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Look to Asian bonds for growth: AGI

Posted on May 20, 2012 by -

Allianz Global Investors is bullish on Asia, according to a recent report in Investments & Pensions Asia. The firm expects Asian bond funds to become more available to Western investors, and expects Asian currencies to appreciate in the years ahead, despite some volatility.

Andreas Utermann, global chief investment officer at AGI, was quoted as saying that “investors remain completely risk averse [regarding Asia] but their risk assessment is based on experiences over the last 30 years – and this is wrong.”

“Asian asset classes will outperform Europe and the US between 2010 and 2020 but there will be times when they will not and these are the times when you want to go in,” said Stuart Winchester, Senior Portfolio Manager, Oriental Income, at AGI. “You have to be patient like a hawk waiting for a big fish.”

David Tan, the new head of investments at AGI Singapore and CIO of Pan-regional Asian Bond Mandates, said that the Asian financial crisis of the late 1990s was “a necessary adjustment for Asia to go through” toward better fundamentals.

 “Most of the Asian economies are export-driven and they have to switch to different ways of getting rich – and one of them is to let the currency appreciate,” said Utermann, adding that the Chinese government “won’t do anything that might spoil the once-in-a-lifetime opportunity of the RMB becoming a global currency.”

Helen Lam, Senior Portfolio Manager RMB and Fixed Income strategies at AGI, expects the RMB to become a fully convertible currency “maybe by 2020” but first China will “have to liberalize the interest markets,” among other things. Recently, the first RMB bonds were launched on the London Stock Exchange, and Lam thinks that New York, followed by Tokyo and maybe Sydney might be next.

© 2012 RIJ Publishing LLC. All rights reserved.

The Mad Men of Wall Street

Posted on May 20, 2012 by -

The New York Times published an article on May 14, 2012 concerning the question of whether the rich, from a moral standpoint, are good or bad. The story reported that “A recent study found that 10% of people who work on Wall Street are ‘clinical psychopaths’ and that they exhibit an ‘unparalleled capacity for lying, fabrication, and manipulation.'”

The vivid term “clinical psychopath” brings to mind the berserk buzz-saw wielding investment banker played by Christian Bale in the film “American Psycho.”  

Since some 3.9 million people work in the financial services industry, a clinically-diagnosed horde of lunatics numbering almost 400,000 people would certainly be a matter of public concern, though it might only confirm some journalists’ views of American capitalism.

It is fair to ask what is the provenance of this “study.” The New York Times cites its source as a March 12, 2011 story in THIS WEEK, which attributes the psychopath data to an estimate made by freelance writer Sherree DeCovny in CFA Magazine, in an article entitled “The Financial Psychopath Next Door.”  

She wrote that “studies conducted by Canadian forensic psychologist Robert Hare indicate that about one percent of the general population can be categorized as psychopathic, but the prevalence rate in the financial services industry is 10%.”

The problem here is that Hare never conducted a clinical study of the financial service industry, and never did research showing that 10% of its members were psychopaths.

John Grohol, the editor of World of Psychology, after the publication of DeCovny’s article, asked Hare about the putative study. Hare told him,  “I don’t know who threw out the 10% but it certainly did not come from me or my colleagues.” 

The closest he came to such a claim was in a research paper he co-authored that analyzed the responses submitted by 203 corporate professionals from seven companies, none of which were on Wall Street. Nor were these 203 people randomly selected. He found that the answers of only eight people—approximately 4% of the sample—indicated psychopathic tendencies on a scale he had devised.

Even though this was not a clinical study, the responses of these eight people, who may not even have worked in financial services, were transformed via the blogosphere into a supposedly scientific finding, cited in one of our most respected newspapers, that one-tenth of those working on Wall Street are psychopaths.

As Ryan Holiday, author of “Trust Me, I’m Lying: Confessions of a Media Manipulator,” explained to me, “Headline-grabbing trend manufacturing such as this now dominates the pseudo-news cycle on the Web.”

Welcome to the Internet, which is not known for its source-checking. Unfortunately it is then only a short leap to the so-called newspaper of record, which is happy to serve up to the public this non-existing study, which demonizes financiers. As a result, we now have mad men of Wall Street running amok in the public imagination.

Edward Jay Epstein is author of “Myths of the Media” and many other books.

‘We Should All Work To Age 70’

Posted on May 20, 2012 by -

We are all getting older and staying in good health for longer. But even though carrying on working for longer would seem a logical next step, we’ve stayed where we are for decades, with no change in the official retirement age.

So many vested interests in so many countries see the age of 65 as sacred and an acquired right that is not up for negotiation. Indeed, one thing that helped François Hollande win the recent French presidential election was his irresponsible promise to reintroduce a retirement age of 60, after it only recently rose to 62.

In most Western countries, people stop work at between 60 and 62, while the ‘workability index’ for most European countries is 75. According to the OECD, a retirement age of 70 would currently be realistic, while working for longer has also been shown to result in people living longer and remaining in relatively better health. In other words, society is letting eight productive years go to waste.

Apart from trade union rigidity and politicians’ inability to take decisions, we ourselves are the biggest barriers to longer working lives. Employers are doing too little to anticipate longer life expectancies in their workforce, with salary structures still based on rising salaries. Opportunities for retraining and updating skills so as to make more flexible use of older employees are being used too little and too late.

Similarly, working environments are not being adapted to accommodate older people, while pension, tax and insurance products are not yet equipped for longer working lives. We need to rid ourselves of the perception that ‘old is expensive.’

But employees, too, are doing too little to anticipate change. Few people are taking responsibility for planning their personal financial future, whereas doing this properly is a way of anticipating the need to continue working into the fourth quarter of your life. The challenge now is to devise a series of cohesive measures to massage society into making better – and obviously responsible – use of those eight years of extra productivity.

I can already hear politicians claiming a special status for people in physically demanding jobs. There, too, anticipation – and at a younger age – is vital. Although there will, of course, always be some groups of people deserving special care, the fact remains that we need to accept that working until you reach an average age of 70 should become the norm.

The question now is what employers should be doing to anticipate society’s need for change. What is the government actually doing? How flexible are trade unions being in helping to devise solutions? Who is educating citizens – particularly young people – to be more aware of the need for financial planning?

The results of a recent ‘stakeholder’ survey disappointed me. People obviously see what is happening, but there are absolutely no signs of any cohesive policies or combined efforts to create the right conditions. There is not even any basic research into what kind of action employers and employees could and would be willing to take.

I would suggest it’s now high time to get that done. The various stakeholders seem trapped in a web of agreements, with the change needed in the retirement age simply being swapped for another issue in the political game. No one dares take that vital first step, with everyone looking at someone else to avoid having to step outside his agreed circle of maneuver.

Some people are happily looking at France and the plans to reverse the increase in the retirement age, with ‘growth’ as the new magic word. But who’s going to invest and come up with the money at this stage of the crisis? The missing eight years of extra productivity all too easily get forgotten when policy for responsibly lengthening working lives is being devised.

I sense there’s little point in waiting for action from politicians. Perhaps we should talk about ‘making existing pension plans more flexible’ rather than ‘increasing the retirement age.’ Insurance companies, pension funds and social security systems will need to anticipate people wanting to work longer. That means coming up with new products to allow delayed retirement on conditions that are satisfactory to all parties. In other words, finding a way of rewarding people who contribute to society for longer.

Perhaps those accepting hybrid retirement will be able to persuade governments, employers, unions and others that many people will be keen and able to remain in the workforce – providing the conditions are right and efforts are made to accommodate the different parties’ wishes. There are also, of course, substantial numbers of older people whose provisions for retirement are inadequate and for whom continuing to work – possibly on a part-time basis – will simply be a necessity.

Harry Smorenberg is an independent strategist in the financial services industry and chairman of the WorldPensionSummit.

No Tower of Babel, or Babble, from Babbel

Posted on May 16, 2012 by -

Whenever the topic of selling income annuity arises (and it arises more frequently these days than ever) David Babbel’s white paper on income annuities, “Investing Your Lump Sum at Retirement,” inevitably comes to mind.

The paper, written by the Wharton School professor in 2007 under the sponsorship of New York Life, makes the case for buying an income annuity better than any glossy marketing brochure you are ever likely to find.

No photos of sailboats or white-haired captains in this document. No his-and-hers Adirondack chairs at the end of the dock.  

Anyone who markets or sells income annuities for a living should not only read this document but carry a creased, dog-eared and heavily-underlined copy of it in his or her coat pocket at all times.

Babbel supplies the background that someone new to annuities might need, then tackles what he calls the seven—a magic number in gambling and in advice manuals; just ask Stephen Covey—myths about annuities and provides a bullet-proof response to each one.

If you have time, I urge you to read the entire paper. For those who don’t have time, I’ll summarize his call-and-response below. First the annuity myth, then a summary of Babbel’s rebuttal.

1. They cost too much. When you calculate the expense ratio that you pay year after year on an actively managed mutual fund, the one-time commission that you pay when buying the typical income annuity will seem quite small.   

2. What if I get sick? An income annuity, especially one that offers accelerated payments in case of serious illness, can be a versatile and thrifty alternative or supplement to long-term care insurance.

3. What if inflation returns? Won’t my fixed payments become worth less? Many of today’s income annuities offer inflation-protection, either in the form of an annual increase or a peg to one of the versions of the Consumer Price Index.

4. Isn’t it cheaper to use some sort of homemade strategy that mimics the behavior of life annuities? That way I can cut out the insurer! Babbel articulates the insurance principle and compares not having an annuity to playing Russian roulette with your financial security.

5. If I put all of my money in a life annuity, will there be anything left for my kids? If you buy an annuity that covers your basic needs, you may be able to give part of the remainder of your wealth to your children today, rather than making your death the prerequisite of an inheritance.    

6. If I purchase an irrevocable life annuity at retirement, don’t I lose control over those funds? Yes, says Babbel, and that’s a good thing! An income annuity can remove the burden, the anxiety and the risk of handling stocks and bonds at an advanced age.  

