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Women are skeptical of advisers: Cerulli
One of the most notable gender-based differences between investors is the desire to be actively involved in day-to-day management of their portfolios, according to Cerulli Associates. Women express less interest in both managing their own accounts and in hiring advisers.
As reported in the latest Cerulli Edge—U.S. Retail Investor Edition, only 41% of female respondents want this depth of engagement in their financial affairs, compared with 57% of men. One in four men “strongly agreed” to wanting day-to-day involvement, versus 15% of women.
Women also expressed more reluctant to pay for financial advice. About half (51%) of female respondents said they are willing to do so, compared with 58% of men. This provides both a challenge and an opportunity to providers in the advice segment,” says Scott Smith, director of advice relationships, in a release.
Advisers will need to make their value clear to women, Smith said. “As regulators are consistently elevating the role of transparency and disclosure in client relationships, investors are more likely to ask questions about advice fees and commission charges.”
As the industry edges toward a greater emphasis on planning-based fiduciary relationships, the benefits of employing trusted advisors are becoming more material. Instead of simply recommending the “best” stocks or funds, advisors are increasingly adopting process-based planning, which creates an implementation timeline.
By dividing this timeline into tangible milestones, advisors can convey the value they add with each step more effectively than if they merely assess an ambiguous “wealth management” fee, according to Cerulli.
“When they connect their remuneration to specific responsibilities and outcomes, advisors will allay the skepticism of many female investors,” said Smith. “That will create millions of mutually beneficial client relationships.”
Equitable announces $1 billion share buyback
Equitable Holdings, Inc. (NYSE: EQH) announced this week that its board of directors has authorized a $1 billion share repurchase program.
“The uninterrupted execution of our capital management program highlights the strength and resiliency of our balance sheet. Combined with our strong performance amidst a challenging year, we remain confident in our ability to generate sustainable cash flows and return capital to shareholders,” said Anders Malmström, Chief Financial Officer of Equitable Holdings, in a release.
“The announcement of a new $1 billion share repurchase authorization further evidences our commitment to delivering attractive capital returns and generating value for our shareholders.”
Under this authorization, the Company may, from time to time, purchase shares of its common stock through various means including open market transactions, privately negotiated transactions, forward, derivative, accelerated repurchase, or automatic share repurchase transactions, or tender offers. The authorization for the share repurchase program may be terminated, increased or decreased by the board of directors at any time.
Comprised of Equitable and AllianceBernstein, Equitable Holdings has approximately 12,000 employees and financial professionals, $746 billion in assets under management (as of 9/30/2020) and more than 5 million client relationships globally.
© 2021 RIJ Publishing LLC. All rights reserved.
January 2021 fund flows follow 2020 pattern: Morningstar
Long-term mutual funds and ETFs collected $95 billion overall in January 2021, according to Morningstar’s latest fund flow report. US equity funds saw outflows of $38 billion during the month, with actively managed funds losing about $26 billion and passively managed funds losing about $12 billion.
Among U.S. category groups, taxable-bond funds dominated, with $79 billion of inflows in January and $459 billion of inflows over the trailing 12 months, the most by far for any group, the report said.
Investors continued to pour assets into intermediate core bond and intermediate core-plus bond funds, which each saw near-record inflows of more than $25 billion and $13 billion, respectively.
Municipal-bond funds saw a record of $15.9 billion of inflows, potentially in anticipation of increased federal support for cash-strapped municipalities. Sector-equity funds took in $18 billion for their fourth consecutive month of gains, powered by big flows into financial and clean-energy ETFs.
At the fund level, passive bond funds attracted the largest inflows in January. Vanguard Total Bond Market II Index led with $6.9 billion of inflows. Ark Innovation ETF joined the top 10 for the second month in a row with $3 billion of inflows.
Equity funds dominated the list of funds with the biggest outflows, with SPDR S&P 500 ETF seeing nearly $12 billion of outflows. Other large funds, such as Vanguard Institutional Index and iShares Core S&P 500 ETF, posted multibillion-dollar outflows.
Vanguard led all fund families with $38 billion of long-term fund inflows during January, with its taxable-bond funds taking in the most among major categories, with $27 billion. State Street Global Advisors had the month’s heaviest outflows at $5 billion.
© 2021 Morningstar, Inc. Used by permission.
Fear of longevity: A victim of COVID-19?
Perhaps the coronavirus pandemic heightened Americans’ sense of mortality, and dulled their expectations of longevity.
No one knows why, but the perceived value of having guaranteed lifetime income (in addition to Social Security) declined between February and August, as the coronavirus pandemic spread throughout the United States and elsewhere around the globe, according to a new whitepaper.
Sponsored by CANNEX and based on the latest Guaranteed Lifetime Income Survey by Greenwald Research, 46% of US consumers feel less financially secure and 22% feel less comfortable with risk as the result of the pandemic.
But the percentage of consumers surveyed who rated lifetime income as highly valuable (6 or 7 on a scale of 7) fell to 63% from 71% between February and August 2020. “This also represents the lowest point this statistic has been in the last three years,” the report said.
“In addition, fewer consumers agreed with the idea that ‘it is especially important for people over 50 to have a strategy to protect their portfolio against significant investment loss,’” the whitepaper said. In February, 84% agreed with this; in August only 76% agreed. There was 84% agreement with that statement in 2019, 91% in 2018, and 81% in 2016/17.
The GLIS is conducted by Greenwald Research and CANNEX. The annual surveys were fielded in February 2020, days before the market fell dramatically in response to the global COVID-19 crisis. To examine the effects of the pandemic, the researchers conducted an additional mid-year update of both surveys between July 30 and August 13, 2020.
This included a survey of 1,000 Americans between the ages of 55 and 75 with at least $100,000 in investable assets, and a survey of 200 financial professionals with at least $15 million in assets under management.
The GLIS also tested the opinions of financial advisers. Between February and August, the percentage of financial professionals who reported themselves “highly confident in their knowledge of lifetime income products” feel to 59% from 71%. In 2019, 73% reported themselves as highly knowledgeable. self-reported confidence in their knowledge of GLI products decreased dramatically from 71% highly knowledgeable to 59%. The year before (2019), 73% felt highly knowledgeable.
Only 35% of financial professionals felt highly knowledgeable about the CARES Act, which was signed into law at the end of March, long before the August study. Furthermore, the CARES Act contains retirement-related measures that could be important for many clients.
© 2021 RIJ Publishing LLC. All rights reserved.
Jackson National Puts Its Future in Veteran Hands
As it prepares to de-merge from UK-based Prudential plc after 35 years and begin trading on the New York Stock Exchange (as JXN), Jackson National Life—the leading issuer of variable annuity contracts in the US—has named new top management.
Laura Prieskorn, most recently Jackson’s Chief Operating Officer, was named CEO. Marcia Wadsten, who joined Jackson 29 years ago and had been Chief Actuary, was named Chief Financial Officer. They replace Michael Falcon and Axel Andre, respectively.
A 31-year Jackson veteran, Prieskorn was responsible for developing the company’s operating platform and has been a member of its executive, investment and product committees, according to a February 10 SEC filing. Wadsten has been a leader in product design, pricing and risk management.
Falcon, whom Prudential plc hired in January 2019, had been CEO of JP Morgan Asset Management in Asia. He had no previous life/annuity company experience. Steve Kandarian, the former chairman and CEO of MetLife, who helped engineer the spin-off of Brighthouse Financial from MetLife in 2017, will be Jackson’s chairman.
