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Are You Being Served?

Posted on February 9, 2014 by Kerry Pechter -

“All the heirs hate it,” rued the paralegal at the law firm that represented the company that held the reverse mortgage on my late father’s two-story condo in a development in suburban Philadelphia. They hate getting sued, that is.

I certainly did. As I explained to the paralegal, I answered my doorbell a few weeks ago to find an officer of the law on the stoop—a stone-faced Lehigh County sheriff’s deputy wearing a Stetson and a brush moustache who, after I confirmed my identity, handed me a thin sheaf of papers, stapled in the upper left hand corner.

Underneath a cover sheet that was peppered with opaque words like “prothonotary,” I found a “Complaint in Mortgage Foreclosure.” The plaintiff was an Austin, Texas, bank that I’d never heard of. The defendant was myself, the executor of my dad’s estate.

Leafing through the “complaint,” I was momentarily transfixed when I saw the phrase, “Amount Due: $264,566.57,” but exhaled when I reached paragraph 12, which said: “Plaintiff does not hold the named Defendants personally liable to this cause of action and releases them from any personal liability.” So why was I being sued?

When one or both holders of a reverse mortgage die, the lender can’t simply seize the house. In the Commonwealth of Pennsylvania, where I live, and apparently in other states, lenders must follow the same procedures that they follow when foreclosing on a home whose owner defaulted on a regular mortgage.

That’s a consumer protection measure. In the case of an ordinary mortgage, it protects impecunious owners from summary eviction. It gives them time to seek bankruptcy protection or repair their finances. In the case of a reverse mortgage, it gives the survivors an interval in which to decide whether they want to exercise their right to sell the house and pay off the reverse mortgage. If they’re not interested in keeping the house, it also gives them plenty of time—perhaps too much time—to empty the house of a parent’s possessions.

A widower, my father died unexpectedly during a short trip to Florida in early 2013. Expecting to return home to Pennsylvania within a week, he’d left the house in casual disarray. That’s how we found it. It’s a strange experience, walking through your late parents’ home for the first time. The contour of their lives is still there, as distinct as the impression left by a head on a pillow. I also felt like an intruder—the way I felt when I would arrive home from college, find no one home and the doors locked, and have to break into my own bedroom through a window.

My brother, sister and I needed time to decide what to do with my parents’ belongings. My father had left an entire household frozen in mid-stride. A pipe rack, briar pipes and ashes. Poker chips in an aluminum carrying case. Golf clubs and best-selling books from the 1950s. Cufflinks and a fake Rolex watch. My mother’s decoupaged chairs and tables. Antiques, pictures in ornate frames, small appliances. Drawer after drawer stuffed with old letters, picture post cards, greeting cards and photographs. Sorting out all of this would take some time.

We siblings had never had a conversation with our father about exactly what would happen to the house after he died. (We’d never talked at all about his death, ever. We didn’t know much about his reverse mortgage, except that he’d used his home equity to trade up to a larger condo instead of staying in his old place and taking cash out—which turned out to be a poor idea.) After finding the reverse mortgage documents among his papers, I called the 800-number and told a phone rep that we didn’t want the house. She told me to wait for an update.

Months passed. Property taxes and maintenance fees were accruing, which made us nervous. We called the mortgage company again and were told to have patience during the foreclosure process, which was required by law and might last as long as 600 days from my father’s death.

Then I started receiving letters from bankruptcy lawyers. At first, I didn’t understand why. “Chapter 13 is an effective way to SAVE YOUR PROPERTY and put an end to the torment of debt,” said one letter. “You may be able to stop real estate foreclosure eliminate unsecured debt and keep your property by filing a chapter 13 with only $331 and no upfront legal fees.” Then one day, a few weeks ago, I found out why.

Without warning, a sheriff’s vehicle (large five-pointed gold star on driver’s door) appeared in my driveway, followed by the chime of my doorbell. After the deputy handed me the papers and drove away, I picked up the phone and called the plaintiff’s law firm to ask what this meant and what I should do. The receptionist commiserated; she had heard this story before. Many heirs become frightened when a sheriff’s deputy serves them with papers, she said. Some of them worry that their own credit rating will be in jeopardy, or that they might need to hire a lawyer.

If reverse mortgages are to gain greater respectability and popularity, this tactless procedure will probably need to change. Reverse mortgage brokers are well aware of this ham-handed process, and they don’t like it. They know it’s not helping their industry’s image. “More clients are passing and I’m seeing upset adult children getting put through the wringer afterwards,” Alain Valles, president of Direct Finance Corp. a reverse mortgage writer in Norwell, MA, told RIJ. “I’ve told fellow loan officers that we need to explain all this to borrower at the beginning of the process.

“But many clients don’t want adult children to know what they’re doing. In my own practice, we give the borrowers printed materials to give to the children. I agree 100% that the reverse mortgage industry is doing a terrible job communicating that the children have no obligation to do anything. Let’s tone down the legalized rhetoric. On the other hand, too many people automatically turn the house over to the lender.”

