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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.

Income Solutions ad

Posted on January 9, 2014 by Kerry Pechter -

In TPA merger, Retirement LLC–Series Two acquires Capella

Posted on January 9, 2014 by Kerry Pechter -

Capella Inc., a third-party qualified plan administrator (TPA) based in Sioux Falls, SD, has agreed to merge with Retirement LLC–Series Two, an independent TPA based in Oklahoma City, OK. The transaction closed on January 2.

Established in 1999, Capella is the largest retirement plan consulting organization in South Dakota. It works with financial professionals, bank trust departments, CPAs and attorneys nationwide. Dana Hagen, who acquired the firm in 2011, will join the merged company’s executive team.

“This is our third merger in the last 12 months and we have no plans to slow down in 2014,” said Robert Krypel, CEO of Retirement LLC–Series Two.

“The TPA retirement business is very fragmented and it’s challenging for smaller firms to both grow their client base and provide high service levels,” said Hagen in a release.

Retirement LLC–Series Two is a TPA and record-keeper for more than 1,600 tax-qualified retirement plans ranging in size from one to 2,500 participants. Its corporate headquarters is in Northbrook, IL. Plans include defined benefit and cash balance, defined contribution, profit sharing, 401(k), ESOP, and 403(b) plans.

Terms of the transaction were not disclosed. Wallingford Partners, LLC advised Retirement, LLC–Series Two.

Broadridge unit signs DCIO service deal with The Standard

Posted on January 9, 2014 by Kerry Pechter -

The Standard has selected Access Data, a Broadridge company, to provide DCIO reporting services to fund partners offering products on The Standard’s retirement recordkeeping platform, Broadridge Financial Solutions announced this week.

Starting in the first quarter, defined contribution investment only (DCIO) reports will be available to The Standard’s fund partners through a new technology portal designed to provide access to asset, trading and sales information at a plan level.

The new portal allows firms offering funds on The Standard recordkeeping platform to monitor sales across retirement plans and to understand the advisor selling those plans. This increased transparency “will provide mutual funds with deeper insight into the advisor-driven retirement market comprised of The Standard and other independent recordkeeping platforms” that serve small and medium DC plans, a Broadridge release said.

Defined contribution assets are forecast to grow to $6.7 trillion over the next five years, the release said. The small to medium-sized plan segment supported by independent recordkeeping platforms is the fastest growing segment for DC assets, the company said.

Access Data provides data management and reporting services for fund firms. Its DCIOConnect aggregates and “cleans” data across 18 leading recordkeeping platforms and the advisor-driven plan market.

Private pension funding level rises 18 points in 2013

Posted on January 9, 2014 by Kerry Pechter -

Higher equity values and rising interest rates pushed the overall funded status of U.S. corporate pension plans to 95.2% in December 2013, a month-over-month improvement of 1.3 percentage points and the highest level since September 2008, said BNY Mellon’s Investment Strategy & Solutions Group (ISSG).

Public defined plans, endowments and foundations benefited in December from the equity rally as well as their holdings in private equity, ISSG said.

For U.S. corporate plans, assets of U.S. corporate plans increased 0.8% and liabilities fell 0.6%, ISSG said. An eight-basis-point increase in the Aa corporate discount rate to 4.93% caused the decline in liabilities.

“The funded status of the typical U.S. corporate plan increased more than 18 percentage points in 2013,” said Jeffrey B. Saef, managing director, BNY Mellon, and head of ISSG, in a release. “It was the best of all worlds.”

On the public side, the typical defined benefit plan in December achieved excess return of 0.4% over its annualized 7.5% return target, ISSG said. Public plan assets must earn at least 0.6% each month to keep pace with the 7.5% annual target.

For endowments and foundations, the net return over spending and inflation was 0.7% as plan assets increased 1.1%. Endowments and foundations continue to be aided by the low-inflation environment, ISSG said.

Equity funds gain record $352bn; bond funds lose record $86bn

Posted on January 9, 2014 by Kerry Pechter -

Equity mutual funds and exchange-traded funds (ETFs) listed in the U.S. enjoyed a record net flow of $352 billion in 2013, nominally breaking the previous record inflow of $324 billion in 2000, according to TrimTabs Investment Research.

Of the record flow, U.S. equity mutual funds and exchange-traded funds received a net $156 billion in 2013, while global equity mutual funds and exchange-traded funds received $195 billion. For U.S. funds, it was the first net inflow since 2007 and the biggest since the record of $274 billion in 2000; for global equity funds and ETFs, the flow exceeded the previous record inflow of $183 billion in 2006, TrimTabs reported.

