Archives: Articles

IssueM Articles

Pershing launches online ‘practice management center’ for advisors

Posted on June 10, 2013 by Editor Test -

Pershing LLC, a BNY Mellon company, has established a new online Practice Management Center where its advisor clients can access the clearing organization’s practice management materials, including whitepapers, guidebooks and interactive tools.

Resources on the platform will be organized by Pershing’s practice management “pillars”: Growth, Human Capital, Operational Efficiency and Managing Risk. A sampling of content available on the site includes:

Business Development and Planning–Becoming a Stronger Wealth Manager
Recruitment and Retention–The 30% Solution: Growing Your Business by Winning and Keeping Women Advisors
Platform and Workflow–Mission Possible III: Strategies to Sustain Growth in Challenging Times
Compliance and Supervisory Guidelines–Effective Sales Supervision and Compliance

Is $1 Million Too Little to Retire On?

Posted on June 10, 2013 by Editor Test -

The New York Times, bless its good grey heart, informed its readers yesterday that $1 million in savings isn’t enough to retire on.

Many Times readers must have nodded in dolorous agreement as they read that story over their Sunday coffee, but I wasn’t one of them. To have a mere $1 million in savings is a hardship that I would wish on myself and on my closest friends.

Seriously, I understand where the Times is coming from. If your lifestyle costs $300,000 a year, which isn’t rare in Manhattan, then $1 million in savings probably won’t last for 20 or 30 years, even if you start riding the subway instead of using taxis (or a car service).

So, I agree with this much: If someone in the highest tax bracket lulls himself into thinking that a $1 million nest egg will generate the same income he earned during his working years, he’s in for a nasty surprise.

* * *

But there’s a straw man hiding in that argument.

Have we now set the benchmark for adequate retirement savings at a point where savings must generate not only 100% of pre-retirement income, but also hundreds of thousands more for long-term care and/or a legacy? And must we use today’s risk-free rate to calculate the initial stake? That’s what the article seemed to assume.

That’s putting a huge burden on the saving and investing side, and none on the cost-reduction side or risk-transfer side. For all but the wealthiest retires, the task of economizing—paying off one’s house and cars, shedding college or consumer debt, delaying Social Security until age 70 and considering annuities—will as important as the task of saving and investing.

Or perhaps, for a few people, we’ve re-defined retirement sufficiency upward to mean “independently wealthy.” An advisor recently told me that his most affluent clients don’t see any distinction between discretionary and non-discretionary expenses. Those clients will be difficult to satisfy.

* * *

Aside from its fear-inducing overtone, another noteworthy aspect of the Times article was its assumption that the 4% withdrawal limit is the only way to avoid running out of money in old age.

The article suggested that $1 million could safely generate only $40,000 in income per year, and portrayed people with only $1 million as having few options. Outside of a major metropolitan area, a 65-year-old person (or couple) with $1 million actually has a lot of options.

If they’re truly dissatisfied with the 4% rule, a risk-averse couple could put $800,000 in a joint-and-survivor life annuity at age 65. Even at today’s terrible rates, they’d get $50,400 a year (with 100% continuation to the surviving spouse and an installment refund to beneficiaries), and still have $200,000 for emergencies or a legacy.

Alternately, a couple could put $500,000 in a 10-year period certain annuity paying $54,000 a year and invest the other $500,000 in a 10-year fixed rate annuity at 3% (with the flexibility to withdraw up to 10% per year penalty free). At age 75, with no withdrawals, the fixed annuity would be worth $671,000. Or, if they have a bigger risk appetite, they could put the non-annuitized assets into a diversified portfolio of stocks and bonds. They could go in a completely different direction and buy $200,000 worth of longevity insurance that pays about $60,000 a year at age 85.

But they still won’t be living the way millionaires expects to live, you say. That depends on how you look at it. As a Middle Eastern proverb says: “He who is not in debt is rich.”

* * *

The Times article, which was the paper’s “most e-mailed” of the day, also bemoaned the fact that owners of high-quality bonds are earning negligible interest. On the one hand, I agree: Low rates are indeed a plague on people looking for a safe home for their cash.

On the other hand, low rates are a blessing for people who’ve been holding stocks for a decade or two.

Without rate repression, the stock indices might well be much, much lower today than they are. And therefore the equity side of Boomer retirement account balances would be much, much lower. (Wall Street apparently agrees: Stock and bond prices trembled after Ben Bernanke hinted in May that the Fed might slow down its bond purchases.)

Like the loveable hooligan in Damon Runyon’s story, “Earthquake,” who redeems himself by holding up the doorway of a burning school so that all of the children can escape the flames, Fed policy has effectively, if not intentionally, propped up stock and bond values to give Boomers a temporary doorway to exit through.

So instead of cursing low annuity rates or waiting until interest rates go up (and stock and bond values to go down), maybe near-retirees should grab this opportunity to trade their appreciated assets for life annuities with 15-year periods certain.

Claiming SS at 62 or 70: A Comparison

Posted on June 10, 2013 by Editor Test -

A consensus in the financial planning profession is that while the Social Security claiming decision is quite difficult and there can be exceptions, it is often beneficial to delay the receipt of Social Security retirement benefits.

I will provide an exploration of this issue. What follows is not an effort to optimize any decision-making, but rather to observe the long-term impacts of two different types of claiming strategies. I’m considering the case of a 62-year-old male who has left the workforce. This person may or may not be married, and I’m not making any effort to separately determine about a spousal claiming decision.

The 62-year-old leaves the workforce and is estimated to have a $2,500 monthly Social Security benefit at the full retirement age of 66. If this person claims that Social Security benefit at 62, they are entitled to receive 75% of the benefit. On the other hand, if the person waits until age 70, they will be eligible to receive 132% of the benefit.

The 62-year-old has $1 million in assets and a lifetime inflation-adjusted spending goal of $60,000 per year.

The first option I consider is that this person begins Social Security at 62 and then uses financial assets to cover the remainder of their spending needs for as long as possible (as long as assets remain) throughout their retirement.

The second option is that this person delays Social Security until age 70, but purchases an eight year period certain immediate annuity. This is not a lifetime annuity, but an annuity that makes payments for eight years and then stops regardless of whether or not the beneficiary is alive.

This immediate annuity is not inflation-adjusted, so it will not provide precisely the same income as Social Security would have given with its inflation adjustments, but I otherwise assume that the individual withdraws what they need from their portfolio to spend $60,000 per year after accounting for any income first from the annuity, and then later from Social Security.

The age 62 Social Security monthly benefit is .75*2500 = $1,875. Currently, according to Cannex, spending $100,000 on an eight-year annuity provides monthly income of $1,084. Thus, with the second strategy, I assume the person spends $172,970 to purchase the annuity that will last through age 70 when Social Security benefits begin.

The following analysis is based on 2000 Monte Carlo simulations, with portfolio administration fees of 0.2%. Market returns and inflation are stochastic, and are based on the same current market conditions I have been using in recent research articles.

For the two strategies, I will track the real spending and real remaining wealth over retirement. The figures show the 10th, 25th, 50th, 75th, and 90th percentiles of outcomes. For spending, the distribution is not wide since I assume that the person spends $60,000 per year (in inflation-adjusted terms) for as long as possible. When the dashed lines fall from the spending level constant, it means that wealth is depleted first at the 10th percentile, and then at the 25th percentile, and so on. When financial assets are depleted the only income that remains is the Social Security benefit (wealth is never depleted in the first eight years when annuity income is part of the budget).

For both strategies, I assume a fixed asset allocation of 40% stocks and 60% bonds for the financial assets.

Strategy 1: Claiming Social Security at age 62

Real income

Real remaining wealth

Strategy 2: 8-year period certain annuity and claim Social Security at age 70

Real income

Real remaining wealth

With Strategy 1, the impact from claiming Social Security at an earlier age is that financial assets are more likely to be depleted and that income drops further in the event of portfolio depletion. The approach used in Strategy 2 of combining the annuity and delaying Social Security makes retirement spending plan more sustainable over the long-term horizon and reduces the harm caused by financial asset depletion. In other words, running out of financial assets is both less likely to happen and less damaging when it does happen.

