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What’s up with the ‘ESG’ rule: Wagner Law Group

Posted on January 22, 2021 by -

This is a brief summary of the full text of the Wagner Law Group’s post-election assessment of the Department of Labor’s intentions regarding a retirement plan sponsor’s fiduciary duties when considering “Environmental, Social and Governance”-related funds for the plan.
Late in 2020, the DOL amended its Investment Duties regulation for the first time in 40 years. In the end, the Final Rule on investment decision making that emerged from the filter of constituent comments does not prohibit fiduciaries of ERISA employee benefit plans from selecting investments that have ESG or other collateral objectives or benefits, and does not create different standards for consideration of such investment options.
Rather, the amended regulation requires that fiduciaries make investment choices based on consideration of pecuniary factors, which is consistent with the DOL’s existing guidance. The Final Rule does, however, shift focus from considering investment options under the totality of the facts and circumstances to considering only defined pecuniary factors to the exclusion of non-pecuniary factors. This could be a distinction without a difference, however, given the expanded interpretation in the Preamble and the flexibility incorporated into the final regulatory language.
The Biden Administration flagged this rule for review under the umbrella of an Executive Order focused on public health, the environment and climate change. Given that the slimmer Final Rule is no longer the stranglehold on ESG investing that the original proposal had been, the Biden Administration could decide not to expend its resources changing it.
Instead, it could opt for reminding benefit plan fiduciaries that, despite the prior administration’s efforts, the DOL does not restrict fiduciary consideration of relevant factors in selecting investments for employee benefit plans, including when considering investment vehicles with ESG or other collateral benefits or goals.

Watch now: A ‘Deep Dive on Retirement Drawdown Strategies’

Posted on January 22, 2021 by -

So many webinars, so little time.

But the title of yesterday’s webinar, “A Deep Dive on Retirement Drawdown Strategies,” made it impossible for me not to add to my calendar. Some 1,800 financial advisers attended it, indicating a level of interest in retirement income planning that the continuing eduction credit opportunity can’t have entirely explained.

The meeting’s sponsor was The American College of Financial services and hosted by Steve Parrish, an adjunct professor of Advanced Planning at the College and co-director of the New York Life Center for Retirement Income, which offers the Retirement Income Certified Professional designation. (Steve’s article on using life insurance in retirement appeared in RIJ only a few weeks ago).

Steve’s guest speakers were Joe Elsasser, an advisor and founder of Covisum, an Omaha-based fintech company, and James DiLellio, an associate professor of Decision Sciences at Pepperdine University’s Graziado Business School in Malibu, CA, who blogs at etfmathguy.com.

You can link directly to the webinar here. You can download the slides here.

Here are a couple of my takeaways from the one-hour webinar:

Evaluating the new IRA stretch period

Citing a paper he’d recently co-authored on the SECURE Act of 2019 and retirement planning, DiLellio and Pepperdine colleague Michael D. Kinsman found that while the Act had abolished the so-called lifetime Stretch IRA, it can still make financial sense for the beneficiary of IRA assets to let them grow for 10 years (the new deferral time limit on inherited IRAs) in the tax-deferred account.

The potential savings simply aren’t as great as they used to be. Relative to the strategy of transferring the inherited assets to a taxable brokerage account and letting them grow for 10 years, DiLellio and Kinsman found the heir’s accumulation advantage to average about 14%, instead of the 33% possible under the old Stretch IRA rules. The savings ranged from 10% to 17%, depending on the tax rates and types of assets involved.

Anticipating tax ‘soft spots’

Elsasser, who said he advises more middle-market retirees than high net worth retirees, talked about his firm’s software, which enables advisors to identify “soft spots” in a retiree’s potential tax liabilities and to avert these spikes from occurring by changing the mix of distributions from taxable, tax-deferred and Roth IRA accounts.

In one extreme example, Elsasser said he had spotted the risk that the retiree would suffer a total effective tax liability of almost 50% of his income for one specific year, if the maximum taxes on 85% of his household’s Social Security benefits, required minimum distributions, and capital gains all happened to coincide. By customizing the pattern of distribution among accounts each year, he tries to maximize the long-term value of a retiree’s estate.

© 2021 RIJ Publishing LLC. All rights reserved.

NY Life, Schwab Flex Their Annuity Muscles

Posted on January 21, 2021 by -

New York Life and Charles Schwab have little in common. Schwab is a publicly held direct-to-consumer all-purpose financial services platform. It doesn’t own a life insurance company. New York Life is America’s most venerable mutual life insurer, and the top seller of fixed-rate annuities in the US in 2020. 

Both are welcoming in the new year with new variable annuity contracts. But they’re approaching the product category from very different angles. Schwab’s Genesis VA has an income benefit, for instance, and will be distributed by Schwab advisers and independent RIAs (registered investment advisors). 

New York Life’s IndexFlex VA includes the firm’s first index-linked annuity. The hybrid product gives contract owners three risk/return possibilities: fund-like variable subaccounts, a fixed account, an index-linked account. It’s a bit of a surprise that New York Life decided to dabble in index-linked products, but desperate (low interest) times evidently call for innovation.

“As soon as I read the filing for IndexFlex, my jaw dropped,” said Sheryl Moore, CEO of Wink, the annuity marketing and data service. “With fixed interest rates as low as they are, and variable annuity sales waning, these companies don’t have a choice but to develop an indexed offering.”

These companies are bringing their very different VAs to market at a time when sales of the category, aside from registered index-linked VAs (RILAs) have trended downward for several years. But VAs are still the only vehicle where investors can put almost unlimited amounts of after-tax money for liquid, long-term tax-deferred growth. For retirees, the VA value proposition—guaranteed income for life without sacrificing liquidity—still makes a lot of sense.  

New York Life’s IndexFlex

New York Life executives have considered but, until now, always refrained from issuing an FIA. The product would fits its image and culture like a rodeo bronc at a riding academy. But the low-yield environment may be giving it no choice but to turn, like so many other life insurers, to options on equity indexes as a source of yield.

The product offer a limited form of one-stop shopping, “The policies are designed for individuals who want the ability to hold variable funds, index-linked investments and a traditional fixed account in the same contract,” the prospectus says. “The policies offer fewer variable investment options, and fewer optional riders and other features than certain of New York Life’s other variable annuities.” 

Within the index-linked option, policyholders can choose a crediting method with either a “capped rate” or a “flat rate,” aka performance trigger. With the capped rate, investors earn the return of the index (the S&P 500 or Russell 1000) up to, for example, 3.5%. With the flat rate, investors earn exactly 3%, for example, whenever the index shows positive performance. Either way, they can’t lose money if they leave their money in the product for the length of the term.

The product has three surrender periods—a five-year, six-year, and seven-year term—with first-year surrender charges of 8%. The annual mortality and expense risk (M&E) charges (usually how an annuity issuer recovers the commission it paid the agent or adviser) are 1.30%, 1.25% and 1.20%, respectively. Annual expense ratios of the variable subaccounts range from 0.37% to 1.06%.

In an email to RIJ, New York Life described the logic behind IndexFlex. “In designing this product, we leaned into simplicity and transparency and what sets IndexFlex apart is the guaranteed nature of the cap rates within the index-linked account,” wrote Dylan Huang, SVP, Head of Retail Annuities, Investment Solutions and Wealth Planning, at the insurer.

