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The Bucket

Posted on July 11, 2012 by -

Advisor interest in alternatives continues to grow: Jackson National

A recent survey by Jackson National Life of 2,000 financial advisors showed an large increase in the expected use of alternatives to help offset market volatility and potentially improve portfolio diversification. Advisers also expressed a growing demand for guided strategies to help leverage alternatives within client portfolios.

According to the Elite Access Alternative Investment survey, more than nine out of 10 advisers expect to increase their use of alternative asset classes over the next year. Jackson distributed the survey to advisers in attendance at more than 100 road shows across the country in support of Elite Access, a variable annuity designed to provide the potential for greater portfolio diversification through the use of alternative asset classes. The surveys were conducted in March 2012 and responses were received from 2,190 advisers. 

Among those advisers who anticipate an increase in their use of alternatives, more than half said they would increase their use of alternatives by 15% or more in the next 12 months. Nearly a third will boost their use of alternatives by 20% or more. Of the small percentage of advisers who have not used alternative asset classes to date, more than 90% say they are now considering using them.

Nearly two-thirds of advisors surveyed cited further diversification as the primary purpose. However, the practical use of alternatives was not as clear among respondents. Understanding of alternative asset classes and clarity on how to use them within client portfolios topped the list of adviser concerns. The contrast between the demand for alternatives and adviser confidence in their proper utilization highlights a specific knowledge gap for product providers to consider.

More than 95% of respondents said that guided strategies would be very or somewhat important in their construction of client portfolios. Nearly four out of five advisers said they would be more likely to use alternatives if offered within a guided strategy.

Guardian Retirement Solutions launches 401(k) fee disclosure website

Guardian Retirement Solutions, a unit of The Guardian Life, has launched a public website, Understanding Plan Fees (www.guardianretirement.com/understandingfees), to provide information and tools to help plan participants and plan sponsors understand their retirement plan fees, the services they pay for and the value the different service providers bring to the table.

on their behalf to ensure they have a tax-deferred benefit to save for retirement.”

The Guardian website includes a host of tools and educational resources, including:

  • High-level information on the new fee disclosure rules
  • Describes the various service providers and specialists associated with the administration of 401(k) plans and what they do.
  • Interactive annotated statements and comparative charts to help participants understand and better comprehend the information they will receive
  • Definitions of key terms plan sponsors and participants will need to know.
  • General retirement planning education and tips.

In compliance with the Department of Labor fee disclosure regulations that went into effect on July 1, plan sponsors will begin providing participants with annual and quarterly information about plan and investment fund fees and expenses.  

U.S. faced its own ‘Eurozone’ issues in 1790: BNY Mellon

Anticipating global GDP to grow at 3%, BNY Mellon chief economist Richard Hoey expects that stronger countries in Europe may begin to exit the recession later this year and that Southern Europe will remain in recession well into 2013. 

“While some observers fear a full-scale global recession, we believe a global growth recession continues to be more likely, given the beneficial drop in energy prices and the easy monetary policy prevailing in most parts of the world except Southern Europe,” Hoey said in Economic Update.

Eroded competitiveness and excessive debt will continue to plague weaker Eurozone countries, according to the report, as they try to become “credibly solvent” and lower their financing costs.  “Both the overall Eurozone social compact of the balance of contributions and responsibilities and the domestic social compact within many European countries need to be renegotiated,” Hoey said. 

The economist recalled a legacy debt precedent by citing Alexander Hamilton, who founded The Bank of New York in 1784.  Hamilton negotiated a compromise to restructure the legacy state debts at a dinner table in 1790 with Thomas Jefferson and James Madison, two leaders from the financially strong state of Virginia, “the Germany of its day,” writes Hoey. 

“The current proposals in Europe for a ‘redemption fund’ to deal with the excessive legacy debts in Europe have some resemblance to the successful efforts of Alexander Hamilton in 1790, 222 years ago,” Hoey wrote. “Such a redemption fund would not be the solution to the Eurozone problems any time soon.  However, if a new Eurozone social compact of contributions and responsibilities can be successfully renegotiated, it could make it financially credible.” 

© 2012 RIJ Publishing LLC. All rights reserved.

Contingent Deferred Annuities: Still a Rare Bird

Posted on July 11, 2012 by -

Since 2007, eight life insurance companies have filed prospectuses with the Securities & Exchange Commission for contingent deferred annuities. Currently, ARIA’s RetireOne (insured by Transamerica) and Great-West’s SecureFoundation products are being marketed.

The Phoenix Companies has several CDA prospectuses pending SEC approval, and Nationwide Financial has put the marketing of its Portfolio Innovator on hold, pending technical integration with distributor platforms. It has been widely reported that Prudential Financial intends to create a CDA this year.

Here are summaries of the CDAs, including both those that are active and those that have been withdrawn or are inactive for various reasons:

Transamerica/ARIA Retirement Solutions (Active)

In December 2011, Transamerica Advisors Life filed a prospectus for a group fixed contingent annuity that is currently marketed by ARIA Retirement Solutions as RetireOne, a CDA aimed at the fee-based advisors at large custodial firms like Charles Schwab—the firm where the people who founded ARIA were once employed.  

The annual expense of the guarantee (or certificate) starts at 1% of the account value for portfolios with no more than 50% equities and rises to 1.75% for portfolios that hit the limit of 80% equities. International exposure is limited to 25%, small/midcap to 10% and alternatives to 5%.

Big deposits earn fee discounts: the fees on a $2 million contract go as low as 85 basis points. On the other hand, clients who take advantage of quarterly high-water marks to step up their benefit base to the account value will have to pay more for the privilege. The maximum contract fee is 2.50%. 

As for approved investment options, the current batch includes over 140 funds and ETFs from families that RIAs like: American Funds, DFA, iShares, Pimco, Schwab, TIAA-CREF, Vanguard and other favorites. Stone expects a lot of RIAs to build new insured portfolios from these approved options at their custodian of choice, rather than try to put an income floor under an existing portfolio. 

But what’s novel about ARIA isn’t the pricing or the investments. It’s the technology that lets the insurance company watch the investments on any of 50 different custodians and hedge them as they fluctuate.

“ARIA’s technology allows us to receive files from the custodians so that we can monitor the positions as we would any of our variable annuity subaccounts, and to use our risk management protocols and hedge accordingly,” a Transamerica executive told RIJ last spring. “We can see the same type of data, as if it were on our own platform.”

Phoenix Guaranteed Income Edge (Pending SEC approval)

PHL Variable Insurance (Phoenix) filed prospectuses in April 2012 for the Phoenix Guaranteed Income Edge, an insurance policy designed to provide lifetime income for advisory clients of Lockwood Advisors who have chosen the LIS2 (Lockwood Investment Strategies Longevity Income Solutions program).

PHL Variable Insurance’s financial strength is rated B+ by A.M. Best, Ba2 by Moody’s and BB- by Standard & Poor’s.

This certificate offers a 5% [of the retirement income base] payout starting at age 65. You can mix and match various asset classes of ETFs and mutual funds within three ranges—up to 60% equities, 80% equities, and 100% equities—and you pay a higher insurance fee as you go up in equity exposure. For instance, it costs 140, 200, and 265 basis points for the three equity exposures for a single life, and 215, 300 and 390 basis points for a joint and survivor. The maximum fee is 500 basis points.

