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Have Investment Managers Earned Their Fees?

Posted on April 6, 2011 by -

Despite the continuing global financial crisis, the uprisings in the Middle East and the Japanese disaster, global stock markets delivered very good results in the first quarter of 2011.

These upheavals test the mettle of investment managers, so you need the proper perspective to evaluate investment performance. The question, “Is performance good?” requires an answer to yet another question: “Relative to what?”

As usual, some styles, sectors and countries performed better than others in this first quarter. Have your managers seized upon the better segments and/or selected exceptional securities? Where have they succeeded and failed?

Bottom line: Have they earned their fees?

Of course, one quarter is too short a timeframe to get excited about winners and losers, but we should get excited about the emerging importance of real due diligence, which is about to become a fiduciary obligation. 

In October of 2010, the Department of Labor issued a recommendation to remove a 35-year old fiduciary exclusion for advisors who select investment managers. If adopted, many advisors who prefer to not be held to a fiduciary status will have a decision to make: stop providing manager recommendations or get serious about manager research.

Those of you who accept this responsibility will want to tighten up your due diligence processes.  You will need to conduct manager research like it’s never been done before. When you do, you will discover something you’ve never had before, namely good active management performance versus passive alternatives. Clients will finally get what they deserve.

Insights into the first quarter of 2011

U.S. markets in the first quarter of 2011 delivered three consecutive positive monthly returns, although March was a squeaker, eking out a modest 0.2% gain. As the chart on the right shows, every US style posted a positive return for the first quarter of 2011, continuing the recovery that began in March of 2009.

This quarter’s 6.2% market return brings the 25-month return from March 2009 to March 2011 to a whopping 100%. Consequently we’ve turned the corner in recovering from 2008 losses; the 39-month return for January 2008 through March 2011 is a positive 1.4% un-annualized, or about 0.4% per year. It’s taken all the running we can do to stay in the same place.

As the optimist plummeting off a skyscraper said, “so far, so good.” We might not continue this recent recovery. A look at what has been working, and what has not, offers some clues.  Mid-sized companies fared best, while value and growth styles fared about the same in aggregate, although core lagged.

This was one of those time periods where the stuff in the middle surprised by not performing in between the stuff on the ends—mid-cap outperformed large and small while core underperformed value and growth.  I use Surz Style Pure® style and country definitions throughout this commentary, as described here.    

Performance by sector

On the sector front, energy stocks fared best, earning 15% in the quarter, as concerns about the Middle East drove up oil prices. Industrials and healthcare were the next best performers, earning 9% and 7% respectively. Rounding out the range of sector results, the remaining sectors returned around 3.5%, far less than the leaders.

Looking outside the US, foreign markets earned less than half as much as the US in US dollars, delivering a 2.7% return, led by Canada and Europe ex-UK, each with 8.5% returns. Europe ex-UK benefitted from a weakening dollar, so currency effects added 5% in the quarter.

Several regions lost value in the quarter: Japan, Emerging Markets and Latin America. For Japan, which lost 3.5%, it was a continuation of a decade-long sequence of disappointing returns, in this case caused by the earthquake and nuclear reactor problems. For Emerging Markets and Latin America, this quarter marked a reversal because these regions had been leading foreign markets. As a result, the EAFE index, which had been lagging the total foreign market for some time, was in line with the total market for the quarter.

 

Now you have several frameworks for evaluating investment manager performance in the first quarter of 2011. But this is only one small aspect of the overall due diligence process – a process which should be forward looking, focused on developing confidence in managers’ abilities to add value. After all, clients always have the choice between active and passive management. Your recommendations of active managers are very important, which is good, and they are likely to become much more important.

 

One Reason the Crisis Got So Bad

Posted on April 6, 2011 by -

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, all of the New York University Stern School of Business. 

With the deregulation of the mortgage finance market, the decade of the 1980s was a period of substantial growth for Fannie and Freddie. At the end of the decade, Fannie and Freddie were fundamentally entrenched as parallel GSEs, with similar structures, privileges, responsibilities, and limitations.

The last major legislation to impact the GSEs until the financial crisis of 2007-2009 was the Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA) of 1992. It produced a number of important rules, one in particular related to capital requirements.

In particular, a risk-based capital regulatory regime was specified for Fannie and Freddie and their two main functions: (i) securitizing and guaranteeing the credit risk of MBS, and (ii) investing in MBS or other similar portfolios of mortgages.

With respect to (i), the capital buffer that the GSEs were required to hold against these guarantees was 0.45% (i.e., 45 cents per $100 of guaranteed mortgages), which implied that the Congress believed that residential mortgages were quite safe instruments to guarantee against credit risk – or that the Congress meant to subsidize these guarantees and was (if push came to shove) prepared to cover any losses.

