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Seminar on dynamic risk budgeting to be held in New York

The CFA Institute and the EDHEC-Risk Institute plan to hold a course called The Advances in Asset Allocation Seminar to help professional money managers learn how “to continue to invest in risky assets so as to meet their liabilities while protecting themselves from excessive losses.”

The three-day course will be held in New York City on July 16-18. According to a release, the seminar will focus on “dynamic risk budgeting approaches” and “reconciling strict risk budget management with implementation of optimal long-term allocation.”

The content, to “be presented in a highly accessible manner by an instructor who combines academic expertise and industry experience” is designed to enable attendees to:  

  • Bridge the gap between modern portfolio theory and practical portfolio construction to build stable models.
  • Understand optimal benchmark construction ad their application to smart index construction.
  • Understand state-of-the-art ALM [asset-liability matching] and LDI [liability-driven investing] and examine the role of alternative assets in ALM.
  • Use dynamic beta management, risk budgeting, and dynamic core-satellite allocation to refine investment management and risk management processes and design new investment solutions.

The course is intended for:

  • Investment management professionals who advise on or participate in the design and implementation of asset allocation policies and portfolio models.
  • Sell-side practitioners who develop new asset management and ALM solutions for institutional, private, and mass-affluent investors.

To register:

  • Go to www.regonline.co.uk/AAA_july_2013
  • Fax back the registration form to +33 (0)4 93 18 45 54
  • E-mail your details to [email protected]
  • Call +33 (0)4 93 18 78 19

1Q 2013 M&A involving RIAs valued at $5.8 billion: Schwab

In the first quarter of 2013 there were 13 completed merger and acquisition (M&A) deals totaling $5.8 billion in assets under management (AUM) within the independent registered investment advisor (RIA) segment, Schwab Advisor Services reported.

It was the highest quarterly total since the first quarter of 2012, when 17 deals were closed totaling $24 billion in AUM.

“We didn’t see a mega deal like we saw in Q1 2012,” said Jon Beatty, senior vice president, sales and relationship management, Schwab Advisor Services. 

Acquisition activity by RIAs increased this quarter, with 54% of the total transactions closed by this buyer category.   

Early findings from Schwab’s 2013 RIA Benchmarking Study show that approximately 27% of RIAs surveyed are actively seeking to buy another RIA firm. For firms with $1 billion or more in assets, one-third are looking to make an acquisition.

 “There will be an increase in appetite for deals among RIAs moving forward if the economy improves and capital and liquidity becomes more accessible,” Beatty said in a release.

© 2013 RIJ Publishing LLC. All rights reserved.

Peace of mind trumps wealth as concern of older affluent Americans

Among older affluent Americans, achieving peace of mind is seven times more important than accumulating wealth (88% and 12%, respectively), according to a new Merrill Lynch study called “Americans’ Perspectives on New Retirement Realities and the Longevity Bonus,” conducted in partnership with Age Wave.

Completed in January 2013, the study is based on a nationwide survey of more than 6,300 respondents age 45 and older. Key findings included:   

  •  57% of Americans ages 45 and older consider retirement “a whole new chapter in life.”
  • 51% of pre-retirees who plan to work in retirement say they want to pursue a new occupation.
  • 52% of parents expect to provide their adult-age children with either healthcare, housing or education support.
  •  35% believe they will need to support their grandchildren in such ways.
  • Although pre-retirees think they will miss a reliable income most in retirement, retirees say they miss the social connections of work the most.
  • 74% said their top priorities are “values and life lessons.”
  • 32% viewed financial and real estate assets as their top priorities.
  • The cost of healthcare tops older adults’ list of retirement worries—even more so among the affluent (37% and 52%, respectively).
  • Serious health problems, being a burden on one’s family, and outliving assets ranked among respondents’ top concerns when asked about their views on living a long life (72%, 60%, and 47%, respectively).
  • 45% of Americans are looking for help deciding the best place to live during retirement.
  •  38% expect to provide housing support for family members (including inviting them to move in).
  • 40% say decisions about living arrangements are among the most important when it comes to retirement planning.

The survey included more than 6,300 respondents age 45 and older. Findings are based on 3,002 responses from the general population. In addition, select study findings are based on an oversampling of an additional 3,005 affluent respondents with $250,000 to $3 million in investable assets (including liquid cash and investments, but excluding real estate). The remaining 320 interviews included an oversample among 60- to 70-year-olds.

© 2013 RIJ Publishing LLC. All rights reserved.

Envestnet adds HiddenLevers to platform

Envestnet will integrate HiddenLevers’ application into its wealth management platform. The integration will allow advisors to stress-test client portfolios directly from the platform “to develop deeper insights into these portfolios which, in turn, will better equip them to acquire new assets and manage client assets better,” the Chicago-based technology company said in a release.

“HiddenLevers has developed a unique macro-economic scenario-based portfolio testing methodology that delivers portfolio insight that is easy to use and explain to clients,” said Bill Crager, Envestnet’s president. The integrated solution will be available from Envestnet in June 2013.

HiddenLevers is a New York-based financial technology company that builds risk management and macro-economic analysis tools.  The core technology maps the correlations between 130 macro-economic indicators, industries and securities.

© 2013 RIJ Publishing LLC.

CANNEX adds “4 Box” income planning to its data platform

CANNEX, which provides data and related services to insurers and broker-dealers in the U.S. and Canada, has added a retirement income planning tool to the section of its website that allows advisors to compare annuity products and pricing in a non-sales environment.

The new tool is the “4 Box Strategy for Income Planning” method. It will be an adjunct to the product education service of the CANNEX Retirement Income Product Exchange (RIPE).

RIPE currently allows dozens of leading life insurers and more than 200,000 advisors to:

  • Obtain comparative pricing and data about fixed annuity products and guarantees from across the industry.
  • Access analytical tools and education material that helps financial advisors position guarantees as a part of a client’s retirement portfolio.

The 4 Box Strategy is the creation of Farrell Dolan, the former executive vice president of income planning at Fidelity Investments. He is president and CEO of Farrell Dolan Associates, a founding member of the Retirement Management Executive Forum (RMEF), and a special advisor to the Retirement Income Industry Association (RIIA).

