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Prudential updates ‘Highest Daily’ living benefit

Posted on January 26, 2011 by Editor Test -

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

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

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

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

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

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

SEC Staff Recommends Uniform Fiduciary Standard

Posted on January 25, 2011 by Editor Test -

The Securities and Exchange Commission staff has recommended “establishing a uniform fiduciary standard for investment advisers and broker-dealers when providing investment advice about securities to retail customers that is consistent with the standard that currently applies to investment advisers.”

The recommendations, which were said to reflect the views of the SEC staff but not necessarily the commissioners, appeared in the 208-page “Study on Investment Advisors and Broker-Dealers” that the SEC produced as directed by section 913 of the Dodd-Frank Wall Street Reform and Investor Protection Act of 2010. The study was published January 19.

Joan E. Boros, Of Counsel at the Washington law firm of JordenBurt LLP and a former SEC staff attorney, has heard little enthusiasm for the report in either direction.

“I don’t assume a uniformed standard will be adopted, nor vice-versa. Mainly, I don’t know what might end up being adopted. The study really didn’t go very far to give any clue of what any rule or rules would require or excuse,” Boros told RIJ yesterday.

“While Commissioners Paredes and Casey seem to want to do less and that’s why they criticized the study, everyone I have spoken to agrees that the study doesn’t really have much substance and [is] a long way from anything that could be adopted,” she added.

“One speculation is that the study was an attempt by the others to get Congress to do the work. That in my book is exhibit one for ‘Beware of What You Wish For.’ As a savvy Hill lawyer has cautioned: It is a lot easier to revise a rule written by a regulatory agency than to amend a statute that Congress enacted.”

The debate over the uniform fiduciary standard has frequently focused less on the ethical issue—the reduction of asymmetrical information and hidden conflicts of interest in the retail securities marketplace—and more on the in-house issue of how a new regulatory regime might upset the business models of various distribution channels.

In opposing the recommendations last week, for instance, two of the SEC commissioners cited commercial factors as their primary concern—defining the main impact of the recommended changes in terms of their potential impact on the price and availability of financial advisory services as opposed to their probity.

Last Friday, January 21, SEC commissioners Kathleen Casey and Troy Paredes released their objections to the study’s findings. They said that it “fails to justify its recommendation” and “does not adequately recognize the risk that its recommendations could adversely impact investors.” They strongly imply that a uniform standard would hurt consumers either by putting brokers and insurance agents out of the advice business or forcing them to charge more for advice.

In the statement, Casey and Paredes write, “The Study unduly discounts the risk that, as a result of the regulatory burdens imposed by the recommendations on financial professionals, investors may have fewer broker-dealers and investment advisers to choose from, may have access to fewer products and services, and may have to pay more for the services and advice they do receive. Any such results are not in the best interests of investors; nor do they serve to protect them.”

Casey and Paredes are the only two Republicans on the commission. Under SEC rules, the five-member commission must have a majority of the party currently in power. The other commissioners are Luis Aguilar, Elisse Walter, and chairperson Mary Schapiro.

Trade groups either praised or condemned the new recommendations, depending on which advisory or distribution channels they represent. The Financial Planning Coalition and the Committee for the Fiduciary Standards, which represent the advisors who are already required to conform to the higher standard, agreed with the SEC staff

Those groups representing registered reps and insurance agents, who are currently held to a standard of conduct that admits a larger element of caveat emptor in relations with clients, opposed the recommendation. These groups included the National Association of Insurance and Financial Advisors (NAIFA), and the Association for Advanced Life Underwriting (AALU).

In their statement, Casey and Paredes echoed the concern among brokerage and insurance groups that creating a uniform standard could bring about lots of unintended consequences—such as raising the cost of financial advisory services for middle-class investors.

That concern is based on their belief that advisors might have to pass along the added costs—caused by spending more hours on each client or switching from commission-based to fee-based compensation or increasing their education—that might be associated with meeting the higher standard of conduct.

Brokers—that is, registered representatives of broker-dealers—currently need to meet the “suitability” standard. This rule-based standard requires them not to sell products to customers for whom they aren’t suitable, but tolerates conflicts of interest (such as broker-dealer sales incentives) in the broker-client relationship.

Often overlooked in the debate, it seems, is a subtle distinction between registered reps of broker-dealers and professional advisors. To the extent that registered reps are rule-following employees of large companies, it’s not clear that they have enough discretion or independence to choose to put the clients’ interests first, even if they wanted to. A self-employed financial advisor has both.

If brokers dispense advice, or if they’re viewed as advisors by their clients, it seems reasonable that they should respect a higher standard. They can’t expect to have it both ways. Whether they will have to charge more for switching from rules-based to principles-based conduct is a separate problem—or perhaps merely a red herring.

The New Madoff Windfall

Posted on January 25, 2011 by Edward Jay Epstein -

Bernard Madoff’s investors are now likely to get back most of the money they sank into his Ponzi scheme.

Indeed, given the favorable tax treatment they will receive, many of his investors will outperform those unfortunates who held legitimate stock market portfolios in the crash of October 2008. Meanwhile, Fortress Investment Group and other savvy hedge funds are now scrambling to buy up Madoff-related losses for as little as 61 cents on the dollar.

Madoff’s fraud is providing opportunities for hedge funds because his court-appointed bankruptcy trustee, Irving H. Picard, with help from federal prosecutors and the Securities and Exchange Commission, has been able to collect $7.2 billion from the estate of Madoff’s alleged accomplice, Jeffrey Picower.

Picower, who died in his Florida swimming pool on October 25, 2009, had been, according to the complaints filed by the trustee, so deeply involved in the scheme that Madoff advised him in advance of his monthly profit “targets,” or the amounts that Madoff planned to pay into Picower’s accounts. Picower could also request higher or lower “profits” for his many accounts.

Moreover, to amplify Picower’s fictional profits, and allow him to siphon off billions, Madoff extended him so much notional ledger credit that Picower’s accounts had, according to the bankruptcy trustee’s analysis, a “negative net cash balance of approximately $6 billion at the time of Madoff’s arrest.”

Picower clearly collaborated in manufacturing his spectacular, if fictitious, profits by faxing Madoff back-dated letters to support fabricated trades. In some of the faked trades, Picower’s reported gains ran as high as 550%. Picower’s funds were frozen before his death, and his wife Barbara Picower and other relatives controlling the Picower estate faced years of litigation, if not prosecution by Federal authorities, if they did not settle with the trustee.

The estate came up with the $7.2 billion it needed to settle through a lucky break. When it was frozen, a large part of Picower’s $5 billion account at Goldman Sachs was invested in Apple stock. Over the next two years, that stock nearly tripled in value. So the estate had not only enough money to settle, but over a billion dollars extra.

The trustee also applied pressure to the families of two other Madoff collaborators: Carl Shapiro, who was 97 years old and infirm, and Stanley Chais, who died of a blood disease on September 26, 2010. Shapiro’s family agreed to repay $625 million. Chais’ estate is expected to surrender over $1 billion (currently frozen).

