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Hartford CEO Comments on VAs Clarified

Posted on April 14, 2010 by Editor Test -

In a news report that Retirement Income Journal reprinted last week, comments by Hartford Financial’s CEO about the company’s commitment to variable annuity sales were incomplete. In his comments during Hartford’s recent Investor Day, chairman, president & CEO Liam McGee said:

“But I do want to comment on annuities. First of all, we believe that annuities are an important part of our wealth management franchise.

“We’ve recently introduced our new Personal Retirement Manager variable annuity, which balances guaranteed income with asset growth. The product is grounded on the principles of low cost for the customer, simplicity for the customer, and a focus on guaranteed income.

“For the reasons that I mentioned earlier, what’s happened to consumers of all types over the last couple of years, guaranteed income in our view is the emerging business opportunity in the annuity space. The product has been well received by our distribution partners.

“We’re still completing getting licensing and authorization in some states including some of the larger states. We expect to see sales traction in the subsequent few quarters.

“But to be clear about our expectations, John (Walters) and I are targeting $5 billion in total annuity sales by the year 2012. Never again will we have a concentration in any product at The Hartford, whether it be annuities or anything else, of the size the VA was.

“This will be an appropriately sized, appropriate return business that we think is going to focus on that emerging trend that I described, guaranteed retirement income. It’s going to allow us now to appeal to a broader target audience as opposed to the traditional annuity market.”

Insurance M&A at Lowest Level Since 2002

Posted on April 14, 2010 by Editor Test -

The U.S. saw a significant decline in the reported value of insurance industry M&A transactions in 2009, and overall global transaction values also declined further from very low 2008 levels, according to a new study by Conning Research & Consulting.

“In the U.S., the value of insurance industry transactions was the lowest we have reported since 2002, U.S. life-annuity marked its second year below $1 billion in M&A values, while the property-casualty sector dropped 78% and health insurance also dipped below $1 billion,” said Jerry Theodorou, analyst at Conning.

The Conning Research study, “Global Insurance Mergers & Acquisitions in 2009,” tracks and analyzes both U.S. and non-U.S. insurance industry M&A activity across property-casualty, life, health and distribution and services sectors.

“Non-U.S. M&A transaction values increased 58% due to significantly larger transactions in the life-annuity and health sectors, while non-U.S. property-casualty declined for the second year,” said Stephan Christiansen, director of research at Conning.

“Looking forward, we are already seeing that pent-up demand is driving increased M&A activity in most sectors of the insurance market, as economic and credit conditions improve and valuations rise again to more normal levels.”

“Global Insurance Mergers & Acquisitions in 2009” is available for purchase from Conning Research & Consulting. www.conningresearch.com

Formation of Target Date Collective Trusts, 1995-2009

Posted on April 13, 2010 by Editor Test -

Annuity Issuers Slowly Enter The Digital Age

Posted on April 13, 2010 by Ben Pousty, Corporate Insight -

It is no secret that annuity issuers have trailed the rest of the financial services industry in terms of online account opening and management functionalities. The inefficient nature of the annuity account opening process is legendary, as is the lack of online transactional capabilities. Login security has also been a longstanding shortcoming that we’ve touched on in earlier articles.

Their past failures to swiftly adopt new technologies notwithstanding, annuity issuers have recently stepped up efforts to implement and actively market paperless document delivery services to clients. Although annuity issuers are years behind banks and brokerage firms in pushing these services, the hope here is that this trend signals a broader change in how business is conducted throughout the annuity industry.

The most progressive contribution among the companies we cover comes from AXA Equitable. In February, the firm’s annuity policyholders were mailed annual reports that, for the first time, were contained entirely on a CD-ROM in digital format. Previous annual reports were mailed exclusively in paper format.

The digital documents offer two key advantages over paper. First, clients no longer have to find space to keep the bulky, hundred-plus page annual report booklets. Documents can simply be downloaded onto the computer for easy storage. Second, a handy search feature makes it easier than ever to navigate the information-intensive documents, which can be difficult to read.

An accompanying letter from the firm’s customer service department provides the rationale for the move to digital document delivery of annual reports. The firm estimates that digital delivery will reduce operating expenses by nearly $11.5 million annually and eliminate over 2,000 tons of paper waste a year. In short, digital documents are the more practical and Earth-friendly option.

Although AXA Equitable is currently the only annuity issuer we cover that offers digital document delivery, a number of firms have been expanding and promoting their electronic delivery services in a more aggressive manner over the past year. Most of our firms have offered electronic delivery for years; however, the additions of privacy, compliance and policy renewal documents to the service have further enhanced the user experience.

In terms of marketing, the vast majority of electronic delivery promotions target clients and focus on the environmental advantages of the service. The promotional imagery generally links to a registration page with additional information about the service in an effort to make new user enrollment as easy as possible.

AXA Equitable, Jackson National and John Hancock have been the most active firms online, posting engaging promotional imagery throughout both the public and client websites. Jackson National has been particularly impressive with its public marketing campaigns. Multiple linked images on the homepage, including the vibrant Flash image below, lead to electronic delivery information and enrollment pages.

Jackson National Public Homepage Green Delivery Promotional Image

Jackson National Green Delivery Promotional Page

It’s encouraging to see that annuity issuers are beginning to put a greater emphasis on online services that cut costs and are eco-friendly. Hopefully, the recent advancement by AXA Equitable and the added industry-wide emphasis on paperless delivery will entice more firms to expand their online resources and services.

Industry Views are special reports that are sponsored and independent from RIJ’s editorial content.

One Man’s Response to Uncle Sam’s RFI

Posted on April 13, 2010 by Editor Test -

As president of Cincinnati-based Qualified Annuity Services Inc., Joe Bellersen has helped many firms convert their defined benefit plans to group income annuities. Until recently, he also distributed Ca nada Life income annuities in the U.S.

So when the Departments of Labor and Treasury solicited public input on lifetime income solutions for 401(k) participants back in early February, Bellersen needed little prep work in order to write up his answers.

Joe knows annuities. Many responses to the DoL’s RFI have come from angry citizens, most of them warning Uncle Sam to keep his confiscatory hands off their savings. But Bellersen’s 65-page document, with charts and appendices, was informative and enlightening. (Other formal and ambitious comments have since been submitted.)

In it, he offers his explanation for how employer-based retirement plans and individual annuity products came to lose their original lifetime income focus. And he offers suggestions on how we may be able to restore that focus.

As he sees it, the inflation-breaking high interest rates in the early 1980s and the subsequent equities boom helped stimulate the rise in lump-sum payouts from defined benefit plans. And a 1994 Supreme Court decision helped recast variable annuities as accumulation tools and eclipse their annuitization feature.

Now, with the mid-decade boom over and the Boomers slouching toward retirement, Bellersen urges a return to that lost focus on guaranteed lifetime income, particularly the kind that’s funded by life insurance company general accounts and based on mortality pooling.

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Of course, he’s biased. That’s what his business is based on. On the other hand, he doesn’t pretend that putting the annuitization genie into 401(k) plans—or back into DB plans—will be easy. “Joe has some strong opinions,” said Lowell Aronoff, CEO of Cannex Financial Exchanges Ltd., which provides income annuity data to Bellersen’s company. “But he’s very knowledgeable.”

How we got to where we are
Bellersen points to a contradiction that’s lying in plain sight but that hardly anyone ever mentions. Even as we discuss annuities for defined contribution plan participants, most people with defined benefit plan coverage don’t take annuities when they separate or retire. If they have a lump sum option, they usually take it.

[As Vanguard retirement researchers Gary Mottola and Stephen Utkus pointed out in a 2007 paper, “Lump Sum or Annuity? An Analysis of Choice in DB Pension Payouts,” only 27% of lump sum eligible employees in a traditional defined benefit plan took lifetime income at retirement or separation and only 17% of people in a cash balance DB plan did so. Less than 20% of those ages 55 to 60 took an annuity.)

The spike in interest rates in the 1980s, and the long bull market that followed, helped foster the trend toward lump sum payouts from DB plans, Bellersen says. High interest rates reduced the present value of annuities, so that sponsors could save money by paying lump sums. For participants, the rising stock market made lump sums look like a better bet.

