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Dialing the Right Withdrawal Rate

Posted on April 14, 2013 by Kerry Pechter -

It’s one thing to create an income plan for high net worth retirees, and it’s something else to show them why the plan makes sense and to persuade them that it’s right for them. Retirement advice demands technical skill, psychology and salesmanship.

Michael Kitces (right) probably knows as much about turning that triple play as anybody. Speaking at the Retirement Income Industry Association spring conference in Chicago last month, the advisor/researcher/writer showed how he calculates the right “safe withdrawal rates” for retired couples and why they embrace his recommendations.

Most of Kitces clients aren’t in any real danger of running out of money. Economizing after a bad year would mean flying first class instead of chartering a private jet, according to one example he used.

In other words, his clients don’t have to get too fancy with flooring techniques or life annuities or holding big reserves that don’t generate any return. Their retirement egg is big enough so they can afford to live on a conservative withdrawal rate, like the safe, all-weather 4% rate that Bill Bengen proposed 20 years ago.

The 4% withdrawal rate (adjusted annually for inflation) is therefore the basic chassis that Kitces builds his income strategies on. But here’s where it gets interesting. Kitces uses factors specific to each retiree or to the prevailing market environment to dial the withdrawal rate up or down by a fraction of a percent. Because of its precision and uniqueness—or the appearance thereof—clients reportedly love it.

A host of adjustments

Kitces adjusts his recommended initial withdrawal rate up or down based on these factors:

The fees that the client will pay.
The client’s tax burden.
Desire to preserve (all or part of) principal as a legacy or a cushion against longevity risk.
Life expectancy or planning horizon.
Diversification in the client’s portfolio.
The client’s flexibility vis-à-vis spending levels.
Equity valuations an interest rates at the start of retirement.
Use of tactical asset allocation (to take advantage of market opportunities).

Here are Kitces’ rules-of-thumb (based on a slew of research) for quantifying those factors in terms of withdrawal rate adjustments:

Every one percent of fees reduces the safe withdrawal rate by 0.30%.
A moderate tax burden (15% capital gains tax and a 25% income tax rate) reduces the withdrawal rate by 0.50%.
The shorter the time horizon, the greater the safe withdrawal rate (SWR), and vice-versa. The SWR for a 20-year retirement is 1% more per year than the SWR for a 30-year retirement. The SWR for a >40-year time horizon is 0.5% less than that for a 30-year retirement.
Equity diversification beyond the S&P 500 (into small caps, international stocks, etc.) can support an SWR 0.5% higher than Bengen’s rate, which he based on an allocation of 60% of assets to an S&P 500 index fund.
The client’s willingness to lower or raise his annual withdrawal amount by 10% if his effective withdrawal rate goes up or down 20%, respectively, can raise the initial withdrawal rate to 5.2% from 4%.
Higher risk tolerance can raise the withdrawal rate by as much as 1%.
The advisor’s ability to use tactical asset allocation can justify a 0.20% increase in the withdrawal rate.
If the market’s average P/E ratio is above 20 at the start of retirement, the initial withdrawal rate should drop by 0.5%. If the average P/E ratio is below 12 at the start of retirement, the initial withdrawal rate can rise by 0.5%.
To preserve principal or leave a legacy equal to the starting capital, the client should reduce his withdrawal rate by 0.20%.

A hypothetical client

How does Kitces apply those principles to a specific client’s situation? At the RIIA conference, he offered the hypothetical of a conservative couple in their late 60s with a 25-year planning horizon, who pay fees of 1.2% (which are assumed not to be offset by the advisor’s skill-premium, or “alpha”).

This imaginary couple was expected to have a moderate tax burden (15% on capital gains and 25% on the rest of their income), a desire for principal preservation, moderate tolerance for risk and moderate flexibility with respect to annual income. Equity valuations and interest rates are historically moderate when their retirement begins.

Based on those conditions, here’s how Kitces would present his initial withdrawal rate recommendation to them:

Base withdrawal rate	4.0%
Negative adjustments
1.2% fees	-0.4%
Moderate taxes	-0.5%
Legacy/longevity hedge	-0.25%
Positive adjustments
25-year time horizon	0.5%
Significant diversification	0.75%
Some spending flexibility	0.5%
Moderate equity valuations, int. rates	0.5%
Tactical asset allocation	0.2%
Final withdrawal rate	5.3%

A compelling story

Selling financial advice, like any kind of selling, is often about creating a compelling story, and Kitces has had a lot of success with this story. It’s as if he assessed you and your car and said, “Based on your reflexes and visual acuity, your car’s horsepower, the stopping power of its brakes, the depth of your tire tread, and the weather conditions, you can drive at 58 mph (or 62 mph or 71 mph or whatever) on a stretch of the autobahn where the average person on an average day should drive at 60 mph.”

When advice is present in that way, it’s harder to ignore. “It’s an incredibly powerful anchoring tool,” Kitces said at the conference. He also described this approach as an effective “behavior modification” technique that comes in handy at those awkward moments when he has to tell clients to cut down their spending for a while.

There’s a certain false precision to his adjustments—but that’s OK in the real world. They’re based partly on assumptions, averages, history, projections, and subjectivity, in addition to higher math. They are arguably not much more than rules of thumb. Kitces acknowledged that, for instance, it’s difficult to say whether the adjustments are truly additive or not.

But, for the purpose of setting an initial withdrawal rate, the ability of the numbers to inspire confidence in the client is the main thing. During retirement, after all, you can tinker with the withdrawal rate to make it more sustainable. If things get bad enough, you can suggest an annuity.

At the RIIA conference, Kitces was asked whether he recommends using a “glide-path,” where the client’s bond allocation rises over time. Perhaps because the 4% withdrawal rate is conservative to begin with, he doesn’t believe in retirement “glide paths.”

“Downward equity glide paths in retirement don’t help very much. While it’s OK to take equity exposure off over time, it’s better to do it when you rebalance and sell winners,” he said. “You get a higher sustainable withdrawal rate.”

TrimTabs attributes market surges to Fed’s ‘money printing’

Posted on April 14, 2013 by Editor Test -

Like Strategic Insights, TrimTabs reported the record inflows of capital into U.S. securities in the first quarter of 2013. But TrimTabs attributed it to the Federal Reserve’s quantitative easing policy rather than investor “rotation.”

“Lots of market strategists are eagerly anticipating a ‘Great Rotation’ out of bonds and into stocks, but no such rotation has materialized,” said David Santschi, TrimTabs’ CEO. “Last quarter’s inflow into bond funds was right in line with the inflows in previous quarters.

“Investors seem convinced the Fed has their back. They snapped up equities across the board as the Fed pumped an average of $4 billion per business day of newly printed money into the financial system.

“Many pundits dismissed the huge inflows into U.S. equity funds in January as a one-off related to seasonal and tax factors. But inflows reached $17.7 billion in March, which was the second-highest monthly level in the past two years,” he added.

U.S.-listed U.S. equity mutual funds and exchange-traded funds received $52.0 billion in the first quarter, the biggest quarterly inflow since the first quarter of 2004, TrimTabs Investment Research reported.

U.S. equity funds, global equity funds, and bond funds each posted inflows in all three of the first three months of 2013. Global equity mutual funds and ETFs took in $65.7 billion in the first quarter, the fifth consecutive quarterly inflow and the highest quarterly inflow since the first quarter of 2006.