As for why New York Life decided to bundle a variable and an indexed annuity in the same contract, he wrote, “We ultimately chose to proceed with a variable annuity design, sold by prospectus, because we were focused on ensuring certainty, transparency and a customer-first design and believe that IndexFlex is best offered by registered professionals who are trained to offer investment solutions. ”

Schwab’s Genesis VA

Schwab’s Genesis VA joins its shelf of immediate, deferred,  fixed, variable and income annuities. Schwab used to distribute Great-West annuities, but Great-West sold almost all of its individual life insurance and annuity business to Protective Life in mid-2020 through a reinsurance deal. Schwab advisers will distribute the product directly to Schwab clients. An advisory version will be available through independent RIAs who custody assets with Schwab Advisor Services.

Schwab is touting the low 45-basis-point annual contract fee. The contract offers an optional guaranteed lifetime withdrawal benefit (GLWB), called SecurePay, for an additional 1.15% per year (up to a maximum annual charge of 2%). Annual expense ratios of the 63 investment options range from 0.03% to 1.67%.

This product, like all VA/GLWB contracts, is intended for people who want retirement income that they can’t outlive and that can’t go down because of poor market performance, without ever depriving them of access to their money. Payout rates for single policyholders are 3.75% of the benefit base (never less than the initial account value, minus ad hoc withdrawals) from ages 60 to 64, 5% from ages 65 to 69, 5.25% from ages 70 to 70 and 5.75% from ages 80 onward. Joint contract payout rates are 50 basis points lower across the board.

Owners who wait at least 10 years from the purchase date and then irrevocably annuitize their contracts get a 2% bonus added to their account values. Those who annuitize can do so on a fixed or variable basis. For the variable annuity, the contract’s assumed rate of return (used for calculating the first payment) is 5% per year, and the amount of subsequent monthly income fluctuates around that number.

For the (still small but) growing number of RIAs who recommend annuities to clients, there’s an “advisory” version of Genesis. The base contract fee is only 25 basis points per year. RIAs can tack on their own fee of up to 1.5% per year (1% if they select the optional return-of-purchase-payments death benefit, which costs 20 basis points a year). RIAs can get their fees deducted directly from the contract as long as their clients don’t choose the SecurePay living benefit option.

(c) 2021 RIJ Publishing LLC. All right reserved.

Unlocking the Code of Moshe Milevsky’s Latest Book

Posted on January 21, 2021 by -

Moshe Arye Milevsky’s latest book, Retirement Income Recipes in R (Springer 2020), is an ambitious and comprehensive review of recent work on the economics of retirement income and pension annuities. As its title suggests, it emphasizes the applications of the relevant algorithms by relying on the widely used open-source software R. (Be prepared to hear a lot about programming with software R. I used R for Dummies as an aid.)

The book’s basic premise is that we don’t know how long we’ll live or what the rate of return on our investments will be. Therefore, in planning for retirement, we should try to minimize our risk of outliving our money. At the same time, we should try not to have too much of our money outlive us—unless we want to leave a bequest.

Moshe Arye Milevsky

Milevsky’s objective is to reveal the economic drivers that determine how long a portfolio will last in retirement. He starts by assuming that the rate of withdrawals and the rate of return on assets are fixed for the duration of retirement. He then derives a formula for “portfolio longevity.” The formula illustrates the interplay between the rate of investment return and the rate of withdrawal (for spending) and their joint effects on portfolio longevity.

The model spans the period from the start of a hypothetical individual’s working life to his/her death. A person starts out with a certain amount of financial capital (an initial lump sum) and a certain amount of human capital (the discounted value of expected future earnings). As the years go by, his/her salary and consumption grow at a designated rate. For the sake of maintaining equilibrium, the discounted value of future consumption equals the discounted value of the personal’s capital (financial and human). Starting with this framework, Milevsky plugs in real-world features, such as uncertain investment returns.

One of the book’s virtues is that Milevsky intersperses his technical exposition (often in the language of R) with thoughtful and sometimes reproving analyses of common approaches to financial planning. (Look for these in the “Final notes” section of each chapter.) In particular, the venerable “4% safe withdrawal rule” really takes it in the shorts. An inflexible withdrawal rate could put the investor under water in an alarmingly small number of years.

In subsequent chapters, Milevsky progresses to more advanced models and covers sequence of returns risk (the risk that years with low or negative rates of return will occur early in retirement, and retirees may need to liquidate depressed assets for income), mortality risk at different ages, and Benjamin Gompertz’ eponymous law of mortality, published in 1825, which captures in continuous time the year-to-year decline in survival rates (i.e., increase in mortality rates) as populations age.

The Gompertz function permits a much more sophisticated analysis of lifetime uncertainty as well as the value and pricing of annuities. Later Milevsky addresses the implications of the empirical finding that, ironically, lifespans vary more widely within groups with shorter average life expectancies (poorer, less healthy populations) than within groups with longer life expectancies (wealthier, healthier populations). He uses this more nuanced approach to longevity when calculating lifetime ruin probabilities (or their complement, lifetime success probabilities) and to the valuation of immediate and deferred annuities.

Key to the financial economists’ approach to the demand for annuities, according to Milevsky, is the concept of longevity risk aversion. Some persons or households are more averse to an unstable level of consumption over their lifetime than others and would pay to avoid that uncertainty. Risk-averse households would presumably be more willing to reduce consumption during their working lives to raise or maintain their level of consumption in retirement. Longevity risk-averse households are likely to have a stronger preference than other households for life annuities, because annuities can insure against poverty (and the proverbial diet of cat food) in extreme old age.

In the penultimate chapter, Milevsky introduces an idea for a new kind of annuity: the Ruin-Contingent Life Annuity (RCLA). This is a deferred annuity that starts to pay income only when a garden-variety equity index (the S&P 500 Index, for instance) falls below a stipulated threshold. The RCLA, which is embedded in all variable annuities with guaranteed lifetime withdrawal benefits, mitigates both longevity risk and market risk. As a financial product, the RCLA is still at the drawing-board stage. Milevsky regards it as the potential basis of a $100 billion dollar industry.

In sum, Milevsky’s latest book is rich in practical ideas, and is also filled with the algorithms and procedures necessary for anyone to apply R to the creation of their own retirement income planning tools. Like many of his other previous books, Retirement Income Recipes in R is also full of fascinating historical asides. This reviewer found the book to be demanding in places, but also a book that will reward any investment in time with a high rate of return.   

© 2021 RIJ Publishing LLC. All rights reserved.

Note: The opening chapters of the book explain how to download R and the front-end R-studio. This provides screens in which to enter R’s functions and data and observe the results of computations, simulations and projections. These chapters also provide simple examples of R’s syntax. Each chapter ends with exercises to reinforce the reader’s grasp of the material. Some readers might also want to refer to one of the many introductory texts on the R language, such as R for Dummies.

Honorable Mention

Posted on January 20, 2021 by -

Life sales show new life in 2020

US life insurance application activity ended 2020 up 4%, the highest annual year over year growth rate on record, according to the year-end MIB Life Index. December 2020 was up 3.7% over December 2019, the highest year-over-year growth rate for the month of December since 2011.

Growth in 2020 was largely driven by younger age groups with full year activity over 2019 increasing among ages 0-44 by +7.9% and +3.8% for ages 45-59. In contrast, activity for ages 60+ fell 1.7%. In the previous two years, the 60+ age group experienced growth while the 44-and-under group saw declines.

Month-over-month, December 2020 was down 9.5% from November, representing an expected, though somewhat stronger than usual, seasonal decline. Year-over-year, application activity increased in all but 2 months in 2020.

The year began strong with February experiencing a record 5.6% year-over-year growth. But activity in March and April declined (by 2.2% and 3.0%, respectively). Activity returned to growth in May and produced year-over-year growth months in July (14.1%), August (9.1%), September (4.4%) and October (7.6%) and then again in December (3.7%).

