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Employment gains not likely without further stimulus: TrimTabs

Posted on August 1, 2012 by Editor Test -

TrimTabs Investment Research estimates The U.S. economy added an estimated 115,000 jobs in July, a 53% increase from its estimate of 75,000 new jobs in June, but down 7.3% from its estimate of 124,000 jobs in May, according to a release from TrimTabs Investment Research. U.S. Bureau of Labor Statistics (BLS) is expected to report July job growth of 90,000 on Friday, the release added.

“We are unlikely to see any significant improvements in the job market without further government stimulus,” said Madeline Schnapp, TrimTabs director of macroeconomic research.

TrimTabs bases its employment estimates on an analysis of daily income tax deposits to the U.S. Treasury from all salaried U.S. employees. These estimates are historically more accurate than initial estimates from the BLS.

Although the U.S. economy has created an average of 105,000 new jobs a month over the past three months, job growth is not strong enough to significantly reduce the nation’s unemployment rate or boost economic growth, TrimTabs said, pointing out that the economy needs to create a minimum of 150,000 jobs per month to absorb all the new people entering the labor force. TrimTabs expects the unemployment rate to remain above 8%.

“Since consumption is now 71% of GDP growth, the lack of jobs is having a negative impact on disposable income, which is pulling down economic growth,” Schnapp said.

In a research note, TrimTabs points to several real-time indicators signaling sluggish economic growth for the foreseeable future:

According to real-time tax-withholding data, wages and salaries rose 3.1% year-over-year in July, up from 2.8% in June but down from an average 3.6% in April and May. Taking inflation into account, real wage and salary growth is just 1.4% year-over-year. In a moderate economic growth environment, real wage and salary growth should be 3%-4%.

The TrimTabs Online Job Postings Index declined 1.5% in July and is down 2.4% over the past three months. This index gained 6.6% over the same time period in 2011.

Initial unemployment insurance claims have been volatile since the week of the 4th of July due to elevated seasonal adjustments. Taking a longer-term view, the unemployment insurance claims trend remains elevated and has returned to mid-March levels. The lack of improvement in this indicator suggests that growth in the labor market has stalled.

“Quote” of the Week

Posted on August 1, 2012 by Editor Test -

The Bucket

Posted on July 31, 2012 by Editorial Staff -

Symetra forms team to support new variable annuity sales

Symetra Life Insurance Company has formed a wholesaling team to represent the company’s registered investment products, including Symetra True Variable Annuity, which launched on June 18, 2012.

The team will focus on sales to fee-based and fee-only advisers. Industry veterans who recently joined the Symetra team include:

Dinah Bird, Ph.D., who was one of the original wholesalers of iShares exchange-traded funds at Barclays Global Investors. She earned a doctorate and master’s degree at Claremont Graduate School, a master’s degree at Texas Tech University and a bachelor’s degree at Southwest Texas University. She holds the CFP and CIMA designations, Kentucky life and health insurance license, and NASD Series 6, 7, 24, 26, 63, 65 and 79 licenses. She is also Symetra’s senior investment specialist for Ohio, Michigan, Indiana and Kentucky.
Jeffrey Jennings, who recently served as vice president, regional marketing director at Sun Life Financial in San Francisco where he was responsible for traditional and fee-based annuity sales through independent broker-dealers. He previously held regional vice president and account management positions at Guardian Investor Services and Hartford Financial Services. Jennings is a graduate of the University of Colorado, Boulder and holds NASD Series 6, 26 and 63 licenses. He is Symetra’s senior investment specialist for Northern California and the surrounding area.
James Maertz, who joins Symetra from Hartford Mutual Funds, where he was a regional vice president. He earned a bachelor’s degree at San Diego State University and holds NASD Series 6 and 63 licenses. Maertz is Symetra’s senior investment specialist for Southern California and the surrounding area.

Managing volatility a key problem for retirement advisors: Natixis

Most financial advisors (81%) say it’s challenging to effectively manage volatility and generate sufficient income for clients already in retirement in 2012, nearly all advisors (95%) are confident that their current investment strategies will help clients better meet retirement income needs, according to a survey sponsored by Natixis Global Asset Management (NGAM).

According to the survey, eight in 10 advisors also say clients continue to be concerned about the “long-term durability” of their assets, including meeting their retirement income goals, outliving their assets (81%) and continuing declines in value of the real estate they own (59%).

Four in five advisors (81%) also reported that it will be difficult to effectively manage volatility risk for those in retirement, with four in ten advisors (41%) finding it “extremely difficult.”

In the area of public policy, 81% of advisors oppose proposals in Washington to scale back retirement savings incentives for 401(k) plans.

The retirement data is part of a study distributed by NGAM through its Durable Portfolio Construction Research Center, and are based on a nationwide survey of 163 advisors at 150 advisory firms whose firms collectively manage about $670 billion in assets.

Allianz Life promotes Emily Reitan

Allianz Life Insurance Company of North America has promoted Emily Reitan to a new role as senior director of Strategy and Business Development. She will be responsible for Allianz Life’s market and business development strategy, marketing planning and the company’s retirement strategy, and report to Nancy Jones, Allianz Life’s chief marketing officer.
Prior to this, Reitan was director of executive projects where she managed the office of the CEO and reported to president and CEO Walter White and his predecessor, Gary C. Bhojwani. Prior to that, Emily was the chief financial officer for Questar Capital, a subsidiary of Allianz Life, responsible for modeling, business planning, regulatory reporting and audits. Before joining Allianz Life in 2005, Reitan was a senior financial analyst for Cardinal Health based in San Diego, Calif.
Reitan received a BA in economics and political science from the University of Puget Sound in Tacoma, Wash. She also earned an MA in international economic policy from American University in Washington, D.C. Reitan is a Financial and Operations Principal and holds FINRA Series 7, 24, and 27 registrations.

Fidelity to fund research on employee stock purchase plans

Fidelity Investments will sponsor a research fellowship at Rutgers University’s School of Management and Labor Relations “to help uncover emerging trends and issues regarding stock options, employee stock purchase plans, performance shares and other forms of equity compensation used by corporations to share ownership and capital income with employees,” the Boston-based fund company said in release.

Ilona Babenko, an assistant professor of finance in the W.P. Carey School of Business at Arizona State University, has been selected as the first recipient of the Fidelity fellowship. Babenko, who will begin her one-year research project this month, will explore why some workers do not invest in employee stock purchase plans (ESPPs). Rutgers University will provide her a $25,000 stipend funded by Fidelity.

The Fidelity Fellowship is one of 23 fellowships to be awarded by Rutgers this year as part of an equity compensation research program started in 2008 at the School of Management and Labor Relations.

Research fellowships are awarded to Ph.D. candidates and postdoctoral scholars who are studying employee ownership, profit sharing, stock options and related topics. They can reside at Rutgers or their home institution.

As part of her research, Babenko intends to survey groups of workers who don’t participate in ESPPs to determine the contributing factors such as financial illiteracy, unfamiliarity with stocks or personal financial constraints. She will also analyze what motivates employees to hold the company stock long-term versus selling soon after purchasing through the ESPP program. Finally, she will study whether employees who receive company stock through compensation plans tend to have higher participation in the equity markets and tend to make better financial decisions.

Fidelity is a major provider of stock plan administration services in the U.S. It services 230 employers nationwide, representing $125 billion in grant value and more than 1.5 million participants.

