Archives: Articles

IssueM Articles

New York Life Sets Income Annuity Sales Record

Posted on August 11, 2010 by Editor Test -

New York Life, the nation’s largest mutual life insurer, announced a record $870 million worth of income annuity sales in the first half of 2010, along with gains in life insurance, long-term care insurance, mutual fund sales.

The company’s sales of long-term care insurance were up 10% over sales in 2009. New York Life reported earlier this year it will pay a dividend to its LTCSelect Premier long-term care insurance policyholders for the sixth consecutive year.

Individual life insurance sales increased 47% through June, compared to an all-time record for sales in the first six months of 2009. For the most part, this growth is being driven by increased sales of both permanent insurance and term products, including the company’s Custom Whole Life product, an innovative form of whole life that allows consumers to choose how long they pay premiums.

Sales of New York Life’s mutual funds (MainStay Funds) totaled more than $5 billion in the first half of the year, with strong performances from Third Party channels accounting for more than $4 billion of the total. First-half net sales of $2.3 billion are on a record pace for the year.

Through June 30, 2010, the company’s 11,500-member field force is up more than 5% over 2009, which was a record year for recruitment of agents, the company said in a release.

Long-Term Care ‘Eats’ 3 Sq. Ft. of U.S. Homes Per Day

Posted on August 11, 2010 by Editor Test -

The rising cost of long term care, abetted by depressed home values, is taking a bigger bite out of American homes today than in 2005, according to LTC Financial Partners, LLC, a long-term care insurance agency.

“Five years ago we started translating long term care costs into square feet of real estate, to highlight the heavy burden of paying for care,” said Denise Gott, the firm’s chairman. “In July of 2005 we calculated that the average national cost for a private room in a nursing home was ‘eating up’ two square feet of the average American home each and every day.” This year, care costs are consuming 2.88 square feet per day, she said.

The national average annual cost for a private room in a nursing home is now $79,935, according to the latest MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs, released in October, 2009. That’s about $219 a day, up from $190 in 2005.

The latest survey from National Association of Realtors shows a median U.S. home price of $183,700. With an average 2,422 square feet per home, according to the U.S. Census Bureau, that equals $75.85 per square foot, about enough to pay for a third of a day of nursing home care.

The less a home is worth, the bigger the relative LTC bite. The value of a 1,286 sq. ft. home for sale at $33,300 in Pennsauken, NJ, would be consumed at the rate of 8.46 square feet a day.

“If you don’t qualify for Medicaid and you’re not protected by long term care insurance, you need to realize that for every day you’re incapacitated, or a family member is, there goes another sizeable chunk of your home,” says Gott.

Boomer Decumulation May Depress Asset Prices

Posted on August 11, 2010 by Editor Test -

Asset sales by decumulating Boomers will depress equity and housing prices over the next four decades, but the sales won’t necessarily trigger an asset price “meltdown,” according to an analysis by the Bank of International Settlements.

“Combining global ageing forecasts and the model coefficients suggests that financial assets prices would face around a full percentage point per annum demographic headwinds over the next forty years,” wrote economist Elod Takats, in a paper called “Ageing and Asset Prices.”

“The estimated aging impact is relatively mild in the United States with around 80 basis points per annum headwind. The drag is estimated to be much larger in most of continental Europe and in Japan,” Takats estimated.

“[T]he United States stock market has averaged an annual real return of 6.8 percent between 1802 and 2006. Shaving off around one percentage point from this return would be substantial, but does not seem to have catastrophic implications,” the paper said.

The problem is that the demographic group that is selling homes and investments—the postwar BabyBoom generation—will be larger than the group that will be buying the assets. In the U.S., that effect will reduce U.S. housing prices by about 30% over the next 40 years, relative to what they would be in a neutral situation.

The trajectory of home prices and investment prices will be somewhat different. Most people buy homes earlier and sell them later than they buy and sell investments. Also, home ownership is much broader than investment ownership, and high net worth investors have discretion over when to sell. Finally, home prices are determined by local markets and investment prices are determined in globalized markets.

Rates Won’t Rise for “Two to Three Years,” Gross Says

Posted on August 11, 2010 by Editor Test -

PIMCO’s well-known bond fund manager, Bill Gross, said in a Bloomberg radio interview that the Federal Reserve is unlikely to raise interest rates for two to three years as it seeks to prevent a double-dip recession.

Treasury two-year note yields dropped below 0.50% percent for the first time last week after a Labor Department report on July job losses. The spread in yields between 2- and 10-year notes is 2.34 percentage points, more than double the average of 1.11 percent over the past 20 years.

“When you analyze that portion of the curve, it says the Fed is on hold for a long, long time,” Gross said. “When you get down to 50 basis points on two-years, that’s giving you a signal that there’s not much left on the table.”

Gross’ $239 billion Total Return Fund has returned 13% in the past year, beating 71% of its peers, according to Bloomberg. It has benefited from the steep yield curve by buying five-year Treasuries and holding them for a year before selling to pick up capital appreciation and interest income.

“Hopefully as long as the curve stays steep and as long as the Fed stays where it is, then you produce two- to two-and-a- half returns as opposed to 50 basis points,” Gross said.

The Fed has maintained a range of zero to 0.25 percent for its benchmark rate for overnight loans between since December 2008 to encourage the economic recovery.

The two-year note yield fell two basis points to 0.51 percent after falling to 0.4977 percent, the lowest level since the Treasury began regular sales of the securities in 1975. The 10-year note yield touched 2.8398 percent, the lowest level since April 2009.

Companies in the U.S. added workers in July for a seventh straight month at a pace that suggests the labor-market recovery will be slow to take hold.Gross believes the U.S. faces long-term structural unemployment near 7%. “The jobs that were will not be coming back and the unemployment rate of 4.5 percent is really a fiction of the levered era,” he said.

Economists on average projected a 90,000 rise in private jobs in July, after a 31,000 gain in June. Instead, the overall employment fell by 131,000 last month and the jobless rate held at 9.5%.

Your Loophole Is My Noose

Posted on August 11, 2010 by Editor Test -

“Here we are in August,” Donald Marron told 300 or so retirement researchers at the National Press Club last week, “and the federal government is still deciding what the tax policy for the current year will be.”

That’s a big obstacle to decision-making by businesses, individuals, and the financial industry. “The future is always uncertain,” said Marron, a veteran inside-the-Beltway wonk and blogger who is now director of the Tax Policy Center at the liberal-leaning Urban Institute. “But now it’s particularly uncertain.”

The fate of the Bush tax cuts is only one of the uncertainties. So is the issue of the whether the estate tax will be enforced retroactively for 2010, and whether Congress will continue the “patch” that has prevented the Alternative Minimum Tax from hurting the upper middle class, and whether the “tax extenders” bill will pass.

Uncertainty even lingers over the impact of health care and financial regulation, he said. Although “historic” bills have been signed into law, their precise effect won’t be known the bureaucracy writes regulations, if then.

But Marron’s main beef was with tax policy, or the lack of it. “We don’t have a well-defined tax policy in the U.S.,” he said. “This creates uncertainty in private business and in the policy community.”

