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When Inflation Doves Cry

Posted on August 26, 2013 by Allan Meltzer -

The Wall Street Journal recently ran a front-page article reporting that the monetary-policy “doves,” who had forecast low inflation in the United States, have gotten the better of the “hawks,” who argued that the Fed’s monthly purchases of long-term securities, or so-called quantitative easing (QE), would unleash faster price growth.

The report was correct but misleading, for it failed to mention why there is so little inflation in the US today. Were the doves right, or just lucky?

The US Federal Reserve Board has pumped out trillions of dollars of reserves, but never have so many reserves produced so little monetary growth. Neither the hawks nor the doves (nor anyone else) expected that.

Monetarists insist that economies experience inflation when money-supply growth persistently exceeds output growth. That has not happened yet, so inflation has been postponed.

Instead of rejecting monetary theory and history, the army of Wall Street soothsayers should look beyond the Fed’s press releases and ask themselves: Does it make sense to throw out centuries of experience? Are we really so confident that the Fed has found a new way?

The Fed has printed new bank reserves with reckless abandon. But almost all of the reserves sit idle on commercial banks’ balance sheets. For the 12 months ending in July, the St. Louis Fed reports that bank reserves rose 31%. During the same period, a commonly used measure of monetary growth, M2, increased by only 6.8%. No sound monetarist thinks those numbers predict current inflation.

Indeed, almost all the reserves added in the second and third rounds of QE, more than 95%, are sitting in excess reserves, neither lent nor borrowed and never used to increase money in circulation. The Fed pays the banks 0.25% to keep them idle.

With $2 trillion in excess reserves, and the prospect of as much as $85 billion added each month, banks receive $5 billion a year, and rising, without taking any risk. For the bankers, that’s a bonanza, paid from monies that the Fed would normally pay to the US Treasury. And, adding insult to injury, about half the payment goes to branches of foreign banks.

In normal times, there are valid reasons for paying interest on excess reserves. Currently, however, it is downright counter-productive. Bank loans have started to increase, but small borrowers, new borrowers, and start-up companies are regularly refused.

Current low interest rates do not cover the risk that banks would take. To be sure, they could raise the rate for new and small borrowers; but, in the current political climate, they would stand accused of stifling economic recovery if they did.

The new Consumer Financial Protection Board is also a deterrent, as banks consider it safer to lend to the government, large corporations, and giant real-estate speculators. The banks can report record profits without much risk, rebuild capital, and pay dividends and bonuses. And the Fed can congratulate itself on the mostly unobserved way that the large banks have used taxpayers’ money.

Instead of continuing along this futile path, the Fed should end its open-ended QE3 now. It should stop paying interest on excess reserves until the US economy returns to a more normal footing. Most important, it should announce a strategy for eliminating the massive volume of such reserves.

I am puzzled, and frankly appalled, by the Fed’s failure to explain how it will restore its balance sheet to a non-inflationary level. The announcements to date simply increase uncertainty without telling the public anything useful. Selling $2 trillion of reserves will take years. It must do more than repeat that the Fed can raise interest rates paid on reserves to encourage banks to hold them. It will take a clearly stated, widely understood strategy – the kind that Paul Volcker introduced in 1979-1982 – to complete the job.

Should the end of QE come in September, December, or later? Does it matter? Historically, the Fed has typically been slow to respond to inflation. Waiting until inflation is here, as some propose, is the usual way. But that merely fuels inflation expectations and makes the task more painful.

And how high will the Fed push up interest rates? Once rates get to 5% or 6%, assuming inflation remains dormant, the Fed can expect a backlash from Congress, the administration, unions, homebuilders, and others.

When contemplating the consequences of this, remember that 40% of US government debt comes due within two years. Rolling it over at higher rates of 4% or 5% would add more than $100 billion to the budget deficit. And that is just the first two years. The budget cost increases every year, as more of the debt rolls over – and that does not include agency debt and the large increase in the current-account deficit to pay China, Japan, and other foreign holders of US debt.

Those who believe that inflation will remain low should look more thoroughly and think more clearly. There are plenty of good textbooks that explain what too many policymakers and financial-market participants would rather forget.

Allan H. Meltzer, University Professor of Public Policy at Carnegie Mellon University and Distinguished Visiting Fellow at the Hoover Institution, is the author of Why Capitalism? and A History of the Federal Reserve.

Most Advisors Favor ERISA Fiduciary Standard: Survey

Posted on August 26, 2013 by Kerry Pechter -

Almost 80% of financial advisors say they support the ERISA fiduciary standard for advice to investors regarding their 401(k) and IRA retirement accounts, according to the results of a recent survey by fi360 and Think Advisor.

The survey measured the attitudes of financial intermediaries toward the fiduciary standard and how they apply fiduciary principles – or not – in practice. More than 380 advisors from a broad set of business models, registration types and compensation schemes participated in the survey.

Participants included registered investment advisers, investment adviser reps (RIA/IARs); broker-dealer registered reps; dual registrants – who are both RIA/IARs and BD registered reps; insurance consultants and insurance producers. Their clients include individual and retirement investors.

The advisory and brokerage industries are currently waiting for a new proposal from the U.S. Department of Labor (DoL) on fiduciary rules that would require advice-givers to put the interests of plan participants first—ahead of their own financial interests or the financial interests of a broker-dealer that pays them—when advising participants.

Current rules allow some advisors to remain exempt from the ERISA fiduciary standard under certain conditions. Several large financial services companies have opposed adoption of a fiduciary standard for all intermediaries.

The 2013 fi360-ThinkAdvisor Fiduciary Survey was conducted by fi360, an organization for fiduciary education, investment analytics, support services and industry insights for financial professionals, in partnership with ThinkAdvisor.com, the online news and analysis site for advisors. This is the third year that fi360 and ThinkAdvisor (formerly AdvisorOne), have collaborated on the survey.

In the survey, advisors largely rejected the most common arguments against extending the fiduciary standard for advice. Survey respondents said extending to fiduciary standard to brokers:

Would not cost investors more for advice (79%).
Would not price investors out of the market for advice (69%).
Would not limit access to advice or products (68%).

