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An Interview with David Wray

Posted on February 8, 2012 by Editor Test -

As the president of the Profit Sharing Council of America, an association of retirement plan sponsors of all sizes, David Wray is in a good position to evaluate the potential impact of the Obama administration’s efforts to change the way Americans save for retirement.

We spoke recently with Wray and asked for his views on the February 2 announcement by the Departments of Labor and Treasury regarding the creation of new requirements for fee disclosure in retirement plans and the removal of certain technical roadblocks to turning qualified savings into retirement income.

RIJ: What are your takeaways from last week’s announcement?

Wray: They’ve clarified that you can take partial annuitization, they clarified the spousal consent issue, and they clarified that if you buy longevity insurance, it will be coordinated with required minimum distributions. All of those things are intended to expand the choices for participants. We’ll have to see what the next step is.

RIJ: On fee disclosure, this doesn’t necessarily mean that a plan can have only the least expensive index funds, right?

Wray: This isn’t about being cheaper. It’s about ensuring value. If someone has a high-service plan, it will cost more. But it is clear that employers will have to rigorously review the fee structure in light of the benefits provided. There is no single right answer to questions about ‘reasonableness’ of fees. The largest fees are for investment management, and people wonder if fee disclosure will impact the philosophic approach to investing, in terms of active versus passive. One the one hand, fiduciaries in large foundations use active management. On the other hand, obviously there are arguments for passive management. The question is, will this [action by Treasury and Labor] change that? I don’t know.

RIJ: How do you think participants might react to fee disclosure?

Wray: You’ll have a period of time when people are surprised, because they didn’t realize the fees are paid out of their assets. There will be a lot of questions, but once the questions are answered, it will go back to normal. The 401(k) plan participants aren’t retail investors. They’re in plans because employers entice them into them. So once you explain the fees they will go back to normal behavior. No one’s going to be storming the corner offices.

RIJ: How do you think plan sponsors are reacting?

Wray: For the large companies this is just another typical government regulation. They have lawyers. They’ll convert this to a routine. The real challenge is how is this delivered to small plans, and how they will digest this.

In the past, plan sponsors knew they had to supervise the investments, but this is a new and highly specific directive. The government is saying, ‘You must get this information in this way at this time.’ It’s the sponsor’s obligation to ensure that providers deliver it. If the data arrives in the form of 5,000 pages in a box, the small plan sponsor won’t have a clue. So they hire consultants, and hand them the box. But the Department of Labor recognizes this and has provided a roadmap for plan sponsors for dealing with it.

RIJ: How will fee disclosure change the way business has been done?

Wray: The big change in all of this will be for small plans sponsors whose plans have been subject to ‘fee bracket creep.’ Small plan sponsors are typically very busy people. They forget that when they signed the original contract the fee structure was based on very few assets in the plan. The fees were naturally very high at that time, because you had to pay to get it running.

The plan is like an individual account in the sense that, as the account balance grows, you should get lower fees, especially as you walk through thresholds—and there are definite thresholds. But if the plan sponsor hasn’t looked at the fee structure for 10 or 20 years, there’s likely to be a problem with bracket creep. The fees may still be at the same high level as when there were no assets. That’s where you’ll see an adjustment. With appropriate supervision, there should be a discussion every four or five years about the fees.

RIJ: How will plan advisors be affected?

Wray: There’s another place where there will be an adjustment. The fee issue is all about getting value for the fees, so what will be exposed is that if people are getting paid and not providing service to plan, there will be pressure to end that relationship. If the broker [who sold the plan] is still getting a trail fee, and that broker hasn’t shown up for six years and isn’t providing services, that arrangement is going to be addressed.

RIJ: What about revenue sharing? Will 12b-1 fees disappear?

Wray: This won’t eliminate 12b-1 fees from plans. Consider the 12b-1 fee as a kind of wrap fee. If they went away they’d come back as a wrap fee. For instance, Form 5500 is a bear to fill out. Somebody has to pay for completing it. If the plan pays for it you have to assess the account holders. The 12b-1 can be used to pay for that; it fits a certain kind of model for advisors. Some people say we’ll go all to passive investments and there will be no 12b-1 fees. In that case, you’ll have a wrap fee. The 12b-1 fee was originally used to help pay for marketing for individual mutual funds. In the 401(k) world it became a sort-of wrap fee replacement.

RIJ: Realistically, fee disclosure isn’t going to solve the really big retirement issues, like the overall lack of saving, right?

Wray: Fee disclosure is not about getting people to save more. Yes, we want the system to be as efficient as possible. But getting people to save in their plans is a whole different issue. As I said before, participants aren’t retail investors. You coax them into the plans through techniques and alternatives, but the problem is still about saving enough.

The reality is, Americans don’t save a lot. We don’t think of saving first. Overcoming that is difficult. People can always find excuses not to save, especially if they haven’t gotten a raise. Reducing fees merely addresses the question, ‘How do we accumulate more faster?’ But the challenge to get people to save remains. We’ve been making progress, but when you read that ‘the economy will go well in 2012 if people spend more and save less,’ you realize how we talk about spending and saving. It’s almost a cultural issue.

Vocal reactions to the New 401(k) Rules

Posted on February 8, 2012 by Editor Test -

Was the Groundhog Day announcement by the Department of Labor (about 401(k) fee disclosure) and by the Treasury Department (about new rules for buying annuities with qualified money):

A. Motivated by Democratic election-year politics?

B. A big step toward a higher fiduciary standard for plan sponsors and advisors?

C. A potential source of new business for your company?

D. The trigger for a participant-led rebellion against high plan fees?

E. A modest step forward in the long campaign to get Americans to prepare better for retirement?

Whichever answer you chose, you would definitely find at least a few like-minded thinkers within the retirement income industry. Each of these ideas was expressed by one or more of the interested parties who spoke to RIJ about the long-delayed government announcement last week. Here are excerpts from a wide range of lively conversations:

“It’s political”: Phil Chiricotti, president, CFDD.

“[Department of Labor Hilda] Solis’ statement on fee disclosure clarifies and confirms what many in the industry had already assumed: that the delay in releasing the final fee disclosure regulation was politically motivated,” said Chiricotti, who runs the Center for Due Diligence, a Chicago-based organization that serves plan sponsor advisors.

“The release was delayed until after Obama’s State of the Union address. This allowed the Administration an opportunity to follow up with a real world example of how the Administration was implementing the populist, pro-middle class (and anti-Wall Street) themes of the President’s speech.

“According to the top advisors in the CFDD network, the proposed guidance is unlikely to be finalized ahead of the Presidential election. Whether it moves forward or not will depend on whether the Democrats retain the White House.

“If Obama is re-elected, there is reasonable probability that the guidance will be formalized, perhaps as a regulation. If not, there might be a last minute push to get something released during the lame duck period prior to the inaugural. But it’s more likely that Republican appointees to Treasury/EBSA would simply allow the proposal to die on the vine.”

“Silent tax on the system”: Charles D. Epstein, the “401k Coach”.

Epstein, author of Paychecks for Life: How to Turn Your 401(k) into a Paycheck Manufacturing Company (2012) and a consultant to plan sponsor advisors, told RIJ that the government’s action are changing the plan advisors’ roles but that fees will always be necessary. He also had strong political views.

“I was at a conference in Florida recently and a panel of experts was asked, What keeps you up at night? They said, ‘The fear that the government will take over the retirement business if we’re not careful.’ There are people in government, and in the Department of Labor, who want to do a land grab of the 401(k) system,” said Epstein. “They think government can run things better. But, no, I don’t think the majority in the Treasury and the Department of Labor want to take over the 401(k) system.”

In the future, the advisor’s role will be not just to sell the plan, but also to foster the participants’ success, Epstein said.

“The advisors need to help get people into the plan, help them figure out how much to save, help them maximize their savings with asset allocation and rebalancing, and show them whether they need a Roth 401(k) account or not. In short, to get in the trenches and help participants understand the plan. The advisor has to say to the sponsor, ‘I’ll be your 401(k) success consultant.’

“Now, does the advisor charge an additional fee or extra basis points to do that job? The advisor now has to re-do all his service agreements. He has to go to an ERISA attorney. The fees will be going down but the advisor’s expenses will be going up.

“Who will pay for that? The advisors can add an additional asset-based fee to the plan. Or they can charge the employees individually [for education]. Or they can get money from employees outside the plan [during the rollover stage]. But anytime there’s a new regulation it’s a silent tax on the system.”

