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RBC Wealth Management ranks first in “satisfaction” survey

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.

Investor Satisfaction Index Rankings
(Based on a 1,000-point scale)

Firm

Index score

JDPower.com

Power Circle Ratings
For Consumers

RBC Wealth Management

 814

  5

Charles Schwab & Co.

 805

  5

Fidelity Investments

 796

  4

LPL Financial

 794

  4

Edward Jones

 788

  4

Raymond James

 785

  3

Ameriprise Financial

 779

  3

UBS Financial Services

 778

  3

Industry Average

 772

  3

Merrill Lynch

 758

  3

Morgan Stanley Smith Barney

 754

  3

Wells Fargo Advisors

 746

  3

Chase Investment Services

 704

  2

Citigroup (CitiCorp)

 670

  2

Source: J. D. Power & Associates.

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.

A $100 Billion Market for SPIAs?

As recently as 2004, New York Life sold only $200 million of income annuities annually. But now the trickle of sales is turning into a steady stream. In 2010, sales totaled $1.9 billion, up 9% from the year before. In the first quarter of this year, the figure jumped 45% from the period a year ago. The gains are substantial in a total market of $7.9 billion.

The growth of income annuities is just beginning, predict Chris Blunt, New York Life’s executive vice president of Retirement Income Security. “In the next ten years, this will become a $100 billion market,” he said in a recent interview.

[In the third quarter of 2011, New York Life intends to introduce a product that could make that market even bigger: a deferred income annuity designed to let people in their 50s or younger buy future guaranteed income at a discount.]

As more baby boomers wake up to the need for safe sources of retirement income, Blunt (at left) expects this type of annuity to be a compelling product. Chris BluntRetirees can use income annuities to guarantee themselves enough income to maintain a desired lifestyle for life. The problem so far is that insurance agents and financial advisors have been reluctant to sell them. Commissions for selling income annuities (usually about 3.5% of premium) are low compared to variable annuities and indexed annuities. And clients have historically balked at the product’s inherently low liquidity.

If you’re relatively new to income annuities, here’s how they work. In a typical contract, a 70-year-old man (or couple) might give the insurance company $100,000 and get a fixed annual income for life.

The longer the client lives, the greater the “effective return” on the initial “investment.” (Income annuities are insurance, not investments, and a widespread misunderstanding of the difference is an obstacle to greater acceptance.) But if the client dies in the first year or two—and if the client hasn’t taken the precaution of stipulating a minimum payout period or of setting aside a legacy—heirs may feel cheated because they have no access to the income or principal.

New York Life, the world’s largest mutual insurance company with some $16 billion in reserves, has to some degree overcome resistance to income annuities with a marketing campaign that emphasizes the value of lifetime income. To explain the value of income annuities, agents contrast them with portfolios of mutual funds, Blunt said.

Blunt cites the example of a 65-year-old man with a $500,000 portfolio that has 42% of assets in equities and 58% in bonds. Each year the retiree withdraws a total that is equal to 4.5% of the initial value of the portfolio. Based on market history, there is a 25% chance that the portfolio will be exhausted by the time the retiree reaches 92. New York Life Ad

He compares this with a portfolio that has 43% of assets in equity, 17% in bonds, and 40% in income annuities. Thanks to the lifetime guarantee on the annuity income, there’s little chance that any combination of planned withdrawals or market downturns will exhaust the second portfolio before the investor dies, so the investor is more likely to have money left for heirs than if he did not have an annuity. Blunt’s example also punctures one of the myths about income annuities: that you have to devote all your savings to it. 

Annuities can deliver higher income because their payment stream includes interest, principal, and—most importantly—the “survivorship benefit.” In a $100,000 portfolio of mutual funds, an investor might safely withdraw $4,500 in the first year. But if the investor puts $100,000 into a life annuity, the annual payout would be about $8,000.

The income is high because of that survivorship benefit. When contract owners die, their remaining principal goes to the insurance company, which uses it to pay other contract owners in the same age-pool. (Of course, actuaries calculate the payouts in advance, before any of the contract owners has died, and there’s a survivorship factored into every payment.)

To alleviate client concerns about losing access to their money, New York Life has been offering liquidity features. A cash-refund option, for instance, promises the client and the heirs a return of at least the original principal. Say a client pays $100,000, receives $8,000 income the first year, and then dies. Heirs would get a check for $92,000.

But the cash refund option is not cheap, because you’re giving up the survivorship credit. In a recent quote, a 70-year-old female who took a plain-vanilla contract got $7,760 a year. With the cash refund feature, the contract only provided $7,071.

