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In League with the Angel of Death

Posted on February 16, 2010 by Kerry Pechter -

A lawyer in league with the Angel of Death, Joseph Caramadre prospected for variable annuity clients among hospice residents and the gravely ill. He paid sick people or couples as much as $10,000 just to put their name on an annuity contract.

For some 15 years, in fact, the prominent Rhode Island attorney, whose family was named the state’s “First Family of Giving” in 2009 for its generosity to the United Way and other causes, quietly helped initiate dozens of these “stranger-originated annuity transactions,” or STATs.

Joseph Caramadre While hospice patients got checks for a few thousand dollars, Caramadre’s associates earned hundreds of thousands in annuity sales commissions. Thanks to the contracts’ enhanced death benefits, his clients invested risk-free during the days, weeks or months until the annuitant died, and stood to earn guaranteed interest or bonuses.

Now Western Reserve Life and Transamerica Life are trying to recover some of those death benefits and commissions, according to complaints filed in U.S. District Court in Rhode Island since last October in which the two companies charge Caramadre, his employees and various brokers with fraud.

Caramadre’s attorney denies the accusation. “There’s no fraud involved whatsoever,” says Robert Flanders, a former Rhode Island Supreme Court Justice and Harvard Law graduate told Retirement Income Journal. “He’s simply taking advantage of the way these contracts are structured.”

Bizarre as it is, the Caramadre case is not unique. Legal documents obtained by RIJ describe a cluster of MetLife, Sun Life, New York Life, Genworth, and Hartford annuities, involving some $9 million in premiums, purchased by a group based in New York City on the life of a destitute, 38-year-old African-American woman dying in a Chicago nursing home. (See below, and “The Exploitation of Sherry Lynn Pratt.”)

Exploiting enhanced death benefits
More on Western Life and Transamerica’s allegations in a moment. First, a bit of background:

STATs are not to be confused with STOLIs, or stranger-originated life insurance transactions. In STOLIs, investors buy in-force life insurance policies from the elderly or pay elderly, infirm people to buy life insurance and designate the investors as beneficiaries. STATs work a little differently.

Typically, a destitute, isolated and terminally ill person—who may or may not be aware of the nature of the transaction—is located by intermediaries to serve as the annuitant of a contract where an enhanced death benefit rider is elected. A third party—an investor—puts up a large premium and is the owner and designated beneficiary.

Advertisement The strategy takes advantage of the contract’s death benefit, either to insure the beneficiary’s investment against market losses or to take advantage of a death benefit enhancement. “By using terminally ill annuitants with short lifespans, the enhanced death benefits, and aggressive investment strategies, the annuity contract becomes a vehicle for a short-term investment in the equity markets,” one of the lawsuits said, adding that:

“When the annuitant dies (ideally not too long or short after contract formation), the owner/beneficiary locks in any market gains during that period. Should the markets yield losses, the enhanced death benefits guarantee, at a minimum, a return of the investment premium.”

The lawsuits indicated that money can also be laundered by a STAT, because an agent, broker-dealer or insurer may neglect to scrutinize the premium, and soon returns it to the owner in the form of a death benefit check from a reputable insurance company.

An insurer becomes vulnerable to STATs when, perhaps to seek a competitive advantage, it offers a rich enhanced death benefit and doesn’t specifically prohibit STATs in its prospectus. The “double enhanced death benefits” in the Western Reserve and Transamerica policies, for instance, offered guaranteed 5% and 6% compound interest on the premium as well as annual step-ups to the annuity’s market value.

Investors may also use the death benefit to invest safely in risky assets. The Western Reserve variable annuity contract purchased by several of Caramadre’s clients, Freedom Premium III, offered aggressive investment options. One of its fund providers, Profund Advisors, offered narrow sector funds, “short” funds, a “Falling U.S. Dollar” fund and an “UltraSmall-Cap” fund.

Life insurance companies would be acutely hurt by STATs when a bear market—such as the two we’ve seen in the past decade—puts deferred annuity death benefits deep in the money. Insurer losses on death benefits in the early 2000s were famously steep.

But the fact that the annuitants in these cases were terminally ill with lung cancer and other ailments—people with less than three months to live “automatically qualified” for “the program,” according to Caramadre’s December 2007 ad in the Rhode Island Catholic newspaper—suggests that the policies would be of less use as investment insurance than as ways to generate commissions, earn bonuses, or obscure the sources of premiums.

MetLife and ING
One of the plaintiff’s attorney in the Rhode Island suits told RIJ that he was not aware of other STAT cases in the United States currently. But there are signs that MetLife and ING have also grappled with the STAT issue to some degree.

In January 2009, MetLife Investors filed a suit in U.S. District Court, the eastern district of New York, against Daniel Zeidman and the estate of Sherry Lynn Pratt, a 38-year-old Chicago nursing home patient who was in the annuitant in a MetLife deferred variable annuity with a 6% purchase payment credit that Zeidman bought in February 2008.

From a ‘STAT’ Notice Issued by ING USA Annuity
Appointed producers are prohibited from selling an annuity contract if: In connection with the sale, the contract owner and/or person being utilized as the measuring life of the annuity contract is offered any consideration or inducement, including, but not limited to, cash payments, gifts or “free” or “no cost” insurance in exchange for participating in the transaction. The producer knows, or has reason to know, that the owner or the person being utilized as the measuring life of the contract is terminally ill. The producer knows, or has reason to know, that the true source of premium payments for a contract has not been disclosed. At the time of sale, a plan exists to directly or indirectly sell, assign, settle or otherwise transfer the contract (or the rights to its death benefits), or an ownership or beneficial interest in an entity that will own the contract, to a life settlement company or other third party. Source: ING Annuity and Life Insurance Company, May 2009.

Zeidman, who provided a $975,000 purchase premium, was named as Pratt’s beneficiary. Pratt, a quadriplegic, died of bedsores within less than a month after the contract was purchased.

In November 2008, an attorney for Pratt’s family, Robert Auler, told MetLife that Ms. Pratt, an arm amputee, could not possibly have signed an annuity contract. Both Daniel Zeidman and Pratt’s family have claimed the $975,000. MetLife, which canceled the contract in January 2009 because of misrepresentations by the purchaser, is asking the court to decide who should receive the nearly $1 million—the Zeidman Estate, or the estate of Sherry Lynn Pratt.

By last spring, at least one other insurer took notice of the STAT issue. In May 2009, the chief compliance officer of ING USA Annuity and Life, Linda Senker, sent a notice to ING’s appointed producers that they would be subject to disciplinary action if they engaged in STAT transactions.

The suits by Transamerica and Western Reserve Life came last fall. They reportedly sparked an investigation by the U.S. Attorney’s office in Providence of Caramadre’s financial practices. Although the U.S. Attorney would not confirm or deny that they opened an investigation, Caramadre attorney Robert Flanders confirmed that he and his client are cooperating with one.

Income Growth During the Booms

Posted on February 10, 2010 by Editor Test -

NewRiver Announces VA Summary Prospectus Index

Posted on February 10, 2010 by Editor Test -

NewRiver, Inc., the Andover, MA-based creators of a central repository of mutual fund documents and data for financial services firms, now offers a Summary Prospectus Index for Variable Annuities.

Like the NewRiver Summary Prospectus Index, the new tracks and provides an overview of all summary prospectus filings that are part of variable annuity contracts. NewRiver is also offering insurance companies a more detailed version of this index specific to each company’s variable insurance products.

According to the Index, a significant number of documents are being filed well in advance of the customary May 1 filing date. Through January 2010, 78 variable product contracts have at least one sub-account with a summary prospectus document.

