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New Tax Relief Bill Summarized by FPA, CCH

Posted on December 21, 2010 by -

The Financial Planning Association has issued a useful summary of the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” by Congress, which President Obama signed earlier this month. CCH has also issued a Special Tax Briefing on the Act. 

The legislation, which will cost the U.S. Treasury an estimated $857 billion in uncollected taxes, will provide guidance for taxpayers and planners with respect to tax rates, the Alternative Minimum Tax, estate and gift taxes, and certain expired tax provisions.  

An individual earning $50,000 in 2011 will see a $1,890 tax savings in combined income tax and payroll tax rate reductions over what was scheduled under the EGTRRA sunset, according to CCH. The payroll tax holiday alone is estimated to inject $120 billion into the economy in 2011.

The Tax Relief bill will provide:

Two-year extension of all current tax rates through 2012

  • Rates remain 10, 25, 28, 33, and 35 percent
  • 2-year extension of reduced 0 or 15 percent rate for capital gains & dividends
  • 2-year continued repeal of Personal Exemption Phase-out (PEP) & itemized deduction limitation (Pease

Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010, 2011, 2012

  • Reunification of estate and gift taxes
  • 35% top rate and $5 million exemption for estate, gift and GST
  • Alternatively, taxpayer may choose modified carryover basis for 2010
  • Unused exemption may be transferred to spouse
  • Exemption amount indexed for inflation in 2012

AMT Patch for 2010 and 2011

  • Increases the exemption amounts for 2010 to $47,450 ($72,450 married filing jointly) and for 2011 to $48,450 ($74,450 married filing jointly).  It also allows the nonrefundable personal credits against the AMT.

Extension of “tax extenders” for 2010 and 2011

  • Tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes 
  • Above-the-line deduction for qualified tuition and related expenses
  • Expanded Coverdell Accounts and definition of education expenses
  • American Opportunity Tax Credit for tuition expenses of up to $2,500
  • Deduction of state and local general sales taxes
  • 30-percent credit for energy-efficiency improvements to the home (IRC section 25C)
  • Exclusion of qualified small business capital gains (IRC§1202)

Temporary Employee Payroll Tax Cut

  • Provides a payroll tax holiday during 2011 of two percentage points. Employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800. 

2010 tax relief act revenue cost of $857 billion includes: 

  • Individual tax cuts: $186 billion
  • AMT Relief: $136 billion
  • Payroll tax deduction: $111 billion
  • Estate/gift tax relief: $68 billion
  • Capital gains/ dividend cuts: $53 billion
  • Bonus depreciation/179 expensing: $21 billion
  • Unemployment Insurance Extension, $56 billion.
  • Other: $226 billion

HR 4337 modernizes tax code treatment of investment firms

Posted on December 21, 2010 by -

The Regulated Investment Company Modernization Act of 2010 this fall, which is now headed to President Obama’s desk for an expected signature, will

  • Reduce the burden arising from amended year-end tax information statements
  • Improve a mutual fund’s ability to meet its distribution requirements
  • Create remedies for inadvertent mutual fund qualification failures
  • Improve the tax treatment of investments in a fund-of-funds structure
  • Update the tax treatment of fund capital losses

according to a new white paper from Wolters Kluwer Law & Business, which produces information products under the CCH and Aspen names.

Specifically, the legislation:

§ Creates a special rule allowing unlimited carryovers of the net capital losses of regulated investment companies.

§ Exempts regulated investment companies from loss of tax-preferred status and additional taxes for failure to satisfy the gross income and assets tests if that failure is de minimis and is due to reasonable cause and not willful neglect.

§ Revises the definitions of “capital gain dividend” and “exempt-interest dividend” for purposes of the taxation of funds and their shareholders to require that dividends be reported to shareholders in written statements.

§ Allows a qualified fund of funds to pay exempt-interest dividends and allow its shareholders the foreign tax credit without regard to certain requirements that the fund of funds invest in state and local bonds or foreign securities.

§ Modifies rules for dividends paid by funds after the close of a taxable year (so- called spillover dividends).

§ Revises the method for allocating fund earnings and profits to require those earnings and profits to be allocated first to distributions made prior to December 31 of a calendar year.

§ Allows funds with shares that are redeemable on demand to treat distributions in redemption of stock as an exchange for income-tax purposes.

§ Excludes net capital losses of funds from earnings and profits.

§ Prohibits earnings and profits from being reduced by any amount that is not

      allowable as a deduction in computing taxable income, except with respect to a

      net capital loss.

§ Repeals preferential dividend rules for funds that are publicly offered

§ Allows funds to elect to treat a post-October capital loss and any late-year

      ordinary loss as arising on the first day of the following taxable year.

§ Exempts from holding-period requirements regular dividends paid by a fund that

      declares exempt-interest dividends on a daily basis in an amount equal to at least

      90 percent of its net tax-exempt interest and distributes those dividends at least

      monthly.

§ Extends the exemption from excise tax of failure to distribute taxable income of a

      fund to other tax-exempt entities with an ownership interest in a fund.

§ Allows specified gains and losses of a fund derived after October 31 to be

      deferred, for excise-tax purposes, until January 1 of the following calendar year

§ Creates a special rule for estimated excise-tax payments of funds.

§ Increases from 98 percent to 98.2 percent the amount of capital gain net income

      funds must distribute.

© 2010 RIJ Publishing LLC. All rights reserved.

Unmet Expectations

Posted on December 21, 2010 by -

With the first of 78 million baby boomers reaching the milestone age of 65 in 2011, the timing of the publication of a special section on Retirement Income Planning the Journal of Financial Planning this month was certainly appropriate. This piece of research has not arrived on planner’s desks (in print or via the Web) without controversy, however.

The always-forthright financial planning industry pundit, Bob Veres, reviewed it harshly. In fact, he called for “an honest debate about whether [the Financial Planning Association’s] research department is offering any value with these various reports and studies.” Ouch.

Was Veres unfair? Subscribers to Veres’ Inside Information can read his full review and draw their own conclusions.

But I too was disappointed in this four-part special section. I thought it was too superficial a treatment of what is an important topic for financial planners. In the following appraisal, I’ll try to assess the value of the articles in it, which include a write-up of a survey of financial advisors, a Q&A session with advisor Roy Diliberto, an article on creating a “hierarchy of funds” and an article that compares Social Security claiming strategies for couples.     

Part I: The FPA Survey

The first section, a write-up of the results of a survey of 425 Financial Planning Association, was entitled, “Planners Find Success with Retirement Income Strategies.” The title surprised me. Anecdotal evidence tells me that relatively few planners use retirement income strategies; most of them apply the same old systematic withdrawal strategies.

And, given what I know about America’s inadequate savings rate, abandonment of defined benefit plans, and under-utilization of products with longevity guarantees, I don’t see a whole lot of success to celebrate. 

Systematic withdrawal strategies without guarantees may work fine wealthier for Americans—to whom financial planners unquestionably cater to a wealthier class of people. But planners should consider the use of income guarantees for clients of more modest means.

The JFP survey shows that the decumulation strategies used most frequently by planners are “structured systematic withdrawal ” (50%) and the “time-based segmentation,” aka the “bucket method” (28%). The methods that do focus on guaranteed income, the “essential versus discretionary approach” and “Social Security and/or pension” approach, are used by only 14% and 4%, respectively.

The times are changing. But most planners are not.   

The survey discussion ends by talking about withdrawal rates based on findings that average estimated safe withdrawal rates have increased from 4.4% in 2009 to 4.75% in 2010. Dialog with financial planning heavy hitters Michael Kitces and Jonathan Guyton is also included.

Kitces’ original research on the impact of market valuations on withdrawal rates uses historic data to show safe withdrawal rates as a function of the P/E 10 valuation measure, which was popularized by Robert Shiller.

Kitces’ “always historically safe” withdrawal rate ranges from 4.4% for the highest (19.9 to 28.7) P/E quintile to 5.7% for the lowest (5.4 to 12.0) quintile. The P/E 10 measure is now around 23 with the S&P 500 at 1240, indicating that 4.75% may be a bit aggressive.

Part II: “Using a Hierarchy of Funds to Reach Client Goals”

This article rather grandly declares that it’s time to move from modern portfolio theory (MPT) to what the authors call modern retirement theory (MRT).  I can’t disagree with that. But they don’t build much on that. Their core argument simply asserts the desirability of splitting expenses into essential and discretionary, and funding the two types of expenses differently.

The authors propose funding essential expenses with conservative investments and annuities while funding discretionary expenses with riskier products. They recommend an additional bucket for emergencies expenses, funded with highly liquid investments, and a bequest bucket, if desired, filled with long-term volatile investments.

Personally, I believe that a method based on these general guidelines can be particularly useful in helping clients of average means achieve a higher level of financial security in retirement. The fact that it may be more suitable for middle-class clients than wealthy clients might explain why, as the JFP’s own survey shows, only 14% of planners use it. 

Part III: “Life Planning Meets Retirement Planning”

In this brief interview with a JFP editor, advisor Roy Diliberto attempts to articulate the difference between financial planning and life planning. As many advisors can attest, not everyone who excels at textbook financial planning can be an effective life planner. Life planning requires some of the skills, if not the actual certifications, of a clinical psychologist.

The unspoken topic here is behavioral economics, and the application of behavioral economics theory to decumulation strategies is a new and potentially fruitful topic for discussion. In the past, researchers like Daniel Kahneman and Richard Thaler have explored the behavioral aspects of accumulation, but there’s been little discussion of the implications of behavioral economics for decumulation.   

