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Fidelity, USAA, Vanguard are “top of mind” for affluent investors

Posted on May 1, 2012 by Editor Test -

When affluent investors think about acquiring a new financial product or starting a new financial relationship, they think first about Fidelity, USAA and Vanguard, according to research on 50 companies tracked by Phoenix Marketing International. Other top-of-mind firms include American Funds, Charles Schwab, Franklin Templeton, T. Rowe Price, TD Ameritrade, and TIAA-CREF.

Not far behind are brands such as Genworth Financial, John Hancock, MassMutual, MetLife, Nationwide, Northwestern Mutual, New York Life, Prudential, The Hartford, and The Principal, said Phoenix in a recent release.

The Phoenix study polls about 2,000 affluent individual investors twice a year about their impression and consideration of numerous brands that provide diversified insurance and investment products.

A partial list of tracked firms includes Aetna, AIG, AIM, Alliance Bernstein, Allianz, American Century, American Funds, Ameriprise, Aviva, AXA, Charles Schwab, Berkshire Life, Edward Jones, E*Trade, Fidelity, Franklin Templeton, Genworth Financial, Goldman Sachs, Guardian, The Hartford, ING, Invesco, Jackson National, Janus, John Hancock, Lincoln Financial, MassMutual, Merrill Lynch, MetLife, Morgan Stanley, and Nationwide.

Other companies for which Phoenix has multi-year histories on brand health and advertising performance include Northwestern Mutual, New York Life, Oppenheimer, Pacific Life, PIMCO, Pioneer, Prudential, Putnam, Raymond James, State Farm, Sun Life, TD Ameritrade, TIAA-CREF, The Principal, Transamerica, Travelers, T. Rowe Price, US Trust/Bank of America, USAA, Wells Fargo, and Vanguard.

Over one-half of respondents participating in the April 2012 Phoenix brand health and advertising performance study reported that they expect to complete at least one of the following eight investment activities in the next month:

“Meet with my financial advisor,”
“Start thinking about my financial future,”
“Consider purchasing additional retirement products,”
“Find out more about retirement products & services,”
“Change my investment strategy,”
“Establish a new investment account,”
“Close an account, but not terminate the relationship,” or
“Change my financial advisor(s).”

Debt can make you sick

Posted on May 1, 2012 by Editor Test -

A recent study by the American Psychological Association found that money was respondents’ leading source of stress. An Associated Press/AOL, poll comparing those with high debt-stress with those who had low debt-stress, found the following:

27% with high debt stress had ulcers or digestive tract problems, compared with 8% with low debt-stress.
44% with high debt-stress had headaches or migraines, compared with 4% with low debt-stress.
23% with high debt stress felt they were suffering from depression, compared with 4% with low debt-stress.
The heart attack rate of those with high debt-stress was double that of those with low debt stress.
65% more people with high debt-stress suffered from muscle tension or lower back pain than those with low debt-stress.

Medicare budget numbers: bad, worse, and confusing

Posted on May 1, 2012 by Editor Test -

The Trustees of the Social Security and Medicare trust funds have issued a message summarizing their 2012 Annual reports on the current and projected financial status of the two programs. RIJ reported on the Social Security Annual Report last week. This week, we are publishing the summary message issued by the trustees of the Medicare Health Insurance trust fund.

To summarize the summary:

The projected date of HI Trust Fund exhaustion is 2024, the same date projected in last year’s report, at which time dedicated revenues would be sufficient to pay 87% of HI costs.
The trust fund has been paying out more than it has been taking in since 2008, and will do so in all future years.
The share of HI expenditures that can be financed with HI dedicated revenues will decline slowly to 67% in 2045, and then rise slowly until it reaches 69% in 2086.
The HI 75-year actuarial imbalance amounts to 36% of tax receipts or 26% of program cost.
The Trustees assume an almost 31% reduction in Medicare payment rates for physician services will be implemented in 2013 as required by current law, which is also highly uncertain.
For the sixth consecutive year, projected non-dedicated sources of revenues—primarily general revenues—are expected to continue to account for more than 45% of Medicare’s outlays, a threshold breached for the first time in fiscal year 2010.

According to Medicare’s statement:

The Medicare HI Trust Fund faces depletion earlier than the combined Social Security Trust Funds, though not as soon as the Disability Insurance Trust Fund when separately considered. The projected HI Trust Fund’s long-term actuarial imbalance is smaller than that of the combined Social Security Trust Funds under the assumptions employed in this report.

The Trustees project that Medicare costs (including both HI and Supplemental Medical Insurance expenditures) will grow substantially from approximately 3.7% of GDP in 2011 to 5.7% of GDP by 2035, and will increase gradually thereafter to about 6.7% of GDP by 2086. The projected 75-year actuarial deficit in the HI Trust Fund is 1.35% of taxable payroll, up from 0.79% projected in last year’s report.

The HI fund again fails the test of short-range financial adequacy, as projected assets are already below one year’s projected expenditures and are expected to continue declining. The fund also continues to fail the long-range test of close actuarial balance.

The Trustees project that the HI Trust Fund will pay out more in hospital benefits and other expenditures than it receives in income in all future years, as it has since 2008. The projected date of HI Trust Fund exhaustion is 2024, the same date projected in last year’s report, at which time dedicated revenues would be sufficient to pay 87% of HI costs.

The Trustees project that the share of HI expenditures that can be financed with HI dedicated revenues will decline slowly to 67% in 2045, and then rise slowly until it reaches 69% in 2086. The HI 75-year actuarial imbalance amounts to 36% of tax receipts or 26% of program cost.

The worsening of HI long-term finances is principally due to the adoption of short-range assumptions and long-range cost projection methods recommended by the 2010-11 Medicare Technical Review Panel. Use of those methods increases the projected long-range annual growth rate for Medicare’s costs by 0.3 percentage points. The new assumptions increased projected short-range costs, but those increases are about offset, temporarily, by a roughly 2% reduction in 2013-21 Medicare outlays required by the Budget Control Act of 2011.

The Trustees project that Part B of Supplementary Medical Insurance (SMI), which pays doctors’ bills and other outpatient expenses, and Part D, which provides access to prescription drug coverage, will remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs.

However, the aging population and rising health care costs cause SMI projected costs to grow rapidly from 2.0% of GDP in 2011 to approximately 3.4% of GDP in 2035, and then more slowly to 4.0% of GDP by 2086.

General revenues will finance roughly three quarters of these costs, and premiums paid by beneficiaries almost all of the remaining quarter. SMI also receives a small amount of financing from special payments by States and from fees on manufacturers and importers of brand-name prescription drugs.

Projected Medicare costs over 75 years are substantially lower than they otherwise would be because of provisions in the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act” or ACA).

Most of the ACA-related cost saving is attributable to a reduction in the annual payment updates for most Medicare services (other than physicians’ services and drugs) by total economy multifactor productivity growth, which the Trustees project will average 1.1% per year. The report notes that sustaining these payment reductions indefinitely will require unprecedented efficiency-enhancing innovations in health care payment and delivery systems that are by no means certain.

In addition, the Trustees assume an almost 31% reduction in Medicare payment rates for physician services will be implemented in 2013 as required by current law, which is also highly uncertain.

The drawdown of Social Security and HI trust fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident.

For the sixth consecutive year, the Social Security Act requires that the Trustees issue a “Medicare funding warning” because projected non-dedicated sources of revenues—primarily general revenues—are expected to continue to account for more than 45% of Medicare’s outlays, a threshold breached for the first time in fiscal year 2010.

In their joint message, the Social Security and Medicare trustees added the following comments:

The long-run actuarial deficits of the Social Security and Medicare programs worsened in 2012, though in each case for different reasons. The actuarial deficit in the Medicare Hospital Insurance program increased primarily because the Trustees incorporated recommendations of the 2010-11 Medicare Technical Panel that long-run health cost growth rate assumptions be somewhat increased.

The actuarial deficit in Social Security increased largely because of the incorporation of updated economic data and assumptions. Both Medicare and Social Security cannot sustain projected long-run program costs under currently scheduled financing, and legislative modifications are necessary to avoid disruptive consequences for beneficiaries and taxpayers.

Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare. If they take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.

Social Security and Medicare are the two largest federal programs, accounting for 36% of federal expenditures in fiscal year 2011. Both programs will experience cost growth substantially in excess of GDP growth in the coming decades due to aging of the population and, in the case of Medicare, growth in expenditures per beneficiary exceeding growth in per capita GDP.

Through the mid-2030s, population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment will be the largest single factor causing costs to grow more rapidly than GDP. Thereafter, the primary factors will be population aging caused by increasing longevity and health care cost growth somewhat more rapid than GDP growth.

Ford to offer pension buy-outs; Towers Watson calls it a ‘first’

Posted on May 1, 2012 by Editor Test -

Ford Motor Company made the following announcement about its defined benefit plan this week:

“As part of the company’s long-term strategy to de-risk its global funded pension plans, Ford announced today that it will offer to about 90,000 eligible U.S. salaried retirees and U.S. salaried former employees the option to receive a voluntary lump-sum pension payment.

“If an individual elects to receive the lump-sum payment, the company’s pension obligation to the individual will be settled. This is the first time a program of this type and magnitude has been offered by a U.S. company for ongoing pension plans.

