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DC participants should contribute 15% of pay for 40 years: Schroders

Posted on September 19, 2013 by Editor Test -

Retirement plan participants should be required to contribute at least 15% of salary for 40 years or they’ll risk an inadequate standard of living in retirement, according to a global study of defined contribution (DC) pension funds by Schroders Global Strategic Solutions.

Even in countries where employees must contribute to plans, contributions tend to be too low, with Sweden a notable exception, said the authors of the 44-page report, “Lessons Learnt in DC from Around the World.” Two-thirds of final salary was Schroders’ benchmark for an adequate retirement income level. A 3.5% discount rate was assumed. Achieving even half of final salary would, with a 3.5% return, require four decades of 11% contributions, Schroders said.

Even in Australia, where the obligatory rate will rise to 12% by 2019, a report by the country’s largest accounting body, CPA Australia, warned this may not allow citizens to give up work at the current retirement age.

To reduce volatility of returns, Schroders recommends diversification by pension funds into assets outside their domestic market. The firm criticized most collective DC fund managers for failing to target real returns of at least 3%. “You can’t eat relative returns,” said Lesley-Ann Morgan, head of Global Strategic Solutions in London.

This story was originally reported by IPE.com.

Stanford biz professor to host online course on retirement and pensions

Posted on September 19, 2013 by Editor Test -

Stanford Graduate School of Business will launch its first Massive Open Online Course (MOOC) in October, The Finance of Retirement and Pensions, led by finance professor and pension expert Joshua Rauh.

The eight-week course, which starts October 14, 2013, will help participants make better decisions about their own retirement portfolios and about related government programs and policies. To register for the course, go to: http://online.stanford.edu/course/rauh-finance.

“Our goal is to help people make better decisions about their own retirement portfolio and investments, and to shed light on U.S. policies that have important implications for retirees and taxpayers,” Rauh said in a release.

The course is aimed at anyone planning for his or her own retirement, for finance professionals in the retirement fund space, and taxpayers who want to learn more about the sustainability of government-funded retirement programs like Social Security.

The class is comprised of two 45-minute online teaching modules each week. Each modules is divided into 5- to 7-minute segments that can be viewed at any time.

The course will include assignments, quizzes, a team project, interactive webinars, forums led by Stanford GSB alumni, and weekly updates from Rauh. Participants can expect to spend at least four hours a week on all of the course elements.

A symposium on public pensions in January 2014

The Finance of Retirement and Pensions will conclude with an interactive symposium about the challenges of U.S. pension systems. Called “Innovative Ideas for the Future of U.S. Public Sector Pensions,” the symposium will be held in January 2014 at the Stanford Graduate School of Business in Palo Alto, Calif.

The event will feature representatives of the MOOC teams with the five most promising ideas for pension reform. They will present their proposals to a panel of faculty and experts in finance and public policy. Expenses will be covered by Stanford GSB in collaboration with the Hoover Institution.

Big outflows from bond funds persist

Posted on September 19, 2013 by Editor Test -

Redemptions from bond mutual funds and exchange-traded funds reached $20.3 billion in September through Friday, September 13. September’s outflow is already the fifth-highest in any month on record. Bond funds have redeemed $138.4 billion since the start of June, TrimTabs said.

While the monthly outflow has been huge, it is still a recent phenomenon. The year-to-date net outflow of $28.4 billion reverses only a tiny fraction of the inflows from 2009 through 2012, which totaled $1.20 trillion.

“We’ve seen unprecedented redemptions from bond funds since the start of the summer,” said David Santschi, chief executive officer of TrimTabs. “The outflow of $68.6 billion in June was the biggest ever, and the outflow of $37.4 billion in August was the third-biggest ever.”

“The yield on the 10-year Treasury note has jumped 120 basis points since the end of April, which is an enormous move,” said Santschi. “We think the backup in yields has been driven partly by repayment of cheap European Central Bank loans that were used to buy Treasuries and partly by investor fears of ‘tapering’ by the Federal Reserve.”

TrimTabs argued that bond fund redemptions have been so large and so swift because retail investors commonly regard bond funds as safe.

“Many investors who loaded up on bonds in recent years didn’t fully understand the risks of what they were buying,” said Santschi. “Now that they’re suffering losses in funds they thought were low-risk, they want out fast. The exodus suggests ‘tapering’ could be more disruptive than Wall Street thinks.”

Britons debate best way to consolidate DC accounts

Posted on September 19, 2013 by Editor Test -

Retirement policy wonks in the U.K. have been discussing ways to ensure that workers don’t lose track of their various retirement accounts as they move from job to job (and DC plan to DC plan) over the course of their careers.

This issue has become especially important in the U.K. with the advent of universal automatic enrollment in defined contribution plans. More workers are expected to participate in more plans over the course of their lifetimes.

Many U.K. workers, like U.S. workers, leave small DC accounts behind and forget about them when they change jobs. (See RIJ stories, “Zombie 401(k) Accounts” and “Roll Over, Rollovers: ‘Roll-ins’ Have Arrived.”) That creates inefficiencies in the system. In the U.S., it also creates opportunities for companies that aggregate forced rollovers of small retirement accounts whose owners have vanished.

Some in the U.K. suggest the creation of a nationwide non-profit “pension-pot clearinghouse.” Similar to the Pensioenregister in the Netherlands, it would maintain a record of all the plans a person has contributed to and how much has been accumulated, as well as providing an estimate of how much income participants can expect to receive in retirement.

Others within the U.K. government favor a policy that would simply roll forward a person’s current DC assets into his or her next plan, a program known as PFM or “pot follows member,” if the account is smaller than the equivalent of $16,000.

In the pro-registry camp is Michael Johnson of the center-right Centre for Policy Studies in London. In a new paper, he wrote:

“Consumers should have online access to easy to use, secure, retirement savings information windows (“portals”) that, ultimately, display all their sources of retirement income. This would include their State Pension accrued rights as well as private provision. Annual charges and fees should also be disclosed, and the portal should allow the user to project his expected weekly retirement income, based upon a user- determined retirement age and life expectancy.

“Crucially, the portal should enable the user to transfer retirement assets, including occupational pension pots, between industry providers and aggregators, using a paper-free process. This functionality would encourage consumer engagement with saving, and ultimately lead to higher retirement incomes.”

Johnson proposed the launch of a national clearing house – PensionsClear – which, once operational, could help with the automatic transfer of pension pots, as well as provide custody services or ease the complete transfer of one occupational fund’s assets to a qualifying aggregator.

The not-for-profit company’s set-up costs could be financed directly by the industry or potentially through a levy imposed by the U.K. Department of Work and Pensions – with participation mandatory if the industry fails to cooperate.

The European Commission is in favor of a pan-European pension tracking system and earlier this year asked providers in the Netherlands, Finland and Denmark – which has run its national service, PensionsInfo, since 1999 – to explore how such a system might work.

Morten Nilsson, chief executive at Now Pensions, talked up the potential of the portal approach to improve consumer engagement. “Whatever route is ultimately adopted, the costs to the industry both in terms of time and money are going to be significant, which is why it’s critical all transfer mechanics be thoroughly considered and assessed,” he said. “A rushed solution could prove an extremely costly mistake, which would prove even more costly to undo.”

America’s Bond Market Blues

Posted on September 19, 2013 by Editor Test -

The market for United States Treasury securities is one of the world’s largest and most active debt markets, providing investors with a secure stock of value and a reliable income stream, while helping to lower the US government’s debt-servicing costs.

But, according to the US Treasury Department, overseas investors sold a record $54.5 billion in long-term US debt in April of this year, with China slashing its holdings by $5.4 billion. This dumping of US government debt by foreign investors heralds the end of an era of cheap financing for the US.

As it stands, the US government holds roughly 40% of its debt through the Federal Reserve and government agencies like the Social Security Trust Fund, while American and foreign investors hold 30% each. Emerging economies – many of which use large trade surpluses to drive GDP growth and supplement their foreign-exchange reserves with the resulting capital inflows – are leading buyers of US debt.