Genworth Financial announces 2Q 2012 results

Genworth Financial, Inc. has reported net incomeof $76 million, or $0.16 per diluted share, compared with a net loss of $136 million, or $0.28 per diluted share, in the second quarter of 2011. Net operating income² for the second quarter of 2012 was $80 million, or $0.16 per diluted share, compared with a net operating loss of $113 million, or $0.23 per diluted share, in the second quarter of 2011.

“Total net operating income increased both year over year and sequentially, with substantial improvement in Global Mortgage Insurance results partly offset by declines in Insurance and Wealth Management,” said Martin P. Klein, acting chief executive officer and chief financial officer. “In long term care, we are implementing significant rate actions and product changes as part of a company-wide focus on improving business performance, which is key in achieving our longer term goals and objectives as a company.”

Managing volatility a key problem for retirement advisors: Natixis

Posted on July 31, 2012 by Editor Test -

In the area of public policy, 81% of advisors oppose proposals in Washington to scale back retirement savings incentives for 401(k) plans.

Managing volatility a key problem for retirement advisors: Natixis

Posted on July 31, 2012 by Editor Test -

In the area of public policy, 81% of advisors oppose proposals in Washington to scale back retirement savings incentives for 401(k) plans.

GDP growth rate of 2.8% predicted for 4Q 2012: Prudential

Posted on July 31, 2012 by Editor Test -

Thanks to a slowdown in spending by consumers, businesses and government, the U.S. economy barely registered a pulse in 2Q 2012, according to the latest report from John Praveen, chief investment strategist of Prudential International Investments Advisors.

Concern over the economic slowdown, complicated by the pressure of the impending presidential election, is likely to compel the Fed to announce another round of qualitative easing at its August or September meeting, Praveen wrote.

Indeed, Praveen says, there’s plenty to worry about in the near future, including the approach of the so-called “fiscal cliff” and the unresolved sovereign debt crisis in Europe. But he expects U.S. growth to rise in the second half of 2012, predicting an annualized GDP rate of 2.8% in the fourth quarter.

Highlights of the report included:

U.S. GDP growth decelerated to 1.5% QoQ annualized pace in Q2, in line with expectations, slowing from 2% GDP growth in Q1 (revised from 1.9%) and 4.1% in Q4 2011 (revised from 3%). On an annual basis, GDP growth moderated to 2.2% YoY after 2.4% in Q1.
The slower pace of GDP growth in Q2 was due to the drag from weaker consumer spending and government spending. In addition, trade subtracted from growth with imports outpacing exports. However, GDP growth was boosted by solid business investment spending and housing as well as a rise in inventories.
U.S. Q2 GDP growth was driven by contributions from consumer spending (1.05%), business investment (0.54%), inventories (0.32%), and residential investment (0.22%). Meanwhile, the largest drags came from government spending (-0.28%) and net exports (-0.31%).
Consumer spending slowed to 1.5% pace in Q2 from the stronger 2.4% increase in Q1 and contributed 1% after the 1.7% contribution in Q1. Consumer spending was dragged lower by a sharp correction in durable goods spending (to -1% after 11.5% in Q1) mainly led by a decline in Autos. Services spending, the largest component of consumer spending, improved to 1.9% after 1.3% in Q1. Non-durable spending rose 1.5% after 1.6%.
Business investment spending growth slowed to 5.4% from 7.4%, but still added 0.5% to Q2 GDP growth. Equipment and software strengthened to 7.2%, but investment in structures weakened to 0.9% after the strong growth the past four quarters. However, residential investment grew 9.8%, slowing from 20.6% in Q1, but added only 0.2% to growth since it is a relatively smaller component of GDP. Inventories added 0.3% to growth after subtracting -0.4% in Q1.
Government spending contracted -1.4%, subtracting -0.3% from growth, after falling -3% in Q1. State and local spending sunk -2.1%, compared to a more modest -0.4% decline in Federal spending. Net trade subtracted -0.3% with exports adding 0.7%, but imports subtracting -1%. Exports grew 5.3%, while imports grew a stronger 6%.
U.S. Q2 GDP growth came in largely in line with current lowered expectations though sharply lower than expectation at the beginning of the Q2 (2.5%). The details of the GDP report do not indicate that the economy is on track to slow further in coming quarters. In addition, GDP growth for earlier two quarters has been modestly revised higher. However, the Q2 U.S. GDP growth slowdown is likely to increase the odds of the Fed undertaking QE3 at the August/September FOMC meetings. With the U.S. Presidential elections due in November, the window for Fed action is narrow, forcing the Fed to announce additional QE measures over the next two meetings to protect the economy from downside risks.
Looking ahead, U.S. GDP growth is likely to rebound modestly to around 2.2%, in Q3 and further to 2.8% in Q4. Consumption spending is likely to recover to over 2% in Q3 from the anemic pace in Q2 with support from lower oil prices and stabilizing financial markets. Business investment spending remains supported by solid profits and cash levels, but policy uncertainty going into the Presidential election is likely to dampen business spending. Trade is likely to remain a drag with Europe in recession and the dollar appreciation.
Further, there are significant risks to the U.S. economy in late 2012 with the potential massive fiscal cliff of large spending cuts and tax increases in 2013 resulting from expiring tax cuts and spending cuts set to be triggered at the end of 2012. The ongoing European debt crisis and struggling Eurozone economic activity is another risk.

Who’s Afraid of the Fiscal Cliff?

Posted on July 31, 2012 by Editor Test -

At the end of this year, the U.S. economy faces the so-called “fiscal cliff”: the Bush tax cuts will expire, and as a result of the 2011 deal that raised the debt ceiling, automatic spending cuts will begin.

Policymakers are considering how to respond, given the weak prospects for the economy in the short-run, and the dismal prospects for the federal budget in the medium- and long-term. President Obama has proposed extending most of the Bush-era tax cuts, but not the tax rate cuts for the highest-income households, whereas Congressional Republicans would like to extend all of the tax cuts.

A better approach would be to go over the fiscal cliff—that is, let the tax cuts expire and the automatic spending cuts occur—and to enact a temporary stimulus package.

Going over the cliff is the only way to get the economy on a good long-term budget path with a deficit reduction package that balances revenue increases and spending cuts.

It would put the economy on a better long-term path through cutting deficits by about $4 trillion over the next 10 years relative to current policy and by stabilizing the ratio of debt to GDP. This is no small feat. It would be the opposite of “kicking the can down the road,” which is what Congress has done in the past and has been roundly criticized by experts and others.

It is the only way to get a deficit reduction package that is fairly balanced between spending cuts and revenue increases. About 90% of Republicans in Congress have signed the “No New Taxes” pledge. This is a mainstream Republican position, not some fringe part of the party.

The signers pledge to oppose any net tax increases, regardless of the situation. (Think about this: even if we were being invaded and needed revenues to defend the homeland, the Pledge would require its signees to eschew tax increases.)

That means that, although an overwhelming majority of Americans—70% in a recent Pew survey—would like to see revenues account for a significant share of a long-term budget agreement, there is no way to achieve that outcome via a budget “deal” in the current situation. Going over the cliff solves that problem, raising revenue by about $2.8 trillion over the next decade. And, of course, we don’t need a vote to achieve that. Just doing nothing—letting the tax cuts expire—suffices.

Going over the fiscal cliff does create two problems, however, both of which are solvable.

The first is that although it would put the overall budget on a good long-term path, the structure of the resulting tax or spending policies may find disfavor. The revenue increases would come from tax rate increases, rather than deduction-reducing, base-broadening efforts that would make taxes simpler and fairer. The spending cuts would come from military and domestic discretionary spending—where most government investments occur—rather than from the chief drivers of long-term spending growth, Medicare and Medicaid.

