for each age bracket. 

There are three death benefit options: Legacy Lock II (85 basis points with the income rider, 115 basis points without 125, 61-65), Return of Premium (15 basis points) and Maximum Daily Value (45 basis points). All-in annual costs for the B share, including insurance and investment fees, including an income rider and return-of-premium death benefit, would be about 3%. 

© 2014 RIJ Publishing LLC. All rights reserved.

VAs’ negative cash flow exceeds $1 billion in 1Q2014

Posted on June 12, 2014 by -

New sales of variable annuities dropped 6.4% in the first quarter of 2014, to $33.0 billion vs. $35.3 billion in the last quarter of 2013, according to Morningstar’s quarterly Variable Annuity Sales and Asset Survey.

Sales were also down 3.7% from the first quarter of 2013 level of $34.3 billion. Assets rose to $1.88 trillion from $1.87 trillion at the end of last year. Net cash flow was again negative for the quarter, estimated at $(1.1) billion.

VA sales were affected by “poor market performance and increased volatility” during the quarter. Both factors may have helped lift the sales of “VA substitutes” like fixed index annuities with guaranteed lifetime withdrawal benefits (GLWBs).

Jackson National’s industry-leading market share reached 19.3% at March 31, 2014, up from 15.5% on December 31, 2013. With sales of $6.4 billion, up from $5.5 billion in 4Q2013, the unit of Britain’s Prudential plc was the only major VA issuer whose sales grew in the first quarter.

Jackson’s sales growth was more concentrated in its Perspective product line, which saw a 20.2% sales increase, than in its newer EliteAccess line of accumulation-driven VAs, which grew 4%. The other top-25 companies showing growth were Fidelity, Thrivent Financial, and New York Life. Their sales were up 10.5%, 5.5%, and 4.9% in 1Q2014, respectively.

Morningstar noted that its “net flow survey is discontinued beginning this year; the calculated estimates are derived from all reported assets in VA products, vs. the survey process which did not have the industry’s full participation.” Net flows continue to be hurt by “drawdowns of large blocks of aged 403(b) business and the exodus of assets from contracts issued by companies that have exited the industry,” Morningstar said.

© 2014 RIJ Publishing LLC. All rights reserved.

Total U.S. Annuity Sales Up 13% YOY: IRI

Posted on June 12, 2014 by -

The Insured Retirement Institute (IRI) today announced final first-quarter 2014 sales results for the U.S. annuity industry, based on data reported by Beacon Research and Morningstar, Inc. Industry-wide annuity sales during the first quarter reached $56.1 billion, up 13.1 percent compared with the first quarter of 2013 when sales totaled $49.6 billion.

The year-over-year sales growth was supported by continued high levels of fixed annuity sales, which totaled $22.6 billion during the first quarter, according to Beacon Research. This was a 50.7 percent increase from nearly $15 billion in first-quarter 2013 and down just 4.1 percent from $23.5 billion in the previous quarter. Meanwhile, according to Morningstar, variable annuity total sales came in at $33.5 billion in the first quarter, down 3.2 percent compared with first-quarter 2013 total sales of $34.6 billion and down 6.4 percent from $35.8 billion during the fourth quarter of 2013.

“Combined annuity sales across the marketplace are well above the pace set in 2013,” said Cathy Weatherford, IRI President and CEO. “This surge was supported by continued strong sales of fixed annuity products. Sales of all types of fixed annuities soared well above first-quarter 2013 levels, achieving year-over year sales growth ranging, depending on the product, from 38 percent to nearly 155 percent.”

According to Beacon Research, strong fixed annuity sales during the first quarter were sustained by the second highest quarterly sales of indexed annuities on record. Indexed annuity sales reached $11.2 billion during the quarter, a 44.3 percent increase from nearly $7.8 billion during first-quarter 2013 but a 4.4 percent decline from the record high of nearly $11.8 billion set during fourth-quarter 2013. Market value adjusted (MVA) annuity sales continued to grow, reaching $2.48 billion in the first quarter. This was a 26 percent increase compared to sales of $1.96 billion during the previous quarter and a 154.6 percent increase from MVA annuity sales of $972 million during first-quarter 2013. For the fixed annuity market, there were approximately $11.1 billion in qualified sales and $11.5 billion in non-qualified sales during first-quarter 2014.