Blunt says that New York Life gained a leadership position in income annuities because the company has fastidiously fine-tuned the product. “We have spent five years trying to figure out how to market and position these products,” he says. “For most of our competitors, this is not a core business.”

For insurance companies, income annuities are not highly profitable because they require substantial capital, says Blunt. As a result, they may not be ideal products for publicly-held insurers, which must maximize profits. But income annuities can be attractive for mutual companies like New York Life, which seeks to deliver steadily growing profits. Unlike many publicly held insurance companies, New York Life came through the financial crisis in good shape. Today’s low interest rates aren’t necessarily good news for sales, but income annuities rates are tied to long-term bond yields rather than short-term yields.

New York Life is unusually well equipped to cope with longevity risk exposure—the danger that life expectancies will surge unexpectedly, perhaps because cancer or other diseases are cured. If that happened, the company would have to pay out far more lifetime income than planned.

But New York Life’s losses would be balanced by gains on the life insurance side. In an era of greater longevity, the company’s life insurance business would pay out less in claims, making the two products complementary. Many competing insurers could not offset the losses because they tend to focus on variable annuities or other businesses that do not benefit from greater longevity.

© 2011 RIJ Publishing LLC. All rights reserved.

This reprint is being provided as a courtesy by New York Life Insurance Company with the permission of Retirement Income Journal. It is for informational purposes only and represents the views and opinions of its author, who is solely responsible for its content. New York Life’s basis for its example is based on the FRC Whitepaper “Income Annuities Improve Portfolio Outcomes in Retirement”.  FRC (Financial Research Corporation) is an independent research firm not affiliated with New York Life Insurance Company or any of its subsidiaries.  The research for this paper was funded in part by New York Life.

The example cited was based on the following:

The asset allocation was tested rigorously by assuming 25th percentile life expectancy of a 65 year old to age 92 and 10th percentile results to age 96. Withdrawal rates of 4%, 4.5%, and 5% were assumed. The assumed income annuity payout rate, assuming a 3% inflation rider, was 5.1%, which is largely reflective of current payout rates and the current low interest rate environment. Had FRC employed normalized rates across market cycles, the payout would have been closer to 6%, with a 3% inflation rider. The analysis focused on 4% and 4.5% withdrawal rates, based on the past experience shared by financial advisors with FRC in past research. In the 1000 scenarios created by FRC in its Monte Carlo simulations, aggregate index returns and standard deviations were used and not portfolio returns. Indexes results are unmanaged and do not reflect actual product fees, charges and taxes. FRC primarily relied on examples from the Ibbotson ETF asset allocation series for its model portfolios, including both a conservative and moderate portfolio. An aggressive portfolio was not considered, given the logical conservative profile of an average retiree. The FRC simulations applied hypothetical fees and expenses to the returns, including fees of 25bps and a wrap advisory fee of 100 bps. In its simulations, FRC applied federal income tax rates which were assumed to be relatively low given the low-dollar withdrawals assumed in the sales concept. The marginal tax rate or the tax rate applied to the investment income and the rate applied to any additional dollars of income was 15%. The calculated average tax rate of the rate applied to the regular income was 13.8%. The average tax rate is slightly lower than the marginal tax rate since the model assumed a certain level of standard deductions.  

The results shown are the median results of a Monte Carlo simulation of 1000 market scenarios. Median results relate to probabilities; they are not indicative of either the past or future performance of any type of securities or client results. In all likelihood an investor’s results will vary from the median and be affected by factors which the study does not address: how investment decisions are implemented in reality; the client’s investment objectives and risk tolerance and suitability for allocating a significant percentage of retirement assets to a less-liquid annuity vehicle; the costs of investing; and the actual tax profile of any client. No assurance can be offered about the future performance and payout trends of any asset class portrayed in the FRC whitepaper. Significant asset classes such as non-US securities were not evaluated in the FRC analysis. In the future, asset classes could come into favor which would alter the results of an analysis such as the FRC whitepaper. 

In order to reduce the impact of the last 10 years of fat tail events, FRC used 20-year historical standard deviations for each asset class along with subsequent correlations over that 20-year period. While the standard deviations and correlations over longer historical periods were considered, the most recent 20-year returns and standard deviations represented a more appropriate conservative approach given the heightened volatility in the markets over the last decade. The models accounted for inflation, using 2.5% as an acceptable normalized annual measure. Withdrawal amounts were inflated annually by 2.5%. RMDs, required minimum distributions, were taken into account and assumed to begin at age 70. For any amounts withdrawn over and above the assumed cash needs, the excess cash flow was reinvested into a non-qualified account using the same asset allocation.

