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When Herds Get Overconfident, Run for Cover

Posted on March 30, 2011 by Editor Test -

There are about as many explanations for the financial crisis as for the Kennedy assassinations. Fear and greed undoubtedly played their usual parts, along with faulty economic models, moral hazard, and bad monetary policy.

That’s just for starters. Misplaced incentives, ineffective corporate governance, lax regulation, and, if you’re conspiratorially minded, fraud and political corruption may also have acted in supporting roles.

What about plain old human psychology? A new whitepaper by Steve Utkus of the Vanguard Retirement Research Center proposes a model that describes the life cycle of a typical financial bubble. He also uses a term that seems to be coming into wider usage: “representativeness heuristic.”

Utkus’ paper, “Market bubbles and investor psychology,” divides a financial bubble’s life into four stages.

Initial errors in statistical inference caused by the representativeness heuristic.
The emergence of skewed forecasts because of overconfidence and excessive extrapolation.
The amplification of these views through a “risky shift” or group polarization process across the financial system.
The resetting of forecasts to an excessively cautious view.

1. Initial errors in statistical inference caused by the representativeness heuristic.

In the final seconds of a tie basketball game, whom should the coach choose for the last shot: the player with a hot hand tonight or the player with the highest shooting percentage for the season?

Tough call, right? If you choose the hot hand, you might be blinded by the representativeness heuristic. To illustrate this phenomenon, Utkus uses the analogy of a carnival game:

In the game, people are asked to estimate the proportion of black and red balls in a container based on two sample withdrawals. Person A draws out 20 balls, 12 of which are black. Person B draws out five balls, four of which are black.

Experiments show that people put greater weight on the smaller sample with the stronger pattern. “Player B is the person we most believe in because of the strength of his apparently nonrandom outcome,” Utkus writes. “He has what we call a ‘hot streak’ in sports or a ‘hot hand’ in cards—winning four of five games, as it were.”

This type of illusion encourages return chasing, where investors follow the hottest mutual fund managers. It also tends to make people over-optimistic at the beginning of a bubble.

“Applying the representativeness heuristic to the mortgage problem is straightforward,” Utkus writes. Consider “a mortgage analyst estimating default rates on mortgage securities. By analogy, the container is the housing market and mortgage finance system. Player A is the long-term track record of prime mortgages. Player B is the recent short-term track record of subprime or exotic (such as interest-only or negative amortizing) mortgages.

“The mortgage analyst tends to assign to the subprime and exotic mortgages some of the general characteristics of prime mortgages, which dominate the container. In addition, the analyst overlooks the fact that the sample size of subprime and exotic mortgages is consistently smaller and so may not have the statistical validity of a larger, longer-term series.”

2. The emergence of skewed forecasts because of overconfidence and excessive extrapolation.

Over-confidence is endemic, inside and outside the financial system, especially among males, Utkus says. Just as a strong majority of Frenchmen regard themselves as above average lovers, most CEOs regard themselves as above-average among their peers. This leads to overconfidence and straight-line forecasting based on a recent positive returns.

“Our mortgage analyst may start with a forecast default rate on mortgages modeled by a normal distribution with an expected value of 5%. Based on recent mortgage data showing below-average default rates, the forecast begins to shift to the right, with now 5% the maximum expected default rate.

With additional short-term positive information, the forecast becomes centered on

a 0% default rate, with only a low probability of any modest level of defaults. It is through such a dynamic that forecasts of future asset values—whether mortgages or Internet stocks or other financial instruments—become increasingly skewed to the positive.”

3. The amplification of these views through a “risky shift” or group polarization process across the financial system.

The phenomenon of herding, where market participates go lemming-like over a cliff together, is typical of bubbles, Utkus writes. Herding is related to “group think,” which leads to a still-sketchy phenomenon he calls “group polarization.” It’s characterized by a “collective shift to riskier behavior in the system as a whole.” Mobs, in other words, are capable of acts that no individual or small group would commit.

4. The resetting of forecasts to an excessively cautious view.

While pessimism turns to optimism very slowly after a bear market, over-optimism during a bubble can turn into over-pessimism with all the speed and force of a sailboat’s boom during an unanticipated jibe.

“The recalibration phase is the reassertion of more rationally grounded expectations for the future. Market participants come to recognize that their forecasts of the future were unduly positive and revise their expectations accordingly. Depending on how overly optimistic the assumptions had become, the size of this change could be substantial,” Utkus writes.

What can be done to prevent bubbles, or at least to avoid being sucked into believing in one? Experience, expert advice, disinterested perspectives, and especially a focus on long-term investment performance rather than short-term volatility, are ways to avoid a roller coaster ride in the markets, he suggests.

While analyzing bubbles through a psychological prism, Utkus acknowledges that lots of factors can help inflate them. His list of suspects for the recent crisis: “excessive profit-seeking by mortgage originators, bankers, and rating agencies; a lack of institutional investor or homeowner foresight in evaluating the risks of mortgage instruments; differences in sophistication or experience between mortgage originators and homeowners, or between underwriters and investors; misaligned incentives for government-sponsored mortgage agencies; and alleged fraud and deception by various parties in the mortgage process.”

Profits, Politics and the Ruin of Fannie & Freddie

Posted on March 30, 2011 by Editorial Staff -

The following excerpt from “Guaranteed to Fail” is reprinted with permission from Princeton University Press and from the authors, Viral Acharya, Matthew Richardson, Stijn van Nieuwerburgh and Lawrence J. White.

Selection 1: The Race to the Bottom

While there is little doubt that the housing goals played an important role in shifting Fannie Mae and Freddie Mac’s profile to riskier mortgage loans, it remains an interesting question whether Fannie Mae and Freddie Mac deliberately chose to increase the riskiness of the loans that they bought 2004 onward or whether they were forced to do so by the U.S. Congress, which wanted to promote home ownership.

While the public/private nature of the GSEs leads to a moral hazard problem even in normal times, the question is whether moral hazard was exacerbated by the astronomical growth of the subprime market segment.

As pointed out earlier, the GSEs saw consecutive increases in their low- and moderate-income, special affordability, and underserved areas goals in each of 1996, 1997, 2001, 2005, 2006, 2007, and 2008. However, the largest increases took place in 1996 and in 2001, outside of the rapid growth of the 2003 period and onward.

Moreover, the target increases in 2005, 2006, and 2007 were more modest, yet that is when most of the increase in riskiness took place. Finally, Fannie and Freddie missed one or more of their mission targets on several occasions, without severe sanctions by the regulator, suggesting that adherence was largely voluntary.

Former FHFA director James Lockhart testified that both Fannie and Freddie “had serious deficiencies in systems, risk management, and internal controls.” Furthermore, “there was no mission related reason why the Enterprises needed portfolios that totaled $1.5 trillion.” He chalked it up to “the Enterprises’ drive for market share and short-term profitability.” In fact, in testimony to the Financial Crisis Inquiry Commission on April 9, 2010, former Fannie Mae CEO Daniel Mudd admitted as much:

“In 2003, Fannie Mae’s estimated market share of new single-family mortgage-related securities was 45%. By 2006, it had fallen to 23.7%. It became clear that the movement towards nontraditional products was not a fad, but a growing and permanent change in the mortgage marketplace, which the GSEs (as companies specialized in and limited to, the mortgage market) could not ignore.”

Similar language can be found in Fannie Mae’s own strategic plan document, “Fannie Mae Strategic Plan, 2007-2011, Deepen Segments – Develop Breadth,” in which the company outlined its 2007 onwards strategy:

“Our business model – investing in and guaranteeing home mortgages – is a good one, so good that others want to ‘take us out’… Under our new strategy, we will take and manage more credit risk, moving deeper into the credit pool to serve a large and growing part of the mortgage market.”

The data tell the story. From 1992 to 2002, Fannie Mae and Freddie Mac were clearly major participants in high risk mortgage lending. Nevertheless, the period 2003-2007 represented a significant shift.

For comparison purposes, we restrict ourselves to the size of mortgages at or below the conforming limit level. For example, from 2001 to 2003, for mortgage loans with LTVs greater than 80% and/or FICO scores less than 660, Fannie Mae and Freddie Mac represented respectively 86%, 80% and 74% of this high risk activity.

From 2004-2005, this changed as both the dollar volume and share of high risk lending of conforming size loans moved towards the private sector, with $168 billion (and a 26% share) in 2003 to $283 billion (and a 52% share) in 2004 and $330 billion (and 58% share) in 2005.

Consistent with the race to the bottom, Fannie and Freddie responded by increasing their high-risk mortgage participation by recovering a majority share of 51% in 2006 and an almost complete share of the market in 2007 at 87%. Equally important, as a percentage of its own business, Fannie and Freddie’s risky mortgage share increased from 25% in 2003 to 36% in 2007.

Even more telling, if the above analysis is restricted to the very highest risk mortgage loans, i.e., those with LTVs [loan to value ratios] >90% and FICO<620, [the data] shows an almost identical “race-to-the-bottom” pattern in Fannie and Freddie’s share during the 2003- 2007 period, culminating in a doubling of these particularly risky mortgages from $10.4 billion in 2006 to $20.3 billion in 2007.

The SEC 10-K credit-risk filings of Fannie Mae are also revealing of the deterioration in mortgage loans that were purchased by the GSEs during the 2004-2007 period, either for their own portfolios or to be sold off to others. For example, 17% of the 2006 and 25% of the 2007 mortgages that Fannie bought had a loan-to-value ratio in excess of 80%.

The fraction of loans with CLTVs greater than 95% went from 5% in 2004 to 15% in 2007. The borrowers also had lower credit scores: 17.4% of 2006 loans and 18% of 2007 loans had FICO scores below 660. A relatively large share was ARMs (16.6% in 2006 and 9% in 2007) or interest-only loans (15.2% in both years). The Alt-A fraction of purchases was 21.8% in 2006 and 16.7% in 2007, up from 12% in 2004.

Finally, non-full documentation loans went from 18% in 2004 to 31% in 2007. If anything, Freddie Mac’s credit-risk profile was worse than Fannie’s. In 2004, 11% of the loans that Freddie bought had CLTVs above 100%, which increased to 37% by 2007.

