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Wells Fargo to sell no-commission VAs

Fee-based advisors at Wells Fargo will now be able to do what fee-based advisors at LPL have been doing: selling no-commission, no-surrender-charge variable annuities with lifetime income guarantees.

Wells Fargo commission-based brokers have long been selling commission-based, B-share variable annuities to clients. Until now, Wells Fargo hasn’t had VA contracts on its shelf that suit the compensation structure of its fee-based advisors.

There will be four variable annuities on Wells Fargo’s new Advisory Variable Annuity platform, from Nationwide, Lincoln Financial, Pacific Life, and (later in 2012) Allianz Life.

The advisor-sold VAs will be significantly less expensive than the broker-sold VAs, according to Bernie Gacona, senior vice president and director of annuities for Wells Fargo.

“We anticipate the [advisor] fee to be 75 to 100 basis points,” Gacona said. “The inherent fees in an advisory variable annuity are significantly lower. The average cost of a B-share variable annuity is between 350 and 375 basis points. Our advisory variable annuity with a one percent advisor fee will have an all-in range of 280 to 320 basis points.”

According to a Lincoln Financial release, “Popularity of fee-based variable annuities has significantly increased over recent years.  A Lincoln analysis of Morningstar data shows that from 2008 to 2011, sales of variable annuities sold through a fee-based platform increased 36%.”

Besides being less expensive, the advisor-sold contracts have no surrender charge schedule, which means that clients have more freedom to leave the contract if their needs change or if their advisor changes strategy. 

Since the insurance company pays no commission to a broker in this arrangement, the insurer doesn’t need to recover the commission from the clients through annual fees.

Therefore the insurer doesn’t need to charge surrender fees or a high mortality & expense risk fee, both of which are related to recovering the up-front commission that the insurer paid the broker.

The variable annuities chosen by Wells Fargo include Nationwide’s Income Architect contract, a no-surrender charge version of Lincoln National’s ChoicePlus Assurance contract, and the Pacific Odyssey contract from Pacific Life. 

All-in annual fees for the Nationwide contract will be between 150 and 200 basis points, depending on the investment options chosen. The Nationwide contract has a mortality and expense risk fee of just 20 bps, an administrative fee of 20 bps, and a lifetime income rider fee of 60 bps (70 bps for joint and survivor). The investment charges range from 42 to 143 bps. The minimum purchase premium is $25,000. The income benefit base has an annual ratchet, which means that the benefit base gets marked up to the account value if the account value is at a new high water mark on the contract anniversary.

The annual payout rates under the lifetime income guarantee appear to be based on the number of contract years that have passed since purchase, rather than the age of the contract owner or owners. Lifetime payout rates are 4.5% per year of the benefit base in years one through five, 5% in years six through ten, and 5.5% thereafter.

Pacific Life’s Odyssey contract has a mortality and expense risk fee of only 15 bps, an administrative fee of 25 bps, and several lifetime income guarantees with annual rider fees ranging from 30 bps for the single-life CoreIncome Advantage Plus to 175 bps for the joint-and-survivor Flexible Lifetime Income Plus rider. Investment expenses are separate, and investments are restricted to a selection of asset allocation models. The minimum purchase premium is $50,000.

Under the basic CoreIncome Advantage Plus income rider, there is no deferral bonus and the maximum annual guaranteed withdrawal amount is 4% per year for contract owners over age 59½.

The Wells Fargo version of the Nationwide product is more transparent and less complex than commissionable variable annuities, said Cathy Marasco, Nationwide’s associate vice president of product development. “It’s a way to add a guarantee to a portfolio of other assets,” she said.  

© 2012 RIJ Publishing LLC. All rights reserved.

Welcome to RIJ+Advisor

In a web-world full of publications aimed at financial intermediaries, advisors, why add another dozen megabytes to the fire? More important, in an era of e-mail saturation, why send out another e-mail?

We know that a new kind of advisor is emerging—the retirement income specialist. And this type of advisor will need a regular news publication that specializes in information about retirement income. RIJ+Advisor will respond to that need.

Retirement income specialists, by our working definition, are advisors who want to create custom income solutions for their clients. They are advisors who comprehend all the risks of retirement, and who, most importantly, want to mix insurance and investment products in ways that maximize income and minimize risk.

If this describes you, RIJ+Advisor will deliver the news you want and need. The content will evolve—just as the field is evolving—but we can promise that the news will concern income-generating products and processes, compensation practices, retirement designations, and ways of understanding client behavior.

What about Retirement Income Journal?

RIJ+Advisor is a part of RIJ. In fact, you will be able to toggle back and forth between the two pages. RIJ+Advisor is available to all RIJ individual and group subscribers at no extra cost (and vice-versa). We believe that by segmenting our manufacturing-related and our distribution-related news and advertising, we can serve our varied audience better. For the first six issues (three months) RIJ+Advisor content will be freely available to all. After that, the full content will be available only to individual and group subscribers.

We’re confident that RIJ+Advisor will help you grasp the vast and growing opportunity that the Boomer retirement market presents. If you have any suggestions or questions, I welcome them. Email me at [email protected].

© 2012 RIJ Publishing LLC. All rights reserved.

The Best Retirement Research of 2011

The recent convergence of the global aging crisis and the global financial crisis has sparked the publication of hundreds if not thousands of significant academic studies related to retirement income financing. 

As basic research, this work won’t necessarily have immediate business or public policy applications. But it will undoubtedly provide the intellectual foundation from which new financial products and new policies eventually spring.  

We asked academics in the field to identify significant work that they read in 2011, and these were some of the studies they recommended. Some of these pieces appeared earlier in different form—as they evolved from briefs to working papers to journal articles.

Two dominant themes run through these papers. The first involves the optimal use of annuities in personal retirement income strategies. The second involves the role of behavioral finance in personal financial decision-making. There’s also an article on the size of public pension debt and one that questions the social payoff from investment in financial education.

The output of some of the most prominent thinkers in the retirement income field is represented here. We could name a dozen other men and women who published significant articles or books in this area last year. We’ll try to report on their work in the future.

With that disclaimer, here are ten noteworthy retirement research studies from 2011:

Optimal Portfolio Choice over the Life-Cycle with Flexible Work, Endogenous Retirement, and Lifetime Payouts, Review of Finance, Jingjing Chai, Wolfram Horneff, Raimond Maurer, and Olivia S. Mitchell, May 2011.

In this paper, the director of the Boettner Center on Pensions and Retirement Research at Penn (Mitchell) and collaborators from Goethe University in Germany demonstrate a new mathematical model designed to help public policymakers predict how people of different ages and economic circumstances will react to employment disruptions and financial market crashes.

“Some will be able to hedge adverse capital market developments they face in the crisis, not only by altering their asset allocations, but also by altering their work hours and retirement ages,” they write.

Near-retirees, in general, will save more, work harder and retire later. “In particular, we find that when hit by a financial and economic crisis, households near-retirement must cut their consumption both in the short-term and also over the long-term. Moreover, they will have to increase their work effort and postpone retirement.”

Younger people will adapt differently. “During the first five years after the onset of the crisis, young households will reduce work hours, savings, and equity exposure and suffer from a drop in consumption. In the long run, however, they will work more, retire later, invest more in stocks, consume less, save more, and spend less on private annuities.”

The authors speculate that variable payout income annuities, which are currently rarely used, could play a bigger role. “Though fixed payout annuities have been prevalent in the marketplace to date,” they write, “we anticipate that investment-linked payout annuities will become more popular as Baby Boomers age and Social Security benefits will fail to grow.”

When to Commence Income Annuities, Jeffrey K. Dellinger, Retirement Income Solutions Enterprise, Inc., 2011.

The author of this paper wrote The Handbook of Variable Income Annuities (Wiley, 2006), and was a key product developer at Lincoln Financial Group. Here he argues in favor variable income annuities and against the practice of delaying their purchase, except as a way to offset the higher costs of a buying an annuity relative to other decumulation strategies.

