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Mike Treske To Run Annuity Sales and Distribution at John Hancock

John Hancock Financial has appointed Mike Treske to be head of Annuity Distribution for John Hancock and president of John Hancock Wood Logan. He will be responsible for retail distribution and sales of fixed and variable annuities, reporting to Marc Costantini, executive vice president and general manager, variable annuities.

Since 2002, Treske has run the Variable Annuity Financial Planners channel. He joined Manulife’s Wood Logan annuity business in 1999 as Southeast Division Sales Manager and subsequently was named National Sales Manager for the Financial Planners channel.

He began his financial services career in 1987 as a wholesaler. Prior to joining Manulife, he held positions with Fidelity and Evergreen Funds. He is a graduate of the University of Wisconsin-Eau Claire, and attended graduate school at Colorado State University.

Treske succeeds Robert T. Cassato, who will assume a new role as a senior advisor to Manulife Chief Operating Officer John D. DesPrez III on global distribution strategy. Cassato also becomes Chairman of John Hancock Annuity Distribution, succeeding Doug Wood, who becomes Chairman Emeritus. He will continue to lead the U.S. National Accounts group. 

In addition, Chris Mee will assume leadership of the Financial Planners channel, reporting to Treske. Mee, who has been with the company since 1998, most recently served as Divisional Sales Manager for the Southeastern region. Before joining Manulife, he was a financial advisor with A.G. Edwards & Sons and Prudential Securities.

© 2010 RIJ Publishing. All rights reserved.

AXA Equitable To Help Advisors Build a ‘Retirement Income Planning Practices’

AXA Distributors, LLC, the annuity wholesale distribution unit of AXA Equitable Life Insurance Company, has created a comprehensive retirement income planning curriculum for financial professionals.

The program, which combines live presentations with self-study materials, is approved for continuing professional education credit in 49 states.

Central to the curriculum is a step-by-step guidebook for financial professionals entitled “Cracking the Code: Unlock the Secrets of Retirement Income Planning.” Written by a team at AXA Distributors Advanced Markets, “Cracking the Code” is a manual for building a retirement planning practice. It explains:

  • How personal savings fit into a retirement strategy
  • The mechanics of Social Security and Medicare
  • IRA planning strategies
  • Ways to mitigate risk by evaluating and constructing different income distribution methods and strategies
  • Practice management, from establishing a retirement income planning dialogue with clients, to choosing a time-saving technology platform to developing effective marketing strategies.

© 2010 RIJ Publishing. All rights reserved.

Getting Rich Used to Be Easier, 70% Say

A study sponsored by Bankrate, Inc. shows that the majority of Americans think wealth is beyond their reach and that it won’t be easier to get rich any time soon.

The poll, conducted by Princeton Survey Research Associates International, is included in the new Bankrate Financial Literacy series on How to Prosper.

 Among the findings:

  • 70% of Americans believe that it is more difficult to get rich today than it once was.
  • More than half believe it will be even more difficult to get rich in America in the next 10 years while 24% think it will be as difficult as today.
  • One-third of Americans say it’s very or somewhat likely they will attain wealth.
  • 63% say it’s not too or not at all likely they’ll get rich.
  • Only 21% of Americans see traditional investment as a feasible route to wealth; 12% believe investing well in stocks and bonds will provide them with financial freedom and 9% think that investing in real estate is the best way to get rich.
  • 41% of respondents want wealth in order to provide a better life and future for their children and 18% want to take care of their parents and other family members.
  • 27% of Americans see “job loss or income reduction” and the same percentage see “too many bills and not enough income” as the main obstacles to wealth. 
  • 11% blamed credit card debt for putting wealth out of reach.
  • Only 52% of those polled say that they save consistently.
  • To save more, 75% say they have cut back on purchases and 78% say they are foregoing “luxury goods or unnecessary items.”

“Many Americans aren’t necessarily buying into the country’s long-held belief that anyone with a dream can strike it rich,” said Julie Bandy, editor in chief at Bankrate.com.

Princeton Survey Research Associates International conducted the phone survey of 1,003 adults 18 and over for Bankrate. The Bankrate network of companies includes Bankrate.com, Interest.com, Mortgage-calc.com, Nationwide Card Services, Savingforcollege.com, Fee Disclosure, InsureMe CreditCardGuide.com and Bankaholic. 

© 2010 RIJ Publishing. All rights reserved.

Freedom One Financial To Use vWise Participant Education Tools

vWise Inc., the Aliso Viejo, Calif. technology firm, announced that Freedom One Financial Group of Clarkston, Michigan, has adopted vWise’s SmartPlan Enterprise computer-based plan participant education service. Retirement plan consultants, plan providers, and third-party administrators currently use the tool. 

“We will roll out SmartPlan Enterprise February 1 and expect it to quickly become a must-have across our client base,” said Freedom One president and CEO Mark Wayne.  

SmartPlan Enterprise “provides the benefits of a personal financial professional in a website available 24/7/365,” vWise said in a release. It combines “a video-based presentation of detailed financial information with an interactive application that prompts users to make informed investment decisions” and can help “increase plan enrollment, raise participant contribution levels, and reduce support costs.”

The SmartPlan Enterprise’s self-paced, customizable video-based training covers auto-enrollment, matching contributions, and loans. It generates a “personalized investor profile” based on individual retirement needs, risk profile surveys and a selection of investment types and contribution amounts. 

Freedom One Financial Group is one of the nation’s largest full-service 401(k) plan consultants, providing employee communications, retirement planning, and administrative services.

© 2010 RIJ Publishing. All rights reserved.

Obama Is All Ears About Annuities

The U.S. Treasury and Labor Departments are nearing a request for public comment on ways to promote the conversion of 401(k) and IRA savings into annuities or other steady payment streams.

There is “a tremendous amount of interest in the White House” in retirement security initiatives, Assistant Labor Secretary Phyllis C. Borzi told Bloomberg News. Borzi heads the Department of Labor’s Employee Benefits Security Administration.

In addition to annuities, the inquiry is likely to cover other approaches to guaranteeing income, including longevity insurance that would provide an income stream for retirees living beyond a certain advanced age.

AARP is interested in the issue. “There’s a real desire on a lot of people’s parts to try to encourage something other than just rolling over a lump sum, to make sure this money will actually last a lifetime,” said David Certner, legislative counsel for the huge Washington-based advocacy group for retirees.

So is the Treasury Department. “There’s been a fair amount of discussion in the literature taking the view that perhaps there ought to be more lifetime income,” agreed Mark Iwry, a Treasury official who works on retirement income. “The question is how to encourage it, and whether the government can and should be helpful in that regard.”

Fools rush in?

But there’s no clear indication from Washington yet regarding the kind of annuity the administration favors, or whether it understands the differences between immediate and deferred, fixed and variable, single and joint, or life and period certain annuities—in short, all the nuances that make annuity decisions so complex and problematic.

Americans undoubtedly need help with retirement income. The average 401(k) fund balance was $60,700 as of last September 30. That was better than the $47,500 in March 2009, but still shy of its average of $69,200 at the end of 2007, according to a Fidelity Investments review of 11 million accounts it manages.  

Those humble balances argue against income annuities as much they argue for annuities, because small balances buy very little monthly income. If the government mandated partial annuitization, the resulting income streams would be even smaller.  

