Principal Funds wants to demystify Social Security

 Noting that an estimated 74% of current retirees are receiving less than they could from Social Security, Principal Funds has created a suite of resources for financial professionals to help their clients make the most of their benefits.

“It’s clear that investors need help to maximize their Social Security income.”

“Understanding the complexities of Social Security is not an easy task,” said Chad Terry, director of retirement solutions at Principal Funds. “It’s clear that investors need help to maximize their Social Security income.”

New resources from Principal Funds help demystify Social Security benefits, encouraging three simple steps to take with the assistance of a financial professional:

• Know your benefit,
• Understand your options, and
• Determine a plan to maximize your benefit.

Resources include:

• A website that includes videos, a blog written by Chad Terry, director of retirement solutions at Principal Funds, a benefits calculator and other tools.
• A document entitled, What You May Not Know About Social Security Benefits.
• An investors guide with a step-by-step process to help clients maximize Social Security benefits, including a planning worksheet for clients to complete before meeting with an advisor.   
• FAQs that explain key Social Security concepts such as Full Retirement Age, spousal benefits and the calculations used to determine benefit reductions.
• Access to a team of retirement specialists.

“Many retirees may be missing out on hundreds of dollars each month because they’ve been unable to navigate the intricacies of the Social Security,” Terry said.  

Women favor TDFs over risk-based funds: MassMutual

MassMutual’s Retirement Services Division has released data for the fourth quarter 2010 indicating that Female participants in retirement plans administered by MassMutual have shifted an increasing percentage of their retirement savings into asset allocation investments in general (target-date or risked-based options), but are favoring target-date options.

At year-end 2010, women had 24.3% of their retirement assets in asset allocation options while men had 24.0%. Among female investors, average balances in target-date investments are approximately double those of risk-based options. Among men, the split is roughly even between target-date and risk-based options.

Two possible explanations are that women have recognized the need for better diversification and that, historically, men have demonstrated more aggressive investment behavior than women. MassMutual’s data supports the conventional wisdom that men prefer risk-based investment selections and exhibit a preference for having more control over their investments.

 In a recent survey of participants in retirement plans administered by MassMutual, 53.1% of female participants prefer to spend as little time as possible on making investment decisions compared to 35.1% for men. Likewise, 25.9% of women are confident in making their own investment decisions compared to 44.1% for men.

Balances for women continue to trail men by approximately 40% and their deferral percentages continue to trail those of men by 0.5 percentage points.

On a positive note, balances for women gained 5.7% on average for the quarter, compared to 5.5% for men, which also may be explained by their different approaches to investing.

The percentage of participants who stopped or decreased their deferrals during the quarter (3.8%) was at its lowest level since the beginning of the market decline. The number of participant loans, hardship withdrawals, and call center activities declined slightly as well.

The average participant balance in retirement plans administered by MassMutual now exceeds the average balance from year-end 2007 when the market decline began. MassMutual’s data also shows the highest percentage growth in average account balances for the year was experienced by participants in their 40s (10.4%) and 50s (9.8%). Among all participants, retirement assets invested in stable value (24.9%) as a percentage of total assets are now at their lowest level since the start of the recession, demonstrating increased participant confidence in equity markets and increased popularity of asset allocation investment options.

“Superannuation”—Australia’s $1.3 trillion national defined contribution pension program—probably won’t provide enough retirement income to participants, because of market risk and longevity risk, says the Institute of Actuaries of Australia.

To correct that problem, the Australian government should take new measures to deal with longevity risk, such as developing a “new generation variable annuities market,” according to the Institute of Actuaries of Australia.

“We urge the Government to prioritize Budget policies aimed at managing Australia’s aging population, including flexible ‘new generation’ annuities, which protect against the risk of outliving your retirement savings and the market risk of losing superannuation capital in retirement,” said the institute’s chief executive, Melinda Howes.

New generation annuities should seek to emulate some features of popular account-based products like allocated pensions, which provided retirees with access to their capital, payment flexibility and potential benefits from a rising share market, Howes said. Innovation around annuities would enable retirees greater access to their capital when needed while protecting against market downturns.

The institute is therefore asking the Government to change the Superannuation Industry Supervision Act Regulation 106, which it described as “unnecessarily prescriptive” and a reversal of the unfavorable treatment of annuities under aged care and Centrelink rules.

The institute also asserted that annuities and deferred annuities should be able to be issued as a component of an account-based pension, and that tax rules on deferred annuities should be changed so that, if taken out in the drawdown phase, the product is regarded as a pension (rather than a non-pension) for tax purposes. There should also be a clear, regulatory regime for variable annuity style products, the institute stated.

© 2011 RIJ Publishing LLC. All rights reserved.

