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Americans’ attitudes, ambitions and preparation for retirement have changed dramatically as a result of the recession. Five years after introducing the stages of retirement With its recent study, New Retirement Mindscape II, Ameriprise Financial revisited its 2005 New Retirement Mindscape study to take the emotional pulse of people approaching and in retirement.

The findings register the impact of the financial crisis, he difficult economic environment has had on people. In 2005, the U.S. economy was riding a prosperous high. “Five years later our society is in a very different place, and as a result, consumers are approaching retirement with a different mindset,” said Craig Brimhall, vice president of retirement wealth strategies at Ameriprise Financial.

“The years leading up to retirement used to be filled with a sense of excited anticipation, but now we are seeing people hesitate and really question if they are making the right decision. And in the first year of retirement, a stage once synonymous with feelings of liberation, consumers are facing new doubts, concerns and the reality that retirement may not be what they expected,” he said.

Based on telephone interviews with 2,000 U.S. adults ages 40 to 75 last May, The New Retirement Mindscape II^SM study identified six distinct attitudinal and behavioral stages that occur before and during retirement:

1) Imagination, 6-15 years before retirement

2) Hesitation, 3-5 years before retirement

3) Anticipation, 2 years before retirement

4) Realization, first year of retirement

5) Reorientation, 2-15 years after retirement

6) Reconciliation, 16+ years after retirement 

Stage 1: Imagination (six to 15 years prior to retirement) – People in this earliest stage preceding retirement are less “hopeful” (71% vs. 81%) and “optimistic” (72% vs. 77%) than they were in 2005. But 84% feel “happy” and 70% feel “enthusiastic” about retirement, perhaps because they still have time to recover from the recession.

Stage 2: Hesitation (three to five years prior to retirement) –Significantly fewer in the Hesitation stage expect to feel “happy” in retirement than did so in 2005 (82% vs. 92%). Probably because of job setbacks and conflicting financial priorities, fewer in this group have set aside less money in employer-sponsored plans or taxable accounts than in 2005 (74% vs. 91%). They are less likely than those in the Anticipation stage to expect to greatly enjoy retirement (64% vs. 75%) or to save in non-retirement accounts (67% vs. 83%).

Stage 3: Anticipation (two years prior to retirement) – Excitement begins to build in the final two years before retirement day. People in the Anticipation stage are likely to feel “on track” for retirement (77%), possibly because they are also the most likely to be saving and investing (83%) and working with a financial advisor (54%).

Stage 4: Realization (retirement day to one year following) –The optimism and excitement that accompanied this stage five years ago have been muted by the recession. With sharp declines in the value of portfolios, as well as “forced retirements” due to layoffs and career setbacks, many people are struggling. Compared to 2005, far fewer enjoy retirement “a great deal” (56% vs. 78%), say they live their dream (45% vs. 68%) or feel that retirement has worked out as they planned (57% vs. 77%).

Stage 5: Reorientation (two to 15 years after retirement) – Most people enter the Reorientation stage feeling more “happy” (80%) and “on track” for retirement (69%) than in previous stages. They continue to enjoy having “control over their time,” even more than in 2005. More set aside money for retirement (83% vs. 72%) and are working with a financial advisor (43% vs. 34%).

Stage 6: Reconciliation (16 or more years after retirement) – Most people in the Reconciliation stage feel “happy” (80%), but they report more depression than in 2005 (20% vs. 5%). Troubled by the loss of income and social connections, only 56% say they enjoy retirement “a great deal” (56%), compared with 75% five years ago.   

© 2010 RIJ Publishing LLC. All rights reserved.

Guaranteed Living Benefit (GLB) riders were elected in variable annuities (VA) generating $20.3 billion of new deferred VA premium in the second quarter, an 18% increase over the first quarter, according to LIMRA’s second quarter study, which represents 95% of the variable annuity GLB industry.

“Guaranteed living benefits remain extremely popular in this uncertain market as consumers seek financial security for their retirement,” said Dan Beatrice, senior analyst, LIMRA Retirement Research. “We believe the GLBs will continue to be an important driver of variable annuity sales in the foreseeable future.”

For the third consecutive quarter, GLBs were elected 87% of the time when any GLB is available for purchase. The guaranteed lifetime withdrawal benefit (GLWB) election rate remained at 64%. Guaranteed minimum income benefit (GMIB) riders were elected 17% of the time; while, guaranteed minimum accumulation benefit (GMAB) and guaranteed minimum withdrawal (GMWB) each had a three percent election rate in the second quarter of 2010.

LIMRA estimates that GLBs were available in contracts generating $23.2 billion of new deferred VA premium during the second quarter. VA assets with GLB decreased three percent from $440 billion in the first quarter of 2010 to $427 billion at the end of the second quarter of 2010; and total VA assets dropped five percent from $1.433 trillion to $1.358 trillion during the same period.

The rate at which any GLB was elected increased one percent in the career distribution (75%) and bank channels (92%); while independent (90%) and wirehouse (90%) channels remained steady.

LIMRA’s Variable Annuity Guaranteed Living Benefit Election Tracking Survey collects VA GLB sales, election rates and assets on a quarterly basis. The 27 survey participants represent 95% of second quarter 2010 industry sales in which a GLB was elected.

