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Ally, Ally, InFRE

Posted on December 14, 2009 by Editor Test -

If you’ve attended a retirement income conference anywhere in the continental United States recently, you’ve probably met Kevin S. Seibert, CFP, CEBS, CRC, managing director of the International Foundation for Retirement Education, or InFRE.

A tall, sandy-haired Midwesterner, the Barrington, Ill.-based Seibert logs many thousands of air miles each year, delivering slide presentations at retirement conferences and teaching workshops on retirement income to groups of financial advisors, often at banks and insurance companies.

You may even have heard Seibert describe his epiphany when he broke with the orthodoxy of conventional financial planning and realized that life annuities, by virtue of their mortality credits, can be an important source of retirement income.

If you’ve seen Seibert lately, you may also have heard him announce that the Certified Retirement Counselor designation, which InFRE confers, is now accredited by the National Commission for Certifying Agencies, after two years of work by Seibert and his colleague, Betty Meredith, CFA, CFP, CRC.

So-called “senior designations,” as you probably know, have become objects of controversy. Two years ago, a number of self-described “senior specialists” used flimsy credentials and free lunches to hustle retired investors. Several states began prosecuting them.

Regulations soon followed. The State of Massachusetts eventually banned the use of senior certificates except for those accredited by either the NCCA or the American National Standards Institute, two organizations that certify certifiers.

Financial advisors clearly benefit from having the right acronyms after their names. In the retirement income sphere, several certifying bodies are vying for advisors’ attention. To help advisors understand their options, RIJ has initiated an occasional series on organizations that offer certificates in the retirement space.

A few weeks ago, we reported on the Retirement Management Analyst designation, which is currently in development by the Boston-based Retirement Income Industry Association. This week we report on InFre’s Certified Retirement Counselor designation.

Non-partisan manual
Depending on how much you’ve already read about or know about retirement income, the topics that InFRE’s manuals cover and the skills that are assessed during the four-hour, 200-question CRC exams may either be familiar or entirely new.

InFRE’s 276-page, spiral-bound study guide, “Strategies for Managing Retirement Income,” written by Meredith and Seibert in partnership with NAVA (now the Insured Retirement Institute), presents a six-step process that covers all the basics—client assessment, management of retirement risks, income generation, etc.—in thorough and even-handed detail. It doesn’t push any particular philosophy, other than perhaps the assumption that retirement income planning is quite different from financial planning in mid-life.

“We took a lot of the information that’s already out there, we researched it thoroughly, and we used it to develop Strategies for Managing Retirement Income,” Seibert told RIJ. “That’s our main course of study, but it’s separate from CRC. It goes into more depth than the study guides for the CRC examination.”

The distinction between the educational materials that InFRE promotes and the CRC study guides or “Test Specifications” is an important one. To be NCCA-accredited, a certifying body must show that it isn’t merely using a designation as an excuse to sell textbooks or other paraphernalia. Nor does the NCCA accredit an organization that simply awards a framable “diploma” to people who have completed a specific course of study.

“A certification program isn’t based on the education, it’s based on knowledge,” said Jim Kendzel, executive director of the Institute for Credentialing Excellence, or ICE, of which the NCCA is the accrediting arm. “It’s always linked to an assessment tool, and it always involves a continuing education requirement.”

(The credentialing process presents a kind of infinite regression. InFRE is accredited by NCCA, which is part of ICE. ICE, in turn, is accredited by the American National Standards Institute, whose board consists of officers of major U.S. corporations, academics, and federal officials. ANSI represents the U.S. at the ISO, or International Organization for Standardization, which governs the ISO 9000 quality standards.)

InFRE met those requirements in September, after a two-year application process—and twelve years after the CRC was created. InFRE first developed the designation in 1997 in partnership with the Center for Financial Responsibility at Texas Tech University in Lubbock and with help from a federal grant. It has been certifying and re-certifying financial professionals since then.

“About 2,000 people are accredited or in the process of being accredited, and we’re hoping to go to 3,000 by end of 2010,” Seibert told RIJ. “About 60% to 70% are in financial services. Our growth slowed down last year, as anticipated, because state compliance departments were saying, ‘We’re not going to let you use your retirement designation until it’s accredited.’”

One of the first to receive the CRC from InFRE was Linda Laborde Deane, CFP, AIF (Accredited Investment Fiduciary) of Deane Retirement Strategies in New Orleans. Her son Keith, a 2008 University of Georgia graduate, is among the most recent to start the CRC process.

“The more credentialing you have, the more clients respect you and the more confidence they have in you,” she told RIJ. “It’s important that CRC has continuing education requirements because clients are aware of that—that is, if you make them aware of it.”

Deane sees no need for annuities for her retired clients, preferring to rely on prudent, adjustable systematic withdrawals for income. She advises her clients each year on how much they can afford to harvest from their accounts. Though not a market timer, she watches the markets closely. In July 2006 she eased back to a 50/50 balance of stocks and bonds, then stood pat. “My clients went through 2008 without any decrease in their income,” she said.

Annuity revelation
Seibert joined InFRE in 2003. A graduate of Miami University of Ohio with an MBA from the University of Wisconsin, he founded and operated Balance Financial Services, a Chicago financial planning and consulting in 1988. Earlier, he’d been a consultant at William M. Mercer Inc., specializing in employee benefits.

His financial life includes a conversion of sorts. “When you grow up in the fee-only CFP world, you’re taught to think that annuities are bad.” He had not considered the mortality pooling effect, however, which enhances the wealth of the surviving annuity owners.

“That was something of a revelation,” he said. “And you’re not just getting more income than you would otherwise. You’re preserving your managed assets as well by making sure that your basic needs will always be met. One of the cons of annuities is that they take away from your estate. But the opposite is true. If you live a long time, they can preserve your estate.”

You might notice that Seibert and Deane don’t hold identical views on the value of income annuities. But then, there’s nothing in the CRC designation that says they have to.

Letting the GLWB Out of Its Cage

Posted on December 9, 2009 by Editor Test -

The QWeMA Group Inc., the Toronto-based financial engineering group led by Moshe Milevsky, plans to launch an index that will enable retirees to buy a type of annuity that they can get today only by purchasing a variable annuity or a separate account with a living benefit rider.

The index, to be introduced January 1, 2010, will allow the development of a new type of ultra-inexpensive deferred income annuity that QWeMA calls a Ruin-Continent Life Annuity (RCLA). It will be the subject of Milevsky’s column in Research magazine next month.

The RCLA would resemble a variable annuity lifetime withdrawal benefit, which pays the insured parties an income for life only if their accounts are exhausted by a combination of systematic withdrawals and poor market performance before they die.

Where a VA living benefit or even a SALB (stand-alone living benefit) is triggered by a decline in the client’s account balance, however, the RCLA payout would be triggered by a decline in QWeMA’s “sustainable portfolio withdrawal index,” which would mimic a decumulating portfolio.

To look at it another way, the RCLA would be like an advanced life deferred annuity (ALDA), only much cheaper. An ALDA pays out if the annuitant reaches some advanced age, such as 80 or 85. An RCLA would be cheaper because it wouldn’t pay out unless the index had also dropped to its trigger point while the insured was still alive.

“We propose an ALDA in which distinct risk valves must be triggered before an annuitant gets paid,” wrote Milevsky and QWeMA colleagues Huaxiong Huang and Thomas S. Salisbury in an article in the Journal of Wealth Management last spring.

“First and obviously the individual (or spouse) must be alive. But second, to make a claim on their insurance policy, they must have the ill fortune to experience under-average market returns during the years surrounding retirement.”

“The impetus for creating stand-alone RCLA products is that they might appeal to the many soon-to-be-retired baby boomers who are 1) not interested in paying for the entire variable annuity package, and 2) would be willing to consider annuitization, but only as a worst case “Plan B” scenario for financing retirement,” wrote Milevsky and the same co-authors in a January 16, 2009 paper entitled, “Complete Market Valuation for the Ruin-Contingent Life Annuity.”

