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Vanguard issues “How America Saves 2014”

Posted on June 11, 2014 by -

Vanguard, the full-service provider of defined contribution plan services to more than 3.5 million participants with over $600 billion in assets at some 3,000 companies, has published “How America Saves 2014,” the 13th edition of its annual report on participant behavior and experience.   

A copy of the 99-page report can be downloaded here.

Among other findings, the report documented the rise in the use of employer-provided investment solutions by participants. “In 2013, 40% of all Vanguard participants had their entire account balance invested in either a single target-date fund, a single target-risk or traditional balanced fund, or a managed account advisory service,” the report’s introduction said. This trends signals “a shift in responsibility for investment decision-making away from the participant and back to employer-selected investment and advice programs.”

The report pointed to another emerging plan design strategy called “reenrollment,” in which plan sponsors address portfolio construction issues by moving participants into investments such as target-date funds, balanced funds and managed accounts. How America Saves also includes supplemental reports on participant patterns in the DC retirement plans of 12 industries.

The report showed that, although higher participation rates are correlated with auto-enrollment, so are lower deferral rates.

“Plan design, specifically the predominant use of a 3% default deferral rate, means participants in plans with automatic enrollment are saving less,” the report said. “Participants joining a plan under an automatic enrollment feature have an average deferral rate of 4.9%, compared with 7.5% for participants under plans with voluntary enrollment.”

This occurred even though “participants earning less than $30,000 save about 75% more on average under voluntary enrollment designs,” the report added. “This suggests that higher default deferral rates would be amenable to plan participants in automatic enrollment designs. Our research on automatic enrollment indicates that “quit rates” do not deteriorate when higher default percentages are used to enroll employees.”

Other “How America Saves 2014” findings included:

  • In 2013, the median participant account balance was $31,396 and the average was $101,650. Vanguard participants’ median and average account balances rose by 13% and 18%, respectively, during 2013. During the five-year 2008–2013 period, both median and average balances rose by about 80%.
  • Reflecting strong stock market performance in 2013, the median one-year participant total return was 21.9%. Five-year participant total returns averaged 12.7% per year.
  • At year-end 2013, the Roth feature was adopted by 52% of Vanguard plans and 13% of participants within these plans had elected the option.
  • 34% of Vanguard plans had adopted automatic enrollment (AE) as of year-end 2013, up from 24% five years earlier. More than half of all contributing participants in 2013 were in plans with AE and 62% of employees participating for the first time in 2013 were in plans with AE.
  • While initially applied only to new hires in many plans, AE is increasingly used for eligible nonparticipants in half of those plans.
  • AE substantially increases plan participation among low-income workers, young workers, and minorities.
  • Employees who joined their plan through AE had an overall participation rate of 82%, compared with a participation rate of 65% for employees who joined through voluntary enrollment.
  • Of AE plans, 69% automatically increase their participants’ contribution rate annually. Another 29% do not. Separately, 65% of AE plans automatically increase participants’ contribution rate but default them at an initial 3% or less. Vanguard recommends that a typical participant target a total contribution rate of 12% to 15%, including both employee and employer contributions.
  • 98% of AE plans use a target-date fund (TDF), other type of balanced fund, or managed account as the default investment. Nine in 10 choose a target-date fund.
  • In 2013, 40% of participants were solely invested in an automatic investment program, compared with 22% at the end of 2008. Of those, 31% were invested in a single TDF, another 6% held a balanced fund, and 3% used a managed account program.   
  • With the growing use of  target-date funds, Vanguard anticipates that 58% of all participants and 80% of new plan entrants will be entirely invested in a professionally managed option by 2018.
  • The average participant account balance was $101,650 in 2013. Among continuous participants—those with a balance between both year-end 2008 and 2013—the median account balance rose by 182%, reflecting both the effect of ongoing contributions and market returns during this period.  
  • Low-cost index, or passive, funds are becoming prevalent. In 2013, nearly half of Vanguard plans offered an “index core,” or set of index options spanning the global capital markets. Large plans have adopted this approach more quickly, and about 60% of all Vanguard participants are offered an index core.
  • Factoring in indexed target-date funds with their equity and fixed income mix, 84% of participants hold equity index investments.

© 2014 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on June 11, 2014 by -

Prudential board authorizes another $1 billion in share repurchases

The board of directors of Prudential Financial, Inc., has authorized the repurchase of up to $1 billion of its outstanding common stock between July 1, 2014 and June 30, 2015, the Newark, NJ-based company said in a release this week.

Between June 2013 and March 31, 2014, the company repurchased approximately $750 million of its Common Stock.

“Management will determine the timing and amount of any share repurchases under the share repurchase authorizations based on market conditions and other considerations. The repurchases may be effected in the open market, through derivative, accelerated repurchase and other negotiated transactions, and through plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended,” the release said.

MetLife to buy back $1 billion of its common stock

MetLife, Inc. announced that it will resume share repurchases and intends to repurchase up to $1 billion in MetLife, Inc. common stock. The company will utilize existing authorizations from the board of directors to repurchase MetLife, Inc. common stock. The last time MetLife repurchased shares was 2008.

Commenting on the announcement, Chairman, President and Chief Executive Officer Steven A. Kandarian said:  “Our philosophy is that excess capital belongs to our shareholders. The challenge is to strike the right balance between adherence to our philosophy and recognition that MetLife’s required capital levels remain unknown if we are designated a non-bank systemically important financial institution, or SIFI, under the Dodd-Frank Act.

“We anticipated that the non-bank SIFI capital rules would be known by now, but recent statements by the Federal Reserve suggest that we may not see draft rules until 2015. Meanwhile, our capital continues to grow, and later this year we will raise $1 billion as the last tranche of equity units issued to fund the Alico purchase converts to common shares.”

AIG names Peter Hancock as next CEO

The board of directors of American International Group, Inc., has named Peter D. Hancock to succeed Robert H. Benmosche as AIG’s  president and Chief Executive Officer and join AIG’s board, effective September 1, according to a release by AIG this week.

Mr. Hancock will also join AIG’s Board of Directors, effective September 1. He and will succeed Robert H. Benmosche, who currently is AIG President and Chief Executive Officer.

Hancock, 55, currently serves as executive vice president, AIG, and CEO of AIG Property Casualty. He joined AIG in 2010 and was named CEO of AIG Property Casualty in March 2011, when the division was reorganized into two major global groups: Commercial and Consumer. He had previously served as Executive Vice President, Finance, Risk, and Investments, AIG.

Before coming to AIG, Hancock was vice chairman, responsible for Key National Banking, at KeyCorp. Earlier, he spent 20 years at J.P. Morgan, where he established the Global Derivatives Group, ran the Global Fixed Income business and Global Credit portfolio, and served as the firm’s chief financial officer and chief risk officer. He also co-founded and served as president of Integrated Finance Limited, an advisory firm specializing in strategic risk management, asset management, and innovative pension solutions. 

Mr. Hancock was raised in Hong Kong and later attended Oxford University, where he earned his Bachelor of Arts degree in politics, philosophy, and economics.

Plumvo, a “social finance” site, is launched by Peridrome

Plumvo, a new website designed to “help people build and maintain financial plans, allows users to build comprehensive plans for retirement, college funding and other goals and to link the goals to specific pools of assets,” has been launched by Peridrome Corp., the company said this week. A free preview version of Plumvo was also released.

In a release, Plumvo co-founder Gib Veconi said the tool was designed to “accommodate the various and personal ways people think about their goals and money instead of expecting individuals to fit their lives into narrowly-focused forms and spreadsheets.” “People do not experience retirement the same way and they do not save and invest the same way,” he said. “Everyone has a different set of plans and expenses. Plumvo allows each member to develop a personalized plan, unlike any other, that reflects their unique situation.”

Peridrome (the names means “a genus of moths”) is a marketing service for wealth managers, and Plumvo is apparently aimed at advisers as well as individuals. According to the Plumvo website:

“In the future, Plumvo will also become a great new place for financial professionals to reach new clients who are already actively engaged in financial planning. Once a member has organized her finances and identified her goals, she is  in a better position to make decisions informed by professional advice. Both advisor and client benefit from a deeper relationship, built on a shared understanding of the client’s current situation and goals. Plumvo will also keep you up to date on changes in your clients’ plans and provide opportunities to introduce products and services on a timely basis.”

Securian president will also serve as CEO

Securian Financial Group announced that president Christopher M. Hilger will also serve as chief executive officer, effective January 1, 2015. Chairman and CEO Robert L. Senkler, 61, who will retire from active management after serving as CEO for 20 years, will remain as chairman of the board of directors.

Hilger, 49, will be the 13th CEO in Securian’s 134-year history. He was appointed president in 2012.

