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August 26, 2011—So Ben Bernanke finally spoke today. And as I predicted yesterday, all the early headlines are expressing disappointment that he didn’t announce QE3. But this disappointment is misplaced. New policy announcements are for the Federal Open Market Committee (FOMC), not the Chairman. The most he could do is give an indication of where he thinks things will go.

And he thinks they should ease policy. Soon.

Here’s the case he made:

1. Unemployment is too high. This is the usual argument for easing monetary policy.

2. Inflation is below target. The usual constraint preventing this doesn’t bind.

3. The possibility that high long-term unemployment may persist “adds urgency to the need to achieve a cyclical recovery in employment.” There’s a special reason to be more aggressive.

4. “The growth fundamentals of the United States do not appear to have been permanently altered.” Dismissing the counter-argument that this is structural.

5. “[T]he Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.” He’s not out of ammo.

6. The FOMC is now going to meet for two days instead of one to discuss how best to use them. They’ve got to figure out how to load the guns.

Reasons No. 1 and No. 2 are the standard case for monetary easing. No. 3 is the case for urgency. No. 4 poo-poos the naysayers. No. 5 says we can ease. No. 6 suggests he wants to. Add it up, and you have a slam-dunk case for monetary easing. And I think it’s the right case, too.

So I read this as Ben saying: “Here’s the case I’m taking back to the Federal Open Market Committee. When we meet, you’ll hear what they decide.”

This is really the strongest signal he could have sent. QE3—in some form or another—is on its way, probably in September.

The other highlight was Ben warning Congress against short-term spending cuts and fiscal shenanigans that could kneecap the recovery. I hope they’re listening.

Despite falling interest rates, fixed annuity sales increased again in the second quarter of 2011, according to the Beacon Research Fixed Annuity Premium Study. Overall, sales rose 8% to $20.4 billion from the prior quarter, and sales of all but one product type grew.

Income annuities advanced 30%, to $2.3 billion, while indexed annuities grew 18% to $8.4 billion. Fixed rate Market Value Adjusted annuities rose 4%, to $1.5 billion. Fixed rate non-MVAs fell 5% to $8.2 billion.

“We anticipated the sequential growth in both indexed and income annuities,” said Jeremy Alexander, CEO of Beacon Research. “Indexed annuity cap rates trended lower, but still looked good compared to the quarter’s declining fixed rates on annuities and CDs. Their guaranteed lifetime income benefits were especially attractive during a time of reduced consumer confidence.

“The secure personal pensions provided by income annuities were appealing for the same reason.  We also expected falling interest rates to dampen sales of both fixed rate annuity types.  But yield-seeking purchasers apparently appreciated the somewhat higher rates offered by MVAs.

“Looking ahead, we believe that indexed and income annuities will continue to do well.  The outlook for fixed rate annuities is more uncertain.  Sales may benefit from the continued flight to safety and wider credit spreads or decline due to very low credited rates,” Alexander concluded.

Year-to-date 2011 sales increased 3% to $39.3 billion from first half 2010. Growth in fixed rate non-MVAs (8% to $16.8 billion) and income annuities (2% to $4.0 billion) offset declines in fixed rate MVAs (- 4% to $3.0 billion) and indexed annuities (-1% to $15.6 billion).

Sales were flat compared to second quarter 2010. Improvements in fixed rate non-MVAs (up 4%) and income annuities (up 3%) were balanced by fixed rate MVA and indexed annuity declines of 12% and 2%, respectively.

By product type, the top companies were unchanged from the prior quarter. American National sold the most fixed-rate MVAs, Western National sold the most fixed rate non-MVAs, Allianz sold the most indexed annuities and New York Life sold the most income annuities. 

 © 2011 RIJ Publishing LLC. All rights reserved.

Mutual fund investors who maintained a diversified asset allocation strategy and didn’t pull out of equities came through the financial crisis in relatively good shape, according to Fidelity Investments’ second quarter 2011 review of 401(k) accounts.  

Fidelity analyzed participant actions during the market decline of 2008-2009 through the second quarter of this year4. The results reinforced the value of a long-term investment approach.

For participants who changed their equity allocations to zero percent between Oct. 1, 2008, and Mar. 31, 2009, the lowest months of the market downturn, and maintained this allocation through June 30 of this year, the cost to their account balance was significant. These participants experienced an average increase in account balance of only 2% through June 30.

Participants who dropped to zero percent equity but then returned to some level of equity allocation after that market decline saw an average account balance increase of 25%, a sharp contrast to those who stayed with an asset allocation strategy inclusive of equities. These participants realized an average account balance increase of 50% during the same period.

Fidelity also examined participants who stopped contributing to their 401(k)s during the same market decline of 2008-2009. These participants experienced an average increase in their account balances of 26% through the end of the second quarter, compared to 64% for participants who continued making regular contributions.

The average annual participant 401(k) contribution was $5,790 at the end of the second quarter of 2011, up 11% from the same quarter five years prior. More participants also increased their contribution rates than decreased them (6.1% vs. 2.7% respectively), a positive trend for nine consecutive quarters. Additionally, the Fidelity average 401(k) balance of $72,700 was up 19% over five years.

