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New River and Newkirk in Electronic Delivery Deal

Posted on August 4, 2010 by Editor Test -

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

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

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

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

Posted on August 4, 2010 by Editor Test -

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

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

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

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

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

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

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

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

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

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

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

Posted on August 4, 2010 by Editor Test -

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

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

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

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

Most Plan Fiduciaries “Ill-Prepared” to Evaluate Alternatives

Posted on August 4, 2010 by Editor Test -

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

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

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

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

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

Require audit of internal controls

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

Require understandable financial statements

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

Enterprise risk management skills

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

Fair Valuation Standards

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

Inflation-Indexed and Level Payout Funds from Barclays Bank

Posted on August 4, 2010 by Editor Test -

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

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

Income product aficionados have taken notice.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Independent Fiduciaries to the Rescue

Posted on August 4, 2010 by Editor Test -

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

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

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

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

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

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

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

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

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

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

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

The Gospel of Matthew Hutcheson

Posted on August 2, 2010 by Kerry Pechter -

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

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

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

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

Polemics and profit-making

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

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

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

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

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

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

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

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

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

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

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

A battle over dollars

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

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

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

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

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

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

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

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

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

Behavioral Economics and Retirement Investing

Posted on July 31, 2010 by Editor Test -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Found in Translation

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

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

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

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

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

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

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

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

New York Life Spanish Language Public Website

Retirement Planning CE Course Offered

Posted on July 18, 2010 by Editor Test -

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

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

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

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

ASPPA Supports DOL-Mandated Fee Disclosure 

Posted on July 18, 2010 by Editor Test -

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

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

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

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

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

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

TDF Demographics Revealed

Posted on July 18, 2010 by Editor Test -

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

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

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

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

Additional findings include:

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

RIJ Takes a Holiday

Posted on July 18, 2010 by Editor Test -

RIJ Goes On Holiday

Retirement Income Journal will not be published July 28. The next issue will appear August 4, 2010.

A Dynamic Approach to Sequence Risk

Posted on July 18, 2010 by Editor Test -

Writing in the Journal of Financial Planning, Larry R. Frank, CFP, and David M. Blanchett, CFP, argue that the withdrawal rate should reflect the current risk of portfolio failure, and that the current risk should be recalculated every year during retirement.

Their paper, “The Dynamic Implications of Sequence Risk on a Distribution Portfolio,” ran in the June issue. It claims that sequence risk exists throughout retirement, not just for several years before and after the retirement date.

“Unlike past research, which has suggested sequence risk only exists for a certain period, the authors contend that a ‘spectrum’ of exposure to sequence risk exists, and that sequence risk is always present, regardless of how long distributions have been occurring,” the authors write.

“This paper will discuss this exposure to sequence risk and argue that sequence risk is always present to some degree when there are cash flows out of the portfolio. This paper will also demonstrate that the degree of exposure can be determined through evaluation of the current probability of failure of the portfolio’s value being depleted during the remaining distribution period.”

Frank’s work was the subject of a June 16, 2009 story in Retirement Income Journal, entitled, “A Smarter Form of SWiP.”

The paper also asserts that it’s safer for retirees to raise their spending rate later in retirement rather than earlier. Although the desire to spend is greatest during the early years of retirement, that’s also when long-term portfolio sustainability is still potentially fragile.

“The temptation is to withdraw more early with thoughts of withdrawing less later, that is, consumption ‘smoothing.’ However, sequence risk exposure suggests this is a risky strategy because it essentially entails an increased probability of failure, when portfolio values decline, with an already increased probability of failure through a higher withdrawal rate resulting from an attempt to smooth withdrawals over time,” Frank and Blanchett write.

The authors suggest that advisors do the following for their retired clients:

Adjust WR% as market return trends suggest.
Adjust portfolio allocation to mitigate exposure to negative market returns as market trends suggest.
Start with a reduced WR% to reduce exposure to the impact of declining markets on the probability of failure.

