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Wink, Inc. releases annuity sales data

Posted on November 28, 2019 by -

Deferred annuity sales for the second quarter of 2019 were up 6% over the previous quarter, according to the latest Wink’s Sales & Market Report.

Indexed annuity sales increased by 11% over the prior quarter and were up nearly 14% over the same period last year. Sales of traditional fixed annuity declined by nearly 10% over the prior quarter but rose more than 21% over the same period last year.

Multi-year guaranteed annuity (MYGA) sales increased by 15% over the prior quarter and were up nearly 20% over the same period last year. Structured annuity sales declined 15% from the prior quarter but were up nearly 20% over the same period last year.

Variable annuity sales increased nearly 17% over the prior quarter. (This is the second quarter that Wink has collected variable annuity sales. Additional comparisons will be available in future quarters.)

Based on Wink’s preliminary sales data, aggregated variable annuity sales for the second quarter increased nearly 17% over the prior quarter. Aggregated non-variable annuity sales for the second quarter were down just over 1% from the prior quarter, but up over 16% compared with the same period a year ago.

“Indexed annuity sales set a new record in the second quarter, beating their previous record in 4Q2018 by nearly 3%,” said Sheryl J. Moore, author of Wink’s Sales & Market Report. “Sales of variable and structured annuities increased nearly 20% each. It is a great time to be offering annuities with growth based on an outside benchmark,” she commented.

Indexed annuities have a floor of no less than zero percent and limited excess interest that is determined by the performance of an external index, such as Standard and Poor’s 500. Traditional fixed annuities have a fixed rate that is guaranteed for one year only. MYGAs have a fixed rate that is guaranteed for more than one year.

Structured annuities have a limited negative floor and limited excess interest that is determined by the performance of an external index or subaccount. Variable annuities have no floor, and potential for gains/losses that is determined by the performance of the subaccounts that may be invested in an external index, stocks, bonds, commodities, or other investments.

These preliminary results are based on 94% of participation in Wink’s quarterly sales survey representing 97% of the total sales.

© RIJ Publishing LLC. All rights reserved.

Buttigieg’s plan to close the 401(k) coverage gap

Posted on November 28, 2019 by -

Democratic presidential candidate Pete Buttigieg has released an economic white paper with ideas for improving the retirement security of Americans. The reforms include measures to refinance Social Security, shrink the retirement plan “coverage gap” at small firms, and remove obstacles to the provision of home-based long-term care.

The 37-year-old mayor of South Bend, Indiana, led a public opinion poll last week in Iowa, site of the first (and largely symbolic) Democratic primary on February 3, 2020. Buttigieg surged ahead of Senators Elizabeth Warren (D-MA) and Bernie Sanders (D-VT) and former vice-president Joe Biden.

The main dish on his menu of reforms is an opt-in “Public Option 401(k)” at companies without retirement savings plans. The Buttigieg plan would borrow elements of the SIMPLE IRA, the auto-IRAs created in California and Oregon, and existing 401(k)s to ensure that any full-time “middle-earning American worker” can save at least $500,000 for retirement.

Here are brief descriptions of the elements of the Buttigieg Public Option 401(k):

  • Under the baseline savings plan, if participants contribute 1.5% of pay into a “Rainy Day Account,” the employer would contribute an additional 3% of pay into the worker’s “Retirement Account.” Workers can make additional contributions to either account, reduce their contributions, or opt out at any time.
  • Participants in the Public Option 401(k) can access their Rainy Day Account funds at any time, for any reason, and with no penalty. Retirement Account funds must be saved until old age, taking withdrawals only for disability, unemployment, family medical emergencies, a house down payment or educational expenses. These “safety valve withdrawals” will be capped for high earners.
  • The Public Option 401(k) will be available at large employers first. Employers who already offer a defined benefit pension or a defined contribution plan with a “sizeable employer match or otherwise successful and generous retirement package instead.” will be exempt from offering the Public Option 401(k).
  • Like current SIMPLE plans, the Public Option 401(k) will have a special maximum contribution. Workers can take their Public Option 401(k)s from job to job and retain their opt-in choice from a previous job.
  • Public Option 401(k)s will be invested in broad-based funds with near-zero fees, like those in the federal government’s Thrift Savings Plan.
  • Retirement Account contributions will be defaulted into life-cycle balanced index funds. Other low-cost, safe options will be available. Rainy Day Account dollars will be invested in money market funds.
  • The Public Option 401(k)’s Retirement Account will have the same tax benefits as a 401(k) plan, either traditional or Roth.
  • To create a plan, an employer will go to a designated website, click a few buttons, and start contributing to the worker’s Public Option 401(k) via bank transfers or their payroll provider.
  • Workers will be able to roll their prior 401(k)s into their portable Public Option 401(k) when they switch jobs; at retirement, their savings can be in one place. A portion of rollover amounts can go to the Rainy Day Account.
  • The Public Option 401(k) builds on similar programs in California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Oregon, and Vermont. States can keep their existing programs if they prefer.

© 2019 RIJ Publishing LLC. All rights reserved.

Annuities and the Charles Schwab Deal

Posted on November 27, 2019 by -

Caught between tectonic forces—Wall Street’s demand for higher profitability and Main Street’s demand for lower fees—what’s a publicly held brokerage giant to do? For Charles Schwab, the answer was to scale up by acquiring rival TD Ameritrade this week in all-stock deal worth $26 billion.

But what, if anything, will the ensuing consolidation of discount brokerage platforms mean for companies that issue or distribute annuities–especially those who want to sell more annuities to Registered Investment Advisors (RIAs)?

To annuity market researcher Sheryl Moore, CEO of Wink, Inc., the deal spells new opportunities for the life insurers who put annuities on those platforms. “The ability to get your annuity product in front of consumers that have investments, but no annuities? It is like gold. This is like the keys to the kingdom for any insurance company on [the combined] platform.”

But Dennis Gallant of Aite Group, the financial industry research firm, was less sanguine about annuities. “I thought TD Ameritrade had the more robust annuity platform,” he told RIJ. “We’re not talking a large volume of annuity usage by RIAs on either platform.

“There may be an opportunity for carriers not there now to get on the Schwab platform. But there’s also a chance that Schwab will review all the annuity providers and trim the list. Shelf space is getting narrower and those products or companies with little assets may be left out,” Gallant said.

Similar annuity shelves

Both Schwab and TD Ameritrade have offered annuities to retail and advisory customers for several years. Schwab offers variable annuities (VA) with guaranteed lifetime withdrawal benefits (GLWB), fixed index annuities (FIA), single premium immediate and deferred income annuities (SPIA and DIA) and fixed deferred annuities (FA), according to its website.

In the VA category, Schwab offers the OneSource Choice Variable Annuity with GLWB from Great-West Financial and a Retirement Income Variable Annuity from Pacific Life. Both feature annual mortality and expense risk fees as low as 65 basis points and investment expenses around 60 basis points.

