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Pew report on public pensions draws ire of public pension trade groups

Posted on January 17, 2013 by Editor Test -

A newly-released report on state pension plans by the Pew Charitable Trusts has provoked protests from The National Conference on Public Employee Retirement Systems (NCPERS) and from the National Public Pension Coalition, two trade groups.

The groups, which advocate for public pensions, charged that Pew had shown the status of public pensions in the least flattering light by using data from 2009, a nadir of prosperity for the plans, and that Pew had prescribed remedies that would weaken rather than strengthen the finances of public pensions.

Executive director and counsel of NCPERS Hank Kim said, “The analysis presented in the Pew Charitable Trust’s new report, A Widening Gap in Cities, presents a distorted and outdated picture of the health of municipal pension plans – primarily because the data Pew worked with is four years old.”

The data from 2009, a period that included the financial crisis and its immediate aftermath, “cannot yield a realistic representation of the status of municipal pension plans today,” Kim said.

NPPC executive director Jordan Marks said in a separate release: “Rather than focus on retirement security and the important role that public pensions play in local economies, Pew suggest various reforms that would slash benefits and put retirement benefits at risk.”

NCPERS represents more than 550 public sector pension funds in the U.S. and Canada. NCCP represents millions of public sector employees, including teachers, nurses, police, firefighters and other public sector employees.

28% of plan sponsors offer in-plan retirement income solutions: Aon Hewitt

Posted on January 17, 2013 by Editor Test -

American workers will need 11 times their final pay to meet their financial needs in retirement, but the average U.S. worker falls short of that by about 2.2 times pay, according to a new survey from Aon Hewitt, the global human resources business of Aon plc. The firm surveyed over 425 U.S. employers with 11 million employees.

The survey shows that:

80% of employers are making financial wellness a top priority in 2013.
61% are looking beyond current participation and savings rates and are helping workers evaluate their retirement readiness, up from 50% a year ago.
86% of companies plan to focus communications initiatives on helping workers evaluate and understand how much they need to save for retirement.
76% currently offer target-date funds as a way to provide workers with a simple and straightforward approach to investing.
Of employers who do not offer target-date funds, 35% will likely add this option in 2013.
Managed accounts and online third-party investment advisory services continue to gain popularity (64%), up from 40% a year ago.
28% of companies offer in-plan retirement income solutions—including professionally managed accounts with a drawdown feature, managed payout funds, or insurance or annuity products that are part of the fund line-up, up from 16% a year ago.
Of those employers that do not currently have these options, 30% said they are likely to add them in 2013.

52% of companies will use podcasts and 42% will use text messages to communicate and educate their workers on their retirement benefits in 2013.
The percentage of plan sponsors that plan to use social media channels to communicate with workers has tripled from 6% last year to 18% in 2013.
37% of employers have recently reviewed the total DC plan costs (fund, recordkeeping, and trustee fees). Among those who have not, 95% are likely to do so in 2013.
35% of employers completed a review of DC fund operations, including fund expenses and revenue sharing; 87% plan to do so this year.
31% of employers recently changed their DC plan fund lineup to reduce costs. More than half (52%) of the remaining companies may do so in 2013.

From Prudential, Prudent Forecasts for 2013

Posted on January 17, 2013 by Editor Test -

Dangerous though it is to make predictions, football pundits, Farmer’s Almanac publishers and financial professionals continue to make them, especially at this time of year. They can’t seem to help it. It goes with the territory.

So, at the Millennium Hotel in chilly midtown Manhattan last week, a panel of five Prudential executives delivered their economic forecasts for 2013 to the assembled media representatives—though not in terms that could be construed as promissory or exceeding the legal safe harbor for forward-looking statements.

Sometimes it’s good to be overweight

Prudential has a “bullish tilt” for 2013, said Edward F. Keon, managing director and portfolio manager, Quantitative Management Associates (seated at far right, with Quincy Crosby and John Praveen), a research unit of Prudential Financial. “We’re overweight stocks across the world. We’re also overweight high-yield bonds even though the rally there has been going on a long time.”

Keon called 2012 “relatively calm” in terms of volatility and pointed to the S&P 500’s 16% return as evidence. “It’s been a pretty good year despite all the uncertainty,” he said. “A lot of the bad stuff that we feared didn’t happen.”

In contrast to the 20% drop in equities that followed the battle over the debt ceiling in 2011, the market took the tumultuous Presidential contest and the fiscal cliff in stride, he said. The market had apparently decided to “ignore the rhetoric” and assume that politicians can generally be relied on to “do what they think is right” for the country.

Keon expects U.S. GDP to grow by (2% GDP growth?) and corporate earnings to grow by 10% in 2013. The drag from a higher payroll tax and higher taxes on the wealthy could be “offset by a drop in gasoline prices.”

Asked why equities prices rose in 2012 despite huge outflows from equity funds, Keon said that some of the money has simply moved into equity ETFs but that the biggest factor has been corporate buybacks of their own shares. “There’s no evidence of that slowing down,” he said.

A ‘dichotomy’ explained

Reflecting on 2012, John Praveen, managing director and chief investment strategist, Prudential International Investment Advisors, observed a “dichotomy” between weak economies and strong financial markets around the world. Expansive monetary policies rescued the financial sector and eased pressures that might have split the Eurozone.

“Central bank liquidity explains this dichotomy,” Praveen said, attributing actions by Ben Bernanke at the Fed and to Mario Draghi at the European Central Bank with calming the markets and keeping Greece from abandoning the euro.

The ECB, the Bank of England and the Bank of India have all cut interest rates, he said, and the Bank of Japan announced that it would do more in terms of providing liquidity. Praveen noted that a second quarter correction hurt the markets but a fourth quarter uptick in China’s growth rate gave it a second wind.

Moving at ‘muddle speed’

Quincy Crosby, chief market strategist, Prudential Annuities, extended the discussion of the macro-economy. “The markets have been driven by policy announcements,” she said. “Draghi is responsible for the European rally. Credit has eased, there’s less volatility and risky assets have been moving higher.”

Crosby continued, “There have been 326 separate easing actions by central banks around the world, and the stimulus has underpinned markets. The lower rates are helping companies with their debt loads and giving households more disposable income, enabling the economy to move at ‘muddle speed.’

“The truth is, markets don’t need much growth to do well,” she added, predicting industrial stocks and the industrial metals business will pick up in the U.S. in 2013. “Money will be moving to U.S. companies that have strong overseas markets.”

In terms of bonds, she said, “the barbell strategy of 2012 should still be in play”—meaning that investors will put money in short- and long-term bonds but not in intermediate bonds.

“There will a scavenger hunt for yield by consumers,” she added. “Pensions will be taking more risk. The worry is that you could see a buildup of tremors around the world. Inflationary pressures may be rising in emerging markets and the question is, will emerging market central banks ‘tighten’ in response. That’s how the cycle works.”

When emerging markets tighten, she explained, overseas sales of U.S. companies fall.

Crosby expanded on her comment about “tremors.” “I’m a devotee of Hyman Minsky,” she said. “Complacency leads to trouble. Ben Bernanke is forcing people into riskier assets. Risk begets risk until, when fear hits, it gets out of control.” She interprets the flow of money into high-yield bonds and rising levels of margin debt as signs of complacency about risk.

The Fed, she said, may be setting up the markets for a fall. “Bernanke made it clear that he’ll work out an exit strategy when we get to 6.5% unemployment. So now everybody is focused on the labor reports. But there will be dislocations associated with that. What if they all try to sell at the same time?” She would like to see a bit of inflation. “We hope we’re on the cusp of seeing some inflation and rise in yields. That would confirm that growth is picking up in the U.S.”

‘We like high-yield’

“Rates will stay low in 2013,” said Michael K. Lillard, managing director and chief investment officer, Prudential Fixed Income—a prediction that echoes the Fed’s own statements. In Washington, D.C., “budget battles will continue,” he added. Congressional action will be characterized by “small deals, little fixes and lots of brinkmanship.”

Otherwise, he thinks most of the economic indicators are reading positive for the year ahead. Lillard expects 2% growth in the U.S. this year, 5% growth in emerging markets and 3% average growth worldwide.

“The Fed is in a data dependent mode. Depending on the unemployment rate, the Fed will keep buying securities. There’s value in fixed income overall, but not in U.S. Treasury issues or U.S. agency debt. Government debt might be downgraded again. Two thousand twelve was a good environment for credit products,” Lillard said.

“We like high-yield. Companies are holding steady, with cash on hand,” he added. “The high-yield sector doesn’t show any precursors of defaults. We see a 2% default rate.” He likes “double B” bonds paying a 5% coupon and “single B” bonds paying 6% a year. “We like U.S. money center banks. Banks are more liquid and they’ve got fewer bad assets on their books” than had been the case, Lillard said. “Tighter regulations will keep the banks from taking too much risk.”

Lillard also likes AAA-rated floating rate CLOs (collateralized loan obligations) with subordination levels of 35%, which he said currently offer 140 basis points over LIBOR. “We’re also positive about emerging market foreign exchange, which is biased to outperform the dollar,” he said.

Social Security ‘not going away’

George Castineiras, senior vice president, Prudential’s Total Retirement Solutions, said, “The outlook is very positive for retirement income,” pointing to the fundamentals represented by $18.5 trillion in retirement-oriented savings, the inevitable retirement of the Baby Boom generation over the next 20 years and their need for retirement income.

