Archives: Articles

IssueM Articles

The Implications of Europe’s Solvency II

Posted on October 20, 2011 by Editor Test -

Europe can seem either close at hand or miles away, especially when it comes to annuities. Across the globe, each country represents a distinct jurisdiction with its own rules regarding retirement vehicles and products, not to mention regulations. Therefore, it is easy to become myopically focused on what is happening on the home front and ignore what may seem like irrelevant trends in foreign waters. However, the impending changes to insurance regulation in Europe in the form of Solvency II could have important implications here in the United States, and not just for multinationals.

Of course, there are many insurers in the U.S. that are part of European parent companies, and there is a possibility that they will ultimately have to conform to the European requirements for their U.S. businesses. In addition, U.S. companies with a European presence will have to deal with similar issues in order to continue to operate over there. However, even for purely domestic insurers, Solvency II may have an enduring effect on the regulation of insurance at home.

What is Solvency II?

Solvency II is a modernization of the regulatory system for insurance companies and products in Europe. The model is based on three pillars: quantitative capital requirements; qualitative supervisory review; and disclosure requirements.

The details are still being worked out, so Solvency II will be implemented on a rolling basis, with the first stages starting in 2013 and new capital requirements coming into play at the beginning of 2014 (companies will likely have to producing new calculations during 2013, either on a voluntary or mandatory basis). As each pillar is clarified and codified, the parameters for the next become more defined. Some of the early information about the effects of the new rules on certain product lines will not play out as initially anticipated, since the assumptions behind those rules and the rules themselves are being adjusted.

The new system imposes more rigorous enterprise risk management requirements and it changes the treatment of various products. Solvency II requires analysis of group risk rather than simply looking at each individual subsidiary. This is perhaps the biggest fundamental difference in the two systems and it is a key element to modernization. The consideration of true enterprise risk by regulators can have either a positive or negative effect on capital requirements, as the new rules allow credit for diversification of risk and penalize for overconcentration.

As for life insurance products, though the early estimates put many at a significant disadvantage, more recent adjustments to the rules and models make the changes to fixed and variable annuities largely neutral compared with Solvency I, according to analysis by Morgan Stanley/Oliver Wyman. However, the same cannot be said of the comparison with U.S. capital requirements. Under Solvency I, which did not require a capital calculation for the entire group, this difference did not matter; under Solvency II, European insurers are required to embrace their U.S. subsidiaries into the new calculation.

Mark-to-Market Mayhem

The mark-to-market treatment of assets under Solvency II has material implications because it is so different from the U.S. system. In particular, this affects long-dated instruments, which of course play a significant role in any longevity guarantee, from life annuities to living benefits. The argument against fair value accounting is that it introduces volatility that unfairly represents the assets held against those particular liabilities, which are long-dated and therefore not so sensitive to the short-term volatility reflected in fair value.

The question of whether fair value is the “correct” way of treating long-dated assets is less important than the difference between the two systems. Product management and regulatory capital systems are geared for one or the other, but companies that straddle jurisdictions and must make calculations under both regimes have to deal with a higher degree of complexity.

One of the immediate concerns about Solvency II is that purely U.S.-based companies will have a pricing advantage over their European counterparts because they are not required to comply with the European capital requirements. Pricing benefit or not, some believe that the market advantage will swing the other direction and that companies bound to the more rigorous requirements of Solvency II will tout the superiority of that regime.

Like it or not, European companies that have significant operations in the U.S. have had to make adjustments to their assumptions about capital allocations accordingly. Similarly, American insurers with a European presence have had to do the same, and these companies have to make sure that their European businesses are carefully segregated from the U.S. parent.

Regulatory Equivalence

However, the short-term saving grace of Solvency II is a provision for regulatory equivalence, which would serve to level the playing field in the U.S.; it is possible for non-European regulatory systems to be considered similar enough to Solvency II that those subsidiaries would not require a new set of calculations. Equivalence allows the foreign units of European insurers to operate under the local regulatory regime and vice versa.

The rub? The United States is not among the first wave of countries being considered for equivalence. Instead, Bermuda, Switzerland and Japan are the first jurisdictions getting assessed (even membership in the first wave does not make these countries shoo-ins, and they will have to justify their stance with European regulators). In the meantime, the U.S. qualifies for “transitional equivalence” for a period of up to five years, with the option for permanent equivalence.

In order to achieve permanent equivalence, the U.S. needs to be considered equivalent in the area of either group supervision or group solvency. Initially, that included fair market valuation of assets, but that requirement seems to have been dropped. The NAIC and individual states have balked at the suggestion that the U.S. comply with Solvency II requirements (in August, the Connecticut insurance commissioner issued a press release crying foul to the pressure from abroad), yet the gravity of the impending European insurance rules is impossible to ignore.

The diffuse regulatory structure in the U.S. gets in the way of international relations, both because there is no definitive central body to decide on making changes or to prevent discriminatory practices against the local subsidiaries of foreign insurers (a charge leveled at some states)

The NAIC is doing its part to try to move regulatory practices forward, and through the Solvency Modernization Initiative, it has begun adopting Insurance Core Principles promoted by the International Association of Insurance Supervisors (the NAIC has emphatically gone down this path rather than directly correlating modernization with Solvency II). The Federal Insurance Office, a part of the Department of the Treasury created by the Dodd-Frank Act, it not itself a regulatory body, but it has the ability to engage in international negotiations. Ultimately, this office is also charged with providing guidance about the insurance regulation system and ways of improving consumer safety.

