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Who’s Winning the Rollover War?

Posted on May 26, 2010 by Kerry Pechter -

Follow the money. That adage was true for Woodward and Bernstein (first and second wave boomers will recall them) and it’s true for just about everyone who plays in the retirement income space.

Right now, retirement savings is moving into IRAs from 401(k) plans faster than ever. According to a new Cogent Research survey called “Assets in Motion 2010,” for the first time there’s more retirement money in IRAs than in employer-sponsored plans (ESRPs).

According to the Investment Company Institute (ICI), there was $4.2 trillion in IRAs and $4.1 trillion in defined contribution retirement plans.

Mutual fund companies/IRA custodians have been competing for rollover dollars for years. The dynamics are changing, however, with plan sponsors and providers saying they want to retain plan assets—perhaps because they’re feeling an increase in the negative flow.

Winners and losers have already emerged in the rollover battle, Cogent’s survey shows. Fidelity Investments and the Vanguard Group, for instance, are disproportionate recipients of rollover money, both as IRA custodians and as asset managers.

Almost 40% of affluent investors who expect to execute a rollover in the next 12 months told Cogent they plan to take their money to just five companies: Fidelity, Vanguard, Charles Schwab, Wells Fargo/Wachovia and Edward Jones. Another 21% weren’t sure where they would take their money.

That leaves only crumbs for two dozen other large firms. Indeed, rollovers have been a net drain for most asset managers—despite years of marketing and advertising campaigns.

As Cogent points out, “While the asset management industry has spent millions promoting their Rollover IRA capabilities, very few firms have been able to acquire a large number of rollover assets.”

It will surprise few people that much of the rollover money flows to Fidelity and Vanguard. For millions of plan participants, it’s a quick and easy step from one of Vanguard’s and Fidelity’s 401k plans to their IRAs and their no-load mutual funds.

2009 ESRP Retention Rate The ESRP providers with the highest retention rate (percentage of customers likely to choose the same firm as their IRA custodian are Vanguard (46%), Charles Schwab (45%), Edward Jones (44%) and Fidelity (37%).

Each of those firms offers low costs, lots of investment options, powerful brands (read: a deep reservoir of trust) and robust online and toll-free telephone services. Schwab (“Talk to Chuck”) and Fidelity (The “Green Line”) have strong marketing themes. Vanguard, not a prolific advertiser, has some interesting taglines, like “Would you buy this newspaper if it costs five times as much?”

Cogent’s findings are based on a survey of 4,000 American adults of all ages with $100,000 or more in investable assets. The median age of the participants was 57, 30% were fully retired, and 36% had assets over $500,000. About two-thirds work with financial advisors.

The number of investors and account owners in IRAs is rising (31% and 37%, respectively) while participation in ESRPs is falling, (by 25% and 42%, respectively), the survey showed. Among affluent investors, ownership of ESRPs dropped to 59% in 2009 from 77% in 2006. It dropped to only 29% last year among the oldest (and presumably retired) investors. Three years ago, it was 63%.

Beginning around age 54, savers have more money in IRAs than in ESRPs, the study shows. Gen X&Y and Second Wave Boomers have more money in ESRPs, but First Wave Boomers have more money in IRAs.

But only about one in ten (11%) of affluent investors in the survey expected to roll over money from an ESRP to an IRA in the next 12 months. Among those, 44% were “very likely” or “extremely likely” to rollover.

Still, Cogent extrapolated that to mean 5.9 million households were at least contemplating a rollover soon. Of all age groups, the Second Wave Boomers were most likely (15%) to roll over. Their 401(k)s had an average value of about $111,000.

Asset managers and plan providers need to act before the money finds a permanent home, Cogent says. “Mutual fund and 401(k) providers with asset management capabilities should seek to partner with distributors that are likely to gain most of the Rollover IRA assets over the next 12 months,” the Assets in Motion report said.

“Smart 401(k) providers should help key distributors, particularly advisors, identify Rollover IRA candidates within the plan. In addition, smart DCIO providers should work directly with home office contacts and their financial advisors to create value-added Rollover IRA materials and campaigns that distributors can use to attract and retain assets,” the report continued.

Data from other organizations adds to the picture of rollover behavior. In late 2007, the Investment Company Institute (ICI) surveyed recent retirees who had actively participated in defined contribution plans about how they used plan proceeds at retirement.

Just over half (52%) took lump-sum distributions, and another 7% received part of their distributions as a lump sum. The remaining retirees either delayed their withdrawal, received their distribution as annuities or installment payments, or chose some combination of options that excluded a lump sum.

Of those who took lump sums, only 14% of respondents in the ICI study, with only 7% of the assets, spent their entire distribution. The other 86% reinvested their money. Of those, 65% rolled everything to an IRA and an additional 23% rolled part of the money to an IRA.

The View from the Income Summit

Posted on May 26, 2010 by Editor Test -

Some managers like to tackle big, hairy problems by giving people colored pushpins, felt-tip markers, and big sheets of newsprint and then telling them to pin the paper to the walls and start scribbling their ideas.

The Departments of Labor and Treasury seem to have had a similar goal in mind this spring when they issued their Request for Information (RFI) about adding lifetime income options to 401(k) plans.

But instead of having people post their ideas on newsprint pinned to the wall, the DoL solicited the ideas via the Internet and posted all of them—unless obscenity-laced—on the website of the Employee Benefits Security Administration (EBSA).

Since that started, some interesting discussions have begun. Several of them unfolded last Thursday at the Lifetime Income Summit in Washington, D.C. Organized by AARP, ASPPA and WISER (Women’s Institute for a Secure Retirement), the event was deemed a great success by the 250 or so people who attended—many of whose companies and organizations had submitted opinions to the RFI.

It’s not that anything dramatic happened. The one-day conference ended without producing any major decisions or conclusions, and none are expected soon. “[Labor Secretary] Phyllis Borzi believes in very deliberative decisions,” said Michael Davis, Deputy Assistant Secretary of Labor at EBSA.

But the meeting was attended by many of the most active players and thinkers in the institutional retirement space, and before the day was over, most of the major issues—like whether people are most likely to think about income before or after they leave their plans—had been aired.

Just to drop a few names at random: Bob Reynolds of Putnam Investments, Rep. Earl Pomeroy (D-ND) (pictured above), Mark Iwry of the Treasury Dept., Steve Utkus of the Vanguard Group, Sandy Mackenzie of AARP, Kelli Hueler of The Hueler Companies, Jody Strakosch of MetLife, Christine Marcks of Prudential, Dallas Salisbury of the Employee Benefit Research Institute and Francois Gadenne of the Retirement Income Industry Association.

There were a couple of clear “takeaways.” First, there’s no governmental plot to force participants to buy annuities, according to Jason Furman of the Treasury Department. But that doesn’t preclude a partial “default” into an annuity for people leaving 401(k) plans. Bureaucrats and Congressional staffers also emphasized that the Obama administration has no plans to dictate the course of retirement income industry. They made it equally clear that the industry shouldn’t expect any new tax breaks.

Fiduciary liability was the top issue for 401(k) plan providers. Their primary customers, the plan sponsors, fear participant lawsuits if they recommend an annuity and the issuer subsequently goes out of business. Before they will offer in-plan annuities, plan sponsors the government to identify a safe harbor solution that they can offer and not get sued.

“You can’t overestimate the potential for litigation,” said Lynn Dudley, senior vice president, policy, of the American Benefits Council, a plan sponsor group.

There are other obstacles that need to be cleared away before annuities can be offered in 401(k) plans. One is the absence of a mechanism that allows participants of employer-sponsored plans generally to annuitize a portion of their savings or benefit and take the rest as a lump sum.

It wasn’t clear why this is so, especially when, as Dallas Salisbury, president and CEO of EBRI, noted, “It only takes annuitization of 10 to 15 percent of assets to ensure that people won’t run out of money.”

Another problem involves the lack of resolution over joint and survivor annuities. Most retirees, including couples, opt for single life annuities when they can. But some policy makers don’t want to see surviving spouses on welfare, so a joint-and-survivor contract is likely to be their choice for a default annuity.

The meeting was not a pure lovefest. There were hints of a deep disagreement within the retirement industry over whether rollover IRAs or 401(k) plans will be the arena where most Boomers will decide whether to buy an annuity or a payout mutual fund or not.

Steve Utkus of Vanguard’s Center for Retirement Research and William Gale of the Brookings Institution both tossed polite grenades into the punchbowl by suggesting that the workplace either will not (Utkus) or should not (Gale) be the locus of individual decision-making about retirement income.

