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Building a Bridge to Social Security

Posted on January 7, 2021 by -

Hey, I know where there’s a bridge for sale. It’s not in Brooklyn, and it doesn’t span the San Francisco bay. It starts when your clients retire and ends when they claim Social Security—maybe three, four, five, or even eight years later.

This is the “Social Security bridge” strategy. The idea is for people who retire in their early or mid-60s to delay claiming Social Security until age 70, thereby maximizing their monthly benefit. In the years before claiming, if they’re not working, they can dip into savings to pay their bills.

The strategy doesn’t necessarily work for everyone, and it works to different degrees under different circumstances. That’s why Alicia Munnell, who directs the Center for Retirement Research at Boston College, has crunched the numbers to show who, and under what conditions, should consider the bridge strategy.

Munnell speaks from experience. She was a Treasury Department official and member of the Council of Economic Advisers. She also has a passion for defending Social Security. She’s a consistent voice for the view that the Social Security program faces no financing crisis that a few marginal benefit cuts and/or tax increases can’t solve. 

In a new research brief, “How Best to Annuitize Defined Contribution Assets,” Munnell compares the potential benefits of using a bridge strategy, financed with withdrawals from 401(k) savings, with several other common retirement income-generating strategies.

Her data suggests that middle-class people, who are at risk of running out of money before they die, should use the bridge strategy. In practice, they would spend as much from savings each year as they would have received Hypothetically, they would offset the money spend as much from savings each year between the retirement date and age 70 as they would have received from Social Security benefits, had they claimed when they retired (as most people do). 

Munnell reaches that conclusion by contrasting these income strategies, all based on a hypothetical 65-year-old man with $100,000 in savings:

  • Invest $100,000 at 3% interest and spend $6,340 per year. (The money would run out by age 85.)
  • Spend down that $100,000 at the rate of $4,450 a year. (The money would last a lifetime but income would be low.)
  • Spend $100,000 on an immediate income annuity paying $6,340 per year for life.
  • Spend $16,000 on a deferred income annuity paying $6,340 per year for life starting at age 85 and spend the remaining $84,000 between ages 65 and 85.
  • Use the Social Security bridge strategy and spend enough from savings each month to match the foregone Social Security benefits. (The average Social Security benefit at age 62 is $1,130.)
  • Withdraw only enough from qualified savings each year to satisfy the IRS’s required minimum distribution (RMD) rules, starting at age 72 (under current law).

If you want to read the details of the study, you can find them here. The big takeaway is that the bridge strategy works best for people (in her intentionally simplified example, she refers to a single person) in the 50th to 75th wealth percentile, with savings of up to roughly $250,000. This may not describe the typical advised client, but it does describe people who need help with retirement income planning if they want to avoid living on rice, dry beans, and spaghetti in their old age.

The finding that the bridge strategy works better than buying a retail SPIA or DIA relies mainly on the fact that Social Security, as an annuity, offers more generous benefits than any life insurer could offer to pay. So it makes sense to “buy” more Social Security than to buy a retail annuity.

Most Americans claim Social Security when they retire, which makes a certain amount of sense. First, they suddenly need to replace earned income, and the government is offering what appears to be free money. Second, they will have a natural “liquidity preference” that makes them conserve their own invested savings. Third, they suffer from what economists call the “survival pessimism.” They underestimate how long they’ll live, which makes them underestimate the value of an annuity.

All of those foibles lead Munnell, when she’s wearing her public policy hat, to suggest that 401(k) participants be defaulted (with the option to opt-out if they wish) into using systematic withdrawals from qualified savings to postpone Social Security claiming. 

There are computer programs that allow retirees to see how long they would have to live before a specific Social Security deferral strategy “breaks even.” But the decision about when to retire and when to claim benefits is very personal, and not necessarily easy. It’s all the more difficult when a person can’t control the factors involved. 

In my own case, I remember trying to estimate when the vector of my essential household expenses (which were declining as I paid off house and cars) would cross the vector of my household’s Social Security benefits (which would rise as I deferred claiming). To retire before those vectors intersected, I would have to mobilize savings. Then I had to ask myself, How much savings could I afford to mobilize without jeopardizing my “legacy goals” and need for an emergency buffer? Quite a bit of work was involved. 

I take a general lesson from the paper. It heightened my awareness of middle-class workers’ most important milestones: the date they stop earning a paycheck, the date they’re free from debt (mortgage, auto, student, home equity or revolving debt), and the date they tap into Social Security. Those government benefits will be a lot less painful to postpone if you’re still working and/or debt-free.

© 2021 RIJ Publishing LLC. All rights reserved.

Beware the Equity Bubble: Jeremy Grantham

Posted on January 6, 2021 by -

The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.

Most of the time, perhaps three-quarters of the time, major asset classes are reasonably priced relative to one another. The correct response is to make modest bets on those assets that measure as being cheaper and hope that the measurements are correct. The real trouble with asset allocation, though, is in the remaining times when asset prices move far away from fair value.

This is not so bad in bear markets because important bear markets tend to be short and brutal. The initial response of clients is usually to be shocked into inaction during which phase the manager has time to reposition both portfolio and arguments to retain the business. The real problem is in major bull markets that last for years.

I am long retired from the job of portfolio management but I am happy to give my opinion here: It is highly probable that we are in a major bubble event in the US market, of the type we typically have every several decades and last had in the late 1990s. It will very probably end badly, although nothing is certain.

The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals. For the first 10 years of this bull market, which is the longest in history, we lacked such wild speculation. But now we have it. In record amounts. Tesla’s market cap, now over $600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM. What has 1929 got to equal that?

The “Buffett indicator,” total stock market capitalization to GDP, broke through its all-time high 2000 record. In 2020, there were 480 IPOs (including an incredible 248 Special Purpose Acquisition Companies, or SPACs) – more new listings than the 406 IPOs in 2000. There are 150 non-micro-cap companies (that is, with market capitalization >$250 million) that have more than tripled in the year, which is over three times as many as any year in the previous decade. The volume of small retail purchases, of less than 10 contracts, of call options on US equities has increased eight-fold compared to 2019, and 2019 was already well above long-run average.

Perhaps most troubling of all: Nobel laureate and long-time bear Robert Shiller – who correctly and bravely called the 2000 and 2007 bubbles and who is one of the very few economists I respect – is hedging his bets this time, recently making the point that his legendary CAPE asset-pricing indicator (which suggests stocks are nearly as overpriced as at the 2000 bubble peak) shows less impressive overvaluation when compared to bonds. Bonds, however, are even more spectacularly expensive by historical comparison than stocks. Oh my!

Even now, I know that this market can soar upwards for a few more weeks or even months – it feels like we could be anywhere between July 1999 and February 2000. Which is to say it is entitled to break any day, having checked all the boxes, but could keep roaring upwards for a few months longer. My best guess as to the longest this bubble might survive is the late spring or early summer, coinciding with the broad rollout of the COVID vaccine.

At that moment, the most pressing issue facing the world economy will have been solved. Market participants will breathe a sigh of relief, look around, and immediately realize that the economy is still in poor shape, stimulus will shortly be cut back with the end of the COVID crisis, and valuations are absurd. “Buy the rumor, sell the news.” But remember that timing the bursting of bubbles has a long history of disappointment.

So, I am not at all surprised that since the summer the market has advanced at an accelerating rate and with increasing speculative excesses. It is precisely what you should expect from a late-stage bubble: an accelerating, nearly vertical stage of unknowable length – but typically short. Even if it is short, this stage at the end of a bubble is shockingly painful and full of career risk for bears.

As often happens at bubbly peaks like 1929, 2000, and the Nifty Fifty of 1972 (a second-tier bubble in the company of champions), today’s market features extreme disparities in value by asset class, sector, and company. Those at the very cheap end include traditional value stocks all over the world, relative to growth stocks.

Value stocks have had their worst-ever relative decade ending December 2019, followed by the worst-ever year in 2020, with spreads between Growth and Value performance averaging between 20 and 30 percentage points for the single year! Similarly, Emerging Market equities are at 1 of their 3, more or less co-equal, relative lows against the US of the last 50 years. Not surprisingly, we believe it is in the overlap of these two ideas, Value and Emerging, that your relative bets should go, along with the greatest avoidance of US Growth stocks that your career and business risk will allow. Good luck!

The original version of this article, available here, has been edited for length.

© 2021 by GMO LLC.

The ‘PEP’ era begins

Posted on January 6, 2021 by -

The “PEP” rally is starting slowly. But we’re only a week into it.

As of January 1, 2021, unrelated employers—not bound by a common industry, trade union or even geographical locality— can join a single 401(k) plan, called a pooled employer plan (PEP). The bipartisan SECURE Act of 2019 amended labor law to make PEPs possible.

But only 26% of 401(k) plan sponsors say they are at least “somewhat interested” in joining a PEP, according to Cerulli’s new report, US Retirement Markets 2020: Exploring Opportunities in the Small Plan Market. Among sponsors of existing “micro” plans with under $5 million in assets, just over one-third (36%) had “no opinion” on the topic.

“This may be the sign of a knowledge gap related to PEPs in the lower end of the market,” said Shawn O’Brien, a Cerulli senior analyst, in a release. “When addressing smaller employers, more educational discussions related to the costs and benefits of PEPs may be in order.”

Recordkeepers, advisors, and asset managers also exhibit varying levels of interest in either sponsoring or joining a PEP. Some have already announced plans to launch a PEP in 2021. Others are taking a “wait and see” approach to PEP opportunities. About four in 10 (39%) would “consider participating in the PEP market if approached by an advisor or consultant.”

So far, Aon, Mercer and Principal Financial have announced their intent to act either as PPPs or as service providers within PEPs. But they are outliers. Fewer than one in five (17%) defined contribution (DC) recordkeepers say they are looking to become service providers within a PEP or intend to act as the umbrella or general contractor of a PEP by becoming a pooled plan provider (PPP).

Of the plan advisers who intend to sell PEPs to employers, the majority will target “micro” and “small” plans with $25 million or less in plan assets, as well as employers without an existing workplace retirement plan. For employers with no plan, PEPs will be “sold, not bought,” Cerulli believes.

It remains to be seen what proportion of companies joining PEPs will switch from an existing plan—and bring a pool of assets and participants with them to the PEP—and what proportion will not have previously had a plan.

To help close the retirement plan “coverage gap”—only about half of US full-time employees have access to a tax-favored workplace savings plan at any given time—PEPs will have to attract the latter type of company.

What’s in it for the employers? PEPs can relieve them from many of the administrative burdens associated with offering a standalone retirement plan, and reduce their costs by enabling them to purchase retirement plan services with greater economies of scale.

