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Fee Disclosure: Opportunity or Threat for Plan Advisors?

Posted on October 17, 2012 by -

Ever since the Department of Labor’s two new fee disclosure rules went into effect last summer, plan sponsor advisors have been either bemoaning or celebrating the impact of the new rules on their business.  

Excluding for the moment the possibility that many reasonable people can see this issue from both sides, let’s say that a bright line exists between two groups of plan advisors:

  • Those who worry that plan sponsors will become obsessed with reducing fees, even if it means sacrificing quality, and that sponsors will fire good plan advisors in favor of sweet-talking low-bidders.
  • Those who can’t wait to capture new business by demonstrating that a plan sponsor’s existing advisor hasn’t been tough on fees. 

Now, before we sensationalize this matter, perhaps we should acknowledge that its significance could fade fast if Governor Romney defeats President Obama next month. Odds are good that a Romney-appointed Labor Secretary won’t employ an assistant secretary who believes in the disinfecting power of sunlight as zealously as Phyllis Borzi, the current chief of the DoL’s Employee Benefits Security Administration (EBSA).

Having said that, let’s assume that Obama wins the election and that the Labor Department will try to enforce the letter and spirit of ERISA regulations 408(b)(2) and 404(a)(5) in earnest.

In other words, let’s assume that Obama’s crusaders will push plan sponsors to benchmark their plans’ fees, send out requests-for-proposals and, ultimately, purge advisors who, through negligence or complicity, have allowed recordkeepers and fund companies to play the revenue-sharing game at participants’ expense.    

Tom Gonnella, senior vice president of corporate development at Denver-based Lincoln Trust Company, is among those who see fee disclosure as a major opportunity for his firm. He has already used the fee issue as a wedge to win new business. And, far from having to lower his own fees to get new clients, he finds that he can charge a premium because he reduces the costs of other service providers by so much.

“It’s easier to get clients” since the disclosure rules went into effect, Gonnella said at the Financial Planning Association’s Experience 2012 conference in San Antonio two weeks ago, where he served on an panel on this topic.

“Retirement plans are expensive. You’ll find that there are plans that cost over 200 basis points. So we might save somebody $50,000 in fees right away. We made our TPA (Third Party Administrator) clients look like heroes to the plan sponsors. As a result, we’ve actually been able to raise prices,” he said.

But that’s only one side of the story. While Gonnella sees the upside of fee disclosure, Mike DiCenso, president of Gallagher Fiduciary Advisors LLC of Itasca, Illinois, who appeared on the same FPA panel, worries that it will backfire. He sees a potential for fee disclosure to hurt participants by compelling plan sponsors to reduce costs without regard to quality.  Indeed, this is happening already, he said.

“There is absolutely margin compression going on,” DiCenso said with chagrin. To combat it, he said, advisors will need to do two things: get lean and sharpen their value proposition. Sloppy generalists, he inferred, will be vulnerable. “If you don’t identify and go after the right target market, and if you don’t get more efficient, you’ll find that there are enough advisors out there who will undersell you on price and make it up on volume.”

He anticipates lots of pressure from the DoL. “The regulatory environment is increasing,” he said. “The state and federal agencies are not on same page. There will be an increase in the number of auditors and the number of audits, with a huge emphasis on fees.”

DiCenso concedes that the DoL is right to be worried that Americans aren’t saving enough. But he’s not so sure that fee reduction per se is the best solution, or that plan advisors and other providers should be the scapegoats for participants’ own failures to save for retirement.

“If you look at the number of people with low savings, you can see why the government is taking action,” he said. “But, unfortunately, we have a litigious society instead of an accountability society. People aren’t looking inward for responsibility. They look to hold other people accountable, not themselves.”

As in so many other areas of the regulatory world, the slippery word “reasonable” is causing tremendous confusion and anxiety in the realm of retirement plan fees. A fiduciary—and both plan sponsors and advisors are fiduciaries under ERISA—must ensure that plan fees are “reasonable.” But reasonableness is notoriously difficult to define.

On the one hand, plan sponsors can tell fairly easily if a plan’s investment expenses, which make up some 80% of all fees, are higher or lower than average. (The average is 127 basis points, within a range of 87 to 162 basis points, not counting outliers.) But above-average fees can still be reasonable as long as the quality or quantity of the services provided justifies them. 

It’s too soon to say how all this will end, or whether the new regulations will ultimately succeed in making the U.S. workforce better-prepared for retirement. In the meantime 408(b)(2) and 404(a)(5) have put the advisory relationships in many of the smaller 483,000 defined contribution plans in the U.S. into play. The nimble will win. The snoozers will lose.

One useful tip from the members of the FPA panel: Due to a weakness in the regulations, many fund companies still don’t provide plan sponsors with enough information to determine exactly how much (in dollar terms, as opposed to percentages of assets) plan participants pay for each investment option. An advisor, they suggested, can add immediate value by deciphering the data and exposing the actual costs in terms of dollars and cents.

© 2012 RIJ Publishing LLC. All rights reserved.

Capacity Issues

Posted on October 16, 2012 by -

Question: Now that their capacity to issue variable annuities with rich living benefits is constrained, where can major life insurance companies go for growth?

Answer: By redeploying their remaining capacity to lower-risk products—including fee-based VAs without living benefits—and aiming them at the relatively untapped market of registered investment advisors.

That’s one of the findings in Cerulli Associates’ new report, “Annuities and Insurance 2012: Evaluating Growth Capacity, Flows and Product Trends,” an executive summary of which was provided to RIJ this week by the Boston-based research firm. (The full report is available for purchase from Cerulli.)

“The major takeaway is that the top 15 carriers don’t currently have the ability or appetite to extend their [variable annuity] capacity, they do have an opportunity to redeploy some of that capacity,” said Donnie Ethier, a Cerulli senior analyst and the report’s principal author.

“This is why fee-based variable annuities are the immediate opportunity. Not only are they a way to redeploy some of that capacity from the traditional space, but we know for a fact that the fee-based channel is growing,” he added.

“But is there appetite for annuities among RIAs? We know the channel is growing, but is the appetite really there? We don’t know this yet. What we do know is that the guarantees are less important to RIAs than the costs and the underlying subaccounts.”

The new Cerulli report, the sixth in an annual series, focuses on the ability of the life insurance industry to meet the rising risk-mitigation needs of retiring Baby Boomers at a time when depressed interest rates and elevated equity volatility limit its capacity to take on new risk.

With so many carriers dialing down VA sales or exiting the market, capacity is a front-burner topic for life insurers. At the recent annual conference of the Insured Retirement Institute, participants in a panel discussion about capacity generally played down the problem, suggesting that any advisor or consumer who wants a variable annuity with a lifetime income rider can find one.

Judging by Cerulli’s report, the capacity issue isn’t so easily dismissed, nor is the industry taking it as lightly as the panel seemed to suggest. Cerulli puts the VA industry’s capacity at $163 billion. This number “is reassuring as total flows are expected to remain below this figure for several years to come,” the report says. “However, this affords the industry with insufficient room for growth.”

As Ethier explained in an email to RIJ: “Cerulli estimates gross VA sales to increase to about $164 billion by 2015, about $31 billion of that being net sales. Therefore, we believe the industry can handle the demand side with little difficulty until then, pending an improvement and stabilization of interest rates and equity markets. In turn, this would increase the capacity, allowing increased guarantees, new entrants, etc.

“Currently, the important take-away: Supply is effectively meeting consumer demand, and we believe this will remain into the future,” he added. “However, it leaves little room for the industry to significantly expand or improve. Which brings us back to the concept of ‘redeploying levels of industry capacity,’ since extending capacity is largely at the mercy of economic factors.”

According to Cerulli, there’s reason to be hopeful about annuity sales in general. Advisors receive more unsolicited requests for information about annuities than any other financial product, Cerulli says (see chart on RIJ’s home page.) Second, the industry can switch its emphasis to other products. But much depends on the industry’s ability to reach the fee-based advisors, including RIAs and parts of the independent channel.

Here’s how an excerpt from Cerulli’s new report describes the opportunities available to life insurers:

“While capacity cannot be extended, there are numerous emerging opportunities to redeploy capacity by means of additional annuity and life insurance solutions, including contingent deferred annuities, fixed-indexed annuities (FIA), and even indexed universal life insurance (IUL).

“The most imperative necessity is to capture the attention of fee-based advisors with I-share VAs. Collectively, or independently, these solutions may assist in easing the stresses of issuing traditional VA living benefits, as well as, increase net sales.

Europe’s Solvency II regulations and their impact on the reserve requirements of large European-domiciled insurers have the potential to exacerbate variable annuity capacity issues in the U.S., Ethier told RIJ. Solvency II could create a “domino effect,” he said, where the smaller companies that still offer rich living benefits couldn’t absorb the excess demand from customers that larger VA issuers turn away. To protect themselves from taking on too much risk, the smaller firms—say, Guardian or Ohio National, two mutual insurers that have attractive living benefits—might be forced to de-risk their products or close certain contracts entirely.   

SunAmerica, a unit of AIG, is the carrier best equipped to absorb more new business, Ethier wrote:

“SunAmerica represents one of the most optimistic numerical assumptions when calculating Cerulli’s prediction of the industry’s capacity. According to A.M. Best, AIG ranks as the fifth-largest insurer in the world, and number two in the U.S, on the basis of non-banking assets. Furthermore, it’s believed that VA assets make up less than 5% of AIG’s AUM, which is a key factor in forecasting their assistance in alleviating the industry’s capacity concern…  Ultimately, over time, Cerulli is confident that SunAmerica has the product solutions, hedging mechanisms, and distribution capabilities to rise to the top of the leaderboard, if rivals make way and AIG aspires to do so.”

