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“Liquidity is Alive and Kicking”: Morgan Stanley

Posted on August 5, 2013 by -

Sell-off? What sell-off? The global downdraft in risk markets that followed Federal Reserve Chairman Ben Bernanke’s initial discussion of tapering asset purchases has receded into history. Interestingly enough, the correction ended on June 24, the day China’s central bank provided a liquidity backstop to its markets. Ten days later, the European Central Bank (ECB) decided to start providing forward guidance on monetary policy. [Click here for Morgan Stanley’s entire August wealth management report.]

Then, on July 10, Bernanke assured investors that the tapering process would be slow and dependent on continued improvement in the economic data. He also separated the decision to trim asset purchases from raising short-term interest rates, strongly suggesting such hikes are still years away.

All told, growth-related assets have rebounded sharply, with stocks, commodities and credit recouping 50% to 100% of their losses. Interest rates, which spiked in May and June following the first talk of tapering, recovered about 10%, as measured by the benchmark 10-year US Treasury bond. Furthermore, new leadership has emerged in US equities: Since May 1, when rates began to move higher, growth-oriented stocks, such as financials, industrials, consumer discretionary and health care, have performed best while dividend yield/defensive stocks, such as utilities, telecom services and consumer staples, faltered.

All of these moves are consistent with our view that the recent rise in rates is simply a mid-cycle correction rather than the end of the economic recovery. As the economy improves, rates are supposed to increase and stocks move higher on the expectation of better growth. We suspect there will be occasional corrections in equities as they adjust to higher rates, but we would use those pullbacks to add to growth stocks in the US, as well as to European and Japanese equities. Correlations also continue to fall, which is another sign the economy is healing.

One final note: Europe has been the best-performing equity market since the June 24 lows. This is likely due to the ECB’s decision to give forward guidance on monetary policy while also implying that it will remain supportive for several more years—and likely longer than the Fed. This is very much in line with our thesis that easier monetary and fiscal policy in Europe should result in better growth. As a result, we believe European equities will continue to do better than the consensus thinks, which is why they remain a significant part of our asset allocation. Here we favor value over growth.

© 2013 RIJ Publishing LLC. All rights reserved.

Want more referrals from clients? Prudential white paper explains how

Posted on August 5, 2013 by -

How long does it take an advisor to inspire referrals by clients? On average, advisors say that it takes a little over two years. But according to clients, it takes an average of almost five years. 

That’s according to a new Prudential Financial white paper, “Referrals: A Matter of Trust.” The study was based on data collected in 2011 from 800 clients and nearly 400 advisors.

The paper also shows that clients are generally willing to make referrals, with 56% of clients having provided referrals already and an additional 36% saying they would consider doing so.

Advisors whose clients were likely to refer them tended to rate high on certain characteristics, such as “setting realistic expectations about investments returns,” “delivering on what was promised,” “achieving strong investment performance” and “disclosing their fee levels.”

Clients were also more likely to recommend clients who provided them with a written financial plan, who advised them on generating stread retirement income and preserving and protecting savings. “Firm stability” and “expertise” were also advisor characteristics that correlated with a tendency to refer. Advisors who had long tenure at their firms were also more likely to be referred, as were advisors who could draw upon “in-house” expertise to assist with unique planning issues, such as advanced tax planning or health care.    

Advisors who are accessible, listen well, ask questions to fully understand their clients’ needs and take actions based on what they have learned were significantly more likely to receive referrals, according to the study.

© 2013 RIJ Publishing LLC. All rights reserved.

Those who secure America feel financially insecure

Posted on August 5, 2013 by -

Almost seven in ten (68%) of middle-class military families (those with household incomes > $50,000) agree that today’s military families won’t be able to retire as comfortably as prior generations, according to recent survey results from the First Command Financial Behaviors Index. A year ago, 57% were insecure about retirement.

Compiled by Sentient Decision Science, Inc., the First Command Financial Behaviors Index assesses trends among the American public’s financial behaviors, attitudes and intentions through a monthly survey of approximately 530 U.S. consumers aged 25 to 70 with annual household incomes of at least $50,000.

“Roughly two thirds of survey respondents agree that military families are concerned about the increased possibility of involuntary separation and they worry that changes to military retirement benefits will encourage fewer years of service,” said a release from First Command Financial Services. Survey subjects included senior non-commissioned officers (NCOs) and commissioned officers in pay grades E-6 and above.

During the past six months, more military families have grown fearful (36% in May 2013, up from 28% in November 2012) that sequestration—across-the-board cutbacks in federal spending triggered at the end of 2012—might mean reduced retirement benefits.   

The Index reveals that 92% percent of middle-class military households have retirement savings in addition to their military pension and Social Security. Those who expect to reach full retirement status expect an average of 43% percent of their post-retirement income to come from non-military sources. More specifically:  

  • 73% expect to draw income from 401(k) accounts   
  • 62% expect to draw income from IRAs   
  • 19% expect to draw income from profit-sharing accounts  
  • 19% expect to draw non-military pension

Sentient Decision Science was commissioned by First Command to compile the Financial Behaviors Index. SDS is a behavioral science and consumer psychology-consulting firm with special vertical expertise within the financial services industry. SDS specializes in advanced research methods and statistical analysis of behavioral and attitudinal data.  

© 2013 RIJ Publishing LLC. All rights reserved.

Advisors are encouraged to make clients more Medicare-conscious

Posted on August 5, 2013 by -

With fewer and fewer people covered by employer-sponsored group health plans, financial advisors should make a point of guiding newly-retired clients through the Medicare maze, according to Allsup, a Medicare plan selection service in Belleville, Ill.

Only 25% of employers reported offering retiree health benefits in 2012, down from 32% in 2007, according to a Kaiser Family Foundation survey of employers with more than 200 employees. In 1988, 66% of employers offered retiree group health coverage. Financial advisors are encouraged discuss Medicare plan selection with their clients as they approach their 65th birthday. 

“At many companies, retiring used to mean transitioning from your employer’s health plan to a retiree health plan,” said Paula Muschler, manager of the Allsup Medicare Advisor. “Now, rather than selecting from one or two employer-provided options, more and more individuals are faced with trying to navigate through dozens of different Medicare plan options.”

There are two situations when financial advisors can help their clients navigate the Medicare maze, according to Allsup:

Boomers who are nearing 65 and getting ready to retire. People turning 65 have seven months—three months before their birthday, the month of their birthday and three months afterward to choose a Medicare plan without penalties. It’s also important to understand the deadlines for first-time enrollment and possible penalties if those deadlines are missed.

One’s health status, anticipated procedures, prescription drug needs, financial resources, and plans for travel and relocation in retirement can all have a bearing on choice of plan. On average, retirees can choose from among 31 prescription drug plans (Part D) and 20  Medicare Advantage plans. Alternatives to Medicare could include a spouse’s coverage, veterans healthcare coverage, employer coverage for those still working.

Seniors who already retired and lose employer-sponsored retiree healthcare coverage. Even retirees who have employer-sponsored coverage should enrolled in Medicare Parts A and B when they reach 65, Allsup advises. The loss of retiree group health coverage triggers the option to buy Medigap insurance and Part D under some circumstances.  Seniors can also transition from original Medicare to a Medicare Advantage plan with prescription drug coverage when they lose employer-sponsored coverage. For early retirees, simply reaching 65 is often the trigger to losing retiree coverage.

Often, seniors with retiree group health coverage assume Medicare is not important because they have other insurance. But they need to pay attention. “Turning 65 is a critical time period for Medicare beneficiaries to consider what they need and how they will afford it,” Muschler said.  

© 2013 RIJ Publishing LLC. All rights reserved.

The Federal Reserve in a Time for Doves

Posted on August 5, 2013 by -

The battle is on to replace current US Federal Reserve Chairman Ben Bernanke. One might expect the Fed chairmanship – arguably the second most powerful official position in the United States, and certainly the world’s most powerful financial position – to be determined by a conclave of central bankers. In fact, the choice is largely at the discretion of the US president. So let us consider two of the leading candidates, Lawrence Summers, a former US treasury secretary, and current Fed Vice Chair Janet Yellen.

