Headlines about a suggestion by Tidjane Thiam, the CEO of Prudential Plc, during a May 11 analysts call that Jackson National might soon start de-risking its popular Perspective variable annuity have momentarily distracted many in the annuity industry from truly serious matters, like the Bulls-Heat matchup.   

That’s significant, but I’m not sure what all the fuss is about. Jackson National hasn’t changed any of its option-rich riders or taken any products off the market yet. If it does de-risk its offerings a bit, Jackson National would merely be following the lead of close-competitors MetLife and Prudential Financial in moderating the promises embedded in its lifetime withdrawal riders.

Given the Fed’s protracted low interest rate policy (which raises VA hedging costs even as it props up the U.S. economy) many insurance wonks have been expecting as much from Jackson. “Jackson for a long time was too rich,” one insurance insider told RIJ this week. “A lot of us couldn’t understand it, especially with Solvency II coming. They offered no restrictions on funds and they had really grown fast in the variable marketplace. So finally it looks like the parent said, ‘I’m out, guys.’”

“If your competitors step back, you’ve got to step back,” said Tamiko Toland, who covers variable annuities at Strategic Insight.

The people most likely to be upset by a Jackson National dial-down, if and when it occurs, would be the advisors who loved Jackson’s advisor-friendly  philosophy. Their reaction might be comparable to Ferrari aficionados fretting over a report that next year’s model might have only 400 horsepower instead of 500.   

Contract owners and Prudential Plc shareholders either won’t care or they’ll be cheered by the news. Advisors are only one of a variable annuity issuer’s constituencies, as Stephen Pelletier, president of Prudential Annuities, said in an interview on Monday. “We are always seeking to drive sustainable profitable growth,” he told RIJ.  “It’s always about that. We think that’s the right approach. That’s a win-win-win combination—for our shareholders, distribution partners, and our clients. That approach works for everybody. It’s what keeps us in the marketplace.” Since the financial crisis, Prudential has twice reduced the richness of its Highest Daily step-up feature and survived. 

For those who don’t recall the details of Jackson National’s popular Perspective contract: The last time I looked, it offered about 99 investment options, few if any asset allocation restrictions, and a living benefit featuring annual deferral bonuses of 5%, 6%, 7% or 8%, with rider fees ranging from 95 basis points to 130 basis points per year. Advisors can wind up the benefits, the fees and the risks right to the red line. 

“We’ve always focused on the cafeteria-style VA product, with various withdrawal and bonus options, and we decided to extend that to the GMWB option. It’s an extension of our ‘give the rep a choice’ philosophy,” Jackson National vice president Alison Reed told RIJ last fall.

That, along with its high ratings and the retreat of several erstwhile competitors after the GFC, helped Jackson National post $14.7 billion in variable annuity sales in 2010 (a 10.4% market share), third only to Prudential ($21.7 bn) and MetLife ($18.3 bn).  And Jackson National’s value proposition may feel more liberal to some advisors than either Prudential’s CPPI-based risk model or MetLife’s GMIB. In the first quarter of 2011, Jackson’s sales jumped 45%, to $4.6 billion.   

Some observers think Prudential Plc’s CEO was hearing the approaching footsteps of regulatory change when he made his comments. As a unit of London-based Prudential Plc (no relation to Newark, NJ-based Prudential Financial), Jackson National (U.S. headquarters in Lansing, MI) will be subject to Solvency II, Europe’s risk-based rules for insurance, starting on January 1, 2013.  The three “pillars” of Solvency II include the tightening of standards for capital, internal supervision and reporting. 

In any case, Jackson National isn’t likely to tamper too heavy-handedly with its successful VA formula. But if it did, would advisors switch brands? At the margins, maybe. “Sure, they’ll lose some advisors. But your core is going to stay with you because you’ll take care of them,” our insurance insider said.

“Those guys will get extra special attention,” he added. “The wholesalers are talking to them, and home office staff will travel with the wholesalers. You can do things for them that don’t cost anything. There are value-added services. You can help someone analyze his book of business.  With the wholesaling staff that Jackson has, they can soften the blow with communication. They’ll have a plan figured out that will make them look OK. They have a reputation of being advisor-friendly and that will carry them through.”

In the short run, rumors of future scarcity should boost sales of Jackson’s rich contract.

During the mid-decade VA boom, insurance companies waited until after a crash forced them to de-risk their contracts (or, in some cases, to stop selling VAs entirely). Having enjoyed the 2010 boomlet, the leading issuers are apparently listening more closely to their actuaries than before. The fact that they’re trimming sails now rather than later is good for advisors, clients and shareholders. 

© 2011 RIJ Publishing LLC. All rights reserved.

Lincoln Financial Group has simplified the structure of its Insurance and Retirement Solutions business under the leadership of president Mark Konen and “increased focus on driving results in the Life Insurance, Annuities and Group Protection businesses,” the company said in a release.

The new design “simplifies the structure of the businesses and increases the responsibilities of the senior leaders and their respective teams,” the release said. The senior leaders who were named included:

• Rob Grubka, President, Group Protection – Grubka leads all functions of the Group Protection business including strategy and marketing, product development, underwriting, distribution and service.  
• Brian Kroll, Head of Annuity Solutions – Kroll leads annuity product management, product positioning, retirement solutions research and development and funds management.  
• Mike Burns, Head of Insurance Solutions – Burns leads the manufacturing operations of the Life Insurance business, which now includes underwriting and new business, product management and  product positioning.   
• Jeff Coutts, Head of Financial Management – Coutts continues to lead the financial management portion of the Insurance and Retirement Solutions businesses, which includes valuation, profitability and risk management, product pricing review and asset liability management for all individual life insurance, annuity and group protection products.
• Kristen Phillips, Head of Strategy and Marketing –Phillips will rejoin the company in June as senior vice president and head of Strategy and Marketing for the Insurance and Retirement Solutions business.  In this new role, Phillips leads the Life and Annuity manufacturing strategy functions including marketing and communications as well as product compliance and implementation.

Phillips returns to Lincoln after three years as the Hartford Symphony Orchestra’s executive director. At Lincoln, she was responsible for developing and implementing the life insurance and annuities business strategy, including product implementation, distribution support, and compliance.

