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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: 

NAIFA (National Association of Insurance and Financial Advisors) Career Conference and Annual Meeting

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

2010 Advisors Conference

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


 

LIMRA Annual Conference 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


 

NAPFA Connections Conference

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. 

Transamerica Launches “Bridge” GLWB

Until now, no annuity issuer has targeted an important part of the retirement income market: retirees who need “bridge” income to pay their bills until they start receiving income from a pension or from Social Security.

This week, Transamerica appears to have addressed that market with the introduction of a living benefit rider called Income Link. During the payout stage, this rider delivers an income of between 5% and 10% a year for two or more years, before settling down to a steady 4% annual payout for life.

The rider, which might also suit people who expect to travel a lot during the first few years of retirement, seems to work the same way most other guaranteed lifetime withdrawal benefits do, except that the payout is front-heavy. Contract owners must be at least 55 years old, but no older than 81, to elect the rider.

“Most people are dealing with pots of money in retirement, where they exhaust one and turn the next one on. This product operates not only as the first pot, but also as a permanent long-term pot,” said Dave Paulsen, national sales manager, Transamerica. “This concept has been in the works for 16 to 18 months. We talked to all our main distributors and key partners, and they agreed that this market is underserved.”

Clients who choose Income Link cannot allocate more than 35% of their contract assets to equities, Paulsen said. But even that conservative stance gives clients far more upside than they would get if they decided to take systematic withdrawals from a short-term bond fund during the early retirement years—the strategy that Income Link is designed to replace.  

The investment options are limited to sub-accounts based on Transamerica’s Asset Allocation/Conservative, Transamerica PIMCO Total Return, Transamerica Money Market, Transamerica U.S. Government Securities, Transamerica Foxhall Global Conservative and Transamerica Index 35, as well as an American Funds bond fund and a fixed account.  

The rider fee is 90 basis points of the benefit base, with a maximum of 165 basis points. As is typical of this type of benefit, Transamerica has the flexibility to raise the fee whenever the client raises the benefit base by “stepping up”  to the account value. On each contract anniversary, Income Link allows the contract owner to step up the benefit base to the highest value on any of the 12 preceding “Monthiversaries” of the date of purchase. Since the product is designed to provide near-term income, the rider does not include the “roll-up” that many firms use to discourage near-term withdrawals. 

Transamerica’s VA fees range from 60 to 190 basis points, plus subaccount fees. Surrender charges range from zero to 9%, depending on share class, and a “fund facilitation fee” of up to 30 basis points may apply for certain subaccounts. There’s a $30 to $35 annual administration fee.

Income Link offers these payout rate options (Each percentage is reduced 0.50% for joint life contracts):

  • 10% for two years, then 4% for life
  • 9% for three years, then 4% for life
  • 8% for four years, then 4% for life
  • 7% for five years, then 4% for life
  • 6% for six years, then 4% for life
  • 5% for seven years, then 4% for life

Each percentage is 0.50% lower for joint life contracts.

After purchasing a Transamerica variable annuity, the owner can start Income Link and elect a payout option and an income start date. The elections can be altered if no income payments have been received yet. Once payments start, they have to be taken as systematic withdrawals, according to a monthly, quarterly, semi-annual or annual schedule.

Transamerica sells about 60% of its variable annuity sales through the independent advisor channel. The company was the 11th largest seller of VAs in the U.S. in the first quarter of 2010, up from 14th a year earlier, with sales of $794 million and a market share of 2.54%. “We’ve had double-digit growth year-over-year since 2006,” Paulsen said, noting that, “We don’t expect Income Link to cannibalize our current living benefit offerings. We expect it to be additive.”

© 2010 RIJ Publishing LLC. All rights reserved.

Indexed Annuity Sales Rebound

Indexed annuity sales totaled $8.3 billion in the second quarter of 2010. That was 0.1% lower than the same period in 2009 but up 22.8% from the first quarter of this year, according to AnnuitySpecs.com’s Indexed Sales & Market Report. The report was based on data from 43 issuers representing 99% of indexed annuity production.

“With CD rates at 1% and fixed annuities crediting a mere 3.65% on average, it is no wonder that this was the second-highest quarter in terms of indexed annuity sales,” said Sheryl J. Moore, president and CEO of AnnuitySpecs.com.  

