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US Annuity Sales by Company, First Half 2021

Posted on September 30, 2021 by No Author -

Research Roundup

Posted on September 30, 2021 by Kerry Pechter -

This month’s edition of the RIJ Research Roundup covers a lot of ground. From Australia, recent research offers direction on optimal distribution of defined contribution savings in retirement. In another paper, investment experts at MIT explain who “freaks out” and sells during big market crashes. The answer may surprise you.

We cite two papers for advisers from the Journal of Financial Planning. One tells advisers how to help clients avoid the Social Security “tax torpedo,” which can cause a spike in taxes on benefits. The other article offers up-to-date legal advice from a top ERISA law firm on recommending rollovers without violating any subtleties of the latest iteration of regulators’ “best interest” rule.

Finally, a new Issue Brief from the Center of Retirement Research at Boston College offers statistical insight into your likelihood of needing several years of long-term care in your old age–and into your likelihood of being able to afford it if you do need it. (Practically every family has stories about its struggles to provide and pay for late-life care for a parent.)

“Personalized drawdown strategies and partial annuitisation to mitigate longevity risk.” Wen Chen, Aaron Minney, Peter Toscas, Bonsoo Koo, Zili Zhu, Athanasios A. Pantelous. Finance Research Letters, No. 39. March 2021.

The US has a voluntary defined contribution (DC) system. Australia has a mandatory DC system, to which both employer and employee contribute. But neither country has yet broken the “decumulation” code. Neither system shows DC participants how to convert their plan balances to retirement income.

A group of retirement researchers at Challenger, Australia’s largest annuity issuer, and at Australia’s Commonwealth Scientific and Industrial Research Organization (CSIRO), explored the task. In a recent paper, they provide “a do-it-yourself drawdown design for members of superannuation funds along with comparison studies on a range of retirement income strategies under an array of realistic scenarios. A stochastic economic scenario generator is used to simulate the uncertain outcomes of different drawdown strategies during retirement.”

They hypothesize a single, 67-year-old man with A$50,000 (Australian dollars) in personal savings and either A$300,000 or A$500,000 (both balances were studied) in his “Super” fund. (That’s short for “superannuation fund” as Australian savings plans are called. His fund was divided between growth-oriented assets (equities and real estate) and safe assets (bonds and cash). It was also assumed that he might live for an additional 37 years—to age 104.

Several decumulation strategies were tested with 10,000 Monte Carlo simulations of possible future conditions, including the famous 4% inflation-adjusted method, annuitization of 30% of Super savings, and use of deferred income annuities that provide supplemental income at age 87. It also tested “layering,” the common-sense practice of buying a monthly annuity income stream that, when paired with the basic Australian “Age Pension” (a means-tested entitlement of up to $882 for one person and $1,330 for a couple) covers essential expenses throughout retirement.

Each method was found to have strengths and weaknesses. (It’s dealing with tough tradeoffs that bedevils income planning.) The annuitization of 30% of Super savings, not surprisingly, was the method of “drawdown” most likely to sustain adequate income through to age 104—a degree of longevity risk that would require a substantial amount of personal savings to mitigate without an annuity. Drawdown in Australia is a bit complicated by the fact that strategies can be used to create eligibility for the Age Pension. On the other hand, it entails fewer tax issues than the US system does. Workplace contributions to Supers are taxed (at a concessional rate) as income but withdrawals in retirement are not.

“When Do Investors Freak Out? Machine Learning Predictions of Panic Selling.” Daniel Elkind, Kathryn Kaminski, Andrew W. Lo, Kien Wei Siah and Chi Heem Wong. MIT Sloan School of Management. August 2021

You might be surprised to hear that, according to new research, the investors most likely to “freak out” (as these authors describe it) and sell in a panic during market turmoil are middle-aged men with families.

You might find it surprising that MIT academics consider panic-selling to be a potentially smart, portfolio-protecting move on their part—much smarter than, say, excessive trading. But you would probably not be surprised to learn that those with the smallest portfolios panic-sell the most.

In their analysis of more than 653,000 individual brokerage accounts belonging to almost 300,000 US households, the authors of this paper “document the frequency, timing, and duration of panic sales, which we define as a decline of 90% of a household account’s equity assets over the course of one month, of which 50% or more is due to the results of personal trades rather than market performance.

“We find that a disproportionate number of households make panic sales when there are sharp market downturns, a phenomenon we call ‘freaking out’… Panic selling and freakouts are predictable and fundamentally different from other well-known behavioral patterns. “Investors who are male, or above the age of 45, or married, or have more dependents, or who self-identify as having excellent investment experience or knowledge, tend to freak out with greater frequency,” they found. More than 40% of the freakouts, however, occurred among those with accounts of $20,000 or less—people with presumably little capacity for loss.

“Panic selling and freak-outs often have negative connotations,” the authors write. “We show that this negativity may not always be warranted. While panic selling in normal market conditions is indeed harmful to the median retail investor, freaking out in environments of sustained market decline prevents further losses and protects one’s capital. Panic sales are not random events. Specific types of investors, such as those with less than $20,000 in portfolio value, tend to liquidate more frequently than others.”

“What Resources Do Retirees Have for Long-Term Services and Supports?” Anek Belbase, Anqi Chen, and Alicia H. Munnell. Center for Retirement Research at Boston College Issue Brief, September 2021, 21-16.

There’s no silver lining to the long-term care (LTC) story. LTC insurance is expensive, nobody wants to die in a nursing home, and few people want to see their legacies consumed by nursing home expenses, which can run to well over $100,000 a year.

Medicaid covers LTC cost for many indigent Americans, of course. But people don’t typically hope or plan to be both poor and disabled in their old age. Such an outcome is not uncommon. But it isn’t, to cop a phrase from Hamlet, a consummation we wish for.

How many of us will need LTC before we die? According to a new Issue Brief from the Center for Retirement Research at Boston College, “about 20% of retirees will escape the need for LTSS [Long-Term Support Services] and 80% will need at least a year of part-time support—with around a quarter requiring full-time support for several years… At age 65, only about one-fifth of retirees have the family and financial resources to cover high intensity care for at least three years and about one-third do not have any resources at all. The remaining half of older adults lie somewhere in between.”

The analysis considers informal care from family members as well as paid care that can be bought using income and financial assets and categorizes older adults by their ability to afford minimal, moderate, and severe care needs. The results show that about one-third of retirees do not have the resources for even minimal care and only one-fifth can afford severe care. The pattern varies even more across sociodemographic groups. Married individuals, those with college or more, and whites have more resources for LTSS care needs.

The big question is whether the people who will need help are the same ones who have the resources. To answer that question, the next brief will compare people’s likely care needs with their available resources for LTSS. This process will identify the individuals and groups who may end up with unmet needs and discuss how Medicaid plays a role.

Retirement Account Rollovers: How to Comply with the DOL’s New Fiduciary “Rule.” Fred Reish, Bruce Ashton, and Stephen Pennartz. Journal of Financial Planning, September 2021.

Many hairs have been split with respect to the regulation of so-called “rollover recommendations.” Under ERISA (Employee Retirement Income Security Act of 1974), a financial adviser may only advise a retirement plan participant to move (“roll over”) his or her plan savings to an IRA at the adviser’s firm if doing so is in the client’s “best interest.”

In a new article in the Journal of Financial Planning, ERISA attorneys at the firm of Faegre Drinker show advisers and their firms how to comply with the latest version of the Department of Labor’s rules governing rollovers, which seem to change in subtle but important ways when administrations change in Washington.

The article addresses, for instance, the question of whether a rollover recommendation constitutes regulated (impartial or “fiduciary”) advice if the adviser and the participant don’t yet have a professional relationship. That issue is now settled, according to the article.

“The DOL previously took the position that a rollover recommendation did not satisfy this part of the test unless the investment professional was already a fiduciary to the plan,” the authors write. “In the preamble to PTE 2020–02, the DOL reverses this position and then further expands on its view in a series of Frequently Asked Questions (FAQs) issued after PTE 2020–02 went into effect.”

Quoting from a DOL statement, the authors write, “when the investment advice provider has not previously provided advice but expects to regularly make investment recommendations regarding the IRA as part of an ongoing relationship, the advice to roll assets out of an employee benefit plan into an IRA would be the start of an advice relationship that satisfies the regular basis requirement. The 1975 test extends to the entire advice relationship and does not exclude the first instance of advice, such as a recommendation to roll plan assets to an IRA, in an ongoing advice relationship.”

The regulators, however, allow advisers to make rollover recommendations or solicitations that benefit themselves if they follow the procedures and meet the requirements of Prohibited Transaction Exemption (PTE) 2020-02, which the authors of the paper go on to describe in detail.

“Financial institutions must document the reasons that a rollover recommendation is in the best interest of the retirement investor and provide that documentation to the retirement investor,” the article concludes. “In addition, the PTE’s conditions require that financial institutions adopt policies and procedures that are prudently designed to ensure compliance with the Impartial Conduct Standards and that mitigate permitted conflicts of interest; and conduct and document an annual retrospective review of compliance.”

“Minimizing the Damage of the Tax Torpedo.” William Reichenstein, Journal of Financial Planning, September 2021.

Torpedos come in all sorts of shapes and size. There are torpedos that submarine commanders fire at enemy vessels. There are torpedos in black shirts and white ties who get rough with slow-payers of gambling debts. There are even “torpedo” cigars.

Then there are the “tax torpedos” that strike certain unwary Social Security recipients.

The tax torpedo refers to the “income range where an extra dollar of earned income causes another $0.50 or $0.85 of a Social Security recipient’s benefits to be taxable,” writes William Reichenstein in the current issue of the Journal of Financial Planning. “Thus, taxable income increases by $1.50 or $1.85. So, the marginal tax rate (MTR) is 150% or 185% of the tax bracket, where MTR denotes the additional taxes paid on the next dollar of income.”

In his article, Reichenstein “illustrates how a planner can add substantial value to a mass-affluent client with $1 million of savings by helping them minimize the adverse effects of the ‘tax torpedo,’” mainly by converting tax-deferred accounts to Roth IRAs early in retirement.

Reichenstein’s hypothetical client “makes Roth conversions in his early retirement years before his SS benefits begin, when his MTRs on the converted funds are generally the same as his tax brackets. These Roth balances provide the ammunition that allows him to avoid making additional [tax-deferred account] withdrawals in later retirement years that would be taxed at MTRs of 185% of the tax bracket, due to the taxation of SS benefits.

“These Roth balances allowed [a hypothetical client] to avoid making TDA [tax-deferred account] withdrawals during most of his retirement years that would have been taxed at MTRs of 46.25%.” the article says. If his method is used, Reichenstein estimates the reduction in lifetime taxes for a retiree with an initial portfolio balance of $1 million at $118,053.