Both Summers and Yellen are brilliant scholars with extensive experience in public service. Whereas the mainstream press seems intent on exploring their candidacies as a contest of contrasting personalities, the fact is that both candidates are extremely well qualified. Moreover, both have a reputation for believing that the Fed should not place excessive weight on price stability relative to unemployment. Normally, this dovish bias would be a handicap; nowadays, it is an advantage.

The importance of technical competence in monetary policy has been proved repeatedly by central banks around the world. According to research published in 2003 by the economists Christina Romer and David Romer, the quality of monetary policy depends critically on whether central bankers have a clear and nuanced understanding of policy making and inflation. The 1920’s, 1930’s, and 1970’s are replete with examples of central bankers who did not understand the basics, and whose economies paid the price.

What this means is not just competence in setting interest rates, but also competence in regulatory policy. Some are criticizing Summers’s ardent pursuit of financial deregulation during the 1990’s, when he headed the US Treasury under President Bill Clinton. But these critics overlook his role in helping to fight that decade’s sovereign-debt crises, and his insistence that the US begin issuing inflation-indexed bonds.

In a complex and ever-changing policy setting, it is almost impossible to get every call right, and the important thing is to learn from one’s mistakes. Winston Churchill famously regretted overseeing the United Kingdom’s catastrophic return to the gold standard in 1925, when he was Chancellor of the Exchequer. His performance, needless to say, improved in later years.

As for Yellen, it is true that she was President of the San Francisco Federal Reserve during the last years of the massive US housing bubble – which was particularly acute in her district. But Yellen’s speeches on financial risks showed more foresight than those of most of her peers.

Typically, one looks to the head of the central bank to serve as a bulwark against political pressure to push down interest rates and raise inflation. My own research in 1985 on inflation and central bank independence showed that, in normal times, one generally wants a central banker who places greater emphasis on price stability relative to unemployment than an ordinary informed citizen might do. Installing a “conservative” central banker helps to keep inflation expectations in check, thereby holding down long-term interest rates and mitigating upward pressure on wages and prices.

For the past 25 years, the mantra of “inflation targeting” (introduced in my 1985 paper) has served as a mechanism for containing inflation expectations by reassuring the public of the central bank’s intentions. But excessive emphasis on low inflation targets can be counterproductive in the aftermath of the worst financial crisis in 75 years.

Rather than worrying about inflation, central bankers should focus on reflating the economy. The real problem is that they have done such a good job convincing the public that inflation is the number-one evil that it is difficult for them to persuade anyone that they are now serious about reflation. That is why appointing a “dove” would not be a bad thing at all.

Yellen has already developed a reputation as a dove within the Fed, with speeches consistently showing strong concern about today’s high unemployment. And, though many on the left regard Summers as suspiciously conservative, that is hardly the case when it comes to inflation. His 1991 paper on monetary policy is widely cited as among the first to make the case for avoiding very low inflation targets, in part to give the central bank more room to lower interest rates. Back then, Summers clearly viewed himself as a monetary-policy dove: “I would support having someone in charge of monetary policy who is more inflation-averse than I.”

But now Summers’s dovishness is not a problem. In the face of downward nominal-wage rigidity, higher inflation would facilitate sectoral adjustment and achieve a small but useful impact on reducing debt burdens.

If normal times call for a conservative central banker who helps to anchor inflation expectations, now is the rare time when we need a more unorthodox central banker who will fight deflation expectations. A central-bank version of the Vatican’s papal conclave would have a hard time deciding whether to send up the fumata bianca for Yellen or for Summers – or perhaps for someone else (another former Fed vice chair, Donald Kohn, now appears to be in the mix) with similar inclinations.

© 2013 Project Syndicate.

 

Claim Check

Posted on August 5, 2013 by -

A man in a khaki suit—I’ve always associated khaki suits with summer in Washington, D.C.—leaned toward me at the National Press Club last week and said that a third of the people who claim Social Security at age 62 don’t think they’ll live very long, a third don’t have jobs and the rest, well, their motives aren’t clear.

Sometimes they just don’t trust the government. He knew an executive at a Fortune 500 company who claimed Social Security at age 62 because he didn’t think the Old Age Survivors and Disability Insurance system will be solvent for much longer.

The man in the cotton suit and I were at the 15th annual meeting of the Retirement Research Consortium, which includes the Center for Retirement Research at the Boston College, the Center for Retirement Research at the University of Michigan and the National Bureau of Economic Research.

These centers conduct and sponsor research that the Social Security Administration provides funding for. The researchers generally address problems that face Social Security. They analyze data on the use of benefits, look for patterns and cause-and-effect relationships, and try to draw conclusions that might help the program run more efficiently and effectively.   

One pattern that the Social Security Administration would like to alter is the tendency of Americans to claim their old age benefits at age 62. Until 1956, everybody (except for widows) had to wait until age 65 to claim retirement benefits. But Congress amendd the law that year to allow women to retire at age 62. The same privilege was extended to men in 1961. Today, thanks in part to the law of unintended consequences, about half of all 62-year-olds claim Social Security benefits as soon as they can.  

An urge to claim early

As we all know, lengthening lifespans (which mean more claiming years per person) threaten to strain the system’s finances, so policymakers would like to nudge able-bodied people toward working longer and claiming later. That would mean more taxes going into Social Security and fewer benefits coming out, at least in the near term. It would also mean higher annual payments for workers when they do claim benefits, and, when they pass, potentially higher benefits for their surviving spouses.

Because Social Security plays such an important role in almost everyone’s retirement income strategy, and because the claiming age can have such a big impact on the amount of the annual benefit, financial advisors need to prepare themselves for conversations with their near-retirement clients about when they intend to claim Social Security and why.

Those could be challenging conversations. They will require the advisor to know a lot about Social Security. They may also require advisors to channel their inner psychologists. According to a paper presented at the RRC conference last week by Suzanne Shu of the Anderson School of Business at UCLA (co-authored with John Payne of Duke’s Fuqua School of Business), some people claim Social Security early for reasons that aren’t purely rational.

For instance, some people have a pessimistic idea of how long they will live. Obviously, someone in poor health may have good reason to believe he or she might die 10 years sooner than average. should claim Social Security early.  But, according to Shu’s research, people’s estimates about their own life expectancies aren’t necessarily accurate. In fact, the estimates can swing by as many as 10 years, depending on whether you ask them what age they think they will to or what age they think they will die by. And the answer can have an impact on claiming behavior. “An extra 10 years of subjective life expectation [translates] to a six-month delay in claiming,” said the Shu-Payne paper.

Fairness factor

Other behavioral factors may drive the claiming decision. Some people, the researchers found, might be biased to collect Social Security early because of “loss aversion.” They may feel an acute sense of loss if they don’t claim money that they feel belongs to them. Others may believe that it’s “unfair” for them to delay a reward that they worked hard for and deserve.

To be sure, some old-school Social Security economists don’t consider these behavioral factors to be nearly as strong as concrete drivers of early claiming like illness or employment. But the behavioral view is gaining traction—in many parts of the financial world—because it promises to open up new avenues for behavior modification.

The takeaway? As an advisor, you might need to help clients determine if their reasons for claiming early are reasonable, and whether or not they outweigh the potentially ample benefits of waiting. The benefit payout grows 8% every year they postpone claiming, until age 70. Even if your clients can afford to stop working at 62, they might still benefit from using other sources of income—such as 401(k) assets or a period-certain annuity—while postponing Social Security.

Jobs and debts

Employment status and debt levels also have a big impact both on the timing of retirement and the commencement of Social Security benefits, research at the conference showed. For instance, the availability of Social Security at age 62 apparently can tempt older people who have lost their jobs to abandon their search for a new job (it takes longer for older people to find new jobs than for younger people), according to a paper presented by Alex Gelber of the Wharton School. As an advisor, you may be called upon to help someone decide whether they should yield to that temptation.

The need to service their debts apparently often compels many people to keep working well into their 60s and, consequently, to postpone claiming Social Security. According to a paper presented by Barbara Butrica of the Urban Institute, simply having a mortgage raises the likelihood of working by about seven percentage points above average and reduces the probability of claiming Social Security by three percentage points. (At the conference, one economist quipped that Boomer debt could end up helping to solve Social Security’s solvency problems.)

