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Heat from the Street

Posted on April 3, 2012 by Kerry Pechter -

The Hartford’s recent announcement that it would get out of the individual annuity business brooded over the Insured Retirement Institute’s marketing conference this week like the wall-mounted head of a taxidermized, heavily-antlered, glass-eyed stag.

The insurer’s decision, which apparently came at the insistence of hedge fund manager John Paulson, was an unsettling reminder that Wall Street will help determine the future of the annuity business, for better or worse. Paulson controls a reported 8.4% of Hartford shares (NYSE: HIG).

Indeed, the influence of Wall Street seemed evident in the mere fact that so many IRI attendees stuck around for Monday’s final pre-cocktail general session, listening closely to a pair of sobering presentations on why investors continue to undervalue most life insurer stocks.

The ballroom of the New York Hilton remained quiet as Ramy Tadros of Oliver Wyman explained that, according to his data, every dollar of new VA business—hypothetical, fully hedged living benefit business with conservative assumptions about the economy—stands to lose about six cents, depending on client behavior. Yet some insurance executives continue to use rosy assumptions that project margins of 10% to 20%, he said.

Following Tadros at the podium was well-known UBS analyst Andrew Kligerman, who said the market wants more transparency from lfie insurers. Unless variable annuity pricing techniques become less of a “black box,” he said, investors would undervalue the companies that issue them—even though “the life industry is healthier than it’s ever been.”

“If insurance companies want valuations to go up, they’ll need to declare more,” Kligerman noted. “I’m not seeing the disclosures. That’s the big issue right now.”

And that’s also the big rub. In a business where product developers guard the recipes of their “secret sauces” like four-star chefs, where accounting fudge-factors are not uncommon, and when many investors may not even want to spend time studying the VA funds and riders—how much more transparent can a publicly-held VA issuer be, and how much impact would it have?

(At one point, the irony that life insurance guarantees inspire less confidence than the Street’s demonstrable inability to anticipate the future course of the markets seemed to hang in the air of the ballroom like the tobacco smoke that would have hung there if this meeting were held a few decades ago.)

The other elephant-in-the-room—bigger than the transparency elephant but perhaps more futile to debate—was the low interest rate environment, a form of financial repression that gives life to equities but murders the annuity business. “We need a good move in interest rates,” said Kligerman. “We need 10-year Treasury rates of 3.0 to 3.5%.”

Not hula-hoops

To evaluate the viability of the VA business, however, requires that an investor know much more than how the hedges in the products work. The panelists at the IRI breakout sessions on Monday made it clear that each annuity manufacturer positions its products differently and each advisor uses the products a bit differently. These are not hula-hoops.

At the session on “Trends in Retirement Income,” for instance, Michael Harris of Lincoln Financial, Kevin Kennedy of AXA Distributors, and Bob Densmore of Allianz Financial Services made it clear that their strategies are as different as their ownership (Lincoln Financial is a publicly-held U.S. company; Allianz and AXA have European parents).

Lincoln focuses on consistently pushing its patented deferred variable income annuity, i4Life, which has given Lincoln a perennial fourth-place ranking in VA sales. “Our niche is income,” Harris said. “Twenty percent of the business that comes in the door gets annuitized.” For Allianz Financial, indexed annuities continue to be the sweet spot.

AXA Financial, by contrast, appears most excited about its Structured Capital Strategies ADV variable annuity, an accumulation vehicle that uses a collar strategy to mitigate risk while offering exposure to equities and commodities indices. The product just posted its first $100 million month, Kennedy said, and 58% of sales are going to advisors who’ve never sold a variable annuity before.

The same impression—that there is no monolithic VA industry—was left by a panel on “Retirement Income Methodologies of Advisors,” where statements by Gregory Blank of Blank Financial Group, Ben Kronish of Kronish Associates, Inc., and Gregory Olsen of Lenox Advisors demonstrated the heterogeneity of advisor approaches to the use of annuities.

For Blank, an income benefit is just a safety net that enables his clients to take more risk. For Kronish, who sells only by commission, guaranteed income is the goal, not the safety net. For Olsen, the VA living benefits allow his nervous clients to stay invested through dicey markets instead of cashing out.

1% to 2% growth forecast

Unprecedented sales consolidation was also on the minds of several IRI attendees. Manufacturers and distributors alike were asked if they were concerned that the “big three”—MetLife, Prudential Financial and Jackson National Life—account for more than half of all VA sales. At least one executive said yes.

“I worry that I’ll wake up one day and find that 40% of our business is going to one insurance company,” said Scott Stolz of LPL Financial. “The domination by three firms is unprecedented,” said Bob Densmore of Allianz Financial Services. “We’re seeing a separation into the haves and have-nots. Each company is trying to decide where they want to be in the marketplace.”

Few expect VA sales to be strong in 2012. If anything, the pace of exchanges, which normally account for most new sales, should slow because new products are generally less generous than older products. LPL’s Stolz expressed concern that VA products might “get worse for awhile”—with higher costs and leaner benefits—and lead to a period of lower sales.

MetLife intends to reduce VA sales from $28 billion in 2011 to “$17.5 to $18.5 billion” in 2012, said Kligerman, who predicted sales growth of just one to two percent in 2012 and 2013. Wall Street might even like that; as Kligerman said, “Growth in this category is not seen by investors as a good thing.”

Despite recent upward movement in 10-year Treasury rates, the low rate environment, which escalates the cost of hedging, is expected to linger until at least 2014. If an attractive new product appears in 2012, said one attendee, it will probably come from a smaller life insurer that doesn’t have what one IRI speaker called the “albatross” of a questionable book of old VA business around its neck.

GAO recommends task force to promote micro retirement plans

Posted on March 28, 2012 by Editor Test -

The Government Accountability Office has recommended that the Department of Labor convene an interagency task force with the Treasury Department, the IRS, and the Small Business Administration SBA to foster retirement plan sponsorship by small employers.

In a recent study, GAO documented its findings that:

Only 14% of small employers sponsor some type of retirement plan.
The likelihood that a small employer will sponsor a retirement plan depends primarily on the size of the employer’s workforce and the workers’ average wages, not the industry or the geographic region.
The greatest likelihood of plan sponsorship was among small employers with larger numbers of employees and those paying an average annual wage of $50,000 to $99,999. The most common plans sponsored by small employers are 401(k)s and Savings Incentive Match Plans for Employees (SIMPLE) Individual Retirement Arrangements (IRA)—an employer-sponsored IRA designed for small employers—at 46 percent and 40 percent, respectively, of total plans.
IRS currently does not have the means to collect information on employers that sponsor another type of IRA plan designed for small employers, the Simplified Employee Pension (SEP) IRA plan, which limits what is known about employers that sponsor these plans.

In the executive summary of the report, Private Pensions: Better Coordination Could Help Small Employers Address Challenges to Plan Sponsorship, the GAO said:

“Many small employers said they feel overwhelmed by the number of retirement plan options, administration requirements, and fiduciary responsibilities. For example, many are concerned about the potential risks associated with sponsoring a plan.

“Although federal agencies conduct education and outreach on retirement plans, a number of small employers and other stakeholders said small employers were unaware of these initiatives.

“For example, Labor, IRS, and the Small Business Administration (SBA) collaborate to develop and disseminate information and guidance online but do so through separate websites and in a largely uncoordinated fashion.

“Small employers and other stakeholders also cited other challenges to plan sponsorship, including a lack of financial resources, time, and personnel. However, some small employers said their employees prioritized health benefits over retirement benefits. To address some of the challenges to plan sponsorship, some small employers said they use contracted service providers that perform plan administration tasks.”

Options offered by small employers for addressing some challenges and reducing the complexity of plan sponsorship for small employers included:

Simplification of federal requirements for plan administration, such as easing or eliminating certain plan testing requirements.

Increasing the tax credit for plan startup costs.

Reasons for the study

One-third of private sector employees in the United States work for small employers. Congress and federal agencies have made efforts to encourage small employers to sponsor retirement plans for workers, but federal data show workers’ access to plans remains limited, leaving many without a work-based plan to save for retirement.

For this report, GAO examined (1) characteristics of small employers that are more or less likely to sponsor a plan for their employees, (2) challenges small employers face in establishing and maintaining a plan for their employees, and (3) options to address these challenges and attract more small employer plan sponsors.

GAO defined small employers as for-profit firms that employ 100 or fewer employees. GAO analyzed IRS and Labor Department data, interviewed agency officials and experts, held discussion groups with small employers, and reviewed relevant federal rules, literature, and retirement plan proposals.

Act V of the VA Drama

Posted on March 28, 2012 by Kerry Pechter -

With the departure of Hartford and others from the variable annuity business, the curtain has come down on the fourth act of the VA drama. Innovation was the first act, followed by the Arms Race, De-Risking and then Exiting.

Now the curtain may be rising on Act V: the Buyback of Living Benefits.

In February, Transamerica Life filed a new VA prospectus with the SEC that offers to buy back, with a cash bonus, certain in-force but non-annuitized GMIBs (guaranteed minimum income benefits) that the insurer sold until 2003.

Separately, Achaean Financial, a Chicago-based firm founded by former Lincoln Financial executive Lorry Stensrud and joined recently by former Ibbotson Associates president Mike Henkel, has adapted its immediate variable annuity, IncomePlus+, as a new option that insurers can offer to certain owners of GMIB benefits.

For insurers with in-the-money GMIBs, buy-backs could help reduce the long-term risks and ongoing accounting issues associated with living benefits. For certain owners of in-the-money GMIBs, a cash bonus (in the Transamerica Life plan) or the mortality credits of an IVA (in the Achaean plan) might offer bigger payouts than their GMIB is likely to deliver.

While such deals may make sense on paper, they could carry “optics” risk. Like the re-introduction of “Classic Coke” or the famous Tylenol recall, they imply that mistakes were made. So the communication of these offers, both to advisors and to contract owners, will need to be done carefully—and in compliance with FINRA’s suitability requirements for VA transactions.