With respect to (ii), the GSEs were to hold 2.50% capital against their balance sheet assets (of which mortgages are by far the largest category). Thus, for every $100 in mortgages held, they could (in principle) fund those mortgages with $97.50 in debt and only $2.50 in equity.

In comparison to any other financial institution, Fannie and Freddie were afforded extraordinarily light capital requirements. For example, the capital requirement for federally insured banks and thrifts to hold residential mortgages was substantially greater: 4%. As a result, Fannie and Freddie had much higher leverage ratios – total assets to shareholder equity – than did comparable banking institutions.

To many fixed-income practitioners and analysts, the GSEs’ growth and the expansion of securitization markets for mortgage finance should be considered a success story. But there was a darker side to the interaction between the GSEs and the banking sector: While banks were charged a 4% capital requirement for holding a portfolio of mortgage loans, they were charged only 40% of this, or 1.60%, if they held GSE MBS instead. Within the financial sector, this creates perverse incentives for banks to load up on GSE MBS, thereby increasing leverage all the way around the sector.

To see this, note that if a bank originated $100 worth of mortgage loans, they would have to hold a minimum $4 of capital to be considered adequately capitalized. If the bank sold these loans to the GSEs and the GSEs securitized them into MBS, however, the banks could buy back the GSE MBS and hold only $1.60 in capital, even though their portfolio holdings are identical.

Because the GSEs are only required to hold $.45, this means that, for the same level of risk, the capital requirement for the financial sector as a whole now is just $2.05, or 51% of what it used to be. There is little doubt that the growth in securitization is related to this type of regulatory arbitrage.

*            *            *

The mortgage credit risk of Fannie Mae and Freddie Mac combined grew at an astonishing 16% (11%) annual growth rate from 1980 (1992) through 2007. We saw that this growth was financed using borrowed money and levels of leverage far in excess of other financial institutions.

Why would debt investors finance such growth? Because of the special status and treatment of the GSEs, the financial markets have historically treated them specially: The financial markets believed (correctly, as it turned out, or as a self-fulfilling prophesy) that if either company ever experienced financial difficulties, the federal government would likely intercede to make sure that the company’s creditors did not suffer any losses.

This belief persisted despite the explicit statement on all GSE securities that these securities were not full-faith-and-credit obligations of the U.S. Government. The belief seems largely rational given that for most practical purposes, GSE debt is on par with Treasuries as “liquidity” or “risk-free securities” and therefore is held in hoards by financial firms much like Treasuries (in fact, 50% of GSE debt was held by financial firms in 2008).  The “halo” effect of all of the special features of the GSEs was just too strong for them not to be deemed as too-big-to-fail.

With an implicit guarantee on their debt, Fannie and Freddie were able to borrow at interest rates that were below what the financial markets otherwise would have demanded. This meant that it was quite profitable for the GSEs to purchase mortgages and offer credit default guarantees below fundamental rates, allowing them to vanquish any competition and grow unfettered.

Because fixed income investors – either those holding Fannie and Freddie debt or MBS guaranteed by Fannie and Freddie – believed that there was a government backstop, market discipline went out the window, and there was no one left to restrain Fannie and Freddie.

As described above, adding to this subsidy was the fact that Fannie and Freddie had much lower capital requirements than did commercial banks and investment banks, for guaranteeing as well as holding MBS. With such a lack of a level-playing field, there was really no free market. Instead of capital flowing to its most efficient use, as the deregulation of mortgage markets in 1980’s had anticipated, capital was in fact flowing to its most levered use.

There was no one left to restrain Fannie and Freddie, of course other than the federal government, but in the pursuit of myopic goals of boosting home ownership at all costs, each successive presidential administration turned a blind eye.

© 2011 Princeton University Press.

Plan Sponsor Group Joins Hueler SPIA Platform

Posted on April 6, 2011 by -

Big news in the still-small world of single-premium income annuities: Hueler Companies and the Profit-Sharing Council of America have entered into a relationship. 

The deal, announced late Tuesday after a year of negotiations, is significant. It allows the 1,200 defined contribution plan sponsors who are members of the PSCA to give their six million plan participants access to the Hueler’s Income Solutions, an online platform where 401(k) participants and fee-only advisors can get competitive, no-load bids on SPIAs.  

To put it another way, Kelli Hueler, the purposeful Minneapolis entrepreneur behind Income Solutions, has apparently persuaded David Wray, the president of PSCA, and his board of directors that her platform can give retiring plan participants a transparently-priced, multi-insurer, “out of plan” income option that—and this is key—won’t expose plan sponsors to fiduciary liability.

The PSCA board includes representatives of plan sponsors or providers such as McDonald’s, Playboy Enterprises, Procter & Gamble, New York Life, MGM Resorts International, and The Hartford, as well as small and mid-sized firms. 