The index could show investors if they were spending their savings at too high or low a rate, Milevsky said. The insured investor could invest any way he liked or spend at any rate he liked—the trigger point would depend on the index rather than on his account value.

In effect, the insurance would protect retirees from the risk of experiencing terrible returns shortly before or after retirement—so-called sequence-of-returns risk—as well as longevity risk, or the risk of living too long. Although the client would not face direct investment restrictions, as he or she would with a GLWB, the index itself would incorporate benchmark withdrawal rates and asset allocations.

“It’s not like buying fire insurance on your house, where the policy is based on whether your house burns down or not,” Milevsky told RIJ. “It’s more like buying a policy based on the temperature in the neighborhood. It’s an annuity that’s linked to an index that everyone can see every day, so that anti-selection is reduced.”

An RCLA would be priced higher for someone who opts for a higher withdrawal rate than those who choose a lower withdrawal rate, and lower for older retirees than for younger ones. The price would also depend on whether the index was linked to the performance of, for instance, the S&P 500 or of a less-risky balanced portfolio.

“There’s a need for an independent index for benchmarking in retirement,” Milevsky said. “People don’t know what to compare themselves to. Say they retired two years ago and their portfolio is down severely. Is it down because they’re withdrawing too much, or because of the markets? The index would tell them. Advisors could also compare themselves to the index.”

Wealth/Income Ratios by Age

Posted on December 9, 2009 by Editor Test -

Wealth/Income Ratios by Age
	2001	2004	2007	2009
Total	5.39	5.91	6.19	4.57
Under 30	1.43	1.02	1.58	1.02
30-39	2.18	2.45	2.39	1.50
40-49	4.00	4.31	4.57	3.30
50-61	6.22	6.77	6.75	5.00
62+	10.84	11.34	11.05	8.44
Source: Center for Retirement Research at Boston College, November 2009

Wanted: Iconoclasts

Posted on December 9, 2009 by Martin Hutchinson -

The publicity and vituperation around the book tour of a middling ex-governor of Alaska seems to have nothing to do with Sarah Palin’s politics, which judging from her term in office are unexceptional and only center-right. The heat derives from her style, which is that of an iconoclast outsider, and from the establishment’s fear that iconoclasm may be the wave of the future. Economically, their fears may be justified, whatever Palin’s future career plans.

Historically, iconoclasm was an 8th-century Byzantine movement in opposition to the religious icons central to Orthodox worship. By smashing icons, the iconoclasts hoped to restore the purity of the Church and focus religious belief on the spiritual —they appear to have had similar impulses to those that later inspired Martin Luther to revolt against the decadent Medici papacy. Their opponents, the “iconodules,” did not just love images, they were regarded as enslaved to them.

In the economic arena, there would seem to be a good case for iconoclasm. The bipartisan support for the bailout in late 2008 and the lack of action thereafter has left the institutional structure frozen, even a year after the event. Citigroup, AIG, Fannie Mae and Freddie Mac are still in existence, and no plans have been made for their closure or breakup. Wall Street, in the form of Goldman Sachs, is making record profits and will pay even more outrageous bonuses than in the boom year of 2007, yet much of its activity is pure rent-seeking, with no beneficial effect on the outside economy. The U.S. mortgage market is even more hopelessly compromised than it was a year ago, with the combination of the home-buyer tax credit and the Federal Housing Administration’s lax requirements for only a 3% down-payment producing a new $1 trillion pile of mortgages that appear to be toxic.

Other damaging policies that were improvised during the crisis are also still in place, and show no signs of being reversed. Interest rates are still close to zero; indeed bank “window dressing” was reported to have driven interest rates on short-term Treasury bills to below zero. The monetary base was doubled in late 2008, a sharper increase than ever before in the history of the Federal Reserve, yet there is no sign of its decline, while the banking system’s excess reserves pile up at over $1.2 trillion. On the fiscal side, the 2009 budget deficit was $1.4 trillion and the 2010 deficit promises to be still larger. President Obama has vowed to reduce the deficit, but it has become clear that for this administration the mantra should be “Watch what we do not what we say.” In practice, he remains fully committed to a health-care ‘reform’ proposal that increases both the costs and the budget deficit, by around $1 trillion over the 2011-2020 period.

As I have discussed previously, continued worship of these icons, whether in the form of the bankrupt financial institutions, the zero-interest-rate policies, or the trillion-dollar deficits, will drive the U.S. economy into a renewed downturn that will achieve new records both in terms of pain and difficulty of exit. Yet the iconodules Bernanke, Geithner and Obama continue their worship, and the congressional opposition to them seems content only to vary the forms of ceremony, without producing serious proposals that would break the major icons or even chip them.

Like the 8th-century Byzantine church, the nexus of Washington and Wall Street has grown corrupt and its corruption has come to exert increasing costs on society as a whole. Wall Street has become excessively concentrated, trading dominated and rent-seeking, while its rewards, like those of the overblown Byzantine hierarchy, have become completely out of proportion to the increasingly impoverished lives led by the rest of the population. Goldman Sachs chairman Lloyd Blankfein claims that his organization is “doing God’s work;” St. John of Damascus, the leading iconodule would doubtless have claimed the same on behalf of the Byzantine Church. In Washington, eight years in which the ideology that had been sold to the voters in 2000 was replaced with something quite different, there’s a new clerisy even more enthusiastic to expand the power of government without very much regard as to whether that expansion is either cost effective or helpful to the population as a whole.

In such an atmosphere, with unemployment above 10% and rising, and U.S. living standards descending inexorably towards those of the Third World, it is not surprising that the public beyond the Washington Beltway is in an iconoclastic mood. Its iconoclasm is rational, economically speaking. The tight oligopoly of Wall Street is profiting excessively from its 2008 bailout by taxpayers, with the payments to Goldman Sachs and others on the AIG credit default swaps coming to seem increasingly misguided and possibly corrupt, given Goldman Sachs’s close connection with the Treasury Secretary Hank Paulson who disbursed taxpayers’ money in such an unproductive manner. AIG and Citigroup remain in business, with even AIG Financial Products, the cause of much of 2008’s pain, still in operation. Fannie Mae and Freddie Mac remain dispensing their guarantees to the housing market, noticed by the media only at the end of each quarter as they tote up their losses and demand further billions of the taxpayers’ money. The economically damaging subsidies to home purchase, diverting as they do scarce U.S. capital towards yet more unproductive housing, have just been extended both in time, for a further six months and in scope, to existing homeowners. The economic recovery, such as it is, appears to producing almost no jobs but only an ever-widening spiral in commodity prices, affecting the costs of everything the public consumes and eroding the value of its meager savings.

It’s not surprising given the new public taste for iconoclasm that the iconodules of both political parties have reacted with fear and alarm to Palin, who is no ideologue but through her background and style represents the strongest possible iconoclastic sentiment, opposed to Wall Street, Washington and all their doings. Her own political future is uncertain, as is her capability to take advantage of the new movement. But if she plays her hand cleverly, combining iconoclasm with political centrism, attracting good advisors while maintaining her anti-Washington following, her chances of a major political future at a national level would appear good.

With or without Ms. Palin, the iconoclast movement has substantial momentum. The current political-economic system is simply unsustainable; no economy can afford to pay for four giant zombie financial institutions, two substantial military adventures, a zombie-driven housing market, an exploding health-care bill and Goldman Sachs partners’ lifestyle aspirations. While the iconodules remain in charge, U.S. economic performance will consist of anemic growth punctuated by deep, grinding recessions, with new and small business starved of capital, which is instead sucked inexorably into the triple money pits of housing, the federal and state budget deficits and the investment-banking trading fraternity. In such circumstances, mere reform at the edges will not be enough; icons will have to be broken to liberate the U.S. economy from its excessive costs and allow new private sector growth sectors to emerge.

