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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.

It’s Crunch Time for Annuity Issuers: Conning Research

Posted on May 12, 2010 by Editor Test -

Now that annuity issuers have patched up their vessels from the storm of the financial crisis, they need to think about increasing sales. But, given the end of the variable annuities arms race and a decline in 1035 exchanges, fresh premium is scarce.

Growth will have to come from a new opportunity—providing income guarantees to the defined contribution market, for instance—or from capturing a larger share of the market, or from acquisitions.

That is the thrust of a new study from Conning Research & Consulting.

“The first priority for individual annuity insurers following the financial crisis has been to rebuild capital,” said Scott Hawkins, analyst at Conning Research & Consulting. “Insurers have made significant progress in repairing their capital positions.

“At the same time, premiums have actually declined, and rebuilding them will be a challenge. As insurers seek new growth, each will analyze and leverage their unique competitive advantages to position themselves for either organic or acquisitive growth,” he added.

The Conning Research study, “The Real Challenge in Rebuilding Individual Annuities: Developing Competitive Advantage in a Concentrating Market” reviews the recent history of concentration and consolidation that has altered the competitive landscape and premium growth rate.

Looking forward, the study addresses key strategies that will distinguish successful competitors in this new environment.

“Individual annuity insurers have responded to a slowing rate of growth over the past fifteen years with product development heavily focused on variable annuity benefits,” said Stephan Christiansen, director of research at Conning.

“Yet as insurers look to the future, it is unlikely that enhancing benefits alone will provide the support it has in recent years. Our analysis points to the need for insurers to refine their individual success factors, including superior product development, distribution effectiveness and new market penetration,” he said.

“The Real Challenge in Rebuilding Individual Annuities: Developing Competitive Advantage in a Concentrating Market” is available for purchase from Conning Research & Consulting by calling (888) 707-1177 or by visiting the company’s web site at www.conningresearch.com.

TIAA-CREF Comments on Retirement Income

Posted on May 5, 2010 by Editor Test -

TIAA-CREF, which administers some 15,000 retirement plans for some 3.6 million participants, most of them university employees and staff, has filed a 29-page response to the Department of Labor’s request for information on retirement income.

Like many of the individuals who responded to the RFI since early February, TIAA-CREF took a position against mandatory annuitization of defined contribution assets.

“Automatically placing participants in a lifetime income option has the potential to confuse, anger, and ultimately drive participants away from annuities, while having little positive impact on the overall take-up rate for annuities as an income option,” wrote Larry Chadwick, the organization’s vice president for government relations public policy.

The organization also recommended that the DoL prepare educational materials on lifetime income that plan sponsors could use without worrying about liability.

“General educational materials prepared by the DOL would help mitigate this concern, especially if the DOL would take the position that plan sponsors would not be liable for distributing materials prepared by the DOL on this subject,” the brief said. “In addition, the DOL can offer guidelines and templates for insurance companies to provide educational materials relating to lifetime income options.”

TIAA-CREF had a lot to say about complexities involved in turning defined contribution savings into a joint and survivor annuity.

“One of the disadvantages of in-plan options is that Qualified Joint Survivor and Annuity (QJSA) rules can often be cumbersome, confusing, and difficult to administer resulting, in some cases, in a delayed start to receiving annuity payments. This is one area where the Internal Revenue Service (IRS) could offer some relief by taking steps to ease this burden through regulatory action,” the brief said.

“The most critical plan qualification rule affecting a DC plan sponsor’s willingness to provide for a lifetime income option involves the qualified joint and survivor annuity (QJSA) rules under IRC §401(a)(11) and IRC §417, as well as ERISA §205 (with respect to §401(a) and §403(b) plans respectively). Certain plans are exempt from the QJSA rules provided they satisfy all three of the exemption criteria. IRC §401(a)(11)(B)(iii)(II) (and parallel ERISA section 205) provides that a plan that provides a life annuity payment option cannot be exempt from the QJSA rules.

“The extensive notice and waiver requirements that are triggered once a plan is subject to the QJSA rules provide an additional layer of administrative complexity, costs, and risk for non-compliance and associated corrections. As a result, many DC plans are designed to be exempt from the QJSA rules.

“Consequently, many plans will avoid lifetime income options solely to avoid the QJSA rules, even if such options may ultimately be beneficial for the participants. To make such options viable, the QJSA rules should be amended to provide for a means to have annuity payment options available under the plan without triggering all the QJSA rules and specified means of payment, while still protecting spousal rights and the related policy objectives.

“One approach would be to maintain the spousal beneficiary rules with respect to all forms of payment, including multiple life annuity forms, absent a waiver, and to require a spousal consent for a single life annuity form of payment that does not include a 50% spousal benefit.

