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Sun Life executive writes about retirement income planning

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

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

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

Genworth’s ClearCourse adopted by BB&T

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

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

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

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

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

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

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

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

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

MetLife forecasts financial results for 2010 and 2011

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

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

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

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

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

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

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

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

Hedge Funds Receive $16.0 Billion in October

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

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

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

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

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

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

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

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

Broad adoption of lifetime income recordkeeping standards seen 

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

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

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

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

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

Guidance offered to plan fiduciaries on revenue-sharing 

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

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

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

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

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

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

Latest troubles in the Balkans involve pensions  

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

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

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

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

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

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

© 2010 RIJ Publishing LLC. All rights reserved.

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

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

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

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

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

© 2010 RIJ Publishing LLC. All rights reserved.

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

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

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

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

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

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

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

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

© 2010 RIJ Publishing LLC. All rights reserved.

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

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

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

© 2010 RIJ Publishing LLC. All rights reserved.

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

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

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

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

© 2010 RIJ Publishing LLC. All rights reserved.

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

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

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

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

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

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

© 2010 RIJ Publishing LLC. All rights reserved.

The long-predicted generational war has begun. The retirees lost the first battle over the weekend when it became apparent that President Obama would agree to extend the Bush tax cuts to 2012 and probably beyond.

This opening skirmish pitted two familiar opponents.  One side calls for diverting resources from the private sector to the public sector (i.e., through higher taxes). The goal: to lower the deficit and, beyond that, to bolster Social Security and Medicare and ensure that most Boomers won’t live in fear of poverty or illness during retirement.

The other position calls for diverting money from the public sector to the private sector by lowering taxes. The theory is that the private sector (and its wealthiest members, especially) can use the money more creatively and efficiently than the federal government can.  The country, through its Republican legislators, seems to have endorsed this approach.

That’s politically expedient but shortsighted. Tax cuts will simply drive up the deficit and the debt to the point where we have no choice but to take a blunt hatchet to Social Security and Medicare later on, under duress. Will that help us all in the long run? I don’t think so.

Big cuts will only require citizens to save more while working in order to offset the new shortfalls in social insurance. Pundits wonder why the Chinese don’t consume more. It’s because their government has largely rescinded its social safety net since 1997. Do we really want to be more like China and less like France?

We could be headed back to the pre-1937 world of self-insurance. By definition, that means a loss of utility. Families will have to choose between spending money on a child’s tuition and a grandparent’s rent, food and medical care. There may be no such thing as a free lunch, but there’s also no such thing as free starvation. Somehow, someone will pay.

Many sophisticated people will insist that tax cuts can stimulate the economy and thereby lower the deficit and even rescue Social Security indirectly. But David Stockman himself admitted in 1981 (to the journalist William Greider) that supply-side economics was a convenient lie. It still is.  

So the country must choose. It can face the demographically driven economics of an aging society by sharing wealth in a civilized way, with respect for all and special concern for the growing numbers of elderly.

Or it can split into mutually demonizing camps and engage in a zero-sum battle where the strong shift sacrifices onto the old and politically weak. Over the weekend, we took the first step down the second path. Something feels very wrong about this tax deal.

© 2010 RIJ Publishing LLC. All rights reserved.

IRI Releases Third Quarter Product Trend Update for U.S. Variable Annuity Market

The Insured Retirement Institute (IRI) today released a report on product trend updates within the U.S. variable annuity market for the third quarter. Compiled by Morningstar, the report found a pick-up in new benefits for the third quarter, tripling the new number of issued lifetime benefits when compared to second quarter data. Nineteen new benefits were issued this quarter versus six in the previous quarter. 

Overall, carriers filed more than 60 changes in the third quarter, compared to 76 in the previous quarter. In addition, year-to-year quarterly product changes decreased by 31%, dropping from a pace of 87 filed changes in the third quarter in 2009. Of note, fee changes dropped by half, from 20 in the second quarter to 10 in the third quarter, indicating that the majority of carriers have made their pricing adjustments in response to the new market realities.

The report also found that the popularity of living benefits remained strong, especially the Lifetime GMWB. Nine out of the 11 new living benefits released this quarter were lifetime withdrawal benefits. Additionally, the number of new contracts for the quarter was 20, compared to 15 filed in the second quarter.

Securian Retirement and 401(k) Advisors in Pact 

Securian Retirement has teamed with 401(k) Advisors to offer a 3(38) investment management fiduciary service that allows employers to transfer the responsibility for selecting and monitoring funds to 401(k) Advisors, a nationally recognized investment advisory firm.