The main reasons why this is the case is that the benefit increases built into delaying Social Security assume a real return on underlying assets of about 2.9%, which is quite favorable compared to what investors could expect with their portfolio.
The other interesting impact to observe is the distribution of remaining real wealth over retirement. Immediate uptake of Social Security can potentially allow for a higher bequest if one dies early in retirement, but the potential for leaving a bequest actually improves later in retirement with the delayed Social Security strategy. This has rather interesting implications for anyone seeking to provide a legacy to the next generation.

We must think about the marginal utility of wealth. If someone dies early in retirement, they will leave a larger nest egg to the next generation, and the fact that Strategy 1 provides an even bigger nest egg than otherwise may not have all that much impact on the lifestyle of the recipient.

But in cases with a more lengthy retirement period, the nature of this bequests changes. Delaying Social Security makes it less likely that financial assets are depleted, which means there will be less strain on any potential bequest recipient [e.g., children] to provide reverse support to the retiree. The potential to leave a larger bequest actually is higher with delayed Social Security in these cases when the available bequests with both approaches are less and each dollar of bequest will count for more. In this sense, a retiree may actually be doing a favor for the subsequent generation by delaying Social Security, which may be a counterintuitive result.

Don’t Call Them Investments

Posted on June 10, 2013 by Kerry Pechter -

When people tell you that annuities aren’t the answer, maybe it’s because you’re not asking the right question. Or maybe because you’re asking the right question the wrong way.

Jeffrey Brown, Ph.D., of the University of Illinois has spent much of the last decade studying the way that ordinary people (as opposed to advisors or economists) respond to questions about life annuities. He focuses on how annuities are “framed” or contextualized.

People tend to favor life annuities over other retirement income solutions, he’s found, when the context plays to the strength of annuities—maximizing income and consumption—than when it plays to their weakness—minimizing exposure to market risk and upside potential.

In the end, it comes down to a matter of word choice. Brown has learned through surveys that when you use words like “spend” and “payments” when discussing annuities instead of words like “invest” and earnings,” people tend to like annuities a whole lot better.

At first glance, it sounds too easy: As if kids would eat more broccoli if you called it chocolate cake. But Brown is proposing something closer to: More kids will choose broccoli over chocolate cake if you ask, “Which is more nutritious?” than if you ask, “Which tastes better?”

Although Brown’s research isn’t exactly intended to promote the sale of annuities, he thinks it can’t hurt.

“Our goal is to better understand consumer behavior and what it implies for our theories of consumer choice,” he wrote to RIJ in an email. “[But] My basic sense is that advisers share many of the same behavioral biases as consumers do. That is to be expected, as these biases are deeply ingrained. My hope is that by framing the conversation in a more appropriate way with advisers as well as with consumers, we may get some traction.”

Refining the concept

In a just-released paper, Framing Lifetime Income (NBER Working Paper 19063), Brown and co-authors Jeffrey Klinger (Congressional Budget Office), Marian Wrobel (Health Policy Commission) and Sendhil Mullainathan (Harvard) offer some refinements to Brown’s previous findings about annuities, framing and consumer choice.

In the experiment described in the paper, researchers wanted to answer several questions:

When comparing annuities with some other income solution, are people discouraged from choosing annuities if you mention the amount of the purchase payment/investment? In order words, does the mere mention of a large dollar amount make people afraid of losing liquidity or principal?
If the criterion for choosing an annuity was its ability to generate a threshold monthly income, would more people be attracted an annuity, or would they appeal to a narrower audience, i.e., those with a specific gap between their retirement needs and their savings?
If you guarantee a full or partial return of principal when offering an annuity, will people be more likely to choose it over another solution?
Do prospects’ gender, age, marital status, children or health status affect their preference for annuities under different frames?

To test these questions, Brown collected survey data from about 4,000 people in 2007 and 2008. Of those respondents, 43% were women and 57% were men. More than half were over age 60 and about one-third were over age 65.

On the first, second, and fourth questions, the researchers found little difference. That is, the advantage of the consumption frame over the investment frame stayed much the same whether or not you mentioned the dollar amount of the premium, whether you established a threshold income that only a life annuity could meet, or whether the respondent was male or female, younger or older, or had children or not.

On Question Three, however, the results did show that, in the investment frame, people were about twice as likely (43-47% vs. 20-24%) to prefer a life annuity with principal protection over a savings account paying 4% annual interest. It didn’t matter very much whether the life annuity offered guaranteed return of at least 80% of principal or 110% of principal.

“Within an investment framework,” the researchers wrote, “annuities appear more attractive when they include principal protection, an insight that may explain why consumers who do annuitize are often partial to including period certain guarantees in their products, despite the fact that these guarantees essentially reduce the insurance value of the products.”

These results could have important implications for life annuity issuers who want to increase sales, Brown believes. “Quite a few [annuity markers] have told me this line of research has influenced their thinking. I am not sure that I should name names, however, but most of the big annuity providers are very familiar with the work,” Brown told RIJ. He added that his findings also support proposals to report 401(k) account accumulations in terms of monthly retirement income projections instead of or in addition to account balances.

Brown’s research confirms what a lot of life annuity issuers have learned from experience: that annuities make more sense when viewed as retirement income vehicles than as investments, that consumers prefer annuities to a degree to which they are not aware, and that when advisors ask, “What’s the internal rate of return on a life annuity?,” they’re not asking the right question.

DIA-monds in a rough patch

Posted on June 6, 2013 by Editor Test -

Sales of deferred income annuities reached a record high in first quarter 2013, according to the Beacon Research Fixed Annuity Premium Study. Results for these products increased for the fifth consecutive quarter and were nearly 150% higher than a year ago. The success of DIAs helped overall income annuity sales grow 1.4% year-over-year.

“Deferred income annuities were a bright spot in a difficult quarter,” said Jeremy Alexander, CEO of Beacon Research. “Ongoing product development and increasing sales underscore the importance of generating guaranteed retirement income for consumers and their advisors.”

But the industry continued to be impacted by the ongoing low interest rate environment. Total fixed annuity results were $15 billion in first quarter, down 11.7% from a year ago and 7.7% sequentially. However, fixed rate MVA sales dipped only slightly from the prior quarter, suggesting that consumers are willing to accept some potential interest rate risk in exchange for higher credited rates.

Indexed annuity sales decreased 7.9% quarter-on-quarter to $7.8 billion, and fixed rate non-market value-adjusted (MVA) annuities fell 8.1% sequentially to $4.0 billion. Income annuities dropped 8.2%.

Estimated Fixed Annuity Sales by Product Type (in $ millions)
	Total	Indexed	Income	Fixed Rate Non-MVA	Fixed Rate MVA
Q1 ‘13	14,960	7,787	2,186	4,016	972
Q4 ‘12	16,200	8,452	2,381	4,369	999
% change	-7.7%	-7.9%	-8.2%	-8.1%	-2.7%
Q1 ‘13	14,960	7,787	2,186	4,016	972
Q1 ‘12	16,940	8,166	2,156	5,253	1,368
% change	-11.7%	-4.6%	1.4%	-23.5%	-28.9%

Allianz was once again the top fixed annuity company in first quarter 2013, followed by Security Benefit Life, New York Life, American Equity and Jackson National. Security Benefit Life moved to second place. New York Life remained in third place, American Equity moved up a notch to come in fourth, and Jackson National rejoined the top five in fifth place.

First quarter results for the top five Study participants were as follows:

Total Fixed Annuity Sales (in $ thousands)

Allianz Life 1,163,724

Security Benefit 1,105,733

New York Life 1,079,443

American Equity 929,899

Jackson National 743,682

In first quarter, Western National Life moved from fifth place to take the lead in bank channel and fixed rate non-MVA sales. The other top companies in sales by product type and distribution channel were unchanged from the prior quarter.