Based on information provided to MIB, growth was seen across all face amounts up to and including $2.5M, with double-digit growth in face amounts above $5m. However, activity by face amount varied greatly among age groups. 

Activity for those ages 0-44 increased across all face amounts, with double-digit growth in policies over $250k and up to and including $1m as well as over $5. In contrast, activity for age 71 and older increased only in face amounts over $5m, decreasing in all other categories.

Information provided to MIB showed overall growth across all product types. Data suggests that younger applicants <30 years old favor indexed or interest-sensitive products. Those ages 61 and older are concerned about guaranteed value. Universal Life applications for ages 0-44 increased 11.2%. Increases in Traditional Whole Life for ages 61+  grew 7% 8%. Term applications for those over ages 61 decreased with age.

Lawsuit against Penn’s 403(b) plan settles for $13 million

More than four years after they filed a complaint alleging that the University of Pennsylvania’s 403(b) retirement plan charged “excessive fees,” attorneys for some 20,000 employees and retirees participating in the plan have filed a preliminary settlement approval motion. 

The settlement terms include the creation of a $13 million settlement fund for the plaintiffs and substantial non-monetary relief, including a requirement that Penn conduct a Request for Proposal for bids on recordkeeping fees, a fixed fee for administrative services, and to prohibit recordkeepers from cross-selling its financial products to plan participants. Additionally, Penn agreed to a three-year monitoring period. 

“Sweda et al. v. The University of Pennsylvania et al.,” was filed in 2016 in the US District Court for the Eastern District of Pennsylvania by the St. Louis law firm of Schlichter Bogard & Denton, which specializes in such suits. This case was among the first ever filed against a university over excessive fees.

Plan participants alleged that Penn breached its fiduciary duty under the Employment Retirement Income Security Act (“ERISA”) by, among other things, permitting the plans to charge participants excessive recordkeeping fees and retaining underperforming investments in the plans’ lineups.

Schlichter Bogard & Denton pioneered excessive fee 401(k) and 403(b) litigation. In 2009, the firm won the first full trial of a 401(k) excessive fee case against ABB. The firm’s Tibble v. Edison is the only 401(k) excessive fee case to be argued before the United States Supreme Court. On May 18, 2015, the firm won a unanimous 9-0 decision.

Metro-area businesses expect to recover sooner than rural counterparts: Principal 

Owners of small and medium-sized businesses, especially in rural communities, report more uncertainty about when and how they may recover from the prolonged economic impacts of COVID-19, according to a new report based on the Principal Financial Well-Being Index.

“Survey participants are more concerned and cautious about the economic outlook than in September of 2020,” a Principal release said. While almost half (46%) of businesses surveyed said they are “fully operational,” about one in every four businesses said they’re uncomfortable with their current cash flow situation. About 70% expect their finances to improve, hoping that vaccines and government support may alleviate the situation.

The most recent survey results highlight discrepancies between how rural and metro small and medium-sized businesses are being impacted by the continued economic challenges of COVID-19. Less than a quarter of rural businesses reported being fully operational compared to almost half of metro respondents. A third of rural businesses believe their local economy is declining in comparison to 18% of metro businesses. And 61% of rural businesses feel unsupported or impartial to federal government policies or initiatives designed to help their businesses2 compared to 36% of metro counterparts3.

A majority of rural business owners expects recovery to take two years or more. Most metro-area business owners expect recovery within the next year. Overall, businesses are focused on improving customer satisfaction (30%), offering a new product or service (22%), and creating or improving their website, apps and social media channels (15%).

Although 70% of the respondents said they made no changes to their benefits packages, (81% were businesses with less than 500 employees), many indicate they intend to add or increase “telehealth” services (31%), Employee Assistance Programs (28%), and childcare support (27%) in 2021.

Some may cut other benefits to make room for those. Of businesses with two to 499 employees, 15% are willing to decrease or drop long-term care insurance; 18% of firms with 500 or more employees are willing to give up hospital indemnity (18%).

 

Modeling Variable Annuity Owner Behavior

Posted on January 14, 2021 by -

Older Americans own some $2.2 trillion worth of in-force variable annuity contracts, including about $894 billion in contracts with riders allowing the policyholders to convert their balances into income streams that are guaranteed to last as long as they live.

Actuaries at the issuers of those contracts have to predict (or “model”) the future behavior of the policyholders. They ask questions like: Which owners will switch on income, and when? How many will let their riders lapse? What is the “moneyness” of the contracts? That is, what are the assets worth relative to the liabilities? (More on that below.)

Timothy Paris, CEO of Ruark

The answers to those questions help quantify the risks to the issuer, and help determine the amount of money that issuers need to set aside to support the guarantees. To obtain those answers, many of the large issuers contribute data on policyholder behavior to ongoing studies by Ruark Consulting, LLC, an actuarial consulting firm in Simsbury, Conn.

Ruark’s latest survey

Ruark recently released the results of its 2020 industry study of variable annuity (VA) policyholder behavior. The survey covered 89 million policyholder-years for 13.9 million VA policyholders from 20 participating companies with $675 billion in account value as of the end of the study period, from January 2008 through June 2020. It included data on surrenders, income utilization and partial withdrawals, and annuitizations of VA contracts.

In addition to the usual death benefits and other riders, these contracts had either GLWB riders (guaranteed lifetime withdrawal benefits), which pay an age-related percentage of an account value with a floor) or GMIB riders (guaranteed minimum income benefits), which pay the policyholder a minimum monthly or annual amount.

Overall, the study contained good news for VA issuers; most policyholders use the rider as the carriers intended them to. Under the terms of the riders, a policyholder receives benefits only if he or she a) initiates a stream of payments from their account (at a rate capped by the carrier), and b) are still living when their own money runs out (i.e., when the value of their underlying mutual funds hits zero).

Ruark found that only about 13% of policyholders turned on their income streams in the first year of ownership. In each of the second through 10th years, they turned on income at about half that rate. But “commencement rates more than double in year 11 with the expiration of common 10-year bonuses for deferring income.” After they start taking guaranteed income, more than 85% take it as long as they can. 

Policyholders and their advisers, Ruark has shown, are quite aware that, after a market crash or a drop in interest rates, the rider guarantee becomes more valuable or “in-the-money.” After such an event, their account value might be lower than the present value of the guaranteed income stream. Knowing that this is the adverse event that the rider insures them against, they tend to turn on the minimum income stream right away in hopes of seeing money from the insurer before they die.

COVID-related findings

The study period for 2020 was designed to capture early effects of COVID-19 and related market movements. Ruark’s COVID-related findings include:

  • The in-the-money exposures on GLWB contracts were 23% higher than in Ruark’s 2019 study (and 40% higher for contracts deepest in-the-money). 
  • Among contracts issued since 2011, deep in-the-money exposure increased to 9% of total exposure, up from 6% in 2019. The study contained over 740,000 exposure years prior to withdrawal commencement for contract durations 11 and beyond, more than doubling the comparable exposure in Ruark’s 2019 study.
  • Contracts with guaranteed lifetime withdrawal benefits (GLWB) persisted at greater rates than expected, as current-generation products exhibited greater sensitivity to 2020 market movements than they did in the past.
  • Surrender rates fell uniformly on older product types in 2020; this is suggestive of a new, unique surrender practices, distinct from the practices observed before and after the 2008 financial crisis.
  • GLWB commencement rates were depressed in 2020 among contracts with the highest propensity to exercise the benefit: in-the-money contracts following the end of the deferral bonus period.

