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Research Roundup

Posted on February 13, 2020 by Kerry Pechter -

Last year, a dark book justly titled “Darkness by Design” (Princeton, 2019), warned that the equity trading world we grew up with—one dominated by the New York Stock Exchange and kept more or less honest by its human market-making “specialists”—has all but vanished.

The author, Oxford political economist Walter Mattli, documents the advent since 2000 of a very different trading world—one that’s fragmented, opaque, and algorithm-driven. It’s a world of high-speed institutional trading and “dark pools” run by and for insiders to the detriment of individual investors.

Mattli makes a powerful (and scary) case. But a new paper from the National Bureau of Economic Research (NBER Working Paper 26147), “The Value of Intermediation in the Stock Market,” by Mark L. Egan and Marco Di Maggio of Harvard Business School and Francesco Franzoni of the Swiss Finance Institute, tells a slightly different story.

Human intermediation still exists, they write—at least for institutional investors. Studying over 300 million institutional trades, the three economists found that “more than half of all institutional investor order flow is still executed by high-touch (non-electronic) brokers… Trading is and always has been a relationship business.”

While Mattli emphasizes the arms race in electronic trading speeds, Egan et al found that “Investors prefer to trade with equity traders located in the same city as the investor. Even though the equity orders are placed either electronically or over the phone, physical proximity to the broker influences an investor’s trading decisions.”

Large investors are less interested in fundamental research on stocks than in order flow information, the NBER authors found. Such information helps them avoid moving the market ahead of a large trade or, conversely, helps them anticipate other investors’ large trades and buy or sell ahead of it.

“Hedge funds appear to place a premium on the other types of information produced by brokerage firms, such as whether or not the broker has access to informed order flow,” Egan et al found.

Where Mattli finds that brokers worry less about protecting their personal and professional reputations today, in part because they are employees rather than partners in small firms, Egan et al found that reputation matters to investors.

“A one percentage point increase in the number of traders engaging in misconduct (roughly one additional trader for a median-sized brokerage firm) is associated with a 2% decline in the brokerage firm’s trading volumes,” they write.

Dynastic Precautionary Savings

Uncertainty about a child’s success or failure in adulthood may determine how much the parents try to save during their own working years and how much they refrain from spending in retirement.

That statement may seem obvious, given most parents’ natural concern for their children. But new research suggests that this motive may be stronger than the usual explanations for frugality among retirees, such as their desire to hoard money against the risk of living too long or needing long-term care.

New York University economist Corina Boar calls this type of thrift, “Dynastic Precautionary Savings,” in her paper of the same name (NBER Working Paper 26635). She claims that parents generally create and keep a safety net for their children from roughly the time children enter the workforce until the parents die, about 30 years later.

“Parents of children younger than 40 consume on average $2,528 less per year because at that stage most of children’s income uncertainty is yet to be resolved,” Boar writes. “Holding everything else equal, the consumption of a parent whose child is a construction worker is 2.5% lower than the consumption of a parent whose child is a services worker because of the dynastic uncertainty difference.”

Boar’s theoretical model predicts that “16.7% of total wealth is held for dynastic precautionary reasons, and that children’s income risk is the main driver of intergenerational transfers.” It also predicts that this parental savings accounts for about one-fourth of the adult children’s own cushion against a big drop in income.

Unintended Consequences of a Declining Population

It’s America’s low fertility rate, not just the jumbo size of the baby boom generation, that’s causing fiscal imbalances in government programs, demographers will tell you. Falling fertility and shrinking populations is, in fact, expected to act as a drag on economic growth in all of the wealthy industrialized countries.

“The emergence of negative population growth in many countries… has profound implications for the future of economic growth,” writes Charles I. Jones of Stanford’s Graduate School of Business in his new paper, “The End of Economic Growth? Unintended Consequences of a Declining Population” (NBER Working Paper 26651, January 2020).

In Jones’ view, we’re nearing a tipping point on declining human replacement rates. “If society waits too long to adopt good institutions, the optimal allocation switches from one of sustained exponential growth in population, knowledge, and living standards to one of stagnation and an empty planet,” he warns.

Long-term improvement in living standards could depend on whether a smaller population can manage to generate the innovation needed to deal with future economic threats. Jones ends with a suggestion that automation—perhaps artificial intelligence—could offset the reduced number of human innovators.

Unhappiness and Age

People in their 50s—those bearing the most responsibility, debt, and dependents—are less happy than people younger or older, according to David G. Blanchflower, an economist at Dartmouth College. In “Unhappiness and Age” (NBER Working Paper 26642), he writes, “There appears to be a midlife crisis.”

Blanchflower gathered data on fifteen different aspects of unhappiness among nearly ten million respondents across forty European countries and the United States. Those aspects included “despair; anxiety; loneliness; sadness; strain, depression and bad nerves; phobias and panic; being downhearted; having restless sleep; losing confidence in oneself; not being able to overcome difficulties; being under strain; feeling a failure; feeling left out; feeling tense; and thinking of yourself as a worthless person,” according to the paper.

While there has always been a midlife crisis, Blanchflower believes, the 2008 Great Financial Crisis made the situation worse, especially for people living in rural areas, dependent on manufacturing jobs, and with less than a college education. Urban areas bounced back after the crisis, but mortality rose in rural areas. “The death rate in rural areas from heart disease, cancer, unintentional injury, chronic lower-respiratory disease, and stroke” was much higher than in urban areas.

While the age-adjusted suicide rate in urban counties in the U.S. rose 16% between 1999 and in 2017, it rose 53% in rural counties, Blanchflower’s data shows. By 2017 the suicide rate in rural counties (20 per 100,000) was nearly double that of urban counties. Drug-overdose death rates were higher in cities in 1999, but by 2015 it was higher in rural areas.

Linking his findings to the political arena, Blanchflower asserts that President Donald Trump in the U.S. and Prime Minister Boris Johnson in the U.K. recognized this despair and leveraged it into political victories. “Areas that were left behind voted for Trump and Brexit,” the paper says. “In both instances the votes for change were positively correlated with the unemployment rate, low life expectancy, drug use, the smoking rate, the obesity rate and how poor the area was.”

Why Are 401(k)/IRA Balances Substantially Below Potential?

While 401(k) retirement plans have helped millions of workers amass trillions of dollars in wealth over the past 35 years or so, millions of participants in those plans fail to accumulate enough savings by age 65 to finance their retirements.

In a recent paper, “Why Are 401(k)/IRA Balances Substantially Below Potential?” Alicia Munnell and Anqi Chen of the Center for Retirement Research at Boston College, and Andrew Biggs of the American Enterprise Institute quantify and explain that failure.

“Most workers have 401(k)/IRA balances at retirement that are substantially below their potential,” they write. “For example, a 25-year-old median earner in 1981 who contributed regularly [6% of pay with a 3% employer match] would have accumulated about $364,000 by age 60, but the typical 60-year-old in 2016 had less than $100,000.”

They identify four drivers of this shortfall—the fact that the 401(k) system is relatively new, the fact that people don’t always work for an employer that offers a 401(k) plan, so-called “leakage,” which refers to withdrawals from plan balances during job-changes, and fees that act as a drag on accumulation.

Of those factors, immaturity of the 401(k) system is the biggest problem, they found. On average, it shaves $116,200 off the $364,000 ideal accumulation. Inconsistent contributions, which is related to the “coverage gap” (only about half of workers have access to a plan at any given time), reduces accumulations by another $111,600.

Leakage and fees have less of an impact. Leakage—hardship withdrawals, for instance—reduces the ideal balance by $30,600. Fees, which have fallen in recent years, reduce the ideal balance by only $13,400, the authors found.

Roth 401(k)s: Appealing but Impractical

Posted on February 13, 2020 by Kerry Pechter -

The lives of retirees would probably be simpler if Roth IRAs and Roth 401(k)s replaced tax-deferred traditional IRAs and 401(k)s. Minimum annual distributions (“RMDs”) after age 72 (under the new tax rules) wouldn’t be necessary, and retirees would be relieved of the tax bills that the annual distributions bring in their wake.

Nor would anyone feel compelled to convert a traditional IRA to a Roth IRA—a labor-intensive process often recommended to high net worth retirees as a way to minimize taxes in retirement.

Economists Stephen Zeldes of Columbia University and Mattia Landoni of Southern Methodist University suggest another reason for switching to an all-Roth regime. (Read their paper here or here.)

These two economists observe that tax deferral has caused the accumulation of $3 trillion of additional assets (the present value of taxes on future RMDs) into 401(k)s and traditional IRAs, including rollover IRAs. The money is there, in effect, because the government hasn’t taken taxes out of it yet. In the two economists’ opinion, the government is paying too much in fees on that money.

Zeldes and Landoni calculate that if Roth 401(k)s and Roth IRAs replaced the status quo, or if the government paid institutional-level fees on its investment in 401(k)s and IRAs, the government would save enough money to give every saver a 6% match on their contributions.

“We estimate that tax deferral increases demand for asset management services by $3 trillion, causing the government to pay $20.7 billion [per year] in corresponding annual fees. Tax deferral in our model produces a larger asset management industry, higher taxes, and lower social welfare,” Zeldes and Landoni write.