An icon-smashing president is probably likely to arrive before an icon-smashing Congress, given the electoral advantages to congressional incumbency. The U.S. economy must thus probably suffer at least another three years with the icons in place. Even a sharp 2010 congressional change would probably produce only legislative gridlock, although a belated conversion to iconoclasm by the Obama administration might produce change sooner. By 2013, the case for iconoclasm will be obvious to all. The current period of low interest rates and bubble creation will have met its inevitable sticky end, and the economic costs of unproductive icons will be fully apparent. The economy will be locked in an inflationary version of 1990s Japan, in which necessary reforms have not been taken and the detritus of old problems clogs up the streams of capital formation. At the same time, the costs of health-care reform will be looming close, and the tax increases necessary to move even partially towards balancing the federal budget will be hurting both taxpayers and the economy.

It will thus have become obvious that the housing market needs to be restored to a fully private market state, in which government subsidies are confined to the truly indigent. Zombie banks must be closed down, while the beneficiaries of “too big to fail” must be forced to slim down and divest operations until they are of a size where failure is conceivable. Commercial banks will simply become regional entities, whose failure would damage a regional economy but not the entire financial system. The trading behemoths will be broken into several competitors, whose market share will be too small for them to profit from “insider information” about market flows—a modest transactions tax will also reduce trading’s dominance. Home mortgages will once again be granted locally, with derivatives and securitization technology used only to prevent cost squeezes in high-growth areas. The obvious cost reductions in health care, eliminating the current system’s cross-subsidizations, will be legislated to reduce the sector’s oppressive cost growth. Public expenditure generally will be put on a strict diet, with expansionist foreign policy ended, both in its belligerent and its globalist forms. Finally, monetary policy will set interest rates at a level that rewards savers properly and prevents bubbles.

Iconodule vested interests will oppose such a program with all their strength. But in the end, the iconoclasts will win—the United States cannot economically afford for them to lose.

Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005). Details can be found on the Web site www.greatconservatives.com.

New Retirement Team at BoA Merrill Lynch

Posted on December 9, 2009 by Editor Test -

Andy Sieg, the head of Retirement & Philanthropic Services (RPS) for Bank of America Merrill Lynch who was hired in September from Citigroup by Sallie Krawcheck, president of Bank of America Global Wealth and Investment Management, has realigned his team, the bank reported yesterday.

RPS provides institutional and personal retirement solutions and comprehensive investment advisory and philanthropic services to individuals, small to large corporations, pension plans, endowments and foundations. RPS is responsible for over $450 billion in client assets. As part of this realignment:

Kevin Crain will run Institutional Client Relationships, responsible for institutional retirement business development and client relationship management for over 1,500 plan sponsors and four million participants. Crain is also responsible for oversight of legislative and public policy issues pertaining to retirement. Crain had run Plan Participant Solutions.

Aimee DeCamillo will run the Personal Retirement Solutions business, which will include Plan Participant Solutions, to help guide clients to an individual retirement platform provided by Merrill Lynch Global Wealth Management. DeCamillo, who reports to Sieg, will continue to serve as head of Personal Retirement, responsible for retirement education and planning, IRA products and rollover process, 401(k) plan participant solutions, 529 plans, health savings accounts, retirement income solutions and channel management.

David Roberts has rejoined Bank of America Merrill Lynch to run Equity Plan Services, the equity plan platform and the executive advisory services program, and the non-qualified deferred compensation platform. He will work with DeCamillo and others in GWIM to drive wealth management relationships within the equity plan business. The addition of Roberts is intended strengthen the business’ equity plan platform and infrastructure, considered a growth opportunity for GWIM. Bank of America Merrill Lynch serves more than 600 equity plans covering nearly 2.5 million participants in more than 100 countries, including 21 of the Fortune 125 companies, as of Sept. 30, 2009.

Other members of Sieg’s leadership team include: Paul Cummings, head of Institutional Investment & Advisory Services; John Furlong, head of Institutional Benefit Plans; Cary Grace, head of Philanthropic Management; Barry Lindenbaum, head of RPS Operations & Technology; and Kabir Sethi, head of Strategy & Institutional Business Office.

Financial Industry Wants Fed As Its Watchdog

Posted on December 9, 2009 by Editor Test -

On its blog last week, the Financial Services Forum, a trade group, said its members want the Federal Reserve, not a new financial regulatory agency, to supervise large financial institutions.

FSF chairman is C. Robert Hendrikson, CEO of MetLife. Its members include the CEOs or other senior executives of AIG, Allstate, and Prudential Financial, as well as Goldman Sachs, Fidelity Investments, UBS AG, US Bancorp and other large financial institutions.

In endorsing the Fed, the FSF opposes Senate Banking Committee chairman Chris Dodd (D-CT), who has “proposed to create a single federal banking regulator out of the multiple agencies that now supervise them, including stripping the Federal Reserve and the Federal Deposit Insurance Corp. of their bank supervisory powers,” according to Politico.com.

Last Saturday, during a Senate hearing to consider Fed chairman Ben Bernanke’s re-appointment to another term, Sen. Dodd criticized the economist harshly for his assurances during 2008 that the sub-prime crisis was “contained” and by his failure to negotiate better terms for the government in bailing out AIG and its counterparties, notably Goldman Sachs.

The December 3 FSF blogpost said:

Federal Reserve Chairman Ben Bernanke, who faces what will most likely be a contentious re-confirmation hearing this morning, will no doubt be confronted with questions regarding the recent financial crisis, and what role the Fed, in its capacity as supervisor of large financial institutions, played in that crisis.

While the House Financial Services Committee passed a bill [December 2], by a vote of 31-27, which would expand the Fed’s role as a supervisor, Republican and Democratic members of the Senate Banking Committee reportedly agree on little else other than that the Fed should be stripped of all supervisory powers.

Senate Banking Committee Chairman Chris Dodd, last month, characterized the Fed as an “abysmal failure” in its duties as regulator of bank holding companies. The Committee’s Ranking Member, Richard Shelby of Alabama, has been quoted as saying that “all roads lead to the Fed,” regarding regulatory shortcomings. In addition, the Fed’s supervisory duties are seen as a distraction from its principle role as the monetary authority and the lender-of-last-resort, as Senator Dodd recently argued in an interview on CNBC.

An appropriate policy response to the financial crisis requires an accurate diagnosis of the problems and deficiencies that helped create the crisis. Clearly, a major theme of the financial crisis is catastrophic failures of regulatory oversight.

But the notion that “all roads lead to the Fed” is refuted by the basic facts. Most of the notorious names of this financial crisis—Bear Stearns, Lehman Brothers, Merrill Lynch, Countrywide, Washington Mutual, IndyMac, and AIG—were not supervised by the Fed, either at the subsidiary or holding company level.

The Fed had principal supervisory authority over five of the largest bank holding companies—Wells Fargo, JP Morgan Chase, Citigroup, Wachovia, and Bank of America. Three of these large banking companies, Wells Fargo, JP Morgan Chase, and Bank of America, experienced difficulties principally because they absorbed the other failing institutions.

Wells absorbed Wachovia; JP Morgan Chase absorbed Bear Stearns and Washington Mutual; Bank of America absorbed Countrywide and Merrill Lynch. In this way, these three Fed supervised bank holding companies not only survived the financial crisis, but served as instruments of stabilization and recovery. The Fed’s supervisory record through the financial crisis, while not perfect, is a good one.

Furthermore, supervisory authority is altogether consistent with and supportive of the Fed’s role as the monetary authority, for the very simple and straightforward reason that financial institutions are the transmission belt of monetary policy. First-hand familiarity with the activities, condition, and risk profiles of the financial institutions through which it conducts open market operations—or to which it might extend discount window lending—is critical to the Fed’s effectiveness as the monetary authority.