“Payouts will start later this year and will be funded from existing pension plan assets. This is in addition to the lump-sum pension payout option available to U.S. salaried future retirees as of July 1, 2012.”

Following Ford’s announcement, Towers Watson released the following statement:

The announcement by Ford Motor Company’s announcement “represents a significant development in the U.S. defined benefit pension marketplace,” said experts at Towers Watson this week.

According to the Towers Watson release:

Ford intends to provide a one-time voluntary lump sum offer to substantially all of its salaried retirees by the end of 2013. It appears to be the first such program to specifically target retirees without being part of a broader plan termination.

Historically, lump sum distributions, which allow plan participants to exchange receiving periodic annuity payments for a single lump sum payout, have been offered to participants only upon separation from active employment.

The announcement follows a recent trend by plan sponsors to provide a one-time lump sum offer to former employees who have not yet commenced an annuity payment (so-called “terminated vested” participants).

Although some industry experts have historically questioned the ability of plan sponsors to offer lump sum payments to retirees, Ford Motor Company did not imply they felt there were any legal reservations for them in moving forward, Towers Watson said.

Mike Archer, leader of intellectual capital for the North American Retirement practice of Towers Watson, commented, “There are many considerations, including potential regulatory issues, that plan sponsors contemplating a lump sum offer will need to examine closely. We believe some plan sponsors will conclude that the current regulatory framework will support a properly designed offer.”

“This development could have far-reaching implications for both plan sponsors and plan participants. For plan sponsors, the ability to provide a retiree lump sum offer provides greater flexibility to manage their retirement plans, including the ability to better manage the size of the plan relative to ongoing operations, as well as the ability to more efficiently administer the plan on an ongoing basis,” said Matt Herrmann, leader of the Retirement Risk Management group of Towers Watson.

“From a participant perspective, the decision to receive a lump sum distribution is completely voluntary. We believe that the option to select a lump sum provides plan participants with greater flexibility to plan for retirement income needs, including more control over the timing of retirement income, as well as more control over how retirement income assets are invested.” Archer added, “Each retiree will need to evaluate the trade-offs between greater investment control and the security of a guaranteed lifetime income stream.”

Jackson sidebar ad May 2012

Posted on April 30, 2012 by Editor Test -

Chamber of Commerce offers blueprint for private retirement industry

Posted on April 25, 2012 by Editor Test -

In a new whitepaper, “Private Retirement Benefits in the 21st Century: A Path Forward,” the U.S. Chamber of Commerce, a lobby for business owners and advocate of private enterprise, articulates its recommendations for national retirement policy. Among other things, it calls for preservation of tax advantages for retirement saving and for an exception to the Required Minimum Distribution rules for purchasers of deferred income annuities (“longevity insurance”).

“While we work to enhance the current private retirement system and reduce the deficit, we must not eliminate one of the central foundations—the tax treatment of retirement savings—on which today’s successful system is built. Doing so would imperil the existence of employer-sponsored plans and the future retirement security of working Americans,” said the introduction to the whitepaper.

“The purchase of longevity insurance could reduce retirees’ exposure to the risk of running out of income,” the whitepaper added. “A way to encourage this purchase would be to exclude money used to buy the product from the RMD rules. Also, as with long-term care insurance, longevity insurance could be purchased through a cafeteria plan or with 401(k) plan savings.”

The Chamber also called for the removal of legal barriers to the expansion of “phased retirement” strategies, so that employers can more easily employ key workers in part-time capacities if anticipated labor shortages occur as a result of the retirement of the Baby Boom generation.

Macchia, the Man and the Machine

Posted on April 25, 2012 by Editor Test -

I’ve flown many miles in the retirement space over the past six years, and chances were always good that, in the carpeted lobby of a four-star chain hotel in some city with a large airport, I’d run into David Macchia, the president of Wealth2k. We’d chat briefly; occasionally we’d sequester ourselves for a formal interview. But usually, after a quick exchange, we left each other to his work.

And Macchia (right) works as hard as anybody I know in the retirement space. He’s an entrepreneur, so he feels a different kind of pressure from most. Entrepreneurs pressure themselves, and the passionate ones never let up. (Where does the passion come from? A need for redemption? Only they know.) He’s also one of the true students of the retirement game (insurance division). He’s played it a long time. He analyzes it. His goal is to win.

Wealth2k, Macchia’s 12-person multi-media marketing firm in Boston, developed Income for Life Model, the web-based, time-segmented, retirement income planning/marketing/communication tool that is the subject of today’s lead story in Retirement Income Journal. While researching that story, I asked Macchia what he has learned after ten years of promoting IFLM in meetings with broker-dealer executives, bankers and financial advisors.

He said that, after so many years, he’s still surprised by how much work remains to be done in changing the financial industry mindset from accumulation to decumulation, and to open the minds of investment-minded advisors to hybrid (insurance and investment) solutions to the retirement income challenge.

His own single-minded immersion in retirement income for the past decade led him to overestimate (not surprisingly, perhaps) the degree to which the Mississippi-like delta of the distribution world has not yet woken to the Boomer decumulation opportunity or learned how to exploit it.

“My initial inclination was to imagine greater expertise around the retirement income issue than there actually is,” Macchia said. “Advisors are still trying to [use the principles] of the accumulation world in the retirement domain. They can be extremely helpful in creating accumulation portfolios, but they’re still not as good at creating hybrid or income portfolios.

“The level of experience, both on an individual and in many firms, is still undeveloped. That was something of a revelation. It was a revelation was that even competent financial advisors—seasoned, competent advisors—will often ask for or require advice on how to invest in the context of an income generation strategy.”

To go a step further, Macchia believes that most investment advisors in Macchia’s—and he states this without detracting from what they’re good at—have difficulty shifting their focal range from infinity—the indefinite time horizon of Modern Portfolio Theory—to the shorter depth of field that retirement (and death, to be specific) inevitably imposes.

“Let’s say they’re building [an income] floor and using four time segments,” he said. “Most advisors aren’t used to the context or construct of providing a target rate of return over a specific time period. And many advisors, I think, need to be enlightened about the urgency for the inclusion of a lifetime income floor—at least for those clients who don’t have the flexibility or latitude [to tolerate a wide range of outcomes] because they’re close to being underfunded.”

Career-wise, Macchia started out in the insurance business, so he tends to think mainly about the risk side of the equation. “I can remember travelling around in 1988 or 1989 to various financial offices like PaineWebber and doing public speaking about life insurance and retirement,” he said. “I used to talk about the juggernaut of Japanese economy. At that time, the Nikkei average was over 39,000, and my frame of reference was that it would just keep going up. Here we are 23 years later and the Nikkei is still less than a third of what it was at its peak. Imagine the S&P 500 being a third of what it was in 1989. That experience taught me to have no level of security about imagining what can or can’t happen in the future.”

And, while IFLM itself accommodates investment and insurance products ambidextrously, it’s evident that Macchia believes in the need for insurance products in retirement. “The advisor who reflexively rules out insurance doesn’t have a bright future. If they do, my life experience makes me confident that they’ll be wrong for 85% of their clients,” he said. “The inclusion of a lifetime guaranteed income floor is no longer an economic decision. It comes down to a moral decision about how much risk a client can sustain. If your clients can’t sustain that risk, then how can you morally deny them a guaranteed income?”

The Bucket

Posted on April 25, 2012 by Editorial Staff -

NASI offers ‘exit strategy’ for Social Security payroll tax holiday

With the “payroll tax holiday” set to end on December 31, a new fact sheet from the National Academy of Social Insurance suggests an “exit strategy” that could attract broad public support and help strengthen Social Security for the long term.

The exit strategy would gradually restore the workers’ contribution rate to 6.2% of earnings over several years, in order to smooth the transition from 4.2% (the reduced “holiday” rate) and avoid a sudden impact on the still-fragile economy.

One option would then be to gradually raise the rate from 6.2% to about 7.0% for workers and employers alike, to address Social Security’s projected long-term revenue shortfall.

In combination with other changes, such as lifting the cap on earnings taxable for Social Security (now set at $110,100), a very gradual increase in contribution rates could keep the program in balance throughout the retirement of the baby boomers and beyond.

Social Security has four dedicated sources of income: contributions from workers and employers; dedicated reimbursement funds from general revenues; income taxes on benefits that some beneficiaries pay; and interest on the reserves held in the trust funds. The reimbursement funds ensure that revenue not collected during the temporary tax reduction is being made up dollar-for-dollar.

The National Academy of Social Insurance (NASI) is a nonprofit, nonpartisan organization made up of the nation’s leading experts on social insurance.

LPL Financial completes acquisition of Fortigent

LPL Investment Holdings Inc., parent of LPL Financial, has announced the completion of its parent company’s acquisition of Fortigent, LLC, provider of high-net-worth solutions and consulting services to RIAs, banks, and trust companies.

A new sister company of LPL Financial, Fortigent will maintain its brand and team, and will continue to deliver research, reporting and practice management solutions for banks, trust companies and independent advisory firms. The acquisition will allow LPL Financial to support a wider range of financial advisor business models, according to a release.

Financial terms of the transaction were not disclosed.

