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Prudential, Edward Jones in VA distribution deal

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2011 RIJ Publishing LLC. All rights reserved.

A Month of SPIAs

Retirement Income Journal will focus on single-premium immediate annuities, or SPIAs, during the month of May.

Starting with today’s issue, which features a profile of New York Life’s immediate annuity business by Stan Luxenberg, we’ll devote four weeks of cover stories and features to these guaranteed retirement income vehicles.

We’ll bring you stories about price-shopping for SPIAs online, about the continuing growth of the Hueler IncomeSolutions SPIA platform and a variety of other pieces on income annuities.  

Why income annuities? Aren’t variable annuities more profitable and more exciting? We think income annuities are misunderstood and misrepresented, and that no retiree or advisor can afford to overlook the value of the mortality (or “survivorship”) credit that income annuities offer.

And, as you can see from today’s Data Connection chart, sales of SPIAs are trending upward, just as demographic trends suggest they should. Indeed, Chris Blunt, head of Retirement Income Security at New York Life, predicts a $100 billion-a-year market for SPIAs by 2021.

(As for variable annuities: RIJ will devote the month of July to variable annuities and their Guaranteed Lifetime Withdrawal Benefits, as we did last year.)

We noted above that income annuities are misunderstood. Consider, for example, a story by Brett Arends in last Saturday’s Wall Street Journal, titled “Retirement Income? Annuities Come Up Short.”

The illustration shows the long arms of (presumably) an insurance company executive (or is it a central banker?) pulling the metaphorical rug (a giant dollar bill) from under the cane and walker of a frail elderly couple.   

Now, praise for SPIAs in the Journal seems about as likely as praise for vegan cooking in a cattleman’s quarterly. Mr. Dow and Mr. Jones prefer equities.

To be sure, the article isn’t entirely unbalanced (although it front-loads the negative and back-loads the positive). Arends is right to say that today isn’t necessarily the right time to buy an income annuity, given the fact that interest rates have nowhere to go but up. (For that matter, some experts don’t think it’s not a good time to buy stocks or bonds either.)

But Arends does more than question the appropriate of a SPIA purchase today. By cherry-picking a couple of worst-case-scenarios, he perpetuates several out-of-date myths about income annuities.

First, the article compares income annuities to investments, and mocks the “paltry 3% a year” return for a 65-year-old who lives to age 82 or 85. But income annuities aren’t investments.  They’re insurance. And the big payoff comes if you live a very long time. Longevity insurance isn’t about investment returns. It’s about the value of risk pooling and relief from hoarding. 

The story warns about high costs—saying that insurers “pocket the first 5% of your investment as commission.” (Not necessarily.) It compares today’s SPIA payout rates to the payout rates of the mid-1980s, when interest rates were at historic highs. (Irrelevant.) It talks about SPIA’s vulnerability to inflation. (It’s not alone.) It says SPIAs let you “leave nothing to your heirs.” (Wrong.)

In our reporting this month, we’ll try to skewer these criticisms. We’ll explain ways to get the most out of SPIAs while avoiding the pitfalls. Even Arends offers a backhanded compliment to SPIA at the end of his article. He shows that alternative strategies—staying in cash, buying CDs, staying invested the stock market, or delaying retirement—are not strategies at all. 

Sure, anyone can buy the wrong SPIA at the wrong price at the wrong time. This month, we’ll talk about how to buy the right SPIA at the right price at the right time. 

© 2011 RIJ Publishing LLC. All rights reserved.

Solving the SPIA compensation puzzle

Many of New York Life’s 11,000 agents were wary about selling income annuities. Agents feared that clients would resist any kind of annuities because of concerns about the high fees that are sometimes charged by variable annuities. But Christ Blunt says that agents were soon startled by the warm reaction that they got from many clients. “If you tell 65-year-old people that you can give them a paycheck for life, they love it,” he says.

Agents start by talking to clients about their desire for guaranteed income. A typical client might say that he has $2,500 a month in Social Security benefits and would like to have another $1,000 in guaranteed income.  The agent explains how an income annuity can fill the gap.

While most annuity sales have come from agents, banks have started to play a growing role. When savers grumble about the low yields on certificates of deposits, bank tellers refer them to advisors who can sell annuities.

In the past year, New York Life has been gaining a foothold among broker-dealers, signing agreements with Edward Jones and major wire houses. Brokers had been reluctant to sell the annuities because it was not clear how to compensate advisors. Many advisors typically charge a fixed annual fee, such as 1% of assets. If a client pulls $100,000 out of a portfolio and uses the cash to buy an annuity, the advisor’s income could fall by $1,000 a year. To get around the problem, New York Life now calculates the daily value of each client’s annuity contract. Advisors charge annual fees based on the (shrinking) present value of the annuity.   

“If I am in a fee-based account, how do you charge a fee on an income stream?” Blunt said.  “Every day we price an income annuity and we can tell you what it would cost you today. Say that you bought an annuity a month ago. We could tell you on any given day how much premium you would have to give us to replace the income stream that you already have. You are showing the present value of the remaining payments. It is the declining amount.”

© 2011 RIJ Publishing LLC. All rights reserved.

A $100 Billion Market for SPIAs?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For insurance companies, income annuities are not highly profitable because they require substantial capital, says Blunt. As a result, they may not be ideal products for publicly-held insurers—such as MetLife and Prudential Financial—which must maximize profits.

But income annuities can be attractive for mutual companies like New York Life, which seeks to deliver steadily growing profits. Unlike many publicly held insurance companies, New York Life came through the financial crisis in good shape. Today’s low interest rates aren’t necessarily good news for sales, but income annuities rates are tied to long-term bond yields rather than short-term yields.

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

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

© 2011 RIJ Publishing LLC. All rights reserved.

Pershing positions itself as source for retirement-oriented advisors

Pershing has decided that it’s time to jump on the retirement bandwagon in a big way.

The BNY Mellon unit has expanded its shelf of retirement tools in hopes of becoming advisors’ go-to source for information on helping affluent Boomers figure out what to do with the billions of dollars that they’re rolling over from employer plans to IRAs.

In a release, the global clearing-and-execution firm has set up a website, Retirement PowerPlay, to provide “educational content, a dedicated online destination that provides financial professionals with educational content, tools and comprehensive strategies to help them grow their retirement businesses.”

With the help of Mercatus, LLC,  Pershing has produced a “call-to-arms” report for advisors who have not yet heard of the value of positioning themselves as experts in the area of retirement planning.

The call-to-arms is called The Secret Knock: Unlocking the Retirement Opportunity. It points out, as others have been doing for several years now, that hundreds of billions of dollars—Money in Motion—will be looking for a new home every year from now until the last affluent Boomer investor or small business owner retires—and probably beyond.

The key for advisors is to be perceived as the “Retirement Solutions Provider.”

Based on a propriety survey of 2,086 investors (average age 56, average investable assets, $823,000) and 401 successful small business owners, Pershing’s report asserts that “when the financial professional and firm are considered by their clients to be their primary Retirement Solutions Provider (referred to as the RSP), they can gain significantly more assets. In particular, RSPs see gains in the capture of retirement MIM [money in motion] assets from 45% to 81% and share of wallet gains from 50% to 76%.

