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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.

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.

The United Kingdom’s top pension official described the current low interest rate environment as a “complete nightmare” for pension funds, and said governments should not stand “idly by” if accountancy standards cause unnecessary volatility on pension fund balance sheets, according to a report at IPE.com. 

But Pension Minister Steve Webb said he did not intend to act immediately but to follow the example of Denmark and Sweden, which recently announced a voluntary floor that could be used by the country’s pension providers.

“I’m not going to change Britain’s policy on how we discount future pension liabilities overnight, but it was clearly an issue everywhere we went,” he told delegates at an event organized by the National Association of Pension Funds. 

Webb was asked by reporters whether the UK should follow the example set by Denmark—whose 10-year sovereign bond yield has been about 1%– and modify the applicable discount rate to relieve pressure felt by pension funds.  

Webb, who this week visited Denmark and the Netherlands in an effort to learn about their approaches to risk-sharing, said many people there told him that low interest rates were “a killer” and that the current situation, where pensions were hardly able to discount future liabilities, was “a complete nightmare.”

It is important for realistic discounting of future liabilities to occur, international accounting standards notwithstanding, Webb said. “Governments don’t do accountancy standards because [the standards] are pure, professional and non-political, and [public officials] should just keep out,” he said. “But of course the way liabilities are measured on balance sheets has massive, real implications.”

Webb concluded that governments could no longer stand idly by when accountancy standards were changed due to the “massive” impact such changes would have on a country’s economy. He said the effect also extended to pension fund liabilities being “unnecessarily volatile,” which in turn had consequences for plans.

© 2012 RIJ Publishing LLC. All rights reserved.

The latest retirement industry acronym is SAFE, which stands for The Society for Annuity Facts & Education. The new organization, whose board includes Lowell Aronoff of Cannex and Sheryl Moore of AnnuitySpecs.com, intends to advocate for annuities. Incorporated in Wisconsin, it has filed for 501(c)3 non-profit status there.

“SAFE’s primary focus is to provide factual information about the benefits, features and uses of annuities to the general public,” said the group’s introductory press release, which said that SAFE intends to: 

• Provide consumers and the media with an accurate, comprehensive, and unbiased source of information, in order to help them make informed decisions;
• Limit the amount of misinformation the general public and media are exposed to;
• Communicate important facts about annuities;
• Provide a forum for the exchange of information;
• Provide opportunities for education through town hall meetings, website communications and content, social media, publications, as well as other programs and activities.

Current SAFE board members include:

Lowell Aronoff, Chief Executive Officer, CANNEX Financial Exchanges Limited

Pam Heinrich, Esq., Heinrich Law

Rich Lane, National Director of Sales and Marketing, The Standard

Rod Mims, Senior Vice President and National Sales Manager, Athene Annuity

Gregory L. Mitchell, Senior Vice President & Chief Financial Officer, The Lafayette Life Insurance Company

Sheryl J. Moore, President and Chief Executive Officer, AnnuitySpecs.com and Moore Market Intelligence

Joe Spillman, President, ECA Marketing

Mark T. Stone, Principal & Marketing Strategist, Insurance Insight Group

Eric J. Thomes, Senior Vice President of Sales, Allianz Life

SAFE’s officers include:

President, Mark T. Stone

Treasurer, Gregory L. Mitchell

Secretary, Pam Heinrich

SAFE is currently seeking additional board members from the variable industry and consumer advocacy groups.

In its developmental stage, SAFE has been closely affiliated with NAFA, the National Association for Fixed Annuities, a 501(c)6 organization because it provided the initial resources and guidance in establishing SAFE. However, with the approval of SAFE as a 501(c)3 organization, it will operate independently. 

Founded in 1998, NAFA’s role is to provide education and promote the understanding and awareness of fixed annuities to the insurance industry; including; financial professionals, insurance companies, vendors, members of the media and consumers for the purpose of selling fixed annuities.

© 2012 RIJ Publishing LLC. All rights reserved.

 “The Pew Center on the States this week released an update to its 2011 analysis of public pension funds that is crippled by the same problems as last year’s study – the unfortunate reliance on out-of-date data and faulty assumptions. As a result, Pew’s The Widening Gap Update comes to misguided conclusions that dramatically overstate the challenges facing public pensions,” said Hank Kim, director of the National Council of Public Employee Retirement Systems, in a statement this week.

“This update relies on Fiscal Year 2010 data – meaning much of the data is actually from calendar 2009 – when institutions of every kind were still struggling up from the low point of the Great Recession. So much has changed in the ensuing months that Pew’s analysis is virtually without value.”