“It’s net new business”: Tim Slavin, senior vice president, Broadridge.

“Nobody knows how participants will react, frankly. I don’t see wholesale changes. For the vast majority of people who don’t even open their statements, nothing will change,” said Slavin, senior vice president of Broadridge, a printing and data firm that many third-party administrators (TPAs) use to mail or e-deliver statements, including the new fee disclosures, to plan participants.

“Some people may open their annual disclosure statement and begin to understand. If you’re in a large plan, you’ll already have a low price. On the small plan side, the people with insurance products [such as group variable annuities] might say, ‘I didn’t know this was costing me 200 basis points!’ So I do think you’ll see some movement from older expensive insurance plans to open architecture plans. A fiduciary will say, ‘Maybe we’re overpaying.’ And you might see pressure from participants.

“When I myself was a fiduciary in the small plan space, the fees weren’t something we thought a lot about. Some plans were considered free. We went the provider that charged the firm the lowest cost. That may not have been the firm that charged the participant the lowest fees. The participants thought the plan was free.”

“But no matter what your politics are, transparency is a good thing. This was a long time coming, and it will become an ongoing thing. Younger folks will know what things are costing them. The younger generation will be able to track things better than ours did. An, for [Broadridge], it’s net new business.”

“This will act like a safe harbor”: Blaine Aikin, CEO, fi360.

“The new rules will have several potential impacts,” said Aikin, CEO of fi360, a Pittsburgh-based association that trains and certifies plan fiduciaries. “Part of the problem [for plan sponsor and vendors who have been sued for not monitoring plan fees] was that they weren’t able to make a full disclosure. But full disclosure also accentuates the burden that plan sponsors have to do due diligence. That’s how they will get the liability protection.

“This will act like a safe harbor. Plan sponsors have always had responsibility to enter into ‘reasonable’ agreements. But there was never a consensus on what data they had to consider. This reinforces the idea that due diligence needs to be done. It also gives fiduciaries a better roadmap to what the elements of due diligence are.

“When the new disclosures take hold, and when they see the compensation that they were paying but were unaware of, there will be some shocked plan sponsors. Some of these services were marketed as free but they are not. The most typical instance would be in a bundled platform, where investments are wrapped up with the administration costs.

“If a plan sponsor asked about the administration cost, it would be billed as ‘free.’ But it would be paid for by through revenue sharing.

“Now every direct and indirect cost needs to be clearly identified. That will allow for a comparison between bundled and unbundled products and will enable fiduciaries and non-fiduciaries to see who is getting paid how much and for what.”

“It’s a very positive development”: David John, the Heritage Foundation

“This is a very, very positive development,” said John, a senior research fellow in Retirement Security and Financial Institutions at The Heritage Foundation, a Washington think-tank associated with conservative views. “The changes announced today eliminate unintentional barriers to differing approaches that use lifetime income products without dictating how individuals should use them. They open up new options to future retirees, and should encourage even more market innovations.”

“Income is the next story”: Jody Strakosch, MetLife.

“We’re so excited for the people at Treasury. They’ve been working on this a long time,” said Strakosch, national director, Retirement Products at MetLife, which partners with Barclays Capital on the LifePath Retirement Income program, which allows plan participants to purchase increments of future income through their target date funds.

“They did great work on a couple of specific issues. Savings is critical, but income is the next story. We need to focus participants on income and this is a way to do it.

“Nowhere in the [previous] regulations was there a clear message that said it’s OK to offer partial annuitization from DB plans. Now you have that. You can have monthly income coming in from a portion of your retirement savings. It’s another way to allow people to create an income stream if they want one.”

“Problems will still persist”: Robert Hiltonsmith, Demos.

“These fees parallel the high and in fact excessive fees that characterize the private retirement market in general—fees caused by both lack of financial education and lack of true investment choice,” said Hiltonsmith, a policy analyst in the Economic Opportunity Program at Demos, a New York-based advocacy group.

“Both problems will still persist after the Treasury’s rule changes, which is why more retirement reform is desperately needed to provide all Americans with a safe, low-cost way to supplement their income from Social Security in retirement.”

“No magic”: Teresa Ghilarducci, professor of economics, the New School for Social Research.

“Disclosing fees is a crucial step for savers to know what their true rate of return is on their accounts,” said Ghilarducci, a critic of the current approach to retirement saving in the U.S. “But the disclosure does nothing to help savers get low-fee, high- performance investment managers. There is no magic link between knowing the fees and getting better and more efficient performance.”

“There will be sticker shock”: David B. Loeper, author, Stop the 401(k) Rip-Off.

Loeper, a writer and Registered Investment Advisor who works with individuals and retirement plans up to $30 million in assets, said plan participants should agitate peacefully for fee reductions at their plans.

“There are a lot of small plans that pay huge fees, and when the regulations go into effect and vendors are forced to do that they should have been doing all along, there will be a big retirement plan ‘sticker shock.’ Absolutely. It’s hard to imagine that they wouldn’t. Most people don’t think they’re paying anything for their 401(k)s. If they have $100,000 in their account and they think they’re paying nothing, and then realize that they’re paying fees, they’ll respond.”

“In my book, Stop the Retirement Rip-Off, I explained how to figure out what you’re paying [in plan fees] and, if you’re paying too much, how to organize your peers in a proactive positive manner, not as a complainer, to get your employer to shop for a better plan.

“Protest in a proactive manner, not in a way that’s destructive to your career. If you’re the only who asks, Why do we have this 100 bps fund, your opinion will be dismissed. If you can get others to ask the same question, it can change the perspective of management.

“GMWBs will to be addressed in the ‘next wave”: Unidentified federal official.

Issues regarding the offering of GMWBs in 401(k) plans weren’t addressed by the rules announced last week. But a governmental official familiar with the development of the regulations explained that omission.

“We wanted to pursue [GMWB issues] after we addressed a few plain vanilla issues regarding the simpler products, such as regular fixed immediate or deferred annuities. The issues presented by the GMWB weren’t on the first wave, and most of the people who have asked for guidance on those products are aware that they wouldn’t be. But there’s no question that [the GMWB] is on our radar screen. We’re not approaching the retirement income challenge with a bias [toward any particular product].”

Answers to the eternal question: What do women want?

Posted on February 7, 2012 by Editor Test -

Women investors expect more from financial services providers than men, according to the results of a new survey of some 4,500 U.S. households by Hearts & Wallets, the Boston-area retirement and savings trends research firm.

The study revealed that women investors, who are now the sole heads of one in three U.S. households, are “much pickier” than men regarding financial firms and advisors.

“Women find several key financial tasks more difficult than men, notably retirement planning, and are getting less help with this task. More women than men also describe themselves as very inexperienced about investing and anxious about their financial future,” said Chris Brown, Hearts & Wallets principal.

Key findings of Hearts & Wallets Quantitative Panel 2011 Insight Module “Understanding Women Investors” include:

45% of women (versus 31% of men) are concerned about “making assets last throughout retirement/outliving my money.”
56% of women find retirement planning difficult (versus 51% of men).
12% of women seek help for retirement planning (versus 56% of men).
35% of women (versus 26% of men) feel moderate to high anxiety about their financial future.
41% of women (versus 27% of men) say they are very inexperienced with investing.
15% of women understand how their primary financial services provider makes money—a key trust driver—versus 25% of men.

“Low fees,” “clear and understandable fees,” and “explains things in understandable terms” are what women value most in a financial services firm. Women ranked these attributes at least 10 percentage points higher than men.

“Women want to know what they’re paying for, and how to evaluate providers,” said Laura Varas, Hearts & Wallets principal. “Our study points to the importance of educating women on fees.”

From advisors, “Does not pressure me to buy products,” “is open/honest about fees and compensation,” and “is responsive” were the attributes women expected most, by at least nine percentage points more than men.

The study found women tend to own fewer types of investment products than men, and have higher allocations to bank products, because of lower risk tolerance and lack of financial experience.

“Asset managers, broker-dealers, employer-sponsored plans and others can help women become more comfortable with asset categories that can lead to long-term wealth creation,” said Brown.

Supply-demand imbalance to weigh on US yields: BlackRock

Posted on February 7, 2012 by Editor Test -

U.S. Treasury yields will stay depressed for “a very long time,” BlackRock’s fixed income fundamental portfolios Chief Investment Officers, Rick Rieder, told IPE.com this week.