The interview with Diliberto, who is CEO of Philadelphia-based RTD Financial Advisors, Inc., raises hopes for such a discussion but ultimately disappoints because of the sheer familiarity of the responses. Not that they aren’t sensible. For instance, instead of asking clients, “When do you plan to retire?” he prefers to help clients imagine specific activities at specific life stages. That’s perfectly reasonable, but it’s not new or interesting.

Similarly, he rejects the assumption that most people will spend less in retirement—but few advisors still assume that anyway. When the interviewer asked, provocatively, “What happens when what clients say about their retirement goals doesn’t line up with the actions they take?” Diliberto responds with a reference to clients who feel financially insecure even when they have not reason to. His answers are interesting—but the interview broke no new ground. 

Part IV: “5 Social Security Strategies for Couples”  

In its discussion of the economic impact of various Social Security claiming strategies for couples, this article is quite useful. It helps raise awareness about the financial benefits of delaying claiming Social Security. It also makes clear that, because the benefit level transfers in full to the surviving spouse, Social Security might best be thought of as a “last-to-die” annuity. 

However, an article by William Meyer and William Reichenstein in the March 2010 issue of the Journal of Financial Planning covers similar ground better. Why do I say that? Fahlund postulates a single instance of a couple where the husband dies at age 80 and the wife dies at 95. Meyer and Reichenstein build mortality tables into their analysis so that they can show probability-weighted results. Second, Fahlund evaluates strategies based on total lifetime payouts where Meyer and Reichenstein calculate the present values of lifetime payouts.

In sum, I had hoped to find fresh, practical ideas in JFP’s special section on Retirement Income Planning. Given the importance of the topic, I expected material with greater depth, seriousness and ambition. But my expectations went largely unmet.

You can reach Joe Tomlinson at [email protected].

© 2010 RIJ Publishing LLC. All rights reserved.

Boomers’ Inheritance Estimated at $8.4 Trillion

Posted on December 15, 2010 by -

Baby Boomers, whose financial portfolios have been the focus of much discussion about poor economic prospects, may be finding a ray of hope in the distinct possibility that they will receive an inheritance, according to “The MetLife Study of Inheritance and Wealth Transfer to Baby Boomers.”

“Policymakers should recognize that inheritances are not a silver bullet to achieve retirement security. They should be developing policies and programs to boost Americans’ savings and promote longer work lives.”

The study, authored by the Center for Retirement Research at Boston College for the MetLife Mature Market Institute, reports that Boomers will inherit $8.4 trillion at 2009 levels. The median per person figure is $64,000. $2.4 trillion has already been received.

The figures, drawn from national survey data, say the wealthiest Boomers will be given an average of $1.5 million, while those at the other end of the spectrum will be left $27,000, an amount that represents a larger percentage of the latter group’s overall wealth. Two-thirds of all Boomers stand to receive some inheritance over their lifetime.

Additionally, the study reports that the Boomer cohort has or will receive a substantial sum from their parents while the older generation is still alive, increasing the total transfer of assets from $8.4 trillion to $11.6 trillion.

Total household wealth for Americans of all ages amounted to $65.9 trillion in 2007 (adjusted to 2009 levels), making the Boomers’ inheritance a significant portion of total American wealth.

Sandra Timmermann, Ed.D., director of the MetLife Mature Market Institute, cautions, however, “Regardless of the anticipated amount, any prospective inheritance is uncertain. Parents or grandparents who expect to leave a bequest may revise their plans based on fluctuations in their asset values. Wealth may be consumed by medical and long-term care costs, or simply by virtue of long life. In short, Boomer households should not count on an anticipated inheritance and forego the need for increased financial planning and retirement saving.”

According to Alicia H. Munnell, a co-author of the study and director of the Center for Retirement Research at Boston College, “Policymakers should recognize that inheritances are not a silver bullet to achieve retirement security. They should be developing policies and programs to boost Americans’ savings and promote longer work lives.

“It is also recommended,” said Ms. Munnell, “that the subject of inheritance among the Boomers be used to generate family discussions about estate planning. While not everyone will be comfortable engaging on this topic, those who do so will likely find it helpful. A trusted family financial advisor may be useful in this regard.”

Other key findings of the study include:

  • Most Boomers will receive their inheritances in late middle age, upon the death of the surviving parent. To date, the overwhelming majority of inheritances are passed from parents to children (63% of inheritances and 74% of dollars); grandparents are the second most common source. Few Boomers now have living grandparents, but a majority had at least one living parent.
  • Although only 17% of Boomers had received an inheritance by 2007, two-thirds will eventually receive one. The incidence of receipt increases with income, but 50% or more of households at all income levels will eventually receive an inheritance.
  • Though high-wealth households receive much larger inheritances in dollar terms, these amounts represent a smaller share of their wealth—22% for those in the top tenth compared to 64% for those in the second-to-bottom tenth.
  • Considering only past inheritances, the median amount Boomers received by 2007—adjusted for inflation—is about the same as that received by the preceding 1927–1945 birth cohort at the same ages.

Data were analyzed from the Survey of Consumer Finances (SCF), a triennial survey that over samples wealthy households (latest data available 2007). For data on prospective inheritance receipts, the study relied on the 2006 Health and Retirement Study (HRS), a nationally representative panel of individuals born before 1954 and their spouses of any age

“The MetLife Study of Inheritance and Wealth Transfer to Baby Boomers” may be downloaded from www.MatureMarketInstitute.com.

Sun Life’s New VA Riders Have New Risk Controls

Posted on December 15, 2010 by -

Sun Life Financial Inc. has launched two new variable living benefit riders, an Income Maximizer that provides an annual 8% simple interest roll-up of the guaranteed income base until withdrawals are taken and an Income Maximizer Plus that also offers a 2.5% increase in income payments every year after the contract owner turns on the guaranteed income.

The riders are available on Sun Life Financial Masters variable annuities, including the Masters Flex II (4-year surrender, 1.65% M&E), Masters Choice II (7-year surrender, 1.35% M&E), and Masters Extra II, a bonus contract with 1.70% M&E).

Through the third quarter of 2010, Sun Life, the U.S. unit of Toronto-based Sun Life Financial Services of Canada, was ranked 11th in variable annuity sales in the U.S., with $2.52 billion in premiums so far this year, according to Morningstar. In mid 2009, Sun Life was the 15th-ranked seller of VAs in the U.S.

These gains came after the migration of three former Lincoln Financial Group executives to Sun Life, whose U.S. headquarters is in Wellesley, Mass., in October 8. Former Lincoln CEO Jon Boscia came out of retirement to take over Sun Life’s U.S. operations. Wes Thompson, then the head of Lincoln’s retirement solutions, and Terry Mullen, who ran Lincoln Financial Distributors, went to Sun Life at the same time.  

Steve Deschenes, senior vice president and general manager for annuities at Sun Life Financial (U.S.), told RIJ,  “This is not re-starting the variable annuity arms race. It’s a prudent tradeoff between risk management” and attractive guarantees.

In describing the Maximizer Plus, Deschenes did not use the term “inflation-protection” to describe a feature that offers the same 2.5% uptick in payout each year, regardless of whether the Consumer Price Index goes up by more or less than that—and even if it goes down.  “Think of it as a merit increase,” he said. “We’re saying, ‘It’s like a continuation of the 2.5% raise that you expected when you were working.’”

The increases don’t come free, however. A 65-year-old contract owner would get annual payouts starting at 4% of the income base if he or she opted for the Maximizer Plus, instead of the 5% payout on the Maximizer.

For example, the income from a $100,000 benefit base would be $4,000 the first year, and go up to at least $4,100 the second year, to $4,202.50 the second year, and so on. “It crosses over at about age 74,” Deschenes said. Also, Maximizer Plus costs 125 basis points a year, compared to 110 basis points (130 bps for joint life) for Maximizer. The Maximizer rider fee is capped at 1.75%, which gives Sun Life some flexibility to adapt to volatility while limiting the investors’ exposure to rising costs.

The Maximizer provides an 8% increase in the benefit base every year until the contract owner takes a withdrawal from the contract. This is up from the 7% roll-up previously offered on Sun Life variable annuities. If the owner takes no withdrawals for 10 years, the benefit base is automatically at least double the initial premium.

Like most variable annuities with living benefits, this product isn’t cheap. According to an example on Sun Life’s website, insurance and average investment management costs of 111 basis points could push the product’s expense ratio to 3.65%, or almost half of the 8% return that investors typically hope for from balanced portfolios and not far below the typical annual income payment in retirement.

Deschenes said Sun Life has instituted some new risk management techniques since the financial crisis. “Last February, we put four core retirement funds in the contracts that have internal volatility controls. Those funds are partly self-hedging because they change the asset allocation” in response to volatility. “We also gave ourselves the ability to change the price on the rider if future market conditions and volatility require it,” he told RIJ.

“Some of our PIMCO funds, for instance, also manage to a maximum 15% decline by buying out-of-the-money puts inside the fund. If the cost of the puts exceeds their budget, they’ll buy fewer puts and reduce the equity exposure of the fund,” Deschenes said, noting that MFS and Ibbotson worked with Sun Life on risk management strategies.

© 2010 RIJ Publishing LLC. All rights reserved.

 

 

 

The Bucket

Posted on December 15, 2010 by -

Guardian adds retirement investment options  

 The Guardian Insurance & Annuity Company, Inc. (GIAC), a unit of The Guardian Life Insurance Company of America (Guardian), is introducing an enhanced fund lineup for its group retirement product platform. 

