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A Center for Financial Literacy (CFL), with first-year funding of $3 million from the U.S. Social Security Administration, will open at Boston College, the College’s Center for Retirement Research announced in a press release yesterday.

The new center, to be led by Center Director Alicia H. Munnell, Program Director Steven Sass, and Creative Director Ronn Campisi, will produce educational materials and programs that help people make reasonable financial decisions throughout their working lives and into retirement.

The Boston College team has extensive experience producing financial literacy materials using print, film, and interactive media. Active partners will include the National Bureau of Economic Research, the Brookings Institution, The College of William and Mary, Innovations for Poverty Action, Financial Engines, Knowledge Networks, and the National Endowment for Financial Education.

The Social Security grant calls for the CFL and its partners, in the first year of a five-year period, to:

• Produce print and Web-based interactive guides to financial issues facing retirees.
• Develop a Web-based interactive program to help older workers choose a target retirement age.
• Field commitment programs to help low- and moderate-income households control their finances.
• Design a plan for a comprehensive “go-to” financial website.
• Review the effectiveness of existing financial literacy programs.
• Create a financial literacy “food pyramid.”
• Evaluate how 401(k) participants use target date funds.

“Given the turbulent economic climate and the shift of financial risk to individuals, people need help,” said Alicia Munnell. “The new Center will provide essential tools to improve decision-making.” She will continue to head the Center for Retirement Research at Boston College, which conducts and disseminates new research on retirement income issues.

© 2009 RIJ Publishing. All rights reserved.

Pacific Life has filed an application with the SEC for a Destinations variable annuity that offers an optional 0.10% increase in the lifetime payout rate for each year the owner delays taking a withdrawal during the first 10 years of the contract, if the owner is over age 59½ at issue.

The contract, which has a maximum front-end load of 5.5% (for initial premiums under $50,000) and 75 basis point M&E fee (or, alternately, an annual 1.75% M&E), also has a loan feature, suggesting that it may be intended for use as an in-plan distribution option for retirement plan participants.

The contract’s age-bands and annual lifetime payout rates begin at 4% for those under age 69, 5% for those ages 70 to 84 and 6% for those age 85 and older. During the accumulation period, there’s also an annual automatic step-up of the guaranteed base to the account balance, if higher, subject to fee increases.

The contract offers a range of living benefit riders with fees ranging from 75 basis points for a guaranteed minimum account balance-type rider to 1.75% for the joint-life version of a guaranteed lifetime withdrawal benefit with a 5% annual credit during the initial 10-year waiting period and a lifetime payout rate of 5% or 6%, depending on the contract owner’s age when income begins.

© 2009 RIJ Publishing. All rights reserved.

Jackson National Life has launched Perspective Rewards, a new variable annuity product that pays a 6% automatic bonus on first-year contributions under $100,000 and 8% on contributions of $100,000 or more.

Rewards is the fourth contract offered within Jackson’s Perspective variable annuities series. Annual fees include a mortality and expense risk fee of 1.65%, a 0.15% administrative fee, and fund management fees ranging from 0.57% to 2.63%. The maximum surrender charge is 7.5% during a nine-year contingent deferred sales charge period.

Living benefits available under the Perspective Rewards contract, and their maximum annual expense ratios, are:

• SafeGuard Max, a Guaranteed Minimum Withdrawal Benefit (GMWB) with a five-year step-up, 0.81%.
  
• AutoGuard5, a 5% GMWB with annual step-up, 1.47%
  
• AutoGuard6, a 6% GMWB with annual step-up, 1.62%
  
• LifeGuard Freedom GMWB, a lifetime GMWB with bonus and annual step-up, 1.50%. (Joint contract, 1.86%)
• LifeGuard Select, a lifetime GMWB with bonus and guaranteed withdrawal balance adjustment, 1.20%. (Joint contract, 1.50%).

© 2009 RIJ Publishing. All rights reserved.

