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Genworth Financial Announces 1Q 2010 Results

Posted on May 5, 2010 by Editor Test -

Genworth Financial is much healthier than it was a year ago.

The Richmond-based company reported net income of $212 million in the first quarter of 2010 (before provision for non-controlling interests), compared to a loss of $469 million in the first quarter of 2009. Net operating income was $147 million, up from $14 million a year ago.

Genworth’s results in the quarter included net operating income of $122 million from the Retirement and Protection segment and $91 million from the International segment. This was partially offset by lower net operating losses of $36 million in the U.S. Mortgage Insurance (U.S. MI) segment and a loss of $63 million in Corporate and Other. The impact of foreign exchange on net operating income in the first quarter of 2010 was a favorable $19 million.

Net income in the quarter included a $106 million tax benefit related to separation from the company’s former parent recorded in the first quarter of 2010.

The company spun off ownership of 42.5% of Genworth MI Canada last fall with an initial public offering (IPO) transaction, raising net income available to common stockholders to $178 million the first quarter of 2010. On the same basis, net operating income available to common stockholders for the first quarter of 2010 was $114 million.

Net investment losses, net of tax and other adjustments, decreased to $42 million from $483 million in the first quarter of 2009, and decreased on a sequential basis from $54 million in the fourth quarter of 2009. Net unrealized investment losses, net of tax and other adjustments, declined to $900 million from $4.1 billion in the prior year quarter.

Retirement and Protection earned $122 million compared to $38 million a year ago. Consolidated U.S. life insurance companies ended the quarter with an estimated RBC ratio of approximately 385%.

Retirement income fee-based earnings increased to $17 million from a $27 million loss in the prior year. Results in the prior year were significantly impacted by declines in the equity markets, which accelerated deferred acquisition cost (DAC) amortization and reduced variable annuity income. Earnings in the current quarter reflected equity market growth, lower death related claims and an $8 million favorable DAC amortization adjustment. Total variable annuity sales increased to $205 million compared to $143 million in the prior year from improved equity market conditions.

The retirement income spread-based business had net operating income of $17 million compared to a loss of $20 million in the prior year from improved investment income. Earnings in the prior year included a $39 million loss from lower valuation of limited partnership (LP) investments. Total spread-based AUM remained flat sequentially ending at $18.9 billion reflecting the company’s targeted annuity strategy and favorable persistency.

Life insurance earnings decreased to $37 million from $38 million a year ago as improved investment income and lower taxes were more than offset by less favorable mortality, lower persistency on policies coming out of the post level term period and a $5 million unfavorable correction related to the calculation of ceded reinsurance premiums.

Total life sales reflected a mix shift to the new more capital efficient product suite as well as lower universal life (UL) excess deposits associated with the low interest rate environment. Sales from the combination of term life insurance and the new Colony Term UL product grew 26% versus the prior year and 9% sequentially. The more capital efficient Colony Term UL product, in late 2009, demonstrated strong producer adoption.

LTC earnings declined $1 million to $40 million, as higher net investment income was more than offset by higher claims on old generation policies and a return to lower levels of policy terminations experienced historically. Individual LTC sales increased $7 million year over year, primarily reflecting growth in overall industry sales. Group LTC sales increased to $8 million in the quarter from $1 million a year ago, while linked benefit sales grew to $11 million from $5 million a year ago.

Wealth management earnings increased from $6 million to $11 million primarily from increased revenue associated with a 41% increase in assets under management (AUM) and also included a $2 million favorable tax item. Net flows were $504 million, representing the fourth consecutive quarter of positive net flows. This, combined with favorable market performance, resulted in a $1.2 billion sequential increase in AUM to $20.0 billion.

The Savings Sweepstakes

Posted on May 5, 2010 by Kerry Pechter -

Eighty-six-year-old Billie June Smith of tiny Lake, Michigan, was beaming last February 4 as she stepped forward to accept a check for $100,000 from Steve Winninger, CEO of the NuUnion Credit Union.

At the ceremony in Lansing, the state capital, she held a cardboard mock-up of her sweepstakes check. Measuring about 4′ by 2′, the check was nearly as wide as she was tall.

Luck and thrift had brought Ms. Smith to Lansing. She was one of more than 11,600 Michiganders who deposited over $8.6 million in accounts at one of eight credit unions around the state in 2009. Each depositor was eligible for small monthly cash drawings and an annual grand prize of $100,000.

And her ticket number was drawn for the big one.

A lottery? At a credit union? Bingo! No, this wasn’t some maverick banker’s update on 1950s toaster giveaways. It’s part of a grassroots campaign based on the research of Peter Tufano of the Harvard Business School and a Boston-based nonprofit he chairs, the Doorways to Dreams Fund (D2D).

Life-altering prizes

As millions of Americans reel toward retirement without adequate savings, policymakers and 401(k) plan providers have conjured up lots of different strategies to encourage low- and middle-income people to start saving more.

This effort has produced carrot or stick solutions like auto-enrollment in retirement plans, the proposed Saver’s Credit, tax breaks on saving for health care, college tuition, retirement and long-term care, and research into framing and choice architecture. Yet many Americans still lack the means, motive or opportunity to save adequately.

But they do buy lottery tickets, to the tune of about $60 billion a year in 42 states. So Tufano urges policymakers to channel that compulsion into thrift by linking savings accounts to irresistible, “life-altering” cash prizes.

Instead of buying chances to win, people get tickets for savings. The more money they sock away, the more tickets they get. The yields on savings are small, just like the chances of winning the grand prize. But to many people, the size of the prizes, psychologically, seems to make up for it in both cases. In prize-linked savings programs, participants at least get return of principal.

“Fifty percent of Americans say they can’t lay their hands on $2,000 in 30 days—not from savings, from a bank loan, or from friends or family,” said Tufano, who presented a paper on prize-linked savings programs at the Pension Research Council’s conference on financial literacy, held last week at the University of Pennsylvania’ Wharton School of Business.

“But in 2008, Americans spent an average of more than $540 per household nationwide on state lotteries,” said Tufano, who co-authored the paper, “Making Savers Winners,” with Erick Hurst, Melissa S. Kearney and Jonathan Guryan. “In Massachusetts, people spent an average of $725 per person on lotteries. In the same year, American households spent $430 on all dairy products and $444 on alcohol. We buy more lottery tickets than milk or beer.”

“You have to go where the people are,” he said, rather than try to persuade them to come to where you are.

Unfortunately, prize-linked savings programs are illegal in the United States—except in credit unions. That’s where Doorways to Dreams has directed much of its effort, by organizing pilot prize-linked savings programs at credit unions in Michigan and elsewhere.

It’s not too surprising that prize-linked savings programs are illegal, and not just because they’d break the monopoly on lotteries that state governments currently enjoy. Even if the programs help the masses save, does it make sense to enrich a tiny fraction of them with jackpots while depriving the rest of decent compound interest? And they can hardly be said to make people more financially literate.

But that may not matter. One of America’s leading experts on financial literacy, Dartmouth’s Annamaria Lusardi, is a fan of Tufano’s work.

“What Peter is doing is combining what people like to do into a financial instrument,” said Lusardi, who co-organized last week’s conference with Pension Research Council director Olivia Mitchell. “If low-income people think they only way to become rich is to play the lottery, why don’t we offer an instrument that allows them to save and to play the lottery? I do not find anything paternalistic about it. Quite the opposite. The return may be low, but the objective is to make people save.”