The variable annuity industry’s future evidently depends to a large extent on how well it can pivot from a strategy where wholesalers tried to impress independent advisors with generous commissions and rich living benefits to a strategy that emphasizes the low fees, rich array of investment options and tax deferral that appeal to fee-based advisors.

“Clearly, the traditional pitch of variable annuity wholesalers won’t suffice,” Ethier said. “You can’t go to an RIA and say, ‘We have bigger benefits.’ It’s not that type of sale. Wholesalers need to be more specialized. They’ll need to understand the value proposition of their funds. It may make sense to have a model where wholesalers are CFAs [Chartered Financial Analysts], and have more expertise. But traditional selling will not work with RIAs.”

Ethier points out that Jefferson National has demonstrated that there’s a market among RIAs for a certain type of VA—a flat-fee VA with no insurance riders and lots of investment options. But Jefferson National’s sales, though they now exceed $1 billion, aren’t large enough to prove that that specific niche has vast potential.   

There are an estimated 47,000 advisors in the RIA channel, Ethier said, including about 18,000 who are dually licensed to sell investments and insurance. (The estimate doesn’t include the non-RIA advisors who use the fee-based compensation model.) While the overall financial advisory industry shrank slightly in the past seven years, the compounded annual growth rate of RIAs during that time was 10%, he noted.

According to Charles Schwab’s 2012 RIA Benchmarking Study, released last July, more than 1,000 RIA firms reported in excess of $425 billion in combined assets under management, with 105 of those firms managing $1 billion or more. The median participating firm had 186 clients, $212 million in AUM and $1.3 million in annual revenue.

© 2012 RIJ Publishing LLC. All rights reserved.

Fee disclosure puts thousands of plan advisor jobs in play

Posted on October 4, 2012 by -

Ever since the Department of Labor’s two new fee disclosure rules went into effect at the beginning of July and the end of August, a debate has festered among plan sponsor advisors.

Ignoring for the moment the fact that many reasonable people can see this issue from both sides, let’s say that a trench has been dug between the following two camps:

  • Plan advisors who worry that plan sponsors will become obsessed with reducing fees, even if it means sacrificing quality, and that they will fire good plan sponsors in favor of carpet-bagging low-bidders.
  • Plan advisors who can’t wait to use evidence of higher-than-average plan fees as a way to disenchant plan sponsors with their current advisors, no matter competent and client-centric he or she had been.

Now, before we ratchet up the suspense level, we should acknowledge that this controversy will fade fast if Romney defeats Obama. Odds are good that a Romney-appointed Labor Secretary won’t employ an EBSA deputy who believes in the disinfecting power of sunlight as zealously as Phyllis Borzi does.

Having said that, let’s assume that Obama wins this highly consequential battle-of-straight-arrows and that his Labor Department will try to enforce the letter and spirit of ERISA regulations 408(b)(2), which requires service providers to disclose fees to plan sponsors, and 404a-5, which requires plan sponsors to disclose fees to plan participants, in earnest.

In other words, let’s assume that Obama’s crusaders will push plan sponsors to act in what they believe is the best long-term interest of participants: to benchmark their fees, send out new requests-for-proposals to competing plan advisors if necessary and, ultimately, purge advisors who have been AWOL or have allowed recordkeepers and fund companies to play the revenue-sharing game at participants’ expense.    

Tom Gonnella, senior vice president of corporate development at Denver-based Lincoln Trust Company, is among those who see fee disclosure as an opportunity. He has already used the fee issue to win new business.

“Now it’s easier to get clients,” said Gonnella at the Financial Planning Association’s Experience 2012 conference in San Antonio last week, where he served on an panel on this topic.

“Retirement plans are expensive. You’ll find that there are plans that cost over 200 basis points. So we can save somebody $50,000 in fees right away. We made our TPA (Third Party Administrator) clients look like heroes to the plan sponsors. As a result, we’ve actually been able to raise prices,” he said.

While Gonnella sees the upside of fee disclosure, Mike DiCenso, president of Gallagher Fiduciary Advisors LLC of Itasca, Illinois, who appeared on the same panel, worries that it will backfire. He sees potential for fee disclosure to hurt participants in the name of helping them by reducing the quality of the services they receive.  

“There is absolutely margin compression going on,” he said with undisguised chagrin. “If you don’t identify and go after the right target market, and if you don’t get more efficient, you’ll find that there are enough advisors out there who will undersell you on price and make it up on volume.”

“The regulatory environment is increasing,” he said. “The state and federal agencies not on same page. There will be an increase in the number of auditors and the number of audits, with a huge emphasis on fee disclosure.”

Gallagher concedes that the DoL is right to be worried that Americans aren’t saving enough. But he’s not so sure that fee reduction is the solution, or that plan advisors should take the heat for participants’ own failure to save.

“If you look at the number of people with low savings, you can see why the government is taking action,” he said. “But, unfortunately, we have a litigious society instead of an accountability society. People aren’t looking inward for responsibility. They look to hold other people accountable, not themselves.”

As in so many other areas of the regulatory world, the word “reasonable” is causing tremendous confusion and anxiety in this case. A fiduciary—and both plan sponsors and advisors are fiduciaries under ERISA—fees must be reasonable. But reasonableness isn’t necessarily self-evident. 

Plan sponsors can easily tell whether their plan’s investment expenses, which make up some 80% of all fees, are higher or lower than average. The average is 127 basis points, within a range of 87 to 162 basis points, not counting outliers. But above-average fees can be reasonable if the service quality justifies them. 

It’s too early to say how all this will end, or whether it will produce a workforce that’s better prepared for retirement. In the meantime 408b2 and 404b5 have put the advisory relationships in many of the smaller 483,000 defined contribution plans in the U.S. into play. As always, the nimble will win, and the snoozers will lose.

One useful tip from the panel: Due to a weakness in the regulations, many fund companies still don’t provide plan sponsors with enough information to tell exactly how much (in dollar terms, as opposed to percentages) the plan participants are paying for investments. Plan sponsors will be grateful to an advisor who can decipher the data and show them what their expenses actually are.

© 2012 RIJ Publishing LLC. All rights reserved.

Index annuity from Athene offers five rider-benefits

Posted on October 3, 2012 by -

Athene Annuity & Life Assurance Company has launched ATHENE Benefit 10, a fixed index annuity paired with a rider that provides up to five discrete living and death benefits funded by a benefit base account.

  • Clients can access benefits needed; at death, the remaining account value is paid to their beneficiary.
  • The rider’s guaranteed lifetime withdrawal benefit provides an optional stream of income in retirement.
  • Income is enhanced by 50% if the client becomes unable to perform two of six activities of daily living on a permanent basis.
  • The balance of the rider’s benefit base is paid out over a period of five years if the client is confined to a nursing home,
  • Beneficiaries will receive the remaining value of the benefit base account upon the death of the owner.

According to a release from Athene, a client might start a stream of guaranteed income at retirement, increase that income by 50% if she breaks her hip and requires assistance in dressing and bathing, then activate her confinement benefit if she moves to a nursing home. The amount of each benefit is guaranteed, and determined by the balance in her benefit base account at the time of activation.

ATHENE Benefit 10 features a 6% premium bonus that vests over a 10-year period. The enhanced benefit rider includes early income bonus of up to 10% if lifetime withdrawals are begun prior to the eighth contract anniversary.

The contract includes a fixed account with a 5-year guaranteed rate and two indexed accounts, one monthly additive, the other annual point-to-point, both linked to the S&P 500. These accounts provide safety of principal and interest rate guarantees, along with the potential to earn interest based on the performance of an index.

ATHENE Benefit 10 with Enhanced Benefit Rider is currently available in 21 states.

© 2012 RIJ Publishing LLC. All rights reserved.

22 Vanguard funds switch to FTSE and CRSP benchmarks

Posted on October 3, 2012 by -

To reduce fund expenses, Vanguard said it will stop using MSCI benchmarks and adopt FTSE benchmarks for six of its international stock index funds. The company will also adopt CRSP (the University of Chicago’s Center for Research in Security Prices) benchmarks for 16 of its U.S. stock and balanced index funds, according to a release.

Vanguard chief investment officer Gus Sauter said, “We negotiated licensing agreements for these benchmarks that we expect will enable us to deliver significant value to our index fund and ETF shareholders and lower expense ratios over time.”

Index licensing fees have represented a growing portion of the expenses that investors pay to own index funds and ETFs, Sauter said, adding that Vanguard’s new long-term agreements with FTSE and CRSP will provide cost certainty.

Six Vanguard international index funds with aggregate assets of $170 billion will transition to benchmarks in the FTSE Global Equity Index Series, including the $67 billion Vanguard Emerging Markets Stock Index Fund. This fund and its ETF Shares (ticker: VWO), the world’s largest emerging markets ETF (source: Strategic Insight, as of 7/31/12), will move from the MSCI Emerging Markets Index to the FTSE Emerging Index. While the two indexes are generally comparable, the FTSE Emerging Index classifies South Korea as a developed market.

