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Illinois to bolster state pension with new borrowing—Again

Posted on February 23, 2011 by Editor Test -

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.

Transamerica Launches New VA Income Rider

Posted on February 23, 2011 by Editor Test -

A new optional variable annuity living benefit rider from Transamerica, called Retirement Income Max, offers annual withdrawal percentages of 6.5% at age 75, 5.5% from ages 65 to 74, and 4.5% from ages 59 to 64 for the single life option. The joint life option is 40 basis points less for each age band. The annual rider fee is one percent.

In up markets, in years when no withdrawals are taken, the contract locks in the highest “Monthiversary” value and automatically increases the withdrawal base (the value used to calculate the rider withdrawal amount) to equal the new high water mark.

In down markets, in years when no withdrawal is taken, it provides 5% annual compounding growth to the withdrawal base for up to 10 years. If the withdrawal base was stepped up in the previous year, the 5% growth will be based on that amount, providing “growth on growth” potential.

The mortality and expense risk fee ranges from 60 to 190 basis points, depending on the class of contract. The 100-basis point rider fee can rise if the client opts for step-ups in the income base, but can go no higher than 175-basis points over the life of the contract. The largest surrender charge is 9%.

The investment options include:

American Funds Bond Fund – Class 2 Shares (64 basis points)
Transamerica AllianceBernstein Dynamic Allocation Variable Portfolio (VP) (107 bps)
Transamerica Asset Allocation – Conservative VP (Portfolio by Morningstar) (117bps)
Transamerica Asset Allocation – Moderate VP (Portfolio by Morningstar) (120 bps)
Transamerica Foxhall Global Conservative VP (156 bps)
Transamerica Money Market VP (66 bps)
Transamerica Index 35VP (Vanguard ETFs) (79 bps)
Transamerica Index 50VP (Vanguard ETFs) (76 bps)
Transamerica PIMCO Total Return VP (95 bps)
Transamerica U.S. Government Securities VP (86 bps)
Guaranteed Fixed Account

The AllianceBernstein Dynamic Allocation fund, interestingly, makes short-term adjustments to the fund’s asset mix of individual securities, underlying exchange traded funds, forwards, swaps and futures to achieve targeted exposure to domestic equities, international equities, domestic bonds, international bonds and foreign currency. This approach seeks to generate improved returns per unit of volatility, as compared to those from fixed weight or rules-based models.

“We pay very close attention to the kinds of solutions financial professionals are seeking to effectively plan for their clients’ retirement,” “With the Retirement Income Max rider and a Transamerica variable annuity, we believe we have helped to address the client’s most common and pressing desires – to have a reliable lifetime income stream that is protected from market downturns, and to also have the ability to maximize this income,” said Dave Paulsen, chief sales officer of Transamerica Capital, Inc.

In years a withdrawal in excess of the rider withdrawal amount is taken, the Monthiversary component of the automatic step-up feature will not apply. An excess withdrawal will cause the withdrawal base, and thus rider withdrawal amount, to decrease. If an excess withdrawal causes the withdrawal base to fall to zero, the annuity policy and rider will terminate.

Like most guarantee lifetime withdrawal riders, this rider has certain limitations. Rollups and step-ups don’t apply in years when withdrawals are taken. Contract owners must allocate 100% of the policy value into one or more of the designated investment options. The 5% growth rate applies only to the Withdrawal Base; it does not apply to policy value, optional death benefits, or other optional benefits.

Will New Retirees Rush to Spend Their Savings?

Posted on February 23, 2011 by Editor Test -

Retirement researchers have often wondered what Boomers will do when they finally get hold of their 401(k) or 403(b) or IRA assets. Will they burn through the cash and be flat broke at 75? Will they be spendthrift grasshoppers or frugal ants?

It’s too soon to know how Boomers will manage their savings. But a new study of existing retirees suggests that those with under $90,000 in their accounts may spend it quickly, but people with more than that are likely to hoard their savings.

“Our central finding is that PRA [personal retirement account] assets, like home equity, tend to be conserved in the early retirement years,” write James Poterba of MIT, Steven Vesti of Dartmouth and David Wise of Harvard. “Only a small proportion of households draw down PRA assets precipitously either before or after age 70½.”

Indeed, if there were no Required Minimum Distribution of qualified savings at age 70½, the current cohort of affluent older Americans seems to obey the conventional wisdom that it’s best to spend tax-favored assets last—after guaranteed income and taxable assets.

“There’s been concern that individuals would draw the money out as soon as they got there, and the assets wouldn’t last long during the retirement period. But the evidence is that the withdrawal profiles are relatively modest. Some are making large withdrawals, but the average is modest. It also looks as though the RMD rules are biting,” MIT’s Poterba told RIJ.

The paper, “The Drawdown of Personal Retirement Assets,” says that only about 20% of retiree households report withdrawals from traditional IRAs and 401(k)s before age 70½. After that, the proportion reporting withdrawals jumps to 60%.

Even then, “the overall proportion of assets withdrawn continues to be a small proportion of the PRA balance. This withdrawal ratio averages between one and two percent between ages 60 and 69, and rises to about 5% at age 70½. It fluctuates around that level through age 85.”

“Our evidence is consistent with the view that most households conserve PRA assets for a ‘rainy day,’” the paper said. “Households may want to preserve these funds for contingencies such as entry to a nursing home or other large expenditures”—much as they resist tapping home equity except as a last resort.

But many of today’s retirees have defined benefit pensions that allow them to defer the use of 401(k) assets, MIT’s Poterba told RIJ. Future retirees, few of whom will have DB pensions, may not have that luxury, he conceded.

Future retirees may also have larger average balances, since they’ve spent more time in the 401(k)/IRA era that began in the mid-1980s and which progressed hand in hand with two huge run-ups in stock prices (along with a couple of major busts).

“While I think that what we report provides a good snapshot of people of current retirement age, the key challenge in looking forward is that people will have had more years to save in 401(k)s,” Poterba said.