© 2010 RIJ Publishing LLC. All rights reserved.

U.S. banks saw solid increases in variable annuity and mutual fund revenue for the first half of 2010 but a drop in fixed annuity revenue, National Underwriter reported.

Bank variable annuity revenue was 16% higher during the first half than it was during the first half of 2009, and bank mutual fund revenue was 31% higher, according to Kehrer-LIMRA, a unit of LIMRA, Windsor, Conn. Bank fixed annuity revenue was 27% lower.

The Kehrer-LIMRA report includes 56 banks and credit unions that account for about 40% of the investment revenue at smaller financial institutions.

Investment sales revenue per bank rep fell 37% between 2008 and 2009. During the first half of 2010, bank rep productivity has been 32% higher than it was during the comparable period in 2009.

Similarly, new investment sales revenue per dedicated bank financial rep fell 10% between 2008 and 2009, but that productivity indicator has been 7% higher in the first half of the current year than in the first half of 2009.

Bank investment income per $1 million in total bank revenue fell 12% in 2008, but median investment program revenue increased 5%. That means investment program revenue increased at a majority of the banks, Kehrer-LIMRA says.

For all of 2009, fixed annuity revenue was down 25%, variable annuity revenue was down 21%, and life insurance revenue was up 15%.

The Department of Labor has reported that it has three new sets of guidance at the Office of Management and Budget, which suggests that all three will be issued before the end of the year, says Fred Reish, an ERISA expert and managing director,  Reish & Reicher, a Los Angeles law firm. “This fall promises to be interesting,” he noted.

• New TDF disclosures. This regulation that would impose new disclosure requirements on target date funds in order to qualify as QDIAs and to obtain the fiduciary safe harbor for defaulted participants. When effective, this will require that additional, meaningful information be given to the participants preceding default. (As a practical matter, participants who elect those investments will be given the same information).

• Fee disclosure regulation for participants. This rule was issued in proposed form by the Bush Administration, but was never finalized. The new Administration has picked up that regulation and developed a final regulation. While DOL speakers are giving little specific information, it appears that the regulation will be similar to the proposal. The burden for complying with the regulation will primarily fall upon recordkeepers and bundled providers.

• An expanded definition of fiduciary. There is little in the way of information about the contents of the regulation. However, it seems clear that it will expand the definition of fiduciary advice and that more financial advisers and investment advisers/consultants will be considered to be fiduciaries. Depending on how far that definition is expanded, it could have a major impact on broker-dealers.

© 2010 RIJ Publishing LLC. All rights reserved.

 “The automatic annuitization of retirement balances could help workers achieve a steady stream of income that is guaranteed for life.” From The Report on Tax Reform Options, issued by The President’s Economic Recovery Advisory Board in August 2010.

Jefferson National, issuer a flat $20/month insurance fee variable annuity, now offers access to funds from Dimensional Fund Advisors.  Dimensional’s funds are available tax-deferred to financial advisors who use Jefferson National’s Monument Advisor, the number one RIA-sold VA for three consecutive years according to Morningstar VARDS Data.

Through the new offering, advisors can access six funds:

• VA Global Bond Portfolio
• VA US Targeted Value Portfolio
• VA US Large Value Portfolio
• VA International Small Portfolio
• VA Short-Term Fixed Portfolio
• VA International Value Portfolio

Jefferson National’s Monument Advisor offers more than 250 investment options, or five times the number offered by most VAs, the company said, including the most subaccounts with the Five Star and Four Star Morningstar Rating for a second consecutive year.

According to Cerulli Associates, the fee-based advisory market is one of the fastest-growing segments in the financial industry, with assets topping more than $7.2 trillion as of 2008, and more than 65% of brokers surveyed said they would be interested in going independent.

© 2010 RIJ Publishing LLC. All rights reserved.

The Securities Industry and Financial Markets Association (SIFMA) has submitted comments to the Securities and Exchange Commission (SEC) in advance of its study on the obligations of investment advisers and broker dealers.

In comments to the SEC, SIFMA highlighted the following key principles the Commission should focus on during their six month study:

• The interests of individual investors should be put first. When providing personalized investment advice to individual investors, broker-dealers and investment advisers should deal fairly with clients.

• Broker-dealers and investment advisers should appropriately manage conflict of interest by providing individual investors with full disclosure that is simple and clear and allows them to make informed investment decisions.

• Individual investors should continue to have access to a wide range of investment products and services, a choice among financial service provider relationships and options for paying for financial services and products.

• Any standard of conduct adopted by the SEC should reduce confusion about existing legal and regulatory regimes by being the exclusive uniform standard that applies to broker-dealers and investment advisers when providing personalized investment advice about securities to individual investors.

In addition, SIFMA requested that the SEC ensure that broker-dealers be able to provide individual investors with best execution and liquidity as principal and offer proprietary and affiliated products that certain investors desire. As noted in the letter, broker-dealers offer a variety of products on a principal basis, including fixed-income products such as municipal bonds, initial public offerings and other underwritten offerings.

The comment letter can be found at the following link: http://www.sifma.org/assets/0/232/234/124802/bcb2b9b1-5a0f-4f20-bda3-690160807abb.pdf.

© 2010 RIJ Publishing LLC. All rights reserved.