Sixteen Vanguard stock and balanced index funds, with aggregate assets of $367 billion, will track CRSP benchmarks, including Vanguard’s largest index fund, the $197 billion Vanguard Total Stock Market Index Fund. The fund and its ETF Shares (ticker: VTI) will transition from the MSCI U.S. Broad Market Index to the CRSP US Total Market Index.

CRSP’s capitalization-weighted methodology uses “packeting,” which cushions the movement of stocks between adjacent indexes and allows holdings to be shared between two indexes of the same family. This approach maximizes style purity while minimizing index turnover.

© 2012 RIJ Publishing LLC. All rights reserved.

DTCC I&RS launches research role in analytic reporting for annuities

Posted on October 3, 2012 by -

The Depository Trust & Clearing Corporation (DTCC) has expanded its online “Analytic Reporting for Annuities” service, which offers data and analytical tools for identifying key trends in the annuities market.

The research role is one of a number of enhancements planned for Analytic Reporting that are aimed at providing more detailed information to aid market analysis.

Developed by DTCC‘s Insurance & Retirement Services (I&RS), the new research enhancement provides clients with more comprehensive market information based on annuity product transaction data. Analytic Reporting for Annuities is a service offering of National Securities Clearing Corporation (“NSCC”), a DTCC subsidiary.

The increased market intelligence afforded by the research role allows users to understand and benchmark more thoroughly business performance relative to competitors, peers and the industry.

The data set users can access is derived from the millions of transactions processed by NSCC in over nine million annuity contracts for insurance companies and broker/dealers. The new data is available to NSCC members, as well as sub-advisors, consulting firms and other interested parties.

The research role is included in NSCC members’ subscriptions to I&RS Analytic Reporting. Non-members that subscribe to the service gain access to unique information to assess and understand the industry.

DTCC first launched the Analytic Reporting for Annuities in June 2011 as an online solution that combines data and software to make business intelligence and analytics easily accessible to subscribers anytime and anywhere without the need for data management or software development.

Through NSCC, DTCC’s I&RS processes insurance transactions that support life, LTC, variable and fixed annuities connecting 200 insurance companies and 250 distribution firms. In 2011, I&RS processed over $156 billion of annuity transactions in over 3,000 products for over 100 insurance company participants and over 130 broker/dealers.

In 2011, DTCC’s subsidiaries processed securities transactions valued at approximately US$1.7 quadrillion. Its depository provides custody and asset servicing for securities issues from 122 countries and territories valued at US$39.5 trillion. DTCC’s global OTC derivatives trade repositories record more than US$500 trillion in gross notional value of transactions made worldwide across multiple asset classes.

According to a DTCC release: “With updates approximately two weeks after each month-end, Analytic Reporting allows users to assess their business and access industry intelligence to support management decisions about sales, sales management, marketing and product offerings. Analytic Reporting is a hosted turnkey solution, available online anywhere, anytime to DTCC customers. DTCC customers don’t have to store or manage the data. They don’t have to develop applications or run SQL queries to obtain the business information they rely on for decision-making.”

© 2012 RIJ Publishing LLC. All rights reserved.

The Hartford sells individual life business to Prudential for $615m

Posted on October 3, 2012 by -

The announcement marks final agreement for the company’s three planned sales for a net statutory capital benefit of $2.2 billion from the combined sales.

The Hartford, which announced in March that it would focus on its property and casualty, group benefits and mutual funds businesses, has agreed to sell its individual life insurance business to Prudential Financial, Inc. for cash consideration of $615 million. The sale, which is structured as a reinsurance transaction, is expected to close in early 2013.

The terms of The Hartford’s existing life insurance contracts will remain unchanged, and policyholders will continue to receive uninterrupted, high-quality service, and The Hartford will continue to sell new life insurance products and riders through the transaction’s closing and during a defined transition period thereafter. Employees of The Hartford’s Individual Life business will be offered positions with Prudential.

The Individual Life segment reported core earnings, excluding DAC [deferred acquisition costs] unlock, of $129 million for the 12 months ended on June 30, 2012, or net income of $105 million. The Hartford does not expect to record a material net income gain or loss on the closing of the transaction, based on June 30, 2012, financials.

The agreement is the last of three planned transactions that have been announced within the past three months. The Hartford announced the sale of Woodbury Financial Services to AIG’s Advisor Group in late July and the sale of its retirement plans business to MassMutual in early September. The company is also transitioning its individual annuity business to Forethought.

The Hartford expects the latest transaction to benefit its net statutory capital by approximately $1.5 billion, including an increase in statutory surplus and a reduction in required risk-based capital. In aggregate, the three announced transactions are expected to benefit the company’s net statutory capital by approximately $2.2 billion, including approximately a $1.4 billion increase in statutory surplus and an $800 million reduction in required risk-based capital.

In addition, the company will continue to hold approximately $450 million of statutory capital to support the businesses reinsured to buyers as part of the transactions. The estimated statutory financial impacts are based on June 30, 2012, values and are subject to change based on market conditions and financial results through closing date. The Hartford intends to work with its key constituencies on these transactions and expects to provide an update on the use of proceeds in early 2013.

Following the close of the transaction, Prudential will reinsure liabilities for the contracts covered by the agreement and assume investment assets with a statutory book value of approximately $7 billion in support of these liabilities.

The Hartford’s financial advisors for the Individual Life transaction are Goldman, Sachs & Co. and Greenhill & Co., and the company’s legal advisor is Sutherland Asbill & Brennan LLC.

© 2012 RIJ Publishing LLC. All rights reserved.

Northwestern Mutual adds DIA with upside potential

Posted on October 3, 2012 by -

Northwestern Mutual has introduced a Select Portfolio deferred income annuity designed to protect retirees from the impacts of longevity risk, inflation risk, and investment risk, in part by providing opportunity for gains through dividend accumulation. 

Unlike the carrier’s existing Select DIA, where the future income is fixed, the new DIA allows contract owners to apply Northwestern Mutual policyholder dividends to their annuities. “The beauty of this annuity is its upside potential—the guaranteed income will never go down, and any dividends could increase it,” said David Simbro, senior vice president, Northwestern Mutual, in a release.

According to Simbro, Select Portfolio allows contract owners to take any of the dividends issued by the mutual company in cash or apply them to increase their guaranteed income, or combine the two strategies. Dividends are not guaranteed, but Northwestern Mutual has paid dividends on eligible life policies every year since 1872.

As a mutual life insurer, Northwestern Mutual returns to policyowners the money earned over what is needed to pay benefits, run the company and maintain its financial strength ratings (A++, superior; the highest possible rating from A.M. Best). 

The insurer recently announced that it expected to pay almost $5 billion to 3.3 million policyholders for 2012. About 90% of the money is expected to go to owners of permanent life policies, with an estimated $120 million to term life policyholders and $27 million to annuity owners of record. Below is a chart showing how the company calculates dividends for permanent life policyholders on the basis of their policies’ cash values.


Individuals can purchase the Select Portfolio Deferred Income Annuity where available with a lump sum payment of tax-qualified funds, such as funds held in a 401(k) plan or a traditional or Roth IRA.

Northwestern Mutual also markets a Select immediate income annuity and a Select fixed deferred income annuity, which are components of the recently launched Northwestern Mutual Retirement Strategy.

© 2012 RIJ Publishing LLC. All rights reserved.

Morningstar VA Product Update

Posted on October 3, 2012 by -

Carriers filed 168 annuity product changes in the second quarter of 2012, making for an extremely active period. This compares to 59 new filings during the first quarter of 2012 and 162 in Q2 of last year. Overall, 24 carriers got into the act with some form of new release, significant change, or product pull back. [Click here for a printable pdf of this article, which contains Morningstar charts.]

Continued Pricing Adjustments

Carriers continue to re-adjust pricing to cope with difficult market conditions. Carriers are dealing with the reality that living benefits are costly to maintain, so activity is being sought elsewhere as the wait continues for interest rates to rise. Low-cost I-shares continue to spread out across the market. After the second quarter closed, several major carriers, including MetLife and Allianz, stopped sales of L-shares.

Low cost I-share development continues to expand. This quarter Symetra and Midland National released their versions, following the low-cost launches last quarter by Jackson National and Great West. These products, like Symetra’s True VA with 117 subaccounts and no living benefits, offer tax-deferred shells and cutting edge investment strategies. The AI Report now includes fifty-five I-share contracts versus 34 a year ago.

Sales Volumes and Asset Levels

Second quarter 2012 variable annuity new sales increased 5.5% over first quarter, to $37.7 billion from $35.8 billion, but were down 4.6% from the second quarter of 2011. At the midpoint of the year new sales of $73.5 billion are approximately 48% of 2011 full year new sales, indicating a strong possibility of a flat to slightly down year for VA sales absent a significant uptick in the second half. Assets were down 3.3% due to stagnant market performance, and net flow was up slightly at $4.0 billion vs. $3.8 billion in the first quarter. Net flow continues to be low relative to the 2nd half 2011 levels of $7 to $8 billion per quarter but remains in positive territory.

Q2 Product Changes

Allianz released Income Focus, a new Lifetime GMWB benefit. The annual withdrawal amount for a 65 year old (age at election) is 4.25% (3.75% joint). An additional 1% is added to the withdrawal percentage on the anniversary if the current account value is greater than the previous anniversary. Initial purchase payments are eligible for the 1% increase on the first benefit anniversary; subsequent payments are eligible on the second benefit anniversary. Subsequent payments are tracked separately. The rider fee is 1.30% for single and joint.

