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Managed-vol funds added to JeffNat’s Monument Advisor VA

Posted on December 6, 2013 by Kerry Pechter -

Jefferson National said it has added 23 new investment options, including managed-volatility funds, to its Monument Advisor variable annuity, which is targeted to registered investment advisors and other fee-based advisors who want to trade alternative investments on a tax-deferred basis and have no interest in living benefit riders.

Sales of Monument Advisor have exceeded $1 billion over the past 20 months, Jefferson National said in a release.

The latest additions to Monument Advisor’s 400-option fund roster include 14 investment options from American Funds. Among them are five funds that incorporate Milliman’s short-futures volatility management technique. The technique moves the hedging strategy from the insurer’s balance sheet into the fund itself, financing it with part of the shareholder’s own assets.

Additional options with embedded risk management include Federated Managed Tail Risk Fund II, and Goldman Sachs Variable Insurance Trust Global Markets Navigator Fund, a managed volatility fund. Jefferson National also added six asset allocation funds from SEI, one of the first companies to offer “Manager-of-Managers” investment programs. The last of the new funds is the Gold Bullion Strategy Portfolio from Advisors Preferred Trust.

Jefferson National cited Cerulli research showing that in five years the use of alternative strategy funds could increase more than 245%.The high turnover of such funds generates a lot of short-term capital gains tax, thereby making it advantageous to hold them within a tax-deferred variable annuity wrapper within minimal insurance costs.

The fear that a fiscally-challenged, revenue-hungry U.S. government might try to raise capital gains tax in the future is also believed to be driving sales of investment-only VAs like Monument Advisor and Jackson National’s Elite Advisor.

Aegon reduces longevity risk exposure in Netherlands

Posted on December 6, 2013 by Kerry Pechter -

Aegon has completed a second capital markets transaction to reduce its risk from future improvements in longevity in the Netherlands, the company said in a release.

The transaction is the latest step in Aegon’s strategy to open new capital markets outlets to lay off longevity risk and further strengthens its leadership in the Dutch pension market. The impact on Aegon’s earnings is limited as this transaction was done at an attractive cost of capital.

The transaction has a maturity of 20 years with a commutation covering exposures that run longer than 20 years. It covers underlying longevity reserves in the Netherlands of €1.4 billion. The transaction is the second undertaken by Aegon to reduce longevity risk in Aegon’s pension business in the Netherlands, following a longevity hedge on €12 billion of reserves completed in January 2012.

Aegon’s partners in the transaction are Société Générale in the role of intermediary and Risk Management Solutions as modeling agent. The risk is assumed by third-party investors and reinsurers, including SCOR, the world’s fifth largest reinsurer. SCOR is a €32.6 billion reinsurer operating in 31 countries, with three main business, SCOR Global Life, SCOR Global P&C and SCOR Global Investments.

Five fat years may be followed by five lean ones: T. Rowe Price

Posted on December 6, 2013 by Kerry Pechter -

Be careful, investors. The global investment environment is approaching “an inflection point.” So said T. Rowe Price investment pros at the company’s Investment and Economic Outlook event in New York recently.

Given that what goes up must come down, they suspect that the gains of the last five years—U.S. stock indices are 160% of their lows in 2009 and touching new nominal highs—won’t be matched over the next five.

“The U.S. bull market is aging,” said Bill Stromberg, T. Rowe Price’s head of equity. “International investments, especially in emerging markets, represent the best long-term value from here in fixed income and equity.”

The taper caper. Expect the U.S. Federal Reserve to reduce its bond purchases in the next three to six months, they said. The Fed will move slowly while unemployment is high, but the tapering could “lead to volatile conditions in global equity and fixed income markets.”

“The impact of political uncertainty in Washington should be less than it was this year, once we get past the January sequestration talks and the focus turns to elections,” said Alan Levenson, T. Rowe Price chief economist.

Europe and beyond. Europe’s economic recovery is still in its early stages, which could give European stocks more room to run than their U.S. counterparts. In Japan, ineffective corporate governance and dated labor and regulatory rules will hamper government reform efforts. In emerging markets, equity valuations appear to be below historical norms.

“The macroeconomic environment has transformed from an end-of-the-world scenario and fears of a Eurozone break-up to a story of improving confidence, modest recovery, and improving company fundamentals,” said Dean Tenerelli, portfolio manager of T. Rowe Price European Stock Fund.

Munis on the mend. Global fixed income markets are vulnerable to interest rate increases, but emerging market debt has potential, they said. Credit fundamentals are rising for many states and municipalities, helping U.S. municipal bonds. Revenues are increasing, due to economic improvement and tax rate hikes, and budget gaps are shrinking.

T. Rowe Price favors revenue-backed municipal bonds, especially in areas such as public utilities, transportation authorities, and hospital systems, most of which operate as monopolies within their local markets.

“Despite headlines created by the situations in Detroit and Puerto Rico, municipal bonds still provide a high-quality, time-tested way to earn tax-free income,” said Hugh McGuirk, head of municipal bonds.

“Munis have evolved away from being a predominantly interest-rate sensitive market to a more credit-driven market, which places a premium on strong internal credit research. Underfunded pensions continue to represent a critical challenge for state and local governments.”

PacLife launches fixed annuity with GLWB and roll-up

Posted on December 6, 2013 by Kerry Pechter -

On December 2, Pacific Life introduced Pacific Income Advantage, a single-premium fixed deferred annuity with a lifetime withdrawal benefit option and an annual 6% simple increase in the benefit base until any withdrawal—including a required minimum distribution—is taken, for up to 10 years.

The product, which may be unprecedented, merges the most popular annuity options with the most basic annuity chassis. It’s a little like opting for heated leather seats, turbo and a Pandora radio link in a Hyundai Accent.

In addition to the GLWB and the roll-up, the product provides the features common to multi-year-guarantee fixed deferred annuities. That includes preservation of principal, interest rate guarantees, tax deferral and a death benefit. One industry observer suggested that, from the manufacturer’s point of view, the product’s deferral bonus might be looked at as an expression of the mortality credit and the interest accrual.

The Income Advantage requires a single premium of at least $25,000, according to the manufacturer’s fact sheet. Guaranteed interest rate terms can vary from one to 10 years. The cost of the income rider is 75 basis points (a maximum of 95 bps) for both the single and joint life options. The roll-up is equal to 6% of the purchase payments received within 60 days of contract issue.

The payout rate from age 65 to 69 is 5.25% for single life and 4.75% for joint life. It’s a half a percentage point lower for those ages 59½ to 64 and a half a point higher for those ages 70 to 79. At age 80, the payouts jump to 6.75% for single life and 6.25% for joint life.

The product is a bit like a SPIA with liquidity and a lower payout. For a premium of $100,000, a 65-year-old couple could, after 10 years, turn on a guaranteed lifetime income of at least $8,400 a year (5.25% of $160,000). Exact payouts would vary by contract, depending on changes in interest rate term or interest rate at reset.

A product like this offers more liquidity and legacy value (via the death benefit) but probably less income than a deferred income annuity (DIA). A cash-refund DIA purchased by a 65-year-old couple today for $100,000 would, after 10 years, pay about $11,400 a year, according to Cannex data. Certain fixed indexed annuity contracts today would provide roll-ups as high as 8.5% for 15-year and a 6% payout for a 75-year-old couple.

