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Should We Live to 1,000?

Posted on December 17, 2012 by -

On which problems should we focus research in medicine and the biological sciences? There is a strong argument for tackling the diseases that kill the most people—diseases like malaria, measles, and diarrhea, which kill millions in developing countries, but very few in the developed world.

Developed countries, however, devote most of their research funds to the diseases from which their citizens suffer, and that seems likely to continue for the foreseeable future. Given that constraint, which medical breakthrough would do the most to improve our lives?

If your first thought is “a cure for cancer” or “a cure for heart disease,” think again. Aubrey de Grey, Chief Science Officer of SENS Foundation and the world’s most prominent advocate of anti-aging research, argues that it makes no sense to spend the vast majority of our medical resources on trying to combat the diseases of aging without tackling aging itself. If we cure one of these diseases, those who would have died from it can expect to succumb to another in a few years. The benefit is therefore modest.

In developed countries, aging is the ultimate cause of 90% of all human deaths; thus, treating aging is a form of preventive medicine for all of the diseases of old age. Moreover, even before aging leads to our death, it reduces our capacity to enjoy our own lives and to contribute positively to the lives of others. So, instead of targeting specific diseases that are much more likely to occur when people have reached a certain age, wouldn’t a better strategy be to attempt to forestall or repair the damage done to our bodies by the aging process?

De Grey believes that even modest progress in this area over the coming decade could lead to a dramatic extension of the human lifespan. All we need to do is reach what he calls “longevity escape velocity” – that is, the point at which we can extend life sufficiently to allow time for further scientific progress to permit additional extensions, and thus further progress and greater longevity.

Speaking recently at Princeton University, de Grey said: “We don’t know how old the first person who will live to 150 is today, but the first person to live to 1,000 is almost certainly less than 20 years younger.”

What most attracts de Grey about this prospect is not living forever, but rather the extension of healthy, youthful life that would come with a degree of control over the process of aging. In developed countries, enabling those who are young or middle-aged to remain youthful longer would attenuate the looming demographic problem of an historically unprecedented proportion of the population reaching advanced age – and often becoming dependent on younger people.

On the other hand, we still need to pose the ethical question: Are we being selfish in seeking to extend our lives so dramatically? And, if we succeed, will the outcome be good for some but unfair to others?

People in rich countries already can expect to live about 30 years longer than people in the poorest countries. If we discover how to slow aging, we might have a world in which the poor majority must face death at a time when members of the rich minority are only one-tenth of the way through their expected lifespans.

That disparity is one reason to believe that overcoming aging will increase the stock of injustice in the world. Another is that if people continue to be born, while others do not die, the planet’s population will increase at an even faster rate than it is now, which will likewise make life for some much worse than it would have been otherwise.

Whether we can overcome these objections depends on our degree of optimism about future technological and economic advances. De Grey’s response to the first objection is that, while anti-aging treatment may be expensive initially, the price is likely to drop, as it has for so many other innovations, from computers to the drugs that prevent the development of AIDS. If the world can continue to develop economically and technologically, people will become wealthier, and, in the long run, anti-aging treatment will benefit everyone. So why not get started and make it a priority now?

As for the second objection, contrary to what most people assume, success in overcoming aging could itself give us breathing space to find solutions to the population problem, because it would also delay or eliminate menopause, enabling women to have their first children much later than they can now. If economic development continues, fertility rates in developing countries will fall, as they have in developed countries. In the end, technology, too, may help to overcome the population objection, by providing new sources of energy that do not increase our carbon footprint.

The population objection raises a deeper philosophical question. If our planet has a finite capacity to support human life, is it better to have fewer people living longer lives, or more people living shorter lives? One reason for thinking it better to have fewer people living longer lives is that only those who are born know what death deprives them of; those who do not exist cannot know what they are missing.

De Grey has set up SENS Foundation to promote research into anti-aging. By most standards, his fundraising efforts have been successful, for the foundation now has an annual budget of around $4 million. But that is still pitifully small by the standards of medical research foundations. De Grey might be mistaken, but if there is only a small chance that he is right, the huge pay-offs make anti-aging research a better bet than areas of medical research that are currently far better funded.

© 2012 Project Syndicate.

What, Me Worry?

Posted on December 17, 2012 by -

Last week I came across a remarkable quotation in a Wall Street Journal feature story on the agonies and ecstasies of owning equities.

“A 59-year-old plastic and reconstructive surgeon at the University of Chicago,” the story said, “socks away money in mutual funds at [his advisor’s] urging… Between surgeries, he consults his iPad a dozen times a day to check the stock market. Any sign of a big downturn, he said, would drive him out.”

First, let me say that I wouldn’t want my nose to be within range of this surgeon’s rhinoplasty knife on a day the market tanked. Second, this story makes me question the quality of the advice he’s getting. Third, his story reminds of three things I’d tell him if I were his advisor.

I’m not an advisor. But for several years I was employed by a large direct mutual fund company. Like all of my colleagues there, I spent 20-odd hours a year augmenting the firm’s standing army of phone reps and fielding random calls from shareholders.

In this role I was part crisis-hot-line volunteer, part radio talk show host and part zero-fee investment advisor. (Or, perhaps, investment kibitzer.) The job was a rich source of anecdotal insight into investor attitudes. It also allowed me to share the ideas about investing that I’d absorbed from some of the smart people I worked for.

If the University of Chicago plastic surgeon were on the (recorded) line, I might say to him: 

Invest in an inexpensive, all-purpose, set-it-and-forget-it mutual fund.

Take the Vanguard Star Fund, which costs only 34 basis points a year to own and offers a Whitman Sampler of investments. It’s a classic balanced fund-of-funds with a 60% equity/40% bond/equity allocation. Its bond allocation comes in equal proportions from long-term investment grade, short-term investment grade, and GinnieMae bond funds.

Its stock allocation comes from Vanguard Windsor and Windsor II (14.2% and 7.8%), International Value and Growth (9.5% each), PRIMECAP (6.1%), Morgan Growth (6.1%), US Growth (6.1%) and Explorer, a well-known small-cap fund (3.8%).

Since its inception in 1985, the Star Fund has returned an average of 9.58% per year on a pre-tax basis. In the Great Recession of 2008-2009, it lost about one-third of its value, but $10,000 placed in the Fund in November 2002 would still have been worth $20,000 ten years later.

Why cling nervously to every word from Maria Bartiromo’s lips when you can own a fund like this and focus on your fly-fishing skills instead? When you can implement the recommendations of unconflicted fund advisors and well-vetted sub-advisors for only 34 cents per $100 invested, why allow Jim Cramer to raise your blood pressure?

Don’t risk more than twice as much as you can afford to lose.

At the craps table in Las Vegas or the roulette wheel at Mohegan Sun, you would be foolish to risk more than you could afford to lose. But you’re not likely to lose more than 50% of your investments in equities. So you should be able to invest twice what you can afford to lose.

How much can you afford to lose? To figure that out, the 59-year-old surgeon might ask himself how much income he (and his spouse, perhaps) needs on top of Social Security and guaranteed pension income to fund a satisfactory retirement lifestyle.

If he needs $50,000, then he needs to know he’ll have to be able to lay his hands on at least $1,000,000 when he retires. That’s roughly the going price for a $50,000-a-year joint-and-survivor life annuity at age 65. If he has $1.2 million in assets, for instance, he can afford to put $400,000 of it in stocks.

Channel your inner bear.

We all know that market timing is a loser’s game. But I was permanently impressed by a passage in Roger Lowenstein’s excellent 1995 biography of Warren Buffett where he explains that Buffett was entirely in cash leading up to the crash of 1974-1975, when the DJIA dropped to 577. Buffett feasted on dirt-cheap blue chips; the rest is history.

Since reading that, I’ve wanted to become an investor who not only doesn’t fear apocalyptic-seeming drops in equity prices but who recognizes them for the rare opportunities they are—and to be prepared to take advantage of them when they come.

The Great Recession of 2008-2009, which most people recall with dread, was one of those rare opportunities. The DJIA fell from a high of 14,164 to just 6,547. Triple-A corporate bond yields peaked at 6.28% and Baa bonds at 9.21%. Short-term panic by the masses created immense long-term profits for the few.

You don’t believe such opportunities exist, except in hindsight? After my portfolio lost 35%, I rebalanced heavily into stocks and by late summer 2009 saw the wind refill my portfolio’s sails. Did I master the art of market timing? Not really. In 2010 I moved cautiously back into bonds and have not enjoyed the rally since then as much as I might have. But that’s fine. The important point is: I wasn’t afraid.  

