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Advocacy Group Campaigns for “CPI-Senior”

Posted on January 6, 2010 by Editor Test -

RetireSafe, a national organization with 400,000 senior citizen members, announced a “Let’s Get it Right” campaign for 2010 to establish a new Consumer Price Index for Seniors (CPI-S) so that Social Security benefits can be accurately and fairly determined each year.

The group also announced its support for the pending introduction of new legislation by U.S. Representative John “Jimmy” Duncan, Jr. (R-TN) which would direct the Bureau of Labor Statistics (BLS) to determine the “right” CPI-S formula for seniors.

RetireSafe, an advocacy organization for older Americans, said it “supports this critical first step to correct the faulty formula now used by the BLS, the same one resulting in a “zero” COLA for 2010.”

“The BLS, along with numerous other credible sources, has noted that each of the present methods now used (CPI, CPI-U, CPI-W, and CPI-E) to calculate inflation is severely flawed in measuring seniors’ actual costs and expenses,” said Thair Phillips, the group’s president.

“While there may be other approaches to address this problem, we believe the first step should be an accurate CPI for seniors, a true CPI-S. Fortunately, Congressman Duncan agrees that seniors deserve a fair and accurate annual COLA that can only be determined with a fair and accurate CPI-S. He will be introducing the ‘CPI for Seniors’ Act next month, and we are fully committed to help Congressman Duncan enact this important legislation.”

401(k) Management Tool Launched by Kring Financial

Posted on January 6, 2010 by Editor Test -

Atlanta-based Kring Financial Management has developed a solution, 401k ProAdvisor, for investors who want to manage their 401(k) better but don’t know where to begin.

“Everyone is concerned about the market and their retirement. We want people to realize they are still in control and to give them the tools they need to manage their 401(k) or similar retirement account,” said William Kring, CFP, of Kring Financial Management, a registered investment advisor.

Kring Financial’s advisory service will offer clients personalized advice on their 401(k), 403(b), or similar retirement plan on a quarterly basis. Clients must provide a summary of how their 401(k) money is invested, as well as information about their financial goals, time horizon, contributions, and risk tolerance.

Using that information, the 401k ProAdvisor service will analyze each available fund using multiple factors, and provide specific recommendations on what funds and amounts the client should buy or sell each quarter.

“We study technical and fundamental factors, and use research from several sources before developing our recommended list,” said Kring. 401k ProAdvisor offers forward-looking advice, using the most relevant data to help the employees grow their 401k, but minimize losses, he said. More information is available at http://www.401kproadvisor.com/index.html

Lincoln Financial Completes Sale of Delaware Investments

Posted on January 6, 2010 by Editor Test -

Lincoln Financial Group announced that Macquarie Group has completed its acquisition of Delaware Management Holdings, Inc. and its subsidiaries (Delaware Investments) for $451.8 million in cash, subject to customary post-closing adjustments.

Delaware Investments was a wholly owned subsidiary of Lincoln Financial, focused on asset management. In connection with the sale agreement, Delaware Investments will continue to manage Lincoln Financial general account insurance assets under a long-term contract, and will provide additional sub-advisory services.

Proceeds of the sale will be used for general corporate purposes.

Headquartered in the Philadelphia region, Lincoln Financial Group had assets under management of $137 billion as of September 30, 2009. Its affiliated companies offer annuities; life, group life and disability insurance; 401(k) and 403(b) plans; and comprehensive financial planning and advisory services.

Public Pension Shortfall Estimated at $2 Trillion

Posted on January 6, 2010 by Editor Test -

The U.S. public pension system faces a shortfall of over $2 trillion, and the chairman of New Jersey’s pension fund believes that the deficit will strain many states’ finances and hurt growth, the Financial Times reported.

“State and local governments are correctly perceived to be in serious difficulty,” Orin Kramer told the British newspaper. “If you factor in the reality of these unfunded promises, their deficits will rise exponentially.”

The aggregate funding requirement of the US pension system has been estimated at $400 billion to $500 billion, but Kramer’s analysis set the figure much higher.

Kramer, who is also a senior partner at the hedge fund Boston Provident, warned that outdated accounting models and unrealistic expectations of future returns had led states to underestimate pension requirements.

Instead of mark-to-market accounting, public pension funds rely on actuarial numbers that average out value of assets and liabilities over a number of years, a process known as “smoothing.” Kramer used the market value of the assets and liabilities of the top 25 public pension funds at the end of the year.

He also looked at market interest rates, which corporate pension funds use and which are much lower than the 8% that public funds use to calculate future returns. Even using 8%, the US public pension system would still require about $1 trillion in additional funding, he said.

“The accounting treatment of public retirement plans is the political leper colony of government accounting. It is a no-go zone,” Kramer said.

Thirty-six of the 50 US states, including California and New York, have plunged into budget deficits since fiscal year 2010 began, which for most states was July 1 2009, according to the National Conference of State Legislatures.

Bernanke Blames Crisis on Regulatory Failure

Posted on January 6, 2010 by Editor Test -

In a speech to the American Economic Association in Atlanta over the weekend, Fed chairman Ben S. Bernanke said that regulatory failure was the principal cause of the housing bubble and the 2008 financial crisis, the New York Times reported Monday.

“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” said Bernanke, who is awaiting confirmation for a second term as Fed chairman.

Low interest rates set by the central bank from 2002 to 2006, when he was a member of the Fed’s board of governors, were appropriate for economic conditions at the time, he said, noting that “when historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment.”

In a separate talk at the AEA conference, Donald L. Kohn, the Fed’s vice chairman, said that the fragile economic recovery and weak job market would “warrant exceptionally low” interest rates “for an extended period.”

And In Comes 2010

Posted on January 6, 2010 by Editor Test -

This is the time of year when editors—mindful that most readers are occupied elsewhere—like to review the big stories of the past twelve months. But, after the turmoil of 2009, I’d rather contemplate 2010. Here are some of the issues or trends that I’m eager to watch unfold over the next twelve months.

Fated to live in interesting times
The big question for 2010 involves the direction of interest rates. There’s a recent historical precedent for today’s predicament. In July 2004, after reducing the Fed funds rate to 1.00% in the wake of the dot-com crash, Fed chairman Alan Greenspan raised rates in quarter-point increments, reaching 5.25% two years later under Ben Bernanke.

When that cautious strategy didn’t immediately puncture the bull market that began with the Iraq War, I thought the Fed deserved a Nobel Prize. But only 15 months later, one of America’s longest and deepest recessions began and Bernanke began knocking down to the benchmark rate to only 25 basis points.