A 27-year veteran of the insurance industry, Hilger also serves as CEO of Allied Solutions LLC, a Securian subsidiary headquartered in Indianapolis, IN that distributes insurance products and services to financial institutions. He joined Securian’s management team in 2004 when the company purchased Allied Solutions and was subsequently named senior vice president of Securian’s Financial Institution Group. In 2010, he was promoted to executive vice president with the added accountability for the company’s group insurance business. In 2012, he was appointed president with responsibility for all of Securian’s businesses.

Hilger holds a bachelor’s degree from Indiana University. Senkler, a 40-year veteran of the company, has served as chief executive officer since July 1994. Under his direction, the insurance protection the company provides grew at a compound annual rate of 12% to more than $1 trillion and assets under management quadrupled. The company expanded its St. Paul, MN headquarters to over one million square feet of office space, and its national workforce grew to more than 3,700.

© 2014 RIJ Publishing LLC. All rights reserved.

Club Vita: Where Levity Meets Longevity Risk

Posted on June 10, 2014 by -

Club Vita’s London headquarters are housed in a gleaming, glass-walled 13-story building, designed in 2003 by architects Foster and Partners. From a window in the reception room, visitors can glimpse a handsome tree and a section of an ancient wall that the Romans built sometime around 200 A.D.

The juxtaposition of ancient and modern appropriately represents a firm that pioneers longevity research. Launched in 2008, as a sister company to actuarial consultancy Hyman Robertson, Club Vita delivers longevity analysis and prediction to pension plans of over 200 clients from a cross section of industries: banks, insurance companies, technology, basic materials, industrials, consumer goods and services, utilities and local government. That roster includes major UK firms like Aviva, BP, Diageo, Johnson Matthey and the Daily Mail.

Club Vita works like a real club, with member firms paying subscriptions to receive top-notch statistics gleaned from their deep collective pool of data.  The aim is to provide sharper insights into the life expectancy of every participant in a given plan, and thus improve on ad-hoc adjustments to standard mortality tables. The company’s own 20 employees, including actuaries, statisticians and infrastructure specialists, have developed the largest data base of its kind in the UK, to help firms manage the danger of unexpectedly long-lived participants.

A green solution

“It’s a particularly nasty risk in our business,” explains Steven Baxter, one of the firm’s longevity experts. He and I sit in a conference room, facing the Museum of London, which is devoted to the capital city’s history since prehistoric eras.  It’s another reminder of how time marches on. “Longevity risk is creeping and insidious,” he continues, noting the imaginative theme on the firm’s website at www.clubvita.co.uk. Graphics there depict avocado-shaped cartoon figures in avocado green hazmat suits, engaged in waste disposal activities. 

The point is that dangerous longevity risk requires expert handling, with millions of pounds in UK pension plans at stake. So why did Club Vita decide to go with such whimsical illustrations for marketing their ultra-serious, even somber, service? “We wanted to make life a bit more fun,” is the simple answer.  Even the name—vita means life—expresses a positive goal. “At one point, we actually considered buying some of those green suits and modeling them!” Baxter smiles.

In order to sidestep those unpleasant longevity surprises, plans need a thorough understanding of their membership dynamics, as well as ongoing trends and projections. Club Vita, which looks across workers in diverse industries, is positioned to drill down and calibrate for a granular mortality experience. Its statistical sample pool comprises about 2 million retirees from member firms who are receiving pensions, along with another 4 million pre-retirees. “We focus most on the retired cohort,” says Baxter, “since the probability would be low that a 30-year-old would die soon.”

In its detailed level of analysis, the group takes into account a host of factors.  It measures affluence, considering both pay at and during retirement; geo-demographics, refined down to local postal codes as precise as 12 to 20 houses; age and gender; occupation and health. As another unique element in Club Vita’s manipulation of data, Baxter adds, “we can also use marketing information around consumer habits, like supermarket loyalty rewards.” That sophisticated analysis helps to establish individuals’ characteristics for comparing tiny clusters in the postal code map. 

Club Vita meanwhile prides itself on accessing the most current data, as subscribers update their memberships annually. That timeliness is key to compiling accurate insights. Other statistical record keepers, particularly the Office for National Statistics (ONS) model, estimates for the live UK population based on extrapolations from a 10-year census, which risks error around under-reporting and migration. For example, one important development has been improvement patterns in longevity between socio-economic groups, based on lifestyle adjustments. “We both see that gap narrowing, and our results are consistent with ONS, but we see insights sooner,” Baxter explains.

£1.2 trillion in DB liabilities

Exact prediction counts in the tug-of-war between exposure to costly shortfalls and tying up unnecessary funds for reserves in defined benefit plans.  (The defined contribution market is a different game, where participants shoulder their own longevity risk, by individually assuming that burden upon retirement.) Club Vita primarily serves the shrinking but still substantial DB universe, which now represents eight percent of UK pensions. According to the Purple Book, published annually by the Pension Protection Fund and Pensions Regulator, DB liabilities in January 2014 stood at £1.2 trillion. 

The trouble is that UK plans are not fully funded, and not every company can afford the cash to transfer the shortfall risk, nor are all equipped to buy insurance. That whopping sum of DB obligations in the UK swamps the capacity of the insurance industry to absorb that longevity risk.

Here is where Club Vita plays its role. It helps level the playing field and keeps the longevity insurance players honest. Those counterparties have enjoyed a long history of writing insurance and managing risk. In such a highly competitive sellers’ market, and commanding a wealth of information about key factors, they are advantageously placed to name their own prices.  Compounding their advantage, insurers can balance out some of their life insurance costs against annuities, if account holders live longer.

Before Club Vita came on the scene, the pension industry had little or few comparable data pools to work from, but the club has shifted the asymmetry, so that pension plans can finally assess whether they are indeed paying a fair price. “In the past,” says Baxter, “they relied on guesswork or a leap of faith. But now we provide the science.”

Specific conditions, causing companies pain in funding DB plans from their own pockets, began to transpire in the UK in the late 1990s. Similar storm clouds are now gathering in the US, according to Baxter.  First, a change in accounting practices in the UK, with increased marking-to-market, have made corporate balance sheets more sensitive to interest rate levels. That means payments tied to the end of a contract have become more valuable, and hence a material issue.  These adjustments have resulted in the recognition of the critical importance of understanding longevity patterns, as a way to avoid surprises and gain better insights.

That mission is the driving rationale behind Club Vita’s unique offering. As its clever artwork illustrates, little avocado figures scuttle to monitor and shore up toxic, elusive substances, dispatching them into risk reduction units to contain the challenge. Where knowledge is power, Club Vita provides advance preparedness.

© 2014 RIJ Publishing LLC. All rights reserved.

An Algorithm That Loves Annuities

Posted on June 5, 2014 by -

Decumulationistas, to coin a term, tend to believe that a lot of Americans could probably spend more money with less risk during retirement if they allocated their savings to a blend of annuity and investment products rather than to investments or annuities alone.

Such a product allocation, the theory goes, pays off in at least three ways. It uses mortality risk pooling to boost income; it reduces the need to hoard against uncertain future expenses, and it lets people gamble a little with their liquid investments without losing sleep.   

But how do you optimize such a strategy? And how can you do it in an intellectually rigorous way that:

  • Incorporates the major knowns (income needs, existing resources, legacy desires)
  • Adjusts for the major variables (product fees and features; broker-dealer suitability restrictions) and
  • Doesn’t fudge the major uncertainties (market risk, sequence risk and longevity risk) by assuming average values

In 2008, Moshe Milevsky’s QWeMA Group in Toronto tackled this multidimensional problem. Using partial differential equations, they developed a calculator to generate custom allocations within a portfolio with three types of products: mutual funds, variable annuities with lifetime income riders, and fixed income annuities.

The calculator’s acronym is PrARI, or Product Allocation for Retirement Income. This past spring, Cannex, the Toronto-based financial product data distributor, acquired QWeMA and PrARI. According to Faisal Habib (below right), the president of QWeMA at Cannex, the deal is a win-win for the two firms. The PrARI tool will add a service element to Cannex data products, and the Cannex distribution network will introduce PrARI to a wide audience of broker-dealers. 

Faisal Habib

Insurance company broker-dealers are the most logical audience. Manulife and John Hancock (Manulife’s U.S. unit) were early adopters of PrARI. Then Pacific Life licensed the tool. More recently, Principal Financial has rolled it out. (Those firms could not be reached for comment before deadline.) So far, about 5,000 advisers have access to PrARI, Habib told RIJ, and use it as a sales, education or planning tool.  

Triple threat

PrARI creates portfolios of mutual funds, VA with income riders, and income annuities for a specific reason. Those three product classes address, respectively, three of the biggest financial risks that retirees face: dilution of spending power by inflation, pressure to liquidate depressed assets (“sequence” risk), and the risk that they’ll outlive their savings (longevity risk).

