This week, Putnam Investments introduced three Retirement Income Lifestyle Funds (numbered 1, 2, and 3) which it will market to advisors as potential “core holdings” for decumulation portfolios. The funds are intended for use as part of systematic withdrawal plans in retirement. 

The Boston-based fund company, led by CEO Robert Reynolds and other former Fidelity executives, simultaneously announced an online calculator that shows clients how much monthly income they might expect from the funds, how long the income stream might last and how much money might be left over for heirs.   

A conversation with Jeffrey Carney, Putnam’s Global Marketing and Products chief, showed that these funds-of-funds are, well, just fancy balanced funds. They don’t provide guaranteed income, either for life or for any specific period. They’re not managed payout funds. They aren’t intended for use as providers of “floor” income in retirement. Advisors who are looking for protection against longevity risk won’t find it here—although the funds do contain portions of Putnam’s family of Absolute Return funds, which use volatility hedges.

What’s new?

So what is new or different here? A marketing insight. According to Carney, the amount of money in final-stage target date funds (“Maturity” funds) is going to balloon over the next 20 years, from about $50 billion to $780 billion.

After owners of those funds roll them into IRAs, they and their advisors are likely to seek more flexible long-term alternatives, Putnam believes. It expects its three Retirement Income funds to appeal to those investors. Their rich compensation (4% for the A share and a 5% CDSC for the B share) should appeal to certain advisors.

Only one of these three funds is truly new. Retirement Income Lifestyle Fund 1 is simply a relabeled version of Putnam’s existing capstone target date fund, the former Retirement Ready Maturity Fund. The Retirement Income Lifestyle Fund 3 is the new name of what had been the Putnam Income Strategies Fund. Only the moderate fund, Retirement Income Lifestyle Fund 2, might be considered freshly minted.

Each fund has a bond allocation of up 60%. According to the Putnam website, Lifestyle Funds 1 and 2 currently have equity allocations of about 13%. Lifestyle 3 has an equity allocation of about 19%.  But the equity allocations can vary over time, to as high as 50% for the relatively aggressive Lifestyle Fund 3, according to the discretion of the fund managers.

All three Lifestyle Funds are “funds of funds,” to the extent that they contain either the Putnam Conservative Asset Allocation Fund or varying amounts of Putnam’s 100, 300, 500 and 700 Absolute Return Funds. These funds aim to beat the rate of inflation over three years by 1%, 3%, 5% or 7%, respectively, using volatility hedges as stabilizers.

Ask Mr. Wizard

So how does income enter the picture? That’s where Putnam’s online Retirement Income Analysis Tool comes in. This wizard helps prospective owners of the Retirement Income Lifestyle Funds anticipate how much income they might draw down from the funds each month through a systematic withdrawal plan. It also shows how clients long that income might last and how confident they can be in the wizard’s forecast.   

To its merit, the wizard involved only a few steps and required no homework. On the initial page, it directed me to enter my “current assets.” I typed in $200,000. (There are separate windows for “taxable,” “tax-deferred” and “tax-free” savings. Only the total amount seemed to affect the calculation, however).

On the second page, the wizard provided two sliders, one for choosing age at retirement (50 to 85) and one for choosing a desired “confidence in meeting income goals” (50% to 99%). I set the first slider at age 65 and the second at 90%. The screen also required me to choose me a male or female mortality table.

The wizard instantly showed me that I could spend about $1,200 a month (7% of my savings) each year. The results for all three Lifestyle funds were virtually identical, oddly enough. If I experienced median results, the tool implied, I’d die in 18 years with about $35,000 left over (give or take about $40,000). 

By clicking on a tab, I was able to reveal a third page. A new slider allowed me to set my desired payout rate and showed me how long my money was likely to last. I chose a spending rate of 5% per year, or $833 a month, and the wizard told me that my money would last for 24 years, with a 90% chance of success. If I spent only 4% a year—the textbook sustainable retirement payout percentage—my money was likely to last until I reached age 97. 

That was an interesting exercise—the type of financial exercise every pre-retiree should get more of—but what did it have to do with these new Putnam funds? I suspected that any number of broadly diversified balanced funds or funds-of-funds could have produced similar results.

These funds, by the way, aren’t cheap, which implies a drag on returns and therefore on the income they produce. Aside from the load (mentioned earlier), Lifestyle Fund 1 costs 103 basis points a year, Lifestyle Fund 2 costs 163 basis points, and the Lifestyle Fund 3 costs 185 basis points, according to Carney. (According to the product fact sheet, investors would pay only 99, 103, and 113 basis points for these funds, respectively, on top of any distribution fees, because of a Putnam management decision to cap the fees, at least temporarily.)

A retiree who invests $100,000 in these funds and averages a 5% return would end up paying about $24,000 in fees over 10 years, according to the prospectus. Incidentally, the best performer of these three funds has gained an average of less than 1.5% a year (net of fees) since 2006.

Unless I’ve missed something, the Putnam Retirement Income Lifestyle Funds, as “income funds,” seem long on promises and short on proven delivery—particularly in light of costs that, judging by the prospectus, can be significant.

© 2011 RIJ Publishing LLC. All rights reserved.     

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.

© 2011 RIJ Publishing LLC. All rights reserved.

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, 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.

 © 2011 RIJ Publishing LLC. All rights reserved.

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.  

 © 2011 IPE.com. 

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 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.