Reichenstein, an emeritus professor of investments at Baylor University and head of research at Social Security Solutions, Inc., offers his strategy as an alternative to the “conventional wisdom” strategy, which calls for retirees to spend down their after-tax accounts first, then to exhaust their tax-deferred accounts and, finally, to take tax-free withdrawals from their Roth IRA accounts. “The key lesson in this case is to focus on your clients’ marginal tax rate,” he writes. “Too many advisers solely focus on tax brackets and do not consider their clients’ MTRs.”

Retirement assets total $37.2 trillion in 2Q2021

Posted on September 30, 2021 by Editorial Staff -

Total US retirement assets were $37.2 trillion as of June 30, 2021, up 4.8% from March 31, 2021, the Investment Company Institute (ICI) reported this week. Retirement assets accounted for 33% of all household financial assets in the United States at the end of June 2021.

If accurate, that puts the estimated current market value of the nation’s household financial assets at about $100 trillion.

Sources for the data included the Investment Company Institute, Federal Reserve Board, Department of Labor, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division.

Wealth remains highly concentrated in the US. According to the Federal Reserve, the wealthiest 1% of households have about 32% of total net worth. The next 9% have about 37% and the next 40% have about 28%. The bottom 50% of the distribution has only about 2% of total net worth.

Assets by plan type

Assets in individual retirement accounts (IRAs) totaled $13.2 trillion at the end of the second quarter of 2021, an increase of 5.4% from the end of the first quarter of 2021.
Defined contribution (DC) plan assets were $10.4 trillion at the end of the second quarter, up 5.3% from March 31, 2021.
Government defined benefit (DB) plans— including federal, state, and local government plans—held $7.5 trillion in assets as of the end of June 2021, a 4.0% increase from the end of March 2021.
Private-sector DB plans held $3.5 trillion in assets at the end of the second quarter of 2021, and annuity reserves outside of retirement accounts accounted for another $2.5 trillion.

Defined contribution plans

Americans held $10.4 trillion in all employer-based DC retirement plans on June 30, 2021, of which $7.3 trillion was held in 401(k) plans. In addition to 401(k) plans, at the end of the second quarter, $645 billion was held in other private-sector DC plans, $1.2 trillion in 403(b) plans, $410 billion in 457 plans, and $802 billion in the Federal Employees Retirement System’s Thrift Savings Plan (TSP).

Mutual funds managed $4.8 trillion, or 66%, of assets held in 401(k) plans at the end of June 2021. With $2.9 trillion, equity funds were the most common type of funds held in 401(k) plans, followed by $1.3 trillion in hybrid funds, which include target date funds.

Individual Retirement Accounts

IRAs held $13.2 trillion in assets at the end of the second quarter of 2021. Forty-five percent of IRA assets, or $6.0 trillion, was invested in mutual funds. With $3.5 trillion, equity funds were the most common type of funds held in IRAs, followed by $1.2 trillion in hybrid funds.

Other developments

Retirement entitlements include both retirement assets and the unfunded liabilities of DB plans. Under a DB plan, employees accrue benefits to which they are legally entitled and which represent assets to US households and liabilities to plans. To the extent that pension plan assets are insufficient to cover accrued benefit entitlements, a DB pension plan has a claim on the plan sponsor.

As of June 30, 2021, total US retirement entitlements were $42.8 trillion, including $37.2 trillion of retirement assets and another $5.6 trillion of unfunded liabilities. Including both retirement assets and unfunded liabilities, retirement entitlements accounted for 38% of the financial assets of all US households at the end of June.

Unfunded liabilities are a larger issue for government DB plans than for private-sector DB plans. As of the end of the second quarter of 2021, unfunded liabilities were 41% of benefit entitlements for state and local government DB plans, 46% of benefit entitlements for federal government DB plans, and 2% of benefit entitlements for private-sector DB plans.

Honorable Mention

Posted on September 29, 2021 by Editorial Staff -

Riskalyze to feature Allianz Life annuities

Allianz Life, the number-three issuer of fixed indexed annuities in the US, and Riskalyze, the company that invented the Risk Number, are partnering.

Allianz Life will be featured in the Riskalyze Partner Store, and Allianz Life has purchased licenses for its retirement and risk management consultants to use Riskalyze when working with financial professionals.

The Riskalyze platform will feature Allianz Life’s index variable annuity (IVA) and fixed index annuity (FIA) products and enhanced them with regular data updates. Advisors use the Riskalyze Partner Store as a one-stop shop for materials, research and strategies.

According to Allianz Life’s 2021 Q2 Quarterly Market Perceptions Study, 64% of Americans saying it is important to have some retirement savings in an investment that provides some protection from market risk.

The partnership between the two companies began in 2014 when Riskalyze users became able to model Allianz Life solutions such as registered index-linked annuities (RILAs), also known as IVAs, to help provide client portfolios with enhanced levels of protection against downturns in the market. The new expansion of the partnership will further enhance the financial professional experience.

Great American annuities now on the Halo platform

Annuities issued by Great American Life Insurance Co., recently acquired by MassMutual, the giant mutual life insurer, will be carried on the Halo Investing digital annuities platform. Financial advisors will be able access, purchase, and manage Great American Life’s annuities through Halo, Great American announced this week.

“The addition of Great American Life adds to the growing number of leading carriers and annuities offerings on Halo’s platform for financial advisors. In addition to providing an expanded lineup of annuities, Halo has an outsourced insurance desk that can serve as the licensed agent of record for advisors,” a Halo release said.

Halo streamlines the execution and management across the annuity lifecycle for advisors and offers different annuity options and strategies from Great American Life, Allianz Life, AIG Life & Retirement, and others.

“Partnering with Halo demonstrates our commitment to growing within the fee-based annuity space,” said Tony Compton, Great American Life’s Divisional Vice President of Broker/Dealer & RIA Sales.
Halo Investing is a technology platform for protective investment solutions, including annuities and structured products. Headquartered in Chicago, with offices in Abu Dhabi, Zurich, Dubai, and Singapore, Halo was co-founded by Biju Kulathakal and Jason Barsema in 2015.

Through the Halo platform, financial advisors and investors can access structured notes, market-linked CDs, buffered ETFs, and annuities, as well as a suite of tools to educate, analyze, customize, execute, and manage the most suitable protective investment product for their portfolios.

www.riskalyze.com/partner-store.

After a Hot 2nd Quarter, Will Annuity Sales Rise This Fall?

Posted on September 29, 2021 by Editorial Staff -

The second quarter of 2021—a period of mild relief from COVID fears and repressed interest rates—saw a big rebound annuity sales.

Total US annuity sales reached $68.2 billion in the quarter, up 40% from the COVID-stricken second quarter of 2020. Except for the fourth quarter of 2008, during the Great Recession, quarterly annuity sales have never higher, according to the Secure Retirement Institute (SRI) US Individual Annuity Sales Survey.

In the first half of 2021, total annuity sales increased 23% from the same period in 2020, to $129.2 billion.

“SRI attributes the remarkable sales in the second quarter to strong economic conditions and consumer pent-up demand after more than a year of living with the uncertainty of the pandemic,” said Todd Giesing, assistant vice president, SRI Annuity Research. “Early indicators suggest third quarter sales will be more in line with first quarter 2021 results, given the resurgence of the pandemic over the summer and falling interest rates.”

AIG was the overall largest seller of annuities, with $9.7 billion in combined sales of fixed ($5.63 billion) and variable ($4.1 billion) annuities, including $3.1 billion in fixed indexed products. Jackson National trailed by a hair with $9.6 billion in total annuity sales; almost all of those sales coming from variable annuities. New York Life was the top seller of fixed-rate deferred annuities ($4.4 billion), of payout annuities ($1.2 billion), and closely followed AIG in total fixed annuity sales, at $5.61 billion.

Total variable annuity (VA) sales [including traditional VAs and registered index-linked annuities or RILAs] were $32.7 billion for the second quarter 2021, up 55% from second quarter 2020. Year to date (YTD), total VA sales rose 33% to $62.7 billion. First half 2021 VA sales logged the highest sales totals since 2015.

Traditional VA sales grew 37% t $22.7 billion in the second quarter. YTD, traditional VA sales were $43.5 billion, up 15% jump from 2020. In the second quarter, RILA sales topped $10 billion, more than doubling (121%) the sales in the second quarter of 2020. In the first half of 2021, RILA sales were $19.2 billion, up 104% from prior year.

VA sales were driven by strong market growth and increased consumer interest in tax-deferred investment options, LIMRA said, and RILA sales just continued to surge. Their options-based protected growth formula—more upside than a fixed indexed annuity, more downside protection than a variable annuity–continues to resonate with distributors and investors. They pose less risk to the issuer than variable annuities with living benefits, the once-favorite product of large publicly traded life insurers.

“While growth in the independent and national broker-dealer channels doubled, this quarter RILA sales also grew substantially in the career channel — up 183% — as more companies with career forces entered the market,” noted Giesing. “This expansion in distribution will contribute to continued RILA sales growth. SRI is forecasting RILA sales to be between $35 billion and $40 billion in 2021.”

Fixed indexed annuity (FIA) sales totaled $16.5 billion in the second quarter, 38% higher than prior year. YTD, FIA sales were $30 billion, improving 6% over the first half of 2020. All distribution channels recorded double-digit growth in the second quarter with sales in banks (up 84%), independent broker-dealers (BDs) (up 53%) and national full-service BDs (up 63%) rising most.

“Increased interest rates in the second quarter benefited FIA sales as companies were able to raise cap rates making the product more attractive to investors,” said Giesing. “While interest rates have dropped off in the third quarter, we believe some of the product innovation introduced by carriers will allow FIA sales to continue to grow through the end of the 2021.”

Life insurers affiliated with private equity or alternative asset managers continue to thrive in the FIA space. Of the top 12 sellers of FIAs in the first half of 2021, seven were PE-affiliated: Athene, the top seller, Global Atlantic, Fidelity & Guaranty, American Equity Investment Life, Security Benefit Life, Equi-Trust, and Delaware Life.

Fixed-rate deferred annuity sales were $16 billion in the second quarter, up 25% from second quarter 2020. In the first six months of 2021, FRD annuity sales totaled $30.6 billion, up 35% from 2020. SRI expects sales to level off in the second half of 2021 but year-end sales results should be at least $45 billion.

Immediate income annuity sales were $1.4 billion in the second quarter, level with second quarter 2020. Year to date, immediate income annuity sales were $2.9 billion, down 12% from prior year results.

Deferred annuity (DIA) sales increased 44% to $510 million in the second quarter. In the first half of 2021, DIA sales were $930 million, 13% higher than prior year.

