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‘Stretching’ the Match Raises Contribution Rates

Posted on December 1, 2010 by Editor Test -

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.

Match Formula	Max. Employer Contribution	Average Participant Contribution	Total Contribution
100%, up to 2% of pay	2%	5.3%	7.3%
50%, up to 4% of pay	2%	5.6%	7.6%
25%, up to 8% of pay	2%	7.0%	8.8%

“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.

Hungary Nationalizes Personal DC Account Assets

Posted on December 1, 2010 by Editor Test -

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.

Despite reform, retirees face steep health care costs

Posted on December 1, 2010 by Editor Test -

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.

Who Is the Typical SPIA Buyer?

Posted on December 1, 2010 by Editor Test -

Six of every 10 immediate annuity purchasers are women, according to LIMRA’s Guaranteed Income Annuities report, which was based on a review of over 55,000 immediate annuity contracts issued in 2008 and 2009.

LIMRA conducted the report to help insurance companies understand their market, customize their products for specific market segments and to capture more of the research organization calls the $250 billion “unrealized annuitization market.”

The report showed that:

The average age at purchase for an immediate annuity is 73. Immediate annuities purchased with pre-tax money were more likely to be clustered around ages that correspond either to the onset of Social Security benefits or IRS required minimum distributions.
The average immediate annuity premium was just over $107,000.
Seven out of 10 immediate annuity buyers purchased lifetime guaranteed income contracts.
Nine out 10 lifetime income annuity buyers chose payments that were guaranteed for a certain period of time or provided a refund guarantee that enabled beneficiaries to recoup some or all of any remaining premium.

Based on LIMRA’s quarterly annuity sales survey, the majority of immediate annuity sales are made through insurance agents. A growing portion is sold through banks, national full-service broker-dealers or independent broker-dealers.

“One of the biggest obstacles for potential clients to buy an immediate annuity used to be fear of losing control of their money, said Matt Drinkwater, associate managing director, LIMRA retirement research. “Today, our research shows it’s not an all or nothing decision. Two thirds of the contracts allow annuitants to convert a portion of remaining payments to cash, if necessary.”

Many immediate annuity contracts offer the option to increase payouts by a fixed amount or adjusted by inflation. However, LIMRA found that 93% of income annuity contracts have no automatic payment increase. LIMRA researchers believe the demand for inflation-protected guaranteed payouts will grow in the coming years with more retirees challenged to address this issue as they live longer.

LIMRA projects that annual fixed immediate annuity sales will increase to more than $12 billion by 2014. In the third quarter of 2010, $2.3 billion was invested in immediate or deferred fixed income annuities, according to Beacon Research.

The Point Person for ‘Secure Retirement Strategies’

Posted on December 1, 2010 by Editor Test -

In his testimony before a panel of Department of Labor and Treasury officials last September, AllianceBernstein’s Mark N. Fortier described his company’s philosophy about helping plan participants convert life savings to lifetime income.

“We believe that combining a target-date portfolio with a withdrawal benefit can create an attractive QDIA⎯one that provides secure lifetime income similar to what’s offered by a traditional DB plan, but with the control and upside potential of a DC plan.

“I’ll refer to this alternative design as a ‘secure income target-date portfolio.’ Here’s how it works:

“In secure income target-date portfolios, the guarantee is a component of the target-date portfolio’s asset allocation. Starting at around midlife, more and more of the portfolio’s assets are automatically covered by guarantees.

“And the guarantees can be backed by multiple insurers.

What this helps do is promote price competition…It also addresses the risk that any one insurer might default or run out of capacity to guarantee more assets. In our conversations with sponsors, they felt that having the guarantee backed by multiple insurers was more than nice… it was a necessity.”

That, in brief, describes the Secure Retirement Strategies program that AllianceBernstein announced this week. Fortier, who joined AllianceBernstein in 2007 after serving as senior vice president and chief technology officer at Diversified Investment Advisors, worked as a senior portfolio manager on defined contribution plan investments until switching to head of products for defined contribution. He spoke about SRS with Retirement Income Journal this week.

RIJ: How does SRS work?

Fortier: Participants get defaulted into target date funds based on the plan rules, and they start to buy protection based on their age. It can vary from client to client, but we think the right age is about 48. The protection is gradually extended until it covers all of the money in the target date fund.

Think of it as tranches of lifetime withdrawal benefits. Here’s an analogy. If I buy into 2020 fund, for instance, my money could be split among multiple investment managers. Here, you slice up each contribution three ways, and each insurer insures a portion of money.

All that the participants need to see is how much money they have and how much income they accrued. It’s an incredibly simple concept. First the asset allocation and now the income is provided by experts. At the same time, you’re weaning people off the focus on account values and onto income.

RIJ: How did the program come about?

Fortier: Our development effort has been three to four years in the making. One of the big concerns we heard from plan sponsors from the get-go was that the single-insurer solution was a showstopper. They said, we can’t put all our eggs in one basket. Now what usually gets portrayed as ‘single issuer is actually default risk. I don’t think default risk is the big issue.

On a percentage basis, default risk has been insignificant. What they don’t emphasize is pricing risk and capacity risk. That is, can we be sure we have a competitive offer? If an insurer were struggling, the first thing they would do would be to raise prices or limit capacity. How can we be sure that that won’t happen? These are the things that are driving us to the multi-insurer solution.”

Not only did the sponsor have heightened sensitivity to the risk of a single issuer, they were also sensitive to fee variability. All of the traditional living benefit riders had price changes built into them, but to the large plan DC market that was a negative. They prefer fee certainty.

So we re-engineered the basic GLWB, and rather than hold the withdrawal rate constant, we said, Let’s let the fee stay the same, and each of the insurers will put forth an appropriate withdrawal rate for money contributed this quarter. Next quarter, if interest rates go from 5% to 10%, the insurer can increase the withdrawal rate. It’s like dollar cost-averaging.

RIJ: In what sense do the insurers compete?

Fortier: You have three insurers vying for each allocation, and if one offers four percent, and another offers five and the third one offers six, the one offering six will get more money. The one who offers four may be signaling that it doesn’t want any more money right now. If the insurers are afraid of market volatility and can’t afford to offer a five percent payout, all three can lower their withdrawal rates for new money yet to come in.

But this is all done through technology under the surface.

RIJ: Sounds complicated.

Fortier: It sounds complicated but the components are all available today. A TDF does virtually the same thing with multiple investment managers. Regarding the infrastructure, however, AllianceBernstein said, ‘We need to step up and we built the infrastructure.’ That was a departure for us, since we’re pure asset management. We built a benefit administration for this. The recordkeeper maintains control of the client-facing side, but we’re the Intel inside. That makes portability easier because the plan sponsor can change recordkeepers and the new one won’t have to start from scratch.

RIJ: And it all helps you retain assets.

Fortier: The strategy is ultimately transformative for the defined contribution space. What’s been missing for most DC participants is that they have no reason to leave their money in their plan. So they roll it over. And as long as the world thinks of rollovers as the default at retirement, then for large institutional managers like ourselves the business model is keeping the money in the plan.”

