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Fund Fees Can Devastate 401(k) Savings: Towers Watson

Posted on March 31, 2010 by Editor Test -

Fund expenses can shave up to 30% from the value of a retirement account over a lifetime of savings and shorten the life of the account by as much as 15 years, according to a new analysis of target-date fund fees by the consulting firm Towers Watson. TDFs are widely used in 401(k) plans.

Differences in TDF fees, which can range from less than 20 basis points per year for passively managed TDFs to more than 180 basis points for actively managed TDFs, have a much bigger impact on variation in cumulative returns than the amount of equities in the fund or the fund’s design, the analysis showed.

“Most employees are losing a very material amount of their retirement assets due to fee-related erosion,” Towers Watson said. “While 20 basis point fees reduced retirement income by one to three years, fees of 50-100 basis points eliminated 7-12 years of retirement income for most participants.

“For savings rates of 8% or more, a 100 basis point fee reduced the age of savings depletion by 9-15 years for all salary levels. The analysis included the effect of Social Security payments, which helped lower-salary employees improve their years of retirement income but also meant they lost more security due to fees compared with high-salary employees at an 8% savings level.”

The study considered four salary levels ranging from $25,000 to $125,000, three savings rates (4%, 8% and 12% of salary), and three fee levels (20, 50, and 100 basis points).

Towers Watson assumed that the participant worked and saved from age 25 to age 62 and drew a retirement income from Social Security and 401(k) savings equal to 70% of their salary. Generally, the higher the salary, the higher the fees, and the greater the savings rate, the greater the impact of fees on the life of the portfolio.

The analysts suggested that some sponsors might persist in offering high-fee funds because they lack economies of scale, they are limited to their record keeper’s fund options, or because they use actively managed TDFs.

Plan advisors and plan sponsors may not like the idea of reducing fund fees in 401(k) plans, if statements made in a March 28 Investment News article are any indication.

The article quoted several advisors and officials expressing disagreement with a recent Department of Labor initiative suggesting that fees and expenses should play a bigger role than historical performance in the evaluation and choice of funds as 401(k) options.

Several advisors appeared to be outraged at the suggestion, implicit in DoL’s latest proposal on regulations governing investment advice for plan participants, that low-cost index funds are better for investors than actively managed funds. They were also evidently out raged that a shift to index funds might lower their revenues.

The article said in part:

“If the agency does set a bias toward passively managed funds, it could mean less business for financial advisers, experts said. If a plan sponsor decides to include only index funds in its plan, the client might not feel that it needs an adviser to help choose funds, said Thomas Clark Jr., vice president of retirement plan services at Lockton Financial Advisors LLC.

“It could also mean increased costs to plan sponsors because index funds offer less in revenue-sharing dollars than actively managed funds, and thus there is less money to cover record-keeping expenses, he said.

“Most advisers oppose the [DoL’s] questions mainly on principle. ‘This makes no sense to me,’ said Manny G. Erlich, managing director at The Geller Group. ‘They need educating.’ Any advice that doesn’t take into consideration the past performance of funds isn’t good advice, Mr. Francis said.

“A bias toward passively managed funds, leading to more 401(k) plan sponsors adding index funds to their lineups, would also have a negative impact on employee engagement in saving for retirement, said Paul R. D’Aiutolo, vice president of investments, advisory and brokerage services at UBS Institutional Consulting.

“‘The purpose is to keep people engaged in their plans,’ he said. While index funds may perform well over the long term, it’s often the ups and downs of actively managed funds that keep plan participants paying attention,’ Mr. D’Aiutolo said.”

Insult to Injury: Disability’s Impact on a Retirement Plan

Posted on March 31, 2010 by Jim Otar -

Picture this: You have a client who is ten years away from retirement. He comes to you for retirement advice. You spend several hours, maybe even a full day with him. You consider many different retirement scenarios.

At the end of this exercise, you prepare a plan that’s as thick as a phone book. In your next meeting, you review the plan with your client.

One of your suggestions is that he buy disability (a.k.a. income replacement) insurance, in case he can’t work and earn income. But your client says that his employer already gives him similar insurance. He has no interest in purchasing his own disability insurance. After some intense discussions, you fail to convince him.

“Oh well,” you think, “maybe he’ll come around soon.” After your meeting, you decide to hand over the plan to your client.

Perhaps the client was just being stubborn. Perhaps he thinks you’re only angling for a big, undeserved commission. Perhaps he genuinely believes that his company hired him for life and their plan is all he needs.

The bottom line is, you weren’t able to demonstrate clearly why he needed disability insurance in his overall retirement plan. But you might have been more persuasive if you had been able to show him the precise impact of a loss of income on his retirement accounts.

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If you haven’t done that before, here’s an example: A couple, Bob and Sue, both 55, have about $300,000 in their retirement accounts. Their asset allocation is 40% equities and 60% fixed income. They intend to save a combined $25,000 each year until they retire at age 65. After retirement, they expect to need $50,000 a year, indexed to inflation. They anticipate $25,000 in combined Social Security benefits. They want their income to last until age 95.

In my case, I run this information through my retirement calculator, which is based on actual market history, and discover that they have a good plan (Figure 1). If they are lucky (top decile of all historical outcomes) and catch a good, long-term uptrend in the market, their portfolio will be worth about $2.7 million in 40 years. Even if they are unlucky (bottom decile of all historical outcomes), they’ll have about $165,000 at age 95.

Figure 1: Bob and Sue’s Retirement Assets over time

Well, not so fast. What if Bob loses his job? In that case, he also loses his disability insurance. Now he’s on his own. If he experiences a health problem or an accident and can’t earn income for awhile, he and Sue won’t be able to save $25,000 every year. Worse, they may have to spend some of their retirement savings to make ends meet. Their meticulous retirement income plan would go down the drain.

Figure 2 depicts the impact of a disability that lasts two years. The blue line on the graph in Figure 2 indicates the portfolio value if Bob has no disability insurance and he suffers no disability. Bob earns income continuously until age 65. Everything looks great; the portfolio lasts at least until age 95.

The red line depicts the portfolio value if Bob has no disability coverage and he becomes disabled during ages 55 and 56. Note that the portfolio life is shortened by 7 years. If Bob were single that might be acceptable, because a disability lasting two years might also reduce his life expectancy. But he needs to consider Sue. There is a 36% chance that she will be alive when their money runs out at age 88. This is not an acceptable retirement plan.

Finally, the green line on the chart indicates the portfolio value if Bob does have disability insurance. Even though he earns no income at ages 55 and 56, the portfolio value is only slightly lower than the blue line, because of the cost of the disability insurance. In this scenario, Bob and Sue still have income until age 95. This is a good retirement plan.

Duration of total loss of income:	Portfolio life is reduced by:
1 year	1 to 7 years
2 years	5 to 11 years
3 years	8 to 14 years
4 years	12 to 17 years

This table shows the impact of loss of income to portfolio life.

Remember that these numbers are only approximate. In this example, the assets were just barely adequate to cover the retirement income. If the client had already in been in what I call the “Red Zone,” the impact would be more severe.

Many factors can reduce the number of years in a portfolio’s life. These include the amount of excess assets already in the portfolio, the amount each spouse earns, when the disability occurs relative to retirement age, the amount of additional expenses the disability makes ne cessary, and whether or not one can collect government disability benefits.