Based on survey data, the report claims that financial professionals at broker-dealers are most likely to be perceived as RSPs by their clients, followed by financial professionals at banks, insurance companies, and 401(k) providers, and, last, by RIAs.

According to a Pershing statement, the new website, Retirementpowerplay.com, provides access to:

  • Power Plays Offers product-specific tips and techniques, tools and marketing resources for expanding retirement assets with Individual Retirement Accounts (IRAs), Rollover IRAs, Roth IRA Conversions and Employer Sponsored Plans.
  • Premium Content Provides the latest retirement news headlines and articles from Dow Jones.
  • Retirement Tool Box Provides product-specific marketing resources including educational content and thought leadership.
  • IndustryWatch Keeps users up-to-date on the latest developments affecting the retirement marketplace.
  • Retirement Calculators Provides valuable tools for comparing IRAs, calculating required minimum distributions, performing Roth conversion analyses and evaluating other critical retirement decisions.
  • Share Your Best Practices Blog Helps financial professionals share best practices, exchange ideas and capture actionable tips for building their retirement businesses.

“Our research confirms that financial professionals who position themselves as retirement solutions providers capture significantly more assets than those not focused on the retirement discussion with their clients or this aspect of growing their businesses,” said Robert Cirrotti, director in product management and development at Pershing LLC, in a statement.

“Retirementpowerplay.com and our suite of retirement solutions are designed to help financial firms develop successful strategies to unlock this retirement opportunity and better serve their clients.”

New Symetra FIA tracks equities and/or commodities indices

Symetra Life Insurance Company has launched of Symetra Edge Pro, a new single-premium fixed indexed annuity (FIA) that offers a choice of two indexes—a large-cap stock index and a commodities index — as well as a fixed account option and guaranteed minimum value feature.

The product lets customers allocate money to accounts whose yields are based on the performance of the S&P 500 Index and the S&P GSCI Index. It is currently available through select banks and broker dealers.

 “This product design came out of discussions with our distribution partners who asked for a solution that offers their clients the opportunity to earn higher crediting rates than more traditional fixed products,” said Dan Guilbert, executive vice president of Symetra’s Retirement Division.

Symetra Edge Pro also has a guaranteed minimum value feature for customers who take no withdrawals for either the five-year or seven-year surrender charge periods, whichever applies. Guaranteed lifetime income options and a nursing home and hospitalization waiver also are available.

The product offers point-to-point and monthly average interest crediting methods, and five account options: S&P 500 Point-to-Point, S&P 500 Monthly Average, S&P GSCI Point-to-Point, S&P GSCI Monthly Average and Fixed Account. Funds may be allocated to one, two or all five accounts, and clients can transfer money between the Fixed Account and any indexed account(s) at the end of each one-year term.

New technology offers to help plan advisors meet fee disclosure rules

Castle Rock Innovations, LLC, a provider of technology-based solutions for the retirement industry, plans a May 2011 rollout for its new patent-pending AXIS Retirement Plan Analytic Platform, a servicing platform for the DOL mandated 408(b)(2) fee disclosure requirements.

A web-based software service, AXIS helps broker dealers, product manufacturers and third-party administrators support the new regulatory fee disclosure reporting requirements, providing coverage from brokerage platform to retirement plan platform and allowing advisors “to identify and establish plans outside the traditional turnkey environments.”

By providing a single view and the ability to manage reporting risks, the AXIS platform enables fiduciaries to handle the ongoing daily tasks of monitoring and reporting fees to plans. It is designed to service all retirement plan types through a single web-based interface and data repository, the company said.

According to Castle Rock’s release, the AXIS platform can interface with any system of record supporting retirement plan data feeds. It can edit and generate reports for filings and report plan expenses, allowing retirement plan managers and fiduciaries to view their business across multiple recordkeeping platforms. The AXIS Platform is scheduled for commercial release May 2011.

“The broker dealer community did not have a systemic capability to identify, collect and establish data from various partner systems for the purpose of managing plan level fee data and generating a comprehensive fee disclosure document for their plans. We also learned that many broker dealers are very concerned about identifying and tracking plans that are sold and serviced outside of the traditional manufacturer’s environment,” said Tom Loch, senior vice president of Castle Rock.

 “We focused our efforts within our servicing platform in its ability to collect and transform data into single data repository and to provide an interface for managing, collecting and reporting plan level fees from many system sources. Our second focus was to build the data processing engine necessary to track changes to fees and the work flow processes to report them efficiently based upon the 60 day reporting rule.”

Average annual cost of private nursing home room: $85,775

Long-term care (LTC) costs have continued to increase, but not as much as other goods and services, according to John Hancock Financial’s 2011 Cost of Care survey of 11,000 nursing homes, assisted living facilities and home health care agencies nationwide.

Based on John Hancock’s 2002, 2005, 2008, and 2011 Cost of Care Surveys, annual increases in the cost of care in various settings closely track the long-term average annual rate of inflation of 4.1%. Specifically, the average costs in 2011 for various services were:

  • For a private nursing home room ($235 a day/$85,775 annually), rising at 3.5% per year.
  • For a semi-private nursing home room ($207 a day/$75,555 annually) rising at 3.2% per year.
  • For an assisted living facility ($3,270 a month/$39,240 annually), rising at  has 3.4% per year.
  • For a home health aide ($20 hourly/$37,440 a year), rising at 1.3% a year.

LifePlans, Inc., of Waltham, Mass., conducted the survey for John Hancock.

One-third of HNW investors have itch to change advisors

Most high net worth investors work with an advisor, but they don’t necessarily intend to keep that advisor, especially if they have contact with that advisor only once a year or less. But they are more likely to be satisfied with their primary institution today than in 2009.

At the same time, the rich are feeling cautious. Twice as many of these wealthy investors described themselves as “conservative” in 2011 as did in 2009, and investors under age 45 say they are mattressing more than 40% of their money in cash or cash equivalents.

And, living comfortably in retirement is of greater concern to these investors than leaving a legacy or funding a child’s education.

These are some of the findings of Rebuilding Investor Trust, a recent survey of 1,290 U.S. investors with more than $100,000 in investable assets (besides home and retirement accounts) by Northstar Research Partners and Sullivan, a communications strategy and design firm. 

The survey showed that:

  • 64% of high net worth investors currently work with an advisor.
  • 43% are “very satisfied” with their primary financial institution (double the rate in 2009).
  • 51% claim to be “very satisfied with their advisor.
  • 36% says they consider moving assets from their primary institution, mainly to seek better investment performance.
  • 25% say they will consider moving assets away from their advisor in the next year, up significantly from 2009.
  • 25% of those without an advisor plan to see investment advice within the year.
  • 74% trust their advisors, up from 61% in 2009.
  • 41% of investors describe themselves as conservative, up from 22% in 2009.
  • 42% of the portfolios of investors under age 45 is in cash or cash equivalents, such as CDs, savings accounts or money market accounts.
  • 58% are focused on protecting principal.
  • 39% are focused on long-term growth.
  • 29% are focused on short-term gains.
  • 19% are “very confident” of reaching their financial and retirement goals.
  • 84% of those not very confident are “uncertain about where things are going.”
  • 90% of those not very confident are most worried about retiring comfortably.
  • 68% of those not very confident are worried about maintaining a comfortable lifestyle.
  • 57% of those not very confident are concerned about leaving a legacy.
  • 37% of those not very confident are concerned about funding a child’s education.
  • 24% of investors who have with contact with advisor only once a year or less are very satisfied with the relationship.
  • 63% of investors with more frequent contact with advisor are very satisfied with relationship.  

