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DSG releases “2010 Retirement Income Products and Solutions Study”

Diversified Services Group, Wayne, PA, has released a synopsis of its 11th annual study of retirement income products, issues and market trends. The synopsis concludes by saying :

At the completion of last year’s report, a major retrenchment was taking place across the retirement income industry. Now, at this point in time, much of the industry has worked through much of this adjustment, and there is a resurgence of optimism among many respondents regarding the outlook for the retirement income market.
Most of the companies in this study are actively preparing for the future, rather than reacting to the recent past.
As companies focus again on building their retirement income business, they face a set of critical challenges that take into account recent market and product adjustments. These challenges include:

• Turning the retirement income market into an expansive and distinctly profitable line of business.   Employing a business model that takes into account the fact that the decumulation phase of retirement is very different from the accumulation phase.
• Acknowledging that a broad array of retirement income planning services and product solutions will be necessary to satisfy all the retirement income needs of the retail consumer.
• Solving for consumer needs that are rapidly becoming critical concerns, but do not yet have widely-accepted or appropriate solutions.

This list of challenges is by no means exhaustive, but it highlights some of the major problems that need to be targeted. How well companies respond to these, and other, challenges will ultimately determine their long-term success.

The complete in-depth Report, which covers survey findings and key perspectives from the executive interviews, is available for purchase by interested parties. For additional information about the 123-page Report from DSG’s1th Annual Retirement Income Products & Solutions Study, please contact Borden Ayers at (610) 989-1710, ext. 21 or by e-mail at [email protected].

Financial crisis report to be published January 27; Commission finds many to blame

The bipartisan Financial Crisis Inquiry Commission will publish its long-awaited and partially-leaked findings as a 576-page book on January 27, the New York Times reported Wednesday. The report is said to conclude that the crisis was not an accident, it was foreseen by many, and it was preventable.

“The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire,” the report states. “The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble.”

Wealth2k announces LTC modeling tool for advisors

Wealth2k today launched the LTC Impact Calculator, a web-based, interactive tool for showing investors the impact of long-term care costs on retirement security.

The LTC Impact Calculator uses state-specific daily rates for nursing home care, enabling advisors to visually demonstrate the impact of uninsured long-term care costs on an investor’s retirement assets. Advisors may use the tool to develop a variety of “what if” scenarios by assuming relevant factors, including:

1. The investor’s age and life expectancy
2. The duration of nursing home care
3. The capital sum of the investor’s retirement assets
4. The projected ROR on retirement assets
5. The rate of asset liquidation

The LTC Impact Calculator offers visual representations that address the effects of LTC costs on both cash flows and ending balances. Wealth2k believes that the LTC Impact Calculator will help investors better understand the value of long-term care insurance, especially in the context of safeguarding retirement security.

Wealth2k also announced that the LTC Impact Calculator will be added to Retirement Time websites, free of charge. In addition, Wealth2k’s new compliant, investor education multimedia presentation, Why Long-Term Care Insurance is Needed*, will also be added to Retirement Time websites at no additional cost.

To sign-up for The Income for Life Model, including Retirement Time, visit www.IncomeForLifeModel.com. Wealth2k is offering a 50% discount promotion on licensing costs for the first three months. The promotion applies only to new customers who sign-up by Thursday, January 27.

Natixis Expands Retirement Strategy Group

Natixis Global Associates (NGA), a global asset manager, announced that today two new key staff appointments that complete the organizational plan for its retirement strategy group.

Paul M. Davidson and Charles N. Johnson have been named to the position of vice president, retirement strategy, working with financial advisors to provide information for plan sponsors and individual investors.

Based in Dallas, Texas, Davidson heads the South Central region. Johnson is located in San Francisco, California and oversees the Western region. Both men report to Matt Coldren, executive vice president and head of the retirement strategy group located in Boston, MA.   

The announcement noted, “2010 retirement-related gross sales serviced by NGA are up 24% as compared to the previous year.”