The exact funds and ETFs available are not named in the prospectus. On top of the insurance fees, there’s a 50 bps fee for participating in the LIS2 program, plus the ETF or fund fees, and an unspecified Lockwood financial advisor fee. Policyholders can pay the fees from a side account. The minimum contract amount for participation is $250,000.

Income Edge is also being offered to clients of J.P. Turner & Co. Capital Mgt., Portfolio Design Advisors, Eqis Capital Management, Inc., and Institute for Wealth Management LLC.

Great-West SecureFoundation Group Fixed Annuity (Active)

On May 1, Great-West Life & Annuity Insurance Co. filed a prospectus a group fixed deferred annuity certificate. This appears be a rollover IRA version of the Great West’s existing stand-alone-living-benefit for retirement plan participants. It will be offered to certain IRA owners who invest in the Maxim SecureFoundation target date funds, with target dates of 2015 through 2005, with the usual five-year intervals between.

The buyers purchase the certificate ten years before the fund with the appropriate retirement date. Since you’re investing in a balanced fund-of-funds that presumably gets more conservative toward retirement, the fee is low—90 basis points per year (1.5% maximum).

Like a GLWB, the SecureFoundation CDA has age bands for determining payout rates in the income phase: 4% a year if income starts between age 55 and 64, 5% if between 65 and 69, 6% if between 70 and 79 and 7% if after age 80. Those are for single contracts. The payout rate for joint contracts is a half-percent lower for each age band.

Nationwide Portfolio Innovator (On hold)

On April 29, 2011, Nationwide filed a prospectus for its Portfolio Innovator, an “individual supplemental immediate fixed income annuity contract,” to be offered to clients who invest in “eligible” portfolios managed exclusively at Envestnet, the Chicago-based regional broker-dealer.

The contract requires a minimum investment of $100,000, and contract owners could pay an insurance fee of 90 basis points for a 45% equity portfolio with no allocation to large cap core funds, to as much as 130 basis points for a 70% equity portfolio with up to 30% large cap core funds and up to 25% international developed market equity exposure. The non-equity portion of each portfolio can be funded with taxable bonds or municipal bonds.

Income can start at age 65 and the payout rate is 5% (4.5% for joint contracts). Nationwide said last March that it intends to distribute the Portfolio Innovator through Morgan Stanley Smith Barney when the two companies’ platforms are integrated.

Genworth Life Harbor (Withdrawn)

On May 3, 2010, Genworth filed a prospectus for a Life Harbor contract, to be offered to clients of Genworth Financial Wealth Management. When Genworth got out of the variable annuity business, it got out of the CDA business too, a company spokesman told RIJ. The minimum investment was $50,000 ($100,000 for ETF accounts) and the insurance fee for a “moderate” 60% equity/40% fixed income portfolio was 85 basis points (100 basis points for a joint contract) or a fee of 100 bps (120 for joint contracts) for a moderate growth 70% equity/30% fixed income “moderate growth” contract, with investment fund options managed by Callan, Goldman Sachs, JP Morgan, Litman/Gregory, Avatar Associates, New Frontier Advisors, and State Street. Contract owners could withdraw 5% for life starting at age 65.

Allianz Life CDA (Never launched)

On October 12, 2010, Allianz Life filed a prospectus for an contingent deferred annuity whose payout bands were linked to the prevailing 10-year Treasury rate. It had a $75,000 minimum, and the only three designated investments were the PIMCO Global Multi Asset Fund, PIMCO Total Return Fund and PIMCO Money Market Fund (PIMCO, like Allianz Life, is owned by Allianz, the German financial giant.) No current insurance charge was specified. The prospectus said only that the charge would be between 0.25% and 1.75% of the benefit base. Under the contract, the payout rate would be 4% with a Treasury rate of less than 3.5%, 5% with a rate of 3.5% to 4.99%, 6% with a rate of 5% to 6.49% and 7% with a Treasury rate of 6.5% or higher.

Merrill Lynch Withdrawal Insurance (Withdrawn)

In 2008, before it was absorbed by Bank of America, Merrill Lynch filed a prospectus for a contingent deferred annuity that it called “withdrawal insurance.” The prospectus was later withdrawn. The annuity certificate cost 50 basis points (60 bps for a joint contract) to insure a Morningstar Conservative portfolio, 65 bps (85 bps for a joint contract) to insure a Morningstar Moderate portfolio, and 95 bps (145 bps for a joint contract) to insure a Morningstar Moderate Growth portfolio. Policyholders could withdraw 5% a year if they started taking income between ages 60 and 69, 6% a year if they started between ages 70 and 79, and 7% if they started at age 80 or older.

Allstate Life CDA (Withdrawn)

In December 2007, Allstate Life filed a prospectus for a contingent deferred annuity. The payout rates started at 5% at age 60, and rose 10 basis points per year to 7% starting at age 80 (50 bps less at each age for joint contracts). The eligible investments were 2005, 2010, and 2015 Retirement Strategy target-date funds, and the cost of insuring them was 75 bps, 100 bps and 125 bps, respectively. No fees were assessed during the payout phase. The prospectus also refers to an annual 5% rollup in the value of the benefit base. The prospectus has since been withdrawn.

© 2012 RIJ Publishing LLC. All rights reserved.

You’ll need 11 times final salary to retire on: Aon Hewitt

Posted on July 11, 2012 by -

A new report from Aon Hewitt warns that most people, even those with secure jobs with great benefits at giant corporations, will be financially unprepared for retirement. Yet idiosyncrasies in the design of the research make the report difficult to interpret.

At first glance, the study’s assertions, based on surveys of 2.2 million plan participants at 78 companies with an average of 15,000 employees each, are somewhat shocking. 

The study, called The Real Deal, estimates for instance that, including the present value of their lifetime Social Security benefits, individuals will need savings worth 15.9 times their final salaries at age 65 in order to maintain their accustomed living standard in retirement.

By that formula, a person with a final salary of $100,000 needs to have saved the equivalent of $1.1 million by retirement in order to maintain his or her standard of living through life expectancy (age 87 for men and age 88 for women). The other $590,000 in retirement wealth would come from the present value of Social Security benefits.

But the study shows that even among workers who retire at age 65 after spending their entire career at a large company with a defined benefit plan and a defined contribution plan with an employer matching contribution, only about 29% will have saved that much.

The average full-career employee will have saved only about 8.8 times his or her salary by retirement, the study said. And if all employees at the 78 companies are counted, only about 15% “have positioned themselves to have sufficient resources to meet their needs if they retire at 65.”

The study notes that if retirement readiness is not widespread among the most secure workers at the country’s most generous companies, it must be much more rare among workers at companies with no DB plan and no DC employer match, let alone among the half of all U.S. workers who don’t have access to a retirement plan. 

“Results for the general U.S. population would likely reveal even larger retirement income shortfalls, compared to the results of this study. The Real Deal study uses data from large employers who generally provide larger retirement benefits and more robust employee communication about the need for retirement savings than smaller employers,” the report said.

But the study also leaves the reader wondering if Aon Hewitt might be setting the bar for retirement readiness too high.

One of the assumptions of the study is that individuals will need to replace 85% of their final salary each year in retirement, a figure that might be open to question—especially for retirees whose mortgages are paid off and whose children are grown. Perhaps most oddly, the study offers findings only for individuals, not couples, and doesn’t consider the possibility that two breadwinners might be contributing to a household’s total retirement savings need.