Schwab also offers Pacific Index Choice FIAs with six, eight and 10 year terms, SPIAs from Brighthouse, Guardian, MassMutual, Nationwide, Pacific Life and New York Life and, in the DIA category, New York Life’s Guaranteed Future Income Annuity II and Pacific Life Secure Income. The platform offers fixed deferred contracts from New York Life, MassMutual and Midland National.

TD Ameritrade has had an annuity desk since 2012. This past September, it added its first FIA: the Pacific Index Foundation contract, which has an optional GLWB. According to its website, it also offers other annuities but doesn’t specify the contracts. The website also gives annuity owners an opportunity to exchange their contracts.

Notably absent from Schwab’s platform are major annuity issuers like AIG, Jackson National, Lincoln Financial, and Prudential. “There is definitely a pattern there,” Moore told RIJ. “If you look at who is already at Schwab, you’re talking about life insurance companies that have been mutually-owned, that have traditionally had career or captive-agency distribution, and that tend to be more conservative than most of their peers.

“The companies not on that list are stock companies that primarily distribute through independent agents or advisers. They offer multiple products through multiple distributions” and offer proprietary products to favored distributors, she added.

TD Ameritrade does offer annuities from at least one publicly held company, Lincoln Financial. But all of its other annuity providers are either foreign-owned or mutual, including Protective (Great-West), Transamerica, Jackson National, Pacific Life, New York Life, MassMutual, and Integrity Life (Western & Southern Life).

Platform competition

What about the ripple effects of the Schwab-TD Ameritrade deal on the technology platforms that have recently sprung up to serve RIAs?

Mark Forman, senior managing director of RetireOne, told RIJ, “We work with many advisors who use TD Ameritrade or Schwab, so we see ourselves as enhancers of their experiences with those platforms. Honestly, we don’t come up against their annuity desks at all. We really don’t see ourselves as competitors with Schwab since they don’t seem to be active in their outreach or engagement with advisers. Additionally, neither firm has the depth or breadth of fee based solutions of a dedicated fee-based annuity platform like RetireOne.”

David Lau, the founder of the DPL Financial Partners (and before that, of Jefferson National, now Nationwide Advisory Services), said he competes with both Schwab and TD Ameritrade, but doesn’t offer exactly the same value proposition.

“We provide RIAs with education on annuities and how to use them properly. The Schwab and TD desks are more reactive and service advisers when the advisers reach out to them. We educate advisers on how to integrate annuities into their practice’s technology—primarily their portfolio management systems and planning software,” Lau said.

“At the same time, we work with carriers to service the RIA industry, helping with anything from product design and features to technology support. We direct them on how to support fee billing, to create account hierarchy (how to add advisers to policies rather than just agents) and to connect data feeds into the proper RIA technologies.

“I am mainly concerned with creating a viable marketplace for fee-based annuities. This will enable fiduciary advisors to deliver better outcomes for clients in retirement. I like to say that DPL helps RIAs operationalize the studies of retirement income researchers like Wade Pfau, David Blanchett and Michael Finke,” Lau told RIJ.

Schwab Institutional remains the largest RIA custodian with $1.55 trillion in assets under custody, followed by Fidelity with $932 billion, TD Ameritrade with $506 billion, and Pershing with $219 billion, according to Cerulli sizing models. The top four custodians—Schwab, Fidelity, TD, and Pershing—collectively hold 80% of the RIA channels’ $4 trillion in advisory assets, according to research analyst Marina Shtyrkov in Cerulli’s wealth management practice.

Deal specifics

According to a Schwab release this week, the acquisition will give Schwab about 12 million new client accounts, $1.3 trillion in client assets, and about $5 billion in annual revenue. The added scale is expected to result in lower operating expenses as a percentage of client assets (“EOCA”), and “help fund enhanced client experience capabilities.”

The combined firm is expected to serve 24 million client accounts with more than $5 trillion in client assets. Together, the two firms recently generated total annualized revenue and pre-tax profits of approximately $17 billion and $8 billion, respectively. The new company would be the second biggest in the U.S. by self-directed customer assets, behind Fidelity, which holds about one-third of that market, according to Cerulli Associates, a research firm in Boston. With TD Ameritrade, Schwab would control about 27% of it.”

According to a Schwab release, “the deal is expected to be 10-15% accretive to GAAP EPS [earning per share] and 15-20% accretive to Operating Cash EPS in year three, post-close. Focusing on expenses, current estimates are for approximately $1.8 to $2 billion run-rate expense synergies, which represents approximately 18-20% of the combined cost base. Some of the expense synergies the combined firm expects to realize will come from elimination of overlapping and duplicative roles. Additional synergies are expected to be achieved through real estate, administrative and other savings.”

The integration of the two firms is expected to take 18 to 36 months, following the close of the transaction. Schwab named Senior EVP and COO Joe Martinetto to oversee the integration initiative, assisted by a teams from Schwab and TD Ameritrade.

The corporate headquarters of the combined company will eventually relocate to Schwab’s new campus in Westlake, Texas, where both companies have facilities and employees. Schwab was founded in San Francisco and has maintained a longstanding commitment to the Bay Area, which will continue.

A small percentage of roles may move from San Francisco to Westlake over time, either through relocation or attrition. Schwab expects to continue hiring in San Francisco and retain a sizable corporate footprint in the city.

© 2019 RIJ Publishing LLC. All rights reserved.

‘RILA’ Sales Boost Annuities Market: SRI

Posted on November 21, 2019 by -

Variable annuity (VA) sales were $26.5 billion in third quarter 2019, six percent higher than third quarter 2018, according to the Secure Retirement Institute (formerly LIMRA SRI) Third Quarter U.S. Annuity Sales Survey. This represents the highest quarterly VA sales results since third quarter 2016.

Year-to-date VA sales were $75.1 billion, level with results from the same period in 2018.

“For the second consecutive quarter, VA sales registered strong growth, driven primarily by the remarkable growth in registered index-linked annuity (RILA) products, which represent nearly 20% of the VA market,” said Todd Giesing, research director, SRI Annuity Research.

“One of the things that is driving the growth in the RILA market is the adoption of Guaranteed Lifetime Benefit (GLB) riders. In the third quarter, RILA sales with GLB riders increased more than $500 million. In the third quarter just under 15% of RILAs were sold with a GLB a sharp increase from just three percent in the prior quarter.”

RILA sales were $4.8 billion in the third quarter, 62% higher than third quarter 2018. In the first nine months of 2019, RILA sales were $12.5 billion, up 63%, compared with prior year sales.

Fee-based VA sales were $785 million in the third quarter—slightly down from the prior year but up almost eight percent from the second quarter. Fee-based VAs represent just three percent of the total VA market.

Total annuity sales increased 1% in the third quarter to $59.4 billion. Year-to-date, total annuity sales were $184.2 billion, an increase of eight percent, compared with the prior year.

Despite an unfavorable interest rate environment, fixed annuities continued to represent the majority of the annuity market with 55% market share in the third quarter, which is down four percentage points from the prior quarter. Fixed annuity sales have outperformed VA sales in 13 of the last 14 calendar quarters.