The study sampled 1,290 individuals with affluent households ($100K+ investable assets, excluding real estate and workplace retirement plans) — including 15% with investable assets in excess of $1 million. The data is weighted to reflect the U.S. population of $100K+ investors, based on the 2007 Survey of Consumer Finance.

The study has a margin of error of +/- 2.5 percent. Rebuilding Investor Trust details specific action steps required by an institution to rebuild trust with its customer base. For more details, or to purchase the complete study, please email Suzanne Leff at [email protected].

An Advisor’s Perspective

Antoine Orr is president of Plancorr Wealth Management LLC in Greenbelt, Maryland. A native of Edmonton, Canada, he worked at Waddell & Reed, MassMutual, and elsewhere before starting his own registered investment advisory firm. He is author of Inside the Huddle (Frostbite Publishing, 2009), a personal retirement planning guide. Instead of charging an ongoing management fee, he charges primarily by the service or by the hour. He spoke with RIJ this week: 

“Among my clients, there’s about a 60/40 split between blacks and whites. I work with a lot of government employees—people who been have fastidious about putting over and above the match into their retirement accounts, who contribute as much as 10 or 15% of their pay. But I find that, regardless of background, some people are well prepared for retirement and others not so much. Even some of the doctors who come in are on both sides of that fence.

“I went to an Easter event a few days ago, and met an African-American guy, 55 years old, former military, who intends to retire in 10 years. He said, ‘I have $300,000 in my retirement account and I’ve been saving for 30 years. If I continue to put money in the stock market, will I have enough money to retire? Should I keep feeding this beast?’—meaning the stock market.

“My reaction: I focus on the tax-free end. Municipal bonds, cash value whole life, Roth IRAs. I show people how to pay down debt. Some folks are in pretty dire shape, although that’s few and far between. They might have been putting money in the wrong vehicles. But they had done what they were told to do.  Now they want to find the best thing to do. They wonder where they can go to accomplish the same goal but without taking as much risk. Most of my clients are already dealing with a financial planner, but when they come to me, they hear a different version. That gets their attention.

“I tell them about the Triad of Doom: Debt, Taxes, and Inflation. I say, let’s do tax management, then debt, then insurance and savings, then retirement planning, then investments and risk. From a tax standpoint, I say, consider putting money into qualified plans. In retirement, you spend that down first, then move to the capital gains accounts, then spend down the last ladder of assets—the Roth IRA, the municipal bonds, and the cash value life insurance.

“In terms of investments, I say, Look at where insurance companies put their money. They put five or six percent into stocks and the rest into bonds. Why? Because they have future claims liabilities. The money has got to be there—so why take all that risk? If they say, but I’m investing for the long term, I ask, How long is long term? How long does it take for stocks to outperform all other asset classes? They usually say, 10 years. I say, Really? It actually takes in excess of 26 years. If your time horizon is less than 26 years, you’re not investing for the long term.

“Are African Americans distrustful of financial institutions? That’s across the board. Whether it goes back to the Freedman’s Bank and Frederick Douglass days, I don’t know. Look—at this point in time, we’ve all been sold a bill of goods. We’re told, buy a house, invest, and have good credit. But to buy a house you have to go into debt. To invest, you have to gamble, and to have good credit you have to have a history of gambling. That works fine for the high-net-worth people. They can ride the wave. But the average American can’t play that game. One hiccup and they’re done. They’re wiped out. So it’s up to us to use common sense. That would be my take.

“I shift the focus from becoming wealthy to becoming financially independent. I was at the 2011 Color of Wealth Policy Summit two weeks ago, and we were talking about the racial wealth gap. They’re still saying that the way to build wealth is to buy a house and leverage it. I said, you’re telling me to borrow my way into wealth? I don’t understand that. If you really want to be financially independent, you have to know how to stick to a budget, how to keep debt low, how to save, how to have proper insurance, and how to set aside money into retirement planning vehicles. Then you can go out and invest what you can afford to lose. That’s the sensible process for 95% of the country. As far as distrust goes, it’s not just the African American community. I have Caucasian clients who have the same concerns. When they hear what I have to say, they say, ‘This makes sense to me intuitively. I’m not waiting on the pie-in-the-sky.’

“As far as there being a lot of financial stuff going on in the African-American churches, that’s true. The churches, unfortunately, have been a breeding ground for ‘prosperity preaching.’ But that’s true for non African-American churches too.  When it comes to giving money to needy family members—that happens on both sides too. It’s the women who give, black and white, because of their nurturing side. They are willing to sacrifice for others. Men are more likely to say to their relatives, ‘You can work. There’s nothing wrong with you.’ But women keep that lifeline open with their sisters, their children, their cousins, and their close friends. The assumption is, ‘If I do it for you, you’ll do it for me.’

“But African Americans are not vastly at odds with the mainstream. There are African Americans with money everywhere. I have a friend who works in government. She’s a G8, with a salary of about $50,000. To pass her on the street, you wouldn’t think she had two nickels to rub together. But she and her husband have over $1 million in savings. A man I know who works for an IT firm who has $300,000. I know African American doctors with $500,000 in variable annuities. They may not have $45 or $50 million, but there’s a lot of wealth. African American wealth is more abundant than people think.”

© 2011 RIJ Publishing LLC. All rights reserved.

A Scholar’s Perspective

Wilhelmina A. Leigh, Ph.D., a senior research associate at the Joint Center for Political and Economic Studies in Washington, D.C., recently wrote “African Americans and Social Security: A Primer.” A graduate of Cornell and Johns Hopkins, she has taught at Harvard, Howard, Georgetown and the University of Virginia. She spoke with RIJ about policies that might help African Americans, and about her own financial life: 

“Part of the gap in savings comes from the fact that African Americans tend to have a spottier employment records and are more apt to have been out of the workforce. For that reason, and for a variety of other reasons, we need to look for solutions that can help them save for retirement but that are not necessarily tied to being in the workplace. The universal IRA, which everyone can have, can do that. If you’re not employed, you can still put something into it.

“We’re also looking at some of the issues in the Social Security system. Among African Americans, more women than men say that it will be an important source of income for them in retirement. In 1935, when the system was created, the man was the primary wage earner. That model still determines the nature of the system, but it puts African American women at a disadvantage in terms of getting benefits that are high enough keep them above the poverty line.

“For people who believe that they can make their fortune as entrepreneurs, there might be ways to stimulate that—ways to put resources into programs that make that an option for them. Some states currently allow people who are employed to leave their job and get unemployment benefits as long as they are going to school to acquire skills to help them start their own businesses.