Security Benefit Life had two of the quarter’s five top-selling fixed annuities for the first time. Its Total Value Annuity was the quarter’s bestseller, up fourth place last quarter, and Secure Income Annuity joined the top five in third place. New York Life’s Lifetime Income Annuity, the quarterly bestseller throughout 2012, finished second. American Equity’s Bonus Gold and Allianz’s Endurance Plus indexed annuities both dropped two notches, but remained in the top five at number four and five, respectively.

Rank Company Name Product Name Product Type

1 Security Benefit Life Total Value Annuity Indexed

2 New York Life NYL Lifetime Income Annuity Income

3 Security Benefit Life Secure Income Annuity Indexed

4 American Equity Bonus Gold Indexed

5 Allianz Life Endurance Plus Indexed

“We expect that fixed annuity sales in the coming months will follow the pattern set early in the year,” Alexander concluded. “Sales may increase slightly coming off from a record year for indexed and income annuities, but low interest rates will continue to hamper significant growth in the near future.”

GAO criticizes “pervasive marketing” of IRA rollovers

Posted on June 6, 2013 by Editor Test -

In April, the Government Accountability Office (GAO) issued a study that examined and criticized the process that job-changers go through when deciding whether to roll 401(k) savings into a rollover IRA or to transfer them to their new employers’ plans.

Click here for a pdf of the report, entitled “401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants.”

The GAO, reflecting the government’s general wish to see Americans keep their tax-favored savings in institutionally priced employer-sponsored plans rather than roll them over to retail IRAs when they change jobs, found evidence that 401(k) providers often make the path to a proprietary rollover IRA easy for job-changers, while making the path toward a roll-in relatively difficult.

The report suggested that, for participants, the process of dealing with retirement accounts following job changes is confusing, non-standardized, and frequently shaped by the business interests of the organizations involved—sometimes to the detriment and sometimes to the benefit of the participant.

“The effort [job-changers] have to make to understand their options and pursue a course of action can be daunting. As a result, participants can be easily steered towards IRAs given the number of administrative obstacles and disincentives to staying in the plan environment and the pervasive marketing of IRAs by 401(k) service providers and IRA providers generally…

“GAO recommends that Labor and IRS should take certain steps to reduce obstacles and disincentives to plan-to-plan rollovers. Labor should also ensure that participants receive complete and timely information, including enhanced disclosures, about the distribution options for their 401(k) plan savings when separating from an employer.”

VA Sales Lack Clear Trend

Posted on June 6, 2013 by Editor Test -

The performance of the variable annuity business in the first quarter of 2013 was mixed.

This year isn’t starting out as strong as 2012 did. Net cash flow into VA contracts—sales minus surrenders, exchanges and distributions—was 76.3% lower in the first quarter of 2013 than in the same quarter a year earlier, according to Morningstar’s Annuity Research Center. At $34.3 billion, total first quarter sales figures were down from $35.7 billion in 1Q 2012.

But 2013 started better than 2012 ended. Net cash flow in 1Q 2013 rose versus 4Q 2012 ($900 million vs. minus $600 million) and sales were up slightly, from $33.9 billion in the final quarter of 2012. Helped by a bull market that pushed the DJIA over 15,000 for the first time, VA assets under management at the end of the first quarter 2013 reached a new record of $1.72 trillion, up from $1.64 trillion at the end of 2012.

Companies Issuing VAs at a FASTER Rate in 1Q 2013 than in 2012		Companies Issuing VAs at a SLOWER Rate in 1Q 2013 than in 2012
Company	Ratio of 1Q Sales to 2012 Total Sales (%)	Company	Ratio of 1Q Sales to 2012 Total Sales (%)
Midland National	47.13	John Hancock	7.25
Minnesota Life	34.74	Guardian Life	9.77
Fidelity Investments Life	33.30	UNIFI Companies	19.00
Inviva	32.35	Security Benefit	19.66
Pacific Life	32.35	MetLife	19.87
Aegon/Transamerica	30.26	Protective	20.08
Symetra	29.68	ING Group	20.86
Lincoln Financial	29.55	Prudential	21.06
Source: Morningstar, Inc. 2013

The overall figures are hard to interpret, however, because the industry is still shaking out and products continue to evolve. The sales leaders are still thriving—especially Jackson National—but the products are generally stingier. “The remaining active retail market companies are largely above water on a net basis, while cash drains from group contracts and exited companies con tinue to be the main culprits driving the low industry number,” wrote Frank O’Connor, director of the Annuity Research Center, in his quarterly report.

De-risking of products can only hurt sales. When VA income riders were patently underpriced in 2005 through 2007, advisors recognized the opportunities and took advantage of them. As products have become more accurately, and even defensively, priced, demand will inevitably suffer, even at a time when 10,000 Boomers are reaching age 65 daily.

Billion-Plus VA Sellers in First Quarter 2013
Company	1Q Sales ($bn)
Jackson National	4.565
Prudential Financial	4.206
MetLife	3.517
TIAA-CREF	3.153
Lincoln Financial	3.079
SunAmerica/VALIC	2.293
AXA Equitable	2.078
Aegon/Transamerica	1.597
Pacific Life	1.291
Ameriprise Financial	1.235
Nationwide	1.132
Source: Morningstar, Inc. 2013

The fastest growing product in the first quarter was Jackson National’s Elite Access B share. A year ago, shortly after it was launched, it was ranked 217^th in sales. At the end of 1Q 2013, it was ranked 10^th, with $785.5 million in sales.

Other contracts that have moved up significantly in the rankings over the past year are AXA’s Structured Capital Strategies B-Series, and two from Pacific Life: the Destination O-Series and Innovations Select. Neither Elite Access nor Structured Capital Strategies is aimed at providing lifetime income, but rather to offer tax-advantaged exposure to alternative investments and a buffer against losses, respectively.

In the various distribution channels, competition is most intense in the asset-rich wirehouse channel. Prudential, Jackson National and Lincoln Financial were the first quarter 2013 leaders in the wirehouses, with sales of $575.8 million, $562.8 million and $526.1 million, respectively. Meanwhile, Lincoln Financial and MetLife fought for leadership in the regional broker/dealer channel, with sales of $670.2 million and $639.7 million, respectively.

The VA industry remains highly consolidated. The ten largest issuers accounted for about 79% of all sales in the first quarter, and the five largest issues accounted for more than half of all sales.

Quote of the Week

Posted on June 5, 2013 by Editor Test -

A retirement boom as far as the eye can see

Posted on June 5, 2013 by Editor Test -

The so-called retirement income opportunity won’t begin to fade in 2050, when about half of the youngest Baby Boomers will have reached average life expectancy, according to LIMRA. That’s because the succeeding generation is just as large.

LIMRA cited U.S. Census Bureau data showing that the number of Americans reaching 65 years old each year will continue to grow beyond the Boomer generation. Even when the last Baby Boomer reaches 65, there should be no noticeable decline in the numbers. In 2013, 3.4 million individuals are projected to reach age 65; by 2023, 4.1 million Americans will reach 65; and 4.2 million by 2050.

There will be no post-Boomer dip because immediately following the Boomers are 78.4 million members of “Generation X” and “Gen Y” individuals, who are now between the ages of 30 and 48. After them, 11-29 year olds represent another 82 million individuals currently between the ages of 11 and 29 who will reach retirement in the next 35-55 years. (See chart on the RIJ home page this week.)

“Financial services firms should be looking at the retirement market not just for the immediate opportunity offered by Boomers but preparing for the possibility of long-term, sustained growth as Gen X and Y consumers prepare for retirement,” a LIMRA release said.

