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Delaying Required IRA Distributions Again Would Largely Help Only The Wealthy

Posted on May 27, 2021 by -

The House Ways & Means Committee is once again tinkering with the law that requires retirees to take minimum distributions from their individual retirement accounts (IRAs) and 401(k)s. Each time, Congress eases the required minimum distribution (RMD) rules at great cost to the federal government. Yet the beneficiaries would overwhelmingly be wealthy retirees and their future heirs.

The committee bill, approved today,  would make two big changes to RMDs. It would allow retirees to wait until age 75 before taking required minimum annual distributions and paying tax on them. Currently, they must begin taking distributions at age 72. And it would make it easier for older adults to avoid taking required distributions by investing their retirement funds in annuities.

The new RMD rules are included in the Securing a Strong Retirement (SECURE) Act of 2021. To be sure,  the measure would make some beneficial changes, including provisions that encourage more employers to auto-enroll workers in retirement plans, an important tool to encourage participation. But it also includes some clunkers, and the RMD rules are high on the list.

Fiddling

Congress can’t help fiddling with the RMD rules.

In December, 2019, Congress allowed workers to delay taking RMDs from age 70.5 to age 72. Last year, Congress waived minimum distributions entirely in response, it said, to the pandemic. Lawmakers felt it would not be fair to require retirees to take distributions after the stock market plunged in March, 2020. Except, whoops, the S&P index rose 16 percent for the year.

Now SECURE would gradually extend the delay to 75. It would rise to 73 in 2022, then 74 in 2029, and finally 75 in 2032. But don’t be surprised if a future Congress accelerates the timetable.  

Remember, the purpose of tax-free retirement plans is to help older adults save for their, um, retirement. It was not supposed to be another tool for bequests to family members. RMD rules are intended to make sure that these assets are taxed during a person’s expected life. Without the rules, rich retirees could simply stash assets in tax-advantage accounts until they die, then pass them on to heirs.

Not cheap

Delaying RMDs again would have major consequences, some unintended.  And it would not be cheap. At a time when lawmakers say they are worried about growing deficits, delaying RMDs would reduce federal revenue by almost $7 billion over 10 years. But the real cost would begin once the age phases up to 74 in 2029. At that point, revenue would fall by about $1.4 billion annually.

But its biggest problem is that delaying RMDs would be so regressive.

In 2018, the roughly 17 percent of taxpayers with adjusted gross incomes of $100,000-plus took more than half of the $253 billion in IRA distributions. Those making $50,000 or less took only about 20 percent.

In 2019, the median retirement account balance was only about $65,000, according to the latest Federal Reserve’s Survey of Consumer Finances.  Another survey found that nearly one-third of people in their 60s or older had less than $100,000 in defined contribution plan assets.

No help to many

Many low-income retirees with such limited retirement assets already take more than the required minimum annually to pay routine bills. Delaying required distributions would not benefit them in any way.

Keep in mind, as well, the life expectancy for low income people is far lower than for the wealthy. The RMD delay also is of no benefit for those who die before age 73.

It is the same story with enhanced annuities. Retirees with relatively little wealth receive few benefits from these investment. Someone investing that median $65,000 at age 65 would get an average payout of only about $250 a month.  

Unintended losers

Charities may be unintended losers from these changes.

They benefit from another complicated provision called qualified charitable distributions (QCDs). By contributing required distributions to charity, seniors can avoid tax on mandatory withdrawals. And QCDs have become a popular way for wealthy seniors to donate to charity.

It appears that these gifts fell sharply in 2020, largely in response to the temporary waiver of RMDs. And it would be no surprise if they continue to fall if wealthy seniors can delay distributions until age 75.

Some heirs are required to close, and pay tax on, their inherited IRAs within 10 years, although spouses and minor children and exempt from that requirement. Even for those subject the 10-year rule, the long deferral can be extremely valuable. 

The Biden Administration is proposing a major shift in the tax treatment of assets held outside of retirement accounts by taxing at death unrealized capital gains in excess of $1 million. By doing so, it would prevent wealthy people from passing on a large share of their wealth tax free.

The RMD change in the SECURE Act, by contrast, would make it easier for wealthy seniors to pass on retirement plan assets with any tax liability delayed for years.      

Note: Click here for the original version of this article at Tax Vox.

US Equity Flows Cool Down in April: Morningstar

Posted on May 20, 2021 by -

Following a record $156 billion intake in March, inflows of long-term mutual funds and ETFs totaled a more moderate $124 billion during April, according to Morningstar Direct’s monthly fund flow report.

“Investors continued to favor passively managed strategies, pouring in $94 billion. About $30 billion went to actively managed funds. ETFs—most of which are passively managed—gathered $75 billion, while open-end mutual funds pulled in about $49 billion,” wrote Morningstar analysts Adam Sabban and Supreet Grewal.

After taking in a record $54 billion in March, US equity funds shed over $500 million in April. Large-blend funds saw the biggest month-over-month change, with roughly flat net flows in April after collecting $25 billion in March. Large-growth funds bled $7 billion, though they’ve regularly experienced outflows in recent years as investors appeared to rebalance away from one of the market’s best-performing equity categories.

Value funds, by contrast, have seen a resurgence in investor interest in 2021. Following a month of record inflows in March, value funds collected smaller but still significant totals in April. Large-value funds raked in about $4 billion, down from $20 billion in March but still enough for their fourth consecutive month of inflows. Small value funds took in about $900 million, well short of March’s record $5.4 billion. Most inflows in these two Morningstar Categories again found their way to passively managed funds, such as Vanguard Value Index VIVAX.

The market’s pivot to value-oriented niche categories continued in April. Equity categories (such as financials, natural resources, real estate, and energy) collected some of the highest totals within the sector-equity category group, which brought in $10.6 billion during the month. Natural resources funds gathered a record $2.7 billion in April, resulting in a month-over-month organic growth rate of 6.0%, the third-highest in the past decade. Passive funds that track the materials sector grabbed the greatest amount of assets in the category. Materials Select Sector SPDR ETF XLB, which tracks materials companies in the S&P 500, brought in the most with $761 million of inflows.

International-equity funds took in $31 billion in April, matching their total from March. Funds in the newly established world large-stock blend category took in more than $11 billion, a record in Morningstar data going back to 1993. Much of that total, however, went to two American Funds vehicles, American Funds Global Insight AGVDX and American Funds Capital World Growth and Income CWGIX, which together received more than $10 billion in new assets as a result of changes to American Funds’ target-date fund allocations. Diversified emerging-markets funds took in $7 billion in April, but that was about half of their record $14 billion inflow in March.

Taxable-bond funds picked up $65 billion in April, bringing their trailing-12-month total to $816 billion. Actively managed taxable-bond funds took in $30 billion, nearly half of the category group’s inflows for the month.

Contrary to their equity counterparts, actively managed taxable-bond funds have attracted a much greater share of investor interest. Over the trailing 12 months, they gathered $466 billion versus passive funds’ $350 billion. Bank-loan and inflation-protected bond funds added to their torrid first quarter, picking up $5.8 billion and $5.5 billion in April, respectively. The two categories experienced the highest organic growth rates within the category group for the year to date as investors sought fixed income funds that can better handle rising interest rates.

Morningstar debuted two new US category groups in April: Nontraditional equity and miscellaneous. These are spin-offs from the alternative category group, and they are intended to segregate more specific portions of the expansive alternative investments universe. Nontraditional equity contains long-short equity and derivative-income funds, strategies that go beyond traditional long-only investing but tend to maintain exposure to traditional market risks. The miscellaneous category group contains niche trading strategies, including leveraged and inverse (short) funds.

The alternative category group retains funds intended to serve as diversifiers with low correlations to broader markets, such as equity market- neutral and relative value arbitrage funds. Given their smaller sizes, absolute flows into these new category groups were modest relative to the others, but they posted some of the highest organic growth rates through the first four months of 2021. Investors may be seeking hedged or indirect exposure to markets given that equity indexes, such as the Morningstar US Large Cap Index, are at or near all-time highs and bond yields remain relatively low.

April’s list of funds with the most inflows includes a few oddities. Four American Funds offerings landed in the top 10, including American Funds Global Insight AGVDX, which gathered the second-most assets of all funds with $6.6 billion in inflows despite just an $8.0 billion asset base. Changes to American Funds’ target-date and model-portfolio allocations drove these changes. A pair of Jackson National funds used in variable annuity platforms also cracked the top 10, but these flows are likely due to fund restructurings rather than new investor dollars. 

© 2021 Morningstar Inc.

24 billion trades recorded on last January 27: Cerulli

Posted on May 20, 2021 by -

As more self-directed investors enter financial markets in earnest, the demand for formal financial advice—and a willingness to pay for it—has increased, according to the latest Cerulli Edge—U.S. Retail Investor Edition. 

The infamous short-squeeze craze of 2021, fueled by a legion of Millennial and Gen-Z investors on Reddit, led to an average of 15 billion trades per day executed in January 2021, higher than the 10.9 billion trade average in 2020 (itself a 12-year high).

January 27, 2021 set a one-day record with 24 billion trades. Robinhood alone accounted for more than 25% of retail trades during this time, according to Bloomberg News.

