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New York Life expands retail annuity team
Matt Grove, head of New York Life’s annuity business, circulated a message to his LinkIn network on September 26 saying that the mutual insurer, which dominates sales of income annuities in the U.S., is expanding its retail annuity team and has two high profile positions to fill.
According to Grove’s note, New York Life is looking for someone to lead its variable annuity product management team and a second person to lead strategic development for the annuity business.
The variable annuity position involves “managing the product development life cycle for our $2.5 billion per year variable annuity business,” Grove wrote. “An ideal candidate would have experience developing variable annuity products and working with the extended product development team—including pricing, technology, legal and marketing personnel—to successfully launch products.”
The person who fills the planning job “would be responsible for leading strategy development, planning and execution, and also helping to transform the annuity business from a set of functional silos into a true P&L. An ideal candidate would have prior experience in a similar role in the annuity industry,” Grove wrote.
© 2012 RIJ Publishing LLC. All rights reserved.
Gender has little effect on IRA asset allocation: EBRI
Men and women differ in many ways, but they do not allocate the assets in their individual retirement accounts (IRA) very differently, according to a new report from the Employee Benefit Research Institute (EBRI).
While gender has little impact on IRA asset allocation, other factors do, the EBRI says. People of either sex who are relatively older, who have relatively higher account balances, or who own a rollover IRA had, on average, lower allocations to equities, according to the report.
Traditional IRAs that originated from rollovers had the lowest percentage of assets in equities (at 41.3%), the highest in money (12.8%) and the highest in bonds.
Roth IRA owners had the highest share of assets in equities (59.1%) and balanced funds (15.5%). They were also much more likely to have 90% or more of their account invested in equities than owners of the other IRA types. IRA owners who also were 35 to 44 years old or had balances under $10,000 were more likely to have more than 90% in equities.
As of year-end 2010, about 46% of all IRA assets were in equities, 20% in bonds, 11% in balanced funds, 9% in money, and 15% in “other” investments, EBRI said.
Generally, as account balances increased, the percentages of assets in a combination of equities (owned directly or through mutual funds) and balanced funds (including target-date funds) decreased, while the percentage in fixed income and “other” assets increased.
Equity allocations were highest for those ages 25 to 34 with the largest account balances and lowest for young IRA owners (under age 35) with account balances under $10,000.
“Those under age 45 were much more likely to use balanced funds than were older IRA owners, and those under age 35 with balances less than $25,000 had particularly higher allocations to balanced funds,” noted Craig Copeland, EBRI senior research associate and author of the report. “This shift follows the standard investing ‘rule of thumb’ that individuals should reduce their allocation to assets with high variability in returns (equities) as they age.”
© 2012 RIJ Publishing LLC. All rights reserved.
Economy grew faster but business investment fell in Q3 2012: Prudential
The latest economics assessment from Prudential global equity strategist John Praveen shows that:
Although the rate of GDP growth remains below trend, a recovery in consumer and government spending helped the U.S. economy improve in Q3 2012. U.S. GDP grew at an annualized rate of 2% in Q3 after growing at a rate of 1.3% in Q2 and 2% in Q1. GDP growth in Q3 was slightly better than market expectations of 1.8% growth. On an annual basis, GDP rose 2.3% YoY after 2.1% in Q2.
Consumer spending (1.4%), government spending (0.7%) and housing (0.3%) drove Q3 GDP growth. Government spending had declined in the previous eight quarters. Residential construction remained “solid.”
Inventories (-0.4%), trade (-0.2%) and business investment spending (-0.1%) all receded in Q3. A drought-related decline in farm inventories subtracted -0.4% from Q3 GDP.
Other details included:
- Consumer spending rose 2% QoQ annualized in Q3, improving from 1.5% in Q2, and added 1.4% to Q3 growth after a 1.1% contribution in Q2. There was a strong recovery in durable goods (8.5% after -0.2%) and non-durable goods (2.4% after 0.6%) spending. However, services spending, the largest component of consumer spending, growth slowed to 0.8% from 2.1%.
- Government spending reversed several quarters of declines, rising 3.7% in Q3 after -0.7% in Q2 and added 0.7% to Q3 growth. The reversal in government spending was primarily driven by an increase in federal national defense consumption spending which jumped 15.2% after falling -2.1% in Q2. While there was also a modest increase in non-defense spending, the increase in defense spending was the primary driver of the sharp increase in federal spending in Q3. By contrast, state and local spending edged down modestly.
- Housing added 0.3% to Q3 growth with residential investment surging 14.4% in Q3 after 8.4%, albeit from a low base. The strength in residential investment is consistent with the upward trend in housing starts in recent months.
- Business investment spending remained weak for the fourth consecutive quarter, suggesting that more businesses are putting projects on hold ahead of the fiscal cliff. Business investment spending declined -1.3% in Q3 after growing 3.6% in Q2 and 7.5% in Q1, and reduced -0.1% from Q3 GDP growth. Spending on equipment and software was flat, while investment in structures fell -4.4%.
- Trade was a drag on growth with net exports reducing -0.2% from Q3 GDP growth. Exports declined -1.6% after rising 5.2% in Q3, while imports edged down -0.2% after rising 2.8% in Q2.
Looking ahead, Praveen expected U.S. GDP growth to slow to around 1.8% in Q4.
On the plus side, “Consumption spending is likely to remain solid due to support from lower energy prices and the recent gains from equity markets,” the report said. “GDP growth is also likely to get a boost from a rebound in farm inventories which were on drag on Q2 and Q3 GDP. Housing is also likely to remain solid with interest rates lower and housing activity remaining solid.”
On the negative side, “business investment spending is likely to remain weak in Q4 despite healthy corporate cash levels due to concerns about the ‘fiscal cliff’ and how it will be resolved once the U.S. Presidential election is over. Trade is likely to remain a drag with slower global growth and Europe in recession.”
Financial Engines cites growth of its Income+ program
Income+, the decumulation strategy that Financial Engines offers to its managed account customers, now has more than 50 signed contracts representing $79 billion in assets from over 900,000 retirement plan participants, the company announced earlier this month. Of those numbers, $30 billion is already under management and 340,000 employees are already enrolled.
The San Francisco firm’s announcement coincided with the Third Annual Retirement Income Summit, held October 10 in New York and co-hosted by Financial Engines and the Pension Research Council of The Wharton School of the University of Pennsylvania.
Launched in January 2011, Income+ is described by Financial Engines “as the first retirement income solution designed specifically for 401(k) plans. Income+ helps protect participants from big losses before retirement and generates steady monthly payouts that can last for life.”
Participants who use the Financial Engines managed account program, Professional Management, which costs each participant up to 60 basis points a year depending on account size, do not need to pay extra to use Income+.
“Income+ …can create the kind of safe but flexible spending from their investment accounts that is needed in this new reality,” said Financial Engines president and CEO Jeff Maggioncalda in a statement.
Income+ does not involve the purchase of an annuity. According to Financial Engines’ website, retirees who want an income guarantee can purchase an annuity. Under Income+, employees maintain full control of their assets and the timing of their withdrawals, can cancel the program at any time, and can choose when to start or stop payouts.
The annual Retirement Income Summit offers a collaborative forum for academics, policy makers, and large employers to facilitate new programs that help retirees create income that can last for life.
Government, policy makers and key executives from nearly 30 large employers representing a cross-section of industries attended the invitation-only event. Of the sponsor participants, more than half were from Fortune 500 companies.
Speakers at the Summit included:
- Michael Davis, Deputy Assistant Secretary of the U.S. Department of Labor
- Mathew Greenwald, president and CEO, Mathew Greenwald and Associates
- J. Mark Iwry, Senior Advisor to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy
- Jason Scott, managing director, Financial Engines Retiree Research Center
- Richard Shea, partner, Covington & Burling and Pension Research Council advisory board member
- John Shoven, director, Stanford Institute for Economic Policy Research
- Panelists from Citigroup, The Home Depot and other large plan sponsors
Stock Split
The stock markets climbed all summer, and were nearing record highs before the Dow Jones Industrial Average fell 243.36 points [recently], down almost 4% from a five-year peak. Yet even before the drop, many investors didn’t trust the rally.
“This is the most disliked rally I can ever remember,” Charles Rotblut, vice president of the Chicago-based American Association of Individual Investors, said last week, referring to the recent stock run up, which ended abruptly after a string of dismal third quarter earnings reports.
Washington gridlock—including speculation about the upcoming Presidential election, stubborn unemployment and the stalemate in Europe—were making investors uncertain, Rotblut notes.