Rather than hold a conventional initial public offering, Prudential plc will use a demerger, “whereby shares in Jackson would be distributed to Prudential shareholders,” the ratings agency AM Best said on January 28. Pending regulatory approval, this “would lead to a significantly earlier separation of Jackson than would have been possible through a minority IPO and future sell-downs,” the release said. Prudential plc will retain a 19.9% share of Jackson.
Jackson had about $205 billion in fee-earning variable annuity (VA) assets on Sept. 30, 2020, according to Morningstar. That’s more than any other US individual annuity issuer. (Only TIAA has more VA assets, with $500 billion, but primarily in its group annuities.) Full-year 2020 financial results will be announced on March 3, 2021, the company said. The spin-off is expected to be completed in the second quarter of this year.
Jackson sold $11.7 billion in VAs in the first three-quarters of 2020. Of that, its top-selling Perspective II contract accounted for about $8.6 billion. Among distribution channels, Jackson is currently the top seller of VAs in the independent broker-dealer channel, the bank/credit union channel and the wirehouse channel.
The context
The US life/annuity industry has seen waves of reconfiguration and consolidation since the 2008-2009 financial crisis. Foreign owners like AXA, ING, and Aviva divested their US annuity businesses, as did MetLife and The Hartford domestically. Opportunistic private equity and buyout firms like Apollo, Blackstone, KKR and others have picked up the pieces and used their esoteric investing skills to raise yields on the assets backing the annuity contracts.
The drivers behind all this creative destruction have been ultra-low interest rates. Starved for yield and seeing the assets behind their liabilities weaken, annuity issuers have derisked, either by divesting, raising prices, switching their product mix or reinsuring distressed blocks of in-force contracts. European owners of US insurers are affected by the implications of Solvency II, a new regulatory regime that is changing the economics of the global life/annuity industry.
Changing strategies
Over the past several decades, Jackson has charted its own distinct path through industry turbulence. Started in 1961 in Jackson, Michigan, Jackson National was a regional life company that sold fixed-rate annuities and term life issuer directly through insurance agents, bypassing big distributors. It was purchased by Prudential plc in 1986.
In 1994, new CEO Bob Saltzman changed Jackson’s business strategy. The company started selling variable annuities, beefed up its wholesaling force, and began courting the distributors it once bypassed. In 2008, the year of the Great Recession, Jackson sold about $6 billion worth of VAs and $4 billion worth of fixed annuities.
Not having sold as many VAs with generous lifetime income riders as firms like MetLife, Prudential and then-AXA Equitable did, Jackson’s VA book wasn’t as vulnerable to the subsequent decline in interest rates. Instead of switching its emphasis to indexed products or reducing its VA sales, Jackson doubled down on VA sales and gave advisers lots of flexibility.
“They were the only carrier that didn’t require investment restrictions on contracts with lifetime income riders, and that gave them half the RIA (Registered Investment Advisor) business,” said Scott Stolz, a former Jackson executive who until recently was head of annuity product distribution at Raymond James.
“I think they made a bet after the financial crisis that the market would revert to the mean, and that VA account values would go up faster if they weren’t volatility controlled.” With the huge bull market since 2010, that bet paid off. They also charged 30 to 40 basis points more for their income riders, while other VA issuers found they hadn’t been charging enough to survive a long interest-rate drought, Stolz told RIJ.
Enter Athene
One challenge for Prudential plc in spinning off Jackson National, Stolz said, was the danger of a ratings downgrade when the newly independent US company no longer has the direct financial support of the British company. In August 2020, A.M. Best downgraded Jackson’s financial strength ratings to “a” from a+” and changed its outlook to negative to reflect “the removal of the rating enhancement previously afforded by Prudential plc.”
Last summer’s deals with Athene, the life insurance subsidiary of Apollo Global Management, may give Jackson the capital reinforcement it needs. Bermuda-based Athene Life Re is reinsuring Jackson National’s $27.6 billion book of fixed annuity business, added a $1 billion to Jackson National’s surplus (via a reinsurance ceding commission).
At the same time, Athene Holding, the parent of Athene Life Re, invested $500 million in Jackson, acquiring 9.9% of voting shares and 11.1% of economic shares. Whether Apollo will take over some of Jackson National’s asset management chores has not been made clear.
Besides Jackson, since 2009 Athene Life Re has reinsured blocks of life or annuity or business for American Equity Investment Life, Western United Life Assurance, Universal American, Jefferson National, Liberty Life, Transamerica, Presidential Life, Aviva USA, Sammons Financial Group, Lincoln National, Voya, MassMutual, Brighthouse Financial and Life Insurance Company of the Southwest.
Other personnel moves
Aside from appointing a new CEO and CFO, Jackson made additional updates to its leadership team. Dev Ganguly will assume the role of Chief Operating Officer. Julia Goatley will return to Jackson and assume an interim role as General Counsel effective February 16, 2021, replacing Andrew Bowden, who is leaving Jackson. Goatley previously served as Senior Vice President, Insurance Legal before departing Jackson in early 2019.
Continuing in current roles will be Aimee DeCamillo, Chief Commercial Officer and President, Jackson National Life Distributors LLC (JNLD); Brad Harris, Executive Vice President, Chief Risk Officer; Chad Myers, Vice Chair of Jackson Holdings LLC; Dana Rapier, Senior Vice President, Chief Human Resources Officer; Stacey Schabel, Senior Vice President, Chief Audit Executive.
Myers will assume Investor Relations and Government Relations responsibilities while leading asset management and institutional product teams, including JNAM (Jackson National Asset Management, LLC, and PPM (PPM America, Inc.).
In Jackson’s finance team, Steve Binioris will continue to lead Asset Liability Management and assume responsibility for the Actuarial team, serving as Chief Actuary for Jackson. Mike Costello will remain Treasurer of Jackson and lead Jackson’s Institutional Products and Financial Planning and Analysis teams. Don Cummings, who joined Jackson in December of 2020, will lead the Controller’s Office, serving as Chief Accounting Officer responsible for Financial Reporting.
© 2021 RIJ Publishing LLC. All rights reserved.
US Population by Age, 2019
The Southwest Book Trader Contemplates Retirement
“Retirement Income Journal? Is that where you’re from? My wife keeps telling me I should retire. My CRS and CSS are getting so bad that I should probably do that,” said George Hassan, sitting in a chair on the lawn inside the low chain link fence around his used-book store on E. Fifth Street in Durango, Colorado.
I was fingering the flea-market bric-a-brac on a table outside the Southwest Book Trader. It is less a store than an uncatalogued mountain of second-hand books, old vinyl LPs, distressed camping equipment and other dusty treasures, all barely contained by the stucco shell of what must once have been a one-story house.
On tables and racks that spill from the shop’s front door, across its narrow porch and into the yard, George sells this and that. A man’s black felt fedora with a teardrop crown appealed to me. It was my size, 7 1/4.
I visit Durango about once a year to see friends and I always visit the Southwest Book Trader. On one occasion, I found a faded Paul Butterfield album in a box of vintage vinyl. George and I were clearly near-contemporaries. We have Pennsylvania in common too. He’s from Pittsburgh. I’m from the Philadelphia area. We both traveled West in the 1970s. I drifted back East, he stayed.
George Hassan. Photo by the Durango Herald.
George has a pirate’s arrrgh in his voice. He also has a satchel of yarns that he retells to tire-kickers like me.
I’ve learned, for instance, about Taj Mahal’s performance in a local bar 40-some years ago, when all the well-known troubadours stopped in a pre-Starbucks Durango. The conversation often turns to books and authors. Last fall he told me the one about his encounter with Hunter S. Thompson.
Years ago, the great gonzo journalist walked into the store. With an antiquarian’s eye for opportunity, George brought out a first-edition of Thompson’s masterpiece, “Fear and Loathing in Las Vegas.” He asked the Great Author to sign it.