Adding lifetime income to 401(k) plans is “a great idea, but how much are people really going to get out of it?” said Karen Ferguson, director of the Pension Rights Center in Washington, D.C., who would like to see a revival of defined benefit plans.  

The public isn’t exactly clamoring for annuities. All but about two percent of 401(k) plan participants take their savings as a lump sum on retirement, according to the Washington-based Retirement Security Project. When they can, even workers with defined-benefit pensions tend to take their benefits as lump sums rather than as annuities. 

“Households’ views on policy changes revealed a preference to preserve retirement account features and flexibility,” said a report by the Investment Company Institute, which represents the mutual fund companies whose products 401(k) participants invest in.  Seven in 10 U.S. households would object to a requirement that retirees convert part of their savings into annuities, the report said.  

Recipe for politicization

A government push for annuities—either life annuities or deferred variable annuities with lifetime income riders—could put it squarely between the insurance companies and mutual fund companies that are in a zero-sum competition for the trillions that Americans hold in retirement accounts.

Mutual fund companies, represented by the Investment Company Institute, clearly don’t want to see 401(k) assets move out of their products and into the general funds of insurance companies, as they would if more Americans bought income annuities at retirement, as many Britons do.

John Brennan, the former chairman of Vanguard, the giant mutual fund company, criticized private annuities as expensive and offering little inflation protection. Americans already have “the best annuity in the world, which is Social Security,” he said on Bloomberg Television.

AARP’s Certner said policy makers could reduce annuity costs by encouraging the use of group annuities, which are bought by employers rather than individuals and often carry lower fees, or using approaches that provide retirement income without commercial annuities.

© 2010 RIJ Publishing. All rights reserved.

New York Life Introduces ‘Lifetime Wealth Strategies’

Last summer, New York Life rolled out a new managed account solution that enabled its own agents and brokers to blend investments and insurance in a single portfolio, whose weightings would shift from stocks and life insurance to bonds and annuities over a client’s lifetime.  

“We launched it in the agency in the second half of last year. There’s been a lot of excitement around it,” said Michael Gordon, first vice president in New York Life’s U.S. life insurance and agency business, who has led the effort so far. “And we’re seeing sales that are consistent with expectations.”

Now the firm, the world’s largest mutual life insurer, plans to offer that solution to third-party distributors. The first version, called Lifetime Wealth Strategies, is designed for registered reps. A tweaked version, intended for fee-based advisors, is contemplated. The third-party partners haven’t been named yet.

The new platform is significant on several levels. It’s the latest of several insurance industry attempts—not all of them successful—to market retirement income processes instead of just products, in a variation of the old give-them-the-razors-and-sell-them-the-blades strategy. And it’s the first to integrate both life insurance and annuities into investment portfolios.

Lifetime Wealth Strategies also represents major a push by the country’s leading income annuity seller, and one of the healthiest insurance companies in the post-crisis world, to solve the “annuity puzzle” and convince the masses—or at least the mass-affluent—to  embrace income annuities.   

“Our goal is not to have a 25% of the [SPIA] market,” Gordon said, referring to the fact that, with $1.4 billion in SPIA sales through the first three quarters of 2009, New York Life alone has a quarter of the U.S. SPIA market. “Our goal is to have a smaller share of a much bigger market.”

Partnering with Ibbotson

The financial engineering that drives the program also has a noteworthy pedigree. The underlying formulas, which New York Life calls the “Protection Solution Decision Model,” as well as the client assessment questionnaire, were created through a partnership with Ibbotson Associates, the asset allocation specialty firm owned by Morningstar, Inc.   

Guiding Principles of
Lifetime Wealth Strategies
  • The older the individual is, the less life insurance is needed and the more bonds should be included in the asset allocation.
  • The higher the initial financial wealth is, the less life insurance is needed but the more bonds should be included in the asset allocation.
  • The more risk averse an investor is, the more life insurance is needed and the more bonds should be in the asset allocation.
  • The more desire the individual has to make bequests to beneficiaries, the more life insurance is needed, but this bequest desire has little impact on asset allocation.
  • The more an individual’s earning power is sensitive to the economy and the stock market, the less life insurance is needed but the more bonds are needed in the asset allocation.
  • Including payout annuities in a retirement asset allocation reduces the probability of outliving assets (e.g., reduces longevity risk).
  • Fixed-payout annuities substitute for bonds, and variable-payout annuities substitute for stocks, although more aggressive equity mixes can be invested in once longevity risk has been diminished.
  • Payout annuities protect against longevity risk; life insurance protects bequests that can be made. In general, the more annuities purchased, the less capital is left over for bequests.
  • Payout annuities should generally be purchased after retirement with staggered purchases because annuities are irreversible purchases that partially lock in investors’ asset allocations and reduce bequests.

Source: Ibbotson et al, “Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance.” The Research Foundation of the CFA Institute, 2007.

The theory behind it, which includes staggered purchases of income annuities in retirement, can be traced to back as a 2007 monograph, sponsored by the CFA Institute, by Ibbotson’s Roger Ibbotson, Peng Chen and Kevin X. Zhu and York University retirement income expert Moshe Milevsky, called “Lifetime Financial Advice: Human Capital, Asset Allocation and Insurance.”


Laurence B. Siegel, the CFA Institute research director who invited Milevsky and the Ibbotson team to write that monograph, says they answered an important question: “How can people save for retirement in DC world where you have no obvious efficient market in the annuitization part of the solution.”

“You can’t hold the index that you care about most—an index of your consumption,” Siegel told RIJ. “You sort-of can with a laddered portfolio of TIPs, but then you don’t get any mortality pooling. Only an insurance company can do this, and the fact that New York Life is doing it is very reassuring. This really has a chance to change the way money is invested by individuals.”

Aside from designing the platform’s gearbox, Ibbotson is also one of the asset managers. “There are four money managers, one is Morningstar Investment Services, who go for alpha. Then there’s Ibbotson Investment Services. They bring an active/passive hybrid strategy that goes after alpha where alpha is feasible, but will go passive in areas where you can’t beat benchmark,” Gordon said.

“Then there’s Brinker Capital, which overweights to absolute return like an endowment, and Loring Ward, which partners with Dimensional Fund Advisors. They use a passive strategy. They don’t believe in long bonds, and they weight to international equities instead of domestic to offset the short term bonds,” he added.

Peng Chen, president and chief investment officer at Ibbotson Associates, thinks the program will bridge the insurance/investment divide for reps and advisors.

“Most advisors are either equipped to look at asset allocation or insurance, but its trickier to put them together,” he told RIJ. “We have a framework that gives them specific recommendations, and we put the recommendations together in an easily managed cohesive package.

Peng Chen“We’ve had great traction with this on the agency side.  It happens seamlessly and automatically, so that as you get into the retirement stage, you begin to see withdrawals from the life insurance portion to fund the retirement income portion,” he added.

The program matches portions of the client’s money with his risks, rather than with specific time-periods. “In the typical ‘bucket methods’ in the market today, you usually see a time-segmented approach,” Chen said. “That doesn’t necessarily solve the issue, however. We’re bucketing not in terms of time segments, but in terms of needs.”