Regarding Social Security, he said, “The average person thinks that it will go away. It won’t go away. Americans depend on Social Security for between 30% and 70% of their income in retirement. You can’t vaporize that.” He called the status of Social Security “grossly misunderstood” and feared that this misunderstanding might motivate too many retirees to start their benefit at age 62 and lock in a minimum payout for life.

Prudential Retirement is of course a big player in the defined contribution plan business, serving some 3.6 million participants and annuitants in more than 4,200 plans with accounts worth about $240 billion.

The big trend in DC plan is automation, he said, referring to automatic enrollment, automatic investment selection, automatic escalation of contributions and automatic income planning (default into a lifetime withdrawal benefit wrapper around target-date fund assets).

To succeed in the DC business, he said, a service provider has to be good at administration, risk management and employee engagement. “Right now, engagement models are bad,” Castineiras said—a reference to the still-evolving regulations intended to govern communication between 401(k) service providers and participants and ensure that participants get unbiased advice about their savings.

How TOPS Avoids Bottoms

Posted on January 16, 2013 by Kerry Pechter -

A funny thing happened in the U.S. equity markets late last May. Jitters about a possible Greek exit from the Eurozone spooked investors. Stocks plunged. S&P volatility spiked. And on the dashboards of certain “managed volatility” funds, red lights flashed.

Among those risk-managed funds were the three TOPS Protected ETF Portfolios that Ohio National, Nationwide and Minnesota Life use to buffer the market risk inherent in the relatively generous lifetime income guarantees of their variable annuities. Without the risk-controls in those funds, in fact, those benefits probably wouldn’t be sustainable in today’s stingy rate environment.

Managed by Valmark Advisors and sub-advised by Milliman, the TOPS Protected ETF Portfolios employ a dynamic short-futures strategy designed to deliver 60% to 70% of the market’s upside during peaceful bull markets while making “drawdowns” shallower.

But the strategy is vulnerable to the kind of head-fake that the equity market put on it last spring, one that can be seen in the red and black chart below (courtesy of Doug Short of Advisor Perspectives). The chart overlays the history of the S&P500 and the VIX volatility index during the past two years, and illustrates the conditions that the portfolios had to weather.

The third-quarter 2011 market correction can be see at left, where the red VIX lines rise above the black S&P500 lines. Farther to the right, in May and June 2012, there were similar hints of an impending correction, but it was a false alarm. Volatility lapsed and the S&P500 recovered. Stiill, the signs temporarily fooled the TOPS Protected strategy, slowing the portfolios’ performance last year.

“Volatility did spike in the early summer of last year,” Doug Short told RIJ. “So I’m not surprised that some funds got whipsawed in 2012 in their read of the VIX and similar volatility indicators. They were expecting a selloff similar to the year before.”

By the end of 2012, all three TOPS Protected ETF Portfoliios (Balanced, Moderate Growth and Growth) had topped their benchmarks (the S&P Daily Risk Controlled 8%, 10% and 12% Indices, respectively) with returns of 8.39%, 8.66% and 8.24%, but not before the industry began to buzz with gossip that these relatively new-to-annuities TOPS portfolios had been a disappointment in a year when the S&P 500 returned 16%.

“We heard the buzz last year, and we fought it as much as we could,” said Michael McClary of Valmark, an Akron, Ohio-based securities firm that is better known in the ETF world than the mutual fund world. “But it took on a life of its own.”

Gauging the performance and appeal of managed volatility funds is both important and difficult. It’s important because VA issuers can ill afford to offer GLWB riders with generous roll-ups to retiring Boomers unless the contract owners bear some of the market risk—by agreeing to put all or part of their premia in low-volatility investment options.

Yet it’s difficult to compare the various competing managed volatility funds, because they come in so many different flavors. They hold different types of assets, use different risk-management methods, have different objectives and cost structures, and track different benchmarks. And they are so new to the variable annuity space that it may be too soon to evaluate them meaningfully. Morningstar, for instance, doesn’t have a managed volatility fund category yet.

Short futures strategy

The TOPS Protected ETF Portfolios themselves are only about 18 months old. They benefit from a strategy created by Milliman over a decade ago for institutional portfolios. The strategy involves using part of the fund’s own assets to enter short equity-ETF futures contracts. The futures appreciate in value when equity prices fall, and their value offsets the paper losses of the fund’s equity holdings.

“We can still be at an 85/15 allocation, but the short futures could give us an effective allocation of 65/35,” McClary told RIJ. The manager doesn’t have to sell equities and, because losses haven’t been locked in, the technique makes the fund less likely to miss out on the next market rebound.

“The mandate of these portfolios is to manage to a risk level directly by dynamically shifting the hedge position for changes in volatility and increased downside exposure,” said Adam Schenck of Milliman. “We expect the portfolios to capture a significant portion of the upside of protracted bull markets, which play out over many years. What we saw over 2012 was an unusual bull market scenario.”

“We will trail during high volatility bull markets. May 2012 was a down month, but we were still well ahead of the benchmarks heading into June 2012,” McClary said. As volatility spiked, “we de-allocated during that period. Then the market shot right up. It was a short-term high volatility bull market. There’s nothing we can do in that situation.

“That type of situation doesn’t carry on for a long time, and [the slightly lower returns] is not something that will change your standard of living. But that’s not the risk we’re protecting against. We protect against high-volatility bear markets and long-term bear markets. We finished with an 8.2% gain and a beta of 0.24 on our balanced model.”

At the end of 2012, TOPS Protected Moderate Growth held about 30% fixed income, 60% equities and 10% cash. The Growth portfolio had a 76.5% equity allocation at the end of 2012. The Balanced portfolio had a 40% equity allocation. The portfolios also enter into short futures contracts tied to the “Mini” versions of the MSCI EAFE Index, the S&P500 Index, the Russell 2000 Index, the S&P Midcap 400 Index and the MSCI Emerging Markets Index.

In the bond portion, TOPS’ biggest exposures were to TIPS, high quality corporate bonds and high-yield bonds through iShares ETFs. In the equity portion, the holdings were a smorgasbord of largely Vanguard, iShares and SPDR ETFs in a wide range of regions, sectors, and styles.

Apples and oranges

Certain other “managed volatility” funds outperformed the TOPS Protected Portfolios last year, but they had different holdings. For instance, the BlackRock Managed Volatility Fund, classified by Morningstar as a Moderate Allocation Fund, held about 50% equities, 38% bonds and 12% cash as of October 31, 2012. It returned 12.27% in 2012, according to vanguard.com, or about 2% behind the Morningstar Moderate Allocation.

It had a turnover rate of 324% over the past three years and a beta of .80 (vs the Morningstar Moderately Aggressive Target Risk), compared to the TOPS Protected Moderate Growth’s beta of 0.28 and turnover of 7%, according to Morningstar. SEI’s Managed Volatility Fund, classified as a Mid-Cap Blend fund, also returned just over 12%. But that’s an equity fund. PIMCO’s Global Multi-Asset Managed Volatility Portfolio, launched last September, is too new to evaluate.

Two charts from Morningstar.com show the behavior of the TOPS Protected Funds over the past 18 months. In the chart directly below, which shows the change in the value of a hypothetical $10,000 in the TOPS Protected Growth portfolio from June 9, 2011 to December 25, 2012, it’s evident that the TOPS portfolio fell much less than the Morningstar Aggressive Allocation benchmark in the 3Q 2011 downturn. It’s also evident that the TOPS portfolio performance nearly matched that benchmark in mid-2012, but lagged that benchmark in the following rebound.

A second chart (below), compares the progress of a hypothetical $10,000 in TOPS Protected Moderate Growth with that of the BlackRock Managed Volatility Fund (Institutional). Their performance diverges in mid-2012, with the TOPS portfolio falling behind during the second half of the year before closing the gap at the end of 2012.

One satisfied insurer

Annuity executives at Ohio National, the Cincinnati-based mutual company that was the first to offer TOPS Protected portfolios as a variable annuity investment option, said they are satisfied with the results that the funds produced in 2012. The company’s VA sales in 2012 totaled $2.8 billion. Overall, the insurer manages $30.6 billion.

Not knowing if customers and advisors would embrace the trade-offs of the relatively untested managed-volatility investment requirement, Ohio National originally offered two GLWB options last January; the richer option one required putting at least half of the premium in managed volatility investments.

“We got acceptance faster than we expected. The wholesalers got some feedback at first. People were a little nervous. They were asking, ‘Is it working as advertised?’ But now the story is accepted,” said Jeff Mackey, FSA, assistant vice president, Annuity Product Management at Ohio National. The story has been accepted well enough that Ohio National was able to eliminate the less-rich living benefit rider entirely.

Steve Murphy, FSA, Ohio National’s senior vice president, Capital Management, told RIJ, “We thought we would need the other rider for 2012 and 2013, but we’ve closed that one, which indicates that the marketplace likes the story. People buy the product for protection.

“And even though they know their benefit base is protected [by the GLWB], they still feel bad if their account value goes down. This strategy [which buffers falls in account value] provides both belt and suspenders. This story has definitely sold well in the marketplace. We had trouble keeping a lid on sales. We de-risked five times last year and still had no problem with sales,” he added.

Mackey told RIJ, “We think these are a good fit for account holders, for advisors who want a stable trail income, and for us on our balance sheet. They give us more stable earnings. It really has performed as expected and we’re pleased.