401(k) Advisors accepts responsibility and discretion for the investment due diligence process under section 3(38) of ERISA.  The new service also provides timely support to retirement plan advisors as the industry prepares for new rules regarding fiduciary roles. The rules are scheduled to go into effect July 2011 and will, in part, require service providers to disclose whether they act as a fiduciary to a plan and in what capacity.

“This 3(38) approach gives broker-dealers a way to support their retirement plan advisors by offering a means of addressing key aspects of new federal regulations,” said Bruce Shay, executive vice president, Securian Financial Group, Inc.

Shay said many employers exhibit a “do it for me” behavior when it comes to retirement plan investment selection. The new 3(38) service will help to bring clarity to this important fiduciary task for plan sponsors and for retirement plan advisors. 

“3(38) investment advisory services will appeal to many plan sponsors who do not have the time, resources, or expertise to select and monitor funds,” said Jeffrey Elvander, CFA, CIO, 401(k) Advisors. “They will embrace the simplicity and efficiency of having an outside investment expert accept this pivotal role in the investment due diligence process.”

Hedge Fund Managers: Yes on QE2, No on U.S. Equities 

Most hedge fund managers remain downbeat on U.S. equities, according to the TrimTabs/BarclayHedge Survey of Hedge Fund Managers for November. About 39% of the 83 hedge fund managers the firms surveyed in the past two weeks are bearish on the S&P 500, and bullish sentiment sank to 31% from 36% in October.

“Moods are still somewhat sour, but hedge funds returned 7.0% in the four months ended October following a rough patch in May and June,” said Sol Waksman, CEO of BarclayHedge.  “About 80% of the funds that reported returns for the January-October period are profitable in 2010.”

On QE2, or the second round of “quantitative easing” by the Federal Reserve, almost half of hedge fund managers thought it would help asset prices, but four in 10 said it will ultimately hurt the economy. Only 9% of managers plan to decrease leverage in the coming weeks, the smallest share since May, while 16% are inclined to increase it.

“It is telling that some managers aim to lever up even though they are predominantly downbeat on stocks,” explained Vincent Deluard, executive vice president at TrimTabs. 

“The Fed is begging firms, consumers, and market participants to take risks, and hedge fund managers are capitalizing on kind conditions. 

“They view QE as an asset-price gift horse—one they are not looking in the mouth—and hedge fund investors have handed them $33 billion in recent months. Also, it certainly doesn’t hurt that managers can borrow to buy assets for virtually nothing courtesy of historically low short rates,” he added.

Bearish sentiment on the U.S. Dollar Index surged to 44% in November, the highest level in six months, from 30% in October.  Meanwhile, bond sentiment has been hammered as long-term interest rates have spiked.  Bearish sentiment on the 10-year Treasury note vaulted to 49%, the highest level since May, while bullish sentiment dove to 13%, the lowest level in six months.

“Market participants have no interest in fighting the Fed in the belly of the curve, where its Treasury purchases are concentrated,” noted Deluard.  “But hedge fund managers are very bearish on the 10-year, and futures traders have been dumping the 30-year bond contract. 

“Also, mom and pop ditched bond mutual funds in the past fortnight after pouring money into them for 100 straight weeks, and TIPS funds have raked in assets in 2010.  The more the market feels the Fed’s reflation strategy will succeed, the more powerless policymakers become to prevent long yields from grinding higher.”

Keating to Lead American Bankers Association

Frank Keating, a former governor of Oklahoma who served as president of the American Council of Life Insurers from 2003 until the end of October 2010, will be the next president of the American Bankers Association, effective January 1, 2011.   

Keating, who will succeed Ed Yingling, worked as an assistant secretary and general counsel at the U.S. Treasury Department and later as acting deputy secretary at the U.S. Department of Housing and Urban Development. From 1995 to 2003, he was governor of Oklahoma.

Keating has served on the board of a savings bank, and his experience at HUD should be helpful when questions about housing finance and the federal mortgage guarantee agencies come up, according to ABA Chairman Stephen Wilson.

At the ACLI, Keating helped to keep the new Consumer Financial Protection Bureau from regulating the business of insurance. The same bureau will have jurisdiction over the big banks that belong to the ABA and over nonbank consumer finance operations.

LifeYield Integrates with Fidelity’s National Financial

LifeYield, LLC, a provider of tax-focused retirement income planning software, has integrated with Fidelity’s National Financial custodian platform. Advisors who use National Financial’s custodian services now can use LifeYield’s retirement income software with no additional data integration.