“There nothing that has to be done at the employer level,” Gale said. “Years from now we’ll look back and wonder why we even considered this. There’s no reason why distribution from defined contribution plans should be firm-specific. It would be better if employers let it go. Employers pay salaries but don’t worry about how employees spend them. They give people health benefits but don’t tell them which doctors to go to. Firms can care about their employees’ retirement security and not try to control how they spend their savings.”

Of course, the retirement income opportunity is big enough to accommodate both scenarios. It may come to pass that millions of rank-and-file participants are auto-enrolled, auto-invested in target date funds, make auto-escalated contributions and are defaulted into some kind of joint-and-survivor annuity-all without leaving the plan. That will enable current plan providers to continue to manage the money.

But, even if that happens, it won’t prevent millions of mass-affluent or high net worth participants from consolidating tax-deferred savings accounts from half a dozen jobs into one rollover IRA and collaborating with an advisor on a bespoke retirement income strategy. That will provide plenty of opportunity for financial advisors.

In other words, it’s not necessarily a zero sum game. But the competition for assets is nonetheless serious. At the end of last year, a tipping point was reach. The amount of money in IRAs exceeded the amount of money in 401(k) plans for the first time, by $4.2 trillion to $4.1 trillion. (See cover story “Who’s Winning the Rollover War?” for more on that.)

Coincidentally or not, large plan sponsors recently reversed course and said they now prefer that former employees keep their assets in their plans. It could be a sign that the fight for Boomer assets is intensifying. As DoL and Treasury officials pore over the RFI submissions and try to develop helpful public policy in this area, they should take care not to get caught in the crossfire.

A Sobering VA Outlook, Via Cerulli

Posted on May 19, 2010 by Editor Test -

A new update from Cerulli Associates offers both good and bad news about the state of the variable annuity industry (“Cerulli Quantitative Update: Annuities and Insurance 2010”).

The bad news, says Cerulli analyst Lisa Plotnick, is reflected in the feeble amounts of new cash flowing into the VA space. Net inflows were only 14%, or $17 billion, in 2009. That’s about half what they were in 2007. “The VA industry is having a very difficult time attracting money right now,” she told RIJ.

“When we see such a concentration of sales among the top sellers, that’s indicative of an industry that’s not growing,” she added. “That doesn’t imply a lot of exchange activity; it implies that the others aren’t pulling in any money.

“The entire annuity industry is still feeling some of the fallout from the Great Recession. There remains a lot of distrust among advisors and consumers. Financial strength rating is the most hyped attribute of an insurance company, which is something we’ve never seen before.”

But the “bad news is not unaddressable,” she noted. If the industry comes through its current period of “stabilization and rationalization” with more willingness to listen to advisors rather than pitch products to them, they’ll be in a better position to recover lost ground.

“They need to clean up their image and be more transparent,” Plotnick told RIJ. “We are not in the same environment as 10 years ago. Jumping onto [product] bandwagons and chasing after RIAs (registered investment advisors)—none of that will work unless serious consideration is given to what advisors are looking for and how the annuity products can fit alongside other products in a clients portfolio.”

Cerulli suggests that variable annuity marketers should prospect for sales in the following areas:

Qualified money. More qualified than unqualified money is flowing into VAs. As of 2009, 70% of total VA premiums consisted of qualified money, up from just 52% in 2000.

Mass-affluent investors. This is part of the qualified money story. Among the mass-affluent, qualified assets represent the majority of their retirement savings.

Rollover IRAs. The great majority of DC plan assets are rolled over into IRAs, and more advisors are said to be considering annuities as investments for rollover dollars. Plotnick writes: “Fifty-seven percent of advisors surveyed in 3Q 2009 would consider both immediate and deferred annuities for rollover dollars, up from 41% in 2005.” Cerulli expects $1.8 trillion in rollovers between 2009 and 2014.

Financial planners. It’s an enduring fact that while advisors on the whole don’t love VAs, advisors intermediate 98% of VA sales. Financial planners “are considerably more likely than their counterparts in other practice types to recommend annuities for rollovers,” Plotnick wrote in the update.

Simpler product designs. Although several VA issuers are still committed to contracts that are loaded with options and potential expenses, Cerulli seems to agree with the side of the industry that’s banking on cheaper, no frills contracts for the advisor market.

On the other hand, “the market isn’t quite ready for simplified variable annuities,” Plotnick said. Advisors still want lots of investment choices, she said. John Hancock’s simple Annuity Note contract got a chilly reception last summer when it offered just one investment option.

Long-term care insurance/annuity hybrids and living benefits on mutual funds. Insurance companies see these two product/distribution areas as offering the most opportunity in the future, Cerulli says. The addition of living benefits to UMAs and the idea of distributing VAs in the workplace are “viewed with less fervor.”

* * *

Advisors continue to say at conferences and in panel discussions that VA wholesalers approach them the wrong way. The wholesalers focus on insurance features, but the advisors want to know about the investments. Wholesalers pitch VAs as an all-inclusive product, but advisors want to hear about blending annuities with other products.

“VA wholesaling must evolve to incorporate product positioning—not product pitching—as a central element, in order for wholesalers to successfully capture advisors who infrequently use variable annuities,” Plotnick wrote.

Although annuity marketers are hoping that the financial crisis will awaken a larger appetite for guaranteed products, that hasn’t happened, Cerulli has found. Although 30% of advisors have “increased their use of guaranteed income streams,” most advisors still have accumulation-focused practices and “remain reluctant to embrace holistic retirement planning” that includes guaranteed income streams and budget analysis.”

On the question of product design, Cerulli thinks less is more. Based on research in the first quarter of 2010, the firm “determined that the most comprehensive features are not necessarily the most effective in generating assets.” Providers should “optimize, not maximize” their offerings, and position them “within a holistic retirement income plan.”

Within the next year or two, it should become clear whether the variable annuity with the GLWB will play a larger role in serving the Boomer retirement market, or if life insurance companies will call off the chase, and return to their core competency of mortality pooling.

From an IVA, New Blood for Insurers

Posted on May 19, 2010 by Kerry Pechter -

At a presentation a few years ago, Peng Chen, president of Ibbotson Associates, projected a slide that plotted the positions of several retirement income products on a risk/return diagram.

In the northwest corner of the chart, as lonely as Pluto on a black map of the solar system, stood the immediate variable annuity (IVA). All other factors held equal, the IVA’s reward-to-risk ratio was highest. Yet no one ever buys it.

Lorry Stensrud wants to change that. Or rather, he still wants to change it. Just a few years ago, as an executive at Lincoln Financial Group, he championed Lincoln’s fascinating but complex i4Life deferred variable income annuity.

Now, as CEO of Chicago-based Achaean Financial, he’s back with a new, patent-applied-for customizable IVA chassis that he calls IncomePlus+. He wants to license it to life insurers, who he hopes will use it as the “Intel Inside” for a new generation of guaranteed income products.

Stensrud, who is 60, thinks that investors, asset managers, plan sponsors, and advisors are ready for an IVA that’s financially engineered to provide a cash refund or a death benefit. But first he has to convince life insurers to believe in it. He hopes they’ll see it as a magnet for new sales and a broom to sweep costly VAs off their books.

He claims to be winning that battle. “The life insurers’ first reaction is that it’s too good to be true,” Stensrud told RIJ. But when they learn more about it, he said, they warm up. “Their next question is, ‘Will the distributors and investors buy it?’”

How it works
So far, Stensrud has been careful about revealing how the product works, partly to protect his intellectual property and partly because different life insurers are expected to customize it in different ways.

Based on his description, however, it’s clearly not as simple as a plain vanilla IVA, which offers a payout that varies up or down from a starting payment that’s usually based on an assumed interest rate (AIR) of about 3.5%. Contract owners can often tinker with the asset allocation and there are no refunds or death benefits.

IncomePlus+ is more complex. It uses a zero-percent AIR so that the first payment is unusually low. Subsequent payments can never go lower than the initial one. On the other hand, there’s a payment cap, and excess earnings go into a reserve fund. It has a “bi-directional” hedging program includes both puts and calls. And it offers a cash refunds (whole or partial) and/or a death benefit that can be enhanced by assets in the reserve fund.

That’s a lot to digest. But, bottom line, on a $100,000 premium, IncomePlus+ would pay a single 65-year-old male about $570 a month to start with a rising floor and ceiling.

