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The Bucket

Posted on September 5, 2012 by Editorial Staff -

The Hartford to sell retirement plans business to MassMutual

The Hartford has agreed to sell its Retirement Plans business to Massachusetts Mutual Life Insurance Company (MassMutual) for a “cash ceding commission” of $400 million, subject to adjustment at closing, according to a release yesterday. The sale, structured as a reinsurance transaction, is expected to close by the end of 2012, subject to regulatory approvals and satisfying other customary closing conditions.

The Hartford’s chairman, president and CEO Liam E. McGee, said: “The agreement marks the second of three planned business sales as we continue to make good progress executing on our strategy.” The Hartford expects the transaction to have no material impact on its GAAP financial results and to benefit net statutory capital by approximately $600 million, including the ceding commission and a reduction in required risk-based capital, on closing.

The Hartford’s Retirement Plans business is primarily a defined contribution business with $54.9 billion in assets under management as of June 30, 2012. The business serves more than 33,000 plans with more than 1.5 million participants, and has a strong presence in the small to mid-sized corporate 401(k) and tax-exempt markets. It also provides administrative services for defined benefit programs. As a result of the agreement, The Hartford’s Retirement Plans employees will become part of MassMutual’s Retirement Services Division.

The Hartford will continue to sell new retirement plans during a transition period, and MassMutual will assume all expenses and risk for these sales through a reinsurance agreement. Between now and the close of the transaction, there are no planned changes with respect to the day-to-day interactions or processes between The Hartford and its Retirement Plans’ distribution partners, plan sponsors and customers.

The Hartford’s financial advisors for the divestiture are Greenhill & Co. and Goldman, Sachs & Co. and the company’s legal advisors are Sidley Austin LLP.

Fitch: No immediate impact on Hartford ratings

Fitch Ratings says today’s announcement regarding Hartford Financial Services Group, Inc.’s (HFSG) planned sale of its retirement plans business has no immediate impact on its ratings.

HFSG has reached an agreement to sell its retirement plans business to Massachusetts Mutual Life Insurance Company (Mass Mutual) for a cash ceding commission of approximately $400 million. The transaction is expected to close by the end of 2012, subject to regulatory approval. The sale will have essentially no impact on HFSG’s GAAP net income but will have a positive net statutory capital impact for Hartford Life Insurance Company of approximately $600 million.

Fitch views the sale as another step in HFSG’s go-forward strategy to focus on property/casualty commercial and consumer markets, group benefits, and mutual funds businesses. To date, individual annuity has been placed into run-off and the company has reached agreements to sell Woodbury Financial Services and its individual annuities’ new business capabilities consisting of the product management, distribution and marketing units, as well as the suite of products currently being sold. HFSG continues to pursue divestiture options for its individual life business. Favorably, a successful execution of the strategic plan to sell these noncore businesses should improve HFSG’s financial flexibility, with sales proceeds increasing holding company cash that could potentially be used to reduce debt.

Fitch already maintains separate Insurer Financial Strength (IFS) ratings on HFSG’s life and property/casualty companies that reflect each businesses respective stand-alone financial profiles. HFSG’s life insurance subsidiaries maintain ‘A-‘ IFS ratings, which are two notches below the property/casualty IFS ratings of ‘A+’. This approach was implemented in February 2009 during the financial crisis to reflect the divergence in operating performance and balance sheet strength between the life and property/casualty operations.

HFSG’s announcement today does not significantly change Fitch’s assessment of the life and property/casualty operating companies’ financial strength. Fitch expects that HFSG will continue to support its insurance subsidiaries and maintain insurance company capitalization that is consistent with the current ratings.

Fitch affirmed the ratings on HFSG and its property/casualty and life insurance subsidiaries on May 15, 2012.

Symetra names actuary Craig Raymond as chief strategy officer

Symetra Life Insurance Co. has appointed Craig Raymond as senior vice president and chief strategy officer, effective Sept. 17, 2012. Raymond will report to Tom Marra, president and CEO of Symetra Financial Corp.

Raymond had been chief risk officer and chief actuary at John Hancock Financial Services since 2009, where he managed and monitored strategic, insurance, liquidity, credit, market and operational risks. He previously was chief actuary at Hartford Life.

As Symetra’s chief strategy officer, Raymond will be responsible for long-term strategic planning, business portfolio analysis, and mergers and acquisitions. He will be based in the Hartford, Conn., area.

Raymond graduated from the Wharton School, University of Pennsylvania, with a bachelor’s degree in economics. He is a Fellow and past vice president of the Society of Actuaries and a Member of the American Academy of Actuaries.

ING Group to sell stake in Capital One

The Dutch financial services giant ING Group plans to sell its 9% stake in Capital One in a deal that could be worth around $3 billion, The New York Times reported today. ING acquired the stake in the American firm when Capital One bought ING Direct USA for $9 billion in February.

ING has been forced to sell assets as part of the conditions of a 10 billion euro ($12.5 billion) bailout it received from its local government in 2008. Along with the sale of ING Direct USA to Capital One, the Dutch firm sold its online bank in Canada to a local rival, Bank of Nova Scotia, last month for $3.1 billion. ING is also planning to sell its Asian insurance businesses.

The Dutch firm said late on Tuesday that it would sell 54 million shares in Capital One, and would set the price before the start of trading in New York on Wednesday. Based on the closing share price on Tuesday, ING’s stake in Capital One is worth around $3 billion. ING said it planned to complete the transaction by Monday, September 10.

The deal for ING Direct USA transformed Capital One into the country’s fifth-largest bank by deposits. The combined business has around $200 billion in deposits, making it larger than regional powerhouses like PNC and TD Bank. Under the terms of the deal, Capital One issued $2.8 billion worth of new shares to ING, making the Dutch firm its largest shareholder.

Shares in ING rose less than 1 percent in morning trading in Amsterdam on Wednesday. Bank of America Merrill Lynch, Morgan Stanley and Citigroup are the joint bookrunners for the deal.

MetLife announces annuity enhancements

The MetLife Income Annuity– a single premium immediate annuity – now offers an “Increasing Income Option” and an “Early Access Option.” The Increasing Income Option will allow the owner to elect to increase their income payments, compounded by an amount they choose, each year. The Early Access Option will provide access to a portion of their income payments in the event that an unexpected need arises.

The Increasing Income Option is an inflation feature that allows the annuity owner to select that their income payments be increased each year by a percentage rate they choose, generally between 2 – 4%. Under this optional feature, income payments will compound on each payment anniversary based on the pre-selected increase rate. This option is only available at issue to contracts issued to owners at least 59½ or older.

The Early Access Option allows clients to take a portion of their future income if an unexpected need arises during their liquidity period. The liquidity period will vary based on the income type elected. MetLife locks in the assumptions used to calculate the liquidity period value when the contract is issued so that clients know at purchase how much they can withdraw during the liquidity period. This feature is only available at issue to contracts issued to owners at least 59½ or older.

Marsh & McLennan gives $1.5 million to Stanford Center on Longevity

Posted on September 5, 2012 by Editor Test -

Marsh & McLennan Companies, which specializes in human resources consulting, will contribute $1.5 million through 2013 to support the Stanford Center on Longevity’s studies and activities related to financial security.

According to a release, the two organizations recently collaborated on a conference where contributors from business, academia and government addressed retirement planning in the age of longevity. This fall, the Center’s Financial Security Division will expand its web resources on that issue.

Michele Burns, former chairman and CEO of Mercer, a Marsh & McLennan company, will serve as Center Fellow and Strategic Advisor to the Stanford Center on Longevity and to its director, Laura Carstensen, PhD, and deputy director, Thomas Rando, MD, PhD.

“The goal is to help drive the dialogue forward in order to facilitate a healthier state of long-term financial security—both for the individual and society,” Burns said in a release.

“Quote” of the Week

Posted on September 5, 2012 by Editor Test -

One 401k provider girds for price pressure as disclosure kicks in

Posted on September 5, 2012 by Editor Test -

Along with the symbolic end of summer, the end of August—the 30th, to be exact—also marked the deadline for starting disclosure of 401(k) fees by plan sponsors to plan participants. As of last July 1, plan sponsors were to have received a rundown of fees from their plan providers.

At this early stage of the fee-transparency game, observers still don’t know for sure whether a spike in cost-consciousness—among sponsors or participants—will follow the fee disclosure deadlines, or if a significant number of plan sponsors will want to switch plan advisors, providers or administrators in search of lower fees.

Providers are evidently concerned about a price war, and suggest that plan sponsors take care not to sacrifice quality for low price.

An executive at Security Benefit warned in a recent release that the Labor Department’s fee disclosure rules could trigger a “fee race to the bottom” unless plan providers shift the focus to the “reasonableness” of service costs rather than the costs alone.