There is clearly impetus to either give the NAIC more power to effect change or create a bona fide federal insurance regulator, both to establish consistent solvency oversight and serve as a negotiating body in international relations. For those itching to see the state insurance system dismantled, the need for national consensus may add to the argument for federal regulation of solvency, if not also products.

Dragged into the Modern Age

The larger and more lasting effect of the adoption of Solvency II is that it will, like it or not, pull U.S. insurance regulation along in its wake. Equivalence will only come about if the U.S. makes significant changes to its system, and the country cannot afford to stubbornly stand by its own practices while others in the international community point to the U.S. as a regulatory backwater.

Furthermore, consumer safety is a top priority for policymakers and the public following the recent financial crisis. The very job of the Federal Insurance Office is to monitor and report on matters of improving protection and reducing systemic risk. Given ongoing volatility and concerns about financial stability, it seems unlikely that the recommendations from that office will be ignored or taken lightly.

If modernization of insurance regulation is inevitable, then it stands to reason that the real competitive advantage goes to those companies that hop to it and make the necessary adjustments, including instituting the new enterprise risk management and other systems required. This fact may be lost in the opportunity that some may grasp in the short-term difference between capital requirements here and in Europe.

Given the country’s history, it is understandable that part of the national character of America is to resist the imposition of laws and rules from abroad. Today, as Europe raises its bar on insurance regulation, is no time for the U.S. to contest change on similar principles. National borders are real but more permeable than one might imagine, and even as a sovereign entity, America does not function in isolation. Thus, Europe’s insurance modernization initiative inexorably, if haltingly, draws the United States into a new era.

For Your Reading Pleasure

If there’s one thing to be said about Solvency II, it is well studied and documented by consultants, accountants, and actuarial firms alike. This list is not exhaustive, but it represents a number of useful reports, summaries, and analysis that are easily accessed on the internet.

Title	Description	Source
The 3 Pillar Approach	A nice graphic illustrating the three pillars with links to a plethora of information on Solvency II	PricewaterhouseCoopers
Survivor’s Guide to Solvency II: 2011	The title says it all; a good overview in an accessible format that is light on technical language	The Review in association with PwC
Solvency 2: Quantitative & Strategic Impact: The Tide is Going Out	Granular information about the changes that come with Solvency II based on proprietary models, including updated modeling	Morgan Stanley and Oliver Wyman
A Report to the Federal Insurance Office	Sections 2.6 and 2.10 directly address international issues, though strangely not mentioning equivalence	Networks Financial Institute at Indiana State University
Equivalence and the U.S. Market
Solvency II and U.S. Equivalence	Very detailed discussion of equivalence and the status in the U.S.	Society of Actuaries
Solvency II Equivalence and Structural Issues for Insurance Groups	A tidy overview of equivalence and related issues, with a good section on the U.S.	Sidley Austin
Solvency II: First Wave of Equivalence Reassessments	A four-page summary on equivalence	Dewey & LeBoeuf
Solvency II Equivalence: Implications for the U.S. Market	A very brief three-page summary on the subject	Ernst & Young
Solvency II: Issues for the U.S. Insurance Market	A four-page summary of the impact to domestic insurers	KPMG

It’s Back: The Hartford’s In-Plan Income Annuity

Posted on October 20, 2011 by Editor Test -

The Hartford has introduced a new version of its Hartford Lifetime Income (HLI), a deferred income annuity option for defined contribution plan participants that was first introduced before the 2008-2009 financial crisis but wasn’t adopted by any retirement plans.

The product allows participants to buy $10 increments of retirement income, with the cost of each increment dependent on the age of the participant and prevailing interest rates at the time of purchase. The contributions go into Hartford’s general account.

As for the timing of the reintroduction, “Recordkeepers are becoming more interested in income. We’re seeing income options requested more frequently in RFPs [requests for proposals] and income is showing up more often in our conversations with clients,” said Pat Harris, The Hartford actuary who designed the product.

The Hartford is currently proposing HLI to new 401(k) recordkeeping and investment clients in the small to mid-sized plan market, and will offer it to existing recordkeeping clients next year. It intends to start accepting contributions on January 1, 2012. The Hartford’s recordkeeping system is on the “RICC” (Retirement Income Information Clearing and Calculation System) middleware platform created by DST Systems, which gives plan sponsors flexibility to change recordkeepers.

This is a somewhat different approach than HLI’s first marketing effort, which found no takers. “Our DCIO [Defined Contribution Investment-Only] income product did not get traction in the large corporate market as these companies generally have not been early adopters for guaranteed income options. The experience did help us mold our new product for the bundled 401(k) market,” said David Potter, a company spokesman.

The investment option is also included at no additional cost in the Fiduciary Assure program, an optional, third-party co-fiduciary service provided by Mesirow Financial.

