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What’s good for General Motors…

Posted on February 14, 2013 by Editor Test -

Unlike the famously premature reports of Mark Twain’s death, reports of the demise of the defined benefit plan are apparently not exaggerated.

Following the example of General Motors in 2012, more defined benefit (DB) plan sponsors intend to offer participants a one-time lump-sum buyout plan in 2013, according to a new survey by Aon Hewitt, the HR unit of Aon plc.

More than one-third (39%) of 230 U.S. DB plan sponsors representing almost five million employees told Aon Hewitt they are “somewhat” or “very likely” to offer lump-sum payouts to terminated vested participants and/or retirees during a specified period, also known as a “window approach,” in 2013. Just 7% of DB plan sponsors added a lump-sum window in 2012.

Plan sponsors will have an added incentive to move pension liabilities off their balance sheets in 2013 and 2014, as anticipated increases in Pension Benefit Guarantee Corporation (PBGC) premiums raise the cost of pension liabilities, according to Aon Hewitt.

Most employers (84%) won’t change their benefit accruals, the survey showed. Only 16% said they are somewhat or very likely to reduce DB pension benefits, while 17% are somewhat or very likely to close plans to new entrants in 2013. Just 10% are somewhat or very likely to freeze benefit accruals for all or some participants.

Half of employers surveyed are likely or somewhat likely “to conduct an asset-liability study” in 2013, and 60% are somewhat or very likely to institute liability-driven investing.

“Plans that are over funded will likely take measures to lock in this position [by] offering lump-sum windows. An underfunded plan will need to [implement] a glide path investment strategy that will de-risk the plan as the funded position improves,” the Aon Hewitt release said.

While just 18% use this glide path strategy today, the percentage is expected to exceed 30% by the end of 2013, the survey showed, as more plan sponsors abandon the traditional approach of investing a majority of plan assets in equities. Aon Hewitt’s survey found that while 52% of plan sponsors favor this majority equity strategy today, just 31% would use this approach by the end of the year.

Poor Standards at S&P, U.S. Alleges

Posted on February 7, 2013 by Editor Test -

In a civil suit that reopens the wounds of the 2008 financial crisis and tests the potentially conflicted business model that major U.S. crediting rating agencies use, the Justice Department Tuesday charged Standard & Poor’s Ratings Services with fraud.

The government—whose own debt was downgraded in S&P in 2011, helping to trigger an equity market correction—alleges that S&P executives knowingly inflated ratings of structured financial products, such as Residential Mortgage Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs), in the years leading up to the crisis.

According to the complaint, S&P, despite claims of objectivity, inflated ratings to please its investment banking customers and to increase or defend its own revenue and market share.

As a result, the suit charged, was that “investors, many of them federally insured financial institutions,” lost billions of dollars when the products’ weaknesses became public and their value fell. S&P eventually announced a broad downgrade of subprime RMBS in July 2007.

On Wednesday, S&P, a unit of The McGraw-Hill Companies, Inc., responded to the suit with a statement:

“The DOJ and some states have filed meritless civil lawsuits against S&P challenging some of our 2007 CDO ratings and the underlying RMBS models. Claims that we deliberately kept ratings high when we knew they should be lower are simply not true. … At all times, our ratings reflected our current best judgments about RMBS and the CDOs in question. Unfortunately, S&P, like everyone else, did not predict the speed and severity of the coming crisis and how credit quality would ultimately be affected.”

The case may hinge on the content and context of certain internal S&P e-mails sent during 2007, when executives evidently discussed the pressure to mollify their primary customers—the investment banks that underwrote the financial instruments in question—by using “business-friendly” ratings models.

In one internal email quoted in the suit, an executive said:

I do not believe that market share is our only objective. However, we cannot ignore the real risk of losing transaction revenue… The balance between market share and analytical integrity is complex, as one needs to consider ‘long-term’ and ‘short-term’ market share. In the short term it may be more beneficial to use modeling assumptions that are more favorable to transactions that are in the pipeline. In the long-term it may be more beneficial to have a more robust model that can be adapted to new transactions (such as long/short, etc.) so that we don’t lose new opportunities to our competitors.”

Another email that reflected internal debate said:

“The only way I can see to move this forward is to approach our clients and ask them for pools and levels, but this looks too much to me as if we are publicly backing into a set of levels driven by our clients.”

The suit also points to the emergence of gallows humor at S&P when the true value of the RMBS and CDO investments became generally known and a crash began to appear likely:

“On July 13, 2007 an S&P CDO analyst emailed employees at two banks that issued CDOs a cartoon that depicted asset-backed CDOs as a game of ‘Jenga,’ where the object is to remove pieces from a structure, creating a more and more unstable structure, until the entire thing collapses.”

The government will have to prove that the internal emails at S&P amount to smoking-gun evidence of fraud. S&P has protested that unflattering emails were “cherry-picked” for inclusion in the suit by the Justice Department.

At the least, however, the suit is likely to shed new light on the business model that major ratings agencies use. The agencies earn huge fees from their investment banking customers, who are able to shop among the agencies for the most favorable ratings. That potentially creates pressure for grade-inflation. The emails quoted in the lawsuit suggest that analysts at S&P may have been less insulated from commercial pressures than S&P publicly claimed.

The suit echoes the theme of some of the lawsuits that followed the dot-com crash of 2000, when analysts at major investment banks were accused of purposely inflating the ratings of certain technology stocks and encouraging investors to buy securities that the analysts privately disparaged.

The Retirement Income Paradox

Posted on February 7, 2013 by Kerry Pechter -

Boomer retirement may be too varied and fragmented and may contain too many “contradictions” to produce the kind of mass-market bonanza for asset managers or insurance companies that Boomer accumulation delivered to the mutual fund industry.

That’s not to say that the demographic and financial trend doesn’t present significant opportunities. But many advisors and product manufacturers are failing to take full advantage of them.

Those are two takeaways from a new report, “Retirement Income Insights 2013—Attracting and Retaining Retirement Income Clients,” based on a survey of 600 advisors from all of the major distribution channels: wirehouse, independent broker-dealer, bank and registered investment advisor (RIA).

Prepared by Dennis Gallant of GDC Research and Howard Schneider of Practical Perspectives, the survey/report is meant to be read by retirement product manufacturers and broker-dealers for whom advisors are a target market. They should find some news in the 113-page report encouraging. Schneider and Gallant found, for instance, that:

Over 70% of advisors increased the number of retirement income clients they serve in the past 12 months.
29% of advisors expect demand for retirement income support to increase significantly in the next 12 to 24 months.
The risk-adjusted total return approach is used to generate income by 40% of advisors, with the remainder of the users split among the pooled or time-segmented approach and the income floor methodology. (See bar chart below.)
Roughly one in three advisors expects to increase use of variable annuities, ETFs, and alternative investments in managing retirement income assets.

But Schneider and Gallant also identified “contradictions” in the retirement income space that hinder advisors and providers alike from tapping the seemingly vast opportunity presented by the movement of Boomer savings from accumulation to decumulation. For instance:

More than anything, advisors need help attracting new retirement income prospects and converting them to clients. They feel confident in their ability to convert savings to income with existing products and processes.
While retirement income clients are important to most advisors, many advisors don’t know how to address basic retirement issues, like setting realistic expectations or educating investors on what challenges retirement will bring.
Although most advisors are confident in their abilities to serve retirees, few know much about essential topics such as Social Security, Medicare, or elder care.
Value provided to retirement income clients does not relate to generating the highest return or the most income. Rather it arises from helping clients with more personal issues—a skill that many advisors lack.