“You have to be careful about looking at narrow performance windows,” he added. “These are long-term investments. The time horizons are 30-plus years out, so to look at their performance over a week or a month is a bit shortsighted.

“Also, you have to remember that these portfolios are designed to mitigate severe downturns. There’s no free lunch here. There will be periods where it could underperform. But if you want the extra protection, you might have to give up something on the upside.”

High stakes

The stakes here are measured in billions of dollars, as fund companies compete to offer managed volatility investments to life insurers, as life insurers compete to offer appealing retirement income products to Boomers (despite market, interest rate, and longevity risk constraints), and as retiring Boomers struggle to squeeze more income—and peace-of-mind—out of their savings.

One indication of the level of competition among asset managers: Last November, a person who did not fully identify himself e-mailed RIJ a highly critical two-page review, dated October 1, 2012, of Milliman’s TOPS Protection method apparently written by a firm called “Retirement Products Research.” RIJ was unable to trace the origin of the document, and the original sender did not respond to requests for attribution.

Strategic Insights looks into “managed volatility”

Posted on January 10, 2013 by Editor Test -

Managed volatility investment strategies are emerging as a solution for investors who want protection from future stock market losses, according to “Managed Volatility: The Anatomy of an Investing Trend,” a new research report from Strategic Insight.

Managed volatility assets have accelerated in less than a decade to $129 billion as of September 2012. The report identifies a total of 175 funds from 32 different advisors.

A major component of the growth comes from funds converting to managed volatility mandates, the report found. At the end of September, $61 billion, or 47% of the total assets in managed volatility funds, came from converted portfolios. Most of this activity has been in the variable annuity space, which also commands the bulk of assets.

The report focuses on several key issues, such as whether managed volatility is a kind of fad, whether managed volatility funds will find a significant market outside variable annuity separate accounts, and whether these funds sacrifice upside potential for downside protection or not.

“The implementation of these strategies may represent a trade-off in terms of cost and/or the sacrifice of some market gains. This perspective is not shared by all investment professionals, with many arguing that certain strategies can improve overall returns by reducing the impact of performance- draining downturns,” the report’s executive summary said.

“The managed volatility trend has really taken off since the financial crisis in 2008,” said Tamiko Toland, managing director of Retirement Income Solutions at Strategic Insight. “These funds include a dynamic element that readjusts the investments for periods of high volatility or market declines. This kind of strategy is directly useful to clients but is also valuable for insurance companies providing guarantees against assets held in variable annuities.”

Because managed volatility funds can help insurers better manage the risk of living and death benefits, these funds have proliferated within variable annuity funds. However, this trend is also gaining steam among retail mutual funds. Managed volatility mutual fund assets have grown substantially from $967 million in the first quarter of 2006 to $21 billion at the end of the third quarter of 2012.

While 84% of today’s managed volatility assets are held within variable annuities, this investment category is gaining a foothold among retail mutual funds and is likely to grow in other areas, including college savings and retirement plans.

With so many players, there are a wide variety of approaches, all classified and identified within the report. “The report is the first of its kind to quantify the managed volatility opportunity and analyze the biggest players,” Toland commented. “We’ve also seen a lot of interest from mutual fund boards for analysis on this trend.”

The Bucket

Posted on January 10, 2013 by Editorial Staff -

ING U.S. hires David Bedard to lead fixed annuities business

ING U.S. has hired David Bedard as president of its annuities business segment, reporting to Maliz Beam, CEO of ING U.S. Retirement Solutions and based in Windsor, Conn. Bedard’s unit focuses on fixed annuity sales.

Bedard will be responsible for product, financial management and the operating performance of the fixed annuity business. He will also serve as a member of the Retirement Solutions executive team.

Most recently, Bedard was executive vice president of Global Annuities for The Hartford Financial Services Group after serving as the chief financial officer of the wealth management business.

Previously, he was senior vice president and chief financial officer for the U.S. Life and Agency division of New York Life Insurance Company, where he also served as senior managing director and chief financial officer for New York Life Investments.

Bedard also held leadership positions earlier in his career at MassMutual and Coopers & Lybrand. He is a certified public accountant, earned a B.S. in business administration from Nichols College in Massachusetts.

Secretary Solis to leave Labor Department

Secretary of Labor Hilda L. Solis announced on Wednesday that she was stepping down, becoming the latest woman to leave President Obama’s cabinet at a time when his personnel choices are drawing scrutiny for their lack of female candidates, the New York Times reported.

Ms. Solis, a former congresswoman from California, told colleagues in an e-mail that she had submitted her resignation letter to Mr. Obama Wednesday afternoon.

She said she had decided to step down after consulting family members and friends. Associates of Ms. Solis, who is 55 and was born in Los Angeles, said she was likely to run for a seat on the Los Angeles County Board of Supervisors.

In a statement, Mr. Obama said, “Secretary Solis has been a critical member of my economic team as we have worked to recover from the worst economic downturn since the Great Depression and strengthen the economy for the middle class.”

Veralytic becomes favored vendor to FPA members

Veralytic has agreed to license its life insurance pricing and performance research at discounted prices for members of the Financial Planning Association through the FPA’s Practitioners Resource Guide.

In a release, Veralytic described itself as “the only patented, objective and transparent evaluation of suitability of life insurance.”

Veralytic compares illustrations of hypothetical policy values that might be considered “misleading” and “inappropriate” by financial and insurance industry authorities. The Veralytic Research provides a star rating system that measures against five categories of policy performance, in terms of suitability.

Mesirow Financial investments now on Mid Atlantic Trust’s platform

Mesirow Financial’s Investment Strategies group has launched a series of model portfolios on the Modelxchange platform of the Mid Atlantic Trust Company, which serves plan sponsors and advisors in the open architecture and third-party administrator marketplace.

The ModelxChange platform will better enable Mesirow to provide 3(38) investment manager fiduciary services to sponsors of defined contribution retirement plans.

Mesirow Financial’s model portfolios are designed for both fee-based and commission-based advisors and offer three levels of 12b-1 payouts. They include exposure to exchange-traded funds (ETF) and mutual funds, allowing advisors and plan sponsors to offer strategies based on mutual funds, passive ETFs or both active and passive ETFs. The portfolio sets also include target-date and risk-based options.

The Investment Strategies team at Mesirow Financial is an independent, third-party consultant that provides asset allocation strategies and manager selection to defined contribution providers, broker/dealers, registered investment advisors, insurance companies and mutual fund companies. Mid Atlantic Trust serves about 40,000 corporate retirement plans and is part of the Mid Atlantic Capital Group.

Northwestern Mutual to recruit more than 5,500 financial professionals in 2013

Northwestern Mutual is aiming to add 5,500 financial representatives and interns in 2013 in response to what it called “an increasing demand for financial security planning.” It will be the second year in a row of record recruiting goals for the insurer.

According to Steve Mannebach, vice president for field growth at development at Northwestern Mutual, the company is seeing both a need and a demand nationwide for a tailored planning approach to asset protection, growth and savings solutions.

RIIA establishes online library of webinars on retirement income

The Retirement Income Industry Association (RIIA) is expanding its webinar series into a formal Retirement Income Virtual Learning Center (VLC), the RIIA said in a release this week.

The objective is to create a library of live as well as archived lectures and presentations on retirement-income research, products, and strategies for personnel at home offices and institutions and financial advisors, according to Kim McSheridan, RIIA consultant for the VLC project.

In addition to supporting RIIA programs such as the Retirement Management Analyst advanced education, the Retirement Market Insight research and consulting platform and the Retirement Management Journal, the VLC will “offer retirement income content and research to help users acquire, retain and expand client relationships; increase revenue; anticipate and manage growth opportunities; and, differentiate themselves in the marketplace for increased success,” the release said.

The content will be delivered by the leading retirement income experts, said Robert Powell, RIIA’s business unit director of publications and the VLC.

The RIIA VLC is also seeking sponsors for each of its webinar tracks. Sponsors receive a one-minute advertisement at the beginning and end of each live and archived webinar and a chance to have a subject matter expert of their choice deliver one webinar during the sponsorship year.

“Softer” version of Basel III sparks comment in Europe

Posted on January 10, 2013 by Editor Test -

European pension experts say the recent launch of a “softer” version of the Basel III framework’s capital requirement rules for banks represents a recognition that stricter capital requirements could have unintended consequences for the global economy, according to a report in IPE.com.

The revision of the previous Basell III proposals includes an extension of eligible assets held by banks to count in their liquidity buffers. A less severe calibration for certain cash flows and a phasing-in arrangement from January 2015 to 2019 are also planned.

According to Michel Barnier, commissioner for internal market and services at the European Commission, the treatment of liquidity is fundamental, both for the stability of banks as well as for their role in supporting wider economic recovery.

“I welcome the unanimous agreement reached by the Basel Committee on the revised liquidity coverage ratio and the gradual approach for its phasing-in by clearly defined dates,” said Michel Barnier, commissioner for internal market and services at the European Commission.

Dave Roberts, senior consultant at Towers Watson, said, “The regulatory system must not be allowed to disrupt an economic recovery.” But he doubted that last weekend’s agreement to soften the liquidity coverage ratio under Basel III would comfort those with similar concerns around IORP II.