7. Shouldn’t I wait to buy in case interest rates go up? You can—but life expectancies may also go up, making annuities more expensive in the future. And while you’re waiting, your investments could lose value. Indeed, what if rates go up and trigger a stock market crash? You might have less money to invest in an annuity.

And here’s Prof. Babbel’s stirring conclusion:

When individuals consider the list of positive attributes associated with life annuities, i.e., guaranteed payments you cannot outlive, low cost, access to invested capital, and reasonably priced features such as inflation adjustment and legacy benefits, the argument for this income solution in retirement is compelling.

By covering at least basic expenses with lifetime income annuities, retirees are able to focus on discretionary funds as a source for enjoyment. Locking in basic expenses also means that the retiree’s discretionary funds can remain invested in equities for a longer period of time, bringing the benefits of historically higher returns that can stretch the useful life of those funds even further.

Income annuities may also be a vehicle that enables retirees to delay taking Social Security benefits until they are fully vested, bringing substantially higher payments at that point.

The key in all of this is to begin by covering all of the basic living expenses with lifetime income annuities. Then, to provide for additional desirable consumption levels, you will want to annuitize a goodly portion of the remainder of your assets, while making provisions for extra emergency expenses and, if desired, a bequest.

These last two items can be accomplished through combinations of insurance and savings. When this is undertaken, you can enjoy your retirement without the burden of financial worries and focus on more productive uses of your time and attention!

Philadelphia Story

Posted on May 16, 2012 by -

This conference, the latest in a long series of conferences organized by Wharton’s Pension Research Council and devoted to important aspects of retirement security, examined the vital issue of financial security from the legal, economic and social points of view.

In particular, it dealt with:

  • The lack of a uniform fiduciary standard for broker/dealers and investment advisers;
  • The reasons for the limited take-up of financial advice; 
  • The effects of financial advice on clients;  
  • The quality of advice.

Speakers included economists, lawyers, pollsters and industry professionals. What follows draws from the more interesting presentations and papers:

The legal basis for the regulation of financial advice is not coherent. New Deal legislation established one standard—that of suitability—for broker-dealers, and a more exacting fiduciary standard for investment advisors. As Arthur Laby explained in a thorough and well-written paper, that distinction worked tolerably well until the 1970s-1980s, when discount brokers emerged and the distinction between broker-dealer and investment adviser became harder to draw.

Recent efforts by SEC to establish a more watertight distinction have not been successful. Passage of new regulations is now complicated by the fact that it is expected that it be preceded by a cost-benefit analysis of the new rules. Meanwhile, the average investor does not understand the difference between the suitability rule that is to apply to broker–dealers (or to the act of brokering) and the fiduciary standard. Gerri Walsh of FINRA remarked that 401(k) plan members did not see themselves as investors!

Financial advice, despite its universal importance, remains the province of the affluent. Kent Smetters thought that most planners will eschew households with less than $500,000 in financial assets. The demand for advice is discouraged by the upfront fee, which is typically upwards of $3,000 per plan. Financial planners emphasize the skilled-labor intensive character of the work, a trait that has resisted the effects of technological advances in financial software. Online advice reduces its cost, but speakers argued that it could not yet compete with the human touch. The implication is that short of a subsidy or technological breakthrough, the average American will remain without  this valuable service.

A paternalistic approach, where everyone gets advice regardless of their interest in it, may not be cost effective. A paper by Angela Hung and Joanne Yoong of Rand reported on a statistical analysis of a sample of older Americans and described the findings of an experiment aimed at determining what led people to seek financial advice. The statistical analysis was not very revealing—there was no significant relationship between either wealth or the level of financial literacy and the propensity to seek advice.  Similarly, there was no obvious impact on investment decisions.

Those seeking advice were more likely to continue making their plan contributions, however, although they were also more likely to reduce them. The experiment divided participants into three lots: one that received no advice; a second, that received advice whether they wanted it or not; and a third that was offered a choice.

Those (in group 3) choosing advice were more likely to lack financial literacy than those who did not, suggesting that advice is a substitute for a do-it-yourself approach. The Rand researchers draw the conclusion that a paternalistic approach, where everyone gets advice regardless of their interest in it, may not be cost effective.

A definite relationship between taking advice and net worth, even when controlling for income, education and cognitive ability, was among the findings of an empirical study by Michael Finke of Texas Tech. Moreover, investors taking advice were less likely to cash out in a severe bear market. A survey carried out by the ICI and presented by Sarah Holden found that a major life event was often a trigger for an initial consultation, and that advice was sought more often when young than when old. The survey also found a significant relationship between education and wealth and the tendency to seek advice. Fear of loss of control often explained a refusal to seek advice.

One interesting paper by two well-known financial advisors, Paula Hogan and Rick Miller tried to integrate the insights of behavioral economics into a life-cycle approach. The life cycle approach is an advance over the traditional approach, because, among other reasons it recognizes the importance of the timing of the decisions to retire and claim Social Security as well as the importance of human and not just financial capital.

However, life cycle economics makes unreasonable demands on people’s understanding of their finances and their ability to foresee their needs many years into the future. The authors noted that their clients were often quite ignorant of their financial situation. Asking a 30-year-old about his retirement is pointless, because he or she will not know what his needs will then be.

Regarding Social Security, Matt Greenwald reported on a survey of financial advisors and the advice they gave on claiming Social Security and related decisions. Sound advice is critically important, especially given the outsized role the program plays in retirement finances. Matt found that many advisors did not have a good idea of how spousal benefits worked, and that they could give bad advice on the timing of retirement. Clients were often preoccupied with the issue of OASDI solvency, which reduced the amount of time available for other topics.

One particularly interesting finding related to the framing of advice on the claiming decision. This decision can be tilted away from delaying a claim by downplaying the insurance aspect of annuitization. Financial advisors favored the first approach. They also favored the break-even approach, as in “if you delay claiming Social Security for two years you can expect to break even in 14 years.” Remarkably, and as Olivia Mitchell noted, it appears that SSA agents have an incentive to encourage prospective claimants to claim early.

Anna Rappaport and Kelli Heuler addressed the important issue of encouraging annuitization, and in particular the role of advice.  They contrasted what they called structured advice with active guidance. The former might take the form of a special website on the site of the plan sponsor, where employees could seek information on terms and premiums, and put questions to on-line advisors. Personal advice, as the name suggests, includes a personal touch. In the authors’ view, the second was far superior to the first, at least in encouraging annuitization. This paper noted that it was not uncommon for plan members to purchase more than one annuity, perhaps because state insurance schemes create an incentive to spread purchases out over more than one state. Zvi Bodie, drawing on his experience as a trustee at Boston University, argued that advisors remained biased against annuities.

Summary. The conference was certainly stimulating. One participant argued that its rather agnostic results argued for a default approach (as with the auto-IRA), there being no magic bullet to broaden the coverage of financial advice, improve its quality and make it more affordable.  Another argued that target date funds (TDFs), given the way they worked, could be seen as a gateway to advice. For my part, I was left without a strong sense of how the coverage and quality of financial advice might be enhanced.

George A. (Sandy) Mackenzie is the author of “Annuity Markets and Pension Reform,” (Cambridge, 2006) and “The Decline of the Traditional Pension,” (Cambridge, 2010). A member of the staff of the International Monetary Fund for many years, he is a currently Senior Strategic Policy Advisor at the Public Policy Institute of AARP in Washington, D.C. The remarks made here are his own and do not represent the opinions of AARP in any way.  

Talking DIAs with Matt Grove of NY Life

Posted on May 15, 2012 by -

RIJ: New York Life’s deferred income annuity, the Guaranteed Future Income Annuity, was introduced in July 2011. Who are the target clients for that product?

Grove: We realized in late 2010, when we started developing Guaranteed Future Income Annuity, that while guaranteed income was a big deal for people in their 60s and 70s, there was a bigger opportunity among people in their 50s and 60s who needed income later [in life]. There are more people in that group, and they have more money. And, while there’s still a fair degree of pension ownership among today’s retirees, people in their 50s and 40s have less pension ownership. So we thought we could pivot off our Guaranteed Lifetime Income product and extend our existing brand.

Matt Grove, New York LifeRIJ: From what we’ve heard, sales are going better than expected.

Grove (at right): We were shocked at the response from the field [agents]. We launched in July with low expectations. Usually, it takes a while to educate the field [agents]. We expected $20 million in sales and got $200 million. The number today is more like $400 to $450 million, and sales are accelerating.

RIJ: What’s driving those numbers?

Grove: The most important factor is that we went against popular opinion on positioning the product. The conventional wisdom is that income annuities are about longevity insurance, and that the typical purchaser would be a 60-year-old leveraging to age 75. Although there is a market there, we positioned GFIA as a solution that provides the financial security that a pension once provided, targeted at a person in his or her mid-50s who is buying a guaranteed income stream that starts in their mid- to late-60s. For them, the need is more personal. It’s less abstract than deferring income to a time when you might not be alive. It’s also a more positive message. A lifetime income product is about protection against living too long. GFIA is about having more income during retirement.

RIJ: It’s interesting that your sales are strong in a low interest rate environment.

Grove: Counter-intuitively, it’s an economic analysis that’s driving sales. People are convincing themselves that it would be a good investment, quantitatively. We just launched ads with the slogan, Get More Income. It showed that a 58-year-old who deferred income for nine years would get 30% more income from GFIA than from a GLWB with a 5% roll-up for nine years and then a 5% withdrawal from the benefit base. It’s really about relative value. The client is asking, ‘What are my alternatives?’

RIJ: But what if people are comparing the annuity to a systematic withdrawal plan from an investment portfolio?

Grove: We have a concept called ‘required yield.’ If Choice A was GFIA, and you got a 10% payout 10 years from now, and if Choice B was a systematic withdrawal plan with a pre-determined distribution rate of 5% from an investment portfolio starting ten years from now, what returns would you need to earn over ten years to match the first-year income that you’ll get from the annuity? That’s the hurdle rate you have to get over in order to match the first-year income [from an investment portfolio with that of an annuity]. We find that those hurdle rates are typically very high.