“Plan sponsors want to help but they don’t want to be directive,” Wray told RIJ. “They’re concerned with the liability that directive means and they don’t want to be wrong.” With the Hueler option, ‘if a participant comes to them and says, ‘I need an income solution,’ they can accommodate them by saying, ‘Here’s access to a transparent, low-cost annuity platform that has educational material.’ There are no endorsements or recommendations.” 

The agreement doesn’t compel PSCA members to do anything; it simply allows them to offer an access code to the platform to  ready-to-retire participants who are interested in converting some of their qualified savings to a guaranteed lifetime income stream. Under the agreement, PSCA plan sponsors won’t have to pay the $5,000 fee that Hueler usually charges for setting up an interface between a plan and the platform.

Income Solutions, for those unfamiliar with it, is a website where members of certain 401(k) plans and certain financial advisors can log on and request competitive real-time quotes on single-premium immediate annuities from eight or nine different highly-rated insurance companies who’ve been vetted by Hueler and who agree to offer special prices with no embedded distribution expenses.

Hueler, a successful provider of stable value fund data, created Income Solutions in 2004 after four years of research. She has spent the past six years talking about it and promoting it at conferences, hearings, roundtables and executive suites all over the country. She has formed partnerships with plan providers Wells Fargo, ING, T. Rowe Price and Hewitt Associates.

In 2007, Hueler and the National Association of Personal Financial Advisors entered into an agreement that would give NAPFA’s fee-only advisors access to Income Solutions for their clients. In 2010, Hueler and Vanguard agreed that Vanguard’s 401(k) participants could have access to the platform. The deal with PSCA marks an new milestone in the ongoing growth of Income Solutions.

While SPIA sales are currently tiny—low interest rates aren’t helping—Hueler doesn’t think they will necessarily stay that way. “There’s an appetite out there that hasn’t been reflected in the sales  numbers,” Hueler told RIJ. “Our volume has dramatically increased. And if every plan sponsor communicated this to employees and employees had a chance to consider this option, you would see substantially higher usage of [SPIAs].”

In essence, Income Solutions is using the Internet to do for SPIA transactions what it has done for books, cars and other products: drive prices down, make transactions more transparent, and put more control in the hands of the consumer.

Just as consumers can compare car prices on cars.com, they can compare the prices of annuities at Income Solutions. Hueler isn’t the first to venture into that territory; for years, New Jersey-based insurance general agent Hersh Stern has been offering competitive annuity quotes through his site, immediateannuities.com. Others use a similar formula.

Both types of sites allow shoppers to see the highest available SPIA payout. That alone is important, because a client who sees only one annuity quote at a time is as helpless as someone who visits one car dealer and sees one isolated offer at a time. On any given day, the spread between the highest and lowest annuity prices can be as wide as 10%. For example, a couple might pay anywhere from $190,000 to $210,000, depending on the issuer, for $1,000-a-month in retirement.

But Hueler’s platform is different in a couple of crucial ways. Most importantly, it eliminates the commissioned salesperson. That makes the transaction cheaper and more transparent. Hueler discloses a flat two percent fee (one percent to finance the Income Solutions platform; the other one percent is paid to the plan provider or charged by the fee-only advisor who mediates the transaction for the participant or investor). In a typical agent-mediated transaction, the buyer pays up to five percent and doesn’t know exactly what the underlying cost structure looks like.

For plan sponsors, these differences matter a lot. The combination of lower, transparent pricing and a choice of bids from a screened selection of multiple high-quality annuity issuers—plus the fact that the SPIA purchase on Income Solutions involves a rollover to an IRA outside of the plan—makes Income Solutions acceptable to the many plan sponsors who are afraid that income options that involve in-plan purchases of annuities from single issuers would expose them to immeasurable liability should the issuer fail.

“The key for us was the transparency,” Wray said. “In the world we live in today, anything that has to do with our system has to be transparent. This platform provides the kind of thing that plan sponsors should be comfortable informing their participants about.” Nineteen percent of his member companies still have programs where they refer participants to a single insurance company for purchasing an income annuity inside the plan, he noted. But the Hueler concept is emerging as a successor to that practice. 

Income Solutions also claims to offer “institutional pricing.” Hueler says that participating carriers have agreed to offer SPIAs to her clients at the “same prices they offer to their best institutional clients.” That pricing remains something of a black box at the carrier end, but it is said to be the stripped-down price with no distribution fees layered on. 

SPIA pricing is the subject of an upcoming article in Retirement Income Journal. So far, comparisons of SPIA prices at Income Solutions, Immediateannuities.com, AARP, Fidelity’s SPIA platform, and Cannex, the independent data provider, show a small but consistent advantage at Income Solutions.

The insurers currently listed as participants in the Income Solutions platform are American General Life, Integrity Life, Lincoln National Life, Mutual of Omaha, Pacific Life, Principal Life and Western National. The largest seller of SPIAs, New York Life, is not listed. Its products are primarily sold through career agents. It also has an exclusive marketing relationship with AARP. MetLife also offers quotes for participants in certain plans. 