NCPERS has been pushing the Secure Choice Pension, a model program that would allow workers in small private sector businesses to join state defined contribution plans.

The Pew study said in part, “States’ public sector retirement funding gap for both pensions and retiree health benefits grew by $120 billion, from $1.26 trillion to $1.38 trillion, from fiscal year 2009 to 2010. The largest part of that year-over-year growth was the increase in pension liabilities ($126 billion), which outpaced the growth in pension assets ($29 billion). The total public pension liability in 2010 was about $3.07 trillion; assets were $2.31 trillion, leaving a $757 billion gap.”

Kim added, “The recently released 2012 NCPERS Fund Membership Study–which relies on the most current data available, Fiscal Year 2011 data from no less than 147 public pension funds – paints a much different, much more accurate and far more positive picture.

“The truth is that the vast majority of public pension funds continue to be solidly funded. All longer-term investment returns (three-, five-, 10- and 20-year returns) grew higher, pointing to continuing long-term improvement in funded status – an extremely positive sign, given the long-term nature of pension fund liabilities.”

© 2012 RIJ Publishing LLC. All rights reserved.

AXA Equitable Life’s Structured Capital Strategies variable annuity, introduced in October 2010, has surpassed $1 billion in new sales, the insurer said this week.

Structured Capital Strategies offers participation for one, three or five years in these indices:  

• S&P 500 Price Return Index
• Russell 2000 Price Return Index
• MSCI EAFE Price Return Index
• London Gold Market Fixing Ltd. PM Fix Price/USD (Gold Index)
• NYMEX West Texas Intermediate Crude Oil Generic Front Month Futures (Oil Index)

On the upside, investors participate in positive index returns up to a cap. On the downside, AXA Equitable will absorb the first -10%, -20% or -30% of loss, depending on the selected index and duration. 

© 2012 RIJ Publishing LLC. All rights reserved.

The current political rhetoric on public pensions that blames their problems on gold-plated benefits and unrealistic investment assumptions misses the point. The dirty little secret in at least 14 states is that politicians have badly misled the public: both political parties have conspired to secretly borrow hundreds of billions of dollars from their state employee pensions.

This paper asks why the Securities and Exchange Commission and ratings agencies like Standard & Poor’s and Moody’s have allowed this to happen.

Public pensions are exempt from ERISA, so they receive no direct federal regulation, and state regulation of public pensions has proven itself largely ineffective. Virtually the only watchdogs are the regulators and independent reviewers who are supposed to provide investors with an honest view of state finances when states borrow money through the municipal bond market. Supervision of pensions is weak.

The deliberate underfunding of pensions has been a backdoor method of borrowing from the plans. Public pension actuaries calculate exactly much funding the plans need each year to run in a balanced fashion. This Actuarially Required Contribution (ARC) is typically mandated by state law, and most state constitutions require a balanced budget. But the 14 states named below have only paid a fraction of their ARC for many years in a row, thus taking on an undisclosed, illegal debt that is senior to municipal bonds. Legislators and governors of all political persuasions have implemented this maneuver.

The vast majority of the lowest funded plans have made subpar ARC payments. These states—which include Illinois, Kentucky, Oklahoma, Rhode Island, Connecticut, Colorado, Alaska, Minnesota, New Jersey, Kansas, New Mexico, Pennsylvania, Maryland, and Missouri, according to the Center for Retirement Studies at Boston College—have made partial payments over the past seven years, breaking the balanced budget clauses of their own constitutions and defying the rules of pension mathematics. They have paid only half of their “mortgage payment” for 10 years. Their documented pattern of underpayment, which is the main driver of funding ratios in the 20%, 30% and 40% deciles, proves that these are self-inflicted wounds.

This lack of full ARC funding is the most immediate reason for the low funding ratios of Illinois SERS (23%), Oklahoma Teachers (27%), Rhode Island Employees (29%), Connecticut Teachers (32%), Colorado PERS (34%), Alaska Teachers (37%), Minnesota PERF (37%), New Jersey Teachers (38%), Kansas (38%), New Mexico Teachers (38%), Pennsylvania Schools (43%), Maryland PERS (43%) and Missouri Teachers (45%).

In Kentucky, we have two funds with nearly identical investments and similar benefits. But CERS, which has paid 100% of its ARC, is nearly 60% funded, while KERS, which has paid less than 50% of its ARC, is now less than 30% funded. Even in a year (FY11) with investment returns of nearly 19%, the assets in KERS grew by only 1% due to the negative cash flows from underfunding.