Encouraging plan sponsors to add lifetime income options to defined contribution plans has been a priority of the Department of Labor in recent years, and the government’s interest dovetails with the insurance industry’s interest in entering the $4 trillion DC market as well as the interest among DC asset managers in continuing to manage client assets even after they leave a plan or retire.

A split still exists between proponents of “in-plan” and “out-of-plan” income options. With the in-plan type, income guarantees are applied to plan assets while the money is still in the DC plan. United Technologies’ jumbo plan, for instance, adopted the AllianceBernstein in-plan stand-alone-living-benefit product, which is backed by three insurance companies, two weeks ago.

With the “out-of-plan” options, the participant rolls assets out of the plan and into an IRA before buying an annuity. The Profit-Sharing Council of America favors the simplicity of this approach, and it has a relationship with the Hueler Income Solutions platform, where retired 401(k) participants and others can roll plan assets into a single-premium immediate annuity at institutional prices.

All of the in-plan annuities allow participants to change their minds and liquidate their contributions to the income option during the accumulation stage. Contributions to the plan have cash value and are not life-contingent.

Under the first iteration of The Hartford Lifetime Income, the cash-out value was calculated by taking the current share price of $10 of monthly lifetime income at age 65 (adjusted for the age of the participant and current interest rates), multiplying it by the number of shares the participant had already bought, and taking 96% of that. The death benefit, however, was equal to the amount contributed to the annuity by the participant.

Under the just-announced version of Lifetime Income, there’s no flat 4% reduction in the value of the share price, which is updated daily for each participant, reflecting his or her age and current interest rates. “If you decide that you don’t want the guarantee, you receive the stated value of the account,” Harris said. “The cost of the ability to cash out is included in the pricing.” In addition, the death benefit and the cash-out value are now the same.

“The change we made was to have the death benefit now equal the cash-out value instead of the annuity-like cash refund amount. In the prior product, the death benefit amount was not as readily available,” said David Potter, a company spokesman.

The daily price of an income share moves in the opposite direction of interest rates, but in the same direction as the age of the participant. The cash-out value can fall if interest rates rise or rise if interest rates fall, said Chris O’Neill of Mesirow Financial, who has reviewed the new version of the Hartford product. But there’s a cap—the cash-out value can’t exceed the value of contributions accumulated at a 3% annual interest rate.

“The income shares are portable, which means that a plan participant can retain the shares and the guaranteed income they provide if he or she changes employers, or the plan sponsor changes providers or recordkeepers,” The Hartford said in a statement.

O’Neill thinks the tweaking of The Hartford product is linked to the recent development of recordkeeping standards for in-plan annuities. “This is consistent with the SPARK Institute data standards initiative to establish what data fields recordkeepers need to provide,” he told RIJ.

“It’s in keeping with an industry-wide move to let the participant see a definite cash value. But there are still no standards for reporting in terms of a current balance and equivalent income. It’s incumbent on each product provider to provide the cash-out value in their own way.”

On the question of how the presentation of the cash-out value might impact participant behavior, O’Neill said, “In the absence of an explicit fee for moving out of the product, if the participants can look at their cash-out value and appreciate how much future income they’d be giving up, then it could be a disincentive to moving money out of the annuity.”

Mutual of Omaha offers an in-plan deferred income annuity that works a bit differently from The Hartford’s. Each monthly contribution to the Mutual of Omaha product is assigned a fixed, five-year accumulation rate. Contributions buy lifetime income units and build an account balance that’s fully liquid until annuitization. A withdrawal from the account reduces the amount of guaranteed income on a pro rata basis. (See the Institutional Retirement Income Council’s website for information on many of the available in-plan options.)

At retirement, the Mutual of Omaha client receives whichever payout is higher—the one guaranteed under the terms of the in-plan product or the one that can be obtained by applying the current account value (adjusted for withdrawals, if any) to the purchase of a single-premium immediate annuity at prevailing rates.

How plan participants will actually use such products remains to be seen. Just as defined benefit plan participants currently do, defined contribution plan participants who contribute to an in-plan annuity like the ones offered by The Hartford and Mutual of Omaha will inevitably compare the guaranteed income stream to the cash-out value at retirement and try to decide which is more valuable to them at the time.

Product manufacturers hope that plan sponsors and plan advisors will educate participants about the insurance value of the annuity, and make sure they don’t shortsightedly discount the hard-to-quantify protection that it can give them from longevity risk. Without liquidity, in-plan annuities would obviously never get started. With liquidity, however, many of the purchasing decisions probably won’t last. A clear behavioral trend may not reveal itself for years, or even decades.

In Denim or in Suits, New Yorkers Want Market Reform

Posted on October 16, 2011 by Kerry Pechter -

The scene of the Occupy Wall Street demonstration at Zuccotti Park in lower Manhattan on October 10 was a flash from the past to anybody who participated in similar events during the late 1960s and early 1970s.

The denim-wearing crowd, the scent of incense, the hand-lettered signs, the anomaly of bare breasts in broad daylight and the incredible lightness of civil disobedience—all recalled the rock concerts, sit-ins and nude beaches of 40 years ago.

But, if they really wanted to up-the-establishment, these avatars of protests-past might have picked a different place to camp out. As I learned the following day at The Big Picture Conference in midtown Manhattan, most of the trading that once occurred at the Stock Exchange now happens on high-speed servers in Mahwah, NJ, 35 miles north of Wall St.