I agree that tax deferral creates complexity, and that the savings from federally-enhanced economies of scale should benefit individual investors, not intermediaries. But the retirement industry has consistently fought to preserve the status quo, for the same reason the two economists want to change it.

The benefits of the current system to the retirement industry are huge, if difficult to calculate precisely because of feedback effects. To get a handle on it, I look at the estimated “tax expenditure” for individual and group retirement—the taxes the government doesn’t collect on contributions or gains—and assume that it translates into extra assets under management and fee revenue that the financial industry would not have received in the absence of tax deferral.

For the five year period, inclusive of years 2019 through 2023, the Joint Committee on Taxation estimates that the tax expenditure for defined contribution plans will be $775.6 billion, while the tax expenditure for traditional IRAs will be $100.9 billion and for Roth IRAs $44.5 billion. The Center for Retirement Research at Boston College recently calculated that fees reduce 401(k) account balances by about 10%. Fees on rollover IRAs at brokerage firms may be higher than fees in 401(k) plans.

(In their model, Landoni and Zeldes assume that the foregone taxes for Roth IRAs and traditional IRAs end up the same in the long run. That’s why they prefer to focus on the impact of fees, where a switch to Roth accounts would be demonstrably cheaper for the government.)

Ironically, it’s their lack of RMDs, which are desirable for the owner, that disqualifies Roth accounts as an viable alternative to traditional accounts under current law. Lack of RMDs makes Roth accounts effective vehicles for inter-generational transfers, but not good vehicles for the provision of retirement income.

Here’s why. If the public policy goal of tax deferral (and the tax expenditures associated with it) is to help people generate more income during retirement, then RMDs are essential to the achievement of that goal. They force the quasi-annuitization of savings and discourage retirees from using tax-deferred accounts for bequests. Ultimately, the government hopes that, if more Americans save, fewer will become dependent on government entitlement programs in their old age. There’s a method to the madness.

Landoni and Zeldes suggest that non-taxable RMDs could be added to Roth accounts to help achieve the policy goal described above. But that would remove a selling point of Roth accounts—flexibility in taking distributions. Financial advisers like the flexibility of a Roth. They have long advised retirees to tap tax-free Roth IRAs last—after spending down taxable and tax-deferred assets. Such delays naturally increase the chance that a Roth IRA will pass to a beneficiary.

Many people glibly say that RMDs exist because “the government wants its money back.” I doubt it. The federal government has shown that it can create all the money it needs whenever necessary. If Uncle Sam were so desperate for our tribute, you would see revenue agents going house-to-house every spring, demanding every last nickel or dime.

You might even see angry taxpayers pour boiling water on the tax collectors’ heads from second-story windows—as happened in my own neighborhood during the John Fries tax rebellion of 1798.

Do We Live in the Best or Worst of Times? (Symptoms of Rural Angst)

Posted on February 12, 2020 by No Author -

MassMutual to offer student debt relief program

Posted on February 6, 2020 by Editorial Staff -

Massachusetts Mutual Life Insurance Company (MassMutual) is offering a student loan refinancing program through the workplace retirement plans it administers. The program is provided through a fintech firm, CommonBond, and will be available to some 2.6 million participants.

Last year, MassMutual began offering CommonBond’s refinancing program through the insurer’s 8,500 plus network of financial advisers.

An estimated 44 million Americans owe $1.5 trillion in student loan debt, according to the Federal Student Aid Office of the U.S. Department of Education, a MassMutual release said. Debt burdens vary widely but that figure implies an average debt of $37,000 per person and a monthly payment of $393.

“CommonBond’s refinancing program opens the door for individuals with student loan debt to achieve other financial objectives, such as insurance coverage, home purchase, or retirement savings,” the release said.

The CommonBond program is available on MassMutual’s MapMyFinances financial wellness tool, which helps users prioritize their personal finance and benefits needs based on their family situation and budget. MassMutual introduced a separate student loan repayment and management program last year.

Brighthouse, Athene announce FIA innovations

Posted on February 6, 2020 by Editorial Staff -

Competition and the low interest rate environment continues to drive innovation in the fixed indexed annuity market as companies try to dress up their products and avoid a trend toward commoditization.

A principal driver of FIA sales is the issuer’s ability to tempt clients with the potential for higher returns by offering the highest possible participation rates or caps, which determine how much of the index gain will be credited to the contract owner.

The average cap rate on an FIA account that’s linked to the S&P500 today is only 3.94%, according to Sheryl Moore at Wink Inc., which collects and analyzes data on the annuity markets. FIA issuers are therefore under pressure to modify their crediting methods to make the potential upside look bigger than that.

Index-linked annuity manufacturers all work under similar financial parameters, but there’s room for creativity. In recent years, banks have created exciting-sounding hybrid or custom indices. Some of these indices contain mechanisms or asset allocations that reduce their volatility.

Because these volatility-controlled indices pose less risk of big returns or big losses, the cost of buying options on their performance is less than the cost of buying options on the S&P500 or Russell 2000 indexes. The issuers can thus afford to buy richer options, a tactic that allows them to advertise higher caps or participation rates.

This week there were two new developments on the FIA product front. Brighthouse Financial (formerly MetLife’s retail business) announced the issue of its first FIA. In the past, Brighthouse has issued registered index-linked annuities (its Shield series) but not an FIA. Also this week, Athene added two new custom indices as crediting options on its existing FIAs.

Brighthouse Financial’s first FIA

Brighthouse Financial, Inc. is entering the independent marketing organization (IMO) distribution channel with Brighthouse SecureAdvantage 6-Year Fixed Index Annuity (FIA). The exclusive distributors of the product will be the Market Synergy Group, a large IMO.

The contract allows investors to link to the performance of two widely used indexes, the S&P500 Index or the Russell 2000 Index. They can choose a “point-to-point” crediting method that gives them the net gain, if any, of the index at the end of six years.

Alternately, they can choose an “annual sum” crediting method where the gains or losses of each contract year are added up to produce the total interest credit. Investors who choose this crediting method are guaranteed that they won’t be hit with a record loss greater than 10% in any contract year.

Two new indices for Athene FIAs

Athene USA has added the Nasdaq FC Index, sponsored by Bank of America, and the AI Powered US Equity Index, sponsored by HSBC, to fixed indexed annuities issued by Athene Annuity and Life Company, a subsidiary of Athene.

The Nasdaq FC Index “employs intra-day rebalancing,” an Athene release said. The AI Powered US Equity Index uses IBM Watson and EquBot artificial intelligence to attempt to identify large-cap stocks that are poised for growth.

The Nasdaq Fast Convergence Index is powered by Fast Convergence technology (patent-pending), which allows it to adapt faster to changing market conditions. It applies this high-speed technology to the stocks in the Nasdaq-100, including Apple, Amazon, Google and Netflix. Like the AI Powered US Equity Index, the Nasdaq FC Index uses an internal volatility-control mechanism that allows the issuer to offer higher participation rates.

“By systematically monitoring market moves and rebalancing throughout the trading day, FC technology more efficiently controls the realized volatility of an index with the goal of higher participation rates in fixed indexed annuities,” the Athene release said

The AI Powered US Equity Index, sponsored by HSBC, is “the first and only rules-based equity strategy to use IBM Watson to turn data into investment insight,” the Athene release said. Developed by EquBot, AiPEX continuously monitors the direct and indirect market data that’s created every day to evaluate and score each of the 1,000 largest U.S. publicly traded companies on a monthly basis.

After identifying stocks whose prices are poised for growth, it then uses a three-step equity selection process to rebalance its portfolio monthly. It tries to reduce the impact of short-term volatility in the equity markets through daily re-allocations between the chosen equities and a cash component.

What Pre-Retirees Intend to Do vs. What Retirees Actually Do

Posted on February 6, 2020 by No Author -

A New Kind of Old Folks’ Home

Posted on February 6, 2020 by Kerry Pechter -

Entering retirement as frisky 60-somethings with exotic travel on their minds, most affluent baby boomers don’t think about the decades ahead, when they might not be able to button their own collars, cook their own meals or ambulate without a walker.

But if you’re advising older people on their finances, you know that many of your clients will eventually need a home health aide, assisted living services, or long-term nursing home care. Preparation for such expenses always beats procrastination.

As a fiduciary and a fee-based or fee-only planner, you may also feel obligated to talk to clients about Medicare, supplemental health plans, or the five kinds of Continuing Care Retirement Communities (CCRCs)—even if you don’t bill explicitly for doing so. For the elderly, health care decisions are financial decisions. The costs of treating injury or chronic illness, which may surpass $10,000 a month, can throw a family into turmoil, lead to panicky decisions, and decimate a family’s accumulated wealth if not properly anticipated.

In an occasional series of articles in RIJ, we’ll review the pros and cons of the various solutions to the long-term care dilemma. This week we’ll look at one CCRC, a “fee-for-service” facility where near-retirees can prepare for their long-term housing and medical care needs, instead of waiting until a broken bone or a loss of mental sharpness precipitates a crisis decades from now.