Reish & Reicher Comment on TDF Proposals

Posted on July 18, 2010 by Editor Test -

Reish & Reicher, the Los Angeles law firm that specializes in employee benefits and ERISA issues, has issued a bulletin on target date funds, with comments on last month’s guidance on TDFs from the Securities and Exchange Commission and the Department of Labor.

“We expect that the SEC proposals will be adopted much as proposed. We also expect that the DOL’s checklist and QDIA amendments will be consistent with the Bulletin and the SEC proposals,” the bulletin, from Fred Reish (pictured at left) and his associates, said.

“The initial effect should be to educate plan sponsors and participants about asset allocation, glide paths and target date differences. We believe the long-term effect will be that plan sponsors and advisers will focus on the needs and characteristics of the covered workforce and the design differences of TDFs.”

Reish and Reicher recommended that plan sponsors protect themselves by asking:

Is the TDF line- up designed to be aggressive, moderate or conservative? Is that appropriate for the particular workforce?
Is it appropriate if most participants are defaulted (e.g., an automatically enrolled plan)?
Does the glide path go “to retirement” or “through retirement?”
If “through retirement,” are the participants aware that the plan sponsor made that decision for them?

“From a legal perspective, the critical point is that fiduciaries need to engage in a prudent—and documented—process to make each of those decisions. A prudent process can produce a range of acceptable decisions. The failure to engage in a prudent process is a fiduciary breach,” the attorneys said.

The SEC’s Proposals

In summarizing the government’s proposals for remedying the issues associated with target date funds, Reish & Reisher wrote:

The SEC’s proposal would require marketing materials for a target date fund that includes the target date in its name to disclose the asset allocation of the fund among types of investments.

The types of investments—such as equity securities, fixed income securities, or cash—would need to appear with the fund’s name the first time the fund’s name is used.

The SEC’s proposal would require target date marketing materials to include a prominent table, chart, or graph that clearly depicts the asset allocations among types of investments over the entire life of the fund.

These proposals would also require a statement:

Explaining that asset allocation changes over time.
Noting 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.
Providing the final asset allocation.

The SEC’s proposal would require target date marketing materials to include a statement informing the investor:

To consider the investor’s risk tolerance, personal circumstances, and complete financial situation.
That an investment in the fund is not guaranteed and it is possible to lose money by investing in the fund, including at and after the target date.
Whether, and the extent to which, the intended percentage allocations may be modified without a shareholder vote.
In addition, funds would be required to add a statement in their marketing materials warning that the funds come with risks and should not be chosen based solely on investors’ retirement dates.

Further, the proposal would amend the commission’s antifraud guidance to state that marketing statements suggesting that investments can be chosen based on a single factor or that investments are simple and require no monitoring can be misleading.

Another perspective

Ron Surz, president of PPCA Inc. and Target Date Solutions in San Clemente, Calif., who has written about target date funds for this publication, commented in recent days on the Reish & Reicher bulletin. He suggested that, for fiduciaries, merely complying with proposed SEC guidelines won’t necessarily be enough to fulfill their responsibility to participants.

“Much of [the bulletin] reads as if the regulators think plan participants are choosing target date funds, but they’re not. Even those who are not defaulted into target date funds do not really choose from among the various available target date funds. Their choice is limited to the funds that the sponsors make available to them, and this choice is, it would seem, typically made out of convenience,” Surz wrote in an email to RIJ and others.

“Fred’s concluding remarks, advocating a prudent process, assume the best from fiduciaries, which is the right thing to do although I think it’s more complicated than that.

“Here’s what I think is going on… TDFs are a Qualified Default Investment Alternative (QDIA). Plan sponsors think any QDIA is a safe harbor, so they’re all good—regulatory prudence. Or if they are concerned about picking a particular TDF, how can they go wrong with the name brands everyone else uses, like Fidelity, T. Rowe & Vanguard—procedural prudence. Also, Plan Sponsor magazine has determined that most plan sponsors base their TDF selection on their advisor’s recommendation—delegated prudence.