Allianz also released a Lifetime GMWB with a 4.5% withdrawal rate for a 65 year old, Income Protector, available in single and joint versions. Steps ups are many and unique. There is an 8% fixed annual step up. There is a highest quarterly anniversary value step up, and two other unique step ups: when the owner moves into the next age band, the withdrawal percentage and amount may step up if greater than current guaranteed amount; and after withdrawals start, the highest anniversary value step ups continue (calculated after full withdrawals are taken). The annual fee is 110 basis points.

Guardian has released Investor II VA, a new owner driven contract (B, L-shares). Benefits include four different flavors of Lifetime GMWB and the three common death benefits. The fee is 140 bps for the B-share.

Lincoln National released Lifetime Income Advantage 2.0—Protected Funds, a new Lifetime GMWB with a 4.5% guaranteed withdrawal for a 65 year old (joint life based on younger spouse’s age).

The benefit offers two step up methods, a 5% fixed or highest anniversary value step-up. A feature is included that increases the withdrawal percentage to 10% (for owners age 65 or older) to cover nursing home due to medical necessity provided the benefit has been in effect for five years. The fee is 105 bps (125 joint). (Lifetime Income Advantage 2.0) In addition, a version of the benefit is offered with 5% withdrawal rate for a 65 year old that requires investment allocations. Lincoln closed the earlier versions of these benefits.

Lincoln also updated its i4Life Advantage hybrid GMIB by dropping the minimum payout floor from 4.5% to 4.0%. The fee stays the same at 105 bps (125 bps joint) and the benefit converts to an immediate variable annuity after an access period. The lifetime income guarantee assures at least 75% of the account value as a benefit amount. A 4% lifetime income payment is available for a 65 year old.

Minnesota Life released a new version of its single and joint Lifetime GMWB, Ovation Lifetime Income II. It is similar to its current benefit and continues to offer a 5% lifetime withdrawal for a 65 year old. The fee for the new version increased 5 bps to 120 bps.

Nationwide released new B, L, and Bonus share versions of their Destinations 2.0 contract with an updated 7% Lifetime Income Option—Single and Joint. The benefit (95 bps single and 120 bps joint) offers a 5.25% withdrawal (4.5% joint) with a 7% simple step up for 10 years of no withdrawals. If the account value falls to zero after withdrawals have begun, a settlement option allows a lump sum payment of a portion of the remaining benefit base.

Penn Mutual released Smart Foundation, a new annuitant driven contract in B, L, and Bonus share versions. The fee is 140 bps for the B-share. Benefits include a GMAB; Lifetime GMWB and the standard return of premium and HAV death benefits.

Protective released B, C, and L-shares versions of Protective VA. The contract fee is 130 bps for the B-share. The Lifetime GMWB, SecurePay, offers a 5% withdrawal (4.5% for joint version) after age 59 1⁄2. There is a highest anniversary value step up. The benefit includes a medical emergency provision that increases the withdrawal percentage by 0.25% to 2.0% (after a two-year waiting period and up to age 75). There is also a nursing home provision that doubles the withdrawal percentage (capped at 10% withdrawals) if confined to a nursing home. The purchase option (10 bps) allows purchase of the benefit after time of application. Rider fee is 60 bps (single and joint). There is a second version of the Lifetime GMWB, SecurePay R72 that offers a 7.2% annual step up for 10 years or until the first withdrawal. The fee is 100 bps (single and joint).

Prudential closed its X-share bonus product to new sales in late June.

RiverSource released the 2012 version of RAVA 5, available in B, C, and L shares. Pricing ranges from 95 bps for the 10 year surrender charge “B” version to 145 bps for the C-share. The contract offers a lifetime withdrawal benefit, a GMAB and the three common death benefits, Return of Premium (ROP), Highest Anniversary Value (HAV) and an Earnings Enhancement Benefit (EEB).

RiverSource’s new Lifetime GMWB, SecureSource 3, has a 5% withdrawal for a 65 year old (4.75% for joint life version) and the fee is reduced 30 bps to 120 bps (130 bps for joint life). The benefit base compounds at 6% annually, plus there is a highest anniversary value step up. An interesting feature is the bump up to the withdrawal percentage of 0.5% each year (reduced from 1%) during the withdrawal period provided the account balance hasn’t dropped 20% or more below the benefit base. Investments must be allocated to proscribed funds. Beneficiaries may continue withdrawals until the benefit base is exhausted. Funds must be invested into one asset allocation model.

Symetra released True VA, a new I-share (60 bps) with no living benefits but standard and enhanced earnings death benefits. The contract lists 117 subaccounts offering passive, active and alter- native funds. The contract features a flexible annuitization option that can be funded from the subaccounts over time. In addition, there is an automatic sell strategy program designed to protect against market volatility.

SunAmerica released a new version of Polaris Platinum, featuring a fee drop from 152 bps to 130 bps. The contract carries a full suite of Lifetime GMWBs with specific allocation funds: Polaris III with Income Plus 6% Dynamic and Custom Portfolios; 8% Dynamic options; Single and Joint versions.

VALIC lowered the withdrawal percentage and raised the fees on IncomeLock Plus 6 and IncomeLock Plus 8, its Lifetime GMWBs. The fees increased from 110 bps to 130 bps (from 135 bps to 155 bps for joint). For IncomeLock Plus 6, withdrawals go from 6% to 5.5% (single life) and from 5.5% to 5% (joint life). For IncomeLock Plus 8, withdrawals go from 5.5% to 5.0% (single life) and from 5.0% to 4.5% (joint life). Withdrawals drop to 4% (all versions) once the account balance reaches zero. There is also a highest anniversary step up and a deferred bonus that doubles the benefit base after 12 years of no-withdrawals.

Pipeline

Allianz closed its Vision C and Connections L contracts. In addition they reduced the withdrawal percentage on their newly released Income Focus Lifetime GMWB benefit. As of July 23rd, the withdrawal percentage is 3.75% (3.25% joint life) for a 65 year old (down from 4.25% single and 3.75 joint). (Income Focus). The step up on a second version of their Lifetime GMWB, Income Protector, dropped from 7% to 5% in July.

Hartford reduced the withdrawal percentages on their Future5 Lifetime GMWB benefits from 5% to 4.5% (single and joint), and raised the fee on the Future6 single from 85 bps to 105 bps.

Jackson National announced that the M&E charge on its Perspective II contracts will increase by 0.05% in September.

Lincoln is releasing an add-on benefit to their i4Life Advantage called 4Later Advantage Protected Funds. This step-up benefit offers annual 5% fixed and highest anniversary value step-ups to the benefit base for an annual fee of 105 bps (versus 15% every three years in older versions). Account value must be invested in one of five allocation funds.

In August MetLife closed its GMIBs and Lifetime GMWBs to new premiums (GMIB Plus III, GMIB Plus IV, Lifetime Income Solution Plus). In addition, on its GMIB Max IV MetLife is decreasing the withdrawal percentage from 5.0% to 4.5% under the no lapse feature at or after age 62 and adding a 5.0% withdrawal for no lapse at or after age 67.

New York Life introduced Income Plus, a variable annuity with a standard GMIB and the optional Guaranteed Future Income Benefit. The owner elects an income start date then makes discretionary transfers from the account balance to purchase annuity payments. The 100 bp rider allows the purchaser to lock in a guaranteed income stream to be started in the future, which is also funded over time either automatically by the company or with discretion by the owner.

Available for new sales on August 1, Pacific Life released a new contract for the Schwab platform, Schwab Retirement Income, with a 60 bps contract fee and a Lifetime GMWB (80 bps single; 100 bps joint) at a 5% withdrawal guarantee and a selection of three fund of funds subaccounts.

Prudential stopped selling the Bonus version of Premier Retirement in July and will also launch a new version of its Lifetime GMWB, Highest Daily Lifetime Income 2.0, in August. It will differ from the currently sold version in that it will have reduced withdrawal rates; a higher fee; and different investment guidelines. The fee is increased from 95 bps to 100 bps (single life) or 110 (joint life). Minimum issue age is age 50 (up from 45). The Lifetime GMWB continues to offer a 5% withdrawal for a 65 year old, but a new age band from 591⁄2 to 64 years old offers 4.0%. Clients can invest among 19 pre-approved asset allocation models or designated funds.

RiverSource launched a new GMAB, Accumulation Protector, in July. It will allow the owner to invest in the Columbia Managed Volatility sub-account.

SunAmerica lowered the base rollup on the version of the Income Builder GLWB on its O-share contract from 6% to 5.25% effective June 25.

In July, VALIC announced its IncomeLOCK benefit was closed to new sales.

Marco Chmura, Kevin Loffredi, and Frank O’Connor contributed to this article.

© 2012 Morningstar, Inc.

Annuities Touch Down at TD Ameritrade

Posted on October 3, 2012 by -

TD Ameritrade Institutional, which provides brokerage and custody services to thousands of fee-based registered investment advisors (RIAs) across the U.S., announced last week that it has added annuities to its platform for the first time.

No-commission deferred and immediate annuities from four different life insurers—Transamerica, Great-West, MassMutual and New York Life—will be available on the platform, which is a unit of TD Ameritrade, the $8.4 billion Omaha-based discount brokerage firm.

“We’ve been hearing more of a need from our advisors about retirement income and about their clients’ retirement needs,” said Matt Judge, director, wealth management, TD Ameritrade Institutional. “Traditionally, annuities have been high cost, and the right investment options have been lacking. But we’re working with highly rated third parties and with these products we’re taking some of the issues off the table. We’re product agnostic.”