“Each product gives you a certain hedge for a certain cost,” Habib told RIJ recently. “PrARI gives you a cost-benefit analysis. We can say to the client: this particular combination works in your best interest.” Those three products are for everyone, he adds. They’re mainly for retirees who can’t get enough income simply by withdrawing about four percent of their savings each year.   

To find a blend of those products that meets a retiree’s financial needs and desires with the best chance of success, PrARI needs several inputs. These include the client’s personal and financial information (e.g., age, assets, income needs, sources of guaranteed income); product information from the Cannex annuity database (now supplemented with VA data through a partnership with Beacon Research); and the broker-dealer’s suitability parameters, whatever they might be.

To calculate the probable success of a given product allocation in producing the income a client needs, PrARI feeds all of this information into the algorithm that Moshe Milevsky’s Qwema Group, a private consulting firm, created about six years ago. This algorithm is unusual: It estimates probabilities of success by using “numerical analysis” instead of the more popular Monte Carlo simulations.

In the world where most retirement calculators use the Monte Carlo approach, that’s significant. To get an accurate probability assessment from a Monte Carlo simulation, you have to run millions of projections. That requires too much expensive computer power and time—too much for an everyday adviser-client desktop calculator like PrARI. Numerical analysis offers a short cut. Based on a few carefully chosen samples, it quickly and cheaply interpolates a result that’s still accurate enough for planning purposes.

Numerical analysis

Here’s a crude analogy: A journalist on deadline might confirm a disputed event or fact by calling three knowledgeable people. If all three agree on the facts, the reporter proceeds with the story. The accuracy of that technique, and of numerical analysis, depends on the skill with which the samples are chosen. A Monte Carlo approach might, by contrast, involve asking hundreds of randomly chosen people a single question. 

Habib provided RIJ with screenshots of the inputs and outputs of a highly simplified sample PrARI calculation. The hypothetical involved a newly retired 66-year-old single New Yorker with $1 million in savings, with 60% in stocks and 40% in bonds.

The client expected $18,000 from his inflation-adjusted Social Security but wanted a total retirement income of $55,000, increased by 3% per year for inflation. He wanted a 90% chance of maintaining his desired income for life. He had no legacy desire.

PrARI illustration

PrARI offered a side-by-side comparison between a classic systematic withdrawal from mutual funds and a customized blend of funds and annuities. Both projections called for maximizing income over legacy value. The SWiP program entailed an annual inflation-adjusted drawdown starting at $37,000 from the $1 million (in a 60% equity/40% bond portfolio) to supplement the $18,000 in annual Social Security benefits. This strategy yielded a success probability of 88%, with an expected legacy value of $376,000.  

According to PrARI, the blended solution was better. It generated an income of $71,500 from three sources: Social Security, a $300,000 SPIA (with 10 years certain) paying $23,500 a year for life, and a $600,000 VA/GLWB (50/50 equity/bond allocation) paying $30,000 for life. The plan left $100,000 in cash. The estimated legacy was $340,000 and the probability of meeting the original $55,000 annual income requirement for life (what Qwema calls the RSQ or Retirement Sustainability Quotient) was 100%.   

A credible basis for sales 

In the world of financial product distribution, at least in channels where the culture, the incentives, and the licensing aren’t biased against insurance products, a calculator like PrARI has obvious potential to help financial advisers sell more guaranteed income products.  

“For an insurance agent who has never sold mutual funds, or for a registered rep who has only used systematic withdrawal and never an annuity, this tool helps them in suggesting and justifying alternative solutions,” said Habib. “It’s a value-add for them.”

Each distributor that uses PrARI “white labels” it and puts its own product options and suitability guidelines into the system. Cannex, as a purveyor of data on products from hundreds of insurance companies, tends to remain product-agnostic.

“We didn’t want to be seen as partial to one set of products or another. We had a unique proposition in product allocation. We never wanted Qwema to be seen as the development arm of any particular company,” Habib told RIJ.

PrARI does, however, exclude certain products when their terms aren’t attractive. “The tool is client-focused. If the fees are too high, or if the withdrawal rates or crediting rates are too low, then you’ll see the allocations move out of them,” he said.

In some cases, PrARI produces no recommendations at all. As retirement advisers know, clients don’t always have enough savings to spend as much as they’d like during retirement and still avoid ending up without enough money to live on. 

“The algorithm won’t magically bring them an adequate income. Advisers say, ‘If I put all my client’s information in, why don’t we get a solution? Why doesn’t my client get more income?’ We tell them, ‘We can’t go against the market. If you don’t have enough you don’t have enough,’” Habib said.

“The question then comes up, ‘What can I go back to my client with?’ We tell them: Ask the client to save more, delay retirement, or consume less. The adviser says, ‘You are making my life difficult.’ But there’s a no other way to do it. We can put in all the complex math and the theory of actuarial science, but sometimes it won’t give you an answer.”

© 2014 RIJ Publishing LLC. All rights reserved.

British pension industry wary of “collective” DC

Posted on June 5, 2014 by -

The British pension industry offered a mixed response this week to the UK government’s announced intention to create new legislation that will allow the establishment of collective—i.e., centrally managed—defined contribution (CDC) retirement plans similar to Denmark’s. 

The UK government’s commitment to CDC was made in the Queen’s Speech, a statement by the head of state describing Parliament’s initiatives in its next session, which begins in the autumn, according to IPE.com.

UK pension law does not currently allow DC/DB hybrids in which plan sponsors and participants share the investment risk. There’s no provision for anything but pure DC, where participants bear the risk for outcomes, and pure DB, where plan sponsors bear the risk.    

The new legislation is slated for 2016. That’s when the country launches its new basic “first pillar” old age insurance program. That’s also when workers will no longer be able to substitute participation in an employer-sponsored plan for contributions to the government-sponsored supplemental DC plan, a practice known as “contracting out.”

Many existing DB plans are expected to close when contracting-out ends. When that happens, the government would prefer to see employers adopt CDC plans (also called “Defined Ambition” plans) than to see U.S.-style DC plans become the norm in the UK.

While some sections of the UK industry welcomed CDC, others said plan sponsors aren’t enthusiastic about it, it’s not consistent with the recent abolishment of requirements for annuitization of tax-favored savings, and the timing is bad.

The National Association of Pension Funds (NAPF), for instance, had previously asked the government to slow down its reforms of the DC market, as the industry absorbs other changes, including auto-enrollment and a cap on fees by 2015.

Others said that CDC plans might have difficulty achieving the scale required for success. Duncan Buchanan, president-elect of the Society of Pension Consultants (SPC), said, “It is unlikely employers will feel pressure from employees to establish or contribute to new-style ‘risk-sharing’ schemes. CDC requires critical mass to make risk sharing fair. Without large numbers of members, these collective schemes might not be able to get off the ground.”

Alex Waite, of LCP, a pension consulting firm, said, “This type of pension scheme has some attractions. However, pooling risks between members generates winners and losers, and it is likely that anyone that loses out materially will call foul. Against this background, it is unlikely employers will rush to set up CDC schemes.”

Lee Hollingworth, head of DC at consultancy Hymans Robertson, said CDC would have distinct winners and losers. “Potential losers include younger savers and the less well-off,” he said. “The muted reaction of employers is based in part on the Netherlands’ experience. There, employers have found themselves paying in extra money rather than face the industrial relations impact of benefits being reduced.”

Not everyone is so skeptical. Danny Wilding, partner at consultancy Barnett Waddingham, said that while CDC might not be right for all employers, it would be a welcome new option. “CDC has the potential to offer more generous and stable pension returns to scheme members and act as a viable alternative to both DC and DB schemes,” he said.

© 2014 RIJ Publishing LLC. All rights reserved.

Voya hires Milliman to hedge its closed VA block

Posted on June 5, 2014 by -

Voya Financial, Inc. (formerly ING U.S.) has agreed to outsource the actuarial valuation, modeling and hedging functions for its Closed Block Variable Annuity (CBVA) segment to Milliman, the companies said in a release this week.

Milliman will calculate the financial reporting and risk metrics, and the analytics used to determine hedge positions. Voya will oversee and manage the CBVA segment and retain full accountability for assumptions and methodologies, as well as the setting of hedge objectives and execution of hedge positions, according to the companies.

In the release, Michael Smith, chief executive officer, Insurance Solutions and manager of Voya Financial’s CBVA segment, said:

“Following our move to cease offering variable annuities with guarantee features in 2010, and having also completed significant work to ensure the CBVA segment is appropriately managed to protect regulatory and rating agency capital, we are now taking an appropriate next step by outsourcing certain functions for this run-off block. Our agreement with Milliman allows us to create a more streamlined framework for the CBVA segment and achieve a more variable cost structure for this run-off block.”

