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For Many Investors, Ten-Year Returns Are Less Than Zero
The exodus of assets from domestic equity funds has been a big story this year. But TrimTabs Research notes that a lot of that outflow is finding its way into global equities, thus refuting the conventional wisdom that aging Boomers aren’t losing their risk appetite.
“Global equity mutual funds have posted an inflow of $72.2 billion since the end of March 2009, roughly matching U.S. equity fund redemptions of $65.2 billion,” according to TrimTabs September 22 fund flow report.
“In other words, there seems to be a specific disdain for U.S. stocks. We believe this is mostly because U.S. equities have been a terrible investment in the past decade.”
But TrimTabs confirmed another piece of conventional wisdom: that retail investors tend to buy high and sell low. Mis-timing the market apparently made the past decade even worse for many people than the S&P’s point-to-point net-zero performance in the Naughts Decade implies.
During the past decade, the S&P 500 ranged from a high of 1,565 in October 2007 to a low of 676 in March 2007. But the “flow-weighted purchasing price” was 1,434. That’s worse timing than a chimpanzee could achieve by throwing rubber darts at a Bloomberg screen. “If investors had bought randomly, their flow-weighted purchasing price should be 1,171—the average closing price of the S&P 500 in the past decade,” TrimTabs reported.
As a result, “about half of U.S. equity mutual fund investors are sitting on paper losses of more than 25% even though the S&P 500 stands exactly at its 10-year average,” the weekly bulletin said. “This helps to explain persistent equity fund outflows despite the recent rally. Some mutual fund investors are so deep underwater that rallies are essentially meaningless to them. Also, many investors might be selling simply to harvest losses on their underwater positions.”
© 2010 RIJ Publishing LLC. All rights reserved.
Jackson Enhances VA GWMB, adds BlackRock Fund
Jackson National Life has introduced a “customizable guaranteed minimum withdrawal benefit (GMWB) called Freedom Flex as an option on its Perspective series variable annuity contracts.
“We took our Lifeguard Freedom Six, which had a six percent annual bonus and an annual step-up for a fee of 95 basis points, renamed it Freedom Flex, and added a 5%, 7% or 8% bonus with either an annual or quarterly step-up,” said Alison Reed, vice president of product management. “The rider price now ranges from 90 bps for a 5% bonus with an annual step-up to 130 basis points a year for the 8% bonus with an annual step-up.” Quarterly step-ups aren’t available on the 8% bonus.
“We’ve always focused on the cafeteria-style VA product, with various withdrawal and bonus options, and we decided to extend that to the GMWB option. It’s an extension of our ‘give the rep a choice’ philosophy,” Reed told RIJ.
Perspective contract holders can choose from the following options:
- 5-8% annual bonus or “roll up.” Investors can grow their guaranteed withdrawal balance (GWB) by selecting an annual bonus ranging from 5% to 8% in years with no withdrawals.
- Quarterly or annual step-ups. Contract holders can capture investment gains with annual or quarterly step-ups. Annual step-ups lock in the contract anniversary value, while quarterly step-ups lock in gains annually based on the highest adjusted quarterly contract value.
- Single or joint option. Clients can provide guaranteed lifetime income for themselves with the single option, or for themselves and their spouse with the joint option. The joint option isn’t available on the 7% rollup with the quarterly step-up or the 8% rollup.
- 99 investment options. Contract holders can choose from among 99 investment portfolios, without asset allocation restrictions.
Contract holders who wait 10 years (or until age 70, if later) to take withdrawals are eligible for a 200% GWB adjustment, which increases their guaranteed withdrawal balance to double what they invested in the first year.
When investors are ready to start taking retirement income, they may withdraw between 4% and 7% of their guaranteed withdrawal balance every year for life, depending on their age at the time of the first withdrawal. Contract holders can also start and stop withdrawals as desired, giving them the flexibility to decide when to take income.
In conjunction with the Freedom Flex launch, Jackson has added BlackRock, the world’s largest asset manager with $3 trillion under management, to its investment manager lineup. The firm will manage the new JNL/BlackRock Global Allocation portfolio, and will also subadvise the JNL/BlackRock Commodity Securities portfolio. In May, the company expanded its investment offerings with the addition of six American Funds Insurance Series portfolios.
© 2010 RIJ Publishing LLC. All rights reserved.
Vanguard’s Low Fees Get Lower
Vanguard’s ultra-low cost “Admiral” class of mutual fund shares, until now available only to investors able to put at least $100,000 in an individual fund, are now within the reach of ordinary middle-class investors.
Investors now have to put only $10,000, not at least $100,000, in Vanguard’s broad stock and bond market index funds to buy ultra-low cost Admiral Shares, and only $50,000, not $100,000, to qualify for Admiral Shares on most Vanguard actively-managed funds.
Someone investing $50,000 in Vanguard’s 500 Index Fund, for instance, would pay $35 a year in management fees instead of $90. He or she would pay seven basis points (.07%) per year in fund management fees, the Admiral Shares price, instead of 18 basis points, the Investor Shares price.
The move affects an estimated two million Vanguard shareholders and 52 Vanguard funds, including the huge Total Stock Market Index Fund (Admiral Shares, 7 basis points/Investor Shares 18 bps), the Total Bond Market Index Fund (Admiral Shares, 12 bps/Investor Shares, 22 bps) and Total International Stock Market Index Fund (Admiral Shares 20 bps/Investor Shares, 32 bps).
© 2010 RIJ Publishing LLC. All rights reserved.
The Bucket
Google to Map Inflation Using Web Data
Google is using its vast database of web shopping data to construct the ‘Google Price Index’ – a daily measure of inflation that could one day provide an alternative to official statistics. But the GPI is still a work in progress, the Financial Times reported.
At the National Association of Business Economists conference in Denver, Google chief economist Hal Varian said economic data can be gathered far more rapidly using online sources. The official Consumer Price Index data are collected by hand from shops, and only published monthly with a time lag of several weeks.
Since last Christmas, Varian said that the GPI shows a “very clear deflationary trend” for web-traded goods in the U.S. Though not seasonally adjusted, the data show that prices rose during the same period a year ago. The ‘core’ CPI in the US, which excludes food and energy, rose 0.9 per cent on a year ago in August.