The key point, though, is that having the additional revenues and lower spending path that comes from going over the cliff would give policymakers the opportunity—the budget resources —to strike a budget deal, and the less-than-ideal structure of the tax and spending changes would give them the incentive. And because the “No New Taxes” pledge makes it impossible to include significant revenues as part of a budget deal now, it will be easier to reach a balanced deficit reduction package if we go over the cliff first and then negotiate spending up a little and taxes down a little, rather than trying to reach balanced deal now by negotiating taxes up and spending down.

The second problem is that going over the fiscal cliff, without enacting other policy changes, would likely hurt the economy in the short-run, as the Congressional Budget Office and others have noted. This is basically an argument that spending cuts and tax increases will hurt the economy in the short-run, and therefore it is an argument that a stimulus package—that is, tax cuts and spending increases—could help the economy in the short-run.

A stimulus package that stays away from the partisan wrangling over the Bush tax cuts, and consists instead of payroll tax cuts, infrastructure investment and aid to the states could be structured as temporary and would have a bigger “bang for the buck” than extending the Bush tax cuts, while also being more progressive.

The expiration of the Bush tax cuts and the automatic spending cuts slated to take effect in a few months offer a rare chance to do what policymakers have not, so far, been able to do—deal seriously with the 10-year budget deficits looming over the economy. Legislators should embrace that opportunity while also tending to the short-term needs of the economy.

On Moshe Milevsky’s “The 7 Most Important Equations”

Posted on July 31, 2012 by Editor Test -

Wit, a lively narrative voice, and a gift for invention—these were scarce commodities in retirement finance books until Moshe Milevsky started writing them. Life-or-death drama and graveyard humor always lay latent under the actuarial tables, but nobody ever liberated them the way this prolific 40-something Canadian finance professor has.

Imagine a reader’s surprise, a few years ago, on opening a text with the yawn-worthy title, The Calculus of Retirement Income: Financial Models for Pension Annuities and Life Insurance and finding this: “I arrived at the conference venue early—as most neurotic speakers do—and while I was waiting to go onstage, I decide to wander around the nearby casino, taking in the sights, sounds and smells of flashy cocktail waitresses, clanging coins, and musty cigars.”

Milevsky (at left) proceeds to introduce the indelible “Jorge,” a (probably fictional) roulette player with a “very primitive gambling strategy.” Before every spin of the roulette wheel, Jorge bets a red $5 chip on black. After every spin, he tips the attentive cocktail waitress another $5 chip for refilling his scotch glass.

Inspired by his own fascination with Monte Carlo projections, Milevsky (as narrator) then tells us how he began to calculate mentally how long Jorge’s money, which he is spending, winning and losing as the hours fly by, are likely to last. Soon Milevsky reveals his point: Jorge is Everyman, and his roulette strategy is “a quaint metaphor on financial planning and risk management as retirees approach the end of the human life cycle,” when they are spending their savings even as they continue to risk them in the financial markets.

“So, in some odd way,” the opening anecdote of The Calculus of Retirement Income points out, “we are all destined to be Jorge.”

Milevsky wrote that book in 2006, when I was first searching the Web for books about annuities and retirement finance. It was already his fourth book—he had written or co-authored Money Logic, Insurance Logic and Wealth Logic and had yet to write Are You a Stock or a Bond? (about the nature of human capital), Pensionize^TM Your Nest Egg, and Your Money Milestones, or to co-author Strategic Financial Planning over the Lifecycle. But it was perhaps the first serious book on retirement finance that I’d read, and all I could think was: Who is this guy?

Milevsky’ latest book, entitled The 7 Most Important Equations for Your Retirement: The Fascinating People and Ideas Behind Planning Your Retirement Income (Wiley 2012) plays even more to his abilities as a raconteur than his previous books. It’s an appreciation of his heroes, of the men who invented the conceptual tools that Milevsky uses on his professional workbench every day. It’s also about why those razor-sharp tools matter to the reader. Warning: Readers will need to be fairly smart even to grasp the handles of these tools—let alone juggle them with the casual ease that Milevsky does, like a teppan-yaki chef tossing his knives and spatulas.

The 7 Most Important Equations is challenging, but not inaccessible. While the concepts aren’t simple, the deft organization of the book helps. Each chapter focuses on a different important equation, on the genius who created it (or who won credit for creating it), and the application of that equation in solving retirement income problems.

Leonardo Fibonacci (1170-1250) kicks off the book; Andrei N. Kolmogorov (1903-1987) concludes it. In between, we learn about the contributions of Benjamin Gompertz, Edmond Halley (of the eponymous comet), Solomon Huebner (creator of the Wharton School), Irving Fisher, and MIT’s Paul Samuelson (the Nobelist known as the “father of modern economics”).

There’s a fair amount of math here. If you’re a Wall Street quant, if you munch on mathematical symbols at your desk every day, or if you clearly recall your high school and college math, you won’t be intimidated by the formulas that appear at the start of every chapter. But if you don’t chuckle with recognition when you see something like, a_x = ∑_i=1 ^∞ _iP_x / (1+R)ⁱ, you might feel intimidated and turn the page. That would be your loss (It was mine, sorry to say), because they are the real heroes of the book.

Even if you’re not a quant, however, and merely like learning the origins of things, you’ll probably enjoy hearing that it was Fibonacci who introduced Arabic numerals to Europe, that Gompertz showed the world that our probability of dying increases about 9% every year from early adulthood to old age, and that Irving Fisher was famous for something other his ill-timed comment, made in August 1929, that “stock prices have reached a permanent high plateau.”

Just as importantly, the chapters show how each of these mathematical legends helped answer the questions that almost all of us, except perhaps the destitute or the well-fixed, will struggle with in retirement: How long will my money last? How long am I likely to live? Is it worth it to buy an annuity? Milevsky’s book demonstrates that the same questions that bug Boomers in the middle of the night have bugged great minds for hundreds of years.

Each chapter stops short, quite deliberately, of converting the mathematics and the history into news-you-can-use. As Milevsky writes in the introduction, “Most books about retirement planning are written as guides, instruction manuals or ‘how-to’ books. … Rest assured, this is not one of those books.” Instead, as he tells us, he intends the book to start “conversations” about retirement income planning between his readers and their families and financial advisors.

It’s a slim book—just 178 pages not counting the end matter. Milevsky’s schedule is probably still too hectic—he’s a consultant and speaker as well as a writer and tenured professor—to attempt something on the scale of Peter Bernstein’s Against the Gods. But it wouldn’t be surprising if The 7 Most Important Equations for Your Retirement turns out to be a warm-up for a literary project that Milevsky might be reserving for his own still-distant retirement from Toronto’s York University.

In sum, The 7 Most Important Equations for Your Retirement is a clever, erudite book graced with learned, entertaining asides. If you’ve ever had a great professor, someone young enough to relate to you but old enough to command your implicit respect, who knew his stuff so thoroughly that he never had to hide behind an Oz-like curtain of severity or dumb the material down, then you’ll have a sense of the kind of authorial hands you’re in when you read almost any of Milevsky’s books. If you’re willing to put in the time and keep up the pace, you’ll be amply rewarded.

Weighing the Value of a Variable Annuity

Posted on July 31, 2012 by Kerry Pechter -

How much is a variable annuity worth? For the average person, that would be a hard question to answer, especially in the abstract. Annuity wholesalers, on the other hand, might have to answer that question every time they visit an advisor or a broker.