 “Four box planning uses the concept of income flooring, which is the amount of lifetime income a client needs to help cover essential expenses throughout retirement.  It examines income risks and assesses how clients can support their lifestyles with a combination of portfolio management and risk pooling through the use of annuity income,” said Dolan in a release. “It’s a highly personalized, education-based process that’s proven to be extremely successful.”

The strategy involves covering essential expenses with guaranteed income, such as Social Security, pensions and annuity income, and then allocating other assets to help pay for luxuries, cover emergencies or fund a legacy. This provides consumers with an effective mix of guarantees, flexibility and the opportunity for asset growth during their years in retirement.

© 2013 RIJ Publishing LLC. All rights reserved.

Insurance Tips for Pre-Retirees

The burst of retirement income advertising during the NCAA basketball tournament last March was a leading indicator that more retirees will ask for annuities in their financial plans, an insurance man told hundreds of fee-only advisors in Las Vegas last week.

Mark Maurer, CEO of Low Load Insurance Services, which specializes in brokering insurance to fee-only advisors, spoke at the NAPFA (National Association of Personal Financial Advisors) spring conference at the “Paris” resort.

 “Your clients will be coming to you more often with products they’ve heard about through advertising,” he said. “They will say, ‘I’m worried about running out of money.’ They’ll want you to review what they’ve heard about. You’ll be able to explain it to them.” 

Term layering

Maurer was there mainly to talk about insurance, however, and he had some money-saving ideas for advisors. For example, he said in the 1980s it was common for a high-earning professional such as a surgeon to buy a whole life insurance policy that might require a $20,000 annual premium for $1 million in coverage. Such a policy was typically touted as a way to save for college expenses and retirement as well.

Then term life insurance emerged as the most common form of protection of loss of earning power, and the healthy, 40-something surgeon mentioned above might pay a premium of about $4,500 a year for 20 years of term life insurance with a $3 million benefit.

The latest cost-saving strategy, Maurer said, is “term layering.” The same above-mentioned professional, 20 years from retirement might buy three different separate $1 million policies, one for 10 years, another for 15 years, and the third for 20 years. The annual premium for all three might be just $3,600. The strategy is based on the assumption that the client’s life insurance needs will decline as his children grow up and graduate from college.

Disability with a retirement savings twist

The latest thinking in the realm of disability insurance is to include a form of coverage that, in addition to paying living expenses during the disability, also makes payments into a trust that the disabled individual can tap when he or she reaches age 65. He also described strategies for supplementing employer-provided disability insurance with a private policy and adding a retirement protection plan.

Couples discount

As of April 15, 2013, Genworth introduced gender-specific pricing for long-term care insurance, Maurer said. The rates for single women will go up by as much as 40%. Aside from living longer than men on average, women apparently have the ability to live with illness much longer than men do, and therefore stay in long-term care facilities for longer periods.

But there’s a considerable discount available to couples who apply for long-term care insurance together, he said, even if they don’t buy the same amount of coverage. He described a situation where a woman planned to buy long-term care insurance alone, because her husband already had a paid-up long-term care policy through his former employer.

This couple could save considerably, Maurer said, if the husband bought even a small long-term care policy from the same insurer, so that the pair could qualify for the couple’s discount. The discount is predicated on the likelihood that an ill spouse will delay entering a nursing home as long as he or she can receive care at home from the healthy spouse.

© 2013 RIJ Publishing LLC. All rights reserved.

The Efficient Frontier for SPIAs

In the space of less than a year, it seems, Wade Pfau’s star has risen from that of an obscure lecturer in a Tokyo English-language university to someone who can pack a ballroom at a major Las Vegas casino. With fee-only financial advisors, that is.

On the strength of his meticulous research, Princeton Ph.D., and awards from the Journal of Financial Planning for his scholarly articles, the 30-something Pfau headlined the National Association of Personal Financial Advisors spring conference last week here in America’s R-rated Disneyworld.

He came to preach the wisdom of single-premium fixed income annuities (SPIAs), of all things. Traditionally, planners like income annuities as much as Sky Masterson likes church bingo. But Pfau’s ability to draw a crowd at the “Paris” resort may have been an indicator of growing advisor interest in guaranteed income. Or it may merely have reflected  Pfau’s growing name-recognition.

The gist of Pfau’s presentation is illustrated by one of his slides, which you can see below. It shows that if a retiree’s goal is to satisfy lifetime spending needs while maximizing a legacy, substituting SPIAs for bonds in their traditional stock/bond portfolio can make a lot of  sense. 

[If you want the full text of Pfau’s argument, you can read this research paper, a later version of which appeared in the February 2013 issue of the Journal of Financial Planning.]

Pfau efficient frontier

Forget the 4% rule, Pfau said. It’s not applicable to the real world. It’s based on U.S. market history alone, it’s based on the singularity of American economic performance in the 20th century alone, and it pretends that annuities are not an option.

Having looked at the numbers from many angles, Pfau strongly believes that life annuities can make an important contribution to most retirees’ portfolios—for their certitude, their mortality credit, and their ability to let retirees invest in equities with more peace of mind.      

[When Pfau’s presentation ended, I asked the NAPFA member next to me what she thought. “I think it’s fantastic,” she said. “I’ve followed his work for years. It’s amazing that now he’s right up there with, with…” and she struggled to name a commensurate rock star in this space. I assume she meant Moshe Milevsky, Harold Evensky or Michael Kitces, to name just three possibilities.]

But there’s still the “annuicide” problem, she added. Putting a pen to a paper napkin, she illustrated the fact that if she moves 20% of her clients’ money to SPIAs, her compensation drops by 20%.

Which brings us to the factors or assumptions or anxieties that Pfau and his allies in academia decide to include or not include in their models and their analyses, but which advisors in the real world have to deal with every day, and which make them hesitant to put their clients in annuities. Annuicide is one of them. Others include:

The hyperinflation factor. That 1923 image of the German civilian pushing a wheelbarrow-full of Reichsmarks has remarkable staying power. Advisors worry a lot about hyperinflation. Unlike Pfau, they don’t think the bond market is correctly pricing future inflation risk. They believe Ben Bernanke has his thumb on the scale. Interestingly, Pfau doesn’t recommend buying an inflation-indexed SPIA. In his efficient-frontier model, he seems to assume that SPIAs let retirees hold more stocks, and that equities serve as an inflation hedge.

