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AXA updates Accumulator VA

Posted on October 12, 2011 by -

AXA Equitable Life Insurance Co. has updated its flagship Accumulator series of variable annuities. Introduced in 1995, the product series now offers a 5½% compounded deferral bonus “roll-up” rate on the benefit base to age 85 or until the first withdrawal, whichever is first. Previously, the deferral bonus was 5% and it was paid until age 80.

When withdrawals of lifetime income begin, the benefit base continues to compound at 5%, which the client can either take immediately or leave in the contract to further increase the lifetime income going forward.

Accumulator has an optional Guaranteed Minimum Income Benefit (GMIB) for an additional fee. It puts a floor under the amount that the contract owner can convert to an immediate annuity. 

The updated Accumulator has three different death benefit options. Two of these choices offer, for an additional fee, allow the benefit base to keep growing to age 85. The contract has a first year surrender charge of 7%, declining to zero over seven years.

The Bucket

Posted on October 12, 2011 by -

Nationwide Financial adds eight wholesalers in retirement plan sales  

Nationwide Financial Services Inc. today announced that it has hired eight new wholesalers to support advisors in the annuities and retirement plan businesses, as part of its “‘team of specialists’ approach to helping advisors help their clients prepare for and live in retirement,” the company said in a release.

The new members of the sales team are:

  • Vince Centineo will serve as the regional vice president for the Illinois, Indiana, Kentucky, Michigan, Ohio, Pennsylvania and Washington territory, representing the select market team. He had been an external wholesaler and distribution specialist at Halcyon Capital Markets.
  • Sean Milligan will serve as regional vice president for the North and Central Chicago territory, representing the retirement plans sales team. He had been managing director of institutional sales at MassMutual.   
  • Troy V. Simmons, who will serve as regional income planning specialist for the West territory (which includes Washington, Oregon, California, Nevada, Arizona, Hawaii, Utah, Montana, Wyoming, Colorado, New Mexico, Texas, Kansas, Oklahoma, Montana, Arkansas and Louisiana). He had been a regional vice president at American General.   
  • Eric Bokesch will serve as field service representative for the Cincinnati, Indiana and Kentucky territory, representing pension sales in the private sector. He had been an enrollment advisor at a direct-write third party administrator.
  • Aubrey Burningham will serve as field service representative for the Washington and Oregon territory, representing the group retirement plans sales team in the private sector. She had worked in operations at Paulson Investment.   
  • Geovanny Alfaro will serve as pension field service representative for the New York City and Westchester County territory, representing the retirement plans sales team. He had been a 401(k) retirement plans consultant at Mutual of America.   
  • Gonzalo Villamil will serve as field service representative for the Southern California territory, representing the retirement plans sales team. He had been a mutual fund and 401(k) retirement plans wholesaler at AIG VALIC Financial Advisors.
  • Josh Cesare will serve as pension field representative for the Eastern Pennsylvania, Westchester, New York and New Jersey territory, representing the retirement plans sales team. He had been a registered representative/investment advisor representative at MetLife Securities.

 

Vanguard estimates costs for new service for small plan sponsors  

Interest has been extremely strong in Vanguard reports strong interest in its small 401(k) plan service, which the mutual fund giant and jumbo retirement plan provider announced in September, the company said.

As pressure builds on plan sponsors to scrutinize and justify fees, the plan creates a low-cost option for small plans that don’t have the economies of scale that help drive down fees for large plans. 

Vanguard is providing the new service directly to sponsors of 401(k) and profit-sharing plans with assets up to $20 million, and to advisors who sell fee-based 401(k) plans. The “all-in” plan fees, comprising total investment, recordkeeping, and administration costs, are anticipated to be among the lowest in the small-plans market.

Industry median all-in fees are 1.27% of plan assets* for plans between $1 million and $10 million in assets, said Vanguard in a release, citing data from the Investment Company Institute and Deloitte Consulting LLP.

The new Vanguard service expects to charge 0.32% of plan assets as an all-in fee for a hypothetical plan with $5 million in assets, an average account balance of $50,000, and an investment lineup of Vanguard index and active funds (actual pricing will depend on a plan’s investment options, demographics, and ancillary services).

Recordkeeping and other services are provided through Ascensus, and include a call center, compliance testing and documentation, participant education materials, dedicated plan sponsor and participant websites, and trustee services. Among optional services are participant advice and self-directed brokerage.

 

Most Americans still have low “retirement income IQ”

Of the 1,213 pre-retirees ages 56 to 65 who took a 15-question quiz on retirement issues conducted by the MetLife Mature Market Institute, quiz, a majority answered only five of 15 questions correctly, the company said.

Middle-aged Americans showed “persistent misperception and misunderstanding in a number of core areas, such as life expectancy, inflation, retirement income/savings, long-term care insurance and to some extent Social Security,” said those who conducted the 2011 MetLife Retirement Income IQ study.

Only 17%, for instance, knew that delaying the collection of Social Security by three years would add 24% to the amount they receive.

In the 2008 version of the study, most respondents correctly answered six of the 15 questions. The 2011 study also asked a number of questions related to additional aspects of Americans’ post-retirement income needs.

Only 45% knew that experts believe retirees will need 80 to 90% of their pre-retirement income to maintain their current standard of living. About 40% believed that they should limit withdrawals from their savings to between 7% and 15%, instead of the widely recommended 4% to 6%.

The respondents’ average estimate of what a couple would need in pre-retirement income to cover their essential living expenses (i.e., housing, food, health care, transportation, insurance and taxes) was 61%, very close to informal estimates that about 60% is needed to take care of the absolute basics.   

Key findings from the study include:

  • Sixty-two percent of those surveyed in 2011 realize that the greatest financial risk facing retirees is longevity, compared with 56% in 2008 and 23% in 2003.
  • The most common concern regarding retirement was having enough income to cover essential expenses (32%), followed by the ability to afford health care (18%).
  • The majority (87%) of respondents have taken steps toward ensuring adequate income for retirement, such as increasing their contributions to retirement plans or extending their working years. Just under two-thirds (62%) of them are currently seeking financial product advice.
  • Almost one-quarter (24%) correctly identified that a reverse mortgage is accessible only to homeowners age 62 or older, but more than half (54%) were unaware that a reverse mortgage can be used to purchase a primary home.
  • 42% of Americans still incorrectly believe that health insurance, Medicare or disability insurance will cover the costs of long-term care.

The 2011 MetLife Retirement Income IQ, which included 15 intelligence-quotient questions and an additional set of nine questions to address respondents’ retirement security and planning, was conducted by the MetLife Mature Market Institute and administered online by GfK North America to 1,213 pre-retirees in June 2011. Participants aged 56 to 65, working full-time, within five years of retirement, who were the co- or primary household financial decision-maker qualified for the survey. Data were weighted based on gender, education and occupation. The margin of error for the survey was +/- 3 percentage points.

 

LPL Financial Retirement Partners enhances “Tool Suite” for plan advisors

LPL Financial Retirement Partners has enhanced its Tool Suite package for pre-qualified, retirement plan-focused financial advisors. The enhancement includes a new Lineup Comparison Tool component.

LPL Financial Retirement Partners is a division of LPL Financial that focuses on serving the brokerage and practice management needs of independent retirement plan advisors.

The Tool Suite helps advisors conduct plan provider and investment manager searches, monitor fiduciary responsibility, communicate with plan sponsor clients through a highly customized interface, complete regular due diligence and identify new retirement plan opportunities.

The Lineup Comparison Tool is available as an additional module. It allows advisors to compare performance and comprehensive expense information for up to five retirement plan lineup options in a side-by-side format.  

“The expansion of the LPL Financial Retirement Partners Tool Suite is the culmination of our integration with National Retirement Partners (NRP) and an expression of our focus and commitment to the retirement plan industry,” said Bill Chetney, executive vice president of LPL Financial Retirement Partners.  

 

Americans clueless about the real cost of retirement

One-third of Americans (34%), including 38% of women and 30% of men, don’t know what percentage of their savings they will need to take out annually in retirement, according to a new survey by Edward Jones and Opinion Research Corp.   

The survey of 1,011 respondents showed that 22% of Americans think that they will need to use more than 10% of their retirement savings each year. One-third of those between the ages of 35 to 44 expect to spend the same percentage on a yearly basis once they stop working.

Among retired Americans, 15% believe they will need to withdraw more than 10% of their saving; 25% of non-retirees believed that.   

Younger Americans (18-34-years-old) say they do not believe their retirement will come at a high cost, as 19% said they plan to withdraw one to two percent annually from their retirement savings.

Other key findings from the survey included:

  • 44% of Americans expect to spend less than 10% of their retirement savings each year. This decision was influenced by gender as 50% of men polled indicated the same compared with 37% of women.
  • 12% of Americans in the Northeast and 11% in the West expect to spend more than 20% of their retirement savings on a yearly basis. In contrast, 49% of respondents in the South and 46% in the Midwest expect to withdraw less than 10% pof their retirement savings each year.
  • 50% of Americans with a household income of more than $100,000 plan to spend less than 10% of their retirement savings each year. One-third of those with a household income of $35,000 to $50,000 expect to spend more than 10% annually.

United Technologies Adopts In-Plan Annuity

Posted on October 6, 2011 by -

The retirement industry has been waiting for a Fortune 100 company to set an example and be the first to add an in-plan income option to its 401(k) plan. Now one has.    

