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IRI publishes brief guide to deferred income annuities

Posted on August 29, 2013 by Editor Test -

Any advisor or layperson who has general questions about deferred income annuities (DIAs) can find most of the answers in a new Insured Retirement Institute whitepaper entitled “Deferred Income Annuities: Insuring Against Longevity Risk.”

The whitepaper describes in sufficient but not excessive detail how DIAs work and how they compare with other types of annuities, such as single premium immediate annuities, variable annuities with income riders and fixed indexed annuities with income riders.

The IRI also explains why people would purchase a DIA (to protect against running out of money, to provide income for medical expenses later in life) and how they can use DIAs (by creating sequential or overlapping layers of DIA income in retirement) to maintain inflation-protected income throughout retirement.

An insurance agent or financial advisor might hand out this brochure to prospective clients. It doesn’t refer to specific products by name. Some of the information about DIAs came as a surprise, such as the assertion that DIAs (unlike SPIAs) typically can’t be liquidated for a commuted value after purchase.

Aside from providing information about DIAs, the brochure also includes information that professionals may find familiar, about longevity risk, the risk of disability in old age, market risk, and other risks that a source of guaranteed lifetime income can mitigate.

French government tweaks its public pension—and European bureaucrats

Posted on August 29, 2013 by Editor Test -

Only seven years away from a potential €20.7b ($27.6 billion) shortfall in the financing of its pay-as-you-go social security program, the French government announced that it would lengthen the contribution period (to 43 years from 41.5 years by 2035) and incrementally raise contributions for both employers and employees a total of 0.3 percentage points by 2017.

But Francois Hollande’s government conspicuously ignored some of the recommendations that the European Commission had made to it regarding pension reform—such as the recommendation to increase the statutory retirement age, increase the full-pension contribution period, and not require higher contributions from employers.

Both employers and employees would see their social contributions increase over the next four years – by 0.15 percentage points in 2014 and 0.05 percentage points in 2015, 2016 and 2017 – to reach an overall increase of 0.3 percentage points by 2017.

The government will also ask companies to finance special accounts for “hardship conditions at work.” These special accounts, to be introduced in 2015, will help employees performing heavy physical labor to learn new skills, switch to part-time work or retire earlier than the legal retirement age.

Another measure recommended by both the Commission and a French pensions advisory panel in June – which sought to limit indexation – was watered down.

Instead of revising the indexation rules, which could have led retirees to see their pensions fall by one percentage point compared with inflation, Hollande’s government moved the date of adjustment of pensions from April to October. The move could help France save as much as €600m ($800 million) by 2014, according to the government.

The Global QE Exit Crisis

Posted on August 28, 2013 by Stephen S. Roach -

The global economy could be in the early stages of another crisis. Once again, the US Federal Reserve is in the eye of the storm.

As the Fed attempts to exit from so-called quantitative easing (QE) – its unprecedented policy of massive purchases of long-term assets – many high-flying emerging economies suddenly find themselves in a vise. Currency and stock markets in India and Indonesia are plunging, with collateral damage evident in Brazil, South Africa, and Turkey.

The Fed insists that it is blameless – the same absurd position that it took in the aftermath of the Great Crisis of 2008-2009, when it maintained that its excessive monetary accommodation had nothing to do with the property and credit bubbles that nearly pushed the world into the abyss. It remains steeped in denial: Were it not for the interest-rate suppression that QE has imposed on developed countries since 2009, the search for yield would not have flooded emerging economies with short-term “hot” money.

As in the mid-2000’s, there is plenty of blame to go around this time as well. The Fed is hardly alone in embracing unconventional monetary easing. Moreover, the aforementioned developing economies all have one thing in common: large current-account deficits.

According to the International Monetary Fund, India’s external deficit, for example, is likely to average 5% of GDP in 2012-2013, compared to 2.8% in 2008-2011. Similarly, Indonesia’s current-account deficit, at 3% of GDP in 2012-2013, represents an even sharper deterioration from surpluses that averaged 0.7% of GDP in 2008-2011. Comparable patterns are evident in Brazil, South Africa, and Turkey.

