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Greetings from New Orleans

Posted on April 18, 2013 by Editor Test -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What should be done next? Kerzner asked.

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

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

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

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

What about interest rates? Kerzner asked.

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

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

What’s your biggest regulatory concern? Kerzner asked.

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

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

Principal Financial Joins the DIA Club

Posted on April 18, 2013 by Editor Test -

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

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

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

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

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

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

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

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

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

The Principal Deferred Income Annuity allows contract owners to delay income for up to 30 years. Four times during the life of the contracts, once payments begin, the contract owner can withdraw six month’s worth of payments at once. Purchasers can use qualified or non-qualified money to buy the contracts, and can buy single or joint-and-survivor contracts. There is a return of premium death benefit before income begins, and an optional return of unpaid premium death benefit after payments begin. Payouts can be automatically raised by up to 5% per year or they can track the Consumer Price Index.

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

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

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

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

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

A Man of Conviction

Posted on April 17, 2013 by Kerry Pechter -

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

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

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

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

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

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

Ambitious and idealistic

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

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

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

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

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

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

Tamarack and Credit Suisse

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

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

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

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

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

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

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

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

What executives say about Obama’s auto-IRA proposal

Posted on April 15, 2013 by Editor Test -

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

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

Unconventional Wisdom

Posted on April 15, 2013 by Editor Test -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

An Interest Rate Menagerie

Posted on April 14, 2013 by Russell Wild -

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

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

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

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

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

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

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

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

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

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

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

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

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.”

Nationwide to acquire 17 HighMark Capital funds

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