Roll-ups have been a key selling point of deferred annuities with living benefits over the past five or eight years. At a time when money market funds earn less than the inflation rate, a roll-up of 5% or more looms large in the public imagination.

Indeed, anecdotal evidence shows that many if not most annuity owners (and even some advisers) perceive the roll-up is the equivalent of guaranteed growth rate. The roll-up, of course, doesn’t increase the surrender value of the contract; it merely increases the size of each payment. The manufacturer can also offset the impact of a roll-up by reducing the payout percentages.

At the end of the guarantee period of the new Pacific Life product, the owner has a 30-day window to renew at available rates without risking a market value adjustment. The product can be sold to annuitant/owners up to age 85. The option to annuitize the contract can’t be exercised after age 95.

A withdrawal charge is assessed for the length of the guarantee period, for up to seven years. For partial withdrawals over 10% of the contract value in any given year, a market value adjustment will be assessed. The product is not available in New York.

There’s a curious comment in the press release on this product. It says “Guaranteed Withdrawal Benefit annual credits increase the protected value and will be treated as earnings when withdrawn.” That’s a bit puzzling. The annual credit—the roll-up—enhances the benefit base, not the account value.

The roll-up merely increases the rate at which the client withdraws his own money; why count it as “earnings”? The point is probably moot for contracts purchased with fully-taxable qualified money, but it may be significant for contracts purchased with after-tax money.

RetiremEntrepreneur: Lou Harvey

Posted on December 4, 2013 by Kerry Pechter -

WHAT I DO: Dalbar has been characterized as a ‘policeman’ of the financial services community. There are three areas of service that we focus on. First, we’re well known for tracking investment behavior and activities related to financial services. Second, we perform qualitative and quantitative evaluations of business processes. The third area is certification. Our most closely followed report is the Quantitative Analysis of Investor Behavior, or QAIB. We do tracking reports for customer service, investor statements, websites and, most recently, for mobile devices. We’ve also issued reports covering fee disclosure, fiduciary changes, target date funds and asset allocation practices. As for our name, the ‘Dalbar’ brand name was arbitrarily invented. The name had to be unique, not offensive, not too long, not too short, easily spelled and pronounced.

WHO MY CLIENTS ARE: Our clients are, on one hand, financial institutions, and on the other hand, the advisors and suppliers to financial institutions. We work with investment firms, 401(k) record keepers, broker-dealers and insurance companies. If the company’s brand name is generally known, then it is most likely a client of Dalbar’s.

WHY PEOPLE HIRE ME: We intelligently combine quantitative and qualitative work. That’s what makes us unique. Another factor is the process that we use. In order to achieve results for clients, we have technology that brings a lot of variables into a common platform, which then arrives at an evaluation. Technology is central to what we do. Our reputation, our brand and our history also make us unique.

WHERE I CAME FROM: I was born in Puerto Barrios, Guatemala, in 1942 and then moved to Jamaica, where I received a degree in physics from the University of the West Indies. Then I moved to New York. After a couple of months I got a card in the mail inviting all those ‘interested in planning your financial future’ to a meeting. At the meeting, a man started talking about mutual funds and diversification and investment management. I was wide-eyed. I was a scientist by education and a technical person by nature. I talked to him about getting involved in the business and that’s how I got started. Dalbar was founded in 1976. I was able to fund my start-up through sufficient personal capital for the first few months, and never looked back after that. I got my spirit of entrepreneurship from my mother. She had many wise sayings, the most memorable being, “You don’t have to be rich to be independent.” As for being a person of color, it has not affected the course of my career. If I suffered from racial discrimination, I was not aware of it. If I had access to set asides or affirmative action privileges, I have never used them.

HOW I GET PAID: We sell a variety of different products. There are some studies that we do gratis. We also do studies where firms pay a fee to participate and receive a copy of the study, as well as studies that firms request. Fees for evaluations also vary. We may do evaluations for a single firm, or we may syndicate our evaluations. Our evaluations of client statements, for instance, are syndicated valuations. The third bucket includes the certifications. For that we charge a uniform fee, which is a critical part of our credibility. Everybody pays the same fee, win, lose or draw. Dalbar is a private partnership.

MY RETIREMENT PHILOSOPHY: I am having so much fun working that I won’t quit until I can’t get up in the morning. I do have a strong senior management team in place that can operate without me. There is an exit plan for the business. As for annuities, I have no objection to them. They can play a critical role in retirement. But, I personally don’t have a need for an annuity’s benefits. It comes down to personal strategy. Unfortunately, most people aren’t so lucky as me. They don’t enjoy what they do. Also, hundreds of millions of people have suffered a disservice. They’ve been led to believe that if they save 5% or 6% of their income and invest it for 45 years, they can retire at 65 years of age at some level of comfort. Most researchers know that that’s not true. People need to save three to four times as much as they’re currently saving. Instead of putting money away for comfort in retirement, people are living too high on the hog today. It’s not about moving financial chess pieces around. It’s about saving more money. That, I think, is the only solution to this retirement problem.

Four Fallacies of the Second Great Depression

Posted on November 28, 2013 by Kerry Pechter -

The period since 2008 has produced a plentiful crop of recycled economic fallacies, mostly falling from the lips of political leaders. Here are my four favorites.

The Swabian Housewife. “One should simply have asked the Swabian housewife,” said German Chancellor Angela Merkel after the collapse of Lehman Brothers in 2008. “She would have told us that you cannot live beyond your means.”

This sensible-sounding logic currently underpins austerity. The problem is that it ignores the effect of the housewife’s thrift on total demand. If all households curbed their expenditures, total consumption would fall, and so, too, would demand for labor. If the housewife’s husband loses his job, the household will be worse off than before.

The general case of this fallacy is the “fallacy of composition”: what makes sense for each household or company individually does not necessarily add up to the good of the whole. The particular case that John Maynard Keynes identified was the “paradox of thrift”: if everyone tries to save more in bad times, aggregate demand will fall, lowering total savings, because of the decrease in consumption and economic growth.

If the government tries to cut its deficit, households and firms will have to tighten their purse strings, resulting in less total spending. As a result, however much the government cuts its spending, its deficit will barely shrink. And if all countries pursue austerity simultaneously, lower demand for each country’s goods will lead to lower domestic and foreign consumption, leaving all worse off.

The government cannot spend money it does not have. This fallacy – often repeated by British Prime Minister David Cameron – treats governments as if they faced the same budget constraints as households or companies. But governments are not like households or companies. They can always get the money they need by issuing bonds.

But won’t an increasingly indebted government have to pay ever-higher interest rates, so that debt-service costs eventually consume its entire revenue? The answer is no: the central bank can print enough extra money to hold down the cost of government debt. This is what so-called quantitative easing does. With near-zero interest rates, most Western governments cannot afford not to borrow.

This argument does not hold for a government without its own central bank, in which case it faces exactly the same budget constraint as the oft-cited Swabian housewife. That is why some eurozone member states got into so much trouble until the European Central Bank rescued them.

The national debt is deferred taxation. According to this oft-repeated fallacy, governments can raise money by issuing bonds, but, because bonds are loans, they will eventually have to be repaid, which can be done only by raising taxes. And, because taxpayers expect this, they will save now to pay their future tax bills. The more the government borrows to pay for its spending today, the more the public saves to pay future taxes, canceling out any stimulatory effect of the extra borrowing.