“We expected that 2020 behavior would be different,” said Timothy Paris, Ruark’s CEO. “By looking at industry-level data, we are better able to identify and quantify those differences— especially on the most recent products.”

‘Moneyness’

For annuity issuers with many billons of dollars in long-term VA rider liabilities, the big question is this: Given trends in interest rates, performance rates of funds in the separate accounts, contract lapse rates, and owner survivor rates, what level of claims can I expect in five, 10 or 20 years? How much reserves and capital do I need to hold to support those anticipated claims?

Actuaries don’t have digital crystal balls, but they do have metrics to tell them whether contracts are currently “out of the money” (not on course to trigger a claim before the client dies) or “in the money” (on course to trigger a claim). They also have two yardsticks—nominal and actuarial—to measure the “in-the-moneyness.”

An income rider is nominally in-the-money if and when the owner’s account value is below the guaranteed “benefit base.” This is the notional minimum amount on which the clients’ income payments will be calculated. Initially equal to the account value, the benefit base may later be higher or lower than the account value. For instance, a client’s investments may start at $100,000 and then fall to $95,000, but the benefit base can’t be less than $100,000. After 10 years of annual deferral bonuses, the benefit base might be $200,000, regardless of the actual account value.

Contracts are actuarially in-the-money—and pose the greatest risk of loss for the insurers—if the owners are also on track to live past the point when they will have begun receiving benefits from the insurer’s general fund instead of their own separate accounts. The fewer the number of clients who reach the point of receiving money from the general fund, the more profitable the product to the issuer.

Some owners of VA living benefits (either guaranteed lifetime withdrawal benefits or guaranteed minimum income benefits, which are more like deferred income annuities with a floor) never use the rider. At a certain age, they may no longer believe they need the protection, so they’ll surrender the contract and stop paying the fee for the GLWB or GMIB rider. Other owners (and their advisers) are very savvy. They know when the contract is nominally or actuarially in the money, and they will act accordingly.

Which assumption should issuers of VAs with income riders model their future liabilities (and reserve requirements) base their future liability and reserve estimates on—nominal or actuarial moneyness?

“Some issuers argue that annuity owners are not actuaries or calculating machines,” Paris told RIJ. So they’ll look to simpler proxies, like ‘nominal moneyness.’ Others believe that while annuity owners aren’t doing detailed calculations, they have some sense of actuarial/economic value. So they use an actuarial moneyness measure. We spend more time talking with our clients about this issue than anything else, because it is critically important to the long-term profitability of these products.”

© 2021 RIJ Publishing LLC. All rights reserved.

AM Best assesses variable annuity regulatory reforms

Posted on January 14, 2021 by -

AM Best expects variable annuity (VA) reforms from the National Association of Insurance Commissioners’ (NAIC) to diminish noneconomic volatility that resulted under the previous framework and may reduce the use of captives by US life insurance and annuity writers.

In its Best’s Market Segment Report, “Variable Annuities Reforms Leading to Mixed Results for Life/Annuities Insurers,” AM Best notes that the new rules eliminate a Standard Scenario Amount (SSA). The SSA was the primary cause of noneconomic volatility as it was a single-prescribed scenario, reflecting an immediate drop in equity prices, followed by low returns thereafter, and did not recognize hedging beyond the first valuation year.

In addition, policyholder behavior assumptions used to determine the SSA did not reflect more-recent industry experience. The VA reforms also change the accounting treatment for hedges, currently marked to market, to better match the liability being hedged.

The VA reforms were in effect as of Jan. 1, 2020, but companies had the option to adopt the changes earlier. Early adoption may have had some advantages, but one disadvantage was the loss of the option to grade in the changes over the next three years. Of the companies with larger exposures to VA business, four adopted VA reforms as of year-end 2019—Jackson National, Equitable, Transamerica, and Brighthouse—with mixed results.

Although the NAIC’s changes will help fix various flaws in the existing framework, the potential for volatility will challenge VA writers. While increased hedging levels no longer will result in potential noneconomic volatility, the levels will still be driven by market conditions and the impact on the actual costs of such hedges.

Other financial solutions are still limited, given the decline in reinsurance activity. Moreover, the use of captive reinsurance is likely to decline significantly because of the recommended changes; however, as long as true economic values and those of various accounting regimes differ, the use of alternative financing methods will continue.

During the first quarter of 2020, companies with large exposures to VAs reported significant reserve increases due to market performance, leading to large declines in pretax operating income. Operating losses continued through the third-quarter 2020, albeit at lower levels than in the first quarter.

The challenges of the past year have put pressure on VA writers, and persistently low interest rates have made it more difficult to manage VA blocks of business. The VA reforms will serve to diminish the noneconomic volatility under the previous regime, but ongoing developments related to the pandemic will likely lead to more uncertainty, with potential increases in equity market volatility.

© 2021 RIJ Publishing LLC. All rights reserved.

Why Sammons MYGA Sales Spiked in 2020

Posted on January 13, 2021 by -

Opportunities occur when luck meets preparation, wise people are known to say. When the pandemic panic struck US financial markets last March, and bond prices fell, a window opened and Sammons Financial Group jumped through it—scooping up investment-grade fixed income assets whose prices were beaten-down and whose yields were elevated.

Market timing? Yes, but in the best sense of that expression.

The employee-owned (ESOP) company—created by the late entrepreneur Charles Sammons, an Oklahoma Territory orphan who diversified a Dallas hay-and-grain business into insurance and finance and died a billionaire in 1988—made hay out of those yields by increasing the payout rates of its fixed-rate annuities.

Fixed rate annuities were what many nervous investors fled to in the middle of 2020. Sammons’ high payout rates got attention and led to a spike in sales. By the end of the third quarter of 2020, Sammons YTD fixed annuity sales were $6.59 billion, second only to New York Life. Six months earlier, by contrast, Sammons had been ranked 15th, with only $880 million in YTD fixed annuity sales. The West Des Moines-based company has $100 billion in assets, according to its website.

Bill Lowe

“It was an interesting year for us,” Sammons Institutional Group president Bill Lowe said in an interview this week. “We had been preparing for a recession and were going up in the quality in our portfolio in preparation for it. During a recession, credit spreads widen and high quality assets appreciate in value.

“No one predicted the pandemic, but when spreads gapped, we had an opportunity get some attractive yields. So we saw a monstrous increase in sales of fixed multi-year guaranteed rate annuities (MYGAs).” Of Sammons’ $6.59 billion in fixed annuity sales through the end of the third-quarter 2020, $3.93 billion was in MYGA contracts and $2.59 billion was in fixed indexed annuities (FIAs). 

One might think that the same opportunity to buy depressed high-quality bonds was available to all of Sammons’ direct competitors in the fixed annuity market. Not necessarily.

“It all depends on what your portfolio looked like,” Lowe said. “We had been moving up in quality. A large share of our assets were rated NAIC 1.” That’s the highest strength rating that the National Association of Insurance Commissioners assigns to insurer’s general account assets.

Life/annuity companies with weaker investment portfolios, perhaps because they were already straining for yield and taking more risk, “couldn’t have bought what we did. If their assets had slipped out of NAIC 2, there are greater capital requirements for those bonds.

“Many companies needed to increase their reserve capital because of their variable annuities with guaranteed lifetime withdrawal benefits (VAs with GLWBs),” he added. “So, yes, everybody saw the same opportunity, but not everybody was in a position to take advantage of it.”

As Sammons ramped up sales, some of its competitors intentionally reduced theirs. “Other companies really pulled back. Some companies almost exited the fixed annuity business. Or they dropped rates to such uncompetitive levels that they were effectively out of the business. So there was less competition. We had the added advantage of being an A-rated company. There are not a lot of A-rated fixed rate annuity carriers.” Sammons Financial is rated A+ by Fitch, AM Best and Standard & Poor’s.