However, the numbers in the table above might help you convince your client that, during the accumulation stage, disability insurance is not a luxury but a necessity for proper retirement planning. A retirement plan isn’t complete or comprehensive until you have carefully examined and covered the risk of disability.

Jim Otar, CMT, CFP, is a financial planner, a professional engineer, a market technician, a financial writer and the founder of retirementoptimizer.com. His articles on retirement planning won the CFP Board Article Awards in 2001 and 2002. He is the author of “Unveiling the Retirement Myth – Advanced Retirement Planning based on Market History” and “High Expectation and False Dreams” Your comments are welcome: [email protected].

ING Offers a Simpler, Cheaper Variable Annuity

Posted on March 31, 2010 by Editor Test -

During the variable annuity “arms race,” ING was a full-fledged nuclear power. Just two years ago, sales of its LifePay Plus product, with its lavish 7% roll-up, were running over $1 billion a month.

Then the financial crisis hit, ending the arms race almost overnight. ING de-risked its product and pulled in its horns. VA sales in 2009, at $6.7 billion, were down almost 40% from $10.87 billion in 2007.

Now the Dutch-owned firm has undergone a reorganization, combining its annuity and rollover businesses into ING Financial Solutions, and it has revealed its first new variable annuity product design since the crisis.

The new variable annuity contract is Select Opportunities. The 7% roll-up has been stripped away, replaced by a simple ratchet. The price is over 100 basis points lower. It is part of a suite of products that ING introduced this spring under a new strategy that’s intended to offer advisors a variety of simplified products rather than multiple versions of a complicated one.

“We closed our other variable annuities as part of a broader strategy to take solutions to the market, as opposed to a single product,” said Bill Lowe, president and head of distribution for ING Financial Solutions.

“Before the financial crisis, every company was going after the same advisors with the same product—the variable annuity with a big benefit guarantee,” he told RIJ. “Now companies are going after different parts of the market.

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“We’ve decided to go with a multi-product strategy—the fixed, indexed, and variable annuities and a mutual fund custodial IRA-based product. From a risk/reward perspective, we’re targeting the adviser with a whole spectrum of solutions,” he added.

Select Opportunities is a bundled product, with one death benefit and one living benefit, both standard. It has three age bands and a shortened five-year surrender period that puts it “between a B-share and an L-share.” It is offered in a single life version only, with no joint-and-survivor options.

The all-in cost is about 2.25% a year, including 100 basis points for the living benefit rider, 75 basis points for the mortality and expense risk fee, and 50 basis points for the investment management.

“We’re going after any advisers who were turned off by variable annuities because of the price,” Lowe said. “There’s an inflection point where they just wont buy the product.”

The client’s annual payout rate—4% at age 65, 4.5% at age 70, and 5% at age 75—kicks in when the client enters each age band, regardless of when payments began. “It automatically steps you up, so there’s inflation protection,” Lowe said.

The contract offers 11 investment options, including three large-cap index funds, a midcap and a small cap index fund, two international equity index funds, a Treasury Inflation-Protected Securities fund, and a money market fund. The equity allocation is limited to 70% of the insured portfolio.

“We tried to keep it as simple as we possibly could,” Lowe said. “We’re trying to draw in the individual who says ‘there’s just too much optionality, it’s too confusing.’ The price is back to where annuities were in the early 1990s.”

Percentage of U.S. Households At Risk of Lower Living Standard in Retirement

Posted on March 30, 2010 by Editor Test -

Eating the Competition’s Lunch

Posted on March 30, 2010 by Kerry Pechter -

In a conference room in the old American Lithograph Building on Park Avenue in Manhattan recently, 15 female New Yorkers listened intently to a fellow New Yorker talk to them in New York-ese about how to manage their 401(k) accounts better.

The women, all employees of Landor Associates, a creative firm that manages brands for firms like Citigroup, Federal Express and Pepsico, ranged in age from 25 to 60. The instructor was Tony Truino, an energetic, nattily dressed MetLife advisor with a fast, in-your-face-but-in-a-nice-way Brooklyn patter that suited this audience to a tee.

“The rule of 25… has anybody heard of it?” Truino asked. “It’s a quick way to calculate how big of a nest egg you’ll need to retire on.” If you spend one twenty-fifth of your savings, or 4% per year, he explained, “Statistically, you won’t run out of money. But what if you spend $100,000 on health care on the first two years? I wouldn’t use the rule of 25. It’s close, but it’s not absolute.”

The concepts rained down in bunches, and weren’t easy to absorb. “My head hurts already,” remarked one of the participants. “Where’s the roulette table?” joked another, perhaps imagining a simpler way to gamble.

And so it went for almost two hours, as Truino and accountant George Gerhard, his MetLife tag-team partner, clicked through PowerPoint slides on topics like the differences between stocks and bonds (“ownership versus loaner-ship”), the security of T-bonds (“the government will always print enough money to pay you back”) and so forth.

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The women remained silent, but focused. This was serious stuff.

The seminar at Landor Associates in February was just one of dozens of similar brown-baggers conducted by MetLife advisors under the insurer’s Retirewise investment education program for 401(k) participants.

The programs, which generally consist of four two-hour mid-day sessions, have been conducted at companies all over the U.S. The subject matter ranges from the basics of investing to the complexities of retirement income planning. MetLife charges neither the participants nor the plan sponsors a fee.

Post-Crisis, people are waking up to Americans’ their overall lack of preparedness for retirement and the shortage of unbiased information for 401(k) participants about converting savings to income. Retirewise helps answers that need.

What’s noteworthy about the program is that MetLife conducts the seminars at companies where another company—like Fidelity Investments, for instance—is the 401(k) plan provider. MetLife will typically also have a relationship with the plan sponsor, perhaps the dental insurance provider.

Retirewise is therefore something of a Trojan Horse. It gives MetLife a chance to promote its brand on its competitors’ turf. Indeed, its advisors aren’t shy about offering one-on-one consultations to seminar participants when the program ends. The consultations frequently lead to rollovers to MetLife when the employees change jobs or retire.

The campaign is also noteworthy in light of the recent announcement of the formation of the Defined Contribution Institutional Investment Association, one of whose stated goals is to foster the retention of participant assets in their plans (or in “deemed IRAs” in the plan) even after they retire. If anything, the battle for participant assets is accelerating.

The program’s genesis
MetLife advisors have been conducting onsite education sessions for several years. But the roots of Retirewise in its current form go back to 2006, said Jeff Tulloch, a MetLife national sales director and manager of the insurer’s Individual Business Liaison Group, which includes Retirewise.

“It started with our CEO, Rob Henrikson, who comes out of the retirement business,” Tulloch said. “He knows we are facing a situation in America where it’s tough for a lot of people, where they’re responsible for their own retirement. So he asked us, ‘How do we leverage what we already do and apply it to what’s going in the market.’

“We looked at two of our U.S. businesses, the institutional business, which has 60,000 corporate customers, including 90 of the Fortune 100 companies, and our retail side, where we have 8,000 to 10,000 financial advisors. We started to think about leveraging those two—the customer relationships and the retail space.”