“At first we thought we needed to be within 5% to 10% of a SPIA payout rate, and that if we added upside potential we would be competitive,” Stensrud said. “But the distributors told us that nobody buys a SPIA at 65. They’ll compare us with systematic withdrawal plans (SWPs), so the payouts only need to be in the five percent range. A lower starting payment also means we can give larger increases when we have positive performance.”

A textbook SWP pays out 4%, or $333 a month per $100,000. (Without eating principal, of course.) A life-only IVA with a 3.5% AIR would pay about $616 a month initially, and fluctuate with the markets. A life-only SPIA would pay a flat $654 a month, according to immediateannuities.com. A SPIA with an installment refund would pay a flat $619 a month.

A variable annuity with a GLWB, by contrast, would pay just $417 a month to start. But most investors arguably regard that product primarily as an investment, and regard the income option less as a “full-size tire” than as a “donut” spare that they keep in the trunk for emergencies. In other words, they don’t necessarily have the same expectations of the income component that a SPIA or IVA buyer would. So it’s an apples-to-oranges comparison.

(Additional information about IncomePlus+ can be found in Stensrud’s interview in March with Tom Cochrane of annuitydigest.com, “Achaean Financial is Proving Innovation is Alive and Well in the Annuity Business.”)

Is the timing right?
Life insurers, or at least certain life insurers, will be receptive to his product, Stensrud believes, because it might help them free up some of the statutory reserves that they’re currently dedicating to underwater GLWBs. If they add IncomePlus+ as a settlement option to those contracts and persuade even a fraction of in-the-money policyholders to use it, they’ll save a lot, he said.

Insurers will also like IncomePlus+ because it’s reinsurable, which can’t be said for GLWBs, according to Stensrud: “The reinsurance aspect is important for most life companies. If they need to offload the business they have the opportunity to do that. There isn’t reinsurance available on any GLWB in the country.”

Others wonder if Stensrud’s reading of the marketplace is accurate. “I’m not sure if there are a lot of GLWB issues trying to find a way to get those contracts off their books,” said Jeffrey Dellinger, author of Variable Income Annuities (Wiley Finance, 2006) and a former colleague of Stensrud’s at Lincoln Financial. “It’s too soon to tell if there’s a demand for what Lorry is selling.”

Income annuity purists like Moshe Milevsky, meanwhile, wonder why some people are still determined to add liquidity to income annuities, when doing so only compromises their income-generating power, which arises from mortality pooling.

“The only free lunch in the annuity business is mortality credits,” said the Toronto-based academic and author of The Calculus of Retirement Income (Cambridge University Press, 2006) and other books. “If you are willing to give up dinner when you die, you can get a better lunch. These mortality credits increase with age and can be fused onto either variable investments and/or fixed investments. End of story.”

On the other hand, the primary audience for IncomePlus+ isn’t purists, and it isn’t even investors at this point. The audience is life insurers, asset managers, and financial advisors, and Stensrud thinks that many of them are looking for a product that’s somewhere between the GLWB and the SPIA.

The assumption underlying Stensrud’s strategy is a conviction that the variable annuity with a typical GLWB can’t deliver rising income in retirement under most circumstances. Indeed, even GLWB manufacturers concede that high fees and annual distributions are likely to stop the underlying account balance from reaching new high water marks, which are a prerequisite to higher payouts. But a properly engineered IVA can produce rising income, Stensrud thinks, and do it at lower risk and lower expense than a GLWB while still providing liquidity.

It may not be as simple or as elegant as a barebones IVA, or offer as much upside as one. But, historically, those don’t sell.

Low Rates Keep U.S. Solvent. But for How Long?

Posted on May 19, 2010 by Michael Pento -

According to the Department of Treasury’s auction staff, the U.S. auctioned $8.8 trillion in bills, notes and bonds in fiscal year 2009. That number is greater than the entire publicly traded debt, which is currently $8.4 trillion.

The reason for the enormous amount of debt issuance is due to our surging annual deficits and rollovers that must occur more frequently because of the government’s decision to issue debt on the short end of the yield curve.

The astronomical size of debt the Treasury must auction each year raises a question; who will buy it? The U.S. saved $464.9 billion last year and is currently saving at a $304 billion annual rate in March. China liquidated $34 billion in Treasuries in December of 2009, while Japan and Europe are struggling to meet their own government obligations.

Since we do not have the domestic savings to fund our own debt and foreigners may not have the will or means to continue to funnel their savings to the U.S., the result is we must depend on current holders to rollover their debt on a continual basis.

However, if interest rates begin to rise to their historical levels (the average yield on the 10-year note is 7.3%) investors may balk at rolling over their debt, which would increase our interest rate expenses and could bankrupt the country.

Of course, that leaves our central bank as the buyer of last resort and is the primary reason why gold is rising in all currencies and recently reached an all-time nominal high in U.S. dollars.

The U.S. is now more addicted to artificially-produced low interest rates than at any other time in her history. But that’s not just my opinion.

Listen to what Ben Bernanke said before the House Financial Services Committee regarding whether the U.S. faces a debt crisis similar to Greece; “It’s not something that is 10 years away. It affects the markets currently…It is possible that the bond market will become worried about the sustainability [of deficits over $1 trillion] and we may find ourselves facing higher interest rates even today.”

Separately, Bloomberg reports that the “Maestro” himself, Alan Greenspan, is so concerned about a sudden sharp increase in interest rates that every day he checks the rate of the 10-year note and 30-year bond, calling them “the critical Achilles heel of the economy.”

And what does China think of the fiscal state of the country and the precarious state of our bond market? Deputy Governor of the People’s Bank of China Zhu Min said in December that “the world does not have so much money to buy more U.S. Treasuries.”

The United States is the largest debtor nation in history. Our continued solvency depends upon low interest rates. But low rates are engendered either naturally from increased savings or artificially from money printing.

Without having the adequate savings to bring down rates, the Fed has supplanted savings with monetization of debt. However, money printing eventually leads to intractable inflation and will send bond yields much higher, especially on the long end of the curve.

To make matters worse, we currently see the difference between revenue and spending headed further in the wrong direction. The budget deficit for the month of April was reported to be $82.7 billion. That figure was nearly 4 times last year’s reported deficit in April, which was $20.9 billion. The April shortfall was the second for that month since 1983. The deficit for fiscal 2010 to date, which ends in October, is $799.7 billion.

Revenue fell 7.9% YOY while spending increased 14.2%. According to the CBO, the nation’s publicly traded debt will reach 90% of GDP in 2020 and, most importantly, interest payments are projected to quadruple to more than $900 billion annually by that year. Of course, as daunting as that trillion-dollar annual interest rate expense will become, it could be much greater if rates do in fact rise.

Indeed, if rates rise significantly the country will face a liquidity and solvency crisis the likes of which the planet has never before witnessed. There is a significant amount of pent-up selling pressure in our bond market. Nearly fifty percent of our publicly-traded debt is held by foreigners and 63% of foreign central bank reserves are held in dollars.

The Fed must quickly move away from its zero percent interest rate policy, otherwise inflation will ravage the country just as it has done every other time the Fed has taken rates below inflation and left them there for a protracted period. If they delay too long, they will be forced to bring the yield curve much higher to fight that insidious inflation.

It seems to me the sooner they move the less they will have to raise rates. Therefore, it’s imperative for the Fed to act now before they are forced to aggressively raise rates to fight inflation or the market forces interest rates higher on its own; which, given our extreme level of debt, will render the U.S. insolvent.

Michael Pento is chief economist of Delta Global Advisors and is a senior contributor to GreenFaucet.com. This essay first appeared on PrudentBear.com.

Share of Household Financial Assets Held in Investment Companies

Posted on May 18, 2010 by Editor Test -

Nervous Americans Not Flocking to Annuities

Posted on May 18, 2010 by Editor Test -

Annuity sales are suffering, despite reports that volatility-shocked Americans want guarantees. (See “Total First Quarter Annuity Sales.” ) Low interest rates are hurting fixed annuity sales while variable annuity issuers, still hurting from the financial crisis, have not enjoyed the bounce that a recovering stock market often brings.

Total annuity sales for the first quarter were $47.4 billion, down 6.9% from $50.9 billion in the previous quarter, and down 27%, from $64.4 billion in the first quarter of 2009, according to a combined report from the Insured Retirement Institute, Morningstar, Inc., and Beacon Research.

Fixed annuity sales for the first quarter were $16 billion, down from $19 billion in the previous quarter, representing a 14.7% decline. Year-to-year quarterly sales of fixed annuities were down 51.9%, declining from $34 billion in the first quarter of 2009.