Survey participants strongly agreed that investors are unaware of the differences between the fiduciary standard governing investment advisers and the much lower “suitability” standard used by the brokers. Of the advisors participating in the survey:

97% say investors don’t understand the differences between brokers and investment advisers.
72% say the titles “advisor,” “consultant,” and “planner” imply a fiduciary relationship exists.
82% say disclosures alone are not sufficient to manage conflicts of interest.

On the retirement issue, advisors said the ERISA fiduciary standard that applies to advice to retirement investors in 401(k) accounts should also apply to IRAs and rollovers from 401(k) and IRA accounts.

79% agree that ERISA fiduciary duty should cover advice on rollovers out of 401(k)s and IRAs.
72% say the ERISA fiduciary duty that applies to 401(k)s should also apply to advice on IRAs.
61% agree that the Labor Department should expand the number of advisors who are considered fiduciaries

The survey also showed that compensation models make a material difference in how intermediaries interact with investors.

Commission-only and commission/fee participants lean away from the fiduciary standard, while fee-only and fee-based participants lean toward the fiduciary standard.
Most commission-only and fee/commission (more commissions than fees) would rather be fee based (more fees than commissions) or fee-only.

Spoiler Alert

Posted on August 26, 2013 by Editor Test -

Here’s a true story.

Not long ago, I phoned a person in New Orleans who owns a Victorian bed-and-breakfast. I was writing an article about Airbnb.com, which she has used as a tool to help market her B&B and, ultimately, to help fund her retirement. We had talked a lot about her plans for retirement—she’s an energetic 60-something—during the two days I rented one of her rooms.

“It’s funny that you should choose this moment to call,” she said. She was about to leave her house to sign an agreement with a pair of Primerica representatives. They had convinced her to move an inheritance of $250,000 from a wrap account at Chase into Franklin Templeton mutual funds.

Her money had lingered at Chase for over a year while she fretted about what to do with it. Though she was experienced at running a small enterprise—she had overseen the reconstruction of her B&B after Hurricane Katrina—she was a stranger to investing. But she had come to trust two Primerica reps who had conducted free seminars in personal finance at her local community center. Now, after several intense meetings, they had arrived at closing day.

She was satisfied that she was about to do the right thing. “The Primerica people told me that it would be much cheaper for the money to be in mutual funds,” she said. The expression, mutual funds, was clearly new to her.

“That might be true,” I said. “But those are probably load funds that they’re selling you. How much will you be paying for them today, when you sign the papers?”

“I don’t know,” she said. She also didn’t know which funds she would be buying, or how her money would be allocated between stocks and bonds.

“I wish could go to that meeting with you,” I said.

There was a pause at the other end of the line. Money is a very personal matter. Perhaps I had violated her space.

“Well, you could,” she said. “I could put you on speaker phone.”

About an hour later, the four of us gathered for the meeting—the two Primerica reps, my friend, and I, as a tinny, disembodied voice emerging from a smart phone. The B&B owner introduced me simply as a “friend,” and explained that I wanted to ask a few questions. Meanwhile, in my office in Pennsylvania, I had opened a browser window and was scrolling through a list of descriptions of Franklin Templeton funds.

“Fire away. Absolutely,” said a man and a woman, congenially.

“How much exactly will this transaction cost my friend today?” I asked.

The sound of rustling papers could be heard. Then one of the reps said, “$5,300.”

My friend said nothing. I couldn’t see her face, so I didn’t know how this piece of information registered. So I proceeded with a few routine questions about asset allocation and about their specific fund choices.

The portfolio was allocated for moderate growth. Nothing unusual there. But I noticed on my screen that the actively managed growth fund that the reps chose for her carried a load of more than 5%. That helped explain the $5,300. Oddly, however, the fund had returned only about 3% in 2012, when the S&P 500 saw double-digit growth. I questioned the fund choice.

The reps became defensive. “It’s easy to cherry-pick the data,” they said. “You have to consider the entire portfolio.” I asked a few more questions. They became irritable. The man demanded to know who I was and whom I represented. He looked up my website on his computer and saw an advertisement on my leaderboard. How much do they pay you, he asked.

The B&B owner defended me. “He’s just a friend of mine. I don’t think he needs to tell you that.”

“We’ve had this happen before,” the rep said heatedly, “where somebody comes in at the last minute and takes a sale away from us.”

During the pause that followed, I stared at my computer screen with my telephone headset on and tried to imagine the tableau at the unseen office in New Orleans. The rep’s mask of dispassionate advice had slipped, revealing the sales machinery underneath. Anger, like a fang, had been displayed. The rep apologized and tried to recover his poise, but he had crossed an invisible line.

After a few moments, I said I had no other questions and thanked them for their information and cooperation. The call ended.

In my office, I paced back and forth across the carpet, and wondered whether I should have minded my own business. After all, these reps were just doing their jobs. They had obviously worked hard for the account. Had I not accidentally called the B&B owner today, she would never have known that the transaction had cost her anything at all. Then I thought: Friends don’t let friends pay retail.

“Are you alone?” I asked when she picked up her phone.

“No, but I can be,” she said. After a moment, she added, “Now I am.”

I urged her not to sign anything until she received a second opinion from a fee-based advisor. She agreed and said that she would end the meeting. For a moment, I was speechless with gratitude; rarely does anyone, in my experience, have enough trust—or humility—to accept such advice. We said goodbye and rang off.

The next time we spoke, two or three weeks later, I asked if she had visited with the advisor whom I had located for her through an online database. She had.

“How did it go?” I asked.

He had offered to set her up with a portfolio of no-load mutual funds and to charge her an hourly fee, she said. But she probably was not going to use his services. I asked why not.

“Because he was going to charge $600,” she said.

“But you just saved $5,300.”

“Yes, I know,” she said. “But $600 is a lot of money.”

It is a lot of money, I admitted, especially when you’re writing a personal check. So I played the last card in my hand, and suggested that she call one of the big no-load mutual fund houses. A special high-net-worth representative, I said, would happily guide her through the transfer of her money from Chase and recommend a moderate-risk portfolio of inexpensive index funds. She said she would.

