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You can see a lot just by looking, said Yogi Berra. Here’s a corollary to that rule: you can hear a lot just by listening.  Below are a few things I heard at the SPARK Institute conference in D.C. earlier this month.  

John Karl, the president of the Retirement Learning Center and executive director of the PLANSPONSOR Institute, warned members of the 401(k) advisor and provider community to prepare for a big uptick in enforcement actions from the Department of Labor.

The DoL is authorized to hire 997 new people for 2012, he said. Of those, 941 are new enforcement officers at the Employee Benefits Security Administration. EBSA apparently intends to put teeth in the new regulations, such as fee disclosure, that it is currently pushing through.   

The two easiest ways for plan sponsors to get pinched by EBSA for excessive fees, he said, are the following: First, if the plan has grown but the fees haven’t fallen to reflect the new economies of scale. Second, if the sponsor is unconsciously still mailing checks to advisors who no longer provide advice.

In what he called “a terrible reflection on us as an industry,” Karl said that the DoL considers 77% of plans non-compliant with regulations. So DoL will soon be “deploying record numbers of people to kick the tires,” he predicted. They’ll be looking for “low-hanging fruit,” he warned, in order to maximize the number of successful actions and demonstrate efficient use of resources.    

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Mark Iwry, the deputy assistant Secretary of the Treasury for retirement and health policy and a Senior Advisor to the Secretary, spoke at length—Iwry speaks slowly and deliberately—about the Treasury’s partnership with DoL in promoting retirement security.

While at the Brookings Institution, he co-invented the Auto-IRA, which small employers can use in lieu a 401(k) plan to give their employees a chance to save through payroll deferral.   

During the Q&A period, Iwry was asked about the contradictory impressions that different parts of the government are offering about the sanctity of the tax deferral on contributions to workplace plans.

Some legislators are making noises about cutting the subsidy to reduce the budget deficit. Administration policymakers, like Iwry, seem to want to strengthen the existing system—the system that puts bread on the kitchen tables of most of the people in the room.      

Iwry’s answer suggested that the tax deferral is not in jeopardy (at least not during an Obama presidency). Here’s what he said:

“The defense [against removal of the deferral] is to be hard at work to improve it and to make sure it reaches more of the public. To the extent that it doesn’t reach everyone, or that its results are not meaningful to tens of millions of workers, it becomes more vulnerable to cutbacks. To the extent that it reaches more people, it’s easier to justify.” He compared taxpayers to “equity investors” in the 401(k) system, and the question is whether they are getting enough “bang for the buck” in terms of retirement security.

My reflexive thoughts: Why should the government get rid of tax deferral—and have to replace the existing system with something new—as long as it can use the threat of removing tax deferral to keep the retirement industry responsive to its needs?

Such is the bargain that the retirement industry has made—the bargain of a regulated oligopoly. 

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It was suggested at the conference that the DoL, though undoubtedly well-intentioned, may be opening up a big can of worms by requiring plan sponsors to tell participants exactly how much they’ve been paying for a “benefit” that many of them thought was free. 

Some wondered what will happen next year when plan participants—and it might only take one Paul Revere per company to arouse the rest from their slumber—discover that their 401(k) bill (depending on the size of their account) is as big as their electric bill.      

“[The number] will jump out there for the large-balance fees,” said Bob Kaplan, a vice president and national training consultant for ING, who led a breakout session called Helping Your Clients Cope with Fee Disclosure. “People will say, ‘I knew I was paying something but I didn’t realize how much it was.’ People react to dollars. Percentages don’t resonate.”  

Kaplan said that fee disclosure will create some interesting challenges for plan sponsors. “How many sponsors know exactly what their fees are? And if you don’t know what they are, how do you know if they’re reasonable or not?” he asked rhetorically. The new precision about fees will certainly end the practice of bundling fees, he said: “This ends ‘Give me the investment management and I’ll throw in the plan administration.”

At the very least, he noted, fee disclosure will create a competitive shake-up in the plan provider world. Plan sponsors will have to solicit bids every three to five years just as a defense against accusations of being asleep at the switch. Smart companies, someone said, will “get out in front of” the arrival of fee disclosure and institute a communications plan that assures employees that the plan’s fees have been examined and are, at the least, comparable to fees at similar companies.    

 © 2011 RIJ Publishing LLC. All rights reserved.

To access a copy of “How America Saves,” click here. Vanguard issued the following release early today:

The portfolios of nearly 30% of participants in 401(k) retirement plans at Vanguard are in automatic professionally managed investment programs, which particularly benefit individuals who lack the skills to invest properly on their own, according to Vanguard’s How America Saves 2011. The report also showed that participant account balances in 2010 rose to their highest levels since Vanguard began tracking them in 1999.

The annual report, now in its 10^th edition, is widely used as a barometer of retirement planning trends. Along with a look at the overall patterns of Vanguard’s 3 million-plus participants, How America Saves this year includes supplemental reports with analyses of participant behavior in the defined contribution (DC) retirement plans of eight specific industries.

“The growing number of participants taking advantage of professionally managed investment programs and services in their plan clearly shows that the 401(k) system can offer investors a successful way to invest for retirement,” said Jean Young, coauthor of How America Saves 2011. ”These services have the potential to dramatically reshape portfolio outcomes for participants because they address the need of many individuals who don’t have the skills to manage their retirement assets.”

More participants getting professional investment help
The increasing adoption of automatic professionally managed investment programs is significant because they eliminate portfolio construction mistakes by many participants. By year-end 2010, 29% of Vanguard participants were entirely invested in one of these programs, which include a single target-date or balanced fund or a managed account advisory service. Twenty percent held one target-date fund, a dominant trend because 79% of plans offered target-date funds as of year-end 2010. Another 6% held one traditional balanced fund and an additional 3% used a managed account program. In comparison, in 2004, just 7% of all Vanguard participants were solely invested in an automatic investment program.

