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Beware of Pension-Buying Funds

Posted on April 28, 2013 by Kerry Pechter -

The retirement income underworld appears to be flourishing. As the New York Times reported yesterday, companies like U.S. Pension Funding and Advantage Financial Consulting operate websites that encourage cash-strapped veterans and others to sell their future pension streams at steep discounts.

Those same firms also invite yield-hungry investors to take advantage of the opportunity to earn returns of as much as 14% by investing in funds that buy those pension streams. If your clients are considering one of these investments, please persuade them to invest in something safer and more respectable.

The structure of these investments is unclear, and one has to wonder if investors, like pensioners, might be victimized. While investors in structured settlements can obtain legal ownership of annuity or lottery income, the same may not be true of pension income. In fact, pension-purchasing may simply be illegal.

Here’s a list of websites that encourage veterans, teachers and others to sell their retirement income streams (One site that is not listed below, webuypensions.com, has been labeled a potential “attack site” that may try to hack your computer):

Although the Times played the story on its front page, the pension-buying business is not breaking news. It was exposed almost two years ago on the website publicintegrity.org, whose story on August 19, 2011, documented cases like these:

Kirkland Brogdon Sr., a former Marine from Janesville, Calif., took a payment of $24,542 in 2003 in return for eight years of payments from his pension and the purchase of a $60,000 life insurance policy assigned to Structured Investments.
Daryl Henry, a disabled Navy veteran from Laurel, Md., took a $42,131 payment from Structured Investments backed by his pension in 2003. Including life insurance premiums, his contract’s effective annual interest rate was 28 percent, according to data in his class-action court filings.
Retired Navy physician Louis Kroot, M.D., of Lexington, Kentucky, and his wife signed over 95 monthly pension payments—a total of $2,457.37 per month after taxes—to an account controlled by Structured Investments. They also agreed to pay $131.04 per month over six years for a $180,000 life insurance policy that lists Structured Investments as a beneficiary—an assurance the company would be repaid if Louis dies and his pension payments end.

These loans have been found to violate the law regarding military pensions. According to a report published at the AARP.org website in 2011:

“In an Aug. 22 ruling, Judge David C. Velasquez said the agreements that the retirees had signed violated federal law against ‘assigning’ military pensions to other parties. He called the pension buyouts ‘unscrupulous and substantially injurious.’ [For a copy of a September 2011 opinion by Judge Velasquez that it’s illegal to buy military pensions, click here.]

“The company, Structured Investments, maintains that its practices are legal. A company official did not return calls seeking comment… About 1.5 million veterans received about $40.3 billion in pension payments from the Pentagon last year, making them an attractive target for companies that place ads online and in trusted military publications.”

Pension buyout businesses rely on the fact that many Americans are financially illiterate and can’t calculate—or are too blinded by need or bereft of options to calculate—the poor value that they receive for their pensions or annuities. (Above, an example of a box that appears on one of the pension buyout websites listed earlier.)

In a new study, “Financial Literacy and High-Cost Borrowing in the United States,” Annamaria Lusardi and Carlo de Bassa Scheresberg of the George Washington University School of Business show that people with the least education are the most likely to be victimized by high-cost financing schemes.

“Considering a representative sample of more than 26,000 respondents, we find that about one in four Americans has used one of these methods in the past five years,” they write. “Moreover, many young adults engage in high-cost borrowing: 34% of young respondents (aged 18–34) and 43% of young respondents with a high school degree have used one of these methods.”

CFP Board endorses recent federal action on senior designations

Posted on April 25, 2013 by Editor Test -

The Consumer Financial Protection Bureau has issued recommendations to prevent the misuse of senior designations, certifications and titles used by individuals working in the financial services industry. The Certified Financial Planner Board of Standards, Inc. has endorsed them. A copy of the CFPB report is available here.

Among the Bureau’s recommendations, CFP Board supports:

Creating a centralized tool for consumers to research and verify senior designations, including whether the designation meets certain fundamental criteria to be considered a valid and credible designation;
Tracking by the Securities and Exchange Commission of complaints related to senior designations, as well as requiring understandable disclosures by any individual claiming expertise specific to seniors;
Requiring that those individuals holding senior designations and certifications meet and maintain minimum levels of professional standards, including education and accreditation, as well as a minimum standard of conduct; and
Increasing the supervision and related enforcement of individuals holding certain designations and working with seniors.

In August 2012, CFP Board submitted a comment letter to the Bureau, along with the results of its Senior Financial Exploitation Study. A number of CFP Board’s recommendations from that letter are reflected in whole or in part in the Bureau’s report.

Recommendations included establishment of a rating system for professional certifications and designations, the execution of an educational campaign in connection with the rating system, and the use of objective criteria, modeled after CFP certification standards, when evaluating other financial services designations.

These standards include accreditation; substantial education and experience; a fair, valid and reliable exam; continuing education requirements; high ethical and professional standards; and a rigorous enforcement process that includes revocation of the certification where appropriate and a public disciplinary process.

Treasury yields will lift at year-end: BNY Mellon

Posted on April 25, 2013 by Editor Test -

Treasury yields should hold steady through mid-2013 before rising toward year-end, according to the April Bond Market Observations from Standish, BNY Mellon’s fixed income specialist.

The U.S. dollar should benefit from political uncertainty in Europe and the Bank of Japan’s aggressive policy stance, Standish said, noting that “the easing policies of major central banks have been the primary reason for the resilience of the global economy to shocks, and have helped to drive the rally in global capital markets so far in 2013.”

“In the past, shocks such as the Cypriot banking crisis and the lack of a clear winner in the Italian parliamentary elections would have sent capital markets reeling,” said Thomas Higgins, Standish’s chief economist. “Now, the flood of liquidity from global central banks has dampened investor reactions to these types of issues.”

The fiscal drag in the United States could still hurt the global economic recovery, Standish said. As a result, Standish expects the Federal Reserve to stay the course with its asset purchase program until economic activity picks up toward year-end, according to the report.

When Treasury yields begin to rise, the increase is likely to be gradual similar to the one that accompanied the Fed tightening cycle in 2004 rather than the sudden increase which occurred in 1994, Standish said. The Fed’s transparent communication with the market should alert investors well in advance of any change in policy, moderating the rise in yields, according to Standish.

Low rates drive life insurance industry restructuring: Fitch

Posted on April 25, 2013 by Editor Test -

Recent transactions in the life insurance space show that industry restructuring is accelerating, Fitch Ratings said in a release this week. “Increased opportunities for both traditional and nontraditional players in the insurance arena are seemingly on the rise,” the release said.

“We expect merger and acquisition (M&A) activity, which has lagged company-specific restructuring initiatives to date, to accelerate in 2013,” according to Fitch. “We note increased M&A activity could lead to negative rating actions based on integration and financing concerns.”

Fitch pointed to AXA’s planned sale of its MONY Life Ins. Co. unit to Protective Life Corp. (PLC). In announcing the agreement, AXA highlighted its “desire to release resources it had tied up in closed, noncore portfolios and reinvest those resources in higher growth markets and businesses.”