Of Fidelity plan sponsors, 72% defaulted participants into a target date investment option, up from only 8% five years prior. Additionally, more than half (52%) of participants utilized a lifecycle investment option, with 46% of these participants – one quarter overall – investing 100% of their 401(k) assets into the option.  

© 2011 RIJ Publishing LLC. All rights reserved.

Lack of financial sophistication costs Americans tens of billions of dollars a year in unnecessary mortgage interest and investment costs, according to research recently published by Anna Lusardi, a George Washington University expert in financial literacy.

The paper, entitled “Financial Literacy, Retirement Planning and Household Wealth,” was based on surveys in the Netherlands but the results are considered applicable to the U.S. Co-authoring the paper were Marteen van Rooij of the Dutch Central Bank and economist Rob Alessie of the University of Groningen. The paper was published this month by the National Bureau of Economic Research (NBER).

Regarding excess mortgage fees, the paper said, “Suboptimal refinancing among US homeowners result in mortgage rates that about 0.5–1% higher on average. Given the current size of the U.S. mortgage market, this is equivalent to $50–100 billion additional annual interest costs paid.”

In the matter of investment costs, the paper said that U.S. investors could save billions by investing in index funds instead of actively managed funds.

“US investors are estimated to have foregone 0.67% of average annual equity return because of fees, expenses and trading costs of active investment strategies in an attempt to beat the market,” the paper said. “This amounts to a total annual cost of about $100 billion that could have been saved by passively following the market portfolio.

Based on data gathered in the Netherlands, the researchers estimated that people with high financial literacy have a median net worth of € 185900 ($268,210), or about quadruple the median net worth of those with lowest financial literacy (€ 46700; $67,377).   

“The net worth difference associated with the difference in the 75th and 25th percentiles of the advanced financial literacy index”—those at the top and bottom of the middle 50%—“equals € 80000 ($115,426), i.e., roughly three and a half times the net disposable income of a median household,” the paper said.

People who are financially literate tend to accumulate more money over their lifetimes because they do more financial planning, invest in stocks, and diversify their assets, the researchers wrote. People who are less financially literate are discouraged from planning or acting on their plans because they are constantly faced with a high learning curve.

As Lusardi and her co-authors put it, “Financial literacy lowers the costs of collecting and processing information and reduces planning costs, thereby facilitating the execution of financial decisions and bringing down economic and psychological thresholds for stock market participation or retirement savings calculations and subsequent development of retirement plans.”

© 2011 RIJ Publishing LLC. All rights reserved.

A subgroup at the National Association of Insurance Commissioners (NAIC) is asking whether the current regulatory framework for separate accounts makes sense, and whether guarantees have a legitimate place in a separate account, the National Underwriter reported.

Members of the separate accounts subgroup at the NAIC’s Life Actuarial Task Force have included those questions in a response to a request from Joseph Torti III, the Rhode Island insurance superintendent and chair of the Financial Condition Committee at the NAIC, Kansas City, Mo.

Torti and his committee asked the actuarial task force to look into concerns “regarding a growing trend by life insurers to include non-unit linked products within the separate accounts,” according to Leslie Jones, the South Carolina insurance regulator and chair of the task force.

The analysis could come up for discussion Saturday during an actuarial task force meeting at the NAIC’s summer meeting in Philadelphia.

About 50 years ago, regulators say in the response, the U.S. Supreme Court told the Variable Annuity Life Insurance Company that it had to set up separate accounts for investment-linked variable annuities. The NAIC developed models that helped insurance regulators share oversight over the variable products with the U.S. Securities and Exchange Commission (SEC).

Holders of the unit-linked policies were insulated against problems in the insurer’s general account but also risked loss of principal, the regulators say.

Since then, insurers have used separate accounts in many other types of products, regulators say.

So far, regulators say, none of the models give a precise definition of the term “variable.”

“As a result there seems to be an increase in companies trying to take advantage of the flexibility available through separate account designs,” the regulators say.

Some products may be simple fixed products insulated against general account problems, the regulators say.

“This may create an unfair discriminatory situation, because if a product is in the separate account the policyholders may perceive that they are getting a ‘safer’ deal than if the product is in the general account,” the regulators say. “There is now law that allows regulators to constrain a company from putting a product in a separate account…. A question to explore is whether the current framework inappropriately allows for preferred classes to exist or be created within a separate account to the detriment of the general account.”

Another question to ask is what, if any, variable product guarantees would be covered by a guaranty association, the regulators say.

Still another “question to explore is whether guarantees have a legitimate place in any separate account, given the preferred class of policyholders and insulation issues discussed earlier,” the regulators say.

This question won’t seem to go away: As the Boomers switch from accumulation to decumulation and liquidate their securities, will the sell-off undermine the prices of equities and bonds?  