The big inflows into equities did not come at the expense of bonds. Bond mutual funds and ETFs received $72.3 billion in the first quarter, the seventeenth consecutive quarterly inflow.

Hedge funds underperform S&P 500

BarclayHedge and TrimTabs Investment Research reported today that Hedge funds took in a net $11.4 billion (0.6% of assets) in February, building on an inflow of $4.3 billion in January, reported BarclayHedge and TrimTabs Investment Research. The results are based on data from 3,434 funds.

“The hedge fund industry continues to struggle with performance,” said Sol Waksman, president of BarclayHedge. “The industry delivered a return of 0.4% in February, less than half of the S&P 500’s 1.1% rise. In the past 12 months, hedge funds earned 5.8%, while the S&P 500 rose 10.9%.”

Stock-picking hedge fund managers performed well in February and in January, the report found. “Managers of Equity Long Only hedge funds rose 1.1% in February, the best performers out of 13 major fund categories,” said Waksman. “Fixed Income and Multi-Strategy are the only two strategies that posted inflows in the past 12 months.”

Funds of hedge funds continued to shed assets, losing $3.3 billion in February and $54.3 billion in the past 12 months. They underperformed the hedge fund industry by 216 basis points in the past year.

Funds and ETFs post record net in-flows of $246 billion in 1Q 2013

Posted on April 14, 2013 by Editor Test -

Stock and bond mutual funds and exchange-traded funds (ETFs) set an all-time quarterly net flows record in the first quarter of 2013 of $246 billion, according to Strategic Insight. That was 42% more than the previous record of $173 billion set in the first quarter of 2012.

In March alone, $63 billion flowed into stock and bond mutual funds and ETFs, including exchange traded notes (ETNs).

The inflows, coupled with strong market appreciation, boosted the combined market value of stock and bond mutual fund and ETF assets by nearly $800 billion during the first three months of 2013, to about $9.7 trillion for mutual funds and $1.47 trillion for ETFs.

Double-digit returns for major US fund sectors so far in 2013, driven by generally positive economic news on labor and housing markets, should continue to stimulate demand for such funds in the months ahead.

Older investors are evidently moving from cash to bonds, and younger investors from bonds to stocks.

“We observe two Great Rotations in parallel and both should persist,” said Avi Nachmany, SI’s Director of Research. “One prominent rotation is along the traditional risk curve with money flowing to stock investments. The other is from un-invested cash and into income vehicles, anchored by a semi-permanent state of investment anxiety by many, as well as by the demographic of wealth.”

Near-retirees will continue to buy conservative income-producing investments, but they will protect their portfolios from the prospect of rising interest rates by investing in “flexibly managed bond and income funds,” he added.

Mutual funds

Long-term stock and bond funds attracted $49 billion in March and $193 billion in the first quarter. US equity funds alone netted $13 billion during March and $49 billion in the first quarter, an all-time quarterly high. Strategic Insights expects stock and bond funds to accumulate a record of more than $500 billion of net inflows for all of 2013.

Exchange traded products (ETPs)

In March, exchange-traded products (including exchange-traded funds and notes) attracted $15 billion of net intake, including $10 billion into stock-oriented products and $5 billion into taxable bond exchanged traded notes. For the first quarter, net intake for ETPs was $53 billion, including $46 billion for ETFs and $7 billion for ETNs.

ING U.S. to rebrand as Voya Financial

Posted on April 11, 2013 by Editor Test -

ING U.S. has announced plans to rebrand in about two years as Voya Financial. The company “believes the new brand identity will support its mission to make a secure financial future possible — one person, one family and one institution at a time,” according to a release.

“Our vision is to help working Americans prepare for the important financial journey they face. We want to be known as the company that understands and supports their diverse needs as they seek to advance their retirement readiness — in essence, to be America’s Retirement Company,” said Rodney O. Martin Jr., CEO of ING U.S.

ING U.S.’ Amsterdam-based parent, ING Group, has previously announced its base case plan to divest ING U.S. through an initial public offering (IPO). ING U.S. will start operational rebranding following the proposed IPO.

The operational rebranding process is expected to take approximately 24 months once it is started, and ING U.S. would not use its new name and logo commercially until the operational rebranding process has been completed. The Voya Financial identity would, however, be reflected in the company’s new ticker symbol (NYSE: VOYA) upon completion of the IPO.

Until the rebranding is complete, ING U.S. will operate “business as usual” with its current “ING U.S.” name and brand assets.

Choosing the new name

“The Voya name reminds us that a secure financial future is about more than just reaching a destination. Preparing for it should be like taking a voyage and having positive experiences along the way,” said Ann Glover, chief marketing officer of ING U.S. “Our new identity supports the idea of envisioning the future while closely aligning with what the ING U.S. brand is already known for — proactively and optimistically guiding Americans on their journeys to and through retirement.”

The name also brings to mind bright, vivid colors and will incorporate the use of orange.

“We are partial to the color orange. It’s differentiating, optimistic and associated with ING in the U.S.,” added Glover. “While we’ll grow into a new shade of orange, the memorable, distinctive color will remain.”

U.S. brand evolution

Although ING has operated in the United States for decades, the ING brand was not introduced through advertising in this country until 2001. Since then, the company’s branding efforts have received national awards for creativity and effectiveness. They have included the trademark ING “Bench” campaign, as well as an integrated marketing effort that calls attention to knowing and planning for your retirement “Number.”

Last month, the company launched “Orange Money,” its newest creative campaign that underscores the importance of carefully managing your retirement dollars. This concept supports ING U.S.’s focus on advancing retirement readiness, and will help bridge the future transition of ING U.S. to Voya Financial.

I’ll Let You Work Out the Details

Posted on April 11, 2013 by Editor Test -

Brian Graff, the executive director of the American Society of Pension Professionals and Actuaries, is a smart and candid guy. He commented on Forbes’ website yesterday about the Obama budget proposal to block people with more than about $3 million in their combined IRAs and defined contribution accounts from adding any more to the accounts.

Graff explained, as he always explains when people talk about limiting contributions to 401(k) accounts, that the policy would backfire, because small business owners would react by shutting down their company’s plan altogether.

“When a small business owner reaches the $3 million limit, they’re going to shut the plan down,” Graff said. “They don’t like being told they don’t get anything out of a plan.”

That explanation bothers me. I can see the pragmatism behind it. But I find it profoundly cynical. If it’s true—and I’m not so sure that it is— I think it would be reprehensible for anyone to take that attitude. It smacks of blackmail. Why have a public policy that depends on people who have contempt for public policy?

To find out what other people were thinking about the Obama proposal, I checked out the 401(k) Group on LinkedIn, where somebody opened a discussion on the $3 million cap idea. “Government interference,” someone called it. A “success tax,” someone else said. Another person suggested impeachment, calling Obama a “Marxist pig.” (And LinkedIn is the high-toned social network.) Another contributor contested the whole notion of income taxes at all.

Whence springs this well of sympathy for the ultra-wealthy? Am I the only one who doesn’t have over $1 million in my retirement accounts? If the tax-deferred system is so intrusive, if it does so little for the average joe, and if ERISA and the tax code are so complicated, why not call the whole thing off? Who needs to carry a huge burden of deferred taxes into retirement, anyway?

I mentioned cynicism above. The level of cynicism in the retirement industry about the average participant is startling. And sadly, it’s justified. Participants don’t contribute enough. They do not read their statements or their disclosures. They do not rebalance annually.

