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The Securities & Exchange Commission has issued several proposals to strengthen its rules for the advertising and marketing of target-date retirement funds, Pensions & Investments reported.

Under one proposed rule, marketing materials that include a date in a target date fund’s name must also disclose the fund’s asset allocation at the target date. Another proposal would require marketing materials to include a table, chart or graph that depicts the asset allocations among types of investments over the life of the fund.

“The table, chart, or graph [must] be immediately preceded by a statement explaining that the asset allocation changes over time, noting that the asset allocation eventually becomes final and stops changing, stating the number of years after the target date at which the asset allocation becomes final, and providing the final asset allocation,” according to an SEC fact sheet on the proposals.

The SEC also proposed to require target-date fund marketing materials to state that a target date should not be selected based solely on age or expected retirement date. In addition, fund disclosures would have to say that investments in target-date funds aren’t guaranteed.

A review by SEC staff had revealed that funds with the same dates had equity exposures of 25% to 65% at their target dates. Even at the fund’s “landing point,” when it reaches its most conservative point and stops changing, the equity allocations of funds with the same target date ranged from 20% to 65%, said SEC chairman Mary Schapiro said.

“Investors need more information than just the date in a fund’s name,” Ms. Schapiro said. “They need context in order to evaluate what the date means and what the fund’s projected investment glidepath is.”

The public will have 60 days to comment on the proposals after publication in the Federal Register, according to John Heine, an SEC spokesman. Publication is expected “as soon as possible,” Mr. Heine added.

© 2010 RIJ Publishing. All rights reserved.

When asked to rank their loyalty toward a dozen or so prominent plan providers, sponsors of small, medium-sized and jumbo 401(k) plans come up with different rankings, according to the Cogent Research Retirement Planscape 2010 survey of about 2,200 U.S. plan sponsors.

 For instance, while Vanguard generated the most loyalty among jumbo plan (> $20 million in assets) sponsors, it ranked only fourth among sponsors of medium size plans ($5 million to $20 million) and tenth among micro plans (assets < $5 million). 

Cogent concluded that plan providers are able to win loyalty in each size-tier to the extent that they choose to specialize in meeting the needs that are characteristic of each tier. According to the survey:

• Bank of America Merrill Lynch was the plan provider with the most loyal customers among the micro plans, where administrative support is the highest driver of sponsor loyalty. ING and Mass Mutual ranked second and third.

• Fidelity Investments had the highest loyalty among mid-size plans where the most important criteria are plan participation support, fees, and administrative support. Principal Financial and Mass Mutual ranked second and third.

•  Vanguard had the most allegiance among large plan sponsors, where “the ability to help sponsors with participant communications and problem solving has a critical impact on loyalty.”  Charles Schwab and Fidelity ranked second and third.

 “These findings reflect the day-to-day realities that sponsors face across the full spectrum of plan sizes,” said John Meunier, Cogent Principal. “Micro-plan sponsors need help getting their plans up and running. As plan assets grow, so too do sponsor needs, not only to manage the plan but participants and costs as well. When we’re talking about the biggest plans, it’s more about accountability to stakeholders, and keeping the plan and participants on track,” said John Meunier, a principal at Cogent. 

© RIJ Publishing. All rights reserved.

France’s statutory retirement age is set to increase gradually from 60 to 62 by 2018 under proposals outlined by Labour minister Éric Woerth, IPE.com reported. Life expectancy had increased by three years since 1980, when the current retirement age had been agreed, Woerth said.

Despite the announcement, all proposals still have to be agreed by Parliament, which is expected to address the issue in September.

The move is expected to allow the government to save €18bn, or about $27 billion, and combat a growing pensions deficit. Woerth said these savings could not have been achieved simply by increasing the contribution period.

“All other things equal, this should increase the size of ERAFP and also further improve its solvency, which is already satisfactory,” said Philippe Desfossés, chief executive of ERAFP, the French civil service supplementary pension scheme. “However, these changes will occur only gradually, and it remains to be seen whether the actual retirement age will increase as much as the legal one.”

Without changes the retirement age, France’s state pension deficit was expected to hit between €72bn and €115bn by 2050 in calculations made by the Conseil d’orientation des retraites (COR), the country’s leading pension advisory body.

The reforms will go hand in hand with an already implemented increase in minimum contribution period. Currently, at 40.5 years, it is set to increase to 41.5 by 2020.