On the account statements, the insurance and investment assets are integrated, with insurance assets counted toward the fixed income allocation of the portfolio. “A conservative investor might be assigned an 88% fixed income and 12% equity allocation, but the fixed income might be part insurance. So the allocation could be 10% insurance, 78% fixed income and 12% equities,” Gordon said.

On a mission

Other insurance companies have launched investment/insurance platforms, with mixed success. Nationwide and Envestnet launched a time-segmented program last summer called RetireSense among Envestnet’s advisors. It’s still too new to assess.

A few years ago, MassMutual introduced a tool called the Retirement Management Account, which came to naught as a result of the financial crisis and internal management conflicts.

Jerry Golden, who created the Retirement Management Account, which employed staggered purchases of income annuities in a rollover IRA, says the New York Life venture is most likely to succeed if it is led by a dedicated, focused marketing team that champions the managed account concept itself, not just the products in it.

If the team is made up of competing advocates of individual products, the whole effort could founder, he said. “If product sales are easier than program sales, then they’ll take the path of least resistance,” said Golden, who left MassMutual after the RMA project imploded.

Before the financial crisis, Phoenix Companies partnered with Lockwood Capital Management on a unified managed account that attached a lifetime income guarantee to an investment portfolio. But New York Life’s platform eschews living benefits in favor of the company’s bread and butter SPIAs, which it calls “Guaranteed Lifetime Income” to avoid the word that continues to confuse and frighten consumers.

The company has steadily nurtured those sales during the first decade of this century. 

GLI Actual Sales (in Premium)  $MillionsIn 2003, the company’s SPIA sales were only $115 million. But that year, New York Life’s current CEO, Ted Mathas, called for focus groups to help make the products more consumer-friendly. The company subsequently added liquidity features to the product, such as cash withdrawal opportunities and interest rate adjustments. 

Sales rose. In 2004 and 2005, the insurer’s SPIA sales reached $294 million and $439 million, respectively. In 2006, New York Life won the contract to market SPIAs through AARP, and sales grew faster. In the first three-quarters of 2009 alone, New York Life SPIA sales totaled $1.4 billion, including over $600 billion each through captive distribution and third-parties, and $138 million through AARP.

The Lifetime Wealth Strategies program is expected to help maintain the momentum.  

“This should massively expand the market,” Gordon said. “It’s like the evolution that the securities industry went through. Buying an individual security was a big deal before mutual funds came along.  The process wasn’t scaled yet.  You needed Modern Portfolio Theory and asset allocation and then the technological revolution to make it happen. Our idea is that something similar will happen in annuities.”

© 2010 RIJ Publishing. All rights reserved.

The Visible Hand Behind the Crisis

Anyone searching for a “visible hand” among the causes of the financial crisis should read the analyses written last year by professors at New York University’s Stern School of Business.

The overleveraging that made the collapse of the subprime housing crisis so deadly didn’t just happen, they say. It was pushed. 

So argue Viral V. Acharya and Matthew Richardson in a paper called “Causes of the Financial Crisis,” which appeared in Critical Review last year.  They also worked on a related paper, “On the Financial Regulation of Insurance Companies,” with NYU colleagues John Biggs and Stephen Ryan.  

Regulatory arbitrage

In their Critical Review article, Acharya and Richardson explain why the banks themselves were caught holding so many toxic assets:

Instead of acting as intermediaries between borrowers and investors by transferring the risk from mortgage lenders to the capital market, the banks became primary investors.

Since-unlike a typical pension fund, fixed-income mutual fund, or sovereign-wealth fund-banks are highly leveraged, this investment strategy was very risky. The goal, however, was logical: namely, to avoid minimum-capital regulations.

One of the two primary means for this “regulatory arbitrage” was the creation of off-balance-sheet entities (OBSEs), which held onto many of the asset-backed securities. These vehicles were generically called “conduits.” Structured investment vehicles (SIVs), which have received the most public attention, were one type of conduit.      

With loans placed in conduits rather than on a bank’s balance sheet, the bank did not need to maintain capital against them. However, the conduits funded the asset-backed securities through asset-backed commercial paper (ABCP)—bonds sold in the short-term capital markets.

To be able to sell the ABCP, a bank would have to provide the buyers, i.e., the banks’ “counterparties,” with guarantees of the underlying credit-essentially bringing the risk back onto itself, even if it was not shown on its balance sheet. These guarantees had two important effects, however.

First, guaranteeing the risk to banks’ counterparties was essential to moving these assets off the banks’ balance sheets. Designing the guarantees as “liquidity enhancements” of less than one year maturity (to be rolled over each year) allowed banks to exploit a loophole in Basel capital requirements. The design effectively eliminated the “capital charge” and thus banks achieved a tenfold increase in leverage for a given pool of loans.       

They conclude that

The genesis of it all was the desire of employees at highly leveraged LFCIs (Large, Complex Financial Institutions) to take even higher risks, generating even higher short-term “profits.” They managed to do so by getting around the capital requirements imposed by regulators-who, in turn, were hoping to diminish the chance that deposit insurance, and the doctrine of “too big to fail,” might cause LCFIs to take just such risks.

Taking on more assets that were backed by insurance rather than reserves may have “looked like the desirable thing to do” for a department within a large bank, but it “would create excessive risk for the bank as a whole,” Acharya told RIJ. “From [the department’s] standpoint it all makes sense. The risk was hedged and most of the losses would be felt by the creditors if it failed.”

The banks were not unlike a balanced fund manager who over-weights equities during a boom. Until the market turns, investors see the profits that the “style drift” produces but not the risks. Such strategies—which some fund managers couldn’t resist during the dot-com boom—proved fatal to many of those funds and their investors in 2000.  

Slippery slope

In the case of ABCP conduits, banks largely provided insurance themselves, Acharya told RIJ. But in the case of AAA-rated tranches of sub-prime mortgages and corporate bonds and loans, they often bought insurance from elsewhere.  This reduced capital requirements on these tranches practically to zero. That’s why the credit default swaps (CDS) prolifically written by AIG became so important.

The purchase of the credit default swaps by banks to insure against these tranches—in place of reserves—can be traced in part to the purchase of $350 billion worth of such insurance purchased by European banks “as a temporary fix for the fact that capital requirements in the Basel I agreement had placed European banks at a competitive disadvantage to U.S. investment banks, which were given a head-start on Basel II treatment by the Securities Exchange Commission (SEC) in the United States,” Acharya told RIJ.  That turned out to be a slippery slope.

“The moment you allow one player in the financial sector easier access to leverage, then everyone has to do it,” he said.

Moral hazard was ultimately responsible for the crisis, the NYU authors conclude. Federal deposit insurance for banks, state guaranty funds for insurers, belief in the principle of “too big to fail” and the limited liability of shareholders versus creditors all encouraged managers at large complex financial companies to take risks they otherwise would not have.

They recommend tighter regulation of banks and insurance companies and/or taxes that would force financial institutions to internalize the risks they are imposing on the financial system as a whole.  In their August 2009 white paper, the NYU authors conclude: 

“Insurance companies should not be able to offer “insurance”/protection against macro-economic events that yield systemic risk unless the insurance is fully capitalized. This would cover CDS on AAA-tranche CDOs, insurance against a nuclear attack, the systematic portion of insurance on municipal bonds, and so forth.

