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Pondering the End of QE

Posted on January 30, 2014 by Kerry Pechter -

The departure of US Federal Reserve Board Chairman Ben Bernanke has fueled speculation about when and how the Fed and other central banks will wind down their mammoth purchases of long-term assets, also known as quantitative easing (QE). Observers seize upon every new piece of economic data to forecast QE’s continuation or an acceleration of its decline. But more attention needs to be paid to the impact of either outcome on different economic players.

There is no doubting the scale of the QE programs. Since the start of the financial crisis, the Fed, the European Central Bank, the Bank of England, and the Bank of Japan have used QE to inject more than $4 trillion of additional liquidity into their economies. When these programs end, governments, some emerging markets, and some corporations could be vulnerable. They need to prepare.

Research by the McKinsey Global Institute suggests that lower interest rates saved the US and European governments nearly $1.6 trillion from 2007 to 2012. This windfall allowed higher government spending and less austerity. If interest rates were to return to 2007 levels, interest payments on government debt could rise by 20%, other things being equal.

Governments in the US and the eurozone are particularly vulnerable in the short term, because the average maturity of sovereign debt is only 5.4 years and roughly six years, respectively. The United Kingdom is in better shape, with an average maturity of 14.6 years. As interest rates rise, governments will need to determine whether higher tax revenue or stricter austerity measures will be required to offset the increase in debt-service costs.

Likewise, US and European non-financial corporations saved $710 billion from lower debt-service payments, with ultra-low interest rates thus boosting profits by about 5% in the US and the UK, and by 3% in the eurozone. This source of profit growth will disappear as interest rates rise, and some firms will need to reconsider business models – for example, private equity – that rely on cheap capital.

Emerging economies have also benefited from access to cheap capital. Foreign investors’ purchases of emerging-market sovereign and corporate bonds almost tripled from 2009 to 2012, reaching $264 billion. Some of this investment has been initially funded by borrowing in developed countries. As QE programs end, emerging-market countries could see an outflow of capital.

By contrast, households in the US and Europe lost $630 billion in net interest income as a result of QE. This hurt older households that have significant interest-bearing assets, while benefiting younger households that are net borrowers.

Although households in many advanced economies have reduced their debt burdens since the financial crisis began, total household debt in the US, the UK, and most eurozone countries is still higher as a percentage of GDP (and in absolute terms) than it was in 2000. Many households still need to reduce their debt further and will be hit with higher interest rates as they attempt to do so.

Some companies, too, have been affected by QE and will need to take appropriate steps if such policies are maintained. Many life-insurance companies and banks are taking a considerable hit, because of low interest rates. The longer QE continues, the more vulnerable they will be. The situation is particularly difficult in some European countries. Insurers that offer customers guaranteed-rate products are finding that government-bond yields are below the rates being paid to customers. Several more years of ultra-low interest rates would make many of these companies vulnerable. Similarly, eurozone banks lost a total of $230 billion in net interest income from 2007 to 2012. If QE continues, many of them will have to find new ways to generate returns or face significant restructuring.

We could also witness the return of asset-price bubbles in some sectors, especially real estate, if QE continues. The International Monetary Fund noted in 2013 that there were already “signs of overheating in real-estate markets” in Europe, Canada, and some emerging-market economies. In the UK, the Bank of England has announced that in February it will end its mortgage Funding for Lending Scheme, which allowed lenders to borrow at ultra-low rates in exchange for providing loans.

Of course, QE and ultra-low interest rates served a purpose. If central banks had not acted decisively to inject liquidity into their economies, the world could have faced a much worse outcome. Economic activity and business profits would have been lower, and government deficits would have been higher. When monetary support is finally withdrawn, this will be an indicator of the economic recovery’s ability to withstand higher interest rates.

Nevertheless, all players need to understand how the end of QE will affect them. After more than five years, QE has arguably entrenched expectations for continued low or even negative real interest rates – acting more like addictive painkillers than powerful antibiotics, as one commentator put it. Governments, companies, investors, and individuals all need to shake off complacency and take a more disciplined approach to borrowing and lending to prepare for the end—or continuation—of QE.

Time to Redefine Defined Contribution?

Posted on January 30, 2014 by Ben Norquist -

Without question, the defined contribution industry has done Americans much good over the years. Nonetheless, it routinely ignores its own flaws. The leaders of the DC industry would do well to confront those shortcomings head on, rather than remain content with the status quo.
Two glaring challenges for the current DC model are:

The need to expand plan access to many more of the nation’s workers.
The need to make the system more efficient (i.e., generate more retirement income per dollar of savings).

From a macro perspective, the DC industry has been a moderate success and has the potential to become much better. (That’s saying a lot, because the 401(k) was never designed to be so central to Americans’ retirement security.) But if we want the DC industry to shoulder the bulk of our nation’s retirement financing needs in the future, we need to explore options that will dramatically expand coverage and significantly increase efficiency.

Though I own a training firm, I respectfully disagree that more participant training and education is the solution. While I agree that we need informed and knowledgeable participants, I don’t believe that participant education will solve the lack of universal access and the systemic inefficiencies.

Do we really believe that participant self-direction is the road to broader access and retirement security? Do we really believe that employers are the ones best suited to fulfill the arcane plan administrator and fiduciary roles defined under ERISA?

I don’t claim to know all the answers, but I believe two truths are self-evident:

These problems exist.
Ignoring them won’t make them go away.

While we may agree or disagree with the assertions or conclusions in the American Academy of Actuaries’ recent whitepaper, I believe it can and should stimulate a healthy, broad-based discussion about the challenges facing both the DC industry and our nation as a whole.

Unfortunately, most of the news and commentary that is published on this topic either unsparingly attacks the entire DC concept or blindly defends the DC status quo. Neither approach, in my opinion, will help move us forward.

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Posted on January 30, 2014 by Kerry Pechter -

Obama Gives ‘Auto-IRA’ a Shout Out—and a New Name

Posted on January 30, 2014 by Kerry Pechter -

Her name is myRA. And as soon as President Obama mentioned her—or, it—in his State of the Union on Tuesday night, members of the media and the retirement industry scrambled to learn more about this new-sounding federal initiative in the retirement income space.

Here’s what the President said:

“Tomorrow I will direct the Treasury to create a new way for working Americans to start their own retirement savings: myRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in… And if Congress wants to help, work with me… to offer every American access to an automatic IRA on the job, so they can save at work like everybody in this chamber can.”

Indeed, as the New York Times reported this morning: “In a stop in Pennsylvania on Wednesday, Mr. Obama signed a presidential memorandum and handed it to Treasury Secretary Jack Lew. It instructed him to create the new ‘starter’ retirement savings program called ‘myRA.'”

The old is new again

The proposal sounded new, but it’s been years in the making. Rep. Richard Neal (D-MA) has been re-submitting a bill to create so-called auto-IRAs since at least 2007. Mark Iwry of the Treasury Department and David John of AARP, pushed for it when they were at the Brookings Institution and the Heritage Foundation, respectively. Bill Gale of the Brookings Institution’s Retirement Security Project has written about it.

In 2011, a West Virginia policy group began promoting VERA (Voluntary Employee Retirement Account), a state-sponsored, privately-run, optional workplace savings program that also happened to be named after a woman. So far, California is the only state that has passed an auto-IRA law. The efforts have been driven by a desire to increase savings among the tens of millions of American workers whose employers don’t offer payroll-deduction savings plans.

But now the idea has a specific endorsement from the nation’s CEO, in effect. “There had been some talk about the President doing a speech on retirement in September. But that never happened—in part because of the health care ruckus. So it was held over for the State of the Union,” a person familiar with the situation told RIJ this week.

“We always hoped it would get into the speech at some point,” said an aide in Rep. Neal’s office. “It fit in better with the President’s theme this year.” The source of the name wasn’t immediately apparent. “The press folks at Treasury may have come up with Myra. When we start naming things in Congress, we usually use acronyms.”