Interest-only loans grew from 2% to 20%, and low-FICO-score loans from 4% to 7%. As a final indication of its all-in approach to mortgage lending in 2007, note that mortgage loans with both FICO<620 and LTV>90% reached $20.3 billion, essentially double that of any other year.

Clearly, the quality of GSE loans deteriorated substantially from 2003 to 2007. It seems that the GSEs were able to stretch the concept of a prime, conforming loan much beyond what its regulator had intended.

RIIA Marks a Few Milestones

Posted on March 24, 2011 by Editor Test -

At the depth of the financial crisis two years ago, Francois Gadenne, the co-founder of the Retirement Income Industry Association, had to dig deep for the industry support that would keep his then three-year-old organization alive.

Two years later, RIIA has not only survived, but was able to mark several important milestones at its fifth annual Spring Conference, held this week at Morningstar Ibbotson headquarters in Chicago. Those accomplishments include:

The publication of the third edition of its “Body of Knowledge,” by Francois Gadenne and Michael Zwecher (with editorial support from Kerry Pechter, editor and publisher of Retirement Income Journal). The book articulates RIIA’s philosophy and acts as the text for candidates who want to apply for RIIA’s professional designation, the Retirement Management Analyst.
The publication of the first issue of the Retirement Management Journal. Edited by Robert J. Powell III, the retirement columnist at marketwatch.com. The first issue contains feature articles by Shlomo Benartzi, Ph.D., the behavioral economist, researchers Dennis Gallant and Howard Schneider, Sharon Carson of Bank of America Merrill Lynch, as well as the Journal’s first prize-winning essay, “Capturing the Income-Distribution Opportunity: A Historical Analysis of Distribution Philosophies and a Solution for Today,” by Zachary S. Parker, CFP, and Paul R. Lofties, CFP, ChFC, of Securities America.
The conferral of the Retirement Management Analyst designation to 50 people, and the “hope of doubling that in 2011,” according to Gadenne.
The consolidation of a base of corporate sponsors that reflects the diversity of its membership. Sponsors of this week’s Spring Conference included Ibbotson Morningstar, Allianz Global Investors, Dimensional SmartNest, Guided Choice, Putnam Investments, Barclays Capital, Boston University’s Center for Professional Education, and DST Systems.

IRIC offers guidance on selecting in-plan GMWB

Posted on March 24, 2011 by Editor Test -

In a white paper published by the Institutional Retirement Income Council, a trade group, ERISA attorneys Fred Reish and Bruce Ashton offer guidance for plan sponsors and their advisors who are thinking about adding an in-plan annuity option—specifically a variable annuity with a guaranteed minimum withdrawal benefit (such as Prudential’s IncomeFlex program or Great-West’s SecureFoundation)—to their plan’s investment options.

“The decision to offer an investment with a GMWB feature in a 401(k) plan is a fiduciary one. Not all GMWBs are the same. For this reason, before offering GMWBs, fiduciaries should engage in a prudent process to assess whether to offer such a feature and if so, which one to offer,” the attorneys write. “This paper discusses the legal standards governing a fiduciary’s decision to offer a GMWB, particularly in choosing the insurance carrier that offers the feature. It provides fiduciaries with a starting point for that process.”

Concluding that the choice of an in-plan annuity requires “a prudent decision-making process” on the part of a fiduciary, the attorneys describe the following considerations as the most relevant:

The current financial strength of the insurance company offering the feature; that is, at the time the decision to offer the GMWB is made, is there a reasonable basis to believe that the insurance company will be financially able to make all future guaranteed payments if it is required to do so?

The premium cost of the GMWB and the fees and expenses of the underlying investment option to which the feature is attached.

The portability of the feature – that is, portability by a participant to a different 401(k) plan if he changes jobs, the ability to continue the feature if the participant’s benefit is rolled over to an IRA, and the continued availability of the feature if the plan sponsor changes providers
The education provided by the insurance company so that participants can understand and decide whether it is appropriate for them – particularly with respect to the impact of withdrawals that exceed the guaranteed minimum.

CIO who timed real estate market for MetLife becomes its CEO

Posted on March 24, 2011 by Editor Test -

The board of MetLife Inc. has named Steven Kandarian –who in 2006 sold the Peter Cooper Village/Stuyvesant Town apartments in Manhattan to Tishman Speyer and BlackRock Realty for $5.4 billion – to succeed C. Robert Henrikson as president and chief executive officer. The real estate is now worth $1.8 billion.

Henrikson, who has been chairman, president and CEO of MetLife, New York (NYSE:MET), since 2006, will turn 65, the company’s mandatory executive management retirement age, in May 2012.

The MetLife board says Kandarian, who is now the company’s chief investment officer, will take over as president and CEO May 1. In April, the board will nominate him to for a seat on the board.

Henrikson will stay on as chairman until the end of the year, the board says.

Kandarian has been MetLife’s CIO since April 2005. He led efforts to diversify the company’s investment portfolio, in part by making the decision to sell the Peter Cooper Village/Stuyvesant Town development for $5.4 billion in 2006, at the market peak.

A report January 25, 2010 in Bnet.com told the story well:

“Insurers are generally known as plodders who are paid to be careful with their clients’ premiums. For them a long-term Treasury is considered a risky investment.

“So the decline and fall of prominent New York realtor Tishman Speyer and private equity firm Blackrock Inc.’s investment in two of New York City’s biggest apartment complexes deserves a closer look – especially when the winner in this game of Monopoly is MetLife the nation’s largest, and arguably one of the most conservative, life insurers.

“In the mid-1940’s MetLife developed and then owned two sprawling housing developments, Peter Cooper Village and Stuyvesant Town. But when Steve Kandarian became MetLife’s chief investment officer in 2005, recognized two things early on. First, the commercial mortgage-backed securities market had turned into a bubble, with banks underwriting bad investments and then passing them along to other investors. And second, the Peter Cooper/Stuyvesant Town holdings had become too big a part of MetLife’s overall real estate portfolio.

“So Kandarian and MetLife took steps to cut back on the insurer’s investments in risky mortgages, and put the two big real estate investments on the market.

“Tishman Speyer was quick on the draw, perhaps because the realtor and its backers believed they could rid themselves of the subsidized units and make a huge profit, according to New York magazine. They paid $5.4 billion for the two complexes at the height of the market.

“They were wrong. Tenants at the two projects took the realtor and its backers to court and fought them to a standstill. Meanwhile, New York apartment prices were hammered, as were highly leveraged deals by private companies like Blackrock that got closed out of the capital markets during the recession, according to the Wall Street Journal.

“The two developments are now worth about $1.8 billion, according to some sources, about a third of what MetLife sold it for. And Tishman Speyer and Blackrock just defaulted on the $4.4 billion debt used to finance the project, leaving it in the hands of equity investors like the Church of England, CalPERS and The Hartford.

“In an audit of U.S. financial corporations MetLife was found to be one of the healthiest. And, at a time when other insurers held their hands out for TARP money, MetLife refused it. The $5.4 billion it got from the sale of Peter Cooper Village and Stuyvesant Town undoubtedly helped.”

In 2009, Kandarian assumed responsibility for MetLife’s global brand and marketing services department.

In July 2009, MetLife put its institutional operations, its individual operations and its auto and home unit in a single U.S. business as a result of a strategic review started by Kandarian.

In October 2009, Kandarian testified at a House Financial Services Committee hearing on efforts to develop what became components of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Kandarian was executive director of the Pension Benefit Guaranty Corp.

The Bucket

Posted on March 24, 2011 by Editorial Staff -

Mutual of Omaha Adds 401(k) Wholesalers

Mutual of Omaha subsidiary, Retirement Marketing Solutions, Inc. (RMS), has appointed two new retirement plan wholesalers, Charles Lutzow and John McCabe, in the Chicago and Houston areas, respectively. The move increases Mutual of Omaha’s reach in two of the largest cities in the country, Chicago and Houston.

The move “addresses an increasing demand for retirement services from small and midsize plan sponsors in Texas and Illinois,” said Chuck Lombardo, president and CEO of Retirement Marketing Solutions.Lutzow recently served as the founder and owner of CAL Financial Group, Inc. specializing in mergers and acquisitions and CAL Financial, Inc. an insurance and investment firm in the State of Illinois.

He holds the Series 6 Investment Company/Variable Contracts Products Limited Representative, 7 General Securities Representative, 24 General Securities Principal, 63 Uniform Securities Agent, and 65 Uniform Investment Adviser licenses.

Lutzow also has Life and Health licenses in the State of Illinois. He received a bachelor’s degree from Loyola University in Chicago. He also holds professional designations of Chartered Financial Consultant and Certified Funds Specialist. McCabe most recently served as a senior 401(k) wholesaler for AXA-Equitable in Houston. Prior to that, he was the East Coast director of pensions for Oppenheimer & Co. Inc. Retirement Services, where he specialized in selling/closing cash balance plans with 401(k) plans to law practices and physician groups.

McCabe began his career in 1984 with AXA-Equitable and held numerous upper management positions with the company before moving to Oppenheimer in 2004. He earned his bachelor’s degree from Wake Forest University. He has a General Securities Series 7 license and holds professional designations of Chartered Life Underwriter, Chartered Financial Consultant and Master of Science in Financial Services.

Jacksonlaunches Portfolio Construction tool

Jackson National Life has launched a new Portfolio Construction Tool, an interactive online solution that helps advisers build customized investment portfolios. Jackson provides a wide range of investments within its variable annuity offering, with no asset allocation restrictions. The Portfolio Construction Tool helps advisers select the mix of subaccount options that best meet their clients’ retirement income needs.

The tool, which is available for appointed producers who register on www.jackson.com, aggregates historical performance information, subaccount analytics and educational materials. A variety of interactive filters allow advisers to screen investment options by asset class, portfolio manager, investment style, expenses and performance. Advisers can to marketing and educational materials, including fact sheets, brochures and videos.

Advisers can also save and edit individual proposals, create templates for future use, and generate summary reports to review with clients.

“Jackson’s product development philosophy has always been focused on investment freedom, choice and flexibility,” said Daniel Starishevsky, senior vice president of marketing for Jackson.