The new investment options available to The Guardian Choice group variable funding agreement and The Guardian Advantage group variable annuity retirement products will provide more investment choices for investors. The Guardian Advantage will also provide the opportunity for retirement plans to decrease overall fund costs to participants.

The Guardian Advantage will now offer 25 new funds in a variety of asset classes with some existing investment options now being offered in a lower expense share class.  The Guardian Choice fund will add an additional 17 funds in which one existing investment option will offer a share class change consistent within its specific fund family.   

New York Life adds installment refund feature to SPIA

New York Life Insurance and Annuity announced the launch of an Installment Refund feature to provide its lifetime income annuity policy owners another option to guarantee a return of premium.

“The Installment Refund option expands on our most utilized legacy feature, the Cash Refund option.  Providing retirees the comfort of a paycheck every month with the added benefit that their beneficiaries will be provided for has remained a popular choice among retirees and we anticipate the Installment Refund feature will be a well-received addition to the features and benefits on our lifetime income annuity,” said Matt Grove, vice president of Retirement Income Security, New York Life. 

The Installment Refund feature provides its lifetime income annuitants the ability to provide their beneficiaries with the return of premium, less all payments made, on a scheduled installment basis.

In addition to the new Installment Refund option, the other legacy options include the Cash Refund option, where the beneficiaries will receive a lump sum equaling the premium less all payments made and the percent of premium death benefit, which offers beneficiaries a death benefit totaling 25% or 50% of the original premium chosen at policy issue.

  • Consumers can access their investment in the policy beyond the scheduled income payments in the event additional funds are needed due to unexpected circumstances. Each policy includes two withdrawal features that provide access to cash after the policyholder is at least age 59½—a Payment Acceleration feature and Cash Withdrawal feature:
  • Payment Acceleration allows policy owners to receive their next scheduled monthly payment, along with the five subsequent payments — for a total of six months of income payments all at once. When this option is exercised, income payments will not be paid for the next five months.
  • Cash Withdrawal provides a one-time opportunity to receive the discounted value of future payments through one of two features: “Up to 100%” Cash Withdrawal which allows policy owners to withdraw up to 100% of the discounted value of remaining guaranteed payments at any time during the guaranteed period; and the 30% Cash Withdrawal feature allows policy owners to withdraw 30% of the discounted value of future expected payments, and may be exercised on certain policy anniversaries or at any time upon proof of a significant, non-medical financial loss.

John Kim adds responsibilities at New York Life

Executive vice president John Y. Kim will succeed Gary Wendlandt as chairman of New York Life Investments and as chief investment officer of New York Life Insurance Company on January 1, 2011, the mutual insurer announced.

Kim is currently president and CEO of New York Life Investments, which manages $275 billion. His new title will be chairman and CEO of Investments. He reports to New York Life chairman Ted Mathas and is a member of the executive management committee. 

Kim, a graduate of the University of Michigan who holds an MBA from the University of Connecticut, joined New York Life in 2008. He had previously been president of Prudential Retirement and president of CIGNA Retirement and Investment Services. He also spent 17 years with Aetna Life & Casualty, where he was CEO and CIO of Aeltus Investment Management and CIO of Aetna Life Insurance and Annuity Company.   

Investors with advisors save more: ING

A new ING Retirement Research Institute study shows that people who spend time with a financial professional report saving two to three times more for retirement than peers who do not use an advisor. Those with advisors “feel more knowledgeable about investments and more confident in their ability to enjoy retirement,” the company said in a release.

The findings were generated from data captured by ING’s free peer comparison web-tool, INGCompareMe.com, which went live in 1999. It allows anyone to benchmark himself or herself anonymously against other investors on financial behavior.

Since 2009, tens of thousands of people have used the tool. 

The study analyzed data on more than 14,000 users who entered their profile information into INGCompareMe.com and answered a specific question about how much time they spent with a financial professional to discuss investments and their financial future (possible response choices ranged from no time to a lot of time).

Nearly one-third (31%) indicated they spent some time with a financial professional. Among the findings:

More savings. Those who spent a lot of time with an advisor said they saved, on average, more than three times as much for retirement as those who spent no time at all.  

Greater knowledge. About 58% of those who spent a lot of time with a financial professional believed they knew more about investments than their peers.  

More confidence. Six in ten of those who spent some time or a lot of time with an advisor considered themselves to be moderate investors.   Those who spent very little or no time with an advisor were more conservative.

More optimism. More than 60% of those who spent a lot of time with a financial professional said they were highly confident about enjoying their retirement, compared to 34% who spent no time.  

Pension funding fell $22 bn in November: Milliman

In November, the Milliman 100 Pension Funding Index, which consists of 100 of the nation’s largest defined benefit pension plans, showed that these plans experienced asset decreases of $8 billion and liability increases of $14 billion.

The result was a $22 billion decrease in pension funded status for the month. November’s decline in funded status follows two months of improvement and leaves the pension funding deficit at $335 billion.

“It seems likely that these 100 pensions will end 2010 with a decline in funded status compared to where they were at the end of 2009,” said John Ehrhardt, co-author of the Index. “Companies are now turning their attention to 2011 and what it will take to improve funded status in what looks likely to be a big year for pension expense.”

This month’s study continues to offer projections for 2011 and 2012, illustrating how asset performance and discount rates may drive funded status. In the most optimistic scenario, which assumes a 12.1% annual asset return and an ultimate discount rate of 6.45%, pensions would reach full funded status in the fall of 2012.

A pessimistic scenario (4.1% annual asset return, 3.95% ultimate discount rate) would dip funded status below 65% by the end of 2012. 

Allianz Life Promotes Bob Densmore to SVP-National Sales Manager

Allianz Life Insurance Company of North America has named Bob Densmore as senior vice president-national sales manager. He will lead Allianz annuity sales strategy through the independent, bank, regional and wire broker/dealer distribution channels.

Densmore joined Allianz Life in 2008 as a district director for the Midwest District. He began his career as a financial advisor with Thrivent Financial. In 1996, he joined Jackson National as a brokerage manager responsible for wholesaling fixed and index annuities. As a regional vice president for Jackson, he raised more than $2 billion in variable annuity premium.

MassMutual Retirement to hold online seminar on 403(b) regs

As part of its continued commitment to provide advisors and plan sponsors the most up-to-date and relevant information, MassMutual Retirement Services is sponsoring an online seminar featuring a panel of 403(b) retirement plan experts, hosted and moderated by PLANSPONSOR Founder and Director Charles Ruffel.

“As 403(b) regulations tighten and financial markets fluctuate, nonprofit organizations are under greater scrutiny. The Department of Labor (DOL) has expanded the Form 5500 reporting and audit requirements that fall on nonprofit plan sponsors. This online seminar will help advisors and plan sponsors stay abreast of the ongoing changes in the nonprofit retirement market,” says Lisa Murphy, MassMutual ERISA Consultant.

The online seminar will feature David Levine, principal at Groom Law Group, Washington, D.C., in addition to Brenda Van, western managing director and nonprofit market leader and Lisa Murphy, ERISA Consultant, both of MassMutual Retirement Services. In this 60-minute webcast, the panelists will discuss Form 5500 reporting and audit requirements, fiduciary duties, final IRS regulations, and will conclude with a question and answer session.

“As a result of the many recent regulatory changes, it’s critical for nonprofit plan sponsors to understand the new fiduciary responsibilities and to have a due diligence process in place to reduce risk and limit or mitigate fiduciary liability,” says Murphy. “Plan sponsors have taken initial steps toward complying with the regulatory changes, but many are still concerned about their liabilities and how to mitigate risk. At MassMutual, we want to help prepare and educate advisors and plan sponsors so they can properly comply with the new regulations, maximize the benefits of their 403(b) plan, and help prepare participants for successful retirement years,” adds Murphy.

To register for the online seminar, go to the MassMutual website and click All Events under Intermediary Events. 

Job security more dream than reality: EBRI 

Full-time workers in 2010 had been in their jobs an average of just over five years, continuing a slow increase in employment longevity that began in 2004, the Employee Benefit Research Institute (EBRI) reported.

The average is somewhat misleading, however. Job tenure for men has been falling since 1983, while women’s tenure has risen in that period. The once-big gender gap in job tenure has almost closed.  

EBRI also found that older workers appear to be staying in their jobs longer. But overall, the American work force over the past 30 years has had a high level of turnover—and that probably won’t change.    

“For the great majority of American workers, so-called ‘career jobs’ never existed, and they certainly do not exist today,” said Craig Copeland, EBRI senior research associate, and author of the study. “A distinct minority of workers have ever spent their entire working career at just one employer.”

 The findings are published in the December EBRI Notes, “Job Tenure Trends, 1983–2010,” and are based on the latest data from the U.S. Census Bureau’s Current Population Survey. The full report is online at EBRI’s website at www.ebri.org.

How to rebuild trust and engage Millennials

Trust, Millennials and choice: These three words signify the cultural trends that most heavily affect the financial services and investment industry today, according to Mintel Comperemedia.  

Lack of trust continues to hinder financial institutions, as only 28% of Mintel respondents say they trust the financial services industry in general and only 43% trust their bank to “do what is best for their customers.” Consumers are wary of corporate motives. Brands will have to re-earn decades of lost trust.   

“Banks and other financial services companies need to concentrate on rebuilding their images,” notes Susan Wolfe, VP of financial services at Mintel Comperemedia. “The key to these efforts will be increased transparency and a two-way dialogue between the company and customer…it’s about the relationship and a good place to start is with the unsuspecting Millennial generation.”