The Retirewise instructors or “specialists” include some of MetLife’s top producers. “We took a small subset of advisors who concentrate on retirement and are part of the retail field force, and we trained them as Retirewise specialists. It’s about 250 people, a small elite group whose members meet certain high-level criteria.”

A curriculum has gradually evolved over time. “We saw the lack of a comprehensive financial education program. We said, let’s incorporate things like investment principles and risk and get people thinking about their governmental benefits. There was no specific direction in terms of product or approach,” Tulloch said. MetLife does try to match the instructors with the audience, so it was no coincidence that at Landor, both the instructors and the audience were New Yorkers.

The program consists of four seminars. The first is devoted to the most basic issues: the importance of starting early to save for retirement, the principle of compounding and the Rule of 72, the impact of inflation, taxes, and fees on accumulation, the differences between various tax-deferred accounts, and so forth.

In the second seminar, the advisors describe the building blocks of a portfolio, including stocks, bonds, mutual funds and annuities. (MetLife is a leading seller of variable annuities with living benefits.) Concepts like asset allocation, diversification, and dollar cost averaging are also covered.

The third part of the program delves specifically into the transition from work to retirement. It covers payout options from defined benefit and defined contribution plans, the merits of income annuities, and the maximization of Social Security benefits. The fourth and final seminar involves aging, estate planning and insurance questions.

“We settled on a four-part program, with two hours in each part,” Tulloch told RIJ. “At the beginning, we wondered, will employees go for that? Eight hours is a long time, and you have prep work and homework on top of that. Our conclusion was, this is a lot of information to cover and even eight hours isn’t enough to do it right. So part of the message of the program is, this is just a launching pad for your financial education.”

Post-seminar consultations
So far, MetLife has conducted about a thousand Retirewise programs at about 500 different companies, reaching about 25,000 participants. People of all ages and income levels attend the voluntary sessions. The average age is about 45. An estimated 40% of the participants, MetLife has found, regard their employer-sponsored plans as the foundation of their retirement security.

Northeast Utilities, a power company in southern New England, has been the site of 25 to 30 different MetLife 401(k) education seminars over the past four or five years. The company employs 6,000 workers at four electric utilities in Connecticut, Massachusetts and New Hampshire.

Keith Coakley, the firm’s Director of Compensation and Benefits, said that NU first hosted a MetLife education program in 2004, when it invited advisors from Barnum Financial Group, an arm of MetLife, to counsel employees during NU’s transition from a defined benefit to a defined contribution pension plan. MetLife was (and is) a provider of home and auto insurance to NU employees.

Fidelity Investments is NU’s 401(k) provider. The Boston-based fund giant has offered to send its own investment counselors to NU, along with the printed education materials that it regularly sends out to its plan sponsors and participants. But NU was happy with MetLife and wanted to keep things simple.

“We don’t bring them both in,” Coakley told RIJ. “We once had a situation where we had two entities offering advice here. We found that it was a little confusing and even a little overwhelming for employees. So we decided to have one onsite presence. Employees can go to the nearby Fidelity office for advice if they want to, and Fidelity is always good over the phone.

“Prior to MetLife we had three different firms who were provided training, and it took a lot of effort to select the ones who didn’t sell so vigorously that the employees felt they were getting a sales pitch,” he added. The employees didn’t feel pressured by MetLife, and NU lost no staff time. “MetLife does all the meeting planning. We do almost nothing.”

Sober assessment
MetLife may use the soft-sell approach, but it does sell. Tulloch estimates that as many as half of the seminar attendees ask for a one-on-one consultation with an advisor after the program ends. Those meetings may or may not lead to ongoing professional relationships. But MetLife has found that the program also helps the plan provider.

“We wondered, how will this play with 401(k) providers? Would employers see how our program and the providers could work together? We found that the 401(k) providers benefit from what we’re doing,” he said.

“I was at a debriefing with an employer in California a year ago, and the human resource manager commented that after the seminar they’d seen an uptick in the contributions,” he added. “The specialists talk about increasing participant savings rates by one percent or so.”

While they’re heartened by the success of Retirewise, the program has brought MetLife officials to a sobering assessment of Americans as retirement savers.

“There’s been a verification in my own mind that we are a nation of procrastinators and spenders, who are concerned about retirement but don’t know where to start,” Tulloch added. “Employees tell us, ‘I know the basics of investing, but I don’t know how to pull it all together.’”

As MetLife spokesman Pat Connor put it, “We’ve learned that people don’t think about the retirement issue very much.”

Social Security Cash-Flow Turns Negative

Posted on March 25, 2010 by Editor Test -

The Congressional Budget Office says the Social Security system will pay out more in benefits this year than it receives in payroll taxes, an event not expected until at least 2016, The New York Times reported.

Unemployment has forced many people to apply for benefits sooner than planned while also reducing payroll tax revenue. But Stephen C. Goss, chief actuary of the Social Security Administration, said that the change would not affect benefits in 2010.

The $29 billion shortfall projected for this year is small, relative to the roughly $700 billion that should flow in and out of the system, Goss said. The system, he added, has a balance of about $2.5 trillion that will take decades to deplete. The cushion is expected to grow again if the economy recovers.

Indeed, the Congressional Budget Office’s projection shows the recession easing in the next few years, with small Social Security surpluses reappearing briefly in 2014 and 2015.

After that, demographic forces are expected to overtake the fund, as more and more baby boomers leave the work force, stop paying into the program and start collecting their benefits. At that point, outlays will exceed revenue every year, no matter how well the economy performs.

Although Social Security is often said to have a “trust fund,” the term really serves as an accounting device, to track the pay-as-you-go program’s revenue and outlays over time. Its so-called balance is, in fact, a history of its vast cash flows: the sum of all of its revenue in the past, minus all of its outlays. The balance is currently about $2.5 trillion because after the early 1980s the program ran surpluses, year after year.

Now the balance will slowly start to shrink, as outlays start to exceed revenue. By law, Social Security cannot pay out more than its balance in any given year.

For accounting purposes, the system’s accumulated revenue is placed in Treasury securities. In a year like this, the paper gains from the interest earned on the securities will more than cover the difference between what it takes in and pays out.

Vandalism Follows Obama Health Bill Signing

Posted on March 25, 2010 by Editor Test -

On Tuesday, President Obama signed H.R. 3590, the Patient Protection and Affordable Care Act bill, saying it will lead to “reforms that generations of Americans have fought for and marched for.”

On Wednesday, law enforcement officials reported that Democratic legislators had received death threats and been the victims of vandalism because of their votes in favor of the health care bill, according to The New York Times.

Meanwhile, the Senate parliamentarian has ruled informally that the “Cadillac health plan excise tax” provision in a second major health bill, the Reconciliation Act of 2010, complies with the rules governing budget reconciliation bills.

The House passed the Reconciliation Act, H.R. 4872, Sunday, but the Senate still must pass it before Obama can sign it into law. Several Democratic officials and lobbyists are predicting that Democrats can count on getting 52 votes for H.R. 4872. They are expecting the final vote to occur before the Senate leaves Friday for the two-week Easter recess.

Obama, who has often talked about the insurance struggles his own mother faced as she was dying of cancer, noted that some of the provisions in PPACA, particularly provisions affecting insurers, will take effect this year.

Republicans reacted angrily to the signing.