The Portfolio Construction Tool is the latest in a series of products and services for advisers. In October 2010, Jackson introduced LifeGuard Freedom Flex, the first customizable guaranteed minimum withdrawal benefit (GMWB). In 2007, Jackson introduced the Living Benefits Selection Center, which helps advisers identify the right living benefit for clients.

EBRI’s 2011 Retirement Confidence Survey: Working for Pay in Retirement

How many workers expect to work for pay after they retire?

The 2011 EBRI Retirement Confidence Survey (RCS) has consistently found that Workers are far more likely to expect to work for pay in retirement than retirees are to have actually worked, according to the 2011 EBRI Retirement Confidence Survey. The age of workers planning to work for pay in retirement now stands at 74%, up from 70% in 2010.

The survey found:

• Retirees are far less likely to report having worked for pay in retirement than workers are to say they will work. Only 23% of retirees in the 2011 RCS say they worked for pay since they retired. Moreover, very few of those who have not worked for pay in retirement think it is likely that they will return to paid employment sometime in the future (2% very likely, 8% somewhat likely).

• Large majorities of retirees who worked in retirement in the 2010 RCS say reasons for doing that include wanting to stay active and involved (92%) and enjoying working (86%). However, almost all retirees who worked in retirement name at least one financial reason for doing so (90%), such as wanting money to buy extras (72%), a decrease in the value of their savings or investments (62%), needing money to make ends meet (59%), and keeping health insurance or other benefits (40%).

• Many workers are also planning to rely on income from employment to support them in retirement. Three-quarters of workers say that employment will provide them (and their spouse) with a major (24%) or minor (53%) source of income in retirement (77%) total, up from 68% in 2001, but statistically equivalent to 79% in 2009 and 77% in 2010).

Full details of the 2011 Retirement Confidence Survey are in the March 2011 EBRI Issue Brief and online at www.ebri.org/surveys/rcs/2011/ The RCS is conducted by the nonpartisan Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates. The RCS, now in its 21st year, is the longest-running annual retirement survey of its kind in the nation.

Nationwide finds value in business coaches

At Nationwide Financial Services, there’s apparently no contradiction between “business class” and “coach class.”

Nationwide’s top sales people can now receive training in coaching and mentoring from the Worldwide Association of Business Coaches (WABC). The insurer believes that coached helped increase variable annuity sales by 32% and first-year fixed life insurance sales by 70% in 2010.

The firm’s sales people can become Certified Business Coaches by participating in an 18-month program that involves 120 hours of in-class training, 500 hours of hands-on coaching practice, and 120 “oversight” hours in which they receive feedback from coaches who have already earned their certification.

Twenty-one sales leaders in the field and internal sales and service organizations have become Certified Business Coaches through the WABC program so far. The program was recently expanded to Nationwide’s public-sector retirement plans sales leadership.

The WABC is the first international professional association dedicated exclusively to business coaching and the only association of its kind to require advanced qualifications for membership.

Nonqualified deferred compensation plans help retain key workers: Principal

As the economy improves and key employees ponder outside offers, nonqualified deferred compensation plans can help retain them, according to a new white paper from the Principal Financial Group, How to Recruit, Retain & Retire Key Employees.

The findings are based on a study of nonqualified deferred compensation plan sponsors and plan participants conducted with Boston Research Group. Key findings include:

Nearly one in five employers report nonqualified benefits have become more valuable to recruitment and retention efforts in the past year.
Almost all employers (97%) with nonqualified plans in place say they will continue offering these benefits next year.
Employees participating in nonqualified plans also say they value the plans to help reach their retirement goals. Nine out of 10 participants (91%) expect to maintain or increase deferrals in the coming year.

“Now is the time for employers to review their employee benefits, which offer a powerful bargaining chip when convincing employees to stay put,” said Gary Dorton, vice president of nonqualified benefits for the Principal Financial Group.

The study noted an increase in the number of mid-level managers participating in these plans (36% , up from 17%), suggesting nonqualified plans may be becoming a more mainstream benefit and no longer just for executives.

To view additional research and insight from The Principal, visit our Principal Research Center.

Many advisors overlook rollovers: Cogent

Posted on March 24, 2011 by Editor Test -

Nearly half of all advisors fail to take advantage of the opportunity to manage their clients’ rollover assets, according to a new survey by Cogent Research.

But about a third of advisors, apparently more resourceful or aggressive, said they gained $5 million or more of rollover assets in the previous year. On average, these high performing advisors have an average of $128 million in assets under management.

The Investment Company Institute estimated in May 2010 (Research Fundamentals, Vol. 19, No. 3) that Americans held about $4.2 trillion in traditional or rollover IRAs, exceeding the $4.1 trillion in defined contribution plans. Together, IRAs and DC plans accounted for more than half of the $16.0 trillion in retirement assets at year-end 2009.

“There is a group of highly focused advisors who not only build the biggest books of business, but also put their mind to winning rollover assets. They are firing on all cylinders,” said David Feltman, Cogent’s managing director for Syndicated Research.

The highly successful “rollover advisors” convert more retirement accounts and the size of those accounts is 2.4 times larger, at $344,000, than the advisors who fall into the second tier in terms of rollover success.

The Cogent Study revealed a significant opportunity for both asset managers and advisory firms to win both IRA and ESRP (employer sponsored retirement plans) conversions.

“These assets are available to be won and those who work hardest succeed at winning them,” said Feltman. “Given the propensity of retirees to move their employer-sponsored account at retirement, these funds are a ripe opportunity.”

A year ago, Cogent reported that for the first time that it had been tracking investor allocations, wealthy Americans held more assets in IRAs than in workplace-based retirement accounts like 401(k)s and 403(b)s. The findings were included in the report, 2010 Investor Assets in Motion: IRA & Retirement Marketplace Opportunities.

The report, based on a nationally representative sample of 4,000 affluent and high net-worth Americans, found that while ownership of both types of retirement accounts is down since 2006, ownership of workplace-based retirement accounts have decreased much more dramatically. Since 2006 IRA ownership has slid by just 5%, meanwhile ownership of workplace-based retirement accounts has decreased by almost one quarter (23%).

It appears that the majority of dollars that investors formerly allocated to ESRPs have been funneled into IRA accounts and, to a lesser extent, bank accounts. This shift has resulted in the proportion of assets affluent Americans hold in IRAs (31%) to surpass the proportion of assets they hold in 401(k) and other employer-based retirement plans (25%).

Domestic non-financial debt level now $36.3 trillion

Posted on March 23, 2011 by Editor Test -

Debt of the domestic nonfinancial sectors expanded at a seasonally adjusted annual rate of about 5% in the fourth quarter of 2010, after an increase of 4.25% in the previous quarter, according to the Federal Reserve’s Flow of Funds Accounts of the U.S., Fourth Quarter 2010.

Private debt edged up 1.25% at an annual rate in the fourth quarter, while government debt increased 12.75% percent.

Household debt, which declined 0.5% in the fourth quarter, has contracted each quarter since the first quarter of 2008. Home mortgage debt fell at an annual rate of 1.25% in the fourth quarter, compared to an average decline of more than 2.5% percent during the previous four quarters. Consumer credit rose at an annual rate of 2%, retracing the previous quarter’s decline.

Nonfinancial business debt rose 3.5% in the fourth quarter, on the heels of a 2.25% increase in the third quarter. Corporate bonds outstanding posted strong increases in both the third and fourth quarters, more than offsetting declines in commercial mortgages and commercial paper outstanding.

State and local government debt rose about 8% at an annual rate in the fourth quarter, after a 5.5% increase in the third quarter. Federal government debt increased at an annual rate of 14.5% percent in the fourth quarter. For 2010 as a whole, federal government debt grew a bit more than 20%.

At the end of the fourth quarter of 2010, the level of domestic nonfinancial debt outstanding was $36.3 trillion; household debt was $13.4 trillion, nonfinancial business debt was $11.1 trillion, and total government debt was $11.9 trillion.

Household net worth was an estimated $56.8 trillion at the end of the fourth quarter, up about $2.1 trillion from the end of the previous quarter.

RIIA ‘Gets’ Open Architecture

Posted on March 23, 2011 by Kerry Pechter -

Open architecture is arguably the key to growth in the retirement income business. Choice and transparency, which now drive the markets for cars, books and shoes, etc., are starting to drive the markets for investments, advice and annuities.

Few financial services trade organizations seem to understand this better than the Retirement Income Industry Association. You can read it in RIIA’s slogan, “The view across the silos,” and hear it in the noisy diversity of viewpoints at its conferences.

The latest of those conferences—RIIA’s fifth annual Spring Conference—was held this week at Morningstar-Ibbotson headquarters in Chicago. Attended by just 150 (but sold-out), it was an occasion for networking, new product presentations, and for marking RIIA’s achievement of a couple of important milestones.

What follows are jottings-down of conference factoids and observations. Certain topics—breaking news from Putnam Investments CEO Robert Reynolds and publication of the third edition of RIIA’s “Body of Knowledge—are handled in the accompanying feature articles.

Updates on products and services

Leo Clark, director, Barclays Capital, talked about Barclays Notes for the second time at a RIIA conference. The notes promise to provide 10 or 20 years of flat or inflation-adjusted income for retirees. They compete with fixed-period income annuities and with the fixed-period TIPS-based payout funds currently marketed by PIMCO.

So far Barclays Notes haven’t gotten much traction in the marketplace well and have been met with some skepticism by attendees at both RIIA conferences. One attendee suggested that Notes are a mass-affluent product that is mismatched with Barclays’ traditional high-net worth market.

Others find Barclays Bank, which guarantees the Notes, to be a less credible guarantor than an insurance company. Still others characterized the product as simply “lending money to Barclays” as opposed to using Barclays as a traditional financial intermediary.

Larry Kiefer, systems officer at DST Systems, which designs software and builds systems for 401(k) recordkeepers and other clients, talked about his company’s plans to solve some of the technical problems that discourage plan sponsors and recordkeepers from offering annuity options to participants.

In the third quarter of 2011, his company plans to launch a platform or hub that would connect multiple insurance product providers to 401(k) recordkeepers, participant websites, and call centers.

The hub, which Kiefer called a “field of dreams” project because DST plans to build it in hopes that customers will come, would allow recordkeepers to offer more than one insurance product without having to build a separate system to interface with each insurer, and would allow recordkeepers to switch providers more easily and less expensively.