“Ann’s Choice” is a sprawling 1,600-unit apartment, assisted living and nursing home complex in Warminster, a suburb north of Philadelphia. It was built in 2002 on the site of an 18th century farm owned by Quakers Bartholomew Longstreth and his bride, Ann Dawson—the facility’s namesake. The stone houses, fields, woods, and unpaved turnpikes of the colonial era are now a matrix of condominiums, mini-malls and four-lane boulevards.

“Ann’s Choice,” Warminster, PA

“It’s almost like living on a cruise ship,” said Ryan Doherty, a sales counselor who leads tours of Ann’s Choice for prospective tenants, in describing daily life in the 103-acre complex. “People will get up, get dressed and leave their apartments in the morning, and sometimes not come home until the evening.”

On a recent Monday, Doherty was guiding a tour of “Keystone Clubhouse,” one of four multi-use buildings linked by sky-bridges to 17 multi-story apartment buildings. He led the way past administrative offices, a roomful of women learning bridge, a music room, a clubroom with wing chairs, and a large meeting room “where people can fly their drones if they want to,” Doherty said.

Crossing a sky-bridge to one of the residential buildings, Doherty led the way down a carpeted hall where niches of family pictures personalized some of the apartment entrances. By one door were 1970s-era framed photos of a statuesque, auburn-haired woman in the satin bodice and mesh stockings of a men’s club hostess, posing with entertainer Sammy Davis, Jr., and boxer Muhammad Ali.

Like a real estate agent, Doherty showed a visitor the “Fairmont,” the “Hastings” and the “Brighton” sample apartments. All are designed for independent living couples or singles. Each has a kitchen and one or one-and-a-half baths. At 701 square feet, the single bedroom Brighton was the smallest. The other two, at about 1,000 square feet, had two bedrooms. Residents furnish their own units. There are move-in services. Pets are OK; smoking isn’t.

Ann’s Choice residents might remain in the independent living section for the rest of their lives, receiving visits as needed from a housekeeper, health aide, nurse, emergency medical technician or doctor. Many, however, will need help with “activities of daily living” or round-the-clock attention, and will have to move to an assisted living studio apartment or room, to the nursing care area, to the “Memory Care” facility for Alzheimer’s patients, or temporarily to a nearby hospital.

All of the residents have Medicare coverage and a supplemental plan. Ann’s Choice is one of 20 Erickson Living Network of Communities, whose 27,000 residents nationwide must enroll in the Erickson Medicare Advantage HMO unless they have their own Medi-gap policy. Residents who arrive with long-term care insurance coverage are encouraged to keep it.

Paying for it

As a “Type C” CCRC, Ann’s Choice follows a fee-for-service or a la carte expense model. (See box.) It requires an upfront investment in an apartment and a demonstration of enough financial assets to cover future care. Residents who meet the entrance requirements have a near-guarantee of lifelong care.

Ann’s Choice’s costs are geared to match the financial resources of mass-affluent or middle-class couples. Most residents come from the surrounding suburbs and are downsizing from single-family homes. Doherty said many have assets of about $500,000, half of it in home equity and half in invested assets.

“We have tradesmen and we have white-collar people,” he told RIJ. “And the most expensive apartments are located alongside the least expensive apartments.”

The process starts with a $1,000 fee that secures a place on Ann’s Choice’s waiting list. During the waiting period, applicants can access the fitness facilities and restaurants; they want you to get acclimated. Then there’s the purchase of an apartment and a monthly service plan.

The most expensive apartment at Ann’s Choice is a “luxury two-bedroom, two-bath unit with a sunroom/den” for between $476,000 and $636,000. The least expensive is a studio apartment for between $117,000 and $153,000. The ranges indicate differences in locations and features such as balconies, patios or bay windows.

The down payment is 90% refundable to departing residents or their heirs, unless the resident has drawn on its value to pay for services. This is characteristic of Type-C CCRCs, which differ in their treatment of lodging expenses from Type A (irrevocable down payment) and others (partial reimbursement, monthly rental, personal ownership of a purchased unit).

The deposit works a bit like a hybrid fixed annuity with a long-term care rider. That is, the value of the annuity serves as a deductible for the long-term care insurance, and is tapped only if long-term care is needed. If a resident leaves Ann’s Choice, he or she may not get the 90% back immediately, but may have to wait until Ann’s Choice receives fresh funds from a new entrant. That may pose a potential risk factor for residents, but Doherty said Ann’s Choice has a current occupancy rate of 99%. Giving the rising number of retirees in the U.S., filling apartments probably won’t be difficult.

Each style of apartment comes with a corresponding monthly service fee ranging from $2,018 to $3,186 per month. That’s for one person; a spouse or second person costs an additional $897 per month. Monthly fees inflate by 3.5% every year, thus doubling in 20 years, even without an increase in level of care.

The service fee includes the cost of utilities (except telecom), exterior maintenance, and property taxes, along with 30 restaurant meals per month, on-call emergency responders, fitness club membership, and dozens of club activities ranging from bocce to mah jongg to poker to politics.

Incidentals and options like parking spots, visitor meals and lodging, housekeeping and wheelchair rental have separate fees. If a couple goes to Florida for three months in the winter, they get a $36-a-day reduction in their monthly service fee.With 1,600 units, Ann’s Choice is three to five times the size of most CCRCs, so its residents enjoy economies of scale.

Once someone moves to one of the assisted living, skilled nursing, or memory care units in the “continuing care” center, the monthly fees can rise to $6,000 a month or even as high as $14,000 a month, Doherty told RIJ. Again, a Type-A or Type-B CCRC would involve the pre-payment of some or all of those expenses, but a fee-for-service Type-C CCRC like Ann’s Choice doesn’t.

Pros and cons

Doherty said that many people who apply for entrance to Ann’s Choice bring their financial advisers to the meeting. There are no loans involved, but Ann’s Choice wants to know upfront if an applicant’s resources—a combination of investments, long-term care insurance, pensions, Social Security benefits—will be enough to pay whatever expenses arise in the future.

That said, a certain number of beds at Ann’s Choice are reserved for Medicaid patients. According to Doherty, few or no long-term residents are forced to leave for inability to pay; the facility has a “benevolent fund” to help out. Residents are contractually obligated not to give their money away to children or charity after they get in.

The best candidates for a Type-C CCRC like Ann’s Choice will clearly be people who like to plan ahead, who want the ease of condo living, and who like the idea of a bundled solution to their future medical needs. They will have embraced the concept that their home equity will be spent on long-term care or go to heirs, as the situation requires or allows.

Financial advisers should be aware that the management or disposal of the resident’s “outside” assets is subject to a subtle restriction. According to the Ann’s Choice contract, the resident may not “divest yourself of, to sell, or transfer any assets or property interests (excluding expenditures for your normal living expenses) that reduces the assets that you or your representative disclosed as available assets for you on admission, without having first obtained our written consent.”

That doesn’t mean that Ann’s Choice tries to monitor its residents’ finances. “If you were to exhaust your assets and want to spend down the entrance deposit you had put down upon making the move to Ann’s Choice, we would perform an audit to ensure that the money was spent in an honest fashion,” Doherty said.

As an adviser, you would hope that no client of yours would leap into a Type-C CCRC commitment before letting you or an attorney review the contract. But Doherty pointed out that it’s more common for people to wait too long to apply for entrance to Ann’s Choice than to act too hastily.

Members of the Silent Generation (born pre-1946) are apparently famous for balking at the idea of moving to a “home” and losing independence. Many Boomers will undoubtedly feel the same way. “It’s a hard pill for some people to swallow,” Doherty said. But if they wait until they need assisted living services, or if they’ve already spent down too much of their savings, they may not qualify for admission.

As an adviser, the more you know about the financial aspects of downsizing from a family home to a CCRC, the better you can help your clients make this complicated transition efficiently.

Industry-led ‘Retirement Income Institute’ to Launch

Posted on January 30, 2020 by Kerry Pechter -

In the latest stage of its campaign to break through the fog of misinformation that keeps annuities obscure, the industry-led Alliance for Lifetime Income has created an academic spin-off to bring new and existing pro-annuity research to the world’s attention—in language that the world can easily understand.

The new project is called the Retirement Income Institute, or RII. The Alliance for Lifetime Income, a 501c (6) non-profit educational organization, was started more than two years ago by a slew of the largest life insurers, asset managers and other big financial services firms with stakes in the annuity market.

Harris

“The ALI created the Retirement Income Institute for the purpose of fostering scholarly research into retirement income and particularly protected lifetime income—the regular and reliable payments that last throughout your lifetime, like payments from annuities, pensions and Social Security,” said Seth Harris, a former senior Department of Labor official who is Senior Advisor to RII and academic Fellow of ALI.

“The Institute will foster new original scholarly research and also translate and glean insights from existing research on retirement income,” he added. “It’s going to help people who are not familiar with scholarly language, to be able to learn from and take action based on the valuable insights and findings, that scholars have developed over many years.”

Harris said that the RII will do a combination of commissioning and funding new research on annuities, soliciting specific authors to do specific research, publishing reviews of past research, translating existing research into plain language white papers, and facilitating data-sharing between companies and academics for research purposes.

The primary audience for the RII’s output will be members of what Harris called the retirement income “ecosystem,” including manufacturers, distributors and advisers. They can use the information to develop talking points, fine-tune marketing angles and generally bolster the case for annuities with the public.