House Minority Leader John Boehner, R-Ohio called the event something that “looked and sounded like a liberal Democratic pep rally” for “a massive government takeover of health care.”

Sen. John McCain, R-Ariz., told an Arizona radio station that Democrats should not expect any cooperation from Republicans in the Senate for the rest of the year, according to The Hill, a Washington newspaper.

Officials in Florida, Pennsylvania, Texas and 11 other states have filed a suit to block implementation of PPACA is the U.S. District Court for the Northern District of Florida. The states are objecting to provisions that require individuals to have health coverage and provisions that would require states to pay to expand Medicaid programs.

Tom Currey, president of the National Association of Insurance and Financial Advisors, Falls Church, Va., said NAIFA members “are pleased that Congress has recognized the positive role that health insurance agents can play in helping small businesses and individuals acquire appropriate health insurance plans.”

If PPACA takes effect as written, agents should still to be able to perform their traditional role, Currey said, adding that he likes a provision that would increase penalties for individuals who fail to have health coverage.

Hartford Financial Prepares to Repay U.S. Treasury

Posted on March 25, 2010 by Editor Test -

Hartford Financial Services Group Inc. has completed the previously announced stock and debt offerings it is using to get out of the U.S. Treasury’s Capital Purchase Program, National Underwriter reported.

Hartford Financial borrowed $3.4 billion in 2009 from the CPP, which is part of the Troubled Asset Relief Program. To pay back the CPP obligations, Hartford has sold:

About 60 million shares of common stock.
23 million “depositary shares,” which each represent a 1/40th interest in a share of Hartford’s 7.25% Mandatory Convertible Preferred Stock, Series F.
$1.1 billion of senior notes, including $300 million in 4.00% senior notes due 2015, $500 million in 5.50% senior notes due 2020, and $300 million in 6.625% senior notes due 2040.

The underwriters exercised options to buy 7.3 million shares of the common stock and 3 million depositary shares. Hartford is seeking approval to use $425 million in debt offering proceeds and the proceeds of the stock and depositary share offerings to pay the Treasury back by repurchasing preferred shares it issued through the CPP program.

Hartford will use the rest of the senior-note offering proceeds to prepare to re-pay debt that will mature this year and next year.

“We were pleased with the execution of the capital raise,” Hartford Chairman Liam McGee says in a statement. “There was a high level of investor interest in our offerings and pricing was favorable, reflecting confidence in the Hartford’s future.” The Treasury Department will still have warrants to buy Hartford common stock. Hartford has not announced plans to buy the warrants back.

More Assets Moving From 401(k)s to IRAs

Posted on March 25, 2010 by Editor Test -

More people are rolling over their 401(k) savings into IRAs when they leave their jobs or retire, according to research published today by Charles Schwab, Pensions & Investments reported.

The research found 69% of assets held by 401(k) participants were distributed from former employers’ plans within 12 months of leaving a job, confirmed Eric Hazard, a spokesman for Schwab. Thirty-one percent kept their money in their former employer’s 401(k) plan.

Of the assets that were moved, 80% were rolled over into IRAs, 10% were taken in cash distributions, 8% were moved into new employer plans and 2% were taken in other forms of distributions, according to a Schwab news release on the report.

The research was based on records of 12,198 employees who left jobs in the fourth quarter of 2008; Schwab then checked where the employees had distributed their 401(k) assets by the end of 2009. The data were obtained from a database of 1.5 million participants in Schwab-administered 401(k) plans, Mr. Hazard said.

“We are definitely seeing an uptick in the number of 401(k) plan participants who choose to roll over plan assets instead of cashing out or leaving savings with a previous employer,” Catherine Golladay, vice president of 401(k) advice and education at Schwab, said in the release.

In an earlier study, Schwab found that among participants who left an employer in the first quarter of 2008, 57% of assets were moved out a former employer’s plan by the first quarter of 2009, while 43% of assets remained in the plan, the news release said.

Of those distributed assets, 75% were rolled over into IRAs, 14% were taken as cash distributions, 7% were transferred to new employer’s plans and 4% were taken in other forms of distributions, Mr. Hazard said.

Australians Want More Workplace Savings

Posted on March 25, 2010 by Editor Test -

Sixty-one percent of Australians support a rise in the Superannuation Guarantee to 12% and are prepared to pay for it with a direct contribution from their wages, according to a survey released March 15 by the Australian Institute of Superannuation Trustees.

Superannuation Guarantee is the official term for compulsory contributions to retirement funds made by employers in Australia on behalf of their employees. An employer must contribute the equivalent of 9 per cent of an employee’s salary.

There’s more to the situation than the contribution rate, however. The Australia system of private retirement accounts funded by employer contributions, which supplements a state old-age pension and private savings, is complicated by the way contributions are taxed, by the still-meager savings of older workers for whom the program arrived late in life, and controversies over the fees and commissions paid to the managers of the retirement funds.

The AIST-commissioned consumer survey, conducted March 3-11, was released at the Conference of Major Super Funds in Brisbane, according to Investment magazine in Sydney. It suggests many Australians are concerned that their current level of super contributions won’t provide them with enough retirement income.

AIST CEO Fiona Reynolds said it appeared that the community was ahead of the views of most politicians on the need to lift the level of super contributions.

“It seems that both the super industry and the public understand that 9% … is not going to deliver a comfortable retirement. We hope this message is received by the government and … that steps are taken to improve adequacy within our retirement incomes system,” Ms. Reynolds said.

The Superannuation Guarantee contribution was originally set at 3% of the employees’ income, and has been incrementally increased by the Australian government.

Since July 2002, the minimum contribution has been set at 9% of an employee’s ordinary time earnings. The 9% doesn’t apply to overtime rates but is payable on bonuses and commissions.

Although compulsory superannuation is now popular, small business groups resisted it at first, fearing the burden associated with its implementation and its ongoing costs.

After more than a decade of compulsory contributions, Australian workers have over AU$1.177 trillion superannuation assets. Australians now have more money invested in managed funds per capita than any other economy.

Financial Execs Invited to Endorse ‘Fiduciary Statement’

Posted on March 25, 2010 by Editor Test -

A dozen well-known economists, academics and writers, including Vanguard founder John Bogle and Nobelists George Akerlof and Daniel Kahneman, have called for a “Fiduciary Standard” apply to all who provide investment or financial advice.

Such protests notwithstanding, legislators have dropped the imposition of a fiduciary standard on all intermediaries from the financial reform bill now moving through the Senate. A fiduciary standard would require all financial intermediaries to put the interests of clients ahead of their own.

“Restoring the faith of investors must begin with a demand that investment and financial advisors stand up for the rights of their clients,” wrote Bogle, whose company often insists that its only loyalty is to its customers. “No man can serve two masters.”

In 2008, an SEC-commissioned RAND Corporation study found that most investors don’t understand that financial intermediaries, such as insurance agents, registered representatives and Certified Financial Advisors, operate under very different standards or burdens of trustworthiness.

The Committee for the Fiduciary Standard, a volunteer group of investment industry leaders and practitioners, was formed last year to inform and nurture discussion of the fiduciary standard as presently established under the Investment Advisers Act of 1940.