Hedge funds like Fortress are betting that this $9 billion fund, together with additional monies that the trustee squeezed out of the feeder funds and banks that profited from the Madoff Ponzi scheme, will enable investors (and purchasers of investors’ losses) to recover at least 70 cents on the dollar. If so, the final irony of the Madoff fraud may be that it will provide a windfall for the hedge funds that bought up his losses at a steep discount.

A Death in the Family, Part II

Posted on January 25, 2011 by Kerry Pechter -

(This is the second part of a two-part article. The first part can be found here.)

One of the Ruth Cohen’s ambitions, in her last decade, was to master a difficult piano piece: Rachmaninoff’s arrangement of Fritz Kreisler’s Liebeslied. She did learn it, and performed it (with her daughter-in-law turning the pages of the sheet music). Her son videotaped the performance and posted it on YouTube in August 2007.

The following spring, a hiatal hernia required surgery, but Ruth recovered. Then, in December 2009, she fell while leaving her southern California condo for a long-postponed lung examination. In the hospital, she at first appeared to need only a few stitches to close a cut on her chin. But after two days, she started coughing blood.

One specialist diagnosed a treatable reappearance of lung cancer. Another specialist suspected terminal lung cancer. At that point the Cohens dropped into a medical-financial-emotional zone of ambiguity that traps many families in their situation. It’s a triangle where families carom between hope and fear and where the prospect of bottomless expense may open like a crevasse beneath their feet.

“We were led to believe that she might get better,” her son told me. But, faced with contradictory prognoses, the family wasn’t sure whom to trust. “My wife was afraid they might be trying to make money from her by saying they could reverse her lung cancer.” he said. Optimism naturally won out.

Ruth moved into a nursing facility, qualifying for Medicare and Medi-gap coverage because she received regular radiation treatments at a nearby hospital. Her son paid out-of-pocket for a private room. At some point she contracted MRSA—Methicillin-Resistant Staphylococcus Aureus—and began receiving intravenous antibiotics.

At the nursing home, Ruth’s daughter-in-law was struck by the impersonal way that much of the medical staff treated Ruth. To combat the institutional indifference, she loaded Ruth’s Liebeslied video onto her smartphone and began playing it or e-mailing it to almost every doctor, nurse and technician on the floor. She became the ombudsperson—the “official PITA” [pain-in-the-ass], her husband said—that all hospital patients need but few get.

“I wanted them to know that the way she looked now was not her,” the younger woman said. “I wanted them to know how vibrant she was, and how much more music she had in her. I also wanted her to get great treatment. And everybody she met there was deeply affected by Ruth.”

The daughter-in-law’s own mother’s situation back in Connecticut was an important reference point for her. As much as she wanted her mother-in-law to live, she didn’t want to repeat what was happening in her own parents’ home. Her father, a retired professional, had for years been spending large sums on 24-hour in-home professional nursing care for her mother, who had dementia.

Talking finances

Outside the hospital, the family talked finances. They agreed to sell Ruth’s condo and rent an apartment for her in an assisted-living facility where one of Ruth’s close friends lived. The rent would consume the condo profits in about two years, they figured. It would also wipe out any prospect of a bequest.

A bequest was more important to some family members than to others. The attorney and his wife were well-fixed; they had no need for an inheritance. His younger brother did need one, but without hesitation the brother agreed to spend whatever was available to helpp his mother. A licensed real estate agent, he flew with his wife to California to put the condo on the market. It sold quickly.

“My brother understood that if she died he’d get a benefit,” the attorney said. “But he still favored making all the decisions toward helping her live. He loved her. There were no financial hesitations. We were glad to use all the money from the condo. We were already thinking about using up all our own money after hers ran out. That was stupid, probably, but nevertheless… We thought she was getting better and that she might live five or ten years more.”

In the end, they didn’t have to spend all of their money, or hers. After a week in the new apartment, when Ruth was barely settled in with her furniture and piano, she suddenly weakened and was re-hospitalized.

“The new doctor in hospital said, Why didn’t you tell us she has cancer?’” her daughter-in-law said. “We thought she had slow growing cancer. They said no. Her lung cancer was advanced. Besides that, her kidneys were failing. In the end her body was so heavily loaded with antibiotics for the MRSA that her kidneys shut down.” She was put on dialysis and her condition improved. The family became optimistic again.

“Ruth wanted to live more than anything,” her daughter-in-law said. She wanted everything done, despite having said ‘no heroic measures.’ She had wanted the esophageal surgery. She wanted to be on dialysis. But she was dying of cancer.”

After three weeks, a new doctor came to talk to Ruth. Her daughter-in-law and younger son were in the room. This doctor had watched and listened to the Liebeslied video. He had evaluated Ruth’s x-rays and charts. His purpose at that point was clearly not to treat her but to help her let go of life and accept her own death. But calling this a “death panel” would be a disservice.

“He said he had seen the video. He told her how rich and full and worthwhile her life had been and that life was not something to cling to,” her daughter-in-law told me. “He said what a privilege it was to know her even for a short time. He was near tears himself. He was amazing. And after that it was easy for her to decide to end the dialysis.”

The family’s feelings were understandably mixed, however. In another conversation, the daughter-in-law said, “The saddest moment was when she gave up on the dialysis. My husband wanted her to live. There was no peaceful resignation in this death at all.”

Two days later, at half past midnight, in a bedroom at her son’s home, released from dialysis machines, flashing monitors and PICC-lines and eased by morphine injections that her daughter-in-law learned to administer, Ruth Cohen struggled for a moment, then died at the age of 87 with her family around her. Her performance of Fritz Kreisler’s Liebeslied is still posted on YouTube. At last count, it had 62,566 views.

New Income Solutions for Long Retirements

Posted on January 20, 2011 by Editor Test -

As Americans live longer—20, 30 or even 40 years into retirement—and depend less on Social Security and defined benefit plans for income, the need for longer-term retirement income solutions is greater than ever.

Longevity insurance annuities, also known as deferred income annuities, may provide part of the solution. These annuities are usually purchased at retirement, but don’t make their first income payment until a pre-determined future date, typically 10 or 20 years later.

For example, a 65-year-old might buy an annuity that provides a monthly distribution check starting at age 80 or 85. The older the contract owner is when payments begin, the less the annuity will cost initially. Longevity insurance annuities may therefore help provide a source of guaranteed income for people who live beyond the average life expectancy.

This income stream is life-contingent, however. That is, the annuities generally have no cash value if the owner dies before the income start date. This may be one of the principal reasons few financial advisors have considered them, and why they do not appear on many investment platforms. But, with the numbers of people over age 100 growing rapidly—more rapidly than any other age group— there is an equally growing need for advisors to consider an array of retirement income solutions.

Longevity Annuities—Often Overlooked

Although privately purchased annuities are the only commercial source of guaranteed longevity protection, they still aren’t widely available on the platforms through which most advisors deliver retirement products and services to individuals. Most asset allocation models, for instance, have no “longevity bucket” that reserves a spot for annuities in an individual’s retirement income plan.

At the same time, longevity insurance products don’t easily fit the fee-based compensation structure toward which more advisors are moving. Simply put, fee-based advisors get paid based on assets under management, and pure longevity insurance isn’t a liquid, quantifiable asset. So even those advisors who might believe longevity insurance is right for their clients must leave the managed account structure to purchase it.