Total fixed annuity sales rose 28% in the second quarter to $35.5 billion. Year to date, total fixed annuity sales were $66.5 billion, 15% above the first half of 2020.

Additional information can be found in LIMRA’s Fact Tank.

Buy ‘I Bonds’ and Worry Less about Inflation

Posted on September 23, 2021 by No Author -

Financial planners and investment advisors all tell you to create an emergency fund before you start investing in risky assets. Your emergency fund should be held in safe and liquid assets like FDIC-insured saving accounts.

But interest rates on these accounts are close to zero and taxable. Moreover, if these accounts are retirement accounts such as an IRA, withdrawals before age 591⁄2 are subject to a 10% penalty in addition to taxes on the withdrawals.

So where should people invest their emergency funds? We say they should consider U.S. Treasury Series I Saving Bonds, commonly called I Bonds, which are distinct from Treasury Inflation-Protected Securities, or TIPS. (For a side-by-side comparison of the two, click here.)

What are I Bonds?

First introduced in September 1998 I Bonds (the “I” stand for “Inflation”) are inflation-protected, are issued by the United States Treasury, and provide a guaranteed real rate of return for 30 years. This is in contrast to the nominal fixed rate of interest provided by most traditional bonds and CDs.

The total yield of an I Bond is made up of two components: a fixed rate that remains the same for the 30-year life of the bond, and an inflation adjustment that’s reset every six months. The fixed rate is currently zero, and the last inflation adjustment in May 2021 was 3.54% per year.

You add these two components together to arrive at the composite rate of 3.54% per year.

I Bonds were designed primarily for small savers/investors. You can buy a maximum of $10,000 of I Bonds a year for each Social Security number via TreasuryDirect (treasurydirect.gov).

In addition you can buy them with any federal tax refund due to you, up to $5,000, for which you will receive paper I Bonds. You cannot hold them in a special retirement account, but the taxes due are deferred until maturity or the date they are redeemed. If you redeem I Bonds prior to five years, you’ll lose the last three months’ interest. After holding them for five years, there is no penalty for redeeming I Bonds before maturity, except that the federal tax on the interest must be paid in the same year as the redemption.

I Bonds offer many benefits:

They’re risk-free. They are obligations of the U.S. Treasury, so they are even more secure
than Social Security benefits. (It is possible for the U.S. Treasury to default on these bonds, so strictly speaking they are not completely free of default risk as explained above.)
They offer inflation protection. That’s especially important for retirees who no longer have wage increases to rely upon. With all the current government spending and deficits, inflation could return with a vengeance. I Bonds protect you against the ravages of future inflation.
They’re tax-deferred. Even though you purchase I Bonds with after-tax money for your
taxable account, they offer tax deferral for up to 30 years. You can elect to report the interest annually if you prefer, but most investors choose the default tax deferral option and thus only pay tax on the accumulated interest when they eventually redeem the I Bonds.
They’re flexible. They offer a tax timing option. They can be redeemed any time between one and 30 years. That offers lots of flexibility after owning them for one year. This flexibility allows you to buy I Bonds when you’re in a high tax bracket and redeem them when you’re in a lower tax bracket, such as after you’ve retired or are temporarily out of work.
They’re free from state and local taxation. This can mean higher after-tax returns for those investors who live in high-tax states, and they’re even better yet for folks who live in areas where they pay both state and local taxes.
If used for qualifying educational expenses, the interest earned is free from federal taxes.
They offer a put option. If future I Bonds offer a more attractive fixed rate, it may make
economic sense to redeem the older lower-yielding I Bonds, pay the taxes due on the interest earned, and then buy the newer I Bonds with the higher fixed rate. (Remember, however, if you redeem I Bonds within the five years of purchase, you will forfeit the last three months of interest.)
You can’t lose money. The composite rate can never go below 0%. I Bonds will never return less in nominal terms than you invested in them even if the country enters a prolonged period of deflation. You never lose the interest you’ve earned. In real terms you do better if there is deflation than if there is inflation. A recent bout of reported deflation took the I Bond composite yield to 0% for a six-month period. But as a result of the 0% “floor,” holders actually outstripped inflation by more than the guaranteed fixed rate during that period. So, if your I bond was worth $10,000 before that period of deflation, it would have been worth $10,000 after the deflation adjustment period ended. However, because of deflation, that $10,000 would buy more goods and services.

How I Bonds work

Now let’s explore the mechanics of purchasing and redeeming I Bonds and talk a bit about how they work. You must first open an individual account at TreasuryDirect.gov and link it to your bank account. Once your account is open, you can then make your purchases online and the Treasury will deduct the purchase price from your linked bank account.

Purchase limits. There is an annual purchase limit of $10,000 in I Bonds in electronic form per Social Security number. A married couple could, therefore, purchase a total of $20,000 per year.

A tax-time purchase option. The option to use your tax refund to buy up to $5,000 in paper I Bonds raises your limit from $10,000 to $15.000 in that year–$10,000 in electronic form and $5,000 in paper form.

Timing your purchases. Interest is earned on the last day of each month and is posted to your account on the first day of the following month. So, if you own your I Bonds on the last day of any month, you’ll earn that full month’s interest. Therefore, it’s best to buy your I Bonds near the end of the month, since you can earn a full month’s interest while only owning the I Bonds for perhaps a day or two. On the other hand, when redeeming I Bonds, you’ll want to do so on or near the first business day of the month, since redeeming them later in the month won’t earn you any additional interest.

Redeeming paper I Bonds. Simply take your paper I Bonds to your bank, sign the back and the bank will credit your account just as if you had deposited cash. The funds will normally be available to you the following day. You could also receive cash.

Redeeming electronic I Bonds. You can redeem your I Bonds (or any portion of your bond holdings, so long as you leave at least $25 in your account) using your online account. The money is then transferred into your linked bank account.

Avoiding probate. I Bonds don’t qualify for a step-up in cost basis at one’s death as many other investments, such as stocks and real estate, do. (I Bonds are like bank-CDs in that regard.) But you can title them in such a way as to avoid having them included in your estate subject to probate—by having either a second co-owner or a beneficiary listed on your I Bonds.

Zvi Bodie is emeritus professor of economics at Boston University, Mel Lindauer wrote The Bogleheads’ Guide to Retirement Planning, David Enna is founder of Tipswatch.com, and Michael Ashton is ‘The Inflation Guy’ at Enduringinvestments.com.

I’m HIPP, and That’s Not Cool

Posted on September 22, 2021 by John Rafferty -

Huey Lewis and The News once sang, “It’s Hip to be Square.” My wife and I are also HIPP. We’re “High Income, Pre-retired, and Pension-less.” HIPP is not so cool. I don’t think it squares with a solid retirement strategy.

We are almost debt-free, but we are also at least five years from retirement. We hope the market will feather our retirement nest in the interim. There are millions like us: folks nearing retirement who have saved considerable sums, who are accustomed to a healthy annual income from our work, and who expect no sources of guaranteed lifetime income other than Social Security at retirement.

Markets have delivered for a long time. It’s easy to assume they’ll deliver that desired nest egg when you need it. But markets deliver until they don’t. Then you need a back-up plan. That’s where annuities can step in and become the heart of a retirement strategy.

A Real CAPE to Fear

We’ve been conditioned, if not spoiled, by a decade of sparkling capital markets performance. But historically low Treasury yields, tight spreads and high equity valuations do not bode well for future performance.

One valuation metric to watch is the Shiller CAPE, or Shiller Cyclically Adjusted Price Earnings Ratio, or CAPE. Developed by Yale economist Robert Shiller, the CAPE smooths out the lumpiness of price/earnings ratios that short-term, transitory events can cause. It averages the inflation-adjusted earnings of a firm or an index over the prior ten years and compares those earnings to the current price.

The last time the Shiller CAPE was as high as it is today (around 38) was in 1999, according to one recent article. Between 1999 and 2003, the S&P 500 Index (including dividends) lost money. It had a compound annualized growth rate of about -0.62%. Although fixed income performed better during that period, today’s low yields suggest that bond returns will be muted in the future.

Helping clients to the finish line

The annuity industry fortunately offers a way to convert some of the capital market’s recent bounty into lifetime cash flows that conventional capital methods will find tough to match. The guaranteed lifetime withdrawal benefit (GLWB) offers an excellent hedge to the prospect of below-average market returns in the critical years before and during early retirement.

Assume that a 60-something couple wants to retire in five years. Any number of fixed indexed annuities (FIA) with a GLWB purchased today, can produce an annual cash flow equal to 6-7% or more of premium amount or the contract value (whichever is greater) five years from now.

For example, if a 62-year-old couple funds an annuity with a lifetime withdrawal benefit with a $1 million premium, they could expect a lifetime cash flow of at least $65,000 a year, covering both lives, beginning in five years. Variable annuities with high joint distribution rates are rarer, but the 6.5% (of initial premium) rate can be reached with a five-year delay to age 70.

To enjoy the same income using a simple 4% annual withdrawal rate, the couple would need their $1 million to grow to $1.625 million in five years—a return of 10.2% per year (net of fees). If the couple would like to use a more conservative 3% withdrawal rate—as experts like David Blanchett, Wade Pfau, and Michael Finke have suggested—the annual returns needed to equal the annuity results would be about 16.7%.

The annuity can be especially helpful for people who have under-saved for retirement. Suppose our 62-year-old couple realizes that, to close the gap between their Social Security benefits and their essential expenses in retirement, they will need to spend a risky 6% or 7% of their savings every year. The GLWB will give them the income they need without the substantial risk of exhausting their savings too soon.

But even for HIPP folks with seven-figure portfolios, a 3% to 4% withdrawal rate might not provide enough safe monthly cash flow to replace pre-retirement income and maintain an accustomed lifestyle.

Caveats are in order. Most safe withdrawal rate methods include inflation-adjustments; they typically allow annual withdrawals to grow by 2% to 3% of the initial amount. The GLWB solutions I recommend may offer a version that allows for growth, but those solutions would start at lower payouts than the versions I’ve referenced.

But an annuity with a GLWB can maximize cash flow potential at minimum risk during the initial travel-intensive, “go-go” years of retirement. That makes it an excellent lifestyle hedge. Owning that type of annuity might even make it cool to be HIPP.

Vanguard and RCH to offer ‘auto-portability’ service to plan participants

Posted on September 22, 2021 by Editorial Staff -

Vanguard, a leading retirement plan provider in the US, has engaged Retirement Clearinghouse LLC, to offer “auto-portability”—a service ensuring that job changers can easily “roll in” assets from old 401(k)s to new 401(k)s—to 4.7 million participants in the 1,700 plans it administers for 1,400 plan sponsors, starting in mid-2022.