“The broader use of LSDs [lump sum distributions] was due to the very high interest rates available for discounting distributions on plan terminations,” he told RIJ. “It gathered steam as plans realized that offering a lump sum as an ‘optional form of an annuity’ allowed the liability to be removed from the sponsor’s balance sheet at a discount.

“The participant will grab the lump sum regardless of whether it’s the right thing to do. You can talk to them till you’re blue and they wont choose a pension. They’ll choose instant gratification. There’s a complete disconnect,” Bellersen added.

He finds it ironic that the government wants 401(k) participants to do what DB plan participants have stopped doing. In his comments to the Labor Department, he writes, “We must pause to ask these questions: 1) Why have DB plans been permitted to become cash bonus plans? 2) If DB plans are cash bonus plans, then why expend efforts on making DC plans income replacement plans?

“There seems to be inherent contradiction with regard to the retirement income policy. This is a paradox.” If we’re going to talk about lifetime income for 401(k) plans, he says, we should also think about restoring lifetime income to DB plans.

Fateful Supreme Court decision
Bellersen points to another inflection point in the saga of the decline of lifetime income over the past 30 years. A single court decision, he said, catalyzed the metamorphosis of variable annuities into tax-deferred investments from retirement income tools.

“In 1994 the Supreme Court held in NationsBank of North Carolina, N.A. et al. v. Variable Annuity Life Insurance Co. et al., that the Comptroller of the Currency was allowed to conduct annuity transactions. The Supreme Court granted rights for banks to sell annuities on the premise that conducting such sales were ‘incidental’ to ‘the business of banking.’”

In the process, variable annuities turned into tax-deferred mutual fund portfolios. “The court went on to cite: ‘The Court further defers to the Comptroller’s determination that annuities are properly classified as investments, not ‘insurance’ within §92’s meaning.’ This decision cleared the hurdles and was a watershed event allowing the sale of annuities by banks and imposing a product-driven mentality.”

If that’s true, it’s easy to see how the Supreme Court decision may have unintentionally enabled the subsequent spate of alleged “unsuitable” variable annuity sales. “This decision eliminated the theory of insurance since it focused solely on the tax deferral aspects of annuity contracts and was supported by professional opinions that ‘no one ever annuitizes.’ Such a bold categorical declaration permitted deferred annuities to be sold on the basis that ‘one size fits all.’ Nothing could be further from the truth,” Bellersen wrote.

Yet another smoking gun in the demise of defined benefit plans was the 50% reversion tax on pension surpluses that was enacted in the early 1990s. As many have pointed, this tax led to underfunding and plan terminations. In response, the sponsors decided that “rather than add contributions and invest in the same way as before, we’ll put in less and take more risk,” he told RIJ.

Recommendations
Introducing a guaranteed lifetime income to employer-sponsored plans will require several reforms, Bellersen concluded. Among them would be the provision of participant education to help people understand the full value of guaranteed lifetime income and the reason why annuities cost more than investments, the resolution of gender differences in payout rates, and the tailoring of income solutions to individuals, so that people with ample defined benefit income, for instance, don’t necessarily annuitize their defined contribution savings.

How Big Is the Gap in Public Pensions?

Posted on April 13, 2010 by Editor Test -

The financial crisis of 2008 will continue to hurt state and local government pension funds for at least several years, and a rebound in both the stock market and the economy may be required to restore them to health.

That is the assessment described in a new research brief from the Center for Retirement Research at Boston College, entitled The Funding of State and Local Pension Funds, 2009-2013, by Alicia H. Munnell, Jean-Pierre Aubrey and Laura Quinby.

Funding ratios for public pensions could drop to 72% by 2013, from 78% in 2009, or as low as 66% under a “pessimistic scenario,” the authors said. At 72%, the funding shortfall could rise (in constant dollars) from $728 billion to about $1.2 trillion.

The study was based on 126 state and local plans representing about 90% of the universe of state and local plans. State and local pension plans currently have about $2.7 trillion in assets-enough to cover pension outlays for about 15 years on average even with no investment growth.

A Snapshot of Public Pensions

Roughly three-quarters of state and local government employees take part in an employer-provided pension plan. Around 80% of public employees have only a defined-benefit pension, 14% have only a defined-contribution pension, and 6% have both. Government employees typically receive benefits equal to around 2% of final earnings per year of employment. Some public sector employees take part in Social Security, while others are not covered by Social Security and receive their principal retirement income from their employer’s program.

The average state employer contribution rate as of 2006 was 9.9 percent of employee salary, while the average employee contribution rate was 5.7 percent. As of 2006, around 60% of public-pension assets were held in domestic or foreign equities and slightly over 25% in bonds, with smaller allocations in real estate, cash, alternate investments such as private equity, or other asset classes.

Public sector pensions tend to allocate around 10 percentage points more of their assets to equities than do private sector pensions. The share of public sector assets held in equities has risen from around 4% in 1990 to around 70% as of 2006. State pensions on average project future nominal returns of 8%; the lowest projected return for a state pension is 7% and the highest is 8.5%. Rates of return on plan assets are either projected by plan managers or established in statute. -Andrew Biggs

“So there’s no immediate cash crisis,” said Munnell, the Center’s director. But she added that in some states public pensions could run short in as little as six or seven years.

“State and local governments are facing a perfect storm: the decline in funding has occurred just as the recession has cut into state and local tax revenues and increased the demand for government services. Finding additional funds to make up for market losses will be extremely difficult,” the brief says.

Nationwide, the funding shortfall will require states, on average, increase their annual pension fund contributions by about $400 per covered employee. Because of the shortfall, contributions for 2009 will be about 8% of state budgets, up from a historical average of 6%.

Others say the problem is much more serious, given the volatility of future market returns and the inability of states to modify their pension obligations. For instance, the American Enterprise Institute (AEI) estimated this month that the size of the state employee pension shortfall alone is more like $3 trillion.

That figure uses the 10-year Treasury rate as the discount rate for the obligations and adds the hypothetical cost of guaranteeing the obligations with put options in the financial markets.

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Because governments may need to raise taxes to cover future pension obligations, the problem has become increasingly political, often characterized by resentment toward teachers and other state, county or city workers with public pensions.

“There is no reason public-sector employees should receive retirement benefits that are either larger or more secure than those received by private-sector workers,” wrote Andrew Biggs of the AEI. He recommends that new public sector employees be offered defined contribution plans instead of traditional pensions.

Munnell said that up until about 50 years ago, state and local governments did little in the way of formal funding of their employee pension plans. But after the Baby Boom created a surge in demand for public school teachers in the 1960s, and a big increase in pension commitments, the funding issue got more attention.

According to CRR, it was said in the mid-1970s: “In the vast majority of public employee pension systems, plan participants, plan sponsors, and the general public are kept in the dark with regard to a realistic assessment of true pension costs. The high degree of pension cost blindness is due to the lack of actuarial valuations, the use of unrealistic actuarial assumptions, and the general absence of actuarial standards.”

In the 1990s, with the creation of a Governmental Accounting Standards Board, benchmarks were established. The funding ratio continued to improve until the financial crisis of 2008. The CRR researchers noted that states and municipalities don’t have many options to respond to the pension dilemma. For various reasons, they can’t raise employee contributions or earned benefits. Because of the recession, tax revenues are down and demand for services are up.

“One small step… would be for states and localities to at least pay their full Annual Required Contribution,” which the Governmental Accounting Standards Board defines as the an amount needed to cover the cost of benefits accruing in the current year and a payment to amortize the plan’s unfunded actuarial liability. “Otherwise, the only option is to wait for the market and the economy to recover.”

The future health of state and local pensions “depends increasingly on the future performance of the stock market. Under the most likely scenario, the funding ratio will continue to decline as the strong stock market experienced in 2005, 2006, 2007, and much of 2008 is slowly phased out of the calculation.”

The AEI’s Biggs made the following recommendations for public pensions:

Pensions must disclose greater detail regarding investment risk. These details should include the volatility of their investments and the co-variances of returns between different elements of their portfolios.