Of Ponies, Manure Piles, and Annuities

Posted on June 11, 2014 by -

In the New York Times article on deferred income annuities last Saturday, the writer seemed to focus on whether DIAs are a “wise buy.” Like most articles on annuities in mass media, this one presented annuities in what’s known as the “investment frame.”

Here we go again.  

Viewed through the investment lens (“as through a glass eye, darkly,” to borrow Mark Twain’s assessment of James Fenimore Cooper’s dim literary vision), life-contingent annuities tend to look dumb. 

When using the investment frame—i.e., when comparing annuities with investments like no-load mutual funds—annuity expenses seem ridiculously high. The costs of income annuities, though hidden in the payout rate, run (according to a recent presentation by Wade Pfau of The American College) as high as 15% of premium for distribution, administration and (largest of all) adverse selection. And that doesn’t count the potential 3.5% state tax.     

It gets worse before it gets better. When a writer frames annuities as investments, the value of the so-called survivorship credit or mortality credit tends to be discounted. (Or, if mentioned at all, it becomes a sad reminder, as behavioral economist Meir Statman once said, that annuities “smell of death.”) To banish the odor, many people elect a cash refund option. But that just adds another cost, and another reason not to buy the product. Opting for the cash refund or a period certain (although not a terrible idea) is like buying insurance for your insurance.     

Using the investment lens to evaluate a DIA is like looking at a burning match through a welding mask. The flame won’t be very bright. For DIAs or SPIAs (single-premium immediate annuities) to make sense, you have to view them through what Jeff Brown of the University of Illinois and others have called the “insurance frame.”

In a nod to the insurance frame, the Times reporter conceded that “you might view the purchase [of a DIA] as an insurance policy.” But that understatement only added to the confusion. An annuity is an insurance policy. And insurance policies cost more than investments because you’re paying insurers to relieve you of a chunk of your market risk and longevity risk. When you buy stocks or bonds, you retain the risk.   

The cost of annuities is akin to the pile of manure in the barnyard parable that Ronald Reagan made famous. According to The Gipper’s brand of cowboy optimism, a manure pile meant that a pony must be nearby. If we admit that annuity costs are like manure—a necessary evil, if you will—then you have to ask, where’s the pony?     

For a retiree, the pony is: more spending power, relative to a 3.5% systematic withdrawal plan from a mutual fund portfolio; the extra risk you can take with your other money; the cash you don’t have to hoard against the risk of living to 95; the assurance that if the stock market blows up, your retirement won’t; the freedom to ignore CNBC and sleep heartburn-free. These ponies, invisible to anyone wearing investment glasses, are reasons to tolerate the manure pile. You buy insurance so you can do fun stuff that you wouldn’t otherwise be able to do, because of the risks.

When you’ve spent all your life thinking with your investment side of your brain, it’s tough to switch to the insurance side. But it would be refreshing to see a Times article on DIAs that quoted, for example, Curtis Cloke, the Iowa adviser who uses period certain DIAs to give ultra-HNW clients free rein with the rest of their wealth. Or Faisal Habib at Cannex, whose PrARI modeling tool shows how to squeeze more income with less risk from the same-size nest egg by blending mutual funds and income annuities. 

Or the Times might have called David Laibson, the Harvard behavioral economist who has become interested in retirement and annuities. Last February, in a keynote at the Morningstar institutional investor conference, Laibson described good bets and bad bets. The strategy of buying a life-contingent income annuity with a fraction of your savings is a good bet for retirees, he said.

If you live a long time, he reasoned, the annuity’s survivorship credits will pay off. And if you die early, so what? Your heirs won’t be cheated because you won’t have had the time or the need to spend the bulk of your savings. The annuity asset may vanish (or shrink), but so will the liability. That’s using the insurance frame.

We’re not here to exalt annuities. If you (or your clients or customers) can afford to retain market risk and longevity risk in retirement, so much the better. It would be nice, however, if mainstream journalists would look at income annuities with fresh eyes and see them through insurance lenses.

© 2014 RIJ Publishing LLC. All rights reserved.

The Interest Rate Enigma

Posted on June 11, 2014 by -

Today, the United States government can borrow for ten years at a fixed rate of around 2.5%. Adjusted for expected inflation, this translates into a real borrowing cost of under 0.5%. A year ago, real rates were actually negative. And, with low interest rates dominating the developed world, many worry that an era of secular stagnation has begun.