Last November, Alight Solutions announced that it would offer RCH’s roll-in service to millions of participants in the Federal Thrift Savings Plan, which is administered by Accenture Federal Services.

Auto-portability enables the transfer of small-balance accounts so that fewer accounts are forgotten, cashed out, or left on the plans’ books. Cash-outs are a source of “leakage” and of savings inadequacy. All three outcomes can be costly for the plan, the participant or both.

“Together with RCH, we aim to help the most vulnerable plan participants combine their retirement assets, capture the vast benefits of a 401(k) plan, and enhance their overall financial wellbeing,” said John James, managing director and head of Vanguard Institutional Investor Group, in a release.

Retirement plan leakage “affects Black and Brown workers in particular and contributes to a systemic issue of savings insufficiency in these underserved demographics,” said Robert L. Johnson, founder of the Black Entertainment Network, chairman of The RLJ Companies and owner of RCH.

Plan participants with small balances often do not roll over retirement savings into their new plans or to rollover IRAs when changing jobs. Employers, for their part, have the right to move abandoned accounts with less $5,000 into financial warehouses known as “Safe Harbor IRAs,” where fees may be higher than in the plan. Those “stranded” accounts, large or small, are easily forgotten.

The RCH Auto Portability program automates the movement of an employee’s 401(k) savings account from their former employer’s plan into an active account with their current employer’s plan. First piloted in 2017, the program completed the industry’s first-ever fully automated, end-to-end transfer of retirement savings from a Safe Harbor IRA into an employee’s active retirement account.

The service can also help simplify plan administration and improve plan compliance by reducing the instances of abandoned accounts and uncashed checks.

“Our partnership with Vanguard represents a giant leap forward in the campaign to make auto portability for small accounts the new 401(k) plan default process when participants change jobs,” said Spencer Williams, founder, president, and CEO of Retirement Clearinghouse, LLC.

A leading recordkeeper for defined contribution plans, Vanguard has a long history of partnering with mission-aligned firms to provide groundbreaking solutions that help improve participant outcomes. Strategic engagements with industry-leading firms, such as RCH, enable Vanguard to augment its proprietary offerings and deliver comprehensive services, cutting-edge technologies, and best-in-class experiences to plan sponsors and their participants.

In the release, Vanguard said it supports key components of SECURE 2.0 legislation and endorses the Department of Labor’s e-delivery rule, the Securing a Strong Retirement Act, the Retirement Security and Savings Act, and the Receiving Electronic Statements to Improve Retiree Earnings (RETIRE) Act in 2018.

Honorable Mention

Posted on September 22, 2021 by Editorial Staff -

Lincoln Financial to gain $1.2 billion in capital from reinsurance deal

Security Life of Denver Insurance Co., a subsidiary of Bermuda-based Resolution Life, will reinsure approximately $9.4 billion of Lincoln Financial Group’s in-force executive benefit and universal life reserves, according to a Lincoln release. (“Reserves” in this context means “liabilities,” or the estimated amount that the reinsurer will need to pay policyholders in the future. Reserves are not assets.)

The reinsurance transaction will release about $1.2 billion of capital for Lincoln. The proceeds will predominantly be used to fund incremental share repurchases of approximately $900 million that Lincoln expects to complete by the end of the first quarter of 2022. The remaining proceeds will be used for general corporate uses, primarily paying down debt.

The transaction is expected to increase Lincoln Financial’s adjusted operating earnings per share by about 5% and expand ROE in 2022. Under the terms of the reinsurance agreement, Lincoln Financial will retain account administration and recordkeeping of the policies.

The transaction will have no impact on Lincoln Financial’s relationship with, or commitments to, its distribution partners and policyholders, the release said. Lincoln Financial said it will continue to sell individual life insurance and executive benefits products.

The agreement is dated September 17, 2021, with an effective date of October 1, 2021. Closing of the transaction is subject to customary conditions, but no regulatory approvals are required to close the deal.

The transaction is structured as a coinsurance treaty for the general account reserves and as a modified coinsurance treaty for the separate account reserves, with counterparty protections including a comfort trust and investment guidelines to meet Lincoln Financial’s risk management objectives.

Lazard acted as financial advisor and Sidley Austin LLP served as legal advisor to Lincoln Financial.

Rotenberg to run Fidelity’s $4.1 trillion Personal Investing division

Joanna Rotenberg has been named head of Fidelity Investments’ $4.1 trillion Personal Investing division, effective early November, the fund giant and retirement plan provider announced. Rotenberg succeeds Kathy Murphy, who will step away from her role by the end of the year.

Rotenberg joins Fidelity from Toronto-based BMO Financial Group, where she was group head of Wealth Management since 2016 and a member of the company’s Executive Committee since 2010. Rotenberg will report to Abigail P. Johnson, chairman and chief executive officer of Fidelity, and join the Fidelity Operating Committee.

Fidelity’s Personal Investing division services more than 30 million client accounts with $4.1 trillion in assets under administration.

Guggenheim Life and Annuity “under review” by ratings agency

AM Best has placed under review with developing implications the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of “bbb+” (Good) of Guggenheim Life and Annuity Company (GLAC) (Wilmington, DE).

The Credit Rating actions “reflect GLAC’s decline in surplus and weakening in its risk-adjusted capital position during the first half of 2021, driven in large part by the payment of stockholder dividends to its ultimate parent, Sammons Enterprises, Inc.,” AM Best said.

GLAC’s management is working on a capital plan to increase its capital and surplus and strengthen its risk-adjusted capital position. The ratings are expected to remain under review while GLAC management finalizes its capital plans and AM Best can fully assess the impact this has on the company’s capital and surplus position and risk-adjusted capitalization.

Schwab: Average balance of self-directed brokerage accounts is $348,183

The average account balance of self-directed 401(k) brokerage accounts (SDBAs) across all retirement plan participant accounts finished Q2 2021 at $348,183, a nearly 22% increase year-over-year and a 4.3% increase from Q1 2021, according to Charles Schwab’s SDBA Indicators report for 2Q2021.

SDBAs are brokerage accounts within retirement plans, including 401(k)s and other types of retirement plans, that participants can use to invest retirement savings in individual stocks, bonds, exchange-traded funds, mutual funds and other securities outside their plan’s core investment offerings.

Trading volumes were in line with the prior year at an average of 14 trades per account, as participants encountered COVID volatility with the rise of the Delta variant, according to the report. “Despite some fears, participants saw account growth year-over-year as stocks continued to climb off the March 2020 low and consumer confidence surged back to pre-pandemic levels,” a Schwab release said..

The majority of participant assets were held in equities (37%). Mutual funds were the second largest holding at (30%), followed by ETFs (20%), cash (12%), and fixed income (1%).

Allocation Trends

The data also reveals specific asset class and sector holdings within each investment category:

Mutual funds: Large-cap funds had the largest allocation at approximately 34% of all mutual fund allocations, followed by taxable bond (19%) and international (16%) funds.

Equities: The largest equity sector holding was Information Technology at 29%. Apple was the top overall equity holding, comprising 10.26% of the equity allocation of portfolios. The other equity holdings in the top five include Tesla (6.28%), Amazon (5.03%), Microsoft (2.72%) and NVIDIA (1.84%).

ETFs: Among ETFs, investors allocated the most dollars to US equity (50%), followed by sector ETFs (15%), international equity (13%) and US fixed income (13%).

Other report highlights:

Advised accounts held higher average account balances compared to non-advised accounts – $550,127 vs. $302,330.
Gen X had the most advised accounts at 48%, followed by Baby Boomers (36%) and Millennials (13%).
Gen X made up approximately 45% of SDBA participants, followed by Baby Boomers (32%) and Millennials (18%).
Baby Boomers had the highest SDBA balances at an average of $532,338, followed by Gen X at $306,489 and Millennials at $103,777. All balances were up from Q1 2021.
On average, participants held 12.3 positions in their SDBAs at the end of Q2 2021, up slightly from 10.5 last year and consistent with Q1 2021.

The SDBA Indicators Report includes data collected from approximately 174,000 retirement plan participants who currently have balances between $5,000 and $10 million in Schwab Personal Choice Retirement Accounts. Data is extracted quarterly on all accounts that are open as of quarter-end and meet the balance criteria.

The SDBA Indicators Report tracks a wide variety of investment activity and profile information on participants with a Schwab Personal Choice Retirement Account (PCRA), ranging from asset allocation trends and asset flow in various equity, exchange-traded fund and mutual fund categories, to age trends and trading activity. The SDBA Indicators Report provides insight into PCRA users’ perceptions of the markets and the investment decisions they make.

Learn to [Ted] ‘Lasso’ Women Clients

Posted on September 22, 2021 by Kerry Pechter -

Financial advisers who want to attract and retain more female clients might want to watch “Ted Lasso,” the Emmy-sweeping series streaming on Apple TV+.

Ted is the fictional American coach of England’s fictional Richmond Greyhounds football club (i.e., soccer team). He doesn’t win many matches; he hardly knows a pitch from a playing field. But he wins the trust, confidence, and respect of almost every woman he meets.

By the eighth episode, the funny, vulnerable Lasso has melted the frosty hearts of club owner Rebecca (with his homemade shortbread), Mae, the salty, 70-something publican at a nearby sports bar, and Sharon Fieldstone, the psychologist who cures his striker’s phobia of scoring.

David Macchia

Lasso radiates the soft skills that David Macchia and Marcia Mantell must have had in mind when they created “Women And Income,” their soon-to-launch turnkey marketing, education, planning and lead-generation package for advisers who want to project the kind of aura that divorced women and widows can warm to.

Male advisers have a notoriously high client-attrition rate where women are concerned. Surveys indicate that women often change advisers when their husbands die. Since women tend to outlive men and eventually control their household’s assets, and simply as a matter of principle, the argument goes, advisers should be more sensitive to the needs and wants of women.

“I think of the women’s market as an ecosystem that advisers need to enter if they want to have a retirement income practice,” Macchia told RIJ recently. “We believe that if they can communicate better with women, their business will expand and they’ll leave women with better plans.”

Customized for women

Macchia and Mantell should be familiar names to many in the retirement industry. Macchia created the Income for Life Model (IFLM), a planning software and marketing package for agents and advisers who use the “bucketing” or “time-segmentation” method of matching assets with liabilities in blocks of three, five or 10 years over the length of an individual’s retirement.

Marcia Mantell

Mantell, an author, blogger and retirement business development consultant, has written two paperbacks: “What’s the Deal with Retirement Planning for Women?” and “What’s the Deal with Social Security for Women?” She and Macchia were active in Francois Gadenne’s Retirement Income Industry Association, or RIIA, before it disbanded in 2017.