Actuarial firms contracted by pensions should calculate the probability that plan assets will be sufficient to meet obligations, such as is currently done for Social Security by the plan’s actuaries and by the Congressional Budget Office.

Second, pension plans should reform their accounting methods to include the market value of plan liabilities.

Employee contribution rates should be increased and eligibility for retirement delayed. Where possible, the rate at which future benefits are accrued should be reduced. For instance, most plans currently pay 2% of final salary per year of service; while accrued benefits should be honored, future benefits could be earned at a lower rate.

States should no longer put off their own pension contributions. Each state must do the maximum to restore its plans to solvency. For newly hired employees, public sector pensions should shift to a defined contribution basis to make them more comparable to plans offered in the private sector.

1Q 2010 Equity Performance: An Unconventional Evaluation

Posted on April 13, 2010 by Ron Surz -

Although the first quarter of 2010 started badly, with US stocks losing more than 3% in January, the market recovered most of those losses in February, setting the stage for 6%+ returns in March. All of the first quarter return was earned in March.

As the chart below shows, every US style posted a positive return for the first quarter of 2010, continuing the recovery that began in March of last year. This quarter’s 5.7% market return brings the 13-month return from March-to-March to 66%.

Smaller companies fared best, while all three styles—Value, Core, and Growth—fared about the same in aggregate. Value, Core, and Growth stock groupings within each size category are defined by our proprietary aggressiveness measure, a proprietary measure that combines dividend yield and price/earnings ratio.

We designate the top 40% (by count) of stocks in aggressiveness as “Growth.” The bottom 40% are called “Value,” with the 20% in the middle falling into what we choose to call “Core.”

Performance by sector
On the sector front, Finance came roaring back with a 12% return, followed closely by Consumer Discretionary and Industrial stocks. Other sectors earned mid-to-low single-digit returns, except Telephones & Utilities, which lost 2% in the quarter.

Although it’s not shown in the chart, cross-sectional volatility was highest in Consumer Staples, indicating a wide performance spread across individual stocks in that sector. Financial held that distinction for most of 2009.

Country Returns Now let’s look outside the US. While 2009 market performance far exceeded domestic returns, the first quarter of 2010 was a different story. Foreign markets earned 6.7% in local currencies but only 2.9% in US dollars, about half the US market return, as the dollar strengthened against other currencies.

Japan led the quarter with an 8.5% USD return. Europe ex-UK was the only region that lost money, declining 1.8% in the quarter. EAFE and ADRs lagged because of their larger company orientation. Large companies (not shown in the exhibit) earned 1.8% in the quarter while mid- and small-caps returned 5.5% and 6.3% respectively. Unlike the US, where core was in favor, growth stocks fared best outside the US.

How did your portfolio perform?
Traditional peer groups are poor barometers of success or failure, but advisors still believe that there are no better choices. Not so. As a benchmark, we use Portfolio Opportunity Distributions (PODs), our proprietary method that represents the range in performance of all of the possible portfolios that managers could have held when selecting stocks from a specific market.

S&P 500 PODs For S&P 500-based portfolios, for instance, we provide the following PODs. Use this table and graphic in the meantime to evaluate your investment managers. (Performance numbers for periods ending 3/31/10 are available now, but most peer groups won’t be released for a month.)

We believe that this chart will help you compare your equity portfolio’s performance with all possible performances-not just its peer group’s. Note, for example, that a return of 40% for the year ending March, which would appear to be good on its surface, is in fact bottom quartile. But extend the timeframe out two years or more, and a mere 1% return is a top quartile winner.

P. Kennedy Proposes Savings Accounts for Children

Posted on April 7, 2010 by Editor Test -

Under the Aspire Act of 2010, H.R. 4682, introduced by Rep. Patrick Kennedy (D-R.I.), the U.S. government would jump-start the savings habits of every American under 18 with a Social Security number.

H.R. 4682 would create an account with $500 for all children at birth. Children in families below the national median income would be eligible for up to an additional $500 at birth and matching funds up to $500 each year for additional funds put into the account.

Account holders could withdraw funds at 18 to pay higher-education expenses; at age 25, the funds could go toward homeownership or into a retirement plan. Account holders could also add up to $2,000 per year to their accounts by contributing tax refunds or payroll deductions. For tax purposes, the accounts would be treated the same as Roth IRAs.

Secretary of the Treasury would transfer $500 each year (with an inflation adjustment every five years) for every American under age 18, starting when they are issued a Social Security Number, to a Lifetime Savings Account.

The Lifetime Savings Accounts would be invested in Aspire Fund, default investment program run by the Aspire Fund Board and managed “in a manner similar to a lifecycle investment program” and “allocated to investment funds in the Aspire Fund based on the amount of time before the account holder attains the age of 18.”

Americans To Spend Their Mad Money Sanely

Posted on April 7, 2010 by Editor Test -

With economic uncertainty still lingering, many Americans plan to use their tax refunds in a fiscally conservative fashion, according to a survey released by Bankrate, Inc., “How Americans will spend their tax refund.”

More than eight in 10 polled (84%) said they would use the refund to pay down debt, save or invest, or spend on everyday necessities. The poll, conducted by Princeton Survey Research Associates International, also showed:

Among the findings:

55% of Americans polled expect to get, or have received, a tax refund this year while 24 percent expect to owe.
Only 7% planned to use their money on “fun” activities like shopping or taking a vacation.
Among the 84% fiscally conservative respondents, 30% percent intended to pay down debt, 28% said they will save or invest, and 26% anticipate spending their refund on food or utility bills.
Only 3% of those getting a refund took a refund anticipation loan; of those with incomes under $30,000, the rate was 6%.
19 percent of Americans plan to adjust their tax withholding rate to avoid a big refund next year while 71% plan on keeping their withholding the same;
Among those who anticipate owing money, 63% plan on paying their taxes straight from their bank accounts; 6% anticipate borrowing money to pay off their tax bill.
Of those who owe money, 17% plan on setting up an installment plan with the IRS.

This national random-digit-dialed phone study of 1,002 adults 18 or older was conducted for Bankrate by Princeton Survey Research Associates International. The sample was weighted by demographic factors including age, gender, race, education and census region to ensure reliable and accurate representation of adults in U.S. households. The overall margin of error for the survey is +/- 4 percentage points based on the total sample.

Czech It Out: Pension Pains are Global

Posted on April 7, 2010 by Editor Test -

The U.S. is far from the only country that faces a growing fiscal burden as the result of an aging population. The same trend threatens the Czech Republic.

Unless the Czech Republic creates new policies for dealing with healthcare and retirement benefits for the aged, the country’s “long-term fiscal sustainability remains a serious challenge,” according to a report by the Organization for Economic Cooperation and Development (OECD).

As reported by IPE.com (Investment & Pensions Europe), the Czech Republic’s own Ministry of Finance estimated that rapid population aging would increase age-related spending by 6.4 percentage points over the next 50 years.

Without reform, that demographic trend would push the country’s public debt past 60% by 2040 and to more than 250% of GDP by 2060. The OECD said raising the retirement age by two years won’t be enough.

“Recent legislation extending the increase in the retirement age will do much to fend of the threat of looming increases in pension spending” said the OECD, “but on current projections pension expenditure is still set to rise from around 7.8% of GDP in 2007 to roughly 11% by 2060.”

“Tackling this challenge without imposing large—and possibly unsustainable—increases in social security contributions or other taxes is likely to require a combination of both further parametric adjustments to the system and structural changes,” the report added.

The Czech finance ministry has predicted that projected spending will fall by 1% of GDP by 2060 following a recent move in 2008 to increase the retirement age by two years. However, age-related spending in the Czech Republic will be 23.4% of GDP by 2060, according to data gathered by the European Commission.

The country should consider phasing out the differentiation between men’s and women’s retirement ages and introducing partial indexation of benefits to life expectancy, the authors of the OECD report recommended.

It claimed the earlier Czech government’s aim to create a voluntary but fully-funded, defined contribution plan or “second pillar pensions regime” might help the country’s pension problems. On the other hand, diverting assets from the state defined benefit pension to fund a new DC pension “could undermine financial sustainability too.”

