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There’s been a 21% increase in new plan inception and an 18% increase in assets in cash balance retirement plans, according to the 2012 National Cash Balance Research Report from Kravitz, the designer, administrator and manager of corporate retirement plans. 

 “IRS regulations released in October 2010 added flexibility for plan sponsors, so we expect this growth rate to continue accelerating,” Dan Kravitz, president of Kravitz, said in a release.

There were 7,064 cash balance plans active in 2010 (the most recent year for which IRS reporting data is available), up from 1,337 in 2001, representing 810% growth in less than a decade. There are now 11.1 million participants in cash balance plans nationally, with $713 billion in total plan assets.

Also known as ‘hybrids,’ cash balance plans provide a guaranteed cash balance benefit at retirement rather than a lifetime annuity or lump sum benefit, as defined benefit plans do. Like a 401(k) plan, however, cash balance plans are portable.   

“A cash balance plan can allow for much higher contribution amounts,” according to a fact sheet from Summit Retirement Plan Services. “Annual participant contributions to a 401(k) plan are limited to no more than $49,000 ($54,500 if age 50 or over). Cash balance plans on the other hand have no contribution limitations and are only limited by the cost of a maximum projected benefit at retirement… permitted by the Congress, currently $195,000 per year at age 62.”

The 2006 Pension Protection Act clarified IRS approval of cash balance plans, removing uncertainty over their legal status and making it easier to establish and administer them.  Between 2006 and 2010, almost 4,400 cash balance plans were created, compared with 1,684 between 2000 and 2005.

More than half of cash balance plans exist at medical, dental, legal and other professional offices, almost always in tandem with a profit-sharing plan. Contributions are usually in addition to paychecks, rather than deferred from paychecks, and go into a pooled, low-risk investment fund. Over 70% of the plans are at companies with fewer than 25 employees. The largest cash balance plans have typically been created at corporations that switched to them from defined benefit plans.

The 2012 National Cash Balance Research Report also showed that:

• The average employer contribution to staff retirement accounts is 6% of pay in companies with both cash balance and 401(k) plans, compared with 2.3% of pay in firms with 401(k) alone.
• Between 2008 and 2010, there was a 38% increase in new cash balance plans, despite the financial crisis and recession.
• 84% of cash balance plans are in place at firms with fewer than 100 employees.
• California and New York together account for 23% of all cash balance plans nationally, but the fastest growth in new plans has been in Florida, Texas and Michigan.

These and other highlights of the 2012 National Cash Balance Research Report will be discussed in a free Cash Balance Outlook 2012 webinar led by Dan Kravitz on Thursday, August 9. 

© 2012 RIJ Publishing LLC. All rights reserved.

“In aggregate, the life insurance industry has the capital capacity to support a significant expansion of new retirement income sales.” So says a new Conning Research & Consulting report entitled, The Big Payout: Growing Individual Retirement Income Opportunities 2012.

An executive summary of the report, provided to the press, points out the opportunities and the challenges for life insurance companies in the face of the Boomer retirement wave. While it was not clear from the summary how much news life insurance executives and industry watchers might find here, Conning analyst Scott Hawkins, an author of the report, has proven highly knowledgable in the past.   

The latter part of the study, according to the table of contents, provides a probing discussion of the capital capacity issues that life insurance companies, and raises questions about competition between within a life insurer for the corporation’s free capital capacity, the impact of greater regulation of capital, and about the need to acquire new capital to respond to the income opportunity.

 “Conning’s analysis suggests that individual annuity insurers currently have some capacity for growth. Conning estimates that at the end of 2011, the individual annuity line held approximately $1.2 trillion in assets and the additional free capital could support an additional $600 billion in new assets. However, the aggregate amount of estimated free capital is not distributed evenly across all companies or insurance groups. As a result, some companies may have a better capacity to absorb new growth than others may,” the report said.

“Growth opportunities in other areas may place demands on some of that capital capacity,” the report continued. “In addition, regulatory clouds may inhibit insurers from deploying their capital in the short-term. However, given the potential market and its development over a long horizon, well-capitalized insurers can be expected to identify and pursue their opportunities in a growing retirement market.”