“A reworking of the accounting system for insurance companies to better aid the regulator and investors would also be desirable:

  • The accounting for insurance policies should be made more/reasonably consistent with the accounting for substitutable risk-transferring financial instruments, such as derivatives. Fair value accounting, the usual accounting approach for these other financial instruments, is the best way to do this, but a not-too-distant alternative such as fulfillment value accounting may be adequate.
  • The income smoothing mechanisms in statutory accounting principles (SAP) should be eliminated.
  • Better financial report disclosures are needed for insurance policies that are written as put options on macroeconomic variables. These disclosures should clearly indicate concentrations of risk, how historical data is used to value the positions, and other important estimation assumptions.”

© 2010 RIJ Publishing. All rights reserved.

Ready for a Reality Check

The headline on the story in this month’s Journal of Financial Planning hooked me right away: “Achieving Sustainable Retirement Withdrawals: A Combined Equity and Annuity Approach.” Just the kind of thing I troll for.

But as I read, I found the paper to be unsettling. It was so perplexing that I asked several advisors to interpret it for me. They too were perplexed. One advisor, in fact, telephoned me before I called him, to ask me if I understood the article. 

For those who have seen it, I can clear up one mystery immediately: a key piece of information was missing. As author David M. Cordell, Ph.D., CFA, CFP, told me, the fact that the study’s hypothetical investor added $100 a year to savings (10% of his income) was accidentally omitted.  

Here’s the gist of the article:  The authors compared five financial planning strategies to determine the one most likely to fund the future retirement of a certain hypothetical 45-year-old.

This imaginary middle-aged investor earns $1,000 a year and has $5,000 in invested savings.  At age 65, he wants a retirement income of $1,265 (70% of current income, adjusted for 20 years of 3% annual inflation) that will last until age 100.

Of five proposed strategies, three involved systematic withdrawals from uninsured investment portfolios: an all-equity portfolio, a 50/50 balanced portfolio, and a portfolio with an equity allocation equal to 128-minus-attained-age.  The investor funds the portfolios at age 45.

The other two strategies involved annuities. The first called for a variable annuity  (holding equity portfolios only) with a five percent lifetime withdrawal guarantee. The second called for an all-equity portfolio with an option to buy a life annuity at a “trigger date.”

The trigger date was defined as any date from age 60 onward when the all-equity portfolio became big enough to buy a life annuity yielding one percent above inflation that could produce the desired retirement income.  

Each strategy’s degree of success was defined as the percentage of 1,000 Monte Carlo simulations in which it could produce the target income until age 100. The winner: the all-equity annuity with an option to buy a life annuity. 

Time out, I thought. An all-equity portfolio, from age 45 onward? That sounded risky, given the possibility of a bear market near retirement. The authors’ assumption of a 12.9% return rate for the equity portfolio, with an 18.3% standard deviation, also seemed high. (It’s based on the return of the Russell 1000 index from inception in 1986 to the end of 2008.) Nor had I ever heard of a 128-minus-age rule of thumb for equity allocations.

As for the life annuity, the paper seemed ambiguous. The authors didn’t say the investor should buy the annuity, only that the method was deemed a success if the portfolio grew big enough to buy the required annuity at any time between age 60 and age 100.

I was confused, and I was not alone in my confusion. The advisors I consulted about the article generally shared my reaction.  One said it “left me cold.” Another said it was evidence of the eternal gap between academics and practicing advisors.

A third said, “This is just this is one more SWiP [Systematic Withdrawal Plan] article with a nod in the direction of annuities.  I did not find it to be persuasive . . . and it doesn’t address the idea of improving the efficiency of an equity portfolio with an annuity”—a concept that William Sharpe of Financial Engines has written about. 

A fourth advisor said that age-based rules of thumb about asset allocation don’t work, as a rule. A fifth advisor, like me, couldn’t tell if the authors favored income annuities or not. 

In the meantime, I also reached out to Cordell, a professor at the University of Texas-Dallas, and asked whether he advocated life annuities. Here’s his e-mail reply.

“It isn’t that we are recommending the income annuity,” he wrote. “Rather, we are saying that the existence of that option gives us the possibility of locking in the needed life income if one chooses. We define success as making it all the way to age 100. If you have accumulated enough to buy the income annuity, you have succeeded.

“However, you may decide not to buy the annuity. In the long run, a 100% equity portfolio should accumulate more money than other asset allocations, and many people will choose to retain the portfolio rather than buying the annuity. Estate planning considerations and short life expectancy are obvious reasons not to buy the annuity.

“On average, you should be able to generate the same income as the annuity by maintaining the 100% equity portfolio and still retain (at least a portion of) the corpus, but there is still risk. The annuity is obviously a way to reduce the risk.”

In the end, the authors seemed to use the same argument for maintaining an annuitization option that marketers of variable annuities with lifetime withdrawal guarantees do: if investors know they can convert to guaranteed income if necessary, they can stomach more equities. As they put it:

“By specifying the annuity purchase as a future alternative, the financial planner can encourage a higher-equities portfolio, which will likely lead to a larger accumulation in retirement.”

It’s the simultaneous endorsement of equities and annuities that leaves me at a loss, I think. If you read the article by Cordell et al, and would care to validate or contradict my reactions, please e-mail your comments to me at [email protected]

© 2010 RIJ Publishing. All rights reserved.

VALIC Sued Over “Redundant” Tax Benefits

For the second time in a decade, Variable Annuity Life Insurance Company (VALIC) is the target of a class action suit alleging that managers and agents employed by the AIG subsidiary engaged in aggressive and unsuitable variable annuity sales practices.

The December 21, 2009 action claims that VALIC’s agents, disregarding warnings in NASD Notice to Members 99-35 and motivated by high commissions, sold tax-deferred annuities to people they knew would use them to fund tax-deferred retirement plans. The purchasers would have been better off with low-cost mutual funds, the suit said.   

The national law firm Hagen Berman Sobol Shapiro LLP filed the suit in U.S. District Court, District of Arizona, on behalf of two California teachers, John and Brenda Hall, and others who bought VALIC annuities as far back as 1974. The suit seeks return of fees paid by plaintiffs, a jury trial, costs, and punitive damages.

Evelyn Curran, a spokesperson for VALIC, which was the defendant in a similar class action suited filed by the aggressive New York firm Milberg LLP in September 2001, furnished RIJ with a prepared statement, which said in part:

“VALIC is aware that John and Brenda Hall have recently filed a lawsuit in United States District Court for the District of Arizona.  VALIC, however, has yet to receive any notice of service against any of the defendants named in the lawsuit at this time.

“VALIC understands that the Hall lawsuit alleges facts and claims that appear to be identical to the same alleged in James Drnek and Maureen Tiernan, et al. v. VALIC, et al., another class action lawsuit that was dismissed by a United States District Court in Arizona in 2005. 

“That dismissal was affirmed on appeal in 2007. As was the case in Drnek, VALIC believes these allegations to be without merit and we anticipate a favorable resolution to the case.”

Oddly, a plaintiff in the Drnek case, Phillip Bobbitt, filed a class action lawsuit in U.S. District Court, State of Arizona, on November 2, 2009, charging Milberg LLP with professional negligence in their representation of Bobbitt and others in their failed suit against VALIC.