The unhappy client. In the distribution world, there’s always disintermediation risk. When clients are nervous about the markets, they phone their advisors and worry out loud. Clients may have a strong desire to sell what they have and buy something else. They may regret the annuity purchase and blame the advisor. The client factor sometimes eludes academics.

Issuer risk. A major advisor concern about annuities is the risk that the insurance company, the counterparty, might go out of business. Insurers may find it odd that advisors have more faith in common stocks than in AA-rated diversified financial services companies that happen to issue SPIAs, but they do. For advisor and client, a risky but liquid asset can feel safer than a “guaranteed” but illiquid asset. Note to insurers: Advisors know that some of your firms got TARP money in the crisis, and it has affected the entire life insurance industry’s reputation. 

Annuity stigma. In concept, annuities have a place in every retirement advisor’s toolbox. In practice, annuities have a bad reputation, thanks to years of pushy, commission-based selling that resulted in ugly media coverage. For that reason alone, many fee-only advisors don’t want even to investigate annuities of any kind. That’s a shame, because many of them evidently don’t know that today’s annuities can be customized to solve a wide range of client needs. 

Lack of knowledge of annuities. Most investment-oriented or accumulation-oriented advisors and clients know very little about annuities. Few understand the mortality credit and they usually discount the value of transferring longevity risk to a life insurer.

Pride of craftsmanship. Showing any sort of packaged financial product to a serious financial planner is like showing a piece of ready-made furniture to a master woodworker. One of his or her first thoughts is likely to be: “I can build that better myself, and cut out both the manufacturer’s overhead and the middleman.” This may be short-sighted. For one thing, it’s difficult to buy longevity risk protection without buying a life insurer’s products. For another thing, advisors like Curtis Cloke have shown that annuities offer lots of opportunity for creativity.

Legacy concern trumps longevity risk. The clients of successful planners are more likely to worry about their ability to afford to leave a sizable legacy than about running low on money before they die. Hence they don’t need annuities. One of Pfau’s points, however, is that it’s easier to maximize a legacy with life annuities than without them, because they allow clients to take more risk with their non-annuitized assets.

No difference between luxuries and necessities. As Pfau mentioned in his presentation, Kitces and others have written that high-net-worth retirees don’t distinguish between discretionary and non-discretionary needs. They may see no significant difference between luxuries and necessities, between wants and needs.

For them, the threshold for retirement portfolio success or failure is therefore higher—it must produce an income that supports their “lifestyle” instead of just their hypothetical survival needs. The need to establish a precautionary income “floor,” which annuities can address, may mean little to them.

Interestingly, Pfau concedes this point for the sake of discussion, and his data shows that SPIAs help just as much in helping clients meet that higher threshold as they do in helping them avoid the lower one.

A final note: In response to her concern about annuicide, I told the advisor next to me at Pfau’s presentation about the Cannex-Retirement Income Industry Association initiative to allow advisors to charge a reduced asset management fee on the present value of the SPIAs their clients own.

© 2013 RIJ Publishing LLC. All rights reserved.  

Athene divests Aviva USA’s life insurance business

Private-equity firm Athene Holding Ltd., which bought Aviva USA last year for its thriving fixed index annuity business, announced on May 1 that it would divest Aviva USA’s $10 billion life insurance business thorough a reinsurance arrangement with Commonwealth Annuity and Life.

Athene was one of three private equity firms, along with Guggenheim Partners and Harbinger, that recently bought life insurance companies as a way to enter the fixed indexed annuity business, which has had sales of about $35 billion a year over the past three years. Sales have been driven by the availability of lifetime income options on FIAs.   

The reinsurance agreement means that Commonwealth will take control of Aviva USA’s life insurance assets and liabilities, while allowing Athene to issue fixed indexed annuities through its other operating life companies, according to a reinsurer familiar with the situation.

A.M. Best said it would keep the A- (Excellent) strength ratings of Aviva Life and Annuity Co. and Aviva Life and Annuity Co. of New York under review with negative implications. The review began last December when Athene bought Aviva USA. A.M. Best also put the A- strength ratings of Commonwealth and its subsidiaries under review with negative implications.

© 2013 RIJ Publishing LLC. All rights reserved.

Wells Fargo DC plans to carry Prudential’s in-plan annuity option

Wells Fargo & Co. will make Prudential Retirement’s IncomeFlex in-plan annuity option available to some three million plan participants at about 3,000 defined contribution retirement plans, the two companies announced. Prudential Retirement is a unit of Prudential Financial, Inc. IncomeFlex is already available to participants at about 7,000 defined contribution retirement plans.

IncomeFlex allows plan participants who are nearing retirement to buy a stand-alone living benefit that works a lot like the guaranteed lifetime withdrawal benefit on a retail variable annuity contract, but less expensive and simpler because it’s sold institutionally. Participants who choose the option pay an added fee and a floor is established under the amount of income they can receive for life under the terms of the contract.

Wells Fargo & Company has $1.4 trillion in assets and provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 9,000 stores, 12,000 ATMs, and the Internet. It has offices in more than 35 countries and 270,000 employees serving one in three U.S. households. It ranks 25th on Fortune’s 2013 rankings of America’s largest corporations.   

© 2013 RIJ Publishing LLC. All rights reserved.

Financial Engines makes Income+ service portable from 401(k) to IRA

Financial Engines said it will extend its “Income+” retirement income planning service, formerly available only to 401(k) plan participants, to the Individual Retirement Accounts (IRAs) that it manages.   

Demand for Income+ has been strong, Financial Engines said. Over 70 plan sponsors have signed contracts as of March 31, 2013, representing over $126 billion in assets and over 1.4 million participants.

The new service will enable participants to take Income+ with them if or when they roll their Financial Engines-managed 401(k) accounts to Financial Engines-managed IRAs with custodians such as Charles Schwab and TD Ameritrade.