As the Fed begins to remove the liquidity it has injected into the economy [by selling mortgage-backed assets it purchased during the crisis], he said, it could trigger a flight to quality, possibly leading to lower Treasury yields.

But Rieder also warned against expectations for curve steepening, saying that even long-dated yields are unlikely to move very far.

“The biggest dynamic is simply the lack of supply in fixed income,” he said. “We are seeing something we have not seen for at least 25 years.”

A generation’s worth of leveraging, which peaked at the height of the credit boom, created a huge supply of fixed income securities, he said. Between 2002 and 2007, there was $1.5 trillion (€1.1trillion) of net fixed income supply and approximately another $1 trillion of structured supply.

But, thanks to deleveraging, net debt issuance is set to turn negative in 2012, according Rieder, who cited estimates from Credit Suisse. “At the same time, demand will be growing, because populations are aging and longevity is extending at a faster rate than ever before,” he told IPE.

“Every single developed country has a declining working-age ratio combined with credit-to-GDP levels of 100% or more. As the Japan situation has shown, that means less productivity, growth staying low, more dependence on fixed income and more need for yield.”

BlackRock expects corporate DB plans to buy $1.2 trillion in long U.S. Treasury bonds over the next decade. Insurance companies will need $592 billion worth of high-quality bonds in 2012, even if they write no new business.

With net US Treasury supply reducing significantly in 2012 and supply from financial corporations, mortgage agencies and other sources of securitized debt turning negative, the only source of stable supply of bonds will be non-financial corporations.

“The only sector that isn’t de-leveraging is business – so the only source of supply will be in the form of corporate credit,” Rieder said.

To build diversified portfolios of fixed income in the face of low supply, he added, investors may have to relax their credit-quality restraints and purchase high-yield and emerging market debt.

‘Toxic’ annuity market exists in UK: Report

Posted on February 7, 2012 by Editor Test -

In Britain, the National Association of Pension Funds said the U.K. government must reform the annuity market or see retirement savers “short-changed by a toxic system,” IPE.com reported.

Under the current system, many new retirees from employer-sponsored plans fail to shop around for the best income annuity and are at risk of losing significant amounts of potential income over their lifetimes.

A report by NAPF and the Pensions Institute (PI) of London’s Cass Business School predicted that the loss in annuity income could triple to £3bn ($4.75bn) over the next decade if changes were not introduced.

The report charged that plan sponsors and service providers don’t offer enough information to participants. “Often they get nothing more than a leaflet pointing them to a website with a postcode-based search engine,” it said. The report recommended that pension funds should have an in-built open-market option.

If this did not achieve certain goals set out by the government, the report said, then a national annuity support and brokerage system should be introduced.

The report pointed to a “severe lack” of transparency in the U.K. annuity market. Advisors were quoted as claiming that “insurers pushed rates down when they saw a group of retirees approaching, as they expected the incoming pensioners would not shop around.”

The director of PI, David Blake, called the report a “wake-up call” to the pensions industry. NAPF chief executive Joanne Segars said “People are saving throughout their working lives only to end up short-changed by a toxic system. Every year, a billion pounds that could have been paid out in pensions instead disappears down the plughole of a murky annuity market.” Lower and middle-income earners are affected most, she added.

Referring to the imminent introduction of auto-enrollment in the U.K., she said: “There is no point in encouraging people to save if we do not help them get the most out of their savings.” She also called for more transparency in pricing and structure.

“If the annuity system is not radically overhauled, employees in defined contribution schemes in the private sector will continue to suffer massive detriment, and the government’s new auto enrolment regime will fail the very people it aims to help secure financial independence in retirement,” David Blake added.

Sales mount for New York Life’s deferred income annuity

Posted on February 7, 2012 by Editor Test -

Since last July, New York Life has collected $230 million in premiums on sales of its Guaranteed Future Income Annuity, a deferred income annuity that allows individuals to create their own pensions in advance of retirement, with one or more payments and with flexible income start date. In a release, the mutual insurer said GFI is the “fastest growing annuity product solution in the company’s history.”

The product is aimed at pre-retirees between ages 55 and 65 who plan to retire in five to 10 years. It is available from New York Life career agents and select investment firms nationwide. Sales of New York Life’s Guaranteed Future Income Annuity, which initially began through agents, now make up 35% of guaranteed income annuity sales through New York Life’s field force of 12,250 agents across the country.

The remaining 65% of sales come from New York Life’s traditional guaranteed income annuities, where income starts immediately.

New York Life is the largest mutual life insurance company in the U.S. It has the highest possible financial strength ratings from four of the major credit rating agencies: A.M. Best (A++), Fitch (AAA), Moody’s Investors Service (Aaa), Standard & Poor’s (AA+).

Capital One’s bid for ING Direct could be approved this week—or not

Posted on February 7, 2012 by Editor Test -

The Federal Reserve’s Governors are expected to decide at a closed meeting on Wednesday whether or not to approve Capital One’s $9 billion bid to buy ING Direct USA, according to Bloomberg News.

Consumer groups such as the National Community Reinvestment Coalition have opposed the acquisition, claiming that it “would make Capital One so risky it could put the U.S. financial system in danger.

Since August, the Fed has held public meetings on the matter in Washington, D.C., Chicago and San Francisco.

Capital One said it would remain a “traditional bank” and hold just 1.5% of total U.S. deposits after the deal is made. It also has argued that the plan would give ING Bank USA customers access to more services, including fixed-rate home mortgage loans and a broad network of ATM machines. Capital One also said it would continue to offer ING Bank’s savings accounts with no minimum balance and no monthly fees–features.

Capital One has promised to invest $180 billion over 10 years in low-and moderate-income communities if the ING deal is approved, and to hire people in Delaware, where ING Direct USA is based, and in Sioux Falls, S.D., where HSBC has a domestic card facility.

The Best Retirement Research of 2011

Posted on February 7, 2012 by Kerry Pechter -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The paper concluded:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The World of Retirement Research

Posted on February 2, 2012 by Editor Test -

Lots of time, money, intellectual effort and server space are devoted to research into the annuity puzzle and other mysteries of retirement income each year, and examples of it or press releases about it pour into RIJ’s gmail account almost hourly.

In fact, there’s not enough time in the day to read all the abstracts and executive summaries, let alone the full text of the briefs, working papers, and journal articles themselves.

To acknowledge the people behind all this work, we’re making retirement income research RIJ’s main topic for February. You can expect articles about some of the best research of the past year, about the business of retirement income research, and about the surge in the creation of retirement research centers at major insurers and asset managers.

The research that we see comes from many sources. Academia of course generates reams. The Center for Retirement Research at Boston College is a big producer, and the National Bureau of Economic Research broadcasts a constant flow of work from university economics departments and research centers, including the Pension Research Council at the Wharton School and the Center for Retirement Research at the University of Michigan. The Journal of Financial Planning also prints a lot of academic work.

Think tanks are also players in the retirement research game. We see work from the Retirement Security Project at the Brookings Institution, the Urban Institute’s Program on Retirement Policy, and the Rand Center for the Study of Aging.

From the consulting realm, we get a lot of thought-leadership pieces, free reports, or research reports that cost thousands of dollars each. It comes from household-name outfits like Aon Hewitt, Deloitte, Ernst & Young, Mercer, Milliman, Towers Watson, and the Big Cs: Celent, Cerulli Associates, Cogent Research and Conning.

Not-for-profit associations put out a lot of useful data. EBRI, the Employee Benefit Research Institute, is a fountain of statistics on qualified plans. The Society of Actuaries and LIMRA are valuable sources of data and new thinking. Then there’s the alphabet soup of Washington-based trade groups: DCIIA, ICI, the IRI, IRIC. RIIA-USA, based in Boston, now generates research papers through its Retirement Management Journal. In the Philadelphia area, Diversified Services Group, with its Retirement Management Executive Forum, also puts out regular reports.

Several professional firms are in the business of conducting research or gathering and selling data. Members of this group might be Beacon Research, Financial Research Corp., GDC Research, Hearts&Wallets, Mathew Greenwald Associates, Strategic Insight, and TrimTabs. (Morningstar-Ibbotson might belong in this category too—or among the consulting firms. Excuse me if I mixed a few apples and oranges.)