If owners of variable annuity contracts with deep-in-the-money living benefits had acted in a strictly economically rational manner in the winter of 2008-2009 and begun exercising the benefit (and perhaps shoveling their withdrawals into
depressed stocks), it would have been bad news for the insurance companies who issued those contracts.

The insurers would have lost assets under management, lost the fee revenue on those assets, and possibly (depending on their previous actuarial assumptions) had to set aside a higher level of reserves.

Fortunately for the insurance companies, most VA owners didn’t jump on that opportunity—not, perhaps, because they weren’t financially astute but simply because they chose to stay-the-course with their existing retirement plans. It remains to be seen exactly how insurance company actuaries will use that experience in making assumptions about benefit utilization and reserve requirements in the future.

Those insights come from a recent study by Ruark Consulting LLC on behalf of eight insurance companies: AXA Equitable, ING, MassMutual, Ohio National, Pacific Life, Prudential, Sun Life of Canada, and Commonwealth Annuity and Life.
Ruark’s “2010 Variable Annuity Surrender Study and 2010 Variable Annuity Benefit Utilization Study” examined the variable annuity surrender and benefit utilization data at those companies before, during and after the 2009 financial crisis and recession. The data included over 10 million
policy years of experience from January 2007 through March 2010.

Among those owners who took partial withdrawals, the study found that only about one-third of owners of in-the-money living benefits withdrew the most efficient amount—the maximum they could take without reducing their guaranteed benefit base from their contracts during the financial crisis. The rest took either more or less than that amount, which mitigated the risk to the insurance company.

“Insurance companies and actuaries would typically have expected that the benefits would be used with a high level of economic efficiency—that people would use them when they were in-the-money—but the data is not showing that,” said Rich Tucker, a vice president at Ruark Consulting.

Key findings of the 2010 Variable Annuity Surrender Study, which was follow-up to a similar study published by Ruark Consulting in 2008, included:

• Full surrender rates have declined significantly since the 2008 recession. The prevailing opinion is that owners greatly curtailed all financial activities in favor of watchfulness during this period. A combination of low interest rates and a pull back by VA writers on the aggressiveness of new living benefits also meant that fewer better alternatives to current VA contracts were available.
• Policies with guaranteed living benefits experience lower surrender rates than those without. The type of living benefit also has an effect. Policies with Guaranteed Lifetime Withdrawal Benefits (GLWB) have the lowest surrender rates, followed by Guaranteed Minimum Income Benefits (GMIB), Guaranteed Minimum Withdrawal Benefits (GMWB), Guaranteed Minimum Accumulation Benefits (GMAB), and then policies containing no guaranteed living benefit.
• Surrender rates decline significantly as the current value of guaranteed benefits increases. This is commonly referred to within the industry as “In‐the‐Moneyness” level. The In‐the‐Moneyness affect is exhibited for all types of guaranteed living benefits (GLWB, GMIB, GMWB, GMAB). Policies with a guaranteed minimum death benefit (GMDB) only also exhibit this effect, albeit to a lesser degree than found with guaranteed living benefits.
• When the equity markets dropped in 2008 and 2009, there was a temporary spike in surrender rates for contracts without valuable In‐the‐Money living benefits.
• Surrender rates will also vary noticeably by attained age, policy duration, distribution channel, commission structure, and policy size.

Ruark’s 2010 Variable Annuity Benefit Utilization Study, which was a follow‐up to the similar study published by Ruark Consulting in 2009, covered partial withdrawals under variable annuity contracts containing Guaranteed Lifetime Withdrawal Benefits (GLWB), Guaranteed Minimum Withdrawal Benefits (GMWB) and Guaranteed Minimum Income Benefits (GMIB), as well as partial withdrawals on policies that did not contain any guaranteed living benefit.

Partial withdrawals were measured by annual frequency. The amount taken, given that a withdrawal had occurred, was also measured. The amount taken was expressed as a percentage of the guaranteed base amount of each policy, the current account value, and, for GLWB and hybrid GMIB designs, the maximum allowed to be withdrawn under the terms of the benefit.

The partial withdrawal activity among owners with any of the guaranteed living benefits (GLWB, GMWB, and GMIB) was strikingly similar to those without such benefits. We’ve noted that full surrender rates have declined since the 2008 recession. At the same time, utilization of partial withdrawals under Guaranteed Living Benefits has not shown a significant increase. Owners appear to be preserving the future value of their guaranteed benefits for when they are needed in retirement.

Key findings common to partial withdrawal activity include:

• Partial withdrawal frequency increases with attained age
• Older age tax qualified policies exhibit higher partial withdrawal frequency than non‐tax qualified policies. This is due to required minimum distributions at age 70 under tax qualified policies.
• Among owners taking partial withdrawals, substantial proportions take amounts larger than the maximum allowed under their benefit (thereby causing a reduction in benefit amount). A substantial portion also take an amount below the maximum allowed. These proportions vary noticeably by the attained age of the owner.
• Withdrawal frequency and amounts withdrawn have not noticeably increased on policies with greater In‐the‐Moneyness 

After reading a Wall Street Journal article entitled, “Retirement Income? Annuities Come Up Short,” Gary S. Mettler, vice president of Nyack, NY-based Presidential Life Insurance Co., an issuer of temporary life annuities, wrote this response to the paper:

“The fixed annuity industry has already begun to address many of the issues raised in [Brent Arends’] Wall Street Journal article, published on Sunday, May 1, 2011 regarding lifetime fixed annuities by re-introducing a derivative of the lifetime annuity called ‘temporary life.’

“Temporary life is a short duration and life-contingent fixed annuity.  The contract usually doesn’t exceed durations of 5 or 6 years, with the provision that one must continue to survive to receive annuity payments, but in no case will it last more than the scheduled duration. 

“With this fixed annuity design, the Insured/Annuitant gets the benefit of two pricing elements; the interest rate assumption (now, admittedly very low) and the use of their mortality factor, based on their age and gender.  Both elements work to boost annuity payments.  But, because the contract is a short duration, again usually 5 – 6 years, the cost to purchase a temporary life “life contingent” income annuity is much lower than the cost to purchase a full lifetime annuity. 

