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No Health Insurance? You Court Financial Catastrophe

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.

 

From Down Under, A Novel Income Product

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.

Retirement Opportunity Will Also Be Disruptive—Deloitte

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.

Fed’s Anti-Inflation Fire Drills Employ ‘Reverse Repos’

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.

Green Zone Strategies

“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.”

Green Zone Strategies by Jim Otar

Get Smart

It’s never been dumb to call a product “Smart.” There are Smart Cars from Daimler AG, Smart Menus at McDonald’s, a Smart Payment Program at Fidelity, Smart Balance margarine, and even Smart Toilets that take your vital signs when you’re not looking.

Not to mention SmartMoney magazine. And who can forget the “Smart. Very Smart.” commercials that the Smothers Brothers made for Magnavox compact disc players in the late 1980s.

When Lincoln Financial Group introduced its SmartIncome single-premium immediate annuity (SPIA) in 2007, the campaign didn’t initially look very smart. With the Iraq War/real estate bull market near its dizzy peak, investors were chasing risk, not running from it.

But since the 2008-2009 crash, Boomers’ appetite—or curiosity, at least—regarding income annuities appears to have quickened. Hints of demand for products like SmartIncome inspired Lincoln to support it with a new marketing push this fall.

“Pockets of the market have started looking at the product,” said Kris Kattman, vice president and associate actuary at Lincoln, who helped design SmartIncome. “We still have a way to go to penetrate the wider market. But we’ve steadily seen more interest and more applications all year long.”

SmartIncome was designed to overcome the usual objections to income annuities. People don’t like the forfeiture inherent in life annuities, so SmartIncome pays a lump-sum death benefit equal to the unpaid premium, if any, when the owners die.

People don’t like the illiquidity of income annuities, or the level payments of fixed income annuities. SmartIncome lets the owners access up to 10% of their unspent premium each year without penalty. As for inflation, both the monthly payments and the death benefit are indexed to the Consumer Price Index-Urban.

“We recognize that people don’t like to give up control, so we said, you can take up to 10 percent with no surrender charge. Beyond 10% we charge the equivalent of a surrender charge,” Kattmann said. “If the owners want to liquidate the contract entirely, they can.”

Such flexibility inevitably comes at the expense of the payout rates, however, and the interest generated by all the new flexibility is likely to die when prospects find out how low the initial payments will be.

For instance, the current average payout for an inflexible, no-cash value SPIA is about $650 a month for a 65-year-old man with a $100,000 premium. Lincoln didn’t quote prices on SmartIncome, but the payout of a roughly comparable inflation-protected SPIA with a cash refund feature from Vanguard is currently only $436. Moreover, Kattmann said the payout from SmartIncome, with its 10% annual withdrawal feature, would probably pay about “10 to 15 basis points” less than the typical inflation-adjusted, cash refund SPIA.

SmartIncome is available through all of Lincoln’s distribution channels, Kattman said. “Not many broker dealers have added it to their lists, but we’re working on that,” she said. The product offers intermediaries a choice of compensation streams: three percent upfront commissions with a 0.25% annual trail or an annual one percent trail. Both are comparable to similar products offered by other issuers.

In recent years, other insurance companies have tried to achieve a compromise between liquidity and payout rates in income annuities. But that’s a tall order, since annuities are like Chinese finger puzzles—they tighten as the stretch. Like the bonds on which they are based, their yields are inversely related to their liquidity.

New York Life, the most prolific seller of immediate annuities, offers a cornucopia of options on its SPIAs, including one where the payout rate resets if the 10-year Treasury rate has risen by two percentage points or more by the fifth contract anniversary. Presidential Life recently introduced a two-tier joint-life SPIA that perks up payout rates by limiting the duration of the second annuitant’s payments to life or a period certain, whichever comes first.

There’s a market for such products, but not as large a one as many economists believe there should be, given the gradual disappearance of corporate defined benefit pensions. For the first half of 2009, SPIA premiums were only $3.8 billion, or about three percent of the annuity market, which itself is only a small fraction of the mutual fund market. Academics have a name for feeble SPIA sales. They call it “the annuity puzzle.”

© 2009 RIJ Publishing. All rights reserved.