COR had previously suggested that, without reforms, the minimum contribution period would have to be increased to 43.5 years by 2050 if pensioners wished to continue relieving a full pension.

© 2010 RIJ Publishing. All rights reserved.

To repurchase the $950 million in preferred shares it issued to the U.S. Treasury under the Treasury’s Capital Purchase Program (CPP), Lincoln Financial Group is selling $335 million worth of common stock and up to $750 million of senior notes. The public offering was announced June 14.

Lincoln intends to repurchase the $950 million of preferred shares with the proceeds of the common stock offering, $250 million from the bond offering, and cash on hand. The additional $500 from the sale of debt will be used to support universal life reserves of Lincoln Financial’s insurance subsidiaries.

“We ended the year in a strong capital position, and our first quarter results reflected the strength of our business model,” said Dennis R. Glass, president and CEO of Lincoln Financial. “The repurchase of the CPP preferred shares combined with securing long term financing for a portion of our life insurance reserves completes a series of capital initiatives in support of our strong ratings and gives us additional financial flexibility as we look to invest in our core businesses.”

The U.S. Treasury will continue to hold warrants to purchase approximately 13 million shares of Lincoln Financial’s common stock at an exercise price of $10.92 per share. The company does not intend to repurchase the warrants.

J.P. Morgan will serve as Global Coordinator for the offerings. Credit Suisse, Morgan Stanley and Wells Fargo Securities will act as joint book-running managers for the equity offering and BofA Merrill Lynch, Deutsche Bank Securities and US Bancorp will act as joint book-running managers for the debt offering. The underwriters have a 30-day option to buy up to an additional 15% of the offered amount of common stock from the company.

© 2010 RIJ Publishing. All rights reserved. 

The New York State Common Retirement Fund, one of the largest pension funds in the US, is looking into the possibility of filing a class action lawsuit against BP for recklessness, Pensions & Investments reported.

Robert Whalen, spokesman for state Comptroller Thomas DiNapoli, said: “We’ve been looking at all the options we have available, including potential litigation. We want to make sure if there was negligence or recklessness we are made whole appropriately,” according to a Wall Street Journal report.

New York officials have estimated BP’s plummeting share price has cost the $133 billion state pension fund more than $30 million since one of the oil giant’s offshore drilling rigs in the Gulf of Mexico exploded on 20 April. The New York State Common Retirement fund currently owns more than 17.5 million BP shares.

Meanwhile, New Jersey’s $68.9 billion public pension fund earned a $5.5 million profit from its investment in BP plc, selling about half of its holdings before an April 20 explosion at the British oil giant’s offshore well in the Gulf of Mexico caused a massive and continuing oil spill.

The New Jersey Department of Treasury’s Division of Investment, Trenton, which manages investments for seven public retirements systems within the state pension fund, began selling BP shares in early January and completely ended its ownership of BP stock by May 11, a department spokesman said.

New Jersey’s pension system bought BP shares over several years, ending in September 2009. With a cost basis of just under $460 million and total share sales amounting to about $465 million, the pension system earned about $5.5 million.

“We felt oil prices would be volatile or would fall,” a spokesman said. “We felt BP had reached a peak and that it was time to cash in some of our gains.”

After its last BP stock purchase in September 2009, the pension system held 51.94 million shares of BP that were traded on the London Stock Exchange and whose share price differs from the price of the company’s American depositary shares traded on the New York Stock Exchange.

Between mid-January and April 9, New Jersey had sold about half of its shares. It sold the rest of the shares at several times after the oil well explosion. The New Jersey state pension fund still owns $45 million in BP corporate bonds.

© 2010 RIJ Publishing. All rights reserved. 

We’re devoting the bulk of this week’s and next week’s issues of Retirement Income Journal to the variable annuity market. This week, we focus on the latest products and sales trends. Next week, we’ll delve into some of the issues that cloud the variable annuity industry’s future.  

Later, we’ll combine all of the articles and data in a microsite within our website, to serve as an ongoing resource for annuity manufacturers, advisors and others who have an interest in this product category. Each year, we’ll conduct an industry review.

The VA industry is searching for new directions, new markets and new story lines. The confidence that the industry used to draw from bull markets has largely been missing in the past year, despite the re-inflation of equity prices. Some companies are enjoying immense sales, but even they would prefer to see the whole industry thrive.   

