Archives: Articles

IssueM Articles

Annuities enjoy record sales in 1Q2024

Posted on June 3, 2024 by -

U.S. annuity sales were $106.7 billion in the first quarter of 2024, 13% above prior year results, according to results from LIMRA’s U.S. Individual Annuity Sales Survey. This is the highest first quarter sales results since LIMRA started tracking sales in the 1980s. The survey covers 92% of the total U.S. annuity market.

“Demand for investment protection and guaranteed retirement income remains strong. This is the 14th consecutive quarter of year-over-year growth in the U.S. annuity market,” said Bryan Hodgens, head of LIMRA research, in a press release.

“That said, total annuity sales have come down from fourth quarter 2024, largely due to a softening in the fixed-rate deferred annuity market. However, LIMRA expects annuity sales to perform well through 2024.”

Fixed-Rate Deferred
Total fixed-rate deferred annuity (FRD) sales were $43 billion in the first quarter, 4% higher than first quarter 2023 sales. This is the ninth consecutive quarter of growth for FRD annuity sales. FRD annuities remain the primary driver of annuity sales growth, representing more than 40% of the total annuity market in the first quarter.

Fixed indexed annuities
Fixed indexed annuity (FIA) sales had a record first quarter. FIA sales totaled $28.6 billion, up 24% from the prior year. FIA sales have experienced 12 consecutive quarters of year-over-year growth.

“Growth was widespread with 61% of FIA carriers and 8 of the top 10 carriers reporting sales growth,” the release said. “Sustained strong interest rates have allowed carriers to improve FIA crediting rates and raise cap rates, which increased the overall product line attractiveness. LIMRA expects FIA sales to continue to grow through 2025.”

Income annuities
Income annuity product sales continue to thrive under the higher interest rates. Single premium immediate annuity (SPIA) sales were $3.6 billion in the first quarter, 6% higher than the prior year’s results. Deferred income annuity (DIA) sales were $1.2 billion in the first quarter, increasing 40% year over year.

Registered index-linked annuities
For the fourth consecutive quarter, registered index-linked annuity (RILA) registered record quarterly sales. RILA sales increased 39% in the first quarter to $14.5 billion.

“For the second consecutive quarter, RILA sales outperformed traditional variable annuities (VAs). RILA sales should continue to outpace traditional VA sales throughout 2024. LIMRA is forecasting RILA sales to surpass $50 billion in 2024,” the release said.

Traditional variable annuities
Traditional VA sales improved in the first quarter, up 7% year over year to $13.7 billion.

“While traditional variable annuity sales grew in the first quarter, sales remain historically low,” said the release. “Today’s investors have more annuity options to achieve their accumulation goals than they did a decade ago.”

© 2024 RIJ Publishing LLC. All rights reserved.

A Plan Sponsor’s Guide to In-Plan Annuities

Posted on June 3, 2024 by -

So many annuities, so little time. For 401(k) plan sponsors who feel inclined to add a guaranteed income option to their plans, the learning curve is likely to be steep and high. In-plan or out-of-plan annuity? Fixed, fixed indexed, or variable? Which life/annuity company?

A new whitepaper aims to flatten and shorten that curve. The 39-page document, “Prudent Practices for Retirement Income Solutions,” is sponsored by companies with both long experience and substantial stakes in the growth of the 401(k) annuity phenomenon.

Led by Broadridge Financial Solutions, the group includes Broadridge’s fi360 service for plan fiduciaries, annuity product data providers CANNEX and The Index Standard, internet “connectivity” provider, Micruity, and ERISA lawyer Fred Reich of Faegre Drinker Biddle & Reath.

Broadridge is not alone in anticipating the need for guides to assessing 401(k) annuities. “[The National Association of Plan Advisors] has already developed an education program for plan advisors to help them understand the process for evaluating lifetime income options. PSCA [Plan Sponsor Council of America] is in the process of doing the same for plan sponsors to be launched toward the end of this year,” Brian Graff, CEO of the American Retirement Association, the umbrella organization that includes NAPA and PSCA, told RIJ last week.

The Broadridge whitepaper suggests a process that plan “fiduciaries”—consultants whom the Employee Retirement Income Security Act of 1974 requires to act solely in the best interest of plan participants when recommending or managing plan investments or administering a plan—can use if and when selecting one or more decumulation strategies for the plan.

“We’re focused on increasing consideration of retirement income in 401(k) plans. A rising tide will lift all ships, so it benefits everyone [to] have a standard way of looking at it and educating the market,” Broadridge’s John Faustino told RIJ in a recent interview. “Plan sponsor advisers will be able to use our technology to identify the options and needs of a given plan and monitor it on automated basis.”

The ten-step process is described in the table below, reprinted from the whitepaper.

According to Faustino, three types of income tools are available to plan sponsors: fixed income annuities, target date funds with flexible lifetime withdrawal benefit riders, and managed payout programs without guarantees.

“A lot of our work is focused on hybrid and insurance side. But the consortium advocates for consideration of introducing retirement income while purposely staying away from making recommendations,” Faustino told RIJ.  Broadridge intends to involve other retirement trade groups in the consortium’s work. Faustino mentioned LIMRA, SPARK Institute, and the American Retirement Association.

Together, these groups are encouraging and preparing themselves for a world made achievable by the SECURE Acts, passed by Congress in 2019 and 2022. The first SECURE Act introduced a new “safe harbor” that was meant to “remove the plan fiduciary’s fears that it would have to make a determination as to the viability of an insurer to provide lifetime benefits, and the concern that it could be liable for the future insolvency of an insurance carrier the plan fiduciary may select,” according to the white paper.

If, as appears to be the case, the push for annuities in 401(k) plans has come mainly from insurers and asset managers—more than from plan sponsors or plan participants—then it’s not surprising to see the push for education about annuities and retirement income coming from the same source. The Broadridge initiative bears that out.

Some surveys have shown that participants want retirement income tools, at least in principle. But most participants aren’t asking plan sponsors for annuities. At the most recent national conference of the Plan Sponsor Council of America, a panel took up the question of retirement income solutions in plans.

In a report on the PSCA website’s news page, the author wrote, “A refrain heard a few times throughout the conference was ‘retirement income products are like automatic enrollment, participants weren’t asking to be auto-enrolled, but the solution was developed to meet a need and is now commonplace.’ This refrain seems to be pushing back against the notion that there isn’t a need for retirement income solutions because no one is asking for them.”

The largest plan sponsors are likely to be the first to adopt income solutions, to be among the first to be approached by annuity providers, and to be able to dedicate the most resources to educating participants about retirement income. Of some 710,000 defined contribution plans in the US, about 1,200 have at least 10,000 participants. These large plans account have 42.1 million participants (42% of the total participant population) and $3.6 trillion in plan assets (46% of total DC assets).

© 2024 RIJ Publishing LLC. All rights reserved.

 

 

Athene’s group annuities not the ‘safest available,’ lawsuit charges

Posted on June 2, 2024 by -

A “pension risk transfer” or PRT allows a company to swap its traditional defined benefit plan for a group annuity issued by a life insurer. To help ensure that plan participants get their benefits from the life insurer in retirement, US pension law requires companies to select the “safest available annuity.”

A federal class action suit, filed last March 13, charged aerospace and defense contractor Lockheed Martin and its plan adviser, State Street Global Advisors, with failing to pick the safest available annuity in 2021 when they replaced Lockheed’s $9 billion pension with a group annuity from Athene Life and Annuity, a leading life/annuity company. The suit was filed by a group of the plan’s participants.

The lawsuit is noteworthy. Athene was the largest seller of annuities in the US in the first quarter of 2021, with $9.73 billion in sales, and it executed the largest PRT transaction of 2023: the transfer of AT&T’s $8.05 billion pension to an Athene annuity. St. Louis attorney Jerry Schlichter, famous for his successful suits against defined contribution plan sponsors for not protecting their participants from high fees, co-filed the suit against State Street and Lockheed.

Thomas D. Gober

On May 28, in a new filing on behalf of the plaintiffs, certified fraud examiner Thomas D. Gober charged that State Street shouldn’t have recommended Athene to Lockheed, and that Lockheed shouldn’t have bought its group annuity from Athene, because of what Gober described as Athene’s thin surplus, illiquid investments and use of opaque offshore reinsurance with its own affiliates. Athene itself is not a defendant in the case.

The fraud examiner’s 16-page filing said, in part:

By Apollo causing most of the business to be sent to offshore affiliates that do not file under SAP [statutory accounting principles], it makes opaque the solvency or liquidity of the offshore reinsurers. Relevant here, as of December 31, 2023, Athene Iowa is counting on more than $155 billion of reinsurance with its own captives and offshore affiliates.

Comparing that amount in affiliated reinsurance with Athene Iowa’s total reported surplus (its only buffer between a viable carrier and one in receivership) of $2.88 billion [1.44%, or assets of $202 billion divided by liabilities of $199 billion] the gravity of the lack of transparency and risk of the offshore reinsurers is of great concern.

The fact that the Bermuda-based Athene Re controls such a large percentage of Athene Iowa’s assets would make an orderly liquidation under state insurance laws unwieldy and costly as marshaling assets located in Bermuda for the benefit of pensioners will not be a simple and straightforward process.

The surpluses of other large life/annuity companies, such as TIAA (13.83%), New York Life (12.24%), Nationwide (6.77%), and Pacific Life (6.5%) are much higher than Athene’s, Gober said.

Athene rejects the allegations. An Athene spokesperson told RIJ in a May 30 email:

These are baseless complaints instigated by class action attorneys who are attempting to enrich themselves at the expense of retirees. Athene is a safe and secure provider of annuity benefits, with outstanding financial strength, proper reserves, excellent capitalization, and strong credit ratings.

Pension group annuities provide many protections that enhance retirement security. Insurers like Athene have deep expertise in managing annuity obligations, are subject to robust regulation, and hold regulatory capital to protect policyholders.

The suit may serve as a test of the legal soundness of what RIJ has called the “Bermuda Triangle” strategy, a business model initiated by Athene and copied by other annuity issuers. In Gober’s statement, he referred to the model as the “Bermuda triangle” and illustrated it with this graphic:

The strategy varies in its details but typically involves a US life/annuity company that sells fixed rate or fixed indexed annuities, a Bermuda or Cayman-based reinsurer, and a large asset manager or investment firm that devotes a portion of the annuity reserves to investments in “alternative” assets, such as collateralized loan obligations and asset-backed securities. In the strategy, all three entities are often affiliated or part of the same holding company.

Practitioners of the Bermuda Triangle business model claim that the reinsurance reduces capital requirements and alternative assets bring in higher investment yields. This allows annuity issuers to offer higher crediting rates for annuity policyholders and higher profits for equity shareholders—a win-win for all stakeholders.

Critics claim that the strategy produces under-capitalized, shakier life/annuity companies, and that without the use of questionable “regulatory arbitrage” between the US and reinsurance havens like Bermuda, some of those life insurers would be insolvent.

The regulation at the heart of this case, Instructional Bulletin 95-1, “was issued on March 6, 1995, in the wake of the failure of Executive Life Insurance Companies of California and New York,” according to a Department of Labor document. “[IB 95-1] provides guidance to pension plans considering the purchase of annuities ‘to transfer liability for benefits purchased under the plan to [an] annuity provider.’ IB 95-1 also emphasizes the fiduciary responsibility owed to plan participants in the selection of the ‘safest annuity available’ and makes it clear that ‘[c]ost consideration may not … justify the purchase of an unsafe annuity;’ nor is it appropriate to rely solely on insurance rating services.”

Annuity sales boom attracts private equity-backed insurers: AM Best

A June 4 Best’s Special Report, “Annuity Premiums Soar, Surrender Protection Strengthens,” states that annuity products have been attractive for consumers in the last few years, propelled by the rising interest rate environment and crediting rates that generally have been higher than competing products offered by larger national banks.

As insurers look to capitalize on the favorable environment, newer market entrants have added much-needed capacity to the market, particularly through multiyear guaranteed annuities (MYGA) with their attractive interest rate spreads and shorter durations. With the overall 2023 premium growth, annuity writers posted a 68% year-over-year increase in indexed annuity net premium income to $28.9 billion; 48% growth in fixed deferred annuities; and a 33% increase in premium for variable annuities without guarantees.

“Growth in the annuity market has heightened competition, as many new companies have entered the space, including several new private equity and asset management-backed insurers looking to capitalize on the difference between the cost of liabilities and potential favorable investment returns,” said Erik Miller, director, AM Best. [Emphasis added.]

Baby Boomers seeking income and wealth transfer solutions for trillions of dollars in assets is also driving consumer demand. Additionally, surrender benefits rose 32% in 2023; however, according to the report, the share of policies with market value adjustment surrender charges also has more than doubled in the last 10 years.
“Older annuity policies with lower rates were outside of the surrender charge protection, and so with the favorable crediting rates, insurers have been able to sell new annuity products with the higher rates to these customers while also locking them into policies with surrender charges,” said Jason Hopper, associate director, industry research and analytics, AM Best.