Five factors contributed to Sammons’ sales burst in 2020, Lowe said. The first was competitive rates, based on the timely bond purchases. The second was Sammons’ strength ratings. The third was the rate advantage that fixed annuities always enjoy relative to Treasury bonds and certificates of deposit.

“The prescription for uncertainty is certainty. People want something certain when there is uncertainty. If you look at the fixed annuity market overall, it was up slightly [1%] year-over-year on September 30, 2020,” Lowe told RIJ. 

“In the third quarter of 2020, fixed rate sales were up 60% compared with the third quarter of 2019. People could see what had happened to the yields on other safe money, such as Treasuries or certificates of deposit. Those rates were not very attractive.”

Regarding the last two items that contributed to Sammons’ 2020 success, “one is that we were well-equipped to do e-business. We required that of our strategic partners. In a pandemic, you can’t do paper applications. That’s one reason why the overall annuity market dropped,” he said.

“Advisers couldn’t meet face to face with their clients. Even if a client lived only a mile away, advisers would still have to mail the contract to the client. That’s why rep productivity dropped a lot in April and May.

“The last point in our favor was the simplicity of the fixed rate annuity sale. During a disruption, the fixed rate product is easy to sell over the phone. A VA with a GLWB is much harder. In the third quarter we were the number one seller of fixed rate annuities in the industry and number one in the bank channel.

“We’ve expanded our distribution in the bank channel. Banks are where the action takes place in MYGAs. Early on, the ‘seven-year’ MYGA business was terrific. Over time sales gravitated toward the three-year contract. It’s always a big seller.

Lowe was asked if Sammons’ sales burst was sustainable. “The BBB+ instruments gapped significantly last March. They’ve since come back, and spreads have tightened over the year. Can our competitiveness be sustained? Will we see another opportunity like March, April, and May?

“I can only say that we were well positioned for this last spring. When you combine very attractive rates with a 100-plus year-old company that’s conservative and rated A+, and you have the distribution positioned in the right places, you’re going to be positioned for an opportunity like this.”

Before 2020, Sammons reported the annuity sales of its two member insurers, Midland National and North American Company for Life and Health Insurance, separately to the Secure Retirement Institute at LIMRA. In January of last year, the company refreshed its brand. It adopted an oak leaf as its corporate symbol and began reporting its consolidated annuity sales as Sammons Financial.

© 2020 RIJ Publishing LLC. All rights reserved.

New law to show who qualifies for a PPP loan

Posted on January 12, 2021 by -

The Payroll Protection Program (PPP), a component of last year’s CARES (Coronavirus Aid, Relief, and Economic Security) Act, provided relief for struggling small businesses affected by the pandemic. But as of August 8, 2020, loans under the PPP ceased, with approximately $130 billion in unused funds. 

Now we have PPP2, or the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, a part of Consolidated Appropriations Act of 2021. The lending program has reopened, and an additional $284 billion has been made available. (The act’s modifications to the PPP are described below.)  

Under PPP2, only community financial institutions will initially be able to make first-draw PPP loans on January 11 and second-draw PPP loans (described below) on January 13. The PPP will open to all participating lenders shortly thereafter, although a precise date has not been specified. 

Loan application forms were released on January 8: Form 2483, Payroll Protection Program Borrower Application Form, and Form 2483-SD, PPP Second Draw Borrower Application Form, a new form for second-draw loans. The IRS also issued an 82-page interim final regulation, reflecting existing guidance under the PPP as well as guidance on the newly enacted provisions. 

(Please see Wagner’s law alert dated January 1, 2021, for in-depth coverage of the CAA provisions impacting employer-sponsored benefit plans.) 

Significantly, the PPP now permits businesses that have already received one PPP loan to receive a second loan, referred to as a second-draw loan. To be eligible for this second-draw loan, a business must have 300 or fewer employees, including domestic and international affiliates, with special rules for businesses in the hotel and food industry. 

In addition, the business must have used or will use the full amount of its prior PPP loan on eligible expenses and demonstrate at least a 25% reduction in gross receipts for any quarter in 2020 compared to the same quarter in 2019. A borrower that was in operation for all four quarters of 2019 can submit copies of its annual tax forms that show a reduction in annual receipts of at least 25% in 2020 compared with 2019. 

The maximum loan amount for second-draw loans is the lesser of 250% (350% for businesses in the food and hotel industries) of the applicant’s monthly payroll costs in the one-year period prior to the loan, with a cap per employee of $100,000 annualized, or $2 million, a ceiling substantially lower than the $10 million cap on first-time PPP loans. 

The business must also have been in existence on February 15, 2020, and the application for the second-draw loan must be submitted by March 31, 2021. The loan funds must be used during a covered period. Under the CARES Act, the covered period was either eight weeks or 24 weeks, but the CAA permits the borrower to select any period between eight weeks and 24 weeks as the covered period.

Certain businesses are not permitted to receive a second PPP loan, including:

  • Publicly held organizations
  • A business with ties to the Peoples Republic of China
  • Banks
  • Life insurance companies
  • Businesses that derive more than one-third of their annual gross revenue from gambling activities
  • Entities engaged in political or lobbying activities
  • Advocacy organizations and think tanks
  • Persons required to register as a foreign agent

However, the Act has expanded coverage to Code Section 501(c)(6) organizations, such as business leagues; housing cooperatives; destination marketing organization; and certain news organizations.

The CCA requires that at least 60% of the PPP loan be used on payroll expenses. Additionally, both new borrowers and those borrowers that have not yet applied for forgiveness may use the PPP loans for four new categories of expenses:

  • Covered operation expenditures, which includes payments for any business software or cloud computing software that facilitates business operations;
  • Covered property damage, which includes costs related to property damage and vandalism or looting due to public disturbances during 2020 that was not covered by insurance or other compensation;
  • Covered supplier costs; and
  • Covered worker protection, including personal protective equipment; a combined air or air pressure ventilation or filtration system; and onsite or offsite screening capabilities. 

Further, businesses that returned funds, possibly because they were unsure if they satisfied SBA conditions, or did not accept the full amount possible, may be eligible for increased PPP loan amounts equal to the difference between the maximum amount available and the amount retained.

Other changes under the CCA include:

  • Simplified forgiveness applications for recipients of loans of $150,000 or less reversing the IRS’s position
  • Clarification that organizations receiving PPP loans will be able to deduct expenses paid for by funds received under the loan
  • Greater flexibility for seasonal employees
  • repeal of the Cares Act provision requiring PPP borrowers to deduct the amount of their Economic Injury Disaster Loan advance from their PPP forgiveness amount
  • Permitting PPP borrowers to use the employee retention tax credit.

© 2021 RIJ Publishing and Wagner Law Group.

Honorable Mention

Posted on January 12, 2021 by -

Annuity distribution expert Scott Stolz joins SIMON

Scott Stolz, CFP, RICP, has joined SIMON Annuities and Insurance Services LLC as Head of Insurance Solutions. The former president of Raymond James Insurance Group, will be responsible for expanding the reach of SIMON’s annuities platform across new channels and will play an integral role in the development and release of new analytics and design capabilities as the insurtech platform achieves new scale.

Stolz joins SIMON with more than 35 years of experience in the insurance industry, industry-wide recognition for his leadership, and an aligned vision for delivering a simplified pre- and post-sale experience for financial professionals. He most recently served as President of the Raymond James Insurance Group, Global Wealth Solutions, overseeing Annuities & Insurance.