Mentioned by Jethro Tull

Prize-linked savings programs do seem to have a productive track record. As Tufano’s research shows, these schemes been used in various parts of the world since the 17th century. In Britain, a government agency called the National Savings & Investments has been marketing Premium Savings Bonds for over 50 years.

First sold in England in 1956 to encouraged savings after World War II, Premium Bonds are now owned by 26 million Britons with £26 billion ($39.4 billion) invested. Each month’s prize fund—the top prize is £1 million ($1.5 million)—equals a month’s interest (currently 1.5%) on the principal. The minimum single purchase is £100, which buys 100 chances to win. The maximum account balance is £30,000.

(Tufano’s research shows that the premium bond has even appeared in the lyrics to a classic rock song. A line from Thick as a Brick, the title track of the 1972 Jethro Tull album, reads: “… how’s your granny and good old Ernie: he coughed up a tenner on a premium bond win.”)

The first recorded prize-linked savings program was the “Million Adventure” in the UK in 1694. Intended to help pay off debt from the Nine Years’ War (1689-97), the British government sold 100,000 tickets at £10 each. Lower-income people brought fractions of tickets through syndicates. As a savings program, it paid out £1 per year, and each year 2,500 of the tickets would win prizes of up to £1,000.

Premium bonds became popular all over Europe at the end of the 19^th century. Today, they’re offered in 20 countries from Brazil to Germany to Sri Lanka. Prizes include gold bars, DVDs, apartments, cars and motorcycles, encyclopedias and, of course, large and small cash prizes. In early 2009, JP Morgan Chase ran a no-purchase-necessary, “Double Your Deposit” sweepstakes that paid up to $10,000 to savers.

The unlikelihood that prize-linked savings will ever become a huge phenomenon in the U.S. has apparently not stopped Tufano and the Doorways to Dreams Fund from continuing to pursue programs at credit unions or from pursuing fundamental research into the psychology of non-saving.

D2D has partnered with Olson Zaltman Associates, a Pittsburgh-based consulting firm that uses the ZMET, or Zaltman Metaphor Elicitation Technique. It requires individuals who are not highly verbal to describe their feelings or attitudes with a collage of digitized visual images.

In the process, they claim to be “probing the minds of lower income consumers in order to bring innovation to the marketing of savings.” D2D says it “hopes to dramatically strengthen the storehouse of consumer data and insight from which financial service vendors, policymakers and non-profit providers may draw.”

AIG Mending, But Still Dependent, GAO Says

Posted on April 28, 2010 by Editor Test -

The Government Accounting Office (GAO) has issued an 89-page report, “Trouble Asset Relief Program: Update of Government Assistance Provided to AIG,” that offers a portrait of the global insurance giant’s financial health two years after its near-fatal losses in the subprime mortgage crisis.

While AIG is healthier than it was 18 months ago, as indicated by the price of credit default swaps on its debt, its share price, and reductions in its debt to the Federal Reserve, the GAO says the company has mainly exchanged government debt for equity, turning U.S. taxpayers from creditors to shareholders, and it is not ready to function without outside assistance.

The report says in part:

AIG’s commercial paper programs, which reflect the amount of commercial paper AIG has issued to third parties, have steadily decreased from a high of about $13 billion in December 2007. Due to the general breakdown of the U.S. commercial paper market and reluctance from market participants to purchase or roll over AIG’s commercial paper, by September 30, 2008, the balance had dropped to $5.6 billion.

As of December 31, 2009, AIG had no outstanding commercial paper held by third parties. According to AIG, this is because all of AIG’s third party commercial paper had matured and, currently, AIG’s subsidiaries do not have access to third party commercial paper funding. This funding source had been replaced by commercial paper purchased by FRBNY’s CPFF, which was utilized by AIG until the facility expired on February 1, 2010.

As a result of the facility closing, AIG’s CPFF amount outstanding had decreased to $4.7 billion from a high of $15 billion one year earlier. However, given AIG’s ongoing reliance on federal assistance, it remains unclear when support provided by CPFF will be replaced with funds from AIG’s own operations. Unlike many of the other large institutions that received government support as a result of the financial crisis, AIG has not yet been able to tap traditional sources of short-term capital, including commercial paper or other debt markets until recently.

In particular, International Lease Finance Corp. (ILFC) and American General Finance (AGF) recently have been able to access the capital markets. In March 2010, ILFC sold $4.05 billion of secured debt and unsecured debt, and in April 2010, AGFS Funding Company-a wholly- owned indirect subsidiary of AGF-entered into and fully drew down a $3 billion, 5-year term loan.

In closing, the report says:

Federal assistance provided to AIG has gradually shifted from debt to equity, with a reduction in the authorized amount of the FRBNY Revolving Credit Facility and an increase in the amount of preferred equity interests held in AIG and various special purpose vehicles for the government. Consequently, the government’s, and thus taxpayer’s, exposure to AIG is increasingly tied to the success of AIG, its restructuring efforts, and its ongoing performance.

However, the sustainability of any positive trends in AIG’s operations depends on how well it manages its business in this current economic environment. Similarly, the government’s ability to fully recoup the federal assistance will be determined by the long-term health of AIG, the company’s success in selling businesses as it restructures, and other market factors such as the performance of the insurance sectors and the credit derivatives markets that are beyond the control of AIG or the government.

U.S. Retirement Assets

Posted on April 28, 2010 by Editor Test -

U.S. Retirement Assets
	1994	2007	2008	2009
Private DC	$1.16T	$3.73T	$2.67T	$3.34T
403(b), 457	$0.24T	$0.81T	$0.72T	$0.78T
IRA/KEO	$1.06T	$4.78T	$3.58T	$4.28T
Private DB	$1.28T	$2.67T	$1.93T	$2.12T
State&Local	$1.11T	$3.30T	$2.33T	$2.67T
Federal	$0.51T	$1.20T	$1.22T	$1.32T
Annuities	$0.52T	$1.60T	$1.40T	$1.53T
Total	$5.91T	$18.09T	$13.85T	$16.04T
Source: Retirement Income Industry Association, Federal Reserve and Profit Sharing Council of America

Great-West Enters the In-Plan Income Space

Posted on April 28, 2010 by Editor Test -

The fourth largest retirement plan recordkeeper in the U.S. has begun offering an in-plan group variable annuity option that allows defined contribution plan participants to add a guaranteed lifetime withdrawal benefit (GLWB) option to their target-date fund assets.

Great West Retirement Services, a unit of Power Corporation of Canada, announced the option, called SecureFoundation, last February and began accepting assets on April 1, according to Sara Richman, FSA, a vice president of product development at the Denver area company.

“We’re doing presentations to companies that have recordkeeping relationships with us. One sponsor has taken it already and we have a list of companies that will be adding it in the coming months,” Richman said. She declined to name specific clients.

“They’ve embraced what we’re doing. They understand the value of the income protection,” she added. “They’re saying, ‘This is exactly what we need and we’re going forward with it.’ Others are still asking questions like, ‘How do I know if this is priced right?’ ‘How do I know if you’ll be around in 30 years?’ ‘Is it the right product for us?’”

As of the end of 2009, Great-West Retirement Services’ FASCore recordkeeping division served 23,000 defined contribution in the corporate, government, healthcare/non-profit and institutional markets, representing 4.2 million participants with $123 billion in assets, according to the company.

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SecureFoundation is just one part of Reality Investing Lifetime Solutions program, Richman said. It offers different levels of guidance for different participants—those who want someone to manage their accounts for them, who want help with their accounts, or who intend to manage their accounts on their own.