“But at the highest level either plan sponsors, or their consultants, but preferably both, need to care about substantive prudence—picking the best. Regulatory checklists and required fund disclosures may give fiduciaries pause and should encourage substantive prudence. In other words a prudent process will hopefully lead to enlightenment, but the process alone is no guarantee.”

The Brilliant Gimmickry of TDFs

Posted on July 18, 2010 by Editor Test -

Back in the 1990s, when the first target date retirement funds were launched, I didn’t think they’d be a runaway success. Frankly, the concept smelled like a marketing gimmick. Brilliant, but reeking of gimmickry.

The decision-makers at the fund company in whose catacombs I worked at the time seemed to share my skepticism. Vanguard put more faith in its “life strategy” funds, a still-available stable of funds-of-funds that aimed for a target risk level, not a target retirement date.

Focusing on target-risk, I think may still be a more defensible idea than focusing on target-dates. As we have since learned, there is no magic in the target date concept. It was not a formal concept. It was not standardized. It had no track record to commend it. But it had much more sizzle than the target-risk concept.

I don’t have the mathematical or economic chops to tell you exactly why the TDF concept didn’t strike me as technically sound. But it seemed to resemble a blind form of market timing. Regardless of your thoughts on market timing, you must agree that it’s not pin-the-tail-on-the-donkey.

Putting a date on a fund didn’t seem right. In my experience, the equities market doesn’t behave like a railroad line, with stations neatly placed five years apart. No conductor strides the aisle, shouting “New Rochelle” or “Rye” and reminding riders to gather up their bags. Only Social Security works that way.

In any case, the smarter investors don’t think of themselves as ticketed passengers on the market train. They think more like members of Butch Cassidy’s Hole in the Wall Gang, who arranged to jump on and off the train (with greenbacks and gold) while it was between stations.

Nonetheless, investors began pouring money into Fidelity’s (with all due respect) pioneering target date Freedom funds. Other fund companies, including Vanguard, soon introduced their own fleets of TDFs. The rest is history.

By enshrining TDFs as qualified default investment in qualified plans, the Pension Protection Act of 2006 introduced an element of moral hazard into the equation. The government stamp of approval, with no manufacturing standards attached, was an invitation for negligence if not abuse.

The market crash of 2008 and 2009 demonstrated however that TDFs wore no clothes of invisible magic thread. But magic had been implied. Though fund managers may never have explicitly promised that TDFs were a panacea for retirement savers, many investors clearly believed (as Senate hearings last year revealed) that TDFs would provide them with a soft-landing into a pillowy retirement.

The very fact that the TDFs were dated fostered the belief that they would eliminate the terrible sequence risk that millions of people face as they approach the so-called retirement “red zone” and try to lock down a secure nest egg. That’s what made TDFs so successful. But the financial crisis showed that TDFs did no such thing.

Sure, TDFs rebounded in the past 12 months, along with other balanced funds. But they provided no special service to their owners (especially not to those who paid five percent loads when they bought them).

Subsequently we witnessed the inevitable federal inquiry and now (see cover story) the inevitable proposals for new regulation. The regulations will undoubtedly lead to disclosures that nobody will bother to read and that future SEC commissioners won’t bother enforcing (other than to enforce the publication of the disclosures).

I have no beef with financial innovation, as long as it doesn’t cost much. TDFs have generated lots of business for the funds industry. And they may eventually produce better outcomes for individual investors and plan participants than those folks would or could have achieved on their own.

But TDFs have always been more a sales strategy than an investment strategy, and we should recognize that.

They’re Relatively Well-Off

Posted on July 18, 2010 by Kerry Pechter -

More than half of America’s 37 million elderly, judging by the Census Department’s latest income survey, live on incomes below the amounts that most of us would consider desirable or tolerable and far below the amounts that financial planners typically use in their hypothetical examples.

