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New York Life paid out more than $1 billion to SPIA owners in 2013

Posted on April 30, 2014 by Editorial Staff -

New York Life’s 129,000 income annuity policyholders received more than $1 billion in payouts in 2013, an increase of 12% over 2012, the company said in a release this week. Of the $1 billion in payouts:

Nearly 20% went to policyholders between the ages of 65 and 69.
More than 30% went to policyholders between the ages of 70 and 79.
More than $500 million went to policyholders 80 years old and older.
The average monthly payout in 2013 was $682, or about half the average Social Security benefit.

New York Life leads the $10 billion income annuity market with a 33% market share for single-premium immediate income annuities and a 40% market share for deferred income annuities, according to industry data. The mutual company has been the SPIA sales leader since 2006 and had total income annuity sales of over $3 billion in 2013, according to the release.

Quote of the Week

Posted on April 30, 2014 by Editorial Staff -

The Retirement Industry Conference

Posted on April 25, 2014 by Kerry Pechter -

At the Retirement Industry conference in Chicago two weeks ago, researchers from LIMRA’s Secure Retirement Institute presented annuity sales data for 2013. They also predicted 6% average annual growth for fixed annuities, 2% growth for variable annuities and 4% for annuities overall between now and the end of 2018.

Slides from the presentation by Joseph Montminy and Jafor Iqbal of LIMRA can be found here.

With sales of $145.3 billion in 2013, variable annuities remained the top selling type of annuity in the U.S. But despite the bull market in equities last year—higher equity prices don’t coincide with higher VA sales the way they did a few years ago—gross sales fell slightly from 2012 levels.

The reasons: reduced life insurer appetite for selling VAs, less generous living benefit riders and a greater emphasis by manufacturers on less capital-intensive VAs that are designed for tax-deferred accumulation rather than guaranteed retirement income.

Difference companies are using different product strategies. Jackson National (with its popular Elite Access VA,) Guardian, AXA, and Protective are among the leaders in promoting accumulation-focused VAs, according to LIMRA. AXA, Allianz Life, MetLife and CUNA are promoting structured VAs that give investors upside potential with a cap and a buffer against downside losses.

According to the presentation, all of the major VA issuers, including Prudential, MetLife, Jackson National, Lincoln Financial, AXA and others, have cut their risk exposure either by reducing their distribution, requiring contract owners to use managed-volatility funds, offering to buy back in-the-money contracts, or blocking additional contributions to existing contracts.

(On the upside, last year’s bull market helped drive up VA account values, on which part of VA fee revenue is based.)

VA contract owner behavior

Because VA policyholder behavior has a big impact on profitability, LIMRA has tracked it on behalf of its life insurance members. As the data show, withdrawal and surrender behavior is largely determined by the kind of money the annuity was purchased with (qualified or non-qualified), the age of the owner and whether the owner is systematically withdrawing the assets for retirement income.

The guaranteed lifetime withdrawal benefit (GLWB) rider has been a mixed blessing for VA issuers. It brought in lots of premium, but it attracted qualified money (seeking retirement income), mainly from IRAs, instead of the after-tax money (seeking tax deferral on large sums) historically associated with VA purchases.

Qualified contracts with GLWBs are less likely to lapse, and to the extent that those riders were underpriced (as many were during the VA “arms race” of the mid-2000s), the cost of maintaining them and managing their market risks and longevity risks can make them long-term liabilities.

According to LIMRA, contract owners who elected guaranteed lifetime withdrawal benefits (as opposed to guaranteed minimum income benefits, withdrawal benefits or account balances) who purchased their contracts with qualified money, who set up systematic withdrawal plans, and who keep their annual withdrawals close to the percentages dictated by the rider, were the least likely to surrender their contracts in 2012.

Assessing the 2.36 million existing VA contracts with living benefits in 2012, LIMRA found that 71% were owned by Boomers ages 48 to 66 and two-thirds were purchased with qualified money. The average contract was “in the money” by $16,300 in 2012. (Thanks to the bull market, the amount of in-the-moneyness has probably shrunk since then, a LIMRA spokesman said.)

Owners of qualified contracts with living benefits had an average surrender rate of only 4.2% in 2012, and those with a GLWB had an average surrender rate of just 2.9%. Surrenders by GLWB owners with systematic withdrawal plans were rare (2-3% at any age).

FIA sales soar

The abrupt rise in sales of fixed indexed annuities (FIAs) during the last three quarters was the big annuity sales story of 2013. Sales rose to $11.9 billion in the fourth quarter from $7.9 billion in the first quarter.

Fixed indexed annuities are selling better for several reasons. The five-year Treasury rate more than doubled after May 3, to 1.72% from 0.68%, offering fixed annuity issuers about 100 basis points of breathing room. Aggressive private equity-owned insurers, particularly Security Benefit, made their presence felt. FIAs with GLWBs probably absorbed some of the demand for lifetime income that VA issuers lacked the appetite or the capacity for.

The Boomer retirement wave continued to drive demand for guaranteed income. In 2013, $105 billion of the $230 billion in annuity sales involved income guarantees, according to LIMRA. VAs with GLWBs accounted for $61.7 billion, VAs with GMIBs for $11.9 billion, and FIAs with GLWBs for $20.7 billion. Single premium immediate annuities ($8.3 billion) and deferred income annuities ($2.2 billion) both posted record annual sales.

Resignation in retirement

Mathew Greenwald of Greenwald & Associates, the research survey firm, and Carol Bogosian of the American Society of Actuaries presented the findings of a recent survey and focus groups involving 1,000 near-retirees, 1,000 retirees, and 200 retired widows ages 45 to 80.

The research, part of the Society of Actuaries’ ongoing analysis of the cluster of risks associated with aging and retirement, found that most people drift into retirement without much planning or preparation, nor do they worry much about their ability to adapt to the challenges of retirement if and when they arise.

Middle-aged and older Americans tend to be either confident, optimistic or resigned about retirement. They appear to underestimate their need to tap savings in retirement (as a supplement to pensions, Social Security, dividends, capital gains and interest), tend not to recognize the risk of cognitive decline in old age, and don’t appreciate the potential impact of inflation on their future purchasing power, the data showed.

As earlier research has shown, many pre-retirees seem to overestimate their ability or willingness to extend their working years. In focus groups, retirees confessed that retirement is often thrust upon people rather than chosen.

“When the company reorganized and showed that they weren’t interested in people my age and opportunities came and went. Opportunities came to younger people and to me it was a sign that you’d better start thinking about it,” said one focus group participant. Another said, “I was on the road constantly. I found that I was getting less and less enjoyment out of it… It was just too much.”

Keynote by Thaler

The celebrity speaker at the Retirement Industry conference was Richard Thaler, the well-known behavioral economics expert at the University of Chicago and the co-author of “Nudge,” a book that promoted the use of default options such as auto-enrollment and auto-escalation in 401(k) plans to raise participation rates in employer-sponsored retirement plans.

To break the rhetorical ice, Thaler posed this riddle to the presumably math-adept LIMRA crowd:

Consider two one-mile lengths of iron rail meeting at a single junction. If a heat wave caused the length of each rail to expand by an inch, how high would the junction have to rise off the ground to accommodate the expansion (assuming that both lengths of rail stayed rigid and straight and didn’t buckle)?