“Another potential remedy is to not apply QJSA rules until a participant elects an annuity and then only if the annuity is not a QJSA. This can be accomplished with little burden to plan sponsors since insurance companies would be willing to administer these rules as part of the annuity contract.”

From GAO, a Primer on Retirement Income

Posted on May 5, 2010 by Editor Test -

The Government Accountability Office, which has researched retirement income several times in the past, delivered its latest report on the topic to Senator Herb Kohl (D-WI), chairman of the Senate Special Committee on Aging, on April 28.

Kohl, whose committee will hold hearings on the state of retirement income next month, had asked the GAO to examine the “options that retirees have for drawing on financial assets to replace preretirement income,” the “options retirees choose,” and “how pensions, annuities and other retirement savings vehicles are regulated.”

The GAO’s report, “Retirement Income: Challenges for Ensuring Income throughout Retirement,” surveys the landscape of retirement income thoroughly, without offering many surprises for close followers of the defined contribution and individual annuity markets. For the person who’s new to this topic, or who wants a handy compendium of facts and figures on this subject, it could be highly valuable.

The report shows, for instance, that Americans over age 65 live on income from Social Security, employer-sponsored defined benefit pensions, distributions from defined contribution plans, individual annuities, investments in stocks, bonds, and mutual funds, and earned income.

For most people, it doesn’t add up to much. After reading the report, you’re likely to be left with the impression that the median American retiree—if such a notional character exists—will start retirement with under $50,000 in guaranteed household income and perhaps $100,000 in savings.

Whether that amount can suffice will undoubtedly vary from household to household, depending on home equity, health, region and a near-infinite range of other variables. Among some policyholders, it indicates a national retirement crisis.

Social Security

Extrapolating from the GAO data, it appears that for people who earned between about $48,000 and $106,800 during their working years, Social Security benefits average about $25,000 per year.

For people who made less than that, Social Security payments will be lower but will replace a higher percentage of their former income. For people who are used to making over $100,000, Social Security payouts will level off at about $25,000 but replace a declining percentage of their former income.

As the GAO puts it, “Social Security benefits for retired workers at full retirement age (age 66) in 2010 provide 90% of the first $761 of average monthly indexed earnings, 32% of additional earnings up to $4,586, and 15% of earnings above $4,586, up to the limit on the annual base of covered earnings each year or $106,800 per year ($8,900 per month) in 2010.”

The GAO doesn’t calculate the present value of Social Security benefits for the average person. But its figures suggest that a new retiree would need about $400,000 to purchase a retail income annuity that would produce an annual income equal to the average Social Security benefit.

Even then, the annuity income wouldn’t have the inflation-adjustments that Social Security has. If you consider that the average household saves only around $100,000 by retirement, the value of Social Security to the average person looms large.

Defined benefit pensions and annuities

Many Americans are still eligible for defined benefit pensions. The ones who aren’t are not making up for it by buying income annuities. About one in three American households still had a traditional defined benefit pension plan in 2007, according to Survey of Consumer Finances data cited by the GAO. In that year, according to the IRS, the average combined taxable pension and annuity income was $19,500.

Of that amount, the portion attributable to annuity income would appear to be negligible. Few households—about 6% percent—owned individual annuities in 2007. Only 3% ($8 billion) of the total amount of annuities sold in 2008 was fixed immediate annuities, designed solely to provide lifetime income.

The GAO indicated concern about the costs of variable annuities with lifetime income guarantees, noting, “one variable annuity prospectus we reviewed indicated that maximum expenses for a $10,000 investment and a 5% annual rate of return could exceed $7,000 over a 10-year period.”

Defined contribution plans and investments

Of the people who have DC plans and taxable investments, few have balances large enough at retirement to buy an income annuity that pays as much as the average DB pension. In 2007, before the recent recession, half of the households with someone aged 55 to 64 had financial assets of $72,400 or less.

An estimated 61% of households “at or nearing typical retirement age” have a defined contribution plan account or an IRA, as of 2007. The median account value was only $98,000. At current rates, that would purchase a fixed income of less than $6,500 a year for a 65-year-old couple, GAO figures showed.

About one in five households headed by someone ages 55 to 64 holds stocks directly, with a median value of $24,000, while 14% hold pooled mutual funds, with a median value of $112,000. Only 2% held bonds directly, which had a median value of $91,000.

It might be inferred from those figures that wealthier people hold bonds, but it’s not clear. Certificates of deposit are held by 21% of near-retirement households, with a median total value of $23,000. An estimated 35% of those households had cash value life insurance, with a median value of $10,000.

The Hidden Risk in Target Date Funds

Posted on May 5, 2010 by Ron Surz -

Choosing the appropriate target date fund (TDF) for an investor is not easy, given the large number of products in the marketplace and the lack of tools to easily compare those offerings. That choice, however, is made a lot easier if one focuses on the component of TDFs where investors are exposed to the greatest risk—what I call the “risk zone.”