At the conference, the speakers were even more pointed in their complaints about the financial system than the protesters, and their comments were more sobering than a dozen AA meetings. Sponsored by Barry Ritholz, a money manager who publishes The Big Picture financial website, the conference showcased the a series of experts—a gold bug, a technical analyst, consultants to institutional traders—who led the audience of 300 or so through a litany of numbing factoids and predictions.

The gold bug

For instance, Paul Brodsky of New York-based QB Asset Management predicted that the price of gold was currently selling at about an 80% discount and that it would eventually top out at about $10,000 an ounce.

This figure, which Brodsky called the “shadow price” of gold, comes from dividing the current outstanding amount of public and private debt dollar-denominated ($52 trillion) by the current level of gold in the world. (He did not say why such a relation between the dollar and the price of gold should exist or be expected, however.)

“That’s the realistic value of gold—if there is no more money printing,” Brodsky said. “In 1980, the shadow price was under the market price. Today it’s much higher than the market price.”

Brodsky, a self-professed gold bug, believes that the only politically acceptable way to solve our debt crisis will be through inflation, and he thinks the country will move back to a quasi-gold standard where the government will redeem gold at $10,000 an ounce.

He sees the end of the dollar’s reserve currency status in the near future. “There’s a rotating debasement of currencies that presages the end of a currency regime,” Brodsky said. “It happened in 1945 and in 1971 and it may be happening now. Baseless currencies have all gone away and so shall this one. We’re on the cusp of a change in the global monetary system.”

The Fed’s rescue of the private financial system bought time but solved nothing. “The economy can’t be deleveraged by shifting private debt to government balance sheets,” Brodsky said.

The HFT watchers

If Brodsky’s numbers were scary, Sal Arnuk and Joe Saluzzi of Themis Trading offered even more worrisome descriptions of the damage that high-frequency traders (HFT) are doing to the financial system today.

The two men, who are consultants to institutional investors, explained that HFTs are using phenomenal computing speeds and program trading to take advantage of arbitrage opportunities in what has become a highly fragmented trading world. (The illustration at right is their informal map of the many platforms on which equities are traded throughout the U.S. today.)

The exchanges, including the New York Stock Exchange, now make money selling “enriched data feeds” and renting server space to HFTs who trade micro-seconds ahead of other market participants. “They can re-engineer the national best bid/offer. They see the future. That’s risk-free arbitrage,” Arnuk said.

“Some of the more nefarious players flood the an exchange to slow it down and arbitrage [the difference] away. It scares us,” said Arnuk. “Our market has been hijacked by conflicted interests,” added Saluzzi.

Advising members of the audience never to place a market order, the two men warned that, thanks to program trading by HFTs, an even bigger “flash crash” than the one that occurred last May is likely. “HFTs will supply liquidity in a monsoon and take it away in a drought,” Saluzzi said.

Two percent of the trading firms now account for 80% of the volume on the exchanges today, they said. They called for a series of reforms: speed limits on trading velocity, limits on leverage, limits on data distribution, fees for order cancellation, fees for high usage of the exchanges, and perhaps “separate highways” for HFTs and regular investors.

The technical analyst

A third presenter, James Bianco of Bianco Research, estimated the chance for a new recession at “better than 50%,” based on the fact that, three years after the financial crisis, the system is more leveraged than it has ever been.

The Fed’s policy of converting private sector debt into public sector debt had the immediate effect of stemming panics and preventing defaults, but it hasn’t helped extinguish any debt or put the economy on a sound footing.

“What deleveraging has occurred? Total debt is again very close to a new nominal high. There has been no deleveraging. Total debt is higher than it was at the end of the ‘Great Recession’,” he said. “You cannot cure a debt problem with more debt. You can make it better for awhile. We did that. Now we are back to having too much debt in the form of government debt, which is why the U.S. is getting downgraded and Europe’s yields are soaring.”

“If the economy goes into recession, earnings forecasts are not 10% to 12% too high. Instead they might be 20% to 40% too high. In other words, if the economy goes into recession, the earnings forecasts are horribly wrong. They might be so wrong that one can make the case that the market might be overvalued,” Bianco added. “We believe this is in part what is bothering the markets, the epiphany that the economy is much weaker than expected and a recession will blow a hole in earnings forecasts to the point that the market might not be cheap anymore.”

Meanwhile, back at Zuccotti Park

Although they were far more informed and articulate than the motley demonstrators at Occupy Wall Street, the speakers at The Big Picture Conference were, in their own way, just as angry and just as alarmed about the current state of the economy.

The Occupy Wall Street phenomenon has probably not turned violent so far—in the U.S. at least—because it has found so little opposition. The demonstrators appear to be voicing emotions and opinions that a majority of Americans share. (It’s significant that the recent eviction or “clean-up” effort was called off after confrontations became more physical.)

On the day I visited Zuccotti Park, a youthful-looking man in a well-tailored charcoal-grey suit who said he was 60 years old was standing by the steps to the Trinity Building, about a block and a half or so south of the park. When asked what he thought of the sit-in, he said, “I think it’s great. It’s about time we’re seeing something like this.”