“Retail investors are particularly enthusiastic about non-U.S. stocks, which should make contrarians wary,” said David Santschi, CEO of TrimTabs.

“Global equity mutual funds took in $137 billion last year, which was more than seven times the inflow of $18 billion into U.S. equity mutual funds. These highly disproportionate inflows occurred even though non-U.S. stocks as a whole badly lagged U.S. stocks.”

Meanwhile, U.S.-listed bond mutual funds and ETFs redeemed a record $86 billion, nominally topping the previous record outflow of $62 billion in 1994.

“The Fed finally succeeded last year in its long-running campaign to coax fund investors to speculate. The ‘great rotation’ that some market strategists long anticipated is under way,” Santschi said in a release.

“Bond funds have suffered seven consecutive months of redemptions for the first time since late 1999 and early 2000,” noted Santschi. “Nevertheless, the outflow of $196 billion in the past seven months reverses just a fraction of the inflow of $1.20 trillion from 2009 through 2012.”

Hedge fund thrive

Hedge funds took in $17.5 billion (0.9% of assets) in November, the highest inflow in six months and the second highest in the past two years, according to BarclayHedge and TrimTabs Investment Research.

“The hedge fund industry has taken in a net $66.9 billion in 2013, a healthy turnaround from an outflow of $8.2 billion in the same period in 2012,” said Sol Waksman, president and founder of BarclayHedge. Hedge funds had net inflows in nine of the first 11 months of 2013.

Industry assets climbed to a five-year high of $2.1 trillion. “Assets are up 17% in 2013 but are still 14% below the all-time peak of $2.4 trillion in June 2008,” Waksman said.

The monthly TrimTabs/BarclayHedge Hedge Fund Flow Report said:

The hedge fund industry gained 0.8% in November, underperforming the S&P 500, which gained 3.1%.
Equity Long Only hedge funds gained 2.3%, adding to October’s 1.9% gain.
Equity Long Bias funds gained 1.6%, down from a 2.3% gain in October.
Funds of hedge funds took in $1.9 billion (0.4% of assets) in November, reversing course after redeeming $1.1 billion October.
Funds of funds added assets in just three of the past 24 months.
The hedge fund industry posted inflows in 15 of the past 24 months.

The monthly TrimTabs/BarclayHedge Survey of Hedge Fund Managers finds a plurality of managers bullish on the S&P 500’s prospects for January. Bearish sentiment is at a three-month high, while bullish sentiment is at a three-month low. Nearly two-thirds of respondents expect equities to outperform bonds and precious metals over the next six months, and a similar proportion expects developed markets to outpace emerging and frontier markets in the same period.

The latest 401(k) stats from EBRI

Posted on January 9, 2014 by Kerry Pechter -

If all 401(k) participants were a single investor, he or she would be a moderate-risk investor with an asset allocation very close to the classic middle-of-the-road portfolio of 60% equities, 30% bonds and 10% cash, according to the December 2013 Issue Brief from the Employee Benefits Research Institute (EBRI).

Highlights of the brief included:

The bulk of 401(k) assets continued to be invested in stocks. On average, at year-end 2012, 61% of 401(k) participants’ assets were invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. A third was in fixed-income securities such as stable-value investments and bond and money funds.
72% of 401(k) plans included target-date funds in their investment lineup at year-end 2012. At year-end 2012, 15% of the assets in the EBRI/ICI 401(k) database were invested in target-date funds and 41% of 401(k) participants in the database held target-date funds.
More new or recent hires invested their 401(k) assets in balanced funds, including target-date funds. For example, at year-end 2012, nearly 54% of the account balances of recently hired participants ages 20-29 were in balanced funds, compared with 51% in 2011, and about 7% in 1998. A significant subset of that balanced fund category is in target-date funds. At year-end 2012, 43% of the account balances of recently hired participants ages 20-29 were invested in target-date funds, compared with 40% at year-end 2011.
401(k) participants continued to seek diversification of their investments. The share of 401(k) accounts invested in company stock edged down to 7% at year-end 2012. This share has fallen by more than half since 1999. Recently hired 401(k) participants contributed to this trend: they tended to be less likely to hold employer stock.
Participants’ 401(k) loan activity remained steady, although loan balances increased slightly in 2012. At year-end 2012, 21% of all 401(k) participants who were eligible for loans had loans outstanding against their 401(k) accounts, unchanged from year-end 2011, 2010, and 2009, but up from 18% at year-end 2008. Loans outstanding amounted to 13% of the remaining account balance, on average, at year-end 2012, down one percentage point from year-end 2011. Nevertheless, loan amounts outstanding increased slightly from the previous year.
The year-end 2012 average 401(k) account balance in the database was 8.4% higher than the year before. That figure may not accurately reflect the experience of typical 401(k) participants in 2012, however. To understand changes in 401(k) participants’ average account balances, it is important to analyze a sample of consistent participants. As with previous EBRI/ICI updates, analysis of a sample of consistent 401(k) participants (those that have been in the same plan since 2007) is expected to be published in 2014.