Over the last decade, these countries’ foreign-exchange reserves have swelled from $750 billion to $6.3 trillion – more than 50% of the global total – providing a major source of financing that has effectively suppressed long-term US borrowing costs. With yields on US ten-year bonds falling by 45% annually, on average, from 2000 to 2012, the US was able to finance its debt on exceptionally favorable terms.

But the ongoing depreciation of the US dollar – which has fallen by almost half since the Bretton Woods system collapsed in 1971 – together with the rising volume of US government debt, undermines the purchasing power of investors in US government securities. This diminishes the value of these countries’ foreign-exchange reserves, endangers their fiscal and exchange-rate policies, and undermines their financial security.

Nowhere is this more problematic than in China, which, despite the recent sell-off, remains by far America’s largest foreign creditor, accounting for more than 22% of America’s foreign-held. Chinese demand for Treasuries has enabled the US to increase its government debt almost threefold over the last decade, from roughly $6 trillion to $16.7 trillion. This, in turn, has fueled a roughly 28% annual expansion in China’s foreign-exchange reserves.

China’s purchases of American debt effectively transferred the official reserves gained via China’s trade surplus back to the US market. In early 2000, China held only $71.4 billion of US debt and accounted for 8% of total foreign investment in the US. By the end of 2012, this figure had reached $1.2 trillion, accounting for 22% of inward foreign investment.

But China’s reserves have long suffered as a result, yielding only 2% on US ten-year bonds, when they should be yielding 3-5%. Meanwhile, outward foreign direct investment yields 20% annually, on average. So, whereas China’s $3 trillion in foreign-exchange reserves will yield only about $100 billion annually, its $1.53 trillion in foreign direct investment could bring in annual returns totaling around $300 billion.

Despite such low returns, China has continued to invest its reserves in the US, largely owing to the inability of its own under-developed financial market to generate a sufficient supply of safe assets. In the first four months of this year, China added $44.3 billion of US Treasury securities to its reserves, meaning that such debt now accounts for 38% of China’s total foreign-exchange reserves. But the growing risk associated with US Treasury bonds should prompt China to reduce its holdings of US debt.

The US Federal Reserve’s announcement in May that it may wind down its quantitative easing (QE) program – that is, large-scale purchases of long-term financial assets – by the end of this year has sparked fears of a 1994-style bond-market collapse. Concerns that a sharp rise in interest rates will cause the value of bond portfolios to plummet have contributed to the recent wave of foreign investors dumping US debt – a trend that is likely to continue to the extent that the Fed follows through on its exit from QE.

Yields on ten-year U.S. bonds are now 2.94%, a 58% increase since the first quarter of this year, causing the interest-rate gap between two- and ten-year bonds to widen to 248 basis points. According to the Congressional Budget Office, the yield rate on ten-year bonds will continue to rise, reaching 5% by 2019 and remaining at or above that level for the next five years. While it is unlikely that this will lead to a 1994-style disaster, especially given that the current yield rate remains very low by historical standards, it will destabilize the US debt market.

For China, the benefits of holding large quantities of US dollars no longer outweigh the risks, so it must begin to reduce the share of US securities in its foreign-exchange reserves. Given that China will reduce the overall size of its reserves as its population ages and its economic-growth model shifts toward domestic consumption, a substantial sell-off of US debt is inevitable – and, with it, a large and permanent increase in America’s financing costs.

Out of Commission

Posted on September 19, 2013 by Kerry Pechter -

Imagine a financial marketplace without manufacturer commissions.

It’s not easy—unless you live in the United Kingdom, where commissions have been outlawed since last January 1 under Retail Distribution Review (RDR), a set of rules instituted by Britain’s Financial Conduct Authority, the successor to the Financial Services Authority.

In practice, RDR is intended to make fees transparent, align the interests of the client and the intermediary, and make advice the only thing that people who call themselves advisors can charge for.

Advisers can’t provide advice or recommend a product until they’ve explained to the client exactly what the advisory charge will be. The client pays the advisor directly or by deducting the fee from an investment or premium. Advisors can be either “independent,” which means they must be product agnostic, or “restricted,” which means they sell from a limited shelf of products or specialize in a type of product.

Either way, commissions are out, except in sales of pure protection products like term life and long-term care insurance. The new sunshine rules leave little or no room for B-share compensation, deferred acquisition costs or distribution fees that are simply bundled into an annuity’s rate of return or payout rate.

“The focus of RDR was really on two things,” Andrew Powers, Deloitte’s RDR expert in the U.K., told RIJ this week. “Priority number one was to make sure advisors are appropriately qualified. Number two was to make sure that advisors described their services correctly.

“They have to say whether they are ‘independent’ or ‘restricted’. They must be transparent in charging. They can no longer be paid a commission by the product provider. Before, people thought the advice they were getting was free. Now the regulators are saying no to that.”

A 15-20% sales drop

RDR’s impact so far has been far-reaching but uneven. Independent financial advisors who have already switched over to fee-based compensation and who already have a high-net-worth clientele may be the least affected. Their business is even expected to grow. For banks, whose advisors serve the mass-affluent in the U.K. as in the U.S., it’s a different story. Banks have reportedly withdrawn from advisory services. Clients who are accustomed to “free” advice from a broker are suffering from sticker-shock.

Eighty percent of investment products, and many insurance products such as annuities, were sold by commission in Britain before 2013. Sales of those products have dipped by 15% to 20%, according to Powers.

Insurance companies that used to pay commissions directly to advisors are adjusting to a new system of “facilitated charging.” With a client’s consent, the insurer can deduct the intermediary’s fee from the investment or premium and send him or her a check. Adapting to RDR has cost them the equivalent of about $50 million in systems changes alone, Powers told RIJ this week.

It’s not clear if what happened in the U.K. under RDR could happen in the U.S. under a so-called fiduciary rule. Under Section 913 of the Dodd-Frank Act, which instructed the SEC to look into tighter regulation of financial advice, commissions are not deemed to be inherently non-fiduciary. But that’s not to say that SEC or the Department of Labor, which is working on a second draft of a fiduciary rule proposal, couldn’t put pressure on the commission model.

Although many brokers in the U.S. have switched from commission-based to fee-based or mixed-compensation practices since the financial crisis, broker-dealers and their registered reps still rely heavily on commission-based business. Young brokers who haven’t established a personal book of business are especially dependent on commissions for compensation.

The Securities Industry and Financial Markets Association (SIFMA), which represents brokers, recently wrote that a fiduciary standard and commissions can co-exist. The brokerage business model might raise “conflicts that need to be appropriately managed, but they do not preclude a broker from fully satisfying a fiduciary standard,” wrote Ira Hammerman, SIFMA’s general counsel.

In an email, Scott Stolz, senior vice president, PCG Investment Products at Raymond James, told RIJ, “We have followed [RDR]. My boss [Chet Helck, CEO of Raymond James Global Private Client Group] is volunteer chairman of SIFMA so he has a front row seat to this. He’s not discounting the possibility that this will occur in the States.

“It’s our opinion that it would leave the small to mid-level investor out in the cold. No one is likely to take on a client with $100,000 or less in assets if they are going to generate only $1,000 per year in revenue. These are the very people that need the most help. As I understand it, a big difference between the UK and the US is the fact that the average US investor has more assets to manage, while in the UK it’s more about retirement income flow. That’s a very different model that requires a different solution.”

How a fee-based advisor sees it

How do U.K. advisors feel about the switch to RDR? Not surprisingly, fee-based advisors aren’t too ruffled by it. But commission-based brokers who sold products rather than advice have seen their revenue model all but criminalized.

Expressions of bitterness have appeared in the comment-chains at the end of online articles about RDR on Citywire’s New Model Advisor website. But there is also a scattering of mea culpa comments. Some advisors concede that the U.K. financial services industry was due for a clean-up after the financial crisis.

Anna Sofat, a principal at Addidi Wealth Limited in London, is a fee-based independent financial advisor. The new law requires her to comb the entire financial landscape for the best solutions for her clients.

Sofat, not unlike certified financial planners (CFP) in the U.S. in their comments about a fiduciary standard, believes RDR will be good for her firm and other well-established firms. Now that people are aware that they’re paying for advice, the theory goes, they’ll demand higher quality.