Simply pursuing the lowest cost is a risk for small plan providers, which account for 90% of the nation’s 401(k) plans, said Kevin Watt, senior vice president of Security Benefit’s defined contribution group.

“The ability to easily see costs will prove invaluable to plan participants,” he said. “But reasonableness means a lot more than cheap.” If service quality decays, plan participants could be hurt more than helped by the new rule, he said.

“It’s absolutely critical that before the RFPs [requests for proposals] start going out, participants need to know what they give up for stripped-down, low-cost plans,” Watts added.

The first round of the DOL’s fee disclosure rules, which became effective on July, requires service providers to disclose the compensation they receive to plan sponsors. Sponsors will be able to compare service prices among providers more easily, stoking price competition among providers.

As of August 30, the new rules require plan sponsors to begin disclosing the fees of the investment options in their plans to participants. Watt said disclosures will give good advisors an opportunity to stress the link between the cost of advice and investment outcomes.

Security Benefit partners with licensed financial planners to provide advice to employer-sponsored retirement plans. The firm’s recently-launched Security Benefit SecurePoint Retirement 401(k) product includes the services of Mesirow Financial as an ERISA 3(38) fiduciary.

Plan sponsors are not compelled by their fiduciary responsibility or by the new regulations to determine that fees are low, only that the fees are “reasonable.” Their perception of reasonableness may depend on whether they get complaints about fees—or perhaps legal action—from plan participants.

Fidelity Investments, the largest 401(k) provider, has released fee data to participants and not received much feedback, but that was no surprise because Fidelity’s fees already reflect vast economies of scale. It may take longer to see how participants at tens of thousands of small, higher-cost plans will react as they learn more about their fees.

“Participants will be surprised by the size of these fees,” predicts business and tax attorney Christopher Ezold, a Philadelphia-based attorney specializing in business, employment and health care law. (According to a research group, New York City-based Demos, the total fees paid on 401(k) plans reduce accumulation in retirement accounts by 30% on average over a lifetime of saving.)

“In fact, many will be startled to see that they are paying investment management fees at all. The new rules will likely strengthen a trend to reduce fees on all 401(k) plans as long as participants learn what action they should take,” Ezold said. But he warned that the mere availability of fee information will not necessarily lead to lower fees.

“Now that the proverbial curtain has been pulled away, the heightened focus on fees will empower the participants to demand a better return on their investment,” said Ezold. “However, participants need to do their homework and take action. These new quarterly reports need to be examined and compared if the plan participants expect to see change.”

“America the Undertaxed”

Posted on September 5, 2012 by Editor Test -

At a little past midnight in the old-fashioned clubroom of an Ivy League university a few months ago, two men settled deeper into leather chairs and swirled the ice in their last cocktails of the night. The topic of U.S. tax policy came up.

It’s not healthy, one said, when as many as half of all Americans pay virtually no federal income taxes, leaving the rest with a huge burden. If the poorer people paid more, they might better appreciate the true cost of what society gives them and relinquish their sense of entitlement.

Personally, I would prefer to owe more taxes. That’s not because I think it could make me a better citizen, but because I’ve noticed that bigger tax bills tend to correlate with higher standards of living. In any case, I’m not sure whether I’m taxed fairly or unfairly, relative to the services and benefits I get.

In the home stretch of a presidential race where the tax question is front and center, an MIT political science professor makes the counter-intuitive claim in the latest issue of Foreign Affairs that the U.S. is a low-tax haven compared with other advanced countries.

In an article called “America the Undertaxed,” Andrea L. Campbell claims that the overall tax burden has been shrinking in the U.S. for decades, on both rich and poor, and that the decline has led not to general prosperity but merely to a concentration of wealth in fewer hands.

Campbell gathered a wide range of data that enable her to make comparisons between the U.S. of several decades ago and today and also between the U.S. and some 30 other countries in the Organization for Economic Cooperation and Development, or OECD.

In terms of historical data, she claims that the effective federal income tax rate for a family of four with a median income was was just 5.6% in 2011, down from 12% in 1980. Overall, the individual income tax was equal to 10.4% of Gross Domestic Product in 1980 but had fallen to 8.8% in 2005.

Wealthy families have evidently gotten about as much relief as the median family. “The top one percent of taxpayers paid an average federal income tax rate of 23% in 2008, about one-third less than they paid in 1980, despite the fact that their incomes are now much higher in both real and relative terms,” Campbell writes.

Taxes on US corporations, as a percent of all federal revenues, have fallen to 10% today from 30% in the 1950s, her data shows. And while the U.S. has a statutory corporate tax rate of 39%, tax credits made the effective corporate tax rate between 2000 and 2005 only 13%, according to a Treasury Department report cited by Campbell.

Compared with 33 other industrialized nations, total tax revenues in the U.S. were the third lowest as a percent of GDP in 2009, the article said. The highest percentage was 48.1% in Denmark. The percentages in the U.K. and Canada were 34.3% and 32.0%, respectively, and the percentage in the U.S. was 24.1%. Only Chile and Mexico, at 18.4% and 17.4%, respectively, ranked lower than the U.S. on that scale.

Looking only at personal income taxes at all levels of government as a percentage of GDP, the U.S. doesn’t differ much from other countries, on average. Our personal income taxes equal about 9.2% of our GDP, while the OECD average is 10.1%. But European countries have a value-added tax or VAT, which accounts for their higher total tax revenues, as a percent of GDP.

The VAT is a tax on the value added to goods and services at every stage in the production of a given product. On average, other OECD countries get the equivalent of 6.7% of GDP from VAT every year. The VAT is a regressive tax, meaning that it eats up a larger percentage of the income of the poor than of the rich, but the VAT is generally used to finance universal social services, which tend to have relatively more value to the poor than the rich.

Since taxes in the U.S. are already low, according to Campbell’s analysis, she sees little point in proposals by Rep. Paul Ryan (R-Wis.), the Republican vice presidential nominee, to reduce the tax burden by cutting federal spending to 16% of GDP by 2050 from 24% of GDP today. “Ryan’s plan would give those with incomes over $1 million a tax cut of $265,000” on top of the Bush tax cuts already in place, while raising taxes on low-income households by cutting the Earned Income Tax Credit, she writes.

But, as one of the two men in the clubroom argued, wouldn’t cutting entitlements and raising taxes on low- or moderate income households give that demographic a stronger sense of responsibility? Doesn’t social insurance spoil people and encourage moral hazard?

That idea does have a certain self-serving appeal, but it’s difficult to see how someone with even an average income could afford higher taxes. A person with a gross income of $42,000, for instance, currently takes home about $2,500 a month after withholding for income and payroll taxes and deductions for health insurance and a modest 401(k) deferral. That doesn’t leave much room for higher taxes.

If our taxes have in fact been shrinking for decades, then why do we feel so hounded by the taxman? I don’t know. Maybe it’s because there are so many different taxes and fees, or because the tax code is so complex. Maybe we fail to factor in the value of the available tax credits and deductions, or don’t acknowledge the value of what our taxes buy. Perhaps higher tax rates are just an inevitable (though nonetheless unwelcome) covariant of success.

Or it may be that declines in tax revenues, such as we’ve seen as a result of the financial crisis, can’t help but translate into higher levies on those who are still able to pay. For them, it must feel like persecution.

Life annuities are more popular than retail sales suggest: AARP

Posted on September 5, 2012 by Editor Test -

Sales of individual life annuities have always been relatively modest, prompting perennial explanations of the “annuity puzzle,” as well as speculation that, despite the Boomer retirement tsunami, Americans may never really warm up to the idea of insuring against longevity risk.

But a new study from the AARP Public Policy Institute shows that, when offered the choice between a lump sum and an annuity in an employer-sponsored retirement plan, Americans choose the lifetime payout surprisingly often—more often, that is, than retail sales data suggest.

That means there may be “more potential in the annuity market than many observers have assumed,” according to the authors of “Older Americans’ Ambivalence toward Annuities: Results of an AARP Survey of Pension Plan and IRA Distribution Choices,” which was published last spring.

“People who have defined benefit plans, and who have a choice in the matter, are likely to elect an annuity,” said Sandy Mackenzie, who co-wrote the report with Carlos Figueiredo. “Even among members of defined contribution plans, one in three say they would be willing to choose an annuity.”

The world according to AARP

Even if you exclude Social Security, the study showed, annuities themselves aren’t rare in America. “Among retirees [ages 59 to 75], no less than 74% were receiving (or expecting to receive) income from an annuity of some kind, and 63% were receiving income from a life annuity,” the study found.

Among older workers [ages 50 to 75] whose most important plan was a traditional DB pension that offered a lump sum distribution option, 63% told the AARP researchers that they intended not to take a lump sum distribution. Of current retirees who had had a lump sum option, 87% had not taken the lump sum. Only about one in ten older workers and retirees with a lump sum option expected to choose or had already chosen the option of taking a full lump sum balance.