Voya Financial, which has had a long-term relationship with Milliman, will complete parallel financial closing actions with Milliman prior to final implementation. The transition is expected to be completed in 2015. At the end of 2013, ING Group had about $71 billion in VA assets, according to Morningstar. But that amount is said to have shrunk considerably since then.

In 2010, Voya Financial stopped actively writing new retail variable annuity products with substantial guarantee features and separated its CBVA segment from its Ongoing Businesses. This run-off segment is classified as a closed block and is managed separately from Voya Financial’s Ongoing Businesses – Retirement Solutions, Investment Management and Insurance Solutions.

Milliman manages about $100 billion in closed variable annuity business for about 15 life insurance companies, according to Deep Patel, a Milliman principal who is involved in the project.

Once a block is in run-off, it gradually shrinks to nothing. Its guarantees are still sensitive to interest rate risk and equity market risk and have to be hedged, however. But companies typically want to focus their IT budget and best IT personnel on new and growing parts of their businesses. So it makes sense for them to outsource the maintenance of a shrinking business.

For Milliman, on the other hand, hedging is a core business. “This is our bread and butter,” Patel said. He added that hedging a closed block of VA guarantees isn’t much different from hedging new business. Both require a lot of computing power, hard-to-find financial engineers and costly redundancies. “We have double everything. For our internet connection, we’ll have AT&T and Verizon.”

VA hedging has also evolved in a way that makes it more appropriate for outsourcing, he said. “The way that companies see VA hedging has changed a little over the years. They used to see hedging as a strategic tool and a competitive advantage. But now it’s seen as an ongoing operation or service. When something is strategic, you tend to keep it in house. When it’s just operational, you might not.”

© 2014 RIJ Publishing LLC. All rights reserved.

Morningstar buys HelloWallet, bolsters participant advice business

Posted on June 5, 2014 by -

Morningstar, Inc. has agreed to buy HelloWallet Holdings, Inc., the five-year-old, 50-employee provider of online financial advice to retirement plans and their participants, for $52.5 million. Morningstar had a $15.3 million minority stake in HelloWallet and will pay the balance of $39.0 million shortly, the Chicago-based financial services company said in a May 29 release.    

HelloWallet allows retirement plan participants to create dashboards on their computers or smartphones where they can monitor all of their financial information—retirement accounts, checking accounts, credit card accounts, health care savings accounts, etc.—in one place. Then it provides tools for creating budgets, investing for retirement or achieving specific financial goals. Members give HelloWallet read-only access to their accounts.

HelloWallet was founded in 2009 by Matt Fellowes, a 39-year-old consumer finance expert with a Ph.D. in political science from the University of North Carolina. He will remain a leader of the company. Over the past five years, the SaaS (“Software as a Service”) startup has established a number of clients among retirement plan sponsors, including Marsh and McLennan, United Technologies and Salesforce.com.

Their participants can use the HelloWallet software to manage their personal finances; HelloWallet claims to help companies prevent 401(k) leakage, drive higher participation in health savings accounts and flexible spending accounts, and reduce taxes.
Even before the acquisition, Morningstar was the largest provider of managed retirement accounts in terms of participants served, with almost one million individuals enrolled.

Behavioral economics plays a big role in HelloWallet’s software design. It “combines behavioral economics and the psychology of decision-making with sophisticated technology to provide personalized, unbiased financial guidance to more than 1 million U.S. workers and their families through their employer benefit plans,” the release said.  

“Holistic advice is becoming a ‘must have’ capability, as employers increasingly look for integrated solutions across their retirement and healthcare programs. Today’s routine financial choices are directly linked to tomorrow’s long-term retirement, health, and savings decisions,” Fellowes, founder and CEO of HelloWallet, said in the release.

According to the release:

“Through HelloWallet’s website and mobile applications, employees input their goals and priorities and add their financial information, including income, bank accounts, credit cards, retirement plans, insurance, and investments. HelloWallet creates budgets and analyzes trends in financial behavior to recommend how members can prioritize financial decisions, identify ways to stretch their paychecks, and make the most of their benefits, such as 401(k) plans, health savings accounts, flexible spending accounts, and insurance. “HelloWallet also automatically alerts members when they need to make changes.

“The majority of participants who use HelloWallet make quantifiable changes in how much they save, use available benefits, and pay off debt. During the last 12 months, the median HelloWallet member increased savings deferrals by 38%. HelloWallet has also found that its members pay off debt two times faster after receiving the company’s proprietary, personalized financial guidance.”

© 2014 RIJ Publishing LLC. All rights reserved.

Hungry for rollover data? This pricey report might help

Posted on June 5, 2014 by -

A new proprietary report from Cerulli Associates may interest anyone who’s trying to follow-the-retirement-money and capture more Boomer assets as they leak from the buttoned-down world of 401(k) plans to the relative flexibility and freedom of the rollover IRA universe.

The 129-page report is called, “Evolution of the Retirement Investor 2013,” and is priced at $13,000, according to a Cerulli release.

The report contains data on 401(k) participant behavior and attitudes, the size of the IRA market, flows into rollover IRAs, and perceptions of financial services products, among other metrics. 

Qualitative information is based on executive interviews, a focus group composed of retirement plan “communication experts,” and a proprietary survey of more than 1,000 retirement plan participants, Cerulli said.

Companies named in the report include Charles Schwab, Fidelity, MassMutual, MetLife, MFS, Precision Information, Putnam, TD Ameritrade and Vanguard.

Cerulli has distributed a few sample pages of the report, including two charts. One of the charts shows that “personal budget” and “company match” are the two biggest determinants of an individual’s contribution to an employer-sponsored retirement plan.

Plan sponsors may be interested to know that Cerulli found “personal budget” to be more important to participants ages 50 to 59 than to participants in any other age group. “Company match” was more important to participants ages 30 and under than to participants in any other age group.

Another chart showed that savings shortfalls and personal debt were the reasons most often cited by plan participants ages 55 and older for delaying retirement. Cerulli noted that Boomers are likely to move gradually into retirement, rather than follow the traditional pattern of ending their careers with a small office party and the proverbial gold watch.

“Retirement is a significant lifestyle change and it may take many individuals extra time to come to a decision, especially if a spouse is still working. This further demonstrates that retirement is not necessarily the logical, planned decision that the industry often conveys in many of its messages,” an excerpt from the report said.

The gradual or erratic nature of the Boomers’ retirement process, and the rarity of formal planning, suggests that advisers and product manufacturers might find fewer markers or milestones—age, employment status, asset level, location of retirement accounts—that can help them identify the most likely prospects at any given time.

Boomers will evidently present a moving target.

© 2014 RIJ Publishing LLC. All rights reserved.

Performance of life insurer stocks cools in 2014: A.M. Best

Posted on June 5, 2014 by -

In a May 26 report on the stock market performance of major publicly held life insurance companies, A.M. Best notes that the sector’s 62% gain in 2013 was followed by a four percent decline as of May 9, 2014.

Highlights from the report, which costs $80 at the A.M. Best website, included:

  • The top performers in the first quarter of 2014, based on variance from consensus EPS estimates, were Symetra, Principal Financial and Genworth, whose estimates beat by 37%, 15% and 11%, respectively.
  • Life/annuity stocks are trading at 11.8 times trailing 12-month operating earnings and 1.3 times adjusted book value, which compares to historical multiples of 12.7 and 1.2, respectively. Two stocks trading at lower-than-historical P/E ratios are Lincoln National at 9.3 times earnings versus its 15.3 historical average; and Prudential at 8.5 times versus its 14.3 average.
  • Insiders sold more than 2.5 million shares in the first quarter ($120 million), compared with only 2,000 shares ($31,000) repurchased.
  • Cash dividend payouts increased 14% in the first quarter of 2014 to $1.5 billion from $1.3 billion in the prior-year period. The dividend payout ratio also increased to 21.5% from 20.2% a year earlier. The largest issuers in the quarter were MetLife ($311 million), Prudential ($247 million) and Sun Life (SLF-C) (C$220 million).
  • Repurchase activity doubled in the first quarter of 2014. Life/annuity companies spent $2 billion repurchasing their shares, with Aflac ($405 million), Prudential ($250 million) and Voya ($250 million) accounting for more than 75% of the increase. Companies spent 28.3% of operating earnings via share repurchases in the first quarter of 2014, up from 15.2% in the first quarter of 2013. Life/annuity companies are authorized to repurchase roughly $10 billion of shares under existing, board-approved repurchase programs, A.M. Best noted.
  • Life/annuity companies issued $4.9 billion of debt in the first quarter, or 26% more than the $3.9 billion issued in the first quarter of 2013. The largest debt issuers in the quarter were Principal Financial and Manulife, which issued $3 billion and $600 million, respectively.