Most employers are resistant to changes in the health care status quo and worry that reform will raise rather than reduce overall costs, according to a new poll by Watson Wyatt.

The poll of 160 employers found that 73% believe health care costs will increase if health care reform legislation is enacted. Even more (86%) think the health care proposals being considered would weaken the role employer-sponsored plans play in providing health care coverage.

Fewer than three in 10 (29%) of employers said they would support a tax on high-income employees with high-cost plans. Fewer than one in five (19%) would support a tax on insurers that provide high-cost plans. Only 11% would support taxing employer-paid health insurance premiums.

The poll found that only 10% of employers would support an “employer mandate” that required them to provide health insurance, but 50% would support a mandate requiring individuals to buy health insurance. Ten percent would support both, and 30% would not support either.

“Escalating health costs have been top of mind for employers for years now, but the reform debate has pushed this issue to a critical point,” said Ted Nussbaum, North America director of group and health care consulting at Watson Wyatt.

“While the national debate centers on options for expanding coverage and ways to generate revenue to fund reform, employers are concerned that health care costs will rise even higher as a result of the new legislation,” he added.

© 2009 RIJ Publishing. All rights reserved.

Investment consultants have become the gatekeepers for asset managers hoping to distribute through a 401(k) platform, especially as plan sponsors demand best-of-breed managers and custom target-date funds, according to the third quarter issue of The Cerulli Edge-Retirement Edition.

This trend toward investment consultants cannot be ignored, the report said, since they now control as 41% of DC assets, with the majority of these assets in large plans over $500 million in assets.

Over three-quarters of consultants said they want asset managers to demonstrate consistent investment performance track record without “surprises.”

“Consultants want stable investment organizations that have a repeatable process, and equally importantly, they want to know when something goes awry,” notes Scott Smith, senior analyst at Cerulli Associates.

Asset managers should develop the role of the portfolio specialist, he added. A good portfolio specialist takes relationship management burdens off of portfolio managers while using their investment knowledge to strengthen the relationship management team. Only 57% of consultants feel direct access to a portfolio manager is very important.

As the DC market increases in size and complexity, asset managers should be prepared for an institutional sale through investment consultants. By understanding how investment consultants operate and effectively meeting their demands, managers can be best poised to take part in custom target-date funds and open-architecture DC platforms.

Other findings from this issue of The Cerulli Edge-Retirement Edition include:

• As plan sponsors try to meet to higher fiduciary standards, they will increasingly turn to investment consultants.
• The best way for asset managers to reach the investment decision makers in a consulting firm is to understand the firm’s business structure and organization.
• The shift of client assets into alternatives and long-duration fixed income will create opportunities for managers with proven track records in these asset classes.

© 2009 RIJ Publishing. All rights reserved.

In response to the failure of the major credit rating agencies to protect the public from flawed securities in recent years, the Securities & Exchange Commission voted on September 17 to adopt or propose measures to require greater disclosure, foster competition, address conflicts of interest, shed light on rating shopping, and promote accountability.

The Commission has proposed or decided on:

• Giving competing credit rating agencies access to the necessary underlying data about structured finance products so they can offer unsolicited ratings.
• Requiring greater disclosure of potential sources of revenue-related conflicts.
  
• Determining the use of “ratings shopping” by requiring issuers to disclose any “preliminary ratings” obtained from other rating agencies.
• Eliminating a current provision that exempts NRSROs from being held liable when their ratings are used in conjunction with a registered offering.
• Changing the Commission’s rules and forms to remove certain references to credit ratings by nationally recognized statistical rating organizations (NRSRO).
• Reopening the public comment period to allow further comment on Commission proposals to eliminate references to NRSRO credit ratings from certain other rules and forms.

In 2006, Congress passed the Credit Rating Agency Reform Act that provided the SEC with authority to impose registration, recordkeeping, and reporting rules on credit rating agencies registered as Nationally Recognized Statistical Rating Organizations (NRSRO). Currently, 10 credit rating agencies are registered with the Commission as NRSROs.