I don’t know how that turned out. I suppose I should give her a call.

Think Retirement Income Ad 720

Posted on August 22, 2013 by Editor Test -

Outflows from bond funds accelerate

Posted on August 22, 2013 by Editor Test -

Bond mutual funds and exchange-traded funds have already redeemed $30.3 billion in August through Monday, August 19, according to TrimTabs Investment Research. This month’s outflow is already the third-highest on record.

“The $114.1 billion in redemptions since the start of June marks an enormous shift for the bond world,” said David Santschi, CEO of TrimTabs. “Before June, bond funds posted inflows for 21 consecutive months.” TrimTabs reported that the heavy selling in August follows a record outflow of $69.1 billion in June and an additional outflow of $14.8 billion in July.

“The record inflows into bond funds in the previous four years likely account for the intensity of the recent redemptions,” said Santschi. “A staggering $1.2 trillion poured into bond mutual funds and exchange-traded funds from 2009 through 2012. Many investors probably didn’t grasp the interest rate risk they were taking. Now that they’re suffering losses in funds they regarded as ‘safe,’ they want out fast.”

In a research note, TrimTabs explained that outflows have been heaviest in funds investing in municipal bonds and Treasury bonds.

The municipal bond mutual funds TrimTabs tracks daily posted an outflow of $2.1 billion (2.3% of assets) in the past month, while municipal bond exchange-traded funds redeemed $199 million (1.7% of assets). Similarly, the Treasury bond mutual funds TrimTabs tracks daily posted an outflow of $3.4 billion (1.8% of assets) in the past month, while Treasury bond exchange-traded funds redeemed $1.9 billion (0.5% of assets).

“The exodus from bonds suggests that if the Fed actually starts tapering—as opposed to just talking about doing something in the future—it might be more disruptive than Wall Street thinks,” added Santschi.

Study faults retirement and investment websites

Posted on August 22, 2013 by Editor Test -

Compared to high-traffic, highly successful websites like Amazon.com and Expedia.com, retirement and investing sites get lower scores from consumers for usability and engagement, according to a brief report released by the research firm Change Sciences.

Retirement and investing sites in general are less likely “to compel site visitors to take desired actions such as returning to the site, signing up, or recommending the site to a friend,” the report said.

The data was gathered last July, when New York-based Change Sciences asked users to interact with retirement and investing web sites and provide feedback on their experiences. A sample of the findings was released this week.

Company sites that were evaluated included Ameriprise, E*Trade, Fidelity, Merrill Edge, Schwab, T.D. Ameritrade, T. Rowe Price and Vanguard.

According to the released report, “Retirement and investing sites scored below average for usability and engagement, and well below average for conversion. [As a group], they ranked behind any other group in our current data set for their likelihood to convert prospects.”

Specifically, “The top stumbling blocks [for users] were that there was too much going on, they were forced to do too much reading, and the navigation was difficult,” the report said. Bank sites tended to be more user-friendly than brokerage sites.

For those reasons, retirement and investing sites lagged sites in other industries. “Retirement sites are a significant distance from top performing sites in travel, ecommerce and entertainment. Compared to our current top financial site, Chase Cards, retirement and investing sites are 10% less engaging, 12% less usable, and 27% less likely to convert,” the report said.

“Users want to have the most important information readily available. People were not willing to search through long paragraphs of dense text to find what they sought,” the report said.

Two typical user comments: “Too many choices, nothing in particular stood out as ‘read me first’” and “I think the website is convoluted. It’s difficult to navigate. I wish there were clearer, more direct links to pertinent information in clear view on the main page. I was overwhelmed and probably wouldn’t access the website again unless I absolutely had to.”

Although most U.S. households are eligible to contribute to retirement accounts, few do so, the report noted. Only 16% of U.S. households contributed to any type of retirement account in tax year 2011. Still, retirement savings accounted for 36% of all household financial assets in the U.S. at the end of the first quarter of 2013, according to Investment Company Institute figures.

Annuity Specs is now “Wink”

Posted on August 22, 2013 by Editor Test -

Two sources for annuity and life insurance product information, AnnuitySpecs and LifeSpecs, have consolidated under a new brand name: Wink. Wink is also the distributor of Wink’s Sales & Market Report, a source of indexed insurance product sales and trends.

The rebrand “encompasses all of the company’s tools, reports and resources under one name, one new dynamic website, in order to ensure the company’s clients remain the most informed in the industry, via a new, innovative, and progressive approach,” the company said in a release. Wink’s founder, president and CEO is Sheryl J. Moore.

Wink’s portal for life insurance and annuity information is LooktoWink.com. Visitors can find the AnnuitySpecs and LifeSpecs tools, which provide product details and comparisons.

Each quarter, Wink’s Sales & Market Report provides sales information on indexed annuity and indexed life products as well as analysis and updated details on all currently available indexed insurance products.

Nominate Your Favorite Income Product

Posted on August 22, 2013 by Editor Test -

Retirement Income Journal needs to leverage your expertise and good judgment. This year, for the first time, we’re sponsoring a Retirement Income Industry Association Award. The category: Innovation in Retirement Income Products.

As a member of the broadly-defined retirement income industry, you probably know of a product, introduced in the last 12 to 18 months, that has distinguished itself from the others—either in its financial engineering, actuarial wizardry or ability to create value in a difficult economic climate.

We’re looking, ideally, for products that help people turn savings into income or that mitigate an important retirement risk. Potential nominees can be insurance products, investment products or hybrid products. But they shouldn’t be information technology or software products.

Friday, September 6, is the deadline for submitting specific products as nominations. E-mail your suggestions to [email protected]. To add weight to your nomination, tell us why you believe the product deserves to win this first-time annual award.

In addition to the winner of the award, there will be two runner-ups. So the product you nominate has three chances to win.

Note: Contrary to popular belief, Retirement Income Journal and the Retirement Income Industry Association are not linked as businesses. They merely have similar names and similar interests, and have audiences and constituencies that overlap.