In total, life/annuity companies returned $3.6 billion (50% of operating earnings) of excess cash to investors in the first quarter. This was a 51% increase over the $2.4 billion that was returned in the first quarter of 2013. Most notably, Ameriprise, Torchmark and Voya paid out more than they earned this past quarter.

© 2014 RIJ Publishing LLC. All rights reserved.

 

Ten ‘emerging developments’ in FIAs: Oliver Wyman

Posted on June 5, 2014 by -

“Fixed Annuities: Recap and… What’s Next?” is the title of a new white paper from the consulting firm Oliver Wyman. The report offers a list of  “emerging developments to watch for in 2014 and beyond”:

  • M&A activity should continue.  There exists a wide range of views on the valuation and attractiveness of the business. This and other factors, such as limited capital available to certain carriers, will likely fuel additional M&A activity.
  • The FIA market is well positioned for rising rates relative to the traditional fixed annuity market. Most FIA carriers’ inforce blocks are composed of recent sales and thus have surrender charge protection that reduces disintermediation risk. About half of inforce FIAs feature a market value adjustment (“MVA”). Although many MVA features had mixed effectiveness when corporate yields spiked in late 2008-early 2009, MVA formulas were subsequently improved for new business. In addition, most carriers with growing GLWB blocks generally stand to benefit from higher reinvestment yields. Finally, rising rates would be expected to positively impact sales and reduce pressure on new business profitability
  • As long as the yield curve remains steep, significant growth in banks and broker dealer distribution will likely continue. This is being accomplished with low commission and short surrender charge “no frills” designs with competitive indexing features. In the long run, sales in this channel will benefit from inforce bank channel contracts rolling into new contracts, much like in the VA market.
  • AXA (2010), MetLife (2013) and Allianz Life (2013) have launched VA/FIA hybrids that do not have living benefits. The rationale for introducing these designs varies. For VA manufacturers, they could be a way to attract VA assets without offering rich guaranteed living benefits. Hybrids could also fill the “spectrum” of products available, or as a way to expand in new distribution channels. Finally, hybrids can be designed to balance the risk profile of existing VA blocks, which can motivate VA carriers to enter the space for risk mitigation purposes.
  • Several carriers have recently announced their intention to redomicile. Carriers relocating to Iowa include Fidelity and Guaranty Life (announced November 2013) and Symetra (announced January 2014). Athene also decided to locate its headquarters in Des Moines following the Aviva transaction. Going against this trend is EquiTrust, who is moving to Illinois from Iowa (announced January 2014). Regulatory environment, operating costs and human resources are the key motivators.  
  • Thanks to a sharp decline in interest rates and statutory valuation rates, the conservative AG 33 framework is causing reserve strain for many carriers offering GLWBs. A number of companies obtained permissions from their regulator to apply less conservative reserve approaches on their inforce block such as AG 43 or modifications to AG 33. Meanwhile, the American Academy of Actuaries Reserve Working Group (“ARWG”) is working on the VM-22 reserving framework for fixed annuities. The industry is generally eager to adopt principle-based approaches on new business.
  • Third party providers have accelerated the product release cycle and helped many carriers reduce costs. One such third-party provider issued $9 billion of FIAs in 2013. As the FIA market matures, operating costs and service to consumers and distributors will become more important differentiators.
  • Significant inforce blocks are starting to exit the surrender charge period, which will give FIA carriers a wealth of data on surrender behavior. GLWB utilization experience is still emerging, and several more years of experience are needed to observe behavior outside the surrender charge when a GLWB is present. Due to relatively limited industry data, there exists a wide range of GLWB surrender and utilization assumptions. Going forward, a growing number of FIA carriers will apply advanced analytical techniques such as predictive modeling to gain further insight into policyholder behavior for application in assumption setting and customer retention.
  • With stronger corporate balance sheets and lower interest rates, certain FIA carriers compensated declining yields by seeking additional liquidity and credit risk premium. Growing sales volumes from PE carriers and the rebalancing of asset portfolios from acquired blocks have created significant investment activity.
  • In contrast to their VA counterparts, FIA GLWB riders benefit from stable statutory and US GAAP accounting. Because of this and the “fixed income/book value lenses” of many FIA carriers, many companies primarily view GLWBs as a source of insurance risk that is consequently left mostly unhedged. But GLWB riders impact both the duration and convexity of the insurance liability, and its sensitivity to index returns. Many FIA carriers will become more deliberate about how they embed GLWBs in their ALM, how they approach hedging decisions and how they manage statutory accounting volatility.

© 2014 Oliver Wyman.

The Bucket

Posted on June 5, 2014 by -

Two new regional sales directors hired at Great-West

Great-West Financial has appointed two new regional sales directors, Jo Harrison and Kevin Olean, as regional directors of variable annuity sales to independent broker-dealer channel. Olean will serve New York and Harrison’s territory will include Indiana, Michigan, Ohio, western Pennsylvania and West Virginia.

Most recently, Harrison served as regional business consultant with Curian Capital, LLC, as well as regional vice president, business development consultant and internal wholesaler for Jackson National Life Insurance Company. A graduate of Colorado State University, he’s a certified fund specialist and holds FINRA Series 7, 63 and 65 licenses.

Olean worked as senior regional sales consultant with Prudential Annuities Distributors, Inc. A graduate of the University of New Haven, he holds FINRA Series 6 and 63 licenses and variable life licenses in Connecticut, Massachusetts, Maine, New Hampshire, New York and Vermont. While at Prudential, he received the 2006 IBD 1st Year Sales Achievement Award, 2009 IBD Innovation Award, 2012 IBD Salesmanship Award and 2012 IBD Sales Team of the Year Award.

Transamerica Retirement Solutions reports steady growth

Transamerica Retirement Solutions (Transamerica) has reported first quarter 2014 sales of $4.3 billion for its qualified retirement plan business, an increase of 43% over the same period in 2013. Total deposits were $8.3 billion, a 42% increase. Net deposits rose 12%, to $3.0 billion. 

For all of 2013, Transamerica said sales were $16.8 billion, up 47% over 2012, deposits were $21.2 billion (up 12%) and net deposits were $7.8 billion (up 24%).   

Assets under administration (AUA) topped the $100 billion mark for the first time in 2013 and ended the first quarter of 2014 at $128 billion. Transamerica serves about 24,000 plan sponsors with 3.4 million participants in defined benefit and defined contribution plans, including including traditional and Roth 401(k) and 403(b), 457, profit sharing, money purchase, cash balance, Taft-Hartley, multiple employer plans, nonqualified deferred compensation, and rollover and Roth IRAs.

Transamerica provides participants with an online “nudging” tool called Retire OnTrack, said Kent Callahan, president and chief executive officer of the Employer Solutions & Pensions Division of Transamerica. The tool allows participants to see how their accumulation projections might change if they altered their contribution rates or their investment choices.

In a release, Callahan said the company will continue to sponsor a “Drive to 10” initiative that encourages participants to defer at least 10% of their incomes to their retirement accounts. 

VA expert moves to IRI from Morningstar

Frank O’Connor, the veteran variable annuity expert, has joined the Insured Retirement Institute as vice president of Research and Outreach. O’Connor had been product manager, Asset Manager Annuity Solutions at Morningstar, Inc.

O’Connor was the director of Product Development for Finetre Corp.’s VARDS Online, before it was acquired by Morningstar in 2005. O’Connor held various positions at Morningstar after joining the firm following the acquisition, including serving in product management roles for the Variable Annuity Database; Morningstar Annuity Research Center, Annuity Analyzer; and Morningstar’s Licensed Data and Data Redistributor business lines. 

O’Connor was an executive benefits consultant from 1997 to 2001. He holds an MBA from The John H. Sykes College of Business at the University of Tampa and a BA in International Relations from the University of South Florida.

David Byrnes joins Security Benefit as top bank wholesaler 

Security Benefit Life Insurance Company has hired David Byrnes as head of Bank Markets for its Bank/Financial Institution Channel.

Byrnes will manage all sales and relationship aspects of the channel, serving as the primary contact for all existing and future partner financial institutions. He will also lead the Financial Institution Channel’s third-party wholesaling relationship.  

Over a career of more than 25 years in the financial and annuity industries, Byrnes has held several sales and executive positions, including executive vice president, director of sales and relationship management, at Sun Life Financial in Boston.  

© 2014 RIJ Publishing LLC. All rights reserved.

America’s Move to Faster Growth

Posted on May 29, 2014 by -

Last December, I speculated that GDP growth in the United States would rise in 2014 from the subpar 2% annual rate of the previous four years to about 3%, effectively doubling the per capita growth rate. Now that the US economy is past the impact of the terrible weather during the first months of the year, output appears to be on track to grow at a healthy pace.