Vastly underestimating the leverage effect created by the length of the rails, the vast majority of the audience thought the junction would have to rise by less than one foot. The answer was almost 30 feet.

That’s the number you get by applying the Pythagorean theorem, which says the square of the hypotenuse of a right triangle (in this case, 5,280 feet plus an inch, or 5280.0833 feet) minus the square of the base (5,280) will equal the square of the triangle’s height, which is what you’re trying to solve for.

At the end of his speech, which described the successes and limitations of auto-enrollment and auto-escalation, Thaler made two parting suggestions. He recommended that people maximize their Social Security benefits by claiming at age 70, even if it means spending their tax-deferred savings in the meantime. He also suggested that Uncle Sam allow people to buy higher Social Security benefits before or at retirement.

Waiting for the Fiduciary Train

Posted on April 25, 2014 by Kerry Pechter -

Don’t expect the second draft of the Department of Labor’s proposal for a new fiduciary rule to arrive in August of this year, as scheduled. It still needs to be reviewed by the Office of Management and Budget, and it may be the target of a time-consuming lawsuit while it’s there. The final draft may not appear until after November’s mid-term election.

So said David C. Kaleda, a principal in the Fiduciary Responsibility practice of the Groom Law Firm, at a half-day seminar at the Practicing Law Institute in grimy, glistening Manhattan on Tuesday. The seminar’s timely title: “Financial Services Fiduciary Duties: Navigating the Emerging Regulatory Maze.”

Kaleda, a tall young attorney in a light-grey suit and yellow medallion necktie, was one of the expert panelists who appeared before an audience of several dozen compliance lawyers, many of them seeking guidance on how to help their advice-giving clients or companies avoid future trouble with the fiduciary police.

Opponents of the DoL proposal will likely challenge it with a lawsuit during the up-to-90-days review by the OMB, he said. If that happens, the expected line of attack will be that a stronger standard of conduct for advisers will make advice too expensive for middle-class investors. “The lawsuits will likely be based on costs,” Kaleda told RIJ.

No one from the Department of Labor spoke at the seminar, which didn’t focused on pension law. The comments of two of the regulators who were at the PLI seminar—Angela Goelzer of FINRA and David Blass of the SEC—were mostly conciliatory.

“We need to be careful not to shut down a whole business line,” Blass, the chief counsel, Division of Trading and Markets at the SEC, said at one point. “We’re not looking to ban commissions,” he later added. Blass stressed that Mary Jo White, the SEC commissioner, has made it a priority to determine whether to seek a unified investment adviser–broker/dealer standard of conduct—not to seek such a standard, as she was evidently misquoted.

Those were not fighting words. (The regulators did express special concern about “hat-switching,” i.e., about the potential for double-billing when an adviser wearing his registered rep “hat” earns a commission for selling a product and later, acting as a registered investment adviser, charges a fee for managing the same assets.)

The seminar, chaired by Clifford Kirsch of Sutherland Asbill & Brennan, a prominent D.C. law firm, was ornamented by the presence of Arthur Laby, a Rutgers University Law School professor and expert on fiduciary matters, and of Andrew J. “Buddy” Donohue, a former director of the Division of Investment Management at the SEC who is now a managing director at Goldman Sachs. (Let’s pause a moment to appreciate the implications of that.)

Equally noteworthy speakers and panelists included, along with those already mentioned, lawyers William Delmage and David Blass of the Securities and Exchange Commission, Melanie Fein, Claudia Marmolejo of Morgan Stanley, James Shorris of LPL Financial and Steven Yadegari of Cramer Rosenthal McGlynn, an asset management firm.

I attended the seminar to absorb as much detail about the never-ending fiduciary issue as a non-lawyer can hope to. I have to admit that, years ago, the fiduciary issue seemed simple to me. What about honesty is so hard to understand, I wondered. Of course, it’s not that easy, especially in situations where multiple stakeholders with finely divided loyalties are involved.

For an individual, self-employed, fee-only financial adviser, the fiduciary ideal may in fact be achievable. But for financial advice-givers at huge publicly-traded firms like Morgan Stanley, which conduct proprietary trading, which underwrite and distribute new issues, who may represent clients on opposite sides of the same deal and so forth—this is the situation at Morgan Stanley as Marmolejo described it—the opportunities for conflicts of interest are countless and hard to manage. On the contrary, the firm may value the conflicts as synergies.

Judging by comments from Marmolejo, Shorris and Yadegari, many firms are preparing for more intense management of fiduciary risks, regardless of what the DoL’s next proposal looks like. Morgan Stanley, LPL Financial and Cramer Rosenthal McGlynn are all are either adding new compliance positions, setting up cross-disciplinary committees, learning to identify conflict-of-interest “triggers,” and developing policies designed to reduce or disclose those conflicts.

How expensive, and how dull, that must be. The reality, in my experience, isn’t dull at all. Throughout the whole fiduciary debate (whose roots stretch back at least to the 1999 “Merrill Lynch Rule,” which muddied the line between compensation for sales and for advice), I have often wished that the discussions included more of the war stories that I routinely hear.

“War” is not an exaggeration in this context. I’ve heard eyewitness accounts of wirehouse managers slamming their fists on desks and screaming at novice reps: “No matter what you do here, it will never be enough!” Ex-brokers have described former supervisors who characterized client appointments purely as “opportunities” to reach monthly sales targets. I know mutual fund clients who didn’t know that their transactions cost them a dime, unless or until they asked.

In private, the sales side of financial services is often a Glengarry Glen Ross [Warning: This video clip is for mature brokers only] world that few investors see, that arbitration conceals, and that industry veterans rarely kiss-and-tell about. Because this world is largely invisible, the DoL’s quest for a higher standard of conduct for intermediaries can easily be made to seem like a solution in search of a problem.

But a problem does in fact exist. Millions of Americans don’t seek the financial advice they need because they don’t know whom to trust. What’s the estimated cost of all that lost business, compared with the cost of regulation? We’re not likely to hear that question raised, let alone answered, in the months ahead.

Losing Interest

Posted on April 25, 2014 by Barry Eichengreen -

Two of the world’s most prominent economic institutions, the International Monetary Fund and Former US Treasury Secretary Larry Summers, warned that the global economy may be facing an extended period of low interest rates. Why is that a bad thing, and what can be done about it?

Adjusted for inflation, interest rates have been falling for three decades, and their current low level encourages investors, searching for yield, to take on additional risk. Low rates also leave central banks little room for loosening monetary policy in a slowdown, because nominal interest cannot fall below zero. And they are symptomatic of an economy that is out of sorts.

Identifying the problem, much less prescribing solutions, requires diagnosing underlying causes. And here, unfortunately, economists do not agree. Some point to an increase in global saving, attributable mainly to high-saving emerging markets. Readers will detect here echoes of the “savings glut” argument popularized nearly a decade ago by the likes of former US Federal Reserve Board Chairmen Alan Greenspan and Ben Bernanke.

There is only one problem: the data show little evidence of a savings glut. Since 1980, global savings have fluctuated between 22% and 24% of world GDP, with little tendency to trend up or down.

Even if global saving slightly exceeds 24% of world GDP in 2014, it is unlikely to remain that high for long. China’s saving will come down as its GDP growth slows, the authorities decontrol interest rates on bank deposit, and the economy rebalances toward consumption. That will be true of other emerging markets as well, as their growth rates similarly fall from the exceptional peaks scaled at the end of the last decade.