But can you blame them? They have little job security, no representation when plan decisions are made, and often even no matching contribution from their employer. They believe that the investment game is rigged. And they’re right.

Here’s a simple solution. Along with offering a defined contribution plan, every employer should contribute 10% of each employee’s pay into the employee’s plan account. The employees will take home 10% less, but that’s OK, because they won’t miss what they never had. Some companies already do this.

Once the money is in the plan, they can’t take it out, except to roll it into another qualified account. At retirement, they use a certain percentage of their savings to buy a deferred income annuity fund that pays an income if and when they reach age 85. In return, they can distribute the rest of their qualified savings tax-free.

A win-win, right? I’ll let you work out the details.

Funny Money and the Super-Rich

Posted on April 11, 2013 by Martin Hutchinson -

Increasing inequality is bemoaned by the left worldwide, with the Financial Times’ Edward Luce doubtless making President Obama choke on his cornflakes by claiming that “U.S. inequality will define the Obama era.”

Yet contrary to the left’s fond belief, the increasing inequality and the crass behavior of the super-rich are responses, not to inadequate levels of taxation, but to two decades of monetary policy that has imposed negative real interest rates on the world economy.

Ben Bernanke, his predecessor Alan Greenspan, and their imitators abroad are responsible for the rise of a global nouveau riche class that is not only uniquely privileged, but in many (though not all) cases uniquely unpleasant in its ethics and behavior.

Self-made, through leverage
If you compare the first “Forbes 400” list of the richest Americans in 1982 with the 2012 list, you will notice a startling change. Whereas a clear majority of the 1982 list—32 of the top 50—had inherited their money, in 2012 a larger majority of the list—34 of the top 50—were self-made, coming from families that were poor or middle class, and in most cases without a significant business presence. Over such a short period (many of the top names of 2012 were already on the 1982 list) that’s a remarkable change.

Another change since 1982 is that the rich have got richer; the combined net worth of the Forbes 400 was 2.8% of U.S. GDP in 1982, and 11.5% of GDP in 2012—in other words, the average wealth of a Forbes 400 member had increased by over 4 times as a share of the U.S. economy, thus by 8 times in real terms, or by over 20 times in money terms.

Naturally, you’d expect the proportion of self-made billionaires to have increased between 1982 and 1997, because of the huge bull market in U.S. stocks, and indeed it had, but only from 18 out the top 50 to 23, a proportion close to that of 1918.

Only since 1997 has the great switch to self-made ultra-rich taken place, with a corresponding further increase in fortune size that’s not explained by the relatively modest growth in stock values (less than doubling in nominal terms, up only 10-20% in real terms) during the period.

The enablers

The explosion in self-made super-rich from 1997 to 2012 and the increase in their net worth were due to the same cause: the highly expansionary monetary policy instituted by Greenspan in February 1995 and exacerbated by Bernanke since 2006.

The mechanism is quite simple. Interest rates close to or below the rate of inflation favor borrowers over lenders, since borrowers are able to attract borrowed capital at close to no cost in real terms.

Hence highly leveraged strategies, which rely on borrowing large amounts of money and investing in relatively low-yielding assets, create wealth very rapidly, enabling the nouveaux riches to overtake established wealth holders.

The key to getting rich in the modern economy is thus no longer the ability to build a good long-term business, but access to cheap leverage. Technology has also had an effect; businesses that are largely virtual and essentially ephemeral, such as Google and Facebook, can be built up much more quickly than old-fashioned businesses requiring massive investments in bricks and mortar or worldwide sales forces.

Return of old money
There are three conclusions to be drawn. First, the prevalence of nouveaux riches is a temporary phenomenon produced by pathological monetary policies worldwide; once those monetary policies are changed, most of the fortunes built largely on leverage will vanish.

Second, adopting leftist policies of high tax rates will only cement the current wealth structure in place. It will make it impossible instead of over-easy to create new fortunes, and will thus increase the dominance of the current nouveaux riches in the world economy.

Third, the unspeakable vulgarity of modern plutocrat culture is also a passing phase. By 2030, London house prices will have crashed, and the majority of nice homes will again be owned by those with long-established money, once again able to compete in the housing market.

The ultra-rich will no longer have to perpetuate their tottering overleveraged empires through pointless international “deals” but will settle to building family dynasties, while deploying their long-term fortunes in ways that are truly enjoyable.

Resentment of the super-rich is generally an unpleasant emotion, detracting from life’s fulfillment and leading to immoral and economically counterproductive government meddling. Currently, however unpleasant are the current plutocrats, resentment should be turned squarely towards the source of their ill-gotten wealth: Ben Bernanke and his funny money colleagues worldwide.

Fitch: Puerto Rico’s bond rating (BBB-) depends on reform

Posted on April 11, 2013 by Editor Test -

Noting that Puerto Rico faces a large structural budget gap until fiscal 2015, Fitch Ratings said its rating on the commonwealth’s general obligation bonds (BBB-, with a negative outlook) will depend on continuing pension reform.

Reforms signed into law in Puerto Rico last week aim to reduce future cash flow deficits in the plan both by increasing payments into the plan and reducing future cash payments out of the plan, Fitch said in a release.

The legislation converts the current PERS defined benefit plan into a hybrid defined benefit/defined contribution plan. It also raises employee contributions, increases the retirement age, and reduces future benefit payments.

Even with these changes, the commonwealth will have to increase its annual payments to the fund, Fitch said.

The current fiscal year’s economic and revenue underperformance have increased the fiscal 2013 operating imbalance and widened the gap the commonwealth must address in its upcoming budget deliberations.

While Fitch does not expect the fiscal 2014 budget to be structurally balanced, the rating assumes substantial progress toward structural balance.

Poland denies rumors that it will nationalize ‘second pillar’ assets

Posted on April 11, 2013 by Editor Test -

In response to speculation that the Polish government might nationalize assets in the country’s mandatory second pillar funds (known by the acronym OFE), worth PLN268.9bn (€65bn), the Polish Chamber of Pension Funds (IGTE) urged the government not to tamper with the accounts of those close to retirement.

The suggestion that the government intended to nationalize the individual defined contribution accounts has been “fiercely denied” by Polish finance minister Jacek Rostowski, according to a report this week by IPE.com.

In spite of those denials, many observers believe the government will still attempt to access some of the assets, due to the need to reduce its deficit in line with the European Union’s excessive deficit procedures.

In defending its management of the second pillar funds, the IGTE pointed to the OFEs’ average annual return of 6.5% since they were created in 1999, or far better than the returns of bank deposits and other savings vehicles.

The IGTE also said the second pillar funds had helped finance private industries and infrastructure projects in Poland, creating hundreds of thousands of new jobs.

Press reports have said the Polish government intends to cancel some of the PLN120bn of government debt held by the funds, moving the private pension savings of participants within ten years of retirement into a so-called conservative fund run by the state-owned Social Insurance Institution (ZUS).

The letter noted that moving the savings of those ten years away from retirement to ZUS meant that the government would not use the money to fund a pension for them but would use their savings to pay benefits to current retirees.

Although no specific proposals were included in the letter, IGTE chairman Wojciech Nagel recently said that savers in OFEs should be able to use their pension pots to buy term annuities, rather than receive a lower income from a life annuity. Those retiring would be able to choose the term over which the pension would be paid. In addition, they would receive a minimum state pension.