“A variable income annuity will produce more income than a fixed income annuity, because (1) the insurance company does not bear the investment risk in the former and thus does not have to introduce a margin for asset depreciation risk, (2) the insurance company does not bear interest rate risk in the former and thus does not have to introduce a margin for interest rate risk, and (3) the contract owner can choose to have his annuity income benefits based on a collection of assets with a higher mean return than that associated with the collection of typically high-quality, fixed-income securities held by the insurer to back fixed immediate annuity obligations.”

Regarding the best time to buy an immediate annuity, Dellinger argues that it depends on when the mortality credit (which increases with the age of the purchaser) offsets the added costs of the annuity. Otherwise, “the income annuity should commence immediately—assuming one needs incremental income at that point in life,” he writes.

“This paper… quashes the misconceptions that one should take withdrawals from mutual funds or deferred annuities for a number of years and then purchase an income annuity later or purchase income annuities on a staggered basis merely because a given amount of premium translates into higher periodic income with advancing age.” 

Good Strategies for Wealth Management and Income Production in Retirement, Mark Warshawsky and Gaobo Pang, published in Retirement Income: Risks and Strategies (MIT Press, 2012) pp 163-178.

In this chapter from a just-published book, two Towers Watson consultants suggest that retirees can best balance their need for liquidity and their need for protection from longevity risk and create a secure retirement through the gradual annuitization of their savings over a period of 20 to 25 years following retirement.

 “A phased annuitization scheme over a number of years should be a sensible pillar for retirement wealth management,” they write. “This gradual process works to smooth over fluctuations in annuity purchase prices and captures the benefits of risk pooling (i.e., mortality credit) and thus longevity insurance for advanced ages. The annuity payouts establish a consumption floor to cover basic living needs throughout an individual’s life.”

“The results also reveal the merits of a fixed percentage systematic withdrawal scheme from the remaining portfolios… Risk can never be eliminated entirely, and these strategies are good overall to achieve desirable outcomes and avoid bad ones.” As more and more savings gets annuitized, up to 100% at age 80, for instance, the equity allocation of the liquid assets also goes up, eventually to 100% in late life—by which time the liquid assets are small. The exact pace of annuitization, how many years it is spread over, the amount annuitized each year, depends on age of retirement, equity/bond portfolio mix at time of retirement, whether the annuity is a single or joint-and-survivor contract.

What Makes a Better Annuity?, Jason Scott, Wei-Yin Hu, and John G. Watson. Journal of Risk and Insurance, 2011, Vol. 78, No. 1, 213-244.

Life annuities are expensive, thanks to adverse selection, marketing, and distribution costs, which hurts sales, this study explains. One way to make them cheaper and more attractive would be to delay the payouts until an age when the survivorship credit—the dividend from mortality pooling—offsets the costs.

In the views of these authors, all of whom work at Financial Engines, annuity product designers should create products where income doesn’t begin until later ages, or products where longevity insurance is added to existing portfolios, or even ultra-cheap products where the payouts are contingent on both advanced age and financial ruin.    

 “We find that participation gains are most likely with new annuity products that concentrate on late-life payouts,” they write. “Annuity innovation should focus on adding survival contingencies to assets commonly held by individuals…

“We find demand only for those annuity contracts with a significant time gap between purchase and payouts… [and envision] a robust financial market where individuals can purchase payouts contingent on any future market state, and a more limited insurance market where individuals can purchase payouts contingent on both the market state and a personal state—their survival.”

Portfolios for Investors Who Want to Reach their Goals While Staying on the Mean-Variance Efficient Frontier, Sanjiv Das, Harry Markowitz, Meir Statman, and Jonathan Scheid. The Journal of Wealth Management, Fall 2011.

This paper reconciles the world of the efficient frontier (EF), where time horizons and goals other than investment returns are secondary or irrelevant, and the principles of behavioral finance. The writers include the Nobel laureate who co-fathered the EF (Markowitz) and the author (Statman) of What Investors Really Want: Know What Drives Investor Behavior and Make Better Financial Decisions (McGraw-Hill, 2010).

“Investors want to reach their goals, not have portfolios only on the mean–variance efficient frontier,” and allocate different amounts of money to separate “mental accounts” devoted to their major goals, the authors write. “Mean–variance investors have a single attitude toward risk, not a set of attitudes mental account by mental account. In contrast, behavioral investors have many attitudes toward risk, one for each mental account, so they might be willing to take a lot more risk with some of their money.”

Practitioners of goal-based or time-segmented “bucketing” strategies may find this research reassuring. “The number of investors who were willing to take a lot more risk with some of their money exceeded the number of investors who were willing to take a little more risk with all their money by a ratio of approximately 10 to one,” the authors write. “Yet taking a lot more risk with some of our money adds to our overall portfolio risk about the same as taking a little more risk with all our money.”

Framing Effects and Expected Social Security Claiming Behavior, Jeffrey R. Brown, Arie Kapteyn, Olivia S. Mitchell.  NBER Working Paper 17018, May 2011.

Deciding when to receive Social Security benefits is one of the most important retirement planning decisions that most Americans will make. Yet this decision is less often determined by careful reflection than by the way it is “framed.” That leads many people to take benefits too early, the authors of this paper write.  

In fact, the Social Security Administration’s way of presenting the question in “break even” terms—by asking long someone needs to live to recoup the income lost by claiming at age 66 or 70 instead of at 62—encourages many people to take benefits too early.

“Individuals are more likely to report they will delay claiming when later claiming is framed as a gain, and when the information provides an anchoring point at older, rather than younger, ages,” the authors write. “Females, individuals with credit card debt, and workers with lower expected benefits are more strongly influenced by framing. We conclude that some individuals may not make fully rational optimizing choices when it comes to choosing a claiming date.”

Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds, James J. Choi, David Laibson, Brigitte C. Madrian.

This paper, which won the 2011 TIAA-CREF Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security, is especially timely, given the advent of mandatory fee disclosure in 401(k) plans.

Originally published in 2006 as an NBER working paper, it claims that participants select high-fee index mutual funds over lower-cost options that can produce the same returns because they place greater emphasis on annualized returns since a fund’s inception.

The paper concluded:

  • Many people do not realize that mutual fund fees are important for making an index fund investment decision.
  • Even investors who realize fees are important do not minimize index fund fees.
  • Making fee information transparent and salient reduces allocations to high-cost funds.
  • Even when fee information is transparent and salient, investors do not come close to minimizing index fund fees.
  • Investors are strongly swayed by historical return information.
  • Investors do not understand that without non-portfolio services, S&P 500 index funds are commodities.
  • Investors in high-cost index funds have some sense that they are making a mistake.

 

Annuitization Puzzles, by Shlomo Benartzi, Alessandro Previtero, Richard H. Thaler, Journal of Economic Perspectives, (Published by Allianz Global Investors Center for Behavioral Finance, October 2011).

“Our central point is simply that drawing down assets is a hard problem, a problem with which some households appear to be struggling, and one that could be made easier with full or partial annuitization,” write the well-known authors of this article, which non-academic annuity marketers should find useful.

Yet, as the paper points out, there are some significant obstacles to wider annuity ownership. Annuities are often presented as gambles (“Will I live long enough for this to pay off?”) rather than as longevity risk reduction strategies. Nor is there a clear roadmap for former qualified plan participants who want to shop for annuities.

 “We believe that many participants in defined contribution retirement plans would prefer to annuitize as well, but not if they have to do all the work of finding an annuity to buy, as well as bear the risk and responsibility for having picked the annuity supplier,” the authors write.

 “It is now time to consider making automatic decumulation features available in defined contribution plans. Such features could range from full annuitization to options that include a mix of investments and annuities—for example, perhaps including a deferred annuity component to handle the problem of tail risk in longevity and even long-term care coverage…”

Public Pension Promises: How Big Are They and What Are They Worth?, Robert Novy-Marx and Joshua Rauh. Journal of Finance, Vol. 66, Issue 4, August 2011. 