LIMRA estimates that there will be nearly $22 trillion in investible assets from Americans age 55 and older available for retirement income solutions by 2020. Younger generations—who probably won’t have a pension and likely to be solely responsible for their retirement savings—are likely to have more by the time they reach age 55.

The Bucket

Posted on June 5, 2013 by Editorial Staff -

DST’s CFO, Ken Hager, to retire after successor is in place

DST Systems, Inc. announced that Kenneth V. Hager, vice president, chief financial officer and treasurer, plans to retire after 29 years of service to the company. He will continue in his current role until a successor is in place.

Hager has served as CFO and vice president since April 1988 and has been treasurer since August 1995. He led DST’s successful IPO in 1995 and has been DST’s primary interface to the investment community since that time. During Mr. Hager’s tenure, DST has grown from a $100 million mutual fund processing company to a $2 billion global provider of diversified services to a broad range of industries.

DST is undertaking a process to name Mr. Hager’s successor. The Company does not intend to provide an update on the process until a successor is named.

BB&T revamps retirement plan websites

BB&T Retirement and Institutional Services has redesigned its two websites to create a “retirement destination” for plan sponsors and participants, the company said in a release.

Retirement plan sponsors now have access to additional retirement planning resources, such as industry news, fiduciary and compliance updates, worksheets and stock research.

The redesigned plan participant website includes a new section which offers education sections for different stages of retirement planning. Additional changes include easier menu navigation, tab viewing, new charts, in-page help and PDF confirmations. Visitors also have access to interactive retirement planning tools, videos and additional investment and retirement planning services offered by BB&T.

BB&T Retirement and Institutional Services offers a range of employee benefits consulting, fiduciary, philanthropic, corporate trust and investment management services to small and large corporations, charitable organizations, foundations and endowments, and state and local governments.

International bond fund bolsters Vanguard’s ‘Total Market’ lineup

Vanguard has launched a Total International Bond Index Fund, in three share classes, Investor, Admiral, and Institutional, for purchase immediately. The expense ratios for the fund’s Investor, Admiral, Institutional, and ETF share classes will range from 0.12% to 0.23%, as shown in the table below.

The fund’s ETF shares (ticker: BNDX) commenced trading on June 4, 2013.

The top country holdings as of April 30, 2013 were Japan (22%), France (11%), Germany (11%), Italy (8%), and the United Kingdom (8%). Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged) will be the new fund’s benchmark.

The index comprises about 7,000 investment-grade corporate and government bonds from 52 countries. To meet regulated investment company (RIC) tax diversification requirements, the index caps its exposure to any single bond issuer, including government issuers, at 20%.

According to a release, Vanguard designed the new fund to give investors broad exposure to international fixed income markets and to complement Vanguard’s Total Stock Market Index Fund ($248 billion in assets), Total Bond Market Index Fund ($117 billion), Total International Stock Index Fund ($95 billion), and Total World Stock Index Fund ($3 billion).

Vanguard Total International Bond Index Fund
Share class	Min. initial investment	Annual expense ratio (%)
Investor	$3,000	0.23
Admiral	$10,000	0.20
Institutional	$5 million	0.12
ETF (BNDX)	—	0.20
Source: Vanguard.

Vanguard also announced:

Ended: the subscription period for Vanguard Emerging Markets Government Bond Index Fund. Investor, Admiral, and Institutional shares are available for purchase. The fund’s ETF shares (ticker: VWOB) are expected to begin trading on June 4, 2013.
Vanguard Total International Bond Index Fund has been added to 18 of Vanguard’s funds-of-funds (including Vanguard Target Retirement Funds) and represents 20% of the fixed income allocation of the funds.
Vanguard Short-Term Inflation-Protected Securities Index Fund has replaced Vanguard Inflation-Protected Securities Fund in three Target Retirement Funds (Target Retirement Income, 2010, and 2015).
The 0.25% purchase fee for the Short-Term Inflation-Protected Securities Index Fund has been eliminated.

VA Issuers Keep On Tweakin’

Posted on June 5, 2013 by John McCarthy -

The VA industry in the first quarter of 2013 was impacted by a number of changes in the distribution footprint. Changes in the variable annuity provider list dominated the quarter. SunLife sold its U.S. variable annuity business to Delaware Life Holdings, owned by Guggenheim Partners. Hartford moved to reduce its liability with one of the more impactful buyout offers in recent memory. On the flip side, Forethought Financial entered the market with a new VA issue.

Overall, product development activity was robust. Carriers continue to adjust benefit levels down. In addition, activity continued on the subaccount side to reduce volatility in investment offerings. Carriers filed 97 annuity product changes in the first quarter of 2013. This compared to 101 new filings during the fourth quarter of 2012 and 59 in Q1 of last year.

New product launches were modest. Carriers filed very few new contracts and a small number of new benefits. Most of the activity this quarter centered on fee changes to existing products and revisions to step ups and withdrawal percentages.

Q1 Product Changes

AXA released new versions of its Accumulator (13.0) and Retirement Cornerstone (13.0). The fee is unchanged but the attached benefits are updated (see page 3). AXA issued new versions of its GMIBs. The GMIB I costs 1.15% (up from 1.10%) and guarantees a benefit base to annuitize after a 10-year waiting period. A 5% step up works until age 85 or first withdrawal. The step up is 4% if the first withdrawal is taken before the age 65 anniversary (the highest anniversary value step up is dropped).

A “no lapse guarantee” kicks in at annuitization if the account value falls to zero. An automatic conversion feature turns the benefit into a lifetime GMWB with either a 5% withdrawal of the benefit base or 6% of the account value, whichever is higher. (A joint life option is available as well). The benefit is applied to the Accumulator 13 contracts.

AXA’s new version of the GMIB II costs 1.30% (up from 1.25%) and guarantees a benefit based to annuitize after a 10-year waiting period. A 5% step up works until age 85 or first withdrawal. The step up is 4% if the first withdrawal is taken before the age 65 anniversary. A “no lapse guarantee” kicks in at annuitization if the account value falls to zero. An automatic conversion feature turns the benefit into a lifetime GMWB with either a 5% withdrawal of the benefit base or 6% of the account value, whichever is higher. (A joint life option is available as well). The benefit is available with the Accumulator 13.0 contracts.

Forethought Financial issued its first variable annuity contract, the ForeRetirement VA (B-, C-, and L-shares). The fee for the B-share is 1.15% which includes a 0.50% premium-based charge. The contract offers a Lifetime GMWB with an age-banded withdrawal percentage (5% for a 65 year old; 4.5% in the joint-life version) and two types of step ups: a highest anniversary (based on highest daily value) and a 6% fixed annual step up for ten years. The rider fee is 1.25%. There is also a second Lifetime GMWB with similar withdrawal and step up features and a highest anniversary (based on highest annual value) step up for a fee of 1.05%.

Hartford offered a cash buyout to current contract holders as a way to reduce exposure on their books. Owners of the Lifetime Income Builder II rider were offered the greater of the contract value on the surrender date, or, if the account is underwater, the contract value plus 20% of the benefit base (capped at 90% of the benefit base). Contracts affected include the Director M series and the Leaders series.

Nationwide increased the withdrawal percentage of the joint version of its Lifetime GMWB benefit called “7% Lifetime Income Rider” in January. It is also increasing the fee to 1.50% from 1.20%. A 65-year old will now get 4.75%, up from 4.5%.
Ohio National decreased the step ups and some withdrawal percent- ages on their GLWB Plus (joint version). The withdrawal percentage dropped .25% for a 591⁄2 year old and dropped 0.5% for a 65 year old. The step up dropped to 6% from 7%.
Pacific Life closed the CoreIncome Advantage 5 Plus joint rider in March. Earlier, in February, Pacific Life increased the fee to 1.35% from 1.00%.

Principal lowered the issue age for its Lifetime GMWB to 55. It created a new withdrawal age band on the GLWB for 55–59 year olds of 4.5% (single) and 4.0% (joint).