An IVA chassis

Of the two buy-back innovations, the Achaean product may have broader significance, since it is being actively marketed to a number of insurers. And, according to Henkel, an institutional investment manager, it may eventually be offered to issuers of GLWBs as well.

“There are some innovations embedded in it—that’s where our patent-pending resides—but it’s based on an IVA chassis,” Henkel told RIJ. “The problem with a standard IVA, compared to a VA guarantee on an account high water mark, is income variability. Even with the AIR (assumed interest rate) calculation, a string of bad years could drag the payment down. Lorry [Stensrud] said, We’ll have an IVA with a guarantee that payments can’t go down.”

The Achaean product differs from a standard IVA in a couple of important ways. First, it will be offered as a new rider, added retroactively, to existing GMIB VAs. Second, it involves a method for determining whether a GMIB owner is likely to be better off with an IVA or not.

The account value of the existing VA would be used to buy the new IVA, which would offer a higher annuitization factor than the insurer was contracted to pay on the guaranteed benefit base (presumably higher than the account value) under the GMIB.

For the first five years of the IVA, payments would be flat, and would be “within 10% or 15%” of the payments from a conventional SPIA, Henkel said. During that initial period, excess earnings from the managed assets would go into a side fund from which, subsequently, income bonuses would be paid or shortfalls amended.

“A risk-sharing mechanism, which acts as a collar, is embedded in the construct of the IVA,” Henkel said. “For instance, a 65-year-old investor who put 100,000 into an Achaean policy might get a 6% payout, of which 3% would be return of principal and the rest investment return.

“If the $100,000 earns more than 3%, the excess goes into a risk-sharing pool. That money can be used to true up a payment or to enhance income. Any excess at the end of the policyholder’s life would be paid out as a death benefit,” he said.

If this sounds like Lincoln Financial’s popular i4Life variable income annuity VA rider, there’s a reason. Stensrud was part of the i4Life product team when he was at Lincoln. But what’s new is the formula that determines whether IncomePlus+ would be better for the contract owner than the exisiting GMIB.

That test relies on Monte Carlo simulations of future market performance, but its outcome appears to depend primarily on the age of the owner, and whether the IVA’s mortality credits would produce higher payouts than the GMIB—which offers no mortality pooling effect—could deliver.

The insurer benefits too, Henkel said. The IVA isn’t as expensive to hedge as the GMIB. And, unlike VAs, the IVA can be reinsured, which frees up insurer capital. “We call it remediation,” he said. “We’re going to insurers with problematic books of business and saying, ‘Would you like to do something about it?’”

Taking your lumps

As the filed prospectus explains, Transamerica Life is making a one-time Alternative Lump Sum Offer (“ALSO”) to eligible owners of in-force riders that it offered until 2003 on 26 variable annuities. As of January 31, 2012, 9,994 contract owners could be affected. Policies that have already been annuitized aren’t eligible for the ALSO.

If the account value is less than a certain percentage—as yet unspecified—of the benefit base, Transamerica will add a bonus—unspecified in the prospectus—to the surrender value. No surrender charges will be assessed if the contract is still in the CDSC (contingent deferred sales charge) period.

To accept the offer, the contract owner can either surrender the existing contract, trade it in for a new Transamerica Life policy, or exchange it for another insurer’s life or annuity policy, the ALSO prospectus said.

“It’s only for the older benefits,” said Tamiko Toland, Strategic Insight’s variable annuity watcher. “AEGON talked about this in its last earnings call, though not specifically. They spoke more generally about the issues with the legacy block and measures to mitigate that risk. It goes back to the GMIB. They sold GMIBs until 2003 and then switched to GLWBs. This doesn’t affect any of the newer business. It’s a risk management strategy. That older business is covered by macro hedges, not dynamic hedges. Paying off a long-dated obligation with a lump sum reduces the risk management onus.”

Jeffrey Dellinger, an actuary formerly with Lincoln Financial who owns Longevity Risk Management Corp. in Fort Wayne, Ind., told RIJ in an e-mail:

“Given that these programs take time to put together, Transamerica likely started working on this ALSO program well before the December 2011-March 2012 stock market run-up. It may have appeared that the GMIB benefit base would provide an amount of income superior to the actual account value benefit base more frequently or by a greater order of magnitude than originally envisioned.

“If that were coupled with longer anticipated payouts due to greater-than-previously-assumed annuitant longevity, then that combination of events could have inspired Transamerica to take this action.

“The rider charge might have been insufficient to cover the difference between the GMIB benefit base—upon which the annuity payouts will be premised—and the VA account value—upon which the annuity payouts would be otherwise premised. And with interest rates being so low, Transamerica may be unable to make up the shortfall via the margin between earned rate on investments and credited rate on the underlying immediate annuity reserve during the payout phase.

“Without studying the specifics of the riders, that would be one educated guess motivating Transamerica to offer the ALSO program. In short, it might be buying back the GMIB option— essentially an equity put option—and conceivably doing so at less cost than if the option were actually exercised, depending on what it offers customers in the way of an ‘Enhancement Amount’ to do so.”

A well-financed Seattle start-up aims to spread cheap financial advice

Posted on March 28, 2012 by Editor Test -

FutureAdvisor, a Seattle company started by young computer whizzes, has begun offering a free online financial service with the same name, that will help investors “reduce fees, maximize on tax efficiency and select the right investments,” the company said in a release.

The founding team includes financial industry veterans, software engineers from Microsoft and several math PhDs. Based in Seattle and a Y Combinator funded company, FutureAdvisor is backed by Sequoia Capital and angel investors Keith Rabois, chief operating officer of Square, and Jeremy Stoppelman, founder of Yelp.

“We started with the vision that high quality advice should be available to everyone,” co-founder Bo Lu told RIJ. “If you don’t already have wealth accumulated, it’s hard to get high quality advice. When I started looking for advisors for my friends, I found either fee-based advisors, who took one percent of the assets and wanted at least $500,000 in investments, or brokers who tried to sell them annuities or life insurance.

“After helping our friends with their finances, we created FutureAdvisor,” he said. “You can think of it as an encoding of the entire body of index-investing knowledge. Our team is half finance people and half engineers. We monetize by having a small percentage of users sign up for our Gold or Platinum Plan. We only make money from one direction. We won’t carry advertising.

“Advisors love us, because they see this unmet need as clearly as we do. They’re recommending us to the [adult] children of their clients. We built FutureAdvisor with younger people in mind, but we’re being used by people across the age spectrum.” Lu estimates that, in a country with only about 250,000 advisors, a lot of people won’t be able to get personal financial advice.

“We envision a world where old school financial advisers are obsolete, except for the very wealthy,” he said.

FutureAdvisor’s release said that its online service includes:

Free basic automated service, with optional upgrades. The services that require no human intervention are free. Optional Gold and Platinum plans, priced at $49 and $195 a year, respectively, allow clients to schedule consultations with live financial advisers.
Help with allocation. FutureAdvisor provides recommendations for future investment selections based on age, risk tolerance as well as current portfolio mix.
Tips on re-balancing. FutureAdvisor reminds its clients to rebalance regularly.
Advice on saving. FutureAdvisor tells clients how much they need to save per year to stay on track toward their retirement goals and calculates how much they need to save overall to retire comfortably.
An objective viewpoint. FutureAdvisor translates proven investment principles into a web application that “everyone can understand, without being swayed by human emotions.”

The Gold Plan includes 24/7 portfolio monitoring, coupled with rebalancing alerts and an annual scheduled video call with an on-staff adviser. The Platinum Plan provides a face-to-face connection of a real-life adviser and includes everything from the Gold Plan plus unlimited video calls with an investment adviser. FutureAdvisor is launching with a promotion whereby people who refer three others to FutureAdvisor receive the Gold Plan free.

Fiserv launches ‘Retirement Illustrator’

Posted on March 28, 2012 by Editor Test -

Fiserv, Inc., a $4 billion provider of financial services technology, said it has introduced Retirement Illustrator, an “interactive and collaborative” retirement income planning tool for financial professionals.

Based in Brookfield, Wisconsin, Fiserv has more than 3.6 million accounts on its wealth management platform and over one million UMA sleeves. It now owns AdviceAmerica financial planning technology and CashEdge data aggregation capabilities.

Retirement Illustrator is intended to help advisors present retirement spending requirements and distribution alternatives, accounting for risk events such as withdrawal, longevity, survivor needs and healthcare risks.

“Retirement Illustrator boasts support for the front-office component of the Fiserv convergence strategy. The underlying technology of the solution gives financial professionals a powerful way to illustrate real-life scenarios and the impact on an investor’s retirement plan in a simple, easy to understand manner,” the company said in a release.

The tool enables advisors “to forecast varying market conditions and the impact financial products can have on an investor’s retirement outlook – a powerful sales illustration tool in today’s volatile market. A highly graphical analysis can be generated with clients face-to-face or collaboratively by phone,” the release said.

“An unlimited number of scenarios can be created at the touch of a button, giving advisors a robust and unique way to display side-by-side comparisons of how different product solutions, life expectancies and an array of life choices can affect retirement income,” the release continued.

“Retirement Illustrator uses Monte Carlo technology to offer simulations of retirement plans in favorable and unfavorable market conditions. The solution answers investors’ most important questions, like ‘What If I retire earlier or later?’, ‘What if I allocate less money or more money’ or ‘What If I die before my spouse?,’ all illustrated with intuitive, graphical demonstrations,” said Cheryl Nash, Fiserv’s president of Investment Services.

Fitch approves of Hartford’s decision to run-off annuities

Posted on March 28, 2012 by Editor Test -

After a review of Hartford’s plan to focus on its property/casualty (P/C) commercial and consumer markets, group benefits, and mutual funds businesses, Fitch Ratings affirmed the credit ratings of Hartford Financial Services Group.