Northwestern Mutual sells Russell Investments Center in Seattle

In what is believed to be the largest single asset office sale in the western United States since 2006, Northwestern Mutual has sold the Russell Investments Center to CommonWealth Partners for $480 million.

Northwestern Mutual bought the 42-story, 872,000 square foot office building in the fall of 2009. The Russell Investments Center, located at 1301 Second Avenue in Seattle’s business district, was constructed in 2006.

The company increased the property’s market value by raising occupancy from a virtually empty building to 95% leased. In December, the company listed the building for sale as part of ongoing management of its real estate investment portfolio.

“This transaction is an example of how we actively manage our $5.8 billion real estate equity portfolio to generate strong returns on behalf of our policyowners,” said Paul Hanson, managing director–real estate, Northwestern Mutual. “The company’s real estate strategy typically focuses on long-term holds; however, the Seattle market rebounded quickly, creating an excellent opportunity for the company to realize a gain for our policyowners.”

Northwestern Mutual’s real estate investments are part of its $166 billion general account investment portfolio, which backs the insurance and annuity products that are actively managed for the benefit of policyowners. The company manages its real estate equity portfolio through buying, developing and selling assets in various markets across the country.

CBRE, the world’s largest commercial real estate services firm, served as broker for the transaction through a team led by Vice Chairman Kevin Shannon. The sale is not expected to cause disruption for tenants with long-term leases, including Russell Investments, Boeing, Nordstrom, Dendreon, JP Morgan Chase and Zillow.

NETFA, the first US-based ETF trade association, is formed

Senior executives of leading US-based exchange-traded fund (ETF) companies have agreed to launch the National Exchange Traded Funds Association (NETFA) to represent and promote the US ETF industry. The new chairman of NETFA is John Hyland. The vice-chairman is Adam Patti.

Over the last five years, assets in US-listed ETFs have grown an average of 24% annually, from $408 billion on December 29, 2006 to $1,211 billion as of March 30, 2012. There are over 1,400 ETFs listed on US exchanges as of March 30, 2012 (source: 2011 ICI Factbook, Index Universe).

NETFA will provide industry statistics and commentary on ETF related issues to the US financial media, and advance industry issues with regulators, government agencies and interested third parties.

BNY Mellon and Investor Analytics introduce liability modeling

BNY Mellon announced that it is adding enhanced liability modeling to its risk management solution for institutional clients. The new service, based on capabilities provided by Investor Analytics, will enable clients “to evaluate both asset holdings and liabilities in a common risk framework,” the company said in a release.

“The enhancements enable clients to evaluate funded status and assess the risk analytics for total and individual assets and liabilities compared to selected benchmarks. In addition, clients will be able to model the behavior of assets and liabilities under possible market stresses and yield curve changes,” the release said.

“We’ll provide our pension plan sponsor clients with a more complete picture of the impact of market events on their fund obligations,” said John Gruber, global product strategy head of the Performance & Risk Analytics group of BNY Mellon Asset Servicing.

“Our Risk Management service now provides asset owners with the ability to view and analyze how plan assets, liabilities and funding levels behave in response to a complete range of market shocks, scenarios and stresses,” said Damian Handzy, CEO of Investor Analytics.

New York Life introduces three-year term for MVA fixed annuity

New York Life has introduced a three-year initial interest rate guarantee and matching three-year surrender charge period on its Secure Term MVA Fixed Annuity.

The new offering provides a guaranteed 1.15% ratetax-deferred, over the three-year term, compared to the national average of 0.69% for three-year CDs.

The three-year term complements the product’s existing five-, six-, seven- and eight-year terms, and is now available to consumers through New York Life’s agency sales force as well as through select third parties.

According to LIMRA, New York Life was the largest seller of market value adjustment fixed annuities in the fourth quarter of 2011, with $134.3 million in sales. In the first quarter of 2012, New York Life exceeded its fourth quarter sales with a company-record-setting $262.1 million in sales.

The Secure Term MVA Fixed Annuity offers the following features:

Multiple initial interest rate guarantee periods, including the new three-year term.
Tax-deferred growth.
Access to the funds when needed through a surrender-charge-free window during each policy year.
A guaranteed death benefit where beneficiaries receive the policy’s full accumulation value.
The ability to convert accumulated assets to guaranteed lifetime income.

Linked LTCI attracting younger buyers

An increasing number of national insurance companies are offering protection that combines life insurance with potential long term care insurance benefits. According to the 2012 Buyer Study conducted by the American Association for Long-Term Care Insurance, these linked benefit (also called “combination”) products are gaining favor with individuals in their 40s and 50s.

The Association’s annual study of leading insurers found that 53% of buyers of these hybrid policies were under age 65 in 2011 compared to only 48% in 2010. Some 42.5% of male and 38.5% of female buyers were between ages 55 and 64 explains Jesse Slome, director of the national trade group. Nearly 10% of buyers were between ages 45 and 54.

The AALTCI study reported sales for the participating linked benefit insurers increased 14% in 2011 and the premium increased almost 20%.

Pressure builds for passive pension management in Ireland

Posted on April 25, 2012 by Editor Test -

A new survey from the British actuarial consulting firm, LCP, suggests that high levels of fees paid by Irish pension funds could be cancelling out the benefits of active asset management, IPE.com reported.

LCP’s Ireland Investment Management Fees Survey 2012 found that the fees charged for active management are at least three times those for passive management. The report asserted that because investment managers charge fees based on the level of assets under management, fee bases generally fail to align the interests of trustees with those of the investment managers.

Indirect costs remain high, while many plans may be paying high investment advisers’ fees because of the larger number of manager selection exercises and the increased complexity in monitoring investment arrangements.

Michael Butler, head of investment consulting for LCP in Ireland and the report’s author, said: “Clients are focusing on investment strategy reviews but neglect the fact they can renegotiate fees with their managers. Fees for both active and passive management have become more competitive because there are many more managers now offering investment services in Ireland.”

Butler reckons pension funds could save as much as 30% off managers’ standard fees by negotiation. More than 90% of the managers in the survey said they were willing to negotiate on fees, even for pensions with relatively low assets. He added fees could also be reduced by shrewd selection of active or passive management for different asset classes.

“Managers in specialist asset classes such as diversified growth funds and multi-asset funds often deliver added value by active management,” Butler said. “This means the performance can justify the fees being paid.”

But in other asset classes such as developed equities, active managers are not necessarily adding a lot of value, he said. Fees can, therefore, wipe out any value added.

“We are seeing clients move those asset classes to passive mandates,” he said. “However, there are many more pension funds that should be doing this.”

Butler also said more managers in Ireland could offer performance-related fee structures. At present, these are only generally offered by hedge funds, but LCP is putting pressure on the industry to make these structures more widespread.

Jerry Moriarty, director of policy at the Irish Association of Pension Funds, said: “The report is very helpful in giving trustees a benchmark as to what they should be paying and highlights the benefits of negotiating on fees with investment managers.”

He pointed to the report’s finding that differences between fees charged in the UK and Ireland had narrowed dramatically.

“When the Irish government introduced the pensions levy last year, to deflect criticism, they argued that pension funds paid much higher asset management fees than in the UK, and at much higher levels than the levy,” he said.

“This research shows the complete lack of substance in that argument, which was used to justify the levy.”

Social Security: A manageable problem

Posted on April 25, 2012 by Alicia H. Munnell -

The following is excerpted from “Social Security’s Financial Outlook: The 2012 Update in Perspective,” a research brief by Alicia H. Munnell, director of the Center for Retirement Research at Boston College and Peter F. Drucker Professor of Management Sciences at the Carroll School of Management at Boston College.

The 2012 Trustees Report shows a significant increase in the program’s 75-year deficit from 2.22 percent to 2.67 percent of taxable payroll and an advance in the date of trust fund exhaustion from 2036 to 2033. These changes reflect the slow recovery from the recession and rising disability rolls, among other factors.

While the deficit is larger and the date of exhaustion nearer, the story remains the same. The program faces a manageable financing shortfall over the next 75 years, which should be addressed soon to restore confidence in the nation’s major retirement program and to give people time to adjust to needed changes.

Over the next 75 years, Social Security’s long-run deficit is projected to equal 2.67 percent of covered payroll earnings. That figure means that if payroll taxes were raised immediately by 2.67 percentage points – 1.34 percentage points each for the employee and the employer – the government would be able to pay the current package of benefits for everyone who reaches retirement age at least through 2086.
A lasting fix for Social Security would require additional changes.

Solutions that focus just on the next 75 years sometimes involve the buildup of trust fund assets in the near term and the sale of those assets to pay benefits in the out years. Since the trust fund would have no further bonds to sell in the 76th year under this approach, the program would suddenly be short of money. Lasting solvency would require either a pay-as-you-go system with substantially higher pay- roll tax rates/lower benefits or the buildup of a trust fund larger than that required for 75-year solvency, the returns from which could cover some of the costs. Realistically, eliminating the 75-year shortfall should probably be viewed as the first step toward long-run solvency.

Social Security’s shortfall looks less daunting when outlays are shown as a percent of Gross Domestic Product (GDP). The cost of the program is projected to rise from 5.0 percent of GDP today to 6.1 percent of GDP in about 2050, where it remains even after the re- tirement of the baby boom because of the permanent decline in fertility rates discussed earlier (see Figure 3). The reason why costs as a percent of GDP more or less stabilize – while costs as a percent of taxable payroll keep rising – is that taxable payroll is projected to decline as a share of total compensation due to continued growth in fringe benefits.

