Archives: Articles

IssueM Articles

FundQuest to Carry Fidelity’s No-Frills Variable Annuity

Posted on December 1, 2009 by Editor Test -

Fidelity Investments Life Insurance Company (FILI) and FundQuest, a provider of fee-based managed account services, have agreed that FundQuest will market the Fidelity Personal Retirement Annuity to broker-dealers and about 40 registered investment advisors.

The deal, which helps Fidelity extend its reach into the fee-based advisor and RIA channels, had been under discussion for about 18 months, according to one person familiar with the arrangement. “FILI was looking to get into the RIA and broker-dealer spaces, and this was one of the results of that push,” the source said.

Fidelity Personal Retirement Annuity (FPRA) is a bare-bones variable annuity that provides an opportunity for tax-deferred accumulation in more than 50 funds with an annual annuity charge of only 35 basis points-well below the industry average of 1.37% for nongroup open variable annuities. The contract can be annuitized but does not offer any guaranteed income riders or guaranteed minimum death benefits.

In other words, the transaction is unrelated to the turbulent world of variable annuities with lifetime income guarantees, which has gone through boom and bust in the last three years or so. Interest in products like FPRA and Jefferson National Life’s low-cost variable annuity are pure tax-deferral vehicles for fee-based advisors with clients who want to save far more on a tax-deferred basis than they could in an IRA or a 401(k) plan.

Interest in such products could rise or fall in the future, depending on the future of U.S. tax policy and whether high-income taxpayers expect to pay more or less taxes in retirement than they currently do. On the other hand, a product like FPRA has value for someone who simply wants to save on a tax-deferred basis for several decades and then convert the assets to an income annuity-the purpose for which it was originally intended.

FPRA will be featured on FundQuest’s Wealth Architect, an advisor back-office and investment management platform. Advisory firms use Wealth Architect to outsource the construction and management of fee-based mutual fund models, unified managed accounts (UMAs), income portfolios, specialized portfolios and a variety of services. FundQuest was already a client of the Fidelity Institutional Wealt h Services Group.

“This is about expanded distribution rather than product innovation,” said Joan Bloom, senior vice president in Fidelity’s individual retirement business. “Fee-based advisors are generally under-represented in the annuity space. We believe that annuities can play an important role in adding tax efficiency to a portfolio.”

Some of FundQuest’s broker-dealer clients are owned by insurance companies that in some cases offer their own competing variable annuities. “Some advisors have their own proprietary products, in which case we wouldn’t be offered. Or we might, depending on their views on open architecture,” Bloom added.

The alliance, said to have been initiated by a FundQuest client who wanted access to an additional variable annuity through the FundQuest platform, marks the first time Fidelity’s annuity and insurance business has expanded its distribution through a turnkey asset management firm like FundQuest. Since 2005, Fidelity has marketed the product direct to consumers. Both firms are based in Boston. FundQuest, which has an estimated $40 billion under management in the U.S. and Europe, is a unit of BNP Paribas.

According to a release, FundQuest has integrated FPRA into its asset allocation modeling capabilities for fee-based advisors. Fidelity will provide annuity-related sales support and access to Fidelity’s insurance-licensed sales representatives.

Tom Johnson Joins New York Life

Posted on November 25, 2009 by Editor Test -

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.

Phoenix Launches Two Indexed Annuities

Posted on November 25, 2009 by Editor Test -

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.”

Important Roth Conversion Dates

Posted on November 25, 2009 by Editor Test -

Important Roth Conversion Dates
Jan 1, 2010	First day that conversions can be made under new regulations
Dec 31, 2010	Last day that conversions can be made to have two years to pay the taxes owed
Oct 15, 2011	Last day to recharacterize 2010 conversions (includes extensions)
Apr 16, 2012	Tax-filing deadline (50% of the 2010 conversion amount will be brought into income for 2011 tax year)
Apr 15, 2013	Tax-filing deadline (remaining 50% of the 2010 conversion amount will be brought into income for 2012 tax year)
Source: Merrill Lynch Wealth Management.

Fixed Annuity Sales Weakened in Third Quarter: Beacon Research

Posted on November 25, 2009 by Editor Test -

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.

The Latest Chapter in the Indexed Annuity Saga

Posted on November 25, 2009 by Editor Test -

A federal jury in Minnesota decided in mid-October that Allianz Life Insurance Company of North America used deceptive practices in selling billions of dollars worth of indexed annuities between 2000 and 2007.

But, in the case of Mooney vs. Allianz Life, the jury found no reason to award damages to the estimated 340,000 people who joined the class-action suit against Allianz Life, because they didn’t lose money on the products.

The verdict didn’t necessarily vindicate Allianz Life, but the company doesn’t appear to have suffered from the publicity. Its MasterDex indexed annuity was the top-selling product of its type in the third quarter, and the top-selling fixed annuity in the independent producer channel.