Fitch Ratings has upgraded the outlook for the U.S. life insurance sector to stable from negative. The negative outlook was initially assigned in September 2008. A stable outlook for the sector indicates that Fitch believes a vast majority of insurer ratings will be affirmed as they are reviewed over the next 12-18 months.

A special report published today, ‘U.S. Life Insurance Sector: Outlook Revised to Stable’ is available at www.fitchratings.com.

Over the next 12-18 months, Fitch’s primary rating concerns for life insurers include:

• Uncertainty over the economic outlook and the potential for a double-dip recession.
• Higher-than-expected losses on commercial real estate (CRE) related assets.
• Emerging interest rate risk due to historically low interest rates, which are having an impact on industry investment yields, and uncertainty regarding the direction of future interest rates.

The Stable Rating Outlook for the U.S. life insurance sector reflects the industry’s improved balance sheet and operating fundamentals. Fitch notes that sustained improvements in investment valuations and financial market liquidity has resulted in a significant reduction in investment losses, and allowed the industry to raise capital and fund near-term maturities.

Fitch expects that favorable trends in industry earnings performance and investment results in 2010 will continue over the near term, but will continue to lag pre-crisis results due to the lower interest rate environment and steps taken by the industry to lower risk in the investment portfolio by reducing investment allocations away from higher risk, higher return asset classes.

Results in 2010 have benefited from improved interest margins, higher equity market valuations (relative to prior year), and the aforementioned decline in investment losses. Fitch expects the industry’s large in-force variable annuity business to be a drag on profitability over the near term, and could cause a material hit to industry earnings and capital in an unexpected, but still possible, severe stress scenario.

Fitch views the passage of the Dodd-Frank bill earlier this year as credit neutral for life insurers but recognizes that uncertainties remain over the interpretation of several aspects of the bill. Primary concerns include the potential designation as a systemically important non-bank financial institution and its implications, and the uncertain impact on industry sales practices, particularly for registered products.

The outlook revision also considers the positive steps taken by a number of life companies to de-risk their product offerings, reduce reliance on institutional funding sources, and strengthen hedging and other risk mitigation programs.

Since the September 2008 shift of Fitch’s U.S. life insurance industry rating outlook to negative, Fitch has downgraded 35 out of 55 rated U.S. life insurance groups one or more times. Over the same time period, Fitch has upgraded two U.S. life insurance groups. The large majority of the rating downgrades during this period were limited to one to two notches. While ratings of U.S. life insurers have been broadly affected by the financial crisis, the limited magnitude of the rating downgrades reflected the industry’s relatively stable liability structure and strong capital position going into the credit downturn.

Fitch’s sector outlook assumes a continued, albeit weak, economic recovery with modest GDP growth and continued high unemployment levels. Fitch’s outlook does not incorporate exogenous shocks to the economy, and will factor in such events should they occur. Fitch’s expectation for CRE-related investment losses are closely tied to Fitch’s economic assumptions. Fitch continues to believe that the industry’s CRE-related loss exposure is manageable and has been reasonably factored into existing ratings under Fitch’s stress testing methodology.

From the perspective of interest rate risk, over the near term, minimum rate guarantees incorporated in the policyholder accounts of the U.S. life insurance industry will limit the ability of life insurers to maintain interest margins due to low investment yields. Longer term, Fitch is concerned that strategies that life insurers may be using to reach for additional yield will make them vulnerable to disintermediation and asset-liability mismatches in a rapidly rising interest rate environment. Such strategies could include extending portfolio durations and asset-liability mismatches, accepting higher levels of lower rated securities, and amassing sector concentrations.

© 2010 RIJ Publishing LLC. All rights reserved.

Even though most people like the annuity concept, more than half (53%) of Americans aged 44-75 expressed distaste for the word “annuity”, according to a survey from Allianz Life Insurance Company of North America.

Some 80% of 3,200 people surveyed preferred a product with four percent return and a principal guarantee over a product with an 8% return subject to market risk—thus answering the classic behavioral finance question, Would you prefer a 100% change of $50 or a 50% chance of $100. But they balk at the word, “annuity.”

“No other financial product offers guaranteed income for life. Government, financial planners and the industry need to re-educate the American public about what these products do and how they can help secure a stable retirement,” Allianz Life said in a release.

The study, titled Reclaiming the Future: Challenging Retirement Income Perceptions, found that   respondents had decades-old prejudices regarding annuities. Fifty-three percent first formed their opinion of annuities 10-20 or more years ago. Only 27% knew of innovations made with annuities during the past five to 10 years. Only 23% know that variable annuities allow contract holders to participate in market gains.

When people understand annuities, they’re very satisfied with them. According to the study, 76% of annuity owners are “very happy” with their purchase. More than half of owners like the product because it’s a safe, long-term investment vehicle (57%), a great way to supplement their retirement income (56%), and an effective tool to get tax-deferred growth potential (56%). Consumers ranked annuities second-highest (50%) in satisfaction among all financial instruments, beating mutual funds (38%), stocks (36%), U.S. savings bonds (35%) and CDs 25%).

© 2010 RIJ Publishing LLC. All rights reserved.

Vanguard and the Hueler Companies, two companies identified with low-cost retirement savings and income solutions, have teamed up to offer a web-based service that lets individual investors seek competitive quotes on income annuities from several major insurers for purchase in their rollover IRAs.     