Like Prudential’s IncomeFlex

Because target date funds and in-plan GLWBs are a qualified default investment alternative under the Pension Protection Act of 2006, participants in plans that offer auto-enrollment can now be defaulted into programs like SecureFoundation and passively ride such a product for the rest of their lives. If participants change jobs, they can maintain the same investment and benefit in a rollover IRA.

“What we’re really trying to do with our SecureFoundation retirement income product is put back in play some of the attributes of a defined benefit plan into the defined contribution market,” said Great-West Retirement Services president Charles P. Nelson in a published interview. “We’re defining that up front, leveraging the portability functionality that has been developed in the defined contribution market through self-directed brokerage-type options.”

SecureFoundation resembles Prudential Financial’s IncomeFlex program, an in-plan GLWB that was introduced in 2007. Both options allow participants to add a certain level of protection against investment risk, timing risk and longevity risk in retirement. Both are potential game-changers in the employer-sponsored retirement plan industry.

“SecureFoundation is similar to IncomeFlex or Nationwide’s SALB (stand alone living benefit), in the sense that they are all income guarantees applied on traditional investment vehicles. SecureFoundation is more similar to IncomeFlex, because both are engineered to DC accounts. Nationwide’s SALB is for a brokerage managed account program.”

Maxim Target Date Fund Starting Asset Allocations
Maxim SecureFoundation Lifetime Portfolio	Equity Fund Allocation	Fixed Income Fund Allocation
2015 Portfolio	50-70%	30-50%
2025 Portfolio	60-80%	20-40%
2035 Portfolio	70-95%	5-30%
2045 Portfolio	75-95%	5-25%
2055 Portfolio	75-98%	2-25%

As of the end of 2009, Prudential’s IncomeFlex product was offered in 170 retirement plans, where 5,000 participants were using it and had invested $261.5 million.

The “all-in” cost of SecureFoundation is 160 basis points per year, including 90 bps for the insurance rider and 70 bps for the eligible funds, which include five Maxim SecureFoundation target date funds (2015, 2025, 2035, 2045 and 2055) or Balanced Portfolio.

Typically, the contract owner would begin paying the 90 bps for the rider at a “trigger date” ten years before their target retirement date. Unless they decided to turn it off, they would continue paying it for the rest of their lives. Under the current contract, Great West could increase the annual rider fee to a maximum of 150 bps.

Glide-paths by Ibbotson

GW Capital Management LLC, a Great West unit doing business as Maxim Capital Management, manages the funds. The “glide-paths” for the target date funds were created by Ibbotson Associates, a unit of Morningstar, Inc. Putnam Investments, which Power Corporation purchased in 2007, is not involved.

Like all GLWBs, SecureFoundation guarantees, in effect, that if the contract owner’s account goes to zero during his or her life-either because of market depreciation, permitted distributions and/or fee attrition-the contract owner will still receive a specific percentage of the protected benefit base (the initial premium or higher) every year until he or she dies.

In theory, a 65-year-old could obtain somewhat similar protection by purchasing an advanced life deferred annuity (also known as longevity insurance) that would provide life-contingent income at, say, age 83. But that would require the kind of irrevocable, lump sum payment that most consumers resist. GLWBs offer longevity insurance on the installment plan.

“It’s a very intriguing approach,” said Joe Bellersen, president of Qualified Annuity Services, a group annuity specialist. “The fact that you’re paying for the tail coverage out of the returns is a convenient way to overcome the resistance to paying for longevity insurance. You’re essential paying for it in installments and paying for it out of the return. I can see that as an appealing approach to someone getting ready to retire from a plan.”

This type of option has been extremely popular as an individual variable annuity rider, with almost all recent purchasers of variable annuities electing it. Prudential and Great West are the first to offer it to the $3.34 trillion private defined contribution plan market. Under the Pension Protection Act of 2006, both target date funds and GLWB riders on target date funds are blessed as QDIAs—qualified default investment alternatives.

Retirement plan consultant and ERISA attorney Fred Reish of Los Angeles is familiar with the in-plan GLWB concept and believes that it will become more prevalent. “I think it has legs. This product has a lot of appeal from a 401(k) perspective. Ultimately the marketplace will decide who the winners and losers will be. But there’s a clear-cut need for guaranteed income, particularly among people will end up with account balances of $200,000 to $500,000,” he said.

“The fact that the premiums [in SecureFoundation] begin at age 55 is very good, since that’s when people will have larger account balances and the guarantee will be worth the most,” he added. “I like the idea that the protection is built-in, but that people also have the freedom to get out if they want to. I like the institutional pricing. This costs 1.5% or 1.75%, while even a reasonably priced retail product might cost 2.5% or 3%. There are just a lot of advantages to an in-plan solution.”

Sleep-easy blanket

By all accounts, annuity manufacturers don’t tout the rider as a source of guaranteed income, but rather as a layer of sleep-easy investment insurance that enables retirees to tolerate a relatively high level of equity exposure in retirement, knowing that, if the market slumps, they’ll get a minimum payout per year. The rider doesn’t guarantee the account balance or the investment performance, only the “benefit base.”

In a roundtable discussion sponsored by Great West, Ibbotson president Peng Chen commented on the difference between the Maxim target date funds in Secure Foundation and the funds Great West offers without a GLWB.

“We made a couple of tweaks compared with the standard Maxim Lifetime Asset Allocation Series offered by Great-West,” he said. “Unlike the typical glide path that assumes you’ll continue to de-risk as you get into retirement, this actually stays relatively flat because, since you have this protection, to some degree, you can afford to invest a little bit more aggressively and enjoy the long-term upside of the equity market.”

“The second thing we did was look at the underlying investment options inside the fund, and we worked with Great-West to implement this asset-allocation glide path using index-type products, which significantly reduced the cost of that protection,” Chen added.

Age Bands and Payout Rates under SecureFoundation
Single Coverage	Joint Coverage (Based on age of younger spouse)
4.0% for life at ages 55-64	3.25% for life at ages 55-64
5.0% for life at ages 65-69	4.25% for life at ages 65-69
6.0% for life at ages 70-79	5.25% for life at ages 70-79
7.0% for life at ages 80+	6.25% for life at ages 80+

The rate at which contract owners can withdraw each year depends on their age, and in this respect SecureFoundation adds an interesting twist to traditional GLWB designs. People who take income at 55, 65, 70 or 80 and receive 4%, 5% 6%, or 7% of their benefit base, respectively, aren’t necessarily locked into that percentage for life. (For joint coverage based on the age of the younger spouse, the withdrawal rates are 75 basis points lower for each age band.)

For instance, a person might retire at age 65 and begin taking the guaranteed 5% of the benefit base per year. When that person reaches age 70, he or she could opt to change the payout rate to 6% of the current account value. This would make sense only if the new payment turned out to be higher, which would depend on how far the account value had dropped from the benefit base as a result of market performance, distributions and fees.

Although the potential market for an in-plan income option like qualified retirement plan market is huge, some have wondered whether sales might be limited by the insurers’ underwriting capacity. Ibbotson’s Chen believes, however, that if demand is great enough for in-plan GLWBs, insurers will create capacity.

“There’s no question that these guarantees require insurance companies to manage their balance sheets effectively,” he said. “I think if you take a static view, then, you can figure out how much ‘capacity’ there is. And if you calculate the potential amount of dollars that might come under the guarantee, then there is potentially a capacity issue. Right now, there isn’t really an issue-at least not a big issue). You may have a few firms pulling back from offering VA guarantees, but there is plenty of supply right now.