For scholars Petra Steinorth and Olivia S. Mitchell, that question was the starting point for a rather precise evaluation of annuities, which they document in a new paper, “Valuing Variable Annuities with Guaranteed Minimum Lifetime Withdrawal Benefits” (National Bureau of Economic Research, July 2012).

In the paper, they assess the relative values of three types of annuities: a “ratchet” or “step-up” GLWB, a plain vanilla (no ratchet) GLWB, and a single premium immediate annuity, or SPIA. They use two yardsticks that academics often use to evaluate annuities: the money’s worth ratio (MWR) and the annuity equivalent wealth (AEW).

If a person wants to stay fully invested, they found a VA lifetime withdrawal benefit—especially one with a ratchet, which provides the potential to lock in market gains and produce larger payouts—can provide the balance between upside potential and downside protection that many Boomers are looking for in retirement.

But when the three products are judged purely by the amount of uninsured wealth a retiree would need to enjoy the same protection from longevity risk that each annuity provided, the SPIA was the most valuable.

“A VA/GLWB combination does offer a higher expected utility than investment only alternative,” the authors wrote. “Still, the traditional SPIA appears to be a more attractive product than the VA/GWLB options examined here.”

VAs need “standardization”

In an interview with RIJ, Steinorth and Mitchell described the thrust of the paper. “Our research shows that variable annuities with guaranteed withdrawal lifetime benefits will be appealing to rational individuals who seek to protect against running out of money in old age. These products are more attractive than holding the same portfolio mix outside the VA/GWLB, due to the fact that people are protected against outliving their assets.”

They added, “These products also offer flexibility in that investors can withdraw more than their guaranteed benefit amount if they need to. We show that when people have a “ratchet” in the VA/GWLB – which resets people’s account values when markets do well—they are more likely to keep making just the guaranteed withdrawal amount, rather than depleting assets faster. From an industry perspective, this makes withdrawals more predictable.

“A payout annuity offers something that no plain stock or bond portfolio can provide—namely, protection against outliving one’s assets,” the authors wrote. “The VA/GWLBs we explored will be appealing to retirees seeking to balance capital market risk with longevity risk, and we anticipate that many Baby Boomers will find them to be a useful product.

“Nonetheless, the complexity of the product makes it difficult for many to understand. Greater standardization along a few dimensions might enhance their appeal in the marketplace.”

AEW versus MWR

To compare GLWBs and SPIAs, Steinorth and Mitchell hypothesized a 65-year-old man with $100,000 to invest in either a VA/GLWB with a ratchet and a 5% payout, a “plain” VA/GLWB without a ratchet and a 5% payout, and a single-premium immediate annuity with a fixed annual lifetime payout rate of $6,950. The man also had $13,000 in Social Security income.

The authors stipulated that the VA assets would be invested as follows: 48.5% in equities, 22.2% in fixed income securities, 14.7% in balanced/hybrid funds, 11.5% in bonds, and 3.3% in money market assets. In addition, they assumed that the investments would produce an average return, before fees, of 6.75% per year. VA/GLWB all-in fees were assumed to be 333 basis points per year (ratchet) and 308 bps per year (plain).

After a flurry of complex simulations and calculations, Steinorth, who teaches at St. John’s University, and Mitchell, who directs the Pension Research Council at the University of Pennsylvania’s Wharton School, determined the money’s worth ratios (MWR) and the annuity equivalent wealth (AEW) of the three products.

An annuity’s MWR is the ratio between the present value of the expected payments from the annuity (adjusted for mortality rates) and the purchase price of the annuity. An annuity with no distribution or administration costs or adjustment for adverse selection (the tendency for healthier people to buy annuities) would by definition have an MWR of one.

Steinorth and Mitchell determined that a 65-year-old male’s ratchet VA/GLWB (with the asset allocation and performance mentioned above) would have an MWR of 0.90, a plain VA/GLWB would have an MWR of 0.89, and his SPIA, with a $6,950 annual payout, would have an MWR of 0.80. (They noted, however, that SPIAs paying $7,950 a year, as they once did, would have MWRs of 0.90.)

By that measure, a VA/GLWB seemed to offer superior value. The authors then calculated the AEWs of the products. An annuity’s AEW is the amount of money a risk-averse person without an annuity would need in order to feel as secure—to have as much “utility”—as a person with an annuity.

By this measure, the SPIAs appeared to be superior. According to Steinorth and Mitchell, a person would need $107,000 in uninsured assets to feel as secure as he would with a $100,000 plain VA/GLWB, $114,000 to feel as secure as with a $100,000 ratchet VA/GLWB, and $135,000 to feel as secure as he would with a $100,000 SPIA. (They noted that the SPIA AEW would be $165,000 if the SPIA paid $7,950 a year.)

The paper also asserted that:

The VA/GLWB with the ratchet that they modeled can be a better value than a plain VA/GLWB, at current fee levels. “A ratchet priced at 25 bps is a valuable addition to a VA/GWLB from the consumer’s perspective,” the researchers wrote.

People who own GLWBs with step-ups (potential annual increases in the value on which the benefit is based during rising markets) are less likely to take withdrawals in the early years of the contract; and to spend the most starting after the 14^th contract year.

People “mostly use the plain VA/GWLB a buffer or last resort to protect against extreme longevity. They take early excess withdrawals to significantly reduce the guarantee base and then rely on the guaranteed benefit after the account value has been mostly depleted or previous investments turned out poorly.”

Floor-and-Upside: A New Strategy for a New Era

Posted on July 30, 2012 by David Macchia -

“Anything is possible.” Over the course of my career, this is perhaps the most important lesson I’ve learned. It holds a special relevance when I speak to financial advisors about the business strategies they should use to maximize their own success.

When it comes to generating retirement income, savvy advisors will move beyond old dogmas and open their minds to new investing strategies. Advisors should also try to position investors for a wider range of outcomes, including some that may be considered extremely unlikely.

Let me offer you a true story that helps frame my advice.

In 1989, one of my consulting clients, PaineWebber, sent me on a twelve-city speaking tour. I delivered the same seminar presentation in each venue: Tax-Advantaged Retirement Planning for Affluent Investors. The seminars took place in nice hotels in major cities. In the morning I’d train the PaineWebber stockbrokers in the local branch office, and in the evening I’d present a seminar to the brokers’ clients and prospects on the utility of including insurance products in investment portfolios as a way of generating tax-favored retirement income.

The impossible became possible

My seminars included a rather emotional discussion about Japan. Looking back, I see a striking parallel to the concerns of Americans today. In 1989, many American worried that the Japanese would surpass us in economic power.

This was quite understandable given the facts: In 1989, eight of the world’s ten largest banks were Japanese. In the 1980s the market value of Japanese real estate had skyrocketed to stratospheric levels. The world’s most expensive retail space was located not in London, New York or Beverly Hills, but in the Ginza section of Tokyo. From 1980 to1989 the Nikkei 225 stock index rose from about 5,000 points to more than 39,000 points. The index reached its all-time high in December 1989.

Japanese citizens possessed the world’s highest rate of personal savings—more than 14% a year. Japanese manufactures dominated in consumer electronics. The world’s most admired company was Sony. News reports in the U.S. about the acquisition of high profile American properties such Rockefeller Center and the Pebble Beach Golf Club by Japanese investors only added to the anxiety that caused Americans to feel that their country had become a declining economic power. Japan appeared to Americans much as China appears to us today: a seemingly unstoppable economic juggernaut destined to inevitably become the world’s largest economy.

