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RetirePreneur: Ron Mastrogiovanni

Posted on May 22, 2014 by Jenna Gottlieb -

What I do: Our software focuses on healthcare costs in retirement. One product, our HealthWealthLink calculator, integrates variables such as age, gender, lifestyle, and health issues like high blood pressure, diabetes, and cancer, to project individualized healthcare costs. Financial service professionals can then use the reports to help clients create savings plans to meet their future healthcare obligations.

Ron Mastrogiovanni RP box

On the income side, we concentrate on Social Security optimization and working in retirement. Some 70% of Baby Boomers plan to work in retirement. Many feel they’re too young to retire. Others may need to pay for healthcare. Most have no idea how these elements will impact their overall bottom line. We help retirees claim Social Security at the optimal time and reveal how annual income can affect Medicare premiums—two factors that, if properly planned for, can save clients tens of thousands of dollars throughout retirement.

Where I came from: The bulk of my career has been spent in financial services. I was one of the founders of FundQuest, which started in the 1990s. We were in the fee-based business, and back then, it wasn’t about fees; it was about commissions. We believed the industry was destined to move toward a more fee-based environment, and investors would find this approach more acceptable than traditional commissions. We were early in that business model, but eventually it became popular, and BNP Paribas acquired FundQuest in 2005.

Who my clients are: We work with financial service companies, including banks, insurers, broker/dealers, and 401(k) record keepers that need to help clients save for healthcare, whether it’s through capital market products, annuities, life insurance, or long-term care insurance. For retirees, future healthcare costs are projected to be equal to the cost of housing, food and transportation combined.

When we started this company, we expected our clients to be mass-market consumers between ages 55 and 70. But a Merrill Lynch survey showed that 80% of affluent Americans cite healthcare as a major concern. We found no real difference between high net worth investors, the affluent, or mass-market individuals. Our original target was Baby Boomers, but studies show that 70% of Gen X and Gen Y also consider healthcare an important issue. Simply put, rising healthcare costs affect everyone. However, if we shift to an advisor’s viewpoint, focusing on the more affluent clients certainly becomes important. If you can save your client $100,000 or more in healthcare costs, that’s good for business.

Why people hire me: The company was founded on this basic premise: “Wouldn’t it be valuable to address Americans’ most important retirement issue—healthcare costs—and complete the transaction in one single meeting?” Our methodology concentrates on four key domains: healthcare, long-term care, working in retirement, and Social Security. Our objective is to complement the traditional financial planning process as a standalone service or as an integrated application. We have not positioned ourselves to compete with the firms concentrating on comprehensive planning.

What drives me: I started out in large companies and quickly became bored. I interviewed with a small start-up and loved the pace. Most start-ups don’t know what they want to be when they grow up. They’re constantly changing—processing feedback from the market, seeing what works and what doesn’t work, evolving in different directions. I find that challenging and exciting.

How will I handle my own health care expenses in retirement: I hope that all of my research will at least enable me to afford my own healthcare when I retire. I have tried to remain diversified in capital market products as well as insurance so that I can control my Modified Adjusted Gross Income (MAGI). This is just one of the many strategies clients can employ to ensure their Medicare premiums won’t go through the roof, and that’s what I do.

My retirement philosophy: I don’t like the word “retirement.” Some dictionaries define retirement as the withdrawal from an active working life, which to me is quite negative. I think “free-styling” is a better term. I like to think of Dennis Hopper in the old Ameriprise ads. He said, “This generation isn’t going to bingo night,” and “Dreams don’t retire.” For my retirement, I’d like to be just as productive as when I held a full-time job. My other goal is to never go to a nursing home. I want to save enough so that I can be in my own home as long as possible and retain control of my life. Independence is very important to me.

Changes in family structure parallel rising inequality

Posted on May 22, 2014 by Editorial Staff -

Americans in non-traditional families—that is, not in families of married heterosexual couples with a child under 21—are much more likely to feel financially insecure than traditional families, according to LoveFamilyMoney, a survey of 4,500 Americans conducted by Allianz.

Even though 85% of Americans consider themselves as middle-class, the study found, 57% of non-traditional family members said they are “making ends meet,” “struggling financially,” or “poor.” That was 10 percentage points higher than members of traditional families. About half (49%) of modern families say that they currently live paycheck to paycheck, versus 41% of traditional families, and 25% are not saving any money at all.

Only 19.6% of U.S. households are the traditional married-heterosexual-couples-with-children today, down from the 40.3% in 1970, the study said.

Allianz defined non-traditional or “modern” family structures as one of the following:

Multi-generational: Three or more generations living in the same household
Single parent families: One unmarried adult with at least one child under 18
Same-sex couple—Married or unmarried couples living together with a member of the same gender
Blended—Parents who are married or living together with a stepchild and/or child from a previous relationship
Older parent with young children: Parents age 40+ with at least one child under five in the household
“Boomerang” families—Parents with an adult child (21-35) who left and later rejoined the household

The study also found:
Only 30% of modern families felt a high level of financial security, versus 41% of traditional families.
Nearly 36% of modern families have collected unemployment, versus only 21% of traditional families.
35% of modern families have unexpectedly lost a main source of income, compared with 23% in the traditional category.
Twice as many modern families have declared bankruptcy versus traditional families (22% compared with 11% of traditional families).
34% of modern families believe that they have “excellent/above average” financial planning knowledge/expertise, compared with 44% of their traditional counterparts.
51% of modern families (versus 60% of traditional families) think that they are on track to achieve their financial goals.
58% of modern families say that covering current expenses takes priority over planning for the future.

On the other hand, 54% of modern family members say they openly talk to their children about their personal financial situation, versus 47% of traditional families. Moreover, 47% of modern families have actively encouraged their children to invest and save for their own retirement goals, compared to only 38% of traditional families.

But modern families are unlikely to rely on professional assistance to build their own financial plan, Allianz said in its release. Less than half (43%) of modern families say they have ever used a financial professional, versus 53% of traditional families.

More than a quarter (26%) said they “don’t make enough money to think about financial planning for the future,” versus 18% of traditional families. Nearly a third (31%) say they have “too many expenses and/or debts to pay off before I can think about planning for the future,” compared to about a quarter (26%) of traditional families.

DoL to hold hearing on “facilitating lifetime plan participation”

Posted on May 22, 2014 by Editorial Staff -

The U.S. Department of Labor’s Employment Retirement Income Security Act Advisory Council will meet June 17 to June 19 at the U.S. Department of Labor, 200 Constitution Ave. NW, Washington, D.C. 20210. The meeting will be held from 9 a.m. EDT to 5:30 p.m. EDT on June 17 and 18, and from 8:30 a.m. EDT to 4:30 p.m. EDT on June 19.

On June 17 and 19, the meeting will take place in C-5320, Room 6.
On June 18, the meeting will take place in C-5521, Room 4.

Council members will hear testimony from invited witnesses and to receive an update from Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. The council is studying these topics:

Issues and considerations around facilitating lifetime plan participation;
Outsourcing employee benefit plan services; and
Compensation and fee disclosure for pharmacy benefits managers.

Descriptions of these topics are available on the advisory council page of the EBSA website.

The meeting is open to the public. Organizations or members of the public who wish to address the council or submit a written statement should email their requests by Tuesday, June 10, to the council’s executive secretary Larry Good at [email protected] or call 202-693-8668.

Florida Senator proposes expansion of TSP

Posted on May 22, 2014 by Editorial Staff -

Rising conservative political star Sen. Marco Rubio (R-FL) has proposed allowing more Americans to use the federal Thrift Savings Plan that only federal employees and members of Congress currently use. The TSP is similar to a 401(k) plan.

Senior citizens should also receive a fixed sum for buying health care insurance from a private company or from Medicare, Rubio said at the National Press Club recently. The government would subsidize the cost of the insurance, pegging the subsidy to the cheapest available option. In addition, he called for Social Security payroll taxes to be suspended for workers who work past age 65.