A “DC carve-out” of existing pension assets would lead to a “transitional deficit” as revenue into the DB plan or “first pillar pensions regime” fell, so how much impact it would have at retirement would have to be carefully determined at the carve-out stage.

Either way, said the OECD, a simple carve-out of assets would need to be topped up with further reforms to ensure Czech workers have enough retirement income.

Instead, the OECD has proposed the Czech Republic introduce mandatory or “soft compulsion” to pensions by requiring individuals to “opt out” of a new DC plan rather than “opt into” one. In other words, the OECD recommended something similar to the “Auto-IRA” that the Obama administration is considering.

Though market turmoil may have created a sense in the public’s mind that a Social Security-type pay-as-you-go plan is safer than a market-based 401(k)-type plan, the OECD pointed out, a poor economy also hurts both types of plans.

“The crisis has reduced the rates of return on contributions to the PAYGO pillar as well, even if the decline has been less visible,” said the OECD. In that case, it might be better for Czechs to have both types of plans or “pillars,” the OECD report suggested.

Hartford CEO to VAs: “Never Again”

Posted on April 7, 2010 by Editor Test -

Hartford Financial Services Group Inc. chief executive officer Liam McGee, who repaid a $3.4 billion government bailout last week, said he’ll avoid focusing on variable annuity sales that contributed to two straight annual losses, according to a Bloomberg report.

“We learned our lessons from the last two years,” McGee told analysts and investors today at a presentation in New York. “Never again will we have a concentration in any product, whether it be annuities or anything else, of the size that VA was.”

McGee, hired in October, is repositioning Hartford after losses under his predecessor forced the firm into the U.S. rescue. The stock market’s recovery helped Hartford return to profitability in the fourth quarter and aided McGee as he sold stock and debt to repay the U.S. Treasury Department. McGee, 55, said when he was hired that he would reduce risk and conduct “an intense review” of the 199-year-old insurer’s businesses and strategy.

“De-risking general parts of the business is a focus,” said Randy Binner, an analyst with FBR Capital Markets, in an interview before the Hartford presentation. “Their risk profile is more market-sensitive than other life insurers.”

The insurer expects total annuity sales of $5 billion in 2012, the company said today. It didn’t give a comparable figure for 2009 in a slide presentation available on its Web site. Limra, the trade group, said Hartford’s individual annuity sales were $4.3 billion last year and $10.7 billion in 2008.

Hartford swung to a profit in the final three months of 2009 with net income of $557 million. The company posted more than $4 billion of losses during the 15 months before McGee was hired.

HSAs No Panacea for Retiree Medical Costs: EBRI

Posted on April 7, 2010 by Editor Test -

Health care savings accounts (HSAs) are not likely to cure the medico-financial ills that millions of Boomers will face in retirement, says the Employee Benefit Research Institute.

Not at their current low contribution limits, that is.

Contribution limits and prevailing low interest rates will likely prevent retirees from accumulating enough money in the accounts to cover all of their health insurance premiums and out-of-pocket health care costs in retirement, the EBRI said.

Based on current interest rates, if a 55-year-old contributed $3,000 to his or her HSA in 2009 and also contributed the $1,000 catch-up contribution each year for 10 years, the account would equal $48,300 after 10 years, assuming a 2% interest rate. Assuming a 5% rate, the amount would be $55,100.

But a man age 55 in 2009 would need between $144,000-$290,000 by the time he reached age 65 in 2019 (depending upon his use of prescription drugs in retirement) merely to have a 50% chance of covering all premiums and out-of-pocket expenses for Medigap and Medicare Part D.

Women, who live longer than men on average, would need more. “The savings needed for retiree health care far exceed the savings potential of an HSA,” said Paul Fronstin of EBRI, author of the report.

The present value of lifetime benefits from Medicare for a husband and wife turning age 65 in 2010 has been estimated at about $376,000. Since Medicare on average covers a little more than one-half of health care costs for beneficiaries, the average husband and wife will need a little less than $376,000 in savings to cover what is not covered by Medicare.

An increase in the HSA limits would, however, reduce tax receipts for the U.S. Treasury, and the reduction might have to be made up elsewhere. Most of the benefits of HSAs accrue to people with high incomes, who are most able to fund them and have the most to gain from their tax advantages.

The full report is online at http://www.ebri.org/pdf/notespdf/EBRI_Notes_04-Apr10.HSAs-TaxExpends1.pdf.

Percent of U.S. Tax Units With No Income Tax Liability, 2009

Posted on April 7, 2010 by Editor Test -

Percent of U.S. Tax Units With No Income Tax Liability, 2009
Income*	Single	Jt. Filers	Elderly	w/ Chdrn	All Units
<$10K	99.9	100	100	99.9	99.8
$10-20K	74.3	99.9	89.5	99.8	83.6
$20-30K	36.7	90.2	76.5	98.9	61.8
$30-40K	16	79.8	61.4	89.3	47.5
$40-50K	7.4	71.7	48.2	68.3	35.7
$50-75K	5	34.2	22.5	40.9	21.5
$75-100K	3.6	11.3	8.1	15.1	9.2
$100-200K	4	3.4	4.9	4	4.5
$200-500K	3	1.8	3.9	1.6	2
$500K-1M	2.6	1.8	1.6	2.1	2
>$1MM	2	1.5	1.1	1.3	1.5
All	46.7	38.1	55.3	54.1	46.9
*Cash income is Adjusted Gross Income minus taxable state and local tax refunds, plus total deductions from AGI. Source: Urban-Brookings Tax Policy Center, 2009

Two Trends in One: CTFs and TDFs

Posted on April 7, 2010 by Editor Test -

It’s too soon to say if, when or how it will affect the way Americans save for retirement, but the trend is undeniable: asset managers are creating target-date collective trust funds at a rapid rate and pitching them to 401(k) plan sponsors.

“They still have issues, but they’re gaining traction,” said one 401(k) platform provider who asked not to be identified. His firm offers a range of exchange-traded funds, CTFs, and mutual funds to plan sponsors.

Of the 159 collective trust funds (CTFs) that were launched in 2009, 115 (72%) were formed as vehicles for lifecycle or target date investing strategies. From 2007 to 2009, 439 CTFs were formed, of which 241 (55%) were target date CTFs.

Both collective trusts and target date funds—especially TDFs—were handed a ready-made market when they were approved as QDIAs (qualified default investment alternatives) for 401(k) plans by the Pension Protection Act of 2006.

Top-20 US Collective Trust Fund Managers and Total Assets, 2Q 2009 ($ billions)
Rank	Firm	2Q 2009 Assets	Q 2009 Marketshare
1	BlackRock¹	$388.2	37.8%
2	State Street Global Advisors Ltd.	$123.4	12.0%
3	Northern Trust Global Investment Services	$118.9	11.6%
4	BNY Mellon	$110.6	10.8%
5	Fidelity Investments	$65.0	6.3%
6	Invesco National Trust Co.	$40.8	4.0%
7	Old Mutual Asset Management Trust Co.	$26.2	2.5%
8	Galliard Capital Management Inc.	$17.8	1.7%
9	The Vanguard Group, Inc.	$13.1	1.3%
10	UBS Realty Investors LLC	$10.3	1.0%
11	Capital Guardian Trust Company	$10.0	1.0%
12	Ameriprise Trust Company	$9.5	0.9%
13	Wilmington Trust RISC	$6.3	0.6%
14	Schroders Investment Mgt North America	$5.6	0.5%
15	Amalgamated Bank	$4.8	0.5%
16	Fortis Investments USA, Inc.	$4.4	0.4%
17	Genesis Asset Managers, LLP	$4.4	0.4%
18	Morley Financial	$4.0	0.4%
19	Prudential Private Placement Investor, L.P.	$3.5	0.3%
20	AFL-CIO Housing Investment Trust	$3.6	0.3%
Total CTF market		$1,027.7
¹Formerly Barclays Global Investors NA
Sources: Morningstar Direct, Cerulli Associates

Leading the charge
The largest CTF provider is BlackRock, which has a 38% market share, according to Cerulli Associates. Just four firms, BlackRock (formerly Barclays Global Investors), State Street Global Advisors, Northern Trust, and BNY Mellon, account for 72% of the $1 trillion-plus CTF business in the U.S.