It created a Fiduciary Statement, and has invited the executives of several large brokerage firms to endorse its principles and extend the Fiduciary Standard to registered representatives. The executives include Brian Moynihan and Sallie Krawcheck of Bank of America, Jamie Dimon of JPMorgan Chase, John Mack of Morgan Stanley, and Lloyd Blankfein of Goldman Sachs.

The Fiduciary Statement has been endorsed by:

George Akerlof, Ph.D., Nobel Laureate in Economics 2001
Dan Ariely, Ph.D., Duke University
Cliff Asness, AQR Capital
John C. Bogle, founder, The Vanguard Group
Roger Ibbotson, Ph.D.,  Zebra Capital Management, LLC
Daniel Kahneman, Ph.D., Nobel Laureate in Economics 2002
John D. Markese, Ph.D., American Association of Individual Investors
Don Phillips, Morningstar
Jane Bryant Quinn, author
V. Daniel Radford, Ullico Investment Company
Terry Savage, author
Richard Thaler, Ph.D., University of Chicago

Fiduciary Standard Stripped From ‘Dodd Bill’

Posted on March 25, 2010 by Editor Test -

The Senate Bank, Housing and Urban Affairs Committee approved two changes to the “Dodd bill” on financial regulatory reform that had been sought by the insurance industry, National Underwriter reported.

One of the two changes in the Restoring American Financial Stability Act would eliminate the need for all but one insurer to help pre-fund a “Resolution Authority,” or bailout fund, for troubled financial services companies that threaten the financial system.

An earlier version of the bill would have required any financial services company with more than $50 billion in assets to contribute to the Resolution Authority fund. The fund is supposed to accumulate about $50 billion in cash in 5 years.

Dodd change the provision to read, “and any nonbank financial company supervised by the Board of Governors” of the Federal Reserve System. The change means that MetLife Inc. is the only insurer that would have to help pre-fund the Resolution Authority, according to a lawyer who represents an insurer.

If the failure of a large company depleted the fund, all non-health insurers with more than $50 billion in assets might have to contribute, the lawyer says.

The Resolution Authority would be overseen by a new Financial Stability Oversight Council consisting of 11 federal regulators and one insurance representative appointed by the president. The Treasury secretary would lead the council.

The second of the two changes sought by insurers would weaken an effort by Sen. Herbert Kohl, D-Wis., chairman of the Senate Special Committee on Aging, to impose a fiduciary “standard of care” on all sellers of retail investment products.

The latest version of the RAFSA bill would not impose a universal fiduciary standard. Instead, the bill would require the U.S. Government Accountability Office to study the effectiveness of state and federal regulations that govern intermediaries.

Consumer groups and financial planner groups have been pushing for Congress to make the U.S. Securities and Exchange Commission apply a “fiduciary standard of care” to all providers of personalized investment advice.

A fiduciary standard would require broker-dealers and life insurance agents affiliated with broker-dealers to put the interests of customers above all other interests.

Broker-dealers and life insurance agents want the SEC to continue to regulate them using a standard of care based on suitability, which requires broker-dealers and agents to verify only that the products that a customer buys are suitable for those customers.

Life agents say they would have a difficult time meeting a fiduciary standard, because they often have contracts permitting them to sell products only from one company, or from a small group of companies.

RIJ Receives a Tough-Love Letter

Posted on March 25, 2010 by Editor Test -

A few weeks ago, when Cogent Research sent me survey results showing that Americans have negligible interest in retirement income products, it perplexed me. I seemed to remember hearing exactly the opposite from Cogent in the past.

But, as blind as Justice Herself, I published the news in our March 3 issue, under the headline, “Not Much Interest in Income Products: Cogent.”

The terrible swift sword of retribution quickly followed. It came from my good friend Garth Bernard, whom many RIJ readers know as the former MetLife retirement executive and ardent immediate annuity advocate who since 2008 has been president and CEO of Sharper Financial Group.

Garth wrote to me: “I wanted to express my great disappointment that the RIJ is part of perpetuating this type of nonsense. Yes, strong words, but I want to be very clear that that is what this type of survey is: garbage passing for science.”

This was a stern rebuff, daunting even for a former beat reporter who has, both literally and in the perusal of mortality tables, looked death in the face.

“The issue with surveys of this type is that they ask the wrong questions,” Garth continued. “Cogent itself apparently doesn’t get the point that the way you serve up a question in a survey heavily influences the answers you get.

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“It is like reporting on a survey which asked respondents, ‘Would you use an mp3 file?’ vs. ‘Would you use an iPod?’ I’ll bet that most of the folks who own an iPod may not even know what format the files are in, nor do they care!”

Garth furnished evidence that the “framing” of questions about annuities determines the answers. In closing, he wrote, “I believe that as the editor of such a fine and valuable publication in this area, you would appreciate this pointed feedback.”

I thanked him. Then I wrote a note to Cogent saying that some of my readers—assuming that a single vocal critic stands for a dozen silent ones—seemed to be confused by the apparent inconsistency of Cogent’s data.

Cogent project director Carrie Merrick responded within a day. The apparent contradiction in reports was superficial, she said.

“I think your readers may be referring to Cogent’s 2010 Investor Brandscape study which reported that ownership of annuities (including fixed and variable) is on the rise across all age and wealth segments, particularly Silent Generation investors. Gen X investors are also far more likely to own annuities in 2009 compared to just three years ago,” she wrote.

“We also found that allocations to annuities have increased significantly since 2006, primarily driven by an increased commitment to the products among existing owners.

“In contrast, the retirement income research referenced recently in our newsletter was about ‘retirement income products’ as a whole—with no specification of product type. The low 15% who reported owning ‘retirement income products’ simply highlights the need for more education and understanding on what these products are and the benefits they provide.

“For example, not all people who own annuities said they own a retirement income product—which means they either don’t understand that it is or don’t want to use it in that way. Either way, more education is needed. These themes are explored in detail in our report and will be highlighted in the news release we plan to send out.

“In fact, our retirement income research does complement our Brandscape results in two ways:

“Our findings show that the level of interest in retirement income products—reported in our article at 38%—is on par with, if not higher than, annuity/retirement income product usage levels overall. In addition, our retirement income research shows that this interest is much higher among pre-retirees than those already retired—which is in line with our Investor Brandscape data showing increasing trends in annuity usage.

“Both trends are likely the result of increased risk aversion based on the recent recession and people ‘waking up’ to the idea that they’ll need help to guarantee their income stream in retirement. It’s just that the idea today of a ‘retirement income product’ per se is not well understood or positioned to maximize appeal (we find that investors prefer strategies over products), and our report attempts to address this disparity.”

There you have it. Case closed and off to the morgue.

We received another letter recently, thanking us for amending an error in our feature article, “Easing a Widow’s Hardship” (RIJ, February 10, 2010):

“I did not purchase your article but I was pleased to see that you have issued a correction. My 35 years of experience with the Social Security Administration taught me one lesson above all others: Avoid making sweeping generalizations about how much a widow or widower can expect to receive upon the death of their spouse. The computations are complex and subject to too many variables to simply say that a surviving spouse will always get the higher of their own retirement or the widow’s benefits.

“While it is important to understand that taking reduced retirement benefits can adversely affect the amount payable to the surviving spouse, I recommend couples seek expert advice based on the specifics of their relative ages and benefit amounts before deciding whether to apply at 62 or wait until their full retirement age.