In a release, Conning said:

“At the end of 2011, for example, individual and group annuities held 46% of all defined contribution plan assets. Beyond annuities, however, we estimate there was an additional $7.3 trillion in combined IRA and defined contribution plan assets. Now, insurers have a growing opportunity to help individuals turn those assets into retirement income,” said Scott Hawkins, analyst at Conning Research & Consulting.

“Of course, these assets are attracting other competitors, primarily mutual funds who’ve also helped investors accumulate retirement assets, and insurers need to respond to that competition. However, turning those assets into a secure income stream for retirees requires managing investment volatility and longevity risk. Managing those risks plays to the natural competitive advantage insurers have over their competition.” 

Stephan Christiansen, director of research at Conning, added, “Our analysis highlights the need for insurers to meet the competitive challenge represented by the mutual fund industry, and refine their messaging to the retiree and pre-retiree segments. Adding to the competitive marketing complexity, insurers also face substantial investment issues related to these products, and statutory capital constraints. Yet those insurers that succeed in meeting these challenges may be positioned to enjoy their largest growth opportunity over the coming decade.”

The Big Payout: Growing Individual Retirement Income Opportunities is available for purchase from Conning Research & Consulting by calling 888-707-1177 or by visiting the company’s website.  

Jeremy Lin, the young Harvard-trained point guard who captured the hearts of New York Knick fans with a two-week burst of on-court heroics last spring, executed a sparkling tax arbitrage play when the Houston Rockets picked up his contract this week.

By moving from an ultra-high tax state to an ultra-low tax state, Lin can expect to pay over $1 million less a year in state and local taxes on his three-year, $25.1 million deal with the Rockets than if he’d gotten the same offer from the Knicks, according to Americans for Tax Reform, a Washington-based advocacy group.

As a Knick, Lin was subject to a top state income tax rate of 8.82%, with New York City adding another 3.876%. As a member of the Houston Rockets, he will have no state or local tax burden. At an average salary of $8,366,667, Lin will save over $1 million annually in taxes. Endorsement earnings could push the tax savings substantially higher.

The undrafted Lin led the Knicks to wins in his first six starts, and became the first player in NBA history to score 20 points and record seven assists in each of his first five starts. His last-second three-pointer to beat the Toronto Raptors ignited the phenomenon of “Linsanity” among Knick fans. Texas may soon become known as the Lin Star State.

In their search for future market share, financial services firms intend to address a wider range of household financial needs, to emphasize retirement income planning, and to step up their efforts to educate advisors, according to the Hearts & Wallets’ 2012 industry survey.

The Massachusetts firm, founded by Chris J. Brown of Sway Research and Laura Varas of Masthill Consulting, conducts an annual report based on surveys of executives at some two dozen financial services firms and of consumers in more than 5,000 U.S. households, as well as on focus groups with consumers.

Three of the top ten trends identified in the research this year were:

• Expanded scope of retirement goals and general advice. Offerings will expand to present the whole financial picture, including health (including life and long-term care insurance), taxes, real estate, lifestyle considerations (Including estate planning and couples dialogue) and optimal timing on how to take Social Security. The best delivery methods may be through modular architecture or a series of advice modules.
• Advances in income annuities optimization approaches. More than three-quarters (77%) of respondents indicate that developing better retirement income capabilities is a top priority. Recommending how to use income annuities as an asset location and income source is gaining in importance. As the retirement income market size grows with more people, who have fewer pensions, the need to generate income from various sources when full-time work stops will increase. Credible, empirical methodologies will become a competitive necessity.  
• Boom in advisor education. Firms plan to make advisor education a major priority. Advisors need more support to execute expanded scope, illustrate tradeoffs, annuity optimization and advice on account draw down and savings. Structured approaches supported by tools minimize errors, create efficiencies and share best practices.

