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Buenos DIAs

Posted on May 1, 2013 by Kerry Pechter -

“I just don’t see the appeal of those products,” said the executive of a large issuer of variable deferred annuities with lifetime income benefits. He was sipping coffee on the first morning of the recent Retirement Industry Conference in New Orleans and responding to a question about deferred income annuities, or DIAs.

In one respect, his comment was surprising. His company has sold billions of dollars worth of VAs with guaranteed minimum income benefit riders, which resemble DIAs. On the other hand, his comment wasn’t all that surprising, because no one seems to have seen this product coming.

But it’s here. A half-dozen insurers, some publicly held and some mutually owned, are marketing DIAs. Sales of DIAs are still barely a blip compared to sales of variable annuities or even indexed annuities. Nonetheless, it’s the fastest-growing type of annuity, if only by virtue of having started from a base of virtually zero in 2011.

Anecdotally, DIA sellers say that near-retirees are buying DIAs for “pension replacement.” If that’s true, it would be heartening news for annuity marketers. It implies that a certain number of Boomers are now seeking products whose main purpose is retirement income, as distinguished from products that merely offer an income option. The beginning of the Boomer income bonanza may finally be at hand.

Or DIAs might be a passing fad. Their success may be a symptom of setbacks in the variable annuity space. The reductions in VA rider generosity may have left a small vacuum in the lifetime income market. Rising risk-aversion among both manufacturers and investors may also help explain why DIAs are attracting attention.

The principal irony of the DIA’s newfound fame is that such a product has always been hiding in plain sight. Anyone could buy a seven-year fixed deferred annuity, for example, hold it to maturity and convert it to a customized lifetime income stream. But very few people ever did. Every deferred annuity was a potential DIA, albeit not one where the owner could lock in a future rate of income today.

A couple of observations about the emerging DIA market:

DIAs have eclipsed ALDAs. As recently as 2007 or 2008, academics were keen about a type of DIA that they called ALDAs (Advanced Life Deferred Annuities). These were long-dated, no cash value, life-contingent annuities that offered retirees an inexpensive way to isolate and eliminate the risk of living past age 85 or so. Only a few firms marketed them.

Actuaries, who tend to evaluate products in terms of their predictable aggregate benefits, loved ALDAs. But individuals, whose experiences are unique, didn’t grasp their appeal. What worked in the lab doesn’t necessarily work in the marketplace. Curiously, DIAs are selling better today at lower payout rates than ALDAs did a few years ago at significantly higher payout rates. At that time, Boomers were still too obsessed with stocks to pay attention to an annuity with no link to equities.

The iPad of annuities. Instead of taking income within 13 months, as they do with a SPIA, or after 15 or 20 years, as they would with an ALDA, investors are using DIAs to set up an income stream that begins within five to 10 years after purchase. DIAs occupy a middle ground between SPIAs and ALDAs, in the way that the iPad and other tablet computers occupy a middle ground between the iPhone and the notebook computer. Few people predicted the wild success of the tablet, and few seem to have foreseen the modest success of the DIA.

Liquidity trumps income. Somewhat counter-intuitively, purchasers of DIAs are not maximizing the advantages that the product can potentially provide. According to reports from manufacturers, most DIAs are purchased not only with death benefits that return premium if the owner dies during the deferral period but also cash refund provisions after income begins. By choosing these options, purchasers eliminate at least part of the credit or dividend that mortality pooling can provide. People seem to prefer protecting their beneficiaries to maximizing their monthly payment.

Channel preference. The energy around DIAs seems to emanate mainly from the mutual companies that sell them through a career- or captive-agent force, and less so from the public companies that distribute their DIAs through third-parties or through a combination of career agents and third-parties. It’s possible that the DIA, like the single-premium income annuity, may lend itself more to the career agent channel, where insurance products are a familiar component of lifecycle financial planning, than to the more investment-oriented independent advisor channel.

Like the income annuity, the DIA may also not have the huge sales potential that publicly-held insurers need in order to satisfy shareholders’ appetite for earnings. The margins of the DIA may also be slimmer than those of variable deferred annuities, and therefore less able to support the kinds of sales incentives required for a product to compete for the attention of independent agents, broker-dealer reps and advisors.