“In terms of what they’re willing to invest in, African Americans tend to be more conservative. They would be less likely to go into stocks and high-growth investments and more likely to be interested in owning rental property or small businesses. I don’t know a lot of high-wealth African Americans, but I think there are differences in the way they choose to acquire wealth. I’m thinking about Bob Johnson, who started the BET [Black Entertainment Television] network. He bought a lot of businesses, built them up, and sold them at a profit.

“Wealthy African Americans are often the first members of their families to make it out of their previous circumstances. They often have lots of relatives calling them up for assistance, and they feel obligated to help. In my own case, I’ve had several different jobs.

“Something that struck me during our panel discussion [on April 12 in New York, when Prudential unveiled its whitepaper on the African-American Financial Experience] was the comment that African Americans have to change their values and not feel that they have to have the latest this or that.

“But if you’re a low-income person, a person who is unbanked and who goes to the post office every month to pay their bills with money orders, then you probably have very low self-esteem. Your prospects for ever being anything but low-income may not be great. Buying a big-screen TV might be something you aspire to. It might satisfy your need to improve your quality of life. I believe that, to a point, you have to let people get that out of their systems.

 “I’ve been in the government sector and the 403(b) sector. I’ve had money in TIAA-CREF. About four or five years ago I realized I needed to rationalize it all, so now most of it is in a rollover IRA. The [TIAA-CREF] annuity money is in a separate pot.

“I’m about half in bonds and half in stocks. I try to be conscientious about rebalancing once a year. At the moment, I’m working with a company—I’d rather not say their name—where I can call up and, if I have questions, I can get access to a certified financial planner. I’m a hands-on person. I wouldn’t say to someone, ‘Here, take all of my life savings.’ And, given the ups and downs that we’ve seen in the markets, I would be very mad at someone else if they had put me in stocks in and not warned me that the crash was coming. I once worked with a CFP who advised me to take my money out of CDs and roll them into the market. If I had done that, and lost my money, I could never speak to that man again. 

“I grew up without a whole lot of things. My parents were born during the Depression. They both worked their way through college. They raised their family in a very frugal sort of manner. They said, ‘Don’t spend it if you don’t have it.’ That was the conscious and subconscious message. It worked out well for some of their offspring and not as well for others. I grew up with the idea that I don’t ever want to be without or have a need—a money need—that I can’t meet. Having that kind of need is what makes people steal food from the grocery.

“One advantage we had was that no one in our family was mathphobic. Many people who are mathphobic would just as soon through up their hands say, ‘It just won’t work out for you.’ We were ready to tackle whatever the problem was.

 “When I lived in Boston, people routinely assumed I wasn’t born in the United States. In New York, people assumed I was from the Caribbean. It wasn’t so much my looks as my attitude. I found that fascinating. Maybe they had never been exposed to African Americans who grew up in families like mine, with strong aspirations.  

“My father’s family is still in Georgia. But he moved away at 17 or 18 and wasn’t in touch very much. We grew up without knowing a lot of our cousins. But staying in touch can mean that you carry the full weight of the whole family’s burdens. It’s why some people have to get away. If you’re not living around it, and not dealing with it every day, then it doesn’t weigh you down.

“There’s as much variability among African Americans as there is within any ethnic group. It’s not as if African Americans were a different species. They are over-represented among lower income populations, but that’s where their distinctiveness stops.”

© 2011 RIJ Publishing LLC. All rights reserved.

Understanding the Black Investor

Beyoncé Knowles, Oprah Winfrey, Shaquille O’Neal—the wealth of these black celebrities tells us about as much about the financial lives of African Americans as the wealth of white tycoons like Warren Buffett or Eli Broad tells us about the finances of the average white person.

Not much, that is. Race-based opinion polls and academic studies don’t render a complete or vivid picture either. Surveys tend to produce averages, and averages can be misleading. But survey results, statistics and averages are sometimes the only concrete data we’ve got. 

Recently, several research studies have focused on the financial attitudes and well-being of black Americans. African Americans, these studies suggest, have relatively less money, are more oriented toward saving than investing, and are even more suspicious of financial institutions than the average American.

But the research also shows that African Americans have the same aspirations to wealth, and the anxieties about growing old without it, as everybody else. Hit even harder by the Great Recession than most Americans, they need financial guidance and financial products. They represent a potential opportunity for financial service providers who take the time to understand their values and earn their trust.       

A savings gap

Americans overall are under-saved for retirement. For African Americans, the picture is bleaker. For a variety of complex reasons—unemployment, a high incidence of single-parent households, lower average pay, higher risk-aversion—they lag the general population in ownership of investments and retirement accounts.     

For instance, a recent survey report by Prudential Research, “The African American Financial Experience,” showed, for instance, that African Americans were less likely than the general population to own individual stocks and bonds (32% vs. 43%), mutual funds (31% vs. 41%), IRAs (35% vs. 52%), or to have an estate plan, will or trust (19% vs. 26%). The results, released April 12, were based on a survey of 1,500 African Americans ages 25 to 70 with incomes of $25,000 or more.

“While African Americans are quite confident in their ability to meet their financial goals, they also tend to hold fewer financial products, invest more conservatively, lack relationships with financial professionals, and be more likely to borrow from their company retirement plans,” the Prudential report said.

That survey pretty much confirmed what others had already found. In 2009, according to Retirement Savings Behavior and Expectations of African Americans, 1998 and 2009, a report by Wilhelmina A. Leigh, Ph.D., and Anna Wheatley of the Washington-based Joint Center for Political and Economic Studies: 

• 51% of African Americans but 72% of whites report having money in savings accounts, certificates of deposit, or money market accounts

• 28% of African Americans but 47% of whites report having money invested in an Individual Retirement Account (IRA) or Keogh plan.

• 27% of African Americans but 49% of whites reported owning stocks or mutual fund shares.

• 17% of African Americans but 27% of whites reported owning bonds.

African Americans also lag in the use of 401(k) plans. While race itself is not necessarily a factor in the successful use of 401(k) plans, according to a 2009 research brief, “(401(k) Plans and Race,” issued by the Center for Retirement Research at Boston College:

“African Americans and Hispanics are still less likely to have the kinds of jobs in which participation in a 401(k) plan is possible; they are less likely to have the earnings, job tenure, and other factors that would cause them to participate in a plan; and, once in a plan, they are less likely to have the taste for saving that would result in a high contribution rate.”

When it comes to pensions, many African American households have them, but less commonly than white households do, according to Income of the Population 55 and older 2008, published in April 2010. In 2008, for instance, about 10.6 million white households but only 860,000 African American households received employer pensions.

To put that in perspective: non-Hispanic white Americans outnumber African Americans 5 to 1 but there are 12 times as many white pension recipients as black pension recipients. The median pension for both groups was $12,000, but white households were slightly more likely to have pensions of $25,000 or more a year (24.1% vs. 22.3%).

In the case of government employee pensions, 3.6 million white households and 328,000 black households receive them. The media government pension was $19,200 for whites and $18,000 for blacks. About 38% of whites’ pensions and 34.1% of black’s pensions exceed $25,000 a year. 

For many African Americans—and for many white Americans—the first step toward saving for retirement will be getting out of debt. But that’s a topic for another article.    