“Small businesses often lack the benefits personnel and investment committees often housed within larger organizations,” O’Brien said. “Smaller plan sponsor clients aren’t necessarily looking for a best-of-breed custom target-date fund or a robust financial wellness program. Rather, they want a provider that can support them through the administrative challenges of offering a retirement plan.”

For providers, PEPs could be a vehicle for capturing more clients in the small plan market. For big asset managers, PEPs can aggregate many small pools of assets at small plans into pools of assets large enough to serve economically.

As recordkeepers, asset managers, third-party administrators (TPAs), and intermediaries navigate PEP opportunities, configuring an effective service model will be crucial. Cerulli suggests the flexibility around the type of individual or entity that may serve as a PPP, along with the range of fiduciary responsibilities involved in operating a PEP, could lead to a variety of models. “Providers considering the role of PPP need to be aware of the 3(16) fiduciary responsibilities involved,” said O’Brien. “Recordkeepers and TPAs are seemingly a natural fit for this role.”

PEPs aside, other providers have launched bundled solutions geared toward smaller plans to broaden their market presence and create new product distribution opportunities. Providers seeking to gain adoption in the small plan market must contend with the unique demands and constraints of small business employers and grasp the competitive differentiators specific to this market segment. Developing a simple, cost-conscious, easy-to-onboard 401(k) solution is merely the first step to succeeding in the small plan market, Cerulli said. Providers will also need to guide plan sponsors through some of the challenges associated with administering a retirement plan.

© 2021 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on December 17, 2020 by -

Retirement Income Journal takes a holiday break

As the toboggan-ride of a year slides to a snowy close–we received a foot of frosty flakes here in Emmaus, PA, yesterday–RIJ will begin its annual two-week hiatus. We will publish next on January 7, 2021. Thanks to all our subscribers, advertisers, and sources for all your support last year and in the coming year. Happy holidays from RIJ.

Fed to buy at least $120 billion in bonds per month

The Federal Reserve strengthened its commitment to support the U.S. economy, promising to maintain its massive asset purchase program until it sees “substantial further progress” in employment and inflation, Bloomberg News reported today.

At their final meeting of the year, policy makers led by Chair Jerome Powell on Wednesday voted to maintain monthly bond purchases of at least $120 billion and scrapped their previous pledge to keep buying “over coming months.”

They didn’t announce changes to the composition of purchases in their statement, declining to shift them toward longer-term maturities as some economists had recommended.

Powell called the new language on asset purchases “powerful,” but declined to specifically define what inflation and unemployment rates would trigger a future change in the buying campaign.

Global Atlantic adds $8.5 billion in reinsurance deal

Global Atlantic Financial Group Ltd., a U.S.-focused retirement, life insurance and reinsurance company that agreed last summer to be acquired by KKR, announced a reinsurance transaction with Unum Group involving a closed block of seasoned individual disability income business backed by $8.5 billion in assets.

The transaction will close in two phases, with approximately $7 billion in assets closing concurrent with signing and the remaining $1.5 billion expected to close in the first quarter of 2021, pending receipt of any required approvals and consents. This is the third block reinsurance deal for Global Atlantic in 2020, totaling over $16 billion of assets.

Over 95% of the block is comprised of spread-based claim reserves that pay a steady income stream to the policyholder, similar to fixed payout annuities. The balance of the block is active life policies not on claim.

Additionally, Unum will provide a volatility cover on these active lives, thereby reducing any material disability risk for Global Atlantic on this business. Unum will continue to administer the business and retain all policyholder servicing and operations functions.

Manu Sareen, president of Global Atlantic’s Institutional business, said in a release, “This is a seasoned run-off block of business with a rich history of data and stability of cash flows that are very attractive to Global Atlantic.”

The previously announced Ivy co-investment vehicle will invest alongside Global Atlantic’s subsidiaries. Business ceded to Ivy will be managed using Global Atlantic’s risk and investment management capabilities. In total following this transaction, Ivy will have deployed approximately 60% of its capital commitments.

With this deal, Global Atlantic further advances its position as a leading reinsurance franchise in the U.S. life and annuity marketplace, having reinsured approximately $50 billion of assets since its inception in 2004. I

n July 2020, Global Atlantic agreed to be acquired by a subsidiary of KKR & Co. Inc. The transaction, which is expected to close in early 2021, is subject to required regulatory approvals and certain other customary closing conditions.

Roth IRA assets surpassed $1T in 2019

Roth individual retirement account (IRA) assets grew to more than $1 trillion in 2019 from $600 billion in 2014 and represent the fastest-growing segment of the U.S. retirement market, according to the latest Cerulli Edge—US Retirement Edition.

“The Roth IRA market has exhibited sustained asset growth, and prospects for this segment are strong,” the report said. “Investor contributions and market appreciation were the largest sources of asset growth. Roth IRAs display stronger organic growth (i.e., independent of market performance) [than traditional IRAs] and are well positioned for future expansion.”

Demographic factors support the bullish outlook for Roth IRA rollovers. Individuals under the age of 30 are more likely to own a Roth IRA, while those over the age of 50 favor traditional IRAs, according to a Cerulli survey of retirement investors.

“Most Roth owners are in the phase of accumulating wealth for retirement and continue to grow their account balances,” said Anastasia Krymkowski, associate director, in a release. “Traditional IRA owners are more likely to be drawing down their savings to fund their retirement needs.”

Roth options within employer-sponsored defined contribution (DC) plans are increasingly common. As more participants accumulate Roth balances in a DC context, Roth IRAs will experience more growth from rollovers. Annual rollovers to Roth IRAs have steadily increased over the past decade.

Legislative changes could motivate individuals to save on a Roth basis or convert to Roth. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 eliminated the so-called stretch IRA. The law now requires non-spousal beneficiaries to draw down the entire IRA balance within 10 years of the account owner’s death. This could motivate IRA account holders (especially those with high earning beneficiaries) to favor Roth accounts, allowing for tax-free distributions in the future.

President-elect Joe Biden has proposed a tax credit (rather than a deduction) to all contributing 401(k) plan participants regardless of income level. Some view this as a potential catalyst for increased Roth 401(k) contributions.

“Higher-income individuals, who would no longer benefit from a sizable reduction in taxable income, may switch their savings basis from pre-tax to Roth,” said Krymkowski. Cerulli believes that retirement industry constituents should consider the implications of any potential revisions to the tax code.

© 2020 RIJ Publishing LLC. All rights reserved.

In line with SEC, DOL issues broker-friendly ‘best interest’ rule

Posted on December 17, 2020 by -

The final version of the Department of Labor’s “best interest” rule will hold retail financial advisers to the Impartial Conduct Standards, requiring them to charge only “reasonable compensation” and “make no materially misleading statements” to clients when giving advice.

The impartial conduct standard requires advisers to:

  • Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:
  • Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
  • Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm.

This version of the best interest rule reflects the spirit of the Trump administration. It is much more de-regulatory and less consumer-protective than the Obama administration’s 2016 best interest rule, which extended pension law standards over tax-deferred assets even after the assets are rolled out of qualified plans and into brokerage IRAs.

The Obama rule also required advisers to pledge to act entirely in their clients’ best interests, as fiduciaries, when recommending the purchase of indexed or variable annuities in rollover IRAs. That rule allowed investors to file federal class action suits against advisory firms for breaking that pledge, known as the “private right of action.”

In a press release today that responded to the DOL announcement, the Insured Retirement Institute applauded the rule’s:

  • Change from the original proposal allows a senior executive officer to sign a retrospective compliance review instead of the chief operating officer.
  • Exemption to allow financial institutions to engage in principal transactions with retirement plans and Individual Retirement Accounts (IRA) in which the financial institution purchases or sells certain investments from its own account.
  • Provisions that [place] enforcement authority with DOL regulators and not through a private right of action.

Eugene Scalia

This week’s DOL rule aligns with the Security & Exchange Commission’s best interest rule, which was announced in June 2019.

This new DOL version of the “exemption from prohibited transactions”—that is, transactions involving conflicts of interest between adviser and client—puts no special limits on the kind of compensation that clients may be charged, including third-party compensation that introduces a conflict for the adviser. Today’s DOL release said the exemption will be available to:

“Registered investment advisers, broker-dealers, banks, and insurance companies (Financial Institutions) and their individual employees, agents, and representatives (Investment Professionals) that provide fiduciary investment advice to Retirement Investors. The exemption defines Retirement Investors as Plan participants and beneficiaries, IRA owners, and Plan and IRA fiduciaries.

“Under the exemption, Financial Institutions and Investment Professionals can receive a wide variety of payments that would otherwise violate the prohibited transaction rules, including, but not limited to, commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties.

“The exemption’s relief extends to prohibited transactions arising as a result of investment advice to roll over assets from a Plan to an IRA, as detailed later in this exemption. The exemption also allows Financial Institutions to engage in principal transactions with Plans and IRAs in which the Financial Institution purchases or sells certain investments from its own account.”

Another part of the exemption says,

“The final exemption’s recordkeeping requirements have been narrowed to allow only the [DOL] and the Department of the Treasury to obtain access to a Financial Institution’s records as opposed to plan fiduciaries and other Retirement Investors,” the new rule said. “Second, the final exemption’s disclosure requirements have been revised to include written disclosure to Retirement Investors of the reasons that a rollover recommendation was in their best interest.”

In a press release Wednesday, American Council of Life Insurers vice president Jim Szostek said:

“We’re reviewing what the department released today with that goal in mind. Consumers deserve to know the best interest protections will be in place and that access for lower- and middle-income savers is safeguarded. Now more than ever, average income individuals and families need the ability to access financial certainty. The best interest standard makes sure that opportunity isn’t taken away — either inadvertently or with intent — by a fiduciary-only approach that shuts out the middle market from gaining a stronger financial footing.

The Insured Retirement Institute issued a statement that said in part, “The rule contains several positive changes that can help to ensure consumers will continue to access the financial products and services they need to achieve retirement goals,” said Jason Berkowitz, IRI Chief Legal and Regulatory Affairs Officer.

“We appreciate that the final exemption in the rule aligns with a best interest standard similar to the U.S. Securities and Exchange Commission’s Regulation Best Interest and the National Association of Insurance Commissioner’s model best interest regulation that states have begun to adopt.”

© 2020 RIJ Publishing LLC. All rights reserved.

Making Peace with the Tax Man

Posted on December 17, 2020 by -

Here comes the end of the year—the end of decade—and that means I’ll soon be writing my last estimated tax payment of the year. These seasonal checks to the IRS (actually they’re electronic transfers executed on the web) are among the biggest checks I’ll write all year.

