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Buy ‘I Bonds’ and Worry Less about Inflation

Financial planners and investment advisors all tell you to create an emergency fund before you start investing in risky assets. Your emergency fund should be held in safe and liquid assets like FDIC-insured saving accounts.

But interest rates on these accounts are close to zero and taxable. Moreover, if these accounts are retirement accounts such as an IRA, withdrawals before age 591⁄2 are subject to a 10% penalty in addition to taxes on the withdrawals.

So where should people invest their emergency funds? We say they should consider U.S. Treasury Series I Saving Bonds, commonly called I Bonds, which are distinct from Treasury Inflation-Protected Securities, or TIPS. (For a side-by-side comparison of the two, click here.)

What are I Bonds?

First introduced in September 1998 I Bonds (the “I” stand for “Inflation”) are inflation-protected, are issued by the United States Treasury, and provide a guaranteed real rate of return for 30 years. This is in contrast to the nominal fixed rate of interest provided by most traditional bonds and CDs.

The total yield of an I Bond is made up of two components: a fixed rate that remains the same for the 30-year life of the bond, and an inflation adjustment that’s reset every six months. The fixed rate is currently zero, and the last inflation adjustment in May 2021 was 3.54% per year.

You add these two components together to arrive at the composite rate of 3.54% per year.

I Bonds were designed primarily for small savers/investors. You can buy a maximum of $10,000 of I Bonds a year for each Social Security number via TreasuryDirect (treasurydirect.gov).

In addition you can buy them with any federal tax refund due to you, up to $5,000, for which you will receive paper I Bonds. You cannot hold them in a special retirement account, but the taxes due are deferred until maturity or the date they are redeemed. If you redeem I Bonds prior to five years, you’ll lose the last three months’ interest. After holding them for five years, there is no penalty for redeeming I Bonds before maturity, except that the federal tax on the interest must be paid in the same year as the redemption.

I Bonds offer many benefits:

  • They’re risk-free. They are obligations of the U.S. Treasury, so they are even more secure
    than Social Security benefits. (It is possible for the U.S. Treasury to default on these bonds, so strictly speaking they are not completely free of default risk as explained above.)
  • They offer inflation protection. That’s especially important for retirees who no longer have wage increases to rely upon. With all the current government spending and deficits, inflation could return with a vengeance. I Bonds protect you against the ravages of future inflation.
  • They’re tax-deferred. Even though you purchase I Bonds with after-tax money for your
    taxable account, they offer tax deferral for up to 30 years. You can elect to report the interest annually if you prefer, but most investors choose the default tax deferral option and thus only pay tax on the accumulated interest when they eventually redeem the I Bonds.
  • They’re flexible. They offer a tax timing option. They can be redeemed any time between one and 30 years. That offers lots of flexibility after owning them for one year. This flexibility allows you to buy I Bonds when you’re in a high tax bracket and redeem them when you’re in a lower tax bracket, such as after you’ve retired or are temporarily out of work.
  • They’re free from state and local taxation. This can mean higher after-tax returns for those investors who live in high-tax states, and they’re even better yet for folks who live in areas where they pay both state and local taxes.
  • If used for qualifying educational expenses, the interest earned is free from federal taxes.
  • They offer a put option. If future I Bonds offer a more attractive fixed rate, it may make
    economic sense to redeem the older lower-yielding I Bonds, pay the taxes due on the interest earned, and then buy the newer I Bonds with the higher fixed rate. (Remember, however, if you redeem I Bonds within the five years of purchase, you will forfeit the last three months of interest.)
  • You can’t lose money. The composite rate can never go below 0%. I Bonds will never return less in nominal terms than you invested in them even if the country enters a prolonged period of deflation. You never lose the interest you’ve earned. In real terms you do better if there is deflation than if there is inflation. A recent bout of reported deflation took the I Bond composite yield to 0% for a six-month period. But as a result of the 0% “floor,” holders actually outstripped inflation by more than the guaranteed fixed rate during that period. So, if your I bond was worth $10,000 before that period of deflation, it would have been worth $10,000 after the deflation adjustment period ended. However, because of deflation, that $10,000 would buy more goods and services.
How I Bonds work

Now let’s explore the mechanics of purchasing and redeeming I Bonds and talk a bit about how they work. You must first open an individual account at TreasuryDirect.gov and link it to your bank account. Once your account is open, you can then make your purchases online and the Treasury will deduct the purchase price from your linked bank account.

Purchase limits. There is an annual purchase limit of $10,000 in I Bonds in electronic form per Social Security number. A married couple could, therefore, purchase a total of $20,000 per year.

A tax-time purchase option. The option to use your tax refund to buy up to $5,000 in paper I Bonds raises your limit from $10,000 to $15.000 in that year–$10,000 in electronic form and $5,000 in paper form.

Timing your purchases. Interest is earned on the last day of each month and is posted to your account on the first day of the following month. So, if you own your I Bonds on the last day of any month, you’ll earn that full month’s interest. Therefore, it’s best to buy your I Bonds near the end of the month, since you can earn a full month’s interest while only owning the I Bonds for perhaps a day or two. On the other hand, when redeeming I Bonds, you’ll want to do so on or near the first business day of the month, since redeeming them later in the month won’t earn you any additional interest.

Redeeming paper I Bonds. Simply take your paper I Bonds to your bank, sign the back and the bank will credit your account just as if you had deposited cash. The funds will normally be available to you the following day. You could also receive cash.

Redeeming electronic I Bonds. You can redeem your I Bonds (or any portion of your bond holdings, so long as you leave at least $25 in your account) using your online account. The money is then transferred into your linked bank account.

Avoiding probate. I Bonds don’t qualify for a step-up in cost basis at one’s death as many other investments, such as stocks and real estate, do. (I Bonds are like bank-CDs in that regard.) But you can title them in such a way as to avoid having them included in your estate subject to probate—by having either a second co-owner or a beneficiary listed on your I Bonds.

Zvi Bodie is emeritus professor of economics at Boston University, Mel Lindauer wrote The Bogleheads’ Guide to Retirement Planning, David Enna is founder of Tipswatch.com, and Michael Ashton is ‘The Inflation Guy’ at Enduringinvestments.com.

© 2021 RIJ Publishing LLC. Used by permission.

I’m HIPP, and That’s Not Cool

Huey Lewis and The News once sang, “It’s Hip to be Square.” My wife and I are also HIPP. We’re “High Income, Pre-retired, and Pension-less.” HIPP is not so cool. I don’t think it squares with a solid retirement strategy.

We are almost debt-free, but we are also at least five years from retirement. We hope the market will feather our retirement nest in the interim. There are millions like us: folks nearing retirement who have saved considerable sums, who are accustomed to a healthy annual income from our work, and who expect no sources of guaranteed lifetime income other than Social Security at retirement.

Markets have delivered for a long time. It’s easy to assume they’ll deliver that desired nest egg when you need it. But markets deliver until they don’t. Then you need a back-up plan. That’s where annuities can step in and become the heart of a retirement strategy.

A Real CAPE to Fear

We’ve been conditioned, if not spoiled, by a decade of sparkling capital markets performance. But historically low Treasury yields, tight spreads and high equity valuations do not bode well for future performance.

One valuation metric to watch is the Shiller CAPE, or Shiller Cyclically Adjusted Price Earnings Ratio, or CAPE. Developed by Yale economist Robert Shiller, the CAPE smooths out the lumpiness of price/earnings ratios that short-term, transitory events can cause. It averages the inflation-adjusted earnings of a firm or an index over the prior ten years and compares those earnings to the current price.

The last time the Shiller CAPE was as high as it is today (around 38) was in 1999, according to one recent article. Between 1999 and 2003, the S&P 500 Index (including dividends) lost money. It had a compound annualized growth rate of about -0.62%. Although fixed income performed better during that period, today’s low yields suggest that bond returns will be muted in the future. 

Helping clients to the finish line

The annuity industry fortunately offers a way to convert some of the capital market’s recent bounty into lifetime cash flows that conventional capital methods will find tough to match. The guaranteed lifetime withdrawal benefit (GLWB) offers an excellent hedge to the prospect of below-average market returns in the critical years before and during early retirement.

Assume that a 60-something couple wants to retire in five years. Any number of fixed indexed annuities (FIA) with a GLWB purchased today, can produce an annual cash flow equal to 6-7% or more of premium amount or the contract value (whichever is greater) five years from now.

For example, if a 62-year-old couple funds an annuity with a lifetime withdrawal benefit with a $1 million premium, they could expect a lifetime cash flow of at least $65,000 a year, covering both lives, beginning in five years. Variable annuities with high joint distribution rates are rarer, but the 6.5% (of initial premium) rate can be reached with a five-year delay to age 70.

To enjoy the same income using a simple 4% annual withdrawal rate, the couple would need their $1 million to grow to $1.625 million in five years—a return of 10.2% per year (net of fees). If the couple would like to use a more conservative 3% withdrawal rate—as experts like David Blanchett, Wade Pfau, and Michael Finke have suggested—the annual returns needed to equal the annuity results would be about 16.7%.

The annuity can be especially helpful for people who have under-saved for retirement. Suppose our 62-year-old couple realizes that, to close the gap between their Social Security benefits and their essential expenses in retirement, they will need to spend a risky 6% or 7% of their savings every year. The GLWB will give them the income they need without the substantial risk of exhausting their savings too soon. 

But even for HIPP folks with seven-figure portfolios, a 3% to 4% withdrawal rate might not provide enough safe monthly cash flow to replace pre-retirement income and maintain an accustomed lifestyle. 

Caveats are in order. Most safe withdrawal rate methods include inflation-adjustments; they typically allow annual withdrawals to grow by 2% to 3% of the initial amount. The GLWB solutions I recommend may offer a version that allows for growth, but those solutions would start at lower payouts than the versions I’ve referenced.

But an annuity with a GLWB can maximize cash flow potential at minimum risk during the initial travel-intensive, “go-go” years of retirement. That makes it an excellent lifestyle hedge. Owning that type of annuity might even make it cool to be HIPP.

© 2021 John Rafferty. Used by permission.

Vanguard and RCH to offer ‘auto-portability’ service to plan participants

Vanguard, a leading retirement plan provider in the US, has engaged Retirement Clearinghouse LLC, to offer “auto-portability”—a service ensuring that job changers can easily “roll in” assets from old 401(k)s to new 401(k)s—to 4.7 million participants in the 1,700 plans it administers for 1,400 plan sponsors, starting in mid-2022.

Last November, Alight Solutions announced that it would offer RCH’s roll-in service to millions of participants in the Federal Thrift Savings Plan, which is administered by Accenture Federal Services.

Auto-portability enables the transfer of small-balance accounts so that fewer accounts are forgotten, cashed out, or left on the plans’ books. Cash-outs are a source of “leakage” and of savings inadequacy. All three outcomes can be costly for the plan, the participant or both.