Investment returns for the fiscal year ending June 30 will be flat at best and funding ratios will fall even farther. Once a plan’s funding ratio reaches 40% or less, it can enter a death spiral unless the state stabilizes it with 100% of the ARC. There is little sign of this will happen in these 14 states. Last week, Illinois failed to get to a 100% ARC. The other states are likely heading toward a similar impasse.  

Pensions are designed to withstand periods of investment underperformance if they are funded correctly. Their funding ratios dip, but eventually come back. This is not true of an underfunded plan. Double-digit returns in a fund that’s 30% funded are the equivalent of three percent returns in a fully funded plan. This diluted return often cannot keep up with the outflow of retiree checks, which further compounds the liability. A shift to riskier assets does little in such situations except to create liquidity issues. The question of whether to assume an expected investment return of 8% or 4% hardly matters. 

When criticizing state plans, the media focuses on retirement age and assumed rates of return. These are long-term issues that are relevant to the solvent plans that pay the full ARC. But for these 14 states, the salient issues are solvency and liquidity. The only solution is for the state to pay the full ARC—this year and every year from now on.

I contend that ratings agencies—Standard & Poors, Moody’s and Fitch Ratings—and the SEC have been enablers of this problem. They have allowed a partial payment culture to exist and have failed to punish states and localities for not meeting their ARC. If states had paid half their municipal bond coupons, the rating agencies would have downgraded them. But in the case of pensions they looked the other way. For the most part they have ignored pension liabilities until very recently, and now it may be too late for many states. The excuse of the ratings agencies is that states can always rely on their unlimited taxing powers to make up the ARC payments.   

The ratings agencies have repeatedly let states off the hook with vague plans to pay, for instance, 50% of the ARC now and the rest later. But the widespread strength of anti-tax sentiment makes belief in such promises naïve at best. Attempts to achieve the full ARC have run into repeated roadblocks. One recent response has been to cut traditional subsidies to local governments and school districts and force them to pay the full ARC. But the pension debt shortfall cannot compete with the other funding pressures states face when there’s no credible threat of punishment for shortchanging the plans. If legislators have to choose between raising taxes, firing teachers or policemen, and borrowing from the pension, they will choose the latter.

In nearly all near-bankrupt plans (like Kentucky’s ERS), the ARC is not being met. Poor investments and rich benefits play a role in underfunding, but, especially in the short term, they are insignificant compared to the lack of contributions. Because states are “too big to fail,” this has national implications. Pension underfunding could lead to state bankruptcies or federal bailouts. By looking the other way and not holding states accountable for underfunding the ARC, the SEC and the ratings agencies have helped create a downward spiral that will be politically difficult, if not impossible, to reverse.   

Chris Tobe, CFA, CAIA, has 25 years of institutional investment experience with a focus on public pension plans. He holds an MBA from Indiana University-Bloomington and a BA in economics from Tulane University.

© 2012 RIJ Publishing LLC. All rights reserved.  

Just as my supply of baseball caps with fund company logos happened to be running low, I was fortunate enough to find myself at the Morningstar Investment Conference, where last week dozens of fund company reps were giving away blue or grey or red caps—along with pens, stress balls, mints, fund performance reports and white papers. 

Except by the standards of the Schwab or ICI conferences, the annual Morningstar conference and trade show is immense. So is the venue: Even after accommodating hundreds of booths representing all of the major asset managers—from Aberdeen to Wintergreen—and an adjacent auditorium with seating for about 1,800 financial advisors, Chicago’s vast McCormick Center could probably have also tucked in a couple of 737s.    

I don’t usually write about mutual funds per se, but the Morningstar show included one or two decumulation-oriented sessions, including one on “Tackling the Retirement Income Challenge.” The meeting also offered chances to see and hear icons like William Bernstein and Jeremy Grantham. And, in the media room, the Morningstar folks distributed copies of a recent research paper, “Optimal Withdrawal Strategy for Retirement Income Portfolios.” There was ample grist for the RIJ mill.

The ideal withdrawal rate

The Morningstar paper evaluated and compared five systematic withdrawal methods to see which one was most likely to provide the highest, safest annual payout percentage. The five methods included:

• A constant dollar withdrawal (adjusted for inflation).
• A constant withdrawal percentage.
• A percentage rate that fluctuates with the probability of portfolio failure.
• A percentage rate calculated by dividing the portfolio value by the remaining number of years life expectancy.
• A percentage rate based on maintaining a constant probability of failure over the remaining life expectancy.