Comic Fred Willard Stars in Symetra’s ‘Don’t Fear 65’ Campaign
Known for his film work in Waiting for Guffman and Best in Show, as well as TV roles in Modern Family and Everybody Loves Raymond, Fred Willard appears in three new video shorts hosted on Symetra Life’s DontFear65.com website. Willard also is featured in online ads directing consumers to the site.
The campaign is designed to fight post-crisis paralysis and dispel obsolete ideas about retirement. “‘Don’t Fear 65’ is more than an awareness campaign; it’s a call to action,” said Jim Pirak, Symetra vice president of Corporate Marketing. “With the confidence of many retirees shaken by the economic downturn, Don’t Fear 65 encourages people to take charge of their financial future and approach retirement with optimism.”
In the web videos, Willard is seen on a Sunday drive with an actor playing his grandson. “Grandpa” gives the boy dubious financial advice in vintage Fred Willard style. He regales his grandson with a series of observations about staying healthy, planning for retirement and achieving important milestones in retirement.
A series of title cards are interspersed throughout the videos, countering the questionable advice from Grandpa with sound information about how Symetra’s income annuity products can help build guaranteed income for life. Now in its third year, the campaign website is a resource for Symetra distribution partners to use with their clients as they build financial plans.
The campaign will run nationally through banner ad placements on websites frequented by retirees and pre-retirees, including MSN, Yahoo, WSJ.com, MarketWatch.com, Barrons.com, SmartMoney.com, Kiplinger.com, and online media outlets on the Tribal Fusion ad network. Symetra worked on the updated campaign with Seattle-based Copacino+Fujikado.
TIAA-CREF CEO Calls for New Thinking on Retirement Security
In San Antonio, Texas, TIAA-CREF CEO Roger W. Ferguson, Jr. told members of the National Council on Teacher Retirement at their annual conference that it’s time “to rethink, repair, and restart America’s retirement system.”
He called for a system that would “combine the best practices of defined benefit plans and defined contribution plans, be affordable for employers, and give employees access to guaranteed income that will last a lifetime.” Such a system would:
- Ensure workers have access to retirement savings opportunities. By enrolling workers automatically, private-sector workplace plans can approach the public sector, where nearly all full-time workers have access to a retirement plan, he said.
- Help workers amass sufficient savings, via 15-20 investment options, as well as objective advice and guidance to help workers understand them.
- Provide opportunities to save for long-term retirement health care expenses, which can be anywhere from $200,000 to $800,000 for a retired couple.
- Offer all workers a guaranteed lifetime income option. The average monthly Social Security payment for retired workers is about $1,600, he said, while average monthly spending for individuals over age 65 exceeds $3,000.
Eighty percent of higher education employees, who use TIAA-CREF, describe themselves as “somewhat confident” or “very confident” that they will have enough money to live comfortably in retirement, compared with just 54% of all U.S. workers, according to the TIAA-CREF Institute.
As an example of a new approach to public sector retirement plans, Ferguson cited TIAA-CREF’s agreement with the government of Orange County, California to provide an optional defined contribution retirement account that would supplement a new tier in the county’s defined benefit program.
The plan offers new county employees the option of taking a reduced defined benefit, and the county will match a percentage of savings directed to an employer-provided individual account. It includes fixed annuity options that can be used to supplement defined benefit income guarantees.
Phoenix Life and Reassurance of NY Is Sold to Philadelphia Financial and Renamed
A company that recently split off from the Phoenix Companies Inc. is the new parent of Phoenix Life and Reassurance Company of New York, National Underwriter reported.
Philadelphia Financial, Plymouth Meeting, Pa., a firm that specializes in selling private placement insurance through advisors who serve wealthy individuals, says it has acquired Phoenix Life and Reassurance of New York and renamed the company Philadelphia Financial Life Assurance Company of New York.
Phoenix Companies, Hartford, a 159-year-old insurer that has been hit hard by the recession, sold Philadelphia Financial to Tiptree Financial Partners L.P., New York, in June. Phoenix has been reporting the Philadelphia Financial business as a discontinued operation since 2009.
The main life operating subsidiary of Phoenix Companies is domiciled in New York state, and the Phoenix Companies did not need Phoenix Life and Reassurance to sell life and annuity products in New York state, a Phoenix Companies representative says.
John Hillman is the president of Philadelphia Financial. Tiptree, the current majority owner of Philadelphia Financial is, a holding company controlled by large financial institutions.
Goldman Executive Joins New York Life’s RIS Business
Benjamin Woloshin has joined New York Life as senior vice president and head of relationship management for its Retirement Income Security (RIS) business, reporting to executive vice president Chris Blunt.
Woloshin had most recently been vice president responsible for institutional relationships in Goldman Sachs’ Reinsurance Group. He also worked at MetLife and Putnam Investments.
Blunt said he planned to hire several additional senior-level relationship managers who will report to Woloshin, who replaces senior vice president Allyson McDonald, who has assumed responsibility for the external sales operation of RIS, also reporting to. Blunt.
New York Life’s income annuity business set a new six-month record of $870 million in 2010, Blunt said. On the accumulation side, mutual funds set a sales record of more than $5 billion in the first six months, with third-party channels accounting for more than $4 billion of the total. First half net sales of mutual funds were $2.3 billion, a record pace.
Principal ‘White Paper’ Describes DoL Fee Disclosure Rule
Starting July 16, 2011, a new Department of Labor rule will require many financial professionals to disclose to their retirement plan fiduciary clients the fees they receive and the services they provide. To help professionals understand the implications of the rule, the Principal Financial Group has posted a number of resources on its fee disclosure education website.
The new resources include:
- A white paper by ERISA attorney Jamey Delaplane, partner, Davis & Harman LLP, New Fee Disclosure Rule for Retirement Plan Service Providers: What Financial Professionals Need to Know.
- Commitment of Services. A document allowing financial professionals to outline the services they provide and demonstrate their value to clients.
- Checklist for financial professionals. This overview of ERISA §408(b)(2) can show financial professionals how to comply with the new regulation.
Putnam Makes Fees Transparent for Plan Participants
Putnam Investments will offer transparent and comprehensive disclosure of fees and expenses to participants in the 401(k) plans it administers, the Boston-based fund company announced. The new disclosures will be available online through Putnam’s plan participant web site later this month.