In 2001, Financial Engines expanded its 401(k) investment advice toolbox to include advice on accounts outside the 401(k), including IRAs.  In 2004, the company introduced a 401(k) discretionary account management program, which was expanded in 2011 to include Income+. 

Financial Engines stresses that its IRAs are open-architecture, so plan sponsors should have no fiduciary worries about the rollover process. According the Financial Engines’ release:

“The General Accounting Office found that participants are subjected to pervasive marketing of IRAs, in many cases from their plan service provider steering participants towards the purchase of their own retail products and services. Financial Engines doesn’t sell investments and is free from the product conflicts or the perception of conflicts of interest that can arise for firms that sell products.”

On Monday, Morningstar, Inc., which competes against Financial Engines in this space, announced an updated version of its Retirement Manager, an advice and managed account service for defined contribution participants. 

“For some time now we’ve had two advice and managed account platforms—Advice by Ibbotson and Retirement Manager,” Morningstar’s Alexa Auerbach told RIJ.  “We’ve now taken the best features from Advice by Ibbotson and combined it into Retirement Manager.

“Some of those features include detailed drawdown advice where we’re making recommendations about which accounts (taxable and non-taxable) to draw from each year and how much. We’ve also enhanced the portfolio methodology with a liability-driven overlay and retirement age advice.”

© 2013 RIJ Publishing LLC. All rights reserved.

With Income Annuities, a Lot of Knowledge (or None at All) Is Better than a Little

The truism that annuities are sold rather than bought doesn’t apply to Jean Lown, a professor at Utah State University. Her father, a life and health insurance salesman, lived to be 91. Her 88-year-old mother, a former teacher, still receives a small pension from teaching in New York State years ago. Now in her early 60s, Lown herself intends to annuitize part of her TIAA-CREF savings when she retires in a few years.

“All of the research on retirement preparation shows that there’s a huge gap in guaranteed income, and annuities seem like such a logical way for people to begin to bridge that gap,” Lown told RIJ in a recent phone interview from her home in Logan, Utah, where she has a view of the snowy ridges of the Bear River Mountains. “I’ve seen their benefit personally.”

She also has a professional interest in the topic. “I teach personal finance and investing at USU. Since 1996, I’ve also taught a workshop on financial planning for women. My research interest has been in answering the question, ‘How do we motivate women to take more control of their own finances?’ This is my passion.”

Not long after the financial crisis, Lown and a graduate student, Devon Robb, decided to test the public’s knowledge of and receptiveness toward immediate annuities. The study, whose results were published in the Journal of Personal Finance last winter, was based on a survey of 263 USU employees between the ages of 50 and 65, many of them professors. More than half expected to live past age 85. One-third said that they or their spouses were eligible for a defined benefit pension. One-fourth said they had lost more than 30% of their retirement assets in the financial crisis. 

The results suggested several things:

  • The people who expressed the most interest in immediate annuities tended to be risk-averse and unfamiliar with immediate annuities.
  • Those who rated themselves most familiar with annuities held the least positive attitudes toward them. 
  • A person’s income, life expectancy, or expectation of a pension didn’t seem to affect their attitude toward immediate annuities.

If the survey results are solid, annuity marketers may want to start stressing the link between annuities and independence in old age, rather than just income in old age. In Lowe’s experiment, participants were told four positive attributes of income annuities. Respondents were then asked to say how “convincing” each one was. “Help you remain independent” was considered “very convincing” by 36.1% of the respondents—the highest percentage. “Payments for as along as you live” was the second most compelling attribute, with 34.4% calling it “very convincing.” About 28% found the ability of annuities to deliver “more income than withdrawing investment gains” to be very convincing.

When explaining annuities, advisors may also want to ask their clients to try to forget everything they’d heard about annuities. Although Lown’s survey showed that people who expressed familiarity with annuities liked them the least, she suspected that by “familiarity” they might simply have meant that they’d read or heard something negative about annuities from the media. She doesn’t think that someone truly familiar with the benefits of annuities—people like herself and her parents, for instance—would be averse to them.

© 2013 RIJ Publishing LLC. All rights reserved.

Snoopy Takes a Cue from the Gorilla

The financial engineers at Manhattan-based AXA Equitable (mascot: 800-lb. gorilla) should feel flattered, because their cross-town rivals at MetLife (mascot: Snoopy) have decided to imitate one of AXA’s best-selling products.

The details differ a bit, but MetLife’s new Shield Level Selector closely resembles AXA’s Structured Capital Strategies (over $2 billion in sales since it was launched in 2010). That’s despite the fact that the MetLife product is a single premium deferred annuity and SCS is filed as a variable annuity.

Both products are accumulation vehicles, not income vehicles. They operate much like traditional fixed indexed annuities. Most of the underlying assets are invested in bonds.  A small portion pays for options on a major equity index. When the indexes go up, the options can gain considerable value, and part of the value is credited to the investors’ account. (When the indexes go down, the options expire out of the money.)

But these products differ from traditional FIAs in a couple of important ways. The first way involves risk of loss. FIA sellers boast that you can never lose money on an FIA (net of expenses and surrender fees). They also currently offer annual crediting rates of only about three percent. 

But with the MetLife Shield Level Selector, as with as the AXA Equitable Structured Capital Strategies, investors can get a higher crediting rate limit if they accept the ugly part of the downside risk. We’re talking about the tail risk—i.e., all but the first 10 to 25 percent of downside.

The second difference is that FIAs are still sold mainly through insurance agents, while the AXA and MetLife products are sold through a wider variety of channels, such as career force, banks, wirehouses and the third-party independent advisor channel. A third difference is that lifetime income benefit options are currently driving FIA sales to record levels. These two products are for accumulation, not income.

As for the details of the new MetLife product, contract owners (or, more likely, their advisors) can choose among three maturities (one-, three- or six-year contracts), five different index options, three degrees of insulation from downside risk, and two death benefit options (return of account balance or premium).

