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Response to Last Week’s FIA Article
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.
Britain’s Annuity Muddle
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.
Record Sales for Indexed, Income Annuities in 2Q: Beacon
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.
All-Star Cast Expected for DoL Hearing on In-Plan Income
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 Launches Newest Phase of its ‘Numbers’ Campaign
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 Aims for Bigger Share of Mid-Sized DB, DC Market
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.
My Tailor, My Fiduciary
Several years ago I was being measured for a suit in the fitting room of a tiny tailor shop on Nathan Road in Kowloon. The bespoke construction process involved three laborious fittings, and on the night before my flight home, my suit still wasn’t ready.
The next morning, as I was packing, someone knocked on my hotel room door. A porter handed me a blue plastic clothes bag. Inside hung my suit, nicely pressed and with my name sewn in gold thread inside. But there was no bill. Since I didn’t have time to resolve the situation, I left for the airport. With the suit.
A few years earlier, my wife and I had visited the offices of her ex-college roommate, now a vice president at a major national brokerage. We were financial newbies, and we hoped she could shepherd us through the wolfish brokerage world. We gave her every penny we had, and she gave us a five percent haircut. Ouch.
Those contrasting situations came to mind recently as I read some of the comments on the SEC website in response to the government’s RFI about applying the fiduciary rule to registered reps. The rule would require brokers, like investment advisors, to act in their clients’ “best interests.”
It would a boon to all Americans if, with the stroke of a virtual pen, the SEC could convert all of the financial intermediaries who now treat their supposedly personal clients like mere customers—and applying the caveat emptor principle—into intermediaries who treat every customer like a personal client. That’s a worthy goal.
But it’s not always practicable. The issue, as I see it, involves one’s personal autonomy. My wife’s former roommate, despite her impressive title and income, was and still is an employee. She operates from a corporate playbook. She doesn’t have the prerogative to put her clients’ interests first. No SEC rule can make her behave like a fiduciary.
My tailor, on the other hand, owns his own shop. He can choose to act as a fiduciary. He can choose to let someone walk out of his fitting room, his shop, and his country with a suit. Or not. That’s how he built his business. If he violates the fiduciary standard, he loses his business. (Obviously, plenty of registered reps own their own shops. Presumably, they make their own decisions.)
You can debate the merits of the suitability rule and the fiduciary rule from now until Mary Schapiro explains why her stupendous deferred compensation package from FINRA doesn’t create a conflict of interest for her in her current job, but you can’t require brokers, who are employees who serve corporations, to act like fiduciaries. That functionality isn’t in their operating system.
What the SEC can do is to try to help investors distinguish between custom-made financial advice and off-the-rack advice that’s merely been altered to become “suitable” for them—and especially not to be fooled into paying bespoke prices (neither wrap fees or huge commissions) for off-the-rack services. Personally, I don’t think the SEC will do that. The government’s efforts are just as likely to produce the opposite result. Suddenly, every suit will be bespoke.
But let’s finish the story of my own custom-made suit. Back home, I wore the suit to a business meeting, to a wedding. It felt great, and I showed everyone how the sleeve buttons actually unbuttoned. A few weeks later, the bill from my tailor arrived in an old-fashioned, hand-addressed airmail envelope. When I called his shop on Nathan Road to give him my credit card number, I asked him why he let me take the suit home before paying for it. He said he wanted me to be sure I was satisfied.
“Your tailor is like your doctor or your lawyer,” Manu Melwani confided several times when I was in his fitting room. (He also told me which ex-POTUS ordered a suit with a Velcro fly.) In other words, he behaved like a fiduciary. I’ve bought two suits from him since then, by FedEx and on open account. As for my wife’s ex-college roommate, we soon emptied our brokerage account and transferred all of our money to a no-load fund company. No hard feelings, but we won’t make that mistake again.
© 2010 RIJ Publishing LLC. All rights reserved.
Why We Need The Fiduciary Standard
While the SEC collects a lot of different viewpoints on the fiduciary standard, it might help to spend a little time focusing on the bigger-picture issue that “fiduciary” is trying to address. After all, what’s the point of introducing a fiduciary regulatory scheme into a marketplace that has been functioning profitably and efficiently without it?
You can see this point most clearly if you step back and recognize how differently the financial services world—primarily the brokerage area—operates from the way we do business in virtually every other area of our free market economy.
When I first came into the world of finance, as editor of Financial Planning magazine, one of the first things that sales producers and brokers told me is that every securities transaction has a “winner” and a “loser.” The “winner” had either paid less than the security was actually worth in a free and open market, or had sold something that was worth less than what he charged. In most cases, it was the latter.
Many advisors and brokers back then were selling limited partnerships for significant (8% and up) commissions plus “due diligence” trips to exotic locations as a reward for their selling prowess, plus various overrides, dinners, etc. The fact that virtually all of these investments blew up and lost all or nearly all of their value in the subsequent years suggests that the focus was not on due diligence, analysis or what was best for the consumer.
I still hear this “winners and losers” phrase today in the brokerage world, particularly whenever the brokerage firm’s own products are sold, or when the firm is selling products out of its own inventory. Sometimes the process gets out of hand and the difference between actual value and what is paid becomes too egregious to ignore.
When Banker’s Trust, for instance, was selling complex derivative securities and the brokers then chortled (on recorded calls) about how much had been taken out of the opaque product by the company (“That’s the Banker’s Trust difference…”), the line had visibly been crossed from sharp dealing to forthrightly screwing the customer.