RIJ: It’s surprising that a deferred income annuity is getting so much traction, relative to expectations at least, when you consider that the required minimum distribution rules force most rollover IRA owners to start taking money out of their accounts at age 70½. 

Grove: A lot of people would defer longer if not for the required minimum distributions. We see in our nonqualified business that people would like to defer past that age. The Treasury Department has a proposal out right now that would relax the age 70½ restrictions, with some constraints. That would expand our market.

RIJ: By taking income earlier, aren’t people also giving up some of the so-called mortality credits that come from investing in an income annuity?

Grove: The mortality credit becomes compelling at about age 70. But if you look only at the mortality credit you’re failing to understand the true value of the product. Firms like Fidelity and others that are focused on retirement income are selling income annuities to a younger population. They’ve done their homework, and they understand the value of income annuities in the broader portfolio. The entire point of Modern Portfolio Theory, the bedrock of it, is that you have to look at all of the assets in the portfolio in conjunction with each other. Thinking about them as stand-alone investments makes no sense whatever. It’s the same when you add annuities to the mix.

RIJ: So you’re making the argument that income annuities have benefits aside from mortality credits?

Grove: There are reasons why income annuities improve outcomes. They aren’t correlated with the market. And they remove sequence of returns risk from one segment of the portfolio. Most of the problems that people will have are related to sequence of returns risk. That’s the single biggest threat to their financial health in retirement.

RIJ: You’ve said elsewhere that many clients are choosing cash-refund GFIAs. Doesn’t that structure wipe out the mortality credit?

Grove: It’s not accurate to say that you’re wiping out your mortality credits by choosing a cash refund. You’re still pooling mortality. With the cash refund, we guarantee the principal but not the interest. We’re mortality-pooling your interest, while also giving you the benefit of a steady payout. Although an economist might tell you to buy a life annuity, most people are uncomfortable with the idea that if they were hit by a truck they would lose their money.

RIJ: Some people might prefer to buy an immediate income annuity later than buy a deferred income annuity today. Is there any point in acting now?

Grove: When we write a single premium immediate annuity, the average duration of the liability is eight or nine years. So we buy a bond portfolio with an eight- or nine-year duration. The duration of the GFIA is 18 years. Because of the upward sloping yield curve, we can earn higher returns and that drives higher payout rates.

RIJ: Some people say that New York Life sells the most income annuities because it has such a strong career agency, and that career agents have an easier time selling annuities. Is there any truth to that?

Grove: We have a 30% market share. The nearest competitor has a 5% to 10% share. Our career agency represents about half of our income annuity sales, so we would still be number one if we had no career agents. There is no special aspect of career agency that favors income annuity sales, with the possible exception that the career agency is more insurance-focused and the third-party distributors are more asset-management oriented.

RIJ: What about the fee-based advisor channel? There’s a lot of money there, but it’s resistant to annuities.  

Grove: There have been attempts to establish annuities as a viable fee-based option. We have created a no-load version of our income annuity. We’ve begun to see some major distributors say that they would count the value of an annuity to their AUM. There might be no explicit charge for managing the annuity. Its value would just be counted toward their book of business. There have been discussions about charging a reduced fee for the annuity assets, more like 30 basis points.

RIJ: It’s not easy to change the way advisors think about income annuities.

Grove: The economics of the advisor business were built around asset accumulation. But in retirement, for many customers, the asset base will be shrinking. The time that needs to be invested in client relationships can also go up because you have more people who are worried. But our understanding is that retirement-based practices are going pretty well, and that advisors [who specialize] in retirement aren’t overwhelmed by calls from their clients. It’s a good demographic for advisors.

RIJ: Thank you, Matt.

© RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on May 15, 2012 by -

Mercer launches “My Retirement Workshop” for plan participants

Mercer, the provider of defined contribution plan services to 1.3 million participants, benefits has launched “My Retirement Workshop,” (www.myretirementworkshop.com) an online retirement planning and education campaign for employees whose 401(k) plans it administers.

Styled after popular home improvement TV shows, the website provides interactive tools and instruction to help investors “fix up” their retirement plans.

My Retirement Workshop consists of four main features:

  • A brief self-assessment tool that provides personalized feedback and recommended actions.
  • A selection of projects that address common retirement planning challenges.
  • A toolbox of calculators, worksheets and widgets.
  • An opportunity to “learn from the pros” by watching videos, listening to podcasts or reading articles.

Visitors to the site can interact with peers through discussion boards, take quick polls and share the site through social media. The My Retirement Workshop online education campaign was launched in early May and will be a year-long campaign, with new content and features to be added in the fall.

Participants can access My Retirement Workshop through their plan’s website. A public version of the site is also available at myretirementworkshop.com, where mobile device users also can access a mobile-optimized variation of the site for easy viewing.

Plan participants would welcome an income solution: The Hartford

Three out of five Americans (64%) say their employer’s 401(k) or other retirement plan does not allow them to turn their savings into guaranteed income in retirement or they are unsure if it does, according to The Hartford’s Guaranteed Retirement Income study.

The concept of guaranteed retirement income appeals most to those with a combined annual household income of $50,000-$74,000. A total of 92% in that demographic would like their employer to offer a guaranteed income option compared to 87% percent of those earning $30,000-$49,000, 86% earning less than $30,000, and 84 % earning $75,000 or more.

Women (89%) had a slightly greater preference for guaranteed retirement income than men (84%).

Perhaps because younger workers are less likely to have defined benefit pensions at work, the study also showed that the younger the employees, the more interested in a income solution they were:

  • Overall, 87% of respondents of all ages say they find it “very” or “somewhat” appealing to be able to turn at least a portion of their retirement savings into a guaranteed income.
  • 95% of workers younger than 30 say the same, the highest of any age group.
  • The same sentiment was expressed by 90% of those ages 30-39, 89% of ages 40-49, 88% of ages 50-59, and 77% of those age 60 and older.

The Hartford’s study, which surveyed 2,500 Americans ages 18 and older earlier this spring, was conducted following the introduction of The Hartford Lifetime Income (HLI), an investment option that allows 401(k) participants to use their savings to create a pension-like income in retirement.

Michael Smith named Chief Risk Officer of ING U.S.

Michael Smith has been named chief risk officer with responsibility for overseeing the enterprise-wide and business-level risk monitoring and management program for ING U.S., the company reported.

Smith joined ING in 2009 as chief financial officer and chief risk officer for the ING U.S. Annuity business. In 2011, he became chief executive officer of the ING U.S. Annuity business, and led the effort to manage the variable annuity book of business into a run-off closed block. 

Smith’s responsibilities include managing the framework for measuring, controlling, hedging and pricing risk. In addition to his risk management role, he will continue to oversee the Closed-Block Variable Annuity run-off business.

Before joining ING, he was the head of Profitability and Risk Management for Retirement Solutions at Lincoln Financial Group (LFG), where he held several leadership positions, including chief actuarial officer for Lincoln National Life, chief administrative officer and CFO for Lincoln Financial Distributors Inc. (LFD), CFO and chief risk officer for LFG’s Life and Annuity division and head of customer support for LFG’s Employer Markets division.

An actuary and CFA, Smith holds bachelor’s degrees in economics and Russian studies from the University of Michigan.  

Edward Jones first in “investor satisfaction: J.D. Power & Assoc.

For the sixth year out of the past eight, Edward Jones has ranked highest in investor satisfaction among full service brokerage firms, according to the J.D. Power and Associates 2012 Full Service Investor Satisfaction Study. 

The study measures overall investor satisfaction with full service investment firms on the basis of seven factors: investment advisor, investment performance, account information, account offerings, commissions and fees, website and problem resolution.  

Edward Jones ranked highest in investor satisfaction by J.D. Power and Associates in 2010 and 2009, from 2005 through 2007, and in a tie in 2002, when the study began. Edward Jones in Canada ranked highest in the J.D. Power and Associates Canadian Full Service Investor Satisfaction Study in 2006 through 2008.

The 2012 Full Service Investor Satisfaction Study is based on responses from 4,378 investors who primarily invest with one of the 14 firms included in the study.  The study was fielded in February 2012. Edward Jones’ 12,000-plus financial advisors serve almost 7 million clients individual investors in the United States and Canada.  

Americans respect/disrespect Wall Street   

Each year The Harris Poll asks the Americans what they think about “the nation’s largest banks, investment banks, stockbrokers, and other financial institutions”—the businesses known metonymically as Wall Street.  

Again, this year, the American public said that the Street has problems. Eight percent of those polled agreed with the statement that Wall Street “benefits the country a lot.” (As recently as 2004, that number was 24%.) Twice as many—16%—said Wall Street “harms the country a lot.”

By a margin of 82% to 15%, American adults believe that “Wall Street should be subject to tougher regulation.” But, by 62% to 34%, Americans also believe that “Wall Street is absolutely essential,” the poll showed. Over half of U.S. adults, or 55% (down from 80% in 1997) believe that Wall Street benefits the country while 42% (versus 13% in 1997) believe it harms the country.

Some of the other main findings of this year’s poll, which was conducted among 1,016 adults in mid-April, were:

  • Almost four in five Americans (78%) believe that Wall Street firms should only pay bonuses when they are doing well and making good profits;
  • Seven in ten U.S. adults (70%) believe most people on Wall Street would be willing to break the law if they believed they could make a lot of money and get away with it;
  • Just over two-thirds of adults (68%) do not believe that people on Wall Street are as honest and moral as other people;
  • Two-thirds (67%) of U.S. adults do not believe that what is good for Wall Street is good for the country; and,
  • Almost two-thirds (64%) do not believe most successful people on Wall Street deserve to make the kind of money they earn.

New advisor tool from Nationwide to help with health care cost planning

Nationwide Financial has launched a new online tool, called the Personal Health Care Assessment program, to help advisors estimate their clients’ health care expenses in retirement.