The future may yet belong to variable annuities or to their income guarantees. Five years from now, millions of plan participants might routinely add a guaranteed lifetime withdrawal benefit (or “stand alone living benefit”) to their 401(k) assets, and millions of new retirees might rollover their defined contribution money to a variable annuity in an IRA.

Or maybe not. The variable annuity with a GLWB might become a niche product or perhaps even a relic, as quaint as a Hummer or a video camera that’s so big and bulky you have to rest it on your shoulder. It will depend in part on the economy, both domestic and global. It may also depend on which political party controls Congress, or on who runs the Department of Labor.

The survivability of a particular product is not the most important goal, however. The important thing, at least for those who have a stake in perpetuating the success of insurance companies, is to adapt to circumstance, to continually improve, and to keep all eyes on the prize: designing and marketing tools that help the Baby Boom generation manage its financial risks in retirement.   

© 2010 RIJ Publishing. All rights reserved.

The mortality gap between males with and without a college degree has risen 21 percentage points from 1971 to 2000, so that by the last turn of the century college-educated 25-year-olds could expect to live seven longer than their peers with less schooling.

In a new research paper, “Explaining the Rise in Educational Gradients in Mortality,” David Cutler and Ellen Meara of Harvard, Fabian Lange of Yale, Seth Richards of Penn and Christopher Ruhm of the University of North Carolina at Greensboro, try to explain the gap. 

Even after controlling for smoking and body weight, the college-educated have lower expected mortality rates than their less educated peers. The authors estimate that differential changes in smoking and obesity would have led to a 4 or 5 point decrease, not 21 percentage points. For women, patterns of smoking and obesity only can explain approximately 3 points out of the 42 percentage-point increase.

One possible explanation was that the highly educated have better access to medical care and better adherence rates to prescribed regimes. Another is that environmental and geographically based risks may have declined more over time for the highly educated.

Although they weren’t sure why, the authors thought that even the complete elimination of disparities in behavioral risks across education groups would be unlikely to do away with education-differentials in mortality. A summary of the study did not mention the well-established association between education, wealth and longevity, or whether that association has strengthened over the past several decades.    

© 2010 RIJ Publishing. All rights reserved.

ING has introduced Select Multi-Index 5 and ING Select Multi-Index 7, two registered modified single-premium fixed deferred annuities whose fixed-rate returns are potentially enhanced by linkage to the performance of up to four market indices.

The indices are the S&P 500 Index, S&P MidCap 400 Index, Russell 2000 Index, and EURO STOXX 50 Index as well as a fixed-rate strategy. Investors are not invested directly in these indexes.

“Offering registered fixed index annuities gives us products that we can make available to many banks and full-service brokerage firms, which are looking for more conservative solutions for their clients in this challenging environment,” said Lynne Ford, CEO of ING Financial Solutions.

In late 2009, ING’s U.S. operations merged its annuity and rollover businesses into a new business unit called ING Financial Solutions. ING Select Multi-Index 5 and ING Select Multi-Index 7 were developed as part of a suite of simpler retirement solutions began rolling out earlier this year.

Since then, several new solutions-oriented products, including a multi-manager mutual fund custodial IRA account, a registered fixed annuity, and a lower-cost variable annuity, have been introduced.

ING will still continue to offer non-registered fixed index annuities issued by INGUSA Annuity and Life Insurance Company and ReliaStar Life Insurance Company of New York. 

© 2010 RIJ Publishing. All rights reserved.

Vanguard in the third quarter will introduce its latest target-date fund offering, aimed at investors between ages 18 and 22, confirmed spokesman Joshua Grandy, Pensions & Investments reported. 

The 2055 fund will initially have 72% in Vanguard’s Total Stock Market Index fund; 8.8% in its European Stock Index fund; 4.8% in the Vanguard Pacific Stock Index fund and 4.4% in the Vanguard Emerging Markets Stock Index fund. The remaining 10% will be in the Vanguard Total Bond Market II Index fund.

The Vanguard Target Retirement 2055 Fund will be the 12th in Vanguard’s lineup, which has garnered $41 billion in net flows over the past three years.

© 2010 RIJ Publishing. All rights reserved.