The study concludes with the suggestion that higher savings rates are achievable through auto-enrollment, auto-escalation of contributions and better monitoring of employee progress and with the statement that “ideal solutions [to the savings shortfalls] will improve outcomes with little or no increase in employer costs.” Aon Hewitt was asked to comment but did not return phone messages before deadline.

© 2012 RIJ Publishing LLC. All rights reserved.

You’ll need 11 times final salary to retire on: Aon Hewitt

Posted on July 11, 2012 by -

A new report from Aon Hewitt warns that even people with secure jobs with great benefits at giant corporations are largely unprepared for retirement. Yet idiosyncrasies in the design of the research make the report difficult to interpret.

At first glance, the study’s assertions, based on surveys of 2.2 million plan participants at 78 companies with an average of 15,000 employees each, are somewhat shocking. 

The study, called The Real Deal, estimates, for instance, that, including the present value of their lifetime Social Security benefits, individuals will need savings worth 15.9 times their final salaries at age 65 in order to maintain their accustomed living standard in retirement.

A person with a final salary of $100,000, the study suggests, needs to have saved the equivalent of $1.1 million by retirement in order to maintain his or her standard of living through life expectancy (age 87 for men and age for women). The other $590,000 in retirement wealth would come from the present value of Social Security benefits.

But the study shows that even among workers who retire at age 65 after spending their entire career at a large company with a defined benefit plan and a defined contribution plan with an employer matching contribution, only about 29% will have saved that much.

The average full-career employee will have saved only about 8.8 times his or her salary by retirement, the study said. And if all employees at the 78 companies are counted, only about 15% “have positioned themselves to have sufficient resources to meet their needs if they retire at 65.”

The study acknowledges that if retirement readiness is so weak among the most secure workers at the country’s most generous companies, it must be much worse among workers at companies with no DB plan and no employer match, let alone the half of all workers whose companies don’t offer retirement plans at all.

“Results for the general U.S. population would likely reveal even larger retirement income shortfalls, compared to the results of this study. The Real Deal study uses data from large employers who generally provide larger retirement benefits and more robust employee communication about the need for retirement savings than smaller employers.”

But the study also leaves the reader wondering if Aon Hewitt might be setting the bar for retirement readiness too high.

One of the assumptions of the study is that individuals will need to replace 85% of their final salary each year in retirement, which might be open to debate—especially if the mortgage is paid off and the kids are grown. Perhaps most oddly, the study offers findings only for individuals, not couples, and doesn’t consider the possibility that two breadwinners might be contributing to a household’s total retirement savings.

The study concludes with the suggestion that higher savings rates are achievable through auto-enrollment, auto-escalation of contributions and better monitoring of employee progress and with the statement that “ideal solutions [to the savings shortfalls] will improve outcomes with little or no increase in employer costs.” Aon Hewitt was asked to comment but did not return phone messages before deadline.

© 2012 RIJ Publishing LLC. All rights reserved.

Rates as low as 1% squeeze Northern European pensions

Posted on July 10, 2012 by -

The Netherlands is moving to introduce a new discount rate methodology that it hopes will avert the benefit cuts that underfunded pensions in that country must enact by law at the end of this year if their solvency ratio does not improve.

The hope is that applying the Solvency II-inspired ultimate forward rate (UFR) will give funds the necessary boost, according to a report from IPE.com.

Denmark is also planning to introduce the UFR, which is based on long-term expectations of inflation and short-term rates. The Danish government announced it was in talks with the pension industry to help it manage the current difficulties. Danish 10-year yields dropped below 1% at the beginning of June before climbing to around 1.37% by 20 June.

In Sweden, where 10-year rates fell to as low as 1.02% on June 6, the financial regulator has proposed a temporary floor on the discount used by pension insurance companies. Institutional investors would otherwise have short-sold equities and other risk bearing assets, thus adding to the current financial woes, it was reported.

Yields in Sweden subsequently rose to about 1.4%. One pension insurer, the labor market provider AMF, said its solvency ratio was adequate.

These short-term measures are not expected to address the long-term structural problems that persistent low rates will cause for institutional pensions, however. As Japan’s experience has shown, ultra-low interest rates and volatile, range-bound equity markets can persist for many years.

In the Netherlands, the concern has already been raised that the UFR methodology may underestimate the long-term cost of the benefit entitlements of younger members – essentially just postponing a crisis with a temporary fix. 

Lars Rohde, CEO of Denmark’s ATP, has said that funds, employers and employees must prepare for lower benefits as pension stakeholders deal with the higher contributions necessary to secure equal benefits in the future or lower benefits if current contribution levels are maintained.

With contributions already topping 20% of salary in the Netherlands, and UK pension sponsors facing an aggregate funding level of less than 75%, the cost of maintaining promised benefits is already a high burden for financially straitened members and sponsors alike.

© 2012 RIJ Publishing LLC. All rights reserved.

Extra: Wealthy divorcees are happier than poor divorcees

Posted on July 10, 2012 by -

Divorce has financial as well as emotional consequences, and often cuts a family’s retirement savings in half. But, as a recent survey found, men and women tend to have different post-divorce experiences.

Nearly two-thirds, or 62% percent, of divorced women with at least $1 million in net worth say they are better off financially since their divorce, according to new research from the Spectrem Group.

Their financial well-being differs sharply from other divorced women, especially recently divorced women, who are twice as likely to live in poverty as recently divorced men, according to U.S. Census data.

High levels of wealth combined with financial acumen seem to insulate affluent women from the financial hardships that often accompany divorce. In 2009, the latest year for which data is available, the U.S. Census Bureau reported that 22% of women divorced in the 12 months under study lived in poverty, compared to 11% of men divorced during the same period.

A full 73% of divorced millionaire women say they are knowledgeable or very knowledgeable about investments. “Many wealthy divorced women told us that they feel they are better with money and investments than their former husbands,” said George Walper, Jr., president of Spectrem Group, in a release.

Divorced millionaire women are less concerned about guarding their principal than men or widows, according to Spectrem Group: 45% are focused on protecting principal compared to growing their investments, but 51% of millionaire men and 58% of millionaire widows prioritize principal over growth. Just 17% of divorced millionaire women describe their investment approach as conservative, comparable to 15% of millionaire men, but far fewer than the 31% of millionaire widows who say they invest conservatively.

“With nearly half, or 49%, of divorced millionaire women still working, many feel confident about their futures and their ability to continue building their wealth,” Walper said.

The wealthy are somewhat less likely to be divorced than Americans overall. According to 2010 U.S. Census Bureau, 10.4% of people over 18 were divorced while Spectrem Group has found that about 7% of millionaire households, with $1 million to $5 million of net worth, and 9% of ultra high net worth households, with $5 million to $25 million in net worth, are divorced.

For those who do divorce, millionaire women say being single provides not only financial benefits but mental-health benefits as well: An overwhelming number, 77%, say they are much better off emotionally since the divorce.

© 2012 RIJ Publishing LLC. All rights reserved.

Discount rates fall, pension liabilities rise

Posted on July 10, 2012 by -

In June, 100 of the nation’s largest defined pensions experienced a collective $57 billion decrease in funded status, according to Milliman’s Pension Funding Index. A $20 billion rise in asset values could not keep pace with a $77 billion increase in pension obligations. 

