IssueM Articles
“If you are in the Red Zone, then you must export all of the risk to an insurance company,” writes Jim Otar in Chapter 44 of Unveiling the Retirement Myth. “For secure lifelong income, all your savings must be allocated to life annuities. You will need to cut back your expenses, because even if you use all your savings to buy a life annuity, the payments will be lower than the withdrawal rate that you were hoping for. The most effective remedy is to delay retirement.”
When Bank of America acquired Merrill Lynch in the fever of the financial crisis, BoA CEO Ken Lewis was like the proverbial dog that finally caught the car it was chasing. Lewis got the wirehouse he yenned for, but lost his job in the aftermath.
Lewis’ chair hasn’t been refilled, but life has settled enough at the firm for it to exploit the merger’s synergies. For instance, it has re-launched Merrill’s 2006 My Retirement Paycheck program under the trademark My Retirement Income.
“This is an evolution of My Retirement Paycheck,” Aimee DeCamillo, head of Personal Retirement Solutions for Merrill Lynch Global Wealth Management told RIJ. “That was one of our initial forays” in this area.
The program will connect 15,000 financial advisors, supported by 800 retirement specialists, with Bank of America’s retail banking customers through a network of 6,100 offices and 18,000 ATM machines as well as online and mobile banking.
“Merrill Lynch brought a leadership position in retirement, and Bank of America has a relationship with one out of every two households in an America,” DeCamillo said. [Dan McNamara, who had led retirement initiatives at Bank of America, is no longer with the company, DeCamillo said. Two months ago, Andy Sieg was recruited from Citi to run Bank of America-Merrill Lynch Retirement Services. Sieg was at Merrill Lynch before moving to Citi.]
The new plan is “a comprehensive income plan created for the client. It asks, ‘What does next 12 months look like for you’ and looks at distinct pools of assets in the context of managing four primary risks-the traditional retirement risk components.”
The assets go into “periodic, distinct buckets geared to help take the emotion out of investing. For instance, there’s a long-term bucket that protects against inflation and longevity risk. Or, it can be useful for the high net worth client who wants to set aside legacy assets,” she said.
“If an insurance product is suitable for the client and it complements the clients long-term plan, then an annuity can be included. But the [income solution] could be laddered bonds or CDs,” DeCamillo said.
The new program “is available to all our advisors, but there are always advisors on the leading edge and we’ve spent a lot of time with our top tier advisors,” she added. “There’s no fee for the service itself. It’s available through the regular retail relationships. We soft launched the product internally. We’ve created a whole host of seminars and training programs.”
Here’s how Merrill Lynch described My Retirement Paycheck three years ago: It “can track your income and spending, while frequently updating your portfolio’s value. They’ll also warn you if any of these deviate from your financial plan. They work by routing all your income — Social Security and pension checks, as well as interest and dividend income — into a single account held at the firm. Any money you spend should also be withdrawn from this single account.”
Here’s how BofA describes the new program:
Merrill Lynch Global Wealth Management has launched My Retirement IncomeTM, a feature within the Merrill Lynch Retirement Income Service that connects customized retirement income planning with the Bank of America retail banking network.
My Retirement Income allows clients nearing or in retirement to automatically transfer funds from a consolidated Merrill Lynch cash management account into a Bank of America deposit account on a periodic basis for simplified retirement income distribution and management.
Retirement income transferred into a Bank of America deposit account can be accessed through the nation’s largest retail banking network, which includes more than 6,000 retail banking offices, more than 18,000 ATMs, mobile banking, and online banking.
Merrill Lynch Retirement Income Service is a comprehensive retirement income management solution that:
Also introduced today is the Merrill Lynch Retirement Income Framework, a proprietary retirement income planning and investment approach enabling Merrill Lynch advisors to advise clients on retirement income strategies, taking into account a client’s individual risk tolerance, retirement consumption needs, and appropriate asset allocation.
The approach was designed to better enable clients to meet short-term consumption needs, optimize long-term investment opportunities, and marshal excess savings to maximize the value of their legacies and intergenerational transfer of wealth. Merrill Lynch Financial Advisors have access to this new framework to complement and evolve their existing strategies when working with clients.
The foundation of the new Merrill Lynch Retirement Income Framework is a segmented investment approach best suited for clients nearing and in retirement that divides assets into three distinct portfolios: Consumption Funding (short-term savings and investments), Longevity & Income Replacement (intermediate-term investing), and Wealth Structuring (long-term investing).
The investment framework also takes into consideration and is designed to help mitigate common risks associated with retirement income plans, including longevity, inflation, asset allocation, healthcare and planning risks.
© 2009 RIJ Publishing. All rights reserved.
I asked Josephine Lin, my tour-guide for a sightseeing trip through Taiwan’s spectacular Taroko Gorge, how she intended to pay for her retirement. She hesitated only a moment before sharing her life’s salient financial and personal details.
“I used to be a rich woman, with a house and a trading company,” the sturdy 51-year-old explained as we motored up and down the Gorge, a lush chasm carved through marble by a turquoise river. “Then I married a man who was handsome and tall” but unreliable.
He didn’t have the right “attitude” for business, she said, and squandered about half a million U.S. dollars, throwing good money after bad on a doomed enterprise. A personal financial tsunami followed and the couple lost everything.
