The new report on government debt by the Peterson Institute for International Economics turns out not to be as alarming as portrayed in a May 28 story in the New York Times entitled, “The U.S. Has Binged. Soon It Will Be Time to Pay the Tab.”

After reading that story, I ordered the 50-page report to find out what it said, and whether I should start panicking.  Personally, I’m against panic. And I think it makes people panicky to compare our national debt to a bar “tab.” It isn’t. It makes people think Uncle Sam is almost “broke.” He isn’t.

In terms of sensationalism, the book, entitled, “The Global Outlook for Government Debt Over the Next 25 Years,” did not match the Times account. For a reality-check, I called the principle author, Joseph E. Gagnon, a Harvard-and-Stanford-trained former Federal Reserve official and senior fellow at the Peterson Institute. Gagnon told me that Morgenstern wrote a good story, but that her headline, with its emphasis on the word “soon,” exaggerated his position.  

“The major problems won’t hit us for another five years, or I’d say five to 10 years. But financial markets are forward looking, and they could get worried. But even financial markets will give us two or three years.

“The situation is alarming in the sense that the problem is very large. [Gretchen Morgenstern] used the word ‘soon,’ but she also said, in quoting me, that we have some time to deal with it.

“I’m not against deficit spending, especially when you have huge unemployment. What we’re doing now is fine. People who are not employed are not being productive, and the cost of that waste is higher than the cost of the deficit.

“Someone has to buy the government debt, but if you’re buying the debt, you’re not building a factory. Yes, the U.S. Treasury has the Federal Reserve to buy its debt, and any country with a central bank can do that. But there are limits to how much you can borrow.”

Gagnon’s booklet doesn’t blame deficits on a “binge.” Here’s what it says: “The financial crisis of 2008 brought about the most rapid increase in global government debt since World War II. The International Monetary Fund projects that, between 2007 and 2011, net general government debt (as a percent of GDP) will rise from 51% to 70% in the euro area, from 42% to 73% in the U.S., from 38% to 74% in the U.K., and from 82% to 130% in Japan.”

Indeed, the deficit spending that caused this “debt explosion” prevented a global depression by filling the vacuum of demand, and that investors fled to government debt because it was safe, Gagnon and co-author Marc Hinterschweiger go on to say.

Here’s what Gagnon writes about the threat from our supposedly impatient Chinese creditors:

“Despite the talk in the U.S. and elsewhere of possible malign motives of Chinese or other debt holders, there is not reason to believe that foreign holders of a country’s debt are more likely to sell in a panic than domestic holders. Were China to sell off some of its U.S. government debt out of pique or for political motivation, such a move would hurt China and its export sector even more than it might hurt the United States.”

The book says that if governments of advanced, demographically-aging countries fail to check their fiscal imbalances in the next 25 years—I would add that if their private sectors don’t invest productively, put people to work and fortify their tax bases—then they’re in for trouble. But the book concludes, “the current weak state of many economies argues against implementing budget cuts in the next couple of years.”

We’re in deep deficit because of a financial crisis, imprudent tax cuts and pointless wars, not because we’ve “binged.” (If we’ve binged, it’s by giving the medical and military industries a blank check for over 40 years). When I hear about government binging, I expect the mailman to whisk through my neighborhood in a tricked-out Hummer. Instead, every morning at 9:30, he arrives at my mailbox in the same battered little white Jeep. It’s noisy, and probably needs a new muffler. 

© 2011 RIJ Publishing LLC. All rights reserved.

In Italy, adults with more years of schooling, who consider themselves in good health, and who have higher incomes are relatively more receptive to purchasing income annuities, according to recent research from the Bank of Italy.

In an April 2011 paper entitled, “What Determines Annuity Demand at Retirement?” Giuseppe Cappelletti, Giovanni Guazzarotti and Pietro Tommasino based their findings on the 2008 results of the Survey of Household Income and Wealth, the bank’s biennial survey of the Italian population.