The Hartford hedges its VA risk in Japan

Posted on April 11, 2013 by Editor Test -

The Hartford has announced that the risk profile of its legacy variable annuity block has been significantly improved, thanks to an expanded Japan variable annuity (VA) hedging program, favorable yen weakening and global equity market movements.

“Last March, we announced a new strategy for… reducing the company’s exposure to market volatility, lowering our cost of capital and increasing capital flexibility,” said Liam E. McGee, The Hartford’s chairman, president and CEO, in a release.

“A key element of that strategy… is to reduce the size and risk of the legacy VA block. As a result of actions we have taken and global market movements, the risk profile of the legacy VA block has dramatically improved and Talcott’s [life run-off] operations are now capital self-sufficient.”

The company also announced that financial results for the first quarter of 2013 will include a deferred acquisition charge (DAC) of approximately $600 million, after tax. The charge reflects the elimination of future estimated gross profits on the Japan VA block due to the increased costs of the hedging program.

The first quarter of 2013 will also include the previously announced charge of $140 million, after tax, associated with costs incurred in connection with the company’s $800 million debt tender offer completed in the first quarter of 2013.

Due to these charges, the company expects a net loss for the first quarter of 2013. However, neither of these charges is included in core earnings, a non-GAAP financial measure.

The Hartford also increased its full year 2013 core earnings outlook, which was originally described in its Feb. 4, 2013 news release, to between $1.45 billion and $1.55 billion, reflecting higher Talcott Resolution core earnings due to the elimination of Japan VA DAC amortization expense as a result of the first quarter 2013 DAC charge.

Vanguard to offer 401(k) services through TPAs

Posted on April 11, 2013 by Editor Test -

Vanguard announced that it will make its Retirement Plan Access program available to third-party administrators (TPAs), which provide plan design, compliance, administrative support and other assistance to plan sponsors. Plan sponsors can use Vanguard’s recordkeeping services and low-fee investment line-up while still working with their TPAs.

The move represents an expansion of the Vanguard Retirement Plan Access program, which was introduced in October 2011 to offer bundled services to sponsors of small- to mid-size 401(k) plans and to the fee-only advisors who work with those sponsors. Assets managed under the program are approaching $2 billion, Vanguard said in a release.

A growing number of sponsors of small- to mid-sized plans work with TPAs, Vanguard said, noting that Cerulli Associates predicts that TPA-influenced assets will increase to 22.5% of 401(k) assets in 2014.

Linda S. Wolohan, a Vanguard spokesperson, said the change doesn’t affect Vanguard’s retail retirement plan services, such as setting up SIMPLE IRAs or SEP IRAs, nor does it represent a departure from Vanguard’s large-plan business.

“We are still very much a major presence in the jumbo and large end of the market. This was just a service we started in 2011 for the smaller end of the market,” she said in an email to RIJ.

Asked if Vanguard’s expansion in the small-plan market was linked to the Department of Labor regulatory push to increase awareness of 401(k) plan fees, Wolohan said, “The DOL fee regulations weren’t the primary reason we launched our service in October 2011, but the focus on low fees and fee disclosure requirements has led many small businesses to consider it.”

Obama’s Budget Too Austere for Retirement Industry

Posted on April 11, 2013 by Kerry Pechter -

The Obama Administration proposed a budget for fiscal 2014 yesterday, and it included a handful of items related to retirement. One of those, a proposal to cap accumulations in IRAs and defined contribution plans, elicited outrage and protest from the 401(k) lobby.

The most offending proposal: “An individual’s total balance across tax-preferred accounts” would be limited to about $3 million, or the amount needed to buy a joint-and-survivor life annuity “of not more than $205,000 per year” starting at age 62.

Several organizations within the tax-favored retirement industry issued announcements Wednesday protesting such a cap, which would not affect very many people. A release from the Employee Benefit Research Institute (EBRI) yesterday showed that only about in 1,000 (0.107%) of those who owned IRAs and 401(k)s had a combined accumulation of over $3 million.

The budget proposal also called for a cap of 28% on the ability of high-income taxpayers to reduce their tax liability through a variety of deductions, including employer-sponsored health and retirement contributions, and proposed a “Buffett Rule” under which the wealthy would pay no less than 30% of their after-charity earnings in taxes.

IRAs and defined contribution plans are affected, but not variable annuities. More information can be found in excerpts from the Office of Management and Budget’s Analytical Perspectives and the Treasury Department’s Greenbook.

‘Just isn’t fair’

But it was the cap on aggregated retirement account accumulations that provoked an outcry. Brian Graff of the American Society of Pension Professionals and Actuaries (ASPPA), a leading defender of existing savings incentives, argued that the proposal would give small business owners fewer rights than corporate executives.

“We think it is grossly unfair that a small business owner will be limited to retirement benefits that are nowhere near as valuable as executives’ at large corporations,” Graff said in a release. “Small business can’t use the nonqualified deferred compensation arrangements that provide millions, even billions of dollars in retirement benefits to big corporate executives,” Graff said in a release.

“Every time retirement plan limits are cut, the corporate CEOs get more nonqualified retirement benefits. It’s the small business owners and their employees who lose out and it just isn’t fair.”

“The current tax code already has contribution limits to retirement savings programs, including IRAs, and, therefore, limits on account balances is detrimental to conscientious taxpayers who have made current sacrifices for future security,” said Robert Smith, president of the National Association of Insurance and Financial Advisors (NAIFA). “There should be no limit on the need that life insurance and annuities will address, so how can you limit the vehicles you use (such as IRAs) to address those needs?” Smith asked rhetorically.

A $3 million cap on IRA and/or 401(k) accumulations would affect only a fraction of a percent of Americans. The EBRI data released Wednesday showed that, according to most recent figures, only six in 10,000 (0.06%) IRA account owners had more than $3 million in IRA assets. Only about 41 in every million (0.0041%) 401(k) accounts are worth more than $3 million.

As for the rationale behind the limit, the Treasury’s Greenbook cited the current limit on defined benefit plan payouts to a $205,000-per-year joint-and-survivor life annuity for someone retiring at age 62, and said that there is currently no limit on the amount that a person can accumulate in a variety of different IRAs, defined contribution, and defined benefit plans.

“Requiring a taxpayer who, in the aggregate, has accumulated very large amounts within the tax-favored retirement system to discontinue adding to those accumulations would reduce the deficit, make the income tax system more progressive, and distribute the cost of government more fairly among taxpayers of various income levels, while still providing substantial tax incentives for reasonable levels of retirement saving,” the Treasury Department said.

Here are the retirement-related items in the Obama budget for 2014:

Prohibit individuals from accumulating over $3 million in tax-preferred retirement accounts.

Under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.

The Budget would limit an individual’s total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement, or about $3 million for someone retiring in 2013. This proposal would raise $9 billion over 10 years.

Reduce the value of itemized deductions and other tax preferences to 28% for wealthiest families.

The Budget would limit the tax rate at which high-income taxpayers can reduce their tax liability to a maximum of 28%, a limitation that would affect only the top three percent of families in 2014.

This limit would apply to: all itemized deductions; foreign excluded income; tax-exempt interest; employer sponsored health insurance; retirement contributions; and selected above-the-line deductions. The proposed limitation would return the deduction rate to the level it was at the end of the Reagan Administration.

Observe the ‘Buffett Rule.’

The Budget also puts forward a specific proposal to comply with the Buffett Rule, requiring that wealthy millionaires pay no less than 30% of income—after charitable contributions—in taxes.

