Archives: Articles

IssueM Articles

Quote of the Week

Posted on October 24, 2012 by Editor Test -

“HENRYs” control $8.3 trillion in savings: SBI

Posted on October 24, 2012 by Editor Test -

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.

Investors shun full-service firms: Hearts & Wallets

Posted on October 24, 2012 by Editor Test -

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.

Bank holding companies earn $1.58bn from annuities in first half of 2012

Posted on October 24, 2012 by Editor Test -

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.

DFA Gives Managed Accounts a New Dimension

Posted on October 24, 2012 by Kerry Pechter -

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.”

Cold Turkey for Thanksgiving? No Thanks.

Posted on October 24, 2012 by Editor Test -

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.

Major U.S. firms seek to remove DB obligations: Reuters

Posted on October 22, 2012 by Editor Test -

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

Posted on October 22, 2012 by Editor Test -

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.

Decumulation expert Wade Pfau to teach at The American College

Posted on October 22, 2012 by Editor Test -

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.

Boomers Aren’t The Only Fish in the Sea

Posted on October 22, 2012 by Editor Test -

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.

Paint It Black

Posted on October 21, 2012 by Editor Test -

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.”

Bond funds on track to receive net $300 billion for 2012

Posted on October 21, 2012 by Editor Test -

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.

Hedge fund assets down 28.7% from 2008 peak

Posted on October 21, 2012 by Editor Test -

The hedge fund industry took in $5.1 billion (0.3% of assets) in August, reversing a $9.2 billion outflow (0.5% of assets) in July, according to the TrimTabs/BarclayHedge Hedge Fund Flow Report. Based on data from 2,999 funds, the report estimated that industry assets stood at $1.7 trillion in August, down 28.7% from their June 2008 peak of $2.4 trillion.

“The inflows we saw in August could not mask the profound troubles facing the hedge fund industry this year,” said Sol Waksman, founder and president of BarclayHedge. “While the industry had inflows in four of the first eight months of 2012, much stronger outflows in the other four months yielded net redemptions of $13.2 billion (2.0% of assets) year to date.”

In addition to losing assets this year, the hedge fund industry continued to underperform the benchmark S&P 500, gaining 1.05% in August while the S&P 500 rose 1.98%. For the first eight months of 2012, the industry earned a 4.2% return while the S&P 500 rose 10.1%.

Of the 13 major hedge fund categories that TrimTabs and BarclayHedge track, fixed income funds attracted the most assets in all three time horizons measured in the report: Monthly, year-to-date, and over the past 12 months. Fixed income funds also had the best 12-month returns at 7.1% and the second-best y-t-d returns at 6.2% (Convertible Arbitrage funds came in first at 6.8%).

“Fixed income funds significantly bested the hedge fund industry average of 1.3% for the past 12 months,” said Charles Biderman, founder and CEO of TrimTabs. “We cannot help noting that while the S&P 500 rose 15.4% from September 2011 to August 2012, the best stock-based hedge fund strategy, Equity Long Bias, produced a meager 2.0% return. As an industry, hedge funds seem to have lost their touch in the stock market.”

Among the eight global regions tracked in the report, hedge funds based in Canada had the highest returns in August at 2.9%, while funds based in Japan performed worst at 0.2%. Also in August, funds based in Continental Europe had the largest inflows at 0.6% of assets while China/Hong Kong funds and Japan-based funds had the largest outflows at 0.6% of assets for each category.

“It appears investors were unloading Asia funds and investing them in hope of tapping a rebound in euro-denominated securities, which took a strong beating in the debt-crisis sell-off earlier this year,” said Leon Mirochnik, vice president at TrimTabs.

Meanwhile, the September 2012 TrimTabs/BarclayHedge Survey of Hedge Fund Managers found that sentiment was evenly divided between neutral and bullish on the performance of the S&P 500 for October. Conducted in late September, the survey of 81 hedge fund managers also found that a majority expect Barack Obama to be re-elected and an even stronger majority expect control of Congress to remain divided.