© 2011 RIJ Publishing LLC. All rights reserved.

Events that may interest you

Posted on March 30, 2011 by -

Events on retirement income and related issues this spring and early summer include:

April 5-6. CFA Institute Conference: 2011 Asset and Risk Allocation. Spertus Institute, Chicago, IL. 

April 11-12. Investment Symposium, hosted by the Society of Actuaries. Millenium Broadway Hotel, New York, NY. 

April 13-15. The Retirement Industry Conference, hosted by LIMRA, LOMA and the Society of Actuaries. Caesar’s Palace, Las Vegas, NV.

May 16-17. Life and Annuity Symposium, hosted by the Society of Actuaries. Sheraton New Orleans, New Orleans, LA. 

May 18-20. NAPFA National 2011, the annual conference of the National Association of Personal Financial Planners. Grand America, Salt Lake City, UT.

June 26-28. The Insured Retirement Institute’s 2011 Government, Legal and Regulatory Conference. Omni Shoreham, Washington, DC.

June 26-28. The Boulder Summer Conference on Financial Decision Making. St. Julien Hotel, Boulder, CO.

Corporate pension funded status improved by $12.4 billion in 2011: Milliman

Posted on March 30, 2011 by -

Milliman, Inc., has released the results of its annual Pension Funding Study, which consists of 100 of the nation’s largest defined benefit pension plans. In 2011, these plans experienced asset returns of 12.8% (a $115 billion improvement) that were offset by a liability increase of 7.7% (a $103 billion increase) based on a decrease in the discount rate.

The decline in discount rates fueled record levels of pension expense for these plan sponsors. Collectively, these pensions went into the year expecting a $30 billion charge to earnings, with the final number almost doubling that estimate, at $59.4 billion.

“This was a record year for pension contributions, though the number could have exceeded $60 billion if a few things had gone differently,” said John Ehrhardt, co-author of the Milliman Pension Funding Study.

“Pension funding relief enacted last summer helped reduce the funding burden, along with positive investment performance.  If interest rates remain at current levels (or decline), contributions will be even higher in 2011.”

While the funded status for the year changed only modestly, the year was marked by several significant events. In August, falling interest rates drove up the projected benefit obligation and resulted in a record deficit for the 11 year history of this study.

Over the course of the year, several companies adopted new accounting approaches, which involved full or substantive recognition of accumulated losses and a larger charge to 2010 balance sheets.

Had similar accounting changes been instituted across all of the companies in this study, the resultant charge would have totaled $342 billion.

Despite the eventful (and sometimes volatile) year, pension investment strategies remained relatively consistent.

“For the year, the asset allocation of these 100 pension plans did not change significantly, as investment in equities only decreased from 45% to 44%,” said Paul Morgan, co-author of the Milliman Pension Funding Study. “Fixed income allocations were unchanged at 36%, but allocations to other (alternative) investments increased from 19% to 20%. On average, there were not many changes, though we did see eight of the 100 companies decrease their equity allocations by more than 10%.”

Morningstar gives just six fund families an “A” for stewardship

Posted on March 30, 2011 by -

Morningstar, Inc. released the findings from its 2011 Mutual Fund Stewardship Grade research study, which evaluated more than 1,000 funds from more than 40 fund families on how well each fund treats its fund shareholders’ capital.

The study calculated an average Stewardship Grade for all of the funds it grades within 44 different fund families. Six fund families currently earn an average overall Stewardship Grade of “A”: American Funds, Clipper, Davis, Diamond Hill, Dodge & Cox, and PRIMECAP.

Average overall Stewardship Grades of “B” are assigned to another 16 fund families, and 17 fund families receive “C” grades. Five fund families receive “D” grades in the report. No fund family currently receives an average overall Stewardship Grade of “F.”

Grades assigned to fund families                                by Morningstar, Inc.

 “A”

“B”

“C”

“D”

American Funds

Bridgeway

Allianz

Alliance Bernstein

Clipper

FPA

Artisan

ING

Davis

Franklin

Aston

John Hancock

Diamond Hill

Harbor

BlackRock

Principal

Dodge & Cox

Invesco

Columbia

Putnam

PRIMECAP

Janus

DWS

 

 

JPMorgan

Federated

 

 

Longleaf

Fidelity

 

 

MFS

Legg Mason

 

 

Osterweis

Neuberger Berman

 

 

Perkins

Oppenheimer

 

 

Royce

PIMCO

 

 

T. Rowe Price

RiverSource

 

 

Thornburg

Sentinel

 

 

Vanguard

TCW

 

 

Weitz

TIIA-CREF

 

 

 

 

 

Source: Morningstar Inc.’s 2011 Mutual Fund Stewardship Grade Research Paper

The study looked at how funds have performed since Morningstar first issued its Stewardship Grades in 2004 and again after the company revised its Stewardship methodology in 2007.