The current imbalance between federal expenditures and tax revenues cries out for a more coherent policy, he said. Tax revenues are down to about 15% of GDP, down from a long-term average of about 18%. Meanwhile, government expenditures have reached about 26% of GDP, up from a more familiar 20%. That imbalance, a result of the financial crisis, is unsustainable. But Marron doesn’t see anyone in government working on a timetable to end it.

“You can’t have debt growing faster than the economy,” he said.

“The financial crisis has brought the ‘long-run future’ closer by about a decade,” he figures, simply because it raised the deficit. Putting it another way, “we lost about a decade of response time for dealing with the deficit.

Even if no budget problems existed, we would still have to reform the tax system, which he described as “unfair, inefficient, anti-growth and too complex.”

What’s needed—that is, what’s lacking—is a “vision of where we want to go,” Marron said. “The political process needs to replace the arbitrary and uneven trajectory of tax policy with a coherent plan.”

That will involve “resurrecting firm budget restraints,” as opposed to the “soft”—he intended that to be an understatement—restraints that exist today. PAYGO restraints that require new expenditures to be offset by cuts or new revenue are only a superficial remedy.

“The question is, how big a government do you want?” Marron said. But he pointed out that this question won’t be easy to answer because the word “big” can be very ambiguous.

Some people regard the repeal of tax preferences—such as agricultural or mortgage or oil exploration subsidies, or the Bush tax cuts—as akin to raising taxes and increasing the size and reach of government.

Others regard tax preferences as spending programs by another name and see their removal as tantamount to a reduction in spending and in the size of government.

“You can have a debate over whether you’re growing or shrinking government by closing or keeping loopholes,” Marron said. He did not mention that the recipients of political pork are unlikely to regard it as such, and vice-versa.

Marron said his own “quixotic goal” is to advocate the removal of the tax break for employee health care costs. That would free up $200 billion a year and could single-handedly eliminate Social Security’s long-term funding problems. It would also make individuals more sensitive to the cost of medicine and thereby dampen its overuse. “That might bend the curve” of rising costs, making it less steep.

Speaking of Social Security—Marron disagreed with the conventional wisdom that it’s the “easy” problem to fix.

On paper, that might be true, he said. But there are lots of messy ethical or equity issues complicating Social Security reform, he said, such as whether the pain of raising the retirement age would fall disproportionately on those least able to bear it. (See “The Downside of Upping the Retirement Age,” in the August 11, 2010 issue of RIJ.)

Process First, Not Product

Posted on August 10, 2010 by Editor Test -

Imagine walking into a doctor’s office with a simple headache and receiving a prescription for codeine. You suspect overkill, but the doctor simply says that codeine, in his (or her) opinion, is the best treatment for headaches. Sounds like malpractice to me.

Or, even worse: Imagine that your general practitioner decides to treat you for a condition that clearly requires a specialist. You would quickly seek a new doctor.

Recently, I developed a lower back problem. A friend referred me to a doctor who specialized in back therapy. At our first appointment the doctor summarized his background and training and told me that he wanted to take the following steps:

Take my medical history and review the medications I was taking.
Discuss my symptoms in greater depth.
Take an x-ray of my back.

After completing these steps, he said, he would likely know if he could be of any help. He would then recommend a treatment regimen with specific procedures, a monitoring schedule and costs. In other words, his practice was based on:

Introduction
Fact Finding
Analysis
Recommendation
Implementation
Review

Why would retirement income planning not follow the same process? Instead, the financial services industry tends to lead with product.

Many (though not all) advisors are falling into the “product first” trap. Why? During the late 1980s and throughout the 1990s, many companies eliminated their training programs or turned training over to the product wholesalers. Suddenly financial planning became a war of yield, cost and product features—fueled largely by the great Bull Run of the 90’s.

In this forgiving environment, all advice was good and none was bad. Monkeys throwing darts at The Wall Street Journal could earn double-digit RORs. Process was eclipsed and product drove the train.

Then, out of nowhere, came the “lost decade.” But the most pathetic victim of the past decade wasn’t yield; tragically, it was planning. As a consequence, retirements were destroyed or altered significantly. Lost are the strong training programs of the 1970s and early 1980s. Lost are the problem-solving skills of advisors. Lost are the hopes and dreams of many pre-retirees. And now we’re seeing the industry desperately trying to fix the problem with product.

It’s time to wake up. We need to back up and teach process first. Wholesalers need to bring a financial planning process to the retirement income table. Advisors need to stick to the planning path, not the riders-and-features path. Though the path may end with product implementation, it must begin with fact-finding. In many instances of observing advisors at work, the only fact-finding I’ve witnessed is a request for the information required to complete a product application.

So let’s design a hypothetical course called Retirement Income Planning 101. Lesson One: The three most frequently asked questions by retirees are:

Do I have enough money?
Is my money in the right places?
Which assets do I draw down first during retirement?

Addressing these questions will lead to investment, tax and risk strategies. The first question, “Do I have enough money?” requires a basic understanding of the mathematical relationship between the amount of income needed, the duration of the need, the likely inflation rate and the assumed ROR of the retirement portfolio.

Consider, for example, Alan, age 62. An introductory meeting and fact-finding reveals that he has $700,000 of available assets and wants $3,000 per month for the next 28 years, with a 3% annual increase for inflation. After assessing his risk tolerance, we believe that he can achieve an overall ROR of 7%.

My HP12c calculates that Alan needs $608,000 to achieve his goal. That’s great news, because Alan has $92,000 more than that. (Note that no product has been discussed.) Pleased with the HP12c’s answer, Alan tells me that a previous advisor recommended that he put his entire $700,000 an annuity that would guarantee him $35,000 per year for the rest of his life—which happened to be very close to his goal of $3,000 per month. (Imagine that your dentist pulled the tooth that was “very close” to the one that needed pulling.)

Second question: Is Alan’s money in the “right place”? In other words, does he have the right asset allocation and product mix to deliver a reliable income stream?

Our discussion now turns toward the creation of a strategy that will combine guarantees and market opportunities in a way that provides an inflation-adjusted income for the next 28 years.

We do not discuss specific investments or insurance products, however. Instead, we discuss guarantees and opportunities generically. I explain that if the client wants a growing income, we have to put some of his money in growth (market opportunity) accounts. At the same time, I explain that, during the early years of retirement, he needs to draw his income from money placed in guaranteed accounts. Rarely, at this point would we talk about a particular guaranteed or growth product. We’re discussing the strategy required to reach the goal.

Finally, question three arises. Alan is curious whether to use qualified or non-qualified assets first. A simple determination of his tax bracket, using his tax return, will help answer this question.

Still, no product talk, just a lot of time spent on process—just what a competent doctor would do. Issues that Alan didn’t bring up, but which will require future discussions, are his strategies for dealing with risks associated with longevity and long-term care expenses.

Needless to say, the Alans of the world not only appreciate but also deserve a process similar to the one I’ve just described. They need a process that results in multiple strategies, multiple products and regular reviews and adjustments along the way.

When retirees, their children, and their attorneys all discover that products have been sold to them without the adequate use of process, some advisors will surely face a day of reckoning.

Philip G. Lubinski is president of The Strategic Distribution Institute, LLC.

The Downside of Upping the Retirement Age

Posted on August 10, 2010 by Kerry Pechter -

Ratcheting up the Social Security claiming age is one of the proposed patches to the Old Age & Survivors’ Insurance program’s long-term funding challenges. But such a remedy could also create pain for many Americans nearing retirement.