The problem with this argument is that governments are rarely faced with having to “pay off” their debts. They might choose to do so, but mostly they just roll them over by issuing new bonds. The longer the bonds’ maturities, the less frequently governments have to come to the market for new loans.

More important, when there are idle resources (for example, when unemployment is much higher than normal), the spending that results from the government’s borrowing brings these resources into use. The increased government revenue that this generates (plus the decreased spending on the unemployed) pays for the extra borrowing without having to raise taxes.

The national debt is a burden on future generations. This fallacy is repeated so often that it has entered the collective unconscious. The argument is that if the current generation spends more than it earns, the next generation will be forced to earn more than it spends to pay for it.

But this ignores the fact that holders of the very same debt will be among the supposedly burdened future generations. Suppose my children have to pay off the debt to you that I incurred. They will be worse off. But you will be better off. This may be bad for the distribution of wealth and income, because it will enrich the creditor at the expense of the debtor, but there will be no net burden on future generations.

The principle is exactly the same when the holders of the national debt are foreigners (as with Greece), though the political opposition to repayment will be much greater.

Economics is luxuriant with fallacies, because it is not a natural science like physics or chemistry. Propositions in economics are rarely absolutely true or false. What is true in some circumstances may be false in others. Above all, the truth of many propositions depends on people’s expectations.

Consider the belief that the more the government borrows, the higher the future tax burden will be. If people act on this belief by saving every extra pound, dollar, or euro that the government puts in their pockets, the extra government spending will have no effect on economic activity, regardless of how many resources are idle. The government must then raise taxes – and the fallacy becomes a self-fulfilling prophecy.

So how are we to distinguish between true and false propositions in economics? Perhaps the dividing line should be drawn between propositions that hold only if people expect them to be true and those that are true irrespective of beliefs. The statement, “If we all saved more in a slump, we would all be better off,” is absolutely false. We would all be worse off. But the statement, “The more the government borrows, the more it has to pay for its borrowing,” is sometimes true and sometimes false.

Or perhaps the dividing line should be between propositions that depend on reasonable behavioral assumptions and those that depend on ludicrous ones. If people saved every extra penny of borrowed money that the government spent, the spending would have no stimulating effect. True. But such people exist only in economists’ models.

Use These Maps to Find Boomer Wealth

Posted on November 28, 2013 by Kerry Pechter -

In addition to the ever-growing forest of white papers and surveys that document Americans’ failure to save enough for retirement, there exists a less voluminous but more upbeat lumber pile of literature that shows how much Americans have saved. And it’s a lot—on paper at least.

Two recent surveys, one by Cerulli Associates (of 401(k) participants) and the other by the Investment Company Institute (of IRA owners) throw some fresh, crunchy numbers onto the pile.

Taken together, the two reports shed light on a pivotal question: Which type of account will most Boomers draw their retirement incomes from? Will it be rollover IRAs, 401(k)s, annuities or “All of the above”? The answer will help determine the market shares that different types of intermediaries—investment advisors, fund companies or insurance companies—are likely to enjoy as the Boomers move through retirement.

‘Evolution of the Retirement Investor’

Cerulli’s report, “Evolution of the Retirement Investor 2013,” is proprietary, but a summary is made available to the press. One of the charts, titled “Distribution of RIO Households’ Investable Assets by Investable Assets and Age Range 2012E,” is a prism that reveals the five underlying color-bands of the “ROI,” or retirement income opportunity.

What’s immediately observable is the sheer amount of money saved by households headed by people ages 55 to 69. This group of about 30 million Americans has saved about $15 trillion, of which about $6 trillion is in retirement accounts. The Cerulli data shows not only how much wealth exists in America, but also how concentrated it is.

Of the five groups that the chart encompasses, the least wealthy and most wealthy are both probably—or very different reasons—outside of the retirement market per se. The least wealthy are by far the most numerous (17.3 million) but they have average retirement savings of only $8,900 each. All but invisible to financial services companies or advisers, they will likely rely on Social Security, family members and income from part-time jobs in retirement.

At the other extreme are the 457,000 older heads-of-households who have $1.07 trillion in retirement savings, or about $2.34 million each. Because their retirement savings represent only about 22% of their total investable wealth, however, retirement may not represent a challenge or even a milestone that will drive them to seek new sources of advice or assistance.

Cerulli sees “an opportunity for independent and direct providers” in the lowest of the middle three groups. This group is large (6.3 million) and not so wealthy ($960 billion in retirement assets; $1.54 trillion in other investable assets) that its members won’t need help in trying to stretch their savings over 20 or 30 years of retirement.

This mass-affluent group is currently “underserved” by the financial services industry, the report says. The group’s retirement assets represent a big share (62%) of its total investable wealth. With average retirement savings of only $154,000, this group will be financially “constrained” in retirement. Since their longevity risk will be high, they could be potential annuity purchasers.

‘The Role of IRAs’

The Investment Company Institute (ICI) report, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2013,” looks at the IRA side of the retirement savings picture—especially rollovers. Rollover IRAs are the subject of much scrutiny these days; while nest eggs are usually laid in 401(k)s, they’re increasingly likely to hatch in rollover IRAs.

While the IRA may originally have been intended as a way for the millions of people without employer-sponsored retirement plans to save for retirement on a tax-deferred basis, it hasn’t exactly worked out that way. Americans mainly use IRAs as the default havens for the tax-deferred savings that they voluntarily or involuntarily transfer (“roll over”) from a former employer’s plan. Most of the $5.7 trillion in IRAs today came from rollovers, not from piecemeal contributions.

That’s a boon for the retirement industry. The savings that finds it way into retail rollover IRAs is available for a much wider range of investment options than savings in Department of Labor-regulated workplace retirement plans, while remaining tax-deferred. That worries the Department of Labor, which would prefer that retirement assets continue to grow in an institutionally-priced environment with a fiduciary standard of conduct.

Rollovers, which in about three out of four cases are triggered by a job change, have arguably made IRAs a much larger phenomenon than they would otherwise be. Although there’s roughly an even split between owners of IRAs with and without rollovers, there’s about twice as much money on average in rollover-funded IRAs ($173,000 vs. $90,000).

The median amount of former 401(k) money in IRAs is 70%, and 49% of IRA owners say that 75% or more of their IRA assets are rollover money, according to the ICI. The most common reason (72%) cited for executing a rollover was to preserve tax deferral—an answer that makes sense only for the 46% who said they were forced to move money out of their former employers’ plans.

IRA ownership tends to be a marker for greater household wealth and education, according to the ICI. IRA-owning households have more than double the household income and eight times as much financial assets as non-IRA households, on average. Decision-makers in IRA households are twice as likely to have a college or graduate degree.

Once people set up rollover IRAs, fewer than half seem to contribute to them in a given year—either because they are contributing to a 401(k) at work or because they are retired or because they don’t have extra money to save. (It stands to reason that, without the automatic payroll deferral of a 401(k) plan, people are less likely to contribute to a tax-deferred account.)

Retirees who have IRAs don’t seem in a hurry to dip into them unless they have to. The vast majority of IRA withdrawals are taken after age 70½, when annual minimum distributions are required to begin. Most people of RMD age withdraw the minimum amount required under tax law. Many people evidently experience the annual RMD simply as the occasion for an unwelcome tax bill, especially if they intend to reinvest the withdrawal rather than spend it.