The primary driver of this year’s faster GDP growth is the $10 trillion rise in household wealth that occurred in 2013. According to the Federal Reserve, that increase reflected a $2 trillion increase in the value of homes and an $8 trillion rise in the value of shares, unincorporated businesses, and other net financial assets. As former Fed Chair Ben Bernanke explained when he launched large-scale asset purchases, or quantitative easing, that increase in wealth – and the resulting rise in consumer spending – was the intended result.

Past experience suggests that each $100 increase in household wealth leads to a gradual rise in consumer spending until the spending level has increased by about $4. That implies that the $10 trillion wealth gain will raise the annual level of consumer spending by some $400 billion, or roughly 2.5% of GDP. Even if less than half of that increase occurs in 2014, it will be enough to raise the total GDP growth rate by one percentage point.

The data show that a significant increase in consumption already is happening. Real personal consumption expenditures rose at a 3% rate from the fourth quarter of 2013 to the first quarter of this year. Within the first quarter, the monthly increase in real consumer spending accelerated from just 0.1% in January to 0.4% in February and 0.7% in March. That was faster than the 0.3% monthly growth in real personal disposable income during this period, highlighting the importance of wealth as a driver of spending.

Another indication of the role of wealth in fueling higher consumer spending is the decline in the household saving rate. Total household saving as a percentage of disposable income fell from about 6% in 2011 and 2012 to just 3.8% in the most recent quarter.

Housing starts are also responding to the increase in wealth. The number of housing starts and the value of residential construction fell after the Fed’s announced withdrawal from quantitative easing caused interest rates on mortgages to rise. But that has turned around, with housing starts in April up 26% year on year. And sales of both new and existing homes have recently been rising more rapidly as well.

Higher consumer spending and increased residential investment boosted demand for labor, resulting in a rise in payroll employment of 288,000 in April, up from a monthly average of less than 200,000 earlier in the year. If that continues, it will lead to a faster rate of increase in household incomes and spending.

The favorable effect of the increase in household wealth is being reinforced this year by the improved fiscal position. The economy in 2013 was held back by tax increases, government spending cuts mandated by the sequester process, the temporary government shutdown, and the possibility that a binding debt ceiling would require further cuts in government outlays. Though the prospect of a rising deficit and national debt in the longer term remains, the two-year budget agreement enacted by the US Congress means that the economy will not be subject to such negative fiscal shocks in 2014 or 2015.

The key challenge confronting the economy in the next two years will be faced by the Fed, which must control the inflationary pressures that could emerge as commercial banks respond to a healthier economy by increasing lending to businesses and households. The commercial banks have a great deal of liquidity, in the form of excess reserve deposits at the Fed, which could make inflationary lending a significant risk.

The banks are now content to leave those funds at the Fed, where they earn a mere 0.25% because they are risk-free, completely liquid, and unburdened by capital requirements. The alternative is to lend commercially at relatively low interest rates, with less liquidity, more risk, and the need to provide capital.

But the time will come when the banks will want to use their excess reserves to support more profitable lending. The Fed will then need to raise the interest rate that it pays on excess reserves to limit the extent to which the commercial banks can draw down those reserves to create additional lending and deposits.

That will be a difficult balancing act. If the interest rate is raised too little, banks will use more reserves to support lending, leading to higher inflation. If the interest rate is raised too much, economic activity will be constrained and growth could fizzle.

The situation now has diverged from the traditional scenario in which the Fed controlled the banks’ use of reserves by adjusting the federal funds rate (the rate at which banks lend their reserves to one another). The principle difference is that the Fed will now have to pay the interest on the nearly $2.5 trillion of excess reserves that it holds.  

The US economy is now on a favorable path of expansion. But keeping it there will be a major challenge for the Fed in the year ahead.

Martin Feldstein is a professor of economics at Harvard and president emeritus of the National Bureau of Economic Research.

© 2014 Project Syndicate.

Federal judge denies MassMutual’s motion to dismiss ERISA suit

Posted on May 29, 2014 by -

MassMutual was a “functional fiduciary” under ERISA sections 3(21)(i) and (iii) when it “determined its own level of compensation” as a service provider to a Kansas City-based flooring maintenance firm’s 401(k) plan, a federal district judge in Massachusetts has decided.

Judge Patti B. Saris ruled on May 20 in the long-running case of Golden Star Inc. versus MassMutual that the insurer became a fiduciary when it decided to collect a 1% revenue-sharing fee from third-party mutual fund companies that were offered as investment options under the plan.

“The case law is clear that a service provider’s retention of discretion to set compensation can create fiduciary duties under ERISA with respect to its compensation,” the judge wrote. She denied MassMutual’s motion to dismiss the case and said she will rule on the plaintiffs’ motion for class certification in the future.

The suit is one of several ongoing federal lawsuits in which 401(k) plan participants or sponsors have accused a retirement plan service provider of violating ERISA (the Employee Retirement Income Security Act of 1974) by not acting as a fiduciary—a trusted adviser that puts client interests ahead of its own—in the manner or in the amount that it charged for recordkeeping or investment-related services.

“It appears to be in the MassMutual situation that because they could change the amount of the wrap fees inside their separate account vehicles at their own discretion, without plan sponsor/independent fiduciary approval, even if they weren’t a fiduciary before, they become a ‘functional’ fiduciary,” ERISA attorney and blogger Tom Clark told RIJ in an email this week.

“Any person or company that has the ability to control plan assets is a functional fiduciary. And then it follows that controlling your own compensation is self-dealing under the prohibited transaction and fiduciary duty rules. But please note, so far no liability has been found. Everyone still has their day in court,” he added.

“It has been the law for 40 years under ERISA that a fiduciary cannot control the amount of compensation it receives from plan assets. For example, you couldn’t just say to the recordkeeper, ‘Charge whatever you think is fair’ and throw them the checkbook to the plan trust account,” Clark wrote.

“Done properly, a non-plan sponsor fiduciary, or any plan service provider, is allowed to receive reasonable compensation from plan assets, but an independent fiduciary has to approve it. For example, a plan’s investment committee approves the hiring of a 3(21) investment advisor and approves her compensation at 30 basis points,” he said

“Whether or not that amount is reasonable under the law, the 3(21) [advisor] is not considered a fiduciary as to her own compensation, because it was the investment committee that approved it, although she will be a fiduciary as to investment advice given to the plan.

According to the latest court document, MassMutual had provided Golden Star’s retirement plan with recordkeeping services and investment options—including proprietary and third-party funds in separate accounts—through a group annuity contract since 1993. Under the contract, MassMutual was allowed to set separate account management fees at up to 1% of the daily market value of the accounts.

Aside from the determination of MassMutual’s fiduciary status, the case centers on a dispute over the practice of revenue sharing, and whether revenue sharing arrangements are sufficiently disclosed or if the payments enrich others at the expense of the plan participants.

Golden Star claims that the revenue sharing payments that MassMutual has been paid by third-party mutual fund providers are largely unrelated to services provided to Gold Star and are “pay to play” payments for access to the plan.

MassMutual has claimed that the payments were used to “offset the fees and other payments it would otherwise collect from [the Golden Star plan] or its participants as compensation for management of the separate accounts.”

Golden Star says there was no “dollar for dollar” offset. There’s also a dispute about when MassMutual told Golden Star about the revenue sharing arrangements, according to the court document.

© 2014 RIJ Publishing LLC. All rights reserved.

EBRI reports IRA statistics for 2012

Posted on May 29, 2014 by -

At year-end 2012, the Employee Benefit Research Institute’s IRA Database contained information on 25.3 million accounts owned by 19.9 million unique individuals, with total assets of $2.09 trillion, according to an EBRI release this week.

The data continues to show two trends. By far most of the money in IRAs gets there through rollovers from employer-sponsored retirement plans, and the average balances of IRAs tends to be much higher than the median balance—meaning that the average is skewed upwards by the presence of a relatively few very large accounts.

The total amount of savings in IRAs is much larger than the $2.09 trillion in the EBRI database. According to the Federal Reserve, IRAs represent about 24% of total U.S. retirement assets of $23.7 trillion, or $5.69 trillion.   

US Retirement Market Pie Chart

Among the highlights of the report:  

  • The average IRA account balance in 2012 was $81,660, while the average IRA individual balance (all accounts from the same person combined) was $105,001. Overall, the cumulative IRA average balance was 29% larger than the unique account balance.
  • Rollovers dwarfed new contributions in dollar terms. Ten times the amount of money was added to IRAs by rollovers than by contributions, even though the number of accounts receiving contributions (2.4 million) outnumbered the accounts receiving rollovers in 2012 (1.3 million accounts).   
  • The average individual IRA balance increased with age, from $11,009 (for those ages 25–29) to $192,961 (for those ages 70 or older).
  • Among individuals who maintained an IRA account in the database over the three-year period in question, the overall average balance increased each year—from $95,431 in 2010 to $95,547 in 2011 and to $106,205 in 2012.
  • Men had higher individual average and median balances than females: $139,467 and $36,949 for males, respectively, vs., $81,700 and $25,969 for females. The likelihood of contributing to an IRA did not significantly differ by gender within the database, however. Both Roth and traditional IRAs owned by either males or females (and those not identified by gender identified) were equally likely to receive contributions.
  • IRA owners were more likely to be male. In particular, those with an IRA originally opened by a rollover, or a SEP/SIMPLE IRA were much more likely to be male (57.4% of the former, and 58.2% of the latter).
  • Younger Roth IRA owners were more likely than older Roth owners to contribute to their Roth IRA. Forty-three percent of Roth owners ages 25–29 contributed to their Roth in 2012, compared with 21% of Roth owners ages 60–64.

