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Swiss Re completes first longevity trend bond

Posted on January 4, 2011 by Editor Test -

Swiss Re has transferred $50 million worth of longevity-trend risk to the capital markets, Global Pensions reported. Under the transaction, Kortis Capital will provide cover to Swiss Re against a divergence in mortality improvements within two selected populations, the insurer said.

The bond, which is based on population data, would trigger in the event of a large divergence in the mortality improvements experienced between men aged between 75 and 85 in England & Wales and men aged 55-65 in the US.

“The global longevity issue is already huge and will continue to grow as the result of aging populations and higher risk awareness,” said Brian Gray, Swiss Re’s chief underwriting officer.

Swiss Re has offered natural catastrophe bonds for some time, but has more recently begun securitizing its life risks. The firm has obtained over $1.5 billion in extreme mortality risk protection from its Vita program since 2003.

Swiss Re head of life & health Christian Mumenthaler said, “The Kortis program is of particular note as it provides protection against adverse deviation in mortality improvements for both Swiss Re’s mortality and longevity portfolios, whilst taking into account the complementary nature of the two risks.”

The bonds are single tranche Series 2010-I Class E Notes rated BB+ (sf) by Standard & Poor’s, according to the report.

Bank of America Settles Fannie-Freddie Claims

Posted on January 4, 2011 by Editor Test -

Bank of America will take a $2 billion charge to settle claims with Freddie Mac and Fannie Mae, the bank announced Monday. The agreements center on loans that Countrywide Financial, which was purchased by BoA in 2008, sold to the two agencies, which were privately-run but whose obligations were backed by government guarantees. They have been under the conservatorship of the Federal Housing Finance Agency since taking huge losses in the mortgage crisis.

The bank also said it would record a $3 billion provision in the fourth quarter to repurchase obligations for home loans sold by Bank of America affiliates to Fannie Mae and Freddie Mac. As part of the deal, Bank of America made a $1.34 billion net cash payment to Fannie Mae and another to Freddie Mac for $1.28 billion. Both were paid on Dec. 31.

The deals with Fannie Mae and Freddie Mac, the company said, will nearly resolve all the claims against Countrywide, which arose “out of alleged breaches of selling representations and warranties” related to mortgages. Bank of America, based in Charlotte, N.C., is set to report fourth quarter-earnings in mid-January.

Prior to the announcement on Monday, analysts had estimated that the bank would earn $0.253 a share for the period, according to Bloomberg data. The company posted a loss of $0.77 a share in the third quarter.

States Have Mandate, But Not Money, To Oversee Mid-Sized Advisors

Posted on January 4, 2011 by Editor Test -

As states prepare to assume the federal government’s role in monitoring and regulating of thousands of mid-size investment advisers in July 2011, deficit-ridden states are wondering how they’ll finance their new roles, the Wall Street Journal reported.

The Dodd-Frank financial reform act shifted the regulation of 4,100 investment advisers, with $25 million to $100 million of assets under management, from the Securities and Exchange Commission to state regulators in an effort to improve oversight of the midsize firms.

Through September 2010, the SEC examined just 9% of the 11,888 investment advisers it currently regulates. “There are about 3,000 investment advisers that have never been examined by the SEC, and these firms will go to the top of the state examination priority list,” said Robert Webster, director of communications at the North American Securities Administrators Association, a group representing state regulators.

NASAA said it is “confident” that state securities regulators will marshal the resources needed for their new role. In Texas, state regulators say investment advisers will face much greater scrutiny following the switch.

Four states—California, Florida, New York and Texas—will account for 35% of all the advisory firms switching over to state regulation, according to National Regulatory Services, a Connecticut consulting firm. But large budget deficits in those states will make shouldering a larger regulatory workload difficult.

California expects the number of investment advisers it will regulate to increase to about 3,800 this summer from 3,070 now. The state has just eight full-time staff dedicated to registering and examining investment advisers. Its request for extra resources is subject to the overall state-budget process, at a time of massive cutbacks.

In Florida, the number of advisers overseen by 75 full-time staff is expected to increase to 1,800 from 1,100 under the Dodd-Frank change. “We have asked for additional positions,” said Amy Alexander, deputy director of communications at the Florida Office of Financial Regulation. “We do not know whether new positions will be approved.”

New York has no regular examination program for the more than 1,500 advisers it oversees, relying instead on its extensive statutory powers under the Martin Act to punish misconduct if problems emerge.

Texas, which expects the number of investment advisers it regulates to double to about 2,400 from 1,200, has had a request for an extra 10 staff approved. The money to fund the extra staff hasn’t been released.

Boomers May Regret Payroll Tax Holiday: Op-Ed

Posted on December 28, 2010 by Editor Test -

A former chief of staff of the House Select Committee on Aging and a policy analyst assert in an op-ed in the Palm Beach Post that the tax deal passed by Congress last week is a major threat to the solvency of Social Security.

Robert Weiner, the former chief of staff, and Jonathan Battaglia write, “Under the radar screen, the new tax deal is threatening the livelihood of America’s present and future seniors — to line the pockets of millionaires.

“If made permanent, a new Social Security ‘payroll tax holiday,’ reducing the ‘match’ employers pay from 6% to 4% of salary, will drop the solvency of the program 14 years, from 2037 to 2023. At the same time, Congress agreed to increase high-end loopholes in the estate tax, exempting 39,000 estates worth as much as $5 million.”

Weiner and Battaglia said the most dangerous part of the deal is that the payroll tax holiday could become permanent. “The new philosophy in Congress seems to be ‘once a cut, always a cut.’ When the payroll tax holiday expires in a year, Republicans will insist on keeping it, just as they did with the Bush tax cuts for the wealthy.”

They say that Congress can “dig themselves out” of the problem the same way President Obama and Congress extended Medicare reimbursements for physicians: “Congress should have adopted an amendment to the tax bill proposed by some far-sighted lawmakers that would have replaced changes in payroll taxes with a one-year credit to provide tax relief to businesses, while not threatening the solvency of the Social Security trust fund.

“Instead, Congress broke down the firewall of separate Social Security funding and gave it to general revenue to help business—and the heck with seniors.”

Weiner and Battaglia cited the courage of the late congressman Claude Pepper, who stood up to Carter Commerce Secretary Juanita Kreps’ suggestion to increase the retirement age to 68 for full Social Security benefits and got her to back off.

“That’s the courage we need from somewhere now. Congress should clean up the mess it just created for seniors, and for all the young and middle-aged who hope to grow old.”

SPARK Institute starts data project for non-registered plan investment options

Posted on December 28, 2010 by Editor Test -

Starting in 2012, the U.S. Department of Labor will require every sponsor of a 401(k) plan or similar plans to create a single chart listing all of the plan’s investment options so that participants can compare them easily.

The SPARK Institute, an association of the largest retirement plan service providers and investment managers, says it has started developing standards to help providers of non-registered plan investment options meet the new data requirements.

The new standards will help the providers share the comparison chart information electronically with one another and with existing investment information aggregators, the institute says. The institute notes that it already has developed information-sharing standards for 403(b) plans and lifetime income arrangements.

The chart must include options such as fixed annuities, collective investment funds or separately managed accounts that aren’t registered with the U.S. Securities and Exchange Commission and don’t ordinarily release the same kinds of public reports that registered mutual funds do, according to the SPARK Institute, which is based in Simsbury, Conn.

High popularity, low penetration augur well for ETF growth

Posted on December 28, 2010 by Editor Test -

More two-thirds of the assets invested in exchange-traded funds (ETFs), which has surpassed $1 trillion (€735bn) in the U.S. alone, is held products offered by just three companies, according to BlackRock’ global ETF research and implementation strategy team.