Jackson National, New York Life, lead annuity sellers: LIMRA

Posted on August 21, 2013 by Editor Test -

Total annuity sales rose nine percent, to $56.5 billion, in the second quarter of 2013 compared to the previous quarter, but were one percent below the same quarter in 2012, according to LIMRA’s quarterly U.S. Individual Annuities Sales survey, which covers 95% of the market. See Annuity Industry Estimates.

In the first six months of 2013, total annuity sales were down four percent, to $108.2 billion, from mid-year 2012. Jackson National Life, with $11.68 billion in sales of variable ($10.28 billion) and fixed annuities ($1.4 billion) in the first half of this year, was far ahead of runner-up Lincoln Financial, with $8.29 billion. See Company Rankings.

Still enjoying their somewhat surprising run, quarterly deferred income annuities (DIA) sales surpassed $0.5 billion for the first time, reaching $535 million in the second quarter of 2013, 15% higher than in the second quarter of 2012. YTD, DIA sales grew 151% to nearly $1 billion. DIA sales are on pace to reach $2 billion by the end of the year — doubling 2012 results.

In fixed annuities, the top five fixed sellers were New York Life ($2.67 billion), Security Benefit Life ($2.54 billion), Allianz Life ($2.43 billion), American Equity Investment Life ($2.07 billion) and AIG ($1.69 billion).

Quarterly indexed annuity sales topped $9 billion for the first time. Second quarter sales were up five percent compared to last year. YTD, indexed annuities improved one percent, to $16.8 billion. Bank market share of indexed annuities was 12% in the second quarter; triple its market share in 2008. Guaranteed lifetime withdraw benefit (GLWB) riders continue to help propel indexed annuity sales. Indexed GLB rider election rates also hit an all-time high of 76% in the second quarter of 2013.

“Observing the economic improvements, including interest rate increases, we believe variable annuity sales have stabilized while fixed annuity sales will continue to improve for the remainder of the year,” said Joseph Montminy, assistant vice president, LIMRA Annuity Research, in a release.

Variable annuity (VA) sales were one percent lower in the second quarter of 2013 compared with the second quarter of 2012, totaling $38.2 billion. However, VA sales rebounded from the prior quarter, up eight percent. Year-to-date (YTD), VA sales totaled $73.7 billion, a three percent decline from 2012. Election rates for VA GLB riders slipped two percentage points to 82% in the second quarter. GLBs were offered in 89% of VAs in the second quarter.

Single premium immediate annuity (SPIA) sales were flat in the second quarter of 2013 compared to one year ago, at $1.9 billion, but were 12% higher than in the first quarter of the year. In the first six months of 2013, SPIA sales totaled $3.6 billion, three percent lower than in 2012.

Total fixed annuity sales, including indexed, book value, market value-adjusted (MVA), deferred income, fixed immediate and structured settlements, totaled $18.3 billion in the second quarter, down one percent compared with the prior year. Fixed-rate deferred annuity sales, which include book value and MVA, declined 15% in the second quarter to $5.5 billion.

YTD, fixed deferred sales are down 20% from a year ago, at $10.7 billion. Book-value sales were down 19% in the second quarter, compared with prior year, to reach $4.3 billion. MVA sales in the second quarter 2013 were $1.2 billion, equaling sales from prior year.

As Equities Rise, So Do VA Sales—A Little

Posted on August 20, 2013 by Editor Test -

Prudential and MetLife both experienced steep and, presumably, deliberate reductions in new variable annuity sales in the second quarter of 2013, but others—Jackson National Life, Lincoln Financial and American General—helped make up the difference.

Prudential gross VA sales were down 42% from the first quarter of this year, to $2.44 billion from $4.21 billion, while MetLife’s sales were down 21%, to $2.75 billion from $3.52 billion, quarter over quarter. All figures are according to Morningstar’s Variable Annuity Sales and Asset Survey for 2Q 2013.

In its second quarter results, Prudential reported net VA sales of $517 million. From July 2011 through June 30, 2013, Prudential has repurchased 35.2 million of its common shares for $1.9 billion, and has board authorization to spend up to $1 billion more to buy back shares before next June 30.

Prudential reduced its VA benefits and its compensation for intermediaries this year. Mark B. Grier, Prudential vice chairman, said in an August 8 conference call with analysts:

“Our gross annuity sales for the quarter were $2.5 billion, down from $5.4 billion a year ago. The lower level of current quarter sales reflects actions we’ve taken to adapt our products to the current environment. As we discussed at our Investor Day in June, we’ve responded to market changes by pulling a number of levers to maintain appropriate return prospects and improve our risk profile.

“In February of this year, we introduced our current living benefit feature called HDI 2.1. The biggest changes in HDI 2.1 brought down some of the value of the guarantee by adjusting payout rates at various age bands. For example, to get a 5% annual income payout, the client must be aged 70 when payouts commence as compared to age 65 in the previous version of the product. We also eliminated the guaranteed doubling of the protected withdrawal value after 12 years.

“While leaving the rider fees unchanged at 100 basis points for individual contracts, and 110 basis points for spousal contracts, we also reduced the commission rates that we pay in February to maintain an appropriate balance between the value proposition to customers and compensation to our distribution partners. We implemented the commission change in a transparent manner, working with our broker dealer partners and we have maintained strong distribution relationships.

“Over the past year, we’ve also withdrawn our ex-shares or bonus product and suspended acceptance of subsequent premiums on generations of products offered before 2011. Additionally, in late July, we implemented a cap on subsequent purchase payments on the HDI products we offered prior to last August. We believe that our product continues to offer a solid value proposition in an attractive market and we regard our sales level as an outcome rather than a target.”

Including TIAA-CREF’s 403(b) variable annuity, the top five sellers—Jackson, Lincoln, TIAA-CREF, American General and MetLife—accounted for more than half of all VA sales in the second quarter. The top 10 sellers accounted for more than 75%.

Overall, thanks perhaps to the ongoing bull market in equities, second quarter 2013 variable annuity new sales were up 7.7% over the first quarter, to $36.9 billion from $34.3 billion. Sales were slightly lower than the $37.7 billion sold in the second quarter of 2013.