The new disclosures will:
- Give participants access to real-time information about their total fund expense ratios, as well as any transaction fees associated with their plan.
- Address the expense ratio of each investment option, converted into a dollar value per $1,000 invested; offer a list of transactions and transaction fees as well as any fees related to services such as managed accounts or online advice.
- List the services that participants can access, including automatic plan features that help them save; educational programs; comprehensive statements; Putnam’s Lifetime Income Analysis Tool, which estimates monthly retirement income; and available investment choices.
- Be accompanied by a video tutorial that addresses: assessing plan value; the employer’s fiduciary responsibilities as they relate to the value and fees of their plan; the different types of fees that participants typically incur and an explanation of charges.
© 2010 RIJ Publishing LLC. All rights reserved.
Retirement Income ‘Smackdown’
James and Ann West, your average hypothetical American couple on the cusp of retirement, face a dilemma. They hoped to retire in 2014 on $451,000, most of it in qualified plan savings. But Jim, 66, recently suffered a mild infarction and has decided to retire now. Ann, 62 and still earning $30,000, is baffled about what to do next.
What’s the best retirement income plan for the Wests? That was the challenge laid down for individual and plan sponsor advisors in the “Retirement Income Smackdown,” a contest sponsored by the Center for Due Diligence and judged at the CFDD’s 2010 Advisor Conference last week in Chicago.
The winning strategy, determined by a paper-ballot vote among about 150 people, came from John Mulligan, a 53-year-old Oregon CFP and CIMA. He “advised” the Wests to live on earned income and savings for four years, then maximize Social Security, and invest their excess capital in a globally diversified portfolio of stocks, bonds, real estate, commodities and cash.
In a phone interview, Mulligan described his influences as Moshe Milevsky, the RIIA’s “build a floor and create upside” philosophy, fellow advisors Ed Slott and Craig Israelsen, and Horsesmouth’s “Savvy Social Security Planning for Boomers” product—though not necessarily in that order.
There were two other Smackdown finalists at the CFDD conference, the best of about 25 entries. Burlington, Iowa, advisor Curtis Cloke recommended that the Wests top up their monthly income in retirement by purchasing two installment-refund income annuities, one immediate and one deferred until Ann’s retirement in 2014, with $290,000 of their savings.
A third contestant, William Heestand, a plan sponsor advisor in Portland, Oregon, approached the Wests as plan participants rather than as individual clients. (The CFDD is primarily an organization of plan sponsor advisors and ERISA specialists.) Heestand advised the Wests, who both had qualified plans, to put an in-plan, stand-alone guaranteed lifetime withdrawal benefit rider on their $451,000 in retirement accounts.
The people behind the Smackdown—Phil Chiricotti, the CEO of CFDD, Keith Diffenderfer, the advisor who hatched the idea, and Garth Bernard, the consultant who MC’d the Smackdown—kept the elements of the West hypothetical as uncomplicated as possible. The Wests, for instance, were renters, not homeowners. It wasn’t said whether they had heirs or beneficiaries.
The takeaway from their comments: the problem of designing an income plan was both difficult to solve and, perhaps paradoxically, amenable to a wide variety of solutions. Chiricotti wants to reprise the contest at the 2011 CFDD Advisor Conference.
Maximize Social Security
In examining the Wests’ situation, John Mulligan noticed that the couple was four years apart in age. He also noticed that their stated monthly income needs were about $4,000, and that they could eventually meet their fixed costs simply by maximizing their Social Security benefits.
So Mulligan’s plan called for Jim to retire now but delay Social Security until age 70, when he’d qualify for the maximum benefit: $2,990 a month. He advised Ann to work for four more years, then take spousal Social Security benefits of $1,450 for four years before switching to her personal benefits of $1,943 at age 70. (The Social Security estimates include cost of living adjustments, or COLAs.)
During the four-year gap, when Ann was still bringing home $2,250 each month but Jim was foregoing Social Security, Mulligan prescribed a simultaneous Roth IRA conversion of Jim’s $250,000 401(k) assets (in five annual steps) and a $1,775-a-month drawdown of his Roth account to cover living expenses. He paid part of the Roth tax bill with the Wests’ $25,000 money market savings.
As for the Wests’ invested assets, Mulligan advised them to allocate their savings to twelve categories, a la Craig Israelsen (small, medium and large cap domestic stocks, non-U.S. stocks, emerging market socks, real estate, resources, commodities, domestic and non-U.S. bonds, TIPS, and cash), and to rebalance monthly. Such a portfolio would have averaged 9.51% a year from 2000 to 2009, Mulligan said.
Buy income annuities
At the heart of Curtis Cloke’s strategy were two income annuities. Cloke, the creator of the THRIVE Income Distribution System, advised Jim West to take $2,265 a month in Social Security benefits immediately. He recommended that Ann retire in four years and claim lifetime benefits of $1,472.
To supplement Jim’s Social Security benefits and Ann’s salary until 2014, Cloke had the Wests put about $250,000 in an inflation-adjusted (5%), installment-refund, joint life income annuity that paid $754 a month starting in April 2011. In addition, Ann used $39,000 of her qualified savings to buy a deferred installment-refund joint life income annuity that paid a level $341 a month, starting in January 2018. At that time, Ann would begin taking $624 a month in RMDs from her 403(b) plan.
After purchasing their annuities, the Wests would have about $160,000 for emergencies and splurges. If they needed more liquidity for any reason, they could tap the commuted value of their $250,000 annuity. Cloke’s plan also included a conversion of Ann’s 403(b) to a Roth IRA. He rejected other scenarios—such as Jim delaying Social Security or Ann retiring in 2010—because they consumed so much capital over the next four years.
Get a living benefit rider
Then there was the GLWB solution. William Heestand, president of The Heestand Company, a Portland, Oregon plan sponsor advisor, assumed that Jim’s 401(k) and Ann’s 403(b) plans each offered a stand-alone lifetime withdrawal benefit rider like Prudential’s IncomeFlex or Great-West’s SecureFoundation in-plan annuity programs.