Send the Social Security Statement to Everyone On One Day!

Posted on October 12, 2011 by Editor Test -

The Social Security Administration is no longer sending its Social Security Statement – which provides personal estimates of Social Security death, disability, retirement benefits – to anyone under age 60. These are budget-cutting times in Washington, and the program cost $55 million a year. With a few tweaks, however, the program could be the single-most effective initiative for improving the retirement prospects of U.S. households.

Americans suffer from pathological passivity when it comes to retirement planning. A study sponsored by the Financial Security Project at Boston College (URL) found Americans approaching retirement are seriously worried about their prospects and angry at the government, their employers, and the financial services industry, with the combination of worry and anger producing paralysis, not action. They don’t seek information and don’t take action that could improve their prospects.

For this to change, information must be “pushed” – delivered directly to their doorstep. The information must be clear, readily digestible, and actionable, explaining what recipients could do to improve their prospects. And it must be delivered in a context that makes it easy for recipients to process this information, develop a plan, and move from plan to action.

The Social Security Administration spent $55 million to deliver personalized Statements to the doorsteps of 150 million U.S. workers. That’s 35 cents per worker. The Social Security Administration remains a trusted source of information. Social Security benefits remain the most important source of retirement income for the great majority of U.S. households. And claiming later is the most effective way they could improve their retirement prospects: monthly benefits claimed at 70 are over 75% higher than benefits claimed at 62. In sum, nothing comes remotely close to pushing trusted, critically important, and actionable information to U.S. workers – let alone for 35 cents per worker.

Moreover, the program could be dramatically more effective. The Statement itself could be improved. But the most effective tweak is to send the Statements to everyone on the same day. (Statements are currently sent out 3 months before the recipient’s birthday – a penny-wise administrative “economy.”)

If everyone received the Statement at the same time, it would create an “event” – Statement Day – that would dramatically magnify the program’s impact. Financial services companies and advisors would focus their advertising, introduce new products, and offer special online and seminar-type programs around Statement Day – drawing attention to the Statement and explaining how their products complement Social Security – itself a critical advance in retirement planning. Employers would leverage Statement Day to draw attention to benefits they provide, and how they complement benefits provided by Social Security.

The media – TV, magazines and newspapers, and on-line “publishers” –would carry Statement Day articles and discussions on retirement planning, and financial planning more generally. And workers would discuss these issues with family and friends. All this focus and discussion makes it much easier for Americans to process information, develop a plan, and move from plan to action.

So what about the $55 million expenditure, in these budget-cutting times? If Congress or the Social Security Administration won’t pick up the tab, could the financial services industry underwrite some or all of the $55 million? The unprecedented focus and attention to the products and services the industry provides – and the business generated – is clearly worth the expense. Organizing and collecting the funds, and paying for Statement Day is probably an impossible task. But putting Statement Day on the industry’s political agenda is not. And a careful review could put Statement Day at the top.

Steven Sass is associate director for research at the Center for Retirement Research at Boston College and author of The Promise of Private Pensions: The First Hundred Years (Harvard, 1997).

The Scoop on Pre-Owned Annuities

Posted on October 12, 2011 by Editor Test -

A financial planner friend of mine e-mailed me a long list of pre-owned annuities that he was excited about. No wonder. The effective rates of return were as high as 8%.

You may or may not be acquainted with pre-owned annuities. These are contracts that were purchased from a highly rated insurance company as part of a structured settlement.

In many cases, the original owner won a damage suit—product liability, medical malpractice, industrial accident, etc.—and the damages were paid, in full or in part, with an annuity. In other cases, the original owner may have purchased the annuity himself or even won a lottery prize.

When the owners of the contracts would rather have cash, they sell them (or a portion of them) at considerable discounts. The initial buyer is likely to be a large structured settlement company, such as J.G. Wentworth. This “factor” may distribute them through annuity brokers, who sell them to individuals. The original discount, needless to say, must be large enough to create value for everyone along the chain, perhaps including a lawyer who steered the contract to the factor in the first place.

I downloaded my friend’s pdf and scanned an eight-page spreadsheet of over 200 pre-owned contracts. Without exception, the issuers were well-known, A-rated life insurance companies. The start dates ranged from next week to September 2036. Most of the effective rates of return were above 5% but not higher than 8%.

No two contracts were alike, because structured settlements tend to be tailored to the needs of specific plaintiffs. The contracts made uniform or non-uniform, annual, monthly, or lump-sum payments. Many were guaranteed for a specific period. Most were “life-contingent.”

In those cases, as annuity broker Bryan J. Anderson of Annuitystraighttalk.com of Whitefish, Montana, explained to me (he was not the source of my friend’s spreadsheet), the contract is contingent on the life of the original owner, who was probably in his or her 20s or 30s. These contracts generally come bundled with a life insurance policy that guarantees either the full promised payout or merely the new owner’s principal.

Here’s one pre-owned contract on the spreadsheet that might be perfect for a 55-year-old client: A life-contingent contract from an insurer rated A (Excellent) by A.M. Best offered a monthly payout of $4,900 for 99 months starting in mid-2021. The price: about $223,000. The sum of the payments: about $541,000. The effective yield: 6.75%.