Hartford’s plan calls for the individual annuity business to be placed into run-off, and for HFSG to pursue divestiture options for its individual life, Woodbury Financial Services, and retirement plans businesses. Following the announcement, Fitch affirmed all ratings for HFSG and its primary life and P/C subsidiaries.

“The affirmation reflects our view that HFSG will continue to support its insurance subsidiaries and maintain insurance company capitalization that is consistent with the current ratings, with HFSG not expected to sell any insurance operating companies as part of any divestiture of businesses. While the plan creates execution risk and has the potential to affect HFSG’s business position and the franchise value of its ongoing businesses, Fitch considers these risks to be manageable,” Fitch said in a release.

The release continued:

“We expect a portion of cash proceeds from any future sale of the noncore businesses to be directed toward debt reduction, thereby contributing to a delevering of the balance sheet and an improvement in the weak interest coverage ratios at the holding company. “Hartford’s liquidity position is solid, with approximately $1.6 billion in holding company cash, fixed maturities, and short-term investments at Dec. 31, 2011, providing the necessary flexibility to allow cash to go toward debt reduction.

“We believe management’s target of a 12%-13% return on equity in continuing lines of business may be difficult to achieve in the short term due to the highly competitive P/C underwriting environment and weak investment yield outlook. However, in the long term, higher returns may be attainable as the company’s strategic focus is sharpened, and if market and economic conditions improve.

“Over the long term, management’s decision to exit more volatile businesses such as variable annuities and individual life should help de-risk the company as it becomes less vulnerable to swings in investment performance. Still, market risk will need to be managed carefully to maximize the sales price of businesses that no longer fit with the company’s new strategic focus.

“Execution risk relates primarily to the need to find the right buyer for the non-essential units and in disposing them at a reasonable price given weak market conditions. The longer the company requires to sell the individual life and retirement plan businesses, the greater the risk that prospective buyers will gain the upper hand in negotiations and view it as a distressed sale.

“Until the exited businesses are sold or run off, the risk remains that management time and resources will be diverted away from higher return core operations.”

Mad Men

Posted on March 27, 2012 by Editor Test -

Stocks were battered on Monday, but the bloodletting didn’t happen on any stock exchange and Bloomberg didn’t report it. The damage occurred at the Roosevelt Hotel on Madison Ave., during presentations at an otherwise composed Society of Actuaries meeting.

The SoA hosts periodic Investment Symposiums, and this one was staged in New York. One of the event’s four subject tracks—Retirement/Pensions—was of relevance to RIJ readers, as was a session on demographics and investments, where financial pundit Robert Arnott was video-conferenced in from Budapest.

For me, the leitmotif of the Retirement/Pension track was that risky assets and pensions mix like, for instance, metallic sodium and H₂O. Explosively, that is. The critique of equities, or more specifically, of equities as the most appropriate feedstock for retirement income flooring, came from several angles:

1) Longer time horizons don’t make stocks safer,

2) Asset-liability matching is the only way to ensure positive pension outcomes,

3) TIPS, not equities, should be the primary raw material for generating essential retirement income,

4) As Boomers age, demand for stocks will fall.

If there were any bulls at this meeting, they were repeatedly gored—at least by the speakers on the retirement/pensions track. (Since these were pension folks, rather than, say, active fund managers, that’s not surprising.)

Zvi Bodie, the Boston University economist, advisor to pension fund managers and co-author of a recent book (Risk Less and Prosper (Wiley, 2011)) that urges individuals to finance their retirements primarily with ladders of Treasury Inflation-Protected Securities, set the tone early.

Taking a position that he articulated in his book, Bodie argued that time-diversification—the conventional wisdom that stocks always pay off in the long run—doesn’t work. Instead, it’s an illusion based on a small and biased set of historical returns.

As evidence, Bodie cited the fact that no sane options dealer would sell you a long-dated put on the S&P 500. Average returns admittedly become less volatile over time (because ups and downs cancel each other out), but cumulative returns can diverge widely over time, as Monte Carlo simulations attest.

When it comes to achieving a no-risk personal pension, Bodie recommends no-risk investments. “If a neighbor comes and asks me for financial advice,” Bodie said, “I tell him, ‘I can’t give you any recommendation on the stock market.’ But I do say, ‘Buy the maximum number of [U.S.] I-Bonds that you can get. They’re paying a zero real rate of return, you can cash them in at their accrued value at any time after the first year, and there’s no downside price risk.’”

Henry Hu of the University of Texas, who gained a mix of fame and notoriety in 2011 with a plan for investors to buy government annuities, followed in a similar vein. “Many investors have a mystical belief in ‘stocks-for-the-long-run.’ Even at the height of the NASDAQ bubble, a Paine Webber survey showed that the average investor expected an average annual return from stocks of 15.3% over the next 10 years.

“The fundamental problem, the 800 lb. gorilla in the room, is that we don’t save enough,” Hu added. He suggested that Americans buy U.S. bonds to fund inflation-adjusted annuities issued by the federal government. “If you price it right, it won’t cost the government anything,” he said. “It will also diversify the base of U.S. debt. We’re too dependent on Asian countries for their willingness to buy Treasuries.”

Ron Ryan of Ryan ALM, Inc., came up next to say that public pensions are running huge deficits in part because they don’t have the right benchmarks. Instead of using market benchmarks, he said, they should be using “customized liability benchmarks.”

If each fund’s investment policy were dictated by its own goal, more precise asset-liability matching would be possible, and the achievability of the goals wouldn’t swing up and down with the value of the investments. But that never happens today, he said.

No customized liability benchmarks have existed, however—until now, said Ryan, who helped created the original Lehman bond indices and whose company is now in the business of creating customized liability benchmarks for corporate and public pensions.

“How can you use a generic market index when pension liabilities are all different?” he asked. “Until a customized liability index is in place, nothing on the asset side can work. A handful of market indices dictate how pension assets are managed, but they have nothing to do with the liabilities.”

The long decline in interest rates since 1982 hurt defined benefit pensions badly, Ryan said, by making them more expensive to fund. Pension fund managers also failed to take advantage of surpluses during the mid- to late 90s by rebalancing from stocks to bonds. From an accounting standpoint, public pensions looked particularly underfunded after the 2008 market crash, he added, because their assets were marked to market while the value of their liabilities were still based on an assumed growth rate of 8%.

Appearing via a broadband video connection from Budapest, Robert Arnott of Research Affiliates spoke about the findings in his paper in the latest issue of the Financial Analysts Journal, which forecasts slowing GDP growth and declining share prices in developed countries that are aging.

It was no coincidence, for instance, that the bull market in the U.S. started when leading-edge Boomers hit their mid-30s and ended when they hit 62. As he puts it in the paper, “Young adults are the driving force in GDP growth; they are the sources of innovation and entrepreneurial spirit. But they are not yet investing; they are overspending against their future human capital. Middle-aged adults are the engine for capital market returns; they are in their prime for income, savings, and investments.”

He goes on to write, “Large populations of retirees (65+) seem to erode the performance of financial markets as well as economic growth. This finding makes perfect sense; retirees are disinvesting in order to buy goods and services that they no longer produce, and they are no longer contributing goods and services into the macroeconomy. This effect is less pronounced for bonds, presumably because they are sold later in retirement than stocks, in conformity with widespread financial advice.”

The American Recovery

Posted on March 27, 2012 by Mohamed A. El-Erian -

The United States has gone through an arduous period of intervention and rehabilitation since the global financial crisis in 2008 sent it to the economic equivalent of the emergency room. It moved from the intensive-care unit to the recovery room and, just recently, was discharged from the hospital. The question now is whether the US economy is ready not just to walk, but also to run and sprint. The answer will powerfully influence global economic prospects.

It is easy to forget how critical things were back in the fourth quarter of 2008 and the first quarter of 2009. Having suffered what economists call a “sudden stop,” many parts of the US economy were imploding or had ceased to function – to extend the medical metaphor, even the most vital organs were threatened.

Economic activity collapsed and unemployment surged. Credit stopped flowing. Banks were on the verge of bankruptcy and nationalization. International trade was disrupted. Income and wealth inequalities worsened. And a general sense of fear and uncertainty inhibited the few healthy parts of the economy from engaging in meaningful hiring, investment, and expansion.

Parlous conditions required dramatic measures. And that is what the economy got in the form of unprecedented fiscal stimulus and unthinkable policy activism on the part of the US Federal Reserve.

As they intervened, American policymakers consulted closely with their counterparts around the world, urging them to take supportive steps. And they did, culminating in one of the most successful periods of global policy coordination in history, involving both advanced and emerging economies.

For many, the global economic summit held in London in April 2009 marks the point when the US economy turned the corner. The change was so notable that many policymakers fell into the trap of projecting a quick rebound, especially given America’s prior history of economic dynamism and resilience, only to be humbled by what has proven to be a protracted and complex process of recovery. Even today, that process highlights the scale and scope of the economy’s structural weaknesses.

Having reduced the risk of a relapse into recession, the US economy is able now to move on its own power, though gingerly. The horrific collapse in the labor market has given way to consistent monthly employment gains, albeit less than what is needed for a full recovery. Manufacturing activity has picked up, helped by a surge in exports. The housing sector seems to be finding a tentative bottom (though housing finance remains incoherent). Consumers have better access to credit. And, sensing all of this, companies are beginning to deploy the massive precautionary cash balances that they have accumulated.

With the US still by far the largest economy in the world and the anchor of the international monetary system, its well-being has huge implications everywhere. So, not surprisingly, the US recovery has helped to set a calming and constructive tone – and at a critical juncture, given that Europe is still struggling with a debt crisis on the eurozone periphery, and emerging economies are going through a cyclical slowdown.

Politics is also in play, and in a manner that significantly influences who will lead the world’s superpower after this November’s presidential and congressional elections. The economic improvements already have helped President Barack Obama’s re-election prospects, as has the continuing drama of a drawn-out, divisive, and expensive Republican primary.