The tendency to choose an annuity was weaker among workers and retirees covered by 401(k) plans, and weaker still among those whose most important plan was an IRA. But even in those cases, the annuity was a surprisingly common choice.

In 401(k) plans that offered options other than lump sums, 31% of current older workers and 25% of retirees planned to elect or had already elected a life annuity. Another 24% of workers and 18% of retirees planned to elect or had elected a series of regularly scheduled payments in lieu of a lump sum. Only 11% of workers but 30% of retirees planned to elect or had elected a lump sum. One in four workers was still undecided decision.

The survey showed how stark a difference there is between current retirees and near-retirees in terms of the type of retirement plan coverage. In the survey, 61% of retirees said they had a traditional DB or cash balance plan, compared with only 33% of those who were 50 and over but still working.

Squaring the facts

Mackenzie and Figueiredo can only speculate, however, why people are more amenable to the life annuity concept when it’s an exit strategy from an employer-sponsored retirement plan than when it’s a retail option.

“There may be a problem with the marketing of retail annuities or the way they’re perceived,” said Mackenzie, a former International Monetary Fund official and author of Annuity Markets and Pension Reform (Cambridge, 2006) and The Decline of the Traditional Pension (Cambridge, 2010).

“Maybe the participants feel that the in-plan annuity comes from a more trusted source. The lack of previous association with an insurance company might explain low retail sales. Our message is simply that, based on our data, the market for immediate annuities shouldn’t be so vanishingly small,” he said.

“There might be self-selection bias affecting the results [i.e., that people who like annuities choose companies that offer defined benefit plans], or because people may choose the annuity just because it’s the default,” Mackenzie added. “I don’t want to overplay the results, but if you observe that the demand for life annuities as such is pretty small, then how do you square that with the fact that, even among members of defined contribution plans, one in three say they would be willing to choose an annuity?”

The AARP study joins the relatively slim body of literature on annuitization rates in retirement plans. A 2007 study by Steve Utkus and Gary Mottola of participants in two Vanguard-administered Fortune 500 plans, a traditional DB plan and a cash balance plan, found that “annuitization was popular among a small though meaningful group: 27% of older participants in the traditional plan and 17% in the cash balance plan elected an annuity.” The older the participant at the time of the distribution—which didn’t necessarily occur at the moment of retirement—the more likely he or she was to take an annuity over a lump sum.

The data for “Older Americans’ Ambivalence toward Annuities” was collected in the spring of 2010. Some 1,750 older workers, aged 50–75, and 670 retired people aged 59–75 were interviewed. Each had to be a member of at least one pension plan or have an individual retirement account (IRA). Older workers had to have a pension plan or retirement saving account. Retirees had to have begun drawing or receiving payments from their most important retirement plan/account in the last three years.

Bernanke, Equities and the November Election

Posted on September 4, 2012 by Kerry Pechter -

If Mitt Romney’s and Paul Ryan’s punches have failed to KO a vulnerable president, the reason may be no farther than your Bloomberg terminal, where you can see that the S&P 500 has more than doubled since the earliest days of the Obama administration.

Credit for the rally—or blame, if you’re an angry bear—arguably goes to Fed chairman Ben Bernanke, who as arbiter of U.S. central bank policy has suppressed prevailing interest rates and somehow—despite a strong undertow of risk aversion among mass investors—managed to buoy up stock prices.

Last Friday, at the annual symposium sponsored by the Kansas City Fed at the foot of the Grand Tetons—the Olympus of the banking gods—Bernanke reiterated his commitment to keep rates low for as long as another two years; by mid-afternoon on August 31, the S&P hit 1409, up from 680 on March 9, 2009.

In the course of his address, whose meaning was as usual camouflaged in Fed-jargon and stippled with acronyms, Bernanke more or less assured the markets that his motto remains, “Easy does it.” Hence the equities outlook, as well as Obama’s, is pretty good, at least for the moment.

It could be worse

Regarding the stock market, Bernanke specifically said, “It is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.”

The first stage of the Fed’s asset-buying policy also put a floor under prices of mortgage-backed securities and lowered retail mortgage rates, he said. Lower mortgage rates helped people refinance, if they qualified, and support higher home prices.

Once the forces of deflation were muzzled, in Bernanke’s view, the economy could begin to recover, and did. “As of 2012, the first two rounds of LSAPs [large-scale asset purchases] may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred,” Bernanke said in his speech.

“As of July,” he added, “the unemployment rate had fallen to 8.3% from its cyclical peak of 10% and payrolls had risen by 4 million jobs from their low point… Inflation (except for temporary deviations caused primarily by swings in commodity prices) has remained near the [Federal Open Market] Committee’s 2% objective and inflation expectations have remained stable.” Manufacturing, housing, and international trade have strengthened, and investment in equipment and software has rebounded, he said.

Four dangers

Four things could still go wrong, Bernanke conceded. First, the Fed’s policy could backfire if it buys too many U.S. government agency and Treasury bonds, reduces the liquidity of the market for U.S. debt, and compels private buyers to demand higher yields in return. Second, the Fed could eventually own so many assets that, when the economy revives, it couldn’t sell them fast enough to suck excess cash out of the economy and prevent inflation. Third, the Fed’s rate-suppression policy could compel investors to take bigger risks in hopes of higher yields, and thereby de-stabilize the financial system again. Finally, a sudden spike in rates could cause the assets on the Fed’s balance sheet to fall in value and the Fed might lose hundreds of billions of dollars. But the potential dangers of his policies, the central banker said, were outweighed by their positive effects.

A number of “headwinds” are preventing the economy from recovering faster than it has, Bernanke added. He cited the facts that new construction remains at low levels, that hiring and purchasing by governmental entities is down because of depressed tax receipts, that uncertainty and anxiety persists regarding the so-called “fiscal cliff” at the end of 2012, that many homeowners and small businesses still find it difficult to borrow, and that uncertainty about the Eurozone economy is weighing on Americans.

Rates will stay low

In conclusion, Bernanke was fairly clear that interest rates aren’t going up soon, at least not if the Fed can help it. “A number of considerations,” he said, “…argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods.”

Letter to the Editor

Posted on August 29, 2012 by Editor Test -

Dear editor:

I noticed the opening sentence of “Weighing the Value of a Variable Annuity” (July 31, 2012 RIJ) mentions that Steinorth and Mitchell indicate that a VA lifetime withdrawal benefit—especially one with a ‘ratchet’—can provide upside potential and downside protection many Baby Boomers want in retirement.

Attached is a short PDF I sent to you previously, containing selected language from the 1998 GMWB & GLWB patent filing. Anticipating such a desire for a ratchet, I included it in the patent filing and even gave a numerical example of how this would work. (See page 3 of the attached PDF.)

Another reason a VA-writing life insurer might want to offer a “ratchet” GLWB is for persistency purposes. Suppose the VA account value goes up substantially after the GLWB election in a product with a standard, non-ratcheting GLWB. In the current product, a consumer’s GLWB withdrawal level is fixed at the original level. If the consumer performs an exchange to a new VA and elects a new GLWB still of the standard, non-ratcheting form, then he or she establishes a higher GLWB withdrawal level.

If the original VA-writing life insurer had offered a “ratchet” design, such loss of business on the books could have been avoided, resulting in higher assets under management and the commensurately higher M&E&A revenue.

So while a ratcheting GLWB may offer additional value (for an additional price) to the consumer, the insurer’s self-interest can also play a role in the offering of such a design.

Best wishes,

Jeffrey Dellinger

Most participants still oblivious of plan fees: LIMRA

Posted on August 29, 2012 by Editor Test -

Two-thirds of Americans with defined contribution (DC) plans or IRAs say they spend “less than five minutes” perusing their retirement plan disclosures, and 20% say they “rarely or never” read the disclosure paperwork, according to a new LIMRA survey.

Younger plan participants (age 18-35) are more likely to report reading their disclosures and are more likely to reach out to their employer for information about their retirement account than older participants, the survey showed.

“With the implementation of the Department of Labor’s new fee disclosure rule, LIMRA wanted to gauge participant sentiment throughout the process,” said Alison Salka, corporate vice president, LIMRA Retirement Research. “Not surprising, almost 9 out of 10 participants either did not know the fees they paid or did not think they paid any fees for their employer-sponsored retirement plans.

“As participants are provided more detailed information about their retirement plans’ structure and fees, we are interested to see how they respond. This survey is part of a series to track consumer knowledge and understanding of the information and the subsequent actions (if any) they take.”

Only 12% of plan participants said they could estimate the amount of fees and expenses they paid on their retirement plan account. Three-quarters of these participants said they felt the fees and expenses were reasonable. Interestingly, 56% of those who estimated the fees and expenses thought their fees were more than 2%, which is more than double the all-in median fee for a defined contribution plan participant (based on plans included in a 2011 Investment Company Institute study).