Unlike traditional asset classes, annuity payments involve systematically returning the client’s principal to him or her. Annuities may be more favorable to older clients, when mortality credits can impact the payout of the annuity in later years. Access to a client’s money in an annuity can be significantly affected by surrender charges and taxation. Annuities are a long-term retirement-income vehicle, and an insurance company’s financial condition can change over time.

IMPORTANT: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Past performance is no guarantee of future results. This example only presents a range of possible outcomes.

New York Life Lifetime Income Annuities are issued by New York Life Insurance and Annuity Corporation (A Delaware Corporation), a wholly owned subsidiary of New York Life Insurance Company, 51 Madison Avenue, New York 10010. Guarantees are backed by the claims-paying ability of the issuer.

 

SPIA Flow at Fidelity: $70M-a-Month

Fidelity Investments is on track to sell about $1 billion worth of single-premium immediate annuities this year—all of them issued by non-Fidelity insurance companies.

The Boston-based no-load mutual fund giant sells SPIAs issued by New York Life, Principal Financial, John Hancock, MassMutual and MetLife direct to the public through an online platform and (more often) through its walk-in branch offices around the U.S.

“We’re averaging over $70 million a month. In 2006 our overall [SPIA] sales were just over $100 million for the year, so that is real growth,” said Brett Wollam, senior vice president of marketing for Fidelity Investments Life Insurance Company. “We’re on pace for record year in annuities.”

Sales began going up after Fidelity incorporated SPIAs into its online retirement planning tools: the Income Strategy Evaluator and the Guaranteed Income Estimator. The tools, introduced early this year, lead investors through a decision-tree that, based on their own answers to a series of questions, produces a customized product allocation.  

The list of income products, which gradually narrows down as the client answers recorded spoken questions, includes bond ladders, CD ladders, fixed income annuities, variable income annuities, VAs with lifetime income benefits, income replacement funds, period certain annuities, and mutual fund portfolios set up with systematic withdrawal plans.

“[Our success with SPIAs] is the result of a broader integration of annuities within our financial planning process,” Wollam said. “Organizationally, Fidelity Investments Life Insurance (FILI) is part of our retail investing business. One of the areas of focus in the retail investing business is financial planning; we try not to sell products [in isolation].”

“The Income Strategy Evaluator is the starting point. It can be used in a self-directed way or with a representative. You put in your preferences. You indicate, for instance, if a guarantee is more important to you than growth potential or vice versa, or if you want to leave assets to your heirs,” Wollam said.

“Based on that, along with your assets and your financial situation, the tool will recommend a multi-product solution. It might combine fixed or variable annuities with a systematic withdrawal plan. It can compare similar solutions with and without annuities. Increasingly, multiproduct solutions are recommended and are appealing to investors,” he added. 

The process tries to help make sure “you’re covered in a negative situation. Our approach is to ask, ‘What is the gap between your essential expenses and the income you expect to receive in retirement?’ As for the amount of money you should put it in an annuity, our rule of thumb is that it should definitely less than half and more like a quarter,” Wollam said.

Fidelity’s average SPIA premium is “well over $100,000,” he said.  Most contract purchasers are between the ages of 65 and 70. A lot of the purchasers have rolled money over to a Fidelity IRA, either from a Fidelity retirement plan or from outside Fidelity. Some people use an immediate annuity as an income bridge from the time they stop earning a paycheck to the time they’re eligible for higher payouts from Social Security.    

By embedding the annuity in the context of a broader strategy, Fidelity is able to disarm a potential client’s prejudices toward annuities. “The term ‘annuity’ carries baggage,” Wollam said. “There are perceptions of high cost and complexity. But you can overcome a lot of that resistance by demonstrating to people that an annuity can help them meet their income needs with fewer assets and a higher degree of certainty.”

But the SPIAs do not sell themselves. “Virtually all of our [SPIA] sales require a representative and about 90% come through one of our branches. One of the big differences in our distribution model is that reps generally get a salary and performance bonuses [rather than commissions], and the emphasis is on financial planning and customer satisfaction. We’re there to act as the agent.  The difference between our model and the Hueler Income Solutions model, is that we’re more involved in closing the business.”

Income Solutions is a SPIA platform designed to offer competing, institutionally-priced bids from several annuity issuers to defined contribution plan participants who want to roll over part of their assets into an income annuity at retirement. Vanguard sends its retail and institutional clients to the Income Solutions platform in lieu of selling annuities direct. Charles Schwab hosts a SPIA platform where it offers contracts issued by Symetra, MetLife, New York Life, and Nationwide.

