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Our Half-Full, Half-Empty Retirement Glass

Posted on November 15, 2011 by Editor Test -

The Achilles heel of the defined contribution system in the U.S. is that too few workers enjoy its coverage. At any given time, almost half of America’s private-sector workforce lacks access to an employer-sponsored retirement savings plan.

The half-empty status of our private pension system looks like this: Only 54% of full-time workers ages 21 to 64 have retirement plans at work; Hispanic workers, younger workers and people who work for small companies are less likely than average to have access to a plan, according to the EBRI, Employee Benefit Research Institute.

In part because of this shortfall, the U.S. received a ‘C’ in the 2011 Mercer-Melbourne Global Pension Index. “In the private sector, the coverage of the American system isn’t as broad or as comprehensive as elsewhere,” David Knox, a Mercer partner and author of the index report told RIJ. “Many people in the workforce have no provision other than Social Security.”

That’s a problem that we can’t really afford to ignore or (in the all-purpose catch phrase) “kick down the road.” It’s a problem not only for the millions who might retire on little more than $1,000 a month from Social Security. It’s also a problem for anybody who may have to help support (as a family members or a taxpayer) larger numbers of elderly poor.

More to the point, it’s a problem for the huge defined contribution industry and the millions who make their living in it. Unless the 401(k) system becomes more equitable and more universal, the tax preferences that, in effect, help finance the whole system will be subject to attack from both liberals and deficit hawks. It will also be increasingly vulnerable to competition from alternative solutions that could eat at its assets under management, or AUM.

Several of those solutions are already on the table. For instance, the National Commission on Fiscal Responsibility and Reform to cap tax-favored contributions at 20% of pay up to $20,000, down from the current 100% of pay up to $49,000. William Gale of the Brookings Institution has urged the government to replace tax deferral that drives the 401(k) system with a flat-rate tax credit worth 18% of a participant’s contributions. Mark Iwry, a Treasury Department official, has been promoting “automatic IRAs” for small company employees without retirement coverage.

More recently—and this is the topic of today’s cover story in RIJ—there have been some surprising proposals to open up state employee pension plans to participation by people whose private or non-profit employers don’t sponsor retirement savings plans.

That may seem like an odd idea. Considering all the criticism that state plans have received for over-promising benefits and using unrealistic discount rates to measure their funding status, relying on an expansion of state plans to provide coverage for private sector or non-profit workers might seem unlikely.

Yet the proposals are out there and people are working on them. According to pension experts who spoke with RIJ, theses plans, frankly, aren’t considered likely to come to fruition. Anecdotally, they inspire a lot of opposition from private industry. That’s not surprising. A worker who doesn’t have access to a plan today is still a potential participant in a defined contribution plan in some future job.

The inequities of the pension industry resemble the inequities of the health care industry. Many people go uninsured, but public sector initiatives to make health care coverage universal meet with a lot of opposition. Both issues are related to ancient problems regarding free enterprise and the role of the state, which themselves tend to be paradoxical and may be insolvable.

If Republicans take the White House in 2012, some of those currently pushing for reform of the retirement system from within the government may lose positions and influence. We may hear less criticism of the status quo. On the other hand, conservative deficit hawks may scrutinize the cost of tax deferral more skeptically than ever.

If there is a silver lining here—we don’t hear a lot these days about silver linings, do we?—it is that outside challenges are forcing the 401(k) system itself to become more efficient, more transparent, and more responsive to the ultimate goal of providing lifelong retirement income.

Changing Money

Posted on November 13, 2011 by David Lindorff -

SHANGHAI – The dollar isn’t so almighty in China these days.

I recently visited Shanghai after an absence of 15 years and was shocked by the magnitude of change. Phalanxes of new cars and a modern subway grid that outshines the Paris Metro have replaced the slow river of bicycles I remembered. A Maglev train floats people to and from the airport at a smooth, silent 275 mph.

More surprising was the fact that nobody seemed to want my U.S. dollars. When I first lived and worked in Shanghai in 1991 as a Mandarin-fluent Fulbright Professor of Journalism, the Chinese wanted American cash so badly that I was accosted everywhere I went by people asking to exchange renminbi for dollars at black market discounts.

Others have described similar experiences. One friend of mine, a young American working in China as an English teacher, told me in 1993 that he was once biking into the city, and was on a street packed solid with cyclists when a bus suddenly crowded the whole pack against the curb.

My friend’s bike collided with a neighboring cyclist’s and his handlebar gashed the man’s wrist, which bled profusely. My friend, who spoke Chinese, apologized equally profusely, and was dismounting his bike to offer help when the man, blood gushing from his arm, begged, “Change money? Change money?”

Today, it’s dollars that go begging. Nobody wants greenbacks, which are viewed here the way Americans have (until recently) viewed Canadian bills. The Chinese now are driving hard bargains for their “hard” currency with any Americans trying to unload dollars.

Even big money earns little respect. The controller of the local unit of a French-based company told me he can’t break ground on a new factory in Shanghai because he can’t exchange the $70 million his parent company sent him for renminbi, and the local construction companies won’t accept payment in dollars, because they keep losing value.

Now for the most humbling part. The day before our flight home to Philadelphia I had to change $6,000 worth of RMB into bucks (I knew it would be a costly hassle to do this back in the U.S., where most banks don’t even change money.)

Frankly, I expected sub-par service at the bank. When I was last in China, a visit to any bank at 3 p.m., an hour before closing, meant having to wake up one of the sleeping tellers by knocking on the security glass.

Eventually someone would raise her or his head, look in annoyance at the intruder, then at the clock on the wall, groan, and finally trudge to the counter, acting as though the customer was crazy to expect service so close to closing time.

This time it was different. At 3:30 p.m., bustling tellers at a branch of the Chinese Construction Bank zipped through their transactions with clients, who on entering the lobby received numbers and were directed to a seating area to watch a video of Charlie Chaplin’s “Little Tramp” while awaiting their turn at the window. When my turn came, the teller could hardly count out $100 bills for my wad of 380 100-RMB notes fast enough.

Neither Shanghai nor the almighty dollar is what it used to be.

Unlikely Rescuer

Posted on November 13, 2011 by Kerry Pechter -

Concerned that only about half of all full-time workers in the U.S. are covered by an employer-sponsored retirement savings plan at any given time, a number of pension advocates, economists and public officials have hatched ideas for expanding coverage.

So far this fall, in separate initiatives, the National Conference on Public Employee Retirement Systems (NCPERS), economist and 401(k) critic Teresa Ghilarducci of The New School, and Massachusetts state representatives have proposed plans that would give more people access to state pension plans.

In a kind of pension version of the medical “public option,” these proposals suggest that a state could leverage its existing pension infrastructure and expertise, and either administer a professionally-run defined contributions for private sector workers without plans, or else allow such workers to contribute to a separate sleeve of a state’s public retirement fund.

This approach has been under discussion in state pension circles for some time. A similar idea was developed for Washington State in the mid-2000s, according to Boston University pension expert Zvi Bodie. But it was reportedly opposed by private plan providers and was dropped before it came to fruition.

In an interview, Professor Bodie was sympathetic but skeptical regarding the likelihood of expanding access to public pensions. “This is yet another proposal to do something that makes sense,” he told RIJ about the NCPERS plan (described below.) “But why should it have any better chance of success than the others?”

Some might question whether state pension plans are the right vehicle for solving the country’s retirement savings shortage. After all, many of which emerged from the 2008 financial crisis badly underfunded. But with gridlock at the national level, state governments are seen by some as better able than Congress to take action.

Like the push to broaden health insurance coverage by introducing a public insurance option or state insurance exchanges, any push to broaden retirement plan coverage by opening up state plans is likely to be controversial. Nonetheless, the need exist and the proposals are out there. Here are summaries of three of them.

The Massachusetts plan

Two weeks ago, the Massachusetts House of Representatives voted 143 to 7 to approve H. 3754, which authorized the state treasurer to “sponsor a qualified defined contribution retirement plan… that may be adopted by not-for-profit employers for their employees,” in compliance with IRS rules and the Employee Retirement Income Security Act, or ERISA.

Like most bills, it is short on operational specifics. Participants might invest in a privately run, state-supervised qualified trust or in the existing state employees plan. Under the proposal, the treasurer could contract, after a competitive bidding process, with plan advisors, administrators or investment managers in the private sector to create and manage a qualified trust for non-for-profit employers and employees.

Participants could be permitted to contribute to the “same investment products as provided through a deferred compensation plan for employees of the commonwealth administered by the treasurer.” The assets in the new plan would be segregated from the state employee assets, however.