The debt levels of older people have been steadily rising. On average, debt consumed 10% of older adults’ assets in 1998, 14% in 2006 and 18 in 2010, according to Butrica. The median value of outstanding debt among those between ages 62 and 69 grew to $32,000 per person in 2010 from $19,000 in 1998. Note to advisors: Clients who say they want to retire earlier might benefit from guidance on eliminating mortgage debt, either through refinancing to a shorter-term loan, accelerating their payments, or downsizing to a smaller home.

Systemic security

What about a client who wants to claim early because he or she thinks the Social Security system is headed for the same fate as Detroit’s insolvent municipal pensions? There are evidently many such people, and their numbers will probably grow. One University of Delaware professor at the conference said that he surveys his students each semester and a majority consistently say they don’t expect ever to collect Social Security.

None of the experts at the conference—outspoken admirers of Social Security, for the most part—seemed to doubt the program’s durability. A featured speaker, economist Alice Rivlin, a former vice chairman of the Federal Reserve, said Social Security merely needs  “restorative reform,” as opposed to radical reform, in order to regain solvency. She and others at the conference also asserted that as long as older Americans are a potent voting block, legislators of both parties are unlikely to try to do away with it. Social Security wasn’t dubbed the “third rail of American politics” for nothing.

Pessimism about Social Security may stem from a mistaken belief that the program is as susceptible to insolvency as a municipality’s public employee pension or a private company’s defined benefit plan. But the federal government’s ability to fund itself is of an entirely different nature than a city’s or a corporation’s. People who want to claim at 62 purely out of fear that Social Security is on the verge of collapse should probably be advised to take a chill pill.

© 2013 RIJ Publishing. All rights reserved.

Reel Returns

Posted on August 4, 2013 by -

What I do—I primarily work with secondary market annuities. I was 23 when I started. Fortunately, people took the leap with me and I’ve been able to stay with it. I’ve been at it for 11 years now. I started an online forum five years ago that took a conservative view about investing. I wanted to cast a broad net so I put everything I know about annuities online and it boosted my presence with current clients. Now we exclusively work with leads generated online. I feel very fortunate. The guys I learned from years ago would be amazed that I don’t make a cold call. The secondary market is quite often the best deal we find for people. Operating as we do online in a competitive nature, we can’t come out with the second best plans. The secondary market allows us to do that. It’s been extremely appealing to people, because the [primary market annuity payout] rates are really low.

Bryan Anderson head shotWho my clients are—Most of my clients are people who are five years away from retirement. If they are further than a few years away, we give them information about the different annuities available. Many of them get back to us when they are ready to buy. By providing education, we allow them to become comfortable with us. My approach is: ‘I’ll teach you how annuities work and then we can pick one.’ It resonates well.

Why people hire me—The people that work with me or buy from me are the people who spend time with me. I try to put them on the same side of the table as me. Everyone has his or her niche. I’m an avid fisherman and for me it’s not uncommon to be on the water with people in their 50s and 60s. It’s very natural for me to talk to people of that age about fishing and the relationship extends to my business. Also, I feel like in the secondary market we don’t have the problems other [annuity brokers] do. Our clients get nice rates and we get them where they want to go. When all is said and done, an annuity is the safer type of investment. The transfer process isn’t quite as simple as filling out a form. It does takes a bit of time to explain the product and at the end of the process some say, ‘No thanks.’ But there’s certainly a part of the secondary market that works out.

How I get paid—I’m on commission for sales and I also have a life insurance business that is steady. Annual revenues will be close to $1 million this year. My commissions range from 2% to 6%. This process has been a commitment. I worked for myself from the beginning and I went long periods of time without making money. The value we add is the safety of the transaction.  We utilize a separate agreement with each factoring company, so we dictate how the purchase process works, which ensures that our clients’ best interests are protected throughout. Legal review and oversight of each case allows us to guarantee that all contingencies have been covered and no encumbrances to the future payment stream will arise. Since potential issues with these contract transfers have been well documented in the press, we are able to address each of those issues on a case-by-case basis. As [my business partner] likes to say, you can buy a box of nuts and bolts and sheet metal and maybe make a car out of it. Or, you can buy a finished car. We sell the car. Other [secondary-market annuity] factoring companies and brokers sell nuts and bolts.

Where I came from: I didn’t want to get a marketing or management degree. I wanted something interesting and challenging, so I got a finance degree. My uncle was a very successful self-made businessman and I always wanted to pursue a finance career. I always asked him ‘How do you do this?’ When I got out of college, he introduced me to a financial advisor and he hired me. I found good fortune and learned excellent personal financial planning strategies from a first-class group of advisors at Northern Rockies Financial Group in Missoula, Montana. My aversion to risk blended well with people who disliked the unpredictable nature of the equities market. 

My retirement philosophy—Leave nothing to chance. People rely on a paycheck when they’re working, which allows them not to worry much about their investments. But when you’re not working, up and down market movements will change your lifestyle. You could perhaps earn 12% on a riskier bet, but you definitely can achieve 5% or 6% with safer investments. 

B J Anderson in Alaska2

(Above: Anderson fishing in Alaska.)

© 2013 RIJ Publishing LLC. All rights reserved.

Fiduciary crusader gets 17 years for theft from retirement plans

Posted on August 1, 2013 by -

BOISE – A federal judge this afternoon sentenced Matthew D. Hutcheson, 41, of Eagle, Idaho, to 210 months in prison, U.S. Attorney Wendy J. Olson announced. On April 15, 2013, a jury convicted Hutcheson of 17 counts of wire fraud. U.S. District Judge William Fremming Nielsen also ordered Hutcheson to serve three years of supervised release and pay $5,307,688 in restitution to the victims.

Hutcheson is a former trustee and fiduciary for the G Fiduciary Retirement Income Security Plan (the “G Fid Plan”) and the Retirement Security Plan & Trust (the “RSPT”). During the eight day trial, the government presented evidence that beginning in 2010, Hutcheson perpetrated schemes to defraud the G Fid and RSPT plans, and misappropriated over $5 million of plan assets.

The jury heard evidence that from January 2010 through December 2010, Hutcheson misappropriated just over $2 million of G Fid Plan assets for his personal use. On 12 occasions, Hutcheson directed the G Fid Plan record-keeper to wire transfer plan assets from the G Fid Plan account at Charles Schwab to bank accounts he controlled and to other bank accounts for his personal benefit.

Hutcheson used these assets to extensively renovate his personal residence, including installing a pool, to repay personal loans, to purchase luxury automobiles, motorcycles, all-terrain vehicles, and a tractor, and for other personal expenses. When G Fid Plan clients, plan record-keepers, and others requested information about the location and status of the plan assets, Hutcheson misrepresented that they were safely invested.

The jury also heard evidence that in December 2010, Hutcheson misappropriated approximately $3,276,000 of RSPT Plan assets to pursue the purchase of the Tamarack Resort in Donnelly, Idaho, on behalf of a limited liability corporation he controlled, called Green Valley Holdings, LLC. In December 2010, Hutcheson directed the RSPT Plan record-keeper to wire transfer approximately $3 million from the RSPT Plan to an escrow account for the benefit of Green Valley Holdings, LLC. Hutcheson directed the RSPT Plan record-keeper to describe the transaction in plan records as an investment in a fixed income bank note.

In reality, Hutcheson used the $3 million to purchase a bank note secured by a majority interest in the Osprey Meadows Golf Course and Lodge at the Tamarack Resort in the name of Green Valley Holdings, not the RSPT Plan. Hutcheson later obtained a $425,000 cash loan from a private lender in Virginia using the same bank note as collateral, and placing the lender above other creditors in case of default. When the RSPT Plan auditor questioned Hutcheson about the investment, Hutcheson told the auditor there was no plan investment in a fixed income bank note, and that he had “loaned” the money from the RSPT Plan to Green Valley Holdings.

Hutcheson produced purported loan documents to the auditor, but they were fraudulent and forged. In addition, in December of 2010, Hutcheson directed the RSPT Plan record-keeper to wire transfer $275,000 from the RSPT Plan to a bank account he controlled. Hutcheson transferred $250,000 of this money to an escrow account at US Bank to demonstrate to the Tamarack Corporation’s creditors that Green Valley Holding had the financial means to purchase the resort. Later, Hutcheson spent the money for personal purposes.

After approximately three hours of deliberation, the jury found Hutcheson guilty on all counts.