The deal links Vanguard, a leading provider of jumbo 401(k) plans and a major destination for rollover money from other providers’ platforms, with Hueler, a relatively small Minneapolis firm whose CEO, Kelli Hueler, has virtually crusaded for making income annuities available to retirees at “institutional” prices five percent or more less than retail. 

Currently, on Hueler’s Income Solutions web-based platform, near-retirees in participating 401(k) plans can ask for competitive bids from participating companies, including Hartford Life, ING Life, Integrity Life, John Hancock Life, MetLife, Mutual of Omaha, Pacific Life, Principal Life, Prudential Insurance, and Western National Life. 

The timing of the announcement is significant. It comes a week ahead of Department of Labor hearings on in-plan income options. The hearings themselves mark the new phase of competition for rollover dollars that is heating up among asset management firms and insurance companies. 

Both Kelli Hueler, CEO of the Hueler Companies, and Steve Utkus of Vanguard Retirement Research Center, are scheduled to testify at the September 14-15 hearings.

Today, the two companies issued the following release:

Vanguard Annuity Access™, coupled with Hueler Companies’ Income Solutions® platform, is designed for individuals seeking a guaranteed stream of income in retirement to augment their investment holdings, workplace retirement plan, and Social Security benefits,” the companies said in a release.

“The service can be particularly attractive to retirement plan participants rolling their assets over to a Vanguard IRA (individual retirement account) as they retire. Prospective purchasers can obtain customized quotes on a real-time basis and evaluate competitively priced, directly comparable contracts from multiple companies.

Hueler Companies has been a leading provider of web-based annuity purchase systems since 2004. The firm now provides participants in more than 1,000 defined contribution plans access to income annuities as a tax-deferred rollover option for their retirement assets.

“Traditionally, annuities have been viewed as complex products that were sold and not bought. Vanguard Annuity Access brings the tools and transparency to the annuity-buying process, enabling self-directed individuals interested in a ‘paycheck for life’ option to make an informed decision,” said Tim Buckley, managing director of Vanguard’s Retail Investor Group.

Mr. Buckley added that the new annuity service complements Vanguard’s market-based options for retirees, which include systematic withdrawals from a diversified portfolio of low-cost Vanguard mutual funds, Vanguard Managed Payout Funds, and retirement income plans developed by a Certified Financial Planner™ (CFP) professional.

“The new Vanguard Annuity Access service is a powerful collaboration that brings together Hueler’s proven low-cost annuity platform with Vanguard’s trusted name,” said Kelli Hueler, CEO of Hueler Companies. “Now prospective annuity purchasers—both retirement-ready plan participants completing a rollover and transitioning individual investors—will benefit from an easy-to-use online resource supported by Vanguard’s licensed, non-commissioned annuity specialists.”

Income Annuities for DC Plan Participants Entering Retirement
Defined contribution plan sponsors are paying increased attention to retirement income strategies, with the goal of providing their participants with the education and tools they need to translate their lump-sum benefits into sustainable income. Since many sponsors are concerned that “in-plan” options such as income annuities will lead to added fiduciary responsibility and increased plan complexity, Vanguard Annuity Access will be offered to participants as an IRA rollover option.

“More than 80% of retiring participants in Vanguard-administered DC plans leave their employer’s plan within three years, typically for an IRA rollover account. As a result, our plan-sponsor clients are interested in an “outside-the-plan” guaranteed income program,” said Barbara Fallon-Walsh, head of Vanguard Institutional Retirement Plan Services. “Many plan sponsors offer the Vanguard Financial Plan service for their participants aged 55 and older, which provides them with free access to a CFP who can help them with retirement income planning. Vanguard Annuity Access represents an additional service they can offer participants entering retirement.”

Vanguard provides recordkeeping and investment services to 3.5 million participants and 1,700 plan sponsors in more than 2,500 defined contribution plans.

Plain Talk about the Risks of Income Annuities
John Ameriks, head of Vanguard Investment Counseling & Research co-author of Vanguard retirement income research (including Generating Guaranteed Income: Understanding Income Annuities) encourages retirees to weigh the pros of guaranteed income versus the cons, which include loss of investment liquidity, the potential reduction in bequeathable wealth, and the risk of default of the underlying insurer.

Costs are another important consideration. The investment management, distribution, administrative and other costs associated with fixed annuity products are reflected in annuity quotes.  As a result, the “apples-to-apples” comparability of quotes at the time they are obtained is critical in evaluating whether contracts are competitive among their peers.

Vanguard Annuity Access is designed to provide competitive payments to investors, resulting from the meaningful competition among insurance companies on the Income Solutions platform and from the institutional, or group-rate, pricing of the annuities offered. The quotes should also be competitive because of the low transaction fee of 2% of the annuity purchase amount.

“For retirees who place a high value on having an additional lifetime income guarantee beyond Social Security and a pension—and are willing to accept the costs and risks of annuitization—low-cost income annuities can be an important part of a broader investment plan,” said Mr. Ameriks.