Italians are sensitive to the price of annuities, with sensitivity varying by education wealth and financial literacy. In the survey, heads of Italian households were asked: ‘Imagine you are 65-years old and will receive an inflation-adjusted pension of €1,000 a month. Would you give up that half of that pension in exchange for an immediate lump sum of €60,000? Of €80,000? Of €100,000?’

Only 40% of those surveyed said would exchange half the annuity for the lowest lump sum, while 69% would accept the middle sum and 82% would accept the highest sum. Only 64% of those with a primary school education would take the 80,000, while 77% of those with at least a bachelor’s degree would. Of those in  “very good health,” 72% would take 80,000, but only 63% of those in less than good health would.

Among those with a college education, who are also in the highest wealth quartile and evidence the highest level of financial literacy, just 45.3% would give up half the annuity for €100,000, only 17.9% would give it up for €80,000 and a mere 9% would give it up for €60,000.

The Italian market for deferred annuities is strong, but few deferred products are ever annuitized. According to the Bank of Italy, out of 1.94 million deferred annuity products that matured in 2003-2005, only about 11,000 were annuitized. Only about 15,000 annuities were in the payout phase in 2006.

Like many other countries with aging populations, Italy’s public retirement program has undergone significant reform in the past few years. People who have entered the retirement system since 1996 have participated in a mandatory defined contribution workplace programs where each person’s contribution to personal notional account is 33% of pay, with 22% from the employer and 11% from the employee. The account grows at a rate pegged to the Italian GDP and is converted to a pension as early as age 58 (for those with at least 35 years in the system). 

© 2011 RIJ Publishing LLC. All rights reserved.

Russell Investments said announced today that assets in its LifePoints Funds Target Date Series, a set of nine TDFs and an In Retirement Fund, grew 44% in 2010 and surpassed $1 billion.   

The series is available to retirement plans via the firm’s U.S. advisor-sold business, which partners with financial intermediaries and defined contribution record keepers.

The series’ 2055 fund, for instance, has a 10% bond allocation, while the In Retirement Fund maintains a 68% bond allocation throughout retirement.

According to Morningstar, the only categories to exceed target date funds’ percentage gains in 2010 were alternative and commodities funds.

Here’s a high-tech twist on the “more you buy, the more you save” slogan that for decades has helped American shopaholics rationalize their indulgences. 

Putnam Investments has launched the Putnam PriceCheck&Save iPhone application for participants in 401(k) plans to help individuals direct the money they “save” while shopping into long-term tax-deferred savings.   

Mutualfundwire.com wrote that the app “interacts directly with the 401(k) recordkeeping platform that Putnam uses to run the employer’s 401(k) plan. That interaction enables Putnam to make a one-time deferral into the plan for the amount the app user specifies.”

“By using leading mobile technology, we are trying to change behavior from impulse spending to impulse saving – all with a few taps on their iPhone,” Putnam said in a release.

The app enables participants in Putnam 401(k) plans to use their iPhone camera to scan the bar code of most sales items to register price, comparison-shop across other retailers to seek a lower cost, see the potential cost savings in terms of future monthly income in retirement, and immediately direct the price differential to the individual’s 401(k) account.

“Putnam’s PriceCheck&Save app is a powerful new way to demonstrate the eye-opening trade-off between spending today and its future financial impact on an individual’s retirement – translated through the critically-important language of income,” said Edmund F. Murphy, III, Head of Defined Contribution, Putnam Investments. “By using leading mobile technology, we are trying to change behavior from impulse spending to impulse saving – all with a few taps on their iPhone.”

Murphy explained that the larger educational effort motivating the launch of the tool is designed to showcase the connection between thoughtful purchasing and the ability to save for the future, by looking through the lens of retirement income.

“Putnam is hoping to create greater understanding in the marketplace about the critically important relationship between individuals’ spending of current income and saving of current income on their future retirement income. Spending and saving do not need to be mutually exclusive activities,” he noted.

ING Insurance U.S. has appointed Maliz E. Beams as CEO of ING Retirement, overseeing ING’s employer-sponsored retirement plan business, ING Retirement Services, and its retail retirement business, ING Individual Retirement.