Investors who choose the S&P 500 Index can elect to have MetLife absorb negative returns up to:

  • 10%
  • 15%
  • 25%
  • 100% of index loss

The contract also offers five index options:

  • S&P 500 Index of large-cap U.S. stocks.  
  • Russell 2000 Index of small cap stocks.  
  • NASDAQ-100 Index, which includes the100 largest domestic and international nonfinancial securities listed on NASDAQ, by market cap.  
  • MSCI EAFE Index, which includes over 1000 international stocks from companies in Europe, Australasia and Far East (EAFE).
  • Dow Jones-UBS Commodity Index, which is comprised of exchange-traded funds (ETFs) on physical commodities. 

Not all of the permutations and combinations are permissible. An investor who chooses the S&P 500 Index option has the maximum flexibility. He can choose one, three or six year terms and any of the buffer options. People who invest in any of the other indices may choose only the 10% buffer option; they can’t buy protection against the first 15%, 25% or 100% in losses.

Here’s an example of the kind of risk/reward trade-offs the MetLife product enables investors to contemplate. For instance, the one-year cap for investments linked to the S&P 500 with zero downside—MetLife absorbs 100% of the loss—is an unalluring 1.65%, according to today’s rates. (Rates are adjusted every two weeks in response to market conditions.) But if the investor accepts all losses beyond the first 10%—i.e., he loses 2% if the investment falls 12%—the one-year cap jumps to a much more attractive alluring 5.75%.

If such flexibility sounds potentially overwhelming, MetLife offers an alliterative heuristic to divide and conquer the decision-making process. “With advisors, we try to talk about the three ‘Ps’,” MetLife senior vice president Liz Forget told RIJ this week. “They stand for Protection, which is the percentage of downside you want MetLife to absorb, Participation, which refers to the different index options, and Personalization,” which means choosing among the maturity and the death benefit options.   

Common sense suggests that investors will divide their premiums among the various index options in order to get diversification, and then choose their maturities and level of protection on the basis of their risk tolerance for risk or perhaps their time horizon. The product’s target market is people nearing retirement, Forget said.

Since this is a fixed annuity, there are no stated fees. The fees are embedded in the computation of the crediting rate. If you choose the enhanced, return of premium death benefit, the earnings caps are about 25% lower than if you choose the standard return-of-account-value death benefit. It’s difficult to tell at a glance whether the death benefit option is a bargain or not.

This product also offers a somewhat more conservative way to combine risk and return. It’s called “Step Rate.” Let’s say that you opt for the Step Rate on a three-year investment linked to the S&P 500 with a 10% downside buffer. If the index experiences a return of zero or greater return over that period, you’ll earn a cumulative 14.0% (at current rates).

On the other hand, if you chose a three-year S&P 500-linked investment with a 10% downside buffer but without the Step Rate, your crediting cap would be 23.3%. But if the three-year return happened to reach only 2%, you’d earn only 2%, not the Step Rate of 14%.

© 2013 RIJ Publishing LLC. All rights reserved.

The FIA ‘Loophole’

Here in Toronto, the odds of finding the perfect mango in Kensington Market are roughly one-to-one. The city’s Red Rocket streetcars, unlike investments, virtually never go off their rails. And the locals are born with lifelong health insurance. Let’s face it: there are riskier places on earth.

That may help explain why the risk-minded Society of Actuaries chose Toronto for this year’s Life & Annuity Symposium. Or perhaps it was simply Canada’s turn. In any case, some 500 actuaries showed up here this week to burnish their credentials and ponder the rate-starved state of the life insurance industry.

Fixed indexed annuities, along with deferred income annuities, are one of the few growth areas for annuities these days. The topic of the new private equity players in the FIA market arose several times. Long story short: The barbarians are at the gate. With their how-do-they-do-that pricing, they’re giving fits to traditional FIA issuers.

It’s not complicated, the panelists at one breakout session said. The private equity firms, particularly Guggenheim Partners and Athene Holding, are aggressive in their search for new pools of assets. They’re not bashful about using leverage, about buying reinsurance offshore and about getting extra yield from residential and commercial mortgage backed securities.

“This is all about grabbing more assets that are stickier, and generating slightly higher yields on those assets by investing more aggressively at the margins, especially in areas where they have a competitive advantage, like high-yield [bonds],” said John Nadel, a life insurance analyst at Sterne Agee & Leach Inc. in New York.

“Those higher yields are essentially profit margin, and it gives them great leveraged returns. They’re also using a lot of offshore captive [reinsurers] that have lower capital requirements. These are third-party investor-type players who may not care as much as you do about the long-term health of the insurance industry,” he said.

Howard Rosen of Standard & Poor’s ratings division affirmed that the private equity firms aren’t attracted to the insurance business per se. “They’re highlighting what they do best,” he said. “They look at life companies as groupings of business units, and they’re selectively taking them apart. They don’t look at the world the way [actuaries] do. Guggenheim is an asset manager. They acquired blocks of business and they acquired the people needed to do the insurance management part of it. But they want the assets.”

“There’s been a paradigm shift,” said David J. Weinsier, the U.S. life practice leader at Oliver Wyman. “The nontraditional insurers who have entered the market view the business differently. They’re running a net investment spread business, and earning the difference between the investment return on assets and the rate on their stable long-term fixed annuity funding sources.”

In his presentation, Weinsier gave a rough example of how one of the new firms might achieve a 12% return on equity. For instance, they might expect a gross investment return of 5%—“No three percent assumptions for them,” he said—and expenses of 0.5%, for a net investment return of about 4.5%. Their cost of funds might be about 3.75% (2.75% for premium and benefits and one percent for expenses).

The margin would then be 75 basis points. If the leverage ratio (of capital to reserves) is 10%, the margin expands into a return on investment of 7.5%. If you add the 4.5% expected return on invested capital, you get a total return on equity of 12%.  Weinsier quoted the representative of a large U.S. annuity issuer as having described his returns in the following way at an A.M. Best conference last March:

“[The] 6-7% net yield on assets less 3-4% liability cost of funds equals 2-4% net investment spread. Less 1-2% [for] G&A [general and administrative expenses] and taxes results in 1-3% operating income. Return on equity benefits from targeted leverage of 10-14x (capital/reserves ratio of 7-10%).”

“The private equity companies, the hedge funds and an increasing number of insurance companies are using the economic framework, where cash flow is king. Your company may not be thinking about its [FIA] business this way, but it should be,” Weinsier added, “because this is how your competitors are thinking.”