Prior to his 15½-year tenure with Raymond James, he served as Senior Vice President of Jackson National Life, Vice President of North American Security Life, and Senior Vice President of SunAmerica. Stolz earned both a BSBA and MBA from Washington University in St. Louis, with a focus in Finance.

A frequent contributor to industry publications on insurance-related topics, Stolz has authored articles featured in Financial Advisor magazine, ThinkAdvisor, Research magazine, and Investment News. He is an active leader who appreciates the opportunity to volunteer his time for social and professional causes, dedicating time each year to SunCoast United Way, and formerly serving on the boards of the Insured Retirement Institute, LIMRA’s Retirement Institute, and as a Board Trustee for the American College of Financial Services.

TIAA private equity affiliate raises $6.4 billion in new capital

Churchill Asset Management, an investment-specialist affiliate of TIAA-owned asset manager Nuveen, raised more than $6.4 billion of new committed capital in 2020, more than doubling its 2019 fundraising figures, with an additional $2.2 billion expected to close in the first quarter of 2021, the private equity financing specialist announced this week.

The firm’s investment teams closed and/or committed more than $6 billion in new investments across 229 distinct transactions in 2020, despite the slow down in second quarter deal flow due to the COVID-19 pandemic, according to a release. The firm is focused on “private equity-backed businesses that maintain a defensible market position.”

Churchill specializes in middle market financing, including origination, structuring, underwriting, syndication, and deal monitoring and oversight. The firm has invested $36 billion in private capital across more than 960 transactions. With over $27 billion of committed capital, it provides first lien, unitranche, second lien and mezzanine financing, in addition to equity co-investments and private equity fund commitments.

MetLife unit in longevity reinsurance deals with Legal & General

Metropolitan Tower Life Insurance Company, a subsidiary of MetLife, Inc., announced this week that it completed four United Kingdom longevity reinsurance transactions with Legal & General Assurance Society Limited in 2020.

Under the agreements, Metropolitan Tower Life Insurance Company will provide reinsurance to Legal & General for longevity risk associated with a combined total of approximately $2 billion of pension liabilities.

Thrivent promotes two new senior managers

Nikki Sorum has been named senior vice president of Thrivent Advisors and Luke Winskowski has been promoted to senior vice president of Advice and Wealth Management, the financial services giant Thrivent announced. 

Thrivent recently launched a new brand and national advertising campaign, and is expanding its distribution capabilities, said Mary Jane Fortin, chief commercial officer at Thrivent, in a release.

Sorum will lead Thrivent’s career network of financial professionals as well as the remote channel. Her team also will focus on related business areas, including practice management and leader development. Sorum was previously senior vice president of membership at Thrivent.

Winskowski will lead the newly created Advice and Wealth Management organization. He will oversee advice delivery, product solution wholesaling and sales support, health protection solutions, and custody and brokerage services. He will continue to be vice president and head of the Thrivent Advisor Network, Thrivent’s platform for independent investment advisors.

MRA Associates joins CAPTRUST

CAPTRUST Financial Advisors has added Phoenix-based MRA Associates. The 59-person firm brings $3.29 billion in assets under management to CAPTRUST.

Founded in 1991, MRA provides investment advisory, wealth management, and tax consulting for private clients and institutions. The firm is led by Managing Partner and Chief Executive Officer, Mark Feldman and the Executive Leadership Team comprised of Brad Lemon, Christina Burroughs, and Mike Hirte and includes 55 advisors and staff.

MRA also brings to CAPTRUST a new service offering: income and estate tax compliance and consulting services for individuals, families, trusts, and related closely held operating businesses and entities.

Since 2006, CAPTRUST has added 44 firms. Consistent with previous firms that have joined, MRA’s locations in Phoenix, Las Vegas and Wayzata, Minnesota will now take on CAPTRUST’s name and branding.

Financial illiteracy costs Americans $415 billion in 2020: NFEC

Among the 1,548 respondents divided into six different age groups, American adults each lost $1,634 on average in 2020 due to lack of money management knowledge, according to a 1,548 responses to an end-of-year survey by the National Financial Educators Council.

The NFEC survey posed a single question: “During the past year (2020), about how much money do you think you lost because you lacked knowledge about personal finances?” For the complete survey results conducted between December 30, 2020 and January 3, 2021, visit: https://www.financialeducatorscouncil.org/financial-illiteracy-costs/.

By extrapolating these results to represent the 254 million adults in the US, NFEC estimated that financial illiteracy cost the country’s citizens more than $415 billion in 2020.

The 2020 data ($1,634 per adult) was a significant increase from 2018 ($1,230) and 2019 ($1,279) surveys.  The total cost for the adult population in 2019 (240 million) was $309 billion.  The 2020 data accounted for a population increase of 14 million more adults.  If the 2019 population data were used today, it would show an increased cost of adult Americans $85 billion more than last year.

About one in five (21.6%) survey respondents said they had lost more than $2,500 in 2020 because of lacking personal finance knowledge. Just over 40% reported losing more than $500 due to this knowledge gap. This figure was calculated by averaging the total number of respondents selecting each category, using the lowest number in each range.

The NFEC has been conducting the survey for five years. In a 2016 NFEC survey, US adults indicated that they had lost an average of $9,725 across their lifetimes due to lack of financial knowledge; one in three respondents reported lifetime losses over $15,000. Nearly 25% of participants said they had lost more than $30,000 across their lives because of this knowledge lack, which underscores just how important teaching financial literacy can be.

Deficits in personal finance capability increase people’s risk of incurring bank fees, facing high interest rates on loans and credit cards, and losing money in investments. It should be noted that the survey results may represent an underestimate of actual losses, since people may lack financial knowledge but remain unaware of their lost opportunities.

Lincoln partners with Morningstar on 401(k) managed accounts

Lincoln Financial has added an Advisor Managed Accounts service, which enables a retirement plan’s registered investment advisor (RIA) to create plan-specific investment portfolios and leverage the proprietary portfolio assignment process from Morningstar Investment Management LLC, according to a release this week.

These personalized investment programs, offered through the Lincoln Alliance program, enable the RIA to use each plan participant’s age and plan balance, among other information, to create the portfolios used by the program.

“The Advisor Managed Accounts service complements and builds on our suite of custom asset allocation products, such as YourPath,” said Ralph Ferraro, senior vice president, Retirement Plan Products and Solutions, Lincoln Financial Group, in a release.

More than half of plan sponsors offer a managed account option in their plans, the release said, and this number is likely to increase. Morningstar Investment Management found that, even after accounting for age and income, more than 70% of off-track participants (participants with a less than 70% chance of achieving retirement income goal) studied increased their savings rates after using managed accounts.

Morningstar Investment Management provides the technology platform that allows the RIA to create plan-specific portfolios, then matches each participant with an unique asset allocation, and acts as fiduciary for the participant portfolio assignment process. Advisor Managed Accounts can be offered as the Qualified Default Investment Alternative (QDIA), with the plan sponsor designating it as the QDIA for all participants, or on an opt-in only basis, so each participant can actively choose the service.

© 2021 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on January 7, 2021 by -

Empower completes purchase of MassMutual retirement plans

Empower Retirement’s previously announced acquisition of Massachusetts Mutual Life Insurance Company’s (MassMutual) retirement plan business has been completed following the receipt of regulatory approval, Empower said this week.

MassMutual’s retirement plan business moves to Empower in a reinsurance transaction for a ceding commission of $2.35 billion. When combined with Empower’s existing US business, the balance sheet of the transferred group annuity business will be supported by $1 billion of required capital.