“I was selling that book for $300,” George told me. “If he signed it, would be worth ten times that.”
Thompson took the book from George, but not in an appreciative way. “Where did you get this?” the legend thundered, god-like. “I don’t even have one of these. This is my book.”
“No, it’s my book,” George said, gently retrieving it. “But I’ll sell it to you for $300.” The mood soured. George set the book aside to help another customer. Thompson stamped out, heading for the Ralph Lauren Polo outlet down the block. When George returned, the first edition of “Fear and Loathing in Las Vegas” was missing.
When George hit the street, he could hear shouting from the direction of the outlet, which was near the Durango & Silverton Narrow Gauge railroad station. Unhappy with the clothing selection, or whatever, Thompson was dressing down a clerk. The first-edition was in the crook of his arm. George pulled it out and left.
The first-edition remained unsigned by Thompson, who died in Woody Creek, Colorado, in 2005.
I bought the black fedora, which was perfect except for a small hole in the forehead, and a good-as-new vintage fly-fishing vest. George gave me his 10% out-of-towner’s discount.
“I should know this,” I said, as George handed me my purchases through the twin towers of books and CD cases that frame his office-alcove. “But what do CRS and CSS mean?”
“You write about retirement and you don’t know about CRS and CSS? They mean ‘Can’t Remember Sh-t’ and ‘Can’t See Sh-t.’”
“Right,” I said.
Then I touched the brim of the fedora and said, “See you next year, George.” He’ll be there, and he’ll tell me another.
© 2021 RIJ Publishing LLC. All rights reserved.
Population Pyramid, USA 2050 (projected)
Britain passes landmark pension legislation
“The biggest shake-up of UK pensions for decades,” as the British government put it, occurred this week when the UK Pension Schemes Bill received Royal Assent and became law, IPE.com reported this week.
Introduced in the House of Lords in January 2020, the bill completed its passage through parliament last month after the government gave reassurances in relation to proposed funding rules.
“This Act makes our pensions safer, better and greener, as we look to build back better from the pandemic. Its passage will reassure savers that they can, and will, have a retirement they deserve,” said Guy Opperman, minister for pensions.
The legislation provides for the creation of collective defined contribution (CDC) schemes, which are hybrids of DC and defined benefit plans. It also boosts the powers of The Pensions Regulator (TPR), introduces a framework for “pension dashboards,” and provides for pension fund climate change-related reporting and governance requirements. It also intends to combat the risk of pension scams.
Potential fines of £1m or more
The TPR’s new beefed-up powers could lead to greater use of the “voluntary clearance process,” whereby companies can inform the regulator when significant activity might affect a defined benefit (DB) scheme.
“Following recent high-profile cases of perceived pension scheme abandonment, non-compliant parties, including individual decision makers, now risk fines of £1m or more, or even imprisonment,” said Mark Grant, head of pensions at law firm CMS.
“The Pensions Regulator’s new weapons should be of concern to any corporate group with a DB pension scheme. With the risk of liability cutting through the corporate veil, all group companies—not just DB employers—urgently need to be familiar with the new regime.”
At TPR, CEO Charles Counsell said his agency would work with industry to produce the necessary codes and guidance to ensure measures were introduced in an effective way. “We are a risk-based and proportionate regulator and this measured approach will continue,” he said. “Our work is driven and directed by the pursuit of our statutory objectives and we use our powers where appropriate and reasonable to do so.”
Auto-enrollment bill
Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), drew attention to talk of a further pensions bill, perhaps as soon as next year, which would ideally improve the auto-enrollment framework.
“We hope the government will use it to fulfill its promise to increase the level of automatic enrollment savings so it is based on each pound of earnings and to widen the scope of automatic enrollment so that 18 year olds, rather than only 22 years and above, are included,” he said. “The government said they would do this by the mid-2020s so a statute in 2022 leading to adoption in the years after would fit the bill.”
© 2021 RIJ Publishing LLC. All rights reserved.
The story of Geode—Fidelity’s low-profile indexing jewel
The Wall Street Journal reported this week on the growth of Geode Capital Management, Inc., and its success in helping its giant parent, Fidelity Investments, gradually establish a footprint in the all-consuming index fund category—a space where Fidelity was slow to commit its brand.
Set up in 2001 by Fidelity and spun off as a separate entity in 2003, Geode has about 140 Boston-based employees, most of whom are quants—financial engineers trained in mathematics or computer science. Its investment-research team has just a dozen members.
Growing steadily without a marketing budget, Geode now manages some $720 billion, up from less than $100 billion a decade ago. It manages more money than Blackstone Group Inc., Eaton Vance Corp. and Putnam Investments, according to the report. Geode advises on all of Fidelity’s no-fee Zero funds and dozens of others.
“The firm began as one of a handful of boutique managers created to invest a slice of the fortune of the founding Johnson family, along with those accumulated by a coterie of current and former Fidelity executives,” the Journal said.
Fidelity committed $229 million to the computer-driven investor and installed as its head Jacque Perold, a Fidelity executive who later served as the investment firm’s president. Fidelity’s nascent index funds were originally subadvised by Bankers Trust Corp. Perold was succeeded by Vincent Gubitosi, who served for 13 years until 2020. Bob Minicus succeeded him.
A link to the full-story, which is behind the Journal’s paywall, can be found here.
Which ‘Dependency Ratio’ Should We Use?
Which “dependency ratio” should we use when forecasting the potential burden of Social Security on future taxpaying workers? Economists disagree.
You’ve undoubtedly heard that Social Security’s 80-year-old pay-as-you-go (PAYGO) financing method is riding a downtown train to insolvency. Indeed, even as Americans keep paying for Social Security, a majority believes that Social Security “won’t be there” when they retire.
It’s as if Americans were fatalistically paying insurance premiums while believing that their insurance company would soon be insolvent. It makes no sense.
Among the evidence for Social Security’s looming inability to meet its obligations in full (assuming Congress makes no changes in tax rates or benefit levels), the nation’s rising aged dependency rate is the statistic cited most frequently as the program’s fatal flaw. This dependency rate is the ratio of Americans over age 65 to Americans of working age (20 to 64).
As a country, we’re just not as young as we used to be. In 1945, five years after Ida May Fuller of Ludlow, VT, received the first Social Security check, the aged dependency ratio was 12%, according to 2019 report by the Congressional Research Service (CRS). The aged dependency ratio has steadily risen since then. By 2025, according to the CRS, it will be 32%. That is, there will be 32 Americans over age 65 to every 100 people of working age. By 2055, when few if any Baby Boomers will still be living, the aged dependency ratio is expected to reach 39%.
Social Security Population Density Ratios 1945-2095
Economists have also looked at the ratio of workers to Social Security beneficiaries, not just those in specific age categories. In 2005, Kent Smetters and Jeff Brown estimated that the ratio of workers to beneficiaries had fallen from 16:1 in 1950 to just 3.3:1 in 2004. They predicted that by 2040, because of a declining birth rate and rising life expectancies, there would be only two workers per beneficiary.
The implication is that future workers will have to pay much higher payroll taxes to ensure that—as legally required under the PAYGO financing method—the tax revenue equals the benefits paid. Smetters and Brown estimated that the payroll tax might have to reach 18%, up from 12.4% today, to prevent benefit cuts of about 25%.
Total dependency ratio
But a few “heterodox” economists have suggested that the aged dependency ratio exaggerates the burden that Social Security benefits pose for the nation’s workers. They argue that we should use the total dependency ratio when assessing the nation’s ability to finance Baby Boomer retirement.