Since as far back as 1994, asset managers and academics have debated this question. Financial fundamentalists say that stock prices are determined by expectations of corporate earnings, not by demographics. A landmark 2004 study by MIT’s James Poterba scoffed at the threat. A 2006 GAO report offered the “inequality” argument: the deep concentration of equity ownership among the wealthy makes a broad wave of liquidations unlikely.

But, barring lots of immigration or foreign buying on Wall Street, common sense suggests that sellers will outnumber buyers in the future. Which is never a good omen for prices. So the question continues to nag.  

Among the most recent pessimistics are Zheng Liu and Mark M. Spiegel of the Economic Research Department of the Federal Reserve Bank of San Francisco. Their August 22 Economic Letter asks, “Boomer Retirement: Headwinds for U.S. Equity Markets?”

Liu and Spiegel compare demographic trends and trends in the price/earnings ratios of stocks and conclude that Baby Boomer accumulation helped inflate the stock market after 1982 and that Boomer decumulation will in due course deflate the market. 

“Between 1981 and 2000, as baby boomers reached their peak working and saving ages, the M/O ratio [the ratio of the size of the age 40-49 cohort to the age 60-69 cohort] increased from about 0.18 to about 0.74,” they write. “During the same period, the P/E ratio tripled from about 8 to 24.

“In the 2000s, as the baby boom generation started aging and the baby bust generation started to reach prime working and saving ages, the M/O and P/E ratios both declined substantially. Statistical analysis confirms this correlation.

“We estimate that the M/O ratio explains about 61% of the movements in the P/E ratio during the sample period. In other words, the M/O ratio predicts long-run trends in the P/E ratio well.”  

How far might the P/E decline? “Given the projected path for P/E* [the potential P/E ratio] and the estimated convergence process, we find that the actual P/E ratio should decline from about 15 in 2010 to about 8.3 in 2025 before recovering to about 9 in 2030,” they conclude.

Liu and Spiegel have reviewed the literature, and they admit that factors like retention of equities for bequest purposes and foreign demand for U.S. equities could dull the demographic undertow. But they note that Europeans and Asians are also getting older and are subject to the same decumulation trends. 

This question seems to be part of a larger question—will U.S. industry and workers be productive enough to support a large non-working population in the future? Will domestic companies generate high earnings, employ lots of people, and pay them salaries high enough to keep the economy churning and the prices of assets high? If equity prices decline, it won’t be because the Boomers aged per se. It will be because we didn’t collectively rise to the challenge. 

The 2006 GAO report offered a dour kind of comfort. It suggested that the threat of Social Security and Medicare insolvency, public pension underfunding, widespread financial illiteracy and other broad issues, are likely to pose much bigger problems for  the vast majority of Boomers, who never owned much in the way of stocks or bonds  in the first place. 

© 2011 RIJ Publishing LLC. All rights reserved.

Variable annuity (VA) sales jumped 16% in the second quarter when compared to the prior year, to reach $40.9 billion, according to LIMRA’s second quarter 2011 U.S. Individual Annuities Sales survey.

MetLife ousted Prudential from top spot as the leading seller of variable annuities, with $13.624 billion in sales in the second quarter. MetLife’s leading VA offers a guaranteed minimum income benefit (GMIB), in contrast to the guaranteed lifetime withdrawal benefit (GLWB) offered by the second and third leading VA sellers, Prudential Financial and Jackson National, respectively.   

“Variable annuity sales grew 20% in the first half of 2011, reaching $80.7 billion,” said Joseph Montminy, LIMRA assistant vice president, annuity research. “Recent market volatility will certainly affect third quarter VA sales but consumer demand for guaranteed income protection will continue to drive sales of VAs with guaranteed living benefit (GLB) riders. Eight-seven percent of new VA sales elected a GLB rider (when available at purchase) in the second quarter of 2011.”

Total annuity sales hit $62.4 billion in the second quarter, an increase of nine percent compared to prior year. Year-to-date, annuity sales reached $122.4 billion, improving 13 percent from the first six months of 2010. For the fifth quarter in a row, VA sales have improved, boosting overall annuity sales.

Fixed annuity sales continue to struggle in the current low interest rate environment, falling one percent in the second quarter compared to prior year. However, at $21.5 billion, fixed annuity sales grew six percent compared to the first quarter of 2011. In the first half of 2011, total fixed annuity sales grew one percent over prior year, reaching $41.7 billion.

After a strong first quarter, book-value sales recorded a slim one percent increase to $8.5 billion in the second quarter of 2011 compared to the second quarter of 2010. Year-to-date, book-value sales grew six percent, to reach $17.2 billion.

Market-Value Adjusted (MVA) sales declined in the second quarter of 2011, down 13 percent to $1.4 billion when compared to prior year. Year to date, MVA sales dropped 3%, totaling $2.8 billion.

While indexed annuity sales declined one percent in the second quarter of 2011 when compared to prior year, sales increased 14% from the first quarter of 2011, to reach $8.1 billion. This brings indexed annuity sales close to the record levels experienced in 2010.

Immediate annuities posted record sales results in the second quarter, up 5% compared to prior year and 22% from prior quarter, to reach $2.2 billion.