Unsolved Mystery

The “mystery shopper” is one of the oldest and most effective research tools. You can learn a lot simply by having someone pose as a naïve consumer and catch a seller off-guard.

Journalists use this trick. Industrial spies use it. The Drug Enforcement Agency, obviously, uses it. So do market researchers.

A couple of years ago, the Washington researcher and consultant Mathew Greenwald deployed mystery shoppers to help annuity manufacturers and marketers learn why more Americans don’t buy life annuities to finance their old age.

In a two-part experiment, Greenwald first asked a bunch of academic economists whether the typical Boomer retiree should buy an annuity. “We know that annuitization is rarely used, and all kinds of reasons have been given for that, but I wanted get some insights into the desirability of an annuity,” Greenwald told RIJ recently.

In other words, if no one at all vouches for annuities, further research would be pointless. “Game over,” as it were. But all of the academics recommended annuities.

Mathew Greenwald“I interviewed 11 economists and others who are not involved in selling annuities,” Greenwald continued. “They all had different opinions about the circumstances that call for annuities. Some thought you should buy one at retirement. Some thought you should wait until age 70 when the payouts are higher, or that you should buy longevity insurance that starts when you’re 85.”

But, small differences aside, the academics unanimously supported annuities.

In the second part of the experiment, Greenwald recruited eight mystery shoppers and assigned each of them to approach an investment advisor and ask for help in creating a financial plan for retirement. “They went to advisers and said, I’m close to retirement, and I’d like your advice on how I should manage money in retirement.”

The mystery shoppers were all real near-retirees with assets of roughly $600,000 to $3 million. The advisors were registered reps at large broker-dealers such as Wachovia, Morgan Stanley or Raymond James. The meetings between clients and advisors were not a sham. The shoppers presented real account statements and, in some cases, financial plans were drawn up and fees were paid.

Not one of the advisors mentioned annuities, the shoppers told Greenwald. Instead, every advisor suggested a systematic drawdown from a diversified portfolio of stock or bond mutual funds.

Most of the advisors assumed an average positive growth rate for stocks and bonds. Their calculations and projections showed, typically, that the retirees would grow increasingly rich over the next 30 years and leave a large bequest—in addition to receiving an income.

This type of evidence is more qualitative than quantitative, Greenwald said, but it can be enlightening when combined with other data. “It’s the juxtaposition that’s of interest,” he said. “Theorists come to a different conclusion than practitioners. It informs other work we’re doing.”

Similar findings
Advisor attitudes toward annuities were also part of a study conducted by Brightwork Partners LLC at the beginning of 2009. Most of the survey participants were advisors at wirehouses, insurance companies, and independent broker dealers. Together, they represented 20 to 25 percent of the active registered rep community.

The findings of the Brightwork study support the findings of Greenwald’s mystery shopping experiment. Only 53% of advisors (and 68% of insurance company advisors only) in the Brightwork study said they recommended a period-certain income annuity to their retirement clients “almost always or sometimes.”

Advisers were more likely to recommend systematic withdrawal plans, income-oriented mutual funds, bond or CD ladders, variable annuities with lifetime income riders, long-term care insurance or “working longer” as solutions to retirement income needs.

Only nine percent of the advisers said basic payout annuities were “very” attractive. An additional 42% said they were “somewhat” attractive. That percentage jumped to 80% or more, however if the annuity included coverage for a surviving spouse, a guaranteed return of premium, or a provision to pay long-term care costs.

Advisors apparently believe they can plan for retirement income without using annuities, which they consider to be a very expensive solution to the problem, Brightwork’s Ronald L. Bush told RIJ.

For a client with $800,000, for instance, they would tend to self-insure against longevity risk. They might set $200,000 aside in a “granny fund,” not to be opened until age 85, if necessary, and tap the other $600,000 between ages 65 and 85. Annuities are seen rather as “packaged solutions” for retirees with less money under management and a greater need for income.

A survey of 503 advisors nationwide conducted by Allianz Global Investors last August delved into the retirement income question but the word “annuities” didn’t come up.

Nearly nine of 10 (89%) of advisors think their clients would be receptive to the idea of products that provide guaranteed lifetime income, but just 50% of advisors have talked to their clients about such products, according to the survey.