The survey suggested that there is more conversation about retirement income than action. “While most advisors say they are delivering retirement income support, only a limited number, less than five percent, have actually positioned their practice to serve retirement income clients,” said Schneider, president of Practical Perspectives.

“Not a lot of advisors are promoting themselves as retirement income experts. At the same time, their potential income clients don’t know whom to turn to. The mass-affluent clients in particular are a bit lost in terms of how to find the right kind of help. It’s hard for them to find an advisor or a firm that says, ‘Come to us and you’ll find the answers you need about retirement,’” he added. “Advisors know there’s a huge retirement income opportunity out there. But they also have a lot else going on in their practices.”

Schneider chart 2013 Another contradiction: Despite the proliferation of consumer ads (e.g., ads for Charles Schwab, TDAmeritrade and Raymond James in the Feb. 11-18, 2013 issue of The New Yorker) for help with retirement, there’s apparently no perceived standard-setter in the retirement income space. “When we ask broker-dealers ‘Who does retirement well?’ there’s always a 10 to 15-second lull. Firms don’t see anyone doing it particularly well, except perhaps Fidelity, with its ‘Green Line’ campaign,” Schneider said.

At the same time, many advisors concede that they lack the “soft skills” that become even more important in the decumulation phase than during the accumulation phase.

“Advisors understand the nuts and bolts of retirement. They know how to set up income streams. Where they really struggle is with finding clients and engaging with them. Engagement means knowing how to interact with clients, how to get them to grasp longevity risk or sequence of return risk, how to get them to have a realistic vision of what day-to-day life will be like in retirement,” he said.

“Communication skills aren’t as important when dealing with an accumulation-stage client. Retirement requires a different skill set. Advisors who are used to dealing with 45-year-olds are less comfortable talking about when to take Social Security and how to figure out the Medicare puzzle.”

What advisors say about retirement income

(Quotes from interviews by Practical Perspectives and GDC Research)

“The art of knowing how to replace a paycheck is very different than building a portfolio or growth. The distribution phase and the accumulation phase are two very different things.”

“I would hope my broker-dealer would provide more assistance with product information/ support.”

“There’s too much product-pushing to fit needs that have to be integrated with the entire portfolio and person.”

“Distribution systems that exist now are specifically geared toward annuities, which are not the only answer for most clients. I wish I could be involved in the creation of a brand new product- neutral system that can help advisors plan for all aspects of retirement incom

The survey also suggested that product manufacturers and their wholesalers are still trying to put a round peg in a square hole, so to speak, when calling on advisors.

“Product manufacturers have defined retirement income narrowly; usually in terms of creating products that generate income. But that addresses only one aspect of what advisors are doing. The challenge for product providers is to figure out the solutions that advisors will want to use, but also to understand the nuances of how they’re delivering income,” Schneider said.

Advisors, he noted, are often disappointed to find that annuity or mutual fund wholesalers tell the same story to all advisors, ignoring the fact that some advisors use systematic withdrawal while others use bucketing methods, or income flooring products.

But advisors apparently have certain blind spots of their own.

“Two things surprised me,” Schneider commented about the study. “When we asked advisors what concerned them most about the current market environment, the potential for rising rates wasn’t a major concern. That was worrisome because it suggests that advisors think they can anticipate when rates rise, and take action to preserve their clients’ portfolios. But if history is any guide, advisors can’t predict big market moves. They’re much more concerned with inflation and taxes.

“The other big surprise was that a significant number of advisors said they converted 50% or less of their prospects to clients,” he added. “Advisors like to say that if they sit down with a prospect, they’ll convert them 95% of the time. But the dirty secret is that the ratio isn’t that high. Most advisors rely on referrals for new clients. They know there are all these people out there who need help, but they don’t know how to find them.”

Ultimately, advisors and providers alike may be underestimating the new challenges posed by the Boomer retirement wave. “The financial services industry took the problem of accumulation, of building wealth, and applied a simple, model-driven approach, mainly around the principles of Modern Portfolio Theory,” Schneider told RIJ. “In fact, they may have made it seem more complex than it actually was.

“Now, with retirement income, they’re taking an inherently complex and individualized problem and trying to apply model-driven or packaged solutions. But retirement isn’t that easy.”

As equity funds enjoy record inflow, veteran market-watchers fret

Posted on February 7, 2013 by Editor Test -

An all-time record $77.4 billion flowed into all U.S.-listed equity mutual funds and exchange-traded funds in January, according to TrimTabs Investment Research.

“The inflow in January smashed the previous record of $53.7 billion in February 2000, which was just before the technology stock bubble burst,” said David Santschi, CEO of TrimTabs, in a statement.

Of the $77.4 billion, $39.3 billion flowed into U.S. equity mutual funds and exchange-traded funds, while $38.1 billion flowed into global equity mutual funds and exchange-traded funds, TrimTabs reported in a research note to clients.

Both were record amounts. The previous record for U.S. equity funds was $34.6 billion in February 2000. The previous record for global equity funds was $27.1 billion in January 2006.

“These record inflows should make contrarians very nervous,” said Santschi. “Big inflows from fund investors have historically coincided with market tops. Note that four of the top ten biggest inflows were in early 2000.”

Inflows did not slow late last month, suggesting the buying was driven by optimism about the markets as much as by investments of bonus money or reinvestments after tax-related stock sales late last year, TrimTabs speculated.

“The Federal Reserve is creating about $4 billion in new money every business day, and even a few Fed officials are concerned that this money printing is blowing up asset bubbles,” said Santschi. “Investors need look no further than the equity markets to find lots of froth.”

In settling ERISA violation case, ING Life will pay $5.2 million

Posted on February 7, 2013 by Editor Test -

ING Life Insurance and Annuity Co. (ILIAC) has agreed to pay $5.2 million to certain of its retirement plan clients after settling Department of Labor charges that the insurer had an “undisclosed practice of keeping investment gains [that were] realized when it failed to process requested transactions in a timely manner.”

The DoL said that the $5.2 million represents “net gains pocketed by the company due to how certain transaction processing errors were handled between 2008 and 2011. ING’s failure to disclose its policy on reconciling transaction processing errors to retirement plan clients resulted in ING receiving compensation in violation of the Employee Retirement Income Security Act, or ERISA,” DoL said.

The settlement will restore funds to roughly 1,400 retirement plans, said Acting DoL Secretary Seth D. Harris. ILIAC, which has offices in Connecticut, has approximately 35,000 ERISA-covered plan clients. It provides, among other things, custodial and third party administration services to employer-sponsored defined contribution plans.

“Gains and losses result when the share or unit value differs between the contract date and the actual trade date. Any gains in share or unit value between the contract date and trade date are kept by ILIAC, whereas ILIAC is obligated, by contract, to make plans whole for any losses,” detailed the DoL in its announcement of the fine.

According to terms of the agreement:

ILIAC must disclose its policy on how it corrects transaction processing errors to plan clients covered by ERISA. Its transaction policy must be presented to current and prospective ERISA plan clients in writing. Current plan clients have the opportunity to object to the policy within 30 days of receipt. Prospective plan clients will be informed of the policy by way of its incorporation in ILIAC’s contracts and service agreements.
The disclosure also will state that ILIAC will track the effect of the corrections for each affected plan on an annual basis and will make that information available to its ERISA plan clients.
In addition, ILIAC will acknowledge in the disclosure that any gains it keeps as a result of the policy constitute additional compensation for the services the company provides and it will report such compensation in accordance with ERISA Section 408(b)(2).
ILIAC has agreed to pay a $524,500 civil penalty.
ILIAC will further adopt procedures for properly terminating abandoned plans through the Employee Benefits Security Administration’s Abandoned Plan Program. If the company attempts to contact the sponsor of an abandoned plan, but is unsuccessful, ILIAC will then become that plan’s qualified termination administrator.