Millennials, those aged 22-35, grew up in a much different world from that of their predecessors. Investment firms typically ignore this younger group, but the recession is likely to change the way they see the financial world. It may make them permanently more frugal and conservative. 

Though they tend to worry less than older generations, over half of Millenials are still concerned about having enough money to retire one day. Nearly four in 10 Americans in the Gen X, Baby Boomer and Swing Generation groups say they don’t think they will ever be able to retire.

The overwhelming number of choices that consumers have is also an issue for the investment world. “Too much choice can lead to anxiety and paralysis, which results in consumers doing nothing as they are afraid to make a bad decision and choose the wrong product. Financial companies need to push investment options in a way that instills trust and simplifies the message,” Wolfe said.

403(b) Survey Reveals Progress and Stability  

Sponsors of 403(b) plans took important steps forward in managing their plans over the past three years—despite a grueling economy and sweeping new regulation, according to a new survey of 403(b) plan sponsors from the Profit Sharing/401k Council of America (PSCA).         

The survey, sponsored by the Principal Financial Group, also revealed that the vast majority (73 %), of 403(b) sponsors held firm on making employer contributions to their plans and 40 % of those that suspended matches are restoring them.

“We saw real stability in the midst of volatility as 403(b) plans began restoring employer matches at the same rates as 401(k) plans,” says David Wray, PSCA president, about results from the just-released 403(b) Plan Response to Changing Conditions survey. “We also saw a significant increase in employee education as 403(b) sponsors helped employees focus on rebuilding. That may explain why these plans also report increased participation.” 

Highlights from the survey include:

  • More than a third (38%) of respondents report that participation rates have increased. 
  • More than half of respondents (50.8%) increased employee education and communication efforts over the last year.
  • Nearly a quarter (22.6%) added investment advice
  • Nearly 16% of 403(b) plans that suspended the match plan to reinstate it within the next six months.  

“Clearly, these 403(b) plan sponsors have shown resilience over these recent tumultuous years,” says Aaron Friedman, national non-profit practice leader, The Principal. “The survey shows that 403(b) plans appear to have adapted remarkably well to challenging economic times and major regulatory change.”

The 403(b) Plan Response to Changing Conditions survey—part of an ongoing series of PSCA surveys on 403(b) plans—reports on the 2009-2010 plan year experience of 599 403(b) plan sponsors from across the country. Find full survey results at www.psca.org.

No more compulsory annuities in U.K.

Posted on December 15, 2010 by -

Investors in the United Kingdom will be able to spend part their tax-deferred retirement savings—known as “pension pots” in Britain—before they retire, under new pension rules.

Employees with defined contribution pension schemes will no longer have to buy annuities by age 75, and may take out up to a years’ worth of funds before retirement.

For those who can demonstrate that they have a secure pension income of at least £20,000 (about $31,500) a year, there will be no limit on the amount that they can withdraw early.

“The majority of people have quite small pension pots on retirement and this safety net will mean that in practice they are still likely to buy an annuity to make sure they have an income through retirement,” said the Association of British Insurers in a release.

The British Treasury estimates that 12,000 people a year will be eligible to use the flexible pension draw-down rules. Tax on pension funds left unspent at death has also been cut to 55% from 82%. The rules will go through Parliament as part of the 2011 budget, and are set to come into force from April 2011.

© 2010 RIJ Publishing LLC. All rights reserved.

Phoenix issues “Medicaid annuity”

Posted on December 15, 2010 by -

The Phoenix Companies, Inc., has launched the Phoenix FamilyShield Annuity, a single premium immediate annuity designed to meet federal regulations that allow people to qualify for Medicaid long-term care benefits while protecting an income stream for their healthy spouses.

“For those who do not have long-term care insurance, Medicaid or other government programs may cover some of the cost of this care,” said Philip K. Polkinghorn, senior executive vice president, business development, at Phoenix. “These programs permit an individual to use marital funds to purchase a certain type of annuity so as to provide an income stream for a loved one.” 

The product can be customized with a choice of premium amounts and payment periods:

  • It must be funded with a minimum single premium payment of $10,000 in non-qualified or qualified/IRA funds.
  • It will immediately begin a monthly stream of income payments for a period certain between two and 30 years. If the owner/annuitant dies before the end of the period, the designated beneficiary will receive the remaining monthly payments.
  • As required by Medicaid regulations, the contract has no cash value, is irrevocable, non-transferable and non-assignable.
  • It is generally only appropriate for individuals and spouses who are applying for Medicaid or other government benefits.

Phoenix FamilyShield Annuity was developed in conjunction with The Ohlson Group, Inc., which will work with Saybrus Partners, Phoenix’s distribution company. Because Medicaid regulations vary by state and are subject to change, Phoenix does not guarantee eligibility for assistance. 

© 2010 RIJ Publishing LLC. All rights reserved.

Money market funds grow as bond appetite slows

Posted on December 15, 2010 by -

After contributing $26.8 billion to long-term mutual funds in October, investors added just $2.7 billion in November, according to Morningstar, Inc. The decline reflected a loss of enthusiasm for fixed-income funds and the continued outflow from U.S. stock funds.

Money market funds were the direct beneficiaries of these trends, with inflows of $24.7 billion, their best month since January 2009. U.S. exchange-traded funds (ETFs) saw inflows of $10.3 billion in November, pushing year-to-date inflows to $95.6 billion and total industry assets to $951.5 billion.

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

  • Inflows for taxable-bond funds reached just $6.1 billion in November versus $21.0 billion in October, the smallest monthly inflow for the asset class since May. After 22 consecutive months of net inflows, municipal-bond funds saw net outflows of $7.6 billion in November. This reversal comes after investors added nearly $105.6 billion to the asset class from January 2009 through October 2010 and marks the worst month for municipal-bond funds in terms of net outflows except for the $8.0 billion redeemed in October 2008 during the credit crisis.
  • Rising rates and currency swings contributed to a tough month for emerging-markets bond and world-bond funds, some of the more aggressive areas of the bond market. Nevertheless, money continued to flow to emerging-markets bond funds. These offerings have collected more than $13.7 billion in 2010, and total assets have nearly doubled over the last 12 months to $36.8 billion.
  • Large-growth funds had the biggest outflows of any Morningstar category this year, losing $43.5 billion.
  • Investors pulled $1.0 billion from Vanguard funds in November, the firm’s first month of long-term fund outflows since October 2008. Equity-oriented families including American, Fidelity, and Columbia also continued to suffer outflows. Despite redemptions of $1.9 billion from PIMCO Total Return, the fund’s first month of net outflows in two years, PIMCO still took in $1.1 billion during November.

Additional highlights from Morningstar’s report on ETF flows:

  • U.S. stock ETFs, with inflows of $7.9 billion, topped all ETF asset classes in November, followed by international-stock ETFs with weaker, yet positive flows of $2.3 billion as a result of renewed sovereign credit fears in Europe and a stronger U.S. dollar.
  • Vanguard collected $6.3 billion of the $10.3 billion assets added industry-wide in November. The firm’s ETF assets rose more than 62% over the last 12 months, allowing it to capture nearly 15% of the market share.
  • After recording inflows during every month this year, taxable-bond ETFs saw outflows of $660 million in November.
  • Silver ETFs continued to see healthy inflows. Investors looking to increase their commodities allocations may see silver, which has seen price appreciation of 65% year to date, as a good alternative to gold, which has gained 26% over the same period.

The complete flow report is available from Morningstar.  

 © 2010 RIJ Publishing LLC. All rights reserved.

E&Y offers four keys to success for life insurers

Posted on December 15, 2010 by -

Despite entering 2011 with a stronger balance sheet, reasonable earnings momentum and slightly rising direct premiums, the U.S. life and annuity insurance industry will be challenged by broad regulatory changes and an uncertain economic environment, according to Ernst & Young’s Global Insurance Center 2011 US Outlook for the life insurance industry.

Insurers will need to create new products and services and leverage distribution channels for top line growth, while reducing costs and unprofitable risks for bottom line earnings, according to Doug French, Principal, Financial Services and Insurance and Actuarial Advisory Services Leader at Ernst & Young LLP (US).

“We remain in a challenging environment where it’s difficult to attract new customers and retain existing ones,” French said. “Companies that clearly understand these issues and react quickly and prudently in their strategic core businesses will gain a competitive advantage.”

Ernst & Young identified four issues for US life and annuity insurance companies:   

1. Responding to the changing regulatory environment: New legislation and regulations, such as the Dodd-Frank Wall Street Reform, Solvency II and ongoing accounting changes driven by the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB), will raise the potential of altering the growth trajectory of the life and annuity insurance industry in the US. They might also compel insurers to exit particular lines of business. 

2. Establishing capital and risk management solutions post-crisis: As the industry returns to pre-crisis levels of new business and seeks further growth, capital will require careful management to efficiently fund new business needs. A key challenge will be identifying the most cost-effective capital solutions to support strategic growth initiatives. The redundant regulatory reserve requirements will also continue to be an issue for insurers. Similarly, insurers selling annuity products will need to seek solutions that manage the risk and reserves required to support the guaranteed benefits embedded in these products.

3. Improving customer relations and increasing operational efficiencies: Insurers seeking to reach new customers and maintain existing relationships will need to strengthen distributor networks and improve their administration and customer service systems. Insurers must also control costs to achieve adequate profit levels and protect the balance sheet. To do so, companies are expected to increase the ease of doing business through investments in technology and lower their resource costs through shared services, offshore captives and outsourcing.