Liberal policymakers see the auto-IRA and its default investment, a Treasury bond called the R-bond, as a way to extend convenient workplace retirement savings plans—and the benefits of tax deferred savings—to the tens of millions of workers whose employers don’t offer DC plans. The R-bonds are the default investment in an auto-IRA, just as target date funds are the default investment in many 401(k) plans that use auto-enrollment.

The auto-IRA would be more or less compulsory, except for the smallest, newest employers. Employers who don’t offer retirement plans would be required to “connect their employees with a payroll deduction IRA,” according to the White House fact sheet. (Under Rep. Neal’s original legislative proposal, employers with fewer than 10 employees and those in business less than two years would be exempt from the mandate.)

Employees would be passively enrolled in the program unless they actively opted out. All contributions would go into R-bonds, which would earn the same rate as the government’s Thrift Savings Plan Government Securities Investment Fund.

The program is designed not to take market share from the private retirement industry. In fact, it incubates infant savings account for it. When the myRA accounts reach a value of $15,000, participants would transfer the money to an account at a larger investment company. Households making over $191,000 and individuals earning over $129,000 won’t be eligible to use myRA.

The program is also designed not to scare off potential participants. A myRA is a Roth IRA, so contributions (as opposed to gains) can be withdrawn at any time. Initial contributions can be as small as $5. And while the default investment, a government bond fund, won’t offer much return, it won’t pose any risk of loss. One could argue that tiny accounts can’t benefit much from equity exposure anyway.

Mixed reaction

MyRA was greeted with a mixed reaction from the retirement industry on Wednesday morning. BlackRock, the big asset manager that recently declared its ambition to be the nation’s leading retirement company, praised it. So did Cathy Weatherford of the Insured Retirement Institute, though she added a reminder that the tax deferral for retirement savings must be preserved.

That reminder was necessitated by the fact that during the State of the Union the President—somewhat unnecessarily—chose to burnish his liberal credentials by positioning the myRA as a policy corrective to an “upside-down tax code” that gives “big tax breaks to help the wealthy save, but does little or nothing for middle-class.”

The White House fact sheet on myRa said, “Current retirement tax subsidies disproportionately benefit higher-income households, many of whom would have saved with or without incentives. An estimated two-thirds of tax benefits for retirement saving go to the top 20% of earners, with one-third going to the top 5 percent of earners. Our tax incentives for retirement can be designed more efficiently.”

That’s just waving a red flag in front of the 401(k) industry’s leaders. They don’t deny that their services fail to reach tens of millions of full-time U.S. workers. But they resent the implication that any of their participants benefit from an inequitable subsidy. “It is extremely unfortunate that while promoting the importance of retirement savings in the State of the Union address, President Obama chose to attack the 401(k) plan, the primary retirement vehicle for tens of millions of middle-income working Americans,” said Brian Graff, CEO of ASPPA and NAPA, the trade groups for plan administrators, in a press release Wednesday.

“The president said the tax incentives for 401(k) plans primarily benefit those with higher incomes. In fact, 80% of 401(k) plan participants are middle-class Americans making less than $100,000. The president said the tax incentives for retirement savings are ‘upside down’—meaning they mostly go to the wealthy. In reality, households making more than $200,000 only get 17% of the tax benefits from 401(k) plans, while middle income households enjoy the majority of such tax benefits.”

Some people are simply skeptical of new regulations. Small-government proponents have argued that Americans without workplace retirement plans don’t need a new program because they can already create traditional or Roth IRAs on their own, and contribute as much as $5,500 ($6,500 age 50 and over) a year to them. But it usually takes at least $1,000 to open an individual IRA, and there’s no simple provision for automatic contributions. History has also shown that people are much likelier to save through an automatic program at work than on their own.

The administration no doubt feels some pressure to move the auto-IRA and the R-bond ideas off the back burner. Baby Boomers aren’t getting any younger, and President Obama has only three years left to deliver on his administration’s pet initiatives. The hardest part may be to convince small employers to set up payroll deduction mechanisms for their employees. As we saw with Obamacare, mandates aren’t popular.

“Do you believe in the American Dream?”

Posted on January 23, 2014 by Kerry Pechter -

While about three in 10 Americans are “satisfied” with their financial situations, an even larger percentage—especially among Caucasians—have lost hope that they will realize the “American Dream,” according to a MassMutual study.

The insurers’ third biennial report, The 2013 State of the American Family Study, shows that half of the older Millennials (ages 25-32) surveyed feel the “American dream” has disappeared. Almost half (45%) of older Boomers (ages 54-64) claim to agree.

Given the daily press reports about income equality in the U.S.—almost three-fourths of America’s 120 million households average less than $18,000 in investable assets, according to recent data from Cerulli Associates—such figures no longer seem surprising.

“American dream” means different things to different people. About 80% of older Boomers consider it to mean home ownership and financial independence, while younger people “focus on developing a monthly budget,” according to MassMutual.

Additional key findings include:

Chinese- and African-Americans are optimistic. Only 17% of Chinese American respondents and 28% of African Americans believe the American Dream is disappearing. But 42% of Caucasian respondents believe so.

Overall satisfaction is up. Three in ten American families are satisfied with their current financial situation, up from 18% in 2009, and 39% now say they are very good at managing money, compared to 30% in 2009. Gen X, ages 33-44, lags in “financial satisfaction” and “investment confidence,” however.

Younger Boomers are more satisfied than older Boomers. Thirty-eight percent of younger Boomers (ages 45-53) are satisfied with their financial situations, compared to 30% of those ages 54-64, and the gap grown. Older Boomers own fewer financial products than younger Boomers (4.7 versus 5.1) and trail in their “confidence to select investments” by 11 percentage points.
The State of the American Family Study is a biennial survey conducted in 2009, 2011 and 2013 for MassMutual by the Forbes Consulting Group, LLC. Survey subjects have had household incomes of at least $75,000.

The system is working: EBRI

Posted on January 23, 2014 by Kerry Pechter -

Assuming a smooth employment history—30 years of 401(k) savings eligibility in working life and unimpaired Social Security benefits afterwards—most (83-86%) individual workers could retire with least 60% of their final income (adjusted for inflation) according to the Employee Benefit Research Institute. (EBRI).

EBRI’s computer simulations and projections showed that the higher your target replacement rate—i.e., the higher your expenses in retirement—the more likely you will be to hit the target, and vice-versa.

“When the threshold for a financially successful retirement is increased to 70% replacement of age-64 income, 73-76% of these workers will still meet that threshold, relying only on 401(k) and Social Security combined. At an 80% replacement rate, 67% of the lowest income quartile will still meet the threshold,” EBRI said.

If you also assume that people are auto-enrolled in 401(k) plans and that their contributions are auto-escalated, the replacement rates go up. If Social Security benefits are curtailed after the so-called trust fund is exhausted, then replacement rates go down, the EBRI showed.

The press release seemed to suggest that if all three traditional legs of the retirement “stool” are in place—diligent saving in a workplace plan, a reinforced Social Security program, and a fair amount of personal savings—then a typical worker could maintain his or her standard of living even after earned income stops.

The release didn’t say if the individual data could be extrapolated to arrive at the expected income for retired working couples, or if working couples might need to replace a different percentage of their pre-retirement household income than single people.

EBRI first calculated the accumulated retirement-adequacy deficits by age, family status, and gender for Baby Boomers and Gen Xers in 2010. The aggregate deficit number, assuming current Social Security retirement benefits, was estimated to be $4.6 trillion, with an individual average of approximately $48,000.

If Social Security benefits were to be eliminated, the aggregate deficit would jump to $8.5 trillion and the average would increase to approximately $89,000. Those numbers are present values at retirement age, and represent the additional amount each member in that group would need at age 65 to eliminate his or her expected deficits in retirement, on average.