So what will Bernanke do this year? Re-run the Greenspan strategy, or try something different? I’m no expert when it comes to interest rate policy, but advisors tell me they don’t have much faith in the rally that began last March. Unsupported by economic growth, it may be too fragile to withstand any rate hike at all.

Outlook, variable
What’s the future of variable annuities with guaranteed lifetime income benefits? Sales results from the third quarter of 2009 suggested that, despite price increases, advisors still prefer the super-dreadnought products-the ones with guaranteed roll-ups on the accumulation side and guaranteed income on the distribution side-to the new, slimmed down products without roll-ups.

But, to borrow a phrase from the NFL playoff vocabulary, variable annuity product developers don’t control their own destinies. Variable annuity sales correlate to the stock market, following it up or down. I still think of variable annuities as a transitional product, opening the way to an unbundled product like Moshe Milevsky’s ruin-contingent life annuity.

For the average young American hoping to build a personal pension, I would think that a plain vanilla variable annuity, sold direct at minimal cost, would serve just fine. They would start contributing $100 or $200 a month at age 25, and convert the assets to income (fixed or variable) at retirement. Too simple, I guess.

A time and a place to talk about income
After hearing about the low-level of financial literacy among people in their 50s, I’ve been wondering where and how participants in defined contribution retirement plans are going to learn how to convert their savings into income.

The workplace is the best place for people to learn about converting assets to an income stream. Sponsors of DC plans want to point their participants toward a secure retirement. Plan providers, including insurance companies and asset managers, certainly have the means to provide income advice.

On the other hand, plan sponsors would rather not incur either the cost of education or any liability for their ex-employees’ financial health. Asset managers and plan providers will gladly provide education because they want to rake in rollovers. But will their advice be impartial?

Plan participants could end up falling through the cracks without income-oriented education. In my experience, few DC participants formally retire. They simply leave to pursue new opportunities. There is no obvious time or place for retirement income planning.

Whither New York Life
The world’s largest mutual insurance company and America’s biggest issuer by far of single-premium immediate annuities, consolidated its annuity, life insurance, and mutual fund businesses under executive vice president Chris Blunt about a year ago.

At a conference last October in Chicago, Blunt mentioned that his group would introduce a managed account in 2010 that produced retirement income. I’m curious to see how well this product-and New York Life’s reorganization-performs.

Lincoln Financial Group and MassMutual both ran into issues when they created omnibus retirement divisions. The insurance culture and mutual fund cultures (read: equities) approach risk so differently that meshing the two groups-let alone achieving synergy-is bound to be a tall order.

Gender issues and financial advisors
An advisor I know recently told me that he was transferring ownership of his practice to his female junior partner. With the number of new financial advisors falling, it occurred to me that it would make sense for women to take up the slack.

It’s dangerous to generalize about gender. But it’s been observed that women make gains in a profession when the compensation goes down. I expect the profit margins in financial advice to fall as more Boomers move into the risk-averse world of retirement income and as the U.S. economy slows.

The future of Retirement Income Journal
These are just a few of the stories we hope to cover in 2010. I and RIJ associate publisher Randi Goldsmith will do so on the strength of the support that we’ve received so far from our individual and corporate subscribers, and from our advertisers. We intend to enrich our product and make it more useful and informative. We wish all of our readers a happy new year and a successful 2010.

AXA Trumpets a Treasury-Linked VA Rider

Posted on January 6, 2010 by Kerry Pechter -

Only two years ago, AXA Equitable was the 800-pound gorilla of variable annuity sales. In the first three quarters of 2007, the insurer sold nearly $12 billion worth of its Accumulator contract, which boasted a 6.5% roll-up on a GMIB rider.

Then the gorilla slimmed down, due largely to the financial crisis. AXA variable annuity sales totaled less than $6 billion in the first nine months of 2009, a 50% decline in 24 months. But because the whole industry suffered, its market share fell only to 6.4%, from 8.8%.

Now the global insurance giant is pounding its chest again, with its first new variable annuity product since the crisis. The new product is designed to give investors a way to benefit from the interest rate increases that seem inevitable. And if rates do go up, it could give them a higher roll-up and higher payout rate than the five percent currently offered by competitors.

Steven Mabry “In times of historically low interest rates, we’re giving clients an opportunity to benefit from rising rates. They can let their benefit base grow by 10-year Treasury rates plus one percent or withdraw at 10-year Treasury plus one percent,” said Steve Mabry, senior vice president of annuity product development. The current rate for the product, which has been rolled out through AXA Equitable career agents but not third-party distributors, is rounded to 5%, based on a 3.8% 10-year Treasury rate.

Called the Retirement Cornerstone Series, the contract contains two buckets or “sleeves.” The first sleeve is a traditional variable annuity separate account with some 90 investment options, ranging from cheap index funds to aggressive actively managed growth funds.

The second sleeve is also a separate account, but its value is protected by a living benefit rider that provides a roll-up and a guaranteed lifetime income benefit. Both the roll-up and payout rates are linked to the 10-year Treasury rate. The client pays a rider fee only on the assets (or rather, on the benefit base achieved by the assets) in the second sleeve.

On each contract anniversary during the accumulation period, the guaranteed benefit base—the sum of contributions to the second sleeve minus withdrawals—automatically compounds at a rate equal to about one percent over the prevailing 10-year Treasury rate, but no less than four percent and no more than eight percent. Every three years, the value of the benefit base is also ratcheted up to the market value of the assets in the sleeve, if it’s higher.

In any year during the life of the contract, the client can also withdraw money at a rate determined by the same formula—one percentage point above the prevailing 10-year Treasury rate (but no less than four or more than eight but percent)—without reducing the guaranteed income base. As is typical for such riders, excess withdrawals reduce the benefit base on which the value of subsequent withdrawals will be calculated.

“It’s income insurance,” Mabry said. “If you retire with $500,000, what do you do with it? If you invest in mutual funds, there’s no guarantee that if markets go down you won’t be out of money when you’re 80. With this, you’re guaranteed a certain amount of income for life. It means you can invest in equities with peace of mind.”

The contract is designed to adapt to an investor’s changing needs. The contract owner or advisor decides how much money to put in each sleeve, or when to transfer money from the growth sleeve to the income sleeve. Presumably, clients will gradually move assets into the protected sleeve as they get older as a way of taking money off the table.