Fixed Deferred Annuities Also Available
The Vanguard Annuity Access service will also offer access to fixed deferred annuities with fixed interest durations ranging from three to seven years. These savings vehicles are designed for tax-sensitive investors wishing to supplement other forms of retirement savings, such as 401(k) plans and IRAs. A fixed deferred annuity lets clients earn a fixed interest rate on their savings for a set number of years. Both the interest rate and principal are guaranteed by the insurance company that issues the annuity.

© 2010 RIJ Publishing LLC. All rights reserved.

Like many students of the variable annuity game, I have been watching The Hartford Financial Services Group’s recent public relations disaster closely. My first thought: what a terrible waste of brand strength. Even though The Hartford has struggled rather publicly through the financial crisis—it needed a $2.5 billion infusion from Allianz SE and $3.4 billion from Uncle Sam—its brand has held up pretty well.

But this latest incident could knock a few points off the Big Red Stag’s antlers. 

It could also snowball into more than just a public relations disaster. At a time when the Treasury Department is about to auction The Hartford stock warrants to recoup TARP money, and when the Securities and Exchange Commission is pondering the suitability/fiduciary standard for broker-dealer reps, a news story that raises questions about the financial stability of any insurer or the integrity of any reps could have wider implications. On Tuesday, in fact, the Connecticut insurance commissioner, Tom Sullivan, said he would look into the matter.

That may be why one industry observer told me that the issue is “very touchy” and that other variable annuity issuers “are watching it closely.”

If I read Darla Mercado’s recent stories in Investment News correctly, someone at Hartford Life Distributors mailed letters to owners of certain Hartford variable annuities—presumably including ones with underpriced living benefits that were sold during the pre-Crisis VA ‘arms race’—suggesting that they talk to their advisors about possibly exchanging those contracts for contracts with the insurer’s less risky-to-the-issuer Personal Retirement Manager income rider. (See RIJ’s article on the product.) The letter is signed by a vice president of product management at Hartford Life Distributors.

Late last month, at least some contract owners apparently received those letters before their advisors received similar letters from The Hartford giving them a heads-up about the communication with clients. That mix-up alone would be a violation of protocol, and a good way to jeopardize Hartford’s hard-won third-party distributor relationships. It’s an unwritten law that the client belongs to the advisor, not the carrier.

The company has explained that the client letters went to people whose contracts were out of the surrender period—if it were otherwise, this would be an uglier matter—and that such letters were not unusual. “The letters to advisors simply didn’t go out on time,” according to the insurer. I’ve seen both letters. They are brief and dry. To say that the letters “entice” owners to exchange contracts, as the Investment News article did, seems to me like an exaggeration.

I was told by one observer that such letters, especially to clients, are “not typically” sent out by VA issuers, however. That person also noted that both letters contain headlines that mention an “Exchange Program.” The use of the word “program” apparently triggers a requirement of SEC or at least FINRA approval. The implications of that, if any, aren’t clear.

Worse case scenario: The letter to clients could foster speculation that The Hartford is worried about the risks associated with contracts still on its books, which leads to questions about its financial stability. The letter also allows speculation that the original contract may have been less than suitable for the client, which raises questions of advisor integrity or competence. 

Those are not questions that anyone in the insurance or brokerage industries wants anyone to be asking. The annuities industry, which two years ago had to deal with the NBC Dateline fiasco involving indexed annuities, doesn’t need another image-flaying scandal. Neither does The Hartford.

A few weeks ago, in Cogent Research’s Advisor Brandscape 2010 research study, the reputation of The Hartford’s variable annuity business was still very high among advisors. The company’s VA sales had fallen to 18^th place at the end of the first quarter of this year—perhaps by design, as CEO Liam McGee suggested in statements last spring—but it still ranked as high as third in brand imagery, trailing only industry leaders MetLife and Prudential.    

Advisors don’t necessarily see the Hartford as an innovator, the study showed, but 34% of advisors considered the company a “leader in the VA industry.” Regional broker/dealer reps in particular held it in high regard. Bank advisors ranked it second among VA issuers in terms of “good value for the money” and third overall in “offers the best retirement income products.”

But the trend has been negative. From 2009 to 2010, the company slipped from fourth place to seventh place in brand equity score. And while it still ranked first in advisor market penetration, with 44% of advisors listing it among their VA providers, it lost ground in the percentage of advisors who considered it their primary VA provider. 

Starting in late 2009, the variable annuity market has split starkly into those companies who are truly committed to the product and those who, post-Crisis, had serious doubts about the wisdom of selling long-term equity puts. Prudential, MetLife, and Jackson National are committed. The Hartford, John Hancock and ING have had second thoughts. Tellingly, the leaders have stuck with generous income riders while doubters switched to simpler products with lower fees and more modest promises. The public, and advisors, prefer the generous products.

It’s somewhat ironic that The Hartford wanted to get investors out of the type of product that’s justifiably more popular—because of its richer terms—than the one that it’s trying to lure investors into. In hindsight, the company might have capitalized on the good will established by those rich promises rather than trying, it now appears, to renege on them. Failure to accept a sunk loss is a mistake that behavioral finance experts warn amateurs to avoid.   

It is my understanding that, accounting issues aside, even the most generous-looking lifetime income guarantees don’t represent a loss for the issuer unless or until the contract owner(s) are still alive when the account value (as a result of allowable withdrawals and/or poor market performance) goes to zero. Of course, there may be a method to this madness that escapes me or that The Hartford isn’t sharing.