Ten years ago, the discount rates used by public pension actuaries to calculate future liabilities and current contribution requirements weren’t yet political hot potatoes. Now they are. This paper suggests using “the state’s own zero-coupon bond yield corrected for the tax preference on municipal debt (which we call the ‘taxable muni rate’)” rather than the risk-free Treasury rate or the average historical returns of a balanced portfolio.

“We calculate the present value of state employee pension liabilities as of June 2009 using discount rates that reflect the risk of the payments from a taxpayer perspective. If benefits have the same default and recovery characteristics as state general obligation debt, the national total of promised liabilities based on current salary and service is $3.20 trillion,” the authors write.

“If pensions have higher priority than state debt, the present value of liabilities is much larger. Using zero-coupon Treasury yields, which are default-free but contain other priced risks, promised liabilities are $4.43 trillion,” they added. By contrast, “assets in state pension funds were worth approximately $1.94 trillion as of June 2009… total state non-pension debt was $1.00 trillion and total state tax revenues were $0.78 trillion in 2008.”

The Financial Education Fallacy, Lauren E. Willis, American Economic Review: Papers and Proceedings 2011, 101:3, 429–434.

Millions of Americans, studies show, are too financially illiterate to navigate the investment world or plan effectively for their own retirement. In this paper, a Loyola Law School professor advises against assuming that more financial education is the answer. Regulation is cheaper and more effective than education, she argues. 

“Effective financial education would need to be extensive, intensive, frequent, mandatory, and provided at the point of decision-making, in a one-on-one setting, with the content personalized for each consumer,” writes Willis.

“The government money and time required would outstrip any ordinary public education campaign. A new highly skilled professional class of affordable, competent, independent financial educator-counselor-therapists would need to be created, regulated, and maintained.

“The price to individuals in time spent on education—rather than, for example, earning more income—would be enormous, such that financial education might decrease wealth. The psychological analyses needed to individualize de-biasing measures would be personally invasive. Are these costs we are willing to bear?”

© 2012 RIJ Publishing LLC. All rights reserved.

Millionaires don’t think monolithically: Spectrem

Millionaires and multi-millionaires have a wide range of attitudes regarding taxation and socially responsible investing, depending on their age and position, according to a 2012 survey by Spectrem Group.

Not surprisingly, younger millionaires appear to be more socially conscious as investors than older ones. A less self-evident finding was that wealthy senior corporate executives appear to worry more significantly about taxes than wealthy business owners do.

Among investors with net worth of $1 million to $5 million, not including their primary residence, 37% consider social responsibility when they invest.  But this concern varies with age:

•           Of those 44 and under, 50% name it as a concern. 

•           Of those ages 45 to 54 and 55 to 64, 39% and 40%, respectively, name it as a concern.

•           Of those older than age 65, 31% name it as a concern.

Among investors with $5 million to $25 million in net worth, not including their primary residence, 27% cite social responsibility as a concern when investing. But their concern also varies by age:

•           57% of those younger than 44 name it as a concern.

•           41% of investors aged 45-55 do.

•           28% of those 55 to 64 do.

•           24% of those over 65 do.

Regarding tax hikes and investment strategies, the prevalence of concern varied by the title or position of the high net worth investor. Among those surveyed in the first quarter of 2012, 62% cited concerns about tax increases. But the percentage of those concerned about taxes varied by position:  

•           74% of senior corporate executives.

•           65% of managers.

•           57% of doctors, lawyers, accountants, dentists and other professionals.

•           55% of business owners.

While 28% of all millionaire investors said that they planned to adjust some of their investments in 2012 due to tax considerations, the percentage of those planning to adjust varied by position:

•           40% of senior corporate executives.

•           28% of professionals.

•           28% of managers.

•           15% of business owners.

© 2012 RIJ Publishing LLC. All rights reserved.

Let These Tax-wise Algorithms Do Your Calculations

Retirees hate to pay taxes, and they especially hate to pay them unnecessarily. That of course creates opportunity for advisors who want to help clients generate retirement income tax-efficiently—and for the software companies that serve advisors.

One such firm is Boston-based LifeYield LLC, which was started by none other than Paul Samuelson (the son of the legend). It claims that its algorithms can help retirees liquidate assets so tax-efficiently that they enhance their income by up to 33% and increase their legacies by 45%. LifeYield even hired Ernst & Young in 2010 to certify those claims. 

“Smart advisors understand what we’re describing, but few do it because it’s too time-consuming,” said Jack Sharry, LifeYield’s executive vice president of strategic development, in a recent interview with RIJ. “We’re working with very simple, well known rules, but synthesizing them all is mind-boggling.” 

LIfeYieldROI starts by creating a unified managed household (UMH) account, ensuring that a client’s desired asset allocation spans all of a family’s accounts. The next step is to relocate investments to their most tax-efficient positions. Bonds, which produce ordinary income, are better suited to tax-deferred or tax-free accounts. Equities held for more than a year have the lowest tax liability and can live in taxable accounts.

Relocating assets creates a tax cost, which LifeYield calculates as well to ensure that the expense of moving assets doesn’t outweigh the gain. Finally, the program looks at tax lots for each asset and calculates how best to harvest capital losses to offset capital gains.

“This way you not only cut taxes, but you generate income,” says Sharry. The program makes recommendations every time cash is withdrawn or invested. It also calculates the best way to withdraw money from taxable and non-taxable funds in retirement. 

This can be complicated. Conventional wisdom says that assets should come out of taxable accounts first, leaving money in tax-deferred and tax-free accounts to continue to grow. (With the exception that required minimum distributions must be taken after age 70½.) But a client might be better off if he spent his qualified assets, which are taxed heavily at death, and left appreciated taxable assets to heirs. Because the cost-basis of appreciated assets is “stepped up” to their market value at death, heirs pay no capital gains tax on them.

“Part of our process is to recommend Roth conversions along the way,” says Sharry. “We’re walking, chewing gum and juggling chainsaws all at once.”

The process is so complex at times that Sharry, who spent more than 25 years in marketing and product development at Morgan Stanley, Putnam Investments and The Phoenix Companies, didn’t believe such a system could be built. Then he met Samuelson, an MIT graduate (and whose father, of course, won the Nobel Prize in economics) who had been working on the problem for several years.

“He’s a whiz kid,” Sharry said. “As we say in Boston, he’s ‘wicked smart.’” After Sharry retired from Phoenix in the summer of 2008, Samuelson asked him to join LifeYield’s board. Sharry, who has lots of contacts among prospective clients, subsequently became a partner, serving as a senior leader in sales, marketing, product development and distribution strategy.

So far, LifeYield’s product has been adopted by Suntrust, Northwestern Mutual, ING, and Cambridge Associates. The firm is now in “serious discussions with seven of the 10 largest firms in our industry,” says Sharry. “They’re all looking to incorporate this as part of an overall retirement program.”

Of course, the wealthier the client, the greater the potential to reduce taxes. And if taxes rise in the future, as many fear, demand for LifeYield’s product should climb. Investors who’ve given up on the stock market and can’t find yield elsewhere should be eager to find significant savings in taxes, says Sharry. “We’re doing a lot of little things that over a long period of time make a big difference by saving people from paying taxes they shouldn’t have to.”

LifeYield also offers LifeYield Illustrator, which brings all of a client’s assets into one illustration, thereby encouraging clients to consolidate their assets with one advisor. A third product, which will tell advisors when to take money from Social Security, pensions, annuities and other accounts, is set to come out this summer.

© 2012 RIJ Publishing LLC. All rights reserved.

The SEC approves new circuit breakers to control market volatility

Two proposals submitted by the national securities exchanges and FINRA (Financial Industry Regulatory Authority) to address extraordinary volatility in individual securities and the broader U.S. stock market have been approved by the Securities and Exchange Commission, according to an SEC release.