Putnam Investments plans to launch a version of its Absolute Return 500 Fund, called the Putnam Variable Trust Absolute Return 500 Fund, for use by insurance companies in variable annuities and other variable insurance products in lieu of balanced funds.  

 The new version is designed to seek a return that beats the inflation rate (as reflected by Treasury bills) by 5% over a period of at least three years or more, regardless of market conditions, and with less volatility than that “historically associated with traditional  asset classes that have earned similar level of return.”

The fund combines two independent investment strategies: A beta strategy that seeks to balance risk and provide positive total return through a comprehensively  diversified, multi-asset class market portfolio with broad exposure to  investment markets; and an alpha strategy with a variety of active trading  tactics that employ security selection, tactical asset allocation, ,  currency transactions and options transactions.

The new variable trust offering will join the Putnam 529 for America and  Putnam RetirementReady (lifecycle) funds as investment vehicles that make  Putnam absolute return strategies available to advisors and their clients.     

“This subaccount aims for targeted return with managed volatility  that insurers can use in assembling portfolios to help meet their variable  products’ investment, risk and volatility objectives,” said Putnam’s President and Chief Executive Officer Robert L.  Reynolds.

The trustees of the Putnam Funds have approved the proposed subaccount, and  Putnam has filed the subaccount with the U.S. Securities and Exchange  Commission. Subject to the required review the Putnam VT Absolute Return 500 Fund will be launched in spring 2011.   

The Putnam VT Absolute Return 500 Fund will be managed by the same team of portfolio managers and in the same manner as the retail Absolute Return 500  Fund, led by Jeffrey L. Knight, Head of Global Asset Allocation.

Putnam Investments launched the mutual fund industry’s first suite of Absolute Return Funds in January 2009 with four funds: the “100” Fund (Class A: PARTX) which seeks to beat inflation by 1% over periods of three years or more net of all fund expenses as measured by T-bills, and can be an alternative to short-term securities; a “300” Fund intended to beat inflation by 3% and provide an alternative to bond funds; the “500” Fund,  and the “700” Fund, designed to beat inflation by 7% and provide an alternative to stock funds.      

To manage risk, the funds use short-maturity  fixed-income securities; derivatives to hedge against market declines;  Treasury futures contracts to reduce interest-rate risk; and cash positions  to help stabilize fund performance.

Currently, the Putnam Absolute Return  Funds have almost $3 billion under management and are used by almost 10,000 advisors from more than 500 broker dealers.

At the  end of January 2011, Putnam had $123 billion in assets under management,  including mutual fund assets of $68 billion and institutional assets of $55  billion. Putnam has offices in Boston, London, Frankfurt, Amsterdam, Tokyo,  Singapore, and Sydney.  

© 2011 RIJ Publishing LLC. All rights reserved.

Nearly two-thirds of independent advisors plan to use separately managed accounts and variable annuities more in 2011, and more than two-thirds say their clients want more conservative investments and guaranteed income features, according to a survey of financial advisors conducted last November by Curian Capital LLC.

The survey, which covered almost 1,300 advisors at 162 firms with an average of about $38 million under management, also revealed:

Investors are still just as jittery, if not more so, than they were in the aftermath of the financial crisis, and are open to alternative investments and techniques such as tactical portfolio allocation.

Eager to use their time more effectively, advisors want more functionality from their technology platforms. They want to be able to view all of a client’s holdings, incorporate multiple product types, and generate consolidated proposals and reports on a single platform.

Many advisors ignore the wholesaling materials that product providers flood them with. More than a third of respondents said they don’t have time to use the programs offered by manufacturers, and a significant percentage felt programs were delivered ineffectively.  

In other highlights of the survey

• Advisors’ economic outlook is split nearly evenly – 42% believe the recession is over and 46% believe it is not over. However, the vast majority of respondents agree that most clients do not believe the recession is over.

• The recent rise in the equity markets is not enough to impact clients’ risk tolerance; 88% of respondents say their clients’ risk tolerance is either lower or unchanged compared to a year ago.

• More than two-thirds of advisors say their clients are requesting more conservative investments and guaranteed income features. Additionally, nearly half of respondents report a strong demand for income investments and tactical asset allocation.

• 43% of advisors feel that not generating enough income to last through retirement is the biggest threat to their clients’ retirement plans and report that only 36% of their clients feel the same. 37% of advisors say the majority of their clients are even more concerned about market volatility. However, only 16% of advisors share this sentiment.

• To meet increased demands for retirement income, nearly two-thirds of advisors expect to increase their use of separately managed accounts and variable annuities in 2011.

• More than two-thirds of advisors believe inflation is a growing concern that will begin to impact portfolio construction within the next two years.