The risk zone is the five to ten years before and after retirement. During this period, investors are least able to tolerate the impact of adverse market conditions, where significant dollar losses in their portfolio can be offset only by reductions in their standard of living.

The risk zone is also critical from the plan sponsor’s perspective. Older, more senior, employees are more likely to sue, or at least make their voices heard, than are younger employees with smaller account balances. Employers should fear the risk zone for both its litigation threat and its importance to employee morale. Fiduciaries need to set objectives for the risk zone, and safety first should be the order of the day.

Glide paths of TDFs differ markedly as they approach the risk zone, and this divergence creates a hidden risk for investors. Without understanding the implications of an excessively risky glide path in the risk zone, investors may face painful choices in their retirement. I have created a simple metric, which I explain below, that can help advisors and investors choose the right TDF.

Equity Allocation of Target Date Funds We need to be especially diligent and protective during the risk zone, but how do we measure and evaluate safety in this critical period? As shown in the graph on the right, TDFs have a wide range of equity exposures in the risk zone; they disagree about the appropriate level of risk. The range of equity allocations widens as retirement approaches.

The Safe Landing Glide Path^TM (SLGP) is also shown in the graph. The SLGP^TM is designed to achieve two common sense objectives:

Build a portfolio that, at retirement, delivers to each participant at a minimum his or her accumulated contributions plus inflation.
Grow assets as much as possible without jeopardizing the first objective.

The safety-first objective necessitates an end point where the fund is invested mostly in safe inflation-protected assets, such as TIPS and T-bills.

Let’s consider the risk and reward trade-offs for varying equity exposures in the risk zone. Since investors should be concerned with lifestyle risk, I define risk as a dollar loss rather than percentage loss. Losing 10% of a one-dollar portfolio is significantly less painful than losing 10% of a million-dollar savings account.

Lifestyle in retirement depends on money, not percentages. Accordingly, I have measured ending wealth and risk for all 40-year glide paths from 1926 through 2009. There are 44 such 40-year paths ending in calendar years. I assumed that the investor contributes $1,000 initially and increases this $1,000 by 3% per year, roughly equal to the historical inflation rate. I measured risk as the dollar-weighted downside deviation, and “reward” as the dollar growth. I also analyzed just the last 10 years of the glide path to focus on the risk zone. There are 74 such 10-year periods.

I compared the reward (dollar growth) and risk (of dollar loss) of the SLGP^TM target date fund to that of the average TDF, shown as the middle line in the graph above. The glide path of the SLGP^TM ends almost entirely in safe assets, whereas the typical TDF ends with 40% in equities because it is a “through” fund designed to continue beyond the retirement date, so it is substantially riskier in the risk zone. The results for the ratio of reward (ending wealth) to risk (dollar-weighted downside deviation) are as follows:

Reward-to-Risk Ratios 1926-2008

The SLGP^TM unsurprisingly delivers superior reward-to-risk in the last 10 years before retirement. Somewhat surprisingly, however, the reward-to-risk ratios are about the same for the entire 40 years prior to retirement, primarily because the glide paths of the two approaches are similar for the first 25 of those 40 years. When viewed over the continuum of their lives, TDFs look deceptively similar; their hidden risk is revealed only when one examines the risk zone.

Danger: Risk of Large Losses Enlightened advisors should focus on the risk zone in their TDF selection. Most TDFs provide similar asset allocations prior to the risk zone, and then diverge widely in their equity exposures as the target date nears. Most TDFs view the target date as a speed bump on the highway of life, ignoring the risk zone altogether. During this critical period TDFs demonstrate their mettle, by protecting or not.

“Safety first” is the right choice as the target date nears because lifestyles are at stake. Advisors can help protect their clients from lifestyle risk by choosing the right TDF.

For an entertaining and informative description of the risk zone, and an explanation of why spending is harder than saving, please see the video of Prof. Moshe Milevski, York University, at Return sequence risk.

Ron Surz is president of Target Date Solutions.

Top 10 Bank Holding Companies in Annuity Fee Income

Posted on May 5, 2010 by Editor Test -

Top 10 Bank Holding Companies in Annuity Fee Income (Millions)
	2009	2008	Change
Wells Fargo & Co.	$678.00	$118.00	474.6%*
JPMorgan Chase & Co.	328.00	363.00	-9.6%
Morgan Stanley	253.00	N/A	N/A
Bank of America Corp.	251.83	145.89	72.6%
PNC Financial Services	121.28	69.50	74.5%
Regions Financial Corp.	93.53	109.50	-14.6%
SunTrust Bank Inc.	80.46	123.84	-35.0%
US Bancorp	66.00	100.00	-34.0%
KeyCorp	60.73	56.42	7.6%
BB&T Corp.	46.07	45.94	0.39%
Source: Michael White-ABIA Bank Annuity Fee Income Report *Reflects acquisition of Wachovia Bank.