The recent Goldman Sachs imbroglio captured the firm at a moment when its own interests were different from those of the customer in unusually visible ways. Most of the time, we don’t have this level of visibility, because in the investment world even stocks and bonds that you overpaid for eventually make you money. You make less money than you would have made in a fair transaction, perhaps a lot less—which may be why brokers use another phrase so often: “A bull market hides all sins.”
But let’s stop for a moment and look at other professions and industries in our free marketplace, and recognize how different the brokerage mentality is from… everybody else. When you buy groceries or a new pair of jeans, the store takes a markup, but essentially there’s a fair exchange of value in the transaction—and no visible winners or losers. When somebody buys my newsletter service, I work hard to ensure that the buyer will get more value than what he/she paid me. In my experience, most financial planners operate under the same general ethos.
The “point” of the fiduciary standard is to eliminate this persistent—and unusual, in our marketplace—adversarial relationship between broker and customer, and most especially to rid the financial services marketplace of situations where the customer who is about to enter into a transaction doesn’t realize that there is an adversarial relationship.
This, incidentally, explains very clearly why the independent RIA community of advisors views with great distrust FINRA’s overtures to take over regulation of advisors. FINRA’s regulatory structure boldly endorses this adversarial business model—and, worse, the organization has a poor track record of preventing abuses of it. Indeed, in the past, FINRA seems to have had a high tolerance for practices which visibly benefited the brokerage firms at the expense of their customers—precisely the opposite of what we would want from those acting as protectors of the consumer.
Somehow, the largest financial services organizations in the U.S. marketplace have managed to exempt themselves from the way that most companies do business. Instead of competing on quality, brand and price—as, say, the manufacturer of shoes, groceries, furniture or computers do—they have found ways to generate their profits based on incomplete information and the financial illiteracy of American consumers.
They are not alone (recent revelations about the activities of mortgage brokers comes to mind), but the market meltdown and sales of junk products and revelations of ultra-sharp dealing and subsequent legislation all point to the conclusion that free markets function most effectively, safely and perhaps even profitably whenever the product and service providers strive to provide maximum value for the dollars they receive from the consuming public. A fiduciary standard would codify this behavior in an industry that is unfortunately unfamiliar with its most basic concepts.
The SEC might consider one more issue as it gathers its facts and opinions. Look at the motives of those who are in favor of a fiduciary standard, and at the motives of those who oppose it. Those in favor—generally the most informed consumers and members of the RIA community—have very little to gain, personally and professionally, from their advocacy. The astute consumer will find the fiduciary needle in a haystack regardless of the regulatory structure. RIAs are actually advocating for more meaningful standards imposed on professionals like themselves. Their opinions should, I would argue, be given more weight, because instead of protecting their own wallets and pocketbooks, they are speaking up for the consumer and what they believe is right.
The brokerage firms, meanwhile, are protecting extremely lucrative sources of revenues, including profit margins dramatically higher than most American businesses. I would argue that the SEC should give their arguments less weight in the fiduciary debate. Not only are they predictable and self-serving; they are also visibly not in the interests of the retail financial customer.
I think we can call a spade a spade here: The brokerage firms, in their lobbying efforts, are asking for the continued license to put their hands into the pockets of their customers. FINRA, meanwhile, seems by its regulatory behavior to believe that putting hands into the pockets of consumers is a perfectly acceptable business model, so long as there are limits on how much of the consumer’s wallet can be removed, unseen or unnoticed, in any single transaction.
On the other side of the argument, RIAs and those who advocate for a fiduciary standard are asking the SEC to create a regulatory structure such that, if any money comes out of the consumer’s wallet, it is intentional on the part of the consumer—and, further, that there be a good-faith effort by the other party in the transaction to provide at least as much value and benefit as the monies paid.
As a fiduciary advocate myself, I find myself wondering: “Is there any way that should be considered an unreasonable request? Who would argue that it is?”
If the SEC needs more information on this specific set of comments, I recommend that its research team talk to brokers off the record, preferably off-hours. They’ll tell you that in most, perhaps all of their securities transactions, there is a winner and a loser. Some of the largest financial services institutions in the world, with their considerable resources and expertise, abetted by widespread financial illiteracy, have created an environment where the consistent loser is the consumer.
As the SEC gathers information on the fiduciary standard, I hope it will not lose sight of the whole point of the exercise: Is this the kind of marketplace we would want for American consumers? Is this “winners and losers” marketplace consistent with the SEC’s mandate to protect consumers?
Bob Veres is publisher of Inside Information and a columnist for Financial Planning magazine.
© 2010 RIJ Publishing LLC. All rights reserved.
Imperfect Harmony
As the hundreds of comments on the Security and Exchange Commission’s website demonstrate, there’s plenty of discord over the question of “harmonizing” the ethical rules that registered representatives and investment advisers play by.
In July, the new Dodd-Frank Wall Street Reform and Consumer Protection Act punted the political football of creating uniform rules of engagement for brokers and investment advisors over to the SEC, asking the SEC to recommend new rules in six months. The SEC, in turn, invited public input.
The question is whether registered broker-dealer representatives should meet a fiduciary standard and to act in the “best interests” of their clients at all times, as registered investment advisors are required to do, or if reps may continue to follow the more flexible suitability standard, which tolerates conflicts-of-interest that don’t violate the interests of the client.
The issue isn’t merely an academic or legalistic one. It involves turf rights in the financial services landscape. More brokers want to be able to play in the advice space, a potentially more lucrative realm than the increasingly cutthroat transactional space. Advisors, understandably, would like to keep their profession’s barrier-to-entry as high as possible.