Interest rates continued to fall in third quarter 2019, negatively affecting fixed annuity product sales. The 10-year Treasury rate fell 35 basis points during the quarter, ending the period at 1.68%. This is down 98 basis points from the beginning of the year.

After two consecutive record-breaking quarters, third-quarter fixed annuity sales were $32.9 billion, down three percent from third quarter 2018. Yet, because of the strong sales in the first half of 2019, total fixed sales were $109.1 billion in the first three quarters, up 14% from the prior year.

Fixed indexed annuity (FIA) sales were $18.6 billion, three percent higher than third quarter 2018. Year-to-date, FIA sales were $56.6 billion, 13% higher than the same period in 2018.

“Following a record-breaking quarter for FIA sales, market conditions dampened demand for FIAs,” noted Giesing. “Given the low-interest-rate environment and the impact it had on cap rates to accumulation-focused products, we expect to see a greater portion of FIA sales to shift to guaranteed income products in the next several quarters.”

Fee-based FIA sales were $159 million in the third quarter, more than double sales in the third quarter of 2018. However, this is a 30% drop in sales from the first quarter 2019 results. Fee-based FIA products still represent less than 1% of the total FIA market.

Fixed-rate deferred annuity sales dropped 14% in the third quarter to $9.9 billion. Again, strong sales in the first half of the year balanced the declines of the third quarter. Year-to-date, fixed-rate deferred annuity sales totaled $38.1 billion, up 18% from last year.

Single-premium immediate annuity (SPIA) sales fell to $2.3 billion in the third quarter, down four percent from the prior year. In the first nine months of 2019, SPIA sales were $7.8 billion, an 11% increase from the prior year.

Deferred income annuity (DIA) sales were $590 million in third quarter 2019, seven percent higher than prior year results. However, this was 19% lower than DIA sales in second quarter 2019. In the first nine months of the year, DIA sales totaled $2 billion, 19% higher than the prior year.

The third quarter 2019 Annuity Industry Estimates can be found in LIMRA’s Fact Tank.

To view the top 20 rankings of total, variable and fixed annuity writers for third quarter 2019, please visit Third Quarter 2019 Annuity Rankings. To view the top 20 rankings of only fixed annuity writers for third quarter 2019, please visit Third Quarter 2019 Fixed Annuity Rankings.

The Secure Retirement Institute’s Third Quarter U.S. Individual Annuities Sales Survey represents data from 94% of the market.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on November 21, 2019 by -

DPL Financial Partners expands insurance platform for RIAs

DPL Financial Partners, a web platform where registered investment advisors (RIAs) can buy annuities and life insurance from a variety of carriers, said now serves 300 RIA firms, up from 200 last April, according to a press release issued this week.

DPL’s member firms represent more than 2,600 individual advisors who work with an estimated 320,000 households with combined assets under advisement of $130 billion, the release said. DPL is also allowing firms to join DPL as “lifetime” members and plans to hire a dozen more personnel by the end of 2019, the release said.

RIA members range in size from boutique practices with less than $50 million in assets to national firms with hundreds of advisors and billions in assets. Firms typically join the network on an annual renewal basis, but the firm is currently rolling out the lifetime membership option.

The DPL platform has added five new insurance carrier partners this year, bringing the total number of carriers on the platform to 17 and the number of commission-free annuity and life products to 31, the release said. DPL is based in Louisville, KY.

DPL was created by David Lau, a co-founder of Jefferson National Life, which distributed investment-only variable annuities to RIAs. Jefferson National was acquired by Nationwide in 2017 and relaunched as Nationwide Advisory Services.

  1. T. Rowe Price now closer to issuing active ETFs

The Securities and Exchange Commission (SEC) has granted preliminary exemptive relief to T. Rowe Price to offer semi-transparent exchange-traded funds (ETFs).  T. Rowe Price can now bring to market ETFs that employ the firm’s actively managed investment approach.

The semi-transparent structure, which is an alternative to the daily portfolio disclosure structure used by conventional transparent ETFs, would allow T. Rowe Price to deliver its active strategies in an ETF wrapper without disclosing information that could be harmful to the interests of fund shareholders.

  1. Rowe Price has negotiated with the SEC about the potential launch of semi-transparent active ETFs for several years and first filed for exemptive relief in 2013, according to a press release. More regulatory steps must take place before the firm can launch any ETFs.
  2. Rowe Price is still determining which investment strategies may be available as semi-transparent ETFs, though it will begin by offering certain U.S. equity strategies.

Due to regulatory requirements for daily portfolio transparency, most current ETFs are based on passively managed strategies. By contrast, T. Rowe Price’s active ETFs will enable investors to pursue alpha beyond a passive index.

Financial literacy low among African-Americans

In a test administered by the TIAA Institute and the Global Financial Literacy Excellence Center at George Washington University, African-Americans answered 38% of the Personal Finance (P-Fin) Index questions correctly compared with 55% among whites, according to a report based on the test results.

The report, “Financial Literacy and Wellness among African-Americans: New Insights from the Personal Finance (P-Fin) Index,” was released this week. The results left open the question of whether low financial literacy was a cause or an effect (or both) of low average wealth and income among African-Americans relative to whites.
African-Americans scored highest on “borrowing” matters, with 47% of these questions answered correctly, on average. They scored lowest on “insuring,” with 32% of questions answered correctly. African-American financial literacy was lower than that of whites in all areas but “comprehending risk,” where they scored similarly.

“The nation’s 44 million African-Americans account for 13% of the U.S. population and have a significant impact on the economy, with $1.2 trillion in purchases annually, the TIAA-GFLEC report said.

“Yet the financial well-being of African-Americans lags that of the U.S. population as a whole, and whites in particular. The reasons for these gaps are complex, but one area of importance in addressing them is increased financial literacy.”

Regarding the possible cause of the disparity between whites and blacks, the report suggested that low socio-economic status was a cause as well as a result of low financial literacy.

“The financial literacy gap between African-Americans and whites can be partially, but not completely, attributed to underlying demographic differences between the two groups. Financial literacy is consistently correlated with various demographics in the adult population as a whole. In general, financial literacy is lower among females, younger individuals, those with less formal education and those with lower income,” the report said.

TIAA and the GFLEC stressed the link between financial literacy and financial wellness among African-Americans. Financially literate people “are more likely to plan and save for retirement, to have non-retirement savings and to better manage their debt; they are also less likely to be financially fragile,” their press release said.

“African-Americans make up 13% of the U.S. population and constitute a critical segment of our economy. Yet financial literacy gaps exist across this demographic group regardless of gender, age, income level, or degree of education,” said Stephanie Bell-Rose, Head of the TIAA Institute. “It is imperative that we continue to shed light on this challenge in order to better map a course for financial success.”