“NFS is one of the leading custodians for the financial advisory marketplace, including for many advisors at Cambridge Investment Research, LifeYield’s newest client,” said Mark Hoffman, LifeYield’s CEO and co-founder. “Integrating with NFS makes it easy for advisors to use LifeYield, so it makes perfect sense.” LifeYield is a retirement income generation software solution that helps advisors minimize the tax consequences of decumulation.

LifeYield is also integrated with Pershing’s custodian platform and with Albridge’s account aggregation services.  Any advisor using one or all of these services now can have client tax lot data imported directly into LifeYield’s retirement income software.

MassMutual Offers Document Management Solution for TPAs

MassMutual’s Retirement Services Division has introduced a new document management system for third-party administrators (TPAs) of employer-sponsored retirement plans. The system is available to all TPAs and offers unlimited use for one rate, MassMutual said in a release.

The new system includes:

• Plan amendment processing.
• Ability to create customized templates and designs at the TPA level so that many provisions can be pre-populated.
• Tracking, monitoring and review of plan documents and amendment histories.
• Batch processing of regulatory amendments and required participant notices.
• Conversion from DC prototype to volume-submitter documents and vice versa.
• Software upgrades coordinated by MassMutual independently from a TPA’s system.
• Technical support by MassMutual’s ERISA Advisory Services Team. 

The service is available to all TPAs regardless of whether they have retirement plans on MassMutual’s platform. For more information or a demonstration of the system, call Steve Witkun at (413) 744-0744.

NPRF to contribute up to €10bn toward Ireland’s EU bailout, government confirms

Ireland’s National Pensions Reserve Fund (NPRF) contribute as much as €10bn toward the €85bn package under its bailout agreement with the European Union and its state pension will be frozen at 2010 rates for three years, with no COLA, IPE.com reported.

NPRF assets will be used to buy Irish bonds, according to the three-year National Recovery Plan anncounced by Taoiseach [prime minister] Brian Cowen and finance minister Brian Lenihan.  The total domestic contribution to the bailout was said to be €17.5bn.

He said any decisions about how soon and how fast the deinvestment would occur would be a decision for the National Treasury Management Agency. The spokesman added that further details would be released later in the week, when a Memorandum of Understanding would be published.

Jerry Moriarty, head of policy at the Irish Association of Pension Funds, said the NPRF’s funds would have never been sufficient to cover the estimated €116bn in liabilities of the public sector and the state pension.  

“The €25bn in the NPRF was the only pre-funding to cover that – that was never going to be enough anyway,” he said. “Now that’s reduced to €7bn means they are in a much worse place than they have been.” Moriarty said legislation existed to avoid any early draw down of assets prior to the 2025 payout date, simply because the country hit a rocky patch.

“Unfortunately, we’ve hit more than a rocky patch,” he added.

According to its third-quarter results, the NPRF holds €24.5bn in assets, with €6.6bn invested in bank shares of Allied Irish Bank and the Bank of Ireland. The remaining €17.9bn are held in its discretionary portfolio, which returned 6% for the nine months to September, compared with 1.9% returns over the same period for its holdings in the Irish lenders.

Putnam Investments said it would lower total expense ratios of its four Absolute Return Funds, which have $2.6 billion in assets, by up to 54%. The reduction will reduce the expenses for Putnam’s 10 RetirementReady target date funds of funds, which include Absolute Return Funds, by up to 24%, the company said in a release.

The new total expense caps, which limit recurring costs such as management and service fees, were implemented retroactive to November 1, 2010, to align with the beginning of the new fiscal year of the Absolute Return Funds. The percentage reductions in the expenses of the Funds’ Class Y shares are as follows:

* Total expense caps are before any performance fees and exclude certain expenses, such as distribution and service (12b-1) fees (if applicable for a share class). Please see the Absolute Return Funds’ prospectuses for additional details.
** Expense reductions are shown as compared to the expense ratios shown in the Absolute Return Funds’ prospectuses dated 2/28/2010.                
The total expense caps represent a contractual obligation of Putnam to limit the Funds’ total expenses through at least February 28, 2012. 

The Putnam RetirementReady Funds also saw significant reductions in their expense ratios as a result of the new total expense caps for the Absolute Return Funds. The percentage reductions in the expenses of the RetirementReady Funds’ Class Y shares are projected to be as follows:

* Expense reductions are shown as compared to the expense ratios shown in the RetirementReady Funds’ prospectuses dated 11/30/2009.
** Putnam RetirementReady® 2055 Fund will be launched on 11/30/2010.                  