“For example: A male, age 80 need only spend $52,793 to purchase a temporary life annuity in order receive a monthly income of $1,000 for five years vs. spending $103,505 for a lifetime income annuity.

“If this man dies after two years, then his estate is only out the $52,793 annuity cost for the temporary life annuity and not the $103,505 cost for the full lifetime annuity.  If the man survives the five years, his income ceases from the temporary life annuity. But now he can purchase a new temporary life annuity when he is five years older, at age 85

“If interest rates don’t change over this five-year period his new age 85 purchase cost for another five-year temporary life annuity will be $49,179.  However, if annuity rates improve over this period by 10% or 20% due to interest rate improvements, his new age-85 purchase cost for the temporary life annuity will be $44,264 or $39,434 respectively for the same $1,000 monthly income payment.

“In this manner, individuals can still purchase the pricing element of a life contingent income without being compelled to purchase a full lifetime annuity.  And via a multiple temporary life annuity contract purchase strategy at different ages, individuals can participate in a rising interest rate environment.”

Lincoln group VA sales now supported by TPA Channel

Lincoln Financial Group today announced that its Lincoln Director group variable annuity-based retirement solution will be available for new sales exclusively through a service model supported by the Third-Party-Administrator (TPA) channel.

The Lincoln Director solution will continue to offer plan sponsors fiduciary assistance, employee retirement education and communications, and additional opportunities for plan enhancements through value-added services.

Eric Levy, Lincoln’s head of products, Defined Contribution, said, “While TPA exclusivity for Lincoln Director is the ideal model for the micro-to-small markets, we will continue to offer a suite of competitive, full-service solutions that address the needs of the mid-and-large end of the market.”

As a plan provider, Lincoln Financial also provides fiduciary support, funds management, and accumulation strategies. Current Lincoln Director full-service retirement plan cases will not be affected by the change.

The Lincoln Director investment lineup offers 90 options from 15 fund families. The program also offers a range of distribution options, including Lincoln’s patented i4LIFE Advantage solution that ensures a lifetime of income, with a minimum guarantee and control over assets.

Allianz Life names director of Consumer and Distribution Insights

Craig Parker has been appointed the new director of Consumer and Distribution Insights at Allianz Life Insurance Co. of North America, with responsibility for consumer and distribution research, trend analysis, segmentation, analytics, and reporting functions.

Parker will also oversee the CRM team, which has responsibility for CRM administration, campaign management, and territory management. He joined Allianz Life in 2008 as a senior business process consultant, responsible for leading and coaching OPEX projects.

Prior to joining Allianz Life, Parker held market research, marketing integration, and Six Sigma roles at GE Capital and Genworth. He earned his bachelor’s degree in public relations and advertising from University of Wisconsin-Madison.

Mutual of Omaha adds new funds to Its 401(k) product offering

Mutual of Omaha’s Retirement Plans Division has added 20 new non-proprietary funds from 11 different investment managers, including Vanguard Target Retirement Funds, which the company said “are complementary to our… Mutual GlidePath series of funds.”

“Mutual’s GlidePath funds are characterized by a multi-manager approach, using a combination of actively and passively managed investments, while Vanguard Target Retirement Funds are comprised of Vanguard’s passively managed index funds,” said Tim Bormann, 401(k) product-line director for Mutual of Omaha.

Mutual of Omaha now offers three Qualified Default Investment Alternatives (QDIA) to plan sponsors. Other new funds include:

• Templeton Global Total Return Fund
• Goldman Sachs Small Cap Value Fund
• John Hancock Disciplined Value Mid-Cap Fund
• Lord Abbett Value Opportunities Fund
• MFS Value Fund
• Waddell & Reed New Concepts Fund
• Dodge & Cox International Stock Fund
• Franklin International Small Cap Growth Fund
• Nuveen Tradewinds Global All-Cap Fund
• Wells Fargo Advantage Emerging Markets Equity Fund
• Stadion Tactical Fund

Funded status of U.S. corporate pensions 89.2% in April: BNY Mellon

The funded status of the typical U.S. corporate pension plan in April rose 0.7 percentage points to 89.2%, the eighth consecutive month of improvement, according to BNY Mellon Asset Management.    

The funding ratio for the typical corporate plan has improved 4.9 percentage points since the beginning of the year, according to the BNY Mellon Pension Summary Report for April 2011.

Thanks to rising equity prices worldwide, the value of assets for the typical corporate pension plan’s assets rose by 2.6% in April, outpacing the 1.8% rise in liabilities, according to the report.  Liabilities rose because the Aa corporate discount rate fell to 5.50% from 5.61%. Lower yields on these bonds result in higher liabilities.

“An increasing number of plan sponsors are evaluating their prospects to further improve their funded status through return-seeking assets, such as alternatives and equities,” said Peter Austin, executive director of BNY Mellon Pension Services. “The question most frequently asked is whether now is the time to increase the liability hedge given interest rate trends. “

Prudential Annuities enhances investment platform

Prudential Annuities has added BlackRock Global Strategies Portfolio and AST Wellington Management Hedged Equity Portfolio to its roster of variable annuity investment options. 

The company said it is the first to offer an alternative investment asset allocation portfolio in a variable annuity. Prudential now offers six alternative strategies among a total of 18 asset allocation portfolios. 

AST Wellington Management Hedged Equity Portfolio’s 100% equity asset allocation uses an index-option overlay to provide downside protection.

Nationwide posts 29% higher net income in 1Q 2011

Nationwide reported a 10% increase in net operating income for the first quarter of 2011, compared to the same period in 2010. Net operating income of $476 million through March 31, 2011 was driven by lower claims in the company’s property & casualty business combined with continued asset growth in the financial service business and improved investment performance overall.

Total operating revenue in the quarter was $5.2 billion. Net income in the first quarter of 2011 was $512 million, up 29% from the same period in 2010. Results included $2.7 billion in property & casualty claims, life insurance benefits, credited interest, and other accident and health benefits paid to policyholders.

A table of financial highlights and further video commentary on results are available at www.nationwide.com.