Securian buys two more insurers

Securian Financial Group is acquiring American Modern Life Insurance Company (AMLIC) and its subsidiary, Southern Pioneer Life Insurance Company (SPLIC), from American Modern Insurance Group, Cincinnati, OH, the St. Paul-based insurer said in a release. The transaction is expected to close by the end of the year following regulatory approval.

The acquisition will increase the scale of Securian’s credit protection business by 25%. Securian will integrate the acquired business into its St. Paul operations in 2012. American Modern will provide transition services until integration is complete.

AMLIC and SPLIC’s products are similar to those offered by Securian, including credit life and disability insurance and debt protection programs provided to customers of financial institutions.

With more than 50 years of experience in the financial institution market, Securian is the third largest underwriter of credit life and disability insurance in the United States measured in direct written premium according to the Consumer Credit Industry Association (CCIA).

In July, Securian announced its acquisition of Balboa Life Insurance Company and Balboa Life Insurance Company of New York.

New T. Rowe Price bond fund combines higher risk with floor 

T. Rowe Price has introduced a Floating Rate Fund (PRFRX) for individual investors. The new no-load mutual fund is T. Rowe Price’s second new bond fund launch this year, after the Emerging Markets Local Currency Bond Fund (PRELX).

The Floating Rate Fund invests in loans to below investment grade companies in search higher yields while providing some protection against interest rate risk. 

The minimum initial investment in Floating Rate Fund is $2,500 or $1,000 for retirement plans or gifts or transfers to minors (UGMA/UTMA) accounts. The net expense ratio is estimated to be 0.85%.

The Floating Rate Fund invests in floating rate loans or leveraged loans, which have interest rates that reset either quarterly or monthly, usually to a certain percentage above the London Interbank Offered Rate or LIBOR.

These loans are arranged or syndicated by banks for companies that usually have a significant level of debt relative to equity and whose loans are rated below investment grade in terms of creditworthiness. Often, the loans are used for recapitalizations, acquisitions, leveraged buyouts, and refinancings.

Many floating rate loans also have a LIBOR floor, which means they pay a certain interest rate even if LIBOR falls. In today’s low interest rate environment, LIBOR floors can be especially attractive as they could provide better current income than comparable loans without floors. As of July 31, 2011, about 47% of the loans in the Floating Rate Fund have a LIBOR floor.  

“The Floating Rate Fund has more credit risk than a fund investing in investment-grade securities, but it also can be used to manage interest rate risk and provide higher yields,” said Stuart Ritter, a T. Rowe Price planner.  

T. Rowe Price manages $2.2 billion in floating rate strategies as of June 30, 2011, and has managed the Institutional Floating Rate Fund (RPIFX) for advisors and institutional investors since its launch in 2008.

Justin Gerbereux and Paul Massaro, managers of T. Rowe Price’s Institutional Floating Rate Fund, will manage the new Floating Rate Fund for individual investors.

“This fund should not replace low-risk bond investments in a diversified portfolio, as it is a sub investment-grade asset class. However, loans usually are at the top of the capital structure, which means that they are among the first to be paid in the event of a default,” said Gerbereux in a release.

A Forrester Research Inc. survey commissioned by T. Rowe Price in the second quarter of 2011 showed that 56% of investors do not understand that the market prices of existing bonds fall when prevailing interest rates rise, and vice-versa.      

Zurich appoints Lance Henderson

Zurich has appointed Lance Henderson as head of sales, Corporate Life and Pensions North America for Global Life. Henderson will manage the Corporate Life & Pensions sales force in North America, with responsibility for strategy and marketing initiatives. Henderson, who will be based in Edina, MN and report to Sherif Zakhary, head of Corporate Life & Pensions North America for Global Life, had been Regional Director–Americas for Allianz Group, where he was responsible for managing an employee benefits network in the Americas, Middle East and Africa.

He previously worked with American International Group as deputy director in the International Benefits Division. Mr. Henderson holds a bachelor’s in Business Administration from Valparaiso University and is a Certified Employee Benefits Specialist and a certified member of the Health Insurance Association of America.  

The Hartford expands into structured settlement annuity market

The Hartford is re-entering the structured settlement annuity market as part of an ongoing strategy to grow its annuity business, the company announced today.

The Hartford’s Structured Settlement Fixed Annuity, issued by Hartford Life Insurance Co., provides tax-free payouts to people who receive settlements related to a workers’ compensation or personal injury claim.   

The Hartford also offers medical underwriting for structured settlements, a capability that not all carriers are able to provide. Because structured settlement recipients sometimes have accident-related injuries that can reduce their life expectancy, medical underwriting can potentially increase their periodic payments.

The Hartford, which has an “A” (Excellent) financial strength rating from A.M. Best, had $7.6 billion in assets under management (AUM) related to structured settlement annuities and $91.3 billion in total annuity AUM as of June 30, 2011.

New York Life reports record immediate annuity sales 

New York Life sold over $1 billion worth of fixed immediate annuities in the first half of 2011, the company reported. That was more than any other issuer and represented an increase of 26% over the same period last year. New York Life SPIAs are sold by New York Life agents and third-party distributors.   