The $57 billion decrease in funded status, combined the decrease of $129 billion in April and May, accounted for the $186 billion decline in funding during the second quarter.

“With the help of the lowest discount rate in the 12-year history of our study, corporate pensions last month saw their funding deficit increase to a near-record $415 billion,” said John Ehrhardt, co-author of the Milliman Pension Funding Study. “This is the second worst deficit we’ve seen.” 

In June, the discount rate used to calculate pension liabilities fell to 4.32% from 4.56%, raising the PBO to $1.698 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.263 trillion to $1.283 trillion.

Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.32% were to be maintained throughout 2012 and 2013, these pensions would improve the pension funded ratio from to 77.4% from 75.6% by the end of 2012 and to 82.0% by the end of 2013.

© 2012 RIJ Publishing LLC. All rights reserved.

Float Through Retirement on a CDA

Posted on July 10, 2012 by -

As variable annuity manufacturers search for fresh markets for their lifetime income guarantees, they can’t help but drool over the estimated $2.55 trillion that’s held in fee-based retail managed accounts at hundreds of large and small asset management firms across the U.S.

Selling annuity products into that channel is problematic, however. Most of the advisors on managed accounts don’t sell commissioned products or don’t want to move money from a taxable to a tax-deferred account. They may also believe that diversification is the only portfolio insurance their clients will ever need, even in retirement.

Yet the owners of retail managed accounts, especially those age 55 and older, are now widely agreed to have a growing interest in protection from longevity risk and sequence of returns risk–an interest that their fee-based advisors may not feel they can afford to ignore.

To respond to that interest, and to neutralize the qualms of fee-based advisors, certain life insurers have designed a relatively new class of products variously called contingent deferred annuities (CDAs), stand-alone living benefits (SALBs), synthetic annuities” or withdrawal insurance.

It’s not clear yet how rich the CDA business will be or when it will kick in. Insurers still have to win the approval of some skeptical state insurance commissioners. They also need to convince fee-based advisors that the insurance value of CDAs outweighs their costs. It might also help if insurers can conjure up a better name for CDAs—the word “annuities” is still a liability for most advisors and investors.      

Some of the remaining questions about CDAs will be cleared up in the fall, when a National Association of Insurance Commissioners committee and the Government Accountability Office finish their review of the adequacy of the reserve requirements and the consumer protections that will apply to CDAs. Assuming that those reports don’t yield any big surprises, the path to wider state approval of CDAs should finally open.

The biggest regulatory hurdle to CDAs appears to have been crossed last February, when the NAIC’s first CDA committee agreed that CDAs are annuities, because they are life-contingent. On that point, the committee sided with Prudential Financial and Transamerica and against MetLife and the State of New York Insurance Commissioner, who both claimed that CDAs are financial guaranty insurance, because they are contingent on “changes in the value of specific assets.” The State of New York made its ruling in September 2009, when Eric R. Dinallo was superintendent. 

Swap meet

For those who are new to the CDA concept, here’s a brief primer. In its simplest terms, it functions like a swap contract. As the owner, you’re guaranteed a fixed stream of income from a given portfolio—about 5% of your designated portfolio for life—while a life insurer deals with the risk that the portfolio value might drop to zero before you die. 

You pay the insurer an annual premium about 1% of the original value of the portfolio to assume that risk. If your portfolio is exhausted before you die, the insurer protects you by paying you your 5% until you die. If your portfolio is never exhausted, the insurer will have paid you nothing out of its own pocket and any remaining assets go to your beneficiaries when you die.

That type of contract should sound familiar, because a CDA resembles a GLWB in a variable annuity, but with a couple of important differences that are essential to making it attractive to fee-based advisors and managed account platforms.

On the one hand, a CDA is like a GLWB in that the insurance company puts some restriction on what you can invest in, so that you can’t abuse the guarantee by taking huge risks. On the other hand, a CDA differs from a variable annuity in that the underlying mutual funds or ETFs are held in a retail managed account, not in a separate account at the insurance company. Second, the assets can be in a taxable or tax-deferred the retail managed account; variable annuity separate accounts are always tax-deferred.   

The first CDA was offered by the Phoenix Companies through Lockwood Advisors (now an affiliate of Pershing owned by Bank of New York Mellon) at the end of 2007. Some people trace the intellectual foundation of subsequent CDAs to a paper published in the spring of 2009 by Moshe A. Milevsky, Huaxiong Huang and Thomas S. Salisbury in the Journal of Wealth Management.

That article proposed a new kind of insurance contract that the authors called the Ruin-Contingent Life Annuity, which would pay out only if the owner was still alive and only if his or her assets were exhausted by a combination of systematic withdrawals and/or poor market performance.

In the case of the Milevsky RCLA, the underlying assets would be invested in an index fund, and the pricing of the product would depend on several factors, including the chosen withdrawal rate and the level of the index at the time the contract was purchased. Most importantly, the contract would not require the client to give up control over the assets.

Pros and cons 

For a near-retiree who already has a managed account at a wirehouse like Morgan Stanley Smith Barney or at a TAMP (turnkey asset management platform), and who is comfortable with the costs and benefits of investing within such a structure, the advantage of the CDA is pretty clear: For a relatively small additional fee, the retiree can guarantee that she’ll never run out of income.

There are other pluses. If your managed account is taxable, you don’t have to move the money into a tax-deferred account. Your advisor can continue to rebalance and harvest gains and pay capital gains tax. And it’s not necessarily a permanent commitment. After you retire, if several years of bull markets indicate that you’re very unlikely ever to run out money, you can lapse the contract. 

On the downside, you do have to move your assets into one of the approved model portfolios specified in the CDA contract, or at least re-allocate your assets to fit the approved allocations. Then there’s the expense. Although CDAs don’t have the mortality & expense risk fees or the death benefit fees associated with variable annuities, you’ll still have to pay 1% to 1.5% wrap fee to the firm that manages your account.

The cost of the CDA itself ranges from a low of about 100 basis points for a low-risk portfolio with single-life protection to a high of 390 bps (in the pending Phoenix product), for an all-equities portfolio with joint-and-survivor protection.  (It’s possible that you may end up paying an additional fee to advisory platform; it’s not entirely clear what incentive the platform has to sell the annuity in the first place. The Phoenix CDA contract includes a 50 basis point annual fee for the account manager.) As with a GLWB, the policyholder faces the constraint that if he or she withdraws more than the allotted amount (usually 5%) in a single year, the level of future annual income may drop.

Early candidates

Although several companies have filed prospectuses with the SEC for CDA-type products over the past five years, few if any are available at the moment to retail investors. (See the feature in today’s RIJ.)

The Phoenix Companies recently filed applications for four separate CDAs, to be offered at four different asset management firms. Genworth created a CDA but dropped it when it dropped out of the variable annuity business. Allianz Life filed for a CDA but never launched it, according to spokesperson Sara Thurin Rollin.

Nationwide created a CDA a few years ago to market through advisors at Envestnet, the Chicago advisor platform, but that product has languished. “Nationwide is hopeful to offer SALB products again in the future,” a company spokesman told RIJ. “However, we have faced some challenges that have caused us to put our current SALB offerings on hold. The challenges include obtaining state approvals for large states, and technology integration.”

