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Last week, the Congressional Budget Office weighed in on the biggest economic imponderable in the health care debate: how private health insurance premiums will behave under health reform.

Building on its December 2008 CBO health insurance market analysis, CBO forecast largely benign effects from health reform’s private market reforms and subsidies on the vast majority of the presently insured (e.g. voting public). 

According to CBO, only 17% of Americans in the so-called non-group market—largely individuals—would see premium increases in 2016 (the CBO reference year), because they would be required to purchase fatter benefits with less economic risk.

CBO believes that the other 83% of the presently insured will see little or no change.

I think the fiscal risks of a partially federalized private health benefit are significantly greater than CBO has suggested.

Estimated premium subsidies in proposed legislation—$574 billion over ten years in HR 3962—are pegged to estimated private health insurance premiums.

If, as a result of legislative intervention, premiums actually rise by, say, double the forecasted rates, Congress will be under fierce political pressure to match the increases, or throw millions of people who depend on subsidies back into the ranks of the uninsured.  

Where that additional money would come from in 2016, with trillion-dollar deficits, Social Security transitioning to negative cash flow, and baby boomers flooding onto Medicare, becomes a large question. 

What we’re really talking about is trying to predict the fluid dynamics of a $900 billion lake of money—the private insurance premium pool. Lake volume is determined by how private insurers price their products, which, in turn, is determined by how their actuaries forecast both variables that will be politically controlled and variables that are beyond political control.

Terra incognita   

Under health reform, the federal government will aggressively restructure insurance underwriting practices. Insurers will be required to:

• Issue policies to anyone who applies.
• Cover an (politically determined) “essential benefit.”
• Not cap the benefit for those with catastrophic medical expenses.
• Not charge more than two or three times the least expensive rate to the oldest or sickest in the pool.
• Add people in their 20s to their parents’ policies, and a host of other factors.

There is no actuarial roadmap through this completely restructured insurance marketplace. It’s terra incognita, properly labeled “Here There Be Dragons!”

Health reform will also create a new Boulder Dam to hold back the lake—a system of health insurance exchanges that become the gateway to the private market, not only for those presently uninsured, but also for a large number of the currently insured population. The exchange’s rules will be the de facto regulatory hurdle health plans will have to surmount to reach the rest of us.

Some humility is appropriate here for all forecasters: the behavior of that lake of money is a classic complex phenomenon. 

Benign assumptions

For all the comforting semblance of objectivity, the CBO’s analysis is just a guess—an educated guess—about how the lake will behave if you completely restructure its boundaries. You can model the heck out of it, but all you really do is reframe your uncertainties.

CBO makes some truly debatable assumptions that lead to their benign forecast:

• That there is little provider cost shifting in the present market, and will be less in the future because of all the newly covered folks.
• That there will be limited risk selection risk from those who take up coverage; that more healthy people will take up coverage in the most volatile non-group segment because of premium subsidies.
• That there will be only modest increases in health care use due to the legislatively mandated reduction in cost sharing by subscribers.
• That there will be little or no inflationary impact on health care prices of increased demand for health care from the uninsured. 

 It is actually hard to construct a rosier scenario than the one CBO created.

What’s really happening

Let’s contrast CBO’s rosy scenario with what’s happening right now in the market segments with the greatest risk-individual and small-group coverage.

Presently, the private insurance cost trend is between 8% and 9% across the health system, and rising. Large groups are seeing rate quotes for 2010 below that number.  Individual and small-group clients are seeing mid-to high teen rate increases for 2010. 

What accounts for the widening spread between inflation and health costs, and between cost and rate quotes, in the non-group market segment that health reform will restructure?

Actual health care demand—hospital admissions, physician visits, prescriptions filled—remains pretty soggy (flat or low single digits), so whatever is pushing up rates isn’t driven by primary demand.

Why rates run ahead of costs or inflation

Cost shifting is certainly a rising contributor to both spreads—cost above inflation and rates above cost.  

CBO seems to think that just because providers charge insurers higher rates than Medicare and Medicaid doesn’t mean that they are shifting costs. If it weren’t for cost shifting, most providers who have margins wouldn’t have them. Private insurance is where all their profits come from.

When Medicare flattened costs under the Balanced Budget Act (BBA) in 1997, the result was a lagged surge in private insurer costs, which peaked in 2003. Coincidence? I don’t think so. 

I and my consulting colleagues have spent this fall telling providers that it’s time to learn to make money at Medicare rates, because health reform could eventually force insurers to restructure their contracts or cap their rates.

Another contributor to the spread between the 8-9% cost trend and mid- to high-teen rate increases is the effort by insurers to float their overhead (which is being whittled away at, rather than energetically cut) on a smaller base of profitable risk business.

These plans may have lost as many as nine million risk lives in the past two awful years, and if it were not for hefty Medicare Advantage enrollment gains, a lot of the bigger plans would be in a heap of trouble.

Since Medicare Advantage margins will be sharply cut by health reform, we may be seeing some anticipatory rate increases to small-group and individual subscribers.