The first initiative would establish a “limit up-limit down” mechanism that keeps trades within a specified price band. It is meant to replace the single-stock circuit breakers installed on a pilot basis after the so-called “flash crash” of May 6, 2010.

The new circuit breaker would be set at a percentage level above and below the average price of the security over the prior five minutes of trading. The percentage would be 5% for more liquid securities in the S&P 500, the Russell 1000, and certain exchange-traded products. It will be 10% for other securities.

The second initiative lowers the percentage-decline threshold for halting all U.S. exchange-listed securities on a market-wide basis. It also shortens the amount of time that trading is halted. This circuit breaker will replace one adopted in October 1988, which was triggered once, in 1997, but failed to go off during the May 2010 crash.

“The initiatives we approved are the product of a significant effort to devise a sophisticated, yet workable and effective way to protect our markets from excessive volatility,” said SEC Chairman Mary L. Schapiro.

The exchanges and FINRA are slated to install both circuit breakers by February 4, 2013 on a pilot basis for one year.

© 2012 RIJ Publishing LLC. All rights reserved.

Asset allocation is alive and well

Despite the much-ballyhooed demise of Modern Portfolio Theory pronounced in the wake of the 2008 stock market crash, not everyone has lost the faith. In fact, advisors are split almost evenly over whether asset allocation still works, according to a recent article in the Journal of Financial Planning, “Going to One: Is Diversification Passé?” by Jim Grote, a CFP and financial writer.

While correlations did soar to +1.0 during the market meltdown, advisors interviewed for the article say that’s largely due to panicked selling on the part of investors, and any correlation between +.95 and -1.0 still can offer enough diversification to lower overall portfolio risk. Indeed, some assets, like gold, high-quality bonds and Treasuries did well in 2008 and helped temper some of the volatility.

 “What we learned from 2008 was to diversify the ‘sources’ of our returns,” said Joan Malloy, managing director for the Greenway Family Office in St. Louis. “Our clients need to have income derived from real estate rents, master limited partnerships, bond coupon payments, dividends, etc.

“As advisers we need to drill down and analyze the risks that could pose a threat to the return source. We need to diversify in terms of industries and not just asset classes. In addition, the crash should reinforce the need to keep a cushion of liquid assets,” she added, noting that when you compare major indices, diversification was vindicated three years after the crash.

Another advisor, Thomas Balcom, founder of 1650 Wealth Management in Boca Raton, Florida, said he finds diversification in alternative investments, such as long-short funds, market-neutral funds, structured notes, and managed futures. Unlike commodities and REITS, these hedging strategies are less likely to become highly correlated because, “everyone is not going to short the same stocks in the same sectors at the same time, thus protecting these [alternatives] to some degree from destructive herd behavior,” he said.

© 2012 RIJ Publishing LLC. All rights reserved.

How Retirement Advisors Get Paid

Lots of advisors, brokers and agents would like to reposition themselves as retirement income specialists so that they can do good (and do well) by helping Boomers turn their 401(k)s and IRAs into secure paychecks that last a lifetime.  

But financial professionals who choose that path are bound to discover that their old compensation practices don’t necessarily suit their new specialty. If an advisor has become accustomed to making money in a certain reliable way, it may not be easy to change.        

Today, RIAs (Registered Investment Advisors) typically charge asset-based fees for managing portfolios, while insurance agents accept only commissions for selling insurance products, and registered reps may charge a combination of the two, depending on whether they sell products or provide advice or both. A pure financial planner may charge by the hour or by the plan.

True retirement advisors, however, create income plans that blend investments, insurance, and advice on a variety of topics. They straddle the fee-based, the commission-based, and the planning worlds, and therefore need new and more flexible ways to charge for their services.

Some advisors are already creating hybrid compensation methods to fit their hybrid practices. A few of them spoke recently with Retirement Income Journal. It’s arguable that if advisor compensation practices don’t evolve, the advice profession won’t evolve to meet the Boomer challenge, and fewer Boomers will get the type of retirement income planning services they need.    

Deducting commissions

Matt Repass, for instance, is an advisor with Pks Investment Advisors LLC, in Ocean City and Salisbury, Md., who holds insurance and security licenses. To create retirement income streams for his clients, he usually builds ladders of period-certain income annuities.

“Everyday when I speak to people they get a biased opinion from the insurance guy they’re talking to who says they can plan everything using annuities. And then the brokerage guy tells them you can solve everything with investments. I always believed it took good investment planning and insurance planning to do the job.”

Repass collects commissions for selling annuities and, separately, charges a one percent fee for managing client investments. Taking commissions, he said, doesn’t distort his decisions.

“My job as an RIA is to utilize what’s in the best interests of my clients,” he told RIJ. “I get calls almost daily from insurance reps who want to lead with the commission amount. You don’t stay around the length of time I have paying attention to that.”

Sean Ciemiewicz, a fee-based LPL-affiliated advisor at Retirement Benefits Group in La Jolla, Calif., deals with annuity commissions another way: He deducts them from his clients’ asset management expenses. “If we’re using a asset-based fee and an annuity fits the client, we will reduce the fee by the percentage we’re being paid in trailing fees on the annuity,” he said in a recent interview.

To the extent that a commission exceeds his standard asset-based fee, Ciemiewicz said he reduces his asset-based fee accordingly. When purchasing a no-load annuity for a client, he will charge 1% on the assets.

Dana Anspach, a fee-only planner and founder of Sensible Money in Scottsdale, Ariz., also charges clients in a variety of ways. She starts with a flat introductory rate of $1,500-$2,000 to run prospects through a detailed questionnaire, and hold a few meetings where she delivers some basic financial information.

“I’ve done that for many years and it’s a very effective way for people to determine if they want to establish relationship,” she told RIJ. Clients can then choose a $175 hourly rate for a plan or isolated advice, or a maximum fee equal to one percent of assets under management (which includes the cost of the plan).

Anspach uses a stand-alone living benefit (SALB), aka contingent deferred annuity (CDA), from ARIA Retirement Solutions, and applies it to managed accounts. “It’s up to us to find the lowest-cost way to shift the risk to an insurance company,” she said. “The solutions ARIA offers are satisfactory in relation to the cost of those options.” Transamerica Life has been the provider of ARIA’s SALB.

The author of About.com’s “Your Money Over 55 Guide” website, Anspach bases her fees not on assets per se but on the amount of decisions she has to look at to create and monitor tax-efficient, risk-appropriate and cost-effective plans and portfolios.

“We try to price our services so that we can deliver value to clients regardless of the account size,” she said. “I’m a boutique so I can adjust my pricing. I’ve been known to lower my pricing for clients who don’t want to meet with us [in person].”

As for facing conflicts, Anspach said she likes the concept of longevity insurance (a deferred income annuity that typically starts making payments if an when the client reaches age 85) but acknowledges the “annuicide” factor. “I’m taking money away from me and putting into product where someone else gets money.” Charging a commission for an annuity would suit her business model better than charging a fee for researching and recommending annuities, she said.

Testing one’s ethics

Gary Phelps, a fee-only advisor at Redrock Wealth Management in Las Vegas, Nev., charges a combination of hourly fees, flat by-the-plan fees, and asset-based fees. He doesn’t need to take commissions because he generally doesn’t see a need for annuities in his bucket-style retirement income strategies.

“With a diversified portfolio of low-cost index funds and ETFs, your chances of achieving your goals are very high,” he says. Nonetheless if an annuity is called for, like most fee-only advisors he’ll chose from a slowly growing range of no-load options.

He also avoids commissions because he feels they open the door to ethical concerns. “There are bad apples everywhere, and if you take the conflict of interest out, the chances of getting a bad apple are substantially reduced,” Phelps told RIJ.

Of course, he admits that conflicts exist on the asset-based side. Fee-only advisors, for instance, will lose assets if they advise clients to pay down their mortgages. In that case, he said, an advisor has to fall back on the plan and do what’s best for the client.