United Technologies Corp., the Hartford, Conn.-based global conglomerate that builds Pratt & Whitney aircraft engines, Sikorsky helicopters and Otis elevators, has added what it described as an “unbundled” version of AllianceBernstein’s Secure Retirement Strategies program to its $15 billion, 102,000-participant defined contribution plans.

Secure Retirement Strategies, which was described in a December 2010 RIJ article and accompanying feature, allows participants to invest in a series of target date funds, which can be covered by a “stand-alone living benefit” that works like the guaranteed lifetime withdrawal benefit of a variable annuity.

Three annuity issuers—AXA Equitable, Nationwide, and Lincoln Financial—will share responsibility for the guarantee, a spokesman for Nationwide told RIJ on Tuesday. (AXA Equitable and Lincoln Financial managers could not be reached for confirmation before deadline. UTC would not confirm the names of the participating insurers. UTC spokesperson Maureen Fitzgerald said that the insurer selection process was still ongoing.)

Mark Fortier of AllianceBernstein told RIJ Thursday that UTC, out of fiduciary concerns, will retain the flexibility to change insurers if they believe it is necessary, rather than accept them as part of an AllianceBernstein bundled product. “The ultimate decision regarding the insurers is theirs,” he said. “If one of the insurers doesn’t meet their criteria, they can change. That’s the key distinction, as opposed to a packaged product where they don’t have that choice. They need that safety valve.”

UTC will be able to change insurers, for instance, if the insurer’s price gets too high or if it runs into capacity problems—issues that are much more likely than outright insolvency.  “Solvency is the last problem you’d have to deal with. Price competition and capacity come first,” Fortier said. 

The deal is significant on several levels, Fortier noted. It marks the first adoption of the in-plan lifetime withdrawal benefit by a major non-insurance corporation; it marks the introduction of personalized glide paths in target date funds; it gives each insurer the flexibility to adjust prices based on changing market and interest rate conditions; it gives a large company—one that has already fought ERISA class-action suits in court—the fiduciary protections that a large plan with huge potential exposures must have.

In the past, Fortier said, lack of adequate technology meant that target date fund issuers had to assign people to five-year buckets. When a stand-alone living benefit was added to a traditional TDF, it meant that people of different ages were treated as though they were the same age, thus inevitably discriminating against some. “To assume that everybody in a 2010 fund was 65 years old was flawed.” Today, he said, it’s technically possible to mass-customize TDFs and resolve that problem. “It’s the next logical evolution.”

Other companies offer in-plan options that attach a stand-alone living benefit to target date funds. Prudential was first-to-market with a solution called IncomeFlex. Diversified Investment Advisors, Transamerica and Vanguard collaborate on a program called SecurePath for Life, and Great-West Life offers a program called SecureFoundation. The UTC-AllianceBernstein deal, by setting a precedent for the establishment of an in-plan option at a jumbo plan, could create opportunities for all these providers.

Large corporations have a strong incentive to adopt in-plan income options in DC plans, Fortier noted. As large firms closed their DB plans and switched new employees to DC plans, they lost the ability to manage the workforce that DB plans have always provided. From their inception, DB plans have allowed companies to replace older employees with younger employees in a humane, predictable and orderly way. By adding an in-plan option to their DC plans, large companies can regain that capability.

UTC revised its two 401(k) plans for salaried and union employees in January, reducing the number of investment options and investment managers. It replaced actively managed equity funds with passive ones and cut fees. In March 2010, it changed record keepers, going to Aon Hewitt from Fidelity.

“As in other DC plans, investment options are arranged in tiers: a target-date fund series for people with the least experience in investing; a group of core funds for those with more investing experience; and a self-directed brokerage window of mutual funds for participants who say they are more active, savvy investors,” a May 30, 2011 P&I report said.

The lifetime income option provides an income solution for new employees, who are not eligible for UTC’s $17.6 billion defined benefit plan. It was closed to new employees at the end of 2009.

About two weeks ago, UTC announced that it would buy Goodrich Corp. for $16.5 billion, adding a maker of aircraft landing gear and jet-turbine casings to take advantage of a record surge in commercial plane orders.

In mid-September, ctpost.com reported that UTC unit Sikorsky Aircraft would cut three percent of its global workforce in the face of constrained commercial and military spending, or about 540 of the helicopter-maker’s 18,000 global workforce, of which 9,500 are based in Connecticut. In 2009, amid the financial crisis, UTC cut its global workforce of over 200,000 by more than 10,000 jobs.

Five years ago, UTC’s 401(k) plan was the one of the targets of unsuccessful lawsuits filed in four states accusing seven large companies of violating pension laws by allowing their employees to be overcharged by outside firms operating 401(k) retirement plans. UTC won all of the suits.

The employees were charged millions of dollars in excessive management fees, which often were hidden in obscure agreements and not disclosed to the workers, according to attorney Jerome Schlichter, who filed the suits in federal district courts in Connecticut, California, Illinois and Missouri.

© 2011 RIJ Publishing LLC. All rights reserved.

Our Debt Won’t Bankrupt Our Grandkids

Posted on October 6, 2011 by -

Challenging conventional wisdom is part of our mission at Retirement Income Journal, and few pieces of wisdom are more conventional than the supposition that adding more dollars to the national debt will impoverish our grandchildren.

This assumption has paralyzed the country. Fears of increasing the nation’s annual budget deficit or the long-term national debt have emerged as urgent reasons for sawing off the limbs of Social Security and Medicare, on which virtually all retiring Baby Boomers will be sitting.  

Politically, to be soft on the deficit today is arguably as suicidal as it was to be “soft on Communism” before 1989. No practical politician wants to be accused of saddling our grandchildren with the burden of paying back the federal debt. 

But what if this assumption is false? What if it is counter-productive? What if it is based on a simplification or a misunderstanding of the nature of the debt of a sovereign nation with a fiat currency?

Though you rarely hear about their work, several economists have challenged this idea over the years, beginning at least as far back as the 1930s, during debates over the blessings or evils of the New Deal.

These economists believe that government expenditures on infrastructure and education (in the Great Recession) or soil conservation and rural electrification (as in the Great Depression) help the current economy (by employing people) as well as tomorrow’s economy (by fortifying the nation’s intellectual and physical capital).

Here, to start with a very recent example of this “heresy,” is a quote from Cornell economist Robert Frank’s latest book, The Darwin Economy (Princeton and Oxford, 2011): 

“We’re told that economic stimulus financed by borrowed money will increase the public debt and impoverish our grandchildren. And since most people don’t want to impoverish their grandchildren, the discussion ends there. But prudent public investment does not impoverish our grandchildren at all. On the contrary, when the government borrows money at four percent and invests it in a project that yields 18 percent during an economic downturn, the effect is to not only to put people to work who have been otherwise sitting idle but also to enrich our grandchildren.” (pp. 54-55)

Another example, in a similar vein, comes from Modern Monetary Theory proponent Warren Mosler’s 2010 book, The Seven Deadly Innocent Financial Frauds (Valance Co., Inc.):

“… The idea of our children being somehow necessarily deprived of real goods and services in the future because of what’s called the national debt is nothing less than ridiculous.

… When I look at today’s economy, it’s screaming at me that the problem is that people don’t have enough money to spend. It’s not telling me they have too much spending power and are over- spending. Who would not agree?

Unemployment has doubled and GDP is more than 10% below where it would be if Congress wasn’t over-taxing us and taking so much spending power away from us.

When we operate at less than our potential—at less than full employment—then we are depriving our children of the real goods and services we could be producing on their behalf.

Likewise, when we cut back on our support of higher education, we are depriving our children of the knowledge they’ll need to be the very best they can be in their future. So also, when we cut back on basic research and space exploration, we are depriving our children of all the fruits of that labor that instead we are transferring to the unemployment lines.”

This line of thinking pre-dates the current crisis. Back in 1961, when the federal debt as a percent of GDP had subsided (after the huge run-up during World War II) to about the same level as in 1937, Michigan State economist Abba Lerner, in his lucid and indispensable Everybody’s Business (MSU Press), said this:

“Another argument—and this one is quite a tear-jerker—is that the national debt will be a burden on our grandchildren, and that it is immoral and heartless of us to allow posterity to pay for our profligacy. This is nothing but an echo of the original confusion. If the debt should be repaid by our grandchildren, it is hard to see who would be receiving the repayment except our grandchildren. There is, besides, the other question of whether or not the debt would in fact ever need to be repaid, and this applies just as much in our grandchildren’s time as in the present.” (pp. 108-109)

The earliest defense of this position that I could find was in Thurman W. Arnold’s The Folklore of Capitalism (Yale, 1937), a book that gleefully tries to deconstruct our most cherished illusions about politics and economics: 

“Belief in the inherent malevolence of government resulted in a fiscal fairyland in which the following propositions, absurd though they were from an organizational point of view, appeared to be fundamental truth:  

  1. If the government conserves our soil from floods and erosion in order to bequeath to posterity a more productive country, our children will be impoverished thereby and will have to pay for it through the nose.
  2. If government builds a large number of productive public works which can be used by posterity, posterity will be worse off.
  3. We cannot afford to put available labor to work because that would burden posterity.
  4. We cannot distribute consumer’s goods now on hand, because that would burden posterity.