Morningstar reported a 37% gain in new sales at American General/SunAmerica, a 32% gain for Lincoln National and 25% for Jackson National. Variable annuity assets were up slightly ($331 million) at about $1.72 trillion. In a healthy sign, net cash flow was up.

“Net cash flow improvement was more pronounced in the second quarter, with $2.5 billion of positive net flow adding to $0.9 billion of positive flow in the first quarter to move the industry further away from a state of net redemption,” wrote Morningstar Annuity Research Center project manager Frank O’Connor.

“While still low by historical standards, the improvement reflects an increase in new dollars deposited to VA products – a welcome development. As with new sales, the improvement is significant as it was broader based than in prior quarters… Cash drains from group contracts and exited companies continue to be the main culprits driving the low industry numbers.”

It’s an Index! It’s an Income Calculator! It’s a Fund!

Posted on August 20, 2013 by Kerry Pechter -

BlackRock, which manages nearly 10% of the $4.45 trillion in defined contribution assets in the U.S., has tried for several years to bring novel annuity-linked solutions to the problem of converting 401(k) account balances into lifetime income.

Before the financial crisis, BlackRock promoted SponsorMatch, a two-sleeve solution that used each participant’s employer-matching contribution to buy increments of future income, in the form of an optional MetLife income annuity at retirement.

Then came LifePath Retirement Income, which is based on BlackRock’s LifePath target date funds. Substituting an annuity pool for the bond portion of the TDF, the program allows participants to build up a retirement income stream over time.

SponsorMatch was, arguably, ahead of its time. LifePath Retirement Income is a work in progress. Each met resistance from sponsors who, while seeing the importance of pivoting toward income, are reluctant to confront the fiduciary or recordkeeping issues associated with so-called “in-plan annuities.”

Now BlackRock has a new program. It too helps participants prepare for the purchase of a life-contingent annuity at retirement, but it doesn’t involve an insurance company. It creates “investable indexes” that show the current average price of $1 of annual inflation-adjusted lifetime income at age 65 for people of various ages. The indexes are tied to a yet-to-be-announced series of proprietary target-date bond funds whose NAVs correspond to the Index with the same date.

CoRI makes the scene

The latest effort is called CoRI, an evocatively nonspecific name (created in a brainstorming session, but not an acronym, said a BlackRock spokesman) that embraces a palette of related products and services. So far three components of the program have been launched or are near-launch:

The CoRI Indexes, expressed in dollars, which shows the cost of $1 of life-contingent annuity income at age 65; there is a CoRI 2018 Index for 60-year-olds, a 2019 Index for 59-year-olds, etc. Today’s Index for a 60-year-old, for instance, is $15.41. The Index is $14.70 for a 59-year-old and $16.41 for a 61-year-old. To get the Index for each age, it takes the current price per dollar of inflation-adjusted lifetime income for a 65-year-old and discounts it to the present day, using current interest rates.
The CoRI Tool, a web-based calculator that shows about how much annual life-contingent annuity income a person’s current savings will buy when the user (ages 55 to 64) reaches age 65. The tool simply takes the CoRI Index for your age and divides your savings by that number to show how much annual income you could buy with your savings at age 65. It doesn’t account for any fees or premium taxes associated with the purchase of an income annuity, however.
BlackRock Cori Funds. a prospectus for Cori 2017, 2019, 2021, and 2023 funds with the SEC July 3o, with Investor A and institutional shares.

BlackRock hasn’t revealed its entire CoRI strategy yet. The Index and the Tool are presumably intended to differentiate BlackRock’s bond fund from competitors in the 401(k) space, establish thought-leadership in the “income” trend and stimulate online “engagement” with participants, ultimately leading to sales of the CoRI Index funds by participants within 10 years of retirement.

Exactly how participants might use the funds to create income at retirement or how this strategy might help BlackRock retain those assets when participants retire and leave their plans isn’t clear. In an interview, BlackRock didn’t describe any broader plans to market CoRI to individual investors or to RIAs. Refinements to the CoRI calculator, such as the ability to include income from Social Security, were hinted at but not specified.

The CoRI Index may simply be an elaborate marketing push, one that assumes that sponsors will want to offer and participants will want to buy BlackRock’s bond funds just because they have a clever feature that helps participants calculate how much annuity income they might be able to buy at retirement. But there may be wrinkles that BlackRock hasn’t revealed yet.

The launch of CoRI is certainly timely, though Stephen Bozeman (right), director and senior investment strategist for BlackRock Defined Contribution, told RIJ that it’s largely a coincidence that BlackRock unveiled its CoRI program at the same time that the Department of Labor has set up its own retirement income calculator and solicited comments from the retirement industry on safe-harbor guidelines for offering savings-to-income calculators on their 401(k) plan portals.

The federal government is eager for plan participants to begin thinking of their account balances in terms of how much monthly lifetime income they can produce, rather than as lump sums. Asset managers are eager to keep participant money in their products as participants move from accumulation to income.

“We see people using the Index to get their bearings. It creates more certainty around income,” Bozeman told RIJ. “It’s the same concept as a TDF; it gets more conservative as you approach retirement. It serves as a glide path to a fixed deferred annuity. We think this is the best metric for translating savings to income. It’s appropriate for investors 55 to 64. Young investors are more focused on accumulation; we think the emphasis should be on savings until you reach the pre-retirement period.”

“The timing has been good for us, but [the CoRI] project has been in the works for years,” added Bozeman, a former Barclays Global Investors principal who came to BlackRock’s LifePath division in May 2011.

“The genesis of this idea came about as a result of LifePath Retirement Income. LifePath had an imbedded liquid annuity. It had some issues; plan sponsors were concerned about someone beside themselves choosing the annuity provider. It’s also hard to put an income reporting metric on a 401(k) platform.”

An “investable index”

Bozeman described the link between the CoRI Index and the CoRI Index funds. “One of our innovations with the CoRI index has been to take the calculation into an investable bond portfolio. The movement of the value of that bond portfolio is the index. The Index represents the average price of $1 of inflation-adjusted life-contingent income.