Heestand’s advice: Jim should retire now and claim Social Security, while Ann should work until 2014 and then claim. They should cover their entire $410,000 in qualified savings with a GLWB and activate the 5% annual withdrawal ($20,500). He assumed that their expenses started at about $56,000 per year, including Medicare supplements and long-term care insurance premiums.
Spreadsheeting the variable annuity’s investment performance under benign and adverse market conditions, Heestand observed—as others have—that the GLWB was superfluous under a benign scenario. But under adverse conditions, it provided about $300,000 more in income over a lifetime and left a larger estate than an uninsured, investment-only strategy. In particular, it protected the Wests from sequence of return risk, which Heestand described as “the real deal—the biggest financial risk in retirement.”
© 2010 RIJ Publishing LLC. All rights reserved.
Quote of the Week
Milliman Assesses Impact of Dodd-Frank Act on Insurers
Only one section of the Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) significantly affects the insurance industry, but that section—Title V—could have significant implications, according to Milliman.
Title V describes the creation of a Federal Insurance Office (FIO) within the Department of the Treasury and outlines a program of state-based insurance reform.
These changes “are significant because they represent a first step toward the potential transfer of regulatory authority from the states, the exclusive locus of regulatory authority until now, to the federal government,” says a new white paper written by Milliman analysts Joy Schwartzman and Gail Ross.
The FIO will collect information and monitor all lines of insurance except health insurance, long-term care insurance and crop insurance. Within 18 months, the FIO’s director must give Congress an assessment of the current state regulatory system and recommend improvements to the regulation of insurance in the U.S.
Besides covering systemic risk regulation, capital standards and consumer protection, the report will inquire into “the feasibility and potential costs and benefits of regulating insurance at the federal level and/or sharing such regulation between the states and the federal government.”
The two biggest effects of the legislation, Milliman said, would likely be greater access to market for nonadmitted insurers and single-state regulation and financial reporting for reinsurance companies.
© 2010 RIJ Publishing LLC. All rights reserved.
Wealth2k Enhances Income Illustration Software
Wealth2k, marketer of the Income For Life Model retirement income planning software, has introduced a new application that “allows advisors to dynamically create income strategies that blend time-segmentation of retirement assets with period certain and lifetime income elements including SPIAs and annuity income riders,” the Boston-area company reported.
“This software application addresses the need for an understandable, unifying structure that gives context to various investment products, including products that provide guaranteed income elements,” said Wealth2k founder David Macchia in a release.
Wealth2k has produced a 4-minute video explanation of the new illustration platform, which is being released as an upgrade to Wealth2k’s existing IncomeForLifeModel program. The video can be found at www.IncomeForLifeModel.com.
Within pre-set ranges, advisors can define financial assumptions including:
- Dynamic time-segmentation (2-10 segments)
- Segment duration
- Segment-specific rate-of-return objectives
- Segment-specific inflation assumptions and liquidation factors
- Staged lifetime income benefits commencing in any year of the income plan.
Advisors may combine all their clients’ external sources of retirement income, including pensions and Social Security. The software will solve for a “floor” of guaranteed retirement income, and can incorporate external income sources in the “flooring” calculation.
© 2010 RIJ Publishing LLC. All rights reserved.
Allianz Life Introduces First Inflation-Protected FIA Income Rider
Alliance Life’s MasterDex X fixed indexed annuity now offers a “Simple Income III” rider, which provides guaranteed lifetime income with optional inflation protection. According to the issuer, it is the first rider of its kind to offer adjustments for inflation.
Simple Income III offers level, indexed, or inflation-protected payments. Under the inflation option, payments rise with increases in the Consumer Price Index (CPI-U).
Inflation is the number one retirement risk, according to the 2009 Risks and Process of Retirement Survey Report from the Society of Actuaries. At an assumed average of 3% annual inflation, $100,000 loses 14% of its purchasing power in five years and 45% in 20 years, according to the issuer.
The CPI-U-linked payment option protects purchasing power throughout the first 20 years of income, up to 10% per year. For an extra annual fee of 60 basis points, the Simple Income III Rider also offers an 8% bonus added to the withdrawal value each year until income withdrawals begin or the client turns age 90, whichever comes first.
Allianz Life is a unit of Allianz SE, the 20th largest company in the world by revenues, according to the Fortune Global 500, August 2010.
© 2010 RIJ Publishing LLC. All rights reserved.
Pacific Life Launches Its First SPIA
Encouraged by requests from its wholesalers and independent advisors, Pacific Life has introduced its first single-premium, immediate fixed annuity, called Pacific Income Provider.
“For many individuals, retirement plans were a primary source of retirement income, but once they retired they found themselves coming up short. In this new retirement reality, clients need multiple sources to provide guaranteed lifetime income,” states Christine Tucker, Pacific Life’s vice president of marketing, Retirement Solutions Division.
Pacific Income Provider offers 10 payment options, including Life with Cash Refund, which returns any remaining purchase amount to the beneficiary when the annuitant dies.
Clients may also opt for a Future Adjustment Option, which allows a one-time increase or decrease in income payments. For example, a client may delay taking Social Security until age 70 to maximize benefits. In this situation, the Future Adjustment Option may be elected to schedule a decrease in income payments starting at age 70. Alternately, clients can choose an Inflation Protection Option, which increases payments by 2%, 3% or 4% per year.
New marketing materials and additional information regarding Pacific Income Provider are available at PacificLife.com. Financial professionals can run multiple quotes through an enhanced illustration system to determine a payment option for their clients.
© 2010 RIJ Publishing LLC. All rights reserved.
The Bucket
FPA to Offer InFRE Materials to Advisors
Under an alliance between Financial Planning Association (FPA) and the International Foundation for Retirement Education (InFRE), FPA members will have access to discounts on new retirement planning tools and resources. The assistance is benefit of the FPA Member Advantage Program.
FPA members now have access to discounted educational packages offered through the InFRE Retirement Resource Center (IRRC) on various topics within retirement planning, such as the Strategies for Managing Retirement Income Package, Certified Retirement Counselor (CRC) Program, “Managing Your Retirement Income” Educational Workshop and many more. CRC certificants and registrants will also receive discounts on FPA’s Virtual Learning Center archives and are eligible for a group membership program discount.
FPA members will receive 20 percent off the purchase price of InFRE retirement programs through October 31, 2010. After October 31, resources are available to FPA members for 15 percent off the purchase price.