“This is a population first that did not work all of its working life when 401(k)s were ubiquitous,” he added. “They’re reaching retirement with smaller balances, and they have a higher rate of DB coverage than successor generations, so more of them I suspect are people who were able to take 401(k) plans as a supplemental plan.”

The study is also skewed in the sense that not low-income Americans are a lot less likely to have PRAs. The paper shows that only 8% of the people in the bottom 10% of wealth, health and income status have PRAs, while 80% of people in the top 10% do. (It’s well known that only about one half of American workers have access to any workplace retirement savings plan.)

People with smaller account balances are more likely to spend down those balances quickly in retirement, the paper showed. Early retirees (ages 60 to 69) with less than $90,000 in their PRAs were likely to withdraw at least 10% of their assets per year. Those with $20,000 to $30,000 in their accounts spent down an average of 22% a year.

The paper also showed that, “among households headed by someone between the ages of 60 and 69, roughly 10% of PRA owners make an annual withdrawal of 5% or more of their PRA assets, and about 7% withdraw more than 10% of assets.

“At ages 72 and older, after required distributions begin, 59% of households withdraw less than 5% of their PRA balance in a typical year, and 77% withdraw less than 10% of balance. On the other hand, 11% of those over the age of 72 withdraw more than 20% of their balance.”

LPL Taps Five Insurers for New VA Platform

Posted on February 23, 2011 by Kerry Pechter -

LPL Financial, the nation’s largest independent broker-dealer, has decided to make it easier for its 12,444 affiliated financial advisors to sell variable annuities and integrate them into fee-based client relationships.

The vehicle is LPL’s new Fee-Based Variable Annuity platform, which allows advisors to handle a client’s VA subaccount assets the same way they handle other investments—on the same screens, in the same statements and through the same billing processes.

For the minority of LPL advisors who were already selling VAs, the new platform may not change much. But advisors who were on the fence about VAs could begin to sell them if they don’t have to interrupt their normal workflow to do it.

LPL advisors are free to sell VAs from a wide variety of issuers, but the broker-dealer has put only five insurers on the platform: AXA-Equitable Life, Allianz Life, Lincoln National Life, Prudential Annuities and Sun Life Financial. Two requirements: no surrender charge and an M&E of no more than 65 basis points.

Insurers have long recognized that their hopes of growing the VA industry’s share of the $10 trillion-plus Boomer retirement hoard, stuck for a decade at about 10%, depend to a large degree on getting fee-based advisors to sell them. It’s been a tough sell.

In recent years, many VA issuers created a special share class for fee-based advisors, eliminating the commissions and the high mortality and expense risk charges that typically went with them. But that innovation didn’t move the sales dial much, because buying and servicing a VA still required a departure from the advisors’ normal procedures.

Advisors were still required, for instance, to obtain the client’s permission before money from one annuity subaccount to another. The new platform lets advisors reallocate VA assets without the out-call.

“The advisor now has the capability to implement changes in a client’s portfolio on a discretionary basis,” said John Moninger, LPL’s executive vice president of Advisory and Brokerage Solutions. “That’s a big deal. It’s one of the biggest deals.

“In 2008 and 2009, we were having a hard time making changes in clients’ accounts. The clients were asking, why did you have to call me about these assets and not the others? The technology allows us to bring that into the system,” he said.

In a statement, LPL said, “Through this platform, purchases of fee-based variable annuities will be integrated in the existing LPL Financial process for opening accounts for investors, and holdings will be viewable through all advisor-facing technologies, including BranchNet, the company’s proprietary, web-based technology platform that allows advisors to manage all critical aspects of their business.”

Sign of the times

LPL’s move is also a sign of the times. The effort to create the new platform was driven in part by a rising appetite for safety among investors and a growing need among Boomers for secure retirement income, Moninger said.

“Coming out of the financial crisis, a lot of fee-based advisors wanted to know how to protect investors from similar events in the future. They were saying, I need this vehicle but I want to do it on a fee-basis. We were also watching the demographic shift,” he said.

Regarding LPL’s criteria for including insurers on the platform, Moninger named soft qualities rather than hard sales numbers. “Of course, our primary partners in variable annuities go way beyond that list,” he said. “But we were looking for a complementary list of firms who were committed to educating our advisors, some of whom have not used annuities in the past, and who were committed to product development, who were committed to change and to thinking this all the way through.”

“It’s a big step in the right direction,” said Bruce Ferris, head of sales and distributions at Prudential Annuities. “It moves annuities closer to the mainstream of fee-based advisors. In the past, we’ve had a version of our variable annuity for sale through LPL with very little traction. We said, if we create a share class [for fee-based advisors] will that get us there? And the answer was a resounding ‘No.’ We were still asking the advisors to do business on our terms and not theirs.”

Will this new platform raise sales among fee-based advisors? “The proof will be in the results. There are still many advisors who won’t go near annuities, but this should allow them to bring annuities into the conversation.” This development could also lead to “unbundled solutions where we put our protection on other pools of assets,” Ferris said.

At AXA-Equitable, Steve Mabry, senior vice president, annuity product development, said LPL like his firm’s product. “LPL was looking for different types of products and our Cornerstone contract is attractive to them,” Mabry said.

“It’s got a two-sleeve approach, with over 100 funds on the performance side and a guaranteed account that grows at a rate of 1.5% over the 10-year Treasury rate on the protection side,” he said. “It allows the fee-based advisor to become more of an income engineer, and to move the assets over time from performance to protection.”

As for consumers, they apparently aren’t as averse to paying an annual wrap fee on their VA assets as they are to paying a front-end load (with an A-share variable annuity) or a high ongoing M&E charge (as with a B-share product), says Dywane Hall, an LPL manager in Alexandria, Va.

“A big benefit of using the variable annuity platform is the fee structure,” Hall said. “It’s about bringing in the people who want the advantages of a variable annuity and don’t mind paying the advisor a management fee but who have heard all about the huge fees associated with variable annuities. You’re taking the hesitancy out of the equation. Overall, it’s just another arrow in your quiver.”