Sales of New York Life’s affiliated mutual funds (MainStay Funds) are up 62%, totaling more than $9 billion in the first six months of the year, with sales in third-party channels accounting for more than $5 billion of the total. According to Barron’s magazine, MainStay Funds ranked third out of 46 fund families for the 10-year period ended December 31, 2010 − the second year in a row that MainStay commanded the number three spot.

NY Jets and NY Giants to play in new MetLife Stadium

MetLife has announced the signing of a 25-year agreement with the NFL’s New York Giants and New York Jets to name the New Meadowlands stadium in East Rutherford, N.J., MetLife Stadium.   

“MetLife Stadium is one of the highest-profile stadiums in the country with more than two million fans attending events every year, and it will host Super Bowl XLVIII in February 2014. As home to the Jets and Giants, it is the only stadium that houses two NFL teams, both of which are ranked among the top-five most valuable franchises in the league and have substantial national fan bases,” the company said in a release.

“MetLife’s influence in the home of the Giants and Jets will be impossible to overlook,” said Steve Tisch, chairman and executive vice president of the New York Giants. “We are pleased to partner with such a well-respected company, and be closely associated with the signature MetLife assets.”

The MetLife Stadium agreement makes MetLife the official insurance company of the Jets, Giants and the stadium complex, and includes interior and exterior branding on the venue. Specific elements of the agreement include: naming rights to the stadium; 120,000 square feet of branded space at the main west entrance; four illuminated signs on the exterior of the building; four inner-bowl signs; and TV, radio, print and online media opportunities.

Why is everyone still referring to the recent financial crisis as the “Great Recession”? The term, after all, is predicated on a dangerous misdiagnosis of the problems that confront the United States and other countries, leading to bad forecasts and bad policy.

The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong. Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.

But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.

A more accurate, if less reassuring, term for the ongoing crisis is the “Second Great Contraction.” Carmen Reinhart and I proposed this moniker in our 2009 book This Time is Different, based on our diagnosis of the crisis as a typical deep financial crisis, not a typical deep recession. The first “Great Contraction” of course, was the Great Depression, as emphasized by Anna Schwarz and the late Milton Friedman. The contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete.

Why argue about semantics? Well, imagine you have pneumonia, but you think it is only a bad cold. You could easily fail to take the right medicine, and you would certainly expect your life to return to normal much faster than is realistic.

In a conventional recession, the resumption of growth implies a reasonably brisk return to normalcy. The economy not only regains its lost ground, but, within a year, it typically catches up to its rising long-run trend.

The aftermath of a typical deep financial crisis is something completely different. As Reinhart and I demonstrated, it typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak. So far, across a broad range of macroeconomic variables, including output, employment, debt, housing prices, and even equity, our quantitative benchmarks based on previous deep post-war financial crises have proved far more accurate than conventional recession logic.

Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a “Great Recession.” But, in a “Great Contraction,” problem number one is too much debt. If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions.

For example, governments could facilitate the write-down of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries.  For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work), in exchange for higher payments in ten to fifteen years if Greek growth outperforms.

Is there any alternative to years of political gyrations and indecision?

In my December 2008 column, I argued that the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning.

Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times.

The big rush to jump on the “Great Recession” bandwagon happened because most analysts and policymakers simply had the wrong framework in mind. Unfortunately, by now it is far too clear how wrong they were.

Acknowledging that we have been using the wrong framework is the first step toward finding a solution. History suggests that recessions are often renamed when the smoke clears. Perhaps today the smoke will clear a bit faster if we dump the “Great Recession” label immediately and replace it with something more apt, like “Great Contraction.” It is too late to undo the bad forecasts and mistaken policies that have marked the aftermath of the financial crisis, but it is not too late to do better.

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the International Monetary Fund.

© Project Syndicate, 2011.

New rate-sensitive crediting strategy for ING FIAs

To calm fears among fixed-income investors about the potential for interest-rate hikes, ING USA Annuity and Life Insurance Company (ING USA) has introduced a new crediting method called Interest Rate Benchmark Strategy for its indexed annuities. 

During each annuity contract year, any increase in the 3-Month LIBOR Interest Rate will be multiplied by a predetermined factor (the Interest Rate Benchmark Participation Multiplier) and credited to the contract, up to a stated cap. If rates remain the same or fall, there will be a floor of zero crediting.  

 The Interest Rate Benchmark Credit Cap and Interest Rate Benchmark Participation Multiplier are declared in advance, guaranteed for one year, and may change annually for each contract. This strategy tends to credit more interest than other indexed or fixed-rate strategies during a period when interest rates are rising.

“Many consumers are parking their long-term money in short-term savings vehicles because they’re paralyzed by the current rate environment. This new crediting strategy addresses the concerns about low rates and the possibility that they will rise in the near future,” said Chad Tope, president of ING Annuity and Asset Sales at ING.  