This initiative follows the re-pricing of nearly all of Putnam’s other retail mutual funds announced in July 2009. At that time, management fees were significantly reduced or eliminated on fixed income, asset allocation and RetirementReady funds.

In addition, Putnam obtained shareholder approval of “fund family breakpoints” (under which asset-level discounts for management fee determinations are based on the growth of all Putnam mutual fund assets, rather than the growth of an individual Putnam mutual fund’s assets) for all funds and performance fees for U.S. growth funds, international funds and the Putnam Global Equity Fund.

Putnam Investments and Absolute Return Strategies

Putnam Investments launched the mutual fund industry’s first suite of Absolute Return Funds in January 2009 with four funds:

• Putnam Absolute Return 100 Fund seeks to outperform inflation, as measured by T-bills, by 1%, net of all fund expenses, over periods of three years or more, and can be an alternative to short-term securities.

• Putnam Absolute Return 300 Fund seeks to outperform inflation, as measured by T-bills, by 3%, net of all fund expenses, over periods of three years or more, and can be an alternative to bond funds.

• Putnam Absolute Return 500 Fund seeks to outperform inflation, as measured by T-bills, by 5%, net of all fund expenses, over periods of three years or more, and can be an alternative to balanced funds.

• Putnam Absolute Return 700 Fund seeks to outperform inflation, as measured by T-bills, by 7%, net of all fund expenses, over periods of three years or more, and can be an alternative to stock funds.

Absolute return strategies seek to earn a positive total return over a full market cycle with less volatility than traditional funds and largely independent of market conditions. Absolute return strategies also seek to outperform broad market indexes during periods of flat or negative market performance.

© 2010 RIJ Publishing LLC. All rights reserved.

The Labor Department’s Employee Benefits Security Administration (EBSA) posted a proposed rule in the Federal Register yesterday that would broaden the definition of a “fiduciary” of an ERISA retirement plan and protect “participants from conflicts of interest and self-dealing.”

Public comments are invited until January 20, 2011.

The proposed rule defines certain advisers as plan fiduciaries even if they do not provide advice “on a regular basis” to an employee benefit plan or to plan participants, according to the posting. Fiduciaries, by definition, must place their clients’ interest ahead of their own and may be held personally liable for lapses in duty. 

“Upon adoption, the proposed rule would affect sponsors, fiduciaries, participants, and beneficiaries of pension plans and individual retirement accounts, as well as providers of investment and investment advice related services to such plans and accounts,” the posting said.

“The proposal amends a thirty-five year old rule that may inappropriately limit the types of investment advice relationships that give rise to fiduciary duties on the part of the investment advisor. The proposed rule takes account of significant changes in both the financial industry and the expectations of plan officials and participants who receive investment advice.” 

 © 2010 RIJ Publishing LLC. All rights reserved.

Employees tend to contribute more to their retirement plans if the employer matches a fraction of their contribution instead of their entire contribution, even when the employer’s contribution stays the same, according to a Principal Financial Group study.

As indicated in the chart below, employees contributed more when their employer matched 25% of up to 8% of pay than when their employer matched 50% of 4% or 100% of 5%. The maximum employer outlay was the same in each case.

“The data tells us that while the employer contribution stays at 2 percent, the higher target deferral in the match formula is spurring participants to save more,” said Barrie Christman, vice president of individual investor services at The Principal. “Employers can incent better savings behavior without having to increase their costs.” Stretching the matching contribution to a higher level does not hurt participation rates, the analysis showed.

Among participants contributing to plan with an employer match, 43% contributed 6% to 10% and 26% contributed 11% to 15%. “We believe most retirement plan participants should be saving in the 11-15 percent range–including employer match–in order to have a sufficient income at retirement,” said Christman. Of that sample group, 75% defer up to their employers’ matching contribution.

© 2010 RIJ Publishing LLC. All rights reserved.

Following Argentina’s 2009 example, cash-strapped Hungary appears to have appropriated the assets of its national defined contribution plan in order to fund its operations, IPE.com reported.

“This is effectively a nationalisation of private pension funds. It’s the nightmare scenario,” said Dávid Németh, an economist at ING in Budapest.

Despite protests from the European Commission and from its own pension funds and analysts, the Hungarian government terminated the country’s mandatory “second-pillar” pension system, consisting of notional individual accounts, and put the nearly €10 billion into the state treasury.

Hungary has a three-pillar pension system. The state-funded pay-as-you-go scheme, similar to Social Security, is the first pillar. In 1997, the country added a second pillar—a mandatory private pension funded by payroll deferral and invested in financial markets to generate additional returns and fund future individual pensions. Hungarians who adopted the second pillar were originally promised a three-quarters state pension.