In creating a VA platform, LPL isn’t ruling other types annuities out of the retirement equation. “We don’t believe there’s anyone answer to the retirement income puzzle,” Moninger told RIJ. “We’re just trying to solve two things: how do we improve client experience through the behavior of the advisor, and how do we make our advisors more efficient? When we solve those two, the solutions will pop out.”

The Bucket

Posted on February 16, 2011 by Editorial Staff -

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.

A Q&A about GuidedSpending 2.0

Posted on February 16, 2011 by Editor Test -

After GuidedChoice announced its GuidedSpending 2.0 retirement income planning model for qualified plan participants, RIJ submitted a few follow-up questions about the new service to GuidedChoice CEO Sherrie Grabot and Chief Investment Officer Ming Wang. Here are RIJ’s questions and the executives’ responses.

RIJ: In the hypothetical client examples offered during your Webex presentation on February 9, the GuidedSpending tool appeared to recommend a $2,300 a month payout for a plan participant—“Al”—with $200,000 in savings, and a $4,610 monthly payout for a couple—“Gene and Eva”—with $357,000 in savings. Those payout rates sound extremely high, 13.8% and 15.5%, respectively. Did those figures include Social Security and/or pension income?

GuidedChoice: An important differentiator of GuidedSpending for the defined contribution market is that it includes ALL retirement accounts that the retiree wants to include. Social Security is automatically calculated and included for them, but they can choose to modify or omit it. In addition, any applicable employee benefits, pension, retiree medical, stock options, etc. are also automatically included. Spousal, prior employer plans, and any non-plan accounts or assets are also included. The retiree can always choose to modify or omit any accounts GuidedSpending has included.

The $2,300, and $4,610 are an after-tax, spendable monthly income including all sources of retirement income that the individual chose to include in GuidedSpending. Al only has Social Security and a single 401(k) balance of $200,000. The couple’s amounts included Social Security of $1,745 monthly, a small pension income of $350 monthly beginning at Gene’s age 65, as well as amounts that would come from Gene’s 401(k), the $200,000 balance, and Eva’s 403(b), a $82,000 balance. Gene also had a previous retirement plan balance of $70,000 that is included. Together they had nominal IRA balances of $3,908. We show the amounts in summary and detail to the client in the interface.

RIJ: The last slide in your presentation showed payouts of about $7,000 a year from a $100,000 account. In answer to my question about that rate of payout, your chief investment officer seemed to say that if you have $100,000 in savings you can afford to take out 4% of principal plus about 3% worth of growth, to get to seven percent. But that contradicts every sort of model I’ve ever seen that calculates sustainable payout rates. Or perhaps I misunderstood him.

Guided Choice: Sustainability of payout rates will depend on various factors, two key factors being the planning period and whether the payout in adjusted for inflation. For now, we will ignore inflation. Assume the person retires at age 65 and has a planning period of 25 years, until age 90, starting with $100,000 in his account. If we assume no return from investment, then he can withdraw 4% of his account value. The next year, he can withdraw 4.17% since there are only 24 years left to fund. Each year, he can withdraw incrementally a greater percentage of the balance because the planning period is reduced by one year. By the 11th year, he can withdraw 6.67%. Over this 11-year period, his average withdrawal rate is 5.13% using a zero rate of return.

In essence, the client would withdraw $4,000 each and every year for the 25 years. The dollar amount stays the same, but as a percentage of the account balance, the payout ratio increases each year. By the 11th year, this means there are still 15 years left, and he can therefore withdraw 1/15 of his account value which equals 6.67%

If we assume a rate of return, as we do in the case we showed on the slide, then the percentages that could be withdrawn each year will be higher than the zero rate of return example. In the example comparing the Spending Strategies, we use an annual 4% rate of return, the guaranteed return on many annuities. So each year, a higher percentage can be withdrawn, with the average being 7.2%.

During the years 2000 to 2010, because GuidedSpending uses a high and low spending value, the overall average is higher. In other words, during the good years in the market, investment performance would allow for more money to be withdrawn, but the retiree did not choose to withdraw more since the utility value of more money is too low. They preferred to leave the money in the account to provide for a “rainy day” or to leave for heirs. This “consumption smoothing” methodology provided a higher sustainable payout rate during the years between 2000 and 2010. (Note: Other periods could experience different results.)

RIJ: In previous conversations with a GuidedChoice executive, I was told that you envisioned a GuidedChoice IRA down the road, but during last week’s presentation, you were more cautious about announcing a proprietary IRA, saying, “Stay tuned.” Do understand correctly that when you’re partnering with an investment firm like Charles Schwab, a participant’s money would rollover to a Schwab IRA, but if you’re partnering with a firm that has no IRA capability of its own, you might offer your own rollover IRA?

GuidedChoice: The markets are evolving at an exciting pace, and we are working with our clients and prospects to deliver a variety of integrated solutions. Because of the proprietary nature of the work being done, we’re not currently at liberty to discuss the details of some of our future plans. We are working on integrated solutions with partners designing rollover IRAs, annuity products, guaranteed income mutual funds and low cost ETF solutions. This should prove to be an active year in product launches, so we will keep you abreast as we move along.

Paradise Regained

Posted on February 16, 2011 by Martin Hutchinson -

Emerging market central banks in China, India, Brazil and elsewhere are now raising interest rates fairly aggressively, and even in the United States long-term Treasury bond rates have risen significantly in spite of Fed Chairman Ben Bernanke’s efforts to hold them down.

Given the continued rise in commodity prices, it’s likely that these are just the first moves in a lengthy period of interest rate rises. In the medium term, this could raise real long term interest rates, net of inflation, to the 5%-6% levels of the early 1980s, necessary to quell inflationary forces and compensate for the lengthy and unjustified period of ultra-cheap money.

It’s thus worth contemplating what such a world of high interest rates will look like.