“It’s my understanding that the bigger firms are leading the charge into target-date CTFs,” said Jake Hartnett, senior analyst, Institutional Asset Management, at Cerulli Associates. “Pyramis, Fidelity’s institutional money manager, has come out with them. BlackRock also has a TDF-CTF product.”

“We have cloned a Freedom Fund collective trust,” said Beth McHugh, a Fidelity vice president, referring to Fidelity’s proprietary line of target date funds. “They’re fairly recent and they’re not available to everyone. We also have other multi-fund collective trusts.”

“The trend has been shared among various providers,” said Steve Deutsch, who tracks CTFs for Morningstar, Inc. “BlackRock, Putnam and Nuveen are there, but also smaller firms like Avatar Associates and Manning & Napier. Since CTFs are unregistered, you’ll see a mix of established firms as well as boutiques and smaller firms that can’t afford to go through the cost and time of registration.”

According to Cerulli, CTF assets peaked at $1.43 trillion in 2007 after five years of steady growth. The “flight to quality” in 2008 and 2009 cut their assets to $1.07 trillion in 2008 and $1.03 trillion last year. Of that trillion, about 28% is in DC plans and 72% in DB plans. Morningstar estimates the CTF total at about $1.6 trillion, with about half in DB and half in DC.

That’s still only a fraction of the $13.4 trillion that Americans hold in retirement accounts, in the form of mutual funds, exchange traded funds, variable annuity separate accounts, and individual stocks, as well as CTFs.

Made for each other
Because CTFs are marketed only to institutions, and not to the public as mutual funds are, they do not need to submit a prospectus to the Securities and Exchange Commission for approval and provide one to every potential investor. They are supervised by banking regulators rather than by the SEC.

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But TDF-CTFs aren’t merely wholesale, bank-regulated versions of target-date mutual funds.

“We have compared target date mutual funds and TDF-CTFs from same firm,” Deutsch said. “While they may have the same name and the same target date in their objective or strategy, you’ll get completely different money managers running them, different investment decision processes, different allocations and different return streams. They’re not just low-cost clones of mutual funds.”

Cerulli’s Hartnett thinks the CTF structure will actually enhance the target date strategy, because it will make it easier than ever for target date fund managers to hold alternative assets as they seek more sophisticated, institutional-style diversification.

“The target date format and the CTF structure are made for each other,” he said. “Part of the TDF solution, which even in the mutual fund format includes getting exposure to non-correlated assets, is to bring a more institutional level of management to DC plans.”

Presenting the target-date investment strategy in a CTF wrapper will also relieve some of the fiduciary burden from plan sponsors, Hartnett said. By statute, the trustees of CTFs have fiduciary responsibilities that mutual fund managers do not. They can relieve that burden from plan sponsors, or at least share it.

Frequency of Data Calculations and Reporting to Institutional Clients, 2009 “Because [CTFs] are bank-registered products, you have an external fiduciary joining the plan sponsor,” he added. “Plan sponsors like that. If the asset manager is using a ‘40 Act’ [i.e., Securities Act of 1940] mutual fund format, there’s no co-fiduciary. From what we’ve heard, that makes the CTF an easier sell. We’ve also heard that Taft-Hartley plans [multi- employer union-sponsored DC plans] are more comfortable with CTFs.”

The percentage of defined contribution plans offering mutual funds declined to 54% from 65% over the six-year period from 2003 to 2008, according to Morningstar. Meanwhile, a higher percentage of plans are using institutional mutual funds (to 80% of plans from 72%), of collective trusts (to 45% from 32%) and separate accounts (to 29% from 24%).

Ironically, CTFs were the investment structure of choice in defined contribution plans during the early days of the 401(k) phenomenon—a holdover from DB practices.

But as the mutual fund business grew, mutual funds supplanted CTFs in DC plans. Mutual funds, which were built for the retail market, have traditionally been more transparent than CTFs in terms of offering prospectuses and daily valuations. But they are more expensive.

Back to the future
Now the pendulum has swung the other way. Precisely because they don’t market to the general public and don’t have to meet a heavy regulatory burden, CTFs operate more cheaply than mutual funds—especially actively managed funds.

In response to consumer and government pressure to cut plan costs, plan sponsors have become increasingly receptive to a variety of low-cost alternatives, including index funds, institutional mutual funds, exchange traded funds, separate accounts, and CTFs.

“Collective trusts, separately managed accounts and institutionally priced mutual funds all have advantages,” said David Wray, president of the Profit Sharing Council of America, an organization of large 401(k) plan sponsors. “There is no single right answer.”

The positioning of target date funds in collective trusts won’t necessarily resolve certain problematic aspects of target-date funds, however. The problems, which were reviewed in Senate hearings last year, include the wide variation in TDF design and the difficulty that investors have in benchmarking TDF performance.

The hearings also revealed that many investors believed that by investing in target date funds, they would reach retirement with adequate savings and that the volatility of their savings would taper off by retirement.

In fact, until they experienced steep losses in 2008, many TDF investors had no idea that so much of their money was at risk. The very fact that TDFs were dated created a false impression that they would protect investors from the market risk associated with an ill-timed retirement.

When packaged inside CTFs, which are less transparent than mutual funds, TDFs are not likely to be any more understandable to the average plan participant than they were before. Whether there’s the seed of a crisis in the wedding of these two strategies remains to be seen.

My Life as a ‘Dangerous Woman’

Posted on April 7, 2010 by Teresa Ghilarducci -

When I tell people at parties that I’m a professor of economics who specializes in pension policy, I get a lot of yawns and sidelong glances. I don’t mind—retirement policy is important, but it does tend to be complex.

So imagine my surprise when I saw a Google Alert linking these two word strings: “Teresa Ghilarducci” and “the most dangerous woman in America.” (Not, for instance, Angelina Jolie?)

How did I gain such notoriety? When the banks were bailed out in 2008, I testified before Congress, calling for government to help regular people, not just banks. Absorb the collapsing 401(k) assets on a volunteer basis, I recommended, and replace the assets with safe ones.

Maybe I should have stopped there. But I didn’t. I said 401(k)s were failures and that tax breaks for saving money should go only to the people who need them most, with the government guaranteeing a safe return on savings.

But despite what I thought was a modest proposal, some people heard me—or deliberately misinterpreted me—saying that I wanted the government to take over 401(k)s. And these people weren’t just casual listeners. They were active conservatives, including the Big Enchilada himself—Rush Limbaugh.

Oh, well. No publicity is bad publicity, right?

Wrong. Limbaugh attacked me three times, calling me “communist babe,” among other endearments. Lots of people listen to Rush, it turns out. The exaggerated story soon went viral, to Fox News, the Wall Street Journal editorial page, and to a dizzying array of right-wing bloggers, some of them very angry. You’d be surprised how many there are. I sure was.

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The story even reached John McCain, who in the last weeks of the Presidential campaign accused Democrats of wanting to confiscate 401(k)s. If I were a horse, a friend told me, I’d have won the trifecta.

Of course, they shoot horses, don’t they?

Things got pretty scary for a time. My employer, the New School, became alarmed at the screaming voicemail death threats and ominous threatening emails. The university’s security chief gave me his cell phone number. I won’t reveal his last name, but Steve is big and alert. He made me feel secure.

But then support poured in. Justin Fox of Time magazine said the attacks on me were unfair. I wasn’t killing 401(k) plans, he wrote; Wall Street was doing a perfectly good job of that on its own. The New York Times Magazine called my suggestion one of the best ideas of 2008. US News and World report ran a nice article about me. (My glossy photo was soft-focused, with a flower in the background.)

Parade Magazine, which has tens of millions of readers, wrote favorably about my plan in its Intelligence Report section. And the Annenberg Center’s Political Fact Check debunked the false accusations about my alleged “socialist” and “theft” motives. (It’s still on the web if you care to see it.)