AllianceBernstein’s Multi-Insurer In-Plan Annuity

Posted on December 1, 2010 by Kerry Pechter -

Investment management giant AllianceBernstein has formed an alliance with three of the largest annuity issuers—AXA Equitable, Lincoln Financial, and Nationwide—to offer defined contribution plan participants a way to turn their target date funds into a lifetime income stream.

Under the new program, which the company calls Secure Retirement Strategies, plan participants who invest in AllianceBernstein’s target date funds will, about 20 years before retirement, begin protecting that money with a so-called stand-alone living benefit that provides an income that the participant can’t outlive.

Attaching stand-alone lifetime income benefits to target date funds in 401(k) plans isn’t new—Prudential Retirement has been doing it for several years through its IncomeFlex program and Great-West Life & Annuity’s retirement division began marketing a similar program to plan sponsors last spring.

What’s new is that three insurance companies are collaborating to provide the living benefit, not one. AllianceBernstein will face the client, and it has created a proprietary administration system called GATES (Guarantee Aggregation, Trading and Expensing System) to handle the job. But behind the scenes, AXA Equitable, Lincoln and Nationwide will be splitting the task of providing the living benefit.

On a tactical level, AllianceBernstein hopes that this three-legged approach, and the diversification it provides, will quell plan sponsors’ queasiness about liability in case their plan’s insurer defaults on its obligations down the road. For some sponsors, it probably will. Others won’t feel safe offering annuities until the Department of Labor offers an explicit “safe harbor” that exempts them from future risk.

On a strategic level, the $496 billion (as of 12/31/2009) manager of defined benefit, DC and individual assets, wants to find ways to retain participant money under management more or less permanently. Indeed, all of the big institutional investment managers are maneuvering to hold onto the Boomer assets they have and add as much to them as possible. It’s a 21st century financial version of the Great Game, where the prize is management fees on a pool of trillions in savings as rather than Central Asian oil and gas.

How SRS works

Secure Retirement Strategies works like existing SALB programs. When plan participants who have invested in Alliance Bernstein target date funds (whose other managers are bond specialist PIMCO, large-cap value equity specialist Wellington Management and index specialist State Street Global Advisors) reach their mid to late 40s, they begin purchasing a rider that puts a floor under the “benefit base”—the notional amount on which future income payments will be based.

As participants make their period contributions to their TDFs, AXA Equitable Life (whose parent, AXA Financial, owns 63% of AllianceBernstein), Nationwide, and Lincoln Financial, will compete to guarantee a future chunk of income based on each contribution. The guaranteed payout rates fluctuate with market conditions. They’re also based on the age of participant at the time he or she makes the contribution. That is, earlier contributions buy more future income than later contributions. The standard fee for the guarantee is one percent, although plan sponsors can buy a richer guarantee by paying more.

“It sounds complicated but the components are all available today,” said Mark N. Fortier, CFA, head of the SRS project at AllianceBernstein. “A TDF does virtually the same thing with multiple investment managers.” [See accompanying feature, “The Point Person for Secure Retirement Strategies.”]

Nationwide became involved in the project after receiving a request for proposal from AllianceBernstein in 2009. “They were looking for multiple insurers [for their project] and we were interested in trying to penetrate the in-plan guarantee market,” said Cathy Marasco, assistant vice president, Nationwide’s Individual Investments Group. AllianceBernstein sought proposals from eight or nine strong insurers at the beginning of the project, Fortier told RIJ. All three of the finalists have A+ ratings (second of 16 categories) from A.M. Best.

AllianceBernstein provides investment options for Nationwide’s retirement plans, but the companies don’t compete directly in the institutional arena. AllianceBernstein focuses on larger plans and Nationwide focuses on large plans only in the public pension market. The deal gives AXA Equitable and Lincoln access to a large plan market they don’t ordinarily reach, Fortier said. Lincoln was not available for comment and AXA referred all questions to AllianceBernstein.

“We’re just providing the guarantee behind the scenes,” Marasco said. “The participants think they have one guarantee but actually their guarantee is split across three insurers. We’ve looked at other designs where there was a lead insurer and a reinsurer. But in this case we own our guarantee and we’re not taking on the risk of the other insurers.

“Each insurer will set its own guaranteed income rates quarterly,” she added. “[Regarding fees], we agreed upon a price, but we have the flexibility to change the payout rate based on the market environment and hedging costs.”

Outside perspectives

Prudential, whose IncomeFlex program pioneered the addition of stand-alone living benefits to target date funds, is watching the AllianceBernstein effort. The Newark, N.J. based company, the leading seller of individual variable annuity contracts, thinks the three insurer approach solves some problems but creates others.

“We emerged from the financial crisis stronger than ever and we’re leveraging that advantage. So we haven’t had to go the multi insurer solution,” said Brent Walder, senior vice president in Institutional Income Innovations, Prudential Retirement. “We have over 1,000 plans, and our plan sponsors are comfortable with a single insurer solution. We’ve had a lot of dialogues with very large plan sponsors [about liability].

“One way to solve that need is the AllianceBernstein way and split it three ways. You have a higher likelihood of a problem but less severity if one happens. But as you introduce more insurers, there’s more to explain. You have different withdrawal rates for different contributions. Our product is more straightforward and simpler. Those are the tradeoffs.”

Also watching the AllianceBernstein launch is Ron Surz, president of Target Date Solutions in San Clemente, Calif., who designs custom target date funds and is an advocate of TDFs that have zero equity allocation at the planned retirement date. (AllianceBernstein’s institutional TDFs reach a 50% equity allocation at maturity and maintain it through retirement. That makes them easier to hedge than than the firm’s retail TDFs, which have up to a 60% equity allocation at the retirement date.)

Surz thinks that SRS is a step-forward but not a complete retirement income solution for plan participants. “The desire to ‘DB-ize’ DC plans is reasonable and honorable on its surface, but [the retirement income challenge] requires something more creative than jamming retirees into anything, like annuities and/or GLWBs,” Surz told RIJ. “Retirement is way too complex for a one-size-fits-all solution. So the majority should opt out. Those who don’t opt out might be better off with a GLWB than not, but they would be best served by some serious education and review of their options.

“As Einstein said, ‘We cannot solve today’s problems at the same level of thinking that created them,’” Surz added. “I personally don’t believe that the ‘solution’ is currently sitting on a GLWB shelf. But I applaud the efforts to seek out a better way. I also believe that we still haven’t properly tackled the much simpler accumulation phase, where product is primarily designed for profit rather than for the benefit of the participant.”

Liability concerns

Skepticism persists regarding the willingness of plan sponsors to accept in-plan annuities if they can be held responsible for the failure of the insurance partner they choose. “Having the opportunity to diversify the provider risk is something sponsors are interested in,” one observer close to the situation said. “But with this the participant is still getting a sponsor-selected solution.

“You have to remember that the plan sponsors’ confidence in the financial services industry has been shaken deeply. Until they feel that there’s a clear way to deal with the fiduciary liability, they won’t get excited about this. Some will pick it up but not others,” he added.

But he thought that AllianceBernstein was well-qualified be an innovator in the in-plan annuity area. “They get the plan sponsors more than a lot of other groups—maybe because they’re such a great plan sponsor themselves. They work hard at their own program. There’s no ‘shoemaker’s children’ there,” he said.