More troubles followed. Her import-export business failed when customers and suppliers began trading direct over the Internet. She was forced to use her lump-sum state pension, equal to a month’s salary for each of the 25 years she contributed to it, to repay relatives who’d lent her money.
Four years ago, single again, Ms. Lin left teeming Taipei to live with her parents in Hua Lien, a banana-growing, stone-cutting city of 100,000 on Taiwan’s Pacific Coast. She eventually reinvented herself and turned her life around—but I’ll come back to that later in this story.
27% savings rate
You might still think of Taiwan as a crowded island of cheap factories off the coast of China, instead of the beautiful, subtropical, high-tech place that it is. You might also imagine that the Taiwanese don’t have much in common with Americans regarding retirement.
But like Ms. Lin, who speaks fluent English and has traveled widely, Taiwanese Boomers often arrive at retirement by paths as steep and circuitous as many American Boomers do. And a look at retirement financing in Taiwan can offer some useful perspective on our own predicament.
A week’s visit obviously wasn’t enough for me to fully understand the retirement situation in Taiwan. But meetings with university professors, local managers from Prudential Financial and Fitch Ratings, and government officials—including pro-business President Ma Ying-jeou—provided a lot of detail.
During a visit to National Chengchi University in the mountains near Taipei, for instance, I heard professor Jennifer L. Wang of the Department of Risk Management and Insurance give a PowerPoint presentation called “Retirement Strategy for an Aging Population.”
As a country, the Taiwanese have good reason to worry about their collective ability to finance retirement. Over the next couple of decades, women’s life expectancy at birth is expected to rise to 85.6 years. The ratio of those over age 65 to those 15 to 64 years old will jump to 34% from 13.5%. At the same time, women are bearing an average of only 1.14 children.
The country’s pension system, like ours, has several moving parts. For government and university employees, a lifetime of low pay is redeemed by a relatively generous pension. Indeed, older Taiwanese public employees still earn a state-guaranteed 18% on their lump-sum payouts, no matter how low the prevailing rates go. Some workers in the private sector and public sector also receive a defined benefit pension through their job.
For other workers, since 1950 there’s been a pay-as-you-go Social Security-type lump-sum pension that replaces as little as 15% of income in retirement, according to one source. To supplement it, the government added a national defined contribution plan in 2005. It’s funded by employer contributions (6% of pay) and employee contributions (up to 6%), but few workers contribute to it. Workers don’t manage their own accounts; the funds are managed—poorly and opaquely, some say—by the government.
In 2008, the government created a National Annuity Pension Plan with an annuity payout option that covers the self-employed and those not enrolled in other public plans. There are also $180-a-month stipends for retired farmers and supplemental $90-a-month checks for certain of the elderly.
The Taiwanese also save a lot in personal accounts. On average, they put aside 27% of their income despite a dearth of tax incentives to do so. Most of the savings goes into bank accounts or in fixed annuities and certificates of deposit. The wealthy traditionally park their savings overseas to elude estate taxes, but a recent inheritance tax cut to 10% from 50% has drawn some of that money back to Taiwan—boosting housing and equity prices.
Prudential sees opportunity
Attracted by Taiwan’s wealth—it has a per capita GDP of $16,500 and $320 billion in U.S. Treasuries in reserve—and relatively open market, many overseas financial firms have set up shop here. Thirty-nine firms have established local entities called Securities Investment Trust Enterprises (SITEs) and offer 509 offshore mutual funds currently worth about NT$1.94 trillion or $58 billion.
One of those SITEs belongs to Prudential Financial, which entered Taiwan by buying Masterlink in October 2000. In a presentation at the Caesar Park Hotel on XhongXiao East Rd., Patricia Tsai, CEO of Prudential Financial’s SITE, explained that her firm manages $3.08 billion here, divided among 26 equity (domestic and international) and fixed income funds.
The retirement market offers at least two opportunities for Prudential and competitors like Polaris and JPMorgan. First, Taiwan’s state pensions are loosening their investment rules. In 2000, they outsourced none of their money to outside managers. But in 2008, desperate for better returns, they outsourced 30% of it. That money is up for grabs.
Second, a 2007 survey by mutual fund providers showed that participants in the state defined contribution plan would like the option to invest in mutual funds rather than keep all of their money in the state-managed fund, which guarantees only a two percent return. Firms like Prudential want to help them manage their own money, 401(k) style.
Pensions as political footballs
Before that can happen, however, legislative changes will have to occur. Retirement finance here, as everywhere, has complex political ramifications. Promises of higher pension payouts and even outright payments have long played a role in local election campaigns in Taiwan, according to Lin Wan-I, a sociologist at National Taiwan University.
Today, because the government chooses investments for the state pension funds and awards contracts for managing part of the money, fund management is vulnerable to political manipulation, said Mr. Lin, a rice farmer’s son who was a government official in the recent Democratic Progressive Party (DPP) administration.
(The DPP held Taiwan’s presidency from 2000 to 2008 before losing it to the Kuomintang (KMT). The KMT had ruled the country since 1949, as a dictatorship until 1988 and since then as a democratically-elected government.)