“Writing” those virtual checks is painful, of course. But I’ve made my peace with the Tax Man. Or you might say, I’ve adopted a few rationalizations that make it tolerable, if not exactly sweet, to send those large checks to Uncle Sam each quarter. (If I didn’t have to pay income taxes, I could probably afford to hire an office assistant. But then how would I deduct the expense?)

Years ago, a band of “tax strikers” in Whitefish, Montana, argued that the alleged “confiscation” of their money by the IRS violated the US Constitution. More recently, Grover Norquist, the founder of Americans for Tax Reform, said he wishes for a government small enough to “drown in a bathtub.” I don’t agree with the bases of those views, as I note below.

Historically, Americans have always resented taxes. Every schoolchild learns about the Boston Tea Party and perhaps the Whiskey Rebellion as well. Here in Lehigh County, Pennsylvania, Frey’s Rebellion erupted in 1799 when Quaker taxmen arrived in sinister English-speaking pairs from Philadelphia and demanded about 25 cents per window from German-speaking homesteaders.

Coins were scarce in those days. So from their garnished windows, German frauen poured boiling water on the tax collectors below. Meanwhile their husbands met at the Commix Hotel, Red Lion Inn and Trum Tavern (all still serving ale and spirits) to plot their resistance. During the ensuing skirmish with Alexander Hamilton’s troops, they were too drunk to shoot straight. No harm, no foul; a jury in Philadelphia chose not to convict the eponymous ringleader, John Frey, of treason.

Taxes today are far more than 25 cents per window, but they’ve stopped bothering me. One of my rationalizations is that I’ll get part of my taxes back in the form of a guaranteed inflation-adjusted joint and survivor life annuity, plus health care, in retirement, thanks to Social Security and Medicare. I think even the wealthy undervalue those social insurance programs.

A second rationalization is that federal government spending accounts for about 31% of U.S. gross domestic product. I figure that, since money is so fungible, about 31% of my own revenue (and the value of public services I use, like freeways) must come from Uncle Sam’s expenditures. So it makes sense to pay about a third of my taxable income back to the government.

A third, and related, reason why taxes don’t discourage or inflame me: I believe that paying taxes reduces inflation and ipso facto, protects the purchasing power of my after-tax dollars. This may or may not technically be true (economists still differ). But from what I know about the “monetary circuit” (i.e., the federal government spends high-powered dollars into existence and taxes them out of existence; in between, the banks multiply the dollars by lending them) this makes sense.

The history of paper money bears this out. In colonial America, this is exactly what happened. If a bridge or toll road was needed and no one, as was often the case, had access to significant quantities of gold or silver money, a state government might issue paper money to pay the contractors. Simultaneously, they levied a tax—as dues for living in the colony, you might say.

The money was declared legal tender. Its value would be moot if not for the fact that, at tax time, people could use that same paper money to settle their tax bill. When the tax was collected, officials of the colony burned to remove it from circulation and
“make room” for a new round of paper-money issuance to pay for infrastructure, lest it cause inflation.

You may not buy that story. But it’s documented (thank you, Farley Grubb of the University of Delaware) and it explains why we don’t have to pour boiling water on IRS agents anymore. If the government really needed to squeeze money out of us before it could pay any of its bills, then two thickset gentlemen would probably appear on your doorstep every April 15 with badges and a warrant to search under your couch cushions. It would be ugly.

All of these rationalizations have led me, however reluctantly, to conclude that taxes are simply the cost of money; or, at least, the cost of maintaining the value of our fiat money, which has succeeded in financing a far-reaching empire because it is universally accepted as legal tender.

We should certainly not pay any more taxes than we absolutely must. But we’re only diluting the currency pool by taking extraordinary measures not to pay them. That’s why Grover Norquist’s bathtub story gets it wrong. Without taxes, we would not be richer. Without taxes, there would be no US money—and nothing in which to drown the government.

© 2020 RIJ Publishing LLC. All rights reserved.

What’s Missing from SECURE 2.0

Posted on December 17, 2020 by -

In December 2019, the SECURE Act was signed into law, with one of the primary intents to improve the delivery of retirement income solutions through 401(k) plans. One provision provides fiduciary liability protection to employers who include annuity options in their plans. Another provision requires all defined contribution plans to disclose annually the value of each participant’s account balance as an annuity in retirement.

Fast-forward to 2021, when bipartisan legislation called SECURE 2.0 is likely to become law. Though SECURE 2.0 aims to improve retirement outcomes through expanded coverage and increased contribution levels, it lacks two provisions that I believe would improve it:

Non-insured retirement income options. The Department of Labor (DOL) should be required to provide fiduciary liability protection to employers who offer non-insured retirement income options under their 401k plans. Surveys indicate that, while many participants welcome plan-based retirement income options, many prefer to not purchase annuities.

Fearing potential fiduciary liability, few plan sponsors currently offer non-insured income options. The more options a plan offers (beyond those required by law) the greater the risk of lawsuits should the participant dislike the consequences of having elected that option. With protection from this liability, more employers might be amenable to adding non-insured options to their plans.

Those options might include distributions based on the 4% rule, on the required minimum distribution tables, or actuarially based on investment returns and life expectancy. The first two might incorporate minimum or maximum annual withdrawals. The latter option could include distribution patterns based on expected spending needs at various retirement stages. Employees could of course opt out or change at any time without penalty. The DOL might suggest additional options.

Variable QLACs. The Internal Revenue Service (IRS) should be required to allow the use of variable Qualifying Longevity Annuity Contracts (QLAC). Currently, QLACs must provide a fixed guaranteed income. As a result, insurers hold the premiums in their general accounts in low risk securities. In today’s low interest rate environment, this practice makes QLAC payouts unattractive on a price-to-benefit basis.

The lengthy accumulation period of these contracts (between premium payment and the first benefit payment) can be 15 or 20 years. Few retirees wish to lock in their future retirement funds for such a long period with an unattractive internal rate of return.

Allowing variable QLACs could potentially provide larger and more attractive future income. As an example, over a 15-year period the difference in the accumulation of funds between a 3% and a 5% rate of return would result in a 33% larger benefit. One approach might be to invest the premium at purchase date in a target date fund that converts to a fixed income annuity at payout date.

As Congress addresses the retirement income challenge faced by tens of millions of retirees who will rely on withdrawals from their defined contribution plan accounts for essential income, an increased focus on retiree preferences is critical.

Reader comments can be directed to [email protected]

© 2020 RIJ Publishing LLC. All rights reserved.

The Catch-22 of In-Plan Annuities

Posted on December 17, 2020 by -

The road to including lifetime income options in the investment lineups of defined contribution (DC) plans was smoothed a bit by the 2019 SECURE Act. But the law didn’t remove every roadblock that annuity issuers face before 401(k) plans can become a thriving distribution channel for their products.

[Note: Factual errors about the Principal Pension Builder in the December 17 version of this story have since been corrected.]

To be sure, the Act did a couple of important things. It reduced the legal liability of plan sponsors for their choice of annuity provider, allowed participants to take their annuities with them when changing jobs, and made it easier for participants to see how much monthly income their current accumulations could buy.

But the Act didn’t remove a Catch-22 that complicates the introduction of annuities into 401(k)s. Annuity issuers can’t tailor annuities to fit 401(k) rules and still give full rein to the value of annuities.

The life insurers ideally hope that their 401(k) annuity offerings can be bundled into qualified default investment alternatives (QDIAs), so that participants can be auto-enrolled (defaulted) into them. At the same time, pension law requires life insurers to make their 401(k) annuities liquid—i.e., convertible to cash instead of to an income stream in retirement. Current QDIAs are target date funds (TDFs), managed accounts and stable value funds.

But, to check both of those boxes, annuities must become a bit less annuity-like. Part of an annuity’s yield advantage—their “alpha,” so to speak of—depends on their illiquidity (locking money into higher-earning, long-term investments). Additional yield depends on pooling effects (risk-sharing among participants that could entail forfeiture of assets to other pool members).

Because those key characteristics conflict with the rules governing 401(k)s, life insurers must adapt their annuities in various ways to fit the 401(k) world. Luckily, they don’t have to start from scratch. They’ve had several years of practice with this challenge, which is part legal, part behavioral (popular resistance to illiquidity and pooling).

Principal Pension Builder

Principal Financial and TIAA are bullish about their in-plan annuity designs, which involve deferred income annuities (DIAs). Contributions to the DIAs would grow in value during the participant’s accumulation years. Later, if they desire, participants would need to actively choose to convert the assets to lifetime income or cash them out gradually all at once.

These products allow participants to enjoy the relatively high returns and low volatility that come from investing in a life insurer’s general fund instead of in an ordinary bond fund. The general fund achieves higher returns by adding a dash of high-yield investments to a portfolio consisting mainly of highly rated corporate bonds. The general fund mitigates volatility by holding bonds to maturity.

The Principal Pension Builder, first introduced in 2015, has been reintroduced as the in-plan annuity option for companies that join Principal EASE, which is Principal’s Pooled Employer Plan, or PEP. (PEPs are plans that dozens or hundreds of unrelated companies can join; the SECURE Act made PEPs possible.)

EASE participants can’t be defaulted into the Pension Builder DIA; they must choose it and allocate part of their contributions to it. With each contribution, they buy a slice of guaranteed lifetime income in retirement. In the hypothetical example from Principal’s Pension Builder brochure, a participant might begin contributing to the DIA at age 50.

  • “Participants who purchase PPB on a payroll basis are purchasing slices of annuities with each purchase,” a Principal spokesperson said. “The monthly guaranteed income amount purchased will not change in value during the participant’s accumulation years, as the deposit has purchased a deferred income annuity for that participant and the value is no longer exposed to the market. Participants are given the opportunity as they approach the income start date to choose a different income start date or a different form of annuity, which will provide them with the actuarial equivalent of the monthly guaranteed income amount they were promised at the time of deposit.”

principal chart 11-19-20

TIAA RetirePlus

TIAA deals with the liquidity/general account conflict differently in its RetirePlus program for 403(b) plans at non-profit institutions. Participants can be defaulted into RetirePlus, which is a kind of custom target-date managed account that each employer can fill with its own investment lineup. If the employer wishes, the fixed income option in the program is a TIAA group fixed deferred annuity instead of the usual bond fund.

In its RetirePlus solutions, TIAA offers a modified version of TIAA Traditional, the fixed deferred annuity that TIAA plans have offered for decades. The difference is that the fixed annuity in RetirePlus plans is fully liquid (to satisfy the QDIA requirements) and the classic TIAA Traditional annuity is much less so.