Lawsuits accusing insurers of selling tax-deferred annuities to fund tax-deferred accounts have not been entirely unfruitful for plaintiffs, however. In 2007, Pacific Life Insurance settled with clients of Milberg LLP—called “one of the best known and most feared class-action firms in America” by one writer—for $60 million in a suit similar to the Halls’.

The average recovery per plaintiff in that case (“David J. Nelson and Samuel Cooper et al. v. Pacific Life”) was said to be only $7.23 per $1,000 invested, or the equivalent of six month’s M%E fees.

In that case, a notice Milberg LLP sent out in 2007 to purchasers of Pacific Life annuities read in part:

“The Settlement will provide $60,000,000 in benefits to the Class, including a $40,000,000 Cash Settlement Amount and a $20,000,000 Contract Credit Settlement Amount. The Class includes all persons who, between August 19, 1998 and April 30, 2002, inclusive, purchased a Pacific Life individual variable deferred annuity contract, purchased a certificate to a Pacific Life group variable deferred annuity contract…, where such contract was used to fund a qualified contributory retirement plan (such as an IRA, a 401(k) plan or other retirement account.”

The recently-filed Hall v. VALIC lawsuit charges, among other things, that:

  • “VALIC, its successors and subsidiaries, as well as VALIC officers and directors, failed to disclose that the tax deferral feature of the deferred annuity was redundant and unnecessary for class members.”
  • “One agent who expressed concern to his manager that VALIC was ‘thumbing their nose at 99-35,’ was told that he did not ‘have anything to worry about’ because he was ‘just an agent.’ In fact, at least two agents were fired from VALIC after selling a client a mutual fund, rather than a variable annuity.”
  • “At [a training] session held in San Mateo, California in May 2001 for VALIC Agents in the western United States, Howard Weinthal, who was VALIC’s National Sales Training Coordinator, and Mark Liebert, who was Director of New Representative Training, told the attendees that ‘you can basically ignore 99-35.’
  • “VALIC and VAMCO target 403(b) plan investors (mostly school, hospital and nonprofit organization employees) in particular for deferred annuity sales, and train their agents to recommend a deferred annuity to every prospective customer who is eligible to invest through a 403(b) plan investment, without disclosing that the deferred annuity product is redundant and unnecessary, and regardless of whether the customer has an insurance need that is met by the product. [original italics]”
  • “[VALIC] sales training materials explicitly tell agents to recommend deferred annuities as categorically appropriate for all qualified plan investors. In August 2000, VALIC senior compliance personnel from the home office in Texas told a convention of hundreds of VALIC Agents gathered in Las Vegas that the agents did not need to worry about scrutiny relating to the company’s non-compliance with NASD NTM 99-35 or relating to private lawsuits by deceived investors, because ‘VALIC is a big company that can withstand challenges to its sales practices.’”

© 2010 RIJ Publishing. All rights reserved.

The National Retirement Risk Index, 1983-2009

The National Retirement Risk Index
1983 to 2009

The National Retirement Risk Index, 1983 to 2009
% of Americans at risk of being unable to maintain their pre-retirement standard of living in retirement
Source: Center for Retirement Research at Boston College

Unfinished Business

In late January 2009, the clouds obscuring the 401(k) advice landscape momentarily lifted. That’s when the U.S. Department of Labor issued final regulations for the Pension Protection Act of 2006 that vastly liberalized the rules governing investment guidance in the workplace.

But, within days, a regime change occurred. The Obama-ites put the last-minute Bush regulations on hold, intending to put a new spin on them. Where the Bushies were inclined to loosen the reins on commission-based advisors in the workplace, the new Secretary of Labor, Hilda Solis, now talks about adding “automatic annuities” to plans as an exit strategy. 

Companies that provide 401(k) education and advice are now waiting for further instructions from the DOL. Among them is Ernst & Young, the accounting and consulting firm. Besides advising Fortune 100 companies on designing 401(k) plans and choosing vendors, E&Y also offers telephone help-lines and general financial education that put it on the front line of what has become a participant education battlefield.  

Regulatory Timeline on 401(k) Participant Advice
1996: DOL Interpretive Bulletin 96-1. Clarifies the distinction between non-fiduciary participant education and fiduciary investment advice.

2001: DOL Advisory Opinion 2001-09A. Allows investment provider to give participants investment advice via an ‘independent financial expert’ using ‘objective criteria.’

2001-2006: Retirement Security Advice Act, Independent Investment Advice Act. Two legislative proposals that did not pass.

2006: Pension Protection Act. Allows auto-enrollment, creates QDIAs, and allows advisors with conflicts of interest to offer participant advice under controls.

2007: Field Assistance Bulletin 2007-1. Provides guidance on allowing a ‘fiduciary adviser’ to render advice with an unbiased computer model or with ‘fee-leveling.’

January 2009: DOL Final Rules. Liberalizes restrictions on advice from advisors with conflicts of interest. Put on hold by Obama administration.

December 2009: DOL Announcement on ‘Automatic Annuities.’ Secretary of Labor Hilda Solis announces interest in income annuities as a default distribution option in defined contribution plans.

“It’s one of the best-kept secrets that a large accounting firm does this,” said Lynn Pettus, national director of the firm’s Employee Financial Services Practice, which runs a telephone call center in San Diego and offers educational websites and online calculators. “We’ve been in financial counseling and rank-and-file education for about thirty years.”

To shed light on the state of participant education, Pettus and colleague Hall Kesmodel published a paper last September under the auspices of the Pension Research Council at The Wharton School. The study, “Impact of the Pension Protection Act on Financial Advice: What Works and What Remains to Be Done?”

Their paper makes timely reading for anyone who wants a better grasp of the current state of participant education, an overly politicized realm that is related to the retirement income market as Serbia was related to World War I. That may be an exaggeration, but not a huge one.

Here’s why: Plan participants desperately need neutral advice on converting their savings to lifelong income. Financial services providers desperately want access to the multi-trillion rollover market that participants as a group represent. Plan sponsors are stuck in the middle with fiduciary responsibility and costs. The stakes and the potential for paralysis are immense.

Unresolved problems

Pettus and Kesmodel aren’t entirely disinterested observers. Their paper advocates what E&Y sells: holistic financial advice as opposed to specific advice on choosing investments. But they do a good job of summarizing the existing legislative and operational landscape as well as unresolved problems in participant education. Some of those problems are:

Many participants prefer not to confide in a computer. The computer models that are now used to provide automated investment and financial guidance increasingly rely on the input of detailed personal financial information from plan participants.

But few “are inclined to input the required personal information (from all of their various accounts) to obtain investment advice, and even fewer understand advice tool outputs and investment concepts,” Pettus and Kesmodel write. (For more on issues surrounding consumer use of online planning tools, see this week’s RIJ cover story, “The Trouble with Calculators.”

Programs lack distribution advice for older participants. “Decisions facing today’s plan participants approaching retirement include: when to commence defined benefit pension benefits; whether to elect an annuity or a lump sum; when to begin Social Security benefits; determining the appropriate level of cash reserves versus invested assets; whether to pay off their mortgage; and ordering and timing account withdrawals to minimize taxes,” the paper said.