Advisors were far less optimistic than their clients about the performance of equities in the years ahead. But 74% of advisors felt their clients could protect themselves by focusing on alternative investments like Treasury Inflation-Protected Securities or commodities.

Compensation factor
What explains the popularity of annuities among academics but not among advisors? Greenwald did not believe that the academics’ position reflects a belief that annuities represent the “greatest good for the greatest number.”

That is, nothing in his discussions with academics suggested that they recommended annuities because they believe that mortality pooling, on which annuity payouts are based, are a society’s most efficient way to avoid a future epidemic of impoverished old people.

Rather, he said, the academics have done the math and believe that income annuities—their illiquidity notwithstanding—actually give their owners more spending power in retirement than they can get by keeping all their money at risk in the financial markets.

“I don’t think these people were thinking about what is good societally,” Greenwald said. “I think they believed annuities were more effective for individuals. I did an experiment once where we compared income from annuities with income from bonds.

“A 70-year-old man with $235,000 could get an income of $1,000 a month by investing it in a bond paying five percent, or he could get the same income by putting $130,000 in a life annuity and investing the other $105,000 in a side fund.” If the man lived longer than 10 years and the side fund earned eight percent a year, the annuity would be the better solution.

Income annuities might sell better, some say, if advisors were better compensated for selling them. With three percent commissions and, in some cases, a 0.25% trail, income annuities don’t pay a transaction-oriented rep as well as mutual funds or a variable deferred annuities do. Fee-based advisors fare even worse: an income annuity reduces the level of assets under management.

Neither Bush nor Greenwald asked advisors directly about a link between low income annuity sales and compensation, in part because it’s a delicate topic. But they offered their insights into the issue.

“From the qualitative work we’ve done with advisors, even the insurance company affiliated advisor will say, ‘You know, annuities are fine for certain clients but I don’t use them because I want to continue to manage the money,’” Bush told RIJ.

“I think advisors are receptive to innovative products or new product solutions but they have to get paid,” he added. “They have a compensation goal in mind, and they’ll try to make their compensation goal with each client. It depends on their target market. If they’re seeing a high volume of clients without a lot of assets, they’ll look for a packaged solution that gets the job done quickly.”

Greenwald acknowledged the impact of compensation, noting that it makes a difference whether the advisor has a fiduciary responsibility or not. “Are there some people who are not doing what’s in the best interest of their clients because of compensation? That’s the direction this issue leads you in. If so, that would be unfortunate.”

© 2009 RIJ Publishing. All rights reserved.

Probability of Survival From the Age of 65 in 2045

Probability of Survival From
the Age of 65 in 2045
  Female Male Both One
Only
To the age
of 80
80.4% 77.8% 62.6% 95.6%
To the age
of 90
45.3% 36.2% 16.4% 65.1%
To the age
of 100
5.7% 2.5% 0.1% 8.1%
Note: Calculations in table are based on UP 1994 Tables projected.
Source: Longevity: The Underlying Driver of Retirement Risk, Society of Actuaries.

Zone Therapy

Over the next four weeks, Retirement Income Journal will reprint four consecutive chapters from Jim Otar’s new book, “Unveiling the Retirement Myth.” We begin with Chapter 41, “The Zone Strategy,” which describes Otar’s system for determining whether pre-retirees have enough wealth to cover their retirement spending needs easily, whether they might need life annuities to prevent financial ruin, or whether they fall somewhere between the two.

The Zone Strategy by Jim Otar

In the ‘Green Zone’ with Jim Otar

Jim Otar doesn’t much care what you think. As the Canadian financial advisor likes to say in his eastern-Balkan accent, “You can’t please everyone. I’m 58 years old. I’m deep in the ‘Green Zone.’ People can think what they like.”

But if your field is retirement income, you probably will care what Otar thinks. Since he switched from engineering to finance in 1994, his articles, books, and Retirement Optimizer planning tool have become increasingly meainstream.

Or perhaps the mainstream has become increasingly Otarian. 

“In the beginning, it was very lonely,” he told RIJ. “[William] Bernstein’s Retirement Calculator from Hell triggered my first questions, in 1996. I said, That is what I’m trying to tell everyone: You cannot have an assumed growth rate. That’s when I started developing my ideas, which became my first book, High Expectations and False Dreams, in 2000.”