In its November ETF Landscape Industry review, BlackRock also said that its own ETF vehicle, iShares, claimed the biggest share of the market, with 486 out of 2,422 products and assets close to $550 billion, or almost 45% of the market.

State Street Global Advisors was second with $171bn in assets and a 14% market share, followed by Vanguard. In total, the 133 vehicles provided by these three companies accounted for 70% of the market, with 63% of assets held in the top 100 ETFs.

Over half of institutional investors surveyed by BlackRock expect their use of ETFs to increase over the next three years, with one in five saying their asset allocation to the product would grow by as much as 10% within that period.

The company also called for investors to agree to a clear definition of what constitutes an ETF, saying that some products on offer did not offer real-time net asset value indicators, with products that were not even funds claiming to be ETFs.

Despite their popularity, however, ETFs are still unknown to many people. Research from Mintel shows that more than six in 10 investors—including high income investors–say they don’t invest in ETFs simply because they “don’t know what they are.”

Even among ETF owners, only 54% feel they are “very knowledgeable” about ETF investing, Mintel said. Only 17% of existing investors in mutual funds and individual stocked reported feeling comfortable with the idea of investing in ETF products.

“ETFs have not penetrated well into some potential markets,” a Mintel spokesperson said. “One reason is that they are not commonly offered in qualified plans such as 401ks, but even those who invest in non-retirement accounts are still quite unfamiliar with the this newer type of investment.” Given their lack of market saturation, Mintel predicts that ETFs will experience double-digit growth over the next five years.

For capital gains tax, the “honor system” ends January 1

Posted on December 28, 2010 by Editor Test -

Starting January 1, 2011, the Internal Revenue Service will require brokerages to track the cost basis on equities bought after that date, and to send taxpayers and the government an annual form recording it when investors sell shares.

Brokerages already report the proceeds from sales of securities to the IRS. Next year, they’ll also have to provide information on the purchase price, known as the cost basis, of stocks.

In other words, investors will no longer be able to use the honor system when calculating their capital gains for tax purposes. Before this rule, the government didn’t have a way to verify if an investor was reporting the true gain on a sale unless there was an audit, said Greg Rosica, a tax partner at Ernst & Young who is based in Tampa, Florida.

“We expect our clients are going to get a 1099-B form in 2012 and they could have an outcome that they don’t expect,” Said Brian Keil, director of cost basis and reporting at Charles Schwab Corp.

Investors who buy shares of the same company on different dates or prices will see the biggest change, said Eric Smith, a spokesman for the IRS. They’ll need to identify which shares they’re selling before the sale settles, which typically means within three days for stocks.

The regulations take effect at later dates for other trades. Starting Jan. 1, 2012, brokers will have to record the cost basis for mutual funds and stocks held in dividend reinvestment plans, which require investors to reinvest at least 10 percent of dividends paid.

Cost-basis reporting also applies to the majority of ETFs in 2012, the IRS said.

The rules take effect for options and fixed income securities, such as bonds, acquired on or after Jan. 1, 2013, according to the IRS.

“Clients today often meet with their accountant, or when they are doing their taxes, and look backward,” said Keil of Schwab, the largest independent, publicly traded brokerage by client assets. “They select which lots they would have used with a lot of hindsight. That’s not going to be the case anymore.”

Brokerages including Schwab, Fidelity Investments and TD Ameritrade Holding Corp. will offer investors choices for reporting cost basis including using the last stock bought or highest cost, the firms said. Investors may tell the company to always sell shares minimizing gains, for example, or specify shares for a particular trade before it settles, according to the IRS.

For taxpayers who don’t choose, the brokerage must record the purchase price of the first shares bought, known as first- in-first-out or FIFO, according to the IRS. The firm may choose cost averaging as its default for mutual funds and stocks held in dividend reinvestment plans, the IRS said.

Brokerages will be required to transfer cost-basis information for stocks bought after Jan. 1, if an investor switches firms, said Gregg Murphy, senior vice president of brokerage products for Boston-based Fidelity. Firms incur a $100 penalty for sending an incorrect form to the taxpayer and a separate $100 penalty for sending an incorrect form to IRS, according to regulations.

Investors should review their tax situation before choosing a reporting method, said Sheryl Eighner, a director in the personal financial services group at PricewaterhouseCoopers LLP in Chicago. Taxpayers may want to identify certain shares if they need to offset gains with losses, for example, she said.

Depending on the amount of appreciation between the date a security was bought and sold, choosing the right reporting method could result in a smaller capital gains tax, David Sands, a tax partner at New York-based Buchbinder Tunick & Company, said.

Picking the wrong one could result in a bigger payment than necessary, he said. Gains on stocks, corporate bonds and mutual funds held at least a year generally are taxed at a maximum 15% federal rate. Short-term gains are taxed at an individual’s ordinary rate, currently as high as 35%.

Fiserv Introduces Cost-Basis Reporting Solutions

Fiserv, Inc., the provider of financial services technology solutions, today announced the launch of the first in a series of new tools to support the Cost Basis Reporting Regulation, a provision of the Emergency Economic Stabilization Act of 2008.

The law requires that, effective January 1, 2011, financial intermediaries provide to investors and the Internal Revenue Service (IRS) the adjusted cost basis for covered securities. This new regulation will provide investors the means to accurately report gains or losses on the sale of securities for their annual tax filings.

This cost basis solution from Fiserv allows for efficient daily import and calculation of data from books and records to provide adjusted cost basis information — information that can be used for reporting tax-aware strategies and for responding to tax harvest requests.

Fiserv has worked closely with its straight-through trading partners, as well as the custodians and third party vendors who provide books and records to identify changes they may or may not be making to support the regulation.

Many partners are making changes to accept “versus purchase” data in trading messages, which the allocation communication process from Fiserv already supports. In order to ensure accurate processing of specified lot relief, reconciliation is required to go down to the tax lot level.

In response to this requirement, Fiserv has introduced a full tax lot data reconciliation solution. This technology, available now, provides clients with reports and automated synchronization tools that identify and reduce differences across the entire APL platform between tax lot data, including cost basis information.

The reconciliation will enable clients to maintain tax lot consistency from one application to the next. Data synchronization reduces inconsistencies to enable accurate reconciliation and provides transparent client data that can then be reported to the IRS and the end investor.

Fiserv, a technology provider for the managed accounts industry, processes more than 3.4 million accounts on its APL platform and is the technology provider for more than 1 million UMA sleeves.

In 40 Years, U.S. Will Be Less Populous—and More Prosperous—Than Expected

Posted on December 28, 2010 by Martin Hutchinson -

The Census Bureau issued the first results of the 2010 Census this week, showing that the U.S. growth in population in 2000-2010 was only 9.7%, the lowest decennial growth since the 1930s and the second lowest on record. This has modest if beneficial effects on our understanding of where the United States is today. However it has much more important effects on what kind of United States we will see in 2050.

There is a “consensus” view of the United States in 2050, based partly on multi-culturalist wishful thinking and partly on extrapolation of the 13% population growth of the 1990s. In that case the United States would have become “majority minority”—a prediction that first appeared in Time magazine after the 1990 census and has been repeated ad infinitum since.

The new census result blows such predictions out of the water. We can [now] project forward from 2010’s actual number [and] get a U.S. population in 2050 of a mere 333 million. That intuitively seems far too low, but with immigration law enforcement likely to tighten at least in the short term, a 2050 population of below 400 million certainly now looks plausible, with the demographic split only moderately changed from today’s.

Ignoring the social effects of changing demographics, the economic effect of a lower population growth rate is very considerable, and mostly positive. First, with only 90 million new inhabitants in the next 40 years compared with the previous estimate of 130 million plus, only two-thirds of the projected expenditure on schools, roads, housing, government offices and other infrastructure will be needed, saving perhaps $500 billion per annum (including housing and schools) in scarce capital resources that can be devoted to more economically productive capital investment in the nation’s businesses.