Lower home prices

Much though one may wish for such a world, it has to be admitted that there will be some fairly severe side effects, albeit temporary ones. The incipient U.S. housing market recovery that began in spring 2010, which has since shown signs of petering out, will disappear altogether.

With mortgage rates at around 7-8% or quite possibly higher, the current generation of homebuyers will gasp when told what their mortgage payments will be. Congressional action to limit the home mortgage interest deduction may well increase the sticker shock further. The result will be further declines in house prices.

For most houses, prices will not collapse, but decline perhaps a further 10-15%. However there will be certain categories of house whose prices will collapse, notably the “McMansion,” built in the post-1995 boom, mostly of shoddy materials, with gaudy features and very large living space, but normally not much land. Houses in this category that at the top of the boom sold for $1.5 million will find a demand only at the $500,000 level, as the economics of home-buying will simply not support mortgages of the size necessary for the original purchase.

Consequently some quite wealthy people, who had overstretched to buy their dream houses, will find themselves not merely underwater but drowned, as their mortgage will exceed the value of their house by $500,000-$750,000.

Treasury funding crisis

A second adverse affect of a high interest rate world will be on the Federal budget and to a lesser extent on state budgets. The Congressional Budget Office’s budget projections to 2021 assume a 10-year Treasury bond rate ranging no higher than 5.4% during that decade. In a high interest rate environment this is clearly far too optimistic.

Furthermore, the increase in interest rates will affect the U.S. Treasury’s borrowing costs quite quickly, because in the last decade Treasury has foolishly allowed the average maturity on its debt to decline to a mere 4.5 years. Thus, even if the current efforts to cut public spending bear some fruit, the deficit will soar again once the high interest rate period hits.

As a corollary of this, Treasury may find bond funding has become much more difficult to obtain. Investors will be looking at capital losses of 20-30% on their longest term Treasury bond holdings, and even the mildest mannered central bank may come to feel that there must be a better way to invest. Hence the advent of the high interest rate environment may well coincide with a Treasury funding crisis.

Of course, the Fed can always buy up all the paper that Treasury issues, as it is doing currently, but in an environment where inflation is a real problem it’s likely that some combination of the authorities and the markets will have prized Bernanke’s tiny frozen hands off the Fed tiller, so that avenue may no longer be available.

This situation is unlikely to result in a full U.S. default, but it will undoubtedly make for a very unpleasant couple of years.

Disappearing spreads

The U.S. Treasury’s problems will mostly require an unprecedented degree of self-discipline among the Executive and Legislative branches. However the rise in interest rates will also cause huge problems for the U.S. banking system and more particularly for the “shadow” banking system of hedge funds, private equity funds, etc.

Many banks and hedge funds have invested heavily in mortgages or mortgage-backed securities, relying on Bernanke to keep short-term interest rates low enough to maintain a satisfactory “spread” between their short-term borrowing costs and their long-term mortgage income. As interest rates rise, this spread will disappear and the value of their mortgage portfolios themselves will decline. First Pennsylvania Bank went bust this way in 1980; the casualty list is likely to be much longer this time.

Higher interest rates will not just affect investors in mortgage bonds. Private equity funds buy companies and leverage the purchase, relying on the company’s cash flows to pay debt service costs. As interest rates rise, debt service costs will rise, reducing the capital value of a given corporate cash flow and causing the fund’s outflows to exceed its inflows in many cases. This will quickly cause a high mortality rate among the private equity fund community. Similarly hedge funds, many of which rely on excessive leverage of moderate but fairly predictable returns, will find a high interest rate environment very unpleasant indeed.

Positive effects

So far I have covered only the adverse effects of a high interest rate environment, most of which will be fairly short-term although the fiscal discipline imposed on politicians will be with us over the longer term. However, as readers were perhaps guessing when I expounded the high mortality levels high interest rates would produce among hedge funds and private equity funds, a high interest rate environment will have a number of positive effects, most of which will be structural and long-term.

For a start, the culling of the private equity and hedge fund industry will decimate the excessive bonuses of Wall Street (because there will no longer be such an active market for top traders’ services) and will sharply reduce the percentage of top graduates heading for these mostly unproductive activities. Leverage in the economy as a whole will decline; it will have become too expensive. The search for short-term gain will also decline, because it will be too expensive and difficult to collect together the money pools for such speculation.

More savings

These changes will over time greatly benefit the rest of the economy. It will at last encourage saving, since savers will be rewarded with positive real returns. Since saving will increase and consumption consequently diminish, the pressure of imports will also diminish and the U.S. balance of payments deficit will finally decline towards zero, reducing the country’s vulnerability to foreign finance providers.

This combination of higher saving and a lower payments deficit will begin to recapitalize the U.S. economy.

One of the principal factors tending to weaken the earning capacity of the U.S. workforce has been the steady de-capitalization of the U.S. economy since 1995 through low savings rates, periodic asset price crashes and high payments deficits. Meanwhile the capital resources of competing emerging markets, particularly in East Asia, have increased.

With interest rates higher and the U.S. economy being recapitalized, the erosion of U.S. living standards will diminish and (if immigration laws are properly enforced) the 40-year decline in the living standards of the U.S. blue collar worker will come to an end.

More jobs

We come finally to the most important and unexpected effect of higher interest rates. We now have at last a control experiment, to compare the job-creating capacity of a high interest rate environment with that of a low interest rate environment, and the contrast is a stark one. Following the unemployment peak of 1982, when real interest rates were very high under the tender ministrations of Paul Volcker, the U.S. economy created 4.7 million jobs in the first fifteen months. This time around, in spite of massive “stimulus,” both fiscal and monetary and Bernanke’s gravity-defying monetary efforts, the first fifteen months after the peak in unemployment have seen the creation of only 930,000 jobs – one fifth the number, in a workforce almost 40% larger.

The explanation is quite simple when you consider the question from first principles. Low interest rates reduce the cost of capital, hence increase the propensity of employers to use capital-intensive technologies, substituting capital for labor wherever possible. Conversely high interest rates, by making capital more expensive, increase the propensity of employers to hire more labor and train its existing workforce to produce more output rather than investing in capital-intensive equipment.