How problematic low real rates are depends on the reason for their decline. The prevailing view is that the downward trend largely reflects a fall in equilibrium or “natural” interest rates, driven by changes in saving and investment fundamentals. In other words, a higher propensity to save in emerging economies, together with investors’ growing preference for safe assets, has increased the supply of saving worldwide, even as weak growth prospects and heightened uncertainty in advanced economies have depressed investment demand.

This perceived decline in “natural” interest rates is viewed as a key obstacle to economic recovery, because it impedes monetary policy’s capacity to provide sufficient stimulus by pushing real rates below the equilibrium level, owing to the zero lower bound on nominal rates. How to stem the decline in equilibrium rates has thus become the subject of lively debate.

Conspicuously absent from the debate, however, is the role of financial factors in explaining the trend decline in real rates. After all, interest rates are not determined by some invisible natural force; they are set by people. Central banks pin down the short end of the yield curve, while financial-market participants price longer-dated yields based on how they expect monetary policy to respond to future inflation and growth, taking into account associated risks. Observed real interest rates are measured by deducting expected inflation from these nominal rates.

Thus, at any given point in time, interest rates reflect the interplay between the central bank’s reaction function and private-sector beliefs. By identifying the evolution of real interest rates with saving and investment fundamentals, the implicit assumption is that the central bank and financial markets can roughly track the evolution of the equilibrium real rate over time.

But this is by no means straightforward. For central banks, measuring the equilibrium interest rate – an abstract concept that cannot be observed – is a formidable challenge. To steer rates in the right direction, central banks typically rely on estimates of unobserved variables, including the equilibrium real rate itself, potential output, and trend unemployment. These estimates are highly uncertain, strongly model-dependent, and subject to large revisions. 

Moreover, central banks’ policy frameworks may be incomplete. By focusing largely on short-term inflation and output stabilization, monetary policy may not pay sufficient attention to financial developments. Given that the financial cycle is much more drawn out than the business cycle, typical policy horizons may not allow the authorities to account adequately for the impact of their decisions on future economic outcomes. The fact that financial booms and busts can occur amid relatively stable inflation does not help.

With financial-market participants as much in the dark as central banks, things can go badly wrong. And so they have. Over the last three decades, several credit-induced boom-bust episodes have caused major, sustained damage to the global economy. It is difficult to square this reality with the view that interest rates, which set the price of leverage, have been on an equilibrium path all along.

The focus on fundamental saving and investment determinants of interest rates is entirely logical from the perspective of mainstream macroeconomic models, which assume that money and finance are irrelevant (“neutral”) for the output path in the long run. But successive crises have shown that finance can have long-lasting effects. Financial factors, especially leverage, not only can amplify cyclical fluctuations; they can also propel the economy away from a sustainable growth path. Indeed, a growing body of evidence shows that output is permanently lower in the wake of a financial crisis.

All of this suggests that the trend decline in real interest rates does not just passively mirror changes in underlying macroeconomic fundamentals. On the contrary, it also helps drive them. Low interest rates can sow the seeds of financial booms and busts.

Policies that do not lean against the booms but ease aggressively and persistently during busts induce a downward bias in interest rates over time, and an upward bias in debt levels. This creates something akin to a debt trap, in which it is difficult to raise rates without damaging the economy. The accumulation of debt and the distortions in production and investment patterns induced by persistently low interest rates hinder the return of those rates to more normal levels. Low rates thus become self-reinforcing.

This alternative perspective highlights the trade-off inherent in ultra-accommodative monetary policy. Monetary policy cannot overcome structural impediments to growth. But the actions that central banks take today can affect real macroeconomic developments in the long term, primarily through their impact on the financial cycle. These medium- to long-term side effects need to be weighed carefully against the benefits of short-term stimulus. While low interest rates may be a natural response to perceptions of a chronic demand shortfall, such perceptions are not always correct – and can be very costly over time.

Laying the foundations of a sustained recovery requires measures to strengthen public- and private-sector balance sheets, together with structural reforms aimed at raising productivity and improving growth potential. More stimulus may boost output in the short run, but it can also exacerbate the problem, thus compelling even larger dosages over time. An unhealthy dependence on painkillers can be avoided, but only if we recognize the risk in time.

© 2014 Project Syndicate.