With the addition of the ING Interest Rate Benchmark Strategy, the ING Secure Indexed Annuity platform now offers three core ways for consumers to pursue an interest crediting strategy. The new strategy will complement existing indexed strategies and fixed-rate crediting strategy available on the products.

Annuities are issued by ING USA Annuity and Life Insurance Company (Des Moines, IA), member of the ING family of companies. ING Annuity and Asset Sales is a department name within ING’s U.S. operations.

Stock funds lost assets in July; stock ETFs and bond funds grew: Strategic Insight 

U.S mutual fund investors sold about $23 billion in stock mutual fund shares and bought about $8.4 billion worth of bond mutual fund shares in July, for a net outflow of about $16 billion, or 0.2%, from combined US stock and bond mutual funds in July 2011 (in open-end and closed-end mutual funds, excluding ETFs and funds underlying variable annuities) according to Strategic Insight. 

The sharp decline of stock prices in early August incited further redemptions. In the first week of August, SI estimates that stock fund net redemptions equaled about 0.3% of the more than $6 trillion held in equity funds. The dramatic volatility this past week may have resulted in further stock fund net withdrawals of about 0.5% of stock fund assets.

International/global equity funds saw net outflows of nearly $1 billion. Money-market funds saw net outflows of $113 billion in July. This represented a widening of outflows from June, when money funds saw net outflows of $44 billion.

These tiny ratios are reassuring, and are in line with historical redemption patterns studied by SI over the past 20 years and before, according to SI.

 “While some short-term redemptions from equity mutual funds during recent weeks and possibly in coming ones are likely, Strategic Insight’s research has shown that redemption spikes after stock market price declines have historically been limited in scope and short-lived,” said Avi Nachmany, SI’s Director of Research.

July’s bond mutual fund inflows were fueled by demand for global and emerging markets bonds, as investors continued to search for low-risk alternatives to low-yielding cash vehicles.  

Through the first seven months of 2011, bond funds saw net inflows of $77 billion, a healthy pace if off 2010’s pace. Strategic Insight expects demand for select bond funds to persist as long as near-zero yields on cash investments and stock market anxieties continue.

Strategic Insight said U.S. exchange-traded funds (ETFs) in July experienced roughly $15 billion in net inflows. Through the first seven months of 2011, ETFs (including exchange-traded notes, or ETNs) saw net inflows of $68.5 billion. At the end of July 2011, U.S. ETF assets stood at $1.104 trillion.

Insider buying at three-year high: TrimTabs 

TrimTabs Investment Research reports that buying by corporate insiders has picked up dramatically as stock prices have swooned.

Based on the latest filings of Form 4 with the Securities and Exchange Commission, insiders have bought $861 million so far in August. Insider buying this month is running at the fastest pace since May 2008, and insider buying this month is already higher than in any other month this year.

TrimTabs regards the pickup in insider buying as a bullish sign. Since insiders know more about their companies’ prospects than anyone else, it is positive that insiders are putting some of their own cash to work in the market.

But TrimTabs cautions that insiders are not infallible. Insiders were also buying heavily in late 2007 and early 2008, right before the financial crisis intensified.

Great-West Retirement Services establishes fee-disclosure template

Great-West Retirement Services has created a disclosure template that it says provides plan sponsors even more information about its services, fees and expenses than will be mandated by the Department of Labor’s 408(b)(2) disclosure regulation, whose compliance deadline is next year, the company said in a release.   

 “We combined almost all fee disclosure information into a single, comprehensive document, and even disclosed certain fees not required by the new regulation,” said Charlie Nelson, president of Great-West Retirement Services, the fourth largest retirement recordkeeper in the U.S., by number of participant accounts, according to Pensions & Investments.

The company is a subsidiary of Great-West Life and Annuity Insurance Co., which is a unit of Great-West Lifeco Inc., which is part of the Canada-based Power Corp. Great-West Retirement Services provided 401(k), 401(a), 403(b) and 457 retirement plan services to 25,000 plans representing 4.5 million participant accounts and $155 billion in assets at June 30, 2011.

“We surpassed other requirements as well,” Nelson added. For example, the regulation doesn’t require a service provider to show fees in dollars and percentages instead of formulas; however, we provide our disclosure in both dollars and percentages. We also provide a summary of fees as well as a detailed breakdown by category.”  

The template provides third-party certification from DALBAR, Inc., that it complies with the regulation, Nelson said. A sample template is available upon request by emailing [email protected].

Brinker Capital Taps Bill Simon to Head Retirement Plan Services Group

William P. Simon, Jr. has joined Brinker Capital, an investment management firm, in the new position of managing director, Retirement Plan Services. Simon will also serve on Brinker Capital’s Operating Committee. He reports to Brinker Capital President, John Coyne.

Before joining Brinker Capital, Simon served as Managing Partner at PPB Advisors LLC. Previously, he spent 22 years at American Funds, initially as a mutual fund wholesaler. Between 2003 and 2009, he held a variety of senior positions. He also held positions at Van Kampen Merritt and with Federated Investors, where he began his career.

In June, Brinker Capital, based in Philadelphia, added seven ETF strategies to its Defined Contribution retirement plan offering.

