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The QWeMA Group inks deal with The Principal, launches annuity benchmark

Posted on February 5, 2014 by Kerry Pechter -

A version of the retirement product allocation tool created by The QWeMA Group—the company that Canadian finance professor Moshe Milevsky (left) sold to CANNEX Financial in 2013—has been adopted by The Principal Financial Group for use by its career advisers and its licensed phone counselors, according to a release by The Principal this week.

Principal’s service-marked version of the tool is called the Principal Income Protector. In the past, ManuLife and its subsidiary, John Hancock Financial, as well as Pacific Life have used the software, which shows the retirement income sustainability (RIS) percentage—the likelihood that income will last for life—of various allocations to mutual funds, variable annuities with income benefits, and life-contingent annuities.

The new tool was revealed to financial professionals who attended a Retirement Income Boot Camp sponsored by The Principal, the release said. Milevsky, Ed Slott of Ed Slott and Company; and Laurie Santos, director of Yale University’s Comparative Cognition Laboratory, spoke at the event.

“The tool gives people a retirement income sustainability number. In the process, it shows them that the more sustainability they want, the more they might have to give up in terms of legacies or bequests,” Milevsky told RIJ.

As the percentage of assets that are allocated to mutual funds or deferred variable annuities or income annuities gets dialed up or down, the RIS goes up or down. “Advisers seem to be using it to determine retirement readiness more than to sell certain types of products. It can serve as the back end to whatever front-end the company wants to build,” he added.

Milevsky said he presumed that the companies licensing the QWeMA algorithm had collected data on the cost-effectiveness of using it as an advice or selling tool, but he hasn’t seen any data of that sort.

CANNEX PAY Index

Separately, the CANNEX PAY Index was introduced this week. Milvesky, who retains a financial interest in QWeMA and is research director at CANNEX, said in a release that QWeMA and CANNEX had introduced an unprecedented single-premium immediate annuity payout index.

The benchmark will provide average payouts for single male, single female and joint life annuities against which advisers and investors can compare the payouts of particular products. Along with publicizing future average annuity payouts, Cannex will use some three million separate historical annuity quotes that it has warehoused over the years to show what the index would have been in years past.

In a release, Milevsky said:

“The index is calculated using an extensive dataset of annuity payouts, tracking rates for life annuities at various ages and over time,” the release said. “Note that this isn’t another index based on periodic surveys, historical Monte Carlos or hypothetical affordability numbers. It represents live prices and I am convinced it will become the Dow Jones Industrial Average (DJIA) of life annuities.

“As you can see from the attached, the CANNEX Pay Index yield for a 70 year-old male on Wednesday January 29, 2014 , is 7.73% per year. This means that the typical payout annuity from the top ten insurance companies would provide an income of $7,730 per year for life, on a premium of $100,000. For reference, compare this against the (infamous) 4% sustainable spending rule.”

The CANNEX PAY Index fluctuates (daily) based on market and demographic conditions. CANNEX will be monitor this number and report it each month. In the near future, CANNEX will also make available to all researchers the dataset of historical annuity quotes that went into the creation of the new index.

“We wanted to create a transparent index that the major newspapers could start printing along with the Dow and the S&P 500. It’s a number that will change from week to week and month to month. It’s much more than the annuity quotes that you can get online. We took a lot of care in averaging the prices of the major insurance companies. We weighted them by market penetration. We created filters and threw out outliers. We back-created the index based on past data,” Milevsky said in an interview.

The data that’s used to create the index may also have other uses. “Cannex has a treasure trove of annuity price data that nobody had been leveraging,” he added. “We can invert annuity prices and see how long the market believe that people will live. We can compare the prices to Treasury yields to see whether insurance companies are being more or less generous. It can start a conversation. If prices go up or down, people will have an opportunity to talk about why.”

Schwab introduces all-ETF 401(k) plan

Posted on February 5, 2014 by Kerry Pechter -

If index funds are good for 401(k) plan participants, would ETFs be even better? Charles Schwab seems to think so.