In making these three recommendations, I don’t pretend to offer definitive advice about investing. I’m not qualified to do so. But I feel that I’m as qualified as any other investor to share some tips on how to cultivate inner calm while investing in equities. The last thing I’d want to do with my time—which isn’t as valuable as a plastic surgeon’s—is to spend it checking the Dow Jones Average on my iPad twelve times a day.  

© 2012 RIJ Publishing LLC. All rights reserved.

Of Burn Rates and Funding Ratios

Posted on December 17, 2012 by -

“I just don’t want to run out of money during my retirement!”

In my more than 30 years as a financial advisor, I have heard this—or at least some version of it—from client after client. It’s understandable. After all, who looks forward to a retirement that depletes a nest egg far too early?

Truth be told, if this is the only concern on the mind of a person facing retirement, the answer is really quite simple. You need only radically minimize expenses in order to extend savings as long as possible. But who wants to live like a miser?

Retirees didn’t save for years and years just to let the money sit in an account while pinching pennies. They want their money working for them as a resource for attaining their vision for retirement. But, how much can they safely withdraw each year? What happens when uncertainty strikes?

As planners, we can make all sorts of assumptions and projections for our clients, and develop likely cash flow and investment scenarios. But we can’t predict what will happen. As much as we hate to admit it, we are often times just guessing, regardless of our Monte Carlo analyses.

So, how should retirees utilize their money now, while at the same time remaining confident that it will be available throughout their lifetimes? Researchers like William Bengen and Jonathan Guyton have provided some answers to this question.

In general, they said that if you invest in specific ways, you can safely draw an initial percentage (4% to 5% of your total savings) and expect to increase this income stream with inflation each year for at least 30 years. Guyton also provided some excellent rules or financial “guardrails” a retiree should implement when the withdrawal rate is too high or when market performance doesn’t match expectations.

Funding ratio and burn rate

Along with these excellent rules, we propose that planners adopt two additional ratios—the funding ratio and the burn rate. These ratios are designed to set off warning signals when spending gets out of line and give planners additional ways of gauging a retiree’s ongoing financial wellbeing. You might think of them as a retirement dashboard. Even if everything is in good working order when retirees begin their journeys, you can’t ignore the gauges and warning lights along the way.

The funding ratio is well-established as a warning indicator for defined benefit plans. It is calculated by taking the market value of a retiree’s portfolio and dividing it by the present value of future expected withdrawals. The funding ratio should be 100% (or higher for extra protection). If the ratio stays at 100% from the first through the last year of a person’s retirement, there will always be enough money to meet planned withdrawals.

What if, during one’s retirement, the funding ratio falls below 100%? This suggests that there are not enough savings to meet future withdrawal needs. Something must be done. One remedy is to implement the financial “guardrails” explained by Guyton. At minimum, one should consider cutting planned withdrawals to ensure that the funding ratio returns to the safe level of 100%.

The other benchmark we recommend is the burn rate. This is the rate at which next year’s planned withdrawal rate differs from this year’s actual rate of return. If it is negative, it means the retiree is withdrawing more than he is earning.

If the burn rate is positive, it means the retiree is withdrawing less than she could, and her capital will grow. If retirees do not want to deplete their capital, their burn rate should be zero. The higher the burn rate, the faster capital will be depleted.

Hypothetical couple

To illustrate, let’s apply the funding ratio and burn rate to a hypothetical case in which a married couple, “Bob and Mary,” is planning for their retirement. Bob is a 63-year-old doctor and Mary is a 60-year-old housewife. Bob is retiring at the end of the year with a $1,000,000 IRA. Bob and Mary would like to withdraw $64,000 per year, with annual increases to match inflation, to the age of 93. Assuming 3% average inflation, their withdrawals should be $64,000 for the first year, $65,920 for the second year and so on. If their portfolio is diversified and well managed, including equities, we would expect that their $1,000,000 account will earn an average annual compound return of 6.5% throughout retirement.

Let’s explore how Bob and Mary’s retirement might play out if the market doesn’t cooperate, and if warning signals are ignored and no corrective actions are taken.

Table 1 summarizes a retrospective analysis of Bob and Mary’s retirement plan over a 30-year period. It reveals some unpleasant details. Their initial withdrawal rate was clearly too high at 6.4%. Even more worrisome is the fact that their funding ratio was projected to be 73.6% at the end of the first year of retirement—well below the funding ratio of 100% that indicates long-term sustainability.

The burn rate indicator is also blinking yellow. Though only -0.1%, this burn rate signals a troublesome future. It means that Bob and Mary withdrew money faster during the first year than the portfolio earned it. They withdrew 6.4%, yet only earned 6.5%.

Ulivi Chart 12-16-2012What about their withdrawal rate for next year? It jumps to 6.6% from 6.4%, a signal that they are taking a larger chunk out of their nest egg. Their portfolio balance at the end of the first year is still close to $1 million ($996,840), so they might think, “Why all the fuss?” But this is just the beginning of our story.

Let’s travel forward in time to see how Bob and Mary are doing five years later. Bob is now 68 years old and Mary is 65. They withdrew $74,194 that year, which gave them the same purchasing power they had five years before. However, this means the couple will have to withdraw $76,420 next year, or 8.7% of their $880,528 portfolio.

Their burn rate and funding ratio, which are -2.2% and 61.5%, respectively, are lower than they were five years ago. Despite the worsened warning signals, the couple still might feel confident because their portfolio is worth $880,528. But let’s look five more years down the road.

In the 10th year of retirement, the couple’s portfolio is worth $716,191. They would have to withdraw 12.4% of this balance to maintain their planned withdrawals. This situation is actually worse than it seems.

Their burn rate has deteriorated to -5.9% from -2.2%. The difference, 3.7%, is 1.6 percentage points higher than in the previous five-year period. Their funding ratio has fallen to 48.7%, meaning they have enough money to cover only half of their anticipated withdrawals over their projected 20 remaining years of retirement. Bob and Mary’s situation has begun to look worrisome.

Let’s fast-forward another five years. At age 78, Bob’s retirement nest egg has shrunk to $381,271. The burn rate this year is -20.4%, which means the couple has outspent this year’s earnings by 20%. Even worse, their funding ratio has fallen to 26.4%. Clearly, their portfolio can no longer sustain planned future withdrawals.

If the funding ratio and burn rate had been applied from the beginning, their financial planner could have warned them early on that their original withdrawal rate of 6.4% would be unsustainable. The funding ratio of 73.6% and the burn rate of -0.1% at the end of the first year would have demonstrated this. Corrective actions, such as a change in spending pattern or a reduction in withdrawal rate, might have been recommended.

In sum, we believe that if financial planners adopt these two additional ratios, the funding ratio and the burn rate, they will be better able to advise and guide their retired clients.  

Let’s address some questions that readers may have:

Q. Why do you assume a 6.5% rate of return every year during retirement?

A. For simplicity. The goal is to regularly compare the present value of future withdrawals to the current size of the nest egg. Just as in golf and tennis you should keep your eyes on the ball, in retirement analysis you should watch how the size of your nest egg compares with the amount required to meet expected future withdrawals, i.e., the present value of your expected withdrawals. To do that, you have to assume a discount rate.

Q. If I use the funding ratio, do I also need to use the burn ratio?

The burn rate looks at a different set of variables. Specifically, it looks at whether you are gaining less than you are withdrawing. A small negative burn rate is tolerable for retirees who wish to deplete their capital, but a large negative burn rate is a warning. Keep in mind too that many people prefer not to deplete their capital in retirement. For them, the burn rate is an excellent tool for making sure they never deplete or reduce their capital.

Q. Can the retiree ignore these warning signs?

A. Yes, but at the risk of running out of money before their retirement ends.

Q. Would you recommend this protocol at the start of retirement?

A. Yes. People who are about to retire should consider these ratios and recognize their importance as tools for monitoring their risk of depleting capital prematurely.

Q. How often would you use these ratios to make course corrections during retirement?

A. Ideally, they should be calculated every quarter, but at least once a year. 

Ricardo Ulivi, Ph.D., is a professor of finance at the California State University–Dominguez Hills, and a practicing fee-only advisor and member of NAPFA. Sky Nguyen is a student at California State University–Dominguez Hills and an intern at Ulivi Wealth Management.

References:

Bengen, William. Conserving Client Portfolios During Retirement (FPA Press, 2006).

Guyton, Jonathan. “Decision Rules and Portfolio Management for Retirees: Is the ‘Safe’ Initial Withdrawal Rate Too Safe?” Journal of Financial Planning, October 2004.

Guyton, Jonathan, and Klinger, William. “Decision Rules and Maximum Initial Withdrawal Rates,” Journal of Financial Planning, March 2006.