“Given the strong link between financial literacy and financial well-being, increased financial knowledge can lead to improved financial capability and behaviors,” said Annamaria Lusardi, Academic Director of GFLEC and Denit Trust Endowed Chair of Economics and Accountancy at GWSB, in the release.

The TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) assessed financial literacy across these financial activities: earning, consuming, saving, investing, borrowing, insuring, understanding risk and gathering information. The report was authored by Paul Yakoboski, senior economist at the TIAA Institute; Annamaria Lusardi, academic director at GFLEC, GWSB; and Andrea Hasler, assistant research professor in financial literacy at GFLEC, GWSB.

© 2019 RIJ Publishing LLC. ALl rights reserved.

Longevity Insurance with an Inter-Generational Twist

Posted on November 21, 2019 by -

Is there a market for a deferred income annuity (DIA) contract that middle-aged people can buy digitally, with monthly contributions of under $250, that will pay them an income if and when one of their parents reaches a ripe old “trigger age”?

MassMutual and its subsidiary, Haven Life, are betting that mass-market Gen-Xers and Millennials with aging parents present just such a market. They’re making the product affordable by using digital-only distribution and delaying the earliest income age to 91.

Their product is called “AgeUp.” It will be issued by MassMutual and distributed by Haven Life Insurance Agency, a MassMutual in-house fintech startup. Haven Life acquired the web technology for the service by purchasing Quilt, a Boston-based insur-tech firm. For a product fact sheet, click here.

Quilt had developed a Betterment-style website model (colorful, lots of white space, with ultra-simple navigation, a child’s-play calculator and minimal client inputs). Its success in selling term life and other insurance products online got MassMutual’s attention. Now the insurer, the in-house distributor, and the in-house tech partner are collaborating on AgeUp.

Blair Baldwin

“There are three things that make AgeUp unique: the longer deferral period, the financial availability, and the fact that we split the parties of the contract, so that the contract owner is the adult child and the parent is the annuitant,” said Blair Baldwin, general manager of the AgeUp product and founder of Quilt.

MassMutual will not be the first to enter the market for multi-premium, digitally-distributed DIAs. Nationwide and Blueprint Income have been in it for several years. Others, like Kindur, have jumped in more recently. But AgeUp has a very different spin.

AgeUp’s target customers are people in their 30s, 40s, or 50s with household incomes of $50,000 to $100,000. They’re far-sighted enough to recognize that they might have to support a parent in extreme old age. But they can’t afford long-term care insurance for the parent or a big-premium DIA for themselves.

Most other DIAs require the income to start by age 85. AgeUp pushes the start age to 91 to achieve higher mortality credits from longevity risk pooling, which allow mass affluent to buy more income than if payments started earlier. Baldwin, a graduate of Harvard College and Harvard Business School, pointed out to RIJ that the mortality credits at 91 are significantly greater than at, say age 89.

In this scenario, the Millennial or Gen-X child would own the contract, and the parent would be the annuitant. The anticipated monthly payment would be $25 to $250, with a maximum premium of $6,000 per year, according to Baldwin. The product would be available with and without a cash refund feature.

Here’s an example easily calculated at the AgeUp website. If the purchaser were 45 years old and the parent 70 years old, and the child contributed $250 a month for 20 years (a total purchase premium of $60,000), the purchaser would receive an income of about $2,300 a month until the parent died.

Adding a cash refund would reduce the monthly income to about $1,400. In that case, the death of the parent before age 91 would trigger a refund of the paid-in principal to the contract owner or to the owner’s beneficiary if the original contract owner has died. In the example above, adding a cash refund would reduce the monthly payout to just $1,400.

“[We’ve found that] about half of the people would rather skip the cash refund and pay a lower monthly income for the same amount of income and about half would rather have the return of premium guarantee and take about half as much future income,” Baldwin said.

The contract ends with the death of either the contract owner or the annuitant. If the parent is still alive but the original contract owner has died, the contract owner’s beneficiary cannot continue the contract by making subsequent monthly payments. If the contract owner became terminally ill, however, he or she could transfer ownership to another person, and the new owner could continue the product, Baldwin said.

One benefit of having the child serve as the contract owner, Baldwin said, involves Medicaid. As long as the income stream from the annuity doesn’t belong to the parent—who might already be a Medicaid client—then it doesn’t interfere with the parent’s ability to qualify for Medicaid. “This was a conscious product design,” Baldwin told RIJ. “For parents who are that old, the kids are probably managing their money anyway.”

“I co-founded Quilt in 2015, and we were on the property & casualty and life & health side. We wanted to do some innovative product development work in insurance, but we had no manufacturing capability,” he said.

“When the opportunity popped up for us to join Haven Life and MassMutual, they gave us an open-ended challenge: Take a totally fresh look at annuities and create a new annuity product that resonates with the underserved middle market. And it had to be all digital—no advisers—a pure-play digital product.”

To drive consumers to the AgeUp website, Baldwin and Haven Life have launched a media blitz. Baldwin said an ad campaign to people in their 30s to 50s is planned for social media sites Facebook and Instagram.

AgeUp was recently approved for sale in 44 states, Washington, D.C. and Puerto Rico, with plans to reach even more of the population by the end of 2020. In 2020, another version of the product will allow people in their 60s and 70s to buy AgeUp for their own future expenses. In that product, the contract owner and annuitant will be the same person.

© 2019 RIJ Publishing LLC. All rights reserved.

RIA consolidators face a $2.4 trillion opportunity: Cerulli

Posted on November 21, 2019 by -

The total available market for registered investment advisor (RIA) acquisitions over the next five to 10 years is $2.4 trillion in assets under management (AUM), according to Cerulli Associates, the Boston-based global consulting firm.

The $2.4 figure is based on the assets currently managed by advisors on the brink of retirement ($1.6 trillion), by breakaway advisors ($469 billion), and by growth-challenged RIAs ($348 billion).

“The major RIA consolidators currently manage a total of $308 billion today, so $2.4 trillion represents a massive growth opportunity,” said a Cerulli release this week.

One driver of RIA consolidation is an impending succession crisis among advisors. About one-third of advisors in the RIA channels plan to retire in the next 10 years, and many lack a succession plan.

“Succession planning resources are decentralized in the independent channel, meaning the largest, well-capitalized RIAs are best positioned to match advisors to a like-minded successor, help navigate the process, and provide capital to fund the transition,” said Marina Shtyrkov, research analyst at Cerulli, in the release. “More than 80% of advisors who are currently affiliated with an RIA consolidator see it as a succession exit strategy.”

As the RIA channel continues to take market-share from broker/dealers (B/Ds) by attracting advisers with the prospect of independence, the assets managed by those breakaway advisers present another growth opportunity for consolidators.

“Consolidators provide the safety net of operational support, strategic guidance, and economies of scale, while also allowing advisors to retain flexibility and gain more control over their practice than they have in the B/D channels,” Shtyrkov added.

On the other hand, breakaway advisers worry about losing clients when they leave a B/D and about the cost and responsibilities associated with operating their own RIA. Roughly half would rather join an existing independent firm than start their own, according to Cerulli.