The ease with which investors can trade on Robinhood has earned it a following among young investors eager to start investing. Yet the multitude of ways to engage in financial markets, from stocks and exchange-traded funds (ETFs) to options and short-squeezes, plus the gyrations of the markets in the past year, have led these investors to consider asking for formal help at an increased rate.

“Recent data collected indicates that self-directed investors are increasingly interested in formal financial assistance and willing to pay for that advice,” according to Scott Smith, director at Cerulli.

The “meme stock” craze of 1Q 2021 has some lessons for advisors, Cerulli said. “While these niche stocks accounted for less than 0.1% of market activity at the time, it highlights the need for advisors to keep tabs on how their clients consume and act on financial information, particularly on forums like Reddit,” said Smith.

Though the “democratization of finance” can be seen as a net positive for getting average investors engaged in the stock market with few barriers to entry, this freedom does not come without risk. As quickly as the “meme stocks” spiked, they fell just as fast. They have been volatile ever since, which can lead to large losses for investors who bought at inopportune moments.

While this should not necessarily lead advisors to dissuade their clients from making high-risk investments, it does become important for advisors to frame these market swings in the context of financial history and clients’ long-term goals in order to combat herding biases, according to Cerulli.

“Keeping abreast of the influences and influencers shaping discussions in public forums can help advisors frame these conversations on the clients’ terms while ensuring that the best laid financial plans are not squandered by temporary craze,” Smith said.

© 2021 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on May 20, 2021 by -

Under proposed bill, non-profits could join PEPs

Senators Charles Grassley (R-Iowa), Maggie Hassan (D-N.H.), and James Lankford (R-Okla.) introduced a new bill this week, the “Improving Access to Retirement Savings Act.” The bill was immediately applauded by the Insured Retirement Institute, which advocates for the retirement industry.

The bill would encourage non-profit organizations to offer employee retirement benefits by providing those groups with the same access to pooled employer plans (PEPs) that the SECURE Act (Setting Every Community Up for Retirement Enhancement) offered to small businesses.

The measure also clarifies when a tax credit can be used by small businesses to help facilitate offering retirement plans to their employees if they join a multiple employer plan (MEP) or PEP. “This clarification will encourage more small businesses to offer a retirement plan and facilitate greater use of MEPs or PEPs as the means to provide that plan,” an IRI release said.

“The Improving Access to Retirement Savings Act complements the Securing a Stronger Retirement Act (HR 2954), which recently passed unanimously in the House Ways and Means Committee,” the release said.

NY ruling on Reg-187 could help life sales: AM Best 

AM Best, the ratings agency, believes life insurance companies’ regulatory burdens and costs could be eased by a recent court ruling overturning regulations geared toward increased consumer awareness in New York life insurance and annuity sales.

The state’s Supreme Court Appellate Division recently struck down the rules known as Regulation 187 as being “unconstitutionally vague.”

In a new Best’s Commentary, “Regulation 187 Overturned by Division of New York Supreme Court,” AM Best notes that the ruling also could lead to more life insurance sales, though New York regulators could still appeal the decision.

Regulation 187 had been in effect since August 2019 for annuities and February 2020 for life insurance. The regulation applied to sales transactions, as well as transactions involving in-force policies, to insure that such transactions or recommendations are in the best interest of the consumer and meet their financial objectives.

Regulation 187 identified suitability information needed at the time of transactions; defined the duties of producers—and of insurers where no producer is involved; and included insurer responsibilities and supervision requirements to assure compliance.

Fichtner named chief economist at Bipartisan Policy Center

The Bipartisan Policy Center announced this week that Jason Fichtner, Ph.D., will join BPC as vice president and chief economist.

Fichtner served in several positions at the Social Security Administration during the George W. Bush administration, including as deputy commissioner of Social Security, chief economist, and associate commissioner for retirement policy. He also worked as an economist with the IRS, Joint Economic Committee, and Mercatus Center, and has been a fellow with BPC for the past three years.

Fichtner is also a senior fellow with the Alliance for Lifetime Income and Retirement Income Institute and a research fellow with the University of Wisconsin-Madison Center for Financial Security. He also serves on the board of directors of the National Academy of Social Insurance as treasurer, the editorial advisory board of the Retirement Management Journal, and as a reviewer for the Journal of Pension Economics and Finance.

Fichtner is finishing the academic semester at the Johns Hopkins University School of Advanced International Studies, where he is a senior lecturer and an associate director of the Master of International Economics and Finance program. Throughout his academic career, he was also an adjunct professor at the Georgetown University McCourt School of Public Policy and the Virginia Tech Center for Public Administration and Policy.

His work has been featured in The Washington Post, The Wall Street Journal, The New York Times, Investor’s Business Daily, The Los Angeles Times, The Atlantic, and USA Today, as well as on broadcasts by PBS, NBC, and NPR. 

Thiel joins LifeYield’s board

Former Merrill Lynch executive John Thiel has been appointed to the fiduciary board of LifeYield, the provider of unified managed household (UMH) platforms.

As head of Wealth Management at Merrill Lynch, Thiel led the company’s shift into goals-based wealth management centered upon client outcomes. He currently sits on the boards of Franklin Templeton, FINRA Investor Education Foundation, the V Foundation, Decker Communications, and his alma mater, Florida State University.

As a senior advisor and partner at My Next Season, Thiel supports executives transitioning into retirement or new careers.

© 2021 RIJ Publishing LLC. All rights reserved.

Not Yet Legal in the US: CRITs

Posted on May 20, 2021 by -

The 401(k) will continue to be the primary employer-provided private sector retirement savings program for the foreseeable future. Unfortunately, 401(k) plans are not designed to provide retirees with the steady lifetime retirement income they need.

Many participants would like to see income options in their 401(k) plans. Though employer plans can fulfill this role, to date most employers have expressed a reluctance to do so. Individuals are thus required to assume this challenge on their own.

Retirement income can be generated through pre-planned structured withdrawals from an investment portfolio, but this approach requires some investment expertise. It may not provide sustainable lifetime income nor does it offer longevity risk pooling, which can increase retirement income substantially.

Though an individual retiree can pool longevity risk by purchasing a guaranteed lifetime income annuity from an insurance company, these annuities are not popular. Many people consider them expensive relative to their benefits, especially in a low interest rate environment. Certain variable insurance products provide guaranteed minimum levels of income for life, but their fees can be high and they don’t pool longevity risk.

Welcome to CRITs

Collective Retirement Income Trusts (CRITs), though not currently allowed in the US under ERISA qualified plans or Individual Retirement Accounts (IRAs), offer an alternative for creating reliable income. CRITs, should they become permitted by law, would be established, administered and managed by financial institutions and open to anyone with retirement savings.

CRITs would work as follows: At or after retirement, investors would irrevocably transfer a portion of the assets in their employer plans or IRAs into a CRIT. The CRIT would pay the retiree a monthly income for as long as the CRIT has collective assets. The amount of the payments would be actuarially determined and subject to adjustments (increases or decreases) based on the actual mortality and investment experience under the CRIT.

These adjustments make certain that the CRIT does not run short of money but at the same time pays out actuarial gains to all retirees on a fair basis. Individuals could choose payments for life or for “life with a period certain.” (A 15-year period certain would likely result in a return of principal or more.) They could choose a single life contract or, to provide for another person, a joint-and-survivor contract.  

The CRIT would invest in a collective professionally managed balanced portfolio similar to a defined benefit pension fund. The retiree’s initial monthly benefit would be based on several factors: The amount of savings he or she transferred to the CRIT, an assumed investment rate of return based on the CRIT portfolio composition, the age of the retiree (and co-annuitant, if applicable), the assumed average life expectancy for the covered group (preferably gender-based), and the income option selected.

To allow the CRIT to pool longevity risk, CRIT participants may not withdraw money in a lump sum. Longevity risk pooling increases the benefits for all retirees. It anticipates the savings that will come as some participants die and forfeit their remaining savings to the fund. Retirees would not invest all their retirement savings in a CRIT. They would likely want to keep some funds for liquidity needs.

Unlike payments from traditional defined benefit plans and insured fixed income annuity contracts, the CRIT payments can fluctuate. The changes would reflect differences of the fund’s investment performance from the assumed rate of return and of the group’s actual mortality rate from its assumed mortality rate.

Additional changes to benefits might occur if it seems appropriate to adjust the future investment return or life expectancy assumption. A change in benefits might reflect changes in the investment environment or in the covered group’s life expectancy.

Available abroad, but not in US

To prevent large swings in benefit amounts (either up or down), benefit adjustments may be spread over several years. Note that the use of more conservative investment and life expectancy assumptions would reduce the size of the initial benefit but raise the likelihood of future benefit increases. A CRIT provider might also offer different sets of underlying investment portfolios. Highly risk-averse investors might select a conservative option. Those with more risk appetite could choose an aggressive option. 

In addition to longevity risk pooling, the CRIT can enhance retirement income in other ways. Professional investment managers may be able to achieve higher returns and lower expenses than individuals through access to investments not available to individuals. The CRIT might cost less to manufacture, administer, or distribute than an insurance product, and it would avoid the costs of the hedges that annuity issuers typically buy to protect themselves against adverse investment expense changes and mortality risk changes. In Canada, where such programs are newly being offered, studies show 25% higher payout rates from CRITs relative to insured fixed income annuities.   