If you’d rather not invest as much and you want a guaranteed payout, you could try this one: a $100,000 lump-sum payout 10 years from now. The price: $58,500. The effective yield: 6.0%.

Wow, many people have said. Then they say, What’s the catch?

If you’re dealing with a trustworthy middleman, who has ascertained that the original owner has clear title to the contract, there may be no catch. The middleman should be able to assure you that: No ex-spouses or dependent children have unknown claims; there are no hidden liens or trusts with claims on the assets; the owner has not already sold the contract; an independent court has ruled that the sale of the contract is in the best interest of the owner. If I were buying a life-contingent secondary market annuity, I would want to see copies of the original court documents and the life insurance policy on the original owner.

Regarding taxes, any income from a secondary annuity that was purchased with IRA money would presumably be taxed as ordinary income after age 59 1/2, like any other IRA withdrawal. Income from an annuity purchased with after-tax money would be partially taxable. (The broker may be able to provide an amortization table that shows how much of each income payment comes from interest. There’s no 1099 from the insurance company, however.) Should your own lawyer get involved in the transaction? That may be redundant when you’re dealing with a trusted broker, but it’s highly recommended if you try to circumvent a broker and negotiate a deal directly with a factor, I’m told.

These bargains appear to be for real and safe—if you work with the right people and do careful due diligence. The biggest concern for the honest brokers in the business is that too many competitors might jump in, making it harder for existing brokers to obtain access to contracts and narrowing the margins.

If you have had any experience, good or bad, with pre-owned annuities, please send your story to kerry.pechter@retirementincomejournal.com.

RSQ-y Business at John Hancock B/D

Posted on October 12, 2011 by Kerry Pechter -

Many nice things come to us from Canada. Jeopardy host Alex Trebek comes quickly to mind. There’s actors like Rick Moranis and Rachel McAdams. Can’t forget those familiar green bottles of Moosehead lager.

And now comes the Retirement Sustainability Quotient.

John Hancock Financial Network is importing a web-based retirement “product allocation” strategy from its Canadian parent, ManuLife, and making it available to 1,900 independent financial advisors in the U.S. who use John Hancock—an entity distinct the life insurer of the same name—as their broker/dealer.

The new program and website, called Retirement Ready, is built around the Retirement Sustainability Quotient (RSQ) technology that Toronto-based QWeMa Group created and launched on the web for Canadian customers of ManuLife about four years ago.

QWeMA Group is led by Moshe Milevsky, the well-known author, business school professor and consultant who has advised a number of U.S. insurance companies on product development and retirement planning strategies.

“Retirement Ready uses Moshe Milevsky’s product allocation methodology, which generates the probability of having a sustainable income in retirement,” said Bruce Harrington, the head of retirement strategy and sales for JHFN who came to John Hancock from LPL Financial a year ago.

“During the development cycle for this, one of the two big things we heard when interviewing was, ‘I already know how to mix these products but I didn’t know how to explain how I did it,’” Harrington told RIJ.

“On the surface, it’s meant to be simple. We intentionally wanted to have a simple approach for advisors. They tell us, the more I need to input [into a calculator] the less time I have to use it. But underneath it interacts with Moshe’s QWeMA engine,” he said. “We announced and this at our national sales meeting in Boston,” he said. “We’ll roll it out across the country through a series of road shows in October and November.”

Retirement Ready gives advisors a modeling tool that allows them to estimate a client’s annual income need in retirement (net of Social Security and pensions) and then to divide the client’s investable assets into three income generating products—a systematic withdrawal plan (SWP) account attached to an investment portfolio, a single-premium immediate annuity, and variable annuity with a guaranteed minimum withdrawal benefit.

Using sliders, the advisor and client can adjust the allocation of assets to each product category. As they move the sliders, two other numbers on the screen automatically go up or down: the projected value of the client’s legacy (account value at death) and the client’s Retirement Sustainability Quotient.

The RSQ measures the likelihood that the client’s money, as allocated to the SWP account, SPIA and GMWB, will produce the desired income (the default value is 80% of the pre-retirement income) until the death of the client (or the surviving spouse). The RSQ ranges from zero to 99%.

A score of less than 80% is a signal that the client either has to save more, work longer, spend less in retirement, downsize a home, or allocating more of his or her savings to products that produce guaranteed income. (A SPIA, for instance, can perk up insufficient savings with mortality credits.)

Why those three products? As Milevsky himself explains in a video on the ManuLife sight, each product handily addresses one of the three most important retirement risks. The growth potential of the risky investments in the SWP account protects against inflation risk, the SPIA protects against longevity risk, and the GMWB (especially one with a strong deferral bonus) protects against sequence of returns risk.

“Once you do the ‘what if”-ing, it produces a compliance-approved report,” Harrington told RIJ. The calculator is linked to at least three databases: the Cannex database of U.S. SPIAs, Morningstar’s Annuity Intelligence service, and John Hancock Mutual Fund’s comparison tool, Portfolio Insight. It is not connected to a brokerage or annuity ordering system.