RetiremEntrepreneur: Borden Ayers

Posted on January 9, 2014 by Kerry Pechter -

What do you do? I’m a principal with The Diversified Services Group Inc., a consulting and research firm focused on the financial services industry that was established in 1989. I am involved in the retirement market segment. When I joined the practice in 1996, we wanted to find a niche that was not yet a focal point for the industry. We concluded that the retirement income market was overlooked, and I focused on that. In 1997, we launched a syndicated research initiative on attitudes and perceptions about retirement income. We’ve also concluded a number of proprietary research and consulting engagements for clients on the retirement income opportunity. In 2003, we started the Retirement Management Executive Forum, or RMEF.

Who are your clients? DSG’s clients are banks, insurance companies, broker-dealers, and asset management firms. The RMEF provides a platform where representatives of our 33 member firms can meet and discuss retirement income issues. The forum meets twice a year, with about 45 people at each meeting. They tend to be executives charged with developing, implementing, and managing their firms’ retirement distribution and income market strategies. The representative may manage the business overall, or a product line specific to retirement income. Although we sometimes look at the institutional side of the retirement business, we pay more attention to the retail consumer market.

Why do they hire you? When it comes to retirement savings, the market for research and business strategy planning services is mature and the field is crowded. In retirement income, however, we were early entrants. With the RMEF, we simply want to provide a forum for structured and informative discussion about the retirement income market. We aren’t a lobbying organization, an educator or a vendor. We simply provide a forum where our clients can learn about the retirement income market and discuss the real challenges they face.

Where did you come from? Back in 1978, I started my career with a major insurance company. Initially responsible for the marketing and sale of qualified retirement plans in the Midwest, I moved to Philadelphia and eventually headed the firm’s pension, annuity, and mutual find sales. In 1994 I became the president of a regional trust company, managing the personal trust services business and the sale of financial products. After 18 years in the corporate world, I wanted to do a venture of my own and joined DSG. The firm has a bank services practice and retirement management market practice. I have four partners, all of whom come from management roles in the financial services industry, along with support staff and several strategic alliances.

What motivated you to go independent? There’s a point in corporate management life where form takes precedence over substance and one has less control over events. I decided I could have a greater impact if I was unencumbered by corporate constraints. Ownership in my own business was also a factor. I am one of five owners.

How do you get paid? The RMEF charges a nominal annual membership fee. For consulting and research, we get paid for our experience and the range of business planning and research services we provide. Client co-sponsorship fees cover our syndicated research projects. Rather than advertise the RMEF, we rely mostly on word-of-mouth and testimonials.

How do you feel about annuities? An annuity is simply a way for people to acquire their own individual pension. Unfortunately, they’re perceived negatively and they’re misunderstood. They’re tagged with labels like “use it or lose it,” “high costs,” and “annuicide,” most of which don’t apply to current versions of the product. Personally, I have owned and own annuities, principally for non-qualified tax deferred savings and to provide retirement income.

The Equities Outlook for 2014

Posted on January 8, 2014 by Ron Surz -

Part I: The Present

After feasting on the U.S. stock market’s 54% run-up from 2009 to 2010, we starved in 2011, suffering a 1% loss. Those who said the markets were due for a healthy lull turned out to be right. Stock markets both here and abroad had a good 2012 followed by a spectacular 2013, generating another 54% return in the U.S over two years.

The past five years have been among the best on record, almost erasing the memory of the five years ending 2012, as shown in the graph on the right. These past five years produced the third highest return, albeit following two of the lowest performing 5-year periods.