© 2014 RIJ Publishing LLC. All rights reserved.

Don’t look for another boom year for life/annuity stocks: A.M. Best

Posted on May 29, 2014 by -

After a 62% gain in 2013, the prices of U.S. life/annuity stocks fell three percent in the first quarter of 2014, according to the latest issue of Best’s Journal, the bi-weekly publication from A.M. Best.  “Further underperformance is expected as stocks are trading at historically high valuations,” the ratings agency said in a release.

Investors continue to be bullish on U.S. health insurance stocks, with results up 3.5% in the first quarter of 2014, the release said. Cash management activity remains strong, however.

The life/health insurance segment returned $3.6 billion to investors through share repurchases and dividends in the first quarter. Health insurers repurchased almost USD $3.4 billion worth of shares, an increase of nearly 133% over the same period of 2013.

Other highlights in this issue of Best’s Journal include as follows:

  • U.S. life/health industry continues to tread water in a benign economy:The current low interest rate environment has significantly curtailed near-term growth opportunities for the U.S. life/health insurance industry, according to a Best’s Special Report.
  • U.S. health exchange enrollment results may lead to higher utilization: This Best’s Special Report takes a look at the first Affordable Care Act open enrollment numbers and what they may mean for insurance companies.
  • Sustainable profitability is key for healthy capitalization of China’s non-life insurers: This Best’s Special Report looks at China’s new solvency framework and A.M. Best’s view of its impact on non-life insurers.

© 2014 RIJ Publishing LLC. All rights reserved.

Cerulli offers data on growth of index funds

Posted on May 29, 2014 by -

Cerulli Associates has published the May 2014 issue of The Cerulli Edge – U.S. Monthly Product Trends. The current issue of the monthly newsletter examines passive investment strategies and the growth of passive mutual fund assets. It also includes a close look at enhanced indices, Cerulli said in a release.

The findings in the current issue included: 

  • Index-based strategies pose the greatest threat to active traditional and core U.S. strategies. Flows to passive U.S. equity funds in 2013 outweighed flows to active equity funds by $60 billion to $3.4 billion. Active managers tell Cerulli they are developing new retail and institutional products (e.g., multi-strategy and outcome-oriented products) that don’t compete directly with passive strategies. 
  • According to a recent Cerulli survey, all asset managers surveyed believe that international and global equity and fixed-income passive strategies (including enhanced index and smart beta products) are likely to take market share away from active investment strategies in the institutional channels over the next 24 months. 
  • Mutual funds saw net inflows of $27.8 billion in April. For a second consecutive month, taxable bond mutual funds topped all other asset classes with monthly net inflows of $8 billion in April, despite bank-loan funds being in net redemptions during April.
  • April net inflows into ETFs of $18.5 billion helped lift the vehicle’s YTD flow total to $30.3 billion. International equity ETFs topped the flow league table in April with $8.5 billion. U.S. equity and taxable bond ETFs followed with net flows of $3.8 billion and $3.6 billion, respectively. 

© 2014 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on May 29, 2014 by -

The mass affluent tend to be grasshoppers, not ants: Merrill Edge

Neither public speaking, gaining weight nor going to the dentist induces more stress among mass affluent Americans than running out of money in retirement, yet many are not willing to consume less and save more to prevent that from happening, according to the latest Merrill Edge Report from Bank of America.

The bi-annual survey conducted among 1,000 Americans with $50,000-$250,000 in investable assets also found that most parents would cut spending on themselves to help their children; 35% said they’ve withdrawn money from their own savings to cover children’s expenses. 

In other survey findings:

  • More respondents (63% versus 48%) say that having enough money to live “in the here and now” is more important than saving more for the future.
  • More than a third of women report unexpected costs have gotten in the way of their retirement savings, compared to 28% of men.
  • About one in two mass affluent say financial stability is an attractive quality when considering a mate, while others are more likely to be drawn to an appealing sense of humor, money saved or a stable job.

While 55% of respondents surveyed said they’re frightened of not having enough money throughout retirement, 33% said they won’t consider cutting back on entertainment, 30% won’t cut back on eating out and 28% won’t spend less on vacations. Only 19% said they would make it a priority to set aside a windfall for retirement.   

More women than men (59% versus 51%) are frightened about the possibility of not having enough money when they retire. The fear of an uncertain retirement is also most common among 61% of Gen Xers (aged 35-50) and 61% Boomers (aged 51-64. Only 41% of Millennials (aged 18-34) feel this way.

Divorce is associated with retirement anxiety. Almost seven in 10 (68%) divorced survey participants say they are worried about not having enough money during retirement, compared to 53% of respondents who are single, married or widowed.

More than four in 10 respondents (43%) described “choosing among different investment products such as stocks, bonds and exchange-traded funds” as the most complicated part of investing. One in three said handling changes in the stock market is the most difficult and 9% found understanding how 401(k)s and IRAs work the hardest.

In terms of daily financial management, 89% of mass affluent investors set a household budget, but 66% of budget-setters said they often violate their budgets. The two most common obstacles to saving for retirement were the need to pay off debts and the need to cover unexpected costs.

Women are much more likely than men to be attracted to someone with a stable job (51% versus 24%) and to be attracted to someone with financial stability (64%). The mass affluent are often drawn to someone with an “appealing sense of humor” (74%) or someone with whom they “have chemistry” (66%).   

Millennials are more than twice as likely as respondents in other age groups to be attracted to someone who has some money saved (37%). Gen Xers are most likely to be drawn to people who have financial stability (59%).

Guardian, Morgan Stanley ink small 401(k) deal  

The Guardian Advantage and The Guardian Choice funding vehicles, both from Guardian Insurance & Annuity Co., will be added in the investment options on Morgan Stanley 401(k) sales platform, according to a release by The Guardian this week. 

Morgan Stanley operates the largest wirehouse retirement platform, the release said. The Guardian will also participate in Morgan Stanley’s Sales & Training Provider Program.

“Ninety percent of all plans in the 401(k) industry are in the small-plan market and a recent Guardian survey uncovered that 65% of financial professionals polled believe there is a large opportunity in this space,” said Michael B. Cefole, senior vice president of Guardian Retirement Solutions, in the release. “The Morgan Stanley platform allows Guardian to significantly extend our reach in this segment, which continues to be considerably underserved and holds vast prospects.”

The Guardian said that, in addition to getting shelf space at Morgan Stanley, it has broadened its investment options, increasing the size of its national sales team, earned the J.D. Power Call Center Certification award for the third consecutive year, launched a national series of educational seminars for financial professionals, and developed an enhanced enrollment magazine.

“Joining forces with Morgan Stanley provides accessibility to our full scope of retirement solutions to small-plan sponsors across the nation.  We continue to extend our reach across the RIA, broker-dealer and benefit broker segments to solidify our position as the country’s go-to provider of group retirement products in the micro- to small-plan market,” Cefole said.

Guardian also launched a new website (401k.GuardianLife.com) that provides participants with a variety of educational tools to help them better understand their own investing styles and information about how to maximize their retirement planning.

© 2014 RIJ Publishing LLC. All rights reserved.

Short on Shares, Women Share Homes

Posted on May 28, 2014 by -

The idea of widows and divorcees cohabiting to save money was a novelty in the late ‘80s, when it served as the premise for NBC’s hit comedy, The Golden Girls. It turns out that those girls—saucy Blanche, dizzy Rose, crusty Dorothy and wise Sophia—were ahead of their time.       

Today there’s a website, Roommates4Boomers.com, built specifically to facilitate matchmaking between unattached women over age 50 who want to reduce their housing costs by doubling up or tripling up in a home or apartment with women like themselves.     

Roommates4Boomers was founded in 2013 by Karen Venable, who was living alone at age 55 and thinking about the importance of her women friends “to my well-being.” She searched online for a service that could help her locate a compatible, reliable roommate but didn’t find much.

Karen Venable

So she decided to start an online roommate-finder business for female Boomers. Roommates4Boomers works like Airbnb, the short-erm rental website, and eHarmony, the dating site. Over the past year, Venable has built a national database of roommate-seekers and an algorithm that matches women with similar preferences, attitudes, tastes, and habits.