The same empirical objection applies to arguments that blame low interest rates on the increasing concentration of income and wealth. It is plausible that the wealthy consume smaller shares of their income, and recent trends in income and wealth distribution certainly are troubling on many grounds. But to affect global interest rates, these trends have to translate into increased global savings. And the evidence is not there.

A second explanation for low interest rates is a dearth of attractive investment projects. But this does not appear to be the diagnosis of stock markets, notably in the United States, where equities are trading at record-high prices. And it sits uneasily with the enthusiasm with which venture capitalists are investing in firms commercializing new technologies.

Some economists, led by Northwestern’s Robert Gordon, argue that, stock market valuations notwithstanding, all the great inventions have been made. The commercial potential of the Internet, the human genome project, and robotics pales in comparison with that of the spinning jenny, the steam engine, and indoor plumbing.

Maybe so, but it is worth observing that technology skeptics have been consistently wrong for 200 years. History suggests that, while we may not know what the high-return inventions of the future will be, we can be confident that there will be some.

Still others, like the Fed’s current leader, Janet Yellen, suggest that investment and interest rates are depressed as a result of the damage done to the economy and the labor force during the Great Recession. Specifically, the skills and morale of the long-term unemployed have been eroded. Detached from the labor market, they lack incomes to spend; and, stigmatized by long-term unemployment, they are not regarded as attractive employees.

As a result, firms see inadequate demand for their products, and a shortage of qualified workers to staff their assembly lines. The result is low capital spending, one of the striking anomalies of the current recovery, which in turn can explain other troubling aspects of the recovery, from slow growth to low interest rates.

This argument has considerable merit. But, though it can explain why capital spending has been weak and interest rates have been low for the last three years, it cannot account for why capital expenditure has been insufficient to prevent rates from trending down for more than three decades. Here, the only explanation still standing is the shift in the composition of activity away from capital-intensive forms of production, like manufacturing, to less capital-intensive activities, like services.

If the disorder has multiple causes, then there should be multiple treatments. There should be tax incentives for firms to hire the long-term unemployed; more public spending on infrastructure, education, and research to compensate for the shortfall in private capital spending; and still higher capital requirements for banks and strengthened regulation of nonbank financial institutions to prevent them from excessive risk-taking.

Finally, central banks should set a higher inflation target, which would give them more room to cut nominal interest rates in response to a future slowdown. This is not something that a new Fed chair, anxious to establish her anti-inflation bona fides, can say out loud. But that is what her arguments imply.

Barry Eichengreen, author of Exorbitant Privilege, is an economist at the University of California–Berkeley.

AIG and nine IMOs launch income-oriented FIA

Posted on April 25, 2014 by Editorial Staff -

In a deal announced this week, American General Life, part of American International Group (AIG), will issue a new fixed index annuity (FIA) with a lifetime income rider, to be distributed by Market Synergy Group, which represents nine IMOs (independent marketing organizations) that claim to broker over $8 billion in annual FIA sales.

The president of Topeka, Kansas-based Market Synergy Group is Lance Sparks, a former senior vice president of annuity marketing at Aviva USA. Aviva USA became Athene Annuity & Life Assurance (Athene Annuity) following its acquisition in 2013 by Athene Holding Ltd., a unit of Apollo Global Management.

In a phone interview, Sparks, who is 43, said he and other former Aviva USA executives who left after the Athene acquisition started Market Synergy Group with equity investments from nine large IMOs that had been selling Aviva USA annuities. Mark Heitz, a former Aviva USA executive, came out of retirement to join Sparks at Market Synergy Group.

Market Synergy Group was created negotiate distribution deals between carriers and these IMOs: CreativeOne, Brokers International, Financial Independence Group, DMI Inc., M&O Marketing, InsurMark, Insurance Agency Marketing Services, Magellan Financial and Kestler Financial Group.

The contract to be issued by AIG is the Power Select Plus Income Index Annuity. The product has a 10-year surrender period, a $25,000 minimum premium and uses the S&P 500 as its linked equity index. Sparks conceded that the crediting methods are “vanilla,” but said the product’s value is intentionally concentrated in the living benefit: Specifically, in the flexibility of the deferral bonus or “roll-up” of the income benefit base, which is automatically included for an annual fee of 1.1%.

During the first ten years of the contract, contract owners can earn a full 7.5% roll-up in every year when they don’t take a withdrawal, and they can earn a partial bonus equal to the difference between the full roll-up percentage and the percentage of the income base that they withdraw, if positive. Liquidity during the deferral period and benefit bonuses aren’t mutually exclusive. There’s also a premium bonus of up to 7%, Sparks said.

No deferral bonus is credited if the withdrawal is larger than permitted under the contract. The benefit base is automatically double the premium if no withdrawals are taken before the tenth contract anniversary.

The AIG product is positioned more as a substitute for an income annuity than for a bond. FIAs are “definitely an income play right now,” Sparks said. “We’re focusing on providing people with a piece of guaranteed income.”

“Once we had an A-rated carrier, we wanted to focus on the best income payouts,” Sparks said. “In other products you cease to get the roll-up after a withdrawal. We went to what we call a ‘keep the difference’ feature.” He declined to name the actuarial firm that helped design the product.

The product has three crediting options: sn annual point-to-point index interest account, a monthly point-to-point additive index interest account, and a monthly average index interest account, with a spread.

The age-bands and percentages for guaranteed lifetime withdrawals for single persons is 4.25% for ages 60 to 64, 5.25% for ages 65 to 69, 5.75% for ages 70-74, 6.25% for ages 75-79 and 6.5% for ages 80+. For couples, the payout is 50 basis points lower in each age band.

As for the wisdom of partnering with AIG, a company whose reputation was more than sullied during the financial crisis and subsequent government bailouts, Sparks described AIG’s redemption story as an asset rather than a liability.

“It’s a classic comeback of an American company,” he said. “AIG signified the Great Recession, but the people who stayed have accomplished a big turnaround. AIG is a huge player, and it wants to make a significant entrée into the index annuity industry.”

Symetra doubles its YOY sales of deferred and immediate annuities in 1Q2014

Posted on April 25, 2014 by Editorial Staff -

Symetra Financial’s first quarter 2014 adjusted operating income was $65.7 million, or $0.56 per diluted share, up from $49.4 million, or $0.36 per diluted share, for the first quarter of 2013, the company reported this week.

For the first quarter of 2014, net income was $79.3 million, or $0.68 per diluted share, compared with $66.0 million, or $0.48 per diluted share, in the same period a year ago.

Deferred annuity sales for the quarter were $627.5 million, nearly double the $322.0 million of the year-ago quarter. Higher interest rates and wider distribution of Symetra annuity products through banks and broker-dealers drove sales of fixed index and traditional fixed annuities.

Income annuity sales were $87.5 million for the quarter, up from $40.7 million in the prior-year quarter. “The continued effectiveness of our sales strategies and a more favorable interest rate environment” helped grow sales of single premium immediate annuities (SPIAs) in the first quarter, according to a Symetra release.

“We continued to achieve strong year-over-year sales growth in annuities, individual life insurance, and group life and disability income insurance,” said Tom Marra, Symetra president and CEO, in the release.