“Now that I have retired from Social Security, I offer this expert analysis to help people maximize their income from Social Security. My web site, www.StepUpSocialSecurity.com, explains the services I provide.

By Diane Owens, speaker and consultant, founder of Step Up Your Social Security.

Much appreciated. Please send your remarks, questions, criticisms, or story suggestions to [email protected].

Private Debt Outstanding, U.S., 1916-2009 (As % of GDP)

Posted on March 25, 2010 by Editor Test -

Floor It!

Posted on March 25, 2010 by Editor Test -

Seekers of enlightenment travel to Sedona, Arizona to drink from the region’s legendary font of spiritual energy. So Michael J. Zwecher still marvels that he just happened to be there, after attending the 2008 Super Bowl, when he received his life-changing insight about retirement portfolios.

“In Sedona, it dawned on me that you could make a lot of the retirement income framework compatible with an accumulation framework,” he told RIJ recently. “You simply had to reformat it a little bit.

“You just shift the fixed income component of your portfolio from an amorphous blob of relatively safe securities into something that delivers an outcome. Not just safe—but delivers a tangible outcome.”

That was two years ago, when Zwecher took the first step on an intellectual journey that led him from risk management at the pre-BofA Merrill Lynch to finishing a book that shows financial advisers how to build outcome-based portfolios for retirees.

In the book, Retirement Portfolios: Theory, Construction, and Management (John Wiley & Sons, 2010), whose text is by turns technical, straight-forward and lyrical, Zwecher proposes that retirement investing is very different from pre-retirement investing.

The first is comparable to flying a plane at 30,000 feet; the other, as he put it, is like trying to land that plane on an aircraft carrier deck. “With a perpetual horizon,” he writes, “there will always be another whack at the cat and the world isn’t about to end; riding out a storm may be a feasible tactic… In retirement, the strategy is to protect lifestyle and there is only one whack at the cat.”

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In pursuit of that protection, the book advocates the division of a retiree’s assets into “flooring”—comprised of sources of guaranteed income such as Treasury strips, income annuities, private pensions or Social Security—and everything left over, which provides emergency cash, a planned bequest and money for growth or “upside potential.”

While Zwecher’s book (and accompanying workbook) is useful for any adviser, it is actually a required text in the core curriculum of the Retirement Management Analyst designation, a new credential created by the Retirement Income Industry Association, or RIIA, which held its annual conference in Chicago this week. (See cover story, “Spock-o-nomics at the RIIA Meeting.”)

RIIA, for those who are not familiar with it, is an organization started in 2005 by Francois Gadenne, a French-born, Boston-based entrepreneur in the retirement field. He had been urged by friends in the financial services industry to start a new kind of trade group.

What the industry needed, they said, was a forum where all sectors of the retirement industry—advisers, economists, asset managers, insurers—could swap ideas. It would take a blend of views from all of those “silos,” they believed, to create income solutions for retiring Boomers.

Gadenne and Zwecher met a few years ago and found that they shared similar ideas about retirement income. When Zwecher left Merrill Lynch they collaborated on the creation of the RMA designation and co-wrote an RMA training manual, How to Benefit from the View Across the Silos (RIIA Publishing, 2009). It and Zwecher’s new book are the basic texts for the designation.

Advisors who have never considered any retirement income strategy for their clients other than the systematic withdrawal of four percent per year from a balanced portfolio should find Zwecher’s book eye-opening. On the hand, advisors who are accustomed to building bond ladders or incorporating annuities into their retired clients’ will find themselves in fairly familiar territory.

Zwecher’s system shares some of the elements of so-called bucketing methods. It involves different pots of money for generating a reliable retirement paycheck, for emergencies, and for potential growth. But he doesn’t believe that stocks can ever be fully relied on to produce income—even when given a time horizon of 15 or 20 years.

The ideal reader for Zwecher’s book is an advisor who is a “student of the game” and who enjoys thinking about this stuff. The ideal clients for the solutions described in the book would be people whose annual income needs in retirement will be more than 3.5% but less than 7% of their investments.

As the book explains, people who need less than 3.5% a year can generally afford to live on interest and dividends. Those who need more than 7% of their savings each year often need help from income annuities, whose “mortality credits” can help make up for a shortage of savings.

The book is filled with nuggets that are likely to stick in the mind: “We want to change the focus from volatility to outcomes,” and “Having the flooring in place creates a freedom in the upside portfolio that was not previously there” and “Lifestyle relative to wealth and not just the wealth level that matters for a flooring recommendation.”

In one memorable passage, Zwecher writes, “Portfolios are occasionally described as gardens to be watered, weeded, and pruned. Even if your portfolio were a garden, your portfolio isn’t meant as a flower garden, but a vegetable garden. You probably didn’t work hard and save money just to create something decorative… your portfolio is not an end in itself, but a means to achieve your ends.”

The financial crisis, Zwecher believes, is making more clients question the value of financial advice. “Trying to pick winners is the weakest way for advisors to earn their fee,” he told RIJ. Going forward, he thinks, advisors can best justify their fee by ensuring that the client’s portfolio achieves its primary mission: providing lifetime income.

Spock-o-nomics at the RIIA Meeting

Posted on March 24, 2010 by Kerry Pechter -

CHICAGO—Clad in dark jacket and turtleneck, Moshe Milevsky beguiled the Retirement Income Industry Association’s conference Tuesday with a presentation about investor behavior on Vulcan, the Class M planet where Mr. Spock was born.

The specific topic was “longevity risk aversion.” You may never have heard of it, and neither had most of the 135 or so attendees at RIIA’s spring meeting, which is to its industry what the Democratic National Convention is to politics—at least in its diversity of viewpoints.

Milevsky, the well-known goateed Toronto-based finance professor and writer, asked the gathering at Morningstar/Ibbotson headquarters to imagine a Planet Vulcan where the inhabitants had only one investment option, risk-free inflation-protected bonds with a real return of 2% to 2.5%.

Vulcans differed, however, in their fear of outliving their money and in their access to pensions. Milevsky’s advice to them was that the less they feared outliving their money and the larger their pension or annuity income, the more they could spend each year in retirement.

That may sound reasonable on its face. But it collides like a maverick asteroid with two pieces of conventional wisdom: that 4% is the proper asset drawdown rate in retirement and that stocks are the proper investment for people who are afraid they might survive long enough to exhaust their assets.

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“Don’t scare people by saying you have to invest in stocks if you expect to live to age 95,” said Milevsky, who is the author of, most recently, Your Money Milestones: A Guide to Making the 9 Most Important Financial Decisions of Your Life (FT Press, 2010).

‘Floor, Then Upside’
Not everyone in Morningstar’s corporate auditorium—which its striking view of the 50-ft sculpture by Picasso in Daley Plaza and Chicago’s pillared, classical-revival City Hall—may have accepted Milevsky’s assumption that people who are averse to longevity risk are equally averse to financial risk.

But that seemed to be fine with RIIA president Francois Gadenne, who confessed in his conference-concluding remarks Tuesday that he loves a good intellectual tussle. The same might be said for most of RIIA’s eclectic and distinguished membership, which includes insurance company executives, mutual fund executives, economists and other academics, software vendors and income-oriented advisors.