The Principal Expands Online Library for Advisors
To attract retirement-minded advisors to its offerings, Principal Financial Group has launched a Retirement Education Portal that gives advisors access to an online library focused on retirement income planning and “tools and resources for overall retirement plan education.”
Financial professionals will be able to select materials based on number of years prior to retirement or by the stages of retirement planning. Resources include customizable education plans, meeting materials, and a new magazine called Education Edge.
The portal also gives financial professionals access to “local education personnel” who conduct group education meetings and one-on-one meetings with participants. The expanded portal is part of Principal’s Retirement Income Edge program.
Mutual of Omaha Says “Aha!” to Social Media
Mutual of Omaha, which sponsors a campaign that it calls “Life’s Aha Moments,” has launched an online survey inviting people to vote for their favorite aha moments of the year. The top vote getters will become commercials for the company’s 2011 national broadcast advertising campaign, which will debut early next year.
“Aha Moments” are the epiphanies that are the topic of the “uplifting” and “inspirational” stories that Mutual of Omaha has collected from the public. The company kicked off its sponsorship of life’s aha moments in February 2009 with national advertising, a website devoted to aha moments, and an online community through Facebook, Twitter and other social applications.
For more information on aha moments, visit http://www.mutualofomaha.com/aha.
The company recorded more than 1,000 such stories during a recent four-month, 25-city national tour. From those 1,000, the company selected 75 moments for the first round of voting, which began October 1 and concludes on October 15. Consumers will be able to view and vote for all of the eligible entries at http://ahamoment.com/vote.
Following the first round of voting, the top 25 vote getters will move into the final round of voting, which begins on October 18th and ends on October 31, 2010. The top-10 moments will become the company’s newest television ads. The website will also allow people to encourage others to vote by sharing their favorite moments via e-mail, Facebook, Twitter and other popular social media outlets.
Phoenix and AltiSure Launch ‘Secure Lifestyle’ Annuity Series
The Phoenix Companies, Inc., and The AltiSure Group, an annuity and life insurance design and distribution company, announced the launch of their co-developed Secure Lifestyle Annuity Series, which includes The Secure Lifestyle and the Secure Lifestyle Bonus fixed indexed annuities.
The Secure Lifestyle Annuity Series offers two benefits: 1) The Safety Growth Strategy, a new interest crediting method, and 2) The Guaranteed Income and Family Wealth Transfer Benefit (GIFT), which combines guaranteed lifetime withdrawals with an enhanced death benefit for one charge.
“With the Safety Growth Strategy, a client can benefit from the positive return of the S&P 500 in excess of 5%,” said Philip K. Polkinghorn, senior executive vice president, business development at Phoenix.
The product’s GIFT Benefit is an optional rider that offers clients guaranteed lifetime withdrawals and an enhanced death benefit with a 6% compound annual rollup in one package. Clients can maximize their income opportunity by deferring the start of withdrawals under their Guaranteed Lifetime Withdrawal Benefit (GLWB), while remaining protected by the enhanced death benefit until the beginning of the guaranteed withdrawals under the GLWB rider.
“If the client defers the start of withdrawals for 12 years, the income benefit base used to calculate the annual GLWB amount will grow to more than triple the original premium with the Secure LifeStyle Bonus Annuity,” said Niju Vaswani, president of AltiSure.
The 10% premium bonus offered with the Secure LifeStyle Bonus Annuity boosts the initial account value by 10% of the original premium at contract issue. A percentage of the premium bonus and its earnings vest each year during the surrender charge period. All interest is credited on the entire account value including the premium bonus. Generally, products that do not offer bonuses have higher credited interest rates, participation rates and caps.
Optional riders such as the GIFT Benefit involve a fee calculated as a percentage of the benefit base that is deducted from the contract value. There are surrender charges during the first 10 years.
AllianceBernstein Acquires Alternative Investments Group from SunAmerica
As part of its expansion into alternative investments, AllianceBernstein L.P. has acquired a group at SunAmerica that manages a portfolio of hedge fund and private equity fund investments.
“We are pleased to add to our alternative investment capabilities this exceptional hedge fund and private equity fund investment team,” said AllianceBernstein Chairman and CEO Peter Kraus. “Marc Gamsin and his SunAmerica Alternative Investments colleagues have built an outstanding platform.”
“We’ve admired AllianceBernstein’s superb investment research for many years, and we’re thrilled to become a part of this respected, global institution, while maintaining our long-standing SunAmerica relationship,” Gamsin said.
© 2010 RIJ Publishing LLC. All rights reserved.
Madoff’s Unsolved Mysteries
The black hole into which Bernie Madoff pumped a still unaccounted-for $7.9 billion grew even darker on September 26 with the death of 84-year-old Los Angeles investment advisor Stanley Chais, one of only two potential witnesses to the laundering of these mystery funds.
Both Chais and another Madoff associate, Jeffry Picower, had been charged in separate fraud suits by the SEC in 2009. The government hoped they would help expose the “labyrinth of interrelated international funds, institutions, and entities of almost unparalleled complexity and breadth” into which the money vanished, as a bankruptcy trustee described it.
But neither case will ever come to trial. In two of the greatest disappearing acts in financial history, Chais died 10 days ago of a rare blood disease and Picower drowned in his own swimming pool in Florida last October, after an apparent heart attack at age 67. Each had known Madoff for 30 years or more, long before he began his Ponzi scheme.
Both men had enjoyed special access to Madoff’s operation. According to the SEC complaint, Picower was told in advance of Madoff’s monthly profit “targets,” or the amounts with which Madoff planned to pad Picower’s accounts. With this knowledge, Picower or his assistant could request higher or lower “profits” for various accounts.
Moreover, to amplify Picower’s fictional profits to accommodate this siphoning off, Madoff extended him so much fictional credit that his accounts had, according to the bankruptcy trustee’s analysis, a “negative net cash balance of approximately $6 billion at the time of Madoff’s arrest.”
Picower collaborated by faxing Madoff backdated letters to support fabricated trades, some of which reportedly earned profits as high as 550%. As a result, Picower was able to withdraw over $2.4 billion just between 2002 and 2008.