© 2012 RIJ Publishing LLC. All rights reserved.

IRA assets to reach $8 trillion by 2017: Cerulli

Posted on December 13, 2012 by -

Individual retirement account (IRA) assets reached $5 trillion in the first quarter of 2012, and should increase 60% to $8 trillion in 2017, according to a new proprietary report from Boston-based research firm Cerulli Associates.

“The lack of income options available in defined contribution plans will make IRAs the focal point for many in their retirement income planning process,” Kevin Chisholm, senior analyst at Cerulli, explains.

In the report, “Evolution of the Retirement Investor 2012: Understanding 401(k) Participant Dynamics, and Trends in Rollover and Retirement Income,” Cerulli analyzes pre-retiree, retiree, and post-retiree transactions and investor behavior, including a close look at IRAs.

The report makes recommendations in three areas. A summary of the report said:

  • Recordkeepers should further advance their participant demographic segmentation profiling characteristics. Profiling based exclusively on age does not take into account many other aspects that contribute to a participant’s life stage. Firms that are able to segment participants further by life stage and attitude toward retirement savings may be able to promote personalized communication and drive engagement.
  • IRA providers and advisors need to establish relationships early to be in position to benefit from a rollover opportunity. In the majority of cases, the rollover goes to an existing relationship. Providers should be less focused on the current opportunity and try to project the benefits of a long-term relationship.
  • Advisors and investors clearly value the benefits of variable annuities (VA); however, Cerulli recommends that insurers and asset managers expand alternative product solutions and guarantees. Asset managers not at scale to distribute unique solutions should continue to support insurers in the traditional VA marketplace, while both insurers and larger asset managers can evolve in-plan designs. Cerulli emphasizes that enhancing in-plan products will help educate investors earlier in life, which may advance awareness, retirement readiness, and asset bases.

Topics covered in the report include investor behavior in DC plans, desires for advice and guidance, money in motion via rollover, and retirement income product use and need considerations. The report also reviews IRA, SEPs, SIMPLE, and Solo 401(k) plans.

Research included in this report is from two proprietary surveys: a retirement income survey, and a 401(k) participant survey with over 1,000 respondents.

FIA sales up a hair in 3Q 2012: AnnuitySpecs.com

Posted on December 13, 2012 by -

Total fixed indexed annuities were $8.7 billion in 3Q 2012, up 0.04% from the previous quarter, according to the latest Indexed Sales and Market Report from AnnuitySpecs.com, which covered 45 carriers and 99% of FIA production.   

Despite historically low caps and crediting rates, sales were up 0.24% from the same period in 2011 and only half of one percent lower than 3Q 2010’s record sales levels, said Sheryl J. Moore, president and CEO of Moore Market Intelligence, owner of AnnuitySpecs.com.

Allianz Life maintained its leading sales position with a 14% market share, followed by Aviva Security Benefit Life, American Equity, and Great American (GAFRI). Security Benefit Life’s Total Value Annuity was the top-selling indexed annuity for the quarter.

Guaranteed Lifetime Withdrawal Benefit (GLWB) elections dropped for the third consecutive quarter, which Moore attributed to reductions in the rider terms.  

In the third quarter, there were four GLWB rider charge increases, eight reductions in the riders’ deferral bonuses and sixteen reductions in rider payout rates, as carriers reduced the risks of their products. The “de-risking” of these benefits over the quarter made income-based indexed annuity sales just as challenging as those based on accumulation, Moore said.

The Bucket

Posted on December 13, 2012 by -

Prudential buys $7.5 billion portion of Verizon pension obligations

Prudential Insurance Co. of America, a unit Prudential Financial, has announced that the Verizon Management Pension Plan has purchased a single premium group annuity contract from Prudential Insurance to settle approximately $7.5 billion of Verizon’s pension liabilities of the Plan.

Under the contract, Prudential Insurance has irrevocably assumed the obligation, beginning January 1, 2013, to make future annuity payments to approximately 41,000 members of the Verizon Management Pension Plan. Only retirees with fixed benefit payments who have been receiving payments since at least January 1, 2010 are affected.

 Last Friday, U.S. District Court Judge Sidney Fitzwater in Texas rejected the November 27 request by two Verizon management retirees for a temporary restraining order and preliminary injunction blocking the transfer.

The two retirees said the move would strip them and approximately 41,000 other affected employees of their federal legal protections, such as pension guarantees through the Pension Benefit Guaranty Corp., and interfere with their rights under the retirement plan. 

In his ruling, Judge Fitzwater wrote, “Verizon’s proffered legitimate, nondiscriminatory reasons for defining the group of retirees for the annuity contract… Verizon explains that it chose this group of retirees for the annuity contract because, inter alia, it simplified the contract to include only retirees with fixed benefit payments who had been receiving such payments since at least January 1, 2010.

“Limiting the annuity contract to these stable pension obligations also reduced the cost to Verizon by limiting the uncertainty that would arise if the annuity contract included pensions for participants not yet in pay status, or for recent payees who are more likely to challenge the calculation of pension benefits.”

A.M. Best reviews Phoenix Companies ratings   

The Phoenix Companies’ financial strength (B+) and issuer credit ratings (bbb- and bb-) have been “placed under review with negative implications” by A.M. Best Co., the ratings agency said in a release.

The companies affected are Phoenix Life, PHL Variable Insurance, Phoenix Life and Annuity, and American Phoenix Life and Reassurance. The ratings are likely to remain under review pending the completion of the waiver process and the filing of the year-end 2012 Form 10-K.

Phoenix is seeking consent from its bondholders to waive the indenture’s requirement to furnish timely financials to the trustee on its 7.45% Quarterly Interest Bonds due 2032. A majority of the bondholders is required to extend the date on this requirement for the filing of third quarter 2012 financial statements.

Phoenix’s 7.45% Quarterly Interest Bonds, with approximately $253 million outstanding, are a retail issue sold in $25 increments. They currently trade near par. The under review status reflects A.M. Best’s concerns as to the uncertainty of achieving a successful outcome to the waiver process.

On November 8, Phoenix declared that it was postponing the release of its third quarter 2012 financial statements to restate its financial results. The company intends to file this report by the deadline for its 2012 Form 10-K, which is due by next March 18.

A. M. Best said it believes Phoenix has a “credible contingency strategy” in place if needed, but one that reduces its already limited financial flexibility. Its subsidiaries are profitable, but A. M. Best believes they will be hurt if Phoenix can’t obtain the necessary waiver.

Nationwide and Lincoln warn of need for LTC planning

A new Nationwide Financial-Harris Interactive survey of 501 financial advisors shows that 42% say their clients think of “Medicaid planning” as a way to protect their children’s inheritance from the potential cost of long-term care.

About half of Americans who need long-term care use Medicaid to pay for it, Nationwide said, in a release apparently intended to encourage the purchase of long-term care insurance instead of using Medicaid.

Besides the poor and those who have exhausted their assets, that number includes people who purposely shift assets to heirs to qualify for government coverage of their LTC expenses.

The Deficit Reduction Act of 2005 discourages transferring assets to children by implementing a five-year, look-back provision, instead of a three-year look back, but “Medicaid planning” is becoming a more often used tactic.

Disadvantages relying on Medicaid include:   

  • Medicaid recipients don’t always get to live where they wish. Nursing homes are not required to accept new Medicaid patients.
  • Medicaid often uses nursing home care to the exclusion of assisted living, home health care or adult day care.
  • Medicaid patients do not get private rooms and may have limited ability to upgrade.   
  • Healthy spouses may be deprived of resources if Medicaid planning is used. 

In the survey, advisors said only 15% of their clients understand the potential costs of long-term care well; 35% say their clients understand the costs “not at all well.” At age 65, people have a 70% chance of eventually needing long-term care. in their lifetime. The average annual cost for a shared room in a nursing home is projected to be $265,000 by 2030, Nationwide said.

Separately, a panel of long-term care experts participating in a webcast sponsored by Lincoln Financial Distributors encouraged Americans to be “more proactive in their long-term care efforts and to partner with knowledgeable financial professionals to ensure customized programs that can help protect assets and prepare for retirement issues.”

The panel of industry professionals included Steve Schoonveld, head of Linked Benefit Products for Lincoln Financial Group; Melissa Spickler, senior vice president, wealth management advisor of Merrill Lynch; and, Dr. Stephen Holland, chief medical officer of Univita Health. Moderating the webcast was Andrew Bucklee, head of MoneyGuard Solutions Distribution for Lincoln Financial Distributors.