So there you have it. This clunky system is designed to protect the heirs from potentially losing valuable equity in the parents’ homes, and it unquestionably does. But it also leaves many others feeling rattled and blindsided. There should be a more streamlined, and more civil way for reverse mortgage companies to take possession of these leveraged properties after the owners die. Tender feelings aside, the current method, with its long limbo period, must create extra costs for the mortgage company, which they undoubtedly pass along to their borrowers.

RetiremEntrepreneur: Andrew Rudd

Posted on February 9, 2014 by Jenna Gottlieb -

What I do: Advisor Software builds analytical tools to help advisers provide better advice to their clients. We help the adviser get more clients, deliver more relevant advice to the client, and develop stronger and more collaborative relationships with clients. For example, our “goal-based” investing method helps clients identify their goals, prioritize them, and identify the optimal strategy to best fund them. I am very much a proponent of identifying the goals and aspirations clients want to achieve in life and retirement.

Who my clients are: Of the three groups in our client base, one includes the large platforms, asset managers and broker-dealers, such as Charles Schwab, Russell Investments, State Street Global Advisors, and LPL Financial, among others. We provide them with client acquisition, portfolio rebalancing, asset allocation, risk modeling and other analytical tools. The second group of clients consists of advisers, and the third are individual investors.

Why people hire me: We tend to be more willing to do custom work than our competitors. We provide customized services for each client—developing specifications, workflow and interface design—which means we spend a lot of time with them. Our product business has a strong reputation and track record. It gives clients confidence that we understand exactly how advisers use their tools. Most recently, we’ve developed a goal-based financial planning tool that significantly improves adviser productivity.

How I get paid:We’re flexible in customizing our fees depending on the client’s considerations. Some clients like to structure fees by the number of seats and type of usage. Others are interested in a flat fee.

Where I came from: I started my working life as an academic. I received a PhD in finance and operations research at UC Berkeley, where I co-founded Barra, Inc. with a colleague, Barr Rosenberg. I taught at the business school at Cornell University for a number of years, then returned to Berkeley to work with Barra. We provided services to the institutional financial community. We delivered indices, portfolio risk, performance analytics and optimization tools. In 2004, we sold Barra to Morgan Stanley. That’s when I moved full time to Advisor Software.

Why a private venture instead of academia: I was always interested in creating products. But I’m still interested in academics. I write occasionally for academic journals and I’m finishing a book with a colleague. I like to keep one leg in each camp. Both lifestyles have their advantages and disadvantages. Both provide challenges that make life interesting and rewarding.

My view on annuities: There are good and bad aspects to annuities. The key disadvantage, for the client, is the loss of control of the assets. The benefit, on the other hand, is the assurance of a lifetime cash flow. There’s clearly a use for annuities, but there’s a trade off. I don’t personally own any annuities, simply because in my present circumstances they don’t fit into my financial plan, but that’s not to say they won’t at some stage in the future.

My retirement philosophy: The success of Barra has enabled me to be aggressive in saving for retirement and investing in various philanthropic ventures. My philosophy is to have enough to last for my doddering years, to support the causes I find important and valuable and, if anything is left over, to leave it to my surviving family. (RIJ has heard through the grapevine that the British-born, squash-playing Rudd, now 66, bought a small vineyard north of San Francisco and will spend at least part of his “doddering years” pursuing a passion for wine and viticulture.)

Video: RIJ Editor at The American College

Posted on February 5, 2014 by Kerry Pechter -

The Active Ingredient

Posted on February 5, 2014 by Russell Wild -

In March of 2008, Bear Stearns introduced the first actively managed ETF, the Bear Stearns Current Yield Fund. Later that year, Bear Stearns went belly up, and the first actively managed ETF, after just months from its creation, was put to rest.

Since then, the universe of index-tracking (passive) ETFs has grown exponentially, from several hundred in 2008 to 1,480 today. Purveyors have not only endeavored to track every possible index, but they have also created their own newfangled indexes to track. In search of sales, the industry has been trying to bury the stigma of Bear Stearns and raise interest in actively managed ETFS.

And so, in the past year or two, we’ve seen the introduction of 80 actively managed ETFs. The largest, and most successful, is the PIMCO Total Return ETF (BOND), with current assets of $4 billion. The smallest is… well, the smallest may be out of business by the time this article appears.

Active ETFs have not exactly set the investment world on fire. Why? The memory of Bear Stearns may be a deterrent. ETF investors may simply have a penchant for indexing. Or perhaps ETF providers are hesitant to reveal their secret sauces to investors: ETFs, at least to date, have required much more transparency than mutual funds. (ETF managers must disclose their holdings every day; mutual funds managers disclose theirs every quarter).

But unless ETF providers find another avenue of brand-extension, they will try to sell active ETFs, as well as to lobby regulators to equalize the transparency rules.