The information will be disseminated through the ALI website and in other ways. There will be a conference in partnership with MIT, Harris said. The RII will not publish a journal but will encourage its scholars to publish RII-sponsored research in academic journals.

For decades, academics from Menahem Yaari to Moshe Milevsky to Wade Pfau have generated terabytes of research that proves the more or less self-evident point that retirees who buy guaranteed lifetime income products—i.e., annuities—are less likely to run short of money before they die.

But for reasons that include low interest rates, the crowding-out effect of Social Security, conflict with advisers’ business models, the complexity and cost of insurance products compared with investments, and negative headlines about the mis-selling of annuities, annuities are either unknown to or ill-favored by the public. Ironically, that’s happening when millions of retired Boomers need tools for converting savings to income.

The ALI is the annuity industry’s attempt over the past two years, at no small cost, to change the tone of that conversation through public events, a traveling visual reality booth, admirable spokespeople, ads on National Public Radio, and even sponsorship last summer of a concert tour of the U.S. by the Boomers’ beloved Rolling Stones.

ALI members include AIG, Allianz, Brighthouse, Capital Group/American Funds, Equitable, Franklin Templeton, Global Atlantic, Goldman Sachs, Invesco, Jackson National Life, J.P. Morgan Asset Management, Lincoln Financial Group, Macquarie Group, MassMutual, Milliman, Pacific Life, PIMCO, Protective, Prudential, State Farm, State Street Global Advisors, TIAA, Transamerica and T. Rowe Price.

The ALI will add a couple of firms to this list shortly, Harris told RIJ. (New York Life and Northwestern Mutual Life, major manufacturers of single-premium immediate annuities, have been conspicuously absent so far.)

At least a dozen prominent retirement income experts from universities and think tanks have lent their gravitas to the RII by agreeing to serve on its Scholars Advisory Group. Jonathan Forman and Leora Friedberg (see below) will chair the group.

“Jonathan and I both joined RII in the fall,” Friedberg told RIJ. “There will be an effort to connect researchers and the industry. The connections can go both ways. We’ll be translating scholarly research in this area—translating research that doesn’t have as wide a reach as it should. Another direction is to have the industry speak more to researchers and help to direct the research, or to provide data for the research.”

Alicia Munnell, director of the Center for Retirement Research at Boston College, told RIJ that the RII offered her a leadership position, but she said she declined for lack of “room on her plate.” RIJ was told that at least some of these academics will be paid, and there will be funding for research, but RII did not say who will be paid or how much they might be paid.

Here are the 12 co-chairs and members of the Scholars Advisory Group in alphabetical order, including six (*) who were already Fellows of the Alliance for Lifetime Income:

Co-chair: Jonathan B. Forman, University of Oklahoma College of Law
Co-chair: Leora Friedberg, Associate Professor of Economics and Public Policy, Frank Batten School of Leadership and Public Policy, University of Virginia
Andrew Biggs, Resident Scholar, American Enterprise Institute
Annamaria Lusardi, DenitTrust Endowed Chair of Economics and Accountancy, The George Washington University School of Business
*Ben Harris, Alliance Fellow, Executive Director, Kellogg Private-Public Interface, Northwestern University
*Bill Gale, Alliance Fellow, Arjay and Frances Miller Chair in Federal Economic Policy and senior fellow in the Economic Studies Program, Brookings Institution
*Gopi Shah Goda, Alliance Fellow, Senior Fellow and Deputy Director at Stanford Institute for Economic Policy Research
*Jason Fichtner, Alliance Fellow, Senior Lecturer, Associate Director, Johns Hopkins University School of Advanced International Studies
Julie Agnew, Richard C. Kraemer Term Professor of Business at William & Mary School of Business
*Michael Finke, Alliance Fellow, Dean and Chief Academic Officer, American College of Financial Services
Nora Super, Senior Director at Milken Institute Center for the Future of Aging
*Wade Pfau, Alliance Fellow, Professor of Retirement Income, The American College

Harris said that the RII 2020 research agenda will be four-fold: 1) New approaches to the annuity puzzle; 2) Optimizing annuities in a retirement portfolio; 3) Private sector solutions for legal and regulatory barriers to annuities in 401(k) plans; 4) Understanding differences in consumer behavior and decision-making.

2019 was a remarkable year for passive large-cap funds: Morningstar

Posted on January 30, 2020 by Editorial Staff -

Though the S&P 500 gained 31.5% in 2019, actively managed U.S. equity funds saw $41.4 billion in outflows last year. It was the sixth year of net outflows during the decade-long bull market, according to Morningstar’s report on U.S. mutual fund and exchange-traded fund (ETF) flows for full-year and December 2019.

Passive U.S. equity funds had $162.8 billion in inflows, finishing the year with a 51.2% market share based on total assets.

Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund, and net flow for U.S. ETFs shares outstanding and reported net assets.

Morningstar’s report about U.S. fund flows for the full-year and December 2019 is available here. Highlights from the report include:

Long-term funds collected $414.6 billion in 2019, more than double 2018’s $168.3 billion. Money market flows received $547.5 billion in inflows, the group’s best year since 2008’s record $593.6 billion. Thanks to rising markets, long-term assets grew in 2019 to $20.7 trillion from $16.9 trillion.
The strong long-term inflows in both December and for all of 2019 were due almost entirely to record inflows for both taxable-bond and municipal-bond funds, which collected $413.9 billion and $105.5 billion, respectively, for the year, and $50.3 billion and $10.2 billion, respectively, for December. With greater 2019 flows than their active counterparts, passive taxable-bond funds now have a third of that market.
In December, investors directed $25.3 billion of inflows to passive U.S. equity funds, but $23.5 billion of outflows from actively managed U.S. equity funds.
Among the top-10 largest U.S. fund families, Vanguard saw its best month of the year in December with inflows of $22.3 billion. Its $183.3 billion in inflows for 2019 topped 2018’s $162.9 billion, and the firm’s long-term assets grew by $1.1 trillion to $5.3 trillion—a 25.7% market share.
Vanguard Total Bond Market Index II saw the greatest inflows of 2019 with $29.7 billion. This fund is only available to investors through target-date funds, and this same dynamic likely propelled the $29.0 billion of inflows into Vanguard Total International Bond Index. Both currently have a Morningstar Analyst Rating of Silver.
© 2020 RIJ Publishing. All rights reserved.

Demography of Annuity Ownership in U.S.

Posted on January 30, 2020 by No Author -

Honorable Mention

Posted on January 30, 2020 by Kerry Pechter -

2019 was a remarkable year for passive large-cap funds: Morningstar

Passive U.S. equity funds had $162.8 billion in inflows, finishing the year with a 51.2% market share based on total assets.

Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund, and net flow for U.S. ETFs shares outstanding and reported net assets.

Morningstar’s report about U.S. fund flows for the full-year and December 2019 is available here. Highlights from the report include:

Long-term funds collected $414.6 billion in 2019, more than double 2018’s $168.3 billion. Money market flows received $547.5 billion in inflows, the group’s best year since 2008’s record $593.6 billion. Thanks to rising markets, long-term assets grew in 2019 to $20.7 trillion from $16.9 trillion.
The strong long-term inflows in both December and for all of 2019 was due almost entirely to record inflows for both taxable-bond and municipal-bond funds, which collected $413.9 billion and $105.5 billion, respectively for the year, and $50.3 billion and $10.2 billion, respectively for December. With greater 2019 flows than their active counterparts, passive taxable-bond funds now have a third of that market.
In December, investors directed $25.3 billion of inflows to passive U.S. equity funds, but $23.5 billion of outflows from actively managed U.S. equity funds.
Among the top-10 largest U.S. fund families, Vanguard saw its best month of the year in December with inflows of $22.3 billion. Its $183.3 billion in inflows for 2019 topped 2018’s $162.9 billion, and the firm’s long-term assets grew by $1.1 trillion to $5.3 trillion—a 25.7% market share.
Vanguard Total Bond Market Index II saw the greatest inflows of 2019 with $29.7 billion. This fund is only available to investors through target-date funds, and this same dynamic likely propelled the $29.0 billion of inflows into Vanguard Total International Bond Index. Both currently have a Morningstar Analyst Rating of Silver.

Alight Financial Advisors hires Edelman Financial Engines

Edelman Financial Engines has agreed to provide financial planning and investment management services to clients of Alight Financial Advisors, a unit of Alight Solutions, a benefits and payroll services provider.

Under the preferred agreement, FE will now offer integrated financial planning and comprehensive investment management services with a dedicated planner for employees of sponsors using AFA advisory services will receive services from Edelman Financial Engines’ national network of financial planners.

The enhanced offering expands the existing advisory services for retirement plans delivered through AFA by providing comprehensive, financial planning and investment management services, free of product conflict, to support employees with their personal finance decisions.

The newly available services include:

A dedicated financial planner who can work with employees in-person, over the phone or online.
Plans that can help employees reach specific goals.
Institutional investment management for all the household’s accounts, including IRA and taxable accounts.
Tax optimization, including investment specific tax efficiency; and
onsite education and planner programs at the employer’s offices.