Nationwide offers FDIC-insured account to plan participants

Nationwide Financial Services, Inc. has added the Nationwide Bank FDIC Insured Deposit Account option to its diverse menu of retirement plan offerings.

The new product offering is an interest earning account that provides retirement plan participants with principal protection, current income and in-plan liquidity.

Funds placed in the account are considered deposits of Nationwide Bank and are insured by the Federal Deposit Insurance Corporation (FDIC) to at least $250,000 per participant.

The Nationwide Bank® FDIC Insured Deposit Account will be offered to plan sponsors of 401(a), 401(k), 457 and executive deferred compensation plans.

Lazaro joins New York Life from Van Kampen

To broaden its defined contribution investment only (DCIO) practice, New York Life Investments has appointed Al Lazaro as Midwest regional vice president, reporting to Steven Dorval, managing director of defined contribution assets for New York Life Investments. 

Mr. Lazaro had been Van Kampen Investments’ Midwest regional vice president focused on the Midwest. A graduate of Bradley University, he has also worked at Evren Securities in mutual fund marketing.  

New York Life’s seven DCIO professionals sell the MainStay mutual fund family and New York Life’s stable value products. New York Life Investments currently has $4.3 billion in DCIO assets and $300 billion in total assets under management. 

AXA Equitable launches Cornerstone Allocator, powered by Morningstar  

AXA Equitable Life Insurance Company, with Morningstar Associates, LLC, has launched Cornerstone Allocator, a web application intended to help advisors tailor client investment allocation recommendations in AXA’s Retirement Cornerstone variable annuity.

Retirement Cornerstone, introduced in 2010, is a tax-deferred investment platform that, unlike a traditional annuity, supports two interactive but distinct accounts – one focused on the opportunity to maximize investment growth potential through over 100 sub-account fund choices, the other on providing innovative retirement income protection that can help address the inflationary impact of rising interest rates.

Cornerstone Allocator serves as a user-friendly guide to aligning the power of Retirement Cornerstone to each client’s risk profile and income objectives. Specifically, it is designed to assist financial professionals in making determinations about how to distribute assets between Retirement Cornerstone’s Investment Performance Account and Protection with Investment Performance Account and to allocate assets among the many investment options within each account.

The tool helps financial professionals facilitate Retirement Cornerstone client reviews and promote understanding of the objectives behind account and asset allocation choices. Using Cornerstone Allocator, financial professionals can generate a client-approved Allocation Report that complements hypothetical illustrations and/or marketing materials provided to the client during the account opening process.

The client-facing Allocation Report displays the following information:

·            A review of the client profile responses

·            Investment Performance Account and Protection with Investment Performance Account allocations

·            Aggregate and detailed asset allocation summary by Account

·            Individual Investment Profiles for the sub-accounts elected generated by Morningstar

DST Systems buys Newkirk Products

DST Systems has acquired Newkirk Products, Inc. for undisclosed terms. Newkirk, an industry leader in the developer and deployer of communications, education, and investment information for companies in the retirement planning, managed care, and wealth management industries, will be a unit of DST’s Output Solutions Segment

Newkirk, which will retain its brand identity, has 40 years’ experience solving communication issues of financial institutions and professional firms focusing on 401(k), 457, 403(b), money purchase and profit sharing plans. It has operations in New York, Oregon, New Jersey and Minnesota.

Newkirk’s on-demand publishing and marketing solutions are expected to complement DST Output’s transactional and digital fulfillment solutions, making it easier for companies to communicate to customers across print, mobile, and electronic channels. It also enables clients of DST Retirement Solutions to access Newkirk’s communication and education materials, financial planning tools and plan documents.

DST provides information processing and computer software products and services to the mutual fund, investment management, insurance and healthcare industries. It also provides integrated print and electronic statement and billing output solutions through a wholly owned subsidiary.

“Social Security Timing” Software Unveiled

Senior Market Sales, Inc., an Omaha-based insurance marketing organization, has introduced its Social Security Timing™ software, which helps married retirees maximize their Social Security benefits.   

Social Security Timing™ has two components. The first is the free “What’s at Stake?” consumer calculator, which shows the best and worst possible Social Security election decisions. It also shows their top three election strategies and prompts them to consult an advisor. The second component is the Social Security Timing™ software that financial advisors can purchase to use with their clients.

The Social Security Timing™ Software and the free “What’s at Stake?” calculator are available for review at www.SocialSecurityTiming.com.  

“Whether to elect Social Security early or late is a decision virtually every retiree is faced with,” said Joe Elsasser CFP, Director of Advisory Services for Senior Market Sales and the software’s creator. “Social Security Timing™ is the only software in the marketplace that simultaneously calculates all whole year election age combinations across nine possible election strategies in order to identify the strategy that offers the highest lifetime benefit.”

Senior Market Sales is a full-service IMO. Joe Elsasser, CFP, is an Omaha-based independent financial advisor.

Longevity Awareness Expands Retirement Income Opportunities: Conning

The transfer of longevity risk creates a tremendous growth opportunity for insurers who develop and distribute retirement income products. However, profitable growth depends on managing the risks associated with these products, according to a new study by Conning Research & Consulting.

“The life industry has grown significantly during the past two decades by helping individuals accumulate retirement assets,” said Scott Hawkins, analyst at Conning Research & Consulting.

“However, Baby Boomers are increasingly concerned about outliving their accumulated assets as they near or enter retirement. At the same time, pension plan sponsors are concerned about managing their assets to meet their obligations to current and future retirees as life spans increase. The longevity risk concerns of both individuals and groups represent significant premium growth opportunities for insurers over the medium term.”

The Conning Research study, “Expanding Retirement Income Opportunities for Insurers: Managing Increased Longevity Risk” identifies and quantifies growth opportunity for insurers that provide retirement income products that manage longevity risk. It explores key longevity and investment risks to profitable growth that insurers face as they develop this opportunity and how insurers could manage these risks.