CRITs are not currently available in the US. For CRITs to be allowed, a change in US pension law would be required. If they were allowed, the Treasury and Labor Departments would likely regulate them. Regulators would monitor overall CRIT operating expenses, asset holdings, investment return and life expectancy assumptions, and the methods used for adjusting benefit levels. Annual independent audits of the CRITs may also be appropriate.

While CRITs might compete with individual fixed income annuities, life insurers could be among the larger providers of CRITs. Life insurers would profit from administering them and would have no financial risk to reserve capital against, since retirees absorb all benefit level risk. While CRITs don’t guarantee investors against a drop in income, they are more likely than other risk-based income methods to produce steady income based on professional management in a collective diversified fund.

CRITs offer potential value to people who seek predictable lifetime income, who feel more comfortable letting professional institutions manage their retirement funds, who do not have access to unbiased outside expertise, and who do not participate in employer plans that offer retirement income options. Retirees in the Netherlands, Great Britain, Canada, and elsewhere are already benefiting from CRIT-type programs and plans, but Congress would have to amend US law before they could be offered to the public here.

Mark Shemtob, FSA MAAA MSPA FCA EA CFP,  can be reached at [email protected]

If the DOL Investigates You…

Posted on May 20, 2021 by -

New Secretary of Labor Marty Walsh is known as a champion of the interests of working people, a group that retirement plan participants presumably belong to. His agency said in April that it might revisit the current “exemptions from prohibited transactions” for play advisers (Read FAQ 5, here).

But the former Boston mayor and former president of Laborers’ Union Local 223 seems more concerned about jobs these days than re-opening old debates over the meaning of “best interest” and “fiduciary” with respect to advising ERISA plan sponsors and participants.

So Registered Investment Advisors and broker-dealers have no special reason to fear a storm-surge of DOL investigations into the probity of their investment or rollover recommendations. The DOL will still launch investigations, however, and they’ll be as Kafka-esque as ever.

To help prepare advisers for what a DOL investigation might entail, the ERISA experts at the law firm of Faegre Drinker held a webinar two weeks ago. They offered answers to some of the most common concerns and apprehensions that advisory firms have about DOL investigations.

The bad news seems to be that cooperating with a DOL investigation can be distracting and time-consuming. The good news is that investigators prefer to arrive at amicable solutions that allow both sides to raise a flag and declare victory at the end.

What happens first, and how should I act?

“In most cases, you’ll receive a letter informing you that your organization is under investigation under ERISA, with regard to your advice to pension plans or 401(k)s,” said Faegre Drinker partner Josh Waldbesser, himself a former DOL investigator. “You’ll typically get a long list of document requests and a request for ‘voluntary cooperation.’ A letter might say, ‘Give us all communications to subject X.’”

His advice: Call your ERISA lawyer and stay calm. Many aspects of the investigation will be negotiable. That includes the scope of the investigation, the range of documents you need to produce, the amount of time you’ll be given to produce them, the people who will be interviewed and, when the time comes, the terms of the outcome.

“You can negotiate everything and you should,” said partner Phil Gutwein, noting that the DOL isn’t your friend, either. “Approach this as you would litigation. Think of the DOL as a plaintiff’s attorney. They have similar incentives to find a problem and to get certain results. You need to figure out something you can give them to end it. Position your response to get the result you want. Being strategic pays off in the end.”

What will the DOL investigators be looking for?

Their job, obviously, is to look for violations of the Employee Retirement Income Security Act of 1974, as ERISA is officially known. If your firm advises a retirement plan, the DOL will be looking for any evidence of prohibited transactions, such as the sale of your firm’s proprietary products. They’ll look at the plan’s Form 5500 for red-flag investments and for opaque fee arrangements. They’ll want to know if your firm is properly bonded.

“Their biggest focus will be on prohibited transactions and conflicts of interest,” Waldbesser said. “You can have an economic conflict, related to a proprietary product for example, that can easily be rectified. You may have a source of undisclosed compensation. Those are the things you want to have at front-of-mind.” 

“ESOPs [Employee Stock Ownership Plans] have been an enforcement priority for years,” said Brad Campbell, also a Faegre Drinker partner. “There are incentives within the DOL to investigate sales to participants and rollovers. We’ve seen a focus on fiduciary service providers, compensation for RIAs, proprietary goods or services, and managed accounts.” Gutwein added, “Sometimes the DOL finds something amiss at a plan sponsor, and then starts looking at the plan fiduciaries for sins of commission or omission.” 

“I often hear the question, ‘Does the DOL have a quota for finding violations? Or did we just get unlucky?’” Campbell said.

How can we not shoot ourselves in the foot?

Ask the agents why they’re investigating you. That will help you tailor your response and speed the resolution. “Don’t withhold anything and don’t volunteer anything—unless you want to volunteer low-hanging fruit,” Campbell said. Finding a violation, getting a correction, and closing the case is in everybody’s interest.

“They don’t want to read truckloads of documents any more than you want to produce them,” Waldbesser said. “Don’t wait until you can send them all of your documents. Send them the easy-to-reach documents right away, and the harder-to-reach documents later, when you can lay hands on them.”

If your firm is both an RIA and a broker-dealer, find out which one the DOL is interested in. Some practices are prohibited at one and not the other. “Ask the agents if they’re investigating the RIA or the B/D,” said Campbell. “If you can narrow it to the RIA, all the better. From the very beginning, negotiate the scope of the investigation and keep it as narrow as possible.”

Be cooperative, but “don’t invite them to go through our files,” said Faegre Drinker senior counsel Bruce Ashton. “Don’t be tempted to do a data dump. You must provide anything they ask for. Sometimes you can withhold things under attorney/client privilege. Some internal memos you may not want to provide.”

The worst thing you can do is not to cooperate with the investigation by ignoring requests.

How long is the investigation likely to take?

The initial phase, for fact-finding, is also the longest phase. “You can expect it to take months and it may drag out for years,” Waldbesser said. “You might receive a request for a document and then not hear from the DOL for a long time.”

Agents may be called away to other duties. Regional offices of the DOL may need to decide which region should lead the investigation. Don’t be surprised, or worried, if you don’t hear from them. “It’s not bad if there’s a long pause,” Campbell said. “Let sleeping investors lie. There’s no need to reach out to them.”

You may be asked to sign a tolling agreement to stop the statute-of-limitations clock from running down. If the DOL is going to file a lawsuit, there’s a rule that its fact-finding phase has to end at least six months prior to the filing. Delays may also occur because of jurisdictional overlap. If your company has offices in two different DOL districts, you might get calls from both districts, or have to wait until the two districts sort out who should investigate you.

What sort of resolution can I expect?

“The vast majority of investigations do not wind up as law suits,” said Waldbesser, a former Chicago-based DOL investigator.

“There’s no ‘quota’ system per se, but the investigators are measured on performance. There are different ways the DOL measures that,” Campbell said. “They used to look at the rate of opening new cases, rather than opening ‘good’ or ‘likely’ cases. Then they looked at the number of cases closed with results.” If they find something simple, like inadequate bonding, and they can get a solution with action right away, they’re likely to take it. “Their fiscal year ends September 30, so there’s a lot of desire to wrap things up by then.”

“The DOL has a lot of authority, but if you don’t cooperate they’ll sue and they don’t want to have to do that,” Gutwein said. “That provides each side with an incentive to compromise. The DOL only has so many resources, so there’s a desire to resolve a case without more effort than necessary.”

© 2021 RIJ Publishing LLC. All rights reserved.

Fidelity’s average 401(k) balance: $123,900

Posted on May 13, 2021 by -

Fidelity Investments’ first-quarter 2021 analysis of retirement account balances, contributions and savings behaviors shows that average balances across more than 30 million IRA, 401(k), and 403(b) retirement accounts reached record levels despite the headwinds of the pandemic and related unemployment.

Retirement accounts reached record levels for the second consecutive quarter. The average IRA balance was $130,000, a 1% increase from last quarter but a 31% increase from Q1 2020. The average 401(k) balance increased to $123,900 in Q1, a 2% increase from Q4 and up 36% from a year ago. The average 403(b) account balance increased to a record $107,300, an increase of 1% from last quarter and 42% higher than in Q1 2020.

IRA activity increased in the first quarter as many investors made contributions to their IRAs for 2020 tax filing purposes. Investors made contributions to 1.3 million IRA accounts in Q1, a 52% increase over Q1 2020. Total IRA contributions increased to $4.3 billion in Q1 2021, nearly double the $2.9 billion in contributions from a year earlier. In addition, 26% of overall IRA contributions were made by investors under the age of 35, up from 23% in Q1 2020. The percentage of contributions to Roth IRAs continues to increase, rising to 60% of all IRA contributions in Q1 2021.

Loans and withdrawals from 401(k) accounts dipped slightly in Q1. The percentage of workers with an outstanding 401(k) loan dropped to 17.5%, down from 19.7% in Q1 2020. Only 1.6% of 401(k) savers initiated a new loan in the first quarter, which was flat from Q4 2020 and down from 2.4% a year ago. The percentage of workers who withdrew from their 401(k), including hardship withdrawals, dropped to 2.4% in the quarter, down from 6.1% in Q4 and 3.0% a year ago.