Struggling RIA firms create more acquisition opportunities. Large and small RIAs face growth-related challenges, including “time constraints, increasing costs, technology integration, compliance hurdles, accommodations for increased staff headcount, and reallocations of management responsibilities.”

“By delivering turnkey resources, strategic guidance, and expertise, consolidators allow advisors to focus on what they really care about, such as growth and working with clients,” Shtyrkov said.

Large RIA consolidator firms are well-positioned to seize this opportunity. “[They] couple the fiduciary appeal, adviser-first culture, and flexibility of the RIA model with the up-to-date technology, sophisticated marketing power, reliable back-office support, and preferred pricing,” the Cerulli release said.

Cerulli divides RIA consolidators into three categories: RIA-branded platforms, financial acquirers, and strategic acquirers. The consolidators themselves “are an attractive opportunity for private equity investors and asset managers,” Cerulli said.

© 2019 RIJ Publishing LLC. All rights reserved.

Eagle Life adds new income-focused FIA with roll-up

Posted on November 21, 2019 by -

Eagle Life Insurance Company, a subsidiary of American Equity Investment Life, has added the Eagle Select Income Focus fixed index annuity (FIA) contract to its lineup of Eagle Select FIAs. The contract, which is distributed through broker-dealers and banks, emphasizes lifetime income through a living benefit with a multiplier in case of disability.

According to the product brochure, the living benefit includes two deferral bonus options, which adjust the “Income Account Value” (IAV) on which the monthly payout is based. There’s a free 5% (simple interest) annual increase in this benefit base that lasts 10 years or until income begins, whichever is sooner, and a 10% (simple interest) annual increase that has an added fee equal to one percent of the contract value. If the contract value is higher than the benefit base when income begins, the contract value will be stepped up to the benefit base or IAV.

With the Fed’s three 25 basis-point rate reductions in Fed funds rate in the past year, annuity benefits have dropped. In the case of the Eagle Select Income Focus contract, at age 65, the payout rates are 4.4% of the IAV for a single life contract or 3.78% for a joint life contract. So, for example, a 55-year-old couple paying a $100,000 income could withdraw 3.78% of $150,000 ($5,670) at age 65 under the free living benefit and 3.78% of $200,000 ($7,560) under the option with a 1% fee.

For comparison, a single-premium immediate joint-life annuity for a 55-year-old couple with a $100,000 premium would pay out $7,068 per year. Adding a cash refund or a 10-year period certain feature would reduce the payments by $7 or $14 a month, respectively.

The new contract, now available, offers clients a lifetime income benefit rider with “Wellbeing Benefit” option. If a contract owner becomes unable to perform two out of six activities of daily living, he or she can use the option to enhance income payments for up to five years. The enhancement is 200% for a single life contract owner and 150% each for the two owners of a joint life contract.

The option doesn’t require confinement in a nursing home and no annual fee is applied to the contract. Contract owners can make multiple premium payments without adding more years to the seven-year surrender period. Starting in year two, contract owners can make withdrawals of up to 10% of the contract value penalty-free.

© 2019 RIJ Publishing LLC. All rights reserved.

Why high returns leave Dutch DB plans unhappy

Posted on November 14, 2019 by -

Despite enjoying solid returns since the financial crisis, Dutch defined benefit pension funds are still tormented by low interest rates and expect lean years ahead, according to a report this week at IPE.com.

Citing a survey of the 100 largest DB plans by the Dutch financial daily Het Financieele Dagblad (FD), IPE reported average returns of 10% for the past 10 years; in the first three quarters of this year, the five largest pension funds reported returns of 15.1% to 19.1%.

For instance, the €1bn hairdressers plan (Kappers) averaged 10% growth during the past five years and posted the best result (2.3%) for 2018, the FD survey found. But ever-falling rates, which the funds use to discount their future liabilities, have undermined their funding ratios.

Gerard van de Kuilen, the pension fund’s chair, said Kappers’ funding ratio funding fell to 93.8% as of September 30, forcing the plan to contemplate benefit cuts in the absence of higher contributions.

The plan’s positive investment returns were due mainly to its 50% interest hedge of its liabilities through interest swaps and bonds, whose solid results were due to declining interest rates, he said, adding, “But this is something you don’t want.”

Van de Kuilen explained that, because of its young participant population, the liabilities of Kappers have a duration of no less than 34 years so that “a 1% drop of interest rates means a rise of liabilities of 17%.”

Similarly, the €459bn civil service plan ABP posted returns of more than 15% for the first three quarters of 2019, with equity, bonds and private equity yielding 21.9%, 11.4% and 11.1%, respectively, while real estate generated 16.2%, according to Diane Griffioen, the plan’s head of investment. But its funding ratio was only 91% as of September 30.

Simon Heerings, director of risk management at consultancy First Pensions, said most Dutch schemes face the same challenges. “Low rates generate insufficient returns relative to rising liabilities,” he said. “As the high returns are largely due to dropped interest rates, the rosy figures will in part disappear as soon as interest rates rise again.”

“I keep on seeing pension fund trustees and media referring to record returns and pension assets, but they deliberately ignore the liabilities side of the balance sheet,” observed Rob Bauer, professor of finance at Maastricht University.

Most Dutch pension investors expect much lower returns during the coming years, according to a survey among 10 fiduciary managers by Dutch consultancy Sprenkels & Verschuren.

Average returns for equity and credit would drop to 4%, 3% and 0%, respectively, for the next five years, the managers predicted. Part of this year’s returns reflected a rebound from losses incurred during the last quarter of 2018, said ABP’s Griffioen.

© 2019 RIJ Publishing LLC. All rights reserved.

 

SECURE Act still stuck in Washington gridlock

Posted on November 14, 2019 by -

The SECURE Act remains in limbo in the Senate, having failed to pass by unanimous consent as it did in the House last May. Senators Pat Toomey (R-PA), Ted Cruz (R-TX) and Mike Lee (R-UT) have placed holds on the bill, which contains reforms that the retirement industry has long lobbied for.

The bill would, among other things, make it easier for smaller employers to join open multiple employer plans, ease non-discrimination rules for frozen defined benefit plans and add a safe harbor for selecting lifetime income providers in defined contribution plans. It also increases the automatic-enrollment safe harbor cap to 15% from 10%.

Senators have added 10 amendments, with five from each party. The five amendments that Senate Republicans were:

  • Fixing a drafting error in the Tax Cuts and Jobs Act to ensure the full cost of store, office, or building improvements can be immediately expensed, as was originally intended (offered by Mr. Toomey).
  • Expanding 529 college savings plans to cover expenses of K-12 students and educational costs for home-schooled students (offered by Sen. Cruz).
  • Allowing individuals with terminal illnesses to take out money from their retirement plans early penalty free (offered by Sen. Richard Burr (R-NC).
  • Expanding the existing provision in the bill that allows 529s to be used for apprenticeship programs. Currently, the SECURE Act only allows for Department of Labor-recognized apprenticeships (offered by Sen. Mike Braun (R-IN).
  • Removing a SECURE Act provision that would provide pension funding relief for community newspapers (offered by Sen. Lee).