ILIAC issued a statement in which it said, that the settlement with the DoL “enhances our broader efforts to increase transparency in the industry and help our clients better understand how their plan services work.”

“Under terms of the agreement, ING Life Insurance and Annuity Company will continue applying its policy – which was communicated to sponsors during the 408(b)(2) fee disclosures in July 2012 and again recently as part of a sponsor mailing,” the ILIAC statement said.

The settlement was the result of an investigation conducted by EBSA’s Boston Regional Office. It was reached with the assistance of the DoL’s Regional Office of the Solicitor in Boston.

Security Benefit’s EliteDesign VA adds 71 investment options

Posted on February 7, 2013 by Editor Test -

Security Benefit Corp. has added 71 new subaccounts from 23 U.S. investment managers to its fee-only EliteDesigns variable annuity product. The contract issued by the unit of Guggenheim Partners now has 269 variable account options.

The new offerings include fixed income, asset allocation, global/international and alternative investment options from Dimensional Fund Advisors, JP Morgan and other asset management firms, as well as new underlying funds (within funds-of-funds) from Guggenheim Investments, said Michael K. Reidy, vice president and national sales manager of the RIA and Independent Broker-Dealer Advisory Channel at Security Benefit, in a release.

Other managers of the newest EliteDesigns portfolios are Fidelity Investments, Ibbotson Investments, Pioneer Investments, Putnam Investments, Innealta Capital and Western Asset Management. All told, 38 asset managers are represented, investing across 36 Morningstar categories.

Simple variable annuities with lots of investment options and no living benefits, like Jefferson National’s “flat-fee” Monument Advisor contract, allow advisors to trade in and out of portfolios often and own high-turnover portfolios without generating short-term capital gains—a feature that higher tax rates could make more salient.

Deferred variable annuities are the only vehicle that allows tax-deferred growth on a virtually unlimited amount of after-tax contributions. Unlike B-share variable annuity contracts, fee-only variable annuities do not involve commissions. Therefore they carry no surrender charges for early withdrawal and have minimal mortality and expense risk fees.

All deferred variable annuities, even those that do not offer living income benefits, permit contract owners to convert the assets to guaranteed lifetime or fixed-period income streams and to spread out the deferred tax liability over a lifetime of payments. In practice, however, deferred variable annuity contracts are rarely annuitized.

Well-known CFP bases new venture on mining old VAs

Posted on February 7, 2013 by Editor Test -

A new information service, Annuity Review, has been launched by Parsippany, New Jersey-based MACRO Consulting Group, whose founder and senior partner is Mark Cortazzo, CFP, (at left) the widely quoted financial advisor and variable annuity expert.

For a fee, Annuity Review will provide individuals and their advisors with detailed assessments of variable annuity contracts they already own but whose value they may not fully understand. The initial cost is $199, which includes reviews of up to three contracts. Each additional contract review costs $49. Other volume-based price arrangements may be available.

According to MACRO Consulting’s release, “The program is designed to help both fee-based financial advisors, who typically may not work extensively with insurance products, as well as individual investors, uncover hidden value within their existing variable annuity contracts and gain a clearer understanding of how they may fit in a broader financial planning strategy.”

“The variable annuity industry has changed substantially in the last few years, and many of the older, ‘vintage’ VA contracts may contain valuable provisions that were overlooked at the time of purchase,” Cortazzo said in the release. “These could include more generous payouts, relatively lower costs, superior fixed options, death benefits, and lifetime income guarantees that an investor could not find today in a new contract.”

“Some insurance companies are actively looking to exit the variable annuity business by closing products and offering cash payments to holders of existing contracts. By hiring an objective, third-party consultant, individual investors and fee-based advisors can possibly uncover provisions in a pre-existing contract that may deserve a second look before one simply surrenders the contract.”

The Bucket

Posted on February 7, 2013 by Editorial Staff -

Putnam’s latest thought-leadership effort starts February 11

Putnam Investments has launched “an ongoing dialogue with the marketplace” in 2013. The topic: the importance for financial advisors and investors “to continually anticipate the evolution of the investment markets… and act to seize a new set of opportunities and mitigate unforeseen challenges.”

The Boston-based fund company will kick off its awareness-building campaign, entitled, “New Ways of Thinking,” on Monday, February 11, through a series of new print, direct marketing, and online advertising, and will use a host of content-driven, multi-media vehicles “to communicate the need to incorporate modern, innovative investment approaches into more traditional investment models and mindsets in order to continually stay ahead of the curve.”

In addition to new print, direct marketing and online advertising, the firm said it “will develop content-rich thought leadership through business seminars, industry events, and white papers on an array of topics including the marriage of traditional and alternative products, benefits of Sharpe ratio investing, active risk management, and more.”

Pershing survey reveals differences between older, younger advisors

The financial advisory industry will need to add about 237,000 new financial professionals over the next 10 years to make up for the 12,000 to 16,000 advisors who will retire each year, according to Pershing LLC’s Inaugural Study of Advisory Success.

The study was based on a survey of 357 advisors. According to the study, firms should look to address the following key differences among older and younger advisors over the next several years:

Younger advisors are more collaborative than older advisors. Older advisors are less team-oriented than their younger counterparts, with over 60% saying they prefer to “work on their own” versus being team-oriented, and nearly 33% saying they don’t need the right team to achieve success.
Younger advisors are less satisfied with the independent model compared to older advisors. Among independent advisors, 83% are satisfied with being an independent advisor. Advisors aged 50-59 (46%) and 60+ (53%) are significantly more satisfied with being independent compared to the younger age groups (31% 25-39 and 19% 40-49).
Younger advisors want to make money and also make a difference. Less than half of all advisors think personal gain and reward plays a major role in personal success. Advisors aged 25-39 are significantly more likely to say gain/reward plays a major role compared to all other age groups. In the youngest advisor age group (25-39) 73% of advisors believe “having clients who appreciate the value they provide” is one of the top three most rewarding experiences of being an advisor. This compares to 57% for the 40-49 age range, 57% for 50-59 age range and 56% for the 60+ age range.
Younger advisors are much more likely to embrace and use technology. 85% of advisors aged 25-39 describe themselves as being “technology-embracing,” compared to 70% and 73% for advisors aged 40-49 and 50-59, respectively. Advisors 60+ in age are far less likely to be technophiles: only 56% describe themselves as technology-embracing.

Edward Meehan joins Groom Law Group’s ERISA litigation group

Edward Meehan has joined the ERISA litigation group of Groom Law Group, Chartered, a Washington, D.C. law firm that focuses on employee benefits. He had been a partner in the litigation group of Skadden, Arps, Slate, Meagher & Flom LLP.

An experienced litigator, Meehan has substantial experience in disputes involving employee benefits, including pension and health plans, often in the context of Chapter 11 or other corporate restructurings. Representative matters include work for American Airlines and Eastman Kodak on retiree health benefit issues, for Hayes-Lemmerz International, Inc. on pension and retiree health matters, and for US Airways on pension issues.

In addition to his work on employee benefit matters, Mr. Meehan has defended class actions and other complex disputes across a wide range of industries. He also has represented clients in connection with Department of Labor and Securities and Exchange Commission investigations.