The program uses proprietary health risk analysis and up-to-date actuarial cost data such as personal health and lifestyle information, health care costs, actuarial data and medical coverage to provide a meaningful, personalized cost estimate that will help clients plan for medical expenses.

To illustrate the opportunity that advisors have for using the medical issue as a way to enhance or initiate client relationships, Nationwide also sponsored a Harris Poll showing that nearly half of soon-to-be retired high net worth Americans say they are “terrified of what health care costs may do to their retirement plans,” and nearly three in four say soaring health care costs is among their top retirement fears.   

The Poll of 1,250 Americans (half of whom plan to retire by 2020) with $250,000 or more in household assets showed that 38% of those nearing retirement haven’t discussed their retirement with an advisor. Of those who have, only one in five discussed health care costs in retirement not covered by Medicare.

The survey also revealed that 43% of soon to be retired Americans say they plan to discuss health care costs with a financial advisor. Of the 12% of near-retired Americans who said they plan to switch financial advisors, 54% said they would be likelier to stay with their current advisor if they could get help planning for health care expenses in retirement.

Although three in five (59%) near-retirees say that most financial advisors are not equipped to discuss retirement health care costs with their clients, many of those who have indicated that it was worthwhile. Only one in five surveyed say they are confident in their knowledge of Medicare coverage, and more than half say it is “very to extremely important” they educate themselves on Medicare coverage when planning for retirement.

Near-retirees who plan to enroll in Medicare estimated that Medicare would pay for 68% of their health care costs in retirement. But when asked how they arrived at that percentage, nearly three in four said they guessed or didn’t know, 15% based on their own research, 7% spoke with friends who have already retired and 4% said their financial advisor told them. According to the Employee Benefit Research Institute, Medicare currently covers only about 51% of the expenses associated with health care services.

While 45% expect health care to be their biggest expense throughout retirement, on average they expect to spend only $5,621 a year on health care. But a 2010 study estimated out-of-pocket health care expenses for a 65-year-old couple retiring today and living for 20 years to range from $250,000 to $430,000, or as much as $10,750 a year per person.

Harris Interactive collected data for the survey from January 3-19, 2012. Sampling included 625 adults ages 55+ having $250,000 or more in household assets who plan to retire by 2012 and 625 retired adults ages 65+ having $250,000 or more in household assets.  

Waste from “suboptimal” trade execution cited

As much as $5 billion is wasted each year in sub-optimal broker routing decisions, according to an examination of the execution quality of marketable limit orders and at-the-quote limit orders on U.S. equity exchanges by Woodbine Associates, Inc.

The report, “U.S. Equity Exchange Performance,” focuses on how exchanges compare in execution quality and information asymmetry associated with basic order types central to price discovery.

“There are differences among exchanges,” said Matt Samelson, principal and author of the report. “The buy-side must look out for themselves, intensively review sell-side order handling, and insist on accountability for sub-optimal routing. At the same time, the buy-side should be willing to pay higher commissions to brokers that truly provide superior order routing and premium service.”

The third annually-produced report examines exchange performance in marketable limit orders and at-the-quote limit orders less than 2,000 shares, without special order handling instructions, traded during normal trading sessions, excluding the opening and closing trades. 

Marketable limit orders are examined on the basis of execution prices and the degree of post-execution price reversion. At-the-quote limit orders are examined only on the basis of price reversion. Orders are examined in the context of capitalization and listing exchange.

“Many orders are not routed to the right venues at the right time for the right reasons,” added Samelson. “When a broker’s fiduciary responsibility to a client’s execution ends, economics turn toward the broker and away from the client. Pennies earned by brokers may cost principals dollars in execution quality. It is important that each client knows where their broker’s fiduciary responsibility ends.”

To learn more, e-mail Ryan Surprenant ([email protected]) or call 203-274-8970, ext. 203.

J.P. Morgan offers Financial Engines’ Income+ service to 401(k) plans

Financial Engines and J.P. Morgan Retirement Plan Services have announced that Financial Engines® Income+ has been integrated into J.P. Morgan Retirement Plan Services’ 401(k) offering.

Income+ is available as part of J.P. Morgan’s in-plan professionally managed account program, J.P. Morgan Personal Asset Manager, which works within a 401(k)’s existing investment line-up to enable more personalized portfolios designed to provide steady retirement income.

Income+ is designed to balance safety and growth in the years leading up to retirement. It provides steady monthly payouts from a 401(k) account, which can last for life with the optional purchase of an out-of-plan annuity.

Fidelity enhances its smartphone app

Fidelity Investments said its free mobile phone “app” has been updated to enable stock plan participants to access and track their portfolios and conduct transactions from their iPhone, iPod touch or Android.

The app enables participants with stock option plans to exercise and sell their options by following simple prompts. Investors can determine the total value of all of their options, the price of their exercisable options, the estimated value of their options and the aggregated tax rate that will apply if the options are sold.

Previously, participants could view their stock plan account balances from their iPhone, iPod touch or Android smart phone but could not conduct transactions. Other recent mobile enhancements include improved trading and research capabilities, comprehensive international market analysis and mobile check deposit for IRA and brokerage customers.

Participants now using FutureAdvisor, a free planning tool, to track $1 billion   

Less than 60 days since its initial launch, FutureAdvisor, a company started by West Coast techies that provides free web-based retirement income planning tools, says that it is of over $1 billion in assets and has identified more than $37 million in fee-saving opportunities for users.

FutureAdvisor’s co-founder, Bo Lu, also said the company has released a private beta version of a new product called “FutureAdvisor Premium” that provides automatic rebalancing and portfolio cleanup.

Since its launch last March 20, FutureAdvisor has experienced an increase of 25% growth week over week in people adopting the service, with many new users coming from Microsoft, Google, Intuit, and Oracle. FutureAdvisor supports more than 100 of the largest 401(k) plans in the country.   

According to a release, the company’s “new [rebalancing] service eliminates an often complex and frustrating process and moves the industry one step closer to providing users the convenience of a portfolio that manages itself.”  

Bond funds grew again in April: Morningstar

Posted on May 15, 2012 by -

PIMCO Total Return led all funds in April 2012 with inflows of $2.7 billion, the fund’s strongest month since August 2010, as taxable bonds continued to be the biggest destination for investors last month, Morningstar Inc. reported. 

Despite low yields, taxable bond funds collected a net $16.9 billion in April, bringing the flow total to $96.9 billion so far in 2012—a pace that could match or break 2009’s record inflows of $282.5 billion.

Domestic stock funds meanwhile saw net outflows of $9.3 billion and money market funds saw net outflows of $17.3 billion. The net inflow for April for all long-term mutual funds was $20.8 billion, down from $29.3 billion in March.

Morningstar’s report on monthly mutual fund flows also showed:

  • On a relative basis, inflows for bond funds in recent years surpass the assets that flowed to equity funds during the height of their popularity in the late 1990s. Taxable-bond funds have absorbed $728.2 billion since January 2009, and total taxable-bond fund assets have nearly doubled.
  • While U.S.-stock funds shed $214.9 billion overall during the last three years, the actively managed subset fared even worse, losing nearly 15% of their beginning assets. About 22% of all outflows from actively managed U.S. stock funds, or about $58.9 billion, over the past three years has come American Funds Growth Fund of America alone.

Spotlight on JPMorgan   

Bucking the broad tide, J.P. Morgan’s asset base has grown by 2.5 times in the past three years to $158.2 billion, thanks in part to the firm’s actively managed equity offerings. Its Large Cap Growth, Equity Income, and US Equity funds have taken in a combined $6.6 billion over the trailing 12 months.

“Naturally, strong performance explains much of this popularity,” wrote Morningstar editorial director Kevin McDevitt. “The three equity funds mentioned above all have sterling long-term records. Overall, J.P. Morgan’s funds beat their average category peers over every trailing period, albeit by fairly small margins.

“The firm has also made a strong marketing push, doing its best to stay in front of advisors through frequent email updates on funds and manager conference calls. Plus, it hasn’t been shy about rolling out new funds with 15 offerings introduced since March 2010.

“Several of these newbies fall into trendy categories such as currency, real estate, bank loan, world bond, and long/short equity. It isn’t clear yet whether the firm has an advantage in these areas. Seven of the 11 funds lag their typical category rivals over the past 12 months.”


Top five SPIA sellers, 2003-2011

Posted on May 15, 2012 by -

Like sales of variable annuities, sales of single premium immediate annuities have become more concentrated among a handful of companies. Back in 2003, the top five sellers accounted for only a third of SPIA sales; in 2011, the top five accounted for more than half, according to the Fixed Annuity Premium Study by Beacon Research. (See chart below.)

In addition, none of the insurance companies who comprised the top five SPIA sellers in 2003 were still represented among the top five in 2011. Over that time, SPIA sales among the top five more than doubled, to $4.39 billion from $1.6 billion, while total SPIA sales rose to $8.48 billion from $4.75 billion.

The leader in SPIA sales for the past six years, New York Life, wasn’t even among the top five nine years ago. Genworth Financial, once a leading SPIA manufacturer, is no longer among the top 5. American General slipped out of the top five after 2008, the year in which its parent, AIG, had its catastrophic meltdown. 

 Top 5 Annuity Manufacturers

Is This Any Way to Sell SPIAs? You Bet./

Posted on May 9, 2012 by -

Here are a few examples of the transactions consummated at Income Solutions, the online, institutionally priced, multi-carrier, auction-style single premium income annuity sales platform established by Minneapolis businesswoman Kelli Hueler:

  • A 66-year-old woman working with an advisor logs on and, over a period of three years, requests 22 competitive SPIA quotes and pays $10,000 each from her IRA for a dozen single-life annuity contracts, four at a time. She uses several different insurers and buys mainly inflation-indexed contracts. Monthly income: $575.
  • An 85-year-old man assisted by a facilitator working for his 401(k) plan provider gets four SPIA quotes and rolls over $250,000 into a joint-and-survivor, 100% continuation life annuity with a term certain. Four months later, he logs on by himself and rolls over $175,000 for a single life, term-certain contract from a different carrier. Total monthly income: $2,997. 
  • A 61-year-old man logs on, gets nine quotes and, four months after receiving the first quote, uses $70,000 in qualified money to buy a five-year term certain annuity contract—as a bridge to delayed Social Security claiming or to cover the last five years of his mortgage. Monthly income: $1,200.