According to a report in Pensions & Investments website, Sen. Patty Murray, D-Wash., objected, saying the amendments offered are “not in the interest of working families and will kill any chance this bill has of becoming law. She asked Toomey to modify his request to consider the House version of the bill, to which he declined.

Sen. Rob Portman (R-OH) urged his colleagues to pass the SECURE Act. “For the past 5 1/2 months some of us have been trying to get this legislation done. I think it’s time for us to move forward with these reforms.”

© 2019 RIJ Publishing LLC. All rights reserved.

Fidelity adds USAA SPIA to its annuity platform

Posted on November 14, 2019 by -

The USAA Single Premium Immediate Annuity (SPIA) has joined to The Fidelity Insurance Network, a platform at the Fidelity Investments website where investors can compare and choose from a curated shelf of annuities. It is the first USAA annuity to be offered on Fidelity’s platform.

Other SPIAs on the platform include SPIAs enables individuals to convert a lump sum into guaranteed income for life or a predetermined set period of time. Additionally, the product offers:

  • The ability to protect beneficiaries.
  • An inflation adjustment option that increases payments up to 3% each year to help address the steadily rising cost of living.
  • A one-time withdrawal feature to help address certain financial emergencies.

Fidelity has offered simpler, high value annuity products for more than 30 years, the investment company said in a release. Its insurance platform also includes fixed and variable annuities.

“Our role is to help investors make informed decisions in the context of a holistic financial plan, and annuities, when designed and used appropriately, can help investors address key financial needs, including tax efficient retirement savings to supplement 401(k)s and IRAs, and pension-like guaranteed income in retirement,” a Fidelity spokesman told RIJ yesterday.

“Fidelity offers access to both Fidelity annuity and insurance products, as well as well-known third-party carrier products. As one of the leading insurance and annuity providers in the country, the addition of USAA products helps us enhance our annuity selection.”

© 2019 RIJ Publishing LLC. All rights reserved.

‘Top of Mind’ Wealth Management Platforms

Posted on November 14, 2019 by -

Life is so frantic today—thanks to devices and software that help us compress more activity into tinier increments of time—that people are too busy to look for investment advice from sources other than friends, family, or familiar brands like Fidelity, Charles Schwab and Vanguard.

So says the latest edition of The Cerulli Edge—Retail Investors Edition, from Boston-based Cerulli Associates, the global consultants.

“Widely reported investor satisfaction with their current financial providers, combined with demanding and distracted lifestyles, leave well-known wealth managers in a position of strength,” the report said. “Unaided awareness is one of the most crucial metrics in understanding a firm’s significance in the lives of potential consumers.”

In short, brand strength is king. As a retail consultant once said to me, “What makes a great brand? It’s a promise kept over and over and over.” As a Vanguard institutional executive once told me, “I tell new hires, ‘Just don’t screw it up.’” He meant nothing more complicated than “Don’t mess with success.”

Vanguard, Schwab and Fidelity have been building their brands since the 1970s, after the stock market bottomed out in the recession of 1974. While others were moaning about the death of stocks, their leaders recognized (along with Warren Buffett) that the only direction for the market was up.

Each grabbed a niche—Vanguard in low-cost indexing, Schwab in discount brokerage, and Fidelity in retirement plans and actively managed mutual funds—and never let go. Each steadily reaped the Zeitgeist of demographics (40 years of Boomer savings), financial deregulation, massive money creation (thanks to federal deficit spending), the resulting asset value inflation, and the federally-subsidized (via tax deferral) 401(k) system, which brought “Main Street to Wall Street.”

Each of their highly visible leaders—Vanguard founder Jack Bogle, Fidelity fund manager Peter Lynch, and Charles Schwab himself—gave their firms trustworthy public faces. Until recently, one of their few brand-strength peers from the 1970s was PIMCO, whose voluble co-founder, Bill Gross, rode the bull market in total bond returns—created by the long descent from Fed chairman Paul Volcker’s double-digit interest rates—until falling yields could no longer support the fees associated with his actively managed bond funds.

Scott Smith, director of advice relationships at Cerulli, explained why these three firms have proven to be the fittest survivors in the financial service game.

“Fidelity achieves an unmatched level of unaided awareness among affluent investor respondents, with an average of 50% citing the firm when asked to name a provider in the space,” he writes in The Cerulli Edge.

“The firm’s extensive advertising, combined with its presence as a retirement plan provider for millions of participants, make it the most formidable brand in the wealth management segment,” Smith wrote.

In early 2009, as the financial crisis bottomed, then-Fidelity chief marketing officer Jim Speros, his internal ad team, and the Boston ad firm Arnold Worldwide conceived of an animated green navigation line, like those found in GPS systems, that would lead investors back to success. Fidelity still uses the award-winning concept. According to MediaRadar.com, Fidelity spent over $100 million in 2018 on print, digital and television advertising.

“Though frequently not the first to enter developing segments, once [Fidelity] has decided to do so, the move is usually decisive, which bodes well for the firm’s ability to maintain its premier position among investors, advisors, and retirement plan sponsors,” Smith wrote.

Charles Schwab is the name that 33% of affluent investors surveyed mention when asked to name a provider in the investment space, according to Cerulli. In ad-speak, that’s called a “strong unaided awareness level” within the target market.

“Schwab makes a concerted effort to increase awareness levels through a variety of ongoing ad campaigns, highlighting the firm’s strengths,” Smith wrote. “The firm often takes a leading position in advancing investor-focused initiatives.”

The “Talk to Chuck” ad campaign that began in 2005 featured its CEO and helped humanize the company. “It’s a bit of a risky move,” Marc E. Babej, a brand and corporate strategy consultant, told a New York Times advertising columnist at the time about the campaign. “‘Talk to Chuck’ sounds like, ‘We love you, man.’

“But it stands to get attention,” and “if Chuck becomes an icon for the company, in a ‘What would Chuck do?’ way, it would help set Schwab apart in the marketplace.” It did, and it continues to.

By contrast, Vanguard has done relatively little advertising or marketing. Bogle, who died last January, was philosophically averse to spending current customers’ money to court new customers. Yet 23% of investors surveyed cited Vanguard when asked to name a company in the investment space. (I worked at Vanguard from 1997 to 2006.)

“By opting out of the more active marketing options used by Fidelity and Schwab, Vanguard consigns itself to a somewhat reduced awareness level, but this has little downside for them,” according to Smith. “The firm has been an early leader in the low-cost investing movement. Even though other providers have made efforts to match, or beat, Vanguard’s initiatives, the firm maintains an unmatched public perception as a low-cost provider.”

“Costs matter,” Bogle was famous for saying. He tried not to let investors forget that even a modest-seeming 1% annual expense ratio can reduce lifetime savings by 25% or more. According to one of his biographers, Bogle was not born a discounter. Instead, after the 1974 crash, he decided that coaxing traumatized investors back into mutual funds would require ultra-low prices as well as optimism about the future of the economy.