What comes next? One could easily envision a retail client or a plan participant using a flexible-premium DIA to build a future pension over the course of a lifetime. The contributions could be assigned either to separate accounts for equity exposure or to discrete purchases of future income, priced at a steep discount.Several of the new DIAs offer deferral periods as long as 40 years or more, even though no assets are currently available to match such long-dated liabilities exactly.

The short-lived SponsorMatch partnership between MetLife and BlackRock would have created exactly that type of vehicle. Today’s DIAs are interesting, but, as currently structured and used, with such a short period between the purchase date and the income start date, they deliver less value than they’re capable of. Of course, annuities can’t deliver any value at all unless people are willing to buy them.

Jackson National adds investment options to Elite Access VA

Posted on April 29, 2013 by Editor Test -

Jackson National Life is adding several investment options to its Elite Access variable annuity (VA), including more than 20 new subaccounts and seven new fund managers, the company said in a release.

The offerings provide access to alternative and traditional strategies and investments, including international opportunities and additional guidance portfolio options through Curian Capital LLC, Jackson’s retail asset management subsidiary.

Sales of Elite Access were $1.3 billion in 2012, the company said. Jackson’s total VA sales in 2012 were $19.7 billion, up from $17.5 billion in 2011.

The newest Curian Guidance Portfolios include:

Curian Guidance – Growth
Curian Guidance – Institutional Alt 100 Conservative
Curian Guidance – Institutional Alt 100 Growth
Curian Guidance – International Opportunities Conservative
Curian Guidance – International Opportunities Moderate
Curian Guidance – International Opportunities Growth

In addition, the following new funds address low and rising interest rates or inflationary periods:

Curian Guidance – Interest Rate Opportunities
Curian Guidance – Multi-Strategy Income
Curian Guidance – Real Assets

Elite Access now includes 18 alternative investment options, including managed futures, commodities, listed private equity, global infrastructure and convertible arbitrage that provide enhanced diversification potential. New alternative funds added to Elite Access include:

Curian/BlackRock Global Long Short Credit
Curian/Eaton Vance Global Macro Absolute Return Advantage
Curian Long Short Credit
Curian/UBS Global Long Short Income Opportunities
Curian/Urdang International REIT

New traditional funds added to Elite Access include:

Curian/Aberdeen Latin America
Curian/Ashmore Emerging Market Small Cap Equity
Curian/Baring International Fixed Income
Curian/Lazard International Strategic Equity
Curian/Schroder Emerging Europe
JNL/Franklin Templeton Income
JNL/Mellon Capital Utilities Sector

New fund managers in Elite Access include:

Aberdeen Asset Managers Limited
Ashmore EMM, L.L.C.
Baring International Investment Limited
Eaton Vance Investment Managers
Schroder Investment Management North America Inc.
UBS Global Asset Management (Americas) Inc.
Urdang Securities Management, Inc.

Equity rally fosters optimism among non-retired: Wells Fargo/Gallup survey

Posted on April 29, 2013 by Editor Test -

Most Americans (59%) want less political gridlock in Washington, even if their favored policies don’t win, and 88% think political divisiveness is bad for investments, according to the quarterly Wells Fargo/Gallup Investor and Retirement Optimism Index.

The 10% rise in the S&P 500 Index in the first quarter of 2013 seems to have inspired investor confidence. On average, U.S. investor optimism rose to +31 in March, up from -8 in November 2012, the survey showed.

Non-retirees were much more optimistic than retirees. Among non-retired Americans, the optimism level rose to +38 this spring from -8 last November. Retired Americans are less optimistic at +7, up from -5 last November. The spread between the two groups follows six quarters of closely aligned sentiment.

Most investors (70%) say they have not paid much attention to retirement plan fees, despite last summer’s new disclosure regulations.