Establishes automatic workplace pensions and expands the Small Employer Pension Plan Startup Credit.

Under the proposal, employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit Individual Retirement Account (IRA) that is compatible with existing direct-deposit payroll systems. Employees may opt out if they choose.

[Businesses] with 10 or fewer employees would be exempt. Employers would also be entitled to a tax credit of $25 per participating employee—up to a total of $250 per year—for six years. The Budget will increase the maximum tax credit available for small employers establishing or administering a new retirement plan from $500 to $1,000 per year. This credit would be available for four years.

Switch to chained CPI for Social Security.

Beginning in 2015 the Budget would change the measure of inflation used by the Federal Government for most programs and for the Internal Revenue Code from the standard Consumer Price Index (CPI) to the alternative, more accurate chained CPI, which grows slightly more slowly.

Unlike the standard CPI, the chained CPI fully accounts for a consumer’s ability to substitute between goods in response to changes in relative prices and also adjusts for small sample bias.

The Budget only applies the change to non-means tested benefit programs. The switch to chained CPI will reduce deficits by at least $230 billion over the next 10 years.

Return estate tax to 2009 parameters and close estate tax loopholes.

The Budget returns the estate tax exemption and rates to 2009 levels beginning in 2018. Under 2009 law, only the wealthiest three in 1,000 people who die would owe any estate tax.

It would also eliminate a number of loopholes that currently allow wealthy individuals to use sophisticated tax planning to reduce their estate tax liability. These proposals would raise $79 billion over 10 years.

Strengthen the Pension Benefit Guaranty Corporation.

The Pension Benefit Guaranty Corporation (PBGC) acts as a backstop to insure pension payments for workers whose companies have failed. Currently, PBGC’s pension insurance system is itself underfunded, and PBGC’s liabilities exceed its assets. PBGC receives no taxpayer funds and its premiums are currently much lower than those a private financial institution would charge for insuring the same risk.

The Budget proposes to give the PBGC Board the authority to adjust premiums and directs PBGC to take into account the risks that different sponsors pose to their retirees and to PBGC.

[This reform] would require a year of study and public comment before any implementation and the gradual phasing in of any premium increases. This proposal is estimated to save $25 billion over the next decade.

PBS to critique 401(k) plans

Posted on April 9, 2013 by Editor Test -

Please click on box below to watch preview.

The Bucket

Posted on April 4, 2013 by Editorial Staff -

Income projections have small but significant effect on participant savings rates

Sponsors and providers of workplace retirement plans have been encouraged to provide participants with quarterly estimates of the amount of monthly income each might receive during retirement based on their current or projected account balances.

Three researchers from Stanford and the University of Minnesota decided to test participants in the university’s retirement plans to see if such information actually produces higher savings rates and, by extension, greater financial security in retirement.

Their results, published by the Center for Retirement Research at Boston College, showed that income projections changed the savings behavior of only a small percentage of people, but that those people increased their savings rate by $1,150 a year on average.

The researchers divided 17,000 University of Minnesota employees into four groups—a control group that received no special education and three treatment groups. Each treatment group received one of these brochures:

A “planning treatment” brochure with general information on saving for retirement and a step-by-step guide for signing up or changing contributions to a Voluntary Retirement Plan (VRP).
A “balance treatment” brochure with added age-specific projections of how hypothetical additional contributions to the VRP would translate into additional balances at retirement.
An “income treatment” brochure with added age-specific projections of how the additional contributions to the VRP would increase retirement income.

Compared to the national population, the university workers were more educated and had more retirement savings. They are covered by Social Security and by one of two generous employer plans. They can also contribute to a tax-deferred Voluntary Retirement Plan (VRP).

The results show that the “income treatment” had a small but significant effect on savings rates. Compared to the control group, members of the income group were 1.2 percentage points more likely to change their contributions during the six-month period following receipt of the brochures – 5.3% vs. 4.1%.

Members of the income group as a whole increased their retirement saving, on average, by just $85 more per person than the control group. But, considering only those who made a change, members of the “income group” increased their savings by $1,150 more per year than those in the control group.

Relative to the control group, individuals in the other two treatment groups – the “planning group” and “balance group” – were also more likely to change their VRP contributions but did not show a statistically significant increase in the amount of saving.

“It was not the income projections alone, but the combined effect of providing retirement planning information along with the balance and income projections that encouraged the increase in saving for those in the income group,” the researchers wrote.

The effect of the income treatment on retirement saving was significantly reduced among people who had difficulty in paying bills, who said they live “pretty much for today,” and who were inclined to procrastinate. The effect was enhanced among people who described themselves as “good at following through.” Intelligence and financial literacy scores had no measurable impact on savings behavior.

The authors of the study were Gopi Shah Goda, a senior research scholar at the Stanford Institute for Economic Policy Research, and Colleen Flaherty Manchester and Aaron Sojourner, who are assistant professors at the Center for Human Resources & Labor Studies, a part of University of Minnesota’s Carlson School of Management.

New York Life’s operating earnings up 18.4% in 2012

New York Life announced a record operating earnings of $1.6 billion in 2012, an increase of 18.4% over 2011. Surplus and asset valuation reserve in 2012 rose to a record $19.6 billion, the company said in a release. Combined life insurance face value was $816 billion, also a record.

Individual recurring premium life insurance sales through the company’s 12,000 agents grew 4% over 2011, while annuity sales through agents were up 9%. Sales of long-term mutual funds through agents rose 34% over the prior year. Assets under management for New York Life increased 12.6% to $381 billion.

In 2012, $8.1 billion in benefits and dividends was paid out to the company’s life insurance policyholders and annuity contract owners.

On the annuity side, New York Life continued to lead the industry in providing guaranteed lifetime income, with a 28% market share in fixed immediate annuities, according to LIMRA.

Morningstar webinar to focus on variable annuities

Morningstar will sponsor a free webinar next week to review the past year in the VA industry, highlighting product development and distribution as well as trends and expectations for 2013.

The presenters will be Kevin Lofreddi, vice president, Morningstar, and John McCarthy, product manager, Morningstar. The webinar will take place at 3:30 p.m. Central (4:30 p.m. Eastern) on April 11.

Nationwide to acquire 17 HighMark Capital funds

Nationwide Financial has agreed to acquire 17 equity and bond mutual funds from HighMark Capital Management, Inc.. The transaction is expected to bring Nationwide’s fund business about $3.6 billion in new assets. Terms weren’t disclosed.

The transaction, which has been approved by the boards of both mutual fund complexes, is expected to close by the end of the third quarter, pending regulatory and shareholder approvals. Afterwards, Nationwide’s mutual fund business is expected to have about $51 billion under management.

HighMark Capital Management, a unit of Union Bank, N.A., will become the subadviser for the successors to the nine funds that it currently manages in the form of nine new Nationwide Funds. Eight of the 17 mutual funds are subadvised by three other asset managers: Bailard, Inc., Geneva Capital Management Ltd, and Ziegler Lotsoff Capital Management, LLC. Those relationships will continue.

HighMark Capital Management will focus on managing institutional and high net worth assets for its wealth management and separately managed institutional businesses, where it will oversee more than $15 billion in client assets.

Nationwide Financial engaged Cambridge International Partners Inc. as its financial advisor and Stradley Ronon Stevens & Young, LLP as its legal counsel. Berkshire Capital Securities LLC acted as the financial advisor and Bingham McCutchen LLP as the legal advisor for HighMark Capital Management and Union Bank.