Schwab Retirement Plan Services, Inc., which serves 1.3 million 401(k) plan participants, this week announced a new full-service 401(k) program in which exchange-traded funds will serve as core investments. Participants will be able to own the ETFs in a Guided Choice or Morningstar Associates managed account, or in a self-directed brokerage account, if the plan offers one.

Fred Barstein, founder of The Retirement Advisor University (TRAU), told RIJ that Schwab’s move is “Potentially important—though the real question is whether there is a significant price difference between index funds and ETFs, and will it matter in the small and mid-size market? Will the perception that ETFs are cleaner (no trading costs) than index funds be appealing? Will the greater variety be appealing?

“For most people, ETFs are excellent building blocks to capture beta within managed investments like TDFs, custom asset allocation funds and even retirement income—which is the strategy BlackRock seems to be pursuing for the DC market,” he added.

In a release, Schwab claimed to be the first major full-service provider to offer such a plan. Steve Anderson, head of Schwab’s institutional retirement business, described it as “an additional version of Schwab Index Advantage,” a program that Schwab started in 2012 to help participants “use low-cost index mutual funds and personalized advice.”

The new version has a goal of “further driving down investment costs by using low-cost exchange-traded funds,” the release said.

Schwab estimated that a 401(k) plan using index exchange-traded funds could cost 90% less than a 401(k) plan using actively managed mutual funds and 30% less than a 401(k) plan using index mutual funds.

“Several employers have already expressed strong interest in becoming first adopters of the exchange-traded fund version of Schwab Index Advantage. Given the typical 6-12 month sales and implementation cycle in the 401(k) industry, the firm anticipates clients will be offering this new version of Schwab Index Advantage to their employees later this year,” the Schwab release said.

According to the release:

“Using a patent-pending process, Schwab Index Advantage is the first 401(k) program that fully integrates exchange-traded funds as core investments within the plan, including commission-free intraday investing along with the ability to process partial share interests,” Anderson said.

“Many solutions on the market today unitize shares, batch trades, trade only once a day at a single price, or require individuals to open a self-directed brokerage account to access exchange-traded funds. “We believe a truly effective offering requires the ability to invest in and receive allocations of both full and partial shares of exchange-traded funds when the market is open, and that’s what we’ve built. Other 401(k) offerings that we’ve seen take a less comprehensive approach to including exchange-traded funds and also tend to serve smaller plans,” he added.

Assets in exchange-traded funds have grown from $66 billion in 2000 to more than $1.6 trillion at the end of 2013 according to the Investment Company Institute. “The notion by some industry commentators that these benefits should not be available to 401(k) participants reminds me of the proponents of gas lighting who, 100 years ago, argued that electricity was dangerous and unnecessary,” Anderson said in the release. He added:

“Despite the obvious benefits of exchange-traded funds, mutual fund companies that dominate the 401(k) industry have largely ignored them – simply because these companies lack either the capabilities or the will to effectively accommodate exchange-traded funds in the retirement plans they offer. Others in the industry suggest that offering exchange-traded funds to 401(k) participants will lead to over-active trading, an argument not supported by the facts.²We heard the same false argument 25 years ago when the industry began updating participant 401(k) balances on a daily basis, instead of quarterly,” Anderson noted.

Employers and their retirement plan consultants who use the new Schwab program will be able to build investment lineups from a list of 80 low-cost index exchange-traded funds in more than 25 asset categories. Providers include Charles Schwab Investment Management, ETF Securities, First Trust, Guggenheim Investments, Invesco PowerShares, iShares ETFs, PIMCO, State Street Global Advisors, Van Eck Global, Vanguard and United States Commodity Funds.

Participants will be able to use managed account programs fromGuidedChoice Asset Management, Inc. or Morningstar Associates, LLC.

