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DIA-monds in a rough patch

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.”

© 2013 Beacon Research.

GAO criticizes “pervasive marketing” of IRA rollovers

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.”

© 2013 RIJ Publishing LLC. All rights reserved.

VA Sales Lack Clear Trend

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 217th in sales. At the end  of 1Q 2013, it was ranked 10th, 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.

© 2013 RIJ Publishing LLC. All rights reserved.

 

 

 

A retirement boom as far as the eye can see

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.

© 2013 RIJ Publishing LLC. All rights reserved.

The Bucket

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’

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.

© 2013 Morningstar, Inc.

Sign of the Times

My first experience with the 21st 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.

© 2013 RIJ Publishing LLC. All rights reserved.

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

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.   

© 2013 RIJ Publishing LLC. All rights reserved.

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

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.

© 2013 RIJ Publishing LLC. All rights reserved.

The Bucket

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.

© 2013 RIJ Publishing LLC. All rights reserved.

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

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

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.

© 2013 The Urban Institute. Used by permission.

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

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.

© 2013 RIJ Publishing LLC. All rights reserved.   

A DIA with Dividends

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 18th 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 10th 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.

© 2013 RIJ Publishing LLC. All rights reserved.

Crump, MetLife form brokerage tie

In a new brokerage relationship between Crump Life Insurance Services and MetLife, Crump will provide sales support, underwriting, technology and brokerage services to MetLife’s financial professionals, Crump announced in a release.

Representatives from MetLife and its affiliates “will have access to a broad portfolio of non-proprietary products that offer a full spectrum of life-related insurance solutions for their clients, leveraging Crump’s tools, services and technology,” the release said.

The new partnership is effective immediately.

© 2013 RIJ Publishing LLC. All rights reserved.

What the rich think about money

Long-term care and out-of-pocket healthcare costs, combined with financial support for extended-family members pose a significant risk to retirees who are trying to protect accumulated wealth, according to the U.S. Trust 2013 Insights on Wealth and Worth study of 711 American adults with $3 million or more in investable assets. 

The U.S. Trust findings support previous academic studies that found that protection products such as long-term care insurance and life annuities can help prevent the exhaustion of savings or potential legacies by a parents’ or one’s own unanticipated, open-ended health care costs or extreme longevity.

“The majority of people we surveyed grew up in middle-class families and created their own wealth. They don’t see themselves as wealthy, and many are unaware of risks and circumstances that grow increasingly complex as wealth accumulates,” said Keith Banks, president of U.S. Trust. “The wealthy have been disciplined about protecting their assets from market loss, but may have a false sense of financial security. They are not adequately planning for family health concerns or for the retirement that they want.”  

The wealthy have largely shifted their investment priorities from asset protection to asset growth, the Insights on Wealth and Worth study found. Yet fear still trumps greed in their investment practices. The survey found that:

  • 47% of all respondents have created a financial plan to address long-term care needs that they and their spouse or partner might need, but only 18% have a financial plan that accounts for parents’ long-term care costs.
  • Only 27% of baby boomers and 16% of those over age 68 say they ever expected their parents might ask for financial assistance. Yet, one-third of Generation X and 46% of Generation Y expect their parents or in-laws to rely on them for financial assistance eventually. 
  • 63% of wealthy people feel obligated to support their parents or in-laws if needed, even if it jeopardizes their own financial security, and 55% feel a responsibility to provide financial assistance for siblings if necessary.
  • 56% of wealthy parents say they provide financial support to their adult children.
  • 46% of respondents have supported (not a loan) to adult family members other than their own spouse or partner
  • 69% do not have a financial plan that accounts for the financial needs of any of these other adult family members.
  • 88% of people surveyed say they feel financially secure right now, and 48% feel even more financially secure today than they did five years ago. Women, members of Gen X (adults aged 33 to 48) and the wealthiest of the wealthy feel less confident, and worry about income in retirement.
  • 60% of HNW investors say asset growth is a higher priority than asset preservation, a reversal of goals from a year ago when 58% rated asset protection higher.
  • 63% say however that reducing risk and achieving a lower rate of return is more important than pursuing higher returns by increasing risk.
  • 56% of HNW investors have a large amount of funds still sitting in cash accounts. Only 12% are content leaving their cash on the sidelines, yet only 16% have immediate plans to move it. Two in five plan to gradually invest cash holdings over the next two years, and 35% have no plans to invest it.
  • 57% of respondents say that pursuing higher returns regardless of the tax impact is a higher priority than minimizing taxes. Only 34% feel very well-informed about the impact of recent tax law changes on the total return of their investment portfolio.
  • 37% of respondents (42% of men and 30% of women) feel very well-informed about how the tax law changes affect their income. And two in three respondents do not feel well-informed about strategies available to them to help minimize the impact of taxes on income, investments or their estate.
  • 69% of high net worth investors aren’t changing investment strategy in order to minimize taxes.
  • 86% of wealthy investors agree that a long-term buy-and-hold approach still is the best growth strategy, with 35% strongly agreeing with this.
  • 62% of high net worth households, including 52% of those still working, are very confident they will have sufficient income in retirement, in contrast to the rest of the U.S. population.
  • 60% of non-retirees have been calculating their retirement income by reviewing expected distributions from retirement savings accounts. Yet a large number have not adequately accounted for inflation (47%), taxes on investment income (52%), life expectancy (56%), the cost of long-term care (62%), or financial support their children (80%) or parents (82%) might need.
  • 75% of respondents have not adequately factored into their retirement planning any increase or decrease in real estate values. Yet 23% of retirees and 52% of non-retirees (including 39% of baby boomers) say primary residential real estate is important to funding their retirement.
  • 33% of high net worth adults under the age of 49 envisions working beyond age 65. Meanwhile, 60% of Boomers, many already in retirement, now have plans to work beyond age 65.
  • Once retired from their current occupation, 11% of respondents say they are likely to continue working full-time in a new endeavor and 41% expect to continue working on a part-time basis. More than half (54%) of the wealthy would like to spend time volunteering.
  • About 25% of survey respondents attribute the majority of their wealth to an inheritance. Those who have inherited wealth are more likely to want to leave an inheritance themselves.
  • 77% of people who inherited the majority of their wealth, and 63% of those who earned it, consider it an important goal to leave a financial inheritance to the next generation.
    Two in three baby boomers do not expect to receive an inheritance; 57% of adults under the age of 32 do expect an inheritance.
  • 64% of baby boomers, compared to 78% of adults younger than age 32 and 72% of those over age 68, think it’s important to leave an inheritance.
    Only 42% of wealthy parents agree strongly that their children are/will be well-prepared to handle their inheritance. Few wealthy parents believe their children will be mature enough to handle their wealth before the age of 25.
  • Just 39% of parents whose children already are age 25 or older have fully disclosed their wealth to children, while 53% have disclosed just a little and 8% have disclosed nothing at all.  
  • 88% of parents agreed that their children would benefit from discussions with a financial professional. One in three (31%) respondents received formal financial training themselves from a professional advisor. Yet only 16% of parents have provided, or have plans to provide, their children with access to formal financial skills training.
  • Two-thirds of wealthy parents say they would rather have their children grow up to be charitable than to be wealthy.
  • 89% of wealthy parents believe their children appreciate the value of a dollar and the privileges of growing up in a family with good fortune. However, half of parents (51%), particularly those with young children, think their children feel entitled to a lifestyle that was worked hard for, and 47% worry that, by growing up without knowing what it’s like to go without, their children may not attain the same level of success.

Despite awareness of the importance of estate planning, Insights on Wealth and Worth found:

  • 72% of respondents do not have a comprehensive estate plan, including 84% of those under the age of 49, and 65% age 49 or older.
  • 55% have never established a trust of any kind, primarily for two reasons: procrastination and the mistaken notion that outlining wishes in one’s will precludes the need for a trust.
  • 60% of respondents have named, or intend to name, their spouse or partner as executor of their estate. Only 32% consider the financial knowledge and skills of the person they name as their executor. Having sufficient legal and financial knowledge was cited as the top difficulty in serving as an executor by those who already have served, particularly by women.
  • 67% of respondents say they have organized their personal, financial, medical and legal records and information in one place, but 46% have not informed the executor of their estate about how to access the records.
  • 55% of respondents say they have organized passwords for accessing digital records or accounts, but 63% have not specified their wishes authorizing access to the passwords or to any online assets.
  • 65% of wealthy households surveyed own investments in some type of tangible asset, ranging from real estate to oil and gas properties to farmland, a trend particularly evident among younger investors. One-third (35%) of investors under the age of 32 say that tangible investments are important to their overall wealth strategy given the current tax, political and economic environment.
  • 60% of wealthy individuals feel that they can have some influence on society by how they invest, and 45% agree that it’s a way to express their social, political and environmental values.
  • Nearly half (46%) of respondents feel so strongly about the impact of their investment decisions that they would be willing to accept a lower return from investments in companies that have a greater positive impact; 44% would be willing to take on higher risk.
  • 51% of those surveyed, including 65% of women and 67% of investors under age 49, think it is important to consider the impact of investment decisions on society and the environment. Yet only one in four investors has reviewed their investment portfolio to evaluate its impact on these concerns.
  • 59% of high net worth individuals dedicate a portion of their wealth to the collection of valuable assets such as such as fine art, watches and jewelry, antiques, fine wines and rare coins and books or classic and high-performance cars. Only about half of those with collections have insurance. Only 19% of collectors have discussed or outlined their wishes for the collection with future heirs.