Weekly surveys of the sentiments of the Association’s 150,000 members (with the option to pick “bearish,” “bullish” or “neutral”) have revealed bullish outlooks to be below average for 28 of the past 29 weeks. Bond allocations among surveyed members have been above average for more than three years.
Many investors are frustrated with low yields, they don’t have confidence in the market and they are worried about “another shoe dropping,” Rotblut says. “And nobody counts how many people have just checked out of the market,” he adds. “They tend to just very quietly move away.”
Wharton professors disagree about which way stock markets are headed and whether investors should be in or out. Some have pulled their own investments out of equities and don’t plan to return. Others say bearish investors are hurting themselves by withdrawing at the worst possible time and missing out on the market’s upside.
Chris Goolgasian doesn’t need surveys to tell him how retail investors feel about the stock market these days. As head of the U.S. portfolio management and investment solutions group for Boston-based State Street Corp., he meets regularly with brokers and advisors who manage individual client portfolios. In as many as 80 meetings since April, they have all said the same thing: How do I get my clients out of cash and bonds? “This is repeated at every meeting,” Goolgasian notes. “These advisors are meeting clients who are extremely bearish.”
Investors have moved about $2 trillion into cash and fixed income since the financial crisis, Goolgasian says. And despite a number of indicators that suggest the market today is “a fairly low risk environment,” many retail investors “don’t want to hear it. Money flow weekly is still out of equity funds and into bonds and cash.”
Investors who have swapped equities for bonds have “exchanged nominal safety for a real loss,” Goolgasian points out. “They are getting ‘safety’ in their accounts in that they are not seeing volatility…. But they are going to suffer real losses because the bonds and cash they bought are earning less than the inflation rate.”
Institutional investors are less likely to divest from equities, given spending goals that can’t be met with bonds earning 1.5%, Goolgasian notes. Individual investors, on the other hand, are suffering from a number of ‘isms’: “Pessimism about the job market, skepticism about the equity rally and cynicism about our political leaders and their ability to pull us out of this.”
Many investors pulled their money out of the market in 2008 and haven’t come back, scared of volatility and still reeling from the drama of the Flash Crash in 2010. That’s been a mistake, according to Wharton finance professor Jeremy Siegel. Even factoring in Tuesday’s drop, the market’s value has doubled since March 2009. Volatility has eased. For equity investors, Siegel sees sunny days ahead.
“The public unfortunately lags [behind] what’s going on in the market,” says Siegel, noting that rank-and-file investors tend to be bullish at the top of the market and bearish when the market is about to recover. “It is not unusual for the public to miss the first half to two-thirds of a bull market. Then they get in at the end, and they ride it down.”
To sophisticated market watchers, the fact that most retail investors are staying out of the market right now is actually a positive indicator, since history shows that public flows in and out of the market are usually badly timed, Siegel says. “I still think this bull market definitely has room to run,” he notes. “I can easily see stocks up another 20% to 30% from these levels in a year or two.”
Wharton finance professor Franklin Allen holds the opposite view—as well as opposite investments. “I don’t have much in the stock market at all anymore,” notes Allen, who describes himself as risk-averse. “It’s in Treasuries and real estate.”
Allen says he doesn’t know why the stock market is as high as it has been lately, and wonders if it’s a bubble. The recent rally may have more to do with quantitative easing by the Federal Reserve (QE3) than a positive economic outlook, he notes.
Despite low returns on bonds and Treasuries, Allen says he wouldn’t go back into the market unless equity prices dropped by about 30%. “If you think the market is going to drop, then zero [return] is better than minus-20,” Allen points out. “That’s the perspective that people who are pulling out are using.”
Wharton finance professor Richard J. Herring says the market outlook remains uncertain. “It is hard to imagine earnings continuing to grow since they are already at an historical high relative to GDP, and the economic outlook is tepid at best,” he notes. “Many experts believe this is a market pumped up by QE3 and little else.”
Market volatility over the past few years may be keeping investors away, Herring suggests. “Although we are now back to about where we were in 2006, it has been a horrifying ride, and some investors bailed out at precisely the wrong time because they were terrified it could go still lower.”
A crisis of confidence?
Confidence in the markets has been damaged in a variety of other ways, with a number of incidents causing individual investors to wonder how well they are being protected by institutions such as the Securities and Exchange Commission, Herring adds.
“The Madoff scandal, MF Global, the flash crash, the software error at Knight Capital, the NYSE settlement with the SEC over information sold preferentially to a program trader, the bizarre spectacle of the Facebook IPO and scandals at several major banks all have undermined the confidence of individual investors that they can be treated fairly,” he says. “It seems like a game rigged against [them].”
This is costly to society, because it means that less capital will be available for risk-taking and the liquidity of markets will diminish, Herring notes. “Although many overlook the point, we should realize that confidence in the markets is an enormously valuable public good. If investors trust that they will be treated fairly, they will be much more likely to place their savings in marketable instruments, and both the quality and quantity of capital formation will be improved.”
About 46% of American households held investments in stocks or stock funds at the end of 2011, down from 53% in 2001, according to the Investment Company Institute, a Washington, D.C.-based association of U.S. investment companies.
“We have seen outflows from domestic mutual funds since 2007,” says Investment Company Institute senior economist Shelly Antoniewicz. Yet she says it would be wrong to suggest that investors are simply running away from stocks. “We don’t think that investors are fleeing” domestic equity markets, she adds. “We think of it as diversification.”
For example, from the beginning of 2007 to August 2012, a total of $196 billion flowed out of domestic mutual funds and exchange traded funds. During that same period, $361 billion went into international equity mutual funds and ETFs, which “more than offsets all the flows out of domestic equity,” Antoniewicz says out.
Investors are also putting more money into products such as target date funds and hybrid mutual funds, which contain a mix of equities and bonds, she adds. During the first nine months of 2012, for example, $45 billion flowed into hybrid mutual funds, up from $30.7 billion for the year 2011 and $23.7 billion in 2010.
With two bear markets in the past decade, the willingness to take risk has gone down across all age groups, Antoniewicz notes. “Even within age groups, people are a little more risk averse. They are more conscious about diversifying.”
A general malaise
Reticence to invest in stocks may also reflect “just a general malaise and a growing distrust for essentially all of our institutions,” says Olivia S. Mitchell, a Wharton professor of business economics and public policy and executive director of Wharton’s Pension Research Council. A Gallup poll in June, for example, found that only 21% of Americans have confidence in banks, down from 60% in 1980.
“The other thing you see over and over again is that people today are extremely pessimistic,” Mitchell adds. Worries include the U.S. economy, the looming fiscal cliff, continuing turmoil in Europe and a slowing economy in China. “If China’s growth is tapering off, what does it mean for the rest of the world? People are skeptical,” she notes.
Mitchell cites the latest Chicago Booth/Kellogg School Financial Trust Index, a quarterly survey of public attitudes toward financial institutions, which found that only 15% of those surveyed said they trusted the stock market, and 47% said it was likely to drop 30% or more in the next 12 months.
Her daughters, both in their 20s, echo public sentiment, Mitchell says. They argue that there’s no point in putting money in their 401ks because they could lose it, and if they put it in the bank, they won’t earn enough to beat inflation, “so they might as well spend it.” It’s not exactly what Mitchell wants to hear: Long term, that approach translates into having to save more, consume less and most likely delay retirement.
Mitchell herself pulled out of the stock market entirely in 1999, investing her pension in Treasury Inflation-Protected Securities (TIPS) instead. “And I’ve made more money investing in TIPS between 1999 and today than if I had invested in the stock market,” she says. “Since the year 2000, the market hasn’t performed very well.”
The problem now is that TIPS are paying negative returns, and she is reluctant to put all of her money in real estate. “I don’t think there is any easy answer except work longer, save more and spend less,” Mitchell suggests.
Most middle class households probably held too much of their investments in stock anyway, notes Wharton business economics and public policy professor Kent Smetters, which is why he is “not too upset” with the apparent trend away from equities. “Stocks should not be the main workhorse vehicle for basic retirement needs,” Smetters says. “Bonds should be used for basic retirement and stock for goals where falling short is more acceptable to the household.”
Smetters recommends that portfolios include bonds, TIPS and some stocks, but adds a caveat: “People should not use the expected return on stocks when estimating how much saving they need,” he says. “They should use a bond yield to adjust for risk. That forces them to save but also better manages risk.”
© 2012 RIJ Publishing LLC. All rights reserved.
The Fed’s Exit Strategy
Exit from this regime [quantitative easing] could prove difficult. In particular, some observers worry that the expansion of the Federal Reserve’s balance sheet could ultimately prove inflationary. If that were the case, then I would regard the costs as exceptionally high.