Even the affluent would need to save tens of thousands more to offset the lifelong financial loss inflicted by a benefit delay, according to a recent New York Times interview with economist Larry Kotlikoff. A delay would be even more painful for members of what the Senate Aging Committee calls “vulnerable groups.”

As described by a procession of distinguished academics at the 12^th annual Retirement Research Consortium in Washington, D.C., last week, those groups include workers without college training, certain ethnic groups, the disabled and, of course, the aged. According to one pair of researchers, they also include the un-conscientious, the overly agreeable and the neurotic.

The Retirement Research Consortium is made up of three organizations, the Retirement Research Centers at Boston College and the University of Michigan and the National Bureau of Economic Research, which are funded by the Social Security Administration.

Social Security, which Franklin Roosevelt signed into law 75 years ago this coming Saturday, was naturally the focus of the meeting, whose title was “Retirement Planning and Social Security in Interesting Times.” Clearly, no one was there to attack it, least of all luncheon speaker James Roosevelt, Jr., FDR’s grandson and CEO of Tufts Health Plan.

But, aside from Roosevelt’s spirited stem-winder of a defense of his grandfather’s legacy, the proceedings were less a birthday celebration for Social Security than an examination of the interplay of many factors that help determine how financially well-fixed a person or household will be by retirement age (and how sensitive they might be to changes in Social Security, like raising the retirement age).

Those variables include education, intelligence, race, sex, personality, health status in old age, employment practices, market disruptions as well as financial incentives and disincentives—whose effects can only be inferred from masses of survey data. As Matthew Shapiro of the University of Michigan said, “It’s complicated.”

Healthy life expectancy

Any proposal to raise the retirement age raises a new set of questions. For instance, are most people healthy enough to work longer? Some are and some aren’t, and a hike in the retirement age would be especially tough on those who aren’t.

“People could work longer if they were forced to,” said Ellen Meara of Dartmouth, who presented a paper called “Healthy Life Expectancy: Estimates and Implications for Retirement Age Policy,” co-written with David M. Cutler of Harvard and Seth Richards-Shubik of Carnegie Mellon.

People tend to report only a slow decline in health between the ages of 50 and 70, suggesting that many people are capable of working longer. “If we raised the early retirement age in Social Security, people ages 62 to 64 would go up 15% in labor force participation,” Meara said.

But healthy life expectancy, like life expectancy, varies by sex, race, and educational level. College education adds up to 3.5 years of healthy life, being white adds up to 2.8 years, and being female adds up to 2.7 years. At the extremes, a college-educated, 62-year-old white woman can expect 18 more years of healthy life while a 62-year-old black male with a high school degree or less has only 10.3 years.

A reduction in the Social Security claiming age could therefore discriminate against certain people—especially those with less education, many of whom may have worked for decades in physically demanding jobs.

If they’re unable to work at age 62, and can’t get Social Security benefits, they might file for Social Security disability benefits instead. A higher claiming age would raise disability rates by three percent overall, Meara predicted, and by twice that amount among those with a high school education or less.

Employment and older workers

The willingness of employers to retain or hire people who would be forced to work throughout their 60s by a higher claiming age is another factor in the debate over Social Security rules.

There’s evidence that older men with five years or more of tenure at their job are less likely to lose their jobs than younger men, but older men without much seniority have weaker job security, according to Richard W. Johnson and Corina Mommaerts of the Urban Institute.

The past two recessions were apparently tough on men in their 50s and 60s. “The 2001 recession disproportionately increased layoffs for men aged 50 to 61, relative to younger workers, and that pattern might be recurring today,” Johnson and Mommaerts wrote. “Unemployment rates increased substantially for older workers in 2009, and rates for those age 65 and older increased much more rapidly during the Great Recession than in previous downturns.”

Exposed to the job market, older workers have a tougher time finding jobs, especially jobs that pay as much as they’re used to earning. Male job seekers ages 51 to 60 are 39% less likely to become re-employed each month than those ages 25 to 34, and men age 62 or older are 51% less likely. Women ages 51 to 60 fared better than men, but women age 62 and older fared about the same.

So even if they are healthy and capable of working, and despite laws and policies against age discrimination, many unemployed people who are in their 60s may be left without any source of income if the claiming age is raised.

It hurts to be neurotic

People who are relatively less intelligence, less conscientious or more neurotic tend to arrive at retirement age with less money than their smarter, more fastidious and more emotionally stable fellows, and might presumably be less able to adjust comfortably to an increase in the retirement age and/or a cut in Social Security benefits.

Although many smart people lost a lot of money in the bear market of 2008-2009, they also tend to have more money than other people, and can afford the losses, said Matthew Shapiro, an expert in “cognitive economics,” which is similar to but not the same as behavioral finance.

People with no financial wealth had no exposure to the stock market, and therefore no stock losses. But they were five times more likely to experience financial distress from the crisis as people with money, Shapiro found, because of tighter credit conditions.

Personality factors, as distinct from educational achievement and intelligence, may also have something to do with how much money people accumulate during their lifetimes and how well prepared they will be for retirement in a world with less support from government.

For instance, self-descriptions of “conscientiousness” were associated with additional average annual earnings of $1,536, according to psychologists Angela Duckworth of the University of Pennsylvania and David Weir of the University of Michigan, as well as more years in the labor force. “Neuroticism” was associated a reduction in average earnings of $698 per year.

Conscientious people were “organized,” “thorough,” “responsible” and “hardworking.” “Agreeableness” and “extraversion” also had negative associations with average earnings in the study. “Openness,” which includes intelligence, curiosity and sophistication, was slightly negatively correlated with annual earnings.

Teaching Americans how to be conscientious may be just as important to their financial security in old age as teaching them math skills (“numeracy”) or other elements of financial literacy, Duckworth and Weir concluded.

In UK, Protest Against ‘Lynch Mob’ Mentality on Public Pensions

Posted on August 4, 2010 by Editor Test -

It could be a preview of the potential battle in the U.S. between taxpayers and the schoolteachers and policemen who receive public-sector pension recipients. But the British are so much more eloquent.

A leader of Unite, Britain’s largest union, has attacked the UK government, the media, the private sector and so-called pensions experts for “acting like a lynch mob” on the issue of public sector pension reform, according to a report in Investments & Pensions Europe.

The union argued this “coalition of vested interests” had created a “climate of hysteria” in order to “manipulate the facts.”

Derek Simpson, joint general secretary at Unite, said: “This unholy alliance, embracing Confederation of British Industry leaders and deputy prime minister Nick Clegg, already have good pension nest eggs, which the average private and public sector employees can only dream about.”

He claimed the “vested interests” had already come to the conclusion that public sector pensions should be cut, notwithstanding ongoing consultation on the issue.

The Hutton commission – headed by former Labour cabinet minister John Hutton – is due to make an interim report on public sector pensions in September, submitting full proposals in time for the 2011 Budget.

Simpson questioned the independence of the commission and its ability to resist lobbyists wishing to “drastically erode the modest pensions of millions of public sector workers.”