A website is born

“We started creating the website a year ago,” Venable (right) told RIJ. “I’m a Boomer myself and found myself living alone a few years ago. There are a lot of women in the same situation, thinking about who they might live with and the benefits of a home share.”

About 13 million of the 39 million or so Baby Boomer women (born in 1946 to 1964) are divorced, widowed or have never married, said Venable. Of those, more than four million are over 50 and live in households with at least one other woman, according to the Census Bureau. 

While most Boomers still remain in their primary home, both pre-retirees and retirees foresee reasons for eventually moving out, according to the Society of Actuaries’ 2013 Retirement Risk survey of 2,000 Americans between ages 45 and 80. Mathew Greenwald & Associates conducted the survey. 

The SoA report found that 74% of retirees considered the reduced responsibility for upkeep and maintenance a deciding factor in leaving their primary home. Almost 80% said health or physical disability might compel them to give up their home, or changing needs after the loss of a spouse, or the attraction of lower expenses. Retired widows are the most likely of all retirees to consider harvesting the equity in their current home by downsizing (77%).

The Roommates4Boomers website uses several screening criteria when arranging matches. “We ask questions like: Are you liberal, do you exercise, do you have pets, do you like to read, do you like to listen to loud music, are you clean, do you have furniture, are you religious, would you share a bathroom, are you gay, do you work, and are you an early riser?” said Venable, naming just a few. The service is free until a match is found and a member is ready to contact the prospective roommate. After that, the cost is $29.95 per month.

While Roommates4Boomers focuses solely on matching senior women as roommates, other websites are capitalizing on the growing co-housing trend. LetsShareHousing.com is an Oregon-based company that allows senior men and women to post profiles online and find roommates for a $34.95 annual subscription fee. Subscribers can browse profiles and connect with other members. Another site, SeniorCohousing.com, provides information for senior men and women considering a shared housing arrangement. The site also features new co-housing communities out West.

Retirement risks for women

Anna Rappaport, an actuary and chair of the Society of Actuaries’ Committee on Post-Retirement Needs and Risks, told RIJ that older women need such a service. “Women face a number of retirement risks that relate to living longer than men, including outliving their savings, not having access to long-term care insurance, and financial hardship from widowhood. Deciding where to live is another problem many women face in retirement,” she said in a recent interview.

Housing is just one of many risks facing Baby Boomer women today, added Rappaport, who has focused on retirement risks for women. “Women generally have lower savings accounts, lower Social Security benefits, lower pension benefits, and lower 401(k) accumulations than men. That has long-term implications, since the life expectancy for women is longer than that of men,” she said.

“I definitely see a value for this type of website,” she told RIJ. “There is huge potential for co-housing arrangements because housing is the biggest item of expense for most retirees. Housing could also be integrated with support and care if people can find others who can share domestic responsibility and provide companionship.”

© 2014 RIJ Publishing LLC. All rights reserved.

The Fiduciary Rule: Going, Going…

Posted on May 28, 2014 by -

Years ago, the reporters, kibitzers and idlers who watched jury trials at the courthouse in Yellowstone County, Montana, had a rule-of-thumb that rarely failed: “The longer the jury stays out, the more likely it is to acquit.”

This truism, probably shared by courthouse loungers across America, comes to mind whenever the Department of Labor announces another delay in the re-proposal of its so-called fiduciary rule for 401(k) and IRA advisers (as it did this week, pushing the date back to at least the beginning of 2015).

The longer the DoL’s Employment Benefits Security Administration takes to draft a new version of the rule, I think, the likelier it is that the re-proposal—if one ever appears at all—will be declawed enough not to provoke the blowback from the investment industry that the first one did. It will probably absolve broker-dealers and registered reps of the ethical crimes implied by the first draft. 

Not that Phyllis Borzi, head of EBSA and the champion of a higher fiduciary standard for IRA advisers, wants it that way. I have spoken to her semi-privately on two occasions. Each time, she expressed her conviction that the money in rollover IRAs should be as safe from the potential predations of retail financial sales people as it was inside employer-sponsored plans.

She meant that as long as the money in an IRA enjoys the blessing of tax deferral, it represents pension assets, and should be handled with all the delicacy and restraint that a defenseless and irreplaceable nest egg deserves. If it were up to her, I think, by now she would have issued just as strong a proposal as the first one, critics be damned. Her position will not change.

But Ms. Borzi’s powers are not unlimited. She’s not the only member of the jury panel, so to speak, and it’s unlikely that either the wording or the spirit of the final proposal will be up to her alone. She’ll need support, and it’s not clear where it might come from. Neither her boss, the new Secretary of Labor, nor the soon-to-be lame duck POTUS seems poised to make her fight their fight.  

Her view isn’t invalid. As far as I know, no other developed country with an employer-based, tax-favored defined contribution plan allows the participants of that plan to move their accounts (often containing not just their own deferrals, but also substantial employer contributions and government credits) over to the less regulated, often high-priced, accumulation-driven playing fields of retail finance prior to retirement.

Even in the U.S., it’s not clear that anyone ever intended that most 401(k) money would eventually enter rollover IRAs and, consequently, pass through a period of custody in the retail channel before people began spending it in retirement. We should all marvel that such a state of affairs exists at all. 

But is this situation marvelously good or marvelously bad? It’s very good for the retail channel. It can be good or bad for the clients, depending on how smart they are and whom they decide to trust with their money. Personally, I cringe whenever I see a discount brokerage ad offering “up to $600” as a reward for rollovers; the thought of people day-trading with their retirement money must be one of Ms. Borzi’s worst nightmares.

In any case, it’s too late for her to change the rollover situation for Boomers. Trillions of dollars have already rolled from 401(k)s to IRAs. It will also take much more than a labor secretary, let alone an assistant labor secretary, to defeat the powerful investment industry on such a high-stakes issue. It would take a president with lots of political capital. Most importantly, owners of rollover IRAs (i.e., voters) aren’t clamoring for federal protection from advisers. Case dismissed.     

© 2014 RIJ Publishing LLC. All rights reserved.

Annuity Sales Rose 11% in 1Q2014: LIMRA

Posted on May 22, 2014 by -

Led by fixed annuity sales, overall sales of annuities improved 11% in the first quarter of 2014, year over year, according to a survey by the LIMRA Secure Retirement Institute (LIMRA SRI) that covered manufacturers representing 95% of the market.  
Fixed annuity sales rose 43% increase in the first quarter, compared to prior year, reaching $23.5 billion. Total annuity sales in the quarter reached $57.7 billion.

For a list of top 20 annuity manufacturers, click here. For a bar chart of annuity sales since 2003, click here.

“Despite recent declines in interest rates—falling from just over 3% at the end of 2013 to 2.7% at the end of the first quarter—we are still predicting approximately 10% growth for fixed annuities in 2014,” said Todd Giesing, senior analyst, LIMRA SRI Annuity Research, in a release.

Fixed-rate deferred annuities, book value and market value adjusted (MVA), had another robust quarter, increasing 48% in the first quarter to reach $8 billion. Indexed annuity sales rose 43% in the first quarter, totaling $11.3 billion. 1Q2014 LIMRA Annuity Sales

“Product innovation has played an important role in growing the indexed annuity market—especially in new distribution channels. More companies are introducing uncapped crediting strategies that utilize volatility-controlled indices to manage the risk,” the LIMRA release said.

First quarter indexed annuity sales through the bank and independent broker-dealer (IBD) channels grew significantly. IBDs now account for 13% of FIA sales, up from just 3% in the year-ago quarter. In the same period, bank share of FIA sales grew to 16% from 10%.

“Traditionally, independent agents have represented most of the indexed annuity sales.  Recent sales growth in the bank and IBD channels has not detracted from the independent agent channel, which increased 15% in the first quarter,” Giesing said in the release. Indexed annuity guaranteed living benefits (GLBs) election rates were 68% (when available) in the first quarter.

Deferred income annuities (DIA) reached $620 million in the first quarter, 57% higher than in 2013. But DIA sales were down 13% from the fourth quarter of 2013. It was the first quarter over quarter decline for DIA products since LIMRA SRI began tracking them. 

But with five additional companies entering the DIA market in 2013 and more expected in 2014, LIMRA SRI expects more growth in the DIA market. Single premium immediate annuity sales improved 47 percent in the first quarter to reach $2.5 billion.

VA sales fell 3% in the first quarter, to $34.2 billion, their lowest level in four years. VA sales have fallen to 59% of the total annuity market from 68% in the first quarter of 2013. When available, GLB riders were elected 79% in the first quarter. Increased focus on accumulation and tax deferral, as well as changes in GLB riders has affected election rates of these riders.

© 2014 RIJ Publishing LLC. All rights reserved.