Under the DPP, Lin said, he helped design a national long-term care insurance program and worked to rationalize the country’s fragmented old age pension system. In a conversation with RIJ, he was critical of the KMT, which he said used unrealistic promises of high pension benefits and low pension-related taxes to help win the presidency in 2008.
“Every day, people pay less, but get higher benefits,” Lin said. He also charged that, under President Ma, the government has begun collecting a national long-term care insurance tax but has neglected Lin’s plan to create an infrastructure to deliver nursing home care to Taiwan’s elderly.
And while the state’s defined contribution pension fund lost billions in the 2008 financial crisis, the fund is not run transparently. Reports are issued, but only infrequently, he said.
“We don’t know how the government invests that money. It’s very difficult to understand where the money went. I’m a social insurance expert but I still don’t know much about it.” The state pension is on track to run out of money in 17 years, he said. When asked who would make up the shortfall for Taiwan’s elderly, he smiled, pointed skyward and said, “God.”
Peaks and valleys
The politicians in Taipei have had mixed success coping with the country’s pension problems, but Josephine Lin has made a lot of headway in her personal quest to ensure a secure old age. In the U.S., we hear a lot of talk about how retirees may have to embark on second careers; Ms. Lin has been there and done that.
Not long after moving back to her hometown of Hua Lien in 2005, Ms. Lin was chatting to a friend about what to do next. The friend said, in effect, “You speak English. You love to talk. We live a half-hour from one of the most famous natural wonders in the world. You ought to become a tour guide.”
So she did. She joined the Tourist Guide Association and hired herself out on a contract basis to one of Taiwan’s major tour group management firms. She became a self-taught expert on the volcanic forces that slowly fused and lifted Pacific Ocean sediment into marble mountains 10,000 feet high, and the typhoon-driven rains that, over the millennia, cleft them and created Taroko Gorge.
Almost every day, she and her driver shepherd groups of Western, Mainland Chinese, and Southeast Asian tourists in a VW Caravelle minibus up and down the 19-kilometer canyon, pointing out the shrine to the fallen construction workers, the killer bee nests and the seasonal waterfalls that pour spigot-like from the near-vertical hillsides.
An independent contractor, she earns a decent wage and lots of tips—and perhaps a revenue stream from the owners of the jade shops to which she steers tourists after their trip to the Gorge. She’s still paying down old credit card debt, but after a career with as many peaks and valley as the mountains that surround her, she’s pleased to say that life is good again.
© 2009 RIJ Publishing. All rights reserved.
“Progressive” is not a word typically associated with the annuity industry’s online efforts. The annuity account opening process continues to be arduous and efforts to fully automate and streamline the online process have stalled. Additionally, annuity client and advisor websites lag behind other segments of the financial services industry, such as banking and brokerage, in terms of online account management and client servicing functionalities.
While some of these shortcomings can be attributed to stringent regulatory policies, much of it also has to do with the average age of annuity customers. Annuity contract holders are generally older than most investors, a result of the products’ retirement-focused payout structure. The recommended age to purchase a variable annuity is 55 and recent surveys show the average age of annuity owners is currently 70, up from 66 in 2005.
This brings us to annuity firms’ reluctance to implement social media capabilities on their consumer and advisor websites. A look at the average age of users shows why annuity providers may still be hesitant to get on board: recent surveys conducted by HitWise have found that 59% of the users on social networking sites are between the ages of 18-34 — not exactly the target audience for annuity firms. While the number of users 55 or older has increased by 77% over the last year, this group still accounts for only 5% of the total user base. Moreover, the main draw for many 55+ users surveyed was reconnecting with old friends and staying in touch with family.
Despite the apparent age and lifestyle discrepancies between social media users and annuity investors, a few firms have introduced social media features to clients and prospective investors with varying degrees of success.
Over the last two years, AXA Equitable and TIAA-CREF have both taken a stab at customer-facing social media projects. Among the firms we cover, TIAA-CREF has been the most active and most successful to date. The firm recently launched the final version of myretirement.org, after first making a beta version available to select participants in February 2007.
Myretirement.org offers message boards that allow TIAA-CREF clients to discuss a broad range of financial and lifestyle topics, ranging from investment strategies to travel and leisure. Users create custom profiles with personal images and are able to view other member profiles. Myretirement.org also lets members connect directly via friend requests, a popular feature borrowed from larger social networking sites.
MyRetirement.org Homepage
AXA Equitable introduced MyRetirementShop.com in July 2008. The sitelet combined investment education content and lifestyle resources (concierge service for purchasing event tickets, golf reservations, etc.) with open forums promoting discussion among community members on a variety of topics.
With nearly 10,000 members and several hundred posts, TIAA-CREF’s myretirement.org seems to have established a solid footing among TIAA-CREF plan participants. Conversely, while AXA’s MyRetirementShop.com remains publicly available, the open forums (the lone social networking aspect of the site) were removed in October 2008 due to a lack of participation.
The relative success of TIAA-CREF’s social network shows that annuity providers can do well in the social media space. But why did TIAA-CREF succeed while AXA languished?