He added that the Trades Union Congress last year estimated the majority of public sector pensioners receive a pension of less than £5,000 ($8,000) a year, and that half the women on NHS pensions receive less than £3,500 ($5,600) a year.

“We are not talking about great riches here,” he said.

New River and Newkirk in Electronic Delivery Deal

Posted on August 4, 2010 by Editor Test -

Newkirk Products, Inc., has agreed to distribute NewRiver’s Prospectus Express product in the 401(k) and 403(b) markets via Newkirk’s Fund Central platform. Prospectus Express allows electronic delivery of compliance grade prospectuses and other disclosure documents for mutual funds, ETFs, UITs and other prospectus-delivered securities. Fund Central provides online performance and investment information to retirement plan participants. Implementation is expected to be completed in early September.

Newkirk will use NewRiver’s Virtual Document Warehouse (VDW) to shift from “pick and pack” delivery of paper compliance documents to print on demand (POD) for first-dollar-in and fund-change-notice applications. Newkirk customers will be notified about this service’s availability at a future date.

“From a compliance and cost point of view, printing six page Summary Prospectuses digitally, when required, is superior to the legacy method of printing to stock, transporting, then assembling compliance packages at a distribution site. We are pleased to be working with Newkirk to implement this streamlined document delivery system for the retirement market,” said Russell Planitzer, NewRiver’s CEO and chairman.

Spark Institute Seeks Input on Proposed Data Standards for In-Plan Income Options

Posted on August 4, 2010 by Editor Test -

The SPARK Institute is seeking public comment on a draft of information-sharing standards and data records for lifetime income solutions that are used in retirement plans. “These standards will make it more feasible and cost effective for record keepers and insurance carriers to make retirement income solutions available to plan participants,” said Larry Goldbrum, the group’s general counsel.

The document, “Data Layouts for Retirement Income Solutions,” is posted on The SPARK Institute website at http://www.sparkinstitute.org/comments-and-materials.php. Comments are due by Friday, August 13 and should be sent to [email protected].

“The standards “will allow customer-facing record keepers to offer one or more products from unaffiliated insurance carriers; will facilitate portability of products when a plan sponsor changes plan record keepers (record keeper portability); and will support portability of guaranteed income when a participant has a distributable event in the form of a rollover to a Rollover IRA or as a qualified plan-distributed annuity (participant portability),” he said.

The standards were developed by an 80-member SPARK Institute task force drawn from 35 member and non-member companies, including the insurance companies that issue income products, along with record keepers and other trade organizations.

“We are soliciting comments and feedback to help us further refine the standards before final release,” Goldbrum said. “You do not have to be a SPARK Institute member to comment on the standards; in fact we encourage comments from all interested parties in an effort to encourage wide-spread adoption of the standards when they become available,” he added.

The standards accommodate such in-plan options as fixed deferred annuities, guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum income benefits (GMIB) solutions under several different service models followed by insurance carriers, including a record keeper traded model, provider traded model and guarantee administrator model.

“They were designed to be flexible and accommodate as many products and services as reasonably possible, but still maintain a reasonable degree of certainty so there are reliable common standards among users,” Goldbrum said.

With the growing importance of retirement income solutions for American workers, providers have begun developing innovative products to address the need,” Goldbrum said. “But, since the absence of standards for sharing necessary information among the insurance product providers and unaffiliated record keepers was an impediment to more widespread access to these products, our members asked us to develop industry standards as we did for 403(b) plans.”

“We believe strongly in the importance of lifetime income solutions in DC plans and the importance of providing a practical solution to the portability challenge,” said Charlie Nelson, chairman of The SPARK Institute and president of Great-West Retirement Services. “The SPARK Institute standards eliminate the portability challenge by providing a practical and innovative solution that record keepers and product providers in the DC market can use to make lifetime income products portable.”

The SPARK Institute represents retirement plan service providers and investment managers, including banks, mutual fund companies, insurance companies, third party administrators and benefits consultants. Collectively, its members serve over 62 million participants in 401(k) and other defined contribution plans.

To Offset Potential S.S. Cuts, Save 10 Percent More

Posted on August 4, 2010 by Editor Test -

If Social Security benefits decline in the future—as many advisors expect—then people should consider saving more today, according to a July 31 New York Times article based on data from Boston University economist Laurence J. Kotlikoff.

Assuming an increase in the full retirement age to 70 from 67 (implying a 20% cut in Social Security benefits), Kotlikoff suggested that a hypothetical 45-year-old couple should save an extra $90,000 before they retire. At age 55, the same couple year-old should begin saving an extra $82,900.

In both cases, the couples would have to cut their discretionary spending (money left over after housing costs, taxes and retirement and college savings) by about 10% per year in order to meet the higher savings goal. In the example, the couple had to cut their annual discretionary spending from about $43,000 to about $39,000.

The hypothetical couple was tracked from age 35 to age 100, and was on track to save just over $1 million by age 65. Initially, they each earned $60,000, had each saved $37,500, and earned a return of two percentage points above inflation on their investments. They had two children, a $350,000 mortgage and lived in New York State.

Most Plan Fiduciaries “Ill-Prepared” to Evaluate Alternatives

Posted on August 4, 2010 by Editor Test -

Matthew Hutcheson, the independent fiduciary and 401(k) reformer profiled in today’s issue of RIJ, thinks alternative investments could be a trap waiting for unwary or unprepared qualified plan sponsors.

As Hutcheson told members of the House Subcommittee on Health, Employment, Labor and Pensions last July 20, in a statement entitled, “Creating Greater Accounting Transparency for Pensions”:

While “many plan fiduciaries are exploring alternative investments to improve portfolio performance and reduce risks… most fiduciaries of employer sponsored retirement plans are ill prepared to perform an appropriate level of due diligence” when choosing alternative investments for their plans.

Interest in alternative investments—“tangible assets (i.e. gold or art), commodities, private equity funds, hedge funds, and closely held stocks” as well as “derivatives and guru portfolios” like the ones peddled by Bernard Madoff—is rising as frustrated investors look for better returns and relief from “financial industry fatigue,” Hutcheson testified.

Yet he listed several reasons why alternative investments are often too complex for the most plan fiduciaries. The fair market value of alternatives may be difficult to determine, there may be “unobservable inputs” that affect the value, little historical information may be available, and the costs of buying and selling alternatives can be high, he said.

Require audit of internal controls

Require that alternative funds have an independent auditor sign off on internal controls based upon the Committee of Sponsoring Organizations’ (“COSO”) definition of what it means to effectively evaluate internal controls.

Require understandable financial statements

Retirement plan fiduciaries want a “plain English” executive summary to an investment’s annual report and more complete disclosures. Indentifying a reasonable expected return on capital will otherwise be difficult at a minimum and perhaps even impossible based on what those familiar with such matters would otherwise require before proceeding with an investment.

Enterprise risk management skills

Fiduciaries considering alternative investments must possess sufficient knowledge themselves to investigate whether alternative investments are being managed by individuals with strong enterprise risk management skills. There must be a common, standardized language between all alternative investment managers, auditors, and plan fiduciaries. Key principles, concepts, and guidance must be conveyed under a common framework. A fiduciary’s ability to accurately compare two or more competing alternative investments depends on it.