Thus the uproar. Meanwhile, Baby Boomers go begging for guidance on how to spend their retirement savings, but vastly distrust the providers of financial services, in part because the rules of the game are so opaque and so fluid. If the SEC can resolve this matter and restore a bit of confidence in the system—a very big if—everyone should be better off.
Vox populi
Over the past five weeks or so, the SEC has received an earful from brokers and advisors. Virtually all of the brokers’ emails urge the government not to subject them to a new and costly layer of regulation. Most, but not all, of the investment advisors’ comments call for extending the fiduciary standard to any intermediary who provides, as one letter put it, “a scintilla” of advice.”
Harold Evensky, the well-known advisor and co-editor of Retirement Income Redesigned (Bloomberg, 2006), believes that it is easy to tell when the fiduciary rule applies. “I believe that for practitioners there is a simple test to determine when they will be subject to a fiduciary standard,” he wrote.
“I refer to this as the ‘YOU’ standard. If an investor calls and says, ‘I’d like to buy 100 shares of XYZ’ – Suitability standard. If an investor calls and says, ‘What does your firm think of XYZ stock?’ and the advisor says ‘we believe . . .’ – Suitability standard. If the investor says ‘Do you think I should buy XYZ stock?’ and the advisor says ‘Yes, I think YOU . . .’ – Fiduciary!
Some advisors regard the brokerage industry as hopelessly compromised under the status quo.
“The only reason for brokers not to be held to a fiduciary standard is the self-interest of the brokerage industry,” wrote Brendan E. Connelly, a fee-only advisor in Madison, Wis. “I was a broker myself at one time and made the difficult yet accurate decision to transition to the fee-only/fiduciary model. Thank God I did as my conscience and my clients both love it. Do the right thing. Resist the lobbying money of the brokerage industry and hold them to a fiduciary standard.”
One-night stand?
Others feel that conflicts of interest are endemic to the brokerage world, and that better disclosures could adequately protect the average investor.
“I believe that extending the fiduciary standard to broker-dealers is not ethically possible. Broker-dealers sometimes work with both parties in a transaction, such as when taking a company public. How would it be determined who deserved the fiduciary obligation?” wrote Edward D. Hinds III, a financial planner in Paso Robles, Calif.
“Customers need to understand whether they are purchasing executions or advice. They need to understand whether it’s a one-night stand or a relationship. They do not understand that now,” wrote Peter J. Chepucavage, an attorney with Plexus Consulting in Washington, D.C.
Reps and agents bridle at the suggestion that they or their suitability standard render an inferior form of care, or that current FINRA regulations and state insurance laws are ineffective. Paul B. Crouch of Lake Forest, Ill., echoed the opinions of many when he wrote:
“I have been in the Insurance industry for over thirty (30) years, and a Registered Representative for seventeen (17) years. Over the years, I constantly receive more layers of regulation. Enough is enough. Adding another layer of regulation means another layer of compliance, and even more costs to consumers… There is a PERCEPTION that the legal fiduciary duty governing investment advisors provides greater investor protection than the suitability standard governing Broker/Dealers. This PERCEPTION is FALSE.”
Kyle Paterik, a Los Angeles financial consultant, expressed fears about exposure to lawsuits. He also took it for granted that the fiduciary rule is incompatible with taking commissions—an assumption that advisors don’t necessarily agree with.
Monday morning quarterback
“My concern with the new vague fiduciary standard is the unchecked ability of our clients to be a Monday morning quarterback and sue us for every dip and turn the market brings…” he wrote. And “by demanding all advisers work on a fee-based schedule, you will be creating a barrier to entry that will shut a large percentage of our population out of receiving quality financial advising and management.”
A two-tier ethical scale is appropriate for a two-tier financial world, suggested Christen Gibbons, ChFC, ChLU, of Ithaca, New York. The fiduciary rule, in other words, may be a luxury that only the high net worth investor can afford.
“When I’m recommending a product to fill a specific insurance or investment need, I work as a representative under the suitability model,” she wrote. “When I’m doing more sophisticated financial planning I am an advisor under the fiduciary standard model.
“This is more costly because of the required reporting and ongoing service including additional advisor liability. I can only do this type of work for people that have higher income or net worth.”
Several reps argued, with reason, that the “best interest” standard of the fiduciary rule is tough to define. “In your consideration of the fiduciary standard, please tell me what is ‘best’? asked Suzette Moline, a registered rep in Sundance, Wyoming.
“Would that be measured by historic underwriting, service standards, price (as in cheapest), premium relative to the benefit of a product, or perhaps the rating of the company providing the product? There are too many interpretations of such a standard… it adds a vague legal liability standard that looks back and is enforced after the fact by the SEC or trial lawyers who have perfect vision in hindsight.”
Robert Ramos, a CFP in Waldorf, Md., agreed: “How on Earth can ‘best interest’ be determined with the myriad of solutions available in today’s marketplace and the every increasing number of new products coming to market?”
Is water wet? Is grass green?
“If we want to study whether a ‘fiduciary duty’ is better for consumers, then we should also study if grass is green, if water is wet, and if deserts are dry,” wrote Luke Dean, a professor of finance at William Paterson University in Wayne, NJ. “A fiduciary duty requires a ‘professional’ to do what is in their clients’ best interest.
“How could anything less than this be good for clients or consumers or even a ‘profession’? There shouldn’t be a ‘fiduciary-lite’ created. Do what’s best for the American consumers and force American corporations to do what’s best for consumers instead of continuing to offer inferior products/advice with superior fees and expenses.