Allianz Life maintained its lead sales position with a 19% market share. Aviva repeated in second place, followed by American Equity, Lincoln National and North American Company. Allianz Life’s MasterDex X was the top selling prodct for the fifth consecutive quarter. Jackson National Life dominated sales of indexed annuities in wirehouses for the third consecutive quarter.

For indexed life products, second quarter sales were $165.8 million, an increase of more than 16% from the previous quarter and 25% over the same period in 2009. The survey was based on data from 33 carriers representing 100% of production.

“This quarter’s sales are reflective of increased consumer interest in these products, as a result of record-low interest rates on interest-sensitive insurance products. We have never had a greater level of interest in the indexed life market from highly rated insurance companies. Indexed life is finally transitioning from a niche product to mainstream insurance,” Moore said.

Aviva held the top sales position, with a 18% market share. Pacific Life, Penn Mutual, AEGON Companies and Minnesota Life followed, in that order. The top product was Pacific Life’s Pacific Indexed Accumulator III.  Over 80% of sales utilized an annual point-to-point crediting method. The average target premium paid was $7,036.

© 2010 RIJ Publishing LLC. All rights reserved.

VA Sales Up Sharply in Q2: LIMRA

Variable annuity (VA) sales increased 11% in the second quarter of 2010, as compared to the prior year, to reach $35.5 billion, according to LIMRA’s U.S. Individual Annuities Second Quarter 2010 Sales Report, which represents 96% of the market.

VA sales were 10% higher than sales in the first three months of 2010. For the first six months of 2010, VA sales improved 8% compared to the first half of 2009, totaling $67.9 billion.

“After five consecutive quarters where VA sales were lingering in the $31-33 billion range, we are finally seeing signs of recovery as VA sales jumped more than $3 billion in the second quarter,” said Joe Montminy, assistant vice president for LIMRA’s annuity research. “Most companies in the top twenty experienced VA sales growth this quarter—whereas last year we saw growth concentrated with the top five carriers.”

Fixed annuity sales continued to decline in the second quarter, down 26% compared to the second quarter of 2009, when total fixed annuity sales were much stronger. However, compared to the first quarter, fixed annuity sales improved 13% to $21.5 billion in the second quarter of 2010 and $40.5 billion year-to-date.

After a slight drop in the first quarter of 2010, second quarter indexed annuity sales matched the record levels hit in the second quarter of 2009. Market volatility and the low interest rate environment continued to drive sales of indexed annuities, which reached $8.2 billion in the second quarter.

Book value annuity sales dropped 43% in the second quarter of 2010, totaling $8.1 billion but improved 7% from the first quarter. Second quarter MVA sales of $1.6 billion were down 54% from second quarter 2009. Fixed immediate annuity sales were $2.1 billion and structured settlement sales reached $1.5 billion in the second quarter of 2010.

Total annuity sales were down 7% in the second quarter compared to the second quarter of 2009 to $57.0 billion. However, total annuity sales grew 11% over the first quarter, marking the first quarterly increase in total annuity sales since the fourth quarter of 2008. Year-to-date, total annuity sales totaled $108.4 billion.

 

© 2010 RIJ Publishing LLC. All rights reserved.

Broadbridge Acquires NewRiver for $77 Million

Broadridge Financial Solutions, Inc. has agreed to acquire NewRiver, Inc., a provider of electronic investor disclosure solutions, for approximately $77 million. NewRiver’s work force, located in Andover, Massachusetts and New Delhi, India, will become part of Broadridge’s Investor Communication Solutions division.

The merger agreement has been approved by the Boards of Directors of both companies and the transaction is expected to close in August subject to customary closing conditions. The acquisition is expected to be accretive to Broadridge’s earnings per share in fiscal year 2011.

NewRiver, founded in 1995, pioneered the first electronic prospectus. Its regulatory disclosure communication solutions allow customers to control compliance risk and costs. Its clients include mutual funds, variable annuity insurers, retirement plan administrators and brokerage firms. NewRiver has been a supplier to Broadridge for nearly 10 years.

The acquisition accelerates Broadridge’s e-strategy while strengthening its industry-leading compliance communication capabilities, the company said in a release. “Broadridge’s integrated e-delivery and hard copy fulfillment capabilities, combined with NewRiver’s database of content and its FundPOINT compliance and productivity tool, will assist financial institutions in meeting their compliance and oversight requirements.”  