A large current-account deficit is a classic symptom of a pre-crisis economy living beyond its means – in effect, investing more than it is saving. The only way to sustain economic growth in the face of such an imbalance is to borrow surplus savings from abroad.

That is where QE came into play. It provided a surplus of yield-seeking capital from investors in developed countries, thereby allowing emerging economies to remain on high-growth trajectories. IMF research puts emerging markets’ cumulative capital inflows at close to $4 trillion since the onset of QE in 2009. Enticed by the siren song of a shortcut to rapid economic growth, these inflows lulled emerging-market countries into believing that their imbalances were sustainable, enabling them to avoid the discipline needed to put their economies on more stable and viable paths.

This is an endemic feature of the modern global economy. Rather than owning up to the economic slowdown that current-account deficits signal – accepting a little less growth today for more sustainable growth in the future – politicians and policymakers opt for risky growth gambits that ultimately backfire.

That has been the case in developing Asia, not just in India and Indonesia today, but also in the 1990’s, when sharply widening current-account deficits were a harbinger of the wrenching financial crisis of 1997-1998. But it has been equally true of the developed world.

America’s gaping current-account deficit of the mid-2000’s was, in fact, a glaring warning of the distortions created by a shift to asset-dependent saving at a time when dangerous bubbles were forming in asset and credit markets. Europe’s sovereign-debt crisis is an outgrowth of sharp disparities between the peripheral economies with outsize current-account deficits – especially Greece, Portugal, and Spain – and core countries like Germany, with large surpluses.

Central bankers have done everything in their power to finesse these problems. Under the leadership of Ben Bernanke and his predecessor, Alan Greenspan, the Fed condoned asset and credit bubbles, treating them as new sources of economic growth. Bernanke has gone even further, arguing that the growth windfall from QE would be more than sufficient to compensate for any destabilizing hot-money flows in and out of emerging economies. Yet the absence of any such growth windfall in a still-sluggish US economy has unmasked QE as little more than a yield-seeking liquidity foil.

The QE exit strategy, if the Fed ever summons the courage to pull it off, would do little more than redirect surplus liquidity from higher-yielding developing markets back to home markets. At present, with the Fed hinting at the first phase of the exit – the so-called QE taper – financial markets are already responding to expectations of reduced money creation and eventual increases in interest rates in the developed world.

Never mind the Fed’s promises that any such moves will be glacial – that it is unlikely to trigger any meaningful increases in policy rates until 2014 or 2015. As the more than 1.1 percentage-point increase in 10-year Treasury yields over the past year indicates, markets have an uncanny knack for discounting glacial events in a short period of time.

Courtesy of that discounting mechanism, the risk-adjusted yield arbitrage has now started to move against emerging-market securities. Not surprisingly, those economies with current-account deficits are feeling the heat first. Suddenly, their saving-investment imbalances are harder to fund in a post-QE regime, an outcome that has taken a wrenching toll on currencies in India, Indonesia, Brazil, and Turkey.

As a result, these countries have been left ensnared in policy traps: Orthodox defense strategies for plunging currencies usually entail higher interest rates – an unpalatable option for emerging economies that are also experiencing downward pressure on economic growth.

Where this stops, nobody knows. That was the case in Asia in the late 1990’s, as well as in the US in 2009. But, with more than a dozen major crises hitting the world economy since the early 1980’s, there is no mistaking the message: imbalances are not sustainable, regardless of how hard central banks try to duck the consequences.

Developing economies are now feeling the full force of the Fed’s moment of reckoning. They are guilty of failing to face up to their own rebalancing during the heady days of the QE sugar high. And the Fed is just as guilty, if not more so, for orchestrating this failed policy experiment in the first place.

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. His most recent book is The Next Asia.

Summer Is Almost Over. So Is QE

Posted on August 28, 2013 by Editor Test -

As the summer of 2013 coasts toward its unofficial end, the thoughts of many financial observers are focused on the beginning of the end of the Fed’s “quantitative easing” program, and the potential impact on the markets.

In anticipation of rising yields and falling prices as the Fed buys fewer bonds in 2014, investors have been herding money from bonds to stocks. Pundits call the re-allocation process part of a “great rotation” (an expression not heard much until recently).