The total dependency ratio, which the Social Security Administration tracks each year, is the ratio of all presumably dependent Americans—children and adolescents age 20 and younger as well as people age 65 and older. It tells a different story from the aged dependency ratio.
Workers are also supporting fewer children than they used to. The same falling birth rate (the number of live births per thousand women of child-bearing age) that exacerbated the aged dependency ratio has reduced the youth dependency ratio—and buffered the total dependency ratio.
In their recent textbook, Macroeconomics (Springer, 2019), economists Randall Wray, William Mitchell and Martin Watts argue that the “standard way of calculating the dependency ratio provides a flawed indication of the relationship between active workers relative to inactive persons.”
As an alternative, they propose using an “effective dependency ratio.” In addition to young workers, this would include a more detailed accounting of the rate of labor force participation, the underemployment rate, and the contributions of unpaid labor such as child-rearing and housework.
Wray and a colleague at Bard College’s Levy Institute, Dimitri Papadimitriou, raised the same issue in a paper they published near the end of the Clinton administration, when Social Security reform resurfaced as a public issue.
“If we add the under age 20 population to the 65 and over population to obtain a ‘dependent’ population, workers in 1965 supported more dependents than any generation will support through the year 2075,” they wrote.
“The ratio was nearly 0.95 in 1965, indicating that each person of ‘normal’ working age supported about one person who was not of normal working age. That ratio fell to 0.71 by 1995, and will continue to fall slightly through 2020; it will rise to only 0.83 in 2075.”
US government figures support this. In 2019, the CRS reported (see chart above) that the total dependency ratio in the US peaked in 1965 at 95%. That figure included a youth dependency ratio of 76% and an aged dependency ratio of 18%. In other words, there were about 94 dependents per 100 workers.
Fifty years later, in 2015, the youth dependency ratio had fallen to 44% and the aged dependency ratio has risen to 25%, for a total dependency ratio of 69%. The total ratio is expected to surpass 80% in 2035 and level off in the high 80s afterwards. The youth ratio will remain in the mid 40s indefinitely.
From 1945 to 2015, the total dependency ratio rose only one percentage point, to 69%. It is projected to rise to 88% between 2015 and 2095. That’s significant, but it’s much less dramatic than the projected “tripling” of the aged ratio since 1945 and the 78% increase in the aged ratio (to 43% from 25%) between 2015 and 2095.
An ‘effective dependency ratio’
Clearly, most economists use the aged dependency ratio because the payroll tax goes primarily to pay for the benefits of aged Americans, and much less to pay for the benefits of American youth. Two Social Security experts told RIJ that simply makes the most sense.
“One needs to calculate an aged dependency ratio to see implications for programs for the aged,” Eugene Steuerle of the Urban Institute told RIJ. “We provide nowhere near the same support for the young through government programs, especially at the federal level. Spending on the young is also more likely to be growth enhancing; spending on the old is much more need-based; they aren’t substitutes.”
Similarly, Jason Fichtner, a former Social Security economist now at Johns Hopkins University, told RIJ, “The Trustees look at the aged dependency ratio because it is a measure of ‘financing’ stability as benefits are being paid out for a given year — the number of those age 65 and over are considered ‘dependent’ on those of working age 20-64. Children are excluded because they aren’t working and paying taxes to support the elderly.”
Those favoring the use of an “effective dependency ratio” have acknowledged that. ”We realize, of course, that the dependent aged have different kinds of requirements than do the dependent young,” wrote Wray and Papadimitiou in 1999.
But “there can be no doubt,” they added, “that the ‘real burden’ of providing for the educational, housing, recreational, and medical needs of the young baby boomers in the 1950s and 1960s represented a very large transfer of real resources toward production of the goods and services consumed by those under age 20—and much of that transfer was accomplished through the tax system as workers and property owners were taxed whether they had children or not (for example, property taxes paid for new schools).”
The point here is that a lot of variables go into painting the portrait we have of Social Security’s future finances. Besides the dependency ratios, those variables include future rates of productivity, immigration flows, recessions and pandemics, the labor force participation rate, national output, and many others. Not all models will use the same set of variables.
Even when economists use the same variables, they may not make the same assumptions about the quantities of those variables. They will reach different conclusions, and their conclusions will shape public opinion in different ways and lead to radically different policy recommendations. It may be safe to neglect the total dependency ratio, or it might be a mistake.
© 2021 RIJ Publishing LLC. All rights reserved.
Honorable Mention
Pacific Life to distribute two fee-based annuities
Pacific Life will begin distributing two fee-based annuities, Pacific Odyssey and Pacific Index Advisory, through its partnership with The Pinnacle Group, an insurance and annuity back office for more than 15,000 registered reps and registered investment advisors (RIAs).
Pacific Life said has used “the pain points and wish lists” of financial professionals to aid in its design of fee-based, cost-conscious, tax-deferred advisory annuities that include optional protection and income benefits.
Pacific Life said its RIA channel team, Pacific Life Advisory, will continue to develop fee-based annuities and help advisers incorporate them into their practices. “Simplified technology integrations are a priority, and the company continues to team up with new custodians and insurance-licensing firms to make it as easy as possible to include annuities in clients’ portfolios,” a Pacific Life release said.
NARSSA sets up platform to support accredited Social Security experts
The National Association of Registered Social Security Analysts, or NARSSA, which educates and certifies Social Security advisors, has launched a virtual business center to assist its Registered Social Security Analysts (RSSAs), the group announced this week.
The virtual business center provides RSSAs with continuing education and training, business development tools, a client relationship management solution, access to Microsoft Office 365, Social Security maximization software, RSSA branded marketing materials, invoicing and payment solutions, coaching and advisory support services, and the RSSA proprietary SECA Tax Savings Calculator.
The Tax Savings Calculator is used to determine how much a business owner 50 years and older can save annually on employer and employee Social Security taxes without sacrificing future benefits. Potential annual savings for the business owner and lifetime savings in Social Security benefits can be hundreds of thousands of dollars.
Founded in 2017, NARSSA provides financial advisors with a 5-course online training program approved by the IRS, the CFP Board, and NASBA for professional continuing education. Passing the online program is a prerequisite for taking the National RSSA Competency Exam and earning the RSSA certificate credential. For more information, visit www.narssa.org or www.rssa.com.
PGIM Investments announces over $21 billion in net fund flows for 2020
PGIM Investments ended 2020 with the second highest net mutual fund inflows in the fund industry, with $21.7 billion in net flows. The asset manager recorded mutual fund assets under management (AUM) of $160.4 billion, up 31% from 2019.
Growth was driven primarily by demand for PGIM’s actively managed fixed income funds. The firm is now the eighth largest fixed income mutual fund family in the US. It is the fourth fastest-growing fund family by organic growth and has had positive net flows for 12 consecutive years, according to a release.
PGIM Investments and its affiliates manufacture and distribute funds on behalf of PGIM, Inc., the $1.5 trillion global investment management business of Prudential Financial, Inc., one of the 10 largest investment managers globally.
Additional 2020 business highlights include:
- 86% of the firm’s mutual fund AUM is in 5- and 4-star-rated funds, as rated by Morningstar.
- 90% or more of PGIM’s mutual fund AUM beat their Morningstar category averages over the last 3-, 5-, 10-, 15-, and 20-year periods, respectively.
- PGIM Investments has executed on 58 strategic fee reductions resulting in $166 million in annual shareholder savings since 2012.
- 84% of PGIM mutual fund assets are now in the first or second quartile of expense ratio rankings.
- In November 2020, PGIM Investments launched its third closed-end fund, raising $493 million upon its IPO.