Jack Bogle

In the decades that followed, he was pre-disposed to pass the savings from rising economies of scale back to his customers. He had the liberty to do so. Vanguard was not simply a private company, with no army of common stock shareholders or Wall Street analysts to please, but a marketing-and-back-office cooperative owned by its member mutual funds, which are in turn owned, technically, by their shareholders. (Indeed, Vanguard’s internal transfer-pricing arrangement, which provided services to the funds “at-cost,” would lead in 2014 to accusations of tax evasion by a former employee. No regulatory agency bothered to prosecute.)

Though a formidable competitor not inclined to doubt his own instincts, Bogle was quite modest about Vanguard’s achievements. He gave much of the credit for the company’s success to the 401(k) system, the information technology revolution, and the Boomer retirement wave.

Bogle did not own Vanguard. No one does. Even insiders are hard-pressed to articulate its precise ownership structure. As an observer once said, “Vanguard just seems to float out there in non-Euclidean space, like the Eye of Providence floating above the pyramid on the back of a dollar bill.”

© 2019 RIJ Publishing LLC. All rights reserved.

Marshmallows and Social Security

Posted on November 14, 2019 by -

What do Social Security benefits and marshmallows have in common? When placed squarely in front of most people, both are hard to resist.

Almost everyone knows about the famous “marshmallow test.” In the late 1960s, Dr. Walter Mischel of Stanford put marshmallows under the noses of preschoolers and asked them to wait 15 minutes before popping them in their mouths. Some were promised a reward if they “delayed gratification.” Most kids couldn’t go the distance.

Similarly, Social Security benefits become available to most Americans at age 62, and people who retire in their early- to mid-60s tend to file for Social Security right away. Few retirees delay claiming until age 70, when the monthly benefit is as much as 76% higher than at 62.

Experts at the Center for Retirement Research (CRR) at Boston College would like to help people stop treating Social Security like a marshmallow. In a new paper, they recommend adding a default option to 401(k) plans that would make it easy for retirees who retire before age 70 to use their tax-deferred savings for living expenses so they don’t have to claim Social Security until then.

This “bridge” strategy isn’t new. But the authors of the new paper, led by CRR director and retirement thought-leader Alicia H. Munnell, offer calculations proving that, over the long run and for many mass-affluent Americans, this approach beats other common strategies, such as buying an immediate or deferred income annuity with part of one’s savings.

“[We] would introduce a default into 401(k) plans that would use 401(k) assets to pay retiring individuals ages 60-69 an amount equal to their Social Security Primary Insurance Amount (PIA) – the monthly amount at an individual’s full retirement age,” write Munnell, Gal Wettstein, and Wenliang Hou in “How Best to Annuitize Defined Contribution Assets?”

Alicia Munnell

Defaulting participants receive “their PIA (the benefit at full retirement age) for as many years as their balances will permit and are assumed to claim once their balances are exhausted or at age 70, whichever is later.” In a footnote, the authors concede that underfunded retirees should ideally work longer, save more and claim later. The bridge strategy, they say, would be their best alternative to that.

Bridge to somewhere

The “bridge” concept has enjoyed episodes of popularity in academic and public policy circles over the past 15 years. It partly reflects the low interest-rate environment. Better to decumulate fixed income investments that are earning under 4%, the logic goes, than to forego an annual 8% rollup in Social Security benefits.

That strategy faces a couple of potential headwinds in the financial services world, however. In a kind of corollary to Gresham’s Law (which dictates that “bad money drives out good”), most new retirees are inclined to spend the “government’s money” first and conserve their own liquid savings for later. Fee-based planners aren’t likely to recommend that strategy; the spend-down from a retirement account would lower the advisers’ own asset-based income.

The CRR’s bridge policy doesn’t harmonize with the bottom-line interests of annuity issuers and distributors either. The strategy relies on using savings to maximize Social Security benefits, not to buy commercially available income annuities. There’s a reason for that: buying “extra” Social Security benefits is much cheaper.

The bridge concept, in essence, would prevent early retirees from unwisely locking in a lifetime of minimal Social Security benefits. “Providing a temporary stream of income to replace an individual’s Social Security benefit would break the link between retiring and claiming,” the paper said. “As a result, retirees could delay claiming Social Security in order to maximize this valuable source of annuity income.”

“As with any default,” the paper said, “the worker would retain the ability to opt out in favor of a lump-sum or other withdrawal, including leaving the funds in the plan. Even if the payments had started, workers would still be entitled to change their mind and change the size of the distribution, or switch to a lump sum for their remaining 401(k) balances, rolling the lump sum to an IRA as a tax-free transaction.”

The CRR team ran an analysis comparing the bridge strategy with other strategies, which are listed below.

  • Applying 20% or 40% of tax-deferred savings to the purchase of an immediate income annuity beginning at age 65.
  • Applying 20% or 40% of tax-deferred savings to an income bridge between age 65 and 70.
  • Applying 20% of tax-deferred savings to the purchase of a deferred income annuity with income starting at age 85, and either spending down the remaining 80% between ages 65 and 85, or spending only required minimum distributions from age 70½ to age 85.

For single men, single women, and couples with tax-deferred wealth at the 75th percentile level ($106,000, $110,000 and $275,000, respectively) and assumed Social Security benefits of $15,348, $14,514, and $28,569 (respectively), the income bridge was the least expensive way to finance retirement over the long-term.

The optimum strategy for a specific man or woman would of course vary, depending on factors such as total household wealth, expenses, and “shocks” (financial or health-related) during retirement. The authors didn’t even try to calculate the optimal strategy for couples because too many variables were involved.

United Technologies’ experiment

There’s a lot besides the “bridge” proposal in this comprehensive 40-page paper. The authors venture an explanation for the long-standing “annuity puzzle” (i.e., low immediate income annuity sales). They also offer useful updates on existing private sector solutions to the challenge of turning 401(k) savings into lifetime income.

For instance, the paper describes United Technologies Corp.’s (UTC) novel solution, TIAA’s 403(b) group annuity approach, and the solution marketed by Prudential, Great-West and Transamerica to 401(k) plans, which involves attaching an optional guaranteed lifetime withdrawal rider (GLWB) to a plan participant’s target date fund.

The UTC defined contribution plan design, which replaced a defined benefit pension plan, resembles a GLWB rider but with three life insurance companies offering the option instead of one. The three companies bid against each other once a year to offer the highest annual lifetime floor income to each participant in the program, based on the participant’s contributions in the prior year.

About third of UTC’s participants have opted for what is called the Lifetime Income Strategy (LIS), but they’ve transferred less than 10% of their assets into the program. “At the end of July 2019, the company’s defined contribution plan had over 140,000 participants and $28.5 billion in assets. The LIS, which was introduced as the default for new hires in 2012, had about 45,000 participants and $1.9 billion in assets,” the paper said.