The bill, a revival of a proposal made in 2009, was approved without debate and sent to the Massachusetts Senate for consideration. Not-for-profits employ14% of the state’s workers, and less than one in five workers in not-for-profits has access to an employer-sponsored retirement plan, according to an October 27 Boston newspaper report.

Massachusetts has a $5 billion deferred compensation plan for about 300,000 state employees. According to a 2011 report by the Pew Center on the States, Massachusetts’ long-term pension liability for current and future retirees of $61.1 billion for fiscal 2009 was only 68% funded. The state made 66% of its actuarially recommended contribution (ARC) of $1.97 billion in fiscal 2009.

Ghilarducci’s plan

Not long after the Massachusetts legislators acted, economist and 401(k) critic Teresa Ghilarducci of the Schwartz Center for Economic Policy Analysis at The New School in Manhattan recommended that similar plans be adopted throughout the U.S. and be offered to all workers, not just employees of not-for-profits.

In a recent article, “How Policymakers and State Pension Funds Can Help Prevent the Coming Retirement Crisis,” Ghilarducci and co-authors Lauren Schmitz and Robert Hiltonsmith described the plan this way:

“The best policy would be an individual account that would be portable between employers in which workers and employers would contribute at least 5% of pay into an account with guaranteed to earn at least 3 percent above inflation. At retirement, workers would have option of converting their savings into an annuity, a guaranteed stream of income for life.”

Ghilarducci, whom Rush Limbaugh once called “the most dangerous woman in America” for arguing that the 401(k) system fails most Americans, had previously advocated “Guaranteed Retirement Accounts,” a national defined contribution plan with a 5% employer/employee contribution, a $600-a-year tax credit and a 3% guaranteed real return.

“In effect,” the report continued, “the state pension funds could “open a window”, much like a bank would for a new customer, for private sector workers who want their retirement savings managed by professionals and, at retirement, have the option of a stable annuity.”

Gridlock in Washington prompted her to change her strategy. “Due to the current political climate, the federal government may not be able to act, so states should step up and help their own citizens save for retirement. State legislatures could create such accounts and then take advantage of the already existing public pension infrastructure to invest the funds,” the SCEPA report said.

Secure Choice Pension

Yet another proposal for opening up state employee pension plans came in September from the National Conference on Public Employee Retirement Systems, or NCPERS, which represents more than 500 public plans in the U.S. and Canada. Its plan is called the Secure Choice Pension, or SCP.

Each state could create a SCP, setting it up as a multi-employer plan. SCPs would be modeled on cash balance plans, where employers contribute to professionally managed funds on behalf of employees. In a SCP, every participant would have a virtual account that would grow by 6% of covered earnings each year, plus an annual credit of the 10-year Treasury rate plus 2%. A guaranteed minimum accumulation rate of 3% a year would take effect if an employer withdrew from the plan and a funding shortfall occurred.

“This plan would establish statewide pension plans for all the employees in the private sector of that state,” said Hank Kim, the director of NCPERS. “Under the ideal situation it would be funded by a joint contribution from employer and employee. An administrative board composed of plan sponsors, employer and employee representatives and a board of trustees would run it.”

As for investment management, “We envision a co-investing of assets [with state pension assets] as the new plans start up, but the money would be in two completely separate trusts. It could be contracted out to insurance companies or 401(k) providers,” Kim told RIJ.

“[NCPERS] would provide a model plan document, but each state can tweak it,” Kim added. “Under our concept it would lead to an annuity. We would strongly discourage if not prohibit lump sum distribution. This would not be a plan for those who already have a pension plan or other coverage. This is a pension for those who don’t have one. We don’t think it will compete with the mutual fund or the 401(k) business. The penetration of 401(k)s into the small market, which is the one we’re looking at, hardly exists.”

A person entering such a plan at age 25 and staying in it for 40 years would ultimately receive an annuity replacing about 29% of his or her pre-retirement income, which would supplement Social Security’s replacement rate of 30%, NCPERS estimates. Someone entering an SCP at 35 would be able to replace 21% of income after 30 years and someone entering at age 45 would replace 13%.

Kim said he envisioned 25% to 30% of SCP assets invested in risky investments and about 70% to be invested in Treasury Inflation-Protected Securities, or TIPS. The strategy for dealing with funding shortfalls would apparently be left up to each state that sponsors an SCP. The liability could fall on the employer, or on a reserve created by the state, or by a pool funded by contributions from employers.

Considering the criticism that states have received for contributing too little to their plans, using unrealistic discount rates to value their obligations, and allowing benefits to get too generous, why should state pension plans be used as a model or a framework for a new breed of retirement plan, Kim was asked.

“Data shows that the criticism is really unwarranted,” he told RIJ. “There have been a few high profile instances of plans with funding challenges, but that’s because some plan sponsors, the states, have essentially taken holidays from their fiduciary contributions. Public plans have been around for over 100 years. We think we are a model, and shame on us to hold back on what might be a possible solution just because we’ve been criticized.”

‘Don’t Trust Your Pension to Someone Younger than You’

Posted on November 13, 2011 by Editor Test -

The Bucket

Posted on November 9, 2011 by Editorial Staff -

Strong VA sales drive Jackson National growth

Jackson National Life Insurance Co. generated $17.9 billion in total sales and deposits during the first nine months of 2011, up 25% over the same period in 2010, the company said in a release. Variable annuity sales rose 31% over the first nine months of 2010, to $13.7 billion.

Jackson, an indirect wholly owned subsidiary of the United Kingdom’s Prudential plc, generated total sales and deposits of more than $5.7 billion during the third quarter of 2011, compared to $4.9 billion during the third quarter of 2010 and $6.4 billion during the second quarter of 2011.

VA sales were $4.2 billion during the third quarter of 2011, up 15 percent over the same quarter in 2010 and down 15 percent from the second quarter of 2011, as market volatility reduced customer demand for equity-based products.

During the first nine months of 2011, Jackson generated $1.1 billion in fixed index annuity sales, compared to $1.3 billion during the same period of the prior year. Traditional deferred fixed annuity sales totaled $531 million during the first nine months of 2011, compared to $1.0 billion during the same period in 2010. Jackson restrained fixed and fixed index annuity sales during the first nine months of 2011, as the company continued to direct available capital to support higher-margin product sales.

Curian Capital, Jackson’s registered investment adviser that provides fee-based managed accounts and investment products, attracted $2.1 billion in deposits during the first nine months of 2011, up 41% over the prior year period. As of September 30, 2011, Curian’s assets under management totaled $6.7 billion (including more than $300 million of assets managed on third-party platforms), compared to $5.4 billion at the end of 2010.

During the first half of 2011 (latest industry data available), Jackson ranked:

Third in total annuity sales with a market share of 8.6%
First in VA net flows
Third in VA sales with a market share of 12.2%
Ninth in fixed index annuity sales with a market share of 4.4%
12^th in traditional deferred fixed annuity sales with a market share of 1.9%

Janus selects Fidelityas its plan provider

Janus Capital Group has chosen Fidelity Investments to provide it with a defined contribution plan (DC), a non-qualified retirement savings plan and stock plan services, the companies announced.

Fidelity began delivering certain Janus participants with 401(k) and non-qualified retirement savings plans on July 1, and began providing eligible participants with stock plan services on October 17. Upon final implementation of all three savings programs, Fidelity will service approximately 1,100 Janus participants with an estimated $250 million in assets under administration.

Under FINRA Rule 350 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, Janus must monitor the securities trading activities of its employees. Fidelity’s Employee Compliance Reporting platform will give Janus a daily electronic snapshot of participant trading accounts and positions.

David Goldstein appointed general counsel at Symetra

Symetra Financial Corp. has named David Goldstein as senior vice president and general counsel, reporting to Tom Marra, president and CEO. Goldstein replaces George Pagos, who retired on Sept. 30.

Goldstein will advise Symetra senior management on strategic and operational issues and oversee the company’s legal and compliance departments, including corporate governance, securities compliance, contracts, and statutory and regulatory affairs.

Before joining Symetra, Goldstein was a partner at Sutherland Asbill & Brennan LLP in the firm’s Washington, D.C.-based Financial Services Practice Group, which serves financial institutions, including insurance companies, investment advisors, broker-dealers and employee benefit plan service providers.

Goldstein previously served on the staff of the U.S. Securities and Exchange Commission in the Division of Investment Management. Earlier in his career, he was an assistant vice president and assistant general counsel at the Variable Annuity Life Insurance Company (VALIC).