“John Adams said that one of his fundamental doctrines for government was that you had to ‘protect the sheep from the wolves.’ It is unreasonable to expect all American consumers to know the difference between an investment adviser regulated under the 1940 legislation and the 1934 legislation. It’s also unreasonable that we’re still using legislation that is over 70 years old for the financial services and its ‘professionals.’
“Make all financial services professionals be fiduciaries, and you’ll see that more consumers will utilize them. Make insurance companies and investment advisers offer best products at best prices in a transparent fashion, rather than just pushing their own companies’ inferior products with superior commissions and fees.”
As of August 30, more than half (236) of the 400-plus messages were what the SEC called Type A letters. These summarized the opinions of life insurance agents and protested the extension of the fiduciary rule. Less than one-third (131) were Type D letters. These represented the opinions of financial advisors, and recommended the extension of the fiduciary rule to all providers of investment advice. (It was unclear whether the SEC or specific trade organizations provided the boilerplate language for the five standard letters.)
© 2010 RIJ Publishing LLC. All rights reserved.
A Snapshot of U.S. Household Debt
For the first time since early 2006, total household loan delinquency rates declined in 2010Q2. As of June 30, 11.4% of outstanding debt was in some stage of delinquency, compared to 11.9% on March 31, and 11.2% a year ago, according to a chart-rich report from the Federal Reserve Bank of New York.
Currently about $1.3 trillion of consumer debt is delinquent and $986 billion is seriously delinquent (at least 90 days late or “severely derogatory”). Delinquent balances are now down 2.9% from a year ago, but serious delinquencies are up 3.1%.
Aggregate consumer debt continued to decline in the second quarter, continuing its trend of the previous six quarters. As of June 30, 2010, total consumer indebtedness was $11.7 trillion, a reduction of $812 billion (6.5%) from its peak level at the close of 2008Q3, and $178 billion (1.5%) below its March 31, 2010 level. About three-quarters of household debt consists of mortgages.
The number of credit account inquiries within six months – an indicator of consumer credit demand –ticked up for the first time since 2007Q3. Credit cards have been the primary source of the reductions in accounts over the past two years, and during 2010Q2 the number of open credit card accounts fell from 385 to 381 million. The number of open credit card accounts on June 30 was down 23.2% from their 2008Q2 peak.
About 496,000 individuals had a foreclosure notation added to their credit reports between March 31 and June 30, an 8.7% increase from the 2010Q1 level of new foreclosures. Arizona, California, Florida and Nevada continue to indicate higher than average delinquency and foreclosure rates.
New bankruptcies noted on credit reports rose over 34% during the quarter, from 463,000 to 621,000. While we usually see jumps in the bankruptcy rate between the first and second quarter of each year, the current increase is higher than in the past few years, when it was around 20%.
Mortgage originations fell another 4.1% between 2010Q1 and 2010Q2, to $364 billion. While mortgage originations in 2010Q2 were 20.6% above their 2008Q4 trough, they remain more than 50% below their average levels of 2003-2007. Auto loan originations rose 25% in the second quarter, and were nearly 32% above their trough levels of 2009Q1. Still, auto loan origination balances remain well below their levels of 2005-2006.
About 2.6% of current mortgage balances transitioned into delinquency during 2010Q2, continuing the decline in this measure observed over the last year. Transitions from early (30-60 days) into serious (90 days or more) delinquency improved sharply in 2010Q2, falling from 39% to 33%, the lowest rate of deterioration since 2008Q2.
Nonetheless, despite recent improvements in this rate and the “cure” rate – transitions from delinquency to current status, which rose to nearly 30% – both remain at very unfavorable levels by pre-crisis standards.
© 2010 RIJ Publishing LLC. All rights reserved.
Dutch Pensioners in a Panic
NETHERLANDS – The Dutch Parliament was set to discuss the prospect of benefits cuts at 14 pension funds yesterday during an emergency debate with social affairs minister Piet Hein Donner, IPE.com reported.
Donner should spell out exactly which pension funds are likely to cut benefits and rights in order to avoid panic among workers and retirees, said Paul Ulenbelt, the socialist party member of Parliament who organized the meeting.
Ulenbelt, who opposes the cuts, said that employers and even workers should the plug financial gaps. If needed, he said, the government should ultimately step in with “loans and guarantees.”
“If we can save banks and guarantee Greece’s financial liabilities, we can’t let the elderly down,” he said.
In the wake of the financial crisis, 340 of 600 Dutch private pension funds had to submit a recovery plan mapping out how to increase their funding to a minimum of 105% within five years. Of the 18 pension funds that already factored in rights cuts, however, 14 have failed to recover sufficiently, Donner said in a letter to Parliament.
The coverage ratio of Dutch pension funds, after an initial recovery in spring 2009, has fallen to 100% on average, largely due to a steep drop in long-term interest rates in the second quarter of 2010. Pensions funds have also had to take new longevity figures into account, which has lowered coverage ratios by approximately five percentage points.
Donner said there was no reason to assume low interest rates – approximately 3.2% at present – would increase any time soon, and that the possibility of a quick economic recovery was still uncertain.
The Association of Industry-wide Pension Funds (VB) also called on the 14 funds to inform their participants as soon as possible about the likelihood of rights cuts.