Moshe Milevsky, who says he is an “informal consultant” to two CDA manufacturers, thinks that consumers may eventually learn to think about buying CDAs the way they think about buying “home, car, life or travel insurance,” given that their life savings deserves to be insured as much as their car or home does.

But before that happens, he told RIJ, “there are a number of behavioral obstacles that people will have to overcome” before they agree with economists that CDAs are a good idea. In response to a question about the life insurance industry’s underpricing of variable annuity living benefits prior to the financial crisis, he said, “I think the insurance companies have learned their lesson from [the crisis], and are better—although not perfect—at quantifying the risks.”

Because insurance products are regulated at the state level, CDAs will have to be approved by insurance commissioners in key states before they can gain much momentum. At least some of those commissioners are waiting to hear from a second NAIC committee and from the GAO on their confidence in the ability of CDA issuers to handle the market risk, longevity risk, operational risk and policyholder behavior risk that they’re taking on.  

The America Academy of Actuaries generally approves of CDAs. In a June 27 presentation to the NAIC, Cande Olsen of the American Academy of Actuaries’ Contingent Annuity Work Group argued that the same regulatory framework—Actuarial Guideline 43 (AG43) and C3-Phase II—that governs reserving for variable annuities will work for CDAs. She also claimed that, with synthetic GIC products, regulators already have experience regulating products with funds outside the insurers’ control.

As with variable annuity GLWBs, the biggest danger to insurers would probably not come from market risk. Equity markets would generally bounce back long before the guarantee was exercised—as occurred after the 2008 financial crisis. A greater danger might be the possibility that medical science will find a way to extend the baby boomers’ average life expectancy by five or 10 years.

CDAs do not pose one of the serious risks to insurers that GLWBs do: The risk that, because of an extended market downturn, carriers will not be able to recover, through asset-based fees, the sizeable upfront commissions that they have to extend to intermediaries when selling B-share variable annuities. With CDAs, insurers don’t bear the distribution expense.

© 2012 RIJ Publishing LLC. All rights reserved.

It’s Not the Heat, It’s the Frugality

Posted on July 10, 2012 by -

Much of the country was struck by a heat tsunami in late June and early July. Thunderstorms and tree-felling “derecho” winds accompanied 100-degree temperatures in some places. In Boulder, Co., where I was visiting, storm clouds brought lightning, which sparked fires in the mountains above town.  

But the most common complaint I hear from RIJ subscribers and others around the country these days, after we exhaust the topic of heat, is that the pace of business is slow. Money is not changing hands. The multiplier effect is ineffective. 

“My business is in the toilet,” a usually chipper colleague on the West Coast’s gold coast told me. “People have money, but they’re not spending it,” said someone who was trying to sell $10,000 booths for a conference in the fall. A 57-year-old hoped that his company’s recent acquiror won’t eliminate his job. A consultant said he’s just experienced the two worst months of an otherwise recession-proof career. And so it went.

Like the talking heads on CNBC after the stock exchange closes at 4 p.m. weekdays, we can always find a proximate cause for the economic doldrums du jour. The looming election and the uncertainty of its impact on taxes, regulation and federal spending happens to be my favorite scapegoat.

To paraphrase Woody Allen, in one direction lies utter devastation; in the other, total ruin. To mangle Robert Frost, it looks like our world will end either in the fire of inflation or the ice of austerity. To quote Bob Dylan: “Take your pick, Frankie boy. My loss will be your gain.”

Or, as Nachum the beggar said to the villager in Fiddler on the Roof who gave him only one kopeck in alms: “Just because you had a bad week, why should I suffer?”

*            *             *

For annuity manufacturers, one reason to be hopeful is the possibility that contingent deferred annuities (CDAs) will sell well in the fee-based advisor channel and perhaps in the retirement plan channel. (CDAs are the subject of RIJ’s cover story this week.)

To succeed, however, the product might need a new name. As everyone knows, the word “annuity” renders most people unconscious. Earlier names for these unbundled guaranteed minimum withdrawal products (GMWB)—“synthetic annuity” and “stand-alone living benefit”—didn’t quite sing either.

But we’re probably stuck with the term CDA for a while, if only because annuity manufacturers have just spent a lot of time and legal firepower convincing a National Association of Insurance Commissioners committee that CDAs are annuities, and therefore life insurance products, and not “financial guaranty insurance” like the credit default swaps that ruined AIG during the financial crisis.

If you can think of a more melodious name than “Contingent Deferred Annuity,” please e-mail your suggestion to me. If someone can come up with a plausible, pleasing substitute for CDA, I’ll send him or her a fresh copy of “Someday Rich,” the new John Wiley & Sons book by Tim Noonan and Matt Smith.

*            *            *

Over a glass of hoppy IPA craft beer in Boulder just before the start of a stimulating Consumer Financial Decision-Making Conference in late June, I had an interesting conversation with Jeff Brown, the esteemed annuity “framing” expert from the University of Illinois. We had differing opinions about the impact of Social Security on annuity purchasing behavior.

I argued that Social Security crowds out demand for private annuities, and that the crowd-out effect helps explain the so-called “annuity puzzle.” The average person, who has a $1,100 inflation-adjusted monthly income from Social Security, effectively owns a life annuity with a present value of almost $200,000, I reasoned. In other words, if someone has $200,000 in personal savings, then half of his total wealth (aside from home equity) is already annuitized via Social Security. Why should he annuitize more?

Nonsense, said the formidable Dr. Brown. He argued that, even if people have a $2,500-a-month income from Social Security, $2,500 will probably still represent a small enough percentage of  their basic monthly cost-of-living that Social Security should have little or no effect on their real or perceived need for additional guaranteed income. As in so many discussions about annuities, the correct answer probably varies by individual and by income level. In the meantime, since Brown is the expert, I’ll defer to his view.

*            *             *

Finally, an amateur economist’s note about macroeconomics: The view that federal taxes are “theft” and the corollary that the poorer half of the population should pay more in taxes (while the rich should pay less) has never seemed convincing to me. So, while hiking in Colorado earlier this year, I ignored the wild elk and the Indian paintbrush and tried to imagine an analogy that would show why those statements are wrong.  

Pardon the mundane metaphor, but it occurred to me that that economy works like a bathroom sink. The water, obviously, enters through the faucet. It drains out either through the drain-hole at the bottom of the sink or (if the drain-hole is closed and the faucet stays open) through the overflow hole near the top of the sink.

Think of the water from the tap as government spending and the water in the sink as money in the economy. To keep the sink from overflowing with money (and causing inflation), the government must remove money via taxes. Uncle Sam can take taxes from people at the bottom of the economy (through the drain-hole) or from people at the top of the economy (through the overflow hole).

If the government takes money from people at the bottom of the income scale by leaving the drain-hole open, the sink certainly won’t overflow. But it won’t fill, either. To fill the economy with money but prevent inflation, you need to take the money from the people at the top of the income scale. You could, in theory, turn off the money tap (fiscal austerity) and eliminate the overflow hole and the drain (zero taxation), but the water in the sink would stagnate and (ultimately) evaporate.

Q.E.D.

© 2012 RIJ Publishing LLC. All rights reserved.