“David has built an outstanding track record of success at one of the nation’s top private law firms. He is a strong leader, known for his proactive and collaborative approach,” said Marra. “With his deep experience in insurance and securities matters, David will be a valuable contributor as we pursue Symetra’s ‘Grow and Diversify’ strategies.”

Goldstein earned a bachelor’s degree at Hampshire College in Amherst, Mass., and a law degree at Boston University School of Law.

The Principal gets early start on fee disclosure to plan sponsors

In advance of the April 1, 2012 deadline set by the Department of Labor for such action, The Principal, a major retirement plan provider, said it has begun disclosing fees to its plan sponsors.

“Beginning this week, plan sponsor clients and their financial professionals have access to all the revamped disclosures required by the new DOL regulation— including a redesigned fee summary,” The Principal said in a release.

The Principal began delivering a redesigned summary of fees to new clients in July and started unveiling it to existing clients beginning November 1, 2011. The new summary displays the most important information on the first two pages, as requested by financial professionals and plan sponsors.

The Principal also launched a new online disclosure landing page where sponsors can find required information on investments, fees, fiduciary status and services in one place. The company said it expects to offer an online participant disclosure resource center in mid-November.
The DOL has also issued a regulation changing how plan sponsors communicate fees and investments to participants. While the first compliance date for most sponsors is in May of 2012, The Principal has already made a number of changes to make it easier for plan sponsors to comply and will unveil a new online participant disclosure resource center in mid-November.

DST announces partnership, acquisitions

DST Retirement Solutions, a provider of Application Service Provider (ASP) and Business Process Outsourcing (BPO) defined contribution solutions, has announced an alliance with Wealth Management Systems Inc (WMSI), a leading provider of rollover services, to “provide expanded rollover service options to DST clients,” DST said in a release.

WMSI offers a web-based rollover application for retirement plan participants, call center technology for rollovers, a network for targeting rollover services to select participants and a program for administering force-out provisions and plan terminations.

On August 5, 2011, DST’s IOS (Innovative Output Solutions) subsidiary acquired Lateral, a $80 million U.K. company engaged in integrated, data driven, multi-channel marketing, for $41.7 million.

“The acquisition allows IOS to extend and develop its service/product offerings by further integrating communications through print, data and e-solutions and by providing additional solutions such as data insight and online marketing to the IOS client base,” DST said in a release.

On July 1, 2011, DST acquired the assets of IntelliSource Healthcare Solutions, whose principal product is CareConnect, an automated care management system. The addition bolsters DST Health Solutions’ medical claims processing product offering for integrated care management.

On October 31, 2011, DST completed the previously announced acquisition of ALPS Holdings, Inc., a provider of a comprehensive suite of asset servicing and asset gathering solutions to open-end mutual funds, closed-end funds, exchange-traded funds, and alternative investment funds.

Primerica to market Lincoln Financial indexed annuities

Lincoln Financial Distributors (LFD), the wholesale distribution subsidiary of Lincoln Financial Group, and Primerica, Inc., the multi-level marketing company that sells financial products to and through middle-income Americans, have announced that 82,000 of Primerica’s 92,000 licensed representatives would add Lincoln’s fixed indexed annuity to their product offerings.

Starting in November, certain Primerica representatives will begin offering Lincoln’s Lincoln New Directions and OptiChoice (7-year surrender only) to their target middle market—families with annual incomes between $30,000 and $100,000.

Lincoln will establish a dedicated team to coordinate Primerica’s efforts with Lincoln’s back office, field wholesalers and internal sales support. John Chidwick, Lincoln’s national sales manager, will oversee the new distribution channel, reporting to John Kennedy,head of Lincoln’s Retirement Solutions Distribution.

Since 2007, Chidwick has served as a divisional sales manager for Lincoln. He previously held leadership positions for The Hartford and AIG.

Putnam introduces ‘Short Duration Income Fund’

Putnam Investments has launched the Putnam Short Duration Income Fund, which seeks to combine characteristics of money market funds and ultra-short bond funds, including a check-writing feature.

The new Fund will “strive for a higher rate of current income than is typical of money market funds and a have a greater focus on capital preservation than is usually associated with ultra short bond funds, with the goal of maintaining liquidity,” Putnam said in a release.

The fund will invest in a diversified portfolio of fixed-income securities composed of short duration, investment-grade money market, and other fixed income securities. Its primary benchmark will be the BofA Merrill Lynch U.S. Treasury Bill Index. The fund will hold certificates of deposits, commercial paper, time deposits, repurchase agreements and U.S. government securities, including Treasury Bonds and other fixed income instruments.

The fund will also invest in asset-backed securities, investment-grade corporate bonds, sovereign debt, and will use derivatives to manage risk. The fund will make daily accruals and pay distributions monthly.

The new fund will be managed by a team led by Michael V. Salm, co-head of fixed-income at Putnam.

Bill to offer state DC plan to non-profit workers passes in Massachusetts

Posted on November 9, 2011 by Editor Test -

Legislation passed last week in the Massachusetts House of Representatives would allow the state treasurer’s office to offer a tax-deferred retirement savings plan to employees of nonprofit organizations, according to local press reports.

The House passed the bill 145 to 7. The bill, H. 3754, is now headed to the Senate and, if approved there, to Governor Deval Patrick.

“Many nonprofits work hard to provide health care and human services, and many other valuable services, but don’t have the resources to offer a retirement plan for their hard-working staff, who likely not make significant pay,” said Gailanne M. Cariddi, a North Adams Democrat.

“This is will be rewarding for nonprofit employees, as it should be, and it will likely mean greater worker retention in those areas. I’m hoping the Senate will favor the bill as well.”

Some 14% of workers, nearly a half-million, are employed by nonprofits in Massachusetts.
The retirement savings plan that the Treasury is aspiring to create would be similar to a 401(k) or a 403(b). The plan that will be established for NPOs will deduct pre-tax dollars from an employee’s paycheck and invest them in a tax deferred market portfolio. The treasurer’s office would administer the participant-funded plan at no cost to taxpayers.

House Speaker Robert A. DeLeo said, “these NPOs provide critical services for a wide-ranging demographic. The passage of this bill sends the message that our government cares about these groups and the people they help.”
Pending final passage of this bill, the Treasury plans to work with the Internal Revenue Service to establish a retirement savings program that would be made available to all of the non-profit organizations in the state.

But an unidentified citizen commented on one website, “Unless they can get Congress to overturn 37 years of ERISA protection for qualified plans, it won’t work. Governmental plans are exempt from ERISA. Plans that cover non-governmental employees are covered by ERISA. They certainly won’t be able to administer the new plan they want correctly since the state has zero experience complying with ERISA.”

About 54% of full-time adult workers are in a retirement plan: EBRI

Posted on November 9, 2011 by Editor Test -

The October 2011 Issue Brief from the Employee Benefit Research Institute examines the level of participation by workers in public- and private-sector employment-based pension or retirement plans, based on the U.S. Census Bureau’s March 2011 Current Population Survey (CPS), the most recent data currently available (for year-end 2010).

Among the major findings:

Sponsorship rate: Among all working-age (21–64) wage and salary employees, 54.2 percent worked for an employer or union that sponsored a retirement plan in 2010. Among full-time, full-year wage and salary workers ages 21–64 (those with the strongest connection to the work force), 61.6 percent worked for an employer or union that sponsors a plan.

Participation level: Among full-time, full-year wage and salary workers ages 21–64, 54.5 percent participated in a retirement plan.

* Trend—This is virtually unchanged from 54.4 percent in 2009. Participation trends increased significantly in the late 1990s, and decreased in 2001 and 2002. In 2003 and 2004, the participation trend flattened out. The retirement plan participation level subsequently declined in 2005 and 2006, before a significant increase in 2007. Slight declines occurred in 2008 and 2009, followed by a flattening out of the trend in 2010.

* Age—Participation increased with age (61.4 percent for wage and salary workers ages 55–64, compared with 29.2 percent for those ages 21–24).

* Gender—Among wage and salary workers ages 21-64, men had a higher participation level than women, but among full-time, full-year workers, women had a higher percentage participating than men (55.5 percent for women, compared with 53.8 percent for men). Female workers’ lower probability of participation among wage and salary workers results from their overall lower earnings and lower rates of full-time work in comparison with males.

* Race—Hispanic wage and salary workers were significantly less likely than both white and black workers to participate in a retirement plan. The gap between the percentages of black and white plan participants that exists overall narrows when compared across earnings levels.