With Women And Income, they’ve hybridized IFLM. Like IFLM, the new service will use ready-to-use, white-labeled multi-media marketing material and planning software. The gender-driven education, coaching and training tools are designed and presented by Mantell. Software training will be provided by Jason Ray, Wealth2k’s head of training and a Certified Financial Planner. The software focuses on retirement income generation.

Instead of a pure bucketing strategy, the new hybrid strategy puts an optional “floor” element or lifetime guaranteed income layer under the sequence of investment buckets. “That construct best protects women against the risks that can derail their retirement security,” Macchia said. “It’s based on what financial advisers have told me over the years and from reading research studies and white papers.”

As a business development service for advisers, Women And Income proposes to operate primarily as a lead-generation tool. Macchia and Mantell intend to recruit no more than 500 advisers nationwide. The advisers will be sent an average of 240 qualified leads per year, or about 20 per month.

“Lead generation is a large component of the new business. We’ve also created new presentation technology. This is larger in scope than what we’ve done previously, in terms of the complexity and the number of deliverables,” Macchia said. The service includes a personalized landing page and a dashboard for tracking data.

Ted Lasso

To get the leads, Macchia will use Facebook, the social media of choice among Boomer-age women. He’ll rely on Facebook ads, and Facebook’s algorithms, to put ads in front of target audiences; in this case, that would be women of the right age, geographic location, socioeconomic and marital/widowhood status. When fully ramped up, the system will provide 10,000 leads per month to 500 advisers, and 120,000 new leads per year.

Macchia will recruit women for virtual or live seminars and meetings, perhaps twice each month for 10 attendees on each occasion, where the adviser will try to convert them into clients. “By the time the advisers meet them, we’ll have familiarized the women with the topic [of retirement income],” Macchia said. “They’ll have been shown why it’s beneficial for them to attend an event, and we’ll help build attendance.”

Part of the appeal to advisers is exclusivity. Each adviser will have a distinct territory of the US with a minimum population of 500,000. Each adviser will also have exclusive access to the leads that the service generates in that territory. For these services, Macchia and Mantell expect to charge a one-time licensing fee of $2,500 for the first 50 advisers who enroll ($10,000 thereafter) and a monthly subscription fee of $2,000.

The two partners are aiming their product at all advisers, including those who are self-employed and those employed by banks, and broker-dealers. “They’re all facing the same hurdles,” Macchia said.

Know children’s names

“The male advisers know that women don’t like their approach,” Mantell said in an interview. “But they don’t know what to do. No one has been able to create a format or recipe for an adviser to follow when advising women. We provide a path. To sum it up, women are looking for personal connections and the guys are too clinical.”

It’s not necessarily rocket science, she added. Male advisers would be much more effective with women if they simply started every meeting by inquiring about a female client’s children—but they need to ask about the children by their names, and know where they go to school, and, for instance, know whether the school’s football team won or lost last week.

“You can’t fake genuine. That’s one of the messages that I try to get across. Women can tell if you’re a used car salesman from four blocks away. It’s not that we have a special radar or super power. We just get people. We understand body language and behavior. It’s instinctual. It’s our survival skill.”

A lot of consultants and financial services firms are targeting the divorced-and-widowed Boomer segment. McKinsey and Charles Schwab recently issued white papers on the topic. But the potential market appears large enough to handle lots of players. By 2030, according to data from the government’s Survey of Consumer Finance, much of the $30 trillion in Boomer-owned financial assets will be controlled by women.

So let’s channel our inner Ted Lasso. Maybe. Lasso’s wife began breaking up with him before he moved from Kansas to England to coach British football, so he has suffered at least one rejection. Or the showrunners may simply have wanted to maximize their plot options. By the start of Season Two, Ted checks all the boxes: Husband, father, eligible bachelor. With the right certifications, he’d probably make a good financial adviser as well.

What Women Care More (Or Less) About Than Men

Posted on September 22, 2021 by No Author -

How to Make US Retirement Policy Work Better

Posted on September 16, 2021 by Kerry Pechter -

Among Washington’s many policy wonks, few have tilled the field of retirement finance as diligently as William G. Gale, J. Mark Iwry, and David C. John. Their fingerprints can be found on initiatives like the auto-IRA, state-sponsored retirement plans, and the Qualified Longevity Annuity Contract (QLAC).

Over the past 20 years, they’ve hatched or championed ideas on retirement policy, articulated them in articles and books, and then tried to shepherd them through the kinks, bottlenecks and minefields of Washington’s legislative, regulatory, bureaucratic and political corn-maze.

David C. John

Now they’ve edited a book of essays called “Wealth After Work.” It’s a portable treasury of practical ideas for improving retirement security in America. The publishing arm of the Brookings Institution, with which all three are or have been associated, released the book this summer.

Gale is director of the Retirement Security Project at Brookings and the author of “Automatic: Changing the Way America Saves” (Brookings, 2009) and other books. Iwry, an attorney and former Treasury official in the Obama administration, and John, a senior public policy strategist at AARP, co-created the auto-IRA. John’s affiliation with the conservative Heritage Foundation prevents them from being cast as pure paladins of progressivism.

There are a lot of gnarly details in this book, which is a good thing. All of the policy proposals described in this book have pros and cons, which the authors document. The authors know most if not all the nuances of these policy proposals. Understanding policy nuances is essential for anyone who hopes to satisfy the many stakeholders who have to buy in before anything new gets passed—or before obstacles to new ideas can be removed.

William Gale

Readers who are interested in retirement income (or the “distribution” phase, as opposed to the pre-retirement “accumulation phase”) should find the chapters titled “From Savings to Spending,” “When Income Is the Outcome,” “Supplemental Transition Accounts for Retirement,” and “Retirement Tontines” especially valuable.

“From Savings to Spending” proposes what some might call the holy grail of workplace retirement plans: a mechanism for making a defined contribution plan behave like a defined benefit plan. They propose a managed payout fund that would hold an individual’s diversified DC savings and distribute an annual income based on fund quantity, performance, and the age of the retiree. At the same time, a small percent of the fund would go each year toward the purpose of a QLAC, to extend the same income for as long as the individual lives.

J. Mark Iwry

They also know how to untangle a knotty issue or proposal and separate its strands without taking sides. For instance, I was fascinated by the gnarly details of Chapter 12 (“When the Outcome is Income”). It deals with the hurdles to putting annuities in retirement plans—a major goal of the life/annuity industry.

The authors of this chapter—the three editors and Victoria Johnson—propose an independent body that can evaluate insurers so that individual plan sponsors doesn’t have to hire expensive consultants when trying to choose an annuity provider for their participants. They observe the futility of requiring a plan sponsor to vet an annuity provider (i.e., life insurance company) without vetting the type of annuity (Fixed income? Variable with living benefit?) that the carrier wants to sell the plan sponsor.

The chapter entitled “Supplemental Transition Accounts for Retirement” describes START accounts. These are savings sidecars, funded by workers and employers through payroll contributions (1% each) for growth in an investment fund. At retirement, give workers enough “bridge” money to delay claiming Social Security for a few years after they retire. By delaying, they lock in higher benefits for life. Savers would use their START funds, in effect, to “buy” an extra year of deferral.

The last chapter in the book describes “Retirement Tontines.” Tontines are non-guaranteed annuities that are not necessarily underwritten by life insurers. They are distinct from managed payout funds in that only the surviving contributors to the fund receive income each year. Each participant’s income is increased because there’s no life insurer charging for longevity risk transfer. Adding a death benefit or spousal continuation would require further actuarial engineering.

Honorable Mention

Posted on September 16, 2021 by Editorial Staff -

Michelle Richter to lead the Institutional Retirement Income Council

The Institutional Retirement Income Council (IRIC), a non-profit think tank for the retirement income planning community, today announced the appointment of Michelle Richter as executive director, effective October 1, 2021. Ms. Richter, a 20-year retirement industry veteran, becomes IRIC’s second executive director and will succeed Robert Melia, who is retiring at the end of September.

Michelle Richter

Ms. Richter is the founder of Fiduciary Insurance Services, LLC, a strategic consultancy and Registered Investment Adviser, and will continue in that role. She has 20 years of experience inventing, deploying, advocating for, and scaling innovative products and programs at the intersection between insurance and wealth management.

Ms. Richter serves in both retail and institutional channels, advising insurers, financial institutions and academics on new product and program design, strategic planning, launch execution, industry advocacy, marketing, and competitive intelligence. Ms. Richter holds a bachelor’s degree in Economics from Wesleyan University, and an MBA in both Management and Finance from Columbia University’s Graduate School of Business.

Melia was appointed IRIC’s first executive director in 2017. His retirement is effective September 30. He will remain actively involved with the organization through the end of the year to help ensure a smooth leadership transition.

The Institutional Retirement Income Council (IRIC) is a non-profit, membership-based organization of industry advisors who are dedicated to sharing best practices, informing about legislative and regulatory issues, and facilitating solutions for plan sponsors and their participants. Its mission is to “facilitate the culture shift of defined contribution plans from supplemental savings programs to programs that provide retirement security.”

AIG to distribute annuities through SIMON

AIG Life & Retirement’s annuities will be distributed to wealth managers through SIMON Annuities and Insurance Services, a digital insurtech platform that helps facilitate insurance sales to advisers with rider illustrations, performance statistics and allocation analytics.

“2020 and 2021 have led a new wave of advancement to digitize insurance processes. Still, it is a relationship-driven industry, and will remain so as long as investors require a broad range of products with flexible options and features to choose from,” said Jason Broder, CEO at SIMON.

“That’s where technology fits in. More professionals now have access to AIG’s incredible suite of retirement solutions and can navigate them supported by SIMON’s powerful analytics. It’s a great pleasure to welcome AIG Life & Retirement to SIMON.”

According to a release, SIMON’s technology demonstrates product features in an interactive way, showing the retirement-planning capabilities of each product available on its annuities shelf and making products easier to understand. Financial professionals will be able to find and explore AIG annuities, access product-specific marketing literature, and run allocation and income analytics within the product—all on the SIMON platform.

Morgan Stanley and Empower partner on workplace benefits

Morgan Stanley at Work and Empower Retirement are partnering on a “comprehensive workplace retirement offering” for employers who want to leverage company benefits as an employee attraction and retention tool.
The partnership builds on an existing relationship between the two firms, which includes both Morgan Stanley’s investment services and Empower’s technology and product and service capabilities. The partnership entails:

Combined access to Morgan Stanley at Work’s stock plan administration services and Empower’s growing retirement plan market share
Access to cobranded digital-forward solutions and capabilities
Streamlined administration for plan sponsors and Financial Advisors
Fund selection driven by the Morgan Stanley Global Investment Manager Analysis (GIMA) team
Favorable administrative pricing terms through Morgan Stanley.