The index mutual fund version of Schwab Index Advantage was launched in 2012 and includes an automatic enrollment feature and a managed account advisory service. Before the introduction of Schwab Index Advantage, only about four percent of Schwab participants elected to opt for a managed account; today, 85% do.

Schwab said it can deliver the managed account service for 45 basis points or less ($45 per $10,000 invested). With the ETF management fees, participants would pay about 60 basis points per year in fund investment costs and managed account fees. The typical expense ratio for managed account program based on actively managed mutual funds would be 90 to 140 basis points, Schwab said.

Popular FIA adds new index crediting method

Posted on February 5, 2014 by Kerry Pechter -

Security Benefit Life’s Secure Income Annuity, the second-best selling fixed indexed annuity in the first three-quarters of 2013 according to Wink’s Sales and Market Report, has added a new interest crediting option based on the Morgan Stanley Dynamic Allocation (MSDA) Index.

Secure Income Annuity offers a guaranteed lifetime income rider for 95 basis points a year. The rider includes a seven percent annual roll-up in the benefit base for the first 10 years (or until income payments begin, if earlier). The roll-up is renewable for contract owners under age 80, with the roll-up applied until age 85 or for a maximum of 20 years.

The contract offers an initial premium bonus of between 2% and 8%, depending on the state of issue. According to product literature, an early surrender may force a recapture of part of the bonus.

For the S&P 500 Index, annual point-to-point crediting method, the cap or maximum rate was 3.25% a year as of January 6, 2014. The S&P 500 monthly sum index cap is 1.60%. There’s a 10-year surrender period. The payout rate starts at 4.5% at age 55 (4.0% for joint life) and goes up by 10 basis points per year until age 90.

The Morgan Stanley Dynamic Allocation Index is described in the product literature as “a rules-based strategy that consists of equities, short-term Treasuries, mid- to long-term bonds, and alternatives,” plus cash, that are in turn made up of sub-asset classes.

Four times a month, the holdings are rebalanced, up to a fixed allocation limit for each asset class. The Index gets exposure to those asset classes and sub-asset classes by holding exchange-traded funds, which are themselves index funds that can be bought or sold throughout the trading day.

For instance, the index can hold up to 100% equities, but no more than 50% domestic, global or emerging market equities. It can hold up to 75% bonds, but no more than 20% high-yield bonds. It can hold up to 50% alternative investments, but no more than 25% gold or real estate.

“On each rebalancing selection date,” the literature said, “the index methodology is applied to determine the asset mix that had the maximum historical return with 5% annualized volatility during the prior 63-trading-day period. Over the next five-trading-day rebalancing period, the weight of each sub-asset class is adjusted from its prior level, and the new asset allocation is gradually established.”

MyRA Defies the Equities-First Rule

Posted on February 5, 2014 by Kerry Pechter -

Does the MyRA strategy contradict the investment rule-of-thumb about investing in equities when you’re young?

The default investment of the automatic-Roth IRA (“MyRA”) that President Obama ordained in his State of the Union address last week was a bond fund that mimics the Government Securities Investment Fund that’s available in federal workers’ Thrift Savings Plan.

The investment would resemble the “R-bond” that David John, William Gale and Spencer Smith described in an AARP Public Policy Institute paper in October 2012:

The R-Bond would be an account, not a specific bond. It would pay interest at a rate similar to the five-year Treasury (T-Bond), with rates set every six months. There would be no maturity date, and amounts could be added to the R-Bond account at any time.

Workers who don’t opt out of MyRAs, which are intended to be “starter” Roth IRAs, buy R-bonds with payroll deferrals (with $25 initial minimum, $5 per pay period). Contributions wouldn’t be tax deductible—which is a little strange, because Obama clearly wants to democratize the tax expenditure on retirement savings—but low- and middle-income workers can claim the Retirement Savings Tax Credit of up to $2,000. But I digress.