Reporting to Rob Leary, president and COO of ING U.S., Beams will be responsible for linking the two units into a single Retirement operation as ING Group prepares for an initial public offering (IPO) of its U.S.-based retirement, insurance and investment management businesses. She will be based in ING’s Windsor, Conn., and Braintree, Mass. offices.

Beams previously served as president and CEO of TIAA-CREF’s Individual and Institutional Services, where she founded the Wealth Management business and re-launched IRAs, Insurance Products and Private Asset Management. She has also held leadership roles at Zurich Scudder Investments, Fleet Financial and American Express.

Beams received a B.A. in English from Boston College and an M.B.A. in marketing and finance from Columbia University. She was named one of “The 25 Most Powerful Women in Finance” in 2008 and 2009 by U.S. Banker magazine, and has been listed on Who’s Who of American Women.

In a speech on June 3, Federal Reserve Board member Daniel K. Tarullo described the ideal characteristics of enhanced capital requirements for large financial institutions and rebutted some of the financial services industries most common objections to those requirements.

Speaking at the Peter G. Peterson Institute for International Economics in Washington, Tarullo offered a report on the progress of the Dodd-Frank legislation toward its January 2012 deadline for reducing the risks of so-called “systemically important financial institutions” or SIFIs.

Tarullo listed five parameters for successful capital requirements:

1. An additional capital requirement should be calculated using a metric based upon the impact of a firm’s failure on the financial system as a whole. Size and interconnectedness of the firm with the rest of the financial system are the most important factors.
2. The metric should be transparent and replicable, reflecting a trade-off between simplicity and nuance.
3. The enhanced capital standards should be progressive in nature, “increasing in stringency” with the systemic footprint of the firm. While Dodd-Frank requires us to apply enhanced capital standards to all bank holding companies with more than $50 billion in assets, but the supplemental capital requirement for a $50 billion firm is likely to be very modest.
4. An enhanced requirement should be met with high-quality capital. Our presumption is that this means common equity, which is clearly the best buffer against loss.
5. U.S. requirements for enhanced capital standards should, to the extent possible, be congruent with international standards.

In other remarks, Tarullo said:

The regulatory structure for SIFIs should discourage systemically consequential growth or mergers unless the benefits to society are clearly significant. There is little evidence that the size, complexity, and reach of some of today’s SIFIs are necessary in order to realize achievable economies of scale and scope.  Some firms may nonetheless believe there are such economies. For them, perhaps, the highest level of an additional SIFI capital charge may be worth absorbing. Others, though, may conclude in light of the progressive form of the capital requirement that changes in the size and structure of their activities would align better with their returns.

The history of financial regulation over the last thirty years suggests that, when certain activities are restricted, firms will look for new areas in which to take more risk in the search for return. Capital regulation is the supplest and most dynamic tool we have to keep pace with the shifting sources of risk taken by financial firms.

The cessation of proprietary trading and the limiting of private equity activities will directly reduce risk-weighted assets and thus capital requirements. Similarly, centrally cleared derivatives will carry lower capital charges.

Moral hazard is already undermining market discipline on firms that are perceived to be too-big-to-fail. Higher capital standards will help offset the existing funding advantage for SIFIs.

There is little if any research showing that firms need to have balance sheets with the size and composition some do in order to achieve genuine economies of scope and scale. The lower leverage that would result from higher capital requirements should lead to at least some reduction in the required return on equity.

 © 2011 RIJ Publishing LLC. All rights reserved.

The SPARK Institute is accepting requests from the retirement plan community for possible changes to its lifetime income solutions data standards, said Larry Goldbrum, General Counsel. 

“SPARK Institute members have, as a result of their implementation work, identified and recommended several improvements to the original version of the Data Layouts for Retirement Income Solutions, which was released in September of 2010,” Goldbrum said.  The current version of the Data Layouts is posted on The SPARK Institute website at http://www.sparkinstitute.org/comments-and-materials.php.