If longevity insurance were an asset class in the traditional sense, incorporating them into existing platforms might be easier. But, while stocks, bonds and commodities are all classified by the levels of market risk to which they are exposed to, there is no traditional classification for the longevity risk—the risk of outliving one’s savings—that deferred income annuities address.

Longevity Insurance and Managed Account Platforms

Despite significant effort, the wirehouse brokerage community has been slow to integrate longevity products into its asset allocation models. We estimate that only about 10% of wirehouse advisors and 25% of independent advisors regularly sell annuities. In other words, 75% to 90% of advisors may have clients who want or need longevity insurance but aren’t getting it. While there has been some innovation by smaller brokerage firms, wire houses tend to be extremely proprietary with asset allocation models and resistant to outside asset allocation methodologies.

We expect a variety of non-insurance financial firms to design and build new products incorporating or complementing longevity insurance and income annuities. The aim of such new products wouldn’t be to displace existing annuity providers—most investors don’t use annuities anyway—but to reach the clients who have unmet needs for longevity protection.

These new products would likely provide flexibility, liquidity, and resistance to inflation—as well as the ability to reside on the platforms that managed-money advisors use. It will undoubtedly be a challenge to incorporate these products into existing asset allocation and optimization models as well as brokerage platforms. But in the long run, the resulting benefits for retirees, advisors, and providers should make the effort worthwhile.

The above is a paid advertisement. PIMCO does not offer insurance guaranteed products or products that offer investments containing both securities and insurance features. PIMCO offers security products that may complement insurance products. All investments contain risk and may lose value.

Longevity insurance is only available from an authorized insurance dealer. Fixed annuities, like all annuities, are insurance products and are not insured by the FDIC, the NCUSIF or any other government agency, nor are they guaranteed by, or the obligation of, the financial institution that sells them. All product guarantees are made solely by the issuing insurance company. Income payments under an annuity, therefore, depend solely on the issuing insurance company’s claims-paying ability and financial strength.

This article is intended for financial intermediaries and not for public distribution. The views described may not be suitable for all investors. This material is not intended to provide, and should not be relied on for accounting, investment, legal or tax advice. You should consult your accountant, investment, tax or legal advisor regarding such matters.

This material contains the current opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2010, PIMCO.

Most Investors Understand TDFs: Vanguard

Posted on January 20, 2011 by Editor Test -

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

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

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

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

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

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

Among Vanguard’s findings:

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

The 800-pound Irony of TDFs

Posted on January 20, 2011 by Editor Test -

Last Friday, January 14, was the deadline for industry comments on the Department of Labor’s proposed amendments to regulations surrounding target-date fund disclosures, and most of comments were submitted on the final day.

There weren’t many. Only 30 comment letters on TDF regs were filed since late November 2010 with the DoL’s Employee Benefit Security Administration (EBSA). But many came from organizations—or from the general counsels of those organizations—that represent millions of people and trillions of dollars.

We’re talking about Vanguard and Fidelity (managers of 60% of TDF assets), the American Council of Life Insurers (variable annuity issuers), the Profit-Sharing Council of America (plan sponsors), the Defined Contribution Institutional Investors Association (asset managers), the Investment Company Institute (mutual funds), AARP (retirees), etc.

(You can find all the comments at the EBSA website.)

The industry’s comments pointed in many directions, but boiled down to a half dozen concerns that regulations might make the whole TDF mess even messier. For instance, makers of TDFs fear that fresh warnings about the risks of TDFs might give the impression that TDFs are any riskier than other investments.

In the same spirit of damage control, industry lawyers wanted to make sure that regulations for TDFs don’t apply to managed accounts in retirement plans, and that new regulations don’t simply duplicate old regulations—a justifiable fear—and that EBSA won’t set too short a deadline for compliance.

New TDF disclosure requirements appear to be inevitable, however, mainly because TDFs blew up during the financial crisis. Yes, they’ve since bounced back. But the crisis revealed that, as a class, they lacked the standardization and transparency that you might expect of a product that had been approved as a qualified default investment alterative (QDIA) for broad use by America’s least astute investors. The primary problem was a dangerous overweighting in equities under the fuzzy rationale that retirees with inadequate savings should own risky assets in order to avoid running out of money.

Now the activist administration that the financial crisis helped usher into office—specifically, EBSA chief Phyllis Borzi—wants to make sure the TDF industry doesn’t go back to business as usual simply because the funds have rebounded (with massive help from the Fed, but that’s another story). Hence the current verbal duel between regulators and lawyers.

Sadly, most (but not all) ignored the 800-pound irony in the room: Why negotiate over disclosures when the people who invest in TDFs don’t read disclosures? TDFs are designed for plan participants who don’t have the time, expertise or inclination to get involved in saving or investing. Eighty percent of them, according to one EBSA comment letter, abandon their TDFs at retirement anyway.

The most pertinent and compelling comments came from those who pointed out what should be obvious: that plan sponsors and plan fiduciaries are responsible for ensuring that plan participants have investment options that will help them accumulate adequate savings by their retirement age with minimal risk. DC plan fiduciaries, not regulators, should be the ones demanding investment options that don’t have hidden vulnerabilities.

One fog-clearing letter came from Joe Nagengast, a principal at Target Date Analytics, LLC, Marina del Rey, Calif.. He posited that a TDF’s “ floor objective is to deliver at target date accumulated contributions intact plus inflation, and a target objective is to grow assets as much as possible without jeopardizing the floor objective.” A TDF’s pursuit of other objectives—like solving longevity risk by investing in equities—only jeopardize the primary objective,” he wrote.

Regarding the all-important fiduciary issue, Ron Surz, president of Target Date Solutions, of San Clemente, Calif., wrote in his EBSA comment letter: “Proposals that focus on participant enlightenment are misguided for two reasons: participants don’t choose TDFs and they don’t read disclosures.

“Fiduciaries, namely plan sponsors and their advisors, choose target date funds, and they should read disclosures, although it would seem that they don’t. So why is this an important distinction? You wield the stick of potential litigation, probably best focused on fiduciaries rather than fund companies.” Surz, a frequent critic of the mainstream TDF industry, wants fiduciaries to insist on zero equity allocation at retirement.

Yes, I know that TDFs might be better than nothing, and that most TDFs are sold by circumspect outfits like Vanguard and Fidelity. But, at the margins, TDFs can be guilty of, if not murder, then reckless endangerment. They’ve succeeded because they’re a convenient way to provision a large, captive, undiscriminating audience, and because they bear the QDIA stamp of approval (with its attendant moral hazard)—not because they have intrinsic merit. Custom TDFs might represent an improvement, but that’s a different story, and the latest round of comments doesn’t appear to address them.

2010 saw modest gains in global pension funding: Aon Hewitt

Posted on January 19, 2011 by Editor Test -

Global pension funding levels ended the year slightly up, despite a roller coaster year, according to a new analysis from Aon Hewitt, the global human resource consulting and outsourcing business of Aon Corporation.