LIMRA also asked participants what action they would take if they found out their fees and expenses were higher than average. (See chart below.) One-quarter said they would move their assets into funds with lower fees, one-fifth said they would talk to their employer about trying to lower the fees but nearly half said they would take no action or they didn’t know what they would do. While men are slightly more likely than women to say they would take no action than women (19% vs. 13%), women are more likely to not to know how they would react (36% vs. 26%).

“This study underscores consumers’ lack of understanding about how their retirement plans are administered,” noted Salka. “This offers an opportunity for plan sponsors and providers to educate participants on the value and benefits of the plan.”

Young guns want to eat your lunch

Posted on August 29, 2012 by Editor Test -

Don’t look now, but a group of former MicroSoft techies and math geeks want to take over the mass-affluent financial advice market.

FutureAdvisor, the “online investment advisor for the everyday investor,” has raised $5 million in Series A funding from Sequoia Capital, according to the company.

The firm now analyzes—but does not manage—$4 billion in assets and claims to save its users, including 11 million 401(k) participants, a combined $50 million over a lifetime.

The young firm, which RIJ first wrote about last March, has just launched what it calls the industry’s first personalized 401(k) fee analysis and recommendation features, designed to help people save on fees in their 401(k) portfolios. This feature can be found at www.futureadvisor.com/401k.

“FutureAdvisor promises to democratize access to financial advice, save consumers thousands of dollars on annual fees, and enable customers to retire more comfortably,” said Warren Hogarth, a partner at Sequoia Capital, in a release.

Sequoia Capital has invested an additional $5 million in FutureAdvisor, completing its Series A round. The founding team includes financial industry veterans, top software engineers from Microsoft and math PhDs from top universities. In addition, FutureAdvisor is backed by angel investors, Square’s Chief Operating Offer, Keith Rabois and Yelp founder Jeremy Stoppelman.

A company release said, “Built on research-backed algorithms, FutureAdvisor’s free Web service gives everyday investors personalized recommendations to reduce fees, maximize tax efficiency, and select the right assets in their portfolios. Unlike traditional advisers, FutureAdvisor is free and requires no minimum assets. The founding team includes financial industry veterans, top software engineers from Microsoft and several math PhDs from top universities.”

Participants better off in TDFs: The Principal

Posted on August 29, 2012 by Editor Test -

In analyzing a subset of 2.4 million defined contribution accounts, The Principal Financial Group, marketer of LifeTime target-date funds, recently compared participants who use a TDF (the “do it for me” crowd) with participants who select their own allocation and services (the do-it-myself” group).

The Principal research showed that do-it-myself participants tended to be less diversified than participants who use one TDF option. The former used an average of two to four investment options across the board, compared to the average 15-20 underlying investment options in the typical target date portfolio.

“We believe a minimum of five asset classes should be used with a broad selection of investment options to provide adequate diversification for the typical retirement plan participant,” said Jeff Tyler, portfolio manager, Principal LifeTime Funds. “The research shows that many do-it-myself investors aren’t meeting that mark.”

The Principal took the orthodox position that TDFs for younger investors should have higher equity positions because those investors have a long time horizon. The assumption of higher risk-tolerance by young investors is not universally accepted, however.

Zvi Bodie of Boston University has claimed that there’s no evidence that time diversification works for equity holders. In addition, the directors of NEST, Britain’s public option defined contribution plan, believe that losses of principal in early life can turn young investors away from equity investments permanently.

Principal found that, on average, do-it-myself participants born after 1987 had nearly 30 percentage points less equity exposure (54.7%) in their portfolios than the 83.95% within a target date investment option for that age.

There’s less controversy over the beneficial effects of regular portfolio rebalancing—a typical built-in feature of TDFs. The Principal found that only two percent of do-it-myself investors elected an automatic rebalancing service.

“We found that do-it-myself investors are rarely taking the important step of selecting auto-rebalancing services to keep their portfolios at the risk tolerance level they selected based on their time horizon. Auto-rebalancing is another step to take the emotion out of investing, to avoid negatively reacting to volatile markets,” Tyler said in a release.

The Principal’s research was based on a survey of participants of defined contribution (DC) retirement plans serviced through The Principal, and considered only their plan assets.

Forecast from Morgan Stanley: Slightly bullish

Posted on August 29, 2012 by Editor Test -

Morgan Stanley Smith Barney’s Global Investment Committee has released a cautiously positive economic and financial outlook this month, at least from the viewpoint of risk sellers. It expects further monetary easing by the Fed and the European Central Bank to “support risk-asset markets and eventually the global real economy.” Sellers of risk protection might not take comfort in its expectation of low rates until 2014.

On various asset classes, MSSB said its position is:

Overweight: Investment grade and emerging market bonds and managed futures, emerging market equities, and US region equities. Within US equities: large caps, growth.
Market weight: Total equities; commodities, short-duration and high yield bonds.
Underweight: Cash, developed-country sovereign debt, developed market equities, inflation-linked securities and global real estate investment trusts.

On economies, the position is:

We expect global growth to remain positive this year and next, despite the fact that Europe is in recession and growth is slowing in the U.S. and most emerging market economies.
Globally, we expect core inflation to abate; fundamentals and policy options in emerging market economies are generally more robust they are in the developed market economies.

On profits:

Expect a softening of 52-week forward earnings per share. The S&P 500 forward earnings figure remains below $111, down from nearly $112 in early summer.
Forward earnings per share for global equities has dropped under $28 from more than $30 last summer.

On interest rates:

In developed markets, central-bank policy rates are likely to remain low at least into 2014.
The Federal Reserve will probably embark on a third round of Quantitative Ease.
The European Central Bank will further support EU sovereign debt markets and major European banks.
Emerging market central banks have begun easing to offset slower growth.

On currencies:

In the short-term, we expect US-dollar strength versus the euro will persist in the short-term.
Longer term, major developed market currencies will likely decline against several emerging market currencies.

A Time to Laugh, or Cry

Posted on August 29, 2012 by Kerry Pechter -

As of the halfway mark of 2012, the news on variable annuities, like news about the world at large, is mixed. The good news: net new money is flowing into the business. The bad news: net flows are at their lowest level since the beginning of the living benefit era.

LIMRA released mid-2012 sales figures for the top 20 annuity issuers in the U.S. last week. This week, Morningstar followed up with its quarterly VA sales report. The numbers provide specific detail to the anecdotal reports that annuity sales have softened this year.

Sales are off 6% year-over-year for three main reasons. Supply is down as a result of the retreat or withdrawal of several once-major players. Products are also less generous than they use to be, thanks in part to the fact that low interest rates raise the cost of hedging the guarantees. In addition, the industry relies heavily on its biggest members for growth. The five largest issuers (including TIAA-CREF) account for about 58% of sales; the top 10 issuers account for 80%.

At this point, most people know about MetLife’s intended pullback from the market, evidenced by its lower (but still high) sales this year. In 2011, MetLife sold $12.65 billion worth of variable annuities in the first half of the year. In 2012, the firm’s mid-year VA sales were $9.54 billion, a decline of just over 25%. MetLife was in third place in VA sales rankings in mid-2012, after having been first in mid-2011.

In his first-quarter 2012 earnings call, MetLife CEO Steve Kandarian told analysts that the firm was targeting total annual 2012 VA sales of “$17.5 to $18.5 billion,” following its record sales of $28.44 billion in 2011. To the chagrin of investors and brokers, MetLife has reduced the generosity of its living benefit riders to help reduce risk exposure and temper its sales.

MetLife’s chief competitors, Jackson National Life (known for giving advisors maximum investment freedom) and Prudential Financial (known for its “highest daily” benefit and asset-transfer risk management mechanism), have also moderated the generosity of their riders, but without as much impact on sales. Jackson’s VA sales are actually up slightly.

Jackson’s mid-year 2012 sales were $9.64 billion, compared with $9.53 billion for the first half of 2011, putting it in second place, up from the third spot a year ago. Prudential VA sales were down about 9%, to $10.29 billion this year from $11.35 billion in the first half of 2011.

Among the rest of the top 10, sales are down moderately at Nationwide and RiverSource, up moderately at AXA Equitable and AIG, and roughly even at Lincoln Financial, AEGON/Transamerica and Allianz Life of North America. Meanwhile, there’s been some action among smaller companies. Ohio National and Guardian, for instance, have quietly slipped into Morningstar’s top 20 list after beefing up their products earlier in the year.

Guardian Life, a mutual company, saw the industry’s biggest percentage increase in sales, going from $487.5 million in the first half of 2011 to $843.4 million in the first half of 2012, an increase of more than 70%. Ohio National sales data didn’t appear on LIMRA’s Q2 2012 sales list because it doesn’t participate in the LIMRA survey, but it did appear on Morningstar’s. The Cincinnati mutual insurer, which introduced a new living benefit rider last winter that offers a 7% annual rollup for those who agree to invest in volatility-managed funds, had first-half 2012 sales of $1.377 billion, up 65% from $837 million in the first half of 2011.