* Geographic differences—Wage and salary workers in the South and West had the lowest participation levels (Florida had the lowest percentage, at 43.7 percent) while the upper Midwest, Mid-Atlantic, and Northeast had the highest levels (West Virginia had the highest participation level, at 64.2 percent).

* Other factors—White, more highly educated, higher-income, and married workers are more likely to participate than their counterparts.

New USAA life income annuity offers emergency medical rider

Posted on November 9, 2011 by Editor Test -

USAA Life, an A++ rated (A.M. Best) member-owned company primarily serving military families, has introduced a new immediate income annuity that allows contract owners to withdraw up to 30% of the present value after three years to cover the expense of a “financial emergency, such as a an uncovered medical expense.”

The product is called Guaranteed Retirement Income Plan.

Robert Schaffer, USAA’s assistant vice president of annuities, said the contract owner would receive reduced income, based on the new present value and prevailing interest rates. “We wouldn’t strip anything off. There’s no additional fee to get the rider,” he told RIJ this week.

Schaffer said the company’s income annuity was due for an update. “We spent time with focus groups, and the question came back, ‘What if I have to pay for funeral expenses or some other emergency?’ We listen to our members as we design and build products.”

Not by accident, more than 90% of USAA’s life annuity contracts include a period certain. “Our advisors work hard to makes sure our members don’t select a life-only annuity. We make sure we put a guaranteed period on it so they get their money back,” Schaffer said.

USAA’s income annuity purchasers have an average age of 59 to 60, he said. They are typically retired service people who, perhaps while working as consultants, want extra income until they are ready to receive Social Security benefits.

USAA members tend to live longer than average, Schaffer said, but the company remains price-competitive by keeping costs low. It sells directly to members, primarily over the telephone through salaried financial advisors. He said USAA recently increased its holdings of municipal bonds from 15% to as much as 25% of its assets.

As of June 2011, USAA reported a net worth of $19.3 billion, up steadily from $14.4 billion in 2007. It has 8.4 million members and 24,000 employees, about 20% of whom are former members of the U.S. armed forces.

‘Individual mandate’ constitutional, U.S. appeals court says

Posted on November 9, 2011 by Editor Test -

In a 2 to 1 ruling, the District of Columbia U.S. Circuit Court of Appeals has ruled that the government can require Americans to purchase health insurance under the so-called “individual mandate” plank of the Patient Protection and Affordable Care Act of 2010 (PPACA).

The dispute over the individual mandate remains to be settled by the Supreme Court, so appellate court rulings are not final.

The court ruled in connection with Susan Seven-Sky et al. vs. Eric H. Holder Jr. et al. (No. 11-5047). Judge Harry Edwards concurred. Judge Brett Cavanaugh dissented, saying that the federal Anti-Injunction Act prohibits the federal courts from considering suits seeking to block implementation of new federal taxes.

The PPACA minimum essential coverage provision requires most Americans to buy major medical coverage or pay a penalty. The plaintiffs had said the commerce clause of the U.S. Constitution, which empowers Congress to regulate commercial activity, doesn’t give Congress the authority to require individuals to buy commercial products, such as health insurance from for-profit companies.

Senior Judge Laurence Silberman, appointed by Ronald Reagan, conceded in an opinion for the majority that a congressional move to require most Americans to buy a product or services seems to be “an intrusive exercise of legislative power,” and that “surely explains why Congress has not used this authority before.”

“But that seems to us a political judgment rather than a recognition of constitutional limitations,” he added. “It certainly is an encroachment on individual liberty, but it is no more so than a command that restaurants or hotels are obliged to serve all customers regardless of race…

“The right to be free from federal regulation is not absolute, and yields to the imperative that Congress be free to forge national solutions to national problems, no matter how local–or seemingly passive–their individual origins,” Silberman wrote.

Regarding Judge Cavanaugh’s dissent, Silberman said Congress took care not to describe the penalty for failure to own a minimum level of health coverage as a tax, and that the federal courts have never held a payment described in a federal law as a penalty to be a tax as defined the federal Anti-Injunction Act.

New USAA Life income annuity offers emergency medical rider

Posted on November 9, 2011 by Editor Test -

USAA Life, an A++ rated (A.M. Best) member-owned company primarily serving military families, has introduced a new immediate income annuity that allows contract owners to withdraw of to 30% of the present value after three years to cover the expense of a “financial emergency, such as a an uncovered medical expense.”

The product is called Guaranteed Retirement Income Plan.

Robert Schaffer, USAA’s assistant vice president of annuities, said the contract owner would receive reduced income after the withdrawal, based on the new present value and prevailing interest rates. “We wouldn’t strip anything off. There’s no additional fee to get the rider,” he told RIJ this week.

$10 million a week in sales for New York Life’s deferred income annuity

Posted on November 9, 2011 by Editor Test -

Last July, when New York Life introduced its deferred income annuity—Guaranteed Future Income Annuity—the product seemed to make lots of sense. It allows individuals to buy personal pensions with multiple premiums ($10,000 initial minimum), and at a discount, in advance of retirement.

But the product also appeared to face hurricane-force headwinds, from two angles. First, many Americans continue to resist illiquid and irrevocable financial products. Second, the Federal Reserve’s sustained low interest rate policy would appear to hurt income annuity payouts. Last spring, when New York Life first discussed the product publicly, Moody’s Seasoned Aaa corporate bond yield averaged about 5.13%. In October 2011, it was 3.98%

So the big mutual insurer’s announcement this week that it had sold $100 million worth of the GFIA—20% of New York Life’s total income annuity sales—within three months of the product launch, was fairly remarkable.

Compared with, say, ETF sales, that’s not a fortune. But for a somewhat experimental income annuity, it’s noteworthy.

The product is “the fastest off the blocks of any New York Life annuity product launch in memory,” said Chris Blunt, the executive vice president and head of Retirement Income Security at New York Life. “The sales estimate for the product for all of 2011 was surpassed after 10 weeks on the market.”

From New York Life’s viewpoint, Fed policy may even be helping its product. Compared with today’s ridiculously low yields on short-term investments, the annual payout from a deferred income annuity can look downright lavish.

“We believe that consumers have been craving a product like this,” said Matt Grove, a New York Life vice president. “2010 Macro Monitor data reveals that, on average, 35% of the assets of pre-retirees ages 50-64 are in cash or other low-yielding cash equivalents. This product gives consumers exposure to longer duration bond portfolios, they benefit from compounding, [and if you] include return of premium and mortality credits, deferred income annuities can have substantially higher payout rates than other fixed income investments,” he said.

The core market for the product is someone between the ages of 55 and 65 who intends to retire in five to ten years. To that person, New York Life believes that the payout rate of its product will look very good compared to the current yield of 1.2% on a five-year certificate of deposit.

“By investing in the Guaranteed Future Income Annuity, a 57-year-old man could guarantee a 7.8% per year lifetime payout rate at age 62,” the company said in a release this week.

But how good is that? Certainly, there’s a discount at work. The yield on a life-only single premium income annuity at today’s rates is only about 6.9%, according to immediateannuities.com.

To look at it another way, it would cost a 62-year-old $113,000 today to buy a life-only annuity that paid out $7,800 a year. New York Life’s hypothetical 57-year-old will get $7,800 a year five years from now by paying a $100,000 premium today. To reach $113,000 in five years with comparable safety, that person would have to find a no-risk investment earning 2.5% a year. As we know, that’s not easy right now.

The longer the contract owner chooses to delay income, of course, the higher the effective payout rate. Last summer, New York Life estimated that a 57-year-old male purchaser could get an annual payout of 11.3% by waiting until age 66 to receive income.

The product offers its biggest discounts to people who use it as longevity insurance, and choose not to take income until age 80 or beyond. According to an earlier New York Life estimate, a 65-year-old man who invests $100,000 (in after-tax money) in the GFIA would receive $65,500 per year starting at age 85, if he lived that long.

But not very many people are inclined to make that bet, which would maximize their “mortality credit”—the dividend that accrues to all living policyholders. Indeed, even New York Life’s annuity-loving customers are apparently willing to give up yield to make sure they don’t forfeit any of their principal.

Virtually all of the people (98%) who have bought the GFIA so far have taken the default option to receive a return-of-premium death benefit if they die during the deferral period. About 20% of the policies so far have been joint-life, Grove said, and of those, about one in four are life policies with a period certain of 10 to 15 years. A period certain of 15 years ensures that at least the premium will be paid back to the contract owner or beneficiaries.