Other performance highlights:

Benefits loss ratio improved to 57.1% from 68.5% in first quarter 2013.
Higher fixed indexed annuity account values delivered a significant earnings contribution in deferred annuities.
Strong year-over-year growth in sales of annuities, individual life, and group life and disability income.
Guidance range for 2014 Operating EPS raised to $1.80-$2.00.

Deferred annuities

Pretax adjusted operating income was $30.2 million for the quarter, up from $29.1 million in the previous period. Higher fixed indexed annuity (FIA) account values contributed $6.0 million to interest margin compared to $0.8 million in the prior-year period.
Earnings for the quarter included $2.1 million of investment prepayment-related income, net of related amortization, compared with $7.4 million in the prior period.
Total account values were $13.9 billion at quarter-end, up from $12 billion a year ago. Strong FIA sales drove this growth, with FIA account values rising to $2.1 billion from $539.1 million a year ago.

Income annuities

Pretax adjusted operating income was $9.4 million for the quarter, up from $8.8 million in the prior-year period, primarily due to more favorable mortality experience. This was partially offset by a lower interest spread on slightly lower reserves.
Mortality gains were $5.3 million for the quarter, compared with mortality gains of $1.0 million in the previous period. Mortality experience can fluctuate from period to period.

Only 6% of DC plan participants contribute the max: GAO

Posted on April 25, 2014 by Editorial Staff -

Despite an increase in the limits on tax-deferred contributions to defined contribution plans in recent years, the number of retirement plans declined in 2011 and only 6% of participants—about 2.4 million people—contributed as much or more than the limits, according to study by the U.S. Government Accountability Office that was published in March and released this week.

The latest GAO study, like its 2011 study of the same issue, found that high-income participants are most likely to contribute the maximum. “An estimated 76% of participants who contributed at or above the 2010 limits were in the top tenth percentile of earners; 47% were in the top fifth percentile. By contrast, an estimated 2% of participants who contributed at or above any of the 2010 limits had median incomes or below.” Only one-tenth of one percent of participants contributed the maximum combined employer/participant amount of $49,000 in 2010.

According to a summary of the study:

“Since 2000, the dollar amount of these limits has increased over time,” the GAO said in the summary of the report published in March and released to the public on April 21. “However, from 2009 through 2011, the number of new pension plans formed each year in the private sector remained relatively flat, and was below the levels reported previously for 2003 through 2007.

“Specifically, from 2009 through 2011, private-sector employers sponsored about 81,000 new pension plans, including 75,000 defined contribution (DC) plans and 6,000 defined benefit (DB) plans. DC plans with fewer than 100 participants accounted for about 90% of all new plan growth over this period.

“Moreover, the net change in the number of pension plans over this period was negative, with the number of terminated plans more than offsetting new plan formation by nearly 34,000 plans. Over the three-year span from 2009 through 2011, private-sector employers terminated about 106,000 DC and 9,000 DB plans.

“Overall, there were about 52,000 fewer employer-sponsored pension plans in the private sector in 2011 than there were in 2000. Thus, while tax incentives from increased contribution limits may have spurred new plan formation, other events—such as company consolidations and bankruptcies stemming from the recent recession—may have discouraged it. Nevertheless, despite the overall decline in number of plans, the total number of participants rose throughout the decade.

“The percentage of DC participants affected by the 2010 statutory limits and their income characteristics were similar to those reported previously for participants affected by the 2007 limits. In 2011, GAO reported that an estimated five percent of all DC participants who contributed to their plans in 2007 were affected by the statutory limits.

“Based on an analysis of the most recent data from the Federal Reserve’s Survey of Consumer Finances, about six percent of all DC participants who contributed to their plans in 2010 were affected by the statutory limits in that their annual contributions in 2010 reached or exceeded one or more of the three limits examined. Of this group:

About three percent were under age 50 and contributed at least $16,500 (the elective deferral limit).

About three percent were aged 50 or older and contributed at least $22,000 (the combined elective deferral and catch-up contribution limits).

Another one-tenth of one percent of all ages contributed at or above the combined employer-participant contribution limit of $49,000.

Participants affected by the 2010 statutory limits shared similar income characteristics with their counterparts in 2007. When compared with other DC participants who contributed below all of the 2010 statutory limits, this group had disproportionately higher earnings (90th percentile and higher) and were more likely to have additional assets of greater average value in their households.

Growth of Fidelity’s ETF partnership with BlackRock described

Posted on April 25, 2014 by Editorial Staff -

With New Indexed Annuity, Nationwide Takes a Walk on the Wild Side

Posted on April 17, 2014 by Kerry Pechter -

Nationwide isn’t known for selling fixed indexed annuities, but the big re-mutualized insurer introduced an FIA two months ago with the audacious name of New Heights. This product can be explained in only two ways: briefly and at length.

The short take: Nationwide has partnered with Annexus and its actuarial affiliate, Genesis Financial Development, to market a variation of a similar balanced index annuity that Annexus and Genesis first built for Aviva (now Athene) back in 2006.

The longer version: It will require many paragraphs of text and a link or two to describe the accumulation and income phases of this 10-year product, whose collaborators are betting that its uncapped equity exposure, the generous-looking payout percentages of its living benefit and Nationwide’s strength (A+ rating from A.M. Best) will generate wide interest.

There are no slam-dunks in this business, of course. New Heights will still have to compete with top-selling FIAs like Allianz 360, which uses dynamic index allocation, and Security Benefit TVA, which is pegged to a volatility index.

It’s also unclear whether this ambitious product, whose design (like that of most FIAs) may strike traditionalists as an unnecessarily complicated way to get exposure to the equity premium and generate retirement income, will make FIA-believers of the many remaining skeptics in the broker-dealer and wirehouse channels.

The timing is obviously favorable. Given the 50% spike in FIA sales in the second half of 2013 (thanks in part to modest interest rate relief), along the life insurers’ reduced appetite and capacity to sell variable annuities with living benefits, and the Boomer income wave, it may be a no-brainer.

Mike Morrone, Nationwide’s associate vice president of individual products and solutions, thinks so. “Every carrier sees that the FIA market is growing fast,” he told RIJ this week. “And it will only continue to grow at this pace. We thought it was the right time to enter that market.”

Morrone stressed that New Heights, like all FIAs, should be thought of a substitute for fixed income investments, not stocks. But references to equity performance are hard to avoid in any discussion about FIAs.

“The uncapped design helps maximize upside potential,” he said. “It will take advantage of big ups and downs in the market. If you think equity prices will bounce around in a tight range, this design may not be for you. It harnesses volatility.”

An ‘uncapped’ accumulation strategy

FIAs can be thought of as structured notes in insurance wrappers. The managers classically invest more than 90% of the available assets in bonds and the rest in call options on an equity index. The bond returns protect the principal and the options, by appreciating when equity prices go up, offer upside potential.

But creative actuaries can tailor the outward features of FIAs in countless ways. With New Heights, Nationwide currently offers a choice of three “uncapped” strategies with two-year terms. The three strategies promise investors three levels of “participation” (up to 70%) in the gains of the S&P 500 Index that are in excess of a “spread” of up to 1.85%. In addition, a portion of the account value grows at a declared annual rate of one percent.

Nationwide explained how the crediting calculation would work if you used the 60% participation rate and the 1.85% spread. Suppose, for instance, that the S&P 500 rose 30% over two contract years. You’d multiply 30% by 60%, to get 18%. Then, to find the two-year return from the fixed account, you’d square one percent (and get 2.01%, or 1.01 squared minus 1) and multiply that by its participation rate (40%). The result would be 0.804%.