The answer may lie in the phased roll-out and development of the TIAA site, the firm’s philosophy governing the end-user experience, and the unique nature of the firm’s customer base. With Myretirement.org, TIAA-CREF created an open social networking site that fostered a truly collegial atmosphere. By allowing members to communicate directly and building the site around user-driven message board content, TIAA ultimately allows the end-user to determine their experience. AXA’s MyRetirementShop, on the other hand, highlighted content provided largely by the firm, making the open forums feel secondary. The site also imposed significant barriers to entry, including a separate registration process.
TIAA-CREF had another advantage in that the firm’s clients tend to be drawn from certain professional backgrounds, specifically the academic, medical, research and cultural fields, i.e., those that “serve the greater good.” This shared experience provides a strong foundation for an online community.
TIAA-CREF’s decision to initially release a beta version of myretirement.org for select clients also contributed significantly to its success. During the roughly two plus years of the beta release, the firm was able to use feedback to improve site features and work out the kinks, while at the same time seeding the community with active users. Thus, when the final version went live, the site was already chock-full of user-generated content. AXA, on the other hand, launched MyRetirementShop.com without seeding the community, meaning that when users first accessed the site, they found an online ghost town.
Thus far, annuity firms’ general hesitancy to enter the realm of social media has been justified — the current crop of annuity clients has not taken to social networks in any truly meaningful way. But this will not be the case forever. After all, on networks like Facebook, the fastest growing demographic is users 35 years old and older.
© 2009 Corporate Insight, Inc. All rights reserved.
Industry Views are special reports that are sponsored and independent from RIJ’s editorial content.
Which Insurance and Annuity Providers Do Retirement-Oriented Registered Reps Like Best?
Source: Brightwork Partners, LLC
Based on phone interviews of 338 retail advisors, December 1, 2008 to January 8, 2009.
TAIPEI—Jack Wu teaches economics at the National Chengchi University in Taiwan’s capital, and he’s had first-hand experience with the country’s evolving pension system. As a professor at a public university, for instance, the 43-year-old bachelor is covered by the public employees pension system.
The pension isn’t as generous as it used to be—those hired since 1995 don’t earn the guaranteed 18% on savings in retirement that some older civil servants still enjoy—so Wu has mutual funds with AEGON and ING and contributes $450 a month to a university-sponsored deferred income annuity from Taiwan Life.
“The 18% policy was said to have created a great burden on those outside the public sector, who thought it was unfair,” Wu told RIJ over a lunch of spicy chicken and noodles yesterday at the Sheraton Taipei on Zhong Xiao East Rd.
Wu, who has a Ph.D. from the University of Michigan, is also a first-hand participant in Taiwan’s response to the fact that, like the United States, it will soon have too few workers supporting too many retirees. He’s part of the international Aging Society 2030 project, serving on a team that is helping boost financial literacy in rural parts of this subtropical New Jersey-sized island nation of about 23 million.
“The savings rate is high in Taiwan, but only five or six percent of the population invests in securities,” he said. “The rest put their savings in the bank. That’s why I and two other colleagues from the Department of Social Work and Insurance are working on a project to educate the elderly people to make investments, prepare for their retirement, and not rely only on the social security system.”
New defined contribution plan
East Asian countries like Japan and Taiwan are faced with a demographic double whammy: their longevity is among the world’s highest and their birth rate is low. In Taiwan, married couples are producing only about 1.1 child each. And even as they lose manufacturing jobs to China, only 120 miles away across the Taiwan Strait, the Taiwanese are trying to establish a stronger social insurance safety net, including national health insurance and pension reforms.
“We had a new labor pension scheme launched in 2005,” Wu said. “In the past, if you worked in the private sector, your employer could deposit some money for your pension, but if you didn’t work there until retirement you lost it. Now we have the new individual account.
“Your employer deposits six percent, which is mandatory, and you can add another six percent voluntarily. The contributions can only receive about three percent interest, a time deposit, so we haven’t really had self-management. They collect the money, and invest in stocks and bonds, and give you three percent.
“About 30% of the Taiwanese are self-employed and in the past have been outside the official pension system, but we have a new national pension in October 2008 that covers them. They must contribute 675 Taiwanese dollars a month (about $20) and can receive a retirement benefit of about 7,000 Taiwan dollars a month (about $210). That’s only enough for basic needs. For low-income people the government subsidizes 100% of the contributions,” he said.
But not everyone likes the new plan. “Lots of people are refusing to pay into national pension for their children or spouses, because they think the benefit isn’t high enough and because they’re not sure whether the assistance will be there when they retire,” Wu told RIJ.
“Only about 60% of the people who are supposed to be covered by national pension are paying, and they represent about 20% of the whole population of Taiwan. The system is still trying to work and the government is pushing more people to participate in the pension,” he said.
“Most people in the rural areas don’t even know how to contribute to the national pension, even though the government has sponsored commercials about it. People in the rural areas think they can rely on themselves. We also have the Old Age Farmers Allowance. Farmers can get 6000 Taiwanese dollars a month, and they don’t have to contribute. Elderly people can also get about 3000 Taiwanese dollars a month, or about $180, without contributing anything.”
Reverse mortgages
To help Taiwanese families finance retirement, Wu said, the government has promoted reverse mortgages, financed through banks. But, if successful, such a program could clash with cultural norms. “In traditional Chinese society, the property is important, and parents would leave property to children,” he said. “But if they use the reverse mortgages, there might be issues.”