The average 401(k) employer contribution rate was 4.6%, and the average amount contributed to employees’ 401(k) was $1,720. Among 403(b) accounts, the average employer contribution was 4.1% and the average amount was $3,000.

Companies made matching 401(k) contributions to 83% of employees in the quarter. The most popular 401(k) match formula in the first quarter, which is used by 41% of employers on Fidelity’s platform, continues to be a 100% matching contribution for the first 3% of an employee’s contribution and a 50% match for the employee’s next 2%. Under this formula, a 5% employee contribution of $100 would be eligible for an $80 employer match.

More than a third (36.9%) of companies automatically enroll employees into their 401(k) plan. Among organizations with 50,000 or more employees, 62% use auto-enrollment. Of the employees automatically enrolled in their 401(k) plan, more than 90% stay enrolled in their plan.

While the most common default savings rate for auto-enrolled employees is 3%, a growing number of companies are steadily increasing this rate. As of Q1, one in five employers (20%) auto-enroll employees at a 6% savings rate.

© 2021 RIJ Publishing LLC.

Structured annuity (RILA) sales volume up 89% in 1Q2021: LIMRA SRI

Posted on May 13, 2021 by -

In the first quarter 2021, total US annuity sales rose 9% from the year-ago quarter, to $60.9 billion, according to preliminary results from the Secure Retirement Institute (SRI). The rise was attributed to higher interest rates and equity prices. 

“The S&P 500 Index closed 6% higher at the end of the first quarter and the 10-year Treasury rate nearly doubled in the first three months of 2021, to 1.74%,” said Todd Giesing, assistant vice president, SRI Annuity Research, in a release. “While SRI expects the equity markets to continue to improve in 2021 and interest rates to experience slow growth, concerns about increased regulations may disrupt the market.”

Thanks to an 89% increase in sales of registered index-linked annuities (RILAs), to $9.2 billion, first quarter variable annuity (VA) sales reached their highest point since 4Q 2015, at $29.9 billion, 15% higher than in 1Q 2020. SRI expects VA sales to grow as much as 9% in 2021, and forecasts positive growth in this market through 2025.

“The current economic environment favors RILAs,” said Giesing. “RILAs offer better pricing than indexed annuities to investors looking to mitigate downside risk and enjoy potential investment growth as the bull market continues.” More carriers are entering the RILA market and some are expected to introduce GLB riders to this product line this year. SRI is forecasting RILA sales to grow as much as 50% in 2021 and the RILA market to grow through 2025.

Traditional VA product sales fell 2% year-over year in the first quarter, to $20.7 billion, however. “Low interest rates continue to deter manufacturers from selling traditional VAs with guaranteed living benefit riders,” he added.

“Today, almost two-thirds of the VA GLB business is written by the top three VA carriers. As many traditional VA companies focus on the continued growth with protection-based offerings, this will offer little growth opportunities for investment-focused traditional VAs in the short term.” 

Total fixed annuity sales rose 4% in the first quarter to $31 billion. Fixed-rate deferred annuity sales were $14.3 billion, up 46% from prior year results. While SRI expects a dip in fixed-rate deferred annuity sales this year, it expects a rebound by 2022.

“Crediting rates for fixed-rate deferred products remained steady and well above any other short-term investment vehicle, like CDs,” Giesing said. “Over the past three years, nearly $150 billion has been invested in short-term fixed-rate deferred products. These assets will be coming out of their surrender periods over the next couple of years. We expect many investors to reinvest in fixed-rate deferred annuities due to the rising rates, driving sales to close to $50 billion over the next few years.”  

Fixed indexed annuity sales dropped 15% in the first quarter to $13.7 billion. Despite the first quarter decline, improving interest rates should buoy FIA sales throughout the year. SRI is forecasting FIA sales to increase 8 to 17% in 2021.

While improved, interest rates remain very low, undermining interest in income annuity products. In the first quarter, immediate annuity sales were $1.4 billion, 26% lower than the prior year. Deferred income annuities dropped 13% to $410 million.

Preliminary first quarter 2021 annuities industry estimates are based on monthly reporting, representing 86% of the total market. A summary of the results can be found in LIMRA’s Fact Tank.

The top 20 rankings of total, variable and fixed annuity writers for first quarter 2021 will be available around early June, following the last of the earnings calls for the participating carriers.

© 2021 RIJ Publishing LLC.

Merton and Muralidhar’s Retirement Income Vision

Posted on May 13, 2021 by -

On April 30, RIJ editor and publisher Kerry Pechter interviewed Robert C. Merton, co-recipient of the 1997 Nobel Memorial Prize in economics, and Arun Muralidhar, author of the 2018 book, Fifty States of Gray, about SeLFIES. Click here to watch.

SeLFIES are risk-free, inflation-indexed government bonds for sale to individuals or plan participants before retirement. The bonds would fluctuate in price according to prevailing interest rates and the purchaser’s years-to-retirement, but each one would be guaranteed to produce a discrete amount of annual income, such as $5, for a retirement period of 20 years. A deferred income annuity could create income from age 85 on.

SeLFIES resemble a TIPS ladder. Unlike Social Security, the bonds would be a negotiable private asset possessed by the purchaser, and immune to political risk (such as Congress curtailing Social Security benefits). SeLFIES could be bestowed to heirs. They are also universal. Any sovereign country in the world could issue SeLFIES in its own currency. SeLFIES, in effect, solve the problem of converting savings to income.

To hear more about this brilliant idea–which would help finance the US government but also compete with equities and corporate bonds for retirement savings–listen to this recording of the April 30 interview.

© 2021 RIJ Publishing LLC. All rights reserved.

 

Get a Downside Buffer with Your Variable Annuity

Posted on May 13, 2021 by -

Delaware Life is one of the new breed of life insurers that was born or renamed after the Great Financial Crisis, when big asset managers like Guggenheim, Apollo and Goldman Sachs helped gobble up stressed blocks of annuity business at bargain prices from US insurers like Sun Life Financial, Aviva, The Hartford, and others.

Based in Waltham, Mass., Delaware Life emerged from the 2013 Guggenheim-led purchase of Sun Life Financial’s annuity business. Group 1001, a holding company whose CEO is Guggenheim Insurance senior managing director Dan Towriss, now owns it. Delaware Life first sold fixed deferred annuities, then added fixed indexed annuities (FIAs). In 2020, it ranked 12th in FIA sales ($1.6 billion) and 13th in fixed deferred annuities ($1.1 billion) in the US, according to LIMRA. 

Many of the big insurers that once sold tens of billions of dollars in variable annuities (VAs) with living benefits and generous income bonuses—including Prudential, Equitable (then AXA-Equitable), and MetLife—have retreated from that business. But Delaware Life, which still owns a run-off block of Sun Life variable annuities, introduced a VA with GLWBs and an annual increase in the income base in November 2018. 

By the end of this month, the firm plans to launch a second VA contract, Delaware Life Accelerator Prime. In addition to income riders for deferred income, the contract features an optional downside buffer. The buffer resembles those offered by the hot-selling registered index-linked annuities (RILAs). But Accelerator Prime is no RILA: the owner invests directly in funds, not in options on an index.   

Dale Uthoff

“We’re looking to diversify into variable annuities,” said Dale Uthoff, the senior vice president and actuary who runs Delaware Life’s VA business, in a recent interview with RIJ. “In that sense, we’re going in the reverse direction of the traditional VA issuers. There are some synergies between hedging FIAs and VAs. In a VA, there’s an implied put option, and on the index annuity there’s a call option. We do believe that’s a benefit. They have different risk profiles and a different customer base.”

“It competes directly with the RILA,” said Tamiko Toland, head of annuity research at CANNEX, which collects, computes, analyzes, and distributes annuity data to annuity distributors and advisers.

Variable annuity with a buffer

Accelerator Prime has a profusion of features and options packed into a single product, built for sale by commission primarily through banks and wirehouses. Its main differentiator among its peers is that downside buffer, or “Guaranteed Market Protection Benefit.”

This GMPB comes in two term lengths. Its Armor Flex 7 version protects the policyholder from loss to principal of up to 10% over seven years. Its Armor Flex 10 version protects against losses up to 20% over 10 years. Net losses beyond those lower bounds are the contract owner’s loss. The GMPB rider costs 45 basis points a year when purchased alone and 10 basis points when purchased with a GLWB.

Unlike a typical RILA, the GMPB offers only a downside buffer, without an upside cap or participation rate. Since the owner of a VA invests directly in funds, rather than buying a collar of options on a market index, an upside cap or participation rate is irrelevant. A RILA owner, however, can use an all-equity index, while Accelerator Prime owners who choose the GLWB or GMPB riders must invest in 25 or so “cautious” or “moderate” asset allocation funds.

Overall, the Accelerator Prime offers 96 fund choices from 20 asset managers, including well known providers of actively managed funds, such as American Funds, Goldman Sachs,  Morgan Stanley, T. Rowe Price, Franklin Templeton, MFS, Lord Abbett, Columbia Threadneedle, Valmark’s TOPS, and others.