Allianz Life sold $1.4 billion worth of fixed annuities (which include indexed annuities) in the third quarter, second only to industry leader New York Life’s $1.7 billion.

The jury’s decision was, however, a modest vindication for indexed annuities, whose enthusiasts have long insisted can be higher-yielding alternatives to bonds when the Federal Reserve drives short-term interest rates to levels lower than the inflation rate, as it has done twice during the past decade.

“They’re good as an alternative to a bond fund, and they should be viewed as a separate asset class,” said Jack Marrion, who co-authored a recent paper “Real World Index Annuity Returns,” with Geoffrey VanderPal and David Babbel. It was published by the Wharton Financial Institutions Center.

The paper argues in scholarly detail that, despite the negative publicity they have attracted, indexed annuities have done what they were designed to do: protect principal and offer the potential for higher returns than bonds or CDs during low-interest climates.

From 2003 to 2008, for instance, the 19 indexed products that Marrion and his co-authors surveyed provided an average annual return of 6.05% while the S&P 500 returned 3.18%. The average returns masked a wide variation in returns, which ranged from 3.0% a year to 7.80% a year over that period.

That variability or unpredictability, Marrion concedes, is a weakness of indexed annuities. But he says that this weakness stems not from the product design, but from th rate renewal policies of the issuers of the contracts. They have the right to change the terms of the product each year, and may do so to the disadvantage of the contract owner.

“That’s the tough part,” Marrion told RIJ. “You have to rely on the integrity of the carrier. It all comes down to how the company treats you when they re-set. I tell people to get the [issuer’s] renewal history. If they won’t give it to you, don’t buy the product.”

Marrion also concedes that the product has at times been mis-sold as a safe way to invest in an equity index. When someone buys an indexed annuity, about 95% of the premium goes into bonds and the remaining five percent is invested in equity index futures.

“Yes, some people buy this as an alternative to stocks. But if they do, then it’s been mis-sold,” he said. The beauty part of the product, he pointed out, is the fact that each year it can only ratchet up in value and can never slide back. Related products, such as 10-year structured products consisting of zero-coupon bonds and equity index options, do not have annual check valves that prevent the account from giving up its gains, but indexed annuities do.

The controversy over indexed annuities is far from ended, as anyone who has followed this product’s history knows. In mid-2008, the Securities and Exchange Commission passed a rule that would allow it to regulate indexed annuities as securities beginning in 2011. This change would mean that indexed annuities would be sold through broker-dealers instead of through insurance marketing organizations.

But last July, a federal appeals court ruled that, while the SEC had the authority to regulate indexed annuities, the SEC had failed to evaluate the impact that would have on the indexed annuity market. The court sent the matter back to the SEC for further work, and that’s roughly where it stands today.

Re-Start Your Engines?

Posted on November 25, 2009 by Editor Test -

The variable annuity arms race lives on.

Judging by the companies that experienced the sharpest sales growth in the quarter, investors and advisors still can’t resist living benefit riders that promise generous 10-year “roll-ups” followed by a lifetime of guaranteed income.

Prudential Annuities sold a whopping $5.83 billion w orth of variable annuities in the third quarter, a number that accounted for 23.2% of the quarter’s advisor-sold (non institutional) variable annuity volume, according to VARDS, Morningstar’s variable annuity information service.

Until late August, Prudential was still selling its lavish HD7 living benefit rider, which offered 7% annual compound growth of the income base over a 10-year waiting period. The insurer subsequently offered a slightly de-risked HD6 product that still offered a 6% annual compound roll-up over 10 years.

The other breakout issuer was Jackson National Life, whose $2.91 billion in third quarter sales represented a 90% year-over-year increase for the carrier, a unit of Prudential plc (no relation to Prudential in the U.S.), according to executive vice president Clifford Jack.

MetLife, the VA sales leader through September 30, 2009, sold $3.4 billion in the third-quarter, a decline from its sales pace during the first half of the year. Overall, variable annuity sales were down about one percent from the second quarter, at about $31.8 billion.

Although the Dow Jones Industrial Average rose about 16% in the third quarter—which should have offered a brisk tailwind for VAs—a drop-off in 1035 exchanges apparently nullified the effect. With so many VA issuers offering less generous guarantees than they did last year, there were virtually no flashy new products to tempt contract owners into switching to.

Too early to tell
It’s probably premature to leap to the conclusion that the variable annuity arms race has been rekindled, albeit at a slightly lower temperature. But aggressive, complicated retirement income benefits apparently still appeal as much to Boomers and their advisors as they did before the crisis—and perhaps more so.