The biggest appeal of this product—like other lifetime income products—is undoubtedly its ability to confer peace of mind on people. It allows a risk-averse person who doesn’t have a defined benefit pension to buy one privately and achieve a DB-style sense of security. If he or she can get an “early-bird discount” on that purchase, so much the better.

Six Ways Insurers Can Fight Low Interest Rates

Posted on November 8, 2011 by Editor Test -

Low interest rates could cost large U.S. life insurers an average of 51 basis points in investment income over the next three years, or about 10% of their average income yield in 2010, according to a new study by Ernst & Young.

The study, “The impact of prolonged low interest rates on the insurance industry,” was written by Doug French, Richard De Haan, Robb Luck and Justin Mosbo and released in October. It was based on an analysis of the top 25 life and top 25 property/casualty insurers.

Though substantial, the projected decline was less than the 68 bps drop in yield that E&Y estimated life insurers suffered since the financial crisis. “As we go to press [in October],” the report said, “the market turmoil has pushed the 10-year rate down to a new record low of 1.72%, compared with an average of 2.70% in August 2010 and 3.59% in August 2009.”

“A 10% decline in yield is significant, and it goes right to the bottom line,” said French, a managing principal in Insurance and Actuarial Advisor Services at E&Y. Even if insurers try to maintain profit margins by raising prices and reducing benefits more or less in unison, they will still face the headwind of a weak economy. “It’s hard to raise prices to the end-consumer when you have a 9.1% unemployment rate,” he said.

The identities of the insurers studied were not revealed. Projected declines in yields varied among the 25 life insurers, from under 10 bps to almost 70 bps. The impact of the decline, as measured by difference from 2010 yields, also varied widely from one insurer to another.

Nineteen of the life insurers studied were public companies and six were mutual companies. The average expected yield decline was higher among mutuals (59 bps) than among public companies (48 bps). French attributed the difference to the fact that “the mutuals have been selling a lot of business in the last few years. They’ve done really well.”

E&Y suggested that insurers might explore mitigating low interest-rate risk through:

• In-force management—Identify and, where appropriate, pull the levers on in-force blocks to help offset declining investment yields. This includes reducing interest crediting rates and policyholder dividends, limiting premium dump-ins and possibly adjusting premiums, product charges or commissions, to name a few. However, this is subject to contractual guarantees, policyholder behavior, market, reputational and legal considerations.

• Re-price products—pricing products to reflect the current investment environment mitigates the risk for new business flows. However, this is subject to a number of competitive constraints and impacts to management production targets. The market remains very competitive, and whether decreased levels of investment income will be passed on to policyholders, absorbed by the companies or a combination of both remains to be seen.

• Change product mix—refocusing sales efforts on products that are not heavily dependent on investment income to meet profitability targets will help reduce the impact from new business flows.

• Cash flow management—using cash inflows to pay cash outflows minimizes the amount of reinvestment over the short term and delays the impact on portfolio yield. However, this may just mask the real economic losses; it is not a long-term solution and is subject to asset allocation, asset-liability management (ALM) and liquidity considerations.

• Increase asset duration—investing in longer-term assets offers the potential for additional yield and proper ALM as liability durations extend. However, duration mismatching over extended periods will increase risk, and long-term interest rates are at near-historic lows too, with the 30-year treasury rate at the time of writing at 2.79%.

• Increase allocation to risky assets—increasing investments in lower credit-quality assets or alternative asset classes may lead to higher expected yields. But it comes with additional risks. It may not make sense on a risk-adjusted basis and is subject to additional capital requirements, investment limitations and liquidity constraints.

It’s a Twister, Auntie ‘Ben’

Posted on November 8, 2011 by Kerry Pechter -

“Operation Twist” and its monetary policy predecessors are keeping life insurers in a whirl.

In just the past ten days, MetLife said it would lower the deferral bonus on its hottest living benefit rider, Sun Life Financial was placed under “negative watch” and American Equity Life, a big issuer of fixed deferred annuities, announced its first rate renewal reduction since 2007.

A stream of similarly dismal announcements is expected in coming months as more insurers adjust to the impact of the Federal Reserve’s decision last August to keep interest rates, including long-term Treasury rates, suppressed until at least 2013.

Observers like Neil Strauss of Moody’s Investors Service don’t expect low yields to create an immediate crisis for life insurers. But companies will feel pressure as they scramble to either find ways to maintain profit margins by raising prices or reduce profit expectations.

“This is not a crisis, but there will be pain,” Strauss told Retirement Income Journal this week.

If rates stay down for five years or more, however, life insurers could be more severely hurt, said Strauss, the author of Moody’s August 19 report, “Protracted Low Interest Rates Would Present Major Risks for U.S. Life Insurers.”

“It would take a few years for this to become an issue where we would take action on our ratings,” Strauss said. “We say in the article that it’s not a major issue in the short term. Should rates stay low of five years or less, it can be dealt with.

“It takes a while for companies’ portfolios to turn over and to reassess DAC [deferred acquisition cost] assumptions. But in the meantime, they still want to make their pricing targets and minimize their losses.”

Sun Life’s new rider

To a degree, life insurers have the consolation that they and their competitors face the same problem. On the other hand, manufacturers of certain products will feel the impact of Fed policy more sharply than others, according to Moody’s.

Those include producers of fixed-rate deferred annuities and of “long-tailed annuities” with “embedded interest rate guarantees (such as unhedged ‘rho’ embedded in variable annuities with guaranteed minimum income benefits or death benefits), and long-term care/long-term disability income products,” said the Moody’s report.

Canadian-owned Sun Life Financial, a leading variable annuity issuer, announced a third quarter loss of $621 million as a result of falling interest rates and equity prices, and was placed “under review” by A.M. Best. Under Canadian accounting rules, Sun Life also had to reserve an additional $500 million against the lifetime costs of hedging its guarantees.

“As a Canadian-owned company, we’re operating under a more conservative and more onerous standard,” Deschenes told RIJ. “We’re present-valuing a lot of the changes into a single quarter and accepting the increase in reserves. In the U.S., you can smooth that impact over time and build in the potential for mean reversion.”

Not coincidentally, the Wellesley, Mass.-based company last week announced a new variable annuity rider that will cost much less to hedge. The new Vision variable annuity has no deferral bonus and offers a payout of just 4% per year for life at age 65.

But it also allows up to a 70% equity allocation and the living benefit rider costs only 35 basis points for a single life and 50 basis points for joint life.

“You can’t offer the same products in a two percent environment that you can in a 3.5% environment,” Deschenes said. “Three-point-five is the historical average, and we were at 3.3% on the 10 year Treasury just six months ago, and over 4 percent on the 30-year. This morning we’re at 2.1% for the 10-year and close to 3% for the 30-year.”

Sun Life’s announcement followed close behind MetLife’s announcement that it would lower the deferral bonus on its GMIB Max variable annuity rider for the second time this year, to 5%, and Deschenes expects many other variable annuity issuers to follow suit.

“My expectation for the next six months, if rates stay at current levels, is that you’ll see additional changes. It’s just a question of when, depending on their particular methodologies, companies will bake the results into their product lines,” he said.

Prudential adjusted last January

Prudential reduced the deferral bonus of its top-selling Highest Daily variable annuity living benefit for the second time at the start of 2011. The move appeared at first to backfire, since it allowed MetLife to come forward with its GMIB Max and seize the lead in variable annuity sales in the second quarter of this year.

But now, with MetLife’s retreat on the rider benefit, Prudential can feel somewhat vindicated. Regarding the richer products that the company sold in the past—including the Highest Daily Lifetime 7, whose deferral bonus doubled the income base in 10 years—Prudential says that the hedges it purchased and the reserves it set aside when those products were sold continue to protect the risks of those products.

“Back in January we made a product change, from Highest Daily Lifetime 6 to Highest Daily Lifetime Income, and we had a marginal fee increase and reduction in the accumulation rate,” said Bryan Pinsky, senior vice president, product development at Prudential Annuities.

Prudential’s dynamic asset allocation method, which shifts client money to an investment-grade bond portfolio when equity prices fall, simultaneously reduces its equity market risk and, paradoxically, its interest rate risk, Pinsky said.

“We’ve done some internal analysis and found that the equity exposure in our product is cut by half or more, and that the overall interest rate exposure is the same or marginally less. Because we have less drag from an equity perspective, we reduce the likelihood that the client’s assets are depleted, thereby reducing our interest rate exposure.”