Like AXA, “many insurers are taking steps to refocus operations and discontinue or divest businesses that have underperformed and/or no longer provide a strategic fit,” according to Fitch.

Persistently low market interest rates are helping drive the product rationalization, Fitch said. Low rates “lower the relative profitability of some traditional products while also lowering the cost of borrowing if debt is used to finance the acquisition of these businesses.”

Other examples of rationalization noted by Fitch:

Hartford Financial Services’ sale of its individual life business to Prudential Financial, Inc. and its retirement plans business to Massachusetts Mutual Life Insurance.
Aviva PLC’s sale of its U.S. annuity and life operations to Athene Holding Ltd.
Genworth Financial’s sale of its wealth management business to a partnership of Aquiline Capital Partners and Genstar Capital.
Sun Life Financial’s sale of Sun Life Assurance Company of Canada (U.S.) and Sun Life Insurance & Annuity Co. of New York to Delaware Life Holdings, which is owned by Guggenheim Partners.

According to the Fitch release:

Insurers most affected include those that were active in the annuity and long-term care businesses, where unfavorable results have led a number of major players to exit the market.

Canadian and European insurers are expected to further rationalize their participation in the U.S. life insurance market in part due to ongoing underperformance and concerns over pending capital regime changes in their local markets (e.g. Solvency II), which could lead to an increase in required capital associated with having U.S. life insurance operations.

We expect this rationalization process will continue to create opportunities for both traditional players looking to strengthen existing core business, reinsurers with an expertise in block acquisitions, and nontraditional players (e.g. private equity), which are expected to play an increasing role in the life industry and have completed a number of transactions to date largely involving fixed annuity business.

I Survived the Frontline Broadcast

Posted on April 25, 2013 by Editor Test -

I watched Martin Smith’s 60-minute documentary, The Retirement Gamble, and participated in a live twitter discussion during the broadcast. Some of the experts who spoke on camera are friends or acquaintances of mine, including Theresa Ghilarducci of the New School, Zvi Bodie of Boston University, and my former employer, Vanguard founder Jack Bogle.

Sadly, the approach taken by the filmmaker suggested that even after three decades of exposure to and participation in 401(k) programs, most Americans are still in the dark about them. There’s clearly been a failure of education, but I’m not sure who’s to blame.

The hour-long show also left too great an impression, I thought, that Americans are helpless victims of some sort of financial conspiracy. There may indeed be a conspiracy; but people aren’t necessarily helpless. It would have been useful if Smith had shown viewers who don’t like their 401(k) plan how to implement a successful retirement savings strategy on their own.

It also seemed naïve of the filmmaker to marvel at the idea that 401(k) plans differ so much (in terms of expenses, investment options and matching contributions) from employer to employer. Would he be surprised to discover that health care benefits vary from company to company? Or that compensation varies?

* * *

As for the criticisms voiced in the broadcast, the 401(k) industry should take them to heart and not seek refuge in denial or sophistry. For instance, I believe it’s counterproductive for representatives of the industry to play this card: “Small business owners will stop sponsoring plans if there’s a $3 million ceiling on their tax-deferred accounts.”

This argument will enable the industry’s critics to ask, “Why should the nation’s retirement savings policy, financed by $70 billion a year in taxpayer subsidies, depend on satisfying the evidently unquenchable appetite for tax deferral on the part of a few very wealthy small business owners?”

This “$3-million-isn’t-enough” argument, even if it has validity, will not win hearts or minds. It announces that the 401k system’s private/public partnership isn’t working. Even if the industry wins this point, it looks churlish. Blackmail is not a winning strategy for the 401(k) industry.

It’s not wrong to earn an honest profit. But at least three things are wrong about the current system:

The plans are presented as an employee benefit even when they are often just expensive products that are vended at the workplace.
The tax subsidy isn’t producing the desired effect, which should be retirement sufficiency for the mass of Americans.
The industry enjoys economies of scale that are not necessarily passed along to the consumer. Costs go down, but asset-based fees grow.

The 401(k) system is just one example of several problematic public/private partnerships in the U.S. The same mechanism is at work in the tax-subsidized health care industry and in the tax-subsidized mortgage industry. Sometimes these partnerships deliver the best of both worlds, as hoped. Other times, they deliver the worst.

A Chat with Nationwide’s Eric Henderson

Posted on April 24, 2013 by Editor Test -

Eric Henderson, Nationwide Financial’s senior vice president of Individual Products and Solutions, spoke with RIJ for a few minutes last week during the Retirement Industry Conference in New Orleans, which was sponsored by LIMRA, LOMA and the Society of Actuaries.

In terms of variable annuity sales, Nationwide finished 2012 in 11th place with $4.22 billion in premia. Its top-selling contract was the recently introduced Destination B 2.0, with $563 million in sales. In 2011, Nationwide finished 6^th in sales, at $7.4 billion. Nationwide’s VA assets were worth $47.84 billion at the end of 2012, the 13^th largest amount.

We asked Henderson what the retirement industry can expect to see from Nationwide over the next several months.

Henderson: Over the longer-term, we’re thinking about bridging the life insurance–annuity divide. We have an opportunity to do that because of our new management structure [which combines the life and annuity businesses].

With life insurance, people are accustomed to thinking in terms of lump sums. But when you think about it, life insurance is income. In that sense, it’s like an annuity. Life insurance provides income on death, and annuities provide income on retirement. We’re trying to innovate around the concept of combining the two and creating a single product.

RIJ: I see. People would have one product over the life cycle, so there would be continuity of business for the insurance company and less fragmentation for the client in the way he buys insurance over the life cycle. What’s happening with your variable annuities… you had a big net outflow last year .

Henderson: We’ve tried to be prudent in the variable annuity space. We were one of the first to pull back [on benefits] when interest rates dropped. We aligned our benefits with the rate environment. Others tried to ride it out [without de-risking their products immediately] and took some losses. We did experience a loss of market share in 2012 and had negative flows, but in the first quarter of 2013 we’ve seen positive flows. In terms of reducing benefits, the competition has finally caught up with us.

RIJ: Where’s your approach to the VA market going forward?

Henderson: We’re still bullish on the variable annuity with a living benefit. But as we pulled back on our living benefit, we began to sell a lot of variable annuities without it. We’re getting the tax deferral message going. Our alternatives-focused variable annuity is also selling well. So we’re more diversified in our VA offering than we were a few years ago. The ratio is now about 50/50 or 60/40 between contracts with a GLWB and those without.

RIJ: Several companies have introduced a deferred income annuity. Is Nationwide planning to launch one?

Henderson: We’re working on a deferred income annuity but we don’t have one yet. We’ve been updating our IT systems, and we saw no sense in launching a new product on the older system. But we’ve also moved up to the number three position in sales of immediate annuities. We’ve grown faster than the industry in that respect. We’re selling it as a complement to the VA: you put a portion of your money in each.

RIJ: How do you account for your success with immediate annuities?

Henderson: We’ve had a lot of success with RetireSense [Nationwide’s time-segmentation planning tool for retirement income]. People have a lot of concerns about loss of control with annuities. We’re trying to tell people that the annuity gives you more control. We want people to re-think what they mean by control.