The Empower partnership will expand Morgan Stanley at Work’s ability to serve advisor-sold plans under $50 million in assets with comprehensive retirement solutions to attract and retain talent. The partnership with Empower comes shortly after Morgan Stanley at Work announced a business partnership and strategic investment with Vestwell to serve small retirement plans, demonstrating its commitment to innovation and thoughtful disruption in the workplace wealth space.

Morgan Stanley at Work’s Retirement Solutions is a flexible, multi-provider recordkeeper platform designed to meet the individual needs of companies. Through a consultative process, the Firm’s retirement specialists help companies improve plan competitiveness and fiduciary risk management, investment selection and monitoring, and employee retirement readiness.
Retirement Solutions is part of the Morgan Stanley at Work suite of financial solutions, which spans Equity Compensation through Shareworks and E*TRADE Equity Edge Online, Retirement and Financial Wellness Solutions. Morgan Stanley at Work combines cutting-edge planning and risk management software, Morgan Stanley intellectual capital and financial education delivered through multiple channels, including Equity Edge Online, are part of the Morgan Stanley at Work solutions and are offered by E*TRADE Financial Corporate Services, Inc.

Jackson National completes ‘demerger’ from UK parent

Jackson National Life announced this week that it has completed its previously announced demerger from Prudential plc. Jackson is now an independent company, and its Class A common stock is expected to commence “regular way” trading under the ticker symbol “JXN” on the New York Stock Exchange on September 20, 2021.

Jackson, now headed by CEO Laura Prieskorn, is the top retailer of individual variable annuities in the US and its Perspective II is the top-selling variable annuity contract.

Prudential plc (unrelated to Prudential Financial in the US) shareholders voted to approve the demerger on August 27, 2021, and Jackson’s Class A common stock began “when-issued” trading on the New York Stock Exchange on September 1, 2021. Prudential shareholders of record as of the close of business on September 2, 2021, received a distribution of one share of Jackson’s Class A common stock for every 40 shares of Prudential ordinary stock held on the record date.

Concurrently with the completion of the demerger, the previously announced appointments to Jackson’s Board of Directors became effective.

Health Savings Accounts: Not Used as Directed

The Employee Benefit Research Institute released a study finding that between 2019 and 2020, Health Savings Account (HSA) balances modestly increased by $400. However, average annual individual contributions fell 2%. Average annual distributions declined to an all-time low of $1,700.

The study, “Trends in Health Savings Account Balances, Contributions, Distributions, and Investments and the Impact of COVID-19,” concluded that account owners are mainly using the accounts to cover current expenses instead of leveraging the tax preference by contributing the maximum or by maintaining HSA balances for retirement health care expenses. In addition, account holders’ use of investments other than cash within HSAs remains low, at 9%.

Lower HSA contributions could be tied to employment concerns related to the COVID-19 pandemic; distribution declines could owe to fewer people seeking routine medical care during the pandemic, EBRI said.

This Issue Brief is the fifth in a series of longitudinal studies from EBRI’s HSA Database, examining trends in account balances, individual and employer contributions, distributions, invested assets, and account-owner demographics from 2011‒2020. Such analysis can help plan sponsors, providers and policymakers better understand strategies that can help improve employee financial wellness. The HSA Database contains 11.4 million accounts with total assets of $32.9 billion as of Dec. 31, 2020.

“As individuals become more familiar with HSAs, they are using the accounts more as designed,” said Paul Fronstin, EBRI Director of Health Research and Education. “Account balances are growing over time, enabling longtime accountholders to withdraw larger sums when unexpected major health expenses occur. Plan sponsors that value employee financial wellness can work with administrators and advisors to better educate employees on the use of HSAs, including available investments.”

A New Path to Inflation-Resistant Income

Posted on September 16, 2021 by Kerry Pechter -

Achaean Financial and National Western Life Insurance are finally bringing to market Lorry Stensrud’s long-nurtured idea for an immediate income annuity with upside potential. RIJ recently obtained a copy of the state filing document from National Western. State approvals are pending.

The product’s working title has been simply Income Plus+ (IP+), but that could change when National Western brands it. Like a single premium immediate annuity (SPIA), it can provide retirees with monthly income for life. The client can surrender it, however; and it has a death benefit. Like an indexed annuity, it uses options on an equity index (the S&P MARC 5) to create income growth.

Chad Tope

“Customers give us money and we give them a guaranteed income stream immediately. We also take a small portion of their money and buy a three-year option on an equity index,” said Chad Tope, chief marketing officer at National Western Life and a veteran of annuity distribution at Voya.

“The performance of the option account will determine if their payments increase. If there’s growth at the end of three years, the income steps up by the change in the Consumer Price Index. But the payments can’t go down,” he told RIJ in an interview.

“We have the ability to change the mindset of how advisors think about longevity and mortality based offerings, and to give them an alternative to a 60/40 portfolio with bonds paying in the 2% to 2.5% range. A 20% portfolio allocation to IP+ can provide guaranteed lifetime income, take stress off the equity portfolio, and potentially reduce withdrawals from the equity portfolio,” Stensrud told RIJ in an email.

Lorry Stensrud

According to the hypothetical example on the filing document, a 65-year-old male who purchased IP+ with a $100,000 premium would receive at least $1,097 per quarter or $4,388 per year for life. Payments are designed to start low and rise with credits from the options on the index.

The S&P MARC 5 Index is a multi-asset index diversified into the S&P 500 Index (without dividends), the S&P GSCI Gold Index and the S&P US 10-Year Treasury Note Futures Index. It seeks a volatility level of 5%. It overweights equities when volatility is low and overweights bonds when volatility is high. The index was created in March 2017.

Ross Moody

National Western Life is a stock company incorporated in Colorado with headquarters in Austin, Texas. It is closely held by the Moody family. Its president and CEO is Ross Moody. According to its latest 10-Q filing, it has about $14.5 billion in assets and $11.9 billion in liabilities. The company is rated A by AM Best and A- by Standard & Poor’s. According to publicly available sources, it was founded in 1956, and as of 2019 had about 275 employees and 25,200 contracted independent agents and operates in 49 US states.

The company reported $118 million in sales in the quarter ending June 30, 2021. Of that, about $114 million involved fixed indexed annuity contracts. Like other insurers, the company has used reinsurance to relieve capital pressures and in recent years has invested more in bonds rated BBB-, according to the 10-Q.

The IP+ annuity was successfully piloted last year by advisers using the JourneyGuide retirement planning program, which is part-owned by Tim Ash of Ash Brokerage.

Tope said that IP+ will mainly be distributed through advisers at banks and broker-dealers. “The product is intended for advisers who do retirement income planning,” he told RIJ. “It’s not meant for single sales. It’s got to be part of a planning process.”

Stensrud sees room for IP+ in the “1035 exchange” market. He thinks a lot of existing variable annuity owners and their advisers will see logic in exchanging their VAs for IP+, which he thinks will be seen as superior in cost and upside potential to a VA with a guaranteed lifetime withdrawal benefit (VA/GLWB). “This solves the suitability and ‘best interest’ issues associated with exchanges,” he said.

“The 79% of advisers who are primarily fee-based find our indexed product attractive since it has a higher starting payment than bonds, no market risk and the highest probability of increasing income,” Stensrud told RIJ. There will eventually be a no-commission version of the product for the fee-based market. “That being said,” he added, “this is a new product and faces the training and education requirements necessary to build a market. Luckily, for Achaean we can use JourneyGuide’s training and illustration tool.”

Stensrud was CEO of annuity operations at Lincoln National Life, called Lincoln Retirement, during the development of Lincoln’s i4Life rider, which was a guaranteed income benefit on a variable annuity. When Lincoln consolidated its life and annuity operations in 2003, Stensrud left to start his own company.

We wrote about Stensrud’s IP+ idea in 2010, in 2012, 2016, and in 2020, as he searched for a life/annuity company to underwrite the product. Early on, he positioned it as way for them to relieve the pressure on their balance sheets from capital-intensive VAs with GLWBs.

Why did it take so long for Achaean to find a life insurer to underwrite IP+? “At first, life companies didn’t want to hear our message because they were enamored with GMxB sales results and the associated ‘arms race,’” Stensrud said. “Then, when dangers of these products were revealed and capital requirements increased, most of the same companies moved to survival mode and were not interested in new ideas.”

Tax hike looms for top earners

Posted on September 16, 2021 by Editorial Staff -

On Monday, Sept. 13, House Ways and Means Committee Chair Richard Neal (D-MA) introduced the final portion of the committee’s budget reconciliation recommendations. The latest section—Subtitle I, Responsibly Funding Our Priorities—contains tax increases on high-income individuals, corporate and international companies and funding to increase Internal Revenue Service enforcement, among other provisions. The major changes for individuals are described below. A section by section summary of Subtitle I can be found here.

Once the House Ways and Means Committee and the other House committees approve their respective budget recommendations, which House Democratic leaders have requested be completed by Sept. 15, the entire package will be compiled by the House Budget Committee and then sent to the House Rules Committee for the debate process for House floor consideration.

Increase in Top Marginal Individual Income Tax Rate. The provision increases the top marginal individual income tax rate in section 1(j)(2) to 39.6%. This marginal rate applies to married individuals filing jointly with taxable income over $450,000, to heads of households with taxable income over $425,000, to unmarried individuals with taxable income over $400,000, to married individuals filing separate returns with taxable income over $225,000, and to estates and trusts with taxable income over $12,500. The amendments made by this section apply to taxable years beginning after December 31, 2021.

Increase in Capital Gains Rate for Certain High Income Individuals. The provision increases the capital gains rate in section 1(h)(1)(D) to 25%. The amendments made by this section apply to taxable years ending after the date of introduction of this Act. A transition rule provides that the preexisting statutory rate of 20% continues to apply to gains and losses for the portion of the taxable year prior to the date of introduction. Gains recognized later in the same taxable year that arise from transactions entered into before the date of introduction pursuant to a written binding contract are treated as occurring prior to the date of introduction.

Increase in Corporate Tax Rate. This provision replaces the flat corporate income tax with a graduated rate structure. The rate structure provides for a rate of 18 percent on the first $400,000 of income; 21 percent on income up to $5 million, and a rate of 26.5% on income thereafter. The benefit of the graduated rate phases out for corporations making more than $10,000,000.

Funding of the Internal Revenue Service. This provision appropriates $78,935,000,000 for necessary expenses for the IRS for strengthening tax enforcement activities and increasing voluntary compliance, and modernizing information technology to effectively support enforcement activities. $410,000,000 is appropriated for necessary expenses for the Treasury Inspector General for Tax Administration to provide oversight of the IRS.