The problem is that the sense of relief now can – and probably will – be taken too far. Indeed, today’s good news should not obscure some consequential structural limitations that will require prolonged therapy and caution. After all, the US economy has yet to regain its full strength, is too structurally impaired to sustain any rapid forward movement, and has not yet started to overcome the many distortive side effects of the extreme medicine that it received.

Locking in recovery implies a multi-year program of serious and coordinated reforms that fundamentally improve the way the country educates and trains its citizens, invests in infrastructure and finances other productive outlays and housing, competes in the global economy, and formulates and adheres to a rational budgetary process. Such a program will also require a recovering America to navigate several key challenges in the next few months.

For starters, the economy is not yet in a position to handle the 4-5%-of-GDP “fiscal cliff” that is approaching as all of the hard political decisions that were postponed come into view at the end of this year. The prospect of a disorderly fiscal contraction needs to give way to a more rationally designed approach that avoids undermining the fragile recovery. To accomplish that, the political class must avoid the bickering that almost sent America back into recession in 2011, and that raised major questions about the quality of the country’s economic governance.

Oil prices are not helping. Having already surged on account of Iran-related geopolitical concerns, they are altering American consumers’ behavior, weakening their confidence, aggravating the country’s payments imbalances, and further reducing policymakers’ flexibility.

And then there is Europe, which is yet to overcome decisively its debt and growth problems. Like other countries, the US must continue to strengthen internal firewalls to limit its vulnerability to what is still a complex crisis across the Atlantic.

America’s full recovery is not yet guaranteed. A mix of steadfastness, caution, and good luck is needed for that to happen. And when it does, the country will be in a better position to repay its massive hospital bill.

Mohamed A. El-Erian is the chief executive officer and co-chief information officer of PIMCO.

The Bucket

Posted on March 27, 2012 by Editorial Staff -

DST Brokerage Solutions merges DST TASS and Wall Street Advisor Services

DST Brokerage Solutions, a unit of DST Systems, a developer of tools, products, and services for broker-dealers, has combined its two sub-accounting service providers to form DST Market Services, LLC.

The new entity was created through the merger of DST TASS and Wall Street Advisor Services, and will continue to deliver mutual fund processing and sub-accounting services.

As a registered broker-dealer, DST Market Services is subject to the same regulatory environment as their clients. It will continue to provide mutual fund subaccounting services based on broker-dealer operations experience, an understanding of subaccounting work flow processes, and DST’s technology platform. DST Market Services is also a member of FINRA and SIPC.

Broadridge launches FinancePro

Broadridge Financial Solutions, Inc., has launched FinancePro, a global, multi-asset, multi-currency securities financing solution that can help financial institutions “optimize their funding activities by enabling them to make better collateral decisions and efficiently scale their repo, treasury and securities lending desks.”

FinancePro enables tracking and management of positions throughout the entire lifecycle of a financing transaction. The new Tri-party Allocation Simulator allows firms to optimize collateral allocations within tri-party trades prior to submission to the clearing bank. This unique capability reduces the firms’ overall funding expense.

FinancePro’s reporting capabilities allow front-, middle- and back-office personnel to analyze and act on information across a broad array of criteria, including: geographies, entities, currencies, business units, depositories, asset classes, counter-parties and many other categories.

This increased visibility into aggregated global positions will enhance Broadridge’s clients’ ability to optimize collateral and mitigate market and operational risk across legal or regional business entities. Advanced workflow functions within FinancePro also allow sales, trading and compliance teams to review and approve financing transactions according to pre-defined thresholds and parameters.

FinancePro integrates with Broadridge’s industry-leading securities processing solutions such as impact, BPS and Gloss as well as other front-, middle- and back-office systems. A full suite of straight-through-processing adapters is available for executing inter-capital broker transactions. FinancePro is designed to adapt to applicable regulatory requirements and tri-party reforms.

Investors postponing decisions until after election: BNY Mellon

In the past 10 years, the percentage of American investors who believe they will run out of money someday has risen to 48% from 30%, according to a survey commissioned by BNY Mellon Wealth Management.

More than six in ten investors (61%) surveyed said that Americans are pessimistic about the markets compared to fewer than four in ten (39%) who sense optimism.

“When it comes to how investors feel about the financial markets, you could say that bleak is the new black,” said Larry Hughes, CEO of BNY Mellon Wealth Management. “Many people are so negative about the markets that they find it hard to believe that something could possibly go right.
The survey, conducted last February, found that such worries are leading investors to postpone their investing or planning decisions, with 59% saying they are waiting for conditions to improve before taking action.

Nearly four in ten investors said they are holding off until after the Presidential election to take action and more than a third said they don’t intend to make any decision before they have a better sense of where tax and interest rates are heading.
Leo Grohowski, BNY Mellon Wealth Management’s Chief Investment Officer, said he nonetheless sees several opportunities in the current market: emerging market equities, high-yield bonds, dividend stocks.

Jere Doyle, senior vice president of BNY Mellon and an estate planning strategist for BNY Mellon Wealth Management, notes that the current combination of low interest rates, valuations and taxes offer specific planning opportunities.

“Given low interest rates, intra-family lending can be a compelling and timely estate planning opportunity. Bear in mind that transfer tax rates are likely to go up this year,” Mr. Doyle said. “There are also a number of mortgage and credit strategies now, too, because of historically low interest rates.”

SIGNiX and VERTEX partner to promote digital signatures

SIGNiX, a provider of digital signature technology, will partner with VERTEX, a provider of professional services and software to the financial services industry, to promote the use of electronic execution of transactions with secure digital signatures.

“The adoption and importance of e-signature technology has been rapidly accelerating in our industry,” said Steve Wilson, VERTEX’s CEO. “SIGNiX’s secure digital signature service is especially suited to significant financial transactions, and they are the only solution certified by the annuity industry through IRI, the Insured Retirement Institute.”

VERTEX “will offer our standalone solution known as MyDoX for immediate use by companies with no need for integration, but they also have the professional services resources to tightly embed the SIGNiX signature service as a seamless part of any automated process or application,” said SIGNiX CEO Jay Jumper.

Allianz Life promotes Matt Gray to vice president

Matt Gray has been named vice president, Market Management and Product innovation (MMPI) at Allianz Life Insurance Company of North America. He will lead product strategy and development, customer experience, and customer intelligence initiatives, as well as competitive intelligence, market research, segmentation, and analytics that help inform company strategies.

Gray started with Allianz Life as an intern in 1998. Most recently, he served as assistant vice president for the actuarial group, collaborating across the company in the development of new Allianz Life products including the Allianz ProV1 Annuity, the Simple Income III Rider on the MasterDex X Annuity, the Allianz 360Annuity, and the Allianz 365i Annuity. During his time with Allianz Life, Gray was part of the team that developed the Allianz Life dynamic hedging platform, assisted Allianz Korea in developing a fixed index annuity, and consecutively led actuarial product development for variable and then fixed index annuities.

Gray holds a Bachelor of Science degree in mathematics from the University of Minnesota. He is a Fellow of the Society of Actuaries, a member of the American Academy of Actuaries, and holds a Series 7 securities registration.

Treasury Department launches “Ready.Save.Grow.”

The U.S. Department of the Treasury has announced a new public education initiative, Ready.Save.Grow., that will “provide information and access to affordable, safe and convenient Treasury savings options that can help people take control of their future.”

Ready.Save.Grow. offers information and solutions to people who may not be aware of Treasury savings options, such as digital savings bonds and Treasury marketable securities,” said Bureau of the Public Debt Commissioner Van Zeck.

The Treasury Department’s Bureau of the Public Debt offers interest-bearing digital savings bonds starting at $25 and Treasury marketable securities starting at $100, and with no risk of principal loss. These savings options are offered through TreasuryDirect.gov, and can be purchased online or through payroll direct deposit after opening a free TreasuryDirect account.

20% of Americans 50+ unsure how to save

A survey of 463 investors commissioned by Natixis Global Asset Management (NGAM) found that even many affluent people aren’t sure how much they need to save, say they lack money for investing and prefer to spend today rather than save for tomorrow.

“Too many Americans… aren’t aware of the solutions available to them or simply don’t have enough money available to put toward savings,” said John T. Hailer, president and chief executive officer, Natixis Global Asset Management – The Americas & Asia.

Among the key findings from the NGAM survey:

30% of investors with $300,000 to $500,000 of assets, 22% with more than $1 million and 18% of those over age 50 aren’t sure how much to save or invest for future needs..
32% of respondents with less than $1 million in investable assets, 16% of those with more than $1 million in assets and 19% of those over age 50 say they can’t afford to save.
18% of Americans say they would rather spend today than put money away for the future. 22% of those with less than $500,000 in assets say they’d rather spend than save, compared with 13% of those with more than $1 million.

Steep market movements in the last few years have raised doubt among investors. Overall, 47% say they curbed their savings and investing because they didn’t want to risk losing money. NGAM CEO Hailer said effective retirement solutions should be “durable portfolios” that include commodities, currencies and alternative mutual funds as well as stocks and bonds.

Other findings from the survey include:

28% percent of investors rate their portfolios as “risky,” while 47% categorize them as “neutral” and 25 percent as “not risky.” Just 17% of those with more than $1 million in investable assets label their investment portfolios as “risky,” compared to 33% of those with less than $1 million. More men (35%) than women (19%) classify their investment portfolios as risky.
Asked what most motivates them to save, 48% of Americans overall say providing for themselves and their families is their primary objective. Asset growth is the second choice, at 18%, and capital preservation to provide for future generations of their family is third, at 9%. Saving for their children’s education trails at 5%.
More women than men (53% compared to 43%) say their top reason to save is to take care of themselves and their families. More men than women (21% compared to 14%) said asset growth is the next biggest motivator for saving.

The Natixis Global Asset Management U.S. Investor Insights Survey was conducted by CoreData Research, which surveyed 463 American adults to better understand their investment attitudes, behavior and sentiments. The survey was conducted in May and July 2011. In addition, NGAM conducted qualitative interviews with investors in October 2011.