Phelps noted that he’s hurting himself, at least in the short run, by eschewing commissions. “A broker who sells a $500,000 client into all variable annuities can walk away with $35,000 in one day,” he said. “I make a comfortable living [as a fee-only advisor], but it takes a lot longer and is a lot harder to get there.”

Fee-only planner Russ Wild tries to prevent conflicts of interest from occurring at all. “I have from the start charged my clients an hourly fee or a percentage of assets under management,” said the head of Global Portfolios in Allentown, Pa. “Either way, it doesn’t matter what the clients invest in. If I put 20% of a client’s money into an annuity, I will still charge the client the same amount, whether it’s an hourly fee or $5,000 a year.”

While most of his clients are too wealthy to need annuities, when they do he introduces them to a rep from a low-cost provider like Vanguard and helps them shop for the right policy. “I wouldn’t want to sell annuities,” Wild told RIJ. “I don’t want to sell anything except advice. I think I’m a moral person, but I’d rather not test that.”

© 2012 RIJ Publishing LLC. All rights reserved.

Pardon Our Dust

We regret and apologize for the recent disruption in our service. 

Some readers of Retirement Income Journal encountered a blank page and a stark sense of vacancy when they tried to access our stories over the weekend and on Monday, either by surfing to our home page or by clicking through the links in our e-mails.  

In plain language, we experienced a server glitch.

Jason, our web host in Salt Lake City, e-mailed us on Saturday to say that “during routine server maintenance early this morning, WiredTree ran into issues with the core server” where RIJ resides. As a result, he wrote, “we are currently offline. All data is safe and secure via backups as well as a fully redundant server set up in a completely different data center.”

The glitch occurred during an ongoing elevation to more advanced technology at WiredTree, a Chicago-based provider of “managed and vps hosting systems.” Out of curiosity, I visited its website. WiredTree specializes in “virtualization,” which claims to provide many of the same services as a giant piece of hardware without the giant expense.  

Bottom line: We were good before, but now we’re even better. 

*                  *                  *

This spring, several people casually asked me how Retirement Income Journal is “doing.”  

Without betraying any competitive secrets, I can say that, thanks to the support of our readers and advertisers, we’re doing well.

Over a dozen of the major insurance companies and asset management companies, as well as several broker-dealers, have purchased company-wide site licenses or group subscriptions to RIJ. In addition, hundreds of individual advisors, academics, and financial services executives have purchased individual subscriptions.       

That’s significant. When we put up a “paywall” in November 2009 and began charging for access, we knew we were entering unknown territory. Even the biggest media companies have stumbled with the subscription model.

But in our case, the response started strong and, thanks to a strong renewal rate, it hasn’t quit. That’s gratifying, of course, from a revenue perspective. More importantly, it gives us the editorial freedom we need to pursue our goal: to provide an unbiased information forum for the decumulation industry.  

And, because of your support, we now have sufficient resources to expand our product offerings. Look for some surprises from RIJ this year, sooner rather than later. 

© 2012 RIJ Publishing LLC. All rights reserved.

Aggressive auto-enrollment practices don’t backfire: NY Life

Employees are not more likely to opt out of an employer-sponsored retirement plan if they are automatically enrolled and automatically set at a high contribution rate, according to a study of participants by New York Life Retirement Plan Services.    

Plans implementing auto-enrollment with an automatic contribution rate of more than 3% have consistently experienced lower opt out rates than plans with lower default rates, year-over-year, New York Life said.

Plans with less than 4% default rates experienced 14% opt-out rates, vs. 10% opt-out for plans with greater than 3% default deferrals for the 12-month period ending March 31, 2012, the New York Life study showed.

The study also showed that plans that auto-enroll participants using an initial contribution rate greater than 3% of salary have a 95% overall participation rate, compared with 88% for plans that auto-enrolled participants using an initial contribution rate of less than 3%.

The analysis involved 480 plans and 800,000 participants across New York Life’s retirement platform. The number of plans on the New York Life platform that have adopted auto enrollment was 61% as of March 31, 2012, compared with 21% in 2006.

© 2012 RIJ Publishing LLC. All rights reserved.

MetLife adds more Protected Growth Strategy portfolios

MetLife has added three new investment options to the lineup of Protected Growth Strategy portfolios in its variable annuity products. The Protected Growth Strategies are “risk-managed,” meaning that the portfolio managers reduce their risk exposure when market volatility rises.

Contract owners who choose certain lifetime income guarantees must allocate their purchase payments among the Protected Growth Strategy Portfolios and/or to an intermediate bond portfolio.

The three new portfolios are:

  • Invesco Balanced-Risk Allocation Portfolio – a risk-balanced strategy, which diversifies the portfolio based on risk instead of asset class.
  • JPMorgan Global Active Allocation Portfolio – a momentum strategy, which identifies persistent trends in returns and adjusts the portfolio accordingly.
  • Schroders Global Multi-Asset Portfolio – a managed volatility strategy, which adjusts the asset allocation mix as market conditions change to minimize exposure to less favorable assets.

The original Protected Growth Strategies portfolios include:

  • AllianceBerstein Global Dynamic Allocation Portfolio;
  • AQR Global Risk Balanced Portfolio;
  • BlackRock Global Tactical Strategies Portfolio; and
  • MetLife Balanced Plus Portfolio (co-managed with PIMCO)

The new portfolios, along with the four original portfolios, are now available to all new and most existing variable annuity customers,  regardless of the election of certain optional benefits. From their introduction in May 2011 until now, the Protected Growth Strategy portfolios were accessible only to customers who elected certain optional variable annuity income riders and paid the rider fee.

© 2012 RIJ Publishing LLC. All rights reserved.

Moody’s and A.M Best disagree on GM-Prudential deal

Moody’s Investor Service Inc. has said that the June 1 agreement between General Motors and Prudential Insurance Co. (Prudential) to provide income annuities for GM white-collar pensioners is a “credit negative” for the Newark, NJ-based financial services company, according to a report in LifeHealthPro.

Some industry experts, including Prudential CEO John Strangfeld, now expect other companies to make similar deals, though of lesser size. 

When asked during a June 7 event in Washington, D.C., if more deals like the GM one were anticipated, Strangfeld answered, “Yes. It is the shape of things to come” and that there would be “more of this to follow.”  

But in its Weekly Credit Outlook, Moody’s called the transaction a “credit negative” for Prudential because the contract, valued at almost $30 billion, will now comprise 5% of Prudential’s general account holdings.

Such a high percentage poses a significant risk concentration due to the challenges of managing a long-duration portfolio, the low-yield environment, and the difficulty in estimating longevity risk. 

On the other hand, Prudential’s investment and actuarial expertise, along with its experience in asset liability management, put it in a good position to handle the risks associated with the deal, Moody’s said.    

A.M. Best Co., meanwhile, has affirmed the financial strength rating of A+ (Superior) and issuer credit ratings of “aa-” of the domestic life/health insurance companies of Prudential Financial, Inc. (Concurrently, A.M. Best has affirmed the ICR of “a-” of PFI and all existing debt ratings of the group. All domestic life/health companies of PFI are collectively referred to as Prudential. The outlook for all ratings is stable.

Referring to the GM deal, “A.M. Best notes that with the recently announced pension risk transfer transaction with General Motors, fixed annuities (both group and individual) will represent an increasing component of total statutory general account reserves. A.M. Best believes that, in general, annuities are a less creditworthy line of business compared to ordinary life insurance products. It is noted, however, that Prudential has established a track record of successfully managing, and to some degree, mitigating many of the risks inherent in its various annuity product lines.”

© 2012 RIJ Publishing LLC. All rights reserved.

New indexed annuity from Phoenix addresses three retirement risks

The Phoenix Companies has launched the Phoenix Personal Protection Choice Annuity, a single premium fixed indexed annuity that allows an annuity holder, for an additional fee, to purchase any combination of three different benefits: lifetime income, chronic care and/or an enhanced death benefit.