This question has been visited before, but Morningstar’s addition to the field was a new yardstick it calls the  “Withdrawal Efficiency Rate.” The WER equation reveals “how well, on average, a given withdrawal strategy compares with what the retiree(s) could have withdrawn if they possessed perfect information on both the market returns, including their sequences, and the precise time of death.”

The preferred method, consequently, would be the one that “on average captures a higher percentage of what was feasible in a perfect foresight world.” The methods were tested for hypothetical portfolios with assumed equity allocations of zero, 20%, 40% and 60%, as well as for portfolios owned by single retirees or couples at ages 60, 65, 70, 75 and 80.

The winner, according to Morningstar’s calculations, was the last one, the Mortality Updating Failure Percentage method. “The results make intuitive sense,” the Morningstar authors wrote. “Since market returns and mortality are stochastic variables, a probabilistic approach that incorporates the distribution of both into the withdrawal strategy… should be expected to produce results that dominate strategies that focus on one or none.”

The paper offered a chart, whose data is replicated below, suggesting payout rates at different ages for men, women and couples. 

The traditional flat 4% rule, which some observers have characterized as too generous and risky for the slow growth era that appears to lie ahead, is unnecessarily stingy and inflexible, the paper seems to say. The Morningstar numbers also appear to add fodder to the debate over whether a careful systematic withdrawal plan can eliminate the need for a guaranteed income product.

It looks like this paper would give ammunition to advisors who are inclined to deal with longevity risk simply by reducing equity exposure and not bothering with annuities. At the same time, the results seem to conflict with the opinion, held by some, that retirees need more income at the beginning of retirement, when they’re more likely to travel, for instance.

The authors suggest that if you don’t want to bother with a lot of complicated calculations, just use the RMD method—the portfolio value divided by the number of years of life expectancy remaining—as a drawdown rule of thumb. They prefer the RMD method to the commonly-used “constant dollar” and “constant percentage” drawdown methods.   

Of bonds and bond funds

At the breakout session entitled, “Tackling the Retirement Income Challenge,” panel members John Ameriks of Vanguard’s Investment Counseling & Research group, Sue Stevens, CEO of Stevens Wealth Management (and formerly of both Vanguard and Morningstar), and William Bernstein, a neurologist better known as co-founder of Efficient Frontier Advisors and author of “The Four Pillars of Investing,” engaged in a wide-ranging conversation about stocks bonds, and annuities. 

Sue Stevens said she’s preparing her clients for average annual returns of about 4.5% a year for the foreseeable future, with “equity returns in the 5% to 7% range and bond returns in the 2% to 4% range.” She said she would probably become more interested in income annuities as interest rates rise. As an advisor, she said her biggest job right now is “getting clients to lower their expectations for portfolio returns.”

Bernstein joked that the bonds he holds have the average maturity of “green bananas.” For retirement income, he recommended a ladder of individual TIPS. Ameriks, a Ph.D., defended the use of TIPS mutual funds—like Vanguard’s—over individual TIPS. “It costs money to manage those ladders,” he said. On the other hand, he conceded that Vanguard “always gets calls [from shareholders] when TIPS funds have negative returns.”

Vanguard phone reps try to calm clients down by explaining the concept of duration, and the inherent ability of bond funds to benefit from the same higher coupons (on new bonds) that drove prices (of existing bonds) down. “We don’t need to stampede people out of bonds,” he cautioned. Regarding annuities, Ameriks suggested that retirees allocate money to bonds rather than buy variable annuities with lifetime withdrawal benefits. (Vanguard sells VAs, but it has a much bigger stake in bond funds.) 

Grantham, ever bearish

Keynote speaker Jeremy Grantham attracted a standing room-only crowd on the final day of the conference. The British-born investment guru, whose bearish quarterly reports are widely read and discussed, held the audience rapt while sharing his market predictions. But he seemed to lose the advisors’ attention as he digressed into bleak descriptions of the Malthusian dystopia that he believes may loom ahead.

“We live on a finite planet, we have finite resources, and we can’t grow indefinitely,” Grantham told an audience that would probably rather have heard expansive, bullish predictions. Glumly, he expressed little faith in humankind’s ability to respond wisely to the challenges ahead. Instead of acting rationally, he said, “We will behave casually and in a spendthrift manner with lots of waste.”

In an increasingly urbanized world where governments in developing countries are struggling to feed their citizens, Grantham regards rising demand for food as an investment opportunity. He is tracking the remaining sources of indispensible agricultural inputs, like potassium and phosphorous. “I spent time with the Moroccan phosphate people,” he said. “Eighty-five percent of the world’s phosphorous is in Morocco. But we don’t like to talk about problems [like rising population and food shortages]. They’re inconvenient and threaten the progress of the system.”