In announcing today’s sentence, Judge Nielsen made specific findings that Hutcheson defrauded more than 250 individual victims, used sophisticated means to commit his offenses, abused a position of private trust as a fiduciary and trustee for the plans, and willfully obstructed justice by committing perjury at trial and offering a fraudulent document into evidence.

“Mr. Hutcheson’s criminal conduct had many aggravating factors that required the firm sentenced imposed by the Court today,” said Olson. “Mr. Hutcheson placed his own personal interests and greed above the clients’ whose retirement interests he pledged to safeguard. This office will continue to take pension fraud very seriously and hold accountable those who seek personal gain from others’ hard work through fraud and deceit. I commend the federal law enforcement officers who conducted the thorough investigation and Assistant United States Attorney Ray Patricco for his outstanding prosecution of this case.”

“The defendant’s despicable conduct jeopardized the financial security of workers covered by these pension plans,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “He funded a life of luxury at the expense of hundreds of people who were just trying to save for retirement. This case is indicative of our close and continued partnership with fellow federal agencies to vigorously pursue those who abuse their positions of trust and commit crimes against employee benefit plan participants.”

“Matthew Hutcheson willfully defrauded more than 250 individual investors and abused his position as trustee of their retirement plans to divert $5.3 million for his personal use,” said FBI Salt Lake City Special Agent in Charge Mary Rook. “The FBI and its law enforcement partners are committed to investigating and prosecuting those who fund a luxurious lifestyle at the expense of hard-working, trusting investors. Some victims in these types of cases have their life savings tied up in fraudulent investments and never fully recover. We encourage the public to remain vigilant—check your investments; ask your investment manager hard questions; and report suspected fraud to the FBI.”

The case was investigated by the United States Department of Labor, Employee Benefits Security Administration, and the Federal Bureau of Investigation.

S&P 500 companies post record level of pension underfunding

Posted on August 1, 2013 by -

A report published today by S&P Dow Jones Indices reveals that, despite strong double-digit gains in the equity markets last year, S&P 500 issues posted record pension and OPEB (Other Post Employment Benefits) underfunding for fiscal 2012.

The culprit: low interest rates. The report, “S&P 500 2012 Pensions and Other Post Employment Benefits (OPEB): The Final Frontier,” can be accessed in full by going to www.spdji.com/sp500.

Data shows that S&P 500 defined pensions reached an underfunding status of $451.7 billion in fiscal 2012, up $97 billion over the $354.7 billion posted in 2011 and up $200+ billion over the $245 billion posted in 2010. OPEB underfunded levels increased to $234.9 billion in 2012 from $223.4 billion in 2011 and $210.1 billion at the end of 2010. Combined, the amount of assets that S&P 500 companies set aside to fund pensions and OPEB amounted to $1.60 trillion in 2012, covering $2.29 trillion in obligations with the resulting underfunding equating to $687 billion, or a 70.0% overall funding rate. 

“The double-digit equity gains of 2012 were no match for the artificially low interest rates which vaulted pension liabilities into record underfunding territory,” says Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices and author of the annual report.

“The result is that companies have only 77 cents for each dollar they owe in pensions and only 22 cents for each dollar of OPEB obligations. The good news for current retirees is that most S&P 500 big-cap issues have enough cash and resources available to cover the expense. The bad news is for our future retirees, whose benefits have been reduced or cut and will need to find a way to supplement, or postpone, their retirement.”

The S&P Dow Jones Indices report also shows that estimated pension return rates declined for the 12th consecutive year, dropping to an estimated 7.31% in 2012 versus 7.60% in 2011 and 7.73% in 2010. Discount rates declined for the fourth year in a row, falling 78 basis points to 3.93% from 4.71% in 2011 and from 5.31% in 2010, significantly increasing projected obligations.

The report also reviewed the status of Other Post Employment Benefits (OPEB). Within the S&P 500, 286 companies offered OPEBs in 2012. With $302.3 billion in OPEB obligations, only $67.4 billion was funded, leaving OPEB funding at 22.3%. OPEB’s funding status continues to pale in comparison to that of pensions (77.3%).

“The American dream of a golden retirement for baby boomers has dissipated for most,” adds Silverblatt. “Plans have been reduced and the burden shifted with future retirees needing to save more for their retirement.  For baby-boomers it may already be too late to safely build-up assets, outside of working longer or living more frugally in retirement.  For younger workers, they need to start to save early, permitting time to compound their returns for their retirement.  Corporations have shifted the responsibility to them, and if they don’t step up now, they won’t have anything for retirement.”

© 2013 RIJ Publishing LLC. All rights reserved.

Social Security behavior modification: What works?

Posted on August 1, 2013 by -

A new brief from the Urban Institute’s Program on Retirement Policy shows that some of the government’s incentives and disincentives—a rising full retirement age, a bigger penalty for taking benefits early and a bigger reward for taking them late—is beginning to have some effect in encouraging people to delay Social Security.

To be sure, there was a spike in claiming during the financial crisis, but it subsided. “Retired worker awards increased 12% in 2008 and 20% in 2009, when a then-record 2.7 million adults received retirement benefits for the first time. The unemployment rate soared over that period, more than doubling between 2007 and 2009 for workers age 55 or older.”

Unemployment continued to grow in 2010, but the claiming rates declined that year and again in 2011, even though the unemployment rate for workers age 55 or older remained as high as in 2009. The number of retirement benefit awards increased by only about 3,000 in 2012, despite continued substantial growth in US population age 62 to 69.

 “The share of retirees collecting Social Security at age 62 has fallen 12 percentage points over the past decade,” to about half of women and less than half of men, the report said. About one in four men now claim at the current full retirement age of 66.

There are huge spikes in claiming rates at age 62 and then again at the full retirement age (FRA) for each age group. In other words, most people either take benefits when they reach the earliest possible age or the FRA, whatever theirs happens to be. Few people wait until age 70, when they qualify for the maximum benefit.

The full retirement age (FRA) was raised to 65 years and two months for those born in 1938. It increased another two months for each successive birth cohort until it reached 66 years for those born in 1943. It will stay at 66 until it begins increasing two months per year again for those born in 1955 through 1960. Current law sets the FRA at 67 years old for everyone born in 1960 or later.

The penalty, as it were, for retiring at age 62 has been going up, while the incentives for waiting until later ages has been increasing. People born in 1937 receive 80% of their full retirement benefits if they retire at age 62, but people born in 1943 receive 75% and people born in 1960 receive only 70%.

The reward for delaying Social Security benefits is also much higher than it once was. Congress has gradually increased the actuarial adjustment for delayed claiming past the FRA. That adjustment, now 8% a year (up to age 70) for those born in 1943 or later, was only 3.5% for those born in 1925.

The government reduces Social Security benefits for people by $1 for every $2 they earn over $15,120 prior the year they reach FRA. The exempt amount rises to $40,080 in the year they reach FRA. After the FRA, there’s no penalty for earned income.   

The FRA seems to be a behavioral anchoring. Fully 25% of men born in 1943 or 1944 claimed at age 66 or later, including 19% who claimed at 66 (their FRA). By contrast, only 4% of men born between 1938 and 1942, whose FRA was 65, claimed at age 66 or later. Thirty percent of these men, whose FRA ranged from 65 years and 2 months to 65 years and 10 months, began collecting at age 65—more than twice the share of men born in 1943 or 1944 who began collecting at that age.

Half of women born in 1943 or 1944 claimed at age 62, compared with three-fifths of those born between 1935 and 1937. Eighteen percent of women born in the later years claimed at age 66 or later, up from 6% for those born in the earlier years. As with men, fewer women now begin collecting benefits at age 65 now that the FRA is 66 years.

Delaying claiming raises monthly benefits by five-ninths of a percent per month in the three years before the FRA, and by two-thirds of a percent per month in the four years after the FRA.

© 2013 RIJ Publishing LLC. All rights reserved.

NEXCOM hires Prudential Retirement as recordkeeper

Posted on August 1, 2013 by -

The Navy Exchange Service Command’s 401(k) plan, has chosen Prudential Retirement as its recordkeeper, Prudential announced. NEXCOM’s 300 stores and 14,000 employees provides military members, retirees and their families with retail products and services worldwide.   