The study also noted that the presence of a defined benefit accrual at age 65 increases the probability of not running short of money in retirement by 11.6 percentage points, and is particularly valuable for the lowest-income quartile as well as the middle class.

The full report, “The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis,” is published in the January EBRI Notes, online at www.ebri.org

Vanguard partners with HelloWallet

Posted on January 23, 2014 by Kerry Pechter -

Vanguard is partnering with HelloWallet, the venture-backed start-up that provides the type of automated, low-cost, Internet-mediated financial guidance that suits the basic needs of mass investors, the slim budgets of corporate retirement plans, and the fiduciary responsibilities of plan sponsors.

Washington, D.C.-based HelloWallet, whose founder and CEO is 38-year-old political scientist Matt Fellowes, has financial backing from Morningstar, Inc., TD Fund, Grotech Ventures, and Revolution LLC. Vanguard will make the service available to its 3.5 million 401(k) customers, who also have access to the managed account services of Financial Engines, Vanguard said.

Anyone can go to the HelloWallet website, provide personal financial information, and get an instant assessment, followed by a quick financial plan by email. In response to one recent inquiry, the HellowWallet algorithm told a 34-year-old married parent of two children with a two-earner household income of $135,000 that he and his wife should have $35,400 on hand for emergencies and $325,000 already saved for retirement, assuming death at age 83.

According to a case study published by the Harvard Business Review in 2011:

“HelloWallet offers a range of services including PFM, financial planning, a system to aggregate users’ financial accounts, and an application to help users find financial products that are better deals than their current ones.

“While not the first to market with this type of service, HelloWallet differentiated itself in three major ways. First, it was independent, meaning it did not receive monetary incentives from financial institutions to push their products, nor did it receive payments (i.e., commissions) when individuals made buying decisions.

“Second, it looked at over 130,000 financial products to help users find the best products for them, compared to its competitors, which searched through a much smaller number of products. Third, because it was independent, it used a subscription model in which individuals paid a monthly fee.

The case… examines two key issues HelloWallet is grappling with: 1) How to price its product for its two different channels – the direct-to-consumer channel and the enterprise channel – and 2) How to proportionately allocate its resources for the two channels.”

According to Vanguard’s release:

“Employee members currently access the service through HelloWallet’s website and mobile app. Members input their goals and priorities and add their financial information, including income, bank accounts, credit cards, retirement plans, medical and other insurance, and investments.

“HelloWallet creates budgets and analyzes trends in members’ financial behavior to recommend how they can make the most of their financial opportunities (e.g., 401(k) plan, health savings account, flexible spending account, or insurance), prioritize financial decisions, and identify ways to stretch their paycheck further.”

As of December 31, 2013, Vanguard managed more than $2.45 trillion in U.S. mutual fund assets. In addition to serving retail investors, the Valley Forge, PA-based firm provides full-service recordkeeping and investment services to about 3.5 million participants in almost 4,000 defined contribution plans.

Where do the wealthiest Americans buy their financial services?

Posted on January 23, 2014 by Kerry Pechter -

“High net worth” investors in the U.S. maintain an average of four investment advice relationships, according to Cerulli’s sixth annual assessment of the U.S. high net worth ($5-$20 million in investable assets) and ultra high net worth (>$20 million) markets.

The report’s title is “High-Net-Worth and Ultra-High-Net-Worth Markets 2013: Understanding the Contradictory Demands of Multigenerational Wealth Management.” This market tends to have already accumulated wealth and focuses primarily on wealth management and preservation.

The very wealthy represent a relatively tiny subset of Americans. Cerulli’s own data, combined with government data, shows only about 833,530 households in the U.S. with $5 million or more in investable assets. They represent just 0.7% of the 120.1 million U.S. households but their members control 31% of investable assets, or about $9 trillion.

In sheer numbers, the affluent/mass-affluent market ($500,000 to $5 million) far outnumbers the wealthy. The 11 million affluent households control about $14.5 trillion, or close to half of the investable wealth in the U.S. Still, they and the wealthy represent only about 10% of all Americans.

The three biggest types of providers of financial services to the wealthy are the so-called wirehouses (Bank of America-Merrill Lynch, Wells Fargo, UBS and Morgan Stanley) with $2.4 trillion, private client groups, with $1.4 trillion, and state-registered trust companies, with $446 billion.

These channels can overlap or incorporate other channels, however. Wirehouses may own trust companies, for instance, and trust companies may outsource advisory services to independent registered investment advisers (RIAs).

Asset managers (mutual funds, hedge funds) trying to market their products to HNW investors view the RIAs as the most attractive channel to sell into, followed by multi-family offices (MFOs), bank trusts and wirehouses, Cerulli’s report said. RIAs and MFOs tend to have open architectures and rely on third-party money managers.

HNW investors tend diversify their providers, “leverage their status among providers and advisors,” and have access to institutional products and prices, Cerulli’s report said.

On the other hand, “high-net-worth investors appear reluctant to terminate existing relationships,” said Donnie Ethier, associate director at Cerulli, said in a release. “Nearly one-quarter of high-net-worth households report their primary provider controls at least 90% of their investable assets.”

The very wealthiest American households—those with $100 million or more—are the ones most likely to internalize all their financial business by creating a single family office, whose expenses can run to $1 million or more per year.

As the biggest owners of investable assets, HNW families have benefited greatly from the run-up in equity prices since 2009. “Many high-net-worth investors have moved on from the financial crisis, including recovered assets, optimistic economic outlooks, risk tolerances, and product mix,” Ethier said in the release. “The damaged trust of many financial institutions post-crisis seems to be a non-factor in the recent increase in provider relationships.”

Channels (such as direct providers) that offer greater autonomy, flexibility, and a wide variety of services will continue to attract wealthy investors, Cerulli’s release said. Providers are most likely to lose their HNW customers when generations turn over. The biggest threat to providers’ existing business with HNW households is the potential for breakage of long-standing relationships when assets move from one generation to the next, and are split among multiple heirs who choose their own sets of providers.

Leave Retirement to the Professionals, Actuaries Say

Posted on January 23, 2014 by Kerry Pechter -

If the keys to the domestic retirement income industry were handed over to America’s actuaries—those brainy, well-compensated civil engineers of the insurance world—what vehicles would they drive and where would they steer them?

Until this week, one could only guess. But a new report from the 17,500-member American Academy of Actuaries, “Retirement for the AGES: Building Enduring Retirement-Income Systems,” posits four basic principles that, if followed, it believes will lead to better pension plans and more secure retirements for participants.

The 23-page document, prepared by the Forward Thinking Task Force of the AAA’s Pension Practice Council, describes the four principles as Alignment, Governance, Efficiency and Sustainability. They represent ideals that probably wouldn’t surprise anyone in, say, Canada or Denmark. But in the U.S., some might call them radical.

If followed, the document makes clear, those principles would lead to defined contribution and defined benefit plans that, compared to the typical 401(k) plan, would be more outcome-driven, run by disinterested pension professionals, and much more focused on fulfilling the needs of the participants.

For instance, the discussion of the “Alignment” principle suggests that the current situation, where employers sponsor plans and participants manage their own money, is far from optimal. Pensions can be a headache for sponsors, and most rank-and-file participants, who may not even file their own tax returns, have no business managing something as fragile as a nest egg, the report suggest.s.

The report points to TIAA-CREF, the centralized, non-profit retirement plan that allows university faculty and staff to keep the same plan even as they move from one institution to another, as one example of all four principles in action.

“There are characteristics of TIAA-CREF that align well with the principles in the report,” said Don Fuerst (left), one of the authors of Retirement for the AGES. “The benefits are portable and there’s very little leakage. We’d like to encourage systems like that. Collective management of funds isn’t essential. You could have a successful system without it. But that would be a favorable aspect. We’d like to see stronger rules about leakage.”