Democrats were critical of Rubio’s plan. “Senator Rubio [has] renewed the GOP’s commitment to ending Medicare as we know it, forcing future seniors to spend more out of pocket on medical care when they need it most,” said Democratic National Committee spokesman Michael Czin.

Rubio says he will not decide whether to run for the White House in 2016 until after November’s midterm elections. If former Florida Governor Jeb Bush pursues the presidency, Bush and Rubio would compete for home-state money and support.

Ruark completes study of FIA surrender patterns

Posted on May 22, 2014 by Editorial Staff -

In a follow-up to a similar study in 2011, Ruark Consulting, LLC (RCL) has conducted a fixed indexed annuity surrender study involving 12 carriers representing a majority of FIA sales, the Simsbury, Conn.-based firm said in a release this week.

The study covered the period 2007 through third quarter of 2013 and consisted of 9.3 million contract years and 380,000 surrenders. The large volume, and the use of data scrubbing and validation, enabled it to draw “credible conclusions” about surrender behavior, RCL said.

Among the factors analyzed were:

Duration
Imputed return
Surrender charge period
Policy size
Bonus
Time period
Living benefit presence and value
Market Value Adjustments

The study found the “expected but very graphic pattern” of low surrender rates during the surrender charge period, with a steep shock lapse in the year following the expiration of the CDSC, followed by single-digit surrender rates. Surrender rates of contracts with living benefits have been lower by one to three points per year.

“Contracts with low annual imputed credited rates display worse persistency than higher-credited contracts – but this result does not extend clearly across the hierarchy of those higher-credited contracts,” the Ruark release said. “On contracts with an MVA feature, a positive MVA value correlates to higher surrender rates at points representing a nadir of interest rates.”

Ruark Consulting has performed policyholder behavior studies for the annuity industry and individual companies since 2007. Examined behaviors have included surrender, living benefit utilization, annuitization, mortality and longevity.

Quote of the Week

Posted on May 22, 2014 by Editorial Staff -

Merrill Lynch’s Intentions are “Clear”

Posted on May 21, 2014 by Kerry Pechter -

Every major financial services company craves a share of the trillions of dollars in IRA rollover money—most of it germinated and incubated in subsidized 401(k) accounts, thank you—and announcements of new corporate initiatives in that direction occur almost weekly.

Merrill Lynch is not a newbie in the pursuit of retirement savings. In March 2004, for instance, in a move seen at the time as a defensive response to Fidelity’s retirement efforts, Merrill Lynch launched a “Retirement Paycheck Service.” But that was a decade ago—before the financial crisis and before the absorption of Merrill Lynch into Bank of America.

Now “the Bull” has a new campaign around retirement. Last week, David Tyrie, managing director and head of Personal Wealth and Retirement at Merrill Lynch Wealth Management, hosted a webinar to launch Merrill Lynch Clear, a marketing and communication strategy designed to burnish the firm’s appeal as a rollover IRA destination.

One obvious question—a question that arises when almost any firm announces such an initiative in this space—is whether there’s steak to go with the sizzle. With “Clear,” Merrill Lynch may be changing its marketing and communication strategy to better penetrate the Boomer retirement market. Clear “is a new way to engage clients and help them solve their goals,” Tyrie told RIJ in a recent interview. “It’s a better experience. And if we offer a better experience, more people will come to us.” But there’s no clear indication that Merrill Lynch intends to change, or feels a need to change, its accumulation-driven business model and culture.

Neither a product or service per se

Big companies periodically re-discover that listening to customers and focusing on their wants and needs is the path to bigger sales, and that appears to be what Clear is all about. But whether a holistic, client-centric approach, which fee-only financial planners use, can thrive in the high-pressure, high-cost, sales-driven environment of a wirehouse remains to be seen.

“I want to be careful not to call it a product or a service. It’s an approach,” Tyrie said during the webinar. “It involves seven life priorities (below right). We frame the conversation around that, and we help the customer make the trade-offs that they need to make to realize their goals. We provide trusted guides—specially-trained advisers who are armed with new technology.”

Seven Clear Priorities

The new approach is based on listening tours and focus groups that Merrill Lynch has conducted over the past year. “People told us they were looking for a holistic approach to retirement,” Tyrie said during the webinar. “They said, ‘Don’t just send me to a website. Don’t tell me there’s a silver bullet. Don’t tell me there’s any kind of guarantee. And don’t call it retirement income;’ call it retirement outcome.

“In one of our focus groups, we asked 14 people what percent of the time a rocket traveling to the moon is likely to be ‘on track.’ The answer is: it’s ‘on track’ only three percent of the time; 97% of the time it’s off track. Mission Control is constantly correcting its course. People today don’t want to be put in a rocket. They want Mission Control. They want constant course correction. This fit perfectly into Merrill Lynch’s model. And that’s how we came up with Merrill Lynch Clear.”

Retirement income philosophy

When asked if there’s any particular retirement income philosophy, or method or tool that Clear is supporting, Tyrie didn’t point to anything in particular. But in fact, a team at Merrill Lynch recently published a whitepaper that promotes a “proprietary Goals-Based Wealth Management” process that includes the creation of retirement income.

There’s not much here that’s new. This process (see graphic below) will sound familiar to most fee-only financial planners and to those who have read the Retirement Income Industry Association’s curriculum for the Retirement Management Analyst professional designation.

The GBWM process may represent a major change in the practices of Merrill Lynch advisors, however. It involves the incorporation of Social Security income and future health care expenses–household balance sheet items–into the overall planning process—making the process more holistic. Changing a sales culture to a planning culture, especially at a huge and tradition-bound institution, isn’t likely to be easy.

ML Clear Circle

Instead of investment risk being the main or the only consideration by the adviser, the GBWM calls for a consideration of the main retirement risks—longevity risk, sequence of returns risk, health care risk and inflation risk. It also embraces all of the products and processes that can mitigate those risks—“systematic withdrawal programs, variable and immediate annuities, longevity insurance… investments with market downside protection, life insurance [for legacy purposes] and long-term care insurance.”

There’s no major embrace of insurance products here, however. In the whitepaper, annuities are described as safety nets for “ a lower net worth client with a high desire for protection and low desire for protection.” For high net worth clients, “the resource allocation might focus on systematic withdrawal programs, self-funded long-term care and wealth accumulation.”

On the technology side, a major element of the Clear initiative, and perhaps its primary medium, is an iPad application that Merrill Lynch advisers can use with clients.

Long build-up to Clear

Merrill Lynch’s most recent pivot toward the retirement opportunity has been in the works for some time. Last July, Investment News reported on an internal Merrill Lynch memo describing the consolidation of the firm’s huge 401(k), its personal retirement, and its preferred-segment-solutions divisions into a Retirement and Personal Wealth Solutions unit under Andy Sieg, head of global wealth and retirement solutions. David Tyrie reports to Sieg.

The memo outlined an asset- and client-retention strategy starting in the 401(k) business and continuing on the retail side for the life of the client. The article quoted Tyrie as saying: “The magic formula is this relationship with the customer while they’re with a retirement plan — you build trust, there is an interest to stay with you. We have a field force of 15,000-plus advisers who are serving individual clients and if a participant chooses to work with an adviser, we can get them there.”

“You have this massive group of people moving to retirement, and it’s built on this initial stage of retirement; there is no guidance for this second stage,” Mr. Tyrie said. “The industry should adopt the strategy of to and through retirement. That’s what customers want.”

Retirement Mountain ML

Merrill Lynch has also moved to establish its thought leadership status in the retirement space. In 2013, the firm financed the creation of The Journal of Retirement, a scholarly journal published four times a year by Institutional Investor Journals and edited by annuity and pensions expert George A. “Sandy” Mackenzie, who has held senior positions at AARP and the International Monetary Fund.