Thus a high-rate economy has a smaller proportion of capital inputs in the total – about 28% of total inputs in the 1980s versus 32% recently, according to the Bureau of Labor Statistics – and a lower productivity growth rate, about 1.2% per annum in 1979-84 and 2.4% per annum in 2005-10. While the Greenspan/Bernanke monetary policies have increased recorded productivity growth, therefore, they have reduced job creation, in this recession creating a pool of long-term unemployed that will remain a miserable underclass until they pass on, decades in the future.

Short-term pain, long-term gain: that’s what we have to look forward to once interest rates rise to their proper level. However while the short-term pain will be concentrated on Wall Street, politicians and a few overenthusiastic homeowners, the gain will be more general. For the great majority of the American people, the long-term effects of higher savings, lower house prices and faster job creation will feel like Paradise Regained.

Martin Hutchinson’s columns appear regularly at prudentbear.com. He is the author of “Great Conservatives” (Academica Press, 2005) and co-author with Kevin Dowd of “Alchemists of Loss” (Wiley, 2010).

Wealth2k offers free LTC presentation to advisors

Posted on February 16, 2011 by Editor Test -

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.

US stock & bond mutual funds receive $34bn in January

Posted on February 16, 2011 by Editor Test -

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.

A UK white paper compares public pension funds to Ponzi schemes

Posted on February 16, 2011 by Editor Test -

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.

UBS, State Street and BlackRock to manage NEST money

Posted on February 16, 2011 by Editor Test -

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.

Rule 408(b)(2) delayed until 2012

Posted on February 16, 2011 by Editor Test -

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.

A Guide for the Perplexed Participant

Posted on February 16, 2011 by Kerry Pechter -

GuidedChoice, an independent provider of investment advice for employer-sponsored retirement plan participants, unveiled the second and newest version of its GuidedSpending retirement income module during a webinar.

The Los Gatos, Calif.-based company, co-founded in 1995 by Nobel Prize laureate Harry Markowitz, partners with many plan providers on the institutional side, but also offers the same planning tools to financial advisors and individual investors that it does to plan participants.

“We’re reinventing the way retirees get paid,” said Sherrie Grabot, CEO of GuidedChoice. “Every retiree is different, so each one needs a different solution and planning style. But they all want to know how to spend their money and how to reduce their risks.”

How much will in-plan income advice programs like GuidedChoice and Income+ change the dynamics of the retirement industry, where money has tended to flow out of plans at retirement and into rollover IRAs where it is managed by financial advisors or self-directed at a firm like Fidelity, Vanguard or T. Rowe Price?

Industry expert Dennis Gallant, president of GDC Research, thinks that the new programs might keep some money in the plans and out of the hands of advisors. But holders of larger 401(k) accounts will probably still seek advisors when they retire, he said.

“Will it undermine the intermediaries? Probably not. It may have an effect at the margins. We’ll see,” he said, adding that many people still won’t be able to make tough decisions on their own. “Unless someone says, ‘This is the right thing to, do it,’ they might come to the edge but they won’t have the confidence to act.”

Howard Schneider, president of Practical Perspectives, another research firm, thinks it’s significant that these programs are “pushing the retirement income decision further upstream”—that is, prior to retirement. Retirees with more money will continue to seek advisors however, he believes, but people with less money may opt for a less-expense web-mediated form of income planning.

“Most decisions have been at the point of retirement: you get your rollover, you sit down with an advisor,” Schneider told RIJ. “But if someone comes up with a solution that works in the 401(k) structure, then it will become a challenge for those advisors and other organizations that want those clients or rollovers. None of those things have worked yet, but if somebody finds the right solution, it will be game-changing.”

“The jury is still out on how disruptive any of these products will be,” said Joshua Dietch, a managing director at Chatham Partners in Waltham, Mass.

The GuidedSpending webinar, conducted last Wednesday before a small online audience, offered only a basic description of the updated tool. Like Financial Engines’ Income+ program, announced two weeks ago, GuidedSpending 2.0 gives plan participants a mechanism for turning their retirement accounts into retirement paychecks.

Both of these programs are likely to help keep more assets in employer-sponsored plans. After they retire, plan participants won’t have to roll their money into an IRA and search for an advisor to help them tackle the retirement income challenge. They can leave their money where it is. In that sense, both programs leverage the well-known inertia of the average plan participant.

The two programs have different market strategies, however. Income+ is aimed exclusively at Financial Engines’ 401(k) managed account clients and charges them nothing besides their current managed account fee. GuidedSpending is aimed at just about anybody—inside or outside of a plan.

To use GuidedSpending, all they have to do is pay the annual fee. Access to the online tool, along with phone support, costs either $49.95 or $249.95, depending on whether you just want GuidedChoice to consider your defined contribution assets or if you want help creating a plan that includes all of your household’s accounts.

“This is the first online tool of its kind to be offered to all participants within a plan, rather than just as an executive benefit,” the company said in a release. “GuidedSpending was designed to replace the overly simplistic 4% rule approach long used by financial planners. It addresses the need for an easy way to find a personal answer about the amount of money to withdraw each year in retirement in a way that is both more flexible and more effective.”

The program would also include suggestions for choosing a portfolio allocation along the “efficient frontier” between risk and return, and well as advice about drawing down various accounts in a sequence that minimizes taxes. “Our system allows them to choose their planning style,” said Harry Markowitz, who originated the efficient frontier concept.

Grabot avoided specifics when talking about the adoption of GuidedChoice by plan providers and sponsors. In a release, the company said, “reactions from beta testers and early adopters, including a 13,000-participant Fortune 500 company, have been extremely positive.” The new service can be started with “the flip of a switch,” Grabot said, with no need for new technology.

Tom Condron, executive vice president at GuidedChoice, said annuities would be included in the modeling of retirement income strategies. So far only single-premium immediate annuities and deferred income annuities, aka longevity insurance, are being modeled, he said.