Although the Trustees Report focuses on Social Security’s financial shortfall as a percent of either taxable payroll or GDP, it also reports the financing shortfall in dollars. One measure of the shortfall – the present discounted value of the difference between projected revenues and expenditures over the next 75 years – amounts to $8.6 trillion.

Although this number appears very large, the economy will also be growing. So dividing this number – plus a one-year reserve cushion – by taxable payroll over the next 75 years brings us back to the 2.67 percent deficit discussed above. As a percent of GDP over the next 75 years, this deficit is 0.9 percent.

The 2012 Trustees Report confirms what has been evident for two decades – namely, Social Security is facing a long-term financing shortfall which now equals 2.67 percent of taxable payroll or 0.9 percent of GDP. To put the magnitude of the problem in perspective, defense outlays went down by 2.2 percent of GDP between 1990 and 2000 and up by 1.7 percent of GDP between 2000 and 2010.

While Social Security’s shortfall is manageable, it is also real. The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits. There is no silver bullet. Despite the political challenge, stabilizing the system’s finances should be a high priority to restore confidence in our ability to manage our fiscal policy and to assure working Americans that they will receive the income they need in retirement.

Mind Your ETFs and CITs

Posted on April 24, 2012 by Editor Test -

Major changes are afoot in the financial services and the retirement plans industry. These changes are taking place at multiple levels and they will have a major impact on the industry. To stay relevant, prosper and survive, advisors must acknowledge and adapt to these changes.

After extensive research and networking, the CFDD has identified the primary paths to growth for retirement plan specialists. Industry research has always been overly optimistic. Automatic enrollment has been a positive, but future retirement plans asset growth will be fueled by market returns, not formations, participation or contributions.

In spite of this observation, the asset shift within retirement plans will be of epic proportions. That shift will include investment categories, vehicles and strategies. In other words, the flow of money is the path to growth and it will dwarf the opportunities created by disclosure and new fiduciary definitions.

ETF net new flows were reported at a record $55.9 billion during the 1st quarter of 2012. Fueled by market gains, the robust flows helped ETF assets reach $1.21 trillion, up from $1.06 trillion at year-end.

Net long-term mutual fund flows were reported at $106.3 billion during the same first quarter period, up sharply from the $67.1 billion captured during all of 2011. Excluding money market funds, long term US mutual fund assets increased to $8.70 trillion during the 1st quarter, up from $7.96 trillion at year-end.

ETF growth has been championed by the media, but ETF growth is benefiting from far more than lower fees, liquidity and transparency. In addition to lower costs, less than stellar active management results are drNot surprisingly, Vanguard’s $36.8 billion in net new mutual fund flows during the 1st quarter of 2012 were 35% of total industry mutual fund flows and 100% ahead of their 1st quarter 2011 flows.

Looking back to the 2011 calendar year, Vanguard captured $43.8 billion in net new flows, 65% of the mutual fund industry’s total flows.iving investors of all stripes towards passive investment strategies, a trend unlikely to be reversed. The dynamics of ETF distribution will also play a major role in transforming the industry.

These changes will certainly have a major impact on investment managers, but the shift to passive investments will also have a significant impact on investment strategies and investment vehicles, particularly target date funds (TDFs) and Collective Trust Funds.

Net New ETF Flows Billions (Source: ETF Industry Association)
Category	2011	1st Qtr. 2012	1st Qtr. 2011
Industry	$115.2	$55.9	$28.2
Vanguard	35.8	17.2	10.4
Vanguard % Total	31.1%	30.8%	36.9%

The ETF picture is much the same. Vanguard’s $17.2 billion in net new ETF flows during the 1st quarter of 2012 were 31% of total industry ETF flows and 65% ahead of their 1st quarter 2011 flows.

Looking back to the 2011 calendar year again, Vanguard captured $35.8 billion in net new flows, 31% of the ETF industry’s total flows.

The regulators are clearly encouraging a passive approach and investors may or may or may not embrace active management in the future. If they do embrace active management, the costs and margins are still headed for the basement.

Net New Long-Term Mutual Fund Flows Billions (Source: Morningstar Direct)
Category	2011	1st Qtr. 2012	1st Qtr. 2011
Industry	$67,121	$106,315	$85,310
Vanguard	43,745	36,825	18,020
Vanguard % Total	65.2%	34.6%	21.

The aforementioned observation is important because industry margins are shifting away from traditional investment managers. Going forward, the money will be made on the construction of low cost solutions, tactical applications, alternatives and advanced risk management. As indicated by robust flows, firms with unique skill sets, like PIMCO, JP Morgan and others, can still participate in the consolidation-driven growth cycle in a big way.

One final thought on mutual fund flows. If we eliminate the domestic equity outflows after the 2008 financial crisis, the industry’s net new flows look quite robust. Indeed, the net new flows into bond funds have been staggering in recent years. The record inflows into bond funds are also one of the primary reasons equities have rallied and why the bond bubble will eventually burst.

A trillion here, a trillion there…

Based on ICI input, the DC plan market, including 403(b), 457 and other DC plans, totaled $4.5 trillion at the end of 2011. Mutual fund assets were reported at 52%, or $2.3 trillion, of total DC plan assets. Based on additional ICI data, DC plans held $303 billion, or 13%, of total mutual fund assets, in passive investments.

Assuming 13% of the other $2.2 trillion in non-mutual fund DC plan assets were indexed, an additional $286 billion was held in passive investments. In other words, approximately $589 billion of total DC plan assets are invested in passive investments.
If we subtract DC plan assets ($4.5 trillion), annuities ($1.6) and IRAs ($4.9) from the $17.9 trillion in total retirement plan assets reported by the ICI, that leaves us with $6.8 trillion in other retirement plan assets, including state & local government plans, private DB and federal pension plans.

Assuming 13% of those assets were indexed, that leaves us with another $884 billion held in passive investments, bringing the total to $1.5 trillion.

Given that the $500 billion held in The Federal Thrift Savings Plan, the world’s largest DC plan, is passively managed via BlackRock index funds, we can account for another $386 billion (100% -13% = 77% x $500). This increases the total retirement plan assets held in passive investments to $1.9 trillion.

After analyzing large DB plans, it is interesting to note that over 50% of the domestic equity assets are invested in passive/enhanced investments and approximately 23% of the domestic fixed income assets are indexed. A smaller percentage of foreign and alternative investments are indexed. Given that about 25% of total DB plan assets are indexed, we need to add at least another $400 billion to the total.

Ignoring non-profit DB plans which are not picked up by the reporting services, approximately $2.5 trillion of the nation’s retirement plan assets are held in passive investments and the growth is accelerating. It is not well understood, but the vast majority of these indexed assets are held in collective trust funds, conclusions supported by our collective trust fund analysis below.

Due to varying approaches and weighting alternatives, indexing can be complicated. Sponsors and participants may not fully understand indexing, but the flows and reduced costs are irrefutable. When the world’s largest active investment manager, Fidelity Investments, is recommending the addition of index options to their retirement plan clients, it’s easy to conclude that The Times They Are A-Changing. Indeed, as Bob Dylan would say, “You don’t need a weatherman to know which way the wind blows.”

Collective trust funds
Collective investment trust funds (CITs) have been around a long time, but the increased scrutiny on fees, regulatory changes, operational enhancements, NSCC capabilities and custom solutions have catalyzed new interest in CITs.

When compared to other investment vehicles, CITs offer pricing flexibility, fewer trading restrictions, lower operating costs and no redemption fees.
Fee issues, conflicts and the costs of running multiple CITs can be an issue, but successful advisors eventually get too big for model portfolios. Given the availability of multiple platforms, CITs can offer a distribution solution not available to model portfolios.

The additional costs can be offset by utilizing individual securities, institutional share classes, other collective funds and ETFs. The CITs may also use alternatives and there are multiple ways to structure fees and contracts to eliminate conflicts.

Regulated by the Office of the Comptroller of the Currency (OCC) and/or state regulators, CITs have long played a meaningful role in the nation’s retirement plans. CITs holdings are limited to qualified retirement and governmental plans, including certain DB and DC plans. They are not available to 403(b), endowments, foundations, IRAs or personal trusts.

Working with Hand Benefits & Trust, a BPAs company, we put the market for CITs under the microscope. Based on Morningstar data for state institutions without FDIC insurance and the OCC call reports for other institutions, CITs and Common Funds were reported at $2.7 trillion at the end of 2010.

Based on the 2010 report, we estimated Common Fund assets (not eligible for retirement plans) at about $500 billion. In other words, CITs held about $2.2 trillion in employer sponsored retirement plan assets at the end of 2010.

Approximately $900 billion of the $2.2 trillion in CITs was held in DC plans, including 23% stable value, 5% Target Maturity, and 62%, or $646 billion, in other private DC plans. The remaining $1.3 trillion was held by private DB and government pension plans.
The call reports and Morningstar data reported at the end of 2011 totaled $3.0 trillion, including $2.4 trillion in Bank & Trust Company holdings and $605 billion in Uninsured State Chartered Trust Cos.