The plan has $188 million in assets for about 6,500 participants. Prudential Retirement serves about 3.6 million participants and annuitants and had $299.4 billion in retirement account values as of March 31, 2013.

© 2013 RIJ Publishing LLC. All rights reserved.

Sammons beefs up the investment options in its rollover IRA funds and annuities

Posted on August 1, 2013 by -

Sammons Retirement Solutions Inc. has added equity, bond and alternative investment options to its LiveWell Retirement Series of mutual fund IRAs and variable annuities. The additions bolster existing offerings in balanced equity/bond and high-yield bonds while adding access to gold and real estate options.

Sammons has added 36 new mutual funds to its LiveWell and LiveWellPlus Mutual Fund IRA Series offerings and eight investment options to its LiveWell Variable Annuity. It also added four new fund companies to its multimanager IRA platform: Columbia Management, First Investors, Pax World and Transamerica. The platform now has 138 funds from 23 managers. Columbia Management and First Investors have also been added to the variable annuity offering.

For the LiveWell Mutual Fund IRA Series, Sammons has broadened the range of socially responsible, balanced equity, international large-cap equity and high-yield bond funds. In addition, a gold fund and a global real estate fund are available on the platform for the first time.

For the LiveWell Variable Annuity, the eight new options expand an investment roster where 90% of the offerings boast a 5-year or longer track record. The additions include two high-yield bond offerings, an emerging markets bond offering and five equity options with large blend, large value, moderate and growth strategies.

The LiveWell Models, a series of risk-based asset class model portfolios created for the LiveWell Retirement Series and developed by Morningstar Associates, LLC, will also be updated.  

© 2013 RIJ Publishing LLC. All rights reserved.

Great American Life FIAs now sold by Wells Fargo Advisors

Posted on August 1, 2013 by -

Wells Fargo has added Great American Life Insurance Co.’s fixed indexed annuities, which offer income and death benefit riders, to its product shelf, the two companies announced.

Wells Fargo Advisors now offers Great American Life’s AssuranceProtect 6 and AssuranceSelect 7 fixed-indexed annuities. Additionally, they offer the IncomeSecure, Inheritance Enhancer and IncomeSustainer Plus optional riders, which provide a combination of guaranteed retirement income and enhanced death benefits.

Great American Life Insurance Company is a member of Great American Insurance Group® and rated “A+ (Strong)” by Standard & Poor’s and “A (Excellent)” by A.M. Best Co. for financial strength and operating performance.

Great American Life is a top five provider of fixed and fixed-indexed annuities in the financial institutions market, according to BISRA 2013 first quarter bank channel annuity data report and Beacon Research 2013 first quarter fixed annuity premium study.

Great American Life Insurance Company and Annuity Investors Life Insurance Company are annuity subsidiaries of Great American Insurance Group. The members of GAIG are subsidiaries of American Financial Group, Inc. Wells Fargo Advisors manages $1.3 trillion in client assets as of June 30, 2013, and has 15,268 full-service financial advisors and 3,340 licensed bankers.

© 2013 RIJ Publishing LLC. All rights reserved.

Zombie 401(k) Accounts

Posted on July 31, 2013 by -

Zombies are everywhere these days—even in 401(k) plans. Take for instance, the undead retirement plan accounts of long-departed former employees who leave their accounts, their money, and their plan providers in a kind of limbo. Checks sent to them are often returned to sender or go uncashed.

When these accounts accumulate, they can create administrative costs and even fiduciary headaches for plan sponsors and providers. As it happens, the same 2001 law that enabled the Bush tax cuts—EGTRRA—created a pathway for 401(k) plan sponsors and providers to outsource this problem and get the accounts off their books. A small, specialized industry has sprung up in response.

Millennium Trust of Oak Park, Ill., for instance, holds zombie money in rollover IRAs while it tracks down missing participants. PenChecks Inc., of La Mesa, Calif., has created a national registry to reunite uncashed checks with their rightful owners. RCP (Risk Compliance Performance) Solutions of Dresher, Pa., helps companies clean up the tax and reporting problems that zombie accounts can create. Centier and Inspira serve as safe-harbor IRA custodians for automatic rollovers.

You don’t hear much about this corner of the 401(k) business. While financial advisors and big firms like Fidelity and TD Ameritrade compete avidly for large-balance, voluntary IRA rollovers, the world of small-balance forced-out IRAs, with its zombie accounts and orphaned checks goes largely unnoticed. But it’s a multi-billion dollar subculture unto itself.

Forced rollovers

Terry Dunne (right) knows that subculture as well as anyone. As managing director of Millennium Trust’s Automatic Rollovers unit, he oversees about $900 million in 150,000 accounts that have been rolled over by the firm’s plan sponsor clients, including companies as large, well-known and varied as Alcoa, Halliburton, and Planet Hollywood. (Millennium Trust also custodies about $7 billion in self-directed IRA assets for registered investment advisors and other clients.)

Terry Dunne“Other custodians don’t want small accounts, or accounts where the participant is missing or non-responsive,” Dunne told RIJ. “If you’re a Fidelity, for instance, you won’t make much money on the spread on your investment. And if you can’t find that person, you can’t reach into their other pockets [to increase your wallet-share]. In our case, the size of the account doesn’t matter because we charge the same flat fee for opening up the account and managing the account.”

There are about 600,000 opportunities for force-outs of small accounts per year from the nation’s 401(k) plans, he said. He estimates that 15% to 20% of the participants who have been forced out become lost or unresponsive.

 “We work with about 14,500 plans, and we have opened up about 325,000 accounts for missing and nonresponsive participants,” Dunne said. “Each plan could be sending us one account a month or thousands per year. We work with about 150 large plan sponsors. Each year we open more and more accounts. Our goal for this year will be to open 125,000 to 150,000 accounts.

“Our standard fee is $25 to open an account, and $45 per year to manage it. The money is invested in a money market vehicle. We aggregate the money, and send it to a bank. The bank pays us a percentage, and we pay out a slightly smaller percentage to the client. [The spread] was a lot better when we started this business seven years ago, but it will come back.”

Legal grey zone

Department of Labor (DoL) rules on automatic (or “default”) rollovers are fairly clear. A plan sponsor can force out accounts owned by unresponsive or missing participants and worth $1,000 to $5,000 and outsource the matter to an IRA custodian. On amounts under $1,000, the employer can send a check, but if it comes back in the mail or goes uncashed, the account enters a legal grey zone.   

Say, for instance, that plan sponsor Widgets Unlimited asks its plan provider to close an account of a former employee and send him or her a check for $1,000. The plan provider might withhold $200 for income taxes, triggering a 1099 statement, and send a check to the former employee for $800.

But what happens if the check is returned to sender or is never cashed? In that case, it enters a regulatory and administrative grey zone. Can the money stay at the plan provider, earning a float for the provider? The DoL says no, that it must go back to the plan. But should it go into a money market account, where it’s safe from loss? Or into a qualified default investment alternative (QDIA), such as a target date fund? And what about the tax status of that $800 distribution? Is it qualified money or unqualified? If it’s still qualified, should the $200 in withholding be restored to the account?

Plan sponsors may hesitate to ask the DoL for guidance on such matters, for fear of triggering an audit. Within the automatic rollover business, reasonable people have been known to disagree. According to Dunne, the distribution remains qualified money, even if the withholding is never restored. (The clients will theoretically get a 1099-C and receive a credit for any erroneous withholding when they subsequently file their taxes.)

“We say that uncashed checks are still assets of the plan, and that as long as the plan searches for that person, and the person remains missing or non-responsive, they can be rolled over [to an IRA],” Dunne told RIJ.

A national registry 

Others interpret the law differently. PenChecks, one of Millennium Trust’s competitors, also accepts custody of automatic or default IRAs from plan sponsors and tries to find the missing participants. But, once a check is sent out, it disagrees with the policy of returning the money to the plan or continuing to treat distributions as qualified money.

On its website, Penchecks says, “After much research, PenChecks believes that if the institution cannot restore the taxes withheld under where appropriate to restore the funds back to qualified status in order to establish a Default /Missing Participant IRA then the most appropriate approach is the funds should escheat to the participant’s state once the applicable period of time has elapsed.”