In a single year, Ohio National rose from 21^st place to 13^th place on Morningstar’s VA sales ranking, which was the greatest positive change in ranking of any company during that time. Ohio National was also the fourth-highest selling VA issuer in the wirehouse channel, with $367.2 million in the first half of this year. Its two most popular contracts are the ONCore Premier and ONCore Lite II.

John Hancock may have seen the biggest decrease in VA sales, with a decline from $1.05 billion in the first half of 2011 to $514.8 million in the first half of 2012.

Sun Life Financial, the Canadian-owned company that has gotten out of the VA business in the U.S., is the only firm not on LIMRA’s top 20 list of domestic VA sellers in mid-2012 that was on it in mid-2011 (with $1.65 billion in sales). Hartford Life, which was not on the list a year ago, is back on the top 20 list this summer, with about $480 million in VA sales. The Hartford will continue to sell VA contracts until the sale of its VA business to Forethought is completed, a company spokesman said. (Hartford and John Hancock were not on Morningstar’s top 20 in the latest report; ING Group and Ohio National were there instead.)

Everything but net

Less fresh money is flowing into VAs this year. According to an analysis by product manager Frank O’Connor of Morningstar’s Annuity Research Center, only about $7.8 billion of the $73.5 billion in VA sales in the first half of 2012 was net cash flow; exchanges from one contract to another made up most of the sales volume.

“The positive flow has gotten so concentrated in the two or three biggest companies that when they hit the brakes the industry number nose dives,” O’Connor told RIJ yesterday. He rattled off the annual mid-year net flow totals (in billions) for years 2005 through 2011: $10.0, $15.2, $15.1, $14.7, $11.2, $9.8, and $11.6.

If net flow stays at the current low pace, the variable annuity industry will end 2012 with the least total net flow than it has seen in over a decade. It will be even lower than the $17 billion recorded in 2009, during the aftermath of the global financial crisis, and far below the $46 billion recorded in 2003.

Morningstar’s VA numbers were slightly different from LIMRA’s. Second quarter 2012 variable annuity new sales were up 5.5% over first quarter 2012, to $37.7 billion from $35.8 billion, but were down 4.6% from the second quarter of 2011, O’Connor’s report said. “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,” he wrote.

The two most significant trends in VAs this year are what O’Connor called a “back to basics” movement that emphasizes the tax-deferred growth advantage of VAs (which put no limit on contributions of after-tax money) and a trend toward simplified lifetime income guarantees.

On the “back to basics” side is Jackson National’s Elite Access product, launched last March 5. The B-share has a 1.00% combined M&E and Administrative charge. It offers no death or living benefit guarantees; rather, its focus is on tax deferral and a broad array of investment options, including alternative asset classes.

Two other “back to basics” contracts are the Midland National LiveWell and Symetra Tru variable annuities. Both offer no loads and an extensive range of investment options, but the LiveWell VA offers a guaranteed death benefit and costs more (2.65% vs. 1.32%, all in). Neither product offers an income benefit.

Both Schwab and TDAmeritrade are adding low-M&E, simplified VAs with living benefits to their platforms. Schwab Retirement Income, launched on August 1 and underwritten by Pacific Life, has an optional single or joint lifetime withdrawal benefit and three fund options: Schwab Balanced, Balanced with Growth, and Growth funds. All three options are funds of exchange-traded funds (ETFs) and each costs 0.80% a year. The contract has no guaranteed death benefit. The total cost of 2.20% (2.40% for joint) also includes a 0.60% M&E/Administrative fee and 0.80% for the single lifetime withdrawal benefit (1.00% for the joint life version).

Great West launched the Smart Track contract last February 27 for TD Ameritrade’s platform. Smart Track offers an extensive fund lineup, a tiny 0.25% combined M&E and administrative charges, average total fund expenses of 1.01%, and optional single or joint lifetime income benefits for an additional 1.00% (the joint version has a lower withdrawal percentage). Only amounts allocated to the Maxim SecureFoundation Balanced L fund, with a total expense ratio of 0.94%, are covered by the guarantee, so the all-in cost for the income guarantee in Smart Track is just 2.19%, in the same territory as the new Pacific Life product on the Schwab platform.

The most popular VA share classes remain the B-share (61.4% of sales) and the L-share (21.3% of sales), but sales of the client-friendly O share, whose M&E fee drops from B-share to A-share levels at the end of the surrender period, are growing. From virtually zero sales a year ago, the O share had a 3.9% share of sales as of June 30, 2012, according to Morningstar.

The High-Voltage Plank in the GOP Platform

Posted on August 29, 2012 by Editor Test -

The 2012 GOP party platform was posted on The New York Times site yesterday. The section on Social Security pretty much reiterated the statement on the 2008 platform. (See the two below.) Both call for putting the program on a “sound fiscal basis” and “giving workers control over, and a sound return on, their investments.”

The 2012 platform stipulates, “No changes should affect any current or near-retiree.” As a Boomer, I was relieved to hear that; but why divide the country into Social Security haves and have-nots? The platform also charges, “Younger Americans have lost all faith in the Social Security system, which is understandable when they read the non-partisan actuary’s report about its future funding status.” (More about that in a moment.)

There’s no mention in the platform of tampering with the $100 billion-a-year tax expenditure for employer-sponsored savings plans, but closing unnamed tax loopholes is one of the ways that Paul Ryan has said he hopes to reduce the federal budget deficit.

Security for those who need it: Ensuring Retirement Security (2012 Republican platform)

“While no changes should affect any current or near-retiree, comprehensive reform should address our society’s remarkable advances in longevity and allow younger workers the option of creating their own investment accounts as supplements to the system. Younger Americans have lost all faith in the Social Security system, which is understandable when they read the non-partisan actuary’s reports about its future funding status. Born in an old industrial era beyond the memory of most Americans, it is long overdue for major change, not just another legislative stopgap that postpones a day of reckoning. To restore public trust in the system, Republicans are committed to setting it on a sound fiscal basis that will give workers control over, and a sound return on, their investments. The sooner we act, the sooner those close to retirement can be reassured of their benefits and younger workers can take responsibility for planning their own retirement decades from now.”

Social Security (2008 Republican platform)

“We are committed to putting Social Security on a sound fiscal basis. Our society faces a profound demographic shift over the next twenty-five years, from today’s ratio of 3.3 workers for every retiree to only 2.1 workers by 2034. Under the current system, younger workers will not be able to depend on Social Security as part of their retirement plan. We believe the solution should give workers control over, and a fair return on, their contributions. No changes in the system should adversely affect any current or near-retiree. Comprehensive reform should include the opportunity to freely choose to create your own personal investment accounts which are distinct from and supplemental to the overall Social Security system.”

I don’t understand the determination to dismantle Social Security just because of a temporary demographic bulge. If there’s a deep well of antipathy toward Social Security among Americans, I’m not hearing or seeing it. Whenever I witness a demonstration of retirement income planning software, for instance, I can’t help noticing that the red, blue, green or yellow bars of the illustrations always include inflation-adjusted Social Security income in the projections. Remove Social Security income, and we’ll have to rewrite all the software.

The suggestion that Social Security doesn’t give people a “sound return” on their money has never made sense to me. (What is a “sound return,” exactly?) First of all, Social Security income is guaranteed. Guarantees are expensive, but worth it. Second, Social Security benefits are immune to deadly sequence-of-returns risk; it relieves the worry of retiring in the wrong year. Third, it’s inflation-adjusted. At today’s annuity prices, a new retiree would need at least $300,000 to replace a modest $1,800-a-month Social Security benefit. That’s why, as a sole proprietor, I gladly wrote a five-figure check to Mr. FICA for 2011. It’s a bargain. (Yes, Social Security crowds out the private annuity market. If that’s the motive for dumping it, then we should have a debate on that specific question.)

As an armchair economist, I still can’t figure out how the U.S. can “go broke” by taking money out of the economy via FICA taxes and immediately placing it back into the economy through the distribution of Social Security benefits—and thereby financing consumer demand, on which the health of the economy supposedly depends.

I must also question the accuracy of the GOP platform suggestion that “non-partisan actuaries” have thrown up their hands over the future of Social Security. Here’s what the American Academy of Actuaries said in 2007 (and the AAA refered to this document in a recent release):

“The problems facing Social Security, when placed in the context of the enormous US economy, are not nearly as daunting as they might seem when presented in stark dollar terms. In the 70-year history of Social Security, the tax rate has increased from 2% to 12.4% of taxable payroll; the estimated increase required to fund the current system over the next 75 years is far less. Further, the need for such tax increases can be reduced, or even eliminated, by changes in benefits and other features; and any required changes can be phased in gradually. Does this mean we can do nothing and just wait to see what develops? While waiting will not destroy the system, there are advantages to acting now.”