“The good advisors will survive, but RDR makes life a lot harder for mediocre or bad advisors,” she told RIJ in a phone interview. “There’s much more emphasis on the advisor’s qualifications, the bar has been raised. And there’s much more transparency around cost.”

People in lower wealth brackets and people who resist advisor fees will have other options, she added. Some will opt for packaged solutions. “Companies are beginning to create more structured investment propositions for the middle-class. A number of insurers and investment companies, for instance, are coming up with risk-adjusted portfolios. The advisor can in effect outsource the proposition to them. In reality, that’s already been the case. There have never been bespoke solutions for people with £20,000 ($32,000),” she said.

The ‘disenfranchised’

Other people will seek out direct providers. “There will also be a lot more do-it-yourself investors, although it takes a certain type of consumer for that. It takes a certain set of skills and attitudes. Our firm finds plenty of takers among the middle-earners. What’s happened is that they begin to appreciate the value of quality advice. We might start out by charging by the job, and after that they can sign on to an ongoing service,” Sofat said.

RDR will “disenfranchise” millions of British investors, Power’s research showed. These are people who got sticker shock when they learned how much advisors cost or, conversely, people whom financial service firms don’t have any incentive to pursue. Deloitte estimates the number of disenfranchised at about 5.5 million, of whom about 600,000 are “affluent.” The disenfranchised represent a potential market for providers of low-cost, packaged, direct, online or workplace-delivered advice solutions.

Research by NMG Consulting for the FCA last spring showed that it may take some time for Britons to grow accustomed to the differences between commissions and fees and what RDR means for them. An NMG survey found that many people are skeptical that they will ever see how exactly how costs are calculated.

“I think because they can’t call it commission, it’s going to be dressed up as a fee,” one survey participant told NMG. “I’d be thinking they’re getting a commission out of whatever the product is.”

The many potential consequences of RDR—intended and unintended—may take some time to surface. It’s a work in progress. “I think [RDR] is a step forward. There had been a lot of cases of mis-selling driven by high commissions in the U.K. To deal with it, regulators thought they had to draw a line,” Powers told RIJ.

“But you could say that it’s a bit of a baby-and-bathwater situation. Some people have begun to say, ‘Look, there’s the potential for a bunch of do-it-yourself investors to invest in higher risk assets without understanding the risks, and their savings might get destroyed.’ There’s a debate going on about that right now. The regulators originally took the position that ‘no advice is better than bad advice.’ But now some of them are waking up to the idea that no advice isn’t the answer.”

Symetra FIA surpasses $1 billion in sales

Posted on September 12, 2013 by Editor Test -

Symetra Life Insurance Company announced that total sales of its Symetra Edge Pro Fixed Indexed Annuity have crossed the $1 billion mark. Introduced in April 2011 and sold through banks and broker-dealers, Edge Pro gives clients the choice of two index options — the S&P 500 Index and the S&P GSCI Excess Return Index — and offers a fixed account option and guaranteed minimum value feature.

Contract owners who leave their money untouched through the end of the five- or seven-year surrender charge period will see growth regardless of index performance.Owners can also withdraw up to 10 percent of the contract value annually, free of surrender charge. Guaranteed lifetime income options and a nursing home and hospitalization waiver also are available.

In just over two years since launch, Symetra Edge Pro has become a core product for Symetra. In response to the product’s success, Symetra’s Retirement Sales team is expanding its wholesaling support in New Jersey and northern Florida for the first time. Twenty-six wholesaling territories across the country now support Symetra retirement products.

Lufthansa permanently grounds its DB plan

Posted on September 12, 2013 by Editor Test -

German airline Lufthansa has announced plans to terminate its existing bargaining agreement with employees – including its defined benefit (DB) pension fund – by the end of this year.

In Frankfurt, chief executive Peter Gerber said the costs for retirement provision for its domestic employees alone had increased from €210m to €250m since 2011.

One of the main cost drivers was the guaranteed minimum interest rate of 6-7% for employees set down in the current contract.

Lufthansa said it would replace the agreement with a defined contribution scheme linking returns more closely with capital markets. In total, DB obligations at the Lufthansa Group amount to €11bn.

The company said another €2.4bn would be set aside for pilots retiring early.

According to a survey by Morgan Stanley, Lufthansa is straddled with one of the largest net pension liabilities as a percentage of market capitalisation in Europe.

The airline offloaded its loss-making subsidiary bmi in 2011 but had to pay £84m (£103m) into the bmi pension fund to provide additional benefits to employees and allow the scheme to enter the UK’s Pension Protection Fund.

One in four US households stressed by debt: Mintel

Posted on September 12, 2013 by Editor Test -

One in four households (25%) feel that the level of debt they are carrying is causing significant stress in their lives, and the same percentage (25%) state that the amount of debt they have impacts their day-to-day lives, according to new research from Mintel.

Over one in ten (13%) American households think people would disapprove if they knew how much debt they were in and a further 11% report that the amount of debt they have has had a negative impact on their personal relationships.

“The economic recovery is in full swing, but many households are still struggling to make ends meet and the pressure of everyday expenses is stressing them out,” “Consumers are feeling increasingly bogged down by their debt and they don’t seem to see an end in sight, as many expect to carry debt into retirement,” said Susan Menke, senior financial services analyst at Mintel.

Only 48% think it is an achievable goal to be debt free at retirement, with only 30% stating they will be able to live comfortably in retirement. Furthermore, just a quarter (25%) of US consumers state they are comfortable that they have enough set aside in a savings account for unexpected expenses and 24% state that they have very little or nothing in a liquid savings accounts because they are having trouble meeting everyday expenses. Seventeen percent (roughly 20 million households) don’t think they’ll ever be debt free.

Six in 10 (61%) households who have debt say that paying it off is one of their primary financial goals. About half (48%) say they would like to pay it down or pay it off in the next year.

‘Managed solutions’ pass $3tr in assets: MMI

Posted on September 12, 2013 by Editor Test -

The Money Management Institute (MMI) has released MMI Central 3Q 2013, a statistical overview of data and trends for the managed solutions industry for the second quarter of 2013. Highlights of this edition include:

By the end of the second quarter, total MS assets had passed $3 trillion – which marked an all-time high – and were up nearly 140% from $1.3 trillion at the end of 2008. All segments of the MS market have experienced strong growth in the four-and-a-half years since the end of the financial crisis, signaling investor and advisor confidence in professionally managed solutions and their disciplined investment approach.
Over the same period, Rep-as-Portfolio-Manager programs are up 230%, followed by Rep-as-Advisor with growth of over 190%, Mutual Fund Advisory at 150%, and SMA Advisory at 50%. UMA Advisory assets rose fivefold, but from a much smaller base than the other segments.
During the volatile market environment of the second quarter, MS assets grew a modest 2%, or $59 billion. For the first six months of 2013, assets grew by $310 billion, about two-thirds of the increase for all of 2012.
Looking at MS asset growth by market segment, increases – given the 2% overall growth – were lower across the board during the second quarter. UMA Advisory had the largest asset growth of any segment – 4% compared to 8% in the prior quarter. Rep as Portfolio Manager ranked second with a 3% increase, down from 7%, followed by Mutual Fund Advisory at 2%, down from 8%, and SMA Advisory and Rep as Advisor, both at 1% and both down from 10%. Rep as Portfolio Manager continues to display momentum with one-year and three-year annualized growth rates of 31% and 34%, respectively.
Net MS industry flows slowed from $88 billion in the first quarter to $55 billion in the second quarter, but the six-month flows of $143 billion compare favorably with $184 billion of flows for all of 2012. Flows for the trailing one-year period were $234 billion compared to $220 billion at the close of first quarter 2013.
Mutual Fund Advisory had $19 billion in net flows during the second quarter, a modest 3% increase, and was the only segment to show an increase in flows over first quarter. Although Rep as Portfolio Manager experienced the largest decrease for the quarter, dropping to $11 billion in flows from $28 billion during the first quarter, it continued to have the largest trailing one-year net flows, some $70 billion. For the trailing twelve months, the market segment net flow leaders were Rep as Portfolio Manager at 30% followed by Mutual Fund Advisory, Rep as Advisor, SMA Advisory and UMA Advisory at 25%, 21%, 13%, and 10%, respectively.
While not robust, the 2% growth rate of MS assets for the quarter again outpaced other industry segments with Money Market Funds up 0.4%, Long Term Mutual Funds down 1%, and ETFs down 2%. On a net flow basis, Long Term Mutual Funds – a $9.8 trillion market – had net outflows of $27 billion for the quarter and ETFs – a $1.4 trillion market – had net flows of $21 billion. This compares to the $55 billion in net flows for the $3 trillion MS market and $11 billion in net outflows for Money Market Funds.
Fixed income investments dropped from 45% of SMA assets at the close of the first quarter to 42% at the end of the second quarter while the share of domestic equity rose 4% to 40% – evidence of the growing apprehension about rising interest rates and the ongoing rotation back into equities. In a similar vein, there were aggregate second quarter net outflows of $41 billion from municipal and taxable bond mutual funds and combined inflows for the quarter of $33 billion into U.S. and international stock funds.
As it has for a number of years, Morgan Stanley Wealth Management continues to be the leading sponsor of MS programs with $627 billion in assets under management at the end of the second quarter, representing about 21% of industry assets. The other firms ranking in the top five are Bank of America Merrill Lynch, Wells Fargo, UBS Financial and Charles Schwab.
Among money managers, BlackRock Financial Management leads the rankings with $54 billion in traditional SMA assets and an 8% market share, followed by Nuveen Investments, Legg Mason, Eaton Vance, and J.P. Morgan Investment Management.
SMA-related program types continue to evolve. In addition to UMA Advisory, dual contract programs, which permit advisors to sign clients up directly with money managers not on their firm’s approved list, are also on the rise, growing 5% for the quarter and 36% annualized over the past three years.

“I’m financially literate, but you’re not”

Posted on September 12, 2013 by Editor Test -

It’s been said that 90% of French men consider themselves better-than-average lovers. And everyone knows that all of the children in Lake Wobegon, Minn., are above average. Now comes survey evidence that most Americans consider themselves to have better-than-average knowledge about saving and investing. They can’t say the same about their neighbors, however.

According to a survey conducted as part of Genworth’s continuing series of Psychology of Financial Planning consumer research, 52% of Americans gave themselves an A or B grade on their saving and investing knowledge, while giving the average American a failing grade of D.

Almost all of the survey respondents agreed on the importance of financial literacy and the nation’s lack of financial literacy. More than half blamed “lack of financial education” as a main reason why Americans don’t save enough for retirement.

Genworth’s Financial Education study was conducted in collaboration with J&K Solutions, LLC and Toluna, Inc. The data was collected from an online survey in June 2013. 1011 adults (ages 25+ with household incomes of $50,000 or higher) across the United States were surveyed.

“Despite having more financial education resources available than ever before in the form of books, TV shows, websites, blogs, etc. we don’t take advantage of them and, if we do, we don’t apply what we learn. Why? Financial decisions, behaviors, and actions are highly motivated by emotional and psychological factors,” said Barbara Nusbaum, a New York-based psychologist and “money coach.”

The data reveals that only 40 percent of women would give themselves a grade of A or B on their knowledge of saving, preparing for the future, and investing options compared to 66 percent of men. Furthermore, women (21%) appear to be more driven by fear than men (14%) when it comes to seeking more financial education.

When asked who should take responsibility for educating the American public on basic financial matters, the vast majority (75%) of respondents place the responsibility for financial literacy on themselves, followed by parents and family (56%), teachers/school (50%), the financial industry (34%), independent third-party organizations (19%) and government (17%).

Seven Nominees for Our Product Innovation Award

Posted on September 12, 2013 by Editor Test -

Seven distinctive annuity contracts were nominated by RIJ readers as candidates for the Retirement Income Industry Association’s first-annual “Innovation in Retirement Income Products Award,” which this magazine is proud and delighted to sponsor.

The winner of the award, along with two winners of honorable mention certificates, will be named at the RIIA annual meeting on October 6-8 in Austin, Texas. Dimensional Fund Advisors will host the meeting at its headquarters there.

None of the nominees resembles “your grandfather’s” annuity, which we’ll define as a single-premium immediate annuity (SPIA). Instead, there are two deferred income annuities (DIAs), two fixed indexed annuities (FIAs), a contingent deferred annuity (CDA), a variable annuity (VA) and even (for Canadian retirees) a single-premium immediate variable annuity (SPIVA).

Here, in alphabetical order by issuer, are the nominees:

Great-West Financial Smart Future (CDA)

This is a contingent deferred annuity for retail clients who want guaranteed lifetime withdrawals without the tax implications of a variable annuity and with the low investment costs of an exchange-traded fund. The client’s assets go into a Great-West Secure Foundation Balanced ETF, which is wrapped in a stand-alone living benefit, the Great-West Secure Foundation Guarantee. Income payments can potentially rise if the 10-year U.S. Treasury rate rises.

ING-U.S. Lifetime Income (FIA/GLWB)

ING Lifetime Income is a single premium deferred fixed indexed annuity with a guaranteed lifetime withdrawal benefit. During the deferral period, the income base can grow in two ways. After a five-year deferral, the benefit base is stepped-up to 150% of premium, less any withdrawals. After a 10-year deferral, the benefit base is stepped-up to 225% of premium. Contract owners can also benefit from gains linked to the performance of the S&P 500 Index, up to a cap of 6% a year. A client who deferred for seven years, for example, would receive the step-up to 150% at the end of Year Five, plus gains of up to 6% in Years Six and Seven. Under the income rider, the client would then take a percentage (determined by his or her age) of the benefit base for life.

Midland National IncomeVantage (FIA)

This fixed indexed annuity offers three different ways for the contract owner’s benefit base to grow during the accumulation period: through a premium bonus, through annual interest credits linked to the performance of an equity market index, and through income deferral bonuses (“roll-ups”). Contract owners take income via a guaranteed lifetime withdrawal benefit. In one hypothetical example, a premium of $100,000 was augmented in the first year by a $5,000 premium bonus, a $5,250 deferral bonus, and a $2,000 index credit from gains in the S&P 500, for a first-year increase in the benefit base to $112,500.

New York Life Guaranteed Future Income Annuity (DIA)

The GFIA is a flexible-premium deferred income annuity for both qualified and non-qualified savings, with income beginning on a date chosen at the time of purchase. After an initial premium of at least $5,000, contract owners can make subsequent contributions of as little as $100. Future income payments depend on the size of the premium and interest rates prevailing at the time of contribution. Owners between ages 18 and 68½ can purchase a contract with qualified savings; owners up to age 75 can purchase a contract with non-qualified savings. New York Life claims to have 44% of the DIA market, as of mid-2013.

Northwestern Mutual Select Portfolio Deferred Income Annuity (DIA)

Under the unique terms of the Portfolio DIA, the contract owner is eligible for Northwestern Mutual’s annual dividend, which was almost 6% in 2013. The contract owner can receive the dividend as cash or as enhanced income, in any proportion. Before income begins, clients can move their income start-date up or back by as much as five years. This is a single premium product, and can be purchased only with qualified money. There’s an optional death benefit and several payout structures. Northwestern Mutual claims to have captured one-fourth of the deferred income annuity market in the first half of 2013.

Sun Life (of Canada) SunFlex Retirement Income (IVA)

This Sun Life single premium immediate variable income annuity is available to Canadian singles and couples ages 55 and older who want to turn tax-deferred savings into income that can grow over time, starting within one-year after purchase. For downside protection, the contract puts a floor under the payout rate, starting at a minimum of 3.5% of premium per year for a 55-year-old and rising with age. For upside potential, the income levels can rise if the underlying mutual fund investments perform well.