Jerry Bramlett, vice president and head of U.S. institutional sales and marketing of Dimensional SmartNest, described the Dimensional Fund Advisors’ entry into the increasingly competitive market for managing the accounts of plan participants as they transition from accumulation to distribution.

SmartNest will be officially launched later this year. It was created a few years ago by a team led by Nobel Laureate Robert C. Merton, and has been used by companies in Europe. It will be a topic of future RIJ stories.

Bramlett’s discussion was juxtaposed with presentations by Sherrie Grabot of GuidedChoice, the 401(k) advice provider that recently launched GuidedSpending, an income program for 401(k) participants without managed accounts, and by David Ramirez, portfolio manager at Financial Engines, which recently launched Income+, a managed account income planning program with which SmartNest will apparently compete.

A health care cost monster of our own creation

A panel of health experts and one speaker, Charles Baker, former Harvard Pilgrim Health Care CEO, had scary things to say about the impact of rising health care costs on retirees and on the nation at large.

Baker expected growth in health care costs to continue to outpace inflation and GDP growth in coming years. The larger the health sector grows, he said, the more entrenched and influential the health care industry lobby will be, making it increasingly harder to make the disruptive changes that are necessary to slow the growth in health care spending, now at about 16% of GDP.

Asked what he would do if he were “health czar,” Baker, who ran unsuccessfully for the governorship of Massachusetts in 2010 as a Republican, said he would shift Medicare’s emphasis on reimbursement for high-tech procedures to an emphasis on “cognitive care.”

“What Medicare pays for is where the industry goes. It’s the chassis on which the whole health care system sits,” he said. He would also shift the emphasis of medical education to a team-orientation from an individual orientation.

Physician Bryan Negrini, warned that Alzheimer’s disease will become increasingly prevalent as the U.S. population ages, at much greater cost. The cost of long-term care for someone with Alzheimer’s will come on top of the estimated $250,000 or more that couples should expect to have to pay out-of-pocket for health care during retirement.

The 80:20 rule, as applied to household incomes

Doug Short, a retired IT professional whose steady, constantly updated production of stock market historical charts attracts some 2.7 million visitors to his website, dshort.com, gave a presentation called “The Retirement Puzzle in an Age of Uncertainty.”

His slides showed the somewhat startling widening of income growth disparity between the highest-earning 20% of U.S. households, and especially the highest-earning 5%, and the other 80%.

Starting in 1985, and roughly following the contours of the subsequent bull market in equities and bonds, the real incomes of the top 5% roughly doubled, to $300,000. The average incomes of the top 20% rose about 70%, to $170,000. Income growth at lower quintiles was increasingly flat.

Given that by 2001, the top 2.7% of households owned 58% of publicly-traded stock, that may be no mystery—although the relationship between equity ownership and income growth isn’t transparent. It could have something to do with the huge growth of compensation through stock options. The divergence of income also coincided with the rise of U.S. government debt, the 401(k) system, and tax reduction, Short noted.

Putnam’s Man with a Plan

Posted on March 23, 2011 by Editor Test -

Since moving from Fidelity in 2008 to run Putnam Investments—the two firms are only a short stroll apart along Water St. in Boston—Robert Reynolds has been vocal and visible in raising Putnam’s profile in the retirement income space.

On Tuesday, the frequently flying Reynolds stumped for Putnam in Chicago, where he spoke at length from a prepared text at the Retirement Income Industry Association’s annual conference, held at Morningstar-Ibbotson headquarters.

Reynolds had plenty to say. His speech coincided with his firm’s announcement of a “suite of income-oriented funds that aim to help advisors work with retirees in developing strategies for monthly income flows, at varying levels of risk tolerance, to flexibly address their changing lifestyle financial needs throughout retirement.”

He said a prospectus for the funds was filed with the SEC earlier this week and the funds, along with a planning tool for participants and advisors, will be available in the middle of this year.

He also slightly surprised the RIIA audience—about 150 executives and professionals from many silos of the retirement industry—by calling for a new regulatory body called the “Lifetime Income Security Agency,” or LISA. As an acronym, “it beats PBGC,” Reynolds said.

LISA, he said, would vet retirement income products, establish a “risk-based national insurance pool” to be funded like the Federal Deposit Insurance Corporation and discourage products that make “unsustainable promises that lower the public’s trust.”

Reynolds also railed at deficit hawks in Washington who regard the tax incentives for savers as “tax expenditures” that are costing the Treasury money. He warned of an imminent attack on the deductions for contributions to IRAs and 401(k) plans. “The torpedo is already in the water,” he said.

Putnam’s retirement income solution appears to revolve around a systematic withdrawal calculation tool that advisors can use when helping their clients draw a non-insured, non-guaranteed income stream from a portfolio of Putnam’s RetirementReady target date funds with its existing Absolute Return funds. (The latter aren’t to be confused with true absolute return funds that use long-short positions, derivatives and leverage to achieve their returns.)

Reynolds said the new offerings were filed with the Securities and Exchange Commission on March 22. The suite consists of three Putnam Retirement Income Funds, called Lifestyle 1, Lifestyle 2, and Lifestyle 3.

According to Putnam’s press release:

Lifestyle 1, the suite’s retirement income conservative option, will be the new name of Putnam RetirementReady Maturity Fund, which includes a combination of Putnam Absolute Return 100, 300 and 500 Funds, Putnam Asset Allocation: Conservative Portfolio and Putnam Money Market Fund.
Putnam Retirement Income Fund Lifestyle 2, a moderate retirement income portfolio, will be a new fund and strategy based on a combination of Putnam Absolute Return 100, 300, 500 and 700 Funds, domestic and international equity securities, convertible securities and fixed income securities.
Putnam Retirement Income Fund Lifestyle 3, the most aggressive option in the suite, will be the new name of Putnam Income Strategies Fund, which will be modified to include a combination of Putnam Absolute Return 700 Fund, domestic and international equity securities, convertibles and fixed income securities.

“The suite, which is designed for investors who are already in retirement, who plan to retire in the near future or who expect to begin withdrawing their invested funds soon,” Putnam’s release said.

Jeff Carney, Putnam’s head of global products and marketing, told RIJ yesterday, “By integrating the Absolute Return funds with the relative return funds, you’re providing risk reduction. When you’re drawing down your assets, it’s volatility that kills you. This strategy gives you a better shot at a more controlled sequence of returns. Let’s say the targets of the Absolute Return funds are one, three and five percent. You could blend two of the funds to try and get 2.5%.”

Carney went on, “If [a pre-retiree] says, ‘I need a return of three percent of $100,000, the tool would tell you how much you have to save to generate enough income at that rate, and what your expected risk will be. It tells them the trade-offs. A great application for this is stay-in-the-plan assets. If I’m in our RetirementReady Maturity Fund”—the last and most conservative of Putnam’s target date fund series—“I can now change it to a mix of [target-date, absolute return and relative return] funds. The numbers of dollars in the Maturity Fund are quite small today, but over the next ten years, they’ll be huge. [Rollover] IRAs are another huge marketplace.”

Putnam’s program is not a decumulation plan or a form of non-guaranteed annuitization, Carney made clear, if one defines decumulation or annuitization as a mixed drawdown of both principal and returns over the course of retirement. It’s for individuals and advisors who want to preserve principal while getting a fairly stable income from a specific portfolio of both equities, fixed income investments and cash.

Income annuities and guaranteed lifetime income benefits are not a part of Putnam’s solution, which is aimed at the large group of investors and advisors who still shy away from insured products. “We’ve done a lot of work on annuities. We’ve made the fees on our product to be extremely competitive with them. The challenge on the annuity side is the complexity, the fees, and the mandates,” Carney told RIJ.

Industry observers have been somewhat skeptical of Putnam’s Absolute Return Funds, saying that their stated return goals are promissory and that they don’t truly meet the traditional definition of absolute return funds, sophisticated vehicles that combine long-short strategies, derivatives and leverage. Carney dismissed the skepticism.

“We can short up to 30% of the [Absolute Return] funds, though we’re not short much right now. ” he said. “We’ve been using these types of funds on the institutional side for years, and we decided that what was good for the institutional market is good for the individual market. People say that the names of the funds are a misnomoer or promissory, but that’s missing the point. When equities zag, these funds zig. They don’t behave like relative return funds. They stress the target return rather than the relative return over a rolling three-year period. We’ve got 10,000 advisors using these things and over $3 billion in assets. There’s a reason why they work.”

A Putnam release added, “The products can be used as a stand-alone solution or to work in tandem with other retirement income vehicles, and will offer funds with differing levels of return potential and risk.”

“The funds will be accompanied by a new, prescriptive planning tool to help guide advisors and clients in creating a range of personalized income strategies drawing from their retirement savings. These Putnam Funds, combined with the planning tool, allow risk levels and withdrawal rates to be customized and regularly updated to meet individuals’ needs and evolving circumstances.”

“Subject to regulatory review, the funds are expected to be available in their entirety by midyear. The tool will be available at or near the funds’ launch.”

China outlines Social Security Fund expansion

Posted on March 16, 2011 by Editor Test -

The assets under management of China’s National Council for Social Security Funds (SSF) are expected to reach 1 trillion yuan ($148.70 billion) by the end of 2011, Investment & Pensions Asia reported.

The fund, which was established in 2000 and receives a statutory 10% of the proceeds of all IPOs by Chinese state-owned enterprises (SOEs), is the largest pension fund investor in China.

Its current allocation is made up of 45% fixed-income assets, 30% stocks and 25% private equity. IPOs by SOEs are expected to swell the fund’s coffers by RMB 20 to 30 billion per year until 2015.

The chairman of the fund, Dai Xianglong, said it is looking “to increase its allocation to social housing projects as well as taking an active role in driving development of China’s nascent private equity markets. It is also seeking to improve returns from fixed-income products against an expected backdrop of rate hikes this year.”

China’s government announced this week it will build 10 million social housing units at a cost of RMB 1.3 trillion ($198 billion) in the coming year, and the SSF looks set to play an important role in the welfare spending hikes outlined in the government’s latest five-year economic plan, which runs to 2015.

