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Vanguard consolidates three managed payout funds into one

Posted on November 7, 2013 by Kerry Pechter -

The same low interest rate environment that has forced annuity issuers to reduce their payout rates has also affected the world of payout mutual funds, as evidenced by Vanguard’s recent decision to consolidate its original three payout mutual funds into one fund that pays out at a target annual rate of just 4% of the account value, down from its previous 5%.

The $804 million Vanguard Managed Payout Distribution Focus Fund and the $110 million Vanguard Managed Payout Growth Focus Fund will merge with the $531 million Vanguard Managed Payout Growth and Distribution Fund to create the $1.45 billion Vanguard Managed Payout Fund. The merger is expected to be complete by January 2014. Investors in the phased-out funds will become investors in the consolidated fund.

The new fund-of-funds will allocate its assets across Vanguard funds that invest in stocks, REITs, bonds, cash, inflation-linked investments, and selected other exposures, such as commodities and market-neutral investments.

“Vanguard research indicates that a 4% payout offers a higher probability of providing a stable income stream that can be sustained over the 20-30 year retirement period of the typical retiree,” the company said in a release. The payouts consist of earnings and, if earnings fall short, they will be topped up with a return of principal. The funds aren’t guaranteed against loss of principal or against the risk that the owner might outlive the payments.

Vanguard originally launched the three funds to offer Vanguard investors a way to supplement their retirement income that was more structured than pure systematic withdrawal but not insurance-based. Each fund featured specific payout and principal objectives. Promoting payout funds makes sense for Vanguard, which has a much bigger stake in mutual funds than in annuities. Although Vanguard distributes white-label annuities that are issued by life insurance partners, it doesn’t own an insurance company. Vanguard competitor Fidelity Investments also offers managed payout funds.

Since the 2008 launch of the first managed payout funds, market conditions have not favored the concept. “The funds have faced challenges in meeting their objectives, given a financial market environment marked by a prolonged period of historically low bond yields,” said the release. “The funds also encountered difficulties gaining investor acceptance and understanding, given that the managed payout concept is relatively new, coupled with the complexity of the funds’ strategies and payout formulas.”

The Bucket

Posted on November 7, 2013 by Kerry Pechter -

What middle-class retirees like/don’t like about Obamacare

The Affordable Care Act’s elimination of pre-existing condition exclusions, provision of free annual Medicare check-ups, and initiatives to cut Medicare costs are the aspects of the new health care law that middle-income U.S. retirees like best, according to a survey by Bankers Life and Casualty Company Center for a Secure Retirement.

Just over half (52%) of retirees surveyed disliked the law’s so-called personal mandate—the requirement that individuals own health insurance or pay a penalty, the survey showed. A nationwide sample of 800 retired Americans ages 55+ with annual household incomes of $25,000 to $75,000 participated in the internet-based survey.
Only about half of middle-income retirees say they understand how the ACA affects them. Women are the least familiar with “Obamacare”. Three times as many women do not feel confident in their understanding of ACA as compared with those who say they understand how the law affects them (56% to 17%, respectively).

Two aspects of the ACA that affect retirees are not well understood by retirees. One in six (18%) retirees doesn’t know that ACA caps health insurance premiums for older people relative to rates for younger people. The same percentage doesn’t know that ACA the “donut hole” in Medicare Part D prescription drug coverage.

Retirees and insurance exchanges

Nearly one-fourth (23%) of middle-income retirees say they retired for personal health or disability reasons, suggesting that they will need the ACA until they reach age 65. Of the 27% of middle-income retirees ages 55 to 64 who don’t receive any type of government insurance coverage, 15% have purchased their own private health insurance policy and 12% don’t currently have health insurance.

A slightly greater total percentage of retirees ages 55 to 65 find themselves as potential beneficiaries of the state health insurance exchanges than the percentage of the working population. More than four in ten (42%) middle-income retirees ages 55 to 65 say they either have or will investigate the cost of health insurance through an exchange.
The research for this report was conducted in September 2013 for the Bankers Life and Casualty Company Center for a Secure Retirement by The Blackstone Group conducted the research for the report for Bankers Life in September 2013. The full report is online at CenterForASecureRetirement.com. All survey participants had heard of the Affordable Care Act (Obamacare) and were not enrolled in Medicaid.

New York Life claims dominance in SPIA and DIA markets

New York Life said in a release this week that it has a 33% share of the U.S. market for fixed immediate annuities and a 44% share of the market deferred income annuities, according to LIMRA.

According to the company, its overall income annuity sales rose 13% in the first half of 2013 over the same period in 2012. This year is the first time that deferred income annuities have their own category in the leading industry rankings.

The release said that, according to LIMRA (the life insurance marketing and research association), there is a “growing interest in this market,” and it estimated that “collectively consumers age 45-59 have almost $10 trillion in financial assets so we anticipate these products will to continue to have remarkable growth.”

RICP designation gains momentum at The American College

With more than 3,000 licensed advisors and insurance agents registered so far, and about 250 graduates, The American College of Financial Services said its program for offering a Retirement Income Certified Professional (RICP) designation is the fastest-growing financial advisor credential program launched in the school’s 87-year history.

“Many consumers don’t have pensions to rely on, and there is deep confusion about the safety of government bonds and how Medicare and Social Security may change in the future,” said Larry Barton, president and CEO of the Bryn Mawr, Pa-based university, in a release.

“The three, intense courses that are delivered strictly online, with detailed case studies and challenges on how to help all clients, from those at-risk for poverty all the way to the ultra affluent, has delivered unlike anything we have seen over nine decades.”

The program addresses such questions as:

What is the best strategy for meeting a client’s income needs in retirement?
What is the safe withdrawal rate from a portfolio?
How should portfolios be managed differently during the course of retirement?
How can clients maximize income in a low-interest-rate environment?
What is the most tax-efficient withdrawal strategy?
How can clients choose the best Social Security claiming strategy?
How do income annuities and employer-sponsored benefits fit into the mix?

The RICP curriculum contains college-level courses on:

Retirement Income Process, Strategies and Solutions
Sources of Retirement Income
Managing the Retirement Income Plan

Head of Vanguard fixed income group to retire

Robert F. Auwaerter, principal and head of the Vanguard Fixed Income Group, today announced his intention to retire after 32 years with the firm, effective in March 2014. He joined Vanguard in 1981 when the company internalized the management of its money market and municipal bond funds, which then had assets of about $1.3 billion.

Today, the Vanguard Fixed Income Group manages nearly $750 billion invested in 70 taxable and tax-exempt bond, taxable and tax-exempt money market, and stable value funds. The Group oversees about $450 billion in actively managed funds and approximately $300 billion in bond index and exchange-traded funds.

Mr. Auwaerter, who plans to step down in March 2014, is responsible for the portfolio management, strategy, credit research, trading, and planning functions for the Fixed Income Group, which comprises 120 investment professionals and support staff.

Gregory Davis, CFA, will assume the position of head of the Vanguard Fixed Income Group. Mr. Davis, 43, currently serves as chief investment officer of the Asia Pacific region and is a director of Vanguard Investments Australia.