Likewise, 168 sub-accounts have summary prospectus documents. However, as individual sub-accounts are often included in multiple contracts, there are a total of 776 sub-fund documents available across all variable annuity contracts so far.

This announcement follows NewRiver’s September, 2009 upgrade of Variable Products Express 2.0, a solution that allows insurance carriers to host their contracts and related fund compliance documents and assures these documents mirror those found on the SEC’s EDGAR system. It allows insurers to provide their customers with all required compliance documents without re-directing the contract owner to the various fund company’s web sites.

Corporate Insight Announces Monitor Award Winners

Posted on February 10, 2010 by Editor Test -

Bank of America was the overall winner with 16 Monitor Awards while Fidelity Investments followed with nine “Best of Breed” prizes in the 2009 edition of Corporate Insight’s annual review of the online offerings of more than 70 financial services firms.

Corporate Insight, a New York-based provider of competitive intelligence to the financial services industry, evaluated online offerings such as account information and security, educational content, transactional capabilities in the banking, brokerage, credit card, annuity, mutual fund and mutual fund advisor businesses.

Companies receiving the highest number of Corporate Insight Gold Monitor Awards in their respective award categories were:

Advisor Category: American Funds, MFS
Annuity Category: John Hancock
Bank Category: Bank of America
Credit Card Category: Bank of America
e-Monitor Category: E*Trade Financial, Fidelity
Mutual Fund Category: Fidelity

American Funds and MFS received the greatest number of overall Mutual Fund Advisor Awards. BlackRock, Capital One and SunTrust, which were added to the competition for the first time in 2009, received Monitor Awards for unique offerings in several categories.

The mutual fund industry embraced social media in 2009, Corporate Insight said. Vanguard, American Century, Putnam, Franklin Templeton and other fund companies are using Twitter accounts, Facebook pages, blogs and third-party networking and social bookmarking sites to interact with investors and advisors, within FINRA guidelines.

Several firms introduced new applications, websites and text-based services. Chase, Citibank, E*Trade and KeyBank introduced mobile programs for the iPhone, while Wells Fargo introduced an application for BlackBerry. Corporate Insight expects the banking industry to invest heavily in wireless capabilities in 2010.

At Lincoln Financial, VAs Are a Bright Spot in Down Year

Posted on February 10, 2010 by Editor Test -

Lincoln Financial Group reported net income of $102 million for the fourth quarter of 2009 but a net loss of $485 million for the full year of 2009.

The Individual Annuities segment reported income from operations of $120 million in the fourth quarter of 2009 versus a loss from operations of $172 million in the year-ago period. Variable annuity product deposits of $2.1 billion were up 9% versus last year and drove net flows to $838 million, an increase of 42% year-over-year.

Gross annuity deposits were $2.5 billion and net flows were $818 million, both up versus the prior year. Gross deposits and net flows declined from the third quarter of 2009, driven by fixed and indexed annuities, reflecting the low interest rate environment. For the full year, gross deposits were $10.4 billion versus $11.7 billion in 2008, and net flows were $3.9 billion compared to $4.1 billion.

Companywide, net income in the fourth quarter of 2009 included a non-cash charge of $109 million, after tax, for the “impairment of intangibles related to the company’s media assets” and net realized losses of $98 million, after tax, which includes the results of the variable annuity hedge program.

The fourth quarter income from operations was $297 million and full-year income from operations was $943 million. Income from operations in the current quarter reflected growth in average variable account values compared to a year ago and included favorable returns on alternative investments.

Lincoln’s Defined Contribution segment reported income from operations of $33 million, versus a loss from operations of $1 million for the same period a year ago. The current quarter included a net negative impact of approximately $3 million, after tax, primarily related to tax and expense true-ups.

Gross deposits of $1.2 billion were down 7% versus the prior year. Total net flows were a negative $62 million, reflecting the institutional nature of the business, which drives variability in quarterly net flows. For the full year, gross deposits were $5.0 billion versus $5.5 billion in 2008, and net flows were $1.0 billion compared to $781 million.

Employers Restore ‘Match,’ But Worry About Retirement Readiness

Posted on February 10, 2010 by Editor Test -

The percentage of employers who are confident about their workers’ ability to retire with enough assets fell to 54% this year from 66% in 2009, according to a new Hewitt Associates study of 162 large and midsize U.S. employers.

Only 18% were “very confident” about their employees having enough income to last throughout retirement. But 80% of employers that suspended or reduced their 401(k) matching contributions in 2009 said they plan to restore the match this year, the study showed.

According to the survey:

59% of the employers now offer automatic enrollment, up from 51% in 2009.
78% of the employers offer target-date fund options, up slightly from 77% in 2009.
46% of the employers that do not already offer automatic rebalancing are “very” or somewhat likely to add that feature to their plans this year.
38% said they are very or somewhat likely to add automatic contribution escalation.

“In the last 18 months, employees’ 401(k) accounts took a serious financial hit due to the severe market downturn,” Pamela Hess, a Hewitt retirement research specialist, said in a statement about the survey results.

“While there has been marked growth in 401(k) balances since the market recovery began, we still see too many workers not saving and investing in a way that will help them achieve their retirement goals,” she added.

CCH Reviews Tax Proposals in Obama Budget

Posted on February 10, 2010 by Editor Test -

President Obama’s proposed budget has tax proposals for 2011 that reflect a heightened concern with job creation and the rising deficit. CCH issued a Special Tax Briefing on the measures. The administration wants to:

Reinstate former top marginal rates

The president proposes reinstating the top marginal income tax rates of 36% and 39.6% rates for single individuals with incomes over $200,000 and married couples filing jointly with incomes over $250,000.

The $200,000 amount would be reduced for the standard deduction and one personal exemption and indexed for inflation for 2011. The $250,000 amount would be reduced for the standard deduction and two personal exemptions and indexed for inflation for 2011.

The 39.6% rate would start at the inflation-adjusted level now in place for the 35% rate, which for 2010 is $373,650. The president would also make permanent the 10%, 15%, 25% and 28%percent tax brackets, which are due to expire after 2010.

Levy 15 bps fee on big banks’ “covered liabilities”

The president’s 2011 budget also includes his “financial crisis responsibility fee,” a tax on the liabilities of financial institutions with at least $50 billion in consolidated assets. The rate of the fee applied to covered liabilities would be approximately 15 basis points. The fee would be effective as of July 1, 2010.

“This is one of the more controversial elements in the budget,” Luscombe noted.

Restore 20% capital gains tax

Those in the top two brackets would also see an increase in their capital gains rates, to 20% from the current 15% after 2010. However, rather than taxing qualified dividends as ordinary income beginning in 2011, as under current law, Obama would retain their treatment as capital gains.

“Upper-income taxpayers would actually fare somewhat better under Obama’s proposals than they would under current law, which would repeal almost all the Bush-era tax cuts as of 2011,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA.

“Retaining the 10% and 25% brackets benefits them as well as other taxpayers, as does retaining of the treatment of dividends as capital gains. However, they would not fare as well as they have in the past.”

Reinstate estate tax

While the federal estate tax has officially expired for 2010 and is officially set to return in 2011 at pre-2001 levels, the president’s FY 2011 baseline budget assumes a retroactive reinstatement of the estate tax to January 1, 2010, at 2009 levels.

That’s the thrust of the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Bill of 2009 (H.R. 4154) to permanently extend the estate tax at 2009 exemption rates, passed by the House last year. The bill would impose a 45% tax on estates above $3.5 million per individual and $7 million for married couples. The bill is now in the Senate where, at press time, no action has yet been taken.