Headquartered in Paris and Boston, Natixis Global Asset Management’s assets under management totaled $719 billion (€527 billion) as of September 30, 2010. In the U.S., NGA includes Natixis Asset Management Advisors, L.P. (a registered investment advisor).

HPconsolidates retirement plans with Fidelity  

Fidelity Investments has extended its relationship with HP (Hewlett-Packard), the world’s largest technology company, to provide its employees in North America with total retirement services for an additional five years. The extension began on January 1, 2011. The agreement extends the relationship Fidelity and HP began in 1991.

As of November 30, 2010, HP’s defined contribution assets totaled $14.2 billion.

As a part of the agreement, Fidelity will begin servicing an additional 162,500 participants in the EDS retirement plans previously serviced by other providers. In total, Fidelity will now be servicing all of HP’s retirement plan participants, covering more than 135,000 defined contribution and 192,000 defined benefit participants.

HP participants will continue to access their retirement accounts as well as planning tools through Fidelity’s NetBenefits Web site. They may also receive personal finance education and employer benefit support through HP Finance Central, a customized retirement planning portal developed by Fidelity’s Benefits Consulting business.

In addition, participants have access to virtual guidance and telephone support, Web-based workshops and seminars, plus in-person assistance at Fidelity’s 152 investor centers.

ING’s Planwithease.com reaches million 403(b) participants

ING’s U.S. Retirement Services business announced that it now reaches more than one million 403(b) retirement plan participants with its plan administration service, planwithease.com®.  

ING developed planwithease.com prior to the new IRS 403(b) regulations taking effect in January 2009, and in anticipation of the greater responsibilities that many tax-exempt plan sponsors would have under these regulatory changes.

The system was designed to assist tax-exempt employers—public schools and 501(c)(3) nonprofit organizations—with increased plan administration burdens arising out of the new 403(b) regulations.  The goal is to help them remain compliant as they manage their new role as a primary point of contact for participants initiating retirement plan transactions.  

Currently, more than 1,400 of ING’s 403(b) plan customers use planwithease.com, which

enables various retirement plan vendors to input their respective data into the system. This data is then merged so that sponsors can generate reports and conduct a number of administrative tasks required by the IRS regulations, such as annual notifications to employees, contribution limit monitoring, and review and approval of participant withdrawal requests.

The service provides participants with 24-hour access to account summary information for each of their selected vendors, and allows participants to initiate withdrawal requests, all in a secure environment.  Planwithease.com can also provide employees with electronic salary-reduction agreements, and enable them to make contribution rate changes online. Additionally, the site offers retirement planning tools and calculators to help educate employees about whether they’re on track to meet their personal retirement goals.

Mass affluent don’t expect to be rich: Merrill Edge Report

Despite reports of improving economic conditions, the mass affluent lack confidence that their financial picture will brighten in the near future, according to the Merrill Edge Report, a new semi-annual study from Bank of America Merrill Lynch that looks at the financial concerns of consumers with $50,000 to $250,000 in investment assets.

Nearly half (45%) of the mass affluent surveyed believe they will never be wealthy, even though 75% of them have a household income in excess of six figures, according to the survey.

Sixty-three percent of respondents believe that preparing for long-term goals such as retirement and college education will only get harder in the future. Nearly two in five (36%) consider themselves low-risk investors, and 45% said they are more conservative with their investment decisions today than they were a year ago.

Balancing short- and long-term financial needs is a priority for 63% of mass affluent, but they struggle to accomplish both goals. In the last year 28% of mass affluent have tapped into their long-term investments, such as retirement and college savings accounts, to meet monthly living expenses like bills or groceries (29%), and a mortgage payment or car loan (14%).

© 2011 RIJ Publishing LLC. All rights reserved.

In response to RIJ’s article last week on the Lifetime Cash Flow product from the Bank of Montreal, we received a letter from RIJ reader and guest columnist Garth Bernard, CEO of Sharper Financial Group, and former resident of Toronto.

Saying that the product “is a fair value with room for improvement,” Bernard observed that the guaranteed lifetime withdrawal riders on U.S. indexed and variable annuities offer more income than Lifetime Cash Flow (LCF) and that differences between U.S. and Canadian tax law would prevent a U.S. bank or insurer from offering an identical product. “Essentially, BMO has introduced a Canadian version of the GLWB to Canadian retirees,” he wrote.