“We’re targeting younger audiences by saying, ‘If you don’t want to pay for the guarantee right away, you don’t have to. When you’re ready to lock in some of your gains, you can switch to lifetime income.’ That’s where we’re seeing excitement in the field,” Mabry said.

“People can invest on the mutual side, and not incur the guarantee fee until they’re ready. When they are ready, they can do a 10% sweep per year or whatever they want into the guaranteed account. We give them a lot of flexibility to engineer their income,” he added. If the client’s account value in the protected sleeve falls to zero during his or her lifetime, the insurer pays either a fixed 4%, 5% or 6% (depending on whether the money runs out when the client is younger than 85, 86 to 94, or over 95, respectively) of the benefit base each year until death.

The contract’s separate account fees range from 1.3% to 1.7% per year, depending on the share class chosen. There’s a “ratchet” death benefit option for 25 basis points and an enhanced death benefit for 80 basis points. The guaranteed income benefit charge starts at 0.80% per year, with a maximum of 1.1%. Annual fund management fees range from 39 basis points to 1.68%, depending on the fund.

“We actually looked at this product before the crisis,” Mabry told RIJ. “We were trying to think of something for people who were worried about inflation. Now we’re in a period of historically low interest rates. Most people think rates are going up and this design allows people to participate in a rising interest rate environment.”

Noel Abkemeier, an annuity analyst at Milliman, liked the new AXA contract, based on a reading of the prospectus. “Historically, the 10-year Treasury rate has been around 6% and in the ‘aughts’ it was 4.5%. This suggests that the roll-up might average around 6% and withdrawals can be around 6%. And the withdrawals are based on a growing roll-up benefit base.”

At those rates, Abkemeier said, a healthy person stands a good chance of still being alive if or when his actual account balance drops to zero, and of getting something other than his own money back from the insurance company. “The chance of collecting is reasonably good,” he noted. He pointed out, however, the payout rates become somewhat less generous—and fixed, rather than floating—after the contract owner’s account goes to zero.

A Decade to Remember. Or Not.

Posted on January 5, 2010 by Ron Surz -

In April of 2008, I started writing about the miserable stock markets we’ve experienced in this first decade of the 21st century, suggesting that things might even get worse. They did.

Then they got better in 2009, but not good enough to bring the decade into positive territory. We have just experienced the worst U.S stock market decade in the past eight decades, starting in the 1930s.

In this end-of-year commentary, I examine the past year and the past decade, placing them into perspective relative to the long run history of our stock markets. I discuss both domestic and foreign stock markets. Toward the end, I focus on my specialty, target date funds.

The worst calendar-decade ever
The U.S. stock market, as measured by the S&P 500, earned 26.5% in 2009, rebounding from a 37% loss in 2008. This recovery was not enough to restore previous losses, however, so we’ve ended the decade with an average annualized loss on the S&P of 1% per year, well below the 84-year long term average return of 9.8% per year.

By contrast, bond performance for the year (4%) and the decade (7.4%) was in line with historical averages (6.1%), as was inflation (2.8%). Completing the picture, we’re paying the government to use their mattress, with Treasury bills yielding 0.15% for 2009.

Of the eight calendar decades for which we have complete stock market data, the 2000s were the worst performing, although they were not the worst 10-year period ever. The following chart shows the returns of the past eight calendar decades, as well as the best and worst 10-year periods ever.

There have been worse times than the 2000s: the S&P lost 5% per year in the 10 years ending August 31, 1939, and we just experienced the worst real 10-year loss in the period ending February 28, 2009. That decade brought real cumulative losses of 49%, or 6.5% per year. Investors would have been better off in bonds or Treasury bills than in stocks.

In 2009, all boats were lifted
What sectors, styles, and countries have performed best and worst? The bottom line: everything worked in 2009, and only growth stocks failed for the decade. The real questions of course are all about the future; an understanding of the past should help.

Style Returns in 2009 As the exhibit on the right shows, every investment style had substantial gains in 2009. Smaller companies gained more than 40%, exceeding the 24% return to larger companies. Similarly, growth outperformed value, earning 37% versus 29%.

The “stuff in the middle” that we call “Core” surprised by underperforming both value and growth, a somewhat unusual occurrence. Our style definitions are mutually exclusive and exhaustive, making them excellent for style analyses, both returns-based and holdings-based. Note that we use Surz Style Pure indexes throughout this commentary, as described at the end.

On the sector front, every sector had gains in aggregate, but it was certainly possible to lose money in several sectors. In the exhibit below, we show the range of portfolio opportunities available in each economic sector by using a simulation approach that creates portfolios at random, selecting from stocks in each sector. We call this approach “Portfolio Opportunity Distributions” (PODs).

As you can see in the next exhibit, Information Technology was the best performing sector for the year, earning 65.74% (middle of the “Info Tech” floating bar), while Finance was the worst sector with an 11.44% return. But note the ranges of the floating bars. Financials had a lot of opportunities, i.e. a large spread in portfolio returns, while consumer discretionary was quite narrow.

Note also how the S&P 500 performed in each sector (red dot), near median in most, but underperforming in energy, where smaller companies fared best. The S&P 500 underperformed the broad market of roughly 5500 stocks in 2009, earning 26.5% versus the total market’s 31% return. Note also the sector weighting differences in the bottom of the graph. You can use this exhibit to dissect your own performance.

Sector Opportunities in 2009: S&P500 ranked against Total Market

Opportunities abroad
Moving outside the US, it was possible to double your money. Foreign markets fared much better than the US in 2009, earning 45% versus our 31%. Latin American stocks returned a sensational 108% in the year, and every country except Japan outperformed the US, so some will say that diversification “worked” in 2009, vindicating portfolio theory.

In the aftermath of the 2008 catastrophe many lamented that diversification didn’t work when you needed it most because everything tanked at the same time. Nothing works all the time, and diversification doesn’t promise better performance, just greater stability of returns. It is indeed a world market, and owning more than just U.S. companies was valuable in 2009.

The decade of the 2000s
Annual reporting season will start soon, and this is one of those unfortunate times when consultants and investment managers will try to console their clients by explaining how their pain is less, hopefully, than most others. Based on our analysis, the average US stock fund eked out a modest 0.1% per year gain during the past decade. It was a decrepit decade.

The good news, however, is that much of the pain was limited to just the growth sectors of the market. This will be particularly awkward and delicate for growth stock managers, and is likely to bring forth the difficult question about the superiority of value investing. As for value and blend (or core) managers, they should have delivered positive returns for the decade, with smaller value stocks delivering double-digit returns.