Second, with 10% fewer people around in 2050, the endowment of land and capital will be 10% greater per capita. In general, that should ensure that real wage rates even for the unskilled cease the unhappy slippage of the past few decades and start to increase again as Joe Sixpak once again claims his fair share of the nation’s ever-increasing output. Even between 2000 and 2010, the 0.1% lower than expected annual growth of population results arithmetically in a 0.1% higher annual growth in real GDP per capita.

A slower rate of population growth in 2010-2050 implies a generally richer 2050, with higher per capita income growth and better opportunities at the bottom of the earnings pyramid, both unalloyed blessings. Slower population growth will also affect education. With overall population perhaps 10% lower than projected, and annual growth maybe a third lower than projected, the resources of the education system will be ample for the needs of the new generation.

This means that low performing schools and in particular low performing colleges can be closed, poor teachers weeded out and resources concentrated on providing the best possible start in life for the modest new cohort – and on providing top quality re-training and education for the ever-increasing number of older people whose career paths have been wiped out by technological change.

There is a growing body of evidence that the massive expansion in college education since 1950 has gone too far, with too many mediocre and useless educational experiences being provided to those ill suited to benefit from them. Return a cohort of 18-22 year olds from community college and sociology courses to the workforce, while expanding education and training opportunities for those in middle age, and economic efficiency and general welfare will be immeasurably increased.

Needless to say, the lower projected population growth does not offer unalloyed benefit. In particular it will make the financial position of the Social Security and Medicare programs more difficult. With fewer young workers funding the costs of retirement and old age care, the actuarial deficits in those programs will increase. Admittedly by 2050 the worst “hump,” the retirement and old age of the baby boomers, will be almost past, but the cash flow drain in the 2030-2050 period will be severe.

Two factors will alleviate this problem. First, with a wealthier population containing fewer poor people, the Medicaid program of medical care for the indigent will be correspondingly less troubled, while the subsidy necessary to Social Security and Medicare will be less pronounced. Second the reduced need for infrastructure spending will itself free up additional funding for these programs.

However the most urgent policy need for the programs, made more necessary by the new demographic reality, is to continue the gradual raising of the retirement age beyond its current goal of 67 in 2026. By continuing the current addition of one month of working life per annum, the retirement age (and eligibility age for Medicare, which should rise in parallel) will become 68 by 2038, 69 by 2050 and 70 by 2062. Medicare will then still be in horrendous actuarial deficit until we cut medical costs through tort law reform and other means, but Social Security’s problem should by this means be solved.

With the malign 1990s vision of rapid population growth, combined with the unpleasant reality of anemic economic performance as seen in the 2000s, the United States would by 2050 become a teeming melting-pot, with widespread poverty, high taxes to fund frantic infrastructure spending and the overcrowded poly-ethnic young unwillingly paying the welfare costs of the impoverished old. In the new version, with population growth finally under control, the United States of 2050 will be much richer, more harmonious and indeed happier – not a melting pot but a country club.

Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005) and co-author with Kevin Dowd of “Alchemists of Loss” (Wiley, 2010). An unabbreviated version of this article appeared at prudentbear.com.

Of apples, oranges and unemployment rates

Posted on December 28, 2010 by Editor Test -

Health and wealth have always gone hand in hand. In a new study published by the National Bureau of Economic Research, Dhaval M. Dave of Bentley University and Inas Rashad Kelly of Queens College, City University of New York, use information from the Behavioral Risk Factor Surveillance System (1990-2007) to explore the relationship between the risk of unemployment and the consumption of various healthy and unhealthy foods.

“A higher risk of unemployment is associated with reduced consumption of fruits and vegetables and increased consumption of ‘unhealthy’ foods such as snacks and fast food,” they write. They suggest that reduced income and depression might lead to poor dietary habits.

“Among individuals predicted to be at highest risk of being unemployed, a one percentage point increase in the resident state’s unemployment rate is associated with a 2-8% reduction in the consumption of fruits and vegetables. The impact is somewhat higher among married individuals and older adults,” said an abstract of the study.

SEC seeks comments on credit rating standardization

Posted on December 28, 2010 by Editor Test -

The SEC has posted the request for comments on a Credit Rating Standardization Study today in the Federal Register, National Underwriter reported.

The SEC is conducting the study to implement Section 939(h) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which requires it to investigate the feasibility and desirability of standardizing credit ratings terminology, market-stress-related rating triggers and estimated default probabilities.

The SEC asks, for example, whether it is feasible and desirable to standardize credit ratings terminology, so that all credit rating agencies issue credit ratings using identical terms.

“Some credit rating agencies employ multiple credit rating scales designed to distinguish between different types of issues and/or issuers,” SEC officials note. “For example, a credit rating agency may employ different credit rating symbols for ratings of long term securities, short term securities, money market funds, claims paying abilities of insurance companies, and issues and/or issuers in different jurisdictions.”

The SEC asks whether commenters believe that some types of credit rating symbols used by credit rating agencies are more or less suitable to standardization, and whether it makes sense to use a single credit rating scale for all types of issues and issuances.

“Should a standardized credit rating terminology employ a separate terminology for certain asset classes (e.g., for structured finance ratings)?” officials ask. “Are there asset classes or types of ratings, such as short term or financial strength ratings, where a separate terminology should be considered?”

SEC officials also ask for comments on the organizations or combination of organizations that should be responsible for developing and administering the standardized credit rating terminology.

The SEC could do the job, but an independent board also could take responsibility for standardization, officials say.

Comments are due Feb. 7, 2011.

A ‘Turbit’ Drawdown Strategy

Posted on December 28, 2010 by Kerry Pechter -

Zeno’s dichotomy paradox, an age-old principle that most of us learn through Aesop’s fable of the tortoise and the hare, says that a series of partial efforts will never quite finish the job at hand.

This paradox applies nicely to the retirement drawdown problem—except that, in retirement, the hare wins. By consuming only a fixed percentage of his savings each year, a retired rabbit is much less likely to consume all of it than a retired turtle, who spends a fixed dollar amount every year.

That’s precisely what two CFPs at Vanguard demonstrate in their recent study,
“A more dynamic approach to spending for investors in retirement.” They then go a step farther and demonstrate that a hybrid strategy—a “turbit,” if you will—works better than drawing down either a fixed amount or a fixed percentage.

The two CFPs, Colleen M. Jaconetti and Francis M. Kinniry, Jr., don’t actually refer to Aesop’s fable in their paper. They simply compare three methods of drawing down a hypothetical $1 million portfolio (50% bonds, 35% domestic equities and 15% international equities) over a retirement of 35 years.

The first method involves spending $47,500 a year, adjusted annually for inflation, regardless of market conditions. The second method involves spending exactly 4.75% of the portfolio each year, regardless of the size of the portfolio. The third method, in their example, limits each year’s spending to a ceiling of 5% more or a floor of 2.5% less than the amount spent in the previous year.

“As in the percentage of portfolio strategy, the investor calculates each year’s spending by taking a stated percentage of the prior year-end portfolio balance. The investor also calculates a ‘ceiling’ and ‘floor’ by applying chosen percentages [5% and 2.5%] to the prior year’s spending amount,” the study says. “The investor then compares the three results. If the newly calculated spending amount exceeds the ceiling, the investor limits spending to the ceiling amount; if the calculated spending is below the floor, the investor increases spending to the floor amount.