First-quarter flows to U.S. equity funds are largest in nine years: TrimTabs

Posted on April 4, 2013 by Editor Test -

U.S.-listed U.S. equity mutual funds and exchange-traded funds received $52.0 billion in the first quarter, the biggest quarterly inflow since the first quarter of 2004, according to TrimTabs Investment Research.

“Many pundits dismissed the huge inflows into U.S. equity funds in January as a one-off related to seasonal and tax factors,” said David Santschi, TrimTabs’ CEO. “But inflows reached $17.7 billion in March, which was the second-highest monthly level in the past two years.”

The big inflows into equities did not come at the expense of bonds. Bond mutual funds and ETFs received $72.3 billion in the first quarter, the seventeenth consecutive quarterly inflow.

U.S. equity funds, global equity funds, and bond funds each posted inflows in all three of the first three months of 2013, TrimTabs said. Global equity mutual funds and ETFs took in $65.7 billion in the first quarter, the fifth consecutive quarterly inflow and the highest quarterly inflow since the first quarter of 2006.

“Investors seem convinced the Fed has their back,” Santschi said. “They snapped up equities across the board as the Fed pumped an average of $4 billion per business day of newly printed money into the financial system.”

“Lots of market strategists are eagerly anticipating a ‘great rotation’ out of bonds and into stocks, but no such rotation has materialized,” said Santschi. “Last quarter’s inflow into bond funds was right in line with the inflows in previous quarters.”

Phoenix and AltiSure issue ‘Next Generation’ indexed annuities

Posted on April 4, 2013 by Editor Test -

PHL Variable Insurance Co., a unit of the Phoenix Companies, has issued the Phoenix Next Generation Annuity, a fixed indexed annuity to be distributed by The AltiSure Group and aimed at middle-market retirees and pre-retirees.

As a special promotion, Phoenix and AltiSure are offering higher fixed and index crediting rates until June 30, 2013.

The contract’s Protected Inheritance Benefit combines a guaranteed lifetime withdrawal benefit (GLWB) with a return of premium death benefit paid to beneficiaries in five equal installments. Unlike competing contracts, the death benefit in this contract doesn’t decrease as the lifetime withdrawal benefits are drawn, the company said.

The annuity will be offered through a partnership between Phoenix and The AltiSure Group, a life and annuity design and distribution firm that aims to offer its members access to a handpicked group of productive agents. According to a Phoenix release, the new FIA helps people near or in retirement “balance income needs during retirement with the desire to leave an inheritance.”

With the optional Protected Inheritance Benefit, available for an added fee, the income level for the GLWB and the return of premium death benefit percentage are selected at issue. The owner can choose a base level income after year one or a higher income guarantee after a five-year wait.

The return of premium percentage at death is available at 100%, 75% or 50% and does not change even after the initiation of GLWB payments. The bonus version of the Next Generation Annuity adds between 6% and 10% of the premium (depending on the state) to both the account value and the return of premium death benefit.

MetLife now manages a sixth of Romania’s DC assets

Posted on April 4, 2013 by Editor Test -

Two of Romania’s pension funds, which account for almost one-sixth of the assets in the nation’s defined contribution or “second pillar” pension, have merged due to MetLife’s purchase of Aviva’s Central and Eastern European (CEE) business, IPE.com reported.

Last summer MetLife bought Aviva Life Czech Republic, Aviva Life Hungary and Aviva Life Romania, which ran the second pillar fund Pensia Viva.

MetLife already owns Romanian insurer and pension fund provider Alico, which it purchased from AIG in 2010.

Romania’s pension regulator, The Supervisory Commission of the Private Pension System (CSSPP), approved the merger of the pension funds run by Aviva and Alico last week. Pensia Viva was merged with Alico and saw its market share in the second pillar increase to 14% from 6.8% with 822,420 participants, according to the CSSPP.

At year-end 2012, more than 5.7 million Romanians participated in the second pillar with net assets of RON 9.64bn (€2.18bn) in nine funds. Since 2008 the number of funds has been halved to eight funds following several mergers, the CSSPP said.

“As long as it does not affect the competitiveness of the system, this process is beneficial to maintain a stable market,” said Marian Sarbu, CSSPP’s president, adding that mergers make funds bigger and better able to benefit from economies of scale.

The market could “expect other mergers and acquisitions transactions, as part of a natural process,” Sarbu noted, saying that pension fund managers could decide to further restrict their business on an “international, regional or local level.”

In 2012, the funds in the Romanian second pillar returned 10.5%, having invested almost 94% of assets in domestic securities, while the remainder was invested in other EU member states’ bonds.

Dementia treatment in U.S. to cost $379 billion to $511 billion a year by 2040

Posted on April 4, 2013 by Editor Test -

If one of your relatives or friends or acquaintances has dementia, you know how stressful, and expensive it can be to treat and support someone with the disease, which sometimes requires years of full-time nursing home care and/or unpaid care by relatives.

A study published this week in the New England Journal of Medicine asserts that the cost of care for people with dementia “represents a substantial financial burden on society, one that is similar to the financial burden of heart disease and cancer.”

“The total monetary cost of dementia in 2010 was between $157 billion and $215 billion,” said the RAND Corporation study. “Medicare paid approximately $11 billion of this cost.”

Those numbers were based on an estimated prevalence of dementia among Americans over age 70 of 14.7% in 2010, and an annual estimated cost per patient of between $31,000 and $70,000.

More specifically, the yearly cost per person was either $56,290 (95% confidence interval (CI), $42,746 to $69,834) or $41,689 (95% CI, $31,017 to $52,362), depending on the method used to value unpaid care, according to the study.

The researchers studied 856 people from the population of 10,903 that participated in the long-term, nationwide Health and Retirement Study (HRS). They were diagnosed on the basis of a 3- to 4-hour in-home cognitive exam and a review by an expert panel.

The cost estimates were based on self-reports of out-of-pocket spending, the use of nursing home care, and Medicare claims data. Unpaid care provided by family members and others was valued at the cost of equivalent formal care or by an estimate of the lost wages of the informal caregivers.

According to a report in the New York Times today, “The RAND results show that nearly 15% of people aged 71 or older, about 3.8 million people, have dementia. By 2040, the authors said, that number will balloon to 9.1 million people.

“The study found that direct health care expenses for dementia, including nursing home care, were $109 billion in 2010. For heart disease, those costs totaled $102 billion; for cancer, $77 billion.

“Researchers project that the total costs of dementia care will more than double by 2040, to a range of $379 billion to $511 billion, from $159 billion to $215 billion in 2010. Because the population will also increase…, the burden of cost per capita will not grow quite as fast, but will still be nearly 80% more in 2040.”

The RAND authors included Michael D. Hurd, Ph.D., Paco Martorell, Ph.D., Adeline Delavande, Ph.D., Kathleen J. Mullen, Ph.D., and Kenneth M. Langa, M.D., Ph.D. The National Institute on Aging contributed to the study’s cost.

Participants Still Wary of Equity Risk: Spectrem Group

Posted on April 4, 2013 by Editor Test -

Despite recent equity market highs, 401(k) plan participants still hold a significantly smaller share of their tax-deferred savings in equities than they did before the 2008 meltdown, according to the Spectrem Group’s Retirement Market Insights Report 2013.