Its sixth spring conference is a turning point for RIIA. It marks the most public introduction so far of the books, training program, and professional designation—the Retirement Management Analyst—that RIIA leadership has been developing for more than a year.

The philosophy behind the designation is “build a floor, then create upside.” As a group, RIIA believes that pre-retirement or “accumulation” investing is fundamentally different from investing during retirement. In the latter, reducing risk becomes paramount.

This idea doesn’t simply mean adopting a more conservative asset allocation or other wealth preservation tactics in retirement. It means that retirees should lock down a safe, adequate income—from pensions, Social Security, annuities, laddered bonds, or structured notes, etc.—before putting money at risk.

[See accompanying feature story “Floor It!” on Michael J. Zwecher’s new book, Retirement Portfolios: Theory, Construction and Management (John Wiley & Sons, 2010), which is required reading for the RMA designation.]

This concept is somewhat heretical. It strikes at Jeremy J. Siegel’s bullish dogma that, on average, stocks pay off in the long run. RIIA contends that on average isn’t good enough in retirement, where an ill-timed fat-tail event can mean a diet of cat food for the elderly. Stocks, many RIIA members might concede, aren’t necessarily bad for retirees. But they aren’t good for money that retirees can’t afford to lose.

It’s no coincidence that, more so than most retirement industry groups, RIIA has academics and economists among its members. Their conservative viewpoint reflects their focus on public policy rather than the exciting, but ultimately zero-sum outcomes produced by the financial markets.

On the other hand, that philosophy doesn’t preclude profits, and the stocks-are-just-for-mad-money idea was implicit to some extent in most of the presentations at the conference, including the presentations by leading marketers of retirement products and planning tools.

Income products and processes
On the product side, for instance, Tom Streiff of PIMCO talked about his firm’s TIPS funds, which pays out a predictable, inflation-protected income over either 10 or 20 years. Tom Johnson of New York Life followed with a discussion of the mortality credits embedded in immediate annuities.

On the planning side, Jack Sharry of LifeYield explained his company’s proprietary strategies for tax-efficient decumulation. Boston University economist Larry Kotlikoff presented his widely-used ESPlanner software, which focuses on maintaining a consistent standard of living in retirement through “consumption smoothing.”

Whether stocks pay off in the long run was the central issue in a panel discussion on the usefulness of time-segmented retirement planning methods. “Time-segmented” or “bucket” methods generally include the many strategies that dedicate certain assets in a retirement portfolio to fulfilling income needs during specific segments of time, usually ranging from one to five years.

The panelists—Gary Baker of Cannex Financial Exchanges, Sherrie Grabot of Guided Choice, Tom Idzorek of Ibbotson, Larry Kotlikoff and moderator Richard Fullmer of Russell Investments—were asked whether it makes sense to assign progressively riskier assets to the buckets, so that a bucket designated for liquidation in 20 years, say, could safely be stuffed with emerging market small-cap stocks on the presumption that they are likely to “mature” in value by then.

This narrow question was a bit of a straw man, and the discussion was not conclusive. But it seemed to settle on the fact that many people do find time-segmentation or buckets to be a useful framework for retirement income planning. And it was noted that bucketing doesn’t require investing in stocks, or the belief in stocks-for-the-long-run, to be useful.

In his presentation, Milevsky approached the risky assets issue from a different angle. He suggested that there’s an “internal contradiction” in telling people who are worried about outliving their assets to put more money in equities. “You can’t deal with extreme aversion to longevity risk only with stocks,” he said.

His slide show, and the paper it was based on, “Spending Retirement on Planet Vulcan,” suggested—somewhat counter-intuitively—that adding annuities to a retirement portfolio is a better way to enhance the retirement drawdown rate and to make your money last than adding stocks.

“If you worry about living, which is different from expecting to live,” he told RIJ, “then you should increase your allocation to annuities rather than gambling on stocks, which is inconsistent with said risk aversion.”

401(k)s: They’re Not (Necessarily) Just for Employees Any More

Posted on March 24, 2010 by Editor Test -

Among the things that a retiring employee could traditionally expect from his or her employer – gold watch, cakes, cards, and golf- or gardening-related gifts – they could also be pretty sure they’d soon be booted from the company 401(k) plan.

Since these retirement savings plans were introduced in 1978, companies generally haven’t allowed non-employees to hitch a free ride, since the cost of keeping them in the plan outweighed the advantages of keeping their dollars in the plan.

More recently, however, the tide has begun to turn among employers, retirees, record keepers and regulators that could keep more retirees in their 401(k) plans well into, or even straight through, their retirement.

Anecdotal evidence certainly supports the notion that this will become a trend. At recent meetings PIMCO had with 18 large plan sponsors, a show of hands indicated that a decade ago, none of the plans would have considered keeping retirees. But today, all 18 say they want to keep retirees on the plan, and 16 said they are actively developing plans to retain them.

Though it’s hard to know exactly how strong the trend will be, the stage is certainly being set for an increasing number of retirees to stick with their 401(k) plans. And it’s nearly certain that at least some plans will start to do whatever they can to retain retirees’ assets in the years to come, and that many savers will likely be attracted to the benefits of staying in a plan.

The Employer’s View
Companies have traditionally wanted to get retirees out of the plan as fast as possible because they didn’t want to foot the bill for administrative tasks, answering questions and dealing with ad hoc withdrawals for people who were no longer with the company. Compounding this was the even larger problem that they simply didn’t have the administrative capability to write the regular checks that retirees often need to meet their day-to-day spending needs.

In recent years, however, record keepers have started developing technologies that can help 401(k) plan sponsors more economically meet retirees’ needs, including installment plan methodologies that can efficiently make regular monthly payments. It’s clear that all the economies and efficiencies aren’t built in yet, but as the processes improve and become more prevalent, it will likely continue to diminish employers’ aversion to keeping retirees.

As recordkeeping improves, other potential advantages of retaining retirees start to emerge, particularly the benefit of keeping assets – usually the largest balances in the plan – on the plan’s books. The more assets in the plan, the more administrative costs are spread out, and the more economical it may be for all participants. Many plans are also finding that not all retirees start drawing money from their plans in the early years, as they rely on other funds such as Social Security or money they’ve already paid taxes on. So not only do the big balances often stick around longer than the employer might expect, but the retirees do not necessarily require much service beyond simple administration.

The Retiree’s View
Just as plans have historically wanted retirees out, there is a whole industry made up of brokers, advisers, planners and certain mutual fund companies that are eager to acquire retirees by rolling over their 401(k) savings. PIMCO estimates that assets eligible for rollover out of defined contribution plans will be almost $400 billion this year alone, and it’s clear there will be lots of players competing to manage that money.

For a retiree, this means the options are growing, and each has trade-offs that warrant consideration. On one side of the equation are retirees who don’t have, or care to have a full-service financial advisor, whether for cost savings or other reasons. Typically the investment choices inside 401(k)s often have institutional pricing, which can carry lower expense ratios than share classes on other platforms. In an effort to retain retirees, some companies have also begun to build programs aimed at helping savers plan for retirement and offering guidance on how they can meet their goals.