Aon Hewitt monitors and analyzes daily pension funding levels of U.S., U.K., Continental European and Canadian companies in the S&P 500, FTSE 350, DJ Euro Stoxx 50 and TSX, through its Pension Risk Tracker tool.

The analysis found that the funded status of global pension plans were 87% at the end of 2010, up slightly from 86% at the beginning of the year. According to Aon Hewitt’s estimate, global pension assets increased by 8% during the year, while pension liabilities increased by 7% over the same period.

Analysis by region

According to Aon Hewitt’s analysis, global pension assets gained in 2010, fueled by a strong performance in equity markets and bond price appreciations due to falling interest rates.

United States

Pension funded status in the U.S. closed 2010 at 88%, unchanged from the start of the year. Three quarters of positive returns offset the negative returns of the second quarter and the drop in interest rates.
Strong equity returns of 5% to 15% and a 30-50 basis point recovery in corporate bond rates boosted end-of-year status by six percentage points.

“Action [in 2011] will take the form of dynamic de-risking… Plan sponsors will also shift their focus to the payment of lump sums starting in 2012, when the changes in terms brought on by the Pension Protection Act are fully implemented,” said Joe McDonald, Aon Hewitt’s Global Risk Services leader in the U.S.

United Kingdom

Accounting deficits eased significantly for U.K. companies in the FTSE 350 index during the fourth quarter of 2010. Assets rose by just over 2% and liabilities fell by 4%.
The drop in liability values was largely due to an increase in corporate bond yields of 40 basis points, although this was partially offset by an increase in market implied inflation.
The average funded ratio increased to about 91% at the end of the year from 85% at the start of the final quarter, despite a rise in bond prices and collapse of equity prices on the last trading day of the year. as bond prices increased and equities fell.
The year saw double-digit growth in asset values outstripping the increase in liabilities. The aggregate deficit of FTSE 350 companies reduced from pounds Sterling 60bn at the start of the year to under pounds 50bn—an improvement but still low compared to 2008 and 2009.
Volatility of funding ratios continues, with many daily changes in excess of 1 percentage point—not critical, but enough to cause significant distress to finance directors seeking to control emerging quarterly results.

Continental Europe

In Continental Europe, average funded ratios fell to 71% from 75% over the course of the year, as liabilities grew faster than asset values.
Funding levels fall as low as 64% in August, before peaking at 73% just before the December holidays. Rising bond yields boosted fourth quarter funding levels. Funding levels fell a full percentage point on the last trading day of the year.

Canada

In Canada, a positive fourth quarter 2010—assets rose 4%, liabilities fell 2%–helped reverse some of the losses by pension plans in the first three quarters.

The average funded ratio among companies in the S&P/TSX index increased from to 94% on December 31 from 88% on October 1. However, the positive results were not enough to reverse loses experienced during the first three quarters. Volatility continued to be a major concern throughout the quarter, with daily changes in funded ratios of 2%.

BNY Mellon study notes funding pressures on US retirement plans

Posted on January 19, 2011 by Editor Test -

A new study by BNY Mellon Asset Servicing says U.S. retirement plan sponsors face “unprecedented cost pressures” and that many “are reducing the benefits they offer or looking to rebalance funding between employers and employees.”

The study, Redefining Retirement: What Changes to Defined Benefit and Defined Contribution Plans Mean for Plan Sponsors and Their Service Providers, concludes that plan executives believe that they “will either pay now for their retirees’ benefits or that they, or society, will pay later.”

The study found that:

50% of private company executives surveyed said that their plans made them more competitive as an employer, whereas 73% of public plan executives felt that their plans were an asset.
The attractiveness of defined contribution plans for employers lies in the reduction of funding volatility; in the long run, funding costs for defined contribution may be higher or lower than current costs, but the ability to control volatility is seen as an unparalleled advantage.
Hybrid defined benefit/defined contribution plans offer the professional management of defined benefit with the portability of defined contribution; some type of hybrid plan may be the best solution for employers and employees if employer costs can be managed effectively.
Executives are looking to their service providers for help in assessing performance for private equity and other illiquid assets, and defining new strategies for assuring a stable retirement for their employees.

The study was co-produced with research and consulting firm Finadium LLC.

“The most pressing question that sponsors of defined benefit and defined contribution plans have to answer today is how to provide retirement benefits that offer employees sufficient funding without causing further strain to employer balance sheets or government budgets,” said Laurin Moore, head of the US Tax Exempt Business at BNY Mellon Asset Servicing.

As the study notes, 55% of plan sponsors surveyed expect to need greater assistance in respect of performance measurement, while 35% expect the same in respect of risk management, particularly for illiquid investments in their defined benefit programs.

The study is based on interviews with large US pension plans conducted during June 2010, accounting for US$749.9 billion in assets across 30 retirement systems (16 corporations and 14 public entities). Of the systems surveyed, 81% of assets were in DB plans with the remainder in DC and a handful of health care retirement accounts. Over two-thirds of the plans surveyed held assets in the US$5 billion to US$50 billion range. The study is available at bnymellon.com/foresight/pdf/redefiningretirement.pdf.

U.S. Treasury now owns AIG

Posted on January 19, 2011 by Editor Test -

American International Group (AIG) has executed its previously announced recapitalization plan with the U.S. Treasury, the New York Fed, the AIG Credit Facility Trust (the Trust), including repaying about $21 billion to the Fed and exchanging various forms of government support into common shares.

As a result, the Treasury Department will owning about 92% of AIG’s common shares. AIG expects that over time the Treasury Department will sell its stake in AIG subject to market conditions.

“Now, we will continue to focus on strong business performance for the benefit of all of our stakeholders, including our largest shareholder, the Treasury Department,” said Robert H. Benmosche, AIG president and CEO. “We continue to believe [taxpayers] will realize a profit on their investment in AIG.”

QE 1 & 2 boost stocks, not economy: TrimTabs

Posted on January 19, 2011 by Editor Test -

The Federal Reserve’s quantitative easing programs are supposed to jump-start the economy and generate jobs but have only helped raise stock prices, according to TrimTabs Investment Research.

“While QE1 and QE2 have worked wonders on the stock market, their impact on GDP and jobs has been anemic at best,” said Madeline Schnapp, Director of Macroeconomic Research at TrimTabs.

“GDP increased a modest 2.7% in the third quarter of last year,” noted Schnapp. “We need GDP growth of 3.0% to 3.5% to significantly reduce unemployment. Employment gains averaged only 94,000 monthly in 2010, much less than the 150,000 per month needed to absorb population growth, and consumers collectively have $1.1 trillion less to spend annually than in 2008.”

TrimTabs noted a correlation between quantitative easing and equities. The S&P 500 rose 67% during QE1, the period from March 2009 to March 2010 when the Fed bought nearly $2 trillion in mortgage-backed securities, Treasuries, and agency debt.

Stock prices fell 13% in the subsequent five months, but have risen 20% since Fed Chairman Bernanke announced QE2 at the end of last August 2010.“When QE2 ends in June, the economy is in danger of returning to slow growth mode unless its structural problems are addressed,” predicted Schnapp.