Although concerns about another market bubble have emerged, the graph below suggests otherwise. Even though stock prices have surged, both dividends and earnings have kept pace. Prices appear to be reasonable.

It’s useful and insightful to examine the sources of these returns. The following formula works quite well:

Return = Dividend Yield + (1 + Earnings Growth) X (1 + P/E expansion/contraction) – 1

This formula is simple yet elegant, stating that total return equals dividend yield plus sources of price change, namely the compounding of earnings growth with investor-driven changes in the price/earnings (P/E) ratio. I’ll use this formula again when we discuss the future.

The components of returns for the past two five-year periods are shown in the graph on the right. As you can see, P/E expansion and contraction has been the driving force. This component is primarily driven by investor behavior, and may well be the cause of future economic results rather than being a leading indicator of the economy.

In his 1998 book, Beast on Wall Street, Robert Haugen contends that the market crash of 1929 caused the Great Depression, as opposed to predicting it. In other words, the market drives the economy rather than anticipating it. If so, recent P/E expansion bodes well for the economy, if this expansion continues.

The big question remains: what will be the ultimate effects of quantitative easing? There’s no doubt the bond market is being manipulated and that this has a material effect on stock markets. Stock buy-backs are proliferating because money is cheap. Corporations can borrow at very low interest rates to buy their own stock, which drives up share prices. Will buy-backs continue when the brakes come off of interest rates? What forces will drive future P/E expansion/contraction? We don’t know.

America the Beautiful

The U.S. stock market has performed best, particularly in 2013, as shown in the graph below. Consequently there is a wide dispersion of performance among multi-asset managers, especially target date funds. The primary benefits of target date funds are diversification and risk control, both of which suffered on a relative basis in 2013.

The most diversified funds underperformed their U.S.-centric competitors, as did funds with rigorous risk controls. This leads to the potential for error on the part of plan sponsors, and to the hiring and firing investment managers for the wrong reasons.

Using the return components formula above, the U.S. stock market’s 2013 return breaks down as follows:

33% Return = 2% Dividend + (6.5% Earnings Growth compounded with 23% P/E Expansion)

Some styles and sectors have thrived while others have struggled. Outside the U.S. country-by-country performance varied widely. The following section examines these results.

Recent winners and losers

U.S. stocks

Growth stocks led the way in 2013, with small-cap growth stocks earning 44%. Large-cap-core companies earned “only” 23%, and large-value earned 28%. Style returns clustered around 30%, which was a pretty good place to be. This has been one of those unusual periods where the “stuff in the middle” (core) has not performed in line with the “stuff on the ends.” (I use Surz Style Pure^® classifications throughout this commentary.) Core might well outperform value and growth going forward, in a regression toward the mean.

Stocks by sector

On the sector front, consumer discretionary and health care fared best, earning more than 43%. By contrast, materials eked out a meager seven percent return, and telephones-and-utilities also lagged at 16%. Consumers led the year, in contrast to previous periods when infrastructure spending and the “Chindia” effect led the way.

Over the past five years, smaller companies of all styles have led, as have consumer-oriented stocks. The big change in 2013 was in the leadership of technology stocks, which had performed relatively well prior to 2013. Interestingly, the previous five years (2004-2008) were led by value stocks in the energy and materials sectors. The leadership of the U.S stock market has shifted dramatically.

But the interesting details lie in the cross-sections of styles with sectors, especially for those who want to exploit momentum effects, as discussed in “Part 2: The Future” below.

Stocks by region

Foreign markets earned 16.5%, lagging the U.S. stock market’s 33% return and EAFE’s 23% return. Japan and Europe earned 30% on a dollar basis. In yen, the Japan return was an even more impressive 44%. The Japanese stock market soared this year as the yen was purposely weakened against the dollar. Countries outside Europe and Japan earned less than 11%. Latin America lost 4% (all in $US).

On the style front, core surprised, as it did in the U.S. It led rather than lagged, though not by much.

Leadership in 2013 shifted to Japan and Europe from Latin America and Australia/New Zealand. Style leadership shifted from value to core. EAFE and ADRs have both underperformed. This is because smaller companies have performed best. They’ve earned 20% per year while large companies have lagged with annualized returns of 16% per year.

My 2012 Commentary indicated that Japan would become a bargain in 2013—a deep value play—and that was a pretty good call. As concerns about a weakening U.S. dollar have been allayed, at least temporarily, interest has diminished in Latin America and Australia/New Zealand.