In addition to automatic investment programs, many plans offer advice services utilized by a strong number of participants. Three in 10 plans offered online advice and one in eight offered managed accounts. Financial planning services are offered to all participants with plan sponsor authorization, but a fee may apply to those younger than 55. In all, about 15% of participants use advice services if offered, with managed accounts the most popular.

When the 15% of advice users (including those in managed accounts, considered both an advice service and an automatic professionally managed investment program) are added to participants invested in a single target-date fund (20%) and a single balanced fund (6%), more than 40% of participants are taking advantage of investment management programs or advice services when they are offered through their plans.  

Account balances up but may not present the entire picture
In 2010, average ($79,077) and median ($26,926) account balances reached their highest level since Vanguard began tracking this data in 1999 in How America Saves. Rising account balances point to ongoing contributions and improving investment returns. The median account balance for participants in their plan at both year-end 2007 and year-end 2010 grew by 31%. Eight in 10 of these “continuous” participants saw their balances rise or stay flat. Results for pre-retirees 55-64 were almost identical to those for the overall continuous participant population.

“Account balances have been cited as too low to be helpful in retirement,” said Steve Utkus, coauthor of the report. “But keep in mind that the typical participant is a 46-year-old male who is saving 8.8%, with 20 to 25 more years to work and grow his account. His retirement plan assets will be complemented by Social Security benefits and other savings, perhaps assets in other employer plans or a spouse’s plan, or personal savings. Even though we always encourage people to save more—ideally at least 12% to 15% of their income—the reality is that many participants may be on target for retirement.”

Additional key trends
Here are other notable trends in participant and plan sponsor behavior:

• Participation rates. Twenty-four percent of Vanguard plans have adopted automatic enrollment, up 3 points from 2009. Yet the 2010 plan participation rate was 74%, down 2 points from 2009. Increases in participation from the growing use of automatic enrollment were offset by participation declines caused by difficult economic conditions.

• Contribution rates. The average deferral rate in 2010 was 6.8% and the median was 6.0%, unchanged from 2009. Yet average deferral rates were down from their peak in 2007 of 7.3%. About half of the decline was likely caused by economic conditions and half was attributable to increased adoption of auto enrollment. While auto enrollment increases participation rates, it can also lead to declining plan contribution rates because default deferral rates are typically set too low at 3% or less and participants do not tend to increase their deferrals on their own.Employee and employer contributions combined are also down modestly. This average contribution rate in 2010 was         9.7% and the median was 8.8%. The reasons are likely the same as above, in addition to the decline of some                 employer contributions during the low part of the recent economic cycle.

• Low-cost investment options. With the current focus on plan fees, more plan sponsors are interested in offering an “index core,” a comprehensive set of low-cost index options that span the global capital markets. In 2010, 40% of Vanguard plans offered a set of options with an index core, making the design available to about half of all Vanguard participants.

• Loans. New loan issuance rose in 2009 and 2010, returning to prerecession levels of 2005. In 2010, 18% of participants had a loan outstanding.

• Hardship withdrawals. The number of hardship withdrawals grew 47% during the 2005–2010 period. The 2.2% of participants taking hardship withdrawals in 2010 is still low on an absolute basis.

• Distributions. The majority (70%) of participants who left their employer in 2010 and were eligible for a distribution preserved their plan assets for retirement by remaining in the plan or rolling over their savings to an IRA or new employer plan. In terms of assets, 92% of all plan assets available for distribution were preserved.

DTCC Launches Analytic Reporting Service for Annuities

The Analytic Reporting Service for Annuities, an information service designed for insurance carriers and broker/dealers selling annuity products, has been launched by DTCC Insurance & Retirement Services.
The new information service will take data aggregated from DTCC’s daily processing of annuity transactions, turn it into insight and business intelligence, and distribute it to companies that need help making critical decisions about sales, sales management, marketing and advertising, and product offerings.

“We process approximately 150 million annuity transactions each month, which means we have a tremendous amount of industry information and market intelligence in our own systems that can be used to help our customers manage and grow their business,” said Adam Bryan, Managing Director, I&RS.   

DTCC’s depository provides custody and asset servicing for more than 3.6 million securities issues from the United States and 121 other countries and territories, valued at US$36.5 trillion. In 2010, DTCC settled nearly US$1.66 quadrillion in securities transactions.

Developed with the help of an advisory group composed of delegates from DTCC member firms, the Analytic Reporting Service for Annuities was piloted in late 2010 by an advisory group composed of delegates from DTCC member firms. The group provided I&RS with feedback on what kind of data should be presented and how it should be used. 

The Analytic Reporting Service for Annuities features a Web-based interface presenting customizable and searchable views into trends in inflows, outflows and net flows; analysis by product, carrier, distributor, agent and investor; and the option to create custom market segments. The service aggregates the millions of daily annuity transactions submitted to DTCC to provide dealers and carriers with information about their sales and relationships, such as:

• Cash flows by product, carrier and broker/dealer
• Market shares
• Fastest growing products
• Fastest growing client types, and
• Detailed trends by carrier, distributor, product, ZIP code and more.

Customers can also compare information and trends from their own business with the aggregated data of all participants. This will help firms understand similarities and differences, and identify further opportunities.

“The Analytic Reporting Service will provide us with a new view of the transactions we process through DTCC, and we see the great potential for it to turn those transactions into valuable information we can effectively use to better understand our business, trends and new opportunities,” said Scott Wagner, Insurance Business and Data Analyst, Risk Product Management, Waddell & Reed, Inc.

The Analytic Reporting Service is a service offering of National Securities Clearing Corporation (“NSCC”), a clearing agency registered with the U.S. Securities and Exchange Commission and wholly-owned subsidiary of DTCC.