The shift of DC plan savings into adviser-managed IRAs when participant changes jobs—IRA assets now outnumber 401(k) assets—represents a loss of alignment, he said, largely because of the higher costs, greater risk-taking and conflicts of interest that often characterize the retail realm, relative to the institutional.

“The practice of accumulating money into 401ks and then rolling them into IRAs isn’t the most effective way to create retirement income. When money is rolled into IRAs, it’s often managed by financial advisors, and their interests are not necessarily aligned with the retirement needs of participants.”

The white paper’s section on Governance seems to be discussing mainly defined benefit pension plans, with references to unions and participant representatives on boards. Indeed, it uses the Ontario Teachers’ Pension Plan as an example. But Fuerst said the principles are suitable for all types of pensions.

“The scope is not limited to private or public sector, or defined benefit or defined contribution,” he told RIJ. “It tries to articulate the key principles that are important in designing any system to deliver retirement income. These are elements that could make any plan more effective.”

In the section on Efficiency, the paper addresses the potential to reduce costs and improve outcomes through economies of scale (regional or national plans sponsored by financial institutions) and risk-pooling (the use of longevity insurance or immediate income annuities in tandem with systematic withdrawal plans in retirement.

The fourth principle in the paper is Sustainability. Given the vicissitudes of the economy and the finite life-spans of most companies, many pension plans have historically failed to realize their ambitions. The paper points admiringly to the adoption of “sustainability factors” in national pension plans overseas, where the retirement age and benefit levels have been indexed to changes in fertility or mortality.

As might be expected when the actuaries are the authors, the paper shows an implicit faith in the laws of large numbers and the benefits of risk-pooling. It also seems to take for granted that producing the greatest good for the greatest number is the proper goal of pension stakeholders.

Others might argue that an individual has the best chance for retirement success through personal effort, astute risk-taking, and departure from the herd.

The AAA, which is responsible for the actuarial profession’s public policy arm (as opposed to the Society of Actuaries, which is the professional development arm) hopes that “Retirement for the AGES” will have an impact in Washington during the coming year.

“We’ve already had a briefing at the Capitol for congressional staff members,” Fuerst said. “There were people there from a number of different committees. We sent a copy of the report to [deputy assistant Secretary of the Treasury] Mark Iwry and other people on the Hill. We’re going to hold a forum in Washington in April, and host a further discussion of theses issues. We hope this gets a lot of attention.”

BlackRock declares itself the retirement leader, hires Bruce Wolfe

Posted on January 23, 2014 by Kerry Pechter -

Birds don’t do it. Bees don’t do it. Not even the flowers or the trees do it. But, in recent years, several large financial services companies haven’t been able to resist declaring themselves to be the next leader of the retirement space.

The latest self-annointee is BlackRock, the $4.3 trillion asset manager and purveyor of iShares exchange-traded funds (ETFs) and LifePath target date funds (TDFs). Though not a plan recordkeeper, the firm has also been a leader in the DCIO (defined contribution investment-only) business.

This week, BlackRock announced that it would create a combined United States Retirement Group (USRG) to coordinate and grow its sales into the DC and IRA markets. Chip Castille, the head of its DC business, will be the new group’s leader while continuing to lead the DC business. Bruce Wolfe (above), who once led a similar reorganization effort at Allianz Global Investors and has been a consultant to BlackRock, will be USRG’s chief operating officer.

Last fall, BlackRock with some fanfare introduced its CoRI Index, an online tool that helps individual investors calculate their retirement readiness. Bond funds that will serve as the proverbial blades in the CoRI razor are yet to be publicly announced. Castille gave a presentation on CoRI at the Retirement Income Industry Association meeting in Austin, Texas, last October.

In a recent internal memo to U.S. employees and contractors, Rob Fairbairn, head of BlackRock iShares and retail, wrote, “We want BlackRock to be the undisputed leader in helping our clients manage and solve this crisis. Beyond any single retirement product or initiative, BlackRock should own the retirement category and transform the way investors, financial advisors and institutions approach it.”

Wolfe, in an interview with RIJ this week, briefly described what he’ll be working on at BlackRock in 2014, and how BlackRock might compete with entrenched soup-to-nuts firms like Fidelity and Vanguard, which serve the entire retirement savings food chain with individual and institutional funds and ETFs, plan administration and recordkeeping, IRA rollovers, brokerage services and annuity distribution.

“The question became, ‘How can [BlackRock] expand its DCIO business to take the company into retirement in a broader context? My new responsibilities will involve developing product strategies and marketing efforts around the retirement theme. I’ll be taking the lead on issues around decumulation,” Wolfe said.

Part of Wolfe’s job will be to follow the money, which is steadily flowing from DC plans to rollover IRAs. “We’ll be developing, or evaluating, multi-asset products and asking, ‘How do we get them not only onto defined contribution platforms but also work to penetrate the IRA market?’” he said. “We’ll distribute not just through the U.S. Retirement Group but will also partner with U.S. Wealth Advisory, BlackRock’s U.S. retail business.”

Wolfe provided no new details on the CoRI project. “On a tactical level, the CoRI index is out and available. The products associated with it have not been approved yet. These are registered funds and they’re still in the approval process. CoRI has applications in the DC space and with the insurance companies,” he said. “The short answer to your questions is that we’re going to look at everything.”

Founded in 1988 within The Blackstone Group as a fixed income specialist, BlackRock adopted its current name in 1992. It became a subsidiary of PNC Financial in 1995 before going public in 1999. Since then it has acquired Merrill Lynch Investment Managers (2006), the Quellos Group LLC (2007) and Barclays Global Investors (2009).

A Physician Heals Himself (Financially)

Posted on January 23, 2014 by Kerry Pechter -

Dimitri Merine is a 56-year-old radiologist at a not-for-profit hospital near Baltimore. During the 2008-2009 financial crisis, he had the sobering experience of watching older colleagues wring their hands over their investment losses and their crumbling retirement dreams.

“A couple of my co-workers had to keep working because of the market meltdown. They didn’t feel that they’d saved enough, and they felt too old to implement the strategies that I’m using now. Some of these strategies need a long lead time,” he told RIJ recently. “That forced me to get moving so that I wouldn’t find myself in the same situation.

At a time when most financial advisers are still learning how to combine insurance and investment products to maximize both income and safety in retirement, a few ambitious near-retirees like Dr. Merine aren’t waiting for the advice profession to discover the merits of guaranteed retirement income.

They’re taking matters into their own hands. Indeed, risk-averse do-it-yourselfers like Dr. Merine are proof that at least some high net worth investors want to get more creative about retirement income. Those who can’t find advisers to help them are helping themselves.

Goal: $200,000 a year

Dr. Merine and his parents moved to New York City from Haiti when he was eight years old. He grew up in the turbulent Crown Heights and East Flatbush sections of central Brooklyn. He was educated at Columbia University and Washington University Medical School and spent his residency at Johns Hopkins Hospital. A financial autodidact, he reads the New York Times, Wall Street Journal and Barron’s.

Today he is a member in good standing of the Sandwich Generation. His father and mother are 77 and 80 years old, respectively. His children are only seven and 10.

“Legacy is a big issue,” he said, though he has not set up a trust or created a formal estate plan. He and his wife have a modest Genworth joint long-term care insurance policy (five-years total coverage at $200 a day, with a simple 5% inflation adjustment and a 90-day waiting period) as a buffer against out-of-pocket nursing home expenses. He contributes to the Maryland College Savings Program at T. Rowe Price.

He’d like to retire when he reaches age 63, in about seven years. “When I began to think seriously about retirement several months ago, I wanted to learn about alternative income methods. My goal was to have a retirement income of about $200,000 a year after taxes, and I wanted more than half of it to come from sources other than systematic withdrawal,” Dr. Merine said.

While still holding an investment portfolio at Merrill Lynch, he looked at three potential sources of retirement floor income, including income annuities, bond ladders, and Social Security. He started to learn about income annuities. He read Annuities for Dummies. Then he made a decision that few people make but which academics almost universally recommend. He bought longevity insurance.