Hearts & Wallets’ comprehensive industry benchmark survey, The Hearts & Wallets 2012 Retirement Income Competitive Landscape Survey, was conducted in the spring of 2012. Its findings, along with best practices, top 10 trends and an in-depth review of advice experience, are within the full study, Inside Retirement Income Advice 2012: A Comprehensive Review of Advice and Guidance Experiences, the Engines that Power Them, and Retirement Income Strategies for the Future.

© 2012 RIJ Publishing LLC. All rights reserved.

In the fifth and latest iteration of their Popping the Hood series, BrightScope and Target Date Analytics analyze and grade 49 fund families from 41 different fund companies, including 420 target date funds. Each fund series receives an overall score and ranking as well as a five-part evaluation covering company/organization, strategy, performance, risk, and fees.

Investments in TDFs continue to grow, the report shows. The product category saw only a modest 9.3% increase in assets under management in 2011 due to poor market performance in second half of the year, but BrightScope projects that target date assets will reach $2 trillion in 401(k) plans by 2020.

The primary distribution channel for TDFs is likely to remain defined contribution plans, for at least two reasons: first, 401(k) participants prefer a ‘buy and forget’ strategy that doesn’t require regular portfolio rebalancing and, second, TDFs are approved by the Department of Labor as a qualified default investment alternative (QDIA).

BrightScope and Target Date Analytics published the following highlights of the report, which sells for $1,200 per copy ($20,000 for group distribution):

• American Century received an “A” ranking for the second year in a row. American Century LIVESTRONG Portfolios have received an A grade in every report since Popping the Hood II.
• JPMorgan and MFS are also top performers, receiving an overall “A” for the second straight year.
• Putnam jumped up to an “A” in 2012 after earning a “C” in Popping the Hood IV. They switched from a “Through” strategy to a “To” strategy in 2010 and began investing in alternative asset classes.
• The number of target date fund families is no longer increasing. New entrants include BlackRock LifePath Index and Lincoln Financial Group’s Presidential Protected Profiles. Columbia (F in Hood IV, D in Hood V), Oppenheimer (F in Hood IV, C in Hood V), and Goldman Sachs (F in Hood IV, F in Hood V) all recently announced that they would be closing down their target date funds in 2012.
• Some fees have dropped significantly since the last study. Allianz reduced fees from an average of 0.91% to 0.64% Nationwide reduced fees from an average of 0.64% to 0.42% PIMCO reduced fees from 0.88% to 0.80%.
• The standard to be a truly low cost, index TDF fund series is now under 20 basis points thanks to Vanguard (0.18%), TIAA-CREF Lifecycle Index (0.18%) and Fidelity Freedom Index (0.19%). BlackRock LifePath Index (0.28%) and iShares (0.31%) are close behind.
• Fees as a whole are still high – 72 basis points is the average institutional TDF fund – but that has come down 3 basis points since last year.
• The percentage of equity held in TDFs at the target date appears to have stabilized at about 42% in 2011 after increasing from 40% to 43% from December 2007 to December 2010.

In 2011, Popping the Hood IV noted that number of funds with a “To” the target date strategy was increasing.

• At the end of 2010, 40% of the funds were using a “To” compared with 30% at the end of 2007.
• The db-X TDFs switched to a “To” strategy in 2011, and the new BlackRock LifePath Index funds also use a “To” strategy, so the percentage was up to 42% by the end of 2011.
• With Columbia, Oppenheimer, and Goldman Sachs closing down their TDFs (all of which use a “Through” strategy), that percentage should rise to nearly 45%, or 21 out of 47, by the end of 2012.

Performance and risk metrics in Popping the Hood are based on three years of performance data, which no longer include 2008. Fund families that sustained big losses in 2008 therefore got a fresh start in this year’s report. Fund families that take more risks and hold higher amounts of equities may benefit. New strategies are being utilized, for example:

• ETF usage in TDFs is growing. iShares (100% ETF), Lincoln’s Presidential Protected Profile (over 90% ETFs), BlackRock LifePath, BlackRock LifePath Index, and State Farm all have at least 50% allocation to ETFs. Four other fund companies increased their allocations to ETFs in 2011. Fourteen fund companies invest in ETFs, representing 28% of the fund families in the study.
• There are now 11 all-index-fund TDFs. BlackRock LifePath Index and Presidential Protected Profiles were created in 2011 and both utilize index funds exclusively. BlackRock is following the trend set by Fidelity, ING, TIAA-CREF, and John Hancock in launching an index fund alternative to its standard TDFs.
• Invesco and PIMCO both utilize absolute-return, volatility management strategies that include alternative assets such as futures and derivatives. They are having success with both fund families receiving an Overall “A” in Popping the Hood V.
• Non-traditional asset classes such as TIPS, real estate, and commodities are slowly gaining traction in the TDF marketplace. Those three asset classes now comprise about 6% of the underlying holdings of target date funds, compared to about 4.5% at the end of 2009. AllianceBernstein, Allianz, and Fidelity are particularly notable for increasing their allocations to these asset classes, to the point where they commonly comprise 15%-50% of the portfolios of their TDFs.

© 2012 RIJ Publishing LLC. All rights reserved.

As auto-enrollment into retirement plans becomes the norm in the UK, the government and pension industry are trying to avoid the creation of lots of tiny accounts that multiply when people change jobs and never add up to much in terms of retirement income, according to a report in IPE.com. 

Currently, UK officials are talking about having people take the retirement accounts that were created under auto-enrollment to their new employers when they change jobs. If that becomes policy, it would rule out the idea of aggregating small accounts—perhaps under £2000 or so—into a big “aggregator” retirement plan such as Britain’s new public defined contribution plan, the National Employment Savings Trust, or NEST, or some other giant fund.

Speaking as he published the government’s response to last year’s consultation on small pot consolidation, Department for Work and Pensions (DWP) official Steve Webb expressed a preference for the “pot follows member” model outlined at the time. (In the UK, defined contribution retirement accounts are commonly called  “pension pots.”)

The DWP has said that creating auto-enrollment in DC plans without establishing a policy for rollovers “would result in 50 million dormant small pots by 2050.”

“We need a system where people build up worthwhile pension pots in one place rather than having lots of small pots all over the place,” Webb said. “At the moment, every time someone moves to a new job, there is a risk they leave behind a small pension pot they lose track of. Our plans will mean individuals get better value for their savings and bigger pensions as a result.”

Many within the UK pension industry have raised concerns about the “timing and practical challenges” to account consolidation, according to the DWP. Proposals so far have been limited to consolidating only the small accounts created by automatic enrollment programs. Any defined benefit rights or accounts created before automatic enrollment would not be subject to consolidation.

The issue of “detrimental transfers” was one of particular concern to the National Association of Pension Funds (NAPF). Its chief executive, Joanne Segars, pointed out the danger that automatic transfers might put accounts into retirement plans with higher expenses and weaker governance.

She branded it a “pensions lottery,” where members could be automatically transferred into a different scheme without being aware of its impact, and called on the government to reconsider its “pot follow member” approach.

“A better solution would be to allow people to transfer their pensions into large-scale, low-cost aggregators, which are simpler and better placed to deliver good member outcomes,” she said.

The NAPF has long been an advocate of larger-scale defined contribution (DC) schemes, with chairman Mark Hyde Harrison and others repeatedly calling for “super trusts.”

However, the DWP said its analysis demonstrated that an aggregator approach would only result in “limited” consolidation, since it would have to limit the size of the transferred accounts to prevent one or more “aggregator plans from distorting the market.

“In addition,” the agency said, “the creation of one or more dormant aggregated pots would be inefficient for the pensions industry. This option fails to deliver against two key reform objectives of promoting member engagement and tackling inefficiency.”

The department said there was “generally” support for many issues surrounding automatic transfers, such as letting people opt out of consolidation without necessarily having professional advice while doing it.  being able to opt out of any consolidation, and that it should happen “unadvised”.

The DWP envisions a project similar to the Netherlands’ “Pension Dashboard” on which people can see all of their accrued pension rights and retirement accounts side by side.   

© 2012 RIJ Publishing LLC. All rights reserved.

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.

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.