DTCC, through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks.

Fidelity launches four muni income funds suitable for laddering

Fidelity Investments has introduced the Fidelity Defined Maturity Funds, a series of four national open-end municipal income funds, each with a defined maturity date. They “seek to bridge the gap between individual bonds and bond funds, and are the first actively managed municipal bond defined-maturity funds in the market,” the Boston-based fund company said in a release.

The funds invest primarily in investment-grade municipal bonds clustered around the funds’ defined end dates and seek as high a level of current income, exempt from federal income tax, as is consistent with the preservation of capital. To protect existing shareholders and to ensure orderly liquidation of the funds, the funds will close to purchases for new and existing investors approximately 12 months prior to their maturity date. Each fund plans to liquidate and distribute its net assets to investors shortly after its defined end date.

“When compared to a traditional bond fund, the price volatility of the Defined Maturity Funds is designed to decline as their underlying bonds approach their maturity. However, unlike individual bonds, these funds do not return a pre-determined amount at the funds’ defined end dates,” said Mark Sommer, co-manager of the Fidelity Defined Maturity Funds. “These funds may be appropriate for income-seeking investors who are interested in combining the defined-maturity feature of individual bonds with the many features of bond funds, including diversification and professional management, thus removing much of the legwork of individual bond investing.”

The initial series consists of four funds with different maturity dates of four years (Fidelity Municipal Income 2015 Fund), six years (Fidelity Municipal Income 2017 Fund), eight years (Fidelity Municipal Income 2019 Fund) and 10 years (Fidelity Municipal Income 2021 Fund). A Single Investment Approach. Many Ways to Apply It.

The Defined Maturity Funds are flexible investment options designed to help meet the needs of investors by seeking to provide federally tax-exempt income that they can either receive as a distribution or reinvest to maximize payout potential at maturity. Investors could use the Defined Maturity Funds in three potential ways: as an income vehicle, an investment vehicle, or as a laddering opportunity.

MetLife Joins Schwab SPIA Platform 

Charles Schwab’s newly expanded SPIA Choice Platform now includes a single premium immediate fixed income annuity product from MetLife Investors USA Insurance Company. The Schwab platform also includes annuities issued by New York Life, Nationwide Life, and Symetra Life. 

“Over the past year, we’ve seen a confluence of economic and demographic changes that have resulted in an increased focus on the need for guaranteed retirement income sources,” said Peter Crawford, Senior Vice President, Charles Schwab. “These additions to our existing SPIA platform further diversify our fixed income annuity offering and are consistent with Schwab’s overall open architecture approach that enables investors to choose the products that make the most sense for their specific situation.”

A Schwab execuive also noted that a fixed income annuity can help retirees delay tapping into Social Security, which can help people avoid penalties associated with taking Social Security payments too early, and can also enable people to receive a credit of eight percent per year for delaying taking Social Security payments, even after they are eligible, up to age 70.

Strategic Insight and PLANSPONSOR Introduce Pathfinder 2.0

Strategic Insight and PLANSPONSOR have introduced Pathfinder 2.0, a unique web-based tool that enables financial advisers with a retirement plan practice to:

·       Compare and select retirement plan providers that best match plan sponsor needs

·       Retain clients with a higher degree of efficiency

·       Increase productivity and close-ratio for new business

Pathfinder 2.0 has an individual adviser version as well as an enterprise version for Broker Dealers, Registered Investment Advisers (RIAs) and Defined Contribution Investment Only (DCIO) firms that seek to provide additional services to advisers.

According to Kevin Ng, Pathfinder Product Manager, “In an increasingly complex and demanding regulatory environment, alongside a heightened awareness of the importance of fee transparency, Pathfinder 2.0 offers retirement plan advisers a proven tool and process to facilitate the complex business of conducting a comprehensive RFP. Pathfinder also allows advisers to more easily standardize and document their search and due diligence process.”

With Pathfinder 2.0, financial advisers receive:

·       The ability to tailor a search across the nation’s leading recordkeepers

·       Quick and easy access to an extensive library of RFP/RFI questions

·       Detailed side-by-side comparisons of the 401(k) industry’s top service providers

·       Access to Strategic Insight’s mutual fund and ETF investment data

·       Customized client reports

Kelly Bush joins Lincoln Financial Distributors  

Lincoln Financial Distributors (LFD), the wholesale distribution subsidiary of Lincoln Financial Group, has hired Kelly Bush as regional sales director with the Institutional Retirement Solutions Distribution (IRSD) team.

Reporting to Aaron Moore, national sales director of Lincoln’s Institutional Retirement Solutions team, Bush is responsible for selling Lincoln’s defined contribution, open-architecture solution, the Lincoln Alliance Program, to financial representatives throughout Southern California, Arizona and Nevada. He is based in Orange County, California.

Bush was a regional vice president for Pentegra Retirement Services from 2009 to 2011. He has served in a range of sales positions with The Standard Co., ICMA-RC and Nationwide Retirement Solutions. He earned a master’s degree in business administration and management from Nova Southeastern University, Fort Lauderdale-Davie, FL, in 2008; and, a bachelor of science degree in business administration from Franklin University, Columbus, OH in 1992. He holds licenses for Life, Health and Variable Annuities in California, as well as FINRA Series 7, 26, 63 and 65.

Sun Life Financial to sponsor Cirque de Soleil’s IRIS 

A new two-year partnership between Sun Life Financial Inc. and Cirque du Soleil gives Sun Life naming rights to IRIS, a Journey through the World of Cinema, a major new Cirque de Soleil production that will been presented only in Los Angeles at the Kodak Theatre at Hollywood & Highland Center, home of the Academy Awards.