RIJ: Have you seen any tangible benefits from Nationwide’s decision to privatize?

Henderson: We’re focusing on the benefits of being a ‘new mutual.’ We think this [ownership structure] gives us the best of both worlds. As a public company we learned how to be smart about expenses and earnings. As a private company, we can pay more attention to the economics than we could under GAAP accounting rules, and we worry less about short-term earnings volatility.

RIJ: Thank you, Eric.

Roll Over, Rollovers: ‘Roll-Ins’ Have Arrived

Posted on April 24, 2013 by Kerry Pechter -

In 2011, about 3.4 million Americans moved some $307 billion from old 401(k) accounts into new accounts somewhere else. About half of the money rolled over to IRAs at big DIY institutions like Vanguard and TD Ameritrade. The other half went to advisor-directed IRAs at wirehouses like JPMorgan Chase or regional broker/dealers like LPL Financial. Less than one percent, or only about $2 billion, rolled into new 401(k) accounts.

Spencer Williams (above), the CEO at Charlotte, N.C.-based Retirement Clearinghouse LLC, wants to alter that financial traffic pattern. For the past year or so, his firm has begun showing new employees at one large corporate client how to consolidate old 401(k) accounts and old rollover IRAs into their new 401(k) plans.

Williams is now the apostle for “roll-ins.” He’s undergone a conversion of sorts. Formerly a rollover specialist—he ran the rollover IRA program with Jerry Golden at MassMutual—he now sees a big opportunity in helping young and mid-career people gather up all their old, small and neglected retirement accounts into their current 401(k) plan.

Ultimately, he wants to create a clearinghouse for 401(k) accounts, and he changed the name of the company from Rollover Systems to Retirement Clearinghouse this spring to reflect that vision and to mark the shift in strategy. He recently hired former MassMutual colleague Tom Johnson, recently of New York Life, to develop new business among big 401(k) recordkeepers.

There’s a quixotic element to this crusade. Williams seems to be swimming against the current, which has been sweeping loose retirement money away from old 401(k)s to rollover IRAs. But Williams has a deep-pocketed backer (the majority owner is Robert Johnson, who sold Black Entertainment Television to Viacom for $3 billion in 2001) and initial success in executing roll-ins for one large plan sponsor.

And he has a sense of mission: he thinks his clearinghouse will help stop so-called leakage from retirement accounts when people change jobs and help agglomerate the small, “stranded” accounts littering the retirement industry so that people can manage their savings smarter—and ultimately retire with more money.

“You can see the nexus of providers and participants and public policy interest here,” he said. “If we could implement this system-wide, we think we could reduce the cash-out rate [from tax-deferred accounts] by 50%,” Williams told RIJ.

The ‘ah-ha’ moment

Williams, a US Naval Academy graduate, became more interested in roll-ins than rollovers only recently. Back in 2007, Johnson headhunted him away from MassMutual to help turn around one of Johnson’s companies, Rollover Systems. Williams replaced Reggie Bowser, a former Lending Tree executive who started the firm in 2001 to capitalize on the rollover provision in the first Bush tax cut (“EGTRRA”). The provision allowed and encouraged plan sponsors to force the small 401(k) accounts of separated employees into safe-harbor IRAs, and spawned the assisted rollover business.

In 2010, a Rollover Systems client, a 250,000-employee company that Williams declines to identify, asked Williams if his company could assist new employees with help consolidating old accounts in their new 401(k), in addition to helping outgoing employees move their 401(k)s into rollover IRAs. That’s when Williams had his epiphany.

“It was an ah-ha moment. We asked ourselves, ‘If we can do an assisted rollover for job changers, could we do an automatic roll-in?’ The answer is yes. We find that there are all kinds of circumstances for consolidation. There are plans that terminated. There are companies that are sold. Every job change turns into a series of consolidations. Our mission is to create a new automatic path to consolidation,” he told RIJ.

“We have found an almost perfect alignment among the many players in the industry—sponsors, participants, and recordkeepers—simply by focusing on a transaction called a roll-in. We’re not religious about 401(k) versus IRA. We’re religious about one account for one participant.”

Williams now foresees a business that handles both ends of the account transfer process, whisking money and data from the old 401(k) recordkeeper—it works with 75 third-party administrators and 10,000 plans—to the new 401(k) recordkeeper, and encouraging participants to roll in any small rollover IRAs they have at the same time.

The process, mediated by 20 Retirement Clearinghouse phone reps, currently takes an average of 55 minutes. Revenues will come from charging each participant a $79 fee for the transfer service. The fee may be subsidized by the recordkeeper, Williams said, or it may not. Retirement Clearinghouse itself won’t earn asset-based fees.

The target market would be job-changers who are relatively young or have small accounts, rather than the near-retirement workers with six-figure 401(k) accounts who are about to leave their final employer.

How big is the opportunity? Citing data from Cerulli Associates, the Employee Benefit Research Institute and other sources, Williams claims that 9.5 million of the Americans who participate in employer sponsored retirement plans change jobs every year. What’s more, he claims, there are 38 million “stranded” accounts held in 401(k) plan accounts by people who no longer work for the plan sponsor, all of which are ripe for consolidating in the worker’s current 401(k). (The Department of Labor says 11.7 million participants are inactive.) Also ripe for consolidation, he said, are 25 million IRA accounts with balances of less than $20,000.

‘That dilemma is gone’

To a skeptic, the clearinghouse and roll-in ideas sound a little like the proverbial $100 bill on the sidewalk: If it were real, wouldn’t somebody have picked it up already? Indeed, 99% of the money leaving 401(k) plans goes to rollover IRAs, and 77% of that money goes to asset managers or advisory firms with whom the participant already has a relationship. Where’s the evidence of a big demand for roll-ins?

And what if the job-changer’s new 401(k) isn’t as good, in terms of investment selections or costs, as the old 401(k)? Firms like TD Ameritrade and E*Trade spend a fortune advertising to job changers—reminding them that the fees will be lower and the investment selection will be wider in a rollover IRA than in their old 401(k). One could envision fiduciary issues for a plan sponsor whose recordkeeper employed an assisted roll-in firm that encouraged participants to move money to an inferior plan.

Williams doesn’t think these are major hurdles. For the plan participant, he says, the long-term benefits of consolidating accounts and managing them in one place outweigh any benefits that might be lost if the new 401(k) plan didn’t outshine the previous one. He also doesn’t expect a battle from the rollover IRA industry, because he’s focusing on a high volume of small accounts, and not competing for the larger accounts that attract the interest of advisory firms and big IRA custodians.

Gary Baker, the president of Cannex USA, the annuity data aggregator, who worked with Williams and Golden on MassMutual’s rollover business, thinks that the 401(k) recordkeepers may embrace the idea of a clearinghouse because it will provide some “database and fiduciary relief” for both plan sponsors and recordkeepers.

The “800-pound gorilla” for the 401(k) industry, he said, is the fact that a large portion of the assets in some plans might belong to former employees. Plan providers have mixed feelings about parting with those revenue-generating assets. They might gladly let the assets go, however, if they thought that a clearinghouse would pump in as much new money as it pumped out.