In March, Merrill Lynch’s director of Investment Analytics and the co-author of the white paper on GBWM, delivered a presentation on that topic at the RIIA’s spring meeting. In April, a director in the Merrill Lynch Personal Retirement Solutions Group, Bill Hunter, was a panelist at LIMRA’s Retirement Industry Conference in Chicago.

Next steps

There’s no reason to doubt that Merrill Lynch is serious about securing its ability to retain and grow assets, but one former Merrill Lynch insider said that style may be outweighing substance in the new positioning and that certain peripheral factors are likely to affect how the firm deals with the retirement opportunity.

More so that its rivals in the wirehouse space, such as Wells Fargo and UBS, Merrill Lynch has a bias against technologies “not invented here,” he said. In the retirement space, that would mean that the firm would want to build a retirement assessment or product-allocation tool in-house.

But technology resources are always limited, and a robust tool for creating retirement solutions out of investments and annuities might not get priority over projects brought from more vital parts of the business, such as separately managed accounts, or SMAs, he said.

As might be expected, annuities are not a favored product at Merrill Lynch, he added. The compliance department is said to be wary of annuity sales, and puts them through a disproportionate amount of suitability review. In addition, compensation for annuity sales at Merrill Lynch is lower than at other wirehouses, specifically to disincentivize potentially conflicted sales, he said.

A high net worth client who worked with a Merrill Lynch adviser last year told RIJ that his adviser had no ideas about generating retirement income other than systematic withdrawals from an SMA, and that his only retirement tool was a calculator that predicted chances of portfolio ruin at different withdrawal rates.

“The products that I wanted to talk about”—such as deferred income annuities—“are not things that their advisers use or like to use,” the client said. His adviser wanted to sell him “very expensive private REITs.” But that bias could be changing, the client said. The adviser recently told him that he was about to receive additional retirement training.

Since January, about 10,000 of Merrill Lynch Wealth Management’s 15,000 advisers have been “made aware” of the Clear initiative, Tyrie said. About 3,000 advisers have been trained to use the Clear iPad application. Asked if Clear would soon be the subject of a media campaign, a Merrill Lynch spokesman told RIJ, “Ongoing Merrill Lynch advertising will begin to focus more around the seven life priorities this fall, with placements in traditional and non-traditional media.”

MetLife’s New DIA, and Its Competition

Posted on May 16, 2014 by Kerry Pechter -

The expression “arms race” doesn’t suit the staid world of income annuities, but MetLife’s announcement of a new deferred income annuity (DIA) this week raised the pace of competition a bit in this newish and fast-growing annuity product category.

The new contract, called MetLife Guaranteed Income Builder, appears to be the first DIA to offer the option of a commuted value during the deferral period. Contract owners don’t have to die to get their money back. If they haven’t started receiving income payments, they can surrender the contract and receive at least 92% of their purchase premium.

This feature has a price: Contract owners will get lower monthly payouts if they choose it. But MetLife expects people to welcome the opportunity to choose. “People have a fear of locking up their money,” said MetLife senior vice president Elizabeth Forget.

“We don’t have any data yet [on the way it affects sales], but it adds a lot to the conversation at the point of sale. People may or may opt for it. It could be like the inflation protection option. Everybody wants it until they see how much lower it makes the monthly payment.”

All or most competing DIA contracts offer an optional cash refund death benefit during the deferral period equal to the premium (or 90% of premium growing at a compound 3%) as well as a cash refund or installment death benefit equal to any unpaid premium during the income period. Death benefits undermine (but don’t eliminate) the best feature of an income annuity—the boost that comes from pooling mortality risk—but it’s hard to sell these products without them.

New York Life remains the issuer to catch in the DIA race, if it can be called that. The big mutual, according to the industry data it cites, sold 40% to 50% of the $2.2 billion in DIA premium gathered in 2013. Northwestern Mutual is, anecdotally, the closest follower, with about a quarter of the market.

Click on table below to compare the features of different products.

The new MetLife DIA—it replaces an older “longevity insurance” DIA that provided income from age 85 on—also lets contract owners move their income start date twice (most products allow only one change) during the deferral period. They can move the start date up to five years earlier or five years later than the original start date. This option is available to people with contracts that have guaranteed periods or a cash refund feature.

In another nod to the vagaries of life and consumer indecision, MetLife lets DIA owners in the deferral period split their original purchase premium into two parts and buy two income streams with different start dates. Both start dates have to be inside the 10-year window around the original start date.

Evidently hoping to appeal to a younger audience, MetLife has a minimum premium of only $2,500. Most DIAs have minimum purchase premiums in the $5,000 to $20,000 range, with $10,000 the most popular. Contract owners can add as little as $500 at a time thereafter.

MetLife will distribute the Guaranteed Income Builder through its affiliated advisers and through third-parties. Four of its competitors—Guardian, MassMutual, New York Life and Principal are sold—and are said to be selling very well—through the Fidelity Insurance Network.

Not mentioned in the MetLife product literature is the availability of an option to withdraw up to six months of monthly payments in a lump sum after income payments begin. Several companies allow contract owners to do this once. Lincoln Financial’s Deferred Income Solutions contract permits this convenience three times.

So far, Northwestern Mutual Life is the only issuer to offer DIA contract owners the option of receiving the same annual dividend that its life insurance policyholders receive. The dividend, though not guaranteed, has lately been 5.5% or thereabouts.

People who buy the Select Portfolio version of the DIA receive a slowly rising percentage of the full dividend each year during the deferral period and may receive the full dividend by the time they take income payments. Contract owners can take the annual dividend in cash or use it to buy additional income, or do some of each.

The Select version of the product offers no annual dividend. But it does offer a significantly higher level of guaranteed income than the Select Portfolio. In the hypothetical illustration in Northwestern Mutual’s product literature, the guaranteed income in Select for a $200,000 premium, a five-year deferral, and a single life contract for man taking income at age 65 is $13,700 a year.

For the same owner, the guaranteed income in a Select Portfolio contract would be only $10,374 at age 65, if all dividends (based on the 2013 dividend) in the deferral period were spent on more income. But by the start date, when the full dividend kicked in, the total income (if 80% were taken in cash and 20% were used to buy more income) would be $13,666. By age 70, in the hypothetical, income would be $15,004.

That sounds good, but there’s another factor. The amount of the dividend is linked to amount of unreturned premium. The dividend check could therefore shrink over time, depending on how much of the check the owner uses to buy more income.

In terms of marketing, most of the eleven DIA issuers seem to be recycling story lines that have been used for years in the SPIA space. DIAs are variously pitched as ways to cover any essential expenses that Social Security and pensions don’t; they protect against the risk of outliving one’s money; they can provide the safety that allows retirees to take more equity risk with their remaining assets; the income can help cover health care expenses later in life.

Judging by the illustrations in their product literature, Symetra (and First Symetra) and First Investors (Foresters) may be the only issuers who are still positioning their DIA as pure longevity insurance—not providing income until age 85—to protect against outliving one’s money or ending up a “burden” on one’s children.

Symetra’s product literature describes a hypothetical 68-year-old woman who uses 10% of her $500,000 in savings to buy an income of $2,475 a month at age 85. First Investors’ literature offers an illustration of a single 65-year-old man who pays $100,000 (one-seventh of his assets) for an income of $3,312 per month at age 85. Both examples use a life-only contract to show the maximum income available.

The One True Path to Income

Posted on May 16, 2014 by Kerry Pechter -

Every May, when the lawn grows green and shaggy again and the John Deere roars to life after its six-month snooze, the word-scapers here at Retirement Income Journal return to one of their favorite subjects: Income annuities.

Last week we tried to deconstruct the “crowding out” effect of Social Security on retail income annuities. This week we’ll examine that old-made-new product, the deferred income annuity, or DIA.