You’re probably wondering whose baseball cap I took home. Thank you, Motley Fool Funds.    

© RIJ Publishing LLC. All rights reserved.

A blue square now beckons from the center of the menu bar on the Retirement Income Journal homepage, labeled: “New! Go to RIJAdvisor”.  That square is a digital toggle switch that lets you visit a new page within RIJ—and (because we’ll be mailing it out separately) a new publication.

It’s called RIJAdvisor.

Here’s why we created RIJAdvisor: RIJ’s 7,000 readers come from many sectors of the retirement industry. Most of them work in one of two realms: product design and manufacturing (insurers and fund companies) or product sales and distribution (broker-dealers and financial advisory firms).   

Until now, we’ve tried to meet the needs of readers in both of these worlds with RIJ alone. Now, in the interest of segmenting our editorial content, we’re concentrating our manufacturing coverage in RIJ and our distribution coverage in RIJAdvisor. 

In RIJ, we’ll take the same holistic approach to our coverage of manufacturing that we have since May 2009. Almost anything that touches the global old age financing phenomenon will continue to be fair game. That includes but isn’t limited to topics of specific interest to professionals at the big financial services firms. 

In RIJAdvisor, we’ll focus on the needs and interests of financial intermediaries. More specifically, we’ll provide useful information for advisors who want to specialize in creating retirement income for their clients and seize the Baby Boomer decumulation opportunity. We believe this relatively new speciality area is poised for growth.

We’ll distribute RIJAdvisor by e-mail every other Friday. The content of the first six issues, starting with the June 18 issue, will be accessible to all—RIJ paid subscribers and recipients of our free e-mail newsletter.

After September 1, we’ll hoist the “paywall” and only paid (individual and group) subscribers will be able to access the full content (beyond the headlines and summaries and freebies). Subscribers will receive 76 mailings a year for the same price we used to charge for 50.  

Speaking of subscribers, I’d like to publicly thank the firms that have purchased site licenses or group-rate package subscriptions to RIJ: AXA Equitable, Cannex, Capital Group, DST Systems, Envestnet, Ernst & Young, Fidelity Investments, Financial Engines, Genworth, Hueler Companies, ING, LPL Financial, MassMutual, MetLife, Milliman, Nationwide, Northwestern Mutual, Prudential Financial, the SEC, Security Benefit, SunAmerica, Sutherland Asbill, TIAA-CREF, Towers Watson, Transamerica, T. Rowe Price, Vanguard, and Wells Fargo.

We’re just as grateful to the hundreds of individuals who have subscribed to RIJ over the past three years. Collectively, our subscribers and advertisers have enabled us to provide eclectic, independent coverage of the retirement income industry.

If you have any suggestions or questions about RIJAdvisor, or about RIJ, we welcome them at [email protected].

© 2012 RIJ Publishing LLC. All rights reserved.

Low Rates Weigh on Life Insurers: Towers Watson

With U.S. interest rates at their lowest since right after World War II, chief financial officers (CFOs) at North American life insurance companies — particularly those with significant exposure to fixed-rate products — are under substantial financial pressures. According to data from a recent survey from global professional services company Towers Watson, Life Insurance CFO Survey: Low Interest Rate Environment, life insurance CFOs said the current low interest rate environment is their primary business concern, as almost half (45%) of the survey respondents emphasized that a prolonged low interest rate environment is the greatest threat to their business.

Further, life insurance CFOs are not optimistic about the immediate economic future. Eighty-seven percent of all respondents believe there is a 50% or greater likelihood of a major disruption to the economy in the next 12 to 18 months, with 27% saying there is a 75% likelihood and 7% saying the likelihood of a major disruption is almost certain.

Against this backdrop, CFOs do not expect the low interest rate environment to change quickly. Over two-thirds (68%) said they expect a three- to five-year period of low interest rates, followed by a gradual increase. When asked to consider their organization’s interest rate risk exposure, CFOs’ metrics of greatest concern were their levels of statutory capital (63%), followed by their level of statutory earnings (53%).

In response to the low interest rate environment, CFOs said they are considering or taking a number of actions to control interest rate risk. More than half (57%) said their company has established risk tolerance limits for interest rate risk; however, 43% have not done so, and over 40% of CFOs with established rate risk tolerance limits indicated they have breached them.   