Mr. Davis joined Vanguard in November 1999 and, prior to his current position, served as a senior portfolio manager and head of bond indexing in the Vanguard Fixed Income Group. Mr. Davis and his team then managed more than $200 billion in bond index fund portfolios.

Mr. Davis earned a B.S. in insurance from Pennsylvania State University and an M.B.A. in finance from The Wharton School of the University of Pennsylvania.

Mr. Auwaerter began his career in 1978 at Continental Illinois National Bank and Trust Company. He serves on the Fixed Income Forum Advisory Board and the Credit Roundtable Advisory Board. In 2012, the Fixed Income Analysts Society elected Mr. Auwaerter to its Fixed Income Hall of Fame.

Mr. Auwaerter earned a B.S. in finance from The Wharton School of the University of Pennsylvania and an M.B.A. from the Kellogg Graduate School of Management of Northwestern University.

MassMutual to pay record $1.49 billion dividend

MassMutual will pay its largest dividend in 150 years—$1.49 billion—to eligible participating policyowners in 2014, the company announced this week. The payout reflects a dividend interest rateof 7.1% for eligible participating permanent life and annuity blocks of business, up from last year’s rate of 7% even.

The approved estimated payout represents an increase of $101 million – or about 7.3% – from the 2013 estimated payout and reflects updated investment, mortality, morbidity, expense and other experience, the company said in a release.

Strong performance by MassMutual’s asset management subsidiaries—OppenheimerFunds, Babson Capital Management and Baring Asset Management—and its non-participating businesses (retirement services and non-participating product lines) were key contributor to the strong dividend, the release said.

The estimated record payout comes at a time when MassMutual maintains among the highest financial strength ratings² in its industry and is reporting very strong levels of surplus of approximately $12 billion and total adjusted capital over $14 billion; both are key indicators of the company’s overall financial strength. The 2014 payout marks the 16^th consecutive year that MassMutual’s estimated payout exceeds $1 billion, and the company has paid $20 billion in dividends over the past 20 years.

Of the total dividend payout, an estimated $1.47 billion was been approved for eligible participating owners of whole life policies. More than 99% of eligible participating life policies will receive a dividend in 2013 that is the same or higher than they received in 2013. Whole life policyowners can use dividends in cash or use them to pay premiums, purchase paid-up additional insurance coverage, accumulate at interest, or repay policy loans and policy loan interest.

Investors want trustworthy advisers: Jackson National

Jackson National’s inaugural 2013 Jackson Investor Education Survey was released week, revealing the opinions of 500 representative U.S. pre-retirees between ages 45 and 65 about retirement, investing and financial education.

Examples of findings from executive summary include: 2013 Jackson Investor Education Survey Executive Summary.

“Having an advisor whom I trust and who really gets me” was the answer chosen most frequently by men (42%) and women (44%) to the question, “What would make the most positive difference in your current financial outlook?” (Less than half of all respondents were currently working with an advisor.)
“Honesty, financial/investment knowledge and track record” are more important than “ability to communicate” and “responsiveness to needs” in an advisor, men and women agreed.
33% of women and nearly 40% of men said they would benefit from professional financial advice, even though they said they understood the fundamentals of investing.
5% of women and 3% of men classified themselves as “Ostriches,” or those who just bury their heads in the sand and hope for the best.
Less than one percent of both genders classified themselves as “Socializers;” i.e., those who based financial decisions on information from social media outlets.
Financial education was considered a top educational priority by fewer than half of those surveyed.
“Saving enough for retirement” was the top financial concern for 74% of women and almost 76% of men.
14% of men and 13% of women said they don’t have a good understanding of financial/investment products.
11.8% of women respondents and 4.3% of men said they would need intensive education to feel “even remotely confident” making investment decisions.

Jefferson National touts the savings made possible by its Monument Advisor VA

Jefferson National estimates that its flat-fee Monument Advisor variable annuities have reduced insurance fees for Registered Investment Advisors (RIAs), fee-based advisers and their clients by over $60 million since it was launched in 2005.

An exchange from a traditional VA with insurance fees averaging 1.35% per year to Jefferson National’s flat-fee VA of $20 per month can save an average of $2,500 in one year and $144,794 over 20 years, based on tax-deferred compounding.

Unlike most variable annuities sold in recent years, which emphasis their lifetime income benefits, Monument Advisor is sold to advisers who want to take advantage of the ability to invest almost unlimited of after-tax money in an account where the assets grow tax-deferred until withdrawal.

Alternative investments drive hiring by asset managers

Almost half (47%) of asset managers expect to hire dedicated marketing personnel and 41% expect to hire dedicated sales personnel in the next 12 months to support alternative investments, according to new research from Cerulli Associates, the Boston-based global analytics firm.

Firms have hired more dedicated sales professionals than any other alternatives-related position in the past year, Cerulli said in a release. The number of sales personnel dedicated to alternative products increased 54% from 2012 to 2013 among managers that distributed alternatives to both retail and institutional clients.

As alternatives are becoming an increased focus and a larger business line for some firms, Cerulli recommends continued evaluation of support levels to ensure that the appropriate resources are committed to alternative product lines on an ongoing basis.

Quote of the Week

Posted on November 7, 2013 by Kerry Pechter -

A Second Look at the ‘Floor-Leverage Model’

Posted on November 7, 2013 by Kerry Pechter -

A little controversy always helps draw attention to an important topic that might otherwise go unnoticed.

Our cover story from two weeks ago about using a triple-leveraged ETF fund for upside in an otherwise low-risk retirement portfolio strategy (‘The Floor-Leverage Model,” October 22, 2013) elicited a note of admonishment from Laurence B. Siegel, the director of the Research Foundation of the CFA Institute.

The RIJ article reported on a retirement investment strategy that Jason Scott and John Watson of Financial Engines described recently in the Financial Analysts Journal. They recommended investing 85% of savings in safe assets (for stable income) and the rest in one of the off-the-shelf, daily-rebalanced triple-leveraged exchange-traded funds that are currently offered (for upside).

Siegel, the author and co-author of many scholarly articles on retirement income and related financial themes, copied RIJ on an email saying that the strategy wouldn’t work as advertised—or not as many readers were likely to believe it would work. We forwared Siegel’s remarks to Jason Scott. Scott responded that the 3x ETFs that he used have an internal mechanism that might resolve Siegel’s objection.

Here’s Siegel’s original note:

“One problem (among many) with the triple-leveraged strategy is that the 3x leveraged portfolio does not deliver 3x the market return! It’s less, and can be much less, and can even be negative when the market return is positive.

“Take a hypothetical $100 investment in the 3x leveraged exchange-traded fund. Say the market falls 10% on the first day. The portfolio delivers a minus-30% return so you have $70 left. The next day, the market returns to its original level, which means it experiences a positive 11.11% return.

“The 3x portfolio delivers a +33.33% return so the $70 now grows to $93.33, not $100. If the market is this volatile (a standard deviation of 10% per day), the erosion of value takes place at 6.67% every two days until you have essentially no money left, while the market itself is unchanged. In practice, the market’s volatility is a little less than 1% per day, not 10%, so the erosion is slower.