Taking Income, the Russell Way

Posted on October 21, 2012 by Kerry Pechter -

Someday Rich, the new book by Russell Investments veterans Tim Noonan and Matt Smith, is a must-read for retirement planners, not just because it offers a clear model for evaluating each client’s retirement needs, but also because it shows how this approach can build trust and closeness with affluent clients.

The book’s authors—Noonan is managing director of capital markets at Russell Investments and Smith is a consultant and former Russell managing director—detail a methodology, linked to ideas published several years ago by their former colleague, Richard Fullmer, that applies the institutional framework for measuring pension liabilities to individuals.

Their “personal asset liability model” yields a ratio that addresses the question that clients care about most: Can I retire comfortably? Clients who have a ratio of 100%—that is, if they have enough invested savings to purchase a life annuity that could cover their important needs in retirement—are considered to be fully funded.

The Russell system gives life annuities a kind of backhanded compliment by using their purchase price as a threshold for staying fully invested. As long as a client has at least enough savings to pay for an annuity that can cover his or her future needs, the authors explain, the client can afford to postpone such a purchase.

If the client never needs an annuity, that’s ideal, they say. If the client merely delays the purchase of an annuity, that would be good too. For one, the cost of a lifetime income stream falls as the client ages. Second, most clients are happy to keep their assets outside an annuity for as long as possible. Finally, a delay lets fee-based advisers keep assets under management that much longer.

Clients with funded ratios between 85% and 130% (and who have savings of roughly $500,000 to $1.5 million) represent the “sweet spot” for the Someday Rich method. Clients with funded ratios of less than 85% usually have no choice but to buy an annuity if they want to mitigate longevity risk. Clients with funded ratios above 130% tend to be more preoccupied with estate planning than longevity risk. (Editor’s note: These categories correspond more or less to Jim Otar’s “Yellow Zone,” “Red Zone,” and “Green Zone” clients, respectively.)

By making those in-between clients more aware of their funded ratio, the authors say, advisors can do them a big favor. The funded ratio indicates whether clients should think about working longer, investing differently, saving more, or spending less as they approach or transition into retirement. At the very least, showing clients their individualized funded status can spark a much more meaningful conversation than merely talking in generalities about asset allocation or fund performance.

How to maintain funded status

A client’s potential for earned income—i.e., their “human capital”—will likely have the greatest impact on his or her funding ratio, the book says. But it’s just one of many factors. How much the clients save, spend and invest also affects the funded ratio, obviously, as do wild card factors like interest rates and share prices.

As retirement approaches and one’s human capital declines or ends completely, the investment portfolio becomes more vulnerable to those wild card factors. During that transition period—when investment losses can, if not handled properly, do lasting damage to retirement security—advisors need to manage each client’s assets closely and, if possible, improve their funded ratio.

Someday Rich shows advisors how to engage with clients to determine the most effective withdrawal rates during retirement. Advisors can propose a variety of withdrawal rates and asset allocations, and demonstrate the probability that each combination will generate a long-range surplus or shortfall. Armed with that information, clients are better able to decide how much to spend or, alternately, how much to leave to heirs.

As for the wisdom of increasing a client’s bond allocation as her or she nears retirement, the authors suggest using each client’s funded status as a guide. They recommend an “adaptive asset allocation method in which the advisor dynamically adjusts their [clients’] portfolio risk with respect to their funded status.” This entails buying stocks when stocks go up and selling when stocks go down—a downside-protection strategy that may strike some advisors as counter-intuitive.

To maintain or improve the funded ratio, the authors also suggest “dynamic hedging strategies,” such as using put options to cover their equity exposures. A very different approach would be to reduce longevity risk by buying a life annuity to cover some or all of the client’s essential expenses, and taking more market risk with the remaining assets.

Someday Rich covers other many topics. It provides strategies for engaging clients and recommendations for approaching different types of clients. It includes chapters (some contributed by other authors) on building confidence, on Russell’s approach to target date funds, on health, disability and long-term care insurance, and on Fullmer’s work on the measurement and mismeasurement of risk.