Great-West Financial launches ‘Retirement Income Control Panel’   

Great-West Financial is expanding its suite of retirement readiness products and services for plan sponsors and participants, including “a real-time, personalized calculation of estimated retirement income based on the individual’s unique circumstances.”

The new tools include:

  • The Retirement Income Control Panel provides a tailor-made retirement strategy for savings targets and gives each individual a custom income plan for spending down his or her retirement savings.
  • 3(21) Fiduciary Services for new ERISA 401(k) plans provides plan sponsors and their advisors with co-fiduciary protection in the selection and monitoring of a plan’s investment options.
  • Account Retirement Income Estimate on Physical Statements provides participants with an estimate of their monthly retirement income based on the accounts Great-West Financial record keeps for them.
  • The Retirement Readiness Report Card for plan sponsors analyzes and reports on participants’ estimated retirement income levels versus participants’ target retirement income levels, then gives plan sponsors strategies for closing the gap (planned for the first quarter of 2013).

The Retirement Income Control Panel automatically draws real-time participant account data from Great-West Financial’s recordkeeping system. The panel also analyzes information an individual enters about assets outside of his or her Great-West Financial retirement plan. Industry expert Ibbotson Associates, Inc., part of the Morningstar Investment Management division, uses this custom data set to calculate the individual’s estimated monthly retirement income.

The Retirement Income Control Panel then compares the participant’s estimated retirement income with their target retirement income and highlights any gap between the estimated and target dollar amounts.

New York Life Retirement Plan Services to take new approach  

New York Life Retirement Plan Services has gained substantial assets under administration over the past year, has appointed new client-facing executives, and has expanded further into providing executive benefits after successfully implementing a new business model initiated a year ago, the mutual insurer said in a release.

Since September of 2011, New York Life has made sales conversions and commitments of more than $5 billion, lifting total assets under administration to $43 billion and the number of participants served to nearly 1.2 million from 1.1 million.

Among the company’s new business wins for bundled retirement plan services is the $1.2 billion retirement plan of the IT company Fujitsu Management Services of America, Inc. Other new business wins include: the $1.7 billion retirement plans of a pharmacy distribution provider; a $700 million Midwest-based life and property & casualty insurer’s plan; the $140 million retirement plan of a financial holding company with a portfolio of 15 regional banks; and a $90 million Pipefitters Local union plan.

In addition, notable new business wins in the executive benefits and stable value markets include: a $5.5 million COLI-funding for a multi-national bank; a $1 million COLI-funding for a grocery chain; a $70 million stable value placement at a technology company; and a $17 million stable value placement at a private university.

Over the past 12 months, New York Life has also added substantially to its relationship management and sales staff. The company has hired seven additional relationship managers to support the following practices: Taft-Hartley; financial and professional services; manufacturing, materials, distribution and retail; and technology and communications.

In addition, New York Life has added four new sales directors to support the company’s heightened focus on sales in the Western and South Central regions, as well as in the executive benefits market space.

John Hancock Financial Network introduces iPad app for advisors 

John Hancock Financial Network has introduced the “Retirement Ready” iPad app, an interactive tool designed to help financial professionals engage prospects and clients in an educational retirement income conversation.

The app, which is customizable to display the representative’s name and firm, includes information on the basic concepts of retirement income in distinct chapters, videos, exercises and interactive worksheets.

The content covers the client’s personal vision of retirement, the differences between the accumulation and distribution phases of life, detail on some of the key risks in retirement including longevity, market volatility and inflation, and creating a sustainable retirement income using a product allocation approach.

As with its original Retirement Ready microsite, JHFN worked with Blue Rush, a digital marketing firm, to develop the iPad app.

The Retirement Ready app is available now in the iTunes App store. General educational content will be available to the general public. The interactive tools will be accessible only to JHFN representatives.

Genworth Financial names president and CEO 

Thomas J. McInerney has been named by Genworth Financial Inc. as the company’s president and CEO, effective January 1, 2013. He also will be elected to the Genworth board of directors. James S. Riepe will continue to serve as the company’s non-executive chairman. 

Most recently, McInerney served as an advisor to The Boston Consulting Group. He previously held senior positions at both ING Groep and Aetna Financial Services. At ING, he was chief operating officer and a member of the Management Board for Insurance, responsible for the worldwide insurance and investment management businesses, encompassing some €425 billion of assets and 35,000 employees. He also served as CEO of ING Americas, overseeing insurance, pension, and investment management businesses in the United States, Canada, and Latin America. 

McInerney graduated with honors from Colgate University in 1978 with a BA in Economics and received an MBA with a concentration in Finance and Investments from the Tuck School of Business at Dartmouth in 1982.   

Lincoln Retirement names two sales directors

John McKeehan and Reed Steinmann have joined Lincoln Financial Group’s Retirement Plan Services as sales directors for the Institutional Retirement Solutions Distribution (IRSD) team. The IRSD team sells Lincoln’s full service retirement plan services to corporate and nonprofit/tax exempt plan sponsors.

McKeehan and Steinmann report to Michael Hall, IRSD National Sales Director. McKeehan supports the Southwestern region of the country and Steinmann covers the Midwestern region.

Prior to joining Lincoln, McKeehan was Regional 401(k) Director at Putnam Investments. He has served in retirement plan services roles with National Retirement Partners, Monarch Capital Management, Smith Barney and Morgan Stanley. McKeehan attended the University of Southern California and the Wharton School of Business. He also holds FINRA Series 63, 65, 7, 9 and 10 licenses. McKeehan is based in Orange County, California.

Steinmann comes to Lincoln from DWS Investments where he was a retirement consultant specializing in defined contribution and investment only solutions. He was also a financial advisor at Ameriprise Financial. Steinmann has a bachelor’s degree in economics from the University of Illinois, Urbana/Champaign. He also holds FINRA series 3, 7 and 66 licenses and has a Chartered Retirement Plans Specialist designation. Steinmann is based in Elgin, Illinois.

Cogent Research: Plan Participants ask for ‘auto features’

Americans participating in 401(k) and 403(b) plans want more support from their employers in reaching their retirement goals, according to “The Participant’s Retirement Plan,” a new report from Cogent Research.

The report is based on a survey of nearly 5,000 plan participants in the U.S. Americans participating in employer-sponsored retirement plans.

According to Cogent Research, 49% of plan participants across all plan sizes want a feature that automatically raises the contribution percentage by a specified amount each year. Only 18% of participants say they currently use such a feature.

Only 13% of the smallest employers are offering the feature to their plan participants, but 53% of employees of small business say they want access to it, the study showed.

Nearly half of all employers with 1,000+ employees say they offer contribution auto-increase, a number that matches interest levels among their employees (51%). However, only 19% of Americans tied to plans offered by large employers say they are currently enrolled in such a program.

“For small employers, the issue is a lack of access to this feature. However, for larger employers, the issue is more a lack of awareness that this feature is in place to help them,” said Christy White, principal of Cogent Research.  

End is in sight for U.S. ownership of AIG shares

Posted on December 13, 2012 by -

The U.S. Treasury Department has priced an offering of about 234.2 million shares of AIG common stock at $32.50 per share, American International Group has announced. When the $7.6 billion transaction closes, Treasury will own no more AIG shares.

The transaction will fully resolve U.S. government support of AIG. Treasury will continue to hold warrants to purchase approximately 2.7 million shares of AIG common stock, the sale of which is expected to provide an additional positive return to taxpayers.

“We are very pleased to repay 100 percent of all that America invested in AIG plus a total combined positive return – or profit – of $22.7 billion,” said AIG president and CEO Robert H. Benmosche.   

Beginning in September 2008, Treasury committed $182.3 billion to stabilize AIG. Since then, through asset sales and other actions by AIG, America has recovered the principal and earned about $22.7 billion.

BofA Merrill Lynch, Citigroup, Deutsche Bank Securities Inc., Goldman, Sachs & Co. and J.P. Morgan Securities LLC have been retained as joint bookrunners for the offering.

AXA Equitable donates famous mural to the Met

Posted on December 13, 2012 by -

American artist Thomas Hart Benton’s epic mural (detail) America Today—a panoramic celebration of American life in the booming 1920s—has been donated by AXA Equitable Life Insurance Company to New York’s Metropolitan Museum of Art.

Thomas P. Campbell, the Museum’s Director and CEO, and Mark Pearson, AXA Equitable chairman and CEO, announced the gift this week.

Over the past 80 years, the mural has travelled from the New School for Social Research at 66 W. 12th St. in New York City, to AXA Equitable headquarters at 787 Seventh Ave., and to the insurer’s subsequent headquarters at 1290 Avenue of the Americas. A year ago, when renovations forced the mural to be moved, AXA Equitable decided to gift it to the Met.