Contract owners can choose the Future Income Max or the Starting Income Max option (the difference is in their Assumed Interest Rates (AIR), 3.5% and 5%, respectively, which are used to calculate the initial payment). Payments start lower under Future Income Max but have more potential to grow. Payments under Starting Income Max start higher but have less potential to grow. If interest rates rise and fixed payout annuity rates become more attractive, contract owners have the option to convert their remaining assets to a fixed annuity.

Transamerica Retirement Income Choice 1.6 (VA/GLWB)

Recognizing that many people need more income during the initial “go-go” years of retirement, this Transamerica/AEGON variable annuity offers an income rider (Income Link) that lets contract owners “front-load” their income. That is, they can opt for higher payout rates during the first seven years of retirement (e.g., 10% for the first two years, 9% for first three years, etc.). When that period expires, the contract owner or owners receive four percent of the benefit base for the rest of their lives. The product also has a “Monthiversary” feature that enhances a policy owner’s ability to increase the benefit base. Instead of giving the contract owner only one chance per year (on the contract anniversary date) to step-up the benefit base to the current market value, Transamerica gives RIC owners a one-day window each month to exercise their right to an annual step-up. This makes the likelihood of a meaningful step-up much greater.

Sizing Up the DIA’s Sales Potential

Posted on September 12, 2013 by Editor Test -

Does the deferred income annuity, or DIA, have strong enough legs to carry the big life insurance companies to their rightful domination of the retirement income market?

To me, the idea of buying a personal pension in advance of retirement makes sense. It involves planning ahead, which is what grown-ups are supposed to do (and what children don’t). But the devil’s-advocate question still needs to be asked. And people in upper-floor rooms with walnut-paneled walls and wool-carpeted floors are probably asking it.

“Yes” might seem like the obvious answer. Eight or nine major annuity issuers have introduced DIAs in the past two years. Six more are planning to offer them in the near future, according to Donnie Ethier of Cerulli Associates. (One recent entrant is Americo Financial Life and Annuity, which has taken an existing DIA, brushed it off, and reintroduced it as Platinum Provider.)

And for good reason. Sales growth has been spectacular, at least in percentage terms. According to LIMRA, sales of DIAs in the first half of 2013 were 150% higher than in the first half of 2012. DIAs were a $50 million-a-year business before mid-2011, when New York Life announced its Guaranteed Future Income DIA. In 2013, first half sales were almost $1 billion.

On the other hand, what appears to be mass migration might just represent a lot of fast-follower and me-too activity rather than a real sea-change. Sometimes you’ve got to offer a product just to avoid giving customers a reason to go somewhere else. From what I hear, the DIA is simple enough, cheap enough and safe enough for almost anybody to bring to market pretty quickly.

In absolute terms, sales are still modest. DIA sales would have to keep doubling for several years in a row before volume approached the sales of fixed indexed annuities ($36 billion a year), let alone sales of variable annuities ($150 billion a year, about half of which is exchanges and about 10% of which represents net growth, according to Cerulli).

Here’s the rub. Sales of DIAs are, at least so far, concentrated in one type of issuer (mutually-owned) and in one distribution channel (captive/career). According to Beacon Research, 67.1% of DIAs have been sold by captive agents. Another 25.1% by brokers in large/regional broker-dealers, whom the mutuals can rely on not to compete with the captives, Beacon CEO Jeremy Alexander told RIJ.

Just two companies currently account for more than half of DIA sales. New York Life, the largest mutual in the U.S., claims to have 44% of the DIA market in the first half of 2013. Northwestern Mutual Life, which this year introduced a DIA that accrues annual dividends, claims to have another 25%. MetLife and Lincoln Financial, two public companies, are also marketing DIAs, but it remains to be seen how passionate they will be about it.

Mutual companies vs. public companies

In short, the DIA looks like a sure winner for the mutual insurers and the career/captive agent distribution channel. But does a spread product like the DIA offer a big enough profit margin to arouse the publicly held life insurers, who face insatiable demands for higher earnings?

And does it offer enough compensation to beguile the agents and reps in the IMO/independent agent channel or independent broker-dealer channels, who for years have been spoiled by the high commissions of fixed index annuities and variable annuities?

I consulted a couple of smart industry watchers about this. Jeremy Alexander, for one, thinks that DIAs have a big future. He said the trend started in the captive channel mainly because the agents are a captive audience; mutual insurers can teach them the DIA story quickly. “I do think the other carriers will get traction – it just may take some time. Remember captive producers are a lot more “trainable” then other producers,” he wrote in an email.

Jay Robinson of Financial Independence Group (FIG), an insurance marketing organization, also believes DIAs have cross-over potential. “That’s going to be a huge market, not just among the captives. MetLife has entered that space. You’ll see the direction of the industry go away from variable annuity to the FIA with a GLWB and DIA,” he said. FIG is promoting the defined income annuity and the Thrive Income method of using it in retirement planning to its agents.

As for profitability, Robinson thinks the deferral period of the DIA gives carriers plenty of opportunity to put the money to work, and he believes that compensation for DIAs will be “comparable with SPIAs, at about 3% or 4%.” It could be even higher for long-deferred contracts, he said. Americo’s single-premium deferred income annuity, Platinum Provider, which offers single or joint life payouts with an optional death benefit and a 2%-5% annual inflation adjustment, pays a very competitive commission, he told RIJ.

On the other hand, DIAs arguably only make sense in the context of a careful, long-range retirement planning framework. So it remains to be seen whether they will catch the imagination of fast-paced intermediaries who want to quickly “drop a ticket,” who are commission-driven or AUM-driven and who are strangers to the insurance culture. DIAs are susceptible to the same “annuicide” objection—the loss of fee-generating AUM following an annuity sale—that compels reps to reject immediate annuities.

Perhaps a deferred variable income annuity with an income floor—a DIVA—would be more appealing to publicly owned insurers and independent distributors than a fixed DIA. Sun Life recently introduced such a product in Canada. (See today’s story on “Nominees.”) Lincoln Financial’s i4Life product has DIVA-like characteristics. According to Moshe Milevsky of York University, there’s no reason why a DIVA couldn’t work, from a manufacturer’s point of view.

The frustrating truth, however, is that different types of manufacturers and different types of distributors have tended to align themselves with different products and different compensation regimes. Because of that, the DIA’s ability to make the leap beyond its current sweet spot is still open to question.

The Elephant in the Room

Posted on September 12, 2013 by Kerry Pechter -

The annuity story should be a simple one. In fact, everyone in the business knows one version of it by heart. There will be waves upon waves of Baby Boomers. They crave guaranteed lifetime income. Only life insurers can scratch that itch. Yadda yadda yadda.

If only it were that simple. Different insurers emphasize different products, with differing costs, risks, and profit margins, through different distribution channels to different consumers, depending not least on whether the insurers are owned by public, mutual, or private equity companies.

Such differences, along with the essential unpredictability of the economic and regulatory weather, make it difficult if not impossible for anyone to describe the entire the entire annuity-slash-retirement income business with any authority, let alone its future course.

But certain people are tasked with trying to make sense of it all, and who make an effort to illuminate the path ahead. Among the current annuity market analysts are Donnie Ethier of Boston-based Cerulli Associates and Scott Hawkins of Conning Inc., which is based in Hartford, Conn. Cerulli has just published Ethier’s latest report, called “Annuities and Insurance 2013: Balancing Shrinking Supply and Increasing Demand for Guarantees.”

The view from Cerulli

Looking at the variable annuity business, Ethier sees a bunch of s-curves and switchbacks in the road ahead. The problem won’t be shortages in supply, he said. According to Cerulli’s data, life insurers have the capacity to sustain about $142 billion a year in sales of variable annuities with living benefits, with an optimistic range of $153 billion and a conservative estimate of $132 billion. Any consumer who wants to buy a variable annuity with a GLWB will be able to find one, Ethier told RIJ.

But there’s not much room for growth, he added. Life insurers will have to look for other sources of new business, such as selling contingent deferred annuities (CDAs) and VAs without living benefits to the $2.8 trillion managed account market, or picking up defined benefit pension assets as Prudential did with General Motors, or hopping on the deferred income annuity (DIA) bandwagon currently led by New York Life. Six more of the major annuity sellers intend to roll out DIAs, he said, in addition to the eight or nine life insurers that already have.