The fund has an upper limit for overseas assets of 20%, although currently this has remained stable at 7% since last July. The fund has a long-stated aim of fulfilling this quota, but Dai refused to put a time-scale on this expansion.

In December, the fund added seven asset management companies and one securities company to its list of external asset managers. Notably, whereas previously these have almost all been foreign companies, the most recent additions are nearly all Chinese-run: China Universal, Dacheng, Fullgoal, Guangfa, Haitong Fortis, ICBC Credit Suisse, Yinhua and Citic Securities.
Dai said there were unlikely to be more such appointments in 2011.

U.S. Insurance M&A Rebounds in 2010

Posted on March 16, 2011 by Editor Test -

Insurance mergers and acquisitions in the U.S. picked up momentum in 2010. Sharp increases were seen for insurance service providers and distribution targets, a potential leading indicator of market shift. A prominent theme underlying insurance company transactions was selectively targeted bolt-on acquisitions of specialized units, according to a new study by Conning Research & Consulting.
“Mergers and acquisitions in the U.S. insurance market increased significantly in 2010, with a 35% increase in transactions and a 224% increase in deal values. This represents a reversal of a five-year decline in merger activity in the market,” said Jerry Theodorou, analyst at Conning Research & Consulting. “The increased activity was the result of buyers responding to soft market insurance conditions as well as generally improving conditions for M&A, including a more vibrant economy, more buoyant equity markets, and stronger capital positions at insurers.”
The Conning Research study, “Global Insurance Mergers & Acquisitions in 2010: Moving from Defense to Offense” tracks and analyzes both U.S. and non-U.S. insurance industry M&A activity across property-casualty, life, health and distribution and services sectors.
“Despite the pickup in M&A in 2010, insurers were generally cautious in their plays. Target properties were largely midsized companies offering accretive bolt-on opportunities, in contrast to the large consolidations seen in earlier periods of strong insurance M&A activity,” said Stephan Christiansen, director of research at Conning. “Specialty underwriting units were a strong focus for activity, as were specialty distribution groups. Insurers in 2010 also actively pursued alternatives to outright M&A of risk bearing entities in order to minimize reserve risk and the complexities of integration following a merger. Marquee underwriters or underwriting teams were sought out and hired, and managing general agents were acquisition targets as well.”

Don’t Subsidize ‘Middle-Age Retirement’

Posted on March 16, 2011 by Eugene Steuerle -

The idea of changing the retirement age, or the age of eligibility for Social Security benefits, has long been part of a narrow debate about how to ensure the long-term fiscal sustainability of that program. But we should really confront the retirement age as part of the much broader debate about societal progressivity: Who in our society has the ability to give more, who needs more support, and when do they need it?

The income tax, for example, is progressive in that households with higher incomes are expected to contribute a higher share of it, while lower-income households pay little or no tax. In the case of the retirement age, we should be asking whether we really intended to create what Social Security has become—increasingly a retirement system for people in middle age, most of whom report good or excellent health.

For over half of beneficiaries retiring in their early 60s today, the result is that one member of a couple with average life expectancy spends well more than a quarter century retired. We need to ask whether such a system leaves Americans adequately prepared for old age and, more broadly, allows society to take advantage of older citizens’ tremendous potential. That is, does the typical 62-year-old have more ability to give and less need for support than the typical 90-year-old?

It is true that many people in late middle age need help, for reasons of health or the economy. But let’s be honest: Most of the benefits from expanding years of retirement support have gone to relatively healthy middle-income and affluent people, who still have much to contribute. It’s not just that we and everyone else get these extra years of benefits but that those of us with above-average income get higher levels of benefits, often twice as much or more than those with lower lifetime incomes.

Think of it this way: Social Security has expanded years of support universally, resulting in both lower revenues and a lost opportunity to target resources progressively to the disabled, those with low- and moderate-lifetime incomes, and older individuals with greater health needs and fewer capabilities to care for themselves. Such a program, whether chosen or arising by accident, is akin to an across-the-board cut in tax rates that seems fair on the surface but happens to give thousands of dollars in cuts to higher-income taxpayers as a way of giving much less to middle- and low-income taxpayers.

Long-term unemployment and disability are real issues, but they don’t really depend on whether one is 62 or 65. Many workers in their 50s and younger also find themselves unable to handle the physical demands of their jobs or adjust to the fact that the job in which they’ve invested no longer exists anywhere, and no other position currently matches their skills. Nor, despite claims to the contrary, do more years in retirement disproportionately benefit low-income minorities. Yes, some have lower life expectancies, but many of those people die before age 62 or receive disability payments that don’t change with the retirement age. If we really wanted to help disadvantaged minorities and other workers with lower lifetime earnings, we could use the money more progressively by targeting benefits directly to them, through devices like minimum benefits and removal of the discrimination against parents — minority women particularly — who were not married and therefore get nothing out of the current spousal and survivor benefits, although they pay for them.

Unfortunately, in negotiations with the several commissions and task forces on the budget deficit in 2010, many liberals focused so intently on protecting the current benefit system that they overlooked real opportunities to improve the equity and progressivity of our retirement system. The consequence is to endanger a once-in-a-generation chance to improve benefits and security for those in old age, including reductions in poverty and near poverty among the elderly.

The question we should be asking is a simple one: For how many years should people who are not disabled receive benefits to support their retirement?

A single person retiring at the earliest retirement age (65) in 1940 was likely to receive close to 14 years of benefits. By 1975, this person could retire at 62 and would likely receive benefits for 19 years, and today that number has risen to almost 22 years. When it comes to couples retiring at the earliest retirement age, by 2030, at least one partner is expected to receive benefits for nearly 30 years.

Is the decision to provide benefits for an ever-increasing number of years one that we, as a society, have made thoughtfully? Is it one that we would have made independent of other societal needs, such as children’s programs?

Put another way, if you define old age by, say, the last 15, 18, or even 20 years of life, then Social Security has become, almost by definition, a middle-age retirement system.

Arguments about the retirement age often center on a chronological age like 65, the normal (and early) retirement age when Social Security was first created in 1935. However, the number of years spent in this undifferentiated period known as retirement is all the more dramatic when we look to both actual retirement ages and life expectancy. Americans on average retired at age 68 in both 1940 and 1950. If they were to retire for the same number of years on average today as they did in 1940, they would be retiring at age 75. In 2070, they’d quit working at about age 80. Instead, they retire on average at about age 64.

At the same time that people are retiring earlier and living longer, Americans have been having fewer children. Unlike increases in life expectancy, which doesn’t really increase the proportion of the population in the last years of life, fewer births do create fewer younger people (say, in the first three-quarters of their lives) per older person (say, in the last quarter of her life).

These demographic effects — longer lives, more years of support, and lower birth rates — can be combined. Rather than four workers per Social Security beneficiary in 1965, or the current ratio of 3-to-1, we are projected to move to 2.1 workers for every Social Security recipient by 2035. Social Security costs, as a share of gross domestic product, in 2030 will be about twice as high as they were in 1970, mainly because of these demographic effects.

These demographic pressures stretch well beyond Social Security. But so would the benefits of encouraging people to spend fewer years in retirement and more time in the labor force. To the extent we can improve employment rates, we can also increase national income and personal income and in turn, raise income-tax revenues and therefore the level of benefits that government can provide to the truly needy.

Within the Social Security system, reducing the incentives for early retirement would boost payroll-tax revenues. This could allow the system either to provide a higher level of benefits for all or to concentrate benefits progressively on those who are older and who, in our current middle-age retirement system, receive increasingly smaller shares of total benefits over time. Less than 35 percent of benefits to men go to those expected to live 10 or fewer years; in 1968 these older recipients received more than half of all benefits.

Here’s one way this shift toward a more progressive system could work: Suppose reform gradually increases the earliest retirement age, which today is 62. For an average couple retiring at that age, at least one of the two (more often the woman) is likely to make it to about age 90, and that life expectancy is rising.

Under current practices, Social Security balances would change little because that loss of any one year of benefits for some workers is offset by higher benefits they receive later. If people would work one year longer, however, personal incomes would rise by about 8 percent for every year of life thereafter. And as people earn more and delay drawing benefits, they receive higher annual Social Security benefits, draw down their private retirement balances for fewer years, and save longer. The individual or family is likely to be far better off and so, too, is the government — but mostly through higher income-tax revenues. In fact, at any tax rate, the additional revenues to Social Security would support higher average lifetime Social Security benefits as well.

The phenomenon of continually expanded years of retirement, however, is not just a question for Social Security or government policy more generally. It is a question about how we decide to live our lives and best use our nation’s pool of human capital in the 21st century. In the next few decades, older workers will be seen as women were in the last half of the 20th century: the largest pool of underutilized talent in the economy. If we modernize the signals and symbols around the idea of when old age begins — not just in Social Security but in the private sector as well — labor demand is likely to shift toward this pool of talent.

This argument is supported by evidence from history. Over the last half of the 20th century, the entry of women and baby boomers into the workforce made it easy to meet labor demand and allow other workers to retire for ever more years. The employment rate of adults, measured as a percentage of all adults, has increased in almost every non-recession year. That suggests that it’s a mistake to project the future work of those aged 62 to 68 by their recent employment rates, just as it was wrong to project the labor supply of women in 2000 by what they were doing in 1950. And increasing employment for older Americans need not come at the expense of younger workers, because the income older workers earn translates to more demand and more jobs for all. Put another way, by inefficiently pushing people into retirement, we’re reducing their output and personal income in ways that reverberate throughout the economy in the same way as an increase in unemployment does.

We are at a time when we need to look at all the elements of our nation’s social contract — those we created deliberately and those that arose by accident — and question whether they are achieving the goals of social justice and progressivity as well as making the best use of our most valuable resource — our people. The unintended transformation of Social Security into a middle-age retirement system has proved to be a poor way of promoting progressivity and dealing with larger macroeconomic questions, and a gradual shift in the other direction would have countless benefits for older Americans, those with greater needs among old and young alike, and the economy as a whole.

Eugene Steuerle holds the Richard B. Fisher Chair at the Urban Institute in Washington, D.C. and writes the on-line column “The Government We Deserve.”