26North inks $4.9 billion reinsurance deal

26North Reinsurance Holdings, which was founded in 2022 by one of the co-founders of Apollo Global Management, closed a $4.9 billion reinsurance deal with Life Insurance Company of the Southwest (LSW), a unit of National Life Insurance Co., 26N Re said in a release.

The deal will see a subsidiary of 26N Re reinsure a “seasoned and diversified” block of multi-year guarantee and fixed annuity products issued by LSW, the company said. LSW is a member company of National Life Group, which was founded in Vermont in 1848.

In addition, 26N Re agreed to provide a quota share reinsurance agreement for future fixed annuities issued by LSW. The transaction brings 26North’s total assets under management to approximately $22 billion.

“This transaction will significantly scale our reinsurance business and continue to diversify 26North’s platform,” said Josh Harris, founder of 26North and co-founder of Apollo in 1990, in a statement. “We believe that our culture of prudent risk management and strong governance allows 26N Re to partner with the highest-quality cedants who are looking to leverage our long-term capital and asset management expertise.”

Harris has a long history in private equity. He worked for Drexel Burnham Lambert for two years in the 1980s, left to get a degree at Harvard Business School, and then joined former Drexel partners Leon Black and Marc Rowan to establish Apollo Global Management in 1990, according to Harris’ Wikipedia page.

By then, Drexel had filed for bankruptcy due to illegal junk bond activity. A major investor in Drexel junk bonds (i.e., financer of Drexel’s leveraged buyouts), the Executive Life insurance companies, failed in 1991.

In a separate news release last month, Agam Capital, “an analytics-driven platform partnering with insurance companies to enhance their financial flexibility,” is advising and partnering with 26N Re in the formation and launch of AeCe ISA, Ltd. (“AeCe”), a Bermuda-domiciled Class E life and annuity reinsurer. Agam’s founders are Chak Raghunathan and Avi Katz.

National Life Group is a minority owner in AeCe, which will reinsure single premium deferred annuities written by LSW.

Agam’s “pALM” analytical platform and other Bermuda capabilities will support 26North in the development and establishment of a new entrant into the fast-growing market for life and retirement reinsurance solutions in Bermuda. Agam described pALM as a “proprietary asset and liability management (ALM) system” offering “a fully embedded dynamic strategic asset allocation (SAA) and enterprise risk management (ERM) infrastructure.”

As part of the launch, AeCe will leverage Agam’s Bermuda ISAC structure which offers a comprehensive suite of operational, management and governance services to Bermuda based reinsurers. Separately, Agam and AeCe entered into a long-term Management Services Agreement.

Suit continues against Aon plc over Bermuda reinsurance

Clear Blue Insurance Co. and Aon plc, the insurance broker, will have until June 21 to present motions in Clear Blue’s lawsuit again the Aon plc and Aon Insurance Managers (Bermuda) Ltd.  in a case related to the bankruptcy of the insurtech firm Vesttoo Ltd., AM Best reported in May.

Clear Blue seeks to recover damages from Aon for, according to the complaint, “hosting a rogue operation on its Bermuda-based platform in clear violation of law, regulation, contract and standard market practice.”

Clear Blue sued Aon in New York state court in 2023 for alleged damages connected with letters of credit issued by Vesttoo involving Aon and its Bermuda-based segregated cell entity, White Rock. The complaint said, “Clear Blue entered into a series of reinsurance transactions with and/or involving Aon, its wholly owned subsidiaries Aon Insurance Managers, White Rock and White Rock’s various segregated accounts, causing material financial, regulatory and reputational damage to Clear Blue.

“Aon and its entities could have stopped the Vesttoo fraud ‘dead in its tracks,’ but “facilitated it by removing all the statutory, regulatory and contractual safeguards and ignoring standard market practice.”

“This complaint is meritless,” an Aon spokesperson told AM Best. “Vesttoo has publicly admitted that its executives conspired with third parties in a highly sophisticated and elaborate fraud. As one of the victims of that fraud, Aon is focused on continuing our work to develop a path forward for all affected parties.”

The Supreme Court of Bermuda recently sanctioned a bankruptcy plan filed by Vesttoo creditors and approved the joint provisional liquidators (JPLs) of Aon’s White Rock Insurance SAC to remove objections to the Chapter 11 plan involving White Rock and other parties, AM Best said.

The Bermuda court’s decision, filed with the U.S. Bankruptcy Court for the District of Delaware, allows the JPLs to unconditionally withdraw their objections to previously proposed versions of the bankruptcy settlement plan and cedent settlements with the Official Committee of Unsecured Creditors of Vesttoo, appointed in the Vesttoo Chapter 11 case involving White Rock. The liquidators are also authorized to consent to confirmation of the plan.

The liquidators are also allowed to consent to cedent settlements with the committee and JPLs for White Rock involving insurers Clear Blue, Chaucer, Beazley plc., Markel Corp. and Porch, according to the Bermuda court ruling. Underwriting entities of Clear Blue parent Pine Brook Capital Partners II (Cayman) have current Best’s Financial Strength Ratings of A- (Excellent).

Strength ratings of Everlake Life (formerly Allstate) downgraded

In May, AM Best downgraded the financial strength rating (FSR) to A (Excellent) from A+ (Superior) and the long-term issuer credit ratings (Long-Term ICR) to “a+” (Excellent) from “aa-” (Superior) of Everlake Life Insurance Company and Everlake Assurance Company, collectively known as Everlake Life Group (Everlake Life). Both companies are domiciled in Northbrook, IL.

According to AM Best:

The outlook of these Credit Ratings (ratings) has been revised to stable from negative. The ratings reflect Everlake Life’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management (ERM).

The change in Everlake Life’s business profile assessment to neutral from favorable reflects the strong competitive environment for bidding on flow reinsurance of annuities; Everlake Life’s moderate market share and reserve profile; and is similar to peers with a strategy of seeking flow reinsurance of annuities.

Everlake Life’s reserve profile, which includes universal life with secondary guarantees and structured settlements, is unlikely to change in the near term, even with the successful acquisition of additional multiyear guarantee annuity business, which was done in 2023 and is expected to continue.

According to its website, Everlake Life Insurance Company and Everlake Assurance Company are US based insurance companies specializing in life insurance and annuities. Everlake U.S. Holdings Company purchased Allstate Life Insurance Company and Allstate Assurance Company on November 1, 2021.

Everlake Life has over 1.6 million policies in force and over $23 billion in assets under management. It also administers select policies issued by Lincoln Benefit Life Company, Surety Life Insurance Company, American Maturity Life Insurance Company, and Columbia Universal Life Insurance Company.

According to AM Best, Everlake Life’s balance sheet strength assessment benefits from its strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), prudent asset liability management and development of its own internal capital modeling. This is partially offset by affiliated reinsurance in support of a significant block of term life insurance.

The operating performance continues to be assessed as strong given the three- and five-year return on equity ratios, which compare well against other strong-level peers, in addition to diversified profits between ordinary life and individual annuity products.

Everlake Life’s growth will be dependent on management successfully executing its strategy to acquire new business given the run-off of a large in-force block, but management has recently been more successful in acquiring new business. The ERM approach employs a typical three lines of defense strategy, including individual risk owners in the business areas, an ERM committee and an audit risk committee that reports directly to the board of directors. Risk appetite and tolerance statements with limits and triggers are quantitative and clear.

Midland National FIA for RIAs leads its category

Capital Income, Midland National’s first commission-free fixed index annuity (FIA), was named top fee-based fixed index annuity in 2023, according to LIMRA.

The product emerged from Midland Advisory, an internal team that Midland National Life formed in 2021 to design annuities for registered investment advisors (RIAs) and their clients. Midland is part of Sammons Financial Group.

Since its launch, Capital Income has consistently ranked high as a strong indexed annuity choice for advisors. In addition to earning the 2023 overall top spot from LIMRA, Midland National performed well in fourth quarter 2023 sales. Notable results from the Q4 2023 Wink Report include:

No. 3 Deferred Annuity Companies – RIA Distribution

  • Deferred Annuity for RIA Distribution & Fee-Based Overall
    • No. 1 Capital Income FIA
    • No. 5 Oak ADVantage 7-year MYGA
    • No. 6 Oak ADVantage 5-year MYGA
  • Indexed Annuity Products – RIA Distribution
    • No. 1 Capital Income FIA
    • No. 9 IndexMax ADV 5-year

Midland National Capital Income carries a guaranteed lifetime income rider with an income multiplier that can double income payments for up to five years for contract owners with health problems.

If a fee-based advisor does not have an insurance license but wants to provide a client with an annuity, Midland National makes Capital Income available through outsourced insurance desks that can act as agents of record. This enables the advisor to maintain discretionary authority over the client’s account.

© 2024 RIJ Publishing LLC. All rights reserved.

Test-drive annuities at CANNEX/Luma ‘Marketplace’

Posted on June 2, 2024 by -

CANNEX, the annuity data provider, has partnered with Luma Financial Technologies, a fintech firm, to launch the CANNEX Annuity Marketplace. The new platform is designed to help financial professionals at small and mid-sized firms research, compare, and select annuities for clients.

Advisers, agents and retirement plan sponsors can use the platform, accessible through a portal on Luma’s website, to analyze the performance of hundreds of fixed, fixed indexed-linked, variable, and income annuities based on CANNEX’s annuity data, research, and illustration resources.

The Annuity Marketplace will provide income, rate, yield, and product information on annuities from more than 60 issuers, a CANNEX release said. Advisers can illustrate the outcomes of market scenarios and investment choices across products, asset allocations, riders, and annuity categories.

The proliferation of new annuity products, the expansion of annuity sales, and the passage of regulations that require advisers and agents to find products “consistent with best interest requirements and client goals” has increased “the importance of being able to understand and evaluate annuities on a standardized basis” said Gary Baker, president, CANNEX USA, in a release.

“The marketplace provides an important resource for financial professionals looking to help clients incorporate annuities into their financial plans,” added Jay Charles, director of Annuity Products, Luma Financial Technologies.

CANNEX is an independent financial data and research services company with operations in Canada and the U.S. Since 1984, it has provided data, analytics, illustrations and research services to insurance companies, banks, brokers, service providers and independent advisers.

Fintech software developed by Luma Financial Technologies is used by broker/dealer firms, RIA offices, and private banks worldwide. Founded in Cincinnati in 2018, Luma also has offices in New York, Zurich and Miami.

© 2024 RIJ Publishing LLC. All rights reserved.

The age-old question: How long will your clients live?

Posted on June 2, 2024 by -

Our financial lives would probably be both more difficult and easier if we all knew exactly when we would die. Personal credit would presumably dry up as the “deadline” approached. But deciding how much to save for retirement would be easier.

A new white paper from HealthView Services, a Danvers, MA-based firm that collects longevity data for advisers, financial institutions and employers, could help advisers estimate how much longer a 65-year-old is likely to live.

From a mountain of data gathered from 266 million people, HealthView teases out predictions that individuals and advisers can use in planning for retirement. The white paper shows, for instance, that 65-year-olds with no chronic health problems should expect to live to age 88 (if male) and age 90 (if female).

But only about one in 20 Americans are disease-free at age 65. People suffering from high blood pressure, diabetes, heart disease, cancer, and other chronic diseases die one to six years sooner. Men age 65 with diabetes have a life expectancy of only 79 years.

Turning the data around, the white paper also reports the probabilities of living to age 90 for people with various diseases. People with no chronic disease at age 65 have a one in five chance living to age 95 “and beyond.” Those with diabetes should forget about living to 95.

HealthView quantifies the somewhat morbid inverse relationship between life expectancy and spending capacity. Assuming a new retiree with $1.1 million in savings, the paper’s authors conclude that, compared with someone in excellent health, a high blood pressure sufferer could afford to spend $448,000 more in retirement, smokers can afford to spend $616,000 more, and diabetes sufferers can spend $728,000 more, because of their shorter life expectancies.

The white paper describes a hypothetical couple, both 55 years old. One has a history of diabetes and a life expectancy of age 82. The other is healthier and can expect to live to age 90. By HealthView’s calculation, the healthier partner can expect to spend $3.17 million in retirement (including Social Security benefits and income from an annuity) while the partner with diabetes can expect to spend only about $2 million.

Though the white paper doesn’t make a point of this, the term “average life expectancy” may be misleading. When various cohorts of 65-year-olds are described as having average life expectancies of 14, or 16, or 18 years, it means that half of them will be deceased by then and half will live longer.

For financial advisers trying to estimate how long their high-net-worth clients will live, the white paper suggests that only the very healthiest people should reasonably expect to live to age 95. Others may need less savings for retirement or, conversely, be able to spend more of their savings during retirement. Luck, of course, will still play a role.

© 2024 RIJ Publishing LLC. All rights reserved.

Double Trouble in the Bermuda Triangle

Posted on May 30, 2024 by -

There’s trouble in the Bermuda Triangle. Anyone who manufactures, sells, or owns annuities should hope the trouble is resolved quickly. But now that a state insurance commission is involved (in one instance) and a hornet’s nest of European football fans (in another), resolution could be slow.

For more than a decade, observers of the annuity industry watched the growth of what RIJ calls the Bermuda Triangle strategy, where large asset managers acquire life insurers to issue fixed-rate and fixed indexed annuities and finance high-yield investments with the annuity revenue.