“Note that it’s possible to take advantage of this mathematical property of leveraged ETFs. After the market has fallen 10%, you “top up” by buying $30 more of the 3x leveraged fund. When the market then rises 11.11%, the portfolio grows from $100 to $133.33. You are now beating the market! Your cost basis is $130 but your portfolio value is $133.33, again while the market has gone nowhere. But this takes a lot of trading and a lot of spare cash, and almost nobody does it.”

Here’s Scott’s reply:

“I completely agree that the 3x leverage fund does not deliver 3x the market return. Beyond a single day’s return, 3x the market is not an appropriate benchmark given the fund is short (i.e., has borrowing costs) and is rebalanced daily.

First, borrowing costs are clearly a drag on the leveraged return. Logically, without alpha, a $1 investment can’t generate the returns of a $3 investment. You have to consider the costs associated with borrowing the other $2.

The other factor, beyond borrowing costs, is the daily rebalancing of the 3x fund. Simple compounding dictates that the 3x leveraged fund won’t deliver 3x the market return over longer periods.

A quick example: Suppose the return on the market for one day is R and the next day is S. The cumulative market return is (1+R)*(1+S) – 1, or R + S + 2*R*S. The cumulative return on the 3x fund rebalanced daily is (ignoring borrowing costs) (1+3R)*(1+3S) – 1, or 3R + 3S + 9*R*S

Note that the 3x leveraged fund’s two-day return isn’t three times as large as the market’s two-day return. The cross-term from compounding (R*S) is different. This becomes a bigger and bigger factor as the time horizon expands.

Given the difference in returns, which investment is better? Neither is better per se, but if you want to implement a CPPI strategy, the daily-rebalanced fund is the appropriate choice.

A CPPI strategy is conservative when you are near the floor and aggressive when you are better able to absorb losses. For instance, if you have 1% of wealth above the floor, a CPPI-3 strategy would hold a 3% equity position. Similarly, if you have 15% of wealth in excess of the floor, a CPPI-3 strategy would hold a 45% equity position. The daily-rebalanced 3x fund provides this consistent triple exposure. A 3x-the-market strategy doesn’t.

Another illustration of this point: Suppose you take $1, borrow $2 and invest the entire $3 in the market with a buy and hold strategy. Without borrowing costs, your returns will be 3x the market. If the market drops by 20%, your $3 investment in the market drops to $2.40. Because you are using a buy and hold strategy, you don’t change a thing. The result is that you have $0.40 in value controlling a $2.40 portfolio.

In other words, your leverage ratio after a 20% market drop has ballooned to 6! This is much riskier than the CPPI target surplus leverage of 3. You risk losing the remaining $0.40 of surplus (and perhaps erode the floor as well).

The daily-rebalanced leverage fund starts off the same way. You have $2 in borrowed money and $3 invested in the market. A 20% market drop results in a $2.40 market exposure. Because of the rebalancing, however, the daily 3x fund uses $1.20 to retire debt. After this rebalance, the positions look just like they would have had the initial investment been $0.40—$0.40 invested, $0.80 borrowed and $1.20 market exposure. The target 3x exposure is retained.

The Floor-Leverage Rule approach does not suggest investing in the 3x leverage fund because it somehow will deliver long-term performance equal to 3x the market (it obviously does not and cannot). Rather, the purpose of the 3x leverage fund is to combine with the risk-free investment to deliver buy-and-hold CPPI returns. (Author’s emphasis.) In that regard, the 3x fund delivers the expected performance.

Let me put it a different way. Suppose you take a CPPI-3 strategy and decompose it into a risk-free portfolio that guarantees the CPPI floor and a residual portfolio. The returns from the residual portfolio will be the same as the returns generated by a daily-rebalanced 3x leverage fund. The residual portfolio will not generate three times the market return over any time horizon.

The historical performance section of the paper and the CPPI discussion cover this in detail. I should underscore again that this research reflects my views and those of my co-author, and may or may not reflect the views of Financial Engines.

“A very high level summary of the paper is:

A theoretical model suggests that an annually-reviewed CPPI strategy should appeal to an average-risk retiree with a preference for sustainable spending.
The desired CPPI strategy can be implemented with minimal transactions (annual) and a guaranteed floor if a 3x leverage fund is available for investment.
Such an investment has been recently introduced.
One possible outcome: the Floor-Leverage Rule for Retirement.

In a follow-up email, Scott responded to a question from RIJ about the timing of transfers of profits from the 3x leveraged ETF to the flooring account. His reply:

“Harvesting should occur only if the leveraged account exceeds 15% of the total portfolio value. As such, harvesting should never exhaust the leverage account. Poor markets could result in the leverage account failing to provide any income increases. In principle, the value of the leverage account shouldn’t go to zero unless the share price of the leverage ETF goes to zero.

“I haven’t investigated whether harvesting more often than annually would improve efficiency. I would guess the impact is marginal. More frequent harvesting might be warranted in a large market run-up. Taking money off the table immediately seems like a better strategy than being potentially over-exposed to the market.”

In Finland: Saunas are Hot, Retirement is Cool

Posted on November 7, 2013 by David Lindorff -

Helsinki—Mikko Kautto, impeccable in a blue suit and open-collared shirt, was sitting at a table in the cafeteria of the modern Centre for Pensions building on the outskirts of Finland’s capital city, answering questions about the operation of his Nordic country’s retirement system.

How, he was asked, does Finland—with its own graying bulge of Baby Boomers, low immigration rate and low birth rate—plan to deal with its version of the impending global retirement crisis?

Kautto (below, right), the director of research at the Centre for Pensions, looked surprised and a bit bemused. “We don’t see it as a crisis,” he said. “We see it as having a lot of older citizens that we need to make sure have a comfortable retirement, and we have been planning for that for years. It’s certainly a challenge, but it’s not a crisis.”

If Finland finds itself more confident than the U.S. in the face of the Boomer retirement wave, it’s not because their demographics are more favorable. More than a quarter of the country’s 5.4 million people are already over age 60 and almost five percent are over age 80, compared to 19.1% over age 60 and 3.8% over age 80 in the U.S. Life expectancy at birth in Finland is about 80 years. In the U.S., it’s about 79 years.

The difference may simply involve better planning and less-politicized public discourse. The U.S. has historically dealt with its Social Security system on a crisis-by-crisis basis. The crisis du jour stems from the projected exhaustion of the system’s so-called Trust Fund. If that fund—which contains special-purpose Treasuries purchased with surplus FICA taxes—zeros out in the mid-2030s (and nothing changes U.S. demographics, such as an influx of hard-working young immigrants), the pay-as-you-go system’s ongoing tax revenues are expected to cover only about 75% of future retirees’ promised benefits.

In contrast, Finland’s government and its rival political parties, together with workers, employers and retirees, have long collaborated to create a sustainably solvent public retirement system whose payments are intended to replace close to 60% of pre-retirement income (higher for those who are poor or were unemployed for long periods).

“In the early 1990s, Finland began preparing in earnest for the large aging population we saw coming,” Kautto told RIJ. National studies showed that most retirees would need about 60% of their final pre-retirement income to maintain their standard of living in retirement, he explained. “Consumption smoothing” became the goal of the program. (Sixty percent replacement is ample in Finland because certain costs are low. Health care, including long-term care, is essentially free, and children who go to college pay no tuition and in fact receive a €450 ($600) monthly stipend for living costs.)