Like Picower, Chais worked closely with Madoff. (His name came up first on Madoff’s office speed dial.) According to the SEC complaint, Chais withdrew $1.15 billion from 60 accounts for himself, family members, and corporations in which he held interests, from funds into which he consolidated his clients’ money, and from other entities. Madoff enabled him to justify such massive withdrawals by crediting him with inexplicably high phantom profits, with some accounts earning over 300% a year.
Together, Picower and Chais withdrew a total of $7.9 billion between 1995 and 2008 from the phantom profits that Madoff allocated to them, according to the reckoning of the bankruptcy trustee.
Why were such staggering notional profits systematically credited to the Picower and Chais accounts and then systematically and purposefully siphoned out of these accounts? Were Picower and Chais following instructions in re-depositing the billions that they withdrew?
All Ponzi schemes need an exit strategy. Unfortunately, with the deaths of Picower and Chais, we may never unravel the secret of where that money ended up.
© 2010 RIJ Publishing LLC. All rights reserved.
Craig Israelsen’s Seven Percent Solution
If your clients want to enjoy a retirement of 30 years, and they estimate that they’ll need, oh, $50,000 a year to live on, how big a portfolio will they need if they want a reasonable assurance that they won’t run out of money?
The conventional answer would be $1,250,000 (allowing for an annual withdrawal rate of four percent).
Craig Israelsen’s answer would be $714,285 (allowing for an annual withdrawal rate of seven percent).
If you buy into the conventional wisdom, and think Israelsen is either a dreamer or a fool, destined to run out of money if he dares take his own advice, you should look at his extensive and impressive number crunching. It’s all in his new book, 7Twelve: A Diversified Investment Portfolio with a Plan (Wiley, 2010).
Israelsen, who teaches personal finance at Brigham Young University and writes regularly for various financial journals, told RIJ that even if he were to retire today, at age 51, with a life expectancy of 35 years, he would feel “pretty comfortable” taking a seven percent initial withdrawal rate and adjusting that each year for inflation—provided he had two years worth of cash to turn so that he didn’t have to withdraw from the nest egg portfolio in a down market. “If I don’t have cash in reserve, then a 5% withdrawal rate is safer.”
His confidence comes from the power of a well-diversified portfolio, exactly the kind of portfolio he outlines in 7Twelve.
The “7” refers to seven core asset classes; the “twelve” refers to 12 different funds used to represent those core asset classes. Put them all together, and rebalance regularly, Israelsen said, and you have something “vastly superior and more resilient” than the typical 60% U.S. stock/40% aggregate bond portfolio from which the common wisdom dictates you mustn’t tap more than four percent a year.
The seven core asset classes and 12 specific funds recommended for the portfolio are as follows (core asset classes are in bold, specific funds in regular type)
- U.S. Stock (Large-company, mid-cap, and small)
- Non-U.S. Stock (Developed nations and emerging market)
- Real Estate
- Resources (Natural-resource stocks and diversified commodities)
- U.S. Bonds (Aggregate and Treasury inflation-protected securities)
- Non-U.S. Bonds
- Cash
Although Israelsen allows for the use of actively managed funds, he prefers index funds, and the book gives specific examples of index funds you can use—both mutual funds and exchange-traded funds.
The ideal mix of funds, per Israelsen, depends on whether you’re still young or getting a bit older. For young, “early accumulation” investors, he recommends a portfolio with perfectly equal allocations (8 1/3% of your total pie in each of the 12 funds). That would give you two-thirds equity and one-third fixed-income.
For older, “late accumulation” investors and investors already in retirement, he recommends somewhat higher allocations to inflation-protected securities and cash, with everything else getting equal measure. Whatever your portfolio mix happens to be, Israelsen recommends yearly rebalancing by selling leaders and buying laggards.
Back-testing shows that such a portfolio, properly managed, would have survived all rolling 25-year periods in recent history with yearly withdrawals as high as 7.5% (with a 3% annual inflation bump). Even with yearly withdrawals of 10%, the 7Twelve portfolio would have survived 94% of all rolling 25-year periods since 1970. (Yes, even the hellish 2008 market freefall.) In contrast, a typical 60/40 vanilla stock-and-bond portfolio would have survived 94% percent of all 25-year periods with a 7.5% withdrawal rate and 63% with a 10% withdrawal rate. (An all-stock or all-bond portfolio would have fared considerably worse at either withdrawal rate.)
As for average annualized returns, the 7Twelve portfolio, in the 10-year period that ended in December 2009, earned 7.8% with a standard deviation of 15.1. That compares quite favorably with large-cap stocks (-1.0% return, standard deviation of 20.9) or an aggregate bond portfolio (6.3% return, standard deviation of 3.12).
Israelsen designed the 7Twelve portfolio, he says, to exploit the enormous power of diversification, but also to please more traditional advisors and investors, who might shy away from anything too complex or foreign. He has no objection to advisors tinkering with the basic recipe; in fact, he does so himself. “This is a work in progress,” he said. Including less traditional asset classes, such as emerging-market bonds and small-cap international stocks, might even add muscle to the mix, he says.
The power of Israelsen’s 7Twelve portfolio, and the high withdrawal rate that it promises, deserve serious attention. This new model for diversification could make retirement a whole lot easier for a whole lot of people.
Russell Wild is a fee-only financial advisor based in Allentown, PA, and the writer of many books, including most recently, One Year to an Organized Financial Life (Da Capo Lifelong Books, 2009).
© 2010 RIJ Publishing LLC. All rights reserved.
A Fortune in Reversals
Here’s a true story.
Six years ago, a 74-year-old woman died suddenly. Her grieving husband couldn’t bear to live in the two-bedroom condo they’d shared since they became empty-nesters two decades before. A newer, sunnier condo in a nearby development appealed to his need for change.
The new condo with its glittery granite counters seemed beyond his means. But by selling the old condo, putting two-thirds down on the new one and using a reverse mortgage to pay off the balance of his new 30-year mortgage, he was able to trade up and still live mortgage free.
This man, who happens to be my father, doesn’t exactly fit the reverse-mortgage stereotype. He’s not a destitute widow determined to die in the family home. He’s an attorney who spent “not wisely but too well” for most of his life and retired with lots of home equity but not quite enough savings.