• Nearly half of all respondents cite time management and efficiency constraints as the biggest challenges they face. To address these challenges, 47% plan to incorporate more technology to eliminate paperwork, while 33% say they will outsource certain functions to a third party.

• 81% of respondents say they will focus on acquiring more affluent clients in 2011, while 59% plan to market their business more aggressively.

• Most advisors value product expertise, investment research and marketing support from product providers; however, they also report that they don’t have time to utilize these services, and delivery is often ineffective.

• 74% of advisors say the ability to view all of a client’s holdings on a single platform is very important, while 68% want a platform that supports multiple product types and investment options.

© RIJ Publishing LLC. All rights reserved.

As the equities market go, so go variable annuities.

Variable annuities (VA) sales grew 10% in 2010 to reach $140.5 billion, according to LIMRA. In the fourth quarter, VA sales rose to $38.5 billion—17% over the four quarter of 2009 and 11% higher than the third quarter of 2010.

From September 1 to February 18, the Dow rose from 10,016 to 12,391, an almost 24% gain.

The results were reported in LIMRA’s U.S. Individual Annuities Fourth Quarter 2010 Sales Report, which represents 96% of the market.

 “We saw growth in almost two-thirds of the VA industry in 2010,” said Joseph Montminy, assistant vice president for annuity research at LIMRA. “Strong growth in the equities market and continued interest in guarantee income riders drove fourth quarter VA sales to its highest level in more than two years.”

At $57.6 billion, total individual annuity sales in the fourth quarter of 2010 were 6% above the same period last year and 3% above the third quarter of 2010. Overall, total annuity sales fell 7% in 2010, however, mainly because of lower fixed annuity sales.   

Indexed annuities enjoyed record sales for a second consecutive year in 2010, rising 7% over 2009 to reach $32.1 billion. In the fourth quarter of 2010, indexed annuity sales improved 17%, to $8.2 billion, over the same quarter a year earlier.

Indexed annuities outperformed fixed-rate deferred annuities for the first time ever in the fourth quarter of 2010, by 43% to 40%.

At $19.1 billion, total fixed annuity sales in the fourth quarter of 2010 were 9% below sales in fourth quarter 2009 and 10% under sales in the third quarter of 2010. After a breaking records in 2009, total fixed sales in 2010 were down 27%, to $80.8 billion. Low interest-rate spreads will continue to deter fixed annuity sales until the current economic environment improves, LIMRA experts believe.

At $6.4 billion, book value annuity sales were 33% lower than in the fourth quarter of 2009 and 11% percent lower than sales in the prior quarter. Total book value sales were 45% lower in 2010 than in 2009, at $29.3 billion.

Fourth quarter MVA sales of $1.3 billion slipped 13% from the fourth quarter of 2009 and 28% from third quarter 2010 levels. Fixed immediate annuity sales were flat in the fourth quarter of 2010 versus the fourth quarter of 2009, totaling $1.8 billion, a 10% decline from the third quarter of 2010. In 2010, fixed immediate annuity sales were one percent higher than in 2009.

© RIJ Publishing LLC. All rights reserved.

Already heavily in debt, the state of Illinois hopes to borrow an additional $3.7 billion this year to make its annual contribution to the state pension fund. The prospect has made municipal bond markets nervous and sparked an investigation into whether Illinois has hidden the risks that the pension fund poses, according to news reports. 

Illinois was initially scheduled to sell the bonds on February 17. But on the 21st, the sale was pushed back until next week, state officials said, so the bond markets, and overseas investors, would have more time to digest Governor Pat Quinn’s budget address on Wednesday.

A similar strategy backfired in 2003, when the state tried to replenish its pension fund by borrowing $10 billion at 5.1% and reinvesting the money. But the money earned only 3%, not the projected 8%, and the ensuing scandal led to the indictment of former Governor Rod Blagojevich and several associates on influence-peddling charges.   

This time it’s different, say state officials.   

“The bonds we’re talking about issuing next week are not meant to do what the 2003 bonds did, so the rate of return the portfolio of the pension funds earn is not relevant to this discussion,” said one official. Rather than seek high returns, he said, “the pension bonds we’re issuing next week are simply for this year’s contribution. There is no attempt at arbitrage.”

On the new bond issue, Illinois’ lead underwriters are Morgan Stanley, Goldman Sachs and Loop Capital Markets; 11 other underwriters will sell smaller portions. A local firm, Peralta Garcia Solutions, is advising the state, and three law firms are also involved.

The bond prospectus explains the troubled history of Illinois’s pension system, revealing that that the bonds issued in 2003 called for the state to reduce its annual contributions to the pension fund and use the money instead to pay the bondholders their interest.