Some observers worry that the largest asset manager-led insurers might fail and leave their policyholders to seek reimbursement from state guaranty funds. But I’ve expected solvency issues to appear first sooner among smaller, less well-capitalized fast-followers or imitators of the strategy.

Recent problems at two relatively small Bermuda Triangle life/annuity groups seem to fulfill that expectation.

PHL Variable goes into rehab

In one of the two unrelated cases, PHL Variable Insurance Co. was taken into “rehabilitation” by the Connecticut Insurance Department (CID) this month. According to a CID document, the COVID pandemic accelerated claims on PHL’s block of multimillion-dollar investor-owned-life-insurance policies. The long interest-rate drought of the 2010s also hurt the insurer’s ability to support their guarantees.

In part because of those problems, PHL currently has negative $900 million in capital and surplus. Its “aggregate assets are projected to be exhausted in 2030” when “approximately $1.46 billion of policyholder liabilities will remain unpaid,” according to the CID.

PHL’s owners clearly don’t want that headache. Once part of the Hartford-based Phoenix Companies, PHL became part of Nassau Financial in 2016, when Nassau, then only a year old, bought the publicly-traded Phoenix, took it private, and retired the Phoenix brand.

David Dominick

Nassau was created with $750 million from Golden Gate Capital, a San Francisco investment firm with stakes in businesses as diverse as Bob Evans restaurants, VirginiaGreen lawn products, and Securly child security software. Golden Gate’s leader, David Dominick is a private equity specialist with experience at Bain Capital. Dominick hired Phil Gass and Kostas Cheliotis to start and run Nassau.

Gass and Cheliotis had been at HRG Group and Fidelity & Guaranty Life, both practitioners of the Bermuda Triangle strategy. With Gass as CEO, Nassau began assembling the components of the triangle. In 2016, Nassau bought Phoenix, bought (and later sold) Saybrus Partners, an insurance distributor. In this period, it also bought Constitution Life and CorAmerica (a commercial real estate loan originator).

In 2018, Nassau formed Nassau Re Cayman and Nassau Asset Management. In 2018, Nassau issued a fixed-rate deferred annuity. In 2019, it issued its first fixed indexed annuity (FIA). In 2020, Nassau bought Foresters Life Insurance and Annuity and Delaware Life of New York (but not Delaware Life). It also formed Nassau Private Credit and Nassau Alternative Investments. Nassau’s FIA sales were about $691 million in 2021, $890 million in 2022 and $1.1 billion in 2023.

Nassau’s PHL unit, burdened by its investor-owned life policies, was already declining toward insolvency, however. Starting in 2019, PHL entered several reinsurance deals with “captive” and “affiliated” reinsurers to reduce its liabilities and bolster its surplus. It’s not clear how much independent capital these reinsurers posted. Ultimately, these band-aid solutions failed.

PHL now looks like an orphan. In 2021, after putting some capital into PHL, Nassau requested and received permission from regulators to “deconsolidate” from PHL and transfer it to GG Holding, the ultimate parent of Nassau and Golden Gate Capital. GG Holding told regulators that it won’t put more money into PHL. PHL’s remaining captive reinsurer, Concord Re, evidently can’t cover PHL’s liabilities.

On March 31, PHL was taken into rehabilitation by Connecticut regulators. Since KPMG, PHL’s external auditor, said that PHL’s ability to continue as a going concern was in doubt, “rehabilitation” sounds unrealistically optimistic. There are a variety of simple and complex life insurance policies and annuities on its books. The biggest money loser is the block of corporate-owned life insurance, whose owners paid far less in premiums than PHL counted on, according to CID documents.

Don’t mess with European soccer fans

In the other Bermuda Triangle disaster, the life insurance companies include Atlantic Coast Life (domiciled in Missouri but based in Salt Lake City), Sentinel Security Life and Haymarket Insurance (both domiciled in Utah). ACL and SSL issue fixed indexed annuities and both are units of New York-based Advantage Capital or A-CAP, whose CEO is Kenneth King.

The asset manager is 777 Partners of Miami and 777 Re of Bermuda. The freewheeling principals of those companies, Josh Wander and Steve Pasko, principals appear to have misjudged the pride that European football club fans take in their teams. After 777 Partners started on a series of leveraged buyouts of soccer teams in Britain, France, Australia, Germany, Spain, Italy and Belgium, managers and fans of those clubs rebelled against the presence of foreign moneymen on their pitch.

Their protest was reported in January in Josimar, a Norwegian football publication. The story was picked up by Semafor, the New York Times Athletic, and others. If you go to Elon Musk’s “X” channel and search for #777OUT, you’ll see and hear the excitement. But remove children from the room before you do.

As the hashtag indicates, fans of those clubs want the Miami-based 777 out of their teams’ front offices. They resent their chronically under-financed but beloved teams being swept up by what they see as a carpetbagging American leveraged buyout firm. (Fans of “Ted Lasso” may empathize.) Wander and Pasko were forced to resign from 777 Partners in late May.

In recent years, the two had poured hundreds of millions of dollars into European football clubs, with at least some of the money allegedly coming from King’s life/annuity companies in the US. But in 2023, the spree collapsed. Creditors went unpaid. Lawsuits were filed against 777 Partners and 777 Re demanding repayment of tens of millions of dollars.

The circular exchange of obligations between insurers, reinsurers and asset managers characterizes the Bermuda Triangle strategy, and that sort of paper chase seems to have been operative at 777. One unhappy counter-party alleged that 777 uses a “web of companies… to move around money and assets to operate and conceal a sprawling fraudulent enterprise.”

The 777 debacle also involves alleged malfeasance. Leadenhall Capital Partners, a London firm with a fund devoted to “life insurance-linked investments,” has sued Wander, Pasko, and King. Leadenhall claims that 777 didn’t mention that the $350 million in collateral against which Leadenhall loaned 777 money was already pledged to someone else. According to Leadenhall’s complaint, AM Best downgraded A-CAP’s credit rating to “bbb” with negative implications on February 23, 2024, citing A-CAP’s “high reinsurance leverage and declining counter-party credit quality.”

The question is whether these two examples of ill-fated Bermuda Triangle operations are isolated catastrophes, or leading indicators of a wider problem. To me, they confirm that a successful business strategy—and the Bermuda Triangle strategy has proven successful for the largest players—will eventually attract players who, for one reason or another, can’t make it work. Someone else eventually has to pick up the pieces.

© 2024 RIJ Publishing LLC. All rights reserved.

News briefs

Posted on May 1, 2024 by -

High interest rates lead to record-breaking 1Q2024 annuity sales

Total U.S. annuity sales were $113.5 billion in the first quarter of 2024, 21% above prior year results and just shy of the quarterly sales record set in the fourth quarter 2023, according to preliminary results from LIMRA’s U.S. Individual Annuity Sales Survey, representing 84% of the total U.S. annuity market.

This is the highest first quarter sales results since LIMRA started tracking sales in the 1980s. “The remarkable sales trends over the past two years continued into 2024. Favorable economic conditions and rising investor interest in securing guaranteed retirement income have resulted in double-digit sales growth in every product line,” said Bryan Hodgens, head of LIMRA research. “While there are potential regulatory and economic headwinds in the second half of the year, LIMRA expects annuity sales to continue to perform well.”

Fixed-rate deferred annuities

Total fixed-rate deferred annuity (FRD) sales were $48 billion in the first quarter, 16% higher than first quarter 2023 sales. FRD annuities remain the primary driver of annuity sales growth, representing more than 42% of the total annuity market in the first quarter.

“Eighty-five percent of FRD sales are short duration products (less than five years). Higher interest rates combined with insurers’ ability to offer, on average, better crediting rates, have propelled product sales to another level,” noted Hodgens. “To put these first quarter results in perspective, from 2008 to 2021 the average annual FRD sales were just $42 billion, 14% lower than first quarter 2024 results.”

Fixed indexed annuities

Fixed indexed annuity (FIA) sales had a record first quarter. FIA sales totaled $29.3 billion, up 27% from the prior year. “FIA products continue to offer very competitive crediting rates while protecting the principal investment, an attractive proposition for today’s investors,” said Hodgens.

Income annuities

Income annuity product sales set a quarterly record due to rising interest rates. Single premium immediate annuity (SPIA) sales were $4 billion in the first quarter, 19% higher than the prior year’s results. Deferred income annuity (DIA) sales were $1.1 billion in the first quarter, increasing 35% year over year.

Registered index-linked annuities

For the fourth consecutive quarter, registered index-linked annuity (RILA) registered record quarterly sales. RILA sales increased 40% in the first quarter to $14.5 billion. “Product innovation and new market entrants suggest the RILA market still has significant growth potential. LIMRA is forecasting RILA sales to exceed $50 billion in 2024,” Hodgens said.

Traditional variable annuities

Traditional variable annuity sales improved in the first quarter, up 13% year-over-year to $14.5 billion.“Strong equity market performance over the past year has made traditional VAs more attractive,” said Hodgens. “While these products will not command the market share they did 10 years ago, LIMRA predicts the continued equity market growth will propel traditional VA sales to grow as much as 10% in 2024 from current levels.”

Preliminary first quarter 2024 annuity industry estimates are based on monthly reporting. A summary of the results can be found in LIMRA’s Fact Tank. The top 20 rankings of total, variable and fixed annuity writers for first quarter 2024 will be available in mid-May, following the last of the earnings calls for the participating carriers.

Life insurers like private credit, survey shows

A third of insurers said they intend to increase their allocations to private debt in 2024, as the class now constitutes a mainstay of investment portfolios, according to a new survey out by Mercer and Oliver Wyman, A.M. Best reported.

The two units of Marsh McLennan surveyed 80 insurers globally and found almost three-fourths, 73% of them, are currently invested in private markets. Of those, 39% said they intend to increase that allocation over the year and 32% of those tallied in the wider industry said they plan to do so in 2024.

Common headwinds to increasing allocations in the class included the cost and complexity of both investment instruments and manager selection, the report found.

“With elevated interest rates and fixed income volatility, as well as considerable uncertainty around inflation, many insurers are reevaluating their investment frameworks and assessing ways to put excess cash to work,” Amit Popat, Mercer’s global head of financial institutions, said in a statement. ”

Allocations to private debt strategies are in focus for a significant proportion of insurers, as they seek access to the enhanced income, diversification, and structural protection benefits afforded by the asset class.”

The report found 43% of life insurance companies intend to expand their private allocation, while 37% of nonlife carriers have similar goals. Geographically, insurers in the United Kingdom and Canada were most likely to say increasing private placements topped their list, with 50% each, followed by 41% in the United States, 38% in Asia and 37% in Europe.

Six-in-10 cited optimizing their fixed income portfolio as an opportunity in 2024, while 51% cited diversifying portfolios away from traditional asset classes, such as domestic fixed income and domestic equities. Another 40% cited enhanced cash management as an opportunity this year.

Market volatility, cited by 61% of respondents, was the most-cited challenge to investment frameworks over the next 12 months, prompting insurers to reexamine fixed-income strategies, the survey found. Just 7% of insurers said they plan to increase cash in 2024, while 27% planned to reduce exposure.

“The market experience of the past year, which didn’t pan out exactly as many had expected, has reinforced the need for insurers to maintain a solid core while also maintaining agility to respond to and capitalize on evolving market risks and opportunities,” said Joshua Zwick, head of Oliver Wyman’s Asset Management Practice, in a statement.

Another asset management report recently found recessionary risk in the United States remains a top-of-mind concern for many insurers globally, and companies are increasingly eyeing the use of artificial intelligence, according to a Goldman Sachs Asset Management survey.

Jackson National introduces ‘+Income’ VA rider

Jackson National Life Insurance Company has added a lifetime income benefit (a guaranteed minimum withdrawal benefit or GMWB) option to the contracts in its Market Link Pro II and Market Link Pro Advisory II registered index-linked annuities. The new GMWB is called “+Income.”

The optional GMWB will be priced at 1.45% (to a maximum of 3%) of the contract value per year. Single and joint-life versions of the living benefit will be available, a Jackson release said. The payout rates start at 4% for contract owners ages 50 to 59 and go up to 6% for those ages 80 and older. Payout rates are 0.5% less for joint contracts, all else being equal.

Jackson’s RILAs offer five index options, which can be used in any combination, along with up to three crediting methods. In June 2023, Jackson enhanced the RILAs by adding a new crediting method (Performance Boost), a 3-year term, and an intra-term “Performance Lock” feature.

The available “price” indexes (which exclude dividend yield) include the S&P500 Index, the Russell 2000 Index, the MSCI EAFE Index, the MSCI Emerging Markets Index, and the MSCI KLD 400 Social Index. The Jackson RILAs offer “floors” (which set limits to a client’s losses during a single crediting period) and “buffers” (which absorb a client’s initial losses, up to an established limit, during a single crediting period).

RILAs are classified as variable annuities, are regulated as securities, and are sold through broker-dealers. They are structured products that resemble fixed indexed annuities (which are principal-protected insurance products, not securities). RILAs tend to offer higher potential upside performance and greater potential loss than FIAs.