About 4,000 RIAs use the TD Ameritrade platform, and have about $160 billion under custody there, or about $40 million per RIA. Overall TD Ameritrade custodies $461.2 billion in total client assets as of Aug. 31, 2012. RIAs will be able to buy annuities for their clients through licensed, salaried members of an annuity team in Dallas that has undergone annuity training by Morningstar annuity experts.

The RIA channel has largely shunned annuities in the past. RIAs as a rule don’t take commissions and commissions have traditionally been used to incentivize most annuity sales. But RIAs have begun expressing more interest in annuities, for two reasons.   

First, RIAs often have new clients who already own B-share variable annuities. If the annuities are out of the surrender period, the RIA may be able to add value by exchanging the existing contract for a no-load “I-share” contract (although an RIA’s asset-based fee may equal or exceed the 1% that insurers typically add to the mortality and expense risk fee to recoup the upfront commission they pay an intermediary who sells a B-share contract). TD Ameritrade now offers I-share contracts from Transamerica and Great-West.

Second, more RIA clients are expressing an interest in secure lifetime income. The new annuities on TD Ameritrade Institutional’s RIA platform all offer income options of one kind or another. The Transamerica and Great-West variable annuities offer guaranteed lifetime withdrawal benefits, which offer a mix of income and liquidity. For clients willing to give up liquidity for the survivorship credit that comes from mortality pooling, TD Ameritrade offers a MassMutual fixed immediate income annuity as well as a fixed immediate income annuity and a fixed deferred income annuity from New York Life.  

 “The annuities are there for those who want them—especially as an option for 1035 exchanges,” Judge said. “Many of the RIAs’ clients come from the wirehouses and have annuities with high fees. Now the advisor can move them into a cheaper product and add value by managing the subaccounts.” He described the 1035 business as “low-hanging fruit,” to be followed perhaps by purchases of new annuity contracts by RIAs as the Boomer retirement wave gathers momentum. “Money into new annuities will be further down the road,” he predicted.

Morningstar’s annuity team has provided annuity expertise to TD Ameritrade in preparation for the launch. “We’ve been working with TD Ameritrade over the last year or so,” said John McCarthy, Product Manager of Morningstar’s Annuity Solutions group. “They are using our Annuity Intelligence report for their sales and compliance functions. [Morningstar’s] Kevin Lofreddi trained their internal sales desk in Dallas. They’re competing with all the other DIY platforms.”

Charles Schwab, a direct competitor of TD Ameritrade, offers several no-load white-labeled annuities on its retail platform. Schwab’s OneSource variable annuity is issued by Great-West Life & Annuity, and its Income Choice variable annuity is issued by Nationwide Life.

According to Morningstar, Pacific Life has underwritten a new variable annuity contract for the Schwab platform, Schwab Retirement Income, with a 60 bps contract fee and a guaranteed lifetime withdrawal benefit (80 bps single; 100 bps joint), a 5% payout rate and three fund-of funds investment options. But neither Pacific Life nor Schwab have officially announced the contract’s availability.

The timing of TD Ameritrade’s move partly reflects the fact that life insurers have only gradually developed a broad selection of low-cost share class of variable annuities that suits the non-commissioned world of the RIA. “Last year there were 35 active I-share contracts and now there’s 55, so their availability has become much greater in the last 12 months,” said McCarthy.

When looking for life annuity providers, TD Ameritrade shopped for strength and got it: MassMutual and New York Life both have the highest possible ratings from A.M. Best, A++ (superior). Both have Excellent (A for MassMutual and A- for New York Life) from Weiss Ratings, which to be more parsimonious with it’s A’s than the Big Four ratings issuers.

“We went through an extensive due diligence process. We involved Morningstar in the process. The financial stability of the firms was the key thing we looked at, as well as [in the case of variable annuities] a robust and differentiated investment offering,” Judge told RIJ.

“This is clearly a space where our financial strength ratings serve us well,” Judy Zaiken, a MassMutual vice president, told RIJ in an email. “Yet, most of Fidelity SPIA [single premium immediate annuity] sales, including ours, are from their branch offices, not their RIA platform.” 

TD Ameritrade Institutional isn’t planning a special promotion for annuities. “We market our entire platform,” Judge said, “So we’ll do some awareness campaigns, but they won’t be specific to annuities.” His firm may add more products to its annuity platform in the future, but has no specific plans to do so.

“We don’t offer a fixed indexed annuity but we’re open to new offerings. CDAs [contingent deferred annuities] are not in our agency offering, but they are on our radar screen,” he said. “ARIA Retirement Solutions [a CDA provider] is on our Affinity Partnership list and they sell to the broader RIA community. Mainly, in offering annuities, we’re looking at the demographics. The need is out there.”

It remains to be seen whether a significant number of RIAs are ready or eager for annuities, especially at a time when annuity benefits aren’t very generous, thanks mainly to the low interest rate environment.

The appearance of no-load I-shares “doesn’t guarantee that RIAs will jump on the bandwagon,” McCarthy said. “For insurers, their margins are tight, so they are looking at new markets. RIAs are a relatively untapped market. Time will tell how sales go.”

“I predict that annuity sales by RIAs will grow when fee-based SPIAs become more prevalent,” MassMutual’s Zaiken said. [That will happen when] industry efforts to solidify standards around assigning an asset value to SPIA against which an RIA can assess a fee are successful.” The Retirement Income Industry Association and Gary Baker of Cannex are currently working on such a standard, she said.

TD Ameritrade, which has some six million customers in the U.S. alone, was founded in the early 1980s by J. Joseph Ricketts (now owner of the Chicago Cubs and a prominent antagonist of President Obama, for which his daughter raises campaign funds). The firm seized opportunities offered by the discount brokerage and online trading trends, and went public (as Ameritrade) in 1997.

Growing rapidly by merger and acquisition, in early 2006 Ameritrade acquired the TD Waterhouse USA unit of the TD (Toronto-Dominion) Bank Financial Group and changed its name to TD Ameritrade. TD Ameritrade Institutional was a principal sponsor of this week’s Financial Planning Association Experience 2012 conference in San Antonio.

© 2012 RIJ Publishing LLC. All rights reserved.

Remember the Alamo… and the Annuities

Posted on October 3, 2012 by -

The flour tortillas, refried beans and jalapeno peppers that they served at the Financial Planning Association Experience 2012 conference in San Antonio this week were piping hot and on everyone’s lips. The same could not be said for the topic of annuities.

I had traveled southwest to the home of The Alamo on Saturday to pay homage to Davy Crockett, king of the wild frontier and 1950s pop culture icon, and to learn what advisors think about retirement income in these famously uncertain times.

For many CFPs, annuities are apparently not front-of-mind—unless you mean the universal inflation-indexed annuity sponsored by Uncle Sam. On Sunday, for instance, CFPs packed a medium-sized ballroom to hear William Meyer and William Reichenstein explain how to squeeze the most income out of the Social Security entitlement.   

Did you know that two giant “rat-holes”—low spots in the deferral premium curve—are hidden in the Social Security claiming calendar, and that if you claim at the wrong time—say, close to Full Retirement Age—you can fall into one of them?   

“Ninety-five percent of advisors screw this up,” warned Bill Meyer. He confessed that he himself had screwed it up for years before he and Reichenstein wrote a book [“Social Security Strategies” (self-published, 2011)] and software about how to do Social Security right.  

The short version of their talk: Your clients should claim at age 70 if they or their spouses expect to live past age 80½. And they should never claim benefits during the “rat-holes” (from age 62 yrs, 1 mo to age 63 yrs, 11 mos, and from age 65 yrs, 5 mos to age 66 yrs, 7 mos).

Only seven years ago, at the start of a bull market in equities, the nation flirted with privatizing Social Security. But at a time when interest rates are vanishingly low, it’s little wonder that appreciation for the 75-year-old New Deal relic has grown. (It’s also little wonder that, with a government-sponsored annuity as rich as Social Security, so few people buy private annuities.)

Despite the fact that at the conference the FPA honored Wade Pfau, Ph.D., the young Princeton-trained economist who has calculated the benefits of blending systematic withdrawal and life annuities for maximum retirement income, most CFPs and registered investment advisors (RIAs) still don’t devote much mental space to retail annuities or to the so-called survivorship credit that they offer.

For instance, during the Q&A after their session on “Integrating Retirement Planning Research into Your Financial Plan Implementation and Client Communication,” Jonathan Guyton and Dave Yeske were asked why they hadn’t mentioned annuities.

 “I focus on the value of flexibility. I hate making irrevocable decisions with my clients’ money. I have a bias against annuities for that reason,” said Yeske. Guyton, who has written extensively on safe withdrawal rates, suggested that if markets get bad enough, even insurers might not be able to fulfill their guarantees. He also believes that annuities are too expensive.

“When clients see how much money they have to give up for a given income,” they lose interest in life annuities, he said. As for variable annuities, he added, “The guaranteed lifetime withdrawal benefit is almost certainly a fixed income strategy” because the fees make step-ups in the income base unlikely, especially during the payout stage. 

Later on Monday, Guyton gave a presentation on the 4% rule, in which he reviewed his own widely published formulas for adjusting clients’ recommended payout rates up or down at regular intervals to reflect changes in the anticipated inflation rate and trends in equity valuations. During the Q&A, Guyton was asked if his strategy was indifferent to any floor income that his clients expected from Social Security and pensions.