Retirement Specialists are Generalists

Posted on July 2, 2012 by -

At a backyard barbecue a few years ago, an 82-year-old millionaire-next-door—he once owned a cardboard box manufacturing company—told me that he hesitates to consult a financial advisor out of fear that he’ll be talked into an investment that doesn’t suit him.   

This gentleman isn’t afraid of outright fraud. He merely believes that an advisor will steer him to whatever product that advisor likes to sell. He doesn’t know how to find an advisor who will create the best solution for him, and not the best solution for the advisor.     

Many investors are similarly baffled. A 2008 Rand Corporation report found, for instance, that few investors could even distinguish between a broker and an advisor. The default option, for many people, is not to seek professional financial advice at all.  

My awareness of this problem was heightened this spring, while I was comparing the guaranteed lifetime withdrawal benefit riders of fixed indexed and variable annuities. In the course of one interview, a manufacturer reminded me that, in the real world, no advisor would show both products—FIAs and VAs—to the same client. 

Duh. Like physicians, financial intermediaries specialize. Their specialties reflect different forms of training, licensing, regulation, compensation methods or simply the preferences of their firms. FIAs, for example, are sold almost exclusively by independent insurance agents, while VAs are sold primarily by independent advisors.

We believe that the status quo is ripe for change. The baby boomer retirement phenomenon demands it. Very few boomers will be able to live on interest and dividends alone. Most mass-affluent boomers will need to combine insurance and investment products to achieve financial security.   

To serve them properly, more advisors will have to become adept at cobbling together retirement income from a variety of resources. They will need to create mosaics of annuities, payout mutual funds, bond ladders, reverse mortgages and perhaps long-term care policies. Investment specialists will need to learn about insurance and vice-versa. To specialize in retirement income is to become a generalist.

RIJAdvisor serves advisors who embrace this vision, and who want practical information that will help them realize it. We know the transition won’t be easy. Many advisors can’t or won’t leave their comfort zones to learn about new products, new processes or new ways of getting paid. But the rewards of responding to the baby boomer opportunity are great enough, we believe, to make the journey worthwhile.

© 2012 RIJ Publishing LLC. All rights reserved.

Defining ‘Tactical Asset Allocation’

Posted on July 1, 2012 by -

FPA’s 2012 Trends in Investing study found that a majority of advisors have become tactical asset allocators, according to “The Rise of Tactical Asset Allocation” by Michael Kitces in the Journal of Financial Planning.

This doesn’t mean advisors are abandoning the principles of MPT—far from it. But they are less willing to base their allocation decisions on historical averages (such as the 5% from long-term bonds) that no longer apply.   

Tactical allocation doesn’t necessarily contradict MPT, Kitces points out: “Harry Markowitz himself acknowledged that the Modern Portfolio Theory tool was simply designed to determine how to allocate a portfolio, given the expected returns, volatilities, and correlations of the available investments. Determining what those inputs should be, however, was left up to the person using the model.”

Advisors are turning to different strategies, including concentrated stock picking, sector rotation, alternative investments, and market valuations. But they’re hardly day-traders. The advisors in the study made no more than about five allocation changes a year.  Nonetheless, many advisors feel unprepared to allocate assets tactically, and the study shows a growing trend over the past three years toward advisors letting someone else figure it out by outsourcing their investment management chores.

In a related article about the Trends in Investing study, Brad McMillan recommends allocating 15% to 25% of a portfolio’s assets to alternative investments. Managed futures, long/short funds and even so-called “go anywhere funds”—though these are hard to define, let alone rely on—can diversify a portfolio by providing non-correlated returns.

“There are two ways to do this,” McMillan wrote. “First, find an asset class that is largely under-owned, where the perception (but not the reality) is that it’s too dangerous or otherwise undesirable for most people. The second way is to find a strategy that will work in a non-correlated way by design.”

Since most asset classes have been so finely sliced and diced by size and geographic region, it’s preferable to look at diversifying strategies such as long-short and absolute return and assets such as Business Development Companies. Of course, as “weird and scary” investments become more popular they lose their value to diversify.

“The lessons are the same as for any traditional asset class,” writes McMillan. “Pay attention to valuations; watch for bubbles; make sure you understand the strategies, risks, and expected results; and always be aware of where the asset class is in the popularity cycle, as that will help determine the potential for alpha.”

© 2012 RIJ Publishing LLC. All rights reserved.

Great Expectations… Dashed

Posted on July 1, 2012 by -

A recent Wall Street Journal article observes that the financial crisis and increasing longevity have combined to alter baby boomers’ inheritance expectations dramatically.

Many parents suffered substantial losses in the 2007-2009 market crash. Many parents are living longer than they expected. Greater demands placed upon smaller parental resources are a recipe for smaller inheritances.

To add insult to injury, in some cases parental shortfalls are large enough that the children are called upon to help out: funds flow from children to parents rather than the other way around.

Every family that finds itself in this kind of situation is disappointed. Parents are unable to keep commitments they made at least to themselves, and perhaps to their children. Children who had been counting on an inheritance to pay for education for their children, to buy a nicer home, or to fund their own retirements have to make other plans.

Each family’s situation is different. It is impossible to say just how each one developed. And, it would be extremely unfair to suggest that specific courses of action could have prevented these disappointments. Hindsight is famously 20/20. We have information now that the profiled families didn’t have when they made their financial decisions.

However, today’s parents, planning for their own retirements and for their own children’s inheritances, can take steps to avoid similar disappointment in the future. Each step is very simple:

Bet on your savings, not on the market. If your retirement plan depends on excellent stock market performance, you are relying on a mechanism you cannot control. On the other hand, if your plan depends on saving enough, you are in charge.

Don’t underestimate how long you may live. The article provides some statistics on longevity (how long people live). It’s important to understand that estimates of life expectancy are averages. Roughly speaking, if life expectancy for a 65-year-old man is 85, half of men 65 will live beyond (in many cases, well beyond) 85. And, those averages may not apply to you. If, for example, you don’t smoke, your life expectancy can be seven years longer than for someone who does. Checking out www.livingto100.com is one way to get an objective perspective on your own situation.

Convert some assets into income for life. Single premium immediate annuities (SPIAs) can provide income you can’t outlive. If the income is inflation-protected, you’ll limit the risk that inflation will erode your purchasing power. (Important caveat – if you know your life expectancy is below average, perhaps due to illness, lifetime income annuities are not a good choice). This is insurance against outliving your assets.

Wait to begin receiving Social Security benefits. Annual benefits starting at age 70 can be as much as 76% higher than starting at 62. There is an important sense in which this is your most attractive income annuity purchase opportunity – the price is better than for commercial annuities and the benefits are inflation-adjusted.

While life is uncertain, and nothing can guarantee success, incorporating these steps into your retirement planning will certainly improve your chances.

© 2012 Sensible Financial.

How HNW investors generate income

Posted on June 30, 2012 by -

People with at least $250,000 in investable assets are looking for dividend-producing stocks and corporate bonds as sources of income, according to a new poll from Fidelity Investments.

The poll was taken during the live “Fidelity Viewpoints Forum: Investing for Income” in Boston on June 13 where five Fidelity portfolio managers discussed a range of topics including Eurozone implications to the U.S. economy, opportunities in emerging markets, and that they believe many U.S. corporations are currently a quality investment in stocks and bonds.