If the plan sponsor or provider hasn’t sent a check yet, it can find former participants through the National Registry of Unclaimed Retirement Benefits, which was established by PenChecks. Former participants can go to the registry and search for lost money by Social Security number. When participants make themselves known, PenChecks notifies the plan sponsor so that the provider can pay out the account.

For checks that have already been sent out, PenChecks created the Missing Distributee Program. Recordkeepers or institutions can transfer these amounts to PenChecks. According to the Penchecks’ website, “The assets are held on an after-tax basis in an interest bearing account legally separate from the assets and liabilities of PenChecks. PenChecks performs a search for the participant, registers the account with the National Registry of Unclaimed Retirement Benefits and starts the escheat clock running based on the participant’s state of residence. This is an efficient outsourcing service that allows clients to clear these checks from their books and avoid monitoring and dealing with all the different escheat laws in all the states.”

“There are no laws around the tax status of uncashed checks. Nobody has any real clear guidance on how you deal with them,” said Mark D. Sweatman, president of RCP Solutions’ Retirement Plan Management Services division, which helps companies mitigate their exposure to fiduciary violations related to uncashed checks, but doesn’t take custody of rollover IRAs. “The destination for that money could be a rollover IRA or an escheat account, depending on whether it’s considered after-tax or pre-tax money. We consult with ERISA counsel at the plan sponsor and say, how do you want to handle this? It’s up to the plan sponsors where they want to put the money after mitigation.”

As for why a check might go uncashed, there are several possibilities. “We’ve seen an outstanding check for as much as $283,000,” Sweatman told RIJ. “People put it under a pile and never get to it. People move and the new homeowner throws away their mail instead of forwarding it. We’ve seen plan conversions where the old recordkeeper is holding uncashed checks and the new recordkeeper doesn’t want them. We see it everywhere. It’s a problem for sure, and the larger the company, the larger the problem.”

The forgotten $735,000

Reuniting people with their money may be the most rewarding part of this business. Dunne said that his two dozen phone reps can locate about 80% of the missing participants whose qualified accounts they inherit fairly quickly and often with the help of credit reporting agencies. Generally, about one in five people roll their IRAs out of Millennium Trust as soon as learn that the money is there.

Dunne never ceases to be surprised at the way some people can forget about the money in their retirement accounts. “Not everybody cares about money to the same degree that you and I do,” he told RIJ. “Many people just forget that they have this money.”

Many of them are young. “Say you’re a giant retail store like Marshall Field’s and over the course of time you employ lots of young women anywhere between the ages of 19 and 24. They work for six to eighteen months and they quit. Over the next five years they might move once or twice, or get married and change their name. Eventually you have no way to track them down any more,” Dunne said.

“We get their Social Security number and date of birth, two pieces of information that don’t change. We find them and say, ‘You have a retirement account with $1,200 in it.’ They say, ‘Are you kidding me? That’s great!’ And that solves a problem for Marshall Field’s, which is in the business of selling dresses, not tracking people down.”

Not all of the amounts are trivial. “The biggest amount we ever handled was $735,000. We found the person in Japan. We were too polite to ask how they managed to forget a sum that large. I have a feeling it wasn’t their only money. He was happy that we found him, of course. He left the money with us for six or eight months. Then he rolled it over to [Charles] Schwab,” Dunne told RIJ.

A change in the law helped create the automatic rollover business and a change in the law could also squeeze it. “A big risk for us is that they expand the dollar amount that’s eligible [for force-out accounts] to a number north of $25,000,” Dunne said. “It would bring more players into the market. When an individual leaves a given company, the advisors are interested in any balance north of $50,000. They want to meet with the participants, and get them into an IRA in their broker-dealer. There’s tremendous [competition] around those larger accounts.”

© 2013 RIJ Publishing LLC. All rights reserved.

Ghost Metropolis

Posted on July 31, 2013 by -

The poster child for Detroit’s decline is the old Michigan Central Railroad Station (pictured below). Tourists trek from overseas to photograph this derelict building, a once-grand 15-story structure that stands stripped like an abandoned car, as perforated as a soiled and tattered IBM punch card. To see it is to disbelieve it.

You may never have been to Detroit, and you’ve probably read your fill about its bankruptcy. My wife was born there, and over the past 30 years, I’ve visited there at least two dozen times. On all but three or four of those trips, I’ve only seen the suburbs. They look like prosperous suburbs anywhere, only flatter.

The city of Detroit is a different story altogether. It’s a ghost metropolis. Yes, there’s a new baseball stadium, an open air farmers market, a restored Fox Theatre (an original “picture palace”), a zoo and, of course, casinos. There are also minor signs of gentrification by hip young urban homesteaders. But these isolated nodes of activity, criss-crossed by concrete expressways, dot an otherwise devastated landscape of abandoned schools, empty factories and boarded-up homes.    

detroit central stationDetroit, not unlike parts of Baltimore and Philadelphia and many smaller Rustbelt cities, isn’t so much a failed city as an abandoned one. As people, jobs and businesses have streamed to the suburbs or the Sunbelt, revenues from income tax and property tax have plummeted. The financial crisis was a coup de grace, reducing the value of Detroit’s pension assets by over $1 billion.    

When Detroit’s emergency manager filed for Chapter 9 bankruptcy recently, the fate of the city’s retirement plans was cast into further doubt. Its underfunding was recalculated upward to $3.5 billion from $640 million. I have tried to understand the pension situation by downloading city documents, and by calling someone I know who I thought might know a lot about the bankruptcy and the pensions. He told an interesting story about one aspect of the pension mess.

In June 2005, according to an audit of the pensions, the city of Detroit, unable to contribute to its pension funds otherwise, borrowed $1.44 billion from European banks in a deal brokered, according to the Wall Street Journal, by UBS and others, who earned $46.4 million in fees. Of the proceeds, $740 million went into the city’s General Retirement System and about $630 million into the Police & Fire Retirement System.

The city did not issue debt, however. “Service corporations” were established by the two pensions to set up a trust to receive future pension contributions from the city. The trust issued 20-year “certificates of participation” (COPs) to the lenders. The city also entered into swap agreements to protect itself and its lenders from interest rate risk.

According to my source—I have not independently confirmed it—the European lenders acted in the belief that Detroit’s obligations were “sovereign.” In the run-up to the financial crisis, sovereign debt, even from shaky governments like Greece, Spain (or, apparently, Detroit) was valued less for its LIBOR yield than for the fact that it required less reserving when it was leveraged—i.e., used as collateral for further borrowing and lending.   

The limits of that strategy were exposed by the global financial crisis, and most or all of the lenders failed. The Wall Street Journal reported on July 22 that the COPs lenders included Dexis, a since-nationalized Franco-Belgian lender, Ireland’s Depfa Bank Plc, UBS, and Bank of America. Dow Jones reported that Commerzbank, through its Eurohypo unit, loaned Detroit $400 million, and that the loans are now in a German government-run “bad bank.”  

The financial crisis also wiped out a big portion of Detroit’s pension assets. In fiscal 2009, the city’s General retirement fund lost over $1 billion in value while paying out $270 million in benefits. It will never recover. From June 30, 2008 to June 30, 2009, the investment income of the General fund (which has about only about 6,200 active participants and 11,800 retirees) went from a $614.3 million gain (on $3.42 billion in assets) to a $794.7 million loss. Assets fell to $2.25 billion, a decline of over $1 billion.

Since then, payouts have overwhelmed investment revenue and contributions. Benefits have steadily risen, from $271 million in FY 2008 to $387 million in FY 2012, which included a huge third-quarter equities market drop. Assets at the end of FY 2012 were still under $2.2 billion, and assets fell by almost $263 million. In its Proposal for Creditors, released on June 14, the Emergency Manager said the city won’t be making its $50 million current-year contribution to the police and fire plan and, in the future, won’t be contributing the estimated $200 million to $350 million a year that it would take to fully fund both  pensions, now underfunded by an estimated $3.5 billion.

It’s unclear whether the foreign lenders (or, in most cases, their own receivers) will be able to recover much from Detroit. The value of the COPs has already been written down by as much as half. The certificates are not secured or funded by any particular municipal income stream. (The swap agreements may be funded by gambling fees.) It’s been suggested that the COPs may have been issued improperly in the first place, and that Detroit Emergency Manager Kevyn Orr may try to void them entirely. The June 14 proposal said, somewhat mysteriously, that “the City has identified certain issues related to the validity and/or enforceability of the COPs that may warrant further investigation.” A lawyer for the city declined to comment.