Fidelity offers ‘real-time fractional shares trading’

Fidelity Investments, an online brokerage with more than 23 million retail accounts, says it will now offer “real-time fractional shares trading” of stocks and ETFs (also known as dollar-based investing). Investors will be able to trade as little as 0.001 of a share using Fidelity’s app for mobile phones with the iOS and Android operating systems.

Fidelity is the only brokerage firm to offer zero online commissions for stock and ETF trades, zero account minimums, zero account fees for retail brokerage accounts, a higher cash sweep rate versus the other largest online brokerage firms regardless of investable assets1, and continues to forgo payment-for-order-flow from market makers for stock and ETF trades, helping facilitate industry leading price improvement for customers.

In a release, Fidelity said it will execute all fractional trades in real-time during market hours, rather than at the end of a trading day or after consolidating multiple orders to trade full shares. Fractional share or dollar-based trades must be “market” or “limit order” types and are good for the day only. The service is available in eligible Fidelity retail accounts, including brokerage, HSAs, IRAs, and self-directed brokerage accounts via a workplace retirement plan.

Fidelity expects investors to use dollar-based trading to make round-dollar purchases of several stocks at the same time, or to practice dollar-cost averaging with automatic, periodic, round-dollar transfers from a bank account to a Fidelity brokerage account.

MetLife assumes $1.9 billion in Lockheed Martin pension liabilities

In a major pension risk transfer deal, a unit of MetLife, Inc. will provide annuity benefits worth about $1.9 billion to about 20,000 retirees and beneficiaries in Lockheed Martin Corp.’s defined benefit pension plans, MetLife announced this week.

Lockheed Martin, through its master retirement trust, purchased a group annuity contract from MetLife’s Metropolitan Tower Life Insurance Company in December 2019. The transaction will not change the amount of the monthly pension benefit received by the corporation’s retirees and beneficiaries.

Metropolitan Tower Life Insurance Company, rather than Lockheed Martin, will be responsible for making these monthly payments. No action is needed by retirees or beneficiaries. Lockheed Martin and MetLife will provide details to retired participants and beneficiaries whose ongoing payments will be made by Metropolitan Tower Life Insurance Company.

MetLife’s 2019 Pension Risk Transfer Poll projects that the market for transfers will continue to grow in 2020. More than three-quarters (76%) of DB plan sponsors with de-risking goals intend to completely divest all of their company’s DB plan liabilities at some point in the future, and 33% intend to do so in the next five years.

MetLife, through its subsidiaries, Metropolitan Life Insurance Company and Metropolitan Tower Life Insurance Co. manages benefit payments of more than $2 billion a year for more than 700,000 annuitants. Overall, MetLife was responsible for $47 billion of transferred pension liabilities as of Sept. 30, 2019.

MassMutual and Millenium Trust introduce 401(k) ‘sidecars’

Massachusetts Mutual Life Insurance Company now offers an emergency savings solution to every worker who participates in one of the insurer’s 401(k)s or other defined contribution plans. It will be available to more than 2.6 million participants in plans for which MassMutual is the administrator or recordkeeper.

The emergency savings fund product was created and will be administered by Millennium Trust Company, LLC, a which custodies automatic rollovers of small abandoned MassMutual 401(k) accounts to IRAs.

The solution will be available automatically through MassMutual’s MapMyFinances financial wellness tool. The accounts require a minimum deposit of $25 per month, are FDIC-insured, taxable and through Millennium Trust’s cash account sweep program earn a risk-free rate of return. The maximum amount workers can accumulate in their emergency account is $250,000.

MassMutual’s 2019 Workplace Financial Wellness Study found that 79% of employers say their workers are struggling financially. About half of employers estimate that at least 25% of their workers struggle financially and 15% of employers say at least half of their workers are plagued by financial woes, the study found.

The most prevalent employee financial problems cited by employers include credit card or other consumer debt, day-to-day expenses for housing and childcare, the inability to save and prepare for retirement, a lack of emergency savings, and high medical costs, according to the study.

You’ll love New York Life’s Super Bowl Ad

Posted on January 30, 2020 by Editorial Staff -

New York Life’s Super Bowl LIV television ad is infused with serious emotion. It defines the four kinds of love, as described in the New Testament. The ad will run between the first and second quarters of Sunday’s NFL championship between the Kansas City Chiefs and the San Francisco 49ers, broadcast on Fox.

In the 60-second spot, there’s a montage of people expressing philia (friendship), storge (familial love), eros (sexual love), and finally agape (charity, in the highest sense, or divine love). It’s pronounced “ah-GA-peh.” That’s the kind of love that motivates acts of generosity and selflessness—like, the ad tacitly suggests, buying a New York Life insurance product.

“Agape is the best,” wrote C.S. Lewis of “The Lion, the Witch and the Wardrobe” fame, “because it is the kind God has for us and is good in all circumstances… I can practice Agape to God, Angels, Man & Beast, to the good & the bad, the old & the young, the far and the near.”

The ad is a component of New York Life’s larger “Love Takes Action” campaign, which will run throughout 2020. The campaign will emphasize integrity and humanity, and the company’s purpose: “To be there when our policy owners need us,” according to the press release.

“The Agápē film recognizes the actions people take every day to protect their loved ones. It aims to remind Americans that they have the power to act on their love, whether through considerable hardships or the smallest and most personal gestures. Fortitude is required to build better futures and we want to celebrate love taking action with our policy owners, future customers, financial professionals, and employees,” said Kari Axberg, New York Life vice president, Brand Marketing, in the release.

This Sunday’s ad will be New York Life’s first Super Bowl ad since 1990. Decades ago, the company ran tongue-in-cheek TV ads staged on the grass of a real outdoor gridiron. A mock “offensive line” wearing “New York Life” uniforms helped the “quarterback”—a bespectacled husband in shirtsleeves—run for a touchdown.

Anomaly led the creative and production for the film, which was directed by Cole Webley of Sanctuary Content. There’s a voiceover by actress Tessa Thompson. She portrayed civil rights activist Diane Nash in the historical drama Selma, starred in the sports drama Creed, HBO’s Westworld, and Thor: Ragnarok and The Avengers.

Max Richter, whose musical interpretation of Agápē, performed by London’s Royal Philharmonic Orchestra, “captures the emotion of each distinct kind of love,” wrote the original score for the ad.

Tetris, Taxes and Retirement

Posted on January 29, 2020 by Kerry Pechter -

Taxes are often a retiree’s most vexing expense. That’s especially true for people who are debt-free. If bills are minimal and there’s no earned income, then property taxes, capital gains taxes, and taxes on superfluous IRA distributions loom larger in the retiree’s mind.

That creates opportunities for financial advisers. If you’re not currently a decumulation tax maven, there’s no shortage of books, software and webinars that can make you one. Such advice can save your clients money and make your client-relationships “stickier.” Tax-minimization is challenging, but it pays off.

Reichenstein

When clients have taxable, tax-deferred and tax-free (i.e., Roth) accounts, helping them take withdrawals in the most tax-efficient way is a good place to start. You’ve probably heard or read that spending from taxable, tax-deferred and tax-free (Roth) assets, in that order, works best.

But that tradition, like the 4% withdrawal rule, is being questioned. William Reichenstein, an academic known for his work with William Meyer on Social Security claiming strategies, suggests in a recent book (and companion software) that the conventional wisdom is often suboptimal. Different spending sequences, he says, especially those that take into account potential taxes on Social Security benefits, can result in subtle annual tax savings that lead to big savings in the long run.

In “Income Strategies” (Retire Inc., 2019), Reichenstein describes several strategies, from the simple to the complex; we’ll share two of the simpler illustrations below.

The goal of his book, Reichenstein writes, “is to demonstrate how coordinating 1) a smart Social Security claiming strategy with 2) a tax-efficient withdrawal strategy from the financial portfolio can either lengthen the longevity of a retiree’s financial portfolio or increase the after-tax value of the remaining portfolio for the retiree’s heirs.”

A game of tax ‘Tetris’

To show flaws in the conventional wisdom, Reichenstein hypothesizes a retiree in her mid-60s. She has three accounts to draw from: a taxable account worth $549,601, a tax-deferred account (TDA) worth $916,505 and a Roth IRA worth $234,928. She intends to spend $81,000 a year, or about 5% of her initial savings. She’s assumed to be invested 100% in bonds earning 4%. Social Security and inflation are left out for the sake of simplicity. Her tax brackets are fixed at 2013 levels.

If this retiree followed the conventional wisdom strategy, she would spend from her taxable account for the first seven years and a half years. Then she would spend from her TDA for 16 years. Lastly, she would spend from her Roth IRA. Her portfolio is projected to last until she’s about 98 years old.

Reichenstein notes that the traditional approach renders her tax rate at no more than 15% during the first period of retirement (because withdrawals will be mainly return of principal. It then concentrates her tax burden during years eight to 24, when withdrawals from her TDA will all be taxed as ordinary income at a marginal rate of 25%. In the last eight years, her Roth distributions aren’t taxed at all.

Alternately, he writes, the woman could have reduced her lifetime taxes and added up to two years and four months (or increased her legacy proportionately) by mixing some highly-taxed TDA distributions into the low-tax first seven years and last eight years. She could use her least-taxed years to convert TDA assets to Roth IRA assets.