CFOs have increased the cost of insurance rates for interest-sensitive products as a way to better manage their interest rate risk. Forty-three percent of respondents said, based on future expectations, the language of their policy forms allows them to change cost of insurance (COI) rates under the universal life products they sell based on investment earnings, while 50% said they can change COI rates for variations in mortality alone. Many are taking advantage of this provision in their policies. In the past five years, just over a third of respondents have increased COI rates, expense loads or both on at least some part of their life block.

Survey respondents have also implemented product change strategies, or are considering implementing them, as a result of the low interest rate environment. Nearly all respondents have taken significant steps, and virtually all (96%) have reduced their minimum guarantee on fixed-account products. Over half (56%) have adjusted their premium rates, reduced living benefit guarantees or adjusted fees on annuity products (56%), or ceased or significantly curtailed sales of some products (54%). One-quarter have even taken the step of exiting product segments, and another 13% plan to do so in the next six months.

CFOs predict growth, despite current environment

Despite their unfavorable near-term outlook on the economy, CFOs are more optimistic about improvements in their financial results. Seventy-one percent of respondents expect increases in new life and annuity premiums of 4% or more in the first quarter of 2012, compared to the same period in 2011. Over 80% expect GAAP net revenue to grow by 4% or more in the first quarter, compared to the same period in 2011. When compared to expectations from Towers Watson’s last CFO survey, this represents a notable increase in optimism: When asked about expectations for the third quarter of 2011, only 43% predicted increases in new life and annuity premiums of 4% or more, and just 50% anticipated a GAAP net revenue increase of 4% or more. Adding to the sense of optimism, 50% of respondents predicted GAAP net income will increase by 4% or more compared to the first quarter of last year.

About the survey

Thirty CFOs, 19% of the 162 North American life CFOs invited, participated in the survey. Because each survey question was not applicable to each participating company, the respondent base varies from question to question. The respondents are primarily from large and midsize life insurance companies in North America; 67% of respondent companies have assets of $5 billion or more, and 20% are multinationals.

New single-day volume record set at CBOE Futures Exchange

CBOE Futures Exchange (CFE) announced that Monday, June 18 was the most active trading day in CFE history. Volume totaled 160,552 contracts traded throughout its full suite of products. Monday’s volume surpassed the previous high of 152,133 contracts set on August 5, 2011.

In addition, trading volume in futures on the CBOE Volatility Index (the VIX Index) also established a new single-day record today as 159,744 contracts traded, eclipsing the previous record of 152,067 contracts, also on August 5, 2011.   

During May 2012, trading volume, both exchange-wide and in VIX futures, exceeded two million contracts for the first time. Total exchange volume hit 2,022,433 contracts, while 2,000,154 VIX futures contracts changed hands. Through the end of May, CFE’s year-to-date trading volume stood at 7,838,752 contracts, 76% ahead of the 4,463,758 contracts from 2011. 

CFE currently offers futures on ten different contracts, including:

• The CBOE Volatility Index (the VIX Index)
• Weekly options on VIX futures (VOW)
• CBOE mini-VIX (VM)
• CBOE NASDAQ-100 Volatility Index (VXN)
• CBOE Gold ETF Volatility Index (GVZ)
• CBOE Crude Oil ETF Volatility Index (OVX)
• CBOE Emerging Markets ETF Volatility Index (VXEM)
• CBOE Brazil ETF Volatility Index (VXEW)
• CBOE S&P 500 3-Month Variance (VT)
• Radar Logic 25-Metropolitan Statistical Area (MSA) RPX Composite Index (RPXCP)

‘ShareBuilder 401k’ aims to help firms assess plan fees

Retirement plan service provider ShareBuilder 401k has introduced tools that enable companies to calculate the fees they and their employees are paying, and determine whether or not those costs are reasonable. The tools are available at www.401kFeeSaver.com 

 “At ShareBuilder 401k, we encourage employers to keep employee fees below one percent,” said ShareBuilder 401k general manager Stuart Robertson.  

ShareBuilder 401k now offers a free online “fee checker” that quickly and easily calculates a 401(k) plan’s employee fee percentage. Employers simply enter their plan’s total assets (or average annual balance) and total investment product fees listed in their 401(k) plan fee disclosure document, and a quick estimate and assessment of their plan’s fees is produced.

For a full custom cost comparison, employers submit their fee disclosure documents to [email protected], and within 48 hours, ShareBuilder 401k will return a breakout of potential cost savings for both employer-paid and employee-paid costs on an annual basis and over a five-year horizon.