Fortunately, I am confident that such fears are misplaced. That is because we now have the ability to pay interest on excess reserves (IOER). This means we can keep inflation in check regardless the size of our balance sheet. If the recovery got underway in earnest and credit demand surged, we could slow down the rate of credit creation by raising the interest rate we pay on excess reserves.
Banks wouldn’t lend out funds at lower rates than what they can earn from holding reserves with us. As a result, a hike in the IOER would raise the level of interest rates throughout the economy and this would dampen any expansion of credit. Our ability to pay interest on excess reserves is an essential tool that we can use to avoid future inflation problems.4
We are mindful of the fact that there could still be confusion about how exit will take place. This could increase financial market volatility. To reduce this risk, the FOMC has published a set of exit principles. These principles lay out a roadmap about how exit is likely to occur:
- First, the end of reinvestment of maturing securities;
- Second, an increase in short-term interest rates, and,
- Third, the gradual sale of mortgage backed securities to shrink the magnitude of excess reserves in the system and ultimately to restore the Fed’s balance sheet to a predominately all-Treasury portfolio.
A degree of humility is appropriate given the lack of experience as to how markets will respond when economic conditions eventually cause investors to anticipate exit. When asset purchases are anticipated to end or when asset sales begin to be anticipated, this will affect term premia in ways that cannot be precisely predicted in advance. That said, I do expect the repricing will prove manageable. We will seek to communicate so as to avoid generating sharp shifts in term premia and in long-term interest rates. Also, we will play close attention to ensure that financial institutions are managing their interest rate risks appropriately.
The third set of costs is the impact of higher short-term rates on the Federal Reserve’s earnings and balance sheet when exit occurs. When we ultimately raise short-term interest rates, this will squeeze the Fed’s net interest margin. Also, when the Fed sells long-term assets, there is some prospect for losses on these sales depending on the level of long-term interest rates at the time when such sales occur. This means that the Fed’s earning could fall sharply or even turn negative in a given year. We look at this issue very closely to understand the risks here.
The good news is that a very large proportion of our liabilities—those associated with currency outstanding—has no interest cost. This mitigates the risk of a sharp net interest margin squeeze. Moreover, our analysis shows that the cumulative income generated over the period in which the balance sheet has been unusually large is likely to exceed normal levels under a wide range of scenarios.
In my view, while the costs are real and need to be carefully evaluated, they pale relative to the costs of not achieving a sustainable economic recovery. A failure in that regard would lead to widespread chronic unemployment. Not only would that be tragic for millions of people, but it also would generate chronic shortfalls in the nation’s potential output and fiscal capacity. Relative to the costs outlined above, the benefits from avoiding such an outcome seem overwhelming.
The SmartNest Back-Story
Last March, David H. Deming, a convivial former JPMorgan managing director, gave a slide presentation about Managed DC, Dimensional Fund Advisor’s new managed account program for defined contribution plans, during the Retirement Income Industry Association’s spring meeting at Morningstar headquarters in Chicago.
Managed DC appeared ready-to-launch. Deming, then the CEO of Dimensional Retirement, passed out business cards and invited a journalist to call him for a detailed interview about the program, which is based on software called SmartNest that was developed about six years ago by Nobel Prize-winning economist Robert C. Merton. (See today’s RIJ cover story.)
But subsequent phone calls and e-mails to Deming later that spring went unreturned, and by September it emerged that Deming had been ousted from DFA, for unknown reasons. He had left Austin, Texas, where DFA is based, and moved to Oyster Bay, New York, where according to the networking website LinkedIn, he now has a financial advisory firm, D. H. Deming & Co.
Over the summer, DFA chairman David Booth had replaced Deming with Michael Lane, 45, a DFA vice-president. Unlike Deming, who arrived at DFA in 2009 when it bought the patented SmartNest software, Lane has long had a close working relationship with Booth.
Lane’s most recent title, according to LinkedIn, was “vice president, Office of the Chairman,” where his job description was “work[ing] with the chairman on strategic global initiatives.”
“I’ve been around DFA for 18 years, and I’ve been an employee for eight years,” Lane told RIJ a few weeks ago. “I’ve been working on long-term strategic initiatives, including how to provide a better, more integrated lifetime experience for plan participants. David Booth asked me two months ago if I would take over as head of Dimensional SmartNest, and take it from an interesting solution to getting it out into the market.”
A 1989 political science graduate of the State University of New York at Binghamton, Lane started in the financial services business as a registered rep at Equitable Life. He spent seven years at AEGON Financial, rising to president of Advisor Resources, then served as vice-president of advisor distribution at TIAA-CREF.
Asked if Deming’s non-homegrown status at DFA was linked to his sudden departure, Lane told RIJ: “I would couch it… I’ve been around the firm for a long time—almost 20 years. There is some value in knowing all the people in the firm, in having worked outside and inside the firm, and in knowing how to get things done here.”
The story of how DFA came to own SmartNest is an interesting one, though the details remain elusive.
SmartNest was originally the property of Integrated Financial Limited, a hedge fund firm that Merton—a co-founder of the Long-Term Capital Management hedge fund whose spectacular crash and bailout in 1998 was chronicled in Roger Lowenstein’s best-selling book, When Genius Failed—started in 2002 with a team from JPMorgan. The team included Deming, a former JPMorgan managing director, as well as Robert Mendoza, a former vice-chairman of JPMorgan, and Peter Hancock, a former CFO of JPMorgan. Merton himself had been a senior advisor to and managing director of JPMorgan Chase from 1999 to 2001, according to Reuters.
In January 2007, Integrated Financial merged with another financial advisory firm, Marakon Associates, which was co-founded in 1978 by Jim McTaggart, to form a new company called Trinsum Group. Merton became chief science officer and McTaggart became CEO. In a press release, Trinsum described itself as a firm that creates “breakthrough solutions by combining the science of finance, the discipline of management and the art of advice.” It boasted of offices in seven cities, from Singapore to New York to Zurich.
“Trinsum Group, will integrate advisory services previously accessible only through the use of multiple providers,” a company press release said. “By offering an integrated approach, Trinsum Group will fill the gap between management consulting and investment banking for objective, real-world advice steeped in financial science.”
The release continued, “The new company will serve top management of large corporations on issues relating to strategy, execution, organic growth, M&A, productivity and organization. The firm also plans to add a strategic risk management practice in early 2007. In addition, Trinsum Group will offer sophisticated investors a range of investment vehicles, and will continue to develop next-generation financial products such as SmartNest, a pension management solution that addresses deficiencies associated with traditional defined-benefit and defined-contribution plans.”
But, like a lot of other financial firms during the 2008-2009 period, Trinsum failed, or the Integrated Financial-Marakon merger failed, for reasons that aren’t immediately clear. According to Crain’s New York Business, Trinsum Group’s creditors filed for liquidation in July 2008, and Trinsum filed for Chapter 11 bankruptcy in 2009.
In its filing, Trinsum reported liabilities of $15.8 million and assets of $1.2 million—“$1.1 million of which is listed as the value of a patent for an investment management software program called SmartNest.”
So DFA appears to have plucked SmartNest from a burning ship; the collapse of Trinsum led to two years of lawsuits and appeals that appear to have been dismissed or denied. Deming accompanied SmartNest to DFA, stayed on as CEO of Dimensional Retirement/SmartNest for three years or so, and then left suddenly last summer. The ball is now in Lane’s hands.
© 2012 RIJ Publishing LLC. All rights reserved.
Quote of the Week
“HENRYs” control $8.3 trillion in savings: SBI
Financial services marketers are increasingly interested in a demographic that research firm Strategic Business Insights (SBI) calls HENRYs (High Earners Not Yet Rich), according to a recent report in SBI’s MacroMonitor newsletter.
“We define HENRYs as households with a primary head between the ages of 20 and 70 who is not retired and with total household income between $100,000 and $249,999. No one can predict with certainty which of these households will become rich. Marketers who hope to profit from the success of HENRYs who emerge at the top of the wealth-accumulation ladder should cast the net broadly,” according to MacroMonitor.
“HENRYs wield a disproportionate share of influence on the future of the US economy and the financial-services industry. The 21.5 million HENRY households constitute 22% of the not-yet-retired 20- to 70-year-old population and 17% of all households. Yet they control 61% of the financial assets in [that] group and 31% of total financial assets in the United States—$8.3 trillion—and have annual income totaling $3.1 trillion,” SBI said in a release.
The demographics of the HENRY households are:
- Average age, 47. Nearly half (46%) have a primary head of household between the ages of 45 and 59.
- Average annual income, $144,000. More than one in three (36%) have total annual household incomes greater than $150,000.