“With so many more people nearing retirement, the thought is, ‘We’ve built these assets, and now that I have these funds, what is the distribution process?’” Pettus said. “In the past, we’ve always talked about financial planning as accumulation. But now how do we manage the drawdown?”

Retirement isn’t always a participant’s top priority. Only 30% to 45% of plan participants say that saving for retirement is their long-term savings goal, especially when compared to college tuition, home ownership or automobile purchases. Studies show that ‘don’t have enough money’ was a much more common reason (23%) for not contributing to a workplace savings plan than dissatisfaction with investment options (4.3%) or plan complexity (2.2%).

Hall KesmodelKesmodel believes that, generally, people who have credit card debt or who lack a ‘rainy day fund’ for routine cash crises should probably remedy those issues before worrying about their 401(k) plan, let alone take risks with their investments.

“The broader picture is that you shouldn’t pile every dollar into your 401(k),” he said. “And if you have credit card debt and no rainy day fund then you shouldn’t be in the stock market.”

QDIAs aren’t a panacea. While the PPA allowed managed accounts and TDFs as qualified default investment options in employer-based retirement plans, Pettus and Kesmodel believe these solutions may raise as many questions as they answer.  Participants may need significant education in choosing one of several default options. TDFs proved not to provide adequate protection from a default option not know how to choose among advice tools and QDIAs.

Employees’ average tenure is only four years. While common sense suggests employees work longer at big companies, the average job tenure in America is only 4.1 years. Financial education is likely to be fragmented at best. And, according to one study, 43% of older workers with at least $50,000 juggle more than six separate checking, saving and investment accounts. 

Universe of options still unexplored

Even when the DOL gets around to re-tooling the PPA regulations to suit Secretary Solis, the PPA didn’t have anything to say about showing participants how to convert savings to income, the E&Y authors point out.  

“The PPA is focused on investment advice and fund selection in 401k, but that’s a small piece of the puzzle,” Kesmodel told RIJ. “PPA failed to consider that there are much broader issues at play here with respect to ensuring that participants have a secure retirement.”

The E&Y paper concluded that “future advice might need to include income product selection (e.g., managed pay-out mutual funds vs. annuities)” and that “employers will also confront a decision on how (or if) to automate this payment process and whether to provide employees with pay-out options inside or outside the plan, and/or educate participants on the universe of options beyond the plan for managing retirement income derived from their 401(k)s.”

That could happen in 2010, if Solis follows through with an announcement last December that one of her priorities for this year is to work with I. Mark Iwry, an advisor to the Treasury Department, to make it easier for companies to offer “automatic annuities” as an option for people retiring from defined contribution plans.

© 2010 RIJ Publishing. All rights reserved.

Wealthy Less Materialistic, Survey Shows

Four out of 10 (42%) of America’s wealthy have felt a negative impact on their family budget, with one-third experiencing a negative effect on their lifestyle, according to the sixth annual Wealth and Values Survey conducted by PNC Wealth Management in Philadelphia.

Nearly nine out of 10 (88%) say it is “more important than ever to live within my means” and 66% believe they have “developed a greater appreciation for the non-material wealth in my life.” Half say they “feel more centered because the recession has given me an opportunity to re-evaluate my priorities.”

Concern over children becoming more spoiled has risen dramatically in the last two years. This year’s survey revealed that 35% “believe that my children may be too spoiled by money and have too many material possessions,” up from 22% in 2007.

The survey, designed by HNW, Inc., was conducted online last fall by Harris Interactive among 1,046 Americans age 18 or over with incomes of at least $150,000 (if employed), at least $500,000 of investable assets (unless retired) or at least $1 million of investable assets (if retired).

In other findings, Just over half (51%) believe the recession has changed the way their children will manage their finances and has prompted nearly half (47%) to discuss money management with their children.

The survey of 1,046 Americans with at least $500,000 in investable assets also revealed that four in 10 (42%) have cut their spending on non-essential goods, while three in 10 (29%) have provided financial assistance for friends or family who need it.

Among the ultra-wealthy (those with $5 million or more in assets), 39% are more likely to have provided financial assistance to friends or family, compared to 26% of those with assets of $500,000 to $1 million.

“For wealthy individuals, the recession has presented an ideal opportunity for a strategic analysis of their current lifestyle,” said Steve Pappaterra, managing director of wealth planning for PNC Wealth Management.

“It is time to strip away the clutter, discern what is most important, and develop tangible action steps to ensure that key goals and dreams are accomplished and important values are passed on.”

© 2010 RIJ Publishing. All rights reserved.

Western & Southern Enhances Income Annuity

Western & Southern Financial Group has announced enhancements to IncomeSource, the single premium immediate annuity issued by its units, Integrity Life Insurance Company (Cincinnati) and National Integrity Life Insurance Company (Goshen, NY). 

The enhancements include:

  • Commutation benefits. Allow access to funds for emergencies to owners of period-certain contracts.  
  • Cash refund payout. Offers a conditional money-back guarantee for beneficiaries.
  • Increasing payout option. Guarantees annual increases up to five percent to offset impact of inflation.   
  • Temporary life payout. A period-certain contract that allows the owner to benefit f rom mortality credits. 

Sales of IncomeSource grew by 25% to an all-time high in 2009, surpassing a record set in 2008. Third-quarter 2008 YTD sales were $119.36 million with a 2.1 percent market share. Third-quarter 2009 YTD sales were $170.42 million, a 43% increase over the same period in the prior year. Market share increased to 3.2%. 

Western & Southern is a Cincinnati-based group of financial services companies that own or manage over $43 billion. It has a Standard &Poor’s AA+ Very Strong rating, A.M. Best’s A+ Superior rating, Fitch’s AA Very Strong rating and Moody’s Aa3 Excellent rating, all with a Stable outlook, as of September 2009.

© 2010 RIJ Publishing. All rights reserved.

Will “Auto-Enrollment” Kill the Employer Match?

Why use a carrot when a stick will suffice?

The trend toward “auto-enrolling” employees into defined contribution retirement plans was supposed to increase participation in these plans and contribute to greater retirement security for more Americans.

But the trend has a negative consequence that somebody must have foreseen: by raising participation rates, auto-enrollment raises the cost of employer-matching efforts and may encourage some employers to reduce their match. It may even undermine the need for an employer match as an incentive to participate.

An article in the December issue of the newsletter of The Retirement Policy Program at the Urban Institute says “firms appear to reduce the rate at which they contribute to 401(k) plans when they adopt auto-enrollment. Auto-enrollment then, will not necessarily raise future incomes for all eligible employees.”

The article’s authors, Barbara Butrica of the Urban Institute and Mauricio Soto of the International Monetary Fund, found that the mean match rate for companies that use auto-enrollment is 44% (median = 46%) of the first 6% of salary, while the mean rate for companies that don’t auto-enroll is 51% (median = 53%).

A seven-point reduction in match rates offsets about 42% of the increase in matching costs caused by auto-enrollment, they said. The article doesn’t discuss whether the higher participation rates associated with auto-enrollment brings benefits to the employer that would justify the expense of higher matching costs.

“Our findings suggest [auto-enrollment] could lead to lower account balances at retirement for those who were already enrolled or would have enrolled anyway,” the authors conclude.

© 2010 RIJ Publishing. All rights reserved.