In other words, style effects are extremely pronounced and important for evaluating long-term performance. The old saw that value and growth perform about the same over the long run does not apply to the past decade. Similarly, there was a wide spread of country results during the decade, with Japan losing 2.8% per year while Australia & New Zealand delivered 20% returns.

So here’s my prediction of what evaluators like Morningstar will proclaim: Growth stock managers were more skillful than value managers during the decade because the majority of growth stock managers outperformed their benchmarks, while the majority of value managers lagged their benchmarks.

This is poppycock caused by a peer group flaw known as classification bias. Peer groups are terrible backdrops for evaluating performance. That’s why we provide you a better way in the next two exhibits, which are being published here weeks before the “real” results are available.

The universes in these exhibits are created using PODs. They represent all of the possible portfolios that managers could have held when selecting stocks from the indicated markets.

Traditional peer groups are very poor barometers of success or failure because of their myriad biases. Everyone knows that it’s easy to find a peer group provider that makes you look good, but for some reason the industry tolerates, even condones, this deceptive practice.

Now is the time to stop the subterfuge, because we can. PODs are bias free and are therefore a much more reliable performance evaluation backdrop, plus they’re available now, many weeks before the “real” biased peer groups. You can use the chart below to get an early and accurate ranking of your own portfolio. Just plot your dot.

TDFs: A good idea gone awry?
Many retirees, as well as those who are saving for retirement, have invested in target date funds. Target date funds start out aggressively when the target date is distant and then become more conservative as the target date draws near.

The target date fund (TDF) industry is growing rapidly. Currently encompassing $310 Billion, this industry is forecast to grow above $2.5 Trillion in the next 10 years [see Casey, Quirk 2009], primarily because it has become the preferred qualified default investment alternative (QDIA) under the Pension Protection Act of 2006.

TDFs are a reasonably good idea, but suffer from pathetic execution, at least so far. This is due in large part to the fact that most TDFs are currently designed to serve beneficiaries beyond the target date, to death, instead of to their presumed target-the retirement date.

Such funds have come to be known as “THROUGH” funds (as opposed to “TO” funds which are designed to end at the target date). A secondary issue with TO funds is the amount of equities that should be held at the target date; we believe zero is the correct answer because savings are most dear as retirement draws near.

2008 was disastrous for TDFs, with the typical 2010 fund losing 25%, because it held 45% in equities. 2010 funds are intended for those retiring between 2005 and 2015. We should have learned a lesson from 2008, but little has changed other than it is likely that the Securities and Exchange Commission and Department of Labor will require fuller disclosure, especially about the meaning of the date in target date fund names. Perhaps THROUGH funds will have to be called target death funds.

An important question for fiduciaries is what are the risk and reward trade-offs of THROUGH versus TO TDF paths. To answer this, we have measured ending wealth and risk for all 40-year glide paths going back to 1926. Importantly, the risk measure is dollar-weighted downside deviation, which we call “risk of ruin.” The rationale for this measure of risk is provided in my 2009 Advisor Perspectives article. The graph below summarizes the results.

As you can see, the reward-to-risk is about the same for the complete 40-year glide path, but TO funds dominate over the critical last 10 years of the path. So now you know the risk and reward considerations in your choice between TO and THROUGH – although both provide roughly the same reward-to-risk profiles over the full 40 years, “TO” funds are much safer over the final 10-year period as the target date approaches.

Defined contribution plan fiduciaries have come to believe that any target date fund will suffice because all target date funds are qualified default investment alternatives (QDIAs). But there are huge differences among target date funds, especially near the target date, so this generic belief is false. Fiduciaries have the responsibility to select and monitor good target date funds. In particular, convenience and familiarity are foolish reasons for entrusting employee savings to the plan’s recordkeeper.

Ron Surz is president of PPCA, Inc. and its subsidiary, Target Date Solutions.

This commentary incorporates Surz Style Pure® Indexes, StokTrib holdings-based style analysis and attribution, and Portfolio Opportunity Distributions. Surz Style Pure indexes are available for free on Evestment Alliance, MPI, Zephyr, Factset, Informa, SunGard, Pertrac, Morningstar, and other platforms. Designed especially for returns-based style analysis, they meet William F. Sharpe’s recommendation to use a style palette that is mutually exclusive (no stock is in more than one style) and exhaustive (the collection of indexes comprise the entire market).

REFERENCES

Basu, Anup and Michael Drew, “Portfolio Size Effects in Retirement Accounts: What Does it Imply for Lifecycle Asset Allocation.” Journal of Portfolio Management, April 2009

Casey, Quirk & Associates, “Target Date Retirement Funds: The New Defined-Contribution Battleground”. November 2009 Research Paper.

Siegel, Laurence B. 2003. Benchmarks and Investment Management. Research Foundation of CFA Institute, Charlottesville, Va.

Statman, Meir. “What Do Investors Want?” Journal of Portfolio Management, 30th Anniversary Edition 2004, pp. 153-161

Surz, Ronald J., “Should Investors Hold More Equities Near Retirement, or Less?” Advisor Perspectives, August 2009.

————–,“The New Trust but Verify.” PPCA White Paper, November 2009.

The Medical-Industrial Complex

Posted on December 23, 2009 by Editor Test -

In 1980, Arnold S. Relman, M.D., then the editor of the New England Journal of Medicine, described the devolution of his profession into a profit-driven business. In a famous editorial, he called the health care industry a “medical-industrial complex.” He didn’t mean it as a compliment.

His 2007 book, “Second Opinion: Rescuing America’s Health Care” (Public Affairs), called for the end of for-profit medicine in the U.S. This week I telephoned Dr. Relman at his home in suburban Boston—he’s a professor emeritus of Harvard Medical School—and asked for his opinion of the health care bill that the Democratic leadership of the Senate has promised to pass by Christmas.

“It’s a mixed bag,” he said. “My wife, Marcia Angell, who writes about health care and appears a lot on TV, differs with me on this issue. We both believe that in the long run we need a single-payer system, and a revised and reformed delivery system to get rid of fee-for-service and private insurance and the commercial aspect of health care.

“She agrees with Howard Dean that the current effort is so inadequate that it would be better to see it disappear and start over. I disagree. I believe that what comes out will be very inadequate and will not attack the cost problem, and that it has many deficiencies.

“But I believe that it’s better than nothing and it would be a serious mistake if Congress failed to do anything. If we get nothing out early next year, it will be years and years before we attack the problem again.