Fidelity created its own insurance company, Fidelity Investments Life Insurance, years ago in the expectation of high demand for annuities when the Baby Boomers began retiring. In the 1990s, decided to host a platform where it could offer a variety of best-in-class issuers.   

“We’ve had SPIA partners since the 1990s. What we’ve learned in the income space is that there’s value in having a choice. We have high quality providers and you know you’ll get quality and competitive rates,” Wollam said.

Fidelity used to have an income annuity of its own that sat side by side with the other products on its platform. But then it thought better of it.  “Our proprietary brand didn’t add value,” Wollam told RIJ.

“We had strong brands on the platform and if at a given moment one of them offered a better payout, clients usually went with the better offer. Our value-added is financial planning. We realized that offering our own annuity wasn’t necessary,” he said.

“We didn’t want to muddy the water with our brand,” he added. “We didn’t have the scale to do it as efficiently as the other companies on the platform. Why give people an opportunity to see us as neutral or not the best? But we’ll always be there.”  

© 2011 RIJ Publishing LLC. All rights reserved.

Fixed annuities from three small insurers make Barron’s “smart” list

Three annuity issuers companies that don’t make headlines very often—The Standard, the Life Insurance Company of the Southwest (LICS), and Royal Neighbors of America—appeared on Barron’s list of “25 smart annuities” last Saturday.

While smaller than most of the other 15 companies on the  list (see today’s Data Connection at right), these companies nonetheless have top-tier strength ratings from A.M. Best. Judging by their addresses and/or histories, they also have a whiff of counter-culture about them, relatively speaking.

National Life art

Rather than being located in an insurance stronghold like Massachusetts, Connecticut, Iowa or Minnesota, two of the firms are headquartered in a pair of “blue” states that bookend the country like copies of Helen and Scott Nearing’s classic Living the Good Life (in the East) and the collected beat poetry of Gary Snyder (out West).   

The Standard (A, A.M. Best) is based in Portland, Ore., while LICS’s parent, National Life Group (A, A.M. Best), is based in Montpelier, Vt., a region where Volvo 240s and cork-soled Birkenstock sandals never go out of fashion and a high proportion of mature women wear their steely locks defiantly undyed.    

The Standard’s Focused Growth five-year guaranteed rate fixed deferred annuity and its Index Growth fixed indexed annuity made the Barron’s list. The Standard is a unit of publicly held Stancorp Financial Group (2010 revenues of $2.77 billion).

Two of LISC’s fixed indexed annuities, the SecurePlus Platinum and the SP Flex, were among the five S&P 500 FIAs on the Barron’s list. Its parent, founded 160 years ago, is a mutual company with assets of about $20 billion.  Earlier this year, National Life introduced a Lifetime Income Benefit Rider on a universal life insurance policy, with the income deducted from the policy’s account value through partial withdrawals and loans.  

Smaller and even more focused in its mission is Royal Neighbors of America, an Illinois non-profit with $766 million in assets that was founded in 1895 to “support women and those they care about.” Its Choice 5 multi-year guarantee fixed deferred annuity was among the five five-year contracts recommended by Barron’s.  

Royal Neighbors has a national network of 220,000 “members” who belong to chapters of 10 or more people each. The members not only own Royal Neighbors products, but also volunteer to sponsor or support a variety of local causes.

Through the Nation of Neighbors program, begun in 2007, the company and its members have given over $1 million to 800 women to help them achieve their dreams, such as starting a day care center or, in one case, writing a book about the experiences of women entrepreneurs in the Dakotas.  

© 2011 RIJ Publishing LLC. All rights reserved.

Annuities, Sudden Darlings of the Media

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

What’s Your Competition Doing? E&Y Knows

Last spring, Allianz Life and Sun Life introduced new variable annuities, while Pacific Life and Prudential changed their living benefit riders. To learn more about the products, you could consult their websites and prospectuses. Or, for one-stop-shopping, you could go to Ernst & Young’s Retirement Income Knowledge Bank.

Launched five years ago, the RIKB offers more than just variable annuity information to its corporate subscribers, who include insurers, banks, broker-dealers and assets managers. The online database tracks life insurance products with long-term care riders, target-maturity funds, income replacement funds, defined benefit plans, and reverse mortgages. 

“This is the only database that covers the entire retirement income industry,” said Gerry Murtagh, the Knowledge Bank’s manager, in an interview. “Other products focus on sectors of the market, such as variable annuities or target-maturity funds.” E&Y does not publicly disclose the price of a site license to the RIKB. Nor does the global consulting firm release the names of specific subscribers.