There are two GLWB income riders, with either a 6% (Income Boost) or 7% (Income Control) simple annual increase in the benefit base for up to 10 years. (The benefit base is the notional minimum amount which, when multiplied by the age-related payout percentage, determines the annual lifetime income benefit.) There are two GMAB (Guaranteed minimum accumulation benefit) riders, which protect most or all of principal over seven or 10 years.

The Accelerator Prime comes with all the fees you’d expect in a traditional VA with multiple insurance riders. All-in fees, including a GLWB or GMAB, investments, an optional death benefit, and the annual fee for mortality and expense risk, could range to 3% or more. (Investment and m&e fees are based on the account balance; rider fees on the benefit base). The seven-year surrender charge period for each premium payment has an initial penalty of 8% for excess withdrawals. 

A scratch-pad calculation showed that if a 55-year-old couple invested $500,000, they could get about $44,625 for life starting at age 65—substantially more than they could get from a deferred income joint-life annuity purchased at age 55 for $500,000, according to immmediateannuities.com. if the benefit base at age 65 were $1 million, the owner of the Accelerator Prime could expect to pay rider fees on the $1 million throughout retirement and other fees on the account balance. If either spouse outlives the account value, the insurer would pay at least $44,625 per year for as long as he or she lives. 

Distribution strategy

Delaware Life packed so many options into one contract because many of the larger broker-dealers have room for only one VA contract per issuer on their platforms. “There’s limited shelf-space at broker-dealers,” said Tom Seitz, president of Delaware Life Marketing and former executive vice president at Sun Life Financial Distributors, in an interview. “We offer a core chassis but with a lot of flexibility.”

Tom Seitz

In 2014, when the company was selling only fixed annuities, it distributed through insurance marketing organizations (IMOs), which act as wholesalers between insurers and insurance agents. Delaware Life began distributing through banks and broker-dealers in 2017 and 2018. It began employing its own wholesalers and “created an ‘impact’ model versus a ‘coverage’ model, so that we can drill down into territories,” Seitz told RIJ. 

“Now we have more than 15 IMOs, and 75 to 80 banks and broker-dealers,” he added. “We’re not trying to be all things to all people. We’ve been targeting specific organizations and broadening the product portfolio.” The company responded to the communication barriers imposed by the COVID-19 pandemic by investing in the Allego sales platform, data mining tools and other digital technology. 

Delaware Life is not currently marketing no-commission annuities to fee-based Registered Investment Advisors through web platforms like DPL Financial Partners or RetireOne. “We have not actively gone after RIAs or invested in the platforms,” Seitz said. “We’re looking at them, but we’re going to let the dust settle on that. We have enough on our plate with our current model.” Group 1001 has its own web-based distribution platform, called Gainbridge, which sells Guggenheim Life and Annuity fixed deferred and single-premium immediate annuities. 

Delaware Life has had growing pains in its short life. Because the company didn’t have its own administrative system when it bought Sun Life Financial’s annuity business, service problems “began when Delaware Life transferred a group of annuity contracts to a third-party administrative platform,” according to the Massachusetts Attorney General, which investigated customer complaints about the insurer. 

Delaware Life eventually agreed to pay $214,000 in 2018 to some 2,000 customers to settle “allegations of delayed payments under annuity contracts,” and $30,000 to the Commonwealth of Massachusetts. According to an Attorney Genera’s office release, “After becoming aware of the problems, Delaware Life began taking steps to address associated errors and implement system improvements.”

© 2021 RIJ Publishing LLC. All rights reserved.

The Trade-Offs of a Big Spend on Infrastructure

Posted on May 13, 2021 by -

Economists and pundits have been arguing over whether the Biden infrastructure plan would be inflationary or not. Advisers wonder what to tell clients about taxes and volatility. US equities fell about 4% in the first three days of this week. We’re money people so naturally we’re interested in the money aspect of the plan. 

I like the infrastructure goals: I believe the environment is in jeopardy and that we have to deal with it. I don’t expect the private sector to solve that problem. But I wonder about public-sector the execution skills. Democrats are rushing to pass a big appropriations bill before the 2022 mid-term elections. Infrastructure renewal will take patience. 

The infrastructure bill, I have read, calls for spending $200 billion per year for 10 years. The money, if appropriated, will probably take decades to spend. Its cost will be financed over a longer period. Even the smallest projects will require needs-assessments, prioritization, environmental impact studies, competition, bids, and so on.

Information about infrastructure has so far come mainly from lawyer-legislators who know little about hydrology, material science, optical fiber networks, or power grids. Are Pete Buttigieg, Jennifer Granholm, Marty Walsh, who run the Transportation, Energy, and Labor departments, respectively, getting briefed by civil engineers? I don’t know. 

The big questions are the similar to those in wartime: Where will the human and material resources come from? What purchases or activities might we have to give up to supply those resources to the effort? Exactly what categories of manufacture will we have to put on hold, or abandon, in order to renew infrastructure? Or are there enough idle human and material resources in the US today to accommodate Biden’s vision?

Those are worthwhile macroeconomic questions. The current quarrels over the  precise definition of “infrastructure” might be an encoded debate on that point. Otherwise they seem infantile.

The financial markets may need Uncle Sam to spend big. As long as we insist on using arbitrary growth conventions like “compound interest” and mark-to-market” pricing of every share of stocks–which cripple debtors and create shaky towers of paper wealth—then the government has to supply more money. Where else will it come from? 

Since we use so much private leverage, we can’t afford big markdowns in the value of collateral. We’ve needed the Fed to support asset prices with low interest rates and quantitative easing. With the world economy so reliant on dollars, we need even more of them. Otherwise we’ll have to tolerate more crashes, busts, deflation and episodes of mass unemployment; the bottom half will suffer disproportionately.

Mainstream macroeconomics predicts dire consequence for debt-financed government spending. In 2016, the Congressional Budget Office studied the impact of federal spending in general and reported:

“Increased federal borrowing reduces the amount of money available for private investment—a phenomenon called crowding out. CBO’s central estimate is that for each dollar that the federal deficit increases, domestic private investment falls by 33 cents. That reduction in private investment results in a smaller capital stock, eventually shrinking output. Similarly, a reduction in federal borrowing leaves more money available for private investment, resulting in a larger capital stock and eventually greater output.”

Since we insist on lower taxes, and we don’t want to borrow, then government can’t spend on infrastructure. And it can’t force the private sector to drop what it’s doing and focus on cooling the planet. That’s a recipe for doing nothing, which seems childish. Adult think ahead, children don’t. That the biggest difference between them, as far as I can tell.

What about the “crowding out” problem. If the CBO’s statement implies that government borrowing will crowd out demand for private debt, reduce the appetite for shares of stock, and reduce the amount of lending that banks will need to do, then it makes sense. There’s reason to believe that the payroll tax and the Social Security system, for example, crowd out the demand for private investments and annuities. Public finance competes with private finance. Demand for private sector credit—and bank revenue–would presumably drop if the government issues trillions of dollars in grants. The banks aren’t likely to stand for that.

But that doesn’t say that the public and private sectors compete in a zero-sum game for a finite pool of dollars. If they did, Fed policy of the last 12 years would have, in effect, exhausted the nation’s supply of drinking water by turning its liquidity hose on financial fires.

Our monetary system is demonstrably more flexible than that. The federal government spends money into existence and banks lend money into existence. Borrowing, taxing, and the gathering of personal savings doesn’t necessarily precede that process. To smooth over mismatches in the supply of money, the public and private financial sectors cooperate. The banks accommodate the Treasury’s need for liquidity. The Fed accommodates the banks’ need for liquidity. A snake-eating-its-tail system would have collapsed a long time ago.

After I lost my job in the financial crisis of 2009, I looked for the license plate number of the truck that hit me. I’m still trying to get a clear description of it.

© 2021 RIJ Publishing LLC. All rights reserved.

Did QLACs Get a Last-Minute Haircut?

Posted on May 6, 2021 by -

Qualified Longevity Annuity Contracts, or QLACs, will get a modest boost if Congress passes the Secure 2.0 bill (H.R. 2954, or The Securing a Strong Retirement Act of 2021) for Americans) in its current form. The bill was approved yesterday by the House Ways & Means Committee by an unanimous bipartisan voice-vote.

QLACs are deferred income annuities (DIAs) that can be purchased with money in an IRA or 401(k) account. Secure 2.0 would repeal the 25% limit on the portion of those savings that can be applied to the purchase of a DIA but keep the dollar limit to $135,000, according to multiple sources. (RIJ was told the committee considered raising the dollar limit to $200,000, but backed away to conserve revenue.) The law also would facilitate the sales of QLACs with spousal survival rights and offer a free-look period of up to 90 days.

“There was discussion about lifting the threshold, which we favored,” said Dan Zielinski, communications chief at the Insured Retirement Institute, which lobbies for the retirement industry. “There’s speculation that cost was a factor in not raising it. We will continue to pursue the issue as the bill proceeds through the legislative process.”

An IRI public statement said, “Increasing the dollar limitation on premiums and authorizing QLACs to be offered through a diverse slate of indexed and variable annuity contracts with guaranteed benefits are critical elements of reforms needed to make QLACs more available to workers and retirees.”