First rate cut in four years

Fixed indexed annuity issuers are also feeling the squeeze of low rates. Des Moines-based American Equity Life, which is among the top three issuers of fixed indexed annuities in the U.S., announced to its producers in late September that it would lower caps and participation rates on new sales in the fourth quarter and make its first renewal rate reduction on existing fixed annuities since 2007.

Rates on new sales were reduced by 40 to 50 basis points, as of October 7. The “renewal rate adjustments are intended to reduce the company’s aggregate cost of money on policyholder liabilities by approximately 15-25 basis points over the next twelve months,” the company said in a release on its website.

But, in a release, American Equity said that it was still able to offer rates that were 1% to 2% higher than the minimum guaranteed rate. State insurance regulators have helped life insurers over the past decade by lower the minimum guaranteed rate to accommodate the drop in prevailing interest rates caused by Federal Reserve policy.

American Equity’s move came as no surprise to Jack Marrion of St. Louis-based Advantage Compendium Ltd, a consultant to fixed indexed annuity issuers and marketers. “When rates go down, renewal rates go down,” Marrion told RIJ. ”On the fixed index annuities, the caps and participation rates are based on how much money is available to buy the index link. So if the company is only making three cents off the dollar from their bonds instead of six percent, something has to give.

“Lowering the index participation is the easiest way to adjust, so you should see the caps coming down. But it’s a relative business, and as long as returns from the stock market and certificates of deposit are low, fixed indexed annuities will still look relatively better.

“There are three parts to this. You have to cut compensation to someone. You’re already seeing cutbacks to the consumer. You’re now seeing compensation to the agents getting cut. The last thing you’ll see will be cutbacks at the insurer.”

A “modified Japan” scenario for life insurers: Moody’s

Moody’s expects interest rates to increase slowly as the U.S. economy slowly revives, but “a plausible downside scenario would see stagnation and protracted low interest rates” similar to Japan’s experience, said an August 19 report from the ratings agency.

US life insurers are not expected to incur significant near-term losses… [but] low rates over a long period (5+ years) would subject them to substantial losses that could result in downgrades, some multi-notch.
An extended period of low interest rates would lead… to significantly lower investment income… but higher statutory reserve requirements and meaningful DAC write-downs (on GAAP financials), weakening companies’ profitability, capital adequacy and financial flexibility.
Most affected would be issuers [of] fixed-rate immediate and deferred annuities, universal life and interest sensitive insurance policies with high minimum crediting rates, variable annuities with lifetime guaranteed income benefits, long-term care and long-term disability.
Few insurers have bought protection against lower interest rates, either because of the high cost of doing so or because they deem the risk to be remote. Exceptions are the minority of companies that have bought interest rate floors, insurers with interest rate hedging programs for variable annuity lifetime income guarantees, and companies that have locked in interest rates on the investment of future premiums for products such as no-lapse universal life and long-term care.
Our review of the 2008–10 regulatory cash flow testing filings for a representative group of US life insurers showed that when interest rates declined, insurers saw a material worsening of reserve margins, with several companies needing to post additional statutory reserves. As expected, results showed that insurers performed much worse under declining rate scenarios than under increasing scenarios.

Liberty Mutual’s new fixed deferred annuity offers three options

Posted on November 2, 2011 by Editor Test -

Boston-based Liberty Mutual has launched a customizable fixed deferred annuity, Freedom Series Builder Annuity, to be sold by Liberty Life Assurance Co. of Boston. Purchasers of the product can choose among three modules—Extra access, Extra care and protection, or Extra assurance.

According to the company, Extra accesshas two features:

Return of premium guarantee – Upon surrender the owner is guaranteed to receive no less than the premium paid less prior withdrawals.
Penalty-free withdrawals – After the first year, the owner can withdraw 10% of your beginning-of-year account value per year. A withdrawal of 5% is allowable without selecting this module.

Extra care and protectionallows for withdrawals or surrenders without withdrawal charges in the event of certain serious health conditions:

Owner or spouse becomes ill and requires a qualifying medical stay for 45 days out of any continuous 60-day period
Owner or spouse is diagnosed as terminally ill
Owner or spouse becomes unable to perform two of the six activities of daily living

Extra assurance allows unrestricted withdrawals if the declared interest rate on the annuity, before any rider charges are applied, drops below the minimum threshold determined at time of contract issue. Additionally, the owner will not incur withdrawal charges if he or she decides to withdraw the account value any time up to 60 days after the rate returns above the minimum threshold.

Annuity inflows for 2011 peaked last March–DTCC

Posted on November 2, 2011 by Editor Test -

The Depository Trust & Clearing Corporation (DTCC) Insurance & Retirement Services (I&RS) released today September reports on activity in the market for annuity products from its Analytic Reporting for Annuities online information service, which is based on the transactions that DTCC processes for the industry.

Highlights of the report included:

Inflows for all annuity types processed in September declined by 19% to $6.7 billion from $8.3 billion in August.
Annuity inflows were at their highest so far this year in March, at nearly $8.8 billion.
The top 10 insurance companies accounted for over 68% of all inflows processed in September.
Quarterly inflows and net flows have shown only slight changes since the beginning of the year.

September inflows went primarily into IRA accounts and non-qualified accounts, with a small percentage going into 401(k) accounts. The percentage of inflows going in to Regular IRA accounts was nearly 50%, while non-qualified accounts received 40% of inflows. Accounts in 401(k) plans received almost 6% of annuity inflows.

Regarding net cash flows (subtracting out flows from inflows), regular IRA accounts took the lion’s share of net flows in September with 85%, or nearly $1.8 billion. 401(k) plans attracted almost 13% of net flows, with almost $265 million, while non-qualified accounts attracted only 4% of net flows, or just under $87 million.

Over the past 12 months, 77% of positive net flows have gone into regular IRA accounts and 12% have gone into 401(k) accounts. Non-qualified accounts attracted 7% of net flows.

Five hundred twenty two (522) annuity products saw positive net flows in September, while 2,105 annuity products saw negative net flows, where the amount of money redeemed exceeded the amount of money invested.

DTCC recently joined forces with the Retirement Income Industry Association (RIIA) to analyze cash flows by RIIA defined broker/dealer distribution channels and product categories. The following chart shows the breakdown of annuity product inflows by distribution channel in the third quarter.

The figures referenced in this release are calculated from transactions processed by DTCC Insurance &Retirement Services. Not all annuity transactions are processed by DTCC.

MetLife, Sun Life feel the pressure from low interest rates

Posted on November 2, 2011 by Editor Test -

With low interest rates driving up the costs of hedging variable annuity living benefits, MetLife announced that it will reduce the deferral bonus on the benefit base of its recently-introduced GMIB Max product from 5.5% to 5%, the company said in a release.

“As of January, the roll-up rate on our GMIB Max product will be reduced from 5.5 percent to 5 percent,” MetLife CEO Steven Kandarian told analysts in a conference call last Friday.

The announcement by MetLife, which was the top seller of variable annuities in the second quarter of 2011, coincided with A.M. Best’s announcement that it would review Sun Life Financial’s strength rating. Sun Life, also hurt by the turbulent stock market and low interest rates, said it expected to lose $621 million in the third quarter of 2011.

The Federal Reserve has said that it may keep benchmark rates near zero through mid-2013 as long as unemployment remains high and the inflation outlook stays “subdued.”

MetLife’s third-quarter variable annuity sales jumped 84% from a year earlier to $8.6 billion, the New York-based company said yesterday. Some of the increase may have been driven by customers who wanted to lock in rates before the terms changed, the insurer said on the conference call.

The following information comes from reporting by Bloomberg on MetLife’s conference call.

“The $8.6 billion variable annuity sales result was record breaking, though we are concerned that this new business would be well below targeted returns given the current low-rate environment,” Randy Binner, an analyst with FBR Capital Markets, said in a research report. “We expect the company to actively manage sales to a more appropriate level.”

MetLife is expanding in retirement products as it retreats from banking. The company, working to sidestep tighter capital rules enforced by banking regulators, is seeking a buyer for its deposits-gathering business and considering the sale of its mortgage operation. The divestitures are “on track” and the company may wind the businesses down if it can’t find a buyer, Chief Financial Officer William Wheeler said today.

“Probably Plan B, though I think this would be an extreme scenario, is we would wind it down,” Wheeler said. “But I think a sale is much more likely.”

Profit at MetLife’s bank unit fell by half to $51 million in the third quarter due to higher expenses, the company said. Operating revenue rose 4 percent to $425 million. MetLife Bank had $17.7 billion of assets and $10.7 billion of deposits at the end of September.