The mixing strategy would, in effect, smooth the woman’s tax burden over her retirement. Each year, she would distribute just enough of her highest-taxed assets to “fill” her lowest tax brackets, thus lowering the effective tax rates on those assets, and using the least-taxed assets to fill her higher brackets. Mentally, it’s in the spirit of the computer game Tetris. But you’re snugging blocks of assets into place instead of colored blocks.

All of this would be much more complex and labor intensive if each of the accounts held a different mix of asset classes, each class appreciating at a different rate, and if the adviser were trying to rebalance the portfolio back to a target asset allocation, or trying to harvest gains or losses. Also, on first reading, it’s difficult to tell how much the tactic of “filling” tax brackets improves a client’s overall average tax rate. Reichenstein’s software presumably offers more definitive answers.

A pea and walnut shells

Later, Reichenstein addresses taxes on Social Security benefits. He hypothesizes the Smiths, a mass-affluent married couple filing jointly. Both are over age 65. They have $18,932 in taxable income and $55,000 in Social Security benefits.

To find out how much tax they’ll owe on their Social Security benefits, they have to calculate their “Provisional Income,” which is $18,932 plus half of Social Security ($27,500) or $46,432. (Pay close attention to what comes next. This is like following the path of a pea between three walnut shells.)

By statute, for the first $32,000 in Provisional Income, no Social Security benefits are taxable. For each dollar of PI between $32,000 and $44,000, $0.50 of Social Security benefits is taxable (0.5 x $12,000 = $6,000), and for each dollar of PI above $44,000, $0.85 of benefits is taxable (0.85 x $2,432 = $2,068), until 85% of benefits is taxable, which is the maximum. So, $8,068 of the Smiths’ Social Security is taxable.

The Smith’s adjusted gross income is therefore $18,932 plus $8,068 or $27,000. That happens to be the same as their household standard deduction under the Tax Cut and Jobs Act of 2017. So they owe no income tax for the year.

There’s lots more in Reichenstein’s book—about minimizing Medicare surcharges, converting traditional IRAs to Roth IRAs at opportune times, deciding whether a retiree or an heir should pay the taxes due on tax-deferred assets—than we can summarize here.

LifeYield and Keebler & Associates

To compare Reichenstein’s methods with those of other practitioners in the field, RIJ talked with two senior executives at LifeYield, a software-as-a-service company that shows advisers how to make retirement distributions more tax-efficient.

Sharry

“We follow the conventional wisdom,” said Jack Sharry, the chief marketing officer. “But we also maintain the client’s asset allocation. Our software optimizes for asset location and makes recommendations consistent with overall theory.”

“We hit the cash target each year and align the portfolio to the household allocation. We don’t let the allocation drift,” Tom Prior, executive vice president for Advisor Support, told RIJ.

“We quantify the tax benefit of each trade, looking at the most beneficial, then the next most beneficial. It’s not a one-off process,” he said. “Improvements are added each year, which makes the adviser-client relationship stickier. We also create a tax efficiency score for each household. The average is 53%.”

As for converting traditional tax-deferred IRAs to tax-free Roth IRAs, Prior said, “We find that a lot of people talk about it but not a lot do it” after seeing the high initial tax cost of conversion. It’s important to see tax decisions within the context of the whole household’s finance, Sharry and Prior stressed.

Grant Keebler of Keebler and Associates, LLC, a tax advisory firm led by Robert Keebler, CPA, in Green Bay, WI, told RIJ that the conventional drawdown wisdom “is the easy and generally correct advice. However, we’ve proven mathematically that a mix of strategies can produce a better result.”

In a recent slide presentation, the Keeblers demonstrated just how multi-dimensional the tax-minimization task can be. To find the best strategy in a given year, an adviser must consider at least four dimensions of every client: Age (under RMD age or older), wealth and income (low, middle, high or ultra-high), retirement accounts (taxable, tax-deferred and Roth), and tax brackets (10%, 12%, 22%, 24%, 32%, 35% and 37% for 2020).

That’s preliminary to minimizing the impact of Medicare surcharges, to finding opportunities for Roth conversions, to considering risk tolerance, or to determining whether it’s cheaper, tax-wise, for a retiree or her heirs to pay the tax on tax-deferred accounts. For the most complex cases, of course, guidance from a Certified Public Accountant (CPA) will probably be necessary.

Source: Keebler & Associates, LLC.

The bottom line: Taxes irk retirees, perhaps even more than they irk younger people. The more money and the more types of accounts that a client has, it seems safe to say, the more he or she needs a tax-efficient drawdown strategy. All of which creates opportunities for advisers to do good and do well by helping retirees maximize not just their annual income but also their legacies.

Outlook brightens in Asia for private annuity sales: Cerulli

Posted on January 29, 2020 by Kerry Pechter -

Annuities issued by insurance companies are expected to grow in importance in Asia, as individuals seek “third-pillar” (private) nest eggs to supplement their “first-pillar” (government) and “second-pillar” (employer-based) pensions, Cerulli Associates said.

Insurance annuities “are likely to remain the preferred route to retirement planning in the near term due to their payout features, with some providing lifelong payouts and guaranteed returns,” according to an Asian edition of the regular Cerulli Report.

“Some Asian governments, such as those in Hong Kong and China in recent years, have leveraged retail investors’ familiarity with annuities and their track records, and introduced annuity-related initiatives to boost the third-pillar retirement segment,” the report said.

In Singapore and Hong Kong, where life insurance penetration is high, annuities’ first-year premium income has grown over the past few years, with double-digit growth in 2018. But Korea’s first-year premium income dwindled over the same period, largely due to competition from retirement pension policies offered by insurance companies under the Employment Retirement Security Act.

China stimulated its commercial annuity market in May 2018 when it introduced tax-deferred pension insurance as part of a third-pillar retirement system. Plan holders can defer tax on their income used to buy pension insurance until they reach retirement age and start drawing money from the policy.

So far, more than 20 insurers have been allowed to offer pension insurance. More providers could be approved as the government rolls out the scheme across the country. The government introduced enterprise annuities in 2004 and occupational annuities in 2016 to supplement statutory pensions.

In Taiwan, deferred annuities have been growing steadily in the past couple of years. Total deferred annuity premium income recorded a compound annual growth rate of 11.1% between 2014 and 2018, despite a slump in 2016. Investment-linked annuities overtook traditional annuities to achieve a 56.7% market share in 2018.

“The importance of annuities is expected to increase significantly, as many markets continue to encourage personal retirement savings,” said Ye Kangting, a Cerulli research analyst. “There is room for innovative funds and partnerships. Asset managers wanting to penetrate the market can consider positioning investment-linked products as instruments for retirement accumulation, while exploring investors’ preferred product features.”

Ruark releases new mortality tables for VAs and FIAs

Posted on January 29, 2020 by Editorial Staff -

Ruark Consulting, LLC today released new industry mortality tables for variable annuity (VA) and fixed indexed annuity (FIA) products. The tables are derived from the company’s 2018 studies of VA and FIA mortality, which comprised experience from over 16 million annuity contracts.

“Our new tables are purpose-built for deferred annuity products,” said Timothy Paris, Ruark’s CEO. “They are demonstrably better than standard industry tables for VA and FIA valuation. The Ruark tables reflect not only the effects of age and gender, but also differences by product type and contract duration. This is key to capturing different anti-selection profiles as the industry’s mix of business changes.”

The company is making the new tables immediately available, free of charge, to clients who have purchased Ruark’s 2018 Mortality Studies. New purchasers of the 2018 studies will also receive the tables.

Detailed study results, including company-level analytics, benchmarking, and customized behavioral assumption models calibrated to the study data, are available for purchase by participating companies.

Ruark has produced aggregate VA mortality tables since 2007, in conjunction with the company’s mortality studies. The new mortality tables expand that work for specific VA rider types and for FIA. They include a table for VA contracts with lifetime withdrawal benefits (“RVAM-LB”); a table for VA contracts without living benefits (“RVAM-DB”); and a table for FIA (“RFIAM”). All are single-life mortality tables. The tables reflect differences in experience by contract duration, which is an important component of mortality anti-selection.

The RVAM-LB table incorporates 34 million exposure years and 320,000 deaths on VA contracts with guaranteed lifetime withdrawal benefits (GLWB) or hybrid GMIB. The table is calibrated to experience in contract durations 3 and later, with select factors for the earlier durations. In Ruark’s 2018 VA Mortality Study, the company found that GLWB and hybrid GMIB mortality is lower than average at issue, and rises to an ultimate level over time.

The RVAM-DB table incorporates 29 million exposure years and 523,000 deaths on VA contracts without living benefits. The table is a select-and-ultimate table with a 5-year select period. In Ruark’s 2018 VA Mortality Study, the company found that VA contracts without living benefits have higher mortality than average at issue. The RVAM-DB table reflects the varying magnitude of anti-selection by issue age.

The RFIAM table incorporates 16 million exposure years and 265,000 deaths on FIA contracts, both with and without lifetime income riders. Similar to RVAM-LB, the RFIAM table is calibrated to experience in contract durations 3 and later, with select factors for the earlier durations. The factors reflect lower mortality at issue, as found in Ruark’s 2018 FIA Mortality Study.