“If you can clean that up, and get new assets from the new people who have joined the company, then that dilemma is gone,” Baker said. “You’re not spending money chasing people who don’t work for you anymore. You have a cleaner, truer book of assets. That takes away some of the messiness of the system. And that makes for a compelling story in Washington, which wants to see the middle-class maintain their savings in institutional programs and not roll over to the retail environment prematurely. Certainly the 401(k) industry would see that as a plus.”

Former Fidelity employee sues over offerings in Fidelity’s own 401(k) plan

Posted on April 24, 2013 by Editor Test -

Retirement plan leader Fidelity has been sued for breach of fiduciary duty under ERISA by one its former employees, who claims that Fidelity offered high-cost, underperforming mutual fund options to participants in the company’s own 401(k) plan.

The federal class-action lawsuit was filed March 19 by former Fidelity employee Lori Bilewicz, of Milton, Mass., on behalf of the FMR LLC Profit Sharing Plan, against Fidelity Investments and unnamed members of the FMR Investment Committee who oversaw Fidelity’s plan.

The suit charges that Fidelity failed to fulfill its responsibility to choose investment options objectively. The plan investments, the suit says, were limited to Fidelity funds that were more expensive than comparable funds available from the Vanguard Group—a direct competitor of Fidelity—and also more expensive than certain other Fidelity funds or low-cost institutionally-priced funds readily available from Fidelity unit Pyramis Global Advisors.

A Fidelity spokesperson, Vincent Loporchio, told RIJ that Fidelity’s 401(k) plan includes low-cost index fund options, and that employee contributions to the plan are supplemented by a combination of annual matching employer contributions (dollar-for-dollar up to 7%) and corporate profit-sharing distributions (as high as 10% of salary per year).

“The benefits far and away exceed any fee revenue that Fidelity receives from employee assets,” he said.

The Bilewicz suit follows earlier lawsuits over Fidelity’s handling of “float” in the defined contribution plans they administer. These suits are Kelley v. Fidelity Management and Trust Co.; Boudreau v. Fidelity Management and Trust Co.; and Columbia Air Services, Inc. v. Fidelity Management and Trust Co.

All of those suits claim that Fidelity earned interest (“float income”) on contributions to or distributions from its 401(k) plans during the brief periods when they were held in interest-bearing accounts before they were invested in Fidelity funds or before they were disbursed to the participants. The suits say that the interest should have accrued to the plans.

These cases make claims similar to those made by the plaintiffs in Tussey v. ABB, Inc., in which Fidelity was found in 2012 to have violated ERISA in its handling of the float. Fidelity has appealed that decision.

The Bucket

Posted on April 23, 2013 by Editorial Staff -

Fidelity adds two new DIAs to its direct sales platform

Guardian’s SecureFuture Income Annuity and the Principal Deferred Income Annuity are the two newest deferred income annuities in The Fidelity Insurance Network portfolio, joining MassMutual’s RetireEase Choice and New York Life’s Guaranteed Future Income Annuity.

“Ideal for investors approaching retirement, these products offer predictable, guaranteed lifetime income beginning on a future date the investor selects in return for a lump-sum investment,” Fidelity said in a release.

“By purchasing a deferred income annuity several years before retirement, investors have the opportunity to turn a portion of their savings into a stream of income payments for the rest of their lives,” the release said.

ABP settles with Goldman Sachs in RMBS sales dispute

ABP, the €292bn ($380bn) pension fund for Dutch civil servants, has settled its dispute with Goldman Sachs over the purchase of residential mortgage-backed securities (RMBS) from the merchant bank between 2005 and 2007, IPE.com reported.

The pension fund declined to put a figure on the Goldman Sachs settlement, but a spokesman stressed that it had been “good by all standards.”

To date, ABP has settled with Deutsche Bank, JPMorgan Chase and mortgage provider Countrywide in RMBS-related cases. Similar lawsuits against Merrill Lynch, Credit Suisse, Morgan Stanley and Ally Financial are pending.

In January 2012, ABP filed a complaint in New York Supreme Court charging that ABP had purchased RMBS from Goldman Sachs based on “false and misleading statements” and that the securities were riskier and the underlying mortgages were worth far less than Goldman Sachs represented.

Goldman Sachs continues to deny the claims. ABP said in a release that the relationship between it and Goldman Sachs had been “normalized.”

University employees save more in plans than corporate workers: Transamerica

Participants in 403(b) plans at universities and other higher education institutions tend to contribute more to their plans than participants in corporate 401(k) plans do, according to a new report from Transamerica Retirement Solutions.

The report, “Retirement Plans for Institutions of Higher Education,” shows that the average deferral rate for faculty and staff in 403(b) or Roth 403(b) plans is 13.4%. On average, 41% of higher education institutions offer automatic enrollment, and 54% apply a default contribution rate of 5% or more. The release didn’t identify the average contribution of participants in corporate plans.

The findings are based on interviews with 90 sponsors in of those plans.

The report projects usage of automatic enrollment in higher education institution plans will increase to 57% percent and usage of automatic deferral increases will more than double to 17% by the end of 2013.

In other findings:

74% of institutions have made some change to their retirement plan in the last 12 to 24 months.
14% of higher education institutions have added a Roth 403(b) option.
65% are planning to enact changes over the next year, including maintenance as well as structural changes.

Vice chairman of Lincoln Financial Network to retire

Lincoln Financial Group announced that Robert W. Dineen, 63, will retire from his position as vice chairman of Lincoln Financial Network (LFN), effective May 1, 2013. Dineen began his career at Lincoln Financial in 2002, when he was named president and CEO of LFN.

He transitioned into the role of vice chairman late last year, and since then he has helped the company develop and refine long-term strategies at both the distribution and corporate levels, Lincoln said in a release. At the time he retires, Dineen will join the Board of Directors for the Lincoln Life & Annuity Company of New York.

The announcement completes a planned succession process that began last October when the company realigned its distribution organization by forming Lincoln Financial Group Distribution (LFGD).

The new structure, which remains under the direction of Will H. Fuller, 42, president of LFGD, combines into one organizational unit the company’s retail and third-party wholesale distribution systems. Both distribution lines remain separate and distinct businesses within the structure, with existing management leading LFD, and David S. Berkowitz, 49, leading LFN.

Treasury yields will lift at year-end: BNY Mellon

Treasury yields should hold steady through mid-2013 before rising toward year-end, according to the April Bond Market Observations from Standish, BNY Mellon’s fixed income specialist.

Broadridge’s “fund mapping” patent rights are confirmed

Posted on April 18, 2013 by Editor Test -

Broadridge Financial Solutions Inc., the provider of regulatory disclosure communications services, announced that the U.S. Patent and Trademark Office has confirmed the validity of its patents after an ex parte reexamination initiated by a competitor.

The Patent Office confirmed the validity of Broadridge’s 16 original patent claims, and also five new claims of U.S. Patent No. 6,122,635 (“the ‘635 Patent,” entitled Mapping Compliance Information Into Useable Format) by issuance of a reexamination certificate, Broadridge said in a release.