At Jackson’s proprietary RILA Digital Ecosystem, financial professionals and clients can find information the Jackson Market Link Pro Suite. The platform provides access “to a data-driven tool that enables clients to generate customized, hypothetical scenarios of the various RILA options. To coincide with the launch of +Income, the tool now includes a new option to illustrate how lifetime income can impact client portfolios,” the release said.

© 2024 RIJ Publishing LLC. All rights reserved.

What are ‘excess return’ indexes?

Posted on May 1, 2024 by -

In Ibexis’ FIA Plus contract, the BoA and HSBC indexes are “excess return” indexes. In that context, the term “excess return” is not intended to reference “out-performance relative to a benchmark” or “alpha.” It means the net performance of a market index above the yield of a risk-free asset, such as short-term Treasury bonds.

Why use excess return indexes in FIAs? They help stabilize both an FIA’s cost (what the insurer pays for options on the index) and its renewal rates (the new participation rates or caps that the insurer announces at the start of each contract year). This will require a brief explanation of the internal dynamics of an FIA.

To create a plain-vanilla FIA, a life/annuity company uses a percentage of a contract owner’s premium (roughly dictated by the current corporate bond yield, minus the insurer’s expenses, or currently about 4% of premium) to buy a call option on a selected market index.

If the index goes up during a specific crediting period (one contract year, for instance), the options gain value, the contract owner gets the gain, up to a cap or participation rate that depends on the issuer’s options budget. If the index goes down during the crediting period, the options expire without value. The contract owner’s account value neither gains or loses value, because they only spent a year’s worth of interest to buy the options, without using principal.

But there’s a potential problem. Over the multi-year term of an FIA contract, volatility waxes and wanes. High volatility in interest rates or equities can drive up the cost of options. FIA issuers must either absorb the higher costs or pass them along to the contract owners in the form of lower crediting rates at the end of each contract year. If issuers renew rate caps and participation rates at stingier levels, contract owners and agents become unhappy.

An excess return index in effect absorbs fluctuations in interest rates and leaves options prices stable. Stable options prices mean stable renewal rates. Contract owners and agents like that.

The cost of options also varies with equity price volatility. To tame this kind of volatility, sophisticated algorithms inside many of today’s FIA indexes automatically move money from risky assets to cash when volatility soars (and back again when markets settle down). This mechanism also helps keep options prices and renewal rates stable.

When you embed both mechanisms–the excess-returns mechanism and the volatility controls–in the design of an FIA index, they smooth out performance. “When the two main drivers of hedge cost changes— interest rates and volatility—are removed from the equation, the index that’s left is highly stable and predictable,” explained Kevin Cloud, a vice president and actuary at CreativeOne, one of Ibexis’ designated wholesalers.

Vol-control mechanisms can actually dampen expected returns enough to reduce options prices (all else being equal) on an index. The FIA issuer can then afford to offer richer crediting rates. That’s why you see participation rates of 200% or more on some indexes.

For instance, “if a price-return version of an index had an expected return of 12%, the expected return of an  ‘excess return’ version of that index might be only 7%,” Cloud told RIJ. “That might translate into a participation rate of 100% for the price-return version but 140% for the excess return version.”

On page 329 of its new “Retirement Security Rule: Definition of an Investment Advice Fiduciary,” issued on April 23, 2024, the Department of Labor warned that these mechanisms can make crediting rates look deceivingly generous:

“The complexity of some index options allows insurance companies to reduce volatility by adjusting the index’s exposure to risk based on market conditions. These include volatility-targeting indexes, which are designed to maintain a consistent level of volatility over time by automatically adjusting exposure to riskier assets, and minimum variance indexes, which select stocks with the lowest historical volatility and adjust the weights of each stock to achieve a target level of risk,” the DOL rule said.

“Some indexes incorporate an ‘excess return’ component, where a benchmark return is subtracted from the gross return to determine the amount of ‘excess’ return that contract owner will earn. Depending on market conditions, it is possible that the excess return feature will materially erode the return on the annuity, which may create confusion and disappointment for owners who do not fully understand the complexity and potential impact of this feature.”

© 2024 RIJ Publishing LLC. All rights reserved.

The case for affiliated reinsurance in the Cayman Islands

Posted on May 1, 2024 by -

RIJ has published many stories on “Bermuda Triangle” life/annuity companies that sell fixed annuities in the US, reinsure their liabilities in Bermuda to modulate their capital requirements, and rely on private equity firms to invest policyholder money in high-yield “alternative” assets.

The Cayman Islands are also a good place to buy reinsurance, according Nathan Gemmiti, CEO of Ibexis Life, the subject of RIJ’s lead story this month. Ibexis Life reinsures about 80% of its new fixed indexed annuity liabilities in the Cayman Islands instead of Bermuda.

In a recent conversation with RIJ, Gemmiti rejected the suggestion that insurance regulations in the Cayman Islands are “lighter” than in the US.

“In both Bermuda and Cayman, per US regulations governing off-shore reinsurance, in order for the US insurer to get reserve credit, the affiliated reinsurer must establish a segregated account with dedicated reserves to at least the statutory levels in the US,” Gemmiti told RIJ in a recent email.

US insurers must use conservative Statutory Accounting Principles (SAP) when calculating how much capital they need to post in support of their guarantees. But  Bermuda-based and Cayman-based reinsurers can use Generally Accepted Accounting Principles (GAAP), which require potentially lower capital outlays. Offshore reinsurance lets US life/annuity companies enjoy the benefits of GAAP standards indirectly, through their offshore affiliates.

“As with Bermuda, US insurance authorities permit US insurers to buy ‘modified coinsurance’ from an affiliated reinsurer in Cayman,” Gemmiti said. “Cayman-domiciled reinsurers can also apply to use most international recognized accounting standard for reserving, such as ‘GAAP’ accounting rules, which can lead to reserving on an economic basis, rather than strict Statutory Accounting Principles that apply to insurers in the US. The NAIC has been discussing principles-based reserving [like GAAP], but these changes have not occurred.”

Cayman is becoming more attractive than Bermuda to US life/annuity companies, Gemmiti suggested. Cayman is trying to align its rules with the National Association of Insurance Commissioners (NAIC) in the U.S., while Bermuda is more aligned with Europe.

“The Cayman Islands has publicly stated that it is in the process of seeking NAIC reciprocal status with the support of a US state sponsor. Bermuda, on the other hand, has European Union Solvency II equivalent status,” Gemmiti said. “This distinction has led to many US based annuity insurers to look to the Cayman Islands.”

A legal perspective

“The Cayman Islands has deservedly been recognized as a leading captive jurisdiction,” according to an August 2023 report, “Five Reasons Reinsurance is Ramping Up in Cayman,” from an attorney at Conyers, a law firm that consults on the laws of Bermuda, the British Virgin Islands, and the Cayman Islands.

“Around 70% of all licenses issued by the Cayman Islands Monetary Authority (CIMA) in recent years have been for commercial or affiliate reinsurers, with private equity groups, traditional reinsurance and insurtech increasingly selecting Cayman for the establishment of side-cars and reinsurance platforms,” the report said.

“The confidence in the jurisdiction has been evidenced by the entry of larger players in the life & annuity space, including RBC Re’s re-domicile from Barbados to Cayman in 2021 and Talcott Re’s establishment of a Cayman reinsurer which assumed a $26 billion block of business in 2022.”

Conyers listed five reasons for considering reinsurance in the Cayman:

  • Tailored capital and/or accounting models. Cayman does not have Solvency II equivalency or NAIC reciprocal jurisdiction status (at least not yet…), which means our legislative and regulatory regime is less prescriptive and therefore affords prospective Cayman reinsurers greater flexibility to propose a bespoke capital model to our regulator without being significantly constrained by specificities in legislation.
  • No day one presence requirement for B(iii) reinsurers. A Class B(iii) licensee may engage and rely on a Cayman Islands licensed insurance manager to provide accounting, administrative and other management services, without the necessity for the reinsurer to put boots on the ground, either in the C-suite or other roles from day-one.
  • Attractive lifestyle for employees. For Class D licensees or other clients who prefer to have C-Suite officers on the ground in Cayman, the Cayman Islands Government allows for a 25 year work permit exclusively for reinsurance executives (as detailed further in our article on our immigration practice in Conyers Coverage Issue 9). Expats can also own and invest in property. The quality of the schools, infrastructure and lifestyle offered on the Island are some of the softer attractive features of establishing a reinsurer in Cayman for those looking to build out resourcing in the long term.
  • Speed to market. CIMA’s published timeframes for the approval of a new license is 6 to 8 weeks from the time of submission of a complete and comprehensive application. This provides commercial certainty for groups looking to have a license in place in order to write a transaction with inherent deadlines. CIMA is known to be commercial and available which permits licensees to build strong working relationships with the regulator.
  • Financial, political and economic certainty. Cayman’s stability (financially, politically, economically) particularly relative to other offshore domiciles (for example, the Cayman Islands runs an attractive budget surplus. The Cayman Islands Government has expressly stated that it does not intend to enact local legislation in the Cayman Islands for the purposes of collecting a Global Minimum Tax locally.

© 2024 RIJ Publishing LLC. All rights reserved.

BlackRock relaunches its “LifePath Paycheck” retirement income tool

Posted on May 1, 2024 by -

BlackRock, which manages $1 trillion in assets and is one of the leading distributors of target date funds (TDFs) through defined contribution (DC) retirement plans, has relaunched its LifePath Paycheck program. The program would make it easy for plan participants to buy income annuities with part of their DC savings while leaving the balance in the plan and in BlackRock funds.

BlackRock is partnering with two life/annuity companies, Equitable and Brighthouse, to provide annuities to the program. Before retirement, participants would contribute to a group deferred annuity. At retirement, participants would have an opportunity to buy single-premium immediate income annuities (SPIAs). To buy the SPIA, participants would have to make an active decision to move part of their plan assets to a rollover IRA and then buy the annuity with their IRA money.

So far, 14 DC plan sponsors, with a combined $27 billion in target date fund (TDF) assets, intend to offer LifePath Paycheck as an income option for some 500,000 employees, a BlackRock release said. Avangrid, Adventist HealthCare Retirement Plans, and Tennessee Valley Authority Retirement System have signed on to place their auto-enrolled participants into the product.

Since TDFs, along with managed accounts, are “qualified default investment alternatives” under the Pension Protection Act of 2006, the contributions of employees who have been “auto-enrolled” into a 401(k) plan can be automatically invested in their plan’s TDFs.

Here’s how LifePath Paycheck works, according to BlackRock:

  • When participants who have invested in a BlackRock target date fund reach age 55, a portion of their investment portfolio starts flowing into a new asset class called lifetime income, which provides participants with the option to purchase a lifetime income stream in retirement.
  • Beginning at age 59½, those participants of an eligible retirement plan can, if they choose, redeem their investment in LifePath Paycheck and withdraw a portion of their retirement plan savings—about 30% of their LifePath Paycheck investment at age 65—and purchase annuities that provide lifetime income from insurers selected by BlackRock.
  • The rest of their savings stays in the plan. If they don’t make a decision on how to invest the money, it will be invested for them in a liquid portfolio of about 50% stocks and 50% bonds.

It was not immediately clear how the two insurers, Equitable and Brighthouse, would share the flow of contributions to the group deferred annuities or the flow of IRA assets into the SPIAs. It was also unclear who would educate participants regarding their decision to annuitize part of their plan savings or not.

Employers could default participants into LifePath TDFs, and into the deferred annuity inside the TDF, but no one could default them into actually buying an irrevocable annuity. Participants would have to make an active decision to do that.

LifePath isn’t new. Its first incarnation was SponsorMatch, a savings-to-income option developed by Barclays Global Investors (BGI) and MetLife before the Great Financial Crisis of 2008. At that time, insurers Prudential, The Hartford, John Hancock, and Great-West were all developing or launching savings-to-income programs, primarily using variable annuities with lifetime withdrawal riders.

BlackRock bought BGI in 2009 and introduced the LifePath brand in 2010. MetLife spun off its retail annuity business into Brighthouse Financial in 2017.

In 2013, BlackRock introduced its “CoRI” concept. This educational tool for plan participants showed how much annuity income their bond investments would buy at retirement. It included an index that tracked the cost today of $1 of inflation-adjusted lifetime income, starting when the participant reached age 65. The CoRI concept was difficult to communicate, however, and faded from view.

In 2020, BlackRock LifePath Paycheck was officially born. Like the current offering, it involved a target date fund whose assets could eventually be converted to an income annuity. Brighthouse Financial and Equitable were the designated underwriters of the annuity. Voya would be the recordkeeper. That program has now been relaunched.

As the Boomer retirement wave rolls through the financial services environment, asset managers like BlackRock have trouble controlling their own destinies. They distribute target date funds through retirement plans, but they are DCIO (defined contribution investment only) companies. They don’t administer plans or offer rollover IRAs to retirees from their plans (as Vanguard, Fidelity and TIAA do). They stand to lose assets when participants retire.