Equity exposure has dropped by 10 percentage points. In 2012, 401(k) participants held 36% of their assets in diversified equities and another 13% in company stock. In 2006, these investors had 40% of their assets in diversified stocks and 19% in company stock.

Investors are taking more risk with their retirement funds than they did in 2008, however, when 401(k) plan participants held just 29% of their assets in equities and 13% in company stock.

Similarly, 401(k) participants just held 21% of their total in money market funds in 2012 versus 32% in 2008. But they still are keeping more funds liquid than in 2006, when just 16% of their assets were invested in money market funds.

Nearly half, or 46%, of plan participants who are age 55 to 64 say their household is not saving enough to meet their financial goals, Spectrem found. Just 35% of participants in that age group expect to retire comfortably.

The Spectrem report showed the concentration of assets and participants of the 401(k) industry in the largest plans. For instance, 40% of the participants (20.2 million) and almost half of the assets ($1.44 trillion) are in the approximately 1,500 plans that have 5,000 or more participants.

At the other extreme, 14% of the participants (7.2 million) and about 11% of the assets ($310 billion) are in the 489,000 plans that have fewer than 50 participants.

Other insights from the report include:

• Both private and public defined contribution plans continue to outperform private and public defined benefit plans.

• Private sector defined contribution plans, aided by ongoing employee contributions, have surpassed the previous peak in 2007.
• Total U.S. retirement assets grew to $16.3 trillion by year-end 2012 from $15.1 trillion at the end of 2007.

Brand Conscious, But in Different Ways

Posted on April 4, 2013 by Editor Test -

Affluent investors and financial intermediaries (brokers, advisors) apparently don’t see eye to eye when asked to name their favorite financial services companies, according to two sets of data released recently by Phoenix Marketing International.

When surveyed by Phoenix, the two groups were not asked the same question. Affluent investors were asked to name their ten favorite providers of retirement products. Advisors were asked to name their ten favorite fund companies.

Many of the differences in the lists, which were generated over several survey periods and among advisors in five different distribution channels, seemed to boil down to the simple fact that the investors favored direct providers and the advisors didn’t. American Funds, however, appeared frequently on both sets of lists.

Affluent investors’ picks

Among investors, Fidelity, Vanguard and USAA had the “highest overall brand impression and consideration as a provider of retirement products and services among affluent investors,” according to four separate surveys by Phoenix Marketing International between May 2011 and November 2012.

Fidelity ranked first in three of the surveys, and USAA ranked third in all four. Vanguard ranked first in the May 2012 survey and second in the other three. Other companies consistently placing among the top 10 were TIAA-CREF, T. Rowe Price, Charles Schwab, ING, and American Funds.

The presence of Vanguard, Fidelity, T. Rowe Price, Schwab and TIAA-CREF on the survey listings suggests that affluent investors are very familiar with the direct and low-cost providers, many of whom specialize in passively-managed index funds. The results of the latest survey can be seen at right.

Advisors’ picks

PIMCO, which specializes in actively-managed bond funds, was ranked among the top five brands, based on “overall impression and consideration to recommend,” by advisors in all five distribution channels. Otherwise, Phoenix found that advisors’ “overall impression and likelihood to consider for recommendation to their clients in the next six months, varies by the advisor’s role and type of firm where they are employed.”

BlackRock was among the top 10 in all five channels. Vanguard, which was rated first by Registered Investment Advisors, was among the top 10 in only one other channel, regional broker dealer, where it was ranked ninth.

Fidelity was on every list except for regional broker dealer, but was never ranked higher than third. American Funds was ranked first or second in each of the three broker-dealer channels, and was seventh in the RIA channel, but was not among the top 10 at national full-service firms (wirehouses). MetLife was on every list but the independent broker-dealer. Franklin Templeton was on every list except insurance broker-dealer.

Advisors in the wirehouse channel were the only ones to list wirehouses among their ten favorite brands (Morgan Stanley and JP Morgan Chase). Similarly, advisors in the insurance broker/dealer channel listed six insurance companies (Genworth Financial, Lincoln Financial, New York Life, Mass Mutual, Prudential, and MetLife) among their most respected brands.

About the surveys

The semi-annual Phoenix study among affluent individual investors has been conducted since November 2008 and was last administered in November 2012 among 1,447 respondents. Study data are representative of the U.S. population by age and geography. Also reported are detailed evaluations of Print and TV advertisements, plus investors’ likelihood to consider such leading brands such as:

Aetna, AIG, Allianz, American Century, American Funds, Ameriprise, Aviva, AXA, Berkshire Life, Charles Schwab, CNA, Columbia Funds, E*Trade, Edward Jones, Fidelity Investments, Franklin Templeton, Genworth Financial, Goldman Sachs, Guardian, The Hartford, ING, Invesco, Jackson National, Janus, John Hancock, Lincoln Financial, MassMutual, Merrill Lynch/Bank of America, MetLife, Morgan Stanley Smith Barney, Mutual of America, Nationwide, Northwestern Mutual, NY Life, Oppenheimer, Pacific Life, PIMCO, Prudential, Putnam, Raymond James, State Farm, Sun Life, TD Ameritrade, T. Rowe Price, The Principal, TIAA-CREF, Transamerica, Travelers, US Trust/Bank of America, Vanguard, and Wells Fargo.

Pick and Roll(over)

Posted on April 3, 2013 by Kerry Pechter -

None of the ads for financial services companies during this year’s NCAA men’s basketball tournament was an absolute slam-dunk, but they were all good, nevertheless. The retirement industry definitely seemed to step up its game for the Big Dance.

In my house, TV viewership spikes during March Madness. My wife graduated from Michigan State and I spent a year at Indiana. My dad went to Temple and my niece just graduated from Syracuse. We always have someone to root for (or against).

I ignore the burger, beer, deodorant and car commercials that flood the coaxial cable during every timeout, but I watch the retirement-related ads with professional interest. There have been lots of them, and there will surely be more this coming weekend.

During the tournament’s first 60 games alone, some 337 commercials from Edward Jones, E*Trade, Fidelity, Northwestern Mutual, Charles Schwab, TD Ameritrade, Transamerica, and USAA were broadcast. Prudential also squeezed at least one of its Blue Sticker ads in there somewhere.

That doesn’t include the 99 “Mayhem” ads from Allstate or the 126 Capital One spots, in many of which Charles Barkley plays straight man to a loopy Alec Baldwin. (Nine of the tournament’s 20 “most engaging” ads, according to iSpot.tv, were from Capital One. The viewers’ favorite? The ad featuring Sir Charles’ freshly laundered briefs.)

The NCAA tournament, which neatly coincides with tax season each year, obviously delivers the upscale male audience that financial services firms crave. It’s too early to see the demographics of this year’s audience, but Scarborough Research has data from 2012.

Besides skewing male (71%), last year’s audience tended to be slightly older, more affluent and more educated than average. The Boomer share (ages 45 to 64) was 38% (vs. 34.7% for all U.S. adults). About 38% were college grads (vs. 26%), 17.4% had been to graduate school (vs. 11.3%), 28.6% earned $100,000 or more (vs. 20%) and 48.3% owned a home worth $150,000 or more (versus 40%).

Marc Grozalsky of Phoenix Marketing International, which studies financial services advertising, said about “10% to 15%” of the audience is affluent, though retirement companies aren’t interested only in them. “They get the smaller investors too, which helps them in the long run,” he told RIJ this week.