When the value of a MyRA account reaches $15,000, the IRA would roll over to an IRA custodian/fund company under contract with the government, or to a new 401(k) plan (if the employer decides to sponsor one) or, in the event of a job change, to a personal Roth IRA.

Wait. The first $15,000 goes into a bond fund? Isn’t that heresy?

Presumably, a lot of those MyRA owners will be young employees or first-time investors. Had they worked for a company that sponsored an auto-enrolled 401(k) plan, they probably would have been defaulted into a 2045 or 2050 target date fund. Those funds allocate up to 90% of their assets into domestic and international stock funds.

The asset allocation strategy of the MyRA accounts evidently defies the conventional wisdom, embedded in TDFs, that investors with long time horizons should invest mainly in stocks. As I understand it, the conventional wisdom is based largely on the historical outperformance of stocks vis-à-vis bonds.

Speaking as a 401(k) participant and a father, I’ve never thought that a person’s initial savings should go into equities. In my case, I waited until I’d saved about $10,000 in my 401k) before I invested in stocks. I’ve advised my grown children to do the same.

People with better credentials than mine endorse this strategy, for a variety of reasons.

What the experts say

In the Fall 2013 issue of the Journal of Retirement, Robert Arnott of Research Affiliates, LLC, wrote that “the heuristic of buying stocks when young and bonds when mature—a rule of thumb by which many billions are invested—is flawed.” One reason, he says, is that when you’re young, your account is too small for an uptick in stocks to make much difference.

On MyRA specifically, Arnott’s opinion is nuanced. “Obama’s MyRA has a few Achilles’ Heel’s, notably the fact that there’s only one investment option, which happens to offer roughly zero real interest rate, and that the enrollee has to take the initiative to sign up. Accordingly, few will,” he told RIJ in an email.

“But, you are correct that the notion that starting conservative and becoming more aggressive beats the opposite strategy, which is dominant in target dated strategies.”

Moshe Milevsky is the well-known York University professor who wrote a guide to life-cycle investing called “Are You a Stock or a Bond?” He links asset allocation to employment; people with volatile careers should hold bonds, and people with safe university or government jobs can afford to go long on stocks.

“Early on, saving $10,000 to $15,000 is much more important than the asset allocation,” he said in an email. “Having equities (vs. bonds) very early on in the process isn’t as important. Of course, eventually, you want to move them into some sort of equity exposure (if their job is safe and if they understand risk, etc.).

The United Kingdom has a new program called NEST (National Employment Savings Trust), a government-sponsored workplace savings program for the low- and middle-income workers whose employers don’t offer a plan. NEST uses TDFs, but during the initial five-year “Foundation” phase, contributions go into a low-volatility balanced fund.

NEST’s reasoning runs on the same track as Milevsky’s. “If you look at the demographics of our target group, they have equity-like human capital,” Paul Todd, NEST’s investment policy manager, told RIJ in 2012. “They’re the first people to experience redundancy [layoffs]; they may not have property [real estate] or personal savings, so there’s a lot more volatility to their human capital. That makes you think harder about what’s suitable for them.

“Our research showed that for people who don’t have diversification of resources, it’s not helpful to expose them to high levels of volatility right off the bat.” Another danger: early disappointment could discourage those people from ever risking money in the stock market again.

Employer mandate?

President Obama’s MyRA program (which has policy roots going back to 1999) has already come under some criticism. People have scoffed at the low returns on the R-bonds. But a riskier default investment would risk a backlash—just look at the criticism of TDFs after the 2008 crash—and the use of a balanced fund might have introduced administrative chores and expenses. Government bonds were clearly the safest, simplest default investment for the beta-version of a national workplace savings plan.

So far, I’ve seen only a few signs that the MyRA program will trigger the kind of backlash that exploded in 2010, after Obama included a similar if not identical initiative in his annual budget. The conservative blogosphere went ballistic with accusations that the program was government confiscation of private savings in disguise. You can find that sentiment here.