According to the release, the ‘635 Patent is core to Broadridge’s solutions for electronic delivery of compliance information, which help streamline the mutual fund regulatory-communications process.

The company acquired the ‘635 Patent and the related Mapping Compliance Information solution in 2010 when it purchased NewRiver, Inc. Issuing from an application filed more than 15 years ago, the ‘635 Patent is a pioneering patent in the field of electronic preparation and delivery of securities compliance information.

The ‘635 Patent allows Broadridge to exclude others from creating and maintaining a content database wherein EDGAR filings are sorted, separated and kept up-to-date. The database helps financial firms meet compliance and oversight requirements by providing access to up-to-date disclosure materials.

The automated, EDGAR-sourced collection and compilation solutions protected by the ‘635 Patent, combined with other Broadridge capabilities, enables fund companies to adopt the Summary Prospectus model and deliver “plain English” prospectuses at reduced print and postage costs.

Defined contribution assets grow at Northern Trust

Posted on April 18, 2013 by Editor Test -

Assets under management at corporate and public retirement plans managed by Northern Trust’s Defined Contribution Solutions unit have more than doubled in the past three years, the company said in a release.

Assets managed by Northern Trust for defined contribution (DC) plans rose to approximately $78 billion as of December 31, 2012, from $37 billion at the end of 2009. Northern Trust’s target-date funds, the Northern Trust Focus Funds, exceeded $4 billion in assets on January 31, 2013, with the addition of several large corporate DC plan clients.

The assets grew at an annualized rate of 136% from the end of 2009 through the end of January 2013. Northern Trust has approximately $214 billion in DC assets under custody.

The company also offers a Global Balanced Fund, which allocates across stocks, bonds and real assets. Other strategies include core options in index equity, fixed income and multi-manager funds, as well as customized asset allocation solutions.

New York Life urges devoting annual IRA contributions to its DIA

Posted on April 18, 2013 by Editor Test -

New York Life has lowered the minimum initial premium payment for its Guaranteed Future Income Annuity (GFIA) to $5,000 from $10,000, noting that the change will help people use annual IRA contributions to fund a deferred income annuity.

Earlier this year, New York Life announced that the GFIA had exceeded $1 billion in premiums since its July 2011 introduction.

“We believe this new lower initial premium payment will open up this proven way to fund retirement to Gen Xers and Gen Yers who may already be making regular IRA contributions,” said Matt Grove, senior managing director, New York Life. “Funding GFIA through an IRA contribution combines the tax benefits of an IRA with the pension-like guaranteed lifetime income of an income annuity.”

The product modification makes it easier for younger people to build their own defined benefit pension, New York Life said. In 2010 only 9.6% percent of family heads under age 45 working in the private sector had a DB plan.

According to a New York Life example, if a 37-year-old male purchased a GFIA with a $5,000 IRA contribution and then contributed $5,000 annually for the next 30 years, at age 67 he could receive over $19,000 a year for life. If a 27-year-old male who contributed $5,000 IRA contributions to a GFIA for 40 years, at age 67 he will receive over $33,000 a year for life. Payouts for women or couples would presumably be lower because of their greater life expectancy.

In 2013, the maximum dollar amount that can be put into an IRA each year increased to $5,500 from $5,000 in 2012.

The Phoenix Companies launches Income Elite Annuity

Posted on April 18, 2013 by Editor Test -

The Phoenix Companies Inc. has launched the Income Elite Annuity, a single premium fixed indexed annuity with a Guaranteed Lifetime Withdrawal Benefit (GLWB) rider. The product has a “simple structure designed to maximize guaranteed lifetime income” and will be available through independent distributors working with Saybrus Partners, Phoenix’s distribution subsidiary, Phoenix said in a release.

Phoenix Income Elite Annuity provides a guaranteed lifetime income stream through a GLWB rider. There is an additional fee associated with the rider, but the fee does not impact the guaranteed income amount. The amount of the annual income is based on the single premium, issue age and length of time until the rider is exercised.

Contract holders can choose from three different point-to-point indexed accounts and a fixed account. In lieu of stronger death benefit guarantees, the product is designed to provide a larger guaranteed income.

American General introduces FIA with 7% roll-up

Posted on April 18, 2013 by Editor Test -

American General Life Insurance Company (American General) has introduced AG Choice Index 10, a fixed indexed annuity that offers to double the income base of its living benefit after a 10-year waiting period. Contract owners receive a 4% premium enhancement on premiums paid in the first 30 days of the contract.

The contract offers three interest-crediting strategies – a one-year fixed interest account, an annual point-to-point index interest account, and a monthly point-to-point additive index interest account.

With the AG Lifetime Income Plus contract option, the income base—the amount on which lifetime withdrawals are based—is guaranteed to double to 200% of premiums paid, as long as no withdrawals are taken before the tenth contract anniversary. The rider also guarantees that retirement income will rise by 7% each year that withdrawals are not taken in the first 10 contract years.

The highest payout rate is 6% for the oldest owners of single-life products.

Greetings from New Orleans

Posted on April 18, 2013 by Editor Test -

I’m “broadcasting” from sultry New Orleans, where the first full day of the 2013 LIMRA-LOMA-SOA Retirement Industry Conference got underway this morning.

In his opening remarks, LIMRA-LOMA president and CEO Robert Kerzner made a surprise announcement that the two organizations, which are traditionally identified with the life insurance sector, have decided to get more involved in the retirement sector.

One tangible step in that direction, he said, will be the introduction of a new retirement designation, to be offered by LIMRA and LOMA to home office employees of the organization’s member companies. The first foundation course will be offered in the fall of 2013, and delivered over the web.

“We’re aiming it at the people who work behind the scenes at banks, insurance companies and broker/dealers,” Kerzner told RIJ.

The designation will not be aimed at advisors or producers, and will not compete with designations for advisors, such as those offered by the Retirement Industry Income Association (provider of the Retirement Management Analyst) and the American College (provider of the Retirement Income Certified Professional), Kerzner said.

The biggest problem facing the retirement industry is lack of savings by Americans, Kerzner said, and the main reason for lack of savings is “present-bias,” which makes people favor immediate over deferred gratification.

Kerzner then introduced a panel of Eric Henderson of Nationwide, Charles Nelson of Great-West Financial, Stig O. Nybo of Transamerica Retirement Solutions, and Jay Wintrob of AIG Life and Retirement, and asked them to address questions about the industry’s current dilemma.

What’s the biggest problems facing the industry, and what are their solutions? Kerzner asked.

“Outcomes are the biggest challenge, said Nybo. “We have to tell people how much they have to save. We have this huge battle with consumerism. If we don’t get this right, we’ll see a lot more legislation, and that’s not the solution.”

“Identifying, training, supporting the next generation of advisors” is the best way to solve the retirement problem, said Wintrob.

“Retirement leakage is a huge problem,” Nelson said. “The typical person will have seven jobs, and 40% of employees that terminate and go to a new job, cash out. We have to have the courage to address that issue.” He praised Britain’s NEST program, a national defined contribution plan, which permits no withdrawals during accumulation and encourages annuitization at retirement.