Prohibition of IRA Investments Conditioned on Account Holder’s Status. The bill prohibits an IRA from holding any security if the issuer of the security requires the IRA owner to have certain minimum level of assets or income, or have completed a minimum level of education or obtained a specific license or credential.

Tax Treatment of Rollovers to Roth IRAs and Accounts. Under current law, contributions to Roth IRAs have income limitations. For example, the income range for single taxpayers for making contributions to Roth IRAs for 2021 is $125,000 to $140,000. Those single taxpayers with income above $140,000 generally are not permitted to make Roth IRA contributions.

However, in 2010, the similar income limitations for Roth IRA conversions were repealed, which allowed anyone to contribute to a Roth IRA through a conversion, irrespective of the still-in-force income limitations for Roth IRA contributions. As an example, if a person exceeds the income limitation for contributions to a Roth IRA, he or she can make a nondeductible contribution to a traditional IRA – and then shortly thereafter convert the nondeductible contribution from the traditional IRA to a Roth IRA.

In order to close these so-called “back-door” Roth IRA strategies, the bill eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031.

Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.

Increase in Minimum Required Distributions for High-Income Taxpayers with Large Retirement Account Balances.

If an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, a minimum distribution would be required for the following year. This minimum distribution is only required if the taxpayer’s taxable income is above the thresholds described in the section above (e.g., $450,000 for a joint return). The minimum distribution generally is 50 percent of the amount by which the individual’s prior year aggregate traditional IRA, Roth IRA and defined contribution account balance exceeds the $10 million limit.

In addition, to the extent that the combined balance amount in traditional IRAs, Roth IRAs and defined contribution plans exceeds $20 million, that excess is required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans. Once the individual distributes the amount of any excess required under this 100 percent distribution rule, then the individual is allowed to determine the accounts from which to distribute to satisfy the 50 percent distribution rule above.

This provision is effective tax years beginning after December 31, 2021.

Contribution Limit for Individual Retirement Plans of High-Income Taxpayers with Large Account Balances.

Under current law, taxpayers may make contributions to IRAs irrespective of how much they already have saved in such accounts. To avoid subsidizing retirement savings once account balances reach very high levels, the legislation creates new rules for taxpayers with very large IRA and defined contribution retirement account balances.

Specifically, the legislation prohibits further contributions to a Roth or traditional IRA for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year. The limit on contributions would only apply to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation).

The legislation also adds a new annual reporting requirement for employer defined contribution plans on aggregate account balances in excess of $2.5 million. The reporting would be to both the Internal Revenue Service and the plan participant whose balance is being reported.

The provisions of this section are effective tax years beginning after December 31, 2021.

Surcharge on High Income Individuals, Trusts, and Estates.

This provision adds section 1A, which imposes a tax equal to 3% of a taxpayer’s modified adjusted gross income in excess of $5,000,000 (or in excess of $2,500,000 for a married individual filing separately). For this purpose, modified adjusted gross income means adjusted gross income reduced by any deduction allowed for investment interest (as defined in section 163(d)). The amendments made by this section apply to taxable years beginning after December 31, 2021.

Major Tax Changes for Individuals Approved by House Ways & Means Committee

Posted on September 16, 2021 by No Author -

Prudential Sells $31bn Annuity Block to Bermuda Reinsurer

Posted on September 15, 2021 by Editorial Staff -

Prudential Financial (NYSE: PRU) will sell part of its in-force legacy variable annuity block to Fortitude Re, Bermuda’s largest multiline reinsurer, for $1.5 billion, Prudential announced this week. This deal also releases about $700 million in surplus capital that Prudential can now use for other purposes. Prudential will continue to issue its FlexGuard series of indexed variable annuity contracts, a release said.

The deal will move about $31 billion in assets and liabilities to Fortitude Re, whose parent, Fortitude Group Holdings (FGH), was purchased from AIG in mid-2020 by global investment manager Carlyle Group and T&D Holdings, a Tokyo-based life insurance holding company with a 50-year partnership with AIG in Japan. Its T&D United Capital unit, an asset manager, owns 25% of FGH.

Fortitude Re is a key player in what RIJ has called the “Bermuda Triangle” strategy. This three-cornered structure involves a life insurer, a big asset manager, and a Bermuda-based reinsurer. It frees surplus capital for the insurer, increases the assets under management of the investment company, and exploits the difference in accounting regimes between Bermuda and the US. Sometimes affiliated firms or close strategic partners control all three facets of the strategy.

Deal specifics

Under the agreement, Prudential will sell one of its stand-alone legal entity subsidiaries, Prudential Annuities Life Assurance Corporation (PALAC), including PALAC’s in-force annuity contracts, to Fortitude Re, for an all-cash purchase price of $1.5 billion, subject to certain adjustments at closing, plus an unspecified capital release to Prudential and an expected tax benefit.

The PALAC block primarily consists of non-New York traditional variable annuities with guaranteed living benefits that were issued before 2011. These types of annuities were capital-intensive, in part because it’s difficult to predict how policyholders will use them. Those contracts represent about $31 billion or 17% of Prudential’s total in-force individual annuity account values as of June 30, 2021, or about $180 billion.

Regarding its ongoing individual annuity business, Prudential said in its release:

Prudential will retain its interest in all FlexGuard buffered annuity contracts and PALAC recently issued fixed and fixed indexed annuities through a reinsurance agreement with Fortitude Re and, subject to regulatory approvals, intends to offer those FlexGuard and other recent PALAC customers the option to replace the issuer of their contract with another Prudential subsidiary, with further details to be provided to applicable customers. Prudential will continue to sell new FlexGuard and other protected outcome solutions through additional existing subsidiaries.

“Prudential’s individual Annuities business in the US remains an important component of our business mix and organic growth strategy,” said Prudential Executive Vice President and Head of US Businesses Andy Sullivan. “Going forward, we will be better positioned to deliver new investment strategies like FlexGuard, which continues to achieve record success, and focus on creating the next generation of protected income solutions.”

The ratings agency AM Best reported on the trade yesterday. “The roughly USD 30 billion of variable annuities acquired in the deal will be funded via excess capital and modest debt issuances at FGH.” The execution risk associated with the deal will be mitigated partly by “the Fortitude Re management team’s extensive expertise in the variable annuity sector, and by the higher certainty around future cash flow patterns resulting from acquiring the business via a secondary market,” AM Best said.

While “Fortitude Re is not participating directly in the acquisition, the change in FGH’s capitalization could have an impact, as its financial flexibility could become limited if initial assumptions around the acquisition materially change. The transaction is not anticipated to impact the organizations balance sheet strength metrics materially following its anticipated close in first-half 2022,” the ratings agency said in a release.

Upon closing, Prudential anticipates a reduction to pre-tax annual adjusted operating income of approximately $290 million, based on an estimate of lost revenue on the transferred $31 billion. Proceeds from the transaction are expected to be used for general corporate purposes. The transaction is subject to regulatory approval and other customary closing conditions. It is expected to close during the first half of 2022.

Fortitude Re “designs bespoke transactional solutions for legacy Life & Annuity and P&C lines. Fortitude Re is an independent company backed by a consortium of sophisticated groups led by The Carlyle Group and T&D Insurance Group. Fortitude Re holds approximately $45 billion in invested assets as of June 30, 2021,” the release said.

Debevoise & Plimpton LLP served as legal counsel to Fortitude Re. Sidley Austin LLP served as legal counsel to Prudential, and Goldman Sachs & Co. LLC served as exclusive financial advisor.

Progress for retirement provision in ‘Build Back Better’ bill

Posted on September 10, 2021 by Editorial Staff -

The House Ways and Means Committee has approved the retirement subtitle of the Build Back Better Act, legislation supported by the American Retirement Association as a way to help close the coverage gap and boost the existing retirement savings system, according to a report from the National Association of Plan Advisors.

The retirement subtitle, which is estimated to cost nearly $47 billion over 10 years, was approved by the Committee Sept. 9 on a near party-line vote of 22-20. Reps. Stephanie Murphy (D-FL) and Ron Kind (D-WI) voted against the retirement legislation. It will now be sent to the House Budget Committee to be packaged with a larger set of other proposals as part of the budget reconciliation bill—the cost of which could reach $3.5 trillion—before moving to the full House of Representatives for consideration.

To read the original story, click here:

For more details on the Subtitle B retirement provisions, click here. The legislative text for the retirement provisions (Subtitle B) is available here, and a Joint Tax Committee description of the legislation is here.

The Bermuda Triangle was Busy this Summer

Posted on September 10, 2021 by Kerry Pechter -

Followers of what RIJ calls the “Bermuda Triangle” trend may have spotted a couple of large deals in that space this past summer—during that deceptively peaceful lull between mass vaccinations and the Delta surge.

On August 9, the recently created Bermuda-domiciled reinsurance arm of $600 billion asset manager Brookfield Asset Management bought Texas-based American National Group, a closely held publicly traded life insurance company group, for $5.1 billion. American National Life had $28.6 billion in assets at the end of 2019.

On July 13, Global Atlantic Financial Group, a US-focused annuity, life insurance and reinsurance company majority-owned by KKR, the $342 billion global asset manager, reported a new USD $4.8 billion reinsurance transaction.

In the deal, Global Atlantic’s Bermuda-based subsidiary Global Atlantic Assurance Limited will reinsure blocks of life insurance policies issued by subsidiaries of French insurer AXA: AXA China Region Insurance Company Ltd and AXA China Region Insurance Company (Bermuda) Ltd. It was Global Atlantic’s first block reinsurance transaction sourced outside the United States, according to a release.

RIJ uses the term Bermuda Triangle to refer to the trend, not entirely new but accelerating as we speak, that involves complex three-way arrangements between a US life/annuity company, a Bermuda-based reinsurance company, and a large asset manager like KKR, Apollo, Blackstone, Carlyle, Ares, or Brookfield.

These wealthy firms are buying insurers or reinsuring blocks of business because it gives them several opportunities to make money. They can earn fees managing the assets (insurance and annuity premiums), they can take advantage of Bermuda’s GAAP accounting regime to economize on capital and invest in riskier, higher-yielding assets, or they can borrow against a life insurer’s assets to finance new deals, bringing in more institutional investors. Since annuity premiums doesn’t move for years at a time, they can earn an “illiquidity premium” from investing in long-dated assets, either for sale to life insurers or other investors.

This is heralded on Wall Street as a win-win-win. Private equity firms are said to know how to get more yield from the insurance assets, thus putting the liabilities (promises to policyholders or contract owners) on a firmer financial footing.

When they own life insurers, the PE firms are said to pass higher yields on to annuity owners by offering them higher crediting rates on fixed deferred or fixed indexed annuities. Since they are using these assets to make higher profits, they’re also helping their own shareholders. Bermuda, by the way, welcomes all this commerce.