In the U.S., however, Simon Johnson of MIT’s Sloan School of Management blasted any attempt to soften regulations on banks, charging that soft regulations were the cause of the financial crisis. On his New York Times blog, he wrote, “Again the Europeans want to double down by letting the banks do want they want…

“This week the Basel Committee on Banking Supervision, as it is known, let us down – once again. Faced with renewed pressure from the international banking lobby, these officials caved in, as they did so many times in the period leading to the crisis of 2007-8. As a result, our financial system took a major step toward becoming more dangerous.”

Pension representatives stressed that the only link between Solvency II, the revised IORP Directive, and the regulatory framework for banks was based on Basel II regulation, which remains in use until Basel III is implemented.

Like Basel II, Solvency II organizes capital requirements under the “first pillar,” governance and supervision under the “second pillar “and disclosure and transparency under the “third pillar.”

It was pointed out that the change in regulation from Basel II to Basel III dealt with issues more relevant to banks than to insurance companies.

“Banks typically rely much more on shorter-term funding… funding liquidity and short-term access to capital markets is more important for banks,” said Paul Sweeting, European head of strategy at JP Morgan Asset Management. “Insurance companies are much more likely to use long-term financing and are not so much subject to the risk of reduced access to capital markets as banks would be.”

Even though Basel III may indirectly influence IORP II via the Solvency II regime, it is the longer-term capital adequacy requirements rather than liquidity that worry pension funds.

“Pension schemes and insurers have a very different liability profile to other financial institutions, and, hence, there is less focus within Solvency II on liquidity and more on the type of underlying assets held by institutions,” said Pete Drewienkiewicz, head of manager research at Redington.

DC sponsors will go shopping, but most will just be looking: Cerulli

Posted on January 10, 2013 by Editor Test -

In a new report, State of Large and Mega Defined Contribution Plans: Investment Innovation and the Plan Sponsor Perspective, Cerulli Associates predicts a surge in recordkeeper search activity but anticipates that most of the requests-for-proposals will be to benchmark pricing.

“More than half of plan sponsors [say] they are likely to conduct a search for recordkeepers within the next two years,” said Kevin Chisholm, senior analyst at Boston-based Cerulli, in a release. “However, many of these plan sponsors have no intention of leaving their current recordkeeper.”

The proprietary report examines the new products that have been developed for defined contribution (DC) plans, compares them to existing investment lineups. It is intended to give asset managers, recordkeepers, and consultants “a window into plan sponsor thinking and short- and long-term prospects for DC investment ideas.”

“There is concern that the current emphasis on costs will increase the frequency of provider searches and force recordkeepers to re-bid on plans before they become profitable,” Chisholm said.

“About 60% of plans have been with their current recordkeeper for more than three years. But a significant percentage, slightly more than 40%, have been with their current recordkeeper for less than three years.”

Cerulli expects a sharp rise in recordkeeper searches as the fee disclosure drama plays out. Recordkeepers will need to determine which plans are actually shopping for a new provider and which plans simply want to benchmark pricing. Cerulli suggests that recordkeepers take the RFPs seriously, because such opportunities are rare.

The report is based on a survey of over 250 sponsors of large ($250 million to $1 billion) and mega ($1 billion +) DC plans, as well as surveys of DCIO asset managers and conversations with executives at recordkeeping firms, investment consultants, and asset managers.

Forethought completes acquisition of businesses from The Hartford

Posted on January 10, 2013 by Editor Test -

Forethought Financial Group, Inc. has completed its purchase of the individual annuity new business capabilities and a broker/dealer from The Hartford, as of December 31, 2012.

Forethought said it expect to launch its first variable annuity during the first quarter of 2013. The broker/dealer, now known as Forethought Distributors, LLC, gives Forethought underwriting and distribution capability for variable products.

“This acquisition broadens Forethought’s annuity distribution platform to include the broker/dealer channel while also facilitating the addition of a variable annuity product line,” Forethought said in a release. “The company’s expansion will help meet the growing need for retirement income products in a marketplace facing diminished availability.”

Over 100 annuity professionals in product, distribution and marketing will move from The Hartford to Forethought. Robert Arena, who led The Hartford’s individual annuity business, joins Forethought as President, Forethought Annuity, a unit of Forethought Life Insurance Co.

New offices in Simsbury, Conn., and Berwyn, Pa., have been opened to support the operation for Indiana-based Forethought Life Insurance Company. These capabilities complement Forethought’s existing non-registered distribution platform, led by Forethought executive vice president Paula Nelson.

Founded in 1985, Forethought Financial Group, Inc., is a privately held, diversified financial services organization based in Houston, Texas, with insurance operations throughout the U.S.

Wealth2k announces retirement income solution for banks and credit unions

Posted on January 10, 2013 by Editor Test -

Wealth2k has introduced The Income for Life Model Income Choice Strategy, a solution “designed to guarantee a period of smooth, monthly retirement income, plus offer the opportunity to either participate in an investment account, or receive continuing guaranteed monthly income, for life,” according to a Wealth2k release.

Income Choice Strategy combines two fixed annuity contracts intended to provide guaranteed income for 14 years, and, beginning in year 8, a step-up in income equivalent to a 3% annual inflation adjustment.

The “choice” in Income Choice Strategy relates to the investor’s option to either participate in an investment portfolio, the value of which may be used to purchase additional guaranteed income beginning in year 15, or, purchase a deferred income annuity (DIA) that will provide guaranteed monthly retirement income, with a step-up, beginning in year 15.

According to Wealth2k founder and CEO, David Macchia, “Today, the average 6-month CD rate has dropped to a meager 0.4%. Factor in inflation and the situation for savers is dire. This has created the need for innovative, income-producing strategies.”

“For investors whose main concern favors guaranteed income over full liquidity, a hybrid investing strategy, one that seeks to combine guaranteed retirement income with an investment account, may better meet the investor’s objectives,” said Wealth2k Managing Director, Jason Ray.

2012: Resumption of the Stock Market Recovery

Posted on January 10, 2013 by Ron Surz -

Never test the depth of the water with both feet–African proverb.

After feasting on the U.S. stock market’s 54% run-up from 2009 to 2010, we starved for performance in 2011, suffering a 1% loss. Some said the markets were due for a respite, so this lull was healthy, but I felt we were lucky that results weren’t much worse, as they were outside the U.S., and that 2012 would be a disappointment.

I was wrong.

Stock markets both here and abroad had a good year in 2012. So is now the time to get back into the stock market? Are you ready to jump in with both feet?

I’m not.

Let’s take a close look at the details of what occurred in 2012 so we can assess the opportunities and prepare for the surprises that 2013 will bring. In particular, let’s look at momentum and reversal possibilities coming into 2013. I’ll give you my opinions, and you should form your own.

Here are a couple of facts worth noting about 2012. As discussed in my Q3 commentary, investors bailed from equity mutual funds, which should have depressed stock prices, but corporate-share buybacks more than offset this exodus. Also, much of the stock mutual fund redemptions found their way into stock ETFs, a move from active to passive management.

We should not forget the losses sustained in 2008. Despite popular perception, we have just now recovered 2008 losses; the 54% 2009-2010 gain did not offset the 38% loss in 2008. But 2012 has brought the U.S. stock market back into positive territory, with a 3% cumulative return for the five years 2008-2012. We’re above break-even.

I begin with a review of the lessons learned in 2012 around the globe and then extend the perspective to the longer-term history of U.S. markets over the past 87 years. My goal is to arm you for thoughtful investment decisions.

For the entire Surz commentary, click here.

Three New Annuities to Ring in 2013

Posted on January 10, 2013 by Kerry Pechter -

Every day, it is said, 10,000 Baby Boomers reach retirement age. Many are looking at their mutual fund balances and wondering, What will happen to me and my wife [or husband] if our investments tank? And what will happen if one of us lives to 100?

Of course, these are the questions that product developers in the annuity divisions of life insurance companies spend a lot of their time preparing creative answers for. And they continue to do so despite the Federal Reserve chairman’s dogged interest rate suppression campaign.

Since the start of 2013, three different life insurers have introduced three new contracts aimed at addressing those same two problems, but by different routes and probably via different distribution channels:

American General, an AIG affiliate, has launched a deferred income annuity (DIA), Future Income Achiever, into a promising market whose ice was broken by New York Life’s successful exploitation of that niche.
Security Benefit, a Guggenheim Partners company, has issued a fixed indexed annuity contract, Foundations Annuity, whose optional guaranteed lifetime withdrawal benefit offers a 15-year, 8.5% simple withdrawal base roll-up.
Securian, a unit of Minnesota Life, has issued its first new base variable annuity contract in several years, the MultiOption Guide Series, with a variety of living and death benefits, including a 6% roll-up with a potential 200%-of-premium deferral bonus.

All three contracts represent more or less all-in-one solutions that anticipate and address several of the financial risks that most Boomers will face before or during retirement—sequence of returns risk, market risk, inflation risk, health care risk and longevity risk—but which few of them fully understand or know how to protect themselves against.

Future Income Achiever

American General’s longevity insurance product allows people 90 and younger (under age 70 for IRA money) to pay a lump sum today (minimum of $20,000) for an income that starts as soon as one year or as late as 40 years after the purchase date.

By deferring income, the contract owner can lock in a higher future payout—thanks to interest accrual and so-called mortality credits—than if he or she purchased an immediate annuity. It’s a conservative way to eliminate the intervening market risk.

Three death benefit options are available for the period before payments begin—no benefit, return of premium, or return of premium with 3% growth. For people with impaired health, there’s a “medical underwriting” option for those with impaired health, resulting in a lower premium or higher payout. (People with heart disease or diabetes, for instance, can be assigned an “age” that is older than their chronological age.)