After Fidelity, Empower is now the nation’s second-largest retirement services provider. The acquisition increases Empower’s participant base to more than 12 million and retirement services recordkeeping assets to approximately $884 billion administered in about 67,000 workplace savings plans.

More than 1,700 employees who had been affiliated with MassMutual’s retirement plan business will join Empower to provide the full range of support services for financial professionals, plan sponsors and participants.

Eversheds Sutherland served as legal counsel, and Goldman Sachs and Rockefeller Capital Management served as financial advisors to Empower. Skadden, Arps, Slate, Meagher & Flom LLP served as legal counsel and Lazard served as exclusive financial advisor to MassMutual.

New York Life completes acquisition of Cigna group benefits businesses

New York Life, America’s largest mutual life insurer, today announced the completion of the company’s acquisition of Cigna’s group life, accident, and disability insurance business. The $6.3 billion acquisition, which was first announced on December 18, 2019, adds approximately 3,000 employees and over nine million customers. The new business will be rebranded New York Life Group Benefit Solutions.

With the completion of the acquisition, New York Life is now a top five insurer across group life, accident, and disability insurance. New York Life and Cigna have also entered into a multi-year collaboration that will continue to bring differentiated, integrated health and group benefit solutions for clients and prospects who desire them.

New York Life Group Benefit Solutions will operate within New York Life’s portfolio of strategic businesses, which includes Group Membership Association, Institutional Annuities, Institutional Life, New York Life Direct, and Seguros Monterrey New York Life, among others.

According to Bloomberg News, “Such acquisitions are rare for New York Life, which operates as a mutual insurance company owned by its policyholders. In general, life insurers are turning to group benefits because they’re less sensitive to low interest rates, which have impacted investment income for many years. The pandemic delayed the deal’s completion by a quarter and has affected results because of higher mortality rates. However, the company remains optimistic about the long-term strategy behind the acquisition.”

Two more states adopt ‘best interest’ standard for annuity sales

Arkansas and Michigan have become the latest states to approve regulations requiring insurance producers and agents to keep consumers’ best interest in mind when selling annuity products, according Bestwire, a services of A.M. Best.

The new regulations largely follow the model law approved last year by the National Association of Insurance Commissioners (NAIC). As adopted, the Arkansas regulations, which took effect Dec. 29, 2020, require the producer or agent to make “reasonable efforts” to obtain consumers’ information before making recommendations on annuities.

In Michigan, the state legislature last month rolled the annuity suitability language into another piece of insurance legislation. It says producers “shall act in the best interest of the consumer under the circumstances known at the time.” The rules became effective Dec. 29, 2020. The two states join Iowa, Arizona, and Rhode Island, which adopted regulations following the NAIC model last year.

Voya completes sale of life and annuities businesses

Voya Financial, Inc., and Resolution Life Group Holdings (Resolution Life) have received all regulatory approvals needed to complete the sale of Voya’s Individual Life and non-retirement legacy annuities business to Resolution Life. The transaction closed on Jan. 4, 2021.

Voya also announced that it intends to enter into an accelerated share repurchase (ASR) agreement with a third-party financial institution before the end of the year, under which it will repurchase approximately $150 million of its common stock. The initial delivery of shares under the ASR would take place in the fourth quarter of 2020, with final settlement during the first quarter of 2021.

A Fortune 500 company serving about13.8 million individual and institutional customers in the US, Voya had $7.5 billion in revenue in 2019. The company had $657 billion in total assets under management and administration as of Sept. 30, 2020. 

Ares completes acquisition of F&G Reinsurance Ltd

Ares Management Corporation (NYSE: ARES) and its indirect subsidiary Aspida Holdings Ltd. have completed Aspida’s previously announced acquisition of F&G Reinsurance Ltd from FGL Holdings, a subsidiary of Fidelity National Financial, Inc.

As part of the transaction, Aspida will enter into a strategic flow reinsurance agreement with F&G related to certain annuity products. Terms of the all cash transaction were not disclosed.

The Company, a Bermuda-domiciled life and annuity reinsurer with approximately $2 billion in invested assets as of September 30, 2020, will continue to operate as a reinsurance company in Bermuda as Aspida Re. Members of the Company’s management team will remain in place. Aspida Re said it “intends to be a solutions provider to insurance partners that are looking to optimize their balance sheets and be best positioned for future growth.”

Through Ares Insurance Solutions (“AIS”), Ares will originate and manage insurance assets to scale Aspida’s platform. This has included the recent appointment of Raj Krishnan, Partner and Chief Investment Officer of AIS, who will lead AIS’s asset management support for Aspida Re and its ceding insurers.

Ares Management Corporation (NYSE: ARES) is a leading global alternative investment manager operating integrated groups across Credit, Private Equity, Real Estate and Strategic Initiatives. Ares Management’s investment groups collaborate to deliver innovative investment solutions and consistent, attractive investment returns for fund investors throughout market cycles. As of September 30, 2020, Ares Management’s global platform had approximately $179 billion of assets under management with more than 1,400 employees operating across North America, Europe and Asia Pacific. 

Aspida Holdings Ltd. is an indirect subsidiary of Ares Management Corporation, which was created to execute on Ares Insurance Solutions’ plans to issue insurance and reinsurance products for individuals and institutions seeking to fund their long-term financial needs.

Unum and Global Atlantic unit agree on coinsurance deal

Unum Group (NYSE: UNM) today announced that three of its insurance company subsidiaries have entered into an agreement to reinsure a substantial portion of Unum’s Closed Individual Disability Insurance Block (“IDI”) business, backed by approximately $7.1 billion in reserves, to a subsidiary of Global Atlantic through a coinsurance arrangement.

Global Atlantic’s subsidiary will maintain over-collateralized trust accounts for the benefit of each Unum ceding company to secure its obligations under the relevant reinsurance agreement. Unum will continue to provide service and administration for the reinsured IDI business.

Once the transaction is fully executed, assuming receipt of all consents and regulatory approvals, Unum expects to release approximately $600 million of capital backing the block. Initially, the released capital is expected to be held at the holding company, increasing capital flexibility during the current challenging economic environment.

There is expected to be minimal impact to the weighted average risk-based capital ratio and statutory operating earnings of its U.S. traditional insurance subsidiaries once the transaction is fully completed.

Unum will retain the multi-life IDI block that is reported as part of the Unum US Supplemental & Voluntary segment, which continues to be an important element of the Company’s core growth strategy. The Company will also retain certain Closed Block IDI business not reinsured as part of the transaction, as well as certain assets with yields exceeding current market levels, which will support yields for other product lines, including long-term care.

As part of the transaction, a subsidiary of Unum will provide a 12-year volatility cover for the active life cohort, which represents approximately 5% of the total statutory reserves of the IDI block reinsured by Global Atlantic’s subsidiary. At the end of the coverage period, Global Atlantic’s subsidiary will retain the risk for the remaining incidence and claims risk on the block.

Unum and Global Atlantic will complete the reinsurance transaction in two phases. During December 2020, approximately 75% of the in-force IDI block, primarily direct business written by the Unum ceding companies, will be reinsured to Global Atlantic’s subsidiary effective as of July 1, 2020.

Additional IDI business, consisting of direct business not ceded at the first closing in December 2020 and business assumed by Unum from third parties, will be reinsured in the first quarter of 2021, subject to receipt of required consents and regulatory approvals.

The total net considerations to be paid to Global Atlantic’s subsidiary at the closing of the first phase of the reinsurance transaction is approximately $376 million, which will be offset by cash tax benefits. The ceding commission for the second phase of the reinsurance transaction is subject to adjustment based on the consents actually received.  The payment for the volatility cover is also subject to adjustment based on the consents actually received.