Compare and contrast

It’s interesting to compare the answers that IRA owners and 401(k) participants gave to a question about their primary source of financial advice. Sixty percent of IRA owners in the ICI survey said a “financial adviser” was their most common source of advice on “creating a retirement strategy.” In the Cerulli survey of participants, the largest single share (26.9%) named “401(k) provider” as their primary source of retirement advice.

That might suggest that as long as people have most of their money in 401(k) plans, they’re most likely to rely on the provider’s recommendations. That might be good news for major 401(k) providers like Vanguard and Fidelity. But after a rollover, people seem more likely to rely on advisors, which would appear to be good news for brokers and financial advisers. The data isn’t definitive either way, however. Even among participants, 15.7% name “financial advisor” and an additional 8.4% name “financial planner” as their primary source of advice.

The prospect of managing the Boomers’ trillions is galanizing, to be sure. But it’s worth remembering that those are still mainly paper trillions, and the assets could deflate at almost a moment’s notice. The jury is still out on whether and by how much the sales of securities by Boomer retirees might depress market values, and whether or not the U.S. economy will be strong enough to keep security prices high in coming years.

VA Issuers Limit Inflows in 3Q: Morningstar

Posted on November 28, 2013 by John McCarthy -

The third quarter of 2013 showed modest activity. Last quarter’s “house cleaning” meant most carriers already made their impactful product adjustments. So changes to the nuts and bolts of products and structures were minimal this quarter. The biggest movement related to access to products, with AXA Equitable making a buyout offer, a group of carriers limiting subsequent payments to their products, and Jackson National expanding access by reopening the availability of living benefits for its joint life products.

Hartford continued to execute on its reallocation requirements. Several carriers including MetLife, Nationwide, and Prudential (via a cap) managed exposure by limiting subsequent payments to contracts and benefits. Carriers have a number of ways they can limit exposure. Much of the heavy lifting in this area was done last quarter via fee increases, limits to step ups, and reductions in with- drawal rates. This quarter, carriers triggered their option to limit inflows to earlier, more generous versions of contracts in order to control liability.

Low interest rates continued to put pressure on carriers and hampered any ability to ratchet benefit levels back up.

During the third quarter, carriers filed 84 annuity product changes compared to 182 product changes in the second quarter of 2013 and 106 in the third quarter last year.

Q3 Product Changes

Allianz rolled out a hybrid VA (Index Advantage). This contract costs 1.25% as a B share and has no living benefits. Funds can be invested in three subaccounts or tied to two interest crediting strategies based

on indexes from S&P, Nasdaq, or Russell. The first “protection” cred- iting strategy bumps up the account value by a predetermined percentage if the index gains value after a year. The credit percentage changes every year (it is currently 4.5%) and will never be less than 1.5%. A second “performance” crediting strategy either steps up the account value (subject to a cap) or reduces the benefit base (offset by a buffer that never changes over the contract life). Losses worse than the buffer reduce principal.

Released in July, Allianz Investment Protector is a Guaranteed Minimum Accumulation Benefit that covers a 10-year protection period and offers return of premium or, if higher, 80% of the highest anniversary value during this period. Its fee is 1.30%.

Also in July, AXA filed a buyback offer to owners of certain living benefits for the Accumulator series of contracts issued between 2004 and 2009. The buyback was executed in September. The offer
asks the client to terminate either the Guaranteed Minimum Income Benefit rider or enhanced earnings rider in exchange for a credit to the account’s value. The calculation factored in multiple values and credited an amount to the contract owner’s account.

As of September 13, 2013, and for a limited time, AXA offered an increased account value to owners of certain Accumulator
contracts who have elected the Guaranteed Minimum Income Benefit. If accepted, the Guaranteed Minimum Income Benefit, optional death benefits, and standard death benefit will terminate and only the account value will be payable upon death. Contact the carrier for details.

AXA closed the Accumulator 11.0 Series (B, C, CP, and L shares) in September.

In September, Jackson National re-released the joint versions of its living benefits after a hiatus. The joint versions of the LifeGuard Freedom 6 and the LifeGuard Freedom Flex are available again. The Freedom 6 offers an age-banded guaranteed withdrawal (currently 4.5% for a 65-year-old). The three standard step ups are available: highest anniversary value; a 6% fixed step up for 10 years of no withdrawals; or a doubling of the benefit base after 12 years. Its fee is 1.60%. The LifeGuard Freedom Flex offers an age-banded guaranteed withdrawal (currently 4.5% for a 65-year-old), and a fixed step up of 5%, 6%, or 7%—one of which is chosen by the client. The step up chosen then determines the rider fee range (from 1.35% to 1.60%). The other two step up options (highest anni- versary value and deferred benefit base) are similar to the Freedom 6.

MetLife limited subsequent payments in its GMIB Max series of riders as of August.

As of July 15, 2013, Nationwide limited subsequent payments into its lifetime withdrawal benefits (5%, 7%, and 10% Lifetime Income Options).

Principal changed the age bands on its lifetime withdrawal benefit (Guaranteed Minimum Withdrawal Benefit). The single-life version consolidated from five age bands to three. The withdrawal rate for a 65-year-old dropped from 5.25% to 5%. Principal also reduced the number of age bands on its Income Builder series (Income Builder 3 and Income Builder 10). It reduced the Income Builder 3 age bands from eight to five and from seven to four for the Income Builder 10. The withdrawal rates for a 65-year-old did not change.

Protective rolled out a new Lifetime Guaranteed Minimum Withdrawal Benefit called SecurePay 5. It offers a 5% lifetime withdrawal and two step ups: a highest anniversary value and a 5% fixed step up for 10 years. The rider has a nursing-home provision that doubles the withdrawal percentage if the contract owner is confined to a nursing home. There is also a medical-condition provision that increases the withdrawal percentage between 0.25% and 2% if the contract owner’s medical condition qualifies. The fee is 1.20%.

Prudential tweaked the withdrawal rates on its relatively new Defined Income benefit, which guarantees lifetime withdrawals now ranging from 3.35% for age 45 to 7.35% for ages 85+. A different percentage applies for each issue age between 45 and 85. Contracts issued prior to September 13, 2013 ranged from 3.15% to 7.15%, while contracts issued prior to July 15, 2013 ranged from 3% to 7%. Prudential also increased the step up to 6% from 5.5% (single and joint versions).

Prudential limited subsequent payments into some of its HD Lifetime Income benefits to a $50,000 annual maximum on additional purchase payments. The change was effective July 29, 2013 (August 8, 2013 for employer-sponsored qualified retirement plans). This applies to HD Lifetime Income, Spousal HD Lifetime Income, and HD Lifetime Income with Lifetime Income Accelerator.

Security Benefit updated its EliteDesigns. The new C share contract has 275 subaccounts including alternative asset classes and offers a return of premium death benefit. The cost is 1.45%.

SunAmerica closed the Polaris Advantage, Polaris Advantage II, and Polaris Preferred Solutions bonus contracts in the third quarter.

Pipeline

Hartford set an October 4, 2013 deadline for owners of the Director M lineup to reallocate their investments or face losing the Lifetime Income Builder rider. Contract owners are required to place a minimum of 40% of assets in fixed-income investments and a risk- based asset allocation model. This follows a first quarter cash buyout offer to owners of the Lifetime Income Builder II rider on the Director M series and the Leaders series.