- Total PGIM Investments AUM including ETFs and closed-end funds as of Dec. 31, 2020 amounted to $163.3 billion.
PGIM Investments and its affiliates also raised nearly $5 billion in products outside of traditional open- and closed-end mutual funds and ETFs, including separately managed accounts, subadvised, collective investment trusts and strategist model portfolios.
Equitable launches institutional retirement service
Equitable, the financial services organization and principal franchise of Equitable Holdings, Inc., has launched Equitable Retirement Vision, a new platform for ERISA and non-ERISA retirement plans. Its features and services for plan sponsors and participants include:
- A managed account option, reflecting professional advice for an integrated investment strategy and asset allocation based on a participant’s age and attitude toward risk. Participants can further customize their allocation online.
- The Equitable Fixed Account, which guarantees a minimum interest rate and provides some protection from market volatility.
- Fiduciary support for plan sponsors, including 3(16) administrative fiduciary services to reduce administrative burdens and mitigate liability for plan sponsors; 3(21) and 3(38) investment fiduciary services to assist plan sponsors with fund selection and mitigate fiduciary liability.
- A personalized digital retirement wellness program.
- An open architecture investment platform, with more than 16,000 mutual funds and Collective Investment Trust (CIT) options.
- A self-directed brokerage account offered through an unaffiliated third-party.
- Mobile account access to account information, tools, and services.
Equitable Retirement Vision is designed for small-to-medium sized businesses, K-12, higher education, governmental, healthcare and not-for-profit sectors. Equitable will continue to offer its other group retirement plan products including the Retirement Gateway and EQUI-VEST variable annuities. Fiduciary services are offered through SWBC Retirement Plan Services, Wilshire and NBS. Managed account services are offered through Stadion Money Management.
© 2021 RIJ Publishing LLC. All rights reserved.
Who Stormed the Capitol? Future Retirees
Most of us have seen (and re-seen) footage of angry (mostly white) men laying siege to the US Capitol on January 6. Despite the shouting and the symbolism—Confederate flags, ‘Camp Auschwitz’ t-shirts, buffalo-horn headpieces—the wellspring of their rage—if rage is the right word—isn’t clear.
Presumably, most of them pay FICA (Federal Insurance Contributions Act) taxes every two weeks or so. With luck, most will retire someday. And they’re probably counting on Social Security and Medicare benefits when they do.
So their attitudes toward government and their outlook on the future are relevant to us. To learn more about the rationale for the rage, I attended a Zoom webinar on Wednesday called “Reconciling and Healing America: Addressing US Polarization and Extremism.” It was hosted by the Brookings Institute in Washington, D.C., and Brookings president John Allen moderated.
‘A poisonous way to legislate’
“There are incentives to be 100% divided,” said Joe Straus, a former Speaker of the 150-member Texas House of Representatives. “Most people who run for the state legislature or for Congress run in districts that were drawn to elect one party or the other. For that reason, most races, even races for the US Senate, aren’t all that competitive.Most candidates have more to fear in the primary than in the general election.
“In my case, I usually didn’t have a Democratic opponent in the general election, and the biggest criticism I faced was that I wasn’t conservative enough. One product of this system is that two of the most recognizable laws passed in the past 10 years, the Affordable Care Act and the 2017 tax bill, both were passed without a single vote from the other party. That’s a poisonous way to legislate,” Straus said. He cited the media’s role in reinforcing negative perceptions of the opposite side.
Brookings vice president Darrell M. West then led a group conversation with three Brookings fellows: Elaine Kamarck, Camille Busette and Carol Graham. Each specializes in one or more subcategories of politics, economics, sociology or psychology.
‘My America is white and Christian’
“Donald Trump won 2,547 counties that accounted for 29% of US gross domestic product,” Kamarck said. “Joe Biden won 509 counties that accounted for 71% of GDP. That’s a dramatic difference.” It occurred, she added, because “over the past century, Americans have concentrated on the coasts. As a result, people in states like California, Texas, New York and Florida are under-represented in American politics.”
This data implies that people in so-called Middle America are politically over-represented on a per capita basis—which is ironic, if they feel relatively disenfranchised.
Kamarck explained that two structural elements of our Constitution accounted for this imbalance: the Electoral College, with its winner-take-all disposal of a state’s electoral votes, and the Senate, with its allocation of two Senate votes per state, no matter how sparsely or densely populated.
Ironically—a word that was relevant throughout this discussion—Republican voters are also significantly richer than Democratic voters, on average. “Joe Biden won among people earning less than $30,000 a year, less than $50,000 a year, and less than $100,000 a year. Donald Trump won among people making more than $100,000 a year and more than $200,000 a year,” Kamarck said.
Demographic statistics helped clarify the picture. “Biden won 64% of first time voters, many of whom were young or of color, and Trump did better among older voters,” she said. She also cited anecdotal evidence from individuals she spoke to. “One woman told me, ‘This is no longer my America. My America is white and Christian. And what’s happening today isn’t what I think America should be.’ So there are cultural as well as economic divides. And that makes it difficult to know what to do about it.”
‘Messiness comes with a multicultural society’
Building on Kamarck’s observation on the role of the Electoral College and Senate, Busette described those institutions as “chaperoning” political discourse in the US, in the sense of limiting or stifling its range. Americans may be clashing violently because they lack venues or habits for clashing peacefully, she believes.
“We don’t have a structure that engages the popular voices in the polity. We have the rise of the South, which means the rise of Black people. But we don’t have processes or structures that allow us to be comfortable with a large amount of community engagement without those guardrails. We have a hard time, as a polity, accommodating the kind of messiness that comes with a multicultural society. We have high degrees of polarization, but we don’t have a narrative that allows us to accommodate many kinds of experiences and to deal with problems as they come up.”
She empathized with white blue-collar workers—to a point. “If you’re white and you lost your job in Youngstown, you have no narrative. We have a narrative about success in the US: You do it by yourself. You pull yourself up by your own bootstraps.”
But she added that white working class folks too often believe a high school education should be enough to make it in America. “Forty years ago, they benefited from non-equitable policies, but now they have to do more in order to be competitive in the marketplace,” she said.
Minorities are more hopeful
White males are sensitive to rhetoric that piques their anger because they’re suffering, agreed Graham. They are dropping out of the workforce, living with their parents, and succumbing to opioid addiction at higher rates than people of color. They often have poor physical and mental health, and tend not to migrate geographically to pursue job opportunities.
“Deaths of despair are actually less prevalent among low-income minorities than among low-income whites,” she said. “Minorities are more objectively disadvantaged, but they tend to be more hopeful, more optimistic, more resilient and report less stress than low income whites.
“Low-income minorities believe strongly in the importance of higher education, but low-income whites are often skeptical about higher education. They think, because their fathers had good working class jobs, that there’s no need for them to go to college.” She tied this belief to their skepticism of scientific evidence about climate change and pandemics.
When blue-collar jobs provided a “stable and respectable middle-class existence,” white males with high school educations could enjoy the narrative of the American dream,” Graham added. That narrative implied that “if you’re poor, you’re a loser who didn’t try hard enough. In counties that voted for Trump, a higher percentage of people said they’ve lost hope in the past five years. They want to make America the way it was again. But obviously that’s not possible,” she said.
How much do the Brookings observations help explain what happened on January 6? The people who invaded the Capitol seemed jubilant, justified and empowered rather than despairing. Or were they just wearing the battle-masks of desperate people? Certainly there were many types of people at the siege, with different grievances and degrees of grievance.
Everyone at the Capitol on January 6 was a future retiree, if not a retiree already. In the meantime, they are taxpayers and voters. People who mistrust government will probably be more receptive to arguments to convert Social Security to private investment accounts.