There’s no need to scold The Hartford here, because Bob MacDonald, the former CEO of ITT Life, a one-time Hartford subsidiary, did a thorough job of it on his blog this week. MacDonald, a legendary and controversial figure who built an equity-indexed annuity empire at Allianz Life of North America in the first half of this decade, writes:

“It is obvious that despite all that has happened to the success and good name of Hartford over the past few years, the management of the company is still highly capable of consistently making decisions that are not in the best interests of the company. Clearly the CEO, who has no insurance experience, has demonstrated his inability to change the environment of self-destruction at Hartford.

“Knowing the past actions of Hartford management and its current arrogant attitude toward customers and the distribution system, one could rightfully question ever buying or selling a product of the Hartford. It seems – as I have suggested previously – the only way to save Hartford from itself is for the company to be acquired by another insurance organization that can clean house and return Hartford to the great company it once was.”

That type of righteousness will probably be tough for the folks at Hartford to hear, knowing that it comes from the mischievious author of books with titles like Beat the System and Cheat to Win. 

The Hartford’s letter-gate problem might merely reflect one company’s or one executive’s idiosyncratic error—or, to be polite, the appearance of error. And, in ordinary times, the whole mess might vanish overnight. But these aren’t ordinary times. Investors are nervous, markets are volatile, a potentially game-changing election is coming up, and the reputation of the financial services industry is under examination. A cap-gun could set off a panic.

© 2010 RIJ Publishing LLC. All rights reserved.

David Babbel writes to comment on RIJ’s article in the August 25 issue on fixed income annuities, which reviewed a paper that he co-authored with Jack Marrion and Geoffrey VanDerPal:

I appreciated your thoughtful review of our recent article on "Real World Index 
Annuity Returns" in your August 25th, 2010 edition of the Retirement Income Journal.

It was accurate and expressed a healthy skepticism in your final paragraph, that
referenced the final paragraph in our article about the levers included in index
annuities, which can be changed by the insurer at its discretion.  

[We] should have added to that sentence that although the insurer does have discretion
to change certain contract parameters, such as the
cap levels or participation rates, it does not have unfettered discretion to alter
them, because the contracts themselves have minimum guaranteed levels for both, as
well as state minimum nonforfeiture value schedules, that will always ensure a
return of zero or greater. 

Moreover, and more importantly, the insurers face the
discipline of the market.  If they try and credit less than a competitive and fair
rate for FIA writers, they will face the dissatisfaction of their consumers, the
rancor of the agents, the cost of lapsation, and the hesitancy of agents to ever put
future clients in such products. This would essentially be the death knell of their
future business.  

Therefore, consumers have at least three layers of protection—
contractual minimums, state minimum nonforfeiture values, and competition enforced
by both consumers and, more importantly, agents (because they are more aware of what
other companies are offering)—which should assuage the risk aversion of many.

In the United Kingdom, an estimated six out of ten people are settling for retirement income that is up to 30% lower than possible because they don’t shop around for the best annuity rate when they retire and convert their savings to income. The situation sheds light on the decisions U.S. consumers might face if 401(k) companies were to offer competing income options.   

The financial secretary to the British Treasury, Mark Hoban, is reported to have asked the Association of British Insurers (ABI) to explain why so few people use the ‘open market option,’ which allows new retirees to transfer their money from the asset management company where they accumulated their savings to another provider with a higher annuity rate.

In the first half of this year, only around 40% of retirees took advantage of the open market option. The rest settled for the annuities offered by the companies with which they had built up their “pension pots,” potentially missing out on hundreds of pounds of extra pension.

Douglas Baillie, a Perth-based adviser who this year launched the online service comparemyannuity.co.uk, believes there are several reasons why more people do not shop around for a better annuity. “There is a lack of awareness generally about the open market option and pension companies are not as forthright about it as they should be. Although they are obliged to mention it to policyholders as they approach retirement, they tend to bury it in the small print at the end of a six-page letter.

“Also when companies spell out the choices under their policy, they only write down the pension which they offer, or the alternative of a tax-free cash lump sum plus a reduced pension. What they really should be doing is including a third choice telling policyholders they can buy a possibly better pension elsewhere and how they can go about it.”

Another specialist comparison service was launched this week by fairinvestment.co.uk.

Questioned by The Herald, the ABI refused to comment beyond saying: “The ABI and its members are committed to making the process of shopping round for an annuity as straightforward as possible.”

However, David Trenner of Intelligent Pensions in Glasgow is skeptical. He says: “Why is it that the ABI even allows companies which don’t want to sell competitive annuities to continue doing so, even though they are clearly in breach of their duty to treat customers fairly? The answer is that the ABI is a trade body so it can hardly turn round to the likes of companies such as Scottish Widows or Friends Provident and tell them what to do.”

“Take the example of a 65-year-old woman who may have saved for 30 years with the Scottish Widows and built up a pension fund of £60,000,” Trenner said. “If she was retiring today she could be offered an annuity of £3300 per annum, when she could get £3748 just by switching to Aviva. Why would she want to take a lower pension for the rest of her life just because she has saved with a particular company?