It concluded that funds with high Stewardship Grades (those receiving grades of “A” or “B”) are very likely to survive in the long-term, and more likely to provide competitive risk-adjusted returns in the ensuing period.

For purposes of the study, funds are considered successful if they have a Morningstar Rating of three stars or higher, a metric that broadly measures whether a fund’s shareholders have fared well relative to peer funds on a risk-adjusted basis. Funds were deemed unsuccessful if they received a Morningstar Rating of two stars or lower or if the funds did not survive.  

Morningstar uses five major criteria to arrive at a Stewardship Grade: the corporate culture of a fund’s parent organization; the quality of the board of directors overseeing the fund; the fund managers’ financial incentives; the fund’s fees; and the fund firm’s regulatory history.

Morningstar analysts assign each component an individual grade, and combine the scores to provide an overall Stewardship Grade. Funds that are determined to be the best stewards of capital receive an “A” grade, while the worst receive an “F.”  Morningstar currently assigns Stewardship Grades to more than 1,000 of the approximately 1,750 funds that its analysts actively follow.

The study found that of the funds Morningstar graded in 2004 and 2007:

  • About 99% of funds that received “A” Stewardship Grades survived.
  • More than 80% of the funds earning grades of “A” or “B” in 2007 had competitive risk-adjusted returns relative to their peers.
  • Approximately one-third of funds receiving an “F” grade in 2004 didn’t survive to today.
  • About one-quarter of funds receiving a “D” grade were liquidated or merged away.

Other positive correlations include:

  • Approximately 87 percent of funds that earned “A” grades for corporate culture in 2007 were successful in the ensuing period;
  • Managers who have their own financial incentives aligned with fund shareholders had good results—more than 75 percent of the equity funds earning “A” grades in 2007 in the manager-incentive category were successful in the ensuing period;
  • Funds with low fees had the best risk-adjusted returns, primarily over long-term periods.

Among all current fund evaluations, the most common Stewardship Grade is a “C,” which Morningstar assigns to 455 funds. On the high end of the scale, 90 funds currently earn an “A” overall grade and 359 funds receive a “B.” On the lower end, 145 funds currently receive a “D,” and just two funds receive an overall Stewardship Grade of “F.”

Morningstar assigns Stewardship Grades only to funds that Morningstar analysts actively follow, meaning an analyst reviews and writes an analysis on the fund at least once per year. Every one to two years, the analysts review and update the Stewardship Grades for the families’ funds that are listed below.

The overall grades are based on the sum of the points associated with each of the five methodology areas: corporate culture, board quality, manager incentives, fees and regulatory history. The maximum Stewardship Grade score is 10 points, with corporate culture contributing up to 4 points; board quality, manager incentives, and fees each contributing up to 2 points; and regulatory history contributing up to 0 points but as low as negative 2 points for funds with poor regulatory histories.

 

 

The Bucket

Posted on March 30, 2011 by -

Janus hires Malinsky as regional retirement director for the Financial Institutions team

Janus Capital Group Inc. has appointed Mike Malinsky to be regional retirement director of Financial Institutions. He reports to Chris Furman, vice president and managing director of Financial Institutions.

Malinsky will partner with divisional managers and wholesalers in the insurance industry to promote Janus’ strong product options. He will also be responsible for facilitating sales, servicing and strategy implementation within the Financial Institutions team.

Malinsky had been vice president and funds manager at Genworth Financial. He has more than 17 years of experience in the financial services industry, including 11 years with Genworth. He managed all mutual fund relationships within Genworth’s variable annuity and group annuity policies, which represented approximately $12 billion of assets under management. 

Malinsky earned a bachelor of science degree in finance and a master of business administration from Virginia Commonwealth University.

ING hires Cruz to lead individual retirement investor channel

ING has named Orlando R. Cruz as president of its Individual Retirement Investor Channel.  Reporting to ING Individual Retirement CEO Lynne Ford, he will lead a team responsible for providing phone-based guidance and support to both new and existing ING customers looking for help with their retirement savings and income needs.  

Cruz had been at Wells Fargo, where he most recently served as senior vice president and head of internal retirement consultant program for its Retail Retirement Group. In this capacity he led a team whose members were the “advisors’ advisors” for retirement and guaranteed income planning.

In more than 20 years at Wells Fargo and its predecessor companies, Cruz served as senior vice president and director of the internal retirement consultant program, as national sales manager of offshore products, as Southern Divisional sales manager of the field-based retirement consultant program, and as director of global and intermediary distribution.  He has extensive experience with retirement and insurance product distribution in the U.S., Latin America and Europe as well as experience with institutional products, including 401(K) retirement plans.