Stocks Due for an Upturn, says CRR

Posted on March 16, 2011 by Editor Test -

In contrast to more bearish observers who still regard the U.S. stock market as over-priced, researchers at the Center for Retirement Research are bullish. But they don’t appear to be using the cyclically-adjusted P/E that some observers use.

“Stocks currently are priced near 15 times earnings, offering stockholders a potential real return of 6.5 percent,” write CRR’s Richard W. Kopcke and Zhenya Karamcheva in a new article. “Over the coming decade, if earnings continue to recover as they have during past business cycles, stocks are likely to pay returns that compare favorably to their historical averages.”

“After falling sharply during the last recession, margins for nonfinancial corporations have recovered substantially, reaching 8.5 percent of output despite the weak expansion of business activity,” they added. “… If margins remain near 8%, thereby splitting the difference between the high margins of the 1950s and 1960s and the low margins of the 1970s and 1980s, stock prices would likely remain at or above 15 times earnings as they have done in past economic expansions.”

Even if the overall economy doesn’t improve, stocks can still gain value, the article said. “Even if the growth of GDP remains relatively low for much of the coming decade, corporations can use stock purchases as they have over the last 25 years to boost the growth of their stock prices to match past rates of appreciation,” the authors write.

“The additional appreciation resulting from these purchases generally will not affect the rate of growth of the total value of outstanding stock. Therefore, the additional growth in stock prices will be matched by the rate at which the number of shares shrinks,” they add.

Not all market watchers are as optimistic. In mid-February, John Hussman of Hussman Funds, who relies on the Shiller P/E (this “cyclically-adjusted P/E” or CAPE represents the ratio of the S&P 500 to 10-year average earnings, adjusted for inflation), wrote that the market is still overvalued.

“Last week, the S&P 500 Index ascended to a Shiller P/E in excess of 24. Prior to the mid-1990’s market bubble, a multiple in excess of 24 for the CAPE was briefly seen only once, between August and early-October 1929,” he wrote. “Based on our standard methodology (elaborated in numerous prior weekly comments), we presently estimate that the S&P 500 is priced to achieve an average total return over the coming decade of just 3.15% annually.”

In a March 1, column, Doug Short of dshort.com, wrote that the S&P 500 has recovered enough from its March 2009 bottom so that the Shiller P/E ratio is now in its second-highest quintile. In other words, stocks went from being undervalued back to being slightly overvalued.

His conclusion: “The Financial Crisis of 2008 triggered an accelerated decline toward value territory, with the ratio dropping to the upper second quintile in March 2009. The price rebound since the 2009 low pushed the ratio back into the top quintile. By this historic measure, the market is expensive.”

Millionaires’ attitudes, a leading indicator, are pointing up

Posted on March 15, 2011 by Editor Test -

Millionaires’ views on the current state of the U.S. economy have improved but remains “very weak.” Regarding their own finances, their outlook became much more positive at the end of 2011, however, according to the fourth annual Fidelity Millionaire Outlook survey.

Using a scale from +100 to -100, Fidelity gauged millionaires’ confidence in the economy at -54, up from -91 less than two years ago. Meanwhile, their personal outlook rose to +37 by the fourth quarter of 2011.

“Millionaires’ outlook could be seen as a leading indicator of the direction of the economy, especially since the last time we conducted this survey in early 2009, they forecasted improvement in all aspects of the U.S. economy at the beginning of 2010,” Michael R. Durbin, president, Fidelity Institutional Wealth Services.

Sentiment about the stock market is up 92 points (to +1) among millionaires—about one-third of whom say they have made back all the money they lost in the market from the fall of 2008 through the first half of 2009.

Despite the stock market’s positive performance over the past couple of years, the Fidelity survey found that 42% of millionaires, whose age averages 56, still do not feel wealthy, compared to 46% who said they didn’t feel wealthy in 2009. Those who classified themselves as not feeling wealthy said they would need at least $7.5 million to feel wealthy.

Of the 58% of millionaires who say they do feel wealthy—up slightly from 54% in 2009—they began to feel so at $1.75 million in investable assets, which is consistent with 2009 and up from $1.5 million in 2008.

“The feeling of wealth is relative, based on factors such as the current market environment, a person’s age, lifestyle, and so on,” said Durbin.

Millionaires’ future outlook has dramatically improved and is at the highest level in the survey’s history (+37). The biggest driver of millionaires’ outlook by the end of 2011 is business spending (+48), this component’s highest level since the survey’s launch in 2006.

Only 17% of millionaires say that the 2008-2009 market downturn shook their investing confidence and 68% do not expect market volatility to become the new norm.

Forty-three percent of millionaires say they are more knowledgeable investors now than before the market downturn, 75% feel financially secure, and 43% indicate they will invest more in the stock market over the next 12 months.

Four in 10 millionaires cite “securing enough resources to support their lifestyle during retirement” as their biggest concern, yet 69% have a well-developed financial plan and 81% are careful about spending.

Most millionaires (64%) are “extremely or very concerned” about the impact of potential tax changes on their investments and 36% plan to use tax free investments more. Thirty percent say they plan to invest more in IRAs over the next 12 months, up from 20% in 2009. Almost 40% expect to increase their mutual fund holdings over the next 12 months, up from 25% in 2009.

The Fidelity Millionaire Outlook is a study of 1,011 financial decision makers U.S. households with investable assets of at least $1 million, excluding workplace retirement accounts and any real estate holdings. Northstar Research Partners conducted this year’s survey online in October 2010.

30% of employers to restore matching contributions in 2011

Posted on March 15, 2011 by Editor Test -

Among employers who reduced or eliminated matching contributions to employee retirement accounts since the financial crisis, 30% intend to reinstate them in 2011, according to the 7^th annual Retirement Plan Survey by Grant Thornton LLP, Drinker Biddle & Reath LLP, and Plan Sponsor Advisors LLC.

Forty two percent don’t plan to reinstate their match this year.

A year ago, over half (53%) of the employers had not decided whether to return to previous contribution levels and 33% had no plans to do so.

Despite cutbacks by both plan sponsors and participants, 83% of plan sponsors reported that either very few or none of their employees had expressed concerns about their retirement readiness.

More plan sponsors are focusing on emerging market (EM) equities, with 77% of plans reporting inclusion or consideration for 2011. Last year, EM was included or under consideration by only 46% of plan sponsors. Real estate investment options were second to EM with 53%, followed by global bonds at 48%.

“These asset classes share a lack of correlation with the equity markets. Commodities, real estate, emerging markets and global bonds can be valuable when incorporated into a diverse portfolio,” said Erica O’Malley, Grant Thornton’s national Employee Benefit Plan practice leader.

Fifty-nine percent of plan sponsors responded that they have conducted one or more tax/legal compliance reviews on their plan in the past three years, an increase from 46% in last year’s survey.
Fifty-seven percent of plan sponsors surveyed had frozen their defined benefit plans to new entrants. Of those who froze plans, 58% had also frozen the accrued benefits to existing participants, while 42% continued to accumulate accrued benefits for the current population.
Over 80% of 403(b) sponsors surveyed believe they have established adequate internal controls over ongoing operations.
Fifty-eight percent of plan sponsors stated that they were not considering a Roth feature in their plan at this time, slightly lower than the trend in the marketplace.

Americans anxious about retirement, new surveys show

Posted on March 15, 2011 by Editor Test -

With a mountain of household debt and a molehill of retirement savings, most Americans would be delusional if they were confident about retiring securely. The results of two new national surveys suggest that most Americans are perfectly sound of mind in that respect.

The 2011 Retirement Confidence Survey, a project of the Employee Benefit Research Institute (EBRI) and Principal Financial Group, found that only 13% (tying an all-time low) of American workers are “very confident” about having enough money to live comfortably in retirement and 27% (an all-time high) are “not at all confident.”

Simultaneously, a new Country Financial survey showed that only 28% of Americans surveyed believe a middle-income family can save enough for a secure retirement. That’s two points lower than last year and nine points less than 2007.

“High unemployment rates; government fiscal crises; rising health care costs; lower investment returns; a surging older population putting pressure on Social Security and Medicare; and longer life expectancies” are all sapping confidence, the EBRI/Principal survey showed.

Just 19% of Americans think they will need $1 million or more for retirement, while 64% think they’ll need less, according to Country Financial. Another 18% are unsure.

Among other key findings in the 2011 Retirement Confidence Survey, available on the EBRI website at www.ebri.org:

Roughly a third of both workers and retirees dipped into savings last year to pay for basic expenses. Those with 401(k) or an individual retirement accounts (IRA) were far less likely than those without these accounts to tap into savings.
More than four in ten (42%) say they guesstimate their retirement savings needs, while 70% say they are a little or a lot behind schedule in planning and saving for retirement.
More than half of workers say they have less than $25,000 in total savings and investments, excluding their homes.
A significant number of workers (20%) say they now intend to retire later (at an older age) than they had planned. But almost half of current retirees (45%) say they retired earlier than they planned, mainly because of a health problem or disability.

Take the ‘Gauss’ Work Out of Saving

Posted on March 15, 2011 by Kerry Pechter -

You may remember Jim Otar from several October 2009 issues of Retirement Income Journal, when we featured excerpts from his book, “Unveiling the Retirement Myth,” which provided some refreshingly plain talk about decumulation.

In the book, the Toronto-based engineer-turned-advisor assigned hypothetical near-retirees to a Green, Grey or Red Zone according to their account balances and chances of running out of money. He then described financial strategies for those in each zone.

Eighteen months later, Otar is back with an equally ambitious new white paper. But this time he’s writing about accumulation strategies. Entitled “Retirement Income Accumulation: Non-Gaussian Analyses of Accumulation Strategies and Products,” the 45-page article contains some unfamiliar assertions—and some unfamiliar terms—that have unsettled at least a couple of the advisors who have seen it.

Regarding his assertions, Otar (below) contends that the equities markets are much less predictable than most investors are led to believe. If you hope to reach a long-range savings goal with a high degree of certainty, he argues, you’ll therefore need more time, more savings and a lower equity allocation than commonly thought.

As for terms, he introduces us to “non-Gaussian” distributions, “Capital Accumulation Equivalency” and “Aftcasting.” The first refers to his departure from the use of normal return distributions or Monte Carlo simulations; the second and third refer, respectively, to his proprietary methods for benchmarking a variety of accumulation strategies and for analyzing the history of stock market returns.

