Archives: Articles

Tom Johnson has joined the New York Life Insurance Company as head of business development for Retirement Income Security, the division formed in 2008 to combine the mutual insurer’s annuity, mutual fund and long-term care insurance businesses.

Johnson will report to Chris Blunt, executive vice president in charge of Retirement Income Security, and will be responsible for business development of the division’s products, with an emphasis on defined contribution plans and 401(k) rollover options.

A 33-year veteran of the life insurance industry, Johnson joins New York Life from MassMutual, where he was senior vice president of Retirement Income, Strategic Business Development. In addition to over 10 years at MassMutual, he worked at Federated Investors, Inc.

Johnson began his career at his family’s company, The Johnson Companies, a benefits consulting firm that is recognized as the birthplace of the 401(k) savings plan. He has a B.A. in Religion from Gettysburg College and attended the Harvard Business School Program for Management Development. He is a board member of the Profit Sharing/401(k) Council of America and the Retirement Income Industry Association and a trustee for the Employee Benefit Research Institute.

“I am very pleased that Tom is joining New York Life. Tom brings a wealth of knowledge, industry best practices and networks that will help us continue the momentum we have had since the division’s creation last year, aimed at providing holistic solutions for advisors to use with their clients that address each phase of the retirement process,” said Blunt in a news release.

© 2009 RIJ Publishing. All rights reserved.

The Phoenix Companies, Inc., whose downgraded strength ratings have limited its ability to sell variable products, has brought two new indexed annuities to market, the Phoenix Index Select and Phoenix Index Select Bonus. The life insurer is currently rated B++ by A.M. Best, BB by S&P and Ba1 by Moody’s.

Both products offer three optional guaranteed minimum withdrawal benefit riders for income-minded investors. Each has a 10-year surrender charge—the maximum allowed under most state insurance commission guidelines—and the principal protection characteristic of indexed annuities.

The minimum initial premium is $15,000. With the Select Bonus, the company increases the account value by 5% at issue, so that a $100,000 investment would have a value of $105,000 immediately.

“The story is around simplicity,” said Lou DiGiacomo, principal of Saybrus Partners, a Phoenix distribution subsidiary, in an interview with RIJ. “We’re trying to make it very simple for consumers to understand, and we’re stressing retirement benefits and retirement safety.”

Under the Phoenix Index Select, investors can choose among two different crediting methods, an annual point-to-point method, which locks in gains each year, and a five-year point-to-point method, which locks in gains at the end of a five-year period.

The annual point-to-point method can be pegged to the S&P 500 Index, the Dow Jones Industrial Average, the Dow Jones Euro Stoxx 50 Index or any combination of the three. The five-year point-to-point can be pegged only to the S&P 500. New investors can allocate their premium to any or all of these methods, or invest in a fixed-rate account currently paying 2.8% per year.

These options have various “participation” rates and “caps,” which indicate how much of the index return the investor is entitled to over the course of the one-year or five-year periods. For instance, under the one-year point-to-point S&P 500 method, the investor can participate in all of the S&P returns, but only up to a cap of seven percent per year. For the Bonus Select, the cap on that method is 6.5% per year.

The investor can also choose among three different income riders, each costing 0.50% of the benefit base each year. Of the three options, the “Income 25” applies a 25% bonus to the benefit base—the amount on which future payouts are calculated, which may be higher than the actual account balance.

Another option, called “Income Plus,” offers a potential eight percent annual increase in the benefit base during the first ten years of the contract. A third option, the “Income Max” offers immediate income at an accelerated payout rate. DiGiacomo likened the Income Max to “a single-premium income annuity,” but with “control of your money.”

© 2009 RIJ Publishing. All rights reserved.

U.S. sales of fixed annuities were an estimated $21.9 billion in the third quarter 2009 according to new data from the Beacon Research Fixed Annuity Premium Study.

Quarterly sales were down 21% compared to both third quarter 2008 and the prior quarter. On a year-to-date basis, total market sales were an estimated $84.5 billion, 16% above the first three quarters of 2008.

Indexed annuity results were 6% ahead of the year-ago quarter. Sales of the other product types declined year over year. Market-Value Adjusted (MVA) products were down 37%, book value annuities fell 30%, and income annuities dropped 16%.

“Sales didn’t fall in third quarter due to lower demand for fixed annuities,” said Jeremy Alexander, CEO of Beacon Research. “The public remained in a conservative mood. The success of Pacific Explorer shows how well a product with competitive credited and minimum guaranteed rates could do. But we don’t expect to see growth in sales until rates begin rising and it becomes more profitable for companies to issue fixed annuities sometime next year.”

Compared to the second quarter of 2009, estimated sales were lower for all product types. Sales of book value products were down 28%; MVA, down 25%; indexed, down 11%; income, down 10%. The indexed annuity share of sales rose to a seven-quarter high of 34%, but book value annuities remained the dominant product type with a 45% share.