From a negligible sales base in 2011, when New York Life wrote the first modern DIA contract, DIA sales jumped to $1 billion in 2012 and then more than doubled, to $2.2 billion in 2013, according to LIMRA’s Secure Retirement Institute. By comparison, sales of immediate annuities (SPIAs) grew by $600 million in 2013, to $8.3 billion.

Eleven insurers now offer DIAs in the race. (See today’s cover story.) The sales leaders tend to be mutual companies (which like asset-liability matched products) with stellar strength ratings that assure clients that they’ll still exist in 40 years. New York Life accounts for about half of annual sales. Northwestern Mutual, MassMutual and Guardian Life are in pursuit. But MetLife, Principal, and other publics just getting started.

Career agents sell 57% of DIAs, according to LIMRA. Full-service national broker-dealers sell 40% and banks sell the rest. Though those numbers hide it, New York Life, MassMutual, Guardian and Principal Financial are reported to be selling DIAs with great success through Fidelity’s annuity platform.

AIG and Principal DIAs are currently quoted and offered for sale on the Income Solutions web platform operated by the Hueler Companies, and other brands will soon join them, according to CEO Kelli Hueler. Established to give 401(k) plan sponsors with a direct, open-architecture, low-cost “out of plan” SPIA option they can offer to participants at retirement, Hueler now wants to offer DIAs as well.

Today’s DIAs, which typically start providing income five to 15 years after issue, are a hybrid of two earlier types of DIAs that never got much traction in the marketplace: the flexible premium annuity and “longevity insurance.”

People used those more traditional DIAs to buy future income at a steep discount. The discounts were funded by long years of compounding and by mortality pooling. But these products had little appeal in the marketplace because they lacked liquidity and, just as importantly, exposure to the equity premium.

The new breed of DIA is a more palatable compromise. The deferral period is usually just long enough to allow insurers to back them with longer and slightly riskier bonds, but the income doesn’t seem hopelessly distant. The latest designs remove the biggest barriers to sales.

Add a death benefit to allay fears of forfeiture and the product lends itself to the type of “best of both worlds” framing that helps producers close sales among retiring Baby Boomers who are looking for pension-like income. DIAs, along with fixed indexed annuities with income riders, may also be absorbing some of the demand left by the diminished supply of variable annuities with generous guaranteed lifetime withdrawal benefits.

The monthly payout of a single-life DIA purchased with a $100,000 premium by a man at age 59½ with a 10-year deferral and a cash refund of unpaid principal on death is comparable to the guaranteed payout of a variable annuity with a GLWB that offers a 10-year, double-your-benefit-base deferral period and a 5% payout at age 69.

The highest current DIA payout for such a contract would be $990.80 per month, according to Cannex, which provides the most up-to-date DIA quotes. The hypothetical GLWB payout would be $1,000 a month for life. The GLWB, whose underlying assets would include equities, would have more upside potential than the DIA, but it would also have higher costs.

DIAs have an advantage over SPIAs. A 55-year-old investor who wanted to protect himself from sequence of returns risk during the run-up to retirement could, as an option, put money into a 10-year fixed annuity and wait until age 65 to decide whether to buy a SPIA. To provide liquidity, the insurer would have to back the product with short-term, high quality bonds.

The same investor could get a somewhat larger income stream with a DIA, all else being equal. “The mortality credit drives about a quarter of the difference and the rest comes from our ability to take advantage of the yield curve,” an actuary at one of the DIA issuers told RIJ. “Besides going a little longer in maturity, to 10 or 15 years, we can also take some calculated credit risk. We’re not talking about anything exotic, just double or triple Bs.”

One obstacle to buying a DIA is that they tend to require planning ten or more years in advance of retirement, which most people don’t do. People who are considering buying a DIA qualified money, such as rollover IRA assets, should probably start thinking about the decision before age 60.

That’s especially true for people buying a DIA with qualified money. Several DIA issuers set the latest purchase age at 68, 68½ or 69, for qualified premiums, because the payouts must begin before age 70½, when required minimum distributions begin. People who are trying to leverage the higher mortality credits at older ages might find that restriction a bit confining.

Those who are buying a DIA with non-qualified, or after-tax money, face no such restrictions. Maximum-issue ages for these assets are as high as age 95. For such clients, DIAs can also help spread the income tax due on the interest earned on the principal over a period of many years. Once all principal has been distributed, however, the payments are 100% taxable as ordinary income.

DIAs are a useful new arrow in the product quiver of SPIA manufacturers. While SPIAs are mainly purchased by people in their late 60s or older, DIAs give issuers a product that they can offer to people in their 50s, thus broadening their market. Like SPIAs, DIAs can be positioned as a way for retirees to reduce risk in one part of their portfolios so that have more freedom to take risk with the rest of their assets.

As a risk-averse person approaching retirement without a defined benefit pension, I find the DIA concept appealing but the payouts still underwhelming. Low interest rates aren’t the only reason for the unimpressive payout rates. Adverse selection—the tendency for healthy people to buy annuities and vice-versa—inflates the contract price by about 10%.

I try to rationalize the low-interest rate problem by telling myself that low rates have driven equity prices up. Ergo, if I sell inflated equities to buy my DIA, I’m not hurt by the low rates. It’s a comforting thought, but not very.

I also tell myself that complaining about low rates is just a way of dodging the reality that I just haven’t save enough. Many of us still seem to expect growth and appreciation, as opposed to sheer saving (and the sacrifices it entails), to painlessly fund our retirements. That may turn out to be true for some, but you can’t count on it.

Piketty and the Zeitgeist

Posted on May 16, 2014 by Dani Rodrik -

I get the same question these days wherever I go and from whomever I meet: What do you think of Thomas Piketty? It’s really two questions in one: What do you think of Piketty the book, and what do you think of Piketty the phenomenon?

The first question is much easier to answer. By sheer luck, I was among the earliest readers of the English-language version of Capital in the Twenty–First Century. Piketty’s publisher, Harvard University Press, had sent me the pre-publication galleys, hoping that I would contribute a blurb for the back cover. I did so happily, as I found the scope, depth, and ambition of the book impressive.

I was of course familiar with Piketty’s empirical work on income distribution, carried out jointly with Emmanuel Saez, Anthony Atkinson, and others. This research had already produced startling new findings on the rise of the incomes of the super-rich. It had shown that inequality in many advanced economies has reached levels not seen since the early part of the twentieth century. It was a tour de force on its own.

But the book goes far beyond the empirical work, and narrates an intriguing cautionary tale about the dynamics of wealth under capitalism. Piketty warns us not to be fooled by the apparent stability and prosperity that was the common experience of the advanced economies during a few decades in the second half of the twentieth century. In his story, it is the un-equalizing, destabilizing forces that may be dominant within capitalism.

Perhaps more than the argument itself, what makes Capital in the Twenty-First Century a great read is the sense of witnessing a superb mind grapple with the big questions of our time. Piketty’s emphasis on the political nature of the distribution of income; his subtle back-and-forth between the general laws of capitalism and the role played by contingency; and his willingness to offer bold (if, to many, impractical) remedies to save capitalism from itself are as refreshing as they are rare for an economist.

So I would have liked to claim that I was prescient in foreseeing the huge academic and popular success that the book would have upon publication. In truth, the book’s reception has been a big surprise.

For one thing, the book is hardly an easy read. It is almost 700 pages long (including the notes), and, though Piketty does not spend much time on formal theory, he is not beyond sprinkling an occasional equation or Greek letters throughout the text. Reviewers have made much of Piketty’s references to Honoré de Balzac and Jane Austen; yet the fact is that the reader will encounter mainly an economist’s dry prose and statistics, while the literary allusions are few and far between.

The economics profession’s response has not been uniformly positive. The book’s argument revolves around a number of accounting identities that relate saving, growth, and the return to capital to the distribution of wealth in a society. Piketty is very good at bringing these abstract relations to life by hanging real numbers on them and tracing their evolution over history. Nevertheless, these are relationships that are well known to economists.