- More than twice as likely as non-HENRY households (63% to 26%) to hold at least a four-year college degree; 29% hold a master’s degree or higher. (Non-HENRY households are households with annual incomes below $100,000.)
- Fewer than half of HENRY households have dependent children; nearly one in three have children older than 18 years.
- Only 13% of HENRYs are single-headed households (never married, divorced, or separated).
- Roughly three-quarters of HENRY households hold a first mortgage. About one-half have a vehicle loan; 61% carry credit-card balances. The average HENRY household has more than $220,000 in total liabilities.
- Statistically, all HENRYs own insurance products. Specifically, 91% own vehicle insurance, 97% own homeowner’s or renter’s insurance, 95% own health insurance, and 50% own individual life insurance.
According to SBI, HENRY households are significantly more likely than non-HENRY households to own CDs, money market deposit accounts, mutual funds, stocks, bonds, or IRAs.
In particular, 14% of HENRYs have 529 education-savings accounts, 81% have a salary-reduction savings plan, and 90% own a home. They are slightly more likely than non-HENRYs to own a business (15% to 11%).
Although almost half (44%) of HENRYs place most of their savings and investment assets at banks, nearly one-third concentrate their money at a full-service brokerage, mutual fund company or financial-planning company. About one in eight (13%) have a defined benefit pension plan. Almost nine in 10 HENRY households report using online banking services, and 36% invest online.
- Over half of HENRY households name retirement as their most important saving and investing goal.
- Two in five HENRYs are not preparing for retirement.
- HENRYs’ top-four areas of retirement focus are to manage assets (33%), to live within a fixed income (32%), to handle health issues (14%), and to put affairs in order (11%).
- The majority of HENRY households have a financial strategy; 13% do not.
- HENRY households are very confident in their financial responsibilities—38% indicate that they are “extremely” or “very” confident.
- Only 15% of Henry households say they have a written financial plan based on professional advice.
HENRYs are much more likely than non-HENRYs to:
- Favor technology, embrace investment risk, value and trust advisors.
- Consider themselves sophisticated and informed and express financial attitudes suggesting that they are satisfied and confident.
- Express a desire to consolidate and simplify their finances.
© 2012 Strategic Business Insights, LLC.
Investors shun full-service firms: Hearts & Wallets
The shift toward “do-it-yourself” investing is gaining momentum at the expense of full-service advisor platforms, according to research firm Hearts & Wallets. Only Vanguard and T. Rowe Price, as well as banks, made sizeable gains from 2011 to 2012.
“Ordinary Americans are frustrated with brokers, financial planners and other advisors because their value proposition is unclear, pricing is opaque, and there is no way to evaluate providers except to measure absolute return,” said Laura Varas, Hearts & Wallets principal.
“Even self-directed firms like USAA, which have previously had consistently high scores, saw a drop in their Hearts & Wallets Score,” Chris Brown, Hearts & Wallets partner, said. “Some full-service firms had very low scores. Investors just aren’t sensing enough value for their dollar.”
Banks attract the under-$100,000 crowd
Banks upped their overall share of primary relationships from 43% to 47% in one year. Banks lead in primary relationships among households with under $100,000 in assets, with a 58% share. “Part of this is due to flight to security out of fear of losing principal,” said Varas in a release, “But the low interest rates on insured bank products are a serious concern.”
Self-service brokerages lead in share across other wealth segments. Full-service brokerages’ share of households with $1 million or more fell to 32% in 2012 from 36% in 2011. Banks’ share rose to 17% in 2012 from 13% in 2011 for this wealth segment, according to Insight Module “Focus on Advice: Preferences, Sources and Use of Technology,” the latest report from Hearts & Wallets’ 2012 Investor Quantitative Panel.
This annual survey of more than 5,400 U.S. households tracks specific segments and product trends and is both a proprietary database and series of syndicated reports.
Less than two-thirds of investors now use a financial services professional. The percent of investors who cite a financial professional as their primary provider of investment advice fell to 21% in 2012 from 25% in 2011. Usage dropped sharply among households with $100,000 to $500,000 and $2 million plus in investable assets.
Investors trust those close to them, with 57% relying on family and 47% on friends in 2011. Emerging investors put the most trust in friends (64%) and family (82%).
Investors’ stated process preference and the type of firm they actually select as their primary provider often don’t match. Only 37% of self-described “delegators,” for instance, use a full-service brokerage as the primary provider. “This misalignment demonstrates investor confusion about provider services,” Varas said.
Technology usage for investment information held steady in 2011, conserving 2010’s big gains. Investors across the board use technology. One third of investors use technology to check accounts. One quarter use planning tools or calculators, and 12% use technology to trade securities. Pre-retirees use technology for getting quotes, screening funds and trading securities. Investors ages 43 and under use technology the most.
© 2012 RIJ Publishing LLC. All rights reserved.
Bank holding companies earn $1.58bn from annuities in first half of 2012
Bank holding companies earned $1.58 billion from the sale of annuities in the first half of 2012, up 3.4% over the $1.53 billion earned in the first half of 2011, according to the just-released Michael White-ABIA Bank Annuity Fee Income Report.
But annuity income would have fallen if not for earnings reported by thrift holding companies (THCs) and by new bank holding company Raymond James Financial, Inc.
Thrifts and savings and loan holding companies began reporting insurance fee income for the first time in first quarter 2012. Several bank holding companies that are historically and traditionally insurance companies have been excluded from the report.
Second-quarter 2012 annuity commissions rose 2.4%, to $799.9 million, from $781.4 million earned in second quarter 2011 and rose 2.3% from $781.7 million in first quarter 2012.
Compiled by Michael White Associates (MWA) and sponsored by the American Bankers Insurance Association (ABIA), the report measures and benchmarks the banking industry’s annuity fee income. It is based on data from all 7,246 commercial banks, savings banks and savings associations (thrifts), and 1,070 large top-tier bank and savings and loan holding companies (collectively, BHCs) operating on June 30, 2012.
Of the 1,070 BHCs, 426 or 39.8% participated in annuity sales activities during first half 2012. Their $1.58 billion in annuity commissions and fees constituted 14% of their total mutual fund and annuity income of $11.33 billion and 28.9% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $5.47 billion. Of the 7,246 banks, 942 or 13% participated in first-half annuity sales activities. Those participating banks earned $367.4 million in annuity commissions or 23.2% of the banking industry’s total annuity fee income; their annuity income production was down 8.4% from $401.1 million in first half 2011.
Kevin McKechnie, executive director of the ABIA, said, “Of 426 large top-tier BHCs reporting annuity fee income in first half 2012, 185 or 43.4% were on track to earn at least $250,000 this year. Of those 185, 65 BHCs (35.1%) achieved double-digit growth in annuity fee income for the quarter. That’s more than a 30-point decline from first half 2011, when 121 institutions or 65.4% of 185 BHCs that were on track to earn at least $250,000 in annuity fee income achieved double-digit growth. Along with a doubling of BHCs that experienced decreases in annuity commissions and fees, these findings of less growth and more declines are troublesome, despite the overall increase in the banking industry’s annuity revenues year-to-date.”
Two-thirds (67.1%) of BHCs with over $10 billion in assets earned first-half annuity commissions of $1.49 billion, constituting 94.1% of total annuity commissions reported by the banking industry. This revenue represented an increase of 2.3% from $1.46 billion in annuity fee income in first half 2011. Among this asset class of largest BHCs in the first half, annuity commissions made up 14.9% of their total mutual fund and annuity income of $9.99 billion and 30.3% of their total insurance sales volume of $4.92 billion.
BHCs with assets between $1 billion and $10 billion recorded an increase of 24.3% in annuity fee income, rising from $61.8 million in first half 2011 to $76.8 million in first half 2012 and accounting for 18.3% of their total insurance sales income of $418.9 million. BHCs with $500 million to $1 billion in assets generated $16.2 million in annuity commissions in first half 2012, up 31.7% from $12.3 million in first half 2011. Only 29.9% of BHCs this size engaged in annuity sales activities, which was the lowest participation rate among all BHC asset classes. Among these BHCs, annuity commissions constituted the smallest proportion (12.1%) of total insurance sales volume of $134.0 million.