But there’s a cost to adding liquidity. Yields vary, depending on the version of fixed annuity contract RetirePlus a plan sponsor uses, the prevailing interest rates, and a participant’s own longevity with TIAA, but the yield of the fixed annuity in RetirePlus solutions will always generally be about 75 basis points (0.75%) less than TIAA Traditional. If a participant wants to cash out of the fixed annuity, TIAA pays them out of reserves.

There is no penalty for participants who take the fixed annuity portion of RetirePlus as cash, but they’d be giving up a valuable annuity if they didn’t take their account value as a retirement income stream. That’s because the TIAA income annuity continues to accrue dividends for the life of the contract, creating the potential for a rising income in retirement. While RetirePlus is currently marketed to 403(b) plans, TIAA sees no reason why a similar solution can’t be used in the 401(k) market.

From a TIAA RetirePlus video

Which product design will win?

Other DIA-based 401(k) annuity offerings have appeared recently, notably from BlackRock and Wells Fargo. Participants who invest in BlackRock’s LifePath target date funds would see part of their contributions shift into an in-plan group annuity at age 55. At retirement, they could turn on an income stream that combined payouts from the annuity and systematic withdrawals from their remaining investments.

Participants in Wells Fargo Retirement Income Solutions program can contribute to a target-date Collective Investment Trust (CIT). At retirement, 15% of their account balance would be applied to the purchase a qualifying longevity annuity contract, or QLAC. A QLAC is a deferred income annuity whose payouts can be delayed until age 85 without violating the rule on required minimum distributions at age 75.

DIAs received a vote of confidence recently from Cerulli, the global consulting firm. Cerulli recently reported that, of all 401(k) in-plan annuity designs, DIAs may offer the best value. “[We believe] annuitization products, where an investor converts a lump sum to a guaranteed income stream, represent the better solution for DC plans,” according to The Cerulli Edge U.S. Monthly Products Trends report for November 2020.

Cerulli is less enthusiastic about the guaranteed minimum withdrawal benefits that characterized the first generation of 401(k) annuities. These were target date funds with a living benefit rider attached. At about age 45 or 50, participants were defaulted into paying 1% per year for a rider that offered a lifetime income guarantee and liquidity. The value-add of this product comes from allowing retirees to stay invested in equities and get exposure to the equity premium throughout retirement. Many people have difficulty understanding these products, which have two sleeves: the cash value of the contract and the “benefit base,” a notional amount used as the basis for calculating the owner’s minimum guaranteed annual income in retirement.

But those products, all introduced before the SECURE Act, did not find a significant market. “There are a handful of target products that offer guaranteed retirement options, most notably guaranteed minimum withdrawal benefits (GMWBs),” the Cerulli report said, but added that “GMWBs often have Byzantine rules and restrictions associated with them, making them challenging for less sophisticated investors to understand.”

© 2020 RIJ Publishing LLC. All rights reserved.

 

 

Bermuda Triangle Part IV: The Reinsurance Angle

Posted on December 10, 2020 by -

When a life insurer “cedes” a block of fixed indexed annuity (FIA) contracts to a reinsurer and the deal releases hundreds of millions of dollars in reserves that had previously supported the liabilities in that block, are the contracts blocks less safe than they were before? 

And should the adviser who sold the contract or the client who bought the contract be at all concerned about the future administration or the safety of the contract?

We tossed these questions out to people who follow the life/annuity reinsurance space and they gave us three definitive answers: “No,” “Maybe,” and “Yes.” It all depends, evidently, on the type of reinsurance deal under discussion.

In the case of a plain-vanilla transfer of risk from one life insurer to a second, unaffiliated life insurer, then the adviser and client needn’t give it any thought. “Reinsurance is not an event. It’s part of the process and seamless,” said an Ameriprise adviser who has sold many fixed indexed annuities over the past decade. 

But if a life insurer transfers a block of annuities to a captive reinsurer—that is, to itself—then there might be cause for concern. Those transactions tend to be opaque and at less than “arm’s length.” And if the reinsurer is domiciled in a regulatory or tax haven like Vermont, South Carolina, Bermuda or the Cayman Islands, it’s another potential red flag. Those jurisdictions might be less fussy about the amount or type of assets they require as reserves. 

Mike Gilotti

“The original issuers could probably still own riskier assets on their own balance sheets, but not in the same amounts as the offshore reinsurer can,” Mike Gilotti, a retired insurance industry consultant, told RIJ. “Or, if they did, they would have to reserve more or see it reflected in their average credit ratings.” The ultimate purpose for these maneuvers, he added, is to issue products that have higher crediting rates. “They’re trying to remain in a competitive position. That’s what’s going on here.”

RIJ began reporting on the “Bermuda Triangle” strategy last August. We have focused on partnerships between annuity issuers and asset management companies. The asset managers seek higher returns by investing part of the annuity assets in securitized bundles of debt. 

An equally important corner of the triangle involves the use of reinsurance to move life insurance and annuity liabilities off of the life insurers’ balance sheets to release reserves and/or invest in riskier assets. Earlier this year, three Federal Reserve economists published a paper on all three corners of the triangle. Academics at Princeton and the London Business School began studying this world of “shadow insurance” in 2013. They wrote:

“Liabilities ceded to shadow reinsurers grew significantly from $11 billion in 2002 to $364 billion in 2012. This activity now exceeds total unaffiliated reinsurance in the life insurance industry, which was $270 billion in 2012. Life insurers using shadow insurance tend to be larger and capture 48% of the market share for both life insurance and annuities. These companies ceded 25 cents of every dollar insured to shadow reinsurers in 2012, up from two cents in 2002.”

Pittsburgh-area advisor Matt Zagula, founder of Smart Retirement Advisors, has grown so concerned about this phenomenon that he created his own benchmarking system to measure the exposure of various FIA issuers to offshore reinsurers with hard-to-evaluate assets.  

Matt Zagula

“If the life insurer created a captive offshore reinsurer and transferred a block of business to it, we have to ask, ‘Why did they put it in there?’ If we can’t say with any degree of certainty that the reinsurer is as solvent as the ceding company, where we could see the assets, then we would suspect that there’s a reason for the lack of transparency. If they didn’t get an advantage from the reinsurance transaction, why did they do it?”

Ultimately, this is all about the sustained low interest rate environment and the way it has reshaped the life insurance industry since the Great Financial Crisis (GFC) of 2008-2009. The GFC and the interest rate drought drove life insurers out of the annuity business, created a slew of divestitures, mergers and acquisitions, and reinsurance deals, and—along with certain regulatory changes—inspired life insurers to do captive reinsurance deals. 

The GFC (and subsequent regulatory changes) also opened opportunities for private equity artists (starting with Apollo’s acquisition of Aviva and most recently involving KKR’s acquisition of Global Atlantic) to enter the annuity business and acquire control of the money supporting long-term annuity contracts and deploy part of those assets into securitized investments. The process has elevated a product once scorned by all but “Wild West” insurance agents—the FIA—into the annuity industry’s flagship product.

Tom Gober is a forensic accountant in Richmond, VA, who has followed this trend for years.  “Over the past decade, virtually all for-profit life insurance companies have engaged in these special purpose captive reinsurance deals,” he told RIJ. He described two types of problems that can crop up after a reinsurance deal.

The first is a potential administrative problem that would affect individual policyholders. “Any time a transaction puts distance and time between the annuity owner and whoever is collecting premiums or sending money—anytime a gap is created—you increase the odds of bad things happening,” he said. For instance, the reinsurer might outsource policyholder communications to a third-party company, which then fails to keep policyholders informed about  actions they must take or benefits due to them. 

The second type of problem is more troubling. It involves the reinsurance deals we’re discussing here, where a life insurer uses a wholly owned or affiliated captive reinsurer (owned by the same holding company) in a tax or regulatory haven to create a paper transaction that frees up reserves—without reducing the original insurer’s liabilities. Multiple life insurers have done this many times since the GFC, creating what some believe is a potential buildup of systemic risk for the life insurance industry.

One document Gober shared with RIJ showed evidence of this. The document was filed with the National Association of Insurance Commissioners (NAIC) for 2019 by a major life insurer. It listed the assets and liabilities ceded to the insurer’s wholly owned reinsurer. In this case, the parent company took a reserve credit of more than $1.5 billion, and transferred half a billion to the captive reinsurer. The parent declared more than a $1 billion in unspecified “letter of credit-like” assets to cover the difference in reserves.

“I believe that many of these blocks of business are only being funded in part with real assets; the rest are being backed by contingent items that do not qualify as assets. Every transaction with a captive which funds any amount less than real liabilities is in violation of the NAIC’s Model Holding Company Act,” Gober said. 

Even when the reinsurer is not affiliated with the ceding life insurer, Gober believes, the profits anticipated by the reinsurer—made possible by the looser standards of the regulatory or tax haven—may be helping finance the reinsurance transaction and produce the desired gains for the ceding company.

As RIJ reported last August, Bermuda uses a different accounting standard (GAAP), which doesn’t require reinsurers to hold as much reserve capital as US (statutory) accounting rules do. A US life insurer can create its own reinsurance company in Bermuda and then can move a block of annuity business (“reinsure” it) to that new company. This act alone frees up capital, which the life insurer can use for other purposes.

“By having a Bermuda-based reinsurer, some companies are doing indirectly what they couldn’t do if the assets and liabilities stayed with the original domestic issuer: Get a credit for having reinsurance and take hard assets out,” said Larry Rybka, CEO of Valmark Financial Group, which helps advisers monitor the products they sell, in an interview last summer.

Can we assume that because a company released reserves through reinsurance that the liabilities transferred to the reinsurer are not as well protected as they once were? These new structures are so complex and so varied, that even people who should be in a position to know where all the numbers are buried don’t know the answer, said Mike Gilotti. 

“The assumption you can truthfully make about the reinsured liabilities is that those contracts are backed differently from the way they would be backed in the US,” he told RIJ.  “You can’t tell by looking at the amount of capital released in the transaction that the reinsured liabilities aren’t supported as well. There are just too many variables involved. Even people in the business don’t always have a handle on it.”  

© 2020 RIJ Publishing LLC. All rights reserved.

Shadow-Boxing with the Fed

Posted on December 10, 2020 by -

In the wake of the less-than-spectacular (though I think under-rated) November employment report, research shops are telling clients that the Fed will most certainly shift the pattern of asset purchases toward the longer end of the yield curve.

I find this position curious. Fed speakers have said both implicitly and explicitly not to expect changes to the asset purchase program at this next Fed meeting. From my perch, there appears to be a communication error in the making.