That’s just a sideshow, however. A larger potential problem is that employees will opt out. The biggest threat to the MyRA program will come from small employers (excluding the very smallest and newest firms) who resent a federal mandate to set up automatic payroll deferrals (of at least $25 to start and $5 per payday) for their employees.

“Employers that do not provide any employer-sponsored savings plan would be required to connect their employees with a payroll deduction IRA,” said the White House Fact Sheet on MyRA. A presidential memorandum on MyRA for Treasury Secretary Jacob Lew said:

“Within 90 days of the date of this memorandum, you shall begin work with employers, stakeholders, and, as appropriate, other Federal agencies to develop a pilot project to make the security developed pursuant to subsection (a) of this section available through payroll deduction to facilitate easy and automatic contributions.”

Here’s what the advocate for small businesses said last week: “Similar to the concerns with health care, where you’re trying to expand coverage, when you mandate options, you drive people to something that’s not as good as what the private market is offering,” said Aliya Wong, head of retirement policy for the U.S. Chamber of Commerce.

Of course, the point of MyRA is that the status quo doesn’t have a remedy for the fact that 87 million of America’s 120 million households have an average of less than $17,000 in investable assets. Sure, people can save without a workplace plan. But they aren’t. From a public policy perspective, MyRA isn’t a panacea—for one thing, Roth IRAs are easier to dip into and squander than 401(k)s or traditional IRAs. But it’s a start. It has already inspired Sen. Tom Harkin (D-IA) to revive his USA Retirement Funds Act. We shall see what the Treasury pilot program produces.

Quote of the Week

Posted on January 30, 2014 by Kerry Pechter -

Flight plans and financial plans seem to fly together

Posted on January 30, 2014 by Kerry Pechter -

Airline pilots tend to save aggressively and are more likely to be engaged in retirement planning than average, according to a survey by Cleary Gull, a financial services firm in Milwaukee.

Of the pilots surveyed, 80% contribute to their retirement plan, and more than half contribute 10% of salary per year. Twelve percent said they contribute more than 20%, 41% contribute 11-20%, and 20% contribute 6-10%.

Cleary Gull works with pilots from all of the major airlines. In addition to managing pilot assets, Cleary Gull offers a free asset allocation service to pilots. Many pilot have changed their plans significantly since the financial crisis due to mergers and streamlining of benefits plans.

“Most pilots have had to work longer and save more in order to reach their retirement goals,” said Bob Warner, managing director at Cleary Gull. “Many are seeking outside guidance to help them with the complexity.”

Seventy-four percent of pilots say they have a financial plan. A third of their financial plans were prepared by an advisor. The survey found that 19% rebalance their portfolio quarterly, 23% rebalance annually and 40% rebalance on an ad hoc basis. Many either work with an investment advisor (24%) or want to work with an advisor (63%).

Pilots tend to be confident in their retirement planning ability (75%). A good portion of pilots use the brokerage window (60%), which allows them to invest in individual stocks or mutual funds not included in their plan’s investment line up.

Cleary Gull surveyed 182 United and Continental pilots who are part of the legacy 401(k) retirement plans in December 2013. Cleary Gull is a leading registered investment advisor guiding client assets totaling $2.6 billion as of 12/31/13 with a focus on high net worth individuals, pilots and health care organizations.

Armenians protest mandatory national DC plan

Posted on January 30, 2014 by Kerry Pechter -

Thousands of Armenians have taken to the streets to protest the mandatory funding of the second-pillar pension system, introduced at the beginning of this year.

According to reports from French news agency AFP, approximately 6,000 protesters marched in the Armenian capital of Yerevan over the weekend to protest against the government’s controversial decision.

Since 1 January, all Armenians born after 1974 have had to transfer 5% of their salaries to newly created pension funds managed by the local subsidiaries of France’s Amundi and Germany’s Talanx Asset Management.

According to the AFP, Naira Zohrabyan, secretary of opposition party Prosperous Armenia, described the law as a “racket”, allowing the government to “get its hands into people’s pockets.”