Those diversions, plus enormous investment losses in 2008 and 2009, left the pension fund with a shortfall of about $86 billion, or roughly twice the shortfall before the 2003 bonds were issued.

“That pension plan has been consistently abused now for at least the last 16 or 17 years,” said Brad M. Smith, president-elect of the Society of Actuaries and chairman of Milliman. He called the state’s schedule of pension contributions for the coming years “incredibly dangerous,” adding: “There’s a reasonable chance that these plans will run out of money.”

A 1994 state law, Smith noted, permits Illinois to contribute less to the pension fund every year than the amount that would actually cover the benefits. Adding new bond proceeds will not address that basic flaw, which investigators now say was based on an accepted actuarial method.

© 2011 RIJ Publishing LLC. All rights reserved.

Prudential Financial revenue rose 11% in 2010, but net income fell 20%

Prudential Financial Inc. posted an 88% drop in fourth-quarter net income on derivatives charges, but revenues for the quarter jumped 17% to $8.1 billion. For all of 2010, total revenues rose 11% to nearly $31 billion, but net income fell 20%, to $2.7 billion.

Net income for the fourth quarter dipped to $213 million on $912 million in realized losses and related charges on derivatives and fair value changes in embedded derivatives, pretax. These included $161 million in impairments and losses on sales of credit-impaired investments, Prudential Financial said in a release.

The company also announced that Bernard Winograd, 60, will retire as executive vice president and chief operating officer of its U.S.-based businesses on Feb. 11, to be succeeded by Charles F. Lowrey, 53, current president and chief executive officer of Prudential Investment Management.

In 2010, the company achieved “individual annuity account values over $100 billion and retirement account values over $200 billion,” said chairman and CEO John Strangfeld in a statement.

Earlier this month, Prudential completed the acquisition of two Japanese life insurers, AIG Star Life Insurance Co. Ltd. and AIG Edison Life Insurance Co., from AIG for about $4.2 billion in cash and assumption of third-party debt. 

In Prudential’s individual annuity business contributed $146 million to overall income by reducing amortization of deferred acquisition costs on policies and releasing reserves for guaranteed death and income benefits on variable annuities. Results were driven by gains in customers separate account values, Prudential said.

Buffett feels bullish

Warren Buffett’s $5 billion investment in Goldman Sachs during the financial crisis was a bet that the authorities would prop up the ailing economy, the billionaire businessman has claimed, according to bobsguide.com.

In an interview with the Financial Crisis Inquiry Commission (FCIC), the investor said that he knew key figures in charge of US financial policy would do what they could to ensure the financial system did not collapse. Buffett, who was quoted by Bloomberg, said: “It was a bet essentially on the fact that the government would not really shirk its responsibility at a time like that to leverage up at a time when the rest of the world was trying to deleverage.
“I made the fundamental decision that we had the right people, in [Ben] Bernanke, [chairman of the Federal Reserve] and [Henry] Paulson,[then-Treasury Department Secretary] and there with a president that would back them.”
The investor acquired preferred stock in Goldman Sachs during 2008, an investment which provides him with an annual ten per cent dividend.
As much as $700 billion was provided to banks and firms working within the financial services industry as part of the government’s Troubled Asset Relief Program.

Morningstar advisor platforms to receive bond data from Interactive Data Corp.

Morningstar, Inc., and Interactive Data Corporation have entered into an agreement where Interactive Data will supply individual bond information to Morningstar’s advisor software products. The bond universe will be available next month in Morningstar Advisor Workstation, the research and investment planning software platform used by roughly one in four financial advisors in the U.S., and in April in Morningstar Office, a portfolio management solution for independent advisors.

Morningstar will now feature reports and research on more than 1.3 million individual bonds, including corporate, government and municipal issues. It represents the first time an advisor software platform has offered comprehensive bond data alongside underlying holdings-based analytics for multi-security portfolios.

 Advisors will be able to use Morningstar’s investment database to search, screen, and sort bond information and create Investment Detail Reports(TM) on individual bonds, which will contain up to 10 years of performance history so that advisors can evaluate how the bond issue has weathered a variety of market conditions. Advisors can also use the report’s bond issue details and risk exposure to evaluate the bond’s role within a portfolio and compare against other bond issues.

Once the bond data is available, when advisors import their client portfolios from third-party integration partners into Advisor Workstation or Morningstar Office, the software will automatically recognize the fixed income securities in those portfolios, saving time and resources by eliminating the need to manually map the security or assign a less-accurate proxy.