“If we do get a bill out, it will not control costs. There is not a prayer that it will affect the continuing inflation of costs. What will happen is what’s happening here in Massachusetts. They passed a law over three years ago which almost wiped out un-insurance. Only two percent have no health insurance. But the state is going broke because of rising costs.

“It’s bad in Massachusetts. They can’t afford to cover all the uninsured with the present system, and that’s what will happen in the United States as a whole if this legislation is passed. We may get more people insured but we won’t be able to afford it.

“But that’s better than nothing, because we’ll have to do something. Business—that is the 80% of the economy that has nothing to do with health care—will see that they’ve been screwed by the industry and the public will see that we need a tax-based insurance system.

“The private insurance system is a parasite. There’s overwhelming evidence that they don’t contribute anything for the money they take out of the system. We’ll need them to go into some other business. We’ll have to pay them off or buy them out. That will become clear over the next couple of years after this is passed.

“My profession is slowly waking up to the fact that it can’t keep the current system. They will have to trade fee-for-service for salaried positions, so that we have lots of Mayo Clinics all over the country. Ten years ago, the overwhelming majority of doctors reflexively opposed any kind of government system. Now they’re beginning to have second thoughts.

“It’s better to have something passed. More people will get covered. Costs will go up more rapidly than before. And maybe we’ll begin to make changes we should have made years ago. My wife says, ‘You’re dreaming. If it gets passed, people will say, Look at how bad the government messed things up.’

“Marcia and I have both testified in Washington. Single-payer was off the table from the beginning. [Sen. Max] Baucus made it clear he wouldn’t hold single-payer hearings. He invited Marcia to come down and meet with him personally, and talk about single-payer. He listened sympathetically and said, ‘If we were starting from scratch, I’d be for single-payer. But there’s too much water over the dam, and we have to make deals with the AMA, the insurance industry and the drug industry.’

“My wife takes a dim view of that. But I’m saying that half a loaf is better than none. It remains to be seen what, if anything, will come out of it. Even if the Senate does pass a bill, we don’t know what will happen in the conference with the House. In the afterword of the new edition of my book, I say I can’t predict what will happen, but if anything comes out it still won’t solve our problem.

“Money is driving everything. As I wrote in 1980, medicine has become a commodity in trade. It’s extremely profitable the way that it’s organized, and as long as we allow investors and profits to drive the system we’re hopeless. Costs will continue to rise and rise because government is going to put more money into the industry. The good side is that more people will be covered, more people will have insurance, and that’s good enough to start with.

“But we have to start working as soon as it passes. We have to get started on real reform. Ultimately we will turn things around. I’m not sure the only solution is single-payer tax-supported insurance. We need no insurance at all—just universal access, a budget that we have to live by, and not-for-profit multi-specialty medical groups with plenty of primary care and salaried doctors. We can afford it if we get rid of the waste, fraud, profits and overhead. The problem is not the money. It’s the system.”

Lawmakers Dilute Fiduciary Standard for Discount Brokers

Posted on December 23, 2009 by Editor Test -

A one-sentence provision in the huge financial services reform bill passed by the House last week would require brokers to provide advice as fiduciaries but hold them only to suitability standards when they execute that advice by making trades, Investment News reported.

The legislation, which the Senate has yet to consider, would require the Securities and Exchange Commission to establish a fiduciary duty for brokers who provide investment advice. But the bill adds language that says registered reps have no “continuing duty of care or loyalty to the customer” after providing the advice.

The provision was apparently for the benefit of discount brokerage firms, such as Charles Schwab & Co. Inc., the report said.

“That could be read to eviscerate fiduciary duty,” Marilyn Mohrman-Gillis, managing director of public policy for the Certified Financial Planner Board of Standards Inc., said of the provision.

“It’s OK to hat-switch” under the provision, said Neil Simon, vice president of government relations for the Investment Adviser Association. Under the clause, “The duty applies only at the time the advice is given. It does not extend throughout the relationship.” Allowing brokers to “switch hats” between the two standards of care would confuse clients, he adds.

New Executive Hires at AVIVA USA, ING

Posted on December 23, 2009 by Editor Test -

Aviva USA, Des Moines, Iowa, has named Jeff Frazee as senior vice president and chief information officer of its life and annuity business. Frazee will be responsible for information technology functions supporting the business. He had been senior vice president and chief information officer of West Bend Mutual Insurance Co, West Bend, Wisc.

ING Financial Solutions has hired Lynne Ford as the CEO of its annuity and rollover business. Ford had been executive vice president and managing director of the retail retirement group at Wells Fargo & Company, San Francisco.

Ford had spent most of her career at Wachovia Bank, which merged with Wells Fargo in late 2008. She will report to Rob Leary, CEO of ING Insurance U.S., part of ING Groep, the Netherlands.

Cerulli Calls DB(k) a “Diamond in the Rough”

Posted on December 23, 2009 by Editor Test -

On January 1, 2010, employers will be able to install “DB(k)” benefits. These new retirement savings vehicles blend the guarantee of a pension with the growth potential and ease of use of a 401(k), according to the fourth quarter issue of The Cerulli Edge–Retirement Division.

“The major advantages of these plans relate to compliance concerns,” the report said. “These plans are exempt from typical top-heavy or non-discrimination 401(k) testing rules so they can be skewed toward highly paid workers. They also have simplified filing requirements when run in tandem with a 401(k) plan. Cerulli views the DB(k) plan as a buried gem in 2010.

“DB plans in general are receiving short-term funding relief from stricter rules imposed by the PPA, but funding pain is quite acute with experiences from the current recession likely hastening the private pension’s decline. But, Cerulli believes a diamond in the rough exists in the PPA that seeks to revive pension benefits in combination with 401(k) plans—the DB(k) plan for 2010.”

In other findings, Cerulli reported:

Disappointment. The timing of poor economic conditions and a change in executive leadership has derailed the great intentions of PPA for enhancing growth in DC plans.

Damp reception. A one-time Roth IRA conversion opportunity in 2010 is being met with skepticism by providers fearing movement of sticky IRA assets, anxiety by advisors confounded by predicting tax changes, and confusion by investors about the true benefits of a Roth IRA.

Hybrid vigor. The PPA’s 2010 clarification of the tax treatment of long-term care payments from annuity products effectively enables the development of so-called annuity/long-term care insurance combination products, requiring insurance companies to examine how they might construct and distribute these hybrids.