QLACs need any help they can get. They haven’t not sold well over the past seven years. According to LIMRA Secure Retirement Institute, sales of all DIAs, including QLACs, totaled only $1.7 billion in 2020, down 32% from 2019. That was barely more than a quarter of the sales of immediate income annuities ($6.3 billion).

Would removing the 25% help QLAC sales, or help retirees? I thought the 25% QLAC limit supported a policy goal of getting middle-class people with mostly tax-deferred savings to carve out a small portion of their savings to mitigate longevity risk. It’s hard to imagine the government choosing to encourage anyone to spend their entire IRA wealth on a QLAC.

Pre-2014 regulations prevented a QLACt from coming to market at all, because retirees typically begin receiving payouts from DIAs until well after age the age at which required minimum distributions (RMDs) must begin (formerly 70½, now 72 and headed up to 75 if Secure 2.0 passes).

The 2014 QLAC regs partially removed that legal obstacle. They allowed pre-retirees and retirees to apply up to 25% of their retirement account balances (to maximum of $125,000) for the purchase of QLACs. RMDs on that portion of savings could be delayed until the retiree began receiving payments from the QLAC—at the age of 80 or older.

“We created the QLAC in 2014 to help restore lifetime income to 401(k) and other DC plans and IRAs,” said Mark Iwry, the deputy Treasury Secretary who shepherded the QLAC into existence, in an interview this week. “Our policy strategy was driven by the behavioral hypothesis that savers would be more likely to see benefit in partial, deeply deferred annuitization. 

“The value proposition is to buy protection only from the longevity risk that is most worrisome—the tail risk of outliving average life expectancy— at the modest cost of giving up only 15% or 20% of their account balance,” he said.

But financial advisers and their Boomer clients saw a glass half-empty, not half-full, and declined to drink very deeply from it. The tax break—from postponing a portion of RMDs for 10 years or so—was too small to excite tax hawks. And an annuity with a waiting period of 15 years had weak appeal, even though the delay made the annuity cheaper. (Treasury foresaw that issue and set no minimum age for starting income from a QLAC.)

“Among other useful provisions in the Neal-Brady SECURE 2.0 bill, I’ve supported repealing the QLAC 25% limit and raising the dollar limit,” Iwry told RIJ.  He said the tighter limits established in 2014 were dictated by the need to change the rules by changing a regulation, not a law.

“Because we created QLACs by regulation, we established those limits to help ensure that the RMD relief on which QLACs are based would be solidly within our regulatory authority consistent with the statutory RMD framework,” he added. “Repealing the 25% limit will make it easier to buy QLACS in IRAs by rolling the premium amount to the IRA from a 401(k) plan.

“The repeal of the limit is mainly to allow the plan participant, for instance, to roll $125k of his $500k 401(k) account to an IRA and use all of the $125k to buy a QLAC, rather than have the limit apply again at the IRA level, thereby requiring him to roll over four times as much as he needs to buy the QLAC into the IRA,” Iwry told RIJ.

While QLACs offer a modest tax break for the wealthy, their best application might be to help mass-affluent Boomers whose savings is largely in retirement accounts and who expect to live longer than average. The QLAC allows them to implement a simple two-bucket retirement income strategy that could greatly reduce their risk of outliving their savings.

For instance, at current annuity rates, a 65-year-old couple with $500,000 in their 401(k)s might use $100,000 of that money to buy a joint-and-survivor QLAC paying about $1,000 per month when they reach age 80 and guaranteed for as long as either of them lives. Such a contract could include either a cash refund feature or a minimum of 10 years of payments for the same price.

Between ages 65 and age 80, this hypothetical couple could live on the remaining $400,000, spending as much as $25,000 a year to supplement their combined Social Security benefits of $25,000. Academic research, such as a paper by Jason Scott and others in the mid-2000s, has demonstrated that such a strategy can maximize income in retirement while reducing risk of outliving savings.   

© 2021 RIJ Publishing LLC. All rights reserved.

Secure 2.0: A Booster Shot for Qualified Savings Industry

Posted on May 6, 2021 by -

The House Ways & Means Committee voted yesterday to approve “Secure 2.0,” otherwise known as H.R. 2954 or “The Securing a Strong Retirement Act of 2020.” With a few last-minute tweaks, it now goes to House of Representatives for consideration.   

With that bipartisan action—for which the committee members lavishly praised themselves during a Twitter webcast yesterday—the committee moved the 401(k) industry closer to receiving a second-round booster shot from Congress. The first shot was the SECURE Act of 2019, which introduced pooled 401(k) plans, an easier path to in-plan annuities, and other innovations.

The Insured Retirement Institute and the American Council of Life Insurers both welcomed the passage of Secure 2.0 in press releases this week, as well they should. Like the SECURE Act, Secure 2.0 accommodates many specific remedies sought by the 401(k) industry itself.

For instance, the bill expands auto-enrollment and auto-investment in qualified plans, lets non-profit 403(b) plans form multiple employer plans and use collective investment trusts, and increases credits to plan sponsors for the costs of starting or joining a qualified savings plan.

Regarding participants, high-earners with the greatest ability to save will get the most out of the bill’s higher catch-up provisions, the delay of required minimum distributions (RMDs) from qualified plans to age 75 by 2032, and the ability to apply more savings to Roth 401(k) accounts—which helps affluent retirees to pass their 401(k) accounts to heirs tax-free.

Victims of domestic abuse—once indelicately known as battered women—will be allowed to take emergency cash penalty-free from their qualified accounts. People paying down student debt will be eligible for employer matching contributions.  Wealthy people will be able to transfer more of their IRA savings to charity.

In the annuity sphere, the bill would allow variable annuities to include ETFs as investment options and would remove existing limits on the amount of tax-deferred savings that could be used to buy Qualified Longevity Annuity Contracts (QLACs), which are deferred income annuities whose start date doesn’t occur until after the RMD age.

“For the most part, it contains a reasonable set of provisions,” said the Urban Institute’s Eugene Steuerle in an interview with RIJ, demurring that there’s no attempt to align the Social Security start age and the RMD age to create synergy between the two.

“Many [of the provisions] simply accommodate the simple fact that we are living longer, or, with QLACs, that we often don’t save enough for older old age. However, age provisions for private retirement assets are now further out of synch with Social Security’s age thresholds,” he said.

QLACs have not been a big seller, but Mark Iwry, the former Treasury official who shepherded the QLAC into existence during the Obama administration, and who was consulted on the writing of the QLAC provisions in Secure 2.0, continues to recommend them for the people—i.e., women—most at risk of living to 95 or 100.

“The combination of mortality pooling and predictable investment for 15 to 20 years produces a meaningful add-on to Social Security income starting at 80 or 85,” Iwry told RIJ yesterday. “Never mind that Homer [Simpson] thinks all those beers and cheeseburgers mean he’ll never live past 80. The QLAC is for Marge.”

A summary of the bill’s provision can be found here. We dive into a deeper level of detail below:

Increase RMD age to 75 by 2032. Congress wants to raise the age for initial minimum distributions from retirement accounts—again. The SECURE Act generally increased the required minimum distribution age to 72. Secure 2.0 increases the RMD age to 73 starting on January 1, 2022, to 74 starting on January 1, 2029, and to 75 starting on January 1, 2032. The bill also lowers the penalty on those who don’t take large enough taxable distributions. 

All Roth matching contributions. Secure 2.0 would allow participants in 401(k), 403(b) and governmental 457 plans the option of receiving the plan sponsor’s matching contributions on a Roth basis, if the participant wishes. That helps participants who’d rather get tax-free withdrawals from their plans in retirement instead of making tax-deductible contributions today.

The same provision should be welcomed by those who contemplate passing their retirement plan wealth to their children tax-free, and by those who expect federal taxes to go up if the government feels compelled to offset the inflationary impact of big infrastructure spending with a deflationary tax hike.

Allow ETFs in variable annuities. Section 203 of Secure 2.0 would “facilitate the creation of a new type of ETF that is ‘insurance dedicated.’” These new ETFs would be eligible for inclusion in individual variable annuities. ETFs are already available in retirement plans and IRAs. The new law would simply update Treasury regulations that were written before ETFs were invented.

Remove limits on funding Qualified Longevity Annuity Contracts (QLACs) with tax-deferred savings. QLACs are deferred income annuities whose payouts begin after the owner reaches the age (currently 72) at which RMDs from tax-deferred accounts, like IRAs and 401(k)s, are required. They were created in 2014.

The original rules were conservative, as a way to conserve tax expenditures. Retirees could use no more than 25% (up to $125,000, originally) of their retirement account values to buy QLACs. In addition, spouses couldn’t pool their tax-deferred savings to buy joint-and-survivor QLACs. Under Secure 2.0, retirees could apply all of their tax-deferred savings to QLACs, up to $135,000, and could buy QLACs with “spousal survival rights.”

These relaxations could help promote the purchase of QLACs, whose sales have also been hurt by low interest rates and by life insurers’ price increases to offset adverse selection (the risk that only the healthiest people will buy QLACs). There have also been mixed messages from the government.

People can use QLACs to start paying out income at any time after the RMD start date. But QLACs have nevertheless been positioned in government press releases as a kind of ALDA (advanced life deferred annuity) that doesn’t start paying income until ages 80 to 85. To give retirees more flexibility in setting an income commencement date, the government has always allowed QLAC payouts to start at anytime after the RMD date.