The NGAM survey looked at four different categories of investors, including: Mass-market investors (with $200,000–$300,000 of investable assets); mass affluent investors ($300,000–$500,000 of investable assets); emerging high-net-worth investors ($500,000–$1 million in investable assets); and high-net-worth investors (more than $1 million of investable assets).

Without tax deferral, 401(k) participants would save less: EBRI

The recent proposal to alter the tax deferred status of 401(k) plans could reduce 401(k) account balances by 6% to 22% for workers ages 26-35 by the time they reach Social Security normal retirement age, according to the Employee Benefit Research Institute (EBRI).

Participants in smaller plans would experience deeper average reductions in 401(k) balances, according to EBRI’s baseline analysis. Participant balances at Social Security normal retirement age for workers currently ages 26‒35 in plans with less than $10 million in assets could decline 23% to 40%, depending on the size of the plan and income of the participant.

EBRI’s report analyzed the potential response of both private-sector 401(k) plan sponsors and participants to a proposed scenario where workers would have to pay federal taxes on these amounts currently, rather than on a deferred basis (as under current law), and receive an 18% government match on all contributions instead.

“Surveys of individual participants suggest… that some would decrease or even eliminate their contributions in response to these changes,” said Jack VanDerhei, EBRI research director and author of the report. “Additionally, surveys of plan sponsors indicate that many would modify their plan design, or even terminate these plans.”

Full results of the study are published in the March EBRI Notes, “Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances,” online at www.ebri.org

In the debate over reducing the federal deficit, a 2011 plan was proposed that would modify the existing tax treatment of both worker and employer 401(k) contributions and introduce a flat-rate refundable tax credit that serves as a federal matching contribution into a retirement savings account.

FEI applauds passage of Dodd-Frank fix for derivatives end-users

Financial Executives International (FEI) has commended the House of Representatives for passing H.R. 2682 and H.R. 2779, to clarify that commercial end-users of over-the-counter (OTC) derivatives should be exempt from certain regulatory requirements, as intended by the Dodd-Frank Act.

FEI is a professional association for senior-level financial executives from both major public and private companies. The two bills now go to the Senate for consideration.

“This legislation will ensure end-users can continue to hedge business risks, innovate and grow their businesses without adding billions of dollars in new costs or placing strain on hundreds of thousands of jobs,” said Marie Hollein, president and CEO of FEI.

H.R. 2682 would clarify that end-users should not be subject to regulatory-imposed margin requirements, and H.R. 2779 would prevent companies’ internal, or inter-affiliate trades from being subject to requirements meant only for certain street-facing swaps.

Shlomo Benartzi, of Allianz Global Investors Center for Behavioral Finance, publishes Save More Tomorrow

Allianz Global Investors Center for Behavioral Finance has announced the release of Save More Tomorrow (Portfolio Penguin), by Shlomo Benartzi, professor and co-chair of the Behavioral Decision-Making Group of the UCLA Anderson School of Management and chief behavioral economist of the Center.

The book addresses the behavioral challenges that led to the retirement crisis – inertia, limited self-control, loss aversion and myopia – and transforms them into behavioral solutions. Half of Americans do not have access to a retirement saving plan at their workplace; of those who do, about a third fail to join. Those who do join tend to save too little and often make unwise investment decisions.

“This book applies the relatively new field of behavioral finance to 401(k) plans with the ultimate goal of improving retirement outcomes,” said Benartzi in a release. “As we recover from market conditions that left many Americans uneasy about their ability to secure a comfortable retirement, it is critical that plan sponsors use lessons from behavioral finance to make it easier for their employees to save, save more and save smarter.”

The Allianz Global Investors Center for Behavioral Finance was founded in 2010 to help turn academic insights into actionable ideas and practical tools that financial advisors and plan sponsors can use to help their clients and employees make better financial decisions.

Will RIAs Sing This ARIA?

Posted on March 22, 2012 by Editor Test -

When Charles Schwab & Co. decided to look at the feasibility of wrapping lifetime income guarantees around mutual fund and ETF accounts a few years ago, it tapped its chief legal counsel for insurance, David Stone, to co-lead the evaluation effort.

Schwab’s executives eventually decided to pass on the idea, but Stone didn’t let it go. He saw a huge opportunity in offering living benefits to the registered investment advisors who manage big custodial accounts, and he had a high-tech plan for seizing it.

So Stone, 53, left Schwab in late 2008 and, with former Schwab technology guru R. Scott Strait and two others, started ARIA Retirement Solutions in early 2009. (ARIA denotes “Access to RIAs”.) The San Francisco-based start-up, bankrolled since January by Polaris Ventures, sells a no-load stand-alone living benefit (SALB) to RIAs called RetireOne.

“We said, ‘Let’s build an income product that appeals to the $1.3 trillion in assets [at the big custodial firms] that don’t have annuity penetration, by eliminating all the reasons why RIAs won’t adopt them,” Stone (at right) told RIJ in a recent interview.

Transamerica Advisors Life, a new entity organized specifically for this venture by AEGON/Transamerica, is thus far the only insurer writing guarantees for the product. (See prospectus.) But ARIA’s open-architecture hub is built to accommodate multiple insurers, as well as dozens of custodians and hundreds of potential investment options.

ARIA itself doesn’t manage, insure or custody money. Instead, it’s a cloud-based technology platform whose servers connect RIAs, their clients, the custodians of their managed accounts, the insurers who write guarantees for ARIA, and a team of licensed agents that provides compliant services. It’s a formula that Stone and his backers believe will finally open the huge RIA market to income guarantees.

“You can view us as the hub,” Stone said. “We do the administration for the insurance company. We connect the insurance company, the advisor and the end client. The clients deal directly with ARIA in Louisville. There’s a friendly front-end for the advisor.

“We do the suitability determination, and provide feeds from the custodial firms to the insurance company,” he added. “Once the product is up, it’s going to be open architecture from an insurance point of view. Transamerica is just the first insurance company to participate.”

“We’ve been watching the evolution of the SALB, and we felt that the independent RIA channel is an underserved market from a guarantee perspective,” said Anne Spaes, head of institutional relationships at Transamerica Advisor Life. Since the mid- 1990s, AEGON’s Monument Life unit has sold a no-load variable annuity to brokers and RIAs, called Advisor’s Edge. But Advisor’s Edge had—and still has—an M&E pricing structure, no income guarantee, and places the assets at the insurance company—none of which fit the RIA practice model.

SALBs: a brief history

RIAs, as a rule, avoid insurance products. They’re generally not insurance-licensed and only a small percentage of them take any commissions. Paid to assemble portfolios, they have little appetite for the portfolios that come bundled into VAs. But, as the advisor channel with the largest average balances, they’re too big a market for insurers to be left out of.

So insurers created SALBs—living benefits that were unbundled from VA investment options. These stand-alone living benefits could be sold to RIAs, unified account (UMA) managers, and third-party asset-management programs (TAMPs), and wrapped around almost any moderate-risk taxable or tax-deferred portfolio.

Lockwood Management promoted the first official SALB in late 2007, with The Phoenix Companies providing the living benefit. In the post-crisis summer of 2009, Nationwide Financial and Morgan Stanley Smith Barney announced a partnership to wrap a living benefit around wirehouse portfolios. Introduced during tumultuous times, neither venture got far.

A life insurer faces certain constraints when building a SALB. The investment options have to be tame enough and generic enough to be insurable at an acceptable price but exciting enough to interest investors. To hedge the investment properly, the insurer also needs to monitor them. That’s easy with a variable annuity because the investments live in the insurer’s subaccounts, but harder when the protected investments live at Schwab or Fidelity or TD Ameritrade (for example), as they do with a SALB.

Enter ARIA

ARIA’s RetireOne addresses those issues, but doesn’t conquer the laws of physics and finance while doing it. The annual expense of the guarantee (or certificate) starts at 1% of the account value for portfolios with no more than 50% equities and rises to 1.75% for portfolios that hit the limit of 80% equities. International exposure is limited to 25%, small/midcap to 10% and alternatives to 5%.

Big deposits earn fee discounts: the fees on a $2 million contract go as low as 85 basis points. On the other hand, clients who take advantage of quarterly high-water marks to step up their benefit base to the account value will have to pay more for the privilege. The maximum contract fee is 2.50%.

As for approved investment options, the current batch includes over 140 funds and ETFs from families that RIAs like: American Funds, DFA, iShares, Pimco, Schwab, TIAA-CREF, Vanguard and other favorites. Stone expects a lot of RIAs to build new insured portfolios from these approved options at their custodian of choice, rather than try to put an income floor under an existing portfolio.

But what’s novel about ARIA isn’t the pricing or the investments. It’s the technology that lets the insurance company watch the investments on any of 50 different custodians and hedge them as they fluctuate.

“ARIA’s technology allows us to receive files from the custodians so that we can monitor the positions as we would any of our variable annuity subaccounts, and to use our risk management protocols and hedge accordingly,” said Transamerica’s Spaes. “We can see the same type of data, as if it were on our own platform.”

A tri-fold market

That leaves the marketing strategy, and Stone seems to understand his target end-client.

“There are three categories of people who might buy this product. There’s the person in his 50s who wants to insure his retirement savings until he gets to retirement. This product gives you sequence-of-returns protection while allowing you to grow your asset base,” Stone told RIJ in an interview last week.

“Then there’s the person who buys it at 65 who wants to control his assets but still get guaranteed income,” he added. “Third, there’s the 55-year-olds who will buy it and hold it until they die. We expect 70% of our customers to buy the guarantee before reaching retirement age. We tell the advisor, once your client gets to retirement, you can recalculate. If the GLWB is in the money”—that is, if the benefit base is higher than the account value—“you keep the contract. If it’s not in the money, you reevaluate.”