Prudential issued new versions of the Premier Retirement Series. It raised the fee on its Premier Retirement contract by 15 bps to 1.45% for the B-share. The new version of the Lifetime GBWB (HD Lifetime Income v2.1) drops the withdrawal percentage for a 65 year old to 4.5% from 5% (single) and eliminates the deferred benefit base bonus step up that previously doubled the benefit base after 12 years of no withdrawals.

Prudential also released the unique Defined Income variable annuity as a B-share for a 1.10% fee. The product offers a Lifetime GMWB with a withdrawal rate that ranges from 3% to 7% (single) or 2.5% to 6.5% (joint) for a fee of 0.80%. There is a step up of 5.5% annualized based on the highest daily value. The subaccount option is a long-duration bond fund. Prudential maintains the ability to adjust the step up and withdrawal percentage as needed on new business.

SunAmerica changed its name to American General. The firm is still using the SunAmerica brand name for some of its contracts, including the Polaris line. SunAmerica dropped the step up on its SA Income Builder-Dynamic Options (single and joint) to 6% from 8%. In addition, the carrier changed from an age-banded lifetime guaranteed structure to a straight 5.25% guaranteed withdrawal (older owner at first withdrawal) for single life. The joint version now offers a straight 4.75% lifetime withdrawal that replaces the prior age-banded structure. The carrier also raised the issue age to 65 from 45 on the single and joint versions.

SunAmerica decreased the withdrawal percentage on the SA Income Plus (Dynamic Options 1 and 2) Lifetime GMWB. The withdrawal percentage is now 5.0%, down from 5.5% (single) and 4.5%, down from 5.0% (joint) for the age-band from 45–64. The 65+ age band remains the same. SunAmerica also limited the purchase payment calculation to only include first year purchase payments, down from the first two years of payments. This applies to the Income Plus-Dynamic Options 1–3 and the custom option (Lifetime GMWBs).

SunLife sold its U.S. variable annuity business to Delaware Life Holdings, owned by Guggenheim Partners. This adds to Guggenheim’s variable annuity block of business from Security Benefit. The sale included Sun Life’s U.S. domestic variable annuity, fixed annuity and fixed index annuity products.

VALIC decreased the lifetime withdrawal percentage on the IncomeLOCK Plus 6-Dynamic Option 1 and Option 2. The single life dropped from 5.5% to 5.0% for the 45–65 age band. The joint life withdrawal is now 4.5% down from 5.0%. The 65+ age band remains the same.

Sign of the Times

Posted on June 5, 2013 by Kerry Pechter -

My first experience with the 21^st century hospitality phenomenon known as “Airbnb” occurred last April in New Orleans.

My cab from Louis Armstrong Airport had just arrived in front of the blue Victorian townhouse with white trim and lavender shutters where I’d booked accommodations for two nights. It was located on a narrow street in Treme (pronounced Truh-MAY), a ragged neighborhood where architectural and horticultural beauty vie with urban decay for your attention—as they do in many parts of that city.

But there was a slight problem. The taxi driver, an Israeli-Arab who was also a part-time graduate student, had not wanted to deliver me to Treme. Too dangerous. During the ride from the airport, he told me, “If I were you, I would not stay there.” Slightly shaken, I used my cellphone to call Felicity, who owned the Victorian and was my Airbnb host. I told her what the driver had said. Naturally, she was furious. “This is a wonderful neighborhood,” she said.

So, when we arrived, cabbie and innkeeper were both stoked for a confrontation. Felicity, a vibrant woman in her sixties whose blue eyes and caramel complexion seemed to embody New Orleans’ overall ethnic make-up but whose accent hinted at a cultivated Manhattan upbringing, scolded the cab driver for disrespecting her neighborhood. The driver looked at her skeptically, perhaps sardonically. He spread his arms as if to say, “Whatever, lady.” Then he sped off, leaving Felicity and me alone on the brick sidewalk in front of her house. She was exactly the person I was hoping to meet.

Accommodating retirement needs

For those who haven’t heard of it, Airbnb.com is an online lodging platform where people who have an unoccupied penthouse or a spare bedroom or sometimes just a futon behind a curtain in their living room can advertise and rent them to budget travelers who relish a lodging experience that can range from the luxurious to the equivalent of visiting a relative or, as we used to say, crashing at a friend’s pad.

Founded in 2008 by two Rhode Island School of Design grads and a Harvard-trained computer programmer, the San Francisco-based start-up already boasts over 10 million lodging-nights booked at some 300,000 locations in 34,183 cities in 192 countries.

Airbnb’s potential as a source of supplemental retirement income for cash-strapped retirees seemed obvious to me the first time I read about it. It offers Boomers with empty nests and others a way to monetize the equity in their homes. Simultaneously, it offers retirees a way to afford the global travel they’ve been dreaming about. Airbnb’s sudden global success can’t help but be, to some extent, a marker for Boomer under-saving as well as a leading indicator of the resourcefulness we can expect from millions of oldsters worldwide as they grapple with income shortfalls in the decades ahead.

To use Airbnb, you just surf to its website and respond to the prompt that asks you where you want to go and when you plan to travel. You can shop by city or by neighborhoods in a city. Accommodations start at $25 per night and climb from there.

Heading to New York City? How about Soho? You can rent an immaculate apartment that sleeps four for $175 a night or $1,295 a month. Want to relax on the Adriatic island of Corfu for a while? You can stay in a whitewashed, flower-decked hideaway in a small village for $49 a night or $328 a week. Or you could choose from 112 other listings for an apt/home on Corfu.

If you’re wondering how absolute strangers in this somewhat grey-market lodging industry achieve a level of trust high enough to share living quarters (and perhaps a bathroom), Airbnb has an app for that. Guests must submit a request to the hosts. The host remains semi-anonymous while reviewing the request.

As an added measure of security, the host may demand enough personal information about the prospective guest to achieve a sufficient comfort level. The host retains the option to reject the request. If the request is granted, the lodger pays in advance. After the visit ends, the host posts a review of the lodger online where other hosts can see, and the lodger posts a review of the host where other potential lodgers can see. (There are a few horror stories floating around, like the one about the person who discovered that he’d be sharing his “private” room with two other lodgers.)

Going to [Ex]Treme

When I asked Felicity if she was using Airbnb to help finance her retirement, she said, “Absolutely.” Born in New York City during the Baby Boom, she had lived in many places and worked for a series of not-for-profit organizations throughout her life. Some years ago, drawn to New Orleans by its dynamic music scene, she settled a few blocks from the French Quarter in the Treme neighborhood.

By the time she reached age 60, she hadn’t socked much savings away. But she had acquired a rambling Victorian home with 14-foot ceilings, marble fireplaces and a two-story gallery next to the leafy garden in the back, invisible from the street, which might once have been servants’ quarters or “dependencies.” She began renting these tiny apartments to students by the month.

After Hurricane Katrina inundated Treme and severely damaged the house, Felicity used the insurance proceeds to refurbish it. She put granite counters and new appliances in the kitchen. She refilled the rooms with art, curios and antiques. Like many New Orleans homeowners, she painted the exterior in multiple colors. A few months ago, she began listing her bedrooms on Airbnb for $90 a night.

My bedroom was at the top of a long, banistered staircase. There was a ceiling fan, a wide bed, a tall wardrobe and a non-working fireplace. I shared a bathroom with the semi-retired Minneapolis couple in the next room. About 8:30 p.m., as I was preparing for the first day of the LIMRA-LOMA Retirement Industry Conference, Felicity knocked on the door and invited me to join her and her companion, who doubles as the building’s “super,” for an impromptu dinner of beef, baked sweet potatoes and boiled greens.

Sign of the times

Homeowners have always taken in lodgers during hard times. Little wonder that Boomer-era retirees—who themselves may have bunked in makeshift “pensiones” while vagabonding through Western Europe in the 1970s—would think of supplementing their income by renting rooms. To be sure, not all Airbnb hosts are Boomers. Many are young artists, and many of their guests are young artists.