“Together with RCH, we aim to help the most vulnerable plan participants combine their retirement assets, capture the vast benefits of a 401(k) plan, and enhance their overall financial wellbeing,” said John James, managing director and head of Vanguard Institutional Investor Group, in a release.

Retirement plan leakage “affects Black and Brown workers in particular and contributes to a systemic issue of savings insufficiency in these underserved demographics,” said Robert L. Johnson, founder of the Black Entertainment Network, chairman of The RLJ Companies and owner of RCH.

Plan participants with small balances often do not roll over retirement savings into their new plans or to rollover IRAs when changing jobs. Employers, for their part, have the right to move abandoned accounts with less $5,000 into financial warehouses known as “Safe Harbor IRAs,”  where fees may be higher than in the plan. Those “stranded” accounts, large or small, are easily forgotten.

The RCH Auto Portability program automates the movement of an employee’s 401(k) savings account from their former employer’s plan into an active account with their current employer’s plan. First piloted in 2017, the program completed the industry’s first-ever fully automated, end-to-end transfer of retirement savings from a Safe Harbor IRA into an employee’s active retirement account.

The service can also help simplify plan administration and improve plan compliance by reducing the instances of abandoned accounts and uncashed checks.

“Our partnership with Vanguard represents a giant leap forward in the campaign to make auto portability for small accounts the new 401(k) plan default process when participants change jobs,” said Spencer Williams, founder, president, and CEO of Retirement Clearinghouse, LLC.

A leading recordkeeper for defined contribution plans, Vanguard has a long history of partnering with mission-aligned firms to provide groundbreaking solutions that help improve participant outcomes. Strategic engagements with industry-leading firms, such as RCH, enable Vanguard to augment its proprietary offerings and deliver comprehensive services, cutting-edge technologies, and best-in-class experiences to plan sponsors and their participants.

In the release, Vanguard said it supports key components of SECURE 2.0 legislation and endorses the Department of Labor’s e-delivery rule, the Securing a Strong Retirement Act, the Retirement Security and Savings Act, and the Receiving Electronic Statements to Improve Retiree Earnings (RETIRE) Act in 2018.

© 2021 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Lincoln Financial to gain $1.2 billion in capital from reinsurance deal

Security Life of Denver Insurance Co., a subsidiary of Bermuda-based Resolution Life, will reinsure approximately $9.4 billion of Lincoln Financial Group’s in-force executive benefit and universal life reserves, according to a Lincoln release. (“Reserves” in this context means “liabilities,” or the estimated amount that the reinsurer will need to pay policyholders in the future. Reserves are not assets.)

The reinsurance transaction will release about $1.2 billion of capital for Lincoln. The proceeds will predominantly be used to fund incremental share repurchases of approximately $900 million that Lincoln expects to complete by the end of the first quarter of 2022. The remaining proceeds will be used for general corporate uses, primarily paying down debt.

The transaction is expected to increase Lincoln Financial’s adjusted operating earnings per share by about 5% and expand ROE in 2022. Under the terms of the reinsurance agreement, Lincoln Financial will retain account administration and recordkeeping of the policies.

The transaction will have no impact on Lincoln Financial’s relationship with, or commitments to, its distribution partners and policyholders, the release said. Lincoln Financial said it will continue to sell individual life insurance and executive benefits products.

The agreement is dated September 17, 2021, with an effective date of October 1, 2021. Closing of the transaction is subject to customary conditions, but no regulatory approvals are required to close the deal.

The transaction is structured as a coinsurance treaty for the general account reserves and as a modified coinsurance treaty for the separate account reserves, with counterparty protections including a comfort trust and investment guidelines to meet Lincoln Financial’s risk management objectives.

Lazard acted as financial advisor and Sidley Austin LLP served as legal advisor to Lincoln Financial.

Rotenberg to run Fidelity’s $4.1 trillion Personal Investing division

Joanna Rotenberg has been named head of Fidelity Investments’ $4.1 trillion Personal Investing division, effective early November, the fund giant and retirement plan provider announced. Rotenberg succeeds Kathy Murphy, who will step away from her role by the end of the year.

Rotenberg joins Fidelity from Toronto-based BMO Financial Group, where she was group head of Wealth Management since 2016 and a member of the company’s Executive Committee since 2010. Rotenberg will report to Abigail P. Johnson, chairman and chief executive officer of Fidelity, and join the Fidelity Operating Committee.

Fidelity’s Personal Investing division services more than 30 million client accounts with $4.1 trillion in assets under administration.

Guggenheim Life and Annuity “under review” by ratings agency

AM Best has placed under review with developing implications the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of “bbb+” (Good) of Guggenheim Life and Annuity Company (GLAC) (Wilmington, DE).

The Credit Rating actions “reflect GLAC’s decline in surplus and weakening in its risk-adjusted capital position during the first half of 2021, driven in large part by the payment of stockholder dividends to its ultimate parent, Sammons Enterprises, Inc.,” AM Best said.

GLAC’s management is working on a capital plan to increase its capital and surplus and strengthen its risk-adjusted capital position. The ratings are expected to remain under review while GLAC management finalizes its capital plans and AM Best can fully assess the impact this has on the company’s capital and surplus position and risk-adjusted capitalization.

Schwab: Average balance of self-directed brokerage accounts is $348,183

The average account balance of self-directed 401(k) brokerage accounts (SDBAs) across all retirement plan participant accounts finished Q2 2021 at $348,183, a nearly 22% increase year-over-year and a 4.3% increase from Q1 2021, according to Charles Schwab’s SDBA Indicators report for 2Q2021.

SDBAs are brokerage accounts within retirement plans, including 401(k)s and other types of retirement plans, that participants can use to invest retirement savings in individual stocks, bonds, exchange-traded funds, mutual funds and other securities outside their plan’s core investment offerings.

Trading volumes were in line with the prior year at an average of 14 trades per account, as participants encountered COVID volatility with the rise of the Delta variant, according to the report. “Despite some fears, participants saw account growth year-over-year as stocks continued to climb off the March 2020 low and consumer confidence surged back to pre-pandemic levels,” a Schwab release said..

The majority of participant assets were held in equities (37%). Mutual funds were the second largest holding at (30%), followed by ETFs (20%), cash (12%), and fixed income (1%).

Allocation Trends

The data also reveals specific asset class and sector holdings within each investment category:

Mutual funds: Large-cap funds had the largest allocation at approximately 34% of all mutual fund allocations, followed by taxable bond (19%) and international (16%) funds.

Equities: The largest equity sector holding was Information Technology at 29%. Apple was the top overall equity holding, comprising 10.26% of the equity allocation of portfolios. The other equity holdings in the top five include Tesla (6.28%), Amazon (5.03%), Microsoft (2.72%) and NVIDIA (1.84%).

ETFs: Among ETFs, investors allocated the most dollars to US equity (50%), followed by sector ETFs (15%), international equity (13%) and US fixed income (13%).

Other report highlights:
  • Advised accounts held higher average account balances compared to non-advised accounts – $550,127 vs. $302,330.
  • Gen X had the most advised accounts at 48%, followed by Baby Boomers (36%) and Millennials (13%).
  • Gen X made up approximately 45% of SDBA participants, followed by Baby Boomers (32%) and Millennials (18%).
  • Baby Boomers had the highest SDBA balances at an average of $532,338, followed by Gen X at $306,489 and Millennials at $103,777. All balances were up from Q1 2021.
  • On average, participants held 12.3 positions in their SDBAs at the end of Q2 2021, up slightly from 10.5 last year and consistent with Q1 2021.

The SDBA Indicators Report includes data collected from approximately 174,000 retirement plan participants who currently have balances between $5,000 and $10 million in Schwab Personal Choice Retirement Accounts. Data is extracted quarterly on all accounts that are open as of quarter-end and meet the balance criteria.

The SDBA Indicators Report tracks a wide variety of investment activity and profile information on participants with a Schwab Personal Choice Retirement Account (PCRA), ranging from asset allocation trends and asset flow in various equity, exchange-traded fund and mutual fund categories, to age trends and trading activity. The SDBA Indicators Report provides insight into PCRA users’ perceptions of the markets and the investment decisions they make.

© 2021 RIJ Publishing LLC. All rights reserved.

Learn to [Ted] ‘Lasso’ Women Clients

Financial advisers who want to attract and retain more female clients might want to watch “Ted Lasso,” the Emmy-sweeping series streaming on Apple TV+.

Ted is the fictional American coach of England’s fictional Richmond Greyhounds football club (i.e., soccer team). He doesn’t win many matches; he hardly knows a pitch from a playing field. But he wins the trust, confidence, and respect of almost every woman he meets.

By the eighth episode, the funny, vulnerable Lasso has melted the frosty hearts of club owner Rebecca (with his homemade shortbread), Mae, the salty, 70-something publican at a nearby sports bar, and Sharon Fieldstone, the psychologist who cures his striker’s phobia of scoring.

David Macchia

Lasso radiates the soft skills that David Macchia and Marcia Mantell must have had in mind when they created “Women And Income,” their soon-to-launch turnkey marketing, education, planning and lead-generation package for advisers who want to project the kind of aura that divorced women and widows can warm to.

Male advisers have a notoriously high client-attrition rate where women are concerned. Surveys indicate that women often change advisers when their husbands die. Since women tend to outlive men and eventually control their household’s assets, and simply as a matter of principle, the argument goes, advisers should be more sensitive to the needs and wants of women.

“I think of the women’s market as an ecosystem that advisers need to enter if they want to have a retirement income practice,” Macchia told RIJ recently. “We believe that if they can communicate better with women, their business will expand and they’ll leave women with better plans.”

Customized for women

Macchia and Mantell should be familiar names to many in the retirement industry. Macchia created the Income for Life Model (IFLM), a planning software and marketing package for agents and advisers who use the “bucketing” or “time-segmentation” method of matching assets with liabilities in blocks of three, five or 10 years over the length of an individual’s retirement.

Marcia Mantell

Mantell, an author, blogger and retirement business development consultant, has written two paperbacks: “What’s the Deal with Retirement Planning for Women?” and “What’s the Deal with Social Security for Women?” She and Macchia were active in Francois Gadenne’s Retirement Income Industry Association, or RIIA, before it disbanded in 2017.

With Women And Income, they’ve hybridized IFLM. Like IFLM, the new service will use ready-to-use, white-labeled multi-media marketing material and planning software. The gender-driven education, coaching and training tools are designed and presented by Mantell. Software training will be provided by Jason Ray, Wealth2k’s head of training and a Certified Financial Planner. The software focuses on retirement income generation.

Instead of a pure bucketing strategy, the new hybrid strategy puts an optional “floor” element or lifetime guaranteed income layer under the sequence of investment buckets. “That construct best protects women against the risks that can derail their retirement security,” Macchia said. “It’s based on what financial advisers have told me over the years and from reading research studies and white papers.”