“The quarter-to-quarter drop in fixed annuity sales was due mainly to lower book value and MVA results. It appears that prospective buyers expected higher rates in the future and did not want to lock in first quarter’s credited rates,” said Beacon Research President and CEO Jeremy Alexander.

“A year ago, fixed annuity sales hit a record high because of the flight to safety and strong fixed annuity rate advantage. It’s not surprising that year-over-year results were down substantially,” he added.

Variable annuity sales for the first quarter were $31.4 billion, down 1.5% from $31.9 billion in the previous quarter. Year-to-year quarterly sales of variable annuities were up marginally, posting a 3% increase from first quarter 2009 sales of $30.4 billion. First quarter 2009 net sales were $3.4 billion. There were $21.7 billion in qualified sales and $9.6 billion in non-qualified in the first quarter.

“While total sales were down slightly from fourth quarter levels, we saw continued strength in the sales of products offering robust living benefit guarantees,” said Morningstar, Inc. Director of Insurance Solutions Frank O’Connor.

“Products offering lifetime guaranteed withdrawal benefits with value enhancers such as step-ups and bonus credits represented the lion’s share of sales,” he said. “This is a reflection of the VA investor’s desire for higher returns in a low rate environment coupled with a willingness to exchange a percentage of those potential returns for the protection offered by these benefits.”

First Quarter Index Annuity Sales Down 3.9%: AnnuitySpecs

Posted on May 18, 2010 by Editor Test -

First quarter 2010 sales of indexed annuities were $6.8 billion, down 3.9% from the same period last year, according to the 51st edition of AnnuitySpecs.com’s Indexed Sales & Market Report. Forty-three issuers participated in the report, representing 99% of indexed annuity production.

Sales were down 3.4% compared to the last quarter of 2009, according to Sheryl Moore, president and CEO of AnnuitySpecs, who was not surprised by the results.

“Typically, the fourth quarter is the biggest sales push of the year. Agents submit the bulk of their business in the fourth quarter so that they can qualify for rankings and incentives,” she said. “Plus, sales in 2009 set records in the indexed annuity industry. It is always hard to top sales levels when the benchmark is set that high.”

In the first quarter, Allianz Life again led all issuers with a 20% market share. Its MasterDex X was the top selling product for the fourth consecutive quarter. Aviva repeated in second place, followed by American Equity, Jackson National and ING.

Jackson National Life dominated the bank and wirehouse channels for the second consecutive quarter.

For indexed life sales, 33 carriers in the market participated in the AnnuitySpecs.com’s Indexed Sales & Market Report, representing 100% of production.

First quarter sales were $143.0 million, a decline of nearly 12% from the previous quarter and a 9.3% reduction from the same period in 2009.

“The indexed life market experienced a similar phenomenon as the indexed annuity business. Last year was the second-highest year ever for IUL sales, so that means the data is going to be comparatively less favorable,” Moore said. “Several companies that are newer to the market had impressive gains this quarter. In addition, we are still expecting new entrants before the close of 2010.”

Aviva’s led all rivals in sales with a 20% market share, followed by Pacific Life, National Life Group, AEGON Companies and Minnesota Life. Aviva’s Advantage Builder was the best-selling indexed life product in the first quarter. Over 84% of sales used an annual point-to-point crediting method, and the average target premi um paid was $5,724.

Fidelity Launches Corporate Bond Fund

Posted on May 18, 2010 by Editor Test -

Fidelity Investments has launched a new Corporate Bond Fund that will invest at least 80% of assets in investment-grade corporate bonds and other corporate debt securities, and repurchase agreements for those securities.

“We saw a gap in our mutual fund lineup and interest from our advisor customers, and we think we can offer expertise in that area of the market,” said Sophie Launay, a Fidelity spokesperson.

The fund will track the Barclays Capital U.S. Credit Bond Index, a value-weighted index of investment-grade, corporate fixed-rate issues with maturities of one year or more. Retail and advisor shares will be offered.

“We currently offer investment-grade bond funds that invest in the entire market, as well as those that focus on specific underlying sectors or maturity ranges,” said John McNichols, senior vice president, Investment Product Management, Fidelity Personal Investments.

“With this new fund, we’re able to offer investors targeted exposure to corporate bonds, which represent about 20% of the investment-grade bond market. Through the fund, investors and advisors will gain access to the debt of many of the largest and most successful companies in America.”

McNichols added, “With the future possibility of rising interest rates, investors may be concerned about the near-term outlook for bond returns. However, historical data shows that even during periods of rising rates, the frequency and magnitude of negative returns for bonds was far lower than that for stocks, suggesting an allocation to bonds still reduced the volatility of an investment portfolio.”

Fidelity Corporate Bond Fund is co-managed by David Prothro and Michael Plage. Prothro currently manages credit-only strategies for institutional clients, as well as investment-grade bond portfolios available exclusively to Canadian retail and institutional investors. Plage, who joined Fidelity in 2005 as a fixed-income trader, also manages a number of credit-related portfolios for institutional investors.

Regulate Ratings Agencies More or Less?

Posted on May 18, 2010 by Editor Test -

Which amendment to the Senate’s financial regulation legislation would better address the conflicts of interest that rating companies face when judging the products issued by the firms that pay them:

An amendment to create an independent government-appointed panel to assign Wall Street deals to rating companies and prevent shopping for ratings. Or,
An amendment to drop the Nationally Recognized Statistical Rating Organization (NRSRO) designation that puts a misleading stamp of approval on rating agency practices.

Sen. Al Franken (D-MN), the former “Saturday Night Live” comedy writer, proposed the first amendment. Sen. George LeMieux (R-FL) proposed the second.

The Senate approved the Franken amendment, S.A. 3991, by a 64-35 vote, over the opposition of Sen. Christopher Dodd, (D-CT), chairman of the Senate Banking, Housing and Urban Affairs Committee, which drafted the underlying bill, S. 3217, the Restoring Financial Stability Act of 2010.

But Sen. LeMieux’ amendment is also part of the packet of changes that have been added to S. 3217, despite its inconsistency with the Franken amendment, according to Reuters Breakingviews column in the New York Times May 17. The columnists said LeMieux’s idea was “a far better outcome” because it prevented a “bureaucratic nightmare” and required “better due diligence by investors.”

The Franken amendment would give the SEC the authority to set up a Credit Rating Agency Board, or CRAB, to be made up of investors and independent regulators. The new body would assign a credit rater for a security.

The SEC would determine the size of the board. The majority of members would be investors, with at least one representative of a credit-rating company and one representative of an investment bank. Each year, the board would scrutinize each rating firm’s accuracy in grading debt compared with competitors and ensure that all payments were “reasonable.”

Chris Atkins, a spokesman for Standard & Poor’s, New York, was disappointed. Atkins said the Franken amendment “could result in a number of unintended consequences.” It would give rating firms less incentive to compete with one another, pursue innovation and improve their models, criteria and methodologies.

“This could lead to more homogenized rating opinions and, ultimately, deprive investors of valuable, differentiated opinions on credit risk,” Atkins said. “Most important, having the rating agency assigned by a third party, whether the government or its designee, could lead investors to believe the resulting ratings were endorsed by the government, thereby encouraging over-reliance on the ratings.”

Rising Flows for Active U.S. Stock Funds

Posted on May 18, 2010 by Editor Test -

U.S. open-end mutual funds gathered nearly $41.0 billion in assets in April, bringing YTD inflows to $165.1 billion, according to Morningstar, Inc. Domestic-stock funds took in $6.3 billion in April, the most since May 2009. Actively managed U.S. stock funds enjoyed their first month of positive flows since May 2009.

Year-to-date net inflows for ETFs reached $19.9 billion after $12.2 billion in inflows in April, including $5.6 billion to international stock ETFs. Flows were positive for all ETF asset classes during the month.

Target-date funds continued to gather assets, with inflows of $20.5 billion in 2010 through April. These funds accounted for more than half of Fidelity’s total flows and almost 40% of T. Rowe Price’s over the past 12 months.

Investors withdrew $118.8 billion from money market funds during the month. Total outflows for money markets have reached $443.0 billion in 2010, which already surpasses the outflows for all of calendar year 2009.

Vanguard gathered the most mutual fund assets in April of any fund family with $8.6 billion. Hotchkis and Wiley, Matthews Asia, and Osterweis also saw strong inflows during the month.

Although Vanguard still ranks third in ETF assets, it continued to take market share from top competitors, iShares and State Street. Vanguard, which has about $11.8 billion in total net inflows YTD, has more than doubled its ETF assets over the past year.