MetLife beat analysts’ estimates when it announced that third-quarter operating profit was $1.11 a share. Net income surged more than 10-fold to $3.58 billion, helped by gains in derivative hedges. The yield on 10-year U.S. Treasuries plummeted 39 percent in three months to 1.915 on Sept. 30.

Kandarian was ordered by the Fed to scrap his plans to resume share buybacks and raise MetLife’s dividend, the insurer said this week. MetLife, which as an insurer is regulated by the U.S. states, is “well capitalized” and will seek approval for an increase early next year, Kandarian said in a statement.

“We want to return capital to shareholders,” Kandarian said on the call. “The hope is that over time people in Washington will understand the difference between the banking business model and the insurance business model.”

The A+ (Superior) financial strength ratings and “aa” issuer credit ratings of the core life insurance subsidiaries of Toronto-based Sun Life Financial Inc. have been placed under review with negative implications by A.M. Best Co., the ratings firm reported.

The subsidiaries include Sun Life Assurance Company of Canada, Sun Life Assurance Company of Canada (U.S.), Sun Life Insurance and Annuity Company of New York and Sun Life and Health Insurance Company.

The “under review” status follows Sun Life’s estimate that it expected to lose $621 million for the third quarter of 2011.

“The results for the third quarter were impacted by substantial declines in both equity markets and interest rate levels. Due to the sensitivity of SLF’s U.S. individual life and variable annuity businesses to these market changes, its U.S. operations were most impacted. In addition, SLF’s fourth quarter results are expected to include a methodology change of $500 million related to the valuation of its variable annuity and segregated fund liabilities, which will provide for the estimated future lifetime hedging costs of these liabilities,” A.M. Best said in a release.

Despite the expected losses, A.M. Best notes that SLF and its operating subsidiaries remain well capitalized from a risk-adjusted perspective.

By placing the ratings under review, A.M. Best can conduct an analysis of the full third quarter 2011 financial results, which will include both an enterprise and legal entity review.

Mercer adopts Financial Engines’ Income+ program

Posted on November 2, 2011 by Editor Test -

Financial Engines’ Income+, a retirement income solution for 401(k) plan participants, has been rolled out to Mercer’s defined contribution administration client base, the two companies announced.

Freeman, Kinder Morgan and Milacron are the first three Mercer clients to go live with Income+. Financial Engines has received commitments from six more Mercer plan sponsors to offer Income+ more than 50,000 additional 401(k) participants.

Milacron will automatically enrolling all 401(k) participants over age 60 into the service. Participants can opt out of enrollment or cancel the service at any time without penalty.

Income+ is an extension of Financial Engines’ 401(k) managed account program. It was introduced in January 2011 to help plan participants turn their balances into income.

The Income+ feature is available to participants in Financial Engines’ managed accounts program at no additional cost. Income+ does not require employers to add an annuity or change the fund line-up in their plan.

As part of a managed account, Income+ gives employees control of their money, which stays in their 401(k) account and doesn’t lock them into a particular investment or insurance product. After the income phase begins, former participants can start payouts, stop payouts, take additional withdrawals or cancel at any time without penalty.

Gov. Perry’s tax plan, analyzed

Posted on November 2, 2011 by Editor Test -

Governor Rick Perry has proposed major changes to the federal tax code as part of his recently released budget plan, “Cut, Balance, and Grow.” The Perry plan would retain the existing structure of the current individual income tax, but allow taxpayers the option of paying tax under an alternative system characterized by a single 20 percent tax rate.

A preliminary analysis of the Perry plan by the Tax Policy Center, based on information posted on the campaign website, public statements by Mr. Perry and his staff, and details contained in an analysis performed by John Dunham Associates (JDA) released by the campaign.

Description of Plan
Governor Perry’s individual “flat tax” proposal would create an optional alternative tax system with a single 20 percent tax rate, which effectively operates as an “alternative maximum tax.” The tax would apply to an income base similar to that in current law, with four major modifications:

1) Long-term capital gains, qualified dividends, and social security benefits would not be taxable

2) Taxpayers could claim a standard exemption of $12,500 for each individual and dependent

3) Taxpayers could continue to claim deductions for mortgage interest, charitable contributions, and state/local taxes paid but these deductions would phase out beginning at $500,000 of income

4) All other above-the-line deductions, itemized deductions, and credits would be eliminated

Taxpayers could choose either the current tax system or the alternative “flat tax” system, but once they opt into the new system, they could not switch back.

At the corporate level, the Perry plan would make four major changes:

1) Reduce the corporate income tax rate from 35 to 20 percent

2) Allow for immediate expensing of all investment purchases

3) Fully exempt foreign-source income of U.S. based corporations

4) Eliminate all other tax expenditures not related to depreciation, R&D, or foreign-source income

The Perry plan would also permanently repeal the federal estate tax and the surtaxes contained in the 2010 Patient Protection and Affordable Care Act (PPACA).

Because the Perry plan would retain the current system as an option, the details concerning that system matter a lot for estimating the plan’s impact. Of particular importance is whether or not the Perry plan would extend the various individual income tax provisions that are scheduled to expire at the end of 2012. Based on material released by the campaign and statements by a spokesperson, we have concluded that the Perry plan would allow all of the provisions to expire as called for under current law.²

The Perry plan differs substantially from the standard flat tax as originally developed by Robert Hall and Alvin Rabushka and subsequently proposed by former House Majority Leader Dick Armey, former presidential candidate Steve Forbes, and others.

That plan would apply the same single tax rate to the entire cash flow of businesses. In other words, while firms could deduct cash wages, they could not deduct the cost of employee fringe benefits like health insurance and retirement contributions.

The Hall-Rabushka flat tax plan would also disallow deductions for employer-paid payroll taxes and interest payments. In contrast, according to a spokesperson for the Perry campaign, “[n]ormal businesses [sic] expenses that corporations recognize on their financial statements will continue to be deductible.” That provision would shrink the tax base significantly, compared with the Hall-Rabushka Flat Tax plan.

Revenue Implications
The Perry plan would reduce federal tax revenues dramatically. TPC estimates that on a static basis, the Perry plan would lower federal tax liability by $995 billion in calendar year 2015 compared with current law, roughly a 27 percent cut in total projected revenue. Relative to a current policy baseline, the reduction in liability would be roughly $570 billion in calendar year 2015.

Appendix: Assumptions underlying Tax Policy Center analysis

Based on the campaign’s summary and the analysis from John Dunham Associates, TPC assumes that the existing tax law remains unchanged. In other words, all provisions currently scheduled to expire under current law will do so, including the annual patches to the AMT, the lower marginal rates and marriage penalty relief originally passed in 2001, the 15 percent rate on long-term capital gains and qualified dividends, and the higher amounts and increased refundability of the earned income tax credit and child tax credit. The expiration of provisions of existing law would affect those taxpayers who would otherwise see their tax liability higher under the optional flat tax system than under 2011 tax provisions.
Income under the optional flat tax system equals current law total income less net long-term capital gains, qualified dividends, and taxable social security benefits received. Taxable income equals that income less a standard exemption of $12,500 for each individual and dependent and applicable deductions for mortgage interest, charitable contributions, and state and local taxes paid. These deductions are available to all taxpayers who opt into the alternative system. The new tax does not include any other above-the-line deductions, itemized deductions, and credits.
Standard exemptions phase out for taxpayers at a rate of 2 percent for each $2,500 of income over $500,000 (the current law rule for the personal exemption phaseout, or PEP). Deductions for mortgage interest, charitable contributions, and state/local taxes paid are reduced for high-income taxpayers by 3 percent of income over $500,000 (the reduction under current law—known as Pease—but without the provision limiting the reduction to 80 percent of total deductions).
Businesses may fully expense all capital expenditures (equipment and structures) and research and development expenses. Businesses may continue to deduct normal business expenses, including interest paid and employee fringe benefits, as under current law. Foreign source income of U.S. corporations would not be subject to tax. All business-related tax expenditures, other than those that involve capital cost recovery and the deferral of foreign earned income, are repealed.
The following transition rules would apply: 1) firms may deduct their existing basis in inventory, equipment, and structures at enactment over five years using the straight line method; 2) firms may claim existing net-operating losses (NOLs) and tax credits as under current law; 3) all undistributed foreign earnings at enactment are immediately subject to a one-time 5.25 percent tax, payable over five years.
The estimates of the corporate tax provisions are based on the steady state tax system after the phase-in (with expensing replacing depreciation) and do not count the revenue losses in the transition from allowing deduction of existing asset basis over five years or the increased revenue from the tax on undistributed foreign earnings. We assume no net loss of revenue in the steady state from switching to a territorial system.