Lew Minsky, the executive director of the recently-formed Defined Contribution Institutional Investment Association, which is composed of large asset managers, including AllianceBernstein, has also been following the SRS launch closely.

“We went to five cities and talked to large plan sponsors and the most common concern was single insurer risk,” he told RIJ. “Whether it’s a real or a perceived issue, its been holding plan sponsors back from moving forward. That’s one of the things that AllianceBernstein saw in the marketplace. And they saw that if they could get plan sponsors past that issue it would be very impactful.

“AllianceBernstein has been working on this for a couple of years. It’s an incredibly complex and difficult process to get insurers together to collaborate. You’ve got competing companies with their own business interests and historical differences. There are no anti-trust issues here, as far as I know, but you have a group of companies working in their individual business interests.

“In this case, they’ve decided that it’s in their business interest and in the broader interests of the industry to move this product forward. Equally important, from an industry evolution perspective, [is that] a certain group of insurers sees an unrealized opportunity in the in-plan market, but they’ve had real challenges in taking advantage of it. They see this as a way to tap into that opportunity.

“But I think asset managers in general, and AllianceBernstein in particular, as part of serving the DC marketplace, are honestly trying to figure out the best way to design to design these long-term default investment structures,” Minsky added. “That involves planning for accumulation and decumulation.

“I expect to see other companies trying this. I know of a couple of large sponsors that are looking at doing similar things with their custom target date funds, and one employer that’s looking at forming a multiple insurer pool. We have to get people away from a simple focus on accumulation, and this definitely speaks to that.”

Four Firms Capture Half of VA Sales

Posted on November 24, 2010 by Editor Test -

The top four variable annuity issuers—Prudential, MetLife, Jackson National and TIAA-CREF, in that order—accounted for over half of the $98.76 billion in new variable annuity sales in the first three quarters of 2010, according to Morningstar.

The top 10 variable annuity sellers accounted for about three quarters of all sales through September 30, and the top 20 accounted for about 95% of all sales, as the industry continues to concentrate in the wake of the financial crisis.

Third quarter sales were down just one percent from the second quarter, falling to $33.61 billion from $33.93 billion. Total YTD sales of $99.8 billion was up from $93.2 billion in the first three quarters of 2009.

But exchanges from one contract to another continue to dominate activity in the variable annuity space. Net flows (new sales, net of exchanges and payouts) were $6.4 billion, up from $6.2 billion in the second quarter and up 125% from net flows of just $2.9 billion in the third quarter of 2009.

Ameriprise experienced the biggest jump in sales from the second quarter to the third, with an increase of $904.2 million—a jump of 80%. The company’s share of the market rose to 6% from only 3.3%. The only issuer with a comparable leap forward was Horace Mann, whose sales grew 75%, to $24.9 million.

Many companies saw double-digit declines in sales, due either to the customer flight to the top sellers, to a reduction in product benefits, to their business decision to reduce their exposure to risks associated with variable annuity contracts, or to a combination of all three.

The following major VA issuers all recorded double-digit percentage declines in sales in the third quarter (listed from largest to smallest in VA sales): Sun Life Financial, -11.2, Pacific Life, -11.3, John Hancock, -19.2, ING Group, -15.5, Thrivent Financial, -13, New York Life, -18.7, Hartford, -22.6, Northwestern Mutual, -15.6, Massachusetts Mutual, -15.5, Genworth Financial, -12.6, Midland National, -27.9 and State Farm, -42.2.

Asset allocations within variable annuities are less conservative than they were in the first quarter of 2009, but much more conservative than they were at the peak of the mid-decade bull market

In the quarter just ended, 45.6% of the $1.42 trillion in VA contracts was invested in equities, 21% in fixed income funds, 18.8% in balanced funds, 11.9% in bonds, and 2.7% in money market funds. During 2006 and 2007, the equity allocation stayed close to 60%, plus or minus a percent, while allocations to balanced funds ranged from 9% to 12%.

On a nominal basis, variable annuity AUM peaked at $1.49 trillion in the fourth quarter of 2007. At the end of the third quarter of 2010, AUM was $1.42 trillion.

Empty Nesters

Posted on November 24, 2010 by Editor Test -

Decumulation Beat

Posted on November 24, 2010 by Editor Test -

A universal fiduciary standard requiring all financial advisors intermediaries to put their clients’ interest first sounds like a self-evident improvement over the status quo, but it’s hard to see how it could work.

Extending the fiduciary label assumes that all advice-giving intermediaries can act the way doctors and lawyers do. But M.D.s and attorneys usually have the independence to act in a client’s interest if they choose. Not all financial intermediaries can act independently.

A person serves the one who signs the checks. While we live in a representative democracy, most of us (i.e., those who aren’t self-employed or unionized) work in more or less benevolent dictatorships where our loyalty belongs to the firm or the supervisor who pays our wages, salaries and bonuses and controls our advancement.

As an newsroom colleague of mine used to point out long ago, people should always know “which side their head is battered on.”

A fee-only advisor who gets paid by his or her clients can take a fiduciary oath fairly easily. Conflicts of interest will arise, but the conflict takes place in the conscience of the advisor. It’s a very different scenario for advisors who are employed by big companies. If they want to advance, they have to be more loyal to the company—to sell or recommend what the company has decided its advisors will sell or recommend, for instance—than to the client.

We could debate the meaning of “advice,” “advisor,” or “best interest.” We could tell ourselves that an advisor can “switch hats” and use the fiduciary standard for one client and the suitability standard for another. We could conjecture that the parallel interests of the company, its shareholders, its employees and its clients eventually converge. But that’s only in a non-Euclidean universe, not in the everyday world.

If we created a uniform or harmonized fiduciary standard, we’d be asking some advisors to serve two masters at the same time. That’s either an impossibility or a recipe for existential stress. Or a dilution of the standard itself.

I’m not saying that only self-employed fee-only advisors are capable of acting in the client’s best interest. They’re not necessarily selfless. At a fee-only advisor conference recently, one advisor told me that she doesn’t want to see a fiduciary standard for wirehouse advisors because the fiduciary standard represents her competitive advantage over brokers.

“When I first meet clients, I explain that I’m a fiduciary, and that I work for them. And they like that,” she said. Sure, she was defending her turf from a new cohort of competitors. But she knows that when she makes a statement like that, she can make it stick. I may be wrong, but I don’t think most wirehouse advisors can do the same.

Disclosures aren’t the solution. Disclosing conflicts of interest doesn’t make them go away. The most vulnerable investors don’t read disclosures.

Ironically, Securities and Exchange Commission chairperson Mary Schapiro could determine the outcome of this debate. (The Dodd-Frank financial reform bill left the matter up to the regulators in the executive branch to define the fiduciary rules.)

Why “ironically”? According to reports in credible newspapers, Schapiro accepted a multi-million payout from the financial services industry when she left the top job at FINRA, where she was demonstrably ineffective. In her new, relatively low-paying government job, it must take a superhuman effort not to serve the financial industry first and investors second.

