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Estate Tax Extension Awaits Senate Vote

Posted on December 9, 2009 by Editor Test -

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

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

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

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

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

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

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

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

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

Luck of the Draw

Posted on December 8, 2009 by Kerry Pechter -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conning Research: Individual Annuities Rebound in 2009

Posted on December 2, 2009 by Editor Test -

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

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

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

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

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

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

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

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

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

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

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

It’s Reigning Buckets

Posted on December 2, 2009 by Editor Test -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Total Fixed Annuity Sales Third Quarter 2009

Posted on December 2, 2009 by Editor Test -

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

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

Posted on December 2, 2009 by Editor Test -

Holiday Cheer

Posted on December 2, 2009 by Kerry Pechter -

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

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

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

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

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

Hold the apocalypse

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

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

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

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

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

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

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

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

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

Averages can mislead

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

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

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

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

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

Equities and retirement

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

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

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

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

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

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

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

Transport Firm Taps The Principal for 401(k) Services

Posted on December 1, 2009 by Editor Test -

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

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

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

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

TIAA-CREF CEO Suggests Five Principles of Retirement Security

Posted on December 1, 2009 by Editor Test -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Nuances of Insurance Wholesaling Revealed

Posted on December 1, 2009 by Editor Test -

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

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

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

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

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

Allianz Life’s New Index Annuity Offers Multiple Income Options

Posted on December 1, 2009 by Editor Test -

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

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

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

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

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

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

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

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

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.

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