Owners who are receiving monthly payments can request a lump-sum payment equal to the next six months’ worth of payments. Regular payments resume six months later. Owners older than age 59½ can exercise this option twice during the life of any non-qualified contract. The contract has no cash surrender value.

Contract owners interested in inflation protection can opt for an uncapped annual income increase that’s tied to the Consumer Price Index-Urban, or for an annual increase of between 1% and 5% (simple or compound) or a flat-dollar increase. All the usual income annuity payout options are available: single and joint, life only, life with period certain, life with cash refund or installment refund, and period certain.

New York Life, the dominant seller of income annuities, introduced a DIA in July 2011. It was a bigger success than anticipated, attracting about $100 million a month in premia. Since then, other insurers with high credit ratings—the long-dated nature of the liabilities demands it—have joined in. MetLife and Symetra offer DIAs.

Integrity Life currently has a DIA in limited distribution. Forethought, purchaser of The Hartford’s annuity business, may or may not market The Hartford’s DIA. American General is rated A+ (strong) by S&P, A2 (good) by Moody’s, A (strong) by Fitch, and A (excellent) by A.M. Best.

Foundations Annuity

Since Guggenheim Partners bought Security Benefit two years ago, the insurer has leaped into the top five in fixed annuity sales, largely on the strength of its accumulation-oriented TVA fixed indexed annuity contract, featuring the annuity linked TVI. With its latest contract, Foundations Annuity, the company offers an unusually rich-looking deferral bonus.

Doug Wolff, president of Security Benefit Life, told RIJ that this product, unlike the company’s Secure Income and Total Value fixed indexed annuities, is designed for the independent broker/dealer and bank channels. He declined to say what commissions would be offered, but said the five-year version would pay a commission commensurate with a multi-year guaranteed rate fixed annuity and the seven-year version would pay a commission similar to that of a B-share variable annuity.

Owners of the seven-year Foundations contract (though not the five-year) who opt for the guaranteed lifetime withdrawal benefit can get, in addition to a 1% premium bonus, an 8.5% simple-interest annual rollup of their benefit base for the first 15 years of the contract. The GLWB option costs 90 basis points per year.

During the income stage, the payout bands are more in line with industry standards than the roll-up. The guaranteed annual income stream starts at 4% of the benefit base (3.5% for joint annuitants) at age 50 and increases by 10 basis points per year, with a maximum of 7% a year (6.5% for joint annuitants) at age 80 and older.

For example, someone who invested $100,000 at age 55 and waited 15 years to take income could expect a minimum income base of $229,775 at age 70. He would get a minimum income of 6% a year, or $13,726.50.

During the accumulation period, the owner can choose between a guaranteed fixed rate of 1% to 3%, or three index crediting methods. The current rate is 1.40%. There’s a market value adjustment for withdrawals over 10% of premium during the accumulation period.

The index crediting methods are all tied to the S&P500 (without dividends) and include an annual point-to-point with a cap, annual average (if positive) with a cap, and an annual sum of the monthly changes (with a monthly cap on the upside but not the downside) in the S&P500.

As of January 7, 2013, the annual caps on the index crediting methods for the annual point-to-point crediting method were 2.50% for the 5-year product and 2.75% for the 7-year product; for the monthly sum method the monthly cap was 1.40% for the 5-year product and 1.50% for the 7-year product; for the annual average method the annual cap was 2.75% for the 5-year product and 3.00% for the 7-year product.

“Although the theoretical limit [on the monthly sum method] is 18%, the largest practical limit one might see would be a 10%-11% annual return. But, more realistically, somewhere between 0%-3% would be earned,” Jack Marrion, the well-known indexed annuity analyst at Advantage Compendium, told RIJ.

Fixed indexed annuities can generally offer more generous living benefit options than variable annuities because they don’t require as much hedging against downside risk as VAs. It’s widely anticipated that Guggenheim Partners is bringing its investment expertise to Security Benefit’s assets, and that will translate into either higher benefits for the consumer, higher profits for Guggenheim, or some of each.

MultiOption Guide Series

Securian’s new variable annuity is its first new base contract since 2003, according to Dan Kruse, second vice president, Individual Annuity Products, for the unit of Minnesota Life.

“There’s nothing shocking in it relative to the current marketplace standards,” Kruse told RIJ this week. “This new contract is a way of setting ourselves up for what we’re planning for later this year, which is to in introduce our next GLWB suite. We launched our latest GLWB in May 2012. Rates have dropped since then and put me a little edgier than Id like to be. We’ll continue to adjust to the market, and move more in the direction of volatility-managed funds.”

Among the many investment options from mutual fund companies, the latest Securian VA contract includes three Northern Lights TOPS Protected funds, which use a short-futures strategy engineered by Milliman to smooth out returns. “We have already gotten the TOPS volatility-managed funds into the product but we have not forced money into them. We intend to require clients to put a chunk of the premium into managed volatility funds in order to get the best living benefit rider,” Kruse said.

Securian’s VA offers three living benefit riders. There’s a GMIB (guaranteed minimum income benefit) for 90 basis points a year and both a single and joint GLWB for 120 basis points a year. The GLWB offers a 6% deferral bonus for contract years when no withdrawal is taken, and contract owners who go the first 10 years without a withdrawal are eligible for a minimum benefit base equal to 200% of the initial premium.

The mortality and expense risk fee is 120 basis points for the B share and 155 basis points for the L share, plus an administration charge of 15 basis points in each case. Several death benefits are available.

“We combined our B and L shares to give them the same starting point for surrender charges [at 8%]. That made the liquidity/fee tradeoff simpler for the customer to see and understand,” Kruse said.

During the income stage, the payout rates are 4.5% (4% for joint contracts) through age 64, 5% (4.5%) for ages 65 through 74, 5.5% (5%) for ages 75 to 79, and 6.5% (6%) for ages 80 and over. The annual expense ratios of the investment options range from 48 to 195 basis points.

CBO’s Q&A aims to clarify impact of new budget legislation

Posted on January 7, 2013 by Editor Test -

In response to the large number of questions it has received from the public about the impact of the recently-enacted federal budget legislation, the Congressional Budget Office (CBO) has provided the following Q&A for guidance:

Does the legislation increase or decrease federal budget deficits?

That depends on what you compare the legislation with: Relative to what would have occurred under the laws previously in effect, this legislation will increase budget deficits in coming years. Relative to what would have occurred if most tax and spending policies that were in effect in 2012 were continued, this legislation will reduce budget deficits in coming years.

Like all of CBO’s cost estimates, our estimate for this legislation shows the effects of the legislation relative to current law at the time we did the estimate. Relative to the laws in place at the end of 2012, we estimate that this legislation will reduce revenues and increase spending by a total of nearly $4.0 trillion over the 2013-2022 period. (Also like all of CBO’s cost estimates, this estimate’s numbers for the effect of changes in the tax code—which represented the bulk of the bill—were produced by the staff of the Joint Committee on Taxation. They published the details of their tax revenue estimates separately.)

From that perspective, why will the legislation increase deficits? Mostly because, under the laws previously in place, numerous tax provisions originally enacted in 2001, 2003, and 2009 would have expired. As a result, in 2013 personal income tax rates would have gone up for people at all income levels, the alternative minimum tax (AMT) would have applied to many more people, estate and gift taxes would have risen, and a number of other revenue-increasing changes in tax law would have taken effect. This legislation will prevent those changes in law from occurring or reduce their scope; hence, relative to what would have happened without the legislation, it embodies substantial tax cuts. The legislation also will boost deficits by increasing spending, mostly for refundable tax credits and unemployment compensation.

That dramatic widening of the budget deficit will increase interest payments on the federal debt, an impact that is not included in CBO’s cost estimates. The additional debt service will cost about $600 billion. Thus, if we added the estimated cost of the legislation and the related debt service to our previous baseline budget projections (which followed current law at the time), we would show additional deficits between 2013 and 2022 of roughly $4.6 trillion.

Instead of comparing legislation with the law that was in effect at the end of 2012, one might also compare it with the tax and spending policies that were in effect in 2012 (or, in the case of the AMT, in 2011). Many of those policies were scheduled to expire at the end of December—but suppose instead they had been continued. If so, revenues would have been noticeably less than they would have been under the laws scheduled to be in effect in 2013 and beyond.

For example, CBO reported in its August Update to the Budget and Economic Outlook that extending certain income tax and estate and gift tax provisions scheduled to expire on December 31, 2012, and indexing the AMT for inflation would have boosted deficits by roughly $4.5 trillion during the 2013-2022 period through a combination of reduced revenues and increased outlays for refundable tax credits (see Table 1-5, page 19).

The extensions just enacted were less extensive than those assumed for that calculation, and hence the deficit increases as a result of the new legislation will be smaller than that: The cost of the comparable tax provisions in the legislation just enacted is estimated to be about $3.9 trillion over that decade.

Therefore, compared with an approach of extending the policies in CBO’s example, the legislation will have a smaller cost—probably in the range of $0.6 trillion to $0.7 trillion less. (Beyond those provisions, the legislation’s other changes to current policies were very small. CBO does not publish estimates for legislation relative to current policies, so we have not done a precise calculation of the savings compared with that benchmark.)