Based on 10,000 simulations using historical returns for their hypothetical balanced portfolio, the Vanguard analysts determined that their hybrid or compromise strategy would result in a portfolio ruin rate (risk of exhausting savings within 35 years) that was lower than the fixed spending strategy (11% versus 29%) but with spending shortfalls (annual income less than the initial amount) occurring less often than with the fixed percentage strategy (48% of the time versus 53% of the time).

There are no hard-and-fast rules with this approach, Kinniry and Jaconetti point out. They chose 5% and 2.5% to calculate the floor and ceiling, but those numbers (as well as the spread between them) can vary, depending on the advisor’s and the investor’s preferences.

“The narrower the spread… the more similar this strategy is to the dollar amount grown by inflation strategy,” they write, and “the wider the difference between the ceiling and floor percentages, the more similar this strategy is to the percentage of portfolio strategy.”

Most significantly perhaps, the paper suggests that the hybrid strategy allows investors to spend more of their savings each year in retirement, depending on their age and their asset allocation. For instance, retirees with a 20-year horizon and a moderate portfolio could spend 6.75% in the first year of drawdown by obeying a 5% ceiling and 2.5% floor but only 5.75% if they decided to follow a fixed-amount drawdown method.

The Vanguard paper adds nuance to the conventional 4% retirement drawdown rule. Most retirees—that is, those who don’t use insured retirement solutions—will naturally settle on a hybrid withdrawal method, since neither the fixed-amount and fixed-percentage drawdown methods are likely to be flexible enough for life’s vicissitudes.

This paper’s value isn’t so much its recommendation of a hybrid strategy as its careful elucidation of the details of one. In a sense, their hybrid suggests a home-made structured product—one that offers a guaranteed income range to the investor but where excess returns or losses are absorbed by the investor’s own portfolio instead of by the issuer of the product.

The Bucket

Posted on December 22, 2010 by Editorial Staff -

AXA Equitable Study Shows People Will Work Longer

Results from AXA Equitable Life Insurance Company’s Retirement Reality Study show that today’s working world anticipates retiring much later than previous generations. The average age of retirees polled around the world is 57 years old. However, current workers anticipate retiring at 61.

In addition to working longer, people in most countries are expecting a lower standard of living in retirement. Globally, 43% of workers and 30% of retirees believe their retirement income will be insufficient. Working people know they need to prepare for retirement, with 46% saying they have started to prepare and an additional 37% intending to start later.

Americans are among the top nations surveyed to say that they have already started their retirement planning. Among U.S. Workers, 72% said they have started saving for retirement, compared with a global average of 46%. Not only has a large percentage of Americans started preparing for retirement, they are starting younger than people in other countries. U.S. workers are among the youngest to say that they have started to prepare for retirement; the average age in the U.S. is 31, compared with the worldwide age of 34.

Although Americans seem more prepared than their counterparts in other countries, the anticipated retirement age is still among the highest of any country. The average American anticipates retiring at 64, three years older than the survey average of 61, and six years older than their desired retirement age of 58.

Additional survey findings include:

Americans have the most self-reliant view of retirement savings, with 58% of those polled, a greater percentage than any other nation surveyed, preferring to fund their retirement savings on their own rather than depend on the government.

U.S. workers prefer meeting face-to-face with someone when purchasing an investment. In addition, 65% of workers and 65% of retirees have used insurance, financial or other professionals as sources of information to find out about financial products vs. 50% among workers and 44% among retirees across all countries.

Research firm GfK NOP managed the survey globally for the AXA Group. Local firms fielded the questions in each country from March 1st to May 25, 2010. This is the fifth global survey released by AXA Equitable and its parent, AXA Group, and is part of the company’s continued effort to enhance its understanding of the retirement issues. A total of 31,539 people between 25 and 75 years old were interviewed in 26 countries.

Lincoln Financial promotes Freitag as CFO

Lincoln Financial Group has promoted Randal J. Freitag to executive vice president and Chief Financial Officer, effective January 1, 2011. He will replaces Frederick J. Crawford, who became executive vice president and head of Corporate Development and Investments. Freitag and Crawford will both serve on the company’s senior management committee and report to Lincoln president and CEO, Dennis R. Glass.

As CFO, Freitag will lead Lincoln’s financial team, which includes corporate finance, risk management, treasury, corporate tax, corporate actuarial, audit and investor relations.

Freitag joined Lincoln Financial in 1995 and served in a variety of management positions before being named Chief Risk Officer in 2007. Prior to joining Lincoln Financial, Freitag held various actuarial roles. He earned a B.A. degree in mathematics from the University of Minnesota and is a fellow of the Society of Actuaries.

MFS Survey: What Does the “Fearful” Investor Look Like?

Based on the responses from its recent investor behavior survey, MFS Investment Management® (MFS®) was able to classify 12% of respondents as “fearful,” 18% “hopeful,” and 11% “opportunistic.” From that, MFS is able to report the following statistical measures of the attitudes and behaviors of those in need of the most help, the self-described “fearful” investors:

“We’re closing out a decade book-ended by the dot-com bubble burst and the worst recession since the Great Depression — perhaps reengaging with clients about investing basics would be a good place for advisors and their clients to start, to help to make the novice less nervous.”

89% were very concerned about another serious drop in the stock market
73% have lowered their expectations about what life will be like in retirement
71% were pessimistic in their outlook for the U.S. economy over the next five years
62% prefer low risk investments today even if means low returns
61% identify themselves as a saver more than an investor
54% agreed that they will never feel comfortable investing in the stock market again
49% are overwhelmed by all the different investment choices they have available to them
48% said their need for financial advice has increased since the downturn
39% decreased their contributions to 401(k) plans and Individual Retirement Accounts (IRAs)
37% of their portfolios are in cash

Education linked to retirement security: Transamerica

A study by the non-profit Transamerica Center for Retirement Studies addresses the differences in American workers’ retirement preparedness based on their level of education.

The 11^th Annual Transamerica Retirement Survey, conducted among nearly 3,600 American workers, found that the levels of educational attainment among American workers are strongly correlated to their retirement confidence, as well as their ability to save and plan for retirement. The study also makes recommendations for outreach initiatives and public policy, including promoting available tax incentives, improving financial and retirement literacy, and expanding retirement plan coverage, to help improve retirement security among all workers.

Level of educational attainment plays a significant role in Americans’ ability to participate in the workforce. However, once employed, workers with lower levels of education are still often at a disadvantage as it relates to their ability to save and plan for retirement.

Just 60% of workers who only have a high school diploma report being offered a 401(k) or similar plan by their employer, compared to 71% of workers with some college education, 78% of workers with a college degree and 83% percent with post graduate education. Of workers who do have access to a plan, those with only a high school education have a lower participation rate (63%) than those with some form of higher education (77% with some college, 84% with a college degree, and 87% with at least some post graduate education). Those with only a high school education also contribute a smaller percentage of their pay (5% median) compared to those with a college degree (8%percent median).

Workers with lower levels of educational attainment are also significantly less confident in their ability to fully retire with a comfortable lifestyle. Just 40% of high school graduates without any college education are confident in their ability to retire, compared to 53% of college graduates and 64% who have pursued a post graduate education. While most workers agree that they could work until age 65 and not save enough to meet their retirement needs, three-quarters of high school graduates with no college education agree with this sentiment compared to just over 60% of college graduates. Additionally, nearly half of high school graduates without any college education (48%) plan to work past age 70 or not retire at all.

Quarter of UK businesses unprepared for auto-enrolment, says Aon Hewitt

Nearly a quarter of UK businesses have not yet considered the implications of auto-enrolment on their schemes, according to new research from Aon Hewitt.

The consultancy’s UK Benefits and Trends Report 2010 found that 23% of over 480 employers surveyed had not yet considered changes needed to their pension schemes in order to comply with the government’s new pension legislation.