As of October 25, 2013, Jackson National stopped taking applications for 1035 exchanges or qualified transfers of assets. Transactions involving contracts with living benefits will not be accepted unless they are submitted through a Jackson National affiliated broker/ dealer. The company is planning to lift this restriction beginning December 16 of this year.

Minnesota Life released a contract for Waddell & Reed. The Advisors Retirement Builder II contract carries a series of four lifetime Guaranteed Minimum Withdrawal Benefits. Each is set up with a separate fee, step up, and withdrawal percentage. The suite of benefits includes: withdrawals for a 65-year-old ranging from 4% to 5.25%; steps ups from zero to 6%; and fees from 0.45% to 1.40%. The B share costs 1.30% and offers 29 Ivy Funds subaccounts.

Transamerica is readying an O share filing. More info is to come in a future product change summary.

First you’re retired, then you’re not

Posted on November 28, 2013 by Kerry Pechter -

You’ve heard of the revolving-door syndrome. Now a “Revolving-Retired” syndrome has been identified.

According to a recent edition of The MacroMonitor, a publication of SRI Consulting-Business Intelligence, Revolving-Retired households are those with a primary head age 55 or older who has gone from full-time to part-time work, or has retired and returned to the workforce, or has retired and plans to return to the workforce. Heads of households with less than $100,000 in savings and investments and those who rely on Social Security for most of their retirement income are most likely to fit this description.

This may represent a new market niche. According to SRI-BI, “A gap exists between the products and services that financial institutions offer to pre-retired and retired households and the needs of Revolving-Retired households. As retirement evolves into a more flexible yet complicated life stage, financial services providers could benefit from understanding the multiple stages of retirement better.”

Some Revolving-Retired households, as well as households preparing for retirement, continue to support dependents; households with dependent children no doubt postponed forming families in their thirties, The MacroMonitor said.

When unemployment goes up, so does number of ‘partially-retired’

Posted on November 28, 2013 by Kerry Pechter -

Over the half-century from 1960 to 2010, the fraction of the overall white male labor force represented by “partially retired workers” rose from virtually zero to about 15% for 60-62 year olds, and the average length of spells of “partial retirement” has steadily increased.

This finding was reported in “Macroeconomic Determinants of Retirement Timing,” an NBER working paper by Yuriy Gorodnichenko of the University of California at Berkeley, Jae Song of the Social Security Administration and Dmitriy Stolyarov of the University of Michigan.

Hoping to estimate how variations in unemployment rates, inflation and housing prices affect the timing of retirement, they determined that “flows into both full and partial retirement increase significantly when the unemployment rate rises,” especially for workers close to normal retirement age.

“Workers who are partially retired show a differential response to a high unemployment rate,” they found. “Younger workers increase their partial retirement spell, while older workers accelerate their transition to full retirement. We also find that high inflation discourages full-time work and encourages partial and full retirement.” Changes in housing prices had no significant impact on retirement timing.

Harbinger details annuity sales results for fiscal 2013

Posted on November 28, 2013 by Kerry Pechter -

Major changes are underway at Fidelity & Guaranty Life, the insurer that was purchased by the Harbinger Group in the wake of the financial crisis.

In late August, FGL filed for an IPO. On November 1, the company said it would “re-domesticate” from Maryland to Iowa. This week the parent company announced its consolidated results for the year ending last September 30, including results for its insurance division.

“Operating income in our Insurance segment has performed strongly and grown to $522.9 million due to a more favorable economic environment and our solid market position,” said HGI president Omar Asali, in a release.

The firm reported these financial highlights for its insurance segment for fiscal 2013:

Annuity sales, which for GAAP purposes are recorded as deposit liabilities (i.e. contract holder funds), for fiscal 2013 of $1.0 billion, compared to $1.7 billion for fiscal 2012.
Annuity sales fell because of pricing changes and because of relatively high sales during the same period last year from the launch of new products. The pricing changes were made to maintain target profitability and target capital ratios.
Indexed universal life sales grew by 16%.
Net income was $350.2 million, up from $344.2 million for fiscal 2012. Operating income was $522.9 million, up from $159.9 million for Fiscal 2012. Bond sales and adjustments to amortization and reserves (to reflect updated assumptions related to interest rates and option costs based on the current market environment) significantly improved during Fiscal 2013.
Adjusted operating income (“Insurance AOI”) rose by $163.5 million (pre-tax), or 282.4%, to $221.4 million from $57.9 million for Fiscal 2012.
Annual changes made to assumptions about the surrender rates, earned rates and future index credits that are used in the FIA embedded derivative reserve calculation drove the increase. They caused a reserve decrease of $86.5 million during the fourth quarter of Fiscal 2013, net of related DAC and VOBA amortization and unlocking impact.
Also contributing to the increase: immediate annuity mortality gains of $36.3 million during Fiscal 2013 caused by large case deaths and the absence of an $11.0 million charge for unclaimed death benefits, net of reinsurance, recorded in Fiscal 2012 and a reconciliation of adjusted operating net income before taxes to the Insurance segment’s reported net income before taxes below.

FGL had approximately $17.4 billion of assets under management as of September 30, 2013, compared to $17.6 billion as of September 30, 2012. As of September 30, 2013, HGI’s Insurance segment had a net GAAP book value of $1.2 billion (excluding Accumulated Other Comprehensive Income (“AOCI”) of $112.9 million). As of September 30, 2013, the Insurance segment’s investment portfolio had $305 million in net unrealized gains on a GAAP basis. FGL’s statutory total adjusted capital at September 30, 2013 was approximately $1.136 billion.

On November 1, 2013, FGL announced that it would move from Maryland to Iowa to leverage Iowa’s “deep insurance talent pool, sophisticated regulatory approach to indexed products, and strong business climate.” In addition, on August 29, 2013, FGL filed for a U.S. initial public offering.

Does threat of layoffs make workers work harder?

Posted on November 28, 2013 by Kerry Pechter -

Worker productivity in the U.S. rose during the Great Recession. Although the aggregate number of hours worked fell 10.01%, output dropped only 7.16%. Social scientists wondered whether this occurred because companies fired less-productive workers or because the retained workers worked harder.

In their paper, “Making Do With Less: Working Harder during Recessions (NBER Working Paper No. 19328),” researchers Edward P. Lazear and Kathryn L. Shaw of Stanford and Christopher Stanton of the University of Utah found evidence that employees worked harder.

In a review of computer-tracked daily productivity data for 23,000 workers at a large tech company between 2006 and 2010, they found a 5.4% increase in productivity, 85% of which they attributed to employees working harder.

The tech company had operations in states with high unemployment rates, like Florida, and states with relatively low unemployment rates, like Kansas. Worker effort rose the most in areas with higher unemployment rates. Workers whose productivity had previously been below-median boosted their productivity the most.

There was little evidence that less-productive workers had left the firm. Those newly hired during the recession were 1.5% more productive than all the other workers, but their impact on total productivity was small because they made up only 30% of the workforce. They accounted for only 0.68 percentage points of the overall 5.4% boost in productivity.

The Bucket

Posted on November 28, 2013 by Kerry Pechter -

New York Life reports 2013 annuity sales

New York Life experienced strong third quarter gains in sales of life insurance, annuities and mutual funds, as well as an increase in agent new-hires in the first nine months of 2013, the company said. Career agents gathered 10% more whole life insurance premia and 11% more annuity premia in the period, compared with the same period in 2012.