People with health problems or lifestyle issues, such as smoking, may be able to get even better annuity rates, but not all pension companies offer specially enhanced annuities so their customers may be even more disadvantaged. Baillie recently managed to improve the pension of one of his customers, who was in poor health, by a massive 60%, though the normal uplift is more in the region of 20%.

Advisers receive a 1% commission when they arrange an annuity on your behalf, or they may ask for a fee. If you have only a small pension pot, it may be uneconomic for an adviser to put in the work required and the fee may be disproportionate. However, you can do some shopping around for free by visiting the Financial Services Authority’s annuity comparison tables at www.moneymadeclear.org.uk.

© 2010 RIJ Publishing LLC. All rights reserved.

U.S. sales of fixed annuities were an estimated $19.4 billion in second quarter 2010, according to the Beacon Research Fixed Annuity Premium Study. Sales were up 18% from first quarter 2010. Compared to the unusually strong second quarter of 2009, results fell 30%.

Estimated year-to-date sales of $35.9 billion were 43% below those of first half 2009, which were the largest since the Study began in 2003. Sales figures do not include structured settlements or employer-sponsored retirement plans.

Estimated second quarter 2010 sales of indexed and income annuities were the highest in the Study’s 8-year history. Results for all four product types improved relative to the previous quarter. Income annuities advanced 31%, MVAs were up 29%, indexed annuities increased 25%, and book value annuities grew 6%. Compared to second quarter 2009, income and indexed annuities also were ahead – by 10% and 0.4%, respectively. But MVA sales fell 57%, and book value results dropped 48%.

Estimated second quarter and year-to-date sales, by product type:

Product Type     2Q Sales            YTD Sales

Indexed                  $8.2 billion        $14.9 billion             

Book value             $7.2 billion        $14.1 billion

Fixed income        $2.4 billion         $4.2 billion  

MVA                        $1.5 billion         $2.7 billion

Relative to first half 2009, income annuity results improved 2%.  Sales of the other product types declined. MVAs fell 73%.  Book value annuities were down 57%.  Indexed annuities dropped 3%.

Credited rates fell during second quarter, with top rates on multi-year guarantee annuities dropping from more than 4% to 3.75%. However, the fixed annuity advantage over Treasury rates increased, and the market apparently was expecting lower rates in the future. Both factors boosted fixed annuity sales quarter-to-quarter. But although the yield curve flattened, fixed annuity sales by guarantee period changed surprisingly little.

“The spread between fixed annuity and Treasury rates has widened since second quarter, and the flight to safety has intensified.  These conditions suggest a potential quarter-to-quarter sales increase of about 10%,” said Jeremy Alexander, CEO of Beacon Research.

“Actual results will depend on the capacity and willingness of issuers to write new business, of course. Longer term, we also expect rising demand to support growth in fixed annuity sales. The public will be more risk-averse for some time to come, there is wide recognition of the need to save for retirement, and the value of tax deferral seems likely to increase.”  

There were no quarter-to-quarter quarter changes in top five company rankings, which were as follows:

Total Fixed Annuity Sales (in $thousands)

New York Life                                    1,740,520

Allianz Life                                         1,680,253

Aviva USA                                           1,613,045

Western National Life (AIG)          1,293,876

American Equity Investment Life  1,046,737             

By product type, Western National replaced New York Life as the quarter’s dominant issuer of book value annuities.  American National led in MVA sales, replacing Hartford.  New York Life remained number one in income annuities, and Allianz continued as the leading indexed annuity issuer.

Four of second quarter’s top five products were also bestsellers in first quarter, though some rankings shifted. The Allianz MasterDex X, an indexed annuity, continued as the leading product. The New York Life Lifetime Income Annuity rose from fifth to second place. American Equity’s top indexed annuity, Retirement Gold, came in third again. The New York Life Preferred Fixed Annuity moved from second to fourth place. New Directions, an indexed annuity issued by Lincoln Financial Group, joined the top five in fifth place. Second quarter results include sales of some 425 products.

Rank      Company                  Product                                        Product Type

1            Allianz Life                      MasterDex X                                    Indexed

2            New York Life                NYL Lifetime Income Annuity     Income

3            American Equity           Retirement Gold                              Indexed

4            New York Life                NYL Preferred Fixed Annuity       Book Value

5            Lincoln Financial          New Directions                                 Indexed                                               

Three of these annuities also led distribution channel sales. All three were repeat performers, with MasterDex X the top independent producer product, the New York Life Preferred Fixed Annuity the bestseller in banks, and the New York Life Lifetime Income Annuity the leader in captive agent sales. In wirehouses, Pacific Life’s Pacific Explorer was the new sales leader. The NYL Select Five Fixed Annuity replaced another New York Life product in the large/regional broker-dealer channel. Among independent broker-dealers, MassMutual’s RetireEase income annuity led sales for the second quarter in a row.

Channel                      Company                    Product                                    Product Type

Banks and S&Ls            New York Life               NYL Preferred Fixed Annuity  Book Value           

Captive Agents              New York Life                NYL Lifetime Income Annuity Income                                                    

Independent B-Ds        MassMutual                  RetireEase                                     Income           

Ind. Producers              Allianz Life                    MasterDex X                                  Indexed

Large/Regional B-Ds   New York Life               NYL Select 5 Fixed Annuity       Book Value           

Wirehouses                   Pacific Life                     Pacific Explorer                             Book Value

© 2010 RIJ Publishing LLC. All rights reserved.