Otar’s sober conclusion: To be 90% certain of reaching your minimum accumulation goal by age 65—i.e., to be prepared for what he calls the “unluckiest” performance scenario—then you should have an equity allocation of only 50% or less in the bucket of money that you’ve designated for producing retirement income.

How does he arrive at such a conservative number? By calculating the asset allocation that would require the least amount of savings for an investor who needed to accumulate $1 million by retirement under the 10% worst possible performance scenarios, as identified by his Aftcasting technique.

His results, which are tabulated in the white paper, show that even if your time horizon is 30 or 40 years, a 50% equity allocation requires saving the least per year: $15,270 and $8,121, respectively. At 20 years, a 40% equity allocation requires the least ($31,151) and at 10 years, a 20% equity allocation requires the least ($81,706). That’s if you want a 90% chance of successfully hitting your goal.

In what may be an important contribution to retirement planning, he then uses these numbers as a benchmark to assess other retirement savings vehicles. In the process, he finds that people who are within 10 to 15 years of retirement may get better results with the same 90% certainty by investing in a fixed indexed annuity or a variable annuity with a guaranteed rollup and a lifetime income guarantee.

(In the interest of full disclosure: Otar has given paid, educational presentations on behalf of companies that manufacture those products, but his research and his paper were not sponsored.)

Otar insists that he’s not predicting a dismal future for stocks, but merely describing a savings strategy that could withstand one. “The charts [in my paper] do not reflect my opinion or optimism or pessimism,” he told RIJ recently. “They just show the optimum asset allocation based on market history of meeting your target dollar amount at a target future time horizon with 90% certainty.”

Two advisors who were shown Otar’s paper found it perturbing, however. “He’s making, what seems to me, to be a very odd argument that future rates of return will be lower than historic returns,” said one advisor.

“My own prognostication is that we may see about 8% going forward vs. the 9% historic, but he’s implicitly predicting 4.7%,” the advisor said. “I’m not comfortable he can justify his approach. Because of his quirk of leaving out dividends, he’s actually projecting returns going forward that are in the doomsday category.”

Another advisor said, “I found this a frustrating read. ‘Aftcasting’ is presented as a new and vastly superior methodology that uses ‘actual market history.’ So does Monte Carlo analysis. I looked up the definition of ‘Gaussian,’ but I’m still not fully clear on what a ‘non-Gaussian’ approach to retirement planning means.

“Otar makes no mention of the fact that some investors are happy to die broke, and others want to leave a legacy,” this advisor added. “He suggests a significantly different approach for those who ‘have the capability of selecting excellent managers,’ but, of course, every reader of Smart Money magazine thinks he has that capability. He seems to lump all annuity products into two simple categories, not mentioning that some have far, far greater expenses than others.”

But a third advisor had only praise for Otar’s paper. “It’s a fabulous article,” said Doug Short, who charts the markets at dshort.com. “It provides a mechanism for analyzing and comparing the kinds of retirement solutions.” He also liked the non-Gaussian approach: “Monte Carlo does randomized historical returns, but trends are never random.”

The paper may leave the casual reader wondering whether Otar recommends very low equity allocations or merely uses them as a baseline strategy for worst-case scenarios. When questioned, he admits to being very conservative. But he clarified matters by saying that it’s best to take as little risk as possible with the savings that you intend to rely on for your floor income during retirement.

“It all depends to your objective: If you want to reach a certain dollar amount at a certain future date with only 10% certainty, then you can place your money to 100% equity. Who knows, it might work occasionally. But that ‘occasionally’ is not good enough for me as an engineer,” he said.

He also thinks people should begin thinking about retirement earlier. “To me, long-term investing means starting at 25 years,” Otar added. “Any investment time horizon that’s 10 years or under is short-term.” As for advice on what to do today, he said, “The market has been going up for 18 or 20 months, and eventually it will roll over. For a person near retirement, I wouldn’t put more than 40% in equities.” For his own money, he currently favors cash.

In 2010, VA Industry Thrived and Consolidated

Posted on March 9, 2011 by Editor Test -

“Variable annuities ended the year on a strong note by virtually all measures,” writes Frank O’Connor in Morningstar’s Variable Annuity Sales and Assets Survey for the final quarter of 2010.

Total sales reached $136.6 billion in 2010, up 10.3% from $123.9 billion in 2009. Of total sales, $21.5 billion represented new cash flow, up 26.7% from $17 billion in 2009.

“Not since 2006 has the change in year-over-year net flow been more positive than the change in sales,” the report said. VA sales typically follow the fortunes of equity markets, which have gotten a boost over the past six months from the Fed’s quantitative easing policy.

But the net cash flow was also the second-lowest in 12 years, after 2005’s net flow of $20.4 billion. And last year’s total sales were well off the 2007 sales peak of $179.5 billion.

For details on changes to specific annuity contracts in the fourth quarter, see the latest report from Ernst & Young’s Retirement Income Knowledge Bank. Note also that Prudential has released a new white paper, The Importance of Financial Risk Management in Today’s Variable Annuity Market.

In the fourth quarter of 2010, new sales of $37.1 billion reached a two-year quarterly high and posted a 17.4% increase over new sales of $31.6 billion in the fourth quarter of 2009.

The industry continued to consolidate. The top five issuers—Prudential, MetLife, Jackson National, TIAA-CREF and Lincoln National—accounted for $77.73 billion in sales for the year, or 57% of the total, and the top 10 issuers accounted for over 77% of sales. In 2005, the top five companies had a 42.8% share.

In terms of total VA assets, the biggest gains in 2010 were enjoyed by Protective (assets up 37.9% over 2009) Jackson National (up 27.8%) and Prudential Financial (up 14.6%). Declines were registered by Hartford (-11.7%), John Hancock (-4.6%), Pacific Life (-5.5%), Genworth Financial (-8.3%), Security Benefit (-10%) and Phoenix Life (-12.2%).

After TIAA-CREF’s group variable annuity, the top-selling contract was Jackson National’s Perspective II (7-year surrender period), followed by the B, L, and X shares of Prudential’s Premium Retirement VA. Jackson National’s Perspective L share contract was the fifth-best seller.

The survey also showed that:

Year-end assets under management reached a milestone of just over $1.50 trillion, an 11.2% increase over year-end 2009 assets of $1.35 trillion and $3.2 billion more than the all-time record set in 2007.
New cash flow in the 4th quarter slipped a bit from 2nd and 3rd quarter levels, but at $5.4 billion it was 84% higher than the 4th quarter 2009 net flow of $2.9 billion.
At 15.7% the ratio of net flow to new sales was the highest since 2007; both measures point to improvement in terms of new money vs. exchange fueled sales.

The Bucket

Posted on March 9, 2011 by Editorial Staff -

RIA optimism up sharply: Schwab

Independent registered investment advisor (RIA) optimism has risen significantly since July 2010, according to Charles Schwab’s latest survey of more than 1,300 RIAs representing $284 billion in assets under management.

Independent advisors also display optimism across a number of economic indicators and consumer behavior metrics. “They clearly think we are turning the corner economically,” said Bernie Clark, executive vice president and head of Schwab Advisor Services.

When asked about current economic issues, advisors say:

S&P 500:77% expect the S&P 500 to rise in the next six months, up from 63% last July.
Bull/Bear ratio: 56% classify themselves as bulls; 10% are bears.
Consumer spending: 68% expect consumer spending to rise, up from 42%.
Unemployment: 17% believe unemployment will rise, down from 32%.
Housing: 38% say housing will soften, down from 53%.
ETFs:
- 84% currently use ETFs; 31% say they will invest more in ETFs, the most of any investment vehicle.
- 78% currently invest in equity ETFs and 28% plan to invest more in them over the next six months.
- 70% currently invest in international ETFs for their clients, with 23% planning to invest more.
- More than 60% are currently using fixed income ETFs.
Treasury yields: 64% think U.S. Treasury yields will increase in the next six months; 8% think they will go down.
Bush tax cuts: 85% believe the extension of the Bush tax cuts will help the stock market and economy overall.
Quantitative easing: 55% say the Fed’s quantitative easing activities will help the stock market and economy.
Inflation: 64% expect inflation to rise over the next six months, up from 28%.
Cost basis reporting changes: 48% don’t know how recent changes to cost basis reporting will affect their tax situation.

Advisors’ Clients Also More Upbeat

According to the advisors surveyed, their clients are more upbeat entering 2011 as well. Over the past six months, the number of advisors’ clients that needed reassurance that they will achieve their investment goals declined, falling to 23%, down from 30% in July 2010 and down from a high of 49% in January 2009.

Specifically, more than half of advisors’ clients (53%) feel more optimistic about the economy than they did in July 2010, and 56% of clients feel more positive about their investment performance than they did six months ago, up from just 14% in July 2010. However, clients remain cautious about retirement with only 23% percent more optimistic that they will be able to retire on time. According to advisors, 34% of their clients are reducing expenses, down from 47% in July 2010, and 22% are spending more money on discretionary items, up from just eight percent last summer.

Charles Schwab is a leading provider of custodial, operational and trading support for more than 6,000 independent RIAs. The Independent Advisor Outlook Study, conducted for Schwab Advisor Services by Koski Research in January 2011, has a 2.74% margin of error.

The 6.2 million workers over age 65 have big portfolios

The 6.2 million American adults over the age of 65 who are employed full-time or part-time are financially sound and have robust investment portfolios, according to a new study from Scarborough. This is consistent with a recent report of a correlation between higher education and working after age 55.

According to the Employee Benefit Research Institute (EBRI), the higher the educational attainment, the higher the labor-force participation rate. For example, in 2009, 63.1% of Americans ages 55 or older with a graduate or professional degree were in the labor force, compared with 22.4% of those without a high school diploma.

The “Retired for Hire” consumers are slightly more likely than the average adult to have an annual household income of $150,000 and are 51% more likely to live in a home valued at $500,000 or more.

Members of this group are also more likely than the average American to have:

Stocks or stock options as a household investment (23% more likely)
Second home or real estate property (36% more likely)
Mutual funds (27% more likely)
Money market funds (46% more likely)

Additional survey results are available for free download at www.scarborough.com/freestudies.php.