“Everybody likes Rip van Winkle when he’s asleep in the QDIA. But Rip wakes up one day and says, ‘I have to do something with this money,’” said Mark Fortier. Fortier helped the fund manager AllianceBernstein collaborate with three life insurers to integrate variable deferred annuities into the 401(k) plan at United Technologies (now RTX Corp) in 2012.

DCIO asset managers must find ways to retain participant assets post-retirement and enrich the value of their TDFs, whose fees have shrunk under pressure from participant lawsuits. At the same time, they must make themselves relevant to the retirement income discussion.

That’s especially true for BlackRock, whose LifePath TDFs are a $250 billion business. “BlackRock’s main purpose is to hold onto its franchise in TDFs,” Fortier told RIJ. They’re trying to counteract Vanguard and Fidelity and break their duopoly on large retirement plans. Like everybody in that space, they’re also fighting against fee compression. Fund fees are down to single digits.” That is, BlackRock might be able to charge 10 or 15 basis point more for a TDF with an annuity or income feature than for a plain vanilla TDF. “People are doing everything they can to squeeze more juice out of that lemon,” Fortier said.

By putting group deferred annuities in their TDFs and encouraging participants to buy income annuities in rollover IRAs, however, BlackRock (and other asset managers in similar positions) risk sending a mixed message to participants. They want participants to roll out about 30% of their money from the plan to buy an annuity, but leave 70% of their savings in the plan and in BlackRock funds.

Asset retention is BlackRock’s primary goal, Fortier said. “They’re not measuring success in terms of conversions to annuities,” he told RIJ. “This is about maintaining dominance in the mutual fund world, and slowing the downward spiral on fees.” The biggest obstacle to incorporating income solutions into qualified plans lies beyond the control of asset managers, he said. “They think these are product problems. But they’re advice and education problems.”

Michelle Richter, executive director of the Institutional Retirement Income Council, released this comment on BlackRock’s LifePath Paycheck:

“The income stream option built into BlackRock’s LifePath strategies is a material product design advancement for the field of in-plan retirement income, which is frequently more cost-effective than are retail income solutions. Target date funds could prove a way to increase retirement income accessibility for America’s retirement savers; from there, making annuitization optional within the design prevents additional costs or liquidity changes for those who do not expressly choose it. The design is clever, and is entirely consistent with BlackRock’s record of introducing in-plan income solutions seeking to weave together traditional investment with insurance approaches.”

© 2024 RIJ Publishing LLC. All rights reserved.

The DOL Should Challenge the Fifth Circuit’s Opinion

Posted on May 1, 2024 by -

Back in 2018, the Fifth Circuit U.S. Court of Appeals sided with the American Council of Life Insurers (ACLI) and the U.S. Chamber of Commerce to quash the Department of Labor’s proposed “fiduciary rule,” which could have hindered the sales of annuities to IRA owners.

Last week, the DOL issued a new but similar rule. Why would the DOL ignore a powerful precedent and seek a rematch?

DOL may believe that the Fifth Circuit ruling was flawed. As I read it, the text of the 2018 opinion didn’t reflect a strong understanding of the annuity business. It ignored well-reasoned opinions in favor of the rule by two other federal judges. It was also handed down in a circuit where many judges are said to be prejudiced toward business interests and against regulations.

The DOL rule, then and now, charged that insurance agents should be held to the same ethical standards as, say registered investment advisers, when trying to persuade older investors to buy annuities with their IRA savings. That would be as counterproductive, the Fifth Circuit majority seemed to believe, as requiring emergency medical technicians (EMTs) to be doctors and carry malpractice insurance.

Oddly, the Fifth Circuit majority didn’t seem aware of the truism that annuities are “sold, not bought.” On the one hand, it’s true that a few self-educated individuals actively study and buy annuities on their own. But not many. Most people need to be persuaded to buy an annuity. The Fifth Circuit opinion said that “sales” and “advice” are distinct. But the judges didn’t seem to understand that annuity sales frequently require persuasion, which is arguably more aggressive than advice.

The opinion that buried the earlier fiduciary rule also didn’t acknowledge the similarity between some of today’s top-selling deferred annuities and investments. Nor did that opinion reflect an understanding that many financial professionals have both insurance and investment licenses. The majority just didn’t seem to know much about this business.

Why focus on FIAs?

The majority seemed shocked that the DOL singled out fixed indexed annuities for oversight. But the two judges conceded nothing about the complexity or opacity of those products, the high commissions that insurers offer agents to sell them, or the pressure needed to close a six-figure annuity sale.

The judges in the majority didn’t seem to know that most investment advisers, let alone agents, don’t know much about retirement income planning. They lack the specialized training required to help middle-class people orchestrate their qualified and unqualified savings, Social Security benefits, and real estate wealth into lifelong retirement income. Large, out-of-context, one-off product sales are not what retirees need.

When insurance agents encourage IRA owners or rollover candidates to liquidate tens or hundreds of thousands of dollars in stock and bond assets to buy an FIA that could be at least partly illiquid for up to 10 years, they’re arguably more like EMTs who perform open-heart surgery on people with chest pains.

Differences of opinion

Although two judges voided the DOL rule in 2018, two other judges wrote in favor of it. Their opinions are worth reading. A federal judge in Northern Texas had ruled in favor of the DOL rule in 2017; his ruling was overturned by the Fifth Circuit. The chief judge in the Fifth Circuit, Carl E. Stewart, in his dissent, rejected the plaintiffs’ accusations that the DOL acted arbitrarily and capriciously, that DOL was usurping Congress, or that the DOL was trespassing on the turf of state insurance commissions in trying to regulate insurance. From Judge Stewart’s perspective, the DOL was doing its job.

Opinionated opinions

A number of articles and individuals have suggested that the Fifth Circuit of the federal court system, with its several one-judge jurisdictions and many recent Trump appointees, is a venue where business interests have a high probability of getting their cases before sympathetic judges.

Articles in two publications suggested that the Fifth Circuit has been politicized to some extent. “The real upshot of what the judges [in the Fifth Circuit] are doing is deregulation,” said Stephen Vladeck, a professor at the University of Texas law school, in a story by legal journalist Jeffrey Toobin in the New York Review of Books.

“The Fifth Circuit and other conservative judges have resurrected or invented a series of doctrines—from nondelegation in the 1930s to ‘major questions’ in the 2020s—in an attempt to cripple the administrative state,” Toobin wrote.

Of the 16 active Fifth Circuit judges, five were appointed by Donald Trump. “[These judges] have begun to shift an already right-leaning court toward a more monolithic brand of conservatism. These are judges…whose views are less hidden and whose outcomes are easier to predict,” said a 2018 Texas Tribune story based on interviews with legal experts and Fifth Circuit lawyers. “You know what you’re getting if you bring your case here.”

Other federal judges are concerned about this. In March 2024, the U.S. Judicial Conference, the 26-member policy-making body for the federal courts, adopted a new rule aimed at “curtailing ‘judge shopping’ by state attorneys general, activists and others who challenge government policies in courthouses where one or two sympathetic judges hear most cases,” according to Reuters.

The majority opinion sounded opinionated. Sardonically, the judges twice put quotes around the term “conflicts of interest.” The quotes implied that such conflicts exist only in the imaginations of regulators. They reflected a lack of acquaintance with the incentives in financial services that run counter to the interests of consumers.

The financial literacy of the average American has been shown by many surveys to be low. Yet when the judges wrote that “individual investors, according to DOL, lack the sophistication and understanding of the financial marketplace possessed by investment professionals who manage ERISA employer- sponsored plans,” they suggested that only the DOL thinks so. That’s not the case. [Emphasis added.]

In arguing that the DOL bureaucrats were trespassing on the turf of Congress or state insurance commissioners, the majority conjured the hobgoblin of “deep state” Washingtonians. Their opinion also echoed the conservative tenet that regulations are pointless, because they only criminalize the law-abiding, raise the cost of doing business, and do nothing to deter the scofflaws.

After losing at the Fifth Circuit, DOL attorneys chose not to appeal the defeat to the whole 16-judge panel of the Fifth Circuit. The likeliest reason is that Trump administration was happy with the decision to vacate the fiduciary rule. Moreover, Trump’s second Secretary of Labor, Eugene Scalia (son of the late Supreme Court Justice Antonin Scalia), had been the lead attorney for the plaintiffs in the Fifth Circuit appeal. The younger Scalia did not try to undo his own victory.

© 2024 RIJ Publishing LLC. All rights reserved.

For Ibexis Life, Cayman Outshines Bermuda

Posted on April 30, 2024 by -

Bermuda isn’t the only island paradise where U.S. life/annuity companies can execute what RIJ has called the “Bermuda Triangle” strategy. The Cayman Islands, a British Overseas Territory, might be even more suitable for capturing what some call the “inefficiencies” of US statutory capital-based financial regulation.

One upstart annuity issuer with a Cayman-affiliated reinsurer is Ibexis Life. The company sold $453 million worth of fixed indexed annuities (FIAs) in 2023 and reinsured 80% of those liabilities with Ibexis Re, its sibling company in the Cayman Islands. Investcorp, the $50+ billion Bahrain-based firm that in 2021 financed what would become Ibexis, created a New York based group called Investcorp Insurance Solutions, which oversees the management of Ibexis’ assets.

“FIA Plus” is Ibexis Life’s flagship fixed indexed contract. It has some eye-catching features, like a 23.5% cap on the S&P 500 Price Index (for contract owners willing to put accumulated gains at risk) and volatility-controlled bespoke index options from Bank of America and HSBC.

The contract, like many FIAs, offers term-lengths of 5, 7 and 10 years. There are optional premium bonuses of 8%, 11%, and 16% for each term, respectively. There’s a “bailout” feature that releases clients from the contract penalty-free if the S&P 500 Index returns falls short of a promised rate. Ibexis has an A-minus rating from A.M. Best.

That Investcorp wants Ibexis to replicate the asset manager-aligned business model pioneered by Apollo, Blackstone and others, is reflected in Ibexis’ C-suite members. CEO Nate Gemmiti helped launch Athene as an Operating Partner at Apollo, ran Cayman-based Knighthead Annuity and chaired the Cayman International Reinsurance Company Association (CIRCA).

Chief Distribution officer Ryan Lex spent 10 years at Apollo, wholesaling Athene FIAs through independent marketing organizations, or IMOs. Chief Investment Officer Todd Fonner came from Blackstone Insurance Solutions, and had been a senior manager at Renaissance Re.

Ibexis epitomizes the asset-manager-driven life/annuity companies that have been disrupting the U.S. life/annuity business since 2010. A.M. Best recently noted the “innovative third party nature of [Ibexis’] business model,” which involves outsourcing much of what many bricks-and-mortar life/annuity companies still do internally, like policy administration and claims handling.

A FILA revival

Nathan Gemmiti

Ibexis CEO Nathan Gemmiti spoke with RIJ recently about the way FIA Plus lets contract owners take what he called “defined risk” in order to reach for higher crediting rates, about FIA issuers’ use of “volatility controlled” and “excess return” indexes, and about how Ibexis arrives at an FIA options budget.

Among its many options, FIA Plus incorporates a “fixed index-linked annuity” or FILA feature. A FILA is a hybrid between a standard FIA and a registered index-linked annuity (RILA). Fidelity and Guaranty Life brought this type of product to market in mid-2021. But the original F&G product suffered from “low sales and lack of imitation” and is no longer available, according to Sheryl Moore of Wink, Inc., the insurance sales data collector.

Gemmiti believes Ibexis has improved on it. “[FILA] has not been done exactly this way before,” he said. “That’s what I like about it. We’ve taken some RILA-like technology and put it on an insurance chassis so that it can be sold by insurance agents. If you have gains in the product, you can expose those gains to different potential loss levels from a 2.5% loss to a 15% loss. That expands the cap or participation rate on the upside. Since [as with any FIA] you never lose your principal, it’s an insurance product.”

Consider a hypothetical FIA Plus contract owner who accumulates a 15% gain within a couple of years of purchasing the contract. They could get [at current FIA Plus crediting rates] up to an 11.25% one-year return on the S&P 500 Price Index. But if they are willing to risk all of their 15% gain, the cap would rise to 23.75%. (These rates vary depending on the size of the account and whether the client has accepted premium bonuses.)

Vol-controlled indexes

Besides the S&P 500 Price Index, FIA Plus offers access to the Bank of America U.S. Strength Fast Convergence Index (tracking the NASDAQ 100) and the HSBC Artificial Intelligence Global Tactical Index (tracking a basket of stocks, bonds and gold).

These two benchmarks use volatility controls (VCs). Algorithms reallocate from risky assets to safe assets when volatility spikes and back again to risky assets in calmer markets. VCs are, in effect, automated market-timing strategies. If they react too slowly to changes in volatility, they can miss equity market recoveries and deliver poor returns.

“There was a potential problem with some of the older types of volatility-control indexes,” Gemmiti told RIJ. When there was a lot of volatility, they moved into cash. So you had less ability to capture the upside when the market rebounded.” Those indexes worked adequately during the low interest rate period, he said, but are “largely performing quite poorly today.”  To make its VC algorithm hyper-nimble, the HSBC index uses artificial intelligence from Amazon Web Services.