The Bucket

Posted on November 24, 2010 by Editorial Staff -

Prudential Retirement Introduces FDIC-Insured Plan Option

In response to demand for safe investment options, Prudential has added Prudential Protection Account to its suite of institutional retirement solutions. The principal and accrued interest guaranteed investment option is insured by the FDIC for up to $250,000 per participant in Prudential’s 401(a), 401(k) and 457 employer-sponsored retirement plans.

The Prudential ProtectionAccount is an alternative stable value vehicle that allows for FDIC insurance for individual participants in 401(a) and 401(k) defined contribution plans and governmental 457 plans.

“Prudential ProtectionAccount offers liquidity, principal protection, and a competitive rate of return for plans that use Prudential’s recordkeeping platform,” said Carlos Mello, vice president, Prudential Retirement. The account’s funds are deposited at Prudential Bank & Trust, FSB.

Prudential Retirement offers retirement plans to public, private and non-profit organizations with about 3.7 million participants and $194.3 billion in assets, as of September 30, 2010.

Genworth Financial Repays Credit Facility Loans

Genworth Financial, Inc., announced that it has repaid $480 million of outstanding borrowings under its five-year revolving credit facilities, paying down $240 million of outstanding borrowings under each of the two facilities. With this, the company has repaid all of the outstanding borrowings under the facilities, which will remain in effect through May and August of 2012.

Former Prudential Controller Moves to New York Life

New York Life announced that John Fleurant has joined the company as senior vice president, finance, and controller, succeeding John Cullen, who spent 40 years at the company. The former controller at Prudential Financial, Fleurant reports to executive vice president and chief financial officer Michael Sproule.

Fleurant is responsible for overseeing the Controller’s, Tax, and Treasury departments, with responsibility for financial planning, accounting policy, and rating agency relationships.

In 15 years at Prudential, Fleurant was also chief financial officer for domestic businesses. He was a senior manager for Deloitte & Touche, where he spent nine years. He holds a bachelor’s degree in Accounting from Widener University and is a certified public accountant.

Letter to the Editor

Posted on November 24, 2010 by Glenn Daily -

Glenn Daily, a fee-only insurance consultant who publishes glenndaily.com, a website that describes itself as a “resource for making good decisions about insurance,” e-mailed RIJ last week with a response to Curtis Cloke’s letter comparing the merits of commissions and fees in the sale of income annuities. Here is Daily’s comment:

There are two problems with Curtis Cloke’s analysis of the relative merits of fees versus commissions for income

annuities (“Fees vs. Commissions in SPIA Sales,” RIJ, 11/17/10).

First, fees can be tax deductible, depending on the taxpayer’s situation. Commissions are not immediately deductible;

they become deductible as income payments are received, in the sense that the income payments are lower than they

would be without the commissions.

The tax disadvantage of commissions is even worse for qualified annuities. If tax rates remain constant, the after-tax

rate of return on qualified money is equal to the before-tax rate of return, so any expense that reduces the return is

costly. That’s why IRA plan sponsors give participants the option to pay administrative fees separately.

Second, for most consumers, separately-paid fees are more efficient than amortized commissions, because the insurer’s

cost of capital is likely to be higher than the consumer’s opportunity cost of money. Actuary Ralph Gorter explained

this product design issue very well in “Credit Card Approach to Pricing” (Product Development News, August 2000,

available at www.soa.org).

Insurers pay commissions when the annuity is issued, and then they recover those costs from the annuity. They typically

seek a return on invested capital of at least 10%, so the amortized cost will reduce the consumer’s benefits by more

than the amount of the commission—and probably by more than it would cost the consumer to finance those costs himself.

Upfront loads are better for long-term product performance, but consumers balk at upfront loads because they are

transparent and therefore painful. It is easier to sell products that bury the loading in interest rate spreads.

Average Dutch Retirement Age Stays Level

Posted on November 24, 2010 by Editor Test -

The average retirement age of Dutch workers in 2008 of 62 years did not increase compared with the previous year, Statistics Netherlands (CBS) has found. Nearly 80% of workers who retired in 2008 were younger than the official retirement age of 65.

The leveling off of the retirement age has also been attributed to weakening labor demand in the wake of the financial crisis. That is expected to change, however.

“Because pension funds can hardly pay any indexation now, people will feel the urge to keep on working longer, supported by a recovering economy and a growing demand for labor,” said Lans Bovenberg, an economist at Tilburg University and a director at Netspar, the network for retirement, pensions and aging.

Bovenberg has argued that the state pension should be raised to 68 to meet growing life expectancy. The current minority government has agreed to increase the official retirement age to 66 in 2020, but has not yet passed any legislation.

Between 2000 and 2006, employees stopped working at age 61 on average. However, in 2007, following legislation to discourage early retirement, the average retirement age increased to 62 years.

The retirement age of workers in agriculture and fisheries was the highest in 2008, at almost 65. Employees in the hotel and catering business, as well as staff at service providers in the environmental and cultural sectors, retired at age 63 on average. Workers in the care and building sectors, and in public services, took the earliest retirement (age 61).

Health Benefit Costs Grow 3X Faster than CPI

Posted on November 24, 2010 by Editor Test -

Average total health benefit costs per employee grew 6.9% in 2010, or over $9,500—a significant acceleration from the 5.5% increase in 2009 and the biggest increase since 2004, according to the latest National Survey of Employer-Sponsored Health Plans, conducted annually by Mercer.

That was also three times faster than the growth of the Consumer Price Index in 2010 (the last year before the provisions of the Patient Protection and Affordable Care Act, known by its opponents as “Obamacare,” begin to take effect. Cost rose by 8.5% among employers with 500 or more employees, but by just 4.4% among those with 10–499 employees.

Employers expect high cost increases again in 2011. According to Mercer, employers believe that costs would rise by about 10% if they made no health program changes, with roughly two percentage points of this increase coming from changes mandated by PPACA for 2011.

However, employers expect to hold their actual cost increase to 6.4% by making changes to plan design or changing plan vendors. Mercer’s survey includes public and private organizations with 10 or more employees; 2,836 employers responded in 2010.

“Employers did a little bit of everything to hold down cost increases in 2010,” said Beth Umland, Mercer’s director of health and benefits research. “The average individual PPO deductible rose by about $100. Employers dropped HMOs, which were more costly than PPOs this year. Large employers added low-cost consumer-directed health plans and found ways to encourage more employees to enroll in them. And more employers provided employees with financial incentives to take better care of their health.”

Enrollment in high-deductible, account-based consumer-directed health plans (CDHPs) grew from 9% of all covered employees in 2009 to 11% in 2010. CDHP enrollment has risen by two percentage points each year since 2006. The cost of HSA-based CDHP coverage averaged $6,759 per employee among all employers in 2010, or almost 25% lower than the cost of PPO coverage.

Starting in 2014, PPACA sets minimum standards for “plan value” (the percentage of health care expenses paid by the plan) and “affordability” (the employee’s share of the premium relative to household income). These changes are stimulating health promotion or “wellness” campaigns.

In 2010 more employers added incentives or penalties to encourage more employees to participate: 27% of large employers with health management programs provided incentives, up from 21% last year.