So what’s it like to be ‘the most dangerous woman in America?’ I’m working hard on my Rockefeller Foundation grant to promote real pension reform. And I’m still promoting my message—as recently as a few weeks ago, on Larry Kudlow’s CNBC show. Because we still need secure pensions for all Americans.

Citations (Because I’m an academic.)

Ghilarducci, Teresa. “Saving Retirement in the Face of America’s Credit Crises: Short Term and Long Term Solutions,” Committee on Education and Labor, The Impact of the Financial Crisis on Workers’ Retirement Security 1:00, 2181 Rayburn House Office Building. Oral Testimony. Tuesday October 7, 2008.
<http://edlabor.house.gov/testimony/2008-10-07-TeresaGhilarducci.pdf>

Limbaugh, Rush. “Biden: CEO Pensions “Go First” (And Your 401(k) Will Go Next),” Rush 24/7, aired on October 24, 2008.
<http://www.rushlimbaugh.com/home/daily/site_102408/content/01125109.guest.html>

Fox, Justin. “Should the 401k Be Killed?” Time Magazine. Dec. 04, 2008.
<http://www.time.com/time/business/article/0,8599,1864139,00.html>

Mihm, Stephen. “8th Annual Year In Ideas: The Guaranteed Retirement Account,” The New York Times. December 12, 2008.
<http://www.nytimes.com/2008/12/14/magazine/14Ideas-Section2-C-t-001.html>

Brandon, Emily. “Teresa Ghilarducci: The 401(k) Retirement System Has Failed,” U.S. News & World Report. January 30, 2009.
<http://www.usnews.com/money/blogs/planning-to-retire/2009/01/30/teresa-ghilarducci-the-401k-retirement-system-has-failed>

Winik, Lyric Wallwork. “Rethinking Retirement,” Parade Magazine. April 26, 2009.
<http://www.parade.com/news/intelligence-report/archive/rethinking-retirement.html>

FactCheck.Org. November 19, 2008.
<http://www.factcheck.org/askfactcheck/are_congressional_democrats_talking_about
_confiscating_ira.html>

Turning Home Equity into Lifetime Income

Posted on April 6, 2010 by Joseph A. Tomlinson, CFP -

Home equity is destined to become an important source of funds for retirement, and the reverse mortgage is a product designed for this purpose. In this article, I’ll evaluate the reverse mortgage as a product for generating lifetime income, either directly or in combination with an immediate annuity.

The Need to Use Home Equity

For many older Americans, the equity in their home is their largest asset. Data from the Federal Reserve’s Survey of Consumer Finances shows that for individuals over the age of 65, home equity averages about 2 ½ times the amount of financial assets.

The Center for Retirement Research at Boston College has estimated that without tapping home equity, 61% of Americans are at risk of not being able to maintain their standard of living in retirement, and the trend is worsening. In a recent study they conclude:

“Not tapping home equity may be a luxury that future retirees can ill afford as Social Security replaces a smaller share of pre-retirement incomes and people rely increasingly on meager 401(k) balances rather than on traditional pensions.”

Joseph A. Tomlinson, FSA, CFP Retirees can generate funds from home equity by downsizing, or by borrowing against their home’s equity value. The reverse mortgage is a product specifically designed for retirees who wish to stay in their home and have access to its equity.

So far, reserve mortgages have been used by only about 2% of eligible homeowners. They have generated quite a bit of press coverage—some positive because the product meets a growing need, and some negative because of the high fees.

Product Design

Reverse mortgage lenders offer a number of different ways to utilize home equity. Homeowners may take the loan in any of the following forms: as a lump sum advance, as a credit line account, or as a regular monthly payment that lasts as long as the owners remain in the home.

As a rule, the borrower is not required to make any repayments until he or she vacates the home. Proceeds from the sale of the home may used to pay off the loan balance. Any excess of realized sale value over the value of the loan goes to the homeowners or their heirs. Because the loan is non-recourse, the borrower’s obligation cannot exceed the home value, regardless of how long the homeowners continue to occupy their home.

Quote from 3/20/10
Home Value	$300,000
Age of Youngest Owner	75
Advance or Credit Line Available	$162,915
Monthly Funds Available	$1,120
Variable Loan Interest Rate	2.73% + .5% mortgage insurance fee = 3.23%

Here is a sample quote (3/20/10) from Wells Fargo, currently the largest reverse mortgage lender in the United States.

The “Advance or Credit Line Available” is significantly less than the home value because the loan balance grows over time with interest. Amounts available will vary inversely with current interest rates, and directly with the age of the owner.

The “Monthly Funds Available” is the annuity-like payment that owners can choose to receive as long as they remain in their home. The “Variable Loan Interest Rate” in this quote is based on a spread over Libor.

(Note: in examples that follow, I’ve used a projected 6.00% borrowing rate instead of 3.23%. Current rates are at historic lows, so I’ve based the examples on a rate more in line with past averages.)

Fees

Now for the scary news. Here are typical fees based on the above example.

Typical Fees
Origination Fee—paid to lender	2% of first $200,000 of home value, 1% above $200,000	$5,000
Closing Costs—paid for legal, appraisal, and other services	Similar to a conventional mortgage	$2,500
Mortgage Insurance Premium—Paid to FHA/HUD for guarantees	2% of home value + .5% of loan balance	$6,000 + .5% of loan balance (included in the 6.00% projected borrowing rate)
Servicing Fee-paid to lender for monthly servicing		$35 per month
Total Up Front Fees		$13,500

The total fees are much higher than for conventional mortgages. Fortunately for borrowers, most of these fees can be financed and do not require up-front cash. One way to understand the impact of the fees is to look at the effective loan interest rate as a function of how long the homeowner stays in their home and keeps the reverse mortgage. This calculation is based on the cash the borrower receives and the loan amount paid back at maturity.

Duration of Reverse Mortgage	Effective Interest Rate—Monthly Pay Mortgage	Effective Interest Rate—Lump Sum Mortgage
5 years	14.85%	7.81%
10 Years	8.76%	6.98%
15 years	7.44%	6.69%
20 years	6.93%	6.54%
20 years (example when home value limits loan amount)	5.61%	5.56%

The effective interest rates show the impact of the up-front costs. For example, a homeowner taking out a monthly pay reverse mortgage and keeping the mortgage for five years, would be effectively borrowing at a rate close to 15%.

However, for borrowers who stay in their homes for longer durations, the rates look much more attractive. The rates shown in the last line of the chart are based on an example where home prices increase 2 ½% each year and loan balances eventually bump up against home values, effectively lowering the borrowing cost.

The chart illustrates the point made by many loan counselors: that homeowners should not consider a reverse mortgage unless they expect to remain in their home for a long time.

The Lump-Sum/Annuity Alternative

It is almost never a good idea to borrow money to buy a financial product, but it may be worthwhile to consider taking a lump sum reverse mortgage to purchase an annuity that produces lifetime income. The type of annuity could be either an immediate annuity or a variable annuity with a guaranteed lifetime withdrawal benefit.

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In the following example, a hypothetical 75-year-old woman owns a house worth $300,000 (mortgage-free). She would like to generate as much income as possible from the equity in her home. Based on the Wells Fargo quote (above), she could take out a reverse mortgage that would pay her $1,120 per month for as long as she stays in her home. Alternately, she could take the maximum lump sum, $162,915, and buy an immediate annuity (with no refund at death) that, based on Vanguard/AIG rates, would pay $1,281 per month, thus increasing her monthly income by $161.

As another option, she could buy a variable annuity with a guaranteed minimum death benefit. For a 75-year-old, the guaranteed withdrawal percentage would typically be 5%. Unfortunately, 5% would only generate $679 monthly, assuming she purchased the annuity and immediately began taking withdrawals.

Impact on Estate Values

Another important consideration is the impact on amounts left to heirs. The following chart provides a comparison of the three product options in terms of the estate values at different durations.

The estate value is the difference between the home value (assumed to increase 2 ½% annually) and the loan value, for both the immediate annuity and the reverse mortgage strategies. For the variable annuity strategy, the estate value also includes a projection of the growth of the assets in the VA account. The estate value cannot be less than zero.