Less trust and smaller risk appetite  

Trust of financial services companies runs fairly shallow in America. For black Americans, it’s been said that mistrust of financial institutions and financial products is especially strong, perhaps extenings as far back as the failure of the “Freedman’s Bank”—the Freedman’s Savings and Trust Company—which cost tens of thousands of African American depositors their savings in 1874.

The trust level isn’t much higher today. “Although the majority [of African Americans] say they want financial advice, concerns about finding ‘a qualified professional they can trust and relate to’ prevent many from hiring an advisor,” said the Prudential Research report. “In fact, 58% agreed with the statement, ‘I would like advice on saving and planning for retirement, but I don’t know or can’t find a professional I can trust.’” 

Church leaders and “financial ministries” are more popular. Instead of going to financial advisors, to a wirehouse broker, or to the phone reps of a direct marketer, African Americans are much more likely to turn to institutions they trust—their churches—for financial advice and inspiration. According to Prudential, “Nearly half (47%) of African American decision makers are interested in learning about investments through a faith- based organization.”

Perhaps because they’ve been burned by financial services companies, or perhaps because they can’t afford to take risk, African Americans in general shy away from risky investments. The financial crisis has apparently made that situation worse.

“Fear of losing their jobs and homes because of the financial crisis may have exacerbated an existing tendency toward risk aversion,” said the Prudential report. “Two-thirds of African Americans surveyed revealed they do not enjoy investing and describe themselves as savers. Some revealed skepticism about the idea of investing.”

The conservativeness of African American investors, in fact, was pointed out over a decade ago in a 2000 article in Financial Services Review called, “Financial services and the African-American market: what every financial planner should know”. Business professors D. Anthony Platha and Thomas H. Stevenson of the University of North Carolina-Charlotte wrote:

 “At all income, education, and age levels, however, African-American households invest a smaller percentage of their portfolios in the form of mutual funds, brokerage accounts, and outright equity purchases than Caucasian households. In addition, Black households demonstrate a distinct preference for safety and security in their investment preferences, favoring life insurance and real estate assets over corporate debt and equity securities across all levels of household income and educational attainment.”

In 1999, the same journal published a paper by three Ohio State University professors called, “Racial differences in investor decision making.” It said:

“Black households report a lower willingness to take financial risks and have a shorter investment horizon compared to White households. A significantly higher proportion of Black households (60%) than White households (42%) report they are not willing to take any risk. Similar proportions of Black and White households are willing to take substantial financial risk… Of households reporting that they are willing to take risk, 58% own risky assets, compared to only 24% of households not willing to take risk.”

The same anxieties, only more so

As of December 2010, the official unemployment rate for whites was 8.5%, and the public was outraged. But the unemployment rate for blacks, at 15.8%, was almost double that of whites. African Americans, as much or more than other Americans, have reason to worry about their financial security, today and in retirement. 

“African Americans (45%) are more likely than whites (37%) to say they are not too confident or not at all confident that they will have enough money to live comfortably throughout retirement” and while “more than half (almost 54%) of African Americans are very or somewhat confident that they will have enough money to live comfortably throughout retirement, they were less likely than white Americans (61%) to have this level of confidence,” according to the study by Wilhelmina Leigh cited above.

Shrinkage of the public sector workforce is especially threatening to African Americans, about 20% of whom work in the public sector. Blacks are “30% more likely than the overall workforce to work… as teachers social workers, bus drivers, public health inspectors,” according to State of the Dream 2011, a study by United for a Fair Economy, a Boston-based advocacy group. As of last September, according to the U.S. Office of Personnel Management, 17.5% of the 2.06 million-member non-postal civilian federal workforce was African-American.

Any talk about ending Social Security or reducing the full retirement age is likely to make black Americans particularly nervous. While their average benefits are lower than whites’, they are more likely to rely on Social Security for all or part of their retirement income.

In African-Americans and Social Security: A Primer, a study sponsored by AARP and published last February by the Washington-based Joint Center for Political and Economic Studies, Wilhelmina Leigh found that the average monthly Social Security retirement benefit received by African American men in 2008 was $1,109.30; for African American women it was $945.50. The average monthly retirement benefit for white men was $1,333.80; for white women it was $1,014.50.

At the same time, than a third of African-Americans expect Social Security to be their main source of income in retirement and about 40% of black Americans over age 65 rely on Social Security as their only source of retirement income, according to Leigh.

Yet fewer blacks than whites live to collect Social Security. Nearly three of every four white beneficiaries (74%), but only about half of black beneficiaries (55%), receive Social Security retirement benefits. That’s partly because African Americans born in 1950 had about six fewer years of life expectancy at birth than whites, and partly because African Americans are more likely to use disability benefits or survivor benefits instead.

A plausible market?

So should a financial services company invest the time and money that it will take to understand and gain the trust of the black community? For Prudential, it was a no-brainer to sponsor The African-American Financial Experience.

As a 401(k) provider, Prudential works with plan sponsors all over the world, many of whom have large numbers of African American participants. Understanding the habits, values and needs of those participants helps plan sponsors target education programs toward certain behaviors and helps Prudential train call center personnel. Ultimately, it helps the plan retain and increase assets, helps Prudential keeps retain assets under management, and helps the participant arrive at retirement better prepared.

“We understand that there’s a need out there for a greater understanding for what’s driving participant behavior. We’ve done similar studies on Hispanics and Asians. This allows our Retirement division to put together more targeted communications. One size doesn’t fit all,” said Michael Knowling, regional vice president, Prudential Retirement.

“With this study, we learned that African Americans are tapping into their 401(k) plans more than others to pay off loans,” he added. “We also know that they’re saving very conservatively, and in some cases not saving enough. We can work on custom education materials to preserve their retirement plan assets for retirement. If our call center receives a call about a loan or withdrawal, we can guide the caller through other options. Eighty-two percent of people surveyed say it’s critical to have enough money for retirement, but only 32% say they’re confident they’ll have enough.”

© 2011 RIJ Publishing LLC. All rights reserved.

More info on New York Life’s DIA Emerges

Wearing a reversed, Army-green fatigue hat, a chalk-striped suit and open-collar shirt, Dylan Huang cut an unconventional figure during his presentation at the LIMRA Retirement Industry conference in Las Vegas last week.

But the young New York Life vice president had unconventional news to share about the deferred income annuity (DIA) that his company intends to marketing in 3Q 2011, and which a few news outlets have sketchily reported.

The product is a deferred income annuity that would be purchased at a discount perhaps 10 years before retirement to fund lifetime income at retirement. Huang said the currently envisioned product would pay out about 13%—the number is presumably a projection —of the beginning premium after 10 years. That’s roughly double what an immediate income annuity pays today for a 65-year-old male.

Such a product could be purchased with a series of premiums, he said, for interest-rate diversification. A single income stream would begin at an appointed date. All of the income would be for-life, he said. The product apparently won’t be designed for bucket methods that create income for discrete time-segments during retirement.

The product is distinct from the little-used DIAs that are known as longevity insurance and which are typically purchased at retirement to provide income for life starting at age 80 or 85. MetLife and PIMCO are currently co-marketing MetLife longevity insurance to be used in conjunction with PIMCO’s 10-year and 20-year TIPS payout funds. 