Finally, perhaps as many as ten financial services firms, including Allianz Global Investors, ING, Prudential Financial, Putnam, TIAA-CREF, Transamerica, Vanguard and others maintain their own retirement research or behavioral finance research centers that regularly generate thought-leadership whitepapers or sponsor nationwide surveys.

Other companies have hired academics for specific research (New York Life has hired David Babbel of Wharton for research on income annuities and York University’s Moshe Milevsky has made videos for ManuLife’s website) or formed ongoing relationships with them (Richard Thaler of the University of Chicago and Shlomo Benartzi of UCLA work with Allianz Global Investors).

In short, retirement research is all around us. It’s a surprisingly big business. And, in the weeks ahead, we hope to tell you more about it and examine some of the fruit it bears.

Keynes vs. Hayek: The Rap Video

Posted on February 2, 2012 by John Papola and Russ Roberts -

Halfway Back to Prosperity?

Posted on February 1, 2012 by Kerry Pechter -

“If you study the history of financial crises,” the economist and best-selling author Carmen Reinhart told 800 investment consultants in the ballroom of a Times Square hotel this week, you discover that “they cast a long shadow.”

Reinhart’s 500-page tome, This Time Is Different: Eight Centuries of Financial Folly (Princeton, 2009), makes dry reading. But she spoke with almost operatic passion this week as she warned the members of the Investment Management Consultants Association that the nation is only about five years into what, historically, is a decade-long deleveraging process.

“I’m talking about a muddling-through scenario where growth recovery is weaker than what we are used to since World War II,” she said mordantly. Her (voluminous) research shows that median GDP growth and unemployment have been 3.1% and 2.7%, respectively, in the 10 years before credit crises. During the decade after the feverish borrowing hits its peak, median GDP drops to 2.1% and unemployment rises to 7.9%.

“In the post-crisis decade,” she said, “housing prices are lower, unemployment is higher and GDP is lower, because of private sector deleveraging. That is true whether government debt is low or high, and whether it follows a policy of austerity or expansive. There’s about seven years of deleveraging, and that puts a damper on economic activity.”

In her talk, Reinhart, since 2010 a senior fellow at the Peterson Institute for International Economics, espoused no particular economic ideology. She said she embraced the Obama stimulus as a way to stop the Panic of 2008 from fissioning into a full-blown depression, but now worries about paying down the debt.

Reinhart, whose family fled Cuba when she was a child, acknowledged that much of today’s public debt is private debt that governments were forced to cover. Without sounding like a deficit dove, she seemed to favor a policy of mild inflation and debt relief through negative real interest rates—i.e., “financial repression”—over a deflation that flattens debtors or a slash-and-burn austerity. She blamed no one and offered no easy exits from our current fiscal and monetary dilemmas.

Her main point was that, not unlike Joseph’s dream of seven fat years followed by seven famine years, credit booms and busts have historically follow a regular cycle of winding up and winding down.

“The buildup in leverage typically takes seven to 10 years, and same amount of time is spent in deleveraging,” Reinhart told the investment consultants. “Deleveraging doesn’t start big-time until about three years into the crisis. The crisis in the US began in the summer of 2007, so this summer we’ll be five years into the crisis.”

The current recovery probably won’t be quick and easy. “I was in Bear Stearns in the early 80s, during the severe recession of 1982 and the spectacular recovery that followed. What were the factors in the spectacular recovery? Household debt in 1982 was 45% of GDP. Today, even after deleveraging, household debt is still 90% of GDP. So the capacity of households to respond is more difficult,” she said.

“The risk of a ‘double-dip’ is alive and well,” she added. “In the 15 severe crisis episodes we studied, double-dips occurred in the seven of them. Economies went from a subpar recovery to a renewed patch of softness. And if you look at the causes of double-dips, we’re prime candidates.”

For the record, Reinhart explained how we got where we are.

“The pattern that we’re seeing play out in Europe and, with less drama, in the U.S., is a common pattern in history. The process begins with financial innovation, liberalization, and globalization. That facilitates credit and leverage booms. During the boom phase of the cycle, asset prices soar. We feel wealthier and borrow more,” she said.

“Eventually the boom in private debts ends up as a severe financial crisis, which morphs as the financial industry goes into crisis. Eventually the economy implodes and goes into recession. The fiscal side is hit by lower revenues, which, absent stimulus, worsens the deficit. The private debts become public debts. The debts of Fannie Mae and Freddie Mac went from the private-sector to public-sector balance sheets, and added 25 percentage points to government debt.”

After the crises, the responses have also followed a pattern, as central banks and governments try to steer a middle path between inflating away the debt (helping debtors) and maintaining the value of their currencies (helping savers).

“At the end of WWII, all of the winners were mired in public debt. What was the most conducive policy for recovery? Low interest rates with a little bit of inflation. That combination of low stable nominal rates and inflation produces negative real interest rates. It’s a tax on the bondholder. It’s a transfer from savers to borrowers. In periods of high debt, it’s a form of debt relief,” she said.

“Given this environment, of deleveraging, of public and private credit events, it’s not surprising that central banks, both in the U.S. and the other advanced economies, will go to great lengths to keep rates as low as possible for as long as possible. If the problems are both public and private indebtedness, and excess capacity, then the inflation concerns traditionally voiced by central banks will be placed on the back burner for some time to come,” she added.

“Countries go to great lengths to avoid restructuring, i.e., default. The usual alternative is inflation to liquidate debt. We’ve done it. Germany did it after World War I and Brazil did it in the 1980s. Financial repression is a subtle type of debt restructuring.”

Reinhart predicted no quick resolution of the current financial crisis in Europe. “The Greek default at first looked unprecedented for an advanced economy,” she said. “But, since independence, Greece has been in default 48% of the time, with the last default in 1964.

“In Davos, I heard optimism as spreads have come down on Irish and Italian debt. People said, ‘The worst is behind us. We’ve endured crisis.’ I disagree. There will be more restructurings. Portugal is probably next on the list. Ireland has massive external debt sitting there unresolved. Italy and Spain are in the too-big-to-fail category. More defaults and restructurings will be with us for awhile.”

At the same time, she warned about the downsides of a surge of capital into emerging markets. “Low rates in the advanced economies make yields on emerging market bonds very attractive, and emerging markets have been attracting a lot of capital flows. Many have attracted higher flows than they would welcome. Over past two years, there’s been some optimism that emerging markets are the right engine of growth and the right destination for money,” she said.

“But large capital inflows can be destabilizing. They can be too much of a good thing. Banking crises are more likely when a country sees large capital inflows. The US had record inflows. So did Spain, Greece, Ireland, and the UK. All had huge capital inflows, but it didn’t end any better than it has in the emerging markets.

“During the last two years, we’ve seen Brazil, Korea and others attract a lot of flows, with internal leverage growing in those countries, and appreciated currencies. Vulnerabilities are there that weren’t there two years ago. Emerging markets have weathered the storm because they had reduced their external debts extensively.”

Here in the U.S., Reinhart said she is trying to see into the future, without much success. “During the height of the crisis, I for one received the stimulus with open arms, she said. “It made the key distinction of stabilizing the panic, a preventing a bad recession from becoming a collapse like the 1930s.

“But now, five years since the crisis, [it’s clear] that that debt will have to be repaid through some form of restructuring. Services and entitlements will be reduced or they will be reneged on. I don’t know of any instance where the magnitude of debt accumulation is like it is today. I’ve been working on an analysis for planning on how to deal with the surging debt problem but it hasn’t gone very far.”

Deloitte Consumer Spending Index ends 2011 on “low note”; contraction predicted in 2012

Posted on February 1, 2012 by Editor Test -

Despite small improvements in three out of four components, the Deloitte Consumer Spending Index (Index) dipped slightly in December due to a decline in housing prices.

The Index tracks consumer cash flow as an indicator of future consumer spending.

“Initial unemployment claims continued to decline in December, while real wages benefited from a decrease in energy prices,” said Carl Steidtmann, Deloitte’s chief economist. “This positive movement was not substantial enough to offset the continued pressure from the housing market.”

The Index, which comprises tax burden, initial unemployment claims, real wages, and real home prices, fell to 1.86 in December from 1.93 the previous month.

Highlights of the Index include:

Tax Burden: The tax burden rose slightly to 11.09% as state and local governments increased taxes to cover budgetary shortfalls.

Initial Unemployment Claims: Claims moved lower in the most recent month to 396,250, falling below the 400,000 mark for the first time in seven months.