An “out-of-plan” income solution  

If these real-life sales scenarios defy your image of a typical brokered SPIA purchase, that’s no accident. Ten years ago, Hueler, a successful purveyor of stable value fund data to the pension industry, set out to alter the way SPIAs are distributed and sold.    

The SPIA distribution system, she believed, wasn’t ready for the oncoming tide of Boomers (of which Hueler, 52, is one). To her,  SPIA prices, aside from being high, were opaque to the consumer, who never knew what the agent or broker charged or which carriers offered the best prices at any given moment. She also saw that many 401(k) plan sponsors had no apparent conflict-free mechanism for furnishing retirees with a strategy for converting their DC savings to pension-like income. 

So Hueler created Income Solutions (www.incomesolutions.com), which leverages the Internet to bring SPIA shoppers and manufacturers together in a no-pressure, commission-free setting where plan participants—the term “prospect” is obsolete here—can solicit simultaneous bids from between six and twelve insurance companies. A modest number of fee-only advisors also use the platform on behalf of individual clients.

Today, for example, a Vanguard 401(k) participant or shareholder (Vanguard, which unlike rival Fidelity Investments doesn’t have its own online SPIA sales platform, has formally partnered with Hueler since 2010) can go through the Vanguard website, (either alone or more often with handholding from a salaried Vanguard phone rep or a salaried Hueler phone rep in Eden Prairie, Minn.), and request instant, real-time SPIA quotes, or read about SPIAs, or watch a video about SPIAs.

Currently, shoppers can get quotes from Allstate, Integrity Life, MetLife, Mutual of Omaha, Pacific Life, Principal Life and Prudential. New York Life, the largest SPIA seller by far, and MassMutual don’t participate because Hueler’s demand for wholesale pricing would conflict with the prices their career agents and others (New York Life markets SPIAs through AARP) charge.  

To be sure, Income Solutions isn’t unique. For years, SPIAs have been sold direct at the above-mentioned Fidelity direct-sales platform and at websites like immediateannuities.com. But, at a time when plan sponsors are beginning to recognize a fiduciary responsibility to provide income strategies for near-retirees, Hueler has built a liability-free, out-of-plan, rollover-driven, transparently priced (there’s a flat 2% sales cost) solution for them, as well as for fee-only advisors who want to include SPIAs in their clients’ retirement income plans.

A look at SPIAs sales behavior

At the Pension Research Council’s annual conference at Penn’s Wharton School last week, Hueler and co-author Anna Rappaport, a former president of the Society of Actuaries, presented an academic paper that opened a window onto the characteristics of SPIA sales at Income Solutions.  The data they revealed is illuminating, and may even be unprecedented.  

The paper makes clear that people can and will shop for annuities online the same way they’ve grown accustomed to shopping for motor vehicles at cars.com or autotrader.com—by weighing the options, comparing prices and deliberating at their own pace before deciding to buy or not.  

Takeaways from Hueler and Rappaport’s paper, which was entitled, “The Role of Guidance in the Annuity Decision-Making Process,” include:

  • Structural and active advice are critical. In the retirement plan setting, two kinds of advice are involved in determining what plan participants decide to do with their qualified assets when they retire—structural advice and active advice. Structural advice is embedded advice; i.e., guidance that’s implicit in plan design and in a plan sponsor’s decisions, for instance, to mention annuities as a distribution option or not, to provide a mechanism like Income Solutions, to promote the mechanism, to make a help-line available, or to furnish competitive annuity quotes. Active advice is typically provided by a live person, and the sales outcomes may depend on whether that person works for the plan provider, or how that person frames the annuity purchase, or whether that person is salaried or commissioned. The paper identifies forms of structural and active advice that can encourage or discourage the consideration or purchase of a SPIA.      
  • Annuities are often purchased after retirement. “The decision to purchase an annuity typically occurs after an individual has retired… 70% of the purchases [at Income Solutions] were made by individuals who described themselves as retired,” the paper said. Instead of happening at precisely at the time of retirement, “the purchase process often takes place over a longer time period, sometimes in steps… Retirement is a time of transition and adjustment, so it makes sense to annuitize later for a number of reasons.”
  • People like to diversify their risk among several carriers. The paper shows that many people prefer to spread their interest rate risk by buying multiple SPIAs at different times and to spread their carrier risk by buying contracts from multiple providers. 
  • Men and women exhibit different SPIA behavior. Two-thirds of the purchasers at Income Solutions are men. Purchases range in age from 50 to 85, with 56% in their 60s, 32% are age 70 or older, and 8% are 80 years old or older. Seven percent of purchasers had net worth of less than $100,000, while 27% indicated net worth of $500,000 to $1 million, 21% had net worth of $1 million to $2 million, and 14% were worth over $2 million, excluding home equity. About two-thirds of the purchases were made with qualified funds; 28% came from non-qualified funds and 4% from 1035 exchanges.
  •  Contracts vary in structure. Half of the annuity purchasers bought single life annuities, 37% bought joint life annuities and 13% bought period certain annuities. Increases to protect against inflation were included in 14% of the purchases. Eighty-one percent of the joint life annuities were purchased by men; by contrast, only 50% of the single life annuities were purchased by men.
  • Contracts vary in size. “While the average amount of income purchased is over $850 per month… 11% [of buyers] purchased under $200 a month, 18% purchased between $200 and $399 per month and 22% between $400 and $599. Fifty percent purchased less than $600 a month, 22% purchased between $600 and $999, and 28% over $1000 a month… The average purchase amount was $156,000 for males and $110,000 for females.”
  • Live phone reps are essential. “The vast majority of purchases occur after a conversation. Seventy-two percent of the purchases… were through facilitators and advisors, where multiple conversations typically take place. The remaining 28% purchased independently online, but some of them also ask questions after contacting [the 401(k) provider’s] help center. Very few people will make a purchase without a conversation… Many people get multiple bids over time. While purchases can occur immediately, timing varies, and in a few cases it takes more than two years from first contact to purchase.”
  • To get the most value, SPIA purchasers need to see a range of quotes. Hueler’s discovery that SPIA manufacturers change their prices frequently, and that the SPIA price leader can change from month to month, motivated her to start Income Solutions in the first place. A chart in the paper (reprinted below) shows that the range of SPIA prices changes monthly, and that over a multi-year period, any given company sometimes offered the best price, sometimes the worst price, and other times fell between the best and worst.

It’s difficult to say how big an impact Income Solutions is making, because Hueler doesn’t release sales figures other than to say that thousands of plans administered by Vanguard, Hewitt and Wells Fargo have access to her platform. She also has ties to the Plan Sponsor Council of America (formerly the Profit-Sharing Council of America) and the National Assocation of Personal Financial Advisors (NAPFA).

From all accounts, however, she’s shaken up the income annuity industry. Little wonder, since she insists that carriers compete on price rather than brand and because she makes a point of eliminating the commissioned agents and brokers who still account for most SPIA sales.

But with so much money in 401(k) plans and IRAs, with many plan sponsors searching for an “out-of-plan” income distribution strategy other than systematic withdrawals to offer older participants, with growing interest among fee-based advisors in income annuities, and with the growth of federal government encouragement of low-cost lifetime income solutions, the volume on Hueler’s platform seems likely to grow.  

© 2012 RIJ Publishing LLC. All rights reserved.

New CDA offered by Great-West Life for Bank-Affiliated B/Ds

Posted on May 9, 2012 by -

Eager to capture a piece of the vast non-annuity market for asset protection, Great-West Life & Annuity Insurance Co. has created a contingent deferred annuity or CDA—sometimes known as a stand-alone living benefit or unbundled GLWB—for the bank-affiliated broker/dealer market, the company has announced.

The product, SecureFoundation Smart Future, allows advisors to attach a lifetime income guarantee to a balanced portfolio of exchange-traded index funds from Vanguard. The living benefit doesn’t offer a deferral bonus, but it does offer upside in the form of an annual step-up the benefit base (if the account value hits a new high water mark on the contract anniversary) and in a feature that potentially allows the payout rate to rise when the 10-year Treasury rate rises.

The CDA’s minimum payout bands themselves are conservative: just 3% for single contract owners ages 59½ to 64, 4% for those ages 65 to 69, 4.5% for those ages 70 to 74, and 5% for those ages 75 and older. But these rates can rise to ceilings of 5.6%, 8%, 8.3% and 8.5%, respectively, if the 10-year Treasury rate goes up sufficiently, according to the prospectus.

For instance, if a hypothetical 72-year-old contract owner had a benefit base of $80,000 and the 10-year Treasury rate were 5% on his contract anniversary, his payout would be 5% times a stipulated “age adjustment factor” of 1.1, or 5.5%. His annual payout would be $4,400 (.055 x $80,000).

The cost of the Smart Future CDA, referred to as a certificate rather than a policy or rider, is currently 1% a year and is guaranteed to be no lower than 0.70% and no higher than 1.5% while in force. There’s a $10,000 investment minimum.

The only investment option is the Maxim SecureFoundation Balanced ETF Portfolio, a 60% equity/40% fixed income fund-of-funds consisting of the Vanguard S&P 500 ETF, S&P Mid-Cap 400 ETF, Russell 2000 ETF, MSCI EAFE ETF, MSCI Emerging Markets ETF and Total Bond Market ETF. There’s a 5% upfront load on the portfolio’s A shares, which have an annual expense ratio of 64 basis points. The portfolio’s S shares have an annual expense ratio of 74 basis points.