“This transfer of longevity risk creates a tremendous growth opportunity for insurers who develop and distribute retirement income products,” said Stephan Christiansen, director of insurance research at Conning. “Opportunities can be developed from exploiting differences in mortality of specific populations or groups, from fluctuations in specific age cohorts along the mortality/longevity spectrum, or from providing solutions to mismatches between investment and payment durations. However, profitable growth for insurers offering these products also depends on developing effective solutions to challenges of product distribution and on successfully managing the broad-scale accumulation of longevity risk within the insurer’s own portfolio.”

“Expanding Retirement Income Opportunities for Insurers: Managing Increased Longevity Risk” is available for purchase by calling (888) 707-1177 or at www.conningresearch.com.

BNY Mellon to Acquire Wealth Management Business of Talon Asset Management

 BNY Mellon has agreed to buy the wealth management operations of Chicago-based Talon Asset Management, including more than $800 million in assets under management. Terms of the deal, which does not include the firm’s private equity and hedge fund businesses, were not disclosed and the sale is expected to close in the second quarter. 

Talon staff will become part of BNY Mellon and senior Talon principals Terry Diamond, Alan Wilson and Edwin Ruthman will assume leadership roles in the Chicago office.

The companies said the transaction offers several advantages to Talon clients, including:

• Broader global asset management opportunities
• Increased access to alternative investment opportunities
• Enhanced technology and reporting capabilities
• Expanded private banking and wealth planning services

BNY Mellon already employs nearly 450 people in the metropolitan area in an array of business units including asset servicing and treasury services.

Mutual of Omaha offers Mesirow Financial’s fiduciary service to plan sponsors         

Mutual of Omaha now offers a new plan-level fiduciary service option to its retirement plan customers in the form of Mesirow Financial’s investment manager service, which addresses plan sponsor needs under ERISA section 3(38) at the individual plan level.

The new offering, if selected by a plan sponsor, allows Mesirow Financial, an ERISA 3(38) Investment Manager, to select and monitor investment options for a plan. This solution expands and complements the existing 3(21) co-fiduciary service Mutual of Omaha has offered in conjunction with Mesirow Financial since 2007.

“Our new 3(38) investment manager solution provides more flexibility to broker-dealers and their advisors, addressing the Department of Labor’s proposed regulations expanding the definition of ‘fiduciary’ related to investment advice,” said Tim Bormann, 401(k) product-line director for Mutual of Omaha.

“Outsourcing investment selection and monitoring to Mesirow Financial provides an additional layer of protection to broker-dealers and their advisors and allows the advisor to focus on providing other value-added services to their clients. It also reduces the time commitment required by plan sponsors to meet their fiduciary obligations, allowing them to devote more time to running their business.”  

The most notable difference between the 3(21) and the 3(38) fiduciary services is that Mesirow Financial, through a menu-driven approach, provides advisors and plan sponsors with multiple investment line-ups to choose from under the 3(21) service; and with the 3(38) investment manager service, Mesirow Financial assumes full responsibility for developing investment guidelines and acts as the investment manager to the plan.        

Based in Chicago, Mesirow Financial is an independent, employee-owned financial services firm with more than 1,200 employees in the U.S. and London. The firm has capital of $299 million, revenues totaling $526 million for fiscal 2010 and $51.0 billion in assets under management, of which $24.3 billion are in currency and commodities as of the end of 2010.    

GAO study on 401(k) tax subsidy not accurate: ASPPA  

Brian Graff, executive director/CEO of The American Society of Pension Professionals & Actuaries (ASPPA) said the new GAO report, “Private Pensions: Some Key Features Lead to an Uneven Distribution of Benefits,” is wrong in asserting that the 401(k) system disproportionately benefit higher income workers.

“Simply put, the facts say otherwise,” Graff said in a release. He continued:

“Based on the IRS’ own data 74% of workers participating in defined contribution plans come from households making less than $100,000. Only 5 percent come from households making more than $200,000.

“When you measure who gets the tax benefits from these plans, the impact on moderate income workers becomes clearer. Households making less than $50,000 pay only 8 percent of all income taxes, but receive 30 percent of all the tax incentives associated with defined contributed plans. 

“In other words, for every dollar of income taxes paid by these workers they get almost four dollars back in tax incentives for these plans. That’s a good deal by any measure, and it shows that these tax incentives are effectively and efficiently targeted at low and moderate income families. The reason is these plans are subject to stringent nondiscrimination rules that are a part of the tax code and were designed by Congress to make sure these plans provide benefits fairly to everyone.

401(k) plans have proven to be incredibly successful at getting moderate income workers to save.

“According to the Employee Benefits Research Institute, over 70 percent of workers making between $30,000 and $50,000 save when covered by a workplace savings program, whereas less than 5 percent of those same workers save on their own when not covered by a plan. Of course, more does need to be done to expand retirement plan coverage, which is why ASPPA supports proposals, like the Auto-IRA proposal in the President’s budget that would give more workers access to these plans.”

Retirement plan sponsors can learn from Kraft Foods decision 

On April 11, the U.S. Court of Appeals, Seventh Circuit, reversed a lower court judgment for the defendants and remanded critical arguments in a 2006 class action lawsuit brought by plan participants accusing Kraft Foods of allowing the plan to incur high costs and generate insufficient gains.

The Seventh Circuit’s conclusions provide critical lessons for plan fiduciaries, according to Rick Unser, ERISA Risk Management consultant at Lockton Retirement Services:

No Decision is a Decision—If you decide to maintain the “status quo” in your plan, the courts and plaintiff attorneys will argue that you have made a fiduciary decision. If the status quo is deemed to be imprudent, you may be liable for any resulting damages to the plan.

Document Fiduciary Process—Critical in the reversal by the circuit court is that they were “not directed to any place in the record that identifies when defendants” made critical fiduciary decisions. This absence of documentation gave the court significant reservations and ultimately was a key influence in granting grounds for further consideration.

Benchmark Plan Fees—The plaintiffs argued that “prudent fiduciaries” would solicit competing bids for plan expenses “about once every three years.” The Seventh Circuit reversed the district court’s summary judgment and opined that because the plan fiduciaries had not received competing bids, the plaintiffs may pursue an excessive fee argument.

Can Not Rely Solely on Opinions of Consultants—The court also opined and cited several previous cases, that while engaging consultants was “certainly evidence of prudence,” their advice is not a get out of jail free card.