Lake Mead of money

All in all, the fiscal risks from an open-ended new entitlement to premium subsidies are likely to be significantly larger than CBO estimates.

Instead of neat economic models with ten variables, we need something closer to chaos theory to explain how the nearly trillion-dollar Lake Mead of money will behave when we completely re-engineer its flow pattern. Perhaps the Corps of Engineers can lend CBO some staff.

Jeff Goldsmith is president of Health Futures, Inc., and author of  The Long Baby Boom: An Optimistic Vision for a Graying Generation (Johns Hopkins University Press, 2008).

© 2009 RIJ Publishing. All rights reserved.

In the past few years, we have seen the emergence of many new retirement income products. With the exception of guaranteed minimum withdrawal riders on variable annuities, however, we have seen very little in the way of sales of any of the products. In this article, I’ll discuss pros and cons of the various products from my perspective as a financial planner, assess the prospects for these products, and recommend what I believe would be an optimal solution for many people. 

The Immediate Annuity

This product has been the “product of the future” for more than a decade, but the future never seems to arrive. Sales limp along at an annual rate of $10 billion or so, compared to $250 billion for deferred annuities. One rationale for the low sales is consumer aversion to large, irreversible financial commitments, particularly where shorter-than-expected longevity would result in a retrospectively bad investment. Sales may also be low because financial salespeople are loath to sell a financial product that kills the prospect of any future rollover commissions. Given the lack of sales push or customer pull, insurance companies don’t devote a lot of resources to developing or promoting such products. 

However, despite all the negatives, the immediate annuity is a simple product that can match up well with retirement income needs, particularly if payments increase with inflation. Prospects for this product may improve if 401(k) plans are enhanced to make it easy to convert savings into retirement income. It could become attractive for fee-based planners, but few fee-based planners serve the low- and middle-income clients who could best use the mortality-pooling benefits of an immediate annuity to stretch scarce retirement savings. Also, most financial planners have focused on accumulation and not retirement income products.

The following changes might allow immediate annuities (and other retirement products I’ll discuss later) to play a more prominent role in retirement planning:

• Requiring that retirement savings plans offer an immediate annuity option.
• Providing tax subsidies for financial planning to spur the development of a fee-based financial planning industry serving participants in retirement plans.
• Providing planners with the training and software they will need to incorporate immediate annuities and other guaranteed products in retirement plans.

Longevity Insurance

This product also goes by the longer name of Advance-Life Delayed Annuity (ALDA).  It’s an income annuity where the first payment is delayed for a number of years. For example, a 65-year-old man could purchase longevity insurance that pays an income for life that begins at age 85. If the individual dies before reaching age 85, no payout occurs. The individual would need to plan on making retirement savings last to age 85 and then rely on the longevity insurance for income thereafter. The individual would be freed from the planning challenge of trying to make retirement assets last for an unknown future lifetime.

Because of the income deferral, this product costs less than an immediate annuity. An immediate annuity paying an inflation-adjusted $20,000 per year might cost about $290,000, while longevity insurance paying the same benefit would cost only about $40,000.

This product first came on the market a couple of years ago and I’m aware of two companies that offer it. Anecdotal evidence suggests that sales have been miniscule. As with the immediate annuity, the retirement marketplace doesn’t seem to be set up to pay much attention to this type of product. Also, the financial crisis and the problems faced by a formerly AAA company like AIG have made individuals nervous about buying a product that delays income for 20 or more years.

The product also has a fundamental design problem. Going back to our example, let’s say the individual buys the product and then needs to make other savings last until age 85. If individuals make overly aggressive assumptions about investment growth, they may run out of assets before age 85 and then face a period without income. If they are too conservative, they may reach age 85 with more assets than they need, and may regret not spending more money when they could have enjoyed it.

The fix for this problem would be to combine longevity insurance with a product that guarantees withdrawals until age 85 regardless of investment performance. This would be an acronymic marriage of a limited-term GMWB or RCLA (discussed next) with the ALDA.  I believe that longevity insurance has potential as a component in building retirement guarantees, but I don’t foresee strong prospects for it as a stand-alone product.

The Guaranteed Minimum Withdrawal Benefit (GMWB)

This product is offered as a variable annuity rider and has gone through a number of transformations over the decade or so of its existence. The latest version, called the Guaranteed Lifetime Withdrawal Benefit (GLWB), guarantees the annuity purchaser certain minimum withdrawals from the annuity for life (5% of the initial purchase amount is typical), regardless of investment performance. The purchaser pays .50% to 1.00% per year for this rider.

I like this concept for its guarantees, but I have these concerns:

Complexity. This is an “actuaries-gone-wild” product where instead of offering a simple income guarantee based on an initial purchase amount, the product’s guarantees vary with a ratcheting provision based on underlying fund performance. As a financial planner, I would rather show the client something simpler-“Pay X, and y ou’re guaranteed Y-end of story.”