Compulsory defined contribution

Finland has a two-tier publicly-sponsored retirement system. The first tier, known as the National Pension, is designed for non-workers and the working poor and provides a basic means-tested pension, supplemented by a housing allowance. Finland’s parliament, or Eduskunta, sets the benefit level. The benefit is paid to those whose pre-retirement earnings were below €1300 ($1800) per month, beginning at age 65. (It also is paid to the disabled.)

The average National Pension recipient gets about €1800 ($2450) a month, plus the household allowance. A couple would get double that amount. Most workers, however, have incomes that exceed the cutoff for the National Pension. They participate in the second tier pension—a employment-based program in which participation is mandatory.

This second tier pension is funded by compulsory contributions from both workers and employers in the private sector. Instead of contributing to Social Security through a payroll tax (6.2% of pay, or half of the payroll tax) and to individual accounts (via an optional matching contribution), as U.S. employers do, Finnish employers must contribute 17% of payroll to a professionally-managed group insurance contract. Workers contribute an additional 5% to 6% of their pay, for a total of up to 23%. Benefits are based on years worked and worker’s required contributions, not on the performance of the fund.

Despite the cap on deferral percentages, there’s no limit on the amount of income to which those percentages are applied, so high-earning workers can build up proportionately high benefits. “About a quarter of the revenues paid into the [employment-based] system come from the wealthy,” Kautto said, “and about a quarter of the payments go to the wealthy.”

The percentage of wage or salary paid by employers and by employees is periodically adjusted by negotiations between the country’s unions and a group that represents employers. The adjustment is then ratified by parliament and applied to all workplaces and all employees. Finnish pension benefits are adjusted according to where one lives, Kautto noted, with urban dwellers, whose cost-of-living tends to be higher, receiving bigger checks than those living in small towns or the countryside.

The contributions to the employment-based pension system by workers and employers are invested and managed collectively. The Centre for Pensions manages a fund for public employees. A handful of large private insurance companies contract to manage the private workers’ funds and guarantee the future lifetime payout. These insurers are barred from offering other insurance or engaging in speculative ventures, and are overseen by a board that by law includes 50% beneficiary representation.

Both the publicly and privately managed funds buy international stocks bonds and other securities as well as Finnish government and corporate bonds. Only about 20% of the equity investment assets are in domestic equities. Between 2004 and 2013, the total amount invested internationally—primarily in Europe—rose to €105 billion from €50 billion, with about half of that in bonds, a third in equities and the rest in money market funds, real estate, hedge funds and private equity investments..

Envious of Finland

Last year the Centre for Pensions hired Nicholas Barr, a professor of public economics at the London School of Economics, to study of the system’s adequacy, sustainability and system design. While giving it high marks, Barr also recommended that the current average retirement age of 61 was too low, given Finns’ rising life expectancies.

Barr suggested offering older workers incentives to work longer, to prevent any future pressure to reduce benefits or raise worker and employer payments into the system. (There’s already a 4.5% boost in annual benefits for each year offered to workers who delay benefits after 65 until age 68, but he says this should be increased.) Barr also suggested allowing people to draw partial pensions while they continue to work, and then increasing their later pension benefit.

“In a way, I’m very envious of Finland,” Barr told RIJ. “We in the UK and in the U.S. come from very adversarial political systems. Finland is a more consensual political culture.” Finland has been working for decades to ensure the ability of its system to pay for a wave of elderly retirees, while the US has “created a Social Security crisis for political reasons,” he said.

Peter Diamond, an emeritus professor of economics at MIT, who has studied the US Social Security system, agrees. “When Social Security was created, Republicans were heavily opposed,” he told RIJ. “When President Clinton [in 1999] proposed putting some Trust Fund monies into an index fund, [Federal Reserve chairman] Alan Greenspan said it ‘threatened our freedom.’ So whatever we do with Social Security will be the usual compromise between what people want as beneficiaries, and those who are ideologically opposed to the program.”

In 1977, Social Security faced a more imminent crisis than the one we face today. “The Trust Fund was five years away from being depleted,” Diamond said. A few years later, President Reagan signed a bill that significantly raised the FICA tax in steps. Diamond predicts that the current “crisis” will be solved too, “again probably at the last minute.”

In contrast to Finland’s retirement goal of “consumption smoothing” in the transition from work to retirement, America’s Social Security program was never designed to pay for a large portion of Americans’ retirement costs, Stephen C. Goss, chief actuary of the Social Security Administration told RIJ. “In the U.S., we’ve always said that Social Security is meant to provide a floor of protection. The usual adage is that it should be only one leg of a three-legged stool, along with company plans and private savings,” he told RIJ.

The typical Social Security benefit, Goss said, replaces only about 30% of pre-retirement income—which doesn’t come close to matching the 80% of more of pre-retirement income that many advisers recommend. For higher-income Americans, the low FICA-limit and the mild progressivity of the benefit calculation tend to hold down replacement rates. For lower-wage workers, their tendency—often due to ill health—to claim at age 62, when annual benefits are lowest, works to minimize their replacement rates.

Much as they relish their steaming saunas (especially when interspersed with a cold shower or, ideally, a bare-skinned leap into an icy lake or snowdrift) Finns seem to like their retirement system. “If you work 35-40 years you can expect to end up with a fairly comfortable retirement,” said Kautto. “We tend to debate reforms of the existing system here, like maybe capping the pensions for the wealthy, which is very controversial. But there’s no talk here of moving to a defined contribution approach.”

Send MetLife’s ‘regards to Broadway, remember it to Herald Square’

Posted on November 1, 2013 by Kerry Pechter -

MetLife, Inc. announced that it is breaking ground in North Carolina’s Research Triangle area for a new global technology hub.

The giant insurer’s entry into Cary, N.C., coupled with its new U.S. retail headquarters in Charlotte, represents a $125.5 million investment in North Carolina. MetLife has already invested $1.2 billion in insurance funds in North Carolina housing, agriculture, commercial real estate, health care and utilities.

As announced last March, MetLife intends to create 2,600 jobs in North Carolina by the end of 2015, the largest employment initiative in recent state history. Over the next 18 months more than 1,000 engineering, development, app maintenance, IT risk & security and tech support positions will open, according to a release.

Construction on MetLife’s new technology hub is slated for completion in 2015. MetLife is targeting LEED (Leadership in Energy & Environmental Design) Gold certification or higher for the state-of-the-art workplace, which will feature an environment designed to facilitate collaboration and innovation. The campus will consist of 427,000 square feet in two 213,500 square foot office buildings with structured parking.

The buildings will be situated on 26.5 acres fronting the 520-acre Lake Crabtree, which is adjacent to I-40 and the nearby Raleigh-Durham International Airport. In addition, the campus will feature sprawling outside space including a great lawn, amphitheater, patio and places to engage in activities such as basketball and volleyball.

American General launches ‘Power Index Plus’ FIA

Posted on November 1, 2013 by Kerry Pechter -

American General Life Insurance Company has issued a new fixed index annuity, Power Index Plus, that offers a guaranteed lifetime income rider with a 10-year, double-your-benefit-base roll-up, if no withdrawals are taken.