Last week, Sen. Max Baucus proposed changes to the American Jobs and Closing Tax Loopholes Act (H.R. 4213), which the House approved May 28, that would eliminate the requirement that 401(k)-type plans disclose all fees that participants pay.  

 U.S. Rep. George Miller (D-CA), the chair of the House Education and Labor Committee, said that the proposed elimination of fee disclosure requirements was “unacceptable.”  

Federal law does not require the disclosure of fees taken out of workers’ 401(k)-style accounts. The Government Accountability Office found that a one-percentage point difference in fees could cut retirement assets by nearly 20 percent.

Provisions regarding fee-disclosure were based on the 401(k) Fair Disclosure and Pension Security Act, authored by Miller and approved by the Education and Labor Committee last year. Miller’s original bill, which he said would save participants $2 billion, would:

• Help workers understand investment options by providing basic investment disclosures, including information on risk, return, and investment objectives.
• Require workers’ quarterly statements to list total contributions, earnings, closing account balance, net return, and all fees subtracted from the account.
• Give workers the name, risk level, and investment objective of each available investment option before enrolling in a 401(k) plan.
• Require disclosure of fees for each investment option the employee invests, expressed in dollars or as a percentage.
• Require 401(k) service providers to disclose to employers all fees assessed against the participant’s account, broken down into three categories: plan administration and recordkeeping fees, investment management fees, and all other fees.
• Require the U.S. Department of Labor to review compliance with new disclosure requirements and impose penalties for violations.
• Adjust funding requirements so plan sponsors will not have to choose between making forced cash contributions, freezing plans or cutting jobs.
• Adjust the amount of time a plan can make up losses over time and relief on funding-level restrictions, among other provisions.

© 2010 RIJ Publishing. All rights reserved.

Federal Reserve Board Chairman Ben Bernanke addressed the House Committee on the Budget on June 9 regarding economic and financial conditions and the federal budget. Despite improvements in the past year, he said, the long-term outlook is clouded by the aging of the Baby Boom generation. Here’s an excerpt from Bernanke’s remarks:

Our nation’s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession. The exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the necessary policy actions taken to ease the recession and steady financial markets. As the economy and financial markets continue to recover, and as the actions taken to provide economic stimulus and promote financial stability are phased out, the budget deficit should narrow over the next few years.

Even after economic and financial conditions have returned to normal, however, in the absence of further policy actions, the federal budget appears to be on an unsustainable path. A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time.

Among the primary forces putting upward pressure on the deficit is the aging of the U.S. population, as the number of persons expected to be working and paying taxes into various programs is rising more slowly than the number of persons projected to receive benefits.

Notably, this year about five individuals are between the ages of 20 and 64 for each person aged 65 or older. By the time most of the baby boomers have retired in 2030, this ratio is projected to have declined to around 3. In addition, government expenditures on health care for both retirees and non-retirees have continued to rise rapidly as increases in the costs of care have exceeded increases in incomes.

To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.

© 2010 RIJ Publishing. All rights reserved.

In his new book, Retirementology: Rethinking the American Dream in a New Economy (FT Press, 2010), Greg Salsbury looks soberly at the varieties of financial intoxication that have led so many Baby Boomers to be ill-prepared for retirement.

Yet Salsbury, a vice president at Jackson National Life with a Ph.D. in organizational communication, approaches this serious topic in a mordantly funny way, amusing himself (and his readers) with a nonsense nomenclature of behavioral finance neologisms like“ohnosis,” “finertia” and “financia nervosa.”

Retirementology, a sequel to Salsbury’s But What If I Live? The American Retirement Crisis (National Underwriter, 2006), is based on focus groups with affluent Boomers and Salsbury’s own strong views. It catalogs the dumb things that smart people do with money they should otherwise be saving. It also points out the path to fiscal redemption. 

Recently, Salsbury chatted with RIJ about the book.

RIJ: How scientific or thorough a survey of the American public was the research behind your new book?

Salsbury: It was qualitative research, not empirical. We tried to get a wide swatch of ages, and tried to get typical clients of advisors. We were not particularly interested in the abject poor. They will be at the mercy of the prevailing social welfare systems. We were interested in people who had some savings, who were working toward retirement, who saw themselves as involved in investing.

In the book, you lament Americans’ lack of financial foresight. But how can we be in bad shape if Americans currently have $16 trillion in retirement savings currently invested?