Taxable-bond funds retained their dominant position with inflows of $22.1 billion in April, but support waned for municipal-bond funds, which had inflows of only $989 million. Real estate funds, bolstered by strong returns over the trailing 12 months, have gathered $1.5 billion in assets this year through April, for the category’s best start since 2007.

In ETF-related news:

Small- and mid-cap U.S. stock ETFs gathered assets of $1.9 billion and $976 million, respectively. Large-cap ETFs as a whole suffered outflows of about $1.5 billion in April, led by steep outflows of roughly $4.6 billion from SPDR S&P 500 SPY.

Taxable-bond ETFs continued to have strong inflows. Short-term bond ETFs took in $517 million in April, reflecting investors’ preference for the short end of the yield curve.

Part III: Industry Answers

Posted on May 12, 2010 by Editor Test -

Not everyone was swept away by the paranoia about confiscation. On February 24, the following e-mail posts appeared on Morningstar’s Boglehead Forum, where fans of Vanguard founder Jack Bogle’s low-cost investing philosophy gather to chat and deconstruct the economic news:

Paula H.: I keep hearing on the radio that the Government is considering a mandatory conversion of 401K funds to Government annuities for the protection of retirees. Searching, I have not been able to confirm that this is being discussed by government policymakers. Do any of you know about this and its likelihood? Thanks!

Bobcat2: I believe what’s being discussed at least among academics is that most DC plans include an option at retirement for the employee to annuitize some portion of the DC portfolio. Currently most DC plans don’t have such an option. (Small firms might be exempted from offering this option.) I believe what’s also being discussed is that such an option could be made reversible, say after a period two years, with only a small penalty for dropping the annuity.

In the last few days of the 90-day window for public comments on 39 questions about annuity options for defined contribution plans, the DoL was deluged with lengthy papers from dozens of companies, groups and individuals. Almost every player in the retirement income industry, representing millions of people and trillions of dollars in savings and investments, filed pdfs ranging in length from three to 90 pages.

They included financial services companies (insurers, plan providers, banks and fund companies) like TIAA-CREF, Prudential Financial, Allianz Life, MetLife, Lincoln Financial, Putnam Investments, American Equity Life, Great-West Retirement Services, AEGON USA, ING, Alliance-Bernstein, Genworth Financial, Vanguard, Fidelity, T. Rowe Price, John Hancock, Wells Fargo, J.P. Morgan Asset Management, New York Life, BlackRock, Nationwide, The Hartford, Raymond James, Charles Schwab and Mutual of Omaha.

Also submitting comments were trade groups like the Insured Retirement Institute, the Profit Sharing Council of America, the Retirement Income Industry Association, the American Council of Life Insurers, the American Society of Pension Professionals and Actuaries, the Investment Company Institute, the Women’s Institute for a Secure Retirement, the SPARK Institute, LIMRA, the AFL-CIO, SIFMA, the Pension Rights Center, the Defined Contribution Institutional Investors Association, the National Association of Fixed Annuities and many others.

Then there were consulting firms and academic groups like Financial Engines, Morningstar Inc., the Pension Research Council at the Wharton School, Milliman, Hewitt Associates, the law firm of Morgan Lewis, Pension Consultants Inc., Dietrich & Associates, the Individual Finance and Insurance Decisions Centre at the Fields Institute in Toronto, and many others.

At press time, there were submissions too many to read, let alone analyze or assess.

Regarding the provocative Question 13, most seemed to agree that annuities should not be a mandatory offering in 401(k) plans.

The suggestions were nothing if not diverse, however. Some advocated stand-alone living benefits. Others promoted institutionally priced income annuities. Others advocated longevity insurance. In one submission, Scott Stolz, president of the Raymond James Insurance Group, suggested three ways to make “a simple lifetime income option work within existing defined contribution plans”:

Provide a projected income quote on retirement plan statements, based on current annuity rates, along with the account balance.
Allow retirement plan participants to purchase future income with existing assets, in chunks, systematically and irrevocably.
Only the biggest and strongest insurance companies should be allowed to offer income plans, and the federal government must guarantee the income payments.

And some said that, except for promoting financial education, government should leave the defined contribution plan alone. Here’s a submission in that vein from Ryan Boutwell, a retirement plan advisor in suburban Minneapolis:

“I would like to offer my opinion regarding the discussion of Lifetime Annuities being offered within company qualified plans. I am a consultant in the qualified plan industry and have worked with hundreds of business retirement plans over the last 10 years. I do not believe requiring plans to have an annuity feature is a good idea.

“The retirement plan industry is already grappling with the fee disclosure issue and I tend to find small plans are already burdened with onerous compliance rules. Adding a requirement of an annuity feature is going to add more cost inside these plans that are already expensive to administer and invest in.

“It might benefit some of the insurance/annuity providers of retirement plans, but it will definitely be a burden to the pure mutual fund/open architecture recordkeeping programs. These programs are often the most cost competitive for small business plans.

“In an industry that is already under a lot of fee scrutiny adding in another possibly expensive layer of requirements to have a mandatory annuity feature is not a constructive move in my opinion. Especially considering that annuity products are already available to former plan participants on the open market away from their employer.

“If you ask me, the retirement plan industry does not need more requirements to meet, it needs less and from a participant standpoint, participants need more education. I have met with thousands of business retirement plan participants over the last 10 years, most of them are looking for simplification and good solid financial advice. An annuity can be an appropriate investment vehicle for some employees, but it is not a one-size-fits-all solution and at the end of the day it comes back to education to the participant.

“A better-educated participant will make better choices and this will benefit everyone from the Small Business that offers a plan to the participant, to the Vendors that work in this industry. If you are looking to make changes to retirement plans don’t do it by mandating new features that may be right for some, but not others, do it by promoting education within the workforce.”

Now the Department of Labor will try to sift through hundreds of thousands of words to see what patterns or conflicts or insights emerge. The executive branch is also getting into the act. On June 16, the Senate Special Committee on Aging, chaired by Sen. Herb Kohl (D-WI), will hold hearings on the matter. Presumably the committee will want to hear all sides of the story. ;RIJ will attend and report on the proceedings.

Part II: Tracing the Distortion

Posted on May 12, 2010 by Editor Test -

How did the conspiracy theory about confiscating 401(k) assets get started? Some say that the chronological ground zero was economist Teresa Ghilarducci’s October 2008 testimony before Congress, when she suggested replacing the flawed 401(k) system with mandatory contributions to private retirement accounts. For that comment, Rush Limbaugh labeled her the “most dangerous woman in America.”

A year later, in early November 2009, shortly after BusinessWeek reported that the government was interested in exploring the idea of income options in DC plans, Limbaugh said on his ubiquitous radio show (Thanks to David Shankbone for archiving a much longer excerpt):

“Do you know what’s going to happen to you? We don’t know what’s going to happen, but do you know what the Democrat plan for your 401(k) is?”

“Then we’re going to take it. We’re going to take your 401(k), and we will put it in your Social Security account that the government is monitoring for you, and we will invest every year in 3% government bonds.”

“The bottom line is, they’ll take your 401(k) and put it in Social Security.”

Last February 2, the Departments of Labor and Treasury published their RFI in the Federal Register. It consisted of 39 open questions to the public. The 13^th question—the numbering may have been unwise—read as follows:

13. Should some form of lifetime income distribution option be required for defined contribution plans (in addition to money purchase pension plans)? If so, should that option be the default distribution option, and should it apply to the entire account balance? To what extent would such a requirement encourage or discourage plan sponsorship?

On February 17, two weeks after the DoL’s RFI was published, Newt Gingrich and Peter Ferrara published an opinion piece in Investor’s Business Daily that seemed to seize on this question. It said in part:

“In plain English, the idea is for the government to take your retirement savings in return for a promise to pay you some monthly benefit in your retirement years.

“They will tell you that you are ‘investing’ your money in U.S. Treasury bonds. But they will use your money immediately to pay for their unprecedented trillion-dollar budget deficits, leaving nothing to back up their political promises, just as they have raided the Social Security trust funds.”

Four days after Gingrich’s IBD article appeared, the syndicated radio host Bob Brinker was asked about the issue by a caller. Brinker, whose show runs on dozens of U.S. stations, mused on the issue, and then added his own opinion:

“This basically started with hearings that were held by committees involving the politicians you mentioned… And what they did, they had a witness come into the hearing from the New School in Manhattan, and her name was Teresa Ghilarducci.