© 2009 RIJ Publishing. All rights reserved.

Since the beginning of the equity rally last March, Americans have regained some of their characteristic optimism. Nor do they intend to seek professional financial advice, according to the latest quarterly edition of The Principal Financial Well-Being Index.

The survey covered 1,147 employees over age 18 at small and mid-sized companies and 558 retirees in all sections of the U.S. Subjects were selected from among those who have agreed to participate in Harris Interactive surveys. The data have been weighted to reflect the broader population.

Anecdotal reports have suggested that most 401(k) participants didn’t touch their accounts during last winter’s financial crisis. Given the steep stock market rally since mid-March 2009, their inertia seems to have served at least some of them well.

One in three participants either said their account balances have recovered to their January 1, 2009 levels or are expected to recover in two to five years, up from 20% in the second quarter. Only 12% said they expected to delay retirement.

Most don’t use advisors

While 44% of retirees said they began planning for retirement more than 10 years before they actually retired, only 17% of current workers surveyed said they’ve created a plan for converting their savings to a retirement income stream. Of those, only 43% have a written plan.

When they do get around to planning, they are unlikely to hire an advisor, the survey showed. Fifty-five percent of retirees and 38 percent of employees said they “do not want any services from a financial professional.”

Less than 10% of either group said their interest in professional advice had risen since the crisis. Fees, lack of trust, inertia, and confidence in their own planning skills were the most common reasons for not seeking out or consulting an advisor.

Retirees seem to have made up their minds about using advisors, while workers are still thinking it over. Asked what best describes how they manage or intend to manage their savings in retirement, 63% of retirees said they would manage on their own and 34% said they had advisors. Among employees, only 17% had advisors. Less than half (43%) said they would manage their own retirement finances; 26% were unsure what they would do.

Survey Results

On overall well-being

• 66% of employees and 60% are concerned about their long-term financial future.
• 35% of all respondents, but only 25% of retirees, say they worry most about not being able to pay for basic necessities.
• 56% of retirees and 59% of employees have reduced spending in the past two months.

On workplace benefits

• 93% of small to medium-sized employers provide include health insurance, 76% provide dental insurance, 68% provide life insurance, 63% provide defined contribution plans, 63% provide free parking and 46% provide disability insurance.
• 23% of employees would most like to see a defined benefit plan added to their benefit package, 13% would like to see profit sharing or bonuses, and 12% would like flexible hours.
• 43% of employees would like better health insurance and 15% would like an improved defined contribution plan. Health insurance (43%) and defined contribution plans (15%) top the list of benefits that employees most wish their company would improve upon.
• 64% of employees are most satisfied with their defined benefit plan, 56% with their disability insurance, 55% with their defined contribution plan and 53% with their life insurance.
• 87% of employees gave health insurance at least an “8” out of 10 rating for importance.

On defined contribution plans

• 81% of employees participated in their employer’s defined contribution plans.
• 24% of plan participants had made a change to their 401(k) plan in the past six months; 11% increased contributions, 8% decreased contributions, 3% have taken out a loan, 3% have stopped contributing and 2% have taken out a hardship withdrawal.
• The most common reasons for changes their saving habits included “pay down debt,” “pay daily expenses,” and “build up savings accounts.”
• 18% of employees say their balance is the same or higher than it was on Jan. 1, 2008, compared with 9% after the first quarter.
• 16% of employees feel it will take less than two years to recover their lost savings, compared with 11% after the first quarter.
• 20% of employees are not sure how long it will take, up from 12% after the first quarter.
• 2% of employees think they will never recover their peak account balance.