He said it was; his response suggested to me that the 4% method is primarily an accumulation strategy adapted to retirement rather than a true decumulation strategy. It keeps the advisor’s focus on investment risk rather than re-directing it to income-adequacy risk. For that reason, it is probably best suited to people who aren’t actually in danger of ever running short of money.

No variable annuity manufacturer appeared to have sponsored a booth at FPA Experience 2012. (I can’t say for sure whether or not they have in prior years.) That’s too bad: annuity issuers have put a lot of effort recently into building RIA-friendly no-load contracts. Given all the retrenchment in the variable annuity industry this year, however, it made perfect sense.

That’s not to say that fresh ideas about retirement income were entirely absent from the conference. Two retirement income-oriented companies, OneReverse Mortgage and Noble Royalties, Inc., were among the exhibitors in San Antonio. OneReverse recently sponsored a study by Harold Evensky and others on using a reverse mortgage line of credit for financial emergencies in retirement. David Vasquez of Noble Royalties made a pitch for sourcing income from mineral royalties. I met only one representative of an annuity-related company in San Antonio: Bill Atherton of Cannex, the Toronto-based vendor of income annuity pricing information and other data.

A principal sponsor of this year’s FPA Experience was TD Ameritrade Institutional, whose brightly lit hospitality cube glittered at the center of the exhibition floor. The unit of the well-known discount brokerage recently added variable annuities with living benefits from Great-West and Transamerica as well as income annuities from MassMutual and New York Life to its RIA platform. (See today’s RIJ cover story.) The seeds for future annuity sales by fee-based planners may thus be planted, perhaps to germinate when interest rates rise. 

Supplemental information: ¶ “The sky is not falling,” said Bill Meyer regarding the viability of Social Security. ¶ With regard to the “4% rule,” one advisor quipped that it was hard enough convincing one spendthrift retiree to lower his spending rate from 14% to 7%, let alone 4%. ¶ Most fascinating statistics heard: One percent of Americans owns almost half of all domestic financial assets and 20% own 93%. The remaining 80% of Americans live outside the realm of investment advice. ¶ On Saturday, Mary Matalin and James Carville, the campaign-consulting couple and former “Crossfire” co-hosts who work opposite slopes of the continental political divide, delivered entertaining and radically different interpretations of the dynamics of this year’s presidential contest. Afterwards, they signed copies of their recent book. ¶ Stephanie Kelton, a “heterodox economist” from the University of Missouri-Kansas City, received a surprisingly warm reception after explaining that, at the federal level (though not at the state and local levels), taxes do not fund the government. Instead, the federal government relies on taxes to prevent inflation and shape public policy.  

© 2012 RIJ Publishing LLC. All rights reserved. 

Britain adjusts to universal auto-enrollment

Posted on September 26, 2012 by -

Large parts of the UK pensions industry are not ready or for auto-enrollment, just weeks ahead of its launch, according to a panel of pension experts brought together by plan provider AllianceBernstein.   

The huge administrative and IT challenge of so many new savers joining pension schemes could find trustees and small employers unprepared for it, they said in an article reported in IPE.com.

“As auto-enrollment is introduced, there will be 320,000 new savers every month, and over half a million events such as opt-outs every month by 2017. Are providers ready to deal with that scale of work?” said panel member Andy Cheseldine, principal at Lane, Clark & Peacock.

The size of the challenge is reflected in the cost. Cheseldine said he expected final costs to be much higher than the original estimate of £100 (€125) per employer projected by the Department for Work and Pensions. One retailer reportedly has already set aside £2m to pay for implementing auto-enrollment.

“Many organizations are still in a head-in-sand mode,” said Dean Wetton, a pension consultant. “Auto-enrollment is lost somewhere between payroll, HR and the pensions department. Many still see it as a pensions issue, when there are many implications for other parts of the business.”

Others agree. “Employers are still largely focused on defined benefits schemes and not always up to speed on auto-enrollment,” said Steve Delo, CEO at PAN Group, a trusteeship and governance services provider. “Yet anyone who gets auto-enrollment seriously wrong will face public scrutiny, so stress testing and delivery are crucial.”

The panel suggested that larger employers were generally well prepared and organized – the problems lie with smaller employers.

“It is proving difficult to get other employers engaged. Auto-enrollment is just not on their radar yet, so the key is raising wider awareness,” said Stephen Nichols, chief executive of the Pensions Trust occupational pension scheme.

SunGard enhances system for employer-sponsored plans

Posted on September 26, 2012 by -

SunGard has released its Omni Web Solution, a web-based front-office system for defined contribution and defined benefit plan participants, plan sponsors, and customer representatives.

The system allows retirement administrators to provide participants with online access to account information and transactions. It offers a higher level of integration, messaging, reporting, configuration and processing capabilities than prior versions.

According to a SunGard release, new features of Omni Web Solution include:

  • Production-ready integration with personal finance applications and other retirement tools for education, investment advice, statements and rollover services that help offer a smoother and more engaging experience for plan participants
  • Rules-based messaging, redirection capabilities and on-demand reporting that help provide participants with real-time answers to queries, increased transparency into their retirement plans, and plan-specific guidance
  • Paperless transaction approvals and processing, website usage and statistical reporting for plan sponsors
  • Plan administrator capabilities for configuration, plan set-up, and uploading custom web pages to add dynamic and static content to the site 

New York Life funds doctoral program at The American College

Posted on September 26, 2012 by -

New York Life has given The American College $5,000,000 to establish a new 12-course professional doctorate in business administration, the only one of its kind. The American College will begin accepting applications for the PhD program in October.

Applicants must have a bachelor’s degree from an accredited school and meet other qualifying requirements. Once students are accepted, The College will identify two cohort groups, each made up of 15 people, who will move through the coursework together on a mutually supportive basis.

Doctoral scholars will participate in three one-week residencies at The American College’s campus in Bryn Mawr, PA, as well as at least one intensive debrief with faculty prior to their dissertation defense. Students are required to complete one course per quarter online over 12 quarters in addition to the residencies.

In 2007, New York Life donated $2 million to establish the New York Life Center for Retirement Income at The American College to help address the demand for sound retirement income solutions among retired Americans. The gift provided permanent support for programming and research at The College.

LIMRA analyzes potential impact of a new estate tax law

Posted on September 26, 2012 by -

Almost 15 million U.S. households (12.5%) could have a potential tax liability if Congress fails to act and the estate tax law reverts back to a $1 million exemption and 55% maximum tax.

According to LIMRA’s analysis of the Federal Reserve Board’s Survey of Consumer Finances, only 4.4% of households have financial assets greater than $1 million. But if the value of homes and other properties, privately-held business interests, and the face amount of life insurance are included in the value of the estate, far more families could be affected, the life insurance association said in a release.

LIMRA expects Congress to consider three proposals regarding the estate tax are:

  • Let the estate tax law to revert back to a $1 million exemption and 55% maximum tax.
  • Extend the current law with a $5 million exemption and 35% maximum tax.
  • Enact a compromise of a $3.5 million exemption and 45% percent maximum tax.

If Congress fails to act, 14.7 million U.S. households would have a potential estate tax liability, with an average estate tax of $1.4 million, LIMRA said. About 55% of these households do not have enough life insurance coverage on the deceased to pay the tax, and would still owe an average of $1.6 million.

If Congress extends the existing law, 2.4 million households (slightly higher than 2%) would potentially owe estate tax. At a 35% tax rate, their average tax would be $2.4 million. LIMRA’s analysis shows that 43% of these households do not have enough life insurance coverage to pay the tax and would still owe, on average, $3.1 million. 

If Congress agrees to the compromise of $3.5 million exemption and 45% tax rate, 3.6 million households (slightly higher than 3%) might owe estate tax. The average tax owed for these families would be $2.6 million. According to LIMRA’s analysis, 53% of these households do not have enough coverage to pay the tax. On average, LIMRA calculates that these households would still owe $1.6 million.  On average these households would still owe $3 million.

DALBAR validates Pacific Life funds as QDIAs

Posted on September 26, 2012 by -

All of the PL Portfolio Optimization Funds from Pacific Life Funds has been validated by DALBAR, Inc., as meeting the requirements of qualified default investment alternatives (QDIAs) for employer-sponsored retirement plans, Pacific Life said in a release.

The PL Portfolio Optimization Funds are five target-risk fund-of-funds, ranging from conservative to aggressive, that are designed to offer investors one-step diversification. Each includes up to 13 separate asset class styles, spreading risk across various markets.

The asset allocation mix for each fund is determined by Pacific Life Fund Advisors LLC with an eye toward minimizing downside risk.  

The five PL Portfolio Optimization funds from Pacific Life Funds are:

  • PL Portfolio Optimization Conservative Fund—Seeks current income and preservation of capital.
  • PL Portfolio Optimization Moderate-Conservative Fund—Seeks current income and moderate growth of capital.
  • PL Portfolio Optimization Moderate Fund—Seeks long-term growth of capital and low to moderate income.
  • PL Portfolio Optimization Moderate-Aggressive Fund—Seeks moderately high, long-term capital appreciation with low current income.
  • PL Portfolio Optimization Aggressive Fund—Seeks high, long-term capital appreciation.