Rather than being able to look forward to selling their homes and living with their children in retirement, urban Taiwanese today are more likely to have their children and even grandchildren living with them, Wu said. That’s a reflection of declining wages among younger people. “In the cities in the 1980s and 1990s, the younger generation wanted to move out, but more and more people are living with parents again.”
Driving much of the change in Taiwan, as in Japan, is the shrinking number of young people relative to the elderly. Children 14 and younger account for only about one in five Taiwanese. In 2007, there were 7.2 Taiwanese workers for every retiree. By 2026, there will be only 3.2, according to a research paper, “Financial Sustainability of Taiwan’s Social Security System,” Wu published last year.
“It’s rare for a Taiwanese couple to have two children. A lot of Taiwanese women are more educated, and postpone marriage. In the economics department of my university, of the five or six female faculty members, only two are married, and they don’t have children.”
“Less-educated Taiwanese men sometimes have difficulty finding Taiwanese wives and often take brides from Southeast Asia,” he added. “Today, one in six Taiwanese births are now to such brides. Most babies in Taiwan are born to people who are not wealthy. In the rural areas people tend to have more babies. People who live in urban areas often feel that they cannot afford to have children.”
© 2009 RIJ Publishing. All rights reserved.
In Chapter 43 of “Unveiling the Retirement Myth,” Otar explains his approach to helping clients in the “Gray Zone,” who don’t have enough assets to self-insure against the major retirement risks, but not so little savings that they must transfer all or most of their risk to insurance companies by buying life annuities.
Administrative inefficiency, unnecessary treatment, medical errors and fraud cost the U.S. health care system $600 billion to $850 billion each year, according to a Thomson Reuters review of published research and analyses of proprietary healthcare data.
Unnecessary care, some of it associated with “defensive medicine,” accounted for 40% of the wasted expenditures, the news agency found. Fraud accounted for almost 20%.
“An estimated $700 billion is wasted annually. That’s one-third of the nation’s healthcare bill,” said Robert Kelley, vice president of healthcare analytics at Thomson Reuters. “By attacking waste, healthcare costs can be reduced without adversely affecting the quality of care or access to care.”
The study identified these sources of avoidable spending:
Unnecessary Care (40% of healthcare waste): Treatments such as the over-use of antibiotics and the use of diagnostic lab tests to protect against malpractice exposure cost $250 billion to $325 billion each year.
Fraud (19% of healthcare waste): Phony Medicare claims, kickbacks for referrals for unnecessary services and other healthcare fraud cost $125 billion to $175 billion each year.
Administrative Inefficiency (17% of healthcare waste): Redundant paperwork in the U.S. healthcare system accounts for $100 billion to $150 billion in spending annually.
Healthcare Provider Errors (12% of healthcare waste): Medical mistakes cost $75 billion to $100 billion each year.
Preventable Conditions (6% of healthcare waste): Hospitalizations for conditions like uncontrolled diabetes, which could be managed on an outpatient basis, cost $25 billion to $50 billion each year.
Lack of Care Coordination (6% of healthcare waste): Inefficient communication between providers leads to duplication of tests and inappropriate treatments that cost $25 billion to $50 billion annually.
© 2009 RIJ Publishing. All rights reserved.
After the VA arms race ended in armageddon last winter, the big annuity manufacturers tasked their actuaries and product developers to engineer a new breed of income products that wouldn’t backfire like GLWBs.
Life insurance companies have largely decided that stocks are too risky to guarantee, despite the sentiments of Jeremy Siegel’s famous book, “Stocks for the Long Run.”
One of the newest designs is Hartford Life’s Personal Retirement Manager, which the Simsbury, CT insurer calls “a way to combine long-term investment growth and guaranteed lifetime income potential in a single, user-friendly, tax-deferred retirement planning vehicle.”
The Personal Retirement Manager is like Neapolitan ice cream: it’s three flavors in one. Contract owners can allocate their assets bucket-style among mutual funds in a variable account, a fixed return account, and a “Personal Pension Account” or PPA that’s actually a deferred income annuity.
There’s also a process baked into the product. It lets retirees gradually transfer money ($10,000 initial minimum) whenever appropriate from their variable and fixed accounts into the PPA—perhaps between ages 60 and 70—before turning on lifetime income.
“For years, everybody knew that if you wanted income, the SPIA was the most efficient way to deliver it,” said John Diehl, CFP, senior vice president with The Hartford’s Investment & Retirement Division. “So we looked at the basic concept of the SPIA, and we looked at the reasons those products don’t sell, including the fact that the advisor loses track of the assets. We thought that if we offset that, we could get a more successful product than a SPIA and a cheaper, more effective product than a GLWB.”
More appealing
From a marketing perspective, the Personal Retirement Manager is meant to disarm all the usual client objections to income annuities by giving them almost complete access to their money. The unspent income stream can even be refunded. The product is also vastly less risky to the issuer than a GLWB.
“We tried to take away all the negatives that get in the way of the annuity decision,” Diehl said. “And by packaging investment and income in one product, we let people bite off as much as they can chew at any one time. We said, ‘Let’s make income delivery appealing.’”