Wells Fargo & Company (CA), Morgan Stanley (NY), and Raymond James Financial, Inc. (FL), a new addition to BHC ranks in 2012, led all bank holding companies in annuity commission income in first half 2012. Among BHCs with assets between $1 billion and $10 billion, leaders included Stifel Financial Corp. (MO), National Penn Bancshares, Inc. (PA), and Old National Bancorp (IN). Among
Among BHCs with assets between $500 million and $1 billion, leaders were First Command Financial Services, Inc. (TX), Liberty Shares, Inc. (GA), and Nutmeg Financial MHC (CT). The smallest community banks, those with assets less than $500 million, were used as “proxies” for the smallest BHCs, which are not required to report annuity fee income. Leaders among bank proxies for small BHCs were Essex Savings Bank (NJ), The First National Bank of Elk River (MN), and Sturgis Bank & Trust Company (MI).
Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the median Annuity Concentration Ratio was 4.7% in first half 2012. Among the top 50 small banks in annuity concentration that are serving as proxies for small BHCs, the median Annuity Concentration Ratio was 15.1% of noninterest income.
© 2012 Michael White and the American Bankers Insurance Association.
DFA Gives Managed Accounts a New Dimension
It seems de rigueur to have a Nobel laureate’s name tied to your brand if you’re marketing a newfangled managed account program to defined contribution plan sponsors. Financial Engines has William Sharpe, for instance. Guided Choice has Harry Markowitz.
And now comes Managed DC, the managed account program from Dimensional Fund Advisors, whose secret sauce is an algorithm created by economist Robert C. Merton, who shared the Nobel Prize in 1997 for his work on the Black-Scholes-Merton options pricing model.
Designed to be the only investment vehicle that a 401(k) plan participant would ever need, Managed DC is built on a chassis of a DFA fund-of-funds consisting of equities and Treasury Inflation-Protected Securities, or TIPS.
Merton’s algorithm, embedded in software called SmartNest, is intended to ensure that the Managed DC investment vehicle lands safely at a participant’s chosen retirement date, with exactly enough assets on board to buy the participant an inflation-adjusted life annuity large enough to provide him or her with an adequate floor income in retirement.
This project appeared ready for prime time last spring, when Managed DC was the topic of a presentation at the Retirement Income Industry Association meeting in Chicago. Over the summer, however, there was a sudden top-level management shuffle at DFA. (See today’s feature, “The SmartNest Back-Story.”) Now Managed DC is rebooting under DFA vice-president Michael Lane.
Managed DC’s strength and weakness, by some accounts, may be the uncompromising nature of its approach. Unlike managed fund-of-funds that target a retirement date or, in some cases, a tolerance for risk, it targets a retirement amount. That puts a burden on participants to top up their accounts with extra cash when Mr. Market doesn’t deliver effortless gains.
But, according to people close to the situation, DFA co-founder David G. Booth, 65, isn’t in a mood to compromise about Managed DC. He’s thinking about his legacy, and wants to be remembered for more than just having funded the U. of Chicago’s eponymous Booth School of Business with a record-setting gift of $300 million in 2008.
“For as long as I’ve known him, David Booth has had a desire to find a way to improve retirement for everyone, not just people who have millions of dollars,” Lane, who is 45, told RIJ this week. “That’s his vision, and that’s the whole reason we acquired SmartNest in the first place.”
Guidance system
Managed DC is a qualified default investment alternative (QDIA) for defined contribution plans, which means that new participants in ERISA plans can be auto-enrolled into it. Its basic vehicle is a fund-of-funds consisting of a broad-based equity index fund, a short-term TIPS fund, and a long-term TIPS fund. Participants who use Managed DC must apply 100% of their plan contributions to the program. The DFA asset management fee is about 40 basis points a year and the Managed DC overlay will cost 30 basis points, according to an analysis of the program by Wade Pfau.
DFA’s stated intent is to manage the three-part fund-of-funds so that, by the time the participant retires, the balance can buy an inflation-adjusted single premium immediate annuity that pays enough so that, along with income from Social Security and any other available source, the participant has enough to live on.
In other words, each participant’s account will be managed like an individual pension fund, with lots of course corrections along the way, with lots of (hopefully accurate) input from the participant, and with periodic warnings (if necessary) that the fund is off-track.
The software that purportedly steers this vehicle from Point A to retirement is based on an algorithm that Merton (formerly of Harvard, now at MIT) and TIPS advocate Zvi Bodie (now of Boston University) created more than six years ago and called SmartNest.
A 2008 article in a Harvard Business School newsletter described SmartNest this way:
First off, employees are asked to input their desired annual income in retirement. If they are not sure, the recommended target to maintain one’s standard of living is around 70% of your annual income earned in the last few years of your work life. They are then asked to input the minimum amount they would feel comfortable living on. (‘It’s a device to calibrate your risk tolerance,’ Merton says.)
That information is then integrated with the employee’s additional sources of retirement income such as Social Security, a DB plan, or an IRA… to determine and implement a dynamically optimized portfolio strategy that maximizes the chance of achieving your desired retirement income goal. Over the years, that managed portfolio adjusts for factors such as increases or decreases in salary and takes into account explicitly the risks of changing life expectancy, inflation, and interest rates.
SmartNest got its first real-world application at Philips Electronics NV in the Netherlands and Germany, and is said to be still running there. It was a perfect fit there. European companies are looking for ways to transition their retirement plans smoothly from DB to DC. Their employees are used to having someone else manage their money, and they are required to convert their account assets to lifetime income at retirement.
DFA bought SmartNest for an undisclosed sum—the software was valued at $1.1 million when its former owner, Trinsum Group, filed for bankruptcy in early 2009 (see SmartNest feature in this issue of RIJ)—in late 2009, hoping to transplant SmartNest into a very different type of cultural and regulatory soil here in the U.S.
A smarter target date fund
Bodie, in an interview with RIJ, said, “Essentially, SmartNest used a form of asset liability matching. I like to describe it as a ‘target benefit plan,’ with a lot of adjustments along the way. The goal was to produce a target replacement rate of your final salary, and to be better than a DB plan. A traditional DB plan doesn’t offer a COLA adjustment after retirement, and that imposes a huge risk on the participant. [SmartNest was] a much smarter target date fund.”
Behind the gizmo, Managed DC espouses a philosophy that’s currently in vogue: Shift the participants’ focus from accumulation to income. “It’s one thing to say, ‘What’s your number?’ and another thing to manage to that liability,” Lane told RIJ. “If you just put people in funds, that’s managing toward a maximum rate of return.
“That’s different from saying there’s a future liability of X. I hear everyone talking about income right now, but nobody is managing money toward income. Nobody is doing close to what we’re doing. There are others with brilliant people, but nobody is close to what we’re doing.”
Another of Managed DC’s guiding principles: Don’t take more risk than necessary to achieve the desired outcome, and gamble only with your surplus. Although young participants may hold as much as 98% of their Managed DC balances in equities, the proportion devoted to TIPS rises as retirement approaches.
The algorithm uses the ever-changing present value of a future inflation-adjusted annuity as a signal for adjusting the asset allocation. The fund technicians manage each account’s downside risk with a form of Constant Proportion Portfolio Insurance: When equity prices fall, they shift assets into TIPS. That’s the same basic method that Prudential Annuities uses to protect the guarantee in its popular Highest Daily variable annuity living benefit.
Distribution questions
Before participants can start using Managed DC, plan sponsors have to adopt and embrace it. And before that happens, Managed DC has to be mounted on the recordkeeping platforms that plan sponsors use.
So far, according to Lane, Managed DC is integrated with ASPire, a 401(k) recordkeeper that already offers DFA mutual funds to numerous retirement plans. Managed DC will also be on the DST Systems (this was confirmed by DST) and SunGard platforms, which serve as so-called middleware between a wide range of recordkeepers, plan sponsors and investment companies.
Managed DC doesn’t require plan participants to buy an inflation-indexed SPIA with their account assets when they retire—no DC plan has such a requirement–but Lane says DFA is committed to providing them with the education and the projections they’ll need to choose between annuitization, partial-annuitization, and systematic withdrawals from their accounts.
Managed DC also intends to provide them with specific annuity options. Lane identified Principal Financial as the first confirmed provider of an inflation-adjusted SPIA to Managed DC account owners. (Principal Financial could not confirm that prior to deadline.) He said the company is in contact with another A+ rated insurer as a potential SPIA provider. Before DFA bought SmartNest, Lane said, DFA talked with The Phoenix Companies about partnering to offer an advanced life deferred income annuity, also known as longevity insurance. But Phoenix plays no role in Managed DC at present, Lane said. A Phoenix spokesperson said there is no ongoing relationship between Phoenix and DFA.
Income Solutions, the multi-option, no-commission, online immediate annuity purchase platform created by the Hueler Companies in Minneapolis, already provides an annuitization pathway for Vanguard plan participants, and could do the same for participants who use Managed DC. Kelli Hueler, CEO of Hueler Companies, said she’s talked with DFA but has no agreement with the firm.