To De-Risk or Re-Risk, That Is The Question

Posted on September 26, 2012 by -

With UK Gilt yields hovering around a 319-year low, Dutch bond yields at 500-year lows and US Treasuries offering negative returns across all maturity spectrums, it is unsurprising that trustees of pension schemes are questioning whether fixed income (or bond) assets are overvalued.

Furthermore, UK pension schemes looking to de-risk have an additional conundrum whether they should move their assets from equities yielding 3.7% (FTSE All-Share Dividend Yield as at 31 August) to Gilts yielding 2% (15-year Gilt yield as at 31 August). After adjusting for inflation, these Gilts are also yielding negative returns. This makes Gilts less of a risk-free asset and more of a return-free asset.

So how should a UK pension scheme allocate its assets in such an environment? Should they be de-risking or not? The rest of this article sets out some options for pension schemes to consider. The action for pension schemes will depend on their individual situation such as the funding level and strength of the sponsor.

Whilst in the short term both Gilt yields and equity markets can go lower, safe-haven bonds such as Gilts and US Treasuries are over-priced by most long-term measures. If a pension scheme’s funding level and risk budget permits, it could look to allocate its portfolio towards return-enhancing assets by increasing allocation to equity assets. The relative valuation of these assets means investing in assets that back dividend growth or have high spreads could deliver excess return for pension schemes able to handle the short-term risk. Once governments in the developed world have managed to muddle through the recession and there is some resolution to the euro-zone crisis, equities should deliver significant outperformance relative to bonds.

In the meantime, higher equity allocation could lead to higher volatility of funding level. It is also worth noting that a number of pension schemes over last two years have been considering high-yield bonds as an alternative to Gilts to obtain a higher return. This has created a huge demand in the market over this period. However, this is beginning to taper off, as shown by the volume of trading in European high-yield debt market in the last few quarters. 

Yields on high-yield debt have declined towards 7% within the BofA Merrill Lynch US High Yield Master II Constrained index, a level that historically has acted as a floor. In addition, 39% of high-yield debt within the index now trades above its call price. In May 2011, this figure reached 44% just prior to a pronounced decline in prices, possibly suggesting prices are likely to begin to fall soon.

For schemes that wish to de-risk and reduce the volatility of their funding level, they need to first evaluate whether they can afford to do so. For some pension schemes, paying the current market price to hold greater bond investments may be worthwhile to obtain greater certainty of outcomes relative to their liability. If the strategic rationale allows, then pension schemes should not get distracted by the current investment environment. However, the current investment markets also offer opportunities to improve the existing interest rate and inflation hedges without increasing allocation to fixed income assets. This may include slowing the move towards long-duration bonds by investing in shorter-duration bonds or taking advantage of low break-even inflation to switch nominal bond holdings into inflation-linked bond holdings.

Other options available for pension schemes concerned about rising interest rates and losing the absolute value of their bond investment could be to transfer some of their fixed income investment into an unconstrained or absolute return mandate. An unconstrained approach offers a superior ability to navigate interest rate and credit cycles and, as a result, may offer better protection in rising interest rate and spread-widening environments than a long-only fund.

Similar to unconstrained bonds is the greater use of alternative asset classes to obtain inflation and interest rate exposure whilst outperforming government bonds. These alternative assets include timber/forestry, infrastructure (with low private equity correlation) or even solar PV panels for those schemes looking for some added environmental benefits.

Determining the appropriate course for your pension scheme – be it de-risking or re-risking – rests on a number of factors including your funding level and risk appetite. But fundamental to any such process is a governance structure with the agility to react to rapidly changing market environments. This is where trustees who are faced with resource constraints may benefit from working with an investment professional such as a fiduciary manager that is able to identify and implement investment decisions quickly.

 

The Stakes in the Romney-Obama Contest

Posted on September 26, 2012 by -

To hear the two candidates tell it, the U.S. presidential election offers a dramatic choice on the economy: Vote for me, each says, if you want a robust recovery; pick my opponent, and we’ll plunge back into recession.

But regardless of who wins, important economic factors will remain facts of life. Millions of American homeowners are “underwater,” owing more than their homes are worth and weakening the consumer demand that is key to the economy. Employers, even if they are flush with money, won’t hire more workers until they need them—when demand rises or appears ready to.

The debt crisis in Europe resists a quick solution, and deficits and overhanging debt in the U.S. are too big to be whittled down very fast. These deficits will compete for federal revenue that could stimulate the economy through more spending or cuts in taxes.

Given the size of these problems, what is the most likely economic landscape to emerge after the election if President Barack Obama, a Democrat, wins, or if Republican challenger Mitt Romney wins?

Three Wharton faculty members say that, either way, the future is likely to look much like the present, for several years at least. “The notion in the political debate is that if you just do something a little bit differently, things will get much better. But it doesn’t work like that,” says Wharton finance professor Franklin Allen.  

“It seems to me that one of the most depressing things about this campaign has been that it’s more or less tit-for-tat, gotcha issues that have emerged, rather than any serious talk about what [the candidates] are going to do [regarding] the looming problems with the economy,” says Wharton finance professor Richard J. Herring.  

Whoever he is, the next president will face an immediate economic crisis, including the “fiscal cliff,” tax increases and deep spending cuts that will kick in automatically unless Congress and the White House can agree on an alternative. The cliff is a result of a standoff in 2011 over raising the debt ceiling. “I think once the election’s over, that’s going to be the big issue,” says Allen.

What if the Democrats, who support tax increases on the wealthy, and the Republicans, who do not, cannot agree, and the automatic provisions kick in? “I think it’s quite likely that would lead to recession,” Allen states, predicting that tax hikes and cuts in government spending would reduce gross domestic product by about 3%.

While both candidates say their policies would speed job creation, the problems run too deep to be resolved quickly, Allen adds. “It’s become a much more serious problem than we have ever had in this country before,” he says, arguing that many of today’s unemployed will remain so unless they are retrained, a lengthy and expensive process that he says is currently inadequate.

Indeed, according to Allen, the current economic problems are unique in American history. The clearest analogy is Japan, which has been struggling for many years. What’s the solution? “I don’t think anybody really knows,” Allen says.

A divided government

Obama proposes a continuation of the policies of his first term, which included efforts to stimulate the economy through federal spending and modest tax reductions focused mainly on people with low and middle-class incomes. He would allow the Bush-era tax cuts to lapse for people earning more than $250,000 a year, but would keep them for people earning less. He would stay the course with his health care overhaul—the Patient Protection and Affordable Care Act, or Obamacare—and would keep most of the regulations imposed on the financial services industry after the financial crisis.

Romney’s most dramatic economic proposal is to reduce tax rates even below the Bush levels in effect today, while making up for the lost revenue by eliminating some unspecified deductions and tax loopholes. Romney wants to repeal parts of Obamacare and many of the financial regulations. He would loosen environmental regulations and, compared to Obama, place heavier emphasis on exploiting coal and oil.

While the candidates’ economic philosophies and positions are dramatically different, neither is likely to engineer a sweeping policy change, says Herring. The reason: divided government.

Polls predict a close election, with neither contender’s coattails long enough to ensure massive wins by his party’s congressional candidates. The odds thus seem to favor a continued division in government, with neither party getting a veto-proof majority in Congress or a filibuster-proof super-majority in the Senate.

“We have to recognize the fact that whoever wins isn’t going to get a huge, sweeping mandate to do whatever they want,” Herring says. Severe problems undermining the economy are therefore likely to remain unsolved, including the decay of roads, bridges and other infrastructure, debt problems, the eventual insolvency of Medicare and American students’ lagging educational achievements compared to other developed countries.

“The question is, what are they going to do on the margins?” Herring asks.

Federal tax policy is, as most agree, far too complex and confusing, Herring says. But neither candidate is likely to have the mandate it would take to change this, given the vested interests that would resist. While Romney, who has emphasized tax overhaul more than Obama, says he would strip out many deductions and loopholes, he has not said which ones, but has indicated he would not go after popular ones like the income tax deduction on mortgage interest.

‘The worst possible consequence’

The presidential campaign has also focused on two health care issues with significant impact on the economy: Obamacare, the 2010 law that overhauled medical insurance, and Medicare, the financially troubled health care entitlement program for the elderly.

Obama considers the Patient Protection and Affordable Care Act his greatest achievement and has promised to preserve it, while Romney wants to repeal much of it and replace it with a plan that he has not fully detailed. With a continuation of divided government, Obamacare will likely survive, Herring predicts. “Romney has not clearly articulated a workable alternative, though heaven knows we don’t really understand the thing we’ve got.”

From an economic perspective, a key problem with Obamacare as written, says Herring, is the requirement that businesses with 50 or more workers provide health insurance. That has dampened the creation and growth of small businesses, which are the primary source of new jobs, he argues. Unemployment stands at just over 8%.

In the long run, problems with Medicare will have more economic impact than issues surrounding Obamacare, says Mark V. Pauly, professor of health care management at Wharton. By providing insurance to the previously uninsured, Obamacare will “give you a clean conscience,” he jokes, “but Medicare will clean out your bank account. So, from an economic point of view, Medicare is much more consequential.”

Both issues, Pauly says, create uncertainties that weaken business confidence, which in turn helps stifle economic growth. Many business people favor the Republican promise to repeal Obamacare, but worry about what would come next, while Obamacare’s business mandates are a known quantity for now. “If Republicans win and I’m a business providing health insurance, I have a hard time knowing what to expect,” Pauly notes.