The Administration is correct that our nation’s financial sector needs a systemic supervisor—some agency tasked with looking at “the big picture”—and that the Federal Reserve is best suited to serve that role because of its unique tools, powers, and institutional experience. It is the financial fire department—the agency to which financial institutions and markets naturally turn in time of crisis—and is the only financial agency with decades of capital markets experience.

The Fed has been a supervisor of financial institutions since its creation by Congress in 1913. Its supervisory duties complement, not distract from, its role as the monetary authority and lender-of-last-resort. Its supervisory record through the financial crisis is not perfect, but is solid. It has unrivaled institutional experience in supervising large and complex financial institutions.

For these compelling reasons, the Fed should retain its existing supervisory powers and should be carefully considered by Congress for the role as the systemic supervisor.

Allotted $700 Billion, TARP May Cost Far Less

Posted on December 9, 2009 by Editor Test -

The Treasury Department expects to recover $328 billion of the $370 billion it loaned to ailing companies over the past year, the New York Times reported Monday.

The $42 billion difference between the two figures includes about $61 billion in losses on AIG, Chrysler and General Motors and $19 billion gained from government loans to banks, including interest, dividends and profits on the sale of warrants that the government received as collateral.

The government loaned $245 billion to banks last year. Since then, banks have raised over $100 billion in private capital. Last week, Bank of America said that it would soon repay its $45 billion bailout loan. That would raise the amount repaid to $116 billion and leave Citigroup as the only big bank in debt to the government.

While taxpayers still could face losses on new loans under the program, and the Federal Reserve still holds a trillion dollars worth of hard-to-value mortgage-backed securities, the new estimates would lower the administration’s deficit forecast for the 2009-2010 fiscal year to about $1.3 trillion, from $1.5 trillion.

Democrats in Congress plan to divert about $70 billion from what is left in the bailout fund to highway and other construction projects, credit to small businesses and aid to state and local governments.

The bailout program is due to expire at the end of 2009, but the Treasury intends to extend it into 2010. Treasury Secretary Timothy Geithner said “there are parts of the system that are still very damaged.” He said the administration would propose within weeks when and how to end the program.

Last January, fearing that additional bank failures could exhaust the entire $700 billion TARP fund, the Obama administration proposed up to $500 billion more in federal lending authority in the administration’s first budget in February. During the summer, the administration said it might lose more than $300 billion on the program.

Instead, just $7 billion more in bailout money has gone out to banks since Mr. Obama became president, making a second loan authorization unnecessary. Total losses are now projected at about $140 billion or less.

More Advisors Using Bucket Methods—FPA

Posted on December 9, 2009 by Editor Test -

More than one-third of financial planners are now using some form of time-based segmentation approach to generating retirement income, according to the Financial Planning Association’s 2009 Financial Adviser Attitudes and Perceptions About the Retirement Income Distribution Market survey.

The survey was conducted by Diversified Services Group, sponsored by Nationwide Financial Institute of Retirement Income and published by FPA Press.

Financial planners with clients who are in or near retirement said, because of the economic downturn:
• 40% of clients have made lifestyle adjustments
• 18% of clients delayed their retirement
• 6% of clients who had previously retired returned to work

Sixty-three percent of planners surveyed reported they provided retirement income planning advice, services and products to more than half of their client base in the last year. Almost half of the planners surveyed also said they gained between four and ten new retirement income clients in the last year. Almost 80% of planners assist in client’s long-term care decisions.

Additional survey findings include:

Of the time planners spend on retirement planning, 50% is focused on calculating a client’s income needs, determining the right asset allocation mix, developing a withdrawal strategy and selecting and processing investment products and solutions.

More than a third of planners reported using a time-based segmentation approach to income, while 14% use an essential versus discretionary income approach. “Three or four years ago, eight out of 10 planners used the systematic withdrawal approach, now only four out of 10 are using that strategy,” said Brad Davis, vice president of retirement income solutions at Nationwide Financial.

More survey details are featured in Retirement Distribution Planning, a supplement to the December issue of the Journal of Financial Planning. The full survey is available for $5,000 for FPA institutional members ($7,500 for nonmember firms) through the FPA Research Center.

Proposed Law Would Give Annuity Estimates to 401(k) Participants

Posted on December 9, 2009 by Editor Test -

Legislation requiring 401(k) plan sponsors to tell participants how much monthly income their account balance would buy at retirement was introduced in the Senate last week by Jeff Bingaman (D-NM), Johnny Isakson (R-GA), and Herb Kohl (D-WI).

In amending the Employee Retirement Income Security Act of 1974, the Lifetime Income Disclosure Act (S. 2832) would also protect 401(k) sponsors from any liability associated with the required annual disclosures, as long as the estimates are based on guidelines to be issued by the Secretary of Labor.

The measure is patterned on the Social Security Administration’s annual statements, which since 1989 have been mailed annually to working Americans to inform them of estimated monthly benefits based on their current earnings.

“By providing similar information for 401(k) plans, the Lifetime Income Disclosure Act would give American workers a more complete snapshot of their projected income in retirement,” the senators said in a release.

Bingaman and Isakson are senior members of the Senate Health, Education, Labor and Pensions (HELP) Committee, which has jurisdiction over 401(k) plan disclosures; Kohl is chairman of the Senate Aging Committee.

“Half of American households will lack sufficient retirement income to maintain their pre-retirement standard of living. Yet many Americans are unaware of their financial vulnerability. Our bill [will help] them determine whether they are on a path to a secure retirement,” said Bingaman, a long-time Senate leader on retirement issues.

The proposed legislation was applauded by many groups, including Prudential Financial, AARP, the Women’s Institute for a Secure Retirement (WISER), and the Heritage Foundation.

“The Lifetime Income Disclosure Act would go a long way to putting Americans on a more secure path to retirement,” said Christine Marcks, president of Prudential Retirement, in a statement. “We believe that providing greater clarity around projected income in retirement will help Americans better understand the need for increased savings to achieve their retirement goals.”

The legislation directs the Department of Labor to issue tables that employers may use in calculating an annuity equivalent, as well as a model disclosure. Employers and service providers using the model disclosure and following the prescribed assumptions and DOL rules would be insulated from liability.

Estate Tax Extension Awaits Senate Vote

Posted on December 9, 2009 by Editor Test -

The House has voted to eliminate the one-year repeal of the estate tax that was set for 2010. As of December 6, the Senate had not acted on the matter.

The House on December 3, 2000 passed the Permanent Estate Relief for Families, Farmers and Small Businesses Bill of 2009 (H.R. 4154), permanently extending the top federal estate tax rate of 45%, with an exclusion of $3.5 million ($7 million for married couples who fully utilize their exclusions).

The House Bill eliminates the one-year repeal of the federal estate tax and the carryover basis regime for decedents dying after December 31, 2009, and before January 1, 2011. The one-year hiatus was stipulated in the Economic Growth and Tax Relief Reconciliation Act of 2001.

Only about one in 460 or two-tenths of one percent of all deaths in the U.S. result in a taxable estate, according to the Tax Policy Institute. The rate at the start of the Bush administration was 55% and the exclusion was $1 million ($2 million per couple).

The estate tax is expected to generate about $14 billion from 5,500 estates in 2009. In 2008, 17,172 estates owed tax. About 7,500 of those estates were in California, Florida, New York, or Texas.

The 225 to 200 vote reflected the urgency felt by some House lawmakers to provide certainty to estate planning and disagreement over whether to abolish the tax entirely or provide for a lower exclusion. The House Bill also provides for continuation of the gift and generation-skipping transfer (GST) tax provisions as they exist in 2009. The $233 billion cost over 10 years of the House Bill is not offset.

The bill passed mainly along partisan lines, but 26 Democrats joined the Republican caucus in opposition to the measure. Nine House members did not vote. With passage by the House, the bill now has to make it through “the gauntlet that is the Senate,” the website OMBWatch.org reported. One of the biggest stumbling blocks to passage in the Senate is the House’s decision not to index the $3.5 million exclusion for inflation.