Outside perspectives
By now, many people in the retirement industry have become familiar enough with the basic design of Managed DC to have formed opinions about it. In RIJ’s conversations with a few of them, they tended to express support for DFA’s mission, but wondered if it will lead to the envisioned outcomes—especially in a regulatory environment where annuitization is optional and where a lot can go wrong between the auto-enrollment date and the retirement date.
RIJ asked Wade Pfau, Ph.D., who has written about retirement income and will begin teaching next spring in a new doctoral program on financial planning at The American College, to describe the strengths and weaknesses of Managed DC.
“They’re trying to change the defined contribution pension back into a defined benefit pension, where they manage everything for you, But it’s still DC. It’s only a DB pension if you decided to annuitize. The weakness would be that it’s a sort of a black box. It’s complicated, and it’s hard to understand it or to explain to clients. For instance, I’m not sure if they report the asset allocation to [the participant], or if that is kept from you. It also could be expensive in terms of how much you have to save. For instance, if you’re falling behind on your savings, you’ll be put in all TIPS,” Pfau said.
“But it’s good for people who have no intention to manage their own investments. It can guide people to somewhere between their lifestyle spending goal and their minimum spending needs,” he continued. “They don’t need to worry about asset allocation or rebalancing, because the program will help them do the best they can with the amount they are able to save. It’s like an individually customized target date fund.”
An executive at one 401(k) recordkeeping technology firm told RIJ, “There’s no guarantee that when you get to retirement there will be an annuity for you to buy [that’s the same price as the amount you’ve saved]. From a recordkeeping standpoint, there are no big issues with it. It’s no different from anybody else’s managed account program. It just has a different set of inputs and rebalancing rules and different targets. But just because you get on a platform, it doesn’t necessarily mean that plan sponsors will choose it or that ‘money will come rolling in the door.’”
Similarly, an executive at a potential Managed DC competitor said he agrees with the philosophy behind Managed DC, but notes that the capabilities of the SmartNest software shouldn’t be overstated.
“It’s a bit of a placebo,” he told RIJ. “It creates the illusion of certainty rather than certainty. But placebos taste good, so they’re popular.” He compared it to Financial Engine’s “Income+ program.
Even a brilliant model is just a model, and not a duplication of the real world, he added. “They pretend that the participants will always be able to express all of the information they need to [make the model work] properly. Also, there are two sides to the household balance sheet, and the other side is debt. Most folks in this space, including DFA, don’t ask participants about debt. It’s hard to ask about.”
He warned against the trap of being dazzled by the wonders of technology.
“I think they have a great concept,” he said. “But there’s a tendency to over-engineer the mousetrap and think that it’s all about the genius of the mousetrap. [The retirement industry’s] goal is to get people to put their eye on the ball and realize that income is the ultimate outcome. You don’t need to focus on the accuracy of the income. It’s not about the model. It’s about the impact on individual behavior.” Under-saving and under-planning is the problem, he suggested. Solve that, and people will begin to save enough.
What’s next for Managed DC
For the moment, Lane has his hands full trying to get Managed DC on recordkeeping platforms. Then he has to make his pitch to plan sponsors. Many of them have qualms about mixing annuities and 401(k) plans. They may also wonder whether an all-in, 100%-contribution plan is right for their participants. The managed account space is also highly competitive; firms like Guided Choice and Financial Engines have more than a year’s head-start.
“We’ve spoken to the plan sponsors for feedback, but until we’re on the recordkeeping platforms, they can’t access the Managed DC product,” Lane said. “Right now, we’re focusing on recordkeeper integration, and talking to some plan sponsors, consultants—especially if they use ASPire as their record keeper.”
But, beyond merely selling a managed account program, Lane is responsible for realizing David Booth’s vision—something for which Lane may be inherently better suited than his predecessor, David Deming.
“I’ve known David Booth for almost 20 years,” Lane said, “and he has always wanted to provide a better retirement investment experience to the vast majority of people—people who are working hard and making a good living, but who will need to rely on Social Security, and for whom a 401(k) is their only savings.”
© 2012 RIJ Publishing LLC. All rights reserved.
Cold Turkey for Thanksgiving? No Thanks.
When politicians talk about the importance of balancing the budget, about preventing the U.S. from becoming another Greece and about weaning ourselves from Chinese lenders, I get a bit jumpy.
Statements like that suggest a lack of understanding about how a sovereign currency works, and it identifies those politicians as people who could lead us into a spiral of uncontrolled deflation.
Inflation is not my first preference. It sickens me that a ride on the New York subway, a U.S.-made Pendleton wool shirt, and a private college education all cost about 10 times what they did when I was 18 (to name a few homely examples). But I don’t necessarily want to see the value of my house or my investments drop in half next year.
Which is exactly what a sudden, bracing return to “sound money” and “balanced” federal budgets would mean. Anyone who tells you otherwise is either ignorant or trying to fool you.
Conventional wisdom says that the stock market would soar if people invested in corporate paper instead of government paper, and that less federal spending means more spending on Main Street. According to that line of thinking, the U.S. monetary system is a zero-sum game.
But, after three years of reading about our system, I no longer believe that it works that way. Let me channel, for a few paragraphs, the ideas of Warren Mosler, Stephanie Kelton and other proponents of Modern Monetary Theory—which is not a theory so much as a clearer understanding of the way our financial system actually functions.
As everyone knows, local banks create money out of thin air when they grant lines of credit. We seem to agree that that’s not a bad thing—as long as you don’t overdo it. As everyone may also know, the banks’ bank—the Fed—also creates money out of thin air. That’s not a bad thing either—as long as you don’t overdo it.
Sure, we’ve overdone it. For decades. But now is not the time for the Fed and the Treasury Department and the U.S. Congress to suddenly under-do it. Yes, we’re collectively sitting on a somewhat rotten limb. But we shouldn’t necessarily saw off that limb. And not on the basis of misconceptions.
One of the myths in our politics and our economy—a myth that both presidential candidates seem to honor, more or less—is that the private sector funds the government through taxes that are, as some people like to put it, “confiscatory.”
Not so. Under our financial system, the federal government funds the private sector by spending money into existence. Then it reverses the process and extinguishes part of the money by collecting federal taxes.
As the investor/writer Warren Mosler puts it, “The funds to pay taxes and buy government securities come from government spending.”
There’s a related myth that we’re in the hole to Chinese lenders. Not true. We aren’t running up a suicidal credit card balance with the Chinese. We pay dollars to the Chinese for inexpensive goods. With some of those dollars, the Chinese buy U.S. Treasuries. The Chinese, in effect, hand us the money with which we will repay them.
When I chat with my neighbors over the back fence, they often segue from complaining about federal taxes to complaining about local property taxes. They don’t see the fundamental difference between the two. Local taxes are the dues we pay to live in a community and use public services. Local governments don’t issue the currency that we use to pay them.
But our federal government, by definition and design, is different.
Financially, it operates counterclockwise to the local government and the private economy. As the chart from economist Stephanie Kelton on this page shows, when the federal government runs a deficit, the private sector experiences a surplus. And when the federal government runs a surplus (as it did at the end of the Clinton administration) a private sector deficit soon follows.
Many people will find it difficult to accept the notion that the run-up in asset prices over the past 30 years—all that “wealth creation” that Boomers plan to retire on—was largely financed by the enormous run-up in federal debt over the past 30 years.
Believe it. It can’t be otherwise. Every debt has a corresponding asset. And vice-versa. If we balance the budget and shrink the federal debt, we shrink everyone’s assets.
Don’t get me wrong: The current monetary situation isn’t healthy. We’re merely enjoying the false health of a well-supplied addict. But I, for one, would rather not eat cold turkey this Thanksgiving.
© 2012 RIJ Publishing LLC. All rights reserved.
Major U.S. firms seek to remove DB obligations: Reuters
Two giant telecom companies announced major defined benefit pension de-risking moves last week, Reuters reported. On October 19, AT&T announced that it would move a $9.5 billion stake in its wireless business into its underfunded pension plan.
Earlier last week, Verizon said it would sell $7.5 billion in pension obligations to Prudential Financial Inc., which bought part of General Motors’ pension obligations earlier this year.
In a survey released earlier this year by Aon Hewitt, 35% of about 500 large American employers said they expect to offer a lump sum payout to DB plan participants.
Companies are beginning to believe that interest rates will not rise in the near future, analysts told Reuters. Low interest rates mean lower returns on the investments companies use to pay their pension obligations.
Verizon hopes to remove a quarter of its pension burden with a single upfront payment to Prudential in a terminal funding deal. Verizon has said it would inject $2.5 billion into its pension plan prior to closing it.