Sun Life Vice President of Brand Management Bill Webster and Cirque du Soleil President and CEO Daniel Lamarre announced the deal during an unveiling of the IRIS production at the theatre on June 16.

As presenting sponsor of IRIS, a Journey through the World of Cinema, Sun Life will receive extensive brand integration across a variety of Cirque marketing vehicles including: use of Cirque intellectual property, marks and logos; prominent inclusion in IRIS’ extensive brand marketing campaign; branded on-site experiences and signage at the Kodak Theatre; and VIP ticket and customer hosting opportunities. Financial terms of the deal were not disclosed.

Under the terms of the agreement, Sun Life can include IRIS intellectual property in its advertising, marketing, digital, retail and internal campaigns. The company will receive above-the-fold brand exposure in Cirque’s media campaign, which includes print, digital, television, radio and out-of-home components.

Sun Life’s on-site presence at the Kodak Theatre during the run of the show includes an interactive display showcasing Sun Life’s services and products in the historic theatre’s high-traffic Grand Foyer. Other on-site branding elements include custom-created concourse displays and exhibits. The partnership also includes hospitality events for Sun Life to host its VIPs at IRIS shows and the opportunity to custom design an exclusive event at the theatre.

Sun Life also announced that it will be the exclusive U.S. Insurance partner of Cirque du Soleil as well as an official partner for all U.S. Cirque Big Top and Arena Touring Shows, including: Zarkana, a new acrobatic spectacle, at New York City’s historic Radio City Music Hall; Michael Jackson THE IMMORTAL World Tour, a 47-city North American arena-tour show that recreates a Michael Jackson concert; and Varekai, in Manila, Philippines. The agreement marks an extension of an existing relationship with Cirque du Soleil in which Sun Life was as an official sponsor of OVO.

Retirement Plan Advisory Group in pact with John Hancock

Retirement Plan Advisory Group, a wholly-owned subsidiary of National Financial Partners Corp., has signed a partnership with John Hancock Financial Network (JHFN) through which RPAG will offer access to a practice management platform. The platform will be part of a new JHFN program to help its financial advisors expand the retirement plan services they offer clients.

According to the agreement, RPAG will provide access to its proprietary suite of technology, tools, and training resources for advisors seeking to build their business within the framework of a best-practices consulting model. Key components of the RPAG platform include:

• A Scorecard SM Generator for investment fund ranking
• An e401k Proposal system for fee benchmarking and vendor RFPs
• Fiduciary Fitness Program
• Fiduciary Briefcase plan sponsor online documentation portal
• Compensation Calculator for advisor pricing models
• Monthly newsletters and legislative updates for consistent client communication
• Prospecting webinars and other marketing tools to build advisor pipelines

Advisors using the RPAG platform have access to live customer support Monday through Friday, including on-staff CFAs, former practicing ERISA attorneys, RFP specialists and plan consultants. Advisors receive ongoing practice management assessment interviews by the RPAG support team and are invited to attend monthly training webinars, onsite spring training sessions, as well as an annual user’s conference.

Retirement Plan Advisory Group (RPAG), is currently represented by over 300 member firms in 45 states, serving 18,000 sponsors with a combined $60 billion in assets under advisement.

 Different people respond to major financial crises in different ways, depending on their age when the crisis hits, on whether they hang onto their jobs or not, and how much their portfolios were exposed to equities.

So says a new research paper written by Olivia S. Mitchell of Wharton’s Pension Research Council along with Jingjing Chai, Raimond Maurer, and Ralph Rogalla and published by the National Bureau of Economic Research.

The paper contrasts the outcomes for the young and the old as well as the different consequences felt by those who suffer “triple whammys” and those who are “doubly fortunate.”

“Not all households may be affected similarly by the business cycle,” the authors write. “An individual suffers from a ‘triple whammy’ if he experiences a financial/economic crisis at the beginning of the analysis, is unemployed in at least two of the first four years thereafter, and also suffers from below-first quartile cumulated stock market returns until age 62 when he becomes eligible for Social Security benefits.

“By contrast, we define a doubly fortunate individual as someone that never experiences a financial/economic crisis, is never unemployed to age 62, and experiences above-average capital market returns to age 62 with cumulated stock returns in the top 25 percentile.”

The authors also looked at how a financial crisis can change people’s investing habits, their appetite for annuities or liquid investments, and their decisions about when to retire.  With regard to older people, they wrote:

“Households near retirement will reduce both short- and long-term consumption, boost work effort, and defer retirement. Younger cohorts will initially reduce their work hours, consumption, saving, and equity exposure; later in life, they will work more, retire later, consume less, invest more in stocks, save more, and reduce their demand for private annuities.

“When older persons are hit by a combined financial and economic crisis, they are predicted to boost work effort slightly, around 0.3-1.3 percent, over the rest of their work lives. Moreover, their average retirement age rises slightly as well (less than one month). The crisis is felt, instead, in more marked declines in annual consumption, both short- and long-term.

“Compared to a non-crisis scenario, consumption drops by 3.5% before retirement and by around 4.5% after age 80. Households reduce their asset withdrawals by about 2.5% over the short-run and by about nine percent later in life. During the immediate crisis, households reduce their equity exposure by more than 20%, on average, in favor of risk-free bonds.

“Over the longer run, however, investors have a marginally higher appetite for liquid assets, both stocks and bonds, than investors in a non-crisis scenario. Consequently, the level of annuitization decreases.

“Those older households hit especially badly by unemployment and stock market shocks must substantially boost their work effort, by over 20% in their early 60s. Moreover, they cannot afford to retire early and must postpone retirement by about one year, on average. Yet they still experience consumption losses of about 10% in the short-term and about 15% later in life.