People with a bohemian bent are most likely to be comfortable operating an Airbnb or staying in one. At least some of the hosts skirt a few regulations and avoid a few municipal taxes by not registering their homes as short-term rentals or, in some cases, by subletting without telling their own landlords (not that these practices are condoned by Airbnb, which declined to be interviewed for this article). This is a grey-market phenomenon, both in the sense that it is sometimes off-the-books and in the sense that it’s linked to Boomer aging.

In addition to helping Boomers pay for retirement, Airbnb also makes it easier for Boomers to afford their dreams of global travel in retirement. Airbnb’s rapid growth is undoubtedly driven as much by a rising demand for thrifty accommodations as it is by a rising supply of thrifty accommodations. Boomers who used the book “Europe on $5 a Day” in the ‘60s are likely to gravitate to Airbnb’s website today.

Experts in the retirement industry often project a Ghost-of-Christmas-Future dystopia for people who retire without bounteous savings. They overlook both the resourcefulness of the Boomers and the wealth of fallow resources—including spare bedrooms and finished basements—that are currently invisible or ignored but await monetization. Airbnb is just one manifestation of this new reality.

Quote of the Week

Posted on May 30, 2013 by Editor Test -

Employees still not asking about 401(k) fees: Mesirow

Posted on May 30, 2013 by Editor Test -

Mesirow Financial’s Retirement Plan Advisory practice has released its 2013 Retirement Plan Survey Report. The results outline initiatives plan sponsors are considering to keep their plans competitive while fulfilling their fiduciary duties.

The survey addresses retirement plan design, fiduciary oversight options, employee education and fee disclosure, among other topics.

“The reality is that many participants need assistance through custom guidance or a more paternalistic, automated solution,” said Chris Reagan, Mesirow Financial senior managing director and practice leader.

Key findings in the 2013 report include:

Participant interest in fee disclosure is surprisingly low with more than 83% of plan sponsors indicating that employees had very few questions after receiving 404(a) participant fee notification
Automation solutions continue to play a key role in plan design as approximately 55% of plan sponsors surveyed offer automatic enrollment features – a 5% increase from last year
Interest in step-up deferral rate solutions continues to rise as 44% of respondents offer this as an option
The rapid growth of target-date funds continues as more than 85% of plan sponsors reporting using this type of solution – up 13% from last year
Fee disclosure is top of mind with almost 88% of plan sponsors reviewing implicit and explicit plan fees in the past six months

Mesirow Financial’s Retirement Plan Advisory practice oversees more than $4.1 billion in assets and provides comprehensive, co-fiduciary consulting services to retirement plan sponsors.

86% of 67-year-olds are collecting Social Security: MetLife

Posted on May 30, 2013 by Editor Test -

Despite predictions to the contrary, the oldest Boomers (a vast group of 66- and 67-year-olds that includes Bill Clinton, George W. Bush, Linda Ronstadt, Jimmy Buffett, Liza Minnelli, Donald Trump, Sylvester Stallone, Ben Vereen, Cher, among others) aren’t necessarily “working till they drop.”

According to Healthy, Retirement Rapidly and Collecting Social Security: The MetLife Report on the Oldest Boomers, a new study from the MetLife Mature Market Institute, 52% of Baby Boomers born in 1946 are now fully retired, 21% are still employed full time and 14% are working part-time. Of those who are retired, 38% retired voluntarily while others cited health reasons or job loss.

Most of the members of this cohort plan to retire fully by the time they reach age 71, an average postponement of two years since 2011. In 2007 and 2008, 19% of oldest Boomers were retired and 45% were retired by 2011.

The Institute has studied the oldest boomer cohort on numerous occasions, most recently in 2012 with Transitioning into Retirement: The MetLife Study of Baby Boomers at 65 and The Early Boomers: How America’s Baby Boomers Will Transform Aging, Work & Retirement.

The current study follows the finances, housing status, family lives and views on generational issues of this group as they moved from 62 to 67. Most have less income than when they were working, but only 20% feel that their standard of living has declined.

“They seem to be largely feeling healthy and positive. On the negative side, a good half of this group may not have achieved their retirement savings goals and are not confident about paying for the next phase of their lives,” said Sandra Timmermann, Ed.D., director of the MetLife Mature Market Institute.

Among further findings:

86% are collecting Social Security benefits; 43% began collecting earlier than they had planned.
14% of oldest Boomers are working part-time or seasonally.
4% are self-employed.
Long-term care rose to the top of the list of retirement concerns; 31% reporting concern about providing for themselves or their spouses.
Despite the fact that they are worried about long-term care, just under a quarter owns private long-term care insurance.
82% want to age in place and do not plan any future moves.
Eight percent are “upside down” on their mortgage, owing more than the value of their home
The average number of grandchildren is 4.8.
79% of oldest Boomers have no living parents.
More than 10% provide regular care for a parent or older relative; for many, the level of care has increased.
Oldest Boomers continue to believe they will see themselves as “old” at the age of 78.5.
16% of the oldest Boomers see themselves as being sharpest mentally now, in their 60s, but 30% believes they were sharpest in their 40s.
More than 40% of the oldest Boomers are optimistic. Nearly a quarter of those are optimistic about their health, and two in 10 feel good about their personal finances.
More than half of the oldest Boomers feel their generation is leaving a positive legacy for future generations. Values and morals and good work ethics were the top two items cited.

The nationally representative survey for Healthy, Retiring Rapidly and Collecting Social Security: The MetLife Report on the Oldest Boomers was conducted by GfK Custom Research North America on behalf of the MetLife Mature Market Institute in November and December 2012. A total of 1,003 respondents, including 447 people from the 2011 study, were surveyed by phone. Respondents were all born in 1946. Data were weighted by demographics to reflect the total Boomer population.

The Bucket

Posted on May 30, 2013 by Editorial Staff -

ING Group lowers stake in ING U.S. (Voya) to 71%

The underwriters of the ING U.S. initial public offering have bought about 9.8 million additional shares of ING U.S. from Netherlands-based ING Group at the IPO price of $19.50 per share, thus exercising their overallotment option.

The announcement was made by ING U.S., which is listed on the New York Stock Exchange under its new name, VOYA, and started trading on the big board last May 2.

The exercise will reduce ING Group’s ownership in ING U.S. to about 71%. The exercise of the option has no financial impact to ING U.S. The closing of the overallotment offering is expected to occur on May 31, 2013.

BNY Mellon to increase wealth management sales force by 50%

BNY Mellon, the global leader in investment management and investment services, is rolling out a major two-year recruiting campaign to increase BNY Mellon Wealth Management’s sales force by 50 percent. In addition, the firm intends to add private bankers and mortgage bankers, portfolio managers and wealth strategists as well as additional sales support staff.

The campaign represents a new phase in BNY Mellon Wealth Management’s multi-year growth strategy to continue to build presence and capabilities in the US and globally. Despite the sharp economic downturn of 2008, in the past four years BNY Mellon Wealth Management has grown organically and through acquisitions. During that time, the firm has made acquisitions in Toronto and Chicago, opened new offices in Dallas, Washington and the Cayman Islands, and added two new offices in Florida, where it now has a total of seven locations. With this initiative, the firm plans to strengthen the sales teams in its current locations and establish offices in other key wealth markets.

By the end of last year, BNY Mellon Wealth Management’s total client assets reached a record of more than $188 billion, making it one of the 10 largest US wealth managers in 2012, according to Barron’s.

Lincoln Financial Group hires Paul Narayanan

Paul Narayanan has joined Lincoln Financial Group as vice president and managing director of Portfolio Management Analytics, the company announced. He comes to Lincoln Financial from American International Group, Inc., where he was most recently head of Credit Risk Analytics for AIG Property Casualty.