During the webinar, Grabot offered two hypothetical examples of GuidedSpending. In one example, a single, 64-year-old retiree with $200,000 in 401(k) savings was told that he could receive a check for $2,300 a month. A couple with multiple accounts worth about $372,000 and a $350-a-month pension learned that they could receive about $4,610 a month in retirement, according to the slides.

On the face of it, these amounts represented much larger drawdowns than those prescribed by the conventional “4% rule,” and it wasn’t clear by the end of the webinar exactly what those numbers meant or how they were arrived at. Later discussions revealed that the couple, for instance, would receive about $2,100 of their $4,610 monthly income from Social Security and a small pension, and the remaining amount from distributions from savings. For details, see accompanying article, “A Q&A about Guided Spending,” in this edition of RIJ.

Big gender discrepancy in UK savings

Posted on February 9, 2011 by Editor Test -

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.

December hedge fund inflow “bullish”: TrimTabs

Posted on February 9, 2011 by Editor Test -

“Hedge funds are on a tear, and continued aggressive investing is a huge plus for asset prices,” said Vincent Deluard, a vice president of research at TrimTabs.

Hedge funds took in $6.6 billion (0.4% of assets) in December 2010, the sixth straight inflow, according to TrimTabs Investment Research and BarclayHedge. Industry assets stand at $1.7 trillion, the most since October 2008.

“The December inflow is very bullish for the industry because year-end redemptions typically produce an outflow in December,” said Sol Waksman, founder and President of BarclayHedge. “We estimate that industry revenue in 2010 clocked in at $53 billion.”

Risk appetite among hedge fund investors is soaring. Emerging markets funds received $5.8 billion (2.5% of assets) in December, the most since July 2008, while macro funds took in $3.0 billion (2.6% of assets), the most of any hedge fund strategy. Fixed income funds attracted $2.5 billion (1.4% of assets), the eighth straight inflow.

“Macro funds hauled in $13.9 billion last year, which made them the most popular hedge fund strategy of 2010, even though they underperformed the S&P 500 by about 650 basis points,” said Vincent Deluard, Executive Vice President of Research at TrimTabs. “But macro themes have dominated markets, and hedge fund investors count on macro managers to navigate extremely volatile currency markets. The bulk of last year’s macro inflow hit after the first leg of the European debt crisis erupted in May.”

Funds of hedge funds redeemed $1.3 billion (0.2% of assets) in December, the second straight outflow, and underperformed hedge funds by about 600 basis points in 2010. Commodity trading advisors (CTAs) received $1.9 billion (0.7% of assets), the ninth inflow in 10 months, as commodity prices gained momentum. Meanwhile, many hedge fund managers have set new high-water marks.

“More than 60% of the managers in our database have recovered from the losses they suffered in 2008,” noted Deluard. “While the S&P 500 still sits about 8% south of its year-end 2007 level, our Hedge Fund Index is up about 8%. Meanwhile, flows in the past five months rival those of the pre-crisis period.

Furor in Netherlands over cause of pension losses

Posted on February 9, 2011 by Editor Test -

Dutch pension funds have missed out on more than €145bn ($198bn) in unrealized returns over a 20-year period due to over-investment in risky assets and “lack of expertise,” according to Zembla, a Dutch current affairs TV program.

Christian Democrat MP Pieter Omtzigt has called for a hearing and debate on the matter in Parliament.

Bureau Bosch, the consulting firm hired by Zembla to analyze Dutch pension fund investment results for the 20-year period ending in 2009, found that Dutch pension funds have allocated ever more to equities since the 1990s, resulting in excessive risk.

As a result, Bosch reported, the two crashes of 2002 and 2008 wouldn’t have had such a devastating impact on the funds if pension funds had stuck with the safer investment strategies of the past.

Bureau Bosch found that over the period in question Dutch pension funds underperformed the MSCI Europe index, saying that “This underperformance cost nearly €80bn, which amounts to €145bn today if one takes interest and investment returns into account.”

That’s an average loss of €20,000 ($27,300) for each of the Netherlands’ 7.5 million plan participants, Zembla said.

But consultant Frits Bosch said he never meant to say pension funds should not invest in equities. “In the past, strategic allocations to equities were too high, but this is a tactical game. There are times, such as the present, when fixed income might be riskier than equities. In the short term, it may well be better to invest more in equities.”

On average, Dutch pension funds now allocate 61% to equities, Zembla said. During the 2002 dotcom crisis, Dutch funds lost some €50bn. Their funding ratios dropped from 200% in 1989 to 124% in 2002. The credit crunch of 2008 causes the schemes to lose another €112bn, and the average coverage ratio dropped to just 95%.

Dutch central bank director Joanne Kellermann agreed that the funds “take too much risk.”

According to Zembla, the pension fund industry is wrong in arguing that risky investments keep pensions affordable. Under the more risk-averse asset mix of 1989 (which on average consisted of 10% property, 75% fixed income and just 15% equities) Dutch pension funds would have been €36bn richer today and would have a coverage ratio of 115%, the Bosch report said.

Morningstar introduces ETF analysis tool

Posted on February 9, 2011 by Editor Test -

Morningstar, Inc. has introduced four new data points for exchange-traded funds (ETFs) that it claims will provide better measures of the total costs and risks associated with investing in individual ETFs.

Three of the new data points help to quantify the total cost of an ETF by measuring the contributions of an ETF’s portfolio manager to performance and liquidity in the secondary market. The fourth data point measures portfolio concentration in individual sectors or individual securities, Morningstar said in a release.