There’s a very small percentage who have adequately saved and they control a disproportionate amount of the savings. A massive percentage of those funds are in a very small percentage of hands, if you will. Two-thirds of all investable assets are with the Baby Boomers, and it’s growing more that way.

But the Boomers represent a financial puzzle for a number of reasons.  Here’s a sobering statistic. Every day 10,000 Boomers, a group the size of the population of Sedona, Arizona, becomes eligible for Medicare and Social Security, the unfunded liabilities of which were $107 trillion before the financial crisis. Those are people who have most of the money to start with but who will be disproportionately draining the system as well.

Just because you have money doesn’t mean you aren’t making the mistakes that I talk about in the book. It might be someone who is buying too much car or buying a 56-foot sailboat. Folks who had multi-thousand-dollar credit card balances thought nothing of adding tens or hundreds of thousands of dollars onto their mortgages. The mistakes happen at all economic levels. There are a lot of boomers who have overspent. They were counting on their house or their vacation home to pay for their retirement.  

The 401(k) activity is disappointing. The number of active participants peaked in 2005, and enrollment hasn’t returned to that level since. People stopped saving. In 2006 alone, people spent $41 billion on their pets. That’s more than the GDP of many countries. Americans went on a spending binge. In the middle of 2005, 40% of all new mortgages were for non-residences. There was an orgy of spending, along with an abandonment of prudent savings.

With the new health care bill becoming law, that will burden the upper end on taxes even further. California is the poster child for the impact of taxes. For four years, more people have left that state than arrived. The wealthy are fleeing the state. The percentage of seven-figure wage earners has been cut in half since 2005. It’s one of the most tax punitive states in the country. And now they’re escalating taxes even further on the upper two percent. There are not enough of those people to generate enough revenue in the first place, and now you chase them out of the state. That’s what they’ve done.

Why are they having such trouble fiscally? One in five budget dollars goes to public pensions. It’s difficult to attack the policies without sounding like you’re attacking the professions. But look at the dollar amounts. The average policeman collects a $97,000 pension. In Vallejo, California, it’s up to $207,900 a year.  To fund the average captain’s pension, it takes $3 million. 

So what’s to be done?

Any retirement plan is doomed by over-expectations. It’s not reasonable to expect three vacation homes or to seven luxury cruises. People will have to look at their spending. They will have to reassess their priorities. They will have to re-examine the amount of assistance that they can or will give to children. They will have to reexamine their use of 529 plans. They will have to ask, ‘Do I fund my retirement properly or give my kid $50,000 and blow myself up?’ People have to make prudent decisions. A lot of people convinced themselves that they were geniuses during the boom. They had one or two homes that were appreciating. They didn’t think they needed a financial advisor.

You recommend the use of ‘holistic money managers.’ What do you mean by that?

Historically, advisors left people on their own for all of their money matters except for their investment portfolio. But those things can’t be as neatly divorced today as they were historically. What you’re doing with your vacation homes and your rental properties may have a material impact on your retirement portfolio. People’s homes morphed from their largest asset to their largest liability.  

How do you handle your own money?

 Personally, I have had more conversations with my wife about spending. I re-examined my household spending. I didn’t get as carried away as some during the boom, but I’ve tried to be even more cautious since then.  For instance, the other day, when I was still having my first morning cup of coffee, a woman walked up the back steps of my deck. She shook my hand and said, ‘Hi, I’m Lacey.’ I said, ‘I’m Greg Salsbury.’ She said, ‘Don’t you know who I am? I’m here for the dogs.’ My wife, unbeknownst to me, had signed up for a dog-walking service. I cut that frivolity out.

You didn’t refinance your house, not even for home improvements?

I refinanced, but I didn’t take money out. It was all about getting lower interest rates. I’ve always maintained a balanced approach on that. I’ve been pretty involved in behavioral finance, so I haven’t been terribly swayed by the momentum of the moment in the market. My 401(k) savings is in a pretty standard allocation. As a 52-year-old male, I have 40 to 45 % of my 401(k) in equities. I have other accounts of similar size that are 100% equities.

What would be your single piece of investment advice to readers?  How should they have handled the crash of 2008-2009? 

They should have been well diversified to begin with. Getting out in the middle of the crisis would have been an improper response. Those who pulled out at the trough in 2009 and who are still sitting on the sidelines aren’t doing so well. But those who stayed the course recovered nicely.