Supporting our observations on passive investments within CITs, the top five Bank & Trust Companies held $1.9 trillion and included BlackRock, State Street, BNY Mellon, Wells Fargo and JP Morgan, all big players in the world of passive investments. The top two uninsured State Chartered Trust Cos held $500 billion and included Vanguard and Northern Trust.

Compliance challenges and solutions

The July due date for 408(b)(2) fee disclosure is closing fast and covered service providers are scrambling for a solution. With RIAs/IARs and TPAs far ahead of B-Ds and registered reps, many B-Ds will not have a solution in place by the required date.

Expectations of another delay or that other service providers would come forward with a solution have faded. In short, large blocks of retirement plans business are about to become prohibited transactions.
The cost of building a solution just to keep what they already have is no doubt part of the B-D dilemma. Indeed, the cost of servicing retirement plans has gone up and even after the expenditure, there is no guarantee of capturing increased business.

The costs associated with building and maintaining a solution are not only exorbitant, but complicated as well. Given that only large B-Ds can absorb the cost, the B-D community should be pursing outsourced solutions NOW! Small and mid-sized B-Ds should also consider combining resources.

FRA/PlanTools and Fiduciary Benchmarks Inc. both offer outsourced 408(b)(2) solutions. Their services may not be comparable, but FRA/PlanTools seems to be the industry’s low cost provider. For more information, contact David Witz at [email protected] or Tom Kmak at [email protected].

While 408(b)(2) gets most of the media coverage, 404(a)5 will subject discretionary Model Portfolios to participant disclosure rules. The requirements include, but are not limited to, a website with updated fee information, quarterly performance calculations and annual information for investment comparisons.

The coordination and negotiation with record-keepers and TPAs over which duties are considered covered services is another compliance consideration for advisors offering Model Portfolios. If the models are not unitized, fees will be subject to explicit quarterly fee disclosure. Risk-based models may also not benefit from 404(c) protection if participants select models through an advisor’s assistance.

In summary, advisors can keep their existing Model Portfolios and provide the quarterly disclosure along with the required investment information and hard dollar fees. Alternatively, they can convert their models to Collective Investment Trusts and let the trustee provide the proper disclosure.

The Bucketing Brigade

Posted on April 24, 2012 by Kerry Pechter -

Scott Cody became a convert to time-segmented retirement income planning in late 2010, soon after the Great Financial Crisis demonstrated that traditional risk-management techniques tend to fail when volatility and asset correlation are high.

“You can approach retirement income planning in three ways,” said the 38-year-old partner at Denver-based Latitude Financial Group. “You can use systematic withdrawal, which I did for years. You can throw everything into an annuity, but that lacks liquidity. Or you can use a time-segmented approach, which takes the best from the two other alternatives.”

Conveniently for Cody, a Certified Fund Specialist and MBA, a time-segmented income planning tool called Income for Life Model (IFLM) was already pre-loaded onto the platform provided by his broker-dealer, La Vista, Nebraska-based Securities America Inc.

Cody started using IFLM, and it soon earned him a new client, a retired couple who had heard about his new expertise. “‘We think we’re all set home, but we’re willing to listen,’ they said,” Cody said. “It turned out that no one had ever done this kind of planning for them.”

IFLM and Wealth2k

When Cody started using IFLM, he knew little about the story behind the software. He wasn’t familiar with David Macchia, whose 12-person Boston-area marketing firm, Wealth2k, had incubated IFLM from a fairly simple “bucketing” tool into an web-based, open-architecture, multi-media planning-and-sales platform.

Nor did he know about the number of frequent-flier miles, conference speeches, and proposals that Macchia has logged, delivered, and pitched while patiently promoting IFLM over the past decade.

It’s a tale worth telling, not so much because of IFLM’s entrepreneurial back-story as because of the traction that IFLM has been winning lately in financial services distribution channels. Securities America was the earliest institutional adopter of IFLM, back in 2005.

In the past year, Pershing LLC has made IFLM available to advisors who use Pershing’s powerful NetX360 platform. And most recently, Sovereign Bank, a unit of Spain’s Banco Santander, has adopted IFLM for use by its bank advisors in branches in the Northeast U.S.

Taken together, these home office decisions provide evidence that the so-called decumulation mindset—which emphasizes outcomes over probabilities and integrates insurance with investments—is finally gaining momentum among advisors. Several broker-dealers have realized that support for retirement income strategies can help them attract and retain advisors; now their affiliated advisors are learning that the same strategies can attract new clients.

Though far from the only retirement planning software tool—indeed, investment management tools like NaviPlan are still more prevalent—IFLM is distinguished by its focus on matching income-generating accounts or products to discrete time segments in a person’s retirement than most competing tools, and its sales growth serves as a kind of proxy for the progress of the new way to think about retirement finance.

How Pershing “gets it”

Pershing’s NetX360 is a web-based platform that allows advisors to manage sales, trading, processing, compliance, research and reporting through one desktop portal. A unit of BNY Mellon, Pershing serves more than 1,500 institutional and retail financial organizations and independent RIAs representing more than five million investors.

IFLM first became available on Pershing LLC’s NetX360 platform for RIAs last summer and became fully functional in October 2011. Advisors can license it, along with a Wealth2k’s client-facing web portal, RetirementTime, for $35 a month—a sharp discount from the standard $99 per month licensing fee.

“In thinking about what solutions will best solve the retirement income puzzle, three factors rise to the top,” said Rob Cirrotti, the leader of retirement income and long-term savings initiatives at Pershing. “Does it bring simplicity? Does it enhance the value of the advisor? And, how effective is it over time? In other words, it can’t be a one-time plan.

“Prior to having IFLM integrated into the Pershing platform, we offered some of the well-known planning software, such as NaviPlan and MoneyGuide Pro, which have retirement income modules,” he told RIJ. “I thought we needed something more focused and more relevant to the transition from accumulation to income. We did a survey of what was out there—and these tools continue to evolve of course—and we thought W2K met criteria I had laid out.

“I like that IFLM is a framework and not a product solution. If an advisor wants to go the insurance route, he can do that. If his client can afford to self-insure, and wants to take a more aggressive approach, IFLM allows for that possibility. One of the strengths of time-segmented planning is that it brings simplicity to a complex topic and helps the end-investors get their arms around the future,” Cirrotti added.

Aside from promoting retirement income planning through NetX360, Pershing has created a website called Retirement Power Play. “For advisors who don’t leverage NetX360, Retirement Power Play is an education-based campaign that helps understand techniques [of generating retirement income], as well as a way to use it for prospecting and to solidify relationships from a defensive perspective. It’s another way for us to access providers.”

Spanish acquisition

In late March, Boston-based Sovereign Bank announced that it would make IFLM its exclusive choice for retirement income planning and provide it for free to about 200 commission-based, securities- and insurance-licensed investment advisors at some 700 branch banks from Massachusetts to Maryland.

It was a domestic deal with international overtones. In 2009, Banco Santander, the $1.2 trillion Spanish banking giant acquired Sovereign Bank, which had been battered by the financial crisis. Aside from wanting a footprint in the U.S., Santander wanted to capitalize on the Boomer retirement wave and to position Sovereign Bank—which will become Santander Bank in 2013—as a leader.

“Our core strategy is to protect our clients’ assets,” said Jay Delaney, director of retail advice at Sovereign Bank. “We want to make sure they have enough income to live on. To the extent that they want us to manage their discretionary money, we might recommend equity exposure. But we’re not the wirehouse model. We’re much more conservative by nature.”

Being conservative is the bank’s growth model. “We’re a big believer that if we do what’s responsible for our customers, the rest of their money will follow,” he said. “We recognize that we may be only one piece of their financial picture. We need to build upon our relationships with them. We want the entire relationship, from the mortgage to the 529 Plan to the retirement strategy. And that fits with the IFLM model. Retirement income planning is not built on transactional relationships. These are long-term relationships.”

David Macchia told RIJ, “Sovereign Bank has a strategic objective to capitalize on the retirement income opportunity, and they want something to power that objective. They understand that the answer is a platform, not a product—that it’s a strategy that combines multiple products. Sovereign is the first bank that we’ve partnered with like this. In the past, we’ve had bank reps who have used IFLM successfully, but this is our first, top-down, enterprise-wide affiliation with a bank.”

“The dominant mindset has always been to push the communications out from the enterprise website,” he added. “Having worked on this for 10 years, I argued against that, and Sovereign has given every one of the consultants his or her own website, which they can now use individually to reach down to more customers and prospects to deliver messages around retirement income.”

IFLM is co-branded with Sovereign Bank (as opposed to being marketed as a “white-label” product, under Sovereign’s brand) and Sovereign Bank advisors can interact with customers through their own personalized, IFLM-built RetirementTime web portal.

Securities America

“We started working with Wealth2k back in 2005,” said Zachary Parker, first vice president of income distribution and product strategy at Securities America Inc. in La Vista, Nebraska. Of the broker-dealer’s 1,800 or so independent RIAs, about 350 currently use IFLM. Securities America covers the licensing fee for about 80% of them, depending on their productivity levels. “IFLM is our second most widely-used program after Albridge,” Parker said, referring to the unit of Pershing whose widely-used technology allows advisors to get a consolidated view of their clients’ holdings.