Morningstar Advisor Workstation provides financial advisors with investment planning, client presentation, portfolio analysis, and investment research tools. It is licensed to and through institutions such as broker/dealers, custodians, and clearing firms as a web-based modular platform designed to work with a firm’s other back-office systems and applications. The bond universe will be initially available through the Clients and Portfolios and Research modules, with availability in the Hypotheticals and Planning modules later in 2011.

Morningstar Office is a global practice and portfolio management platform for independent financial advisors and wealth managers. It features portfolio management and performance reporting, advanced research capabilities, sophisticated investment planning, and intuitive customer relationship management (CRM) tools for batch reporting and secure communications using the platform’s Client Web Portal and document vault. Morningstar Office users also have the option to outsource all of their account management and reconciliation with Morningstar Back Office Services.

Riskier firms to pay higher PBGC premiums

President Barack Obama’s budget proposes to raise premiums the Pension Benefit Guaranty Corp. charges employers by $16 billion over ten years and, in a significant policy shift, would levy higher premiums on the riskiest companies, the Wall Street Journal reported this week.

The PBGC insures defined-benefit pension plans. Its $80 billion portfolio, mainly assets of pension plans it has taken over, is $23 billion short of the current value of pensions it has promised to pay. Premiums are supposed to make up the difference. Total premium revenues last year were $2.2 billion.

Rather than seeking a simple premium increase, the administration is asking Congress to give the PBGC authority to fashion a new approach in which premiums would be linked to the financial health of the employer sponsoring the underlying pension plan. Currently, two similarly funded pension plans, one sponsored by a well-financed company and another sponsored by a shaky one, pay the same premiums even though the latter is at much greater risk of sticking the PBGC with its pension promises. Under the proposal, the agency could charge the latter company a higher premium. The approach resembles one used to price bank-deposit insurance. Since 2007, the FDIC has grouped banks into four categories and charged riskier ones higher premiums.

Under the Obama proposal, the changes wouldn’t take effect for two years—at the earliest—to give the agency time to devise the new system and go through a formal rule-writing process. Among big issues to be resolved are the factors to use in assessing the riskiness of the employers and how much more to charge riskier companies. About one-third of employers whose pensions are insured by the agency have credit ratings below investment-grade; they would be hit harder by the premium increases.

Some employers and unions are concerned higher premiums would lead businesses to freeze or even terminate pension plans. The American Benefits Council, which represents big employers, recently has complained to Congress about PBGC rules and its approach to businesses. “Employers are fleeing the defined-benefit-plan system…they are freezing their plans, and…certain well-intended PBGC policies can actually threaten business viability and increase PBGC liability,” the council’s Ken Porter testified in December. Of workers with defined-benefit plans, 22% are in plans that have been closed to new workers or ceased accruing benefits for some or all participants, the Labor Department says.

The collapse of several big pension plans has increased the PBGC’s long-term deficit in recent years. In the past, Congress has raised premiums after the agency reported big deficits. The last time, in 2005, Congress lifted the premium on single-employer plans from $19 a worker annually to $30 and indexed it to inflation. Today, the current basic premium is $35. With various add-ons for underfunded plans, the average premium is close to $65.

The PBGC was created in 1974 after some workers lost pensions altogether when their employers went under. It guarantees basic benefits for 44 million American workers and retirees with defined-benefit pensions, a shrinking fraction of the work force, and is currently responsible for paying current or future pensions for about 1.5 million.  

The president’s fiscal commission, led by former Clinton White House Chief of Staff chief Erskine Bowles and former Sen. Alan Simpson (R., Wyo.), recommended PBGC premiums increase by $16 billion over 10 years, the same as the new Obama budget.

 A private deficit-reduction panel, chaired by former Sen. Pete Domenici (R., N.M.) and former Clinton budget chief Alice Rivlin, proposed a 15% increase in the basic premium, among other changes. It recommended that premiums for underfunded plans be linked to the riskiness of their investment portfolios.

John Hancock Annuities launches New ‘Retirement Talk’ video

John Hancock Annuities has launched a second module of the integrated ‘Retirement Talk’ marketing program, giving advisors another simple way to connect with clients who are looking for ways to enhance their retirement security.

The new Retirement Talk module introduces options that help couples planning for retirement ensure that their income will last for the duration of two lives. It features a client-friendly educational video that addresses the emotions that many couples are experiencing after the roller-coaster markets of the last few years, and how they believe it has impacted their plans for retirement. The video complements John Hancock’s original highly successful Retirement Talk video, which demystified annuities and the role that guaranteed lifetime income options may play in a well-rounded retirement portfolio.*

The videos plus a wealth of support material, including an interactive income planning calculator, is available at www.jhretirementtalk.com, and also in CD format.