Real Wages: While down 2.1% from a year ago, real wages posted a small gain to $8.75 on falling energy prices.

Real Home Prices: Prices fell 5.72% from a year ago. Real home prices are back to 2000 levels.

Consumer spending in 2011: The year in review

Three factors significantly boosted consumer spending in 2011, according to Deloitte interpretation of U.S. Commerce Department data:

Gasoline prices are down 60 cents a gallon since May peak, adding $80 billion to household purchasing power.
A sharp drop in the savings rate from 5% to 3.5% has added $150 billion to consumer purchases.
The 2% cut in Social Security tax withholding last January added another $90 billion.

Together these developments represent a gain of $320 billion, yet real consumer spending during that period increased just half that amount, by $160 billion.

Additionally, real disposable incomes have declined on a year-over-year basis for the past four months. Job growth has been in lower-income industries, while the job loss has been in higher-income industries like government and financial services, adding to the weakness in household earnings.

Outlook for 2012

The ability for consumers to continue to spend at the rates seen in 2011 may be in question.

“Going forward, it is unlikely there will be another tax cut, and Social Security tax withholding may rise back to its previous level by March,” said Steidtmann. “Another 150 basis point drop in savings is not likely, and while gas prices can always fall, the rising tensions in the Middle East would argue against such a drop.”

BlackRock launches ‘Multi-Asset Income Fund’

Posted on February 1, 2012 by Editor Test -

BlackRock’s new Multi-Asset Income Fund will offer retail and high net worth clients an income-generation strategy previously available only to BlackRock’s top institutional investors, according to a company release.

Previously named the BlackRock Income Portfolio Fund, the new fund is managed by portfolio managers from the BlackRock Multi-Asset Client Solutions (BMACS) team, which managed over $80 billion in retail client assets at the end of 2011.

The Multi-Asset Income Fund aims to provide less volatility than a traditional balanced portfolio, BlackRock said. Its managers reallocate assets based on daily contact with the firm’s risk management professionals.

“Traditional income sources are falling short in today’s environment. Therefore, we want to help clients employ different strategies that go beyond the simple, 60/40 equity-and-fixed income portfolio rule of the past,” said Frank Porcelli, head of the firm’s U.S. Retail business.

SunAmerica expands lifetime income options

Posted on February 1, 2012 by Editor Test -

SunAmerica has announced a few changes to its variable annuity lifetime income options.

SunAmerica Income Plus 6%has been enhanced with a new income option that guarantees 5.25% withdrawals for life starting at age 65 plus guaranteed rising income for 12 years―even while clients take withdrawals―regardless of market performance.

For those who want more income in the early years of retirement, the SunAmerica Income Plus 6% feature available in select Polaris Variable Annuities continues to offer 6% withdrawals as early as age 45 or up to 7% withdrawals as early as age 65.

The SunAmerica Income Builder 8%feature has also been enhanced with a new lifetime income option that guarantees up to 5% withdrawals for life when withdrawals begin at or after age 65.

With SunAmerica Income Plus 6% and SunAmerica Income Builder 8%, income is guaranteed to increase by the greater of annual performance or an annual income credit on contract anniversaries during the first 12 contract years. After 12 years, income can continue to increase from investment performance.

Joint Life income options with different withdrawal parameters are also available with these features.

SunAmerica has also introduced a new investment portfolio – the SunAmerica Dynamic Allocation Portfolio –as an underlying investment in their variable annuity products. It is available when clients elect one of the new income options.

The new portfolio is an actively managed fund-of-funds with as many as 20 or more money managers. It blends up to 44 existing SunAmerica portfolios. A dynamic asset allocation strategy is employed to help manage the Portfolio’s net equity exposure and the effects of volatile equity markets.

“When the equity market is experiencing high levels of volatility, the portfolio’s net equity exposure will be decreased. Conversely, when the equity market is experiencing lower levels of volatility, net equity exposure will be increased,” said Rob Scheinerman, senior vice president, SunAmerica Retirement Markets.

“What you effectively have is a balanced type model with a volatility control mechanism that we believe will give people a better risk/return experience than they would have in a more traditional, static balanced portfolio.”

The company also offers five fixed income portfolios and a cash management portfolio with its new income options for investors who prefer a different investment approach or want to change their risk profile after their contract has been issued.

With certain income options, the income amount will be reduced in the event the contract value is completely depleted due to market volatility and/or withdrawals taken within the feature’s parameters.

Allianz Life launches new indexed annuity

Posted on February 1, 2012 by Editor Test -

A new fixed indexed annuity with optional income rider and 6% annual deferral bonus—the Allianz 365i Annuity and Income Maximizer Rider–has been launched by Allianz Life Insurance Company of North America.

The product is currently available in 32 states. Only field marketing organizations and agents associated with the Allianz Preferred distribution model will distribute the Allianz 365i Annuity, which is the second exclusive product offered through Allianz Preferred.

The new product offers indexed interest growth potential, a premium bonus, a 10-year declining surrender charge and flexible income choices. It also offers a potential death benefit enhancement for beneficiaries equal to 25% of all interest credits.
The optional Income Maximizer Rider, available for 1.2% of the protected income value per year, creates a floor value for people to use for lifetime income withdrawals. The floor value gets credited with a 6% guaranteed interest roll-up and any additional earned interest based on their 365i index allocations. The credits continue until lifetime income withdrawals or annuitization begins.

The bonus is subject to a 10-year vesting schedule and a 10-year surrender charge schedule. Ten percent of the bonus will be vested on each contract anniversary until the beginning of the 11th contract year, when 100% will be vested. Those who surrender the contract before the beginning of the 11th contract year will lose their unvested bonus. The same would apply for those who begin annuitization prior to the sixth contract year (or who annuitize for fewer than 10 years). These charges may result in a loss of bonus, indexed interest and fixed interest, and a partial loss of principal (your premium).

The Bucket

Posted on February 1, 2012 by Editorial Staff -

Three new plans for Prudential Retirement

Prudential Retirement, a unit of Prudential Financial, has announced three new plan sponsor clients with a combined $95.4 million in plan assets and about 1,100 participants.

U.S. Epperson Underwriting Company, a commercial property and casualty insurance management company, has signed on for a full service retirement solution. Prudential Retirement will record-keep the Boca Raton, Fla. headquartered company’s defined contribution (DC), defined benefit (DB) and deferred compensation plans. Prudential will service $67 million in total combined plan assets and will deliver retirement planning services to more than 329 DC participants and 787 DB participants. The deal became official on Dec. 1, 2011.

Prudential has also assumed recordkeeping responsibility for Garden City, New York-based The Auto Club of New York. The defined contribution plan has more than 580 participants and $18 million in plan assets.

New Orleans, Louisiana-based Energy Partners has also signed on. The 401(k) plan has more than 250 plan participants and roughly $10.4 million in plan assets.

Prudential Retirement counts over 3.6 million participants and annuitants and had $214.7 billion in retirement account values as of September 30, 2011.

Joan Bozek named senior vice president at Prudential Retirement

Prudential Retirement has appointed Joan Bozek as senior vice president, Investment Products, effective immediately. She will report to Jamie Kalamarides, senior vice president, Institutional Investment Solutions.

Bozek will be responsible for Prudential Retirement’s proprietary and sub-advised fixed income, equity, balanced and asset allocation funds with $30 billion in assets under management. She will also lead Prudential’s Due Diligence Advisor (DDA) process, the business unit’s quantitative and qualitative approach to selecting, monitoring and, if necessary, replacing, sub-advised investment managers.

Bozek and her team are also responsible for Prudential’s proprietary retirement investment offerings, including Prudential’s EasyPath, RetirementGoal, Alliance, Discovery, Medley, and client accommodation separate funds.

Bozek will support the distribution of these products through Prudential’s Total Retirement Solutions line of business to our full service sponsors, their advisors and participants, and will explore expanding distribution to third party channels through Strategic Relationships.

Bozek had been vice president, Defined Benefit Product, Service and Operations. Before joining Prudential, she served as the Chief Investment Officer for the Merrill Lynch Retirement Group with responsibility for defined benefit and defined contribution plan investments and as the Chief Risk Officer and Head of Investment Product for Merrill Lynch Trust Company.