“Teresa’s idea is to develop a program that would allow 401(k) members… to convert those accounts to government retirement programs. Now what that would involve, if you elected to convert your account, you would give all the money in your 401K to the United States government… and in return for that, you would receive a guaranteed retirement payout for the rest of your life once you became eligible…

[The caller pointed out that even though they are saying it’s not going to be mandatory, if it doesn’t get much participation, they will turn around and make it mandatory.]

“I think that if it’s not voluntary that you are absolutely right… Not only would I oppose it vehemently, but I would expect that large numbers of 401K holders people across America would rise up in protest of a mandatory confiscation-that’s what it would be…

“If they made it mandatory that would mean that the United States Government… would confiscate all assets in 401K and replace those assets with a guaranteed retirement payout. Now I think if they proposed that to be mandatory that would be a dramatic step toward basically a Socialist system in Washington.”

[Ken said that would be just like they did in Argentina.]

“I don’t know where Ms. Ghilarducci got her idea, but I noticed that her testimony occurred not that far away from El Presidente Christina in Argentina announcing that the government of Argentina—and this just happened within the last several weeks—has announced that they are confiscating all pension fund assets in the country of Argentina. It is a government confiscation of funds.”

By early March, the conversation had moved down the media food chain to the blogging community. A blogger named Sylvia Bokor, who describes herself as an artist and author, began riffing on the RFI:

“From the perspective of the employee, the EBSA Proposal is equally unjust, violating their rights as well. It wants to force Defined Contribution employees to use “a lifetime stream of income-i.e., government issued annuities—thereby forbidding lump sum payouts. In other words, the employee’s money will no longer be his to use as and when he wants it. Government officials will decide when employees can have the money they’ve earned and how they can receive it.

“When government takes over retirement accounts, the money will not be invested in reputable securities earning a return and watched over by expert investment analysts. The money will be siphoned off for other schemes, as is the money one pays into Social Security and Medicare. Employees’ savings will be wiped out. The Proposal is undisguised looting of employer and employee alike.”

On April 3, on a blog called “Krazy Economy,” the blogger “C.W.” elaborated on the government’s supposed scheme, stating as a fact that Uncle Sam planned a massive sell-off of confiscated 401(k) assets. He wrote:

“The following is clear. At some point the government will begin seizing accounts. It may seize only the accounts of retirees and those it deems close to retirement. It is unknown if they’ll seize more. But it will at least seize those and issue annuities for at least those who are retired. This may not be for just the newly retired, but anyone who is retired and has an account large enough to be attractive to seize.

Since the reason for seizing retirement accounts is to use the money for government purposes, it will convert the assets to cash to buy government bonds, probably a newly created special class. The government will sell the securities in the seized retirement accounts.

“This point is absolutely necessary to understand: The government will be selling the seized securities.”

Three days later, the media megaphone was back in Newt Gingrich’s hands, but this time on television. On the April 6 edition of Fox News’ Fox & Friends, this exchange was recorded between Gingrich and co-host Steve Doocy:

Doocy: “There was a BusinessWeek report that said the Treasury and Labor department are asking for public comment on a scheme, it sounds like, to convert 401(k)s and IRAs, into some sort of retirement thing where you give the money to the government, all the money you’ve saved your whole life, and then they will dole it out over a period of time. What’s up with that?”

Gingrich: “I think it’s a very dangerous idea. This is really a secular socialist machine that wants to take over your life. They want to take it over in terms of a proposal that they would, in effect, over time, abolish 401(k)s, migrate Americans to a government-run program so that the politicians would then have your money.”

[An on-screen graphic during the segment stated: “Protecting your savings: Your 401K and IRA confiscated for govt. debt?”]

The Growth of Risk-Based and Target Date Funds

Posted on May 12, 2010 by Editor Test -

The Growth of Risk-Based and Target Date Funds
	Assets ($ Billions)			As a % of all DC Plan Assets¹	As a % of Contrib.²
	Risk Based Asset Allocation	Target Date	Total	As a % of all DC Plan Assets¹	As a % of Contrib.²
2003	$ 45	$ 20	$ 65	2.2%	7.7%
2004	55	35	90	2.7%	9.0%
2005	85	65	150	4.2%	12.8%
2006	120	120	240	6.1%	15.7%
2007	140	195	335	8.0%	20.3%
2008	115	200	315	9.3%	21.7%
2009	135	270	405	9.7%	24.9%
¹ Risk-based asset allocation funds and age-based target date funds held in Corporate DC, 403(b) and 457 plans. ² Hewitt 401(k) Index – Current allocation of participant contributions only in December of each year. Source: Retirement Research, Inc.

Mad About 401(k) Annuities

Posted on May 12, 2010 by Kerry Pechter -

Scores of blunt, angry e-mails warning the government to “keep its hands off my hard-earned money” began arriving in the Department of Labor’s email box last February after the DoL issued its Request for Information (RFI) about encouraging the inclusion of annuities as distribution options in 401(k) plans.

Here’s one example from the DoL’s comment page, which might serve as a focus group for officials and executives who want to test Americans’ hunger for in-plan annuities.

“To whom it may concern: If, in fact, the goal of this plan is to convert, by forced regulation, an existing 401(k) type retirement account into some type of mandatory, government sponsored retirement plan, I am firmly AGAINST IT.

“I do not need the Federal government taking control of my money or retirement plan. I DO NOT need the federal government using my money or controlling how or where my money is invested.”

There are about 500 protest letters—a number large enough to suggest a semi-coordinated rally but probably too small to reflect an orchestrated AstroTurf campaign designed to create the appearance of a grassroots groundswell.

As Part II of this story shows, the ever-provocative Newt Gingrich may have helped ignite the protest with an op-ed piece in the financial newspaper, Investor’s Business Daily, and, six weeks later, an appearance on a Fox News television show.

“This is really a secular socialist machine that wants to take over your life,” Gingrich said on Fox News. Radio hosts Rush Limbaugh and Bob Brinker raised the possibility that, if the worst was true, a misappropriation of private wealth was afoot.

Many of the letter-writers reacted negatively to Question 13 of the RFI, which asked if 401(k) plans should offer a default lifetime income distribution option for all or part of a participant’s assets.

The general feeling is that the average citizen knows how to save, budget and invest his or her own money with much greater skill and prudence than the federal government manages, or rather mismanages, its own finances.

“Americans are SMART enough to figure out how and when to spend their hard earned cash, and DO NOT want the government telling them how they can utilize their own savings!” Lorraine Ebel wrote. lt;/span>

Others suggested that the government had squandered all of its own resources, exhausted its borrowing power, and was now eyeing the last reservoir of American wealth: private retirement savings.

Quite a few warned of a U.S. government conspiracy, modeled on the president of Argentina’s nationalization of defined contribution savings last fall, to confiscate 401(k) assets and replace them with U.S. bonds or a Treasury bond-backed life annuity.

“The U.S. government has screwed up its own finances to the point where it is the largest debtor nation on the planet and in the history of the world. Trillion dollar deficits are forecast for years. Unfunded liabilities of Medicare and Social Security dwarf the acknowledged national debt,” one Jack Spurlock wrote.

Although the federal government was often accused in the letters of having a Socialist agenda, some writers were prepared to blow the whistle on a broader conspiracy by politicians and corporations against the common man:

“DoL, Treasury, and the entire U.S. federal government, are in bed with the Financial Industry, led by Goldman Sachs et al, and all are owned by an elite group of powerful individuals and families, the primary shareholders of the privately held Federal Reserve banks.

“Treasury is especially filled with financial terrorists whose sole purpose is to consolidate wealth and power into the hands of the elites. The United States is bankrupt by design, its imminent collapse having been engineered by the elite, and no amount looting and no power on earth can reverse it or stop it.”

In Part III of this story, we’ll show that many of the responses to the RFI were well-reasoned contributions to the debate over America’s expected retirement income shortfall. They came from members of the retirement income industry, and represent the top-down response to the DoL RFI, as opposed to the bottom-up voices of individuals.

It’s impossible to tell whether or not the anger behind the RFI protest letters was limited to a vocal few, or if it represented the frustration and suspicions of a large segment of the U.S. population. But in the wake of the financial crisis and the bailout, the letters seem to confirm that many Americans don’t trust either the financial industry or the government. And a handful of letters came from people who are apparently beyond mistrust:

“You want to see anger? People will be in the streets with blood in their eyes if you try to impose this massive government seizure of private assets.”