Is this good for investors?

As you know, most academics who have studied the issue have concluded, to the chagrin of many on Wall Street, that few actively managed funds beat the indexes over the long run. It’s largely a matter of costs, which matter greatly in determining returns, as Vanguard advertisements attest.

Ah, but the new actively managed ETFs are considerably less costly than actively managed mutual funds. According to Morningstar, the average expense ratio of active ETFs is only 75 basis points, or about 60% of the average cost of actively managed mutual funds (126 basis points). If the academics were to compare passive investing with active ETF investing, indexing might not have such a clear edge.

That said, passive ETFs are similarly less costly than passive mutual funds. Passive ETFs have an average expense ratio of 60 basis points versus an average expense ratio for passive mutual funds of 75 basis points, per Morningstar. (Coincidentally, passive mutual funds and active ETFs have the same average expense ratio.)

So, to the extent that lower costs influence long-term returns, the new active ETFs, collectively, should perform better than active mutual funds, about the same as passive mutual funds, and not as well as passive ETFs.

Of course, costs aren’t the only determinant of long-term returns. The quality of management (of both active and passive funds, but especially of active funds) is also critical.

Bear Stearns’ management wasn’t very good. We’ll just have to wait and see about quality of management of the new active ETFs.

Russell Wild, a fee-only advisor in Allentown, PA, is the author of Exchange Traded Funds for Dummies, 2^nd Edition, 2012.

The federal income tax turned 100 this week

Posted on February 5, 2014 by Kerry Pechter -

The 16th Amendment to the Constitution was ratified on February 3, 1913, authorizing Congress to levy taxes on income and giving the government a replacement for the tax on alcohol—thus paving the way for the passage of the Volstead Act (Prohibition) in 1919.

“In its first two years, the [income] tax was modest, affecting only a very few citizens and provided only a small part of the government’s total revenue,” the U.S. Census Bureau reported this week. “But the need to fund our involvement in World War I moved income taxes to the center of federal finances.”

In 2011, individuals paid around $1.7 trillion in federal income tax, while state and local income taxes amounted to $114 billion in just the second quarter alone of 2013.

Half of U.S. women fear becoming ‘bag ladies’—Allianz Life

Posted on February 5, 2014 by Kerry Pechter -

Women are becoming more financially confident, but they still face major obstacles to achieving financial security. And the financial industry doesn’t fully understand their needs or how they prefer to learn about financial planning.

So says the newly released “2013 Women, Money & Power Study” by Allianz Life, a survey sponsored by Allianz Life of more than 2,000 women ages 25-75 with a minimum household income of $30,000 a year.

Despite growing confidence among women, “Irrational fears about losing it all and becoming a bag lady remain,” said Katie Libbe, Allianz Life vice president of Consumer Insights, in a release. “Some women keep a ‘secret stash’ of money that their spouse or partner does not know about, which reflects their need to protect themselves financially.”

CFOs of household. Over half of all women surveyed said they are the chief financial officers of their households and 57% say they have more earning power than their partners. A majority say they primarily handle investment decisions, research retirement ideas, handle tax preparation and teach their children about money. Nearly seven in ten (68%) saying they have increased their financial involvement since the crisis.

Few are involved in investment decisions. One in five fits the profile of women who are actively involved in major investment decisions, understand financial products well and are interested in learning more about financial matters. Such “women of influence” may have a high salary and extensive education, “but [they] are just as likely to be a stay-at-home mom who manages the family’s financial future,” explains Libbe. Seventeen percent admitted to keeping a secret stash of money their spouse or partner doesn’t know about.

‘Bag Lady’ syndrome remains. Nearly half of all women (49%) still fear becoming a “bag lady.” Single (56%) and divorced women (54%) fear it slightly more than do Women of Influence (46%). The thought of running out of money in retirement keeps nearly six in ten women (57%) awake at night. Lack of adequate savings was their top retirement concern.

Non-traditional families. Single mothers, women in blended families or same-sex couples, and women in households with multiple generations under one roof often feel too busy to address financial planning strategies. Ninety-two percent of single mothers and 80% of same-sex female couples say that their nontraditional family structure increases the need for financial awareness.

Underserved. Today’s women still feel underserved by the financial industry. Many believe financial information and materials are geared only toward the wealthy. About 20% say their belief that “financial planning is for people that have more money than me” is a major barrier to getting more involved. Sixty-two percent of women don’t have a financial professional. Of those that do, 69% do not view their financial professional as a go-to source of information on spending, saving or investing.

For more insights from the 2013 Allianz Life Women, Money & Power Study, download a copy of the full 10-page white paper at http://www.allianzlife.com/wmp.

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.

Beacon sidebar ad

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.

T. Rowe Price reports AUM of $692.4 billion

Dalbar recognizes MassMutual Retirement Services statements

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

Data Connection