Fair Valuation Standards

The Financial Accounting Standards Board recently published proposed amendments to its fair value measurement and disclosure rules that enhance and standardize the method of valuing alternative investments by the U.S. based Generally Accepted Accounting Principles (GAPP) and the International Financial Reporting Standards (IFRSs). It focuses on standardizing how elements of uncertainty that may affect a fair market value are disclosed. For example, disclosure of the use of one unobservable input over another in a fair market valuation, and how it might have affected the resulting value. This is particularly important for plan fiduciaries investigating the merits of international alternative investments.

Inflation-Indexed and Level Payout Funds from Barclays Bank

Posted on August 4, 2010 by Editor Test -

Barclays Bank Plc has announced two new payout product that allows pre-retirees or retirees to buy monthly income for as long as 30 years—a product that appears to compete alongside PIMCO’s TIPS-based 10-year and 20-year payout funds.

The registered securities are called Barclays Inflation-Indexed Level-Pay Notes, or IILP Notes, and Level-Pay Notes. The company filed a disclosure and marketing materials with the Securities and Exchange Commission on July 20, and a press release was issued July 28.

Income product aficionados have taken notice.

“It’s marketed as a gap product, such as between early retirement and pension benefits or to bridge until longevity insurance kicks in,” said Tamiko Toland, an annuity industry analyst at Strategic Insight, Inc.

“The inflation-adjusted income can adjust down, of course, and these things are not especially liquid, so they really don’t recommend using them unless you are able to or plan to hold them until maturity.”

The notes come in maturities of 15, 20, 25 and 30 years, according to Barclays. The initial principal payment for a 15-year note paying a non-inflation indexed $100 per month would likely be $12,600 to $13,600, with an effective interest rate of 3.59% to 5.05%, according to product literature. The exact price and and rate of return would be determined at the time of sale, depending on market conditions.

The purchase payment for a 20-year inflation-indexed note would be $17,400 to $19,900 per initial $100 per month, with an applied interest rate of 1.93% to 3.40%. In other words, an inflation-adjusted income with a base of $1,000 per month from September 1, 2010 to September 1, 2030 would cost $174,000 to $199,000.

By contrast, a 20-year, period certain, inflation-indexed immediate income annuity paying an initial $1,000 per month could cost almost $230,000, according to the Vanguard Lifetime Income Program calculator. A non-indexed 20-year income annuity paying a level $1,000 per month could cost as little as $161, 290, according to a recent quote from immediateannuities.com.

The first notes will be offered August 23, a spokesperson for Barclays Bank said. The product will be marketed mainly through fee-based investment advisors and that “any underwriting discount for brokers would be disclosed in the offering documents.”

Minimium investment amounts were not made available, nor was it clear what flexibility there would be in the lengths of the payout periods. The hypothetical examples used in the marketing materials mentioned 15-year and 30-year periods.

According to Barclays’ website, the notes “distribute monthly payments that consist of both inflation-adjusted interest and a partial return of inflation-adjusted principal. IILP Notes may be used as an effective cash flow management tool and as part of an investment or retirement portfolio.”

Neither the income level nor the principal is guaranteed. The notes themselves are described as senior, unsecured debts of Barclays Bank Plc, and payments “are subject to the credit risk of Barclays Bank Plc and not, directly or indirectly an obligation of any third-party.” Barclays Bank is rated AA- by Standard & Poor’s and Fitch and Aa3 by Moody’s.

The notes are not highly liquid either. According to Barclays, “The Notes will not be listed on any securities exchange. Barclays Capital Inc. and other affiliates of Barclays Bank PLC intend to make a secondary market for the Notes but are not required to do so, and may discontinue any such secondary market making at any time, without notice.

“Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the Notes easily. Because other dealers are not likely to make a secondary market for the Notes, the price at which you may be able to trade your Notes is likely to depend on the price, if any, at which Barclays Capital Inc. and other affiliates of Barclays Bank PLC are willing to buy the Notes.”

The IILP Notes marketing literature offers three hypothetical examples of how the product might be used. For instance:

Peter Hu retires at age 50, and needs $3,000 a month to cover rent, utilities, groceries (all subject to increases) until his company pension and planned 401(k) withdrawals begin at age 65. To bridge the interim period, he buys 30 units (one unit = $100 a month) of a 15-year Barclays IILP Note, which generates an inflation-adjusted income of $3000 per month.

Mary Thomas retires at 60 and withdraws a lump sum from her 401(k). She uses part of her lump sum to buy 35 units of a 30-year IILP Note, which pays her an inflation-adjusted $3,500 a month. She uses the rest to cover discretionary expenses and to purchase longevity insurance to provide income if she lives past age 90.

George Parker, 70, is retirement. His budget of $5,000 per month comes from SS, $1,000, and savings, $4,000. “He is comfortable taking risk to try to grow the money that he isn’t planning to spend until after he is 85. He buys 40 units of a 15-year IILP note, generating $4000 inflation-adjusted dollars.

Independent Fiduciaries to the Rescue

Posted on August 4, 2010 by Editor Test -

The National Retirement Security Plan is one of Matthew Hutcheson’s most recent ventures. It’s intended to be a scalable way for small plan sponsors to outsource the bulk of their investment and fiduciary responsibilities to outside professionals at a low cost.

The NSRP achieves its economies of scale in several ways. It’s a multi-employer plan, resembling one big plan with a bunch of different locations. The investments also go into a large fund whose investment decisions are made by professionals. Participants can choose age-based or higher-risk portfolios, but they don’t manage their own money.

The independent fiduciary, under Hutcheson’s supervision, is in charge, and very much pro-participant. Matching contributions, for instance, are 100% vested immediately. TD Ameritrade is the custodian (of a cash balance account, a 401(k) account and a 403(b) account), and Trautmann Maher & Associates, Mill Creek, Wash., is the recordkeeper. The investment portfolios are managed by ERISA Section 3 (38) investment manager fiduciaries.

“You’ve got complete novices at the helm of the biggest pools of wealth in the world, and they are vulnerable to the latest industry gimmick,” Hutcheson said. “The solution, I believe in my heart, is for the independent fiduciary coming and applying discipline and shepherding retirement plans to the point where in 20 or 30 years, somebody can have a viable shot in at reasonable retirement. People now view 401k as a tool or product, and ask, ‘What should I do now?’ Our focus is on the future person.”

NRSP “has auto enrollment and auto escalation,” he said. “We have eight investment managers with discretion over the portfolio. One objection to most 401k plans is that the investment managers don’t care and go into junk products. I’ve created eight groups of portfolios.

One manager does Vanguard funds, another does DFA funds, another does socially responsible funds. Each adopting employer can choose the philosophy he or she wants. But I take the reins and become the controlling party of the plan. The HR director and the president resign from their fiduciary positions,” Hutcheson said.

The NRSP literature lists the administration costs at $85 per participant per year, plus just under 1% for fees. Hutcheson told RIJ, “The whole expense is 98 basis points, including the fees for the custodian, trustee, and the default portfolio. As it grows, we’ll take advantage of [the economies of] collective trusts.”

The result, he said, is that “Plumber Bob will be able to get a plan that’s lots better than Fortune 500 companies. I’ve created a way for small guys to have better quality and pricing than the big guys.” As for not letting participants manage their money directly, he said, “Our plan is fiduciary controlled, and we don’t believe participants can make good decisions. We have a duty to protect your future self. A 401(k) is like a bar of soap. Every time they touch it, it gets smaller.”