© 2010 RIJ Publishing. All rights reserved.

Jackson National Life Distributors LLC

Thomas M. Marra, 51, has been named president and CEO of Symetra Financial Corp., succeeding Randall H Talbot, who held those positions for 12 years. Marra had spent 29 years at The Hartford Financial Services Group, where he was president and chief operating officer from 2007 to 2009.

Symetra Financial is the parent of Symetra Life Insurance Company, a life and annuity company that raised about $365 million in a January IPO and was listed on the New York Stock Exchange. Symetra originally expected to sell shares for $18 to $20 but ended up selling them for $12 a share. 

The company earned $46 million for the first quarter on $453 million in revenue, up from $5.1 million in net income on $379 million in sales in the first quarter of 2009.

Berkshire Hathaway, Warren Buffett’s company, owns 26.3% of Symetra Financial, according to press reports. White Mountain Insurance Group, of which Berkshire Hathaway subsidiary General Re owns 16%, also owns 26.3%. 

The board of Symetra decided to bring in Marra because he was available, and because board members decided Marra could “take the company to new heights,” said Symetra Chairman Lon Smith in a teleconference, according to a report in National Underwriter.   

Marra has chaired the National Association of Variable Annuities (now Insured Retirement Institute) and the American Council of Life Insurers. He is a Fellow of the Society of Actuaries, a member of the American Academy of Actuaries, and he serves on the board of St. Bonaventure University.

A 30-year veteran of the financial services business, Marra joined The Hartford Financial Services Group, Inc., in 1980 as an actuarial student. He became executive vice president of Hartford Life, Inc., in 1996, COO in 2000 and president in 2002.

Until 2004, Symetra was the life insurance division of Safeco Corp. But Safeco, focusing on property and casualty business, sold the unit for $1.35 billion to investors led by White Mountains and Berkshire Hathaway.

Marra said he has some concerns about the risks associated with Symetra’s large block of fixed annuity business but believes Symetra’s directors and managers understand the pros and cons of that market, National Underwriter reported. “Right now, having a position in fixed annuities is probably our lead strategy,” he said.

© 2010 RIJ Publishing. All rights reserved.

Lincoln Financial Group has launched MyConfidentFuture.com, “a website designed to help people make informed, educated financial decisions.”

“MyConfidentFuture.com provides up-to-date information and timely insights to help empower people to face their futures with confidence,” said Heather Dzielak, Chief Marketing Officer, Lincoln Financial Group.

The website is organized around topics that are relevant in today’s environment and delivers information people can use to successfully navigate their lives through all its transitions including how to:

• Manage risk with insurance
• Retire with lifetime income
• Save for retirement
• Prepare for the unexpected
• Manage the uncertainty of taxes

Lincoln Financial thought leaders and subject matter experts provide valuable educational tools and resources including:

• Videos on the impact of current issues and trends in the industry
• Calculators that provide a snapshot of an individual’s financial situation including a Roth Conversion calculator
• Research and insights to help people understand issues that impact financial planning challenges and solutions
• Surveys and worksheets to get people involved in the income-planning process

© 2010 RIJ Publishing. All rights reserved.

On June 2, the New York Insurance Department published a draft letter, “Guaranteed Withdrawal Benefits and Excess Withdrawals,” on its website that would give owners of annuities with guaranteed minimum withdrawal benefits a 30-day period in which to reconsider intentional or unintentional excess withdrawals.

The draft letter, which will be on the agency’s website until June 16, is intended to elicit comments from writers of annuities with that living benefit.

The agency is concerned that an unwitting excess withdrawal could, depending on the exact terms of the contract, cause a permanent and possibly disproportionate reduction in a contract owner’s guaranteed income base, thus affecting the owner’s financial security in retirement.

In proposing new requirements for such contracts, the draft letter states:

At the time an excess withdrawal is requested, insurers should provide a clear explanation of how the excess withdrawal will affect the contract owner’s guaranteed withdrawal amount.

Providing an explanation at the time the excess withdrawal is requested will enable the contract owner to assess the potential permanent impact on the guaranteed withdrawal amount and make an informed decision whether or not to take the excess withdrawal.