U.S. Individual Annuity Sales 1st Quarter 2009 ($ in thousands)
Company Name	Variable
MetLife	3,735,343
TIAA-CREF	3,477,673
AXA Equitable	2,836,115
ING	2,229,345
Prudential Annuities	2,106,642
John Hancock	2,057,327
Lincoln Financial Group	1,811,063
Jackson National Life	1,507,550
RiverSource Life Insurance	1,314,669
Allianz Life	1,222,546
AIG	1,179,538
Pacific Life	973,833
Nationwide Life	921,400
Hartford Life	702,009
AEGON USA	687,395
Sun Life Financial	580,910
Fidelity Investment Life	458,398
Massachusetts Mutual Life	342,007
Thrivent Financial for Lutherans	292,584
New York Life	207,364
Top 20	28,643,711
Total Industry	30,700,000
Top 20 Share	93%
Source: U.S. Individual Annuities, LIMRA International

The third-quarter sales data did not suggest that advisors are embracing simpler, less expensive income riders, like the one that John Hancock introduced last summer. Perhaps Boomers will always insist on roll-ups with their living benefit riders, and not just step-ups and guaranteed payouts.

Both Prudential and Jackson National offer lifetime income riders with six percent “rollups.” That means the carrier will increase the owner’s income base—the notional amount on which future payouts will be calculated—by at least six percent each year over a ten-year waiting period.

With Prudential’s compound 6% rollup, for example, a client who invested $100,000 at age 55 would have an income base of at least $179,000 at age 65 if he took no withdrawals, regardless of market performance. After age 59 1/2, he could receive at least five percent of that amount (about $9,000) each year for life if he didn’t withdraw more than $9,000 in any year. [An HD6 Plus prospectus indicated that the income base could double after 10 years and quadruple after 20 years of no withdrawals.]

Jackson National’s LifeGuard Freedom 6 living benefit lets owners withdraw six percent of the guaranteed income base starting at age 75 and seven percent at age 81. The rider includes a chance for a six percent increase to the income base for every year the contract owner delays his or her first withdrawal. The bonus period lasts for ten years, and the period can start over if rising markets lift the income base to a new and higher level.

Beyond that rough similarity, the two companies traveled different routes to higher sales levels. Trade advertising for Prudential’s “Highest Daily” VA income rider seemed to be on every website and every magazine frequented by financial advisors. The company got big results from an eight-minute video for consumers and advisors that explains the rider’s benefits. E-mail blasts to readers of trade publications helped too.

But the ad spending “doesn’t explain our momentum,” said Jac Herschler, head of marketing at Prudential Annuities. “Our success in the four channels [bank, wirehouse, independent, and captive] has been growing over time. Our differentiation in product design is a big factor. The momentum is also a reflection of producers electing our award-winning product.” The number of independent advisors selling Prudential’s variable annuity reportedly more than doubled in the quarter.

Prudential’s HD or “Highest Daily” series is one of the few, if not the only, major VA income rider that offers a daily step up in the income base. It can afford to do that partly because of its “dynamic rebalancing” risk management method, which automatically re-allocates contract assets from equities to fixed income investments when the market dips.

This “selling the dips” technique defies conventional investment wisdom and Prudential admits that it dampens a contract owner’s upside in a bull market. But it significantly limits damage to account balance in a bear market. During the darkest moments of the financial crisis, accounts guaranteed by HD7 riders fell only about 18%, compared to 36% for many contracts whose income riders didn’t use dynamic rebalancing, according to data provided last spring by Prudential.

“Our product design allows us to protect customer account values in adverse markets, and that results in lower net amounts at risk for insurance company,” said Herschler. “In that way our capacity has benefited and the amount that we need to manage through hedging strategies is less than at many companies.”

Another risk management technique in the HD6 appears to be a somewhat stingier payout rate. Contract owners must settle for a five percent payout if they begin taking guaranteed payments between ages 59 ½ and 79, inclusive. Owners must wait until age 80 to receive a six percent annual payout.

Sticking to its story
Jackson National Life, in contrast, spends little on advertising, preferring a slow, steady approach to sales, for which it relies entirely on third-parties. “Something that’s often overlooked but is incredibly important is consistency of message,” said Clifford Jack.

“We’ve been telling the same people the same story for quite some time,” he said. “We’ve had consistency in the senior management for over a decade, consistency in sales leadership, and a higher persistency of wholesalers who’ve been in their territories for a lengthy period of time. The result has been a significant net positive in the number of producers selling our products.”

The company’s outside wholesalers generally start as annuity phone reps, then as internal wholesalers supporting the outside wholesalers, then as business developers who guide advisors through online tutorials, then as outside wholesalers who meet with advisors.

Three other factors contributed to Jackson National’s increasing variable annuity market share over the past two years, Jack added. For one, his company has raised its agility and speed-to-market by building its own technology platform rather than buying it from the outside. Second, even during the thick of the variable annuity arms race, it insisted on pricing its guarantees properly instead of buying volume with unsustainably low fees. Third, Jackson National has benefited from others’ mistakes.