TD Ameritrade to provide brokerage services to ABA Retirement Funds Program

TD Ameritrade, Inc., a broker dealer subsidiary of TD Ameritrade Holding Corp., will provide self-directed brokerage account services to the ABA Retirement Funds Program, a fully-bundled retirement solution available to law firms and their employees offered by the ABA Retirement Funds, a not-for-profit organization.

The 3,700 law firms served by the program will have access to a broad range of non-proprietary investment choices including 100 commission-free ETFs and over 13,000 mutual funds, and independent third-party research and market analysis.

John Hancock Annuities wins 2011 Dalbar award

John Hancock Annuities was named a service leader by Dalbar in its recently announced 2011 Financial Intermediary Service Awards. Dalbar honored John Hancock Annuities as a leading firm in the post-sale award category among financial intermediary firms, based on testing of advisor calls.

Dalbar’s Financial Intermediary Service Award is based on systematic testing of service throughout the year. Dalbar conducts thousands of tests to measure how financial companies respond to the need for service from financial professionals. Companies that exceed a variety of industry benchmarks after one year of testing earn the Financial Intermediary Service Award.

Heapps, Harrington and Rigatti rise at John Hancock Financial Network

Brian Heapps, CLU, ChFC, was named president of John Hancock Financial Network (JHFN), replacing Peter Gordon, who has become the general manager of John Hancock Retirement Plan Services.

Heapps is responsible for all aspects of JHFN, the company’s national network of independent firms, and its broker-dealer, Signator Investors, Inc.

In addition, Bruce Harrington was promoted to vice president of sales and business development, taking on some of Heapps’ prior role. Matt Rigatti was appointed to the new position of assistant vice president of field resources.

Heapps joined John Hancock in 1987 as a financial representative and in 1997 founded JHFN firm Keystone Financial Management in Allentown, PA. He joined JHFN’s home office in 2007 and has served as executive vice president, agency sales and development since then. He holds the Chartered Life Underwriter and Chartered Financial Consultant designations.

Harrington is responsible for JHFN sales across all product lines, relationships with all product sponsors and recruiting. He joined JHFN in July 2010 as head of retirement sales and strategy. Since then he has rolled out two retirement-related platforms for advisors, one for working in the defined contribution market and the other in the retirement income market.

Previously, he served as senior vice president of retirement solutions at LPL Financial. Prior to that, he launched a new business unit focusing on syndicated research at Cogent Research. He also held senior positions at MFS Investment Management and Putnam Investments. Harrington earned a bachelor’s degree in political science from Boston College and an M.B.A. from Suffolk University.

Rigatti, who joined John Hancock in 1995, will be responsible for setting strategy and overseeing JHFN’s field facing teams including firm financing, information technology and supervision.

Rigatti has held a variety of positions of increasing responsibility in variable annuity operations. He is a graduate of Boston College with a degree in history.

Northwestern Mutual announces 2011 financial results

Northwestern Mutual today announced its 2011 financial results, which included an increase in the amount of dividends expected to be paid to its participating policyowners in 2012 to almost $5 billion as well as an increase of more than $500 million in its surplus position.

The company expects to pay $4.97 billion in policyowner dividends in 2012, its second highest amount ever. In 2012, the company’s dividend payout will include a dividend scale interest rate of 5.85% on unborrowed funds for most permanent life insurance products.

Northwestern Mutual said that it expects again to lead the U.S. insurance industry by a wide margin in total life insurance, long-term care and disability insurance dividends paid. It expects to pay approximately three times the ordinary life insurance dividends of its nearest competitor.

The company’s total surplus, a combination of surplus and asset valuation reserve, grew to $18.2 billion at year-end 2011, a company record. “Surplus” represents an insurance company’s capital position, a cushion for the unexpected that is held above and beyond the reserves it also holds to provide for future insurance benefits.

Securian Retirement wins CEFEX certfication

Securian Retirement’s process for selecting investment options for its qualified retirement plan clients received CEFEX certification from the Centre for Fiduciary Excellence for the fourth consecutive year, the company said.

Securian Retirement’s qualified plan products are offered through a group variable annuity contract issued by Minnesota Life. CEFEX is an independent organization that assesses the risk and trustworthiness of investment fiduciaries.

TIAA-CREF names GE veteran as COO

TIAA-CREF, a leading financial services provider, today announced the appointment of Ronald Pressman has been appointed executive vice president and chief operating officer of TIAA-CREF, which has 3.7 million participants at 15,000 educational institutions.

A 32-year veteran of General Electric, Pressman will report to TIAA-CREF CEO Roger Ferguson beginning January 30, 2012.

Pressman most recently served as president and CEO of GE Capital Real Estate and as director of the GE Capital Services and GE Capital Corporation boards. Previously, he served as president and CEO of GE Asset Management and chairman, president and CEO of GE Employers Reinsurance Group. Pressman also served as the CEO of GE Energy Europe, Africa, Middle East and Southwest Asia and the general manager for GE International’s Central and Eastern European markets.

Pressman is a graduate of Hamilton College and will be based in TIAA-CREF’s New York City office.

Kotwal named to Great-West marketing post

Great-West Life & Annuity Insurance Company has appointed Sid Kotwal as assistant vice president, marketing strategy. He reports to Joe Greene, senior vice president and chief marketing officer.

Kotwal will be responsible for competitive research, marketing analysis and benchmarking, branding, and product service positioning. He also will develop initiatives in the positioning, communications and messaging of Great-West products and services targeting financial advisers and insurance and retirement services clients.

Kotwal most recently served as managing director, product marketing and management at Charles Schwab. Previously, he was a vice president of product management at MasterCard International and held positions in product marketing and strategy at American Express, Capital One and Salomon Smith Barney. Kotwal completed his Bachelor of Science degree in mathematics and economics at Cornell University and an MBA in finance and strategic management at the Wharton School of Business.

$300 Billion, Up for Grabs

Posted on January 31, 2012 by Editor Test -

With $300 billion up for grabs from affluent investors planning to roll over assets from former employer-sponsored retirement plans (ESRPs) into IRAs, 2012 is proving to be anyone’s game.

Having spent a number of years growing their DC plan balances, investors are reviewing their options carefully to ensure their retirement dollars continue to flourish – or at least stay intact.

With this in mind, Cogent Research® recently investigated where the rollover opportunity lies within this segment of the market in its 2012 Investor Assets in Motion™ study.

What follows is a summary of key findings and related implications for financial professionals, distributors, and asset managers.

Key Findings

1. The Rollover IRA consideration pool has widened dramatically and now comprises more full-service providers than in previous years. While traditional online distributors are poised to retain the greatest percentage of their current ESRP assets, investors are warming up to more full-service providers, indicating a need for added support navigating the current marketplace.

Full-service advisory firms across the National, Regional, and Independent channels are making significant in-roads with one-quarter or more of their respective customers planning to roll internally.
As this momentum builds, traditional ‘discount’ providers must step-up their guidance and ‘advice’ offerings to ensure retirement assets remain in their coffers.

2. Rollover-related research is on the rise. Within the past 12 months, there has been an uptick in the amount of rollover research being conducted.

More investors are researching rollover options online, contacting their former providers to inquire about rollover solutions, and contacting former employers for rollover kits.
As investors become more knowledgeable, providers need to clearly demonstrate why their rollover solutions are best and equip plan sponsors with educational materials.

3. Ease of doing business and third-party recommendations are increasingly vital to Rollover IRA provider selection. When asked, ease of doing business is a key reason for selecting a rollover provider, particularly among unadvised investors. (Exhibit 1)

Interestingly, alongside the greater adoption of social media, recommendations from friends, colleagues, and employers have grown in importance among all investors.
Since many investors are choosing to bypass provider information and ask a trusted individual about their rollover experience with a particular provider, providers must ensure that the rollover process is efficient and error-free.

(Exhibit 1)

Overall, investors continue to have a healthy appetite for Rollover IRAs and the opportunity remains strong. However, as more full-service providers gain share, distributors and asset managers will need to work even harder to gain the attention of potential Rollover IRA candidates. The combination of product differentiation, unparalleled service, and a concerted effort to reach rollover candidates is the ticket to the big game.

About the Study
Investor Assets in Motion™ study was conducted by Cogent Research last November, surveying over 4,000 investors with at least $100,000 in investable assets, excluding real estate. The primary objective of the report is to help distributors and asset managers evaluate and maximize Rollover IRA opportunities.