After reviewing LCF’s data sheet and disclosures, Bernard found:

• Lifetime Cash Flow’s 10-year deferral with a payout of 6% of the original deposit for life is substantially less than a U.S. variable annuity with a GLWB would pay. LCF also provides no inflation protection.

• The initial principal deposit for LCF is invested in an illiquid structured note for the 10-year deferral period. The note’s underlying investments are mutual funds. As with a GMAB (guaranteed minimum accumulation benefit) on a U.S. variable annuity, the value of the note at the maturity date is the greater of the mutual fund value or the initial principal deposit.

• After the 10-year period, the client can receive a distribution of 6% of the original principal per year for 15 years (or take a lump sum equal to the fee-adjusted value of the underlying mutual fund account). In the 25th year, after the 10-year deferral and 15 years of distributions, the client can continue the 6% distributions regardless of the value of the underlying funds. In that sense, it is no different from a GLWB after the 10th year).
• Tax-free principal is distributed first from the LCF, followed by taxable distributions of gains. This is exactly the opposite of the tax treatment of deferred annuity distributions in the U.S., where taxable gains come out first and non-taxable distributions later. 
• BMO recommends funding an LCF with after-tax savings, allows the use of pre-tax savings. Funding with pre-tax dollars wouldn’t work in the U.S., where the illiquidity of the product during the first 10 years would prevent purchasers over age 61 from making their required minimum distributions starting at age 70½.
• The article says that the income is not insured. That’s incorrect.  If the funds are depleted to 10% of the original principal, BMO makes the payments for life. Therefore, the income is effectively insured—by the claims-paying ability of the bank. Insurance, income tax and securities laws are different in Canada. A Canadian bank can insure a product like LCF, but a non-insurance company in the U.S. could not.  
• The fees on this BMO product appear quite high in relation to the guaranteed benefits provided. Under Series 1 of the notes, the explicit fees are 275 basis points. But there is an implicit additional fee because the participation rate of the principal-protected note in the performance of the underlying fund portfolio is 75%. In other words, there is an additional fee equal to 25% of the underlying fund performance. For example, if the funds were to return a steady 6% every year, the total annual fee would be 275 bps + 150 bps (0.25 x 6%) for a total of 425 bps. The net return to the client would be only 1.75%.
• The product does provide a benefit for beneficiaries that the article doesn’t mention. The article says that payouts after year 25 do not come out of the account value. BMO’s product disclosures state however that interest distributions are paid from the account value after year 25, but 10% of the capital is preserved. Remember that only 90% of the original principal (15 x 6%) was distributed by year 25. So, instead of tapping into its own reserves when the account value goes to zero, BMO taps in when the account value reaches 10% of principal. As a result they leave 10% of the original principal for beneficiaries.

“In conclusion,” Bernard wrote, “this product resembles a VA with two riders. The first rider is a 10-year GMAB with no guaranteed increase (“rollup”) in the benefit base; the second is a 6% GLWB with a 10-year waiting period, no rollup, and no step-ups (mark-ups of the benefit base to the account value).

“The Canadian version differs in that there is no liquidity for the first 10 years (not possible under U.S.-regulated deferred variable annuities), and the fees would be comparable to those of a relatively rich U.S. benefit. I would speculate that the profits on LCF would have to be high relative to variable annuity profits because reserve requirements are higher in Canada than in the U.S.

“As a result, makers of U.S. annuities—variable annuities with GLWBs, fixed indexed annuities with GLWBs, and 10-year deferred income annuities  (which currently yield 11% of principal for life at age 65 when purchased by a 55-year-old male from Symetra)—probably wouldn’t want to issue a product identical to LCF even if they could.”

© 2011 RIJ Publishing LLC. All rights reserved.