That said, I will lay out (again) the case for additional Fed easing as well as the alternative (and, I think) more likely scenario. Here are the prominent elements of the Fed’s recent communications:

First: The Fed wants to emphasize it is not considering raising interest rates. This is fairly straightforward. The Fed does not want to repeat the mistakes of the last cycle and engender expectations of policy normalization.

Second: The Fed’s new strategy suggests that public comments from FOMC participants will have a downward forecast bias, particularly in the near-term. In one of my classes, we do an exercise where a forecaster has an asymmetric loss function; errors on one side of the forecast cost more than errors on the other side. As a consequence, the forecaster should bias their forecast to minimize the odds of an error on the “wrong” side of the outcome distribution. The Fed has explicitly adopted an asymmetric loss function in its policy framework:

Owing in part to the proximity of interest rates to the effective lower bound, the Committee judges that downward risks to employment and inflation have increased.

The rational thing to do when you have such a loss function is to emphasize the downside risk. In other words, when making policy considerations, the Fed is biasing its forecasts down to mitigate the risk associated with being close to the effective lower bound.

This supports an excessively pessimistic public position in which the Fed will say more policy support is likely needed–even if an unbiased forecast says no such support is needed. This will encourage market participants to expect easing even if no reasons for it exist.

Third. The Fed is “woke.” The Fed has long ignored the micro-consequences of its actions, preferring to focus on the macro story. This focus has led the Fed to embrace the risk of higher unemployment in order to reduce the risk of inflation—even though the latter hasn’t been a problem. With the help of the ‘Fed Listens’ events, the Fed now understands how it inadvertently contributed to high unemployment. The Fed now reminds us that it has learned from its errors with comments such as this from the minutes:

Many participants observed that high rates of job losses had been especially prevalent among lower-wage workers, particularly in the services sector, and among women, African Americans, and Hispanics. A few participants noted that these trends, if slow to reverse, could exacerbate racial, gender, and other social-economic disparities. In addition, a slow job market recovery would cause particular hardship for those with less educational attainment, less access to childcare or broadband, or greater need for retraining.

This language, while accurate, contributes to a perception of negative bias in the Fed’s outlook. Note also that while some of these problems are cyclical (a persistently strong job market will help alleviate the stress on lower-wage households), many are structural. Even with a strong job market and fiscal policy fixes, they won’t entirely go away.

The Fed can’t fix everything. It will be interesting to see how it explains pulling back on policy when these issues haven’t been resolved.

Fourth: The Fed wants more fiscal support for the economy. Rightly, in my opinion, it believes the economy’s immediate problems require a fiscal rather than a monetary response. I believe the Fed’s oft-stated concerns regarding the near-term outlook have more to do with maintaining public pressure on Congress to act rather than signaling a monetary policy response. Market participants, however, might interpret the Fed as indicating it will attempt to compensate for a failure by Congress to reach a compromise on fiscal policy.

Fifth: The Fed insists that its tools remain effective and that it will use all of them to support the recovery. Vice-chair Richard Clarida recently said:

These large-scale asset purchases are providing substantial support to the economic recovery by sustaining smooth market functioning and fostering accommodative financial conditions, thereby supporting the flow of credit to households and businesses. At our November FOMC meeting, we discussed our asset purchases and the critical role they are playing in supporting the economic recovery. Looking ahead, we will continue to monitor developments and assess how our ongoing asset purchases can best support achieving our maximum-employment and price-stability objectives.

This suggests that the Fed believes that it can turn up the dial on asset purchases to accelerate the recovery. But that’s wrong.

Sixth: The Fed is increasingly aware of the medium-term upside risks to the forecast, but often downplays those risks. Chair Jerome Powell, for example, in recent testimony that news on the vaccine front is very positive for the medium term. But market participants can be forgiven if they don’t focus on that point. Neither can Powell, because the above points force him back to the near-term risks:

For now, challenges and uncertainties with respect to the vaccine remain, including timing, production and distribution, and efficacy across different groups. It remains difficult to assess the timing and scope of the economic implications of these developments with confidence.

Altogether, the Fed’s messaging dwells on the imminent downside risks to the economy. It feels a need to avoid anything that might sound like it intends to revise the path of interest rates. It’s saying that the economy needs more support, and that it has the tools to support it.

Bottom Line: I have no secret source telling me what will happen next week. I understand the belief that more easing is coming. But I don’t like to predict the opposite of what multiple Fed speakers are saying. The Fed seems to be saying that it will go after the low-hanging fruit by issuing some guidance on the asset purchase program at the next meeting.

In November, the Fed did discuss potentially changing the duration mix or the size of asset purchases. But that discussion regarded policy beyond the current surge of COVID cases.

With financial conditions currently easy and the Fed unable to impact near-term economic outcomes, it has no reason to change policy next week. Of course, the Fed could address any unexpected tightening of financial conditions between now and the meeting.

© 2020 Tim Duy.

Teach Your Brain to Handle Crises

Posted on December 10, 2020 by -

The human brain is a meaning-making machine: It evaluates and reevaluates input, detects patterns, and creates meaning in order to adjust and calibrate our behavior, emotions and actions. As a result, having access to information is vital to our sense of security.

Unfortunately, a lack of sufficient data disrupts this process. It requires tremendous cognitive energy to reconcile uncertainty, weigh risks and probabilities, and predict outcomes. When there are gaps in our information, the brain fills those gaps by making up a story.

If the story we create feels straightforward and easy — regardless of whether it’s accurate — we feel a sense of ease because the internal conflict has been reconciled. When incomplete patterns are completed, we experience a feeling of reward, triggering a dopaminergic response in the brain that we will then crave again the next time we’re in the same situation.

This positive experience motivates us to carry out the same exploratory process the next time we face uncertainty, seeking to turn negative feelings into a positive outcome, to turn uncertain into certain — or, to be more precise, to turn the uncertain into the familiar.

Because of course, the future is never truly certain. We forget that uncertainty is not unique to a crisis, but a permanent fixture of life. What we tend to think of as certainty is often just familiarity, which aids predictability. But that’s OK — familiarity and predictability are comforting enough.

How the uncertainty of crisis disrupts work

Crises are usually acute — sudden, dynamic, volatile and riddled with compounded unknowns. They force organizations and individuals to adjust and course-correct on the fly. Lacking sufficient data to predict outcomes, we feel untethered and disoriented and find it difficult to reconcile short- and long-term planning.

In the case of coronavirus, the unknowable length of the pandemic has thrown a wrench in our short- and long-term predictions. The time horizon for living “normally” again depends on factors we can’t control, such as the availability of vaccines and the health of the economy. With no clear and consistent plan and a time horizon that changes continually due to a lack of public compliance, we all feel stuck in a disorienting loop.

The uncertainty of crisis distorts our perception in many ways. The presence of so many unknowns triggers stress responses that color our cognition and, consequently, our behavior. We enter a self-reinforcing circle: The more unknowns there are, the more stress we feel, and the more reactive and instinctive we become. This vicious cycle disrupts our ability to think rationally and deliberately.

The brain’s most crucial function is to keep us alive — a task it accomplishes by surveying the environment, evaluating sensory input and assessing whether the stimuli it encounters constitutes a threat to survival. Since it’s less costly to overestimate danger than to underestimate it, the brain’s threat detection networks err on the side of caution. The brain categorizes the novel or ambiguous as aversive — and views uncertainty as a source of deep discomfort.

The good news is that we evolve, adapt and learn from adversity — and in times of crisis, we can manage our need for certainty by finding clarity where we can.

How leaders can support employees

Organizations must understand that the stress of uncertainty affects not just employees, but leaders as well. No one is immune to the impact a chronic state of uncertainty has on cognition and behavior.

The stress of uncertainty, and the fact that hierarchical power can blind us to the perspectives of others, means that in times of crisis, leaders may have less capacity to empathize and engage in perspective-taking to understand their employees.

That’s why the traditional approach to crisis — asking leaders to project strength and courage and to mask any signs of weakness — is misguided, serving only to create distance between them and their workforce.

A hallmark of empathic leadership is an understanding that without compassion, resilient leaders fall short, even inadvertently signaling contempt for employees who are struggling or underperforming due to the stress of crisis. It’s crucial that leaders avoid this unintended trap.

Leaders should make a point of displaying vulnerability. No leader has total knowledge of the future. That’s why leadership in this era of prolonged uncertainty means being able to say: “I don’t have the answer, but we’ll figure it out together.”

In a recent NeuroLeadership Institute research study, we found that in times of crisis, employees need their managers and leaders to do three things:

  • Be transparent about what decisions are being made and why.
  • Be clear about how managers can support employees.
  • Model behaviors that are productive, not destructive.

Finally, leaders of organizations can help employees stay healthy and productive through times of uncertainty with a few research-based strategies:

1. Be comfortable with feeling uncomfortable.

Leaders can help employees shift their mindset, learning to see crises as opportunities to learn, grow and adapt. When they shift their mindset in this way, employees feel equipped to rise to the occasion and handle whatever challenges arise.

Specifically, employees can reframe the way they view a crisis, coming to view prolonged ambiguity and uncertainty as an opportunity to develop skills they would not otherwise acquire. Research shows that reframing challenging circumstances in this way builds resilience — the ability to withstand, adapt and learn from adversity, developing an ever-evolving shield that prepares us for future adversity.

2. Focus on clarity over certainty

Leaders can help employees manage the threat they feel in response to rapidly unfolding changes by offsetting the decrease in certainty wherever possible by focusing on questions that actually can be answered.

Leaders should be intentional about finding ways to increase employees’ sense of certainty. By simplifying options, articulating timelines and anchoring on core principles, they create the structure, order and predictability employees need to restore their sense of control.

3. Be essential, not exhaustive

As stress, anxiety and fatigue rise, creating a risk of burnout, leaders can focus on the essential instead of trying to be exhaustive.

Leaders should let go of the need to have all the answers. When novel situations arise, as they inevitably will, focusing on the essential eliminates distractions, easing the burden on the brain.

Research shows that panic and paralysis aren’t inevitable reactions to crisis. By understanding the needs of employees to belong, to know and to have a say, leaders can focus on the strategies that will raise engagement and performance. Together, individuals and organizations can achieve tasks that may have seemed impossible under normal circumstances.

Kamila Sip, Ph.D., is senior director of neuroscience research at the Neuroleadership Institute. Jay Dixit is senior science writer — North America for the NeuroLeadership Institute. 