The new data points are:

Tracking Error: a measure of how closely an ETF follows its benchmark index on a day-to-day basis. Typically caused by sampling error or incomplete replication of the benchmark portfolio, tracking error can cause an ETF’s performance to deviate dramatically from its index over time. Morningstar is the first in the industry to calculate tracking error on a daily basis.
Estimated Holding Cost: a measure of cost that takes into account both explicit and indirect expenses and payments, like income to the ETF from lending shares to options traders. This measures long-term deviations from the index excluding intraday volatility.
Market Impact Cost: a measure of an ETF’s liquidity, by calculating the basis point change in an ETF’s price caused by a $100,000 trade. ETFs with lower liquidity can cost more to buy as large purchases drive up their price.
Portfolio Concentration: a measure of portfolio concentration in a single or small number of sectors, countries, securities, or credit grades or durations, which can affect investment risk.

Morningstar covers about 98% of the ETF universe, with analyst research reports on more than 400 ETFs and data on approximately 4,500 ETFs. Morningstar has more than 15 ETF analysts globally.

The new data points are available in Morningstar Direct, a web-based global research platform for institutional investors, and through licensed data feeds. The methodology for the new ETF data points can be found at http://global.morningstar.com/ETFdatapoints.

What the ‘Lifetime Income Disclosure Act’ may mean for you

Posted on February 9, 2011 by Editor Test -

A Senate bill, S. 267, could require 401(k) plans to tell participants how much monthly retirement income their accounts might generate, National Underwriter reported. The bill was widely discussed last year.

S. 267, the Lifetime Income Disclosure Act bill, was introduced by Sens. Jeff Bingaman, D-NM, Johnny Isakson, R-GA, and Herb Kohl, D-WI. It appears to address some of the concerns of plan providers and plan sponsors. Namely, that they needed a compliant way to express the retirement income potential of a participant’s accumulated savings that would not seem promissory or discouraging to participants.

Few argue with the rationale for such a disclosure, however.

“The key issue is how to make employees aware of this risk [of running out of money in old age] and how to educate employees about lifetime income issues. The Lifetime Income Disclosure Act would require benefit statements to include the annuity equivalent of an employee’s benefit — a small step, but one that can make a significant difference in beginning to tackle the public policy challenge,” according to a background paper distributed by the Senators’ offices.

The terms of compliance

“Under the proposal, defined contribution plans subject to ERISA (such as 401(k) plans) would be required to include ‘annuity equivalents’ on benefit statements provided to employees. An annuity equivalent would be the monthly annuity payment that would be made if the employee’s total account balance were used to buy a life annuity that commenced payments at the plan’s normal retirement age (generally 65).

“The statement would be required to show the monthly annuity payments under both a single life annuity and a qualified joint and survivor annuity (i.e., an annuity with survivor benefits payable for life to the employee’s spouse).

“The annuity equivalents would only be required to be provided once a year, even where quarterly statements are otherwise required. Thus, where quarterly statements are otherwise required, annuity equivalent need only be indexed on one such statement each year.

“Under this proposal, the Department of Labor (“DOL”) would be directed to issue, within a year, assumptions that employers may use in converting a lump sum amount into an annuity equivalent. Accordingly, employers will be able to base their annuity equivalents entirely on clear mechanical assumptions prescribed by the DOL. Of course, to the extent that a participant’s benefit is or may be invested in an annuity contract that guarantees a specified annuity benefit, the DOL shall, to the extent appropriate, permit such specified benefit to be treated as an annuity equivalent.

Avoiding liability

The DOL would further be directed to issue, within a year, a model disclosure that explains (1) the assumptions used to determine the annuity equivalents and (2) the fact that the annuity equivalents provided are only estimates. This model disclosure would include a clear explanation that actual annuity benefits may be materially different from such estimates.

The proposal also provides employers with a clear path to avoid liability: under the proposal, employers and service providers using the model disclosure and following the prescribed assumptions and DOL rules would not have any liability with regard to the provision of annuity equivalents. This exemption from liability would apply to any disclosure of an annuity equivalent that incorporates the explanation from the model disclosure and that is prepared in accordance with the prescribed assumptions and DOL rules. For example, subject to such conditions, the exemption would apply to annuity equivalents available on a website or provided quarterly.

Finally, the proposal does not go into effect until a year after the DOL has issued the guidance needed by employers to implement the new rules.”

Support from ACLI

The American Council of Life Insurers (ACLI), Washington, is supporting the bill.

“Most workers recognize the need to accumulate retirement assets, but many may not think about the need to manage their assets over the course of a retirement that could last 20 or 30 years,” the ACLI says. “Understanding what a lump sum of $100,000 really means in terms of paying the monthly bills will help countless workers in planning for retirement.”

The ACLI cites survey data indicating that many workers say they would save more for retirement if they knew they were saving too little to generate adequate retirement income. In addition to the ACLI, sponsors have support from groups such as AARP, Washington, and the American Society of Pension Professionals & Actuaries, Arlington, Va.

The New ‘Big O’?

Posted on February 9, 2011 by Kerry Pechter -

The most ear-catching idea at the IRI marketing conference in Washington, D.C., last week came from Tim Burke, principal, Insurance Solutions, at Edward Jones. Burke said that his firm is rolling out what he called “O-share” variable annuities and intends to sell them exclusively.

Speaking on a panel called “Simplifying Annuity Marketing,” Burke said the O-share contracts remove some of the complexity from the annuity sale while lowering the long-term cost to the consumer. According to Burke, the O-share’s mortality and expense (M&E) risk fee is the same as a B-share M&E until the end of the surrender period, when it drops to the lower M&E that’s characteristic of an A-share (front-end load) contract.

“We’re trying to remove as many barriers [to the sale of variable annuities] as possible,” Burke said. While his firm has traditionally favored A shares because they’re cheaper for clients over the long-term, “with the increased popularity of riders, we realized that we were putting our clients at a disadvantage with the A shares, because instead of starting off with $100,000 in their account value they were starting out at $96,500, with the commission backed out. We like the B share for that part of it, but we didn’t like the higher ongoing charges on the B share. So we came up with the best of both worlds,” he said. (Watch Burke’s video on today’s homepage.)

Known to some people as “B-to-A-shares,” the O-share concept isn’t new, according to annuity industry consultant Jeff Dellinger, owner of Longevity Risk Management Corp. American Funds, for instance, has a 529 Plan share class that drops the M&E after a few years. Dellinger said it’s no surprise that Edward Jones would pioneer such a VA share class.