Peter Gortzak, vice-chairman of the FNV, the largest union, said: “The picture painted by minister Donner and regulator De Nederlandsche Bank (DNB) is spreading panic. Although a limited number of small pension funds are in a serious position, the large majority do not need to cut benefits. The DNB and the schemes must first look at alternatives, such as raising contributions or additional contributions by employers.”
The large consumers organization, Consumentenbond, also called for “immediate clarity” for workers and pensioners regarding possible cuts, while ANBO, the pensioners lobbying body, attributed low coverage ratios in the wake of low interest rates to the financial problems of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries.
On its website, the ANBO said: “But we mustn’t give the impression pension cuts are caused by financial mismanagement of southern European governments.”
The NBP – the small but vocal lobbying organization of retirees – demanded an inquiry into the matter, as many pension funds’ boards have made “big mistakes.”
© 2010 RIJ Publishing LLC. All rights reserved.
New SALB Launched By Investors Capital Corp.
Investors Capital Corporation (ICC), the broker/dealer and investment advisory unit of Investors Capital Holdings, Ltd., has launched the Investor Protector series: a new, innovative managed investment account paired with a stand-alone income benefit.
The account combines Investors Capital Advisory Services’ (ICA) series of asset allocation models with a stand-alone lifetime benefit that offers the investor a 5% lifetime income stream, regardless of market conditions.
Although Lockwood Advisors introduced a stand-alone living benefit in late 2007, ICC claims to be the first independent broker/dealer to offer a lifetime income benefit on managed money.
The initial investment account value establishes the client’s Retirement Income Base (RIB). The investor may lock in a higher RIB if the account value is higher on the anniversary date for an additional fee. At age 65, the client can draw a 5% stream of income based on the highest, locked-in RIB. A spousal benefit is available.
Clients may remove the rider at any time without penalty or surrender charge. The assets are owned by the investor so the investments are fully transparent and accessible.
© 2010 RIJ Publishing LLC. All rights reserved.
John Hancock Offers “To” and “Through” Target Date Funds
John Hancock Retirement Plan Services will offer two suites of target-date funds, providing participants with a choice of either “to” funds, which are composed mainly of bonds at retirement, or “through” funds, which maintain a substantial equity allocation well into retirement.
John Hancock’s new Retirement Choices target-date portfolios are designed to take participants “to” retirement. They can switch to another investment strategy at time of retirement. The all-index fund asset mix features a lower amount of equities near retirement.
Retirement Choices joins John Hancock RPS’s original Lifecycle suite of TDFs, which was introduced in 2006 and has been renamed Retirement Living. The Retirement Living Lifecycle Portfolios maintain a higher exposure to equities during retirement.
The glide path for Retirement Choices portfolios features a lower allocation to equities and slopes down at a faster pace than it does for the Retirement Living portfolios.
Before launching Retirement Choices, John Hancock RPS surveyed almost 1,000 participants to learn what they want in asset allocation solutions generally and TDFs specifically. About 83% felt it was important for their plan to offer a choice of target-date funds designed to meet the needs of different types of investors. When asked about preference for “to” retirement versus “through” retirement lifecycle options, respondents were split almost evenly.
© 2010 RIJ Publishing LLC. All rights reserved.
In Singapore, as in the U.S., Savings Grow Slowly
In Singapore, HSBC Insurance has unveiled a new annuity contract called SecureIncome to help Singaporeans save for retirement. The product appears to beat putting money under the mattress, but not by much.
Customers contribute at least $200 a month to the contract and receive a guaranteed yield of 1% to 1.5% over the life of the policy, the Business News reported. The current yield on 10-year Singapore government securities is 1.89%.
When the contract matures, policyholders can withdraw a lump sum, receive a monthly income over 10 years, or leave the money with HSBC and earn a non-guaranteed rate, currently 2.5%. Alternately, they can leave their money with HSBC for another 10 years and receive non-guaranteed monthly dividends.
The contract allows unemployed policyholders to defer payment of premiums for up to a year and to receive a death benefit in advance if they are confirmed to have a fatal illness.
HSBC Insurance CEO Walter de Oude compared SecureIncome with fixed deposits, the most popular retirement savings vehicle for Singaporeans.
“The average bank interest rate for 12-month fixed deposits has remained below one percent for the last seven years,” he said, citing data from the Monetary Authority of Singapore.
© 2010 RIJ Publishing LLC. All rights reserved.
A fixed deposit of $100,000 over one year would earn 0.3% a year at Citibank and 0.35% at Standard Chartered.
Plain-vanilla deposits remain the investment of choice for Singaporeans. Eleven percent of Singaporeans expect to place their funds in an interest-bearing savings account within the next year. In contrast, only 5% percent expect to buy an annuity.