“In order to accommodate these and other potentially important changes that may be identified in the early stages of vendor implementation, we are asking everyone in the retirement plan community that is building to, or already using, the Data Layouts to submit additional requests for changes they feel are critically necessary.”  Goldbrum said suggested changes will be accepted through September 30, 2011, with the goal is of finalizing and releasing a new version by the end of October 2011.  Comments should be submitted to [email protected].

“In an effort to limit the potential for disruption, we will only make changes for critical issues that cannot otherwise be addressed through the existing file structure,” Goldbrum stressed.  Additionally, he said, issues that need to be addressed and changes that are needed will be handled according to the following hierarchy:

1. Providing an explanation to accomplish a result or resolve an issue within the existing standards and file structure,
2. Adding new codes,
3. Modifying data field formats, and
4. Adding new fields at the end of an existing record.

Goldbrum said that the resolution with respect to each proposal will be announced on The SPARK Institute website as soon as possible, even though the new version of the Data Layouts will not be released until later this year.  

AXA Equitable Life has introduced Structured Capital Strategies ADV, a product designed for fee-based advisors who want equity and commodity index-linked exposure with some downside protection.

The product is being launched through Commonwealth Financial Network, the nation’s largest privately-held independent broker-dealer and Registered Investment Adviser.  

Structured Capital Strategies ADV’s main feature is its Structured Investment Option that allows clients to participate in the performance of equity and commodity indices up to a cap and with a downside buffer.

The built-in buffer protects the initial negative 10%, 20% or 30% of loss in index value, depending on the investment option chosen. The downside buffer works in tandem with a Performance Cap Rate on the upside market potential.

For the June 15, 2011 S&P 500 Index one-year investment option, for example, a client would have downside protection for the first 10% of any loss in return for a minimum 10% cap on the investment upside.

“Structured Capital Strategies ADV represents a unique, tax-deferred option for investors who are seeking an acceptable risk-reward balance,” said Nick Lane, president of the Retirement Savings division at AXA Equitable. “This product gives fee-based advisors a new way to help shield their clients from some loss and ease them into investing for growth.”

Investment options in Structured Capital Strategies ADV include linked participation in the following equity and commodity indices, with 15 different segment types in durations of one, three and five years:

• S&P 500® Price Return Index
• Russell 2000® Price Return Index
• MSCI EAFE Price Return Index
• Gold Index – London Gold Market Fixing Ltd. PM Fix Price/USD. For IRA accounts only
• Oil Index – NYMEX West Texas Intermediate Crude Oil Generic Front Month Futures. For IRA accounts only.

“For fee-based advisors, Structured Capital Strategies ADV offers a compelling diversification choice for clients who have an appetite for tax-deferred investing but are risk averse and want some protection against market loss. The product’s 1-, 3- and 5-year durations appeal to those clients who are looking for growth opportunities but don’t want or need a long-term, lifetime income product,” said Ethan Young, manager of Annuity Research at Commonwealth.

Segments in the product’s Structured Investment Option are made available for new investments on the 15th of the month or the next business day, at which time the Performance Cap Rate is also set.  At the end of each 1-, 3- or 5-year segment period, investors have the flexibility to re-allocate the maturity value of the segment to a new segment or transfer their account value to other investment options, depending on their needs and objectives.  

One week after launching its “Challenges” advertising campaign, Prudential has followed up with a thought-leadership/survey called: The Next Chapter: Meeting Investment and Retirement Challenges (2011 Study of American’s Current Financial Perspectives).

The survey revealed a significant level of financial gloom among its subjects, who represented a broad swatch of middle- and upper-income America. The respondents ranged from 35 to 70 years old and earned $50,000 or more ($35,000 or more if retired), with investments of at least $50,000 ($100,000 or more if retired). About 44% had incomes over $100,000 and 47% had investable assets over $250,000, indicating a higher-than-random representation of high net worth individuals.