Why Growth Matters More Than Debt

Posted on August 29, 2012 by Editor Test -

The U.S. federal debt recently eclipsed $15 trillion, and is still climbing. That has generated headlines and raised a lot of questions. How should we behave towards China, supposedly our biggest creditor? Has the debt burden become unsustainable? How will our kids and grandkids ever pay off the debt we’ve been accumulating? The answers contain some surprises.

A total federal debt of $15 trillion means debt owners currently hold assets totaling $15 trillion in Treasury bonds, bills, and notes. Let’s examine who owns those assets.

Who owns the debt?

A pie chart is a convenient way of showing how those assets break down by owner. At the time of this writing, the latest official numbers are for December 2011. (The official numbers are updated monthly: The Treasury summarizes our debt position; the Fed estimates the magnitude of foreign holdings by country and reports its own holdings of Treasury securities.)

The United States’ two largest creditors are U.S. citizens and the U.S. government. (Yes, the U.S. government owes itself a substantial sum of its own money; for years, Uncle Sam’s social insurance fund has been using its surpluses to purchase special bonds from Uncle Sam’s general fund.)

What does the pie chart reveal? At least one fact stands out: China’s holding of the total federal debt comes in a distant fourth—behind the U.S. government, the U.S. public, and the Federal Reserve. Interestingly, China and Japan have been neck-and-neck for years as the two foreign entities most desirous of exchanging their export-derived U.S. dollars for interest-bearing U.S. Treasury securities.

How will we pay China (and Japan) back?

That is a misleading question, because every time one of their U.S. Treasury securities matures, we really do “try” to pay them back—with (non-interest-bearing) U.S. dollars. We are obligated to redeem their maturing securities with dollars; otherwise, we would be in default—a scenario that has never, and should never, happen. But the Chinese and Japanese debt holders have been turning right around and exchanging those dollars, in the open market, for brand new U.S. Treasury securities. In effect, we keep trying to pay them back, but they won’t let us; they’d rather hold interest-bearing T-bonds than non-interest-bearing dollars. It’s their choice, and they’ve been consistently rolling their maturing T-bonds over into new T-bonds.

So the proper question is not how will we pay the foreigners back but rather how do we propose to maintain China and Japan’s desire to buy low-interest Treasury securities from us? The answer: A healthy, robust, growing economy is the only way to maintain their confidence in the long run. If they ever started losing confidence in our economy’s prospects, their appetite for acquiring U.S. Treasury securities would be likely to wane, creating upward pressure on our interest rates; that in turn would not help our “debt burden”—which is explained in the section below.

Our priority should not be how to pay them back, it should be how to get our economy growing again.

How much of a burden is the debt?

Because of our large and (historically) robust economy, the worldwide demand for U.S. Treasury securities has been huge; investors view the T-bond as the world’s safe haven. Therefore, rolling the debt over (as described above)—instead of paying it down—has never been a problem. Because the debt has always been rolled over, the debt principal has not been a burden to taxpayers. The “burden” the taxpayers must bear has always been the interest on Treasury securities—not the principal.

Specifically, the debt “burden” is directly indicated by the “interest bite”: the portion of tax receipts required to cover the interest on the debt. When the interest bite is increasing, the debt is becoming less sustainable; conversely, when the interest bite is decreasing, the debt is becoming more sustainable.

What makes the interest bite grow or shrink? The debt level is just one of three primary factors. A second factor is the interest rate demanded by the buyers of T-bonds; for example, when they demand only 1 percent interest, the “burden” of any given level of debt is 80 percent smaller than it would have been had they demanded a whopping 5 percent.

The third factor affecting the interest bite is the level of tax receipts. For any given tax-rate structure, the larger the economy and the more people who are working and paying taxes, the larger the government’s tax receipts—and the lower the debt burden, i.e., the interest bite. A strong economy strengthens our ability to sustain any given debt level.

In summary, there is upward pressure on the “debt burden” when the interest rate rises, the debt level increases, or tax receipts fall. Conversely, there’s downward pressure when the interest rate falls, the debt level decreases, or tax receipts increase.

And with that, it is time to answer the question, how big is our debt burden today? The graphic below shows the answer.

In recent decades, the interest bite has been as high as 19 percent and as low as 9 percent. The chart above shows how the interest bite has tracked for the last 13 years, through December 2011. Mildly surprising is the fact that the current interest bite is no higher than it was ten years ago.

Why is today’s debt burden—as measured by the “interest bite”—lower than the headlines and political rhetoric make it sound? Because even though the debt level is currently growing at a rapid pace, the interest rate on the new debt we’ve been issuing is as close to zero as it has ever been. A near-zero interest rate results in a near-zero interest bite on any level of debt. That’s the good news, but it carries with it an ominous qualification: when the debt level is skyrocketing, as it is today, any increase in the interest rate will quickly cause the interest bite to skyrocket as well—unless it’s offset by additional tax receipts generated by a rapidly growing economy.

In short, today’s relatively low debt burden is merely indicating that we have at least some runway left before it starts challenging the recent high of 19 percent; we would be well advised to use that runway for getting the private sector economy back to robust growth rates. The intent of extraordinary fiscal and monetary interventions by the government is to stop the bleeding in the short run, but the long run depends on the private sector’s economic health.

‘It’s the economy, stupid’

Notably, everything about keeping the debt burden at an acceptable level ultimately depends on the health of our economy. Can we count on China, Japan, the United Kingdom, and OPEC to continue rolling their maturing T-bonds into new T-bonds? Can we count on continued low interest rates due to the T-bond’s reputation as a safe haven? We can if the economy gets back on track. If it does, we can expect the debt burden—the “interest bite”—to remain at an acceptable level, presumably somewhere between today’s 10 percent level and the recent high of 19 percent.

Again, all of those factors depend on the size, health, and growth rate of our economy. The bond market’s judgment as to the U.S. government’s creditworthiness depends on it, and the bond market “knows” that growing the U.S. economy is far more important than shrinking the number of outstanding U.S. Treasury securities—i.e., than “paying down” the federal debt. In short, what’s important for the sustainability of our creditworthiness is not the debt level; instead, what’s far more important is to keep the debt burden—the “interest bite”—inside the guardrails.

The 1992 Clinton campaign had it exactly right: “It’s the economy, stupid.”

Steve Conover retired recently from a 35-year career in corporate America. He has a BS in engineering, an MBA in finance, and a PhD in political economy. His website is www.optimist123.com.

Four out of five advisors continue to use VAs: Cogent Research

Posted on August 27, 2012 by Editor Test -

Advisor interest in variable annuities (VAs) remains stable despite several headwinds, including the retreat of several major annuity issuers from the market, a reduction in product benefits and an increase in fees, according to the Cogent Research Advisor Brandscape 2012 report, which was issued last week to subscribing companies.

While the latest LIMRA data shows that gross sales of variable annuities in the first half of 2012 are down about 6% from the first half of 2011 (to $75.4 billion from $80.1 billion), Cogent’s 2012 survey of 1,741 Registered Investment Advisors and registered reps showed that virtually the same number of advisors sells VAs (81%) and that virtually the same proportion of client assets are allocated to VAs (11%) as did Cogent’s 2011 survey.

But there are some signs of softening enthusiasm for VAs. More than three-quarters (77%) of advisors who currently use VAs told Cogent they expect to continue using them in the future, with 53% saying they intend to use them at the current level (up from 47% in 2011). But about a quarter (23%) expect to reduce their VA usage and the percentage who said they will rely more on VAs dropped to 24% in 2012 from 31% in 2011.

Of those who intend to reduce their investments in VAs, 40% say they will increase their use of SMAs (separately managed accounts), 34% will add more exchanged-traded funds (ETFs), and 29% will increase their use of mutual funds.

Only 11% expected to use more fixed annuities. Among those expecting to increase their use of VAs, 58% will do so at the expense of mutual funds, followed by individual securities (35%) and cash (29%).

Favorite VA issuers

In terms of showing advisor preference among VA issuers, Cogent’s Advisor Brandscape 2012 mirrors the sales figures published last week by LIMRA. As they were in 2011, Prudential, Jackson National, and MetLife are among advisors’ favorite issuers, and their first-half sales were $10.4 billion, $9.6 billion and $9.5 billion, respectively, to lead all VA issuers. According to the Cogent Research report:

Prudential and Jackson National are “pulling away from the pack.” As other providers have retreated from the VA business out of risk management and cash reserve concerns, Prudential and Jackson National stand out for their continued commitment to the business. Both firms earn “Star” distinctions in terms of brand equity, commitment, and ownership, trailing only RiverSource in terms of average revenue earned per advisor. MetLife bests Jackson National in terms of penetration among VA users, but MetLife’s recent announcement that it is reducing its VA focus is likely to reduce its consideration and market share in the future.