DST reaches 1.5 million accounts in ‘alternative space’

DST Systems, Inc., the largest provider of third-party shareholder recordkeeping services in the mutual fund industry, announced that its U.S. Investment Recordkeeping solution now supports over 1.5 million accounts in the alternative investment space.

In a release, DST said it supports a full range of retail alternative investment products, including institutional and retail hedge funds, closed end interval funds, business development companies, managed futures, limited partnerships, and non-traded REITS.

In addition to its recordkeeping solutions and DTCC Alternative Investment Platform support, DST also provides commonly used distribution solutions like DST Vision, FAN Mail, and SalesConnect.

DST provides support for transfer agency operations with TA2000, including service models with options for services and functionality designed to meet a variety of business needs.

Vanguard to further diversify target retirement fun ds

Vanguard today announced plans to add an international bond index fund to 20 all-in-one funds, including Vanguard Target Retirement Funds. The new fund will complement the three other core holdings of the all-in-one funds: Vanguard Total Stock Market Index Fund, Vanguard Total International Stock Index Fund, and Vanguard Total Bond Market II Index Fund.

Vanguard’s 12 Target Retirement Funds, four LifeStrategy Funds, two of its Managed Payout Funds and two Vanguard Variable Insurance Funds will apportion 20% of their respective fixed income allocations to the new Vanguard Total International Bond Index Fund, which is in registration with the U.S. Securities and Exchange Commission.

In addition, Vanguard Short-Term Inflation-Protected Securities Index Fund (Short-Term TIPS Fund) will replace Vanguard Inflation-Protected Securities Fund in the three Target Retirement Funds that offer exposure to TIPS: the Target Retirement Income, 2010, and 2015 Funds. The overall strategic asset allocation and glidepath of the Target Retirement Funds will not change.

The Total International Bond Index Fund will seek to track the performance of a new benchmark— the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). The index comprises approximately 7,000 high-quality corporate and government bonds (average credit quality AA2/AA3) from 52 countries.

The index caps its exposure to any single bond issuer, including a government, at 20% to meet regulated investment company (RIC) tax diversification requirements. The top country holdings as of December 31, 2012, were Japan (23%), France (12%), Germany (11%), and the United Kingdom (9%).

Vanguard is estimating lower expense figures in the amended filing for the Total International Bond Index Fund. The fund will offer conventional shares (Investor, Admiral, and Institutional) with projected expense ratios ranging from 0.12% to 0.23%. The ETF Shares have a projected expense ratio of 0.20%. Vanguard has also eliminated a planned 0.25% purchase fee on the fund.

The Total International Bond Index Fund will represent 20% of the fixed income allocation of the 20 funds-of-funds, with an overall allocation weighting that will range from 2% to 16% of total fund assets, depending on the fund. For example, the new international bond index fund will assume an initial 6% weighting in Vanguard’s largest all-in-one fund—the $20 billion Vanguard Target Retirement 2025 Fund.

Vanguard research shows that the primary factors driving international bond prices are relatively uncorrelated to those driving the U.S. bond market. Vanguard research has also determined that currency volatility can overwhelm any diversification benefit. By hedging currency risk, an allocation to international bonds can lead to lower average portfolio volatility over time.

Short-Term Inflation-Protected Securities Index Fund

The Short-Term TIPS Fund, which has an average duration of less than three years, will have initial weightings in the Target Retirement Income, 2010, and 2015 Funds of 17%, 11%, and 4%, respectively. It will replace the Inflation-Protected Securities Fund, which has a current average duration of 8.5 years.

The fund seeks to track the performance of the Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index, a market-weighted index that measures the performance of inflation-protected public obligations of the U.S. Treasury with a remaining maturity of less than five years. As of December 31, 2012, the index had an average duration of 2.5 years and an average maturity of 2.6 years.

Vanguard research found that TIPS have historically offered protection from unexpected inflation similar to that offered by commodities, but at a fraction of the volatility. Shorter-term TIPS provide higher correlation to realized inflation with less duration risk than do longer-term TIPS securities.

Current expense ratios are 0.16% to 0.18% for the Target Retirement Funds, 0.13% to 0.17% for the LifeStrategy Funds, and 0.34% to 0.46% for the Managed Payout Funds. A single fund may experience a change in its expense ratio as a result of adding the new underlying funds—the expense ratio of the LifeStrategy Income Fund has the potential to increase by an estimated one basis point.

The changes are expected to be completed by the end of the second quarter of 2013.

Retirement income opportunity to reach $22 trillion by 2020: LIMRA

The investible retirement assets of U.S. households ages 55 and older is expected to rise about 83%, to $22 trillion, from 2010 to 2020, according to an analysis by LIMRA Retirement Research of the Federal Reserve Board’s Survey of Consumers Finances.

“The number of Americans who receive income from a [defined benefit] pension plan is on decline, and there will be many more retirees who will have most of their retirement assets invested in [defined contribution] retirement plans,” a LIMRA release said. “The study estimates that almost two-thirds of these assets will be directed towards products that will generate income for them in retirement.”

“We are witnessing financial services firms changing the structure and business model to accommodate more customer-centric information and process, promoting uniform tools and services across the institutional and retail businesses to capture rollovers, emphasizing smooth transition of assets from the savings in institutional plans to retail side of the business where most retirement income products and solution are typically available,” said Jafor Iqbal, associate managing director, LIMRA Retirement Research, in the release.

The findings are included in LIMRA’s new Retirement Income Reference Book (RIRB), published in December 2012. The RIRB provides a comprehensive view of the latest LIMRA data, projections and research on retirement income market.

The Missing Document

Posted on February 6, 2013 by Editor Test -

Long before my father’s death three weeks ago at the age of 83, I and my brother and sister often asked him to unveil the details of his finances to us. We wanted to minimize any unnecessary legal or procedural confusion after his… you know. We hinted, we cajoled, we insisted. To no effect.

“Are you after my money?” my father would respond. “Pushing me to an early grave?” No, we were just worried that some important documents might go missing. “Call my secretary,” he’d say. “She’ll know where they are.” Or, “Just wait for the bills to arrive in the mail.”

The notion that we were eager to lay our hands on an inheritance may have been, for him, a useful fiction. We knew better. My father intended to leave nothing—less than nothing, if possible—on the proverbial table when he ascended from this earthly Server to The Cloud.

He had always been close-mouthed about money. No, that’s not true: he talked frequently about money in general, as most men do. But, like most men, he didn’t talk about his own money. He must have shared a few details with my mother, but only on a need-to-know basis.

During my father’s middle years, when we kids were raising families of our own, he never referred to any preparations for retirement. Knowing him, I’d guess that he had built a sturdy wall of denial between himself and the inevitable.

A strip-mall lawyer, he evidently never planned to retire completely. A heart attack survivor at age 46, and a bypass patient in his 60s, he probably didn’t expect to see the far side of 80. Not that he was reconciled to the idea of death or decline; I suspect he tried not to think about it.

Some people prudently plan and save for retirement. They forego luxuries and ponder their legacies. My father was not one of them. Living for today is undeniably a virtue, and he practiced it. Or, as someone who was self-employed, he may have been too busy juggling accounts in the present to think much about the future.

It’s possible that he simply weighed the price of saving against the price of denying himself and his family the emblems of success—college educations for his children, a diesel Mercedes for himself, a diamond anniversary band for his wife, a small condo in Florida for the winter—and opted to direct his cash flow to the latter. His family would be his beneficiaries in life, not death. Who can argue with that?