For the second consecutive year, the company also reported an 8% increase in its dividend payout to participating policyholders. The total payout increased $109 million over the prior year, to $1.43 billion in 2014. The company said it has paid a dividend every year since 1854.

Individual recurring premium life insurance sales through agents were up 12% through the third quarter compared with the same period in 2012.

New York Life’s sales of single premium immediate annuities and the company’s deferred income annuity, Guaranteed Future Income Annuity, increased 17% through the third quarter compared with the same period in 2012. Total annuity sales through all channels have increased 36% compared with the first nine months of 2012, the company said.

Sales through New York Life Direct, including sales through AARP, increased by 5% over the same period last year. New York Life has been the exclusive direct provider of life insurance to AARP members since 1994 and of lifetime income annuities to AARP members since 2006.

Sales of its MainStay family of mutual funds increased by 78% to a record $22.47 billion through the third quarter, year over year. New York Life’s operations in Mexico (Seguros Monterrey New York Life) saw 10% sales growth in the first nine months of 2013, compared with the same period in 2012.

MassMutual sells record $3 billion of annuities in 2013

Massachusetts Mutual Life Insurance Company has sold over $3 billion of annuities year to date, exceeding prior full-year sales, the Boston-based company said in a release. The total reflects sales across MassMutual’s full suite of fixed, variable, and income annuities.

Sales of the MassMutual RetireEase Choice flexible premium deferred income annuity contributed to the increase, the company said. The product, which allows individuals to buy personal pensions years in advance of their retirement date, is available for direct purchase through the Fidelity Investments website.

MassMutual also attributed sales growth to its “Sound Retirement Solutions” retirement income planning framework. Based on the company’s research into the outcomes of various retirement strategies, the SRS framework shows how guaranteed income streams can help cover a retiree’s critical living expenses.

On Nov. 4, MassMutual announced that its board had approved the company’s largest dividend payout in the company’s history. The payout to eligible participating policyowners for 2014 was about $1.49 billion, up more than $100 million from the 2013 estimated payout and based on a 7.10% dividend interest rate. MassMutual said it has paid dividends to eligible participating policyowners since the 1860s.

Financial strength ratings for MassMutual (and subsidiaries C.M. Life and MML Bay State Life) are: A.M. Best Company, A++ (Superior); Fitch Ratings, AA+ (Very Strong); Moody’s Investors Service, Aa2 (Excellent); and Standard & Poor’s, AA+ (Very Strong). Ratings are as of 11/13/2013 and are subject to change.

[The dividend interest rate is not the rate of return on the insurance policy. Dividends have an investment component, a mortality component and an expense component. Dividends for any given policy are influenced by policy series, issue age, gender, underwriting class, policy year and policy loan rate and changes in experience.]

Towers Watson hires former MetLife executive Edward Root

Edward Root has been hired as a senior pension risk analyst by Towers Watson, the global consulting firm. He will join the firm’s Stamford, Conn.-based North American retirement business, which advises plan sponsors on pension plan risk management strategies.

Root had been vice president and head of U.S. pensions at MetLife, where he was responsible for its multibillion-dollar pension risk transfer annuities business. Previously, he was a senior vice president and actuary at Transamerica. Root began his professional career as a pension actuary at Towers Perrin.

Root received a B.S. degree in mathematics from California State University at Sonoma and an M.B.A. in finance from the University of Southern California.

Jackson National notes rising sales of Elite Access VA

Jackson National Life, a unit of the U.K.’s Prudential plc, reported sales and deposits of $20.7 billion in the first nine months of 2013, up 5.4% year over year. Total sales included $15.5 billion in variable annuity sales, the company said in a release.

The $15.5 billion (up from $15.3 billion in 2012) included almost $3 billion in sales (up from $630.1 million in 2012) of Elite Access, a VA designed for tax-deferred investment in alternatives for accumulation. Sales of Perspective variable annuities, which offer lifetime income benefits, dipped.

Jackson’s sales of fixed index annuities totaled $1.3 billion, up from $1.2 billion in the first nine months of 2012. Fixed annuity sales were $679.6 million, down from $713.5 million in 2012.

In the first nine months of 2013, Jackson issued $1.1 billion of institutional products, up from $440.5 million in the first nine months of 2012. Jackson participates in the institutional market (guaranteed investment contracts, medium-term notes and funding agreements) on “an opportunistic basis.”

Curian CapitalLLC, Jackson’s asset management subsidiary, generated deposits of $2.1 billion during the first nine months of 2013, up 11.1% over 2012. Assets under management in Curian’s core business increased to $10.3 billion as of September 30, 2013, up from $8.9 billion at year-end 2012.

As of November 13, 2013, Jackson had the following strength ratings: A+ (superior) from A.M. Best, AA from Standard & Poor’s, AA from Fitch Ratings, and A1 from Moody’s Investors Service Inc.

Fidelity 401(k) plan accounts now average $84,300

This year’s rising stock market has helped boost the average balance in 401(k) plan accounts provided by Fidelity Investments to a record $84,300 at the end of the third quarter of 2013, an increase of 11.1% from a year prior, Fidelity said in a release.

Employees who were continuously active in their 401(k) plan over the last 10 years saw their average balance rise 19.6% to $223,100 during the past 12 months. For pre-retirees age 55 or older who have been active in their plan for 10 years or more, the average balance is $269,500.

Fidelity also found that one in three participants now uses a professionally managed investment option, such as a target date fund or a managed account.

At the end of the third quarter of 2013, one third (33.1%) of 401(k) participants overall and 55% of “Gen Y” participants (aka “Millennials” under age 30) had all of their plan assets in a target date fund.

Fidelity has seen a more than three-fold increase in the portion of plan sponsors offering managed accounts to their employees since the third quarter of 2009 and in the number of participants using them. Assets in retail managed accounts have more than doubled since then.

Fidelity offers “Plan for Life,” which furnishes advice to plan participants via phone, web, smartphones or tablets and in person.

Guardian declares dividend for life policyholders

Guardian Life Insurance Company of America announced that its board had approved payment of $776 million in dividends to the company’s individual life policyholders in 2014. The dividend interest rate will be 6.25% in 2014, the company said in a release.

Quote of the Week

Posted on November 21, 2013 by Kerry Pechter -

Asia’s appetite for alternatives on the rise: Cerulli

Posted on November 21, 2013 by Kerry Pechter -

Growing appetite for alternative investments will likely drive institutional outsourcing across Asia, according to Cerulli Associates. This could spell good news for managers that offer alternatives as options in variable annuity products.

In a new report, Institutional Asset Management in Asia 2013, Cerulli forecasts that total assets in the region will continue to grow between 2013 and 2017 and hit $17 trillion by 2017. Private equity, commodities, hedge funds, and other alternative investments could play a large role in that.

The report, which examines Asia’s institutional landscape and outsourcing opportunities for external managers, found that allocations to alternatives still remain small at most institutions, often accounting for less than 10% of their overall portfolios. However, these allocations are said to be increasing steadily.

Investable assets of Asian institutions topped $10 trillion for the first time in 2012, rising 9.6% year-over-year. Stronger increases are expected from Southeast Asia, as institutions in those markets are relatively underdeveloped and are growing their assets from low bases.

“Managers that start engaging institutions early, even when the latter are not ready to allocate to alternatives, will stand a better chance of winning mandates when an institution is ready to invest,” says Cerulli senior analyst Chin Chin Quah, an author of the report.