Since then, Otar, who still practices as an advisor, has become better known. His 2002 articles in Financial Planning magazine won a CFP Board award. His website, Otar Retirement Solutions, and his $29.95 Retirement Optimizer planning tool (now $99.95) have a cult following in Canada. He contributed to Harold Evensky and Deena Katz’ 2006 book, Retirement Income Redesigned (Bloomberg).

This month, he officially published Unveiling the Retirement Myth: Advanced Retirement Planning Based on Market History (Otar & Associates, 2009), a 525-page tome that details his Zone system for building a portfolio of investments and, if necessary, income annuities. He offered an early edition for free online in August, but the number of requests for downloads overwhelmed the server.

Otar’s fans—including quite a few members of the Bogleheads discussion group—often note his mechanical engineer’s approach to retirement income planning. That includes a skepticism of straight-line projections, a scrupulous accounting of all sources of friction and a belief in establishing margins of safety that can withstand Black Swan events. 

Few people in the U.S. retirement income profession claim to know much about Otar, but at least one vouched for him enthusiastically. “I have copies of Jim Otar’s earlier books and in my opinion he has done excellent work in the field,” says Bill Bengen, an El Cajon advisor who also contributed to Evensky and Katz’ book.


“Aft-casting”
Otar’s system assigns near-retirement clients to one of three zones. Those in the Green Zone can draw down their savings at a sustainable rate and still cover their living expenses. Those in the Red Zone will go broke early unless they buy annuities. Those in the Gray Zone fall somewhere in between.

Whichever zone a client happens to fall into, Otar can determine how much savings should be allocated to stocks, to bonds or, if the client’s savings can’t produce enough income any other way, a ladder of income annuities.

Personably written and replete with charts and graphs, the book details Otar’s financial philosophy. For instance, he rejects Monte Carlo analysis in favor of “aft-casting.”

“Forecasting says ‘I’m assuming an 8% percent return and three percent inflation.’ In aft-casting, each portfolio value is calculated for each year since 1900. I take all lines and put them on the same chart. It’s actually market history,” he said.

“I try to take the dividends out because right now the rate is about half what it once was. Then there are management fees. You have to include that as well. So I take the indexes and inflation rates from the past and I apply an adjustment for current dividends and portfolio costs. Then I have an outcome I call an aft-cast.”

His calculations also include a factor he calls the “time value of fluctuations,” which acknowledges that the course of finance—like the course of true love and other aspects of life—never travels as-the-crow-flies.

“The time value of fluctuations is the friction created by variations in the growth rate,” he told RIJ. “And that happens every day. Inflation goes up and down, for instance. Those variations in the growth rate crate havoc for your projections.

“You cannot use straight-line assumptions. You have to add an additional factor to the calculations to make up for the losses, which is about 50%. You need 50% more assets than the average calculations. So if you need $1.5 million instead of $1 million. Basically, that’s what time value of fluctuations is.

“To use an analogy, if you’re driving from Phoenix to Tucson there’s no fluctuations, because the highway is flat and straight. But if you drive from Flagstaff to Sedona, you’ll use three times as much gas per mile, because you’re going up and down hills.”

Istanbul to Toronto
Otar was born near Istanbul, Turkey, the son of an accountant who raised a few sheep, fruit trees and vegetables. In the forward to his new book he describes his first experiment with finance: growing cabbage as a cash crop. An early frost wiped out his entire investment in seedlings and manure.

He immigrated to Canada at 20, and earned undergraduate and graduate degrees in mechanical engineering at the University of Toronto. “In 1982, I went into a marine equipment business, and worked in it until 1994, when I went into the financial business. I started looking after my own investments. Then my friends and family wanted advice. I ended up getting my CFP in 2000.

“I also used to do technical analysis, and got my most recent designation, Chartered Market Technician. I did ‘cross over.’ I did ‘bottom out.’ We just followed the signals. Every technician has different signals.”

But he’s not one of those far-out cycle theorists who believe that pi rules the universe. “My advice is, keep it simple. You can’t please everyone. So you have to make happy the people who believe in you. That’s all. Don’t make things too complicated.