The Latest on TDFs (from Vanguard, ASPPA, SPARK, et al)

Posted on January 19, 2011 by Editor Test -

New round of debate

The release of the study roughly coincided with the end of the period for comments on Department of Labor proposed regulations on TDF disclosures, on January 14. The deadline produced a new flurry of recommendations by retirement industry groups such as the American Society of Pension Professionals and Actuaries and the SPARK Institute.

TDFs, of course, have been under scrutiny since they failed to protect near-retirement investors from significant losses in the 2008-2009 financial crisis. The funds had carried a certain assumption of safety—at least for those near retirement—especially after they became a QDIA (qualified default investment alternative) for 401(k) plans.

ASPPA, the American Society of Pension Professionals and Actuaries, recently made several recommendations to EBSA regarding TDF disclosures. For instance, ASPPA believes that merely disclosing the asset allocation of a target date fund does little for the many plan participants who take a lump sum at retirement and roll it into an IRA. ASPPA also suggested advising participants that a TDF that seems appropriate for them might not be appropriate if they have much younger spouses.

The SPARK Institute, an association of plan service providers, recommended removing disclosure language that emphasized the risk of loss from investments in TDFs. “All plan investment options involve varying degrees of risk and EBSA should not single out target date funds, since they may be a good choice for many participants,” ASPPA’s Larry Goldbrum said.

Ron Surz, president of PPCA, Inc., in San Clemente, Calif., and an advocate of TDFs that contain zero equities at the target retirement date, also released comments. “Fiduciaries need to take back control of TDFs by setting objectives that can be realistically achieved,” he wrote in an email.

Surz continued: [They should] “deliver at least accumulated contributions plus inflation at the target date… [and] “grow assets as much as possible without jeopardizing the primary preservation objective.” [But] “the investment policies for achieving these objectives stand far apart from current industry practices.”

Vanguard’s findings

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

Among Vanguard’s findings:

Some 95% of TDF investors in IRA accounts reported having “heard of a target-date fund,” versus 62% of TDF owners in defined contribution retirement plans. Vanguard wasn’t surprised, because participants are frequently defaulted into TDFs.
Only 24% of the participants knew that the asset allocation of most TDFs continues to change after the target year.
61% of participants said they chose TDFs because they wanted “a balanced portfolio, simplicity, and convenience.”
Among investors who hold other investments along with a TDF, 56% said they did so to hold “more aggressive investments.” Another 41% thought they needed a mixed portfolio for adequate diversification.
75% of participants said they intended to gradually draw down their target-date fund assets.
more than 90% of the respondents plan to have an equity position in their portfolio at retirement.

77% knew that the asset allocation becomes more conservative as the target year approaches, showing an understanding of these funds’ changing asset allocation.
68% recognized that target-date funds offer a diversified mix of stock and bonds. (Diversification does not ensure a profit or protect against a loss in a declining market.)
87% believed target-date funds involve “some risk” or more; less than 1% felt they were risk-free.
Only 8% of participants incorrectly believed that target-date funds provide “guaranteed income” and only 4% of participants incorrectly indicated that TDFs provide a guaranteed return or become risk-free at the target date.

BMO Offers Non-Insured Lifetime Income Product

Posted on January 19, 2011 by Editor Test -

The Bank of Montreal (BMO) has launched a non-insured lifetime income product that, after a 10-year deferral period, promises lifetime payouts of 6% per year. If the contract is funded with after-tax money, the income is tax-free for the first 15 years and taxable thereafter.

The product is called BMO Lifetime Cash Flow, and it is backed by the Toronto-based bank, which has an AA rating from DBRS Limited, an A+ rating from Standard & Poor’s and an Aa1 rating from Moody’s. The minimum investment is $5,000, and the money is invested in mutual funds that grow more conservative over time. The all-in 2.75% annual fee is based on the account value.

A BMO spokesperson told RIJ that, while the first 15 years of income consists of returned principal, the subsequent lifetime payouts (6% of principal) do not come out of the account value, which by then presumably contains 25 years of gains. “Payments after year 25 do not draw down on any portfolio gains or deposit value,” said Amanda Robinson. At the owner’s death, the remaining account value goes to beneficiaries.

Here are two illustrations of the just-announced Lifetime Cash Flow product (using Canadian dollars):

Jim, a 55-year-old single man, has no private pension and intends to retire in 10 years. He has $250,000 in taxable accounts and $300,000 in guaranteed investments in his Registered Retirement Savings Plan (RRSP), a tax-deferred account.

He needs $3,000 a month in retirement, half of which will come from his Canada Pension Plan (a payroll-based Social Security-like program) and his Old Age Security (a government pension based on years of residency in Canada).

To provide the other $1,500, he invests $100,000 of his after-tax savings in the BMO Lifetime Cash Flow program ($500 per month for life) and rolls his RRSP money into a Registered Retirement Income Fund (RRIF), from which he begins taking minimum required distributions ($1,000 per month).

At his death, Jim’s beneficiaries will receive the balance in his account, if any, net of fees and withdrawals.

In the second scenario:

Ray plans to retire in 10 years, at age 70, with a defined benefit pension of $2,100 a month and $1,000 from the Canada Pension Plan and Old Age Security. His wife Abby, five years younger, never worked and so doesn’t qualify for the CPP. But she’ll get $400 a month as her Old Age Security. They have $400,000 in taxable accounts.

Their pensions will provide $3,500 a month–$700 a month shy of what they will need. To fill the gap, they invest $140,000 in Abby’s name in the BMO Lifetime Cash Flow program. They invest their remaining $260,000 elsewhere for income and growth. If Ray dies before her, Abby’s income from his pension will be reduced and his income under CPP and OAS will cease.

A BMO spokesperson said the payouts are not adjusted for inflation, and the payouts apparently remain fixed at 6% of the initial investment even if the account value grows during the deferral period and after payments begin.

Since 2009, BMO has offered LifeStage Retirement Income Portfolios, which are notes that pay an inflation-adjusted 6% of the initial investment for 15 years, starting immediately, or after a five-year wait, or after a 10-year wait. That product offered inflation-adjusted, but not lifetime, income. The new product offers lifetime, but not inflation-adjusted, income.

The minimum deposit for the LifeStage Retirement Income Portfolios is $5,000. Each note costs about $100. Assets are invested in BMO’s Lifestage target-date funds. Investors can buy the notes with registered or non-registered (pre-tax or after-tax) savings, but after-tax money is recommended.

At the end of the deferral period—during which the assets are largely illiquid and the investments grow tax-deferred—the notes provide a tax-free, inflation-adjusted income of about 6% of principal per year for 15 years. The all-in annual fee is 2.75% per year.

When all principal has been paid out—i.e., the maturity date—the owner of the notes (or the beneficiary) receives the original deposit back, net of fees and payouts.

In a typical scenario, a 55-year-old might put $100,000 in one of the notes. At age 65, he or she would receive an inflation-adjusted income starting at $6,000 per year for 15 years, tax-free, followed by reimbursement of any money left in the account.

If the market value of the underlying investments drops too much, BMO retains the right to convert the account to a term-certain annuity. “On each business day, we will compare the Deposit Value of a version and series of LifeStage Retirement Income Notes to the annuity value of a LifeStage Retirement Income Note of the same version and series. If on any business day that Deposit Value is equal to or less than the annuity value, a “capital preservation event” will have occurred.