You can’t make an income annuity more liquid without hurting the payout rate, however, and the income stream from the PPA is lower than the rate from a fixed life-only income annuity. It’s hard to make apples-to-apples comparisons, however.
For instance, according to Diehl, a 60-year-old man would pay $100,000 today to lock in a $9,348-a-year commutable income from the PPA starting at age 70. For comparison, Vanguard would charge a 70-year-old man $110,355 for a life-only immediate income annuity (or about $126,000 for a cash refund income annuity) paying $9,348 a year starting today. Bear in mind that the PPA’s $100,000 would grow at a guaranteed annual rate of three percent during the 10-year waiting period.
As envisioned by Hartford Life, the contract owner would transfer money in steps from the variable account and/or the fixed account to the PPA, until the PPA has enough money in it to buy a life annuity that pays a suitable guaranteed rate of income at a pre-selected start date.
“You can imagine a scenario where people are dollar cost averaging into an income stream,” Diehl said. “With SPIAs (single-premium immediate annuities), you’d have to add contract after contract in a ladder. He could in theory turn on part of the PPA. If he had $150,000 in PPA, he could turn on 25% and let the rest ride.”
Contract owners can lock in an annuity payout rate at the time of purchase by setting an income date. But, for flexibility, the contract owner can decide to switch on income up to three years before or after the pre-selected start date and receive the same payout rate, adjusted for age.
“It’s like Social Security, where you can claim a different level of benefits over a range of years,” Diehl said. If you say you want to retire at 67, we’ll be able to quote you an income level if you retire anytime between age 64 and 70. If you go outside the window, you’ll have to take a payout based on current interest rates.”
To resolve the usual objections to income annuities—their irrevocability, lack of liquidity, and lack of a death benefit—Hartford Life has added liquidity back in. The owner can access the money in the variable account at any time; he can also access the fixed account, subject to a market value adjustment if interest rates have change.
When the owner dies, his beneficiaries can receive not just the assets in the variable and fixed accounts, but also the unspent PPA contributions, grown at a compounded rate of (currently) three percent per year.
The product comes in four share classes, A, B, C, and I. The A share has a maximum front-end load of 5.5% and ongoing insurance costs of 50 basis points a year. The B shares have ongoing costs of 50 basis points, including M&E and administrative charges, and an eight-year CDSC period with an initial surrender fee of seven percent. The C shares cost 135 basis points a year. The I shares, designed for fee-based advisors, cost only 30 basis points a year.
Total annual fund operating expenses for all classes range from 44 basis points to 237 basis points. Fund providers include AIM, Alliance Bernstein, Fidelity, Franklin Templeton, American, Hartford, MFS, Lord Abbett, Putnam and Wellington Management.
The product is designed to be friendly to fee-based advisors. Before the client switches on income, the advisor can earn management fees on the assets in all three accounts—the variable, fixed, and the PPA.
Even after income begins, in contrast to a SPIA, the advisor can continue to earn a management fee on the unpaid balance of the PPA. “So for the advisor who says, ‘I’m still providing services, but the asset is gone from the books,’ we’ve made it attractive,” Diehl said.
© 2009 RIJ Publishing. All rights reserved.
With consumer prices down over the past year, monthly Social Security and Supplemental Security Income benefits for more than 57 million Americans will not automatically increase in 2010. This will be the first year without an automatic Cost-of-Living Adjustment (COLA) since they went into effect in 1975.
“Social Security is doing its job helping Americans maintain their standard of living,” Michael J. Astrue, Commissioner of Social Security said. “Last year when consumer prices spiked, largely as a result of higher gas prices, beneficiaries received a 5.8% COLA, the largest increase since 1982. This year, in light of the human need, we need to support President Obama’s call for us to make another $250 recovery payment for 57 million Americans.”
This year there was no increase in the Bureau of Labor Statistics Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of 2008 to the third quarter of 2009. The Social Security Act provides that benefits increase automatically each year if there is an increase in the CPI-W from the third quarter of the last year to the third quarter of the current year.
In addition, because there was no increase in the CPI-W this year, under the law the starting point for determinations regarding a possible 2011 COLA will remain the third quarter of 2008.
Since there is no COLA, the statute prohibits an increase in the maximum amount of earnings subject to the Social Security tax as well as the retirement earnings test exempt amounts. These amounts will remain unchanged in 2010. The attached fact sheet provides more information on 2010 Social Security changes.
The Department of Health and Human Services has not yet announced if there will be any Medicare premium changes for 2010. Should there be an increase in the Medicare Part B premium, the law contains a “hold harmless” provision that protects about 93% of Social Security beneficiaries from paying a higher Part B premium, in order to avoid reducing their net Social Security benefit.
© 2009 RIJ Publishing. All rights reserved.
Rep. Gwen Moore (D-WI) and Rep. Erik Paulsen (R-MN) successfully added language to the bill that will exclude life insurance and annuities in the final committee legislation, the Insured Retirement Institute reported last week.
By clarifying the definition of the “business of insurance,” the Committee ensured that clear that Consumer Financial Protection Agency will not have jurisdiction over life insurance and annuities.