The contract pays out 4% to 8% a year, depending on the age of client and the 10-year Treasury rate at first withdrawal. In a departure from the typical VA living benefit, ARIA’s payouts are based on two factors—the age of the client and the 10-year Treasury rate when guaranteed payments commence—instead of on the client’s age alone. Even after payments begin, the payout percentage can move up or down according to whether the 10-year Treasury rate shifts far enough up or down.

In another departure from custom, ARIA assesses the insurance fee on the account value rather than the benefit base. Consulting actuary Tim Pfeifer, who represented ARIA in its collaboration with the actuaries at Transamerica Advisors Life, told RIJ that the initial insurance expense ratio for a 50% equity portfolio could have been about 15% lower if it were levied on the benefit base. But Stone believed that said that assessing the fee on the account balance would be cheaper for the client in the long run. And, since advisors are used to asset-based fees, he expected them to find that formula more palatable.

Last January, ARIA received an undisclosed amount of funding from Polaris Ventures, a nationwide venture capital firm that “tends to invest in platforms,” said Alan Spoon, the Polaris general partner who is working with ARIA. “This couldn’t happen without real-time, cloud-based platform technology that can link the clients, the RIAs, the custodians and insurance companies. It would have been impossible a few years ago, because the insurance companies wouldn’t have been able to tweak its hedges on a daily basis,” Spoon told RIJ this week.

Polaris, which manages about $3.5 billion worth of institutional money in six venture funds, also has a stake in Focus Financial Partners, a New York-based wealth management platform that supports about two dozen RIAs that manage some $50 billion in assets.

It was partly because of Focus Financial’s enthusiasm for the Stone’s venture that made Polaris eager to invest in ARIA Retirement Solutions. “The Focus firms aren’t guaranteeing distribution,” said Spoon said Spoon, a former president of The Washington Post Company. “But when they put their hands up it told us that there was enthusiasm for this” in the marketplace.

“Ultimately,” he said, “ARIA is promising for macro reasons. If you look at the demographic factors, recent events in the financial markets, and the state of people’s personal balance sheets, there are a lot of forces moving in favor of this.”

Editors note: In an e-mail to RIJ, Nationwide Financial offered this statement about the status of its SALB program with Morgan Stanley Smith Barney:

“Our goal is to help advisors create lifetime income for their clients. We are committed to offering stand-alone living benefits. However, we have faced some challenges that have caused us to put our current SALB offerings temporarily on hold. The challenges include obtaining state approvals for large states, and technology integration. We plan to re-launch Select Retirement with Morgan Stanley Smith Barney once their platforms have been integrated. We remain committed to the SALB business, and continue to work on making it easier for firms to offer these benefits and on bringing new solutions to market.”

A.M. Best places Hartford’s ratings under review

Posted on March 22, 2012 by Editor Test -

A.M. Best Co. said it has placed under review the bbb+ issuer credit rating and the debt ratings of The Hartford Financial Services Group, Inc. as well as the a+ issuer credit rating and the A (excellent) financial strength rating of the Hartford Insurance Pool.

At the same time, A.M. Best has placed under review with negative implications the FSR of A (Excellent) and ICRs of “a+” of the Hartford’s key life/health insurance subsidiaries. All companies are headquartered in Hartford, CT.

These rating actions follow the announcement of the Hartford’s decision to focus its strategy on the company’s property/casualty, group benefits and mutual funds businesses. The company will place its individual annuity business into run-off effective April 27, 2012. The company is pursuing other options for certain product lines within its Wealth Management segment, including sales or other strategic alternatives.

The rating actions for the Hartford Life subsidiaries reflect the execution risk in the current economic environment of the group’s plans to divest its Individual Life, Woodbury Financial Services and Retirement Plans businesses.

Additionally, the revised strategy will cause Hartford Life’s business profile to contract over time and be limited to the ongoing Group Benefits and Mutual Funds businesses, as well declining in-force blocks of fixed and variable annuities. This will result in reduced life/health revenues and earnings available to the enterprise.

The under review with negative implications status recognizes the potential for changes in Hartford Life’s ratings and outlook based on the final outcome of management’s intended restructuring.

A.M. Best believes execution risk may be somewhat diminished by the perceived attractiveness of the Individual Life and Retirement Services businesses. A.M. Best’s understanding is that the Hartford’s current plans do not involve the sale of insurance entities, which may expedite the process.

However, A.M. Best notes that the longer it takes to consummate a transaction, the less likely management will generate its targeted proceeds from the sale. Nevertheless, the planned divestitures will allow Hartford Life to release capital allocated to these businesses and potentially upstream funds to the parent. It is currently uncertain what impact the restructuring will have on the group’s remaining investment portfolio.

The rating actions for the Hartford and the Pool acknowledge the potential for successful implementation of the restructuring plan in line with management’s expectations to result in favorable movement on the ratings. The increase in financial flexibility at the holding company, the expected reductions in financial leverage and the benefits of a more focused management strategy centered around the company’s property/casualty business are viewed positively by A.M. Best, and—if the plan is achieved as expected—would likely result in favorable rating action on these entities. At the same time, however, the under review with developing implications status acknowledges the execution risk associated with the plan and the potential for some continued volatility related to the Individual Annuity business that will be retained, which could have negative implications on the ratings of both the Hartford and the Pool.

A.M. Best will continue to work with management as steps are taken toward accomplishing the plan and will evaluate the under review status as appropriate. Due to the scope of the plan, the ratings may remain under review for an extended period of time.

For a complete listing of The Hartford Financial Services Group, Inc. and its key life/health and property/casualty subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/032104hartford.pdf.

The direct channel is growing: Cerulli

Posted on March 22, 2012 by Editor Test -

The growth of the direct channel growth outpaced that of the advisory channels over the past two years, posting a compound annual rate of 19% versus 14% for advisory channels, according to a new report from Cerulli Associates. At $3.68 trillion in assets, it is now the second largest retail distribution channel.

The giants of the direct market—Vanguard, Fidelity, T. Rowe Price and others—continue to rely on low prices to attract customers. But they’ve steadily added advice and are working harder to gather assets.

“The direct channel [isn’t simply] asset managers distributing their own products to end investors,” said Katharine Wolf, head of Cerulli’s retail investor practice, in a release. “[It’s] a distribution model characterized by… corporate-driven client acquisition, salaried representatives, and corporate-driven advice.”

Cerulli predicts the direct market will grow to close to $5 trillion and will control close to 10% of retail managed accounts assets by 2014, equating to $380 billion.

Ownership of direct accounts is broad, but lies just below the surface. More than 66% of households report owning a direct account, Cerulli said, but only 25% of households use a direct account as their primary provider relationship.

Direct firms serve clients with a multi-channel approach (iphone, web, in-person, email, and chat) to maintain consistent client experiences and—when all the parts mesh properly—an impression of seamless handling.

Direct firms are now among the fastest growing channels distributing mutual fund advisory programs, with new firms are entering the space, Cerulli said.

“Newer entrants… include RIA firms, banks, and technology-driven offerings,” Cerulli said. “The direct model has applications for clients in all wealth tiers, but its sweet spot is clients with between $100,000 and $2 million in investable assets.”

Advisors, investors talk past each other, says Russell report

Posted on March 22, 2012 by Editor Test -

Advisors and clients evaluate a portfolio’s performance differently, according to the Financial Professional Outlook, Russell Investment’s latest quarterly survey of U.S. financial advisors.

The current iteration of the FPO includes responses from about 600 financial advisors working in 141 national, regional and independent advisory firms nationwide.

While 53% of advisors surveyed said they “measure performance in terms of the portfolio’s progress towards meeting the client’s investing goals,” only 29% say clients also measure performance this way.

Instead, advisors said that clients typically gauge portfolio performance by short-term factors such as one-year returns (54%), the portfolio’s absolute return (49%) and portfolio volatility (41%).

“With the market volatility seen in 2011, it’s not surprising that individual investors are fixated on one-year returns and portfolio volatility. But there is little actionable value in these short-term, backward-looking measures for the individual investor,” said Frank Pape, director of Consulting Services for Russell’s U.S. advisor-sold business.

Most advisors (78%) were optimistic about the capital markets over the next three years (78%), but only 18% of advisors believed that clients shared that optimism. While this is higher than the 9% recorded in the December iteration of the FPO survey, it is below levels seen in early 2011.

In 2012, advisors on average expect a 3.9% return for a conservative portfolio, 5.9% for a balanced portfolio and 8.3% for an aggressive portfolio. Despite client pessimism, the advisors say that clients’ return expectations are slightly higher than their own: 4.3% for a conservative portfolio, 6.5% for a balanced portfolio and 9.3% for an aggressive portfolio.

“The broad equity markets have already met or surpassed the expectations of advisors and their clients in the latest FPO, with the U.S. broad market Russell 3000 Index up 9.49%, the Russell Global ex-U.S. Index up 13.5% and the Barclays Capital U.S. Aggregate Bond Index up 0.85% year-to-date as of 2/29/12. But we are only three months into the year and anything could happen,” Pape said.

Priorities differ between advisors and their clients, advisors say. Advisors are most likely to want to talk about portfolio rebalancing and asset allocation, but only 11% of advisors say clients raised this topic themselves.

Additional topics introduced to clients by advisors included portfolio performance (34%) and running out of money in retirement (30%). Clients most often initiated conversations around market volatility (56%), government policy (49%), global events (39%) and portfolio performance (39%).

Uniform fiduciary standard will require new technology: Citi

Posted on March 22, 2012 by Editor Test -

Potential new rules recommended in an SEC Staff study on uniform fiduciary standards for both broker-dealers (BDs) and registered investment advisors (RIAs) will affect many aspects of their activities, according to a new whitepaper from Citi.

Creating investor proposals, account ‘on-boarding,’ suitability assessments, fee arrangements, initial portfolio implementation and portfolio rebalancing would likely be affected by harmonized standards, said the paper, entitled Broker-Dealers as Fiduciaries? How the SEC Staff’s Study Could Raise the Bar for Investment Advice.