[AI strategies are a novelty in the vol-control world, but not yet proven, according to an actuary whose firm creates managed-risk mutual funds and who asked not to be identified. “We have looked at AI volatility forecasting models, we found that the AI models were not better than the ones we were already using, so we did not go down that path.”]

Besides VCs, both the Fast Convergence and the Global Tactical indexes in FILA Plus employ “excess returns” versions of the indexes to offset inflation-driven volatility. (See sidebar on excess-return indexes on the RIJ home page.) Together, these buffering agents help keep the index returns within a predictable band.

The more stable the performance of the index, the more stable the insurer’s “options budget” (what the life/annuity company pays the options dealer for the product, and which determines the contract owner’s crediting rates). The options budget is often based on current corporate bond yields, minus the issuer’s expenses.

The more stable the issuer’s costs, the less pressure it feels to do what FIA issuers do at their peril: cut their crediting rates from one contract year to the next. VCs and excess return mechanisms can even reduce options costs, allowing FIA issuers to raise their crediting rates from year to year. But it’s a wash: the higher rates apply to a tamer product.

“Investors have a legitimate fear that insurers may drop their [indexed annuity] crediting rates over time,” Gemmiti said. That’s why Ibexis established its “bailout” clause. “A meaningful percent of our contracts go into the S&P 500 Price Index, and the cost of options on that index can move over time,” Gemmiti said.

“So we’re promising, and we’re not the only ones, that if crediting rates go down to a specified level, you can walk—surrender the contract—without paying a surrender charge or a market value adjustment. It provides some downside protection for the client. Meanwhile, we’ll be trying to keep our rates flat.”

History of Ibexis

In 2021, Investcorp, through layers of subsidiaries, bought Sunset Life, a Nebraska insurer then in run-off mode, from Kansas City Life for an undisclosed sum. The next year, Sunset Life was renamed Ibexis Life, after an old world species of mountain goat with impressive horns. Investcorp subsequently set up Ibexis Re in Grand Cayman. Ibexis currently has a statutory home in Missouri, a main administrative office in Nebraska, and headquarters in West Palm Beach, Florida.

Investcorp is a global investment manager, specializing in alternative investments across private equity, real estate, credit, absolute return strategies, general partnerships, infrastructure and insurance asset management, according to A.M. Best. In the past, Investcorp has owned such luxury brands as Tiffany & Company, Gucci and Saks Fifth Avenue.

It is known as an aggressive asset manager. About 65% of its assets are alternatives, according to its website. Of Ibexis’ assets, 13.5% are classified by the National Association of Insurance Commissioners (NAIC) as Schedule BA, which include hedge funds, private equity and real estate investments.

At $93.8 million, Ibexis’ Schedule BA assets are larger than its $83 million surplus, according to Ibexis’ statutory filing for 2023. A 2021 NAIC report said, “U.S. insurers with significant exposure to Schedule BA assets as a percentage of total and capital surplus should be monitored closely, given the relatively high illiquidity of these investments… U.S. insurance companies with exposure to Schedule BA assets exceeding 100% of their total capital and surplus in 2021… represented less than 1% of all U.S. insurance companies.”

A group of 11 independent marketing organizations will have exclusive right to distribute Ibexis FIAs: Ash Brokerage, Creative One, DMI, Financial Independence Group (FIG), Gradient, Insurance Agency Marketing Services (IAMS), Magellan Financial, M&O Marketing, Simplicity, Triad Partners and TruChoice.

“Rather than do national distribution, which allows anyone to sell our products, we’ve built a club of insurance marketing organizations that exclusively offer our products. Our operational platform is also tech-focused. It’s all e-applications, and we’ll be able to issue policies the same day.”

Reaction to DOL rule

Since Gemmiti’s conversation with RIJ,  the U.S. Department of Labor issued the long-anticipated second version of its “Fiduciary Rule,” which could make it tougher for  independent insurance agents to sell FIAs to IRA owners. Americans have $13.5 trillion invested in IRAs, according to the Investment Company Institute. IRAs constitute an  important market not just for FIAs, but for all financial products.

Gemmiti reflected on the implications of the new rule. “We’re the guardians of an individual’s retirement money, so as an industry we need to make sure we’re selling suitable products, given a client’s  risk appetite, financial profile and investment horizon. That’s a good thing. Protecting the client and making sure they have good products from financially sound institutions is a positive thing, but destroying the independent agent distribution commission model is not.”

© 2024 RIJ Publishing LLC. All rights reserved.

A ‘Nesting Doll’ of an In-Plan Annuity

Posted on April 3, 2024 by -

More asset managers and life insurers are pitching new annuity products to 401(k) plan sponsors, for both altruistic and selfish reasons. That is, they want to help participants turn their tax-deferred savings into safe retirement income and, simultaneously, to retain or grow the level of participant assets in their funds and annuities.

One recent entry in this market, State Street GTC Retirement Income Builder, is a target date fund (TDF) with an annuity inside. It’s backed by a deep-pocketed strategic partnership that currently includes ARS (formerly part of Annexus), State Street Global Advisors, Athene Annuity and Life, Nationwide Financial, Transamerica Life (as recordkeeper), and Global Trust Company (GTC; a unit of Community Bank).

Annuities are still new to most 401(k) plan sponsors and participants. State Street GTC Retirement Income Builder seems to anticipate (and remove) most of the usual objections to weaving annuities into plans. But this product may be especially hard for the average plan sponsor or participant to understand. (The product’s offering memorandum and brochure are available.)

Aimed at auto-enrolled participants who don’t actively sign up for their employer’s 401(k) plan, the State Street GTC Retirement Income Builder is a target date fund (TDF) containing both mutual fund-like investments and an “in-plan” group deferred fixed indexed annuity (FIA). Participants contribute while they are employed by the plan sponsor.

All TDFs are qualified default investment alternatives (QDIAs), into which plan sponsors can automatically move auto-enrolled participants’ contributions. The annuity can grow like the other funds in the TDF,  whose allocations to equities and bonds become more conservative over time. The TDF is always liquid; participants can move their money to another investment option or, if they leave the plan, pull it out of the plan.

‘Nesting doll’ structure

The structure of the overall product is like a matryoshka or nesting doll. At the core is the group deferred FIA designed by ARS. The annuity tracks an index with an underlying asset pool of 55% equities and 45% fixed income. The index is custom-built and governed by a stabilizer or volatility-control mechanism.

The annuity sits inside the TDF alongside State Street funds. When TDF investors reach age 47 or so, some of their monthly contributions start going into the annuity instead of into a fixed income fund. Through an auction process, five or six life insurers (Athene and Nationwide, initially) can bid for a portion of the incoming premium by offering a competitive crediting rate (a “participation rate,” or percentage of the index return). At the maturity date of the TDF, when the participants start reaching age 65, about 65% of the value of the TDF will be in the ARS Lifetime Income Builder FIA and about 35% in State Street equity funds.

Each insurer deposits its share of the premium into its general fund. Just as it would when managing an individual FIA, the insurer uses an amount roughly equal to the anticipated annual return on its general fund as a budget for buying a call option on the index. The insurer also guarantees that the annuity will provide the contract owner (or joint owners) with income for life.

All of these investment and insurance assets are held inside in a collective investment trust (CIT), a tax-exempt investment vehicle provided in this case by Global Trust Company. As the TDF’s investment fiduciary, Global Trust Company is responsible for choosing the TDF provider (State Street in this case) and the insurers (Athene and Nationwide, so far). Transamerica is the recordkeeper.

All of the insurers use the ARS Lifetime Income Builder FIA, so it’s a more or less level playing field for the insurers. Over time, index gains are locked in and credited to the annuity. Participants who own the TDF accrue units in the annuity, whose value is calculated daily, like that of a mutual fund share.

Dave Paulsen

“We unitized the indexed annuity, so that it trades like a mutual fund,” Dave Paulsen, chief distribution officer of ARS, told RIJ. “If it were sold to individuals, they could buy into it at today’s NAV [net asset value]. It’s fully liquid and transparent. We embed this in the TDF.” The daily NAV is calculated independently by Milliman, the global actuarial consulting firm.

The annuity “is a ‘holding’ in the TDF,” Paulsen told RIJ. “The value that participants see on their statements is fully liquid and available to move or withdraw. So participants get the growth of Lifetime Income Builder regardless of whether they stick around until retirement, when income payments begin. This is a key point. The participant does not give up growth during the accumulation phase, and has full flexibility to transfer or move the assets at any time.”

The income stage  

At age 65 or so, the retired participant begins receiving an income stream fixed at 6% of the TDF’s peak value. Of that fixed income amount, about three-quarters (4.5%) will come from the annuity and about one-quarter (1.5%) from the equity funds. The product aims for the 6% payout, but doesn’t guarantee it. If the equity funds are ever depleted (by a combination of withdrawals and market volatility), the income will drop to 4.5% and remain there until all owners have died.

Distributions begin automatically when the TDF reaches its maturity date; the participant makes no active choice to enter the income phase and no IRA rollover is needed. The payments, Paulsen said, would move into a separate tax-deferred sleeve.

Glidepath of Retirement Income Builder TDF/FIA/GLWB (Click for full brochure)

The retiree can either start spending that money or leave it in the plan (until Required Minimum Distributions begin) for continued growth. The annuity remains permanently deferred, so retired participants can always withdraw lump sums or liquidate their accounts (and receive proportionately less income).

The expense ratio of the State Street GTC Retirement Income Builder TDF is nine bps (total) per year until the participant reaches age 47. At that point, when contributions start going into the FIAs and the insurers set a floor under the value of the participant’s credits in them, the fee goes up to 20 basis points.

These costs are only a fraction of the annual costs of an income guarantee on a variable annuity, which can run as high as 1.5% per year. That’s because the FIA’s income rider wraps only around the value of the annuity, not the entire TDF value, and because the performance of the FIA is much more predictable than the performance of risky portfolio.

Insulating sponsors from liability

The use of the CIT (collective investment trust) to package the TDF, in lieu of a mutual fund structure, reduces the cost of the product while further distancing plan sponsors from legal responsibility for choosing insurers that will always keep their contractual promises. While the plan sponsor bears fiduciary responsibility for choosing the TDF provider (State Street, in this case), the CIT (Global Trust Company) is liable for selecting solid life insurers to underwrite the FIA.

CITs are gradually becoming the preferred legal structure for 401(k) annuity providers. In August 2023, Nuveen, the investment manager of TIAA, introduced its Lifecycle Income Series, a TDF containing the TIAA Secure Income Account deferred group annuity. “The trustee for the new CITs is SEI Trust Company, a leading provider of collective investment trusts to the U.S. retirement market and the ultimate fiduciary authority over the management of and investments made in the CIT, with Nuveen serving as advisor,” a Nuveen release said.

According to a white paper from MFS, “total CIT assets have doubled over the past decade due to its increased adoption among 401(k) plans. In 2022, total CIT assets were $4.6 trillion, and comprised 37%, or about $2.5 trillion, of total 401(k) plan assets. CIT growth has come primarily at the expense of mutual funds, which saw their share of 401(k) assets decline to 42% of total 401(k) assets.”

“The upswing in CITs, relative to mutual funds, as the vehicle of choice for TDFs appears largely due to cost,” writes attorney Maureen Gorman of the law firm of Mayer Brown, in a recent white paper. “For structural and regulatory reasons, they do not have boards of directors and are not subject to SEC filing requirements, and their target market consists of institutions rather than individual investors, resulting in lower marketing costs. With the explosion of excessive fee litigation relating to 401(k) investment options, plan fiduciaries have become increasingly sensitive to cost. Although mutual fund expense ratios have generally declined, CITs remain a bargain in many cases.”

Gorman touched on the idea that plan sponsors can reduce fiduciary responsibility for the choice of insurer by letting the CIT investment manager choose the insurer to guarantee the annuity embedded in a TDF that’s packaged in a CIT.

“Many employers who are reluctant to cause their plans to enter into insurance contracts directly with insurers on account of the fiduciary exposure are more comfortable selecting a CIT TDF, with an investment manager responsible for choosing the insurers backing the lifetime income options offered by the TDF,” she wrote.

“While the choice of the TDF as an investment option is itself a fiduciary act, many plan fiduciaries are more comfortable with evaluating the fund and its manager than with evaluating different insurance carriers. In the Setting Every Community Up for Retirement Enhancement Act (“SECURE”) Act of 2019, Congress created a new fiduciary safe harbor for choosing an annuity provider of “in-plan” annuities, but plan sponsors may continue to prefer that the choice of insurers (and satisfaction of the conditions of the safe harbor) be performed by a TDF investment manager.”

“Unfortunately,” she added, “the published guidance did not address several aspects of these products, especially those of guaranteed minimum withdrawal products, and the gap in guidance has widened with the development of more, and more sophisticated, versions of these products.”

Target market

Despite its internal complexity, State Street GTC Retirement Income Builder is meant to be virtually self-driving for the participant. “The annuity is purchased at the investment manager level,” Paulsen said in an interview. “There are no participant-level decisions. The complexity is taken off of the individual. If you force participants to make tradeoffs, take-up of the product will be low. By not asking people to make decisions that they are not prepared to make, but still making the fund fully liquid, you’ll see adoption rates increase rapidly.”