In the 1990s, Poles faced a situation like the one the U.S. faced in early 2005, when Social Security reform dominated domestic politics. Supporters of reforming Poland’s state pension, including the central bank, the stock exchange, and the pension fund industry, said the state pension was unsustainable because of Poland’s aging population. They called for a diversion of a portion of the payroll tax to privately-run DC pension funds.

Pension reform was enacted. Poles used to contribute 19.5% of their pay to the DB state pension. Since the reforms, however, they’ve diverted 7.3% of that to the DC pensions. But the government can’t seem to afford the diversion away from public coffers. Its public debt is 55.5% of GDP. Anything over 55% triggers automatic public spending cuts, including freezes of pension benefit increases.

In the 2000s, the privately-run pension funds were roiled by financial crises. Personal account values fell, jeopardizing retirement security.  Liberals now argue that the pension reforms of the 1990s were a mistake.  

Last autumn, prime minister Donald Tusk told his chief adviser, Michael Boni, to revise the rules for managing the DC funds. Boni’s proposals were published in October and included:

• Target-date investing. The existing, one-size-fits-all portfolio, which includes an equity cap of 40% of the net asset value of the portfolio, and a 5% limit on overseas investment, would be replaced with three sub-funds, A, B and C. “A,” for new entrants to the labour market, would be a high risk, high- growth portfolio. The equity limit for “B” would be raised to 45%, for mid-career workers. When workers reach 55, their funds would be incrementally transferred to “C,” a low-risk portfolio with a 15% limit on equities. Workers could delay or accelerate their move to “C” by up to five years.
• Lower fees. A reduction in the up-front management fee, currently capped at 3.5% of contributions, to 2.8% for sub-funds A and B, and 2.1% for sub-fund B. However, as an incentive to improve performance, the pension fund management companies could earn a 2% profit fee.
• No more costly poaching. Client soliciting (acquisition) by pension fund companies of members of other funds will be curtailed and banned outright by 2014. In the meantime, agents would only be able to contact by email, phone or post, not in person. The reasoning is that the management companies are spending large sums of monies on poaching each others’ clients. Companies competing for new entrants to the labour market would have to supply them with historical returns.

In mid-November, Boni proposed the creation of retirement (pension) bonds. Returns of the illiquid bonds, in 20 and 30-year maturities, would be linked to GDP growth and redeemable at maturity by the state Treasury. Boni assured the parliament that the bonds would not count as public debt under EU criteria. Most observers are said to be baffled by the proposal.

Prime minister Tusk at one point suggested that participation in the DC schemes could be voluntary. His deputy, Waldemar Pawlak, announced that the 2011 budget was being drafted on the basis of suspended contributions, but Pawlak was contradicted by the finance ministry, which drafts the budget. Tusk has reassured pension fund members and the markets generally that he won’t adopt Hungary’s strategy of effectively nationalizing its DC system.

As of 2011, Polish DC contributions will be reduced to 5% from 7.3%. The reduction in new DC monies could total close to €5bn in 2009 and €4.4bn in the first three quarters of 2010. That will hurt the Warsaw Stock Exchange and the Polish private pension funds, which are heavily invested in equities. According to the stock exchange, in the first half of 2010, payroll DC contributions funded 21% of equity trading.

With 65-odd IPOs completed in the first 11 months of 2010, the Warsaw exchange is also one of Europe’s leading venues for new issues. The exchange is concerned that reduced DC contributions would decrease liquidity and reduce available capital. Fifteen IPOs set for November 2010 were reportedly postponed due to the prospect of declining pension contributions. 

© 2011 RIJ Publishing LLC. All rights reserved.

The Annuity Solutions division of Morningstar has published a report summarizing the variable annuity industry highlights of 2010 and predicting that “the pendulum [will] swing back toward more generous benefits during 2011” after the de-risking trend of 2009 and early 2010.

The report, “Continued Innovation Helps Fuel VA Sales in 2010,” also noted new filings of products not yet available:

• Allianz filed a Lifetime GMWB with a guaranteed withdrawal percentage based not on age, but on the rate of a 10-year treasury note. This ties payouts directly to market performance, removing the age factor. The benefit has not been rolled out yet.