Below you’ll find screenshots from (and links to) the ads I remember best, along with some of my impressions of them. As mentioned above, all of them were good; a few were memorable.

Scorer’s table

Northwestern Mutual (“Earn the Rewards”). My favorite ad, oddly, was sponsored by Northwestern Mutual, which once called itself “The Quiet Company.” This 60-second ad was deceptively simple, and had an undeniable momentum. Driving but dignified wall-of-sound music accompanies the spiraling ascent of a white skyscraper-like Greek column, which rotates as it rises to reveal brief, simple messages in bold block letters.
I appreciated the lack of voice-over; it would have been superfluous and perhaps distracting. This ad may not necessarily motivate people to pick up the phone—there’s no “ask” at the end—but it made for effective branding. The robotic welding arms are a cool touch, and the tagline—“Because life feels richer when you feel secure”—rang true. It’s better to feel rich than to be rich, right? There are fewer tax and estate problems.

Prudential (“Age Stickers). This ad appears to be the second installment of Prudential’s ambitious Blue Age Sticker campaign. Its predecessor premiered during the 2013 Super Bowl. Both ads feature a sample of crowd-sourced Americans attaching pie-sized blue dots to a giant white wall in a public park in Austin, Texas. (iSpot.tv says this ad didn’t appear during the basketball tournament, but I saw it somewhere last weekend.)

The narrator, a real Harvard professor, emphasizes that people are living longer and therefore need more savings. Unfortunately, it perpetuates the myth that our grandparents “didn’t have much of a retirement” because their life expectancy was only 61 and the official retirement age was 65. But, even 70 years or so ago, average life expectancy at age 65 was about 12 years. Average life expectancy at birth was 61 years, due to higher infant mortality.

This ad squeezes almost too much aural and visual information in a brief time-span, but it probably connects with the audience on a level that other ads don’t, thanks to the use of real people. Gotta love the biker-type dude. This ad got a 99% approval rating from people who watched it at iSpot.tv.

TD Ameritrade (“Chef”). This fast-paced ad (below) seemed aimed at a hip, urban, single, young-striver market—not exactly my demographic, but engaging all the same.

It tells the story of a man who starts as a mere prep cook in a restaurant and then works his way up to chef, eventually opening his own bistro. Art-directed to convey the sense of a modern fable, it features cute fake fish and a crock labeled “Retirement.” I enjoyed it but it made me think more about New York or San Francisco restaurants than about TD Ameritrade. The last frame includes a plug for TD Ameritrade’s $600 get-started bonus for new clients, but it was hard to see and seemed like an afterthought.

Edward Jones (“Long-term Goals”). There’s an edge to this 30-second spot. Like the Saab campaigns in the 1980s and 1990s, Edward Jones seems to be pursuing smart, independent thinkers. It invites people with “audacity” and “nerve” to “join the nearly seven million investors who think like you do.”

“Face time and think time make a difference,” says the narrator, emphasizing an advantage that Edward Jones probably has over an E*Trade or a TD Ameritrade. Edward Jones has a complex challenge here. They’re selling a personal touch, but they don’t show an advisor. That might be too obvious, or perhaps old-fashioned.

According to Phoenix Marketing International, viewers didn’t warm to the ad’s minimalistic, sophisticated approach. Here’s what a focus group told Phoenix:

Minimal spend behind the ad led to significantly weak recall.
Only stood out for being viewed as serious.
The spot struggled to breakthrough the clutter and was rated poorly for being worth seeing again, and informative.
Those who felt positive about the ad liked that it had real people in real situations and that it made the ad feel warm and personal. Some thought it was thought provoking and it made them think about the future.
Dislikes included that the ad lacked information and that it was playing on the emotional piece.

I don’t mean to pick on Edward Jones here. These bullet points show just how harsh focus-group participants can be on commercials. The American public may not know much about finance or investing, but it knows what it wants from commercials.

Charles Schwab (“OneSource”). To become absorbed in this commercial, you might have to be interested in ETFs. I personally do not use them and am not even very curious about them, so I mostly paid attention to the swirling bits of grey paper that morphed into a giant ONE or the words ETF OneSource. The 60-second spot emphasized commission-free trading and one-stop shopping. Since this was a product pitch, it ended with a fairly long and rapidly spoken disclaimer, which some people might find annoying.

Charles Schwab (“Bank Designed for Investors”). See description of Fidelity ad immediately below.

Fidelity (“Cash Management Account”). This ad for Fidelity’s banking services and Schwab’s bank ad went chest-to-shoulder like two opposing seven-foot centers. Both appear to pursue the same type of customer, and they both approach him/her with an upbeat male narrator and a seamless, ever-moving montage of text and color—without people.

Both emphasized the access they provide to no-fee ATMs. Schwab’s team colors were white lines on a blue background; Fidelity’s were green type on a white background. Fidelity effectively used its familiar “Green Line” theme here, both for brand reinforcement and as a thread to tie together the sequence of images. Schwab flashed its familiar “Talk to Chuck” balloon-caption icon. I liked the way Fidelity incorporated U.S. Treasury legal tender typography into its ad. These ads feel almost effortless, as if to say: ‘When you have a really strong brand, you don’t have to strain.’

USAA (“Advice” and “Financial Obstacles”). For USAA’s ads to resonate, you probably have to have a strong connection to the U.S. military. That is USAA’s target market, and its TV advertising is tailored accordingly. The images of soldiers hitting the obstacle course in their camouflage fatigues (in “Financial Obstacles”) can’t help but connect powerfully with veterans.

I’m not a veteran but I am a father, and one of my emotional bells was rung by the family reunion moment (“Dad!”) in that commercial. Both of these commercials had a clear call to action at the end, which was reinforced by a close-up of the sepia-toned image of the young uniformed soldier and the elderly veteran that illustrates the cover of USAA’s Retirement Guide.

Transamerica (“That Moment It Became Real”). “When did it become real for you?” asks the caption at the end of one of Transamerica’s retirement ads—“It” being retirement. The “When did it become real” concept seemed a bit dated. Lincoln Financial in its FutureSelf commercials and Prudential in its Day One commercials used that type of epiphany.

The use of two separate stories in this commercial—one with a young mother and her newborn and another with an older executive on the day of his retirement—was probably meant to be all-inclusive, but I found it a bit confusing. I also had to think a moment or two about the meaning of the part of the script that said, “When you leave the only job you ever had for the only one you ever wanted.” It took me awhile to figure out that the second “job” was being a grandparent.

On a positive note, the mention of Transamerica’s 19 million customers at the end of the commercial made a favorable and memorable impact on me. Size does matter.

E*Trade (“Giant Mom Bag”). My inner compliance officer screams “Violation!” every time I see E*Trade’s implicit suggestion that even an 18-month-old can win at day trading, but I can’t resist the E*Trade baby. Neither can other people: The “Giant Mom Bag” spot ranked 12^th among the 20 “most engaging” ads of the NCAA tournament.

In this latest commercial in the infant series, E*Trade takes advantage of investors’ budding awareness of the high fees that they may still be paying on assets in a former employer’s 401(k) plan as a reason for them to roll that money over to an E*Trade IRA.

These ads are undoubtedly effective, and competitors should take heed. (Lest children assume that they too can use E*Trade, the fine-print at the end of the commercial discloses that a person must be 18 years to open a securities trading account.)

Nationwide to acquire 17 HighMark Capital funds

Data Connection