“As plaintiff’s attorneys and judges learn from both current and previous ERISA cases, the facts and determinations gleaned from such cases are also of significant importance to plan sponsors. Plan sponsors should be aware that by applying the analysis and rulings from the courts, they may lower their fiduciary risk profile and better meet their fiduciary responsibilities,” Lockton said in a release.

Mercer elevates “RetireTALK” site for plan participants

RetireTALK, an online video-based retirement planning and education campaign designed to motivate 401(k) plan participants, has been launched by Mercer, the retirement plan administrator.

The interactive website uses hypothetical personal retirement scenarios based on different ages and challenges to bring a “real world” relevance to retirement planning. The campaign launched in mid-April for Mercer’s clients and is also available to the public at www.retireTALK.com.

Participants watch a short video clip, they are prompted to respond to “simple but thought-provoking” questions and then hear retirement savings tips that apply to their own situations. This “watch > react > learn” technique is intended to make education more memorable and relevant to participants in each corresponding life stage, savings habit or age bracket.

The RetireTALK campaign has two-phases, each with its own theme: “Saving and spending habits” and “Fact or fiction.” Each phase will include new personal retirement scenarios, polls, tips, and planning calculators. The campaigns also use social media elements, such as a “Share It” feature and a “Tweet of the Week.”

RetireTALK was developed partly in reaction to key findings from the 2010 Mercer Workplace Survey.  

Huntington fixed annuity offers renewal rate protection 

The Huntington Investment Co., a unit of Huntington Bancshares Inc., launching a new fixed annuity this week that offers “a higher rate than many certificates of deposits, tax deferred interest earnings” and “allows customers to exit the product if renewal rates decrease by more than a half percent,” the company said in a release.

The Huntington SecureFore 7, issued by Forethought Life, is a seven-year fixed annuity contract that lets owners customer lock in a rate for three or five years.  

The rate is reset at the end of that term and annually afterwards. Customers can exit the contract with no penalty if the renewal rate drops more than a half percent below their base rate.

Allianz Unveils Behavioral Solutions to Challenges Financial Advisors Face with Clients

In its latest whitepaper, Behavioral Finance in Action, the Allianz Global Investors Center for Behavioral Finance offers new insights to empower both financial advisors and their clients to make better decisions.

 Released today, this revealing research piece was developed with leading academics to present strategies that address everyday psychological challenges in the financial advisor/client relationship.

“This paper offers academic insights that financial advisors can use to help their clients discriminate between wise intuitions and erroneous judgments.”

“Emotion and intuition play a critical role in people’s decision making, which may lead to systematic and predictable errors,” said Prof. Shlomo Benartzi of UCLA, an expert in behavioral finance and Chief Behavioral Economist of the Allianz Global Investors Center for Behavioral Finance. “This paper offers academic insights that financial advisors can use to help their clients discriminate between wise intuitions and erroneous judgments.”

Behavioral Finance in Action reflects the ideas and research of notable experts, presenting four timely problems faced by advisors and clients:

• Investor paralysis – the psychological fallout from the financial crisis has caused investors to leave record amounts of cash on the sidelines
• Lack of investor discipline – investors often buy high and sell low
• A crisis of trust – the recent financial crisis has had a lasting impact on the bond of trust between financial advisors and their clients
• The disinclination to save – inadequate savings is a chronic problem, not just for retirement but for other contingencies

The Center’s research asserts that these challenges are all products of the intuitive mind and, as such, can be addressed with techniques from the “behavioral toolbox”. For example:

To address investor paralysis, the paper recommends the “Invest More Tomorrow” strategy, where advisors invite clients to pre-commit to begin investing at a specific time in the future, and to agree on the size and frequency of subsequent periodic investments.

• The “Ulysses Strategy” seeks to help advisors rein in a lack of investor discipline by encouraging clients to pre-commit to a rational investment plan in advance of large market movements.
• Simple actions that demonstrate competence and display empathy could be the keys to regaining and maintaining the trust of clients. The paper lays out several basic actions – some of which are counterintuitive – that may help advisors regain the client trust that was battered by the financial crisis.
• The Behavioral Time Machine, currently in development, seeks to bolster savings rates by connecting individuals with their future selves. Using age-progression software, this tool allows people to see images of themselves 30 years in the future and has been proven in studies to be effective at increasing savings rates.

Putnam Investments adds to retirement sales team

Putnam Investments today announced that it has hired two respected industry veterans for senior positions in defined-contribution sales and client relations. 

Michael R. Shamon will be responsible for Putnam’s internal defined-contribution sales team, working with advisors and consultants nationally to support the sales of Putnam’s full-service and investment-only retirement businesses.

Daniel E. McDermott will serve as relationship manager, focused on mid- to large-sized retirement plans.   

Shamon, who will report to National Sales Manager Jim Brockelman, joins Putnam from JPMorgan Asset Management in Boston, where he was Vice President, Client Advisor, in the firm’s Retirement Plan Services division.  McDermott joins Putnam from Prudential Retirement in Hartford, Connecticut, where he was Vice President, Relationship Management, responsible for managing relationships for some of the firm’s largest clients.

McDermott will report to Michael MacWade, Director of Defined Contribution Relationship Management.

Before joining JPMorgan, where he consulted with retirement plan sponsors on investment strategies, fiduciary coverage and maximization of retirement value, Shamon held several positions of increasing responsibility over a nine-year period with Putnam Investments/Mercer HR Services.  Earlier, he served as a Pension and TDA Coordinator for Harvard University and began his career as a defined-contribution plan administrator for NYL Benefit Services Company. 

A resident of Bedford, Massachusetts, Shamon holds a Bachelor of Arts degree in History from the Massachusetts College of liberal arts and an MBA degree from Nichols College. He also is a member of the Investment Management Consultants Association.   

McDermott joins Putnam from Prudential Retirement, where he was responsible for sales and relationship management for some of the firm’s largest clients. Prior, he held several positions of growing responsibility in a 14-year career with Putnam’s defined-contribution unit, including serving as Vice President and Regional 401(k) Sales Director for the Midwest Region. A resident of Franklin, Massachusetts, McDermott received a Bachelor of Science degree in Business Administration from Plymouth State University.