Add those two and you get 18.804% over two years. To annualize that return, you’d take the square root of that number (the square root of 1.8804, minus 1) to get 8.997%. You would then subtract the 1.85% annual spread from that number and get 7.15%. Finally, you would square 7.15 (1.0715 squared minus 1) to find the two-year credit of 14.8%.

The uncapped crediting strategy (also known as “term yield spread”) appears at first glance to promise a greater potential for upside gain than FIA crediting strategies, such as participation rates or capped rates do. It doesn’t necessarily.

According to Jack Marrion’s classic 2003 book on FIAs, Index Annuities: Power & Protection, “the participation rate method produces more credited interest in fair markets, the yield spread approach maximizes returns in great markets, and they come out about the same in good markets.”

Aside from the fear of missing out on the next bull market, New Heights addresses other perceived client concerns. “We tried to take care of some of the pitfalls that we see in current FIAs,” Morrone told RIJ. “Clients today expect to see if their investments have appreciated or depreciated each day. They can’t see that in current FIAs. They’re black boxes. In point-to-point contracts, no daily values are available. We thought that was a defect. People should be able to see the contract value daily.”

“Because we evaluate the performance daily, we can calculate the full gains to date. People can see what their values are.” That allows another innovation: If the client takes a penalty-free withdrawal of no more than 7% of the contract during any of the five two-year terms of this 10-year product, he or she gets the credit earned up to that point, as if it were the end of the term.

Anxious investors have access to another stress-reliever. If they think the market is going to drop, they can freeze the crediting process at any point during a term and lock in the accrued gain. This feature addresses potential investor concern about using a two-year crediting term instead of the more common one-year term.

New Heights’ living benefit

The product’s guaranteed lifetime income benefit is also structured in an innovative way. Most living benefits on VAs and other FIAs offer annual increases (roll-ups or deferral bonuses) that double the benefit base (the amount used to calculate annual income payments) after a ten-year deferral period. With its High Point 365 New Heights reaches a similar payout level by a different route, Morrone said.

The roll-up is only two percent per year for 10 years, instead of the usual seven. But the annual payout percentages at age 65 or 70 can be higher than the five percent that’s common with seven percent roll-ups. In addition, there’s an opportunity for daily increases in the benefit base, as opposed to annual or quarterly increases. (Income can’t be taken before the five-year contract anniversary).

A table of examples in the New Heights product literature for a single-life contract shows that someone who bought the contract at age 55 would qualify for an annual payout rate of 6.65% after 10 years and 9.4% after 15 years. A 60-year-old purchaser would receive a payout rate of 7.4% after 10 years and 11.40% after 15 years. Payouts of joint contracts would be lower.

The basic High Point 365 rider costs 95 basis points a year. The cost increases to 1.25% for contract owners who elect a 3% bonus to the contract value, the benefit base and the return of purchase payment guarantee. The rider can only be elected at purchase and generally can’t be dropped as long as the contract is in force.

The FIA ‘gospel’

The same caveats that apply to other FIAs also apply to New Heights. The product brochure promises “unlimited growth potential,” but broker-dealer reps and their clients could be disappointed if they purchase this product and get average earnings that are only a few percentage points more than bonds. Nationwide’s Morrone insists that New Heights isn’t intended for people looking for equity-like performance.

The profusion of options that New Heights offers will probably strike some advisors and clients as a welcome source of flexibility. But for others the number of choices could represent unwelcome complexities. It’s clear no two contract owners will experience exactly the same results.

The actuaries who built this product made some interesting cost-reducing choices. They extended the crediting term to two years; two-year options are cheaper than one-year options. To allay liquidity concerns, they credited earnings to mid-term withdrawals. They also cut the annual penalty-free withdrawal percentage to seven percent from the usual 10%, and required contract owners to choose either a living benefit or death benefit, not both. These adjustments created room for lower spreads, which translate into higher crediting rates, and a reported seven percent commission.

One FIA marketer interprets the recent hockey-stick increase in FIA sales and the entry of companies like Nationwide into the FIA market as signs of a gradual but inevitable thaw in attitudes toward FIAs.

“I’ve been preaching the FIA gospel since early 1996, and I never thought I’d see them treated as just another annuity in the annuity space, as a peer with variable annuities,” said Paul McGillivray of CreativeOne, a prominent insurance marketing organization. McGillivray is responsible for wholesaling FIAs, including New Heights, to broker-dealers.

“But I knew things were changing when I was accepted on the program of [last week’s] LIMRA Retirement Industry conference,” where he gave a presentation on FIAs. “I’m still in shock.” He believes that Boomer demand for longevity protection, which VAs and income annuities alone can’t satisfy, will continue to drive FIA production and sales.

“I have recently heard three times from three different people that the demand for annuities and lifetime income will far exceed the capacity of VA issuers,” he told RIJ. “So it’s natural that more carriers would take a serious look at the FIA.”

SEI Ups its TDF Game

Posted on April 17, 2014 by Kerry Pechter -

SEI, the $232 billion asset manager in suburban Philadelphia—not far down Route 202 from the campus of fund giant Vanguard—wants to grow its target date fund (TDF) business at the expense of Vanguard, Fidelity and T. Rowe Price, who together dominate the TDF world today.

Six months ago, SEI, which specializes in multi-manager TDF funds, recruited veteran defined contribution specialist Scott Brooks away from Deutsche Asset & Wealth Management to start making presentations to large DC plan sponsors, including those with a history of offering defined benefit pensions.

Brooks, who has also worked at JPMorgan and Oppenheimer, is leveraging several recent developments to catalyze his sales calls. For instance, the Department of Labor’s “Tips” for ERISA plan sponsors on TDFs inspired many plan sponsors to reconsider their current TDF options in light of their fiduciary requirements to offer low-cost funds that suit their workforce demography, risk-tolerance and needs.

In addition, according to Brooks, employers are becoming more interested in having their DC plans serve the purpose that DB plans were first designed to serve: financing the rotation of older, more expensive employees out of the workforce to make room for younger, less expensive employees. They can do that only by helping them save enough to retire.

Another conversation starter for Brooks and other TDF vendors is liquid alternatives, which include such investments as real estate, TIPS and commodities. Marketers of “liquid-alts” are eager to distribute them through DC plans, not as individual investment options but as components of TDFs.

Liquid-alts are potentially appealing to plan sponsors because they help diversify a TDF or investment portfolio. Their performance isn’t necessarily correlated with the performance of stocks, bonds or cash. DB fund managers have long used liquid-alts, so the migration of the strategy to DC plans and TDFs is a natural one.

“Anytime a plan sponsor expresses an interest in liquid alts, it’s an opportunity to have a conversation about custom TDFs,” Brooks told RIJ recently. “We feel the liquid alts add a level of diversification in custom TDFs. We or another provider can embrace the broadest potential set of investments, to fund the glidepath. With liquid alts, which include real estate, hedge funds, private equity, commodities, you can take a pension-like approach to the design of the custom TDF. Yes, that certainly gives us a foot in the door.”

Brooks described SEI’s approach to TDF design. “We have a long history of de-risking defined benefit glidepaths. In trying to achieve a certain income replacement ratio, we take an asset/liability matching approach.