The annuities market is “going through a period of brand inversion,” he said. “There was a time when everyone thought that ‘bigger was better.’ But now some of the bigger brands have become tainted,” creating opportunities for a less well-known but highly-rated company like Jackson National to seize.

Annuity Firms Turn Their Focus To Online Client Security

Posted on November 25, 2009 by Ben Pousty, Corporate Insight -

Annuity issuers are finally beginning to beef up the security of their client sites. Firms have bolstered login requirements, strengthened security measures and educated users about online crimes. A number of annuity client websites now offer detailed tutorials on phishing and other online scams. Several firms have ramped up their login security features.

Pacific Life, for one, has overhauled its entire client login process. The firm implemented computer recognition, which allows only users logging in from verified IP addresses to access account information.

Users can verify their computer by successfully answering a predetermined security question. Clients are also asked to select an image and create a custom caption that will appear on the password screen in order to confirm the page’s authenticity.

Private Enhanced Security Login

Allianz and TIAA-CREF also enhanced their respective client login processes. Allianz tightened its password criteria, forcing clients to choose more secure passwords. Clients are required to change their password every 90 days; Allianz is the only firm we track that requires regular password updates. In January, TIAA-CREF introduced a new login system that incorporates security questions into the regular username/password login process.

More firms are also employing automatic logouts. This simple but effective feature automatically ends a user’s session after they have been idle for a set period of time (most of our firms will now automatically log a client off after 15-30 minutes of inactivity).

Such improvements are more the exception than the rule, however. Pacific Life and Vanguard are the only firms that have incorporated computer recognition as well as customizable security imagery and captions into the login process. Most of the firms we track continue to use barebones login requirements. Too many firms have neglected to make online security a priority.

Although annuity firms have improved client security, they lag behind brokerages and banks. When Corporate Insight launched annuity coverage in 2006, for example, all of the firms in our roster simply required clients to enter a username and password to gain access to online account information. At that time, many banking, credit card and brokerage firms had already added stringent two-factor authentication methods to their login processes.

The speed at which annuity transactions are processed may help explain why annuity firms have short-changed security. Unlike transactions on brokerage websites, where trades are completed instantaneously, annuity transactions take at least one business day to clear. There’s significantly more time to detect fraud.

Because most investors purchase annuities through advisors, there’s usually a second set of eyes monitoring the contracts for suspicious activity. The heavily regulated nature of the product provides additional layers of protection. But these are not reasons for complacency or lax security. The sensitive personal information found on annuity websites will always make them potential targets for identity thieves. More than ever, firms must stress safety and prevention.

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

Ethnicity Alone Doesn’t Predict 401(k) Behavior

Posted on November 25, 2009 by Editor Test -

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.

Ally, Ally, InFRE

Posted on November 25, 2009 by Kerry Pechter -

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.

Health Care Spending as Share of After-Tax Income for Older Married Couples, 2000 and 2030

Posted on November 18, 2009 by Editor Test -

RMD and Dangerous? Not Really.

Posted on November 18, 2009 by Editor Test -

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.

Merrill Lynch Has Answers for Roth IRA Questions

Posted on November 18, 2009 by Editor Test -

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.

Out-of-Pocket Medical Costs in Retirement: Part II

Posted on November 18, 2009 by Editor Test -

Two weeks ago, RIJ reported that the Financial Research Corporation had described as a “myth” a 2006 estimate by the Employee Benefit Research Institute that the average 65-year-old couple would need about $300,000 in savings just for out-of-pocket medical care in retirement.

The report instantly provoked the ire of EBRI’s president, Dallas Salisbury, who said that calling EBRI’s numbers a myth was tantamount to calling them lies. EBRI researcher Paul Fronstin also noted that FRC’s own data actually supported EBRI’s conclusions.

Each of these responsible organizations has a legitimate point. The EBRI has solid evidence regarding the amount of savings a retiree will need to pay for the health insurance needed to supplement Medicare and to pay out-of-pocket health care costs over the average life expectancy.

If you factor in health care cost inflation, the amount of savings needed for maximum protection becomes a shocking number. In a report last summer, EBRI estimated that when today’s 55-year-olds retire in 10 years, the men would need between $114,000 and $634,000 to cover insurance and medical other costs in retirement.

For women, the estimates are even higher. The average 55-year-old woman will need $164,000 to $754,000 in savings to cover medical expenses during retirement. Each person’s spending would depend on individual experience and whether he or she wanted a 50%, 75% or 90% chance of covering all health care costs in retirement, the EBRI said.

And that’s not counting eye care, dental care, or the potential cost of nursing home care, which now averages about $69,000 a year.

But the FRC also had a point. You can calculate prices, but people won’t necessarily be able to pay them. The savings requirements for health care may be mythical in the sense that very few Americans are on track to save anywhere near those amounts, or to have a retirement income that can support that level of expenditure. And if they can’t save or spend that much, they won’t.