Establish “Saver’s Credit”

Establish the planned “Saver’s Credit” but change the credit to a 50% match on contributions up to $500 ($1,000 for joint filers). The matched would phase out at a rate of 5% of adjusted gross income (AGI) in excess of $32,500 ($65,000 for married couples filing jointly). The $500 amount and the AGI amounts would be indexed annually for inflation for tax years beginning with the 2012 tax year.

Require small businesses that employ 10 or more people and that don’t offer a retirement plan to enroll their employees in an IRA to be funded by a payroll deduction, although the employees could opt out.

Reintroduce “Pease” limitation

This year also sees a repeat of the proposal to reintroduce the limitation on itemized deductions, known as the “Pease” limitation, and the personal exemption phase-out, known as PEP, for those above the $200,000/$250,000 income thresholds.

Whenever itemized deductions would reduce taxable income in the revived 36% and 39.6% brackets, the tax value of those deductions would be limited to 28%. The proposal would apply to itemized deductions after they have been reduced by the reinstated Pease limitation.

Continue AMT “Patch”

The 2011 fiscal year budget assumes that Congress will continue to “patch” the alternative minimum tax (AMT) as it did for 2009 and then index it for inflation−or continue one-year “patches” in the future.

Miscellaneous items

As in last year’s budget, the administration is also proposing changes to rules regarding valuation, basis and grantor retained annuity trusts to correct what are seen as abusive practices.

A major initiative for businesses in the budget is $33 billion in small business jobs and wages tax credits. The measure would provide a $5,000 tax credit for every net new employee hired by a qualified small business in 2010, capped at $500,000 for any one firm.

The proposal would also reimburse small businesses that increase wages or hours for existing employees for the Social Security payroll taxes they pay on real increases in their payrolls, up to the current Social Security maximum wage base of $106,800.

Another new item is a proposal to remove cell phones from their current classification as “listed property.” This would lift the strict substantiation requirements for business use and make depreciation of cell phones easier. In addition, an employee could exclude the fair market value of personal use of a cell phone provided predominantly for business purposes from gross income.

“The current rules date back to when a cell phone was an expensive novelty,” Luscombe said.

As in the 2010 budget, the administration again proposes to raise the exclusion currently available on gain realized on qualified small business stock from 75% to 100%. The exclusion is intended to help small businesses raise capital. The administration would eliminate as an AMT preference item the excluded portion of the gain, as well.

“This would be an attractive investment for someone who otherwise might be facing a 20-percent capital gains tax in the future,” Luscombe noted.

The administration also proposes extending the Section 179 expensing and bonus depreciation provisions for 2009 through 2010.

The budget reiterates a number of revenue raisers from last year, including a repeal of the LIFO inventory method, taxation of carried interest as ordinary income and a package of international taxation “reforms.” The president also proposes to revive Superfund taxes for 10 years commencing with tax years beginning after December 31, 2010.

The Search for a Safe Withdrawal Rate

Posted on February 10, 2010 by Joseph A. Tomlinson, CFP -

Current financial market conditions pose a number of challenges for financial planners, not least of which is the determination of safe withdrawal rates for retired clients.

To solve this problem, many advisors rely on research by fellow planner Bill Bengen, who demonstrated in the early 1990s that, based on history, a 4% to 4.5% initial withdrawal rate, with yearly inflation adjustments, would have been safe for 30 years.

But because an individual who holds funds in retirement accounts would likely need more than $1.3 million to generate an inflation-adjusted, after-tax income stream of $40,000 to $45,000, his numbers are not good news for clients contemplating retirement.

Since Bengen’s initial work, he and other researchers have reexamined withdrawal strategy issues to see if it’s feasible to frame the problem differently or to manage retirement accounts so that retirees can take higher initial withdrawals without undue risk of ruin.

In this article, I highlight work done by Michael Kitces, who looks at stock market valuation levels as meaningful guides to setting withdrawal strategies. I also discuss the use of guaranteed products, like annuities, and how their attractiveness may vary with such factors as P/E levels, interest rates, and market volatility.

P/E ratios and withdrawal rates
Kitces, director of financial planning for Pinnacle Advisory Group and publisher of The Kitces Report, has produced a study showing how stock market valuation levels at the inception of a planning period impact safe withdrawal rates.

P/E’s and Stock Returns By Decade
Period	Beginning of Period P/E	Annualized Stock Return
1930-1939	21.5	-.92%
1940-1949	16.9	8.50%
1950-1959	10.6	19.46%
1960-1969	18.3	7.74%
1970-1979	16.9	5.92%
1980-1989	8.8	17.34%
1990-1999	17.2	18.05%
2000-2009	42.5	-.91%
Avg 1930-2009	17.3	11.12%
Sources: Shiller Data Base, Stern NYU Data Base

To remove the impact of earnings cycles, he uses a price/earnings ratio with the past 10 years of earnings in the denominator. This measure has been called “P/E 10” and “Cyclically Adjusted P/E or (CAPE).” Graham and Dodd used it in the 1930’s, and Yale economist Robert J. Shiller popularized it in his 2006 book, “Irrational Exuberance.”
Testing based on historical data shows that beginning P/E levels have been predictive of long-term stock returns, as the following chart shows.

This chart shows initial P/E’s and equity returns for each decade since 1930. It demonstrates a clear tendency for high P/E’s to presage below average returns and vice versa. (Although PE’s have been good forecasters of long-term returns, they have not been useful in the short run. In the late 1990s, P/E’s rose into the high 20’s, and 30’s and stock prices kept climbing. We remember how that ended.)

Safe Withdrawal Rates Based on P/E 10 Quintiles and 60/40 Stock/Bond Mix
Quintile	Lower P/E	Upper P/E	Lowest SWR	Average SWR
1	5.4	12.0	5.7%	8.1%
2	12.0	14.7	4.8%	6.7%
3	14.7	17.6	4.9%	6.3%
4	17.6	19.9	4.9%	5.8%
5	19.9	28.7	4.4%	5.1%
Source: The Kitces Report 05/08

Kitces recognized that long-term returns matter most in retirement planning, and that advisors should consider P/E’s at the beginning of the retirement period when choosing a safe withdrawal rate. The following chart, taken from his study, shows the relationship between P/E’s and safe withdrawal rates. (The P/E Quintiles are based on P/E’s at the beginning of rolling 30-year periods starting in 1881.)

Except for Quintile 5, all of the P/E levels allow higher withdrawal rates than those prescribed by Bengen. The Lowest SWR’s could be used for clients who need to be sure of not running out of money, while the Average SWR’s could be used for clients who have backup resources for use in below-average return scenarios.

Immediate annuities and interest rates
Planners might ask: What investment strategies should I recommend when P/E’s are high and Kitces’ approach dictates low withdrawal rates? How can I raise the withdrawal rate without subjecting the client to undue risk? As of early January PE’s have edged above 20, so we are now in Quintile 5 and these questions apply.

Advertisement Altering the stock/bond mix in favor of bonds might appear to be the best approach under these circumstances, and Kitces examines this strategy in his study. But he concludes that emphasizing bonds would probably do more harm than good. Even at high P/E levels, expected returns for stocks exceed expected bond returns.

Buying annuities or other guaranteed products offers another course of action. Immediate annuities convert investments into lifetime income streams. Based on late-January Vanguard/AIG rates, a 65-year old female could purchase an immediate annuity that pays $426.33 per month with annual increases based on actual inflation for $100,000. That equals a 5.1% initial withdrawal rate, so using an annuity could improve the safe withdrawal rate.

But annuities would not necessarily deliver a huge improvement, because the current environment is not particularly favorable for them. Prices of inflation-adjusted annuities reflect both real interest rates and spreads between Treasury bonds and corporate bonds. Real rates as measured by 10-year Treasury Inflation-Protected Securities (TIPS) are currently only 1.35%, compared to a long-term average of 2%.