Product developers, for instance, use the database to study the fees and features of current products. Executives use it to look for competitive insights and underserved niches. Financial advisors use the RIKB to shop for products for their clients. An advisor can compare the costs and other features of competing products by downloading the relevant data via an Excel spreadsheet or a PDF. Users can run specialized searches for products with certain features or just the products from one company.

“You can look at all guaranteed lifetime withdrawal benefits, or you can narrow the search to only include joint-and-survivor versions,” said Murtagh.

The database boasts unbiased reporting, continuous updates as well as monthly and quarterly  reports on changes in products. The staff of Ernst & Young’s Insurance and Actuarial Advisory Services unit monitors SEC filings and company websites. RIKB researchers post weekly news bulletins that include summaries of filings. Subscribers can access prospectuses through the website.   

Besides government filings, the reports also include news about companies that are setting up retirement income groups or producing surveys on industry trends. The researchers collect and report data on industry trends from trusted sources such as LIMRA, the Life Insurance Marketing and Research Association. A recent quarterly report of the knowledge bank cited LIMRA data on annual VA sales with GLB elected.

The report for the first quarter of 2011 included variable annuity product updates, which must be filed by May 1. For instance, a notice about John Hancock Income Plus for Life 1.11 said that the new annuity offers a lifetime withdrawal percentage of 4% for clients aged 55-63 and 5% for those 64 and older. Pacific Life’s CoreIncome Advantage 5 Plus—a new GLWB—offers 5% withdrawals of the protected payment base per year beginning at age 59½.  

The knowledge bank represents a way for Ernst & Young to serve the financial services industry and to position Ernst & Young as a thought-leader and go-to source of information for its key client segments. Its North American insurance practice alone employs 3,000 actuaries, accountants and other professionals. More than 7,000 professionals serve the global insurance market.

RIBC isn’t the only source of retirement product information. Subscribers to Strategic Insight’s annuity service pay about $20,000 a year to receive daily reports on new filings for variable annuities at the SEC and periodic articles about industry trends, said Tamiko Toland, the annuity specialist at the firm, a unit of Asset International. Strategic Insight consultants also provide subscribers with customized reports about industry trends and opportunities. Toland said that the Ernst & Young service is unique insofar as it provides a information on a wide range of products.

Morningstar also competes in the retirement product information space. In 2005, Morningstar bought VARDS, which provides data on annuity sales. Now VARDS has become Morningstar’s Annuity Research Center, which offers updates on product filings as well as data on sales and assets under management.

In 2010 Morningstar acquired Annuity Intelligence Report from Advanced Sales and Marketing Corporation for a reported $14 million. This subscription service for broker-dealers and insurance companies tabulates information about annuities and riders, including step-up provisions, withdrawal percentages, and fees.

The information’s simple format makes it easy to compare products. A section on titling makes it clear who will be paid when an owner dies. Morningstar also supplies data on the performance of subaccounts.

Cannex, U.S. and Canadian financial product information provider, competes with RIKB mainly in the area of immediate annuities. Using the service, annuity manufacturers and financial advisors can quickly compare monthly income from more than a dozen different products. Advisors at Envestnet, a Chicago-based independent broker-dealer, uses the Cannex data when running calculations of the optimum division of assets between an income annuity and a systematic withdrawal portfolio, said Mike Henkel, a managing director.

© 2011 RIJ Publishing LLC. All rights reserved.

The Bucket

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’s new annuity ad campaign targets wirehouse advisors

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.”

Fund flows decline again in May; ETFs see outflow: Morningstar

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.  

DC Plans and Deficit Reduction

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 Hartford enhances VA suite

The Hartford is introducing new three personal protection options as a part of its Personal Retirement Manager variable annuity suite.

For details, see the product sheet and prospectus. A more complete analysis of this product will be forthcoming during Retirement Income Journal’s focus on variable annuities throughout July.

The new Personal Retirement Manager features include:

  • Future6, a lifetime guaranteed minimum withdrawal benefit that provides income protection and a 6% deferral bonus with market participation through the new Personal Protection Portfolios, which are designed to reduce the volatility of a consumer’s investment portfolio.
  • Future5, a lifetime guaranteed minimum withdrawal benefit that provides income protection and a 5% deferral bonus with market participation through diversified investment portfolios.
  • Safety Plus, a 10-year guaranteed minimum accumulation benefit that provides principal protection with market participation through the new Personal Protection Portfolios and a bonus to future payout rates if it is transferred to the annuity’s Personal Pension Account at the end of 10 years.