Brain-based leadership in a time of heightened uncertainty

Income annuities are “best solution for DC plans”: Cerulli

Posted on December 9, 2020 by -

Annuitization products where an investor converts a lump sum to a guaranteed income stream in retirement are a “better solution for defined contribution plans,” according to a recent issue of The Cerulli Edge—US Monthly Product Trends.

But 64% of respondents to Cerulli’s 2020 Target-Date Manager Survey still cite lack of plan sponsor demand for guaranteed retirement solutions as an obstacle to adoption—despite the 2019 SECURE Act’s provision of regulatory protections for offering annuities.

“The most challenging aspect of offering retirement income products through a defined contribution plan is educating investors on the inherent tradeoffs between maximizing the contradictory factors of guaranteed income, income maximization, and liquidity,” Cerulli analysts write.

Other highlights from the new Cerulli report are:

Asset flows. Mutual fund assets declined 1.5%, to about $16.2 trillion at the end of October. Net flows dipped below zero for the second straight month, with mutual funds ceding $15.3 billion. Exchange-traded fund (ETF) assets shrank by 0.8% over the course of October, but remain above $4.7 trillion. The asset decline was mitigated by $32.1 billion in net flows during the month.

Advice. Investors are far more concerned with the outcomes of their advice relationships than with the mechanics of their portfolios. Asset managers have increased their focus on offering model portfolios, with limited success to date for most. To gain traction, model providers will need to offer truly differentiated strategies that objectively increase the probability of clients achieving their financial goals.

RILAs seen as new flagship annuity

Registered index-linked annuities (RILAs) are poised for growth as more large, reputable insurers enter the space with innovative concepts, according to Cerulli’s latest report, U.S. Annuity Markets 2020: A Decade of Adaptation.

RILAs, whose sales reached a quarterly record of nearly $5 billion in 4Q 2019, “offer the client participation in the returns of mainstream market indices, while protecting the client on the downside, reminiscent of a guaranteed living benefit (GLB), though not as risky for the issuer,” according to Donnie Ethier, director of Cerulli’s Wealth Management practice.

“Several insurers are currently developing RILAs and plan to deemphasize their traditional variable annuities that are more difficult to hedge,” he said in a release this week. With rapid RILA product development and growing acceptance among broker/dealer home offices and advisors, Cerulli expects RILA sales will continue to increase faster than any competing annuity type through 2025.

Cerulli anticipates that RILAs will attract sales and market share away from competing annuity designs. RILA sales were $2.2 billion in 2Q 2018, then achieved a seven-quarter streak where their sales were either the same or better sequentially.

“There is more to the RILA story than simply the product’s inherent characteristics—that is, the promise of some upside potential, linked to market index gains, coupled with a limited degree of downside protection,” Ethier said, adding that insurers have successfully educated distributors and advisors on the product’s advantages. 

© 2020 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on December 9, 2020 by -

Retirement plans cope better this year than in 2008-2009

More than 90% of employers will make their retirement plan contributions this year—a much better performance than in the 2008-2009 financial crisis, according to a new survey of retirement plan sponsors by the Plan Sponsor Council of America, a part of the American Retirement Association.

Nonetheless, 11.5% of plans with fewer than 50 participants changed their matching contribution. That’s more than three times the number of organizations with 5,000 or more participants, the survey showed.

Four times as many employers suspended or reduced their match during the 2008-2009 crisis than during the 2020 crisis, said Hattie Greenan, research director for PSCA, part of the American Retirement Association. 

In 2008 companies that suspended their matching contributions experienced a decrease in plan participation to a much greater degree (72.9 percent of companies) than those that did not change their matching contribution (14.4 percent of companies), as well as a decrease in participant deferral rates.

“I think many [plan sponsors] went into this period expecting it wouldn’t last all that long, likely muting the potential impact on retirement savings,” said Nevin Adams, chief content officer and head of research for the American Retirement Association, in a release. “Mitigating factors, such as the recent broad-based government assistance in the form of the Payroll Protection Program, and have almost certainly helped as well.”

Relying on provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act for permission to do so, more than half of the plans surveyed are allowing coronavirus-related distributions (CRDs). Nearly a third are allowing increased plan loan amounts. Half of plans are allowing participants to pause payments on existing loans that are due through December 1, 2020 and defer payments for up to a year. This is more common at large companies (73.3% of plans) versus smaller ones (23.1%).

One in four plan sponsors reported a recent increase in plan loans, up from 13% of plan sponsors reporting an increase when survey five months ago. Nearly 40% of plans noted an increase in withdrawals since last summer. If only 10% of the roughly 600,000 employers suspended or reduced their contributions, the long-term impact on retirement security would be significant, the PSCA said.

PSCA surveyed plan sponsors in early November 2020 regarding their response to current conditions. The survey received responses from 139 companies that sponsor a 401(k) plan for employees. The full report is available at https://www.psca.org/research/cares_snapshot3

Public pensions have shown “great resiliency” this year: Milliman

The estimated aggregate funded ratio of the nation’s 100 largest public pension plans is 70.7% as of June 30, 2020, down from 72.7% reported in 2019, according to the results of the 2020 Public Pension Funding study by Milliman, the global consulting and actuarial firm. The study assesses the expected real return of each plan’s investments.

The aggregate Total Pension Liability reported at the last fiscal year-ends (for most plans, this is June 30, 2019) was $5.27 trillion, up from $5.07 trillion as of the prior fiscal year-ends, Milliman found. Between the 2019 and 2020 PPFS, over one quarter of the plans (28) lowered their interest rate assumptions, with 90 of the plans now reporting assumptions of 7.50% or below.

“While the impact of the COVID-19 pandemic on public pensions’ financials is not fully clear, plans in this year’s PPFS experienced a huge swing in the estimated combined investment return, from -10.81% in Q1 2020 to 10.72% in Q2. More concrete evidence of the pandemic’s impact will be available once next year’s financial statements are published,” Milliman said in a release.

“Beyond market volatility, which has affected plan assets, we expect that furloughs and shutdowns as a result of the COVID-19 pandemic will impact pay levels and employee contribution amounts, while pressure on government budgets will make it hard to free up dollars to contribute to the plans to shore up their funding,” says Becky Sielman, author of the funding study.

“But public plans have, by and large, shown great resiliency. They are designed and financed to function over a very long time horizon, and can take short-term setbacks in stride.” The full Milliman 100 Public Pension Funding Study can be found at http://www.milliman.com/ppfs/.

TruChoice to distribute Jackson National annuities to RIAs

TruChoice Financial Group, LLC, an insurance products distributor, and Jackson National Life Insurance Company(Jackson) have announced distribution deal that will bring Jackson’s no-commission annuities to fee-based advisers through TruChoice’s Outsourced Insurance Division, according to a release this week.

“The OID distribution model utilizes a product-agnostic, multi-carrier methodology to allow financial professionals to manage client assets and protection needs while working with FINRA-registered and insurance-licensed OID Specialists,” the release said.

Like Jackson, TruChoice has a presence on FIDx, which powers the Envestnet Insurance Exchange and MoneyGuide Protection Intelligence. Three of Jackson National’s fee-based products are now available to RIA firms and IARs through TruChoice’s OID platform: Perspective Advisory II and Elite Access Advisory II (both variable annuities) and MarketProtector Advisory, a fixed indexed annuity.

SPARK Institute elects new chair and vice-chair

The SPARK Institute, a trade association of retirement plan recordkeepers, announced that Ralph Ferraro, SVP, head of Product and Solutions Management, Lincoln Financial, has been elected chair of its Governing Board.

He succeeds Rich Linton, EVP Group Distribution and Operations, Empower Retirement, who has completed his term. Linton has been the chair since 2017 and will remain as an active member of the board.  Kevin Collins, head of Retirement Plan Services, T. Rowe Price, has been elected as vice chair.

The SPARK Institute’s governing board includes twelve firms: AIG, Ameritas Life Insurance Corp., Ascensus, BlackRock, Empower Retirement, FIS Global, J.P. Morgan Asset Management, Lincoln Financial Group, Prudential Retirement, SS&C, T. Rowe Price and Wells Fargo Institutional Retirement.

Pandemic shows importance of 401(k) “sidecar” accounts: Morningstar

Observing that many retirement plan participants have felt compelled to tap their 401(k) savings this year for hardship withdrawals or loan, Morningstar’s head of policy research argues in favor of creating so-called sidecar accounts that workers can use for emergency withdrawals while leaving their long-term savings intact.

In “Harnessing the Power of Defaults to Save for Emergencies,” Aron Szapiro writes, “Sidecar accounts probably would not provide enough of a cushion for many workers affected by COVID-19. A large scale social safety net, like unemployment insurance, needs to be available for massive macroeconomic disruptions.

“But the government’s COVID-19 response and workers’ behavior in response to it, shows the promise of sidecar accounts for more pedestrian emergencies… Many people would likely accept a sidecar program alongside their 401(k) as their default savings setup. These accounts, once filled from default contributions, would be largely preserved for bona fide emergencies.”  

Drawing from 401(k)s represents a significant drag on workers retirement savings, according to the US Government Accountability Office. The GAO estimated that around $70 billion leaks out of the retirement system every year. “Workers would not tap their 401(k) accounts if they absolutely did not have to, given the evidence we see from the post-CARES act withdrawals,” Morningstar has found.

Solash takes on new responsibilities at AIG

AIG Life & Retirement, a division of American International Group Inc. (NYSE: AIG), today announced that Todd Solash, CEO of its Individual Retirement business, will also lead the company’s Life Insurance business, effective immediately.

As CEO, Individual Retirement and Life Insurance, Solash will be responsible for the division’s strategic agenda. He joined AIG in 2017 from AXA US where he was head of the firm’s individual annuities business.

Before that he was a partner within the Insurance practice at Oliver Wyman, a management consultancy. Solash has bachelor’s degrees in Finance and Chemical Engineering from the University of Pennsylvania and is based in Woodland Hills, California.

© 2020 RIJ Publishing LLC. All rights reserved.

A List of Joe Biden’s Tax-related Campaign Proposals: Crowe

Posted on December 2, 2020 by -

Crowe, a global public accounting, consulting and technology firm based in the US, has created a list of President-elect Joe Biden campaign proposals to “provide insight into how individual, corporate, energy, employment, retirement and healthcare taxation could support his non-tax policy agenda.”

“We expect a new administration will focus on providing additional pandemic relief and stimulus, however, changes in tax policy could be on the horizon,” said Gary Fox, managing partner of tax services at Crowe, in a release. “Even if major tax legislation is unlikely, the executive branch has regulatory tools at its disposal to impact tax policies.”