That reduction in deficits relative to extending those policies in effect in 2011 or 2012 would also garner savings in debt service compared with what debt service would have been if those policies had been extended. Including those savings, we would show deficits that are roughly $0.7 trillion to $0.8 trillion less over the coming decade than under a continuation of those policies.

How do the budgetary effects of the legislation compare with the deficits projected before it was enacted?

In our August Update we projected that, under the laws in effect at the time, budget deficits from 2013 through 2022 would total $2.3 trillion. This legislation will boost deficits over that period by an estimated $4.6 trillion (including debt service costs). CBO’s next budget projections will incorporate the effects of the legislation, as well as technical revisions and the effects of a revised economic forecast.

Also in August, CBO published projections under an alternative fiscal scenario that embodied the assumption that many policies that were in effect or had recently been in effect would be continued. For that scenario, we projected budget deficits over the coming decade of $10.0 trillion. (Our August Update presented a description of the policies included in that scenario and our estimate of their budgetary effects on pages 21 to 23.) Compared with the assumptions underlying that scenario, the new legislation will produce deficits that are smaller—but only by $0.7 trillion to $0.8 trillion.

What effect will the legislation have on the economy this year?

We and many other forecasters had warned that, if all of the fiscal tightening that was scheduled to occur at the end of 2012 had actually occurred, the economy probably would have fallen into a recession. Thus, our economic projections under current law last August showed a drop in real gross domestic product (GDP) of ½ percent in 2013 (as measured by the change from the fourth quarter of 2012 to the fourth quarter of 2013).

In a November report, we estimated the economic effects of eliminating various components of the scheduled fiscal tightening. The legislation just enacted by the Congress removes or modifies several of those components:

The extension of expiring tax provisions in the legislation is fairly close for 2013 to the policies that we included in that report under “extend most expiring tax provisions—except for the lower rates on income above certain thresholds—and index the AMT for inflation.” Accordingly, based on the estimate in that report, that part of the recent legislation will probably increase GDP growth in 2013 by about 1¼ percentage points, compared with what would have happened if no legislation had been enacted at the beginning of January.
The legislation also extended emergency unemployment benefits, eliminated for one year the scheduled reductions in Medicare’s payment rates for physicians, and trimmed the automatic reductions in defense and nondefense spending specified in the Budget Control Act of 2011. Although none of those policies is analyzed separately in our November report, certain variations and combinations of those policies were analyzed in that report. Based on those estimates, those parts of the recent legislation will probably increase GDP growth in 2013 by about ½ percentage point.

Taking those figures together, the legislation will probably increase GDP growth in 2013 by about 1½ to 1¾ percentage points relative to what would have happened under prior law. Because CBO’s August forecast showed GDP for 2013 declining by ½ percent under that prior law, the change in law by itself would raise that forecast to an increase of 1 percent or more. However, CBO’s next economic forecast will not necessarily match that number because other information about the economy has become available since we set our economic forecast for the August Update last summer. One of the factors influencing our next forecast will be the fiscal tightening that is still scheduled to occur under current law: Although the recent legislation reduced the magnitude of fiscal tightening by 1½ to 1¾ percentage points relative to prior law, our November report identified other components of tightening that are still in place and that we estimated will damp GDP growth in 2013 by roughly 1¼ percentage point.

What effect will the legislation have on the economy over the longer term?

Although we expect that the legislation just enacted by the Congress will lead to higher output and income in 2013 we also expect that it will lead to lower output and income later in the decade than would have occurred under prior law.

The legislation lowers tax rates for many people—thereby boosting output—but it also expands budget deficits—which will reduce national saving and lower the stock of productive capital, thereby reducing output relative to what would have occurred under prior law. CBO has not estimated the longer-term economic effects of the legislation itself, but we previously estimated the economic effects of the aforementioned alternative fiscal scenario, which embodied the assumption that many policies that were in effect or had recently been in effect would be continued.

Under that scenario, as described on page 37 of our Update, we estimated that real gross national product (GNP) would be 1.7 percent lower in 2022 than would have been the case under prior law. (GNP is a better measure for analyzing the impact of growing debt on income because prospective budget deficits would be financed partly by inflows of capital from other countries that would lead to a future flow of income to those countries—income that is deducted from GDP in calculating GNP.) The longer-term economic impact of this legislation will probably be less negative than that scenario.

New tax law could hurt certain wealthy homeowners

Posted on January 7, 2013 by Editor Test -

A realtor and lawyer in Greenwich, Connecticut has analyzed the residential properties in his affluent community and found that “a third to a half of the houses could be subject to the new fiscal cliff and Medicare investment tax increases.”

“Unlike the much publicized $450,000 threshold for higher capital gains taxes in the fiscal cliff bill, the new 3.8% Medicare investment tax kicks in at $250,000 for a couple,” claims attorney Mark Pruner. “This is on top of the prior years’ 15% capital gains tax so couples are looking at an 18.8% tax, and if their gain exceeds $450,000 then their tax rate will be 23.8%.”

According to Pruner, those who have refinanced may find that after they pay the mortgage, the capital gains tax, the Medicare investment tax, the Connecticut conveyance tax, real estate commissions and legal fees, the funds that they were depending on for retirement are substantially smaller than they expected and could even be a loss.

For people who have retirement bonuses and sell their property in the same year, the problem will be worse if those onetime income events kick them into a higher tax bracket for that year, he said.

The law does provide a $500,000 capital gains exemption for married couples selling their primary residence, but for single people, including widows who stay in their home, the exemption is only $250,000 and the taxes kick in at lower income limits, Pruner asserts. If the property is not their primary residence then there is no exemption and the full 23.8% rate may apply.

The sale of highly appreciated real estate has grown “more complex with the addition this year of the new fiscal cliff tax and the Medicare investment tax,” Pruner said in a press release.

Author tells investors to ignore financial “noise”

Posted on January 7, 2013 by Editor Test -

A new book by a Portland, Oregon-based registered investment advisor warns investors shut out most of the “noise” they hear about “what stocks and investments to buy, which ones to hold and what they should be doing with their money now.”

In his book, The Truth Project: Finding the Courage to Ignore Wall Street (High 5 Communications, 2012), Wayne von Borstel, CFP, president of von Borstel & Associates, also devotes two chapters to retirement planning.

“The news media remains an important source of information for our culture, but consumers need to know when to turn it off and how to separate the good information from the bad information,” said von Borstel in a release about the book.

“You have to learn to control your informational input, and remain systematic, unemotional and diversified in order to keep your subconscious from making you do things that will be detrimental to your financial future.”

In The Truth Project, von Borstel details the path to a prosperous future:

Chapter 1, “Changing Our Financial Attitude,” discusses “moneyholism” and the ways in which investors absorb information they receive from those they believe to be experts.
Chapter 2, “Financial Myths,” dispels myths associated with personal finance.
Chapter 3, “Core Truths,” is concerned with helping investors recognize misguided advice and develop the confidence to ignore it.
Chapters 4, 5 and 6 detail the three phases of a consumer’s financial life. Chapter 4 describes six excuses people give for postponing saving. Chapter 5 focuses on the questions investors should ask when nearing retirement and how to have honest and open conversations about the answers to those questions. Chapter 6 discusses reasons people fail financially when preparing for retirement and provides advice for avoiding those pitfalls.
Chapter 7, “Estate Planning,” presents five case studies about effective estate planning.
Chapter 8, “Why I Do What I Do,” discusses what investors should ask when hiring a financial professional.

Could the Dallas Cowgirls be ERISA fiduciaries?

Posted on January 7, 2013 by Editor Test -

If background checks were run tomorrow, 5-10% of all retirement plan advisors would probably be replaced, writes Phil Chiricotti, the president of the Center for Due Diligence, in his most recent public letter.

“Similarly,” he added, “if E&O insurance and ERISA bonding were subject to meaningful due diligence, more than 50% of all advisors would be replaced or required to improve their coverage.”

Chiricotti voiced strong opinions about the need for more thorough vetting of retirement plan advisors by plan sponsors and higher standards for plan fiduciaries generally.

“After the SEC investigation of pension consultants was released in 2005, the DOL issued tips for selecting and monitoring service providers. These tips were designed to help sponsors determine the quality of services, the reasonableness of fees, conflicts and the willingness to accept a fiduciary role. While helpful, the tips do not uncover the information required to determine expert status,” Chiricotti wrote.

He continued:

“At a minimum, a diligent advisor evaluation process must include background checks for the primary advisor & team members, certification of bonding & insurance coverage, fiduciary responsibility, compensation methodology, full disclosure, conflict safeguards, specific duties, deliverables and validation that the services are rendered by a qualified expert. The advisor’s succession plan and firm, particularly small firms, should also be subject to due diligence.

“Moving beyond the industry hype, the most important question a sponsor can ask an advisor is NOT: “Do you have a legal obligation to act in the best interests of the plan and its participants?” The most important question is: “Are you QUALIFIED to service my retirement plan needs?” This is paramount to understanding the evaluation process because registration status is not a qualifier, i.e., the industry is full of unguided fiduciary missiles.

“While qualified advisors can be a positive catalyst for success, these highly skilled and experienced advisors represent a small percentage of the advisor population. Unfortunately, anyone can call themselves independent, an expert, a professional, a decision maker, an ERISA fiduciary or any combination of the aforementioned, including the Dallas Cowgirls. In reality, it is the standards established by the courts that determine whether an advisor is an expert. Those standards focus on experience, education, skills, training, processes, etc.”