4. Reinventing products and distribution to generate growth: Although the life and annuity insurance industry will enter 2011 with strengthened capital, questions remain about how best to deploy this capital to achieve long-term growth.

Baby Boomers have become acutely aware of their looming retirement challenges and the risk of market losses, and are beginning to clamor for meaningful guarantees. Meanwhile, Generation Y has reached an age where they should be forming households, yet the weak employment environment has, in part, compelled them to remain single or childless in record numbers. If the economy remains stagnant, it could suppress both their desire for savings and life insurance products and their ability to pay for them.

The complete Life Insurance Industry 2011 Outlook report can be found at www.ey.com/insurance.

© 2010 RIJ Publishing LLC. All rights reserved.

 

Social Security Seeks to End Free Loans

Posted on December 15, 2010 by -

The government’s “interest-free” loan loophole may soon be officially closed. 

The Social Security Administration published new rules this week that limit the ability of Social Security recipients to essentially receive interest-free loans from the agency. The rules took effect immediately.

Under the old policy, people who could take their Social Security benefits early, then later withdraw their application for benefits, as long as they repaid the full amount of the benefits received, with no interest charged on the money. They could then also reapply for benefits later on and receive higher benefits.

While this policy was intended to help those who decided to take an early retirement and then went back to work, it ended up becoming a way to get a free loan from the government. People would apply for Social Security benefits, put that money in investments and earn interest and then withdraw their application, paying the government back just the benefit amount.

Now, the new rule limits the time period that beneficiaries can withdraw an application to within 12 months of the first month of entitlement. It also permits only one application withdrawal per lifetime.

“The agency is changing its withdrawal policy because recent media articles have promoted the use of the current policy as a means for retired beneficiaries to acquire an ‘interest-free loan,’” according to the agency.  “The 12-month limitation period is a financial disincentive,” the new rules said. “There is little to be gained by investing benefits for only 12 months.”

The statement, and the rules, also noted that the “free loan” was not really free since it “costs the Social Security Trust Fund the use of money during the period the beneficiary is receiving benefits” and the withdrawal processing also involved the use of the agency’s limited administrative resources.

While the new rules are effective immediately, there is a 60-day public comment period. The agency said it would consider comments and publish another final rule.

 © 2010 RIJ Publishing LLC. All rights reserved.

Rep. Ryan’s Express Could Save—or Derail—Public Pensions

Posted on December 15, 2010 by -

A bill recently introduced by Reps. Paul Ryan (R-Wisc), Darrell Issa (D-Calif) and Devin Nunes (R-Calif) would punish states that fail to transparently disclose their public pension funding status each year by revoking their right to issue bonds that are exempt from federal income tax.   

If the bill were passed—perhaps by the incoming Republican-controlled House of Representatives—it would be hard for a non-compliant state to sell bonds for any purpose, not merely to finance pension benefits for their retired teachers, snowplow drivers, policemen and other public sector workers.  

“In the case of a failure… of State or local government employee pension benefit plans to meet reporting requirements,” the proposed bill says, “no specified Federal tax benefit shall be allowed or made with respect to any specified bond issued by any such State or political subdivision.”

Perhaps the most pointed aspect of the bill, H.R. 6484, is its requirement that states use Treasury rates, which are historically low, to discount pension obligations and calculate funding requirements. Since Treasury rates are far below the rates (as high as 8%) that states now use to project the growth of their pension funds, the switch could instantly double a state’s reported funding gap—and send shock waves through the electorate.    

Why use Treasury rates when states don’t invest pension fund assets primarily in Treasuries? “The argument being made by the congressmen is that because the pensions are risk-free”—that is, the states are obligated to pay them—“you should use a risk-free rate to discount them,” said Ethan Kra, vice president of pensions at the American Academy of Actuaries vice president of pensions. “This bill addresses reporting and disclosure. It does not address funding or required investment risk,” he added.

The bill, which state pension administrators consider politically partisan, reflects the nation’s broad climate of fiscal anxiety in general and about public pensions in particular, Kra said. The Security and Exchange Commissions is worried that states with overwhelming pension costs might end up defaulting on their bonds. Taxpayers nationwide fret that states may plead for pension fund bailouts from Uncle Sam.    

Two of the three sponsors of the bill, Darrell Issa and Devin Nunes, represent districts in California, whose state public pension funding has fallen behind since the dot-com crash of 2001. According to the Pew Center on the States, the California State Teachers Retirement System paid less than two-thirds of its $4.3 billion contribution obligation in 2008.

But overall the state’s projected pension liability of $454 billion is 87% funded. Between 1999 and 2008, the state pension’s liabilities grew 125% while assets grew only 65%. The big hole is in health care, where virtually none of the state’s $62 billion in retiree health care and other benefit promises are funded.

The other sponsor, Paul Ryan, was described in a recent New Yorker article as “the GOP’s designated thinker on the big issues, like entitlement reform.” Ryan, who turns just 41 in January but has represented Wisconsin since 1999, drew attention in early 2009, when he introduced a bill that would have eliminated the Obama stimulus package, replaced Medicare, reduced the top individual income tax rate to 25% and introduced a value-added consumption tax of 8.5%.

 

A stick, not a carrot

As for the bill’s blunt threat to withdraw a state’s tax-exempt bonding privileges unless it improves its pension accounting practices, Kra noted that Congress has a limited array of levers for influencing the states. “They have to do it this way, because under separation of powers, [the federal government] can’t force the states to do anything,” Kra noted.

The bill’s sponsors assert that some states are purposely hiding the impact of past promises to public employees.

“As we speak, lucrative pension promises are being made to public employees that taxpayers simply cannot afford. The plans themselves admit to more than a $1 trillion in unfunded liabilities,” said Rep. Devin Nunes in release. “Unfortunately, the true level of unfunded liabilities associated with these plans—perhaps more than $3 trillion—is being hidden thanks to unrealistic accounting standards.”

Not surprisingly, state pension fund managers resent this characterization, and have denounced the bill’s implied accusation that they are hiding their pension obligations. A coalition of state organizations led by NASRA, the National Association of State Retirement Administrators, in a December 8 press release, said:

“Inaccurate and inflammatory descriptions of the state of public pensions and unnecessary calls for federal intervention are unwarranted and only serve to confuse the public and unduly alarm state and local government retirees.”   

It went to say that “Pension fund asset values have been growing since March 2009, and the most recent data show current assets are approximately $2.9 trillion. The Government Accountability Office has found that public pensions on the whole are financially secure and positioned to meet their long-term pension obligations, and even after the market decline, aggregate public pension funding levels are around 80 percent.”

A pension official in one state told RIJ that the bill is seen more as part of an attempt to undermine public support for state pension plans and hasten their conversion to defined contribution plans, rather than as an attempt to force pension administrators to put the plans on a firmer financial footing.    

“What they’re doing is mean, heavy-handed and punitive,” said the official, who asked not to be identified. “As soon as [the bill] came out, the associations were just deadly opposed to it. There’s a negative reaction everywhere because it’s as though someone’s trying to come in and run your business. It’s also a way to produce the most conservative view of a state’s pension liabilities. But it’s the wrong punishment for the behavior.

“If I understand it correctly, the bill doesn’t refer to the tax benefits of the pension itself, but about the tax treatment of the state’s bonding authority. The state’s ability to issue tax-exempt bonds is related to a lot of things other than pensions. There’s no direct relationship.

“I don’t see the connection between the bonding authority and the pension disclosures. They’re looking for a way to get this information disclosed in the way they want it disclosed. That’s not necessarily wrong, but they’re using the wrong punishment to get us there. It’s too draconian. There’s probably better ways to evaluate the pension liability than with the Treasury rate.

“It would approximately double the pension liability.  That would shock people and I think that’s the effect that they’re aiming for. I don’t know where the assumption came from that the federal government has to bail out the state pensions. Anybody’s who is responsible in this area understands the wisdom of easing toward a more realistic assumed earnings rates. But this bill could create a disaster.”

The pension official said that the push for more conservative public pension accounting practices could have been handled in a less sensational manner through negotiations with the Government Accounting Standards Board, which “has been moving in that direction already.” But Kra said that the GASB has been very slow to act, and that is plagued by conflicts of interest, because some of its members are actively employed as public pension administrators. 

Objective analysis

 The Pew Center on the States recently produced a study of the public pension crisis, “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform.” It criticized state pension administrators for:

  • Failing to make annual payments for pension systems at the levels recommended by their own actuaries;
  • Expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
  • Providing retiree health care without adequately funding it.

In their own defense, state pension fund managers describe themselves as whipsawed by the markets. They felt pressure to abandon conservatism and seek higher returns in the equities markets during the 1990s boom, only to pay for it in the busts of the 2000s. The Pew study noted that:

  • In 2000, just over half the states had fully funded pension systems. By 2006, that number had shrunk to six states. By 2008, only four—Florida, New York, Washington and Wisconsin—could make that claim.
  • In eight states—Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia—more than one-third of the total pension liability was unfunded. Two states—Illinois and Kansas—had less than 60 percent of the necessary assets on hand.
  • Nine states were deemed solid performers, having enough assets to cover at least 7.1 percent—the 50-state average—of their non-pension liabilities. Only two states—Alaska and Arizona—had 50 percent or more of the assets needed.
  • Forty states were classified as needing improvement, having set aside less than 7.1 percent of the funds required. Twenty of these have no assets on hand to cover their obligations.