Shouldn’t he have saved for my mother’s likely widowhood? Yes and no. My mother, a dabbler in oil painting and furniture decoupage, started chain-smoking Chesterfields as a bobbysoxer. She smoked for almost 60 years, more or less avoiding doctors and the risk of an unpleasant diagnosis. Her lungs failed nine years ago, in Florida, when she was only 74. Perhaps she and my father expected it to end that way.

Three weeks ago, the phone rang at my house and, nine years on, my sister was once again the bearer of sad news. My father, who was never in vigorous health but was stubbornly self-sufficient, happened to be visiting the condo in Florida. He had not returned phone calls from friends for a couple of days. His condo superintendent opened his unit with a passkey, eventually reached the bathroom, and screamed.

After the funeral, after the eulogies, after the “This Is Your Life” display of old family photographs, and after the reception, we turned to the resolution of my father’s affairs. We called my father’s secretary of 36 years, and she told us where most of the documents were. They were in a filing cabinet in the garage of his townhouse in Pennsylvania.

My brother, sister and I are now learning to be co-executors and co-trustees. We’ve identified and notified my father’s bank, his credit card companies, his reverse mortgage company, his auto insurer and so forth about his death. He left a revocable trust that apparently has little legal import, a scattering of unsecured debt, and a two-bedroom condo whose value is depressed and whose title needs to be transferred.

Everything that experts say about this somber rite of passage is true, I’ve found. It’s better to put the paperwork in order before death comes. It’s best to spare the survivors any complex legal chores while they’re dealing with complex emotions. It’s of particular importance—perhaps the most important thing of all, in applicable situations—for the siblings to work harmoniously and as a team.

We’re still searching sifting through my father’s papers, trying not to miss anything important. I had half-hoped that, among the copies of the wills and codicils and quarterly statements, there’d be an envelope, addressed to “My Children,” containing a letter, handwritten in my father’s backward-sloping southpaw script, that would answer all of our unanswered questions and resolve all of our family mysteries. So far, we haven’t found such a document and I doubt we will.

Who Do You Love (in the Retirement Income Space)?

Posted on February 4, 2013 by Editor Test -

For its just-published 2012 Advisor In-Retirement Income^TM report, Cogent Research of Cambridge, Mass., asked financial planners, RIAs and broker-dealer representatives to name the product manufacturers they consider to be retirement income thought-leaders.

The co-authors of the study, Cogent’s Meredith Lloyd Rice, a senior project director, and Tony Ferreira, managing director, surveyed over 400 advisors who manage at least $25 million and manage at least 25% of those assets for retirement income.

On last week’s RIJ homepage, we published Cogent’s list of 10 companies that the advisors named most frequently as income thought leaders. PIMCO and Jackson National were tied at the top of the list, with 54% of advisors naming them. Vanguard (53%) ran a very close third.

Six fund companies and four life insurers made the list. Besides Vanguard and PIMCO, the fund companies included American Funds, BlackRock, Franklin Templeton and Fidelity Investments. After Jackson National, the insurers were Prudential, MetLife and Lincoln Financial.

All of these are familiar brands in the advisor world, of course. Both Vanguard and PIMCO (passive and active bond fund specialists, respectively) enjoyed bumper positive fund flows in 2012, as rattled investors added a net $266 billion to taxable bond funds. All four of the insurers are sales leaders in the individual variable annuity space.

Some advisors evidently think of bonds when they think about retirement income, while others think of annuities. Almost half of all advisors surveyed (48%) said insurance companies were “bested suited to offer a retirement income product,” followed distantly by brokerage firm (26%) and mutual fund company (19%).

“Despite some concern about product pricing increases and the exodus by several companies from the variable annuities market, they still do believe that insurance firms offer the best solutions. That comment was consistent throughout our research,” Ferreira told RIJ last week.

Within the advisor community, sentiment is more nuanced. Registered investment advisors, whose clients have the highest average account balances, tend to identify mutual fund firms as retirement income thought leaders. Broker dealer representatives are more likely to identify an insurance company.

Individual investors, perhaps because they’re more familiar with fund companies, tend to associate them with retirement income. Only 14% retirees and pre-retirees interviewed by Cogent Research in a survey last year named insurance companies as best suited in that respect; 34% chose mutual fund companies and chose 25% brokerage firms.

Advisors appear to believe that a household with an annual income of $200,000 before retirement will need $150,000 to maintain the same standard of living. “Generally, they’re trying to replace 75% of their clients’ pre-retirement income,” Rice said, adding that on average advisors rely on a dozen investment vehicles and seven different product providers to accomplish that.

The survey also revealed that advisors’ faith in Social Security has softened. “As always, they tend to look at retirement funding as a three-legged stool,” Ferreira said. “But they no longer think that Social Security, a pension and personal savings will each provide about one-third of retirement income.

“Now they see it as 20% from Social Security, about 36% from a employer sponsored plan and the rest from personal savings. They’re hedging their bets about Social Security’s long-term future. If the money is there, that’s great. But if not, they want to be prepared.”

Although many pre-retirees express a willingness to work longer if necessary, advisors tend to recommend postponing retirement only as a last resource, Rice told RIJ. “If their clients don’t have enough money to fund their desired retirement, advisors are more likely to recommend a change in lifestyle or a change in the size of the legacy,” she said.

Also, high net worth clients tend to worry less about running out of money in retirement than about experiencing income volatility, Rice added. Regarding the use of annuities, she noted that RIAs tend to be process-oriented while broker-dealer representatives are more open to purchasing products. RIAs also tend to be confident that their clients can afford to self-insure against longevity risk or rely on risk-management techniques other than insurance.

Second-Guessing the Fed

Posted on February 4, 2013 by Kenneth Rogoff -

Critics of the US Federal Reserve are having a field day with embarrassing revelations of its risk assessments on the eve of the financial crisis. By law, the Fed is required to publish the transcripts of its Federal Open Market Committee (FOMC) meetings with a five-year lag.

While the full-blown crisis did not erupt until the collapse of Lehman Brothers in September 2008, it was clear by the summer of 2007 that something was very wrong in credit markets, which were starting to behave in all sorts of strange ways. Yet many Fed officials clearly failed to recognize the significance of what was unfolding. One governor opined that the Fed should regard it as a good thing that markets were starting to worry about subprime mortgages. Another argued that the summertime market stress would most likely be a hiccup.

Various critics are seizing on such statements as evidence that the Fed is incompetent, and that its independence should be curtailed, or worse. This is nonsense. Yes, things could and should have been done better; but to single out Fed governors for missing the coming catastrophe is ludicrous.

The Fed was hardly alone. In August 2007, few market participants, even those with access to mountains of information and a broad range of expert opinions, had a real clue as to what was going on. Certainly the US Congress was clueless; its members were still busy lobbying for the government-backed housing-mortgage agencies Fannie Mae and Freddie Mac, thereby digging the hole deeper.

Nor did the International Monetary Fund have a shining moment. In April 2007, the IMF released its famous “Valentine’s Day” World Economic Outlook, in which it declared that all of the problems in the United States and other advanced economies that it had been worrying about were overblown.

Moreover, it is misleading to single out the most misguided comments by individual governors in the context of an active intellectual debate over policy. It is legitimate to criticize individual policymakers who exercised poor judgment, and they should have a mark on their record. But that does not impugn the whole FOMC, much less the entire institution.