‘Fill in the back end’

“The first step was to fill in the back end, and deal with the late-life issues, assuming I live that long,” he told RIJ. “So, after learning about annuities, I decided to sign up for a deferred income annuity with payments starting at age 80. I had divided my retirement into three periods—65 to 70, 70 to 80, and over—and I wanted to have a specific strategy for each time. From 63 to 65, I’d do systematic withdrawal and dividends, but from 65 to 70 I wanted an additional means of income beyond SWP.

“The DIA appealed to me intellectually. It required a relatively small payment upfront. It allows you to plan for a long life, should that happen, and to spend appropriately before you get to the age of 80. As a first step, I sent my information to my Merrill Lynch adviser. He seemed OK with my decision.”

Today’s low annuity payout rates didn’t deter him. “New York Life allows multiple premiums on its deferred income annuity, so I’m able to dollar-cost average into the annuity and spread out my interest rate exposure. For an income of $48,000 a year at age 80, the total cost was $125,000. To get there, I’ll make four purchases of about $31,000 over four years. I didn’t necessarily want the death benefit, but for compliance reasons Merrill Lynch won’t sell a life-only contract. So I was willing to go along.”

“Once I addressed that, the next question was what to do about the years between ages 65 and 80. For that period I wanted more than half of my income to come from somewhere other than systematic withdrawals.” Part of the money would come from Social Security, from required minimum distributions from retirement accounts, and from dividends. He wants to keep his SWP rate lower than four percent, because a more conservative initial rate would allow room for increases later, if necessary.

Building a bond ladder

For the rest of his annual income, “I thought about period certain annuities. But I decided instead to do a 15-year bond ladder. I used after-tax money to buy eight zero-coupon municipal bonds, and I bought seven zero-coupon agency bonds in my Roth IRA. The plan is to hold them to maturity, so the only risk is credit risk, not interest rate risk.

“It was hard to find non-cancelable bonds; they’re not common. So it took awhile to find the appropriate issues, even with help from the Merrill Lynch adviser. Every day there would be 10 new issues, and one or two would be appropriate. It took a good month to five weeks.

“Initially, the plan was to use all muni bonds, but I switched to agency bonds, such as Tennessee Valley Authority issues. They were higher quality and easier to buy. I filled in the later years first. As you get closer, you have less compounding and you pay more. I never found out exactly what the commission was on each bond, and I didn’t do a price comparison with discount brokerages. I don’t do a lot of trading, so I pay per transaction.”

Without going into great detail, Dr. Merine described the rest of his portfolio as a combination of mutual funds (Vanguard municipal intermediate bond fund was one), ETFs (iShares Select Dividend) and individual stocks (Berkshire Hathaway).

When the financial crisis struck in 2008, Dr. Merine kept his cool. He was still 10-plus years from retirement, so he kept dollar-cost-averaging into the heavily discounted markets. “I held on for dear life. I didn’t sell a single thing. Sequence-of-returns risk wasn’t an issue. In retrospect, it was the right thing to do.”

Asked why he decided to become such an ambitious do-it-yourself retirement income planner, he told RIJ, “It’s just my outlook on life. I have a personality that likes to plan things and have a certain level of assurance. You have no idea what the future will bring, so you need to be prepared. As for buying the longevity insurance, it just spoke to me on an emotional basis. It’s a huge psychological relief not to have to plan for those years after age 80. It just makes sense.”

The Bucket

Posted on January 16, 2014 by Kerry Pechter -

Voya’s orange will be a different shade

Voya Financial will be the new name of ING U.S., Inc., starting in the quarter of 2014, the company announced. The re-named company will continue to use two shades of orange in its logo, instead of the single orange hue used by ING U.S.

The schedule for the transition from ING U.S. to Voya Financial will be:

On April 7, 2014, ING U.S., Inc., ING U.S.’s publicly listed holding company, will change its name to Voya Financial, Inc.
On May 1, 2014, ING U.S. Investment Management will rebrand to Voya Investment Management. The Employee Benefits business will begin using the Voya Financial brand.
On September 1, 2014, all other ING U.S. businesses will begin using the Voya Financial brand. All remaining ING U.S. legal entities that use the ING brand will carry the Voya brand.

Until rebranding begins in April, ING U.S. will operate using its current name and logo. Given the volume of material to change and the many aspects of the project to consider, the company chose to stagger the rebranding. During rebranding, nothing will change with respect to customer accounts or policies.

On May 1, 2013, ING U.S. made its initial public offering under the ticker symbol VOYA as part of the divestiture program of ING Group N.V. ING Group still owns 57% of the outstanding common stock of ING U.S., Inc., but expects to completely divest its ownership by December 31, 2016.

The businesses that make up ING U.S. today were formed through a series of acquisitions dating back to the 1970s. In 2001, ING introduced its brand in the United States through advertising.

In March 2013, the company launched “Orange Money,” a campaign that underscores careful management of one’s retirement dollars. This campaign supports ING U.S.’s focus on advancing retirement readiness, and will bridge the transition to Voya Financial. For a look at the Voya logo and colors, go to www.voya.com.

T. Rowe Price joins governing board of the SPARK Institute

T. Rowe Price Retirement Services has joined the Governing Board of The SPARK Institute, Inc, said Jude Metcalfe, president of DST Retirement Solutions, and president of the Institute, in a release.

Aimee DeCamillo, Head of Retirement Plan Services, will represent T. Rowe Price on the governing board.

The governing goard determines The SPARK Institute’s mission and policies. It also oversees the administration and finances of the organization. Other members of the governing board are Ascensus, BlackRock, DST Retirement Solutions, Great-West Retirement Services, The Guardian Life Insurance Company of America, J.P. Morgan Asset Management, Lincoln Financial Group, Prudential Retirement, SunGard and Wells Fargo & Company.

Life insurance reporting will grow more complex: Towers Watson

North American life insurers face a significant number of financial reporting changes because of recent regulation that is now in effect or is still under review and expected to become effective within the next five years, according to Towers Watson, the global consulting firm.

Respondents to Towers Watson’s 32nd Life Insurance CFO Survey report that these changes will require a major evaluation and enhancement of talent, governance and software models. To a lesser extent, products and plan designs will also need to be reassessed.

The complexity and importance of these new reporting requirements will make it necessary for insurers to understand exactly how these changes will alter everything from supplementary reporting to capital financing for products such as UL with secondary guarantees and term insurance.

Even if CFOs have key personnel who can follow the intricate details of these regulations and are free to focus on near- and long-term planning for their company’s financial functions, that planning will be easier for CFOs if they understand the intricacies of these changes.

Symetra will redomesticate to Iowa, but maintain Washington footprint

Symetra Financial Corporation today announced that applications have been filed with the Washington State Office of the Insurance Commissioner and Iowa Insurance Division to redomesticate (change jurisdiction of incorporation) its principal life insurance subsidiary — Symetra Life Insurance Company — from Washington to Iowa.

The change in legal domicile is expected to occur mid-year, pending regulatory approvals. Symetra’s home office will remain in Bellevue, Wash, where about 900 people are employed. The company plans to open an office in Des Moines, Iowa and anticipates hiring 20–40 employees over the next two to four years as the company grows.

Symetra expects the redomestication to Iowa to benefit its competitiveness through enhanced capabilities to offer product features and benefits in high demand by insurance consumers. Symetra does not expect the change in domicile to affect existing policyholders.

Fitch upgrades Sun Life outlook to ‘stable’

Fitch Ratings has affirmed the ratings of Sun Life Financial Inc., including all outstanding issues, as well as the Insurer Financial Strength (IFS) ratings of SLF’s primary Canadian insurance subsidiary, Sun Life Assurance Co. of Canada (SLAC), at ‘AA-‘. The Rating Outlook is revised to Stable from Negative. A complete list of ratings follows at the end of this release.