It is unclear if the Senate will take up the House Bill before year-end. The Senate’s schedule for is dominated by debate on health care reform, leaving little time for action on an estate tax bill. Observers expect the Senate to pass a measure that will merely extend the current rate on a temporary basis. The Senate probably will deal with the issue when it works on comprehensive tax reform legislation in 2010.

The bill would maintain the so-called “step-up in basis” tax rules, which protect many heirs from paying additional capital gains taxes on inherited assets. H.R. 4154 does not include provisions for indexing the estate tax for inflation, reunification of the estate and gift taxes, or portability. A portability provision would let the heirs of the second-to-die in a family to deduct both the husband and wife without the need to establish a trust.

Luck of the Draw

Posted on December 8, 2009 by Kerry Pechter -

When the world’s equity markets buckled last fall like the knees of an aging, exhausted prizefighter in the late rounds of his last title shot, some investors suffered more than others.

The most battered of all, perhaps, were those who were about to retire or had recently retired, whose portfolios were still equity-rich and who planned to live on portfolio withdrawals.

These unfortunate devils were the casualties of so-called “sequence-of-returns” risk. Also known as “timing” risk, it is the risk that you’ll experience negative returns during the years shortly before or after retirement, lock in losses by making withdrawals, and dangerously shorten the life of your savings.

A month ago, RIJ began its series on the various financial risks of retirement with a feature on retiree out-of-pocket health care costs. This week, in the second installment of the series, we take a look at sequence-of-returns risk: what it is, what it can cost, and how best to deal with it.

“There are risks you can afford to bear and risks you can’t afford to bear, and you want to separate the ones that are tolerable from the ones that are intolerable,” said Anna Rappaport, a Chicago-based actuary and consultant. “You have to get rid of intolerable ones, and the tolerable you have to make decisions about.

“The trouble with this risk is that you may not feel it in the first few years. It will hurt you over the longer term. And the one who feels it the most will be the surviving spouse, who will probably be the widow. The money she expected will have already been spent.”

Unplanned retirements
In the past, sequence-of-returns risk wasn’t something a lot of people talked about. If a corporate pension and Social Security were waiting for you at age 65, chances are you could live on your guaranteed assets during early retirement and let your invested assets ride.

Many older Boomers will still enjoy that security. But starting about ten years ago, with increasing numbers of people dependent on defined contribution assets for retirement income, sequence of return has become a bigger issue. The phenomenon of unexpected retirement has also worsened sequence-of-returns risk.

“In the Retirement Confident Studies, a recent series of Employee Benefit Research Institute studies, about four out of 10 people were found to have retired before they wanted to” as a result of disabilities, job loss and the need to care for family members, said Rappaport. They can’t necessarily exit the market at a favorable moment or delay distributions from their savings until the return of a bull market.

In their educational and marketing literature, investment companies began explaining sequence-of-returns risk and warning about it. Prudential Financial, with its “Retirement Red Zone” campaign, has built much of its variable annuity sales strategy around this risk. Manulife has a nifty “slot machine” on its website to jolt visitors into an appreciation of sequence-of-returns risk. John Hancock’s site has an even more sophisticated tool with three slider bars that lets visitors calculate the failure risk of a portfolio based on withdrawal rate, equity allocation, and anticipated length of retirement.

Hare-raising consequences
Sequence-of-returns risk is not linked to retirement per se. It arises when retirees or other investors take regular distributions from assets that are still at risk in the market. When distributions begin, a form of Aesop’s famous fable (based on one of Xeno’s paradoxes) intrudes, and the retiree changes from a tortoise into a hare. Let me explain.

During mid-life, the typical investor contributes to a portfolio, taking advantage of dollar cost averaging to minimize the average cost-basis of his or her portfolio. He ignores short-term fluctuations in the market, trusting in the market’s tendency to produce a more or less predictable long-term average return. The investor is like a tortoise—never stopping to take money out and interrupt the process.

But as soon the investor begins withdrawing an annual income from assets that are still subject to market volatility, the dynamic is reversed and he becomes the hare. Whenever he takes a distribution in a down market, he locks in a loss. If those losses are locked in during the first five years of retirement, he vastly accelerates the decumulation process.

In his 2008 book, “Are You a Stock or a Bond?” York University finance professor Moshe Milevsky offers a hypothetical example of this phenomenon. He supposes two owners of two different funds, each fund with a starting value of $100,000.

The funds deliver a markedly different pattern of returns, but after 20 years, they are both worth $658,000 and so have an identical average historical return. The two investors are equally happy with the results.

It’s a much different story, however, if both investors withdraw $7,000 a year from their funds over the same 20 years. Because one fund loses 18.39%, 4.59% and 19.14% in its first three years, the withdrawals empty it in only 15 years. The other fund, which enjoys mainly gains in its first five years, is worth $198,000 after 20 years, despite the withdrawals.

Sequence-of-returns risk exacerbates longevity risk—the risk of having insufficient income in later life. Withdrawals during a bear market early in retirement do far more damage to portfolios than withdrawals during a bear market later in retirement.

In retirement, we’re all potential hares. The hares who stop to rest for too long near the start of the race will be doomed, financially, to finish far behind those who don’t take rests until later in the race.

Solving the problem
The best way to avoid sequence-of-returns risk is to avoid circumstances that would compel you to take withdrawals from assets whose values are depressed. While that’s easier said than done, there are several ways to do it.

Remedies for Sequence-of-Returns Risk
Deferred variable annuity with a “rollup” and guaranteed lifetime payout. A low-risk “bucket” of assets that can provide with five years worth of income. A single-premium immediate annuity, for life or a period certain. Delay retirement and postpone distributions from invested savings during depressed markets. Reduce withdrawal rate during depressed markets. Target-date funds with low equity exposure at the maturity date.

One solution is simply not to retire in a bear market. Someone who hoped to retire at the end of 2008 with a 401(k) plan invested in stocks and bonds would obviously be better off working another year or two, just to avoid taking distributions from a depressed portfolio and thereby locking in losses.

Many people might be tempted to take Social Security benefits at age 62 or 66 as a way to avoid tapping into their own invested assets, but that’s not necessarily a good idea. Those who expect to live a long time are usually better off maximizing their Social Security benefits by waiting until age 70 to claim them.

Deferred variable annuities with living benefits are one of the newer responses to sequence-of-returns risk. Before the crash, a variable annuity with a “roll-up” during the accumulation period and a guaranteed lifetime withdrawal benefit (GLWB) during the distribution period was one convenient solution to the problem.

These products allow a 55-year-old, for instance, to invest $250,000 and be assured that after a 10-year waiting period he or she could withdraw at least $25,000 a year for life. Many of these products were withdrawn from the market in 2009, but several remain available, albeit with less generous terms.

But GLWB riders tend to impose restrictions and combined insurance fees of more than two percent a year. “I haven’t gotten that enthused about them, because of the prices of the products,” said Jim Tomlinson, a retired John Hancock executive who is now a financial advisor in central Maine.

Target-date funds were once touted as a solution to sequence-of-returns risk. In theory, these funds-of-funds provide a “glide path” that automatically dials down an investor’s portfolio volatility as she approaches retirement. But even many of the mature target-date funds—those sold to people retiring in 2010, for instance—lost a lot of money in the Crash of 2008. That destroyed the illusion that the funds were necessarily safe to tap for income on their target date.

One of the traditional home remedies for this risk is simply to draw down a percentage of assets each year in retirement rather than a specific amount. This would mitigate the impact of reverse dollar cost averaging on the portfolio—that is, you’d lock in a smaller loss during down markets—but it would also mean an inconsistent retirement income. For people with limited assets, it could mean real deprivation.

Having seen the effects of two bear markets in the past decade, an increasing number of advisors are using the so-called bucket method to protect clients from sequence-of-returns risk. This technique, among other things, usually entails drawing an income from a “bucket” of risk-free money for the first five or even 10 years of retirement.