Bernanke’s Balance Sheet Ensures Disaster

Posted on January 7, 2013 by Michael Pento -

As expected, Ben Bernanke officially launched a fourth round of quantitative easing (QE 4) with his announcement last week of $85 billion dollars worth of unsterilized purchases of MBS and Treasuries. In unprecedented fashion, the Fed also tied the continuation of its zero interest rate policy and trillion dollars per annum balance sheet expansion to an unemployment rate that stays above 6.5%. Now, pegging free money and endless counterfeiting to a specific unemployment figure would be a brilliant idea if printing money actually had the ability to increase employment. But it does not.

The Fed recently celebrated the fourth anniversary of zero percent rates and massive expansion of its balance sheet. However, even after this incredibly accommodative monetary policy has been in effect since 2009, the labor condition in this country has yet to show significant improvement.

Last month’s Non-Farm Payroll report showed that the labor force participation rate and employment to population ratio is still shrinking. Goods-producing jobs continue to be lost and middle aged individuals are giving up looking for work. This is the only reason why the unemployment rate is falling. I guess if all those people currently looking for work decide it’s a better idea to stay home and watch soap operas instead, the unemployment rate would then become zero.

But more of the Fed’s easy money won’t help the real problem because the issue isn’t the cost of money but rather the over-indebted condition of the U.S. government and private sector. Keeping the interest rate on Treasuries low only enables the government to go further into debt. And consumers aren’t balking on buying more houses because mortgage rates are too high.

The plain truth is this is a balance sheet recession and not one due to onerous interest rates. More of the Fed’s monetization may be able to bring down debt service payments a little bit further on consumer’s debt. However, it will also cause food and energy prices to be much higher than they would otherwise be. The damage done to the middle class will be much greater than any small benefit received from lower interest rates. Therefore, the net reduction in consumer’s purchasing power will serve to elevate the unemployment rate instead of bringing it lower.

Rather than aiding the economy and fixing the labor market, what the Bernanke Fed will succeed in doing is to ensure his unshrinkable balance sheet will not only destroy the economy but also drive the rate of inflation to unprecedented levels in this country.

Ben’s balance sheet was just $800 billion in 2007. It is now $2.9 trillion and is expected to grow to nearly $6 trillion by the end of 2015. A few more years of trillion dollar deficits that are completely monetized by the Fed should ensure that our government’s creditors will demand much more than 1.6% for a ten-year loan. The problem is that rising interest rates will cause the Fed to either rapidly and tremendously expand their money printing efforts, which could lead to hyperinflation; or begin to sell trillions of dollars worth of government debt at a time when bond yields are already rising.

If yields at that time are rising due to the fact that our creditors have lost faith in our tax base and its ability to support our debt, just think how much higher yields will go once the bond market becomes aware that the Fed has become another massive seller. This new Fed policy is incredibly dangerous and virtually guarantees our economy will suffer a severe depression in the near future. Bernanke should start shrinking his balance sheet and allow interest rates to normalize now. When the free market does it for him it will be too late.

Mr. Michael Pento is the President of Pento Portfolio Strategies and serves as Senior Market Analyst for Baltimore-based research firm Agora Financial.

Michael Kitces summarizes the new tax law

Posted on January 7, 2013 by Editor Test -

In a recent blogpost, advisor/author Michael Kitces summarized elements of the recently-pass tax legislation, H.R. 8 (the American Taxpayer Relief Act of 2012, or ATRA) that might affect financial advisors and their clients.

The legislation averted or at least delayed the much-hyped “fiscal cliff.” It extends most of the Bush-era tax cuts that would have expired at the end of 2012 and reinstates a few rules that expired in 2011.

The legislation also introduces a new maximum tax bracket of 39.6% and increases the maximum long-term capital gains and qualified dividend rates to 20%.

Kitces noted the following changes in particular:

The $450,000 income threshold (taxable income after all deductions, not Adjusted Gross Income) for married couples is a mild form of marriage penalty release. In the past, the top tax bracket threshold was the same for both individuals and married couples.
The 35% tax bracket is still in effect; it’s now one of the smallest tax brackets, applying only to income between $388,350 and $400,000 for individuals ($388,350 to $450,000 for married couples).
The Personal Exemption Phaseout (PEP) used to have a different threshold from the Pease limitation; ATRA unifies these thresholds.
The top estate tax (and gift and GST) rate is increased to a new maximum rate of 40%, up from 35%.
The portability rules for a deceased spouse’s unused estate tax exemption amount are made permanent, which may significantly reduce the use of bypass trusts for all but the wealthiest of families.
Individuals who are subject to the new 20% top long-term capital gains and qualified dividends tax rate will actually find their capital gains and dividends taxes at 23.8%, due to the onset of the new 3.8% Medicare tax on net investment income that would also apply at this income level.
A special rule allows qualified charitable distributions made by February 1, 2013 to be counted retroactively for the 2012 tax year, for those who want to take advantage of the rule for 2012 and 2013.
The 2% payroll tax cut that has been in place for the past 2 years was not extended, and has lapsed. Payroll withholding will need to be adjusted for employees in 2013 (and per the recent Treasury regulations, high income individuals will also need to adjust withholding later in 2013 for the new 0.9% Medicare tax on earned income).
The rules appear to allow the new intra-plan Roth conversions for 401(k), 403(b), and 457 plans. But you still can’t go from a 401(k) (or other employer retirement plan) to the IRA unless you’re otherwise eligible for a distribution from the retirement plan.

With a Name Like Golden, You’d Better Be Good

Posted on January 7, 2013 by Kerry Pechter -

In the retirement industry, many people recognize the name “Golden.” Not as in golden years or oldies or anniversaries, but as in Jerome S. Golden.

A former insurance executive and actuary turned entrepreneur, Jerry Golden has appeared Zelig-like at key junctures in retirement product history. In the mid-1990s, he developed AXA’s first GMIB. A decade later, he led the Retirement Management Account project at MassMutual.

The RMA program didn’t work out—more on that later—and Golden left MassMutual. But he has since launched Savings2Income, or S2I, a retirement income education site for consumers, and a Manhattan-based registered investment advisor, Golden Retirement Advisors.

A lead-generating tool for Golden Retirement Advisors, Savings2Income describes three potential retirement income “tracks,” designed for people ages 45 and older with up to $1 million in investable assets.

There’s a comprehensive planning track, a track that helps investors squeeze the most retirement income out of their taxable savings and a track that merely helps people purchase the right income annuity.

“In the holistic track, we show hypothetical case studies that encompass investors’ Social Security income, their 401(k) assets and their after-tax savings, which we call ‘Personal Retirement Savings,’ ” Golden told RIJ.

“For people who want to do more with their after-tax money, we can create a mini-plan around just those savings,” he added. “The third track is for people who just want to increase their cash flow in retirement. We help them make the right decision about buying a fixed payout annuity.”

On-line visitors to S2I are encouraged to call GRA’s toll-free number, where they are introduced to one of GRA’s licensed advisors. Those in-house advisors serve clients in the New York-New Jersey-Connecticut region over the phone. Golden may also license its process to advisors elsewhere who want to replicate it.

In short, Golden is trying to build a low-cost Web-and-phone-based, scalable retirement income business for mass-affluent and affluent clients. Other advisors, of course, have become RIAs and repositioned themselves as “retirement income specialists.” But Golden comes from a very different direction—primarily from a product development background—to arrive at roughly the same place. And he’s building a primarily virtual, rather than across-the-desk, type of business. (Golden has a Series 65 license but not the CFP designation.)

The S2I venture is predicated in part on Golden’s belief that people can squeeze more retirement income out of their taxable (non-IRA, non-401(k)) savings or windfalls by putting that money into no-load variable annuities and then buying a series of period-certain or fixed payout income annuities with portions of the assets, to top-up income from Social Security and other sources. (He doesn’t recommend buying life annuities until very late in life, if ever.)

Until recently, partial annuitization from deferred variable annuities wasn’t generally practicable, since the tax code didn’t clearly allow it. That ambiguity was cleared up by H.R. 5297, the Small Business Jobs Act of 2010, which went into effect on January 1, 2011. It gave partial annuitization a green light.

If there’s a secret sauce to S2I, it’s the way the GRA phone-bank of licensed advisors will determine when their clients should pull the trigger on purchasing annuities, exactly what kind of contract they should choose, how much income they should buy and who they should buy their annuity from. For the initiated, that’s not rocket science. But the average retiree couldn’t possibly do it on his or her own.

TIAA-CREF’s no-load Intelligent Variable Annuity will be the primary vehicle for the S2I process, Golden said. The VA’s 50 underlying investments from 15 investment companies have expense ratios ranging from 10 basis points to 141 basis points. The annual insurance expense, including a return of principal death benefit, is only 45 basis points for the first 10 years. It drops to just 20 basis points starting in Year 11.

Golden Retirement Advisors will charge another 50 basis points on average for its expertise. For back-office and investment consulting services, Golden partners with Kanon Bloch Carré of Braintree, Mass.

Golden believes that the S2I strategy will beat the classic 4% annual drawdown from taxable during retirement, both in terms of downside protection and in terms of potential tax-deferred build-up inside the variable annuity. It’s not just for people who are super-cautious.

“This might seem namby-pamby,” Golden told RIJ. “But because of the low fees and the tax deferral from the no-load variable annuity, this will outperform both on the upside and during the income mode. The reality is, I don’t see a scenario where we lose.”