Cue the Traveling Music…
Many of the major investment-oriented trade associations hold their annual conferences between mid-September and mid-November. Here’s a list of conferences that might interest you, including links to the relevant websites:
Sheraton Seattle/Washington State Convention and Trade Center, Seattle, WA
September 11-14, 2010
NAPFA (National Association of Personal Financial Advisors (NAPFA)
Practice Management and Investments Conference
Manchester Grand Hyatt, San Diego, CA
September 22-24, 2010
Retirement Income Industry Association Annual Meeting
Hyatt Harborside, Boston, MA
October 4-5, 2010
Center for Due Diligence
Fairmont Chicago-Millenium Park, Chicago, Illinois
October 6-8, 2010
Financial Planning Association Annual Conference
Colorado Convention Center, Denver, CO
October 9-12, 2010
Society of Actuaries Annual Meeting
Hilton New York–New York, NY
October 17-20, 2010
Gaylord National Hotel and Conference Center, Washington, DC
October 24-26, 2010
Insured Retirement Institute Annual Meeting
Westin Michigan Avenue, Chicago, Illinois
October 24-26, 2010
National Association of Fixed Annuities IMO Summit
Hotel Sorella-CityCentre, Houston, Texas
October 27-28, 2010
Society of Actuaries
Equity-Based Insurance Guarantees Conference
Marriott Marquis, New York, NY
November 1-2, 2010
Sheraton Boston, Boston, MA
November 3-5, 2010
Third Annual Retirement Income Symposium
Embassy Suites Chicago Lakefront, Chicago, Illinois
November 8-9, 2010
NAILBA (National Association of Independent Life Brokerage Agencies) Annual Meeting
Gaylord Texan Resort and Convention Center, Grapevine, Texas
November 18-20, 2010
Making The Case for Fixed Indexed Annuities
Champions of fixed indexed annuities, those quirky, complex and controversial niche products that were introduced in the mid-1990s, have had cause for celebration in 2010.
FIA advocates frustrated the Security and Exchange Commission’s clumsy attempt to regulate them. And they saw FIA sales soar to $8.2 billion in the second quarter, up 22% from the first quarter, as investors looked for an alternative to volatile equities and low-yielding bonds.
One of the most ardent and steadfast champions of fixed index annuities, which are structured insurance products consisting of bonds with a dash of equity derivatives, has been Jack Marrion, a St. Louis-based consultant and self-published author of “Indexed Annuities: Protection and Performance” and, more recently, “Change Buyer Behavior and Sell More Annuities.”
Earlier this year, he collaborated with David Babbel, a professor at the Wharton School and Geoffrey VanDerPal, chief investment officer of Skyline Capital Management, in scholarly defense of the products. Anyone interested in these products should check it out.
The charts in their study, Real World Index Annuity Returns, show that, based on data from 15 FIA issuers, FIAs outperformed conventional investments during much of the past 10 years —a paradoxical period when the S&P500’s cumulative return has been roughly zero.
From 1997 through 2007, they say, the five-year annualized returns for FIAs averaged 5.79%, compared to 5.39% for taxable bond funds and 4.73% for fixed annuities. From April 1995 through 2009, FIAs beat the S&P 500 over 67% of the time and a 50/50 mix of one-year Treasury Bills and the S&P 500 79% of the time.
During eight five-year periods starting in 1997 through 2004, their data shows, the FIAs they looked at offered an average annualized return of 4.19% to 9.19%, with no negative years. By contrast, an investor in the S&P500 would have seen four positive five-year periods and four negative ones.
How do FIAs maintain such an apparently even keel? In a bad equity markets, their substantial bond component offers downside protection. In rising equity markets, their equity option component increases in value. Investors in FIAs therefore don’t need to fear the bears and aren’t as slavishly dependent on the bulls. Or, as the authors put it:
“By eliminating the prejudicial effects occasioned by significant stock market declines, and locking in returns annually or biannually, there is less of a need to try and capture large upside market swings to recover from the declines.”
Besides insulating investors from volatility, Marrion and his co-authors say, FIAs do, contrary to certain media reports, offer liquidity (penalty-free withdrawals of at least 10% a year) as well as tax-deferred compound growth. (They don’t mention, because it’s not part of their argument, that many FIAs now offer the kind of lifetime income riders that variable annuities offer.)
In sum, the paper sets out to prove—by demonstrating the past performance of specific products—that FIAs as a concept don’t deserve the smear-treatment that certain tabloid-TV investigators, plaintiff’s attorneys and prosecutors, or past SEC commissioners have given them. And it does a compelling job of that.
So why then, as Marrion himself notes on his website, does the index annuity industry continue to “lose the media battle”? The FIA industry would probably argue that the media is biased in favor of the securities industry. But Marrion doesn’t necessarily agree. In fact, he chides the FIA industry for failing to educate the media properly.
But there may be a more fundamental reason, one that’s described in the last paragraph of Marrion, Babbel and VanDerPal’s paper. I’m not referring to big FIA commissions, or long surrender periods, or the lack of transparency, or the unfamiliarity of derivatives, or the bonuses that inevitably confuse the average innumerate American.
The problem is that a contract’s crediting method—the formula that determines how much the investor earns—can change each year at the whim of the issuer.
“Over 95% of index annuity sales are in products that may change at least one element of their interest crediting methodology after each reset period,” the paper says. “The ultimate determining factor in setting index participation in future years is not the interest rate environment or the cost of options, it is what carrier management decides to do. This human element introduces a random variable that cannot be quantified, thereby making any attempt to project any returns ultimately subjective.”
Unless I misread that passage, it seems reasonable to wonder why any advisor or trusted agent would advise a truly risk-averse investor—the target market for FIAs—to invest in something so unpredictable.
© 2010 RIJ Publishing LLC. All rights reserved.
Financial Engines’ Secret Income Plan
Financial Engines, Inc., the provider of investment advice and managed account services to defined contribution plan participants, intends to begin offering an in-plan retirement income option to its clients starting in late 2010 or early 2011 and to offer it to as many as 4.2 million participants within three years.
Jeff Maggioncalda, CEO of the Palo Alto, Calif.-based firm, said in a recent conference call with security analysts that the “solution will be different from what’s offered today, and will address concerns that have caused employers to avoid embracing” in-plan income options so far, such as high costs and fiduciary issues.