“The financial market is also quite dynamic, and there are many ways that a company can manage that “capacity” issue, i.e., expand it,” he added. “For example, there are discussions about rolling out “longevity swaps” to help securitize longevity risk in the market. Another point is that, if the demand does come, I would expect more capacity to be created.”

The Future of DC Plans, Via PIMCO

Posted on April 27, 2010 by Editor Test -

Are custom target-date strategies, where a retirement plan provider or advisor cobbles together “open-architecture” target-date investment options out of a plans’ existing funds, the wave of the future in defined contribution plans?

PIMCO, the giant bond manager and unit of Allianz AG, thinks so. That’s the gist of a new book by Stacy Schaus (at left), a senior vice president and leader of PIMCO’s defined contribution practice and of PIMCO’s just-released Fourth Annual Defined Contribution Consulting Support and Trends Survey.

Schaus’ book, “Designing Successful Target-Date Strategies for Defined Contribution Plans” (Wiley Finance, 2010), lays out a vision of the DC world of tomorrow—a vision that might also be interpreted as PIMCO’s retirement business strategy.

In this vision, made possible by the Pension Protection Act of 2006, millions of new DC participants would be auto-enrolled and defaulted into custom TDFs, which would be held in low cost collective trusts and be institutionally managed. Their contributions would be “auto-escalated” over the years to enhance their nest egg.

At retirement, according to this scenario, participants wouldn’t leave their plans. They would roll their assets into in-plan “deemed” IRAs, allocate part of their money one of PIMCO’s TIPS payout funds and then cover their longevity risk tail by purchasing an advanced life deferred annuity from PIMCO sibling Allianz Life.

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This, of course, isn’t the only vision that retirement plan providers are pitching to plan sponsors. Another feature in RIJ this week, “Great-West Enters the In-Plan Income Space,” describes Great-West Retirement Services’ SecureFoundation program, in which participants are encouraged to buy off-the-shelf TDFs and protect them with a lifetime income rider starting ten years before retirement. Prudential Retirement introduced this concept with its IncomeFlex program in 2007.

Both the PIMCO and the SecureFoundation/IncomeFlex strategies will inevitably compete with rival strategies that involve individual income annuities, deferred income annuities, or payout mutual funds. In addition, a wide range of retirement income planning tools offer individualized strategies for financial advisors and their high net worth clients. Given the $15 trillion retirement market, there’s likely to be room for many players.

In an interview, Schaus explained the drivers of and philosophy behind PIMCO’s strategy. In designing custom TDFs, she said, PIMCO would focus on helping the participant achieve “retirement income adequacy.” At the same time, the strategy would reflect the “more conservative” approach to investing that might be expected from a company like PIMCO, with its fixed income roots.

Schaus was asked if PIMCO believes in “to” or “through” TDF “glide-path.” In a “to” target date fund, generally speaking, the investor’s bond allocation lands at its permanent maximum—perhaps but not necessarily 100%—at his or her retirement date. In a “through” fund, the investor’s equity allocation might still be 50% or more at retirement, and the fund won’t reach an all-bond allocation for many years, if ever.

“There’s no single answer,” she told RIJ. “Our philosophy regarding the to/through issue is that the allocations are based on each plan’s needs, and the level of certainty that’s required.” She noted that if the retiree adds a TIPS ladder and longevity insurance to their retirement portfolios, those products would absorb much of the market risk, interest rate risk and longevity risk that would otherwise fall on the target-date funds. In that case, the to/through issue wouldn’t be as pressing.

Selected Findings, PIMCO’s 2010 Defined Contribution Consulting Support and Trends Survey*

60% of consulting firms actively promote custom target-date strategies.
100% of firms recommend that clients offer a target date or target risk investment tier.
90% consider custom target-date strategies for plans with assets of $500 million or less.
66% said “insufficient asset size” and 59% said “difficulty of operational setup” deterred plan sponsors from custom strategies.
60% believe collective investment trusts are critical or very important for DC clients.
43% believe exchange-traded funds (ETFs) have no place in DC plans beyond availability in a brokerage window.
73% expect passive strategies in DC plans to proliferate.
82% believed that Treasury inflation-protected securities (TIPS) would bring the most value as an added asset class in DC plans, followed by emerging market equities (57%) and commodities (54%).
75% of plan sponsors would like to retain retiring participants assets in their plans, but only 32% try to do so.
80% believe it is “somewhat to highly likely” that plan sponsors will add a guaranteed income option to their plans over the next two years, but at a slow pace.
Fixed annuities, living benefits, and longevity insurance were the retirement income products most likely to interest plan sponsors.
Hewitt, Mercer, Schwab, Fidelity, JPMorgan and ING are the recordkeepers most supportive of custom strategies.
54% recommend an equity allocation at retirement of 30% to 50%, while 29% recommend less than 30%.
89% said different demographics among companies should drive unique “glide paths.”

*Results are based on responses from 30 U.S. consulting firms serving 2,000 defined contribution plan sponsors with aggregate plan assets of $1.7 trillion.

Life Insurer Capital and Surplus Grew in 2009

Posted on April 27, 2010 by Editor Test -

U.S. life insurers enjoyed double-digit growth in total capital and surplus last year, according to a new report from Moody’s Investors Services, Inc., National Underwriter reported.

Moody’s rated compani es reported a 13% growth in capital and surplus for the year ended 2009. Capital and surplus, including asset valuation reserves (AVR), rose to $237 billion from $210 billion.

Fueling the increases in capital and surplus were improvements in operating income to $41 billion from a loss of $9 billion in 2008. The “robust equity markets” markedly improved earnings in both group and annuity operations.

Offsetting the gains in operating earnings were large realized and unrealized losses in derivatives, the result of losses from hedging variable annuities. In 2009, net realized and unrealized losses totaled $36 billion, as compared to $56 billion in 2008, observes Moody’s.

Other factors contributing to the improvements in companies’ capital and surplus in 2009, says Moody’s, were gains in the carrying values of non-insurance affiliates and equity holdings, both of which show up in unrealized gains (losses). Life insurers also replenished capital by reducing dividends to stockholders (e.g., holding companies) to $4 billion in 2009 from $14 billion in 2008.

Given the substantial capital raises during 2009, operating entities of publicly traded companies were under less pressure to support the needs of affiliated holding companies, says Moody’s. That enabled companies to retain more capital.

A comparison of individual life insurers shows that Hartford Financial Services Group Inc., Hartford, Conn., raised the most capital among Moody’s rated companies in 2009. The total, $6.7 billion, was secured through the federal government’s troubled asset relief program (TARP), plus debt and equity issues.

The three next highest capital raises-$3.65 billion, $2.79 billion, $2.44 billion-were secured, respectively, by Prudential Financial Inc., Newark, N.J., Metropolitan Life Insurance Company, New York; and Lincoln Financial Group (Lincoln National Corp.), Radnor, Pa.

Vanguard Sees Institutional TDF Flows Triple in Five Years

Posted on April 27, 2010 by Editor Test -

Target-date fund use among defined contribution plans administered by Vanguard skyrocketed between 2004 and 2009, with 75% of the plans offering the funds last year compared with only 13% five years earlier, Vanguard said.

According to a Vanguard research report, 12% of those plans’ assets were invested in target-date funds in 2009, compared to only 3% in 2004.

Participants in Vanguard-administered plans put $21.4 billion into target-date funds in 2009, up from $680 million five years earlier. The number of target-date fund investors jumped to 1.2 million last year, from 40,000 in 2004.

“This level of support indicates the funds’ importance in the future of retirement savings and runs counter to the views of some critics that they are not suitable investment options,” Jean Young, a researcher at the Vanguard Center for Retirement Research, said in a release.