As a business development service for advisers, Women And Income proposes to operate primarily as a lead-generation tool. Macchia and Mantell intend to recruit no more than 500 advisers nationwide. The advisers will be sent an average of 240 qualified leads per year, or about 20 per month. 

“Lead generation is a large component of the new business. We’ve also created new presentation technology. This is larger in scope than what we’ve done previously, in terms of the complexity and the number of deliverables,” Macchia said. The service includes a personalized landing page and a dashboard for tracking data.

Ted Lasso

To get the leads, Macchia will use Facebook, the social media of choice among Boomer-age women. He’ll rely on Facebook ads, and Facebook’s algorithms, to put ads in front of target audiences; in this case, that would be women of the right age, geographic location, socioeconomic and marital/widowhood status. When fully ramped up, the system will provide 10,000 leads per month to 500 advisers, and 120,000 new leads per year.

Macchia will recruit women for virtual or live seminars and meetings, perhaps twice each month for 10 attendees on each occasion, where the adviser will try to convert them into clients. “By the time the advisers meet them, we’ll have familiarized the women with the topic [of retirement income],” Macchia said. “They’ll have been shown why it’s beneficial for them to attend an event, and we’ll help build attendance.”

Part of the appeal to advisers is exclusivity. Each adviser will have a distinct territory of the US with a minimum population of 500,000. Each adviser will also have exclusive access to the leads that the service generates in that territory. For these services, Macchia and Mantell expect to charge a one-time licensing fee of $2,500 for the first 50 advisers who enroll ($10,000 thereafter) and a monthly subscription fee of $2,000.

The two partners are aiming their product at all advisers, including those who are self-employed and those employed by banks, and broker-dealers. “They’re all facing the same hurdles,” Macchia said.

Know children’s names

“The male advisers know that women don’t like their approach,” Mantell said in an interview. “But they don’t know what to do. No one has been able to create a format or recipe for an adviser to follow when advising women. We provide a path. To sum it up, women are looking for personal connections and the guys are too clinical.”

It’s not necessarily rocket science, she added. Male advisers would be much more effective with women if they simply started every meeting by inquiring about a female client’s children—but they need to ask about the children by their names, and know where they go to school, and, for instance, know whether the school’s football team won or lost last week.

“You can’t fake genuine. That’s one of the messages that I try to get across. Women can tell if you’re a used car salesman from four blocks away. It’s not that we have a special radar or super power. We just get people. We understand body language and behavior. It’s instinctual. It’s our survival skill.”

A lot of consultants and financial services firms are targeting the divorced-and-widowed Boomer segment. McKinsey and Charles Schwab recently issued white papers on the topic. But the potential market appears large enough to handle lots of players. By 2030, according to data from the government’s Survey of Consumer Finance, much of the $30 trillion in Boomer-owned financial assets will be controlled by women.

So let’s channel our inner Ted Lasso. Maybe. Lasso’s wife began breaking up with him before he moved from Kansas to England to coach British football, so he has suffered at least one rejection. Or the showrunners may simply have wanted to maximize their plot options. By the start of Season Two, Ted checks all the boxes: Husband, father, eligible bachelor. With the right certifications, he’d probably make a good financial adviser as well.

© 2021 RIJ Publishing LLC. All rights reserved.

How to Make US Retirement Policy Work Better

Among Washington’s many policy wonks, few have tilled the field of retirement finance as diligently as William G. Gale, J. Mark Iwry, and David C. John. Their fingerprints can be found on initiatives like the auto-IRA, state-sponsored retirement plans, and the Qualified Longevity Annuity Contract (QLAC).

Over the past 20 years, they’ve hatched or championed ideas on retirement policy, articulated them in articles and books, and then tried to shepherd them through the kinks, bottlenecks and minefields of Washington’s legislative, regulatory, bureaucratic and political corn-maze.

David C. John

Now they’ve edited a book of essays called “Wealth After Work.” It’s a portable treasury of practical ideas for improving retirement security in America. The publishing arm of the Brookings Institution, with which all three are or have been associated, released the book this summer.

Gale is director of the Retirement Security Project at Brookings and the author of “Automatic: Changing the Way America Saves” (Brookings, 2009) and other books. Iwry, an attorney and former Treasury official in the Obama administration, and John, a senior public policy strategist at AARP, co-created the auto-IRA. John’s affiliation with the conservative Heritage Foundation prevents them from being cast as pure paladins of progressivism. 

There are a lot of gnarly details in this book, which is a good thing. All of the policy proposals described in this book have pros and cons, which the authors document. The authors know most if not all the nuances of these policy proposals. Understanding policy nuances is essential for anyone who hopes to satisfy the many stakeholders who have to buy in before anything new gets passed—or before obstacles to new ideas can be removed.

William Gale

 Readers who are interested in retirement income (or the “distribution” phase, as opposed to the pre-retirement “accumulation phase”) should find the chapters titled “From Savings to Spending,” “When Income Is the Outcome,” “Supplemental Transition Accounts for Retirement,” and “Retirement Tontines” especially valuable. 

“From Savings to Spending” proposes what some might call the holy grail of workplace retirement plans: a mechanism for making a defined contribution plan behave like a defined benefit plan. They propose a managed payout fund that would hold an individual’s diversified DC savings and distribute an annual income based on fund quantity, performance, and the age of the retiree. At the same time, a small percent of the fund would go each year toward the purpose of a QLAC, to extend the same income for as long as the individual lives.

J. Mark Iwry

They also know how to untangle a knotty issue or proposal and separate its strands without taking sides. For instance, I was fascinated by the gnarly details of Chapter 12 (“When the Outcome is Income”). It deals with the hurdles to putting annuities in retirement plans—a major goal of the life/annuity industry.

The authors of this chapter—the three editors and Victoria Johnson—propose an independent body that can evaluate insurers so that individual plan sponsors doesn’t have to hire expensive consultants when trying to choose an annuity provider for their participants. They observe the futility of requiring a plan sponsor to vet an annuity provider (i.e., life insurance company) without vetting the type of annuity (Fixed income? Variable with living benefit?) that the carrier wants to sell the plan sponsor.

The chapter entitled “Supplemental Transition Accounts for Retirement” describes START accounts. These are savings sidecars, funded by workers and employers through payroll contributions (1% each) for growth in an investment fund. At retirement, give workers enough “bridge” money to delay claiming Social Security for a few years after they retire. By delaying, they lock in higher benefits for life. Savers would use their START funds, in effect, to “buy” an extra year of deferral.

The last chapter in the book describes “Retirement Tontines.” Tontines are non-guaranteed annuities that are not necessarily underwritten by life insurers. They are distinct from managed payout funds in that only the surviving contributors to the fund receive income each year. Each participant’s income is increased because there’s no life insurer charging for longevity risk transfer. Adding a death benefit or spousal continuation would require further actuarial engineering.

© 2021 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Michelle Richter to lead the Institutional Retirement Income Council

The Institutional Retirement Income Council (IRIC), a non-profit think tank for the retirement income planning community, today announced the appointment of Michelle Richter as executive director, effective October 1, 2021. Ms. Richter, a 20-year retirement industry veteran, becomes IRIC’s second executive director and will succeed Robert Melia, who is retiring at the end of September.

Michelle Richter

Ms. Richter is the founder of Fiduciary Insurance Services, LLC, a strategic consultancy and Registered Investment Adviser, and will continue in that role. She has 20 years of experience inventing, deploying, advocating for, and scaling innovative products and programs at the intersection between insurance and wealth management.

Ms. Richter serves in both retail and institutional channels, advising insurers, financial institutions and academics on new product and program design, strategic planning, launch execution, industry advocacy, marketing, and competitive intelligence. Ms. Richter holds a bachelor’s degree in Economics from Wesleyan University, and an MBA in both Management and Finance from Columbia University’s Graduate School of Business.

Melia was appointed IRIC’s first executive director in 2017. His retirement is effective September 30. He will remain actively involved with the organization through the end of the year to help ensure a smooth leadership transition.

The Institutional Retirement Income Council (IRIC) is a non-profit, membership-based organization of industry advisors who are dedicated to sharing best practices, informing about legislative and regulatory issues, and facilitating solutions for plan sponsors and their participants. Its mission is to “facilitate the culture shift of defined contribution plans from supplemental savings programs to programs that provide retirement security.” 

AIG to distribute annuities through SIMON

AIG Life & Retirement’s annuities will be distributed to wealth managers through SIMON Annuities and Insurance Services, a digital insurtech platform that helps facilitate insurance sales to advisers with rider illustrations, performance statistics and allocation analytics.

“2020 and 2021 have led a new wave of advancement to digitize insurance processes. Still, it is a relationship-driven industry, and will remain so as long as investors require a broad range of products with flexible options and features to choose from,” said Jason Broder, CEO at SIMON.

“That’s where technology fits in. More professionals now have access to AIG’s incredible suite of retirement solutions and can navigate them supported by SIMON’s powerful analytics. It’s a great pleasure to welcome AIG Life & Retirement to SIMON.”

According to a release, SIMON’s technology demonstrates product features in an interactive way, showing the retirement-planning capabilities of each product available on its annuities shelf and making products easier to understand. Financial professionals will be able to find and explore AIG annuities, access product-specific marketing literature, and run allocation and income analytics within the product—all on the SIMON platform.

Morgan Stanley and Empower partner on workplace benefits

Morgan Stanley at Work and Empower Retirement are partnering on a “comprehensive workplace retirement offering” for employers who want to leverage company benefits as an employee attraction and retention tool.
The partnership builds on an existing relationship between the two firms, which includes both Morgan Stanley’s investment services and Empower’s technology and product and service capabilities. The partnership entails:

  • Combined access to Morgan Stanley at Work’s stock plan administration services and Empower’s growing retirement plan market share
  • Access to cobranded digital-forward solutions and capabilities
  • Streamlined administration for plan sponsors and Financial Advisors
  • Fund selection driven by the Morgan Stanley Global Investment Manager Analysis (GIMA) team
  • Favorable administrative pricing terms through Morgan Stanley.

The Empower partnership will expand Morgan Stanley at Work’s ability to serve advisor-sold plans under $50 million in assets with comprehensive retirement solutions to attract and retain talent. The partnership with Empower comes shortly after Morgan Stanley at Work announced a business partnership and strategic investment with Vestwell to serve small retirement plans, demonstrating its commitment to innovation and thoughtful disruption in the workplace wealth space.