Piketty’s pessimistic prognosis rests on a slight extension of this accounting framework. Under plausible assumptions – namely that the wealthy save enough – the ratio of inherited wealth to income (or wages) continues to increase as long as r, the average rate of return to capital, exceeds g, the growth rate of the economy as a whole. Piketty argues that this has been the historical norm, except during the tumultuous first half of the twentieth century. If that is what the future looks like, we are facing a dystopia in which inequality will rise to levels never before experienced.

Yet extrapolation is dangerous in economics, and the evidence that Piketty adduces to support his argument is hardly conclusive. As many have argued, the return to capital, r, may well start to decline if the economy becomes too rich in capital relative to labor and other resources and the rate of innovation slows down. Alternatively, as others have pointed out, the global economy may pick up speed, buoyed by developments in the emerging and developing world. Piketty’s vision needs to be taken seriously, but it is hardly an iron law.

Perhaps the source of the book’s success should be sought in the zeitgeist. It is difficult to believe that it would have had the same impact ten or even five years ago, in the immediate aftermath of the global financial crisis, even though identical arguments and evidence could have been marshaled then. Unease about growing inequality has been building up for quite some time in the United States. Middle-class incomes have continued to stagnate or decline, despite the economy’s recovery. It appears that it is now acceptable to talk about inequality in America as the central issue facing the country. This might explain why Piketty’s book has received greater attention in the US than in his native France.

Capital in the Twenty-First Century has reignited economists’ interest in the dynamics of wealth and its distribution – a topic that preoccupied classical economists such as Adam Smith, David Ricardo, and Karl Marx. It has brought to public debate crucial empirical detail and a simple but useful analytical framework. Whatever the reasons for its success, it has already made an undeniable contribution both to the economics profession and to public discourse.

Dani Rodrik is Professor of Social Science at Princeton’s Institute for Advanced Study and author, most recently, of The Globalization Paradox: Democracy and the Future of the World Economy.

Prudential launches new SPIA

Posted on May 16, 2014 by Editorial Staff -

As part of a broad effort to diversify its risk exposure away from the equity markets and issue products that tie up less capital, Prudential Annuities has introduced a single-premium immediate annuity (SPIA) with an optional cash refund feature and a one-time option to access future payments in a lump sum (under the life with period certain income option).

“We’ve had SPIA products for many years, but this is an updated version,” said Bruce Ferris, president, Prudential Annuity Distributors, in an interview with RIJ this week. “We had a SPIA that hadn’t been refreshed in terms of administration or marketing for many years, and it wasn’t available on Cannex, where most SPIAs are illustrated and quoted. [Getting the product on Cannex] was part of our motivation for reissuing the product.”

From an enterprise risk perspective, SPIA sales also have the potential to help balance Prudential’s heavy weighting toward equity-linked products. “This launch is reflective of a broader strategy of growth through diversification. We want a broader, complementary solution-set that fits the company’s capital deployment strategy,” Ferris said.

“A SPIA is an asset-liability matching product. The behavioral risks associated with it are much lower than with the variable annuity, for several reasons. The contract owner is giving up access to the money, and the company doesn’t need to try to predict when the contract owner might draw income.”

Prudential managers have said in the past that as a stock company Prudential Financial has to deliver profits that excite shareholders—the types of profits that are more likely to come from selling equity-linked products. SPIA and the relatively new Prudential bond-based deferred income product don’t deliver those types of returns, but they do help diversify risk. Although new sales of Prudential variable annuities with living benefits have declined steeply from their peak, the VA book of business still delivers huge revenues, thanks to fees that are linked to the booming equity values of the subaccounts in its existing contracts.

Whether Prudential is now selling bond-linked products instead of, as opposed to alongside, equity-linked products, Ferris could not say. But he noted, “We’re taking a different approach from competitors. Some of our competitors seek success by controlling supply. We seek success by managing risk. That’s why you see diversified products from us—the SPIA, the Prudential Defined Income product, our traditional variable annuity with a living benefit, and our investment-only variable annuity, which is intended to be a tax-deferred accumulation vehicle.”

Reinsurance once again available to VA issuers: Fitch

Posted on May 16, 2014 by Editorial Staff -

Improved pricing and less aggressive investment guarantees are leading to a re-opening of the reinsurance market in the variable annuity space, giving writers of VAs a risk mitigation alternative to in-house VA hedging programs, according to a new report from Fitch Ratings.

But “it is unclear how much of an impact this will have on the risk profile of VA writers,” a Fitch release said. “It could result in a reduction in the industry’s exposure to VA risk or, conversely, it could simply allow insurers to sell more VAs than they otherwise would. Fitch expects the ultimate answer to lie somewhere between the two extremes.”

Like the equity markets, the supply of VA reinsurance market has been volatile in recent decades, Fitch said. It was very active in the 1990s, dried up after the correction in 2000-2002, sprang back to life in 2006-2007, and dried up again after the 2008-2009 financial crisis.

Fitch said it has seen an increase in reinsurance transactions involving VA risk. CIGNA, previously a reinsurer of variable annuity risk, entered into a reinsurance transaction in February 2013 with a subsidiary of Berkshire Hathaway on an in-force book of variable annuities.

In the fourth quarter of 2013, Lincoln National Corp.’s (LNC) largest insurance operating subsidiary entered into a reinsurance treaty with Union Hamilton Reinsurance, Ltd., a Bermuda-domiciled subsidiary of Wells Fargo & Co. This transaction was particularly notable in that the reinsurance agreement involved future new business. Under the terms of the treaty, Union Hamilton will reinsure the living benefit guarantee on 50% of new VA sales from Nov. 1, 2013 through Dec. 31, 2014, up to $8 billion of new living benefit guarantee sales. LNC will retain 100% of the product cash flows, excluding the living benefit guarantee.

Fitch believes that more VA writers are exploring potential opportunities to cede a portion of the risk associated with their VA guarantees, but no other significant announcements of such treaties have yet emerged.

Investors rotate from growth to value; REITs outperformed the S&P

Posted on May 16, 2014 by Editorial Staff -

A “massive” rotation out of growth stocks and into value stocks occurred this spring, according to TrimTabs Investment Research. Growth-oriented U.S. equity exchange-traded funds have redeemed $5.6 billion (4.6% of assets) since the start of April, while value-oriented U.S. equity ETFs have issued $3.9 billion (2.6% of assets).

“Fund flows have shifted dramatically beneath the market’s calm surface,” said TrimTabs CEO David Santschi, in a release. “While most major U.S. stock market averages were little changed in recent weeks, investors showed an overwhelming preference for value over growth.”

The shift in flows has occurred across the size spectrum. Small-cap growth ETFs have redeemed $750 million (5.9% of assets) since the start of April, while small-cap value ETFs have issued $150 million (1% of assets). Large-cap growth ETFs have redeemed $4.6 billion (4.9% of assets), while large-cap value ETFs have issued $2.6 billion (2.5% of assets).

“These flows mark a huge change in trend,” Santschi said. “Investors were favoring growth over value for most of the past year.”

TrimTabs believes the Federal Reserve’s “tapering” and the disappointing performance of recent technology and biotechnology IPOs are probably driving investors to re-evaluate the prospects of growth companies. It also suggested some investors may want to start taking advantage of the sell-off.

“Our liquidity indicators are bullish almost across the board, and ETF investors tend to be poor market timers,” noted Santschi. “While plenty of social media, cloud computing, and biotechnology firms are still grossly overvalued, stock pickers may want to consider scooping up other growth names that have been dumped along with the tech and biotech highflyers.”

NAREIT’s May 2014 REIT market update

U.S. REIT returns outpaced the S&P 500 in April and outperformed the broader equity market in the first four months of the year. Almost all sectors of the U.S. REIT market delivered double-digit total returns for the first four months of 2014. Self-Storage was the industry’s top-performing sector for the year-to-date, delivering an 18.83% total return.