The analysis was based on records of 2,200 DC plans administered by Vanguard in 2009 and 2,100 Vanguard DC plans in 2004.

Financial Reform Bill Blocked, But Derivative Bill Proceeds

Posted on April 27, 2010 by Editor Test -

Senate Republicans voted on Monday to block debate the Democrats’ legislation to tighten regulation of the financial system, most recently known as the Wall Street Reform Act.

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking, Housing and Urban Affairs Committee, filed a 1,408-page version of the bill April 15. A compromise version of that bill was to be debated on Monday.

Meanwhile, members of the Senate Agriculture Committee have approved the Wall Street Transparency and Accountability Act, a bill that would regulate the use of derivatives by insurers.

The committee passed the bill, which does not yet have a bill number, by a 13-8 vote. Sen. Charles Grassley, R-Iowa, joined 12 Democrats in supporting the measure, which was sponsored by Sen. Blanche Lincoln, D-Ark., chairman of the Agriculture Committee.

The proposed bill would not regulate the use of custom derivatives by commercial users such as airlines, farmers, and others who use derivatives to lock in the cost of the fuel or other raw materials used in the products or services they make or sell.

But life insurance companies would face new constraints. Insurers who use derivatives to hedge life insurance policies or other policies against interest rate risk would have to use standardized derivatives contracts listed on exchanges, an insurance industry lobbyist says.

The House financial services reform bill provides an exemption for insurers that use custom derivatives, however.

The April 15 version of Senate Bill 3217-the Dodd bill-included sections that would:

Create a Financial Stability Oversight Council with some ability to oversee non-bank financial companies.
Create an “orderly liquidation authority” for large, troubled financial companies.
Form an Office of National Insurance.
Promote uniformity in regulation of reinsurance and surplus lines coverage.
Create new derivatives markets regulations that might affect how insurers hedge credit and default risk.
Change the rules governing asset-backed securitization.
Overhaul rating agency rules.
Impose new executive compensation system rules.
Create “senior investor protection” rules, including annuity marketing standards developed by the National Association of Insurance Commissioners.
Reorganize and consolidate the federal bank and thrift regulatory agencies.
Impose a federal regulatory system on hedge fund advisors.
Put new restrictions on banks’ capital markets activities.
Revamp securities arbitration system rules.
Increase the borrowing limit on Treasury loans.
Establish a Bureau of Consumer Financial Protection that would not oversee insurance products.

The April 15 version of the bill would also call for studies on mutual fund advertising, conflicts of interest, the use of financial designations; municipal bond disclosure rules, and “harmonization” of the customer relationship standards that apply to brokers, dealers and investment advisors.

Democrats need support from at least 60 senators to have S. 3217 come up for a vote. Observers are speculating that at least one Republican, such as Sen. Scott Brown, R-Mass., might agree to vote for the bill, and then might have some ability to fine-tune the bill.

AXA Equitable VUL Offers Downside Risk Buffer

Posted on April 27, 2010 by Editor Test -

AXA Equitable Life has introduced a Market Stabilizer Option on its variable universal life insurance product. Using upside caps and a downside buffer, the Market Stabilizer Option “can help smooth the impact of equity volatility on a policy,” the company said.

The MSO offers a rate of return tied to the S&P 500 Price Return index*, up to a growth cap. It also provides a downside buffer of up to 25% if the index underperforms.

“The last two years have been among the most turbulent periods ever for equity investors. The related economic insecurity has actually increased consumer awareness of the need for life insurance,” said Christopher M. “Kip” Condron, chairman and chief executive officer of AXA Equitable.

The following hypothetical example, using a 15% growth cap rate, illustrates the MSO:

If the S&P 500 rate of return (excluding dividends):

Increases 15% or more, the linked rate of return on The Market Stabilizer Option indexed-linked rate of return on the Segment Mature Date will equal 15%.

Increases less than 15%, the linked rate of return on The Market Stabilizer Option indexed-linked rate of return on the Segment Mature Date will equal the index performance, excluding dividends.

Stays flat or declines 25% or less, the linked rate of return on The Market Stabilizer Option indexed-linked rate of return on the Segment Mature Date will equal zero.

Declines 30%, the linked rate of return on The Market Stabilizer Option indexed-linked rate of return on the Segment Mature Date will decline by 5% (or the excess beyond the first 25% decline).

AXA Equitable’s MSO, option available for an additional fee, is offered along with more than 50 other investment options to purchases of IL Optimizer. Gains from other policy investment portfolios can be swept into a new MSO segment, without triggering a taxable event.

New Stable Value Unit at New York Life Investments

Posted on April 27, 2010 by Editor Test -

New York Life Investments has launched Stable Value Investments (SVI), a new unit that will create and distribute proprietary fixed income money management solutions backed by book value guarantees from the New York Life Insurance Company.

Aruna Hobbs, who joined New York Life in November 2009 from AEGON Insurance, will lead the new unit. As director and head of Pensions and Savings at AEGON, she was elected to the Stable Value Board of Directors for two terms and was a member of the LIMRA Marketing Officers Round Table.

“Although this is a new group at New York Life Investments, the asset class represents over $8 billion in assets under management firm-wide,” Hobbs said. She estimated the current stable value market at $600 billion.

Wells Fargo Tops Bank Annuity Fee Chart

Posted on April 27, 2010 by Editor Test -

Income earned from the sale of annuities at bank holding companies (BHCs) reached $2.62 billion in 2009, up only 0.5% from the 2008 figure of $2.61 billion, according to the Michael White-ABIA Bank Annuity Fee Income Report.

Of that amount, Wells Fargo & Co. accounted for $678 million, or almost 26%, thanks to its acquisition of the perennial leader in bank annuity sales, Wachovia Bank, during the depths of the 2008-2009 financial crisis. The ten largest bank holding companies accounted for about three-fourths of annuity fee income. (See chart on RIJ homepage, April 28, 2010.)

The report is based on data from all 7,247 commercial and FDIC-supervised banks and 913 large top-tier bank holding companies, of whom 391 or 42.8% participated in annuity sales activities during the year.

Their $2.62 billion in annuity commissions and fees constituted 13.0% of their total mutual fund and annuity income of $20.17 billion and 17.5% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $14.96 billion.

Of the 7,247 banks, 985 or 13.6% participated in annuity sales activities. Those participating banks e arned $824.2 million in annuity commissions or 31.5% of the banking industry’s total annuity fee income.

Sixty-eight percent (68%) of BHCs with over $10 billion in assets earned annuity commissions of $2.48 billion, constituting 94.7% of total annuity commissions reported. This was an increase of 1.2% from $2.45 billion in annuity fee income in 2008.

Among this asset class of largest BHCs, annuity commissions made up 15.7% of their total mutual fund and annuity income of $15.84 billion and 17.6% of their total insurance sales volume of $14.11 billion, the highest proportion of insurance sales volume of any asset class.

Annuity fee income at BHCs with assets between $1 billion and $10 billion fell 9.8% in 2009, to $116.7 million from $129.4 million in 2008, and accounted for 2.7% of their mutual fund and annuity income of $4.32 billion, the lowest proportion of investment sales of any asset class.

Top 10 BHCs in Annuity Fee Income (Millions)
Bank Holding Co.	2009 Fees	2008 Fees	% 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.