In another personnel move, Brinker Capital announced that Paul Cook has joined the firm as Regional Director in the Retirement Plan Services Group. He will help to build new advisor relationships, expand the scope of existing advisor relationships, and introduce new tools and services to existing advisors.

Cook comes to Brinker Capital with experience in retirement plans from his roles at Vanguard, SEI, USI, Stancorp Equities, Bisys, and Valley Forge Asset Management. He holds a BA in marketing from Penn State.

Downgrade of U.S. debt sparks expansion at compliance consulting firm   

FrontLine Compliance LLC, a regulatory compliance consulting firm, has expanded its customized investment guideline review service for large money managers following the U.S. debt downgrade issued by Standard & Poor’s on August 5.

“Investment advisers will have to conduct an inventory of all advisory accounts invested in U.S. debt,” says Amy Lynch, president and founder of FrontLine Compliance and a former SEC regulator. “This is especially important for institutional managers to large entities that typically have strict investment guidelines regarding the quality of fixed income investments.”

FrontLine Compliance offers experienced trading compliance experts that have conducted numerous investment guideline reviews for many large money managers. This type of review is typically outsourced because it is very labor intensive to review all of the related account level documentation against the transactions and holdings.

“The prudent manager should assess account holdings against investment guidelines as stated in client agreements or policy statements,” says Lynch. “It’s common practice for large pensions, foundations, and endowments to restrict debt holdings to AAA rated only. Unfortunately, due to the recent downgrade, an account with this restriction could be out of compliance if it holds long-term U.S. debt.”

In order to comply with Section 206 of the Investment Advisers Act of 1940 investment advisers must follow client investment objectives and guidelines.

New John Hancock RPS website serves plan sponsors, consultants, et al

John Hancock Retirement Plan Services (RPS) has introduced the John Hancock Education Resource Center, a website and materials ordering portal, designed to help plan sponsors, plan consultants and financial representatives educate and motivate employees about planning for retirement.

“We’ve given all of our 47,000+ plan sponsors, as well as the plan consultants and financial representatives that we work with, an easy and intuitive way to deploy a comprehensive education and communications campaign to help employees get ready for retirement,” said Andrew Ross, senior vice president of marketing, John Hancock RPS.

The site provides:

• A Solution Center which helps the user leverage the appropriate education programs and communications to suit their specific needs
• A wealth of employee paper based and electronic materials and tools on retirement, investing, the elements of retirement plans and planning for retirement
• The ability to easily browse materials by life stage or by communications type
• The option to choose various methods of communication such as brochures, online education tools, seminars, and posters
• Instant access to the materials

The Internal Revenue Service (IRS) has issued Notice 2011-68, which discusses the tax rules that apply to annuity-long term care (LTC) benefits hybrids and exchanges of annuity cash surrender value for qualified LTC insurance, National Underwriter reported. The IRS also asked for public comment on the matter.

Tax experts at the American Council of Life Insurers (ACLI), Washington, asked the IRS put those issues on its 2011-2012 guidance priority list two months ago. 

Section 1035 of the Internal Revenue Code (IRC) has been letting taxpayers trade in life and annuity products for other life and annuity products tax-free for many years. A provision in the Pension Protection Act of 2006 added IRC Section 844, which lets taxpayers get or dispose of LTC policies through tax-free Section 1035 exchanges.

Although taxpayers are allowed to make the exchanges, they have not been sure how to report the exchanges, or how the exchanges might affect their income taxes, the ACLI tax experts told the IRS in a comment on the IRS guidance development priority list. The ACLI asked the IRS to confirm that premiums paid for annuity-LTC combination product are included in the investment in the contract.

The Treasury Department and Internal Revenue Service request comments on the following related issues:

• What issues arise when the owner of an annuity contract with a long-term care insurance feature decides to annuitize the contract? Are the policyholder’s rights under the long-term care insurance feature typically the same or different before and after the annuity starting date? How should long-term care insurance charges be accounted for after the annuity starting date? How should the exclusion ratio be determined?
• For the purpose of determining whether the long-term care features of an annuity contract qualify as an insurance contract and thus as a qualified long-term care insurance contract, what is the appropriate characterization of long-term care payments that cause a reduction in a contract’s cash value? Are there common features or contract designs that would lend themselves to guidance on determining whether enough insurance risk is present for the long-term care features to qualify as an insurance contract?
• Is guidance needed on the partial exchange of the right to some or all of the payments under an immediate annuity contract for a qualified long-term care insurance contract? If so, how is such an exchange effected? Under what circumstances should such an exchange be treated as tax-free under § 1035? How should the basis and investment in the contract be apportioned between the qualified long-term care insurance contract received in the exchange and the rights still held in the exchanged annuity?
• What changes, if any, are needed to existing guidance (including publications, forms, and instructions) on information reporting and record keeping to assist issuers of life insurance, annuity, or qualified long-term care insurance contracts in meeting their obligations with regard to the amendments made by section 844 of the PPA?