In response to a question, Huang said that Income Enhancement Option on New York Life’s existing single premium immediate annuity is under review and that the company would like to make it more flexible.

The option allows an increase in the payout rate if the 10-year Constant Maturity Treasury Index in the third full week of the calendar month immediately preceding the fifth policy anniversary is at least two percentage points higher than the 10-Year CMT Index in the third full week of the calendar month immediately preceding the policy date. The higher income benefit would begin on the first scheduled payment after the fifth policy anniversary.

© 2011 RIJ Publishing LLC. All rights reserved.

The Bucket

AXA Equitable launches “Virtual Consultation Calculators”

AXA Equitable Life now offers “video calculators” featuring licensed and experienced financial consultants who help guide individuals through the process of determining how long their retirement savings may last or how much life insurance coverage they may need to protect their families’ future, the company said in a release.

The video calculators, unique to AXA Equitable, provide users with an interactive experience where they receive virtual consultations. Financial consultant David Tornetto offers individuals guidance on estimating how savings may grow until retirement and how withdrawals may impact savings during retirement.

Financial consultant Char Gransta navigates users through a process to assess how much life insurance they may need to replace their income. Combined, these two financial professionals have more than 40 years of experience helping people define and work toward their financial goals.

“Our video calculators provide people with more than just a figure of how much money they might need for a particular life event,” said Andrew McMahon, president of AXA Equitable Life Insurance Company. “These calculators, featuring real financial professionals, simulate what they can expect in an initial conversation with a financial consultant.

“Planning for your retirement, assessing your family’s readiness in the event of death, even just meeting with a financial consultant for the first time – these can all be daunting tasks,” McMahon said. “The virtual consultation can help people get more comfortable, be better prepared when actually meeting with a financial professional for the first time, and hopefully get more out of the meeting in terms of deciding next steps.”

If a user has a question or needs more information about a particular term or topic, he or she simply clicks on a button and the financial consultant explains the topic and provides guidance in greater detail.

“Studies have shown that people spend more time planning for a one-week vacation than they do planning for retirement,” said Connie O’Brien, senior vice president of Internet Strategy and Design for AXA Equitable. “We recently tested this in one of our Retirement Reality Series person-on-the-street interviews and found solid evidence to support the theory. We created the video calculators to make it easier for people to take the first step toward planning for the future. With the Web technology available today, we can provide customers with a new level of resources to help them make more informed decisions at their pace and in a way that is comfortable and convenient for them.”

The video calculators and virtual consultations are available at www.axa-equitable.com.

Prudential Retirement Hits $20 billion in New Third-Party Stable Value Sales

After less than two years after entering the third-party stable value business, Prudential Retirement has surpassed $20 billion in sales, the unit of Prudential Financial said in a release.

Account values have jumped 60% since January, when the business reached more than $12.5 billion in third-party stable value assets for a variety of institutional investment-only clients.

Prudential said its entry into the third-party stable value business in the second quarter of 2009 was fueled in large part to help provide plan sponsors with new options to give plan participants the potential to protect their assets against volatility following the financial crisis of 2008-2009. 

Jeffrey Keller joins MassMutual’s retirement plan sales team

MassMutual’s Retirement Services Division, which set a division sales record in 2010, has hired Jeffrey Keller as a new managing director in its southeast region and will add three new sales support roles in the New York, New England and Michigan territories. MassMutual plans to add further to its sales team later this year, the company said in a release.

Jeffrey Keller has been appointed a managing director for MassMutual effective March 28, covering Georgia, Florida, Alabama and Puerto Rico. He joined MassMutual from New York Life where he spent 13 years in a variety of key sales and marketing leadership roles. Keller most recently served as managing director and head of New York Life’s defined contribution investment only business.

Stan Label, national sales manager for First Mercantile Trust Company (First Mercantile), has announced his plans to retire at the end of April after more than 40 years in the retirement plan business. Label also served on the MassMutual Retirement Services sales management team for 11 years.

Upon Label’s retirement at the end of this month, members of his sales team will report to the regional managers in their respective territories in alignment with the company’s local team philosophy.  

Americans are taking the longer view: Northwestern Mutual   

Americans prefer choices that deliver higher quality, long-term growth and guarantees versus options that are cheaper and faster in the short term, but may be higher risk or deliver less return over the long term, according to a poll conducted by Harris Interactive for Northwestern Mutual.  

The survey of more than 2,000 Americans asked respondents to choose their preference in a series of tradeoffs, including:

  • Trade-off for growth: When asked if an immediate one-time bonus would be preferable to a smaller raise in salary, eighty-seven percent (87%) of those polled indicated they would forgo the bonus and prefer the smaller raise that would end up being more than the bonus in the long term. Only 13% indicated they would choose a one-time bonus.
  • Trade-off for guarantees: When comparing the potential for a large reward with low odds to a smaller guaranteed reward, 83% of people would take the smaller yet guaranteed reward. Only 17% will risk the lower odds of a larger reward.
  • Trade-off for quality: According to the poll, people are prepared to pay a premium for products that hold up over the long-term (82%) versus spending less now for products that are lower quality and need to be replaced sooner (18%).

The survey was conducted online from March 30-April 11, 2011 among 2,159 American adults ages 18 and older.  

Investigation of AIG bailout urged by advocacy group

The Derivative Project, a Minnesota-based non-partisan, taxpayer advocacy organization, has asked Rep. Michelle Bachmann (R, MN) for an immediate House Oversight Committee investigation of all U.S. taxpayer payments to AIG commencing in fiscal year 2008.

The organization is requesting this investigation be completed in conjunction with Bachmann’s legislation, sponsored in January 2011, to repeal the Dodd-Frank financial reform bill.

The Derivative Project requested of Congresswoman Bachmann in this memorandum, the following investigation:

  • What legislation does The Tea Party Caucus and House Republicans propose to prevent taxpayer dollars from being used in the future to fund speculative positions by an end user, like AIG, or other financial institutions if Dodd-Frank is repealed?
  • Are there substantive issues for House Oversight Committee investigation of unequal enforcement of U.S. financial contract law, where U.S. individuals are imprisoned for breach of a financial contract and U.S. corporations and its representatives are allowed a “stupidity” defense, when there is a preponderance of evidence the corporate financial contracts are fraudulent?
  • The Tea Party Caucus and the House Republicans launch a complete House Oversight Investigation of the use of taxpayer dollars to fund collateral call payments to Goldman Sachs and other AIG counterparties during the most recent financial crisis, specifically why these financial contracts were not deemed fraudulent between AIG and Goldman Sachs and unwound in an orderly fashion.
  • The Tea Party Caucus and the House Republicans request a ruling from Attorney General Eric Holder on why the financial contracts between AIG and Goldman Sachs were not deemed fraudulent and a constitutional misuse of taxpayer dollars by the U.S. Department of Treasury headed by then Treasury Secretary Henry Paulson, who had a material conflict of interest in proposing this use of $180 billion of U.S. taxpayer dollars since he had been a partner of Goldman Sachs.  Should the U.S. Treasury Secretary have recused himself from the recommendation that U.S. taxpayers fund collateral call payments from AIG to Goldman Sachs?
  • The Tea Party Caucus and the House Republicans investigate if the $50 billion in taxpayer funds funneled to several banks for AIG collateral payments on derivative financial contract positions should be refunded by the banks to the U.S. taxpayer.