One potential threat to the industry is the possibility of a reverse arm’s race, he said. As major annuity sellers discourage new sales of VAs with GLWBs by shrinking their value proposition, sales could spill over onto smaller issuers, who might react by shrinking their value proposition, thus sparking a downward spiral that further degrades the reputation of the whole industry.

“Protective Life is a great example. As their products became more relatively more attractive, sales went up. But at the end of last year, they said they wouldn’t accept any more [1035] exchanges, just new money,” Ethier said. He sees little potential for a new arm’s race, even if the economy, the equity markets and interests rates reach a more benign new normal—unless it’s driven by competition from aggressive new private equity players.

“As the economy and markets stabilize, you have to wonder if the major VA issuers will feel pressured to get back into this space. Being able to say ‘we’re number one’ isn’t as important to them as it used to be. But we know that there’s private money circling the industry. If they believe they can manage these books of annuity business better, will they enter the market? I don’t think that trend [of private equity companies buying life insurers or blocks of annuity business] is over,” he said.

A bigger threat, which annuity issuers have tried but not succeeded in defusing, is the ongoing shift of advisors in the independent broker-dealer channel from commission-based to fee-based compensation. Since most variable annuities are sold by commission through that channel, this represents a direct challenge to VA sales.

Insurers should not take solace in the fact that there are still lots of reps at independent broker-dealers who can sell VAs, Ethier said. Many of them are now dually-registered (as both reps and RIAs). In fact, the dually-registered channel is the fastest growing channel, with a 22% increase in assets from 2011 to 2012, or twice the average channel growth rate, according to his data. While many remain with broker-dealers and can still take commissions, they are leaning toward the RIA side. According to Cerulli, dually-licensed advisors expect 62% of their revenue to come from fees by 2015, up from 51% today.

By the same token, annuity issuers have had little success cracking the $2.8 trillion managed account market. The I-share variable annuity, which has the compensation element stripped out of the mortality and expense risk fee, was designed to appeal to advisors in this space. But the I-share represented only 4.2% of total VA sales in the second quarter of 2013 and the biggest seller by far was Fidelity ($607.5 million), a direct marketer.

Contingent deferred annuities were once believed to be life insurers’ ticket into the managed account market, but CDAs aren’t really out of the starting gate yet. “Some of the insurers say there’s no way they’ll get into the CDA space until their regulatory status [as securities and/or life insurance products] are determined. Others say they are comfortable with the product but they won’t dedicate resources to it until other companies prove that there’s a demand for it. But the CDA has a higher probability of succeeding in the RIA channel than an I-share variable annuity does.,” Ethier said.

The view from Conning

Scott Hawkins has been tracking annuities and the life insurance industry for years. Conning has just released his report, “Individual Life and Annuity Distribution and Marketing Annual: Analysis and Developments 2013.”

Like most financial products, annuities are related to life-cycle events, Hawkins said. “We see the industry as having two bites at the apple. By that we mean two points in time where Baby Boomers will be primed to listen to a discussion about retirement income. The first bite will be at the day they retire. The second bite will be when they reach age 70½ and have to think about taking required distributions from retirement accounts,” he told RIJ.

In terms of product-related prognostications, Hawkins holds views that many readers will find familiar. “We think SPIAs will hold some appeal for a certain type of consumer,” he said. “We think variable annuities will thrive to the extent that insurers will want to write them. We think that there might be a cross-over of insurers wanting to partner with 401(k) plan providers, offering a GLWB or a CDA or a SPIA or whatever the choice of in-plan solution might be.”

For clues about the future of annuity distribution in the U.S., Hawkins has been watching the drama over Retail Distribution Review unfold in the United Kingdom. Beginning last January 1, advisors in the U.K. had to begin conforming to more consumer-centric level of conduct. Advisors now have to reveal all fees prior to offering advice and meet higher professional standards. The change has all but broken the commission-based business, because product providers are no longer allowed to influence what an advisor charges a client.

“In the United Kingdom and the European Community, you can already see how the shift away from commission-based sales is affecting sales of retirement income products. Commission-based distributors went to a fee-based planning model, which has limited them to clients who can pay the fees. That will drive distributors toward the ultra-high net worth customers and away from the mass consumer. You can expect similar effects here.

“The independent broker-dealers will need to replace their variable annuity revenue stream. They will have to ask themselves, Do we go only to the high net worth customer? As for the insurers, will that encourage insurers them to go direct to the public, and will the variable annuity need to get simpler?”

Like Ethier, Hawkins believes that life insurers will need to look for growth someplace other than variable annuities. “I’m not seeing any return to a strong appetite for VA business among manufacturers. There’s not going to be a new arm’s race, unless it’s on the fixed indexed annuity (FIA) side,” he said.

“Our three-year forecast through 2015 is that VA sales will drift down because of lack of appetite to write new business, less rich guarantees and less incentive for rollovers to new contracts. The manufacturers have also antagonized some of the distributors. We think sales of fixed annuities will drift down unless interest rates recover strongly. We predict that current conditions will continue. FIAs will still have appeal. SPIAs will grow, driven by Boomer retirees.”

The good news for life insurers is that the trend is their friend. Though buffeted by headwinds and headaches, a lot of that resistance is neutralized by the tailwind of the Boomer retirement wave. A healthy level of demand is almost inevitable. “Annuities” are currently tied with Roth IRAs as the “most unsolicited product requests made by investors to their financial advisors,” according to Cerulli’s report. Hawkins told RIJ, “We think the retirement market is just beginning.” Life insurers may or may not make as big a killing from the Boomer wave as they originally hoped, but they should at least be able to make a living.

The nexus of marriage, child-rearing styles, and wealth

Posted on September 9, 2013 by Editor Test -

As cohabitation became more acceptable over the past 60 years and as women have become more financially independent, the “importance of investment in children” has emerged as the most important motive for marriage in the U.S., according to a new paper from the National Bureau of Economic Research.

The paper, entitled “Cohabitation and the Unequal Retreat from Marriage in the U.S., 1950-2010,” identifies linkages between college education, marriage, and the “concerted cultivation” of children, primarily among more advantaged couples, and a link between less education, cohabitation and “natural growth” child-rearing among poor or working-class couples.

These patterns, coupled with higher spending on the enrichment of children by the wealthier, better educated and more stable couples, reinforce and are reinforced by the larger trend toward greater income inequality in the U.S., the authors believe.

“The growing divergence in marriage, cohabitation, and fertility behavior across educational groups has potentially important implications for inequality and the intergenerational transmission of economic disadvantage,” wrote Shelly Lundberg of the University of California at Santa Barbara and Robert A. Pollak of Washington University in St. Louis.

“Cohabitation became an acceptable living arrangement for all groups, but cohabitation serves different functions among different groups. The poor and less educated are much more likely to rear children in cohabitating relationships. The college-educated typically cohabit before marriage, but they marry before conceiving children and their marriages are relatively stable.

“We argue that different patterns of child-rearing are the key to understanding class differences in marriage and parenthood, not an unintended by-product of it. Marriage is the commitment mechanism that supports high levels of investment in children and is hence more valuable for parents adopting a high-investment strategy for their children,” the paper said.

Among the paper’s more startling revelations was the correlation between a mother’s education and her likelihood of having a baby outside of marriage. Among white, Hispanic and black female college-graduates, respectively, 5.9%, 17.4% and 32% of all births were “non-marital.”

For mothers with some college, the non-marital percentages increased to 31%, 45.3% and 68.7%. For mothers with high school educations or less, the percentages were 53.6%, 59.6%, and 83.5%.

MoneyGuidePro’s newest feature encourages client action

Posted on September 9, 2013 by Editor Test -

MoneyGuidePro, the web-based financial planning software, has been enhanced by the addition of Executive Summary, an interactive tool that allows advisors to automate the review of ongoing actions related to a financial plan.

The new tool is designed to help advisors in “more deeply engaging their clients around plan actions. Investors will benefit from a consolidated view of their specific next steps in the financial planning process,” the Powhatan, Va.-based firm said in a release.