Notably, Retirement Ready eschews time-segmented retirement income planning methods. A 65-year-old, for instance, couldn’t use RSQ today to model the purchase of an immediate annuity ten years from now, or the purchase of a deferred period-certain annuity that provides income only from age 65 to 75, or mortality insurance that provides life-contingent income starting at age 80. Since it doesn’t differentiate between assets held in taxable and non-taxable accounts, it probably doesn’t lend itself to tax-driven drawdown strategies.

John Hancock Annuities sells all three of the products that are modeled in the Retirement Ready tool, including mutual funds, SPIAs and Venture variable annuities. Its GMWB rider, Income Plus for Life, provides for a 4% drawdown for life starting at age 59 (3.75% for joint life) and a 5% drawdown for life starting at age 65 (4.75% for joint life). There’s a 6% annual deferral bonus available starting at age 65 (5% available before age 65). The current cost is 1%, with a 1.5% maximum.

From the UK, ideas for better outcomes for DC participants

Posted on October 12, 2011 by Editor Test -

The ‘lifestyling’ approach used by many defined contribution (DC) plans in the United Kingdom is producing smaller retirement account sizes for savers than ever before, and could be replaced by more innovative alternatives, a new report has found.

According to research conducted by Cass Business School and sponsored by BNY Mellon, the lifestyling approach—where investors’ accounts are automatically switched out of equities into government bonds in the 10 years preceding retirement—is now inadequate given the fall in equity markets and annuity rates.

“The equity bear market and the decline in annuity rates over the last 10-15 years has had a devastating effect on the final pensions of DC savers who have relied upon the mechanical lifestyling approach. A more enlightened and more flexible approach to the DC accumulation phase is definitely needed,” said Cass Business School professor of asset management Andrew Clare.

The ‘Outcome Orientated Investing for Retirement’ report argues that DC pension schemes should adopt a “dynamic” investment strategy that enables investors to receive a tailored investment solution and therefore a greater chance of achieving pension targets.

The strategy should be outcome-driven, recognize investors’ attitudes to risk and take a flexible approach to the decumulation phase, the report said.

In the research, Cass Business School and BNY Mellon focus on a ‘momentum’ strategy and a ‘contrarian’ strategy.

In the ‘momentum’ case, the report found that DC schemes should increase their allocation to equities for the coming year if the asset class performs well. If the equity return in the previous year is more than 16%, the allocation to the asset class should be increased by 5%; if the equity return is less than 4%, the allocation should be reduced by 5%.

The ‘contrarian’’strategy stipulates that, when equities perform well the previous year, a decreased allocation is appropriate. According to the research, both strategies work well, as they lead to an improvement of the replacement ratio.

“To some extent, you could deal with the pension problem just by putting more money in.” said Clare. “But it’s not sensible to put more money into a structure that’s not working. Fix the structure first – then put more money in if that’s what you want. We need to think about every DC member as if they were a mini-DB scheme.”

Wealth2k income planning tool added to Pershing advisor platform

Posted on October 12, 2011 by Editor Test -

Wealth2k, developer of the Income for Life Model (IFLM) retirement income planning tool,and Pershing LLC, the giant clearing firm, have announced that IFLM will be integrated into Pershing’s NetX360 advisor platform.

The integration “enables financial professionals to easily assign assets, and soon positions, into income generating buckets within a retirement income plan; making it easy to monitor progress and adjust plans as necessary,” David Macchia, CEO of Wealth2k, said in a release.

The terms of the deal weren’t disclosed. According to the Wealth2k website, individual financial advisors can license IFLM, and an advisor website template called Retirement Time, for $99 a month.

IFLM is a time-segmentation tool that lets advisors assign specific incoming-generating accounts or products to specific periods during retirement. The tool allows for modeling of various income strategies. It is product-agnostic.

Literature available from Wealth2k describes IFLM’s capabilities for advisors:

You can create time-segmented asset alloca- tion strategies with as few as two, or as many as nine segments
The system will solve for a “floor” of lifetime guaranteed income, and will factor in the client’s external sources of income including Social Security and pensions.
The software makes it easy to include guaranteed income benefits within the income plan.
You may even illustrate multiple guaranteed income steams, and design them to begin in any year you choose. The income benefits illustrated can mirror characteristics of popular fixed and variable annuity products.
You choose all of the relevant economic assumptions in constructing the plan. You may define the duration of any segment, its assumed rate of return, assumed inflation rate, liquidation factor and ending balance.

Pershing’s NetX360 is an all-in-one platform that allows advisors to manage sales, transaction processing, trade securities, manage compliance activities, access research and generate reports.

A unit of BNY Mellon, Pershing serves more than 1,500 institutional and retail financial organizations and independent registered investment advisors representing more than five million active investors.

BNY Mellon has $26.3 trillion in assets under custody and administration and $1.3 trillion in assets under management, services $11.8 trillion in outstanding debt and processes global payments averaging $1.7 trillion per day.

Asset prices won’t plummet when Boomers retire—Aviva

Posted on October 12, 2011 by Mirko Cardinale -

The developed world has been giving much thought to the potentially harmful impact of its aging population on asset prices, particularly as the post-war ‘baby boomers’ head into retirement.

The concern is that, if a large proportion of the population moves into retirement and draws down their assets at the same time, this will put a downward pressure on the price of financial assets such as bonds and equities.

However, our own research shows that, while the correlation between bond prices and demographic patterns is meaningful, yields and returns are unlikely to be as seriously impaired as first thought.