As in 2009, medical plan cost increases in 2010 were about two percentage points lower, on average, among employers with extensive health management programs than among those employers offering limited or no health management programs. More than a fourth of employers with 20,000 or more employees require lower premium contributions from nonsmokers.

The prevalence of retiree medical plans slid to its lowest point ever in 2010, with just 25% of large employers offering an ongoing plan to retirees under age 65 (down from 28% in 2009) and just 19% offering a plan to Medicare-eligible employees (down from 21%). An additional 10% of employers have closed their retiree plans to new hires but continue to offer coverage to employees retiring or hired after a specific date.

The full report on the Mercer survey will be published in late March 2011.

Balances of “Consistent” 401(k) Participants Up 32% in 2009

Posted on November 24, 2010 by Editor Test -

The average 401(k) retirement account balance rose 31.9% in 2009, according to an survey of consistent participants by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).

After the 27.8% decline in 2008, the rise in 2009 was in line with the 2003–2007 pattern of steady increases in account balances. The full report is being published simultaneously at www.ebri.org and www.ici.org.

The EBRI/ICI survey, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2009, is based on records on 20.7 million participants at year-end 2009, including 4.3 million who have had 401(k) accounts with the same 401(k) plan each year from year-end 2003 through year-end 2009.

Though the average 401(k) account balance fluctuated with stock market performance, balances of consistent participants grew at an average annual rate of 10.5% between 2003 and 2009, to $109,723 at year-end 2009 from $61,106 at year-end 2003.

The average account balance increased 31.9% in 2009 (compared with a 26.5% rise in the S&P 500 and a 27.2% increase in the Russell 2000 indices), which included changes in 401(k) participant account balances reflect ongoing worker contributions, employer contributions, investment gains and losses, and loan or withdrawal activity. The Barclays Capital U.S. Aggregate Bond Index rose by about 5.9 percent.

About one in five of over 20 million participants had loans outstanding at the end of 2009, up from 18% at both year-end 2008 and year-end 2007. At year-end 2009, 89% percent of 401(k) participants were in plans offering loans.

The share of 401(k) accounts invested in company stock continued its decade-long decline, falling by half a percentage point to 9.2% in 2009. Recently hired 401(k) participants generally were less likely to hold employer stock.

Stocks are still the most popular asset class. At year-end 2009, 60% of participants’ assets were invested in equity funds, the equity portion of balanced funds, and company stock, while 36% was in stable value investments and bond and money funds.

More than three-quarters of 401(k) plans offered target-date funds (TDFs) last year. At year-end 2009, nearly 10% of the assets in the EBRI/ICI 401(k) database were invested in TDFs. One in three 401(k) participants held TDFs.

Recent hires were more likely to hold balanced funds or TDFs compared with earlier time periods. At year-end 2009, about 42% of the balances of participants in their 20s was invested in balanced funds, compared with 36% in 2008 and about only 7% in 1998. At year-end 2009, 31% of the balances of recently hired participants in their 20s was in TDFs, up from almost 23%at year-end 2008.

Low Rates Squeeze Fixed Annuity Issuers

Posted on November 24, 2010 by Editor Test -

U.S. sales of fixed annuities were an estimated $19.5 billion in third quarter 2010, according to Beacon Research’s Fixed Annuity Premium Study. Sales were essentially flat quarter-to-quarter, with only a 0.3% increase, and were down 12% relative to third quarter 2009.

Estimated year-to-date sales of $55.4 billion were 35% below YTD 2009, which was the strongest three quarter period in the eight-year history of the Beacon study. The data excluded structured settlements and employer-sponsored retirement plans.

Credited rates fell during third quarter, with top rates on multi-year guarantee annuities dropping to 3.5% from 3.9%. But the fixed annuity advantage over Treasury rates grew, and this helped MVA sales increase for the second consecutive quarter. The yield curve flattened, and fixed rate annuity sales by interest guarantee period shifted somewhat shorter as a result.

“Sales of fixed annuities were essentially flat quarter-to-quarter. This is puzzling because, although rates declined in third quarter, the spread between 5-year fixed annuity and Treasury rates widened, and that usually stimulates an overall sales increase,” said Beacon Research president and CEO Jeremy Alexander. “But the current interest rate environment poses a challenge for issuers of these annuities because it pressures profitability. Until the interest rate environment changes, these profit pressures will motivate many issuers to limit sales.”

“But MVA sales did grow 14% sequentially, so it seems that these annuities were the ones offering attractive rates. Issuers may have chosen to emphasize MVA sales because market value adjustments help to insulate them from interest rate risk. Indexed annuity sales were up 4%, partly because owners could potentially earn more interest relative to fixed rates on annuities and certificates of deposit. However, we believe indexed annuities did well mainly because of attractive lifetime income benefits, along with premium bonuses.”

Sales by category

Indexed annuity sales hit a record-high 44% of fixed annuity sales in the quarter, (42% YTD) climbing to $8.6 billion, up 4% from the second quarter and up 17% from the third quarter of 2009. They Estimated results of the other product types were:

Book value fixed annuities, which pay a declared rate for a specific period, $6.9 billion, down 5% from the prior quarter but down 31% from the same quarter of 2009.
Immediate and deferred income fixed annuities, $2.3 billion, down five percent from the second quarter, up 17% year over year.
Market value-adjusted(MVA), which pay a declared rate but may adjust in value on early withdrawal, $1.8 billion, up 14% for the quarter and down 39% year over year.

On a year-to-date basis, indexed annuities also had Study-record sales and share of sales. Estimated YTD results by product type were: indexed, $23.4 billion; book value, $21.0 billion; fixed income, $6.5 billion; MVA, $4.5 billion. Income annuity sales improved 7% and indexed annuities were up 4% compared to YTD 2009. Book value sales fell 51%, and MVAs dropped 65%.

Sales leaders by company

Allianz moved up a notch to become the quarter’s sales leader, replacing New York Life, which came in third. Aviva advanced to second from third place. American Equity moved up a notch to come in fourth. Lincoln Financial Group rejoined the top five in fifth place. Results for the top five Study participants were as follows:

Fixed Annuity Sales Leaders (in $thousands)
Allianz Life	$1,970,632
Aviva USA	1,655,341
New York Life	1,442,571
American Equity Investment	1,220,590
Lincoln Financial Group	956,277

Sales leaders by product

Third quarter results include sales of more than 500 products, a Beacon Study record. By product type, Allianz Life remained the leading issuer of indexed annuities. New York Life replaced Western National as book value sales leader and continued as the dominant income annuity company. Great American led in MVA sales, supplanting American National. Top sellers included:

Issuer Product	Product	Contract Type
Allianz Life	MasterDex X	Indexed
Lincoln Financial	New Directions	Indexed
American Equity	Retirement Gold	Indexed
New York Life	Lifetime Income Annuity	Income
Aviva USA	BalancedAllocations Annuity 12	Indexed

Sales leaders by channel

In the bank channel, New Directions was the new bestseller and the first indexed annuity to dominate bank sales in the Study’s history. Among independent producers, MasterDex X was again the leader. New York Life Lifetime Income Annuity was the top channel among captive agents and the New York Life Select Five Fixed Annuity led again among large/regional broker-dealers. In the wirehouses, Pacific Frontiers II (an MVA) replaced another Pacific Life product as the bestseller. Among independent broker-dealers, MassMutual’s RetireEase income annuity repeated as the favorite product.