Anglo-American Economy Still Needs ‘Sugar Daddy’—Bill Gross

In his January editorial “Investment Outlook: Let ‘s Get Fiscal,” Bill Gross, the world’s most famous bond fund manager at Pacific Investment Management Co. (PIMCO), writes that as governments withdraw stimulus measures and their “carefree check writing” stops, asset markets in the U.S. and U.K. may see tough times ahead. 

Gross, managing director and a founder of PIMCO, said the U.S. economy is likely not strong enough to handle the end of the Federal Reserve’s quantitative easing program meant to decrease borrowing costs and stimulate growth. He expressed concern over the Fed’s withdrawal of liquidity to markets and he focused on the Fed’s plans to stop its program of buying Fannie Mae and Freddie Mac mortgage-backed securities, scheduled to end in March.

“Most ‘carry’ trades in credit, duration, and currency space may be at risk in the first half of 2010 as the markets readjust to the absence of their ‘sugar daddy,’” Gross wrote. He added that if exit strategies proceed as planned, all U.S. and U.K. asset markets may suffer from the absence of the nearly $2 trillion of government checks written in 2009.

© 2010 RIJ Publishing. All rights reserved.

Life Insurers Face Lean Years: Ernst & Young

The US life insurance industry may face an extended period of weak earnings, slow growth and greater regulatory oversight, according to Ernst & Young’s Global Insurance Center 2010 U.S. Outlook for the life insurance industry.

Instead of relying on a “back-to-basics” strategy in 2010, insurers should focus on innovating in five key areas, said Doug French, principal, Financial Services and Insurance & Actuarial Advisory Services Leader at Ernst & Young LLP.  Those areas are:

1. Optimize capital in response to ongoing pressures.  Non-traditional capital markets will take years to recover, forcing companies to alter or eliminate products dependent on these sources. With low investment yields, insurers should strengthen prices for in-force business, such as increasing non-guaranteed fees. Companies should plan for liquidity crises, forced liquidation of assets into frozen secondary markets and limitations on transfers of capital within the enterprise.

2. Build more robust risk management capacity with stronger governance and transparency. Risk monitoring should start in business units and be coordinated from the corporate center. Top executives need to confirm the organization’s risk appetite and risk-taking limits. Establish procedures for communicating risk-adjusted performance results. The chief risk officer will also face increasing demands from regulators and rating agencies on risks assumed and capacity.

3. Focus on core businesses and readdress product and distribution strategies. Insurers will continue withdrawing from non-core businesses, as they conserve capital and reallocate it among the most viable businesses. As a result, the industry will consolidate. Insurers will reduce risks by re-designing and re-pricing products.  

4. Operate successfully in a continually changing regulatory environment. Companies will see initiatives like Solvency II, which applies new reserve and capital adequacy requirements, and US GAAP, which may change insurance accounting rules. There will be a continuing dialogue of Federal vs. State regulatory oversight. Efforts at improving consumer protection will continue.  

5. Improve the effectiveness of company infrastructure. Insurers need to reduce costs through process re-engineering and headcount reduction and prepare for a lengthy low-growth environment.  

© 2010 RIJ Publishing. All rights reserved.

The Trouble with Calculators

Anybody who has fiddled with retirement planning calculators knows they aren’t flawless crystal balls. Each has unique idiosyncrasies, and their conclusions are only as smart as the people using them. “Garbage In, Garbage Out,” as the geeks say.

So no surprise that two researchers, after deconstructing a dozen popular calculators designed for “managing risks and resources in retirement,” accused them all of biases and blind spots that limit their usefulness, especially for the amateur investor.

In the 118-page study, “Retirement Planning Software and Post-Retirement Risks,” prepared for the Society of Actuaries and The Actuarial Foundation and published last month, Pension Policy Center economist John A. Turner and attorney Hazel A. Witte found that, to some degree, all the calculators:

  • Produce inconsistent results from similar inputs.  
  • Overstate rates of return, often ignoring fees and other frictions.
  • Favor stocks, skate past Social Security benefits and ignore annuities.
  • Assume an unrealistic level of financial literacy among users.
  • Overstate the percentage of their pre-retirement income that retirees will need.

Ouch! To be fair, this study attacked something of a straw man. The retirement income planning process entails so many variables and unknowns, is so individualized and has so many unresolved theoretical issues, that no calculator—free or professional-grade—could be perfect. It should also be assumed that most free calculators are intended mainly to generate sales leads or to make websites stickier.  

Still, retirement planning calculators in general cry out for a makeover, and this aggressive study, which builds on a similar 2003 study, is an overdue wake-up call. It describes easy ways to improve calculators. It also shows how to improve the retirement income planning process itself. [An 11-page Highlights Report is also available.]

Calculators Reviewed by Turner and Witte
Fidelity Retirement Planning Guidance
AARP Retirement Calculator
MetLife Retirement Income Snapshot
EBSA’s Retirement Planning
T.Rowe Price Calculator
ESPlanner’s Personal Financial Planning
EISI’s NaviPlan Standard USA
EISI’s NaviPlan Extended
EISI’s Profiles Professional
MoneyGuidePro’s SMARTware
AdviceAmerica’s AdvisorVision
Money Tree Software

‘You need to save more’

Turner and Witte looked at five free online calculators for consumers, one consumer program that charges a fee, and six programs designed for financial advisors. All are commonly used and were chosen non-randomly. 

The advisor programs, not surprisingly, tended to be more detailed and better suited for the complex needs of high net worth investors. The consumer programs were simpler, but generally failed to reflect recent findings that many Americans don’t understand basic concepts like compound interest.

“One of the newer developments in economics is behavioral economics,” said Turner, a former government economist who worked for AARP before starting the non-profit Pension Policy Center in Washington, D.C. two years ago. “It’s been a surprise to most economists how little most Americans know about investments and financial markets. A key problem with the calculators is that they haven’t taken that insight into account.

“The calculators assume that the typical user knows a lot more than he does, and therefore they allow users to make errors studies predict they will make. They don’t offer the appropriate feedback when people make errors. That’s a fundamental but easily fixable problem.” 

Overall, calculators emphasized offensive strategies (i.e., investing and accumulation) over defensive strategies (i.e., risk assessment and mitigation). That is, they reflected the still-prevalent assumption that to ensure a secure retirement you must amass a modest fortune of $1 million or more.   

“Typically, calculators do a calculation and then tell you that you need to save more,” Turner said. “But they should also say, ‘You may need to retire later or buy an annuity or spend less in retirement.’” Asked if this might reflect the business goals of investment companies, he said, “There is an element of that going on.”  

That bias tends to encourage bullish growth assumptions. “One of the areas we looked at was the appropriate rate of return to use. For instance, if you input an expected return of 21%, the calculator will say, ‘that’s too high.’ But you can input up to 20% percent and get no feedback from the calculator. It would be better if they provided a cue that told people to underestimate > their returns.

“When the market was doing well, people in general or on average somewhat overestimated the rate of return they could expect to receive. It wasn’t unusual for them to say think that they’d receive 10% going forward. Even after the last few years, I still think people have a tendency to overestimate their returns,” Turner told RIJ. [The calculator on T.Rowe Price’s site assumed an after-expenses average return of 8.8% for stocks, 5.75% for bonds, and 4.1% for short-term bonds.]