Using Psychology to Sell Annuities

Posted on May 12, 2010 by Editor Test -

Is resistance to life annuities partly irrational? If given the unbiased facts, would more retirees convert some of their wealth to sensible, inflation-adjusted life annuities?

Some behavioral finance experts think so. Or, to be more precise, they believe that the application of principles of psychology could boost annuity sales.

So, apparently, does Allianz of America, which responded to the Department of Labor’s recent Request for Information on lifetime income options in 401(k) plans by presenting insights and recommendations about annuities from 10 behavioral finance experts at major universities.

UCLA’s Shlomo Benartzi (above) collected the insights at the request of Allianz of America, which includes Allianz Life and Allianz Global Investors. In addition to providing a handy 10-point checklist for evaluating retirement income strategies, Benartzi catalogued 10 ways that psychology can affect annuity purchase decisions:

Framing. Receptiveness to annuities often depends on how they’re “framed,” says Jeffrey Brown of the University of Illinois. In one experiment, people were asked to choose between a life annuity paying $650 a month until death or a $100,000 savings account paying 4% annual interest. When the annuity was presented in terms of income (“consumption framing”), 70% chose it. When the annuity was presented in terms of investment returns (“investment framing”), 21% chose it.

Vividness. People are more likely to save for the future when they come face to face with aging-especially their own aging. Daniel G. Goldstein of the London Business School and others showed that people allocate twice as much to a retirement savings account after seeing “age-morphed” images of themselves as they will look when they are old.

Loss-aversion. Older people are more averse to loss and change than younger people, says Eric Johnson of Columbia. And that makes them shun annuities. In one experiment, nearly half of the retirees said that they would refuse a coin flip that gave them $100 if they won but cost them only $10 if they lost. In other words, they feared losses 10 times more than they coveted gains. In the case of annuities, the loss of liquidity looms especially large for them. To appeal to older people, guaranteed income products must be positioned as a way to gain more control over income and spending.

Cognitive impairment. Seniors have senior moments. When asked which numbers represented the biggest risk of getting a disease, 1 in 10, 1 in 100 or 1 in 1000, 29% of adults ages 65 to 94 got the answer wrong, according to Harvard’s David Laibson. After age 60, he said, the prevalence of dementia doubles about every five years. Quality of decisions about credit begins to decline as early as age 53. These trends suggest that people should commit to guaranteed income products or systematic withdrawal plans while they can still make optimal decisions.

Bucketing systems. Bucketing may not hold water from a strictly mathematical perspective, but it apparently works for many retirees. Evidence shows that older people save more, and persist in saving, when their money goes into or comes out of accounts that are clearly earmarked for specific purposes. They tend to take less risk with the money in a “Pay the Rent” account than with the money in an account earmarked for purely discretionary purchases, says George Loewenstein of Carnegie Mellon University.

No one-size-fits-all default option. Conventional wisdom says that life annuities are a boon to people with modest savings, because mortality credits boost payout rates. But don’t be so sure, says Harvard’s Brigitte Madrian. If low-income retirement plan participants have no liquid savings other than their 401(k) accounts, maybe they shouldn’t buy life annuities. Before setting up distribution options, plan sponsors should beware of steering people toward sub-optimal default solutions. High- and low-income participants might require different default distribution options, she believes.

Evaluability. Watch out for those “teaser rates.” Many married people opt for single life annuities at retirement merely because they provide higher monthly payments than joint-and-survivor life annuities, he believes. But if they recognized that a single life contract will short-change the surviving spouse, they might act otherwise. To make informed decisions in the presence of several distribution options, participants need complete, symmetrical information, says John Payne of Duke University.

Active decision-making. Think about it: In a study of 100,000 participants in 100 defined benefit plans, Alessandro Previtero of UCLA found that, when forced to make an active decision between a lump sum and an annuity (as opposed to an inertia-driven or default decision), about half of participants chose life annuities over lump sum distributions. Annuities aren’t as unpopular as policymakers assume they are, he thinks.

Money illusion. Most people, and especially older people, don’t fully appreciate that the bread that costs $3.50 today might cost $7 in 20 years. This type of financial myopia accounts is partly to blame for low sales of inflation-adjusted life annuities, says Princeton’s Eldar Shafir. He believes that if people knew exactly how much the real value of a nominal annuity shrinks over time, they’d buy more inflation-indexed contracts.

Fairness. Annuities are just plain misunderstood. When people understand that surviving annuity owners are the de facto beneficiaries when members of an annuity cohort die, they perceive annuities to be more “fair” than if they think-as many people do-that the insurance company keeps the undistributed assets of those who pass away, says Suzanne Shu of UCLA.

Jackson National Tailors GMWB for the Tax-Conscious

Posted on May 12, 2010 by Editor Test -

Jackson National Life’s latest variable annuity living benefit rider is intended for advisors and clients who expect tax rates and equity markets to rise, and whose financial appetites won’t be satisfied by one of those “lite” variable annuities with low fees and meager benefits.

It’s also for advisors and clients who aren’t afraid to digest new acronyms, like GAWA and MEWAR, and intricate new ways to calculate benefits.

Called LifeGuard Freedom 6 Net, the rider is a guaranteed lifetime income benefit that allows owners of a Jackson National Perspective II variable annuity to potentially take a two-tiered withdrawal from their contract each year during the product’s income phase.

The first tier of the withdrawal is the one usually associated with GMWB—a percentage of the guaranteed income base that Jackson National calls the GAWA or guaranteed annual withdrawal amount. Depending on the client’s age when income begins, that would mean a withdrawal of 4% to 7% of the premium, adjusted up (for to lock in market gains) or down (for excess withdrawals).

The second tier of the withdrawal is called the Earnings-Sensitive Adjustment. It equals 40% of the net gains in the account each year, if any, but not more than two-thirds of something called the Maximum Eligible Withdrawal Amount Remaining (MEWAR), which starts out as the same as the GAWA but may change over time.

For example, a person might purchase a contract with $100,000 at age 65. If a year passed and her account value had risen to $108,000, she could withdraw $5,000 (5% of the income base) plus $3,200 (40% of the $8,000 gain), for a total withdrawal of $8,200. In this case the MEWAR was two-thirds of $5,000 or $3,333.

After the $8,200 distribution, the account value would drop to $99,800 from $108,000. In the following year, the client would be eligible for another $5,000 GAWA, plus 40% of any growth of the $99,800 principal, up to the limit of two-thirds of the MEWAR.

The added withdrawals are meant to offset taxes due on the distribution, so that the contract owner’s net income is more or less consistent from year to year, said Alison Reed, Jackson National’s vice president, product management, variable annuities. The rider is available on qualified and non-qualified contracts.

“Let’s say that your contract value increases to $120,000 in the first year,” she explained. “With most available withdrawal benefits a person in the highest income tax bracket would take out five percent, or $6,000, and net about $3,600 after taxes. With Freedom Net 6, you take out $10,000″—$6,000 plus the MEWAR of two-thirds of $6,000—”and net $6,000 after taxes.”

Under the same contract, the owner can receive a 6% roll-up in the income base for each year he delays withdrawals. If he delays 10 years, the income base is automatically at least double the original premium.

There is no free lunch here. As with all variable annuity GMWBs, the payments come out of the owner’s own account. The product is not actually in the money until and unless the account value reaches zero while the owner (or the surviving spouse, in a joint account) is still living and is still eligible to receive a percentage of the income base plus the Earning-Sensitive Adjustment.

The current annual charge for the rider is 1.05% and the maximum is 2.10% (3.0% for joint contracts). The mortality and expense ratio is 1.25%. The expense ratios of the many investment options range from 0.57% to 2.41%, with a weighted average of 0.89%, Reed said.

The withdrawal percentage age-bands are 4% for those ages 45 to 64, 5% for those ages 65 to 74, 6% for those ages 75 to 80 and 7% for those age 81 or older. If other options, such as an enhanced death benefit or premium credit, were added, the all-in cost of the contract could exceed 4% per year.

“Today’s investing landscape is marked by uncertainty and complexity, which creates a need for innovative solutions that can address the challenges facing retirees,” said Clifford Jack, executive vice president and chief distribution officer for Jackson.

“At a time when many providers are focused on simplification, Jackson is committed to giving advisers the choice and flexibility to t ailor products according to the individual client’s unique needs and objectives. Our products are designed for advisers who embrace customization and view financial planning as a process, rather than a transaction.”