Paulsen sees middle-class plan participants as the product’s target market. “I think the top 10-15% of savers, those with the most assets, are likely to go to a financial adviser and roll assets over to a brokerage IRA. The bottom 15% probably won’t have enough savings to fund an annuity,” he said.

“For the remaining 75% in the middle, it will be important to have more guaranteed income in retirement. State Street GTC Retirement Income Builder can complement Social Security. If we attract the mass affluent, I think we can make a difference in how people retire.”

© 2024 RIJ Publishing LLC. All rights reserved.

News in brief

Posted on April 3, 2024 by -

Researchers probe tie between auto-enrollment and household debt in the UK

In a new working paper from the National Bureau of Economic Research, researchers in the U.S. and U.K. report the results of their study of the impact of automatic enrollment pensions on the borrowing behavior of households covered by the NEST national defined contribution employer-based savings plan in the U.K.

“Individuals in many countries are automatically enrolled to save in retirement pensions unless they opt out—perhaps the most widespread policy implementation of nudging. Automatic enrollment is intended to raise household net wealth during the accumulation phase of retirement saving,” the researchers write in the paper, “Does Pension Automatic Enrollment Increase Debt: Evidence from a Large Scale Natural Experiment.”

“We show that the additional observed pension balances created by the introduction of automatic enrollment pensions are accompanied by significant increases in debt during the first 41 months after enrollment,” the paper said. The authors are John Beshears, Matthew Blakstad, James J. Choi, Christopher Firth, John Gathergood, David Laibson, Richard Notley, Jesal D. Sheth, Will Sandbrook and Neil Stewart.

According to the authors, who looked at the experiences of defined contribution plan participants at 160,000 employers with between two and 29 employees, the average automatically enrolled employee accrues an additional £32-£38 ($40.40 to $48 on 4-3-2-24) of observed pension savings per month within the automatic enrollment pension, of which £16-£19 are employer contributions, £13-£15 are employee contributions, and £3-£4 are tax credits deposited to the pension.

But researchers found that the average employee simultaneously accrues an additional £7 ($8.84) of unsecured debt (such as personal loans and bank overdrafts) per month of enrollment, which is 19-23% of the increase in total pension savings and 47-58% of the increase in employee contributions.

Further, the probability of having a mortgage increases by 0.05 percentage points per month of enrollment (a cumulative 1.9 percentage points at 41 months after enrollment), against a baseline prevalence of 38%, and the average mortgage balance correspondingly increases by £118 per month of enrollment.

“Surprisingly,” the researchers noted, “time under automatic enrollment progressively reduces loan defaults and increases credit scores, so that by 41 months after enrollment, the probability of having defaulted within the previous six years has fallen by 1.6 percentage points (13% of the baseline rate) and credit scores have increased by 0.07 standard deviations. We estimate no statistically significant effect on the likelihood of bankruptcy.”

Previous research had shown that the auto-enrollment substantially increases pension participation rates, leading to higher average saving within the pension. However, the effects of automatic enrollment could be offset on other margins.

Automatic enrollment is legally required of employers in the United Kingdom, New Zealand and Turkey. In 2019, 40% of US private industry workers and 28% of US state and local government workers participating in a savings and thrift plan did so in one with automatic enrollment, and most 401(k) and 403(b) plans established from year-end 2022 onwards will be required to automatically enroll employees by 2025.

Prudential closes $12.5 bn reinsurance deal with Somerset Re

Prudential Financial, Inc. announced that it has successfully closed a reinsurance transaction for a portion of its block of guaranteed universal life insurance policies with Bermuda-based Somerset Re.

Under the terms of the agreement, Somerset Re reinsured approximately $12.5 billion of reserves backing Prudential’s guaranteed universal life policies issued by Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey.

The transaction released about $425 million of capital that Prudential had provided to support the block. This transaction covered policies written prior to 2015, representing about one-third of Prudential’s total guaranteed universal life statutory reserves.

First announced on July 24, 2023, the deal “advances the company’s strategy to reduce market sensitivity and increase capital efficiency,” a Prudential release said. Prudential Financial, Inc. had approximately $1.4 trillion in assets under management as of December 31, 2023. It has operations in the United States, Asia, Europe, and Latin America.

Somerset Reinsurance Ltd. is a provider of reinsurance solutions for asset-intensive life insurance and annuity business “helping its clients manage capital efficiency and improve their financial results,” the release said. The firm’s solutions include programs for new business flow and management of legacy blocks of life insurance and annuities, and capital-motivated reinsurance solutions globally. Large Insurers ranked Somerset No. 1 in the Business Capability Index (BCI), as measured by NMG Consulting’s 2023 U.S. Structured Financial Solutions study in the Asset-Intensive Segment.

Strong fourth-quarter for pension risk transfers: LIMRA

Total U.S. pension risk transfer (PRT) premium was $12.7 billion in the fourth quarter 2023, 53% higher than fourth quarter 2022, according to LIMRA’s U.S. Group Annuity Risk Transfer Sales Survey.

“Fourth quarter PR sales historically tend to be elevated and we saw this again in 2023. Plan sponsors often want to close the deal before the end of the year to remove some of the pension risk off their books,” said Keith Golembiewski, assistant vice president, head of LIMRA Annuity Research.

“Strong economic conditions have encouraged more plan sponsors to think about de-risking their pension liability. We continue to see a record-level number of deals, suggesting broader awareness and interest in these contracts. LIMRA expects this trajectory to continue with 2024 PRT sales results similar to the results seen 2022 and 2023.”

In 2023, PRT sales were $45.8 billion. While this is 13% lower than the record set in 2022, it does represent the second highest annual sales since LIMRA began its benchmark study.

LIMRA’s findings show there were 296 PRT contracts sold in the fourth quarter of last year, up 26% year-over-year. In 2023, there were 850 PRT contracts completed, a 25% jump from 2022. This is the highest number of contracts sold in a quarter and annually.

Single-premium buy-out sales were $12.5 billion in the fourth quarter, up 73% from prior year’s results. In 2023, buy-out sales fell 14% to $41.3 billion, as compared to the record buy-out sales in 2022. There were 280 buy-out contracts in the fourth quarter of 2023, up 40% from the fourth quarter 2022. For the year, there were 763 buy-out contracts completed, 36% higher than the number of buy-out contracts sold in 2022.

There were no buy-in contracts reported in the fourth quarter. At year-end 2023, there were eight buy-in contracts sold, totaling $3.9 billion.

Single premium buy-out assets reached $263.4 billion in 2023, up 12% from the prior year. Single premium buy-in assets were $6.9 billion, 2% higher than in 2022. (Two single-premium buy-in contracts were converted into buy-out contracts in the fourth quarter, lowering the total assets.) Combined, single premium assets were $268.5 billion in 2023, an 11% increase from the 2022 results.

A group annuity risk transfer product, such as a pension buy-out product, allows an employer to transfer all or a portion of its pension liability to an insurer. In doing so, an employer can remove the liability from its balance sheet and reduce the volatility of the funded status.

This survey represented 100% of the U.S. Pension Risk Transfer market. Breakouts of pension buy-out sales by quarter and pension buy-in sales by quarter since 2016 are available in the LIMRA Fact Tank.

 

PE-backed insurers control almost 10% of life/annuity assets: AM Best

The U.S. life/annuity insurance segment remains well-capitalized after a nominal 1.6% increase in statutory capital and surplus through Sept. 30, 2023, from year-end 2022, and steady net income, according to AM Best’s annual Review & Preview report on the industry segment.

But the report also showed lingering concerns for 2024 about uncertainty and volatility in financial markets, risks contained within certain asset classes, and remaining legacy liabilities. The Best’s Market Segment Report, titled, “US Life/Annuity Insurers Stay the Course as They Prepare for 2024 Uncertainty,” said that “the rising interest rate environment has affected assets and liabilities, but the overall realized impact to balance sheets has been manageable, owing primarily to companies’ strong asset-liability management frameworks.”

The report discussed the rising number of private equity- and asset manager-owned insurers, which now represent nearly 10% of the total life/annuity industry by admitted assets. Despite the rapid growth in premiums, operating results for these types of organization structures have largely followed the greater industry, and returns on equity have mirrored those of stock companies, with results only minimally below those achieved by the stock entities.

Over the near term, most insurers plan to hold assets to maturity, driving unrealized losses, but they unlikely will be forced to sell to meet liquidity needs. AM Best estimates modest 4% growth in the industry’s capital and surplus for 2023 and expects net income to approach pre-pandemic levels in 2023 and continue growing in 2024.

“With inflationary pressures expected to subside in 2024, the industry has more consensus about the investment landscape but with similar levels of uncertainty as in 2023,” said Michael Porcelli, senior director, AM Best. “Shifts in asset composition has helped insurers mitigate the impacts of rising interest rates while minimizing cash flow volatility; however, these asset allocations cannot completely mitigate all risk, as evidenced by the material decline in the market value of invested assets on insurers’ balance sheets over the past two years.”

According to the report, the industry’s net income of $31.6 billion through third-quarter 2023 was unchanged compared with the same prior-year period. For most companies, COVID-19 mortality had affected earnings, as opposed to balance sheets, suggesting no significant impact on reserves or capital, but the overall impact has declined since early 2022.

The longer-term implications of COVID-19 and other mortality factors on liabilities and future pricing assumptions are still uncertain, with most companies not yet making significant changes to their mortality assumptions.

The report also explores a host of other issues impacting the life/annuity industry, including sales trends, artificial intelligence and accounting changes. Overall, AM Best expects expect segment challenges to remain manageable given insurers’ robust risk-adjusted capital, favorable liquidity profiles and effective ERM practices.

“Uncertainty about the US economy and geopolitical risks could create significant headwinds in 2024, but life insurers have mostly favorable risk management practices, including the use of hedges, adjustments to crediting and discount rates, business mix re-evaluations and a focus on technology and innovation,” said Porcelli.

NewRetirement raises $20 million in venture capital

NewRetirement, a digital-first financial planning platform for consumers and enterprise partners, announced that it has closed its Series A round with $20 million in funding. The infusion brought the company’s total funding to $20.8 million.

NewRetirement founder Stephen Chen said the firm will use the new funding to expand its enterprise offerings, scale onboarding and support for new partners, enhance R&D efforts aimed at helping its user base, integrate LLMs (large language models) and AI (artificial intelligence) to provide more personalized recommendations, and build capacity to meet growing demand.

The round was led by Allegis Capital and joined by Ulu Ventures, Nationwide Ventures, Fin Capital, Frontier Venture Capital, Cameron Ventures, Marin Sonoma Impact Ventures, Northwestern Mutual Future Ventures, Plug and Play Ventures and Motley Fool Ventures.

The NewRetirement planning and modeling engine considers thousands of scenarios, enabling individuals to do holistic accumulation and decumulation planning with digital guidance. NewRetirement’s direct-to-consumer product currently powers financial planning for 70,000 active users who are managing close to $100 billion dollars in their own financial plans.

Employer plan sponsors and plan providers can offer NewRetirement’s planner, calculators, and educational classes to their employees as a self-directed financial wellness benefit. Wealth managers, banks, and insurance companies can use the company’s APIs, planner, calculators, and advisor tools to develop a white-labeled or co-branded platform, enabling them to leverage new business models, retain assets, and drive revenue with more engaged consumers.

© 2024 RIJ Publishing LLC.

Auto workers’ DC plan will link to Hueler Income Solutions

Posted on April 2, 2024 by -

In recent wage negotiations in Detroit, the United Auto Workers union couldn’t persuade the big automakers to restore its members’ defined benefit pensions. The last of those beloved but antiquated retirement-financing vehicles rolled off the Motor City’s unionized assembly lines circa 2007.

But last fall’s compensation agreement contained a consolation prize, thanks to the efforts of retirement entrepreneur Kelli Hueler, CEO of Hueler Income Solutions.

Union workers at General Motors and Stellantis (the Netherlands-based owner of Chrysler, Dodge, Jeep, and Ram, as well as several European brands) in Detroit will have a direct internet link from an employee benefit portal to Hueler’s online annuity platform, where they can use part of their savings to buy a guaranteed income stream.

Long before the SECURE Acts began encouraging annuity vendors and 401(k) plan sponsors to think seriously about forming relationships, Hueler started using her forceful entrepreneurial personality and her connections in the retirement industry (thanks to her stable value fund business, sold to Morningstar in 2020) to talk companies like Boeing and Vanguard into linking their DC plans to her site.

There’s an old saying that “annuities are sold, not bought.” But Hueler has always believed that, properly educated about financial risks in retirement, some 401(k) participants will actively choose to buy income annuities at retirement.

Anyone, including financial advisers, can visit the Hueler platform and solicit competitive income annuity quotes participating life/annuity companies. They can also get quotes for interest-rate yields on fixed deferred annuities. Hersh Stern’s immediateannuities.com and Stan Haithcock’s stantheannuityman.com serve an overlapping but not identical audience.