More troubling are the Brookings experts’ reports of wasted human capital across America’s dominant demographic. Absence from the workforce, lack of education, lack of good physical and mental health—these don’t portray a group of people working to their potential, contributing to qualified plans, paying social insurance taxes, or progressing toward a secure retirement.
© 2021 RIJ Publishing LLC. All rights reserved.
Boola-Boola, Retirement Moolah
Yale University has offered a TIAA retirement savings plan to its professors, administrators and other employees for more than a century. Until three years, ago, the Ivy League school offered a typical 403(b) plan with a variety of investments including mutual funds and several versions of TIAA’s Traditional and variable annuities.
But in 2018, Yale redesigned its $7 billion plan, which serves some 16,000 active participants and 11,000 retirees. It decided to build a custom series of 13 target-retirement-date (TD) portfolios that include TIAA’s guaranteed annuity and Vanguard index funds.
Collaborating with TIAA’s relatively new Custom Portfolio Group and Aon (Yale’s 3(38) investment fiduciary), Yale developed a managed account with a TD series inside it. Each TD portfolio (2010 to 2070) contains a liquid version of the TIAA annuity as its sole fixed-income option. Each portfolio comes in three risk profiles: conservative, standard and aggressive.
Because the managed account is a Qualified Default Investment Alternative (QDIA), Yale can default new participants into the TD series. The TIAA annuity in each portfolio provides participants a secure investment and an easy option to convert some of their savings into guaranteed retirement income if they wish. Yale’s QDIA TDs built on the RetirePlus Pro version of TIAA’s RetirePlus custom TD service.
In the process of working with Yale, TIAA saw its own custom TD business crystallize into a distinct business group, RetirePlus. (The “Pro” version was, in fact, born at Yale.) “Five or six years ago, consultants began asking if we offered custom portfolios,” Tim Walsh, Senior Managing Director for Product Solutions and Distribution at TIAA, told RIJ recently.
“This started as a technology that allowed consultants to create custom models. Then people began to talk about leveraging annuities in qualified plans and we had the RESA Act, and we started having conversations about using annuities. What started as an accommodation has become major topic of conversation,” Walsh said.
At a time when retirement plan providers and sponsors are showing more-than-usual openness to putting annuities in their plans (in part because of a liability-reducing provision of the SECURE Act of 2019), RetirePlus Pro serves as an example of what the income-friendly defined benefit plan of the future could look like, not just for 403(b) plans but for the much larger 401(k)-plan market as well.
Old Eli’s plan
Hugh Penney
“We used to have 115 quality investments from Vanguard and TIAA,” Hugh Penney, Yale’s Senior Advisor for Benefits Policy, told RIJ. “The principal program, going forward, is a custom target date portfolio series. More than 80% of our participants remain straight-up defaulted investors with a portfolio corresponding to their age and expected retirement date.”
About 10% of participants have actively personalized their TD portfolio by confirming or changing their retirement age or dialing the risk of their portfolio up or down.And less than 10% are managing their own investments.
Unless they choose otherwise, new enrollees contribute 5% of salary to the plan and Yale contributes 10%,a 100% match of the first 5% plus a “core” contribution of 5% of salary.
“Online participants can see the new investment line up, custom TD service, and their individually owned legacy annuities,” Penney said. “Some participants have a legacy account, some a new account and some have both. There’s a doorway between them. You can move money out of the legacy plan to the new plan, but you can’t move money from the new plan to the legacy plan.”
For most RetirePlus clients, Chicago-based Mesirow Financial designs the glidepaths (the gradually de-risking of each portfolio’s allocations as participants age) using the client’s existing investment options. As a RetirePlus Pro client, Yale’s fiduciary selected Aon as a 3(38) fiduciary to design the glidepaths of the portfolios.
“Yale’s hourly workers typically retire before age 65 while salaried professors and administrators are more likely to retire near 70. So their glidepaths are different. Hourly workers also have a pension, so their glidepaths are also heavier in equities. This is what’s so useful about customizable portfolios. You can fit the plan to the population,” Penney told RIJ.
“If you had an off-the-shelf TDF for the hourly group, it would likely be too conservative because it wouldn’t know that they had a pension,” he added. With the salaried group, which makes up two-thirds of our population, the off-the-shelf glidepaths would likely have them retiring too early. Another important design feature of RetirePlus Pro is that individually owned annuities in a participant’s legacy account can be “considered” in the construction of a participant’s TD portfolio, thus improving the allocation of their overall account.
As examples of glidepaths, consider two of Yale’s portfolios. The 2060 portfolio fund allocates 11% to the TIAA Traditional guaranteed annuity and the rest to four Vanguard funds: 45% to the Total Stock Market Index, 29% to a Developed Market index fund, 9% to an emerging markets index fund, and 9% to a real estate investment trust (REIT) fund. The portfolio’s expense ratio is just six basis points a year. The 2020 portfolio, for those who recently retired or are planning to retire soon, is much more conservative. It allocates 65% of contributions to the annuity, 14% to the Total Stock Market Index fund, 10% to the Developed Market index fund, 8% to a REIT fund 3% to Emerging Markets. Its expense ratio is only four basis points a year.
A bespoke 403(b) plan
To build the plan it wanted, Yale had to work within the rules of non-profit 403(b) plans and conform to the Employee Retirement Income Security Act of 1974 (ERISA).To default new participants into the plan, Yale’s main offering needed to meet the requirements of a Qualified Default Investment Alternative (QDIA).
Fitting the TIAA Traditional annuity into a QDIA TD series required using a fully liquid version of the contract. A higher crediting version of the guaranteed annuity has more limited liquidity, but allows for faster growth during the accumulation phase. All versions of the TIAA Traditional have a guaranteed rate of return and an option for lifetime guaranteed income in retirement.
“Income was an important design element for us,” Penney said. “TIAA Traditional when annuitized has no built-in inflation protection, but annual dividends help increase the payout from year to year,” providing a de facto inflation buffer.
Yale’s QDIA TD portfolio uses a fully liquid version of TIAA Traditional. Its returns aren’t as robust as those of a less liquid version, but it meets the QDIA requirements; participants can move money into and out of as they wish. Still, the deferred annuity structure makes it so patently valuable that Yale’s TD series essentially offers no other fixed income investment.
The guaranteed annuity investment also allows Yale participants a vehicle inside their 403(b)for converting their savings to future income, in one or more conversions before, at, or after retirement. To achieve all the elements of this progressive custom design, Yale, TIAA and Aon had to work within a managed account that could hold a TD portfolio and also hold an annuity.
No pressure
Yale likes the idea of annuitization but the decision is up to each participant. “Our studies and analyses showed that retirees feel more security in retirement if part of their income is guaranteed,” Penney said. “We’re very comfortable with having the income option. We think annuitization is beneficial. But annuitization is an individual decision for participants.
“We can design the investments to offer and design a TD with a 60/40 retirement allocation, for instance, at a certain age. But as a plan, we can’t advise people about what to do with their investments, so we must address [the annuitization concept] from an educational perspective,” he added.
Yale’s idea of retirement income planning isn’t very different from the recommendations of Wade Pfau at The American College of Financial Services or the “floor and upside” gospel of the late great Retirement Income Industry Association (whose principles are now absorbed into the adviser education component of the Investment and Wealth Institute).
“Our modeling shows that there’s a sweet spot in the amount that a typical participant might consider to annuitize—either enough to double their Social Security benefit or a quarter of their 403(b) assets. With Social Security and secure lifetime income you likely become a long-term investor with the balance of your portfolio,” Penney told RIJ. “Many retirees make withdrawals from qualified plans for income, but that technique and its variations don’t have the same guaranteed profile as an annuity.”