“Broadridge’s acquisition of NewRiver is a natural strategic fit, as evidenced by the success of the joint solution we extended the industry last year in response to the SEC’s Summary Prospectus rule,” said Russell Planitzer, NewRiver’s Chief Executive Officer. “More importantly, our combined creative thinking and expertise brings new levels of sophistication and innovation to electronic disclosure,” he said. 

© 2010 RIJ Publishing LLC. All rights reserved.

Why the Wealthy Should Buy SPIAs

In the 1983 novel, “Eleni,” a man asks his elderly grandfather, who had been a local gallant during his youth, to explain the secret to his success with women. The grandfather replies: “By knowing who wanted me.”

The same wisdom might may apply to selling income annuities. Success may depend more on the receptivity of the buyer than the determination of the seller. 

A doctoral candidate at the University of Virginia has now added to the world’s store of knowledge about marketing immediate income annuities by publishing a highly detailed paper that explains who is or isn’t likely to be receptive to one, and why.

The findings that researcher Svetlana Pashchenko describes in her paper, “Accounting for Non-Annuitization,” won’t shock you. She determined that most people don’t buy income annuities because they already have “pre-annuitized wealth” in the form of Social Security benefits, private pensions or government transfers like Medicaid or welfare.

No surprise there. Social Security “crowds out” private annuities. But Pashchenko broke some new ground in assessing seven obstacles to income annuity purchases and assessing their relative weight for people with different income levels.  

Only the relatively wealthy can afford an income annuity, she found. And there are two potential reasons why they would buy one. (Marketers may want to jot these down.)

First, those who worry about future medical expenses might buy an annuity to fund them. “Uncertain medical expenses increase demand for annuities because health expenditures are increasing with age: the state of being old and alive coincides with the state of being old and having to pay high medical costs. Thus, insurance against longevity risk and insurance against medical costs uncertainty compliment each other,” the paper said. 

Second, those in good health, as a group, may find that adverse selection actually makes annuities cheap for them.

It’s well-known that people who buy annuities tend to live longer than those who don’t, and that drives up the cost for the average person. A middle-income person in bad health, for instance, will tend to overpay for an income annuity by as much as 35%, Pashchenko estimated. Even a healthy poor person tends to pay 25% extra for an income annuity, because low incomes are associated with shorter lifespans, regardless of current health status.  

But healthy people in the fourth and fifth (the two highest) wealth quintiles pay 5.3% and 13.1% less, respectively, than their actual life expectancies would call for, Pashchenko wrote. Apparently, enough members of the general population buy income annuities to make them a bargain for those with the lowest mortality risk—the healthy rich.   

“Since mortality is negatively correlated with permanent income, this means that in the pooling equilibrium, higher income quintiles will face better prices and thus get an implicit subsidy from low income quintiles,” the paper said. Is that fair? Probably not. But it appears to be true.

Pashchenko also found that income annuities can increase the consumption levels of those wealthier owners by almost nine percent. “For a retiree in good health and in the highest income quintile the loss of opportunity to invest in annuities is equivalent to 8.9% of consumption,” she wrote. “For people in good health and in high income quintiles the opportunity to have access to the annuity market is very valuable.”

Pashchenko presented her paper August 6 at the 12th annual conference of the Retirement Research Consortium in Washington, D.C. In concluding her presentation, she conceded that she had not entirely solved the “annuity puzzle.” Despite all the headwinds that she identified and quantified, she calculated that income annuity sales should be about three times higher than they currently are.

The table below, from Pashchenko’s paper, shows seven factors associated with demand for income annuities, along with their impact on demand among lower income groups and higher income groups. Note that “Medical expenses”  and “Adverse selection” are the only positive drivers of demand, and only among the upper income quintiles. 


Source: Pashchenko, Svetlana, “Accounting for Non-Annuitization.” Federal Reserve Bank of Chicago, WP 2010-03.

© 2010 RIJ Publishing LLC. All rights reserved.

 

Which Are the Hottest VA Brands?