Hence the conclusion the EBRI projections are unrealizable and therefore “mythical.” The EBRI projections may show the average costs—but that doesn’t mean the average person can or will pay them. People who can’t afford to be fully insured won’t be. Many will presumably find a way to survive.

“We’re not trying to dispel the idea that health expenses will be an important factor, and even $4,500 is not an insignificant amount,” he said. “But the idea that you need three hundred grand for health care or you’re not going to make it isn’t necessarily true.”

There’s actually little difference of opinion among the research groups. They all see health care costs rising astronomically. And they all acknowledge to some degree that straight-line projections based on current trends might not be literally predictive, because neither the government nor most individuals will be able to pay that much.

Richard Johnson of the Urban Institute and Jon Skinner of Dartmouth College use words like “implausible” and “unsustainable” to describe the burden of health costs on retirees in two or three decades.

“Herb Stein, the chairman of Richard Nixon’s Council of Economic Advisors, used to say that ‘unsustainable growth paths are unsustainable.’ And so if you believe that, EBRI’s point is well put,” said Skinner, who in 2008 co-authored with Kathleen McGarry a research paper entitled, “Out-of-Pocket Medical Expenses and Retirement Security.”

“If you’re 55 and you’re looking ahead to age 75, and health care costs continue to rise by four percentage points per year higher than inflation, then there’s obviously a big expense coming your way,” he said. “It’s the private equivalent of what’s happening on the public level [with Medicare]. If health care costs rise 4% a year then the government will be underwater too.”

“If you accept the Congressional Budget Office projections of future budget deficits, then there’s nothing on the landscape that shows that the growth will stop. As for the EBRI’s number, it’s just a number. It’s illustrative. The basic point is that over the long term out-of-pocket spending for health care is going to be a lot of money.

“I interpret EBRI’s numbers to mean that you better start saving more or plan to reduce other forms of consumption. You can’t save for every contingency. The message is that you must prepare for it,” he said, adding that the Obama administration’s “health care reform won’t change much in the short term. It will be a decades-long process to reform the incentives in our [health care] system.”

In their paper, Skinner and McGarry wonder “whether these doomsday predictions are overblown,” given the shortage of surveys of actual retiree out-of-pocket health care spending.

Their study suggests two reasons why predictions are difficult to make. For one thing, “expenditures [are] skewed towards the very end of life, with more than one-third of the expenditures in the last year coming during the last month of life,” they point out.

Second, people tend to spend more when they have more to spend. “Wealth is more predictive of spending on out-of-pocket health care expenditures than the flow of income,” they write. People with more money can and do spend it on things like in-home elevators and other optional things that people with less money simply do without.

Another specialist in this area is Richard W. Johnson of the Urban Institute, who in October 2004 published a study with Rudolph G. Penner called “Will Health Care Costs Erode Retirement Security?” When asked about the EBRI’s figures, he said his estimates were somewhat lower.

“I get an estimate of more like $75,000 per person,” Johnson told RIJ, or $150,000 per couple. “That’s out-of-pocket health care spending from age 65 forward to death. That’s an average. The median would be lower. Some people will spend nothing because they’re on Medicaid.

“On the other hand, so many of the people who are fully insured are getting huge subsidies from their employers. Ten percent of the over-65 population will experience catastrophic costs, but the median person won’t necessarily spend much.

“Even though my numbers are not as high as EBRI’s, they underscore the need to control spending,” Johnson added. “If [health care spending] continues at its current rate it will bankrupt the government and a lot of families.

“I think you’ll find that once individual spending gets too high, people will just cut back. They will become more savvy consumers. They won’t get those extra tests. That will bring down spending to some extent. But the numbers highlight the fact that health care will be expensive. And even if you’re fortunate enough to have [employer-sponsored] retirement coverage or expect it in the future, you shouldn’t rely on it entirely because it might disappear.”

Out-of-pocket health care expenses in retirement will fall most heavily on people who are in the so-called second income quintile—the lower middle class—who earn too much to qualify for Medicaid. Johnson’s research showed that health care costs might consume half of their after-tax income. Hut he called that scenario “implausible” and wrote, “It is doubtful that society would tolerate this result.”

Dubya’s Lingering Gift

Posted on November 18, 2009 by Kerry Pechter -

One of the holiday gifts that the 43rd president left behind for upscale taxpayers this year is the clause in his Tax Increase Prevention and Reconciliation Act of 2005 that removes the income limit on Roth IRA conversions.

Starting on January 1, 2010, even those who earn more than $100,000 a year can empty a traditional deductible IRA, pay income tax on the distribution, and call it a Roth IRA. After a five-year wait, all distributions from the Roth will be tax-free.