Income Solutions is a so-called “out of plan” annuity option. It requires retired participants to roll over plan assets to an individual IRA by a prior to the annuity purchase. Plan sponsors bear no fiduciary responsibility for offering access to the site. Hueler asks little of plan sponsors beyond a link to Income Solutions on one of their employee benefit portals and a commitment to encourage its use. Income Solutions doesn’t replace a plan sponsor’s existing 401(k) plan providers.

Six highly-rated annuity issuers currently bid on new business on the Hueler platform. They are the Integrity Companies, Lincoln Financial, Mutual of Omaha, Nationwide, Symetra, and Securian. Hueler ordinarily charges a 2% (of premium) sales charge for brokering the sale. According to Hueler’s agreement with UAW members, they will pay only a one percent fee.

According to a January 5, 2024 article in the Detroit News, “The UAW contracts… ratified in November after a 46-day strike, received more attention for other gains, including a total pay increase of 25% over the course of a 4½ year contract, the resumption of cost of living adjustments and a pretax, $5,000 ratification bonus for all employees, including temporary workers.”

The article continued, “The UAW contracts at the three automakers all included a significant boost in the automatic employer contribution to 401(k) plans — with no required employee contribution — for eligible UAW members who are not covered by pensions. The Detroit Three employers will contribute 10% of base pay for these eligible hourly workers. That’s up from 6.4% for those hired after the fall of 2007.”

Michigan has lost more than half of its auto assembly plant jobs over the past 35 years, with auto employment there falling from 98,258 jobs in 1990 to 44,900 jobs last year. U.S. auto assembly plants employed some 278,000 workers last year, according to the Bureau of Labor Statistics, but many workers were employed at non-union plants in the South.

Purchasing power for both unionized and nonunion workers has stagnated since the early 1990s. The average real auto manufacturing wage today is $22, or about the same as 30 years ago, according to data presented on MSNBC last fall. UAW workers earn $18 to $32 an hour, depending on seniority.

Hueler’s headquarters is in Edina, Minnesota, hundreds of miles west of Detroit’s auto assembly plants. But Kelli Hueler is no stranger to large automakers. More than eight years ago, Hueler concluded a deal with General Motors that gave its defined contribution plan members direct access through their plan website to the Hueler platform.

At the time, GM’s 401(k) and profit-sharing plan had 58,000 salaried participants in the U.S., with $11 billion in assets and an average account value of $190,000. The largest single holding was the GMAM Investment Holdings Trust. Hueler has had similar relationships with Boeing and with 401(k) plans administered by Vanguard.

According to the 2015 article in RIJ about Hueler’s deal with GM:

Hueler’s main business contacts are on the institutional side of the retirement industry. Ten years ago, while running a stable value fund data business for retirement plans, she noticed that near-retirees were at a disadvantage in the marketplace because they couldn’t readily compare the prices of a broad range of annuities, whose prices by manufacturer and from month to month.

She knew that an unsavvy or ill-timed purchase by an individual could easily reduce monthly income benefits by as much as 10%. Captive agents promoted only their employers’ products. Open-architecture Internet platforms such as immediateannuities.com were available to individual purchasers, but not as retirement plan option.

“In 2014 we revamped our delivery of the program, and required collaborative communication and ongoing communication. It’s very different from way we started the platform in the early days. The communication is key. We also service the plan participants. Our help center is able to assist the participants. Our goals in help center are to explain annuitization, to assist participants with purchasing as the need arises,” she told RIJ.

“We play a more active role today than organizations may remember us having. In the last five or six years, it’s become a more high touch program. There’s a lot of e-messaging. We have communications where they can use the income estimator right in the communication. Our approach focuses on partial annuitizations. If the plan sponsors don’t already allow partial annuitizations, we advocate for that. We also advocate for participants to keep the rest of their assets in the plan.”

Amid the current debate over the Department of Labor’s proposed fiduciary rule, which aims in part to shield participants from aggressive rollover marketing at the point of retirement, plan sponsors are sensitive about whom they let approach their participants about rollovers. In such a climate, the Hueler model appeals to them.

“We’re not a product manufacturer that might want to sell other products to the participant. It’s clear what our goal is,” Hueler told RIJ. “When we started this business, we structured the program so that it could fit any fiduciary process. We wanted to remove conflicts, ‘pay-to-play’ arrangements, and issuer selection objectives, and to provide level fees and full disclosure.

“If you keep the process opaque and you’re steering people to one product or another, you lose all credibility. We made strategic decisions early on that were unpopular at the time, and very different from the rest of the marketplace. All of that was self-imposed. But now the world around us has woken up to all of that. Those things are seen as the future.”

© 2024 RIJ Publishing LLC. All rights reserved.

Here Come the Suits

Posted on April 2, 2024 by -

Participants in two different multi-billion-dollar defined benefit pension plans filed three separate federal class action lawsuits in mid-March, claiming that the corporate sponsors of their plans breached their  “fiduciary duties” when they decided to sell the assets and liabilities of the plans to Athene Annuity and Life in so-called pension risk transfer (PRT) deals.

Two of the suits are filed against AT&T, former sponsor of an $8 billion pension, and its investment adviser, State Street Global Advisors. Lockheed Martin is the defendant in the third suit. Athene is not a defendant in the case, but plaintiffs in all three actions criticized the choice of Athene as the issuer of the giant annuities that replaced their DB plans.

Pensioners at AT&T and Lockheed are represented by Darby Law Group and by St. Louis-based Schlichter Bogard in two of the suits. Jerry Schlichter achieved both fame and notoriety for his suits against 401(k) plan sponsors a decade or so ago. His clients charged plan sponsors with choosing plan investment options with “excessive fees.” In the third suit, pensioners at AT&T are represented by four law firms.

Plaintiffs’ attorneys are doing what they always do—trying to catch deep-pocketed targets in an egregious legal blunder, while angling for as much as a third of the dollar-value of a potential settlement or judgment. But it’s not surprising that Athene, an affiliate of Apollo Global Management, has attracted such suits.

The suits claim that, by purchasing an annuity from Athene, AT&T and Lockheed violated the Department of Labor’s requirement (Under the DOL’s Interpretive Bulletin-95) to find the “safest annuity available.” The plaintiffs charge that an objective review of Athene would have shown that an Athene annuity didn’t meet that requirement.

Athene and Apollo pioneered what RIJ has called the “Bermuda Triangle” business strategy. The strategy varies, but often involves selling long-dated fixed indexed annuities, using some of the proceeds to finance high-yield “leveraged loans” to risky companies, and reducing surplus capital through the purchase of an unusual form of reinsurance from affiliated reinsurers. RIJ articles about the Bermuda Triangle strategy are referenced in the Schlichter Bogard lawsuits.

One of the suits against AT&T and SSgA alleges that “Athene lacks a sufficient track record to be entrusted with guaranteeing such a massive amount of pension liabilities” and because:

“Athene today is, compared to traditional providers, invested in riskier assets to support participants’ payments, Athene’s risk is increased by its reinsurance of annuities with offshore companies affiliated with Athene which are not as transparent or required to set aside as much capital as U.S.-based insurers; Athene employs questionable accounting strategies to overvalue its assets; and the risks inherent in Athene’s strategies are magnified by unstable economic conditions.”

It’s too soon to say whether the lawsuits might harm Athene, or affect the thriving pension risk transfer business, which allows corporations to offload their DB pensions and allows annuity companies to acquire large asset pools, but deprives pensioners of certain protections under the Employee Retirement Income Security Act of 1974 (ERISA).

The outcomes may depend on the mindsets of the federal judges who hear the cases in Massachusetts (AT&T) and Maryland (Lockheed), and whether they tend to believe that DB pensions are safer in the hands of life/annuity companies and NOHLGA (the association of state guaranty associations, which try to protect annuity owners’ savings in the event of insurer insolvency) or in the hands of the ERISA-regulated DB corporate sponsors and the federal Pension Benefit Guaranty Corporation.

© 2024 RIJ Publishing LLC. All rights reserved.

A Potential Alternative to the Rollover IRA

Posted on April 2, 2024 by -

Many employers may hesitate to add retirement income options and applicable education to their 401(k) plans. This is especially true for smaller employers where cost, administration and liability are of great concern. Many retirement plan participants are therefore left to use rollover IRAs (Individual Retirement Accounts) to fund their retirement income streams..

Rollover IRAs may not be the best solution to this income challenge for many retirees. IRA products and investments often have higher expenses than employer-sponsored 401(k) plans do. The IRA advisor may not be an expert on retirement income strategies, may not be a fiduciary (as a 401(k) plan adviser would be), and may offer only limited distribution options.

Congress should create a new type of institutional entity that could help retirees while releasing many employers from the responsibilities of providing retirement income options and education to plan participants. Employers would continue to focus on helping employees accumulate a retirement nest egg without the income payout burden.

These proposed entities might be called Qualified Retirement Income Providers (QRIPs). Here are some questions about them, with my answers.

  1. Q. Who could sponsor a QRIP?

A. Any organization, subject to regulations and an approval process through the Department of Labor (DOL), could sponsor a QRIP. The sponsor would have ongoing annual reporting and disclosure requirements.

  1. Q. What would be required of a QRIP sponsor?

A. The QRIP would need to serve as a fiduciary consistent with the rules of ERISA. A QRIP must be able to offer both insured and investment-based institutional  retirement income solutions. Fees for investors would be subject to limits and would be fully transparent. Inclusion of products or investments not institutionally-priced could cause the QRIP to be fined.

  1. Q. Who could have their money held in a QRIP?

A. Any individual with an IRA (including prior employer plan rollovers) or a qualified retirement plan account balance with a prior employer.

  1. Q. Would a QRIP add another layer of custodianship to a 401(k) or IRA?

A. No, a QRIP is a totally new and separate entity designed to provide retirement income. It would be another retirement income option for those not comfortable with options that their employer 401(k) plan or individual IRA make available.

  1. Q. Could a QRIP accept direct employee contributions like an IRA or qualified plan?

A. No. QRIPs could only hold rollovers from IRAs or prior employer plans. The accumulation process would remain with the employer plan or IRA.

  1. Q. How would funds be invested in a QRIP?

A. Amounts would be held in target date funds, balanced funds, or other options as permitted by the DOL. Retirees could elect to purchase an annuity with a portion of their accounts that provides some guaranteed lifetime income.

Q. What types of annuities would be permitted?

A. QRIPs should offer single premium immediate annuities as well as Qualifying Longevity Annuity Contracts. Annuities could be provided through an exchange like Hueler Income or directly from insurers as long as priced institutionally. Other options such as variable annuities or fixed index annuities would also be permitted if they include a guaranteed lifetime minimum benefit rider and satisfy regulations to be proposed by the DOL.

  1. Q. How would amounts not used to purchase an insured annuity be paid out to the retiree?

A. A monthly amount would be paid based upon the retiree’s account balance, a hypothetical investment rate of return, and life expectancy. This will be recalculated annually. The retiree can elect to withdraw more or less than this calculated amount provided that the minimum required distribution rules are not violated commencing at age 73.

Q. What other services would the QRIP provide?

A. The QRIP would offer broad-based education on various retirement income strategies and products and implement the actual elections. Modeling tools could also be available. For an additional hourly fee, the retiree could use the services of a fiduciary advisor. The QRIP would be responsible for processing payments and tax withholding and reporting.  The QRIP would assist individuals in initiating the transfer of funds to the QRIP.

  1. Q. Would using a QRIP be required?

A. No, this would be voluntary on the part of the individual. Many retirees may prefer using their own IRA account. Others may be able to secure retirement income solutions directly from their employer plan.

  1. Q. How would individuals learn about available QRIPs?

A. The Department of Labor would post them on its website with all relevant information regarding fees, investment options, retirement income alternatives, and other available services.

  1. Q. How is a QRIP different from an IRA rollover?

A. A QRIP would be required to offer both insured and non-insured institutionally priced products and investments. The QRIP sponsor would be required to serve as an ERISA fiduciary and report to the DOL.

  1. Q. Can one change his or her QRIP?

A. Yes. In addition, an individual could have more than one QRIP.

  1. Q. Can a QRIP be set up today?

A. No. There is no provision in the law that would allow for this type of program. The closest thing would be a Pooled Employer Plan (PEP). Different from a PEP, a QRIP would be joined by individuals and not employers, would not allow new contributions (only rollovers), and would be subject to limitations on fees. Legislative action would be required to allow for QRIPs.

There are many reasons why retirees from employer-sponsored defined contribution plans shouldn’t expect their former employers for help with retirement income planning. In addition, a few individuals spend their entire career with one employer. Their retirement nest eggs are often scattered about.

Providing secure and cost-efficient retirement income is a challenging responsibility that many employers can’t handle well or don’t wish to spend resources on. QRIPs could specialize in providing retirement income and would be required to serve the best interest of the retirees.

Though workers would use QRIPs primarily during retirement, they could also use them during the accumulation years as tax-deferred vehicles for consolidating rollovers from prior employer plans or transfers from other IRAs. This might reduce “leakage” from tax-deferred savings vehicles and encourage portability of savings.

© 2024 RIJ Publishing LLC.