“Knowing Merry Mosbacher [Edward Jones’ head of insurance marketing] and Edward Jones’ buy-and-hold, consumer-oriented philosophy, this doesn’t surprise me,” Dellinger said—even if it means lower commissions for Edward Jones advisors.

A VA sold by Edward Jones tends to have higher persistency and therefore higher profitability for manufacturers, he said, so insurers can afford to drop the M&E after recovering their commissions. From a suitability standpoint, he said, it will hard for an advisor to recommend an exchange from an O-share to a B-share at the end of the surrender period, because the O-share’s lower M&E will be hard to beat.

“This makes sense for Edward Jones because they try to bullet-proof their system so that the advisors can’t get into trouble,” Dellinger told RIJ.

As for manufacturers of B-to-A-shares, Burke mentioned Protective as having a contract with a “persistency credit” that functions as an O-share. Ohio National recently filed a contract that drops the M&E by 50 basis points after a four-year surrender period.

SunAmerica is said to have a B-to-A-share product, but Rob Scheinerman, SunAmerica’s senior vice president of product management, deferred to Tim Burke for comment yesterday. “This is [Edward Jones’] initiative,” Scheinerman said in an e-mail to RIJ. Prudential declined to discuss a contract filed last November that is said to be a B-to-A share product.

Burke was the lone distributor on a panel with Tom Mullen, chief marketing officer at John Hancock Annuities, Kimberly Supersano, chief marketing officer, Prudential Annuities, and Jeff Gardner, divisional vice president, Nationwide.

The topic of the panel was, “Simplifying Annuity Marketing.” It started off with a dismal reminder that VAs have generated little market share growth over the past decade. A multi-colored bar chart the showed just how meek the variable annuity industry’s growth has been since 1998—about 10%—while the total asset pool has more than doubled, to over $17 trillion.

Mullen’s speech began with a look back at the failure of AnnuityNote—John Hancock’s stab at a post-crisis, simple, inexpensive variable annuity with GLWB. He confirmed what lots of people knew. (See Mullen’s video on today’s homepage.)

“What pays the rents is a small core group of producers who are engaged in the full-boat annuities and who are interested what’s hot and what’s new. Breaking beyond that core group”—to advisors who traditionally don’t sell annuities—“has been difficult,” he said.

“And annuities are still annuities,” he added. “We haven’t cracked the nut of making an annuity ticket as easy to drop as a mutual fund ticket.”

More successful for John Hancock, he said, has been RetirementTalk, a series of videos that “paint a picture of how having an annuity in a retirement portfolio helps people sleep better at night. That program has worked very well. Lots of interest from new advisors and existing advisors.”

So has AnnuityValet, which tells advisors how to use the order-entry system. “We have dedicated team members who will hand walk a new producer through their first ticket. That has paid great dividends.”

More upbeat—and why not, given her company’s sales leadership in 2010—was Kimberly Supersano of Prudential. One important takeaway from her presentation was that simplifying the product may not be as important as simplifying the message.

Prudential began simplifying its message five years ago with its broad Retirement Red Zone advertising campaign, which took the impenetrably complex story of sequence risk and reduced it to a gridiron metaphor that even the most casual football fan could understood.

Implicit in the Red Zone approach was an emphasis on the needs of the consumer, not the variable annuity and not even on the ultimate benefits of the product, as so many helm-of-the-sailboat or Adirondack-chairs-by-the-lake ad strategies do. “The product took a back seat to the needs,” Supersano said.

Prudential then bet big on that strategy, pushing out a ton of Red Zone advertising client collateral, research, and advisor education materials. Eighteen months ago, when other insurers were reducing their exposure to VAs, Prudential was in the process of sending out 1.2 million DVDs on their Highest Daily lifetime income concept. The company sent over 800,000 DVDs to 47,500 advisors, with the result that 90% of producers are now aware of the video.

The enormous success of this strategy is somewhat ironic, considering that Prudential’s VA, which uses a version of Constant Proportion Portfolio Insurance (CPPI) to help manage risk, is perhaps the least simple VA product—one that, under some circumstances, even denies advisors control over the underlying investments.

But the Prudential approach is not the only path to success in a difficult market. Nationwide has chosen to focus its attention on fee-based advisors and to pitch Stand Alone Living Benefits (SALBs)—that is, just the longevity insurance piece—to them instead of trying to sell them annuities.

That’s all that advisors really want, said Nationwide’s Jeff Gardner. Trying to substitute a VA investment lineup for an advisor’s personal portfolio preferences makes little sense, he said, because “it’s very annoying for them not to be able to use their own [investment] models.”

“We put our product on a fee-based platform,” Gardner added. “We give them what we do well, but in a different package. Our philosophy toward advisors is, ‘We’ll come to you, and not make you come to us.’”

And, to avoid trying to deliver new wine in old bottles, Nationwide created a special team of wholesalers who had specialized in the fee-based advisors rather than in annuities per se. “They knew how to spell annuity, but their background is in fee-based advisory channel,” he said.

That said, annuities will continue to be tough sell at the conference. As Darla Mercado highlighted in her story on the conference in Investment News, advisors who spoke at the conference pointed out the awkward fact that, with living benefit guarantees getting stingier since the financial crisis, variable annuities are, in general, becoming less rather than more attractive.

Some advisors seem to have unrealistic expectations of annuity contracts. It seems that, for certain advisors, the perfect variable annuity would have low costs, unlimited investment options and no allocation restrictions, and seven percent payouts at age 65. One advisor’s comment that “100 investment choices” in a variable annuity wouldn’t be enough drew a bit of frustrated laughter from insurers in the crowd.

Video: How Edward Jones Simplifies Annuities

Posted on February 8, 2011 by Editor Test -

John Hancock Annuities launches New ‘Retirement Talk’ video

Funded status for largest pensions improves to 82.2% in January

Data Connection