Retirement Talk videos are packaged with a brief message and suggested follow-up actions for the client to consider. An Advisor Guide provides suggestions on identifying clients who may benefit from the program, and offers talking points to address during client meetings. Customizable client letters are also available. The entire program may be presented by authorized advisors in CD format or via a client-approved micro web site, www.jhretirementtalk.com, where authorized distributors and their clients may view the video and related material.

Funded status for largest pensions improves to 82.2% in January  

The nation’s 100 largest defined benefit pension plans experienced asset increases of $6 billion and liability decreases of $35 billion in January resulting in a $41 billion increase in pension funded status for the month, according to the Milliman 100 Pension Funding Index. It was the second consecutive month of positive performance recorded by the index.

For the last 12 months, these pensions experienced a $15 billion improvement in funded status, which compares favorably to the performance over the course of calendar year 2010, when these pensions saw the funded status deficit increase by $49 billion.
“This is the first time [the funded ration has] been above 80% since last April,” said John Ehrhardt, co-author of the Milliman 100 Pension Funding Index. “At the same time, the pension deficit has been yo-yoing between $200 billion and $450 billion for the last two years, and we are still susceptible to that kind of volatility.”

The study offers projections for 2011 and 2012, which help to illustrate the challenge posed by the pension funded status deficit. If interest rates continue along their current lines and these 100 pensions achieve their 8.1% median return, the deficit will shrink to $223 billion by the end of 2012. More optimistic performance—12.1% annual returns and eventual interest rates of 6.67%—would help these pensions reach 90% funded status by the end of September and would eliminate the deficit and put the funded ratio at 108% by the end of 2012.  

To view the complete monthly update, go to http://www.milliman.com/expertise/employee-benefits/products-tools/pension-funding-index/. To receive regular updates of Milliman’s pension funding analysis, contact us at [email protected].

SPARK Institute updates best practices for information sharing

Following a recent two-week public comment period on a draft version, The SPARK Institute has released a final updated version of its information sharing best practices for 403(b) plans,” said Larry Goldbrum, General Counsel. 

“This update of Version 1.04 reflects certain industry developments that occurred since it was originally published in June 2009,” said Goldbrum.  He said there were no significant changes to the draft as a result of public comments.  The effective date of the updated version is October 1, 2011.  The document is posted on The SPARK Institute website.               

The SPARK Institute represents the interests of a broad based cross section of retirement plan service providers and investment managers, including banks, mutual fund companies, insurance companies, third party administrators, trade clearing firms and benefits consultants.   

Advisor-focused websites progressing: IRI

The Insured Retirement Institute (IRI) and Corporate Insight have found widespread improvement in key areas on advisor websites offered by financial services firms.  Advisor sales resources experienced the greatest improvement, rising 18% to an average of 2.72 (out of a 4-point scale) from the 2010 assessment average of 2.54. 

Advisor product information and marketing also saw a notable improvement, with the category average increasing 13% to 2.88 from the 2010 figure of 2.75. Industry averages were up from the 2010 report in five of the six audit categories, a sign that firms are actively addressing key areas on their advisor websites. 

The report also found that:

• A number of firms upgraded the detail and level of transparency offered on both variable and fixed annuity product information pages with a focus on suitability and fees.
• Firms consistently upgraded the size and quality of their advisor sales resource libraries throughout the year, expanding the availability of prospecting and business-building materials with a greater emphasis on growing client relationships.
• Despite a modest increase in the industry average (4%), advisor website design and usability continued to be a strong point, with navigation being the focal point of advisor site revamps performed.
• Advisor sales tools and advisor literature ordering systems categories continue to be an area poised for improvement, with only four new advisor tools being introduced.

Aon Hewitt 401(k) Index Observations for November 2010  

401(k) participants continued to move money from fixed income investments into equities in November, according to the Aon Hewitt 401(k) Index.

A total of $217 million (0.19% of total assets) moved from fixed income funds into diversified equity investments (excluding company stock) during the month, with over three quarters of days seeing equity-oriented transfers.

In contrast, all fixed income asset classes saw net outflows in November. Bond funds experienced (net) outflows of $89 million while GIC/stable value funds had $49 million in outflows.

A sum of $12 million was also shifted out of money market funds. Company stock funds experienced the largest outflows of the month, with $110 million moving out of this asset class, which continued the outflow trend for past several years.

Lifestyle/premixed funds received the largest inflows during the month, with $100 million transferring into this asset class. In addition, all domestic equity asset classes received modest inflows. Small U.S. equity funds rallied during November, and also received $65 million in net transfers. Large U.S. equity markets were relatively flat, but received $55 million in inflows.

The level of transfer activity in November was in line with that of the past few months — 0.03% of balances transferred on a net daily basis. Two days in November had an above-normal level* of transfer activity.