Besides the two telecoms and General Motors, at least four other firms—Taco Bell, Yum Brands (owner of KFC), Kimberly-Clark Corp. and Sears—have taken similar steps. Kimberly-Clark recently told about 10,000 ex-employees not yet receiving retirement benefits that it would offer them a lump sum distribution. Sears Holdings Corp in September contributed $203 million to its pension plan to make it at least 80% funded.
Archer Daniels recently began telling vested former workers they are eligible for a payout. Depending on uptake, ADM estimates it could “reduce its global pension benefit obligation by approximately $140-$210 million and improve its pension underfunding by approximately $35-$55 million.”
Yum said in its filings that it is making a similar decision “in an effort to reduce our ongoing volatility and administration expense.” Funding would come from existing pension assets. It expects a pre-tax non-cash charge between $25 million and $75 million for that purpose in the fourth quarter of 2012.
Major U.S. firms seek to remove DB obligations: Reuters
Two giant telecom companies announced major defined benefit pension de-risking moves last week, Reuters reported. On October 19, AT&T announced that it would move a $9.5 billion stake in its wireless business into its underfunded pension plan.
Earlier last week, Verizon said it would sell $7.5 billion in pension obligations to Prudential Financial Inc., which bought part of General Motors’ pension obligations earlier this year.
In a survey released earlier this year by Aon Hewitt, 35% of about 500 large American employers said they expect to offer a lump sum payout to DB plan participants.
Companies are beginning to believe that interest rates will not rise in the near future, analysts told Reuters. Low interest rates mean lower returns on the investments companies use to pay their pension obligations.
Verizon hopes to remove a quarter of its pension burden with a single upfront payment to Prudential in a terminal funding deal. Verizon has said it would inject $2.5 billion into its pension plan prior to closing it.
Besides the two telecoms and General Motors, at least four other firms—Taco Bell, Yum Brands (owner of KFC), Kimberly-Clark Corp. and Sears—have taken similar steps. Kimberly-Clark recently told about 10,000 ex-employees not yet receiving retirement benefits that it would offer them a lump sum distribution. Sears Holdings Corp in September contributed $203 million to its pension plan to make it at least 80% funded.
Archer Daniels recently began telling vested former workers they are eligible for a payout. Depending on uptake, ADM estimates it could “reduce its global pension benefit obligation by approximately $140-$210 million and improve its pension underfunding by approximately $35-$55 million.”
Yum said in its filings that it is making a similar decision “in an effort to reduce our ongoing volatility and administration expense.” Funding would come from existing pension assets. It expects a pre-tax non-cash charge between $25 million and $75 million for that purpose in the fourth quarter of 2012.
Decumulation expert Wade Pfau to teach at The American College
The American College of Financial Services has hired Wade Pfau, Ph.D., the award-winning Princeton-educated author of several recent academic and popular articles on decumulation, to teach in its new 12-course doctoral program for financial professionals, which is funded by a new $5 million grant from New York Life.
Pfau, 35, is currently an associate professor and director of the Macroeconomic Policy Program at the National Graduate Institute for Policy Studies in Tokyo, where he has taught since 2003. He holds the Chartered Financial Analyst (CFA) designation.
He received three bachelor degrees (in history, economics and political science) from the University of Iowa in 1999 and received his M.A. and Ph.D. from Princeton in 2003. His dissertation topic was Social Security reform and his thesis advisor was Alan Blinder, former vice chairman of the Federal Reserve.
Pfau’s work on retirement income and decumulation has become familiar recently to readers of his Retirement Researcher blog, wpfau.blogspot.com, and of his articles in the Advisor Perspectives e-newsletter.
Pfau said he will continue until March 2013 in the voluntary position of interim curriculum director for the Retirement Management Analyst (RMA) designation, which is offered by the Boston-based Retirement Income Industry Association, founded by Francois Gadenne.
The American College, located in Bryn Mawr, Pa., is also the home of The New York Life Center for Retirement Income, which sponsors the Retirement Income Certified Professional (RICP) designation—which is aimed at the same audience of financial advisors as the RMA.
“I’ll probably be involved in the New York Life Center,” Pfau told RIJ in an interview last night from his office in Japan. “I did a video for them on safe withdrawal rates last summer.”
Pfau recently received three awards that suddenly lifted his visibility in the retirement income community. At the RIIA annual meeting in early October, Pfau was co-winner of the organization’s Academic Thought Leadership Award for 2012, in recognition for two articles, “Choosing a Retirement Income Strategy: A New Evaluation Framework,” and “Choosing a Retirement Income Strategy: Outcome Measures and Best Practices.”
He received the Journal of Financial Planning’s inaugural Montgomery-Warschauer Award for 2011, chosen by the editors to “honor the paper that provided the most outstanding contribution for the betterment of the Journal’s readership.” The award is for the paper, “Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle.” He was also one of six winners of Financial Planning magazine’s 2012 Influencer Award.
Pfau told RIJ that his early goal was to be a U.S. government economist. But after receiving his Ph.D. he took a teaching job in Japan, where he became interested in the evolution of public pension plans in emerging market countries such as Thailand and Vietnam from defined benefit to defined contribution structures.
His first paper for the Journal of Financial Planning, “An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?” was published in December 2010.
When he relocates from Tokyo to the Philadelphia area, Pfau will find many like-minded academics and professionals nearby, at The Vanguard Group in Malvern, Pa., at ING’s offices in West Chester, Pa., at Lincoln Financial Group, at the Pension Research Council of The Wharton School of the University of Pennsylvania, and at the Retirement Management Executive Forum, hosted by Diversifed Services Group, Inc.
© 2012 RIJ Publishing LLC. All rights reserved.
Boomers Aren’t The Only Fish in the Sea
Affluent, high-net wealth younger investors, or “Accumulators,” are higher-value targets for the sales efforts of financial services firms and advisors than are traditional bread-and-butter “Pre-Retirees,” according to the Boston-area research firm Hearts & Wallets.
As defined by Hearts & Wallets, Accumulators are mid- and late-career investors, ages 28 to 64, who do not yet consider themselves pre-retirees. They control about half of all U.S. household investable assets.
By contrast, Pre-Retirees are those of any age who consider themselves within five years of retirement. Only 4.8 million households, controlling $3.1 trillion in investable assets, are Pre-Retirees, and only 55% of true Pre-Retirees are 55 to 64 years of age. The rest are younger or older.
“This study reaffirms the importance of including Accumulators in any client acquisition plan,” said Laura Varas, principal of Hearts & Wallets. “For too long the industry has focused on pre- retirees as the golden goose.
“Neglecting Accumulators by leaving them unsatisfied in financial advice will result in this segment creating relationships with other options, perhaps even category newcomers or technology solutions, to the long-term detriment of industry stalwarts,” Varas added.
Accumulators have needs too
Accumulators face even bigger financial advice gaps than older people, according to Insight Module “Trended Engagement Model: Reasons for Seeking Help and Taking Action,” the latest release from Hearts & Wallets’ 2012 Investor Quantitative Panel. It is based on a survey of more than 5,400 U.S. households.
Four in 10 Accumulators find retirement planning difficult but aren’t getting help. A similar proportion hasn’t yet sought help in getting started saving and investing. The biggest advice gaps for all lifestages are “knowing how to find the right resources” and “handling market volatility emotionally.”
Only 23% of Affluent/HNW Accumulators sought help for choosing appropriate investments in 2012 versus 30% in 2010. The most common action taken after seeking advice was to increase savings.
“The trend to not seek help with financial tasks continues downward in 2012. This reflects investors’ decreased engagement, which is related to the low trust Americans have in financial services providers,” said Chris Brown, a Hearts & Wallets principal. “Only one in five Americans places full trust in their primary and secondary providers, down from one in four in 2011. Accumulators are looking for sound financial advice but they are held back from seeking help with financial tasks because they are unsure of whom they can trust.”
Three ‘screaming needs’
“Our focus groups continue to suggest that until investors’ three screaming unmet needs are satisfied, [investors’ levels of] trust and engagement will remain low,” Brown added. Hearts & Wallets has identified those three unmet needs as questions that service providers aren’t adequately answering: 1) What do you do? (2) How are you paid? and (3) How can I evaluate you?
Accumulators are also at the center of the account consolidation trend. More than four in 10, or 42%, of Affluent/High-Net Worth Accumulators have either consolidated accounts with fewer products or plan to. Accumulator money movement is driven more by what Hearts & Wallets calls the “advice-pricing value propositions” than by pre-retirement simplification.