Additional survey findings from the 2013 U.S. Trust Insights on Wealth and Worth can be found at www.ustrust.com/survey.
Findings are based on a nationwide survey of 711 high net worth and ultra high net worth adults with at least $3 million in investable assets, not including the value of their primary residence. Respondents were equally divided among those with $3 million to $5 million, $5 million to $10 million, and $10 million or more in investable assets. The survey was conducted online by Phoenix Marketing International in February and March of 2013. 

© 2013 RIJ Publishing LLC. All rights reserved.

Eight more insurers to issue DIAs: LIMRA

Eight insurance companies plan to introduce their own deferred income annuities (DIA) in addition to the nine who already do, according to a recent LIMRA-CANNEX study of seven DIA products. In its release about the study, LIMRA and CANNEX did not name the eight new entrants.

Also referred to as a longevity annuity, deferred payout annuity, or advanced life-delayed annuity (ALDA), a DIA pays income to the policyholder starting at least 13 months from the policy date. The traditional single-premium immediate income annuity (SPIA) provides income beginning within 13 months after purchase. 

The deferred income annuity is designed to help jump-start the long-awaited annuity boom by appealing to the millions of soon-to-retire Baby Boomers in the U.S. who anticipate needing guaranteed income five to 10 years or more from now.

The LIMRA-CANNEX study, Features in Income Annuities—Immediate and Deferred Income Annuity Designs, noted these differences and similarities of immediate and deferred income annuities.

  • Multiple contributions: Current designs of deferred income annuities differ from immediate income annuities in several ways. One key difference with a DIA is the ability to make multiple contributions before the income start date. Most (four out of seven) of the current products allow you to make multiple contributions into the contract.
  • Income commencement date flexibility: Another difference between the immediate and the deferred income annuity is the ability to choose a wider range of income commencement dates. With the DIA the income can be deferred for as short as 13 months to as long as 45 years. Most (six out of seven) of the current products allow you to change that commencement date. Five of those six companies allow the date to be deferred up to five years after the original payout date. 
  • Liquidity features: Many of the immediate income annuity liquidity features are also available in a DIA. In fact most (five out of seven) DIAs have at least one liquidity feature. Three of the six companies offer the accelerated payment option. Two of the six offer some access to a commuted value of the guaranteed payments. One company offers 100% liquidity (life included) within 60 days of starting income payments.
  • Income flexibility: Most (five out of seven) of the DIAs have a cost-of-living adjustment option. No carriers differentiate the range of COLA rates offered based upon contract types such as life only or period-certain contracts. One insurance company offers a lower maximum COLA rate for deferred income annuities funded by qualified funds. Currently there are no DIA companies that link the payments to the consumer Price Index.

While still a small percentage of the overall income annuity market, the study also showed that deferred income annuity sales reached more than one billion dollars in 2012.

© 2013 RIJ Publishing LLC. All rights reserved.

Wealth2k Introduces Social Security Wise™

Aggressive financial advisors are always looking for ideas to pitch to their clients—either to generate revenue, to justify their asset-based fee, or merely to stay in touch.

Sometimes these ideas hide in plain sight—like strategies or software to optimize Social Security benefits—until someone identifies their value. Then everyone else picks up on it.  

Wealth2k has introduced Social Security Wise, a “turnkey prospecting solution” or content-marketing solution that can “help advisors build a bridge to consumers who need assistance in crafting retirement income plans,” according to a release from Wealth2k. The monthly subscription cost is $45/month. There is no term commitment.  

According to Wealth2k Founder & CEO, David Macchia, “Software programs have made it easy for advisors to analyze the results of different Social Security claiming strategies. This has been an important development. But the major challenge facing advisors today isn’t analysis, it’s prospecting. Social Security Wise fills a gaping need in the marketplace for a compliant, consumer-facing solution that generates new prospects for retirement income planning.”

Social Security Wise aims to provide these benefits for financial advisors:

  • Advisor-branded Social Security Learning Center
  • Prospecting tool
  • Lead-generation strategies
  • Compliant content (FINRA comment letters covering Social Security Wise content are available on request.)
  • iPad, iPhone and Android device compatibility
  • Income planning discussion openers
  • Google AdWords marketing module
  • “Drip” mailing campaign tools to drive traffic to the advisor’s website
  • Integration with social networking sites

Wealth2k, Inc., based in suburban Boston, provides The Income for Life Model, an advisor-centric retirement income solution for mass-affluent investors, among other products and services. 

© 2013 RIJ Publishing LLC. All rights reserved.