Surprisingly, it also revealed that only 5% intended to level down employer contribution as they shift to auto-enrolment.

Furthermore, the report found that 17% of respondents operate a stakeholder plan as their main pension scheme, with another 14% operating an active stakeholder plan.

Only 5% run a standalone occupational trust-based plan as their main plan, with a further 5% operating a standalone occupational trust-based plan as an additional active plan.

Occupational trust-based schemes are maintained by 4% of companies as part of a defined benefit (DB) plan, while 3% operate an occupational trust-based plan which is part of a DB scheme, with a defined contribution (DC) plan its main pension arrangement.

Just 1% operate a group self-invested personal pension (SIPP) as their main DC plan, with a further 2% offering a group SIPP as an active, but not primary, DC plan

The overwhelming majority of respondents (95%) do not plan to make imminent changes, pending the rollout of auto-enrolment from 2012, while the remaining 5% intend to decrease employer contributions to their DC plan.

Ernst & Young responds to New York AG’s Complaint

The accounting and consulting firm issued the following statement this week:

We intend to vigorously defend against the civil claims alleged by the New York Attorney General.

There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles (GAAP). Lehman’s audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry.

Lehman’s bankruptcy occurred in the midst of a global financial crisis triggered by dramatic increases in mortgage defaults, associated losses in mortgage and real estate portfolios, and a severe tightening of liquidity. Lehman’s bankruptcy was preceded and followed by other bankruptcies, distressed mergers, restructurings, and government bailouts of all of the other major investment banks, as well as other major financial institutions. In short, Lehman’s bankruptcy was not caused by any accounting issues.

What we have here is a significant expansion of the Martin Act. Although the Martin Act is almost 90 years old, we believe this is the first time that an Attorney General is attempting to use this law to assert claims against an accounting firm, rather than the company that took the alleged actions.

Save your payroll tax cut—Principal Financial

In 2011, most American workers will get a two percent boost to their paychecks thanks to the new tax extension bill. It provides a Social Security “tax holiday” by decreasing the current payroll tax rate to 4.2% from 6.2% for one year.

That extra two percent could potentially make a significant difference in their retirement nest eggs over time, says the Principal Financial Group. For example, a 30-year-old earning $50,000 a year who defers an extra 2 percent into his or her 401(k) account over the next year would boost the weekly 401(k) contribution by a little more than $19. That amount could potentially grow to more than $16,600 by retirement at age 66.

“For Americans who can afford it, why not just put part or all of that two percent tax cut into your 401(k) or 403(b) account? It’s money you aren’t used to spending anyway,” said Greg Burrows, senior vice president, retirement and investor services at The Principal. “It may be just the amount to get closer to saving between 11% and 15% of pay. We believe most retirement plan participants should be saving in that range–including employer match—over the course of a career to have adequate income at retirement.”

Workers who are 50 years and older and already maxing out on their retirement plan contributions, could use the 2 percent as part of their catch-up contribution.

“When Americans on average are saving about half of what they need for a secure retirement, any additional amount is a good thing,” said Burrows.

Romania approves pension reform with changes to indexation, retirement age

Romania is set to increase its retirement age and reduce the level of pension indexation, after reform laws were approved by its president this week.

Under the new law, the retirement age for men will increase from 64 to 65, while women will be expected to work until 63, rather than 59, by 2030. There will also be a proportional increase in the mandatory contributory period.

Additionally, the indexation of public pensions will be much less generous than it is at present, with the current earnings-linked basis replaced by so-called Swiss indexation, which increases pensions by the price index plus wage growth.

The changes have been welcomed by Romanian Pension Funds’ Association (APAPR) as making the system more sustainable.

Mihai Bobocea, secretary general, APAPR, said: “Overall, the new pension law somewhat brings the public system a bit closer to where it should be from a sustainability point of view, and it will also help Romania to continue its agreements with international financial institutions.”

Bobocea said: “However, even after this review, the indexation model envisaged for public pensions in the future will definitely prove over-generous, and will have to be toned down. But for now I’m sure all stakeholders should be glad with this reasonable compromise: even though it seems painful from a social perspective, it’s sound, and a lot more sustainable from a budgetary and economic point of view.”

The changes have been introduced to help secure further IMF funding, but have experienced a stormy passage because of the associated cuts in benefits and legislation has taken over a year to be enacted. Despite this, its original draft is still largely intact.

Pimco allows equities investments in Total Return bond fund

Posted on December 22, 2010 by Editor Test -

Pimco’s US$ 250bn (€160bn) Total Return fund, the world’s largest bond fund, has expanded its investment remit to include up to 10% of its total assets in preferred stock, convertible securities and other equity-related securities.

The move follows concern that the long running bull market in bonds is in bubble territory and that inflation and economic growth will damage future returns, according to a report in IPE.com.

The Pimco Total Return bond fund, run by Bill Gross, experienced a US$2bn (€1.2bn) outflow in November, the first in nearly two years, having achieved an average return of 8% a year since its inception in 1987.

A number of bond fund managers have moved towards investing in a wider range of bond, including securities linked to equities, or with characteristics of both bonds and stocks.

Ros Altmann, director general of Saga, said that there was a real risk of the bond market bubble being ignored. “Pension funds have been encouraged to switch into bonds for ‘safety’ and ‘risk reduction’, but if this is a bond market bubble, this is not necessarily the right thing to do.

“Many pension funds will look back and realize that this was a huge bond market bubble – with the Bank of England forcing long-rates down by buying gilts and the US Fed forcing rates down in the US with its own quantitative easing,” she said.

“The best place for institutional money at the moment is in high yielding equities with strong balance sheets and overseas markets where growth is not so constrained.”

Moral Hazard and the Roots of the Financial Crisis

Posted on December 22, 2010 by Editor Test -

Four members of the Financial Crisis Inquiry Commission have delivered a 13-page document tracing the causes of the so-called Great Recession of 2008-2009, thus meeting the December 15, 2010 deadline established by law in May 2009. But the document represents only their views and not the views of the entire commission.

The root cause of the crisis, in their somewhat partisan opinion, was the U.S. government’s zeal in the late 1990s and 2000s to increase federally-insured mortgage lending to high-risk borrowers without adequate regard for—and without heeding repeated warnings about—the risks that policy would eventually introduce into the financial system.

“The government has always supported homeownership. But trying to get something for nothing—to subsidize homeownership without increasing the budget deficit—was a recipe for a crisis,” the report said. “The government, in effect, encouraged the [Government Sponsored Entities] to run two enormous monoline hedge funds that invested exclusively in mortgages and were implicitly backed by the U.S. taxpayer.”

The report goes on to name the reasons why this policy grew out of control, including such factors as low interest rates, a global savings glut and creative lending practices. But the problems in the mortgage arena wouldn’t have become so huge, they argue, if investors, banks and credit rating agencies had not been lulled into under-pricing risk and leveraging up their holdings by a belief that housing prices wouldn’t go down and that, even if they did, the federal government would bail everyone out.

A number of observers—including, apparently, the members of the FCIC who didn’t endorse this report—disagree to varying degrees with this interpretation. According to competing theories, Fannie Mae and Freddie Mac followed rather than led private lenders like Countrywide Financial into the riskiest depths of the subprime market, and that the private sector recklessly exploited government housing policy, interest rate policy and federal guarantees.

The difference is a subtle one. One economist who has been studying the causes of the crisis, Viral Acharya of the Stern School at NYU, believes that the correct answer lies in between. In a forthcoming book on the crisis, Guaranteed to Fail: Fannie, Freddie and the Debacle of Mortgage Finance (Princeton University Press, 2011) he and his NYU co-authors avoid assigning blame. Rather, they describe a disastrous “race to the bottom” in risk-taking that private banks and GSEs both participated in.