One aspect of Future6 and Safety Plus is the introduction of the Personal Protection Portfolios, Hartford said. These required asset allocation models are intended to buffer the impact of volatile market environments. The product also offers two optional death benefit options.

“Even as the investment markets continue to rebound, our clients remain worried about meeting their basic retirement needs,” said Rob Arena, executive vice president of The Hartford’s Global Annuity business. “Investment risk, longevity risk and the fear of running out of money are top-of-mind concerns.”    

The product enhancements are part of a series of investments The Hartford is making in its annuity business in recent months, the company said. In 2011, the company has increased technology capabilities, added sales professionals, hired a new product and marketing leader and launched a new annuity-focused advertising campaign.  

Wolters Kluwer weighs in on Supreme Court’s Janus decision

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.”

Milliman’s annual VA survey analyzes rider exercise rates, lapse rates

Nearly 15% of eligible variable annuity policies with guaranteed lifetime withdrawal riders started withdrawal within the first 12 months after becoming eligible, about 6% began withdrawals within 13 to 36 months and 2% started withdrawals more than three years after eligibility.

Those were among the results of Milliman’s annual Guaranteed Living Benefits survey of leading U.S. VA carriers. Utilization was measured by time-since-eligibility, the degree to which the benefit is in-the-money (ITM), and by attained age. Other trends in the GLB market were also tracked. Utilization rates will rise as more business reaches the later stages of the periods currently under study, Milliman said in a release.

Impact of in-the-moneyness

Withdrawal benefit exercise rates are significantly influenced by the degree to which the withdrawal benefit base exceeds the account value—that is, when the guarantee is “in the money” (ITM).

The median exercise rate if the benefit was out-of-the-money was reported as 13.2%.  This rate increased to 13.9% when the ITM% was less than 20%, to 25.2% when the ITM% was at least 20%, but less than 50%, and to 53.9% when the ITM% was at least 50%.  

Another factor that influences withdrawal benefit exercise rates is attained age.  Such rates increased from a median of 5.6% for attained ages younger than 60, to 16.7% for those in their 60’s, to 34.0% for those in their 70’s, and to 42.2% for those at least 80 years old.  

Experience versus expectations    

The survey indicated how lapses compare with the ITM-sensitive lapses insurers expected. The following table shows the comparison for GLWBs, but experience is similar for other GLBs.  

Lapses Compared to ITM-Sensitive Lapses Expected % of GLWB Responses

Lapses are greater than expected

0%

Lapses are lower than expected (< 10% lower)

56%

Lapses are lower than expected (> 10% but < 20% lower)

22%

Lapses are lower than expected (> 20% lower)

22%

Exchange rates analyzed

Survey participants reported the percentage of VA sales that were external exchanges (nonqualified 1035 exchanges, qualified rollovers, and direct transfers) over the survey period.  

The median of reported exchanges rose from 18.3% in 2009 to 23.6% during the first half of 2010; however, this is still significantly below the level reported for 2007 (39.7%). External exchanges slowed down as GLBs on existing VAs became deeper in-the-money.

The survey reported that about 95% of variable annuities offered in 2009 and in the first half of 2010 included some form of GLB.  The purchase of any GLB by policyholders has increased consistently, on average, from 2006 through 2009, with a slight decline during the first half of 2010.

The average election rate of any optional GLB during 2009 was 74.5% for 2009 and 73.8% for year-to-date (YTD) 6/30/10.  Other contracts contain automatic GLBs; consequently, the effective purchase rate is higher in aggregate.

The survey encompassed guaranteed minimum income benefits (GMIB), guaranteed minimum withdrawal benefits (GMWB), guaranteed lifetime withdrawal benefits (GLWB), and guaranteed minimum accumulation benefits (GMAB).  Hybrid GLBs refers to multiples GLBs that are packaged together, such as a GMAB with a GLWB.      

GLWBs continue to be the most popular GLB type offered and elected.  The percentage of VA sales that offered an optional GLWB has increased from a median of 75.4% in 2006 to 95.1% during the first half of 2010.  Purchase rates of GLWBs also increased over the same period from a median of 54.2% in 2006 to 69.2% in 2009 and YTD 6/30/10.

Events of the past few years have led VA carriers to design products with more flexibility. Most current VA policies allow for the adjustment of rider costs on inforce policies.  Many still allow a change to fees only upon a step-up to the benefit base, and some allow a change on a quarterly basis or on annual policy anniversaries.  There has been some movement by VA carriers to allow for cost adjustments on inforce policies at any time.  

Variable annuity carriers that issue at least one type of GLB were invited to participate in the survey. Of the 18 participants, 11 ranked in the top 20 based on new VA sales, according to Morningstar.