“This indicates that the value of the LifeStage Retirement Income Portfolio is not enough, if invested at the relevant government bond rates (or other higher rate as may be chosen by us), to pay the scheduled capital distributions during the remainder of the term and the Deposit Balance at maturity,” the information statement reads.

The BMO notes appear to resemble Barclays Bank’s Inflation-Indexed Level-Pay Notes, which were introduced last summer in the U.S., and which provide 10 years or 20 years of income backed by the bank. Like the Barclays product, the BMO notes aren’t intended to provide liquidity, although owners can try to sell them on the secondary market or back to BMO. As the product information statement says:

“A LifeStage Retirement Income Note is not designed to be repaid in full on demand at any time. Other than the regularly scheduled capital distributions that we make to you, you will not be able to withdraw the amount invested in a LifeStage Retirement Income Note until it matures. However, you may be able to sell your LifeStage Retirement Income Notes prior to maturity to BMO Nesbitt Burns Inc.,” a capital markets unit of BMO.

Most Canadians receive the Old Age Security (maximum C$524 per month) that’s proportional to the number of years (up to 40) that a person has lived in Canada since age 18. Most also receive the Canada Pension Plan, an earnings-based benefit of up to C$934 a month. The poor are also eligible for a means-tested Guaranteed Income Supplement, and there’s an “Allowance” for spouses or partners of GIS recipients.

The BMO notes are expected to compete in Canada alongside variable annuities with living benefits, Sun Life Elite Plus, and the Desjardins Helios, the Financial Post reported.

A Death in the Family, Part I

Posted on January 19, 2011 by Kerry Pechter -

After 87 years of life, Ruth Cohen still had no time in her busy schedule for death. There were piano pieces yet to write and perform, grandchildren to fuss over, and the unfailing southern California sunshine to wake up to every morning.

The daughter of Russian immigrants gave in—she wasn’t the type to give up—only after doctors confirmed that her lungs and kidneys were beyond repair. No longer eligible for Medicare, she went from the hospital to a hospice bed in her son’s home near LA. A few nights later, on March 27, 2010, she died.

As of January 1, 2011, a new regulation allows Medicare to pay for “end-of-life counseling” for the elderly during their annual wellness visits. Such counseling had been cut from last spring’s health law after Sarah Palin likened it to “death panels.” Now it’s back.

Politics aside, few doubt that families should set aside time to discuss how they will cope with the foreseeable death of an aged parent. There are medical, financial, legal, emotional, and even just logistical issues to talk about, either within the family alone or with professionals.

One big question, for families and for the country, involves the tradeoff between preserving and extending life for the very old and preserving financial resources for their survivors. It’s valid, many health economists believe, to weigh the value of heroic medical care for a grandparent against, say, the value of educating a grandchild.

Judging by one family’s recent experience—I’ve known the Cohens, whose names are changed, for over 40 years—that’s not easy. In their case, doctors couldn’t agree on Ruth’s prognosis. She improved, deteriorated, and improved. Hers sons and daughter-in-law, understandably, hoped for the best and decided to spend whatever it took much to extend her life for as long as she wanted to live.

Neither rich nor poor

Financially, Ruth Cohen was far from rich and far from poor. With three pianos, including a black Steinway the size of a small Mercedes, in her Southern California condo, and with an attorney son and professor daughter-in-law only a few freeway miles away, she could hardly be called indigent.

On the other hand, few financial advisors would regard her as a “prospect.” A widow for the last two decades of her life, she received about $1,000 a month from Social Security and a $392-a-month pension that her oboist husband earned as a high school music teacher in the 1950s, 60s, and 70s.

She earned a bit by teaching piano and performing, but she still had a mortgage so her income fell short. Her son told me, “My wife and I gave her about $7,000 to $10,000 a year. As far as I know, she never considered buying long-term care insurance. She viewed the value of her home as her insurance and me and my wife as her backup.”

All told, her income was less than $30,000 and her home equity ranged from $200,000 to $300,000, depending on the market. Medicare and Medi-gap insurance covered the expenses when she developed lung cancer at 82. Chemotherapy drove the cancer into remission, and she went back to writing and performing both classical music and children’s music.

In fact, she became something of a local musical celebrity in her old age. That itself was a kind of redemption. A piano prodigy at age five and later a conservatory student, she abandoned her own musical studies to raise children in the Philadelphia suburbs. Scholarships helped those children attend Yale and Georgetown. It was a long, sophisticated, accomplished, difficult, middle class life. A distinctly twentieth-century American life.

Disagreeing doctors

The last chapter of the story began, as it often does, with a simple fall, in December 2009. Then came four months of confusion and anxiety, of conflicting diagnoses and hurried financial decisions, and finally, one cathartic night.

(This is the end of Part I of a two-part article.)

The Bucket

Posted on January 19, 2011 by Editorial Staff -

AXA Equitable names pair to executive team

AXA Equitable Life has named Nick Lane and Rino Piazzolla to its executive management team–Lane as senior vice president of Retirement Savings and Piazzolla as senior vice president of human resources.

Both will report to Mark Pearson, 52, who will become AXA Equitable’s chairman and CEO on February 11. Pearson had been CEO of AXA Japan.

Lane, 37, had served as head of AXA Group Strategy in Paris since 2008. Prior to that, he was a director of AXA Advisors, LLC and vice chairman of AXA Network, LLC, AXA Equitable’s retail broker dealer and insurance general agency, respectively. Previously, Lane was a leader in the sales and marketing practice of the strategic consulting firm McKinsey & Co. He holds a B.A. from Princeton University and an M.B.A. from Harvard Business School and served as a captain in the U.S. Marine Corps.

Piazzolla, 57, most recently was UniCredit’s head of Human Resources in Italy. Before joining UniCredit in 2005, he held various human resources management positions in the U.S. and abroad at General Electric Co., PepsiCo and S.C. Johnson Wax. He succeeds Jennifer Blevins, 53, who is retiring after nine years.

FINRA arbitrators rule for retiree, to tune of $136,000

A retired California woman won a six-figure damages award against Smith Barney (now Morgan Stanley Smith Barney) to compensate her for investment losses caused by the Wall Street firm’s recommendation that she buy preferred shares of GM stock not long before the company’s bankruptcy.

On November 18, 2010, a Financial Industry Regulatory Authority (FINRA) arbitration panel ruled that a Smith Barney advisor in Whittier, Calif., unsuitably recommended that Joanne Bohnke invest a substantial portion of her retirement savings in preferred shares of GM in 2007, not long before the auto maker’s bankruptcy. She lost three-fourths of her investment. The panel awarded her $136,000.

“This Time Is Different” wins TIAA-CREF award

Carmen M. Reinhart and Kenneth S. Rogoff won the 2010 TIAA-CREF Paul A. Samuelson Award for their best-selling book, “This Time is Different: Eight Centuries of Financial Folly.”

Reinhart is the David Weatherstone Senior Fellow at the Peterson Institute for International Economics and Rogoff is the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard.

The Samuelson Award is given annually in recognition of an outstanding research publication containing ideas that the public and private sectors can use to maintain and improve America’s lifelong financial well being. The winner receives $10,000.