… Therefore, we do not improve our country, or conserve its resources, or utilize its labor, or run its productive plant to its maximum capacity—out of consideration for our grandchildren.” (pp. 311-312)

These authors are all Keynesians to one degree or another. They believe that government borrowing and spending during serious economic recessions or depressions is the best way to prevent both immediate and long-term damage to the economy and its participants. They don’t merely believe that deficit spending will eventually pay for itself. More fundamentally, they tend to believe, as Lerner pointed out in the selection from Everybody’s Business, that the federal debt may never need to be paid back at all.

This belief is, of course, sheer blasphemy for many—especially for those who like to compare the federal budget to a household budget and the United States to Greece. But, counterintuitive as the idea may seem, it may fit the facts better than conventional wisdom does.

In this view, U.S. Treasury debt is as much a mountain of assets—the savings of millions of Americans, Chinese and others throughout the world who transact in dollars—as it is a liability. It will be serviced, traded, redeemed as it matures and reissued over time, but it will never have to be cleared to zero, nor should it be.

If that’s true, our current dilemma may not be as unsolvable as it seems.  

© 2011 RIJ Publishing LLC. All rights reserved.  

‘Boom Time’ for Variable Annuities?

Posted on October 6, 2011 by -

On the first full day of the Insured Retirement Institute’s annual conference in Boston this week, Prudential’s Bruce Ferris presented a slide on which a bar chart of annual variable annuity sales overlay a line graph of the S&P 500’s yearly performance.

The close correlation between VA sales and the vagaries of the U.S. equities market was evident, and Ferris called it an “unacceptable” pattern for the industry’s future growth.

Later, Ferris commented that another guest speaker, on viewing the same slide, had said, “It should be the opposite.” 

That slide seemed to sum up the dilemma that confronts VA manufacturers today. They’re trying to position VAs as a financial product for all seasons—a parasol in the sun and an umbrella in the rain—but it’s tough to have it both ways. Those who live by the bull appear likely to die by the bull.

In a life insurers’ perfect world, VA sales would rise with equity prices and then soar even higher during slumps; but that hasn’t been the case. The upshot is that variable annuities remain, in effect, a segment of the equity mutual fund market rather than a distinct and unique product category.

LIMRA statistics keep showing that most people who buy VAs buy the riders. But if the GLWBs and GWIBs were causing sales instead of just being associated with them, then shouldn’t VAs enjoy strong sales during down markets?

The industry’s strategy for enhancing popularity is (and has been for at least five years): more education and more outreach to advisors and to the public about the special virtues of VAs. IRI, for its part, has been adding distributors to its membership—80,000 individual advisors, Cathy Weatherford said in her presentation—and trying to educate them about annuities, including SPIAs (there’s a new SPIA payout calculator on the IRI site, for members only. It’s powered by information from Cannex.)

But education so far hasn’t accomplished much. Perhaps VA living benefits should simply be presented as what they are: promises that if you’re still alive and if your account has runs out, you’ll keep receiving an income until you’re dead (as long as you accept certain restrictions and conditions). If so, then people might be less mystified by them and they might require less “education.”  

Still, VA manufacturers can’t be blamed for the straightjacketed financial environment, one that gives them little ability to generate value for shareholders, customers, distributors or employees.

What advisors and pundits say

During a session where 11 advisors responded to questions from a moderator, the audience of 500 or so was able to hear what advisors think about their products. Advisors don’t mind, for instance, the fact that products undergo frequent changes—they judge each version on its own merits. And they like knowledgeable inside wholesalers who provide support over the phone.

On the other hand, they don’t like the loose price bands that give issuers ample room to raise rider expense ratios in the future. They especially don’t like (a perennial complaint) wholesalers who drill them with product features while not warning them about clawbacks and not showing them what type of client would benefit most from a given contract. Only two of the 11 advisors said they use immediate annuities.

On the second day of the conference, there was another moderated discussion featuring broker-dealers, with panelists from Merrill Lynch, LPL, Raymond James and Morgan Stanley Smith Barney. Give-and-take sessions like that one are now a rarity at IRI conferences, however. Breakout sessions have been eliminated and general sessions with big-picture speakers are the rule.

The headliners at IRI this year included Fareed Zakaria, the CNN commentator, Andrew Friedman, the Washington observer, as well as Gary Bhojwani, president and CEO of Allianz Life of North America, chief marketing strategist David Kelly of J.P. Morgan Funds, and Mohamed El-Erian, the CEO and co-CIO of PIMCO.

Zakaria described the dreary situation that the U.S. finds itself in, a state of affairs where U.S. companies have $2 trillion of cash on their books and are producing the same amount of goods they did five years ago but with seven million fewer American workers. That depresses demand and feeds unemployment in a vicious cycle.

His solution was decidedly Keynesian. The way to break the cycle is for government to invest in research and development and infrastructure, he said. Austerity and cutbacks in federal aid to state and local governments are counterproductive.

“The short-term effect of austerity is falling demand,” he said. “If you downside the government, cut jobs and stop giving money to people, you withdraw money from the economy, you lower tax receipts and you widen the deficit.”

Friedman’s speech, by contrast, was implicitly sympathetic to those who might be footing the bill for that spending through higher tax rates.

If current law prevails, he said, the anticipated 3.8% Medicare surtax on unearned income, combined with a likely return to a 39.6% top marginal income tax rate, would bring the highest effective marginal rate to about 44%. (His math wasn’t entirely clear). In addition, the capital gains tax rate will go to 20% from 15%, the dividends tax rate to 44% from 15% and the estate tax to 55% from 35% with the end of the Bush tax cuts.

Friedman, a Harvard-trained lawyer, predicted that Obama would be re-elected, and that the Republicans would retain the House and gain a majority in the Senate—but not the 60-seat super-majority that would enable them to overcome Democratic filibusters. Gridlock government is likely to last until at least 2016, he said.

Even if Obama were defeated, Friedman said, the Bush tax cuts would still expire on his watch in January 1, 2013, and he can veto any bill to extend the cuts that Republicans try to pass before then. Less sanguine than Zakaria, Friedman expected deficit reduction to trump stimulus. “We’re headed to austerity,” Friedman said. “It’s just a matter of how fast.”

Is it “Boom Time”?

A retirement income Trifecta occurred this week, with three organizations sponsoring meetings. In addition to the IRI conference, the Retirement Income Industry Association held its annual meeting and awards dinner in Boston on October 3 and 4. On October 4, Financial Engines and the Pension Research Council of the University of Pennsylvania staged a one-day, research and public policy-oriented retirement symposium in New York.

The theme of the IRI conference this year was, “It’s Boom Time.” One consultant responded privately, “What boom?” A day after the conference, an executive who used to attend every NAVA conference but has since retired, asked me in an e-mail, “Are they still relevant?”

Occasional complaints are heard about IRI’s steep membership fees and about the lack of substantive breakout sessions at the conferences, but this year’s annual conference was probably the most robust since the end of 2008, especially considering the recent Wall Street sell-offs.   

IRI meetings are still probably one of the best places for former insurance company colleagues, now at different companies, to reunite for a few hours. But the days when NAVA members could mix business with golf and spa treatments at La Quinta in Palm Springs are a rapidly fading memory.   

© 2011 RIJ Publishing LLC. All rights reserved.

Putnam launches “Dynamic Risk Allocation” fund

Posted on October 5, 2011 by -

Putnam Investments has launched the Putnam Dynamic Risk Allocation Fund, designed to “actively balance the sources of portfolio risk across multiple asset classes, with flexibility to respond dynamically to changing economic conditions and market valuations,” the company said in a release.   

The fund will make use of a “risk parity” approach that Putnam uses for institutional clients. From Putnam’s description, this approach fills the fund’s risk budget with assets other than equities. “We think it should be a new core holding,” said Laura McNamara, a Putnam spokesperson. “It is a better way to manage risk.”

According to the fund fact sheet, the fund will get 46% of its risk exposure from U.S., non-U.S. and emerging market equities, 22% from TIPS, commodities and REITs, 16% from U.S. and non-U.S. fixed income securities, and 16% from high-yield and emerging market bonds. The typical 60%/40% balanced fund gets 90% of its risk exposure from the equities component, Putnam said.

“The portfolio weightings will be dynamically adjusted in response to changing market conditions, providing the potential to further enhance performance and manage risk,” Putnam said. The fund will also use leverage and derivatives to adjust risk exposures.

Putnam’s Global Asset Allocation team, led by Jeffrey L. Knight, will manage the new fund. The team’s specialists have experience in managing multi-asset portfolios for both the institutional and retail marketplaces, including more than five years of managing portfolios employing a risk-parity approach.   

Putnam launches “Dynamic Risk Allocation” fund

Posted on October 5, 2011 by -

Putnam Investments has launched the Putnam Dynamic Risk Allocation Fund, designed to “actively balance the sources of portfolio risk across multiple asset classes, with flexibility to respond dynamically to changing economic conditions and market valuations,” the company said in a release.   

The fund will make use of a “risk parity” approach that Putnam uses for institutional clients. From Putnam’s description, this approach apparently fills the fund’s risk budget with assets other than equities.

“The portfolio weightings will be dynamically adjusted in response to changing market conditions, providing the potential to further enhance performance and manage risk,” Putnam said. In addition to global equities and global fixed-income securities, the fund Allocation Fund may invest in commodities and real estate investment trusts, and use leverage.   

Putnam’s Global Asset Allocation team, led by Jeffrey L. Knight, will manage the new fund. The team’s specialists have experience in managing multi-asset portfolios for both the institutional and retail marketplaces, including more than five years of managing portfolios employing a risk-parity approach.   