Morgan Stanley at Work’s Retirement Solutions is a flexible, multi-provider recordkeeper platform designed to meet the individual needs of companies. Through a consultative process, the Firm’s retirement specialists help companies improve plan competitiveness and fiduciary risk management, investment selection and monitoring, and employee retirement readiness.
Retirement Solutions is part of the Morgan Stanley at Work suite of financial solutions, which spans Equity Compensation through Shareworks and E*TRADE Equity Edge Online, Retirement and Financial Wellness Solutions. Morgan Stanley at Work combines cutting-edge planning and risk management software, Morgan Stanley intellectual capital and financial education delivered through multiple channels, including Equity Edge Online, are part of the Morgan Stanley at Work solutions and are offered by E*TRADE Financial Corporate Services, Inc.

Jackson National completes ‘demerger’ from UK parent

Jackson National Life announced this week that it has completed its previously announced demerger from Prudential plc. Jackson is now an independent company, and its Class A common stock is expected to commence “regular way” trading under the ticker symbol “JXN” on the New York Stock Exchange on September 20, 2021.

Jackson, now headed by CEO Laura Prieskorn, is the top retailer of individual variable annuities in the US and its Perspective II is the top-selling variable annuity contract.

Prudential plc (unrelated to Prudential Financial in the US) shareholders voted to approve the demerger on August 27, 2021, and Jackson’s Class A common stock began “when-issued” trading on the New York Stock Exchange on September 1, 2021. Prudential shareholders of record as of the close of business on September 2, 2021, received a distribution of one share of Jackson’s Class A common stock for every 40 shares of Prudential ordinary stock held on the record date.

Concurrently with the completion of the demerger, the previously announced appointments to Jackson’s Board of Directors became effective.

Health Savings Accounts: Not Used as Directed

The Employee Benefit Research Institute released a study finding that between 2019 and 2020, Health Savings Account (HSA) balances modestly increased by $400. However, average annual individual contributions fell 2%. Average annual distributions declined to an all-time low of $1,700.

The study, “Trends in Health Savings Account Balances, Contributions, Distributions, and Investments and the Impact of COVID-19,” concluded that account owners are mainly using the accounts to cover current expenses instead of leveraging the tax preference by contributing the maximum or by maintaining HSA balances for retirement health care expenses. In addition, account holders’ use of investments other than cash within HSAs remains low, at 9%.

Lower HSA contributions could be tied to employment concerns related to the COVID-19 pandemic; distribution declines could owe to fewer people seeking routine medical care during the pandemic, EBRI said.

This Issue Brief is the fifth in a series of longitudinal studies from EBRI’s HSA Database, examining trends in account balances, individual and employer contributions, distributions, invested assets, and account-owner demographics from 2011‒2020. Such analysis can help plan sponsors, providers and policymakers better understand strategies that can help improve employee financial wellness. The HSA Database contains 11.4 million accounts with total assets of $32.9 billion as of Dec. 31, 2020.

“As individuals become more familiar with HSAs, they are using the accounts more as designed,” said Paul Fronstin, EBRI Director of Health Research and Education. “Account balances are growing over time, enabling longtime accountholders to withdraw larger sums when unexpected major health expenses occur. Plan sponsors that value employee financial wellness can work with administrators and advisors to better educate employees on the use of HSAs, including available investments.”

(c) 2021 RIJ Publishing LLC. All rights reserved.

 

A New Path to Inflation-Resistant Income

Achaean Financial and National Western Life Insurance are finally bringing to market Lorry Stensrud’s long-nurtured idea for an immediate income annuity with upside potential. RIJ recently obtained a copy of the state filing document from National Western. State approvals are pending.

The product’s working title has been simply Income Plus+ (IP+), but that could change when National Western brands it. Like a single premium immediate annuity (SPIA), it can provide retirees with monthly income for life. The client can surrender it, however; and it has a death benefit. Like an indexed annuity, it uses options on an equity index (the S&P MARC 5) to create income growth.

Chad Tope

“Customers give us money and we give them a guaranteed income stream immediately. We also take a small portion of their money and buy a three-year option on an equity index,” said Chad Tope, chief marketing officer at National Western Life and a veteran of annuity distribution at Voya.

“The performance of the option account will determine if their payments increase. If there’s growth at the end of three years, the income steps up by the change in the Consumer Price Index. But the payments can’t go down,” he told RIJ in an interview.

“We have the ability to change the mindset of how advisors think about longevity and mortality based offerings, and to give them an alternative to a 60/40 portfolio with bonds paying in the 2% to 2.5% range. A 20% portfolio allocation to IP+ can provide guaranteed lifetime income, take stress off the equity portfolio, and potentially reduce withdrawals from the equity portfolio,” Stensrud told RIJ in an email.

Lorry Stensrud

According to the hypothetical example on the filing document, a 65-year-old male who purchased IP+ with a $100,000 premium would receive at least $1,097 per quarter or $4,388 per year for life. Payments are designed to start low and rise with credits from the options on the index.

The S&P MARC 5 Index is a multi-asset index diversified into the S&P 500 Index (without dividends),  the S&P GSCI Gold Index and the S&P US 10-Year Treasury Note Futures Index. It seeks a volatility level of 5%. It overweights equities when volatility is low and overweights bonds when volatility is high. The index was created in March 2017.

Ross Moody

National Western Life is a stock company incorporated in Colorado with headquarters in Austin, Texas. It is closely held by the Moody family. Its president and CEO is Ross Moody. According to its latest 10-Q filing, it has about $14.5 billion in assets and $11.9 billion in liabilities. The company is rated A by AM Best and A- by Standard & Poor’s. According to publicly available sources, it was founded in 1956, and as of 2019 had about 275 employees and 25,200 contracted independent agents and operates in 49 US states.

The company reported $118 million in sales in the quarter ending June 30, 2021. Of that, about $114 million involved fixed indexed annuity contracts. Like other insurers, the company has used reinsurance to relieve capital pressures and in recent years has invested more in bonds rated BBB-,  according to the 10-Q. 

The IP+ annuity was successfully piloted last year by advisers using the JourneyGuide retirement planning program, which is part-owned by Tim Ash of Ash Brokerage.

Tope said that IP+ will mainly be distributed through advisers at banks and broker-dealers. “The product is intended for advisers who do retirement income planning,” he told RIJ. “It’s not meant for single sales. It’s got to be part of a planning process.”

Stensrud sees room for IP+ in the “1035 exchange” market. He thinks a lot of existing variable annuity owners and their advisers will see logic in exchanging their VAs for IP+, which he thinks will be seen as superior in cost and upside potential to a VA with a guaranteed lifetime withdrawal benefit (VA/GLWB). “This solves the suitability and ‘best interest’ issues associated with exchanges,” he said.

“The 79% of advisers who are primarily fee-based find our indexed product attractive since it has a higher starting payment than bonds, no market risk and the highest probability of increasing income,” Stensrud told RIJ. There will eventually be a no-commission version of the product for the fee-based market. “That being said,” he added, “this is a new product and faces the training and education requirements necessary to build a market. Luckily, for Achaean we can use JourneyGuide’s training and illustration tool.”

Stensrud was CEO of annuity operations at Lincoln National Life, called Lincoln Retirement, during the development of Lincoln’s i4Life rider, which was a guaranteed income benefit on a variable annuity. When Lincoln consolidated its life and annuity operations in 2003, Stensrud left to start his own company.

We wrote about Stensrud’s IP+ idea in 2010, in 2012, 2016, and in 2020, as he searched for a life/annuity company to underwrite the product. Early on, he positioned it as way for them to relieve the pressure on their balance sheets from capital-intensive VAs with GLWBs.

Why did it take so long for Achaean to find a life insurer to underwrite IP+? “At first, life companies didn’t want to hear our message because they were enamored with GMxB sales results and the associated ‘arms race,’” Stensrud said. “Then, when dangers of these products were revealed and capital requirements increased, most of the same companies moved to survival mode and were not interested in new ideas.”

© 2021 RIJ Publishing LLC. All rights reserved.

Tax hike looms for top earners

On Monday, Sept. 13, House Ways and Means Committee Chair Richard Neal (D-MA) introduced the final portion of the committee’s budget reconciliation recommendations. The latest section—Subtitle I, Responsibly Funding Our Priorities—contains tax increases on high-income individuals, corporate and international companies and funding to increase Internal Revenue Service enforcement, among other provisions. The major changes for individuals are described below. A section by section summary of Subtitle I can be found here.

Once the House Ways and Means Committee and the other House committees approve their respective budget recommendations, which House Democratic leaders have requested be completed by Sept. 15, the entire package will be compiled by the House Budget Committee and then sent to the House Rules Committee for the debate process for House floor consideration.

Increase in Top Marginal Individual Income Tax Rate.  The provision increases the top marginal individual income tax rate in section 1(j)(2) to 39.6%. This marginal rate applies to married individuals filing jointly with taxable income over $450,000, to heads of households with taxable income over $425,000, to unmarried individuals with taxable income over $400,000, to married individuals filing separate returns with taxable income over $225,000, and to estates and trusts with taxable income over $12,500. The amendments made by this section apply to taxable years beginning after December 31, 2021.

Increase in Capital Gains Rate for Certain High Income Individuals. The provision increases the capital gains rate in section 1(h)(1)(D) to 25%. The amendments made by this section apply to taxable years ending after the date of introduction of this Act. A transition rule provides that the preexisting statutory rate of 20% continues to apply to gains and losses for the portion of the taxable year prior to the date of introduction. Gains recognized later in the same taxable year that arise from transactions entered into before the date of introduction pursuant to a written binding contract are treated as occurring prior to the date of introduction.

Increase in Corporate Tax Rate. This provision replaces the flat corporate income tax with a graduated rate structure. The rate structure provides for a rate of 18 percent on the first $400,000 of income; 21 percent on income up to $5 million, and a rate of 26.5% on income thereafter. The benefit of the graduated rate phases out for corporations making more than $10,000,000.

Funding of the Internal Revenue Service. This provision appropriates $78,935,000,000 for necessary expenses for the IRS for strengthening tax enforcement activities and increasing voluntary compliance, and modernizing information technology to effectively support enforcement activities. $410,000,000 is appropriated for necessary expenses for the Treasury Inspector General for Tax Administration to provide oversight of the IRS.

Prohibition of IRA Investments Conditioned on Account Holder’s Status. The bill prohibits an IRA from holding any security if the issuer of the security requires the IRA owner to have certain minimum level of assets or income, or have completed a minimum level of education or obtained a specific license or credential.

Tax Treatment of Rollovers to Roth IRAs and Accounts. Under current law, contributions to Roth IRAs have income limitations. For example, the income range for single taxpayers for making contributions to Roth IRAs for 2021 is $125,000 to $140,000. Those single taxpayers with income above $140,000 generally are not permitted to make Roth IRA contributions.

However, in 2010, the similar income limitations for Roth IRA conversions were repealed, which allowed anyone to contribute to a Roth IRA through a conversion, irrespective of the still-in-force income limitations for Roth IRA contributions. As an example, if a person exceeds the income limitation for contributions to a Roth IRA, he or she can make a nondeductible contribution to a traditional IRA – and then shortly thereafter convert the nondeductible contribution from the traditional IRA to a Roth IRA.