On a total return basis, the S&P 500 was up 0.74% in April, but the FTSE NAREIT All REITs Index was up 2.88%, the FTSE NAREIT All Equity REITs Index was up 2.99%, and the FTSE NAREIT Mortgage REITs Index was up 1.86%.

For the first four months of the year, the S&P 500 was up 2.56%, but the FTSE NAREIT All REITs Index was up 11.70%, the FTSE NAREIT All Equity REITs Index was up 11.76%, and the FTSE NAREIT Mortgage REITs Index was up 13.23%.

Among other REIT market sectors in the first four months of the year, Health Care was up 16.84%; Apartments were up 16.40%; the Home Financing segment of the FTSE NAREIT Mortgage REITs Index was up 15.36%; Office was up 13.61%; and Retail was up 12.62%, led by Regional Malls, up 13.10%.

At April 30, the dividend yield of the FTSE NAREIT All REITs Index was 4.05%, and the dividend yield of the FTSE NAREIT All Equity REITs Index was 3.57%. The dividend yield of the FTSE NAREIT Mortgage REITs Index was 9.80%, with Home Financing REITs yielding 10.81% and Commercial Financing REITs yielding 7.11%. By comparison, the dividend yield of the S&P 500 was 2.07% Five individual equity REIT market sectors produced dividend yields over 4%: Free-Standing Retail (6.07%); Health Care (5.08%); Mixed Industrial/Office (4.643%); Diversified (4.48%) and Manufactured Homes (4.14%).

Retirement Clearinghouse to help find missing participants

Posted on May 16, 2014 by Editorial Staff -

To help fill a “gaping hole” left by the discontinuation of two government programs, Retirement Clearinghouse LLC (RCH) has introduced a search service to locate missing retirement plan participants, the Charlotte-based company said in a release this week.

The Social Security Administration and the Internal Revenue Service have both decided to stop operating a “letter forwarding program” that helped plan sponsors locate participants who have gone missing due to address changes and other circumstances, the RCH release said.

An estimated 9.5 million defined contribution plan participants change jobs each year, and many leave their accounts behind in former employers’ retirement plans. RCH said the cost to plan sponsors of resolving these accounts is an estimated $48 billion over 10 years.

RCH said it has combined searches of national change-of-address records and commercial databases with Internet tracker and social media search capabilities. It also validates and updates participant data, oversees mailings to last known addresses, and locates missing participants when possible. The service helps plan sponsors meet fiduciary responsibilities.

Is Social Security Unsociable to Annuities?

Posted on May 8, 2014 by Kerry Pechter -

If Uncle Sam began making and selling an inexpensive national automobile—a people’s car analogous to the minimalist Volkswagen beetle of the 1930s—would it “crowd-out” demand for privately manufactured automobiles?

The logical answer might be: Sure, but only among people who drive the cheapest, most basic privately-manufactured cars; people who drive luxury cars like a Lexus, Cadillac or BMW wouldn’t be affected at all.

Here’s a related question: Does the availability of Social Security benefits displace or “crowd out” the demand for individual income annuities among U.S. retirees?

On the one hand, the Boomer retirement wave has clearly stoked demand for retail guaranteed income products. Annual sales of income annuities (immediate and deferred) breached the $10 billion barrier for the first time in 2013. Sales of fixed indexed annuities with living benefit riders also boomed last year.

But while interest in annuities is seasoning slowly, like hickory-smoked barbecue, interest in Social Security has suddenly caught fire. Advisers and their clients are talking about “claiming strategies,” and using new-fangled calculators to “optimize” their benefits. Experts like Alicia Munnell at the Center for Retirement Research at Boston College have recommended “buying an annuity from Social Security” by delaying benefits until age 70 and living on other savings in the meantime. (Today’s low risk-free interest rates and high Social Security deferral “credits” are helping create an arbitrage opportunity, in a sense.)

The Social Security crowd-out question has no single or simple answer. Lots of factors impinge on demand for private annuities besides Social Security. But it seems safe to say that annuity issuers who want to forecast the potential market for guaranteed income, as well as policymakers who are trying to decide how best to alter Social Security, should all be wondering to what extent our public and private sources of retirement income work in concert—or compete.

Yes and no

The short answer to the crowd-out question is “Yes, but not entirely.” The longer and unsurprising answer is, “It depends.” It depends partly on whether you’re emphasizing Social Security’s relative “replacement rate” or the absolute size of the benefits.

Social Security replaces more of the pre-retirement income of middle and low-income workers than of high-income workers. In that sense, like income tax rates, it’s “progressive.” Depending on the yardstick you use, Social Security, when claimed at the full retirement age, replaces 57-65% of a low-income worker’s pre-retirement income, 42-48% of a middle-income worker’s pre-retirement income, and 35-40% of the income of a worker at the top of the Social Security wage scale, according to the Center for Retirement Research at Boston College. Conventional wisdom calls for a 70% to 80% income replacement rate in retirement, so Social Security fulfills at least half of that.

You might conclude that Social Security satisfies most of the average person’s need for so-called income flooring in retirement, just as the pre-war VW bug fulfilled the average person’s vehicle needs. But what about the many advisors’ clients who earn much more than the FICA limit ($117,000 in 2014)? For workers accustomed to grossing $20,000 to $50,000 per month, and expecting to need 80% in retirement ($16,000 to $40,000 per month), Social Security income might replace only part of their need for safe income. The amount would depend on perceived need, debt load or risk tolerance.

“There’s no question that the presence of Social Security crowds out some of the demand for private annuities that would exist in the absence of Social Security. But the replacement levels are sufficiently low that it shouldn’t completely crowd out private annuities, especially for people in the upper and even the middle part of the income distribution,” said Jeff Brown, a University of Illinois economist.

“Public social security (SS) systems, providing mandatory annuitized benefits, crowd out private markets,” wrote Israeli economist Eytan Sheshinski in his 2007 book, The Economic Theory of Annuities. “However, the SS system in the United States provides replacement rates (the ratio of retirement benefits to income prior to retirement) between 35% and 50%, depending on income (higher rates for lower incomes). This should still leave a substantial demand for private annuities.”

Present value of Social Security

But if you ignore the replacement percentages and focus on two other numbers—the maximum benefits under Social Security and the estimated present value of those benefits—it’s hard to imagine anyone needing more annuitized wealth than can be gotten from Social Security.

For instance, a middle-class couple, claiming at ages 64 and 70, might easily receive $4,000 in monthly Social Security benefits, or $48,000 a year before taxes and Medicare B premiums. As a retail joint-life annuity, even without inflation protection, that income stream would be worth about $800,000, according to immediateannuities.com. If that’s equal to or greater than the couple’s total household wealth, do they really need to annuitize more?

That’s how an economist or an advisor who looks at the entire “household balance sheet,” might see it. “I’m not sure I would use the phrase ‘crowd out,’ to describe Social Security’s effect on demand for guaranteed income,” said Moshe Milevsky, the York University finance professor who writes, consults and teaches retirement finance.

“But I certainly agree that many Americans are over-annuitized because Social Security is such a large portion of their income and balance sheet, and it’s hard for the private sector to offer a real inflation-indexed annuity at the same prices.”

Other economists who have studied and written about retirement finance for many years suggested in a recent paper that Social Security is probably why most middle-class households don’t buy retail annuities.

“Old age insurance benefits from Social Security are the major source of retirement income for most retired households,” wrote Raimond Maurer of Goethe University in Frankfurt, one of three authors of a paper published in the March issue of Review of Finance. They found the Social Security spousal benefit to be generous; Germany’s old age pension offers no such feature, Maurer told RIJ. In Maurer’s description, Social Security in the U.S. sounds less like a pre-war Beetle and more like a 2014 Audi.