Seven new broker/dealers have added the Allianz Retirement Pro Variable Annuity to their fee-based advisory platforms, Allianz Life Insurance Co. of North America announced. 

The seven are Cambridge Investments, Advisor Group (representing Royal Alliance, SagePoint and FSC Securities), Commonwealth Financial Network and Valmark Securities. In the past, the product was available only through LPL Financial.

In addition, Allianz Life has added to the team supporting the product, led by Corey Walther, Head of Investment Relations and Fee-Based Distribution for Allianz Life Financial Services, LLC.

Since the end of January, Walther has partnered with Allianz Life’s Broker/Dealer Relationship Management Team to bring additional broker/dealers on board. Walther has also recruited professionals with wealth management experience to educate advisors about Retirement Pro. Recent additions include:

• Jay Rosoff – Formerly with Allianz Global Investors, Rosoff will be responsible for the Northeast region.
• Ryan Hurley – Most recently a Regional Vice President for Allianz Life, Hurley will be responsible for the West region.
• Mike Nicola – Formerly a Senior Vice President of Fund Partner Relations for Allianz Life, Nicola will be responsible for the Central region.

Positions are currently being finalized for the Great Lakes and Southeast regions.

Growing confidence and pent-up demand should quicken the pace of mergers and acquisitions among financial services companies this year, according to the 4^th fannual M&A analysis and outlook for the financial services sector, Positioning for Growth: 2011 U.S. Financial Services Insights, from PwC’s U.S. transaction services practice.

According to the publication:

• Well-capitalized corporate buyers are seeking margin growth and the realization of synergies through strategic acquisitions that expand their footprint and product capabilities;
• Private equity firms, which have been focused on improving existing portfolio companies, will play an increasingly significant role in financial services M&A, as the impetus to put capital to work is bolstered by the revival of the bond markets and a growing market appetite for leveraged deals;
• Recent and prospective regulatory changes will drive small- and medium-sized banks to seek scale through acquisitions, creating significant M&A opportunities in 2011.

The value of announced financial services M&A deals rose to $50.9 billion in 2010 from $36.1 billion in 2009, but remained significantly below the $153.2 billion of deals announced in 2008, according to PwC. A total of 840 deals were announced in 2010, compared with 613 deals in 2009 (for which values were disclosed for 267 and 175 of the deals in 2010 and 2009, respectively).

Divestitures should drive a significant portion of deal activity in 2011. Large banks and insurance companies that need to bolster capital levels are divesting non-core operations and margin-dilutive subsidiaries.

In addition, regulatory changes such as the Volcker Rule, which restricts proprietary trading and certain investment management activities by banks, are likely to drive M&A activity in the asset management space as institutions consider divestitures to avoid restrictions imposed by the pending legislation.

Banking: Shifting Gears from Recovery to Growth

• Investor confidence will increase as asset quality stabilizes and earnings improve. However, non-performing asset levels remain at worrisome levels and high-quality organic loan growth will remain a challenge in the near term, driving banks to seek growth opportunities via acquisition.
• Large banks seeking to bolster capital levels and meet regulatory requirements stemming from significant recent regulatory changes are expected to continue to divest non-core operations and loss-making subsidiaries, attracting attention from both corporate and private equity investors.
• Tightening margins from regulatory restrictions surrounding the permissibility and pricing of certain products and fees will force small- and medium-sized banks to seek consolidation opportunities in an effort to build scale and derive value from synergies.
• FDIC-assisted bank transactions again played a prominent role in deal-making during 2010. However, while the number of FDIC-assisted deals increased in 2010, the institutions were smaller in size than in 2009. Recent activity indicates that the FDIC is offering less favorable deal terms and may be providing banks with more time to raise additional capital or seek suitable buyers.

Asset Management: Continued Deal-Making, Albeit at a Slower Pace

• The recovery in the equity markets since early 2009 resulted in significant increases in management and performance fee income among asset managers, pushing valuations higher and encouraging greater M&A activity.
• Divesture activity among asset managers is likely to increase due to financial reform regulations such as the Volcker Rule, although its immediate impact may be mitigated by the likelihood of a transitional period.
• Most consolidation activity will involve small- to medium-sized asset managers, as pure-play firms seek greater cost efficiencies, expanded scale, new distribution channels and broader product offerings. Private equity funds, already prominent acquirers in alternative investments, are likely to continue to be active investors in this space.
• Expect foreign buyers, particularly from Asia, to continue to play a key role in the U.S. asset management M&A space in 2011.

Insurance: Headwinds Face Insurers Seeking to Sell Operations

• Despite expectations that insurance company deal-making would increase in 2010, activity remained slow, with many deals failing to close because of differences in valuation and doubts about the direction of regulatory and tax reform, especially since many of the rules resulting from the Dodd-Frank Act, such as those on systemic risk, are still being drafted.
• Hesitancy in the insurance M&A market is expected to continue due to uncertainty surrounding legislative tax initiatives.  Obama Administration proposals relating to the insurance industry, such as health care reform and foreign proposals, could impede short term deal activity. Furthermore, the Neal Bill, which was introduced in prior years but never ultimately enacted, still appears to be a concern to investors.
• Rather than seeking growth via acquisitions, insurers with excess capital may look to other options, such as funding stock buybacks, increasing dividend levels or deploying capital to build scale and operational efficiencies.
• Excess capacity and a residual soft P&C market could result in increased consolidation of underwriters, especially in Bermuda, and potentially intensify interest in vertical acquisitions of managing general agencies, managing general underwriters or captive agents.