“Financial advisors can expect significant technological and operational challenges to adhere to any new fiduciary standards,” said report co-author Andrew Clipper, head of Wealth Management Services in North America, Citi’s Securities and Fund Services. The paper points out that broker-dealers and RIAs may need better technology in the following areas:

Automatic linkage from front-to-back of an investor’s information, risk profile, restrictions, proposed portfolio and portfolio execution
Access across all investment vehicle types within and across multiple accounts in the household
Household reporting and rebalancing across multiple account types (e.g., brokerage, retirement, trust)
Tax optimization at the individual investor (tax return) level and across the household

Compliance is expected to be expensive. “Both the SEC and FINRA have recently explored using technology to assist in conducting examinations, and the SEC recognized in the Study on Investment Advisers and Broker-Dealers that BDs may incur on-going costs in developing or acquiring technology,” should the broker-dealer exclusion from the definition of investment adviser be eliminated, said George Magera, a partner in Reed Smith LLP’s Investment Management Group.

Additional copies of “Broker-Dealers as Fiduciaries? How the SEC Staff’s Study Could Raise the Bar for Investment Advice” can be obtained by writing to [email protected] or calling 877-682-2278.

Millionaire ranks grew by 200,000 in 2011

Posted on March 22, 2012 by Editor Test -

Thanks to a buoyant stock market, the number of U.S. households with a net worth of $1 million or more NIPR (not including primary residence) rose by 200,000 to 8.6 million in 2011, according to the Spectrem Group’s Affluent Market Insights 2012 report. There are about 115 million households in the U.S.

It marks the third consecutive year of growth following the 27% decline in millionaire households to 6.7 million in 2008. The total millionaire population remains below the pre-recession high in 2007 of 9.2 million, however.

The ranks of all affluent investors increased in 2011:

• Those with $100,000 or more in net worth NIPR reached 36.7 million from 36.2 million in 2010
• Those with $500,000 or more in net worth NIPR climbed to 13.8 million from 13.5 million in 2010
• Those with $5 million or more in net worth NIPR rose to 1.078 million from 1.061 million in 2010*
• Those with $25 million or more in net worth NIPR grew to 107,000 from 105,000 in 2010*
(*Numbers included in, not in addition to, millionaire households)

Wealthy investors remain worried about the future, however. “Even if they are not directly impacted, continuing high unemployment and the depressed housing market are bedeviling wealthy investors,” said George H. Walper, Jr., president of Spectrem Group, in a release. “Investor optimism has climbed from negative in April 2011 to neutral in February 2012, according to our monthly Spectrem Affluent Investor Confidence Index, but investor outlook won’t significantly improve until unemployment falls significantly lower.”

Home values still make up a big part of the total wealth of many households. According to Spectrem, the primary residence makes up:
• 29% of total assets for Mass Affluent ($100,000 – $999,999 Net Worth NIPR)
• 16% of total assets for Millionaire ($1MM-$5M Net Worth NIPR)
• 9% of total assets for Ultra High Net Worth: (5MM+ Net Worth NIPR)

Additional wealthy investor insights from Spectrem are available at www.MillionaireCorner.com.

In Case You Missed the RIIA Conference

Posted on March 22, 2012 by Editor Test -

Bernie Madoff laundered cash for Bogota drug lords. The most reliable leading economic indicator is the level of fossil fuel reserves. Plan sponsors should brace themselves for a flood of proposals for new in-plan retirement income programs.

Those bits of news, among others, were gleaned from the Retirement Income Industry Association’s spring conference at Morningstar’s headquarters this week in sultry Chicago, where ornamental pear trees bloomed oddly out of season.

This year’s RIIA conference, where 120 attendees gathered in a raked, red-chaired lecture hall that faces the untitled Picasso sculpture in Daley Plaza, focused on creating a dialogue between two distribution channels—retail (individual) and defined contribution (institutional)—that rarely talk to each other.

The two-day meeting was segmented into three subject areas—trust, demographics and innovation—and each day’s panels and presentations were anchored by an outside-the-retirement-business speaker: Frank Casey, a money man who blew the whistle on Madoff, and Tim Garrett, a physicist who believes the supply (and price) of energy explains just about everything else in the economy.

‘Bernie’ and dwindling oil reserves

Casey related the sobering and diverting saga of how, in the process of trying to duplicate Madoff’s returns in the late 1990s at Rampart Investment Management, he and analyst Harry Markopolos deduced that the returns couldn’t be duplicated because they were fraudulent.

One enduring mystery of the case has been why the SEC ignored Casey and Markopolos’ warnings about Madoff; Casey attributed it to incompetence, not corruption. In response to a question, he affirmed rumors that Madoff’s scheme included laundering Colombian drug money, and that he, Casey, was at times afraid for his life.

Garrett’s presentation on peak oil—though he didn’t use that expression—also concentrated the mind. Plentiful coal, oil, and natural gas drove the tide of technical innovation in the late 19^th and mid-20^th centuries, he said. The fact that the world was discovering new fossil fuel reserves faster than it was burning them caused the Baby Boom itself, he believed, whose progress through adulthood drove the 1982-2000 bull market.

Unfortunately, the age of cheap energy appears all but over, Garrett said, and unless new reserves are discovered soon, the world’s economy will, literally, run out of gas. Oddly, he didn’t have much to say about the constraints imposed by global warming or the potential for salvation through renewable energy resources.

Two in-plan annuities

Very interesting, you say, but what about retirement income? Two specific annuities for the 401(k) market came to light, one in a formal presentation and one during one of the networking sessions. In a formal presentation, David Deming of Dimensional Retirement, an affiliate of Dimensional Fund Advisors, announced—or rather, re-announced, since it has had a website for some time—a personal pension product called Dimensional Managed DC.

This product, which RIJ will report on in a subsequent issue, allows plan participants to contribute to a part-TIPS, part-global equity managed account whose assets are intended to be used to buy an annuity at retirement. Participants will be able to track the growth of their future income on an online dashboard. They can also drop out of the program at any time.

The other soon-to-be-formally-announced in-plan annuity product, discussed informally during networking breaks at the RIIA conference, was a UBS program that has been quietly but not secretly brewing for some time. It appears to be based on pure longevity insurance.

According to Drew Carrington, a UBS Wealth Management managing director and head of DC and retirement solutions, participants will be able to contribute to a contract that provides income when and if the participant reaches his or her mid-80s. Neither Deming nor Carrington named specific life insurance partners for their programs.

Cast party

This year’s spring conference may have been RIIA’s most substantive, timely and productive to date. An assiduous work in progress by Francois Gadenne and many others for more than half a decade, the organization survived the financial crisis, grew by 50% from 2010 to 2011, Gadenne says, and now has several initiatives underway.

One of those initiatives involves classes, hosted variously by Boston University, Texas Tech, and Salem State University (in Massachusetts), that lead to a Retirement Management Analyst designation for advisors. Another involves the launch of a Market Insight group to collect data on the retirement income market.

A third initiative has led to the creation of a periodical, Retirement Management Journal, to publish retirement income research and burnish a reputation for thought-leadership. Simultaneously, RIIA has established alliances and partnerships with organizations as varied as the National Association of Fixed Annuities (NAFA), the Depositary Trust & Clearing Corp. (DTCC) and the Defined Contribution Institutional Investment Association (DCIIA).

The depth of financial backing for an organization is hard to guage, but RIIA’s corporate sponsorship appears to be growing. Ibbotson (a Morningstar company), Allianz Global Investors, Dimensional Fund Advisors, Guided Choice, New York Life, DST Systems, Putnam Investments, and Wells Fargo were listed in the conference program as significant event sponsors.

It’s challenge, but it also feels necessary, to describe the difference between the RIIA conference and other retirement industry conferences. The difference springs primarily from the fact that unlike, say, Insured Retirement Institute or the Financial Planning Association, RIIA represents no single product category or distribution channel, but many of them at once.

RIIA conferences are more eclectic and less parochial than others, as its motto—“the view across the silos”—would suggest. To be more precise: a more networking-driven mix of executives and entrepreneurs, political mavericks, and compulsive students-of-the-income-game can’t be found at any other conference in this space.

That mixture generates a difference in vibe—a difference that’s difficult to define but essential to an understanding of the organization’s value. At the risk of exaggerating to make a point, RIIA’s conference differs from others in the way that a cast party differs from a stage play: same players, with their masks off.

Don’t Cut Pensions, Expand Them

Posted on March 22, 2012 by Teresa Ghilarducci -

On March 15, the New York State Legislature agreed to a deal limiting pensions for future public employees. The state thus joins 43 others that have recently enacted legislation curtailing public retirement benefits.

Though New York needs to reduce its spending, the cuts come at a particularly bad time: over a third of New York workers, both public and private, approaching retirement age have have less than $10,000 in liquid assets. As a result, those workers are projected to be poor or near poor in retirement, with an average budget of about $7 a day for food and approximately $600 a month for housing.

Fortunately, there’s an easy solution. Rather than curtailing public and private pensions, New York and other states could save millions of workers from impending poverty by creating public pensions for everyone.

While the recession bears some blame for the looming retirement crisis, experts agree that the primary cause is more fundamental: Most workers do not have retirement accounts at work. Over half of the workers in New York State, more than four million people in 2010, do not participate in retirement plans with their current employers, while over half of American workers do not have pension plans at work.

Private-sector pensions have been on the retreat for decades. In fact, in the late 1970s and early ’80s, Congress, worried about the dismal rate of pension coverage, tried to remedy the situation by extending 401(k) plans, originally designed for executives, to everyone, while also passing a law to create individual retirement accounts.

The problem is that these steps set up incentives through the tax code, which means that the biggest benefits go to the highest earners — people who, moreover, would probably have saved anyway. Today 79 percent of such tax breaks go to the top 20 percent of workers.

Meanwhile, despite extensive commercial advertising for retirement planning, coverage for ordinary people stalled. And even many of those who do save for retirement fail to consistently put away the 5 to 10 percent of their pay necessary to adequately supplement their Social Security benefits.