Designed for near-retirees and retirees, Personal Protection Choice annuity also features six indexed accounts in addition to a fixed account. 

“Standalone products focused solely on income guarantees, life insurance or chronic care can be expensive or go unused,” Phoenix said in a release. “With Personal Protection Choice, annuity holders [can address] the financial gaps that are of greatest concern to them.”

The contract is issued by PHL Variable Insurance Company, a Phoenix insurance subsidiary, and is available through independent distributors working with Saybrus Partners, a Phoenix distribution subsidiary.

Personal Protection Choice offers an Income Protection benefit, a Care Protection benefit and/or a Family Protection benefit.

The Income Protection benefit provides a guaranteed lifetime withdrawal benefit (GLWB) that offers a benefit base bonus of up to 45% of the initial contract value. The bonus is 30% after a one-year deferral, 37.5% after a two-year deferral, and 45% after three years. Alternately, clients can receive a 14% simple interest annual roll-up in the income base for up to 10 years after purchase. As for payout rates, Phoenix quotes a different rate for each age, rather than for age bands.

Dana Pedersen, vice president, Phoenix Life, offered the example of a 70-year-old who invested $100,000 in the product and waited three years to start withdrawals. At age 73, he could withdraw 4.74% of at least $145,000, or $6,873 for life. The payout rates range from 3.32% at age 50 to 6.6% at age 85 or older, she said.

The Care Protection benefit provides an enhanced withdrawal benefit for up to five years in the event that the annuity holder is unable to perform two of six Activities of Daily Living (ADLs) and is confined to a nursing home or receiving care at home. This benefit is available after the second contract anniversary and ranges from 125% to 250% of the guaranteed lifetime withdrawal amount, based on age and qualification level. After the five years of the Care Protection benefit are exhausted, the lifetime withdrawal benefit is still available as long as no withdrawals over the guaranteed amount have been taken.

The Family Protection benefit offers an enhanced lump-sum death benefit for beneficiaries. The enhancement includes a simple interest roll-up of 5% or 10% (depending on attained age) for the first 10 years of the contract, or until the rider exercise date or age 85, whichever comes first. All withdrawals, including the guaranteed withdrawals, reduce the contract value and the death benefit.

In conjunction with Personal Protection Choice, Phoenix also launched REALIZE personal retirement analysis, an online tool adapted for tablet computers. It combines sales, data collection, and annuity quote functions. 

© 2012 RIJ Publishing LLC. All rights reserved.

Was Facebook the Death Knell of Equity Investing?

The Facebook initial public offering, with its combination of management arrogance, private equity greed and Nasdaq ineptitude, has certainly changed the atmosphere in the U.S. and global stock markets. The question is whether, like the ill-fated AOL-Time Warner merger of 2000, it has merely marked the peak of a temporary bubble or the final end of the equity investing cult among the ordinary public.

In the stable days before 1914, retail investors bought few stocks. Bonds represented the best means of saving for retirement or other purposes. Because Britain and the United States were on the Gold Standard, principal on bonds of first class governments and major railroads and corporations was secure against inflation and the interest suffered either no income tax (in the United States before 1913) or a low rate of income tax (as in Britain from 1842 to 1914). Thus investors in even corporate bonds enjoyed a safe and substantial real return, provided only that the corporation’s assets had not been “watered” by issuing more bonds and stock than the properties were worth. (In that case, whether for a railroad or a producer of a commodity such as steel, the costs of servicing the excess debt or equity made the company potentially uncompetitive against a rival railroad/producer whose bonds/stocks had not been “watered.”)

In Britain, the lack of equity investment was caused by the mass of government bonds available for investment after the Napoleonic Wars. The merchant banking system did not get around to carrying out share issues until the Guinness share issue by Barings in 1886. Instead it made its money by issuing bonds, diversifying into foreign government bonds initially and then reluctantly into railroad bonds. To get your shares listed, you had to run the gauntlet of a terrifying set of fly-by-night company promoters, of which Anthony Trollope’s villain Auguste Melmotte was ethically at the top rather than the bottom end. Middle class investors like John Galsworthy’s Forsytes, to the extent they invested in shares at all, invested primarily in the hope of a substantial and improving dividend rather than of capital gain. Mostly they stuck to bonds or, for the more adventurous, rental real estate and mortgages thereon (all those lawyers in the family gave them access to good deals).

In the United States, where the financial markets were even gamier than in Britain, the public invested in bonds, primarily of railroads and state governments, until right at the end of the 19th century, when equity issues sponsored by J.P. Morgan gave adventurous investors some assurance that the company in which they invested was not an outright swindle.

That changed in the twentieth century. First, with inflation, bonds were no longer a solid investment – Soames Forsyte’s Uncle Timothy, still in Consols at the age of 101 in 1920, was by then very eccentric and somewhat impoverished. Closed-end mutual funds had existed in the nineteenth century, but the invention of open-ended mutual funds, in the 1920s in the United States (Massachusetts Investors Trust, 1924) and in the more prosperous 1930s in Britain (Municipal and General Securities: First British Fixed Trust, 1931), allowed small investors access to the stock market for the first time. In the United States, the Great Depression knocked the markets back, as did World War II in Britain, but persistent inflation and increasing prosperity in the 1950s brought the cult of the equity to both countries. 

In Britain the building societies (which paid interest free of basic rate income tax and whose rates floated with interest rates generally) provided stiff competition to equities until the period of negative real interest rates in the 1970s. In the United States savings banks and from 1974 money market funds also remained in the game. However from 1980 the great bull markets in both countries made the equity markets supreme. In the 2000 presidential election, George W. Bush ran successfully on a program of investing Social Security payments in the stock market, since it was apparently bound to provide much higher returns.

This all changed after 2000, as equity markets worldwide failed to offer reasonable returns. They had been bid up to an inordinate extent in the late 1990s bubble caused by Alan Greenspan’s lax post-1995 monetary policies. They were not allowed to fall to a market clearing-level after 2000, as the Fed and other central banks continued to expand money supply excessively. It’s now clear that certainly the 2002 stock market bottom and probably the 2009 bottom were false; that is the decline was reversed by artificially pumping money into the system before a true market-clearing bottom had been reached. Calculations based on nominal GDP growth since the February 1995 change in U.S. monetary policy suggest that a middling level, not a bottom, for the Dow Jones index would currently be around 8,200, so that at today’s levels the market is still 50% overvalued.

It’s not surprising that investors today find equities unattractive; they have been subjected to twelve years of nominal returns close to zero and negative real returns. For a “value” investor it is very difficult to persuade oneself that equities are currently worth buying, other than in the commodities sector where their value rests on the inflated prices of the underlying commodities.

The Fed’s post-1995 policy has thus been extremely damaging. First it inflated equity values to a ludicrous extent, far above any possible rational calculation of value. Then, instead of allowing markets to correct to a level that could have represented “good value” and from which savers could have achieved a high return with only modest risk, the Fed kept prices artificially inflated, but subject to large unpredictable downdrafts such as that of 2007-09. For a thoughtful investor, equities in this environment represent a very poor investment, and will only represent a good one when monetary policy has been corrected and market excesses have finally been wrung out. Needless to say, since we only have a finite lifespan, a period of 15 years or more in which common stocks are a poor, overvalued investment has been a major deterrent to using them as the basis for our retirement and savings planning.

Only in emerging markets was the decade of the 2000s lucrative for equity investors, and there for most U.S. investors information was scarce and the barriers to investment high – many of them erected by the Securities and Exchange Commission and Sarbanes-Oxley legislation, making it hugely expensive for foreign companies to list in the United States, and more or less illegal for U.S. brokers to sell to retail investors the shares of foreign companies that were not so listed.

It’s thus not at all surprising that investors are disillusioned with equities. The problem is, the alternatives available to them all have major disadvantages.