“More than 50% of everything is luck. Actually, two types of luck. The first piece of luck has to do with the timing of retirement with respect to market behavior. If you don’t retire in a bullish trend, your portfolio life can go down by half.

“The second part, which is less important, is the timing of retirement with respect to inflation. Inflation comes in waves, and if you’re in a bad wave, your purchasing power will drain away. The easiest way to minimize the luck factor is to buy insurance. We buy life annuities. If you ladder them, you can reduce the interest rate risk and the market risk.”

Speaking of market risk, Otar, like many others, doubts the sustainability of the equities rally that started in March 2009. “The more the politicians say that the depression is over-the louder their chorus gets-the more I plug up my ears. I don’t think the recovery is sustainable. If you keep printing money you might avoid a depression. But we won’t be going back to a bull market soon.”

Otar’s plans for the coming year include trying to scale his Retirement Optimizer into a tool that millions of Baby Boomers can use to convert their life savings to lifetime income. “We’re talking to a big insurance company here in Canada,” he said. “I hope it works out.”

© 2009 RIJ Publishing. All rights reserved.

 

The Abnormal Is the Norm

On an imaginary wealth spectrum, with the low end of the scale starting at HTM (hand-to-mouth) and the high end topping out at WFBW (well-fixed but worried), my friend Mark might fall into the 78th percentile.

A former engineer, Mark is now 62. He manages his own investments (bonds and dividend-paying stocks) and considers that to be his full-time occupation. I offer his story as just one example of the absurdist financial situations that some highly educated and successful Boomers now find themselves in.

From one perspective, Mark has won life’s lottery. He attended one of the nation’s best universities. He worked at a large and prestigious telecom company. He has two stellar children enrolled in elite private colleges, a supportive and capable spouse, a white clapboard Dutch Colonial and a modest defined benefit pension.

But Mark is stressed. He married late, so his kids entered expensive schools soon after his employer shrugged him off. With no group medical plan or COBRA, he pays $22,000 a year for health insurance. To offset the premiums, he plans to claim Social Security now, rather than wait for higher payments.

If you’re an advisor, what would you tell Mark? I’d bet that any financial advice based on averages, probabilities or formulas will be next to useless for Boomers like him. None of them is average. They are more likely to have been bitten by a Black Swan than to have been rescued by the AFLAC duck.

Mark and his family will undoubtedly survive—on the strength of their own wits and the help of some inherited wealth. But he’s one former Republican who hopes that the Obama health care plan includes a public option.

* * *

Like millions of other people, I’ve been a monkey-in-the-middle over the past three years or so, watching the market go back and forth over my head. But, by following the simple instincts I acquired during my years at Vanguard, I seem to have prevented the past year from becoming the apocalyptic calamity so often alluded to in the media.

In the middle of 2006, when I left Vanguard, I stopped putting new money into my Vanguard 401(k), which had a middle-of-the-road equity/bond allocation of 65:35. In my subsequent employer’s 401(k), I allocated all of my new contributions to a PIMCO intermediate bond fund. Stocks were just too expensive.

From there, I watched my Vanguard portfolio rise slowly, peak in October 2007 and go sideways until September 2008, when the Burmese tiger pit opened under our feet. I did nothing until year-end, when I rebalanced the Vanguard portfolio toward equities. Then I went back to doing nothing until recently, when I reduced my investment in two stock funds that had gained 30% since March.

Thanks to my initial inertia, a tiny bit of market timing, and (mostly) to the “quantitative easing” that fostered the mid-year rally, my portfolio balance looks acceptable to me. It hasn’t returned to its peak and, yes, I’ve forever lost the benefit of a couple of prime accumulation years. But, hey, it’s higher than my net investment. Speaking as an ordinary Boomer investor, the situation—the 401(k) situation, at least—doesn’t feel so dire.

Actually, I must confess an investment secret. I measure the incline of the rise in the Dow and when it reaches a certain pitch, I sell. My trigger-angle and the time scale of the chart are proprietary information. But I can say that by the time the Dow goes perpendicular, I’m long gone.

© 2009 RIJ Publishing. All rights reserved.

Retirement Planning a Challenge for Hispanic Americans

Hispanic Americans have less access to employer-sponsored retirement plans, lower levels of personal savings and inadequate financial literacy than the U.S. average, according to according to a paper, “Hispanics and Retirement: Challenges and Opportunties” prepared by the Hispanic Institute think-tank and the Americans for Secure Retirement (ASR) coalition.