* * *

Will we miss QE, and the floor that it helped establish under the prices of risky assets during the last few years? Ken Volpert, the head of Vanguard’s taxable bond group, clearly will not. He recently wrote a blog post entitled, “Goodbye (and good riddance!) to financial repression.”

Rather than dread falling bond prices, Volpert welcomes an end to the period of negative real yield that the Fed’s bond-buying activity has visited on the overall bond market, as measured by the Barclays Aggregate Bond Index. He hopes for a return to an era when investing in a bond index fund offers an inflation-beating return.

He doesn’t expect bond yields to return to their 10-year averages ($1.9% for Treasuries and 3% for corporate bonds) very soon, however, thanks to a combination of above-normal unemployment, conservative spending by government and consumers, and the effect of “reverse QE” as the Fed gradually sells assets and absorbs some of the excess cash it put into the banking system.

“My expectation is that the continued slow growth will lead to a gradual increase of this real yield back to about 1% for the Aggregate Index over the next two years—a move that is likely to keep total returns in very modest positive territory for the total U.S. bond market over this period,” Volpert wrote.

* * *

While a firm like Vanguard, which manages huge bond index funds, wants to calm its shareholders about rising yields and prevent flight from existing bond funds, more opportunistic firms have capitalized on investor anxiety by creating new types of actively managed bond funds.

In the lead story in the August U.S. Monthly Product Trends edition of the Cerulli Edge, for instance, Cerulli Associates notes that QE has had a significant impact on product development in bond mutual funds.

At the beginning of the financial crisis, when yields were higher, money flowed heavily into intermediate bond funds, Cerulli said, with a peak of $119 billion in 2009. By the second quarter of 2013, however, flows into those funds had turned negative.

Some of that money went into stocks, but a chunk has gone into “non-traditional,” actively managed retail bond funds that follow “benchmark agnostic” strategies. Going forward, the two most likely categories for new product development in bonds are “unconstrained” and multistrategy funds—basically, actively managed bond or income funds—and bank-loan funds, according to a Cerulli survey.

Bank-loan funds buy the speculative-grade and/or variable-rate loans that are used in leveraged buyouts. They offer higher yields than conventional bonds and reportedly have little or no exposure to duration risk. But they come with more risk than the typical bond investor might have an appetite for.

* * *

Phil Chiricotti, the president of the Center for Due Diligence (CFDD), a Chicago-based organization for retirement plan advisors, has also been pondering the potential effects of the end of quantitative easing.

“The unwinding of QE is a place we have never been before and while the modest recovery has continued, it is still fragile. In other words, the ability to absorb higher interest rates remains an unknown,” he writes in his August 28 report.

In particular, he’s interested in the risk exposures of the target date funds (TDFs) that are the default investments in so many 401(k) plans. His report reminds us that different TDFs will respond to changing conditions in very different ways. He’s been tracking the performance of the major TDFs and found big discrepancies in their returns over the past year.

Even among TDFs with the same maturity, returns have varied widely. Within the 2015 “class” of TDFs, performance differed by as much as nine percentage points, depending on their exposure to the booming stock market. Performance has also varied by maturity, with bond-heavy 2015 TDFs underperforming 2045 TDFs by eight percentage points in the year ending June 30, 2013.

“The easy money has been made and TDF holdings beyond cash, stable value and short term fixed income have elevated risk on both the equity and fixed income side,” Chiricotti wrote. He welcomes a return to a period when the invisible hand of the market—as opposed to the hand of Ben Bernanke—sets asset prices.

“Assuming no new shocks—something investors can never be sure of—and no more than a moderate increase in rates, economic fundamentals should eventually replace monetary policy as the key driver of asset class valuations,” the CFDD president wrote.

* * *

I hear relatively little about the vulnerability of equity prices to the end of QE. Many people acknowledge that low interest rates have helped drive the stock market indexes to new (nominal) highs. But there doesn’t seem to be a whole lot of concern that higher yields might trigger a reversal in stock prices. The assumption may be that if the U.S. economy is healthy enough to tolerate higher rates, it will be healthy enough to sustain the bull market.