New York Life SPIA Sales Up 35% in 2009

Posted on December 23, 2009 by Editor Test -

New York Life reported record annuity and mutual fund sales in the third quarter of 2009. The company said it is on pace to sell $1.6 billion worth of fixed immediate annuity sales in 2009, a 35% increase over 2008.

The company, the largest mutual life insurer in the U.S., led all issuers in fixed immediate annuity sales, was first in fixed annuity sales in the bank channel and was fifth in total annuity sales, up from 11th from a year earlier.

Chris Blunt, executive vice president and head of Retirement Income Security for New York Life, said that gross sales of New York Life’s proprietary MainStay Funds grew 25% through September 30 versus the same period last year and had the highest net new flows in its history.

Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security

Posted on December 23, 2009 by Editor Test -

Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security

Source: Congressional Budget Office, November 2009

Test Your Financial Sophistication

Posted on December 23, 2009 by Editor Test -

How financially sophisticated are you? To find out, answer these 18 True or False questions. When you’re finished, compare your answers with the Answer Key at the end of this article. Allot yourself five points for each correct answer.

A perfect score would be 90. The average college-educated person over age 55 scored 61.25, or 68%. If you’re wondering whether you can get continuing education credit for taking the test, the answer is, “Not as far as we know.”

This test was designed by Annamaria Lusardi of Dartmouth College, Olivia S. Mitchell of The Wharton School and Vilsa Curto of Harvard University for people over age 55 with varying levels of education. A paper based on their findings, “Financial Literacy and Financial Sophistication in the Older Population: Evidence from the 2008 HRS,” was published by the Michigan Retirement Research Center at the University of Michigan in September 2009.

1. You should put all your money into the safest investment you can find and accept whatever returns it pays.

2. I understand the stock market reasonably well.

3. An employee of a company with publicly traded stock should have a lot of his or her retirement savings in the company’s stock.

4. It is best to avoid owning stocks of foreign companies.

5. Even older retired people should hold some stocks.

6. You should invest most of your money in either mutual funds or a large number of different stocks instead of just a few stocks.

7.To make money in the stock market, you have to buy and sell stocks often.

8. For a family with a working husband and a wife staying home to take care of their young children, life insurance that will replace three years of income is not enough life insurance.

9. If you invest for the long run, the annual fees of mutual funds are unimportant.

10. If the interest rate falls, bond prices will fall.

11. When an investor spreads money between 20 stocks, rather than 2, the risk of losing a lot of money increases.

12. It is hard to find mutual funds that have annual fees of less than one percent of assets.

13. The more you diversify among stocks, the more of your money you can invest in stocks.

14. If you are smart, it is easy to pick individual company stocks that will have better than average returns.

15. Financially, investing in the stock market is no better than buying lottery tickets.

16. Using money in a bank savings account to pay off credit card debt is usually a good idea.

17. If you start out with $1,000 and earn an average return of 10% per year for 30 years, after compounding, the initial $1,000 will have grown to more than $6,000.

18. It’s possible to invest in the stock market in a way that makes it hard for people to take unfair advantage of you.

Answers.
1. F; 2. T; 3. F; 4. F; 5. T; 6. T; 7. F; 8. T; 9. F; 10. F; 11. F; 12. F; 13. T; 14. F; 15. F; 16. T; 17. T; 18. T.

The Passion of Anna

Posted on December 23, 2009 by Editor Test -

Soon after Annamaria Lusardi began her research into financial literacy in the United States—or rather, into the average American’s lack of financial literacy—she experienced a professorial epiphany of sorts.

The Dartmouth economist realized that financial literacy is not a trivial topic, as some of her peers once scoffed. On the contrary, she sensed that anyone who can’t grasp concepts like compound interest is bound to fail in a 21st century society.

“A lot of my colleagues told me that I should work on something more serious,” Lusardi told RIJ in a recent interview. “But people who aren’t well-equipped to make financial decisions are the ones who’ll face more risk in the future.”

Then came the financial crisis of 2008, and Lusardi’s view became mainstream. The near-collapse of the world banking system awakened many people, including several members of the incoming Obama administration, to the fact that what Americans don’t know about money can indeed hurt them—and hurt the country.

Now Lusardi and her frequent co-investigator since 2000, Olivia Mitchell, the director of the Pension Research Council at the Wharton School, are in demand. They’ve been called down to Washington to advise the Treasury Department’s Office of Financial Education.

And last October, they and the RAND Corporation received a $3 million Social Security Administration grant to open a Financial Literacy Center at Wharton and Dartmouth, and to design and pilot new programs to raise America’s financial IQ.

A few days ago, shortly after Lusardi, a native of Milan, Italy, returned from a financial literacy conference in Brazil, she answered a few questions from RIJ. Here’s an edited transcript of that interview.

RIJ: Professor Lusardi, how would you describe the financial knowledge of the average American?

LUSARDI: The result of all the work I have done with Olivia Mitchell, in every age group and every survey we have discovered how little most Americans know about economics and finance.

RIJ: What makes Americans so generally deficient in financial literacy?

LUSARDI: Americans are not alone. We have done surveys in other countries and we find a lack of financial literacy everywhere. It’s not that people are getting worse. It’s that the world has changed. In the past, in our parents’ generation, they didn’t face a lot of difficult financial decisions. The biggest decision they probably made regarded their mortgage.

That situation has changed. Even at a young age, people are faced with financial decisions about credit cards. Workers are now in charge of making decisions about their pensions. They are facing complex financial markets. The world has changed and we need to face those changes.

When we talk about financial literacy, the important word is not financial but literacy. In the past it would be impossible to live in a modern society without being able to read and write. Today’s it’s impossible to live in a modern economic society without being able to read and write financially. Everybody’s making decisions and we cannot get away without equipping people to make those decisions.

RIJ: Do you think it may be too later for the Boomers to learn more about finance?

LUSARDI: It’s not too late. People are making important decisions at every age. What worries me is that making the wrong decision late in life can have dire consequences, because you don’t have time to catch up. If you make a wrong decision about when to draw Social Security, or whether to annuitize your wealth, you might not be able to afford a comfortable retirement.

RIJ: But will financial education help? Even well educated people made dumb mistakes with their money during the real estate boom?

LUSARDI: The idea is not that if we educate people they will not make any more mistakes. It’s like driving licenses. We require them but we can’t eliminate accidents. But we must give them the basics. When I think of financial literacy, I think of things like interest compounding. If you understand that, you will know that it’s important to start saving early and not to borrow at high interest rates.