In sum, this readable and informative book gives retirement income advisors a framework for evaluating (and increasing) clients’ wealth. It is intended, ultimately, to make clients more likely to recommend the advisor to their friends and family. As the authors put it: “If by closely monitoring their funded status and adaptively managing their portfolio accordingly, you are able to help them sustain their financial security, avoid the cost of annuitization and retain control over their wealth, then you have truly earned your fee and your clients’ loyalty and trust.”

It’s the health care, stupid

Posted on October 18, 2012 by Editor Test -

Though they may disagree on the best way to combat rising medical costs—either with means-testing, vouchers or Obamacare—people of all political stripes between the ages of 55 and 65 fear health care inflation with roughly equal intensity, according to research by Allianz Life.

The Minneapolis-based insurer’s 2012 Retirement & Politics Survey shows that 67% of Americans within 10 years of retirement—64% of Republicans, 69% of Democrats, and 66% of Independents—listed healthcare expenses as their greatest financial anxiety.

Social Security ranked second at 53%, followed by tax payment changes (31%), rising national debt (26%), unemployment (19%) and education (4%) among the threats felt most strongly by people in the pre-retirement group that Allianz Life calls “Transition Boomers.”

Approach to savings varies with party affiliation

Republican Transition Boomers were likelier than Democrats, by 59% to 36%, to identify themselves as “conservative” or “moderately conservative” savers. Democrat Transition Boomers were more likely than Republicans, by 29% to 18%, to describe themselves as “balanced” savers, according to the survey.

Democrats and Republicans will react differently to the outcome of the election, the survey showed. Twenty-nine percent of Republican Transition Boomers said they would probably become more aggressive if Romney wins, while 30% of Democrats would become more conservative. Eighty-one percent of Democrat Transition Boomers anticipated no changes to their retirement approach if Obama keeps his post; 42% of Republicans would become more conservative.

Thirty-nine percent of Independents and 29% of those with no preference identified themselves as conservative or moderately conservative, while 30% of Independents and 34% with no preference identified themselves as balanced in their retirement savings approach.

Asked how they would react if Obama wins, 64% of Independents and 75% of no preference Transition Boomers said they would keep the same retirement savings strategy. If Romney wins, 61% of Independents and 73% of no preference Transition Boomers said they would keep the same retirement savings strategy.

Slightly more Republicans start saving earlier

Seventy-two percent of Transition Boomers began saving for retirement in their 40s or earlier, and 28% started in their 30s. More Republicans than Democrats or Independents or those without party preference started saving for retirement before age 50 (79% to 69%, 71% to 67%, respectively). In total, 17% of Transition Boomers hadn’t begun saving for retirement yet. Only 12% of Republicans, 19% of Democrats, 19% of Independents, and 23% of those with no party preference said they have not yet begun saving for retirement.

The Allianz Life 2012 Retirement & Politics Survey was commissioned by Allianz Life Insurance Company of North America and conducted from Sept. 17-20, 2012 among a random sample of online panelists by Ipsos. The results included 1,209 respondents between age 55 and 65.

Wells Fargo reports wagon-load of income

Posted on October 18, 2012 by Editor Test -

Wells Fargo & Co. reported net income of $4.9 billion for the third quarter, up 27% from the prior quarter and up 22% from 2011, the company reported, noting that it had achieved six consecutive quarters of record net income and earnings per share.

The company’s Wealth, Brokerage and Retirement division reported net income of $338 million, down $5 million from second quarter 2012. Revenue ($3.0 billion, up 2% from 2Q 2012) benefited from $45 million in gains on deferred compensation plan investments. Net income rose $48 million from 3Q 2011.

Excluding deferred compensation, revenue was down one percent primarily due to lower net interest income and reduced securities gains in the brokerage business, partially offset by growth in managed account fee revenue.

Total provision for credit losses decreased $7 million from second quarter 2012 and $18 million from third quarter 2011. The provision in both periods included a $10 million credit reserve release. Noninterest expense increased 3% from 2Q 2012 related to higher deferred compensation plan expense.