Because of that, Hispanic Americans need to consider multiple retirement vehicles, such as life annuities, to supplement Social Security and to bridge the gap in access to employer plans, the paper said. The study found that:

  • Only 41% of Hispanic workers say they have saved for retirement.
  • Only 25.6% of Hispanics are covered by employer-sponsored retirement plans, compared to 42.5% of whites and 40% of African-Americans.
  • Of Hispanics receiving Social Security benefits, almost 80% rely on these benefits for at least 50% of their retirement earnings.
  • Among people 65 and older receiving Social Security, Hispanics receive about $2,124 less in earnings than non-Hispanics, on average.
  • Between 1979 and 1999, the number of middle-class Hispanics households increased nearly 80%. About one-third of Hispanic households nationwide earn $40,000 to $140,000 a year.
  • The U.S. Hispanic population is about 48 million. It is expected to increase to 132 million by 2050, accounting for nearly 30% percent of the U.S. population.

 

© 2009 RIJ Publishing. All rights reserved.

U.S. Life Settlements Activity Flat in 2008

The life settlements market was hit hard by the economic crisis and other factors in 2008, according to Conning Research and Consulting.

“The economic crisis was the major impediment to growth in the United States life settlements market in 2008, as the credit markets froze in the second half and life settlements buyers had difficulty financing new premiums,” said Scott Hawkins, analyst at Conning.

“In addition, the major life expectancy underwriters revised their methodologies, calling into question the accuracy and valuation of existing portfolios. While there were fewer active buyers in the market, our $11.7 billion estimate of 2008 settled policies did increase our estimate of cumulative in-force life settlements face values.”

The Conning study, “Life Settlements: A Buyers’ Market for Now” presents Conning’s estimates of current market size and growth rate, as well as a long-term forecast and analysis of market conditions.

“The life settlements market must shake off profitability concerns and general market concerns about life insurer solvency before it will return to growth,” said Stephan Christiansen, director of research at Conning. “The buyers’ market of late 2008 and 2009 should help buyers re-establish profitability in their portfolios. More policyholders want to sell, and more agents now understand life settlements-the near term challenge is all about buyers’ and investors’ capacity.”

© 2009 RIJ Publishing. All rights reserved.

A Third of DC Plans Have Auto-Enrollment—Mercer

One-third of employers globally offer at least one automatic feature in their defined-contribution plans, according to a Mercer survey of 1,500 employers representing $440 billion in defined-contribution pension plan assets, Pensions & Investments reported.

One third said they offered auto-enrollment in DC plans, one third offered automatic escalation, and about 20% offered automatic rebalancing. Among employers offering a default investment option, 67% use lifecycle funds, the June 2009 survey found.

Also, 90% of employers considering adding or changing a default option are looking at lifecycle funds. Seventy-two percent of employers surveyed have 15 or fewer investment options in their defined-contribution pension plans.

Only one-third of employers plan to change their fund lineups over the next two years. Of those, most plan to increase their options or introduce a lifecycle fund. Also, while 74% of employers have a targeted employee participation rate of 80% to 100% percent, only half of them have achieved that goal.

© 2009 RIJ Publishing. All rights reserved.

Cash-strapped Firms Hope to Delay Pension Funding Mandates

Pension funding requirements that mandated by the Pension Protection Act of 2006 could threaten job creation and investment by diverting cash into pension plans rather than into operations, a Fortune 500 CEO told Congress earlier this month.

Bill Nuti, chairman and CEO of NCR, appeared before the House Ways and Means Committee to argue for relief from the pension obligations instituted by the PPA, which responded to airline and steel company pension defaults by tightening defined benefit funding rules and requiring companies to meet 100% of their obligations by 2015.

Experts from Mercer and Watson Wyatt Worldwide told legislators that defined-benefit pension plans have lost substantial value over the past year and many face significantly higher contributions in 2010. NCR’s pension fell from 110% funded to 75% funded during 2008.

Rep. Earl Pomeroy (D-ND) has drafted legislation that would give companies more time to fund their pension plans. The House Education and Labor Committee approved a similar bill. House Minority Leader John Boehner (R-OH) has introduced another.