“No one has mentioned low interest rates, said Henderson. He added, “We have to get people to overcome their present-bias.”

Regarding the difficulties in the variable annuity business in the wake of the financial crisis, Wintrob of AIG said that too many companies “gorged on sales without understanding the economics” of their products.

Henderson of Nationwide disagreed. “Even if everyone had judged the risks appropriately, the products’ benefits would have been cut back because of the effect of falling interest rate on hedging costs,” he said. Companies would also have eventually encountered capacity issues and been forced to cut back on sales, regardless of how well they had understood the risks, he said.

What should be done next? Kerzner asked.

“We have to tell people what they need to do,” said Nybo. “We provide them with information. We know they don’t read it. But we don’t tell them what they need to do. We need to default them into defined contribution plans at the right contribution rates. We’ve got to get bold about it.”

Kerzner asked the panelists what they thought about the entry of private equity firms into the insurance industry. Some people are worried about their low pricing, he said.

The panelists didn’t see that as a bad development, since it added capacity to the indexed annuity business, brought attention to the value of the industry, and established higher expectations for profitability. Henderson said there was some concern about the risk-taking culture among private equity firms.

“Insurance is not a business where it’s OK for a part of your business to fail, and in the hedge fund that might acceptable. That’s a concern,” he said.

What about interest rates? Kerzner asked.

That depends, the panelists agreed. “If rates spike, it would be bad for fixed annuities but good for no-lapse life insurance policies,” Henderson said. The challenge is to “diversify your risk so that all the guarantees aren’t responding the same way to changing rates.”

“The first couple of hundred basis points [of rising rates] could be helpful to the insurance companies, not hurtful,” said Nybo.

What’s your biggest regulatory concern? Kerzner asked.

“The investment fiduciary regulations,” said Nelson. “The DoL wants to limit the advisor from providing distribution or roll-over advice to participants. The government also sees a conflict of interest in one company providing both recordkeeping and investment services. Those two things concern me.”

We’ll have more on the LIMRA-LOMA-SoA conference next week.

Principal Financial Joins the DIA Club

Posted on April 18, 2013 by Editor Test -

The Principal Financial Group this week became the latest member of the retirement industry to offer a deferred income annuity, following the trail blazed by New York Life in July 2011 and trodden since then by MassMutual, Northwestern Mutual, Guardian Life, Symetra and others.

Jerry Patterson, vice president for retirement income strategy at the Des Moines company, said that The Principal, like its competitors, is focusing on the 10,000 Baby Boomers who retire every day—many of whom are, as he put it, drawing their last paychecks on a Friday and waking up Monday morning not knowing what to do next.

The Principal will be working with Toronto-based annuity consultant Moshe Milevsky and his Qwema Group to help train advisors and educate consumers, Patterson said. The Principal’s producers will employ the same Retirement Security Quotient communications concept that Milevsky created for ManuLife a few years ago and which ManuLife affiliate John Hancock, for one, has used.

The RSQ program, among other things, explains that retirees face three big risks—inflation, sequence-of-returns, and longevity—and that they should use a combination of three products—mutual funds, variable annuities with living benefits, and life annuities—to mitigate those risks, respectively.

“We’re making a big investment in Moshe Milevsky and Qwema and the thinking around their tool and their algorithm,” Patterson told RIJ yesterday. “We want to give advisors a powerful way to have a conversation with clients about the tradeoff between annuities and mutual fund and the balance between guaranteed and non-guaranteed products.”

The company’s DIAs will be distributed primarily through its career agents and through the bank channel.

“Our mantra around this market,” he added, “is that it’s time for less conversation and more action. The industry spent 10 years talking and thinking about the retirement challenge, and now we have 10,000 Boomers a day pouring into retirement. It’s no longer about what they could have or should have done. It’s about how someone who hits 65 deals with the fact that his paycheck is gone.”

By definition, a DIA allows people to buy income that starts no sooner than 13 months after purchase. According to feedback from sellers of DIAs, Boomers are buying them for “pension replacement” and scheduling income to begin with five to 10 years.

In general, they aren’t using them as “longevity insurance,” a term that typically refers to deeply-discounted, non-cash value contracts that don’t pay out unless or until the owner reaches age 85 or so. o

The Principal Deferred Income Annuity allows contract owners to delay income for up to 30 years. Four times during the life of the contracts, once payments begin, 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.

Patterson said that, in preparing its DIA for market, Principal drew on its experience with creating deferred income solutions for athletes, whose earning potential is heavily weighted toward their younger years, and many of whom go bankrupt because they don’t have a plan for spreading their youthful income over their lifespans.

“We’ve created highly customized plans to meet interesting needs,” he said. “We look at plans for job categories where there’s a high degree of bankruptcies. Professional athletes, for instance, have a high rate of bankruptcy. Their pensions don’t kick in until they’re 50.”

Principal also has a single premium immediate annuity (SPIA) business, where it has $2 billion to $3 billion” in assets under management, Patterson told RIJ. Principal also has an Income Protector program where it can help people turn their fixed deferred annuities into income annuities. But that program has not been heavily promoted.

The Principal ranked 19^th in variable annuity sales in 2012, with $870 million in premia, according to LIMRA. Morningstar reported that The Principal had about $6.7 billion in VA assets under management as of the end of 2012, giving it a rank of 26.

Asked if his company might introduce DIAs to its retirement plan business, as an in-plan annuity option, Patterson said doesn’t see any activity in that area soon. “We’re cautious about being first to market anything that might have disruptive impacts on customer relationships, and customers are not screaming for it. Portability is still a big issue. But we keep a close eye on it.”

A Man of Conviction

Posted on April 17, 2013 by Kerry Pechter -

Even as a federal jury in Boise, Idaho found him guilty Monday of wire fraud related to the misuse of million of dollars taken from the retirement plans he managed, Matthew Hutcheson claimed that he was innocent and was only trying to help the participants in the plans.

Perhaps for that reason, there’s something about Hutcheson’s case that still feels unresolved—even though he now faces the possibility of spending several years in prison, probably in a minimum-security federal penitentiary.

How and why did the earnest, fresh-faced man who had once been the poster boy for fiduciary rectitude, testifying on Capitol Hill, turn so quickly into the wanted-poster boy for fiduciary misconduct. How did he go from the guardian of retirement plan participants to the convicted exploiter of those participants?

It’s possible that Hutcheson’s behavior didn’t actually change. His activities in Idaho are consistent with what some had noticed earlier as those of an ambitious self-promoter. His desire to do well seemed at least as strong as his desire to do good, and the former may have simply have had an opportunity to exceed the latter. Or maybe he was not able to see a clear line between the two.

If Hutcheson had merely flubbed an investment of participants’ money in an underpriced golf course at a bankrupt resort, jurors might have been believed that his motivations were pure. But his documented purchases of mid-life toys—a Land Rover, a BMW convertible, a Subaru, two motorcycles, two all-terrain vehicles and a John Deere tractor—can only have cost him friends on the jury.