Cruz earned a bachelor’s degree in finance from the University of Miami, and a certificate from SIFMA’s Securities Industry Institute at The Wharton School.  He is a general securities principal and investment advisory representative holding FINRA Series 7, 9, 24 and 63 licenses.  Cruz also serves on the membership committee of the Insured Retirement Institute (IRI).

AXA Equitable offers turn-key service for small, mid-sized plans

AXA Equitable Life has launched Retirement Gateway, a group variable annuity, to fund retirement plans for the small- to mid-size market. Nick Lane, president of the Retirement Savings division of AXA Equitable, described it as a full service retirement benefit for plan sponsors.   

Retirement Gateway includes a broad range of investment options; fiduciary support; administration support and service; and ongoing, interactive and customizable employee education and service. In addition to the traditional 401(k) plan, Gateway supports other retirement benefit plan types including profit-sharing, age-weighted/new comparability plans, money purchase plans, Safe Harbor plan provisions and a Roth 401(k) feature.

Gateway gives plan sponsors more than 100 investment options from well-known fund families and all major investment categories.

Options include:

  • A choice of Target Date and Risk-Based Asset Allocation Portfolios for investors who want a one-step approach.
  • Individualized investment options that include active, passive (index) and multi-manager styles for those who want to take a more active role in managing their portfolios.
  • A Guaranteed Investment Option (GIO) with a guaranteed fixed rate of return.
  • A Stable Value Fund that offers potential for principal protection with investment diversification.
  • Automatic Asset Rebalancing, a feature that periodically rebalances an employee’s account so the ratio of stocks to bonds resets to the account’s target asset allocation.

Gateway’s investment options can satisfy Safe Harbor provisions under ERISA Section 404(c) provisions, including Qualified Default Investment Alternatives (QDIAs) – the default investment options when employees do not indicate how they wish to invest.

Plan sponsors can choose from co-fiduciary or full fiduciary services for investment selection and monitoring offered by an independent third-party investment advisory firm. Sponsors receive quarterly plan reports including investment updates, a model investment policy statement, a performance summary, a review of investment alternatives, a summary of changes and additions, and an investment watch list.

The plan also offers a choice of bundled and unbundled recordkeeping services. With the bundled service option, an AXA Equitable retirement account manager and plan design specialist work together to create a retirement plan based on the company’s objectives and employee base. With the unbundled services, sponsors choose their own Third-Party Administrator (TPA); AXA Equitable works with the TPA to prepare compliance forms, plan testing and reports.

Gateway provides a secure web-based automated recordkeeping platform to help minimize recordkeeping tasks, increase accuracy and reduce data entry time. The platform provides extensive online reporting capabilities and enables sponsors to submit enrollment data for new plan participants; update plan information; perform numerous transactions; and access plan reports and forms.

AXA Equitable has created a proprietary education program to support the Gateway plan. An innovative, needs-based system, it is designed to aid participant’s decisions. The centerpiece is a multi-media online interactive tool that can be customized to the plan and individual participants.

Morningstar to provide mutual fund platform to eRollover

eRollover, a free online consumer destination focused on retirement planning, today announced it will provide the U.S. open-end mutual fund platform from Morningstar to eRollover members to research trailing performance, as well as the Morningstar Rating for Funds, via proprietary analytical tools.

 “This agreement with Morningstar will allow our members access to the Morningstar platform via various investment tools and screeners. Specifically, our members will be able to research mutual fund performance as well as current Morningstar Ratings for funds,” said Tim Harrington, CEO of eRollover.

eRollover was formed to fill a void in the availability of retirement planning information to the public at a time when people were frustrated over diminishing value in their IRAs and 401(k)s, and not knowing what to do, he added. “The mission of eRollover is to enable people to take control of their retirement and achieve financial independence by providing unique, independent content, so they can make informed decisions about their future.”

At eRollover, a Rollover Center enables people to  complete a 401(k) or IRA rollover.  An Education Center provides unbiased content previously not available to the general public for retirement planning. A Financial Advisor Center will provide access to professional financial advisors via an easy to use database. eRollover is headquartered in Atlanta.

Curian Capital to offer ‘income-oriented’ investment strategy

Curian Capital, LLC, a registered investment advisor that provides a fee-based wealth management platform to financial professionals, today announced the launch of the Curian Income Dynamic Risk Advantage (IDRA) Strategy.

 Designed for investors who want to generate a steady stream of income while protecting against market volatility, IDRA is available as a standalone strategy or within Curian’s new Research Select portfolios.

IDRA builds on Curian’s existing Dynamic Risk Advantage Strategy by incorporating securities that can generate income in the form of dividend payments. The strategy uses a tactical asset allocation process to shift between a group of higher-risk income-oriented investments and a lower-risk portfolio of high-quality, short-term Treasury investments. Through this process, the investor’s exposure to risk is reduced when equity markets are in decline, and increased when markets appreciate.