For an executive summary of the major survey results, contact Sue Saip at [email protected].

© 2011 RIJ Publishing LLC. All rights reserved.

At SPARK conference, a Plug for In-Plan Annuities

Although most 401(k) plan sponsors remain ambivalent about offering in-plan retirement income solutions, in-plan solutions represent an important growth industry for certain retirement plan service providers.  

So the topic of in-plan solutions received a fair share of attention at the SPARK National Conference in Washington, DC, earlier this week (though not as much attention as the well-intentioned but nonetheless disruptive new regulations that are emerging at a snail-mail pace from the Department of Labor).

Three companies that offer an in-plan income option—Hartford, Prudential and BlackRock (with MetLife)—sent delegates to speak the conference. And Chicago-based Mesirow Financial, an advisor to ERISA product manufacturers, weighed in with a preliminary evaluation of such programs. 

A product review by an advisor like Mesirow allows manufacturers to represent their products as ERISA-worthy. Chris O’Neill, Mesirow’s chief investment officer and research director for investment strategies, has analyzed from both fixed and variable in-plan options and found them, at least in principle, to add value as options in employer-sponsored retirement plans.

“We are [in-plan] product advocates,” O’Neill said at the SPARK conference.  “We would like to see these products better understood and utilized more.”

O’Neill sat on a panel with Patricia Harris of Hartford, which offers the Hartford Income for Life fixed deferred income annuity program and Susan Unvarsky of Prudential Retirement, which offers the IncomeFlex in-plan guaranteed lifetime withdrawal benefit. 

O’Neill said there was still some fiduciary concern that participants might end up paying for benefits they don’t receive—either because the insurer fails during a financial pandemic or because of a portability snafu or because participants particularly in situations where they withdraw too much from their accounts without understanding that they’re reducing their level of guaranteed income.

But “Does the product add value and improve retirement portfolios? Mesirow says yes on both counts,” O’Neill said.

Hartford Lifetime Income and Prudential IncomeFlex represent two very different types of in-plan income option. With the Hartford product, a fixed deferred income annuity, participants can buy increments of future monthly income from the Hartford, typically starting at age 65. If they choose, they can reverse the purchases.  IncomeFlex is a lifetime income benefit rider attached to target date funds and provides income without annuitization.     

In a separate presentation, BlackRock’s Chip Castille talked about his firm’s LifePath Portfolios in-plan income product. Once known as SponsorMatch, the product was introduced by Barclays Global Investors in 2007, with MetLife as the insurance partner. In 2009, BlackRock bought BGI from Barclays, the British bank.  Since then, the company has been working to make the product more palatable to plan sponsors—it has not announced any sales yet.

LifePath is a series of target date funds-of-funds that include, as one of the underlying investments, a group “unallocated” deferred income annuity. Over time, an increasing amount of the participant’s contributions to his or her LifePath TDF goes into the annuity option, peaking at 50% at the anticipated point of retirement.

In contrast to the Hartford product, LifePath doesn’t require participants to enter into a contract with the annuity issuer until retirement—and they can choose cash instead even then.

As Castille put it, the participant can use LifePath for years and sell it back “at fair value” to BlackRock when they leave the company. MetLife is so far the only insurer working with BlackRock on LifePath, but BlackRock is looking to offer LifePath clients a choice of interchangeable insurers.

Castille’s presentation was noteworthy in that he emphasized the importance of positioning in-plan income annuities as a way to for participants to achieve “a higher income replacement” in retirement than as a way to avoid running out of money. 

“The defined contribution system can do more at the margins by putting these plans into place,” he said, asserting that an annuity can boost the pre-retirement income replacement rate of a retirement portfolio by about 2.5%, or almost as much as working for an additional three years.

In advocating the use of gain rather than loss as a motivator in selling annuities—greed rather than fear, as it were—he was transferring an insight from the out-of-plan annuity distribution world to the (still largely unrealized) in-plan annuity distribution world. To hear it in the retirement plan context seemed novel.

Thanks to the mortality credit, a life income annuity can provide the same amount of retirement income as a bond ladder but at about 30% less cost, Castille said. That kind of savings will be essential for the average participant, whose $150,000 401(k) account balance at retirement will only replace about 9% of his pre-retirement income, he noted. 

To overcome the recordkeeping hurdles ordinarily associated with adopting an in-plan income option, BlackRock offers LifePath in conjunction with the SunGard Income Window. . Announced last fall, the Income Window is a middleware solution that serves as a kind of universal connection between any plan recordkeeper and LifePath. 