The roots of NRSP go back almost 15 years—to when Hutcheson would have been only 25 years old. “In 1996 I created our first multiple-employer plan. Before that, most [multi-plans] were for [employers in the same industry]. I aggregated unrelated employers to create huge economies of scale. The IRS thought it was great.

“I’ve created 15 of those plans, and each year we roll out better and better versions,” he said. So far, he says, he has about 300,000 participants at about 800 employers, with some 60 new plans in the pipeline and “15 or 20” employers calling him every week.

The potential market for NRSP, Hutcheson said, includes the 30 million employees who don’t have retirement plans and an additional 30 million who have low-quality plans. To serve them, he hopes to train an army of independent fiduciaries. “I’d like to see 50,000 to 100,000 fiduciaries taking care of plans,” he told RIJ. “The change won’t come in the form of new financial products or gimmicks. It will come from having independent experts applying sound principles.”

The Gospel of Matthew Hutcheson

Posted on August 2, 2010 by Kerry Pechter -

“Save America” is the name of one of Matthew D. Hutcheson’s latest website projects, and the name alone gives you some idea of the scale and scope of this 40-year-old retirement industry entrepreneur’s transcontinental ambitions.

Often called the leader of “independent fiduciary movement,” Hutcheson has been working for most of this decade to reform the 401(k) business from within. He has helped invent the profession of independent fiduciaries—third-party stewards who provide expert oversight to small and micro-plans.

An advocate—crusader might not be too strong a word—for higher fiduciary standards and greater fee transparency throughout the financial services industry, he has testified before Congress, written articles and books, and been active in the year-old Committee for the Fiduciary Standard.

For Hutcheson and like-minded challengers of the status quo, the prospects for reform are probably stronger now than they’ve been in many years. Although the new financial reform bill doesn’t address fiduciary issues, it does give the Securities and Exchange Commission “authority to impose a fiduciary duty on brokers who give investment advice.” The SEC has six months to study the issue before taking action, if any.

Polemics and profit-making

But Hutcheson, who is now based in a suburb of Boise, isn’t just a reformer. He’s also an aggressive businessman. Through new ventures like the National Retirement Security Plan (NSRP), a multi-employer 401(k) plan for small companies, and e-luminary.com, a service for linking investors and plan sponsors with well-credentialed advisors, he has plans for what sounds like an independent fiduciary empire.

“We have an aggressive end game,” Hutcheson told RIJ recently. While Hutcheson currently acts as fiduciary for hundreds of small plans with 300,000 participants, with NSRP “we eventually hope to cover 30 million people. We’re focused on the 30 million people who don’t have retirement plans. There’s another 30 million who have low quality plans,” he said.

To help run NRSP, he’s recruiting people who want to be independent 3(21) or 3(38) fiduciaries—full-scope or investment-only—according to his principles. He’s been training them through a series of Fiduciary Symposiums, including one held in Manhattan last May. The keynote speaker was author/entrepreneur Stephen Covey.

By mixing polemics with profit-making, Hutcheson sometimes raises the question of whether his muckraking is a form of self-marketing. Those he has criticized—such as defenders of the 401(k) establishment—seem to think so.

“My sense is that he has been somewhat over-the-top in order to market himself. He thinks fees are too high, and that’s fine. But he has misrepresented how the system works,” said one leading member of the large-plan 401(k) industry who requested anonymity. “But nobody has ever complained about his services.”

Hutcheson’s allies claim there’s no conflict of interest. “Matt practices what he preaches,” said Blaine Aiken, CEO of FI360, which trains investment fiduciaries and which conferred the Accredited Investment Fiduciary Analyst (AIFA) designation on Hutcheson in 2003. “He has a business model and wants to see it succeed, but it’s firmly founded in fiduciary principles.”

“He’s a retirement policy activist who is very committed to a point of view. Not everyone agrees with him, but no one can question his passion,” said Brian Graff, CEO of ASPPA, the American Society of Pension Professionals and Actuaries, to which Hutcheson belongs.

“He’s been on the forefront of fee disclosure. He’s one of the folks out there calling for more transparency. His National Retirement Security Plan is part of a trend. We’re seeing more and more employers saying, ‘We’re not investment experts,’ and throwing up their hands,” Graff said.

No one questions Hutcheson’s credentials. Curiously, he lists no college or university as an alma mater on any website. Instead he cites a list of designations and accreditations from the Institute of Business & Finance, the American Society of Pension Actuaries, the Center for Fiduciary Studies at the University of Pittsburgh’s Joseph M. Katz Graduate School of Business, the International Foundation for Retirement Education (InFRE), the American Academy of Financial Management and the ERISA Fiduciary Guild.

“I started as an actuary and became a practicing fiduciary,” Hutcheson told RIJ. “Politically, I grew up in a conservative Republican Seattle-Texas family. But I’m not aligned with the Republicans or the Democrats.

“I’m independent in the sense that—I have a lot of compassion, but I believe that only a private sector solution can be agile and nimble enough [to address the retirement savings crisis]. It may sound corny, but I believe I have a solution. And it is actually functioning, and we’re making it available to anybody.”

A battle over dollars

Although he is distinguished by his zeal and his visibility, Hutcheson is by no means the only person who believes that the ERISA plan industry needs reform. Many others, for instance, want to see an end to hidden transaction fees in plan investment options.

“Participants have been underserved by the current system,” said Mike Alfred, a co-founder of Brightscope, the 401(k) plan rating service. “I can tell you from raw data, we’ve seen a lot of plans with fees that are beyond exorbitant. For instance, there’s no consensus on the disclosure of trading costs. Because of that, they don’t count it as a fee at all.”

“As a fiduciary in a plan, you’re required to know the expenses but the providers are not required to give you the information,” said Harold Evensky, whose firm, Evensky & Katz Wealth Management, acts as investment fiduciary for plans. “Hopefully, that will change.” Like Hutcheson, Evensky is a member of the Committee for the Fiduciary Standard.

Aside from the fee issue, others besides Hutcheson are trying to bring a higher level of oversight to small company plans where the fiduciary role might be filled by someone without the time or skills to execute it properly, and to do it at a price that small plan sponsors can afford.

Eighteen months ago, for instance, Chip Morton started FiduciaryPlanReview.com to provide scalable fiduciary services to small company plans. But where Hutcheson creates economies of scale by aggregating plans, Morton created a sort of robo-fiduciary service in which a computer reviews plan investments, among other things.

“Most small or micro-plans are in the hands of a local stock broker or an insurance agent who’s a friend of the CEO and who takes it on by default or as a loss-leader for other business,” Morton said. “If they don’t have the skill set to meet the fiduciary standard, we shift the risk to us and issue a warranty” backed by Great American Insurance Group.

Beneath the ERISA complexities, the matter boils down to a simple battle over dollars. Hutcheson and his fellow reformers want more money to stay in participant accounts and less to go out in fees. They also hope to profit in the process.

That makes them less than popular with insurance companies, investment firms, and wirehouses. “He’s quite polarizing,” said Brightscope’s Mike Alfred. “The big mutual fund companies and the Profit Sharing Council of America find him very polarizing.”