On retirement planning

• 50% of employees are not sure when they will retire.
• 12% have delayed their planned retirement date.
• 40% said they would delay retirement by six years or more.
• 83% of employees say they do not have a plan for transitioning their retirement savings into a steady income stream.
• 43% of those who said they have a plan for transitioning from savings to income have an “actual written plan.”
• 44% of retirees said they began to think about managing their spending and investments in retirement more than 10 years before retirement.
• 73% said they would start planning more than 10 years prior to retirement if they could do it over again.

© 2009 RIJ Publishing. All rights reserved.

What makes the current market calamities so much more damaging then the ones of 1987 or 2000-1 is that, indeed, it’s not 1987 or 2001. Barring a huge reversal in the market’s fortunes, there’s not enough time for the current 50%+ losses in equity markets to be recouped.

Now, the average age of America’s baby boomers is in the early/mid 50s, meaning that if they try soon to retire on what the financial crisis has left in their retirement accounts, rather than looking at a future of enjoying coq au vin in Provence, they’ll be dumpster-diving at McDonald’s for a long, long time after the money runs out.

A common pitch in advertisements for American retirement advisory services is that one must have enough so as to not “outlive your money”; presumably, what happens then is that you spend your last years lying in your own excrement in a substandard nursing home populated by those on public assistance. With lifespans lengthening and retirement incomes shrinking, will baby boomers start to regret all those wasted hours in that dammed aerobics class?

What about some other traditional support planks of the American retirement? Well, it’s obvious that many Americans can’t rely on their house as the ark that they can float through retirement on. With real-estate prices down now about 25% from their peak, and still declining about 3% each and every month, the dream of selling the house and moving to a low-priced, sunbelt nirvana is very much in question, especially if the homeowner loaded up the property with first, second mortgages and home-equity lines of credit, hoping that he could pay off the debt with continued house price appreciation.

I suppose that, if you’re infirm and arthritic, there are worse fates than having to spend your retirement in the winters of Buffalo, New York, or Fargo, North Dakota, although right now I can’t think of one.

But even if the case can be made that the road down the defined contribution/401(k) path is a dead end, does that mean that those still in traditional defined benefit plans, primarily workers in older industries such as automobiles and steel, and public sector workers, are living out their retirements with days of wine and roses? No, they’ve got their own problems, almost as bad as those cringing upon seeing what the stock market did to their 401(k) today.

Even with corporations under legal mandate and fiduciary obligation to fully fund their defined benefit plans, many of them don’t; it is estimated that private sector defined benefit pensions are underfunded to the tune of about $400 billion. Labor unions know that if they pushed the companies in court to fully fund their obligations, the companies could just declare bankruptcy to have the judge discharge them from their obligations, as Delta and Northwest Airlines did in 2005. If the companies do declare bankruptcy, their pension obligations are transferred to the US government’s Pension Benefit Guarantee Corporation (PBGC), which is not mandated to continue your pension payments at your previous level.

Congress chronically ignores the PBGC’s cries that it is underfunded, currently to the tune of about $11 billion a year. If one or all three of the Big 3 automakers declare bankruptcy and throw their pension obligations to PBGC, the agency will become massively insolvent within seconds.

Public sector pensions are not covered by the PBGC. If their resources are falling behind obligations, as they are now, with the stock investments of the public sector pension managers heading south just like those of the 401(k)s, it is up to the public authority to make up the shortfall, currently estimated around $1 trillion. That would have to be done with either higher taxes, cuts in other government services, or combinations of both.

Good luck asking voters for increased taxes to support public sector retirements, when their own 401(k)s are being eviscerated.

Is there any form of liberation from the tyranny of evaporating American old-age support? There is, but it’s not pleasant. As camp commander Rudolf Höss said in the sign he placed above the gates of Auschwitz, Arbeit Macht Frei—Work Makes You Free.

Just like the case of the 91-year-old Floridian who had to go back to work bagging groceries after losing his fortune to Bernie Madoff, younger Americans are going to have to get used to sharing the public, working space with a lot more elderly people than ever before. Maybe they’ll still be at their old jobs, blocking career advancement and creating hostility among younger folk, but you’ll see lots more of them in far more menial work—sweeping parks, flipping burgers, manning school crossings, until they can barely stand anymore.