The return to a Stable Outlook reflects SLF’s improved earnings and operating profile, which has benefited from the company’s recent disposition of its underperforming U.S. individual annuity and life insurance businesses.

Fitch’s expectation is that a significant portion of the proceeds from the disposition will be used by SLF to fund acquisitions to grow its U.S. employee benefits business, Asian insurance operations, or its investment management business.

The affirmation of the ratings reflects SLF’s strong capitalization, disciplined investment strategies that have resulted in strong liquidity and solid asset quality, the company’s leading market position in Canada, growth prospects for emerging Asian markets, and relatively stable performance in U.S. mutual funds. Offsetting these positives are the company’s higher levels of operating debt issued from the parent company than many peers, low, albeit improved, fixed-charge coverage, and sizable common shareholder dividends.

Fitch believes that SLF is well-capitalized on a risk-adjusted basis, with a minimum continuing capital and surplus requirement (MCCSR) for SLAC of 216% at Sept. 30, 2013. The sale of the U.S. variable annuity and certain life insurance businesses had a small negative impact on SLAC’s MCCSR of approximately 4 points.

Northwestern Mutual to ramp up recruiting in 2014

Northwestern Mutual plans to recruit more than 2,700 financial representatives and 3,700 financial representative interns in 2014, the company said this week.

According to Steve Mannebach, Northwestern Mutual’s vice president of field growth and development, the company’s aggressive 2014 goal of 6,400 total recruits is a direct result of the increased need Northwestern Mutual is seeing for comprehensive financial planning in the United States.

Northwestern Mutual recruited more than 5,500 financial representatives in 2013 – marking the third consecutive year the company surpassed record highs for recruiting. The company’s 2014 goal stands out in today’s challenging economy where job growth has declined and the national unemployment rate is 6.7%, according to the recently released jobs numbers for December.

Architect of immortality dies at 72

Posted on January 16, 2014 by Kerry Pechter -

Madeline Arakawa Gins, a poet-turned-painter-turned-architect who publicly forswore mortality — and whose buildings, by her own account, were designed to preempt death for those living in them — died on Jan. 8 in Manhattan, the New York Times reported this week. She was 72.

The cause was cancer, said Joke Post, the manager for architectural projects at the Reversible Destiny Foundation, which Ms. Gins and her husband, the Japanese-born artist known simply as Arakawa, established in 1987.

With her husband, with whom she collaborated for nearly half a century, Ms. Gins practiced an idiosyncratic and highly personal brand of art that sought to deploy architecture in the service of large essential questions about the nature of being.

The couple’s vision, as articulated in their published writings and their buildings, was beyond Utopian. It sought not merely better living — but, ideally, eternal living — through design.

Their work was underpinned by a philosophy they called Reversible Destiny. Its chief tenet, as the catalog of a 1997 joint exhibition at the Guggenheim Museum SoHo put it, was, “Reversible Destiny: We Have Decided Not to Die.”

Eluding death through design could be accomplished, the couple believed, through a literal architecture of instability — a built environment in which no surface is level, no corner true, no line plumb. Below, an Arakawa house in East Hampton, New York.

Beware of seeds, stems and scams

Posted on January 16, 2014 by Kerry Pechter -

In the wake of Colorado’s conditional legalization of marijuana production, sale and use, FINRA is warning investors about the potential for fraudulent public offerings of shares in marijuana-related companies in particular and potential volatile, thinly-traded stocks in general.

“With medical marijuana legal in almost 20 states, and recreational use of the drug recently legalized in two states, the cannabis business has been getting a lot of attention—including the attention of scammers. FINRA is issuing this alert to warn investors about potential scams associated with marijuana-related stocks,” the self-regulatory agency said.

Marijuana stock hustles tend to use the same techniques as “pump and dump” stock ploys where the issuers talk up the price of the stock and sell the shares when the price and volume hit a desired peak or target.

“ One company, for example, promoted its move into the medical cannabis space by issuing more than 30 press releases during the first half of 2013. These releases publicized rosy financial prospects and the growth potential of the medical marijuana market,” a FINRA release said.

“The company was also touted on the Internet through the use of sponsored links, investment profiles and spam email, including one promotional piece claiming the stock ‘could double its price SOON’ and another asserting the stock was ‘poised to light up the charts!’ Yet the company’s balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan.”

Metrics of the 2013 bull market

Posted on January 16, 2014 by Kerry Pechter -

What a year it was for U.S. equity investors. And to think that a huge crash made it possible.

The average U.S. stock fund gained 31% in 2013, nearly double the 15.9% earned by international stock funds, according to Strategic Insight. A strong finish to equity markets in 2013 elevated stock funds/ETFs net flows to over $400 billion for the year as a whole. Bond funds, following four years of dramatic inflows in aggregate exceeding $1 trillion, reversed course beginning in the spring as interest rates started to rise. Flows to bond funds were negative each month since June 2013, and such redemptions reached nearly $50 billion in the fourth quarter.

“2014 should witness the continuation of stock investors’ re-engagement,” said Avi Nachmany, Strategic Insight’s research director, in a release. “Demand will remain across a wide spread of U.S. and international stock investment approaches, but will also include bond funds anchoring asset allocation programs and especially those positioned for an improving global economy.”

Mutual funds

Equity funds netted $253 billion in 2013 (excluding ETFs and VA funds), led by strategies for globally diversified developed markets. While bond funds in aggregate suffered modest net redemptions for the year, flexible ‘alt’ bond funds and those positioned for a rising interest rate environment, such as floating rate, short maturity, and global, continued to experienced positive flows.

Exchange-traded products

U.S. equity ETPs (ETFs and other exchange-traded products) netted $19 billion during December and $188 billion in 2013. “Notably, U.S. equity ETFs outsold International ETFs last year by a ratio of over 2:1, whereas international funds were the top-sellers among mutual funds. Overall, however, trends in net sales of ETPs mirrored their mutual fund counterparts, with equity fund gains contrasting a pullback from bond funds,” said Alan Hess, a Strategic Insight analyst.

Capital gain distributions

The rising stock markets since 2009 that have caused leading stock indices to eclipse prior records in 2013 triggered dramatic increases in capital gain distributions last year. Such distributions are estimated to exceed $300 billion for the year, more than tripling 2012 distributions, and were the second highest in history (following 2007 $414 billion according to the ICI). Among stock funds paying capital gains in December 2013, the average ratio was 7.3% of NAV for U.S. equity funds and 5.9% for international equity funds.

For those who own actively managed stock funds in taxable accounts (not in IRAs, 401(k)s, or VAs), representing about one-quarter of stock fund assets, the tax impact of such high capital gains distribution would trigger a greater interest in the tax advantages of index funds and ETFs. “One area of intriguing promise is actively managed ETFs, a segment of intense innovation activity for the coming years,” added Nachmany.

Flows by distribution channels

Mutual fund flows during 2013 were highest via the Independent/Regional BD channel, which accounted for 33% of fund flows via intermediaries. Such BDs also contributed an estimated 18% of ETF flows last year. ETF distribution was led by RIAs, who controlled 23% of ETF flows in 2013 (more than double their 9% share of mutual fund flows). Interestingly, ETF flows via banks (which can include significant institutional investor influence) accounted for 17% of total ETF flows – more than four times such banks’ small and falling share of mutual fund flows (4%).

“Fund managers are increasingly focusing their distribution efforts in more targeted ways across the intermediary-sold market. This includes evaluating opportunities based on differences in fund and ETF acceptance, asset velocity and pace of redemptions, adoptions of innovative funds, and more. As the industry continues to mature, such focus continues to increase in importance,” said Dennis Bowden, Strategic Insight’s Assistant Director of Research.

Guardian Life’s new VA offers alternatives

Posted on January 16, 2014 by Kerry Pechter -

Alternatives are the asset class du jour, and Guardian Life’s GIAC unit introduced a new deferred b-share variable annuity this week called ProFreedom. It allows owners to invest in alternatives—a general term that embraces TIPS, REITS, sector funds, commodities, and global bonds—inside a tax-deferred account.