The Derivative Project is a non-partisan, Minnesota – based taxpayer advocacy organization that seeks to ensure the long-term stability of the U.S. economy through equitable enforcement, for both individuals and corporations, of financial laws and regulations.

The full text of the group’s letter to Bachmann will be made available at The Derivative Project’s website, www.thederivativeproject.com and Blog, blog.thederivativeproject.com.


Equity funds see outflows in March: Morningstar

The pace of inflows into long-term mutual funds slowed slightly to $27.0 billion in March from approximately $27.9 billion in February, due largely to a reversal in U.S. stock flows, according to Morningstar, Inc.

Equities saw outflows of $934 million in March after taking in roughly $26.1 billion combined in January and February.

Inflows for U.S. ETFs rose to $7.4 billion in March after reaching $6.6 billion in February despite outflows of $3.3 billion from U.S. stock ETFs, which typically drive industry inflows.

Americans have increased their investments in passive emerging-market ETFs. Six years ago, actively managed open-end mutual funds and ETFs comprised 79% of diversified emerging-markets assets, but today make up 53%, Morningstar said.

Additional highlights from Morningstar’s report on mutual fund flows:

  • Bank-loan funds, with inflows of $4.3 billion, drove the $18.0 billion that flowed into taxable-bond funds in March. Total category assets for bank-loan funds have reached $59.8 billion, surpassing the $41.2 billion peak reached in June 2007 by nearly 50%.
  • Among U.S. stock funds, large-cap offerings lost about $3.2 billion across the value, blend, and growth categories, while small-cap funds enjoyed modest inflows of $791 million. However, investor preference for small-cap offerings hasn’t held with international-stock funds, where large-caps acquired $3.6 billion in new assets versus just $306 million for small-caps in March.
  • Municipal-bond fund outflows slowed for a third consecutive month, with less than $2.6 billion in March redemptions. Still, roughly $40.4 billion has vacated muni-bond funds over the last five months, which represents 7.8% of beginning total assets.
  • Demand for alternative and commodity funds remained steady with $1.1 and $1.8 billion in March inflows, respectively. Money market funds saw outflows of $12.5 billion in March after inflows of $16.7 billion in February.

Additional highlights from Morningstar’s report on ETF flows:

  • Outflows from large-blend and large-growth ETFs accounted for most of the outflows from U.S. stock ETFs, as these categories lost $6.2 billion and $963 million, respectively. However, several categories in the asset class, including equity energy, natural resources, consumer discretionary, and consumer staples, saw inflows.
  • After beginning the year with two consecutive months of outflows, international-stock ETFs saw inflows of $6.7 billion in March.
  • Taxable-bond ETFs collected assets of $3.1 billion during the month, making a notable contribution to aggregate ETF inflows in March for the first time in seven months.

To view the complete report, please visit http://www.global.morningstar.com/marchflows11. For more information about Morningstar Fund Flows, please visit http://global.morningstar.com/fundflows.

DTCC enhances Licenses & Appointments service

The Depository Trust & Clearing Corporation (DTCC) is developing an enhancement to its Licensing & Appointments (LNA) service that will help carriers track and confirm if agents have been trained and certified to sell their specific annuity products.

These enhancements, which will help centralize the verification of completed mandated training, will roll out later this month. LNA is one of the core automation solutions from DTCC’s Insurance & Retirement Services (I&RS) business.

The changes are driven by the Suitability in Annuity Transactions Model Regulation introduced last year by the National Association of Insurance Commissioners. All agents must now take a four-hour certification course on the fundamentals of annuities, as well as complete product-specific training from carriers for which they solicit annuities.  Each state law has its own specific requirements and training deadlines, and will set its own effective date.

Twenty states adopt annuity education requirements

Eleven states/jurisdictions have adopted regulations requiring further annuity education, including California, Colorado, District of Columbia, Florida, Iowa, Ohio, Oklahoma, Oregon, Rhode Island, Texas, and Wisconsin. Nine more states have proposed regulations. Iowa was the first state to mandate regulations, beginning Jan. 1, 2011, and others are scheduled beginning second quarter, 2011.

“Customers on our Senior Advisory Board approached us with this issue late last September,” said Adam Bryan, managing director, I&RS. “The looming 2011 deadline posed a serious challenge for the industry, since carriers really had no way to centralize the verification of this producer training.

“We saw an immediate fit within LNA, our service that automates and standardizes the two-way flow of information needed to manage producer authorization information between insurance carriers and distributors. We quickly formed a customer task force, and started to work through how we could accommodate these new data requirements with a service enhancement to LNA.”

Phase I Enhancements

In Phase I of the project, which will be fast-track tested for two weeks in April, I&RS has built enhancements to LNA that can take a standardized delimited data file feed from the education vendors who provide this producer training, and translate into the industry-standard LNA format. The new data fields built into the LNA system will then be able to accommodate this training data, so carriers can quickly verify if the agents have been trained and certified.

Some distributors and carriers are using vendors to support their training efforts. The vendors are not required to become members of DTCC’s subsidiary, the National Securities Clearing Corporation (NSCC). They will also not be charged to provide training completion data, nor are required to actually build LNA.

“We wanted to eliminate any possible barriers for the vendors to engage with us,” said Lana Macumber, director, I&RS Strategy and Business Development.

In the next stage of the project, I&RS will extend these enhancements to the LNA Access Platform, the standalone online reporting tool that distributors use to enter, edit, and retrieve various sets of pre-defined required licensing and appointment data.

DTCC is currently working with seven education vendors, including Kaplan, PinPoint (partnering with LIMRA), QuestCE, RegEd (partnering with IRI), Sircon, SuccessCE (partnering with NAFA), and WebCE.

Phase II Enhancements

In the next phase of the project, targeted for early 2012, I&RS hopes to provide real time producer authorization messaging for point-of-sale and transaction processing. By leveraging ACORD XML for producer authorizations, I&RS would be able to navigate these messages to and from requestor to end carrier.

401(k) assets top $3 trillion: SPARK

Assets in 401(k) plans grew by 13% and reached a record $3.075 trillion in 2010 according to the latest Marketplace Update report from the Society of Professional Asset-Managers and Record Keepers (SPARK) and The SPARK Institute.

“Strong performance across all equity sectors, especially the U.S. market over the second half of 2010, coupled with positive returns in the bond markets, helped push total retirement market assets to an estimated $16 trillion by year-end 2010,” said Bob Wuelfing, president of RG Wuelfing & Associates, Inc., which prepared the report.   

The number of 401(k) plans rose to 536,000 in 2010, covering more than 74 million workers in the U.S. in 2010, up from 510,500 plans and 73.4 million participants in 2009.

Additional statistics include:

  • Nearly 70% of participant account balances in equities at the end of 2010, including the equity portion of balanced, life cycle, risk-based asset allocation and target date funds.
  • Total assets in IRAs reached almost $4.5 trillion in 2010.
  • An estimated 20-22,000 new 401(k) plans will be formed in 2011, primarily among small companies.