As for his new website, “Save America,” it’s not quite clear what Hutcheson has in mind. It’s still under construction. The homepage currently says: “Something exciting coming soon from Matthew D. Hutcheson LLC.”

Behavioral Economics and Retirement Investing

Posted on July 31, 2010 by Editor Test -

PIMCO and its affiliates in the Allianz Family recently sponsored “Behavioral Finance and the Post-Retirement Crisis,” a landmark study of behavioral economics as it applies to retirement decision-making. It was published in April in response to the U.S. Treasury and Labor Departments’ Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Income Plans.

Allianz and PIMCO tapped leaders in the field of behavioral finance, led by Shlomo Benartzi, Ph.D., of UCLA, to conduct the study. Below, PIMCO Retirement Product Manager Tom Streiff explains how the study’s findings can foster the development of successful retirement income products.

Q: One major issue for retirees is the risk that they take with their investments. What did the behavioral finance study reveal about risk-taking and risk aversion among older adults?

Streiff: As part of the behavioral finance study, Columbia University professor Eric Johnson built on earlier studies of loss aversion and found that retirees as a group display “hyper loss-aversion.”

It’s not surprising that retirees are more concerned about loss than younger folks. But what was surprising in the study was the magnitude of their concern. For instance, retirees wouldn’t accept a “coin flip” equivalent bet unless they could expect to win $100 on heads for every $10 lost on tails. Earlier studies have shown that the average investor needs to expect to win $20 for every $10 lost in order to feel, on an emotional level, that he or she will “break even.”

It was also interesting that retirees generally respond unfavorably to financial products that offer substantial protection and guarantees. Johnson concluded that retirees view the purchase of certain insured investments as a form of sacrificing control of their money, and perceive it a loss.

This is where “hyper loss-aversion” can inhibit their ability to make what we believe would be more sensible financial decisions. For instance, even if a product offers a future stream of income or can cushion retirees against a large drop in the stock market, they may not buy it if they can’t withdraw their money whenever they want.

Q: How can providers of income-oriented investment products break through this “hyper loss-aversion” mindset and reach retirees? Is it a matter of product design, outreach to advisors and investors, or both?

Streiff: The research highlights the challenges that investment firms face in designing new products and in positioning them as tools for increasing control.

Take inflation, for example. It is the “silent killer” of retirement savings. Over time, inflation can inflict more damage on a portfolio than bear markets or financial crises. Investment firms and planners need to build products and solutions that defuse this inflation threat. They also need to communicate the value of directly hedging inflation and preserving purchasing-power over time. If retirees believe that they are reducing the threats to their wealth, their hyper risk-aversion can be channeled into better decisions.

Eliminating or reducing the chance of default in the portion of a retiree’s assets that provides their basic living expenses can also alleviate loss-aversion. Once retirees’ essential spending needs are taken care of, they may feel better about pursuing higher returns with the rest of their savings.

Q: Why is it so hard for people to perceive the threat of inflation?

Streiff: Most people—especially older people—think in nominal dollars, and overlook the corrosive effect of inflation. Consider that an annual inflation rate of 3% compounded over 20 years can erode purchasing power by nearly 50%. People find it hard to comprehend that they could lose almost half of their savings in real (inflation-adjusted) dollars without losing a single penny in nominal dollars.

In our behavioral study, Eldar Shafir of Princeton University looked at the psychological basis of the “money illusion,” which refers to the dominance of nominal dollars in decision-making. When the future value of savings was stated in nominal dollars, a non-indexed contract was preferred. But when the future value of saving was stated in real dollars, reflecting the loss of purchasing power, they tended to favor an inflation-indexed contract. Moreover, when contract information was presented in a neutral way, preferences were similar to those when nominal dollars were presented.

While the findings confirm that most people think about risk in terms of nominal dollars, they also show that a clear demonstration of the risk of inflation can help minimize the “money illusion.”

Q: What does this result tell us about how to market inflation hedging to individuals?

Streiff: Shafir’s study highlights the critical gap that still exists between the actual threat that inflation poses for retirees and their perception of the threat. More starkly, it shows that their failure to recognize the impact of inflation could harm the sustainability of their finances and cause a material erosion of their purchasing power and standard-of-living.

However, the results also suggest that proper education and presentation, including the use of real dollars instead of nominal dollars to describe future account values or future income streams, can correct this major financial misperception. Not only should financial firms offer products that hedge inflation risk, but they should also present financial information in a way that overcomes the all-too-common intuitive dismissal of inflation threats.

Q: The report also found that products characterized as “income solutions” are more attractive than those positioned as investments. Does this imply that all retirement investment discussions be presented in terms of income?

Streiff: Several key behavioral studies have established that “framing” decisions can have a huge impact on transactions. Consider the difference between advising a person to spend about 70% of their current income in retirement or to plan on eliminating 30% of their current expenditures during retirement. Even though these two proposals are mathematically equivalent, most people find the 30% rule unpalatable and the 70% rule appealing.

As part of the behavioral finance study, Professor Jeffrey Brown of the University of Illinois applied this logic to retirement income, asking more than 1300 individuals over the age of 50 whether they’d choose a life annuity paying $650 each month until death or a savings account of $100,000 bearing 4% interest. Half of the respondents were presented the annuity choice in a “consumption” frame—a monthly income of $650 for life—and half were presented in an “investment” frame—a monthly return of $650 for life.

That simple change caused a major difference in the response to the savings accounts versus the life annuity question. Seventy percent of the respondents chose the annuity when it was presented in the consumption frame (as monthly income) while only 21% of the respondents chose the annuity when it was presented in the investments frame (as monthly return).

Q: How can the results of the “framing” study be built into marketing and product design strategy for income products?

Streiff: The study tells us that the respondents have a far more favorable perception of an annuity when it is presented as a consumption plan that guarantees lifetime income. When an annuity is presented as an investment plan, the owner perceives a greater risk of dying early and relinquishing the wealth to the insurer.

Most of life’s routine expenses—mortgage payments, electric bills, etc.—must be paid monthly, and guaranteed income can cover those expenses. Investment returns, on the other hand, are typically irregular and feel more abstract with regard to expenses.

Clearly, the most useful result of this study is that retirement income products will get far more traction if they are marketed on the basis of the monthly income they can provide for the retiree than on the basis of their “returns.”

All investments contain risk and may lose value. PIMCO does not offer insurance products, including guaranteed income products, or products that offer investments containing both securities and insurance features. This material contains the current opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. © 2010, PIMCO.

Found in Translation

Posted on July 31, 2010 by Ben Pousty, Corporate Insight -

The U.S. Census Bureau projects that minorities—all people other than non-Hispanic, single-race whites—will account for roughly 54% of the U.S. population by the year 2050. If financial services firms hope to be relevant in these growing circles of the population, they must diversify the languages in which they communicate.

To this end, a number of annuity issuers have introduced alternative language websites. In most cases, these are fully translated versions of the firms’ English-language public sites. Thirty percent of the firms we cover now provide access to alternative language websites. That’s twice the number of firms offering such resources in 2008.

Spanish is presently the language most frequently offered. This comes as no surprise, given that Hispanics are the nation’s largest minority group and continue to grow in terms of both population and influence. Chinese-language websites are a distant second in terms of availability, followed by Korean and Vietnamese sites, respectively.