Ruark Consulting, LLC (www.ruark.co), based in Simsbury, CT, specializes in principles-based insurance data analytics and risk management. As a reinsurance broker, Ruark has placed and administers bespoke treaties totaling over $1.5 billion of reinsurance premium and $30 billion of account value, and also offers reinsurance audit and administration services.

Lincoln Financial wraps income rider around CapGroup TDF

Posted on January 23, 2020 by Editorial Staff -

Lincoln Financial Group and Capital Group, investment manager of American Funds, are partnering on the launch of the new American Legacy Target Date Income variable annuity. According to a Lincoln press release this week, it is the first protected lifetime income solution with access to a target date series.

The release noted that investors have become increasingly comfortable with target date funds, which serve as default investments in many employer-sponsored retirement plans for participants who are auto-enrolled into plans. Industry-wide, target date funds have a combined market value of about $2 trillion.

A target date fund is a fund-of-funds whose asset allocations typically become more conservative as the investor ages. The “target date” refers to the investor’s expected year of retirement, to the nearest five-year milestone. For example, there are 2025 funds, 2030 funds, 2035 funds, etc. Major asset managers such as Capital Group, T. Rowe Price, Vanguard, Fidelity and BlackRock each offers its own proprietary series of target date funds.

In 1987, Capital Group and Lincoln Financial collaborated to create the American Legacy variable annuity, the only annuity at the time to offer access to all American Funds Insurance Series (AFIS) funds. The new product’s features include:

Lincoln Financial Group’s highest amount of level protected lifetime income, 5.7% for life at age 65.
Guaranteed growth for future income at a minimum of 6% each year. Higher target date fund results may allow the annuity owner to lock in an even higher amount of growth.
Joint life options for when both spouses are looking for protection, and beneficiary protection even if the account goes to zero.

AIG, AllianceBernstein offer index annuity with income rider

Posted on January 23, 2020 by Editorial Staff -

Is it possible to offer investors a momentum strategy with attractive growth opportunities while diversifying away volatility and indemnifying purchasers against loss of principal and nursing home risks? And without the end-client actually owning any investments?

Consider AIG’s announcement this week that AllianceBernstein’s new “AB All Market Index” will be offered exclusively as an indexing choice in AIG’s Power Select Index Annuities. Alliance Bernstein created the multi-asset index for AIG; Market Synergy Group (MSG) will be the primary distributor.

According to a press release this week, the “AB All Market Index seeks to stabilize returns through a systematic allocation process based on risk and momentum. First, a strategic allocation is constructed, balancing risk equally among the Index’s growth and defensive assets worldwide.

“The Index then uses a proprietary momentum strategy to dynamically adjust exposures, overweighting assets that are trending up and underweighting those with poor performance. The Index’s unique approach blends three different momentum signals to better capture the movement of assets,” release said.

“By using asset classes not commonly found in most index strategies, such as currency-hedged global bonds, plus a dynamic allocation across ten U.S. equity sectors, this new index has the potential to generate solid risk-adjusted performance,” said Bryan Pinsky, AIG’s senior vice president of Individual Retirement Pricing and Product Development, in the release.

This description suggests that the index will contain equal weightings of growth and defensive assets—equities on the one hand and non-correlated bonds or alternatives on the other—but will also pursue a momentum strategy by buying what’s getting more expensive and selling what’s getting cheaper.

The momentum strategy echoes Constant Proportion Portfolio Insurance, which protects the issuer. This asset management technique involves selling risky assets as they drop in price and simultaneously adding enough safe assets so that the product’s account value will never be lower than the guaranteed amount. As additional protection, there’s the standard non-forfeiture guarantee of a fixed annuity.

In an indexed annuity, owner of the annuity doesn’t buy any investments directly. His or her premium goes into the issuer’s general account. The issuer buys a bracket of options on the performance of an equity benchmark—usually the S&P500 Index. The performance of the options over a specific period—usually one year—determines the client’s gains. The gains are capped at a certain level and no principal is ever at risk.

In addition to the AB All Market Index, AIG added a new enhanced income benefit to the Power Select Plus Income Index Annuity. Under the terms of this “confinement rider,” consumers can receive up to double their maximum annual withdrawal amount if confined to a nursing home or other qualified facility for 90 days or more.

The new confinement rider is bundled with all guaranteed living benefit riders for no additional fee and can last for five years or until the depletion of the contract value, if sooner. The enhanced income has no negative impact on the riders’ benefits; however, other restrictions and limitations apply.

Equitable completes spin-off from AXA

Posted on January 23, 2020 by Kerry Pechter -

After spending the past 28 years or so as the U.S. subsidiary of the French financial giant AXA S.A., Equitable Holdings has completed the process of establishing itself as an independent U.S. financial services company.

The operating company, a subsidiary of Equitable Holdings (NYSE: EQH), will now be known as Equitable and no longer as AXA Equitable Life. Equitable’s president is Nick Lane, who joined AXA US as a senior executive in 2005 after stints at McKinsey & Co., the U.S. Marine Corps (as captain), and Harvard Business School, according to his LinkedIn page.

The Equitable brand will be consistent through the company’s subsidiaries and parent company, Equitable Holdings (NYSE: EQH). Equitable Holdings owns a 65% stake in AllianceBernstein, the global asset manager. Equitable Holdings has about 12,000 employees and financial professionals, $701 billion in assets under management (as of 9/30/19) and more than 5 million client relationships globally.

The company’s refreshed brand includes Equitable’s logo, a representation of the Greek goddess Athena that was a consistent element of the company’s 160-year-old visual identity.

Equitable offered its first variable annuity product in 1970 and, under AXA, in 2010, pioneered the structured variable annuity in 2010. Equitable is the leading provider of 403(b) offerings in the K-12 market with 1,000 financial professionals who focus on serving this community.

Equitable Holdings started toward independence in May 2018 with the largest traditional initial public offering of the year on the New York Stock Exchange. In March 2019, AXA S.A. completed a secondary public offering and exited its position as a majority stakeholder.

According to a news release issued late last week, Equitable provides financial advice, protection, and retirement strategies to 2.8 million clients in the U.S. The company offers variable annuities, tax-deferred investment and retirement plans, employee benefits, and protection solutions for individuals, families and small businesses. Its retail products are distributed through an affiliate, Equitable Advisors, with about 4,330 registered and licensed financial professionals, and through major third-party distribution platforms.

Founded in 1859 as The Equitable Life Assurance Society of the United States, the company was a mutual firm serving individuals, families and businesses. In 1881, it became the first company in the industry to practice paying death claims immediately. It was acquired by Paris-based AXA S.A. in 1992.

Right and Left See ‘Reality’ Differently

Posted on January 23, 2020 by No Author -

RIJ Interview: Will Fuller of Lincoln Financial

Posted on January 23, 2020 by Kerry Pechter -

In the slugfest known as the annuity market, Lincoln Financial Group punches above its weight-class. While Lincoln was the third biggest seller of retail annuities in the U.S. in the first nine months of 2019, according to LIMRA Secure Retirement Institute, it is smaller than its rivals.

Lincoln ranks only 187th in the Fortune 500, with $16.4 billion in revenues. Its close competitors—Prudential, AIG, New York Life, TIAA—either rank much higher or have big overseas parents (Jackson National, Allianz Life of North America and, until recently, AXA).

Executive vice president Wilford H. “Will” Fuller has figured prominently in Lincoln’s success. Arriving from Merrill Lynch in 2009, he now runs Lincoln’s wholesale operations, its broker-dealer and its annuity business. At 48, he’s the youngest and third-highest paid executive at Lincoln, according to wallmine.com, with responsibility for units that produce a majority of Lincoln’s revenues.

Fuller talked with RIJ late last fall at Lincoln’s Radnor, PA, headquarters. The past year has been busy: Lincoln added indexed variable annuities (IVAs) to offset softening sales of traditional variable annuities and built new bridges to registered investment advisers. Last September, the Insured Retirement Institute named Fuller its 2019 Industry Champion of Retirement Security.

Just this week, Lincoln announced its latest partnership with Capital Group, which manages American Funds, to issue a new variable annuity with Lincoln’s lifetime income rider attached to a target date fund series created by Capital Group.

RIJ: You joined Lincoln just as the financial crisis bottomed out, in early 2009. The company had recently bought Jefferson Pilot and established its headquarters in the Philadelphia suburbs. How has Lincoln’s product mix evolved over the years?

Fuller: Jefferson Pilot and Lincoln merged 13 years ago. I joined Lincoln Financial 10 years ago. When I joined we had two core product lines. Nearly 80% of our life insurance business consisted of sales of universal life. Ninety percent of our variable annuity sales were VAs with guaranteed living benefits.

After the financial crisis, we decided to become more diversified. So now you see that, within our life insurance business, we have variable, indexed, term and hybrid life, and long-term care solutions. And we sell lots of kinds of annuities. We have a fundamentally different company today. We’ve built out a more resilient and diversified franchise that relies on an all-weather product portfolio. Lincoln Financial is a far more flexible company because of that decision. It’s better than being married to one product design.

RIJ: Diversification is the first rule of risk mitigation, I imagine. For companies and individuals.