“In practice, [Social Security] benefits… which are comparable to a joint and survivor annuity, are well balanced for a couple and provide relatively generous survivor benefits in the range of one-half to two-thirds of the previous income. … For retired couples with moderate financial wealth, purchasing additional annuities in the private market only provides marginal welfare gains. This might explain why so few households participate in the private annuity market and therefore—at least in part—the annuity puzzle,” the German economists wrote.

Like a nice restaurant

Some believe that the availability of Social Security crowds out private annuities in another way—by making them more expensive. “The equilibrium price of annuities is about 14% more than it would have been otherwise in the absence of Social Security,” writes Arizona State University economist Roozbeh Hosseini in a paper published on March 20.

In his view, Social Security drives up the cost of private annuities by worsening the effect of “adverse selection”—the tendency for healthier, longer-lived people to buy private annuities. Because Social Security is mandatory, Hosseini writes, and requires all American workers, regardless of health status or life expectancy, to participate, it reduces its own vulnerability to adverse selection.

But by satisfying the need for guaranteed income among less healthy (and often lower-income; unfortunately the two go together) people, it only shifts that problem to the private annuity market, he claims. “In the presence of Social Security, 47% of the population (those with higher mortality) are not active in the market. These individuals get more annuitization than they need from Social Security.

“On the other hand, individuals with lower than average mortality, expecting longer life spans, accumulate more assets and have higher demand for annuities. These individuals purchase annuities in the market. However, since higher mortality types (good risk types) are not in the market, the equilibrium price of annuities is about 14% percent higher than it would have otherwise been in the absence of Social Security.”

Not everyone agrees, at least not entirely. “Perhaps those ‘low life expectancy retirees’ would decide not to buy an annuity,” Milevsky told RIJ. For them, voluntary private annuities are, on average, even more expensive than they are for people with high life expectancies. Even without considering the possible effect of Social Security, retirement experts like Wade Pfau of The American College, and George A. (Sandy) Mackenzie, editor of The Journal of Retirement, have estimated the implicit load on private income annuities to be 10% to 15%, thanks to costs and adverse selection.

(That’s not a reason to avoid income annuities, Mackenzie wrote in his 2006 book, Annuity Markets and Pension Reform. Just as relatively expensive fire insurance is still much cheaper than the cost of replacing a burnt-down house, even an expensive life annuity is still much cheaper than self-insuring against longevity risk.)

Social Security is “clearly a substitute” for private annuities, and therefore crowds them out, says economist Eugene Steuerle, a senior fellow at the Urban Institute. But Social Security has also stimulated demand for private annuities, he believes.

More so than defined benefit pensions, Social Security created the modern concept of retirement for middle-class Americans, Steuerle told RIJ. Before Social Security, millions of people reached age 65 with nothing in the bank, so they kept working. Social Security enabled them to retire. The larger supply of retirees naturally generated more demand for additional sources of retirement income, such as private annuities.

“It’s like what happens when a restaurant opens in a nice neighborhood without restaurants. Other new restaurants follow, and they benefit from each other,” Steuerle told RIJ this week. At the same time, the growth of retirement savings in 401(k) plans and rollover IRAs has given millions of people the wherewithal to buy additional income. And while only 10% or 20% of them might actually buy annuities, “Twenty percent of a big pile is more than 20% of a small pile,” he added.

DB pensions leave a vacuum

What will happen when defined benefit pensions finally disappear, and no one enters retirement with a DB annuity? Will people buy private annuities to supplement Social Security instead? Annuity manufacturers may hope so, but the market dynamics are not so simple.

For people who have DB pensions, familiarity with guaranteed income evidently tends to foster demand for more. “Our research suggests that the presence of guaranteed income creates demand rather than suppresses it,” said Ross Goldstein, a New York Life managing director, told RIJ.

New York Life, the leading seller of income annuities, paid out more than $1 billion to about 129,000 contract owners in 2013. The average monthly payment was $682, with 60% receiving under $500 a month, 24% receiving $500 to $1,000 a month, and 16% receiving over $1,000. About half the $1 billion went to people ages 80 and older, over 30% to people ages 70 to 79 and nearly 20% to people ages 65 to 69. “It looks a lot like the distribution of income in the United States,” Goldstein said.

As an example of a typical prospect, Goldstein suggested a couple with $500,000 in savings and $40,000 in Social Security and/or pensions, who might boost their guaranteed income to $45,000 or $50,000 a year buying an income annuity with a chunk of savings. The move would reduce principal, but in a single, deliberate coup. It would also reduce the future temptation or need for piecemeal or panicky withdrawals from the remainder.

The disappearance of DB pensions could open up demand for retail annuities. But it would also reduce the number of people who have first-hand knowledge of the rewards of guaranteed income, Goldstein suggested. Most 401(k) participants will need to be taught to think of turning their savings into annuities, an educational process that has barely begun.

Even if the absence of DB pensions does inspire the public to buy retail annuities—an idea that annuity marketers constantly pitch—the substitution rate “won’t be dollar for dollar,” Brown told RIJ. Steuerle agreed. “The decline of DB pensions might help but it won’t be a one-to-one substitution,” he said in an interview.

That leaves the ultimate question: What happens if Social Security benefits shrink, either through means-testing, or less generous indexing, or in terms of replacement ratios, as a result of declining payroll tax revenue? Will that compel millions of people to convert at least part of their IRA or 401(k) money to retail or institutional annuities? Annuity manufacturers are praying for just such an outcome.

One source of rising inequality: Power couples

Posted on May 8, 2014 by Editorial Staff -

Everyone knows that when two doctors marry, or two lawyers marry, or when a doctor and a lawyer marry, they can afford to hire a live-in nanny to shepherd and chauffer the kids while they work 12 hour days.

Researchers have documented an increase in “positive assortative matching,” which is a fancy way of saying that “likes marry likes.” And some believe that the rise of professional couples with two high-powered salaries has helped fuel the wealth-concentration that pundits so often write about and debate over.

The paper, “Marry Your Like: Assortative Matching and Inequality,” was written by a cosmopolitan quartet of economists: Jeremy Greenwood of Penn, Cezar Santos of the University of Mannheim, Georgi Kocharkov of the University of Konstanz, and Nezih Guner of Barcelona-based MOVE (Markets, Organizations and Votes in Economics). It has just been published by the National Bureau of Economic Research.

Here are hypothetical cases used by the authors to illustrate the evolution of the link between marriage choices and financial status over the past half-century:

“In 1960 if a woman with a less-than-high-school education (HS) married a similarly educated man their household income would be 77% of mean household income. If that same woman married a man with a college education (C) then household income would be 124% of the mean.

“Alternatively, in 2005 if a woman with post-college education (C+) marries a man with a less-than-high-school education their income would be 92% of mean household income. This rises to 219% if her husband also has a post-college education. So, at some level, sorting matters for household income.”

To the extent that those examples reflect the new norms, then a husband’s education is still the primary determinant of a couple’s future income, but women are evidently bringing more to the household balance sheet than they used to. If so, it’s an idea that rings true.

Before the 1970s, positive assortative matching—call it PAM—was less common simply because women weren’t as much like men, in terms of education or earning power. Women weren’t attending law, medical or dental schools in today’s large numbers, and they hadn’t yet achieved an equal (or almost equal: the pay differential and “glass ceiling” persist) presence in professional or managerial ranks.

Just as importantly, women aren’t quitting work when they get married and have children, as they used to. In the last 30 or 40 years, the “working mother” phenomenon became the norm. (Working Mother magazine, still going strong, was founded in 1979.) “For positive assortative matching to have an impact on income inequality married females must work. Married females worked more in 2005 than 1960,” the researchers wrote.

The paper doesn’t explore PAM’s implications for retirement, but they’re easy to see. Income and wealth patterns that exist during the working years must certainly persist into retirement, since higher-income workers are more likely to be working in companies with generous retirement plans, more likely to save and likelier to have high Social Security benefits. A power-couple in their early 60s today who delay Social Security until age 70 can expect to receive as much as $6,000 per month, or $72,000 a year, when benefits begin, and regular cost-of-living increases from then on.