US Mutual Fund Inflows On Record Pace

Posted on May 5, 2010 by Editor Test -

US mutual fund investors have put nearly $200 billion into stock and bond mutual funds so far in 2010, making it likely that full-year net inflows would top $450 billion. That would make 2010 a record year, according to Strategic Insight.

The previous record was set last year, when just over $400 billion went into long-term funds, according to Strategic Insight’s Simfund database. These figures include open- and closed-end mutual funds and funds underlying variable annuities, but exclude ETFs.

Inflows have been this high this early in only one previous year—in 2007, when net inflows to stock and bond funds totaled more than $210 billion.

“Lately we are observing the early signs of thawing of investors’ reluctance to get back on the stock market train,” said Avi Nachmany, SI’s Director of Research. “Assuming further economic and employment improvements in the coming months, more such investors should inch higher in their risk curve. But turmoil in Europe and the fragility of the US recovery are just a few of the many concerns still on investors’ minds.”

For all of 2010, Strategic Insight projects that US stock and bond fund new sales are on track to rise 20% (or more) from their 2009 pace. Net inflows are new sales minus investors’ redemptions out of funds.

Worldwide, mutual fund investors have added nearly $1.4 trillion of net flows to bond and stock funds since March 2009’s market bottom, according to Strategic Insight’s Simfund databases, which track more than $20 trillion of fund assets globally. About half of these gains occurred in the US. This year through early May, global inflows to stock and bond funds are nearing $400 billion.

ING Responds to Income RFI

Posted on May 5, 2010 by Editor Test -

ING Insurance U.S. announced today that it has filed suggestions and comments in response to the Department of Labor and the Department of Treasury (the Agencies) joint request for information on lifetime income options for participants and beneficiaries in retirement plans.

Through its filing, ING supports a number of key positions with respect to lifetime income products, while recognizing certain items need to be addressed in order for these products to be more widely embraced by employees who save in a workplace plan. These include the following:

1. ING broadly supports investing in guaranteed lifetime income options within a retirement plan. Retail products, such as individual IRAs or guaranteed income annuities, are also important vehicles for consumers to plan for and manage retirement assets.

2. Regulations must be simplified and clarified in order to address employer fiduciary and administrative concerns. Employers and plan fiduciaries should be given a streamlined fiduciary standard with more objective criteria than exists under current ERISA regulations. Some of the administrative burdens that come with carrying annuities need to be eased in order to attract more employers to offer these types of products.

3. The workplace is the best time to reach participants with materials, resources and communications that can increase their financial literacy and positively influence their behavior.

4. Offering and investing in guaranteed lifetime income options should be encouraged but not mandated. Plan sponsors and participants indicates a prefer choice and control when it comes to plan design and benefit distribution matters.

5. A desirable strategy for many workers would include investing a portion of one’s retirement assets in a lifetime income product. Plans that offer lifetime income distribution strategies tend to present this option to employees as an “all or nothing” decision with respect to their account balance. ING favors steps that would encourage individuals to complete a financial plan and then commit only an appropriate portion of their account balance to a guaranteed income stream, while retaining control of the uncommitted balance.

Lincoln Financial Group Profitable So Far in 2010

Posted on May 5, 2010 by Editor Test -

Lincoln Financial Group net income for the first quarter of 2010 of $283 million, including net realized losses of $27 million, compared to a net loss in the first quarter of 2009 of $579 million, which included net realized losses of $136 million.

The current quarter included income from discontinued operations of $28 million, including a gain on the disposition of Lincoln UK and Delaware Investments. The first quarter of 2009 included a non-cash charge of $600 million, after tax, for the impairment of goodwill in the annuity business.

The Individual Annuities segment reported operating income of $119 million in the first quarter of 2010, up from $74 million a year ago, reflecting a 34% increase in average annuity account values. The first quarter of 2010 included a net positive after-tax impact of approximately $21 million, primarily from DAC unlocking.

Gross annuity deposits were $2.3 billion and net flows were $575 million, up 4% and 34%, respectively, versus the prior year.

Income from Defined Contribution operations was $36 million, up from $30 million a year ago, reflecting a 26% increase in the average account values.

Gross deposits of $1.3 billion were down 16% versus the prior year quarter. Total net flows in the current quarter were $109 million, down from $657 million in the 2009 quarter. The year-over-year declines are primarily attributable to the timing of the placement of a few large cases.

The first quarter income from operations was $276 million, up from $163 million in the first quarter of 2009. Income from operations in the current quarter reflected growth in average variable account values driven by positive net flows and improvement in equity markets, favorable unlocking of deferred acquisition costs (“DAC”) in the annuity business and unfavorable mortality in the individual and group life businesses.

Data Connection