Will the young people take pity on their elders and vote to increase taxes to support these people, or will they, like what happens every day with the sight of homeless people, just turn their heads and look away, and, in doing so, make the society that much coarser and colder?

The magazine Architecture Week recently reported on a project called EDAR (Everyone Deserves a Roof), an attempt by California design students to create a prefabricated living space for the homeless out of abandoned single shopping carts. For American baby boomers, who started out in Levittowns, then moved and are now being foreclosed out of McMansions, will this be where destiny forces them to seek shelter from the sun in their Golden Years?

This is far from impossible—it essentially did happen, in the 1930s. If the financial crisis does not abate promptly, it becomes even more likely that it will again. Anybody that can do simple long division can see that stocks are down 50%, but very few fully realize what it means.

It means that 50%-plus of the wealth of America, built up over generations and generations, has been destroyed in the past 17 months. As the pundits should say now instead of what they said on September 11, when a country is finally forced to live within its means after decades of excess, nothing will ever be the same again.

Julian Delasantellis is a management consultant, private investor and educator in international business in Washington State. 

Read Like Lambs to the Financial Slaughter: Part 1 of a two-part critical essay on how the American retiree became hostage to volatile markets.

Copyright 2009 Asia Times Online (atimes.com)

I arrived late at the Insured Retirement Institute’s annual meeting in Boston Monday and slipped into a darkened ballroom at the Westin Copley just in time to catch the end of the afternoon’s last general session.  

For this particular session, consultant Michael Maslansky had impaneled two dozen or so random investors jury-style in rows of chairs on the ballroom stage. I heard him ask them how they’d prefer to pay for financial advice:  

a.      On a sales commission basis.

b.      As a percent of assets under management.

c.       By the hour.

d.      As a flat fee for service.

By the number of raised hands, “by the hour” and “flat fee” were significantly more popular among consumers. Clearly, insurers will either have to re-engineer their compensation practices or re-educate American investors.

β

This focus group-like presentation, called “It’s Not What You Say, It’s What They Hear: How to Talk to Consumers in a Post-Crisi World,” appeared to reflect the new focus at IRI, which has undergone a complete makeover in its staff, its mission and its website since changing its name from NAVA. 

NAVA—the original National Association of Variable Annuities—had been an inward-looking and somewhat dour trade group of annuity manufacturers. IRI has much broader and more public ambitions.

At the conference, I asked IRI president and CEO Cathy Weatherford, the former Oklahoma insurance commissioner who has been driving the transition since October 2008, whether IRI was focused on lobbying, consumer education, or financial advisors, she said, “All three. We’re doing all of them.” 

IRI’s mission to lobby “insured retirement solutions” is evidenced by the addition of experienced Washington lobbyists to the staff in the past year. Its focus on building stronger ties to the distribution community can be seen in its plan to put regular inserts in Financial Planning, Bank Investment Consultant and On Wall Street magazines.

(In fact, as a reflection of the new parity between advisors and manufacturers at IRI, the organization has raised distributor annual dues sharply to the same $40,000 that insurance companies pay, according to Rick Heil, IRI’s Director of Standards.)

Maslansky’s presentation seemed to indicate that IRI is serious about reaching out to consumers—although it’s hard to tell if IRI’s emphasis will be on learning from consumers or shaping their opinions or both.

In any case, the conference, which ended yesterday, was markedly different from NAVA conferences of the past. There were fewer people. There was a higher male to female ratio—perhaps because companies sent fewer mid-level annuity department staffers. Instead of a three-aisle carnival of exhibitors, as in past years, there were only 13 booths this year. 

Remarkably little was said about new annuity products or about the product flaws that led to the catastrophic failure of variable annuity lifetime riders over the past year. One attendee said he was “incredulous” at that.