One of the key reasons for our differing opinion is due to the age groups used in research. Other studies have generally assumed the ‘high savings cohort’ to be between the ages of 35 and 54. However, since the 1960s, individuals in the developed world have become more likely to attend university, start working in their 20s and have children well into their 30s.

These socioeconomic trends mean individuals are becoming net savers at a steadily later stage in their life. Many households have also been forced to extend their working lives, prolonging the period in which they are net savers, due to increased life expectancy and pressure on pension providers [i.e., Social Security in the U.S.] to reduce the burden of providing insurance against longevity.

As a result, Aviva Investors focused its analysis on the 40-64 age group, believing this demographic best explains asset class returns. We considered data from the G-7 countries, plus Australia, starting in 1962 to provide a significant horizon to assess the impact of demographics.

Our findings suggest that, in most countries, bond yields are expected to rise (and bond prices to fall) over the next 20 years as current levels are often below long-run equilibrium values in function of inflation and GDP growth potential. However, we do not find the impact of demographic trends to be as material as previous studies, some of which even suggested an ‘asset meltdown hypothesis’.

We also find that the impact of these demographic factors is far from uniform. In the US, yields are expected to be pushed up by 60 basis points above the increase warranted by GDP growth and inflation prospects, due to retirement of baby boomers leaving a smaller 40-64 cohort.

By contrast, while UK yields are expected to rise, demographic factors actually lower projected yields due to a stable group of peak earners and positive population growth. We would only predict a 1% increase in Japanese yields over the next 20 years, almost entirely driven by demographic trends, including the expected shrinkage of the overall population.

Italy is a peculiar case, as our model predicts yields 150bps lower on the basis of macroeconomic and demographic fundamentals, including a large and stable 40-64 cohort and a small expected decrease in the overall population. This is also because the model does not assume a ‘default risk premium’, as budget deficits and debt sustainability patterns have not been historically a driver of bond yields in the developed world.

Demographics do influence the long-term behavior of asset prices, but when attempting to forecast the future impact, it is far from clear that they will have as much impact as some have indicated. Suggestions that asset prices could decline sharply as the baby-boom generation reaches retirement appear misplaced.

The Bucket

Posted on October 12, 2011 by Editorial Staff -

Nationwide Financial adds eight wholesalers in retirement plan sales

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

The new members of the sales team are:

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

Vanguard estimates costs for new service for small plan sponsors

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

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

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

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

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

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

Most Americans still have low “retirement income IQ”

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

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

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

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

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

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

Key findings from the study include:

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

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

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

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

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

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

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

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

Americans clueless about the real cost of retirement

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

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

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

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

Other key findings from the survey included:

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

AXA updates Accumulator VA

Posted on October 12, 2011 by Editor Test -

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

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

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

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

The Bucket

Posted on October 12, 2011 by Editorial Staff -

Nationwide Financial adds eight wholesalers in retirement plan sales

The new members of the sales team are:

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

Vanguard estimates costs for new service for small plan sponsors

Most Americans still have low “retirement income IQ”

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

Key findings from the study include:

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

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

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

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

Americans clueless about the real cost of retirement

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

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

Other key findings from the survey included:

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

United Technologies Adopts In-Plan Annuity

Posted on October 6, 2011 by Editor Test -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our Debt Won’t Bankrupt Our Grandkids

Posted on October 6, 2011 by Editor Test -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

If the government conserves our soil from floods and erosion in order to bequeath to posterity a more productive country, our children will be impoverished thereby and will have to pay for it through the nose.

If government builds a large number of productive public works which can be used by posterity, posterity will be worse off.

We cannot afford to put available labor to work because that would burden posterity.

We cannot distribute consumer’s goods now on hand, because that would burden posterity.

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

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

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

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

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

‘Boom Time’ for Variable Annuities?

Posted on October 6, 2011 by Kerry Pechter -

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

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

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

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

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

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

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

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

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

What advisors and pundits say

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

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

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

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

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

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

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

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

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

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

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

Is it “Boom Time”?

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

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

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

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

Putnam launches “Dynamic Risk Allocation” fund

Posted on October 5, 2011 by Editor Test -

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

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

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

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

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

Putnam launches “Dynamic Risk Allocation” fund

Posted on October 5, 2011 by Editor Test -

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

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

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

Posted on October 5, 2011 by Editor Test -

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

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

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

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

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

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

The new study found that:

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

U.S. pension deficit largest since WWII—Mercer

Posted on October 5, 2011 by Editor Test -

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

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

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

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

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

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

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

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

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

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

Courts favor fiduciaries in suit over “imprudent” plan investments

Posted on October 5, 2011 by Editor Test -

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

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

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

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

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

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

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

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

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

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

Nationwide Financial adds eight wholesalers in retirement plan sales

Vanguard estimates costs for new service for small plan sponsors

Most Americans still have low “retirement income IQ”

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

Americans clueless about the real cost of retirement

Nationwide Financial adds eight wholesalers in retirement plan sales

Vanguard estimates costs for new service for small plan sponsors

Most Americans still have low “retirement income IQ”

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

Americans clueless about the real cost of retirement

Data Connection

Lists*