Asked if the private equity firms are playing by different rules than traditional FIA issuers, Weinsier said, “They’re not playing by different rules. It’s not like they’ve invented a 51st state.

“But a lot of the new entrants are taking advantage of a loophole created during the financial crisis that allows certain types of higher-yielding mortgage-backed securities to be categorized as NAIC 1 assets. And they’re holding more of these mortgage-backed securities than you see elsewhere. How long the loophole will remain open, we don’t know, but it’s enabling them to increase leverage and pick up some extra yield. That’s one distinction” between the new players and the older FIA issuers, he said.

© 2013 RIJ Publishing LLC. All rights reserved.

Nine Insurers Now Offer DIAs

At last count, nine insurance companies had entered products in the relatively new but thriving niche market for deferred income annuities, which enable near-retirees to buy a personal pension a few years or a few decades or in advance of retirement, either with a single premium or multiple premiums.

Sales of DIAs surpassed $1 billion in 2012, according to LIMRA. In the variable annuity world, that’s a trivial sum. But in the world of income annuities, where sales expectations are more modest, that’s an impressive sum. (For an analysis of the DIA market, see this week’s RIJ cover story.) 

2012 DIA Sales – Industry Est. (000s)

Q1

Q2

Q3

Q4

 2012

160,000

210,000

270,000

390,000

1,030,000

Source: LIMRA

Provided below are thumbnail descriptions of the DIAs that, to the best of     our knowledge, are currently available:

American General Future Income Achiever

This product requires an initial premium of $20,000, a maximum deferral period of 40 years, and two optional death benefit options during the  deferral period: a return of premium or a return of premium plus 3% compound annual interest. Payments can be increased by 1% to 5%, or they can rise with the Consumer Price Index (CPI-U). Twice during the payout period, contract owners can access up to six months’ worth of income at once.  

Guardian SecureFuture Income Annuity

The Guardian Insurance & Annuity Co., Inc., part of Guardian Life, has introduced a deferred income annuity (DIA) that can be created with as little as $5,000 and provide income that starts up to 40 years after the purchase date. Subsequent premiums can be as low as $100, contract owners can change the start date once after purchase, and owners can receive up to six months of payments at once, one time during the payout period. (This product can be purchased directly on Fidelity’s DIA platform.)

MassMutual RetireEase Choice

This DIA allows contract owners five opportunities during the payout period to access three months or six months of payments at once. It requires a minimum initial purchase premium of $10,000, but subsequent flexible premiums can be as low as $500. The contract offers a return-of-premium death benefit during the deferral stage, inflation adjustments during the payout stage, and a one-time opportunity to change the income start date after purchase. (This product can be purchased directly on Fidelity’s DIA platform.)

MetLife LIG (Longevity Income Guarantee)

This product comes in two versions. The flexible-access version, designed for creating a personal pension, allows contract owners to make multiple purchase payments of as little as $2,500 and to pick their own income start dates. The maximum income version is pure longevity insurance. It has no death benefit or liquidity feature and income may start only at age 85.  

New York Life Guaranteed Future Income Annuity (I and II)

New York Life introduced the first version of this product in mid-2011 and followed up with an enhanced version in 2012. The first version allows contract owners to set a fixed income during the payout period, while the second version allows contract owners a slightly different risk/reward proposition: a lower fixed income guarantee than the first version, but upside potential through exposure to equities during the deferral period. (This product can be purchased directly on Fidelity’s DIA platform.)

Northwestern Mutual Life Select Portfolio

Northwestern Mutual’s single-premium DIA, sold only through the firm’s career force, allows contract owners to apply all or part of the insurer’s annual policyholder dividends to the value of the annuity, either before or after the beginning of the payout period. Alternately, the contract owner can take all or part of the dividends as income. The company also offers a DIA without dividend enhancement. The product is designed for purchase with money from a traditional or Roth IRA or 401(k) plan. Contract owners can choose an option that gives them a one-time opportunity to change the design of their annuity (and move the start date up by up to five years) before income begins.

The Principal Deferred Income Annuity

This product allows contract owners to delay income for up to 30 years. Four times during the payout period, the contract owner can withdraw six month’s worth of payments at once. Purchasers can use qualified or non-qualified money to buy the contracts, and can buy single or joint-and-survivor contracts. There is a return of premium death benefit before income begins, and an optional return of unpaid premium death benefit after payments begin. Payouts can be automatically raised by up to 5% per year or they can track the Consumer Price Index. (This product can be purchased directly on Fidelity’s DIA platform.)

Prudential Defined Income

Prudential’s DIA product is built like a variable deferred annuity with a living benefit but invests 100% client assets in a long-duration bond fund, held in a separate account. It offers an annual compound 5.5% roll-up in the benefit base for every year the client delays taking an income stream. The all-in annual costs are 2.74%. The payout rate from the Prudential Defined Income annuity is based on the client’s age when he or she purchases the contract, not when he or she begins taking income.

Symetra Freedom Income Annuity  

Symetra markets its DIA either as longevity insurance that begins providing income at age 80 or 85, or as a personal pension that begins providing income five to 10 years after purchase. According to Symetra, this product has certain unique features: an annual inflation adjustment of up to 6.5% (available in 0.1% increments), a death benefit in the deferral period for contracts that are life-only in the payout period, and a five-year period certain option.

© 2013 RIJ Publishing LLC. All rights reserved.

Securian, Nationwide add managed-vol funds to VAs

Securian adds managed-volatility portfolios to some VAs

Securian has added a new set of Managed Volatility Portfolios as investment options in some of its MultiOption variable annuities, which are issued by Minnesota Life Insurance Company, a subsidiary of Securian Financial Group, Inc., the company said in a release.

 “These new investment options join three TOPS® Managed Risk ETF Portfolios we introduced last year that also employ hedging strategies,” said Dan Kruse, second vice president and actuary, Individual Annuity Products, Securian Financial Group.

The new options, listed below, became available on May 1, 2013.