TIAA-CREF’s Spanish-language website is the most unusual and engaging among the firms we cover. Its design differs from that of the English-speaking version and it offers fresh investment education and marketing content tailored to Spanish-speaking investors. Four life events-focused promotional images appear prominently on the homepage. Product information and retirement education are easily accessible via a menu bar at the top of the screen.

New York Life, the nation’s largest mutual insurer, offers the most comprehensive alternative language website offerings. The public homepage provides links to independent websites in Spanish, Chinese, Korean and Vietnamese. The four websites have a similar homepage design, which features a large promotional image at the top, a left-side main navigation menu and a variety of information in the body.

As in TIAA-CREF’s Spanish-language site, the investment content and marketing promotions on New York Life’s sites are customized for their respective audiences. Although the quality and quantity of the content varies across the websites, New York Life has implemented a consistent but flexible online infrastructure that should allow the firm to effectively market its products and services to numerous demographics of non-English speaking investors in the U.S.

Given the potential for adding new business, many more firms are likely to expand and upgrade their public alternative-language websites in the coming years.

New York Life Spanish Language Public Website

Retirement Planning CE Course Offered

Posted on July 18, 2010 by Editor Test -

Quest CE announced that its continuing education course, “Retirement Planning and Annuities,” is approved in Missouri and Wisconsin for eight (8) credit hours. Quest has filed this course to be nationally approved and expects approval in the next few weeks.

“Planning for retirement can involve multitudes of subjects. As individuals gain knowledge on the value of annuities, they will understand the benefit of this product,” Quest CE said in a release.

“For example, young couples tend to not consider retirement planning in the early stages of their lives together. Saving for retirement may be difficult, however learning the right ways to save will yield for a high financial gain when ready to retire. The earlier a young couple plans for retirement, the more their retirement will be free from financial anxieties.

In addition, some couples may form an annuity contract with an insurance company, making a series of payments now, to secure receiving periodic payments in the future. Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay the beneficiary a guaranteed minimum amount.”

ASPPA Supports DOL-Mandated Fee Disclosure 

Posted on July 18, 2010 by Editor Test -

Brian Graff, executive director/CEO of the American Society of Pension Professionals & Actuaries (ASPPA) released the following comment on the U.S. Department of Labor’s (DOL) recently released 408(b)(2) regulations, which impose new fee disclosure requirements on retirement plan service providers.

“We commend the U.S. Department of Labor (DOL) for issuing regulations that will bring greater transparency and disclosure of fees charged to retirement plans. We believe these new fee disclosure rules benefit both plan sponsors and providers. Providers now have clear guidance on what disclosures are required and plan sponsors will have the information they need to make informed choices about their retirement plans.

Defined contribution plans, such as 401(k) plans, serve as the primary retirement savings account for many American workers—but the fees and expenses charged to these plan accounts can add up over time to take a substantial bite out of retirees’ retirement savings. Thanks to the new DOL guidance, the rules on fee disclosure will be applied in a uniform manner to all retirement service providers, regardless of how plan services are delivered.

In order to meet their fiduciary responsibilities under ERISA, plan sponsors need to make an “apples to apples” comparison of the fees charged by retirement plan service providers. Complete and consistent fee disclosure, including the specific requirement for the disclosure of fees associated with recordkeeping services, is now the standard for both bundled and unbundled service providers. By promoting fair competition, these new fee disclosure requirements will help ensure that the fees paid by plan sponsors and participants for retirement plan services are reasonable.

ASPPA and its affiliated organizations, which include the Council of Independent 401(k) Recordkeepers (CIKR), and the National Association of Independent Retirement Plan Advisors (NAIRPA), have long advocated for required disclosure of fees for retirement plan services such as investment management, recordkeeping and administration, and transaction based charges. Such information will allow plan sponsors to make educated decisions about how to operate their retirement plans to the ultimate benefit of plan participants.

ASPPA, CIKR and NAIRPA applaud the DOL’s decision to amend the regulation under ERISA Section 408(b)(2) and look forward to working with DOL on the transition required to implement the immense changes required by the new regulations.”

TDF Demographics Revealed

Posted on July 18, 2010 by Editor Test -

Participants who are younger, have lower account balances, and have shorter tenure at their current job are the most likely to use target date funds in 401(k) plans, according to a study released today by the Employee Benefit Research Institute (EBRI).

That’s because new workers are the most likely to be automatically enrolled in their employer’s 401(k) plan and TDFs are often the default option, says the study in the July 2010 EBRI Notes, available at www.ebri.org

The study looked at plan participants in 2007 to see who remained in TDFs, moved out of TDFs, or moved into TDFs if they were not already using them. The study uses the data in the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project, which in 2007 had 21.8 million participants from 56,232 plans across a spectrum of plan administrators.

The share of all 401(k) plan participants using TDFs increased from 25% in 2007 to 31% in 2008, the study reports. If usage grows, as expected, the design of TDFs (especially the investment allocation “glide path”), as well as participants’ understanding of these funds, will become more critical to the future success of 401(k) plans, the study said.

Additional findings include:

Of those participants having an allocation to TDFs in 2007, 93.9% still had some of their account balance allocated to TDFs in 2008. Nearly 10% of participants who were in a plan in 2007 that offered TDFs but did not use them in 2007 were using them in 2008.
Of those participants who were in a plan that offered a TDF in 2007 and were still in the EBRI/ICI database in 2008, 36% had at least some of their account balance in TDFs. By 2008, of this same group of participants, 39.8% had at least some of their account balance in TDFs.
Participants with the lowest salaries were more likely to stay in TDFs and to have begun using them in 2008. However, as salaries increased, there was no significant difference in new TDF use.
Plan size correlated with the likelihood of new TDF use in 2008, but the probability of continuing use showed very little change across plan sizes. In plans with 1−10 participants, 94.8% of those using TDFs in 2007 still had dollars allocated to them in 2008, compared with 93% of those in plans with more than 10,000 participants.
The participants with the highest levels of tenure and the highest account balances are more likely to stop using TDFs (or not start in the first place). Of those participants in 2007 with 30 or more years of tenure and having some of their account balance allocated to TDFs, 85.8% continued to have some assets in TDFs in 2008. Of participants in 2007 with two to five years of tenure, 95.5% remained allocated to TDFs in 2008 after having done so in 2007.
The average age of those participants using TDFs in 2007 was 43.1 and in 2008 it was 42.4, compared with 45.6 and 46.2, respectively, for those participants not using TDFs. The average age for those using TDFs in both years was 42.9.

Sign-up for Corporate Insight‘s free monthly e-newsletters,Industry Insights, and download an excerpt from the report “Social Media: Trends and Tactics in the Financial Services Industry.”All fields are required.
Email
First Name
Last Name
Company

It could be a preview of the potential battle in the U.S. between taxpayers and the schoolteachers and policemen who receive public-sector pension recipients. But the British are so much more eloquent.

A leader of Unite, Britain’s largest union, has attacked the UK government, the media, the private sector and so-called pensions experts for “acting like a lynch mob” on the issue of public sector pension reform, according to a report in Investments & Pensions Europe.

Data Connection

Lists*