Nationwide repositions annuities for sale to RIAs

Posted on October 18, 2012 by Editor Test -

With an eye toward growing its share of the fee-based advisory market, Nationwide Financial intends to integrate distribution of certain no-commission variable annuity contracts with distribution of the company’s traditional offerings.

Nationwide will move the distribution of its “America’s marketFLEX Advisor” and “marketFLEX II” variable annuities, which offer exposure to alternative investments, and the “Nationwide Income Architect” variable annuity, which has a lifetime income benefit, from “specialty” to “core” products area, which includes mutual funds, life insurance and retirement plans.

“The move will better align Nationwide’s product offerings with its team-based approach that puts advisors in touch with specialists across a broad range of client solutions” for consultation on retirement income, accumulation and risk management, the Columbus, Ohio-based company said in a release.

“The growing success of the fee-based market and increased use of alternative investments has us broadening the distribution of our specialty product offerings,” said John Carter, president of distribution and sales for Nationwide Financial, in a release. “Moving these to our core product line provides advisors a wider variety of tools to help their clients prepare for and live in retirement.”

Fitch releases analysis of U.S. life insurers investment holdings

Posted on October 18, 2012 by Editor Test -

At year-end 2011, the general account assets of U.S. life insurance companies were predominately invested in bonds and mortgage loans, according to a new Special Report from Fitch Ratings.

Fixed-income securities on average accounted for 83% of total invested assets. The remaining 17% was comprised of contract loans, cash, stock, derivatives, real estate and other invested assets.

Fitch’s findings are based on statutory information compiled annually from an investment survey of its universe of rated life insurance entities, which represents about two-thirds of the total life insurance industry’s general account invested assets and includes 16 of the largest 20 life insurance groups in the U.S. based on total admitted assets.

Corporate bonds accounted for more than 60% of the total bond holdings. Eighty percent of the corporate bonds were rated BBB or higher and only 11% were below investment-grade. Exposure to foreign government bonds was less than 1%.

Structured securities represented 20% of the investment portfolio among the companies surveyed. These included agency pass-throughs, commercial mortgage-backed securities (CMBS), non-agency RMBS, and asset-back securities (ABS).

Overall quality of commercial loan portfolios remains solid. Ninety-one percent of commercial loans had loan-to-values below 80% at year-end 2011, which represents an improvement from 84% at year-end 2010.

Debt service coverage ratios (DSCR) were also strong; only 6% of commercial mortgage loans had DSCRs below the breakeven point of 1.0x.

Common and preferred equity exposure in life insurers’ general account portfolios remains low. For most life companies, the bulk of their equity market exposure is in non-guaranteed separate accounts tied to variable annuities and pension business. Companies also have additional exposure to asset classes such as common equity and real estate through investments held in Schedule BA.

Cash and short-term investments as a percentage of total invested assets remained unchanged from the end of 2010. Fitch had expected this to decline in 2011 as companies deployed their excess capital accumulated during the financial crisis.

Fitch now believes many companies are holding cash due to long-term interest rate uncertainty. The notable exception was AIG Life, which held 10% of invested assets in cash at year-end 2010 but began deploying it in 2011. By year-end 2011, AIG Life’s cash position fell to approximately 1% of total invested assets.

Allianz Life re-enhances living benefit rider

Posted on October 18, 2012 by Editor Test -

The annual “rollup” on the optional Income Protector rider of the Allianz Vision variable annuity will increase to 6% from 5% on contracts issued on or after October 15, 2012, Allianz Life Insurance Company of North America said this week.

The rollup had once been as high as 7% a year. Then it went down, and now it has recovered half of its loss. “The rollup was previously higher,” an Allianz Life spokesman told RIJ. “We reduced the annual increase from 7% to 5% on July 23, 2012 due to market conditions. Because the environment has stabilized, we were able to bring the annual increase back up to 6%,
effective on Income Protector Riders issued on or after October 15, 2012.”