State employees prefer DB to DC, NIRS/Milliman study shows

Posted on October 5, 2011 by -

When given a choice, public sector employees definitely prefer defined benefit pension plans to defined contribution plans, according to a study by the National Institute for Retirement Security and Milliman called Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers.   

The study analyzed seven state retirement systems that offer a choice between DB and DC plans and found that the DB uptake rate ranged from 98% to 75%, with the balance choosing the DC plan.   

The six states whose seven plans were analyzed for the study included Colorado (88%/12% DC/DB election), Florida (25%/75%), Montana (3%/97%), North Dakota (2%/98%), Ohio (public employee 4%/96%, and teachers plans 9%/91%) and South Carolina (18%/82%).

The authors of the study also looked at the experiences of Nebraska and West Virginia. Nebraska offered some employees hired between 1964 and 2003 only a DC plan, but also maintained a DB plan for other employees. Over 20 years, the average investment return in the DB plan was 11% percent, and the average return in the DC plans was between 6% and 7%.

“West Virginia closed their Teachers’ DB plan to new hires in 1991 in response to funding problems and put all new hires in a DC plan. Unfortunately this did not solve the funding problem, and many teachers found it difficult to retire when relying only on the DC plan,” said Mark Olleman, a Milliman actuary who co-authored the report.

“West Virginia performed a study, found a given level of benefits could be funded for a lower cost through a DB plan, and put all teachers hired after July 1, 2005, in the DB plan as a cost-saving measure. So both Nebraska and West Virginia found a DC plan did not achieve their goals and changed from DC to DB.”

The new study found that:

  • When given the choice between a primary DB or DC plan, public employees overwhelmingly choose the DB pension plan.
  • DB pensions are more cost efficient than DC accounts due to higher investment returns and longevity risk pooling.
  • DC accounts lack supplemental benefits such as death and disability protection. These can still be provided, but require extra contributions outside the DC plan which are therefore not deposited into the members’ accounts.
  • When states look at shifting from a DB pension to DC accounts, such a shift does not close funding shortfalls and can increase retirement costs.
  • A “hybrid” plan for new employees in Utah provides a unique case study in that it has capped the pension funding risk to the employer and shifted risk to employees.

U.S. pension deficit largest since WWII—Mercer

Posted on October 5, 2011 by -

The aggregate deficit in pension plans sponsored by S&P 1500 companies increased by $134 billion during September, to $512 billion, as of September 30, according to new figures from Mercer.

The plan’s aggregate funded ratio was 72% as of September 30, compared to 79% at the end of August and 81% at the end of 2010. Mercer believes that the end-of-month pension funding levels for the S&P 1500 are at a post-World War II low.

The estimated aggregate pension assets of the S&P 1500 were $1.31 trillion, compared with the estimated aggregate liabilities of $1.83 trillion as of September 30, 2011. The previous low point for funding was August 31, 2010 when the aggregate funded ratio was 71% and the deficit was $507 billion.

The decline in funded status was driven by a 7% drop in equities, and a fall in yields on high quality corporate bonds during the month. Discount rates for the typical US pension plan decreased approximately 30-40 basis points during the month. Mercer’s analysis indicates the S&P 1500 funded status peaked at 88% at the end of April, and has since seen a 16% decline.

“The end of September marks the largest deficit since we have been tracking this information,” said Jonathan Barry, a partner in Mercer’s Retirement Risk and Finance business. “Over the past 3 months, we have seen nearly $300 billion of funded status erode. This will have significant consequences for plan sponsors. It will be particularly painful for organizations with September 30 fiscal and/or plan year ends.

“With no expectation for a quick recovery, plan sponsors should evaluate the effects of the recent turmoil on their future cash requirements, as well as the impact on their P&L and balance sheet,” said Mr. Barry. “For some sponsors, the recent drop could result in falling below certain funding level thresholds under PPA which could lead to restrictions on lump sum payments and at the more extreme end, could result in a total freeze of benefit accruals.”

“The recent market turmoil is a reminder to plan sponsors of the need for a pension risk management strategy that is aligned with corporate objectives,” said Kevin Armant, a principal with Mercer’s Financial Strategy Group.

“Those that were aware of the risks and can deal with the increased cash funding and P&L charges associated with the current market downturn may choose to stay the course. Those that can’t will continue to evaluate risk reduction opportunities, including increasing interest rate hedging programs, moving more into long corporate bond allocations or transferring risk through the introduction of a lump sum payment option or purchasing annuities.

For both types of organizations, it’s likely that additional cash funding will be required and it may be useful to look at the option of accelerating those contributions, as some sponsors may have the capacity to take advantage of the low interest rate environment by borrowing to fund.”

The estimated aggregate value of pension plan assets of the S&P 1500 companies at December 31, 2010, was $1.37 trillion, compared with estimated aggregate liabilities of $1.68 trillion. Unless otherwise stated, the calculations are based on the Financial Accounting Standard (FAS) funding position and include analysis of the S&P 1500 companies.

Courts favor fiduciaries in suit over “imprudent” plan investments

Posted on October 5, 2011 by -

On September 6, 2011, in the case of Loomis v. Exelon Corp.(Case Nos. 09-4081 and 10-1755), the Seventh Circuit found that the fiduciaries of Exelon Corporation’s defined contribution retirement plan did not breach their fiduciary duties by offering “retail” mutual funds—funds sold to the general public—nor by requiring participants to bear the expenses of those funds.

The following is based on court documents and a report by Seyfarth Shaw, a national law firm with “a large management side labor and employment practice.” 

The Exelon Plan offered 32 investments options, 24 of which were retail mutual funds with expense ratios of 30 to 96 basis points. The highest expense ratios were associated with actively managed funds and the lower ratios associated with index funds.  

Citing Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), and other Seventh Circuit cases which have stressed the importance of participant choice in understanding fiduciary responsibility with respect to defined contribution plan investments, the Court rejected plaintiffs’ arguments:

Plaintiffs, participants in Exelon’s Plan, contend that its administrators have violated their fiduciary duties under the Employee Retirement Income Security Act, see 29 U.S.C. §1104(a), in two ways: by offering “retail” mutual funds, in which participants get the same terms (and thus bear the same expenses) as the general public; and by requiring participants to bear the economic incidence of those expenses themselves, rather than having the Plan cover these costs. Plaintiffs contend that Exelon should have arranged for access to “wholesale” or “institu- tional” investment vehicles. Some mutual funds offer a separate “institutional” class of shares, and Exelon’s Plan also could have participated in trusts and invest- ment pools to which the general public does not have access.

Similar arguments were made in Hecker but did not prevail. Deere offered 25 retail mutual funds with expense ratios from 0.07% to just over 1% annually. We held that as a matter of law that was an acceptable array of investment options, observing that “all of these funds were also offered to investors in the general public, and so the expense ratios necessarily were set against the backdrop of market competition. The fact that it is possible that some other funds might have had even lower ratios is beside the point; nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems).”

The opinion, written by Chief Judge Easterbrook and joined by Judges Posner and Tinder, concluded that the plaintiffs benefited from the “retail” funds’ transparency and liquidity.  It also concluded that Exelon was not in a position to guarantee investments in a particular fund, and thus to use the Plan’s alleged bargaining power to secure lower cost options, because participants had complete discretion whether to invest in any of the offered funds. 

The Court characterized the plaintiffs’ theory as “paternalistic” because the Plan had given choice over what investments to use to those most interested in the outcome — the participants.  The Court emphasized, “all that matters is the absence from ERISA of any rule that forbids plan sponsors to allow participants to make their own choices.”  The Seventh Circuit further concluded that an attempt to challenge the assessment of investment expenses against Plan participants failed because whether to make participants pay plan expenses is a non-fiduciary matter of plan design. 

The Court also addressed the district court’s award of costs to Exelon and rejected plaintiffs’ assertion that in an ERISA case a showing of bad faith is required for the defendant to recover costs.  The Court held that all that is required for an award of costs is that the prevailing party shows “some degree of success on the merits.”   

Loomis, along with Hecker, and several Seventh Circuit decisions from the employer stock context, teaches that plan fiduciaries are not liable for offering allegedly imprudent investment options so long as they offer participants a reasonable choice of unchallenged investment options (i.e., at least three choices see Howell v. Motorola, Inc., 633 F.3d 552, 569 (7th Cir. 2011)) and so long as the challenged investment is not “manifestly imprudent” (see Peabody v. Davis, 636 F.3d 368, 376 (7th Cir. 2011).

© 2011 RIJ Publishing LLC. All rights reserved.

 

 

The Bucket

Posted on October 5, 2011 by -

Allianz Life names Kara Barrow as vice president, corporate governance

Allianz Life Insurance Company of North America (Allianz Life) today named Kara Barrow as the new vice president, corporate governance. She will lead the legal department’s corporate governance team, supporting the finance, procurement, investment and IT departments and overseeing vendor contracting, strategic transactions, various regulatory filing functions and intellectual property matters.

Since joining Allianz Life in January 2010, Barrow has managed a diverse portfolio of litigation and regulatory matters and provided legal support related to the prevention of fraud. Prior to joining Allianz Life, Barrow was a partner in the Minneapolis office of Faegre & Benson LLP.