So why aren’t I ready to celebrate the Bermuda Triangle? Because some of these deals, unlike the Bermuda weather, often lack for sunshine. Financial activity in Bermuda isn’t as transparent as it is in the US, and the synergies enjoyed by affiliated dealmakers there might be viewed as conflicts-of-interest if they were within view of US regulators. More generally, the life insurance business is looking more like the investment business, and I’m not convinced that’s a good thing.

Bermuda’s Role in a Changing Annuity Industry

Posted on September 10, 2021 by Kerry Pechter -

Bermuda’s pink sand beaches and reliably blue skies are lovely, but the tiny archipelago in the Atlantic has an added appeal. Its financial regulatory climate makes it a perfect domicile for the reinsurance operations of life insurers and, to an increasing degree, private equity companies.

Visitors from those companies are keeping Bermuda-based actuaries busy. An actuary at a global insurance broker and consulting firm, has seen a “doubling or tripling of business,” he told RIJ this week. He asked not to be identified by name and that his company not be identified because he wasn’t cleared to speak to the media.

“Reinsurance assets under management in Bermuda have grown from $300 billion to $700 billion in the past three years,” he said. “All the big insurance companies are here, and all the private equity companies are eyeing Bermuda. They want to take advantage of the economic nature of the Bermuda reserving requirement.”

Reinsurers are simply insurers for insurers—sharing the risks and rewards of the insurance business without the responsibilities and expenses of marketing, distributing and administering annuity contracts or life insurance policies.

An acceleration in the purchase of Bermuda-based reinsurance is the latest in a decade of maneuvers by life/annuity companies in the US to deal with low yields on high-quality bonds. The Fed’s low-rate policy since 2009, so nourishing for equities, reduces the investment yield they need to write guarantees and earn profits for shareholders.

If low rates are a kind of desert, Bermuda represents a palm-fringed oasis. Its financial regulators use Generally Accepted Accounting Principles (GAAP). Under GAAP, estimates of annuity liabilities—what insurers owe to policyholders or contract owners—can be lower than under Statutory Accounting Principles (SAP), which insurers must follow when preparing financial statements for regulators in the US.

Bermuda, 650m E of Cape Hatteras

By purchasing reinsurance in Bermuda on their weaker US liabilities, US insurers can capture the benefits of this difference and improve their finances. They can set up their reinsurance arms in Bermuda and buy it from themselves.

In recent years, big private equity firms have stepped in. Insurers have always hired them to help manage their investments. But, increasingly, the big PE firms (also known as buyout firms or alternative asset managers) have established their own Bermuda-based reinsurers, have bought or reinsured blocks of life insurance or annuity business from US life insurers, and have even purchased US life/annuity companies through their Bermuda reinsurers. This allows them to issue insurance products, reinsure them, and manage the premiums—beyond the view, to some extent, of US regulators.

At RIJ, we’ve dubbed this powerful, vertically integrated arrangement the “Bermuda Triangle.” The steady pursuit of this strategy over the past decade is transforming the annuity industry, with implications for insurers, advisers and clients. On the plus side, the buyout firms have infused the life/annuity business with innovation and capital that it arguably needed. But in bending the annuity industry to their own purposes, are these firms bending it too far? The search for answers starts in Bermuda.

The world’s offshore reinsurance capital

Regulators and business development groups in Bermuda, a British territory located 650 miles east of Cape Hatteras, NC, have aimed at creating a Goldilocks financial regulatory framework—not too accommodating or too strict. It has a rare distinction: recognition by the European Commission as compatible with Europe’s “Solvency II” requirements for insurers and reinsurers. That recognition happened at the end of 2015, and it has helped build Bermuda into a major hub for reinsurance.

Bermuda tries to make reinsurance easy. The big accounting and insurance brokerage firms are there to help advise insurers who are new to reinsurance. It’s also a place where a reinsurer can report the investments backing its liabilities in “five or six pages” instead of the thousand-plus pages that a state regulator in the US might require, according to Tom Gober, a forensic accountant who studies and evaluates the assets backing insurance policies and contracts.

Bermuda-domiciled reinsurers accounted for about $30 billion of the $76 billion in US insurance premium that were reinsured by (“ceded to”) offshore reinsurers in 2019, the Reinsurance Association of America reported. (See chart below.)

“In recent months, the life and annuity market has experienced an unprecedented level of mergers and acquisitions (M&A) activity, as COVID-19 has accelerated an industry restructuring brought on by prolonged low interest rates and the emergence of private equity investor interest,” wrote a PricewaterhouseCoopers accountant in Bermuda Reinsurance magazine last June.

“Registrations over the past year have included private equity investors setting up their own reinsurers, existing players setting up sidecars to bring in third party capital and investment bank-backed transformation vehicles. This increase in activity is an acceleration of the trend in growth seen over the past decade.”

‘Regulatory arbitrage’

When a Bermuda-based reinsurer buys a US life insurer or reinsures a chunk of a US life insurer’s liabilities (or reserves), the reinsurer assumes the liabilities (money that will someday be returned to policyholders) of the US insurer, accompanied by sufficient assets (premium paid in by the policyholder) to back them up.

GAAP accounting, which Bermuda reinsurers use, allows them to estimate or assess those liabilities at a lower price than the US life insurer could using SAP accounting. Fewer assets are required to back up the same set of liabilities in Bermuda.

“Say that a person puts $100,000 into a fixed annuity,” a Bermuda-based actuary told RIJ. “The liability for the US issuer under SAP might be $98,000. For the Bermuda reinsurer it might be only $85,000. In the US, you have to reserve for the worst possible economic scenario. But there may be no actual scenario where you would have to pay the full amount.”

By moving a risk off the insurer’s balance sheet, reinsurance reduces the requirement for the “risk-based capital” that the insurer needs to hold. This capital is “released” for other purposes. The difference in the cost of the liabilities—$13,000 in the example above—doesn’t necessarily mean that the support for the liability is weaker, he noted.

Here’s how the Insurance Information Institute’s website describes the difference in accounting regimes: “SAP accounting is more conservative than generally accepted accounting principles (GAAP), as defined by the Financial Accounting Standards Board, and is designed to ensure that insurers have sufficient capital and surplus to cover all anticipated insurance-related obligations.

“The two systems differ principally in matters of timing of expenses, tax accounting, the treatment of capital gains and accounting for surplus. Simply put, SAP recognizes liabilities earlier or at a higher value and recognizes assets later or at a lower value. GAAP accounting focuses on a business as a going concern, while SAP accounting treats insurers as if they were about to be liquidated.”

But most of the reinsurance deals in the Bermuda Triangle strategy are not plain-vanilla reinsurance, or even plain-vanilla offshore reinsurance. Today’s deals are more likely to involve “modified co-insurance” or “co-insurance with funds withheld.” These are highly complex, less transparent deals between a life/annuity company and its own captive or affiliated Bermuda-based reinsurer, or even between Bermuda-based reinsurer and a life/annuity company that it owns. These involve complex paper transactions that can produce accounting windfalls. Though too complex to address here, we’ll explore the financial benefits of these deals in the future installments of the series.

‘Convergence of demand’

These co-insurance deals are widely characterized as win-wins for private equity firms and for life/annuity companies. “There’s a convergence of demand from private equity firms on the buy-side and from annuity sellers on the sell-side to do something about in-force books that are producing less than ideal returns,” Tim Zawacki, an analyst at S&P Global Market Intelligence told RIJ recently.

“These transactions give the cedant [the life insurer reinsuring in-force blocks of annuities, for instance] access to a much wider array of higher-yielding assets that they can produce internally,” he said. “The asset manager can create investments for these portfolios that may drive higher yields than the insurance companies could achieve on their own,” such as private debt or securitized mortgages.

“This partnership between insurer or reinsurer and PE firm is beneficial for both parties,” wrote Phill Namara at Montaka, an advisory firm in Surry Hills, Australia, in a recent blogpost. “The private equity firms receive long-term capital with little redemption risk that they can invest and earn recurring management fees and performance fees, granted they abide by state insurance laws…

“On the other hand, the insurers or reinsurers benefit from being able to shed legacy liabilities from their balance sheet and [get] higher mixed investment returns from their increased exposure to the PE asset class. Further, they also benefit from presumably lower investment manager fees, given their capital is now managed within the same entity.”

Coming attractions

Tom Gober

Not everyone is so sanguine about these trends. In the fully articulated version of the Bermuda Triangle strategy, two or even all three pieces of the puzzle—the asset manager, the reinsurer and the life insurer—are controlled by the same company. Some, like the forensic accountant Tom Gober, are concerned that the offshore deals might be opaque, and lack the checks and balances that exist when unaffiliated counterparts are involved.

“While I have seen many different varieties of mechanisms used in affiliated, offshore reinsurance deals, all of those variations resulted in the same outcome: they create an appearance of new, extra surplus that would certainly not be allowed in the regulated insurance company – the ceding company,” Gober told RIJ.

Since the financial crisis, many life insurers, in response to the Fed’s monetary policy, have reached for yield by investing in alternative assets that some regard as riskier, including asset-backed securities such as collateralized loan obligations. The National Association of Insurance Commissioners (NAIC) recently reported that private equity-affiliated life insurers, on average, hold higher concentrations of such assets than does the life/annuity industry overall. That makes some observers worry about the potential for higher risk in the system, and the chance for future insolvencies.

There are also potential questions about fixed indexed annuities (FIAs), the product that private equity-owned life/annuity companies like to produce because the money stays in place for up to 10 years at a time. The PE firms call it, “permanent capital.” The lengthy terms give the asset managers time to invest in potentially high-yielding “illiquid assets,” like collateralized loan obligations.

But FIAs are controversial. The federal government twice tried (in 2007 and 2016) and failed to regulate them more closely, out of concern for their complexity and for a history of unsuitable sales by independent insurance agents. Misgivings about FIAs remain, especially among registered investment advisors (RIAs) and financial planners.

All of these developments are reshaping the annuity industry in ways that few distributors or advisers, let alone clients, are likely to appreciate. We’ll address them in future installments of the Bermuda Triangle series.

What are I Bonds?

How I Bonds work

A Real CAPE to Fear

Helping clients to the finish line

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Rotenberg to run Fidelity’s $4.1 trillion Personal Investing division

Guggenheim Life and Annuity “under review” by ratings agency

Schwab: Average balance of self-directed brokerage accounts is $348,183

Allocation Trends

Other report highlights:

Customized for women

Know children’s names

Michelle Richter to lead the Institutional Retirement Income Council

AIG to distribute annuities through SIMON

Morgan Stanley and Empower partner on workplace benefits

Jackson National completes ‘demerger’ from UK parent

Health Savings Accounts: Not Used as Directed

Deal specifics

Data Connection

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