CDA product filings are likely to become more numerous now that the National Association of Insurance Commissioners has clarified that these hybrid investment/insurance products should be regulated as variable annuities rather than as securities alone.

“The regulatory environment is getting supportive of CDAs,” Chris Bergeon, vice president of Financial Institutions Markets at Great-West Life & Annuity. “The NAIC provided guidance in February, and the commissioners have since concluded that [CDAs] should be viewed as variable annuities. The Smart Future solution was designed with input from our bank-affiliated broker-dealer partners, and we piloted it with one of them.”

Great-West Life is rated Superior (A+) by A.M. Best, Excellent (Aa3) by Moody’s, Very Strong (AA) by Fitch and Very Strong (AA) by Standard & Poor’s.

© 2012 RIJ Publishing LLC. All rights reserved.

Dept. of Ruffled Feathers

Posted on May 9, 2012 by -

In 1979, when Kelli Hueler was 20 years old, she spent part of her junior year of college backpacking in Asia. At one point, she found herself in the Khao-I-Deng refugee camp on Thailand’s Cambodian border. A self-described naïve Midwestern kid, she began volunteering alongside Catholic Relief Service workers in a reception tent for women and children who had fled Pol Pot’s killing fields.

“As an American, I had no concept of war or famine,” she recalled this week. “I remember one day I heard a loud rumbling and said to one of the nuns, ‘I think we’re in for some rain,’ or something like that. She said, ‘Honey, that’s not thunder.’ That’s how naïve I was.”

Today, Hueler, the president of Hueler Companies in Eden Prairie, Minn., monitors a different kind of border with a different kind of refugee. Her Income Solutions single premium immediate annuity (SPIA) platform serves as a kind of waystation for people crossing from 401(k) plans into the new frontier of retirement. (See today’s lead story in RIJ). Her humanitarian mission: to help Boomers get the best prices on income annuities.

Her attempts to fulfill that mission since 2003 has won her many allies in the retirement business but also some keen adversaries. Her goal has been to create an alternative annuity sales channel that eliminates many of the inefficiencies and informational asymmetries that characterize traditional annuity sales channels. She has tried to use the Internet to change the annuity industry in much the same way as sites like cars.com and autotrader.com have changed the auto business. But those in traditional channels—for whom inefficiencies and asymmetries are revenue-generating—don’t necessarily welcome the competition.  

In a phone interview this week, I suggested that she has “ruffled some feathers” in the process. A minister’s daughter, surgeon’s wife and mother of three sons, she was both surprised and not surprised to hear that. 

“We would prefer to collaborate with everyone,” she said carefully, referring to Income Solutions. “But we bring a message that challenges the status quo, and that doesn’t put us in a popular position. If we’ve had strong detractors, it’s because we’re taking power away from the traditional delivery channels.”

For example, when Hueler first went to the major annuity manufacturers and asked them to provide products to her platform at “institutional prices”—prices that did not have commissions already embedded in them—she didn’t always get a warm reception. In fact, had she not already established street-cred as a vendor of stable-value fund data to the pension industry, she probably wouldn’t have gotten an audience with insurance executives at all.

It undoubtedly surprises her prospects when they discover that they must meet her terms. When Hueler asks retirement plan sponsors to make Income Solutions available as a rollover option to their participants, she expects them to do much more than just provide shelf space. And, if anything, her expectations have risen over time. When she first courted plan sponsors, she accepted all comers, she told RIJ. She was grateful for any bit of buy-in she could get. But she discovered that some plan sponsors would set up a link to the platform without investing in the tools needed to support it. When she found that weak programs bled the credibility of her service, she decided to choose partners more carefully.  

“We have pulled back from just implementing with whomever wants to link to us,” she told RIJ. “We’re limiting it to those who make the annuity a viable option for participants. When we first started, we were hopeful to have any good plan administrator offer our program. But now we’re having a dialog that’s very different. We’ve learned that this requires program partners who are engaged and who are going to allow for an objective presentation of annuities. If they have any kind of bias against the product, it stops everything.”

She takes the same attitude—call it chutzpah, Norwegian-style—with the advisor community. For the past year or two, Hueler has been investing in an advisor-facing portal on Income Solutions where fee-based or fee-only advisors can learn about income annuities and buy them for clients without encountering a commissioned transaction. Rather than expend resources (there are only a handful of phone reps at Hueler’s headquarters) on any advisor who finds her site on the web, however, she prefers to seek out advisors who share her sense of mission.      

“We’re not handpicking advisors, but there’s no doubt that we’re looking for advisor organizations that are naturally inclined to think the way we do. It’s a bit of a shift from our original vision,” Hueler said.

If Hueler is making people uncomfortable, however, it’s not her exclusivity—which is really just a way of protecting the integrity of her business—that irritates. The more obvious reason is that she poses a new kind of competition that threatens to undermine the traditional structure of the annuity business. In some circles, that makes her as welcome as Jeff Bezos at a meeting of the Downtown Merchant’s Association.

And she has felt the backlash, in subtle ways. At the Income Solutions website, for instance, there’s language that clearly announces the fact that Income Solutions charges a 2% fee. Hueler put the language there in the interests of transparency and differentiation. Competitors, she said, have used that disclosure to make potential clients believe that she charges a fee but they don’t. (Commissions and fees, of course, are embedded in the payout amount of retail SPIAs and not quoted separately.) 

It’s telling that, even though her fee disclosure gives ammunition to her rivals, Hueler let the language stand. She wouldn’t be maneuvered into relinquishing her commitment to transparency. “If you don’t have a value proposition, you won’t be successful, and our value proposition is clearly defined,” she said. “Our desire isn’t to ruffle feathers. It’s to do what’s in the interest of the public. And that makes some people uncomfortable.”

© 2012 RIJ Publishing LLC. All rights reserved.

Is This Any Way to Sell SPIAs? You Bet.

Posted on May 9, 2012 by -

Here are a few examples of the transactions consummated at Income Solutions, the online, institutionally priced, multi-carrier, auction-style single premium income annuity sales platform established by Minneapolis businesswoman Kelli Hueler:

  • A 66-year-old woman working with an advisor logs on and, over a period of three years, requests 22 competitive SPIA quotes and pays $10,000 each from her IRA for a dozen single-life annuity contracts, four at a time. She uses several different insurers and buys mainly inflation-indexed contracts. Monthly income: $575.
  • An 85-year-old man assisted by a facilitator working for his 401(k) plan provider gets four SPIA quotes and rolls over $250,000 into a joint-and-survivor, 100% continuation life annuity with a term certain. Four months later, he logs on by himself and rolls over $175,000 for a single life, term-certain contract from a different carrier. Total monthly income: $2,997. 
  • A 61-year-old man logs on, gets nine quotes and, four months after receiving the first quote, uses $70,000 in qualified money to buy a five-year term certain annuity contract—as a bridge to delayed Social Security claiming or to cover the last five years of his mortgage. Monthly income: $1,200.

An “out-of-plan” income solution  

If these real-life sales scenarios defy your image of a typical brokered SPIA purchase, that’s no accident. Ten years ago, Hueler, a successful purveyor of stable value fund data to the pension industry, set out to alter the way SPIAs are distributed and sold.    

The SPIA distribution system, she believed, wasn’t ready for the oncoming tide of Boomers (of which Hueler, 52, is one). To her,  SPIA prices, aside from being high, were opaque to the consumer, who never knew what the agent or broker charged or which carriers offered the best prices at any given moment. She also saw that many 401(k) plan sponsors had no apparent conflict-free mechanism for furnishing retirees with a strategy for converting their DC savings to pension-like income. 

So Hueler created Income Solutions (www.incomesolutions.com), which leverages the Internet to bring SPIA shoppers and manufacturers together in a no-pressure, commission-free setting where plan participants—the term “prospect” is obsolete here—can solicit simultaneous bids from between six and twelve insurance companies. A modest number of fee-only advisors also use the platform on behalf of individual clients.

Today, for example, a Vanguard 401(k) participant or shareholder (Vanguard, which unlike rival Fidelity Investments doesn’t have its own online SPIA sales platform, has formally partnered with Hueler since 2010) can go through the Vanguard website, (either alone or more often with handholding from a salaried Vanguard phone rep or a salaried Hueler phone rep in Eden Prairie, Minn.), and request instant, real-time SPIA quotes, or read about SPIAs, or watch a video about SPIAs.

Currently, shoppers can get quotes from Allstate, Integrity Life, MetLife, Mutual of Omaha, Pacific Life, Principal Life and Prudential. New York Life, the largest SPIA seller by far, and MassMutual don’t participate because Hueler’s demand for wholesale pricing would conflict with the prices their career agents and others (New York Life markets SPIAs through AARP) charge.  

To be sure, Income Solutions isn’t unique. For years, SPIAs have been sold direct at the above-mentioned Fidelity direct-sales platform and at websites like immediateannuities.com. But, at a time when plan sponsors are beginning to recognize a fiduciary responsibility to provide income strategies for near-retirees, Hueler has built a liability-free, out-of-plan, rollover-driven, transparently priced (there’s a flat 2% sales cost) solution for them, as well as for fee-only advisors who want to include SPIAs in their clients’ retirement income plans.

A look at SPIAs sales behavior

At the Pension Research Council’s annual conference at Penn’s Wharton School last week, Hueler and co-author Anna Rappaport, a former president of the Society of Actuaries, presented an academic paper that opened a window onto the characteristics of SPIA sales at Income Solutions.  The data they revealed is illuminating, and may even be unprecedented.  

The paper makes clear that people can and will shop for annuities online the same way they’ve grown accustomed to shopping for motor vehicles at cars.com or autotrader.com—by weighing the options, comparing prices and deliberating at their own pace before deciding to buy or not.  