In a release, the company said, “Jackson offers LifeGuard Freedom 6 Net with a Joint Option to provide guaranteed lifetime income for customers and their spouses. As with many of the optional benefits available within Jackson’s variable annuities, LifeGuard Freedom 6 Net does not force asset allocation. Contract holders can also start and stop withdrawals as desired, giving them the flexibility to decide when to take income.”

“Potential tax increases are a significant concern for investors, particularly those who are on the verge of retirement,” said Steve Kluever, senior vice president of product and investment management for Jackson National Life Distributors LLC.

“Retirement products that can address these concerns and help clients streamline income planning answer an important need in the marketplace. Furthermore, by allowing clients to select and pay for only those features and benefits that they truly need, Jackson is delivering a solution that can meet a broad range of investor objectives,” he added.

Post-Crisis, Greeks Face Longer Work Lives

Posted on May 12, 2010 by Editor Test -

As part of the fallout from their country’s bailout by stronger European economies, Greeks will have to delay retirement by a couple of years.

To prevent Greece’s state pension system from collapse, the Greek government yesterday proposed legislation to cut benefits, introduce penalties for early retirement, raise the retirement age, and change the formula for calculation pensions, IPE.com reported.

The bill will go to the Greek parliament later this week and could be adopted into legislation by mid-June. The country’s pension gap is €4bn for 2010, while its budget deficit is 13.7% of GDP, or more than four times higher than eurozone rules allow.

The reforms raise the effective retirement age to 63½, from 61½. The statutory retirement ages in Greece are currently 65 years and 60 for women working in the public sector.

Today, the police, harbor workers, security services and journalists for the state TV and radio can retire in their 50s, because they are entitled to a pension after 35 years of social security contributions.

Starting in 2013, these privileges will be abolished. An employee will have to work at least 37 years to qualify for a full pension and there will be strong incentives to work for 40 years.

From 2018, a basic pension of €360 a month for everybody will be instituted. Pension for all retirees will drop up to 15%, in both the public and private sectors. Retirees will receive 12, not 14, payments per year, as Easter, Christmas and summer bonuses will be replaced by low flat-rate payments.

Retirees will also lose 6% of their pension for every year of early retirement they take. Final pensions will replace no more than 65% of the pensioner’s monthly salary when in working life, down from the current 70%.

Dr Jens Bastian, researcher at Hellenic Foundation for European & Foreign Policy (ELIAMEP), said Greece had too many early retirees.

“Especially in the public sector, some professions can retire only after 35 years. Many of these retirees continue to work after their retirement, and often their employment is unrecorded, so they get a generous pension and block entry to young people to the work market,” he said.

According to Bastian, the current unrest reflected a conflict between generations. “However, the government has now adopted a crystal clear policy it does not support early retirement,” he added.

Milliman Proposes “Simple, Obvious” In-Plan Annuity Fix

Posted on May 12, 2010 by Editor Test -

In its response to the Department of Labor’s Request for Information about adding guaranteed lifetime income options to 401(k) plans, Milliman, the global consulting firm, has offered a solution that it calls “simple, obvious and easily implemented.”

For the insurance component, Milliman recommends offering participants stand-alone guaranteed lifetime withdrawal benefits similar to those used by Prudential Retirement in its IncomeFlex in-plan product and recently introduced by Great West Life as part of its SecureFoundation institutional GLWB.

But a significant portion of the plan sponsor community will embrace such a distribution option, says Ken Mungan, leader of Milliman’s financial risk management practice, only if several highly-rated insurance companies create a trust that pools the hedging assets that back up their guarantees, collateralized on a monthly basis. If any one of the insurers in the pool defaults, he said, the trust will support the guarantees.

Plan sponsors have already told Milliman that they will not accept a lifetime guarantee from a single provider. “We’ve gone to many plan sponsors with that proposal and they’ve rejected it,” Mungan told RIJ. “If you’re a plan sponsor, this is an absolute requirement. They want a system that is going to withstand the failure of specific insurance companies, and where their obligation is collateralized and hedged.”

“We feel that those hedge assets should be dedicated to back those guarantees, in a separate account,” he added. “If there is a credit event associated with a life insurance company, there won’t be a panic because they know there’s a specific security held for the plans’ benefit. The system is so large that it far exceeds the risk bearing capacity of any single company, and spreading risk across insurance companies is also a good idea.”

This solution “will originate from the large 401(k) platforms. Each major platform will want a pool for their customers, and will want a group of insurance companies” to support the guarantees. Both the plan sponsors and insurance companies need guidance from DoL on an acceptable way to do this. There has to be clear standards. The life insurance companies have a big opportunity here. They should jump on it, because they need a source of growth, and this could be a big win,” Mungan said.

Prudential Financial Nets $536m in 1Q 2010

Posted on May 12, 2010 by Editor Test -

Prudential Financial’s financial services businesses reported net income of $536 million in the first quarter of 2010 ($699 million in after-tax adjusted operating income, a non-GAAP measure), up from a net loss of $5 million (or positive $427 million in after-tax adjusted operating income) for the first quarter of 2009.

Earnings highlights for the quarter included:

Individual annuity gross sales for the quarter just past were $4.9 billion (up from $2.2 billion a year ago), while net sales were $3.2 billion (up from $643 million a year ago.)

Full-service retirement gross deposits and sales were $5.6 billion, with net additions of $1.1 billion. It was the 10th consecutive quarter of net additions. A year ago, gross deposits and sales were $10.5 billion and net additions were $6.3 billion a year ago.

Individual Life annualized new business premiums of $68 million, compared to $84 million a year ago. Group Insurance annualized new business premiums of $346 million, compared to $344 million a year ago.

International Insurance constant dollar basis annualized new business premiums reach record-high $396 million, compared to $337 million a year ago.

Assets under management of $693 billion at March 31, 2010, compared to $667 billion at December 31, 2009.

Gross unrealized losses on general account fixed maturity investments of the Financial Services Businesses of $3.7 billion at March 31, 2010, compared to $4.4 billion at December 31, 2009; net unrealized gains of $2.4 billion at March 31, 2010 compared to $998 million at December 31, 2009.

GAAP book value for Financial Services Businesses, $25.7 billion or $54.63 per Common share, compared to $24.2 billion or $51.52 per Common share at December 31, 2009.

The U.S. Retirement Solutions and Investment Management division reported adjusted operating income of $514 million for the first quarter of 2010, up from $175 million in the year-ago quarter. The Individual Annuities segment reported adjusted operating income of $260 million in the current quarter, up from $17 million.

Current quarter results benefited $53 million from net reductions in reserves for guaranteed minimum death and income benefits and $21 million from a net reduction in amortization of deferred policy acquisition and other costs, reflecting an updated estimate of profitability for this business.

These benefits to results were largely driven by increases in customer account values during the current quarter. Mark-to-market of embedded derivatives and related hedge positions associated with living benefits, after amortization of deferred policy acquisition and other costs, and hedging positions implemented in mid-2009 to mitigate exposure to declines in capital from adverse financial market conditions, resulted in a net benefit of $16 million to current quarter adjusted operating income.

In addition, current quarter results include a net benefit of $25 million from refinements based on review and settlement of reinsurance contracts related to acquired business. Results for the year-ago quarter included a net charge of $327 million from adjustment of reserves and amortization to reflect an update of estimated profitability, largely driven by declines in customer account values associated with adverse financial market conditions during that quarter.

In addition, results for the year-ago quarter included a net benefit of $261 million from mark-to-market of embedded derivatives and related hedge positions associated with living benefits, primarily driven by the required adjustment of embedded derivative liabilities for living benefits to recognize market-based non-performance risk associated with our own credit standing. Excluding the effect of the foregoing items, adjusted operating income for the Individual Annuities segment increased $62 million from the year-ago quarter, primarily reflecting higher asset-based fees due to growth in variable annuity account values.

The Retirement segment reported adjusted operating income of $171 million for the current quarter, compared to $159 million in the year-ago quarter. Results for the year-ago quarter benefited $13 million from the required adjustment of liabilities for contract guarantees to recognize market-based non-performance risk. Excluding this item, adjusted operating income of the Retirement segment increased $25 million from the year-ago quarter. The increase resulted primarily from higher fees associated with growth in full service retirement account values and a greater contribution from investment results.

The Asset Management segment reported adjusted operating income of $83 million for the current quarter, compared to a loss of $1 million in the year-ago quarter. Investment results associated with proprietary investing activities contributed income of approximately $5 million in the current quarter compared to losses of approximately $40 million in the year-ago quarter. The remainder of the improvement in results came primarily from increased asset management fees and a greater contribution from performance-based fees.

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