Part II: The Future

To forecast future returns, you can use the components formula shown above. Simply plug in your earnings growth estimates and ending P/E. If 2014 turns out to be an “average” year (See yellow cell in table below), we should see a 16% loss. But returns may not be average. The purple cells highlight a band around the average and indicate a performance range from +13% to -18%. Losses are not in most forecasts for 2014. Only contrarians would predict a 16% loss.

This framework can also be used for foreign markets. Because they are currently near historical averages, their expected returns in 2014 are near norm, at plus-9%.

Despite recent market gains, or perhaps in response to them, investors have flocked to hedge funds as defensive moves. Demand for these products should increase substantially in the years ahead as the harsh realities set in. Separating the alpha wheat from beta’s chaff will always be crucial in selecting hedge funds.

The market will continue to put a premium on human intellect. We won’t pay much for exotic hedge fund betas (risk profiles). We’ll know the difference because we’ll abandon simple-minded performance benchmarks like peer groups and indexes, and replace them with the science (as envisioned in my short film, the Future of Hedge Fund Evaluation and Fees).

Forecast for 2014

In Searching for Alpha in Heat Maps, published in early April 2013, I showed how to use heat maps to profit from momentum effects. I have published my forecasts each quarter, and promised to report on their success at year-end. Here’s that report.

Momentum investing worked in 2013 for investors who went long my forecasted winners and short my forecasted losers. If you simply went long my forecasted winners, you won in the U.S. but not in foreign stocks, relative to their respective markets. If you simply went short my forecasted losers, you won in foreign stocks. The momentum of lagging segments persisted longer than the momentum of winners.

Now I’ll offer forecasts for the first quarter of 2014 using heat maps. Shades of green indiciate good performance relative to the total market. Shades of red indicate underperformance. Yellow is neutral.

A U.S. equities heat map for the year ending December 31, 2013 can be seen below. The best performing market segment comprises $45 billion (not shown) of small-cap growth companies in the industrial sector, which earned 62.9%. Small-cap growth companies in the materials sector performed worst, losing 16.7%.

Many quantitative managers employ momentum in their models, buying “green” and selling “red.” Fundamental managers use heat maps as clues to segments of the market that are worth exploring, for both momentum and reversal potential.

Using this heat map, I forecast the following domestic winners and losers for the first quarter of 2014. I’ll continue to track the results on a cumulative and quarterly basis. Let the games continue.

Similarly, the following table is a heat map for foreign stocks in calendar 2013. Health care stocks in Canada have thrived with a 61% return, while materials in Canada have suffered 33% losses.

Accordingly, my forecasts for foreign market returns in the upcoming quarter are:

Probing the Minds of Advisers

Posted on January 8, 2014 by Kerry Pechter -

If anyone knows what financial advisers are thinking about, it’s Howard Schneider, of the Practical Perspectives research firm. For years, he and collaborator Dennis Gallant of GDC Research have regularly surveyed the attitudes and practices of financial advisers.

For their newest publication, “Retirement Income Insights 2014—Using Products and Providers,” they take another deep dive into the space between advisers’ ears. The 155-page report is a result of surveys of a representative sample of 600 advisers across all individual distribution channels.

One quick takeaway: The percentage of advisers who combine annuities and systematic withdrawals (SWP) from risky assets has remained steady over years at about one-third. Most advisors still create retirement income the old-fashioned total-return way, with dividends and/or systematic withdrawal plans (SWP) from a diversified portfolio.

“Academically, there’s this agreement some people need insured or guaranteed income—an income floor—and that they can manage the rest of the portfolio as they like. But that philosophy isn’t taking hold in the field,” Schneider (right) told RIJ this week.

“If you go back five or six years, there’s been no change,” he added. “About 35% of advisors use the floor-and-upside method, about 40% use systematic withdrawals from a diversified portfolio, and about a quarter use a pool or bucket approach.”

More fundamentally, Schneider said, product manufacturers and their wholesalers continue to face the challenge of trying to mass-produce solutions for advisers and investors who resist one-size-fits-all solutions. That seems to be the beauty and the bane of the retirement income challenge, at least for manufacturers.

“Many firms trying to build an attractive advisor offering have been daunted by the highly individualized and nuanced approach to income support that most advisors employ and the wide variety of distinctions that exist among practitioners,” the study said.