About three years ago, Securities America developed Next Phase, a proprietary bucketing approach to retirement income. It was a way to establish itself as a leader in retirement, and thereby help retain existing advisors and recruit new ones. Recently, IFLM became the engine that drives the bucketing strategy within Next Phase.

“When we created Next Phase, we worked with another partner that used a strategy similar to IFLM’s,” Parker said, “and we created videos and workshops around that.” But now Next Phase will use IFLM’s planning software and web presentation. “From an ease-of-use and an illustration perspectives, David’s front-end tool is much better.”

To provide centralized support for advisors who use IFLM, Securities America set up an “Income Distribution Desk.” It gives the broker-dealer an efficient way to answer all the “what-if” questions that advisors often have while using the plan. About 30% of advisors using IFLM rely on the IDD to complete the plan for them, while another 30% use IFLM completely independently and a final third rely on it for intermittent support.

“IFLM offers a good balance of flexibility and usability,” Parker told RIJ. “With NaviPlan or eMoneyAdvisor, you have to spend a lot of time to create a plan. Ninety-percent of the plans our advisors create are pretty simply, and with IFLM a normal plan can be done in 30 minutes to an hour. It’s easy enough that we don’t recommend that an advisor charge a fee for using it.”

To burnish the credibility of its bucketing approach, Securities America published a 15-page white paper last year called, “Capturing the Retirement Income Opportunity.” The paper showed that a time-segmented approach delivered more retirement income than either a traditional systematic withdrawal program or a lifetime income rider on a variable annuity contract, all else being equal. The white paper won an award from the Retirement Income Industry Association.

On the one hand, financial planners say that there’s nothing magical about time-segmentation. Simply locking away a specific bucket of assets for a specific number of years doesn’t immunize it from market risk or eliminate difficult decisions about the timing of sales.

But on the plus side, “bucketing” matches the sort of the mental accounting that many people practice instinctively. And if a time-segmentation tool is flexible enough, it can create a lot of possibilities while posing few limitations or restrictions.

No surprise, then, that Pershing, Sovereign Bank and Securities America have latched onto IFLM, or that advisors might see it as practice-builder. “Securities America is a big advocate of time-segmentation. And when I started speaking about time-segmented distribution strategies with clients, it resonated with them,” Scott Cody told RIJ. “I really feel that there’s a window of opportunity to become a specialist in the retirement income area.”

Investment opportunity in China?

Posted on April 24, 2012 by Editor Test -

Until recently, only a slim selection of NCSSF (National Council for Social Security Fund) mandates, out of the fund’s RMB7.4tr ($1.18tr) worth of pension capital, have been open to Western investors.

But demographic trends and growing deficits are pushing Chinese regulators into action, and the investment scope for pension assets is expanding.

Equity investment is being encouraged, especially into alternative assets such as private equity. Insurance and enterprise annuities (EAs) are also seeking to increase investment returns, presenting more sources of cash for investment managers to draw on.

With pension participation rates increasing and a greater sense of urgency among policy makers, China’s pension system is expected to balloon to RMB28tr ($4.48tr) by 2020.
By the end of 2011, Investments & Pensions estimates that China’s pension system will have a total of RMB7.4tr in AUM, with insurance assets accounting for approximately 55% of all assets and public pension funds accounting for about RMB2tr.

Both segments of the industry, as well as EAs and the NCSSF, have their capital sitting in underachieving investment products – mostly fixed-income.

The number of Chinese over the age of 60 will swell from today’s 178 million to 221 million by 2015. With more than RMB1.3tr ($208bn) in deficits existing in individual pension accounts, regulators are well aware that without reforms, deficits will increase RMB100bn ($16bn) annually. By 2020, the deficit could be as big as RMB6.2tr ($1tr) if contribution rates and investment returns do not rise.
Regulators are already widening the pension system’s investment scope. NCSSF is looking more to alternative assets, and insurers and EAs are moving away from their riskless bank deposit and bond investments.

More importantly, the opportunities for mandates are increasing in all segments for both joint venture and foreign fund management companies (FMC) alike. EA licenses are being handed out, insurers are beginning to look beyond insurance asset management companies (AMC) and NCSSF is receiving more capital than it can manage.

To realize increased investment returns, assets will be outsourced to investment managers with expertise in private equity, equity or overseas markets. Interested parties need to weigh the benefits of directly applying for mandates from NCSSF or establishing a joint venture, such as an FMC, brokerage or trust, where they can obtain an EA license. Setting up an insurance AMC will be the optimal strategy to creating an investment portfolio that will cater to insurance AMCs’ risk appetite.

Annuity net flow was flat in March: DTCC

Posted on April 18, 2012 by Editor Test -

The Depository Trust & Clearing Corporation (DTCC) Insurance & Retirement Services (I&RS) has released its report on March and first quarter 2012 activity in the annuity market.

Annuity inflows processed by DTCC in March increased by almost 10%, to $7.7 billion from $7 billion in February.
Out flows processed in March increased by almost 12% to $6.4 billion from $5.7 billion in February.
Net flows were almost unchanged in March, increasing one half of one percent from just under $1.3 billion to just over $1.3 billion.

The data comes from the Analytic Reporting for Annuities online information service, which leverages data from the transactions that DTCC processes for the industry. National Securities Clearing Corporation, a DTCC subsidiary, provides the service.

Inflows and Net Flows

Inflows and net flows have increased in each of the first three months of 2012, breaking a declining trend in 2011. Inflows and net flows were down in the first quarter of 2012 compared to the first quarter of 2011. Out flows increased.

The increasing divergence of inflows between qualified accounts and non-qualified accounts continued in March. Inflows into qualified account types were slightly under 61% while inflows into non-qualified account types were slightly above 39%. Net cash flows into non-qualified accounts were negative for the third month in a row, meaning that in each of the last three months more funds were withdrawn than added.

In August 2011, DTCC began a partnership with the Retirement Income Industry Association (RIIA) to analyze cash flows by RIIA-defined broker/dealer distribution channels and product categories.

For the six distribution channels defined by RIIA, DTCC I&RS processed the following percentages of inflows in January:

Independent broker/dealers, 29%
Wirehouses, 16%
Regional broker/dealers, 15%
Bank broker/dealers, 14%
Insurance broker/dealers, 9%
Others, 18%

DTCC, through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks. DTCC’s depository provides custody and asset servicing for almost 3.7 million securities issues from the United States and 121 other countries and territories, valued at US$39.5 trillion. In 2011, DTCC settled nearly US$1.7 quadrillion in securities transactions. DTCC has operating facilities and data centers in multiple locations in the United States and overseas. For more information, please visit www.dtcc.com.

How much does asset allocation matter to retirees?

Posted on April 18, 2012 by Editor Test -

Who was likelier to live a long life: the fitness nut who lifted weights and gobbled fish oil capsules while sailing on the Titanic’s maiden trip, or the couch potato who lost his boarding pass and missed the ill-fated voyage entirely?

To put the question another way: why do investors spend a Titanic amount of time tinkering with their portfolios’ asset allocations when other factors—like choosing a retirement age—are bigger determinants of financial well-being in retirement?

That’s the question that three scholars at the Center for Retirement Research at Boston College raise—and answer—in a new article transparently entitled, “How important is asset allocation to financial security in retirement?”

Working longer can overcome sub-par investment performance. That’s not to say, however, that the authors recommend working longer and ignoring asset allocation during their accumulation years.

“I would never recommend working a day longer than necessary!” said Anthony Webb, who wrote the paper with CRR director Alicia Munnell and Natalia Orlova. In an email to RIJ, he wrote, “The idea was to give a sense of the relative power of the various levers, not to suggest that some of the levers should remain unused.”

To prove their point, the authors evaluated the weight of several factors in determining whether a hypothetical person will reach his or her retirement savings goal and (based on the 4% rule) achieve an adequate retirement income.

To weigh the impact of allocation, they simulated the effect of moving from a conservative portfolio to a hypothetically ideal equity portfolio returning 6.2% a year. They compared that with the effects of other factors: the age when people started saving, the age when they decided to retire, whether or not they tapped home equity in retirement, and how fast they spent their savings.

The higher rate of return turned out to the weakest factor. For the average person, the best way to maximize financial wellbeing in retirement is to take Social Security at 67 instead of 62, the paper suggested. Achieving the 6.2% return would allow that person to retire at age 66.5—just six months earlier. In comparison, buying a reverse mortgage could reduce retirement age by 18 months and thrift during retirement could reduce it by a year.

“Given the relative unimportance of asset allocations,” the paper concluded, “financial advisers will be of greater help to their clients if they focus on a broad array of tools – including working longer, controlling spending, and taking out a reverse mortgage.”

The effect of asset allocation was weakest for less affluent households, because rate of return matters less when there are fewer assets. But the overall results were similar for people of all wealth levels and risk appetites.

Despite low rates, bond funds continue to grow

Posted on April 18, 2012 by Editor Test -

Long-term mutual funds received $29.3 billion in March to end the quarter with inflows of $106.3 billion, but U.S. stock funds experienced net outflows for the eleventh consecutive month, according to Morningstar, Inc.

Domestic stock funds lost $8.3 billion in March, while taxable-bond funds topped all asset classes for the seventh month in a row, with March inflows of $24.9 billion. For the quarter, taxable-bond funds saw inflows of $78.5 billion.