RetiremEntrepreneur: Mike Alfred

Posted on August 28, 2013 by Jenna Gottlieb -

What I do: BrightScope is a financial information company, similar to Morningstar, Thomson Reuters, and Bloomberg. We want to bring transparency to markets that historically haven’t had it. Before Morningstar, there wasn’t a lot of information in the public domain about the quality of mutual funds. We’re doing the same thing in the retirement plans space and in the area of financial advice and wealth management. We maintain a database of information on the retirement plan market and add value by quantitatively rating 401(k) and 403(b) plans across critical metrics. The BrightScope Rating reviews more than 200 unique data-inputs per plan and calculates a single numerical score on a 0-100 scale.

Who my clients are: We work with six of the top 10 global asset managers, eight of the top 10 defined contribution recordkeepers, as well as broker-dealers, custodians, and financial advisors. The last major segment of our client base is large plan sponsors, including McDonald’s, Google, Thomson Reuters, and several hundred others.

Why people hire me: We talk to a lot of senior executives in the financial services industry. The one thing we consistently hear is that we have a sterling reputation as a firm that always delivers on the promises we make to clients. I think when people hear the name BrightScope they have a positive impression, even if they don’t entirely understand what we do.

How I get paid: It’s a subscription business model; people pay to access our data and software. At the high end, the Beacon platform costs $325,000 a year off-the-shelf, but some firms pay more for the integration of proprietary data and other custom software. Many top asset managers, custodians, and broker-dealers use our Beacon platform to transmit data among themselves in a data clearinghouse or data exchange format. The platform standardizes the transfer protocols, data formatting, and reporting. Some companies employ a team of in-house IT people whose biggest challenge is taking in reporting from multiple platforms. Our Beacon platform streamlines it for them.

Where I came from: I grew up in San Diego, went to Stanford for my undergraduate degree and majored in history. During that time, I traded highly volatile small cap stocks and much of my early experience came directly from my E*Trade account. When I graduated, I wanted to work in the financial advisory business, but I became disillusioned with Wall Street. The goal in that environment was to sell product. My brother Ryan and I decided to build up an independent firm, and in that process we came up with this idea. Morningstar standardized a fund rating, but no one had come up with a way to standardize and rate a 401(k) plan. That was the big breakthrough for us because no one was doing it and it turned out to be a very big and important market.

My personal retirement philosophy: I don’t think you should ever try to retire. I save the maximum in my personal 401(k) plan every year, but I spend a lot of time running and staying healthy. If you can work until the day you die, that’s optimal. My personal philosophy is that you should save like you will retire, but live like you won’t.

Financial service firms neglect ‘accumulators’: Hearts & Wallets

Posted on August 26, 2013 by Editor Test -

At their peril, traditional financial services firms continue to neglect the 77 million U.S. households that are still in the accumulation stage, a group that has $15.4 trillion and includes the 29 million mid-career households ages 40 to 53 with $7.2 trillion, according to Hearts & Wallets, LLC, the retirement and investment trends research firm.

“New entrants will force incumbents to respond in the coming months to the under-served ‘Accumulator’ market. LearnVest, NestWise and other new competitors [will] enable younger investors to break free from asset-based pricing, which hampers access to desired services,” said Chris J. Brown, Hearts & Wallets LLC principal.

His firm defines Accumulators as those younger than age 64 and not within five years of retirement. Retirees, a separate group, account for 34 million households with $13.8 trillion invested.

The findings come from the Hearts & Wallets annual competitive study, Inside Retirement Advice 2013: Accumulator Focus. Acquiring and Growing Relationships in the Workplace, Online and with Advice & Guidance. It highlights findings from the firm’s annual confidential management survey, Inside Advice Competitive Landscape Survey Q2 2013.

The survey of nearly two dozen leading distributors, employer-sponsored plans, insurers, asset managers and intermediary platform solution providers reveals future strategic priorities for retirement, segment focus, offering scope, social media and technology and sizes the Accumulator market. Participating firms had more than $12 trillion in AUA and more than $10 trillion in AUM, serve more than 50 million retail customers and support more than 60,000 registered reps.