In order to close these so-called “back-door” Roth IRA strategies, the bill eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031.

Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.

Increase in Minimum Required Distributions for High-Income Taxpayers with Large Retirement Account Balances.

If an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, a minimum distribution would be required for the following year. This minimum distribution is only required if the taxpayer’s taxable income is above the thresholds described in the section above (e.g., $450,000 for a joint return). The minimum distribution generally is 50 percent of the amount by which the individual’s prior year aggregate traditional IRA, Roth IRA and defined contribution account balance exceeds the $10 million limit.

In addition, to the extent that the combined balance amount in traditional IRAs, Roth IRAs and defined contribution plans exceeds $20 million, that excess is required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans. Once the individual distributes the amount of any excess required under this 100 percent distribution rule, then the individual is allowed to determine the accounts from which to distribute to satisfy the 50 percent distribution rule above.

This provision is effective tax years beginning after December 31, 2021.

Contribution Limit for Individual Retirement Plans of High-Income Taxpayers with Large Account Balances.

Under current law, taxpayers may make contributions to IRAs irrespective of how much they already have saved in such accounts. To avoid subsidizing retirement savings once account balances reach very high levels, the legislation creates new rules for taxpayers with very large IRA and defined contribution retirement account balances.

Specifically, the legislation prohibits further contributions to a Roth or traditional IRA for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year. The limit on contributions would only apply to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation).

The legislation also adds a new annual reporting requirement for employer defined contribution plans on aggregate account balances in excess of $2.5 million. The reporting would be to both the Internal Revenue Service and the plan participant whose balance is being reported.

The provisions of this section are effective tax years beginning after December 31, 2021.

Surcharge on High Income Individuals, Trusts, and Estates.

This provision adds section 1A, which imposes a tax equal to 3% of a taxpayer’s modified adjusted gross income in excess of $5,000,000 (or in excess of $2,500,000 for a married individual filing separately). For this purpose, modified adjusted gross income means adjusted gross income reduced by any deduction allowed for investment interest (as defined in section 163(d)). The amendments made by this section apply to taxable years beginning after December 31, 2021.

© 2021 RIJ Publishing LLC. All rights reserved.

Prudential Sells $31bn Annuity Block to Bermuda Reinsurer

Prudential Financial (NYSE: PRU) will sell part of its in-force legacy variable annuity block to Fortitude Re, Bermuda’s largest multiline reinsurer, for $1.5 billion, Prudential announced this week. This deal also releases about $700 million in surplus capital that Prudential can now use for other purposes. Prudential will continue to issue its FlexGuard series of indexed variable annuity contracts, a release said.

The deal will move about $31 billion in assets and liabilities to Fortitude Re, whose parent, Fortitude Group Holdings (FGH), was purchased from AIG in mid-2020 by global investment manager Carlyle Group and T&D Holdings, a Tokyo-based life insurance holding company with a 50-year partnership with AIG in Japan. Its T&D United Capital unit, an asset manager, owns 25% of FGH.

Fortitude Re is a key player in what RIJ has called the “Bermuda Triangle” strategy. This three-cornered structure involves a life insurer, a big asset manager, and a Bermuda-based reinsurer. It frees surplus capital for the insurer, increases the assets under management of the investment company, and exploits the difference in accounting regimes between Bermuda and the US. Sometimes affiliated firms or close strategic partners control all three facets of the strategy.

Deal specifics

Under the agreement, Prudential will sell one of its stand-alone legal entity subsidiaries, Prudential Annuities Life Assurance Corporation (PALAC), including PALAC’s in-force annuity contracts, to Fortitude Re, for an all-cash purchase price of $1.5 billion, subject to certain adjustments at closing, plus an unspecified capital release to Prudential and an expected tax benefit.

The PALAC block primarily consists of non-New York traditional variable annuities with guaranteed living benefits that were issued before 2011. These types of annuities were capital-intensive, in part because it’s difficult to predict how policyholders will use them. Those contracts represent about $31 billion or 17% of Prudential’s total in-force individual annuity account values as of June 30, 2021, or about $180 billion.

Regarding its ongoing individual annuity business, Prudential said in its release:

Prudential will retain its interest in all FlexGuard buffered annuity contracts and PALAC recently issued fixed and fixed indexed annuities through a reinsurance agreement with Fortitude Re and, subject to regulatory approvals, intends to offer those FlexGuard and other recent PALAC customers the option to replace the issuer of their contract with another Prudential subsidiary, with further details to be provided to applicable customers. Prudential will continue to sell new FlexGuard and other protected outcome solutions through additional existing subsidiaries.

“Prudential’s individual Annuities business in the US remains an important component of our business mix and organic growth strategy,” said Prudential Executive Vice President and Head of US Businesses Andy Sullivan. “Going forward, we will be better positioned to deliver new investment strategies like FlexGuard, which continues to achieve record success, and focus on creating the next generation of protected income solutions.”

The ratings agency AM Best reported on the trade yesterday. “The roughly USD 30 billion of variable annuities acquired in the deal will be funded via excess capital and modest debt issuances at FGH.” The execution risk associated with the deal will be mitigated partly by “the Fortitude Re management team’s extensive expertise in the variable annuity sector, and by the higher certainty around future cash flow patterns resulting from acquiring the business via a secondary market,” AM Best said. 

While “Fortitude Re is not participating directly in the acquisition, the change in FGH’s capitalization could have an impact, as its financial flexibility could become limited if initial assumptions around the acquisition materially change. The transaction is not anticipated to impact the organizations balance sheet strength metrics materially following its anticipated close in first-half 2022,” the ratings agency said in a release.

Upon closing, Prudential anticipates a reduction to pre-tax annual adjusted operating income of approximately $290 million, based on an estimate of lost revenue on the transferred $31 billion. Proceeds from the transaction are expected to be used for general corporate purposes. The transaction is subject to regulatory approval and other customary closing conditions. It is expected to close during the first half of 2022.

Fortitude Re “designs bespoke transactional solutions for legacy Life & Annuity and P&C lines. Fortitude Re is an independent company backed by a consortium of sophisticated groups led by The Carlyle Group and T&D Insurance Group. Fortitude Re holds approximately $45 billion in invested assets as of June 30, 2021,” the release said.

Debevoise & Plimpton LLP served as legal counsel to Fortitude Re. Sidley Austin LLP served as legal counsel to Prudential, and Goldman Sachs & Co. LLC served as exclusive financial advisor.

© 2021 RIJ Publishing LLC. All rights reserved.

Progress for retirement provision in ‘Build Back Better’ bill   

The House Ways and Means Committee has approved the retirement subtitle of the Build Back Better Act, legislation supported by the American Retirement Association as a way to help close the coverage gap and boost the existing retirement savings system, according to a report from the National Association of Plan Advisors. 

The retirement subtitle, which is estimated to cost nearly $47 billion over 10 years, was approved by the Committee Sept. 9 on a near party-line vote of 22-20. Reps. Stephanie Murphy (D-FL) and Ron Kind (D-WI) voted against the retirement legislation. It will now be sent to the House Budget Committee to be packaged with a larger set of other proposals as part of the budget reconciliation bill—the cost of which could reach $3.5 trillion—before moving to the full House of Representatives for consideration. 

To read the original story, click here:

For more details on the Subtitle B retirement provisions, click here. The legislative text for the retirement provisions (Subtitle B) is available here, and a Joint Tax Committee description of the legislation is here. 

(c) 2021 RIJ Publishing LLC.

The Bermuda Triangle was Busy this Summer

Followers of what RIJ calls the “Bermuda Triangle” trend may have spotted a couple of large deals in that space this past summer—during that deceptively peaceful lull between mass vaccinations and the Delta surge.

On August 9, the recently created Bermuda-domiciled reinsurance arm of $600 billion asset manager Brookfield Asset Management bought Texas-based American National Group, a closely held publicly traded life insurance company group, for $5.1 billion. American National Life had $28.6 billion in assets at the end of 2019.

On July 13, Global Atlantic Financial Group, a US-focused annuity, life insurance and reinsurance company majority-owned by KKR, the $342 billion global asset manager, reported a new USD $4.8 billion reinsurance transaction.

In the deal, Global Atlantic’s Bermuda-based subsidiary Global Atlantic Assurance Limited will reinsure blocks of life insurance policies issued by subsidiaries of French insurer AXA: AXA China Region Insurance Company Ltd and AXA China Region Insurance Company (Bermuda) Ltd. It was Global Atlantic’s first block reinsurance transaction sourced outside the United States, according to a release.

RIJ uses the term Bermuda Triangle to refer to the trend, not entirely new but accelerating as we speak, that involves complex three-way arrangements between a US life/annuity company, a Bermuda-based reinsurance company, and a large asset manager like KKR, Apollo, Blackstone, Carlyle, Ares, or Brookfield.   

These wealthy firms are buying insurers or reinsuring blocks of business because it gives them several opportunities to make money. They can earn fees managing the assets (insurance and annuity premiums), they can take advantage of Bermuda’s GAAP accounting regime to economize on capital and invest in riskier, higher-yielding assets, or they can borrow against a life insurer’s assets to finance new deals, bringing in more institutional investors. Since annuity premiums doesn’t move for years at a time, they can earn an “illiquidity premium” from investing in long-dated assets, either for sale to life insurers or other investors.

This is heralded on Wall Street as a win-win-win. Private equity firms are said to know how to get more yield from the insurance assets, thus putting the liabilities (promises to policyholders or contract owners) on a firmer financial footing.

When they own life insurers, the PE firms are said to pass higher yields on to annuity owners by offering them higher crediting rates on fixed deferred or fixed indexed annuities. Since they are using these assets to make higher profits, they’re also helping their own shareholders. Bermuda, by the way, welcomes all this commerce.

So why aren’t I ready to celebrate the Bermuda Triangle? Because some of these deals, unlike the Bermuda weather, often lack for sunshine. Financial activity in Bermuda isn’t as transparent as it is in the US, and the synergies enjoyed by affiliated dealmakers there might be viewed as conflicts-of-interest if they were within view of US regulators. More generally, the life insurance business is looking more like the investment business, and I’m not convinced that’s a good thing.

© RIJ Publishing LLC. All rights reserved.

Bermuda’s Role in a Changing Annuity Industry

Bermuda’s pink sand beaches and reliably blue skies are lovely, but the tiny archipelago in the Atlantic has an added appeal. Its financial regulatory climate makes it a perfect domicile for the reinsurance operations of life insurers and, to an increasing degree, private equity companies.

Visitors from those companies are keeping Bermuda-based actuaries busy. An actuary at a global insurance broker and consulting firm, has seen a “doubling or tripling of business,” he told RIJ this week. He asked not to be identified by name and that his company not be identified because he wasn’t cleared to speak to the media.