The government now wants to scrap that program and absorb the savings amassed by the nearly three million people over the past 13 years back into the national treasury.

Participants left the second pillar plan en masse after György Matolcsy, the national economy minister, announced that those who didn’t agree to turn their contributions over to the state would lose their entitlement to any pay-as-you-go first pillar state pension. Before that announcement, polls suggested that up to 70% of participants would choose to keep their second-pillar accounts.    

A financier with ties to the governing Fidesz party said: “This is no longer a purely economic issue. If only 30% had opted back in, it would have represented an enormous loss of prestige.”

A government spokeswoman said that pension contributions would be renamed a pensions tax, implying that the government could spend contributions on anything it likes. Fund members have until the end of January 2011 to decide, but experts say the move makes it all but certain that the bulk of the country’s HUF2.7 trillion (€9.6bn) in second-pillar pension assets will be returned to the state treasury.

Gabriella Selmeczi, the prime ministerial commissioner entrusted with communicating the new plans, said today that future payouts would be based only on income and length of service, and not on the scale of an individual’s contributions.

A voluntary “third pillar” program enables people to save more money for retirement by contributing to private pension funds. Starting in 2012, management fees for those plans will be reduced from 4.5% to a maximum of 0.9% of total assets,  a level most industry experts regard as too low to pay for effective fund management.

A spokeswoman for Olli Rehn, the European Commission’s finance commissioner, said: “We are concerned by the Hungarian authorities’ latest announcement concerning the pension system. The announcements appear to reflect an aim of fully abolishing the private pension system.”

The Commission was concerned about the sustainability of the measure. “The pension funds’ accumulated assets are being used to finance current expenditure,” the spokeswoman said.

© 2010 RIJ Publishing LLC. All rights reserved.

 The new health reform law will reduce some health costs in retirement for many people, but retirees will still face substantial out-of-pocket health expenses, according to a new report from the Employee Benefit Research Institute (EBRI).

The full report is titled “Funding Savings Needed for Health Expenses for Persons Eligible for Medicare,” and is published in the December 2010 EBRI Issue Brief, online at www.ebri.org.

EBRI finds that men retiring in 2010 at age 65 will need $65,000 to $109,000 in savings to cover health insurance premiums and out-of-pocket expenses in retirement if they want a 50–50 chance of being able to have enough money. To improve the odds to 90 percent, they’ll need between $124,000–$211,000. 

Women retiring this year at 65 will need even more: $88,000 to $146,000 if they want a 50% chance of having enough money, and $143,000 to $242,000 if they want a 90% chance.

Some prior estimates have been significantly revised downward as a result of changes to Medicare Part D (prescription drug) cost sharing that will be phased in by 2020 due to the recently enacted health reform law, the Patient Protection and Affordable Care Act of 2010 (PPACA). These estimates are for Medicare beneficiaries ages 65 and older. Those retiring earlier would need more.

The new EBRI analysis details how much savings an individual or couple will need to cover Medicare and out-of-pocket health care expenses in retirement, updating earlier EBRI simulation results from 2008.

 “Because employers are continuing to scale back retiree health benefits, and policymakers may soon begin to address Medicare’s funding shortfall, more of the financial costs of health care will be shifted to Medicare beneficiaries in the future,” said Paul Fronstin, director of EBRI’s Health Research and Education Program, and a co-author of the report.  

EBRI notes that in 2007 (the most recent data available), Medicare covered 64% of the cost of health care services for Medicare beneficiaries age 65 and older. Retirees covered 14% and private insurance and various other government programs covered the remaining 12% percent of costs. 

Among the key findings of the EBRI analysis:

• Single men. Men retiring at age 65 in 2010 will need $65,000 to $109,000 in savings to cover health insurance premiums and out-of-pocket expenses, if they want an average (50–50) chance of having enough money. If they want a 90% chance, they’ll need $124,000 to $211,000. 

• Single women. Women retiring at age 65 in 2010 will need $88,000 to $146,000 in savings to cover health insurance premiums and out-of-pocket expenses for a 50% chance of having enough money, and $143,000 to $242,000 if they prefer a 90% chance. 

• The near-elderly. Persons now age 55 will need even greater savings when they turn 65 in 2020. The needed savings for men retiring in 2020 range from $111,000 to $354,000, while needed savings for women range from $147,000 to $406,000 (in 2020 dollars), depending on individual factors.      

© 2010 RIJ Publishing LLC. All rights reserved.