Large firms are uncertain whether to focus on retirement income (55%) or young investors, the survey showed. Encouragingly, 55% of firms think considering the lifetime value of a customer could be useful, up from 43% in 2010.

Participating firms are under pressure to maintain older investor focus. Only 16% of resources (budgets, headcount and management) are devoted to young investors, and only eight percent of firms offer a dedicated young investor focus similar to retirement income. Signs of change are emerging, however, as firms emphasize tools and social media resources that appeal to younger investors and shift strategies.

Social media’s role

Firms primarily use social media for branding and to grow and acquire customers. Only one-quarter cite social media as a service delivery advantage. Online ads, email, Twitter and similar messaging capabilities and communities outrank formerly popular communication vehicles except for seminars and TV ads. Ninety percent agree younger investors demand more immediate and varied ways to communicate, access and validate, and the industry will have to adapt.

“Few Accumulators are explicitly planning for, or intensely interested in, retirement, so speak the language of younger investors,” Brown said. “Three-quarters of firms agree they need to do something different for younger investors. The growing wallets of these future mainstream customers will go to firms that adapt or new entrants.”

We’re Still Accepting Nominees

Posted on August 26, 2013 by Editor Test -

We’re extending the deadline to this Wednesday for nominations for the Innovation in Retirement Income Products award. The winner of the award, which Retirement Income Journal is sponsoring on behalf of the Retirement Income Industry Association, will be announced at RIIA’s annual meeting in Austin, Texas, on October 7.

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 actuarial wizardry, or its value proposition, or perhaps even its sheer simplicity.

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.

Wednesday, September 11, is the new 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 prestigious 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.

Equities should continue to rise in third quarter: Prudential

Posted on August 26, 2013 by Editor Test -

Global stock markets should remain in a modest uptrend with the Federal Reserve unlikely to begin slowing its bond purchases before the fourth quarter of 2013 or early 2014, and with continued support from other developed central banks, according to the September Global Investment Outlook from Prudential global chief investment strategist John Praveen.

A surprising level of upside growth occurred in both the U.S. and the Eurozone during Q2 and growth remains solid in Japan. Improvement in the corporate earnings outlook and supportive valuations were positive indicators for stocks, the report said.

Global stocks

Equity markets rallied in July for several reasons:

Reassurance from the Federal Reserve that it would continue buying bonds;
Optimism about Japan Prime Minister Shinzo Abe’s “third arrow”—proposed financial deregulation—with the solidification of an effective majority following the LDP upper house election victory;
Continued Eurozone stabilization;
Chinese policy makers reaffirming their objective of over 7% growth.

Looking ahead, global equity markets are likely to post further modest gains with:

Developed central banks remaining committed to keeping interest rates low for an extended period and continuing to provide liquidity;

The Fed unlikely to begin QE taper until late Q4 or early Q1 with inflation below the Fed’s 2% target;
Improving global growth with upside growth surprises in the U.S. & Eurozone;
Earnings outlook remains solid with improving GDP growth in the U.S. and Europe and continued solid growth in Japan;
Valuations remain supportive;
Improving risk appetite with easing of Eurozone risks.

However, in the near-term, market volatility is likely to remain high with:

Escalating tensions in Egypt threatening to destabilize the Middle East region and cause a spike in oil prices;
Renewed chatter that strong U.S. macro data could prompt the Fed to start QE taper as early as September;
Continued growth disappointment in China and other emerging economies and policy tightening to defend weak currencies and tackle inflation.

Fixed income

Bond yields are likely to remain under upward pressure from:

Improving GDP growth;
Strong U.S. GDP and ISM readings prompting the Fed to start QE taper as early as September; and
Bond valuations remain expensive relative to stocks.

However, bonds remain supported by:

Ongoing bond purchases by other developed central banks and their commitment to keeping interest rates low for an extended period;
Low inflation in the developed economies;
Renewed increase in safe haven demand as escalating tensions in Egypt threaten to destabilize the Middle East region; and
Sluggish emerging market GDP growth.

Quote of the Week

Posted on August 26, 2013 by Editor Test -

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.

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.

Data Connection