© 2013 RIJ Publishing LLC. All rights reserved.

The Best & Worst TDF Performers

Posted on July 31, 2013 by -

Rising equity markets helped generate strong returns during 2012 and early 2013. Experiencing more volatility, TDFs with equity rich glide paths, tactical overweighting, emerging market and real estate exposure fared particularly well last year. The defensive funds and those focused on real returns lagged, but it is important to review these funds on a risk-adjusted basis over a longer time period.

As noted in the 7/15/13 release by the Center for Due Diligence (CFDD) on TAA: Prudent, Generally Accepted & Diversified, a surprisingly large number of mainstream TDF managers, including T. Rowe Price, are now using a tactical element. Given the increased interest in tactical asset allocation, the CFDD’s white paper on TAA & ERISA Plans was specifically designed to provide an analytic framework for evaluating these complex strategies.

TDFs have diversified via international equity and foreign bonds in recent years. The Morningstar survey noted that TDFs with significantly different allocations and geography delivered somewhat similar results during 2012, but that will not be the case in 2013. In spite of this diversification, the average TDF generated a 13.1% return during 2012, not far from the 16.0% generated by the S&P 500.

Recognizing that few managers add attribution value beyond asset class selection, the flows into passive TDFs exceeded active funds for the first time during 2012. TDF fees continue to fall and while active funds still hold a 68% market share, that market share is down from 85% in 2006.

Bolstered by recordkeeping platforms and brand, Fidelity ($157 billion in TDF assets), Vanguard ($124 billion) and T. Rowe Price ($80 billion) remain the dominant mutual fund providers of TDFs. The big three held a 75% market share at the end of 2012, but that is down from 83% at the end of 2006.

Declining from 48% in 2006 to 32% at the end of 2012, most of the decline in market share was experienced by Fidelity. The increased use of CITs, mediocre performance and the trend towards open architecture contributed to the decline in Fidelity’s market share.

The Fidelity Direct and Fidelity Advisor platforms are quite different, but both offer robust non-proprietary TDF flexibility. Indeed, Fidelity Direct includes the vast majority of TDFs as part of their standard offering, including Vanguard and T. Rowe. Vanguard and the American Funds do, however, appear to be missing from the Fidelity Advisor platform.

Looking at the 2015 vintage, Fidelity’s absolute and risk adjusted returns were average or below during 2012, particularly the Index series. The somewhat conservative glide path and commodity allocation are no doubt taking a toll. Fidelity is the only one of the big three with a commodity allocation and while it was ill-timed, smart allocations could be muted by conservative glide paths during periods of rising equity markets. Unlike the Freedom Series, the Index series does not use High Yield, Emerging Market Debt or REITs. Despite average volatility, Fidelity’s TDF performance did not improve much during the first half of 2013.

From an absolute performance standpoint, T. Rowe, TIAA-CREF, Principal, Great West and John Hancock led the 2012 charge. T. Rowe Price, TIAA-CREF and Principal were also among the top performing TDFs over the trailing three-year period calendar period. Vanguard’s growth rate was the highest among the “big three” last year and while most TDF managers experienced organic growth during 2012, the smaller funds generated the highest growth rates.


TDF managers with more than $1 billion in assets experiencing robust growth during 2012 included John Hancock, up 43%, JP Morgan, up 51%, and Great West, up 71%. TDF Managers with less than $1 billion experiencing robust growth included MFS, up 49%, PIMCO, up 127%, Invesco, up 57%, and Allianz, up 149%. Interestingly, these four firms lack recordkeeping platforms and use different strategies.

2012 was a good year for most TDF managers, but six of the TDF series tracked by Morningstar experienced negative growth, including Alliance Bernstein, DWS and Putnam. Given their less than stellar performance, attribution value and lack of scale, these TDFs should be monitored more closely. While we aren’t sure about their other asset allocation solutions, Putnam’s TDF performance has been particularly poor over the trailing 1, 3 & 5 year periods.

American Independence, Columbia, OppenheimerFunds and Goldman Sachs shuttered their TDFs in 2012, primarily due to a lack of scale. Goldman Sachs is, however, positioning to leverage the market for custom solutions and turmoil in the fixed income markets.

As noted in the lead copy, the first half of 2013 was very different from the 2012 results. The TDF managers are also diverging. US equities performed well during the first half of 2013, but US bonds, foreign bonds, TIPS and commodities all ended in the negative column for the year-to-date period ending 6/30/13.

As noted by Jon Chambers, Principal, Schulz Collins Lawson Chambers, “Those advocating heavy bond allocations may be fighting yesterday’s battle. Asset allocation is about balancing risk, not avoiding it, something that is impossible.” Indeed, the inevitable end of quantitative easing and the record outflows from US bonds during June are reminders that equity and longevity risk are not the only risks facing TDF investors. For more on fund flows and asset class performance, see the CFDD’s DC Plan & TDF Statistical Supplement. 


TDF performance varies by vintage. Given the impact of rising interest rates, the long-dated funds fared better than the short-dated funds for the period ending 6/30/13. In other words, the most risk-averse investors came up short.
Based on the lowest cost share class TDF in Morningstar’s mutual fund database—which does not include funds of funds, target-risk funds & CITs—the average TDF in the 2015 vintage was DOWN 1.4% for the quarter, up 2.1% for the year-to-date June period and up 8.0% for the trailing year. In sharp contrast to the average target date fund, the S&P 500 was UP 2.9% for the quarter, up 13.8% for the year-to-date period and up 20.6% for the trailing year.

When comparing TDF performance, it is important to note that Morningstar’s database does not separate the “to” and “through” funds. This is a serious limitation because these funds have different objectives. As noted previously, comparing funds with different objectives is like comparing apples to oranges.

Given that different strategies and wide ranging glide paths make performance comparisons difficult, we have identified the “to” and “through” funds and added a column with the 2015 vintage equity exposure as of 12/31/12. To assist with risk adjusted performance comparisons, we have added a column with standard deviation for the trailing 1, 3 and 5 year periods. Going forward, the CFDD will separate the “to” and “through” TDFs. We will also include CITs. Based on the Morningstar data, the SSgA Target Retirement CIT actually outperformed T. Rowe Price, the top-ranked TDF manager, with far less volatility.

T. Rowe Price was the top performing TDF for the trailing 1, 3 & 5 year periods in Morningstar’s mutual fund database. The American Funds, MassMutual and TIAA-CREF also placed among the top five for the trailing 1 & 3 year periods. Contrastingly, Putnam was the only manager among the bottom five for all the periods shown. Unlike T. Rowe Price & Vanguard, Fidelity was the only one of the top three managers that failed to place among the top five for any of the time periods. They also avoided the bottom five for the same time periods.


As you might expect, the top performing TDFs—particularly T. Rowe Price—were accompanied with high standard deviation. In other words, these funds may suffer the most if the equity markets tank. By focusing on dividend paying securities, the American Funds Group was the sole exception, i.e., they delivered top decile performance over the trailing 1- and 3-year periods with low standard deviation.

© 2013 Center for Due Diligence. Used with permission.

The Bucket

Posted on July 26, 2013 by -

Fear of markets exceeds fear of death: Nationwide  

Americans are more afraid of investing in equities than of losing their jobs, public speaking or dying. Many would rather use a website for financial planning than meet with an investment professional, according to a new Nationwide Financial/Harris Interactive survey.

According to the “Fear of Financial Planning” survey, of the 783 potential investors over the age of 18 who had at least $100,000 in investable assets, 62% are scared of investing in the stock market, while 58% fear death, 57% fear public speaking and 37% fear losing their jobs.

More than one in two millennials and nearly half of generation X (58% and 48%) turn to websites before financial advisors for help with financial planning. However, 78% of retirees and 61% of high-net-worth investors (those with $250,000 or more in investable assets) use a financial advisor as their top resource for financial planning needs.

The survey also found 83% of respondents are afraid of another financial crisis, while 72% are concerned about unmanageable health care costs and 71% worry they won’t be able to pay for their children’s education.