Key findings of the poll include:

  • 44% of investors said they would put their next investing dollar in U.S. stocks, 16% would put it in investment-grade corporate bonds, 9% chose high-yield bonds and 9% chose “under the mattress,” i.e., cash.
  • Regarding the next six months, 54% of respondents were bullish about dividend-producing stocks and 15% were bullish about investment-grade corporate bonds.
  • 28% cite the Eurozone crisis as their most pressing financial worry, while 27% indicate U.S. debt problems and 24% cite high unemployment/recession.
  • Only 18% percent of high net worth investors expect fixed income investments to match or exceed their return over the past 12 months—about 7%—over the next 12 months. 
  • 32% think their fixed income returns will drop below 4% and the same percentage expects between 4% and 6%. 
  • 86% of high net worth investors believe taxes will be higher next year – both on income and on capital gains and dividends. But 52% don’t intend to implement new tax strategies.

Investors who are balancing higher risk and higher yields, can read a new Fidelity Viewpoint article based on the content shared by the portfolio managers at the forum and entitled “The upside-down world of income investing.”

Envestnet and Achaean Financial in partnership

Posted on June 30, 2012 by -

Achaean Financial has announced a partnership with Envestnet that will make its Retirement Outcome system available to investment advisors who use Envestnet’s wealth management platform. Partial integration has begun. Full integration is scheduled for November 2012.

The advisors will be able to use Retirement Outcome to create an analysis of a client’s income needs before and during retirement, then incorporate that analysis into a proposal on the Envestnet platform, then populate the proposal with investment choices or annuities.  

According to an Achaean release, “Retirement Outcome is an advanced, open-architecture and fully customizable retirement planning tool designed to help investors and their advisors understand the tradeoffs they face in retirement and to create personalized solutions, including appropriate spending, overall portfolio risk and allocations to guaranteed-income products.

“Retirement Outcome takes information about a client’s wealth, income needs and asset allocation to produce a personalized outcome report.  Each of the various investing and spending decisions can then be adjusted to help the client understand the tradeoffs they must make and how they are likely to impact income and wealth throughout retirement.”

© 2012 RIJ Publishing LLC. All rights reserved.

Building – and Selling – a Retirement Income Practice

Posted on June 30, 2012 by -

Many of us grew up in the commission world. We established our business overhead and our budgets at home around first-year commissions. Industry awards and educational conventions have always been based on first-year commissions.

Now a plethora of products are available that pay an advisory fee on an annual basis. In many situations these products are better suited for our clients as they enter into retirement. They are more liquid, sometimes better diversified, and in most cases have lower management and administrative fees.  

Additionally, the recurring revenue they generate creates value in an advisor’s practice, making practice transitions profitable for both the advisors selling their practices as well as the advisors making the purchase. The stress of always wondering “where is my next sale coming from” gets less and less as my assets under management grow.

If all my business and personal needs were met without ever having to sell another product or prospect for a new client, it would be the ideal practice. Yet, I wish I had a dollar for every advisor who has told me they are going to become a “fee only” advisor and six months later they abandon the game.

Why? Because they can’t live on 80% less income while they wait for the assets under management to grow. Nor, in many cases, can they move existing business into an advisory fee format due to regulatory restrictions or penalties that their clients would incur if the existing block were moved.

Sadly, sometimes the result is falling back into our old way of doing things and perhaps not always doing what is best for the client. What is the answer? It’s not as if there’s a $20 million account waiting outside your door that you can put into a 1% advisory fee account that will now give you $200,000 of annual income. There is no “quick fix.”

Personally, I came from that commission world and now have a retirement income planning practice that I have just signed an agreement to sell. The sale will take place in June of 2014 for close to $1 million. If I were still doing commission-only products, my practice value would be significantly less…about 75% less.

When I first designed the Income for Life strategy in 1984 it was specifically to create a strategy for my retiring clients. At the time, I gave no thought to the ultimate impact it might have on my personal retirement plan. While training advisors for the past 10 years it has become apparent that a segmented or “bucket” strategy for producing retirement income is the ideal solution for both the retiree and the advisor trying to transition to the fee-based world.

Without going into a lot of detail, the basis of a segmented strategy is that the income needs for the first 10 years are provided from guaranteed, fixed products. The 10-year-and-longer money is invested in equity portfolios that align with the client’s risk tolerance. The result is an income model that is funded with both commissionable and advisory fee products (the typical mix is about 50/50). Also, the typical sale is usually two to three times larger than a more transactional commission sale.

The result is that the advisor’s current income needs are being met while the fee-based, AUM money quietly builds over the next 10 to 15 years. At the end of 15 years, the AUM money will generate as much recurring revenue for the advisor as the combination of commissions and fees did at the beginning.

For the advisor who intends to work for at least another 15 years, this business plan creates an income stream that meets current needs and creates recurring revenue that can be sold to a transition partner down the line for a two-to- three times multiple. The advisor can personally finance the purchase of his or her practice and create five to 10 years of retirement income that is primarily taxed as a capital gain.

Everyone wins. The client has a reliable income stream from a variety of products that meet their liquidity and investment goals, as well as ongoing service and advice. The advisor has made the transition gradually to the fee world with little or no financial sacrifice. The young advisor has a great opportunity to purchase a profitable practice without having to go through all the early pains and failures of building one.

© 2012 RIJ Publishing LLC. All rights reserved.

How to Become a ‘Doctor’ of Retirement Income

Posted on June 30, 2012 by -

“If you have a heart problem, you don’t want to see a generalist, but a cardiologist,” says Dana Anspach, CFP, the founder of Sensible Money, a Scottsdale, Arizona advisory firm that specializes in dealing with the financial risks of retirement. “Retirement income planning takes a special skill set that goes beyond general planning.”

That skill set is something that relatively few advisors today can boast of having. Most have not looked beyond traditional accumulation-stage investment strategies to grapple with the questions that clients face when they no longer earn a substantial income.

Those questions include: When should I take Social Security? What’s the best way to draw down my 401(k)? How much guaranteed income do I need? How do I deal with longevity risk, tax risk, inflation risk, and health risk? 

But times, as you know, are changing. Several certification programs—some new, some well-established—can show you how to become an expert in retirement income planning.

Just as important, these programs provide their graduates with a designation that can they hang on the wall, that will assure clients that the advisor knows what he or she is talking about, and that can differentiate him or her from other advisors.

To be sure, there’s been some abuse of bogus “Senior Designations” in the past. We looked closely at the following certification programs and feel confident in recommending any of them.     

Retirement Management Analyst

The Retirement Income Industry Association created its Retirement Management Analyst (RMA) designation partly in response to the Great Recession, when retirees were poorly protected, says Steve Mitchell, RIIA’s chief operating officer and director of advisor education.

“There was a real gap in how to monetize a portfolio in a sustainable way,” Mitchell told RIJAdvisor, referring to the process of converting savings to income. “Our approach provides the protection [a retiree needs] by building an income floor with solutions that are not subject to market volatility.”

The RMA seeks flooring solutions from “across the silos.” (“Across the silos” is the slogan of RIIA, whose founding principle was that the retirement income challenge requires solutions from multiple disciplines.) Those flooring solutions range from hedging strategies to annuities to laddered TIPs.