“Combing through data from 66 countries and across five continents, Reinhart and Rogoff focused on patterns of currency crashes, high and hyperinflation, government defaults on international and domestic debts, housing and equity prices, capital flows, unemployment and government revenues to demonstrate that these crises are not isolated events. Reinhart and Rogoff show how closely each of these events fit a discernible and predictable pattern through the last eight centuries,” TIAA-CREF said in a release.

The TIAA-CREF Institute presented the Samuelson award on January 7 in Denver during the annual Allied Social Science Associations annual convention.

Prudential Investments Launches Real Assets Mutual Fund

Prudential Investments, the mutual fund family of Prudential Financial announced the launch of the Prudential Real Assets Fund, a mutual fund that focuses on investments in real estate, metals, fuel, and other commodities.

The fund will also invest in Treasury Inflation Protected Securities as a hedge against inflation and interest rate risk.

“Investing in real assets may also help prove beneficial if the rising U.S. deficit, coupled with reduced tax revenue, puts upward pressure on interest rates and inflation,” said a Prudential release.

“According to data from Ibbotson Associates, when the Federal Reserve raised interest rates from 1.00% to 5.25% percent between June 2004 and June 2006, real assets post-inflation returns produced average annual real returns of 9.35%, versus 4.56% for stocks or the 0.34% loss for bonds.”

The fund’s dynamic asset allocation strategy is led by Quantitative Management Associates, which manages nearly $40 billion in asset allocation strategies, including real assets.

Principal endorses investment principles

Principal Global Investors, the Des Moines, Iowa-based asset manager with $227.4bn (€170bn) in mostly pension fund assets under management, has become the latest “mainstream” firm to sign up to the United Nations Principles for Responsible Investment, according to responsible-investor.com.
The firm, a unit of Principal Financial, runs assets for 10 of the 25 largest pension funds in the world, says “the appropriate consideration of environmental, social and governance (ESG) issues is part of delivering superior risk adjusted returns.”
Other recent well-known asset manager signatories include Capital International, Legal & General Investment Management and T. Rowe Price.

$5.3 billion sets a sales record at MassMutual Retirement

MassMutual Retirement Services Division wrote over $5.3 billion in sales in 2010, breaking the record set in 2009. Assets under management in retirement plans administered by MassMutual reached a record $50 billion or so at year-end 2010 (including First Mercantile), up 16% increase vs. year-end 2009. The division reported net cash flow of about $2 billion for the second consecutive year.

MassMutual also earned record-high satisfaction levels in numerous 2010 industry and proprietary surveys of retirement plan advisors and plan sponsors, with a plan sponsor retention level of 95%.

According to Hugh O’Toole, senior vice president and head of sales and client management for MassMutual’s Retirement Services Division, MassMutual has seen strong growth in its core defined contribution, defined benefit and TRS segments as well as in the nonprofit, Taft-Hartley, and professional employer organization (PEO) markets.

Securian Retirement certified by CEFEX

For the third consecutive year, the Centre for Fiduciary Excellence awarded Securian Retirement the CEFEX certification for fiduciary due diligence regarding investment management.

The CEFEX certification is used by benefits advisors, consultants, brokers, and their clients to assess the performance, consistency, and appropriateness of investment options. “The CEFEX certification is especially important in the markets we serve,” said Bruce Shay, executive vice president, Securian Financial Group, Inc. “Some employers do not have HR and legal experts on staff to monitor plan performance.”

Securian’s retirement plans are offered through a group variable annuity contract issued by Minnesota Life Insurance Company. The Securian due diligence process is led by an in-house committee of four CFAs who also hold the Accredited Investment Fiduciary designation.

CEFEX is an independent, global assessment and certification organization providing comprehensive assessments as measures of risk and trustworthiness of investment fiduciaries. A CEFEX assessment includes reviews of an organization’s practices by an independent Accredited Investment Fiduciary Analyst (AIFA).

Are Direct-Sold Funds a Better Value?

Posted on January 12, 2011 by Editor Test -

In a provocative new research paper, three writers, including one from the Federal Reserve Bank of Atlanta, suggest that broker-sold mutual funds tend to generate returns that are about one percentage point lower before fees than returns generated by less expensive direct-marketed mutual funds.

Jonathan Reuter of Boston College, Diane Del Guercio of the University of Oregon and Paula Tkac of the Atlanta Fed argue that “mutual funds in broker-sold channels charge higher total fees because they need to compensate brokers for servicing investors, and earn lower before-fee returns, because they invest less in portfolio management.”

In short, they claim there’s a “tradeoff between investments in brokers and investments in portfolio management.” The study, published by the National Bureau of Economic Research and entitled “Broker Incentives and Mutual Fund Market Segmentation,” is based on mutual fund distribution data from 1996 through 2002.

The result, they say, is that direct-sold funds not only tend to be cheaper but also better-performing than broker-sold funds, leading to a significant difference in after-fee returns for investors. “This is an unintended consequence for people seeking advice,” Reuter said.

On an after-fee, risk-adjusted basis, broker-sold funds “underperform by about 2.5 percentage points,” Reuter told RIJ, citing a newer, unpublished working paper. “You’re underperforming by more than the fees. That’s the distressing thing.”

The paper also claims that some fund companies may appear to invest more in portfolio management than they actually do. “Consistent with the concern that management fees overstate investments in portfolio management, we find that the median management fee is 80 basis points, while the median subadvisory fee is only 40 basis points,” the authors said.

From a fund marketing standpoint, this makes sense, Reuter explained. Direct-sold companies cater to the informed, performance-driven, do-it-yourself investor, so they hire the best money managers. Broker-sold companies, in contrast, invest in the intermediary services that less self-reliant investors need or demand.

“Vanguard and Fidelity invest in better managers, they’re more likely to hire managers that went to more selective schools, and they get higher risk-adjusted returns,” Reuter said in an interview.

The study also found that very few mutual funds are sold both direct and through intermediaries—for the logical reason that people might not buy through a broker if they could get the exact same fund for less by buying direct. “Only 3.3% of [fund] families serve both market segments,” the paper said. Because of this, brokers have no incentive to recommend index funds, since those funds can easily be purchased direct for less.

Direct-sold companies seem to be as good at active management as they are at indexing. “In the direct channel, the active funds and the index funds have about the same risk-adjusted performance after fees. When you compare across channels, in the broker channel, both the index and the active performance is really bad. That surprised the heck out of me,” Reuter said.

“Because actively managed funds in the direct channel have the strongest incentive to invest in portfolio management, a more powerful test of the puzzle of active management is whether index funds in the direct channel outperform actively managed funds, also in the direct channel,” the paper said.

“Within the distribution channel with the strongest incentive to invest in portfolio management, we find no evidence that index funds out- perform actively managed funds during our sample period. In contrast, when we focus on the sample of actively managed and index funds outside the direct channel, we find that index funds outperform actively managed funds by as much as 8.9 basis points” per month, the researchers wrote.

Even though their costs are high, brokers might be performing a social good by guiding certain investors into mutual funds and away from keeping their money in unproductive cash accounts, Reuter said. “Maybe it’s cheaper from a societal perspective,” he said.