The names “Prudential” and “MetLife,” in that order, come most quickly to the minds of investment advisers and registered reps when they’re asked to name a variable annuity provider, according to the 2010 Advisor Brandscape survey from Cogent Research.

That’s not surprising. Prudential and MetLife were the top two sellers of variable annuities in the U.S. in the first quarter, according to Morningstar, with over $4 billion in sales each and a combined market share of 28.5%. 

In Prudential’s case, a relentless advertising push, a well-differentiated product with rich living benefits, and an enhanced wholesale force helped make it the most recognizable name in variable annuities. The company scored well in the two biggest drivers of adviser loyalty: range of products and long-term sub-account performance.  

Newark, NJ-based Prudential spent $85 million on measured media in 2009 and $18 million in the first quarter of 2010, according to Kantar Media. MetLife, the second most recognizable annuity brand, spent $56 million on consumer and business-to-business advertising in 2009, according to Nielsen.

“Prudential does have very high ad awareness,” said Meredith Lloyd Rice, senior project director for the 2010 Advisor Brandscape report, which was based on a survey of 1,560 registered advisors—independents, brokers and RIAs—last spring. Non-subscribers to the report can purchase a copy from Cogent Research. In the past, VA issuers have used the Brandscape study to find out if their scores reflect their advertising, marketing and wholesaling efforts. 


“The campaign for its HD6 [variable annuity living benefit] seemed to resonate with advisors. In a regression analysis of ‘loyalty drivers,’ we found that ‘range of variable annuity product features’ was the most important loyalty driver for Prudential,” she said.

In mid-June, Prudential signed a deal for two new image-building TV ads for telecast during morning shows, network news shows, and prime time syndicated shows, along with billboard ads in 15 major markets. The company also bought home-plate signage during television broadcasts for eight Major League Baseball teams.

Cogent’s study, which also gathered advisors’ opinions about mutual funds, exchange-traded funds (ETFs), and employer-sponsored retirement plans, added to evidence that some annuity providers have thrived in the “flight to strength” since the financial crisis while others have lost momentum. Companies that maintained rich living benefits, despite the high fees involved, have fared better. Companies that bet the crisis would spark demand for simpler, less expensive riders haven’t done as well.

After Prudential and MetLife, Jackson National, Lincoln Financial, Nationwide, Pacific Life, and Sun Life received the highest combined ratings for awareness and “favorable impressions” from advisors. John Hancock and the Hartford also received high brand ratings, but both have lost ground because of unpopular product design (John Hancock) or questions about financial strength (Hartford). 

Last January, Sun Life purchased naming rights to the Miami Dolphins stadium, in a five-year deal worth $7.5 million. That and other promotional moves appear to be paying off. “An impressive story is building for Sun Life Financial, which holds a position a bit further back in the pack. The firm enjoys stronger consideration and favorability, but has yet to translate this momentum into a deeper sense of advisor loyalty, despite best-in-class performance on several key client experience attributes,” the Cogent report said.

Overall, however, allocation of assets to variable annuities by advisors dropped 20% in 2010, compared to the previous year, as average allocations declined to 8% from 10%. Among registered investment advisors (RIAs), allocations declined to only 2% in 2010 from 6% in 2009. Among those advisors who use variable annuities, the average allocation is 12% of assets.

“A two-year uptick in the use of and allocations to variable annuities has ended and some of the products recent ‘foul weather’ friends, particularly RIAs, appear to have already returned to their previous ambivalence toward these products,” Cogent Research said. Among RIAs the average assets under management (AUM) devoted to variable annuities fell by more than half, from $28.9 million in 2009 to $13.7 million today. When RIAs do buy variable annuities, some apparently do so only to exchange a client’s high-cost contract to an ultra-low-cost contract, like Jefferson National’s.  

Variable annuities tend to be most popular in the independent channel, where 52% of advisors use them and allocate an average of 16% of client assets to the product. Advisors who manage less than $25 million in client assets are most likely to use them in their practice. Independent advisors represent 23% of all advisor-managed assets but 44% of advisor-managed variable annuity assets.

“What emerges across all these categories is a picture of an experienced Independent planner with a smaller book of business who is comfortable with the VA story and has found a niche for them within his or her practice,” Cogent said.

