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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.

Fee Disclosure: Opportunity or Threat for Plan Advisors?

Posted on October 17, 2012 by Editor Test -

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.

Capacity Issues

Posted on October 16, 2012 by Kerry Pechter -

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.

Fee disclosure puts thousands of plan advisor jobs in play

Posted on October 4, 2012 by Editor Test -

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.

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.

Index annuity from Athene offers five rider-benefits

Posted on October 3, 2012 by Editor Test -

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.

22 Vanguard funds switch to FTSE and CRSP benchmarks

Posted on October 3, 2012 by Editor Test -

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.

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

Posted on October 3, 2012 by Editor Test -

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.”

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

Posted on October 3, 2012 by Editor Test -

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.

Northwestern Mutual adds DIA with upside potential

Posted on October 3, 2012 by Editor Test -

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.

Morningstar VA Product Update

Posted on October 3, 2012 by John McCarthy -

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.

Annuities Touch Down at TD Ameritrade

Posted on October 3, 2012 by Kerry Pechter -

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.

Remember the Alamo… and the Annuities

Posted on October 3, 2012 by Editor Test -

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.

Britain adjusts to universal auto-enrollment

Posted on September 26, 2012 by Editor Test -

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.

Bottom Line — There Is No “Typical”

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