“To the recordkeeper, LifePath looks like a single option,” Castille said. When a participant invests, “Income Window goes into the recordkeeper, gets the age of the participant, and then the fund manager puts the money into the right TDF.” At retirement, participants can defer income and/or customize their income stream, while “SunGard manages the delivery of the information to the participant.”

© 2011 RIJ Publishing LLC. All rights reserved.

TIAA-CREF, CFDD create network of RIAs for participant services

TIAA-CREF today announced a new partnership with the Chicago-based Center for Due Diligence (CFDD) and PlanTools to help plan sponsors and participants select an independent advisor to meet their evolving retirement planning needs.

TIAA-CREF has collaborated with the CFDD and PlanTools to create a due diligence standard to qualify advisors to participate in the TIAA-CREF Advisor Network and who can work with plan sponsors and their participants.

An annual fee paid by advisors to the CFDD for managing the program allows advisors to benefit from an increased level of support from TIAA-CREF, including personalized marketing materials, exclusive plan level arrangements, special training sessions, and participation in a new referral program.

The Advisor Network’s minimum standards and advisor review will assist plan sponsors in meeting their fiduciary responsibilities. It will also provide participants with access to a pre-screened network of qualified investment advisors who provide participant level advice at an investment advisory fiduciary standard of care.

“Our experience shows that individuals benefit from retirement planning advice and this Network offers a nice complement to the advice services we offer through our retirement plans,” said Rob Rickey, Head of Advisor Services, TIAA-CREF.

“At the same time, increased focus on plan sponsor’s fiduciary responsibilities has led to greater demand for information and support. Our own experience with both individual and institutional clients has confirmed the growing need to support independent advisors.”

Phil Chiricotti, President, CFDD, said “Participant advice provided by qualified, competent and compliant advisors is a proven path to successful retirement outcomes for participants. TIAA-CREF’s decision to adopt and share the CFDD/Plan Tools documented prudent process for selecting qualified advisors with their clients will accelerate the distribution of meaningful advice to participants in need of expert guidance.”

TIAA-CREF is currently selecting a limited number of advisors for a controlled launch of the Network over the next six months. This group will be the Network’s charter membersand will provide feedback on the minimum standards and process for applying to the Network. The Network will be introduced nationally in early 2012.

Roger Ferguson, TIAA- CREF’s President and CEO, will deliver a keynote session on Positive Outcomes for Retirement Plan Participants: The Power of Advice at the CFDD’s October 17-19, 2011 Advisor Conference at the downtown Chicago Swissotel.

 

 

Jackson National closes five equity funds to VA separate account investors

In a May 31 SEC filing, Jackson National Life said that, effective August 29, 2011, it would close the following variable annuity investment options to all separate account investors, but leave them available to Funds of Funds:

  • The JNL Institutional Alt 65 Fund will be closed to all investors
  • The JNL/Goldman Sachs Emerging Markets Debt Fund
  • The JNL/Lazard Emerging Markets Fund
  • The JNL/Mellon Capital Management Global Alpha Fund
  • The JNL/Red Rocks Listed Private Equity Fund

According to the prospectus:

The JNL Disciplined Moderate Fund, the JNL Disciplined Moderate Growth Fund, and the JNL Disciplined Growth Fund are also referred to in this Prospectus as the JNL Disciplined Funds. The JNL Institutional Alt 20 Fund, the JNL Institutional Alt 35 Fund, the JNL Institutional Alt 50 Fund, the JNL Institutional Alt 65 Fund are also referred to in this Prospectus as the JNL Alt Funds. Also effective August 29, 2011, the JNL/BlackRock Global Allocation Fund no longer utilizes a master-feeder structure.  

Effective August 29, 2011, the JNL/Goldman Sachs Emerging Markets Debt Fund, JNL/Mellon Capital Management Global Alpha Fund, and JNL/Red Rocks Listed Private Equity Fund are only available as underlying funds to the JNL/S&P Funds and JNL Alt Funds.

Also effective August 29, 2011, the JNL/Goldman Sachs Emerging Markets Debt Fund is only available as an underlying fund to the JNL Disciplined Funds, the JNL/AQR Managed Futures Strategy Fund is only available as an underlying fund to the JNL/S&P Funds and the JNL Alt Funds, and the JNL/Mellon Capital Management Emerging Markets Index Fund is only available as an underlying fund to the JNL/S&P Funds and JNL Disciplined Funds.

 

Let’s Not Panic Over the Deficit

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, annuity demand correlates with wealth and education

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 LifePoints TDFs Tops $1 billion AUM

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.

Putnam’s iPhone “app” puts point-of-purchase savings into 401(k)

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.