Takeaways from Hueler and Rappaport’s paper, which was entitled, “The Role of Guidance in the Annuity Decision-Making Process,” include:

  • Structural and active advice are critical. In the retirement plan setting, two kinds of advice are involved in determining what plan participants decide to do with their qualified assets when they retire—structural advice and active advice. Structural advice is embedded advice; i.e., guidance that’s implicit in plan design and in a plan sponsor’s decisions, for instance, to mention annuities as a distribution option or not, to provide a mechanism like Income Solutions, to promote the mechanism, to make a help-line available, or to furnish competitive annuity quotes. Active advice is typically provided by a live person, and the sales outcomes may depend on whether that person works for the plan provider, or how that person frames the annuity purchase, or whether that person is salaried or commissioned. The paper identifies forms of structural and active advice that can encourage or discourage the consideration or purchase of a SPIA.      
  • Annuities are often purchased after retirement. “The decision to purchase an annuity typically occurs after an individual has retired… 70% of the purchases [at Income Solutions] were made by individuals who described themselves as retired,” the paper said. Instead of happening at precisely at the time of retirement, “the purchase process often takes place over a longer time period, sometimes in steps… Retirement is a time of transition and adjustment, so it makes sense to annuitize later for a number of reasons.”
  • People like to diversify their risk among several carriers. The paper shows that many people prefer to spread their interest rate risk by buying multiple SPIAs at different times and to spread their carrier risk by buying contracts from multiple providers. 
  • Men and women exhibit different SPIA behavior. Two-thirds of the purchasers at Income Solutions are men. Purchases range in age from 50 to 85, with 56% in their 60s, 32% are age 70 or older, and 8% are 80 years old or older. Seven percent of purchasers had net worth of less than $100,000, while 27% indicated net worth of $500,000 to $1 million, 21% had net worth of $1 million to $2 million, and 14% were worth over $2 million, excluding home equity. About two-thirds of the purchases were made with qualified funds; 28% came from non-qualified funds and 4% from 1035 exchanges.
  •  Contracts vary in structure. Half of the annuity purchasers bought single life annuities, 37% bought joint life annuities and 13% bought period certain annuities. Increases to protect against inflation were included in 14% of the purchases. Eighty-one percent of the joint life annuities were purchased by men; by contrast, only 50% of the single life annuities were purchased by men.
  • Contracts vary in size. “While the average amount of income purchased is over $850 per month… 11% [of buyers] purchased under $200 a month, 18% purchased between $200 and $399 per month and 22% between $400 and $599. Fifty percent purchased less than $600 a month, 22% purchased between $600 and $999, and 28% over $1000 a month… The average purchase amount was $156,000 for males and $110,000 for females.”
  • Live phone reps are essential. “The vast majority of purchases occur after a conversation. Seventy-two percent of the purchases… were through facilitators and advisors, where multiple conversations typically take place. The remaining 28% purchased independently online, but some of them also ask questions after contacting [the 401(k) provider’s] help center. Very few people will make a purchase without a conversation… Many people get multiple bids over time. While purchases can occur immediately, timing varies, and in a few cases it takes more than two years from first contact to purchase.”
  • To get the most value, SPIA purchasers need to see a range of quotes. Hueler’s discovery that SPIA manufacturers change their prices frequently, and that the SPIA price leader can change from month to month, motivated her to start Income Solutions in the first place. A chart in the paper (reprinted below) shows that the range of SPIA prices changes monthly, and that over a multi-year period, any given company sometimes offered the best price, sometimes the worst price, and other times fell between the best and worst.

It’s difficult to say how big an impact Income Solutions is making, because Hueler doesn’t release sales figures other than to say that thousands of plans administered by Vanguard, Hewitt and Wells Fargo have access to her platform. She also has ties to the Plan Sponsor Council of America (formerly the Profit-Sharing Council of America) and the National Assocation of Personal Financial Advisors (NAPFA).

From all accounts, however, she’s shaken up the income annuity industry. Little wonder, since she insists that carriers compete on price rather than brand and because she makes a point of eliminating the commissioned agents and brokers who still account for most SPIA sales.

But with so much money in 401(k) plans and IRAs, with many plan sponsors searching for an “out-of-plan” income distribution strategy other than systematic withdrawals to offer older participants, with growing interest among fee-based advisors in income annuities, and with the growth of federal government encouragement of low-cost lifetime income solutions, the volume on Hueler’s platform seems likely to grow.  

© 2012 RIJ Publishing LLC. All rights reserved.

Working women save two-thirds as much as men: ING

Posted on May 8, 2012 by -

Women on average are significantly less prepared for retirement than men, and encounter “distinctly different realities” when preparing for retirement, according to a study commissioned by the ING Retirement Research Institute. 

Among those with savings in or outside an employer-sponsored retirement plan, men have saved $149,000, on average, compared to $108,000 in total average savings for women.  For women living with at least on child under age 18 at home, the retirement savings figure averaged $88,000. 

Women plan participants tend to contribute less than their male counterparts, the study showed. More women (42%) than men (34%) contributed just one to five percent of their salary into their plans. Fewer women (25%) than men (33%) have a formal investment plan to reach their retirement goals. More than half (56%) of women don’t feel financially prepared for retirement, compared to only 42% of men. 

Because they spend more time out of the workforce, mothers face additional hurdles when it comes to building their retirement security, according to the study. Serving as a housewife or full-time parent reduces their earning and savings potential and also lowers Social Security benefits. ING U.S.’s study found that:

  • 60% of mothers do not feel prepared for retirement and 46% don’t know how to achieve their retirement goals.
  • 53% of mothers have less than $25,000 saved in their employer-sponsored retirement plan.
  • 65% of mothers are receiving their employer’s full company match compared to 76% of fathers.

The percentage of women 18 years or older in the U.S. who are single has more than doubled in the last fifty years, to 25% from 12%, according to the Pew Research Center.  Among single women, ING’s research found that:

  • 69% said they relied on their own research or family and friends for financial guidance, compared with 63% of married women.
  • 21% of single women were worked with a financial professional, compared with 31% of married, divorced or widowed women. 
  • 28%) have calculated how much they’ll need to retire, compared to half (50%) of men.
  • 26% of single women spent some or a lot of time thinking about retirement, compared to 44% of widowed/divorced women.

The study also found that women across the generations have differences in their approach to retirement and planning.

  • Gen Y (age 25-34) women are most likely to have barriers to saving (86%) compared to women 35 or older (74%) and more than half of Gen Y women (56%) have outstanding student loans.
  • Only a small number (6%) of Gen Y women put most of their extra money to retirement savings, whereas close to half (47%) put it towards entertainment or vacations.
  • More than half (54%) of women ages 50-64 have not calculated how much money they will need to continue their current lifestyle after retirement.
  • Only one-third (33%) of women ages 50-64 have a formal investment plan to reach their retirement goals.

Findings are from an online survey conducted Oct. 5-13, 2011 by ORC International.  Respondents were 4,050 adults between ages 25 and 69 who are employed full-time with an annual household income of $40,000 or greater. Data was weighted to make the results representative of the U.S. population.

© 2012 RIJ Publishing LLC. All rights reserved.

Nationwide expands variable life and annuity investment lineup

Posted on May 8, 2012 by -

Nationwide Financial Services, Inc. today announced several enhancements to the investment lineup for its variable annuity and variable life insurance products, including 15 new fund options.  The changes were effective May 1, 2012.

Nationwide will begin offering the following options from Dimensional Fund Advisors for its variable life products:

  • VA Global Bond Portfolio
  • VA US Large Value Portfolio
  • VA US Targeted Value Portfolio
  • VA International Value Portfolio
  • VA International Small Portfolio
  • VA Short-Term Fixed Portfolio

For the first time at Nationwide, advisors will have access to actively managed target volatility funds for both variable life insurance and annuity products. These funds include:

  • Goldman Sachs VIT Global Markets Navigator Fund
  • AllianceBernstein VPS Dynamic Asset Allocation Portfolio

Other fund additions to the life and annuity line-up will enhance investment options in high yield, asset allocation and mid-cap asset classes:

  • Invesco VI Mid Cap Core Equity Fund
  • MFS VIT New Discovery Series
  • PIMCO VIT All Asset Portfolio
  • Ivy Funds VIP High Income
  • Ivy Funds VIP Mid Cap Growth

Nationwide is also offering two new funds to enhance its high yield bond asset class options for the America’s marketFLEX Series product:
Direxion Insurance Trust Dynamic VP High Yield Bond Fund
Fidelity VIP High Income Portfolio

As of May 1, 2012, Nationwide’s investment lineup includes:

  • 92 variable annuity investment options.
  • 96 variable life investment options.
  • Coverage across 34 Morningstar categories.
  • Access to over 33 money managers.
  • 23 asset allocation investment options.
  • More than 59 variable annuity options with a five-year track record and 49 options with a 10-year track record.
  • More than 68 variable life options with a five-year track record and 58 options with a 10-year track record.

Soft yen cited as cause of first-quarter losses for Prudential

Posted on May 8, 2012 by -

A weakening of the Japanese yen in relation to the U.S. dollar and certain other currencies was cited as the reason for the net loss of $988 million ($2.09 per common share) of financial services businesses attributable to Prudential Financial, Inc., the company reported.

The company took a pre-tax charge of approximately $1.5 billion from net changes in value relating to foreign currency exchange rates and changes in market value of derivatives. The currency-driven value changes were largely offset by corresponding adjustments to accumulated other comprehensive income which are not reflected in net income or loss.

After-tax adjusted operating income for Prudential’s Financial Services Businesses was $741 million, or $1.56 per Common share, compared to $1.62 per Common share for year-ago quarter. In other items from Prudential’s quarterly report:

  • Individual annuities: Account values reach $124.1 billion at March 31, up 9% from a year earlier; gross sales for the quarter of $5.0 billion; net sales $3.2 billion.
  • Retirement accounts: Values reach $239.8 billion at March 31, up 12% from a year earlier; total retirement gross deposits and sales of $9.0 billion and net additions of $404 million for the quarter.
  • Individual Life annualized new business premiums of $79 million, up 22% from a year ago.
  • Assets under management: $636.8 billion at March 31, up 12% from a year earlier; net institutional additions for the quarter, excluding money market activity, $5.4 billion.
  • Group insurance: annualized new business premiums of $313 million, compared to $500 million a year ago.
  • International insurance: constant dollar basis annualized new business premiums of $819 million, up 24% from a year ago.