An Entrepreneur Tackles Decumulation, with TIPS

Posted on November 24, 2010 by Kerry Pechter -

Six months ago, Manish Malhotra was a senior vice president at beleaguered Citigroup, tinkering with retirement income planning software. Now, as CEO of New York-based Fiducioso Advisors, he’s an entrepreneur who’s promoting his own decumulation tool.

A formal launch of his Fiducioso Investment Analytics Platform is months away. But last week Malhotra demo-ed it for the Retirement Income Industry Association.

The platform is intended to help advisors build guaranteed income streams out of annuities and a Maturity Matched Portfolio (MMP) of Treasury Inflation Protected Securities (TIPS), with withdrawals from a portfolio of stocks and bonds when needed.

“With the MMP, we can build inflation-protected income out of laddered TIPS that should be sufficient to meet the needs for a specific year,” Malhotra told RIJ in an interview this week. “If the TIPS don’t mature in a given year or if inflation expectations change, we take money from the SWP (systematic withdrawal program) account. We look at everything together, and all of the buckets are feeding money at the same point.

“We can build a plan for any degree of risk that the investor is comfortable with,” he added. “The first thing you can choose is the goal risk. You can choose a worst case for how long your money lasts. We will find a plan that gives you the maximum income within the constraints that you give us. In our next demo, to make life a little easier, we’ll have five default plans.

“Our core business will be licensing. Our client base is primarily financial advisors and wealth management firms. We won’t be going to retail retirees. The current direction is to license it on a per plan basis—that is, the license includes a financial plan based on the software—but if there is interest in an annual subscription we’re open to that.”

Taking FIAP for a spin

In short, FIAP is a “bucketing” tool. It creates income from several sources at once (like Briggs Matsko’s E.A.S.E. system) rather than assigning specific assets to specific time segments in retirement (like David Macchia’s Income for Life Model or Curtis Cloke’s THRIVE program).

Malhotra says time-segmentation didn’t appeal to him. “We could set up 30 lock boxes, one for every year of retirement. But if you wanted a 90% confidence level of success from that method, the sustainable payout rate would be only 3.48%. By pooling the money [the way we do], your payouts are improved,” he said.

The maturity-matched ladder of TIPS is the keystone of Malhotra’s approach. The ladder can stretch for five, ten or more than 20 years into retirement. Each rung can consist of zero-coupon or coupon-bearing bonds. The client liquidates a set of bonds each year, supplementing the income with semi-annual interest payments from the remaining bonds if desired.

The client’s remaining assets can be put into at-risk investments and income annuities. The allocation depends in part on what degree of portfolio failure risk—the risk of running short of money—he or she can tolerate. The tool spits out a variety of allocation options, singling out (with a green dot among competing red dots) the one that produces the highest income at the lowest tolerable risk.

A Schematic of the Financial Investments Analytic Platform

Source: Fiducioso Advisors, 2010.

The tool is product neutral, so money managers who use the software can plug in the kinds of funds, ETFs, or annuity products that they already use or like. Advisors can use ready-made tools like the PIMCO TIPS payout fund as a substitute for a custom-made TIPS ladder, Malhotra said.

A ladder of TIPS can produce more income with less risk than a conventional systematic withdrawal plan, Malhotra claimed. A 23-year TIPS ladder, he said, can safely produce a 4.6% annual drawdown from age 65 to age 95. That beats the traditional 4%. On a $2 million portfolio, that would mean an annual income of $92,000 versus $80,000.

This week, I took the demo of the FIAP for a spin. The tool let me choose my desired retirement income (from $35,000 to $80,000 from my hypothetical $1 million portfolio), tolerance for “goal risk” or portfolio failure (10% or more), the length of my TIPS bond ladder (zero years, five years or 10 years), the bond allocation of my investment portfolio (20% to 100%) and my desired allocation to a joint life fixed immediate annuity (0%, 25%, 50%, 75% or 100% of my assets).

As a baseline scenario, I chose a 0% chance of running out of money over 30 years, no TIPS ladder, a 60% stock/40% bond investment allocation, and no annuities. Given those constraints, the tool allowed me a safe withdrawal rate of $39,000 (very close to the traditional 4% rate), plus $30,000 from Social Security.

Then I tried turning a few of the dials. If I raised my acceptable risk of portfolio ruin to 10% (introducing the chance that I might run short of money after 23 years in retirement), the tool bumped my income to $74,000. If I introduced a 10-year TIPS ladder (which would absorb $430,000 of my $1 million) and put 80% of my SWP money in bonds, the tool suggested a safe income of just $67,000.

That was just the demo. There are more demos to come before the formal commercial launch next year. “In our next demo, to make life a little easier, we’ll have five default plans,” Malhotra told RIJ. The tool will also allow for tax-efficient withdrawals from taxable accounts, tax-deferred accounts, and Roth accounts, in that order. At a time when more and more advisors are thinking about retirement income, and about establishing guaranteed income floors for their clients, Malhotra expects his product to find a niche.

The Bucket

Posted on November 17, 2010 by Editorial Staff -

Indexed Annuities Set Sales Record

Sales of indexed annuities reached $8.7 billion in the third quarter of 2010. That was up 16% from the same period last year and up nearly 5% from the previous quarter, according to AnnuitySpecs.com’s quarterly report, based on data from 40 carriers representing virtually the entire market.

“With CDs averaging 0.56% a year and fixed annuities hovering at 3.14%, I think we can count on another record quarter to close-out the year,” said the Sheryl Moore, president of AnnuitySpecs.

Allianz Life maintained its leadership position with a 21% market share, followed by Aviva, American Equity, Lincoln National and ING, in that order. Allianz Life’s MasterDex X was the top-selling indexed annuity for the sixth consecutive quarter. The average weighted commission paid to the indexed annuity agent reached an all-time low, 6.50%.

‘Chained CPI’ Will Punish Pensioners: RetireSafe

The ‘Deficit Commission’ draft report that was released last week quickly drew criticism from RetireSafe, a 400,000-member national advocacy group for older Americans.

The draft report contained various approaches to reduce debt many directly affected seniors, two of the most onerous are; the chained Consumer Price Index (CPI) and changes to Medicare services.

“The ‘chained’ CPI will make the already flawed CPI used for the annual cost of living adjustment (COLA) even worse,” said Thair Phillips, president of RetireSafe.

The Bureau of Labor Statistics first published the chained CPI in 2002 by the Bureau of Labor Statistics. It assumes consumers adapt to higher prices by switching to cheaper substitutes for their favorite items. For example, people shop at Costco if their usual supermarket raises prices, or buy chicken if the price of beef rises.

Advocates for older Americans say that seniors don’t have the same flexibility to change their purchasing habits or have as many options as younger people. They see the use of the chained CPI as an excuse to delay cost of living increases in entitlements. A skeptic might say it’s stingier.