A report issued in October by the American Academy of Actuaries, “Risk Management and Public Plan Retirement Systems,” provided some background and perspective on the plight of public pensions. It said:

“State and local workers were excluded from Social Security, at its inception, and thus, subsequently, many states and local governments endeavored to establish plans. Over half of the large public retirement systems that exist today were established between 1931 and 1950, and by 1961, 45 states had established defined benefit plans.

“U.S. Census Bureau data showed that, in 2008, public plans covered almost 26 million active workers and retirees. Size and coverage of public plans vary widely; Table 1 shows that, in general, the very large state systems, which only comprise 9% of the total number of systems, cover 88% of the membership of public employee systems.

“For fiscal year 2008, public sector plans reported holding $3.2 trillion in assets, with $180 billion in payments to plan participants (mostly in payments to retirees and beneficiaries), and $119 billion in contributions ($37 billion from employees and $82 billion from state and local governments).”

© 2010 RIJ Publishing LLC. All rights reserved.

Do FIAs Need Income Riders?

Posted on December 15, 2010 by -

Almost 90% of new variable annuities (VAs) are sold with a living benefit, according to LIMRA. Two-thirds of these benefits are lifetime income riders. That the VA market is a $120 billion-a-year market attests to the popularity of lifetime income riders, which appear to satisfy the public’s hunger for long-term financial safety in retirement. 

The $30 billion-a-year fixed indexed annuity (FIA) market has also embraced living benefits. While there are no statistics regarding the percentage of these contracts that are issued with an income rider, anecdotal evidence suggests that the FIA market is following in the VA market’s footsteps.

Does an income rider make sense on an FIA? Some observers raise the following questions, which suggest that an income rider on an FIA does not make as much sense as an income rider on a VA: 

  1. The income rider on a VA provides guaranteed income that wouldn’t otherwise be available at the time of purchase.  An FIA, as a fixed annuity, already provides guaranteed income at the time of purchase (via guaranteed minimum annuitization rates), so an income rider is redundant. 
  2. An FIA is a fixed annuity, so its long-term average rate return won’t be much higher than a CD’s—perhaps one to three percentage points higher, depending on the competitiveness of an insurer’s interest crediting mechanism on the FIA—and significantly less than a VA might earn.  
  3. The account values in an FIA with an income rider are not likely to be depleted by withdrawals unless the clients reach a very advanced age. Most people will be paying for a benefit they don’t receive. 

1. Is an FIA income rider redundant?

Regarding the first question, it’s instructive to ask why consumers should add a guaranteed income rider to a fixed annuity (which also guarantees most of the principal and adds interest credits) when they could very well annuitize the contract.

They do it for the same reason they would purchase it on a VA. It gives them a lifetime income guarantee while still allowing access to underlying account values. And because the FIA (unlike the VA) already guarantees principal, the income rider costs less on an FIA than on a VA.  One could argue that an income rider on an FIA is better suited to a conservative purchaser who wants an income guarantee (with liquidity) and principal protection.

Some investors in VAs with guaranteed income riders may believe that their principal is protected. They may very well mistake the guarantee on the “benefit base” for a guarantee on the principal or the account value. It isn’t. The benefit base is simply a mechanism for determining the dollar amount of the guaranteed withdrawals. Judging from the descriptions of the benefits base by the popular media, however, the nature of the benefit base may not be clearly understood—by journalists or the public. 

2. Will an FIA offer competitive performance? 

A seller of FIAs might argue, why buy an income rider on a VA when you could get it cheaper on an FIA? The answer given by the seller of a VA is that you can’t expect FIAs to return much more than a CD over the long term. Fees aside, VAs have much more upside potential than FIAs, and can thus generate higher withdrawal guarantees via the commonly offered “step up” or “ratchet features.

On an after-fee basis, VAs may not actually be able to earn significantly more than an FIA. Think about it. VA contract fees including the cost of an income rider range from 200 to 400 bps or more per year. Equity funds aren’t expected to earn the 10.5% of yesteryear. Reasonable expectations for equities might be 8.0 to 8.5% a year going forward. Long-term bonds may return as much as 6% a year.

And even these lower estimates may be more aspirations rather than expectations (See John West’s “Hope Is Not A Strategy” in Research Associates, October 26, 2010). If that’s true, a VA with a balanced allocation might net an average of only about 4.5% a year over the long term.

Not surprisingly, that’s not very different from a fixed annuity. At the end of the day, financial vehicles that provide exactly the same type of financial guarantee should deliver about the same expected result over the long term. If they didn’t, there’s a massive undiscovered arbitrage opportunity somewhere.

To be fair, the fact that FIAs provide principal protection, separately from the income guarantee, suggests that their return should be slightly less than that of the VA with a balanced asset allocation. The difference should be roughly equal the annual cost of long-term put options protecting principal.

3. Do FIAs need another layer of insurance?

What about the assertion that an income rider on an FIA is unnecessary because assets in an FIA are unlikely to be depleted by guaranteed withdrawals within the purchaser’s average life expectancy?.

It’s also likely that if you removed all of the insurance fees from a VA and took the same withdrawals from an uninsured portfolio with the same asset allocation, you probably wouldn’t run out of money either. The VA fees exacerbate the very risk that the income rider mitigates. Ultimately, the likelihood of depletion will be reflected in the price of the rider, regardless of whether the rider is on a VA or FIA.

Five takeaways 

  • A guaranteed income rider makes as much sense on an FIA as it does on a VA and should not be dismissed out of hand.  
  • The income riders on VAs and FIAs are equivalent financial constructs delivered on different platforms. If there’s a performance difference, the FIA’s principal guarantee should explain it. 
  • In practice, no two companies price their products the same because no two have the same capacity or resources to manage the risks. Whatever the product, producers must exercise due diligence to decide if the benefits justify the fees. 
  • In an open market, free of collusion, competition should drive out excess profits or exorbitant fees. By the same token, losses will eventually eliminate companies that under-price or fail to hedge appropriately. 
  • Producers and distribution stakeholders need tools to assess the value of income riders on FIA and VA platforms, so that they can be properly compared. 

Garth Bernard is president and CEO of the Sharper Financial Group. He can be reached at [email protected].

The Bucket

Posted on December 8, 2010 by -

Sun Life executive writes about retirement income planning

Stephen L. Deschenes, Senior Vice President and General Manager, U.S. Annuities, Sun Life Financial Inc. has written a new article in which he discusses the significant challenges that would-be retirees need to be aware of as they begin to plan for a financially secure retirement.

In the paper, Deschenes demonstrates that in order to overcome the risks and obstacles to funding a successful retirement, it is crucial investors and their advisors must first understand what they face.

According to “What is Retirement Income Success,” a strong retirement income plan must adapt to changing lifestyle needs, withstand up and down markets and last for more than 30 years or more now that people are living longer lives. Deschenes spells out the risks as well as the components that investors should understand and the solutions advisors should be discussing with their clients.

 

Genworth’s ClearCourse adopted by BB&T

BB&T Corp., the Winston-Salem, NC-based financial services company, announced that it would add ClearCourse, the guaranteed lifetime income investment option from Genworth Financial, to its retirement plan investment options. 

ClearCourse is a group variable annuity issued by Genworth Life and Annuity Insurance Company and is available to BB&T’s Institutional Services client companies that elect it as an investment choice for their employees.

ClearCourse is designed to protect 401(k) plan participants from retirement risks such as outliving assets, retiring during a down market, and the effects of inflation. ClearCourse provides a guaranteed source of lifetime income.

BB&T is a holding company that operates some 1,800 financial centers in the U.S., with about $157.2 billion in assets and market capitalization of $16.7 billion, as of Sept. 30, 2010.

 

New J.P. Morgan share class let plan sponsors report investment and administrative fees separately 

J.P. Morgan Asset Management today announced that new Class R6 Shares will be available on 18 of its funds.  The new shares, formerly called Ultra Shares for certain funds, allow plan sponsors to report their investment management expenses and their recordkeeping, administrative and marketing expenses separately.  

The Class R6 Shares will have an investment advisory fee and other traditional fund expenses, but not 12b-1 or shareholder servicing fees. “Plan sponsors will have the ability to simplify participant communication through separate disclosure of the applicable fees,” said David Musto, head of J.P. Morgan’s Defined Contribution Investment Solutions business.

Defined contribution and defined benefit retirement plans, 529 plans, and certain direct investors and discretionary investment management accounts within J.P. Morgan Investment Management and its affiliates will be eligible for Class R6 Shares if they meet minimum and eligibility requirements.  

The Class R6 Shares include 18 funds across the spectrum of J.P. Morgan investment capabilities. J.P. Morgan Asset Management has approximately $51 billion in defined contribution assets under management as of September 30, 2010.

 

MetLife forecasts financial results for 2010 and 2011

MetLife expects its operating earnings to increase 38% in 2011, to between $5.1 billion and $5.5 billion ($4.75 to $5.15 per share),” chairman, president & chief executive officer C. Robert Henrikson said this week.

“We plan to grow premiums, fees and other revenues 30% next year to between $45.8 billion and $47.0 billion,” he added. He predicted “an improved operating return on equity (ROE) of approximately 11% for 2011 and further ROE improvements in the years that follow.”   

Premiums, fees and other revenues for 2010 are expected to be between $35.6 billion and $36.0 billion, up approximately 5% from $34.0 billion in 2009. Operating earnings for 2010 are expected to be $3.8 billion to $3.9 billion ($4.26 to $4.36 per share) compared with $2.4 billion ($2.87 per share) in 2009.

Book value per share at year-end 2010 is expected to be between $44.50 and $45.85, up 19% from $37.96 at year-end 2009. The company expects a 62% increase in operating earnings compared with 2009. 