Retreat from VAs by The Hartford and John Hancock have put them in Cogent’s “Drifters” category in 2012. Both firms have experienced declines in “unaided consideration,” “brand favorability” and “investment momentum.” John Hancock is less likely to be associated with “leader” and “financial stability” imagery this year. Both firms struggle in terms of Commitment score rankings in the VA category.

VA providers can burnish their brands by expanding product features and beefing up their wholesaling efforts. Thought leadership efforts tend to improve perceptions of integrity and honesty, while high fees and expenses hurt brand loyalty among advisors.

What Does ‘CFP’ Really Stand For?

Posted on August 27, 2012 by Editor Test -

Since reading about the rift between the Financial Planning Association and the American College over the past few days, I’ve been pondering the patchwork universe of titles, licenses, designations, professional associations, distribution channels, product preferences and compensation practices that financial intermediaries must try to navigate every day using their own moral and revenue-maximizing compasses.

In case you missed the recent articles in Investment News about the incoming CEO of the FPA or the American College’s response to some of her statements, here’s a quick recap:

On August 22, in a news article, Lauren Schadle, who will be the chief executive of the FPA after the organization meets in San Antonio at the end of September, told reporter Darla Mercado, “We’re putting together action plans that speak to the FPA’s being the professional resource and advocate for CFP (Certified Financial Planner) professionals,” she said. “We believe that one profession and one designation is the best way to build the financial planning profession.”

In suggesting that the FPA is the home of the CFP and represents financial “planners,” Schadle antagonized the leader of the American College. In a press release a few days ago, Larry Barton, CEO of the American College, which offers courses leading to the CFP and other designations, responded sharply.

“No one designation can embrace the full gamut of consumer needs. That is why we believe that consumers must have a choice of quality, reputable designations to select from, including and especially the CLU, CFP, ChFC, CPA, and CFA. While our College is one of the largest providers of courses leading to the CFP credential, I have never met any planner who believes education should be limited to one designation for all planners,” said Barton in a prepared statement.

He continued, “Financial planning shouldn’t be artificially defined as a separate profession. Instead, FPA and other organizations should encourage the process of planning to be used as broadly as possible, regardless of the designations an advisor may choose to pursue. We want planners to have choices. The CFPis an excellent one, as are such marks as CLU, ChFC or CFA, for example. As Ms. Schadle assumes the helm of the FPA, it is my hope that she will think twice about isolating the hundreds of thousands of advisors who don’t fit her criteria,” concluded Barton.

Barton then brought in the compensation issue by raising the fiduciary/suitability question, which is linked to the fee-only/commission division. He doesn’t want anyone suggesting that CFPs who follow the fiduciary standard, work for asset-based fees and belong to the FPA are the only sources of trustworthy financial advice.

Although I consider this controversy to be of the “inside baseball” variety, and while it’s not something I know much about, I have one or two minor contributions to make to the debate. Two weeks ago, coincidentally, there was a discussion about the CFP at the Retirement Income Industry Association “bootcamp” for the Retirement Management Analyst designation in Salem, Mass.

The comments I heard there seemed to echo Barton. It was suggested that it would be self-defeating for champions of the CFP designation to identify it solely with the fee-only, fiduciary-standard world. Doing so could make the CFP a “channel-specific” designation, desirable only for the Registered Investment Advisor/financial planner segment of the intermediary universe.

That might be problematic, it was said, because the RIA/planner segment, with an estimated 22,000 members nationwide, is much smaller than either the wirehouse/brokerage segment (351,000 members) or the insurance agent/suitability channel (1.2 million members), according to RIIA’s data. The sentiment I heard at the bootcamp was: Why would anyone want to shrink the market for the CFP or alienate the existing CFPs in the brokerage and insurance channels?

I can only speculate that the FPA leaders might believe that the brokerage world will continue to migrate away from commissions and suitability and toward the fiduciary standard and non-commission compensation. If so, why not be the first to seize the high ground?

The advisors I know don’t seem to get too hung up on designations. One friend who is a CFP and MBA offers advice on a fee or hourly basis only and recommends only no-load products. Another friend, a CFP and CPA, receives fees for planning and commissions (part upfront, part trail) when he sells variable annuities. Their securities or insurance licenses, not their designations, allow them to charge for advice or transactions, and their personal standards of integrity, not FINRA’s or the CFP Board’s, dictate their ethical choices.

The irony is that most clients don’t appreciate any of these distinctions. A few years ago, the Government Accountability Office established that the average person doesn’t understand the differences between the fiduciary and suitability standards or the CFP and ChFC designations or commissions and fees. To them, it’s a murky alphabet soup, and many of them don’t know whom to trust.

The confusion is probably even more acute in the realm of retirement income planning, where almost any intermediary can fashion him/herself as a specialist, where there are no codified best practices, where acceptable products range from securities to insurance to hybrids like variable annuities, and where meaningful designations are only beginning to emerge. As one advisor put it bluntly, “The public is screwed trying to dig through all the [manure] to find the pony.”

Comments? Send them to [email protected].

Economy shows “early signs of sustainable strength”: S&P

Posted on August 22, 2012 by Editor Test -

Growth for 3Q 2012 currently stands at 0.90%, considerably better than the negative 2% growth expected at the start of second quarter earnings season, according the August 17th Lookout Report from S&P Capital IQ’s Global Market Intelligence unit.

“While it may be too early to conclude that the economy has fully emerged from the second quarter ‘soft patch,’ economic conditions have not continued to deteriorate in July and early August,” an S&P release said.

These views are published in the Lookout Report for August 17, 2012. The report also features market insights and commentary on corporate earnings, leveraged loan trends, and commodity index activity.

Highlights of the August 17th Lookout Report include:

The Indian stock market is uninviting. An “anemic outlook for the national economy and a sharp decline in foreign direct investment signal potentially acute currency weakness [are] symptomatic of a prolonged period of internal economic adjustment. Such a scenario could prove discouraging for bond and stock investors alike.”

Global sales of S&P 500 companies “difficult to obtain.” In 2002, S&P Indices removed foreign companies from the S&P 500 Index, rendering Although the S&P 500 Index is a pure U.S. play (foreign companies were removed in 2002) a company classified as U.S. can be global. A company’s reports often show its globalization, but exact sales and export levels are difficult to obtain.

Refinance flood; high-yield “on fire”: In the first 17 days of August, arrangers have launched about $11.2 billion of institutional loans, versus $19.9 billion in all of July 2012 (and far ahead of the $1.4 billion in August 2011, when S&P’s Ratings Services downgraded U.S. debt). The high-yield market has been “on fire,” with $19.2 billion of deals printing in the month to date, versus $21.2 billion in all of July and $7.3 billion in August 2011.

Europe is a drag: Europe’s slowdown activity is the “main drag on the global economy,” according to recent global data releases Risk-reward profiles–as measured by average R2P scores—have deteriorated throughout the world in August ,with decreasing returns and increasing market risk. The score decline was even sharper in Europe.

A review of technology IPOs: The GMI research team examined the performance of U.S. tech IPOs with proceeds of $500 million or greater that came to the market since Google’s debut in August 2004. We found that Facebook shares have slumped by more than 42%, while Freescale Semiconductor Ltd. shares have gained more than 20%.

Energy and “backwardation” lead index gains: Middle East tensions have been a main driver of petroleum price gains in August. Agricultural prices have declined. Backward shaped futures curves have boosted commodity investor returns, adding to total returns for the index.

The Lookout Report provides cross-market and cross-asset class views of current data and forward-looking insights from S&P market specialists who focus on aggregated corporate earnings, market and credit risk evaluation, capital markets activity, index investing and proprietary data and analytics. It can be accessed on S&P.com, the S&P Global Credit Portal and Capital IQ.

The Bucket

Posted on August 22, 2012 by Editorial Staff -

Income annuities drive strong first half at New York Life

In the first six months of 2012, New York Life’s annuity sales and mutual fund sales were both up 17% over the first half of 2011,” a company release said. Income annuity sales alone were 11% higher than in the first half in 2011.

“Mutual fund sales are being driven by consistent investment performance from the company’s investment boutiques in both income oriented and capital appreciation funds, which remain in high demand from customers,” the release said. Other released statistics were:

Individual recurring premium life insurance sales through agents were up 4% through the second quarter, over the first half last year.
New York Life agents recorded an increase of 18% in sales of recurring premium whole life insurance for the same time period.
New York Life generated a 17% increase in long-term care insurance sales over the first six months of 2012.
New York Life hired 1,763 agents so far in 2012 (14% more than in the first half of 2011, and is almost halfway to its goal of 3,700 for the year.

New York Life is rated A++ in financial strength by A.M. Best, AAA by Fitch, Aaa by Moody’s Investors Service and AA+ by Standard & Poor’s (AA+).