Estimated sales by product type for the third quarter and year-to-date were:

• Book value: $9.9 billion/$43.0 billion
• Indexed: $7.3 billion/$22.6 billion
• Market-value adjusted: $2.7 billion/$12.8 billion
• Fixed income: $1.9 billion/$6.0 billion.

Relative to the first three quarters of 2008, there was double-digit growth in all product types except fixed income. MVAs were 25% ahead, book value products were up 18%, and indexed annuities advanced 16%. Fixed income sales fell 3%.

New York Life remained the sales leader in the third quarter. Allianz advanced from third to second place. Pacific Life, a top 10 performer for the first time, came in third. It was followed by ING, which rejoined the top 10 in fourth place. Lincoln Financial jumped three spots to fifth.

Credited rates continued to decline in third quarter. Except on renewal rate annuities with short rate terms, rates at the threshold 5% level were rare. Most renewal rate annuities are book value products, so it’s not surprising that their sales continued moving to shorter initial interest guarantee periods.

MVA annuities went short as well, reversing last quarter’s trend. Most MVAs are non-renewal rate products, and it’s likely that annuity buyers were unwilling to lock in the quarter’s very low rates for more than a few years.

New York Life continued to dominate fixed income annuity sales, but Pacific Life replaced it as the leading issuer of book value annuities. Allianz was number one in indexed annuities, replacing Aviva USA. ING USA replaced American National to become the new MVA sales leader.

Pacific Life took top product honors for the first time with Pacific Explorer (a book value product). The Allianz MasterDex X, an indexed annuity, remained in second place. Another indexed product, Lincoln Financial’s New Directions, came in third, followed by ING’s Guarantee Choice (an MVA). Jackson National’s Ascender Plus Select (an indexed product) took fifth place. Beacon’s third quarter results include sales of some 400 products, excluding immediate annuities.

© 2009 RIJ Publishing. All rights reserved.

Asian workers in the U.S. have higher 401(k) participation and contribution rates than Whites, and Whites have higher rates than African-Americans or Hispanics, according to a new research brief from the Center for Retirement Research at Boston College.

But ethnicity did not predict 401(k) behavior when people with similar education, wealth, home ownership and retirement plan characteristics were compared, except in one respect: Asians still out-contributed Whites by 1.2 percentage points.

The study, “401(k) Plans and Race,” was based on an analysis of the Federal Reserve’s Survey of Consumer Finances. The study did not encompass data on savings rates by Asians in their countries of origin, which may have shown that they save at much higher average rates than Americans. In Taiwan, for instance, the household savings rate is about 28% of income.

With no controls for socio-economic factors, the SCF data showed that Asians are more likely to participate in 401(k) plans than Whites, and that Blacks and Hispanics are almost 8% less likely to participate than Whites. Blacks and Hispanics had lower contribution rates—0.5 and 1.0 percentage points, respectively—than Whites. Asians contributed at a rate that was 1.3 percentage points higher.

Asian workers, who represent only 3.9% of the U.S. non-self-employed workforce, were the most likely to be eligible to participate a 401(k) plan, had by far the highest participation rate (83.1% vs. 77.4% for Whites and just under 70% for African-Americans and Hispanics) and contributed more of their salary (7.8%) than the other groups (6.5% for Whites, 5.9% for blacks and 5.5% for Hispanics).

“The good news is that 401(k) participation and contribution decisions do not appear to vary by race/ethnicity . . . For comparably situated individuals, Blacks, Whites, and Hispanics respond in a similar fashion in terms of joining a 401(k) plan and deciding how much to contribute,” authors Alicia Munnell and Christopher Sullivan wrote.

“The bad news is that Blacks, Whites, and Hispanics are not similarly situated. Blacks and Hispanics are less likely than Whites to be eligible for an employer-sponsored plan, less likely to have characteristics that would lead them to participate, and less likely to have a taste for saving that would lead to high rates of contributions.

“So, the best way to boost retirement saving among minorities is not by thinking about race or ethnicity, but by focusing plan design and education efforts on those with lower levels of earnings and education,” the brief said.

© 2009 RIJ Publishing. All rights reserved.

Underdogs inspire my respect. I’ve always admired, for example, the Required Minimum Distribution. How did the RMD become the pariah of the tax code, the wolf at every septuagenarian’s door?

Nothing so universally detested could be all bad, my contrarian instincts told me.

The RMD must surely suffer when people discuss Roth IRAs, just as cavemen suffer when they see GEICO commercials. Why does anyone convert a traditional IRA to a Roth IRA, except to avoid an RMD?