The product is designed for distribution by financial institutions and independent broker-dealers, but it will also be available to brokerage general agencies (BGAs).

The new FIA offers three interest-crediting strategies:

A one-year fixed interest account.
An annual point-to-point index interest account.
A monthly point-to-point additive index interest account.

The second two are pegged to the S&P 500, excluding dividend yield.

With the product’s Lifetime Income Plus rider, the benefit base is raised to double the amount of premiums paid in the first 30 days of the contract, as long as no withdrawals are taken before the 10th contract anniversary. The benefit base will increase by 7% each year that withdrawals are not taken in the first 10 contract years. The maximum withdrawal rate is 6%, starting at age 75.

Power Index Plus will be issued by American General Life Insurance Company (AGL) in 49 states.

Low COLA: The pause that doesn’t refresh

Posted on November 1, 2013 by Kerry Pechter -

With the 2014 cost-of-living adjustment (COLA) for Social Security payments set at just 1.5%, the annual boost has fallen to about half the rate that it averaged for the period from 1980 to 2010, according to an analysis by The Senior Citizens League (TSCL).

The record low COLAs are reducing the Social Security income of future as well as current beneficiaries, according to the TSCL. “Retirees have lost almost a third of the buying power of their benefits, and low COLAs will also result in lower initial retirement benefits even if seniors haven’t filed claims yet,” says TSCL Chairman, Ed Cates.

Since 2000, Social Security benefits have lost 31% of their buying power, according to TSCL’s 2013 Survey of Senior Costs. During that period, benefits rose 38% but typical expenses for the elderly rose an estimated 81%.

Seniors who haven’t claimed benefits yet are also affected Because COLAs are used in the benefit formula to determine the initial benefit amount, future Social Security beneficiaries will also be affected, the group said in a release. Because COLAs compound over time, the impact of low COLAs today reduce total lifetime benefits geometrically.

TSCL calculates that seniors with an average monthly benefit of $1,200 would lose about $2,667 over the first ten years, and the benefit after 10 years would be $1,439 instead of $1,482. In 20 years, the cumulative benefit loss would reach $11,981, and the monthly payment would be $1,833 instead of $1,943. By the end of 30 years the aggregate loss in benefits would be $31,747 and the monthly payment would be $2,346 instead of $2,561.

Social Security has already begun paying out more than it receives in payroll taxes, and relies on interest earned on the Trust Fund’s $2.7 trillion in U.S. Treasuries to cover the shortfall. But with the overall federal budget is in deficit, the government must borrow in order to pay that interest.

Enter the debt ceiling. “That borrowing is subject to the debt limit,” Cates said in the release. “The government will again hit the debt limit by February 7^thand seniors should be concerned.”

TSCL opposes cutting the COLA or basing COLAs on a less generous “chained CPI.” According to a TSCL survey, over 78% of seniors “favor, or somewhat favor” a requirement that the Social Security taxes should be levied on all wages, not just wages $113,700 or less. Such a change could reduce Social Security’s financing debt by up to 90%, according to Social Security’s Office of the Actuary.

Under current law, workers pay Social Security taxes of 6.2% on 100% of income (and employers match that amount) up to $113,700 per year. Those earning $320,000, for instance, will pay Social Security taxes on just $113,700, or only 36% of earnings.

“Congress should not ask seniors to take deep cuts while continuing to hand out a huge Social Security tax break to high income earners,” Cates says.

Second issue of new scholarly journal on retirement published

Posted on November 1, 2013 by Kerry Pechter -

The second issue of The Journal of Retirement (Vol. 1, No. 2, Fall 2013) has just been published under the stewardship of editor Sandy Mackenzie, formerly of AARP and the International Monetary Fund.

The latest issue includes nine new articles on a variety of topics within the broad area of retirement planning and retirement income. Some of the authors will already be familiar to students of the retirement industry.

Here’s the lineup of stories, which subscribers can find online:

Editor’s Letter, by George A. (Sandy) Mackenzie.

The Glidepath Illusion… and Potential Solutions, by Robert D. Arnott, Katrina F. Sherrerd and Lillian Wu.

Alpha, Beta, and Now… Gamma by David Blanchett and Paul Kaplan.

Applying a Stochastic Financial Planning System to an Individual: Immediate or Deferred Life Annuities?, by Agnieszka Karolina Konicz and John M. Mulvey.

Legacy Stabilization Using Income Annuities, by Matthew Kenigsberg and Prasenjit Dey Mazumdar.

A Goal-Focused Approach to Full Funding: Making Pension Plans More Adaptive to Change, by Andy Hunt and Stuart Jarvis.

Do Mutual Fund Companies Eat their Own Cooking? by Tomas Dvorak and Jigme Norbu.

Converting Traditional Defined Benefit Plans to Hybrid Plans: A Decade of Change by Robert L. Clark, Alan Glickstein and Tomeka Hill.

Developing and Disseminating Financial Guidelines for Retirement Planning, by William G. Gale and Benjamin H. Harris.

Providing Longevity Insurance Annuities: A Comparison of the Private Sector versus Social Security, by John A. Turner.

Annuity cash flows perk up in 3Q 2013: DTCC

Posted on November 1, 2013 by Kerry Pechter -

Annuity products experienced a 7% increase in inflows and a 98% increase in net cash flows in the third quarter of 2013 over the second quarter, according to the Analytic Reporting for Annuities service of the Insurance and Retirement Services unit of the Depository Trust & Clearing Corporation (DTCC).

In the first nine months of 2013, $131 billion in annuity product transactions were processed by DTCC’s National Securities Clearing Corporation (NSCC) subsidiary for:

117 insurance company participants
135 distributor participants
3,394 annuity products

Annuity inflows and net flows grew significantly in 2013. Annuity inflows processed in the third quarter of 2013 grew to $25.1 billion from $23.3 billion in the second quarter, an increase of 7.4%, DTCC said in a release.

Net flows into annuity products nearly doubled, to $4.4 billion from $2.3 billion in the second quarter. Outflows fell to 20.6 billion from $21.1 billion, a decline of over 2%.

The industry is also showing growth compared to the same quarter in 2012. Comparing the third quarter of 2013 to the third quarter of 2012, inflows in Q3 2013 were nearly 15%, or $3.2 billion, higher. Net flows in Q3 2013 were over 8%, or over $343 million, higher. Out flows in Q3 2013 were over 16%, or $2.9 billion, higher than in the third quarter of 2012.

Comparing flows in the first nine months of 2013 to the same period of 2012,inflows rose 7.6%, to $69.5 billion from $64.6 billion, net flows fell to $8 billion from $10.8 billion, a decline of 26%, and outflows rose 14%, to over $61 billion from over $53 billion.

Net cash flows into non-qualified accounts turned positive in 3Q 2013, surpassing $746 million. In previous months more money had been taken out of non-qualified accounts than put in. Net flows into qualified accounts approached $3.7 billion in the quarter.

I&RS is connected to over 450 distribution and carrier firms representing product segments including life insurance, fixed and variable annuity products and distribution channels including banks, brokerage general agencies (BGAs), insurance marketing organizations (IMOs) and insurance broker/dealers.