The median annual income for people over age 65 in the United States is only $18,000, including public assistance and financial help from friends and family. The poorest 20% of the elderly, or more than seven million people, live on less than $9,000 a year. The average elderly income—skewed upward by the highest incomes—is almost $29,000. It ranges from $34,000 (for those ages 65-69) to $21,000 (for those ages 85 and over).

Depending on future economic trends, the repair of Social Security’s finances, and the success of Medicare and Medicaid reform, their numbers may or may not balloon over the next 30 years as the Baby Boom generation retires and the U.S. elderly population doubles.

If you live in a suburb of single-family homes, you may rarely see the elderly poor. If you live or work in a large city, or visit a jobless rural area, or pass through towns on certain Native American reservations, or if you work directly with the elderly, you may meet them every day.

And anyone who rides the train from New York to Washington, D.C. inevitably passes the patched or hollowed rowhouses of Chester, Pa., and Baltimore, Md. The people on the barren streets, if any, tend to be young. The poorest of the elderly are often invisible, out of sight in apartments or nursing homes.

But, aside from the very poor, millions more Americans over age 65 live on quite modest incomes. Fully 80% of America’s elderly, including the younger elderly who are still working, live on less $39,000 a year, according to the June issue of Notes from the Employee Benefit Research Institute in Washington, D.C. The issue included an analysis, “Income of the Elderly Age 65 and Over, 2008,” based on data published as recently as March 2009.

The youngest elderly (65 to 69) have the highest average incomes ($34,481) of all older groups mainly because they still have considerable amounts of earned income. They receive about 40% or $14,000 a year from earnings. The share of income from earnings drops to only about 25% for those ages 70 to 74 and falls much lower after age 75. The average income for the oldest elderly is $21,758.

Income from Social Security averages between $10,000 and $12,000 for all elderly, although the highest annual benefit, received by high earners who don’t claim until age 70, can reach about three times that amount. Almost 90% of Americans over age 65 receive Social Security benefits.

Investments and property provided income for 55.3% of those age 65 and older in 2008. Those with incomes of $38,468 and above received an average of 18% of their income from assets, while those with the lowest incomes (under $9,000) received an average of only about four percent of their income from assets.

Just over one-third (35%) of elderly receive income from pensions and annuities. The average pension, for those from ages 65 to 85 and older, averages between $4,900 and $5,900 a year. To put it another way, while many American receive pension income, the average pension provides less than $500 a month before taxes.

On average, the percent of average elderly income that comes from pensions has been going up and the percent from assets has been going down since 1975. In 1975, people age 85 and older—those born in or before 1890—derived 9.2% of their income from pensions and 26.5% from assets.

In 2009, the same group—born in or before 1925—derived 22.4% of income from pensions and only 14.1% from assets. The reversal in the weights of pension income and income from assets persists across all segments of the elderly population, but is less pronounced among those ages 65 to 74. This phenomenon might reflect the post-World War II expansion of pensions and perhaps the substitution of pensions for personal savings.

More detailed figures on pension income can be found in the government’s Survey of Consumer Finances. In 2006, 11.3 million Americans over age 65, or about 30% of the elderly, received an employer pension that averaged $10,800 a year. About 3.8 million received a government pension that averaged $15,600 and almost eight million received a private pension or annuity that averaged $7,900.

Income from employer pensions ranged from an average of $25,200 a year for 3.3 million elderly Americans who were in the top quintile of income to an average of just $2,280 a year for 466,000 elderly Americans who were among those in the lowest income quintile.

More older men also appear to be working to supplement their overall retirement incomes than did in the past. The percentage of average elderly men’s income that comes from earnings rose to 30.5% in 2008 from only 18.9% in 1985, an increase of more than 50%. Only 18.7% of average elderly women’s income came from earnings in 2008.