While offering no details, Maggioncalda said the program would be an extension of the company’s Professional Management managed account services and would allow users of those services to draw a monthly income in retirement. He did not say whether a rollover IRA would be involved.
The program would not require plan sponsors “to add an annuity or change their investment lineups to offer our solution” and would “eliminate the counterparty risk associated with adding an annuity to their plan,” he said, noting that the program would work “with any open architecture combination of investment products.”
Despite that disclaimer, there’s reason to believe an annuity or annuity-like feature could be involved. Financial Engines offered a description of what it considered a viable in-plan income option in an eight-page written response last May 3 to the Department of Labor’s request for information regarding such plans, and a type of annuity was integral to it.
That hypothetical plan involved the purchase of longevity insurance—life-contingent deferred income annuities that can be purchased at a steep discount because they don’t pay out unless and until the contract owner reaches an advanced age, such as 80 or 85.
Longevity insurance has drawn serious attention from academics in recent years, but not from investors. PIMCO has recommended that investors combine its inflation-protected payout fund with a longevity insurance contract as a retirement income strategy. Annuity expert Moshe Milevsky of York University has written about the advantages of longevity insurance. MetLife, Hartford and Symetra offer quotes on longevity insurance, but the product is rarely purchased.
Currently, the most prominent in-plan income solution might be Prudential Retirement’s IncomeFlex program, which allows participants to add a guaranteed lifetime income benefit, like the ones offered on variable annuities, to target-date funds in a 401(k) account. Great-West also offers such an option. MetLife offers SponsorMatch, a program that allows participants to buy chunks of income far in advance of retirement with their employer match.
Financial Engines, which was co-founded in 1996 by Nobel Prize winner William Sharpe, started as a respected but fairly modest provider of online investment advice to 401(k) plan participants. Among other things, it gave participants access to a colorful Internet-based widget that enabled them to conduct their own Monte Carlo projections of hypothetical portfolio returns.
Over time, the company has come to offer Internet-mediated managed accounts to participants within 401(k) plans, and was recently identified as the largest Registered Investment Advisor in the U.S. The company reported $29.4 billion in 401(k) managed accounts as of June 30, 2010, and $300 billion in “assets under contract.” That number refers to the total assets in the 385 retirement plans whose 4.2 million participants can purchase Financial Engines’ managed account services.
In the DoL comments, Jason Scott, Ph.D., the managing director of the Retiree Research Center at Financial Engines, urged the Department of Labor to amend the tax laws to exempt assets in longevity insurance contracts from the calculation of required minimum distributions.
Though not specific, Scott’s comments describe a managed “hybrid solution” in which participants would draw monthly income from a managed account early in retirement “while always maintaining sufficient assets to give participants the option of increasing the income payout through an annuity purchase.”
In addition, “The advantage of the hybrid approach is that as the insurance becomes compelling, the hybrid solution facilitates a shift from a highly liquid and flexible solution to one more focused on guaranteed lifetime income,” the comments said. Such a program sounds similar to the Retirement Management Account that MassMutual briefly marketed until the financial crisis.
Scott has written about longevity insurance for some time. In a 2009 research paper called, “What Makes a Better Annuity?” he and others suggested that the introduction of longevity insurance, because it protects the owner against longevity risk much more cheaply than immediate annuities, could greatly expand the annuity market.
In the DoL comments, Scott noted that an “allocation of 10 to 15% of wealth to a longevity annuity creates spending benefits comparable to an immediate annuity allocation of 60% or more.” The comments also recommend that any future DoL-approved qualified default income solution contain the following elements:
• Fee reversibility – In the accumulation phase, qualified default arrangements must be fully reversible at no cost for 90 days. A similar guideline should apply to retirement defaults.
• Liquidity – Some insurance products, such as an immediate annuity, exchange liquidity for additional retirement income. However, a default that involves the loss of liquidity could be a significant shock to unaware participants. To manage this concern, we recommend either an extended period where liquidity is retained or a requirement that loss of liquidity requires a proactive participant decision.
• Death benefit – Insurance that maximizes income will not pay a death benefit. However, in a default context, the lack of a death benefit could also be surprising to the heirs of DC plan participants. Similar to liquidity provisions, we recommend either an extended period where a death benefit is retained or a requirement that loss of a death benefit requires a proactive participant decision.
• Conflicts – If the retirement default is an advisory relationship that helps participants with drawdown decisions, existing rules governing prohibited transactions should extend to lifetime income services. Participants should be protected from advice that could be influenced by conflicts of interest associated with the compensation of the advisor.
• Role of Fiduciary in Selecting Default– If a retirement income solution is made a plan default, we recommend that the plan sponsor still play a fiduciary role in the selection and monitoring of any such default.
© 2010 RIJ Publishing LLC. All rights reserved.
How to Reduce the Threat of Fiduciary Liability Lawsuits
The Chubb Group of Insurance Companies and the law firm of Morgan, Lewis & Bockius LLP have released a special report intended to help firms reduce the risk of a fiduciary liability lawsuit.
The report, “Who May Sue You and Why: How to Reduce Your ERISA Risks and the Role of Fiduciary Liability Insurance,” recommends that employers:
- Delegate fiduciary functions to committees with members who have the expertise and time to properly perform their duties.
- Establish programs to train fiduciaries on their responsibilities.
- Ensure the plan’s fiduciary structure and documents do not conflict with plan practices.
- Review fees and expenses at least annually to make sure the plan is not charged for costs that should be allocated to the plan sponsor.
- Accurately document all meeting conversations and decisions and recommendations made by outside service providers.