Curian’s Income Dynamic Risk Advantage Strategy is part of the company’s new Research Select offering, which includes two distinct sets of portfolios that focus on either asset accumulation or income distribution, and can help advisors meet a range of client objectives in a single account. The IDRA strategy is managed by Curian, with Mellon Capital Management Corporation acting as a non-discretionary sub-advisor.

Economy ‘hopelessly addicted’ to federal support: Trimtabs

The U.S. economy added 293,000 jobs in March, the sixth consecutive monthly increase, according to TrimTabs Investment Research.

“Economic growth is stronger than many forecasters and market participants realize,” said Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. “Trillions of dollars in fiscal and monetary stimulus are finally producing the desired increases in growth and employment.”

She added, however, that “while the improvement is welcome, we believe the economy is hopelessly addicted to fiscal and monetary support. Growth slowed last summer after QE1 ended, and we think it could do so again after QE2 is scheduled to end in June.”

TrimTabs’ employment estimates are based on analysis of daily income tax deposits to the U.S. Treasury from all salaried U.S. employees.  They are historically more accurate than initial estimates from the Bureau of Labor Statistics.

In a research note, TrimTabs points out that various indicators suggest the economy is strengthening:

  • Wages and salaries increased an adjusted 7.8% year-over-year in March, up from 3.3% y-o-y in January and 4.7% y-o-y in February.  Moderate economic growth is characterized by year-over-year increases between 5.0% and 5.5%. 
  • The TrimTabs Online Job Postings Index was flat in March, probably because the disaster in Japan disrupted supply chains and made hiring managers more uncertain.  Nevertheless, the index is up 11.0% this year.
  • The four-week average of new claims for unemployment insurance declined to 385,250 in the latest reporting week, the lowest level since July 2008.

Vanguard announces active, multi-manager emerging markets equity fund

Posted on March 30, 2011 by -

Vanguard has filed a registration statement with the U.S. Securities and Exchange Commission for a new actively managed emerging markets equity fund that will complement the firm’s existing emerging markets index fund.

The Vanguard Emerging Markets Select Stock Fund is expected to have an expense ratio of 0.95%, or about 40% less than the 1.68% expense ratio of the average actively managed emerging markets fund (Source: Lipper, December 31, 2010).

The fund will require a $3,000 minimum initial investment and is available only to individual investors who invest directly with Vanguard. As with many of its other international stock funds, Vanguard will assess a 2% redemption fee on shares held less than 60 days in an effort to deter short-term trading. The fee, which is not a load, is paid directly back to the fund to offset transaction costs.

The fund’s four advisors will each oversee 25% of the assets initially. They are:

  • M&G Investment Management Limited, which advises the $5 billion Vanguard Precious Metals and Mining Fund and a portion of the $18.3 billion Vanguard International Growth Fund. Portfolio managers Matthew Vaight and Michael Godfrey will use a valuation-based, return on capital-focused approach to create a portfolio with no country or sector constraints.
  • Oaktree Capital Management, L.P., which advises the $2 billion Vanguard Convertible Securities Fund. The portfolio managers, Tim Jensen and Frank Carroll, will employ a bottom-up research process to invest in a diversified portfolio, limiting exposures by country and industry to avoid concentrated bets.
  • Pzena Investment Management, LLC, which advises the $47 million Vanguard U.S. Fundamental Value Fund. (This fund is domiciled in Dublin, Ireland, and is available only to non-U.S. investors.) The firm will follow a deep value strategy to invest in stocks based on the research of the three portfolio managers, John Goetz, Caroline Cai, and Allison Fisch, supported by a team of analysts.
  • Wellington Management Company, LLP, which advises 19 Vanguard funds representing $195 billion in assets.  Portfolio manager Cheryl Duckworth, along with the deep experience of Wellington’s team of global industry analysts, will seek to add value through in-depth fundamental research.

In a recent article posted on Vanguard.com, “Practice portion control with emerging markets” (www.vanguard.com/portioncontrol), the company encouraged investors not to load up on emerging market equities.   

“Emerging markets can be an important part of an overall investment portfolio, but we suggest that investors use market capitalization as a yardstick for the appropriate amount of an investment,” said Joseph H. Davis, Ph.D., Vanguard’s chief economist.

“Today, emerging markets make up 25% of the international stock market, so we recommend that emerging markets represent no more than 25% of an investor’s international equity holdings.”

Past strong economic growth of emerging markets may not necessarily lead to strong stock returns in the future, he said. A Vanguard research paper (Investing in emerging markets: Evaluating the allure of rapid economic growth, www.vanguard.com/emresearch) published in April 2010 showed virtually no correlation between the average cross-country correlation between long-run GDP growth and long-run stock returns.

State pension reform may undermine Britain’s DB plans

Posted on March 30, 2011 by -

Last week’s announcement by the UK Chancellor of the Exchequer that the UK will simplify its two-tier state pension to a one-tier, £140-per-week ($227) plan has roiled the providers of employer-sponsored defined benefit plans in Britain, IPE.com reported.