The arrival of this tax-saving measure is well timed. Many people expect the government to raise income tax rates to defray the debt created by two wars, the Wall Street bailout and the stimulus package. A Roth conversion would let traditional IRA owners settle all their tax obligations at today’s rates.

Nobody really knows how the tax rates might change. Financial advisors told RIJ they regard the conversion as a chance for high-earning clients to increase their after-tax incomes in retirement or to transfer IRA money—including IRA money rolled over from a 401(k)—money to their children tax-free.

But, even though they have a one-time chance to spread taxes on the conversion over 2010 and 2011 (and as late as October 15, 2012, with extensions) advisors aren’t rushing their clients into Roths. A National Underwriter survey last August showed, in fact, an underwhelming interest in conversions.

More than one tax basket
“In the short run, it seems fairly clear that taxes are going up,” said Russell Wild, a fee-only financial planner in Allentown, Pa. “I think the conversion is something everyone should look at. It should be particularly helpful to those already retired, who don’t currently have any money in a Roth.”

But he doesn’t recommend it to everyone. “It depends on the circumstance,” Wild said. “I’m getting calls from people who want to convert who are still working, and in a high tax bracket today. So even if taxes go up they might still be in a lower tax bracket in retirement.”

Wild believes in not having all your savings in any particular tax basket. “In any given year it’s optimal that you have a taxable and non-taxable basket, so that you can take from the taxable basket only to the point where you leave the 25% bracket,” he said.

For Antoine Orr, a fee-based advisor in Greenbelt, Md., and author of the new personal finance book, “In the Huddle,” a Roth conversion might be an opportunity for investors to correct the mistake of putting too much money in tax-deferred accounts to begin with.

Orr has been recommending for years that people shouldn’t only put enough money into a 401(k) to maximize the employer match. “We don’t know what tax rates will be down the road. You might be putting money in when taxes are lower. I’ve been saying that for 15 years, and people are now beginning to listen.”

Antoine Orr Unlike many advisors, he also recommends drawing down tax-deferred money before taxable money in retirement. While the money in tax-deferred accounts may be compounding, he said, “The taxes are compounding too. The concept comes from Don Blanton’s Moneytrax.”

Orr and Wild both noted that it makes little sense to convert a traditional IRA to a Roth IRA unless you pay the tax bill with money from a separate after-tax account. Otherwise you’ll simply reduce the balance in the Roth and undermine the purpose of the conversion. You might also owe taxes and a penalty on the distribution.

Segmented wisdom
“Whether Roths make sense depends heavily on individual situations, particularly for retirees or near-retirees,” said Elvin Turner, managing director of Hartford-based Turner Consulting, which counsels financial services companies. “This is an issue that is begging to have a financial plan around it. It is only in the context of a full plan that I believe people get to a correct decision on these types of opportunities.

“Again, this is heavily dependent on individual situations or at least on the situations of groups of people in similar segments. For retirees, the situations of retirement will be so different—working in retirement, semi-work, leisure, all of the above—that statements of conventional wisdom that purport to apply broadly will be way off of the mark.

“For example, the decision about whether to spend tax deferred dollars now or later depends heavily on whether you plan to work in retirement. The traditional models assumed little or no work related income in retirement. For retirees, what we are really seeing is the death of “conventional wisdom” and the rise of “segmented wisdom”—where strategies make sense for one or more segments, but never across the board.”

Do advisors think that taxes are going up? Yes and no. Cliff Draughn, president of Excelsia Investment Advisors, a Savannah, Ga., firm that manages money for those with about $4.5 million, has no doubt that taxes are going up. “They’re going to let the Bush tax cuts expire. That’s step one,” he told RIJ. “There’s the cap and trade legislation, which is really a carbon tax. That will hit every individual out there.

“There’s mandatory participation in health care, which could be interpreted as a tax,” Draughn added. “I think they’re going to raise the capital gains tax to 25%, and the 15% tax on dividends will be gone. Dividends will be taxed as ordinary income. The taxability of foreign income is something else that Obama has been talking about.”

“The average citizen just doesn’t understand economics. There are now more people receiving government benefits than there are people paying into the system. It won’t just be the rich who will be affected by the tax increases. It will affect the person earning $40,000,” Draughn said.

Wild is fairly sure that taxes will go up, he’s not sure which ones. “Yes, given the deficit and national debt, it’s mostly likely that income taxes will go up. But that shouldn’t be seen as a must-happen… Government may address the debt in other ways, such as a levying a VAT [valued-added tax]. And while it’s safe to assume that the rates for the most affluent will go up, it doesn’t necessarily mean your taxes will go up.”

Orr says clients expect him to be a tax soothsayer, even though he’s not. “I’m always asked, ‘What will the Chinese do?’ I say, ‘Even if I were in the President’s cabinet, I still wouldn’t now.’ I do know that we’re in world of hurt. It will take some time. It will fall on future generations to pay all this back.”