The 10-panel mural spent decades in relative obscurity. Benton (1889–1975) created it in 1930–31 as a commission for the third-floor boardroom of the New School. The panels were unveiled when the International-style building at 66 West 12th St. opened on January 1, 1931. The artist completed the tenth panel later.

Filled with figures of farmers, coal miners, steelworkers, architects and builders, doctors and teachers, the panels covered the four walls of the 30-by-22-foot boardroom. They established Benton, who received no fee for it, as his era’s leading American muralist and it helped inspire the Works Progress Administration (WPA) mural program of the Great Depression—including murals in WPA-built post offices throughout the U.S.

In 1982, the New School sold the work to the Manhattan art dealer Maurice Segoura on the condition that he would not re-sell it outside the United States or as individual panels. It proved difficult to sell as a whole.

AXA Equitable (then Equitable Life) acquired America Today in 1984, helping then-Mayor Ed Koch and others keep it intact and in New York. Two years later, after a restoration, the mural was installed in AXA Equitable’s new headquarters at 787 Seventh Avenue.

In 1996, the company and the giant mural moved to 1290 Avenue of the Americas, where it decorated the lobby until January 2012. Amid lobby renovations, AXA Equitable decided to send the mural to a permanent public home. Curators Pari Stave, for AXA Equitable, and H. Barbara Weinberg, for the Met, directed the transfer.

Life Insurers, Under Three Microscopes

Posted on December 13, 2012 by -

The problems facing the U.S. life insurance industry—low interest rates, falling demand for life insurance, and increased regulation—are the topic of recently published analyses from three different financial services consulting and research firms.

Ernst & Young, Fitch Ratings and Conning Research have all released reports in the last week. The first two are available for download. Conning’s 127-page report, which focuses on life insurer investments, is proprietary, but RIJ received a summary.

The reports describe an industry sector that “has somewhat recovered from the credit crisis but [remains] challenged by decreasing yields,” as Conning put it. Ernst & Young noted the irony that an industry that normally absorbs risk now finds itself de-risking.

The burden of low interest rates is a common theme of the reports. Ernst & Young says that rates will “inevitably” rise, but makes no prediction about when that might happen. (Yesterday, Federal Reserve Board chairman Ben Bernanke said rates will stay low until at least mid-2015, and won’t rise until the U.S. jobless rate falls below 6.5%.)

All three reports also assess, with varying depth, the nature and impact of regulatory turbulence, coming either from Solvency II, Dodd-Frank legislation, the new Consumer Financial Protection Bureau or, at the state level, from the National Association of Insurance Commissioners.

Conning Research

Conning’s report focuses on the contents and performance of the investment portfolios of life insurers. According to the Hartford, Conn.-based firm, the industry earned $178.9 billion in gross investment income in 2011, up 3.3% from $172.8 billion in 2010. Since 2008, however, the compound annual growth of GII has been only –0.5%.

“The decrease in GII was driven by lower dividends, coupons, interest, and rents starting in 2008 rather than from a significant slowdown in the growth of invested assets, which grew at an average year-over-year growth rate of 2.3% over the study period,” the Conning report said.

“Life insurers have weathered the financial crisis in terms of solvency but not in terms of profitability,” Mary Pat Campbell, the Conning analyst who wrote the report, told RIJ. “They are now accepting the fact that low interest rates are the new normal. There’s a recognition that they will have to deal with this on a longer-term basis.”

Campbell added, “To increase yield, life insurers have been increasing exposure to commercial real estate, lengthening the duration of their bond portfolios and looking at lower credit bonds—not junk, but BBBs. In the financial crisis, they went down in credit quality unknowingly. This time they’re taking a calculated risk.”

Fitch Ratings

In its analysis, Fitch suggested that insurers might not be able to withstand low interest rates for another two-and-a-half years. “Fitch expects sustained low interest rates over the next two years will negatively affect earnings growth rates, but will not have a material negative impact on industry capital,” the ratings agency said, but added: “Fitch expects that if interest rates stay low much beyond 2014, the agency’s outlook would likely be revised to Negative based on weakened earnings profile and anticipated negative capital impacts.”

Regarding variable annuities, Fitch expects that the life insurance industry’s large in-force book of VA business (approximately $1.6 trillion) “will continue to be a drag on profitability, and could cause a material hit to industry earnings and statutory capital in an unexpected, but still plausible, severe stress scenario.”

The ratings agency said it “remains concerned about the risk profile of the VA business… Emerging experience is indicating that the industry’s policyholder behavior assumptions have been too aggressive as a number of insurers have increased reserves in 2010−2012 to reflect lower than expected lapse rates.”

Ernst & Young

Doug French at Ernst & Young summarized life insurers’ historic interest rate dilemma in the same terms as Campbell. “Insurers no longer can manage the problem purely as a short-term crisis — it is now a likely long-term operating challenge,” he wrote.

“This is complicated by the limited ability insurers have to reduce interest rate risks for savings and investment-oriented products like deferred annuities. While the product mix and features will continue to shift, lower projected profitability is to be expected.”

In addition to the squeeze from interest rate policy, Ernst & Young noted the potential for tighter regulations, including “sallies against the tax status of death benefits and the accumulation of cash values within life insurance policies and annuities.”

If Congress perceives that life insurance products are aimed mainly at high net worth customers, French wrote, there’s a risk that it “may try to split the difference by means-testing the taxability of these products, reducing the tax positioning that helps propel sales in the high-net-worth sector.”

At the same time, he added, “the pressure for product transparency and simplified pricing is intensifying.” It may generate scrutiny by the new Consumer Financial Protection Bureau of complex insurance products such as variable annuities with living benefit riders.

Echoing Campbell, French wrote, “To obtain greater yield, insurers may need to increase risk-taking in their asset portfolios, understanding they will have to be adequately compensated in yield for taking on the additional risk.” Insurers will try that and many other maneuvers, he observed, “until interest rates levels inevitably rise.”

© 2012 RIJ Publishing LLC. All rights reserved.

Lobbying 101

Posted on December 12, 2012 by -

Last week, a group of 11 Democratic and Republican U.S. Senators, led by Richard Blumenthal (D-CT), co-sponsored a “Concurrent Resolution” endorsing the existing federal tax incentives for contributions to 401(k) and other qualified retirement plans.

“It is the sense of Congress,” the resolution said in part, “that tax incentives play an important part in encouraging employers to sponsor and maintain retirement plans” and that “existing tax incentives have increased the number of Americans who are covered by a retirement plan.”

Retirement industry trade groups applauded the resolution, but they were partly applauding themselves. The resolution, similar to one introduced earlier this year in the House, was the fruit of lobbying by the trade groups themselves, including the American Council of Life Insurers, the Insured Retirement Institute and the American Society of Pension Professionals & Actuaries (ASPPA).

The resolution was intended as a display of strength to discourage anyone in Congress or the administration from trying to raise revenues by reducing the upper limit of tax-deferred contributions to 401(k)s, now at $17,500 for employee contributions ($22,500 for age 50 and over) and $51,000 for combined employer/employee contributions.

On the one hand, there’s no evident appetite in Washington for rattling the defined contribution industry. But the annual tax expenditure for retirement plans is arguably too large and conspicuous—$162.7 billion overall Congressional Budget Office (CBO) and $50 to $75 billion for 401(k) plans alone—not to be a prime candidate for cuts. And President Obama has already suggested the possibility of capping the tax savings on deductions at 28%.   

Hence the pre-emptive strike. It won’t immunize the 401(k) tax break from caps or cutbacks, by all accounts, but it doesn’t hurt. “While nobody is referencing cutbacks to retirement savings’ tax treatment directly, the effort is designed to prevent it from being swept up in discussions and for Washington not to view it as a source of revenue,” a member of one of the trade groups told RIJ this week.

“It was a team effort. We want to get as many senators on record as possible. It will be helpful in terms of protecting incentives for retirement as we deal with the deficit,” said Brian Graff, president of ASPPA.

Unique incentives

At the nucleus of this debate is the unusual, if not unique, nature of 401(k) tax incentives. Some academics have argued that the incentives are largely wasted, since they disproportionately go to people in high tax brackets who would probably save a lot for retirement anyway. Industry groups counter that the incentives help millions of rank-and-file participants who wouldn’t otherwise save.

But there are more complex factors at work. Any reduction in incentives for business owners will discourage them from offering plans at all, it’s been argued. Second, any reductions in incentives for business owners (or other highly compensated employees) could trigger proportional decreases in incentives for rank-and-file participants.

A recent example of the argument against savings incentives was offered up last month by a Harvard-led team of academics, who published a paper entitled “Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark.”