Symetra expands life and retirement sales force

Symetra Life Insurance Company announced a new sales leader for its western division and six new regional vice presidents to represent the company’s portfolio of annuity and life insurance products.

Wes Severin has been named western divisional sales manager of Life and Retirement Sales, with responsibility for sales planning and day-to-day management and training of 12 external wholesalers covering the western United States. Most recently, Severin was national sales director of financial institution markets at Great-West Life & Annuity Insurance Company in Denver, Colo. Before Great-West, he was a financial advisor with Simmers Capital Management.

Symetra also announced six new regional vice presidents in its Life and Retirement Sales organization:

Christopher Grubbs (Maryland, Washington, D.C., Virginia) most recently served as a regional vice president at New York Life, managing relationships with major financial institutions and independent broker-dealers in southern Virginia and West Virginia. He also has held sales positions with ING and GE Financial (now Genworth Financial).

Lydia Hopper (Los Angeles, Central California) joins Symetra from Michel Financial Group, where she was an annuity specialist. She previously held regional sales roles at MassMutual Financial Group and AIG SunAmerica, focusing on variable and fixed annuity sales through independent and bank registered representatives.

Brad Kiesling (North Texas, Oklahoma) is an experienced annuity and life insurance sales professional, having held external wholesaling roles at Great-West Life & Annuity Insurance Company, AXA Equitable and Genworth Financial. He also was a regional director for Cherry Financial Partners, helping expand the financial services firm’s national network.

Matthew O’Neil (Maine, New York, Vermont) comes to Symetra from Genworth Financial, where he was a regional vice president responsible for annuity sales in upstate New York. He previously held regional sales roles at Phoenix Life and Liberty Funds Distributors, concentrating on variable and fixed annuity sales through independent, bank and regional wirehouse registered representatives.

Matthew Sennet (Florida, excluding Panhandle) joins Symetra from ING Financial Solutions, where he was a regional vice president in north Florida. He also has served as a regional marketing director for Lincoln Financial Distributors and a Florida district retirement planning advisor for Merrill Lynch. He has extensive wholesaling experience with mutual funds and fixed, variable and immediate annuities through multiple distribution channels.

Tammy Viccari (Georgia, East Tennessee and Florida Panhandle) brings to Symetra 13 years of experience as a successful external and internal wholesaler at ING Financial Services and Wachovia. Her financial services background also includes work as a stockbroker at Morgan Stanley Dean Witter.

Gender gap exists in retirement confidence: MassMutual

Economic uncertainty and market volatility have contributed to lower levels of investing confidence and generally more conservative investing behavior among participants.

Confidence in investment decisions and the stock market is much lower for women than men, and the gap is widening, according to a survey of 1,517 plan participants using MassMutual’s Retirement Services last November, December, and January.

MassMutual’s data indicates that men are twice as likely as women to believe the stock market will improve over the next year. Only 37.3% of all participants are confident in making their own investment decisions (vs. 42.5% last year). However, women were significantly less confident in making their own investment decisions.

At the same time last year, the percentages were 32.8% for women and 47.8% for men.

More men enjoy learning about investments (71.7%) than do women (54.4%), and more women (53.1%) than men (35.1%) also prefer to spend as little time as possible on investment decisions.

The survey indicates that a rise in anxiety about having adequate savings to retire. Overall, 67% are concerned they won’t have enough saved for retirement vs. 64.9% last year. In this year’s survey, the percentage of women concerned increased by 4.4 percentage points to 74.7%, while the percentage of men declined by 1.3 percentage points to 61.9%.

Participants of both genders are also becoming more conservative in terms of their investing behavior. Among participants who made a change in their approach to investing in the last 12 months, 61.7% became more conservative compared to 38.3% who became more aggressive.

Among all participants, 39.8% identified being able to retire as their greatest concern, up from 37.3% last year. Significantly, 74.3% agree they have more responsibility for achieving retirement income objectives than their employer. Managing debt is the greatest financial concern for participants under age 40, while being able to retire is by far the greatest concern for people 40 years old or above.

MassMutual’s Retirement Services Division serves approximately 1.2 million participants.

Lincoln Financial bolsters DC team

Lincoln Financial Group announced the appointment of Michael Conte as vice president, Small Market Business Leader for the company’s Defined Contribution Products team. Conte will report to Eric Levy, senior vice president, Head of Defined Contribution Products, and will oversee cross-functional initiatives to help grow Lincoln’s revenue and earnings in the small market space.

During his 13-year tenure at Lincoln Financial Group, Conte has held numerous leadership positions across a variety of functional areas including Sales, Internal Sales and Compliance, and Retirement Plan Administration for Delaware Investments. Most recently Conte served as DC Product and Relationship Manager for Lincoln Financial Distributors. He holds Series 6 and 63 designations and earned a bachelor’s degree in business administration from Rider University.

Lincoln also appointed seasoned senior-level employees John Weber in a new role as vice president, Multi-Fund Business Leader and Bob Melia as vice president, Defined Contribution Product Development. Both positions report to Levy.

Fidelity debunks myths about 401(k)s and IRAs

“Despite the myths out there, [the 401(k)] is helping millions of Americans of all income levels save for their futures,” said James M. MacDonald, president, Workplace Investing, Fidelity Investments, in a recent release.

“Employers are committed to offering a compelling program with a company match as well as lifetime investment guidance to help their employees reach their goals.”

MacDonald pointed to several healthy signs. The average 401(k) account balance rose to $71,500 at the end of 2010, reaching a 10- year high since Fidelity began tracking the data based on the industry’s largest participant base of 11 million 401(k) accounts.

For participants who were continuously active for the past 10 years3, their average balance increased to $183,100 at the end of last year from $59,100 at the end of the fourth quarter 2000.

Average participant deferrals remained at 8.2 percent for an eighth straight quarter. For a seventh straight quarter, more participants increased their total deferral rate than decreased (6.1% vs. 3.0% respectively).

Despite its wide usage as a primary savings vehicle for many working Americans, the following myths about 401(k) plans persists, Fidelity says:

Myth 1: The majority of lower-income employees don’t participate in their 401(k) plan.

· On the contrary, the majority (53%) of participants in 401(k) plans recordkept by Fidelity earning between $20,000 and $40,000 do participate, and 71 percent of participants earning $40,000 and $60,000 participate.

Myth 2: 401(k) participants don’t take an interest in their retirement plans.

· In reality, Fidelity found workplace participants are increasingly more engaged in their plans. In 2010, approximately three out of four active participants contacted Fidelity via the phone or over the Web. More than 1.1 million workplace participants took advantage of Fidelity’s online guidance tools.

· Of those who used the savings tools, nearly half (47%) increased contributions to their 401(k)s by an average of three percentage points (from 4% to 7%)5.

· When employees sought Fidelity’s comprehensive guidance with their investment strategy, one in five made adjustments to their portfolio from suggestions based on their age and target retirement date6.

Myth 3: Most employers suspended their company match during the recession and have not reinstated it.

· Only 8% of Fidelity plan sponsors reduced or eliminated their employer contributions during the height of recession in 2008 and 2009. Since then, more than half (55%) have already or indicated they plan to reinstate this benefit within the next 12 months.

· Larger companies (5,000+ employees) are at the forefront of this trend with 71% having already reinstated or planning to reinstate their employer contribution.

· Overall, 80% of active participants within corporate defined contribution plans recordkept by Fidelity received employer contributions in 2010.

Myth 4: Most people take loans or cash out of their 401(k)s.

· A loan from a 401(k)s is sometimes a necessity for a participant, however, nearly four out of five participants have rejected the urge to take out a loan.

· Seven out of 10 participants opt not to cash out of their 401(k)s in the months following a separation from an employer, instead wisely electing to stay in-plan or rolling over into another qualified retirement account such as an IRA.

Myth 5: Roth 401(k)s are only for older, wealthy employees.

· Not true. More than twice as many active participants in their 20s contribute to Roth 401(k)s than do those aged 50 and older (9% vs. 4% respectively).

· About half of Roth 401(k) contributors earn less than $75,000, and one in four earns less than $50,000.

· One out of five Fidelity plan sponsors offers eligible employees a Roth 401(k). Fidelity’s largest plans (more than 250,000 participants) have adopted at the greatest rate with half offering the feature.

Jackson announces record sales and operating income in 2010

During 2010, Jackson National Life Insurance Company achieved record sales and deposits of $19.8 billion and record IFRS pretax operating income of $1.3 billion.2 Total sales and deposits climbed 30 percent over 2009, driven by a 47-percent increase in variable annuity (VA) sales to nearly $14.7 billion.

IFRS pretax operating income increased 33% over 2009, due primarily to higher spread and fee income. Jackson’s 2010 IFRS net income of $509 million was lower than the $670 million reported in the prior year due largely to the benefit from the reversal of a $319 million tax valuation allowance in 2009.

Total IFRS assets increased to $107 billion at the end of 2010, up from $88 billion at the end of 2009.

“In 2010, Jackson extended its track record of generating sustainable, profitable growth,” said Mike Wells, Jackson’s president and chief executive officer. “Jackson earned more than a half-billion dollars in IFRS net income, which the company achieved in six out of the past seven years.”

Jackson, an indirect wholly owned subsidiary of the United Kingdom’s Prudential plc, finished 2010 with record retail sales and deposits in the fourth quarter of nearly $5.5 billion. Annuity net flows (total premium minus surrenders, death benefits and annuitizations) of $10.9 billion in 2010 were 38 percent higher than 2009. During 2010, Jackson ranked second in variable annuity net flow, according to reporting by SimFund VA. At December 31, 2010,Jackson had $4.6 billion of regulatory adjusted capital, more than nine times the regulatory requirement5, up from $4.0 billion at the end of 2009.

Selection 1: The Race to the Bottom

Mutual of Omaha Adds 401(k) Wholesalers

Jackson launches Portfolio Construction tool

Nationwide finds value in business coaches

RIA optimism up sharply: Schwab

The 6.2 million workers over age 65 have big portfolios

Jackson announces record sales and operating income in 2010

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Jacksonlaunches Portfolio Construction tool