In a similar way, Republicans have a more aggressive plan for reducing the Medicare funding shortfall by subsidizing participants who would shop for health insurance on the free market. But polls show that many Americans worry they would then end up shouldering more of their own health care costs in retirement, so it is unclear Republicans would push for all the changes they have proposed even if they swept the election.

On the other hand, says Pauly, Democrats have yet to propose a clear plan for preserving the current Medicare system for the long term, making the outlook unclear for future beneficiaries. “That kind of uncertainty, in the short run, is about the worst consequence of all the debate about health care,” he says.

Divided government would also make it difficult, if not impossible, to resolve problems with the 2010 Dodd-Frank financial reform law, which has business-dampening features like heavy reporting requirements to multiple agencies, Herring says. One of that law’s key goals was to prevent the need for future bailouts of financial services companies deemed “too big to fail,” but there are serious questions about whether the Dodd-Frank safeguards would work, he adds.

The stock market, after plunging in 2008 amid the financial crisis, has recouped nearly all of its losses. But Herring notes that a key factor in this rebound was the Federal Reserve’s efforts to keep interest rates low. Stocks may not do as well after these efforts end, as they must at some point. “We’re clearly relying much too much on monetary policy,” he says. “The Fed has basically been turning cartwheels” to bolster the markets and economy.

The alternative—better fiscal policy to reduce the danger from factors like the federal government’s huge deficits and debt—seems unlikely given divided government, according to Herring. As things stand now—and are likely to stand after the election—major problems like the deficits, debt, growing health care costs and eventual insolvency of Medicare will be kicked down the road to be dealt with later, after they have become worse and the solutions more costly, he predicts. “If we actually wait until there’s no choice, it’s going to be very painful.” 

© 2012 RIJ Publishing LLC. All rights reserved.

Our Weight: It’s Gaining On Us

Posted on September 25, 2012 by -

Americans of all ages, all education levels, and all income levels have been packing on lots of pounds over the past 25 years. That’s apparently why, even though as a nation we’re smoking less, our average lifespans haven’t grown as much as those of people in other advanced nations.

The numbers are startling: As many as half of all adult Americans will be obese by 2040, and half of the obese women will be “morbidly” obese. And it’s not just the poor and uneducated who getting huskier. Since the late 1980s, the prevalence of obesity has grown most sharply among higher-income, college-educated men.

Along with sporadic governmental responses—like Mayor Bloomberg’s war on Big Gulp containers—this trend has attracted considerable scholarly attention. A new paper from the National Bureau of Economic Research, for instance, tries to measure the effects of two behavioral factors, smoking and obesity, on life expectancy.

The paper, “Projecting the Changes in Smoking and Obesity on Future Life Expectancy in the United States,” was written by Samuel H. Preston, Andrew Stokes and Bochen Cao, all of the Population Studies Center of the University of Pennsylvania, and by Neil K. Mehta of Emory University.  

In short, the researchers suggested that the combination of reduced smoking and rising obesity will by 2040 have added 0.92 years to male life expectancy at age 40 and 0.26 years to female life expectancy at age 40. By itself, the decline in smoking would have added 1.52 years to male and 0.85 years to female life expectancy, the paper said; obesity accounts for the difference. Those numbers, in turn, are embedded in the Social Security Administration’s recent prediction that life expectancy at age 40 will grow by 2.55 years for men and 2.17 years for women between 2010 and 2040. 

Weight gain from 1988 to 2040

“Obesity” has a specific definition. The CDC considers a person to “obese” if he or she has a Body Mass Index (BMI) of 30.0 or higher. A person who stands 5’10” tall would be obese if he or she weighed 215 pounds or more. They would need to lose more than 50 pounds to achieve the normal BMI range of 18.5 to 24.9.

U.S. obesity rates have especially risen sharply over the last quarter century, for reasons that researchers have guessed at but not proven. Over the next quarter century, they’re expected to rise another 10 to 15 percentage points. Today, 37.5% of American adults are obese. “By 2040, 47% of men and 51% of women are projected to be obese,” the authors of the NBER study wrote.   

Even before then, many people will have to lose weight just to call themselves merely obese. “Alarmingly,” the researchers added, “the morbidly obese (BMI>35.0) increase as a proportion of the obese for both males and females, to the point where they constitute a majority of obese women by 2020 and thereafter,” the paper said.

Preston estimated that “US life expectancy at age 50 in 2006 was reduced by 1.54 years for women and by 1.85 years for men as a result of obesity. Relative to higher life expectancy countries, allowance for obesity reduces the U.S. shortfall in life expectancy by 42% (36%-48%) for women and 67% (57%-76%) for men.”  

Cross-demographic impact

One of the biggest increases in obesity in the last quarter-century occurred among demographic groups that once had the lowest rates of obesity. The obesity rates of men with higher incomes rose to 32.9% in 2007-09 from 18% in 1988-94—an 83% increase. The obesity rates of men with college degrees rose to 27.4% from 15.6%–a 76% increase. Indeed, men with high education and income levels had higher obesity rates in 2007-2008 than did men with low incomes and less than a high school degree in 1988-1994, according to CDC data. (The CDC chart below shows the rising prevalence of obesity among men and women over age 20 since 1988. For additional data, click here.)


The data show that our stereotypes about obesity, like most stereotypes, are exaggerations. “Although obesity is frequently associated with poverty, recent increases in obesity may not occur disproportionately among the poor… Over the course of three decades, obesity has increased at all levels of income,” wrote Virginia W. Chang and Diane S. Lauderdale in a 2010 article in the Archives of Internal Medicine.

Although minority groups have higher rates of obesity, “It is typically not the poor who have experienced the largest gains,” Chang and Lauderdale found. “Among black women, the absolute increase in obesity is 27.0% for those at middle incomes, but only 14.5% for the poor. Among black men, the increase in obesity is 21.1% for those at the highest level of income, but only 4.5% for the near poor and 5.4% for the poor.”

Fast food versus statins

In a statistical irony, the NBER paper noted that mortality rates for the obese have been falling as obesity increases, while mortality rates for smokers has been rising as smoking becomes less prevalent. That’s because so many young people, who naturally have lower mortality rates, have been entering the ranks of the obese, and because so many smokers are reaching retirement age, when their mortality rates naturally increase.  

In short, obesity is a more recent phenomenon than smoking, so the obese are younger, on average, than smokers. “Smokers today have been smoking for a longer period, on average, than smokers in the past,” Preston told RIJ in a telephone interview.

“But obese people today haven’t been obese for as long, on average, as obese people were in past,” he added. “That’s one reason why the mortality risks associated with obesity have declined. It also appears that statins and other blood pressure drugs, which have been used disproportionately by obese people, have been effective in reducing mortality.”

For his part, Preston doesn’t know exactly why obesity began to snowball in America 25 years ago—at the sunset of the Cold War and the dawn of the Internet Age.  “Government efforts to discourage smoking and tax increases on cigarettes were effective by the late 1980s,” he speculated. And, while smokers might tend to eat more after they stop smoking, Preston blames other factors for rising obesity since the late 1980s. “The rise of fast food is certainly part of the issue,” he said. “The price of calories in general has declined dramatically.” 

© 2012 RIJ Publishing LLC. All rights reserved.

NY Life officially announces DIA with upside

Posted on September 24, 2012 by -

New York Life officially announced the availability of the Income Plus Variable Annuity that was first reported in RIJ last summer. The deferred income annuity is available through New York Life’s 12,000-agent sales force.

Income Plus enhances the large mutual insurer’s successful deferred income annuity, the Guaranteed Future Income Annuity, which was introduced in mid-2011, by giving contract owners equity market exposure on their assets during the deferral period, before income payments begin.

In both products, if the contract owner dies during the deferral period, the designated beneficiary receives a death benefit. Otherwise, the assets are not accessible until the end of the deferral period, when lifetime payments begin.

The risk/reward equation for this enhanced DIA is slightly different from that of the existing product. Income Plus offers a smaller floor of guaranteed future income than the original DIA, but gives contract owners an opportunity to see that floor get lifted by equity market gains, if any.

 “Income Plus offers a compelling way to pursue income and potential market growth during retirement,” said Matthew Grove, the head of New York Life’s annuity business, in a release. “This next-generation variable annuity gives you confidence that your most important expenses will be covered for the rest of your life, while simultaneously allowing you to pursue more through the benefits associated with market participation.”

In a release, New York Life said:

The optional Guaranteed Future Income Benefit Rider provides a minimum level of guaranteed lifetime income payments, which can be increased if markets perform well.  This rider is available for an annual cost and can only be purchased with a single premium amount at the time of application. 

With the guaranteed income floor established by this rider, policyholders receive essential protection against market declines and income payments that will never decrease due to negative market performance. These payments begin on a date of the client’s choosing.

New York Life now offers an immediate fixed income annuity, a deferred fixed income annuity, and a deferred variable annuity. “Our industry-leading Guaranteed Lifetime Income Annuity provides retirees with guaranteed income now,” Grove said.

“Our category-creating Guaranteed Future Income Annuity provides pre-retirees with guaranteed income later.  With the launch of Income Plus, we now offer pre-retirees guaranteed income and the pursuit of more through participation in the market.”

An Ipsos survey sponsored by New York Life showed that many consumers pursue investment growth in retirement in the hope of traveling more (55%) or enjoying more leisure activities or a club membership (26%). One in eight (13%) would like to be able to use potential gains to make gifts to family members or leave money to their heirs.

© 2012 RIJ Publishing LLC. All rights reserved.