Not surprisingly, the strategies that produce high monthly incomes produce the low estate values.

The difference between the estate values for the reverse mortgage strategy versus the immediate annuity strategy reflects the lack of a refund feature in the immediate annuity. (An immediate annuity with a refund feature would produce substantially less monthly income.) By contrast, the monthly pay reverse mortgage is like an annuity that pays a refund equal to the home’s net equity value.

The monthly reverse mortgage strategy does better than the immediate annuity strategy up to about age 90 in this example, so it is likely to be the favored strategy if the borrower has legacy interests.

The variable annuity strategy produces the highest estate values, but that’s primarily because monthly income is drastically reduced.

Present Value Measure

It is not straightforward to judge the tradeoff between monthly income and estate value, so the next chart uses present values to combine them into a single measure.

I used the 6.00% borrowing rate to calculate the present values. Based on this measure we can see that attractiveness of the immediate annuity strategy depends on longevity-early deaths are penalized, and long lives are rewarded.

The variable annuity strategy performs the worst under this measure. It is completely dominated by the reverse mortgage. (For variable annuity product charges, I assumed a total of 2.25% annually to cover product fees, investment expenses, and GLWB fees.)

For all three strategies there’s a change in tilt between years 15 and 20, which reflects loan values bumping up against projected home values.

These results will vary depending on choice of assumptions, but, nonetheless, I feel this analysis provides a reasonable comparison of the product alternatives.

Conclusions and Future Analysis

The key conclusions I draw form this analysis are:

Despite their high fees, reverse mortgages can be attractive for individuals who plan to stay in their home for a long time.
Effective borrowing costs are exorbitant for shorter-term loans.*
The monthly pay reverse mortgage provides 10%-15% less income than using an immediate annuity, but provides substantially more value in the event of an early death.
For maximum income if estate value is not a concern, consider taking a lump sum reverse mortgage and investing the funds in an immediate annuity.
A strategy of purchasing a variable annuity with a guaranteed withdrawal benefit with a lump sum reverse mortgage does not appear competitive.

* Most reverse mortgages offered currently are under the HUD/FHA Home Equity Conversion Mortgage program, and fees are based on maximum allowances. If the market grows and become more competitive, products may become available with reduced up-front fees that will make them more attractive for shorter durations.

This article offers a start at analyzing the reverse mortgage as a retirement income product, but more research is needed. This analysis was done on a before-tax basis, and a more refined evaluation needs to consider tax effects.

It would also be useful to look at examples where the client has both housing wealth and other savings, and therefore more options in creating retirement income. This analysis can also be improved by developing stochastic forecasts to compare the risks in various strategies.

Such additional research can lay a foundation for incorporating the reverse mortgage product into financial planning software.

New Public Pension Fund in UK Ponders Investment Strategies

Posted on March 31, 2010 by Editor Test -

In Britain, the chief investment officer of the Personal Accounts Delivery Authority (PADA) suggested that a proposed national trust fund for private savings accounts should start by investing conservatively, rather than taking excessive risks.

PADA was set up under the Pensions Act of 2007 to create a national, trust-based pension plan called NEST (National Employment Savings Trust)—a system of personal investment accounts targeted especially for use by low and middle-income workers whose employees may or may not have a workplace savings plan.

Debate has been going on since last year over how the assets in the trust fund should be invested. Mark Fawcett, PADA’s chief investment officer, said that the impact of high volatility in the first five or 10 years of the fund could cause people to give up contributing to personal accounts.

“If we want to build a savings culture, why give them [members] volatility. Keeping them in and keeping them saving is more important than taking a lot of risk in the early years,” Fawcett told delegates at last week’s National Association of Pension Funds meeting in Edinburgh, Scotland, in mid-March.

Under the plan, which is currently scheduled to take full effect in 2012:

Employers will be required to automatically enroll eligible workers into a workplace pension and make a minimum contribution to their pension.

The Pensions Act 2008 allows for the introduction of automatic enrollment to be introduced in stages. New duties are expected to fall on large employers first, but the details of how the new duties will be staged are still to be confirmed. This will be specified by secondary legislation.

A minimum employer contribution of three percent on a band of earnings will be required. However, contributions can be more than this.

The total minimum contribution for eligible workers should equal eight percent of that band of earnings. This is made up of employer contributions, worker contributions and tax relief.

Contributions from both employers and employees will be phased in over a transitional period. Minimum employer contributions are likely to initially be one percent on a band of earnings; rising to two percent before reaching the full three percent.

‘What Do You Want 2Retire?’

Posted on March 31, 2010 by Editor Test -

Tourists naturally expect to see eye-grabbing electronic billboards in New York’s famous Times Square. One of the newest of the giant ads has been posted by Merrill Lynch above a branch of the Bank of America, Merrill Lynch’s parent, at Broadway and 46^th St.

The billboard is the newest component of Merrill Lynch’s “help2retire_____” (read “help2retire blank”) advertising campaign, which invites the investing public to think about what aspects of their daily routines they would like to “retire”—that is, get rid of.

Between March 19 and April 2, the billboard will urge Times Square visitors to send text messages to the billboard, naming the thing they would most like to “retire.” A tally of the responses will be “displayed in real-time.”

The campaign is counter-intuitive in that it focuses investor attention on negative aspects of their pre-retirement lifestyle—such as traffic jams and pinstripe suits-rather than on traditionally positive images of retirement goals, such as sailing, golf, or exotic travel.

Merrill Lynch Wealth Management has also been promoting its “Retirement Income Framework,” which divides a retiree’s investments into short-term, immediate-term and long-term portfolios that satisfy, respectively, immediate consumption expenses, the need for “longevity and income replacement,” and bequests.

Bank of America/Merrill Lynch serves approximately 59 million consumer and small businesses in the U.S. through 6,000 retail banking offices, more than 18,000 ATMs and online.

New Organization Seeks 401(k) Reform and Much More

Posted on March 31, 2010 by Editor Test -

Five different groups in Washington, D.C., have created a new public policy organization, Retirement USA, to identify and promote a new kind of national retirement savings plans that would supplement 401(k) plans.

The five organizations include two labor unions, the AFL-CIO and th e Service Employees International Union, and three pension research or advocacy groups, the Economic Policy Institute, the National Committee to Preserve Social Security and Medicare, and the Pension Rights Center.

“So far we’ve been raising awareness of the crisis in retirement income,” said Nancy Hwa, a spokesperson for Retirement USA. “We had a conference last October, we’ve looked at proposals for new kinds of systems, and we’ve looked at what’s happening in the Netherlands and Australia on this issue.

“There are two tracks we’re working on, a short-term and a long-term track. We want to improve the current system, but things like [the Obama Administration’s proposed] Auto-IRA are just short-term fixes. The group’s real focus is long-term. But even in the future, we’re not saying we have to scrap what we have now and go for something entirely different.”

The group solicited proposals for a new kind of retirement system last fall and has selected five of those proposals for further consideration. The proposals and their authors, in parentheses, are:

Guaranteed Retirement Account Plan (Teresa Ghilarducci). The GRA proposal mandates a contribution of 5% of earnings (up to the Social Security wage base) for all workers, evenly divided between employer and employee.

The employee’s share of the contribution would be offset by a $600 refundable tax credit, which offset contributions by those with incomes below $24,000. The contributions of husbands and wives would be combined and divided equally between their individual accounts.

The plan would guarantee a real 3% annual rate of return. Surpluses would be distributed to participants. A balancing fund would be maintained to ride out periods of low investment returns.

Account balances would be converted to inflation‐adjusted annuities upon retirement, with a partial (10%) lump sum available. A full‐time worker who contributes into the plan for 40 years and retires at age 65 can be expected to receive income equal to roughly 25% of pre‐retirement income.

The plan would also provide a death benefit of one‐half the account balance for participants who die before retiring. Those who die after retirement could bequeath to their heirs half their final account balance less the total of benefits received.

Guaranteed Benefit Plan (Mark Ugoretz). The proposal is based on the ERISA Industry Committee’s Guaranteed Benefit Plan, which is part of a larger proposal titled the New Benefit Platform for Life Security.