Total equity holdings were up slightly from 58.3% at the end of October to 58.9% at the end of November. Overall, participants’ sentiment toward the stock market did not appear to change much in November, as employee equity contributions remained similar to last month at 60.9%.

*A “normal” level of relative transfer activity is when the net daily movement of participants’ balances as a percent of total 401(k) balances within the Aon Hewitt 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months. A “high” relative transfer activity day is when the net daily movement exceeds two times the average daily net activity. A “moderate” relative transfer activity day is when the net daily movement is between 1.5 and two times the average daily net activity of the preceding 12 months.

To help financial advisors explain the value of long-term care insurance in the context of retirement planning, Wealth2k has produced a movie called “Why Long-Term Care Insurance is Needed.”

The compliant eight-minute movie explains that after age 65 approximately two-thirds of individuals will need some form of long-term care. These and other important facts are framed in the context of preserving investors’ retirement security.

“I hope that advisors will use this tool as a way to stimulate discussions with their clients on this crucial subject,” said Macchia in a release. “The movie will make it easier for advisors to broach the issue of planning for the costs of long-term care.”

Financial advisors can download the Wealth2k long-term care insurance movie here. There is no charge. 

Wealth2k also announced the introduction of its the web-based LTC Impact Calculator, an interactive application that illustrates the impact LTC costs can have on an investor’s savings and retirement income.

The tool analyzes the financial impact of a nursing home stay based upon the assumed duration of the nursing home stay, the assumed rate-of-return earned on the retirement assets, and the assumed drawdown rate.

State-specific nursing home costs are utilized in the calculations. The LTC Impact Calculator is being added at no additional cost to Wealth2k’s advisor-personalized Retirement Time websites.

© 2011 RIJ Publishing LLC. All rights reserved.

US mutual fund investors added about $34 billion in net new cash to US stock and bond mutual funds in January 2011—an improvement over December’s roughly $16 billion in net outflows from long-term funds, Strategic Insight reported.  (The figures include flows into open- and closed-end mutual funds, but not ETFs or variable annuity subaccounts).

An estimated $21 billion in net new cash went into US equity funds in January 2011, making it the first month of net inflows to those funds since April, when investors put $11 billion into domestic stock funds, and the first time US equity funds topped $20 billion in net inflows since February 2004.  

“The remarkable increase in stock prices in recent years, and consensus expectations for 2011 to be another year of gains, should continue to stimulate sales increases for equity funds. We project equity fund sales growth of 22% in 2011,” said Avi Nachmany, SI’s Director of Research said, citing the firm’s recent report, Forces Shaping the Mutual Fund Industry in 2011 and Beyond.

International equity funds still drew $12.5 billion in January, their eighth straight month of positive flows.

Bond fund total returns turned positive in January, after two negative months. This helped spark net taxable bond inflows of nearly $13 billion demand–especially to floating rate, high yield and global bond portfolios. Near-zero yields on money fund and bank deposit accounts continue to stimulate bond fund inflows.

Net outflows of nearly $13 billion from muni bond funds were largely triggered by liquidity conditions, including an unusually large slate of muni new issues in recent months. Concerns about the troubled finances of many states and municipalities were also a factor. But that could change: fears over municipal defaults may be overblown, and new issues of muni bonds are starting to slow.

Flows into bond funds should stay strong in 2011, though about 10% less than 2009. “We expect new sales of bond funds in 2011 to exceed $750 billion,” Nachmany said. After seeing net outflows of $509 billion in 2010, money-market funds saw net outflows of $77 billion in January.

Strategic Insight estimated that investors poured an additional $10.9 billion into US Exchange-Traded Funds (ETFs) in January 2011, the fifth straight month of positive flows to ETFs. Flows were driven mostly by demand for US equity ETFs (especially growth funds and sector funds). Bond ETFs, led by high yield and short-maturity products, saw net inflows for the first time since October. At the end of January, US ETF assets stood at a record $1.02 trillion.

© 2011 RIJ Publishing LLC. All rights reserved.

A new report on the sustainability of the UK’s pension system urges that public sector defined benefit (DB) plans should be closed and replaced with defined contribution (DC) schemes by the end of the decade.

The report, Self-sufficiency is the key – Addressing the public sector pensions challenge was published by the Centre for Policy Studies, a Conservative party think tank. It suggests that all public sector workers earning over £10,000 a year be encouraged to enroll in the National Employment Savings Trust (NEST).

In the report, Michael Johnson, a former JP Morgan investment banker and consultant at Towers Watson, argues that public sector pensions are unaffordable, unsustainable and unfair, likening the current situation to a Madoff-style pyramid, collapsing under the pressures of underfunding and demographic change.