The bucket might consist of cash, or short-term bonds, or a payout annuity. “Buying an income annuity is certainly one way to lessen the amount of risk,” said Tomlinson.

“I would rather do that than take systematic withdrawals and hope that we don’t hit the wrong sequence-of-returns,” he said. “When I tell clients how an annuity works, without using the word annuity, they warm to the idea. If you don’t consider the possibility of the guarantee, you’re planning with one hand tied behind your back.”

Conning Research: Individual Annuities Rebound in 2009

Posted on December 2, 2009 by Editor Test -

A new Conning Research study, “Life-Annuity Forecast & Analysis 2009-2011,” predicts that the individual annuity business will rebound from a disastrous 2008 to post record gains in 2009, but that the life industry overall is not out of the woods.

“After the largest net operating loss in the line’s history, we forecast that 2009 will be the year when individual annuities post their largest net operating gain. Our forecast reflects a stabilizing economic environment for 2009 through 2011, which positively affects sales, income, assets under management, and capital,” the study’s executive summary said.

“These conditions enable insurers to release some of the $76 billion in General Account reserves added in 2008, which produced the record loss. Decreased contributions to General Account reserves, combined with fewer surrenders, and increased net premiums, are the major drivers of the 2009’s record net gain of $11 billion.

“This record net gain does not mean a return to normal for individual annuity insurers; even after the record gain, the line still experienced an $11 billion net loss over 2008 and 2009. Changes in consumer product preference combine with increased costs, reduced investment options, and less robust guarantees as insurers de-risk variable annuities to change the line’s value proposition.

“It is a wildcard whether this new value proposition will attract new customers and their assets. The weakened financial condition of some insurers could lead them to exit the individual annuity line, seek additional capital, or merge with other insurers.”

The report also reflects back on the unique disaster of 2008. “In prior recessions, the effect on the financial markets has largely been limited to decreased stock prices. With over 80% of its assets in bonds and 10% in mortgages, prior recessions had a relatively smaller impact on the life insurance industry compared to other financial sectors. In contrast, this recession is having a significant effect on credit markets, and this has hit insurance companies hard,” the report says.

In 2007, companies added only $17 billion of General Account reserves. In contrast, companies added $129 billion during 2008. Much of the increase went toward covering minimum guarantee riders that went ‘into the money’ because of the equity market decline.

For the life insurance industry as a whole, “We project net after-tax statutory income of $16 billion for 2009—less than half the pre-crisis figure of 2007—despite capital losses of $20 billion in the year,” said Terence Martin, analyst at Conning Research & Consulting, in a release.

“Even with a $16 billion capital infusion in 2009, the industry is still well below pre-crisis 2007 levels, and capital leverage ratios have risen dramatically. The industry will continue to face capital constraints in the short term, even as capital losses abate.”

“Underpinning our 2009 forecast is a substantial partial release of the large reserves the industry set up in 2008 for individual annuity minimum guarantees,” said Stephan Christiansen, director of research at Conning.

“Annuities have been the volatile segment for the industry, generating a $4 billion loss for the combined 2008-2009 period, compared to a $12 billion gain in 2007 alone. Life insurance products, on the other hand, have been remarkably stable during the crisis, and this year will generate over $8 billion of net operating gain-in line with prior years,” he added.

It’s Reigning Buckets

Posted on December 2, 2009 by Editor Test -

Envestnet, a Chicago-based provider of investment and back-office services to independent broker-dealers and financial advisors, now offers advisors a “bucket system” that allows them to generate a consistent retirement income for their clients.

The system, called PlanHorizon, resembles other “time-segmented” bucket programs like IFLM (Income for Life Model) and Nationwide’s RetireSense.

“We’ve had a pilot program running for eight months with Securities America, but we’ve been working on tying all this together for two years,” said Jason Kissinger, vice president for product development at Envestnet. “Our first clients are Securities America and National Financial Partners.”

Software tools like PlanHorizon and IFLM offer a framework that allows advisors to create and customize ladders of asset pools to be harvested for income at specific dates or intervals in the future. Envestnet has integrated the tool into the investment, administrative and reporting platform that it offers independent broker-dealers and advisors.

“We can give daily account values for the assets on the platform. We can aggregate account balances. We allow the advisor to say to the client, ‘Here’s where you are, and here’s where you should be, based on when you will need the income,’” Kissinger said. Some 10,000 advisors worldwide currently have access to Envestnet’s platform.

Viggy Mokkarala, an executive vice president at Envestnet in Sunnyvale, Calif., told RIJ, “The time-segmented distribution or bucket method has been around for a long time. But until now there hasn’t been a natural way to combine it with proposal generation and reporting on one tightly integrated platform. That’s the creative addition.”

Given PlanHorizon’s similarity to IFLM, Envestnet engaged Phil Lubinski, the Denver-based advisor who created IFLM, to help during the beta testing. In an interview, Lubinski described some of the product’s capabilities.

“Once advisors fund the model, all the products can be loaded into their reporting systems and tracked on a daily basis,” he told RIJ. “It can also have ‘alerts’ set up that will tell the advisor if a segment has hit its target early. It will also print annual review reports that currently we have to do manually [with IFLM].

“On the input side,” he added, “if an advisor wants the platform to build separate portfolios for each segment, it will do that and also Monte Carlo-test the probabilities of success. It is very sophisticated. It requires a lot of input, but once the input is done, it is an incredible tool for the advisor to manage the client’s retirement.”

If the client wishes, PlanHorizon can accommodate life annuities or annuities with living benefits. The first annuity to be offered with PlanHorizon will be a Nationwide product, Kissinger said. Envestnet has a partnership with Nationwide to distribute two of the insurer’s products—Portfolio Innovator, select model portfolios in an insurance wrapper, and Income Architect, a deferred variable annuity with a five percent lifetime payout.

A bucket system like PlanHorizon, IFLM or RetireSense has both practical and psychological appeal. By assigning “Don’t Open Until” dates to different pools of client money, and by putting risky assets into pools that won’t be tapped for many years, it spares clients the anxiety of paying attention to short-term market volatility.

On the other hand, some advisors are critical of bucket systems, saying that they are just a fancy way of labeling the usual elements—cash, bonds and stocks—in a portfolio. A recent study by Practical Perspectives, a Massachusetts research firm, suggested that bucket systems are already used by many advisors who serve large numbers of older clients.

“Our research shows that almost 60% of advisors-and growing-use some form of bucket or guarantee method for retirement income clients. We believe that this has been accelerated by the downturn and the recognition that advisors must protect income/cash flow from the vagaries of the markets over the short-term,” said Howard Schneider, president of Practical Perspectives.

“Followers of the total return approach were hit hard in the downturn and had to cut income/cash flow and clients were not happy,” he told RIJ. “That said, there is lots of variation in how advisors apply the bucket approach and we expect that variation to grow.”

Total Fixed Annuity Sales Third Quarter 2009

Posted on December 2, 2009 by Editor Test -

Total Fixed Annuity Sales Third Quarter 2009 ($000)
New York Life	1,742,733
Allianz Life	1,424,853
Pacific Life	1,421,235
ING USA Annuity and Life Insurance Co.	1,270,087
Lincoln Financial Group	1,256,178
Western National Life	1,187,168
Jackson National Life	996,773
American Equity Investment Life Insurance Co.	979,958
Aviva USA	677,207
John Hancock	664,146
Source: Beacon Research Fixed Annuity Premium Study, November 2009.

IRI Says It’s “Time to Feel Free” Again

Posted on December 2, 2009 by Editor Test -

Holiday Cheer

Posted on December 2, 2009 by Kerry Pechter -

Conventional wisdom tells us that last winter’s collapse in equity and housing prices devastated the finances of millions of Baby Boomers and left their dreams of a secure retirement, let alone an early or ideal retirement, in tatters.