The chained CPI rose from 100 at the beginning of 2000 to 126.4 in September 2010, representing an increase in prices of over 26% over almost 10 years. The more common CPI-Urban rose from 168.8 in January 2000 to 218.4 in September 2010, an increase in prices of 29.4%, according to the Bureau of Labor Statistics. http://data.bls.gov/cgi-bin/surveymost?su

“Instead of adopting a fair and accurate CPI for seniors as outlined in the CPI for Seniors Act, HR 5305, the Commission goes in the opposite direction to further cut the COLA for older Americans,” Phillips said. “Reducing benefits and punishing older Americans to pay off the debt is not right or fair, and it must be stopped.”

Pershing Buys Clearing Relationships from Jefferies & Co.

Pershing LLC and the investment bank, Jefferies & Company, Inc., have reached a agreement where Pershing will assume certain of Jefferies’ clearing and custody relationships with introducing broker-dealers

Pershing, a unit of BNY Mellon, will also offer its processing services and technology solutions to Jefferies’ retail and institutional broker-dealer customers. The terms are undisclosed and are subject to regulatory approval.

Pershing to Offer Jefferson National’s Monument VA

Jefferson National, manufacturer of a flat-insurance fee variable annuity, said its Monument Advisor VA will be available to fee-based advisors on Pershing Advisor Solutions’ NetX360.

NetX360 is an open-architecture technology platform for fee-based advisors, including independent registered investment advisors (RIAs), introducing broker-dealer firms and dually registered advisors.

Under the new arrangement, fee-based advisors using NetX360 will be able to consolidate clients’ Jefferson National Monument Advisor variable annuity contract data within their clients’ brokerage accounts, allowing real-time updates of the valuation of the VA contracts on their workstation and, subsequently, on clients’ brokerage account statements.

Age – Not Finances – Drives Retirement Timing: Schwab

How do 50-something baby boomers approach fundamental questions about when it’s time to retire? According to a new Charles Schwab survey, 46% have a target date or age in mind, 38% have a target number in mind, and 34% have neither.

And what do retirees actually do? About 47% of retirees said they actually did retire when they reached their target date or age; another 27% said they retired when they reached their financial target; and 38% said they had neither a financial nor date or age target in mind leading up to retirement.

Schwab also surveyed baby boomers about their feelings on Social Security and found that, compared to the general population, 50- to 60-year-olds have far higher expectations for Social Security in retirement.

Over half (55%) of 50- to 60-year-olds are counting on Social Security to supplement their retirement income, compared to 37% for all Americans. While 46% of all Americans aren’t counting on Social Security, only 26% of 50-somethings aren’t counting on it.

Americans’ Retirement Fears Revealed

In a recent survey from Edward Jones, nearly a quarter (23%) of Americans said not being able to pay for healthcare costs in retirement was their top fear, a percentage that has actually decreased over the last four years.

In 2006, when Americans were polled on this topic, 30% said paying for healthcare was their greatest fear. The survey also found that 19% of Americans are worried about having to work longer to supplement retirement savings versus 12% in 2006.

Americans between the ages of 55 and 64 are considerably more worried (35%) about not being able to cover healthcare costs than those of lower age brackets but not as worried as those polled in 2006 (43%). Gender also influenced this sentiment, as 27% percent of women indicated that they were most concerned about healthcare costs, while only 19% of men consider this their greatest fear post retirement.

The study of 1,008 respondents, which was conducted by Opinion Research Corporation on behalf of Edward Jones, revealed that a large percentage of Americans also rank “having to work longer to supplement retirement savings” (19%) and “having to rely on others for support” (19%) as major concerns as they approach retirement. Respondents between the ages of 45 and 54 showed the most anxiety (26%) about having to work longer to supplement their retirement savings.

Americans in lower age brackets (24% of 18-24 year olds and 24% of 25-34 year olds) are most concerned about having to rely on others to support them during retirement. Additionally, within these age groups (18% in each age bracket respectively), respondents also indicated that they are more concerned about “not being able to make provisions for family” than those older than the age of 35.

Household income also had a considerable effect on respondents’ retirement fears, as Americans with annual incomes between $75,000 and $100,000, indicated that they are most concerned about “having to work longer” (35%) and “having to cut back on a desired lifestyle” (21%). Respondents in lower income brackets are more concerned about “having to rely on others for support” and “not being able to provide for family” after they are gone.

Securian Introduces Lifetime Income Benefit for MultiOption Variable Annuity

Encore Lifetime Income, a guaranteed lifetime income benefit, can now be added to many of the Minnesota Life Insurance Company’s MultiOption annuities for an additional cost. Minnesota Life is a subsidiary of Securian Financial Group, Inc.

After age 59½, annuity owners can withdraw a percentage of the benefit base, which is equal to the owner’s initial contribution (or contract value, if the rider is added at an anniversary of the initial purchase).

The rider also can be purchased as a joint benefit. Provided the benefit’s withdrawal limits are followed, the annual income is guaranteed never to fall and may rise annually without annuitization.

The Encore benefit offers three opportunities for income growth:

Ratchets. On each contract anniversary, the benefit base is reset to the current contract value, if higher. This could also raise the amount that can be withdrawn each year. If the benefit’s withdrawal limits aren’t exceeded, the annuity owner never loses those gains to their annual withdrawal amount even if the contract value later declines. A reset could increase the cost of the benefit.
Roll-ups. For each year (up to 10 years) the annuity owner postpones withdrawals, the benefit base rises 5%. This increases the amount of guaranteed income available in later years, but it does not add to the contract value. When applicable, the benefit base will be increased by either the reset, or the 5% enhancement, whichever is higher.
Age brackets. The initial guaranteed annual income percentage is based on the age of the annuity owner when the benefit is added, with 4% being the lowest and 6% the highest. Depending on the owner’s age, the percentage could rise annually.

Encore must remain in place seven years and requires use of an approved asset allocation strategy. Encore Lifetime Income is an option cost in MultiOption Advisor B Class, Legend and Extra based on state approval. The cost of Encore is 1.10% (Single), or 1.30% (Joint). The benefit charge may increase upon a reset but will not exceed a maximum of 1.75% (Single), 2.00% (Joint).

ING Expands Stable Value Business

ING’s U.S. Retirement Services division reports significant growth in its stable value business in 2010, with sales of $3.6 billion through the first three quarters—a three-fold increase over the same period in 2009.

The growth has been fueled by a focus on ING’s synthetic and separate account contracts, and by leveraging the fixed income expertise of its asset management operations, ING Investment Management, the Netherlands-based company said in a release.

ING’s U.S. Retirement Services has about $277 billion in combined assets under administration and management, and serves all sizes and segments of the defined contribution market.

The company’s stable value team has added staff this year as it grows the business through plan sponsors, consultants and intermediaries. New positions have been created in product management, sales and operations.

“ING has been providing stable value solutions to plan sponsors and their employees for over three decades, building up leadership and expertise in this space,” said Rick Mason, President of Corporate Markets for ING U.S. Retirement Services. “While many wrap providers have reduced their appetite or left the business in the past two years, we’ve strategically positioned ourselves to grow in response to market demand.”