BHCs with $500 million to $1 billion in assets generated $21.9 million in annuity commissions in 2009, down 15.2% from $25.8 million the year before. Only 35.4% of BHCs this size engaged in annuity sales activities, which was the lowest participation rate among all BHC asset classes. Among these BHCs, annuity commissions constituted the smallest proportion (13.6%) of total insurance sales volume of $160.7 million.

Among BHCs with assets between $1 billion and $10 billion, leaders included Stifel Financial Corp. (MO), Hancock Holding Company (MS), and NewAlliance Bancshares, Inc. (CT). Among BHCs with assets between $500 million and $1 billion, leaders were First Citizens Bancshares, Inc. (TN), CCB Financial Corporation (MO) and Codorus Valley Bancorp, Inc. (PA).

The smallest community banks, those with assets less than $500 million, were used as “proxies” for the smallest BHCs, which are not required to report annuity fee income. Leaders among bank proxies for small BHCs were Vantage Point Bank (PA), FNB Bank, N.A. (PA) and Sturgis Bank & Trust Company (MI).

Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the mean Annuity Concentration Ratio was 8.5%. Among the top 50 small banks in annuity concentration that are serving as proxies for small BHCs, the mean Annuity Concentration Ratio was 22.7% of noninterest income.

Among the top 50 BHC leaders in annuity productivity (i.e., annuity income per BHC employee), the mean Annuity Productivity Ratio was $2,775 per employee. Among the top 50 small banks in annuity productivity, the mean Annuity Productivity Ratio was $4,574 per employee.

The Goldman Touch

Posted on April 27, 2010 by Edward Jay Epstein -

The SEC might have a great conspiracy case against Goldman Sachs if it could come up with a plausible conspiracy. Its complaint alleges that Goldman Sachs defrauded the investors in its Abacus 2007-AC1 fund by allowing the CDO’s portfolio of securities to be selected by a hedge fund operator who stood to make an immense profit if the fund failed.

The hedge fund operator is John Paulson, who famously made a great fortune by betting that the housing bubble would burst. In early 2007, he wanted to make a billion dollar wager that subprime-backed mortgages would collapse. So he went to Goldman Sachs, which, like the other major financial houses, is in the business of creating such customized gambling products for clients.

For a $15 million fee from Paulson, Goldman Sachs created Abacus 2007-AC1, a synthetic collateralized debt obligation. It provided exposure to $2 billion worth of subprime (mostly BBB-rated) home mortgage-backed securities (MBS) through the device of selling contracts on them that paid off if the underlying mortgage-backed securities defaulted on their payments or suffered a write-down in value.

If the housing bubble did not burst, and the underlying securities (which Abacus did not own) did not default, Abacus would continue to collect handsome premiums on the contracts. If not, Abacus would lose heavily. So the vehicle provided a highly effective means of placing a bet, long or short, on the subprime sector.

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Goldman found three participants to take the long side of the wager on subprimes—ACA Capital Holdings, a bond insurer, IKB Bank, a German-based specialist in mortgage securities, and itself. ACA went long by providing a $900 million credit default swap on Abacus itself (earning a $45 million premium from Paulson, via Goldman) and then investing $40 million of the premium in Abacus. ACA’s wholly owned subsidiary, ACA Management, had sole authority to make the final determinations of the 90 securities in the referenced portfolio, and would receive a management fee.

IKB Bank bought $150 million worth of Abacas’ notes (which, through the magic of structured finance, were rated higher than any of the 90 referenced MBS) in return for a variable rate of LIBOR + 85 basis points on part of the investment and LIBOR + 110 basis points on the rest. Goldman put up $90 million to complete the financing.

Paulson was the only short. He bought the credit default swap that ACA Capital had furnished. All four participants had the same data about the 90 underlying securities, and received the same Offering Circular or “flip book.”” (Unregulated securities do not require a registered prospectus.)

What separated the long and shorts in this billion-dollar bet was their opinion of the direction of the housing market. Paulson, as the lone short, held the view that a “subprime Residential Mortgage-Backed Security wipeout scenario” was possible. In this scenario, homeowners would not pay mortgages, the value of their houses would decline, and the subprime bonds backed by the mortgages would go bust.

Those on the long side continued to hold a more optimistic view. ACA, which had already insured over $21 billion worth of similar subprime-backed bonds, considered the “wipeout scenario” so unlikely that it gave 20:1 odds on the credit default swap it sold in the deal. Paulson proved right, however, and won the bet.

So where is the fraud? Goldman, to be sure, designed a gambling mechanism for clients, including Paulson, to go short or long the subprime sector. But that is no different from designing index funds that allow gamblers to go short or long stocks, bonds, and commodities.

The core of the SEC case is that Goldman withheld vital information from ACA and IKB by not disclosing the identity of the counterparty. ACA knew of course that someone was short the deal, since it sold Goldman Sachs a $900 million credit default swap precisely so someone could take the short side. While Goldman did not say that Paulson was that counterparty, his identity may not have been a mystery to ACA.

Paulson’s top lieutenant in the deal, Paolo Pellegrini, testified to the SEC in 2008 that he had informed ACA Management that the Paulson hedge fund was betting against the transaction. If so—and Pellegrini had no reason to perjure himself—ACA possessed the information that Goldman withheld, and went ahead with the deal.

The other participant, IKB bank, which bought Abacus’ AAA-rated notes, may or may not have been kept in the dark about Paulson, but Goldman stated in the offering material for the notes that it might not disclose information about other Goldman clients, and specifically warned, “this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the Notes.”

The issue here goes beyond non-disclosure of the identity of a counterparty. The SEC’s fraud theory contends that Paulson undermined Abacus by “heavily influenc[ing] the selection of the portfolio to suit its economic interests.” Yet ACA’s Management unit had the sole authority to select each and every bond referenced in the portfolio. It also was experienced in selecting subprime portfolios: it had managed 22 other such deals valued at $15.7 billion.

Paulson clearly made suggestions to ACA, but he wasn’t necessarily able to “heavily” influence ACA to choose bonds it would not have otherwise selec ted, as the SEC claims. Since ACA’s parent was risking over $900 million to insure the deal, why would it choose any but the least risky subprime bonds? It had reason to suspect Paulson’s neutrality because Pellegrini revealed to it, as he testified, that Paulson planned to short Abacus.

In any case, ACA picked the subprime securities to reference in the portfolio, and t hey failed. But 99% of all securities based on subprime loans were marked down by the rating agencies in 2008, so it is not clear that Abacus would have suffered a different fate had ACA picked 90 other subprime securities. In fact, ACA’s losses on Abacus were less than five percent of the $22 billion in losses it suffered in the subprime collapse.

By the time it came to pay off the wager, ACA, overwhelmed with losses from its other credit default swaps, couldn’t pay off the loss on Abacus. The Dutch bank ABN-AMRO, which had backstopped ACA’s debts, had to be taken over by the Royal Bank of Scotland. So the Royal Bank of Scotland wound up paying an $842 million loss on the credit default swap, which went to Paulson.

No one can fault the SEC’s objective of restoring badly shaken public faith in the casinos of Wall Street by ferreting out financial frauds. To this end, it chose to go after Goldman Sachs, a powerful bank that is identified in the public’s mind with rapacious profiteering.

Unfortunately, the SEC’s fraud case against Goldman does not add up. It implies a conspiracy without co-conspirators. If Goldman Sachs had designed its own fund to fail, why didn’t it go short the fund? It could have retained the credit default swap it got from ACA for its own account rather than selling it to Paulson. Instead, it went long by putting $90 million of its own money into Abacus. If it was in cahoots with Paulson, how did it get its share?