“Reinsurance assets under management in Bermuda have grown from $300 billion to $700 billion in the past three years,” he said. “All the big insurance companies are here, and all the private equity companies are eyeing Bermuda. They want to take advantage of the economic nature of the Bermuda reserving requirement.”

Reinsurers are simply insurers for insurers—sharing the risks and rewards of the insurance business without the responsibilities and expenses of marketing, distributing and administering annuity contracts or life insurance policies.   

An acceleration in the purchase of Bermuda-based reinsurance is the latest in a decade of maneuvers by life/annuity companies in the US to deal with low yields on high-quality bonds. The Fed’s low-rate policy since 2009, so nourishing for equities, reduces the investment yield they need to write guarantees and earn profits for shareholders. 

If low rates are a kind of desert, Bermuda represents a palm-fringed oasis. Its financial regulators use Generally Accepted Accounting Principles (GAAP). Under GAAP, estimates of annuity liabilities—what insurers owe to policyholders or contract owners—can be lower than under Statutory Accounting Principles (SAP), which insurers must follow when preparing financial statements for regulators in the US.

Bermuda, 650m E of Cape Hatteras

By purchasing reinsurance in Bermuda on their weaker US liabilities, US insurers can capture the benefits of this difference and improve their finances. They can set up their reinsurance arms in Bermuda and buy it from themselves.

In recent years, big private equity firms have stepped in. Insurers have always hired them to help manage their investments. But, increasingly, the big PE firms (also known as buyout firms or alternative asset managers) have established their own Bermuda-based reinsurers, have bought or reinsured blocks of life insurance or annuity business from US life insurers, and have even purchased US life/annuity companies through their Bermuda reinsurers. This allows them to issue insurance products, reinsure them, and manage the premiums—beyond the view, to some extent, of US regulators.

At RIJ, we’ve dubbed this powerful, vertically integrated arrangement the “Bermuda Triangle.” The steady pursuit of this strategy over the past decade is transforming the annuity industry, with implications for insurers, advisers and clients. On the plus side, the buyout firms have infused the life/annuity business with innovation and capital that it arguably needed. But in bending the annuity industry to their own purposes, are these firms bending it too far? The search for answers starts in Bermuda. 

The world’s offshore reinsurance capital

Regulators and business development groups in Bermuda, a British territory located 650 miles east of Cape Hatteras, NC, have aimed at creating a Goldilocks financial regulatory framework—not too accommodating or too strict. It has a rare distinction: recognition by the European Commission as compatible with Europe’s “Solvency II” requirements for insurers and reinsurers. That recognition happened at the end of 2015, and it has helped build Bermuda into a major hub for reinsurance.

Bermuda tries to make reinsurance easy. The big accounting and insurance brokerage firms are there to help advise insurers who are new to reinsurance. It’s also a place where a reinsurer can report the investments backing its liabilities in “five or six pages” instead of the thousand-plus pages that a state regulator in the US might require, according to Tom Gober, a forensic accountant who studies and evaluates the assets backing insurance policies and contracts.

Bermuda-domiciled reinsurers accounted for about $30 billion of the $76 billion in US insurance premium that were reinsured by (“ceded to”) offshore reinsurers in 2019, the Reinsurance Association of America reported. (See chart below.)

“In recent months, the life and annuity market has experienced an unprecedented level of mergers and acquisitions (M&A) activity, as COVID-19 has accelerated an industry restructuring brought on by prolonged low interest rates and the emergence of private equity investor interest,” wrote a PricewaterhouseCoopers accountant in Bermuda Reinsurance magazine last June.

“Registrations over the past year have included private equity investors setting up their own reinsurers, existing players setting up sidecars to bring in third party capital and investment bank-backed transformation vehicles. This increase in activity is an acceleration of the trend in growth seen over the past decade.”

‘Regulatory arbitrage’

When a Bermuda-based reinsurer buys a US life insurer or reinsures a chunk of a US life insurer’s liabilities (or reserves), the reinsurer assumes the liabilities (money that will someday be returned to policyholders) of the US insurer, accompanied by sufficient assets (premium paid in by the policyholder) to back them up.

GAAP accounting, which Bermuda reinsurers use, allows them to estimate or assess those liabilities at a lower price than the US life insurer could using SAP accounting. Fewer assets are required to back up the same set of liabilities in Bermuda.

“Say that a person puts $100,000 into a fixed annuity,” a Bermuda-based actuary told RIJ. “The liability for the US issuer under SAP might be $98,000. For the Bermuda reinsurer it might be only $85,000. In the US, you have to reserve for the worst possible economic scenario. But there may be no actual scenario where you would have to pay the full amount.”

By moving a risk off the insurer’s balance sheet, reinsurance reduces the requirement for the “risk-based capital” that the insurer needs to hold. This capital is “released” for other purposes. The difference in the cost of the liabilities—$13,000 in the example above—doesn’t necessarily mean that the support for the liability is weaker, he noted.

Here’s how the Insurance Information Institute’s website describes the difference in accounting regimes: “SAP accounting is more conservative than generally accepted accounting principles (GAAP), as defined by the Financial Accounting Standards Board, and is designed to ensure that insurers have sufficient capital and surplus to cover all anticipated insurance-related obligations.

“The two systems differ principally in matters of timing of expenses, tax accounting, the treatment of capital gains and accounting for surplus. Simply put, SAP recognizes liabilities earlier or at a higher value and recognizes assets later or at a lower value. GAAP accounting focuses on a business as a going concern, while SAP accounting treats insurers as if they were about to be liquidated.”

But most of the reinsurance deals in the Bermuda Triangle strategy are not plain-vanilla reinsurance, or even plain-vanilla offshore reinsurance. Today’s deals are more likely to involve “modified co-insurance” or “co-insurance with funds withheld.” These are highly complex, less transparent deals between a life/annuity company and its own captive or affiliated Bermuda-based reinsurer, or even between Bermuda-based reinsurer and a life/annuity company that it owns. These involve complex paper transactions that can produce accounting windfalls. Though too complex to address here, we’ll explore the financial benefits of these deals in the future installments of the series.

‘Convergence of demand’

These co-insurance deals are widely characterized as win-wins for private equity firms and for life/annuity companies. “There’s a convergence of demand from private equity firms on the buy-side and from annuity sellers on the sell-side to do something about in-force books that are producing less than ideal returns,” Tim Zawacki, an analyst at S&P Global Market Intelligence told RIJ recently.

“These transactions give the cedant [the life insurer reinsuring in-force blocks of annuities, for instance] access to a much wider array of higher-yielding assets that they can produce internally,” he said. “The asset manager can create investments for these portfolios that may drive higher yields than the insurance companies could achieve on their own,” such as private debt or securitized mortgages.

“This partnership between insurer or reinsurer and PE firm is beneficial for both parties,” wrote Phill Namara at Montaka, an advisory firm in Surry Hills, Australia, in a recent blogpost. “The private equity firms receive long-term capital with little redemption risk that they can invest and earn recurring management fees and performance fees, granted they abide by state insurance laws…

“On the other hand, the insurers or reinsurers benefit from being able to shed legacy liabilities from their balance sheet and [get] higher mixed investment returns from their increased exposure to the PE asset class. Further, they also benefit from presumably lower investment manager fees, given their capital is now managed within the same entity.”

Coming attractions

Tom Gober

Not everyone is so sanguine about these trends. In the fully articulated version of the Bermuda Triangle strategy, two or even all three pieces of the puzzle—the asset manager, the reinsurer and the life insurer—are controlled by the same company. Some, like the forensic accountant Tom Gober, are concerned that the offshore deals might be opaque, and lack the checks and balances that exist when unaffiliated counterparts are involved.

“While I have seen many different varieties of mechanisms used in affiliated, offshore reinsurance deals, all of those variations resulted in the same outcome: they create an appearance of new, extra surplus that would certainly not be allowed in the regulated insurance company – the ceding company,” Gober told RIJ.

Since the financial crisis, many life insurers, in response to the Fed’s monetary policy, have reached for yield by investing in alternative assets that some regard as riskier, including asset-backed securities such as collateralized loan obligations. The National Association of Insurance Commissioners (NAIC) recently reported that private equity-affiliated life insurers,  on average, hold higher concentrations of such assets than does the life/annuity industry overall. That makes some observers worry about the potential for higher risk in the system, and the chance for future insolvencies.

There are also potential questions about fixed indexed annuities (FIAs), the product that private equity-owned life/annuity companies like to produce because the money stays in place for up to 10 years at a time. The PE firms call it, “permanent capital.” The lengthy terms give the asset managers time to invest in potentially high-yielding “illiquid assets,” like collateralized loan obligations.

But FIAs are controversial. The federal government twice tried (in 2007 and 2016) and failed to regulate them more closely, out of concern for their complexity and for a history of unsuitable sales by independent insurance agents. Misgivings about FIAs remain, especially among registered investment advisors (RIAs) and financial planners.

All of these developments are reshaping the annuity industry in ways that few distributors or advisers, let alone clients, are likely to appreciate. We’ll address them in future installments of the Bermuda Triangle series.

© 2021 RIJ Publishing LLC. All rights reserved.

Northwestern Mutual Life rolls out PX (Planning Experience) Adviser Interface

Editor’s note: Northwestern Mutual provided RIJ with two screenshots from PX (see below) and this additional information:

“[Our] proprietary financial planning tool, PX, is available to the company’s entire field force of 11,000+ financial professionals, who provide insurance, retirement planning, investment services, estate planning and long-term care, among other products and services. 

“We believe in taking a holistic approach to help our clients achieve greater financial security – one that integrates both insurance and investments, and leverages the trusted advice of a Northwestern Mutual financial professional. Our proprietary financial planning tool and products are only available through a Northwestern Mutual advisor.”

When Northwestern Mutual was contemplating the rollout of a new proprietary financial-planning tool called PX, it needed to navigate a number of factors, including a geographically dispersed network of advisors in the field who act as independent entrepreneurs to serve clients with holistic financial plans.

These advisors often develop distinct practice models depending on the needs of their clients—meaning any approach must be multifaceted and reflect the needs of the field force of financial representatives. The company also faced residual skepticism from earlier versions of the tool that did not meet advisor expectations.

When the COVID-19 pandemic emerged just as the PX rollout was set to begin in earnest, it threatened to disrupt the carefully planned and layered deployment effort. Change management and careful stakeholder engagement became essential.

Chief distribution officer Tim Gerend and chief customer officer Christian Mitchell partnered to lead the PX rollout and were able to chart a path to success in spite of these imposing odds. They sat down with McKinsey partners William Decherd and Kia Javanmardian to discuss their collaboration and how they embedded change through persistence, focus, and a clear mission.

McKinsey: Let’s start by talking a bit about the PX tool. What was riding on its rollout?