Analytic Reporting for Annuities is an online information solution containing aggregated data from transactions processed by DTCC’s Insurance & Retirement Services (I&RS). I&RS is the central messaging connection for annuity and life insurance transactions, enabling insurance companies to provide broker/dealers with daily financial transaction information. It processes approximately 150 million transactions each month. Visit http://www.dtcc.com/analytics for more information about the Analytic Reporting Service.

Quote of the Week

Posted on November 1, 2013 by Kerry Pechter -

How the Economic Machine Works

Posted on November 1, 2013 by Kerry Pechter -

Retirement Savings in a Co-Ed Dorm?

Posted on November 1, 2013 by Kerry Pechter -

The securities industry’s effort to outflank the Department of Labor’s Phyllis Borzi made progress this week when the House approved the Retail Investor Protection Act of 2013 by a 254-to-166 vote.

But the law—which would help ensure that retail investors’ rollover IRA assets are not protected by a fiduciary rule—is doomed. President Obama will never sign it. So why bother?

Because there’s so much at stake, obviously.

The bill’s sponsor, Ann Wagner (R-Mo), explained on C-SPAN that the DoL’s fiduciary rule would reduce IRA owners’ access to investment advisers. It would do the opposite. It would likely reduce brokers’ access to rollover IRA assets and restrict their revenues from managing them.

Hence the industry’s (understandable) outrage. Billions of dollars in security industry revenue may be riding on whether or not the DoL’s fiduciary proposal becomes regulatory reality. (Personally, I doubt the DoL will win this one. Borzi, who is chief of the DoL’s Employee Benefit Security Administration has the moxie, but not the muscle.)

If you’re new to this topic, here’s some background information. When someone saves through a 401(k) plan, the managers of that money are subject to the stringent rules of the Employee Retirement Income Security Act of 1974. ERISA requires the managers to act only in the participants’ interests. Ideally, that means low fees, transparency and plain vanilla investments—not exactly catnip for brokers.

When 401(k) plan participants change jobs or retire, however, they can “roll” their tax-deferred savings from the 401(k) to a “rollover” IRA account. The money remains tax-deferred, but it moves outside the jurisdiction of ERISA.

The DoL proposal would apply ERISA-like standards to the tax-deferred rollover money. It would bar brokers who conduct themselves according to suitability standard from advising on the disposition of that money.

That would be huge. Trillions of dollars in IRA rollover money would suddenly be off-limits to all of the registered reps and loosely-defined “investment advisers” (and their broker-dealers) who might otherwise steer retirement savings into actively managed funds or other products with high fees or commissions.

The DoL is afraid those fees will stunt retirees long-term accumulations. For regulators, plan participants who roll over their savings to IRAs are like young girls who move from their parents’ homes to rooms in co-ed dorms on wet college campuses. The DoL knows (and brokers know) that the broker-dealer world is a place where fools and their money are soon parted.

Yes, I understand the financial industry’s argument that, without help from brokers those IRA owners might hold cash for 20 or 30 years. There’s some truth to that. The industry also claims that if the DoL removes the existing incentives to advise middle-income investors—commissions, for instance—those investors won’t get any advice at all. There’s some truth to that too. If the costs and benefits of financial advice were more transparent or tangible, investors could probably decide these issues for themselves. But, as things stand today, most of them can’t.

Let’s ask the ultimate question: Does the DoL have any right to regulate the fees that the industry can assess on Americans’ rollover IRA assets? To answer it, we have to deal with the question of tax deferral, a government-given dispensation that helped make the retirement industry the leviathan that it is today.

To return to our college analogy: the father who’s paying his child’s tuition expects (or hopes, at least) that the college will act in loco parentis and keep a paternal eye on his child. Similarly, the current administration may imagine that Uncle Sam’s $100 billion-a-year tax subsidy on retirement savings (only some of which will later be recovered through required distributions) allows it to expect some forbearance on the industry’s part with respect to the subsidized money, in the form of a fiduciary standard.

Paternalism? Absolutely. Justified? We could argue that one all night.

I don’t question the securities industry’s right to make a buck. I don’t even object to the principle of “buyer beware,” if the buyer is competent. But trying to “have it both ways” seems like overreach. The industry wants to benefit from the tax-deferral subsidy and charge whatever it likes on the subsidized money in rollover IRAs. That’s asking for a lot. More important, it invites Uncle Sam to think about taking the subsidy away.

A Case of Low Book Yields

Posted on November 1, 2013 by Kerry Pechter -

The “overall downward trend” in book yields of U.S. life insurance companies “presages challenges ahead,” according to the twelfth and latest edition of the review of life insurance company investments and returns that Conning’s Insurance Research group has published since 2001.

The review, titled “Life Insurance Industry Investments: A New Perspective on Asset Allocations and Returns,” described the investable assets of 470 U.S. life insurers, who collectively earned $177.5 billion on assets of $3.2 trillion in 2012, down from earnings of $178.9 billion on about $3.16 trillion in 2011.

One takeaway: The effects of low rates will persist, even after rates begin to rise.

Conning provided RIJ with a 16-page executive summary of the 131-page report. The information below is based on the summary and on a telephone interview with its author, Mary Pat Campbell. The names of individual life insurers didn’t appear in the summary.

Regarding the life insurance industry as a whole, the review’s outlook for the future was subdued. With some 85% of its investable assets in bonds, the industry is especially vulnerable to low bond yields. Overall book yields for life insurers hit an all-time low of 5.24% in 2012, which in turn has maintained downward pressure on life insurance company stocks, making it more difficult for them to raise capital and encouraging stock buy-backs.

Conning LI study numbers

Looking at the bond portfolio alone, “Gross book yields… (including cash, short-term bonds, and long-term bonds) decreased by 21 bps in 2012 to 5.01%, 72 bps lower than the yield in 2008,” the report said. “Realized capital gains and positive change in unrealized capital gains and losses, together with investment income, caused the total return for bonds to decrease to 7.54% in 2012, less than the gross total returns seen from 2009 to 2011.”

But the averages mask a wide range of differences in the health of individual life insurers. The industry is made up of more than 200 companies with less than $100 million in assets while the biggest 50 or so companies account for some 83% of the industry’s investable assets, according to the Conning report.

Larger companies tend to have larger, more sophisticated research capabilities that enable them to shop more confidently among riskier but potentially higher-yielding investments in hedge funds and other so-called Schedule BA assets. In 2012, insurers with at least $20 billion in assets held about 90% of the industry’s Schedule BA assets, and just seven large life insurers held 60% of those assets.

One limitation of the report: it doesn’t cover the other side of the insurers’ balance sheets, their liabilities. Liabilities range widely from company to company depending on the types of products it has sold over the past decade. Some insurers, for instance, have large books of under-risky variable annuity contracts. Others may have books of long-term care policies and second-guarantee universal life policies whose prices were based on over-optimistic lapse estimates.

“Some life insurers are doing much better than others,” said Mary Beth Campbell, the author of the review. “The results used to be a lot closer but now they’re spreading out.” The health of life insurers today depends to some extent on how they reacted to the financial crisis of 2008. “Some companies reacted to the financial crisis by fleeing into Treasuries and cash and didn’t get out of that,” Campbell told RIJ this week.