Although a headline in the report said that “Americans are optimistic about overcoming their financial challenges,” there was little evidence of that. About 60% of those polled were “enthusiastic” about facing financial challenges, 70% “really want to focus on the road to recovery,” and almost 60% believe “it’s the American way to face challenges like these head-on.” Yet those responses did not seem to add up to anything close to optimism.

The survey, like many other surveys of this type, found that most people do not trust the financial services industry: “Nearly seven in 10 believe there are few financial services firms that are trustworthy” and “53% don’t believe that an advisor is helpful even in extreme market conditions.”

Even though more “than half (54%) do not feel well prepared to take on the task of rebuilding their portfolios, and three-quarters (73%) point to challenges that span from deciphering confusing product information to navigating an overwhelming amount of options to overcoming distrust of advisors and firms,” most won’t visit an advisor.

Among the somewhat grim findings:

• 69% believe few firms are trustworthy.
• 62% cannot even think of any firms in the financial services industry that they would trust.
• 12% believe that financial services firms are abiding by good fundamentals.
• 53% are not using an advisor at all—with 40% going it alone, and 13% using only the advice of family and friends.
• 57% feel that so many “talking heads” providing conflicting opinions makes it harder for them to make good financial decisions.
• 54% of consumers are suspicious of the word “guarantee” with respect to financial products and investments.
• 58% have lost faith in the markets.
• 44% will never put money in the stock market again.

© 2011 RIJ Publishing LLC. All rights reserved.

New York Life Investments has introduced an investment option for “near-term” (up to five years) liabilities of qualified corporate pension plan liabilities. The product, announced yesterday, is called Guaranteed Interest Pension Account, or GPA, and is designed primarily for smaller DB plans.    

“Contributions are invested in a broadly diversified fixed income portfolio within New York Life’s general account. The GPA features a declared interest crediting rate that resets every six months, allowing plan sponsors more visibility into and control over their pension plans,” the company said in a release.

GPA allows sponsors to structure a portion of their assets to mirror liability cash flows, in accordance with the funding model set forth by the Pension Protection Act of 2006 (PPA), which outlines three segments for liabilities based on duration and the corporate bond yield curve, according to New York Life. The GPA solves for the “near-term” (0-5 years) segment by providing sponsors an investment option that offers a guarantee of principal coupled with competitive yields.

“In the PPA, they prescribed the handling of liabilities by segments—zero to 5 years, 5 to 20 years and 20 years and above. We look at each segment and evaluate the best way to manage the exposures,” said Steven Dorval, CFA, managing director and head of retirement investments at New York Life Investments.

“In the past, there has been a disconnect between the asset allocation and the actuarial work. The asset managers tried to achieve the desired rate of return, without necessarily taking into account the liabilities. That made sense if you had a long time horizon and you assumed that volatility would be smoothed out by mean reversion.”

“After the financial crisis of 2001-2002, a lot of pension clients regarded it as a 100-year flood, an unusual situation where you had both assets losses and low interest rates leading to low funding status. There was a lot of surprise that you could have a perfect storm like that,” he said.

“But as their funding status improved in the years that followed, they were still reluctant to take risk off the table. The crisis of 2008 reminded them that perfect storms are now a common occurrence. Now they’re looking for solutions. An investment committee needs to sort through how much [potential] return they’re willing to give up for predictability.”

“Larger plans with sophisticated staffs and extensive expertise aren’t using this type of bucketing. They think in terms of ‘risk budgeting.’ The more sophisticated they are, the more granularly they evaluate the various risks.  We think that at the smaller, say $250 million plan, [GPA] will be something that the members of the investment committee can get their heads around,” Dorval told RIJ. 

GPA is a group annuity contract issued by AAA-rated New York Life Insurance Company, parent of New York Life Investments.

© 2011 RIJ Publishing LLC. All rights reserved.

Instead of paying transaction fees and getting advice as a “freebie”—as they do with most advisors—many older investors would simply rather pay for personalized advice. So says a new study by Hearts & Wallets, a Hingham, Mass.-based research firm.