It’s 2024. Do You Know Where Your Industry Is?

Posted on May 8, 2014 by Kerry Pechter -

By the year 2024, how will the retirement industry have changed from the way it looks today? The wide-ranging responses of two dozen retirement industry experts to multiple variations of that speculative question have been compiled into a new report.

The 96-page document, entitled “Expert Interviews on the Future of the Retirement Market,” is based on the results of a series of interviews conducted last winter by The Diversified Services Group, Inc. (DSG), a Philadelphia-area consulting firm, and the research firm Mathew Greenwald & Associates (MGA), based in Washington, DC.

RIJ, as a participant in the interview process, received a summary of the results, and we can offer highlights. The report isn’t scientific, it doesn’t reach any kind of consensus on the likely shape of the future and it includes, inevitably, many extrapolations of current trends. The experts’ comments also tend to be rather sober, with references to rising inequality, rising costs, and dysfunctional government.

Its main value, according to DSG’s introduction, is to render a kind of transcript of a high-level brainstorming session, and to stimulate more brainstorming. The interviewees “point out some potential areas for long-term opportunity,” the introduction says. DSG advises readers to “carefully consider some initial actions to gain competitive advantages in these areas.”

Some of those potential opportunities were implied by predictions like these:

Cities should prepare to welcome an influx of Boomer retirees. Warm climate retirement spots will give way to more diverse urban areas that offer retirees cultural opportunities. Seniors in suburban and rural areas will need transportation solutions.
New ways of delivering affordable financial advice will be needed. Most people will not be able to afford comprehensive financial planning services, but piecemeal advice won’t be very useful unless it leads to more comprehensive services.
Architects and contractors may be needed to help convert some of today’s large single-family homes into inexpensive residences or assisted-living facilities for groups of unrelated single retirees. Many full-service nursing homes will close. The long-term care financing puzzle remains unsolved, and government-financed solutions may be necessary.
Hospitals will compete directly with insurance companies to assume the insurance and cost risk.
The size of the Boomer retiree market will force politicians on the left and right to come together and provide support. Opportunities may exist for those who can harness the Boomer energy and apply it in Washington.
- Employers’ unwillingness to go much beyond financial education in preparing employees for retirement presents an opportunity for advisors or plan service providers who can fill this gap with assistance, advice, and income solutions.
- Beyond auto-enrollments and auto-escalation, there is a need for new methods of encouraging additional saving for retirement in employer-sponsored plans.

The interview subjects included retirement experts selected from a variety of fields and areas of expertise. They represented life insurers, financial advisory firms, non-profit research groups and consulting firms. They included such bona fide experts as Dallas Salisbury of the Employee Benefits Research Institute, Mark Warshawsky, currently at the American Enterprise Institute, Wade Pfau of The American College, Michael Kitces of Pinnacle Advisory Group and Christopher Raham of Ernst & Young.

One of the interviewees predicted, “We will be shocked by how little has changed.” But if you asked someone had made that comment in 2004, how wrong they would have been. If recent history is any guide, it seems safer to strap ourselves in and get ready for a bumpy ride.

DSG’s “Expert Interviews” report represents the fifth phase of a planned six-part series of syndicated studies. The annual multi-sponsor research series is entitled, Retiree Insights Research Program. The final phase of the research, a consumer survey, is still in process.

A conference to review the entire research results with the sponsoring organizations is planned for mid-June. Subscriptions for copies of the entire series of research reports are available for purchase, said Borden Ayers, a principal in the DSG organization. Interested parties should contact either DSG or Greenwald & Associates.

Rollover IRA contributions reached $321.3 billion in 2012: Cerulli

Posted on May 8, 2014 by Editorial Staff -

The regulators call it “leakage” but for broker-dealers it’s a veritable gusher. As Americans change jobs or retire, they frequently transfer their savings from low-cost, high-regulated 401(k) plans to rollover IRAs, where the rules and regulations, for better or worse, are much looser.

Cerulli Associates, the Boston-based global analytics firm, follows these asset flows. In a proprietary new study, “Retirement Markets 2013: Data and Dynamics of Employer Sponsored Plans,” Cerulli reports that contributions to rollover IRAs rose 7.3% in 2012 to $321.3 billion. Figures for 2013 were not yet available.

In the report, Cerulli examines the size and segmentation of public and private U.S. retirement markets, including defined benefit (DB), DC, and IRA. The report is the eleventh in an annual series.

Most of the rollover money originates 401(k) plans, and Cerulli advises plan providers—the biggest include Fidelity Investments, Vanguard, ING U.S. Retirement, Great-West Financial, Principal Financial and others—to reach out to departing participants and try to retain the assets before it is rolled over to an IRA at other fund firm or to a broker-dealer.

There’s usually an interim in which to do that. “Participants do not necessarily roll over their assets immediately after leaving their employer,” said Bing Waldert, director at Cerulli. “Some take action months or even years after their departure.”

Other findings from the report, only a portion of which was released to RIJ this week:

59.4% of 401(k) assets are investment-only, 41.7% are proprietary and the remaining 8.8% is made up of self-directed brokerage assets, company stock and other.
In 2014, Cerulli estimated that 32.1% of U.S. retirement assets will be in IRAs, 23.4% will be in public DB plans, 21.7% will be in private DC plans, 14.4% in private DB plans, and 8.4% in public DC plans. In 2002, the IRA share was 26.7%.
In 2012, there were an estimated 45,010 defined benefit plans in the U.S., of which more than three-fourths had fewer than 100 participants and less than 10% had 100-999 participants. Only 701 DB plans had more than 10,000 participants.
Only 24,400 of the nation’s 307,623 financial advisers (7.9%) received more than 40% of their income from work with defined contribution plans in 2012. More than half of the 24,400 were in the insurance channel, and about 20% were in the independent broker dealer channel. Advisers in the insurance channel. Almost 42,000 advisers “dabbled” DC plans, receiving less than 20% of their income from work with plans.

Initial funding granted for Connecticut’s public IRA plan

Posted on May 8, 2014 by Editorial Staff -

The Connecticut General Assembly announced Wednesday that it will invest $400,000 to begin creation of a state-level public IRA plan, open to all private sector workers. The funds were approved in the FY 2014-2015 budget passed by legislators on May 3.

The money will finance the Connecticut Retirement Security Board, which will be “conducting a market feasibility study and developing an implementation plan” for a state-sponsored, workplace-based payroll deferral program for the state’s 740,000 workers who lack access to an employer-based plan, according to a release from Retirement for All CT, an advocacy group that supports the program.

“The Board, chaired by the State Treasurer and State Comptroller, is expected to report back to the General Assembly their findings and a plan for implementation by 2016. Funding included in the state budget is expected to be used to hire the necessary consultants and staff to ensure the Public Retirement Plan will be self-sufficient and compliant with all federal regulations,” the release said.

Detroit municipal retirees to take 4.5% pension cut

Posted on May 8, 2014 by Editorial Staff -

Working through federal bankruptcy mediators, the City of Detroit and the Detroit Retired City Employees Association (DRCEA) have agreed on the treatment of pension and healthcare benefits under a proposed Bankruptcy Plan of Adjustment.

Under the agreement, the city retirees will take a 4.5% cut in current pension benefits and lose cost-of-living-allowances. The benefits can be restored depending on the performance of the General Retirement System under the Plan of Adjustment.

Retirees were also promised a “meaningful voice” in governance of the planned General Retirement System and of a Voluntary Employees Beneficiary Association (VEBA) that is to be established.

The DRCEA is the Detroit’s largest employee association with almost 8,000 members, or about 75% of Detroit’s eligible general retirees.

The Retired Detroit Police and Fire Fighters Association (“RDPFFA”), composed of about 6,500 members or more than 80% of Detroit’s police officers and firemen, reached a similar agreement with the city on April 15.

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