Note: After-tax contributions to a Roth IRA can be withdrawn from the account penalty-free and tax-free at any time. Earnings on contributions to a Roth IRA cannot be withdrawn penalty-free until the account has been open for five years and the account owner is age 59½ or older.

Sales of Indexed Annuities Cool in Third Quarter

Posted on November 18, 2009 by Editor Test -

Sales of indexed annuities reached $7.5 billion in the third quarter of 2009, up 11.3% from the same period last year but down 9.9% from the second quarter of 2009, according to the 45 indexed annuity issuers that participated in the 49^th Advantage Index Sales & Market Report.

“Sales are always going to decline when coming off of a record quarter,” said Sheryl J. Moore, President and CEO of AnnuitySpecs.com. “The big story this quarter is the shake-up in rankings among the indexed annuity carriers. While some companies’ sales are up more than 75%, others’ sales are down almost 60%.”

Allianz Life captured the top sales spot for the first time since the fourth quarter of 2007, and its MasterDex X is again the top selling product in the category. American Equity rose to second place followed Lincoln National, Jackson National and Aviva. The share of sales through the bank channel has tripled in the past year, and now accounts for 12.3% of overall indexed annuity sales.

For indexed life sales, 33 carriers in the market participated in the Advantage Index Sales & Market Report, representing 100% of production. Second quarter sales fell 1.3%, to $130.8 million, from the previous quarter but rose 0.9% from the same period in 2008.

Aviva led all companies in sales, with a 20% market share. Pacific Life’s Indexed Accumulator III was the top-selling product for the fourth quarter in a row. Nearly 60% of sales were of products using an annual point-to-point crediting method, and nearly half of sales were of 9 to 10 year contracts.

Reputation of ‘Alternatives’ Survives the Crash

Posted on November 18, 2009 by Editor Test -

“Institutions and advisors continue to view alternative investments optimistically, despite their questionable performance, correlation, and liquidity during last year’s global downturn as well as the high-profile scandals that rocked the hedge fund industry.”

So said Steve Deutsch, a database director at Morningstar, Inc., in a release about the second annual survey by his company and Barron’s of the way institutions and advisors view alternate investments such as hedge funds, real estate investment trusts, and absolute return funds.

“Institutions and advisors want the benefits of alternative strategies with the positive characteristics of traditional investments-low correlation with liquidity, absolute returns with transparency, and redemptions without restrictions,” Deutsch added. The survey found:

More than 60% of institutions and advisors believe alternatives will at least equal traditional investments in importance over the next five years.
Most of those surveyed expect 10% of their portfolios to be in alternatives over the next five years; one in four institutions expects alternatives to account for more than 25% of their portfolios.
Institutions and advisors expect to increase allocations to hedge funds over the next five years, as they have over the last five years.
Portfolio diversification, absolute returns, and exposure to different investment techniques, like arbitrage or shorting, were the top three reasons for investing in alternatives, as they were in last year’s poll.
Lack of liquidity and transparency were a bigger concern this year than last.

Fewer institutions and advisors view real estate investment trusts (REITs) and commodities as alternative asset classes today than in 2008, the survey showed. Those polled tend to classify investments as “alternative” based on strategy, i.e. absolute return, rather than designation, i.e. mutual fund versus hedge fund.

Morningstar and Barron’s conducted the Web-based survey in late September through early October 2009; 89 institutions and 300 financial advisors participated. Additional results, including charts for 2009 Alternative Investment Survey of Institutions and Financial Advisors can be viewed online.

Three Liquidity Options in New SPIA from Security Mutual Life

Posted on November 18, 2009 by Editor Test -

Security Mutual Life of New York, a 123-year-old insurer with an A rating from A.M. Best, has launched a new immediate annuity contract that allows the annuitant to receive unscheduled lump sum payments.

The retiree does not have to demonstrate a hardship or otherwise provide any reason to Security Mutual for his or her exercising any of three liquidity options:

Partial withdrawals are available as of the fifth, tenth, and 15th contract anniversaries.
Owners of term-certain annuities can withdraw the present value of the remaining term-certain payments.
The owner may at least once during the lifetime of the contract accelerate up to 50% of annuity income payments due in the next 12 months.

The product is currently available in the states of: GA, LA, MA, MD, ME, MS, NC, NH, NY, OH, PA, RI, SC, TX, VA, VT, WV. Applications in other states are pending.

Income-Oriented Advisors Seek Validation: Survey

Posted on November 18, 2009 by Editor Test -

Investment advisors have recovered some of the confidence they divested last winter, but they’d like a chance to either validate or adjust their own income-generation methods by comparing them with the best practices of their peers.

That’s one of the findings of “Update: Advisor Best Practices in Retirement Income, Q4 2009,” the third in a series of surveys of investment advisors in a variety of distribution channels by Practical Perspectives, a Boxford, Mass., research firm and GDC Research of Sherborn, Mass.