“Although narrowly defined prescriptive approaches are inherently appealing to providers and distributors, these initiatives do not resonate with advisors. The reality is that the market for support remains highly fragmented, whether in the methods used for creating income, the products advisors rely on, and the providers and sources they associate with retirement income,” the Schneider-Gallant research showed.

That doesn’t mean they can’t be won over. “Every adviser is different,” Schneider told RIJ. “They all arrive at an approach by trial and error. They don’t want to change what works. And they are all confident that their clients will achieve their goals. But, while they are confident, they are looking over their shoulders and wondering if they’re doing the right thing.”

Insurance companies that issue annuities tend to be more “top of mind” than asset managers among advisers with regard to retirement income expertise, said Schneider, who is based in North Andover, Mass. But that’s to be expected, he said, because annuities are identified specifically with retirement income while mutual funds and ETFs are also used during the accumulation period.

Regarding income products, advisers continue to say that the latest products tend to be too complicated. “Advisers want their clients to be able to understand what they’re buying, but sometimes even they can’t explain the products to their clients,” Schneider said. That point is another source of frustration for manufacturers, who know that many advisers love the latest “bells and whistles.”

Instead of needing or wanting help in managing money or generating income in retirement, Schneider said, advisers want help with their blind spots, like Social Security, Medicare and long-term care insurance. That could mean that a Social Security calculator on an insurance company’s adviser web portal might attract more fee-based advisers than a pitch for annuities.

Other findings in the report, which includes 128 charts, tables and graphs, were:

Over 70% of advisors increased the number of retirement income clients they serve in the past 12 months.
Wariness over rising interest rates in the coming year is driving changes in how advisors expect to manage retirement income portfolios in 2014.
Fewer than 20% advisors are highly satisfied with retirement income support available to them from asset managers or insurance companies.
Only 10% of advisors using variable annuities for more than 50% of their retirement income clients.
About two-thirds of advisors believe yield/income, liquidity, total return, and safety or stability are the most important factors in selecting the investment products for generating sustainable income for clients.
Almost two-thirds advisors cite simplicity as a major challenge in using new products and solutions for retirement income.

The Principal to deregister as an S&L

Posted on January 3, 2014 by Kerry Pechter -

The Principal Financial Group has received the required approvals from the Federal Reserve Board to deregister as a savings and loan holding company, the company said in a release.

During the deregistration process, Principal Bank narrowed its activities to those of a limited purpose trust savings bank. Principal Bank will continue offering individual retirement accounts (IRAs) with FDIC-insured deposits.

“As a limited purpose trust savings bank, we will continue to provide our customers with the income and savings options they desire to help them prepare for retirement,” said Larry Zimpleman, chairman, president and CEO of The Principal.

Prudential in Malaysian joint-venture

Posted on January 3, 2014 by Kerry Pechter -

A newly-formed joint venture of Prudential Financial, Inc. (PFI), doing business as Pramerica, and Bank Simpanan Nasional (BSN), has bought all of the shares and paid-up ordinary share capital of Uni.Asia Life Assurance Berhad (UAL) from Uni.Asia Capital Sdn Bhd (UAC), it was announced this week.

PFI and BSN paid Malaysian Ringgit (RM) 518 million ($160 million) in cash for the UAL shares. PFI’s ownership is through a subsidiary, The Prudential Insurance Company of America (PICA), which holds 70% of the UAL shares, while BSN, a part of the Malaysia Ministry of Finance, holds the rest.

With the closing of the agreement, UAL will develop “customized solutions for BSN’s customers and develop a more integrated bancassurance platform that fully leverages BSN’s distribution network and customer base,” the firms said in a release.

UAL will also continue to sell its products through Pos Malaysia Berhad, a unit of BSN and Malaysia’s only mail services provider, and through its 1,000 retail outlets across the country.

UAL’s former parent, UAC, is owned by Gadek (Malaysia) Bhd, which engages in cultivation and marketing of rubber, oil palm and coffee and operates as an investment holding company. Through its subsidiaries, the company also engages in construction work and project management. The company was incorporated in 1978 and is based in Shah Alam, Malaysia.

Bowl games feature new Northwestern Mutual “Columns” ad

Posted on January 3, 2014 by Kerry Pechter -

Northwestern Mutual debuted new, financial planning themed advertising during the January 1 broadcast of the Rose Bowl Game on ABC. The commercial that was aired during the Rose Bowl can be viewed here.