In their view, moral hazard created by explicit or implied government guarantees of the GSE debt—coupled with a neglect to properly reserve, hedge or even account for those liabilities—did more to bring about the crisis than did the Clinton and Bush administrations’ efforts to expand home ownership among riskier borrowers.

“Our view is indeed that their private-profits-with-socialized-risk [structure] was as big—if not a bigger problem—than their government mandate,” Acharya told RIJ. “In the end, both interacted to produce a terrible outcome, along with race to the bottom with private sector in risk-taking.”

He and his co-authors believe “government guarantees abound, not just to Fannie Mae and Freddie Mac but to much of the financial sector, and that it distorts the price of systemic risk. We think the primary distortion is the lack of government pricing of these guarantees to ‘correct’ the cost of capital faced by the financial sector,” he said.

The U.S. is not the only country whose government has created moral hazard in its financial system, Acharya added. “There are many crises around the world where such distortions were not present. In a way, we are going after that common theme—of mispriced government guarantees and systemic risk externalities—rather than just what went wrong in this particular crisis.”

In his weekly column in the New York Times, Joe Nocera took issue with the report’s conclusion that the GSEs led the private sector into sub-prime morass. “Fannie and Freddie… spent most of the housing bubble avoiding subprime loans, because those loans didn’t meet their underwriting standards,” he wrote on December 17.

“When Fannie and Freddie finally did get into the business, it was very late in the game. But the motivation wasn’t pressure from the government; it was pressure from the marketplace… By the mid-2000s, subprime underwriting and securitization had become so profitable… that Fannie and Freddie felt they had no choice but to dive in.”

Guaranteed to Fail, co-written by Acharya, Matthew Richardson, Stijn Van Nieuwerburgh and Lawrence J. White, comes down somewhere between those two interpretations of the crisis.

“The strong growth in private-label subprime mortgage originations and securitizations had important consequences for the GSEs. First, their market share of originations fell dramatically between 2003 and 2006. Second, the loss in market share made it harder for them to meet their ever-increasing Congress-mandated quotas.

“To preserve the profit growth rates of the pre-2003 period and to simultaneously meet their quotas, the GSEs embarked on an all-in policy, which saw them dramatically ramp up the risks of their portfolio. This policy started as far back as 2000-2001 with the motivation that a stronger GSE presence in the subprime market would create lower priced mortgages for some subprime borrowers.

“While there is little doubt that the housing goals played an important role in shifting Fannie Mae and Freddie Mac’s profile to riskier mortgage loans, it remains an interesting question whether Fannie Mae and Freddie Mac deliberately chose to increase the riskiness of the loans that they bought 2004 onward or whether they were forced to do so by the U.S. Congress, which wanted to promote home ownership.

“While the public/private nature of the GSEs leads to a moral hazard problem even in normal times, the question is whether moral hazard was exacerbated by the astronomical growth of the subprime market segment.”

RIJ’s Top Ten List for 2010

Posted on December 22, 2010 by Kerry Pechter -

An industry as large and as important as the retirement income industry shouldn’t be without its own annual Top Ten List. (Letterman, take note.) I would now like to introduce Retirement Income Journal’s own list of the decumulation world’s ten most remarkable stories, events, and companies of 2010. IMHO.

1. Someone told them to “get out more.”

The most remarkable guerilla marketing campaign of 2010 was embarked upon by AXA-Equitable last summer. A posse of corporate communications managers at AXA headquarters on the Avenue of the Americas grabbed a miniature video recorder, took the elevator down to street level and spent an afternoon interviewing Manhattan pedestrians about their retirement outlook. The footage, edited on a laptop, was published on the AXA website. The same team of gonzo PR folks later commandeered a car and motored to the New Jersey Shore—never call it the “coast”—to shoot a sequel on the boardwalk.

2. My favorite investment book of 2010: Wall Street: Men and Money.

It was 1955 and Martin Mayer was only a few years out of Harvard when his editor at Esquire sent him downtown to research an article on the culture of Wall Street. He approached his subject as an anthropologist might approach a tribe in New Guinea, and his observations became not just an article but a milestone of early New Journalism literature that still works as a both a primer on the financial markets and a window onto a more intimate, more male—as you can tell by the sexist title—and more sensorial Street than the intangible electronic marketplace we know today. You can find a mildly foxed vintage edition at abebooks.com.

3. The most lurid annuities story of 2010.

After a paraplegic former prostitute died from neglected bedsores in a low-rent Chicago nursing home, it was revealed that, only months before, a syndicate had filched her identity and bought a variable annuity with a premium-plus death benefit in her name. A group of con men with access to securities licenses, it turned out, schemed to bilk insurers by exploiting the terminally ill. This heinous practice was mistaken at first as a case of bad-apple advisors who couldn’t resist taking advantage of a weakness in certain contracts. But it was more likely a concerted effort by organized criminals to launder millions of dollars through insurance companies.

4. The best TARP turnaround.

In early 2009, some competitors in the annuity industry were writing off Lincoln Financial Group as financial crisis roadkill. Some predicted Lincoln would be acquired. They saw its acceptance of Troubled Assets Relief Program money as strictly stigmatic. But the website SeekingAlpha.com, for one, argued that Lincoln was basically strong, and it was right. Last June Lincoln announced it would buy back almost $1 billion in shares it sold to the government a year earlier. As of September 30, Lincoln Financial was the fifth biggest seller of variable annuities in the U.S. in 2010, with $6.9 billion in sales. And, go figure: Philadelphia Eagles quarterback Michael Vick, himself a Comeback Kid, now plays in Lincoln Financial Field.

5. Best financial metaphor of the year: “Planet Vulcan”.

At the Retirement Income Industry Association’s meeting at Morningstar/Ibbotson headquarters in Chicago last spring, Moshe Milevsky, the Toronto-based finance professor and writer, asked the gathered retirement mavens to imagine a Planet Vulcan where the inhabitants have only one investment option—risk-free inflation-protected bonds with a real return of 2% to 2.5%. Milevsky had written a paper, “Spending Retirement on Planet Vulcan,” suggesting that annuities, more so than stocks, can help a retirement portfolio last longer and yield a higher income.

6. 2010’s best conspiracy theory: Madoff the money launderer.

O.K., I admit it: there’s no solid evidence to support this theory. But if you’re prone to imagining global conspiracies, consider this possibility: Madoff was a mere middleman in a vast money-laundering scheme where the suppliers of endless tainted cash might have been (choose your favorite nemesis) terrorists, drug barons, arms merchants, or perhaps sovereign nations. Wouldn’t that explain everything, including Madoff’s odd Mona Lisa smile, barely visible under the brim of his baseball cap? Is that the ironic, wistful smile of a person who’s taking the fall?

7. Biggest wrong prediction of 2010: the popularity of annuity-LTC hybrids.

It’s too early, of course, to write the obituary of this product, which wasn’t even street-legal until January 1, 2010. But several people in the retirement business, including myself, thought there would be much more interest in long-term care annuity hybrids, which allow people to get a cheaper rate on long-term care insurance if they first put a chunk of money in a fixed deferred annuity and promise to use the annuity assets as first-dollar coverage of their nursing home bills. Maybe the moment for this product just hasn’t arrived yet. It seemed like a sure winner.

8. Most fascinating threat to mortality tables: telomerase.

This year, scientists were talking about an enzyme called telomerase that keeps your telomeres from eroding. Telomeres are the protective caps at the ends of your chromosomes. Each year, your telomeres get shorter. Eventually, they disappear, lead to cell death. In lab experiments, mice that were bio-engineered not to have telomerase aged rapidly. But when researchers reactivated the natural production of telomerase in old mice, the enzyme halted and even reversed the aging process. Are telomerase pills in the offing? And can I wash them down with a glass of vintage resveratrol?