Advisors are not as nervous about the financial stability of issuers as during the depth of the crisis in 2009, nor are they talking as much about “splitting tickets” among providers to diversify risk. Instead, they are “once again seeking out those providers with a performance story to tell,” while also looking for guarantees that offer security “in the post-meltdown investment environment,” the Cogent researchers said.

Advisor Brandscape showed that, for the first time, more than half (54%) of all advisors describe their compensation as “fee-based.” Because of that, Cogent said “VA providers should build solutions that are simple, low-cost, and priced to “fit” into the growing advisor asset-based platforms.” The average advisor client is 57.7 years old has about $690,000 in investable assets. 


 


© 2010 RIJ Publishing LLC. All rights reserved. 

Retirement Assets Reach $16.5 Trillion 1st Quarter: ICI

The value of Americans’ retirement savings grew in the first quarter of 2010, to $16.5 trillion on March 31, 2010 from 16.1 trillion at the end of 2009, according to a new report from the Investment Company Institute.

The 33-page report, The U.S. Retirement Market, First Quarter 2010, also showed that retirement savings now account for about 36% of all household financial assets in the U.S., up from about 15% in 1980.

The study also showed:

• IRAs held $4.3 trillion at the end of the first quarter of 2010, up 2.1 percent from year-end 2009. Forty-six percent of IRA assets, or $2.0 trillion, were invested in mutual funds.

• Americans held $4.2 trillion in all employer-based defined contribution (DC) retirement plans, of which $2.9 trillion was held in 401(k) plans, on March 31, 2010. Those figures are up from $4.1 trillion and $2.8 trillion, respectively, on December 31, 2009.

• Mutual funds managed $2.2 trillion of assets in 401(k), 403(b), and other DC plans at the end of the first quarter, up from $2.1 trillion at year-end 2009. Mutual funds managed 52 percent of DC plan assets.

• Assets in target date mutual funds grew 9.8 percent in the first quarter. Lifecycle mutual funds managed $281 billion at the end of the first quarter of 2010, up from $256 billion at year-end 2009. Eighty-four percent of assets in lifecycle mutual funds were held in retirement accounts.

A separate ICI report, Defined Contribution Plan Participants’ Activities, covers nearly 24 million employer-based DC retirement plan accounts as of March 2010. The report’s findings include:

  • Low levels of withdrawal activity moved even lower. Only 1.2 percent of DC plan participants took withdrawals in the first quarter of 2010, compared with 2.7 percent in the first quarter of 2009. The share of workers taking hardship withdrawals dropped as well, to 0.4 percent from 1.2 percent in 2009’s first quarter.
  • Fewer participants stopped making contributions in the first quarter of 2010. Only 1.1 percent of DC plan participants stopped contributing in the first quarter of 2010, compared with 2.7 percent in the same quarter of 2009.
  • Most DC plan participants stayed the course with asset allocations during the first quarter of 2010. Four percent of DC plan participants changed the asset allocation of their account balances; 4.5 percent changed the asset allocation of their contributions.
  • Loan activity edged up but remained in line with historical numbers. As of March 2010, 17.0 percent of DC plan participants had loans outstanding, compared with 16.5 percent of loans outstanding at year-end 2009.

© 2010 RIJ Publishing LLC. All rights reserved.

 

 

New York Life Sets Income Annuity Sales Record

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.

© 2010 RIJ Publishing LLC. All rights reserved.

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

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.

© 2010 RIJ Publishing LLC. All rights reserved.

Boomer Decumulation May Depress Asset Prices

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.

© 2010 RIJ Publishing LLC. All rights reserved. 

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

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%.

 

© 2010 RIJ Publishing LLC. All rights reserved. 

Your Loophole Is My Noose

“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.)

 

© 2010 RIJ Publishing LLC. All rights reserved.

Process First, Not Product

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:

  1. Take my medical history and review the medications I was taking.
  2. Discuss my symptoms in greater depth.
  3. 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:

  1. Introduction
  2. Fact Finding
  3. Analysis
  4. Recommendation
  5. Implementation
  6. 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:

  1. Do I have enough money?
  2. Is my money in the right places?
  3. 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.

 

 

 © 2010 RIJ Publishing LLC. All rights reserved.

The Downside of Upping the Retirement Age

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 12th 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.

 

 

© 2010 RIJ Publishing LLC. All rights reserved.

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

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.