Yale’s plan, and the literature on the topic agrees, that most participants are better off using a default retirement savings strategy, designed by experts, than trying to manage their own savings over the decades and through the market’s ups and downs.
“Since the advent of the 401(k), plan sponsors have tried to educate participants to become sophisticated investors, but we realized that is not what most participants actually want,” Penney said. “When the market tanked last spring, we were curious what people would do. In the past we often saw people sell at the bottom of a dip. This time, almost nobody moved and they came out of it fine.”
© 2021 RIJ Publishing LLC. All rights reserved.
Will Biden tinker with tax deferral?
The Biden administration has a plan to replace the tax deduction for IRA and 401(k) plan contributions with a tax credit, according to former Commodity Futures Trading Commission (CFTC) chief market intelligence officer Andrew Busch. His comments were made at the Financial Services Institute’s annual conference and reported by Financial Advisor magazine this week.
During the 2020 election campaign, the Biden/Harris website recommended “equalizing the tax benefits of retirement plans,” which the Obama administration believed accrued disproportionality to high-income retirement plan participants; they save the most money and, because they are in higher tax brackets, defer more taxes.
“Current tax benefits for retirement savings provide upper-income families with a significant tax break, while providing a limited benefit for low- and middle-income workers,” Busch was reported to say. “Biden will equalize benefits across the income scale, so working families also receive substantial tax benefits when they put money away for retirement.” A federal “Saver’s Credit” is already available; it is currently worth up to $1,000 a year as a tax credit.
Opponents of changing the current tax incentives have said in the past that curtailing or changing the benefit will only reduce the incentive to save, noting that high-income retirees eventually pay at least some of the taxes back, depending on their tax brackets in retirement.
In 2017, Busch, a self-described economist and futurist, became the nation’s first Chief Market Intelligence Officer at the CFTC. He advised the SEC, the US Treasury, the Federal Reserve Board, the Federal Reserve of New York and the White House.
Busch said one of income Treasury Secretary Janet Yellen’s first priorities will be to reverse much of Donald Trump’s Tax Cuts and Jobs Act. “They’ll really attack that. Yellen has been very clear: They’re going to raise the corporate tax rate from 21% to 28%,” Busch remarked. In addition, he said, President Biden is considering a “corporate alternative minimum tax and wants to do away with tax cuts for anyone making more than $400,000 while attempting to make permanent those cuts under $400,000.”
Biden’s Social Security reform plan includes applying the 6.2% payroll tax to earned income over $400,000. Fewer than one percent, or 3.3 million Americans, are reported to earn that much in a year. The wealthy get most of their income from investment assets such as dividends and capital gains.
The President’s COVID-19 stimulus proposal of $1.9 billion breaks down into these categories:
- $750 billion for COVID-19 containment and vaccination, aid to state and local governments, and increased federal spending. That includes $350 billion in state and local aid, as well as money for vaccination, testing and tracing, and reopening schools
- $600 billion in direct aid to families: including $1,400 per-person rebate checks and the child tax credit expansion
- $400 billion to financially vulnerable households, including an additional $400 per week in unemployment benefits and the extension of the pandemic unemployment programs
- $150 billion to businesses: this category includes loans and grants to small businesses and paid sick leave.
Republicans favor a “skinny stimulus” plan that would reduce the overall price tag to about $618 billion. The “skinny stimulus” proposal was laid out in a one-page broadside from Sen. Susan Collins (R-ME) and nine other GOP senators to Biden. It recommended reducing individual stimulus checks to $1,000 from Biden’s proposed $1,400 and lowering the income ceiling of those receiving another round of individual checks.
A copy of the Republican proposal can be found here. About half of its outlays ($290 billion) would go to vaccination efforts ($160 billion) and to supplements of $300 per week unemployment benefit supplements ($130 billion). Another $220 billion would fund direct payments to Americans, with up to $1,000 going to singles earning less than $50,000 per year and couples earning less than $100,000. Dependents would receive $500 each.
Like the Biden plan, the GOP alternative would include money for vaccines and other public-health priorities; provide new money for the small-business loan programs created last year; and extend the current level of federal supplemental unemployment insurance. But it would not include funds sought by state and local governments, or rental assistance and progressive priorities such as a higher minimum wage and paid family leave, which Biden favors.
Last spring, the CARES relief act received unanimous approval by the Senate and passed the House with a bipartisan vote of 419 to 6. During the Great Recession of 2008-2009, no Republicans in the House and only three in the Senate supported President Barack Obama’s $800 billion stimulus, known as the American Recovery and Reinvestment Act of 2009 (ARRA), often citing the deficit and national debt as a reason for relative austerity.
Busch predicted GDP growth “north of 4% and rapid job growth,” in the coming year, adding that both could rise significantly if Congress passes a large stimulus package. “Keep in mind how much stimulus has already been released. Some $10.4 trillion has been allocated to the economy. If you are wondering why companies and stocks have recovered, this is why. And there is still $4 trillion that hasn’t made its way into the economy yet,” Busch told the FSI.
According to economists at the Brookings Institute, “Cumulative GDP through 2023 without additional fiscal support is about 3% below its pre-pandemic projected path. But with the $1.9 trillion package, real GDP reaches its pre-pandemic level by the fourth quarter of 2021, and then exceeds it over the next two years as households and businesses make up some of the economic activity foregone during the pandemic. Still, cumulative GDP through 2023 remains about 1% below its pre-pandemic projected path.”
(c) 2021 RIJ Publishing LLC. All rights reserved.
As B/Ds merge, technology and culture are keys to success
As retail wealth management broker/dealers (B/Ds) continue to consolidate, so does the share of B/D advisors who are affiliated with the 25-largest B/D networks. The trend is driven by mergers and acquisitions (M&A), as well as B/Ds’ desire to increase scale in response to a changing industry, according to the latest Cerulli Edge—U.S. Advisor Edition.
It’s expensive for B/Ds to maintain and refresh the sophisticated advisor-facing technology of their web-based platforms in the face of competitive threats, and bulking-up helps.
“Greater scale enables firms to increase these fixed investments, and the returns on those investments can increase significantly when they support a larger number of advisors and assets under management (AUM),” said Michael Rose, Cerulli associate director, in a release. “Those investments also increase their appeal to prospective advisors and help them grow market-share.”
In a recent Cerulli survey, technology was tied for the top spot among the factors most frequently cited by advisors as influencing their decision to join a B/D. B/Ds also say they plan to expand their use of client portals, e-signature, customer-relationship management, and financial planning software, among others.
The COVID-19 pandemic has shown advisors that technology enables them to communicate more effectively with clients, expand geographical reach, and operate more efficiently, among other benefits.
The success of a merger or acquisition, Cerulli believes, often depends on whether the acquiring B/D can retain the advisors in the acquired firm. “This gives a competitive edge to larger B/D firms with greater scale and more robust technology and platforms, which are vital to advisor satisfaction and retention during their migration to the acquiring firm,” Rose added.
Other stickiness factors include advisor support, firm culture, and restrictions on how advisors operate their businesses. These are critical to advisor satisfaction and are not directly correlated with the size of a given firm. This means M&A opportunities are not limited only to very large B/Ds, Cerulli believes.
© 2021 RIJ Publishing LLC. All rights reserved.
Groundhog Day (Again) in D.C.
As the Biden folks settle in and the political parties assume their accustomed positions on the “issues,” it’s notable how quickly they return to familiar attitudes and arguments. It’s “Tastes Great, Less Filling” meets “Groundhog Day.”