“Others have been actively seeking yield and explicitly taking on portfolio risk in the portfolio. They went after bonds of lower credit quality, primarily the BBB and not below-investment grade.”

Companies also differed in their reactions to the Federal Reserve’s low interest rate policy, with some continuing to offer products with underpriced benefits in the belief that rates would quickly recover and others recognizing that a low rate environment could last indefinitely—which turned out to be the right call.

“Some companies were in denial about the low rates. But if you didn’t think that low rates could last for a long time, you weren’t paying attention. Japan has been in that scenario for 20 years,” Campbell said.

Regardless of what happens to rates next year, the residual effects of low-rates will be felt for years to come. “Even if rates were to slowly rise, they would still be historically low,” Campbell told RIJ. “There would be less pressure on companies, but the overall portfolio rate of return could continue to go down,” she pointed out.

“We’ve been in a decreasing rate environment for quite a while. As older, higher-yielding assets have rolled off, newer, lower-yielding assets have replaced them. That process continues to pull down overall portfolio return rates. It could take a while before the life industry recovers.”

Companies have responded by not locking themselves into generous guarantees. Campbell said that more insurers are selling market-value adjusted fixed annuities to protect against a surge in surrenders as rates rise, variable annuity issuers are putting equity hedges inside the separate account portfolios, and crediting rates on universal life policies continue to fall.

On the other hand, life insurers won’t capture a big share of the retirement market from mutual fund companies unless they can offer attractive products. If and when rates rise, competitive pressures may compel them to share the newfound yield with customers by matching new higher-paying liabilities with new higher-paying assets.

“Life insurers still need to compete,” Campbell told RIJ. “Fixed annuities, for instance, have to compete against CD rates. What may happen is that crediting rates on in-force business may go down, but, as rates rise, new products might offer better rates. [Life insurers] can segment their portfolio. Their ability to offer new products [at new rates] would still be limited by capital constraints, and that may be one reason why they’ve been building up capital.”

Quote of the Week

Posted on October 24, 2013 by Kerry Pechter -

The Bucket

Posted on October 23, 2013 by Kerry Pechter -

Income+ from Financial Engines continues to grow

Financial Engines, the 401(k) advice platform that is also the largest independent registered investment advisor (RIA) in the U.S., has signed its 100^th plan sponsor contract for the patented Income+ service, including 41 of the Fortune 500.

So far, Income+, a decumulation strategy that relies on participants keeping their savings with their 401(k) provider after they retire, has been rolled out at 45 plan sponsors. When all 100 signed contracts are rolled out, the potential audience for Income+ will be 1.9 million participants and $180 billion in tax-deferred savings.

Launched in January 2011 as an extension of the Financial Engines’ managed account program for participants, Income+ claims to “protect near-retirees from big losses in anticipated retirement income as they approach retirement and generate steady monthly payouts to retirees from their 401(k) accounts that can last for life,” Financial Engines said in a release.

Participants who choose to roll over their 401(k) assets to an IRA can also use the managed account program, called Financial Engines Professional Management service, including the Income+ feature. Annuities are an out-of-plan option during retirement and not mandatory under Income+.

Income+ is aimed at plan sponsors who want to provide an income solution for retiring workers but who don’t want the potential liabilities that could go with an in-plan annuity. It “eliminates both the need for an in-plan annuity and default risk for the plan,” the release said.

“Further, there is no regulatory uncertainty for plan sponsors, because, as a managed account, Professional Management with Income+ qualifies for ERISA and QDIA protections. Finally, there is no product conflict of interest as Financial Engines is a fiduciary and independent advisor.”

Prudential won’t challenge SIPI designation

Prudential Financial will “not seek to rescind the designation of the company as a non-bank systemically important financial institution by the Financial Stability Oversight Council (FSOC),” according to a release this week.

The brief release added:

“The company will continue to work with the Board of Governors of the Federal Reserve System and other regulators to develop regulatory standards that take into account the differences between insurance companies and banks, particularly in the use of capital, and that benefit consumers and preserve competition within the insurance industry.”

Prudential Financial, Inc. had more than $1 trillion of assets under management as of June 30, 2013, has operations in the United States, Asia, Europe and Latin America.

Guardian launches retirement website for investors and advisers

The Guardian Insurance Company of America today announced the launch of a new online resource for consumers, at www.myretirementwalk.com.

The site offers a variety of calculators, infographics and articles designed for people at various lifetime milestones, such as a first job out of college, mid-career promotions, marriage, starting a family, buying a home and preparing for retirement.

Visitors can select an avatar based on age and gender and then guide that avatar on a simulated “walk.” The site offers advice about saving, managing debt and planning for the future for each stage of life.

My Retirement Walk is also meant to help financial professionals engage their clients in basic retirement and financial planning.

The lead manager on the project is Doug Dubitsky, Guardian’s vice president of Product Management & Development for Retirement Solutions. Guardian developed the website with behavioral finance expert Dr. Daniel Crosby, who will be the main contributor to a blog on retirement income planning at the site.

Swedish pension buffer fund wins case against BNY Mellon

A judge in London’s Commercial Court has ruled that Bank of New York Mellon (BNYM) was negligent in managing securities lending transactions for the Swedish pensions buffer fund AP1 and has awarded the fund damages of up to $33.7 million (€24.7m or SEK219m) mandates, according to a report in IPE.com.

The ruling may be appealed by BNYM, however, a representative of the pension fund said. AP1 had SEK246bn in assets under management at the end of June. The award amounts to less than one-tenth of one percent of the fund’s assets.

The award covers most of the loss incurred by the fund plus interest expenses. The exact amount had not yet been set, according to AP1 managing director Johan Magnusson. BNYM will also have to pay most of AP1’s legal costs.

As DB wanes in the UK, Brits continue to mull retirement reform

Posted on October 23, 2013 by Kerry Pechter -

The UK government’s pensions minister, who last year introduced the DB/DC hybrid concept that he calls “defined ambition” as a model for Britain’s transition from DB to DC, has suggested that Britain should consider emulating Denmark’s ATP system, according to a report at IPE.com.

Offering a preview of a forthcoming paper on defined ambition, Webb said the Department for Work & Pensions (DWP)—Britain’s Labor Department—had narrowed the list of proposals over the large number contained within last year’s consultation.

The Liberal Democrat minister said he is trying to implement change before the next general election in 2015, but is also conscious of the potential changes companies could implement in the meantime. Many plan sponsors in the U.K. are preparing to convert their DB plans to DC.

While a move toward DC is inevitable, he said, elements of DB might remain. “Could we go down a Danish-style route, an ATP-style route, where a bit of what you’ve got is guaranteed and a bit of what you’ve got is variable?” Webb asked in a public address.

One challenge of such an approach would be the high solvency requirements associated with any such level of guarantee, but he said existing models could allow for guarantees “at a much more affordable cost.” Alternately, we “could we go down a collective DC (CDC) model (where assets are managed collectively, not individually), which is not certain, but it may have reduced volatility and better average outcomes, depending on how you passed it.” he said.

The minister suggested the retention of DB models, even without “any of the bells and the whistles”, would be his goal. “It will still be a pension that’s linked with what you used to earn,” he said. “For me, that’s the golden standard.”