Private equity may look logically like the alternative to stock market investment. However overvaluations here are even more extreme than in the public equity market. Interest rates are at record lows, artificially reducing the cost of leverage, while corporate earnings are at record highs in terms of GDP. Both factors can be expected to go into reverse in the near future. And private equity bears much of the blame for the Facebook bubble. The plethora of “insiders” investing at a $60 billion valuation in a company whose true value was no more than $10-15 billion (its competitor LinkedIn is valued currently at $10 billion) drove up valuations to an absurd extent, and their attempt to unload their holdings onto “greater fools” in the public market at a $100 billion valuation produced the fiasco we have just witnessed. Compared with public equity, private equity provides no diversification, just an opportunity for money managers to raise their fees to absurd levels without providing significant additional value. And, by definition, private equity investment is more or less unavailable to investors who are not multi-millionaire favorites of the major brokerage houses.

Hedge funds are now consistently underperforming other investments and should be avoided at all costs. They add no economic value and provide vastly excessive profits to their sponsors. Institutions that invest in them are throwing away their pensioners’ and policyholders’ money; we should avoid joining them.

Debt, whether top-quality or lower quality, is a huge bubble waiting to burst. The fact that Vanguard has closed its “junk bond” fund to new investors is sufficient indication that supply of money here hugely exceeds that of legitimate deals.

Gold, silver and other commodities are less of a bubble, in spite of the huge increases in their prices. The need for consumers in high-population emerging markets to buy products that “hurt when you drop them on your foot” is real, and so therefore is the surge in commodities demand. On the other hand, natural gas has recently shown that supply innovations can bring down commodity prices with a bump, and this is likely to happen elsewhere. The money-supply boost to commodity prices is real too, but will last as long as Ben Bernanke holds his job and not a day longer.

Real estate has cost investors their shirts in the last decade, but is actually now a good investment. Not commercial real estate, whose prices have been inflated by cheap financing, nor residential real estate in Britain, where prices are still far too high, but in the United States, outside the major coastal cities, home prices are now reasonable, in spite of subsidized financing. Rentals will continue to increase compared to sales in the lower/middle-price brackets, so a well-located apartment block in an area of low unemployment is probably one of the better investments available right now. The better-heeled Forsytes took advantage of these opportunities; so should we, provided leverage is kept moderate and holdings conservative.

Equities are never going to regain the place in investors’ affections they held in 1995-2000 and nor should they – that was a bubble, too. Nevertheless, with the exception of careful, moderately leveraged investments in residential real estate, there are no other good alternatives. Once Bernanke has gone, and we have suffered through another major bear market taking the Dow Jones Index down to 5,000 or so, we should once again make the public equity markets, with adequate global diversification, a substantial part of our investment strategy.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005). This column appeared on May 28, 2012 at his website, www.prudentbear.com

© 2012 Martin Hutchinson. Used by permission.

 

Searching for an Oasis

Where to turn for returns? Like thirst-maddened wanderers in the desert, mistaking a dune for an oasis, investors seem to have resorted to drinking sand (read: investing in bonds), because there’s no better refreshment (read: equity returns) in sight. Blame it on Bernanke. Blame it on the Europeans. Blame it on election-year paralysis.

“US investors’ psyches have been battered with a stream of negative news, whether disappointments in job growth or disappointing progress on the euro-zone problems. This has exacerbated the caution that many investors already felt,” said Avi Nachmany, SI’s Director of Research, in his latest report. “Until we see sustained improvement in employment growth and real progress on Greece and the euro, caution will probably favor bond fund flows over stock fund flows.”

How interesting are these times? In one notable anomaly, an income annuity—New York Life’s Lifetime Income Annuity—was the quarter’s bestselling fixed income product, according to the Beacon Research Fixed Annuity Premium Study. That’s never happened before. Year over year, sales of income annuities were up almost 23% in the first quarter of 2012, while indexed annuities, which accounted for almost half of all fixed annuity sales, advanced nearly 9%.

“Both product types did well despite lower interest rates due to demand for guarantees in general and reliable retirement income in particular,” said Beacon Research CEO Jeremy Alexander.

“The success of New York Life’s deferred income annuity also helped boost overall income annuity results, and indexed annuity cap rates looked comparatively good relative to CD and annuity fixed rates,” he said. “As carriers respond to the low rate environment, we expect to see more MVAs, unbundled product features, and GLWB rollup rates that vary based on credited interest.”

Industry-wide, sales of all types of annuities topped $53.1 billion in the first quarter of 2012—down about 2.5% from $54.5 billion during the previous quarter.

Variable annuities

Variable annuities are attracting much less new money this year than last.

Variable annuity total sales were down only 2.7% to $36.2 billion from $37.2 billion in the fourth quarter of 2011, according to Morningstar. And, despite the dip, the market value of variable annuity subaccount assets reached an all-time high of $1.61 trillion in the first quarter, up 7.2% from $1.50 trillion during Q4 2011.

But, according to Morningstar, quarterly net variable annuity sales decreased 34.5% year-over-year. New money fell to $3.8 billion in the first quarter of 2012 from $5.8 billion during the same period in 2011. (There were $24.3 billion in qualified sales and $11.8 billion in non-qualified variable annuity sales in the first quarter.)

Relative to the second half of 2011, the rate of new money coming into variable annuities dropped by about 50% in the first quarter. Net inflows of variable annuities—premiums net of surrenders, withdrawals, exchanges, and payouts—fell to only 10.6% of sales ($3.823 billion) after averaging 21% (about $8 billion) in the second half of 2011. This may have reflected the general retrenchment of the industry, as several carriers exited the VA market and others reduced the generosity of their benefits in light of low interest rates, flat or volatile equity markets, and accounting pressures.

Stock and bond mutual funds

On the other hand, the slowdown in VA inflows may simply reflect a larger trend. According to Strategic Insight, U.S. investors put just $14 billion in net inflows into stock and bond mutual funds in the US in May 2012 (in open-end and closed-end mutual funds, excluding ETFs and funds underlying variable annuities). That was a drop from the $24.5 billion in net inflows to stock and bond funds in April.

May’s numbers also marked the lowest volume of positive net flows since long-term mutual funds experienced net outflows in December 2011, Strategic Insight said. In May, domestic equity funds saw net outflows of nearly $5 billion, during a month of poor stock returns: the average US stock mutual fund lost 4.2% in the month, on an asset-weighted basis. That brought total US equity fund flows to -$7.4 billion for the first five months of 2012—a sharp reversal from the first five months of 2011, when US equity funds enjoyed cumulative net inflows of $40 billion.

International/global equity funds drew net inflows of $5 billion in May, but that was down from the $6.5 billion they took in the prior month. In the first five months of 2012, international equity funds drew aggregate net inflows of $27.6 billion.

Fixed annuities

Returning to fixed annuities: At $16.94 billion, first quarter 2012 fixed annuity sales were down 2.2% from the previous quarter and 8.8% from the year-ago quarter. Fixed non-market value adjusted annuities were down 2.9% from the previous quarter and down 32.6% from Q1 2011. Fixed market value adjusted annuities were up 1.6% from the previous quarter but down 10.4% from a year ago.   

Great American joined the quarter’s top five sellers for the first time, coming in fifth. Aviva USA moved up a notch to take second place and New York Life advanced two notches to place third. Allianz continued as sales leader, and American Equity remained a top-five company.

In terms of sales by product type and distribution channel, the leading companies were unchanged from the prior quarter. The success of New York Life’s Lifetime Income Annuity made it the first product of its type to be a quarterly bestseller. The other leading products were once again indexed annuities issued by Allianz, Aviva USA and American Equity.

Rank      Company Name          Product Name                                        Product Type

1                New York Life                  NYL Lifetime Income Annuity                  Income

2               Allianz Life                        MasterDex X                                                 Indexed           

3               Aviva                                   Balanced Allocation Annuity 12                Indexed                                   

4               American Equity              Bonus Gold                                                    Indexed

5               Aviva                                   Income Preferred Bonus                             Indexed

Bond funds

Taxable bond funds saw net inflows of $9 billion in May, the smallest amount of net inflows they’d experienced since they attracted just over $8 billion in December 2011. Investors continued to use bond funds as income-producing solutions amid extremely low rates. Short- and intermediate-maturity bond funds were the most popular types of mutual funds in May, leading the way with nearly $6 billion in combined net inflows. Emerging market bond and global bond funds followed in popularity.