Add life annuities with rising benefits in qualified plans and IRAs. In the past, the government’s RMD rules included an actuarial test that was intended to discourage the use of annuities with back-loaded income streams in retirement accounts. The test, however, has the effect of excluding “period-certain” annuities, annuities that include guaranteed annual increases of only 1% or 2%, and “return-of-premium” death benefits. “Without these types of guarantees, many individuals are unwilling to elect a life annuity under a defined contribution plan or IRA,” the bill’s summary said.

‘Wacky process’

Steuerle noted that the bill includes only a bit of help for middle-income Americans. “Since most retirement assets are held by those with above average wealth, most of the additional deferrals provided in the bill do little for those with more modest income. With one exception: the provision for automatic deposits into 401(k) plans could be quite significant,” he told RIJ. 

He believes the budget impact of that provision will be mild. “The Joint Committee on Taxation, however, estimates a cost [in lost tax revenue] of only about $700 million annually for that provision, which implies new contributions of perhaps a modest $3 billion a year or so in new contributions to regular (non-Roth) accounts,” he added.

Steurele also questioned the wisdom of encouraging Roth conversions. “The wacky budget process continues to provide incentives to make our kids and grandkids pay for the costs in the out-years by converting more contributions to Roth accounts. Most taxpayers with average income, moreover, are better off not using Roth accounts, but the confusion will likely drag more of them into using Roths,” he said.

While removing some of the frictions in the defined contribution system, the Act does nothing to increase the capacity of low income workers to save more, to prevent them from raiding their retirement savings before retirement, or to help re-finance Social Security before it runs short of revenue in 2034 or so. The bill doesn’t stimulate the spread of state-sponsored Roth auto-IRA plans or increase the ability of America’s gig workers to save.

The bill also ignores differences in the quality of qualified plans. An observer from Mars would never guess from the language of this bill that not all 401(k) plans are equal. Larger plans, sponsored by large, profitable companies, are more likely to offer low fees and low-cost investments and generous matching contributions. These differences mean that the 401(k) system reflects and reinforces patterns of wealth inequality, even as it helps individuals overcome them.   

© 2021 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on May 6, 2021 by -

SPCG, a new consulting group, focuses on structured products

Structured Products Consulting Group, LLC, announced its seventh collaboration agreement this week, to distribute its suite of risk management and income solutions to financial advisors interested in the structured investment and derivatives space. 

SPCG has forged alliances with firms including Halo Investing, Van Hulzen Asset Management, Harvest Volatility Management, Fort Point Capital Partners and Bluestone Capital Management. Eric Miller, CFP, founded SPCG in September 2020. Andy Robertson joined him in January 2021. 

SPCG provides derivatives advice to advisors that cover multiple disciplines within the risk management spectrum. SPCG’s principals have 50 years combined experience in the high-net-worth, institutional and retail derivatives area. They advise on strategies and platforms that span three distinct solution sets: derivative investments, structured products and concentrated equity solutions.

MassMutual and Arconic Corp in $1 billion pension risk transfer deal

Arconic Corporation, an aluminum products firm based in Pittsburgh, PA, has purchased a group annuity contract from MassMutual, transferring about $1 billion of its US pension plan obligations and related plan assets to the big mutual life insurance company, Arconic announced this week.

MassMutual is now responsible for the pension benefit payments still owed to about 8,400 Arconic retirees or beneficiaries. Participants will begin receiving benefits from MassMutual instead of Arconic’s plans beginning in August 2021.

The transaction won’t change anyone’s pension benefits, the release said. Details will be provided to retired participants and beneficiaries whose continuing payments will come from MassMutual.

As part of the transaction, Arconic contributed $250 million to its US pension plans to maintain the funding level of the remaining plan obligations. Arconic obtained the money through a debt offering of $300 million aggregate principal amount of the Company’s 6.125% Senior Secured Second-Lien Notes due 2028, which closed on March 3, 2021.

As a result of the transaction, the Company expects to recognize a non-cash pension settlement charge of approximately $575 million ($450 million after tax), subject to finalization of actuarial assumptions and other applicable adjustments in the second quarter of 2021.

Arconic Corporation (NYSE: ARNC), provides aluminum sheet, plate and extrusions, as well as innovative architectural products for the ground transportation, aerospace, building and construction, industrial and packaging markets.

‘Jackson Financial’ appoints new board of directors

Jackson Financial Inc. has appointed additional independent directors to its board of directors,  effective upon completion of the proposed demerger from Prudential plc (NYSE: PUK). Jackson expects the demerger to be completed by the end of 2Q 2021, pending shareholder and regulatory approvals, according to a release.

The leadership of the new board will include non-executive chair Steve Kandarian and Prieskorn, who will serve as an executive director. The additional independent directors include:

Gregory T. Durant, vice chairman of Deloitte LLP.

Derek G. Kirkland, former managing director and co-head of the Global Financial Institutions Group at Morgan Stanley’s Financial Institutions Group in Investment Banking.

Martin J. Lippert, former executive vice president and head of Global Technology and Operations at MetLife.

Russell G. Noles, former executive vice president and Chief Operating Officer of Nuveen, a subsidiary of Teachers Insurance & Annuity Association (TIAA).

Esta E. Stecher, chair of Goldman Sachs Bank USA.

Two more independent board members will be identified at or following demerger. Committee assignments will be made prior to the completion of the demerger.

Allianz indexed life and annuity products now feature “auto lock”

Allianz Life of North America today announced new “auto lock” capabilities on select  fixed index annuity (FIA) contracts and fixed index universal life (FIUL) insurance policies, the company announced this week.

The innovative new feature allows Policy and contract holders will be able to set an Index Lock once during a crediting period. If reached, it will be automatically locked in until the end of that crediting period.

Contract and policy owners can “lock in an index value and receive positive interest credits without having to constantly check index values or manually activate an index lock,” said Eric Thomes, chief distribution officer, Allianz Life. “This helps reduce risks during times of uncertainty and also helps decrease the probability of receiving zero percent interest.”

The new feature is available on select Allianz Life FIA contracts and FIUL policies. The feature is available on new applications and in-force policies and contracts that currently offer the manual index lock feature.

Principal, Wilshire and BlackRock partner on diversified model portfolios

Principal Financial Group is partnering with Wilshire and BlackRock to offer 25 new model portfolios. The portfolios will include Wilshire Diversified Portfolios, BlackRock iShares ETFs, and BlackRock bond funds.

The Principal Wilshire Diversified Portfolios include three series: Global Hybrid, US Hybrid, and ETF-only. Each has seven underlying portfolios for different risk tolerances. There are also three Separately Managed Account models and one Diversified Income model.

Twenty-four of the 25 portfolios are currently available on the Envestnet platform. The Principal Wilshire ETF Fixed Income portfolio will go live in June.

The launch is part of Principal’s campaign to “enhance relationships with Registered Investment Advisors” and “deliver the product support they seek to best serve clients,” a Principal release said. Principal formed a single client-facing team from multiple teams to support the RIA, Investment Only, and bank trust channels.

The Principal Wilshire Diversified Portfolios come in three flavors: Hybrid, Open Architecture, and Institutional Portfolio Management. The hybrid version blends active management by Principal Global Investors with BlackRock’s low-cost, passive ETFs. The open architecture version offers access to complementary, multi-manager active strategies.The strategies used in institutional version are all vetted by Wilshire’s institutional due diligence process.

As the discretionary asset manager for the Principal Wilshire Diversified Portfolios, Wilshire will have responsibility for asset allocation, investment selection, monitoring, and rebalancing.

Protective adds VA investment options from four major fund companies 

Protective Life Corp’s commission-based variable annuities and their fee-based advisory solutions will begin offering investment options from AllianceBernstein, BlackRock, Columbia Threadneedle and T. Rowe Price, the company, a subsidiary of Dai-ichi Life Holdings, Inc., said in a release.

Protective also added 29 new sub-accounts to their commission-based products and 38 new sub-accounts to their fee-based advisory products.

Protective Variable Annuity II B Series and Protective® Variable Annuity Investors Series are two of Protective’s commission-based solutions distributed by broker dealers and banks. Protective Investors Benefit Advisory Variable Annuity is Protective’s fee-based advisory product solution for registered investment advisors.

American Trust Retirement makes its second acquisition in 12 months

AT Retirement Services, LLC (American Trust Retirement), a provider of retirement solutions to financial intermediaries and their clients, has acquired Stanley Benefit Services, Inc., an independent employee benefits consulting firm based in Greensboro, NC, specializing in retirement plan administration.

The acquisition gives American Trust Retirement’s further expertise in the mid-market space, adds an in-house actuarial team, and supports a broader offering in the defined benefit and cash balance plan markets. American Trust Retirement is a subsidiary of EdgeCo Holdings, a provider of technology-enabled solutions to financial intermediaries and their clients.

Within the last year, American Trust  Retirement also acquired Unified Trust Company, a national provider of retirement plan solutions and fiduciary services. 

Fund Direct Advisors, Inc., an SEC registered investment advisory firm which shares similar ownership with Stanley Benefits, will not be part of the acquisition. They will remain independent and led by Wes Stanley and Chris Stanley. The remaining team members of Stanley Benefits, including Bill Stanley, senior vice president and Chris Francis, vice president, will join American Trust Retirement.