Stable value investment options, which are available exclusively to defined contribution savings plans, are designed to preserve capital and provide steady returns for participants. Stable value was one of the only asset classes to avoid losses and even deliver positive returns for participants throughout the 2008-2009 financial crisis, ING said.

With Savings, Does Quantity Trump Quality?

What matters more: How much a person saves or how they save it?

A new study from Charles Schwab, a major 401(k) plan provider, suggests that for most plan participants the answer is: How much.

Passive forms of guidance such as automatic enrollment and automatic savings escalations and the employer matching contribution have at least as large an impact on participants’ lifetime accumulations as the investment guidance they receive, according to a new survey of 1,005 of the 755,000 participants in 911 plans served by Schwab Retirement Plan Services, Inc.

After 30 years, the study asserted, a hypothetical 35-year-old participant earning $50,000 (with 2% annual wage increases) who started with a 3% deferral and gradually increased it to 8% would have $321,000 at retirement, assuming a 5% average annual growth rate. If the same person stayed at 3%, the accumulation would be only $128,000.

“Asset allocation is important, but people really need to save their way to retirement,” said Steve Anderson, head of Schwab Retirement Plan Services.

The study found:

69% of respondents rated the employer match as the biggest driver of participation. One in four said they chose not to enroll because their employer did not offer a match. Almost three in four of sponsors of Schwab plans offer a match.
Firms with automatic enrollment averaged 88% participation in 2009, compared to 73% participation in firms without automatic enrollment. Plans that introduced auto-enrollment in 2005 saw an average 15% increase in enrollment on average by 2009, compared to an average one percent decline in enrollment among plans not offering auto-enrollment.
In all Schwab-serviced plans, participation averaged 76% in firms offering an employer match and 70% in firms without a match.
83% of participants enrolled in an automatic savings program remained at the increased contribution rate a year after enrollment.

Up to 25% of participants save at the employer match ceiling. Participants would save more if an employer matched 50% up to a 6% payroll deduction than if the employer matched 100% up to 3%.

An earlier Schwab study showed:

70% of participants who receive 401(k) advice increase their deferral rates and those savings rates nearly double as a result, from 5% to 10% of pay.
Participants who receive advice have a minimum of eight asset classes in their 401(k) portfolio compared to fewer than four for those choosing their own investments.
92% of advice users stayed the course in their 401(k) portfolios from July 2008 through February 2009.

Name Game: ING DIRECT Helps Small Plan Sponsors Pick the Right Plan

ING DIRECT’s ShareBuilder 401k, a provider of retirement plans for small businesses, has revamped its product names and services to help business owners compare different 401(k) plan types and select the one appropriate for their firm.

The new product names include Individual 401k (for owner-only companies), Simplified 401k (designed to help employee-based businesses maximize contributions and automatically satisfy government tests), Customized 401k (for flexible matching and vesting options), and Tiered Profit Sharing 401k (enabling businesses to reward employees by group, tenure or age).

ShareBuilder 401k plans are comprised of exchange-traded funds (ETFs) from iShares, SPDR and PowerShares, rather than mutual funds. A registered investment advisor, ShareBuilder shares in the investment fiduciary role with its clients. The ShareBuilder Investment Committee manages the evaluation and selection of the fund line-up and model portfolios automatically for employers and their participants.

All ShareBuilder 401k products offer auto-enrollment, auto-rebalancing, Roth, signature-ready 5500s and much more. Each plan provies access to 401(k) consultants, customer success managers, implementation specialists and customer care for each participant.

Quote of the Week

Posted on November 17, 2010 by Editor Test -

American Funds Is the Top Brand in Large Cap Funds

Posted on November 17, 2010 by Editor Test -

American Funds is considered the “go-to” provider of large-cap growth and large-cap value funds among registered investment advisors, according to a new report from Cogent Research.

Virtually all advisors who use mutual funds include large-cap growth or value funds in their lineup; 39% use large-cap American Funds product for the growth portion and 31% for the value.

BlackRock, American Funds’ nearest competitor in these two asset classes, is named as the “go-to” fund provider by 7% and 6% of advisors, respectively.

No single fund company dominates among advisors seeking mid-cap, small-cap, or international product offerings, according to Cogent’s Advisor Trends in Asset Class Mix 2010TM, a report based on a nationally representative survey of over 1,400 registered advisors.

American Funds dominate all channels except for the registered investment advisor (RIA) channel, where Vanguard Group, Fidelity Investments, and, to a lesser extent, DFA (Dimensional Fund Advisors) pose a challenge.

In all six style boxes comprised of mid-cap and small-cap asset classes, Fidelity Investments and Franklin Templeton are just a few points behind American Funds for advisors who name them as “go-to” providers in these categories.

Franklin Templeton is strong among Regional and Bank channel advisors. “There’s a lot more competition… outside of the large-cap arena,” said Tony Ferreira, Managing Director of Cogent’s Wealth Management practice. “At least a half dozen fund companies are in the hunt within the mid- and small-cap fund space.”

“Take The Hartford and Lord Abbett, for example,” he added. “Among Regional [broker-dealers], these two players match or surpass what a number of larger competitors, including American Funds, are doing in all three mid-cap categories.”

For international equity funds, American Funds and Franklin Templeton were named by 25% and 17% of advisors respectively as their “go-to” provider. Beyond those two providers there are at least 30 contenders each with their own small piece of the pie.

UK’s National DC Plan Considers Investment Options

Posted on November 17, 2010 by Editor Test -

The National Employment Savings Trust (NEST), the U.K.’s state-sponsored defined contribution plan, has ruled out any direct investments in infrastructure, commodities and high yield assets in its first few years of existence, IPE.com reported.

“We won’t be investing in a single infrastructure fund, though, or a single commodities fund, or a single high-yield fund until we get bigger,” said Mark Fawcett, CEO of the program. The fund could get some exposure to those asset classes through its diversified beta fund, however.

The fund isn’t required to invest in UK equities, Fawcett said, but its overall global equity mandate will allow for 10% to be invested in local equities.

While it is still undecided whether NEST will link its pensions to the consumer price index (CPI) or the retail price index, Fawcett acknowledged the government had recently deemed CPI the appropriate measure for pensioners.

Fawcett hoped that, in time, the program would clear internally, lowering the cost and minimizing selling and buying, as the constant influx of new members would create ongoing demand for funds sold by members who are retiring.

He said that with the help of target-dated funds, NEST would be able to minimise confusion and allow people to simply set a retirement date, allowing the default investment strategy to then adjust as the pension age approached.

However, the notion of high risk and return, as well as low risk and return, socially responsible investment funds and religiously compliant funds are still being considered, and final details will be announced in the new year when trustees unveil the scheme’s Statement of Investment Principles.

As for the ultimate size of the scheme after launch, Fawcett said it was impossible to predict, as the soft launch will still require the employees of select companies to opt into the scheme.

Fawcett said that “hedge funds might have a place, certainly, at some point” in the program, but their huge performance fees conflict with the program’s low-fee philosophy. “A lot of pension funds are going into hedge funds at the moment, but it’s perhaps not the first place we’re likely to go,” he added.

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