9. Best use of taxpayers’ money in the cause of retirement income security.

The Obama administration’s Department of Labor and its Employee Benefit Security Administration department may have created nothing but new compliance problems for you this year, but they did have one great idea. They leveraged the Internet to solicit thousands of opinions, both amateur and professional, about the best way to add lifetime income options to employer-sponsored retirement plans. In the process, they created a database of ideas, a networking arena for people interested in retirement income, and a way to take the nation’s pulse on retirement security. I don’t know if it was unprecedented, and I don’t know where it will lead, but it was an exciting development.

10. The industry’s most grateful startup publication.

December 31 marks the end of the first full calendar year of Retirement Income Journal’s existence. It’s been a successful and satisfying first year. As editor and publisher, I’m grateful to all of the people (and the companies and institutions they represent) who read RIJ, subscribe to it, advertise in it—who make it possible. I wish you a joyous and healthy holiday season.

Fees vs. commissions: a rebuttal

Posted on December 21, 2010 by Curtis Cloke -

Mr. Daily’s assertion that, “Fees can be tax deductible, depending on the taxpayer’s situation”, is correct. But miscellaneous itemized deductions, including investment expenses, are generally limited to the amount of expenses over and above 2% of the client’s adjusted gross income (AGI).

My first point is this: When an advisor charges a one percent investment management fee for three years in lieu of a 3% commission on a $100,000 insurance product, since the fee is being charged an inch at a time ($1,000 yearly), the tax payer may be less likely to exceed the annual 2% of adjusted gross income (AGI) threshold required for the tax deduction, and therefore less able to deduct such a fee.

In addition, the original story centered solely on the fees and commissions of single premium immediate annuities and deferred income annuities. These annuities are different and distinct from all other annuities.

Mr. Daily wrote, “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.” As evidence, he cited the article, “Credit Card Approach to Pricing” (Product Development News, August 2000. I have no quarrel with the article, but its subject was a deferred annuity with a bonus, not an income annuity.

As an advisor, I prefer to be positioned to provide both methods of compensation—fees and commissions. It’s more important to understand their differences than to proclaim that one is better or worse than the other in all situations.

Curtis Cloke, a Burlington, Iowa, financial planner, is the creator of the THRIVE income distribution method.

An alert from SPARK Institute on participant fee disclosure

Posted on December 21, 2010 by Editor Test -

The SPARK Institute has issued a “Compliance Alert” regarding potential disclosure problems and fiduciary issues for retirement plan sponsors and certain providers of plan investment options, said Larry Goldbrum, General Counsel. The Institute also announced that it has begun an initiative to help address the disclosure issues.

“Under the Department of Labor’s (“DOL”) participant disclosure regulations, plan sponsors are required to provide participants with information about all of their plans’ investment options in a single chart or similar format to facilitate the comparison of each option offered under the plans,” Goldbrum said.

“However, many investment managers and providers of non-registered investments, such as bank collective funds, separately managed accounts and annuities, may be surprised that they will have to make significant new information available in order for plan sponsors to comply with the new regulations.”

“Some non-registered investment providers may not have the information readily available, and developing the information and cost-effective methods for providing it to plan sponsors and plan record keepers could be complex and time consuming.” Goldbrum added. The Compliance Alert is posted on The SPARK Institute website.

Goldbrum noted that plan sponsors face potentially significant fiduciary issues if an investment provider is unable or unwilling to provide the information that the plan needs in order to comply with the rule. “Plan sponsors should act now to ensure that their non-registered investment providers are preparing the information needed,” he stressed.

“Although the regulation states that plan sponsors can rely on the information provided to them by a third party, one has to question the prudence and soundness of a decision to continue offering a fund that is unwilling or unable to provide information that the DOL has stated should be provided to participants,” he said.

As a result, Goldbrum said plan sponsors may be put in the position of having to drop an investment option if the investment provider cannot supply the information that is required. The SPARK Institute has begun a new initiative to develop data standards for retirement plan record keepers and non-registered investment fund providers to enable them to electronically share information with each other and with existing investment information aggregators.

“We are leveraging the experience and expertise we have from developing information sharing standards for 403(b) plans and lifetime income solutions to identify that data that should be shared and establish the formats and protocol for sharing it,” Goldbrum said.

New Tax Relief Bill Summarized by FPA, CCH

Posted on December 21, 2010 by Editor Test -

The Financial Planning Associationhas issued a useful summary of the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” by Congress, which President Obama signed earlier this month. CCH has also issued a Special Tax Briefing on the Act.

The legislation, which will cost the U.S. Treasury an estimated $857 billion in uncollected taxes, will provide guidance for taxpayers and planners with respect to tax rates, the Alternative Minimum Tax, estate and gift taxes, and certain expired tax provisions.

An individual earning $50,000 in 2011 will see a $1,890 tax savings in combined income tax and payroll tax rate reductions over what was scheduled under the EGTRRA sunset, according to CCH. The payroll tax holiday alone is estimated to inject $120 billion into the economy in 2011.

The Tax Relief bill will provide:

Two-year extension of all current tax rates through 2012

Rates remain 10, 25, 28, 33, and 35 percent
2-year extension of reduced 0 or 15 percent rate for capital gains & dividends
2-year continued repeal of Personal Exemption Phase-out (PEP) & itemized deduction limitation (Pease

Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010, 2011, 2012

Reunification of estate and gift taxes
35% top rate and $5 million exemption for estate, gift and GST
Alternatively, taxpayer may choose modified carryover basis for 2010
Unused exemption may be transferred to spouse
Exemption amount indexed for inflation in 2012

AMT Patch for 2010 and 2011

Increases the exemption amounts for 2010 to $47,450 ($72,450 married filing jointly) and for 2011 to $48,450 ($74,450 married filing jointly). It also allows the nonrefundable personal credits against the AMT.

Extension of “tax extenders” for 2010 and 2011

Tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes
Above-the-line deduction for qualified tuition and related expenses
Expanded Coverdell Accounts and definition of education expenses
American Opportunity Tax Credit for tuition expenses of up to $2,500
Deduction of state and local general sales taxes
30-percent credit for energy-efficiency improvements to the home (IRC section 25C)
Exclusion of qualified small business capital gains (IRC§1202)

Temporary Employee Payroll Tax Cut

Provides a payroll tax holiday during 2011 of two percentage points. Employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800.

2010 tax relief act revenue cost of $857 billion includes:

Individual tax cuts: $186 billion
AMT Relief: $136 billion
Payroll tax deduction: $111 billion
Estate/gift tax relief: $68 billion
Capital gains/ dividend cuts: $53 billion
Bonus depreciation/179 expensing: $21 billion
Unemployment Insurance Extension, $56 billion.
Other: $226 billion

HR 4337 modernizes tax code treatment of investment firms

Posted on December 21, 2010 by Editor Test -

The Regulated Investment Company Modernization Act of 2010 this fall, which is now headed to President Obama’s desk for an expected signature, will

Reduce the burden arising from amended year-end tax information statements
Improve a mutual fund’s ability to meet its distribution requirements
Create remedies for inadvertent mutual fund qualification failures
Improve the tax treatment of investments in a fund-of-funds structure
Update the tax treatment of fund capital losses

according to a new white paper from Wolters Kluwer Law & Business, which produces information products under the CCH and Aspen names.

Specifically, the legislation:

§ Creates a special rule allowing unlimited carryovers of the net capital losses of regulated investment companies.

§ Exempts regulated investment companies from loss of tax-preferred status and additional taxes for failure to satisfy the gross income and assets tests if that failure is de minimis and is due to reasonable cause and not willful neglect.