Additionally, deregulation is welcome news to some institutions. China has been at the forefront with a series of deregulations, especially for insurers. This past June, insurers have been allowed to set up fund management units to offer mutual funds to retail and institutional investors.

Indexed annuity sales soar in 3Q 2013

Posted on November 21, 2013 by Kerry Pechter -

Indexed annuities had record-breaking sales for the third quarter at $10 billion. Indeed, production was up more than 9% when compared to the previous quarter, and up more than 15% when compared with the same period last year, according to Wink’s 65^th Sales & Market Report.

Allianz Life prevailed as the leading issuer of indexed annuities with a 12.91% market share, while Security Benefit Life and American Equity maintained their positions as the second and third-ranked companies in the market. Great American and Aviva rounded out the top five, respectively.

Wink’s report consisted of 42 indexed annuity carriers, representing 98.4% of indexed annuity production.

Indexed life sales came in at $328 million for the third quarter with 48 insurance carriers participating in the ranking, representing 95.1% of production.

Pacific Life maintained its leadership in indexed life sales, with a 13.51% market share. Aegon came in second place in the market, while AXA Equitable, National Life Group, and Minnesota Life rounded-out the top five companies, respectively.

Allianz Life launches Signature 7 FIA, a companion to Core Income 7

Posted on November 21, 2013 by Kerry Pechter -

Allianz Life has launched the Signature 7, a fixed indexed annuity with three index options—the S&P500, the Russell 200 and Barclays U.S. Dynamic Balance Index—as well as a fixed interest option. There’s a seven-year surrender period.

Signature 7 offers an annual reset that locks in earned interest each year. The annuity is available to Allianz Preferred broker-dealers, insurance marketing organizations. It is approved in 41 states.

This is an accumulation stage product, not an income product. Like most FIAs, it’s designed for retail investors who are looking for a safe return that’s higher than they can get from fixed income products. Although the product is described as intended for broker-dealers, the seven-year surrender period may be longer than many broker-dealers would like to sell.

The Signature 7 offers a monthly sum crediting strategy and a spread of 1.7% on the Barclays index. Any return above 1.7% will be credited to the policy on the anniversary in this index.

The new product complements Allianz’s recently launched Core Income 7 annuity, which has a guaranteed lifetime withdrawal benefit option. With the Signature 7 annuity, a policyholder must annuitize to receive lifetime income.

A model for investing Social Security funds in stocks

Posted on November 21, 2013 by Kerry Pechter -

Some observers have suggested investing a portion of Social Security trust fund assets in equities. An existing retirement plan for railroad workers offers a model for how that might be done, according to a new brief from the Center for Retirement Research at Boston College.

The Railroad Retirement program, which holds $23 billion in assets, bears some similarity to Social Security. An act of Congress in 2001 allowed the railroad fund to start investing in equities, and the fund has encountered and overcome some significant risks associated with equity management since then.

The Social Security trust, which currently holds $2.7 trillion in U.S. Treasury obligations, would need to accomplish two things to follow the Railroad Fund’s lead, according to the brief, written by CRR research economist Steven A. Sass.

The Railroad Fund implemented an automatic mechanism to respond to financial shocks. It adjusts the amount of payroll taxes dedicated to the plan based on whether the pension fund’s total assets are up or down. Social Security could create a similar mechanism, according to the brief.

“The Railroad Retirement ratchet adjusts tax rates based on the ratio of Trust Fund assets to annual benefit outlays, averaged over the previous 10 years. The adjustments are designed to keep that ratio within a target band of four to six times outlays. The ratchet raises taxes should the ratio fall below four, and cuts taxes should it rise above six. These adjustments are based on the slow-moving 10-year average of the ratio of assets to outlays because both management and labor sought to avoid sharp year-to-year changes in tax rates,” the brief said.

To limit politically motivated meddling in their fund, the railroads established a trust independent of Congress, the National Railroad Retirement Investment Trust. Social Security could do something similar. To limit manager risk, the Social Security trust could “specify the share of Social Security assets to be invested in equities, say 40%, and then direct those assets to be invested in a broad market index, such as the Russell 3000 or the Wilshire 5000,” Sass wrote.

Net VA flow ebbs to $1.5 billion in 3Q 2013: Morningstar

Posted on November 21, 2013 by Kerry Pechter -

If the variable annuity market were a large dance hall, you might see a dynamic confusion of sweaty couples streaming on and off the crowded floor, some spinning to the music under the glitter ball and others flopping into folding chairs along the wall.

Some are changing partners. A few have slipped out the fire exit for a change of scenery, or headed home. The dancers number almost the same as always—but a subtle ennui in the air suggests that this venue is no longer the hippest in town.

Or, to dispense with obsolete metaphors, you could say that the variable annuity sales statistics for the first three-quarters of 2013 are contradictory and difficult to interpret. Assets under management reached an all-time high. But net flows have reached what may be a 10-year low. Publicly held companies still dominate this market, but they’ve played musical chairs with the top-ten list.

“Shifts in market share this year have been massive,” wrote Morningstar VA analyst Frank O’Connor in his third quarter and year-to-date sales report, issued yesterday. “Former market leaders Prudential and MetLife were down a whopping 44.3% and 37.1%, respectively,” while Lincoln National sales were up 47%, SunAmerica/VALIC (now American General) was up 34.8%, AEGON/Transamerica was up 59%.

Jackson National, which has diversified its VA offerings with the no-living-benefit Elite Access product, was the top seller by a large margin, with $5.2 billion for the quarter and $15.5 billion for the year. Relative to 2012, Elite Access sales have risen more than four-fold so far this year, to $2.77 billion.

Despite the ongoing turmoil in the industry—evidenced by the departures, the de-risking, the dropouts, the buy-backs and the launch of complex structured or buffered products—consumers and advisers are still evidently looking for an all-weather retirement income tool. By no means have they abandoned variable annuities.

In the third quarter of 2013, gross new sales were $34.7 billion, down 5.9% from the previous quarter ($37 billion) and down 3.2% from the year-ago quarter ($35.9 billion). Through the first nine months of this year, sales totaled $106 billion, a 3.1% drop from the same period in 2012. “Absent a significant bump in sales activity in the fourth quarter, full year 2013 sales are expected to be down 2-3% from 2012 sales of $143.4 billion,” O’Connor wrote.

Although sales were slightly down on an industry basis, the shifts in market share this year have been massive. Former market leaders Prudential and MetLife were down a whopping 44.3% and 37.1%, respectively, as those carriers put the brakes on VA sales. The net flows figure was extremely low, at about $1.5 billion in the third quarter and $4 billion for the year so far. But Morningstar characterized the net flow as surprisingly good, given the cash drain from older and/or run-off blocks (like Hartford’s) and from group annuities like TIAA-CREF.

“Though low, net flow remains in positive territory despite the heavy bleeding, which is no mean trick and in some respects perhaps a blessing in disguise to the extent the cash outflow represents a reduction in risk assets,” Morningstar noted.

Sales of variable annuities without income benefits, which are sold for the long-term benefits of tax deferral and tax-deferred trading, were strong in the third quarter. With or without living benefits, variable annuities are still the only product where an investor can put virtually any amount of after-tax money for tax-deferred growth.