RIJ: Where would financial education do the most good?

LUSARDI: In 1996, the Jump$tart Coalition for Personal Financial Literacy started doing a study of high school students every two years. They found that only a small group of students is financially literate, and that group is disproportionately composed of white males from college-educated parents. This means that if we don’t introduce financial literacy in school then people will have to learn it from their families. That’s fine if you come from a college-educated family. But not everyone can learn at home. So we need to provide education in school.

We also need to pay attention to specific groups. Financial literacy is lacking among women. That is a big group. Women are in charge of making a lot of financial decisions and they increasingly have to fend for themselves. Women are in the workforce, but their earnings are lower than men’s, they take time off to have kids, they rely on less stable wages, and there is a high divorce rate. So accumulation for a pension is difficult.

RIJ: Rather than try to educate everyone, why not just establish good rules-of-thumb, like ‘Everyone should try to postpone Social Security benefits until they reach age 70?’ Or establish new practices like auto-enrollment in retirement plans.

LUSARDI: There have been statements that automatic enrollment in retirement plans is a solution to financial illiteracy. But if you are in debt you shouldn’t be automatically enrolling in a 401(k) plan. You have to decrease your debt first. Or if you buy an expensive mortgage because you don’t have any liquidity for a down payment, I haven’t helped you by automatically enrolling you in a retirement plan.

‘Everyone should take Social Security at age 70’ is too crude a rule for my taste. And it’s not true that everybody should wait until age 70. On the other hand, it’s not obvious to me why we present the information in such a way that the default appears to be to take it at age 62.

We shouldn’t be telling people that they can start at age 62. We should push them to start much later. I cannot overstate how important it is for people, if they are healthy, to try to take Social Security as late as possible.

RIJ: The retirement crisis seems to have made more people aware of financial literacy.

LUSARDI: If it wasn’t for the financial crisis, I don’t think we would be talking about financial literacy. It’s a teachable moment. I have been working on this since 2000, and I receive few invitations to talk about it. Publishing papers was really difficult. There was a lot of skepticism that lack of financial knowledge could be so powerful.

But the crisis has shown in such a strong way that people are making mistakes. A lot of people didn’t understand what they were doing. From an economist’s point of view, financial literacy is a public good. If people make mistakes, and if we have to rescue them when they do, then it’s really important to do prevention.

There has always been skepticism about financial literacy, but I think the financial crisis has proven us right. People can make very bad mistakes, and those mistakes have consequences for them and for society. So academics are now turning to this issue and are trying to find evidence-based research. We are very humble, we don’t claim that we will be successful in solving the problem of financial literacy, but we want to give it a try.

Can’t Do The Math

Posted on December 23, 2009 by Kerry Pechter -

The global financial crisis and the analyses of its causes and effects have helped expose the embarrassing fact that Americans don’t know nearly as much about economics, finance or investments as they should.

Leaving aside the revelation that bankers, regulators and even Treasury Secretaries blundered, the crisis highlighted a growing body of evidence that most people can’t answer simple questions about compound interest or investment diversification.

For some researchers, that evidence helps explain why so many Americans fall victim to balloon mortgages and high-interest credit. Even more seriously, it implies that many Boomers aren’t financially competent to plan for their own retirement.

“We find strikingly low levels of debt literacy across the U.S. population,” said a December 2008 paper by Anna Lusardi of Dartmouth and Harvard’s Peter Tufano. “It is particularly severe among women, the elderly, minorities, and those who are divorced and separated.”

And financial ignorance isn’t bliss; it’s expensive. Lusardi estimates that about a third of the $11.2 billion spent in 2008 on late fees and other avoidable credit card charges alone was rung up by “the less knowledgeable,” who pay “46% higher fees than do the more knowledgeable.”

Often mocked by economists as too trivial for serious attention, financial literacy is now getting some respect. Indeed, the federal government this fall funded a $3 million Financial Literacy Center at Dartmouth and the Wharton School, with Lusardi as director. Still, financial literacy experts wonder if Boomers will succeed in building up their math skills before they make fatal errors with their savings.

Three questions
Lusardi, author of “Overcoming the Savings Slump: How to Increase the Effectiveness of Financial Education and Saving Programs” (University of Chicago Press, 2009), has spent much of the last eight years working with Olivia Mitchell, director of the Wharton’s Pension Research Council, to design survey questions to measure financial literacy in the U.S.

Here are some of the questions she’s asked, and that most people get wrong:

1. Suppose you owe $1,000 on your credit card and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double?

2. You owe $3,000 on your credit card. You pay a minimum payment of $30 each month. At an Annual Percentage Rate of 12% (or 1% per month), how many years would it take to eliminate your credit card debt if you made no additional new charges?

3. You purchase an appliance, which costs $1,000. To pay for this appliance, you are given the following two options: a) Pay 12 monthly installments of $100 each; b) Borrow at a 20% annual interest rate and pay back $1,200 a year from now. Which is the more advantageous offer?

For the first question, fewer than 36% of those surveyed knew that it would take more than two but less than five years. In the second question, about 35% knew that you could never get out of debt that way. Only about seven percent identified “b” as the correct answer to the third question.

Dire consequences
Those best equipped for success in America—young, white, married, college-educated men—tend to be the most financially literate. Others—those over age 50, the 70% without a college degree, women, African Americans, Hispanics, the divorced and separated—tend to be less so. Among high school students, Lusardi found widespread financial illiteracy, except among white males whose parents are college-educated.

Besides paying higher credit card fees, people who lack financial literacy are less likely to use mutual funds with lower fees, more likely to avoid stocks (especially foreign stocks), less likely to refinance their mortgage when advantageous and less likely to plan for retirement.

It’s not so much that Americans are falling behind in financial literacy, says Lusardi; it’s that the world has become more financially demanding of everyone. In particular, millions of Boomers are not equipped to handle the responsibilities that come from having a defined contribution retirement plan instead of a traditional pension—including the responsibility to know how to take distributions in retirement.

“What worries me is that making the wrong decision late in life can have dire consequences, because you don’t have time to catch up,” Lusardi told RIJ. “If you make a wrong decision about when to draw Social Security, or whether to annuitize your wealth, you might not be able to afford a comfortable retirement.”

The fallout from subprime mortgage crisis showed that all of us suffer when the financially illiterate make mistakes. Taxpayers often have to bail out or rescue people—CEOs and commoners alike—who get themselves into personal or system-threatening financial jams.