“We’re using a generic mortality table. Each payment is mortality weighted. You’d choose the index that corresponds to the year you turn 65. By having an investable index, you can see how much income your savings buys. It’s a useful translation. If you wanted to hedge the movement in the price of an annuity, you could use the Index even if you don’t invest in the bond funds.”

A BlackRock release suggests that for every CoRI Index there’s a corresponding bond fund, each with its own NYSE ticker, for each year from 2014 through 2023. A 64-year-old participant would buy the CORI2014 fund, for instance, and a 55-year-old would buy the CORI2023 fund.

It’s as if a participant could buy a series of zero-coupon bonds, with the price discounted at current rates for the number of years until the participant reaches age 65, allowing him some assurance—based on best-estimates, however, rather than a guarantee—that the combined value of the investments will buy a predictable amount of inflation-protected lifetime income when they mature together at age 65. Asked why BlackRock hasn’t yet rolled out the CoRI Index funds, Bozeman said, “It’s important to establish that as a metric first and not have that clouded by other efforts for commercializing it.”

BlackRock distinguished itself in another way recently in the retirement income space. This week, the company announced that it would be a sponsor of the Institutional Retirement Income Council, an organization created under the leadership of Sri Reddy, head of Institutional Income at Prudential Retirement. Until now it had been funded by Prudential and John Hancock as a vehicle—it describes itself as a think tank—to advocate for lifetime income options in the DC space, but others in this nascent space have been slow to get on board. Prudential Retirement markets IncomeFlex, a program based on target date funds in a group annuity with a guaranteed lifetime withdrawal benefit.

A competitor’s view

One observer of CoRI says he likes what he sees so far. “This makes a lot of sense,” said one of BlackRock’s competitors in the DC space, all of whom stand to benefit as plan sponsors become more comfortable with income strategies. “It’s for sponsors who want to start the conversation about income but who don’t want to take the responsibility or liability of engaging with an insurance carrier. This is just the first step for BlackRock. The next step is to turn it into a product and solutions. It will be interesting to see if they use it to work with advisors or to do UMA [unified managed] accounts.”

The product most like CoRI in today’s marketplace, he said, is Financial Engines’ IncomePlus program. It gradually moves participant assets from stocks to bond funds over time, with the aim of establishing a source of reliable income for the first 20 years of retirement, while also seeking “to set aside enough bond funds so that you could purchase an annuity [at age 85] if you decide to do so,” according to the Financial Engines website.

The competitor picked a few nits with the CoRI concept, but considered them minor. “The negative aspect is that there’s an implied guarantee,” he said. “The participants may think they have protection, but there’s no guarantee that an insurer will sell them an annuity at that price.” (The CoRI Index doesn’t reflect any of the distribution fees or expenses that would be associated with the price of an immediate annuity.)

“If there’s one thing to disagree with, it’s that they’ve held the retirement age constant at age 65. I’d have made that a variable. Also, these income estimates are all theoretical. But no assumptions can be exactly right. There are two schools of thought in the comments about the DoL’s proposal [for putting a lifetime income projection in retirement plan statements]. One is, ‘Do nothing until you get the income projections perfect.’ The other is, ‘Don’t let the perfect be the enemy of the good.’”

“Kudos to them for making the conversation about income,” he added. “I give them credit for recognizing that the optics have changed for advisors and participants. They’re trying to establish a common language and standards, in much the same way that the DoL is. The more we standardize the conversation, the more [the transition to thinking in terms of income] will happen.”

The CoRI effort apparently reflects the retirement income planning philosophy at the highest levels at BlackRock. Last May, in a speech at New York University’s Stern School of Business, BlackRock CEO Larry Fink criticized the U.S. financial industry in general, and the 4o1(k) industry in particular, for being performance-oriented instead of outcome-oriented.

“Investors don’t care if they’re holding a mid-cap stock or Mexican government bond,” he told a group of MBA candidates, “but whether an investment helps them achieve long-term outcomes like sending their kids to college, buying a house, and funding a decent retirement.” CoRI funds are intended to help them accomplish that last item.

Pardon My Cynicism

Posted on August 14, 2013 by Editor Test -

No one has yet invented a bathroom scale that makes you slim. So why does the Department of Labor believe that providing ERISA plan participants with quarterly projections of future retirement income will help them save more?

I’m all for planning. I believe that measurement drives change. And I agree that every plan’s website should include a link to the DoL’s handy new income calculator, which translates existing savings (and savings yet to come) into future retirement income. It’s essential for participants to think of their savings in terms of income rather than accumulation.

But it’s hard to muster enthusiasm for the DoL’s proposal for yet another statement disclosure that most participants won’t bother to read. As far as I know, there are no studies showing whether income projections will discourage or encourage greater savings.

The proposal assumes much that isn’t necessarily so: that participants will convert their entire account balances to life annuities, that participants will enjoy consistent employment until their normal retirement age, or that assumptions about average growth rates mean anything with respect to a participant’s personal returns.

While life annuity prices offer a convenient, reasonably standardized basis for converting account balances into estimates of future inflation-adjusted retirement income, it seems odd to use them when so many issues related to life annuities haven’t been resolved.

If plan sponsors intended to make life annuities available to all participants in the same way they offer health insurance—at prices with no intermediary costs and with no increase for adverse selection—it would make sense to use life annuities as a benchmark. But there’s little indication that the typical plan sponsor ever expects to offer in-plan annuities. Why suggest the presence of a link between plan assets and annuities when there is none?

In any case, as the Insured Retirement Institute points out in its response to the DoL’s request for comment, the projections aren’t really about retirement income; they’re about inspiring people to defer more of their salaries into their 401(k) accounts. For most people, that will mean consuming less. Pardon my cynicism, but how likely is it that a projection on a quarterly or annual statement will inspire Americans to consume less?

I don’t object to income projections on statements. But let’s not spend an eternity debating about assumptions, disclaimers and safe harbors. The DoL and the 401(k) industry should conserve their time and energy for more pressing matters, such as achieving a compromise on a fiduciary rule for plan advisors (we’re still waiting for a re-proposal), or finding an antidote to the epidemic of excessive-fee class action lawsuits.