Real rates may well rise as the economy recovers, however. The spreads between corporate bonds and Treasuries have narrowed over the past year, and it’s not clear whether they will continue to do so. I expect immediate annuity payout rates to trend higher.

At this time, few companies offer inflation-adjusted life annuities and the pricing may not be as competitive as it is for straight fixed-payout annuities. For example, if we compare the Vanguard/AIG rates for the inflation-adjusted annuity with their current rates for annuities with pre-set annual increases, we find an implicit inflation assumption of 3.3%.
Expected inflation based on the TIPS/Treasury spread is currently around 2.3%. A client could purchase an annuity with preset 2.3% annual increases that would pay $478.52 per month, equivalent to a 5.7% initial withdrawal rate. In this environment, I would not recommend investing large sums in annuities, but a planner might advise clients to begin purchasing a series of small immediate annuities over a number of years.

GLWBs and SALBs
Purchasing an investment product with retirement guarantees, such as a variable annuity with a guaranteed lifetime withdrawal benefit (GLWB) or a so-called Standalone Living Benefit (SALB), is another approach. The relatively new SALB product, now offered by four insurers, is simply an unbundled version of the GLWB attached to a managed investment account.

Both the GLWB and SALB combine longevity insurance with protection against poor investment performance. The investment protection piece is effectively a purchase of long-term put options on the stock market. The best time to purchase these products is when stock market volatility is low and options are cheapest.

Looking back, there were times during 2005 and 2006 when the VIX index, a measure of anticipated volatility, fell to between 11 and 12, or well below its long-term average of about 20. During this period, insurers offered GLWB riders with annual charges of only 30 to 50 basis points, causing Moshe Milevsky of York University and others to question whether those charges were high enough to cover potential losses.

During the financial crisis, the VIX soared to 70. Insurers raised GLWB prices to 80 to 100 basis points, placed stricter limits on investment choices and, in some cases, pulled their GLWB products from the market. The VIX subsided as the market partially recovered, but it still stands at around 25 and insurers have not yet reduced the charges for these guarantees.

Even with reduced rider fees, however, SALB products and variable annuities with GLWBs tend to be expensive. Total annual charges typically run 2% to 3% for products that provide only a 5% income guarantee that does not adjust for inflation. Based on an estimated future inflation of 2.3%, that’s equivalent to an inflation-adjusted withdrawal rate of just 3.75% over 30 years, which is below Bengen’s or Kitces’ lowest recommended safe withdrawal rates.

Clients would therefore not enjoy a better withdrawal rate by moving money into these products at today’s pricing levels. SALBs and GLWBs may eventually play a key role in retirement portfolios, but they will need to be more attractively priced. A no-load SALB based on an underlying portfolio of low-cost index funds could be the answer.

Final thoughts
With its low interest rates, high P/E’s, and keen memories of record volatility, the current environment poses challenges for advisers who hope to recommend withdrawals rates and choose investments or guaranteed products for their older clients. Planners who work with clients contemplating retirement might consider the “Don’t Retire Now” strategy.

Spotlight on Chairman Schapiro

Posted on February 10, 2010 by Editor Test -

The board of the Financial Industry Regulatory Authority will meet today in New York to review charges that former FINRA executives, including current SEC chairman Mary Schapiro, received excessive compensation, and to decide whether to try to recoup some of the money.

The board of the brokerage industry’s self-policing body will review whether FINRA management mismanaged its affairs by paying senior executives nearly $30 million in salary and bonuses in 2008 while FINRA lost a reported $696 million on its own investment portfolio.

FINRA is taking action as a result of a lawsuit by Amerivet Securities Inc., a FINRA member firm in Inglewood, Calif. The civil lawsuit was filed in Superior Court of the District of Columbia last August 10.

The Amerivet complaint goes beyond compensation issues. It charges that FINRA was negligent in its watchdog role and failed to protect securities firms and the public against the activities of Bear Stearns, Lehman Brothers, Bernard Madoff and others at the center of the 2008 financial crisis.

Advertisement “FINRA did nothing to stop the egregious wrongdoings of these and other miscreants nor to inform the investing public that improper and illegal conduct (including massive securities frauds) was occurring on a grand scale,” the suit said.

The Amerivet suit is tied to at least two other lawsuits, one filed by Benchmark Financial Services and the other by Standard Investment Chartered, Inc., against former FINRA executives.

They charge that 5,100 NASD firms were deceived into taking only $35,000 each after voting in favor of the creation of FINRA out of the NASD and New York Stock Exchange regulatory groups, when they were entitled to much more, based on FINRA’s estimated worth of $1.6 billion, court documents show.

At least two of the lawyers in the Amerivet suit, Jonathan Cuneo of Cuneo, Gilbert & Laduca LLP in Washington, D.C., and Richard D. Greenfield, of Greenfield and Goodman LLC in New York, are lead attorneys in the two other lawsuits against FINRA.

Together, the three lawsuits accuse the sitting SEC commissioner, Mary Schapiro, of not just incompetence in the financial crisis but also with helping defraud thousands of investment firms of millions of dollars in payouts they should have gotten by voting for the NASD-NYSE regulatory merger.

The suits also question whether the securities industry can or should police itself, especially in light of FINRA’s failures to do so effectively in recent years.

Thirteen current and former executives of FINRA made more than $1 million apiece in 2008, according to tax forms that FINRA filed in November and the company’s annual report.

As chief of FINRA, Ms. Schapiro received about $3.3 million in salary and bonuses in 2008, including $937,000 in base salary, $1.9 million in incentives, and $520,000 in “other reportable” compensation.

According to court documents, she also received a $7.2 million severance package from FINRA after she accepted President Obama’s appointment to run the Securities and Exchange Commission.

Other highly-compensated former FINRA executives were former chief administrative officer Michael D. Jones ($4.43 million), who is now chief operating officer of the Public Broadcasting Service; Elisse B. Walter ($3.8 million), now with the SEC; and Douglas Schulman ($2.8 million), now commissioner of the Internal Revenue Service.

TIPS for Retirement Investing in the ‘New Normal’

Posted on February 9, 2010 by Editor Test -

Among the lessons we’ve learned from the recent financial crisis is that traditional asset class diversification is not always a free lunch. Another lesson, corresponding with the close of what was essentially a lost decade for major stock indexes: Equities aren’t always long-term winners.

For retirees depending on income from their investments, this education is particularly painful, going to the very heart of their ability to maintain their lifestyle. While a decline in equities may, at times in the past, have been offset by a rise in bonds, having the two assets fall fast and hard in tandem during the crisis was rough for even well-diversified retirees.

School, unfortunately, is still in session, as we head into a period which may well see lower economic growth, increased savings, more government intervention – all topped off with the eventual return of inflationary threats.

This New Normal will challenge all investors and may heighten the traditional risks that retirees face, whether from volatile markets, outliving their portfolios, or simply not having enough savings. Here’s where inflation — long under-addressed by the retirement industry – starts to look particularly virulent.

Tom Streiff, PIMCO Many investors have traditionally relied on stocks and bonds to see them through retirement, based on the widely held – yet often incorrect – assumption that equities are a suitable inflation hedge. It is true that equities might perform well over many time periods, even in the New Normal. However, the volatility of equity returns could represent a substantial deviation from purchasing power when equities do not perform well versus inflation, such as the 10-year period that ended December 31, 2009, or during periods of extremely high inflation like the 1970’s.