Like most people in 1989, I would have told you with great conviction that what was soon to take place in Japan was impossible. Twenty-three years later, we can see that the impossible has actually occurred.

Japan has been mired in an economic decline for more than two decades. To stimulate its economy the Japanese government lowered interest rates to unprecedented low levels. As Japanese savers fled to safe assets, interest rates on 90-day Japanese government paper at times paid a negative rate of interest. Many Japanese savers viewed a small guaranteed loss as their safest option.

From 1989 to 2004, the value of Prime “A” commercial real estate in Tokyo fell 99%. By 2007 the once vaunted Japanese personal savings rate had declined to 1.7%. And by July of this year, the Nikkei 225 index had fallen by more than 30,000 points, to 9,104. Stock prices in Japan are at the same general price level that they were in 1984. In July the share price of Sony, originator of the Walkman and Trinitron TV fell to ¥990, its lowest level since 1980 and a fraction of its high of ¥16,900 in 2000.

Japan’s experience shows that our tendency to project past results into the future can be dangerous and even reckless. We’ve entered a new era where our frameworks for measuring risk are outdated or irrelevant. Regarding the range of possible economic outcomes, something fundamental has changed in our world. As result, our assumptions should be reconsidered.

I suggest that financial advisors consider this when they design investment strategies for their retirement income clients. When dealing with retirees, some of whom may have zero tolerance for economic failure, advisors can’t afford to rely upon models of thinking that may simply provide a false sense of security.

The anti-“floor” dogma

Many academics who have studied retirement income planning suggest that establishing a “floor” of lifetime income be the foundation of an investor’s retirement strategy. It’s hard to argue with this recommendation. If an investor can’t tolerate the risk of being unable to meet essential living expenses, an advisor should include a layer of lifetime guarantee income in the strategy.

The non-profit Retirement Income Industry Association (RIIA) has championed the importance of the income floor—an income source, generally payable for life, which is quite certain or guaranteed and which enables the investor to meet the most important living expenses. But the “floor” is just one component of the investing strategy. The companion component is the search for “upside” through exposure to risky assets such as equities.

RIIA has also created a Client Segmentation Matrix that advisors can use to identify which investors need a “floor” as part of their retirement income investing strategies. RIIA categorizes investors not by AUM but rather by the ratio of their expected annual spending in retirement to the amount of their investible assets. Dividing the investor’s annual spending by his/her investible assets will place each investor in one of three segments:

Overfunded (<3.5%)
Constrained (3.5% to 7%)
Underfunded (>7%)

Clients in the overfunded category are safe. They can choose almost any retirement income investing strategy, including a systematic withdrawal Plan (SWP), and be confident that they will be financially secure. By definition, they have more than enough assets to generate their required level of annual income in retirement.

Underfunded investors, by contrast, have too little money relative to their income needs. There’s not much that the financial advisors can do for them except try to align their income expectations with economic reality.

Constrained investors have the most to gain from a retirement income plan. In my experience, these investors tend to have between $250,000 and $1.5 million in investible assets. Typically, they have little or no margin for error once they start distributing their assets in retirement. Their choice of investing strategy is a truly high stakes proposition. They need an income floor.

(If you wish to specialize in retirement income distribution planning, I recommend that you consider the Retirement Management Analyst (RMA) professional designation offered by the RIIA. Both Boston University and Texas Tech University offer preparatory classes to prepare candidates for the RMA exam. The courses offer income-planning concepts that can help you produce better results for your clients. They can also help you gain a competitive advantage over advisors who still follow the logic of asset accumulation.)

Embrace the “Floor” Your Way

For a variety of reasons, many financial advisors neglect one obvious way to create a floor—guaranteed income annuities. If so, they do a disservice to their constrained clients. In my view, advisors who reject annuities out of hand and have no other way to introduce predictable income won’t have a bright future in retirement income distribution planning and may even find it difficult to keep clients.

Some advisors don’t like the fact that when clients buy annuities, assets escape their management. But that’s short-sighted. Investors tend to consolidate retirement assets with advisors who are experts in retirement income distribution planning, and consolidation may actually increase the total retirement assets advisors manage, even after the purchase of the annuity. Counter-intuitively, advisors who don’t consider annuities may be costing themselves a lot of income.

Moreover, new types of annuity structures make it possible to introduce lifetime guaranteed income within an advisory account. Stand-alone living benefit (SALB) products accomplish exactly this. One registered investment advisory firm (RIA), The Institute for Wealth in Colorado, has introduced the SALB solution in its investment program. San Francisco-based ARIA Retirement Solutions offers a program that makes SALBs available to other RIAs.

Some advisors overlook the fact that even high-net-worth investors can fall into the constrained investors segment and need a floor of guaranteed income. Investors may have $10 million in investible assets, but if they spend $1 million annually on living expenses, they are clearly underfunded.

I have found that financial advisors who wish to find new clients and retain the loyalty of their existing clients will be more successful if they leave old dogmas about “impossible” outcomes behind. “Floor plus upside” is a valuable planning strategy for advisors and retirees who are about to navigate a very different future—a future where nothing’s impossible.

David Macchia, RMA, is founder & CEO of Wealth2k, Inc. He serves as a board member and secretary of the Retirement income Industry Association.

Webinar: Retirement Income with Dividends and Interest

Posted on July 30, 2012 by Kerry Pechter -

What advisors were thinking at the Morningstar conference

Posted on July 30, 2012 by Editor Test -

Because of the low yield environment, financial advisors are more likely to seek income for clients from emerging market bond funds and dividend-paying stocks than from traditional income-producing assets, according to a new survey from Oppenheimer Funds.

“A full 84% of advisors are more likely today to recommend dividend-paying equities and more than three-quarters (76%) of advisors cited a willingness to recommend emerging market bonds or related bond funds over other asset classes,” Oppenheimer said in a release. The survey was conducted on June 20 and 21 at the 2012 Morningstar Investment Conference in Chicago.

For emerging market exposure, half (50%) of the advisors surveyed recommended investing directly in emerging markets companies, 26% were inclined to use funds that invest in companies domiciled in developed countries outside of the U.S., and 21% preferred funds investing in large global multi-national U.S. companies. Three percent of respondents said they don’t need emerging market equities exposure.

On the other hand, 43% of respondents said they’ve reduced exposure to international bonds and 41% have reduced exposure to international equities since the Eurozone crisis began. Almost six in ten advisors (59%) said the European sovereign debt crisis was the most important issue affecting their advice to clients and 26% named the U.S. presidential election.

Compared to the spring of 2011, 59% of advisors said they are seeing clients become more risk adverse in 2012, with increased interest in fixed income investments, while 35% said risk tolerance levels are largely unchanged.

Slightly more than half (52%) of the advisors surveyed agreed that “protecting clients from downside risk resulting from continued market volatility” is their greatest challenge. Another 19% and 18%, respectively, are challenged by “managing clients’ ongoing fears of investing in equity markets” and “helping clients earn real yield on their fixed income portfolios.”

Looking through Morgan Stanley’s crystal ball

Posted on July 30, 2012 by Editor Test -

Morgan Stanley Smith Barney’s Global Investment Committee’s has released its monthly overview of markets, economics and asset allocation. According to the report:

On markets

Our cautious tactical asset allocation remains in place, given the still inadequate policy response to both the European recession and slower US growth.
We are overweight cash, short-duration bonds, investment grade bonds and managed futures.
We are underweight developed-country sovereign debt, high yield bonds, equities, commodities, global real estate investment trusts and inflation-linked securities. We are market weight emerging market bonds.
Regarding global equities, we continue to overweight both the emerging market and the US while underweighting other developed markets. Within US equities, our capitalization preference is large caps and our style tilt is growth.