And yet few attendees said they missed much about the old parochial, preaching-to-the-choir NAVA conferences aside from the fact that some of them necessitated mid-winter excursions to golf havens like Tucson and Palm Springs.

β

Judging merely by the difference in the intensity of audience engagement in two conference events yesterday, IRI members are deeply interested in learning how to market to registered investment advisors (RIAs) and less interested in the Obama administration’s efforts toward automatic IRA enrollment for workers who don’t currently have access to a workplace retirement plan.

For instance, the audience’s attention faltered during Cathy Weatherford’s one-on-one onstage armchair interview of J. Mark Iwry, the Obama administration’s point man on the automatic IRA program and the $500 Savers Credit. By contrast, a standing-room-only crowd squeezed into a small meeting room for a breakout session called “RIAs and the Annuity World: The New Paradigm.”

RIAs are fee-based intermediaries who for several reasons typically don’t sell the variable annuities that many IRI members market. But RIAs are also the fastest growing type of intermediary in the financial landscape, and the decision-makers for increasing numbers of investors. To survive in the retirement income market, annuity manufacturers must win them over.

That won’t be easy. The session’s panelists—Lisa Plotnick of Cerulli Associates, Marc Costantini of John Hancock, and Patrick Ferrer of Advisor Distribution Consultants—described RIAs as more thoughtful, less sales-oriented, more fiduciary-minded, more cost-sensitive and more resistant to wholesalers than, for instance, registered reps.

The courtship of RIAs can already been seen in new products like John Hancock’s AnnuityNote contract, a stripped-down variable annuity with a built-in 5% lifetime payout for an all-in 1.74% fee. But RIAs still “recoil from annuities,” said one panelist. Unless persuaded otherwise, RIAs may continue to generate retirement income the way they know best: by building ladders of municipal bonds.

© 2009 RIJ Publishing. All rights reserved.

A new product upgrade from New River Inc. enables insurers to offer variable annuity prospectuses from their website that mirror those on the SEC’s EDGAR system, thus allowing annuity providers to comply with the SEC’s new Summary Prospectus Rule, the company said in a release.

The upgrade, called Variable Products Express Version 2.0, allows providers to take advantage of the cost savings associated with the web-based delivery of summary prospectuses without having to send contract owners to other websites for information.  

According to NewRiver, the new offering reduces the complexities of managing compliance fulfillment, creates a better user experience and promotes electronic consent and e-delivery.

NewRiver describes its core product, Variable Products Express, as a Web-based SEC-compliant data warehouse that gives insurance providers access to an online library of compliance documents (prospectuses, supplements, semi-annual and annual reports, and statements of additional information) for every open variable annuity and variable life contract and sub-fund sold in the United States.  

© 2009 RIJ Publishing. All rights reserved.

Federal regulator are considering a plan to have the nation’s healthy banks lend billions of dollars to the Federal Deposit Insurance Corporation, which protects bank depositors, the New York Times reported Tuesday.

The move, strongly supported by bankers and their lobbyists, would enable the FDIC to continue the work of rescuing America’s sickest banks. The FDIC insures $4.8 trillion in bank deposits.  The wave of 94 bank failures since last January has severely depleting its funds.   

Bankers and their lobbyists say they’d rather fund the FDIC with voluntary loans from banks rather than the two competing options: have the FDIC levy an emergency assessment from the banks or have the FDIC draw from its $100 billion line of credit at the Treasury Department.

A special assessment of $5 billion to $10 billion over the next six months would crimp bank profits and possibly push more banks into deeper financial trouble. Any new borrowing from the Treasury might look like a new taxpayer bailout that could trigger anti-bank sentiment.

Despite a special assessment imposed on banks a few months ago to keep the FDIC funded, its cash balance is only about $10 billion, down from about $30 billion at the start of the year. Some $32 billion has been set aside for failures that officials expect in the coming months.

© 2009 RIJ Publishing. All rights reserved.