The ads, created by Olson in Minneapolis, Minn., are the latest iteration in Northwestern Mutual’s “Columns” campaign, which began in 2010. They were directed by James Gartner (live action) and Capacity (animation), with music composed by Nylon.

The new spots “will leverage and amplify Northwestern Mutual’s multiyear partnership with the NCAA by including footage of actors portraying student-athletes as the first live-action images to appear during the animated campaign,” the mutual life insurer said in a release.

The series includes six 30-second spots that will air during the Rose Bowl, Fiesta Bowl, Orange Bowl and BCS Championship game. Other spots will feature actors portraying collegiate student-athletes playing men’s and women’s basketball, baseball, and softball.

Basketball themed ads will launch during regular college basketball season on networks such as ESPN and CBS, and continue into the NCAA Women’s Final Four on ESPN and NCAA Men’s Division I Championship airing across TBS, CBS, TNT and truTV, with this year’s 2014 Men’s Final Four airing on TBS and National Championship airing on CBS.

The ads will be supported by local sponsorships, events in key markets, and a short video series exclusively on ESPN and ESPN.com featuring current NCAA basketball coaches sharing how they help their teams plan for success.

For those 65+, work and wealth are linked

Posted on January 3, 2014 by Kerry Pechter -

Not retiring is the most reliable retirement income strategy, judging by AARP’s December 2013 Fact Sheet. The report was based on data from the U.S. Census Bureau’s March 2013 Current Population Survey Annual Social and Economic Supplement.

About one-fifth (21.6%) of the 43.3 million Americans who are age 65 or older still work full-time or part-time. They had the highest personal incomes ($44,470 average; $25,000 median) in 2012. No other sub-group came close.

More older people are working. Americans who are 65+ now get 30.3% of their income from earned income, up from 15.3% in 1990, a generation ago. This reflects their growing labor force participation. In 2000, only about one in eight (13.5%) of people age 65+ worked; In 2012, about one in five did (19%).

Those with the most income—from any source—were the most likely to be working. More than half (54.8%) of the members of the highest income quintile (with at least $43,259 in income, and a median of $65,567) had earned income. While that group also had the highest median Social Security benefits ($18,384) and highest income from pensions and savings ($30,000), their earnings (median, $50,000) was what set them apart, income-wise.

These numbers, based on quintiles and averages, paint a rough picture, of course. They fail to reveal much about the finances of the very wealthiest older Americans. But they also don’t reinforce the stereotype of idle rich with big incomes from pensions and investments. While investment income may distinguish the top 1% or 5%, employment income is still the biggest source of income for top 20%.

Though members of the top income quintile were least likely to receive public welfare assistance (less than one percent do), they were the most likely (8.2%) to receive other government transfers, such as veterans’ benefits, at a median rate of $13,200.

The older people in the lowest income quintile receive a median Social Security income of just $7,559, and only two-thirds receive it at all. Their next highest source of income for that group was public welfare, at a median of $6,000 for those who receive it. Interestingly, only 8.5% of the poorest older Americans reported receiving public welfare. Almost 10% received other types of government transfers, but their median income from that source was just $1,050 per year.

If Social Security vanished overnight, the top quintile of older Americans (income over more than about $43,000) might not miss it. It accounts for only about one-sixth of their income, according to the AARP data. But for all other older Americans, Social Security benefits represent between 45% and 86% of their incomes, on average.

The AARP data was for individuals, not couples or households. So, for some households, these income numbers could presumably be doubled.

The average and median benefit for the 36.4 million Americans ages 65+ who received Social Security in 2012 was only about $14,000 in 2012, according to AARP. The richest Americans ages 65 or older had a median income of $65,567. The income threshold for entrance to the top 20% was only $43,259. More than half (54.8%) of those in the highest income had earned income.

The AARP data doesn’t take into account the uneven dispersion of income throughout the U., or the possibility that the cost of living in low-income areas is much lower than in high-income areas. As everybody knows, it can cost a lot more to live in New York City than in rural Arkansas. In addition, many older people undoubtedly confine their needs and appetites to fit their income.

Below is a chart of income by county in the United States, provided by ArcGIS.com. The areas of darkest green have median household incomes of $82,000 or more, and a more likely to be urban. The areas of lightest brown have median incomes of $24,000 or less, and are more likely to be rural. To people who stay close to home and don’t visit a lot of different or distant zipcodes, the U.S. might appear more financially homogeneous than it actually is.

Recent winners and losers

Part II: The Future

Data Connection

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