The U. S. Department of Labor’s Employee Benefits Security Administration (EBSA) has released the agenda for the upcoming joint hearing with the Department of the Treasury on lifetime income options for retirement plans.

So far, 44 organizations, including major insurance companies, asset managers, consulting firms and trade groups, have asked to have their representatives testify. Scheduled to appear are several well-known figures in the retirement income industry, including David Wray of the Profit Sharing Council of America, Mark Warshawsky of Towers Watson, Kelli Hueler of Income Solutions, Vanguard’s Steve Utkus, Christine Marcks of Prudential Financial and many others.

Accompanying the agenda are copies of the witnesses’ requests to testify and testimony outlines. The hearing will begin at 9 a.m. (EST) on September 14 and 15, 2010 in the Labor Department’s main auditorium, 200 Constitution Avenue, NW in Washington, D.C.

A live webcast of the hearing will be available on EBSA’s Web site at www.dol.gov/ebsa.

The agenda and requests to testify are available on EBSA’s Web site at www.dol.gov/ebsa. Individuals planning to attend the hearing should provide contact information by email to [email protected] and arrive at least 15 minutes prior to the start of the hearing to expedite entrance into the building.

© 2010 RIJ Publishing LLC. All rights reserved.

ING has rolled out ‘Life in Numbers,’ a new television commercial that represents the next phase of a two-year-old marketing campaign focused on motivating consumers to prepare for retirement and their financial future. The August 30 launch also coincides with ING’s elevation of a redesigned public website.

The ad will air on major broadcast and cable outlets during coverage of professional Grand Slam tennis in the U.S. In addition, the spot will run along with ‘Gazillion,’ a previous ad, on financial news stations and during network coverage of high-profile sporting events throughout the fall season, including professional golf and professional and collegiate football.

To complement the television commercial, ING will run targeted digital display ads on popular web sites. The media effort will include banners ads on finance sites, a paid search campaign and custom retirement planning news feeds on the www.INGYourNumber.com web tool.

Both television and digital advertising will drive interest to ING’s recently transformed public website, www.ing.com/us. The redesigned site provides a streamlined experience for all audiences seeking customized life stage products and services. Consumers starting out, raising a family or preparing for retirement can follow a simple and clear path to desired information, such as customer accounts, products offerings and ING’s self-service tools and calculators.

To view the commercial, visit http://ing.us/about-ing/newsroom/tv-commercials/life-numbers-tv-ad.

The ‘Life in Numbers’ spot portrays a series of key moments in one man’s life. As upbeat music plays, the main character rapidly enters and exits through doors to several different scenes in his life, stopping briefly to interact with someone or something along the way—at his job; on his wedding day; after the birth of a child; in his family’s new home; with his adult kids and their children.

Much of the commercial is filmed from an overhead perspective, offering only a glimpse of the framework within which these scenes are playing out—an oddly shaped hallway here, a curved partition there, and an occasional wall with the color orange.

In the final shot, the camera pulls back to reveal that all these events have taken place within the character’s retirement number, which has been on his desk at work all along. The young man looks down with satisfaction, and then caps the number with an orange lid. A narrator explains how life is full of little twists and turns, but that ING can help and that the first step is finding your number.

Past commercials have featured people carrying bright orange retirement numbers as they go about their daily lives. An interactive web tool, www.INGYourNumber.com, enables consumers to calculate their number. In 2009, the advertising evolved to reflect the volatile market conditions and emphasized the importance of protecting that number. This past February, ING unveiled a spot called ‘Gazillion,’ which communicated the importance of proactive planning and using your number as a strategy to prepare for future goals.

 © 2010 RIJ Publishing LLC. All rights reserved.

The Hartford Financial Services Group, Inc. announced new sales and marketing initiatives, led by Denise Diana, aimed at capturing more of the mid-size 401(k) defined contribution and defined benefit retirement plan market—plans with $10 million to $100 million in assets.

As vice president, Retirement Plans Mid-Market, Diana will create a new team of middle market specialists to support financial advisors, Registered Investment Advisors and consultants, and identify mid-market development opportunities, the company said in a release.

“The Hartford has been building its considerable capabilities to serve the middle market for some time, including three strategic acquisitions that expanded our scale and core competencies,” said Sharon Ritchey, executive vice president and director of The Hartford’s Retirement Plans Group.

In September, The Hartford is launching a series of forums for advisors that will unveil new research on retirement plan sponsors’ and participants’ evolving needs, and new approaches in meeting them.

The forums, “A Dose of Reality: Strong, No Sugar,” will consist of practice management modules and insights into The Hartford’s new middle-market initiatives. The seminars will take place in Boston, Atlanta, Irving, Texas, and San Francisco. Diana and other executives from The Hartford’s Retirement Plans Group will be on hand.

Diana has 20 years of experience in the insurance industry, most recently from Transamerica where she was vice president of business development. She has also held key leadership positions at Prudential Retirement and CIGNA.  She is a graduate of Bryant College where she earned a BS with a concentration in marketing, and holds FINRA series 26, 7 and 66 licenses, and a Connecticut Life and Health Producer license.

© 2010 RIJ Publishing LLC. All rights reserved.