• Lincoln National filed a new long-term care benefit that pays a monthly amount for long-term care expenses and costs 1.26% to 1.57%, depending on options chosen (fee calculation is complicated). This benefit pays for long-term care expenses up to three times the initial purchase amount (which must range from $50,000 to $400,000). Payments are offered monthly beginning after the first anniversary and are not taxable. The optional Growth feature gives the ability to increase the monthly maximum benefit amount using a calculation based on the investment growth and the remaining benefit base. The Growth option has a step-up feature through age 76. The benefit is capped at $800,000, covers a single life, and applies only to non-qualified assets.

© 2011 RIJ Publishing LLC. All rights reserved.

Income earned from the sale of annuities at bank holding companies (BHCs) declined 7.6% to $1.84 billion in the first three quarters of 2010, down from $2 billion in the first three quarters of 2009, according to the Michael White-ABIA Bank Annuity Fee Income Report. 

Wells Fargo & Company (CA), Morgan Stanley (NY),  JPMorgan Chase & Co. (NY) and Bank of America (NC) led all bank holding companies in annuity commission income in the first three quarters of 2010, accounting for just under 60% of the total for BHCs. Wells Fargo became a leader in bank annuity sales by acquiring Wachovia Bank in the financial crisis.

Morgan Stanley and BBVA USA Bancshares (TX) posted the greatest annuity commission growth, with 41% and 26% higher sales through the first three quarters of 2010 compared to the same period in 2009.  JP Morgan Chase, Bank of America, PNC Financial, and SunTrust all posted double-digit declines, year-over-year.  

Third-quarter annuity commissions fell 3.1%, to $621.3 million from $640.9 million in 2Q 2010 and 7.3% less than the $669.8 million earned in 3Q 2009.

Compiled by Michael White Associates and sponsored by the American Bankers Insurance Association, the report measures and benchmarks the banking industry’s annuity fee income. It is based on data from all 7,020 commercial and FDIC-supervised banks and 915 large top-tier bank holding companies operating on September 30, 2010.

Of the 915 BHCs, 386 or 42.2% sold annuities during the first three quarters of 2010. Their $1.84 billion in annuity commissions and fees constituted 11% of their total mutual fund and annuity income of $16.84 billion and 15.9% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $11.6 billion.

Of the 7,020 banks, 923 or only 13.2% sold annuities, earning $560.9 million in annuity commissions or 30.4% of the banking industry’s total annuity fee income. However, bank annuity production was down 20.5% from $705.5 million in the first three quarters of 2009.

Seventy-four percent (74%) of BHCs with over $10 billion in assets earned third quarter year-to-date annuity commissions of $1.74 billion, constituting 94.1% of total annuity commissions reported. This was a decrease of 8.1% from $1.89 billion in annuity fee income in the first three quarters of 2009.

Among this asset class of largest BHCs in the first three quarters, annuity commissions made up 10.5% of their total mutual fund and annuity income of $16.59 billion and 15.9% of their total insurance sales volume of $10.92 billion.

BHCs with assets of $1 billion to $10 billion recorded a slim 0.2% increase in annuity fee income, rising to $91.6 million in the first three quarters of 2010 from $91.4 in the same period a year before and accounting for 36.7% of their mutual fund and annuity income of $249.6 million.

BHCs with $500 million to $1 billion in assets generated $16.9 million in annuity commissions in the first three quarters of 2010, up 1.0% from $16.7 million in the first three quarters of 2009.

Only 33.5% of BHCs this size engaged in annuity sales activities, which was the lowest participation rate among all BHC asset classes. Their annuity commissions constituted just 13.3% of their total insurance sales volume of $127.5 million.

Among BHCs with assets between $1 billion and $10 billion, leaders included Stifel Financial Corp. (MO), Hancock Holding Company (MS), and National Penn Bancshares, Inc. (PA).

Among BHCs with assets between $500 million and $1 billion, leaders were First American International Corp. (NY), CCB Financial Corporation (MO), and Ironhorse Financial Group, Inc. (OK).

© 2011 RIJ Publishing LLC. All rights reserved.