The Marketplace Update includes key data on the retirement plan market, as well as commentary on industry issues. It is distributed exclusively to members of SPARK and The SPARK Institute.

SPARK was founded in 1989 as an inter-industry group of investment managers and service providers, particularly in the defined contribution retirement plan market.  Current membership includes over 250 companies representing a broad cross-section of banks, mutual funds, insurance companies, third party administrators, trade clearing firms and benefits consultants.

The SPARK Institute provides research, education, testimony and comments on pending legislative and regulatory issues to members of Congress and relevant government agency officials.  Collectively, SPARK and SPARK Institute member companies serve approximately 70 million participants in 401(k) and other defined contribution plans.

An Industry Awaits Fee Transparency Rule with Trepidation

When rule 408(b)(2) goes into effect, will it achieve the Labor Department’s goal of greater fee transparency in employer-sponsored plans and higher account balances for participants?

Or will it become a ‘Tower of Babel,’ as one writer put it, creating a burden for plan sponsors and providers and perhaps scaring participants from saving?  

Whatever the consequences, a final amended version of the rule may not go into effect until the middle of next year, not long before a presidential election when the country will determine, among other things, whether it likes a reform-minded administration or wants a return to light financial regulation. 

Fred Reish (above), the ERISA legal expert, alerted his LinkedIn followers and others on April 14 that “the amendments to the 408(b)(2) regulation have been fully drafted at the Department of Labor. They are being reviewed by senior officials at the Employee Benefit Security Administration (which is the pension and welfare part of the DOL).

“It would be reasonable to expect that the amendments to the regulation would be fully reviewed and approved by the end of this month, and then sent to the Office of Management and Budget (OMB) for its review.

“It ordinarily takes the OMB 60 to 100 days to approve regulations, so it would be reasonable to assume that the amendments would be published in mid- to late July (but, of course, things always seem to go slower at the government than we would think).

“While we will not be able to see the amendments during the review process, there is a rumor that they will include an extension of time for compliance. Right now, the amendments are effective January 1, 2012.

“Since the probable purpose of the rumored extension (if true) is the late issuance of these amendments, it is reasonable to assume that the new effective date would be somewhere in the range of April 1 to July 1, 2012. But, that’s just a guess. I will do further articles like this as we hear credible information about the amendments.”

Reish did not comment on the merits of 408(b)(2), but Louis S. Harvey, president of DALBAR, Inc., called it a potential “Tower of Babel” that could backfire. His comments were published recently in Volume 16, No. 1 of DSG Dimensions, the periodical of Diversified Services Group. 

“Unlike the mountain of disclosures that exist today this new ERISA 408(b)(2) disclosure has a bite to it,” Harvey wrote. “No, this is not a warning label and is not a description of a privacy policy or showing past performance. This is about compensation and will therefore get the attention of plan sponsors.

“Exposure to the unmasked dollars and cents of a service provider’s pay is certain to raise questions in high cost plans. The new regulation applies to all fiduciaries, record keepers, brokerage services and anyone receiving indirect compensation (compensation that originated from the plan but is paid by a third party such as a record keeper or mutual fund). Compensation anticipated to be less than $1,000 is excluded.”

“The DoL estimates the total first year cost of implementing the disclosures will be $153 million with ongoing costs of $37 million per year. These estimates do not include the economic dislocation that the disclosure will cause but disruption is acknowledged by the DoL.

“The DoL explains that the disclosures will cause ‘the discouragement of harmful conflicts of interest, reduced information gaps, improved decision-making by fiduciaries about plan services, enhanced value for plan participants, and increased ability to redress abuses committed by service providers.’”

At the LIMRA Retirement Industry conference in Las Vegas last week, a John Hancock retirement executive expressed concern about 408(b)(2) possibly backfiring.

“I worry about all the noise over fee disclosure and fiduciary responsibility,” said Arthur E. Creel, executive vice presidnet, sales and marketing, John Hancock Financial Services. “They’re important, but that noise can scare people away from doing the right thing. There are lots of unintended consequences of regulatory change. You could end up with less saving rather than more.”

© 2011 RIJ Publishing LLC. All rights reserved.

Financial system a ‘con game,’ says economist

The world’s financial system is tantamount to “a Ponzi scheme” and the U.S. bailouts of AIG and other entities worsened its problems according to Larry Kotlikoff, professor of economics at Boston University and former adviser to the president.

Speaking at a pension conference in Wassenaar, the Netherlands, Kolitkoff also likened the financial system to “a con game, characterised by a pervasive lack of transparency and made up of fraudulent guarantees and financial promises that cannot be kept,” IPE.com reported.

“AIG insured the uninsurable, and now the US government has taken over that role,” Kotlikoff said. “But managing the crisis by taking on promises you can’t deliver is not a fix to systemic risk. It is itself systemic risk.”

If one were to count the “unofficial” liabilities in US entitlement programs that are presently being kept out of the picture by bogus accounting, the US is actually in worse shape than Greece, he said.

“To cover all those liabilities, federal taxes would have to be raised by 64%, or expenses would have to be cut by 40% – and that is an optimistic estimate,” he said.

The financial system is inherently fraudulent, Kotlikoff said, because financial institutions insure the uninsurable and take on liabilities they cannot honor, while these institutions and their managers themselves take on only limited liability and pass the buck to the tax payer when things go wrong.

The only way to fix this sorry state of affairs is by introducing what Kotlikoff calls “limited purpose banking.”

Financial institutions should be turned into mutual funds or mutual insurance companies with unlimited liability, under supervision of an independent financial authority that would be responsible for verification, appraisal, rating and enforcing full disclosure.

A mutual fund selling shares and investing or lending out the proceeds without the use of leverage makes no promises it cannot keep, nor does it require government guarantees, Kotlikoff said.

Likewise, risks could be insured using ancient ‘tontine’-style vehicles, which mutually insure risks without any attempt to insure the aggregate – and thus uninsurable – risk.

The Dutch pensions system, too, is at risk of going under because it makes promises that cannot be kept, he said.

An ideal pensions system would cut employers out of the picture entirely because “companies have their own interest at heart”, and those interests do not include providing employees with a good income after retirement.

Much better to have the government introduce mandatory savings of about 8% of wages, to be invested collectively in a globally diversified index fund at virtually zero cost, he said.

“The government could then guarantee that people would get what they put in adjusted for inflation, and people could turn to tontine funds to take out additional insurance,” he added.

Kotlikoff also said he hoped his views would resonate in the Netherlands and inspire measures to overhaul the financial system.

“Don’t expect the US to take the lead in this. We are the ones who created this mess in the first place,” he said. But unless the US gets its fiscal house in order, fiscal problems could well trigger a second, and far worse, financial crisis, Kotlikoff warned.

“Once people figure out the government can’t actually deliver what it has promised, other than by printing huge amounts of money, this may trigger a bank run,” he said. “PIMCO has already said it will buy no more US Treasuries, which is not a good sign.”

Kotlikoff, a former senior economist on the presidents Council of Economic Advisers, has proposed a radical overhaul of the financial system in his book Jimmy Stewart is Dead – Ending the World’s Ongoing Financial Plague with Limited Purpose Banking, which was endorsed by Mervyn King, governor of the Bank of England.