Protesters have argued that people should be able to decide what happens to their salaries, and that any supplementary pension payment should be voluntary.

Some news sources reported that the protesters have also filed a petition with the Constitutional Court. So far, the government has made no comment on the protests or the petition.

The Bucket

Posted on January 30, 2014 by Kerry Pechter -

T. Rowe Price reports AUM of $692.4 billion

In its 2013 fourth quarter report, Baltimore-based T. Rowe Price Group, Inc., reported net revenues of $929.8 million, net income of $287.7 million, and diluted earnings per common share of $1.06.

One year earlier, net revenues were $787.3 million, net income was $232.0 million, and diluted earnings per common share was $.88 in the fourth quarter of 2012, the publicly held no-load mutual fund and 401(k) provider reported.

Investment advisory revenues for the fourth quarter of 2013 were $811.7 million, up $134.1 million from the comparable 2012 period, as average assets under management increased $101.2 billion, or 18%.

During the fourth quarter of 2013, market appreciation and income of $45.1 billion and net cash inflows of $0.1 billion lifted assets under management to a record $692.4 billion at December 31, 2013.

Annual results for 2013 include:

Net revenues of nearly $3.5 billion
Net income of $1.0 billion
Diluted earnings per share of $3.90
An increase of 16% from the $3.36 per share earned in 2012

Year-end assets under management of $692.4 billion increased $115.6 billion from the end of 2012, including $127.6 billion from market appreciation and income, reduced by net cash outflows of $12.0 billion during 2013. Net cash inflows of $10.2 billion into the mutual funds were more than offset by net cash outflows of $22.2 billion from other investment portfolios.

The vast majority of these net outflows from our other investment portfolios were concentrated among several large institutional clients outside the U.S. and intermediary clients that changed their investment objectives, repositioned their strategy allocations, or experienced investment performance challenges within their portfolio.

From an investment performance standpoint, 76% of the T. Rowe Price mutual funds across their share classes outperformed their comparable Lipper averages on a total return basis for the three-year period ended December 31, 2013, 77% outperformed for the five-year period, 82% outperformed for the 10-year period, and 71% outperformed for the one-year period.

In addition, T. Rowe Price stock, bond and blended asset funds that ended the quarter with an overall rating of four or five stars from Morningstar account for 78% of the firm’s rated funds’ assets under management. The performance of our institutional strategies against their benchmarks was substantially similar. The firm’s target-date retirement funds continue to deliver very attractive long-term performance, with 100% of these funds outperforming their comparable Lipper averages on a total return basis for the three- and five-year periods ended December 31, 2013.

Dalbar recognizes MassMutual Retirement Services statements

For the third consecutive year, the participant statements issued in MassMutual’s Retirement Services Division’s defined benefit (DB) and defined contribution (DC) plans have been recognized as a “champion” in DALBAR’s annual Trends and Best Practices in Investor Statements report.

In the recently released report, MassMutual’s DB and DC investor statements earned DALBAR’s ‘Excellent’ designation, while the firm’s DB statements garnered a first place ranking.

According to DALBAR, MassMutual’s DB and DC financial statements adhere to the 5 C’s of user-friendly financial communication:

Clarity that allows consumers to easily understand the information being provided
Content that is comprehensive, detailed and useful
Choices that empower consumers in making financial decisions to accomplish their goals
Customer Service that promotes a positive relationship with the firm
Creative Design that supports all communication with appropriate visual elements

A fiduciary standard could help RIAs get 401(k) business: TD Ameritrade

If the fiduciary standards for advisers to defined contribution retirement plans go up next summer—and the Department of Labor seems intent on it—the change could open up opportunities for registered investment advisers, who are already held to that standard.

So says the latest TD Ameritrade Institutional Advisor Survey.

But relatively few RIAs have targeted the $5 trillion DC market. According to the survey, 62% of RIAs service 10 or fewer plans and 19% work with no plans. Only 6% percent of retirement plan advisers are RIAs.