The study investigates:

•   Opportunities to gain Rollover IRA assets at the industry, asset manager, and distributor level
•   Investors’ likelihood to roll assets from ESRPs held with former employers into Rollover IRAs
•   Usage of and allocation to ESRPs and IRAs at the household level
•   Specific steps investors have taken to get ready for retirement

About Cogent Research
Cogent Research helps clients gain clarity, obtain perspective, and formulate direction on critical business issues. Founded in 1996, Cogent Research provides custom research, syndicated research products, and evidence-based consulting to leading organizations in the financial services, life sciences, and consumer goods industries. Through quality research, advanced analytics, and deep industry knowledge, Cogent Research delivers data-driven solutions and strategies that enable clients to better understand customers, define products, and shape market opportunities in order to increase revenues and grow the value of their products and brands.

[email protected]

The Red (Ink) Peril

Posted on January 25, 2012 by Editor Test -

LONDON – Europe is now haunted by the specter of debt. All European leaders quail before it. To exorcise the demon, they are putting their economies through the wringer.

It doesn’t seem to be helping. Their economies are still tumbling, and the debt continues to grow. The credit ratings agency Standard & Poor’s has just downgraded the sovereign-debt ratings of nine eurozone countries, including France. The United Kingdom is likely to follow.

To anyone not blinded by folly, the explanation for this mass downgrade is obvious. If you deliberately aim to shrink your GDP, your debt-to-GDP ratio is bound to grow. The only way to cut your debt (other than by default) is to get your economy to grow.

Fear of debt is rooted in human nature; so the extinction of it as a policy aim seems right to the average citizen. Everyone knows what financial debt means: money owed, often borrowed. To be in debt can produce anxiety if one is uncertain whether, when the time comes, one will be able to repay what one owes.

This anxiety is readily transferred to national debt – the debt owed by a government to its creditors. How, people ask, will governments repay all of the hundreds of billions of dollars that they owe? As British Prime Minister David Cameron put it: “Government debt is the same as credit-card debt; it’s got to be paid back.”

The next step readily follows: in order to repay, or at least reduce, the national debt, the government must eliminate its budget deficit, because the excess of spending over revenue continually adds to the national debt. Indeed, if the government fails to act, the national debt will become, in today’s jargon, “unsustainable.”

Again, an analogy with household debt readily suggests itself. My death does not extinguish my debt, reasons the sensible citizen. My creditors will have the first claim on my estate – everything that I wanted to leave to my children. Similarly, a debt left unpaid too long by a government is a burden on future generations: I may enjoy the benefits of government extravagance, but my children will have to foot the bill.

That is why deficit reduction is at the center of most governments’ fiscal policy today. A government with a “credible” plan for “fiscal consolidation” supposedly is less likely to default on its debt, or leave it for the future to pay. This will, it is thought, enable the government to borrow money more cheaply than it would otherwise be able to do, in turn lowering interest rates for private borrowers, which should boost economic activity. So fiscal consolidation is the royal road to economic recovery.

This, the official doctrine of most developed countries today, contains at least five major fallacies, which pass largely unnoticed, because the narrative is so plausible.

First, governments, unlike private individuals, do not have to “repay” their debts. A government of a country with its own central bank and its own currency can simply continue to borrow by printing the money which is lent to it. This is not true of countries in the eurozone. But their governments do not have to repay their debts, either. If their (foreign) creditors put too much pressure on them, they simply default. Default is bad. But life after default goes on much as before.

Second, deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit. The British government already must borrow £112 billion ($172 billion) more than it had planned when it announced its deficit-reduction plan in June 2010.

Third, the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.

Fourth, there is no connection between the size of national debt and the price that a government must pay to finance it. The interest rates that Japan, the United States, the UK, and Germany pay on their national debt are equally low, despite vast differences in their debt levels and fiscal policies.

Finally, low borrowing costs for governments do not automatically reduce the cost of capital for the private sector. After all, corporate borrowers do not borrow at the “risk-free” yield of, say, US Treasury bonds, and evidence shows that monetary expansion can push down the interest rate on government debt, but have hardly any effect on new bank lending to firms or households. In fact, the causality is the reverse: the reason why government interest rates in the UK and elsewhere are so low is that interest rates for private-sector loans are so high.

As with “the specter of Communism” that haunted Europe in Karl Marx’s famous manifesto, so today “[a]ll the powers of old Europe have entered into a holy alliance to exorcise” the specter of national debt. But statesmen who aim to liquidate the debt should recall another famous specter – the specter of revolution.

Robert Skidelsky, a member of the British House of Lords, is Professor Emeritus of Political Economy at Warwick University.

New York Life resolves itself to a duo

Posted on January 25, 2012 by Editor Test -

There’s been a shift of responsibilities among executive vice presidents at New York Life, reflecting a reorganization of the giant mutual insurer into two major business groups, Insurance and Investments, the company announced this week.

The move is designed to “[enhance] the prospects of New York Life becoming a true leader in retirement solutions beyond income annuities,” chairman and CEO Ted Mathas said in a release.

Chris Blunt, who has run the company’s new Retirement Income Security (RIS) business since it began in 2008, will run the new $3.3 billion Insurance Group. The life insurance business had been led by Mark Pfaff, who will continue to lead New York Life’s 12,000-member career agent force. John Y. Kim, the chief investment officer, will add RIS to his responsibilities as head of the company’s Investments Group. All three executives report to Mathas.

The RIS division encompasses New York Life’s guaranteed income products, including deferred fixed and variable annuities, fixed immediate annuities, and deferred income annuities, which were introduced in 2011. New York Life is the leader in domestic sales of fixed immediate annuities, with a 27.8% market share.

New York Life leads the industry in new life insurance premium written, with a market share of 11.7% in the United States.New York Life Investments, which Kim has led since 2008, has $285 billion in assets under management.

The new Insurance Group will include more than just the agent-sold individual life insurance business. Blunt will also be responsible for the company’s long-term care insurance business, the direct-response life insurance business in Tampa, Florida, which partners with AARP, and the group life business, which is the largest underwriter of professional association insurance programs in the U.S. New York Life’s operations in Mexico are also being incorporated into the Insurance Group.

Mathas noted in a statement that the realignment “enhances the prospects of New York Life becoming a true leader in retirement solutions beyond income annuities, where we lead today.” As he explained it, the reorganization will facilitate efforts to convert invested assets into retirement income products.

“The alignment of former RIS businesses under Mr. Kim is designed to take further advantage of the fast-growing retirement area in which consumers first accumulate funds for retirement and later convert a portion of those funds for guaranteed lifetime income in retirement,” Mathas said in a statement.

“With his new responsibilities as head of the Investments Group, Mr. Kim will have a broad array of institutional and retail products and solutions under his leadership, including retail mutual funds and annuities, and institutional asset management and retirement plan services. The marketing, finance, technology, distribution and service functions that support those product lines are also part of the Investments Group,” Mathas added.

Blunt graduated from the University of Michigan and holds an MBA degree from the Wharton School of the University of Pennsylvania. He joined New York Life in 2004. Kim also graduated from the University of Michigan and holds an MBA degree from the University of Connecticut. He joined New York Life in 2008. Pfaff, a graduate of Manhattan College, joined New York Life in 1985 as an agent in New Jersey and entered sales management in 1988.

Sounds Like a Plan

Posted on January 25, 2012 by Kerry Pechter -

“Only the dead know Brooklyn,” a great novelist once wrote. Thomas Wolfe wasn’t referring to zombies; he was just observing that no one alive could possibly know everything there was to know about that teeming, complex and now very hip borough across the East River from Manhattan.

Financial planning software is, in a sense, like Brooklyn. Although it’s merely a small borough within the sprawling giga-city of information technology, it’s much too large and varied a field for anyone (except possibly Joel Bruckenstein) to grasp in its entirety.

At the same time, it’s way too big to ignore. Individual advisors, technology buyers at wealth management firms, and, indeed, almost anybody who wants to compete in the retirement income industry, should know more about what’s happening on the planning software front.

For this reason: planning software isn’t just about asset allocation and Monte Carlo analysis anymore. In the mass-affluent end of the advice business, where volume will be high and margins low, it’s a sine qua non of survival.

It’s wired directly into the increasingly integrated work flow of the wealth management business, which begins with client portals and lead generation and assessment, then feeds into risk profiling, product selection, and order entry, and ultimately connects to data aggregation, reporting and compliance. The payoff, ideally, will include greater competitiveness, economies of scale, transparency and higher fiduciary standards.