The good news is that the incomes of the elderly, adjusted for inflation, has been rising gradually since 1974. The median elderly income has grown from $13,264 (in 2009 dollars) in 1974 to $18,001 in 2008, a gain of about 36%. The average elderly income has grown faster, rising from $18,715 in 1974 to $28,778 in 2008, a gain of about 54%.

Correction

Posted on July 15, 2010 by Editor Test -

An article in the July 7 issue of Retirement Income Journal, “Is a Two-Cylinder VA Better Than a Single?”, misidentified a variable annuity contract issued by Axa Equitable. The correct name of the product is Retirement Cornerstone, not Cornerstone.

As of March 1st, Retirement Cornerstone has a one-year, not a five-year, waiting period for penalty-free withdrawals and it does not require annuitization, as the article may have unintentionally implied.

PIMCO Unveils Sovereign Bond Benchmarks

Posted on July 15, 2010 by Editor Test -

Fixed income giant PIMCO has launched two sovereign bond indices, the Global Advantage Government Bond and the European Advantage Government Bond, Investments & Pensions Europe reported.

The former will cover the full set of investment-grade government bond markets, while the latter will cover government bonds issued by Eurozone member countries.

PIMCO said the indices would employ a GDP-weighting methodology, setting them apart from more traditional benchmarks, which tend to use debt-weighted, market-capitalisation methodologies.

Instead of giving the highest weights to countries with the most debt, PIMCO’s new indices will give the highest weights to countries with the highest income based on GDP.

PIMCO said the new methodology would help position portfolios in countries with stronger growth dynamics, including emerging markets.

GDP-weighting can also benefit from counter-cyclical rebalancing, “as bond prices tend to move inversely to GDP growth over the business cycle”, it said.

Ramin Toloui, executive vice-president, said PIMCO’s new approach to indexing would help investors avoid more traditional indices’ bias toward high-debt issuers.

Global index provider Markit will administer the latest members of the Global Advantage indices, launched at the beginning of last year.

To Shrink Medical Costs, Make Them Visible: SOA

Posted on July 15, 2010 by Editor Test -

With national healthcare spending expected to rise by hundreds of billions of dollars over the next 10 years, there needs to be a greater emphasis on finding ways to reduce healthcare cost trends. According to the findings from two recent surveys by the Society of Actuaries (SOA), actuaries and consumers both believe that more

Transparency within the U.S. healthcare system is the key to bending the cost curve downward. That’s one of the major findings of two recent surveys of actuaries and consumers by the Society of Actuaries (SOA).

“Actuaries believe there needs to be more transparency between doctors and patients, while consumers feel they could make more informed decisions if they had more information on medical procedures and options for care,” the SOA said in a release.

The survey of more than 600 members of the SOA’s Health Section showed that:

86% recommend making prices for treatments more visible and available for patients. Additional findings include:
79% recommend educating consumers and providers on the efficacy of care.

80% recommend making quality of provider care more visible and available for patients.

90% believe that reducing the number and severity of medical errors will help bend the cost curve downward.

88% believe that combating fraud and abuse within the system can be at least somewhat effective at bending the cost curve downward.

The SOA also hosted an online survey of 1,000 Americans 18 years and older to understand what consumers believe would help them control their own healthcare costs. The survey found:

37% of American adults feel they could better control their own healthcare costs if healthcare providers–or their insurance company–told them about the costs of medical services and the quality of the outcome of procedures.

30% feel they could better control their healthcare costs if, before administering a medical procedure, their physician informed them about the costs of the procedure, the number of times he/she has performed the procedure, and its results.

39% of consumers felt however there was nothing they could do to control their individual healthcare costs.

33% of those surveyed believe they could make better decisions about their health if they know about their long-term health risks and what the outcomes of their behaviors would be.

About 20% of respondents think that they could make better decisions about their health if they have access to a wellness program where they could get information on nutrition and exercise.

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