  • AllianceBernstein VPS Dynamic Asset Allocation
  • Goldman Sachs VIT Global Markets Navigator
  • PIMCO VIT Global Diversified Allocation
  • SFT Advantus Managed Volatility Fund 

They join these TOPS® Managed Risk ETF Portfolios introduced in 2012:

  • TOPS® Managed Risk Balanced ETF Portfolio
  • TOPS® Managed Risk Moderate Growth ETF Portfolio
  • TOPS® Managed Risk Growth ETF Portfolio 

 

Nationwide adds four new managed-vol funds to core VA line-up

Nationwide Financial announced today the addition of four new managed volatility fund options for its core VA line-up. The new NVIT (Nationwide Variable Insurance Trust) Managed Funds are designed to capture growth when the stock market rises and help buffer against major losses when it falls.

The new managed volatility funds include:

  • NVIT Cardinal Managed Growth Fund
  • NVIT Cardinal Managed Growth & Income Fund
  • NVIT Investor Destinations Managed Growth Fund
  • NVIT Investor Destinations Managed Growth & Income Fund

The patent-pending algorithm incorporated into the new NVIT funds evaluates stock market conditions on a daily basis, actively adjusting equity exposure to seek gains when volatility is low and avoid excessive losses when volatility is high.

The new funds invest in a traditional asset allocation portfolio of underlying stock and bond funds, managing investment risk through diversification. An additional layer of risk management for market volatility comes from an overlay of stock index futures, which dynamically adjusts the funds’ overall equity exposure in response to market volatility.

© 2013 RIJ Publishing LLC. All rights reserved.

Small is beautiful, say these plan providers

Transamerica launches Retirement Plan Exchange for small-plan sponsors 

Transamerica Retirement Solutions has introduced a new service, “The Retirement Exchange,” to help more small businesses offer workplace retirement plans to more employees, and to help employees save for retirement at higher rates, the company said.

The announcement comes at a time of rising awareness that many American workers, especially at small companies, lack access to a workplace retirement plan, and that many small company owners are reluctant to sponsor plans because of the potential expense, complexities, and liabilities of doing so.   

According to a Transamerica release, “The Retirement Plan Exchange is aimed at small businesses that don’t currently offer a retirement plan, and at small business owners who want to outsource plan administration and fiduciary tasks.”

Independent firms who are not affiliated with Transamerica will handle the fiduciary and administrator services. The Retirement Plan Exchange will auto-enroll eligible workers at a 6% contribution rate with an automatic increase of two percentage points per year in each of the next two years. Transamerica will make a Roth provision available to all plan participants.

 

The Online 401(k) creates auto-IRA service for small firms

The Online 401(k), a provider of low-cost retirement savings solutions for small businesses, has unveiled its Starter(k) solution, “the first payroll-deduction IRA designed specifically for small businesses with 100 or fewer employees,” according to a release.

Only about eight percent of the country’s smallest business sponsor a workplace retirement savings plan because of the cost and liability, said Chad Parks, founder and CEO of The Online 401(k). Starter(k) solution is designed to help small firms create an simple, automatic IRA savings program instead of a 401(k) plan.     

“Starter(k) is also an ideal solution for businesses who may be subject to legislative mandates, as states such as California consider requiring employers to implement auto-retirement savings through employee paycheck deductions,” Parks said.

Starter(k) functions as follows:

  • Employers pay $25 a month for the service and participating employees pay $4 a month.   
  • The plan features 10 target date model portfolios made up of exchange traded funds for a fee of only 25 basis points (0.25%), including ETF investment expenses, fiduciary advice and trading costs. Fiduciary Plan Review, a third-party investment expert, chose and monitors the portfolios.
  • Participants’ contributions are automated. After picking their investment portfolio, they need to make no other decisions.
  • Accounts are accessible through a web-based platform.
  • Starter(k) can be implemented quickly and easily.  
  • Auto-IRAs don’t fall under ERISA, and therefore entail the costs of complying with ERISA.

 

Small business retirement plan balances have rebounded: Fidelity  

Average balances in small business retirement savings plans administered by Fidelity have increased 20% since 2007 and are up an average of 64% since the financial crisis of 2008, the Boston-based fund company and retirement services provider said in a release.

The data was based on a six-year analysis of accounts at more than 200,000 small businesses (with 10 or less employees) that use a Fidelity SEP-IRA, Self-Employed 401(k) or SIMPLE-IRA savings plan.

The analysis showed:

  • The average contribution to these retirement savings accounts increased across the board since 2007, with those using Self-Employed 401(k)s showing the largest increase of 21%, to $20,950. Employer contributions to SEP-IRAs increased 14% from 2007, reaching $13,250 in at the end of 2012, while average employer/employee contributions to SIMPLE-IRAs increased the least, rising 4% to $6,000.
  • The average balance of Self-Employed 401(k) plans rose from $103,400 in 2007 to $119,500 in 2012—a 16% increase over six years. SEP-IRA and SIMPLE-IRA balances increased by 17% percent to $71,300 and 26% to $31,100, respectively.

© 2013 RIJ Publishing LLC. All rights reserved.

The Bucket

MassMutual Retirement Services appoints new managing director

Kirk Buchanan has been named managing director of institutional sales of MassMutual’s Retirement Services Division, effective April 8, the company announced. He had been regional sales director for The Hartford’s Retirement Plans Group (RPG) for many years.   

Buchanan serves on the dedicated local sales team covering Northern Texas and Oklahoma. Partnering with MassMutual sales directors Jeff Revell and Travis Cox, he will be responsible for business development and sales support of MassMutual’s third-party and dedicated distribution channels focusing on mid-market retirement plans. He is based in Dallas, Texas, and reports to Tanya Jones, western divisional sales manager with MassMutual’s Retirement Services Division.

Buchanan holds a Bachelor of Science in Business and Professional Development from Amberton University. In addition, he holds a Certificate in Pension Law and Administration from The Philadelphia Institute and a Certified Retirement Counselor (CRC) designation from the International Foundation for Retirement Education in McLean, Virginia. He currently serves on the Board of the Dallas/Ft. Worth Chapter of the ASPPA Benefits Council and is also a noted author and publisher of nine books.