“We do not want to set down a law that says ‘there are three ways you can do pension, and here’s what they are,’” Webb said, “but to say ‘here’s a set of models, you can choose.’”

Webb did not directly reference previous proposals for a DC smoothing fundduring his speech, but Pension Protection Fund (PPF) chief executive Alan Rubenstein did.

“For a while there was talk of a DC PPF,” he said. “But my sense is that has now, as you say, gone on the back burner. We are now talking about whether we want a Dutch style-CDC, or a Danish-style ATP?’”

Dept. of ‘Say It Ain’t So’

Posted on October 23, 2013 by Kerry Pechter -

A Florida pension investigator and columnist for Forbes magazine has published a 105-page report asserting that the treasurer of Rhode Island has misspent tens of millions of dollars on asset management fees when she could have used the money to preserve retiree benefits.

An executive summary of the report by former SEC attorney and investment company counsel, Edward Siedle, appears on the Forbes website. The title is, “Rhode Island Public Pension Reform: Wall Street’s License to Steal.”

Less than a month ago, Rolling Stone magazine and journalist David Sirota published related investigative stories–all of them reflecting the fear and anger among public pension officials that their current financial weakness is being exploited by people who want greater access to their asset pools.

Siedle is the president of Benchmark Financial Services of Ocean Ridge, Fla. He was retained by Council 94 of the American Federation of State, County and Municipal Employees (AFSCME), Rhode Island’s largest public employee union, to investigate the management of the $7 billion Employee Retirement System of Rhode Island (ERSRI).

A former regulator and fund company executive, Siedle has published a series of muckraking columns in conservative Forbes about the U.S. retirement crisis and about the hiring of hedge fund managers by public employee pension funds. He himself manages pension funds in Florida, he told RIJ in a phone interview this week.

Three weeks ago, Rolling Stone magazine published a sensational, overheated article about a “plot” by conservative think tanks, foundations and local politicians to use the undeniable financial difficulties of some public pensions—underfunding due to the 2008 crash and systematic underfunding—as an opportunity to convert as many public pensions to defined contribution plans as possible.

RIJ asked Siedle if he agreed with Rolling Stone’s assertion that there’s a “plot” by conservative think tanks, foundations and some politicians to convert public defined benefit plans to DC plans. He paused only slightly before agreeing with the spirit of the Rolling Stone piece.

“In the short term, there’s a conspiracy by the hedge funds to suck dry the assets in public pensions,” said Siedle, whose passion for his topic is evident, and occasionally spills over into his prose. “In the longer-term, Wall Street wants to convert DB pensions that currently pay them only 30 basis points to defined contribution plans that pay them 1%.”

The gist of his article is that Rhode Island’s General Treasurer and the fiduciary of the state pension fund, Gina Raimondo, has overseen a large increase in the fees paid to hedge funds for managing ERSRI assets while cutting retiree benefits by a roughly equal amount—all while denying the participants access to information about the decision-making behind it.

According to Siedle’s report, Raimondo increased the allocation of plan assets to hedge funds, venture capital and private equity funds by 25%, to almost $2 billion, in an apparent attempt to increase pension fund returns. Subsequently, the fees paid to such firms rose to $70 million from about $11 million.

During the same time period, the Rhode Island Retirement Security Act of 2011 was passed. It suspended the cost of living adjustment (COLA) for all state employees, teachers, state police and judges, until the pension fund’s overall funding level surpasses 80%.

The chances of the funding level reaching 80% have been hurt, according to Siedle’s report, by the rise in fees and the reduction in April 2011 of the pension fund’s assumed rate of return from 8.25% to 7.5%. (Both figures are still far in excess of the austere risk-free rate that conservative think tanks recommend.) Siedle’s article says there’s reason to believe that consultants will recommend that the rate be reduced to 6%.

Participants in ERSRI have also become alarmed by the fact that Raimondo’s asset managers have brought in sub-par investment returns, thus diminishing even further the chances of a return of COLA increases. The managers earned “a mere 11.07% versus 12.43% for the median public-sector pension during the 12 months ended June 30, 2013,” Siedle writes.

Siedle has made a specialty of investigating and exposing what he believes to misconduct in the pension and investment world. In late 2008, his firm, Benchmark Financial Services, filed a federal class action lawsuit against FINRA, the financial industry’s self-regulating authority, and its managers, including then-chief executive Mary L. Schapiro. The widely-publicized suit accused them of enriching themselves by deceiving members of the National Association of Securities Dealers (NASD) into accepting only $35,000 each to approve the merger of NASD and the New York Stock Exchange, when the members were entitled to much more.

Jackson National to block 1035 transfers to VAs with optional guarantees

Posted on October 22, 2013 by Kerry Pechter -

With its variable annuity market share ballooning this year thanks in part to reductions in sales by its main competitors, Jackson National Life (A+ – A.M. Best) took steps to conserve its risk budget by blocking one avenue of new business: 1035 transfers into VAs that offer optional guaranteed benefits.

Exempted from the ban are transfers into Jackson’s Elite Access accumulation-oriented VA, which is aimed at advisors who want to manage alternative assets inside a tax-deferred VA wrapper. The moratorium will end December 16, the release said.

“The company is approaching the upper range for calendar year 2013 for total premium from variable annuities (VAs) that offer optional guaranteed benefits,” said a Jackson National release. “Consistent with prior years, Jackson will manage the volume of its VA business in line with the overall growth of its balance sheet.

“To manage sales volumes, Jackson will no longer accept new 1035 exchange business or qualified transfers of assets for VAs that offer optional guaranteed benefits as of 4 p.m. Eastern Daylight Time on Friday, October 25, 2013.

“As of Monday, December 16, 2013, Jackson plans to resume accepting new 1035 exchange business and qualified transfers of assets. No limitation will be placed on new 1035 exchange business or qualified transfers of assets for Jackson’s Elite Accessproduct or for Jackson’s fixed or fixed index annuity products.

“We are actively contacting our distribution partners to alert them that Jackson is taking action to manage our sales volumes of VA products that offer optional guaranteed benefits, as we did last year,” said Clifford Jack, executive vice president and head of retail for Jackson.

“Our goal is to manage production over the next few weeks with as little disruption as possible to our partners and their clients. And, with no limitation on sales of Elite Access, advisors and their clients will still be able to choose a Jackson variable annuity investment platform that offers a variety of traditional and alternative investment options.”

Jackson was the healthiest U.S. annuity issuer in terms of net cash flow in the first half of 2013, according to the Analytic Reporting for Annuities, a service of Insurance & Retirement Services of the National Securities Clearing Corp., a subsidiary of DTCC.

The unit of Britain’s Prudential plc was ranked first in inflows and first in net flows, with $8.4 billion (18.9% market share) and $6.1 billion, respectively. Three Jackson variable annuity products—Perspective II 05/05, Perspective II L-Series and Elite Access—were all among the five best-selling annuity products.

As of October 21, 2013, Jackson has maintained high rating from all four primary rating agencies — A+ from A.M. Best, AA from Standard & Poor’s, AA from Fitch Ratings and A1 from Moody’s Investors Service, Inc. — for more than 10 years, the release said.