In a risk-reduction move that was first announced early last December, Prudential is reducing the size of the roll-up guaranteed by its top-selling Highest Daily Lifetime variable annuity rider to 5% per year until the first withdrawal from 6% per year.

Prudential was the largest seller of variable annuities through the first three quarters of 2010, with $15.55 billion in total sales.

On future sales, a new Highest Daily Lifetime and a Spousal Highest Daily Lifetime rider will replace the existing Highest Daily Lifetime 6. Under the rider, the benefit base—the notional amount on which the future annual payouts will be calculated—ratchets up at an annualized compounded rate of 5% every business day or grows with the account value, whichever is greater.

The benefit base grows as long as withdrawals are deferred, and the benefit base is guaranteed to double after 12 years if withdrawals are deferred for that time. After income payments begin, at the rate of 2.6% to 6% per year depending on the age of first withdrawal.

The mortality and expense risk fee for Prudential variable annuities ranges from 55 to 185 basis points, depending on the share class. The HD lifetime income rider is available for an additional 95 basis points. Investment management fees are extra. 

Prudential controls the downside risk of the product by automatically re-allocating assets out of equities and into an investment grade bond portfolio when equity prices fall. This method, a form of Constant Proportion Portfolio Insurance, tends to limit losses during bear markets but may also prevent the account value from reaching new high-water marks during a recovery.

© 2011 RIJ Publishing LLC. All rights reserved.

Most target-date fund investors understand the funds’ basic design and their risks, but need “education about the highly diversified nature of a single-target date fund,” according to a new study by Vanguard, the second-largest manager of target-date funds in the U.S.

In its Investor Comprehension and Usage of Target-Date Funds: 2010 Survey, Vanguard also found “opportunities exist to improve investors’ knowledge of target-date fund (TDF) mechanics at and around the target date, and the implications of combining TDFs with other assets.”

The study showed that only 62% of plan participants who owned TDFs had ever heard of a TDF.  That finding didn’t surprise Vanguard, since most of those participants were probably defaulted into TDFs and, ipso facto, didn’t need to know or understand them.     

 “Participants who are not aware of TDFs are likely to be unengaged investors—and these funds are intended to provide such investors with a prudently diversified portfolio,” said John Ameriks, head of Vanguard Investment Counseling & Research.

The study was released this month, prior to the Department of Labor’s deadline for comments on proposed regulations on disclosures for TDFs, which came under Congressional and regulatory scrutiny after they failed to protect near-retirement investors from significant losses in the 2008-2009 financial crisis.

For the study, Vanguard in January 2010 surveyed 4,700 Vanguard IRA owners and participants in Vanguard-administered retirement plans, some of who owned TDFs and some who didn’t.  

Among Vanguard’s findings:

• Some 95% of TDF investors in IRA accounts reported having “heard of a target-date fund,” versus 62% of TDF owners in defined contribution retirement plans. Vanguard wasn’t surprised, because participants are frequently defaulted into TDFs.
• Only 24% of the participants knew that the asset allocation of most TDFs continues to change after the target year. 
• 61% of participants said they chose TDFs because they wanted “a balanced portfolio, simplicity, and convenience.”
• Among investors who hold other investments along with a TDF, 56% said they did so to hold “more aggressive investments.” Another 41% thought they needed a mixed portfolio for adequate diversification.
• 75% of participants said they intended to gradually draw down their target-date fund assets.
• more than 90% of the respondents plan to have an equity position in their portfolio at retirement.
• 77% knew that the asset allocation becomes more conservative as the target year approaches, showing an understanding of these funds’ changing asset allocation.
• 68% recognized that target-date funds offer a diversified mix of stock and bonds. (Diversification does not ensure a profit or protect against a loss in a declining market.)
• 87% believed target-date funds involve “some risk” or more; less than 1% felt they were risk-free.
• Only 8% of participants incorrectly believed that target-date funds provide “guaranteed income” and only 4% of participants incorrectly indicated that TDFs provide a guaranteed return or become risk-free at the target date.        

© 2011 RIJ Publishing LLC. All rights reserved.