Interestingly, Hutcheson’s story is a relatively small-stakes subplot within a larger subplot of the last decade’s epic real estate boondoggle. The unfinished resort that Hutcheson purportedly hoped to buy was one of four troubled properties, all involved in a separate federal lawsuit, that were used as collateral for hundreds of millions of dollars in ill-fated loans that Credit Suisse arranged for their owners or developers through its Caymans branch. (More on that below.)

Ambitious and idealistic

Less than three years ago, Hutcheson, a boyish 42, was a high-profile advocate of higher fiduciary standards in the trusteeship of retirement plans. He had testified before members of Congress. He was a member of the Committee of the Fiduciary Standard. He was building a National Retirement Security Plan, a multi-employer plan for small companies. His plans were ambitious and idealistic. He was, if not well known, widely known and not unadmired by prominent people in the retirement industry.

But, incongruously, in April 2012, news broke that he had been indicted by a federal grand jury in Boise. (He lives in the nearby suburb of Eagle, Idaho.) Hutcheson was accused of using about $5 million from two retirement plans to buy the $3.4 million secured by the Osprey Meadows golf course at the bankrupt Tamarack Resort on Lake Cascade, a large reservoir in the mountains about 90 miles north of Boise in west central Idaho.

By all accounts he cooperated with the investigation. Last October, he was offered but apparently did not accept a plea bargain agreement offered by federal prosecutors, according to local press reports. During the trial, Hutcheson took the stand and reportedly testified that he was merely to make investments that would benefit the plans he managed and their participants. His lawyer, assistant federal public defender Robert Schwarz, said that if Hutcheson truly intended to steal, he would have diverted money to offshore accounts and made plans to flee the country.

“No matter how the government wants to spin it, they cannot tell you what his intent is, what was going on in his mind. But he can, and he did,” he said. “People are not infallible, but what’s important in this case is Mr. Hutcheson was trying to do the right thing.” Calls to the public defender were not returned before deadline.

But the jurors didn’t buy it. On Monday, after deliberating for 3 ½ hours, they found him guilty on 17 counts of wire fraud. After the trial, Judge Edward Lodge released Hutcheson pending a July 23 sentencing hearing, saying that he did not consider Hutcheson a flight risk. Hutcheson, who declined to comment after the verdict, faces a punishment of up to 20 years in prison on each count.

“We’re pleased with the jury’s verdict,” Assistant U.S. Attorney Ray Patricco told reporters Monday. “We believe justice was done and that the victims of the pension plans have been vindicated.” It was not immediately clear if or how the plan participants will recoup the money spent on the golf course and on Hutcheson’s personal property.

Tamarack and Credit Suisse

But there’s much more to the story of the Tamarack Resort. In November 2010, when Hutcheson called a press conference in Boise announcing his intention to buy the entire resort complex for $40 million, it was already a victim of the financial crisis and the collapse of the real estate market.

Tamarack, along with the Yellowstone Club in Montana, the Lake Las Vegas project in Nevada, and the Ginn sur Mer resort in the Bahamas, were part of a billion-dollar lending project structured by Credit Suisse that is the subject of complex, ongoing litigation.

A federal class action suit filed in Idaho in July 2011 claims that Credit Suisse, through a Cayman Islands branch, arranged large loans to owners or developers of luxury resorts based on inflated appraisals of the equity in their properties. The loans, or loans with an option to own, were financed with money raised from third-party investors.

The suit charges that Credit Suisse inflated the values of the properties to justify over-sized loans against them, knew that the owners of the properties wouldn’t repay the loans or finish the projects, and positioned itself to take possession of the properties when they were foreclosed on. Credit Suisse denies the charges.

One of the developers who received a nine-figure loan from Credit Suisse was then-billionaire Tim Blixseth, owner of the Yellowstone Club at Big Sky, Montana, and now a plaintiff in the suit against Credit Suisse. According to a December 2012 Associated Press story, “beginning in 2005, Blixseth diverted most of a $375 million loan to the club to himself and then-wife Edra Blixseth. They used the money to buy up luxury estates around the world, a pair of jets, cars, furniture, art and jewelry.

“When the resort started to founder, Tim Blixseth turned it over to Edra Blixseth during their 2008 divorce and took most of their remaining assets. The Yellowstone Club went bankrupt months later. It was later sold and is now under new ownership.”

Regarding the Ginn sur Mer resort in the Bahamas, a November 2012 report in a Caribbean newspaper said, “a Credit Suisse-led lending syndicate took possession of the remaining 1,476 acres at the former Ginn sur Mer project after Ginn Development Company defaulted on its $276 million loan. It effectively inherited the real estate component of the Ginn project, and is looking to develop that in partnership with its own master planner, Replay Resorts.”

The real estate crisis of the past decade evidently isn’t dead. It’s not even past.

What executives say about Obama’s auto-IRA proposal

Posted on April 15, 2013 by Editor Test -

Small-company CFOs and executives interviewed by CFO magazine this week expressed mixed feelings about the proposal in the Obama administration’s 2014 budget to require small companies to offer automatic enrollment in an IRA if they offer no other retirement plan. Here are their comments:

“I fear that in its search for more sources of revenue, Washington may attack the 401(k) concept by taking away the tax deduction for contributions so that the IRS gets the revenue now instead of after employees retire,” said Hank Funsch, president of Dayton T. Brown, a $40 million defense contractor.
“I am philosophically opposed to it being a government mandate or in any way regulated, since it will inevitably cost more than it needs to if done that way,” said Don Doherty, CEO at specialty equipment finance firm Fleetwood Industries. If the rule is to be mandatory, he would prefer that the government carve out a portion of the FICA tax and deposit it into an IRA-like plan on behalf of the employee. The funds would be placed in trust for the employee and inaccessible for general use by the federal government.
“I think this is a good thing, because so many people have so little saved for retirement,” said Kathleen Wolf, finance chief at Atari International Contracting, a small construction firm. “But forcing it is like adding another layer of Social Security. It’s like when the minimum wage jumps. You have to balance that out with something. Generally speaking, it’s probably going to reduce someone’s compensation.”
The proposal “makes a lot of sense. Most employees will not miss the funds invested in their IRAs, but if they do they can opt out. It’s a great way to get individuals to save for retirement,” said Paul Remington, CFO at Westbrook Technologies, a document management software vendor.
“This proposal is very lacking in detail,” said Gregory Marsh, vice president and corporate retirement plan consultant at Bridgehaven Financial Advisors. “Funds will be deferred out of payroll to an investment vehicle, so there has to be a fiduciary. Who’s that going to be? The CFO? What happens, for example, if the company fails to automatically enroll someone who’s eligible to participate?” It makes no sense, he added, to burden CFOs or CEOs with more administrative activities when the new rule “would still not solve the savings crisis.”

Unconventional Wisdom

Posted on April 15, 2013 by Editor Test -

Advisor/researcher Jim Otar doesn’t suffer conventional wisdom about investing gladly, perhaps because he’s never been satisfied with conventional investment results. Trained as an engineer, he might also possess an inborn mistrust of easy assumptions.