She also served as a law clerk for the Honorable Diana E. Murphy in the United States Court of Appeals for the 8th Circuit.   Barrow graduated from Dartmouth College with a degree in history and received her Juris Doctorate from the University of Virginia School of Law. She is licensed to practice law in Minnesota. 

Lincoln Benefit Life’s “IncomeReady” SPIA joins CANNEX Exchange

Lincoln Benefit Life Company, a subsidiary of Allstate, has made its IncomeReady single premium immediate annuity available through the CANNEX SPIA Exchange, which allows financial institutions and more than 150,000 financial services professionals to comparison shop for income annuities, CANNEX announced.

With its data and calculations, CANNEX supports a variety of financial service providers in both the institutional and retail markets, including online services, planning and educational tools providers, as well as advisory firms.

In the case of income annuities, CANNEX maintains the actuarial calculations of each carrier on its platform so that an advisor can get instantaneous access to client-specific income annuity rates in alignment with the clients’ needs.  Financial professionals also have access to product illustrations and educational tools that are linked to the specific results generated by the exchange.  

The Principal unveils “Total View “ retirement plan report

The past year marked an evolution of retirement trends, attitudes and behaviors among retirement plan sponsors and participants from a recovery mindset to a discovery mindset: what they need to do to reach their long-term goals.

This is according to The Total View 2011, a new report from the Principal Financial Group that analyzes calendar-year 2009 and 2010 data from retirement plans with services provided by The Principal® and third-party research. The report is geared toward plan sponsors and financial professionals to help them track retirement trends and benchmark their plans.

“We’re seeing participants shift their focus from getting back to where they were to taking steps to get to where they need to be to reach their financial dreams,” said Barrie Christman, vice president of individual investor services at The Principal. “That’s why we’ve built this year’s report around best practices for ‘retirement readiness:’ enhancing participant engagement to help influence more successful outcomes.”

The Total View 2011, along with a “Fast Facts” report summary and video outlining key trends, is available at www.principal.com/totalview. 2011 marks the seventh year The Principal has produced The Total View.

Windham Capital Management to offer retirement income strategies in Australia   

Boston-based Windham Capital Management and Apostle Asset Management of Sydney, Australia will partner to offer Windham’s Retirement Income Portfolio to the growing population of Australian investors seeking innovative investment products that meet their needs from asset accumulation through income generation post-retirement.

As Australia faces an aging population and associated longevity risk, as well as downside investment risk and inflation protection concerns, Apostle is seeking new ways to relieve these market pressures.   

The Windham Retirement Income Portfolio uses proprietary measures to reduce downside risk and invests primarily in ETFs to access the global markets. Comprised of income-producing assets that adapt to changing market conditions, the portfolio tries to produce high current income and to match inflation.

Apostle creates product solutions for the Australian and New Zealand institutional market.  It has affiliations with many fund managers, including Loomis Sayles & Company, L.P., Aurora Investment Management L.L.C., Highclere International Investors Limited, Vaughan Nelson Investment Management L.P., Cramer Rosenthal McGlynn L.L.C., M.H. Carnegie & Co. Pty Ltd, Carnegie Venture Capital Pty Ltd, H2O Asset Management L.L.P. and Windham Capital Management LLC.

New Russell ETFs offer small cap exposure 

Russell Investments has added four Small Cap funds to its lineup of Investment Discipline exchange-traded funds (ETFs) on NASDAQ. The Investment Discipline funds are designed to replicate specific equity investment strategies.    

The new suite of small cap ETF consists of the following:

  • Russell Small Cap Aggressive Growth ETF (Ticker: SGGG)
  • Russell Small Cap Consistent Growth ETF (Ticker: SCOG)
  • Russell Small Cap Low P/E ETF (Ticker: SCLP)
  • Russell Small Cap Contrarian ETF (Ticker: SCTR)

Following the launch of Russell ETFs in the U.S. market in May of this year, Russell now offers a total of 21 ETFs in the United States as well as two in Australia.

Fidelity launches “Retirement Distributions Center” for IRA investors

Fidelity Investments has enhanced its website with the addition a “Retirement Distributions Center” where Fidelity IRA owners can set up their IRAs and manage their withdrawals, including minimum required distributions (MRDs).  

The center allows investors who are currently taking IRA withdrawals to keep track of their year-to-date distributions and know immediately how much they are withdrawing and which accounts the withdrawals are coming from. It is available at no cost to a range of Fidelity customers, including those over age 59½ with a Fidelity traditional, rollover or Roth IRA, as well as inherited IRA owners of all ages.

Accessible directly from an investor’s Portfolio Summary page on Fidelity.com, the Center provides calculations and tracking, and other resources to help investors answer questions such as:

§ How much do I have to withdraw annually based on the total balance of all of my accounts to comply with the IRS’ MRD requirements?

§ How much have I taken to date from my account(s)? § When do I need to complete the required distributions?

The Center also allows investors to:

§ View comprehensive retirement account information for the account holder. (Fidelity account information is automatically populated and external account information can be added manually.)

§ Select which accounts to execute withdrawals from and make manual withdrawals from selected accounts.

§ Set up and edit automatic withdrawals from their IRAs to help ensure they complete their MRDs by year end and do not miss any payments to avoid incurring IRS penalties (which can be up to 50 percent of the sum not withdrawn by the IRS deadlines).

§ Reinvest their withdrawals directly into non-retirement accounts at Fidelity. § Receive e-mail alerts to help keep their distributions on track, including information such as the amount still due and the deadline for withdrawal.

Investors can also learn about the latest government updates pertaining to their accounts, read online educational content about various types of withdrawals and enroll in Fidelity’s automated withdrawal service. Content in the Center is provided to investors based on their age, type of account(s) and whether they are required to take MRDs.  

The Bucket

Posted on September 28, 2011 by -

New web strategy for DST Retirement Solutions

DST Retirement Solutions, a provider of ASP (Application Service Provider) and BPO (Business Process Outsourcing) defined contribution solutions, is deploying a new strategy to help clients improve participant and plan websites.

Enhancements aimed at improving the “relevance, visual value and directness” of plan sponsor and participant websites include “video capabilities and increased levels of customization, including user preferences to drive tailored content to individuals,” DST said in a release.

The new strategy is built around a framework that includes:

  • Enriched user experiences
  • Content management
  • Customization based on user preferences
  • Security administration
  • Collaborative processing
  • Monitoring and measuring
  • Information targeted to specific audiences

DST Retirement Solutions has engaged Makibie, a web consulting firm, to participate in the project. Makibie will focus on retooling sites to provide “a simplified model to clients that will help them differentiate, improve speed to market and provide consistency across all audiences.”

 

New York Life Retirement Plan Services reorganizes 

New York Life Retirement Plan Services has announced a new service model that “aligns service teams into core industry practices,” the company said in a release.

Joan Driscoll, a 24-year industry veteran with 18 years of experience at New York Life, has been promoted to lead the new effort as managing director of client strategy and is a member of the firm’s 11-member senior leadership team, reporting to David Castellani, CEO of New York Life Retirement Plan Services.

The new structure organizes service team practice groups into four industry segments with the following directors and retirement practice leads, all reporting to Driscoll:

  • Taft-Hartley, led by James Byrne.
  • Technology, led by Michelle Morey.
  • Finance and professional services, led by Joseph DeStefano.
  • Manufacturing, materials and retail, led by Scott Francolini.

Each practice will have its own team of relationship managers, communications consultants, investment specialists, and ERISA consultants. The practice model maintains New York Life’s dedicated service team approach with plan sponsors while creating a core industry knowledge and expertise base within the practice models.

With offices in Westwood, Mass., Parsippany, N.J., and San Francisco, New York Life Retirement Plan Services offers bundled retirement plan solutions and defined contribution investment only products throughout the United States. A division of New York Life Investments, it administers $39.2 billion in bundled retirement plans as of June 30, 2011.

 

New executive director named at $1.3 trillion pension group 

The Committee on Investment of Employee Benefit Assets (CIEBA), which represents more than 100 of the largest corporate pension plans with more than $1.3 trillion in plan assets and 16 million, has appointed Deborah Forbes as its executive director.

Forbes will represent CIEBA to government agencies, Congressional committees, and private organizations involved in issues affecting CIEBA members. She was previously Legislative & Policy Counsel for the Pension Benefit Guaranty Corporation, Pension Counsel for the U.S. Senate Committee on Health, Education, Labor and Pensions, and an associate at Covington & Burlington. She replaces the late Judy Schub.  

Forbes also will represent CIEBA in public forums, develop conference programs for members, lead the group’s research activities, and handle membership recruitment.

 CIEBA’s chairman is Ralph J. Egizi, who is also Director, Benefits Finance & Investments, Eastman Chemical Company.  The organization serves as a forum for corporate pension plan sponsors on fiduciary and investment matters. It is the voice of the Association for Financial Professionals (AFP) on employee benefit plan asset management and investment issues.  

 

Putnam’s new advisor website allows “open architecture portfolio modeling”

Putnam Investments has launched a new web site, www.putnam.com/advisor, that offers “advanced, open-architecture portfolio modeling” designed to help advisors create investment plans for their clients using either Putnam or non-Putnam products. 

The new site builds upon Putnam’s proprietary analytical tool, FundVisualizer, which can model entire investment portfolios from a universe of over 11,000 mutual funds and ETFs, as well as continue to provide product comparisons. 