What to do about it
Historically, financial literacy has had a low priority among economists. Economic theory rested on the assumption that participants in the marketplace acted rationally and in their own best interest. Even if disadvantaged people lacked financial literacy, some experts felt, that was probably among the least of their problems.

But Lusardi, Mitchell, and a few others give financial literacy much higher priority in the hierarchy of human needs. If you teach people the rudiments of investing, they say, you can equip them to solve their bigger problems—or at least prevent them from sliding into debt, bankruptcy and dependency.

This belief relies on two assumptions, however. First, it assumes that the financially challenged are willing and able to learn. Second, it assumes that people make foolish choices with their money out of ignorance and not because circumstances force them to.

One of the more paternalistic responses to financial illiteracy in the retirement savings arena has been to auto-enroll employees in employer-sponsored plans, to provide default investments such as target-date funds and to automatically hike employees’ contribution rates.

For financial literacy champions, however, these are band-aid solutions that boost assets-under-management without addressing the real problem. For instance, these measures doesn’t show people how to balance their need to save for retirement with their need to save for a down payment on a home or educate their children.

“My view is that many ‘nudge-type’ structures can and probably should be implemented, but they will not be sufficient,” Wharton’s Olivia Mitchell told RIJ in an e-mail. “They don’t teach people to become financial adults, to learn to make their own decisions when the easy answers don’t suffice.

“For instance, we can prohibit frequent trading to combat overconfidence but people will find a way around such restrictions. Or we could rule out certain types of financial transactions—for example, adjustable rate mortgages—but this doesn’t give people the tools to decipher and decide on some as-yet-undiscovered financial instrument.

“We can also enhance disclosure—of credit card interest, etc.—but this won’t stop kids from running up credit when they get card applications in the mail,” she added. “And when things get suddenly complex—when the market tanks and there is 10% joblessness—people need to have thought about how to protect against these eventualities while they still have time to plan ahead.”

Another Departure from MassMutual Retirement Income

Posted on December 16, 2009 by Editor Test -

Gary F. Baker, vice president in the retirement income business division of Massachusetts Mutual Life Insurance Co., has left the company, marking the last of a string of departures from the retirement income group, Investment News reported.

In June, Stephen L. Deschenes, the former senior vice president and chief marketing officer for the group, left MassMutual to join Sun Life Financial Inc.’s U.S. division as senior vice president and general manager of the company’s annuity unit. In August, Tom Johnson, a former senior vice president for retirement income and strategic business development at MassMutual, left the company as part of a restructuring that laid off 500 employees. Johnson has since joined New York Life.

MassMutual launched its retirement income group in 2005, when the firm acquired Jerome S. Golden’s business, called Golden Retirement Resources. The insurer brought on Mr. Baker, an 18-year veteran of GE Capital Assurance Co. (now Genworth Financial Inc.), along with Mr. Deschenes and Mr. Johnson, to run the group.

Over the past couple of years, though, MassMutual has been hit by the market meltdown and ratings downgrades. In response, the company has shifted course to focus on traditional insurance products, according to people familiar with the situation. As a result, the insurer has virtually all but shut down its retirement income group.

An Announcement From Chairman Scrooge

Posted on December 16, 2009 by Editor Test -

The number of companies offering traditional holiday bonuses in 2009 are at record lows, according to a new survey from Hewitt Associates. While the current economy has accelerated the decrease, Hewitt’s research shows a steady trend away from these bonuses toward the adoption of more formal pay-for-performance programs.

Less than a quarter (24%) of 300 companies surveyed are offering holiday bonuses this year, down from 42% in 2008. Of those giving bonuses, nearly half (49%) will give cash, spending a median of $250 per employee, and 39% will give gift cards with a median value of $35 per employee. One in five companies will give a turkey, ham or other food.

Replacing holiday bonuses are variable pay programs, which have increasingly emerged as the primary pay for performance vehicle for employers and make up a greater portion of an employee’s overall compensation package.

According to Hewitt research, average employer spending on variable pay as a percent of payroll has steadily increased over the past decade, from 9.7 percent in 2000 to 11.2 percent in 2010. Meanwhile, average pay raises have been steadily decreasing. In 2000, average salary increases were 4.3 percent compared to just 1.8 percent, in 2009.

“Holiday bonuses have been falling out of favor in recent years as companies face increased pressure to reduce costs and are more focused on growth and performance,” said Ken Abosch, head of Hewitt’s North American Broad-Based Compensation Consulting practice.

“Instead of giving arbitrary, across-the-board bonuses, employers want to find ways to appropriately reward their highest performing employees. And they are doing this by reserving more of their compensation budgets for bonuses that are based on performance and must be re-earned each year.”

Apparently no one has told CEOs how much even a small company-wide holiday bonus can improve morale and cohesiveness, or how demoralizing and divisive it is for managers to reserve the bulk of the raises for a few often subjectively-chosen “star” performers.

Goldman Sachs Announces Compensation Changes

Posted on December 16, 2009 by Editor Test -

The board of directors of Goldman Sachs Group, Inc., last Thursday approved changes to its compensation practices for 2009. According to a release on the company’s website:

The 30 members of the firm’s management committee, including global divisional and regional leaders, will receive 100% of their discretionary compensation in “Shares at Risk,” which are restricted for five years. Discretionary compensation represents “the vast majority” of senior management’s compensation and is directly tied to the firm’s overall performance.
Shares at Risk cannot be sold for five years, in addition to other restrictions. The five-year holding period includes an enhanced recapture provision that will permit the firm to recapture the shares if the employee engaged in materially improper risk analysis or failed sufficiently to raise concerns about risks.
The enhanced recapture rights build off an existing clawback mechanism which includes any conduct that is detrimental to the firm, including conduct resulting in a material restatement of the financial statements or material financial harm to the firm or one of its business units.
Shareholders will have an advisory vote on the firm’s compensation principles and the compensation of its named executive officers at the firm’s Annual Meeting of Shareholders in 2010.

In a statement, chairman and CEO Lloyd C. Blankfein said, “The measures that we are announcing today reflect the compensation principles that we articulated at our shareholders’ meeting in May. We believe our compensation policies are the strongest in our industry and ensure that compensation accurately reflects the firm’s performance and incentivizes behavior that is in the public’s and our shareholders’ best interests.

“In addition, by subjecting our compensation principles and executive compensation to a shareholder advisory vote, we are further strengthening our dialogue with shareholders on the important issue of compensation.”

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