For Democrats, federal spending stimulates the “demand side”; for Republicans, it means that a tax or inflationary ricochet will soon come our way. For Republicans, tax breaks stimulate the “supply side”; for Democrats, tax breaks encourage the wealthy to bid up the prices of fine art, tech stocks, and metropolitan condos.
Punxsutawney Phil
Anyone who has seen five, six or eight administrations come and go will smell the stale aroma of déjà vu.
Will we hear the same debates over the effects of a higher minimum wage on employment? Over the virtues of more or less regulation (as if regulation were all evil or benign)? Over the federal debt’s threat to our unborn grandchildren? Over whether universal health care is the camel’s nose of socialism? If not, we can spend more time in the permanent holding pattern over guns and abortion.
Perhaps a Biden-led Department of Labor and SEC will collaborate on a higher “best interest” standard, only to start a new round of court appeals. The Democrats appear ready to take another shot at mining the “tax expenditure” for retirement saving; we know the response by heart. Who knows—some quixotic newbie might suggest the establishment of a federal insurance regulator. The legal briefs are already written.
I dread the re-runs, as ritualized as Civil War re-enactments or Celtic Faires, of every policy dispute on which we waste countless months in one administration, only to have it ignored, contested or reversed in the next. We’ve seen this movie, and it’s a truly Sisyphean production. Actors Bill Murray and Andie MacDowell woke up from their Groundhog Day. I hope someday Congress can too. Progress would feel so novel.
© 2021 RIJ Publishing LLC. All rights reserved.
Nationwide, Annexus partner on in-plan annuity
Nationwide and Annexus Retirement Solutions are partnering to launch a new product for the 401(k) market this year. The product will be a collective investment trust consisting of a series of target date funds (TDFs) that will include a fixed indexed annuity or (FIA) with a guaranteed lifetime withdrawal benefit.
The annuity part of the offering is called “Lifetime Income Builder.” The name of the overall savings-to-income solution, as well as the names of the asset managers who will offer investments in the TDFs, will be forthcoming, a Nationwide spokesperson told RIJ.
According to a release today:
“Lifetime Income Builder… provides plan sponsors an efficient structure designed to be QDIA (qualified default investment alternative) compliant and which offers a combination of liquidity, portability, and ease of use that is currently missing from other in-plan income solutions. This innovative investment option combines guaranteed lifetime income along with a systematic withdrawal strategy that efficiently addresses the risks a participant faces in generating retirement income.
“The new retirement plan investment option… is an expansion of an already successful partnership between Nationwide and Annexus, which has involved bringing new products to market over the past seven years,” the release added.
In October 2020, Nationwide launched an FIA as a stand-alone investment inside a 401(k) plan. You can find an RIJ story about it here.
The passage of the SECURE Act in 2019, which went into effect at the start of 2021, reduced the legal liability that a plan sponsor would face if, for example, it chose to offer an annuity product in its retirement plan and the issuing life insurer later became insolvent and couldn’t meet its liabilities. This relative tweak in pension law has unleashed a surge of new products that, in effect, make defined contribution plans a little more like old-fashioned defined benefit plans, in terms of providing lifetime income.
The introduction of this type of product indicates the further normalization of the use of FIAs. Ten years ago, FIAs were a controversial product sold almost exclusively by independent insurance agents in the “wild west” territory of the annuity business. Five years ago, the Department of Labor tried to make it difficult for advisers to sell FIAs and variable annuities to retirement clients for their IRAs.
But the long-standing low interest rate environment, which began in 2009 and could very well last until 2023 or longer, has up-ended the annuity industry. The retreat of other products has led to the gradual emergence in popularity of index-linked annuities, both fixed and variable.
They tap into the equity markets for their upside potential, via the purchase of options on equity indexes. Many, but not all, broker-dealers now sell retail FIAs, and RIAs can buy no-commission individual FIAs through online platforms like RetireOne, DPLFinancial and Envestnet.
© 2021 RIJ Publishing LLC. All rights reserved.
Experts, Predictions, & Financial Crises in France, 2001-2018
Does the Pandemic Limit Biden’s Fiscal Options?
Largely as a consequence of the pandemic, trillions of dollars have been flowing out of the Treasury’s coffers. The Congressional Budget Office (CBO) projects the federal budget deficit for 2020 alone will exceed $3 trillion, three times higher than pre-pandemic estimates. Meanwhile, President-elect Joe Biden has suggested that trillions of dollars more should be spent to deal with the pandemic and then to address many of the nation’s social needs that will continue to exist beyond the current economic slowdown.
To determine how the longer-term budgetary effects of the pandemic have been playing out so far, and how similar pandemic-related expenditures might also affect the long-term direction of government spending, we compare the CBO’s September 2020, mid-pandemic, projections of real dollar changes in 2030 versus 2019 under current law to what CBO projected pre-pandemic in January 2020.
For the most part, we see fairly modest differences in budget forecasts of where increases in future spending would occur. Almost all of the pandemic-related boosts in spending are temporary, and the long-term trends remain dominated by the growth patterns that Congress and previous presidents had already built into the law, not by long-term societal needs and inequities highlighted by the pandemic.
The one exception is for interest costs. They still rise significantly under the September 2020 projections, but by about $100 billion less than in January 2020, largely reflecting CBO’s forecast of a lower interest rate environment due to Federal Reserve policy and the effect on saving and investment of a world-wide economic slowdown.
Comparing the mid-pandemic to the pre-pandemic forecast, lower interest rates would more than offset the additional interest costs associated with higher levels of debt, resulting in overall lower federal debt service as late as 2030. To be clear, lower interest costs due to a world-wide slump and slower projected economic growth are not good news.
Until recently, a growing economy would provide enough revenue to give a president significant leeway to chart new paths for spending. Such opportunity will likely elude President-elect Biden, however. When 2030 is compared to 2019, Social Security, health, and interest on the debt alone are projected to comprise 91% of the total real spending growth of about $1.4 trillion.
These three sources of additional costs would absorb 122% of the total revenue growth of about $1.1 trillion, assuming current law would remain unchanged after September 2020. Already this 122% figure is an understatement of what is likely to occur over the coming decade, as the new, largely temporary COVID-19 relief adopted in late December, along with the relief likely to be enacted in early 2021, will add to longer-term interest costs, assuming rates don’t fall further.
Moreover, President-elect Biden made campaign promises to increase taxes only for those with very high incomes. That implies that, unlike CBO’s measure of current law, he could feel compelled to accept a lower “current law” revenue base by extending the middle-class individual income tax cuts included in the 2017 Tax Cuts and Jobs Act (TCJA) that are scheduled to expire after 2025.
Under January pre-pandemic projections, Social Security, health, and interest on the debt would constitute a very similar 94% of the total growth in spending and 127% of the total growth in revenues.
Although annual deficits by 2030 are large and growing, they remain close to the pre-pandemic projections. Of course, the accumulated debt will be much larger than formerly predicted. Thus, so far, the long-term impact of the pandemic and the nation’s responses to it reinforce and accelerate pre-existing budgetary trends, both in terms of overall spending projections and ever-larger gap between revenue and those expenditures.
President-elect Biden’s first priority will be to address the pandemic and the short-term economy, thus further increasing government spending. The open question: Once the pandemic is controlled, how will Congress and the incoming President adjust long-term spending and tax policy?
Higher debt levels alone may make it harder for the President to shift the nation’s fiscal path. Yet, absent significant reductions in the built-in growth rates in health and retirement programs, a substantial increase in revenues, or both, our current fiscal trajectory will increasingly hamstring the nation’s ability to address other priorities.