 The site will also offer access to the next version of Putnam FundVisualizer, “allowing them to choose and package a virtually unlimited number of potential fund holdings, assign specific weightings and adjust time periods as desired, to gain insight into the performance behavior and importance of risk-return trade-offs of uniquely constructed portfolios and their underlying components. Additionally, advisors can compare separately created portfolios of their own design,” the company said in a release.

Advisors can use the new site to join conversations on Putnam’s existing social media sites, including those on Twitter (http://twitter.com/#!/putnamtoday) and Facebook, (http://www.facebook.com/PutnamInvestments).

A feedback component will also be available: advisors visiting the site will be able to rate much of its content, such as portfolio manager commentary. Also, the new web site will provide advisors with a sense of what their peers are viewing most on the site, including what investment issues and client-related topics are of most interest – displayed through a visual “tag cloud.”

The Putnam site will also provide advisors with an array of practice management and thought leadership resources to help in their day-to-day and long-term planning work with clients. Advisors will be able to: 

  • Explore an extensive Client Planning section, with detailed guidance for advisors working with clients who are saving for retirement, college and other life goals—including presentations and seminars that advisors can download and use with their own clients. 
  • Access a content-rich “Our Perspectives” section, featuring articles and videos by Putnam strategists and portfolio managers discussing their investment outlook, providing timely insights on events that are shaping the global markets and discussing investment and savings strategies. 
  • Receive access to a wealth of fund data that allows them to gain a deeper product understanding, in a format that can be communicated directly to their clients; 
  • Review a Fund Playbook to see how any given fund can help clients pursue their goals, such as reducing the volatility in their portfolios or addressing the impact of rising interest rates on various mixes of funds; 
  • Use the new “My Putnam” feature to store their favorite content and set alerts for automatically e-mailed updates. 
  • Chat live with a personal support team at Putnam dedicated to their practice, to identify customized solutions and explore business-building resources, practice management tools and continuing education courses.

FundVisualizer is part of an ongoing series of Putnam initiatives designed to provide advisors with transparent content delivered through leading technology. The dynamic tool provides portfolio modeling and side-by-side comparisons of multiple products, including Putnam funds, as well as choices from over 11,000 funds across all categories, including ETFs.  

Advisor loyalty to fund firms is in flux: Cogent

Posted on September 28, 2011 by -

Shifts are occurring among advisors in their level of commitment to the fund companies they use, according to the 2011 Advisor Brandscape, an annual report on adviser trends and product usage by Cogent Research.

Among two dozen leading firms, Dimensional Fund Advisors (DFA) placed first for the second year in a row, while J.P. Morgan Funds, not on last year’s list, placed second. T. Rowe Price and Legg Mason experienced the biggest gains in overall advisor commitment since 2010. The results are based on a nationally representative sample of 1,643 retail investment advisors across all major distribution channels.

The mutual fund provider commitment scores and rankings compiled by Cogent Research are based on a combination of two separate measures: advisor Loyalty to current providers and their anticipated future investment with those providers.

Individual results across all 24 providers included in the ranking are indexed, and then separated into four groups; “Stars,” “Leaders,” “Players,” and “Drifters.” According to John Meunier, Cogent Research principal and co-author of the report, these results not only reflect where providers stand today among the advisors they serve, but point to how momentum is shifting across the provider landscape.

“Last year, DFA and BlackRock were the only Stars in our mutual fund company commitment ranking,” said Meunier. “This year, a total of four firms made it into the top tier, and the gap between DFA and the rest of the pack has narrowed substantially.”

The study also shows that, after several years of declining interest, use of and dependence on mutual funds has grown over the past year. The percentage of users is up from 95% to 97%, and the overall average advisor allocation to mutual funds (as a percentage of total book) rose from 35% to 39%.

However, while these results may appear encouraging, half (50%) of all the advisors currently using mutual funds report that they expect their dependence on these products to decline over the next two years. “It’s obvious, the competition for market share and advisors’ attention will only intensify over time,” said Meunier. “So, building loyalty and momentum today is a simple matter of survival.”

Hearts & Wallets identifies growth in investor technology use

Posted on September 28, 2011 by -

There’s been a significant year-over-year increase in the numbers of investors who use technology to access investment information, according to a survey of more than 4,400 U.S. investor households by Hearts & Wallets, a Boston-area consulting firm.

“The biggest gains were in investors watching videos, a 350% increase, and attending webcasts, a 300% increase,” said Chris Brown, Hearts & Wallets principal. “Other big gainers were assessing potential new providers by their websites, reading blogs and traditional media online, subscribing to investment services (such as Morningstar or paid newsletters), and using tools and calculators.”

Investors are using technology to supplement other traditional go-to resources, the firm said in a release. They are using technology for pre-work before contacting a financial professional, to check up on their advisor and to monitor their advisor’s account management.

“We found fewer people are consulting financial advisors for any advice,” said Laura Varas, Hearts & Wallets principal. “Also, the number of investors dropped who rely upon themselves for financial advice. Technology is supplementing, and in some cases, possibly replacing human advice.”

Yet for all the blogs, websites and other financial resources at their fingertips, many American savers – one-third of all survey participants – say they are “very inexperienced” with investing, an 20% increase in just one year.

A common belief among American savers – including Gen Y-ers – is that it is not possible to improve one’s financial situation or that financial resources are scarce.

The survey shows younger investors are almost as risk adverse as pre-retirees, which does not bode well for willingness to invest in 401(k) plans.”

The study revealed a shift in market share to banks from other financial services channels. Since 2008, banks have steadily gained from 16% to 25% among affluent/high-net worth “Accumulators,” which Hearts & Wallets defines as investors ages 21 to 64 who are not planning to retire within five years. Banking products grew across all age groups, in part because investors are seeking more security in financial products. Convenience may also play a part with the broad offerings of banking institutions.

Insight Modules “Investor Mind-set in Mid-2001: Concerns, Attitudes & Beliefs “ and “Focus on Advice: Sources, Preferences, Use of Technology” are the first in a series of reports this fall from the comprehensive 2011 Hearts & Wallets Quant Panel. This annual, qualitative analysis of U.S. savings and retirement trends incorporates Hearts & Wallets ongoing qualitative consumer and benchmark industry research for insight on investor needs and competitive trends and is part of Hearts & Wallets multi-year study of U.S. investor attitudes and beliefs about savings, retirement and the financial services industry.

The “Investor Mindset in Mid- 2011: Concerns, Attitudes and Beliefs,” Module includes:

• How different investor segments feel about their financial situation as they get ready for, or live in, retirement. How they describe their investing experience and appetite for risk.

• The top concerns of investor segments today as compared to prior years

•Investor beliefs today as compared to prior years (such as employer responsibility for retirement, insurance company ratings, ability to rely on children for support in old age, etc.)

The “Focus on Advice: Preferences, Sources and Use of Technology,” Module includes:

• How preferences for investment decision-making processes are changing

•The sources of advice different investors segments are using

•  How investors use technology. How they blend technology and live channels.

New York Life Retirement Plan Services reorganizes

Posted on September 28, 2011 by -

New York Life Retirement Plan Services has announced a new service model that “aligns service teams into core industry practices,” the company said in a release.

Joan Driscoll, a 24-year industry veteran with 18 years of experience at New York Life, has been promoted to lead the new effort as managing director of client strategy and is a member of the firm’s 11-member senior leadership team, reporting to David Castellani, CEO of New York Life Retirement Plan Services.

The new structure organizes service team practice groups into four industry segments with the following directors and retirement practice leads, all reporting to Driscoll:

  • Taft-Hartley, led by James Byrne.
  • Technology, led by Michelle Morey.
  • Finance and professional services, led by Joseph DeStefano.
  • Manufacturing, materials and retail, led by Scott Francolini.

Each practice will have its own team of relationship managers, communications consultants, investment specialists, and ERISA consultants. The practice model maintains New York Life’s dedicated service team approach with plan sponsors while creating a core industry knowledge and expertise base within the practice models.

With offices in Westwood, Mass., Parsippany, N.J., and San Francisco, New York Life Retirement Plan Services offers bundled retirement plan solutions and defined contribution investment only products throughout the United States. A division of New York Life Investments, it administers $39.2 billion in bundled retirement plans as of June 30, 2011.

SEC weighs action against Standard & Poor’s

Posted on September 28, 2011 by -

Less than two months after Standard & Poor’s downgraded U.S. debt, the staff of the Securities and Exchange Commission says it considering recommending civil legal action against the Standard & Poor’s debt ratings agency over its rating of a 2007 collateralized debt offering.

Collateralized debt obligations, or CDOs, are securities tied to multiple underlying mortgage loans. The CDO generally gains value if borrowers repay. But if borrowers default, CDO investors lose money. Soured CDOs have been blamed for making the 2008 financial crisis worse. Ratings agencies have been accused of being lax in rating CDOs.

The SEC staff said it may recommend that the commission seek civil money penalties, disgorgement of fees or other actions.

S&P has been under fire for its recent downgrade of United States debt, as well as several bad calls it made leading up to the financial crisis and economic meltdown that began in 2008. The unit’s president stepped down last month.

McGraw-Hill Cos., which owns S&P, said Monday that it received a Wells notice from the SEC’s staff on Thursday.

In issuing Wells notices, the SEC enforcement staff gives companies the chance to make the case why charges are unwarranted. That means a formal decision by SEC commissioners to file charges may not occur.

S&P said it has been cooperating with the commission and plans to continue cooperating on the matter.