Below are key aspects of Biden’s campaign tax proposals, which provide a window into tax policy changes that could occur in his administration.

Individual tax
  • Raise the top marginal tax rate 2.6% for income over $400,000
  • Remove the tax rate preference for capital gains and qualified dividends for income over $1 million by taxing them at ordinary rates
  • Keep the 3.8% net investment income tax
  • Support the provision in the House-passed Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act) that eliminates the cap on the deduction for state and local taxes for 2020 and 2021
  • Limit total itemized deductions so the reduction in tax liability per dollar of deduction does not exceed 28%. Taxpayers in tax brackets higher than 28% will have limited benefit of itemized deductions
  • Phase out the 20% pass-through deduction for income over $400,000
  • Beginning with the 2020 tax year, increase the child tax credit to $3,000 ($3,600 for children under 6), make it refundable and allow for advance payment of the credit
  • Raise the child-care credit from the current maximum of $1,200 to $8,000 for one child and to $16,000 for two or more children with income up to $125,000 per year
  • Expand the earned income tax credit to workers older than 65 who do not have a qualifying child
  • Enact a $5,000 tax credit for family caregivers of people who have certain physical and cognitive needs
  • Enact a refundable, advance-able tax credit of up to $15,000 for first-time homebuyers
  • Enact a renter’s tax credit, designed to reduce rent and utilities to 30% of income for low-income taxpayers
  • Exclude forgiven student loan debt from taxable income
  • Eliminate stepped-up basis on transfers of appreciated property at death
  • Raise the estate tax to 2009 levels (possibly a 45% rate and an acceleration of the reduced exemption amount)
Corporate tax
  • Raise the corporate tax from 21% to 28%
  • Require C corporations with more than $100 million in book income to pay the greater of normal corporate tax liability or 15% of book income
  • Eliminate all deductions for expenses to advertise prescription drugs
  • Increase the depreciable life of rental real estate
  • Eliminate the deferral of capital gains from like-kind exchanges for real estate
  • Establish incentives for opportunity zone funds to partner with nonprofit or community-oriented organizations and jointly produce a community benefit plan for each investment – require reporting, public disclosure of community impact and Treasury oversight
  • Enact a 10% offshoring surtax (on top of the current 28% rate) on U.S. company profits from overseas production for sale in the U.S. and for call centers and services serving the United States
  • Double the global intangible low-taxed income rate to 21% and close certain loopholes
  • Implement anti-inversion regulations and penalties
  • Deny deductions for moving production and jobs overseas
  • Impose sanctions on countries that “facilitate illegal corporate tax avoidance and engage in harmful tax competition”
  • Establish a Made in America tax credit for revitalizing existing closed or closing facilities, retooling any facility to advance manufacturing competitiveness and employment, bringing production jobs back to the U.S., expanding job-creating efforts or expanding manufacturing payroll
  • Expand and make permanent the new markets tax credit
  • Establish the manufacturing communities tax credit, and fund the credit for five years to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure
  • Expand the work opportunity tax credit to include military spouses
  • Expand the low-income housing tax credit
  • Establish a workplace childcare facility tax credit of up to 50% of an employer’s first $1 million in costs for qualified on-site childcare
Energy tax
  • Make the electric motor vehicle tax credit permanent, repeal the per-manufacturer cap and phase out the credit for taxpayers with income above $250,000
  • Expand tax deductions for energy retrofits, smart metering systems and other emissions-reducing investments in commercial buildings
  • Reinstate the solar investment tax credit
  • Reinstate tax credits for residential energy efficiency
  • Eliminate certain tax subsidies for oil, gas and coal production, including expensing exploration costs and percentage depletion cost recovery rules
  • Enhance tax incentives for carbon capture, use and storage
  • Establish tax credits and subsidies for low-carbon manufacturing
Employment, retirement and healthcare tax
  • Tighten the rules for classifying independent contractors by increasing penalties for misclassification
  • Raise payroll taxes for workers with more than $400,000 in earnings by increasing the maximum threshold from $137,700 to $400,000 over time
  • Increase tax preferences for middle-income taxpayer contributions to 401(k) plans and individual retirement accounts (IRAs)
  • Replace the deduction for worker contributions to traditional IRAs and defined-contribution pensions with a refundable tax credit
  • Provide automatic enrollment in IRAs for workers who do not have a pension or 401(k)-type plan
  • Offer tax credits to small businesses to offset the costs of workplace retirement plans
  • Support informal caregivers by allowing them to make catch-up contributions to retirement accounts, even if they’re not earning income in the formal labor market
  • Increase tax benefits for older Americans who purchase long-term care insurance using their retirement savings
  • Establish a refundable tax credit that would reimburse companies as well as not-for-profit organizations for the extra costs of providing full health benefits to all of their workers during a period of work-hour reductions
  • Increase eligibility for the premium tax credit by raising eligibility limits and increase the amount of the credit so eligible taxpayers can enroll in more generous health plans
  • (c) 2020 Crowe.com.

Honorable Mention

Posted on December 2, 2020 by -

Aon PEP (pooled employer plan) opens in January with two clients

Aon plc (NYSE: AON) registered its pooled employer plan (PEP) with the Department of Labor this week and will launch it Jan. 1, 2021. Aon, a $47.7 billion global professional services firm, provides risk, retirement and health solutions. It expects more than half of US employers to merge their traditional 401(k)s into pooled employer plans during the next decade, according to a report.  

PEPs were made possible by the passage of the SECURE Act last year. So far Mercer and Principal Financial, among large retirement plan providers, have also announced PEPs. 

The Aon PEP will start the year with two employers in January and is scheduled to add three more clients through April. These initial employers are from a diverse mix of industries that include aerospace, chemical, music production, pediatric medicine and petroleum. “Participants will benefit from higher performing, more efficient 401(k) plans,” an Aon release said.

“Based on overall value, we predict that many more employers will transition to PEPs in the coming years,” said Paul Rangecroft, North America retirement practice leader for Aon. “The benefits of such a move—lower costs, reduced time commitment from corporate staff, improved governance and high-quality retirement planning options—will be difficult to match in a single employer solution.”

Aon believes the economies of scale in pooled employer plans will help lower record-keeping fees, investment management fees, and other costs for firms. Participants may also have easier access to investment tools and education services.

From the employer perspective, pooled employer plans are expected to reduce staff time dedicated to plan management, compliance and governance (i.e., elimination of many tasks such as government filings, plan audits, etc.). “Pooled employer plans will also reduce fiduciary and litigation risks,” the release said.

“The Aon PEP provides the efficiency and scale of a pooled plan, while maintaining individual employer autonomy to define matching and other contribution levels, and various key plan design features,” said Rick Jones, partner for Aon’s Retirement Solutions.

Life/annuity industry suffered sharp drop in net income in first nine months of 2020: AM Best

Net income in the US life/annuity industry fell 57% to $12.7 billion in the first nine months of 2020, compared with the same period in 2019, according to a new Best’s Special Report, First Look: 9-Month 2020 Life/Annuity Financial Results.

The data comes from companies’ nine-month 2020 interim statutory statements received as of Nov. 23, 2020, representing an estimated 94% of total industry premiums and annuity considerations.

According to the report, total expenses increased by 3.2% in the first nine months of 2020. Death, annuity and other incurred benefits rose by 9.2%. These increases negated a 5.8% decline in surrender benefits, a 12.4% drop in general and other expenses, and a decline of $13.4 billion in transfers to separate accounts.

The industry’s total income remained steady, but pretax net operating earnings, coupled with the increase in expenses, fell by 60.4% from the prior-year period to $13.6 billion. A decline in tax obligations and a rise in net realized capital gains mitigated the impact slightly, resulting in industry net income of $12.7 billion for the first nine months of 2020, compared with $29.4 billion in the same prior-year period.

The industry’s bond holdings as a percentage of total cash and invested assets continued to decline during the first nine months of 2020, as cash and short-term investments rose by 38.2% and other invested assets were up by 15.1% from the end of 2019.

Aon partner for Retirement Solutions Rick Jones sent the following statement to RIJ in response to two questions: Will PEPs mainly aggregate existing 401(k) plans or expand coverage to employers without plans, and will PEPs contribute to the inclusion of annuities in qualified plans?

“We predict that many single employer plans will transition into the Aon PEP, but we also foresee an opportunity for new employers to offer 401(k) benefits to employees who never before received a retirement benefit. New employers will be attracted to PEPs because they will reduce time and energy dedicated to plan management, compliance and governance. PEPs will also will reduce fiduciary and litigation risks.

“Moving forward, we believe PEPs will provide robust platforms for retirement plan innovations, including secure forms of lifetime income, better recognition of diversity, equity, and inclusion initiatives, and the best use of behavior analytics to improve retirement outcomes. We are in regular conversation with industry groups and legislators in Washington on these points.

“ We also hope and believe the PEP concept can be expanded to gig workers in the future. The “SECURE 2.0” proposals in Washington include PEP coverage for 403(b) plans as well, and we believe that would be another fantastic development for retirement security. There are many markets that have insufficient or no solutions at all, and we believe PEPs provide a great opportunity to close that gap.” 

Morningstar to integrate ESG factors into research

Morningstar, Inc., has begun formally integrating environmental, social, and governance (ESG) factors into its analysis of stocks, funds, and asset managers, the Chicago-based information giant said in a release.

Morningstar equity research analysts will “employ a globally consistent framework to capture ESG risk across over 1,500 stocks,” the release said. Analysts will identify valuation-relevant risks for each company using Sustainalytics’ ESG Risk Ratings, which measure a company’s exposure to material ESG risks. The analysts will then evaluate the probability that those risks will materialize and the associated impact on valuations.

Results from this research will inform Morningstar’s assessment of a stock’s intrinsic value and the margin of safety required before the stocks receive a Morningstar Rating between five stars and one star. Morningstar acquired Sustainalytics, an ESG ratings and research firm, in July 2020. 

Morningstar manager research analysts will analyze the extent to which strategies and asset managers are incorporating ESG factors as part of its new Morningstar ESG Commitment Level evaluation. The analysts will assess the analytics and personnel committed to each strategy and the extent to which the strategy incorporates those resources into the investment process.

“To perform the evaluation of asset managers, analysts will consider how clearly the firm has articulated its ESG philosophy and policies, and the degree to which it has driven those policies through its culture and investment processes. The ESG Commitment Level evaluation of strategies and asset managers will follow a four-point scale of Leader, Advanced, Basic, and Low,” the release said.   

Transamerica and Aegon launch defined benefit plan service

Transamerica, in partnership with Aegon Asset Management, has launched a new defined benefit plan management service — Transamerica DB Complete. The solution packages services typically outsourced to unrelated third party vendors, including plan administration, asset management, consulting services, and actuarial, non-advisory support.