The rollup is a bonus credited to the contract’s guaranteed income base, which is used to calculate the income payout, as long as certain conditions are met. The rollup is not linked to the contract’s cash value.

The Income Protector’s rollup continues for potentially longer than rollups on most VA living benefit riders. As long as the contract owner doesn’t begin taking income, the benefit base goes up by 1.50% simple interest each quarter for up to 30 years or until the contract owner reaches age 91, whichever is sooner. People who buy the contract at age 40, for example, could benefit from the rollup until age 70.

The subaccounts offered to those who choose the rider include four Allianz Fund of Funds, five intermediate bond funds, a PIMCO high-yield portfolio, an Allianz cash equivalent fund, and seven “speciality” funds. The accounts of rider owners are rebalanced quarterly.

The payout rate between ages 60 and 64 under Income Protector is 4% for individuals and 3.5% for couples. For people 65 to 79 years old, the payout rate is 4.5 for individuals and 4% for couples. For those 80 years old and older, the payout rate is 5.5% for individuals and 5% for couples.

Allianz Vision Variable Annuity mortality and expense risk charges range from 1.40% to 1.70% depending on the contract selected. The optional Income Protector rider is available for an additional current annual charge of 1.20% for single or joint Lifetime Plus payments. The annual rider charge is subject to change, but will never be less than the minimum charge of 0.50% or exceed the maximum of 2.50% for single or 2.75% for joint. The rider charge cannot increase/decrease more than 0.50% in any 12-month period.

The Changing American Family

Posted on October 17, 2012 by Editor Test -

Whatever happened to the “typical” American family of four: Mom, Pop, and two kids? This is an important question because every time a change in federal health care policy or any retirement program is proposed its impact on that supposedly typical family of four is at the center of the debate.

But lost in that debate is this simple fact: That type of family, a married couple with two children, is a very long way from being representative of U.S. households, if they ever were. The 2010 Census revealed that married couples are, for the first time, less than half (48%) of U.S. households, those with any children under age 18 are just 20%, and those with two children are 8%, or less than one in 10 households.

In a 50-year period, the number of U.S. households has more than doubled, rising from 53 million in 1960 to almost 117 million in 2010, a 120% increase. At the same time, the number of married couples with children actually slightly declined, from 23.9 million to 23.6 million — not a huge number change, but a notable change in direction for the married population.

What has increased the most is the number of people who live alone. The 7 million counted in 1960 (then 13% of all households) jumped 350% to 31.2 million, and now accounts for 27% of all households. People who live alone also now rank as the second largest household type, right behind married couples with no children under 18, who account for 28%.

Bottom Line — There Is No “Typical”

Today, no household category can be described as typical. This is because, unlike 50 years ago, no one type reached even a third of the total, as the charts below show.

The Impact on Finances and Home Health Care

An accurate picture of the nation’s household structure is essential to gaining a deeper understanding of what resources families and other types of households need for their retirement planning as well as provisions for home health care.

Many retirement programs, such as Social Security, have spousal benefits that are not available to the now majority of households who are not married couples. But equally important is that unmarried individuals must fund their own retirement programs as well as pay all their household living expenses without the benefit of the second income that twothirds of married couples have.

From a health care planning perspective it is harder to control costs when patients can’t convalesce at home because no family members are there to help them. Unlike 50 years ago, many former hospital-based medical procedures are now done in an out-patient clinic, and recovery is expected to be done at home. That can be quite difficult for people who live alone or for those whose spouse must go to work.

Regarding longer term care, many elderly would prefer to be cared for at home rather than spend their retirement savings on a stay at a nursing home or rehabilitation facility. But almost half (45%) of householders age 65 or older live alone, making home health care delivery to them considerably more expensive.

There are no easy solutions to helping the many millions of single individuals plan for their retirement and manage their short- or long-term health care expenses. But it may help to fully acknowledge that Mom, Pop, and two kids are most certainly not the “typical” American family today.

Peter Francese founded American Demographics magazine, now part of Advertising Age.

Bottom Line — There Is No “Typical”

Data Connection

Lists*