“Business owners and managers need to understand the fiduciary liability exposures they face, especially in an environment where they are likely to reduce staff or employee benefits,” said Christine Dart, vice president and manager for worldwide fiduciary liability at Chubb.
“Employees who still have jobs may not be inclined to ‘rock the boat,’ but those who find themselves overboard are more likely to take legal action against employers, especially if their 401(k) plans sustained losses before they were terminated. Fortunately, employers can take steps to reduce the threat of fiduciary liability lawsuits.”
The U.S. Labor Department reported 910 corrected violations resulting from the 1,042 investigations of violations of the Employee Retirement Income Security Act (ERISA) it conducted in 2009.
“The U.S. Supreme Court’s ruling in LaRue v. DeWolff and regulatory changes have helped empower individual plan participants to bring actions for losses to their own accounts, paving the way for other claims against the fiduciaries,” added Charles “Chuck” Jackson, a labor and employment partner and co-chair of the ERISA Litigation Practice at Morgan, Lewis & Bockius LLP.
“While the goal is to address fiduciary issues before they go to litigation, that may not always be possible,” said Dart. “Companies that follow guidelines such as those suggested in Chubb’s special report may be able to better defend such claims; and fiduciary liability insurance may help manage the defense costs.”
© 2010 RIJ Publishing LLC. All rights reserved.
Reliable Sources Disagree on July Fund Flows Data
With so many trillions of dollars zipping around the globe every hour of every day, it’s hard to keep track of it all. RIJ received two somewhat different reports on July mutual fund and ETF flows from Morningstar and Strategic Insight recently. If you can explain why there were discrepancies, please write and tell us.
According to Morningstar, overall flows into U.S. open-end mutual funds increased slightly in July to $14.1 billion, as equity and balanced funds saw mainly outflows, and bond, alternative, and commodity funds saw mainly inflows.
According to Strategic Insight, U.S. mutual fund investors added about $25 billion in net new cash to U.S. stock and bond mutual funds in July 2010 (in open-end mutual funds, excluding exchange-traded funds (ETFs) and variable annuity subaccounts).
According to Morningstar, U.S. exchange-traded funds (ETFs) registered total net inflows of $6.8 billion in July, marking the sixth consecutive month of positive asset flows. Total ETF assets are up 6% since the start of the year and 29% over the trailing 12 months.
According to Strategic Insight, investors put net $7.5 billion into US ETFs in July. U.S. ETF assets ended July at $831 billion (just off the April peak of $834 billion). International equity and taxable bond ETFs accounted for the bulk of July’s net inflows.
According to Morningstar, bond funds had another strong month of inflows, with investors adding $22.3 billion to taxable-bond funds and $3.9 billion to municipal bond funds, approximately double the inflows municipal-bond funds saw in June.
According to Strategic Insight, bond funds experienced net inflows of $30 billion in July, as inflows persisted among many lower-volatility bond funds used for cash management. In general, U.S. taxable bond funds drew $25 billion in net investments and U.S. muni bond funds attracted $5 billion.
Additional highlights from Morningstar’s report on mutual fund flows:
Bond funds had another strong month of inflows, with investors adding $22.3 billion to taxable-bond funds and $3.9 billion to municipal-bond funds, approximately double the inflows municipal-bond funds saw in June.
Nearly $12.4 billion exited domestic-equity funds in July, but international-stock funds saw less severe outflows of $565 million. Flows into emerging-markets equity funds offset redemptions from broader foreign-stock funds. Emerging-markets equity funds had roughly $161.4 billion in total assets as of the end of July, up nearly 41% over the trailing 12 months.
Emerging-markets bond fund assets more than doubled to $30.8 billion over the last year after taking in more than $1.2 billion in July. A significant portion of these flows were allocated to local-currency emerging-markets bond funds, led by PIMCO Emerging Local Bond Fund with inflows of nearly $3.6 billion over the trailing 12 months.
PIMCO and Vanguard led all fund families in terms of total inflows in July, taking in $5.9 billion and $4.9 billion, respectively. American Funds continued to see significant outflows with another $4.6 billion in redemptions in July.
Additional highlights from Morningstar’s report on ETF flows:
Inflows into emerging-markets ETFs helped make international-stock funds, which saw inflows of $4.6 billion, the most popular ETF asset class in July.
Vanguard Emerging Markets Stock VWO was the top asset gatherer within the international-stock asset class as well as the overall U.S. ETF universe, with $2.3 billion in net inflows in July.
Investors also expressed a renewed interest in single-country ETFs to gain precise international exposure while avoiding struggling Eastern European countries.
Commodity ETFs saw net outflows in July for the first month since February. Although iShares COMEX Gold Trust IAU gathered assets of $209 million during the month, the asset class saw redemptions of $1.8 billion, led by SPDR Gold Shares GLD with $1.4 billion in outflows.
ETFs in the long government and long-term bond Morningstar categories saw combined total net inflows of $1.1 billion, while short government and short-term bond ETFs experienced outflows of $446 million.
U.S. stock ETFs saw outflows of $91 million in July, as inflows into small-cap funds were not enough to offset outflows from large-cap funds. Investors added $2.3 billion to the iShares Russell 2000 Index IWM, bolstering ETFs in the small-blend category, whereas redemptions from SPDR S&P 500 SPY drove outflows from large-cap U.S. stock ETFs.
To view the complete report, please visit http://www.global.morningstar.com/julyflows10.
© 2010 RIJ Publishing LLC. All rights reserved.