Non-Bank Financial Services Companies: Continuing to Drive Significant M&A Activity

• Non-bank financial services companies, such as automobile financiers, commercial and consumer finance companies, broker-dealers, credit card companies and exchanges accounted for some of the year’s biggest deals. The $6.3 billion purchase of Chrysler Financial Corp. by TD Bank and the $3.3 billion acquisition of Americredit Corp. by General Motors Co. were two of the three largest financial services deals announced in 2010.
• Total announced deal volume in 2010 among non-bank financial services companies increased 64 percent, to 242 deals, from 148 in 2009. The value of disclosed deals nearly doubled, from $10.8 billion in 2009 to $21.4 billion in 2010. Private equity firms played a growing role in this space, with the value of their deals reaching $1.9 billion in 2010, up from $22 million in 2009. The less onerous regulatory environment for many non-bank financial services companies, coupled with a continued need for capital, will continue to drive M&A activity in this sector in 2011.
• Further consolidation is probable among stock exchanges, which are likely to pursue M&A opportunities in order to gain market share and generate cost synergies in a highly-competitive global marketplace.

PwC’s report, “Positioning for Growth: 2011 U.S. Financial Services M&A Insights,” is available online at http://www.pwc.com/ustransactionservices.

MetLife has introduced a new variable annuity rider, GMIB Max, with a higher roll-up and payout rate than its existing GMIB. The richer benefit is made possibly by tying it to a suite of risk-controlled investment options, according to Elizabeth Forget, a MetLife senior vice president. The death benefit has also been improved.

Prior to annuitization, contract owners of a VA with the GMIB Max rider can get a 6% compounded annual increase in the benefit base or withdraw up to 6% of the benefit base each year without affecting the benefit base. The roll-up and the payout on MetLife’s existing GMIB remain 5%.

MetLife feels comfortable enriching these features because contract owners must choose from among four “Protected growth” investment options designed to control risk in various ways. The options include:

• AllianceBernstein Global Dynamic Allocation Portfolio. 
• AQR Global Risk Balanced Portfolio.
• BlackRock Global Tactical Strategies Portfolio.
• MetLife Balanced Plus Portfolio, with an overlay sleeve sub-advised by PIMCO.
  

Contract owners can also invest in the Pyramis Government Income Portfolio.

“The GMIB is our core living benefit,” Forget said. “About two-thirds of our contract owners elect it. We think the GMIB has a better value proposition [than the guaranteed lifetime withdrawal benefit, or GLWB]. We can offer the higher roll-up because each portfolio has forecasting methods or risk models that look at volatility and make adjustments to stay within a particular risk range. With the BlackRock fund, for instance, their model tells them to shift to cash when volatility is increasing.”

In 2010, MetLife sold about $18.3 billion worth of variable annuities, of which about two-thirds have the GMIB option. It allows contract owners to take income during retirement while maintaining the option to convert a protected floor value—the guaranteed benefit base—to an income annuity.   

GMIB Max is available for 1.00% of the benefit base as an annual charge deducted from the account value. Upon an optional step-up of the benefit base, the charge may increase up to a maximum of 1.50%, MetLife said in a release.

“EDB [Enhanced Death Benefit] Max complements GMIB Max since the benefit base is determined in the same manner under both riders. EDB Max is available for 0.60% of the benefit base for issue ages 69 or younger or 1.15% of the benefit base for issue ages 70-75 as an annual charge from the account value. Upon an optional step-up of the death benefit base, the charge may increase up to a maximum of 1.50%,” the release said.

© 2011 RIJ Publishing LLC. All rights reserved.

Starting this week, the 12,000 fee-based advisors at Edward Jones can begin selling a low-cost version—the broker/dealer calls it an “O” share—of Prudential’s popular Premier variable annuity with the Highest Daily lifetime income option.

The agreement greatly expands the distribution reach of Prudential’s VA and gives Edward Jones’ independent advisors the option of offering their clients the nation’s top-selling VA product on a fee-based, rather than a commissioned basis.

In that respect, the agreement represents the ongoing adaptation of variable annuities to the independent advisory world and toward a lower, more client-friendly, cost structure.  The product has a seven-year surrender period, and a separate fee, based on the size of the premium, may be assessed for seven years, according to Prudential.

The Prudential Highest Daily GLWB option, with an annual fee of 95 basis points, offers a 5% annual roll-up in the benefit base, a minimum 200%-of-premium benefit base for those who defer income for 12 years, and a 5% annual payout for individuals starting at age 59½.

The HD option manages Prudential’s risk exposure in part by an automatic mechanism that moves client assets out of equities and into bonds when equity values fall. For more information see RIJ’s December 22, 2010 story, “Why Prudential Sells the Most VAs.” 

The new version of the Prudential product, called Prudential Premier Retirement, has only 13 asset allocation models as investment options instead of the 16 available on the B share, said Bruce Ferris, senior vice president, Prudential Annuities.

“There were certain models that Edward Jones did not feel were complementary to their buy-and-hold philosophy. They weren’t necessarily the riskiest ones,” he said, adding that the product won’t be sold exclusively by Edward Jones. “That’s to be determined,” Ferris said. “There are a number of other broker-dealers who are hoping to see how it works out at Edward Jones.”

Merry Mosbacher, principal, Insurance Marketing, at Edward Jones, said that Prudential’s VA now joins those of Hartford, John Hancock, Lincoln Financial, Pacific Life, Protective and SunAmerica on Edward Jones’ platform.

“Kudos to Prudential’s actuaries for helping develop this price structure,” she said. “This structure enables the advisors to optimize how the Highest Daily mechanism works.”

In the past, Edward Jones had sold primarily A share VAs, which have front-end loads and low ongoing insurance charges. But Prudential has never manufactured an A share product, in part because under that structure a clients’ account value would start out below the HD benefit base.

The account would therefore be less likely, at least at first, to post new high-water marks and capture the value of market growth. The new Prudential product has the low ongoing charges of an A share—the mortality and expense risk ratio starts at 85 basis points a year. But, as in a B share VA, no sales charge is deducted from the purchase premium.

As Edward Jones’ Tim Burke, vice president, Insurance Solutions, explained at the IRI Marketing conference in February, the independent broker-dealer wanted a low-cost VA that would suit its advisors’ fee-based compensation structure.

In 2010, Prudential sold $21.7 billion worth of variable annuities, according to LIMRA, or a market share of about 15%. MetLife sold $18.3 billion, Jackson National Life sold $14.7 billion, TIAA-CREF sold $13.9 billion (group variable annuities) and Lincoln Financial sold $9.0 billion.

© 2011 RIJ Publishing LLC. All rights reserved.