Nearly four in five of Millennials and generation Xers (77% and 78%, respectively) fear not enjoying the lifestyle they want in retirement, and two-thirds (66% of millennials and 65% of generation X) fear not retiring at all.   

Harris Interactive conducted the survey online in the U.S. on behalf of Nationwide Financial from March 26 – April 3, 2013. Participants included 783 Americans ages 18 and older with a minimum of $100,000 in investable assets.  

Spain uses social security reserves for extra summer pensions

The Spanish government has tapped into the Social Security Reserve Fund for the third time to pay extra summer pension payments, and is expected to do so again later this year, according to a report by IPE.com.

Angel Martínez-Aldama, director of the country’s investment and pension fund association (INVERCO), said that prime minister Mariano Rajoy’s government took €3.5 billion from the reserve fund in June to pay extra summer pensions. According to the Labour Ministry, the reserve fund is now worth €59.3bn, equivalent to 5.65% of gross domestic product.

Although the Spanish social security system faces severe shortfalls due to high unemployment, Martínez-Aldama said this use of the reserve fund is in line with its initial goal. “There is nothing abnormal about tapping into the fund,” he said. “That is precisely the reason why the fund was launched in the first place, back in 2000.”

But Martínez-Aldama conceded that tapping into the reserve fund for extraordinary payments could lead to “some problems” in the future if the country’s economy does not improve. “However, the economy seems to be improving slightly,” he said.

The government, led by José María Aznar, launched the reserve fund to offset future shortfalls at Spanish pension plans.

Martínez-Aldama said that the reserve fund was supposed to make 14 payments in total this year to pay pensions. While one payment is made each month to finance Spanish pension incomes, two additional payments are expected to be made twice this year to cover extra needs.

New York Life Retirement Plan Services adds two plans

Retirement programs for AMC Entertainment, Inc. (AMC) of the Kansas City metro area, and Dead River Company of South Portland, Maine, have appointed New York Life Retirement Services as their plan provider.

The defined contribution and defined benefit plans of energy provider Dead River Company – totaling $52 million in assets – transitioned to the New York Life platform in mid-April. AMC, a movie cinema operator, is expected to convert its defined contribution and non-qualified plans in August, with a defined benefit plan to transition shortly thereafter.  

Both AMC and Dead River Company will be supported by New York Life’s Manufacturing, Materials, & Retail industry practice service team.

New York Life administers $47 billion in assets in 408 mid- to large-plans with more than 1.2 million participants, as of June 30, 2013.

Is your retirement outlook sunny or cloudy? New mobile app from Transamerica will do the forecast   

Transamerica Retirement Solutions’ new free mobile app, the Retirement Outlook Estimator, allows users to enter specific criteria and then estimates the probability that they will reach their retirement savings goals, the company said in a release.

Four weather forecast icons are used to indicate the retirement outlook: sunny, partly sunny, cloudy, or rainy. The app also provides alternative saving rate scenarios that could produce better outcomes.

The app calculates outlooks based on retirement account balances, contribution rates, investment style, and other retirement income sources. It also incorporates a Social Security income estimate. Information entered on the mobile device is saved, allowing users to edit their goals and savings whenever they would like and provides for a continuously updated retirement outlook. Facebook users can share the app.

For plan sponsor clients and their participants, Transamerica offers an online tool called Retire OnTrack. Along with the Retirement Outlook Estimator, Retire OnTrack offers customized strategies and outcomes, personalized progress reports, and communications intended to keep employees focused on retirement savings.

T. Rowe Price Group reports 2Q 2013 results

T. Rowe Price Group, Inc., had net revenues of $854.3 million, net income of $247.8 million, and diluted earnings per common share of $.92 in the second quarter of 2013, the Baltimore-based financial services firm said in a release.

In the second quarter of 2012, net revenues were $736.8 million, net income was $206.8 million, and diluted earnings per common share was $.79 in the second quarter of 2012.

Investment advisory revenues for the second quarter of 2013 were up $109.7 million to $739.7 million from the comparable 2012 period, as average assets under management increased $86.8 billion, or 16%.

Assets under management decreased by $3.4 billion since March 31, 2013, to $614.0 billion at June 30, 2013, including $379.5 billion in T. Rowe Price mutual funds distributed in the United States, and $234.5 billion in other managed investment portfolios.

Results for the first half of 2013 include net revenues of nearly $1.7 billion, net income of $489.7 million, and diluted earnings per share of $1.83, up $.29 per share from the comparable 2012 period. Assets under management have increased $37.2 billion from the end of 2012 as market appreciation and income of $41.9 billion was slightly offset by net cash outflows of $4.7 billion.

T. Rowe Price said it remains debt-free with cash and sponsored portfolio investment holdings of nearly $2.7 billion. The firm currently expects total capital expenditures for property and equipment for 2013 to be approximately $125 million, which will be funded from operating resources.

Market appreciation and income of $4.6 billion was more than offset by net cash outflows of $8.0 billion during the second quarter of 2013. The majority of the net cash outflows were concentrated among a small number of large institutional and intermediary clients that changed their investment objectives or repositioned their strategy allocations.

From an investment performance standpoint, 78% of the T. Rowe Price mutual funds across their share classes outperformed their comparable Lipper averages on a total return basis for the three-year period ended June 30, 2013, 83% outperformed for the five-year period, 81% outperformed for the 10-year period, and 62% outperformed for the one-year period.

In addition, T. Rowe Price stock, bond and blended asset funds that ended the quarter with an overall rating of four or five stars from Morningstar account for 79% of the firm’s rated funds’ assets under management. The firm’s target-date retirement funds continue to deliver very attractive long-term performance, with 100% of these funds outperforming their comparable Lipper averages on a total return basis for the three- and five-year periods ended June 30, 2013.

© 2013 RIJ Publishing LLC. All rights reserved.

SunGard names key trends in retirement plan services

Posted on July 26, 2013 by -

SunGard, the global technology company, has identified six key trends that are impacting retirement record keepers and plan sponsors:

  1. Retirement record keepers are seeking managed services offerings to help control costs, scale the business efficiently, and simplify and streamline retirement plan administration in order to compete.  
  2. As advisors play a larger role in individuals’ retirement planning, retirement administrators will invest in data, analytics and productivity tools to help advisors enhance service to participants.  
  3. Retirement plan administrators will look to provide standardized fiduciary, compliance and reporting solutions to help reduce the cost of compliance and help employers meet their increased responsibilities amid continued regulatory change.
  4. With the majority of Americans unprepared to fund their retirement, providers are placing a higher priority on offering retirement readiness support, including income projection tools and guaranteed income products.   
  5. As baby boomers retire, record keepers and advisors will seek growth through innovation by engaging younger participants via mobile and social media channels, while also leveraging these channels to reach smaller and micro markets.
  6. Larger retirement plan providers will look globally to achieve growth in new markets such as Latin America, Asia and the Middle East.

© 2013 RIJ Publishing LLC. All rights reserved.

Two senior SEC attorneys join Kirkland & Ellis

Posted on July 26, 2013 by -

Kirkland & Ellis LLP announced today that former U.S. Securities and Exchange Commission (SEC) Enforcement Director Robert Khuzami has joined the firm as a partner in the global Government, Regulatory and Internal Investigations Practice Group. Khuzami, who led the SEC’s Enforcement Division for four years, will be based in  Washington, D.C. and New York. 

During Khuzami’s tenure at the SEC, the Enforcement Division filed its highest rate of cases, in fiscal years 2011 and 2012. He created nationwide prosecution units to concentrate on the high-priority areas of investment advisers and private funds, large-scale trading and market abuse, mortgage and other structured products, bribery of foreign officials under the Foreign Corrupt Practices Act (FCPA), and municipal securities and public pensions.

Senior SEC official Kenneth Lench will also join Kirkland as a partner in the global Government, Regulatory and Internal Investigations practice. Lench, who will leave the agency at the end of July, has headed the Structured and New Products Unit within the SEC Enforcement Division since January 2010 and will be based in Washington, D.C.

Lench spent 23 years at the SEC, where he most recently was Chief of the Structured and New Products Unit. That unit created by Khuzami in 2010 as a specialty group of more than 45 professionals nationwide focusing on abuses in markets for complex securities, including asset-backed securities and derivatives.

© 2013 RIJ Publishing LLC. All rights reserved.