One of the benefits proposed for the new Lifetime Security Plan is a Guaranteed Benefit Plan (GBP), which would provide a single source of retirement income. The GBP is a hybrid arrangement, similar to a cash balance plan.

The GBP would, at a minimum, guarantee the principal that employers and employees contribute to the plan, so that employees would be protected from a net loss. In addition the GBP would establish a minimum investment credit that would apply to the balance of each individual account.

Distributions from the GBP would be paid out at retirement only as a stream of payments or in annuity form. Because each benefit administrator is expected to enroll very large numbers of employees, this large pool should help bring down the cost of annuities, making them significantly more affordable to retirees. Further, the GBP would be guaranteed by the Pension Benefit Guaranty Corporation (PBGC).

These programs would be voluntary for the employer, although the program could be combined with a requirement that individuals whose employer does not offer a plan make minimum contributions to either a pension or retirement savings plan.

The New Benefit Platform calls for competitive independent benefit administrators to administer health and retirement plans. Benefit administrators would be liable for contractual and other common‐law obligations (similar to existing ERISA fiduciary responsibilities).

Guaranteed Pension and Community Investment Plan (Glenn Beamer).

Workers would contribute 5% of their wages to locally‐based funds and receive fully guaranteed lifetime annuities at retirement.

Workers, employers, unions and governments would be encouraged to contribute an additional 5% to 10% of wages. An 80% refundable tax credit would offset $560 of workers’ first $700 in contributions and replace the current deduction allowed for 401(k) plan contributions.

This tax credit would be deficit neutral or would decrease the deficit. The contribution structure would be progressive, and accounts would be fully portable. Full benefits would be payable when the participant’s age and service equals 100.

A locally elected board of trustees would administer the plan and would invest 70% of a worker’s account in a balance‐guaranteed account and 30% in community development. CPCI Community Investment programs would be determined and adopted locally. A federal agency similar to the Pension Benefit Guaranty Corporation will regulate CPCI plans.

Retirement-USA Plus Plan (Nancy Altman). The proposal would establish a defined benefit plan sponsored and administered by the federal government.

Plan participants would consist of all workers in employment covered by Social Security. Benefits would equal 20% of currently scheduled Social Security benefits. Retirement benefits would be paid automatically in the form of 100% Joint and Survivor Annuities.

Additional benefits would be paid directly to divorced spouses who were divorced after at least 10 years of marriage, dependent spouses, parents, children, and grandchildren. The Plan would provide group life and disability insurance, as well.

All benefits would be fully protected against inflation. In addition, all participants would have the option to convert tax‐favored and other savings into a supplemental annuity purchased through the Social Security Administration.

On the date of adoption, plan benefits would immediately vest in all workers who were insured for purposes of receiving Social Security benefits and would be immediately payable to all Social Security beneficiaries. Workers not then vested would become so when they became insured for purposes of receipt of Social Security benefits.

The plan includes two alternative financing mechanisms. The second would leave the plan in long‐range actuarial balance; the first, in long‐range surplus. The first alternative consists of (1) employer and employee contributions on earnings in excess of Social Security’s maximum, (2) revenue from requiring consistent tax treatment of employee contributions to salary reduction plans, (3) revenue from a dedicated federal estate tax, and (4) investment income on Plan reserves.

The alternative method is to require contributions by employers and employees of 1.5% each on wages insured by Social Security and to expand the Earned Income Tax Credit, in order to offset the cost for lower‐income workers.

Insured Retirement Accounts (Regina Jefferson). The proposal would provide insured retirement accounts for individuals not covered by individual employer‐sponsored plans.

Employer and employee would each contribute 3% of wages up to the Social Security wage base to the accounts. The contributions of low and moderate income wage earners would receive a public subsidy, which would be gradually phased out.

Contributions would be made to either a clearinghouse established by the Social Security Administration (or to another entity such as the Pension Benefit Guaranty Corporation). Investment assets would be pooled by the entity receiving them, and the investment function could be contracted out to investment professionals.

As described below, the pooled investment portfolios would be subject to some portfolio design parameters, which would reduce the risk of investment loss. Benefits would be paid as life annuities commencing at retirement age; disability benefits would also be available.

The insurance program and portfolio parameters are the innovative aspect of this proposal and are based on previous work suggesting an optional defined contribution insurance program for private sector plans. The primary idea of the insurance proposal is to protect participants from severe losses that occur close to their retirement.

The insurance would do this by providing that each year’s contribution would earn over an employee’s career no less than the average annual rate of return on a model portfolio that conformed to the investment parameters.

Variable Defined Benefit Plan (Gene Kalwarski). This proposal, developed by the United Food and Commercial Workers International Union, creates a new type of defined benefit plan, removes significant levels of risk inherent in today’s traditional defined benefit plan.

The VDB plan might be described as a floor‐elevator plan. Each participant would receive an annual floor benefit, which would be stated in the form of a uniform retirement annuity. (The benefit could be either a flat benefit or a percentage of pay, in which case the floor benefit would look like a career average defined benefit.)

The floor benefit would be actuarially determined from the plan’s contribution base for all participants in the plan as a uniform benefit, but using a very conservative interest assumption. The floor benefit would also be converted into investment units in the plan’s collective assets, which would be professionally managed. For example, a $100 floor benefit would purchase $100 of investment units.

These investment units would fluctuate in value annually, increasing in value in a year in which the plan’s investment return exceeded the conservative interest assumption (plus a reserve factor) and declining in value in a year in which the plan’s investment return fell below the assumption.

At retirement, employees would receive the greater of the sum of their floor benefits or the sum of their investment units. Benefits would be paid only in annuity form, although a plan could be structured to provide for death, disability, post‐retirement inflation protection, and/or early retirement.

From Genworth, a Less Painful Way to Buy LTC Insurance

Posted on March 31, 2010 by Editor Test -

Genworth Financial, Inc. has issued a long-term care/annuity hybrid product, joining the handful of companies who have take advantage of a provision in the Pension Protection Act of 2006, effective January 1 of this year, that resolves a tax technicality that barred such products in the past.

The Richmond, Va.-based insurers, new product, Total Living Coverage Annuity (TLCA) combines a single-premium fixed deferred annuity with long-term care coverage. It is underwritten by Genworth Life Insurance Company.

Like products announced last year by several companies (see RIJ, July 8, 2009, “A Short-Cut to Long-Term Care Insurance”), the product in effect allows owners of fixed annuities to withdraw the assets tax-free when applying them to long-term care costs. The cost of long-term care insurance is greatly reduced because the fixed annuity assets serve as a very large deductible. Genworth introduced a universal life insurance/LTC hybrid a few years ago.

The product, whose market consists of the estimated $96 billion in out-of-surrender-period fixed annuity assets in the U.S., will mainly save money for people with significant unused capital who would otherwise self-insure against the risk of incurring long-term nursing home or home health care costs.

Katie Liebel, vice president of fixed annuity products, described how the new hybrid works. If an investor put $100,000 into the new product, for instance, he or she could choose $200,000 or $300,000 worth of long-term care coverage, spread over a period of four or six years, she said. Inflation-adjustment is available as an option.

“Only seven percent of the people who are looking for long-term care insurance actually purchase it, and the other 93% are self-insuring,” Liebel said. “This allows them to self-insure more effectively.”

The product, which can be funded with assets from another annuity or life insurance policy, has a minimum premium of $35,000. Once invested, the money earns 3.25% (with a minimum guarantee of 3%) or as much as 3.65% if the premium is $150,000 or more.

As the assets grow, the issuer assesses an insurance charge of between 0.40% and 1.5% on the insurer’s exposure. The expense ratio depends on the amount of coverage purchased as well as the age and health of the purchaser. Liebel described the underwriting as “simplified, with no lab tests or review of doctors’ records.”

Over time, the annuity would grow and the insurer’s exposure would shrink, resulting in a steady decline in fees. The annuity owner could withdraw money from the contract, but doing so would cause a proportionate reduction in the amount of LTC coverage.

Many existing annuity contracts allow accelerated payouts for nursing home costs, but the distributions are not tax-free, as they are when combined with long-term care insurance.

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