“We ask, What’s the current funding status for the individual? It’s a type of goals-based investing. We take best practices from the defined benefit world. I would broadly define us as a designer of ‘through’ TDFs rather than ‘to,’ but those terms are less applicable today than in the past.“

SEI also likes to incorporate managed-volatility funds into TDFs, Brooks said. “We are active users of managed volatility funds in our off-the-shelf TDFs. We feel managed-vol is an important component of the equity exposure, especially when the investor is in the ‘red zone.’ Although we favor the ‘through’ design, we’re sensitive to the fact that as you get close to your goal, you need to reduce risk. Volatility management is one way to do that.”

“SEI sees increased interest in this area. My position was newly created. I was brought in to lead the defined contribution business and to deliver the manager-of-managers solutions as part of that. SEI is substantially upping its game in that area. Formerly I was with Deutsche Asset & Wealth Management. I was focused on alternatives. At Oppenheimer I worked with consultants. I was always in defined contribution, but each role has been slightly different.”

Happy Fifth Anniversary, RIJ

Posted on April 17, 2014 by Kerry Pechter -

Every so often one of the many caring people I’ve met in the retirement industry over the past five years will buttonhole me at a conference and ask, often with a piercing look of concern, how my publication is doing. At first the question puzzled me, because I feel like my life is an open book. Or, in my case, like an open e-newsletter.

But then I realized that, although Retirement Income Journal reaches almost 7,000 people every week, I only converse with, by phone or personal e-mail, half a dozen or a dozen of my readers every weekday. That’s a fairly modest sampling of the entire group.

So I thought that today’s issue of RIJ, which represents our 250^th issue and marks our five-year anniversary as a publication, could serve as an appropriate vehicle for a brief message about how we’re “doing” and our plans for the future.

As many executives like to say, we’re doing very well, but we’re capable of doing much more.

Financially, I think we’ve proven that, if you focus on a niche and choose an industry where legitimate news and analysis has real value to readers, it’s possible to make a healthy profit putting out a paid-subscription publication on the Internet.

It’s obvious but I’ll say it anyway: we couldn’t have done it without our subscribers. They include our corporate site-licensees (too many too name, but including AXA, Ernst & Young, Fidelity, LPL, MetLife, New York Life, Thrivent, TIAA-CREF, and ING) and hundreds of individual subscribers (financial advisors, regulators, academics, attorneys and consultants). Revenue from advertising is an important but smaller part of the business.

Circulation expansion is the big goal for 2014. We’ve hired a talented circulation consultant. We’ll start by reaching out to the thousands of people who receive our e-mails and read our headlines and summaries but who can’t access the content because they haven’t paid yet. (Come on, lurkers! Don’t miss any more of our priceless prose.)

We’ll also double our ongoing effort to make more advisors aware of RIJ and to convert them to subscribers, either individually or as affiliates of broker-dealers or marketing organizations. To serve that audience better, we’ll bring back RIJ-Advisor, the supplement we published twice a month in 2012-2013. In it, we’ll keep making the case that a combination of insurance and investment products can produce more income (and “utility,” as academics say) in retirement than either product class alone.

We’ll be working hard to make a subscription to RIJ pay for itself, by negotiating discounts to select retirement-related products and services for paid subscribers. We also plan to make more of the data that we’ve gathered over the past five years available to subscribers through www.retirementincomejournal.com.

Enough said. Publishing this newsletter has given me an opportunity, previously unimaginable, to meet hundreds of brilliant, committed people in the U.S. and Canada and from as far away as Denmark, Australia and Taiwan. I look forward to providing news and analysis about the Boomer retirement opportunity for another prosperous and productive five years.

Vanguard answers RIJ questions about HFT

Posted on April 17, 2014 by Editorial Staff -

Amid the furor over Michael Lewis’s new book on high-frequency traders (HFT) and his statement on “60 Minutes” that the stock market is “rigged,” RIJ sought out Vanguard’s responses to a few questions about HFT. Here are the questions and Vanguard’s official responses:

RIJ: Does high frequent trading affect mutual fund investors?

Vanguard: We believe a majority of “high frequency traders” (note that is not a defined term) add value to our current structure by “knitting” together today’s fragmented market centers. Nevertheless, there are some high-frequency traders that may be unfairly taxing the system.
That said, the overall cost of investing in the equity markets has actually come down quite significantly due to changes in regulation, technology enhancements, and increased competition. Vanguard also has refined our trading practices over the years to mitigate the adverse impact of trading costs.

RIJ: Does it affect ETF investors?

Vanguard: We’d answer that the same way as above.You could argue that ETF trading costs have benefitted from HFTs tightening the spreads.

RIJ: Is HTF a new form of the same front-running threat that has always faced large-block traders? Or does it have nothing to do with institutional traders per se? From the news coverage I read, it sounds like HTF is a general threat, but perhaps the actual situation is more nuanced. Are institutional traders more affected than individual traders, fund companies more than fund owners, ETF owners more than fund owners?

Vanguard: Traditionally, front running refers to leakage of information that can lead to others trading against you. Yes, the actual situation is more nuanced—as mentioned above, we believe most high frequency traders add value, but some might be disruptive. As a result, we can’t say specifically which group would be more affected.

RIJ: Does Vanguard do internal trading before going to the market, i.e., settling buy and sell orders in the same funds in-house at the end of the day?

Vanguard: We don’t discuss our trading strategies.

New index gauges retiree health costs as percent of SS benefits

Posted on April 17, 2014 by Editorial Staff -

Middle-class Americans’ total health care premiums and out of-pocket medical expenses in retirement may eventually equal or exceed the value of their Social Security benefits, according to the Retirement Health Care Cost Index, a benchmark created by HealthView Services, a Danvers, Mass., consulting firm.

HealthViewServices markets HealthWealthLink application, a tool that shows advisors and their clients how to adjust their retirement income strategies to health care costs. Its new Retirement Health Care Cost Index expresses future retiree health cost exposure as a percentage of middle-income Social Security benefits, although the two figures are not directly related.

“Many Americans believe that Medicare will cover most or all of their health care costs in retirement. This is simply untrue,” said HealthView Services founder and CEO Ron Mastrogiovanni in a release.

[Every year, the government re-sets the Medicare Part B premium, which covers physicians, outpatient visits and medical equipment. For 2014, the base premium is $104.90. Single beneficiaries earning over $85,000 a year, or couples earning over $170,000, pay $146.90, $209.80, $272.70, or $335.70 per month, depending on income level, according to a March 14 report from the Congressional Research Service.

“If projected Part B costs increase or decrease, the premium rises or falls proportionately. However, the Social Security Act includes a provision that holds most Social Security beneficiaries harmless for increases in the Medicare Part B premium; affected beneficiaries’ Part B premiums are reduced to ensure that their Social Security benefits do not decline from one year to the next,” the report said.]

The Index, described in a HealthView Services release, measures the percentage of Social Security benefits required to pay for health care-related costs in retirement for a healthy couple receiving the average expected Social Security benefit at full retirement age. It includes Medicare Part B and Part D premiums, Medigap premiums, and out-of-pocket costs.

According to the Index, future health care costs will average 69% of Social Security benefits for middle-class couples retiring in one year and receiving about $2,100 a month in benefits. But, if health care inflation (estimated at 5% to 7%) continues to outstrip Social Security adjustments (estimated at 2% a year) retirement health care costs will outstrip Social Security benefits—rising to 98% of Social Security in 10 years, 127% in 20 years and 190% in 32 years.