MetLife expects full year 2010 net income to be between $2.8 billion and $3.2 billion ($3.13 to $3.57 per share), reflecting net investment and net derivative gains and losses. For 2009, MetLife reported a net loss of $2.4 billion ($2.89 per share), including $3.3 billion, after tax, in derivative losses. MetLife uses derivatives to hedge a number of risks, including changes in interest rates and fluctuations in foreign currencies. Movement in interest rates, foreign currencies and MetLife’s own credit spread – which impacts the valuation of certain insurance liabilities – can generate derivative gains or losses.   

Premiums, fees and other revenues for the fourth quarter of 2010 are expected to be between $9.5 billion and $9.9 billion, up 4% from $9.3 billion in the fourth quarter of 2009. Operating earnings for the fourth quarter of 2010 are expected to be between $1.1 billion and $1.2 billion ($1.04 to $1.14 per share), up 39% from $793 million ($0.96 per share) in the fourth quarter of 2009.

For the fourth quarter of 2010, MetLife expects net income to be between $170 million and $570 million ($0.17 to $0.56 per share), compared with $289 million ($0.35 per share) in the fourth quarter of 2009.

Per share calculations for full year and fourth quarter 2010 are based on 890.2 million and 1,014.2 million shares outstanding, respectively. Per share calculations for 2011 are based on 1,066.3 million average shares outstanding.

 

Hedge Funds Receive $16.0 Billion in October

The hedge fund industry posted an estimated inflow of $16.0 billion (1.0% of assets) in October 2010, the fourth straight inflow as well as the heaviest since November 2009, TrimTabs Investment Research and BarclayHedge reported.

“Flows are doubtless following performance,” said Sol Waksman, founder and President of BarclayHedge.  “Hedge funds returned 1.95% in October and 7.10% in the four months following the May-June skid.  Also, our preliminary data shows that hedge funds are outperforming the S&P 500 by about 21 basis points through November.

Distressed securities funds hauled in $3.8 billion (3.3% of assets) in October, the heaviest inflow of any hedge fund strategy, while emerging markets funds posted an inflow of $2.2 billion (1.0% of assets).  Meanwhile, fixed income funds received only $506 million (0.3% of assets), the lightest inflow since April.

“Hedge fund investors are exhibiting a healthier appetite for risk,” noted Waksman.  “They are finally venturing into areas like distressed securities after embracing conservative strategies for most of the year.”

Commodity trading advisors (CTAs) received $7.9 billion (2.8% of assets) in October, the eighth straight inflow, while funds of hedge funds took in $3.3 billion (0.6% of assets), the fourth straight inflow.  Meanwhile, hedge fund managers are capitalizing on kind conditions heading into 2011.

“Borrowing money to buy assets is virtually costless, investors handed hedge fund managers $32.1 billion in the past four months, and margin debt is soaring,” explained Vincent Deluard, executive vice president of research at TrimTabs. “At the same time, the rolling 12-month beta of hedge fund returns sits below the long-term average, and that of equity long-short funds is dipping below zero.  Managers should be especially eager to book fat profits through year-end, but they remain very reluctant to make directional bets on equities.”

Managers are also extremely bearish on the 10-year Treasury note, according to the TrimTabs/BarclayHedge Survey of Hedge Fund Managers.  Bearish sentiment soared to 49% in November from 28% in October, while bullish sentiment sank to 13%, the lowest level since the inception of the survey in May.

“Retail investors and pension funds have been pouring money into high-flying fixed income for nearly two years,” noted Deluard.  “But now hedge fund as well as retail bond inflows have ground to a halt, and mom and pop are ditching munis and junk.  The more the infatuation with bond funds fades the more we fear the fallout will prove particularly ugly.”

 

Broad adoption of lifetime income recordkeeping standards seen 

In a recent SPARK Institute survey, more than 85% of the large retirement plan recordkeepers said they plan to use the Institute’s information sharing standards and data records for the lifetime income solutions in retirement plans, according to Larry Goldbrum, the organization’s general counsel. 

More than half of the firms that plan to use the standards expect their record keeping systems to be ready to support them within the next 12 months.

The standards allow customer-facing record keepers to offer one or more products from unaffiliated insurance carriers; will facilitate portability of products when a plan sponsor changes plan record keepers (record keeper portability); and will support portability of guaranteed income when a participant has a distributable event in the form of a rollover to a Rollover IRA or as a qualified plan-distributed annuity (participant portability).

The information sharing standards document, “Data Layouts for Retirement Income Solutions (Version 1.0),” is posted on The SPARK Institute website < http://www.sparkinstitute.org/comments-and-materials.php>, Goldbrum said The SPARK Institute will also maintain a Q&A section on its website to address technical questions that may arise as the standards achieve increased utilization. 

The SPARK Institute represents retirement plan service providers and investment managers, including banks, mutual fund companies, insurance companies, third party administrators, trade clearing firms and benefits consultants.  Its members serve over 62 million participants in 401(k) and other defined contribution plans.

 

Guidance offered to plan fiduciaries on revenue-sharing 

A new whitepaper from ERISA attorneys Fred Reish, Bruce Ashton and Summer Conley analyzes the obligation of fiduciaries with respect to the proper allocation of revenue sharing among participants and the obligation to disclose information about that allocation to the participants. It is entitled “Allocating Fees Among Participant-Directed Plan Participants.”   

“While ERISA does not specify how plan expenses or the revenue sharing that helps pay those expenses should be allocated, it does require fiduciaries to act prudently in making the decision,” the attorneys said in a release. 

“There are a number of workable and acceptable approaches, from pro rata based on account value, to per capita, to an emerging possibility that allocates revenue sharing to the accounts of the participants invested in the funds that make those payments.

“We are beginning to see the latter approach be used in larger plans using service providers with the resources to develop these sophisticated systems.  The specific allocation method that fiduciaries choose may depend on which methods the service provider can accommodate.    

“Whatever allocation method is used, fiduciaries must engage in a prudent process to consider an equitable method of allocation to avoid a breach of fiduciary duty.  This likely means fiduciaries have an obligation to consider all available allocation methods when deciding how to properly allocate revenue sharing amounts.”

The whitepaper analyzes the issues related to the decision on how to allocate costs and the offsetting of revenue sharing, and discusses the obligation of fiduciaries to disclose the methodology to plan participants.  The disclosure issue has come into sharper focus in light of the DOL’s proposed participant disclosure regulation.

 

Latest troubles in the Balkans involve pensions  

Creating a “second pillar” retirement plan is no longer part of the pension reform plans for Bosnia and Herzegovina, the country’s government told the International Monetary Fund (IMF).

“Costs and complexity” were cited as major reasons for the change in the initial plan for the Republika Srpska, which with the Federation of Bosnia and Herzegovina makes up the country of Bosnia and Herzegovina.

Expenditure on public pensions has been one of the fastest-growing components of public expenditure in the two entities. In the Federation, it rose to 10% of GDP in 2009 from 7.7% in 2005; and in the Republika Srpska, to 9% of GDP from 7.8% over the same period.

“The transition to the second pillar has been ruled out as too costly and difficult in the near term,“ the government said. A third pillar had been created over the last few years and the country will see a major overhaul of the first pillar.

The first pillar overhaul will include a “further increase in the effective retirement age of men and women,” a system of awarding points for every year of employment, and an indexation “in line with the Swiss model,” where increases are pegged to an average of CPI and the wage indexes.    

The pension reform strategy for the other part of the divided country, which was approved in summer, “still needs to incorporate an overhaul of privileged pensions” (such as allowing certain types of workers to retire early without loss of privileges), the IMF said.

© 2010 RIJ Publishing LLC. All rights reserved.

 

 

UK pensioners brace for new retirement drawdown rules

Posted on December 8, 2010 by -

The UK pensions industry waits in suspense this week for the publication of a new set of annuitization and drawdown rules. Any changes could immediately affect the 12 million people who hold a “money purchase pension,” the British version of a 401(k) plan.       

Retirees will probably be allowed to spend their savings at the rate they wish as long as they can demonstrate that they have enough guaranteed income from state pensions, private pensions, and annuities to keep themselves from needing public support in retirement.

That is, they would be eligible for this method, called “flexible drawdown,” if they could assure the government that they could provide themselves a lifetime income of at least £10,000-£15,000 a year, the equivalent of $15,800 to $23,600 at current rates.

Those with less savings would be required to ration their savings to some extent in retirement, in a process known as “capped drawdown.” At age 75, they would have to purchase a life annuity with their remaining tax-deferred savings, as they would have in the past.

The British Treasury has proposed a new flat rate estate tax of 55%, instead of the current  82% for those dying after their 75th birthday and 35% for those younger than 75. These changes were scheduled to go into effect in April 2011 under the Treasury’s original proposals, but some insurance companies have been lobbying for a delay, arguing that they would be unable to update their systems in time.

© 2010 RIJ Publishing LLC. All rights reserved.

 

Treasury to sell last of its stake in Citigroup

Posted on December 8, 2010 by -

Two years after bailing out Citigroup, the U.S. Treasury is selling its remaining shares in the company. The move, announced Monday, effectively ends the federal rescue of the giant bank and frees the bank from modest federal pay restrictions.   

The Treasury said that it would start selling 2.4 billion shares of Citigroup common stock. A person briefed on the transaction said it would be priced at $4.35 a share, a 2% percent discount. At that price, taxpayers could profit by $12 billion on the Treasury’s investment in Citigroup.