Annuity products are currently and thoroughly regulated by the Security and Exchange Commission (SEC), FINRA and 50 state regulators, receiving oversight and monitoring. IRI is on record in support of enhanced consumer protections, strongly advocating for transparency, suitable sales and education and training within the industry.
“Today’s action brings us one step closer to protecting consumers while allowing the industry to provide the best products in the most timely fashion,” said Cathy Weatherford, President and CEO of IRI.
This past summer, in testimony provided to the House Financial Services Committee addressing the CFPA and the need to increase consumer protection, IRI testified that given the current regulatory protections, adding yet another layer of regulation to the insurance industry is unnecessary.
© 2009 RIJ Publishing. All rights reserved.
At the Retirement USA conference in Washington D.C. last week, U.S. Secretary of Labor Hilda Solis argued that health insurance reform is essential for a financially secure retirement, RTT News reported.
“For retirees and their families, employer-sponsored health care is rapidly disappearing,” Solis said. “And, outside the unionized and public employee settings, individuals retiring before Medicare-eligibility age are all too often left on their own to find coverage. And what they can find is often too limited and too expensive.
“Even families with health insurance are getting crushed by the rising costs,” she added. “My own father, who had a stroke last year, has seen his prescription drug costs skyrocket. Every family has a story. We can and we must turn this around.”
She also announced that the Labor Department will soon ask retirement plan providers to submit ideas for encouraging more employers to offer guaranteed income options to 401(k) plan participants.
“We also hope to educate participants on the value of selecting a lifetime income stream or annuity product when they retire, so that they will not outlive their retirement benefits,” Solis said. “It’s time to think of new ways to encourage employers to provide pensions for their workers and new types of pensions that do not put the full investment responsibility on workers.”
© 2009 RIJ Publishing. All rights reserved.
The Federal Reserve announced a plan last week to have federal examiners review pay packages at the nation’s largest banks. But the periodic reviews and any discussions between regulators and the companies over pay issues would be confidential.
Rather than impose caps on pay or prohibit multi-million dollar pay packages, the Fed’s plan would try to eliminate compensation packages that encourage risky business practices and a focus on short-term term performance.
“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability, Federal Reserve chairman Ben S. Bernanke said.
“The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system.”
The Fed also revealed details of its decision to cut in half the pay of the highest earning executives at Citigroup, Bank of America, the American International Group, General Motors, Chrysler and the financing arms of the two automakers, all of which received federal bailouts.
The Fed’s plan, which will be subject to a 30-day comment period, will create a two-tier system of supervising pay, using one approach for the 28 biggest bank holding companies and another for smaller banks.
Bank holding companies like JPMorgan Chase and Goldman Sachs would have to present their compensation plans to bank regulators, who could demand changes in the pay packages. The plan would apply to senior executives as well as to traders and loan officers.
In other legislative news, the House Financial Services Committee voted on Thursday to create an agency to protect consumers from predatory lending, deceptive credit card terms and other abuses.
But it will be weeks before both houses of Congress can act on a final bill to regulate the financial services industry, according to Rep. Barney Frank, D-MA, who heads the Financial Services Committee.
A measure to regulate derivatives was passed by the House Agriculture Committee last Thursday, and the Financial Services Committee approved a similar measure the prior week.
© 2009 RIJ Publishing. All rights reserved.
The BISA-Singer’s Bank Holding Company (BHC) Annuity Index fell 15% in the second quarter of 2009, the Bank Insurance and Securities Association announced this week.
The Index is an average based on quarterly annuity (both fixed and variable) revenues (not sales) at 10 large bank holding companies as reported to the Federal Reserve Board. The index fell from125 in the first quarter to 106 in the second quarter.
Aggregate annuity revenue at the 10 bank companies covered declined 11%—from $330.76 million to $293.08 million. BISA and Singer’s Annuity & Funds Report produce the index jointly.
During the same period, sales (not revenues) of the subset of fixed annuities across all depository institutions were an estimated $8.7 billion, according to the Beacon Research Fixed Annuity Premium Study. Its findings are based on the results of insurance companies representing an estimated 86% of the U.S. market.
This was a decrease of 20% from the prior quarter and one percent compared to second quarter 2008. The change was primarily due to falling fixed annuity credited rates and a declining rate advantage over bank certificates of deposit, said Beacon.
The quarter was characterized by substantial declines in annuity production at the nation’s largest BHCs. “This marks the largest slump in the Index since we began tracking annuity revenues in the first quarter of 2007,” said Andrew Singer, editor of the Index. “In the second quarter, all ten bank companies experienced annuity declines compared with the previous quarter.”
© 2009 RIJ Publishing. All rights reserved.
Americans without health insurance are one major illness away from financial catastrophe, according to a new study by the Kellogg School of Management at Northwestern University.
The study, “Does Major Illness Cause Financial Catastrophe?”, suggests that uninsured individuals near retirement age who experience heart disease, cancer or a stroke, can lose up to half of their household assets to medical bills.
The research will be published in an upcoming issue of Health Services Research Journal. The research was conducted by professors David Dranove and Andrew Sfekas at the Kellogg School of Management at Northwestern University, and Keziah Cook, Ph.D. candidate in economics at Northwestern University.