The new reforms will disrupt the practice of “contracting out,” whereby employees could contribute to a workplace DB plan instead of making full contributions to the second-tier of the state pension, consultants warn.

Pension experts at Aon Hewitt and PwC expect that the end of contracting-out will increased the costs of DB plans by about 3.4% of employees’ salaries and lead to the closure of the few remaining DB schemes. 

Marc Hommel, pensions partner at PwC, said: “The end of this incentive will make up the minds of those few remaining employers to accelerate defined benefit closures.”

Paul McGlone, principal consultant at Aon Hewitt agreed, saying those employers that had not yet closed their DB schemes had not done so because of the complexity of such a step.

“The danger with the proposal to abolish contracting-out is that, if companies are going to have to go through a painful consultation process anyway, then they may take the opportunity to simply close the scheme at the same time and use other arrangements to fulfill their forthcoming auto-enrolment obligations,” he said.

Did Income Inequality Cause the Crisis?

Posted on March 30, 2011 by -

The disparity between the incomes of the wealthiest Americans and the incomes of the rest—especially the 180 million folks in the lowest three wealth “quintiles”—has widened over the past three decades. Lots of evidence shows this.

That widening has coincided with: a) bull markets in equities and bonds; b) ballooning public and personal indebtedness; c) a halving of the marginal tax rates on the highest earners (69.125% in 1981 to 35% in 2003).

Hmm. Are there causal links among those phenomena, or just associations? Lately, as the country has struggled to find solutions (or scapegoats) for its massive debt and deficits, that question seems worth asking. 

A recent paper, “Inequality, Leverage and Crises,” by Michael Kumhof and Romain Ranciére of the International Monetary Fund, provides some answers. The authors describe a mechanism whereby, just as the cycle of freezing and thawing splits pavement, a cycle of lending and borrowing worsens income disparity. 

Here’s how Kumhof and Ranciére explain our recent economic history:

“The key mechanism is that investors use part of their increased income to purchase additional financial assets backed by loans to workers. By doing so, they allow workers to limit their drop in consumption following their loss of income, but the large and highly persistent rise of workers’ debt-to-income ratios generates financial fragility which eventually can lead to a financial crisis,” they write.

“Prior to the crisis, increased saving at the top and increased borrowing at the bottom results in consumption inequality increasing significantly less than income inequality. Saving and borrowing patterns of both groups create an increased need for financial services and intermediation.

“As a consequence the size of the financial sector, as measured by the ratio of banks’ liabilities to GDP, increases. The crisis is characterized by large-scale household debt defaults and an abrupt output contraction as in the 2007 U.S. financial crisis.”

Sounds familiar, doesn’t it?  The downward spiral was also driven by our economy’s dependence on personal consumption and the country’s failure to put borrowed money to more productive uses:

“With 71% of the economy’s final demand coming from workers’ consumption, this output cannot be sold unless a significant share of the additional income accruing to investors is recycled back to workers by way of loans. With workers’ bargaining power, and therefore their ability to service and repay loans, only recovering very gradually, the increase in loans is extremely persistent.

“If a large share of the funds is invested productively, higher debt is more sustainable because it is supported by higher income. If instead the majority of the funds goes into investors’ consumption, or into loan growth, in other words an increasing “financialization” of the economy, the system becomes increasingly unstable and prone to crises.”

The least effective solution to the crisis, the authors claim, would be the bailouts that we’ve seen, because they perpetuate the conditions that caused the crisis. A better long-term solution, they say, would be to reduce the debt load and increase the purchasing power of rank-and-file citizens. Inequality of income hurts the rich, the poor, the economy and the country.  

© 2011 RIJ Publishing LLC. All rights reserved.

When Herds Get Overconfident, Run for Cover

Posted on March 30, 2011 by -

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.

  1. Initial errors in statistical inference caused by the representativeness heuristic.
  2. The emergence of skewed forecasts because of overconfidence and excessive extrapolation.
  3. The amplification of these views through a “risky shift” or group polarization process across the financial system.
  4. 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.”

© 2011 RIJ Publishing LLC. All rights reserved.

Profits, Politics and the Ruin of Fannie & Freddie

Posted on March 30, 2011 by -

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.

© 2011 Princeton University Press.

RIIA Marks a Few Milestones

Posted on March 24, 2011 by -

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.

© 2011 RIJ Publishing LLC. All rights reserved.

IRIC offers guidance on selecting in-plan GMWB

Posted on March 24, 2011 by -

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 -

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 -

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.   

 

Jackson launches 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 -

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 -

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 -

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.

© 2011 RIJ Publishing LLC. All rights reserved.

Putnam’s Man with a Plan

Posted on March 23, 2011 by -

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.”

© 2011 RIJ Publishing LLC. All rights reserved.