In his latest monograph, which isn’t as scary to read as its title (“Distributions of Growth in Distribution Portfolios: A Non-Gaussian Approach”) suggests, Otar challenges the intellectual bases for Monte Carlo forecasting, asset allocation strategies and “bucketing.” He also takes a close look at the impact of portfolio rebalancing, advisor skill and costs (See “Determinants of Portfolio Growth” below at right).

Take Monte Carlo analyses. Instead of using Monte Carlo to predict the probabilities of financial outcomes, Otar uses his own creation, which he calls “aft-casting.” It confines the universe of possible future events, or sequences of events, to the sequences that have actually occurred.

“Aft-casting does not predict anything,” he writes. “It only shows what would have happened in history given a specific set of input data. There is no claim or suggestion that past events will be repeated in the future. We are not interested in what happened in a specific year in history, other than to demonstrate it in the examples.

“However, we are very interested in the frequency, the size and the persistency of extreme events (that is, market and/or inflation events) that happened in the past in real life, i.e. a non‐Gaussian framework. These extremes are our starting point for designing a robust retirement plan for our clients.”

Aft-casting helps reveal risks that may go undetected by Gaussian (normal, or bell-curve) distributions. Like Nassim Nicholas Taleb and like the late Benoit Mandelbrot, Otar believes that so-called “Black Swan” events or “discontinuities” in financial trends have been a regular feature of the economic past and will occur regularly in the future.

“If something already happened in the past then it is likely that it will happen again,” Otar wrote in an email to RIJ. “From the probability point of view, many events definitely happen more often than the Gaussian model suggests. The real world events, where one event can trigger another event, follow less of the Gaussian model and more of the Mandelbrot model, in my humble opinion.”

Regarding asset allocation, Otar doesn’t think a portfolio’s ratio of stocks to bonds has as big an impact on long-term returns as most people assume. (If you read the source of asset allocation theory—Gary Brinson’s research—you find out right away that it applies to the differences between the returns experienced by pension fund managers, not to the absolute returns of individual investors.)

“The dynamics of cash flow in a pension fund are entirely different from the dynamics of cash flow in an individual retirement account,” Otar writes in his paper. “A pension fund has a continuous inflow of money over time. In an individual retirement account, inflow of money occurs mainly during working years. After retirement, there is usually no more inflow but only outflow.”

As for bucketing, Otar is also not the only one who has questioned this retirement income strategy, which generally calls for holding a bucket of cash equivalents for short-term, bonds for medium-term and stocks for long-term needs. He’s not necessarily against bucketing: he recommends holding enough cash in retirement for up to five years’ living expenses.

But while Otar acknowledges that bucketing can protect against volatility risk, he doesn’t believe that it can protect against the menace of sequence-of-returns risk, which he regards as Public Enemy Number One for retirees.

Sequence-of-returns risk was long over-looked, because it doesn’t matter much during the accumulation stage. But it can be deadly during decumulation. Just as a poker player’s presence at the table will probably end earlier if he loses several big hands early in the game, a retiree’s savings could run out early if a streak of poor investment returns occurs near the beginning of retirement, when he has begun taking withdrawals.

“The bucketing strategy can help with the volatility of returns by reducing the effects of reverse dollar cost averaging over business cycles. Nothing more,” Otar said in his email. “On the other hand, the sequence of returns creates a much more serious damage to a portfolios longevity and bucketing strategy can do nothing against that.”

The best way to fully understand Otar’s approach to decumulation, including his recommendations on annuities, safe withdrawal rates and the warning signs of retirement trouble, is to read his self-published book, “Unveiling the Retirement Myth,” and using his calculator, the “Retirement Optimizer.” Both can be found at his website.

An Interest Rate Menagerie

Posted on April 14, 2013 by Russell Wild -

The Academy-Award winning film Life of Pi featured a fantastical story of wild beasts battling amongst themselves while adrift on a lifeboat after their ship goes down in a storm. Today’s politicians, pundits and investment advisors are battling amongst themselves over whether an interest-rate storm is coming, and how to build and stock an appropriate lifeboat for such an event.

Some argue we should try to stall the storm as long as possible. Times like these, they say, with unemployment high and businesses skittish to invest, call for as loose a monetary policy as possible to keep rates from rising. In The New Yorker last week, James Surowiecki said the broader good of low interest rates clearly trumps the dampening effect of low interest rates on savings accounts, CDs, and savings bonds. His column was entitled, “Shut Up, Savers!”

Others (name any Republican in Congress or presidential-hopeful) argue that the Federal Reserve’s efforts to keep interest rates low are throwing our seniors to the wolves (or tigers or hyenas), forcing them to accept pitifully low interest rates on their savings, and chewing them up alive (like the meerkats in Life of Pi). Some go so far as to suggest that low rates are forcing seniors back to work, and so stealing employment from the young. We must, for the sake of everyone, they argue, allow interest rates to rise.

In a recent article in the New York Times (“A Debate in the Open on the Fed,” April 2), it was made clear that even officials within the Federal Reserve don’t agree over how to handle this stormy question of what to do about interest rates.

Martin Feldstein argued in an April 1 guest column in this publication that regardless of government policies, regardless of what we want to happen, economic forces will eventually force interest rates up. Others, like bond guru Jeffrey Gundlach, have argued that nothing is inevitable—and that interest rates may stay low for a very, very long time.

This uncertainly has created yet more battles about what to do in the interim, while we’re waiting for interest rates to bolt—or not.

Some investment advisors say that we can’t sit by and watch inflation consume our savings. We should sift through the world of fixed income offerings, seeking yield in strange and usual places, like floating-rate bonds. Burton Malkiel suggests a good look at emerging-market bonds. Some say we should lower our fixed-income allocations along with our expectations, and beef up our allocations to dividend-paying stocks, and REITS.

Other notables of the investing world, such as William Bernstein, argue that we should play it safe. He recommends high-quality, short-duration bonds, even if it means losing out to inflation, so that we can stay on top of the water once the waves of higher interest rates start to smack us hard.

In the Wall Street Journal last week (“Pay Off That Mortgage Now!” April 6), columnist Brett Arends argued that it may not make sense to hold bonds at all. We should trash the bonds and pay off our mortgages, he says. Others have argued strenuously that this is the best time ever to lock in on low-hanging mortgage rates.

All told, the controversy over what we should do about interest rates, as both a matter of both public policy and as investors, is one of the hottest controversies of the era… and not one to be solved anytime soon. As for as public policy goes, I’m in the let’s-stall-as-much-and-as-long as possible group. As an advisor, I’m trying to delicately balance the advice of both Malkiel and Bernstein by squeezing out a bit of extra yield—just a bit—without taking undue risk. On the debt front, I’m all for taking on long-term mortgages and not liquidating our bonds. It’ll pay in the long-run. Maybe.

Of course, my story is one of many. As protagonist Pi said at the end of the movie about the wild beasts, many alternative stories can be told about storms and lifeboats and survival. You get to choose the one you prefer.

Russell Wild heads Global Portfolios, LLC, a fee-only firm in Allentown, PA. He is also the author of Bond Investing for Dummies (2d ed., 2012), Exchange-Traded Funds for Dummies (2d ed., 2012), and other books on finance and investing.

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