“While they are able to dampen the immediate impacts of the crisis through an increase in withdrawal of financial assets (about 30% at age 55), the corresponding drop in financial wealth results in substantial cuts in withdrawals later in life (more than 40% from age 70). These households reduce their equity exposure only by 10% early in the crisis. Over the remaining life-cycle, allocation to stocks is substantially higher than that of households in the non-crisis scenarios.

Regarding younger people, the authors wrote:

“We show that for young households, the financial/economic crisis will have little impact on either work effort or retirement behavior, though they do suffer from a long-term decline in annual consumption accompanied by lower saving. Stock fractions are marginally lower at the onset of the crisis, but over the remaining life-cycle, asset allocation does not change much.

“Young households hit particularly badly by the financial/economic crisis do have more response, reducing their work effort during the crisis by up to 10%; later in life, they must boost work hours substantially – over 20% at age 60 compared to the non-crisis scenario, and must defer retirement by one year on average. Lifetime consumption is also lower: in their early 20s, it is about 15% less, and five percent less even after age 70.

“The other effect is that young households must save substantially more than non-crisis households later in life, to build up at least some financial wealth. Low savings early in life go hand in hand with low stock investment; thereafter, from about age 40 on, equity exposure is continuously higher than that of non-crisis households, while both bond investments and annuity purchases are reduced.

© 2011 RIJ Publishing LLC. All rights reserved.

After the Wall Street Journal reported on June 17 that AARP was betraying its members and caving to the forces that want to cut Social Security benefits, and a New York Times story that said “AARP Is Open to Cuts in Social Security Benefits,” AARP CEO A. Barry Rand responded as follows to what were characterized as “inaccurate media stories”:

“Let me be clear—AARP is as committed as we’ve ever been to fighting to protect Social Security for today’s seniors and strengthening it for future generations.  Contrary to the misleading characterization in a recent media story, AARP has not changed its position on Social Security.

“First, we are currently fighting some proposals in Washington to cut Social Security to reduce a deficit it did not cause.  Social Security should not be used as a piggy bank to solve the nation’s deficit. Any changes to this lifeline program should happen in a separate, broader discussion and make retirement more secure for future generations, not less.

“Our focus has always been on the human impact of changes, not just the budget tables.  Which is why, as we have done numerous times over the last several decades, AARP is engaging our volunteer Board to evaluate any proposed changes to Social Security to determine how each might – individually or in different combinations – impact the lives of current and future retirees given the constantly changing economic realities they face.

“Second, we have maintained for years – to our members, the media and elected officials – that long term solvency is key to protecting and strengthening Social Security for all generations, and we have urged elected officials in Washington to address the program’s long-term challenges in a way that’s fair for all generations.

“It has long been AARP’s policy that Social Security should be strengthened to provide adequate benefits and that it is sufficiently financed to ensure solvency with a stable trust fund for the next 75 years.  It has also been a long held position that any changes would be phased in slowly, over time, and would not affect any current or near term beneficiaries. 

“AARP strongly opposed a privatization plan in 2005, and continues to oppose this approach, because it would eliminate the guarantee that Social Security provides and reduce benefits, and we are currently fighting proposals to cut Social Security to pay the nation’s bills.

“Social Security is a critically important issue for our members, their families and Americans of all ages, especially at a time when many will have less retirement security than previous generations with fewer pensions, less savings and rising health care costs.  And, as we have been for decades, we will continue to protect this bedrock of lifetime financial security for all generations of Americans.”

On June 17, under the headline, “Key Seniors Association Pivots on Benefit Cut,” the Wall Street Journal story read:

“AARP, the powerful lobbying group for older Americans, is dropping its longstanding opposition to cutting Social Security benefits, a move that could rock Washington’s debate over how to revamp the nation’s entitlement programs.

“The decision, which AARP hasn’t discussed publicly, came after a wrenching debate inside the organization. In 2005, the last time Social Security was debated, AARP led the effort to kill President George W. Bush’s plan for partial privatization. AARP now has concluded that change is inevitable, and it wants to be at the table to try to minimize the pain.”

It was a man-bites-dog story that triggered some celebration among those who believe that Social Security is a pair of concrete overshoes for the U.S.  economy. The Journal followed with an opinion piece that said, “As political earthquakes go, the decision by AARP, the senior entitlement lobby, to entertain even the possibility of cuts in Social Security benefits is a 9.0 on the budget deficit scale. If the group really means it, the U.S. may have a chance of avoiding its Greek moment.”

Two days later, the New York Times printed a more measured story. It said in part:

“Our goal is to limit any changes in benefits,” John Rother, AARP’s policy chief, said in a telephone interview, “but we also want to see the system made solvent.”

Mr. Rother said the group’s stance on possible cuts, which was first reported in The Wall Street Journal in Friday’s editions, should be seen less as a major change in position than as a reflection of the political and financial realities facing the Social Security system and the country as a whole.

“You have to look at all the tradeoffs,” Mr. Rother said, “and what we’re trying to do is engage the American public in that debate.”

He made clear that the group’s willingness to discuss cuts comes with conditions: Reductions in benefits should be “minimal,” they should not affect current recipients and instead should be directed “far off in the future,” and they should be offset by increases in tax-generated revenue.

The newly released J.D. Power and Associates 2011 U.S. Full Service Investor Satisfaction Study shows that RBC Wealth Management has the most satisfied customers. (See chart below.)

The study also found finds that “85% of full service investors either have not heard of or do not understand the difference between a suitability standard (where advisors are required to make investments they deem suitable for their clients) and a fiduciary standard (where advisors are required to act in the best interests of their clients and disclose all conflicts of interest).”

Among those full service investors who are currently in a fiduciary relationship, 57% say this increases their comfort level with their advisor, while 42% say that it decreases their comfort level.

“Legislating all advisors to this standard carries an unintended consequence of additional compliance oversight, which could translate into significantly higher costs—likely to ultimately be passed back to investors,” said David Lo, director of investment services at J.D. Power and Associates.