Christian Mitchell: We’re in the midst of a transformation of the overall client experience to ensure the relevance and vibrancy of Northwestern Mutual for many, many decades to come. PX is not just a financial-planning tool but also the cornerstone technology to this broader push into our future experience. That makes its adoption by our advisors critical on multiple fronts.

Tim Gerend: We have a proprietary and differentiated way of going to market, and we want that philosophy reflected in PX. We believe in the role of the advisor in delivering a great client experience. If our advisors aren’t using PX, our clients aren’t getting the full experience.

McKinsey: Every change-management effort presents its own challenges. What were the main ones you had to confront?

Tim Gerend: There were challenges for both design and adoption of PX. Building a proprietary planning tool is a really complicated thing to do. That’s compounded by the fact that we have a huge range of client diversity across our system. We have advisors who are running teams focused mostly on complex planning for high-net-worth clients. We also have advisors who are brand-new to the industry. Our platform needs to work for everyone.

Tim Gerend

The second, more practical challenge is on the adoption side, where we had a user base that was very loyal to their existing planning tool. Our advisors trusted this tool and knew how to use it to motivate their clients to plan and take action. For advisors who are paid based on outcomes, time is literally money; convincing them to do something different obviously poses a real challenge.

Christian Mitchell: When PX was initially created several years ago, it fell short. The early version was not tailored to our unique approach to planning. It didn’t fully showcase how a mix of insurance and investment solutions leads to better outcomes for clients. It also wasn’t built with feedback from the advisors who would be using it. When we were planning for the rollout of the improved PX tool, we knew we would have to address a tremendous amount of skepticism among the field.

Another challenge was that even for folks who had embraced financial planning, this was not a one-for-one swap. The legacy tool was very module-based and transactional. PX is a true, comprehensive financial-planning platform. So we have to get advisors to embrace a broader, deeper element of financial planning in addition to the new platform.

McKinsey: How did you go about crafting a plan to persuade financial advisors to embrace PX?

Tim Gerend: I’ve always enjoyed the challenge of building alignment between the headquarters team, our advisors, and clients. With our business model that is vertically integrated, you’re always solving for multiple constituencies.

Many independent advisors are in this career because they didn’t want someone telling them what to do. That characteristic can be maddening when you’re trying to drive programmatic change, but that’s also what makes advisors resilient and courageous enough to be really great in this business. They are independent business owners who are living and eating based on the success of their business. Those qualities make them the greatest test kitchen you could ever have because if something works, they’re going to use it. And if it doesn’t work, you can’t convince them otherwise. That dynamic ensures we’re delivering something that truly adds value to clients.

Christian Mitchell: Understanding and embracing that independent culture was our true opportunity. Instead of crafting a plan on our own, we developed a strategy to co-create the platform with some of our best advisors. They helped identify and prioritize the functionality and became advocates for the tool. When the field sees our top advisors use something as groundbreaking as PX, there is a natural tendency to want to check it out for themselves. We also have a targeted engagement strategy that started with new advisors with less complex needs, and as the platform evolves and becomes more robust, it makes sense for more senior advisors with sophisticated needs to use it. But getting adoption wins on the board early paved the way for the work that continues today.

Tim Gerend: For those reasons, I find it is much more effective to use an influence model. If you can work in such a way that the field recognizes it’s in their business interest and their clients’ interests to do it this way, you are going to get much more traction in the long run. What I always try to resist is the short term, “We want this outcome. How do we get there? What are the carrots and sticks?” I think it’s worth investing the energy to play the long game, to say, “How are we really solving this problem in a way that meets the needs of clients and the field?” And then, “How would you bring advisors into the process so that they can see it and believe it?”

McKinsey: What methods did you use to build consensus and instill a sense of accountability among your teams?

Tim Gerend: Ultimately, it comes down to working as a team that shares common outcomes rather than independent leaders spending time negotiating “turf.” One of the key developments was that Christian came to me and said, “Tim, I think strategy and execution for adoption of PX should sit on your team.” Christian’s team owned the development of PX, but it was essential for my team to lead adoption—with a lot of partnership across all areas of the enterprise. On one level, it felt like he was lateraling the hot potato to me. But he was exactly right. There was no way we were going to deliver this sort of pathway of adoption to the field without my organization being bought in 100 percent, because we have the on-the-ground relationships and the accountability and oversight of our field leaders, who drive a lot of behavior. Without being able to really leverage that muscle in an effective way, we weren’t going to get anywhere.

So this notion that it was not one leader’s priority but a shared-enterprise responsibility and part of improving advisor performance accelerated the adoption of PX. If our teams weren’t in lockstep from design to implementation, I don’t think this thing would have gotten off the ground.

McKinsey: What are some of the specific challenges you’ve faced with the rollout?

Tim Gerend: The rollout of PX has been a test with real clients: real money, real decisions, real consequences. The level of connection and influence there is really important. The effective integration of the teams meant my organization and Christian’s both accepted responsibility for design and implementation, even though we each don’t own the whole thing. It was a recognition of that shared accountability.

There are a lot of different constituents who are affected by the PX rollout, so it’s not just the advisors. It’s the staff members on their teams who also use the tool. It’s the field leaders who are responsible for overseeing and supervising the advisors. It’s the ecosystem of the network offices, which play a role in how we support and deliver financial security to our clients.

Early on, we were very intentional in selecting the pilot offices, because we were really testing the training, the meeting cadence, the communication, the reinforcement, the incentive structure—all the components of a successful adoption. Once we had that locked in for those four offices, we were able to move through on-boarding successive waves of offices, incrementally making it better each time because we were learning from the groups of offices.

Christian Mitchell

Christian Mitchell: It’s important to note that while we have achieved some significant milestones in our PX rollout, our work isn’t finished. We like to say it is the end of the beginning. We know it will take some time for advisors to truly embrace PX, just like it did for them to embrace the previous planning tool. We also know we will continue to evolve the platform to be more unique and more usable for our clients and advisors as we evolve it with capabilities that go beyond what’s being done out there in the industry today.

McKinsey: How were you forced to pivot in response to the onset of the pandemic?

Christian Mitchell: Initially, I was really worried about the implications of the pandemic, because our advisors are relationship-driven, and in-person interaction has historically been our model. Our change-management approach seeks to use personal influence and relationships with well-known advisors. When the pandemic hit, we made the decision, despite some anxiousness, that we were just going to move full steam ahead. This was our window of opportunity, given where PX was in terms of functionality and our aspirations for what we wanted to accomplish in the coming years.

So we pivoted from the in-person change-management learning sessions to an all-virtual approach. It ended up giving us much greater reach. Tim and I could hop on these kickoff calls with basically every advisor in the office. Even if we had been super-aggressive in terms of travel, we may have been able to get to only five or six offices. Instead, we were able to talk to all of them in a virtual way.

The virtual environment and doing a lot of calls in rapid succession led to iterative learning. When you’re doing much quicker cycles, I think you become much more attuned to what works and what doesn’t, so we could accelerate our learning and adjust our approach.

The virtual environment also encouraged more real-time discussion and afforded teams the opportunity to evaluate PX based on its merits, rather than the rumor mill, which helped tremendously.

Last, and likely most important, PX is a digitally native platform. You can easily show the outputs. It’s a piece of financial-planning software that is suited to working in a 100 percent virtual way. And so that was a massive tailwind as well.

McKinsey: What approaches did you use to overcome existing skepticism among financial advisors?

Tim Gerend: Number one, it’s always difficult to get the attention of the advisors. They are focused on their business, their next client, their next meeting. The practices look very different across the country, and so it’s a constant challenge for those of us at headquarters to say, “How are we shaping the message in a way that’s actually going get on their radar screen, resonate, and land?” The other challenge we had was unique to PX. This wasn’t our first go-round.

Our approach was really to reinforce the value of this change at multiple levels. Number one is obviously John Schlifske, our CEO, with Christian and I being responsible for carrying and reinforcing his strategic messaging. We wanted people to know that we are building a great client experience. PX is the centerpiece of that experience. It’s going to be integrated and seamless and proprietary to Northwestern Mutual and deliver things that you can’t get anywhere else. Having the voice of the CEO was necessary but not sufficient because you still had to have a way of getting people engaged with it. So we supported this with a robust strategic-communications approach that focused on driving measurable engagement across all stakeholder groups.

Second, we had to get advisors to experience the tool and realize PX really can do what they need it to. We were making real progress, in large part because of the partnership and co-creation. If people didn’t experience it for themselves, they would live on the urban legend and skepticism from the very first iteration of the tool.

We also had something called the icon strategy, which focused on engaging our field legends and heroes and role models. We wanted to make sure that some of our most recognizable advisors earnestly believed that this tool was the right approach—and then we amplified their support to demonstrate the alignment with these icons. If it’s good enough for them, then we’ll get the attention of the rest of the field who might be skeptical.

Last, we’ve really been leveraging the advisors who have been part of the co-creation process. Not only have they helped us design and build the platform, but now they are really the ambassadors for PX and the system. How we’re thinking about the next leg of the strategy and rollout really relies on them and their personal testimony about what PX can do for clients.

McKinsey: What metrics did you select to gauge the rollout’s success?

Christian Mitchell: We could have spent two months trying to construct the perfect set of goals that captured all the intricacies of adoption. Instead, we decided to pick a simple metric—the number of advisors who had adopted PX—that was directionally right. Making that call early and giving the teams clarity allowed them to unleash their full creativity and effort.

Tim Gerend: A simple metric was the most effective alignment tool that we could use between our teams because we had a shared definition of success. It also provided us with a weekly mechanism to know whether we were on track. And there was a lot of deep, critical analysis in weekly updates: How do we feel about it? Why are we up? Why are we down? It also drove a lot of the discussion about how we were adjusting the plan as we moved through the year.

Christian Mitchell: We basically have 100 percent adoption for the newer advisors. We have this new generation of digitally savvy advisors who are going to drive so much value for us going forward.

Now that we have progressed on this journey, market share is something we also carefully monitor. A year ago, only 30% of plans were PX plans. Today, more than half of plans are made using PX.

For our more incumbent advisors, we have a tool now that encapsulates our unique go-to-market strategy. It allows them to tell the story they want to tell. We just actually met with a group of our most productive, influential advisors, and the high point of the whole discussion was PX and how far it had come since its earlier iteration. Now they see it bringing to life this power of our unique insurance and investment solutions.

Our managing partners talk about PX as a recruiting tool because it’s so modern and sophisticated. They’re using it in their recruiting pitch for all their new folks. That was really gratifying to hear and gets back to the main strategic push behind PX—our clients. They are getting better, more comprehensive advice. It’s more digestible. They can see their goals online. They can track their progress against goals. We see great early results from that. We’re also seeing some really interesting early indications of greater advisor productivity.

McKinsey: Thinking back on your journey over the past 18 months, what were the main lessons you took away?