But several research studies published by authoritative sources in recent months show that the situation isn’t necessarily as dire as the mass media or the latest end-of-civilization movies like “2012” and “The Road” would have us believe.

These new studies suggest that, contrary to myth, most Boomers didn’t blow their home equity on plasma TVs, most Boomers didn’t lose most of their wealth in the equity and real estate crashes, and most Boomers will be able to retire on time or close to it.

To be sure, suffering exists. People in their 50s who lost their jobs and people who lost their homes to foreclosure face difficult futures. And if the stagflation of the 1970s returns, many of us may find ourselves clipping coupons and looking for senior discounts at theaters and restaurants in retirement.

But the data shows that most of the people that financial advisors and investment companies focus on—over 50, college-educated, and in the upper wealth tiers—came through the crash with a great deal of their wealth intact. If you count the present value of pensions and Social Security as part of household wealth, a surprisingly small percentage of anyone’s wealth is tied up in equities.

Hold the apocalypse

In their study, “The Wealth of Older Americans and the Sub-Prime Debacle,” Barry Bosworth and Rosanna Smart of the Brookings Institute start out on a somber note, saying that “no demographic group was left unscathed” by the 2008-2009 financial crisis.

But the data itself offers a less apocalyptic view. For one thing, there’s no evidence that Boomers “used their homes like ATMs.” Of the 44.9 million homeowners over age 50 in the years 2004 to 2007, 24% extracted money from their home equity.

But of the $12 trillion that their homes were worth, they extracted only $479 billion, or four percent. Almost half (45%) used the money for home improvements. Only 10% financed “consumption”—those proverbial plasma TVs—with home equity.

At the market bottom last March, Smart and Bosworth show, Americans households had lost about a quarter of their wealth. But, even before the upturn, the households that advisors and financial services companies focus on—college-educated people over age 50 and in the upper-third of wealth ownership—still had significant wealth.

Real Value of $100 Invested in S&P 500 If housing wealth and the present value of Social Security and pensions are included, older, wealthier households had average wealth of $1.33 million at the market bottom. That’s down from $1.77 million in 2007, when real estate and stock market values were inflated, but it’s far from total ruin. In real terms (2000 dollars), this segment had almost twice as much wealth in 2009 as in 1983.

By contrast, younger, middle-market people fared worse. That happened not because they lost money in the stock market; they don’t own many stocks. It happened because they were more likely to have purchased homes more recently and had less home equity.

Households headed by someone under age 50 in the middle-wealth tercile, for instance, lost 41% of their wealth in the crash. The average wealth of that group—including housing and the present value of public and private pensions—fell to $45,000 in 2009 from $76,000 in 2007 (in 2000 dollars).

“The percentage losses are larger for younger than for older households,” commented Bosworth and Smart. “The larger loss among younger families is concentrated in housing wealth, which reflects their lower ratio of home equity to value. Thus, a 20% loss in home value became a 45% loss in home equity. Older households have a larger equity position and that translates into a smaller 30% loss of housing wealth.

“[We found] that the losses have been larger for younger households and that less-educated and lower-income households below age 50 have suffered particularly large declines in wealth,” they added. “Younger middle-income households show the largest losses, 40%, because their wealth holdings are dominated by housing with a low equity share, and reliance on defined-contribution retirement accounts, which also were hard hit by the fall in equity prices.”

Averages can mislead

In a similar analysis of the impact of the Great Crash, economists at Dartmouth College and Texas Tech University delve below the statistics on average market losses and show that, although stock ownership in U.S. is highly concentrated among the wealthiest Americans, even they don’t have very much of their household wealth tied up in equities. As a result, the crash by itself shouldn’t ruin their ability to retire as planned.

Looking at the distribution of assets in 2006 of households with at least one member born from 1948 to 1953 (excluding the top one percent, which skews the averages upward), the study showed that on average the households held $115,400 in stocks and that 13.2% of their total wealth (including homes and present value of Social Security and retirement benefits) was invested directly or indirectly in stocks.

But the averages are misleading. The richest nine percent of this group had an average of $561,000 in stocks (8.4% directly and a total of 20.7% if retirement plans are included) while those in next wealthiest decile averaged $237,000 in stocks (5.1% directly and 15.1% overall). No other group had more than 2.6% of their wealth invested directly in stocks.

“We find those nearing retirement had only limited exposure to the stock market decline,” say the authors of “How Do Pension Changes Affect Retirement Preparedness? The Trend to Defined Contribution Plans and the Vulnerability of the Retirement Age Population to the Stock Market Decline of 2008-2009”.

“When direct stock holdings, and stock holdings in IRAs, are added to stock holdings in DC plans, in 2006 total stock holdings of the early boomer cohort averaged 13.2 percent of total wealth. This greatly limits the direct exposure of the early boomer population to the decline in the stock market,” they add. “We also show that as a result, despite speculation to the contrary, those approaching retirement are not likely to substantially delay their retirement in reaction to the stock market decline, probably postponing their retirement by no more than a couple of months.”

Equities and retirement

In a new paper, “Retirement Security and the Stock Market Crash: What Are the Possible Outcomes,” three Urban Institute researchers take the analysis a step farther and compare how early, middle and late Boomers might fare under a variety of stock market scenarios over the next decade or so.

The authors, Barbara A. Butrica, Karen E. Smith and Eric J. Toder, compare several alternative futures for the economy, including a “no recovery” scenario where stocks resume their historical growth from a low, post-crash base; a “full recovery” scenario where stocks make up all their 2008 losses by 2017; and (the worst case scenario) a repeat of the 1970s.

Future market behavior, they find, will mainly affect people who own a lot of stocks, which means those with highest incomes and the most education. If there’s no recovery, those in the top wealth quintile who were born between 1951 and 1955 can expect an 11% drop in income by the time they reach age 67. If there’s a repeat of the 1970s, their retirement incomes could fall 20%. That’s about double the impact on any other group.

“Major income losses from the crash are concentrated among high income groups who own the most stocks. Pre-boomers will on average be worse off, regardless of whether or not the market recovers. Middle and late boomers will also be worse off on average if the market fails to rebound to its previous growth path, but may be net winners if the market drop is temporary and they can benefit from the opportunity to buy low and sell high,” the Urban Institute researchers said.

“Another year of work, however, virtually eliminates any big losers among individuals in the bottom three quintiles in the middle and late boomer cohorts,” they added. “Because low-income individuals receive a relatively small share of their retirement income from DC plans assets and other financial wealth, working another year wipes out most of any losses that they might have sustained, even if the market fails to recover or continues to decline as it did after 1974.”

What’s the big lesson of this research? Most Boomers in higher income groups still have enough pension, housing, and stock market wealth to be able to retire with no dramatic reduction in income, barring anything but an extended bear market in stocks. Those who are most exposed to stock market losses are also the most well-equipped to withstand them.

There’s plenty of pain, particularly among people who have lost their jobs and those who lost their homes. But, generally, as long as there are enough jobs and as long as Social Security is funded, most people will retire as planned. By and large, American retirement doesn’t rest on equities.

Transport Firm Taps The Principal for 401(k) Services

Posted on December 1, 2009 by Editor Test -

Swift Transportation has chosen the Principal Financial Group as its defined contribution and nonqualified plan service provider. The plans serve 18,000 participants. The contract with became effective July 1, 2009.

The Phoenix-based transportation owns the largest fleet of truckload carrier equipment in the United States, with almost 16,000 trucks operating from 40 major terminals in 26 states and Mexico. The consultant advising Swift’s retirement program is Kathleen Kelly of Compass Financial Partners, LLC, an LPL Financial-affiliated firm.

Swift plan participants will receive services and tools including toll-free access to retirement specialists, on-site investment education and retirement planning seminars, online account information and education through principal.com, interactive educational and asset allocation tools, Morningstar investment information, rollover assistance; and the “Plan Ahead. Get Ahead” quarterlymagazine.