Insurers may want to consider as a best practice informing contract owners at the time of a request that an excess withdrawal may be cancelled within 30 days by returning the withdrawal to the company for crediting as of the date of receipt to the same investment options from which the withdrawal was taken.

To discourage owners of GMWB contracts from taking withdrawals during market downturns, when their account values are depressed, most GMWB contracts reduce the guaranteed income base to the same degree that the withdrawal reduces the account value. For example, if the income base were $100,000 and the account value were $80,000, a $20,000 withdrawal would reduce the income base to just $75,000 and reduce the annual payout (at a 5% payout rate) to $3,750 from $5,000.

While recognizing the insurers’ need to limit their exposure to such adverse behavior, New York insurance regulators wrote, “proportional reductions may result in guaranteed withdrawal reductions that are unfairly disproportionate to the excess withdrawal or amount received for a full surrender.”

New York proposes disclosure of the mechanism of the excess withdrawal aspects of the contract before the contract is issued and at the time of the request for a withdrawal that would cause a reduction in guaranteed income.

© 2010 RIJ Publishing. All rights reserved.

Providers of stable value funds for employer-sponsored retirement plans are concerned that some of the tougher restrictions on derivatives trading in the Democrats’ proposed financial regulations could disrupt their business and hurt the plan participants who hold about $650 billion in the funds.

The campaign to protect stable value funds from collateral damage under the new proposals (S. 3217 and H.R. 4173) is being led by the Defined Contribution Institutional Investors Association (DCIIA), a recently formed trade group of plan providers. According to a recent release from the DCIIA, “Financial Regulation and Consequences on America’s Retirement Savings”:

We believe that the definition of a “swap” contained in the bills could have the unintended consequence of materially and adversely impacting stable value funds.

Existing language in the bill could be interpreted to define “swaps” to include synthetic guaranteed investment contracts, sometimes referred to as “synthetic GICs,” and other types of stable value investment contracts.

DCIIA believes the impact of including stable value investment contracts in the provisions of the bill regulating ‘swaps’ may reduce millions of 401(k) plan participants’ access to or, at minimum increase the cost of, stable value funds.

We also believe it is possible that this legislation may lead to the complete elimination of stable value funds in DC plans, impacting the millions of Americans at or near retirement who rely the return and stability of stable value.”

The conflict apparently stems from the fact that stable value funds have, since the early 1990s, used swaps in the wrap contracts that keep their values stable. According to the Pension Investment Handbook (1998): 

“A synthetic GIC is an investment for tax-qualified, defined contribution pension plans consisting of two parts: an asset owned directly by the plan trust and a wrap contract providing book value protection for participant withdrawals prior to maturity.

“The synthetic is an alternative to a traditional GIC in a stable value fund that unbundles the GIC’s investment and insurance components. The plan investing in a traditional GIC owns a group annuity contract, and the insurance company owns and retains custody of the assets backing the contract. With a synthetic, the plan has custody of the asset and negotiates for the wrap contract providing the book value insurance protection separately.

“Synthetic GICs were first introduced in the late 1980s by banks and investment managers anxious to capture a share of the rapidly growing stable value market. By replicating the traditional GIC’s book value payment feature for participants, synthetic GICs were granted similar book value accounting treatment by many accounting firms.

“Synthetics offered the investor the opportunity to diversify away from what had become a very large single-industry concentration in their GIC funds. This need for diversification became a driving force in the stable value market following the financial difficulties of Executive Life and Mutual Benefit in 1991 and 1992 respectively. From a very low volume of sales in 1990, synthetic GICs rose to 35% of stable value sales in 1996.”

Other language in the proposed legislation would cause the swap dealers who are parties to stable value fund management to become fiduciaries and would redefine 401(k) plans as “major swap participants,” thus subjecting them to a host of new regulations and requirements.

In its release, DCIIA recommends that S. 3217 and H.R. 4173 “be reconciled to preserve the benefits of the current system for stable value funds.” It calls for:

• An exemption for stable value investment contracts issued by bank and other regulated financial institutions, to all or part of the swaps requirements of the bills.

• A provision that swaps dealers not be considered fiduciaries to those plans, when the swaps dealers don’t provide advice and when the plan is represented by an established fiduciary that is not related to the swaps dealer.

• An exemption of defined contribution plans that use swaps primarily to reduce portfolio risk from the definition of “major swap participant.”

© 2010 RIJ Publishing. All rights reserved.