For today’s retirees it’s not unusual to live 20, 30, or even 40 years into retirement, complicating their ability to manage risk and deliver returns that maintain their purchasing power. Even if an investor believes that equity exposures may help keep up with inflation, such a strategy elevates the risk of irreparable portfolio damage in the face of extreme, unforeseen market events. Retirees should be spending their time enjoying their lives, not worrying about the risks of having their portfolios ravaged by market crises, of inflation cutting into their purchasing power, or both.

While financial service providers have been aggressively developing retirement income products to meet retirees’ needs, traction has been limited. In recent years, managed payout funds had proliferated and grown in popularity, yet their image has been tarnished by the damage they sustained in the financial crisis due to heavy equity allocations. Insurers, meanwhile, have expanded their menu of annuities – including some that hedge for inflation – yet many retirement investors remain wary of these investments. Annuities offer a fixed rate of return, backed by the claims paying ability of the insurer, but they often have high management costs and steep penalties for withdrawals.

The need for food, healthcare and housing never ends, and portfolios aimed at providing in-retirement income should have elements that cover these costs every month, regardless of equity-market performance or whether inflation is steadily raising the costs of buying these essentials. There is little tolerance for risk in these areas.

Fortunately, there is a compelling solution designed precisely to preserve purchasing power, typically with substantially less volatility than stocks: Treasury Inflation Protected Securities, or TIPS.

TIPS offer an explicit inflation hedge. They are issued by the U.S. government, which guarantees their timely payment of interest and return of principal at maturity. Their face value is adjusted in step with changes in the rate of inflation as measured by the Consumer Price Index for All Urban Consumers (CPI-U), with interest paid on the adjusted amount. At maturity, a TIPS investor receives the original principal plus the sum of all the inflation adjustments since the bond was issued. The result is a 100% connection to inflation, guaranteed by Uncle Sam.

Whether a retiree is drawing down savings over time or living off of interest payments and dividends – and few can – we believe the explicit inflation hedge that TIPS provide can help protect purchasing power over an extended period, while their high quality and government guarantee can offer some reassurance for risk-conscious retirees.

There are risks to TIPS, but we believe many of these can be addressed by a well-designed investment process. The value of a TIPS investment can decline if real (inflation-adjusted) interest rates rise. In the event of a deflationary cycle, which is a sustained fall in prices, the U.S. government guarantees repayment of principal; at maturity, investors receive the greater of the inflation-adjusted principal or the initial par amount. Interest payments on TIPS would decrease in a deflationary environment because interest payments are always based on the inflation-adjusted principal amount, which could potentially be lower than the face value of the bond.

Also, investing in TIPS clearly isn’t without its challenges, particularly for retirement investors who wish to receive a high frequency of payments (preferably monthly) to replace employment income. Most retirees require monthly income to pay for their “must haves,” while TIPS interest payments are twice-yearly. Moreover, there are substantial gaps in TIPS issuance that make for an irregular schedule of maturities – up to four year gaps in some cases.

The challenge is as stark as the pain many investors have felt: Traditional approaches to building a retirement portfolio often depend on a risky asset class that does not explicitly track inflation – or ignores inflation altogether. Investors need a better way. We think TIPS, properly managed, are up to the challenge.


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

To receive more information about Real Income 2019 and Real Income 2029 Funds, please provide the following information:	Email
	First Name
	Last Name
	Company

Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the fund’s prospectus and summary prospectus, if available, which may be obtained by contacting your PIMCO representative. Please read them carefully before you invest or send money.

Past performance is not a guarantee or a reliable indicator of future results. PIMCO does not offer insurance guaranteed products or related products that combine both securities and insurance features. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed. Inflation-indexed bonds issued by the U.S. Government, also known as TIPS, are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation. Repayment upon maturity of the original principal as adjusted for inflation is guaranteed by the U.S. Government. Neither the current market value of inflation-indexed bonds nor the value of shares of a fund that invests in inflation-indexed bonds is guaranteed, and either or both may fluctuate.The funds may use derivatives for hedging purposes which may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. The Funds are non-diversified, which means that they may concentrate their assets in a smaller number of issuers than a diversified fund.

During periods of rising inflation the amount of the monthly distribution is expected to increase and during periods of deflation the amount of the monthly distribution is expected to decrease. The monthly distribution amount may be adjusted during the term of a Fund to better enable the Fund to provide regular monthly distributions through the final maturity date. These distributions are not guaranteed.

The value of most bond funds and fixed income securities are impacted by changes in interest rates. Bonds and bond funds with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally fall as interest rates rise.

The Consumer Price Index (CPI) is an unmanaged index representing the rate of inflation of the U.S. consumer prices as determined by the U.S. Department of Labor Statistics. There can be no guarantee that the CPI or other indexes will reflect the exact level of inflation at any given time. It is not possible to invest directly in an unmanaged index.

This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC. ©2010, PIMCO.

PIMCO Funds are distributed by Allianz Global Investors Distributors LLC, 840 Newport Center Drive, Newport Beach, CA 92660, (800) 927-4648.

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

Easing a Widow’s Hardship

Posted on February 9, 2010 by Kerry Pechter -

It’s an accepted fact that women tend to outlive their husbands. In the sunny condo villages of South Florida, widows know that a good man—that is, a man over 85 who still sees well enough to drive a car at night—is hard to find.

Plenty of statistics support this assertion. By age 62, 57% of Social Security recipients are women. By age 85, the number grows to 69%. At age 92, women outnumber men 2:1, according to Social Security’s Period Life Table for 2005.

Because women generally marry men older than themselves, women outlive their husbands by an average of seven years, despite the fact that women’s life expectancy at age 65 is only two or three years greater than men’s, 19.7 to 17.0.

Rather than a blessing, long life can become be a curse, or at least a trial, for many women. Women’s superior longevity makes them likelier to live their final years alone. That, in turn, makes them likelier to be poor and likelier to need nursing home care.

Advertisement For married women, there are even formal names for this risk: “death of spouse risk” or “widowhood risk.” And this risk is apparently underappreciated. Only 43% of pre-retirees “are somewhat or very concerned that their spouses might not be able to maintain the same living standard after their death.”

“I and many others are very concerned that there is not enough focus on planning for widowhood,” said Anna Rappaport, actuary and chair of the Society of Actuaries Committee on Post-Retirement Needs and Risks.

In this third installment of Retirement Income Journal‘s series on financial risks in retirement, we’ll focus on aging and gender. As Rappaport and others have pointed out, there are ways to help widows. But couples may have to work longer and/or change their Social Security claiming behavior. And success will depend largely on early and comprehensive personal financial planning.

Planning for the surviving spouse
Widowhood or surviving spouse issues will affect millions of couples. Even the affluent and their advisors commonly face decisions that will have a vital impact on the survivor’s welfare—decisions about optimizing the use of Social Security benefits, defined benefit payouts annuities, and insurance.

The Social Security benefit structure works both for and against the interests of women, depending on their specific family situation. As the primary caretaker of children, women are still less likely to work as many years as men. And, while the pay differential has narrowed, women are still paid less than men on average.

Gender Effects in Social Security
In 2007, the median full-time, year-round earnings of working-age women were $35,000, compared to $45,000 for men. In 2007, the average annual Social Security income received by women 65 years and older was $10,685, compared to $14,055 for men. In 2007, for unmarried or widowed women age 65 and older, Social Security accounted for 48% of their total income, compared to 37% for unmarried elderly men and 30% for elderly couples. In 2007, 47% of all elderly unmarried females receiving Social Security benefits relied on Social Security for 90% or more of their income. In 2004, only 24% of unmarried women aged 65 or older were receiving their own private pensions (either as a retired worker or survivor), compared to 30% of unmarried men. Source: Social Security Administration

Women are therefore likely to qualify for lower Social Security benefits than men. For the same reasons, women are less likely to have qualified for defined benefit pensions, or to have saved as much in defined contribution plans as men.