Patented pricing mechanism aims to unlock LTCi hybrid market

Posted on August 14, 2013 by Editor Test -

Yet another of the ill effects of low interest rates on life insurance companies has been to stifle the manufacture of hybrid products that combine long-term care insurance (LTCi) coverage with either life insurance or a fixed deferred annuity.

For people who have the available assets, hybrid LTCi products can significantly reduce the cost of long-term care insurance. Income from the assets of the underlying life policy or the annuity helps fund the LTCi premiums. If and when long-term care services begin, those assets are applied to the initial costs. When the assets are exhausted, the LTC insurance kicks in.

Low interest rates have hurt this market. Most if not all of the issuers of hybrid LTCi products so far have charged level premiums, which means the first premiums are larger than necessary. Part of those early premiums goes into an interest-bearing reserve, to supplement the later premiums, which are smaller than necessary.

But as the Fed lowered rates after the financial crisis, the reserves began to earn far less interest than anticipated. Life insurers responded by cutting back production of hybrid products, according to Rich Tucker, senior vice president at Ruark Consulting LLC, a Simsbury, Conn., firm that works with life insurance companies on research projects and reinsurance coverage.

Now that bottleneck may be opened by a new pricing mechanism that calculates gradually rising premiums, thereby eliminating or reducing the need for reserves. Called FIPO (Flexible Insurance Premium Option), it was created and recently patented by Strategic Health Management, an insurance product developer in Mill Valley, Calif., and will be marketed to life insurers by Ruark.

“When the product is linked to a life policy or annuity and withdraws from the annuity account value, this will withdraw less at first,” Tucker told RIJ. “It’s sloped partly because of the time value of money and partly because the actual long-term care costs incurred are increasing over time. You can think of it as yearly-renewal term [life insurance] policies instead of level-premium term life.”

The pricing mechanism is broadly applicable and can be expressed as software, hardware or a spreadsheet. It could even be used “by an actuary with a green eyeshade and a legal pad,” he said.

So far, most hybrid products have combined life insurance with LTCi. But it makes sense to combine LTCi with fixed deferred annuities, Tucker added. “It would be great to see combos with annuities get more traction,” he said. “The older demographics of the annuity buyer match up very well with the older demographics of the LTCi buyer.”

Tucker called the new product a win-win for insurers and the public. “The benefit of this design to consumers is that they will pay less initially for the LTCi benefit than for a level premium product,” he told RIJ. The FIPO design could also help bring more supply of insurance product to this market. “There’s not enough supply right now; the industry isn’t meeting the needs of consumers,” Tucker said. “This design has the potential to enable insurers to stay, ‘Yes, I can do this.’”

RIJ Advisor will return on August 26

Posted on August 14, 2013 by Editor Test -

RIJ Advisor will return on August 26

Posted on August 14, 2013 by Editor Test -

Funds receive $665 billion net inflow worldwide in first half of 2013

Posted on August 14, 2013 by Editor Test -

Despite net redemptions of $120 billion in June, investors worldwide contributed a net $665 billion to long-term funds (except money market funds) worldwide in the first half of 2013, Strategic Insight reported. The June outflows represented less than a half-percent of the world’s assets under management.

Funds outside the US collected $360 billion on a net basis, of which nearly 75% went to European funds, including cross-border UCITS funds that are sold globally. Bond fund net redemptions in European and cross-border international funds reached 1.7% of total assets during June, similar to the levels experienced in the US.

Equity funds, however, registered net redemptions of just 0.5% of assets. With stock markets recovering in July, cash flows should improve, the firm said in a release: “Historically, stock or bond fund redemptions driven by sharp price corrections have usually been limited in magnitude, short in duration, and non-recurring.”

According to Strategic Insight:

Demand in Europe and Asia will continue to revolve around the major themes of recent months but with some shift in emphasis. Income vehicles, multi-asset, flexible and unconstrained allocation, non-traditional strategies, risk control and managed volatility, target maturity, and outcome-oriented products recently powered the gains for asset managers and will remain in demand, but sales of equity funds will also likely expand over time.

Cash flows for some leading funds in the first quarter ran at more than double the monthly pace seen last year. Sales grew even further in April and May for a few, and even though June was a difficult month, flows in the second quarter were higher than the previous period for several flagship products. Strategic Insight counts nearly 270 funds around the world that each captured at least $1 billion and as much as $13 billion during the first half of 2013.

Class-action 401(k) fee lawsuit against Lockheed Martin will proceed

Posted on August 14, 2013 by Editor Test -

With the August 7, 2013 reversal of an earlier federal district court denial of class certification in the 401(k) fee case of Abbott v. Lockheed Martin (No. 12-3736) by the Seventh Circuit Court of Appeals, the St. Louis law firm of Schlichter, Bogard & Denton, LLP said that it has obtained class certification “involving one of the largest 401(k) fee plans in the United States.”

According to the law firm, “Judge Diane Wood writing for a panel of Judges, ruled that a class could be certified consisting of Lockheed Martin employees and their beneficiaries who invested in the Lockheed Martin 401(k) Plans’ stable value fund between September 11, 2000 and September 30, 2006 and whose investments underperformed the Hueler FirstSource Index.”

Schlichter, Bogard & Denton attorneys said that they argued that the… investments were mainly money market short-term investments with lower returns unlike properly structured stable value investments. “The Court stated that Lockheed’s own documents acknowledged that the stable value fund would ‘not beat inflation by a sufficient margin to provide a meaningful retirement asset,’ the law firm’s release said.

“The Court of Appeals… rejected Lockheed’s contention that our claim involves just a mislabeling of the Stable Value Fund rather than outright mismanagement. Lockheed now is faced with the reality that there will be a trial of this claim which involves massive losses to the employees and retirees,” said attorney Jerry Schlichter in a release.