The news comes two weeks after McGraw-Hill announced that it plans to split up into two public companies with one focused on education and the other centered on markets, featuring the Standard & Poor’s unit. The decision had been expected, as investors have pushed the New York company to boost the company’s stock price, which has dropped by more than 40% since 2006.

McGraw-Hill Education will be the new company focused on education services and digital learning, while McGraw-Hill Markets will retain S&P and J.D. Power and Associates, a market research company. It also includes S&P, Capital IQ, a provider of data, research, benchmarks and analytics and Platts, a provider of information and indices in energy, petrochemicals and metals.

James H. McGraw founded McGraw-Hill in 1888 when he purchased the company’s first publication, The American Journal of Railway Appliances. Since then, the company has provided technical and trade publications, as well as information and analysis on global markets.

Russell introduces ‘volatility-responsive’ asset allocation

Posted on September 28, 2011 by -

Russell Investments’ latest research for institutional investors, entitled “Volatility-Responsive Asset Allocation,” explores the possibility of a dynamic asset allocation policy that varies as market volatility changes.

The underlying principle of volatility-responsive asset allocation is to reduce exposure to risky assets when volatility is high, and to increase that exposure when volatility is low. According to the paper, a volatility-responsive asset allocation policy—which needs to be as systematic and disciplined as any other strategic policy—can lead to a more consistent outcome and a better trade-off between risk and return for institutional investors.

“Market volatility is itself volatile. Markets can be relatively stable at some points in time and explosively volatile at others,” said Michael Thomas, head of consulting and chief investment officer, Americas Institutional and one of the paper’s authors.

“Given this fact, a strategic asset allocation policy is no longer necessarily a set of fixed weights that are held constant until the next review, because the associated risk can be highly variable over time. Rather, a strategic asset allocation policy can be designed to respond to changes in the investor’s experience or to changes in market valuations.”

According to the research authors (Thomas, Bob Collie, chief research strategist, and Mike Sylvanus, senior investment strategist), the foundation of a strategic asset allocation decision is a trade-off between risk and reward. Volatility is an appealing foundation for a dynamic strategy because, unlike the outlook for returns – which are notoriously difficult to forecast – investors can be relatively confident in their assessment of the volatility environment. One reason for this confidence is that changes in volatility are more persistent than changes in returns.

“The most impactful events in a portfolio occur at the extremes – 10 years of well-behaved markets can have less impact on the ultimate success or failure of a portfolio than a couple of outlier months of extreme returns. These extremes tend to be marked by high volatility, in which a 60/40 portfolio can easily behave like an 80/20 portfolio,” explained Thomas.

As part of the analysis, the authors looked at U.S. equity and U.S. fixed income, as represented by the Russell 3000® Index and the Barclays Capital U.S. Aggregate Bond Index. The simulation covered the period January 1979 – June 2011, the timeframe for which data on the Russell 3000 is available. (The strategy starts once 60 days’ return data is available from which to calculate trailing volatility.) The volatility-responsive strategy produced lower volatility than the fixed mix of 50 percent equity and 50 percent fixed income, and its volatility was more stable and predictable. There was also no return penalty over the period analyzed; the volatility-responsive strategy delivered an average 40 basis points higher return after accounting for trading costs.1

“The idea of a dynamic adjustment to a strategic asset allocation is not new; there have always been some investors who vary their allocations because of changing return expectations. There’s also been a growing trend for pension plans to vary their allocations in line with funded status, an approach Russell first wrote about in April 2009 called “liability-responsive asset allocation,” said Collie. “These dynamic programs can easily integrate with one another. What’s new here is the idea of adding volatility to the list of factors driving the variation.”

401(k) Reforms: More Enviable Than Viable

Posted on September 28, 2011 by -

The defined contribution system is full of flaws. Many participants, particularly in small plans, pay too much in fees. They get meager average returns. The system isn’t universal. And, worst of all, it offers no mechanism for turning savings into retirement income. 

But it’s clear from the testimony presented to the Senate Committee on Finance on September 15 that attempts to cure the system of its ills would probably irritate plan sponsors and perhaps discourage them from offering plans at all. 

Well-intended government efforts to reform the pension industry have backfired before, as the history of defined benefit pensions illustrates. 

Take, for instance, the proposal put forward by William G. Gale of the Brookings Institution. Instead of letting 401(k) plan participants exclude contributions (up to $49,000) from their taxable income, the government would credit a certain percentage of the contribution to the participants’ tax-deferred savings accounts. 

The size of the credit would determine its cost. If the credit—i.e., the tax subsidy—were equal to a flat 18% of the contribution, it would reduce the federal tax expenditure on 401(k) plans by $450 billion over the next 10 years. If the credit were set at 30%, it would maintain the current tax expenditure, which is estimated at about $70 billion a year ($123 billion for all retirement savings programs). 

Gale’s proposal would help reduce the federal deficit. It would also ensure that participants save rather than spend the federal subsidy of their contribution and sweeten the subsidy for the participants in the lowest tax brackets.

In short, he offers something for liberals, who claim that tax expenditures that encourage retirement saving accrue disproportionately to those in the highest tax brackets, and something for conservatives, who want to reduce the federal deficit. 

But the proposal, by flattening the subsidy, would effectively raise the taxes of a company’s owners and highest-paid employees—the people on whose favor the decision to sponsor a plan or not usually (unless the employees are unionized) depends. According to Gale’s data, the 18% subsidy would mean a tax hike for the top 40% of earners; the 30% subsidy would raise taxes for the top six percent of earners.

Karen Friedman of the Pension Rights Center proposed four additional reforms. The freshest and most intriguing of those ideas seemed to be the “reverse match.” Employers would make the initial contributions to their employees’ defined contribution accounts, and employees would be encouraged to match those. Under the current system, employers make no contributions unless the employee contributes.

In her hypothetical example, an employer might contribute 3% of pay to all employees, and the employee might be able to contribute up to 6%. This would ensure a contribution for all employees who don’t currently contribute at all.

But it would also mean, presumably, a vast reduction in the current contribution limit (100% of compensation, up to $49,000 or $54,500 for those over age 50), and a consequent reduction in tax benefits for those able to make large contributions. Again, it’s hard to imagine corporate decision makers warming up to that idea.

At the heart of the debate over 401(k) equitability is a sharp disagreement over how the spoils of the annual federal tax expenditure to encourage retirement savings are divided, and how they should be divided.

During the September 15 Senate hearings, Jack Van der Hei of the Employee Benefit Research Institute, whose members include all the major 401(k) service providers, and Judy Miller, representing the American Society of Pension Professionals and Actuaries, whose members are mainly third-party plan administrators, testified that most of the federal subsidy accrues to the non-wealthy.  

Households with less than $100,000 in AGI pay about 26% of income taxes but receive about 62% of the defined contribution plan tax incentives, Miller said. Friedman said that two-thirds of the value of tax expenditures for retirement savings plans go to households in the top income quintile, or top 20% of earners.

Common sense suggests that, on a per capita basis, the benefits of the federal tax expenditures for retirement savings would go disproportionately to those with the highest compensations and the biggest tax bills. But common sense would also suggest that the majority of the tax expenditures would inevitably go to households earning under $100,000, simply because they represent 80% of all taxpayers, according to the Census Bureau.

Does someone who pays more in taxes deserve a bigger tax incentive to save? The 401(k) reformers would say no. They argue that those with high incomes need no incentive at all—that they would save even without incentives because they earn more than they “need.” (Need, of course, remains stubbornly indefinable.)    

So the debate drones on. As long as the law doesn’t require company owners and decision-makers to sponsor workplace retirement savings plans, reforms that hurt them in their wallets won’t get traction. If reformers push them too hard, some sponsors will stop sponsoring. To persuade people who have other options, carrots make the best motivators. The stick approach alone has limitations.

© 2011 RIJ Publishing LLC. All rights reserved.

The Four Most Common Questions about VAs

Posted on September 28, 2011 by -

In its annual survey of top variable annuity issuers this year, Moody’s Investors Service included the four questions that it receives from investors about variable annuities. Moody’s published the issuers’ answers in a Special Comment on September 7. 

The four questions were, according to Moody’s:

  • How “de-risked” are the new VA products?
  • Among companies with material exposure to secondary guarantees, which have the best hedging programs?
  • Are companies still shifting risk to reinsurance captives and how does Moody’s assess capital adequacy for VA risk?
  • How does Moody’s stress test for VAs?

Here is a summary of the issuers’ answers:

How de-risked are the new VA products?

Moody’s noted that the three big variable annuity sellers have all de-risked to some extent this year. Prudential dropped its Highest Daily roll-up to 5% from 6%, MetLife raised its 5% roll-up to 6% but restricts investment choice, Jackson National “has recently made changes (i.e., less competitive features) to some of its most popular products in an effort to curb sales and diversify its suite of offerings,” and AXA “linked its guaranteed withdrawal benefit amount to the current interest rate.”

Certain embedded risk-management mechanisms like Prudential’s and AXA’s “can substantially reduce tail risk,” Moody’s said, but added that the recent level of de-risking won’t neutralize all the risks associated with VAs.

“While the new products are materially de-risked, their profitability is still linked to the vagaries of the equity markets, interest rates, policyholder behavior and the effectiveness of a company’s hedges. Furthermore, companies need to manage statutory, GAAP and economic objectives simultaneously, which can be challenging when VA blocks are sizeable,” the report said.