Central banks’ state-of-the-art macroeconomic models also failed miserably – to a degree that the economics profession has only now begun to acknowledge fully. Although the Fed assesses many approaches and indicators in making its decisions, there is no doubt that it was heavily influenced by mainstream academic thinking – including the so-called real business cycle models and New Keynesian models – which assumed that financial markets operate flawlessly. Indeed, the economics profession and the world’s major central banks advertised the idea of the “great moderation” – the muting of macroeconomic volatility, owing partly to monetary authorities’ supposedly more scientific, model-based approach to policymaking.

We now know that canonical macroeconomic models do not adequately allow for financial-market fragilities, and that fixing the models while retaining their tractability is a formidable task. Frankly, had the models at least allowed for the possibility of credit-market imperfections, the Fed might have paid more attention to credit-market indicators as a reflection of overall financial-market conditions, as central banks in emerging-market countries do.

Last but not least, even if the Fed had better understood the risks, it would not have been easy for it to avert the crisis on its own. The effectiveness of interest-rate policy is limited, and many of the deepest problems were on the regulatory side.

And calibrating a response was not easy. By late 2007, for example, the Fed and the US Treasury had most likely already seen at least one report arguing that only massive intervention to support subprime loans could forestall a catastrophe. The idea was to save the financial system from having to deal with safely dismantling the impossibly complex contractual edifices – which did not allow for the possibility of systemic collapse – that it had constructed.

Such a bailout would have cost an estimated $500 billion or more, and the main beneficiaries would have included big financial firms. Was there any realistic chance that such a measure would have passed Congress before there was blood in the streets?

Indeed, it was precisely this logic that me led to give a very dark forecast in a widely covered speech in Singapore on August 19, 2008, a month before Lehman Brothers failed. I argued that things would not get better until they got much worse, and that the collapse of one of the world’s largest financial firms was imminent. My argument rested on my view that the global economy was entering a major recession, and I had the benefit of my quantitative work, with Carmen Reinhart, on the history of financial crises.

I was not trying to be sensational in Singapore. I thought that what I was saying was completely obvious. Nevertheless, my prediction gained bold front-page headlines in many major newspapers throughout the world. It gained headlines, evidently, because it was still far from a consensus view, although concerns were mounting.

Were concerns mounting at the Fed as well in the summer of 2008? We will have to wait until next year to find out. But, when we do, let us remember that hindsight is 20-20.

Kenneth Rogoff is professor of economics and public policy at Harvard University. He won the 2011 Deutsche Bank Prize in Financial Economics.

CFP Board releases survey and guidebook on using social media

Posted on February 3, 2013 by Editor Test -

Although about 73% of Certified Financial Planner professionals say they use social media, only about 45% use it for professional purposes, according to a recent survey of 3,532 CFP designation holders by the CFP Board.

CFPs cited three main reasons for not using social media for professional purposes:

Compliance prohibitions and limitations (mentioned by 37%)
Uncertainty over compliance and regulatory requirements (33%)
Lack of time (20%).

The CFP Board also released a new Social Media Guide for CFP® Professionals. The guide is intended to help the nation’s 67,000 CFP professionals promote their designations through social media. The document can be found here and on CFP Board’s website.

The survey also revealed that:

LinkedIn is the most popular social media channel for professional use (81.9%), followed by blogs (71.8%), Twitter (45.9%), Google+ (34.5%) and Facebook (19.6%).
CFP professionals’ compliance departments prohibit them most often from using:
- Facebook (33%)
- Twitter (29.4%)
- YouTube (28.7%)
Planners use social media professionally to:
- Network with other planners (44.8%)
- Follow professional news and trends (43.1%)
- Marketing and business promotion (33.1%)
61.2% of CFP® professionals post to social media channels “infrequently”
70% said their firm or company has a formal social media policy that addresses compliance procedures, restrictions and requirements for prior approval.
41% of respondents use “CERTIFIED FINANCIAL PLANNER™ professional” to describe themselves to clients. They also use the terms “financial advisor” and “financial planner.”

Taxable bond funds gain $266.1 billion in 2012: Cerulli

Posted on February 3, 2013 by Editor Test -

The January 2013 edition of The Cerulli Edge, a monthly mutual fund and ETF product trends bulletin from Boston-based research firm Cerulli Associates, showed that for calendar year 2012 U.S. taxable bond mutual funds gained $266.1 billion while U.S. stock mutual funds lost a net $105.3 billion.

DoubleLine’s Total Return Bond Fund had $19.6 billion in 2012 flows, the most of any mutual fund. Five of the top ten funds in terms of 2012 flows were Vanguard index funds and two were PIMCO funds.

Despite seeing a $105 billion net outflow in 2012, U.S. stock funds remained the largest asset class, with a market value of $3.48 trillion at year-end, compared with $2.51 trillion in taxable bond funds, which added $266 billion last year. There’s also $1.4 trillion in international stock funds and $584 billion in municipal bond funds.

Alternatives funds and commodities funds, though trendy, account for just 1% and 0.5%, respectively, of mutual fund assets. Even though index investing continues to gain favor, as of December 2012 active mutual funds held far more assets than passive mutual funds, by a margin of $7.855 trillion to $1.413 trillion.

PIMCO’s alternative mutual funds contributed net flows of $4.7 billion to the alternatives asset class in 2012, the largest contribution to that class by any manager. PIMCO’s Income Fund and Total Return Fund took in $12.6 billion and $18.0 billion, respectively, to place second and fourth among the ten best-selling funds in 2012.

Several Vanguard index funds were also among the most popular. Vanguard Total Stock Market Fund, Total Bond Market II Fund, Total International Stock Index Fund, Total Institutional Index Fund and Total Bond Market Index gained $13.8 billion, $12.3 billion, $11.6 billion, $8.5 billion and $8.0 billion respectively.

Cerulli also found:

Mutual fund assets increased 16.3% in 2012 and garnered $269 billion, almost triple their 2011 net flows of $97.8 billion. Municipal bond and balanced asset classes had net flows of $50.1 billion and $21.3 billion, respectively.
ETF assets grew 27.4% as flows totaled $187 billion. U.S. stock ETFs posted the best flows among the asset classes, with $54.8 billion.
Economic and capital market uncertainty has shaped both Retail and institutional investors want portfolio solutions that can boost returns, subdue volatility, and address liabilities.
Alternative investments’ ability to reduce volatility and provide diversification in portfolios was ranked by third-party-distribution-focused managers as the most important product attribute (4.6 on a 5.0 scale) to financial advisors, followed by risk reduction (3.7 on a 5.0 scale).
About one-fourth (24%) of asset managers marked taxable bond for new product development within the next 12 months.
Of the top-10 flow-gathering Morningstar categories in 2012, intermediate-term bonds had the most net flows with $112.3 billion, and only two were not fixed-income-focused: diversified emerging markets and conservative allocation.

Trading volume in VIX futures rose to new record in January

Posted on February 3, 2013 by Editor Test -

Trading activity in futures on the CBOE Volatility Index(VIX) set several new records in January 2013, including total monthly volume, total monthly average daily volume, single-day volume and open interest, the CBOE Futures Exchange (CFE) said.

The record 2,897,739 VIX futures contracts traded during January was an increase of 258% from the 808,784 contracts traded in January 2012 and a gain of 19% from the 2,435,648 contracts traded in December. The previous record for VIX futures monthly volume was 2,734,248 contracts traded during November 2012.