The median age of the non-retired investor in the survey was 46. For the retiree it was 70. The telephone survey was conducted between March 14 and 24, 2013. According to the survey:

51% of investors say now is a “good time” to invest in the financial markets, up from 39% during the last quarter and now at the same levels as February 2012.
54% of the non-retired say this is a “good time” to invest.
43% of retired investors hold this same view.
85% of investors say they “made no changes” to their investments in the stock market.
10% of investors increased their stock market investments during the first quarter 2013 (6% of retired and 12% of non-retired investors).
50% of retired investors say the low interest rates have done “a great deal” or “quite a lot of harm” to savers and investors as compared to 25% of non-retired investors.
69% of non-retired investors but only 51% of retired investors agree that the benefits of low interest rates have outweighed the costs.
35% of retired investors and 28% of non-retired investors say that low interest rates have caused them to “put money in investments that they might have avoided.”
47% of investors say today’s low interest rates will make them live “less comfortably” in retirement —45% of retired and 48% of non-retired investors.
43% of all investors — 35% of retired and 46% of non-retired — fear low rates will mean they will “outlive their money” in retirement.
33% of non-retired investors say low interest rates will cause them to “delay” retirement.
74% of investors see low interest rates having a positive impact on housing. In the past two years, 33% have refinanced their home – 39% of non-retired and 14% of retired.
For those investors who refinanced, 43% did so to reduce the number of years of their mortgage and 32% to save money.
68% of investors — 59% of retired and 71% of the non-retired — are worried that they will have to pay higher federal taxes in retirement and will have a more difficult time living “comfortably” in retirement.
39% say their worry over higher taxes has made them “more likely to seek after-tax investments,” but 58% say they have not.
Half of all investors say they supported the suspension of the payroll tax holiday in order to provide more funds to Social Security.
35% say the suspension of the payroll tax hike has forced them to reduce their overall spending.
32% say it has forced them to reduce the amount they are saving for retirement.
59% of investors in this survey say that they’d like to see political confrontations in the nation’s capital end as opposed to potentially “getting their way” on future government spending, tax policy and federal budget deficits.
62% of investors say recent political confrontations have had a “major negative” impact on the overall economy
88% say a politically divided federal government hurts the investment climate, with 70% saying it hurts “a lot.”
61% of non-retired investors saying they have “no worries” about being “unhappy” in retirement.
69% of retired investors express the same lack of worry.
29% of non-retired investors say they have a written plan for retirement, down from 34% last quarter.
Over half of investors say their retirement calculations are “a guess.”
Two in three investors (66%) — 56% of retired and 70% of non-retired — say they feel “little or no control” in their ability to build and maintain their retirement savings in the current environment.
65% of investors say they have a 401(k) plan (44% retired and 72% of non-retired investors).
30% of those with a 401(k) plan say the new fee information was something they “paid attention to,” while 70% say they have paid “little” to “no attention” to the new information about fees that has been published in the last year.
62% say the new fee information has had “no impact” on the way they manage their 401(k); however, 37% say the new information had an impact.
56% of investors say the rising stock market has had either a “major” to a “minor” positive impact on their confidence in the economy.
One fifth of investors say the rising stock market has had “no impact” on their perception of the economy.
55% of investors say the rising market has had a “major” to a “minor” positive impact on their ability to retire, while 33% say the rising market has had “no” impact on their ability to retire.

Six new investment options for Prudential’s Highest Daily VA

Posted on April 29, 2013 by Editor Test -

Prudential Annuities, a unit of Prudential Financial, has added six new asset allocation portfolio options to its Highest Dailyvariable annuity investment lineup. The VA now offers 21 asset allocation portfolios in four strategies (traditional, tactical, quantitative and alternative). Three funds will be phased out.

The six new portfolios, which can be used individually or in combination, include:

AST BlackRock iShares ETF Portfolio: Invests in iShares exchange traded funds (ETFs) across global equity and fixed-income asset classes.
AST Defensive Asset Allocation Portfolio: Offers lower equity exposure.
AST Franklin Templeton Founding Funds Plus Portfolio: Consists of four Franklin Templeton value strategies.
AST Goldman Sachs Multi-Asset Portfolio: Offers access to “growth markets” regions; replaces the AST Horizon Moderate Asset Allocation Portfolio.
AST Prudential Growth Allocation Portfolio: Actively managed portfolio that determines allocation and security selection through a quantitative model; replaces the AST First Trust Capital Appreciation Target Portfolio.
AST RCM World Trends Portfolio: Replaces the AST Moderate Asset Allocation Portfolio.