Dranove and his co-authors discovered that the assets of uninsured households declined between 30 and 50 percent among those ages 51 to 64 who experienced a major illness. Similar individuals with private health insurance did not experience a financial loss.
“Lack of insurance is at the heart of the healthcare debate with 4.2 million uninsured Americans over 55. Our research provides compelling evidence of the financial damage for these families,” said Dranove. “Despite a person’s income, the uninsured face the risk of losing their retirement savings.”
The researchers focused on households with baseline assets between $1,000 and $200,000 and who reported one of six major illnesses. The illnesses included diabetes, cancer, lung disease, heart problems, stroke, and emotional or psychiatric problems.
© 2009 RIJ Publishing. All rights reserved.
Challenger Financial Services, Australia’s biggest seller of annuities, has launched a “unit-ised annuity product” specifically designed for inclusion on investment platforms, the Investor Daily in Sydney reported.
The Challenger Guaranteed Income Fund (GIF) aims to provide investors with a monthly income stream and a return on capital at a specified maturity date. It will invest in Challenger Life annuities with different units available to be purchased with different maturity terms attached. Investment terms on offer are for three, five and seven years.
“The creation of an annuity investment option required significant product development because unlike most other platform products, annuities are flexible and bespoke policies sold to individuals. However, the high level of demand from financial advisers and their clients warranted the investment and we’re very pleased with the end result,” Challenger Life chief executive Richard Howes said.
The new product has already been included on the BT [Financial Group] Wrap platform and is available immediately.
“With BT Wrap being first to market with the GIF, the benefits of annuities are more accessible than ever before. The ‘original’ retirement product is now widely available to investors seeking access to guaranteed income streams,” Howes said.
The motivation for its inclusion on BT Wrap has been adviser demand for products that address longevity risk and market risk.
“There are significant reasons advisers are seeking more options for the fixed income allocation of their client’s retirement income portfolios: the wake of the GFC (global financial crisis), generally cautious investor sentiment, government tax reviews and the changing needs of the growing retiree customer group,” head of BT Wrap Chris Freeman said.
© 2009 RIJ Publishing. All rights reserved.
Financial services companies are facing the risk that the retirement of the baby boomers will disrupt existing retirement businesses as retirees move assets from current retirement accounts and into new, income-generating products.
Companies hoping to capture “money in motion” must first address internal issues around operations and products, according to Deloitte’s “Mining the Retirement Income Market” report, released today.
The report reviewed the strengths of insurance companies, mutual fund companies and banks in the competition for Boomer retirement assets, saying:
• “Insurers face a critical decision about whether to unbundle insurance coverage from asset management offerings and how best to achieve this because their ability to assume these risks is a core strategic advantage over players in the other sectors,” said Rebecca Amoroso, head of Deloitte’s U.S. Insurance practice.
• “The largest mutual fund companies in the defined contribution planmarket have the greatest exposure to asset erosion as the baby boom generation retires. But they are also in a potentially good position to capture rollover assets. Still, mutual fund companies will likely need to reposition and broaden their brands for the retirement income market,” said Cary Stier, Deloitte’s U.S. head of Asset Management Services.
• “Because most people view their banks as their primary financial institution, the industry is uniquely positioned to capitalize on its extensive existing customer network and establish a role in planning and managing retirement income programs,” said Jim Reichbach, Deloitte’s U.S. head of Banking and Securities.
In the paper, which is also available at www.deloitte.com/us/insurance. Deloitte offers 10 key actions financial services companies should consider as part of a plan to potentially succeed in the retirement market.
© 2009 RIJ Publishing. All rights reserved.
The Federal Reserve Bank of New York said October 19 that it has been working on a market tool it could use to withdraw cash from the banking system but stressed that it was not about to use it.
The New York Fed, the operational arm of the Federal Reserve, said it had been working during the last year to ensure that “this tool will be ready when and if” the policy-setting Federal Open Market Committee decides to use it.
The tool—reverse repurchase agreements, or reverse repos—would be used to help drain excess reserves from the banks and help to avert the risk of inflation created by the central bank’s emergency bailouts and quantitative easing policies.
“This work is a matter of prudent advance planning by the Federal Reserve, and no inference should be drawn about the timing of monetary policy tightening,” the New York Fed said in a release.
In a reverse repurchase agreement, the Fed sells assets like Treasuries for cash with an agreement to buy them back later at a higher price, thus removing cash from the system.
The focus of the Fed’s recent discussions and tests was to put documentation and systems in place to conduct three-party reverse repos, the New York Fed said. The Fed has been conducting three-party repos with primary dealers since 1999.
In the three-party repo market, the clearing banks JPMorgan Chase and Bank of New York Mellon as intermediaries, which allows for a wider range of instruments to be used in a transaction.
The New York Fed said “it is likely that the Federal Reserve will engage in additional tests in the future,” and that no actual operations have been conducted as part of these tests.
© 2009 RIJ Publishing. All rights reserved.
“One of the perpetual fads in the advisory business is to pursue high net worth clients,” Otar writes. “Keep in mind that what matters most is not the size of assets, but how fast those assets are drained. Being in the green zone is a good indication that the client will likely be a good source of revenue for you, as long as you can create the ‘normal’ index returns and as long as you can maintain his/her trust.”