The more-is-better mantra also expressed itself in the calculators’ assumption that retirees need 70% of their pre-retirement income. Turner agrees with Larry Kotlikoff, the creator of ESPlanner retirement software package, who has argued that retirees can live on far less.

“The target replacement rates do seem to be very high, and that seems to be a pervasive problem, Economists assume that people want the same standard of living when they’re in retirement as when they are working,” Turner said.

“But let’s say you had two kids while you were working, and that your kids were using up a lot of income. That’s a simple point but none of the calculators take the number of children you have into account. That’s not a difficult problem. It just adds another line to the program. But that one change would be a significant improvement.”

Annuities and Social Security get short shrift

Reflecting the pro-investment tendency, these retirement-oriented calculators don’t even hint at the possibility of using annuities. Nor they do help people understand how to integrate the annuity that everyone has—Social Security—into their income planning. 

“Hardly anybody, even the insurance companies, tends to push annuities,” Turner said. “None of the mutual fund companies have anything to say about annuities. They don’t sell them and their assumption is that you will stay with their mutual funds. The only questions how much you have to save or how much you can consume out of what you have saved.

“We know that most people don’t annuitize, and it’s not the fault of mutual fund companies that people don’t annuitize, but it’s still a fundamental problem with the programs,” he added. [The MetLife calculator has a link to an income annuities page and to an illustration of Social Security claiming strategies. In a footnote, the T. Rowe Price calculator has a direct link to the Social Security Administration site.]

While more detail is often good for an advisor-oriented calculator, the doctrine of less-is-more may serve consumer-oriented calculators better, Turner said. People love horoscope books, which provide reams of purported insight based on no input other than the reader’s birthday. Why not devise a retirement income planning calculator that requires minimal inputs?

“It would be interesting to ask, ‘What would the ideal calculator be?’ assuming that you only asked 10 questions, and that you provided have cues and suggestions for answering them. Questions like, ‘How many children do you have? What is your age, your income, your gender, and when do you want to retire?’” Turner speculated. [One of Fidelity’s tools, “Find retirement income products,” is a decision tree that leads users to products based on their answers to just four questions.] 

Call it the paradox of consumer questionnaires. “The problem with online calculators is that if they take more than five minutes they won’t be used, but if they take five minutes or less they won’t have much value,” Turner said. “There is that tradeoff. But even in the ones with modest goals, there’s room for improvement.”

© 2010 RIJ Publishing. All rights reserved.

Reasons Plan Sponsors Do Not Offer Lifetime Annuities

Reasons Plan Sponsors Do Not Offer Lifetime Annuities
Unfamiliar with market offering 24%
Market offerings are not satisfactory 26%
Lack of participant demand 56%
Administrative complexity 36%
Other 13%
Note: The respondents could choose more than one option.
Source: Watson Wyatt 2009 Defined Contribution Plan Trends Report.

Roth IRA Conversion Promotions Are All The Rage Online

On January 1, 2010, all of the advantages offered by Roth IRAs — tax-deferred growth, tax-free distributions and no required minimum distributions — became available to a new demographic of investors thanks to a provision in TIPRA (Tax Increase Prevention & Reconciliation Act of 2005).

Previously, individuals who had modified gross adjusted incomes above $100,000 a year or were married and filed separately were unable to convert their traditional, SEP or SIMPLE IRAs to Roth IRAs.  Signed into law in 2006, the TIPRA provision eliminates these restrictions, extending Roth IRA eligibility to the higher earning investors that are coveted by top firms.  

In anticipation of the impending Roth IRA conversion opportunity and the subsequent influx of higher net worth investors, more than half of the firms we cover have introduced focused Roth IRA sales campaigns and resources online over the last six months. Firms have aggressively targeted both prospective investors and financial professionals in an attempt to establish footing with these key audiences.

John Hancock and Pacific Life have been the most active firms, rolling out impressive online sales campaigns equipped with engaging education and sales resources. John Hancock’s 2010 Roth Opportunity campaign is publicly available and targets prospective investors and clients. Pacific Life’s Roth IRAS: Take a New Look campaign is featured exclusively on advisor websites and focuses on advisor sales support.

Homepage promotions, a page dedicated to Roth IRA education, an educational series of videos and four new calculators make up the comprehensive John Hancock Roth IRA Opportunity campaign. The homepage promotional images, which have been running since September, link to the informative Roth IRA Center page. A comparison table highlighting differences between Traditional and Roth IRAs is presented along with a list of nine investor suitability considerations.

John Hancock 2010 Roth Opportunity Homepage Promotion

John Hancock Roth IRA Center Page

John Hancock Roth IRA Center

The aforementioned Roth IRA-focused videos and calculators are also accessible from the Roth IRA Center. The three part video series looks at key strengths, investor suitability considerations and potential retirement and estate planning benefits related to the Roth IRA Conversion. The four calculators help users perform detailed comparisons between Roth and Traditional IRAs, breakeven analysis and hypothetical legacy planning.

The Pacific Life Roth IRA Conversions: Take A New Look campaign is advisor-focused and offers a diverse selection of engaging client and advisor education resources and sales materials. The firm has been promoting the campaign on the homepage for nearly three months using a variety of colorful images.

Pacific Life Roth IRA Conversions: Take A New Look Homepage Promotion

Pacific Life Roth IRA Conversions: Take A New Look Homepage Promotion

Homepage promotions all link to a campaign-exclusive sales resources page that has been frequently updated over the past three months. Advisor education brochures are made available along with a variety of sales materials for use with clients including informational brochures, pamphlets, prospecting letters and marketing flyers.

Pacific Life Roth IRA Conversions: Take A New Look Sales Resources Page

Pacific Life Roth IRA Conversions: Take A New Look Sales Resources Page

It is no secret that the past 15 months have been unkind to the financial services industry. The Roth IRA conversion represents an excellent opportunity for firms to add new clients and bolster their businesses in the new year.

 

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© 2010 Corporate Insight, Inc. All rights reserved.


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

 

‘Actuary’ Rated Nation’s Best Job

“Actuary”—defined as someone who deals with the financial impact of risk and uncertainty-claimed the honor of “best job” in the new CareerCast.com 2010 Jobs Rated Report released yesterday. “Roustabout” replaced edged out “Lumberjack” as the worst job.   

The Jobs Rated Report is an in-depth review of 200 U.S. professions that ranks them on work environment, income, outlook, stress and physical demands.

Actuary is rated as one of the least physically demanding jobs with little stress, great outlook for employment and income growth, and favorable work environment.

The next four best jobs are Software Engineer, Computer Systems Analyst, Biologist and Historian. Roustabout, Lumberjack, Ironworker, Dairy Farmer and Welder were at the bottom.  

Tony Lee, publisher of the CareerCast.com 2010 Jobs Rated Report, said that the best jobs pay well and have the greatest potential for growth as the economy rebounds.

l;”> “Conversely, Roustabout is the nation’s worst job since it’s dangerous, pays about $31,000 per year and has a negative outlook for future growth,” Lee said, adding that. “Surgeon, the highest-paying job, ranked toward the bottom when you evaluate its stress levels, physical demands and work environment.”

© 2010 RIJ Publishing. All rights reserved.