Nationwide Financial creates DCIO sales team

Nationwide Financial today announced a new defined contribution investment only (DCIO) team to help drive sales of Nationwide Funds by retirement plan advisors. The new members of the DCIO sales team are:

Jeff Gardner will serve as the divisional vice president for the DCIO team, and will be responsible for leading the team. He previously led Nationwide Financial’s fee-based sales team. He earned a master’s degree in business administration from the University of Georgia and a bachelor’s degree from Fordham University.  

Eleana McLane will serve as the regional vice president for the Northeast territory. She joined Nationwide Financial in 2009 and was a regional wholesaler for the fee-based team. She has worked in the financial industry since 1984. She earned a bachelor’s degree from Rider University.

Mark McGowan will serve as the regional vice president for the Central region. He previously worked for Nationwide Financial’s private-sector retirement plans business as a regional wholesaler in St. Louis. He earned a bachelor’s degree in communications from the University of Illinois, Urbana – Champaign and holds an AIFA designation.

Bruce Guarino will serve as the regional vice president for the West Coast. His previous position with Nationwide Financial was as a regional wholesaler for the fee-based team.

Chad Metzger will serve as the regional vice president for the Midwest and Southeast territories. Metzger joined Nationwide Financial in 2009 and worked to increase sales to fee-based advisors. He holds a master’s degree in finance from Xavier University and a bachelor’s degree in accounting and finance from The Ohio State University.  

ASPire Financial Services enhances client services team

ASPire Financial Services LLC, a provider of “conflict-free retirement plan solutions,” has “advanced its client service delivery model through the addition of top talent, process optimization and a customer relationship management (CRM) solution,” the company said in a release.   

ASPire’s new Client Services group will engage clients in three primary areas: implementation, relationship management and customer support. As part of the client service initiative, ASPire hired 30 professionals this year.   

ERISA attorney Jennifer Tanck was appointed vice president of Client Services. Lisa Esker, Customer Service Manager, will lead the call center. She had been assistant vice president, Retirement Plan Services Contact Center, at Raymond James.   

ASPire Financial Services LLC provides customizable services for retirement plans (e.g. 401(k), 403(b), 457(b) and IRA). It has approximately 150 employees and just under $12 billion of recordkeeping assets, 8,000 plans and 255,000 participants.   

© 2013 RIJ Publishing LLC. All rights reserved.

Which is better for Ireland: Auto-enrollment or mandatory participation?

Compulsory pension savings as the most effective way to increase the adequacy of retirement savings, with auto-enrolment branded a more costly and second-rate policy, says a review of Ireland’s pension system by the Organization for Economic Cooperation and Development, IPE.com reported.

The review of Ireland’s pension system, commissioned by minister for social protection Joan Burton last February, criticized the country’s defined benefit (DB) regulation. It argued that plan sponsors shouldn’t be able to abandon underfunded plans and called for changes to the reinstated funding standard.

Ireland could increase participation in its “second pillar” defined contribution through compulsion, auto-enrollment or increasing the level of financial incentives from the government, the OECD report said. Of the three, compulsion was recommended as the cheapest and most effective course.   

“Automatic enrolment is a second-best,” the report continued, noting that the costs associated with establishing an auto-enrolment framework were likely to be higher.”

The authors of the report cited the approach taken by New Zealand and its KiwiSaver reforms, as well as Italy’s largely unsuccessful attempt to boost coverage.  Auto-enrollment’s “success in increasing coverage depends on how it is designed and on its interaction with incentives in the system,” the report said.

Burton said the Irish government should try to drive up private pension coverage after the country’s economy recovers. “The earlier we can bring forward reform the better. However, I am also extremely mindful of the current economic crisis, and this will inform my strategy for the future,” she said.

It is uncertain if the government would consider compulsion.

Three of Ireland’s largest political parties – the current coalition of Fine Gael and Labour, as well as the former administration’s Fianna Fáil party – have previously spoken of auto-enrolment as a viable solution for Ireland. The Irish Association of Pension Funds (IAPF), meanwhile, called soft compulsion the most politically viable policy.   

Pablo Antolin, principal economist in the OECD’s private pensions unit and one of the review’s authors, said compulsion was the think tank’s preferred choice for Ireland.

He doubted that auto-enrolment could achieve the levels of coverage seen in countries with compulsory or quasi-mandatory pension savings, such as Australia, Chile or the Netherlands.

“You have to remember that implementing auto-enrolment is much more complicated [than compulsion], and you have to be very, very careful how you design auto-enrolment with all the other incentives that are in the system,” Antolin told IPE. “Auto-enrolment is soft compulsion for people, but for employers it is pure compulsion. On top of that, the administrative burden for employers is much higher with auto-enrolment than with compulsion.”

© 2013 RIJ Publishing LLC. All rights reserved.

‘Fiduciary duty’ remains under-defined, says UK law professor

The concept of “fiduciary duty” remains too undefined to become the legal standard for appropriate investment practices by pension trustees in the UK, said the head of the London School of Economics’ Sustainable Finance Project last week, according to a report in IPE.com.

Roger McCormick of the LSE’s Department of Law warned that codifying “fiduciary duty” into law wouldn’t necessarily solve the problems plaguing the financial industry and noted that there is still confusion as to what fiduciary duties entail.

“From time to time, you hear suggestions and ideas about fiduciary duty, which tend to point the law in different directions,” he told a reporter. “You have the ESG [environmental, social and governance] community wanting to have a more liberal interpretation of what the duties are. Then you have other people looking at investment banks selling dodgy-looking derivatives products to people that they call ‘muppets,’ and maybe feel that a higher level of duty should be imposed in situations like that.

 “You have to break the questions down in a more analytical fashion, almost forget the label ‘fiduciary duty’ and focus on what the substance of the duty should be,” he said. “You can’t expect trustees to take risk in this area if the law isn’t reasonably clear—they are not going to be interested in sticking their necks out.

“With that as a background, we can have a more enlightened debate on the political aspects – and there are a lot of them,” McCormick added. “This is all about what you do with other people’s money – you can’t get more political than that. [But] It’s very difficult to lay down a hard and fast rule that will work for decades to come.”  

© 2013 RIJ Publishing LLC. All rights reserved.