The study, based on 45 million observations of defined contribution participants, found that tax breaks on savings don’t encourage people to save more; they simply encourage wealthier, financially savvier people (about 15% of Danish participants) to shift savings from taxable accounts to tax-deferred accounts. If you want the majority of people to save more, they found, you should institute automatic contributions.

Ninety-nine percent of incentives are wasted, they said. “Tax subsidies, which rely upon individuals to take an action to raise savings, have small impacts on total wealth. We estimate that each $1 of tax expenditure on subsidies increases total saving by 1 cent. In contrast, policies that raise savings automatically even if individuals take no action—such as employer-provided pensions or automatic contributions to retirement accounts—increase wealth accumulation substantially.” 

John Friedman of Harvard, one of the study’s co-authors, told RIJ this week, “The ideal change would be one where we reduced the subsidy, and made it a 15% or 20% tax credit, and then provided an option for 401(k)-like savings outside of the business setting.”

The retirement industry trade groups in the United States disagree with this view. In arguing that the benefits of the incentives are broad, they point to the depth and breadth of the private pensions in the U.S., now valued at some $11.9 trillion. 

According to the Senate resolution, for instance, 67 million Americans hold $4.7 trillion in 670,000 401(k), 403(b) and 457 plans, 19 million Americans participate in 48,000 defined benefit plans worth $2.3 trillion, and Americans collectively hold another $4.9 trillion in individual retirement accounts (much of it formerly in defined contribution plans).

Addressing the question of equitable distribution of the incentives, Graff told RIJ that “66% of the tax benefits in the deferral go to people who pay 26% of the income taxes.” He also discounted Friedman’s study. “The Danish study is stupid. It was written by a bunch of academics in cubicles who don’t know what they’re talking about.”  

Nonetheless, there is a concentration of contributions at the top end of 401(k) plans. According to an October 2011 CBO report, people who earned $160,000 or more per year comprised 12.7% of participants (5.6 million of 44.1 million) in 2006 but made 32% of contributions ($61.6 billion of $191.8 billion). Few participants other than people earning $120,000 or more contributed the maximum.

Small employers hold the key

This is an apples and oranges discussion because, in the U.S., small business owners sponsor the vast majority of plans. “We see about 700,000 filings per year,” said Brooks Herman, head of research at San Diego-based BrightScope, which benchmarks 401(k) plans. “Only about 55,000 of those have more than 100 employees.”

Given the expense and effort required to sponsor a plan, it’s presumed that if the law doesn’t provide employers with enough tax savings on their own contributions, they might not bother to sponsor plans at all. If that’s true, i.e, if their demand for sponsoring plans is “elastic” (to use an economics term), then taxing them more would be self-defeating.

“Eighty-five percent of all plans are small business plans and 36% of all participants are in those plans,” said Graff. “If you reduced the contribution limit to $20,000 [from $51,000], hundreds of thousands of small plans would close.”

Here’s the crux of the problem. Reducing the limit to $20,000 for business owners and other high-earners wouldn’t merely take money out of their pockets. It would take money out of the pockets of rank-and-file participants—people who never come close to deferring $20,000.

That’s because complex “anti-discrimination” rules require that the plan benefits be fairly proportioned across pay levels. If you reduce the owner’s incentive to give himself a generous match, you reduce his incentive to give his employees a generous match.

Harvard’s Friedman called this situation a “tragedy.” “The whole anti-discrimination thing is silly,” he told RIJ. “It’s silly for the incentives of a firm owner to have anything to do with retirement savings options of the employees, or for the employees to need to have a savings plan set up for them in the first place. But we live in the world that we live in.”

“For better or for worse, the employer plays a central role in the U.S. retirement system,” Jeff Brown of the University of Illinois recently blogged at the Center for Business and Public Policy. “Although there are several reasons that employers offer retirement plans and other employee benefits (e.g., to differentially attract certain types of workers, to help manage retirement dates, to motivate workers, etc.), there is little question that the large tax subsidy looms very large in their decision to use retirement plans—as opposed to other types of benefits—to achieve these outcomes.”

Little danger

Given the gnarliness of this arrangement—and given the current absence of viable alternatives, such as a national defined contribution program or the proposed “auto-IRA” for workers not covered by other plans—few expect that Congress or the administration intends to tinker with the status quo. Last week’s Senate resolution reinforces that impression.

David John of the Heritage Foundation, for one, doesn’t think that President Obama’s re-election mandate extends to cutting retirement incentives. “The victory to the president is in terms of [marginal] tax rates and nothing else,” he added. Although he thinks it might be appropriate “to consider not just how high to tax the income of the wealthy but also what kind of subsidies we should allow them,” he doesn’t think that will happen. “There’s no sign that the president has a mandate beyond changing the marginal rates,” John said.

At BrightScope, Herman said he sees a variety of industry groups “circling the wagons” to protect their tax or spending perks these days. But he doubts that the retirement incentive will be sacrificed on the altar of deficit reduction. “It’s in government’s best interest for Americans to have enough money to retire,” he said. “It would surprise me if the government did something drastic in the coming year [about tax expenditures for retirement]. It would be pennywise and pound foolish.” 

© 2012 RIJ Publishing LLC. All rights reserved.

Fed to Link Interest, Jobless Rates

Posted on December 12, 2012 by -

[To see a video of the December 12 press conference, click here.]

Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated.

Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.

In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.

© 2012 The Federal Reserve.

The Bucket

Posted on December 5, 2012 by -

Cost of health care is chief retirement worry:  T. Rowe Price  

Investors’ biggest retirement concern is rising health care costs, according to a survey of 850 investors ages 21 to 50 sponsored by T. Rowe Price and conducted last August by Harris Interactive. Health care was cited as a concern by 76% of respondents. 

The survey also found that investors have a significant lack of confidence in Social Security and in the ability of their parents and grandparents to finance their desired lifestyle in retirement.

Selected survey findings 

  • The top retirement concerns among investors aged 21-50 are health care costs (76%), rising taxes (67%), Social Security availability (63%), inflation (61%), long-term care (58%), living too long and running out of money (52%), and housing values (52%).
  • Only 16% of investors expect to receive full Social Security benefits as currently promised. Of the remaining 84%, 36% expect to receive no Social Security benefits and 48% expect reduced benefits when they retire.
  • Among those who anticipated a weaker Social Security system, 42% said they would adapt by saving more, 29% by working longer, 11% by investing more aggressively and 5% by not retiring at all. About 13% expected to do nothing.
  • As for helping their parents or grandparents with financial matters, 19% of investors said they are providing guidance with daily expenses, 15% are providing general retirement advice, 13% are providing assistance with daily expenses, and 9% are helping their elders better understand their Social Security options.   
  • Of those providing “general retirement planning guidance,” only 59% believe their parents or grandparents will have enough money to maintain their desired lifestyle; 26% believe their elders will not have enough money and 15% say they are not sure if their elders will or won’t.    

Invesco updates retirement planning website for advisors and investors  

Invesco Distributors, Inc. has launched a comprehensive, “step-at-a-time” website financial advisors can use to help clients better prepare and account for the growing complexities of retirement planning.

The redesigned site was developed to help advisors take their clients through the planning stages by using an intuitive timeline format with easy access to a variety of beneficial tools and related information, Invesco said in a release.

The website is designed to help advisors:

  • Identify the variables unique to their age group — starting in their 20s and lasting throughout their retirement.
  • Take an active, hands-on, intentional approach to retirement readiness.
  • Work closely with their financial advisors throughout the process.

Distinguishing features of the website, invesco.com/RetirementReady, include:

  • A step-by-step presentation of the strategies, factors, variables and decisions that affect retirement savings.
  • A Retirement Planning Timeline that enables investors to determine where they are in the process and access the resources and tools they need at their particular stage. 
  • Numerous visuals to help investors more clearly understand the concepts presented.
  • Twenty-three calculators to help advisors and investors personalize the planning process.
  • A “next steps” call to action for each section that lists actionable items with links to resources and tools.

As national safety nets fray, employers may need to step up: Mercer

Posted on December 5, 2012 by -

As working age populations shrink in the next eight years, it will put stress on national pension systems and pressure companies to compensate with stronger health and retirement benefits, according to a new survey from Mercer, IPE.com reported.

By 2020, Canada, Japan and Russia will each see a 4% decline in their working (ages 15 to 64) populations, while the UK, US and China could see a 2% decline, said the report, based on International Labor Organization data. Hong Kong’s working-age cohort will decline to 70% from 76% of the total population.     

“While the changes seem small in percentage terms, this is a dramatic demographic shift and can have a major impact on state pension systems,” said Deborah Cooper, partner in Mercer’s retirement business.

