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

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

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

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

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

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

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

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

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

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

© 2010 RIJ Publishing. All rights reserved.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Guaranteed Pension and Community Investment Plan (Glenn Beamer).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2010 RIJ Publishing. All rights reserved.

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

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

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

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

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

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

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

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

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

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

© 2010 RIJ Publishing. All rights reserved.

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.”

© 2010 RIJ Publishing. All rights reserved.

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.

© 2010 RIJ Publishing. All rights reserved.

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.

© 2010 RIJ Publishing. All rights reserved.

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.

© 2010 RIJ Publishing. All rights reserved.

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.

© 2010 RIJ Publishing. All rights reserved.

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.

© 2010 RIJ Publishing. All rights reserved.

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

© 2010 RIJ Publishing. All rights reserved.

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.

© 2010 RIJ Publishing. All rights reserved.

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].

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