When a husband in a retired couple (both at least age 62) dies, his widow’s Social Security benefit, if lower, rises to match his own. But his benefit ceases, so that the household income drops by the amount of the benefit of the surviving spouse.

The Social Security benefit structure does not work as well for widows in two-earner households. For instance, if a husband averaged $50,000 in income during his working life and his wife did not work, their monthly benefit and the widow’s survivor benefit will be significantly higher than that of a couple where both partners earned $25,000 a year.

“The Social Security system works very well for a single-earner family with a dependent spouse, but much less well for various combinations of dual-earner families,” Rappaport told RIJ.

There’s a relatively easy way to improve the Social Security benefit for the survivor, for those who can afford to apply it. By not claiming Social Security until full retirement age or later, husbands can significantly increase the amount that they receive in monthly benefits. If they die before their wives, their wives will therefore receive much more per month as widows.

The difference can be substantial. “A husband can increase the monthly benefit his wife gets as his survivor more than 20% if he claims Social Security at 66, not 62, and 60% if he claims at 70,” according to The Social Security Claiming Guide from the Center for Financial Literacy at Boston College.

“For couples where one or both expect to live a long time, late claiming often produces a much better result,” Rappaport said.

Most people, of course, claim Social Security as early as they can. Although this choice may appear to be shortsighted, many have no choice. Some are forced to retire by an illness or disability or the need to care for someone who is ill. Others lose their jobs in their late 50s and never find new ones.

To be able to delay Social Security, individuals would need to work longer, or they would need to mobilize other financial resources, such as 401(k) or 403(b) savings, during the first four to eight years of retirement. That might require an uncommon level of foresight and planning.

Some observers have recommended raising the earliest Social Security eligibility age to age 64 from age 62, or ensuring that the lower-earning spouse’s survivor benefit is at least equal to the higher-earner’s benefit at full retirement age, or requiring spousal consent before anyone can claim at age 62. But changing Social Security regulations is not likely to be easy.

Insurance, pensions and annuities
Because women live longer, they are more likely to require nursing home care than men. Of all nursing home residents, 71.2% are women, according to The National Nursing Home Survey: 2004 Overview published by the Department of Health and Human Services in June 2009.

The latest Merck Manual of Geratrics, citing 1999 data, adds that “of people who reach age 65, 52% of women and 33% of men will spend some time in a nursing home. Of women who die after age 89, 70% have lived in a nursing home for at least some time.”

The mere fact of being the last-to-die makes surviving spouses more likely to need nursing home care but less able to pay for it. Writing in Benefits Quarterly, First Quarter 2007, Rappaport pointed out that “where one member of a couple requires long-term care in a nursing home, it is likely that the survivor will be impoverished after the first death.”

Alternately, she observed that a surviving spouse, unlike the first to die, doesn’t have a spousal caregiver who could help care for her (or him) at home. The mere fact of being alone puts her at greater risk of needing nursing home care. And women are particularly vulnerable since they are less likely to remarry after the loss of a spouse.

When couples discuss the best use of their defined benefit pension payouts or when they consider buying an immediate or deferred payout annuity, they face decisions that will affect the surviving spouse. The fact that joint-and-survivor payouts are typically smaller than the payout rate for one person can make these decisions difficult.

In defined benefit plans, federal law requires that the normal form of benefit from a defined benefit plan be a joint and survivor benefit. But because the single benefit is likely to be higher, many are tempted to take that instead, leaving no income for the survivor. In practice, many people who have the option of taking lump sum benefits from defined benefit plans do so, giving up guaranteed lifetime income.

The same is true for annuities. The income from a joint-and-survivor immediate annuity contract is lower than the payout from a contract for a single man. According to a Vanguard quote, the difference can be $552 to $665, or more than $1,200 per year. This encourages couples not to buy the joint-and-survivor contract−a decision that would deny the surviving spouse annuity income in later years.

Clearly, there are no easy or universal answers to the added risks and expenses that women bear simply by having longer life expectancies than men. Each couple’s circumstances−their overall wealth, their health, and their legacy wishes−will be different.

But, for the country, an unappreciated social challenge is looming. The Baby Boom generation alone will produce more American widows than the world war that catalyzed it. As Brian Korb writes in January’s Journal of Financial Planning, of the 25 million married boomer women, a projected 17.5 million, or 70%, will be widows someday.

Artwork Credit: Trustees of Boston College, Center for Financial Literacy.

Variable Annuity Provider Customer Loyalty Ranking

Posted on February 3, 2010 by Editor Test -

Variable Annuity Provider Customer Loyalty Ranking
1	TIAA-CREF Life Ins Co
2	Ameriprise Financial
3	Allianz Life Ins Co of NA
4	Fidelity Investments Life Ins
5	ING
6	Nationwide Life Ins Co
7	MetLife
8	John Hancock Life Ins Co (USA)
9	Jackson National Life Ins
10	The Hartford/Hartford Life Ins Co
Source: Cogent Research Investor Brandscape 2010

In Search of Plan C

Posted on February 3, 2010 by Kerry Pechter -

WASHINGTON, D.C.—Yesterday was Groundhog Day, the day that supposedly repeats itself ad infinitum, so it was fitting to hear assistant Secretary of Labor Phyllis C. Borzi say something that has been said many times before: that America has a retirement income problem.

“We have a crisis of confidence regarding retirement,” the Obama appointee and employee benefits expert said. She spoke at a half-day conference sponsored by the National Institute of Retirement Security, an advocacy group created by state and local defined benefit plan administrators about three years ago.

“Defined contribution plans used to be our Plan B, after defined benefit plans,” she continued. “But the past two years have shown that DC plans weren’t a silver bullet. We don’t appear to have a Plan C, other than Social Security. Our job is to come up with a Plan C.”

Borzi, who runs the DoL’s Employee Benefits Security Administration, has jurisdiction over some 700,000 private-sector retirement plans and 2.5 million health plans. She was the featured speaker at the NIRS event, which was called “Raising the Bar: Policy Solutions for Improving Retirement Security.”

The event drew a capacity crowd of some 250 people, most of whom work in public pensions, which are under siege because the recession has made it hard for states and taxpayers to fund them. The crowd came to hear speakers like Putnam Investments’ CEO Robert Reynolds, Harvard Law professor Elizabeth Warren, AFL-CIO president Richard L. Trumka and Roger W. Ferguson Jr., the president and CEO of TIAA-CREF.

Nothing startlingly new was revealed at the conference, which was held in the ornate Columbus Club, a one-time “fancy soda fountain” whose walls and ceiling now feature hand-painted Pompeian flowers, inside Washington, D.C.’s restored Union Station. But the event suggested that the issue of retirement income is gaining traction in the nation’s capitol.

Borzi’s presence, and the fact that the Labor and Treasury Departments also chose yesterday to publish a request for 90 days of public input about workplace annuities, seemed to signal that the Obama Administration has officially picked up the retirement income torch.

Compared with retirement income conferences sponsored by the financial industry, this one was distinctly more liberal in tone and sentiment. It reflected the world-view in which government officials are problem-solvers, unions are forces of good, and the welfare of the embattled middle class, rather than the most affluent quintile, take priority.

Nonetheless, Borzi, an attorney who had a reputation as a “fiduciary hawk” during her career as an academic and an ERISA lawyer, didn’t seem to underestimate the challenges her department faces in trying to put lifetime income options in retirement plans.

Borzi ticked off the many “technical and policy” issues that make it difficult to introduce lifetime income options into retirement plans, including questions about spousal consent, around the conversion rates for projecting a plan participant’s future income, or about public’s stubborn resistance to annuitization even when it is offered.