Fidelity launches new workplace advice program, Plan for Life

Auto-enrollment and auto-escalation are high-tech ways to move the dial on overall 401(k) participation rates and account balances, but they don’t begin to provide the “high-touch” assistance that individual participants often need.

To add nuance to its advice and education services, apparently, Fidelity Investments has introduced Plan for Life, a new workplace guidance program.

“Simply asking employees to save more money from each paycheck no longer addresses many of the challenges our participants are facing in today’s economic environment,” said Julia McCarthy, Fidelity’s EVP for Workplace Marketing, Solutions and Experience, in a release. “Plan for Life will help them manage the complexities but simplify the decision making process.”

To support pre-retirees, Fidelity is offering face-to-face planning consultations at the workplace to employees approaching retirement. Fidelity is also opening these sessions to spouses or other family members of the employee as retirement decisions often impact more than just the individual. In addition, onsite education programs will utilize mobile tablets to make it easier for employees to take action and enroll in their workplace savings plans immediately.

In rolling out Plan for Life, Fidelity said it would:

Add licensed phone representatives. Fidelity grew its force of workplace guidance phone reps by 80% this year. All will hold a FINRA Series 7 license.
Offer onsite retirement planning consultations and instant enrollment using mobile tablets. Attendance at on-site guidance sessions was up 40% during the first third of 2012 over the same period last year, Fidelity said.
Introduce “Income Simulator,” a new retirement income illustration tool. This interactive tool illustrates a participant’s potential monthly income in retirement. It instantly reflects changes in contribution rates, retirement age or asset allocation. Future enhancements will allow more account types to be integrated into the tool.
Improve its participant website, NetBenefits.com. NetBenefits.com provides more than one million participants with specific guidance on various work and life events including starting at or leaving a company, having a child, retirement planning as well as steps for an annual financial check-up.

Fidelity Investments has assets under administration of $3.7 trillion, including managed assets of $1.6 trillion, as of July 31, 2012.

Vanguard publishes four white papers on ETFs

Billions of dollars continue to flow into exchange-traded funds, which offer the appealing combination of low costs, the risk-diversification of index funds, and the intra-day tradability of individual stocks. Vanguard, whose 64 ETFs and $215 billion in ETF assets make it the third largest U.S. ETF provider, has issued a series of white papers and articles on ETF and index construction, with commentary on the risks, returns, costs and tax implications of owning and trading ETFs. Summaries of those publications can be found below.

Evaluating dollar-weighted returns of ETFs versus traditional fund returns

Over specific time periods, a mutual fund’s dollar-weighted returns (that is, its internal rates of return—IRRs) often trail the fund’s reported returns (that is, it’s time-weighted returns—TWRs). In recent years it has been claimed that dollar-weighted returns in exchange-traded funds (ETFs) fare even worse than those in conventional mutual funds, owing to the intraday trading flexibility of ETFs. The authors of this new Vanguard research paper demonstrate that such claims, on their own, are problematic and commonly ignore important factors affecting the outcomes. In addition, similar to the IRRs of conventional mutual funds, the return differences for ETFs are highly time-period dependent.
https://advisors.vanguard.com/VGApp/iip/site/advisor/researchcommentary/research/article/IWE_InvResEvalInvestors

ETFs: For the better or bettor?

Do exchange-traded funds encourage their owners to trade more actively? Or are active traders more likely to owners ETFs?

Vanguard put these questions to the test recently by analyzing over 3.2 million transactions by self-directed investors in more than 500,000 positions held in traditional and ETF versions of four Vanguard index funds from 2007 through 2011.

Yes, trading in ETFs was more active than trading in traditional index funds, but 40% of the trading activity differences between ETFs and funds could be explained by investor and account characteristics.

Foresight is only 50:50

ETFs and target benchmarks have proliferated side by side. As of March 31, 2012, more than $1.2 trillion was invested in about 1,400 U.S.-listed ETFs, according to Strategic Insight’s Simfund. At the same time, U.S.-listed ETFs track more than 1,000 different indexes, according to Vanguard’s review of Bloomberg data.

More than half of the indexes use back-tested performance data (i.e., data based on retroactively applying the index methodology to historical data) in lieu of or in addition to live performance data (i.e., real-time performance data after index-live date).

Among the indexes being created for use in ETFs, more than half include back-filled data before the index inception date, and investors can’t always tell which data are hypothetical and which are live. Vanguard researchers found that while 87% of the indexes outperformed the broad U.S. stock market for the time in which back-tested data were used, only 51% did so after the index was launched.

Replicating equal-weighted indexing with traditional indexes

Tracking equal-weighted indexes—where the smallest company in the index has as much weight or importance as the largest company in the index—is a popular strategy among Alternative index funds and ETFs often track “equal-weighted” indices, where all companies have equal weight regardless of size.

Some critics have suggested that investors should abandon market-cap-weighted indexes in favor of alternative equity benchmarks that weight stocks equally, or according to dividends, company fundamentals, or statistical properties. Vanguard researchers say that market-cap-weighted portfolios focused on smaller-cap and value stocks represent a more cost-effective, more transparent, and statistically equivalent strategy.

Are ETFs still a bargain?

Cash flow has poured into ETFs due to the investment vehicles’ low-cost structure but the market’s average ETF expense ratio increased from 0.39% to 0.56% from December 31, 2005, to March 31, 2012. The increase in cost averages is due to the proliferation increase of narrowly focused, niche ETFs launched. Vanguard suggests investors to look more closely at asset-weighted average expense ratios instead, which show where the money is flowing. The asset-weighted average expense ratio for ETFs is only 0.32% which shows that investors are choosing lower-cost ETFs.

Sales at NPH Inc. increase 9% in 2Q 2012

The National Planning Holdings, Inc. (NPH) network of independent broker-dealers booked record revenue of nearly $412 million in the first half of 2012, a 7.5% increase over the previous six months, and a 1.6% increase over the same period in 2011.

The four firms in the network generated more than $8.2 billion in gross product sales for the first half of 2012, up 3% over the last half of 2011. The NPH firms are INVEST Financial Corporation, Investment Centers of America, Inc., National Planning Corporation, and SII Investments, Inc.

NPH achieved revenue of nearly $215 million on gross product sales of more than $4 billion during the second quarter of 2012. Second quarter revenue was up nearly 9% over the first quarter of the year. NPH also continued to grow its representative count during the first half of 2012, compared to the prior year period, ending the half with a total of 3,651 reps.

National Planning Holdings Half-Year 2012 Results
	1H 2012	2H 2011	% ∆	Q2 2012	Q1 2012	% ∆
Sales $m	8,243.89	7,999.15	3.0	4,028.24	4,214.65	(4.4%)
Revenue $m	411.54	382.80	7.5	214.55	196.99	8.9
No. of Reps	3,651	3,636	0.4	3,651	3,652	0.0
Source: National Planning Holdings, Inc. Includes sales and revenue of INVEST Financial Corp., Investment Centers of America, Inc., National Planning Corporation, and SII Investments, Inc.

Fixed indexed annuity sales rise in 2Q 2012: AnnuitySpecs.com

Posted on August 22, 2012 by Editor Test -

Forty-five fixed indexed annuity carriers reported sales of $8.7 billion in the second quarter of 2012, up more than 8% from the previous quarter and 6% from the same period in 2011, according to the 60^th edition of AnnuitySpecs.com’s Indexed Sales and Market Report.

“This quarter’s sales were only 0.60% lower than third quarter 2010’s record-setting indexed annuity sales levels,” said Sheryl J. Moore, president and CEO of Moore Market Intelligence, owner of AnnuitySpecs.com. “That being said, second quarter was a period of flux for indexed annuities; nine different companies made changes to their products on 14 different occasions during this quarter.”

Allianz Life maintained its lead position with a 16% market share. Aviva again was second, and American Equity, Security Benefit Life, and Great American (GAFRI) rounded-out the top five.

After less than one year in the FIA market, Security Benefit Life had the top-selling indexed annuity for the quarter, the Secure Income Annuity. Despite declining fixed interest rates and a transition to income sales, Guaranteed Lifetime Withdrawal Benefit (GLWB) elections dropped this quarter to 53% of total indexed annuity sales. The riders are increasingly being utilized to guarantee income; however, the bulk of the changes to annuity products in the second quarter reduced the relative competitiveness of these annuity benefits.

The Hartford to sell retirement plans business to MassMutual

Fitch: No immediate impact on Hartford ratings

Symetra names actuary Craig Raymond as chief strategy officer

ING Group to sell stake in Capital One

MetLife announces annuity enhancements

Income annuities drive strong first half at New York Life

Fidelity launches new workplace advice program, Plan for Life

Vanguard publishes four white papers on ETFs

Sales at NPH Inc. increase 9% in 2Q 2012

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