On economies

Europe is in recession and growth is slowing in the US and in most emerging market economies. Still, we expect global growth to remain positive this year and next.
The policy options to promote growth in developed market economies are variously limited, politically unlikely or too little, too late. Moreover, fiscal policy is tightening in Europe and is likely to tighten in the US as the fiscal cliff approaches. We expect the cliff to be addressed after the election.
By contrast, fundamentals and policy options in emerging market economies are generally more robust. Globally, we expect inflation to abate.

On profits

Expectations for 52-week forward earnings per share are mixed. The S&P 500 forward earnings figure is now above $112, up from a low of $107 last autumn.
However, 52-week forward EPS for global equities has dropped to about $28, down from more than $30 last summer.

On interest rates

Developed market central-bank policy rates are likely to remain low at least into 2014. The Federal Reserve has extended Operation Twist, given continued tepid US growth; a third round of Quantitative Ease is likely. The European Central Bank (ECB) policy rate is now below 1%. Moreover, the ECB now indirectly supports the EU sovereign debt markets and major European banks. Meanwhile, 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. Longer term, major developed market currencies will likely decline against several emerging market currencies.

For RIAs, life is good: Schwab survey

Posted on July 30, 2012 by Editor Test -

Independent registered investment advisors (RIA) reported record assets under management (AUM) and revenues in 2011 as client acquisition offset flat market performance, according to the 2012 RIA Benchmarking Study from Charles Schwab.

The median RIA firm increased revenues by 12% and AUM by 3.8%, marking a second consecutive year of record highs for the industry. Median net client growth was 4.7%, flat from 2011 but up from 3.5% in 2009. The number of new clients overall grew 8.2%, with 20% of firms seeing the number of new clients up by 14.7%. RIAs saw client attrition of only 3% in 2011.

Schwab’s annual RIA Benchmarking Study represents the views of over 1,000 firms. Participating firms manage more than $425 billion, with 105 firms managing $1 billion or more. The median participating firm has 186 clients, $212 million in AUM and $1.3 million in annual revenue.

Vanguard to offer short-term TIPS index fund

Posted on July 30, 2012 by Editor Test -

Vanguard has filed a registration statement with the SEC for Vanguard Short-Term Inflation-Protected Securities Index Fund. Expected to be available in the fourth quarter of 2012, the fund will offer four low-cost share classes (Investor, Admiral, Institutional, and ETF Shares).

The new fund will track the Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index, a market-weighted index that measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years.

The benchmark index has an effective duration of 2.53 years and an average maturity of 2.59 years (as of June 30, 2012). Barclays, a premier index provider in the fixed income market, is the index provider for all of Vanguard’s fixed income index funds.

The new fund’s ETF Shares have an estimated expense ratio of 0.10%. The fund’s Investor Shares, which require a $3,000 minimum initial investment, have an estimated expense ratio of 0.20%; the Admiral Shares, which require a $10,000 minimum initial investment, have an estimated expense ratio of 0.10%; and the Institutional Shares, which require a $5 million minimum initial investment, have an estimated expense ratio of 0.07%. To offset the transaction costs of purchasing TIPS, the fund will assess a 0.25% purchase fee on all shares (excluding ETF shares).

The short-term fund will complement the existing $43 billion Vanguard Inflation-Protected Securities Fund, an actively managed fund with a duration of 8.5 years and an average maturity of 9.3 years (as of June 30, 2012).

“The new Short-Term Inflation Protected Securities Index Fund will provide an additional choice for investors who are seeking protection from inflation,” said Vanguard Chief Investment Officer Gus Sauter. “The fund’s objective will be to generate returns more closely correlated with realized inflation and to offer investors the potential for less volatility of returns relative to a longer-duration TIPS fund.”

Joshua Barrickman and Gemma Wright-Casparius, both principals and senior portfolio managers in the Vanguard Fixed Income Group, will co-manage the new fund. Barrickman currently manages several Vanguard bond index funds and oversees daily management of Vanguard Fixed Income ETFs. Wright-Casparius co-manages the existing Vanguard TIPS fund. The Vanguard Fixed Income Group oversees nearly $700 billion in assets, including $235 billion in bond index fund assets and $37 billion in bond ETF assets.

New advisor legislation endorsed by Financial Planning Coalition

Posted on July 30, 2012 by Editor Test -

New federal legislation that would authorize the Securities & Exchange Commission to collect user fees to fund increased examinations of registered investment advisers was endorsed this week by Financial Planning Coalition (FPC), an advocacy group formed by the CFP Board, the Financial Planning Association, and NAPFA.

The Investment Adviser Examination and Improvement Act of 2012 bill was introduced by Rep. Maxine Waters (D-CA) and co-sponsored by Rep. Barney Frank (D-MA), and Representative Michael Capuano (D-MA).

The FPC called the bill “a credible alternative” to the Investment Adviser Oversight Act of 2012 (H.R. 4624), introduced in April, which mandated that small advisory firms join a self-regulatory organization (SRO), in addition to current SEC and state regulatory oversight.

While acknowledging the need for more frequent investment adviser oversight, an FPC release said, “Creating a new SRO is not the right solution. The burden of excessive regulation and cost would fall unfairly on small business owners while many larger firms would be exempt and would go unaffected.”

A survey of investment advisers conducted by The Boston Consulting Group showed that 81% of investment advisers would prefer to pay user fees to the SEC than to pay membership fees to a FINRA investment adviser SRO, the FPC release said.

The View from the Variable Annuity Trenches

Posted on July 25, 2012 by Editor Test -

The variable annuity industry, like the rest of the economy and the government, is in a state of suspense in the summer of 2012.

On the one hand, low interest rates are forcing yesterday’s sales leaders to trim withdrawal rates, raise prices and moderate sales. On the other hand, ongoing Boomer demand for guaranteed income is creating new sales opportunities for smaller VA issuers, who didn’t gorge on risk during the boom years.

Roughly speaking, VA issuers are a little like homeowners in the wake of the financial crisis: some carry a lot of risk and can do nothing but wait for the market to turn around; others still have a lot of equity and can enjoy the blessing of low-rate refinancing.

But what does the VA market look like to the people who wrestle with it every day? To find out, RIJ talked to three veterans in the field: Eric Henderson of Nationwide Financial, Dan Kruse of Securian Financial, and Bruce Ferris of Prudential Annuities. Here’s what they had to say.

Eric Henderson, senior vice president, individual products and solutions, Nationwide Financial Services.

Nationwide, one of the largest variable annuity issuers in recent years, has reduced the maximum roll-up on its Destination Navigator 2.0 variable annuity to 7% from 10%. It is partnering with Morgan Stanley Smith Barney to introduce a contingent deferred annuity to fee-based clients.

“The CDA works almost identically to the VA with the GLWB, in terms of what you’re guaranteeing. It’s just a different legal structure. With the VA, the insurance company chooses the fund, but in the CDA, we cover [outside assets] with guarantee. [The insurers] have to price it differently, partly because we see no income from the investments. As a result, you’ll see guarantees on the CDAs being less rich [than VA guarantees].

“Also, the variable annuity is commission-based, so over the long haul the insurer will see more income than from a fee-based product. That’s one reason you don’t see ‘rollups’ in the CDA: you don’t have that extra margin. In the CDA world, you don’t want to over a certain fee level. A few years ago, they didn’t want you to go over 100 basis points [for the unbundled living benefit]. Now there’s leeway to charge a little more for the benefits, but there’s still pressure to keep fees from getting too high in that world.