“Advisors are not sure if their system of providing retirement income is broken or not, but they are open to looking at best practices. They aren’t getting the benchmarking they need,” said Howard Schneider, president of Practical Perspectives, who co-authored the 54-page report with Dennis Gallant, president of GDC.

The study supplements the authors’ two previous advisor studies, a third-quarter 2008 survey called “Advisor Best Practices: Delivering Retirement Income and Transition Support” and a second-quarter 2009 survey called “Examining Best Practices in Retirement Income Portfolios: How Advisors Support Retirement Income Clients.” The report is for sale by the authors.

About 47% of the advisors polled have 40% or more of their clients near or in retirement. Many already use a variation of the “bucket” method, which assigns different accounts or portfolio segments to different stages of retirement or different purposes in retirement.

These advisors, who indicate greater confidence in their methods, are often independent advisors who use the “team approach”-that is, they collaborate with accountants, attorneys, and other specialists in serving their clients, Gallant and Schneider told RIJ.

In their summary, the authors say, “The market now seems divided among total return, pooled [buckets] and income floor practitioners with none of these approaches appearing to dominate . . . One element of portfolio construction that is gaining greater traction is the need to create a safety net to meet minimum income needs for essential day-to-day living expenses. This change underscores the growing distinction between income needs and income wants . . . Product providers looking to expand support to this growing market need to understand that a one-size-fits-all approach will likely gain little traction.”

Of the advisors surveyed by Schneider and Gallant, 36% were independents, 27% were registered investment advisors (RIAs), 15% were wirehouse advisors, and six percent were in insurance companies. The bank and regional broker-dealer channels had five percent each.

Fidelity Outsources GWB Production to MetLife

Posted on November 18, 2009 by Editor Test -

Fidelity Investments has replaced its successful Fidelity Growth and Guaranteed Income variable annuity with a new contract that’s similar in name, less risky to the company, more expensive for investors and has a different underwriter: MetLife.

FGGI was “one of the most successful product launches Fidelity has ever had,” said Joan Bloom, senior vice president at Fidelity Investments. But after the financial crisis its living benefit guarantees became too expensive for FILI, Fidelity’s relatively small captive life insurer, to keep underwriting.

“We sold about $1.5 billion in 16 months” with FGGI, Bloom said. “But this was about volatility and the cost of hedging, and FILI doesn’t have the same capability that MetLife has on the insurance side.” MGGI got a million dollar contract on its first day, she said.

Now called MetLife Growth and Guaranteed Income, the product will be sold exclusively through Fidelity, which markets no-load mutual funds and other financial products and services directly to investors. Fidelity also sells MetLife fixed annuities and single-premium immediate annuities.

In both the new and the prior product, investors are limited to one investment choice. The new product offers the Fidelity VIP Funds Manager 60% Fund, which holds 60% equities, 35% bonds and five percent cash. The old product offered a Fidelity VIP Balanced Fund. “It’s exactly the same investment,” Bloom said.

In both contracts, there was a flat two percent surrender charge during the first five contract years and step-ups of the income base to the account value, if higher, on each contract anniversary until age 85. The new product has a return-of-premium death benefit while the ultra-slim FGGI version did not.

The MetLife edition of the product is more expensive than its predecessor. With a $50,000 initial minimum premium, it has an M&E of 1.90% for single life and 2.05% for joint coverage, and current fund fees of 84 basis points. The FILI contract, which required a $25,000 initial premium, charged a single all-inclusive price of only 1.10% for single owners and 1.25% for joint owners.

“Even at that price [274 to 289 basis points], it still provides value to the customer,” Bloom said, given the historic returns of the product’s 60-35-5 investment allocation. “And it’s among the lowest-priced living benefit products on the market.”

While the original FILI product offered a flat five percent payout from the guaranteed income base, the MetLife version offers three age bands. It pays out four percent of the base for those ages 59½ to 64, five percent to those ages 65 to 75, and six percent to those who delay guaranteed income to age 76 or later.

People approaching or living in retirement can use a portion of their 401(k), 403(b), IRAor any other savings, to purchase guaranteed lifetime income for an individual or for his or her spouse with MGGI. A MetLife/Harris Interactive poll conducted in September 2009 showed that since the economic downturn, 68% of Americans value portfolio protection against market losses more than stock market gains.

Among older baby boomers (ages 55-65) this conservatism is acute, with 16% in the MetLife poll saying that they are “more focused on having reliable monthly income versus focusing solely on the size of their nest egg.”

Sign-up for Corporate Insight‘s free monthly e-newsletters, Industry Insights, and download an excerpt from the report “Social Media: Trends and Tactics in the Financial Services Industry.” All fields are required.
Email
First Name
Last Name
Company

Data Connection

Lists*