© 2012 RIJ Publishing LLC. All rights reserved.

Allstate launches indexed annuities

Posted on May 8, 2012 by -

Allstate, which serves 16 million households in the U.S. and Canada, launched the IncomeProtector and GrowthProtector fixed indexed annuities this week. Currently available in 40 states, the products are expected to be available in 49 states by year-end 2012.

The Allstate Protector annuities offer a minimum guaranteed interest rate combined with an interest rate linked to a market index, such as the Standard & Poor’s 500. Allstate offers two Protector annuities:

  • Allstate IncomeProtector is a deferred fixed indexed annuity whose guaranteed living benefit features a 7% annual deferral bonus that can produce an income base double the purchase premium if income is delayed for 10 years.
  • Allstate GrowthProtector is a flexible premium fixed indexed annuity offering a guaranteed rate of return.  

Both Allstate Protector annuities have a purchase payment bonus that remains part of the contract value or income base while the contract is in force. The bonus is fully vested after 10 years.

© 2012 RIJ Publishing LLC. All rights reserved.

Pacific Life licenses Moshe Milevsky’s “RSQ” income planning tool

Posted on May 8, 2012 by -

Pacific Life has licensed an online retirement income planning tool for advisors—which it has privately labeled Pacific Life Nautilus—from the Toronto-based QwEMA Group, which is led by the noted retirement expert Moshe Milevsky.

The tool, which ManuLife, John Hancock and other insurers have licensed in the past, generates a “Retirement Sustainability Quotient” based on a client’s age, current retirement savings and desired retirement income, and helps the advisor create an income plan using an optimized allocation to three product groups: investments, to protect against inflation risk; variable annuities with living benefits, to cope with sequence risk; and guaranteed lifetime income, to protect against longevity risk.

Advisors can use the tool to “financial advisors to engage clients in a conversation about how to build sustainable lifetime retirement income,” the company said in a release. “The tool helps differentiate the advisor in the art and science of creating retirement income.”

According to Pacific Life’s release: “The higher the RSQ, the more likely it is that the client’s current portfolio can generate the desired level of retirement income stream over his or her lifetime. The tool then offers up to three possible product allocation strategies with higher RSQs. These higher RSQ strategies illustrate how the client might increase his or her likelihood of creating a more sustainable lifetime retirement income.”

Pacific Life is supporting Nautilus with a new suite of sales, education, and promotional resources that focus on the product allocation concept. They include an interactive website and tools, as well as a comprehensive set of printed materials.

© 2012 RIJ Publishing LLC. All rights reserved.

The Truth about Taxes: Almost Everyone Pays Them

Posted on May 8, 2012 by -

Michael Greenstone, Director, and Adam Looney, Policy Director, The Hamilton Project

Today’s employment report showed continued growth in the labor market, although at a slower pace than over the previous four months. Furthermore, the unemployment rate ticked down from 8.3 percent to 8.2 percent in March. The economy has now produced positive jobs growth for the last eighteen months. Employer payrolls increased by 120,000 jobs in March, with manufacturing and health care posting large gains.

In past months, The Hamilton Project has examined employment trends over the last several years, as the Great Recession has taken its toll on many Americans across various segments of the population. This month, in honor of tax day, we explore how the current labor market has impacted one area affecting all Americans: taxes and, more specifically, who pays them.  We also continue to explore the nation’s “jobs gap.”

The positive signs of economic growth over the past several months are good news for policymakers and the American people. Inside the DC Beltway, however, there has been a renewed focus on the nation’s burgeoning deficit, and renewed calls to reform the tax system in ways that create more efficiency and, potentially, additional revenue. Congressional leaders are at a partisan standstill, with many misconceptions around the current tax system complicating the debate.

Who Pays Taxes?

A popular myth swirling around Washington, DC, and throughout the media these days is that many Americans do not pay taxes, and are therefore free-riding off of our society without contributing themselves. This has even been referred to by some as a “new orthodoxy.” The origin of this misconception is the observation that only about 54 percent of American households paid federal income taxes during recession-affected 2011. But that statistic is misleading because it provides an incomplete picture of the overall tax burden on American families, and because it incorporates individuals who naturally shouldn’t be paying taxes because of their age or economic circumstances due to the Recession. A closer look reveals that nearly all Americans do, in fact, pay taxes.

To help illustrate this point, let’s start with some basic fiscal background. Over the last two decades, tax credits for low-income working families with children, like the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), have indeed decreased the number of American households paying federal income taxes. These credits reduce or eliminate income tax liabilities and sometimes result in a net income tax refund for low-income families.

But these credits are also an important component of the progressive tax system that help offset the burden of other taxes and raise poor working families out of poverty. Credits like the EITC and CTC have helped to reduce poverty, provide economic security, and offset declining labor-market opportunities for low-income workers. The EITC alone is responsible for raising 6.6 million children out of poverty. Perhaps most importantly, these credits expand the number of people contributing to the economy by causing many additional Americans to participate in the labor force and causing others to work more hours.

While this helps explain the declining number of low income families paying federal income tax, it does not address one key point: federal income taxes are only one component of the broader federal, state, and local tax system, and only one way in which Americans are able to contribute their fair share through taxes. Indeed, while some families do not pay federal income taxes, these households do pay other forms of taxes. Those who focus exclusively on the federal income tax ignore one of the most significant federal tax burdens on workers—the payroll tax.  In fact, most Americans pay more in payroll taxes than in income taxes.

As shown in the figure below, after incorporating payroll taxes, the proportion of American households who paid federal taxes in 2007, a non-recession year, jumps to 78 percent.

Who pays taxes chart

But, when we take the data a step further, even this statistic is misleading because it counts older households, who are often retirees, and young individuals, even if they are still in school. In fact, many households with no tax liability are young or old, meaning that they are likely to be led by students who subsequently will pay taxes or retirees who paid taxes over their lifetimes. The figure below illustrates the relationship between age and the odds of paying payroll and income taxes. The graph makes clear that younger individuals—those in their late teens and early 20s—pay taxes at relatively low rates, but that is largely because they are in school and not working.  But as they get older and find jobs, the evidence suggests that they will pay taxes. Similarly, after age 60, when more and more Americans are retiring and leaving the labor force, the fraction paying taxes falls rapidly. These retirees have certainly contributed to America’s revenue stream over their lifetimes. To this point, as the U.S. population ages into the future and a greater proportion of Americans reach the retirement age, it is inevitable that a growing percentage of the overall population will pay no income or payroll taxes.

Share of people paying taxes

But during middle age, almost all workers face a tax burden. When looking at those in middle-age, 84 percent faced a net payroll and income tax bill in 2007. This general theme also holds true for low-income households: even households that receive the child-related EITC generally only receive it temporarily, usually when their children are young. On net, even these families face a positive tax bill over time (Dowd and Horowitz 2008).

Furthermore, rising unemployment during the Great Recession has meant that the proportion of American families paying no federal taxes is unusually large today. Unemployed workers without incomes naturally don’t face tax liabilities. But as they find jobs and rejoin the labor force, they will once again contribute to the federal system. Indeed, some of the trends we see today are less illustrative of an unfair tax advantage for the poor; rather, the trends indicate the existence of a group of unfortunate families who have found themselves affected by hard times. And young people today have been particularly hard hit: many are unemployed or weathering the storm in graduate schools, meaning that they are, thus, not paying taxes. When looking more specifically at middle-aged workers with jobs, 96 percent paid federal income or payroll taxes.

Other Forms of Taxes Also Count

Finally, incorporating the additional—and significant—other forms of taxation into our calculation leads to the conclusion that nearly 100 percent of Americans pay taxes in some way, shape or form. All consumers bear the burden of state and local property, sales, and income taxes, as well as excise taxes on items like gasoline, alcohol, or cigarettes. These other taxes tend to be regressive, imposing more of a burden on low-income families than on high-income families—the state and local tax burden is over twice as large as the federal tax burden for the bottom fifth of households (Citizens for Tax Justice 2011). When you fill up your car with gasoline, you can’t avoid paying the tax. The pump does not differentiate between the richest Americans and the poorest families.

The March Jobs Gap

As of March, our nation faces a “jobs gap” of 11.3 million jobs.  The chart below, which reflects our updated assumptions about labor force growth, shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions for job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until March 2020—or eight years—to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate for the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by May 2016—not for another four years.

Conclusion

Virtually all Americans will pay taxes during their lifetime. The uncertainty that came packaged with the Great Recession has allowed for the proliferation of many other economic misconceptions, especially in regard to taxes. Today’s economic context for tax reform is very complex. Most immediately, the economy is still in the midst of a slow recovery with an unemployment rate that remains too high.  Even with robust rates of job growth, it will take years to close the jobs gap. An important role of fiscal policy in the near term is to support recovery in the labor market.

And in the longer-run, the United States is contending with three economic problems: a daunting outlook for budget deficit that imperils our well-being, an increasingly competitive global economy for many American workers and industries, and rising income inequality. The tax code affects each of these problems, and a successful tax reform effort will need to address each of them—or, at a minimum, avoid making any of them worse.

As policymakers return their attention to the nation’s fiscal crisis, reforming the tax system has become a focus of debate. To help inform discussions, The Hamilton Project will release a set of economic facts about taxes that provides an economic context for tax reform, and basic economic criteria that should be used when evaluating tax reform options. These facts will be released during a public forum on May 3 in Washington, DC.  As part of the policy forum, former Council of Economic Advisers Chair Martin Feldstein and Lawrence H. Summers, former Assistant to the President for Economic Policy and former U.S. Treasury Secretary, will discuss the broad economic case for tax reform.  They will be followed by a panel of distinguished experts who will focus on principles for a successful tax reform effort.

© 2012 The Hamilton Project/Brookings Institute.