All three measures would allow companies to make interest-only payments for two years on their 2008 losses and then give them seven years to amortize pension shortfalls. The Pomeroy and Boehner bills also implement 24-month smoothing of assets within 20% of their fair market value. The House labor panel bill limits smoothing to 10%.

“While giving companies additional breathing room to meet their pension obligations may make sense on the surface, we must also recognize that too much latitude could erode the likelihood of workers receiving the full benefits they were promised and could further expose taxpayers to the costs of bailing out the PBGC,” said Rep. Dave Camp (R-MI) and the ranking member of the Ways and Means Committee.

© 2009 RIJ Publishing. All rights reserved.

In the U.K., Are Pensions a Retention Tool, or Just a Compliance Chore?

For most small and medium sized firms in the United Kingdom, pensions are seen as a compliance point and not part of a rewards package. But a majority of large U.K. firms still think of pensions as a way to attract and retain staff, despite the shift towards portable defined contribution (DC) plans.

These were among the findings of “The Business Case for Pensions,” a survey sponsored by Blackrock, the asset management firm, and the Chartered Institute of Personnel and Development. The report also noted that upcoming regulatory changes in 2012 might restrict innovation in employer-sponsored retirement plans rather than stimulate it.

Only 55% of working Britons participate in a company pension “scheme” or plan, the survey showed.  To encourage greater participation, Steve Rumbles, head of UK DC pensions at BlackRock, suggested allowing plan participants to borrow from their workplace defined contribution plans, as Americans can.

“You might think in 2008 most people took advantage of the loan system in the US. But only 1.2% of members actually used it. It gives you piece of mind, even if it is not used,” he said.

The report warned that the introduction of auto-enrollment in 2012, and the minimum contribution requirement of 8% of qualifying earnings could lead to a “follow the herd mentality,” particularly among smaller employers who will look upon the 8% as a maximum rather than a minimum.

“We deal with predominately larger companies and in talking to those with both DB and DC schemes, there is little indication of them leveling down [to the 8% minimum],” Rumbles said. “But that’s because of their recognition of pensions as a retention tool. The herd mentality is likely to be at the smaller end, who will think 8% will be it, and will stay at that level forever unless the government changes it.”

© 2009 RIJ Publishing. All rights reserved.

New White Paper Describes New Normal

More Americans are abandoning the old formula for retirement and focusing on protecting principal and generating “income for life,” according to a new white paper from Allianz Life and LIMRA entitled “How the New Economy is Changing the Way Americans Save.”

By 2020 almost one-third of Americans will be nearing or in retirement, but most don’t have financial plans, the white paper says. The old formula for retirement was one-third Social Security, one-third corporate pension, and one-third investments, such as 401(k) plans. Today many pensions have disappeared, the future of social security is unclear, and stock market investments aren’t considered as reliable as once thought.

“The ‘new normal’ for retirement balances liquidity, volatility and rate of return,” said Allianz Life President and CEO Gary C. Bhojwani. “Today, Americans are looking more closely at guarantees and principal protection as important components of a solid retirement plan.”

The paper outlines how dramatic changes to the economic landscape is changing behavior, and gives an overview of fixed annuities, the only financial instruments that offer both lifetime income and principal protection. Survey data from MSF Financial Management, Allianz American Legacies Study and Gallup illustrates the points regarding retirement options, concerns and income options. The paper also explains how age plays a role in financial decision-making, also known as planning from a life-stage context.

“For many years, people followed the advice that a mix of stocks and bonds reduces risk, provides upside potential, and helps achieve financial objectives,” said Bob Kerzner, CEO of LIMRA. “The latest downturn shows that asset allocation alone is not enough. Consumers must consider a variety of financial options.”

© 2009 RIJ Publishing. All rights reserved.

 

J.P. Morgan Adopts FundQuest’s Advisor Gateway™ Platform

J.P. Morgan’s Broker Dealer Services business will begin using a new managed account program from FundQuest Incorporated, FundQuest announced. The program, Advisor Gateway, uses FundQuest’s reporting, portfolio modeling, fund selection, and rebalancing technology. Other services include due diligence, training, back-office services and wholesaling support.