According to Guardian Insurance & Annuity Co., the issuer, ProFreedom VA offers options managed from boutiques like ALPS/Alerian, Mariner Hyman & Beck, and Merger (Westchester Capital Management, LLC) as well as department stores like Fidelity, MFS and PIMCO.

The contract’s mortality and expense risk fee is one percent a year. The investment options carry annual operating charges of 0.73% and up, according to the prospectus, but it wasn’t immediately clear which option carried the latter charge or why it was so high. There’s a $10,000 minimum ($5,000 for qualified money), an eight-year surrender charge period with a first-year charge of 8%.

The product can be issued with the Guardian deferred income annuity, SecureFuture Income, as a rider. There are three death benefit options, ranging in cost from 25 to 35 basis points a year.

Guardian may have been inspired by the success of Jackson National’s Elite Access variable annuity, which has sold well among advisers who in the past were unlikely to buy variable annuities. Elite Access sales in the first three-quarters of 2013 were $2.77 billion. As of Sept. 30, 2013, it was ranked seventh in domestic individual VA sales.

Variable annuities remain the only financial product that can accommodate a virtually unlimited amount of after-tax premia for tax-deferred growth. Active traders who want to avoid generating a lot of capital gains like this feature, especially if the annuity’s overall fees are low.

In a release, Douglas Dubitsky, Vice President of Product Management & Development for Retirement Solutions at Guardian, stressed the concept that investing in alternatives can “help reduce the impact of market volatility and risk.”

Fidelity sued again over plan fees

Posted on January 16, 2014 by Kerry Pechter -

For the third time this year, Fidelity Investments (FMR LLC) has been the object of a federal class action suit, with the latest two filed by participants of its own $9.5 billion profit-sharing plan, that charges the giant fund company with using its position as plan sponsor, recordkeeper and asset manager of its own plan for self-dealing.

The most recent suit, filed in the names of Aiden Yeaw, Alex C. Brown, and about 56,000 other Fidelity plan participants on January 7 in U.S. District Court in Boston, claims that Fidelity paid itself about $85 million from 2008 to 2013 for recordkeeping services when it had told participants the recordkeeping services were free. Recordkeeping should have cost the Fidelity plan no more than $3.34 million over those five years, the suit said.

In 2012, the recordkeeping fees, which according to the suit came from Fidelity the investment manager paid Fidelity the recordkeeper out of fund fees charged to the participants, amount to an average of $335 per participant, the suit said. The entire disputed $85 million represents less than 16 basis points per year of the fund assets.

It was the third federal class action lawsuit against Fidelity for breaches of fiduciary duty and the second filed by participants in Fidelity’s own plan.

On February 5, 2013, a participant in a plan sponsored by the Hewlett Packard Company filed a class action suit against Fidelity charging that Fidelity should not have kept the revenue—“float income”—from interest-bearing accounts that held purchases and redemptions in mid-transaction.

On March 19, 2013, Fidelity plan participant Lori Bilewicz led a class action suit charging that Fidelity offered its plan participants only its own proprietary funds when it could have offered participants much less expensive funds.

The cluster of law firms in all three suits included the following firms, as well as others: Schneider Wallace Cottrell Konecky LLP of Scottsdale, Ariz., Levin Papantonia, Thomas, Mitchell, Rafferty & Proctor of Pensacola, Fla., Bailey & Glasser LLP of New York and Washington, D.C., and Peiffer Rosca Abdullah & Carr LLC of New Orleans.

Take Me to Your Leader

Posted on January 16, 2014 by Kerry Pechter -

The retirement industry resembles a Tower of Babel today. That’s not necessarily a bad thing. But when blocs with overlapping interests want to achieve interlocking goals, it’s often best to sing in the same language from the same hymnbook at the same time.

And today we don’t. That’s my impression. If I put my ear to the proverbial rail, I don’t hear the sound of an oncoming gravy train—not the way I did in the happy pre-crisis days, when pampered conference-goers could find gas-burning fireplaces in the bathrooms of their casitas in Palm Springs.

Just as every religion needs a Book in order to endure, every movement needs a narrative to solidify shaky coalitions and to articulate a higher purpose—a sublime end that justifies the mundane means.

Before the crisis, the retirement income industry seemed to have a narrative and a higher purpose. The narrative was all about the Boomers. No Boomer retiree would be left behind. The sublime ends (safe, secure retirement for every Boomer) justified the mundane means (selling financial products and services).

For some reason, the narrative has trailed off. It’s possible that the source of the narrative before the crisis came from the hybrid nature of that era’s premier retirement product, the variable annuity with living benefits.

A natural coalition of investment companies, insurance companies and advisers gathered around that product, which had its own association: the National Association of Variable Annuities. NAVA—now the Insured Retirement Institute—seemed to have a grip on the microphone. Not because NAVA was a slick machine (it wasn’t). But because it had a large, deep-pocketed membership with fairly unanimous goals.

Then came the crisis. Stuff happened. NAVA turned into IRI. The administration’s running lights switched to blue from red. Yields shrank. Companies failed, merged, got bailed out. The variable annuity market tried to weather the storm, then caved. The NAVA coalition and its narrative got lost, upstaged or drowned out.

Now, the glue seems to be gone. Fragmentation reigns. Not that there aren’t still several organizations and strong voices floating in the retirement space. There are a lots of organizations representing different sectors of the landscape. But there’s no sense of unity or pooled strength.

The acronyms haven’t changed much. On the advocacy side, you still have well-established groups like IRI (annuities) ACLI (life insurance), NAFA (fixed indexed annuities), ASPPA (ERISA third-party administrators), as well as new faces like IRIC (in-plan annuities) and DCIIA (asset managers in the defined contribution space).

On the research side, you still have groups like EBRI (retirement plan research), LIMRA (life insurance research), RIIA (market analysis and adviser methodology), the Center for Retirement Research at Boston College (academic), and the Pension Research Council (academic).

Down in Washington, D.C., meanwhile, the retirement industry has eminent if low-key allies. There’s the Retirement Security Project at the Brookings Institution (think tank). Within the government, you have people in the Treasury Department silo (Mark Iwry) and the Labor Department silo (Phyllis Borzi) who (this being a Democratic administration) worry most about the retirement prospects of the bottom 80% of Americans.

In short, there are lots of organizations, many of them led by smart, committed, forceful people. But they don’t share a common narrative or redeeming purpose.

The IRI aspires to lead the retirement income brigade. It has strong, savvy leaders in Cathy Weatherford and Lee Davenport. It has focus. It has industry support. It’s a tightly run ship. But it’s an advocacy (i.e., lobbying) group. It has a parochial agenda. And, as far as I can tell, it would probably be much more in tune with a Republican administration than the current one. It doesn’t seem to speak the same language as the Obama administration or the academic groups.

The Retirement Income Industry Association could provide the higher narrative, because it doesn’t lobby. It has strong leadership in Francois Gadenne. It is perhaps the only retirement industry group with a sincere passion for analyzing the market and helping the industry navigate it. It is committed to collaboration across all industry “silos.”

But RIIA, like IRI, doesn’t have all the elements of success. A decade old, it hasn’t yet gathered a critical mass of financial support from big financial services companies. Though its leaders are just as market-driven as any other industry group, Gadenne often speaks a language that is more academic, analytic and entrepreneurial than that spoken by many of the corporate executives whose financial support RIIA needs.

Both of these groups, interestingly, have directed much of their attention to broker-dealers and advisers since the crisis. The other groups have their strengths, but the RIIA and IRI seem like the best candidates for coalition-leadership. Academics like Alicia Munnell at CRR-BC lend important voices—but from the choir loft, not the pulpit. From their specialized positions deep inside giant government bureaucracies, officials like Iwry and Borzi can effect specific and even critical changes, but they can’t lead the parade.