My father’s experience came to mind recently during a conversation with Jeff Lewis, chairman of Generation Mortgage Company (a unit of New York-based Guggenheim Partners that writes about $100 million worth of federally-insured Home Equity Conversion Mortgages a month), who tried to convince me that reverse mortgages aren’t just for the poor and the desperate.
Reverse mortgages will undoubtedly be a piece of the retirement income puzzle for many Boomers, but they’re still stuck with a shady reputation. That comes partly from the sector’s unregulated youth. It also comes from the fact that, like life-contingent annuities, reverse mortgages “smell of death.” Death, in the guise of mortality tables, hovers over the calculation of the payout, just as it does with SPIAs. It’s as if the Grim Reaper joins the attorney, broker and borrower at the big mahogany table on closing day.
Lewis tries to dispel that stigma. And, since his company is one of the few reverse mortgage firms trying to sell jumbo reverse mortgages, which means loans that are based on more than $625,500 worthy of equity and are not government guaranteed, he also tries to sell the idea that “equity release,” as the British call reverse mortgages, is good even for the wealthy.
Only six percent of Americans plan to use reverse mortgages. But “this shouldn’t be a niche product,” Lewis told RIJ. He doesn’t claim that reverse mortgages are cheap (the interest on jumbo loans can be above 8%), or that it’s easy for people to relinquish control over what may be their single most valuable asset, or even that reverse mortgages represent a windfall to the borrower. He does argue fairly persuasively, however, that they can quickly make more onerous obligations go away.
For instance, Sandwich Generation members who are making their parents’ mortgage payments could theoretically eliminate that expense with a reverse mortgage while keeping the parents in their home.
“I was talking to bankers at the Federal Home Loan Bank recently,” Lewis said. “Their demographic is 40-something and 50-something. I asked, ‘How many of you have a parent with a reverse mortgage?’ No one raised his hand. Then I asked, ‘How many of you are sending money to a parent to help pay for their home?’ Three quarters raised their hands. I said, ‘You’re buying your parent’s house over time. What’s your cost of money?’”
He also touts HECMs for short-term use. When set up as lines of credit, he said, reverse mortgages can make more sense than conventional home equity lines of credit. For instance, a 70-year-old person with a paid-for home worth $400,000 might qualify for (net of $15,000 in fees) a $235,000 line of credit whose unspent balance earns interest and which can’t be revoked or changed if home values fall, as they have since 2008. (The money can also be taken as a lump sum or income stream, or some combination thereof.)
But most of the people who use HECMs are, in fact, desperate. A ton of high-interest credit card debt has followed them into retirement, and using a reverse mortgage line of credit instead of tax-deferred savings to pay off the balance on the cards can be the lesser of two evils. “Most clients are using reverse mortgages to make other problems go away,” Lewis said.
This week, it got cheaper to set up a HECM line of credit when the Housing and Urban Development department announced the new “HECM Saver.” With a HECM Saver, seniors can’t borrow as much as they can under the standard HECM. (The difference is 10-18%.) But, because the loan is smaller, the upfront mortgage insurance premium drops to just 0.01% of the loan amount, from 2%.
Both HECM Saver and HECM Standard borrowers must pay an ongoing annual MIP of 1.25%, assessed monthly. On the HECM Standard loan, that represents an increase from the previous charge of just 0.5% per year; the hike reflects the expected continued weakness in home values. But seniors can get a bigger HECM Standard loan under the new rules, because the higher insurance premium allows lenders to use rates as low as 5%.
“This is for smart people, not just destitute people,” Lewis said. “Most people, when they do it, love it. There’s an emotional aspect to the resistance. You have a lot of older people who have always looked at their house as a savings bank, not like an ATM, and a reverse mortgage goes against that mindset. It feels a little like a stigma to them.
“But it comes down to, would you rather have the money or not? The reality is that, in the aggregate, Baby Boomers don’t have enough money in liquid retirement accounts to support themselves in their old age. With a reverse mortgage, they can buy 20 years of peace of mind.”
© 2010 RIJ Publishing LLC. All rights reserved.
SunAmerica Offers Two New Lifetime Income Options
SunAmerica, the Los Angeles-based insurer whose corporate tagline is “The Retirement Specialist,” has added the following two new lifetime income benefits to its variable annuities:
SunAmerica Income Plus 6% Income Option 2. It offers up to 7% annual withdrawals as early as age 65 for investors who want income immediately. The original SunAmerica Income Plus 6% (Income Option 1) will continue to offer 6% withdrawals as early as age 45.
SunAmerica Income Builder 8% Income Option 2. This option provides 8% guaranteed income base growth for up to 12 years, or up to 6.5% annual withdrawals as early as age 65.
The two new guaranteed minimum withdrawal benefits (GMWBs), were added to SunAmerica’s Polaris Variable Annuities. to help address investors’ increasing demand for income flexibility and income guarantees.
Income Plus 6% locks in the greater of investment gains or an annual income credit of up to 6% on contract anniversaries during the first 12 years. Income Builder 8% locks in the greater of investment gains or an income credit of 8% in each year withdrawals are not taken during the first 12 years. After the first 12 years, investors can continue to lock in investment gains annually for lifetime income with either feature.
To ensure guaranteed lifetime income continues even if a contract’s value is completely depleted due to market volatility and/or withdrawals taken within the feature’s parameters, both features include a Protected Income Payment. The Protected Income Payment provides clients with 4% or 3% of their income base annually for life, depending on the feature and income option elected, as well as the age at the time of the first withdrawal.
© 2010 RIJ Publishing LLC. All rights reserved.
Gorilla Marketing
When big companies seek the mantle of thought-leadership, they usually enlist experts at top universities and think tanks. But AXA-Equitable Life has been extracting thought leadership from mere passersby on the sidewalks of New York City and the boardwalks of the New Jersey Shore.
You might call it a form of Gorilla Marketing, given that AXA’s mascot is the 800-lb gorilla.
To be sure, the insurer has done all the usual thought-leadership stuff. It commissioned a Retirement in America Survey of consumers and economists. It hosted a retirement event featuring Paul Volcker. Its chairman and CEO, Kip Condron, co-hosted a business show on Bloomberg TV.