Companies, already faced with demographic change in their own retirement plans, would be expected by employees in many countries to fill the gap in health and retirement benefits as the government raises the minimum pension age and/or reduces benefits.

“To do this effectively,” Cooper said, “companies and employees need to revisit fundamental beliefs on how to prepare for and structure retirement.” 

The sustainability of the UK’s pension system is apparently lagging. The 2012 edition of the Melbourne Mercer Global Pension Index gave the UK a score of 46.5, compared with an average of 52.1. In 2009, when the index was launched, the UK’s sustainability score was 56.4.

The Index tracks the sustainability of the program in the face of factors like the old age dependency ratio, the state pension eligibility age, the opportunity for phased retirement and the labor force participation rates of older workers.

“Only about 50% of the workforce in the UK belongs to an employer-sponsored pension scheme, and there is a risk the system will fail the other 50%, since continuing demographic change will make it hard for the (sometimes self-) excluded group to catch up,” the Mercer report said.

© 2012 RIJ Publishing LLC. All rights reserved.

High-speed traders take “some of the cream off the top”: CFTC official

Posted on December 5, 2012 by -

High-speed trading firms are taking significant profits from traditional investors, in the opinion of Andrei Kirilenko, the chief economist at the Commodity Futures Trading Commission, according to a report in the New York Times.

In a not-yet published study, the Times said, Kirilenko writes that high-frequency traders make an average profit of as much as $5.05 each time they go up against small traders buying and selling one of the most widely used financial contracts.

Kirilenko’s findings are being peer-reviewed, and not all academics agree with them.  But Bart Chilton, one of five CFTC commissioners, said Monday that the study will show that “high-frequency traders are really the new middleman in exchange trading, and they’re taking some of the cream off the top.”

Other government officials have merely expressed uncertainty about whether high-speed traders are earning profits at the expense of ordinary investors.

The Financial Stability Oversight Council, which consists of the nation’s top financial regulators, is said to be worried that the accelerating automation and speed of the financial markets may threaten other investors and the stability of the financial system. The Council took up the issue at a meeting in November that was closed to the public, according to minutes that were released Monday.

© 2012 RIJ Publishing LLC. All rights reserved.

No immediate changes in CE requirements: CFP Board

Posted on December 5, 2012 by -

No changes to the continuing education (CE) requirements for CFP certification will be immediately forthcoming, the directors of the Certified Financial Planner Board of Standards, Inc. have announced.

The board is seeking “further review of previously proposed changes before making any modifications,” the organization said in a release.

At its November meeting, the board resolved to call on the Council on Education (Council) and staff at CFP Board to “study and develop recommendations on the appropriate level of CE to maintain CFP professionals’ competency for the benefit of the public.” Additional public comments will be sought when proposed changes are developed.

In August, CFP Board requested public comment on proposed changes to its CE requirements. CFP Board originally proposed a number of changes that included increasing CE requirements from 30 to 40 hours every two years; increasing the CE ethics requirements from two to four hours; granting some CE credit for practice management courses and for pro bono activities; and expanding professional activities that qualify for CE. 

CFP Board received a record number of comments – more than 1,100 – in response to its proposed changes with the majority being reflective and providing pragmatic viewpoints. Eighty-five percent of those commenting opposed increasing the CE requirement from 30 to 40 hours. 

© 2012 RIJ Publishing LLC. All rights reserved.

Achaean Financial to partner with InFre

Posted on December 5, 2012 by -

Achaean Financial has announced a partnership with The International Foundation for Retirement Education (InFRE) to provide customized training to users of Achaean’s retirement advice software tool, Retirement Outcome.   

Retirement Outcome is an open-architecture retirement planning tool designed to help investors and their advisors weigh the tradeoffs they face in retirement and to create personalized solutions, including appropriate spending, overall portfolio risk and allocations to guaranteed-income products, Achaean said in a release.

Retirement Outcome takes information about a client’s wealth, income needs and asset allocation to produce a personalized outcome report.  Each of the various investing and spending decisions can then be adjusted to help the client understand the tradeoffs they must make and how they are likely to impact income and wealth throughout retirement.

InFRE, founded in 1997, is a 501(c)(3) non-profit education foundation devoted to “enhancing the retirement preparedness of the American worker.”  

Over 16,000 retirement professionals have participated in one of InFRE’s process-oriented retirement income training programs and almost 2,000 individuals now hold the independently accredited Certified Retirement Counselor (CRC) certification.

© 2012 RIJ Publishing LLC. All rights reserved.

Rate Expectations

Posted on December 5, 2012 by -

If Stephanie Schmitt-Grohé were in Federal Reserve chairman Ben Bernanke’s polished, cap-toe oxford shoes, she would favor a monetary policy that raised nominal interest rates to four or five percent instead of keeping them suppressed at zero to 25 basis points.

In a new paper, Schmitt-Grohé (right) and fellow Columbia University economist Martin Uribé contend that the Fed’s easy-money policy, rather than raising expectations of high inflation, is causing Americans to expect a Japan-like scenario of long-term low inflation.

stephanie schmitt-groheInstead of helping jump-start the economy, they say, that low rate policy is keeping unemployment rates high by keeping real wages high. And if executives truly expected higher inflation, which would lower real wages and boost prices, they’d feel more confident about hiring.

Monetary policy, of course, is a murky science where the normal rules of cause and effect seem to vanish, where ordinary intuition and common sense get no purchase, and where one economist’s holy grail is another’s heresy, and vice-versa. 

So it’s difficult to evaluate new ideas. But, at a time when low interest rates are pinching off the annuity industry’s oxygen supply—not to mention starving bond investors and crippling pensions—a rationale for raising rates might sound like salvation in certain quarters.

Different kinds of shocks

At the heart of the Columbia economists’ argument is the difference between a “fundamental shock” to the economy (they give the example of a natural fall in interest rates) and a non-fundamental “lack-of-confidence shock,” such as the public’s reaction to central bank policy.

They think we’ve experienced the second kind. “If it’s a fundamental shock, [the low-rate policy] should be stimulative to employment, but only if it’s a given that the economy will return to normal inflation rates over the next five to 10 years,” Schmitt-Grohé told RIJ.

“But if we’ve had a confidence shock, if every believes that we will become Japan, then the current policy of having a Fed funds rate of zero to 25 basis points isn’t right.” Japan’s interest rates were reduced after a stock market crash in 1989, but inflation and rates have stayed near zero since then.

“In the paper, we entertain the idea that a zero policy makes people think that we’ll never go back to two or three percent annual inflation, but instead move to a Japan-type scenario, where inflation will stay at a half-percent or a quarter percent indefinitely,” she said.

“If the Fed’s paradigm is that our change in expectations is temporary, then its current policy is right,” she added. “But if our assumption is right, if the zero-rate policy is cementing the deflation prediction, then that goes against the policy of easing. It says that we should go back to the four to five percent Fed funds rate. That will kill the belief that we have indefinite deflation ahead. Then you will really change the expectations of inflation.”

The unemployment problem

Schmitt-Grohé and Uribé went down this road in part because they wanted to figure out why lower interest rates have not stimulated the economy and led to higher lending and lower unemployment, as theory says they should. 

The problem may be that the real cost of labor hasn’t gone down, and companies, faced with weak demand and no expectation of rising prices, can’t afford to hire at current wage rates. The Columbia economists believe that expectations of inflation would bring expectations of higher prices, lower real wages, and would therefore create the right conditions for more hiring and less unemployment.  

“When there’s high unemployment, you would have expected wages to give in. But there’s been no decline in real wages,” Schmitt-Grohé told RIJ. “It’s very hard to cut the hourly wage. Employers would rather reduce employment costs by cutting the number of hours that people work. But if you can generate a little inflation, you lower the real wage rate, and you inspire employment.”

She gives Bernanke high marks for preventing a deflation spiral and putting a floor under the value of stocks, mortgage-backed securities and housing, which were in freefall in 2008. But she sees lingering unemployment as a bigger problem than the prospect of a drop in asset prices.  

Not everyone fully agrees with this interpretation. Workers might balk at the idea of absorbing the cost of recovery. As Guillermo Calvo of Columbia’s School of International and Public Affairs and others assert in a new paper, “A spike of inflation during financial crisis may help to reduce jobless recoveries, but at the expense of sharply lower real wages.”

Unemployment, they argue, has stayed high because, under current conditions, banks prefer to finance investment in physical capital rather than in labor-intensive projects. Where physical capital is involved, the collateral is easier to seize in the event of default. “Only relaxing credit constraint might help both unemployment and wages,” they write.

© 2012 RIJ Publishing LLC. All rights reserved..