“Jefferson National’s Monument Advisor, a flat fee product aimed at the RIA market, has seen quarterly sales almost double in the past year. Jackson National’s Elite Access VA, focusing on alternative based investment strategies and offering no benefit guarantees, has nearly tripled quarterly sales in the past year. Another example is Midland National’s LiveWell VA, where sales, while small in the context of the product sales of major players, increased almost 500% in the third quarter relative to the 3rd quarter of 2012,” Morningstar said.

Most of the traditional variable annuity sales leaders or their parents have been stock companies: AXA, AIG (American General, SunAmerica/VALIC), AEGON/Transamerica, Jackson National (Prudential plc), Lincoln National, ManuLife (John Hancock), MetLife and Prudential Financial. ING, AEGON/Transamerica. Nationwide, ranked 13^th in VA AUM, was a stock company but went private.

That makes sense, because their shareholders expect equity-like gains and the only way to get those is by taking risks—which in the 2000s meant equity-linked insurance products. Now that they’ve been whipsawed by equity volatility and an interest-rate drought, it’s not yet clear where they will look next for strong profits.

Not every stock company jumped on the VA bandwagon. Principal (which has less than $8 billion in VA assets under management), Protective, Genworth Financial, and Allianz Life of North America, either purposely chose to stay out of the business of writing puts on the equity markets or just decided to focus on other businesses. Nationwide has

The big mutual companies make up most of the second-ten leading VA issuers. Members of this group include Pacific Life, Thrivent Financial, New York Life, Ohio National, Northwestern Mutual, Minnesota Life, Massachusetts Mutual and Guardian. Together, they sold roughly as much VA product in the third quarter as Jackson National, the distant leader, sold alone.

More than two-thirds of variable annuities sold are of the B-share type, which carries an up-front of commission of 5% or more for the intermediary. Many sales were driven by both rich customer benefits and rich advisor incentives, and the risks as well as the direct cost of sales was high.

The issuer earns back the commission through the mortality-and-expense risk fees paid by the contract owner at least through the surrender period. Those fees may be tied to the account value, which is tied to the stock market, which makes the issuer dependent on steady or rising equity values both to fund the income guarantee (especially if deferral bonuses are promised) and to recoup the deferred acquisition costs (DAC). When equity values dropped in 2008, companies had to set aside higher reserves for potential losses on DAC.

Variable annuity issuers now face the challenge of trying to offer new equity-linked insurance products with lifetime income benefits to Boomers without exposing themselves again to high levels of market and longevity risk. They’re doing that by requiring the investor to share the market risk, often by requiring investors who want living benefits to allocate their premiums to low-volatility mutual funds.

These new risk-shared variable annuity products may in fact sell in significant quantities to Boomers, who will remain amenable to combo-products that offer downside protection and upside potential. But a return to the VA sales boom of the mid-2000s would probably require a return to the peculiar naïveté of the mid-2000s—which doesn’t seem likely anytime soon.

A Fool for a Client?

Posted on November 21, 2013 by Kerry Pechter -

Jerry Schlichter, the St. Louis plaintiff’s attorney whose multi-million-dollar federal class action lawsuits have revealed the vulnerability of 401(k) plan sponsors and providers to “excessive fee” complaints, has struck again.

In this case, the plan sponsor and the full-service plan provider is MassMutual.

The complaint was filed in U.S. District Court in Boston on November 5. The plaintiffs are participants in the MassMutual Thrift Plan, a 14,800-member, $1.7 billion group annuity. The defendants are members of the plan’s Investment Fiduciary Committee and Plan Administrative Committee, as well as Mass Mutual CEO Roger Crandall.

Excessive fees are at the heart of the complaint, as they have been in Schlichter suits against Fidelity, Ameriprise and CIGNA. The suit charges, in essence, that MassMutual enriched itself at the expense of the participants by hiring its own Retirement Services division to steering their savings mainly into MassMutual funds (and a guaranteed-return fund in its general account) when the company should have, as a plan sponsor and a fiduciary, made less expensive, non-proprietary options available.

If you love irony, this almost seems like a case of people suing themselves for moving too much money from one pants pocket to another. On the other hand, it’s hardly a laughing matter.

The defendant in this case, as in a recent Schlichter case against Fidelity, is both the plan provider and the sponsor. Depending on how you choose to look at it, MassMutual’s plan either chose to eat its own cooking or, alternately, it compelled its employee-participants to shop at the company store.

What was business-as-usual yesterday is apparently actionable today. (The fact that the MassMutual Thrift Plan is a “group annuity” isn’t necessarily significant, we are told. According to the complaint, the return on the plan’s fixed interest account assets is set for six months at a time; otherwise, the plan has no insurance features. The lawsuit specifically questions an 85-basis point risk charge on assets in the fixed interest account.)

ERISA aficionados are tracking the story. On his blog, Tom Clark, an ERISA consultant (and former Schlichter law firm attorney) didn’t take sides; he called the suit a wake-up call for customers of MassMutual Retirement Services:

“Plans that use MassMutual as a provider or advisors who recommend MassMutual services and products… should use this as an opportunity to review your plan’s relationship with MassMutual.

This is only a complaint and no one can predict with any certainty how it will turn out. But that being said, if any of the specific allegations found in the complaint could apply to your plan, you have now been put on notice to investigate.

This can include asking for more information, re-reviewing your 408(b)(2) disclosures and agreements, or benchmarking your plan’s fees. These tasks should obviously focus on analyzing any investments in your plan and ensuring that any fees paid are reasonable and necessary.”

The complaint accuses MassMutual of layering extra fees on top of the fees charged by fund subadvisors, that its funds weren’t as inexpensive as Vanguard’s, and that MassMutual was charging its own participants more than MassMutual charged outside institutional clients.

Vanguard appears in the role of curve-wrecker in this lawsuit. The plaintiffs compare the costs of MassMutual’s target date fund offerings unfavorably to similar Vanguard products, with the former costing up to 85 basis points but the latter costing as little as 17 bps.

(But that comparison may be a case of apples-and-oranges. According to Morningstar, MassMutual’s TDFs are either partly or entirely actively managed, while Vanguard’s are mainly or entirely funds-of-index-funds. The federal judge in this case may end up deciding whether the added expense for active management is “reasonable” in the context of an ERISA retirement plan.

[BrightScope gives the MassMutual Thrift Plan a rating of 74 out of 100; that’s above the peer group average but well below best-in-class. Morningstar notes that MassMutual’s retail TDFs are on the pricey side.]

If nothing else, this case suggests that, like the person who serves as his own lawyer and has a fool for a client, a full-service plan provider might think twice before hiring itself to be the provider for its own corporate plan. Even when intentions are impeccable, questions about self-dealing can’t help but arise. As for intentions, the plaintiffs go for the throat by alleging that the MassMutual CEO directly profited, via bonuses linked to MassMutual’s bottom line, from the economics of the plan.

The stickiest wicket in the complaint may be the charge that participants were paying for plan expenses even though the “Plan document” states “that all expenses of establishing and administering the plan including expenses with respect to the group annuity contract and fixed income agreement shall be borne by the employer as a further contribution to the plan.” If true, this alludes to a broader question that the 401(k) system as a whole has yet to answer: What to tell the millions of participants who believe their plans are “free”?

New York Life reports 2013 annuity sales

MassMutual sells record $3 billion of annuities in 2013

Towers Watson hires former MetLife executive Edward Root

Jackson National notes rising sales of Elite Access VA

Fidelity 401(k) plan accounts now average $84,300

Guardian declares dividend for life policyholders

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