But one day in July, Director of External Affairs Discretion Winter asked, “We don’t hear a lot about what real people are doing. We need to make it less about institutions and more about people.”
Armed with a borrowed Flip Video camcorder, three AXA External Affairs staffers buttonholed various types of people on “Wall Street and Main Street.” Near AXA’s headquarters in Manhattan, and at a New Jersey beach town, they interviewed men and women in suits and in T-shirts, white-haired retirees and young professionals, an ex-schoolteacher, an ex-pipefitter and more.
The approach was journalistic, the questions direct: How did you prepare/are you preparing for retirement? What does financial independence mean to you? And if you could start over, what would you do differently?
Survey statistics suddenly became faces. A well-tanned retired schoolteacher with a gold necklace said she started working with an advisor at a young age and felt financially secure. A youngish New Yorker, already retired and looking very relaxed, said he made some smart investments in his 30s and was teaching his adult kids to do the same.
Others were more rueful. In New York, a rangy, unmarried man in shirtsleeves, not unlike Spalding Grey, said he’d “taken a big financial hit a couple of years ago” and now hoped to meet a wealthy woman. A working class couple on the boardwalk said that, in hindsight, they wouldn’t have had four children: the cost of cars, weddings and divorces devastated their savings. A 72-year-old retired pipefitter, sporting a beard and a baseball cap, said he works part-time as a parking lot attendant to make ends meet.
According to an AXA release, “The unrehearsed stories these individuals tell about themselves underscore the gap between hope and reality—about savings, retirement age, retirement income needs, and lifestyle adjustments. A secondary recurring theme is what can happen without adequate financial preparation and guidance.
“AXA Equitable’s ‘Retirement Reality Show’ video series complements the company’s ongoing research and thought leadership programs on the issues surrounding retirement and serves as a platform for taking the public’s pulse on financial risks and preparedness. The purpose of the series is to learn firsthand what real retirement savers and retirees are thinking and doing.”
“Listening to real people is crucial to understanding how the market upheaval of the past few years has rattled their confidence in their ability to retire at all,” said Chris Winans, senior vice president, External Affairs, at AXA-Equitable Life. “It’s one more way we can make sure our products answer today’s financial protection needs.”
So far, AXA has posted three “Retirement Reality Show” videos with a man-on-the-street premise on its YouTube Channel and on its thought leadership webpage, The Source. The response on YouTube has been modest—only a few hundred hits in a medium where a clip like “Charlie Bit Me and It Really Hurt” gets millions. But the videos have been surprisingly popular among the career force and wholesalers, who post them on their client-facing homepages or use DVDs of the clips in presentations.
“That’s been a spontaneous, unanticipated development,” said Winter. “They’re asking, ‘How can I use this? Can I give it to my clients?” Yet AXA-Equitable’s approach to new media has been anything but random. Winans’ staff holds regular meetings on social media, and they talk about social media issues in broader marketing meetings. “We’re gaining comfort with the space,” she said.
More videos are planned but the project is open-ended. “We won’t always be doing man-on-the-street projects,” said Winter, who did the voice-over narration for the clips. “But this complements our traditional research. It’s a way for us to validate what we think we know.”
© 2010 RIJ Publishing LLC. All rights reserved.
French Fight to Retire at 60
Strikes and protests by a reported one million workers against French President Nicolas Sarkozy’s plans to raise the country’s retirement age to 62 from 60 disrupted most of France’s air and rail services last week, according to press reports.
Traffic was snarled in France’s cities, with fewer than half of the Paris Metro’s lines working normally, according to the RATP public transit network. About half of France’s long-distance trains were canceled, according to the SNCF state-run rail system. Limited train disruptions were expected to continue Friday.
The House of Representatives in the French Parliament has already approved the change. The strikes and protests were aimed at pre-empting the Senate’s debate of the amendments, scheduled for October 5.
On September 7, more than 2.5 million workers marched throughout the country as France’s largest union groups called a 24-hour strike protesting proposed cuts to their nation’s version of Social Security. There were some 220 protests, according to the CGT, the country’s leading union federation.
French budget director Eric Woerth cited the possible increase in the retirement age as one of the ways to tackle a spiraling public pension deficit, expected to be €10bn by the end of 2010. Other measures have already been introduced, such as increasing the contribution period from 40 to 41.5 by the end of the decade.
President Sarkozy announced plans earlier this year to tackle the country’s growing pension deficit, with estimates predicting it will grow to between €72bn and €115bn by 2050 according to the Conseil d’Orientation des Retraites (COR). COR recently suggested increasing the contribution period to 43.5 years by 2050 for those who wish to draw the maximum state pension.
Even at 62, France would have one of the lowest retirement ages in Europe. Neighboring Germany has decided to bump the retirement age from 65 to 67. The U.S. Social Security system is also gradually raising its retirement age to 67.
© 2010 RIJ Publishing LLC. All rights reserved.
Obama Signs Partial Annuitization Law
Here’s the text of Section 2113 of H.R. 5297, which takes effect January 1, in its entirety:
SEC. 2113. SPECIAL RULES FOR ANNUITIES RECEIVED FROM ONLY A PORTION OF A CONTRACT.
(a) In General- Subsection (a) of section 72 of the Internal Revenue Code of 1986 is amended to read as follows:
‘(a) General Rules for Annuities-
‘(1) INCOME INCLUSION- Except as otherwise provided in this chapter, gross income includes any amount received as an annuity (whether for a period certain or during one or more lives) under an annuity, endowment, or life insurance contract.
‘(2) PARTIAL ANNUITIZATION- If any amount is received as an annuity for a period of 10 years or more or during one or more lives under any portion of an annuity, endowment, or life insurance contract–
‘(A) such portion shall be treated as a separate contract for purposes of this section,
‘(B) for purposes of applying subsections (b), (c), and (e), the investment in the contract shall be allocated pro rata between each portion of the contract from which amounts are received as an annuity and the portion of the contract from which amounts are not received as an annuity, and
‘(C) a separate annuity starting date under subsection (c)(4) shall be determined with respect to each portion of the contract from which amounts are received as an annuity.’.
(b) Effective Date- The amendment made by this section shall apply to amounts received in taxable years beginning after December 31, 2010.
© 2010 RIJ Publishing LLC. All rights reserved.