Narayanan will be responsible for monitoring risk-adjusted performance by asset class to optimize the company’s investment position, modeling of investment strategies and asset classes, and leading its credit risk measurement analytical framework.

Before his tenure at AIG, which began in 2002, Narayanan ran his own consulting firm that provided credit risk and portfolio management solutions to financial institutions worldwide. He co-authored “Managing Credit Risk: The Great Challenge for Global Financial Markets” and “Managing Credit Risk: The Next Great Financial Challenge,” both published by John Wiley.

Narayanan holds a B.S. in mechanical engineering from the University of Poona in India. He also holds a master’s degree in finance from New York University’s Stern School of Business.

Advisors want more ‘value-add’ support: Practical Perspectives

Posted on May 30, 2013 by Editor Test -

The heavy investment that broker-dealers, asset managers, and insurance companies make on value-add support is impacting financial advisor attitudes and behaviors, but there is significant room to enhance these programs and tools to make them more helpful to practitioners.

So says a new report from Practical Perspectives, an independent consulting, competitive intelligence, and research firm working with wealth management providers and distributors.

The 76-page report, “Value Add Support to Financial Advisors – Insights and Opportunities 2013,” examines the types of value add support currently provided to financial advisors by product manufacturers and distributors. BlackRock/iShares is by far the most frequently listed provider of useful value-add support, followed by American Funds, JP Morgan, MFS, Jackson, and Fidelity.

The report is based on input from over 600 financial advisors gathered through an on-line survey conducted in May 2013. Those surveyed include full service brokers, independent brokers, financial planners, Registered Investment Advisors (RIAs), and bank representatives.

Scant advisor interest in social media

The analysis reviews what influence these programs have on advisor perceptions and behaviors, which firms offer the most useful value add support, and what enhancements advisors desire for value add support. It also examines the topics for support that are of most interest to advisors in the next 12 to 24 months.

Most advisors use value-add support in some form and find it helpful to running a practice. Yet satisfaction with these value add programs is modest, at best, and advisors desire more programs and tools that can be used directly with investors and which are implementation oriented rather than theoretical or academic.

“Product providers are spending tens of millions of dollars on these programs each year to build awareness, loyalty, and sales. Many advisors indicate these programs do influence key factors such as their willingness to consider a particular provider or their loyalty to a provider. The challenge for firms is to differentiate and evolve their programs so advisors will take advantage of the support offered,” said Howard Schneider, president of Practical Perspectives and author of the report, in a release.

Highlights

Other findings of the report include:

Most advisors perceive value-add programs and tools to be useful and rate these programs highly, relative to other forms of sales support.
Nearly 1 in 3 advisors (31%) find value-add support to be very useful and roughly 1 in 2 advisors (46%) find it to be somewhat useful.
At least 3 in 4 advisors indicate that these programs and tools impact their practice, including 28% who believe it has a significant impact.
More than 2 in 3 advisors (69%) perceive value add programs as influencing their overall impression of a provider, including 1 in 4 who rate the impact as significant.
Advisors are divided on the type of value-add support that is most critical in the next 12 to 24 months. Investment, economic, and product issues (32%) and client engagement and development (30%) are of greatest interest.
Most advisors do not perceive receiving help using social media to be important.

The report is available for purchase by contacting: [email protected]

Solvency Isn’t Social Security’s Only Problem

Posted on May 30, 2013 by Eugene Steuerle -

Social Security has morphed into a middle-age retirement system. Despite its great success, its growth in lifetime benefits over time has been decreasingly targeted at its major goals. Even while programs for children and working families are being cut, combined lifetime benefits for couples turning 65 rise by an average of about $20,000 every year.

Couples in their mid-40s today are scheduled to get about $1.4 million in lifetime benefits, of which $700,000 is in Social Security and the rest in Medicare. Typical couples are receiving close to three decades of benefits. Smaller and smaller shares of Social Security benefits are being devoted to people in their last years of life.

If people were to retire for the same number of years as they did when benefits were first paid in 1940, a person would on average retire at age 76 today rather than 64. Soon close to a third of adults will be on Social Security, retiring on average for a third of their adult lives.

While Social Security did a good job reducing poverty in its early years, it has made only modest progress recently, despite spending hundreds of billions of dollars more. The program discourages work among older Americans at the very time they have become a highly underused source of human capital in the economy.

The failure to provide equal justice permeates the system. The existing structure discriminates against the working single head of household and the couple with relatively equal earnings between spouses. At the same time, private retirement policy leaves most elderly households quite vulnerable.

Out of the box thinking needed
Unfortunately, the Social Security debate has largely proceeded on the basis of being “for the box” or “against the box.” The contents themselves deserve scrutiny.

While I applaud the efforts of the Simpson/Bowles Commission and the Bipartisan Policy Commission I believe we can go much further to address the problems I just raised. How? We should start with a basic set of principles and see where they lead us.

Consider. Inevitably, we will pay for balancing the system mainly through benefit cuts or tax increases on higher income individuals, who have most of the resources. That debate need not derail other needed reforms. I suggest the following reforms aimed at meeting Social Security’s primary purposes:

Provide greater protections for those truly old or with limited resources
Support the work and saving base that undergird the system
Provide more equal justice for those suffering needless discrimination in the system, like single heads of household and longer-term workers.

Second, further adjust minimum benefits and the rate schedule and indexing of that schedule over time to achieve final cost and distributional goals. The extent of these adjustments will also depend upon the tax rate and base structure agreed upon.
Some of those fixes cost money, and some raise money. We don’t have to address trust fund and distributional consequences in each and every change.

Eugene Steuerle, an Institute fellow and the Richard B. Fisher Chair at the nonpartisan Urban Institute, is a former deputy assistant secretary of the Treasury.

Gradual versus Lump-Sum Annuitization: The Jury is Still Out

Posted on May 30, 2013 by Editor Test -

What if participants could contribute to deferred income annuities (DIAs) through their defined contribution plans? Would this option give them a safe way to lock in retirement income in advance, while diversifying their interest rate risk and leveraging the time value of money? In terms of maximizing future income, would this strategy outperform the purchase of a single-premium immediate annuity (SPIA) with a lump sum at retirement?

Analysts in the R&D section of Strategic Advisors, Inc., the registered investment advisor of Fidelity Investments, recently compared the hypothetical outcomes of two parallel strategies: Using small percentages of the bond or cash portions of a balanced retirement savings account to make incremental purchases of a DIA for several years before retirement and saving to buy a SPIA at retirement.

Their conclusion after exhaustive calculations: It depends. The experiment showed them what they had probably already guessed: that the outcome depends to a significant degree on when the annuity purchases (incremental or lump-sum) were made. In other words, it depends on luck.

In their study, Fidelity’s Steven Feinschreiber, a senior vice president, Prazenjit Mazumdar, specialist, and Andrew Lyalko, director of R&D, tested the two strategies under thousands of conditions. They used deferral periods of five, 10 and 15 years. They tried the two strategies over a myriad of historical periods, starting in 1926. They used two target equity allocations: a constant level of 50% equity exposure in the total portfolio at retirement or a constant 50% exposure within only the risky (non-DIA) portion of the portfolio.

In one hypothetical, for instance, a 50-year-old man making $55,000 a year dripped 0.33% of his tax-deferred account assets (starting balance: $225,000; contribution rate: 12%) into a DIA each month. In a second hypothetical, a 55-year-old man dripped 0.5% per month. In a third, a 60-year-old man dripped 1% per month. Each intended to retire at age 65. (See Fidelity chart below.)

Meanwhile, in a parallel universe, three similar men with similar assets were letting their accounts grow, without making contributions to a DIA. Three equity allocations during the accumulation period were also tested: 20%, 50% and 70%.