Overall, investors found financial tasks less difficult in 2012 than in 2011, Hearts & Wallets found. Retirement planning continues to lead as the most difficult task. Getting started saving and investing ranks second.
Though wealthier investors tend to have an easier time with financial activities than their less affluent counterparts, one-third of Affluent/HNW Accumulators said choosing appropriate investments, retirement planning and knowing how to find the right resources are “very difficult.” As with the general population, fewer Affluent/HNW Accumulators sought help with financial tasks in 2012 than in 2011 or 2010.
© 2012 RIJ Publishing LLC. All rights reserved.
Paint It Black
The first speaker at this year’s Big Picture Conference in New York on October 10 was Neil Barofsky, author of Bailout: An Inside Account of How Washington Abandoned Main Street while Bailing Out Wall Street. A special inspector general on TARP along with Elizabeth Warren, Barofsky shared some details from his book of what he considers a failed project.
Rather than pursue its bi-partisan mandate to break up banks and preserve home ownership, he said, TARP rewarded the biggest banks and made them 20% to 25% larger. Very little of the money set aside to help people stay in their homes and pay their mortgages actually went for that purpose. Far from lending or renegotiating the terms of troubled loans, banks actually took more money from consumers in higher fees.
Barofsky (left), who now teaches at New York University, said that Treasury Secretary Tim Geithner and the other Goldman Sachs alumni who ran TARP treated him and Ms. Warren as though they were “stupid” because they didn’t have financial institution experience. The bankers also tried to turn Barofsky and Warren against each other, he said.
As for TARP’s mandate to be transparent, Barofsky said the program was anything but. “TARP wasn’t just anti-transparent, it was hostile to transparency,” he said. Geithner et al were more interested in protecting the banks than the people.
Barofsky still believes the government should break up the largest banks—either through a modified form of the Glass-Steagall Act or by raising banks’ reserve requirements. “An incredible opportunity was lost,” he said. In the end, “Dodd Frank was an illusion of effective regulation.”
Hyperinflation?
The next gloom-purveyor was Dylan Grice, the author of Popular Delusions and a global strategist at Societe Generale, who warned that the Fed’s “quantitative easing” policy may bring hyperinflation. In his view, it debases the currency, destroys trust between debtor and creditor, frays the social dimension of money, erodes the basis of capitalism and invites social unrest. When you print money instead of raising taxes, he added on a populist note, you benefit the rich at the expense of everyone else.
Grice (right) quoted Keynes on inflation: “By continuing a process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”
“We need a recession to help stabilize the future,” he said, in a pitch for the cleansing power of deflation. Otherwise we risk “great disorder” of the kind already manifest in the activities of the Tea Party and Occupy Wall Street movements. Europe has coped with its credit crunch by taking money from pension funds, he said; Japan has been printing money and lagging economically for 20 years.
Call him ‘Lucky Jim’
It was not all fire and brimstone. Jim O’Shaughnessy (below left), chairman and CEO of O’Shaughnessy Asset Management, introduced a positive note by arguing that it’s now a great time to buy stocks because the stock market makes its greatest leaps when the country is emerging from recession.
“I still believe we’re living in a Great Recession and this is the time to make sure you’re fully diversified,” he said.
O’Shaughnessy’s three-part formula calls for investing on the basis of Quality (Companies with strong financials), Value (Underpriced companies); and Yield (Companies that pay a reliable dividend). Most investors, he noted, do the opposite. Even during the stock market’s worst 20-year period, from 1929-1949, stocks generated an average annual total return of 6%, he said.
He holds 50% stocks, 19% REITs and 16% high-yield bonds. Echoing Grice’s comments, O’Shaughnessy said inflation is a subtle and pernicious tax; but he believes that even during periods of high inflation stocks, convertible bonds, and high-yield bonds will do well.
David Rosenberg, the chief economist and strategist at Gluskin Sheff & Associates, a Canadian asset management firm, addressed the New Normal, i.e., the current subpar recovery in which headwinds like the depressed net worth of U.S. households and an unacknowledged jobless rate of 15% continue to buffet the markets—despite government fiscal and monetary responses.
The economy should be growing at a rate of 8%, not 1.8%, he said. Since the ill effects of a credit collapse typically last five to seven years, he added: “I like to think we’re halfway through the credit curve.” But “the world is awash in debt,” he mourned, pointing to Europe’s recession and slower growth in China and Korea.
Time to “short Starbucks”?
Perennial Big Picture guest speaker James Bianco of Bianco Research, an affiliate of Arbor Research & Trading, suggested that the economy should be growing at a rate of 2.5%; instead of hovering close to zero. Year-over-year corporate earnings are in the same ballpark, Bianco (below right) said.
“Earnings suck,” he said. “We’re not increasing wealth, we’re just reducing loss.” There hasn’t been any real deleveraging, he believes, and compares QE 1, 2, and 3 to “trying to drink yourself sober.”
Indeed, the recession may not actually be over, opined Michael Belkin, a financial market strategist and author of the Belkin Report. Despite the healthy-looking stock market, he believes we’re slipping back into a recession. He advises investors to short the broad market, get out of technology and industrial materials, short Starbucks, and load up on consumer staples, health care, utilities and financials—in that order.
As at last year’s Big Picture Conference, speakers warned about high frequency trading, or HFT. Sal Arnuk, co-founder and co-head of Themis Trading and Josh Brown, a reporter for the Wall Street Journal, described the disturbing rise of HFT, which may now account for 70% or more of market turnover.
“HFTs don’t have any of the responsibilities of the exchanges but they’re collecting riskless profits from them—a process that certainly seems rigged,” Brown said. Using specialized order types, they get direct feeds of spreads ahead of the consolidated tape and calculate the best bid and offer before the rest of the nation knows about it.
It’s all in your mind
Barry Ritholtz, who created the conference, is CEO and director of equity research at Fusion IQ. Focusing on behavioral finance, he described the typical bull market investor’s sad journey from initial optimism and excitement through anxiety, denial and, finally, despondency. Investors tend to remember the pleasant and forget the unpleasant, he said.
The more self-confident an investor is, the worse his track record, Rithotlz told his audience of Wall Street veterans. We all have a tendency to seek out facts that confirm our biases. We focus on recent data points and fail to see long-term trends. If a bull market is announced on a magazine cover, Ritholtz reminded anyone who needed reminding, you can be sure that it’s over. “Optimistic people, he said, “are unable to evaluate their own ability and it’s devastating to their investments.”
© 2012 RIJ Publishing LLC. All rights reserved.
Bond funds on track to receive net $300 billion for 2012
Mutual fund investors, already adding more than $1 trillion to their bond fund holdings since the 2008 crisis, continued to search for income and safety in bond funds during September, according to Strategic Insight.
“Insatiable demand for income and a lingering, semi-permanent state of investment anxiety continue to drive the choices for most mutual fund investors,” said Avi Nachmany, Strategic Insight’s Director of Research.
Bond funds gained another $32 billion in September, and are projected to amass over $300 billion in net inflows for the full year, exceeding 2010 and 2011 pace, according to the research firm’s latest report. (Flow data includes open-end mutual funds, excluding ETFs and funds underlying variable annuities.)
Investors in stock funds remained cautious, though, despite stock markets double-digit returns so far in 2012. Equity fund shareholders are taking some of their recent profits “off the table,” as stock fund redemptions during September were at the highest monthly level this year, climbing to $17 billion.
(In contrast, ETFs investing in stocks attracted $33 billion during September, their highest monthly take in four years. More ETF observations are discussed below.)
“We anticipate recent investors’ preference to persist in the coming months, but that a slow rotation towards stock funds may emerge in 2013,” added Mr. Nachmany.
Asset allocation funds attracted nearly $1 billion in net flows during September, bringing quarterly net intake to $3.8 billion. “As advisors and investors observe continued economic uncertainty, they increasingly trust the portfolio solutions offered by investment managers,” added Bridget Bearden, head of Strategic Insight’s Defined Contribution and Target Date funds practice.
Money-market funds moved into net redemptions during the month of $5.5 billion, bringing redemptions in such funds to nearly $150 billion so far in 2012.
Exchange-traded products benefited from $36 billion of September net intake, bringing total ETF net inflows (including ETNotes) to nearly $130 billion for the first nine months of 2012, already exceeding the full-year gain in each of the past three years. U.S. Large and Small Cap, Emerging Markets, Gold and Real Estate, and High Yield Corporate bonds were among the many categories gaining inflows, while a number of high-quality bond categories experienced modest redemptions.
About 60% of ETF assets and flows are now sourced from individual investors while 40% are held by institutional investors, according to Strategic Insight research.