Transamerica DB Complete will draw on the expertise of Transamerica Retirement Solutions, Transamerica Retirement Advisors (for fiduciary advisory services), and Transamerica affiliate Aegon Asset Management (for fixed income).

PenChecks Trust launches online payment service for retirement plans

PenChecks Trust, an independent provider of outsourced benefit distribution services and Automatic Rollover/Missing Participant IRAs, has launched Amplify, an online payment processing service that third-party administrators (TPAs), plan sponsors, recordkeepers, financial institutions and plan participants can use to manage regular retirement benefit distributions.

Amplify is “a holistic solution for retirement payment/benefit needs, combining intuitive navigation with robust functionality for better processing and tracking of benefits,” according to PenChecks director of product Kelsey Wolstencroft. Amplify also includes security upgrades for heightened data security. 

Other new or upgraded benefits include: a dashboard with more relevant information, multiple formats for uploading data to the portal, the ability to create and manage recurring payments, and a guided process for submitting benefit elections payment instructions. Amplify can also help plan participants track the status of benefit elections and distributions.

American Equity completes $337 million equity sale to Brookfield; will repurchase more shares

American Equity Investment Life Holding Company (NYSE: AEL) announced today that, following Hart-Scott-Rodino approval, it has closed an initial equity investment of 9,106,042 shares at $37.00 per share from Brookfield Asset Management Inc. as part of a previously announced deal.

With this investment and the accelerated share repurchase and other share repurchases (described below), Brookfield now owns about 9.9% of American Equity stock and will receive one seat on the company’s board of directors. Sachin Shah, managing partner and chief investment officer of Brookfield, has joined American Equity’s board, which has expanded to 14 members.

American Equity also announced that it has entered into an accelerated share repurchase (ASR) agreement with Citibank, N.A., to repurchase an aggregate of $115 million of American Equity’s common stock. Since starting its first share repurchase program on October 30, the company has already repurchased more than 1.9 million shares for $50 million in the open market. Combined with the ASR announced today, the company has substantially offset dilution from the equity issuance to Brookfield.

The company intends to continue to repurchase shares in 2021 under its $500 million share repurchase authorization until Brookfield owns a 9.9% equity interest in American Equity, with further repurchases after American Equity receives the insurance regulatory approvals required for Brookfield’s purchase of additional equity interest above 9.9%.

On October 18, 2020, American Equity announced a set of commercial business arrangements, through reinsurance, with Brookfield. As part of this strategic partnership, Brookfield entered into an equity investment agreement with the company to acquire up to a 19.9% ownership interest in the common shares of American Equity.

This equity investment includes the initial purchase of a 9.9% equity interest at $37.00 per share, and a second purchase, expected to close in the first half of 2021, that with the initial purchase will equal up to a 19.9% equity investment (at the greater value of $37.00 per share or adjusted book value per share (excluding AOCI and the net impact of fair value accounting for derivatives and embedded derivatives). The second equity investment is subject to finalization of certain reinsurance agreement terms, receipt of applicable regulatory approvals and other closing conditions.

Under the ASR agreement, American Equity will receive an initial share delivery of approximately 3.5 million shares, with the final settlement no later than March 31, 2021. The total number of shares to be repurchased will be based on the volume-weighted average price of American Equity’s common stock during the term of the transaction, less a discount and subject to customary adjustments.

Principal promotes senior managers in Latin America and Asia

Principal Financial Group has promoted regional presidents Roberto Walker (Latin America) and Thomas Cheong (Asia) of Principal International to its executive management team. Principal also announced the retirement of Luis Valdés, CEO and president of Principal International.

International markets and the global customer are growing in significance for Principal, the company said in a release. Walker and Cheong will report to Dan Houston, chairman, president, and CEO of Principal.

Walker, senior vice president and president of Principal Latin America, and Cheong, senior vice president and president of Principal Asia, will become executive vice presidents as part of the changes, effective Jan. 1, 2021.

Walker joined Principal in 1996 and has led Latin America for Principal International since 2011. Cheong joined Principal in 2015 as vice president of North Asia for Principal International and took over leadership responsibilities for the entire Asia region in 2019.

Valdés will retire March 31, 2021, after 26 years with Principal. He led Principal International as president and CEO the past nine years – driving significant growth in Latin America and Asia through acquisitions in emerging markets. Valdés will serve as chairman of the Principal International board for two years following his retirement.

Alerus to acquire Retirement Planning Services Inc.

Alerus Financial Corporation (“Alerus”) (NASDAQ: ALRS) has agreed to acquire Retirement Planning Services, Inc. The all-cash transaction is anticipated to be immediately accretive to Alerus’ GAAP earnings per share, adding an estimated $0.08 in 2021 and $0.13 in 2022.

The transaction represents Alerus’ eleventh acquisition in the retirements and benefits vertical since 2003. The transaction is expected to be completed December 18, 2020, and will increase Alerus’ assets under administration/management to approximately $31.5 billion. Terms of the transaction will not be released.

RPS, which does business as RPS Plan Administrators and 24HourFlex,  provides retirement and health benefits administration for more than 1,000 plans, 48,000 plan participants, 300 COBRA clients, and 10,000 COBRA members. RPS is based in Littleton, Colorado, which expands Alerus’ geographic footprint to the Rocky Mountain region.

“A substantial portion of the premium paid will be allocated to a customer account intangible and amortized up to 10 years, contributing to a cash-GAAP earnings difference while restoring the tangible equity utilized to complete the acquisition,” an Alerus release said.

© 2020 RIJ Publishing LLC. All rights reserved.

Retirement Clearinghouse receives investment from billionaire John C. Malone

Posted on December 2, 2020 by -

John C. Malone, chairman of Liberty Media Group, has purchased an unspecified minority stake in Retirement Clearinghouse LLC was (RCH), the 401(k) account portability firm. RCH is majority-owned by Robert L. Johnson, chairman of the RLJ Companies and founder of Black Entertainment Television. 

John C. Malone

RCH previously announced that Alight Solutions will lead the nationwide launch of the RCH Auto Portability Program. The program  is designed to help plan participants move their savings to their new employers’ plans when they change jobs.

“Doing so enables them to avoid cashing out, paying taxes, and being subject to penalties. Every year, $92 billion leaves the U.S. retirement system when job-changing participants prematurely cash out their 401(k) savings accounts, and pay related taxes and penalties, based on data from the nonpartisan Employee Benefit Research Institute (EBRI), the retirement services industry’s gold-standard research provider, an RCH release said.

Black and Hispanic workers are said to be hurt most by this phenomenon—63% of Black and 57% of Hispanic workers cash out upon job-change, according to EBRI. Low-income and younger workers also have high cash-out rates. Half of workers earning $20,000 to $30,000 and 44% of workers ages 20 to 29 cash out within a year of switching jobs.

Robert L. Johnson

The major cause of cash-out leakage is the lack of seamless plan-to-plan asset portability in the U.S. retirement system, according to RCH. RCH defines “auto portability” as “the routine, standardized, and automated movement of a worker’s 401(k) savings account from their former employer’s plan to an active account in their current employer’s plan.”

The U.S. Department of Labor (DOL) cleared the way for plan sponsors and recordkeepers to adopt the technology enabling auto portability by issuing regulatory guidance in July 2019 and November 2018.

RCH completed the first fully automated, end-to-end transfer of retirement savings from a safe-harbor IRA into a worker’s active account in July 2017, on behalf of a large plan sponsor in the health services sector. Since then, more than 1,600 workers have consented to have their former-employer plan accounts transferred into their current employers’ plans.

© 2020 RIJ Publishing LLC. All rights reserved.

Are Target Date Funds the Perfect Vehicle for ‘In-Plan’ Annuities?

Posted on December 2, 2020 by -

The inclusion of lifetime income products and alternative investments into target-date funds could potentially help asset managers and life insurers improve long-term outcomes for plan participants and help themselves stand out in a TDF market dominated by a handful of large players (Vanguard, Fidelity, T. Rowe Price, American Funds and JP Morgan), according to Cerulli Associates.

“Specific provisions in the SECURE (Setting Every Community Up for Retirement Enhancement) Act are designed to facilitate the inclusion of lifetime income products (e.g., annuities) in 401(k) plans and other DC plans that do not typically feature lifetime income products,” according to the latest issue of Cerulli Edge—U.S. Asset and Wealth Management Edition.

According to the report, most (92%) of firms expect managed payout options and annuity allocations to be incorporated into future target-date fund series. The market volatility of the first quarter of 2020 may also serve as a catalyst for lifetime income adoption by DC plans. Nearly two-thirds (63%) of target-date managers say this period of heightened market volatility will increase client demand for guaranteed investments. Providers of lifetime income products should leverage market downturns to illustrate their downside protection benefits, Cerulli suggests.

In addition to annuitization, the use of alternative investments such as private equity funds may change. A Department of Labor (DOL) information letter released earlier this year offers regulatory guidance related to the use of private equity funds within professionally managed strategies (e.g., target-date funds, target-risk funds) that may serve as a DC plan’s qualified default investment alternative (QDIA).

“Although the letter represents a key step toward giving private equity a larger presence within the DC product landscape, adoption will likely occur at a gradual pace as providers look to craft products, educational materials, and messaging for the DC market,” said Cerulli senior analyst Shawn O’Brien in a release.

In the coming months, Cerulli expects plan sponsors and retirement plan providers to engage in more detailed exploratory discussions regarding the inclusion of private equity in multi-asset-class products such as target-date funds. Providers looking to incorporate allocations to private equity should remain aware of the demands and constraints of the DC market.

“Private equity funds are typically characterized by infrequent pricing events, low liquidity, relatively high management fees, and complex investment structures,” O’Brien said. “Conversely, the DC market—litigious in nature—is notoriously fee-sensitive, and the product landscape is dominated by simple, transparent, low-cost investment vehicles.”

Providers must clearly demonstrate to plan fiduciaries how allocating to a certain private equity strategy within a professionally managed product can improve long-term outcomes for plan participants on a risk-adjusted, net-of-fees basis. Asset managers and consultants/advisors looking to offer professionally managed products that allocate to private equity should be prepared to educate plan sponsors on the fundamentals of private equity investing.

“It may take time for many plan fiduciaries to gain a sense of comfort with private equity investments, and therefore, thorough educational and informational engagements may be a necessary precursor to adoption in a DC market where private market investments are rare,” O’Brien said.

© 2020 RIJ Publishing LLC. All rights reserved.