The Plot to Kill Social Security

Posted on November 2, 2011 by Editor Test -

A Black Swan blizzard befell my town last Saturday. My deck chairs vanished under a foot of heavy snow. When the bombardment ended, our shattered trees looked like the splintered, broken masts of Admiral Nelson’s ships after the Battle of Trafalgar.

One of the first headlines I saw when the power returned was at Wonkbook, the Washington Post political blog: “Social Security on the chopping block.”

The Dark Lords are relentless. They wrecked the economy and decimated the tax base. Now they want austerity… for the poor, the old and the sick. Job One is to disown (i.e., confiscate) the Social Security Trust Fund.

Wonkbook’s story was actually just a reference to an earlier story about Social Security that writers at Politico.com filed eight minutes before midnight on Halloween, as if to stress the fear factor.

“In private conversations, and now in public,” the Politico story intoned, “the idea of changing the social program as part of a deficit-reduction deal is gaining some traction— a move that has been politically unthinkable for years,” it said.

False alarm—maybe. The Politico story specified only that the “Supercommittee”—surely one of the lamest ideas ever—may decide to peg Social Security payouts to the CPI instead of the wage index.

What amazes me is that none of the fixes that reasonable people have proposed for Social Security seem to register on, let alone deter, its opponents. A report from the American Academy of Actuaries this year and one from the Senate Subcommittee on Aging last year described sensible patches for Social Security’s problems. But, like B-movie zombies, the enemies of Social Security refuse to die.

The Big Lie is that Social Security, which is money we pay ourselves, threatens America’s very survival. Never mind that we spend $1 billion a week in Afghanistan. Never mind that we spend $2 trillion a year on imports.

On October 29, the Washington Post portrayed the Old Age, Survivors and Disability Insurance program as a vampire: “Social Security is sucking money out of the Treasury,” the story said. “…If the payroll tax break is expanded next year … Social Security will need an extra $267 billion to pay promised deficits.”

Is it paranoid to believe that the assault on Social Security is orchestrated? Two weeks ago, a member of a Society of Actuaries Linked-In discussion group kicked off a debate with the suspiciously disingenuous question: “Is Social Security a Ponzi Scheme?”

I can understand Rick Perry suggesting that. But an actuary?

The initiator of the discussion used the word Ponzi in almost every post. He argued the Ponzi position long after many fellow actuaries patiently explained how a fully transparent pay-as-you-go social insurance program isn’t the same as an illegal pyramid scheme.

Where does the animosity toward Social Security come from? Does Wall Street believe that Social Security crowds out private investment? On that point, they may not be entirely wrong. But so what?

No private annuity can do what Social Security does—mitigate longevity risk, sequence risk and inflation risk—as efficiently as Social Security does. And no one but the federal government can afford to shoulder so much risk indefinitely. We have Social Security for good reasons.

Do Social Security haters think we would all be better off paying no payroll taxes and investing more in our 401(k) plans? If so, let’s have that discussion. Actually, we had that discussion back in 2005, and the vox populi was nearly unanimous: Hands off Social Security.

The attack on Social Security seems at least partly based on a distortion, perhaps willful, of the functions of money. Sometimes money is wealth. But sometimes it is “circulating medium.” Like electricity in a machine or blood in the human body, it animates the system.

Taxes, the issuance of Treasury debt and public expenditures like Social Security are media of circulation. If you disrupt the circulation, you starve the extremities. Financial gangrene consumes the limbs of the body politic, and the rest soon follows.

So, please, lighten up on Social Security. Strengthen it, don’t kill it.

Three Steps to Annuity-Free Income

Posted on November 2, 2011 by Kerry Pechter -

“The rich,” F. Scott Fitzgerald famously wrote, “are different from you and me.”

For Fitzgerald’s tycoons, that meant wearing excellent shirts and driving recklessly. For today’s millionaires, it means having enough money not to worry about running short of it in retirement. And, it can be added, without needing an annuity. Consequently, many so-called high net worth investors avoid annuities.

“Don’t sell me a product!” they say, according to Jack Gardner of Thornburg Investment Management. As Gardner put it in a 2010 essay, certain clients are “loath to accept the loss of control and expense” of insurance products.

For the annuity-averse, Gardner recommends a three-point plan for generating a predictable retirement income without an annuity. As he explained recently at the Center for Due Diligence conference in Chicago, it entails dividend stocks, “endowment-style” spending curbs, and three common-sense asset buckets.

Dividend play

The first point of the plan involves using dividend-paying stocks. Just by owning the top 100 dividend-paying stocks in the S&P 500 instead of the S&P 500 Index, he said, a retiree household could increase its annual income by as much as 25%.

Annualized total returns of the S&P Dividend Aristocrats Index, he said, have been higher than the returns of the S&P 500 for every four-year period since 1990 except in the period that included the end of the dot-com bubble in 2001.

Faced with low bond yields and a future that promises little bond price appreciation, investors can’t help but find a dividend stocks play attractive. Ideally, Thornburg says in its literature on the topic, a dividend stock portfolio should include global equities, which often pay higher dividends than U.S. companies.

Thornburg’s own dividend income fund, Investment Income Builder Fund, holds about 80% equities and 20% bonds. Its largest holding is an Australian telecom. More than half of its bonds are rated BBB or lower, and almost 54% of its holdings are outside the U.S.

Are dividend stocks the answer for yield-hungry retirees in a zero-bound world? Recently they’ve drawn a crowd of admirers, but popularity isn’t necessarily good, says fee-only advisor Russell Wild of Allentown, Pennsylvania, the author of ETF for Dummies.

“A lot of pundits have jumped on board the dividend bandwagon,” Wild told RIJ. “It’s one of the most popular categories in new ETFs right now. They have a recent edge in performance, but when things get popular, their edge tends to get lost.

“One should be cautious about something that’s hot. They’re a good long-term investment, but are they really much better than value stocks? Also, if you have an all dividend stock portfolio you won’t be optimally diversified.”

Endow yourself

The second prong of Gardner’s no-annuity retirement income strategy involved withdrawal smoothing of the type that endowments commonly use to make their money last over a 30- to 40-year time horizon.

Instead of blindly withdrawing a certain percentage from their portfolios every year and increasing that amount by the rate of inflation, Gardner proposed a formula that limited spending to 90% of the previous year’s withdrawal plus only 10% of the current portfolio balance times the withdrawal rate. The resulting amount would then be increased by the inflation rate.

“When things aren’t going well, you need to tighten it up,” Gardner said. “Don’t keep up with inflation. Spend less than inflation.”

For example, suppose a retiree withdrew $50,000 from a $1 million portfolio in the first year of retirement. Then suppose a bear market in the next year reduced the portfolio value to $800,000, while inflation reached 6%. His base withdrawal for the second year of retirement would be $51,940.

Gardner arrived at that number by starting at $45,000 (0.9 x $50,000), then increasing it by $4000 ($800,000 x 0.1 x .05) and then increasing that amount by $3,940 (.06 x $49,000) to get $51,940.

That’s a compromise between the $56,000 that a fixed-dollar payout formula (plus 6% inflation) would have provided and the $42,400 that a fixed percentage payout formula (plus 6% inflation) would have provided, all else being equal.

Someone who retired in 1973—the start of stagflation—and followed the endowment policy would have seen his portfolio last for 30 years. The same hypothetical retiree, using a fixed-dollar strategy, would have run out of money after 21.5 years, according to Gardner’s calculations.

Three easy buckets

In addition to dividend-paying stocks and an endowment style drawdown strategy, Gardner recommended holding assets in three time-segmented buckets. No surprises here.

The first bucket is a checking account. The second bucket contains enough cash to cover two years of expenses and to avert any need to sell depressed assets. A third bucket contains the rest of the assets, in stock and bond mutual funds.

Gardner’s three-point strategy is aimed at people who don’t want the complexity or expense of annuities and can afford to self-insure against longevity risk. But one could argue that even the wealthy can benefit from the survivor credits that come from mortality pooling.

While annuities are admittedly not cheap, neither is Thornburg’s own Investment Income Builder Fund. The A-share carries a front-end load of 4.5% and an ongoing expense of 1.21%. The C-share carries a one-year 1% contingent deferred sales charge and an ongoing charge of 2.02% (1.90% with a Thornburg subsidy through at least February 1, 2012.) The I-share has no front-end load and cost 93 basis points a year, but participation requires institutional-sized purchase amounts.

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