From a client satisfaction perspective, the ethical standard that an advisor follows isn’t nearly as important as whether or not the advisor follows key client management practices, such as (in order of importance):

• Clearly communicating reasons for investment performance
• Clearly explaining how fees are charged
• Proactive advisor contact regarding new products and services or accounts four times in the past 12 months
• Returning client calls/inquiries within the same business day
• Reviewing or developing a strategic plan within the past 12 months
• Providing a written financial plan
• Discussing risk tolerance changes and incorporating into plan where appropriate in the past 12 months

The J. D. Power study, now in its ninth year, measures overall investor satisfaction with full service investment firms in seven factors (in order of importance): investment advisor; investment performance; account information; account offerings; commissions and fees; website; and problem resolution.

RBC Wealth Management ranks highest in investor satisfaction with a score of 814 on a 1,000-point scale and performs particularly well in investment advisor and account information. Charles Schwab & Co. follows with a score of 805, performing particularly well in account offerings and website. Fidelity Investments ranks third with a score of 796.

The study also finds that usage of online communication channels has increased compared with previous years:

• 59% of full service investors have visited their firm’s website in the past 12 months, up from 52% in 2009.
• 51% of full service investors have exchanged an email with their advisor in 2011, compared with 19% in 2008.
• Among investors who visit their firm’s website, those older than 64 years average more than 35 visits to their firm’s website per year. In comparison, investors younger than 45 years average 12 visits per year and investors between the ages of 45 and 64 average 23 visits per year.
• Reviewing documents posted by an advisor and reviewing tax information are among the most common tasks performed by investors visiting their firm’s website.

The 2011 U.S. Full Service Investor Satisfaction Study is based on responses from more than 4,200 investors who make some or all of their investment decisions with an investment advisor. The study was fielded in March 2011.

Angelina Jolie and annuities now have something in common.  I know this because the cover story of Barron’s on June 18 declared that annuities are “hot.”  

Only two weeks earlier, the New York Times ran economist Richard Thaler’s encomium to annuities. (Fascinatingly, his last name is the root word for “dollar.”) Annuities are suddenly the darlings of the media. And that’s as refreshing as it is surprising.

However. While positive articles about annuities are certainly welcome—especially at a time when a relentless interest-rate drought is desiccating their value—these particular articles don’t advance the annuity dialogue very far.   

The Barron’s article unknowingly reinforced the confusion between deferred and immediate annuities. It seemed to suggest that people buy or should buy deferred annuities with the goal of annuitizing them. We know that’s not so. It failed to point out that the five main kinds of annuities don’t have a lot in common except the name “annuity.”

Don’t accuse me of pettifogging. To me, the blurring of these distinctions explains some of the public’s inability to understand annuities and part of their resistance to using them. I’d rather see articles that helped disperse the fog. 

A list of the 25 “best annuities” accompanied the story. It also surprised me. (See “Data Connection” on RIJ’s website today and our news item on The Standard, National Life and Royal Neighbors of America.)

First, the editors divide immediate annuities into two categories: life-only and 10-year fixed-only. Why? Life-with-10-year-certain is the best default SPIA.  Just as mysteriously, the top immediate annuity issuer, New York Life, failed to appear in either category. Based on what? A snapshot of payout rates? In the fixed indexed category, there’s also no mention of Allianz Life’s top-selling Master Dex contract.

In the variable annuity category, the Barron’s editors didn’t mention any of the three most popular individual variable annuities, the Jackson National Life Perspective, the Prudential Premier Highest-Daily, and the MetLife Investor Series. The editors didn’t seem to factor in a VA’s lifetime income rider at all. Barron’s apparently thinks most VA owners do or should annuitize their contracts at retirement. I’m not against that. It just doesn’t reflect reality.

This article wasn’t a serious attempt to educate readers about annuities, the mortality credit, or an annuity’s ability to fill gaps in floor income during retirement for the mass-affluent. The reader-comments that trailed the article showed that confusion and suspicion among investors about annuities still reigns.

Richard Thaler’s article in the New York Times lost me at hello. He opened with a comparison between “Dave”, who has a defined benefit pension and “Ron,” who has a big 401(k) balance. Thaler wondered why Ron shouldn’t follow Dave’s example and buy an immediate annuity instead of trying to manage the money himself. 

I wonder why Thaler wonders. People perceive a defined benefit pension as an employer-paid benefit. People perceive 401(k) assets as their own money. There’s a huge behavioral difference between taking a DB pension (which many people reject in favor of cash when they can) and buying an annuity with your own money.

Also, DB pensions are cheaper than retail annuities. And people with DB plans often have 401(k) plans, so they may not have to make a tough choice between liquidity and income. Thaler’s making an apples-to-oranges comparison. Am I quibbling here? Should I be grateful that a positive article article about annuities by a respected economist in a respected publication appeared at all? Perhaps.

© 2011 RIJ Publishing LLC. All rights reserve

Vanguard launches active emerging markets stock fund

Vanguard has introduced the Vanguard Emerging Markets Select Stock Fund, an actively managed equity fund that will employ four global advisory firms: M&G Investment Management Limited, Oaktree Capital Management, L.P., Pzena Investment Management, LLC, and Wellington Management Company, LLP. The  two-week subscription period is expected to end on June 27, 2011.

Following the subscription period, fund assets will be allocated equally among the four investment advisors, which have different but complementary investment approaches, Vanguard said in a release.

“Vanguard Emerging Markets Select Stock Fund seeks to provide long-term capital appreciation by investing in equity securities of small-, mid-, and large-capitalization companies located in emerging markets,” the release said. The fund’s expense ratio is 95 basis points, compared to a Lipper average of 168 basis points for emerging market funds. 