She made a point of saying that reform would not come at the expense of strong oversight. “Some academics say that, if we waived the fiduciary rules, plan sponsors would offer annuities in their plans. I can assure you that the fiduciary rules won’t be waived on my watch or on [Labor Secretary] Hilda Solis’ watch, but we want to find out how we can make it easier,” she said.

“Labor and Treasury are now looking at a lost feature of DB plans: the lifetime income stream. I use the phrase ‘lifetime income stream’ because I’m not hawking annuities. I don’t work for the insurance companies,” she was quick to point out, perhaps in recognition of the competition between the securities and insurance industries in the retirement market.

“But something has gone wrong, and we need to look for a means or a mechanism for people to enjoy retirement without fear,” she continued. “The 401(k) plan isn’t really a retirement system. You get money out when you change jobs. People either squander their lump sum payouts, or they treat it too conservatively because they’re afraid of outliving their money.”

In putting out a request for information, or RIF, yesterday, Borzi said, “We want to start a national dialogue or conversation to see if it’s a good idea to allow people to take a lifetime income stream” from 401(k) plans. “We want to find out if there are things we can do—products, regulations, legislation—or if we need to do anything at all.”

After the 90-day comment period, “We might have hearings. We might propose legislation. The administration is very interested in retirement security, so there may be administration initiatives,” she said, noting mordantly, “If you don’t know where you are going, any road will take you there.”

Firms Back Variable Annuity Product Launches With Aggressive Online Marketing Campaigns

Posted on February 3, 2010 by Ben Pousty, Corporate Insight -

No annuity product was hit harder during the financial crisis than variable annuities. Many variable annuity contracts saw significant drops in value, in many cases 30% or more, due to the products’ heavy exposure to the financial markets. For an investment that supposedly offers a guaranteed retirement income stream, variable annuities had been exposed as flawed and ultimately risky investment vehicles.

Despite the firms’ best efforts to evolve variable products to fit the new financial landscape, variable annuity sales remained flat throughout 2009 and were down significantly in contrast to 2008. In response to the lackluster sales numbers, firms have intensified their online marketing campaigns to the public, placing additional promotional muscle behind high-profile variable annuity product launches.

Fidelity MGGI Public Homepage Image Fidelity and AXA Equitable have both released memorable, multi-faceted online sales campaigns for new variable annuities over the last three months. Fidelity’s November launch of the MGGI (MetLife Growth and Guaranteed Income) variable annuity was backed by homepage promotional imagery that integrated the firm’s flagship GPS campaign theme and linked to a comprehensive product page.

Aside from offering pertinent details about the MGGI variable annuity and a good selection of literature, the product page also features an engaging video and new product-focused calculator. The video is three minutes long and creatively highlights key product features and strengths using vivid imagery and audio commentary.

The MGGI calculator has an attractive, user-friendly interface and is easy to complete. After inputting age, lump sum investment value and market return, a hypothetical illustration displays the MGGI’s target income payments. The results can be viewed in a summary, chart or table.

The AXA Equitable Retirement Cornerstones variable annuity was introduced online in creative fashion in January. A relatively straightforward homepage image links to the Introducing Retirement Cornerstone sitelet, which contains an interactive cube that highlights key product features.

The interactive Retirement Cornerstone cube focuses on four areas – Tax Deferred Single Platform, Performance, Protection and Retirement Cornerstone. Product structure, key features, available underlying accounts, performance data and account management are clearly explained. Links to the Retirement Cornerstone product information page and related literature are offered in all four sections.

AXA Equitable Interactive Retirement Cornerstone Cube

Over the last year, firms have worked tirelessly to mold variable annuities into safer, more cost-efficient retirement investments that pose fewer risks to both consumers and issuers. It is clear that aggressive and engaging online marketing campaigns will play a large role in selling prospective investors on variable annuities as reliable retirement income solutions.

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

Agencies Seek Public Input on Lifetime Income Options

Posted on February 3, 2010 by Editor Test -

The U.S. Departments of Labor and the Treasury want your advice on how to enhance retirement security for workers by including lifetime annuities or other arrangements as distribution options in employer-sponsored retirement plans. The request for information (RFI) appears in yesterday’s edition of the Federal Register.

“Today’s initiative is particularly important given the shift from defined benefit plans that offer employees lifetime annuities to 401(k) and other defined contribution plans that typically distribute retirement savings in a lump sum payment,” said Phyllis C. Borzi, assistant secretary for the Labor Department’s Employee Benefits Security Administration.

The RFI seeks comments on a broad range of topics, including:

The advantages and disadvantages of distributing benefits as a lifetime stream of income both for workers and employers, and why lump sum distributions are chosen more often than a lifetime income option.
The type of information participants need to make informed decisions in selecting the form of retirement income.
Disclosure of participants’ retirement income in the form of account balances as well as in the form of lifetime streams of payment.
Developments in the marketplace that relate to annuities and other lifetime income options.

Written comments responding to the lifetime income RFI may be addressed to the U.S. Department of Labor, Office of Regulations and Interpretations, Employee Benefits Security Administration, N-5655, 200 Constitution Ave. NW, Washington, DC 20210, Attn: Lifetime Income RFI. The public also may submit comments electronically by email to [email protected] or through the federal e-rulemaking portal at http://www.regulations.gov.

Putnam To Help Plan Participants Forecast Income

Posted on February 3, 2010 by Editor Test -

Putnam Investments has launched an online tool for 401(k) plan participants that will calculate how much they can expect to receive in monthly income after they leave the work force. The tool will initially be available only to Putnam’s plan sponsor clients and their employee plan participants.

Financial advisers will be able to use the tool within three months, Jeffrey Carney, a senior managing director and head of global marketing, products and retirement at Putnam, said at Putnam’s Retirement Income Summit in New York last week.

Unlike tools that require investors to input all their data in multiple steps to figure out what they will need to save for retirement, Putnam’s Lifetime Income Analysis Tool allows participants to go to its plan participant website and immediately see a monthly retirement income statement based on their current savings plan and account balance, according to Mr. Carney.

“Every time a participant logs in to the site, they will see their account balance as retirement income,” said Ed Murphy, a managing director and head of defined contribution.

Participants then can adjust different sliding rules to see how their retirement income would be affected if they increased or decreased their 401(k) contribution rate and their age of retirement.

Because the tool is integrated with 401(k) plan sponsors’ record-keeping systems, it will be more effective in helping participants take actions than other online services, said Dallas Salisbury, president of the Employee Benefit Research Institute.

“This tool has the ability to change how much someone is contributing to their plan in three clicks,” he said. “Last time I changed something in my 401(k) plan, it took 21 clicks.”

Pioneer In Life Settlements Calls It Quits

Posted on February 3, 2010 by Editor Test -

Goldman Sachs Group Inc. has shut down its life settlements provider, Longmore Capital, Investment News reported.

The move marks Goldman Sachs’s exit from the secondary life settlements market, said Michael DuVally, a spokesman for the firm. He said that the decision to shut down the life settlements provider was a “commercial decision.”

“When we entered in 2006, we thought the life settlements market had the potential to grow into a large institutional market, but at the present time we don’t see it growing beyond the size it has right now,” he added.

Goldman’s decision to shut down Longmore Capital arrives about a month after the investment bank’s decision to shut down its QxX mortality index.

Launched in January 2008, the QxX index tracked the lives of 46,000 people over 65 with a primary impairment (other than AIDS or HIV). Goldman followed that with the release of the QxX.LS.2 index in December 2008, with another pool of 65,655 people over 65 with conditions that included cancer and diabetes.