Clients can select action items from a list of pre-determined tasks, such as:

Decreasing cash exposure
Increasing 401(k) contribution
Purchasing additional insurance
Refinancing a mortgage
Updating an estate plan

Action items can have a status and completion date based on a household view of the plan. Investors can access Executive Summary in a view-only format via their MoneyGuidePro Snapshot, allowing them to see what items they must complete as well as their status. Executive Summary can be accessed through any device with a browser.

MoneyGuidePro is the flagship product of PIEtech, Inc.

The Bucket

Posted on September 9, 2013 by Editorial Staff -

Cetera acquires two MetLife broker-dealers

Cetera Financial Group has completed its acquisition of MetLife’s two independent broker dealer firms, Tower Square Securities and Walnut Street Securities.

According to a release from Cetera, the firm now serves approximately 7,400 advisors with more than $141 billion in total client assets, including more than $33 billion in fee-based advisory assets.

Tower Square and Walnut Street will join one of Cetera’s four firms, Cetera Advisor Networks. Its team-based, regional structure offers a strong cultural fit to advisors from Tower Square and Walnut Street who operate within a similar regional structure. Their advisors are located throughout the country, and will expand Cetera’s footprint in the Midwest and Northeast.

The new advisors will use Cetera’s broker-dealer and RIA (registered investment adviser) resources, which include a wealth management and technology platform, a fee-based financial consulting programs, and the Connect2Clients and C2CSocial marketing platforms.

Cetera Financial Group, based in El Segundo, California, encompasses about 7,400 independent financial professionals and nearly 600 financial institutions nationwide. Cetera Financial Group consists of Cetera Advisors LLC, Cetera Advisor Networks LLC, Cetera Financial Specialists LLC, and Cetera Investment Services LLC (Cetera Financial Institutions).

Cetera CEO Valerie Brown had previously been president, then CEO of ING Advisors Network, overseeing four broker-dealers. She also served as president of ING U.S. Retail Annuities and was chief of staff for ING Group’s Executive Committees, Americas and Asia/Pacific.

Nationwide Financial introduces simplified small plan 401(k)

Nationwide Financial has introduced Nationwide Retirement Innovator Advantage, a small plan 401(k) product that offers a streamlined investment menu and a built-in 3(21) fiduciary service from Morningstar Associates at no additional cost to the plan sponsor.

Features of the plan, besides the Morningstar fiduciary service, include:

More than 400 investment options, including target-date funds, lifestyle funds and a variety of fixed investment choices, including the Nationwide Bank FDIC Insured Deposit Account and the Nationwide Fixed Select Contract.
A self-directed brokerage account, fund window and managed accounts from multiple providers.
End-to-end sales support, plan reporting, participant education and an ERISA/regulatory online resource for advisors.

Nationwide’s other simplified retirement plan product, Flexible Advantage, emphasizes flexibility and control for plan advisors. It has attracted $3 billion in sales since its launch in 2011. Innovator Advantage is designed for ease and simplicity.

Nationwide Financial Fiduciary Series, Fiduciary Warranty and a 3(38) Investment Fiduciary service from IRON Financial provide additional fiduciary support for Flexible Advantage and Innovator Advantage.

New York Life’s stable value fund passes $2 billion milestone

New York Life Retirement Plan Services’ Guaranteed Interest Account, a pooled stable value option for defined contribution plans, has surpassed $2 billion in assets, the mutual insurer said in a release.

The GIA was introduced on the company’s bundled recordkeeping platform in July 2009, and as an investment on third-party recordkeeping platforms in July 2011. GIA is available on 13 defined contribution retirement platforms and is available for 401(k), 403(b), 401(a) and 457 retirement plans.

More than one of every 10 dollars on New York Life’s recordkeeping platform is allocated to a stable value option, the company said. Stable value allocations increase as participants age, with baby boomers allocating nearly 20% of new contributions to stable value.

New York Life Retirement Plan Services recently expanded its stable value sales team, adding Kevin Mansfield as director of stable value distribution. He joined New York Life on July 15 and reports to Patrick Murphy. Previously, he served as managing sales director for stable value and DCIO markets at Metlife.

Reporting to Mansfield will be Debbie Vince, stable value sales director for the western region, Glenn Macdonald, stable value sales director for the eastern region, and Joe Simmons, stable value sales director for the mid-west region.

“Twenty to One”

Posted on September 9, 2013 by Editor Test -

Advisors and individual investors often say they won’t recommend or buy income annuities today because interest rates and payout rates are so low. But would the average person know what constitutes a “high” or a “low” payout rate?

A recent finding from Cerulli Associates suggests that most people would not. In a survey earlier this year, Cerulli asked active 401(k) participants age 55 and older (“retirement income opportunity” clients) how large a lump sum they would be willing to pay for a lifetime income of $500 per month starting at age 65.

Assuming that the subjects were trying to come close to the actual cost of a $500/mo. annuity, rather than basing the estimate purely on their willingness to pay, then most of them wildly underestimated the necessary amount.

“Nearly three-quarters (72%) replied $25,000,” said a Cerulli report. Another 18% said $50,000. Only 3.8% came close to the right answer of $100,000. A handful (less than one percent) said $200,000.

“In reality, even among the most aggressive SPIAs, the same 65-year-old female would most likely need to spend between $90,000 and $100,000 to generate the $500, without receiving a death benefit guarantee,” Cerulli said. “This data also helps verify why annuities remain advisor-sold products and why less than 3% of 2012 VA sales were derived via the direct-to-consumer channel.”

Presumably, the Cerulli survey sample included many well-educated people. A high percentage of them should have been capable of deducing that $500 a month equals $6,000 per year. Had they thought about it for a moment or two, they could easily have seen that $25,000 would only buy about four years’ worth of income.

I don’t think lack of ability prevented them from finding a more plausible answer. They probably just weren’t used to doing that sort of calculation. In all likelihood, no one had ever taught them, challenged them, or forced them through the mental exercise of translating savings to retirement income.

Given that less than half of adults (42%, according to the Employee Benefits Research Institute) have tried to figure out how much they need to save for retirement, the frequency of this type of error should come as no surprise. But it’s far from a harmless error. It will lead people to underestimate the cost of lifetime income. As a result, they’ll probably save too little, and perhaps run out of money before they die.

To help solve this problem, the Department of Labor has proposed that 401(k) plan sponsors and plan providers add a section to participants’ quarterly statements where this calculation has been done for them. Participants would see how much income in retirement (based on best estimates) their current savings (or possibly their projected savings at age 65, based on their current trajectory) would generate if it were used to purchase an immediate income annuity.

I’m not sure how effective this type of reform would be. Few participants look at their statements. Few people buy income annuities at retirement. Retirement plan sponsors have already tried to show participants that a slight increase in their contribution rate can produce a significant increase in their savings over time. I haven’t seen any evidence that these efforts have been wildly successful.

Maybe there’s a cheaper, easier way to educate people. There’s already a rule of thumb that says a retiree can spend roughly 4% to 6% of savings per year during retirement, depending on the markets and whether they use a systematic withdrawal method or buy a life-contingent annuity.

We can therefore say that the ratio of final savings to annual income, at current interest rates, is roughly 20 to one. Twenty-to-one is an easy ratio to remember; why not publicize it? Put it on billboards along the nation’s highways. Paint it on the sides of barns in farm country. If more people knew and used that heuristic, a much higher percentage might have been able to answer Cerulli’s survey question more or less accurately.

FRA IRA Rollover Conference Ad300

Posted on September 8, 2013 by Editor Test -

Lots of Little VA Changes in Q2

Posted on September 8, 2013 by John McCarthy -

Annuity product developers accelerated their activity during the second quarter of 2013. Continued low interest rates kept pressure on carriers and hampered any ability to ratchet benefit levels back up. Most of the changes were “low impact,” consisting of adjustments to fees, benefits, and lower volatility subaccount options.

During the second quarter carriers filed 182 changes, compared to 97 annuity product changes in the first quarter of 2013 and 168 in Q2 of last year.