 “Addressing the Elephant in Financial Services: Insights into How Older Investors Really Want to Receive, and Pay for, Investment and Personal Financial Advice,” is the name of the study. It reveals a mismatch, noticed by Hearts & Wallets several years ago, between what Americans want in terms of financial and investment advice and what they’re getting.    

“If someone offered you free advice, how much trust would you have in that advice? Today, the industry has a very confusing fee structure,” said Chris Brown, Hearts & Wallets principal. “Investors want to know what they are paying for, and fee clarity is a major trust driver as our prior research has shown.”

Hearts & Wallets found unmet consumer needs in two areas: 

• Personal finance advice. People value information about retirement and income planning for its own sake, not just as a prelude to a sale. 

• Investment advice. Investors question the motives of brokers who receive commissions from product manufacturers.

“Investors said they like the idea of separating investment and personal finance advice,” said Laura Varas, Hearts & Wallets principal. “They also want to have more choice in terms of a la carte service and flexible fees. This desire was most marked among the mass affluent who might not have enough assets to qualify for more personalized service, but would like the option to pay for more consistent, higher-touch support.”

Investors also favor fiduciary status for advisors, even if it meant higher fees. 

The full report includes:

• The array of personal finance needs of older investors and their words to describe these needs.
• Concept test to determine ways in which older investors prefer to receive, and pay for, investment and personal finance advice.
• Key attributes of “go-to” resources for financial and investment advice
• The myriad sources and rank of information—media, friends/family and financial professionals—that investors use to build consensus and make buy/sell decisions.

Conducted in April 2011, the survey’s nine focus groups included pre-retirees (those within five years of retirement), late career investors (those ages 50 to 65 who are not yet retired and not considering retirement within the next five years) and retirees. Hearts & Wallets will use its annual quantitative study of 4,000 households this summer to find out how much investors are willing to pay for advice.

© 2011 RIJ Publishing LLC. All rights reserved.   

The verbal battle over “tax expenditures” is heating up.

ASPPA (American Society of Pension Professionals & Actuaries) now claims that recent proposals to eliminate tax deferral on contributions to and build-up in 401(k) plan accounts are based on “faulty math.”

The real cost of tax deferral is actually 55% to 75% lower than claimed by Congressional budget hawks, ASPPA says in a new report, “Retirement Savings and Tax Expenditure Estimates.” If so, the proposed cuts won’t save as much as projected and may even jeopardize the future of 401(k)s and other tax-favored savings programs.   

According to ASPPA, , the Congressional Joint Committee on Taxation (JCT) and the Treasury Department’s Office of Tax Analysis (OTA) both use current cash-flow analysis when estimating the cost of the tax deferral. 

But the 10-year timeframe used in their cash-flow analysis doesn’t recognize the fact that 401(k) participants and others eventually pay the deferred taxes after they retire, albeit sometimes at a lower tax rate. Thus tax deferral differs from tax credits or deductions, such as those for medical expenses or mortgage interest, which are never repaid.   

Using present-value analysis, which economists typically use for long-term analysis, economist Judy Xanthopoulos and tax attorney Mary M. Schmitt have calculated that present-value estimates of the five-year cost of retirement savings tax expenditure are 55% lower than those of the JCT and 75% lower than those of the OTA.

 “The short-term window used in Washington budget scoring overstates the cost of retirement savings incentives – and therefore the savings that would result from slashing these incentives,” said Brian H. Graff, ASPPA’s executive director and CEO. He added that “If we reduce the incentives for workers to save through these plans, we will send millions of low- to moderate-income workers into retirement with little savings.”

The JCT and OTA numbers are commonly used in proposals for reducing the federal budget deficit. The National Commission on Fiscal Responsibility and Reform (the Simpson-Bowles commission) used them when it proposed a cap of $20,000 a year (or 20% of income, if less) on the amount of money people could contribute to tax-deferred retirement accounts. U.S. Senator Pete Domenici and former Director of the Office of Management and Budget Alice Rivlin made a similar proposal.

© 2011 RIJ Publishing LLC. All rights reserved.