The Index assumes that primary income earners will generate the Social Security average of $1,294 per month in today’s dollars and their spouses $817 per month. For a healthy couple retiring in one year with one spouse earning maximum Social Security benefits, but earning less than $170,000 in total income, 39% of Social Security benefits will be required to cover healthcare costs. This will rise to 52% of Social Security benefits if they retire in 10 years.

If the same couple earns more than $170,000 in retirement, they will be subject to the Medicare surcharge, which raises Medicare Parts B and D premiums by 35% to 200%, depending on their Modified Adjusted Gross Income (MAGI). A couple in Medicare’s top income bracket who retire in one year will incur $255,267 in lifetime Medicare surcharges.

The Index uses HealthView Services’ cost data from more than 50 million annual health care cases. It is calculated using an actuary- and physician-reviewed methodology that determines individual longevity and retirement health care costs based on age, gender, health, and time to retirement. The methodology is updated regularly to reflect health care cost inflation, Social Security cost-of-living increases, and regulatory changes.

Morningstar publishes March fund flows

Posted on April 17, 2014 by Editorial Staff -

Investors added $39.2 billion to long-term mutual funds in March, with continued strong flows to developed international markets and a rebound in flows to intermediate-term bond funds, according to Morningstar’s monthly estimate of mutual fund flows, which is based on changes in fund assets not explained by performance.

Highlights from Morningstar’s report on mutual fund flows include:

Core intermediate-term bond funds saw inflows of $4.3 billion, their first monthly intake in 11 months. Excluding outflows of $3.1 billion from PIMCO Total Return, intermediate-term bond funds collected inflows of $7.4 billion.
In March, Fidelity transferred $6.5 billion from equity mutual funds to collective investment trusts. This move reduced inflows for U.S.-equity mutual funds, which totaled $2.8 billion for the month, but the mild inflows were not interpreted as anti-equity sentiment.
Excluding the transfer of Fidelity’s mutual fund assets to collective investment trusts, PIMCO was the only fund provider among the top 10 to see net outflows in the first quarter.
Among international-equity funds, which took in $11 billion in March, foreign large blend led all categories with inflows of $6.6 billion. Diversified emerging-markets funds rebounded from February outflows to attract inflows of $1.1 billion in March.

TIAA-CREF buys Nuveen Investments

Posted on April 17, 2014 by Editorial Staff -

TIAA-CREF has agreed to buy Nuveen Investments, which manages about $221 billion, from a group led by Madison Dearborn Partners, for $6.25 billion, inclusive of Nuveen’s outstanding debt, according to a TIAA-CREF release. The deal raises TIAA-CREF’s AUM to about $800 billion.

Nuveen will operate as a separate subsidiary within TIAA-CREF’s Asset Management business, retaining its current multi-boutique business model and continuing to support its investment affiliates through scaled distribution, marketing and administrative services. John Amboian will remain the CEO of Nuveen, and Nuveen’s current leadership and key investment team will stay in place.

The transaction gives TIAA-CREF two mutual fund complexes with aggregate AUM of $181 billion. The boards of directors at both TIAA-CREF and Nuveen each have unanimously approved the transaction. The acquisition is expected to be complete by year-end 2014, subject to customary closing conditions.

A.M. Bestsaid in a news release that the ratings for TIAA and its wholly owned insurance operating subsidiary, TIAA-CREF Life Insurance Company (both domiciled in New York, NY) remain unchanged following the announcement.

Following the transaction, A.M. Best expects TIAA to remain adequately capitalized for its current ratings. A.M. Best will be monitoring the integration process, along with the impact on TIAA’s operating results, risk-adjusted capital and financial leverage once the details about the structure of the acquisition are finalized.

State-sponsored workplace savings program passes Illinois Senate

Posted on April 17, 2014 by Editorial Staff -

The Illinois Secure Choice Savings Program (Senate Bill 2758), which provides a simple workplace retirement savings program for over 2.5 million Illinois workers currently without access to such a plan, was passed by the Illinois Senate on April 9.

The bill, sponsored by Sen. Daniel Biss and supported by AARP, will now move to the House where Rep. Barbara Flynn Currie will be the chief sponsor. Similar bills are under consideration in California and Connecticut.

Senate Bill 2758 would provide access to an Individual Retirement Account (IRA) plan at businesses with 25 or more employees that have been in business more than two years. Automatic payroll deductions and contributions would go into the Illinois Secure Choice Savings Fund, a trust set up outside the state treasury. The law stipulates that administrative expenses not exceed 75 basis points a year. The fund’s board will pick a target-date fund provider to offer a default life-cycle fund. The default contribution amount will be 3%.

The program enables businesses to facilitate employee savings without having to sponsor a plan, comply with ERISA requirements or make matching contributions. Workers would be automatically opted-in to an account, but could opt-out at any time, and the accounts would be portable.

According to the bill, employers who fail without reasonable cause to enroll employees in the plan will be fined $250 for each calendar year or part of a calendar in which the employees weren’t enrolled or had opted out of the plan, and $500 per employee per calendar year for continuing not to enroll employees after the first penalty was assessed.

Nationally, 45% of working-age households have no retirement savings and the average Social Security benefit in Illinois is only $1,281 per month, according to an Illinois Senate release. Over 71% of workers participate in a retirement savings plan when it is offered by their employer – and less than 5% save if their employer does not offer a plan.

The Illinois Secure Choice Savings Program is supported by AARP Illinois, Illinois Asset Building Group, Sargent Shriver National Center on Poverty Law, Woodstock Institute, Heartland Alliance, SEIU Illinois/Indiana and over 45 other businesses, associations and advocacy groups.

Great-West buys J.P. Morgan’s jumbo recordkeeper

Posted on April 10, 2014 by Editorial Staff -

In a deal expected to close in 3Q 2014, J.P. Morgan Asset Management has agreed to sell the recordkeeping part of its large-market 401(k) business to Great-West Financial. Terms of the transaction, which will not have a material impact on JPMorgan Chase’s earnings, were not disclosed, according to a release.

The transaction includes only the recordkeeping services for large- to mega-sized plans, and does not include J.P. Morgan Retirement Plan Services (RPS) growing business in the small plan space, which is administered through Retirement Link.

J.P. Morgan will continue to offer the same investment options, including SmartRetirement target date funds, to its large-plan clients, according to Michael Falcon, head of retirement at J.P. Morgan Asset Management, which has $109 billion in defined contribution assets under management and $1.6 trillion in total AUM.

Employees of RPS will become Great-West Financial employees when the deal closes. The office location in Overland Park, KS, will be retained by Great-West Financial, whose holding company is Great-West Lifeco U.S. and which owns Great-West Financial and Putnam Investments.

J.P. Morgan Asset Management is a unit of JPMorgan Chase & Co. (NYSE: JPM), which has assets of $2.4 trillion and operations in over 60 countries. Great-West Financial is a registered mark of Denver-based Great-West Life & Annuity Insurance Company. It administers $243.5 billion in assets for 5.4 million retirement, insurance and annuity customers.

Record year for bank annuity fee income in 2013

Posted on April 10, 2014 by Editorial Staff -

Income earned from the sale of annuities at bank holding companies (BHCs) reached a record $3.43 billion in 2013, up 9% from $3.15 billion in 2012, according to the Michael White Bank Annuity Fee Income Report.