Written comments should be submitted by November 9, 2011 and should refer to Notice 2011-68. Submit comments to CC:PA:LPD:PR (Notice 2011-68), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044, or electronically to [email protected]. Include “Notice 2011-68” in the subject line of the email.

The pension made the concept of “retirement” possible, starting in the late 19^th century. Will the decline of the traditional defined benefit pension mean the decline or the compression of retirement?

In a new research brief from the Center for Retirement Research at Boston College, CRR director Alicia Munnell shows that the 100-year trend toward an earlier reversed itself in the mid-1980s. Since then, more older people have been working.

Munnell, co-author with Steven Sass of “Working Longer” (Brookings Institution Press, 2008), believes that retiring later, saving more, and spending fewer years out of the work force may be the only way for some Baby Boomers to avoid running short of money in retirement.

Her new paper, “What Is the Average Retirement Age?” describes the decline in labor force participation among older Americans from about 1880 to 1980. As she explains, it was first brought about by the introduction of a pension for Civil War veterans, then by the creation of industrial pensions as a personnel management tool, then by Social Security.

But, over the past 20 years, labor force participation rates among older people have been rising. The average retirement age for men, which was 65 in 1962, fell to about 62 between 1985 and 1995 but has since risen to 64. The average retirement age for women, which was 55 in the 1960s, has steadily risen to 62 as women’s working habits come to resemble men’s.

She lists the following reasons for the trend toward higher labor force participation among men 55 and older in the last two decades:

• The liberalization, and for some the elimination, of the Social Security earnings test removed an impediment to continued work. The delayed retirement credit, which increases benefits for each year that claiming is delayed between the Full Retirement Age and age 70, provided an incentive to work longer.
• The shift from DB to 401(k) plans eliminated built-in incentives to retire. Studies show that workers covered by 401(k) plans retire a year or two later on average than similarly situated workers covered by a defined benefit plan.
• People with more education work longer. Over the last 30 years, the movement of more men up the educational ladder helps explain the increase in participation rates of older men.
• Life expectancy for men at 65 has increased about 3.5 years since 1980, and – despite greater use of Disability Insurance benefits – evidence suggests that people are healthier. Health and labor force activity go together.
• With the shift away from manufacturing, jobs now involve more knowledge-based activities, which put less strain on older bodies.
• More women are working; wives on average are three years younger than their husbands; and husbands and wives like to coordinate their retirement. If wives retire at age 62 to qualify for Social Security, that would push husbands’ retirement age toward 65.
• Workers have a strong incentive to keep working and maintain their employer’s health coverage until they qualify for Medicare at 65.

 “Will the retirement age continue to increase?” Munnell asks. “The fact that all the incentives associated with the recent reversal will remain in place argues for ‘yes.’ But there are risks—the move away from career employment, the availability of Social Security at 62, and employer resistance to part-time employment.”

© 2011 RIJ Publishing LLC. All rights reserved.

Households headed by people 65 and older make up the largest segment of the population of homeowners in this country, and many of them will continue to make home purchases in or near retirement — in many cases, trading in a larger suburban house for a smaller apartment or town house in a more urban area, the New York Times reported.

While the majority of older homeowners will pay with cash and therefore will not need a mortgage, some may require financing — perhaps because their previous home declined in value, or because they wanted to keep a portion of the money from the sale in income-generating investments.

About a third of the 65-and-older households that owned a home in 2009 had a mortgage, according to the Census Bureau’s American Housing Survey, which also put homeownership in this age group close to 81 percent during the second quarter of this year. By contrast, around 64 percent of people 35 to 44 were homeowners, and only 38 percent of those younger than 35 owned homes, the latest census data found.

American General Life Companies has introduced AG Lifetime Income Builder, a new living benefit rider available on selected fixed index annuity contracts and available to those ages 55 and older.

The guaranteed lifetime income rider features an income base that is guaranteed to grow at no less than six percent compounded annually for up 20 years, and a guaranteed lifetime income stream guaranteed to grow at no less than two percent per year if the income base is allowed to accumulate for at least 10 years and no excess withdrawals are taken.   

Available in twenty-nine states as of July 25, the rider is an option on the following single premium index annuities:

• AG VisionMaximizer
• AG Horizon Index 9 and 12
• AG Global Bonus
• AG VisionAdvantage 7 and 9

 At contract issue, the income base is equal to the annuity value, including any applicable premium bonus. The income base is guaranteed to grow at six percent compounded annually.

This “roll-up rate” increases the income base until the earliest of: the 20^th contract anniversary, the date the client begins the income withdrawal phase, or the contract anniversary on or immediately following the client’s 90^th birthday.

Each anniversary during both the growth and income withdrawal phases, if the annuity value is greater than the income base, the income base is “stepped up” to equal the annuity value.

If the client allows the Income Base to accumulate for 10 years or more, before beginning the income withdrawal phase, the client’s lifetime income withdrawal payments will increase by an additional two percent compounded annually each year.

There is an additional cost for this rider, and the client can turn lifetime income withdrawals on or off at any time, take less than the calculated amount or surrender the contract and receive the guaranteed withdrawal value.