Lack of Inflation Protection. At 2.5% inflation, a 5% fixed guarantee is worth only about 3% in 20 years, and 3% isn’t much of a withdrawal guarantee.  I would like to see a product whose guaranteed payouts increase based on actual inflation. Products offered today provide some upside based on underlying fund performance, but the correlation with actual inflation is tenuous.

Cost. A typical variable annuity costs about 2.25% per year. If we add .50% to 1.00% for the rider, we’re near 3.00%. Recent estimates for the premium of future stock returns over bond returns range from 3% to 6%. If that’s the case, a client who uses a variable annuity with a GLWB rider might end up paying out between 50% and 100% of the equity premium in fees.

Rider Utilization. At least one study has shown that, to make best use of the GWLB rider, the customer should take withdrawals at the maximum allowed level immediately after purchase and continue them for life—that is, turn the product into an immediate annuity with an equity-linked refund feature.  My impression is that most customers will use the product for accumulation and never call on the income features at all—thereby turning the product into a very expensive mutual fund investment.

In some ways, the GLWB is ideal for guaranteeing retirement income. But its effectiveness in meeting customer needs is seriously compromised. Given the attractive commissions offered on variable annuities, I expect sales to remain strong. But I think there is a better way forward for the customer, and that takes the form of the next product.

Ruin Contingent Life Annuity (RCLA)

This product is the brainchild of Professor Moshe Milevsky of York University in Toronto. He has noted that it is basically an unbundled version of the GLWB. The product was described in detail in Retirement Income Journal so I’ll provide a simplified example here.

Begin with a block of assets that will be used to provide inflation-adjusted withdrawals at some set percentage of the initial amount. The customer purchases a guarantee that if the funds are depleted-due to longevity, poor investment returns, or an adverse sequence of investment returns-the guarantee will kick in and inflation-adjusted payment will continue for life.  Because payouts are a function of multiple contingencies-longevity and investment related-the product will cost less than a longevity insurance policy that pays out based on longevity only.

Before illustrating how the RCLA works, I’ll show results for other product solutions. We’ll start with a 65-year-old man with $325,000 of savings and the desire to withdraw an inflation-adjusted $20,000 per year for life. One solution would be simply to invest the money, take systematic withdrawals, and hope the money lasts a lifetime. Assuming 2% inflation, 4% bond returns, 8% stock returns, and a 50/50 stock bond mix, the portfolio would last until age 91. The risks with this approach are:  (1) living beyond age 91, (2) experiencing returns lower than assumed, or (3) experiencing a bad sequence of returns, i.e. low returns in the early years of retirement.

A very different solution would be to guarantee a lifetime income by purchasing an immediate annuity. At current rates, an inflation-adjusted annuity generating an initial income of $20,000 might cost about $290,000. That would meet the need for guaranteed lifetime income, but would lock up all but $35,000 of the available funds and leave disappointed heirs if the retiree were to die early.

What about longevity insurance? An ALDA purchased at age 65 and providing $20,000 per year (in today’s dollars) beginning at age 85 would cost about $40,000. That would leave $285,000 to provide income for 20 years. Based on the inflation and investment assumptions used in the systematic withdrawal example above, we would expect the $285,000 to last 22 years-not much margin to guard against bad investment experience.  Based on some Monte Carlo analysis, there’s a 44% chance the assets would not last the needed 20 years.

Now let’s look at the RCLA. An RCLA able to produce the required income might cost roughly $20,000, leaving $305,000 as the portfolio on which guaranteed withdrawals would be taken. In effect, we have created the same lifetime guarantee as the immediate annuity, but with $305,000 of initial liquidity for heirs vs. $35,000 if we purchased an immediate annuity. Among legacy-minded retirees, this may lessen the resistance to the initial purchase. (Of course, the $35,000 would be expected to grow over time and the $305,000 to decline, making the immediate annuity potentially the better investment if the retiree lives a long life.) I have not provided an example based on a variable annuity with a GLWB because I am not aware of any that provide a simple inflation guarantee. But with their high expense charges, GLWBs would not produce results as attractive as with the RCLA.

Compared with the RCLA, a disadvantage of annuities and longevity insurance is that the pricing reflects the insurance companies’ cost of holding reserves for such products in fixed income investments. Even though these represent long-term commitments, insurers are not allowed to support them with a mix of stock and bond investments. GLWB and RCLA pricing allows for equity investing and equity option pricing, which means a lower price for consumers.

Conclusion

Both immediate annuities and the RCLA can help clients build secure retirement plans. But neither of them, as I suggested earlier, is likely to get off the drawing board and into retiree portfolios without major changes, such as mandating that retirement savings plans offer the product, subsidizing the growth of the fee-based planner industry, and providing software and training that supports the use of this product. Existing product delivery systems won’t suffice.

© 2009 RIJ Publishing. All rights reserved.

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.”

© 2009 RIJ Publishing. All rights reserved.

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.

© 2009 Prudent Bear

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.” 

© 2009 RIJ Publishing. All rights reserved.