Should ERISA regulations extend to rollover IRAs?

Posted on April 29, 2013 by Editor Test -

The elimination of 12b-1 mutual fund marketing fees, which add about 25 basis points to the cost of many funds and which can be used to incentivize broker-dealer reps to sell those funds, wouldn’t help investors much, according to a new study from the Center for Retirement Research (CRR) at Boston College.

Instead, the study’s authors recommend:

Making it easier to retain accumulated assets in the 401(k) system.
Making the rollover from a 401(k) to an IRA an ERISA-covered event.
Extending ERISA to all rollover IRAs.
Instituting changes to further control fees in both 401(k)s and rollover IRAs

The CRR study, “The Economic Implications of the Department of Labor’s 2010 Proposals for Broker-Dealers,” suggests that those proposals, which would have reclassified brokers as fiduciaries under the Internal Revenue Code and made them ineligible for the types of incentives funded by 12b-1 fees, didn’t go far enough toward protecting investors who move their money from 401(k) plans to rollover IRAs.

The DoL withdrew its 2010 proposal in the face of resistance from the investment community and hasn’t reissued it yet. The investment industry has maintained that eliminating revenue-sharing arrangements such as 12b-1 fees could force broker-dealers to charge investors directly and explicitly for advice, which could reduce demand for advice, possibly resulting in fewer investors receiving guidance.

According to the CRR study, 12b-1 fees are not a large percentage of brokerage revenue. Such fees amounted to $9.5 billion for all mutual funds in 2009, with about 20% or $2 billion of that attributable to IRA customers, the study said. But that may be only about one percent of the total brokerage revenue that comes from managing investor accounts.

“According to the SEC, total broker-dealer revenues in 2010 amounted to $263.2 billion,” of which about “$55.6 billion came from trading gains and underwriting profits” and roughly $200 billion from managing individual savings, the CRR study said. “Thus, the loss of 12b-1 fees for mutual funds in IRAs ($2 billion) would amount to about 1% of their total (non-trading/non-underwriting) annual revenue ($200 billion).”

Based on existing pricing and cost evidence from the United States and on the experience of ongoing reforms in the United Kingdom aimed at lowering fees and improving investment advice, the CRR analysis showed little effect from eliminating 12b-1 fees. The analysis showed that:

Elimination of 12b-1 fees would reduce IRA customer costs by 4 basis points (.04%).
IRA customers could save another 7 basis points if broker-dealers responded to the loss of 12b-1 fees by moving customers away from high-cost, actively managed funds into low-cost index funds,
Broker-dealers would probably not change their business model with respect to the provision of advice if 12b-1 fees were eliminated.

The DoL’s 2010 proposal was inspired in part by a concern that the friction of high fees on retail funds in rollover IRAs at broker-dealers—about $150 billion went into advisor-managed IRAs from 401(k) plans in 2011, according to Cerulli Associates—would slow the accumulation of retirement savings. (Another $150 billion moved from 401(k) plans to relatively low-cost rollover IRAs at discount brokerages in 2011.)

“As long as accumulations are held in 401(k) plans, participants are operating in a world in which sponsors must operate as fiduciaries and fees are under a spotlight. Once they roll over their accounts into IRAs, they enter a world where suitability becomes the standard of care and broker-dealers are paid commissions that encourage the sale of high-priced mutual funds,” wrote the CRR’s Alicia H. Munnell, Anthony Webb and Francis M. Vitagliano.

“If a fiduciary standard and attention to fees are appropriate for retirement assets when they are in the plan, such safeguards are clearly still appropriate when they are rolled over. The DOL recognizes this logic, but, with its authority limited to defining who is a fiduciary under the Internal Revenue Code, has put forth a very modest proposal.”

The 12b-1 fee was first added to mutual fund expense ratios as a way for fund companies to cover their marketing costs. The fund companies claimed that it was appropriate to pass such costs along to existing shareholders because the economies of scale achieved through new sales would lead to a reduction in overall fund expenses.

Vanguard’s Ken Volpert on Bonds

Posted on April 29, 2013 by Editor Test -

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.

ABP settles with Goldman Sachs in RMBS sales dispute

University employees save more in plans than corporate workers: Transamerica

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