Additional highlights from Morningstar’s report on mutual fund flows:

Actively managed U.S. large-cap stock funds saw their eleventh straight quarter of net outflows, with $20.9 billion heading to the exits.
Intermediate-term and high-yield bond funds saw the greatest inflows in March and in the first quarter among fixed-income funds. Since January 2009, these two categories have absorbed new assets of $314.4 billion.
Emerging-markets bond fund flows reached $6.1 billion in the first quarter, by far the largest quarterly intake for these offerings. Assets in the category have risen to $55.5 billion today from $35.9 billion a year ago.
DoubleLine Total Return saw first-quarter and one-year inflows of $6.4 billion and $15.4 billion, respectively, leading all U.S. open-end funds over both periods.

To view the complete report, please visit http://www.global.morningstar.com/marchflows12. For more information about Morningstar Asset Flows, please visit http://global.morningstar.com/assetflows.

16% of Briton retirees will have nothing but state pension: Prudential plc

Posted on April 18, 2012 by Editor Test -

LONDON—One in six citizens of the United Kingdom who plan to retire in 2012 will depend entirely on the State Pension to fund their retirement, according to Prudential plc’s “Class of 2012” study, which analyzed the financial expectations of Britons nearing retirement age.

Women are more than twice as likely as men to have no other retirement savings or resources; 20% of women retiring in 2012 will depend exclusively on the State Pension compared with just 8%per cent of men.

Overall, Britons planning to retire this year will rely on the government for 34% of their income, on corporate pensions for 35% of income, and on a mixture of savings, investments, personal pensions, part-time work and assistance from family members for the remainder. State Pension payments are set to rise to £107.45 ($171.20) a week for single people on April 6.

Regionally, people retiring this year in the Midlands are the most likely in the UK to rely on the State Pension (40%). This compares with a quarter (28%) of those in Scotland, who claim to be the least reliant on the state for their retirement income.

The Prudential research also shows that 26% of people retiring this year either overestimate by more than £500 ($797) a year what the State Pension pays, or simply do not know.

“While the State Pension is a safety net for pensioners in the UK, it should only ever be regarded as part of an overall retirement plan,” said Vince Smith-Hughes, retirement income expert at Prudential. “For far too many people, the State Pension has become the default income option in retirement.”

Research Plus conducted Prudential plc’s online survey between December 2nd and 12^th, 2011, among 9,614 UK non-retired adults aged 45+, including 1,003 retiring in 2012.

The “Stacking” Strategy

Posted on April 18, 2012 by Kerry Pechter -

Earlier this month, Security Benefit Life introduced Total Value Annuity, a new fixed indexed annuity whose crediting formula includes exposure to commodity and currency futures and whose living benefit roll-up has a risk-sharing feature that goes by the somewhat inelegant name of “stacking.”

Security Benefit, a B++ (A.M. Best) and BBB+ (S&P) rated insurer based in Topeka, Kansas, is still fighting its way back from the effects of the financial crisis. It was purchased for $400 million in July 2010 by Guggenheim Partners, the institutional asset management firm that has managed the insurer’s general account since 2009.

[Another Guggenheim unit—Guggenheim Baseball Management—made the sports pages last week and business news by trying to buy the Los Angeles Dodgers for $2.16 billion. Security Benefit finance chief John Frye told Investment News that, if the deal goes through, “one percent or a half percent” of the insurer’s assets might end up invested in the Dodgers—subject to regulatory approval.]

Security Benefit sees indexed annuities, which it had never sold until last year, as its turnaround ticket. (Companies with less than an A rating tend not to be competitive in the variable annuity space.) Strong sales of its first entry, the Secure Income Annuity, catapulted the firm from nowhere to 13^th place on the indexed annuity sales chart in 2011, according to Annuityspecs.com. That contract’s living benefit rider offered an annual deferral bonus to the benefit base as high as 8% (in some states) for the first 10 years.

The firm’s second retail FIA, Total Value Annuity, has the distinction of offering indirect exposure to alternative investments, this year’s hippest asset class. In addition to the S&P 500 Index, contract owners can link their accounts to a “5-year Annuity-Linked TVI Index,” which Security Benefit Life president Doug Wolff described as “a managed futures index that involves 24 underlying futures contracts, split three ways between commodities, currencies, and U.S. interest rate futures.” The product also offers a fixed interest rate investment option.

“This product gives clients access to a non-correlating index that, when you look at historical performance, produces a very nice risk/return profile, especially when it’s mixed with exposure to the S&P 500 Index,” Wolff told RIJ. “It can go long or short on the futures contracts. It uses a momentum-based formula [for buying and selling futures]; it’s not subjective, it’s all quantitative.”

Any gains from the S&P 500 Index are credited to the account every year in an annual point-to-point structure, but any gains from the more exotic ALTVI index are credited on a five-year point-to-point formula, with no upside cap. Investors must hold the contract at least five years to get full credit for ALTVI-related gains.

Stackability

Then there’s the “stacking” feature, which applies to the optional lifetime income benefit. It involves a 4% roll-up in the guaranteed benefit base—but in this case the 4% is in addition to whatever the contract earns from fixed income investments and index exposure. With a conventional 7% or 7.2% roll-up, the owner gets the greater-of the performance or the bonus. For the insurer, the smaller guarantee is easier to hedge at a time when low interest rates make hedging costly.

“Stacking shifts more of the longevity risk to the annuity buyer,” FIA expert Jack Marrion of Advantage Compendium told RIJ in an email. He added that that’s not a bad thing. “It is one way for carriers to offer potentially higher payouts during low bond-yield environments.”

“I have previously said if index annuities add on commodities or other indices that do not correlate with the broad-market equity indexes currently offered, they may offer diversification that provides positive returns during times when the S&P 500 is declining or enhanced returns in positive times,” he wrote.

By reducing its exposure on the upside, TVA can afford to offer contract owners a living benefit whose single-life payout rate starts at 5% a year at age 60 and increases 10 basis points for every year that the contract owner delays taking income. (The payout rate for joint contracts is about 50 basis points less the single rate.) The contract also keeps costs down by unbundling the living benefit and the death benefit; the policyholder chooses one, not both.

Security Benefit limited the rollout of its SIA product last year to a restricted set of marketing organizations and producers, and the strategy was so effective that the insurer has decided to repeat the formula with its new product. Creative Marketing, Gradient Financial, Impact Partnership, and Advisors Excel are the only independent marketing organizations selling the product.

“Any company that’s looking to grow their annuity business and has less than an A rating would need to look primarily at the independent agency channel for growth,” said Judith Alexander of Beacon Research, whose data shows that about 92% of Security Benefit’s fixed annuity sales in the fourth quarter of 2011 were in the independent channel. “Phoenix and Genworth went through the same process.”

“We’ve partnered with four of the best IMOs in the business, in terms of volume,” Wolff told RIJ. “All have strong administrative groups and strong compliance groups. As a result, we see things like the IGO [In Good Order] rate go considerably higher, which also helps keep costs down.”

The base commission for the producer is 7% for clients ages 50 to 75 and 5% for clients ages 76 to 80. Alternately, producers can opt for a 3% upfront commission and a 0.50% annual trail commission starting in the second contract year. In some states, the surrender period can be as long as 12 years.

Security Benefit isn’t the only insurer with a new FIA that features “stacking.” Aviva has a similar income rider called the Balanced Index Lifetime Income Rider, or BALIR, which the Scottsdale, Arizona-based Annexus Group began selling in March. BALIR’s “Stacked Growth Option” offers a 5% deferral bonus on top of earnings from a combination of a fixed interest rate and a link to the S&P 500 Index. There’s no exposure to commodities and the single life payout at age 60 is 4.5%, or half a percent lower than the TVA.

The Bucket

Posted on April 17, 2012 by Editorial Staff -

Prudential annuity executives move up

Prudential Financial has named two long-time executives to lead the company’s Group Insurance and Annuities businesses.

Stephen Pelletier, who is currently President of Prudential Annuities, will become President of the Group Insurance Business, replacing Lori High, who has resigned. Robert O’Donnell, currently Senior Vice President, Head of Product, Investment Management and Marketing for Prudential Annuities, will become President of the Annuities business.

Pelletier joined Prudential in 1992. Before leading the Annuities Business, he served as chairman and CEO of Prudential International Investments, responsible for Prudential’s Investment Management Business in international markets, including China, Japan, Korea, Taiwan, Mexico, Germany and Italy. In addition, Pelletier was responsible for the company’s offshore investment products. He has also held executive positions at Chemical Bank and Manufacturers Hanover Trust. He received a B.A. from Northwestern University and an M.A. from Yale University.

O’Donnell joined Prudential in 2003 when the company acquired American Skandia. He started at American Skandia in 1997 and led the development and implementation of variable annuities, life insurance, mutual fund, and qualified plan products. The first 10 years of his career, which included time at The Travelers Insurance Company and Mass Mutual, were focused on finance and operational disciplines.

O’Donnell earned his bachelor’s degree in economics from Fairfield University and an M.B.A. in finance from Rensselaer.

Tim Pfeifer Joins Aria Retirement Solutions Board

Tim Pfeifer, actuary and president of Pfeifor Advisory LLC, has joined the board of directors of Aria Retirement Solutions, a provider of guaranteed income solutions to independent Registered Investment Advisors (RIAs).