Tim Gerend: Number one, clearly for me far and away, is the importance of shared goals and team alignment. You have to have a clear and common definition of success because we were asking for so many different things from so many different parts of the organization. If you have people playing a different game, I don’t think that’s going to work.

Second, the architecture or the infrastructure that we set up around this effort was enabled by the speed of communication. We were looking at the metrics every week and evaluating the success of the communication plan, of the learning journeys, of the rack and stack of the PX features on the backlog. I just think the cadence that we were able to keep up was really critical.

Christian Mitchell: What was really different was bringing in the right partners early on for that shared accountability—basically forcing everyone to look each other in their eyes and say, “Hey, we’re going to either win and glory awaits, or we’re going to go down in flames. But we’re going to do it as a team.” So the biggest unlock was to make sure we had shared objectives and goals across the various teams. We needed to be in the trenches on this together. Achieving that shared purpose was critical.

© 2021 McKinsey & Co. Reprinted with permission.

Honorable Mention

Jackson National enhances retirement income gap calculator

Jackson National Life Insurance Company said it has enhanced its proprietary retirement expense calculator tool, designed to help financial professionals effectively project their clients’ retirement expenses based on the federal government’s Consumer Expenditures Survey data.

The updated tool, now named the “Retirement Expense & Income Calculator,” features an income gap analysis and a Proposed Gap Solution illustration powered by the Hedgeness Income Engine.

The tool allows financial professionals to enter data points, including current income, retirement age and retirement state, and generate a custom client report that is personalized to their client’s needs. Enhancements include a new income gap analysis that now enables financial professionals to help their clients determine which expenses are essential for retirement and calculate the gap between those expenses and guaranteed income sources to provide the dollar amount needed to cover the income gap.

If there is an identified gap, the new proposed gap solution then illustrates an amount that could be invested in a variable annuity with an optional income benefit to cover the income gap identified. One enhancement to the new tool is the proposed gap solution, which is powered by the Hedgeness Income Engine, the first cloud-based platform exclusively focused on retirement income outcomes.

Financial professionals who would like to learn more information about the planning calculators and tools Jackson offers can visit https://www.jackson.com/your-financial-future/calculators-and-tools.html.

Ubiquity introduces 401(k) for ‘solopreneurs’

Small business retirement plan pioneer Ubiquity has introduced Single(k) Plus, a full-service solo 401(k) plan with recordkeeping capabilities tailored to “solopreneurs,” freelancers and the self-employed.

With Ubiquity acting as the third-party administrator and recordkeeper, this streamlined individual 401(k) gives solopreneurs the power to easily select investments, make contributions, and track assets within the plan.

Single(k) Plus includes professional 3(38) investment oversight with Ubiquity’s CensiblyYours fund list and model portfolios. Additionally, the new product offers full customer service support and loan provision capabilities along with all the benefits of a traditional retirement savings vehicle.

Released ahead of the Sept. 15 self-employed quarterly estimated tax deadline, Single(k) Plus also gives solo business owners the ability to deduct contributions, along with any plan costs, as a business expense.

The announcement follows Ubiquity’s selection to serve as 3(16) plan fiduciary, recordkeeper, and third-party administrator for Sallus Retirement’s new Pooled Employer Plan (PEP) as well as the addition of turnkey ESG fund options to Ubiquity’s 401(k) offerings.

Income Lab adds $1.7 million in seed financing

Income Laboratory, Inc., a provider of dynamic retirement planning software to the investment industry, has raised $1.7 million from industry executives and investors in a seed financing round the Denver-based startup announced this week. The firm has had $3 million in funding to date.

Investors include Dave Agostine, a former managing director for BlackRock and former CEO of Cachematrix; Tom Florence, a managing director at Hamilton Lane and former CEO of 361 Capital; and Robert Pinkerton, CFO at Conga and an Income Lab board member.

Income Lab introduced a beta version of its cloud-based software in early 2020 for the financial advisory and planning market. Now fully launched, the software incorporates economic and market conditions, dynamic spending analysis, tax-smart distribution planning, and automated plan monitoring and management. Income Lab charges advisors approximately $159 a month per seat.

Earlier this year the firm added a Tax Center, providing advisors with enhanced tools to evaluate the tax consequences of various portfolio withdrawal strategies, including planned cash flows from multiple sources.

Income Lab automates retirement plan monitoring by checking plans monthly to see whether circumstances have changed sufficiently to warrant any modifications. Income Lab then notifies the advisor who can discuss possible adjustments with clients.

Rather than solely using current static software that runs traditional Monte Carlo scenarios, advisors can enhance their practices by adding Income Lab’s technology to adjust dynamically for evolving economic and market conditions, tax regime changes, and shifts in spending.

Agostine and Florence serve on Income Lab’s advisory board, in addition to Derek Tharp, a financial planner at Conscious Capital, lead researcher for financial blog Kitces.com, and assistant professor of finance at the University of Southern Maine.  

Income Lab Chief Innovation Officer Justin Fitzpatrick, Ph.D., CFA, CFP, and CEO Johnny Poulsen, CFP, co-founded Income Lab in 2018 after careers in financial services sales, distribution and management at Jackson National. The firm will use the latest funding to continue to develop and market software.

“We started Income Lab because we saw a massive gulf between the best ideas in retirement income planning research and what an advisor could actually deliver to clients,” Fitzpatrick said in the release. “Income Lab sits at the intersection of practice, research, and technology and is the first truly dynamic retirement income planning platform.”

“We built Income Lab as a ‘bring your own investments’ platform,” Poulsen said. “Our sweet spot is small- and mid-size registered investment advisors that focus on financial planning and have well-defined approaches to investing but are open to new ideas and research in their planning process.”

Women now represent just over half (50.8%) of the US population, according to the US Census Bureau. They graduate from college at higher rates than men and have reached the highest rungs on the corporate ladder. They also tend to outlive their husbands?

In short, women represent a market that male financial advisers can’t afford to underestimate or overlook as easily as—despite 50 years of feminist milestones—they still do.

Many women prefer goal-based investing: Cerulli and Schwab

A new white paper from Cerulli and Schwab Asset Management tries to help advisers correct this market failure by offering “actionable insights for advisors seeking to enhance their client experience for women investors across three stages: client acquisition, engagement and communication, and planning and portfolio construction.”

Segmentation

First, to capture women investors’ business, advisors must start by identifying a segment of the market that best aligns with their services, processes, and personal passions. Women within a specific demographic are more likely to share interests, needs, and preferences. After identifying a segment based on common attributes (i.e., profession, passions, life stage, etc.), advisors can develop a tailored approach and resources that speak directly to the needs of women investors.

“Ultimately, a clear segmentation strategy translates to clarity and intentionality in all other aspects—from authentic business development to targeted service delivery,” said Marina Shtyrkov, associate director at Cerulli.

Engagement and communication

The next stage of the client experience involves client engagement and communication. According to the research, one in five women investors consider the relationship with their advisor and the adviser’s trustworthiness to be the driving force behind overall satisfaction.

“To build trust with women investors, advisors need to foster a sense of collaboration, apply active listening skills, and engage both spouses equally,” added Shtyrkov. “This includes nonverbal communication, use of inclusive language, and proactive outreach.”

Goals-based process

In qualitative research interviews with advisors, Cerulli observed that women investors are more inclined than men to engage in a holistic, goals-based process that prioritizes financial planning over investment performance. For women, money isn’t an end in itself but a means to an end. Their portfolios need to align with their values and objectives.

FIG to offer ‘Quinci’ education, planning and distribution platform 

Financial Independence Group, LLC (FIG), a financial services conglomerate working with independent financial advisors and insurers, is launching “Quinci,” a digital platform powered by SIMON, the online distributor of structured investments and insurance products.

FIG specializes in annuities, long-term care, and life insurance products. Quinci will product advisers with education, analytics, seamless execution, and business management through a partnership with SIMON Markets’ web platform for wealth management professionals. 

Quinci is divided into five sections:

Education: Provides tools to teach advisers about fixed indexed annuities, structured investments, including resource libraries with videos that can be shared with clients.

Financial planning: Using built-in financial planning tools and tools from some of the largest platforms in the industry, advisors can identify the ideal profile for their client.

Marketplace: Advisors can view, filter and analyze products all in one place, assess historical and hypothetical performance under different scenarios, and utilize advanced tools to evaluate products for specific clients.

E-application: Provides fully embedded, seamless execution of the products that are best-suited for clients.  With built-in product training checks and the ability to pre-fill key parts of the application, advisors can submit business with confidence.

Lifecycle: Advisors can manage their entire book of business from initial submission to maturity with real-time status updates and two-way digital communications. After receiving account values, surrender information, and renewal rates directly from the carrier, they can use the Efficient Frontier to re-analyze their clients’ allocations on a yearly basis.

RGA completes EUR3.3bn pension risk transfer deal

Reinsurance Group of America, Incorporated (NYSE: RGA) a leading global life and health reinsurer, today announced the completion of a longevity reinsurance transaction with Athora Netherlands, a leading pension provider in the Dutch market.

The reinsurance transaction covers an in-force portfolio of approximately 46 thousand individual annuity polices written by Athora in the Netherlands with total reserves of approximately EUR 3.3 bln. Under this reinsurance agreement, the longevity risk is transferred to RGA over the full remaining term of the underlying portfolio.

“We are very pleased to have worked with Athora to complete this transaction. This deal is representative of the guiding principles of RGA – to work closely with our clients and partners to develop customized solutions to help them address financial challenges and position themselves for future growth,” said Olav Cuiper, Executive Vice President, Head of RGA EMEA. “We are actively working to grow our longevity business in continental Europe, and we are proud to build on our past groundbreaking transactions in the Netherlands and France and our strong franchise in the U.K.”

The transaction closed on July 1, 2021 and is effective since then. Additional terms of the transaction are not being disclosed.

© 2021 RIJ Publishing LLC. All rights reserved.

Luma adds annuity comparison tool to its distribution platform

Luma Financial Technologies has added an annuity comparison tool, “Luma Compare,” to its structured products and annuities distribution platform, according to a company release this week.

The new feature allows advisors to select, compare and test different annuity products, including variable annuities, fixed index annuities and registered index linked annuities, thus helping advisor comply with Regulation Best Interest (“Reg BI”), the release said.

“An advisor’s ability to ensure they’re offering annuity products that are appropriate and suitable for their clients’ goals, while remaining compliant with Reg BI requirements, is now a task that can be swiftly accomplished,” said Keith Burger, National Sales Director for Annuities at Luma Financial Technologies.

Morgan Stanley, UBS and Bank of America are direct investors in Luma, which was spun out of Navian Capital in 2018 to serve the structured product marketplace, and expanded into the annuity space in February 2021. For more on Luma, see the June 24, 2021 article in RIJ.

© 2021 RIJ Publishing LLC. All rights reserved.