“If you want to deal with a [large wirehouse like] Morgan Stanley, hooking up all the plumbing is expensive. The fee-based advisors will be on the platform, and all of their reporting will be there. So if I add a CDA, the advisors have to have the same level of reporting capability. Typically, all the calculations take place on the platform and the platform provider feeds the data back to the insurer. The provider will want to do the calculations, but the information still has to come back to us because we’re buying and selling positions in order to hedge appropriately. The cost of offering the [CDA] benefit is primarily around hedging and a little around administration.

“If you’re dealing with a large wirehouse, it’s probably a one-to-one transaction between the insurer and the wirehouse. If you’re dealing with a smaller firm, it’s their platform that gets involved. Sure, a fee-based advisor can still buy a fee-based variable annuity, but it’s a relatively short step for us to say, we can insure funds you already have, versus saying the [fee-based] advisor must take his assets and move them to a variable annuity with a completely different set of funds. When [a CDA writer] deals with a Morgan Stanley Smith Barney, or any other large wirehouse, we go with the funds that they have. We might wrap a subset of what’s on the platform. If the wirehouse has 1,000 funds, there might be only 200 we can wrap. Platforms typically already have asset allocation models that we can wrap. That’s the key to the CDA. You work with the funds and the models that are already there.

“At the moment, everything is on hold. There’s the regulatory stuff. And, interest rates being where they are, it’s just not a good time to offer new products. We launched our CDA in the middle of the financial crisis. We won’t know until we get into a more normal interest rate environment.”

Niche player with a ‘catchy’ new product: Dan Kruse, second vice president and actuary, Securian Financial.

Securian Life and Minnesota Life are small, diversified mutual insurers that recently launched the Ovation II lifetime withdrawal benefit, which includes a 6% roll-up and a 200% accumulation if no withdrawals are taken in the first 10 contract years.

“You didn’t see us out in front in trying to build AUM or in pushing the envelope [on product design] over the past three to five years. So that puts us in a somewhat different spot than some of the other players who are taking significant action [in the variable annuity space right now].

“Our Ovation II rider is a catchy step up from the original Ovation that we launched last September. As interest rates dropped we knew there would be changes, but we’re not sitting on the type of legacy book of business that forces other players to [retreat on benefits]. We didn’t try to lead in the past, so we’re not sitting on in-force benefits that are in the money. You see some filings where some companies are trying to buy out those benefits. We don’t have that. [The current environment] allows us to pick our spots. We’ve delivered on what we promised all along. We provide a rational product. It’s not that we’re becoming more aggressive today, it’s that the rest of the industry has fallen back.

“We’re more upbeat that you would have found us a few years ago. The marketplace is priced more rationally today. We pushed down our market share even in key distribution channels for a couple of years, but we knew we wanted to compete a little harder with Ovation. We put the cost of the original Ovation joint rider at 165 basis points with a 5% payout at age 65. When interest rates dropped, the biggest change in Ovation II was the curtailed joint benefit. We dropped the withdrawal percentages by 50 basis points and dropped the price to 120 basis points.

“In general, the big move this year [in variable annuity benefits] has been the withdrawal rates. With the GLWB, the withdrawal rate is the biggest lever you can pull. [Regarding investment restrictions,] there were a bunch of companies going for the directed allocation solution, to create a [automatic asset transfer] formula like Prudential’s. But we’re more interested in volatility-controlled funds. I’ve added the TOPS funds. These funds start to control volatility before they get to our balance sheet, so that there’s no in-house black box. We will add more options like these and we will start to direct money into them.

“We don’t want to rush out and try to become a top ten provider of individual annuities. According to the LIMRA data, we hang in at about 33^rd or 34^th in sales. If we could be the 30^th largest seller, that would satisfy us and our distribution partners. I’d like to find more partners, but I don’t want to be on shelf with 25 other carriers. I’m looking for distributors that appreciate our pursuit of security for the long run, who understand that we’ll be here for the full cycle. We believe that this business can be good for the distributor, the manufacturer and the consumer. We don’t believe in the ‘feature fest.’ We don’t believe in the shiny lure approach.”

The glass-half-full perspective from an industry leader: Bruce Ferris, head of sales and distribution, Prudential Annuities.

After dominating the variable annuity world with its Highest Daily contracts, and weathering the financial crisis with the help of its automatic asset-transfer mechanism, Prudential has gradually cut back its benefits and now speaks often about CDAs, a market it has not formally entered yet.

“[Regarding contingent deferred annuities,] It’s good that people [in the variable annuity business] are looking at and focusing their efforts on unprotected asset classes, whether they are mutual funds, managed money, fee-based businesses, SMAs, or wrapped mutual funds. Obviously, that’s a pool of trillions of dollars. We believe CDAs are very important, and they represent one example of the creative ways that Prudential can innovate in the guaranteed retirement income space.

“I’m frustrated that our industry sees its glass as ‘half empty.’ I think it’s half full. Demand has never been greater. Capacity has been constrained, but to me that spells opportunity. Everyone has pointed to 2007 and said that was the high water mark in gross sales. The reality is that net sales in 2011 were back at highest level, up 28% year over year. Total industry assets were $1.6 trillion. Our assets under management were at their highest ever. My premise is that assets are stickier than ever, because the investor owns something of value.

“We get no credit as an industry for surviving a 100-year event, or for continuing to weather a 30-year bull bond market. Everyone points to the headwind of interest rates. Yet, despite the headwinds and volatility, insurance companies have met every responsibility. The overall financial health of the industry has never been better.

“Constraint number one is the interest rate environment. Companies are deploying capital where it’s best for shareholders. That results in some level dislocation in terms of consistency of providers. We talk about equity volatility, but we also have manufacturing volatility. Some companies are viewing this environment as an opportunity. Companies like Sammons, Symetra and Forethought. These are examples of new entrants, new creativity, and new products. There’s also a back-to-the-future element with a re-emphasis of tax deferral plays. There’s evidence of using alternative asset classes that are not correlated [with the performance of conventional asset classes] for diversification. We [at Prudential] view the [CPPI-like] asset risk transfer mechanism, in one form or another, as being a critical component [in future product design].

“Where the industry may deserve some criticism is when it allows itself to be viewed as a zero-sum game. Can the product be good for the investor and good for the shareholder over time? We believe the answer is yes. Sales aren’t good unless they’re profitable. [Annuity issuers] are quick to compare ourselves with each other and within our own companies, and we allow the advisors to say that our products aren’t as good as they used to be. But, ‘not as good’ compared to what? And, as much as we view the interest rate as a near-term headwind on the manufacturer side, it’s nothing compared to the tailwind we’re getting on the consumer side from the Boomer retirement wave.”

The View from the Variable Annuity Trenches

Posted on July 25, 2012 by Editor Test -

The variable annuity industry, like the rest of the economy and the government, is in a state of suspense in the summer of 2012.

Eric Henderson, senior vice president, individual products and solutions, Nationwide Financial Services.

Niche player with a ‘catchy’ new product: Dan Kruse, second vice president and actuary, Securian Financial.

The glass-half-full perspective from an industry leader: Bruce Ferris, head of sales and distribution, Prudential Annuities.

She’s Not a Captive Academic

Posted on July 25, 2012 by Editor Test -

The shortcomings of our 401(k) system bother Teresa Ghilarducci. She won’t stop sounding an alarm about them. And for that, a few years ago, a fat cigar-smoker with a vast radio audience called her “the most dangerous woman in America.”