The Principal Financial Group, based in Des Moines, Iowa, has $257.7 billion in assets under management and serves some 18.8 million customers worldwide from offices in Asia, Australia, Europe, Latin America and the United States.

TIAA-CREF CEO Suggests Five Principles of Retirement Security

Posted on December 1, 2009 by Editor Test -

Addressing the American Council of Life Insurers on the occasion of National Save for Retirement Week in late October, the president and CEO of TIAA-CREF, Roger W. Ferguson, Jr., defined five principles that he believes should guide retirement planning in the U.S.

Noting that household wealth in the U.S. is still more than $12 trillion below its pre-recession peak despite a $2 trillion gain in the second quarter of 2009, he called for a “holistic retirement system” that includes (the following is an excerpt of his comments):

1. Guaranteed lifetime income. Let’s begin with the ultimate objective-guaranteed income to cover housing, food and power throughout retirement.

In a recent survey of retirees, about half of the respondents (47%) said that they did not receive enough income from Social Security or their defined benefit plans to cover basic living expenses, and were forced to use their savings.

This is disturbing but should not be surprising. The average monthly Social Security payment, for retired workers, is about $1,160.The average monthly spending for individuals over 65 is about $3,044.That’s a significant gap each month. We can help retirees close it, as ACLI members know quite well.

A holistic retirement system should provide an affordable fixed annuity that guarantees enough income to help meet basic needs. The payout mechanism can include the option to provide monthly income for a surviving spouse or dependent.

2. Full participation and adequate funding. Second, we must ensure that everyone benefits. In a holistic retirement system, every employee would be eligible immediately and enrolled automatically, on their first day of work.

We must also recognize that to generate sufficient retirement income, we must ensure sufficient savings. That means we need to increase the current contribution rate, and in some instances double it.

To build sufficient savings, and achieve an income replacement ratio of 70%, contributions in the range of 10% to 14% percent are needed. To help people save more, the system would also include automatic savings provisions and auto-escalation programs that tie savings increases to salary increases.

3. Broad diversification. The third principle is diversification to help manage risk.

A menu of 15 to 20 options is generally adequate and should include a target-date life-cycle fund as the default investment, and a guaranteed annuity option. Research shows that more than 20 options can actually paralyze investors, or cause them to select funds haphazardly, and construct portfolios that are less diversified.

Participants should ideally have the ability to invest in asset classes beyond the traditional mix of stock and bond funds and cash investments that make up the majority of today’s plans. These include commodities, real estate and private equity.

4. Education and Advice. I’ve heard it said that people need education. Certainly, more can be done to improve financial literacy. But what people really need is advice. Investors need objective, noncommissioned advice to build a diversified portfolio consistent with their goals and risk tolerance.

A recent TIAA-CREF Institute surveyshows that investors in higher education who are approaching retirement age are focused on assuring an income that can maintain their standard of living. And they’re seeking advice.

Nearly 9 in 10 (87%) said that advice about retirement income strategies is important to them. Within the past two years, 60% of respondents have sought out objective retirement planning advice.

Providing a broad range of investment options, along with objective advice, can help facilitate rational investment selection and prudent portfolio construction.

5. Retirement health care savings. The fifth principle relates to the cost of health care in retirement. Regardless of your position on the health care debate in Washington, we can all agree that health care is becoming much more expensive.

Over the last 10 years, the cost of health insurance for a family of four has more than doubled.Health care spending will account for one-fifth of GDP (20.3%) by 2018.Any initiative designed to promote retirement security must therefore give people ways to amass savings they will need for health care expenses.

Without an employer-sponsored health plan, a couple retiring at age 65 today is projected to need between $210,000 and $807,000 to supplement Medicare and cover their out-of-pocket health care expenses during retirement.

Our clients in the not-for-profit community have told us that they are concerned about this issue, which is why TIAA-CREF introduced a retirement health care savings plan as part of our offering.

More broadly, we as a nation must provide individuals with more opportunities to help meet their retirement health care expenses.

I’m often asked about the issue of fiduciary obligation. Some plan sponsors interpret this as providing workers with an account and some choices. To me, the answer resides in a holistic retirement system that can assure workers will have lifetime income through retirement.

Nuances of Insurance Wholesaling Revealed

Posted on December 1, 2009 by Editor Test -

A new Mintel Comperemedia survey of 275 insurance producers in the U.S. shows that agents prefer different business practices depending on their years in the industry and whether they’re captive or independent. The survey showed that:

Independent agents rank marketing support higher than captive agents (76% versus 68%), presumably because independents don’t benefit from national advertising campaigns.
Captive producers are more concerned with their company’s brand recognition (92% versus 78%).
All producers rank cash and commission highest among incentives, but captive producers like trips and conferences more than independents do (38% versus 27%).
Agents with less than five years experience are more likely to prefer company websites (55% versus 41% of those with more experience) and conferences (43% versus 34%) for learning about new products.
More seasoned producers report higher preference for direct mail (41% versus 31%) for new product information.
Agents with less experience report higher preference for websites, insurance company leads and networking events than do their more experienced colleagues.

“Insurers need to take note of agents’ unique preferences and shape their marketing and business plans accordingly. Independent insurance producers, for example, need more marketing support and incentives that don’t distract them from their core business goals,” said Daniel Hayes, vice president of insurance services at Mintel Comperemedia.

“Newer agents rely more on websites to attract clients and keep them informed. By supporting electronic media efforts, insurance companies can feed the sales cycle of newer agents who are still building their client portfolios. This is one way to attract newer agents to the insurance company’s products,” he added.

For more direct marketing trend analysis, visit Mintel Comperemedia’s blog for the latest direct marketing trend analysis.

Allianz Life’s New Index Annuity Offers Multiple Income Options

Posted on December 1, 2009 by Editor Test -

Allianz Life has introduced a new fixed index annuity that offers a premium bonus and enhanced accumulation of the initial contribution to investors who wait five years and then take income over at least a 10-year period.

Under the contract, Endurance Elite, which requires a $10,000 initial premium or more, the owner has a contract value and an “enhanced withdrawal benefit,” or EWB. The starting EWB, which equals the first-year premium plus a 10% bonus, earns an “enhanced interest credited at a factor of 105%,” according to product literature.

If the interest rate credited to the contract is 8%, for instance, the EWB would grow by 8.4% (8% x 105%). If the accumulation value does not earn interest in a given period, the EWB value doesn’t change unless the owner makes a withdrawal. The contract owner can choose a monthly sum, monthly average, or annual point-to-point crediting method.

After a five-year surrender period (starting with an 8% charge), the owner can take regular income. He or she can take an income of up to 10% of the EWB per year for at least 10 years, or spread the distribution of the EWB over his or her lifetime.

Individual owners in their 60s can take 5.0% of the EWB for life, owners in their 70s can take 5.5% for life and owners ages 80 to 90 can take 6.0% for life. For joint contracts, the payout rates are 4.5%, 5.0%, and 5.5%, respectively.

After the surrender period, the owner can also annuitize the accumulation value (life or period certain), but will not receive the bonus or enhanced interest. The accumulation value can also be taken over a 10-year period, or the client can take a payout of interest only for five years, followed by payment of the remaining accumulation value. There are also a flexible withdrawal benefit rider and a death benefit rider available at additional charges.

The contract earns interest either at a fixed rate or at a rate indexed to the S&P 500, the NASDAQ 100, The FTSE 100, or to a blend of the Dow Jones Industrial Average (35%), the Barclays Capital U.S. Aggregate Bond Index (35%), the Dow Jones EURO STOXX 50 (20%) and the Russell 2000 (10%). The owner can change allocations each year.

Allianz Life also offers an Endurance Plus variation to this contract. It adds a 20% bonus to all premiums paid during the contract’s first three years. The Plus contract must be held for 10 years before income begins. When an index annuity contract includes a bonus, the crediting method may include a lower participation rate or cap than on a non-bonus contract, or other restrictions.

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