The fund, available to individual retail investors, has a $3,000 minimum initial investment. As it does with its other international stock funds, Vanguard will charge a 2% redemption fee on shares held less than 60 days to discourage short-term trading. 

Some 44% ($748 billion) of Vanguard’s assets under management are in 73 actively managed funds, the company said. Fifteen of its 29 actively managed stock funds use a multi-manager approach.

Care for aging parents costs Americans $3 trillion: MetLife  

Americans who take time off to care for aging parents are losing an estimated $3 trillion in wages, pension and Social Security benefits, according to “The MetLife Study of Caregiving Costs to Working Caregivers: Double Jeopardy for Baby Boomers Caring for Their Parents.”

The study, produced by the MetLife Mature Market Institute in conjunction with the National Alliance for Caregiving and the Center for Long Term Care Research and Policy at New York Medical College, reports that individually, average losses equal $324,044 for women and $283,716 for men. The percentage of adults providing care to a parent has tripled since 1994.

The researchers analyzed data from the National Health and Retirement Study (HRS) to determine the extent to which older adult children provide care to their parents. They also studied gender roles, the impact of caregiving on careers and the potential cost to the caregiver in lost wages and future retirement income.

“Nearly 10 million adult children over the age of 50 care for their aging parents,” said Sandra Timmermann, Ed.D., director of the MetLife Mature Market Institute. “Assessing the long-term financial impact of caregiving for aging parents on caregivers themselves, especially those who must curtail their working careers to do so, is especially important, since it can jeopardize their future financial security.”

The study found that:

• Adult children age 50+ who work and provide care to a parent are more likely than those who do not provide care, to report that their health is fair or poor.
• The percentage of adult children providing personal care and/or financial assistance to a parent has more than tripled over the past 15 years and currently represents a quarter of adult children, mainly Baby Boomers. Working and non-working adult children are almost equally likely to provide care to parents in need.
• Overall, caregiving sons and daughters provide comparable care in many respects, but daughters are more likely to provide basic care (i.e., help with dressing, feeding and bathing) and sons are more likely to provide financial assistance defined as providing $500 or more within the past two years. Twenty-eight percent of women provide basic care, compared with 17% of men.
• For women, the total individual amount of lost wages due to leaving the labor force early because of caregiving responsibilities equals $142,693. The estimated impact of caregiving on lost Social Security benefits is $131,351. A very conservative estimated impact on pensions is approximately $50,000. Thus, in total, the cost impact of caregiving on the individual female caregiver in terms of lost wages and Social Security benefits equals $324,044.
• For men, the total individual amount of lost wages due to leaving the labor force early because of caregiving responsibilities equals $89,107. The estimated impact of caregiving on lost Social Security benefits is $144,609. Adding in a conservative estimate of the impact on pensions at $50,000, the total impact equals $283,716 for men, or an average of $303,880 for male or female caregivers age 50+ who care for a parent.

Lincoln Financial Distributors names new head of Institutional Retirement Solutions Distribution

Jim Lyday has joined Lincoln Financial Distributors (LFD), the wholesale distribution subsidiary of Lincoln Financial Group as head of Institutional Retirement Solutions Distribution, the company announced. He will report to Will Fuller, president and CEO of LFD, and will be responsible for growing Lincoln’s Defined Contribution business in the full service mid-to-large employer retirement plan market.

Lyday has been a senior manager at Prudential Financial and in the defined contribution businesses at The Principal Financial Group.

eRollover launches marketing and lead-generation program for financial advisors

eRollover, which hosts a website focused on retirement planning, has launched eRollover for Advisors, an online marketing solution aimed at helping financial advisors grow their practices. 

Peter Velardi, eRollover’s president and COO, said eRollover for Advisors addresses such issues as client acquisition and internet marketing/ social media. It also aggregates resources for financial advisors. 

For a monthly fee, advisors can “connect with members from eRollover’s growing consumer community who are seeking access to advice to manage their rollover and planning needs. They will also have the ability to receive additional qualified leads from eRollover properties around the web, and will soon access a webinar system to reach interested consumers directly online,” the company said in a release.

Mr. Velardi said eRollover is offering “an opt-in listing of advisors, not a list scraped off of the internet.  In addition to the consumer match feature, eRollover for Advisors provides “a means for advisors to learn how to market to consumers utilizing an array of proprietary social media training resources, including cheatsheets, webcasts, and the possibility for them to connect with experienced specialists to utilize social media to supplement their practice.”

New York Life has launched a business-to-business print and online advertising campaign, targeting wirehouse financial advisors, that highlights the benefits of using guaranteed income annuities in retirement planning. The print ads are currently running in Registered Rep, Investment News and On Wall Street and online ads are appearing on Ignites, FundFire and Morningstar. 

“The campaign is meant to reinforce the thinking validated by academics, that income annuities are a valuable asset class for retirement portfolios. Our strategy is to extend the reach of New York Life and guaranteed lifetime income in the wirehouses and regional broker dealer firms,” said Steve Fisher, chief marketing officer for Retirement Income Security, New York Life, in a release.  “The ad includes a call to action, suggesting that financial advisors rethink retirement income planning to include a guaranteed lifetime income stream.”

Both the print and online ad banners direct advisors to a splash page where they can request the Financial Research Corporation white paper titled “Income Annuities Improve Portfolio Outcomes in Retirement.”  Partially funded by New York Life, the white paper discusses the benefits of using income annuities as an asset class in a client’s overall portfolio.  

“This new campaign positions lifetime income annuities as an asset class within a portfolio and utilizes common investment concepts and terms to promote annuities,” said Matt Grove, vice president in charge of Guaranteed Lifetime Income. “Including guaranteed income solutions have been shown to help improve outcomes in clients’ retirement portfolios.”