The SEC scrutinized Paulson’s records and found no evidence that he did anything with the proceeds other than distribute them to the investors in his funds (including himself). Goldman’s records showed it lost $75 million (after taking its $15 million fee into account).

Not only is there no motive or logic for Goldman to have sabotaged its own fund, the SEC complaint fails to cite a single witness or document to substantiate that theory. Nevertheless, SEC has brilliantly succeeded in implanting that idea in the media.

The New York Times, for example, citing the SEC as its source, reported in its front page on April 15 that “Goldman created and sold a mortgage investment that was secretly devised to failed.” On April 18th, its Nobel Prize-winning columnist Paul Krugman added, “the SEC is charging that Goldman created and marketed securities that were deliberately designed to fail, so that an important client could make money off that failure. That’s what I would call looting.” And a Google search reveals over 600 other similar stories in other newspapers.

The message: If Wall Street deliberately betrays investors in this manner, the government must extend its oversight to every nook and cranny of the financial universe. So however the SEC legal case is settled, the SEC has already won in the court of public opinion.

Edward Jay Epstein is the author of The Big Picture: Money and Power in Hollywood (Random House, 2006) and its sequel, The Hollywood Columnist: The Hidden Financial Reality Behind the Movies (Melville House, 2010).

RIIA Weighs In on In-Plan Income Options

Posted on April 21, 2010 by Editor Test -

The Retirement Income Industry Association’s Retirement Plan and IRA Committee on Lifetime has submitted its recommendations to the U.S. Department of Labor in response to the government’s request for input on how best to bring some of the income benefits of defined benefit pension plans to defined contribution plans.

Among RIIA’s recommendations:

Lifetime income options should become mandated options for all defined contribution plans; but RIIA is not advocating that such lifetime options become mandated elections for all participants.

At a minimum, DoL needs to create a safe harbor detailing the circumstances under which information and assistance can be given to participants without the risk of fiduciary liability.

Further, DoL may want to promote the dissemination of education materials, to participants, that focus on the process of retirement income planning (flooring and upside) and retirement income distribution (investment vehicle and product selection), including the consideration of their human, social and financial sources of capital.

The DoL should consider the following lifetime income options within the context of a decumulation QDIA:

One or more annuities, providing income for life or to a covered life and survivor on a joint and survivor basis.
One or more stable value funds where the fund is an investment option available to participants within the plan. Such stable value fund options should be extended to IRA accounts, subject to the development of sophistication criteria applicable to the trustee or custodian.
One or more products that combine lifetime income and risk premium applicable to insuring certain catastrophic risks (e.g. long-term care) that serve to deplete accumulated assets.
One or more products or funds that are principal protected (e.g. laddered maturities), issued or managed by the U.S. Government or an instrumentality thereof or by a state or federal regulated creditworthy financial institution.
One of more products or funds that combine (i) items 1 through 4 above and (ii) a money market fund.

Affluent Still Nervous, Merrill Lynch Survey Shows

Posted on April 21, 2010 by Editor Test -

The percentage of affluent Americans who are concerned about the economy’s impact on their ability to meet financial goals has fallen to 49% from 58% in October 2009, according to the third and latest Merrill Lynch Affluent Insights Quarterly survey.

But worries about health care costs in retirement and longevity risk appear to be rising. Of the 62% survey respondents who identified health care as a top concern, 56% felt unsure of how rising medical costs should factor into their retirement planning, up from 40% in January 2010. The number of those concerned about whether their assets will last throughout their lifetime rose to 61% from 53% during the last quarter.

The survey also showed:

Two out of three affluent people over age 65 say they are spending more time with friends and family. About 45% plan to dedicate more time to philanthropic endeavors and the same percentage intend to spend more time traveling during retirement.
73% of affluent baby boomers ages 51-64 are concerned about whether their assets will last throughout their lifetime and 61% wonder if they will be able to live the lifestyle they had hoped to in retirement.
40% of survey respondents ages 51-64 expect to retire later than they did one year ago. Nearly one-third (31%) currently support both their children and parents to some extent.
Of these members of the “Sandwich Generation, ” 45% have had to make lifestyle sacrifices to support the needs of their family, 44% have significantly cut back on personal luxuries, 26% percent are now saving less for retirement, and 19% have invited their adult-age children and/or parents to live with them to save money.
Of all groups, 35 to 50-year-olds struggle most with balancing short-term financial priorities and concerns, such as funding their children’s education (52%) and knowing how best to manage a proper cash flow and liquidity strategy (31%).
Younger affluent individuals ages 18-34 say they lack the financial education needed to make the best decisions early in life to maximize their long-term savings and investments. In that group, 23% said they don’t “know where to begin” while 24% said “understanding tax implications associated with retirement savings vehicles” was most challenging.
52% of survey respondents believe the government should do more to assist individuals in their retirement saving efforts. For instance, 50% of these respondents believe that health care coverage should be provided to all retirees, while 44% believe that more financial resources should be put toward Social Security.
Nearly half (47%) of affluent Americans ages 35-50 assume Social Security will not play a role in their retirement, and nearly 70% are skeptical about the future availability of Medicare benefits.
Nearly 65 percent of affluent Americans under the age of 50 would like to see higher contribution limits for IRAs and employer-sponsored retirement plans, and 44% want more retirement education in the workplace. (such as a 401(k)) raised. More than 60% of those under the age of 64 either currently do or would take advantage of financial education or advice services if offered by their employer.
Among the nearly half (44%) of affluent Americans working with a financial advisor, 75% engage with their advisor at least quarterly, and 41% at least monthly. While this frequency is fairly consistent with the previous two quarters, the number of individuals speaking with their financial advisor weekly has steadily risen from 8 to 13% during the last six months.
Approximately 63% of affluent Americans who work with a financial advisor have been doing so for more than six years, and nearly 40% for more than 10 years. More than one quarter (27%) wish they had started working with their financial advisor earlier, indicating many affluent Americans believe financial planning should begin at an earlier stage in life. Among the 56% who do not work with a financial advisor, 25% believe they would benefit from such a one-on-one relationship.
When asked about what they want from advisors, affluent Americans cited proactive investment advice, check-ins to help ensure they’re on track, advice on maintaining their desired lifestyle, holistic planning, help with ensuring adequate liquidity and a plan for charitable giving.

Braun Research conducted the Merrill Lynch Affluent Insights Quarterly survey by phone in March 2010 on behalf of Merrill Lynch Global Wealth Management. Braun contacted a nationally representative sample of 1,000 Americans with investable assets in excess of $250,000, and oversampled 300 affluent Americans in each of 14 target markets.

Volcker’s Minsky Moment

Posted on April 21, 2010 by Kerry Pechter -

At 6’7″ tall, Paul Volcker dwarfed the lectern on the podium at the Ford Foundation in New York last week. He was one of the headliners at this year’s Hyman P. Minsky Conference, and the audience of economists and officials fell silent as he spoke.

“There is something the matter in Washington…,” the 82-year-old former Federal Reserve chairman began.

What followed was not a critique of government, however, but rather a call for better federal regulation of financial institutions in the future. Washington’s problem, he said, was that 16 months after the financial crisis, two key senior positions at the Treasury Department were still vacant.

By the time Volcker finished speaking, in fact, he sounded in sync with the current administration. He asserted that the Fed should keep on regulating the banks, that the financial sector has grown at the expense of the rest of America over the past several decades, and that the “banks shouldn’t be running casinos on the side.”

His sentiments were not out of line with those of most of the people who gathered for the three-day conference, which has been sponsored by the Levy Economics Institute of Bard College for the last 19 years in honor of the late Hyman P. Minsky, who taught economics at Bard prior to his death in 1996.