That might be changing. Half of the survey’s respondents see an opportunity to expand in the retirement business and are currently directing time and resources towards that goal. Another 19% said they don’t advise plans today, but probably will in the near future.

The U.S. retirement market is estimated at $21.8 trillion. Analysts expect it to reach $23.8 trillion by 2017.Retirement plan assets over the past five years increased at a faster pace than non-retirement assets because Americans contribute to their workplace plans with every paycheck across market cycles, TD Ameritrade said.

In addition to their familiarity with the fiduciary standard, RIAs have another potential leg-up on retirement business: half of RIAs surveyed said 10% or more of their clients are business owners, who could steer their companies’ retirement plans to RIAs. Business owners can also provide referrals.

RIAs say they have not capitalized on this opportunity for several reasons:

60% cited a lack of time or resources.
42% cited compliance and regulatory requirements.
38% said they lacked business relationships with third party administrators (“TPAs”) or recordkeepers.
30% were not sure of the opportunity.
25% said they lacked the tools needed to service retirement plans.

Half of RIAs said they would like to understand retirement plan compliance and regulation better; more than half said they want more education about the retirement market. About 58% seek referrals to third-party plan administrators and recordkeepers. More than a third would want ongoing practice management support, the survey showed.

Fidelity tops two lists of ‘top-of-mind’ retirement brands

Posted on January 30, 2014 by Kerry Pechter -

Even financial advisors who claim to focus on the defined contribution (DC) plan market still hold most of their total AUM with individual clients, according to a new study by Cogent Reports, a unit of Market Strategies International.

As a result, “their perceptions of and exposure to investment managers and DC plan providers are largely shaped by their retail relationships and experience,” Cogent Reports said in a release about its new Retirement Plan Advisors Trends report.

If that’s true, Cogent said in the release, then DC providers with strong retail businesses may be better equipped to compete for those advisors’ DC plan business. In other words, full-service DC providers would have an advantage over DCIO (DC-investment only) asset managers and recordkeeping specialists.

According to Cogent Reports, among financial advisors who manage at least $10 million in DC assets:

Only 35% report that DC plan assets comprise one-fourth or more of their total book.
Just 15% of these plan producers have $50 million or more in DC plan assets under management.

All of which helps explain the rankings on the lists below. Starting with Fidelity, these represent the ten firms that plan advisors are most likely to name when prompted to recall DC asset managers and service providers, according to the Cogent survey. These firms evidently have the most brand equity among advisers.

The message for DCIO firms and pure recordkeepers is: Think like a retailer. “Emphasize what DC plan advisors care most about: best-in-class advisor service and support, good value for the money, and strong risk management practices and fiduciary support,” said Linda York, an author of the study.

Cogent’s list of IRA destinations

Of 4,170 investors who opted-in to a recent Cogent Reports online survey and who said they have over $100,000 in investable assets and at least one “old” employer-sponsored retirement account, 9% said they were likely to roll over their old account to an IRA within the next 12 months.

That was one of the findings of Cogent’s latest Investor Rollover Assets in Motion study. One in four (24%) investors has at least one retirement plan with a previous employer where a significant portion (25%) of his/her investable assets still resides, the study also found. Separately, Cogent calculated that U.S. investors will roll over about $280 billion from employer plans to IRAs in 2014.

Investors’ criteria for choosing a rollover provider were:

Low fees and expenses.
An easy process.
Brand reputation.
Existing relationship with the financial services company.

Changing employers and retiring remained the top triggers for initiating a rollover. Consistent with previous Cogent reports, Fidelity Investments and Vanguard—two of the largest full-service retirement plan providers as well as two of the largest IRA custodians—retained their status as the top desired providers for rollover IRAs. Three firms—E*TRADE, Ameriprise and J.P. Morgan Chase—strengthened their positions among the top 10.

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.”

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