In 2006, the Lockheed case was one of a number of 401(k) fee-related cases filed by Schlichter, Bogard & Denton, including its successful case against ABB and Fidelity Investments, currently on appeal. The firm said it has settled cases on behalf of participants in the 401(k) plans of Cigna, Caterpillar, General Dynamics, Kraft Foods, and Bechtel totaling over $90 million. Its recent $35 million Cigna 401(k) plan settlement was the largest settlement ever in a suit charging excessive 401(k) plan fees in violation of the Employee Retirement Income Savings Act of 1974 (“ERISA”).

Canadian men and women are living longer

Posted on August 14, 2013 by Editor Test -

The life expectancy of a 60-year-old Canadian male has increased by 2.9 years (to 27.3 years from 24.4 years) and the life expectancy of a 60-year-old Canadian female has increased by 2.7 years (to 29.4 years from 26.7 years) compared to pension mortality tables currently in use, according to a study by Towers Watson based on a draft set of updated mortality tables released by the Canadian Institute of Actuaries.

The CIA study found generally higher overall life expectancy for workers in the public sector compared to the private sector.

That’s good news for retirees but not necessarily good news for Canadian pension funds, according to Towers Watson. Adoption of the proposed mortality tables could immediately increase pension accounting liabilities by 5% to 10% for many plans.

“Just as sponsors were beginning to see a reduction in their pension deficits due to improvements in the global equity markets and rising interest rates this year, the increase in life expectancy suggested by the CIA study could reverse much of this gain,” said Gavin Benjamin, a senior retirement consultant at Towers Watson, in a release.

The implications of lengthening lifespan extend to sponsors of defined contribution plans as well as DB plans, the study said. It requires plan sponsors and participants to think about saving more. “In a DC plan, the employer provides a fixed contribution to a pension plan over the career of the employee. The plan member is required to manage the investments and the ultimate pot of money from which to draw retirement funds or to purchase an annuity for their lifetime,” said the Towers Watson release.

How to Make Annuitization More Appealing

Posted on August 14, 2013 by Kerry Pechter -

What makes people inclined or disinclined to annuitize their 401(k) savings or their defined benefit pensions? What features might make annuities more appealing? Does the mere manner of presentation of annuities bias people to purchase or not purchase one?

A team of Ivy League researchers and the National Bureau of Economic Research has been working on these questions for more than two years. A member of the team, Brigitte Madrian of Harvard, presented the most recent iteration of their findings at the Retirement Research Consortium meeting in Washington, D.C. earlier this month.

(A 15-minute video of Madrian’s presentation is embedded in this story.)

In part, the study reinforced what annuity marketers and defined benefit pension sponsors already know: that adding flexibility, such as partial annuitization and variable income streams, would be popular.

The most counter-intuitive finding was that people might want inflation-adjusted annuities to a greater degree than current sales suggest. The researchers warned that the findings are based on responses to hypothetical survey questions, not on actual behavior. Two surveys were conducted among people ages 50 to 75, on in August 2011 and the other in June 2012.

In the conclusion of their paper, the authors write:

To increase annuity demand, annuity providers could design products that give beneficiaries more flexibility and control. Our bonus annuity is an example of personalization that increases flexibility and control without compromising longevity insurance.

Another example is an annuity with multiple annual bonuses. Such bonuses could either be pre-selected at the time the annuity was purchased or selected at the beginning of each calendar year. In fact, the payout stream for a given year could be made completely flexible without creating a substantial adverse selection problem. Problematic adverse selection would only arise if inter-year reallocations were allowed, so that a beneficiary could drain his entire annuity following a significant adverse health event.

Other forms of personalization and flexibility could also be adopted, such as limited penalty-free early withdrawals and even asset allocation flexibility (adopting some features of the variable annuity market). Of course, there is a tradeoff between greater flexibility/control and greater complexity. Too much flexibility may drive some consumers away from annuities.

Finding the optimal mix of flexibility and simplification is a significant challenge.

We also find that most consumers prefer partial annuitization of their retirement nest egg to either 0% or 100% annuitization. We find that the availability of partial annuitization raises the average fraction of wealth that ends up annuitized.

Framing changes may also increase the appeal of annuities, especially frames that make the option of partial annuitization salient. In addition, frames that downplay investment attributes of annuities may increase annuitization rates. Regarding choices about COLAs, discussing the implications of inflation for purchasing power over long horizons increases demand for rising nominal payment paths.

Finally, participants report that fears of counterparty risk play a large role in their annuitization choices. By adopting regulations that reduce this fear, policy makers may create moral hazard problems from consumers disregarding the financial stability of annuity providers, but they may also increase overall demand for annuities.

Study estimates public cost of Social Security claiming strategies

Posted on August 14, 2013 by Editor Test -

Two Social Security benefit-enhancing claiming strategies, if widely used, could drive up the costs of the ubiquitous federal program by billions of dollars a year, according to a study by analysts at the Center for Retirement Research at Boston College. The study appears in this month’s Journal of Financial Planning.

The “claim and suspend” strategy could cost about $500 million a year, according to the study. “The beneficiaries are either one-earner couples or those in which the wife’s earnings are very small relative to the husband’s, and the average gain is relatively small,” the study said.

The “claim now, claim more later” strategy, which can be used by two-earner couples, could have cost $9.7 billion if widely used in 2006, and could cost more in the future as Boomers retire in larger numbers and the strategy becomes more popular, the CRR said.

The two strategies increase the claiming options of couples where spouses’ retirement decisions often interact. The “claim and suspend” strategy allows the higher earner to keep working and earning delayed retirement credits while the lower earner collects a spousal benefit.

The “claim now, claim more later” strategy allows the higher earner to collect a Social Security spousal benefit while continuing to work and earn delayed retirement credits; at retirement, this individual then switches from claiming a spousal benefit to claiming a higher retired worker benefit.

The more equal the lifetime earnings of the spouses are, the more they have to gain. Using this strategy, couples can potentially gain between 2.6 and 3.1 percent of their base lifetime Social Security benefits.

Under either strategy, working longer allows the higher earner to boost the size of the eventual survivor benefit that the lower earner will receive if the lower earner outlives the higher earner.

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