The managed account offerings on Advisor Gateway include unified managed accounts, mutual fund portfolios, income portfolios, and separately managed accounts. The new program also offers Advisor Choice, an advisor/client constructed portfolio using FundQuest asset allocation and performance reporting tools.

“Financial advisors who use J.P. Morgan Clearing Corporation’s clearing and custodial capabilities will now have access to FundQuest’s web-based proposal generation, portfolio diagnostics, performance reporting, and open architecture investment research capabilities,” said FundQuest chairman and CEO James L. Fox.

Boston-based FundQuest, a provider of outsourced managed account solutions, has 180 advisory firms as clients and $40 billion in assets under management in its combined US and European operations.

© 2009 RIJ Publishing. All rights reserved.

Sun Life VA Sales Up 35% At Mid-Year

The U.S. division of Sun Life Financial Inc. said its first-half 2009 variable annuity (VA) sales rose 35%, versus the first half of 2008, while VA industry’s overall sales fell 25.4% for that period, according to Morningstar/VARDS.

Sun Life was the fifteenth largest seller of variable annuities in the U.S. in the first half of 2009, with $1.4 billion in sales and a 2.3% share of the VA market, according to LIMRA International. Sun Life’s parent company has a Standard & Poor strength rating of AA2, a Moody’s rating of Aa3, and a Fitch rating of A+3, as of June 30, 2009.

The firm’s year-over-year gains occurred in all three major financial distribution channels. The company’s assets rose 10.7%, more than double the industry’s 5.1% gain. The Wellesley, Mass.-based insurer also almost doubled its market share in VA sales since the end of 2008, and 91% of its new VA sales for the first half of the year included at least one optional living benefit.

Sun Life VA sales increased against the industry average in all three financial distribution channels. Its wirehouse sales roles 82.6%, to $596.7 million in the first half of 2009 versus the first half of 2008, independent channel sales rose 46.6%, to $536.3 million, and bank sales rose 6.3%, to $226.2 million. The industry’s overall sales fell 28%, 23.2%, and 43.4% in those channels, respectively.

© 2009 RIJ Publishing. All rights reserved.

AIG and ING Sell Units to Raise Cash

American International Group, the recipient of a $100 billion-plus U.S. government bailout last year, has agreed to sell its Taiwan life insurance unit, Nan Shan, to a Hong Kong investor group for $2.15 billion, the New York Times reported.

The sale is AIG’s largest divestiture so far since September 2008, when it nearly failed because of losses on credit default insurance it wrote on mortgage-backed securities.  Nan Shan, one of Taiwan’s largest life insurance, has assets of over $46 billion and 7.9 million in-force policies held by about four million policyholders.

Nan Shan’s buyer is Primus Financial Holdings, which was co-founded in early 2009 by Robert Morse, a former senior Citigroup banker, China Strategic Holdings, an investment firm.

AIG previously raised $500 million from the sale of its Pacific Century Group asset management business to a Hong Kong investment firm, $1.9 billion from the sale of its energy and infrastructure investment assets, and $1.9 billion from the sale of 21st Century Insurance Group, an auto insurer. 

Founded in Shanghai in 1919, AIG also hopes to raise cash through initial public offerings for two life insurance units—American International Assurance, or AIA, and American Life Insurance Co., known as Alico—in Asia and New York, respectively.

Like AIG, ING is also using divestitures to raise cash after a huge government bailout.

ING Groep, the Dutch parent of the U.S. insurer, has agreed to sell its Swiss private banking unit to Zurich-based wealth manager Julius Baer for 520 million Swiss francs, or $505 million, as part of a planned disposal of assets after receiving a 10 billion euro government bailout a year ago.

The all-cash transaction is expected to close in early 2010. ING sold its Australian joint venture to ANZ, and may sell units in Asia and possibly North America.

ING has said it wants to sell assets to raise between 6 billion euros and 8 billion euros as it attempts to repay the Dutch state for the emergency funds that propped up its Tier One capital during the financial crisis. The sale of ING’s 51% stake in its Australian joint venture brought in 1.1 billion euros. The Dutch bank and insurer has clients in more than 40 countries, and employs about 110,000 people worldwide.

© 2009 RIJ Publishing. All rights reserved.