Since 2005, ShareBuilder 401k’s pricing has been available on its website, and in 2007 the company began advocating for an industry benchmark of less than one percent for “all-in” employee-paid fees in 2007. It is in the process of sending disclosures to clients in advance of the July 1 deadline.

All ShareBuilder 401k products offer auto-enrollment, auto-re-balancing, Roth, and signature-ready 5500s.  Each plan provides access to 401(k) consultants, “customer success” managers, implementation specialists and customer care for each participant, the company said in a release.

ShareBuilder 401k provides 401(k) retirement plans with exchange-traded fund (ETF) investments from Vanguard, iShares, SPDR and PowerShares for businesses ranging from the self-employed to those with 500 or more employees at www.sharebuilder401k.com.  

“It’s the economy,” smart guy

Americans’ feelings about their own personal finances and the economy likely will influence the outcome of the 2012 presidential election more than anything that the candidates do on the campaign trail, according to a survey by Bankrate.com.

Nearly 6 in 10 Americans reported their personal finances will be either the “single most important” or “one of several important” factors in determining their vote in November, according to a recent Bankrate survey.

Princeton Research Associates International conducted the survey via phone interviews from June 7 to 10, with a nationally representative sample of 1,000 adults in the continental U.S. The margin of error is plus or minus 3.6 percentage points.

The public appears evenly split between the two candidates. Of those surveyed, 21% said their personal financial situations would be better under former Massachusetts Gov. Romney and 21% said they would be better under President Obama. Eight percent were undecided.

Another 50% said the eventual winner wouldn’t make much difference to their personal finances. According to Matthew Singer, a professor of political science at the University of Connecticut, neither candidate has convinced voters they can fix the U.S. economy.

“Presidential approval ratings zig and zag in close concert with Americans’ feelings of financial security,” said Greg McBride, CFA, senior financial analyst for Bankrate.com. “Since late 2010 through May of 2012, the correlation is 0.84. A reading of 1.0 would be a perfect correlation.”

Short on savings? Work a few years longer.

A new Center for Retirement Research at Boston College report highlights the difference a few extra years of work can make toward ensuring that the vast majority of Americans can achieve retirement security. 

The National Retirement Risk Index has shown that an increasing percentage of households will not be ready to retire at age 65, from 30% in 1989 to approximately 50% today. The National Retirement Risk Index is sponsored exclusively by Prudential.

Despite this, however, the new report finds that by working five years longer than the assumed retirement age of 65, the percentage of American households prepared to retire increases to 86%. 

A new Prudential paper, “Planning for Retirement:  How Much Longer Do We Need to Work?” discusses some of the implications of this report for individuals, employers, financial advisors and policymakers. 

The paper notes additional ways to achieve better retirement outcomes, including increasing retirement savings, enhancing employer-sponsored retirement programs that encourage greater saving, increasing the awareness of products that can help retirement savings last through retirement, and requesting that policymakers support regulations such as a creating safe harbors for employers who wish to add guaranteed lifetime income products to their defined contribution plans.

Specifically, the paper lays out several steps that individuals can take to help themselves along the path to retirement security, including:

• Planning for the possibility of working a few years longer than the traditional retirement age of 65.  Doing so has the triple benefit of delaying the receipt of Social Security by a few years to increase monthly benefits, earning wages and accumulating savings for a few more years, and drawing down on savings for fewer years in retirement.
• Ramping up the rate of savings to increase the probability of retiring at age 65 or earlier.    
• Insuring retirement income against the risks of longevity and market uncertainty through guaranteed lifetime income products.

The paper encourages employers to consider helping workers achieve retirement security by:

• Enhancing defined contribution plans by adding features such as automatic enrollment, automatic escalation of contributions and in-plan guaranteed lifetime income products that increase savings.
• Encouraging employees to track their savings progress in terms of an income goal, rather than a savings goal, at a realistic target retirement age. 

For financial advisors, the paper notes the importance of:

• Developing an appropriate target retirement age that is customized for each individual.
• Showing the positive impact that a few extra years of employment can provide in terms of increased financial security.
• Framing the retirement planning in terms of future retirement income rather than a savings objective.

For policymakers, the paper highlights ways they can help Americans achieve a more secure retirement, including:

• Creating safe harbors that address potential employer concerns regarding the addition of guaranteed lifetime income products to defined contribution plans.  
• Passing legislation that makes it feasible for more employers to offer a retirement savings plan in the workplace through Multiple Small Employer Plans. 
• Adopting proposed regulations that require defined contribution plans to project future monthly income on participant statements.