That market never took off, however, and industry observers said that few trades were made on the index.

ING to Help Retirement Professionals Grow Their Businesses

Posted on February 3, 2010 by Editor Test -

ING’s U.S. Retirement Services has launched a new program for advisors, consultants and the third-party administrators (TPA) who serve the small and mid-sized corporate retirement plan market.

Referred to as the ING Grow Program, the suite of practice development tools and resources is designed to help ING’s distribution contacts grow their business.

The resources offered in the ING Grow Program focus on three specific categories:

Sales ideas and business-building tools to help grow relationships.
Value-added thought leadership to keep retirement professionals up-to-date on important industry trends.
Behavior-changing technology and educational applications to help participants become better prepared for retirement.

As part of the program, advisors, consultants and the TPA community will be able to offer clients an outline of their Statement of Services. This document will serve as a value proposition that describes the services they intend to provide and their philosophy relating to consulting, conversion and ongoing installation. Advisors may also include industry experience and qualifications, and customize the statement with a firm logo and contact information.

The program includes a series of ING practice management seminars on topics such as Fiduciary Responsibility and Trends in Retirement Plan Administration. They can also tap into the ING Institute for Retirement Research.

The new program also emphasizes the use of ING’s consumer education resources and web-tools, which can be leveraged at employee meetings and serve as catalysts for retirement planning discussions. These include participant seminars and three retirement planning calculators:

INGYourNumber.com. This can help calculate the total amount of money participants need to save by the time they retire.

INGCompareme.com. This harnesses the power of “peer comparison” to show users where they stand in relation to others on a wide range of saving, spending, investing, debt and personal finance matters.

My Retirement Outlook. This retirement and paycheck analysis tool integrates traditional pension plan assets, Social Security benefits and personal savings, and also identifies potential gaps in retirement funding. Participants can print an instant gap analysis statement.

ING’s U.S. Retirement Services, part of ING’s global insurance operations, has more than $285 billion in combined assets under administration and management.

To Insurers’ Relief, VA Owners Acted Inefficiently

Posted on February 3, 2010 by Editor Test -

Issuers of variable annuity living benefit riders did not come through the financial crisis unscathed. But the pain would have been worse if hordes of contract owners had decided to begin drawing guaranteed income while their account values were depressed.

But they didn’t. According to Ruark Consulting’s Variable Annuity Benefit Utilization Study, only one in five owners of contracts with guaranteed lifetime withdrawal benefit (GLWB) or guaranteed minimum income benefit (GMIB) riders took withdrawals. Of those, only one in three withdrew the maximum annual amount.

Seven insurance companies furnished data to Ruark for the study, including MetLife, AXA Equitable and Pacific Life. The study was based on three million contract years of data from January 2005 to June 2009, and the study encompassed about 25% of the variable annuity living benefit market.

To the extent that these results are incorporated into insurer’s assumptions about policyholder behavior and enable them to reduce estimates of risk exposure, the new data could mean that issuers can reduce their reserves for variable annuity income riders.

“If utilization went the other way, they would have to reserve more,” said Peter Gourley, an actuary and vice-president of Ruark Consulting LLC in Simsbury, CT. Surrender rates for the contracts went down as the contracts became in-the-money, meaning that owners were not letting insurers off the hook for the guarantees.

As at least one observer pointed out last year, savvy VA owners and their advisors could have made the most efficient use of their living benefits by starting their income benefits while the account values were down, and perhaps even using the income to buy equities at depressed prices. Few apparently did.

The study covered partial withdrawals under variable annuity contracts containing Guaranteed Living Withdrawal Benefits (GLWB), Guaranteed Minimum Withdrawal Benefits (GMWB) and Guaranteed Minimum Income Benefits (GMIB).

Withdrawal rates for owners of guaranteed minimum withdrawal benefits (GMWBs) were somewhat higher, with one in three owners taking withdrawals. The higher rate was attributed to the fact that most GMWB contracts lack the “roll-ups” or annual bonuses, common in GLWBs, which incentivize owners not to make withdrawals for as many as 12 years.

The Ruark study also showed that, as common sense would predict, utilization rates went up with the age of the contract owner. Tax qualified policies had higher usage than non-tax qualified policies.

The U.S. insurance industry established a new standard in 2009 for establishing statutory reserves on variable annuity business. Often referred to as VA CARVM, it is a principle-based reserve calculation, requiring companies to perform financial projections that utilize assumptions believed to be appropriate.

Insurance companies also establish allocations of their capital, above and beyond reserves, to support their variable annuity business. These allocations, known as Risk Based Capital, have been on a principle-based method since 2005.

This was Ruark Consulting, LLC’s first Variable Annuity Benefit Utilization Study. In combination with its Variable Annuity Mortality Study in 2007 and Surrender Study in 2008, the actuarial firm claims to have provided the first insights into variable annuity policyholder behavior.

SunAmerica Links VA Rider Fees to Volatility Index

Posted on February 3, 2010 by Editor Test -

SunAmerica, the AIG unit that bills itself as “The Retirement Specialist,” has launched two new variable annuity living benefits whose rider fees fluctuate with the VIX, the index of S&P 500 equity volatility at the Chicago Board Options Exchange.

By sharing some of the hedging risk with the contract owner, the insurer hopes to maintain a relatively generous bonus during the accumulation stage and payout rate during the distribution phase. SunAmerica has apparently not chosen to simplify or strip down its variable annuities, but to offer benefits as rich as possible while still “de-risking.”

Designed for the Polaris series of variable annuities, the two guaranteed minimum withdrawal benefits are called Income Plus 6% and Income Builder 8%. They have distinct but overlapping characteristics.

Both contracts encourage the contract owner to postpone withdrawals by promising to double the guaranteed income base (the purchase premium, initially, and the amount on which payouts will be based) if the contract is undisturbed for 12 years.

In addition, the Income Builder 8% allows owners to take withdrawals of up to 5.5% during the income stage. The income stage can begin as early as age 45. The rider is designed for individuals who want to rebuild their portfolios between now and the time they retire.

The Income Plus 6% allows withdrawals of up to six percent during the first 12 years, and clients’ income bases are credited with the difference if the withdrawal—a required distribution from a qualified plan, for instance—is less than six percent. The rider is designed for people who may be involuntarily retired and need to begin living on their savings.

But the novel aspect of the product is the fee structure. The initial fee rate of 1.1% (1.35% for joint and survivor contracts) is guaranteed for the first year. After that, it can fluctuate with the VIX by as much as 6.25 basis points per quarter or up to 25 basis points per year. But it cannot be higher than 2.2% for one person (2.70% for two) per year or lower than 0.60%. For every one percent change in the VIX, the fees move five basis points.

“We’re passing through the cost of the hedging to the owner so that we can add more value,” said Rob Scheinerman, senior vice president for product management at SunAmerica. “In the marketplace all the products have a variable fee structure. And we’ve seen a lot of riders move up in price. This product also has the ability to go down in price.”

“We spent last year trying to understand the marketplace. Advisors were saying, ‘My clients need to generate the most income today.’ As a secondary message, ‘They’ve put off their retirement and they need a recovery strategy,” Scheinerman said.

Aside from minor modifications that SunAmerica has made to existing products in the past year, Income Plus 6% and Income Builder 8% are the company’s first new annuity offerings since the financial crisis and the bailout of its parent company, AIG.

“We did about $1 billion last year, and we’re getting ready for a build-back this year,” he added, saying that AIG’s troubles have not hurt SunAmerica. “We have very high capital levels and there’s never been any question about our strength. People are comfortable selling our product. We distribute through all channels. The wirehouses are our main channel but we’re also strong in the bank channel.”

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