Average daily volume (ADV) in VIX futures during January was 137,988 contracts, also a new record, and up 241% and 13%, respectively, when compared with 40,439 contracts a year ago and 121,782 contracts the previous month. The previous record for VIX futures monthly ADV was 130,202 contracts during November 2012.

VIX futures set consecutive single-day volume records on January 2, 2013 and December 31, 2012 with 221,323 contracts and 212,800 contracts traded, respectively, surpassing the previous high of 190,081 contracts on September 13, 2012.

During January, open interest in VIX futures reached a new high on four consecutive trading days, culminating on January 16 when open interest stood at a record 472,403 contracts.

Total trading volume at CFE during January was a record 2,927,613 contracts, up 261% from the January 2012 volume of 811,283 contracts and an increase of 20% above the 2,446,471 contracts traded during December. The previous record for total monthly volume at CFE was 2,744,177 contracts traded during November 2012.

Total exchange-wide ADV during January reached a new high of 139,410 contracts, a gain of 244% from January 2012 ADV of 40,564 contracts and up 14% from the ADV of 122,324 contracts in December.

The previous record for CFE total monthly ADV was 130,675 contracts during November 2012. Consecutive CFE single-day volume records were set on January 2, 2013 and December 31, 2012 with 226,951 contracts and 212,984 contracts traded, respectively.

These records surpassed the previous high of 191,228 contracts on September 13, 2012. January was the first month in CFE history where daily volume exceeded 100,000 contracts each trading day. On January 16, exchange-wide open interest stood at 501,559 contracts, a new all-time high, and the first time CFE open interest surpassed the 500,000-contract benchmark.

In BlackRock asset allocation contest, the winners were…

Posted on February 3, 2013 by Editor Test -

The three co-winners of an asset allocation contest, in which BlackRock challenged sophomores and juniors at Duke University to design an ideal balanced portfolio for a volatile, low-yield world, were revealed last week in a New York Times article.

Junior economics majors Mike Du, Alex Kim and Jenny Zhang’s winning allocation was 43% stocks (30.3% Russell 2000 Index and 12.7% Russell mid-cap fund) and 57% bonds (32.1% Treasury Inflation-Protected Securities, or TIPS, and 24.9% aggregate bond fund).

The students projected an average annual return of 9.7% for this hypothetical portfolio, based on historical back-testing. The winners will get an interview at BlackRock and a shot at a summer internship at the Manhattan-based asset manager.

The team’s assumptions included an optimistic future average return of 5.91% a year from bonds in general and a 5.66% return from TIPS. They made no allocation to international equities, which many professional portfolio managers recommend.

The Times compared the Duke undergrads’ allocation with Vanguard and Fidelity target date fund allocations. Vanguard’s Target Retirement 2020 Fund puts 64% in stocks (20% in international equities). Fidelity’s Freedom 2020 Fund calls for 56% stocks (15% in international equities) and eight percent TIPS.

Different Floors, Different Ceilings

Posted on February 3, 2013 by Kerry Pechter -

Investors who seek both upside potential and downside protection on their tax-deferred savings can now find several types of annuity contracts to help them do precisely that. And the number of available choices appears to be growing.

Fixed index annuities, of course, preserve principal (if held long enough) while offering a taste of equity-linked gains during bullish markets. More recently, a spate of variable annuities has appeared that include performance-smoothing managed-volatility funds.

For investors who seek a different balance of risk and reward, there’s a third possibility: Structured annuities where investors can increase their upside potential by sharing the downside risk with the product issuer.

The first product in this category was AXA Equitable Life’s Structured Capital Strategies variable and index-linked deferred annuity. Launched in late 2010, the product features a design and a value proposition that initially baffled regulators when it was first submitted for approval.

For instance, a high-level SEC staff attorney said during a Practicing Law Institute meeting in New York last month that the new contract puzzled him on first reading. An AXA securities lawyer conceded at the same meeting that the SEC review process for the product took seven or eight months. “The terminology was new,” the attorney said. “We wanted to call it Protected Capital Strategies but the SEC said no.”

Sincerest form of flattery

What was so new about it? Structured Capital Strategies has an index-linked crediting method where gains are tied to the increases in several optional indices, up to a certain cap, over a one-year, three-year or five-year term. It can offer more generous caps than, say, index annuities in part because the issuer doesn’t guarantee zero loss of principal.

Instead, the investor assumes the so-called tail risk by agreeing to absorb losses beyond a chosen downside buffer (-10% for one year, up to -20% over three years, or up to -30% over five years). In 2012, a year when rising equity markets made protection more costly than helpful, Structured Capital Strategies owners were in a position to earn more than most owners of managed volatility funds and much more than indexed annuity owners.

“We like the simplicity of the product,” said Kevin Kennedy, head of new business for AXA Equitable’s Retirement Savings division. “Traditional variable annuities solve a need but they’re subject to the three Cs: cost, complexity and commitment. The nice thing about this product is that the costs are embedded in the caps, so there’s no additional cost. It’s simpler than traditional VAs: You just choose the index you want, the maturity and the amount of downside protection. And the commitment is as little as one year.”

Last June, after about 18 months on the market, sales of Structured Capital Strategies surpassed the $1 billion mark. At least two other life insurers—MetLife and Allianz Life—have flattered AXA by filing prospectuses for SEC approval of more or less similar products. Bear in mind that these are all contracts—assets that are index-linked are not held in separate accounts (though assets in optional variable strategies are). The index-linked credits come from the issuers’ investments in options and are backed purely by the claims-paying abilities of the issuers.

Flex Market Shield

MetLife Insurance Company of Connecticut filed a Form S-3 prospectus early this year for a proposed Flex Market Shield single premium deferred annuity. Where AXA’s Structured Capital Strategies offers three downside buffer options, MetLife offers four “shields.”

MetLife customers can take either a little risk or a lot. Pending SEC approval, owners of Flex Market Shield will be able to protect themselves from accumulated losses of up to 10%, 15%, 25% or even 100% over either a one-year, three-year or six-year term.

On the upside, owners can choose either a predictable “step rate” of return (credited only if the performance of the chosen index is equal or greater than zero) or opt for whatever net gain (up to a cap) the index achieved between the beginning and end of the chosen term.

Given the gaps in the current filing, it’s difficult to evaluate this product yet. MetLife’s preliminary prospectus did not name the indexes that contract owners would be able to tie their investments to. But it did say that there would be a choice among several securities indices and at least one commodity index.

The cap rates were not specified and, characteristically for this type of product, will not be fixed until the purchase date. The minimum purchase premium is $25,000 and the penalty in the first year of the six-year surrender period is 9%.

Index Advantage

On January 3, Allianz Life filed an N-4 form for a flexible premium deferred variable and index-linked annuity called Index Advantage. Contract owners can choose between three strategies, a conventional variable annuity strategy or either of two indexed strategies, the Index Protection Strategy or the Index Performance Strategy.

The Protection Strategy works like a traditional fixed indexed annuity. The contract owner is protected against loss of principal. The credited gains are tied to increases in the S&P 500 Index, up to a cap that’s fixed at the time of purchase, depending on market conditions.

The second, or Performance Strategy, resembles the AXA and MetLife index-lined strategies described above. The credits are determined by gains in the S&P 500, the Russell 2000 Index or the NASDAQ 100 Index. For either strategy, there’s a six-year surrender period with a maximum withdrawal charge of 8.5%.

Unlike the AXA or MetLife products, the Index Advantage doesn’t appear to have fixed term options or fixed buffer options. Instead, it appears that Allianz Life will reset the caps and the buffer at the commencement of the contract and on every contract anniversary.