Fuller: We have a principle that, if you plan for the downside, the upside will take care of itself. We plan for down environments, as do our customers. Preferences and markets can change. So we expanded our product offerings. We went for an all-weather product portfolio.”

RIJ: When did you decide to diversify out of variable annuities?

Fuller: In 2016, we decided to participate in more segments of the annuity market. Before then, as I mentioned, we were focused on the variable annuity with guaranteed living benefits. As rates began to recover after the 2016 election, we responded with the same strategies we’d used before: We strengthened the VA benefits, and we benefited from rising sales.

Since then, we’ve brought out indexed annuities and increased our focus on traditional fixed annuities. Those products led to the expansion of shelf space with bank partners. It also led to our January 2019 partnership with Allstate, which is the first property and casualty insurer to distribute our annuities. We have also started building out customized products for new distributors. For instance, we began partnering with Market Synergy Group and Impact Partnership to distribute custom fixed index annuities.

RIJ: How’s that working out?

Fuller: Because of these new products and new channels, we’ll see more overall sales of annuities in 2019 than we did in 2016—even though we expect to sell only about as much of the traditional VA as we did then. Sales of the traditional VA have in fact been off by over $1 billion, but we more than made it up with IVA (indexed variable annuity) sales.

RIJ: The IVA, which is also called the registered indexed linked annuity (RILA) or the structured variable annuity, has been a game-changer for the annuity industry since AXA introduced the first one in 2011. [Like a fixed indexed annuity, or FIA, the IVA uses options to deliver gains or losses within a spread on the performance of a market index or a combination of market indices. An IVA typically offers more upside potential than an FIA because it doesn’t offer absolute prevention from loss.]

Fuller: Our overall variable sales got back into positive territory because of the success of the IVA. We made a commitment to return to net positive flows of variable annuities in 2018, and we achieved that goal a quarter early. But it took some time to be positive in both fixed and variable annuities. We’re positive for the VA market because we’re positive for indexed variable annuities.

RIJ: There’s a relatively new structured products sales platform called SIMON Markets. It offers a tool that helps advisers select the combination of indices in an IVA product that is most likely to maximize the product’s performance. Does Lincoln have anything like that on its IVA platform?

Fuller: With the IVA, we saw the importance of a tool that optimizes the indices. But we decided to focus our marketing on the longer-term indexed variable annuity (IVA) contracts instead. Roughly three-quarters of our IVA sales are in the six-year duration term, [where the initial cap on credited interest is valid for the entire duration of the contract, rather than subject to change every year or every three years]. We also built a calculator that allows advisers to run different scenarios comparing a portfolio with or without an IVA.

RIJ: That product seems to be built mainly for risk-reduced accumulation, not for retirement income generation. But it does seem to be resonating with a lot of people. It’s the annuity world’s version of a structured note.

Fuller: It’s extraordinary how the market for IVAs has grown. At Lincoln, nearly two-thirds of the advisers who sell our indexed variable annuity have sold more than one. We can leverage our broad access to over 90,000 advisers through Lincoln Financial Distributors. On average, they sell about twice as many indexed variable annuities as they do any other annuity category. That product is still in its early days. We launched our IVA, Lincoln Level Advantage, in May 2018 and we have a 15% market share. We launched a commission-based and a fee-based version of that product, but our distribution partners are selling mostly the commission-based product.

RIJ: Does Lincoln offer a buffer version or a floor version of the IVA? [A “floor” means the client can’t lose more than, say, 5%, 10% or 15% in a year. A “buffer” means the client is protected from the first 5%, 10% or 15% loss in a year.]

Fuller: We sell only a buffer design on the IVA. We are researching a floor design as well as additional crediting strategies. We currently sell only a one-year and a six-year term product, but we plan to offer a three-year term product in 2020.

RIJ: That product should be even more attractive with interest rates moving back down.

Fuller: The IVA holds up pretty well in a low volatility, low-interest-rate environment. It was created to withstand the pressures of low interest rates. It’s more capital-efficient and less affected by rates than the VA with a living benefit. At the same time, the IVA takes a lot of work. You must register it with the Securities and Exchange Commission. You must register the insurance subsidiary as an SEC entity. You need an augmented hedging program. And you need shelf space.

RIJ: Comparing the IVA with the fixed indexed annuity, a person might wonder why the FIA focused on zero-losses… as if it were fatal to cross into negative territory in a calendar year. I suppose the no-loss guarantee made a strong marketing story.

Fuller: The no-loss guarantee in FIAs came about because, by definition, a general account product is a principal-protected product. A separate account product can “break a buck,” but a general account product can’t. The original target market for the FIA, if you remember, was the CD [certificate of deposit] buyer. We’ve been in a declining rate environment for almost 40 years. The FIA was born in an era when CD rates were coming down. People wanted safety but they also wanted a rate greater than they could get from a CD.

RIJ: Let’s pivot to the distribution side of the annuity business, if we can. How does Lincoln approach the Registered Investment Advisor (RIA) market, which may or may not represent a growth opportunity for annuity sales?

Fuller: We divide the RIA market between pure Investment Advisor Representatives (IARs), who are associated only with an RIA, and the dually registered or hybrid RIAs, who are also registered with a broker-dealer. These hybrid advisers have their RIA business and their broker-dealer business; they can use either side. They’re a much bigger opportunity than the pure RIA market.

RIJ: What are some of the nuances of marketing to this split group?

Fuller: We approach the two markets in different ways. We can reach the hybrid advisers through their broker-dealer platforms. We call on that market through our broker-dealer wholesalers. But, since the fee-only RIAs are not registered with broker-dealers, we have a dedicated team of wholesalers and relationship managers that works directly with those advisers. We’ve also made technology integrations with Orion, eMoney, Envestnet/Tamarac and Redtail to better support the needs of RIAs. We’re making it easier for them to incorporate annuities into their clients’ planning strategies.

RIJ: Where do you see the most sales potential?

Fuller: I see our products being sold in both places—the broker-dealer and the fee-only RIA platform. The hybrid RIAs have a history of greater appreciation for and use of insurance products. The fee-only RIA platform, on the other hand, is a true frontier for new annuity and life insurance sales. Those advisers haven’t traditionally used insurance products. In fact, fee-only RIAs are skeptical of insurance products. It will require education, new product development and new technology to develop that channel. The RIA market is still small. But it’s the fastest growing adviser market, and it serves people who need annuities. The question is, can we bring those concepts together?

RIJ: Nothing stands still for very long. The brokerage side is changing too, isn’t it?

Fuller: Trying to get shelf space in an era where broker-dealers have curated their product shelf isn’t easy. It’s not like it was before the 2016 Department of Labor’s fiduciary rule, when broker-dealers felt that it was more compliant to have open-architecture for products. Now a curated shelf is considered more compliant.

RIJ: Shifting to the “macro” view, we’re all still feeling whiplash from the Fed’s recent rate reductions.

Fuller: There’s no industry more impacted by low interest rates than the insurance industry. The rates determine the expense of providing the guarantees. Our sales pulled back after the financial crisis because of the impact of rates.

RIJ: Do falling rates affect both the in-force business and new business?

Fuller: Low rates don’t necessarily affect the in-force business. They affect the business going onto the books today. The annuity business we’re selling today is under pricing pressure. In the VA with guaranteed living benefits, low rates increase the cost of the hedging strategy. You can respond to that either by pulling back on benefits or pushing up on cost. Our competitors appear to be pulling back on benefits.

RIJ: Back on July 31, what was your personal reaction the first of the three rate cuts?

Fuller: What was my personal reaction? It was, “Damn it!” We were disappointed at how swiftly the Fed pulled back. It’s hard to see how the monetary policies of the last ten years—of quantitative easing and fiscal stimulus—haven’t resulted in more inflationary pressure. That’s what should have happened, according to current economic theory. I’m disappointed. Obviously, our value proposition is higher, and demand for our products is higher, when interest rates are higher.

RIJ: What can we expect to see from Lincoln in the coming year?

Fuller: We’re moving into 2020 with a game plan on how to manage the low rate environment for a longer period, and we’re implementing that plan.

RIJ: What will that entail?

Fuller: We’ll provide choice. Commission-based products will always be a presence in the annuity marketplace. [Regarding the cost of a one-time annuity sales commission of 3% to 7% relative to an annual asset-based fee of 1%], I’ve always said, ‘Why is this not an easy math concept?’ People need to consider the length of the holding period when they compare the cost of the commission to the cost of the fees [which may be higher in the long-run].

RIJ: And on the product front?

Fuller: Our priority for 2020 is to put product development effort into Lincoln Level Advantage. We’re looking at the duration of the product and at the participation rates. We’re also focused on building out more shelf space for it. Beyond that, our next focus will be to develop guaranteed living benefits that are less sensitive to interest rate fluctuations.

RIJ: With the passage of the SECURE Act in December, will Lincoln try to take advantage of the safe harbor for plan sponsors choosing in-plan annuities?

Fuller: We’ve had a product available: Secured Retirement Income, which is available as either as a standalone investment, or included in the glide path of custom target-date portfolios. We’ve given it a compelling guarantee. We made sure that it’s portable. The take-up rate today is minuscule, but the SECURE Act would mean a completely new frontier for the annuity industry.

RIJ: Thank you, Will. We appreciate this opportunity.

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