S2I’s roots go back to 2004 and a 401(k) rollover tool that Golden brought to Principal Financial. Its brand name was RetireMentor. It became the basis for Retirement Management Account, a process that Golden sold to MassMutual in 2005.

That business, intended to be intermediated by MassMutual’s captive agent force, called for clients to roll their 401(k) assets into MassMutual IRAs, park the money in MassMutual’s proprietary Oppenheimer Funds and then purchase a series of MassMutual income annuities over time.

For a variety of reasons—the project was eclipsed by MassMutual’s living benefit guarantee business; then the financial crisis intervened—that venture never took off. So Golden put his entrepreneurial hat back on.

Being a grandfather by then, he might have scaled back his workload. He decided to double down on it instead. “Part of it is wanting to give something back,” he said, and part is to do something for “the underserved middle-market, the mass-affluent.” Not everyone in his family necessarily agrees with that choice, he noted. “My wife says, ‘Why don’t you just become a consultant?’ ”

Private Equity Confidential

Posted on January 3, 2013 by Editor Test -

Now that private equity firms have decided to get into the annuity business by actually owning and running life insurance companies, retirement industry mavens have been speculating about their short- and long-term impact.

Are they white knights bearing saddlebags of cash and options expertise? Or Trojan horses full of opportunistic Achaeans in pin-stripes? Here are unfettered comments from five insiders who asked not to be identified because they do business with the companies involved in the deals.

“A buying opportunity”

“I see a convergence of two forces: underpriced companies and a belief in the buyer’s ability to invest more productively. The purchasers see a buying opportunity as parents are trying to divest themselves of fixed annuity companies. This is certainly the case with Old Mutual and Aviva and may have been the case with EquiTrust and Liberty Life. Profit squeeze in the low-interest environment also makes it easier for insurers to part with fixed annuity businesses.

“The three purchasers all have a history of successfully investing in more complex asset classes and feel they can safely bring that expertise and higher investment yields into the insurance arena. The higher returns can be split in some fashion between more competitive products and higher profitability. The question is whether they are right and have a sustainable competitive advantage that does not bring extra risk or whether the advantage erodes over time and/or brings extra risk to the policyholders.

“The trader/investor attitude of the purchasers certainly must include the possibility of selling the companies if an attractive opportunity arises; however, this does not seem to have been a major objective in the purchases. I mainly see an attitude of ‘we can run the insurance business better, particularly the investments.’”

“More imagination, more money, more risk tolerance”

“They think they’re buying cheap and they think they’re smarter than the insurance companies,” he said. “Some will be short-term players but others won’t; they will try to stick with this. Here’s the thing: If we get a two percentage point increase in rates over the next three to five years, this all works. They will get out in six years and everybody’s happy.

“There’s the interest rate play, and the fact that demographics guarantee that the industry will grow. There are 21 million more people in the U.S. between the ages of 50 and 74 than there were 10 years ago.

“There’s another part of it: If Solvency II doesn’t have the effect that Aviva plc thinks it will have, and it may not, then it will be possible to recycle these companies back to Europe. The private equity firms could go back to the same people down the road and say, ‘Do you want to buy it back?’

“What do they bring to the industry? More imagination, more money, more risk tolerance. In the case of Guggenheim, for instance, its insurer can say, ‘I need extra million’ and it’s not a problem. The amount of money you play with in the annuity industry is so much less than in the capital markets. They also think they’re better with derivatives than the insurance companies.

“The big fear is that if they will screw up—or if rates don’t go up—and they walk away from this business rather than keep it. You’d have a long-lasting stain on the industry. That wouldn’t be a good thing. They don’t seem to be as scared as they should be on the mortality risk. Behaviorally, they shouldn’t have the same problems that you see on the variable annuity side. Contract owners won’t exercise all the riders at the worst possible time and the [underlying] assets should always be worth something. I am optimistic. I believe that we’ll have an economic recovery. But I’m nervous about a screw-up.”

“The sexiest part of the insurance business”

“You’ll see more and more [acquisitions of insurance companies by private equity firms]. As interest rates remain low there are real challenges, from an ALM [asset-liability management] point of view on various blocks of business that insurers have. Fixed annuity, immediate annuity, and even fixed indexed annuity blocks to some extent, create extraordinary asset management challenges to support the liabilities.

“You have a slew of them. There are seven or eight—Apollo, Aquiline Capital Partners, Guggenheim, Harbinger, Stone Point Capital [which merged with Alterra last month in a $3.13 billion transaction], and they’re starting to collaborate. Harbinger collaborated with Stone Point on the Old Mutual purchase.

“They’re not just buying blocks of business anymore. Now they’re buying whole companies. It all started pretty much with a run-off business. Wilton Reassurance [which acquired Texas Life from MetLife in 2009] is a good example. They were buying blocks of business with no intention of offering new products. Now you have Athene and Guggenheim forming insurance operations. You have Chris Grady [executive vice president, retail products, Athene Annuity & Life Assurance Co.], who used to head up Merrill Lynch distribution, running distribution for Athene. He’s not interested in run-off.

“The private equity companies think they’ve figured out how to come up with more attractive yields to support the liabilities. In their perception they know how to invest. They have a better mousetrap. They think they’re now the sexiest part of the insurance business. They get more aggressive on a portion of their portfolios to support the liabilities of the deal.

“Let’s say they buy $2 billion of assets and $2 billion of liabilities. ‘Now that we have this,’ they say, ‘we have to make it profitable.’ So they’ll take 10% to 50% of the assets and move them into other, more aggressive vehicles. They’ll lengthen the duration or move down in credit quality on the bonds or simply come up with some asset classes that haven’t been identified yet.

“At the same time, they need to be sure that they have enough for the surplus. The RBC [risk-based capital] that they have to put up is pretty high. They’re going from a 5% capital charge in the investment world to a 30% capital charge in insurance. This business isn’t for those who don’t have lots of money. If they are well capitalized and do all the right things, this is a way for these products to continue to be sold, and for fixed annuity issuers to maintain a position in the business.”

“Eventually it gets away from them”

“[Athene] seems to be interested in indexed annuities in New York, but the New York [insurance commission] has traditionally been very tough on carriers using that design. There are significant differences between a New York and non-New York design. There are more consumer advantages in a New York design and that makes it difficult to make the product more profitable.

“The private equity people think they are ‘the smartest guys in the room.’ They feel they have the expertise and the resources to ferret out better investments. But whenever people start reaching for yield it creates problems. And eventually it gets away from them. All the problems that we’ve seen in the recent past come from people trying to get above-market returns.

“I don’t think these deals are dependent on interest rates going up. If there’s a gradual rate increase, they can adjust. But if there’s a spike and the 10-year Treasury goes to 3% in six months, then the industry could face a massive disintermediation problem. Another carrier could come along and offer new products with a better return. That would create losses and that would create management problems.”

“FIAs tend to promise people the least”

“One fear that a lot of observers have is: Are the private equity firms buying these companies just to manage the assets, or will they run them as going concerns? So far, Athene has a pretty good track record in running Liberty Life. The CEO, Jim Belardi, came from AIG. We’re encouraged by the fact that Athene hired someone who knows the insurance industry.

“Security Benefit has been offering competitive products—the rollup rate on their living benefit in particular is attractive. One of their competitors told me that they’re offering terms even more competitive than they need to be to grab sales. A different company told me they saw Security Benefit coming down the pike and came up with their own new strategy to compete with them. New players tend to shake things up and that’s not necessarily a bad thing.

“Another fear that people have is that the private equity firms will take too much risk and end up insolvent, and that they will have to sell the companies at a deep discount. In all the recent sales, the companies have already sold at a deep discount to book value. That’s a big advantage that people who are frightened may not be considering. The question is how conservatively they’ll invest.

“I think the ratings agencies are much more conservative than they were before the financial crisis, for obvious reasons. They’re being very careful about ratings upgrades. If that’s true, how can the private equity firms invest as aggressively as everyone seems to fear? It would jeopardize their ratings. A downgrade would hamper sales, especially in the broker-dealer and bank channels. So there will be a natural limit to how aggressive the private equity firms can be.

“They may not expect to make a killing. I’ve heard that they lowered their own expectations for how much money they can make. In fact, they may like the annuity industry because the profits, though not spectacular, are decent. And, in this rate environment, that’s not easy to find.

“Why are they interested in fixed indexed annuities? Possibly because that product tends to promise people the least. A fixed income or fixed deferred annuity promises a specific return. Most FIA products only promise that if you hold it for the entire surrender period you won’t lose anything.

“My main concern with indexed annuities is that they’re hard to understand. I have an MBA and I’ve been in the industry a long time, and FIAs still give me trouble. Even agents don’t understand them. When there’s more complexity, there’s more opportunity for unhappy owners.

“On the other hand, people can get a more generous guaranteed lifetime withdrawal benefit on an FIA than on a variable annuity, because the carrier doesn’t have to hedge against a drop in the account value. That’s why 61% of FIAs are purchased with IRA money, compared to 51% for all fixed annuities. Banks are slow adopters, but if they get comfortable with FIAs with GLWBs, sales could take off.”

ING U.S. hires David Bedard to lead fixed annuities business

Secretary Solis to leave Labor Department

Veralytic becomes favored vendor to FPA members

Mesirow Financial investments now on Mid Atlantic Trust’s platform

Northwestern Mutual to recruit more than 5,500 financial professionals in 2013

RIIA establishes online library of webinars on retirement income

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