Pfeifer is a consultant to life insurance companies, banks, marketing organizations, regulators and mutual fund companies. A Fellow of the Society of Actuaries and has served on the Society’s Board of Governors, he has been a principal of Milliman, Inc. and a consultant with Tillinghast, a Towers Perrin Company.

**Ibbotson joins Lincoln Financial Group’s LifeSpan platform**

Lincoln Financial Group’s Retirement Plan Services Business has enhanced its LifeSpan Custom Model Portfolios program to allow plan sponsors to “delegate the fiduciary responsibility associated with developing, monitoring and updating” their portfolios to Ibbotson Associates, a unit of Morningstar, Inc.

Ibbotson will create a series of model portfolios, including target date, target risk, and retirement income, using each plan’s existing investment options to build the portfolios.

Lincoln’s LifeSpan program provides an open-architecture administrative platform that enables plan sponsors and consultants like Ibbotson Associates to develop customized asset allocation models for participants.

The platform is available to plans in Lincoln’s small-to-large retirement plan program and to consultants and advisors who wish to act as an ERISA 3(21) investment advice fiduciary or a 3(38) investment manager fiduciary.

ERISA section 3(38) allows defined contribution plan sponsors to hire a registered investment manager and transfer investment-related liability to the investment manager for the oversight of plan investments.

“This offering gives plan sponsors and their consultants an alternative to traditional off-the-shelf target date funds by providing an opportunity to create and manage custom model solutions, now with the option of discretionary management and 3(38) ERISA coverage from Ibbotson Associates,” said Eric Levy, senior vice president, head of Product and Solutions Management, Retirement Plan Services, Lincoln Financial, in a release. “These solutions can help provide both plan participants and plan sponsors the opportunity to generate better retirement plan outcomes.”

The LifeSpan models may be offered as a Qualified Default Investment Alternative (QDIA) and are also available to ERISA and non-ERISA plans.

Three new sales directors at MassMutual Retirement Services

MassMutual’s Retirement Services Division has added three new sales directors to its sales and client management organization, led by senior vice president Hugh O’Toole. They are:

Dararith Ly, who joined the company in 2007, has been promoted to sales director. He will be responsible for retirement plan sales across Pennsylvania, Delaware, West Virginia and Southern New Jersey.

John Randall has been hired as sales director, effective April 2. He is based in Seattle and serves clients in Washington, Oregon, Idaho and Alaska. Before joining MassMutual, he served as district manager with ADP.

Raymond Zittlow was promoted to sales director, effective January 1. Based in Minneapolis, he is responsible for retirement plan sales in Minnesota, Montana, North and South Dakota. Zittlow most recently served as western collective investment trust practice leader with the division’s Memphis branch.

All three men report to Shefali Desai, emerging market sales manager with MassMutual’s Retirement Services Division.

Nationwide Financial enhances SPIA

Nationwide Financial has introduced an enhanced version, called INCOME Promise Select, of its existing INCOME Promise fixed immediate annuity, according to a release. The new version includes:

Lump sum cash refunds for beneficiaries of clients who do not outlive their principal investment.
The option to make lump-sum withdrawals in case of emergency or the need for extra cash.
Two new cost of living adjustment (COLA) options—a 4% and 5% annual increase to go with the existing 1% and 3% options.
A new quote and illustration tool to help advisors demonstrate the benefits and features of Income Promise Select.

The product includes individual and joint annuitant options, as well as period certain or lifetime payouts. The emergency liquidity feature is available with term-certain or cash refund payment options.

The Financial World Is Round

Posted on April 17, 2012 by Editor Test -

The outcome of next fall’s presidential contest may well depend on how many Americans are convinced that cutting the trillion-dollar federal deficit (and the $15 trillion national debt) is Job One for the next administration. And if we make the wrong choice, some drastic and misguided policy decisions might get made.

Mitt Romney, with his recent endorsement of Rep. Paul Ryan’s budget proposal, has identified himself as a deficit hawk. As for the president, he’s probably a deficit dove at heart, but he seems determined not to look soft on the issue.

In fact, much of the country believes, as dogmatically as Colonial-era physicians believed in purging and bloodletting, that Washington should spend much, much less, starting right away. But one group of “heterodox economists,” the Modern Monetary Theorists, disagrees.

You may never have heard of MMT, but its practitioners, who tend to be admirers of the late economist Hyman Minsky, can be found all over the globe. They’re at the U. of Missouri–Kansas City (UM-KC), at the U. of Newcastle in Melbourne, Australia, and especially at the Levy Economics Institute of Bard College in Annandale-on-Hudson, NY. One the easiest ways to find them, as I did last week, is to attend the Levy Institute’s Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies, held every April at the Ford Foundation on E. 43^rd St. in Manhattan.

This year’s conference, entitled “Debt, Deficits and Financial Instability,” was focused on the prospects for financial reform, not on MMT per se. But one of the speakers was L. Randall Wray, Ph.D., of UM-KC, who writes a lot about MMT in academic journals and the mass media. Having read several of his papers, I sought him out.

A wiry, reddish-haired man of medium height, Wray was at the wine and hors d’oeuvres reception after the conference adjourned. He and an MMT ally, Yeva Nersisyan of Franklin & Marshall College, were talking to Robert Kuttner, the longtime Businessweek columnist who now co-edits The American Prospect magazine.

Kuttner had remarked that Americans, in addition to participating in Social Security, should be able to save over their lifetimes in a government-sponsored, professionally managed, globally diversified retirement fund that pays out a consistent income in retirement.

Wray, who seems accustomed to being one of the most radical people in the room, disagreed. The government should get stop collecting a payroll tax entirely, he said, and just provide every retiree with a livable income. The risk-free interest rate, he suggested, should be zero. (He also believes—and this won’t endear him to the retirement industry—in ending tax advantages for 401(k) savings.)

Without warning, a slightly flustered, determined-looking woman approached Wray and said that she had worked in government and at one of the big investment banks and that she disagreed with his ideas. Wray politely, but firmly, responded to her objections. She turned and left. He returned to his conversation.

I’m still trying to get my head around MMT, and I don’t pretend to grasp all the details. I can tell you what its practitioners don’t believe, however. For instance, they definitely don’t agree with the idea, as Speaker of the House John Boehner once phrased it, that when households have to “tighten their belts” the government also has a duty to tighten its belt—by spending less.

To MMT believers, that makes as little sense as saying that a reservoir should release less water during a drought than it does when there’s plenty of rain. The purpose of a sovereign currency and a central bank, they argue, is to provide liquidity—and investment and employment—when the private sector can’t. But to call them Keynesians wouldn’t give you the whole picture.

In contrast to those who’ve announced that the United States is “broke,” the MMT crowd claims that our government can’t go broke or run out of dollars any more than Caesar’s Palace can run out of plastic chips. As for the danger of leaving a massive tax bill for our grandchildren, MMT-ers hold that the federal government doesn’t need taxes to pay for its activities; it relies on taxes mainly to remove excess money from the economy and to prevent inflation. Supply-side economics, which seems to suggest that we’d collectively pay more in taxes if we each paid less in taxes, doesn’t add up for them.

MMT-ers believe that, like Galileo, the Italian astronomer who demonstrated that the Earth orbits the Sun, or like Columbus, who proved that you can’t sail off the edge of the Earth, they’re simply rendering a more accurate portrait of reality than the one most of us carry around in our heads.

Most of us, in their view, still believe that the financial world is flat, not round. We persist in that belief, they might say, because, on the micro level, in our household or municipal or state economies (e.g., Greece or California), the financial landscape is flat. But at the sovereign level, at the U.S. or Canadian or British central banking level, the world is spherical.

But don’t take my word for it. I recommend “Understanding The Modern Monetary System,” a 2011 paper by Cullen O. Roche, “The 7 Deadly Innocent Frauds of Economic Policy,” a short book by Warren Mosler, and “Global Financial Crisis: A Minskyan Interpretation of the Causes, the Fed’s Bailout, and the Future,” a recent monograph by Wray.

MMT might strike you as sacrilegious, or quixotic, or even crazy. If so, you’ll have company—at lofty places like the Bank of England and the University of Chicago. I don’t necessarily agree with all the policy recommendations of MMTers. But, for me, MMT helps explain practically everything that was previously mystifying about our financial system. This much seems clear: the issues addressed by MMT are more than academic. The outcome of the next presidential election, and the health of our economy, may depend on how we feel about them.

NASI offers ‘exit strategy’ for Social Security payroll tax holiday

LPL Financial completes acquisition of Fortigent

Northwestern Mutual sells Russell Investments Center in Seattle

NETFA, the first US-based ETF trade association, is formed

BNY Mellon and Investor Analytics introduce liability modeling

New York Life introduces three-year term for MVA fixed annuity

Linked LTCI attracting younger buyers

Prudential annuity executives move up

Tim Pfeifer Joins Aria Retirement Solutions Board

Ibbotson joins Lincoln Financial Group’s LifeSpan platform

Three new sales directors at MassMutual Retirement Services

Nationwide Financial enhances SPIA

Data Connection

**Ibbotson joins Lincoln Financial Group’s LifeSpan platform**