In the fourth consecutive monthly decline since January’s inflows of $29.8 billion, estimated long-term mutual fund flows were $22.6 billion in May, according to Morningstar. U.S. ETFs lost about $3.1 billion to outflows in May, in contrast to inflows of $23.3 billion in April.

Other highlights of Morningstar’s report on mutual fund flows included:

• U.S. stock funds recorded their first significant outflows of the year, as the asset class lost $4.5 billion in May.
• Although inflows have slowed, international-stock funds collected assets of about $1.5 billion during the month. Diversified emerging-markets equity funds accounted for the majority of these inflows.
• For the fifth consecutive month, inflows increased for taxable-bond funds. Investors added $20.8 billion in new money to the asset class in May, but with a slightly diminished taste for credit risk. Flows into municipal-bond funds were flat after six consecutive months of outflows.
• Following a steep drop in silver and other commodity prices, commodities funds fell more than five percent on average and experienced outflows of more than $500 million in May.

Other highlights of Morningstar’s report on ETF flows included:

• Although three U.S. stock ETFs placed in May’s top-five ETFs by inflows, the U.S. stock asset class saw outflows of $2.7 billion during the month.
• Outflows from international-stock ETFs totaled $1.1 billion in May after inflows of $6.8 billion and $7.1 billion in March and April, respectively.
• Commodities ETFs realized the largest outflow of any ETF asset class in May, as investors withdrew $3.7 billion. May’s redemptions also marked the single largest net monthly outflow for commodities ETFs.
• Taxable-bond ETFs made a healthy contribution to overall ETF flows again in May. The asset class’ inflows of $2.1 billion were second only to alternative ETFs, which also saw inflows of about $2.1 billion.  

Currently one-third of Federal spending is financed by new borrowing. This is unsustainable. However, with the two parties locked in mortal combat in preparation for the 2012 election it is likely that the changes made as part of the debt limit extension in August will be only a down payment.

More will have to be done in 2013 and our political leaders will have to cut more spending and raise revenue. Due to the unpopularity of raising tax rates this means eliminating or reducing the tax breaks and deductions that are termed “tax expenditures.”

According to the Joint Committee on Taxation these tax expenditures reduce Federal revenue by $1.1 trillion annually. The favorable tax treatment of contributions to retirement savings plans accounts for about 10% of this and is among the biggest of these expenditures.

In a June 8 appearance before The Economic Club of Washington, D.C., Sen. Mark Warner, D-Va., said that the so-called Group of Six, a group of senators trying to convert last year’s presidential deficit commission recommendations into legislation, is embracing the deficit commission’s idea of eliminating or reducing these tax expenditures, nearly all of which are popular with the public.

The Debt Commission proposed two scenarios which affect DC plans. One would reduce the combined DC contribution limit to $20,000 or 20%, whichever is less. The other would eliminate it altogether. A big bulls-eye has been painted on the employer-sponsored defined contribution system.

The 2013 tax debate will be a barroom brawl with supporters of each tax preference engaged in a no holds barred effort to preserve as much of their program as possible. Mix in consideration of the tax rate for of capital gains, dividends and corporations and you may have a situation where virtually everyone will be willing to throw the employer-sponsored defined contribution system under the bus.

It gets worse. Many see this situation as an opportunity to replace the current system with one run by the government and if that doesn’t fly they will propose changes that would alter the current system significantly.

For example, some would replace the current tax deferral with a refundable tax credit. And at the other end of the political spectrum some advocates see any tax preference as a social manipulation preferring no tax preferences whatsoever, including those for retirement savings.
If we are going to preserve the current system in anything resembling its current form with anything close to its current contribution limits, we must begin preparing now. Check back for more information on this subject coming soon.

The Supreme Court’s recent 5-4 ruling in the eight-year-old shareholders’ lawsuit against Janus Capital Group, which tested the precise boundaries of liability for misleading prospectus statements, is “significant and far-reaching,” according to a new Briefing by Wolters Kluwer Law & Business.

The decision in Janus Capital Group, Inc. v. First Derivatives Traders, (U.S. Supreme Court, docket No. 09-525) was seen as a victory for Janus’ investment advisers as well as for independent auditors of public company financial statements. The Court ruled that the adviser did not make any of the statements in the prospectuses, the fund did, and only the fund had the statutory duty to file the prospectuses with the SEC.

The Court stated that any reapportionment of liability in the securities industry in light of the close relationship between investment advisers and mutual funds is properly the responsibility of Congress and not the courts.

“Basically, the Court is saying it will not waver from its previous decision that Rule 10b-5’s implied private right of action does not include actions against aiders and abettors,” said Wolters Kluwer Law & Business principal federal securities law analyst Jim Hamilton.

In that previous decision, the 1994 Central Bank decision, the high court ruled that a mutual fund investment adviser cannot be held liable in a private action under Rule 10b-5 for false statements included in its client mutual funds’ prospectuses

The decision, split on ideological lines, was written by Justice Clarence Thomas. Liberal-leaning Justices Stephen Breyer, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan all dissented.

“The Court emphasized that for the Central Bank rule to have any meaning, there must be some distinction between those who are primarily liable (and may be pursued in private suits) and those who are secondarily liable (and may not be pursued in private suits),” Wolters Kluwer said in a release. “The Court has drawn a clean line between the two – the statement issuer is the person or entity with ultimate authority over that statement and others are not.”

Attorneys for the First Derivative Traders were bitter after the decision, which was also seen as a setback for the Obama administration, the Securities and Exchange Commission, and shareholders’ ability to penetrate the corporate veil.

“This is a roadmap for fraud,” said David Frederick, a leading plaintiffs’ advocate at the high court. “That’s what the majority has sanctioned. If the Court allows false statements to issue through intermediaries, it will undoubtedly unleash bad actors.”