He suggested that all currently unfunded pensions, such as the National Health Service’s pension fund, should be closed by 2020 and replaced with nominal DC schemes.

The government should take advantage of the imminent retirement of baby boomers to phase in new DC retirement offerings as replacements for the aging workforce are hired, he said.

“Moving to a DC basis would have to be on an unfunded basis, i.e. notional DC,” the report said. “There would be no underlying assets, and contributions would continue to flow to the Treasury to be available to pay pensions in payment.”

To address the lack of underlying assets, a system of indexation should be developed, the report says. “In the interests of simplicity and transparency, the government should seed the accounts with index-linked gilts (issued on a cashless basis) in an amount that reflects the annual increase in the state’s liability,” it says.

However, the report stresses that the scheme would not be linked to longevity expectations, allowing the government to avoid additional longevity risk. Members wishing to pursue an investment strategy outside of simple gilt [British Treasury obligations] exposure would be allowed to do so, but at their own risk, with the government’s sole obligation being the servicing of the gilts.

A more cautious approach would see a shift to career-average pensions, with a salary cap in place, with NEST and the notional DC scheme described above providing additional retirement income.

© 2011 RIJ Publishing LLC. All rights reserved.

Britain’s National Employers Savings Trust Corporation, or NEST, is hiring UBS, State Street and BlackRock to manage portions of the money in the state-sponsored, employer-based defined contribution plan set up by the Department of Work and Pensions.   

Five investment “mandates” were confirmed. UBS has won the mandate for passive global equities with its Life World Equity Tracker, which tracks the FTSE All World Developed Index. State Street will manage UK Gilts in its fund that tracks the the FTSE Actuaries UK Gilts All Stocks Index. State Street also picked up another fixed income mandate when it was picked to offer UK Index-Linked Gilts (ILG) through its UK ILG Over 5 Years Index Fund.

In the last two of the announced mandates, BlackRock’s Aquila Cash Fund and Life Market Advantage fund will offer cash and diversified beta funds, respectively. The Life Market Advantage fund aims to deliver returns similar to a 60% equity/40% bond fund over the long term, but with less risk.   

NEST CEO Tim Jones said infrastructure is now in place to test the organization’s systems.

 © 2011 RIJ Publishing LLC. All rights reserved.

New fee disclosure regulations for retirement plan service providers will not be put into effect until January 1, 2012, the Employee Benefits Security Administration (EBSA) announced. ERISA Section 408(b)(2) had been scheduled to take effect July 16, 2011.

“We now believe plans and plan service providers would benefit from an extension of the rules applicability date,” said assistant Labor Secretary Phyllis Borzi said in a statement.

The regulations will require the disclosure of direct and indirect compensation to service providers who receive $1,000 or more in compensation and who provide fiduciary or registered investment advice, offer investment options in connection with brokerage or recordkeeping services, or receive indirect compensation from the plan, EBSA said.

The rules require plans to report legal and accounting fees separately, and to describe the fees that participants must pay to borrow from their plan or to have a qualified domestic relations order processed.

The earliest version of the regulations, which were part of the Pension Protection Act of 2006 and was scheduled to take effect in early 2009. That version rejected by the Obama Administration, which wanted tougher safeguards against high fees and conflicts of interests in the sales of investments to retirement plans. 

EBSA published interim final regulations in July 2010 and received many comments, including suggestions for a summary plan document system to help plan fiduciaries use the cost data, Borzi said.  

© 2011 RIJ Publishing LLC. All rights reserved.

Women in the UK lag far behind men in average pension savings, according to The Telegraph.

British women have a median balance of just £9,100 ($14,620) in their defined contribution “pension pots,” while men have a median balance of £52,800 ($84,820). The discrepancy stems largely from career breaks for child-rearing. Until the early 1990s, employers could ban part-time workers from joining their DC plans, which penalized women in particular.

A pension pot of £9,100 would generate an annual income of just £564 ($906), or less than £11 ($17.70) a week as an annuity, according to Hargreaves Lansdown, the independent financial adviser.

The figures were supplied by the Office for National Statistics in response to a parliamentary question by Rachel Reeves, the shadow pensions minister.

The lack of pensions savings of most women will cause particular problems in the next few years, as women have to wait longer before they receive the state pension, according to critics of government policy.

The State Retirement Age (SRA) for women is being raised from 60 to 65, and then—along with men—being raised to 66 by 2020 under recent plans unveiled by the coalition Government. The age hike comes far sooner than under previous proposals by the Labor government.

An estimated 500,000 women born between September 1953 and March 1955 will have to work at least a year longer than they would have under the previous plans.  

© 2011 RIJ Publishing LLC. All rights reserved.