Bank annuity fee income set record revenues in each of the four quarters of the year. Fourth-quarter 2013 BHC annuity commissions reached a record $932.0 million, up 6.5% from $875.0 million in the record third quarter. They increased 17.3% from $794.8 million earned in fourth quarter 2012.

Overall annuity sales leaders in 2013:

Wells Fargo & Co. (CA)
Morgan Stanley (NY)
Raymond James Financial (FL)
JPMorgan Chase & Co. (NY)
Bank of America Corp. (NC)

Results of the report from Michael White Associates (MWA) are based on data from all 6,812 domestic commercial banks, savings banks and savings associations (thrifts), and 1,062 large top-tier bank and thrift holding companies (BHCs) with consolidated assets over $500 million operating on December 31, 2013. BHCs that are historically insurance or commercial companies were excluded.

Of 1,062 large BHCs, 423 or 39.8% participated in annuity sales activities during the year. Their $3.43 billion in annuity commissions and fees constituted 35.6% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $9.65 billion. Of the 6,812 banks, 931 or 13.7% participated in annuity sales activities, earning $800.1 million in annuity commissions or an amount equal to 23.3% of total BHC annuity fee income.

“There were signs of a definite improvement in BHC annuity earnings momentum,” said Michael White, president of MWA and author of the report, in a release. Of 423 large top-tier BHCs reporting annuity fee income in 2013, 216 or 51.1% (up from 179 or 41.8%) earned a minimum of $250,000 selling annuities.

Across the board income increases

Of those 216, 127 BHCs (58.8%) achieved double-digit growth in annuity fee income. That was a 24-point rise from 2012, when 62 BHCs (34.6%) that earned at least $250,000 in annuity income achieved double-digit growth in annuity fee income. The number of BHCs with both meaningful annuity income and double-digit growth doubled from 62 in 2012 to 127 in 2013, the report showed.

“We also examined nearly 100 large top-tier BHCs with at least $1 million in annuity revenue in 2013,” White said, “and 69 of them or 75% attained increases in their revenue. That was twice the 35 BHCs with increased revenue in 2012. Those BHCs whose annuity revenues were up 10% or more outnumbered their 2012 peers by a factor of 2.5 times (54 BHCs in 2013 versus 22 in 2012).”

Two thirds (67%) of BHCs with over $10 billion in assets earned annuity commissions of $3.20 billion, representing 93.1% of the total annuity commissions reported. This was an increase of 7.7% from $2.97 billion in annuity fee income in 2012.

Among this asset class of largest BHCs, annuity commissions made up 37.9% of their total insurance sales volume of $8.44 billion, the highest proportion of annuity income to insurance sales revenue of any asset class.

BHCs with assets of $1 billion to $10 billion

This group recorded an increase of 32.4% in annuity fee income in 2013, rising from $156.4 million in 2012 to $207.1 million, or 22.2% of their total insurance sales volume of $932.4 million. The leaders included:

Santander Bancorp (PR)
Stifel Financial Corp. (MO)
SWS Group, Inc. (TX)
First Citizens Bancorporation, Inc. (SC)
Old National Bancorp (IN)

BHCs with $500 million to $1 billion in assets generated $31.7 million in annuity commissions in 2013, up 8.7% from $29.2 million the year before. Only 29.9% of BHCs this size engaged in annuity sales activities. Among these BHCs, annuity commissions constituted the smallest proportion (11.5%) of total insurance sales volume of $275.7 million.

BHCs with assets of $500 million to $1 billion

The leaders were First Command Financial Services, Inc. (TX), Hopfed Bancorp, Inc. (KY), ION Financial MHC (CT), Northeast Bancorp (ME), and Goodenow Bancorporation (IA).

The smallest community banks, those with assets less than $500 million, were used as “proxies” for the smallest BHCs, which are not required to report annuity fee income. Leaders among bank proxies for small BHCs were Sturgis Bank & Trust Company (MI), Essex Savings Bank (CT), FNB Bank, N.A. (PA), Firstar Bank, N.A. (OK), and Savers Co-operative Bank (MA). These small banks, representing small BHCs, registered an increase of 5.2% in annuity fee income, rising from $36.4 million in 2012 to $38.2 million in 2013.

Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the median Annuity Concentration Ratio was 8.2% in 2013, up from 6.0% in 2012. Among the top 50 small banks in annuity concentration that are serving as proxies for small BHCs, the median Annuity Concentration Ratio was 13.3% of noninterest income, down from 14.8% in 2012.

Among the top 50 BHC leaders in annuity penetration (i.e., annuity fee income per one million dollars of core or retail deposits), the median Annuity Penetration Ratio was $977 per million dollars of retail deposits, up from $863 per million in 2012. Among the top 50 small banks in annuity penetration, the median Annuity Penetration Ratio was $1,428 per million dollars of core deposits in 2013, up from $1,318 in 2012.

Among the top 50 BHC leaders in annuity income per employee, the median Annuity Productivity Ratio was $3,363 per employee in 2013, up from $2,813 per employee in 2012. Among the top 50 small banks in annuity productivity, the median Annuity Productivity Ratio was $4,037 per BHC employee.

Financial discipline is important, but uncommon

Posted on April 10, 2014 by Editorial Staff -

Discipline in financial planning leads to a sense of financial security and a greater likelihood of future happiness, according to the 2014 Planning and Progress Study, which Northwestern Mutual released this week.

But discipline is in short supply among U.S. adults. The study found that:

Less than one in five U.S. adults (18%) consider themselves ‘Highly Disciplined’ financial planners who know their exact goals, have developed specific plans to meet them, and stick to those plans.
One-third (36%) consider themselves ‘Disciplined’ planners who know their exact goals and have developed specific plans to meet them but don’t always adhere to them.
Nearly half of adults (46%) are either ‘Informal’ planners or don’t plan at all.
70% of Highly Disciplined planners feel very financially secure, but only 51% of Disciplined planners, 34% of Informal planners and 17% of non-planners feel secure.
Highly Disciplined planners who are retired are much more likely than non-planners to say that they are ‘happy in retirement’ (91% vs. 63%).

Sixty percent of the survey respondents said their financial planning could use improvement; the most common obstacle to improvement was lack of time, cited by 27% of those surveyed.

Young adults (ages 18-39) and older adults (age 60+) represent the most disciplined financial planners in the U.S. Adults ages 40-59 are the most financially unprepared and most likely to identify themselves as Informal or non-planners. The study also found:

59% of younger adults (18-39) and 54% of more senior adults (60+) identify themselves as disciplined financial planners; less than half of adults aged 40-50 believe they are disciplined.
More than half (51%) of adults aged 40-59 identify themselves as Informal or non-planners; that number drops to 41% for young adults and 46% for older adults.

The study fund that 60% of the youngest Baby Boomers (50-59) know they need to up financial game, but they have the least appetite for it. Of Americans aged 50-59, 25% lack the interest while 13% cite lack of money. Among these young Boomers:

70% don’t use a financial advisor.
40% say they take an “informal” approach to financial planning.
12% wouldn’t call themselves planners at all – the highest percentage of any age group surveyed.

The 2014 Planning and Progress Study included 2,092American adults aged 18 or older who participated in an online survey between January 21 and February 5, 2014.

Data Connection

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