Morgan Stanley & Co. LLC and Rothschild & Co acted as financial advisors and Debevoise & Plimpton LLP served as legal counsel to Unum in connection with this transaction.

© 2021 RIJ Publishing LLC. All rights reserved.

Trends RIJ Will Track in 2021

Posted on January 7, 2021 by -

Most boomers will easily remember Linda Ronstadt’s 1974 country-rock hit, “When Will I Be Loved?” A few may even recall the original 1960 version by Don and Phil Everly, who.wrote the lyrics: “I’ve been put down. I’ve been pushed ‘round. When will I be loved?”

The life/annuity industry has been asking that question for years. By now, the industry expected to be counting far more profits from the sale of annuity contracts to retiring Boomers. No one imagined that ZIRP (zero interest rate policy) would spoil the party.

Healthy yields on AAA-rated corporate are the oxygen of life/annuity companies, and those companies are still gasping for air. After 2008, the Fed’s emergency easy-money efforts propelled the industry into a decade of furious adaptation. A stream of changes in ownership, products, technology, and distribution channels marked the 2010s. 

After all that creative destruction, what’s next? Which trends will persist or peter out? Which products will flourish or flop? In this article, we’ll talk about the trends that Retirement Income Journal expects to cover in 2021 and beyond.

RILAs are still the shiniest, newest annuity. Since the stock market climbs a wall of worry, a certain segment of investors is going to want safety-net products that let them hold equities without sleepless nights. That should mean investor-demand for fixed indexed annuities (FIAs)  and structured annuities (aka registered index-linked annuities, or RILAs).

Of all annuities, RILAs might offer the best “fit” for today’s markets. These contracts use a bracket of options—the sale of downside puts and purchase of upside calls—to deliver more upside potential than an FIA and more downside protection than a variable annuity.

RILAs are the only type of annuity contract that saw healthy sales growth in 2020 (up 25%, to $15.7 billion through September 30). RILAs beguile investors with their offers of “up to” 140% asset appreciation over six years, but it’s not clear how likely that outcome might be.

Low rates have been brutal on the payout rates and sales of what you might call “true” annuities: Single-premium immediate annuities (SPIAs), deferred income annuities (DIAs), and qualified longevity annuity contracts (QLACs). Their yields depend on the contract owner’s longevity as much as on current interest rates, but their source of strength—illiquidity—is what turns potential customers off. DIAs may find new life 401(k) plans, however (See below.) 

The “insurance solutions” gold rush continues. In 2020, RIJ finally started giving this trend the attention it deserves, with our “Bermuda Triangle” series of articles on a new business model that’s relieving the low-yield woes of certain life insurers. We’ll give it more coverage in 2021.

“Triangle” refers to a three-part business model involving a life insurer with blocks of long-dated fixed indexed annuity liabilities, a sophisticated asset manager with expertise in private debt origination, and a reinsurer—especially a captive one domiciled in a jurisdiction with relatively reduced reserve requirements.

Insurance solutions providers—as we’re still learning—are companies that have all the pieces in the model or can bring all these pieces together quickly and efficiently for a life insurer that has slow-moving annuity blocks to sell, refinance or reinsure, and would welcome a huge infusion of new cash so it can reconfigure itself for long-range survival. Tens of billions of dollars in in-force annuity contracts—the savings of millions of risk-averse Americans—have been set in motion since Apollo pioneered this strategy after the Great Financial Crisis.

This trend is both a gold rush and a source of worry. If you’re an asset manager like Apollo, Blackstone, or KKR, or a life insurer who wants help turbo-charging its investment department, it’s a gold rush. If you’re a traditional fixed indexed annuity issuer who can’t match the higher yields of Bermuda Triangle players, or a regulator who’s nervous about the risks of private debt and the opacity of reinsurers, it’s a source a worry.

Merger fever should reappear post-COVID. That Bermuda Triangle phenomenon has been driving M&A in the life/annuity space for about 10 years, and the trend will probably continue in 2021. According to a recent report from Moody’s:

Private capital and companies with private credit, structuring or asset origination capabilities, continue to invest in the life insurance sector. In particular, private or alternative capital continues to participate in the sector’s consolidation by bringing resources to consolidate cash flows.

These firms leverage size and breadth to establish a platform for additional transactions, and allocate capital toward established companies with known brands to increase the insurance business’ return on investment or profitability, often through enhanced investment income.

Moody’s is talking about asset managers pursuing “Bermuda Triangle” strategies. Life insurers are the targets, but they’re also buyers, Moody’s said. They’re shopping for “companies which provide additional technologies to expand their operations and digital capabilities. As a means to enhance its digital capacity, M&A is likely to be motivated through the accelerated role of technology as insurers acquire via insurance buying, underwriting and servicing processes.”

There could be a temporary lull in this trend. “The pandemic-driven economic disruption in the first half of 2020 caused many life insurers to hit the pause button on M&A and divestiture activity to focus on sustaining operations and building liquidity and capitalization,” Moody’s Vice President Bob Garofalo said in a release.

“As the recovery unfolds, life insurers are updating forecasts and assessing the implications of the economic landscape with even lower interest rates and increased asset volatility, and are assessing how to position their products and businesses while considering interest rate sensitivity and the outlook for their capital positions.”

The revolution in distribution. The distribution tree of financial products, including annuities, has grown some new branches over the past ten years. We’re watching the pooled employer plan (PEP) market, which was activated on January 1. Thanks to the SECURE Act of 2019, retirement plan providers can create a single, customizable 401(k) plan that dozens or even hundreds of companies could join.

PEPs would allow providers of mutual funds  to reach millions of prospects with a single sale to a PEP sponsor. They could also do the same for the distribution of annuities through 401(k) plans. We’ll be watching to see which types of contracts, if any, get traction in this market. Contenders include optional multi-premium deferred income annuities, as well as lifetime income riders embedded in target date funds or managed accounts.

The sale of FIAs and other annuity contracts to fee-based registered investment advisers (RIAs) through online platforms is growing; few people would have predicted that 10 years ago, when commission-paid agents sold almost all of them. Annuities have been added to cloud-based RIA platforms, like Envestnet.

Advisers can also buy fee-based annuities on independent platforms like DPL Financial and RetireOne. Direct-to-the-public annuity platforms have also appeared (e.g., Blueprint Income), but a licensed agent still has to mediate the purchase of the annuity.

‘SECURE 2.0’ and Social Security reform. Along with much of the retirement plan industry, we expect to see the Secure a Strong Retirement Act passed in 2021. Known informally as SECURE 2.0, it will include some of the industry wish-list items left out of the SECURE Act of 2019, like requiring auto-enrollment for all qualified plans and raising to 75 the age for initial minimum required distributions from qualified plans.

We’d like to see the Biden administration begin to tackle the Social Security question before mid-term elections in 2022. Last year was the first year in which the program’s payouts exceeded revenue plus interest on the remaining surplus in the trust fund. In other words, some of the benefits are already getting paid out of the US general account.

We don’t think Social Security faces an existential “crisis,” but there remains a technical barrier—comparable to the “debt ceiling”—to the continued payment of Social Security benefits when the surplus built up in the trust fund since 1983 is finally consumed. Starting in 2034, the payroll tax alone is expected to cover just 75% of expenses. President Biden is expected to spend a chunk of his energy on reinstating the Affordable Care Act, but we hope he takes steps toward legislating Social Security out of limbo.

(c) RIJ Publishing LLC. All rights reserved.

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.