Competition welcomed

According to AXA Equitable’s Kennedy, Structured Capital Strategies has sold well both to yield-starved fixed income investors and to cautious equity investors. “The B share is still the best-selling share class, mainly to financial planners, and sales in the bank channel run a close second,” he told RIJ last week.

“In the banks you see more of the five-year product being sold, mainly as an alternative to fixed income products for people looking for better returns than they can get from a CD or money market fund. On the planner side, a lot of people are using our one-year product. It’s for the equity investor who says, ‘Why not protect my downside this year?’”

Although all annuities come with guaranteed payout options, AXA doesn’t see Structured Capital Strategies as an income product. “We see it as a gateway to an income product,” he said. You buy this today and use it as a capital appreciation product. And maybe in five years you have some growth and you move to an income type product.” (For SCS index choices, see fact sheet.)

Structured Capital Strategies was a brainchild of necessity in the aftermath of the financial crisis. AXA sought to maintain sales volume without adding to the risk already incumbent in its large variable annuity book. AXA calculated a way to afford to offer clients higher caps by capping its own downside exposure and relying on the client to assume losses that exceeded their chosen buffer.

“We looked at a bunch of different alternatives, and asked, ‘How do we give clients an upside that’s attractive?’ If you look at indexed annuities right now, the caps are down so low. That’s because the cost of full protection against loss is so high right now,” Kennedy said.

AXA also figured that advisors would not object to the tail risk exposure if wholesalers explained that such exposures were, historically, quite rare. Over the past 324 rolling five-year periods, he said, “the market was down more than 30% only once. If you can give people 99.7% certainty, that’s a robust offer.”

As for the prospect of competition from MetLife and Allianz Life, Kennedy welcomed it. “The category makes a lot of sense,” he told RIJ. “We were the only player initially, and it’s hard to be first sometimes. We think it’s great that competitors are coming in because they help validate the product.”

Matrix Financial Solutions releases practice guide for plan fiduciaries

Posted on January 31, 2013 by Editor Test -

ERISA Fiduciary Issues: A Practice Guide for Advisors, which outlines the opportunities as well as responsibilities of ERISA fiduciaries, has just been released by Matrix Financial Solutions, a unit of Broadridge Financial Solutions.

The guide explains the Employee Retirement Income Security Act (ERISA) fiduciary rules and standards that may apply when advisors deliver investment advice to retirement plan clients.

It also details a “three-step action plan” that advisors can use to review their current business model and, potentially, to expand the range of services they offer plan sponsors:

1. Assess Your Current Business Model. Fiduciary advisors should periodically self-audit and analyze their current practices both for regulatory compliance under ERISA and market viability. For non-fiduciary advisors, a self-assessment can confirm that their current practices do not render them an unintentional fiduciary and can also help evaluate whether they would benefit from serving as fiduciaries.

2. Define and Communicate Your Value Proposition Relative to Fiduciary Support. Advisors should emphasize their special licensing or credentials, honors or recognition, retirement plan training programs completed, experience in working with other plan sponsors, and success stories.

3. Help Plan Sponsors Meet Their Fiduciary Duty. Few plan sponsors understand what ERISA demands of them. Advisors can provide sponsors with educational resources, explain their fiduciary role and then help them meet their obligations.

Lincoln Financial to use Fiserv’s Retirement Income Illustrator

Posted on January 31, 2013 by Editor Test -

Fiserv, Inc., a Wisconsin-based provider of financial services technologies, said that Lincoln Financial Group will be the first client to use its new retirement income technology.

The Fiserv solution, called Retirement Income Illustrator, will “support an enhanced participant experience” in Lincoln’s Retirement Plan Services business and will be offered to Lincoln-affiliated advisors for use with their clients, said a Fiserv release.

Using Monte Carlo simulations, the Fiserv technology will help clients calculate and visualize the impact of potential savings and investment strategies on their cash flow in retirement.

Retirement Income Illustrator is designed to present retirement spending requirements and distribution alternatives in the context of withdrawal risk, longevity risk, survivor needs and healthcare risks, Fiserv said.

On its Unified Wealth Platform, Fiserv currently has more than 3.7 million accounts and over 1.3 million unified managed account sleeves. Fiserv said that its acquisitions of AdviceAmerica financial planning technology and CashEdge data aggregation capabilities allow it to deliver integrated, end-to-end solutions to wealth management firms.

Multiple-employer plans should file only one Form 5500: ASPPA

Posted on January 31, 2013 by Editor Test -

The American Society of Pension Professionals & Actuaries (ASPPA) has asked the federal government for “clarification and transitional relief” regarding filling of Forms 5500 and 8955-SSA for ERISA multiple employer plans (MEPs).

Attorneys for plan sponsors have interpreted two Department of Labor opinions issued last May to mean that many of today’s MEPs may not qualify as single plans under Title I of ERISA and that each employer jointly sponsoring the MEP might have to file its own Form 5500.

But plan sponsors had relied on Revenue Procedure 2001-21 of the Internal Revenue Code to mean that only one Form 5500 need be filed for all sponsors of the MEP.

“It would appear that, for purposes of the reporting provisions of the IRC, MEPs should continue to file a single Form 5500 covering all the employers jointly sponsoring the plan,” wrote ASPPA general counsel Craig P. Hoffman in a letter to the DoL and the IRS.

Hoffman’s letter said that neither agency had yet shown sponsors of MEPs how to “resolve the inconsistent rules that apply to the singular reporting form (i.e., Form 5500) mandated by both agencies as the vehicle for satisfying a plan sponsor’s statutory reporting obligation… As might be expected, the lack of guidance on how to deal with this inconsistency has caused a great deal of consternation.”

ASPPA recommended that the DoL and IRS resolve the apparent inconsistency and that the IRS should make it clear that the plan administrator for any plan subject to IRC §413(c) need file only a single Form 8955-SSA under IRC §6057.

“Until clarified, transitional relief should be provided that would deem a plan sponsor participating in a MEP to have satisfied its reporting obligations under Title I of ERISA and the IRC if a Form 5500 has been filed for the MEP as a single plan,” Hoffman wrote.

“The relief should be made available for any plan year that begins on or before formal coordinated guidance is issued by the Department and IRS. Affected plan sponsors should also be given the option to file individually prior to this deadline.”

IRI announces enhanced members-only website

Posted on January 31, 2013 by Editor Test -

A new website for members of the Insured Retirement Institute (IRI), called “myIRIonline.org,” will offer access to IRI’s print and electronic publications as well as public policy resource centers designed for financial advisors and broker-dealer/distributor members.

Known until 2008 at the National Association of Variable Annuities, the IRI has more than 500 members, including insurers, broker-dealers and distributors, asset managers, solution providers, and financial advisors.

The new myIRIonline.org offers:

A new “advocacy headquarters” offering news and analysis related to the public policy issues affecting the insured retirement industry.
A new education sub-site equipped with webinars, podcasts, and FINRA-reviewed client materials.
A revamped research hub offering the latest economic commentary and data from across the insured retirement industry as well as IRI’s exclusive studies and research publications.
New areas dedicated to providing the latest IRI news, conference information, and updates from the operations and technology sector.

Putnam’s latest thought-leadership effort starts February 11

Pershing survey reveals differences between older, younger advisors

Edward Meehan joins Groom Law Group’s ERISA litigation group

DST reaches 1.5 million accounts in ‘alternative space’

Vanguard to further diversify target retirement fun ds

Retirement income opportunity to reach $22 trillion by 2020: LIMRA

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