On the other side of the coin, we feel it’s abundantly clear why some retirees would want to leave the plan in favor of a full-service adviser relationship. While employers are offering guidance and other services, they are unlikely to completely capture the retiree’s total financial condition and therefore are not likely to offer a comprehensive financial plan as a full-service adviser would.

Potential Policy Tailwinds
There also seems to be some political wind blowing in support of policy that makes it easier or more attractive for plan sponsors to retain retirees. Recently, the Treasury Department and the Department of Labor sent a request for information to a broad swath of the financial services industry, looking for feedback on the variety of methods of offering guaranteed lifetime income benefits inside 401(k) plans. Since this was simply a request, it’s hard to know if it will lead to regulatory or legislative outcomes. Nonetheless, by canvassing the industry on the subject, the government is showing a clear interest in finding new ways for retirees to get guaranteed lifetime income options, including within employers’ 401(k) plans.

A Changing Perception
Since their introduction more than three decades ago, 401(k) plans have been almost exclusively a tool for the accumulation phase of retirement savings, but there is growing momentum towards efforts to make them a credible choice for the decumulation phase as well. As employers make efforts to push the trend forward, advantages are emerging for both the retiree and the plan. With defined benefit plans and Social Security unlikely to be primary sources of retirement income in the future, policymakers are also taking measures to determine whether 401(k)s present a potential platform for distributing lifetime guarantee benefits to retirees.

It’s unlikely that plan sponsors will supplant the holistic advice offered by the financial advisory industry, but they do represent an emerging alternative for delivering retirement income.


PIMCO’s recently introduced Real Income 2019 Fund and Real Income 2029 Fund are designed to provide monthly inflation-adjusted distributions made up of both interest and principal which are paid out until the funds reach their final maturity date. The funds replicate TIPS in the maturity gaps that exist, creating an efficient and systematic means of providing income in retirement. Although TIPS are guaranteed by the U.S. government, the funds’ distributions are not guaranteed. The funds pursue all the best qualities of TIPS, with a frequency of income payments designed to help meet the needs of most retirees.

To receive more information about Real Income 2019 and Real Income 2029 Funds, please provide the following information:	Email
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This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626.©2010, PIMCO.

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

Financial Reform Bill Released by Senator Dodd

Posted on March 17, 2010 by Editor Test -

Senator Christopher Dodd (D-CT), chairman of the Senate Committee on Banking, Housing and Urban Affairs, released a draft of his financial reform bill on March 15.

A summary of the bill’s main provisions was published by the blog, OpenCongress.org, including the following highlights:

Consumer Protections with Authority and Independence: Creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.

Ends Too Big to Fail: Ends the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by:

Creating a safe way to liquidate failed financial firms.
Imposing tough new capital and leverage requirements that make it undesirable to get too big.
Updating the Fed’s authority to allow system-wide support but no longer prop up individual firms.
Establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.

Advanced Warning System: Creates a council to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy.

Transparency & Accountability for Exotic Instruments: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated—including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.

Federal Bank Supervision: Streamlines bank supervision to create clarity and accountability. Protects the dual banking system that supports community banks.

Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation.

Protects Investors: Provides new rules for transparency and accountability for credit rating agencies to protect investors and businesses.

Two Insurers, Two Multi-Media Web Strategies

Posted on March 17, 2010 by Editor Test -

Two major retirement product providers, The Principal and AXA Equitable, have established new multi-media web portals, one to appeal to crisis-battered Americans and the other reaching out to bloggers and reporters.

Principal Financial Group has launched “AmericaRebuilds.com,” an online planning center that’s designed “to engage, educate, inspire and motivate Americans to take action,” the company said in a release.

The site features educational tools, videos and guidance from third-party financial experts and advisors; videos and stories of Americans and their businesses at different stages of rebuilding; financial calculators; and assistance finding an advisor.

The Principal will partner with Time Warner divisions, Time Inc. and Turner broadcasting to drive traffic to the site. With appearances by financial expert Jean Chatzky, the campaign includes a category exclusive sponsorship of CNN’s “Building Up America” series across CNN, HLN and Airport Networks.

The Principal’s “Rebuild” advertisements will run throughout national print, broadcast, cable, financial trade and local business journals, as well as NCAA basketball and football event sponsorships.

The effort also includes a mobile website that furnishes users with a retirement planning calculator; information about budgeting, saving and other goals; savings tips; an advisor locator; and a calendar with reminders to call advisors.

AXA Equitable Life Insurance, meanwhile, has announced the launched “The Source,” a multi-media Web site linked to the company’s existing online press room. It’s intended to promote AXA Equitable as a resource and thought leader on financial protection and retirement planning.

“Innovation remains the fabric of our communications efforts,” said Barbara Goodstein, executive vice president and chief innovation officer. “The Source is the latest example of how the tools at our disposal—notably technology and creativity in this case—help to create a unique platform of learning.”

AXA Equitable hopes bloggers as well as traditional media will use The Source to keep up on financial security trends and the growing pressure on individuals to generate retirement income beyond Social Security and employer-sponsored plans.

Multi-media content now on the site includes highlights of a forum that featured former Federal Reserve Board Chairman Paul Volcker, a look at trends in inflation, interest rates and taxes, and a video that reports on the unique financial needs of women.

New Research Analyzes Benefits of Roth Conversion

Posted on March 17, 2010 by Editor Test -

A new research brief from the Center for Retirement Research at Boston College demonstrates that converting assets from a traditional tax-deferred IRA to a tax-free Roth IRA is most likely to benefit people who:

Expect their income tax rates to rise after they retire.
Want to defer withdrawing money from their IRAs longer than the rules for traditional IRAs permit.
Wish to boost their total IRA balances more than the restrictions on their annual contributions will allow.

The brief, “Should You Convert a Traditional IRA Into a Roth IRA?,” by Richard W. Kopcke and Francis M. Vitagliano, indicates how large the potential market for Roth conversions in 2010, when could be.

“In 2008, the assets in IRA accounts totaled $3.6 trillion,” they write. “These balances exceed, by significant margins, the assets held in defined benefit pension plans and in other defined contribution plans. Traditional IRAs account for more than 95% of total IRA assets.

These conversions will appeal to those who are likely to find that the mandatory distribution rules for traditional IRAs force them to withdraw their balances too soon. Roth accounts give retirees who have adequate financial resources more latitude for making withdrawals in the most favorable manner.

The study also suggests that Roth IRAs enable retirees to leave a larger bequest to their spouses or other heirs. “This option should be particularly valuable to people who expect their IRA savings to provide retirement income for dependents,” the brief said.

Beginning this year, the Tax Increase Prevention and Reconciliation Act of 2005 allows all workers with traditional IRAs to transfer all or part of their balances into Roth IRAs without restriction.

People who have 401(k) plans with former employers can participate as well. The balances in 401(k) plans can be rolled over into traditional IRAs, without penalty or restriction, once people stop working for the sponsoring employer.

Those who hold old 401(k) accounts can convert these balances directly into Roth IRAs, as provided in the Pension Protection Act of 2006. People who convert their balances must include the amount of their transfer in their taxable income.

Those who make transfers in 2010 have the option of paying the tax entirely this year or including half the transfer in taxable income in 2011 and half in 2012. In the future, the tax must be paid entirely in the year of the transfer.

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