Proceeds from the Citigroup sale would be the single biggest profit yet from the government bailout programs. Two years ago,  many doubted the wisdom of using taxpayers’ money to rescue Citigroup, which became the biggest user of several of emergency support programs that the Federal Reserve put in place during the crisis.

But federal officials, worried that the failure of Citigroup might bring down other firms, injected $45 billion into the company in the autumn of 2008, and creating an enormous insurance policy covering potential losses on more than $301 billion of real estate assets.

In return, the government assumed ownership of nearly a third of Citigroup. It also secured a small piece of potential profits through securities known as warrants.

After several other big banks repaid their bailout funds, Citigroup officials pressed for permission to do the same. Last December, Citigroup was allowed to return $20 billion of its bailout funds, and the government announced plans to unwind its remaining $25 billion common stock investment.

Last April, the government began to sell its nearly 7.7 billion shares. Through October, the government had sold about 5.3 billion shares to private investors, at an average price of just over $4 apiece. With dividends and other payments, that meant the government had fully recouped its initial $45 billion investment.

This Monday, the Treasury informed Citigroup that it planned to sell the remaining 2.4 billion shares all at once. Morgan Stanley, which had handled the previous stock sales, is leading the offering.

© 2010 RIJ Publishing LLC. All rights reserved.

St. Louis Fed president rebuts criticisms of QE2

Posted on December 8, 2010 by -

At a recent meeting of the National Economists Club in Washington, St. Louis Fed president James Bullard said the benefits of the Federal Open Market Committee’s decision to pursue additional quantitative easing outweighed its risks. 

On November 3, the FOMC announced it would purchase about $75 billion worth of Treasury securities per month through the first half of 2011. Bullard addressed some of the risks and criticisms raised about this policy, known as QE2:

  • On criticisms that the program may not be effective, Bullard said that the financial market effects of the program have been about what one would expect from an easing of monetary policy.
  • On concerns that QE2 depreciates the dollar, Bullard noted that dollar depreciation is a normal by-product of an easier monetary policy, provided all else is held constant in the rest of the world, and that the U.S. has long maintained an independent monetary policy, a flexible exchange rate, and open capital markets.  He stated that other countries need to have systems in place that can adjust to modest changes in U.S. monetary policy.
  • Regarding the rise in nominal interest rates, Bullard said that QE2 puts downward pressure on nominal rates through securities purchases but that the effects of successful policy would put upward pressure on nominal rates.  Therefore, Bullard argued, looking at the level of nominal rates alone is insufficient to judge the success of QE2.  
  • On inflationary concerns, Bullard said that while too much inflation is a legitimate concern, the 2010 disinflationary trend is worrisome right now.  He emphasized that keeping inflation near the implicit inflation target is very important for maintaining the FOMC’s credibility.
  • Regarding arguments for using a commodity money standard, Bullard stated that although this approach was widely discussed in previous decades when inflation was high and variable, the volatility of commodity prices in recent years has made this approach problematic.  He argued that inflation targeting can be seen as the intellectual descendant of commodity money standards.  “Inflation targeting forces accountability for inflation outcomes onto the central bank,” he said.
  • On fears that the Fed is monetizing the debt, Bullard said the FOMC has often stated its intention to return the Fed balance sheet to pre-crisis levels over time.  Once the FOMC returns the Fed balance sheet to its normal size, Bullard noted, the Treasury will be left with just as much debt held by the public as before the Fed took any of these actions. On claims that QE mitigates fiscal problems, Bullard argued that QE has no impact on the longer-run U.S. fiscal outlook and that this outlook remains very poor no matter what the Fed does.  

© 2010 RIJ Publishing LLC. All rights reserved.

Investment fees represent bulk of plan fees

Posted on December 8, 2010 by -

The average total annual expense ratio for a small (100 participants) retirement plan is 1.33%, while the average total plan cost for a large (1,000 participants) plan is 1.11%, according to the 11th edition of the 401k Averages Book. The average investment expense ratio is 1.26% for a small plan and 1.09% for a large plan. 

Investment expenses account for 95% of a small plan’s total expenses and 98% of a large plan’s. “If an employer really wants to cut their 401(k) costs they need to examine their investment related expenses,” says David Huntley, the book’s co-author. Costs on a 100-participant plan with a $50,000 average account balance range from .57% to 1.76%.  

The 11th Edition provides sixteen quartile charts to help plan sponsors and their advisors see whether their costs fit in the first, second, third or fourth quartile. The range between the 25th percentile and 75th percentile for the small plan universe is 1.18% to 1.49%. “If you’re monitoring plan fees, it will help to understand the difference of being in the first or fourth quartile,” says Huntley.

Published since 1995, the 401k Averages Book (www.401ksource.com) is the only resource book available for non-biased, comparative 401k average cost information.  The 11th edition is available for $95.

© 2010 RIJ Publishing LLC. All rights reserved.

 

Details of the tax compromise revealed

Posted on December 8, 2010 by -

“This compromise is an essential step on the road to recovery. It will stop middle-class taxes from going up. It will spur our private sector to create millions of new jobs, and add momentum that our economy badly needs,” said President Obama this week, describing his tax compromise with Republican legislators. 

The package would cost about $900 billion over the next two years, to be financed entirely by adding to the national debt, at a time when both parties are professing a desire to begin addressing long-term fiscal imbalances, according to a report in The New York Times.

Payroll taxes. It would reduce the 6.2 percent Social Security payroll tax on all wage earners by two percentage points for one year, putting more money in the paychecks of workers. For a family earning $50,000 a year, it would amount to a savings of $1,000. A worker slated to pay the maximum tax, $6,621.60 on income of $106,800 or more in 2011, would save $2,136.  

Tax on capital gains and dividends. The top rate of 15% on capital gains and dividends would remain in place for two years, and the alternative minimum tax would be adjusted so that as many as 21 million households would not be hit by it.

Unemployment benefits. The agreement provides for a 13-month extension of jobless aid for the long-term unemployed. Benefits have already started to run out for some people, and as many as seven million people would potentially lose assistance within the next year, officials said.

Estate tax. The White House did not give details about treatment of the estate tax, but many publications have published the $5 million exemption and 35% rate figures, citing unnamed White House sources, National Underwriter reported.

© 2010 RIJ Publishing LLC. All rights reserved.

 

 

Prices Rise, Benefits Shrink for America’s Most Popular VA

Posted on December 8, 2010 by -

Prudential Annuities will scale back the benefits of three of the guaranteed lifetime withdrawal benefits on its industry-leading variable annuity contracts, according to SEC filings yesterday by its insurance units, PRUCO Life and PRUCO Life of New Jersey. The change is effective January 24, 2011.

Insurers are not permitted to comment on new filings prior to SEC approval.

Prudential is the top seller of variable annuities in the U.S., with $15.55 billion in sales through the first three quarters of 2010. It is the only VA issuer that uses the CPPI method of risk management, which automatically reallocates account assets to a safe investment when equities markets fall. (See this week’s cover story.)  

The riders in question are the Highest Daily Lifetime Income Benefit (formerly the Highest Daily Lifetime 6), its joint-and-survivor version, the Spousal Highest Daily Lifetime Income Benefit, and the version called Highest Daily Lifetime Income Benefit with Lifetime Income Accelerator, which doubles the lifetime withdrawal payout if the owner requires certain types of long-term care (not available in New York).

The new filing put the cost of the Lifetime Income riders, single and joint, at 95 basis points, up from 85 bps, with an allowed maximum of 1.50%, to be levied on the greater of the account value or the benefit base. On the Advisor version of the contract, which has a combined mortality and expense risk and administrative fee of only 55 bps (leaving room for an advisors 1% or 1.5% fee), the current cost of the contract and rider would rise to 1.50% from 1.40%. The expense ratios of the investment options under the existing contract ranged from 0.62% to 2.59%. The cost of the accelerated version will rise to 1.30% from 1.20%.

Assuming an average investment charge of 1.50%, the sum of all the charges, including a 1% advisor’s fee, could easily reach 4% a year or more on a product that yields a guaranteed annual income of, in most cases, 5% of the benefit base.

After January 24, 2011, the payout rates at various age bands will be 3% (for those ages 45 to 54), 4% (for those 55 to 59½), 5% (for those 59½ to 84), and 6% (for those over 84). In each band, the spousal version of the product pays out a half-percent less per year. For most people who choose to begin taking guaranteed payments in their 60s and 70s, the payout rate was and will remain 5%.

Prudential will also stop discontinue new sales of two Guaranteed Minimum Accumulation Benefit (GMAB) riders, GRO Plus II and Highest Daily GRO, on January 24.

The annual compounding rollup on all versions of the GLWB rider will be just 5%–down from the previous 6%, which was reduced after the financial crisis. The product’s original pre-crisis, “arm’s race” era rollup was 7%. The rider promises that the benefit base of the contract will rise every business day at an annual rate of 5%, or to the daily account value, if higher.

The contract promises that the benefit base will at least double in 12 years, as long as no non-permitted withdrawals are taken. In the past, the benefit base could double in 10 years and quadruple in 20 years. The 20-year quadrupling guarantee has been eliminated.

As an example, an investor who put $100,000 into the Prudential HD Lifetime Income VA at age 55 and didn’t touch the money until he or she reached age 67, could then draw $10,000 a year for life (5% of two times $100,000).

Under the previous iteration of the contract, he or she could have taken out at least $10,000 a year starting at age 65 and at least $20,000 a year starting at age 75, provided he or she hadn’t taken any unapproved withdrawals before then.

© 2010 RIJ Publishing LLC. All rights reserved.