In response, in late February California State Senator Kevin De León and Darrell Steinberg, the Senate president pro tempore, introduced legislation that would allow private-sector workers in California to enroll in a modest, state-operated retirement program financed by the workers and their employers — at virtually no cost to taxpayers.

This would increase coverage because employers would put every worker into a plan, either their own or the California plan. In the California version workers could opt out; some will, but most workers once in a plan will stay in.

Also in February, John Liu, the New York City comptroller, called for a similar plan for New York City residents. His program would pool employee and employer contributions into a professionally managed, citywide retirement fund.

Both plans would use the same professional staff and institutional money managers that invest the state and city pension funds to manage contributions made by participating employers and employees in the private sector.

This is a vital step: public pension plans usually outperform 401(k) plans and individual retirement accounts, because instead of a single worker managing a single account, large institutional plans pool workers of all ages, diversify the portfolio over longer time periods, use the best professional managers that aren’t available for retail accounts and have the bargaining power to lower fees and prioritize long-term investment.

By some estimates, costs for public pensions are over 45 percent lower than for individual 401(k) plans. Of course, since these plans would be financed by workers and their employers, there would be no cost to taxpayers.

Saving for retirement is never easy. But finding a safe place to put your money these days is even harder. Opening up public pension options to everyone is a cheap, simple way to help.

Teresa Ghilarducci, a professor of economics at the New School, is the author of When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them (Princeton University Press, 2008).

The Weird Math of Charitable Gift Annuities

Posted on March 22, 2012 by Kerry Pechter -

Anyone who has studied the “annuity puzzle” has heard the assertion, frequently attributed to Menahem Yaari’s famous 1965 paper on the subject, that a retiree with no bequest motive should annuitize all of his or her assets.

But Yaari’s rule-of-thumb appears to ignore the existence of charitable gift annuities (CGA), which allow philanthropic, often high-net-worth retirees to meet their need for lifetime income and their desire to donate money to charity in a single contract.

Charities use CGAs as fund-raising tools. Acting like an insurance company that issues life annuities, a charity will collect a purchase premium, pay out a lifetime income to one or two people, and keep what’s left when they die—either to pay surviving annuitants or as revenue.

CGAs differ from commercial annuities in a few significant ways. All else being equal, purchasers of CGA receive a lower payout rate than purchasers of commercial annuities. But, because their premium doubles as a gift, they receive a current-year tax deduction worth between, say, 10% and 40% of value of the initial premium.

In short, there’s a trade-off. The reduced payout rate increases the chance that a chunk of money (technically, the “residuum”) will be left over for the charitable organization when the annuitants have died. The donor’s current-year tax deduction is the present value of that future chunk of money, discounted at a rate dictated by the IRS.

Standardized (but not mandatory) CGA payout rates have been established by the American Council on Gift Annuities. The suggested rate for a single 65-year-old is 4.7% (as of January 1, 2012)—as compared with almost 7% from an insurance company. Payout rates vary from charity to charity, however, as a couple of examples will show. (And, of course, the tax benefit will depend on each taxpayer’s situation.)

Alan and Connie

An online hunt for information about CGAs led me to Futurefocus.net, one of whose pages provided the hypothetical example of “Alan” and “Connie,” ages 74 and 76, respectively. The imaginary couple decided to take $100,000 out of a taxable money market fund yielding only $1,500 a year and purchase a CGA from XYZ Charity.

The CGA paid them $5,000 a year (or 5%, the ACGA rate) as long as either lived. It also gave them a current-year tax deduction of $34,752 (the present value of the future charitable contribution). Because the Richards are in the 35% marginal tax bracket, they reduced their tax bill by $12,163.

In addition to the current-year tax deduction, the Richards could look forward to excluding $3,980 (representing return of principal) of each year’s $5,000 payout from income taxes for 16.4 years. According to the example (whose calculations I was not able to test), the Richards would have to generate $8,100 a year in earned income to replace the income from the CGA.

The real world of CGAs, it turns out, offers more price flexibility than Alan and Connie’s story would imply. For example, the UJA Federation of New York recently advertised a CGA in the New York Times that offered a much higher payout rate but a smaller deduction than in the hypothetical above.

Using the calculator on the UJA’s website, I typed in Alan and Connie’s ages and premium amount. The UJA, it turned out, would pay $6,500 a year or 6.5% to the Richards—30% more per year than XYZ charity. The higher payout meant that less would be left for the UJA when the Richards died, so the Richards received a tax deduction of only $13,789. Assuming a 35% marginal tax rate, they would save just $4,826.

Why the difference in payout rates and deductions? According to Dick Kellogg of FutureFocus.net, which produced the XYZ hypothetical, some non-profit organizations choose to compete for contributions by advertising higher rates than those suggested by the ACGA. They hope to recoup in volume what they sacrifice on each sale. (That practice is a bit frowned on, Kellogg said. The ACGA created a standardized rate to encourage charities not to compete on rates.)

A higher rate may simply act as a teaser rather than a final offer. William Samers, vice president of Planned Giving and Endowments at UJA Federation of New York, explained that donors can choose, within limits, any blend of payout and deduction that meets their needs or preferences. “I assume they could do that with any charity,” he said.

But, as a rule, only a charity with deep reserves is in a position to offer a higher rate, Samers added. With $30 million in its pool, $23 million in liabilities, plus an unrestricted endowment to draw on, UJA Federation of New York feels comfortable doing it. “If everybody lived to 120, we could still make all our payments,” he said.

‘Not 100% rational’

Actuaries may be interested to know the assumptions behind the ACGA’s standardized payout rates. For instance, the rates are targeted toward a future charitable contribution of 50% of the initial premium, with a minimum present value equal to 20% of the initial premium. All annuitants are assumed to be female and one year younger than their actual ages.

The payout rates assume a 4.25% investment return—a decline of 75 basis points from last July. The assumed expense ratio is 1%. The current-year charitable deduction, however, is based on an IRS-prescribed discount rate, currently only 1.5%. The charities anticipate their funds to average an annual net gain of 3.25%, but the IRS isn’t as optimistic (or as generous).

Of course, prospective donors could always buy a $75,000 commercial annuity and give $25,000 to charity, rather than make the charity wait for them to die. “It’s not 100% rational decision-making,” Samers said. CGA buyers—who likely comprise a separate, wealthier client segment from commercial annuity buyers—may just relish the idea of keeping their money away from both insurers and the IRS.

Is it risky to purchase a CGA? The gift annuity guarantee is based on the claims-paying ability of the charity, and charities fail more easily than insurance companies. Some charities have reportedly purchased commercial annuities as a safeguard. During the financial crisis, many small or shallow-pocketed charitable funds were said to be “underwater,” and a few actually went bankrupt. Before relying on a charity for lifetime income, do your due-diligence.

Fidelity identifies a group of older clients averaging $360k in retirement accounts

Posted on March 14, 2012 by Editor Test -

Investors with both 401(k) plans and IRAs have a combined average balance of $212,600, and members of that group on the verge of or in retirement – between 65 and 69 – have a combined average balance of $359,000, according to Fidelity Investments.

Fidelity reviewed users of one or both types of retirement accounts within its customer base, and came up with average balances for several distinct subsets of that population. The data can be found in the table below.

	Average annual contribution, all ages	Average annual contribution: ages 65-69	Average balance, all ages	Average balance, ages 65-69
401(k) only	$5,750	$7,810	$69,100	$123,400
IRA only	$4,150	$4,910	$71,700	$133,500
Both 401(k) and IRA	$10,300	$11,040	$212,600	$359,000

Few active managers beat indices: S&P

Posted on March 14, 2012 by Editor Test -

Findings released today by S&P Indices for its full year “2011 S&P Indices Versus Active Funds Scorecard” (SPIVA) show that approximately 84% of actively managed U.S. equity funds underperformed their relative S&P benchmark in 2011. Over the previous three-and five-year periods, approximately 56% and 61% of actively manage equity funds underperformed their benchmark.

Bear markets should favor active managers. Instead of being 100% invested in a market that is turning south, active managers have the opportunity to move to cash, or seek more defensive positions. Unfortunately, that opportunity does not translate to reality. In the two true bear markets the SPIVA Scorecard has tracked over the last decade, most active equity managers failed to beat their benchmarks.

SPIVA reports on the performance of actively managed U.S. funds corrected for survivorship bias and shows equal and asset-weighted averages. The complete SPIVA scorecards for the U.S., Australia, Canada and India is available at www.spindices.com/spivaresearch .

Drilling down to style categories, the SPIVA scorecard shows that approximately 69% of large cap funds, 70% of mid cap funds and 51% small cap funds failed to beat the S&P 500, S&P MidCap 400 and S&P SmallCap 600 respectively over the previous three years. The results are similar over the five-year period and more dramatic over the one-year period for 2011.

A table showing the percentage of U.S. equity funds outperformed by their benchmarks can be found on the RIJ homepage, March 14 issue.

The script was similar for non-U.S. equity funds, with indices outperforming a majority of actively managed non-U.S. equity funds over the past three- and five-years with approximately 69% and 55% of global equity funds failing to outperform the S&P Global 1200.

While the active versus passive debate gets less play for bond market funds, S&P Indices has seen similar results over five-year horizons in this asset class. In most bond fund categories, benchmark indices have outperformed a majority of active managers.

DST Brokerage Solutions merges DST TASS and Wall Street Advisor Services

Broadridge launches FinancePro

Investors postponing decisions until after election: BNY Mellon

SIGNiX and VERTEX partner to promote digital signatures

Allianz Life promotes Matt Gray to vice president

Treasury Department launches “Ready.Save.Grow.”

20% of Americans 50+ unsure how to save

Without tax deferral, 401(k) participants would save less: EBRI

FEI applauds passage of Dodd-Frank fix for derivatives end-users

Shlomo Benartzi, of Allianz Global Investors Center for Behavioral Finance, publishes Save More Tomorrow

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