Taxable bond funds have drawn an estimated $110 billion in the first five months of 2012, far ahead of the $80 billion in net flows that taxable bond funds took in over the course of 2011’s first five months.

Meanwhile, muni bond funds saw net inflows of $5 billion in May. Muni bond funds drew $24 billion in net inflows through the first five months of the year, as long-term muni bond issuance has risen substantially from year-earlier levels.

Money-market funds saw net outflows of $2 billion in May, which was an improvement over April’s net outflows of $22 billion. Ultra-low yields continued to hamper demand for money market funds even as more investors turned to them as a safe haven.  

ETFs

Separately, Strategic Insight said US Exchange-Traded Funds (ETFs) saw roughly $2 billion in net inflows in May 2012. That brought total ETF net inflows to $60 billion for the first five months of 2012—a pace that could result in the sixth straight year of $100 billion or more in annual net inflows to US ETFs. At the end of April 2012, US ETF assets (including ETNs) stood at $1.13 trillion, down from $1.2 trillion at the end of April 2011.

Bond ETFs were the only major category to post net inflows in May, drawing net nearly $8 billion. Equity ETFs saw an estimated $6 billion in net outflows, with both domestic and international equity products seeing net redemptions. Real estate and gold ETFs also saw significant net inflows. “ETFs are often used to express investor sentiment regarding the financial market, and so the redemptions from stock ETFs are sending a clear message,” said Loren Fox, SI’s head of ETF research.

© 2012 RIJ Publishing LLC. All rights reserved.

Securian unveils VA living benefit with 6% rollup

Securian has introduced the Ovation Lifetime Income II guaranteed living withdrawal benefit (GLWB) rider, an optional rider available with certain Securian MultiOption variable annuities for an additional cost.

The rider guarantees annual withdrawals from the variable annuity contract, up to an annual limit, for clients age 59 or older. The variable annuity is issued by Minnesota Life Insurance Company, Securian’s largest subsidiary.

The Ovation II GLWB rider offers:

  • A 6% compound benefit base enhancement.
  • A doubling of the benefit base after 10 contract years (or the client’s 70th birthday) if no withdrawals have been taken.
  • CustomChoice allocation allows to select up to a 70% equity/30% fixed income portfolio. Election of the rider requires use of an approved allocation strategy.
  •  Increased withdrawal flexibility so clients can take withdrawals if needed without canceling the six percent benefit base enhancement feature.
  •  Investment options now available include a Minnesota Life selected group of more than 75 underlying investment options from 17 fund families that span a variety of asset classes and, investment styles. This includes the TOPS Protected ETF Portfolios, which strive to provide more consistent returns through dynamic hedging.

© 2012 RIJ Publishing LLC. All rights reserved.

Retirement income will be “the biggest trend”: MetLife

MetLife has released its Retirement Income Practices Study: Perspectives of Plan Sponsors and Recordkeepers for Qualified Plans report, which examines the dynamics of the plan sponsor-recordkeeper relationship with regard to the provision of lifetime income options in qualified plans.

The study assesses whether, and to what extent, plan sponsors of defined benefit (DB) and defined contribution (DC) plans, and recordkeepers are collaborating to educate participants about retirement income strategies and solutions for their participants. The study found that:

  • Ten of the 12 recordkeepers and one in three plan sponsors predict an increasing focus on retirement income for the next three-to-five years.   
  • Tools that will project the amount of monthly income a participant might receive during retirement are not automatically shown to participants when they view their account balances online, nor are they routinely provided to plan participants on statements. Instead, plan sponsors appear to favor a self-service approach.   
  • The “do-it-yourself” model is not taking hold among participants. The majority of recordkeepers surveyed estimated that 25% of plan participants or fewer have made the effort to project their retirement income.
  • 44% of plan sponsors said that most DC plan participants would prefer to “receive at least part of their retirement savings as monthly income for as long as they live rather than receiving all of it in a lump sum that they would invest themselves.”
  •  68% of plan sponsors said they believe the majority of their DC plan participants favor “guarantees that offer stable but somewhat lower returns” over a “higher degree of risk because the returns could be greater.”
  • Only 16% of plan sponsors surveyed offer any form of in-plan retirement systematic income option. Among those, the most widely offered option is an in-plan deferred annuity (27%).
  • 56% of plan sponsors who offer an in-plan retirement income option don’t know specifically what type of product is being offered.
  • Most recordkeepers do not make institutional income annuities and other retirement income products available at the point of retirement nor do they have the ability to administer in-plan accumulation annuity options on their platform.
  • Four of the 12 recordkeepers surveyed currently offer in-plan retirement income options. Of the other eight, four said they are very likely to build the infrastructure required for in-plan retirement income options to be available on their platforms in the next 18 months. The remaining four cited low demand from sponsors and participants as a reason for not exploring this infrastructure.   
  • Eight in 10 plan sponsors (79%) say that fiduciary liability concerns are discouraging them from more widespread offering of income annuities within their DC plan. More than half of plan sponsors (56%) also believe these concerns are dissuading their recordkeepers from more widely offering these products on their platforms. Most plan sponsors believe that their company (62%) is more concerned about annuity-related fiduciary liability issues than their recordkeeper.

The MetLife Retirement Income Practices Study was conducted in two phases between October 2011 and January 2012. In Phase I, the qualitative phase, MetLife commissioned RG Wuelfing & Associates, Inc. to conduct phone interviews with 12 defined contribution plan recordkeepers that service primarily FORTUNE 500® Companies. The interviews were conducted from mid-October to mid-November 2011.

In Phase II, the quantitative phase, MetLife commissioned the research firm MMR to conduct an on-line survey with plan sponsors of retirement plans in cooperation with Asset International. A total of 215 plan sponsors participated in the survey, including 113 from FORTUNE 1000 companies. Phase II of the study was conducted between December 14, 2011 and January 30, 2012.

© 2012 RIJ Publishing LLC. All rights reserved.

Thrivent Financial to consider non-Lutheran customers

What would Martin Luther say? What would Garrison Keillor say?

Thrivent Financial for Lutherans is considering expanding its flock beyond the nation’s 18 million Lutherans and allowing more non-Lutherans into the fold, according to a report in the Milwaukee Journal Sentinel.

The Appleton, Wis., provider of life insurance, annuities and mutual funds has catered almost entirely to Lutherans and affiliated institutions. But a vote of the 2.5 million-membership of the nation’s largest fraternal benefit society could change that. An internal poll showed that about two-thirds of Thrivent members favor expansion, which would require changes in Thrivent’s articles of incorporation.

CEO Brad Hewitt said Thrivent, whose current organization was formed by the 2002 merger of Aid Association for Lutherans in Appleton and Lutheran Brotherhood of Minneapolis, must be careful not to tamper with its faith-based brand. The most likely targets for expansion would be other churches, schools and perhaps certain nonprofit groups that provide social services, he said.

At the end of 2011, Thrivent had $170.2 billion of life insurance protection in force, and paid out $310 million in dividends. Its adjusted surplus stood at $5.4 billion. The organization has reported three consecutive years of growth in sales, revenue, assets under management and total adjusted surplus, which is a measure of an insurer’s financial strength.

Thrivent distributes exclusively through a career force and selects agents who believe in the faith-and-finances theme of the organization. That makes it more difficult to find people and limits growth, Hewitt said.

Hewitt said the company hasn’t decided whether it would need to change its name if it changed its customer base. “We haven’t figured that out yet,” he said. “The reality is, the practical thing is, people call us ‘Thrivent,’ “ he said.

© 2012 RIJ Publishing LLC. All rights reserved.