§ Revises the definitions of “capital gain dividend” and “exempt-interest dividend” for purposes of the taxation of funds and their shareholders to require that dividends be reported to shareholders in written statements.

§ Allows a qualified fund of funds to pay exempt-interest dividends and allow its shareholders the foreign tax credit without regard to certain requirements that the fund of funds invest in state and local bonds or foreign securities.

§ Modifies rules for dividends paid by funds after the close of a taxable year (so- called spillover dividends).

§ Revises the method for allocating fund earnings and profits to require those earnings and profits to be allocated first to distributions made prior to December 31 of a calendar year.

§ Allows funds with shares that are redeemable on demand to treat distributions in redemption of stock as an exchange for income-tax purposes.

§ Excludes net capital losses of funds from earnings and profits.

§ Prohibits earnings and profits from being reduced by any amount that is not

allowable as a deduction in computing taxable income, except with respect to a

net capital loss.

§ Repeals preferential dividend rules for funds that are publicly offered

§ Allows funds to elect to treat a post-October capital loss and any late-year

ordinary loss as arising on the first day of the following taxable year.

§ Exempts from holding-period requirements regular dividends paid by a fund that

declares exempt-interest dividends on a daily basis in an amount equal to at least

90 percent of its net tax-exempt interest and distributes those dividends at least

monthly.

§ Extends the exemption from excise tax of failure to distribute taxable income of a

fund to other tax-exempt entities with an ownership interest in a fund.

§ Allows specified gains and losses of a fund derived after October 31 to be

deferred, for excise-tax purposes, until January 1 of the following calendar year

§ Creates a special rule for estimated excise-tax payments of funds.

§ Increases from 98 percent to 98.2 percent the amount of capital gain net income

funds must distribute.

Unmet Expectations

Posted on December 21, 2010 by Joseph A. Tomlinson, CFP -

With the first of 78 million baby boomers reaching the milestone age of 65 in 2011, the timing of the publication of a special section on Retirement Income Planning the Journal of Financial Planning this month was certainly appropriate. This piece of research has not arrived on planner’s desks (in print or via the Web) without controversy, however.

The always-forthright financial planning industry pundit, Bob Veres, reviewed it harshly. In fact, he called for “an honest debate about whether [the Financial Planning Association’s] research department is offering any value with these various reports and studies.” Ouch.

Was Veres unfair? Subscribers to Veres’ Inside Information can read his full review and draw their own conclusions.

But I too was disappointed in this four-part special section. I thought it was too superficial a treatment of what is an important topic for financial planners. In the following appraisal, I’ll try to assess the value of the articles in it, which include a write-up of a survey of financial advisors, a Q&A session with advisor Roy Diliberto, an article on creating a “hierarchy of funds” and an article that compares Social Security claiming strategies for couples.

Part I: The FPA Survey

The first section, a write-up of the results of a survey of 425 Financial Planning Association, was entitled, “Planners Find Success with Retirement Income Strategies.” The title surprised me. Anecdotal evidence tells me that relatively few planners use retirement income strategies; most of them apply the same old systematic withdrawal strategies.

And, given what I know about America’s inadequate savings rate, abandonment of defined benefit plans, and under-utilization of products with longevity guarantees, I don’t see a whole lot of success to celebrate.

Systematic withdrawal strategies without guarantees may work fine wealthier for Americans—to whom financial planners unquestionably cater to a wealthier class of people. But planners should consider the use of income guarantees for clients of more modest means.

The JFP survey shows that the decumulation strategies used most frequently by planners are “structured systematic withdrawal ” (50%) and the “time-based segmentation,” aka the “bucket method” (28%). The methods that do focus on guaranteed income, the “essential versus discretionary approach” and “Social Security and/or pension” approach, are used by only 14% and 4%, respectively.

The times are changing. But most planners are not.

The survey discussion ends by talking about withdrawal rates based on findings that average estimated safe withdrawal rates have increased from 4.4% in 2009 to 4.75% in 2010. Dialog with financial planning heavy hitters Michael Kitces and Jonathan Guyton is also included.

Kitces’ original research on the impact of market valuations on withdrawal rates uses historic data to show safe withdrawal rates as a function of the P/E 10 valuation measure, which was popularized by Robert Shiller.

Kitces’ “always historically safe” withdrawal rate ranges from 4.4% for the highest (19.9 to 28.7) P/E quintile to 5.7% for the lowest (5.4 to 12.0) quintile. The P/E 10 measure is now around 23 with the S&P 500 at 1240, indicating that 4.75% may be a bit aggressive.

Part II: “Using a Hierarchy of Funds to Reach Client Goals”

This article rather grandly declares that it’s time to move from modern portfolio theory (MPT) to what the authors call modern retirement theory (MRT). I can’t disagree with that. But they don’t build much on that. Their core argument simply asserts the desirability of splitting expenses into essential and discretionary, and funding the two types of expenses differently.

The authors propose funding essential expenses with conservative investments and annuities while funding discretionary expenses with riskier products. They recommend an additional bucket for emergencies expenses, funded with highly liquid investments, and a bequest bucket, if desired, filled with long-term volatile investments.

Personally, I believe that a method based on these general guidelines can be particularly useful in helping clients of average means achieve a higher level of financial security in retirement. The fact that it may be more suitable for middle-class clients than wealthy clients might explain why, as the JFP’s own survey shows, only 14% of planners use it.

Part III: “Life Planning Meets Retirement Planning”

In this brief interview with a JFP editor, advisor Roy Diliberto attempts to articulate the difference between financial planning and life planning. As many advisors can attest, not everyone who excels at textbook financial planning can be an effective life planner. Life planning requires some of the skills, if not the actual certifications, of a clinical psychologist.

The unspoken topic here is behavioral economics, and the application of behavioral economics theory to decumulation strategies is a new and potentially fruitful topic for discussion. In the past, researchers like Daniel Kahneman and Richard Thaler have explored the behavioral aspects of accumulation, but there’s been little discussion of the implications of behavioral economics for decumulation.

The interview with Diliberto, who is CEO of Philadelphia-based RTD Financial Advisors, Inc., raises hopes for such a discussion but ultimately disappoints because of the sheer familiarity of the responses. Not that they aren’t sensible. For instance, instead of asking clients, “When do you plan to retire?” he prefers to help clients imagine specific activities at specific life stages. That’s perfectly reasonable, but it’s not new or interesting.

Similarly, he rejects the assumption that most people will spend less in retirement—but few advisors still assume that anyway. When the interviewer asked, provocatively, “What happens when what clients say about their retirement goals doesn’t line up with the actions they take?” Diliberto responds with a reference to clients who feel financially insecure even when they have not reason to. His answers are interesting—but the interview broke no new ground.

Part IV: “5 Social Security Strategies for Couples”

In its discussion of the economic impact of various Social Security claiming strategies for couples, this article is quite useful. It helps raise awareness about the financial benefits of delaying claiming Social Security. It also makes clear that, because the benefit level transfers in full to the surviving spouse, Social Security might best be thought of as a “last-to-die” annuity.

However, an article by William Meyer and William Reichenstein in the March 2010 issue of the Journal of Financial Planning covers similar ground better. Why do I say that? Fahlund postulates a single instance of a couple where the husband dies at age 80 and the wife dies at 95. Meyer and Reichenstein build mortality tables into their analysis so that they can show probability-weighted results. Second, Fahlund evaluates strategies based on total lifetime payouts where Meyer and Reichenstein calculate the present values of lifetime payouts.

In sum, I had hoped to find fresh, practical ideas in JFP’s special section on Retirement Income Planning. Given the importance of the topic, I expected material with greater depth, seriousness and ambition. But my expectations went largely unmet.

You can reach Joe Tomlinson at [email protected].

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