There’s one thing you can’t call her, however. And that’s a “captive academic.”

Ghilarducci, an author and economist at the New School of Social Research in Manhattan, denounced the defined contribution system in the U.S. in an opinion piece in The Week in Review section of The New York Times last Sunday.

“Basing a system on people’s voluntary saving for 40 years and evaluating the relevant information for sound investment choices is like asking the family pet to dance on two legs,” she wrote. “This do-it-yourself pension system has failed. It has failed because it expects individuals without investment expertise to reap the same results as professional investors and money managers.”

As a solution, she proposes replacing the 401(k) system with a kind of mandatory national cash balance retirement plan—a hybrid of DB and DC. She calls it “a way out that would create guaranteed retirement accounts on top of Social Security. These accounts would be required, professionally managed, come with a guaranteed rate of return and pay out annuities.”

Personally, I don’t agree with everything that Ghilarducci wrote. She claims that someone who earns $100,000 at retirement needs $2 million beyond Social Security in savings to maintain living standards in retirement; a retiree with “an income-producing spouse and a paid-off house” will need less.

This is a straw man. I have never heard anyone claim such a high multiple. A recent Aon Hewitt report estimated that each person will need 11x final salary plus Social Security. The old ING “number” commercials showed suburbanites carrying a number north of $1 million with them on a rectangle of white poster board. (I recently told Brett Hammond (formerly of TIAA-CREF, now of MSCI) that my wife and I would each have about twice final salary in savings at retirement; he smiled and said that we were somewhat short of TIAA-CREF’s benchmark rule-of-thumb.)

But I don’t disagree with Ghilarducci’s basic facts. And, if you work in the retirement plan field, you probably don’t either. Every day, I read reports—from within the industry itself—showing that most Americans don’t earn much, don’t understand money or investing, can’t discipline themselves to save, and arrive at retirement (voluntarily or otherwise) with barely enough cash to zero-out their credit card balances. We all know this.

The industry clearly doesn’t agree with her solutions, however. For Ghilarducci, the 401(k) system, like the inert caged bird in the classic Monty Python pet shop sketch, is a dead parrot. Replacement is the only cure. For people who work in the 401(k) system, or for whom it works well, the parrot is merely resting. The system is basically healthy and can be made to serve the average worker better through new defaults, disclosures and education. Ghilarducci’s 401(k) glass is more than half empty. The industry’s is more than half full.

The purpose of this column, though, isn’t to rehash the pros and cons of the 401(k) system. We can save that for another day. My point is that Ghilarducci is just doing her job as an academic. In the tradition of the school that employs her, she’s a muckraker and a critic and rabble-rouser. She’s a thorn in the side of the entrenched status quo. To her credit, she’s not a captive academic.

You’ve heard of “captive regulators”—regulators who lose their adversarial spirit and, like hostages suffering from Stockholm syndrome, adopt their captors’ beliefs. We have lots of those, occupying some of the highest watchdog posts in the land. Similarly, the 401(k) system has lots of captive academics whose research happens to support the goals and interests of the 401(k) industry itself, and who are lionized for it and I assume, at least indirectly, highly compensated for it. Professor Ghilarducci, bless her angry heart, isn’t one of them.

The Bucket

Posted on July 24, 2012 by Editorial Staff -

Benartzi to advise Achaean

Shlomo Benartzi, a co-chair of the Behavioral Decision-Making Group at the UCLA Anderson School of Management, has agreed to serve as an academic advisor to Achaean Financial, developer of retirement advice software and designer of guaranteed income product, Achaean has announced.

“Benartzi will help Achaean better incorporate ideas from behavioral finance into its existing Retirement Outcome software and into the innovative new tools currently in development by the firm,” the company said in a release.

Benartzi co-founded the Behavioral Finance Forum, a collective of 40 prominent academics and 40 major financial institutions from around the globe. He developed Save More Tomorrow (SMarT), a behavioral prescription designed to increase employee savings rates gradually over time.

Achaean’s Retirement Outcome was cited by the Investment Management Institute as one of the top three models for providing retirement guidance, and is the only open-architecture retirement modeling platform available in the current marketplace. While product-set agnostic, Retirement Outcome is complemented by Achaean’s patent-pending and cost-effective immediate variable annuity product design, Income Plus+.

Income Plus+ was the subject of a March 28, 2012 article and Achaean was the subject of a May 18, 2010 article in Retirement Income Journal.

MassMutual Retirement Services to partner with Rhode Island School of Design

MassMutual’s Retirement Services Division has asked graphic design students at the Rhode Island School of Design (RISD) to help it motivate people in their 20s to save for retirement.

As part of the school’s Corporate Sponsored Studio: Designing Today For Tomorrow program and following a visit to MassMutual headquarters in Springfield, Mass., the students are tasked with creating eye-catching graphics and communication materials to help their generation better understand the importance of planning and saving for retirement – and the benefits of starting early.

“These young thinkers aren’t hampered by old 20th‐century ways of thinking, and will come up with new and innovative ways to reach 20-somethings beyond what MassMutual alone can imagine,” said Kris Gates, assistant vice president of participant and interactive marketing with MassMutual’s Retirement Services Division, in a release.

NAPFA and Kiplinger’s to host free financial advice sessions

NAPFA, the National Association of Personal Financial Advisors, and Kiplinger’s Personal Finance magazine are partnering to provide the public with access to free financial advice each month with the “Jump-Start Your Retirement Online Chats.”

The chats will be held from 1 p.m. to 3 p.m., Eastern time, on the following dates:

Thursday, August 16

Thursday, September 20
Thursday, October 18

To participate, investors should dial 1-888-919-2345 on these dates and a NAPFA member will respond to questions. You may also submit questions at www.kiplinger.com/yourretirement/jumpstart/.

John Hancock Funds launches program for retirement plan advisers

John Hancock Funds has launched a new program designed to help retirement plan advisers demonstrate their value and build stronger client relationships. Available at www.jhfunds.com, the program, “Focus on Value: What Matters Most to Your Clients – and How to Build on It,” includes a guidebook, wholesaler PowerPoint, and Plan Sponsor Toolkit.

In addition, John Hancock participated as a co-sponsor for a survey and study of plan sponsors released in the spring and called: “Can a Professional Retirement Plan Adviser Really Make That Much of a Difference?” The survey findings provide first-person insight into ways that plan sponsors believe retirement plan advisers may bring the greatest value to their plans and participants.

The guidebook includes five key findings from the research study, in which plan sponsors described what retirement plan advisers bring to their plans:

Superior retirement outcomes for participants
Superior fiduciary expertise and improved compliance
Improved plan design
Advanced investment plan
More reasonable fees and overall plan costs.

The guidebook also offers corresponding practice management tips for advisers. The wholesaler PowerPoint, which mirrors the guidebook, is formatted for iPad delivery. The Plan Sponsor Toolkit shows how to evaluate a new or existing financial adviser for a company’s retirement plan.

Symetra forms team to support new variable annuity sales

Managing volatility a key problem for retirement advisors: Natixis

Allianz Life promotes Emily Reitan

Fidelity to fund research on employee stock purchase plans

Genworth Financial announces 2Q 2012 results

Benartzi to advise Achaean

MassMutual Retirement Services to partner with Rhode Island School of Design

NAPFA and Kiplinger’s to host free financial advice sessions

John Hancock Funds launches program for retirement plan advisers

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