Fixed Annuity Sales Stall, but Security Benefit Stands Out

Posted on December 5, 2012 by -

Indexed annuities accounted for 53% of fixed annuity sales and income annuities grabbed a 14% share in the third quarter of 2012, according to the Beacon Research Fixed Annuity Premium Study. Both stats represented record-high market share for those products.

Quarterly and YTD results were lower due to large decreases in fixed rate annuity sales, however. Total fixed annuity results were $16.6 billion in third quarter 2012, down 13% from a year ago and 3% from the prior quarter. Year-to-date sales fell 13% to $50.6 billion.

Indexed annuities had their third-best quarter ever. Sales of $8.7 billion were up 0.5% year over year, though down 1% from the previous quarter. At $2.4 billion, income annuities also posted their strongest quarter ever, with deferred income annuities (DIAs) generating 77% of the $87 million quarter-to-quarter increase.

On a year-to-date basis, both product types had record-high results, with indexed sales at $25.7 billion (up 4.5%) through three-quarters and income sales at $6.8 billion (up 9%).

“Indexed and income annuity market shares grew because their value propositions were attractive relative to the conservative alternatives in third quarter’s low interest rate, uncertain economy,” said Jeremy Alexander, CEO of Beacon Research. “They also became more dominant because fixed rate annuity sales declined so significantly. Many carriers focused on the profitability of their fixed rate annuity product lines at the expense of sales.”


New kid on the block

Security Benefit Life became a top five company for the first time, joining in fourth place. Aviva USA and New York Life switched places to come in second and third, respectively. American Equity moved down a notch to take fifth place. Allianz continued as the quarter’s leading company. Third quarter results for the top five study participants were as follows:

Nationwide took the lead in sales of fixed rate non-MVA (non-market value adjusted) annuities, and was also the new leader in the bank and wirehouse channels. Pacific Life became the top fixed annuity issuer among independent broker-dealers. The other leaders in sales by product type and distribution channel were unchanged from the prior quarter.

In sales by product type, Lincoln National rejoined the top five, with its Alliance (fixed rate non-MVA) taking fifth place. New York Life’s Lifetime Income Annuity was again the quarter’s bestseller. Indexed annuities from Allianz, American Equity and Aviva USA remained top five products. American Equity’s Bonus Gold moved up two notches to come in second.

 

“We’re encouraged to hear that a number of carriers are developing new indexed and income annuity products, and also investing in technology to support their fixed annuity business,” Alexander concluded. “But we don’t expect much sales growth until the interest rate environment improves.”

About Beacon Research’s Fixed Annuity Premium Study

The quarterly Study is the first and only source to track and analyze product-level fixed annuity sales on an ongoing basis, and the first to put a decade’s worth of historical industry, company and product sales information in an easily-searchable online database at www.annuitymarketstudy.com.

Let’s Face It

Posted on December 5, 2012 by -

Assuming that you live so long, do you want to know what your face might look like in 2023 or 2033? I mean, really. Would W.H. Auden or Lillian Hellman have wanted to know what they were destined to look like in their golden years?

For that matter, have you seen “Lincoln”? Great movie. But would Tommie Lee Jones have been delighted to know, back when he and Al Gore dormed together at Harvard in the 60s, that he would look like Thaddeus Stevens someday?

If seeing old Kodak snapshots of your parents or grandparents isn’t sobering enough for you, you now have the opportunity, thanks to the marketing folks at Merrill Lynch, to see how decrepit your mug might look in a decade… or three.

In my e-mailbox this week I found a press release from Merrill Edge, the online self-directed investment platform at Bank of America/Merrill Lynch. A link in the press release took me to Face Retirement, a website where I could have my picture taken with the camera in my own laptop and then see Kerry at 61my image artificially “aged.”

My first take was so ridiculous that I erased it, cleaned myself up a bit, combed my thinning hair, and started over. This time I remembered to smile and look into the camera lens instead of at the screen. A few clicks later, and the software automatically “aged” me. A sag here, a wrinkle there. You can see the “before” shot at left and a rendering of me, age 97, at right below.

This cosmetological form of shock-therapy was meant to alter my “inter-temporal choices” and motivate me to save more for retirement. There’s empirical evidence that this procedure can in fact work. As researchers Hal Hershfield of NYU and others put it in a November 2011 article in the Journal of Marketing Research, “manipulating exposure to visual representations of one’s future self leads to lower discounting of future rewards and higher contributions to saving accounts.”

Perhaps. Whether it works or not, it’s a dubious idea. Even though this concept has received at least two glowing write-ups in the New York Times, and has been used by Allianz Life (“The Behavioral Time Machine”) in collaboration with the respected UCLA behavioral finance expert, Shlomo Benartzi, it doesn’t feel respectful. It smacks of one of those gimmicks that reminds the rank-and-file workers that nobody upstairs “gets it.” As if the saving crisis could be fixed with a parlor trick. As if the decline in real wages since 1970 or the divorce rate has nothing to do with it.

Given today’s high technical expectations, the “aging” software is also relatively crude. I mean, look at the picture below. To really scare people, you need higher production values. If you show me morphing from Smeagol to Gollum a la The Lord of the Rings, for instance, I’ll panic. 

Trust is a big issue in financial services, and this approach doesn’t inspire trust.  The research behind digitized aging has gone from the psychology lab to the business school world to the realm of mutual fund marketing in only a couple of years. The rush to the altar in this marriage between science and commerce seems a little too quick and perhaps a little too cozy. Sure, it may be effective, but who wants financial services marketers to meddle with their deepest hopes and fears about the future?

Kerry at 97The concept isn’t necessarily bad. When handled with taste, it can even be moving. Lincoln Financial Group’s “Future Self” TV commercials were done well. One of the spots took place in a hospital, another in an airplane. Someone gets advice about saving for the future from a dignified elderly person who cryptically identifies him or herself as “you, only older,” before vanishing like the Lone Ranger. Those spots emphasized the wisdom of the future selves, not their wrinkles. 

There’s an element of absurdity to this face-aging thing. You might remember the scene in Back to the Future II, where Michael J. Fox’s matronly mother comes through a doorway and collides with a lithe teenager—herself as she appeared on the night of her own senior prom. “I’m old!” the young girl screams in recognition. “I’m young!” screams the mother.

At worst, the behavior-modification aspect of artificial face-aging has a slightly Orwellian bluntness. It recalls the attempts to terrify Alex, the not-so-juvenile delinquent in the novel and film, A Clockwork Orange, out of his anti-social behavior by propping open his eyelids and forcing him to watch horrible images non-stop until any thought of violence sickens him. The technique didn’t work.

Maybe I shouldn’t be wringing my hands over this. Shlomo Benartzi, for one, doesn’t share my concerns about artificial aging and financial services marketing.

“Yes, I would like to see my ‘older self’,” he said in an interview last summer, after we met at the Consumer Financial Decision Making conference in Boulder. “It’s not intrusive as long as it’s voluntary. I believe most people save too little. If we help them save a bit more it’s probably a good thing. I’m not troubled by the fact that industry can profit from this. Maybe the industry has its own motives. That’s an issue that we shouldn’t discount. But there’s nothing wrong with industry profiting from things that help people. It’s a win-win.”

In any case, I hope Merrill Edge is correct about the way I’ll look when I’m 97. It could be much, much worse. But just thinking about artificial aging gives me grey hair.

Editor’s note: To see 50 years of facial aging, old family photos work just fine. Just below you can see my great-grandparents, Jacob (Koby) Mayer and Kathy Schreiber, on their wedding day in 1890, ages 28 and 23, respectively. Compare that with a picture taken in 1940, on their 50th wedding anniversary.


© 2012 RIJ Publishing LLC.

No Bluff: Try This Tax Calculator

Posted on December 3, 2012 by -

Recently I was exploring the Tax Foundation’s website and discovered a handy federal income tax calculator to help me figure out how much more I would owe Uncle Sam in taxes if America goes over the so-called fiscal cliff at the end of 2012.

(In the cinema of my mind, the fiscal cliff appears as a buffalo jump, where panic-stricken bison were stampeded to their deaths. A traditional buffalo jump was usually a bluff, and the same may be true of the fiscal cliff.)

The calculator showed that if all of the so-called Bush tax cuts expired next year and were replaced by the “Obama proposal,” my total federal tax burden would increase in percentage terms by more than one-third, and in dollar terms would cost me about $140 a week.  That was worse than I expected.  

You can access the Tax Foundation calculator by clicking here. And you can read a breakout of the proposed tax changes by clicking here. For a fascinating spreadsheet of historical marginal tax rates since 1913, click here.