And, for any advisor who wants to capture mature clients and keep them for life, the planning software has to pay much more than lip service to the decumulation stage and guaranteed income. Most of the big planning software players still cater to the brokerage world, however. Boutique companies seems to be where the income action is.

A directory of software vendors

To give RIJ subscribers a kind of Michelin Guide to the planning software world, we’ve created a table listing all of the software that we know about and some relevant information about each. There may be a gap or two, but we intend to refresh this directory regularly.

Our list includes 27 companies, arranged in alphabetical order by name. About a dozen are huge firms that provide comprehensive services to wirehouses, broker-dealers, banks and insurance companies. CGI, FiServ, PIEtech, SunGard, Thomson-Reuters and Zywave (formerly EISI) belong to this club. According to Celent, PIEtech (MoneyGuidePro) has 120 institutional clients and 30,000 users; Zywave has 250,000 users.

Other well-known players that perennially appear in industry surveys include eMoneyAdvisor, Morningstar, Advisor Software Inc., and Money Tree. Then there are other, smaller firms that, although less well known, often have stronger retirement income functionality than the dominant brands, which, like most advisors, still tend to be investment- and accumulation-driven.

Among the income specialists are Asset Dedication (the sole asset manager on the list), Fiducioso Advisors, Wealth2k (whose Income for Life Model uses a time-segmentation or floor-and-upside tool), LifeYield (a specialty tool that models tax-efficient drawdown), and Thrive Income (which employs deferred or period-certain income annuities during retirement).

Although the recession and competitive pressures are said to be holding down prices of financial planning tools, wealth management firms are expected to spend about $319 million on financial planning technology overall by 2013, according to a report, The Financial Planning Market, published by the research firm Celent in April 2011.

That’s up from an estimated $233 million in 2010. According to Celent, broker-dealers see the latest-and-greatest planning tools as a way to attract and retain high-end advisors, and advisors see the tools as a way to engage, educate and retain clients. Analogous to a smartphone, a financial planning tool’s user-interface, its “apps,” and its connectivity with other tools are becoming as important as its core function. Not coincidentally, vendors are developing planning apps for smartphones and tablets.

Making room for income

Income functionality is slow but steadily coming to the financial planning software world, where vendors, taking a cue from the advisors they serve, see investors growing older, risk-averse and interested in a safe income during retirement.

“Virtually all the vendors are enhancing their retirement income features,” said Alex Camargo, an analyst at Celent who, with research director Isabella Fonseca, wrote Celent’s reports on financial planning software last year. “They’re adding functionality that would be useful in the insurance world. Because of the general flight to safety, a lot of firms see the insurance world as an opportunity and will build out to them.”

As Camargo put it in his report, “Many vendors are now offering cash flow-based and goal-based planning around retirement income, giving advisors the ability to compare scenarios by modifying life expectancy, retirement age, Social Security start date, incomes/expenses, etc.

“Vendors are also beginning to incorporate more advanced planning features such as multi-period and partial retirement, human capital considerations, reverse mortgages, and optimal Social Security calculators.”

That is the case at PIEtech, which makes MoneyGuidePro and CashEdgePro and has 120 institutional clients, more than any of its competitors, according to Celent. “We have done a module for showing the benefit of a VA with GMWB floor income, and that’s heavily used by some of our customers. JPMorgan Chase uses it a great deal,” Bob Curtis, PIEtech’s CEO, told RIJ. “It shows you how to much annuity you need to get to fill out a gap.” He expects his firm to focus on income planning more in the second half of 2012.

One of the more income-driven tools is Income for Life Model from Wealth2k, which has adapted to changing conditions over the last 10 years, according to CEO David Macchia. It has evolved from what he described as a relatively simple bucketing tool into a white-label multi-media package that combines product-neutral decumulation tools—time-segmentation or a floor-and-upside approach—and slick client-facing presentation.

Advisors at Securities America Investments have been using Income for Life Model for about five years. This year, the tool will be available on the Pershing NetX360 investment platform. But Macchia says that nudging advisors’ perspectives from accumulation to distribution is taking longer than he expected.

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

The latest products are also reaching out to engage the client as a participant in his own planning process—something that a direct provider like Fidelity, for instance, has been doing for some time.

“There’s a growing realization that a proactive client is a sticky client. The vendors are starting to empower the end client to do a little more. They’re giving the end-client the ability to create a simple scenario, play around with it using slide bars,” Camargo told RIJ.

“Then, in some cases, the advisor gets an alert that a certain client logged in. So it can work as a prospecting tool. It can show the advisor what’s on the client’s mind. That’s important, because you often hear that the end-client doesn’t communicate with the advisor and that the advisor doesn’t understand what the client wants.”

Impact Technologies, maker of Retirement Road Map, recently partnered with LIMRA, the life insurance research organization, to create Ready2Retire, which it calls the “industry’s first interactive web app that creates a bridge between advisors and customers.”

Ready2Retire, uses picture post-card graphics and slider bars to help elicit information from near-retirees about their retirement goals and finances, so the advisor doesn’t have to start awkwardly from scratch. T. Rowe Price, the no-load fund company, has already licensed for its advisors, said Dave Freitag, vice president of marketing at Impact Technologies. Individual advisors can license by individual advisors for $499 per year.

Another major trend in financial planning software is integration. A few products, like Advisor Software’s Wealth Manager, are relatively self-contained. But most financial planning vendors are increasingly creating web-mediated bridges between their tools and tools with complementary functions.

Product vs. process

Greater integration can serve as a competitive edge or as a cross-selling tool, since a firm can network to the partners’ clients. “For example, NaviPlan may not have CRM [client relationship management] functionality built into their solution, so they offer it with a CRM. Or PIEtech might partners with CashEdge to provide account aggregation,” Camargo said. “It’s not the same as open architecture [because companies don’t integrate with competitors].

“A lot of them are integrating into CRM solutions. CRM is a very hot topic for wealth managers and for advisors because they’re trying to capture all of the individuals’ risk profiles and preferences, and capture the assets,” he added. Without integrating, data might have to be transferred manually from one system to another.

“We have a bunch of integration partners and more in the works,” said John DeVincent, executive vice president of marketing at eMoneyAdvisor. “What’s happening is that no one is directly owning the desktop. Although each software company wants to be the desktop tool of choice for advisors, in reality most advisors have five to six applications open at once. They want data to be able to go back and forth between them. So, if eMoney is integrated with Redtail Technologies, a CRM provider, someone who is a licensed user of eMoney and Redtail can connect them and use the functionality of both. That’s integration.”

Ultimately, the scalpel approach to retirement income planning may beat the sledgehammer approach, predicts Freitag of Impact Technologies. As so often happens, less may eventually be more.

“For the most part, the tools are all good and all have different strengths and weaknesses.” Freitag told RIJ. “And their cost is all over the map from inexpensive to really costly. The reason that studying them is so hard is that the tools do so many different things. It is hard to compare them.

“To make it more difficult, every producer likes his or her software the best,” he added. “It is hard for them to be objective. I see a trend away from high-end comprehensive planning tools however. There is a growing interest in focused analysis tools. These tools are easy to use and, more importantly, easy to explain to the client.”

Curtis Cloke, a Burlington, Iowa planner, discovered something like that when he and Garth Bernard began marketing their Thrive Income system. They found that few advisors shared Cloke’s passion for a rich tool that enables “custom analytics” and opens up unlimited possibilities. For that reason, Thrive recently began marketing discrete modules of its original product as components for other planning tools.

But Cloke believes that, going forward, true planners will have a competitive edge over mere product distributors. “Only 10% to 15% of advisors are analytic, process-driven people,” he told RIJ. “But because of economic pressures that are building up even as we speak, that proportion will swing big-time. Those who choose not to embrace a process-driven method, if only for the purpose of compliance and meeting the fiduciary standard, will simply fade away.”

Three new plans for Prudential Retirement

Joan Bozek named senior vice president at Prudential Retirement

TD Ameritrade to provide brokerage services to ABA Retirement Funds Program

John Hancock Annuities wins 2011 Dalbar award

Heapps, Harrington and Rigatti rise at John Hancock Financial Network

Northwestern Mutual announces 2011 financial results

Securian Retirement wins CEFEX certfication

TIAA-CREF names GE veteran as COO

Kotwal named to Great-West marketing post

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