Perhaps no one can. Perhaps a rise in interest rates will change everything. At the moment, it looks like each segment of the retirement income industry may simply go its own way and exploit its chosen niche. That’s fine. Lots of money will be made. But Babel will prevail, no narrative will emerge, progress will be spotty and quite a few Boomers may get left behind.

A Chat with Jackson’s Cliff Jack

Posted on January 16, 2014 by Kerry Pechter -

As of Sept. 30, 2013, Jackson National Life—a low-key firm that, unlike some of its competitors, sponsors no national TV advertising during football or basketball games—had sold the most individual variable annuities ($15.5 bn) and the most individual annuities overall ($17.4 bn) in the U.S.

Deliberate sales diets at MetLife, Prudential and elsewhere helped open Jackson’s path to the top. But, by all accounts, the unit of the U.K.’s Prudential plc has succeeded through a tortoise rather than hare approach. The firm relies on its consistent wholesaling, conservative pricing, balanced product mix and an A+ rating from A.M. Best.

Clifford J. Jack (right), executive vice president and head of retail at Jackson, spoke recently with RIJ about his outlook for 2014, a year that opens on the heels of a two-year bull market in equities and which promises tumultuous mid-term elections, the Fed’s ‘taper,’ and a new fiduciary rule from the Department of Labor.

RIJ: What’s the top-of-mind issue for you right now?

Jack: The idea of amnesia has been coming to my mind lately. Retail investors were pretty darn cautious coming out of the financial crisis in 2009. As a result, a lot of them missed most of the run-up. Now they’re jumping into the equity markets as fast as they can. I worry about the retail investor chasing returns.

I don’t disagree with the wisdom of the outflows from fixed income funds. It’s prudent for people to be cautious in a low-rate environment. But I worry about investors becoming too confident.

The worst thing would be to have lost 50% of your retirement assets late in your career, followed by missing the run-up [since 2009] because of caution, followed by the possibility of investing at all-time market highs.

The potential for this kind of whipsaw effect creates an interesting challenge for manufacturers. We have to temper our need to sell products with our knowledge that it’s not the best idea for people to invest when the market is at all-time highs. It’s been interesting to see how quickly things snapped back after the financial crisis, and how quickly people seem to have forgotten what happened.

RIJ: Jack Bogle probably wouldn’t have said it much differently. What’s the outlook for Jackson National in particular?

Jack: Our overarching issue is, what is the next phase of retirement investing? What should it look like? How can we be positioned best to take advantage of it? We believe that the key is diversification, in the entire portfolio, inclusive of the fixed income area. So, we have tried, with some success, to take a leadership position in building out an alternative platform.

RIJ: You’re referring to your Elite Access variable annuity, which doesn’t have a lifetime income rider, but which offers advisers the opportunity to trade so-called alternative investments inside a tax-deferred account.

Jack: That has gone very well for us. We’re a big believer in that. A significant share of the advisers who have sold Elite Access had never done business with Jackson before. That’s very attractive, because we’re picking up share that we didn’t have before. I believe that type of split is extremely common in the brokerage world and not Jackson-specific. We believe in the ‘bifurcation’ of the adviser market.

RIJ: How so?

Jack: One type of adviser likes to say, ‘I’m the expert. Just give me the underlying tools so that I can invest the way I see fit.’ Another type of adviser says, ‘I’m good with people. I’m good at having clients call me at 3 a.m. I want to leave the portfolio construction to you, Mr. Asset Manager.’ We’re happy to do business with both.

RIJ: As I understand it, advisers can access Jackson directly, or through your asset management platform, Curian Capital, right?

Jack: At Curian Capital [Jackson’s wholly-owned managed account provider], you [the adviser] can build your own portfolio out of mutual funds or separate accounts. You can invest in models or you can invest in managed products. The models are ideas, if you will, that you can tailor, by percentages. With the managed products, we do all the work. You can rely on Curian to pick and choose.

On the Jackson side, which is a larger portion of our business, there’s much of the same flexibility. On the VA side of the business, you can go with Perspective II, which has a living benefit, or Elite Access, which doesn’t. With either one, you can pick and choose funds, or a model or a managed portfolio, depending on what’s in the client’s best interest. You have the same ability with Elite Access. You have individual funds, models or managed accounts.

We want to have, as a continued theme, those advisers who want to do it themselves and those who want to outsource. They can do either at Jackson. I’ve not seen many advisers do both.

RIJ: It doesn’t sound like you’re after the most aggressive advisers, however.

Jack: We ask ourselves, how can we construct portfolios so that you miss the big fat tails, even if it means that you’ll leave some money on the table when markets are going straight up. We talk that language every single day, and we think it makes a difference. But it gets hard to tell that story. Over the past year, a properly diversified portfolio didn’t pay out big.

As a company, smoothing out returns is an important theme for us. We’re willing to walk away from those customers who are chasing returns—unless they’re just doing it with their ‘play money.’ We’re seeking clients who want a good return on a risk-adjusted basis.

RIJ: When you say ‘construct portfolios,’ do you mean at the fund level, the VA separate account level or the managed account level?

Jack: All of the above. We have funds, separate accounts and overlays. If you dissect our four major product categories [VAs, fixed annuities, fixed indexed annuities, and managed accounts], in three out of those four we allow you to construct what you want at the platform, portfolio or product level, depending on desire. People want to buy different stuff, so we offer flexibility.

RIJ: It looks like the Fed under Janet Yellen may stop buying bonds and allow bond prices to fall a bit, causing a rise in rates. What are your thoughts on that?

Jack: We’re cautious with respect to interest rates. We believe they may go up, perhaps quickly and dramatically. We want to be in a good position to give the retail investor options that are not exposed to the tail risk of a rising rate environment. We realize that equities aren’t right for all investors, either in retirement or when approaching retirement.

RIJ: That brings up the topic of fixed indexed annuities. They’re still a bit controversial. Some broker-dealers won’t sell them. Or they will only sell certain ones.

Jack: We like that business. Current returns don’t allow us to offer the benefits we’d like to offer, but that may change. If there’s a orderly rise in interest rates, you may see our FIA business participate in that.

In the early years of the FIA business, in the 1990s, we were actually number one. Then we saw a number of things occurring in the marketplace that made us uncomfortable and we chose not to participate. We gave up sales. And now we’re glad we didn’t participate. The question is, ‘Is the product in the best interest of the consumer?’ Some products are not. In parts of the retail business, the clients’ best interests are not being served.

If we weren’t the first organization to do so, we were close to the first to submit all our FIA materials to FINRA for review. We wanted a product that broker/dealers would be proud to sell alongside everything else they sell. We wanted quality disclosure. We never believed in two-tier [installment pay-out] annuities. We never believed in products that don’t have an overall consumer benefit. We’re happy to walk away from business. It’s the Jackson way. If we lose sales, so be it.

RIJ: That doesn’t seem to be a big problem at the moment.

Jack: We’ve always stayed away from discussing rankings or market share. We always said, ‘We’ll get the sales we’re comfortable with.’ We gave up market share before the financial crisis. We always said that we’d like larger sales but not to the detriment of the company.

Now we’re at the top of the heap and we’re comfortable with it because it has worked. It’s an interesting place to be. Look, it’s hard to stress insurance companies’ books of business any harder than they’ve been stressed over the last six years. In that time, we’ve had no write-downs, we have had to raise no capital, and we’ve made money every year. All of our benefits are profitable because we priced them properly.

We haven’t jumped farther up in the league tables on the fixed side because the fixed annuity market isn’t as attractive, and may never again be as attractive, as it once was. We’re much more inclined to write Elite Access business today than to take balance sheet risk with fixed annuities. If somebody leapfrogs us, if they’re more aggressive than we are, we’re comfortable with that.

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Posted on January 9, 2014 by Kerry Pechter -

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