VA from Fidelity and MetLife marks $1 billion in sales

Posted on January 12, 2011 by Editor Test -

MetLife and Fidelity Investmentshave reported first year sales of more than $1 billion for the MetLife Growth and Guaranteed Income(MGGI) variable annuity, a low-cost contract distributed exclusively by Fidelity and originally manufactured by Fidelity’s own insurance company.

MGGI is the only deferred variable annuity with a living benefit that Fidelity distributes. It allows individuals approaching or living in retirement to use a portion of their retirement assets, particularly from tax-deferred accounts, to provide a guaranteed lifetime income stream for an individual or couple. The product provides the potential for growth when markets are up, and offers downside income protection against market declines.

MGGI is issued by MetLife and includes a built-in guaranteed withdrawal benefit for life which ensures guaranteed lifetime withdrawals of between 4% and 6% of the single premium investment, depending on the age of the client. Once established, the withdrawal percentage does not change.

MGGI simplifies the investment option selection for the customer by offering a single fund, the FidelityVIP FundsManager 60% Portfolio, which uses an asset allocation approach to achieve exposure to multiple asset classes. This asset allocation approach provides potential for both growth and reduced volatility through diversification. MGGI is also priced lower than the industry average for deferred variable annuities with guaranteed withdrawal benefits.

Many Americans unprepared for health expenses in old age

Posted on January 12, 2011 by Editor Test -

Nearly half (48%) of Americans ages 45-70 have no financial plans in place to protect themselves against outliving their assets and the rising cost of healthcare should they live longer than they expected, according to a Society of Actuaries (SOA) survey.

In addition, more than one-third are worried about running out of money during retirement, but only 20% plan to purchase an annuity or other form of guaranteed lifetime income to protect their assets.

At the SOA’s 2011 Living to 100 Symposium in Orlando last week, actuaries, demographers, gerontologists, biologists and researchers from around the world gathered to discuss some of the topics addressed in the survey, as well as share ideas and knowledge on aging, changes in survival rates, challenges of surviving to very high ages and the impact of long life on business and society.

“Americans, specifically the baby boomer generation – many of whom will be eligible for retirement the beginning of the new year – have not saved enough money for retirement,” said Anna Rappaport, FSA, MAAA and president of Anna Rappaport Consulting. The survey also found that 71% of respondents plan to claim Social Security before the age of 70.

In other findings, the SOA survey found that 75% of Americans ages 45-70 protect their tangible assets, such as housing, through home or renter’s insurance; however, only 19% plan to buy long-term care insurance.

The SOA’s survey findings were based upon a nationally representative online survey of 1,006 individuals, ages 45-70, and had an error rate of plus or minus 3.10 percentage points.

Health spending grew less rapidly in 2009

Posted on January 12, 2011 by Editor Test -

During 2009, a year of deep recession followed by slow economic growth, national health care spending rose at its lowest rate in five decades, according to the January issue of Health Affairs magazine.

Health spending rose only 4% in 2009 to $2.5 trillion, or $8,086 per person, down from 4.7% in 2008, according to analysts at the Centers for Medicare and Medicaid Services (CMS) Office of the Actuary in their annual report on national health spending.

But health spending grew as a percent of the gross domestic product, rising to 17.6% of GDP in 2009 from16.6% percent in 2008. It was the largest one-year increase in the 50-year history of the National Health Expenditure Accounts.

Statistical highlights for 2009 from the report:

Consumer out-of-pocket spending reached $299.3 billion, up 0.4%.
3.5 million people were newly enrolled in Medicaid.
The federal government spent 17.9% more on health care in 2009 than in 2008, absorbing 27% of the cost of the U.S. health care bill, due mainly to the infusion of funds into Medicaid from the American Recovery and Reinvestment Act, the “stimulus bill.”
Federal and state Medicaid spending: $373.9 billion, or 15% of the national health care bill of $2.49 trillion.
Medicare spending: $502.3 billion.
Medicare Advantage expenditures reached $125.3 billion, accounting for 25% of total Medicare spending, a share that has nearly doubled since 2003.
Spending on hospital care: $759.1 billion, an increase of 5.1% from the previous year.
Spending on prescription drugs: $249.9 billion.
Spending for physician and clinical services: $505.9 billion.

The recession contributed to a historically low rate of growth in private health insurance spending, slower growth in consumer out-of-pocket spending, and a decline in health care providers’ investments in structures and equipment, the report showed.

The swift impact of the recession on employment and income caused health spending to decline almost immediately after GDP began to decline, rather than after a one-to-two year lag period as in previous downturns.

Poland mixes politics with pensions—with mixed results

Posted on January 12, 2011 by Editor Test -

Poland’s “second-pillar” pension system, a defined contribution plan, is set for a radical overhaul in 2011 under a compromise that maintains the contribution level, but slashes the amount managed privately.

Under Poland’s existing system, workers pay 19.5% of taxable income into the mandatory pensions system. Of this, 12.2% is retained by ZUS, Poland’s Social Insurance Institution, which is analogous to the Social Security program in the U.S., and 7.3% goes into pension funds (OFEs) managed by private-sector financial institutions.

In 2010, Poland’s 14.9 million second-pillar members transferred the equivalent of €707 million or $915.4 million to the OFEs. The OFEs are major players on the Warsaw Stock Exchange (WSE), with some 36% of €55.4 billion ($71.7 billion) of net assets invested into shares at the end of 2010.

On December 30, Poland prime minister Donald Tusk announced that the government proposed to retain the 7.3% contribution, but direct only 2.3% to an OFE. The remaining 5% would be managed in newly created second-pillar individual sub-accounts by ZUS, with an annual return indexed to GDP growth and inflation.

The changes to Poland’s pensions system have been intensely debated for the best part of 2010 against an economic background of a growing government deficit and public debt.

Under EU procedures, contributions to the second pillar counted as budget expenditure. On 10 December, Tusk wrested a significant concession from the European Commission, which will now allow EU member states that instituted second-pillar pensions to offset the cost of these reforms against their budget deficit and debt.

Nevertheless, by the end of 2010, Poland’s debt was running close to 55% of GDP, the point past which cuts in pensions and other government programs will be triggered. The changed system will, the government claims, reduce state subsidies for pension payouts.

Share prices on the WSE fell sharply in response to the government’s news. The government says it will extend the OFEs’ equity investments by replacing the existing one-size-fits-all portfolios with lifecycle funds, including an aggressive, equity-weighted portfolio for younger members, although it hasn’t offered details.

The government also proposes that, as of 2012, individuals can make a voluntary, tax-deductible top-up starting at 2% of wages and rising to 4% by 2017. Meanwhile, the 5% share to be managed by ZUS will also start falling after some two years from the revised system’s start, to 3.8% by 2017.

AXA Equitable names pair to executive team

FINRA arbitrators rule for retiree, to tune of $136,000

“This Time Is Different” wins TIAA-CREF award

Prudential Investments Launches Real Assets Mutual Fund

Principal endorses investment principles

$5.3 billion sets a sales record at MassMutual Retirement

Securian Retirement certified by CEFEX

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