Minsky developed a cautionary theory that periods of prosperity tend to breed complacency in financial markets, making them vulnerable to crises. Some people thought Minsky’s theory predicted the 2008 financial crisis, which in some circles was dubbed a “Minsky moment.”

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The title of this year’s Minsky conference was “After the Crisis: Planning a New Financial Structure.” Given the ongoing efforts in Washington to pass a financial regulatory reform bill—and the debate over whether the Federal Reserve deserves blame for not preventing the crisis or credit for subduing it—the topic was especially timely.

The atmosphere was charged, even heated at times. A buzz was created by the presence of speakers like former New York governor (and “Sheriff of Wall Street”) Eliot Spitzer, Nobel Prize winning economist and journalist Paul Krugman, and the legendary cigar-chomping Volcker.

Volcker had been in the news for over a year, having been appointed by President Obama in early 2009 to chair the newly created Economic Recovery Advisory Board. His so-called “Volcker rule,” a proposal that the largest banks be prohibited from speculative trading on their own accounts or investing in hedge funds, is favored by the Obama administration. Diluted versions of it have also been proposed.

At the conference, where proposals to present the next financial crisis ranged from passing rigid new laws to passing flexible regulations to allowing banks to insure each other or write “living wills” for use during bankruptcies or reorganizations, Volcker expressed skepticism that anything less than laws could effectively rein in bankers from speculative excess.

“You cannot manage the system by relying on regulations,” he said, suggesting that regulations can often be fudged and regulators captured. “How long would an aggressive regulator last? I know he won’t be the object of great affection in the financial community.” Instead, we need a “structural solution,” with laws instead of regulations, so that a regulator can say, “I’m sorry but the law won’t permit it.”

Regarding the wisdom of controversial 1999 repeal of the Glass-Steagall Act of 1933, the Depression-era law that barred commercial banks from underwriting securities and to which the Volcker rule has been compared, he said that “the problem is that we didn’t replace Glass-Steagall with anything good.”

Volcker said he was against giving hedge funds the protection of a government safety net, in favor of establishing a clearinghouse or exchange for trading derivatives, and for bringing money market funds under the Fed’s regulatory umbrella. Money market funds were rescued with public money when they “broke the buck” during the financial crisis.

“If [the money market funds] want to walk and talk like a bank, they need reserves and capital requirements like banks,” he said. “They’re the same as banks without the oversight and without the regulation. They’ve taking trillions of dollars out of the banking system and out of supervision. It creates a classic case of regulatory arbitrage. I’d love to see that taken care of.”

One of the most contentious issues at the conference was whether the Federal Reserve should have its supervisory powers over the U.S. banking system expanded, be restricted to regulating only the largest, systemically-important financial institutions, or even give way to a more politically accountable, consumer-driven regulatory regime.

Like several other current and former Fed officials who spoke at the conference, Volcker took the side of the institution he once led. “The Fed is in the best position to regulate,” he said. “Somebody should have been paying more attention to the development of the subprime mortgage market. But the Fed is in the best position [to regulate the banks] and it would be a big mistake to shut them out of supervision and regulation. The danger of regulatory capture is inherent in the system, and no agency is immune to it. The Fed is in a good position to resist regulatory capture because it also does monetary policy. It isn’t just a regulator.”

As for how well the government intervention worked in 2008 and 2009, he noted that fears that the government might nationalize the banks were a media exaggeration rather than ever a real possibility. “As it turned out, the idea of a stress test and the complicated process of getting rid of toxic assets worked reasonably well,” he said.

Commenting on the repeal of Glass-Steagall and the subsequent merger of commercial banking and investment banking cultures, Volcker regretted that commercial bankers had become infected by the desire for the “higher multiples” of pay that investment bankers enjoyed. He called that a “destructive cultural fact.”

Male 65 Annuity Price Index, Group vs Individual

Posted on April 21, 2010 by Editor Test -

Principal Financial Introduces Participant Planning Tool

Posted on April 21, 2010 by Editor Test -

A new planning tool from the Principal Financial Group helps streamline the process of participant education by giving financial professionals access to a comprehensive library of education plans and materials, the company said.

Financial professionals can use the Participant Education Planning Tool to help retirement plan sponsors increase participation, salary deferrals and overall participant satisfaction with the plan. The tool helps them find:

Ready-to-use education plans
Modifiable templates for education plans
Flexible materials for creating education plans

The tool expands the slate of participant education resources from The Principal for financial professionals to offer clients. They also have access to local education personnel who conduct both group education meetings and one-on-one meetings with participants.

New York Life Reports 2009 Financials

Posted on April 21, 2010 by Editor Test -

New York Life Insurance Company, the largest domestic mutual life insurer and the predominant issuer of income annuities, announced record sales of insurance and investment products in 2009. Operating revenue reached a new high and the firm expanded its surplus by $2 billion, to $15 billion.

Highlights included:

Surplus and AVR (asset valuation reserve) increased more than $2 billion, or 17%, to over $15 billion. The increase included the issuance of $1 billion in surplus notes.
Operating revenue rose three percent, to $14.38 billion.
Operating earnings were $1.22 billion in 2009, down from a record $1.28 in 2008.
Total insurance sales rose 11% from 2008, to more than $2.6 billion, with U.S. life insurance sales up 14%.
Total investment sales rose to $32.85 billion, up 22% over 2008.
Assets under management reached a record of over $286 billion, a 15% increase.

What the ABACUS 2007-AC1 Offering Circular Says

Posted on April 21, 2010 by Editor Test -

In the offering circular for the synthetic collateralized debt obligation at the heart of the SEC’s fraud case against Goldman Sachs, the investment bank disclaims any fiduciary responsibility.

The unregistered prospectus for the ABACUS 2007-AC1 CDO that the SEC claims that Goldman Sachs sold fraudulently includes lengthy disclaimers from the investment bank and the CDO’s manager, ACA Capital.

For instance, on page 8 of the Circular, a disclosure of transaction risk factors says (our emphasis):

Goldman Sachs does not provide investment, accounting, tax or legal advice and shall not have a fiduciary relationship with any investor. In particular, Goldman Sachs does not make any representations as to (a) the suitability of purchasing Notes, (b) the appropriate accounting treatment or possible tax consequences of the Transaction or (c) the future performance of the Transaction either in absolute terms or relative to competing investments.

Potential investors should obtain their own independent accounting, tax and legal advice and should consult their own professional investment advisor to ascertain the suitability of the Transaction, including such independent investigation and analysis regarding the risks, security arrangements and cash-flows associated with the Transaction as they deem appropriate to evaluate the merits and risks of the Transaction.

Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information relating to the Reference Obligations, the Reference Entities and/or other obligations of the Reference Entities and has not undertaken, and does not intend, to disclose, such status or non-public information in connection with the Transaction. Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the Notes.

Goldman Sachs does not make any representation, recommendation or warranty, express or implied, regarding the accuracy, adequacy, reasonableness or completeness of the information contained herein or in any further information, notice or other document which may at any time be supplied in connection with the Transaction and accepts no responsibility or liability therefore.

Goldman Sachs is currently and may be from time to time in the future an active participant on both sides of the market and have long or short positions in, or buy and sell, securities, commodities, futures, options or other derivatives identical or related to those mentioned herein. Goldman Sachs may have potential conflicts of interest due to present or future relationships between Goldman Sachs and any Collateral, the issuer thereof, any Reference Entity or any obligation of any Reference Entity.

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