The results, in terms of accumulated wealth at retirement (present value of annuity plus excess accumulation) and percentage replacement of pre-retirement income, were inconclusive. The DIA strategy modestly outperformed the lump-sum strategy when the equity allocation of the entire portfolio was held constant, but the lump-sum strategy modestly outperformed the DIA strategy when the equity allocation of only the non-DIA portion of the portfolio was constant. Longer deferral periods delivered slightly better results than shorter deferral periods. Higher equity exposure was associated with better outcomes.

So it’s too soon to say that gradual purchase of retirement income is better than lump-sum purchase. Just as important, the results revealed a wide historical variation in the outcomes of DIA incremental purchase strategies. That suggests that it would be difficult to recommend this strategy to retirement plan participants, because they would all have different outcomes based on luck.

Feinschreiber et al suggest further avenues of research, such as testing the effectiveness of buying the same amount of future income each month, contributing equal dollar amounts to the DIA each month, and aiming for a target income replacement rate.

Fidelity doesn’t offer its own DIA. But it does support a web-based platform where advisors and consumers can buy DIAs directly from a number of insurance companies. And it owns a life insurance company. As the largest retirement plan provider in the U.S., it also presumably has more than a casual interest in the potential use of DIAs as in-plan annuity options.

A DIA with Dividends

Posted on May 30, 2013 by Kerry Pechter -

Many financial services companies believe themselves to be, or claim to be, the retirement company. One of them is Northwestern Mutual, although the Milwaukee-based firm ranked just 18^th in variable annuity sales in 2012, with $1.43 billion in premium.

But as a mutual insurer, the 155-year-old concern, which once called itself the “Quiet Company,” doesn’t need to impress Wall Street with top line numbers. It worries more about how well its career agents satisfy their clients’ needs. And, increasingly, those clients say they need guaranteed income.

Consequently, the firm is now one of the eight or nine life insurers that offer deferred income annuities (DIAs), a new class of product that enjoyed a 147% increase in sales in 1Q 2013 year-over-year. (Another eight companies are building DIAs, according to a recent LIMRA-CANNEX survey.)

Northwestern Mutual introduced its Select Portfolio Deferred Income Annuity last October exclusively through its 7,000-member career force. Its initial sales were strong for this category: $63 million in the final quarter of 2012 and $94 million in the first quarter of this year. Total industry sales in 1Q 2013 among six reporting carriers were $395 million, LIMRA said. The sales leaders are MassMutual, New York Life and Northwestern Mutual, another source said.

Dividends are the difference

The distinctive aspect of the Select Portfolio is that, while the basic income under the contract is fixed, the contract owner earns annual dividends over the entire life of the contract. The guarantee is 2%. They start low and gradually scale up. After the 10^th contract year, they equal the dividend that Northwestern Mutual declares for the contract.

“If somebody gives us $100,000 at age 55, we might start the dividend at 3.5% and grade up by 20 basis points each year to 5.5% after 10 years,” Greg Jaeck, Director, Life and Annuity Product Development, told RIJ.

In today’s yield-starved environment, he expects that kind of sweetener to attract attention. The dividend strategy is designed to give the contract owner more income, an opportunity for cash out, or inflation protection. At the time of purchase, the company assumes a 2% account growth rate in order to calculate the monthly payment the contract owner will receive on the income start date.

As dividends accrue, the contract owner can apply any excess (above the 2% guaranteed accrual) to enhance the income stream or receive it as cash during retirement. The dividend rate for DIA owners starts below the regular policyholder dividend rate, Jaeck said, to reflect the dilutive effect of new premia on the general account assets and to protect the interests of existing policyholders.

Exactly how the dividends for each contract owner are calculated and how they translate into income payments is not entirely transparent. Independent advisors might call it a black box. But independent advisors don’t distribute the product, so that particular marketing/communication problem never arises. (Career agents don’t need to worry about “annuicide” either.)

Unlike DIAs from other big mutual insurers like Guardian, New York Life and MassMutual, Select Portfolio DIA isn’t offered on the Fidelity DIA platform, where consumers can buy direct. The Select Portfolio DIA differs from most other DIAs in other ways. It has a deferral period of up to 60 years. It is a single-premium product. Like others, it offers a death benefit during the deferral period, a joint-and-survivor option, and period certain options. (Northwestern Mutual introduced a less flexible DIA, without dividend accrual, in May 2011, and still offers it.)

Two illustrations

How does Northwestern Mutual’s Select Portfolio DIA work under hypothetical conditions? The product brochure offers two examples.

Scott, age 50, $250,000 premium, 15-year deferral

In the first hypothetical, 50-year-old “Scott” uses $250,000 from a 401(k) account at a former employer to buy a single life contract with a 10-year period certain and a death benefit during the deferral period. (The death benefit entitles him to delay his start date if he wishes.) The premium allows him to lock in a fixed floor income of $14,805 starting at age 65. But because he applies all of his dividends to his income during the 15-year deferral period to future income, his guaranteed floor income at age 65 climbs to about $21,000.

Wait, there’s more. Starting at age 65, Scott uses 20% of his annual dividends to enhance his income payments and takes the remaining 80% in cash, in the amount of about $12,000. So, according to the illustration, his starting income at age 65 on the $250,000 initial purchase premium is $33,190. He maintains that strategy, and his income plateaus at about $35,000 for the next 35 years—perhaps because his dividend payout shrinks as his original premium is paid out.

Chris and Jennifer, both age 60, $350,000 premium, 5-year deferral

In the second hypothetical, a 60-year-old married couple, Chris and Jennifer, want their income payments to begin when they reach age 65. Jennifer uses the $350,000 in her rollover IRA to buy a joint-and-survivor contract with a deferral period death benefit. Like Scott, she applies 100% of her dividends to the income payments during the five-year deferral period and takes 80% of the dividends in cash during the income period.

Their income floor during retirement will be $15,159. The dividend enhancement brings it to $21,855 at the start date when both are 65. Dividends will raise their income to a peak of about $28,000 at age 75, and then subside slightly to a plateau of about $25,000 after age 90.

The average premium so far for the product has been about $200,000, Jaeck said. That’s about double what some other DIA issuers report receiving. The fact that the Select Portfolio DIA is a single-premium product and others are flexible-premium may be a factor, but it’s impossible at this point to say for sure. About half of the contracts are joint-and-survivor, the average age of purchase is 59. Clients are deferring income for an average of 8.3 years; 87% of deferral periods are less than 15 years.

DIAs are safer

With sales of virtually all other types of annuities declining in the first quarter of 2013, relative to the first quarter of 2012, the rising sales of DIAs and the increasing number of insurers, both publicly owned and mutually owned, that offer DIAs, has given the annuity industry something to cheer about this winter.

Behavioral economists have long maintained that many people view annuities favorably when annuities are presented or “framed” in terms of the absolute monthly income they can deliver and not in terms of their internal rate of return on the purchase premium (usually based on the assumption that the contract owner lives to his or her average life expectancy). DIAs don’t necessarily frame annuities any differently from the way single-premium immediate annuities frame them.

Annuity marketers have long noted how difficult it is for people to sacrifice liquidity by exchanging up to hundreds of thousands of dollars in growable savings all at once for a fixed monthly income from a single-premium immediate annuity. From a behavioral perspective, the key features of the newest DIAs may be that they separate the purchase date from the income date and offer growth potential during the deferral period.

The growing supply of DIAs may also reflect the fact that they’re safer for life insurers to manufacture than variable annuities with guaranteed lifetime withdrawal benefits—while satisfying a similar hunger among Boomers for delayed retirement income with downside protection and (in some DIAs) upside potential. As Jaeck explained, Northwestern Mutual can decide to lower or raise its annual dividend as markets allow and as it sees fit.

DST’s CFO, Ken Hager, to retire after successor is in place

BB&T revamps retirement plan websites

International bond fund bolsters Vanguard’s ‘Total Market’ lineup

ING Group lowers stake in ING U.S. (Voya) to 71%

BNY Mellon to increase wealth management sales force by 50%

Lincoln Financial Group hires Paul Narayanan

Data Connection

Lists*