Moody’s speculated that reductions in product richness by the three top sellers of VAs could allow other issuers to gain market share.

Which companies have the best hedging programs?

While acknowledging the benefits of an elaborate hedging program, Moody’s pointed out that the need for such a program by a VA issuer is “credit negative.” In other words, conservative product designs that don’t need much hedging inspire more confidence than generous product designs with aggressive hedging. 

Moody’s cited Ameriprise and Lincoln National as two companies with strong hedging programs. Both had hedge programs that “targeted the economics.” With its moderate benefits and controlled growth, plus hedging, Ameriprise came through the Financial Crisis in good shape. Although Lincoln National required TARP money in the Crisis, its VA program wasn’t the main source of weakness, Moody’s said.

Are companies still shifting risk to reinsurance captives and how does Moody’s assess capital adequacy for VA risk?

Many companies still manage tail risk of VA guarantees by using onshore or offshore reinsurance captive companies, Moody’s said, but in many or most cases, those reinsurers are not capitalized to CTE 98 levels (Conditional Tail Exposure 98, or the financial resources a company would need to cover the average of the worst 2% of market scenarios). 

By that measure, Moody’s believes that captive reinsurers are undercapitalized by a collective $10 billion, although most insurers are well capitalized on a consolidated basis. Nonetheless, given that, in Moody’s opinion, the modeling required by state insurance regulators under VA CARVM (the U.S. statutory reserve standard for VA living and death benefits) and C3 Phase II (an approach to calculating U.S. regulatory capital requirements for VA secondary guarantees) doesn’t capture “adverse movements in interest rates or extreme policyholder behavior,” the capital shortfall may be greater than $10 billion.

How does Moody’s stress test for VAs?

Moody’s standard stress scenario for variable annuities is a 25% to 30% equity market decline, the report said. If a company appears likely to suffer losses during those conditions, Moody’s would incorporate the vulnerability into current ratings so that a less abrupt downgrade would be required during a crisis.

In assessing the strength of an insurer, Moody’s also considers the capital position of its reinsurance captive as well as its adjusted RBC (risk-based capital) and the company’s assumptions about policyholder utilization of “in-the-money” guarantees, where the clients’ current assets don’t cover the potential liability.

© 2011 RIJ Publishing LLC. All rights reserved.

Introducing the Virtual RIA

Posted on September 27, 2011 by -

With just $27 million in venture capital, less than $500,000 in assets under management and only a handful of Series 65 advisors in its San Francisco call center, Personal Capital Corp. hardly seems like a serious threat to Vanguard, Fidelity and other giants of the financial industry.

But the entrepreneurs behind this Silicon Valley startup believe that by offering the convenience of financial account aggregation (think Mint.com or Pageonce.com) and the expertise of Series 65 phone reps on one web platform, they can make sophisticated wealth management scalable and affordable for tens of millions of currently under-advised “mass-affluent” Americans.

Personal Capital’s management team isn’t made up of newbies. It includes CEO Bill Harris, the former CEO of Intuit (which bought Mint.com last year) and CEO of PayPal; strategist Rob Foregger, co-founder of EverBank and former president of Personal Trust Services at Fidelity Investments, Jay Shah, former CIO of E-Loan, and Jim Del Favero, former group products manager for Quicken.

“We’re a scalable Registered Investment Advisor. That’s our framework. We’re trying to empower the investor and give a level personalization that hasn’t existed in financial services. You have personalized radio stations, you have LinkedIn, you have social networks, and you can even have shirts tailored online. Why not do true personalization for financial services?” Foregger told RIJ this week.

After talking to Personal Capital managers, I was a little skeptical. Will people hand over the usernames and passwords of their mutual fund and bank accounts to a start-up? (Apparently they will: Mint.com has six million users.) And don’t companies like Vanguard and Fidelity already offer opportunities for account aggregation and advice? Yes, but only to their shareholders.

After looking at Personal Capital’s website and exploring their services a bit, I was a little surprised not to any functionalities directly related to retirement drawdown strategies. If near-retirees have the most savings, and if they’re worried about retirement income, shouldn’t a new service give a nod to decumulation planning? Personal Capital doesn’t have that—at least, not yet.

No one doubts, however, that financial clutter plagues millions of people and that the financial advice industry fails to reach millions of middle-income people with $100,000 or more in household savings. That’s the niche that Personal Capital wants to fill.

How it works      

At Personal Capital’s website, members have access to a two-tier service. There’s an free tier that includes account aggregation and other services and an asset management services that costs from up to 115 basis points a year.

On the first tier, customers upload the usernames and passwords of their financial accounts into an aggregation engine powered by Yodlee to create a dashboard for tracking all of their money at banks and brokerages.

“Transaction modeling, daily e-mail alerts and military-grade security” also comes free, as does a financial check-up and access to “financial analysis and objective advice” from a salaried call-center employee with perhaps a Series 65 securities license.

“The dashboard is free, the vast majority of functions are free, and the vast majority of clients wont be paying us anything, they’ll just be using the dashboard to track their finances and make decisions on their own,” Foregger said.

But “Aggregation is only one component,” he added. “We aggregate, we append third-party data, we provide valuable insights and advice, and we present in a easy to use, but sophisticated UI [user interface]. It’s very challenging, and not done well by many.”

A more sophisticated second tier of service is available for a maximum all-in cost of 115 basis points (a 95 bps wrap fee plus an ETF-sized investment expense ratio) for accounts from $100,000 to $250,000. It costs 90 bps to manage the next $250,000, 85 bps for the next $500,000, 80 bps on the next $4 million, and 75 bps on amounts above $5 million.

The fee covers the services of a “professional advisor,” the creation of a diversified separately managed account (SMA) from existing assets, “continuous rebalancing and tax optimization” and a cash management account.   

Personal Capital calls the SMA a “Personal Fund.” According to Craig Birk, the firm’s portfolio manager, each fund will include up to 60 stocks and will be designed to offer broad global diversification across companies of all sizes and sectors. The funds will be somewhat customized according to Personal Strategy—the “way wealthy families and endowments manage their money.” Birk spent 11 years at Fisher Investments. Personal Capital clears its trades through Penson Financial Services.

The folks behind Personal Choice believe that the mass-customized SMA will replace the mutual fund for many mass-affluent investors. “We’re in the first or second inning of the post-mutual fund era,” Foregger told RIJ. “Mutual funds were great for their day. Mainframe technology helped spur that. But we’re at the next level, where technological can create truly personalized solutions, as opposed to mutual funds.”

Foregger added: “In the traditional model, you meet with an advisor and you push a shoebox full of confirmations across the table and say, ‘Figure this out for me.’ In our high-tech and high-touch model, you add a new account, you put in your user name and password, hit continue, and full data on any particular account appears.”

Competitive landscape

One competitor to Personal Choice is Manhattan-based Betterment.com, but the two have significant differences. Launched to the public by Jonathan Stein and Eli Broverman in 2009, Betterment allows people to connect their checking accounts to an investment account consisting of index funds.

The clients themselves determine the balance between equity and fixed income investments by the manipulating a simple slider bar. Betterment doesn’t aggregate or provide personalized advice, but it does offer automatic account rebalancing—so that investors pick up bargains rather than lock-in losses.

“Personal Capital’s philosophy is, ‘We’ll give you tools but you need one our human advisors. We believe that if people want a human advisor, they’ll go to someone they know personally,” said Stein, who noted that when he was a graduate student at Columbia Business School a visiting speaker named John Bogle encouraged him to pursue Betterment.

Fidelity Investments has an account aggregation service called Full View where Fidelity investors can aggregate their investment, retirement, banking, loan, mortgage and credit card accounts. People with at least $50,000 at Fidelity can get advice over the phone for free, and Fidelity also offers managed accounts and mutual fund advisory services, according to a spokesman. 

Vanguard offers something similar with its over-$50,000 a Vanguard Vantage Account, which according to the company website “lets you consolidate and manage your investment and cash management needs in one convenient place” along with the ability to trade stocks, bonds, CDs, non-Vanguard mutual funds. Cash management services are included.

Two assumptions

For Personal Capital to succeed, people have to be willing to entrust it with the passwords and usernames of their most valuable financial accounts. But will they? The people at Yodlee told RIJ that that problem is why Yodlee, a now widely used aggregation engine, didn’t become a retail business.

“[That’s] “the primary reason Yodlee decided not to pursue a B2C [business-to-consumer] strategy when we started in 1999 but rather to leverage the trust of the bank brands to offer these services to consumers with the context of secure online banking,” said Melanie Flanagan, a press contact at Yodlee.

“But we currently have more than 30 million consumers using services powered-by-Yodlee at both banks and non-banks, so if the value proposition is high enough and the trust/security/privacy is clearly communicated and made a top priority, I think the majority of consumers are now past that fear,” she added.

The successes of Mint.com and PageOnce.com, which have an estimated five million users between them, shows that the public accepts the security of account aggregation, said Foregger. To reinforce that acceptance, Personal Capital touts its “military-grade” security.  

The aggregation companies are also assuming that the IT people at large companies keep doing their jobs. The startups are piggy-backing, in a real sense, on more than a decade of frenetic work and investment by the larger financial services firms to create high-capacity, high-speed, high-security, high-reliability, real time account maintenance and administration systems. Those systems are the shoulders that the likes of Personal Capital and Mint.com stand on.

© 2011 RIJ Publishing LLC. All rights reserved.