The most common changes were consolidations of age bands on the lifetime withdrawal benefit. The most significant changes were those related to de-risking by carriers—namely the asset reallocation directed to clients by Hartford, and the announced living benefit buyback offer by AXA (quarter 3 impact). Hartford also closed a number of contracts, further solidifying their pullout of the VA market.

Q2 Product Changes
AXA closed the Retirement Cornerstone 12.0 series, leaving the 13.0 series as the latest Retirement Cornerstone line open.

Hartford closed a slew of contracts in the Personal Retirement Manager and Leaders IV series of products in May. The move finalized Hartford’s pullback from the VA market, with no remaining Hartford contracts open.

Hartford continues to reduce its exposure to variable annuities, this time by re-allocating investment assets. In May the company filed a change requiring certain contract owners with the Lifetime Income Builder rider to reallocate their investments by October 4th, or face losing the living benefit. This requirement affects selected owners of the Director M lineup. Contract owners will be required to place a minimum 40% of assets in fixed income and a risk-based asset allocation model. This follows last quarter’s cash buyout offer covering the same contracts and benefits.

That offer went to owners of the Lifetime Income Builder II rider, who were offered the greater of the contract value on the surrender date, or, if the account is under- water, the contract value plus 20% of the benefit base (capped at 90% of the benefit base). Contracts affected include the Director M series and the Leaders series.

Jackson National Life updated the Lifeguard Freedom Flex lifetime withdrawal benefit. The Freedom Flex series mixes together a variety of withdrawal percentages, step-up and bonus features. These step up combinations were adjusted this quarter. The base bonus option offers a 5% annual bump, and the fee was increased by 0.10%. The fee went up by 0.15% for the Freedom Flex version with the optional death benefit. Jackson National also adjusted the Lifeguard Freedom 6 Net lifetime withdrawal benefit. The fee was raised by 0.15%.

For all Freedom Benefits, the withdrawal percentages for older ages (age bands starting at 75 and 81) were reduced by 0.50% and 1.00%, respectively. These benefits offer a 4.75% lifetime withdrawal at age 65 with the three types of steps ups: HAV; a 5%, 6% or 7% simple fixed bonus; and a doubling of the benefit base after 12 years of no withdrawals (up from 10 years). These and other JNL changes affected the single life benefits, as joint life versions were dropped last quarter.

Lincoln reduced the withdrawal rate on the joint version of its i4LIFE Advantage w/GIB. The lifetime withdrawal rate for a 65-year-old is now 3.5% (joint), down from 4.0%. The carrier also consolidated the number of age bands from seven to six. Lincoln also limited additional payments to its joint life riders after the first anniversary of rider issue. Additional payments are limited to $50,000 per benefit year if cumulative purchase payments exceed $100,000.

Lincoln also reduced the withdrawal on its Lifetime Income Advantage 2.0 Protected Funds. The single version had an age band added and dropped the withdrawal for 55-year-olds to 3.5% from 4.0%. The payout for a 60-year-old remains at 4% and a 65-year-old still gets 5%. The joint life version dropped the withdrawal from 5.0% to 4.5% for a 65 year old and added an age band at 75+.

For the entire Lincoln Lifetime Income Advantage 2.0 series, the carrier pushed up the eligibility age to 70 from 65 for the feature that doubles the withdrawal percentage in the case of a contract owner requiring nursing home admittance.

Monumental Life consolidated age bands on their guaranteed lifetime withdrawal benefit. A 65-year-old received 5% for life (4.5% for the joint life version). Those contract owners age 70+ now receive 0.50% less. The fee was raised 0.25%.

Nationwide issued the Destination Architect 2.0, and I-share costing 0.40%. There are 110 subaccount options including a number of alternative asset classes. The contract carries a lifetime GMWB costing 0.80% that offers a 4.5% lifetime withdrawal guarantee (which moves to 5.0% after the 5th anniversary). The joint version offers 4.25% lifetime at age 65 for a 0.95% fee. It has a highest anniversary value step up.

Ohio National raised the fee of its single-life GLWB by 0.10% and tweaked one age band (70-74) by increasing it 0.50% from 4.5% to 5.0%. Ohio National also issued a new lifetime withdrawal benefit, GLWB Preferred IS, that offers a generous 5.5% lifetime guarantee (5.0% joint life version), which, if the account balance drops to zero, could switch to 3% – 9% based on the U.S. Treasury rate. The benefit carries two step ups; a HAV and a 7% fixed bump up for 15 years. The fee is 0.95% (1.25% joint).

Pacific Life released the Pacific Choice (B-, C-, L-shares). The fee is 1.20% (B-share) and includes two types of lifetime withdrawal benefits and an accumulation benefit. The CoreIncome Advantage 4 Select offers a 4% lifetime withdrawal for a 0.35% fee. Every three months the fee is re-evaluated and could increase up to 0.50% based on the company’s discretion. There is a highest anniversary value step up. The CoreIncome Advantage Select offers a 5% guaranteed withdrawal with a highest-anniversary step up for a 0.70% fee. (Benefit attached to the Pacific Destinations contract offers a 4.5% lifetime withdrawal for a 0.55% fee.)

Protective filed notice in that it will limit 1035 exchanges and rollovers from qualified accounts. The limitation went into effect May 20th. This will limit further exposure for the carrier into its Protective VA B, C and L Series contracts.
RiverSource re-issued the RAVA5 series (Access, Select, Advantage), raising the fees 0.05%. The Advantage B-share costs 1.10% (L-share 1,35% and C-share 1.50%). The contracts carry the existing lifetime withdrawal benefit and accumulation benefits, and include a variety of alternative asset class subaccounts.

SunAmerica bumped up the withdrawal percentage by 0.25% on the SA Income Builder-Dynamic Option. The single life version of this lifetime withdrawal benefit now offers 5.25% and the joint version is at 5.0%. SunAmerica released the SunAmerica Income Builder, a new lifetime withdrawal benefit. For a fee of 1.10%, the benefit features a 5% lifetime withdrawal for a 65-year-old and two step ups: HAV and a 6% fixed annual step up.

Transamerica broke the bank with a massive update/re-issue of 39 new contracts (including New York versions). The VA lineups for Axiom, Members, Advisors Access, Income Access, Partners, Principium, Retirement Income Plus, TA Variable Annuity all received revisions. The main changes were a new series of death benefits, updated investment options, and elimination of the initial payment guarantee and the fixed life annuitization option. The living benefits remain the same.

Transamerica issued a new contract, the Retirement Income Plus, with a new living benefit that offers a 5.5% lifetime withdrawal for a 65 year old (single; 5.0% joint); a HAV step up as well as a 5% fixed step up. There are six investment options that fall on the con- servative side. The contract fee is 1.30% and the single life version of the GLWB is 1.25%.

Pipeline
Allianz released a new GMAB in July called Investment Protector. For 1.30% the benefit guarantees principal after a 10-year period. The benefit has a step up that is the greater of the account value or 80% of the HAV.
Allianz also plans to increase the fee on its Income Protector series of lifetime GMWBs, a 0.35% bump.

AXA filed a buyback offer in July for owners of certain living benefits on their Accumulator series of contracts issued from 2004 and 2009. The buyback will be executed in September. The offer seeks to have the client terminate either their lifetime GMWB rider, enhanced earnings rider, or other death benefit in exchange for a credit
to their account value. The calculation will factor in multiple values and credit an amount to the contract owner’s account.

Principal plans to roll out a variable annuity called Principal Lifetime Income Solutions on Aug. 1. The fee is 1.40% and the contract carries an existing lifetime GMWB with a 5% withdrawal rate for a 65-year-old (4.5% joint life). There is an HAV step up and a 5% fixed annual step up. The rider fee is 0.95% and the contract offers four low-cost, diversified subaccounts.

Security Benefit is updating its Elite Designs. The new C-share contract will have 280 subaccounts including alternative asset classes and a return of premium death benefit. The cost is 1.45%.

Cetera acquires two MetLife broker-dealers

Nationwide Financial introduces simplified small plan 401(k)

New York Life’s stable value fund passes $2 billion milestone

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