“Insta40” aims to reduce tax on IRA withdrawals

Insta40.org, a system that helps retirees over the age of 60 gauge how much they can withdraw money from their traditional IRAs without triggering an income tax bill on the withdrawal, has been launched by an entrepreneur named Dino Kapadia.

“After accessing www.insta40.org, registering and receiving a password, users can plug in exemptions, income and deductions either from a previous Form 1040 or estimated numbers for the current year,” Kapadia said in a release.   

“Using the ‘What If’ formula, the retiree can now determine an IRA withdrawal amount that will bring that negative taxable income up to almost zero. As the retiree is still well within “zero” as a taxable amount, that IRA withdrawal is income tax-free,” the release said.

Kapadia suggests logging in and assessing your situation two to four times each year.

Roger Yule, a CPA familiar with Insta40’s benefits, said: “Insta40 is an excellent tool for planning one’s withdrawals and spending because you can enter rough estimates at any time of the year and know your potential tax liability well before the end of the current year. Armed with the advance knowledge, you can now plan finance decisions to possibly pay no taxes at all to the IRS, or pay the least possible tax.”

USAA launches six target-risk funds

USAA Investments is launching six diversified target-risk mutual funds that offer a broad range of risk exposure. The series consists of four new funds and two existing funds called USAA Cornerstone Funds.

The funds were designed “to make it easier for investors to help build a balanced portfolio,” USAA said in a release. “These funds will utilize asset allocation, portfolio construction and risk reduction.”

Unlike target-date funds, which automatically evolve toward a more conservative asset allocation, investors who want to change their risk exposure as they age must actively move assets from one target-risk fund to another. The funds require a minimum investment of only $500, with an automatic investment of $50 a month.

The funds include:

• USAA Cornerstone Conservative Fund (USCCX)
• USAA Cornerstone Moderately Conservative Fund (USMCX)
• USAA Cornerstone Moderate Fund (USBSX); formerly the USAA Balanced Strategy Fund
• USAA Cornerstone Moderately Aggressive Fund (USCRX); formerly the USAA Cornerstone Strategy Fund
• USAA Cornerstone Aggressive Fund (UCAGX

Patrick Alfano joins MassMutual Retirement Services in Rocky Mtns

Patrick Alfano joined Mass Mutual Retirement Services Division as sales director in the Rocky Mountain region on June 4. Alfano, who had been sales director at Victory Funds, reports to Shefali Desai, the insurer’s emerging market sales manager.

Alfano will be responsible for business development and sales support of MassMutual’s third-party and dedicated distribution channels focusing on retirement plans with assets under $10 million. Based in Denver, he is partnering with MassMutual’s managing director, Andy Ambrose, in covering Arizona, Colorado, New Mexico and Utah.

The Phoenix Companies releases updated annuities 

The Phoenix Companies has today announced a series of enhancements to its Premier LifeStyle Annuity and Secure LifeStyle Bonus Annuity. These latest product innovations, issued by PHL Variable Insurance Company, a Phoenix subsidiary, are available exclusively through the company’s partnership with The AltiSure Group.   

The Premier LifeStyle Annuity is a single premium indexed annuity with three indexed accounts, a fixed account, principal protection from investment loss and a guaranteed lifetime withdrawal benefit.

Designed for individuals planning for retirement, the offering now provides, for an additional fee, an optional Income Enhancer Plus Benefit that allows for increased income growth based on the performance of the indexed and fixed accounts.

Alternatively, the Secure LifeStyle Bonus Annuity is a single premium fixed indexed annuity featuring an optional G.I.F.T. Benefit Plus (Guaranteed Income and Family Wealth Transfer) that provides, for an additional fee, guaranteed lifetime income withdrawals as well as an enhanced death benefit until guaranteed withdrawals begin. The offering is designed for individuals in or close to retirement who are looking for a guaranteed increase to the income base.

The Premier LifeStyle Annuity differs from its predecessor with the introduction of the Income Enhancer Plus benefit, which immediately enhances the value of the income benefit base by 20% and can continue to grow by 7% compounded each year thereafter for the first 10 contract years. The Income Enhancer Plus benefit also offers an additional potential increase to the income benefit base equal to 125% of the annuity’s interest earnings until lifetime income payments begin.    

The Secure LifeStyle Bonus Annuity provides an immediate premium bonus of up to 8%, an income benefit base bonus of 20%, and potential increases of 7% simple interest each year thereafter as well as an enhanced death benefit. Secure LifeStyle Bonus Annuity provides immediate access to a consistent and reliable source of income, and there is an enhanced death benefit in excess of the initial premium until guaranteed income begins.   

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