Stanley Benefits will be rebranded to Stanley Benefit Services, a Division of American Trust Retirement, eventually transitioning to the highly regarded American Trust name.

American Trust Retirement is a full-service provider of retirement plan solutions to advisors serving the small- and mid-sized plan market. It has offices in Dubuque, IA, Memphis, TN and Lexington, KY. Its services include plan design, fiduciary oversight, discretionary trust services, cost efficiency, service, and technology. 

© 2021 RIJ Publishing LLC. All rights reserved.

Expect RILAs to outsell FIAs by 2024: Wink

Posted on May 6, 2021 by -

Low interest rates and market volatility continued to hurt annuities in the fourth quarter of 2020. Only multi-year guaranteed rate annuities (MYGAs) and structured annuities escaped double-digit declines from 2019; they each posted double-digit increases in sales, according to Wink’s 4Q 2020 sales report, released this week.

Indexed annuity sales were up from 3Q 2020, but well under the near-record sales in 4Q 2019. Fixed annuity sales were the lowest since Wink began tracking them in 2015. The uptick in the 10-Year Treasury yield since the start of 2021 should drive sales of MYGAs higher, but probably won’t help sales of traditional one-year fixed rate annuities, a Wink release said.

While MYGA sales were up from 4Q 2019, and from 2019 overall, four of the ten best-selling MYGA issuers saw sales declines ranging from 41.6% to 80.9%. Wink’s review shows that life insurers with private-equity ownership now account for 25% of the MYGA market. “Expect these companies to focus more on the indexed annuity market, once option costs become less prohibitive,” said Wink founder Sheryl Moore in a release this week.

Structured annuity products, a category only a decade old, continue to enjoy rising sales. At the current pace, sales of this category will have climbed higher than those of indexed annuities at the same point in the product life cycle.

With sales of structured annuities (aka registered index-linked annuities or RILAs) expected to increase again in 2021, more life insurers will develop their own versions of the products, Wink said. Competition will make the product more complex. Development will focus on new indexing methods and new indices, as well as risk-management methods inside hybrid indexes. At the current pace, structured annuities will outsell indexed annuity sales before 2024.

Variable annuity (VA) sales rose from the third quarter, but most life insurers are pulling back their sales of VAs or exiting the category entirely to escape the burden of reserving for the risks posed by products’ lifetime income benefits (“living benefits”).

4Q 2020 sales highlights
  • Total deferred annuity sales for the fourth quarter of 2020 were $56.31 billion. Sales were up 3.87% from 3Q 2020 and up 5.59% from 4Q 2019, but year-over-year sales of all deferred annuities in 2020 fell 5.79%, to $209.14 billion.
  • At $28.77 billion, total non-variable deferred annuity sales were down were down 6.96% from the third quarter but up 7.06% greater than in 4Q 2019. Annual sales of all non-variable deferred annuities in 2020 fell 7.95%, to $112.58 billion.
  • Indexed annuity sales for the fourth quarter of 2020 closed at $15.08 billion. That was up 9.33% from the third quarter but down 12.11% from the same period in 2019. Year-over-year sales of indexed annuities fell 20.67%, to $58.14 billion.
  • Fixed annuity sales 2020 closed at $474.13 million, down 2.95% from the third quarter and down 31.43% from 4Q 2019. Year-over-year sales of fixed annuities fell 35.8%, to $2.07 billion.
  • Multi-year guaranteed annuity (MYGA) sales in 4Q 2020 were $13.22 billion, down 20.58% from the third quarter but up 44.71% from 4Q 2019.  Annual sales of MYG annuities in 2020 rose 12.68%, to $52.35 billion
  • Total variable deferred annuity sales in 4Q 2020 were $27.53 billion, up 18.25% from the third quarter and up 4.52% from 4Q 2020. Annual sales of all variable deferred annuities in 2020 fell 2.47%, to $96.56 billion.
  • Structured annuity sales for the fourth quarter of 2020 were up, closing at $8.41 billion. Sales were 34.59% greater than the third quarter and 70.80% greater in 4Q 2019. Annual sales of structured annuities in 2020 rose 38.35%, to $24.06 billion.
  • “This was a record-setting quarter for structured annuity sales, topping the 3Q2020 record by nearly 35%,” Moore said. “It was also a record-setting year, with sales topping the 2020 record by more than 38%.”
  • At $19.11 billion, VA sales for the fourth quarter of 2020 were up 12.26% from the third quarter but down 10.72% from 4Q 2019. Annual sales of variable annuities in 2020 fell 11.17%, to $72.49 billion.

© 2021 Wink, Inc. Used by permission.

A Quick Way to Estimate Portfolio Longevity

Posted on May 6, 2021 by -

If you’re driving a decade-old car, the needle on the fuel gauge shows you roughly how many gallons of gasoline are still in your tank. But if you’re driving a new car, your digital gas gauge probably also shows you the exact number of miles you can drive before you’re on “E.”   

That innovation has taken a bit of the anxiety out of long car trips. Retirement is also a kind of long trip, and most of us would probably welcome a tool that shows retirees not only how much they’ve still got in their 401(k) plans or brokerage accounts, but also how many more years their savings are likely to last.

In this article, I describe a simple tool that inputs historical market performance, a client’s account balances, her personal “sequence of returns” during the first five years of retirement, and her expected withdrawal rate, to calculate the longevity of her current portfolio in years.

For some clients, the concept of sequence of returns may be hard to grasp. You can ask instead, “Based on your first five years of retirement, did your withdrawals come from portfolio growth or from principal?” If portfolio growth paid for the withdrawals, then the client was lucky: the market financed her expenses. If withdrawals came from principal, she was unlucky.   

To demonstrate the long-term effect of different initial sequences of returns on long-term portfolio life, walk your client through the following scenarios. In the first scenario, the client’s portfolio grows by 20% in each of the first two years of retirement. Then it declines by 10% in each of the subsequent two years. In the fifth year, the growth rate is 3%. This client has had a lucky start. 

In the second scenario, the retiree’s portfolio declines by 10% in each of the first two years, then grows by 20% in each of the subsequent two years. In the fifth year, the growth rate is 3%. This is an unlucky start. Both scenarios are shown in Table 1.

Table 1. Sequence of Returns

Notice that the average annual growth rate for each scenario is exactly the same, 4.6%.

Now, let’s look at dollar value of assets. This retiree starts with a portfolio balance of $100,000. He withdraws $5,000 at the end of each year. Table 2 shows the portfolio value at the end of each year.

Table 2: Sequence of Returns, Distribution Portfolio

The initial sequence of returns can help us predict approximately how long a portfolio will last. Figure 1 depicts the portfolio life (the y axis) as it relates to the percentage of income paid by growth during the first five years (the x axis). We assume a 40% stocks/60% fixed income asset allocation and an initial withdrawal rate (IWR) of 4%.

Each plot point (red triangle) shows the portfolio life for a specific year between 1900 and 2000. The heavy black line on the graph tracks the worst-case (shortest) portfolio lives. For instance, if portfolio appreciation was able to cover 100% of income in the first five years, the portfolio would likely last between 31 and 35 years.

Figure 1: Portfolio life versus the percentage of income paid by growth during the first 5 years

In Figure 2 below, I show the estimated portfolio life for the same 40/60 portfolio but with a range of withdrawal rates. If we used a more aggressive asset mix or a higher withdrawal rate, the heavy black line would shift down, indicating shorter portfolio lives.

Figure 2: Shortest Portfolio Life versus Percentage of Income paid by Growth

Example: Bob retired five years ago at age 65 with $1 million in his portfolio. He needed to spend $35,000 per year (a 3.5% withdrawal rate), subject to indexation for inflation (CPI). After withdrawing a total of $181,410 during those first five years of retirement, his portfolio is now worth $956,000.

Objective: Calculate the shortest likely portfolio life.

Answer: Bob’s net investment is $818,590 ($1 million minus his cumulative withdrawals of $181,410). The portfolio’s net growth is $137,410, calculated as $956,000 (current market value) less $818,590 (his net investment). The growth during these five years covered 76% of his cumulative withdrawals, calculated as $137,410 (net growth) divided by $181,410 (total withdrawals).

Since Bob’s withdrawal rate is 3.5%, draw a vertical line (red dashed line on the graph) starting at 76% on the horizontal axis until it meets the IWR of 3.5%. From there, draw a horizontal line until it meets the vertical axis on the left. The figure shows that Bob’s portfolio should last 30 years, or until he reaches age 95.

Figure 3: Estimating the Shortest Portfolio Life in the Example

What if the worst-case portfolio life is shorter than the clients want or need? As an adviser, you can recommend that they consider purchasing guaranteed income (annuities), reducing expenses (downsize home, reduce gifting, take fewer vacations), or finding other sources of income (rent the basement, create a business, or generate part-time income).

This simple technique enables you to predict the likelihood of a potential shortfall under varying conditions and make changes while there’s still time to do something about it. Keep in mind that the shortest portfolio life calculated here is based on US market history since 1900. Future outcomes may be different.

© 2021 Cemil Otar. Printed by permission of the author.