When someone first described the RMD to me, I was baffled. The U.S. government was apparently forcing senior citizens to move a fraction of their tax-deferred money to a taxable account, and to pay income tax on the amount they transferred.

It made no sense. Then someone explained it to me. The government wants its pound of flesh. In their youth, I was told, these poor retirees sold their souls for a paltry tax deduction, not realizing that the devil, in the shape of the IRS, would eventually claim . . . an RMD.

O.K., here’s where I’m going with this:  We shouldn’t be thinking of the RMD as a pound of flesh. We should be thinking of it as an annuity.

In the United Kingdom, retirees have to convert their remaining tax-deferred savings (they get 25% of it tax-free at retirement) to an income annuity when they reach age 75. They don’t call it a penalty or a curse. They call it an annuity.

Americans and their advisors should think of the RMD the same way, and integrate it with their retirement income plans. The RMD schedule is designed to stretch tax-deferred savings over a lifetime—a long lifetime. You withdraw about 3.6% of your money the year after you reach age 70½. By age 78 you’re taking out about 5%. At age 83 you take out about 6%. If you make it to age 90, you’ll be taking out 10% a year.

Resentment toward the RMD is understandable. If someone doesn’t need the income, the RMD is simply an annual tax bill from Uncle Sam. One 82-year-old I know always mails his distribution to his adult kids, just to get the damned thing off his hands. It’s tainted money.

But if retirees need the income, as most of us will, the RMD is a healthy part of life. It’s money we can look forward to. If a retiree needs the RMD for living expenses, he or she probably isn’t paying a very high marginal rate of income tax on the distribution. No cause for resentment there.

If you don’t need the income, do the sportsman-like thing. Appreciate the value of the tax-deferral that you enjoyed for all those years and pay the income tax. If the distribution threatens to push you into a higher tax bracket, make a contribution to charity. 

I don’t like taxes any more than you do. But the RMD isn’t a tax. It’s an annuity. It has a specific public policy purpose: to ensure that people use their tax-deferred savings for retirement income rather than as a bequest. Tax deferral would make no sense without it.

That’s why it’s not entirely accurate to say that 401(k) owners are up a creek without a paddle when it comes to converting their defined contribution accounts to lifetime income. There’s the RMD. Sure, it’s crude. But would you prefer the British approach? If we didn’t bash the RMD, maybe more people would contribute to their 401(k)s and IRAs. 

Personally, what concerns me more than taxes or RMDs is the abuse of language. We kick language around. We disrespect it. Characterizing the RMD as a government clawback and not an annuity is a corruption of language. And a corruption of language is a corruption of thought. You might even say that language is an underdog. It’s one that inspires my utmost respect.

© 2009 RIJ Publishing. All rights reserved.

A new Merrill Lynch Wealth Management white paper offers a detailed discussion of the Roth IRA conversion option that becomes available January 1 to those with an adjusted gross income of more than $100,000, thanks to a clause in the Tax Increase Prevention and Reconciliation Act of 2005.

The document, which asserts that a Roth IRA conversion isn’t necessarily for everybody, makes several important points. Among them:

Part of the conversion may not be taxable. If you made nondeductible contributions to a traditional IRA, you won’t be liable for income taxes on that money when you convert it to a Roth IRA. You must aggregate all of your IRA assets, determine the pre-tax amount, and multiply it by your tax rate to determine the income tax due.

Delay half of your tax until April 2013. If you convert a traditional IRA to a Roth IRA in 2010, you can either recognize the converted assets as income in 2010, or you can recognize half the income in tax year 2011 and half in tax year 2012. That is, you can pay your tax on half the distribution as late as April 16, 2012 and the tax on the other half as late as April 15, 2013.

Can’t make up your mind? Change it. If you decide that you don’t want your Roth IRA, you can “recharacterize” it back to a traditional IRA and absolve yourself of the tax liability on the conversion.

Generally, the deadline for re-characterization is the due date for your tax return-April 15 of the year after the year of the conversion-but you can re-characterize until October 15 if you filed the original tax return on time. It’s even possible, according to the white paper, to convert the assets of a traditional IRA to several Roth IRAs and recharacterize only those that lose value.

You can convert a former employer’s 401(k) to a Roth IRA. Since you can convert an old 401(k) to a rollover IRA, you can also convert it to a Roth IRA. The same is true for an inherited 401(k) account, an old 403(b) account, a 457 plan, a profit-sharing or money purchase plan, SEP-IRAs and SAR SEP-IRAs. You can also convert SIMPLE IRAS that have existed for at least two years.

Merrill Lynch says it has furnished its financial advisors with a “customized analysis tool” so they can help their clients determine if a Roth IRA conversion is right for them, given their age, retirement income needs, expected tax bracket in retirement, existing taxable accounts, legacy aspirations, and so forth.

© 2009 RIJ Publishing. All rights reserved.