The program recommends investing for upside potential with the assets that haven’t been used to establish the floor. The eight-module, rigorously academic course draws on principles of “life-cycle investing” by considering the interplay of clients’ human, social and financial capital and then matches income against the entire household’s needs, rather than an individual’s. 

The coursework is based on two proprietary texts, The RIIA RMA Book of Knowledge, which was written by RIIA co-founder and chairman Francois Gadenne and Michael Zwecher, and the latter’s Retirement Portfolios: Theory, Construction and Management (Wiley Finance, 2010). 

The RMA is offered as a five-week distance-learning program through Boston University’s Center for Professional Education. The fee is $1,295. The RIIA also offers a five-day, one-week intensive including the final four-hour exam at Texas Tech. The RMA involves other fees, including the annual $500 RIIA membership, which offers access to its magazine, conferences and webinars).

Retirement Income Certified Professional

The American College’s Retirement Income Certified Professional (RICP)  is a new program from the venerated institution that was founded in 1927 by Wharton School professor Solomon S. Huebner. (The RICP program is so new that two of its three segments are still under construction.) The first segment of the three-part training just launched in April, the second and third will launch in September and January, respectively.

The RICP doesn’t rely on a specific textbook or advocate a particular strategy. Rather, each segment offers a series of about eight online lectures (with notes and exercises) by American College professors. The lectures are interspersed with some 20 video presentations by industry experts like Michael Kitces, Moshe Milevsky and Ken Dykewald. Most of the videos are taken from the college’s New York Life Center for Retirement Income  where many of them are available for free viewing. “We introduce people to all the major approaches and allow them to make their own decisions,” said co-director of the New York Life Center Dave Littell.

Each course requires about 50 hours of study and is followed by a 100-question, multiple-choice exam. All three classes are available online at an introductory price of $1,349 (which will increase to $1,860 after the first year).

The American College also offers the Chartered Advisor for Senior Living (CASL) designation. With five self-study segments, it’s broader than the RICP and covers issues from the fields of psychological and gerontology. “The CASL is not a laser focus on retirement planning,” said Keith Henderson, the college’s Senior Strategy Consultant. “There’s a lot on estate planning and long-term care.” In fact, the CASL, which costs $620 per course and requires a $140 admission fee, can complement the RICP.  

Certified Retirement Counselor (CRC) 

The Certified Retirement Counselor designation is offered by the nonprofit International Foundation for Retirement Education (InFRE), which has been affiliated with Texas Tech University.

The course teaches advisors how to define a client’s retirement income needs, identify sources of retirement income, determine how to fill any gaps and protect income streams from threats like taxes, inflation and volatility.

“We’re good at taking the academic material and making it easily relatable to advisors so they can easily explain it to their clients,” said InFRE managing director Kevin Seibert. The CRC has certified some 2,000 advisors, about a third of whom work in banks and about a quarter work in 403(b) plans and 457 plans.

The CRC is primarily a self-study course. It uses uses a combination of four books of 150-200 pages each. These include Fundamentals of Retirement Planning, Fundamentals of Investments, Fundamentals of Retirement Plan Design and Fundamentals of Retirement Income Planning. Each book requires about 15 to 25 hours of study for a four-hour exam with 200 multiple choice questions. The books are supported with 30 e-learning modules with 18 hours of content. The course has an 85% pass rate and costs $900. 

Chartered Retirement Planning Counselor (CRPC)

The Chartered Retirement Planning Counselor designation is offered by the College for Financial Planning, and according to its statistics, increased the graduates’ income graduates by 12% in 2011. The course includes 12 sections, including such topics as managing assets in retirement, planning for incapacity, and estate planning. (Those who have taken the longer and harder Certified Financial Planner (CFP) course may find parts of the CRPC redundant.) Advisors who take the CRPC course can test out of up to one-third of the CFP educational material. Cost: $1,085.

Certifications for plan sponsor advisors

For advisors who work with employer-sponsored retirement plans and small business owners, two of the most widely sought designations are the QCFP and C(k)P. Each offers a basic certificate that signifies expertise in the fundamentals of retirement plan laws and structure, followed by a more in-depth designation described below.

The Qualified Plan Financial Consultant (QCFP), offered by the American Society of Pension Professionals and Actuaries (ASPPA), focuses on all the technical information that advisors who work with plan sponsors need to know. It covers the pros and cons of different types of plans, their vendors, hybrid plan design, advanced qualification testing, plan documentation, distributions and taxation, as well as legal and fiduciary issues.

Because pension rules constantly evolve, advisors need specialized knowledge to keep up with changes. There is one online exam with 85 multiple-choice questions and one proctored exam with 75 questions. The course requires 40-60 hours of self-study. Cost: $1,000.

The Certified 401(k) Professional, or C(k)P, is a new offering from The Retirement Advisor University (TRAU at UCLA’s Anderson School of Management Executive Education. The curriculum includes three days of classes taught by Anderson professors, online lectures and self-study. In addition to legal and fiduciary technical information, the C(k)P offers a suite of courses on marketing and selling plan management services, managing an advisory practice, and maximizing retirement income for plan participants. To pass and become certified, plan advisors must get at least 70% of the exam’s 125 questions correct. Cost: $4,950.

© 2012 RIJ Publishing LLC. All rights reserved.

 

‘Obamacare’ Survives

Posted on June 28, 2012 by -

The Supreme Court on Thursday left standing the basic provisions of the health care overhaul, ruling that the government may use its taxation powers to push people to buy health insurance, the New York Times reported today.

The decision was a victory for President Obama and Congressional Democrats, with a 5-to-4 majority, including the conservative chief justice, John G. Roberts Jr., affirming the central legislative pillar of Mr. Obama’s presidency.

Chief Justice Roberts, the author of the majority opinion, surprised observers by joining the court’s four more liberal members in the key finding and becoming the swing vote. Justice Anthony M. Kennedy, frequently the swing vote, joined three more conservative members in a dissent and read a statement in court that the minority viewed the law as “invalid in its entirety.”

The decision did significantly restrict one major portion of the law: the expansion of Medicaid, the government health-insurance program for low-income and sick people, giving states more flexibility.

Vanguard index wizard Gus Sauter to retire

Posted on June 27, 2012 by -

George U. “Gus” Sauter, managing director and chief investment officer of Vanguard, has announced plans to retire, effective December 31, 2012.

Mr. Sauter, 57, currently directs Vanguard’s global investment management groups, which oversee aggregate assets of $1.6 trillion of Vanguard’s $2.1 trillion in global assets. Mr. Sauter joined Vanguard in 1987 as head of the firm’s internal equity management group. In 2003, he was named the company’s first chief investment officer, assuming oversight responsibility for all in-house stock and fixed income management functions.

Mortimer J. “Tim” Buckley, managing director, will assume the role of chief investment officer upon Mr. Sauter’s retirement. Mr. Buckley, 43, has been a member of Vanguard’s senior staff since 2001 and has directed Vanguard’s Retail Investor Group since 2006. The group serves 5 million individual investors through its client services, high net worth, brokerage, advice, annuity, college savings, and processing operations.

Buckley joined Vanguard in 1991 as assistant to then Chairman John C. Bogle. He has held various leadership positions within the firm’s Planning and Development, Retail Investor, and Web Services groups. From 2001 to 2006, Buckley served as chief information officer and head of Vanguard’s Information Technology Division.

© 2012 RIJ Publishing LLC. All rights reserved.