Factoids mentioned in passing

The paper includes a number of interesting factoids, such as:

  • During retirement, support from spouses and other relatives has significant financial value. “Marriage provides 46% of the protection offered by a fair annuity for a 55-year-old individual,” the paper said. “Adding risk sharing between parents and children, the risk-sharing potential within families is substantial.”
  • People with annuities live, on average, about 3.5 years longer than the rest of the population.
  • Commercial annuities cost about 15% to 20% more than they would if the issuers added no administration or marketing costs, and calculated the benefits solely on the bases of life expectancy tables, premium size and discount rates.

© 2019 RIJ Publishing LLC. All rights reserved.

 

How to Choose an Annuity Issuer

Posted on November 7, 2019 by -

When you shop for a new car, what are your criteria? The manufacturer’s reputation? The model or style of the vehicle? Its main function or purpose in your life? The proximity of the dealer? Or maybe you already have a specific automobile in mind.

Your inquiries wouldn’t stop there. You’ll want to know, for instance, what Consumer Reports or the Kelly Blue Book says; whether a car is likely to perform as expected and hold its value; which dealers provide affordable, get-it-right-the-first-time service.

Annuity shopping isn’t so different from car shopping, except that, as an adviser, you’re shopping for a client, not for yourself. And, as an adviser, if you’re not affiliated with a life insurance carrier, a broker-dealer or an insurance marketing organization (IMO), you might be doing the due diligence on your own.

In this article, we’re talking about finding a life insurer that issues annuities, not about choosing a specific product. At this point in the process, we assume you’re looking for transparency, predictability and great service rather than a specific product’s price, yield, monthly payout or the size of the commission you might receive.

Maybe you’ve never driven down “annuity road” before. With more investors asking safe retirement income or downside protection, and with annuity issuers now offering more fee-based products to Registered Investment Advisors (RIAs), many advisers find themselves grappling with annuities for the first time.

If you’re new to the annuity world, your initial questions might include:

  • What does the client need?
  • Which life insurers specialize in which annuities?
  • What life insurers are safest to invest with?
  • What about those ‘platforms’?
  • Who offers product comparison tools?

In this primer on choosing an annuity provider and a contract, we’ll briefly answer these questions. The challenge can be both simple and complex, but there are rules of thumb. As annuity guru Sheryl Moore, CEO of Winkintel.com, put it, “First, do your due diligence on the company, on their financials, and on their management. Then, do due diligence on how they treat their in-force clients and business. Only then should you look at their product offerings.”

What does the client need?

Annuity research starts with the client. Since there are at least five or six types of annuities, you’ll first have to figure out what kind of annuity a client needs and what function it will serve in his or her life. (This assumes that you put clients’ interests first and that you don’t represent one carrier or specialize in one type of contract.)

So, before you worry about which carrier is “best,” you’ll need to find out why your client needs an annuity. For instance, does he or she need it for guaranteed retirement income, for tax deferral, for accumulation with protection against loss, for a savings goal within a 10-year time horizon, or as a hedge against long-term care expenses?

“The first order of business is, ‘Does the insurer have the product I’m looking for? If you’re looking for lifetime income, for instance, you’ve already narrowed the field,” said Louis Harvey, president and CEO of DALBAR, which evaluates providers of financial services.

Which life insurers specialize in which annuities?

Many of the largest multi-line insurance companies, like Nationwide, Jackson National, AIG, MassMutual, Principal, Pacific Life and Lincoln Financial—offer a range of fixed, variable and indexed annuities. These are among the annuity issuers most popular with advisers. (See chart below from Cogent Research.)

Generally speaking, mutual life insurance companies, which are owned by their policyholders and whose products are more likely to be sold by career agents and advisers, tend to offer simpler, more transparent products than do publicly traded life insurance companies.

For instance, if you’re looking for a fixed deferred annuity or a simple income annuity, New York Life, Northwestern Mutual, Guardian, and MassMutual, all of which are mutual companies, should be in your search. If you’re looking at companies that have specialized in variable annuities, you’ll find Jackson National and Prudential at the top of the sales charts.

Similarly, there are clusters of companies that specialize in fixed indexed annuities (Allianz Life, Athene, Great American, American Equity), in structured or “buffer” annuities (AXA, Brighthouse, CUNA Mutual), in medically underwritten annuities (Mutual of Omaha), or in the newer fee-based, no-commission annuity contracts for RIAs (see “Platforms” below). Once you decide on the kind of contract your client needs, the search for a carrier gets narrower, especially if your search criteria include high sales volume and high strength ratings.

Which life insurers are safest to invest with?

Short answer: All of the “A” rated ones, and maybe even some of the Bs.

To a degree that sometimes mystifies insurance industry veterans, investment-oriented advisers seem to have an exaggerated sense of the financial fragility of large life insurance companies and their risks of becoming insolvent or failing during the life of an annuity contract.

Luckily, the financial strength rating of a life insurance company is easy to find. Just go to their website and click to the Ratings or Investors section. There you should find the strength ratings assigned by the four major rating agencies, which include A. M. Best (the insurance specialist), Standard & Poor’s, Moody’s, and Fitch Ratings.

You won’t usually find Weiss Ratings cited there, but it’s worth checking out. Founder Martin Weiss suspects that the major ratings agencies have indulged in some grade inflation, and he reserves his A+, A and A- ratings mainly for big mutual life insurers and mutual-like companies.

According to the Weiss website (by subscription fee), these include TIAA, MassMutual, State Farm, New York Life, Pacific Life and Guardian. Since they don’t have to impress Wall Street analysts with quarterly performance data, mutual companies can afford to hold higher levels of reserves than publicly traded companies. Weiss rates not only by letter but also by color, and it recommends carriers at the A+ through B- levels.

To learn more about a life insurer, you might call David Paul or Dan Hausmann at ALIRT. This insurance research firm digs down into the financials of the insurance holding companies, looking at not just the parent companies but also each subsidiary life insurer. If you buy a contract from a subsidiary, the ratings of the parent might not completely apply.

“We have a scoring system that shows trends over time,” Paul told RIJ in an interview. “We’re in a period when these subsidiaries are changing ownership like crazy. And their ratings can drop when the umbrella of a holding company isn’t there anymore. We look well below the level of the parent.”

When comparing the yields of fixed annuities, advisers will notice that the B rated companies typically offer higher yields than A rated companies. According to Paul, an adviser shouldn’t necessarily rule out investing in a B life insurer, especially for a contract that will be held for only three to seven years.

“A lot of people dismiss them out of hand, but some are well-run and quite solvent. If you looked at an ALIRT analysis, you might see that they have strong risk-adjusted capital levels. They might be a small or regional company that doesn’t necessarily want to qualify for higher ratings,” he said. “Keep in mind that, if you’re talking about a five-year MYGA (multi-year guaranteed-rate annuity), the risk of a company getting into trouble during that time is pretty low.”

Strength ratings won’t tell you much about a life insurer’s annuity service quality, however. “When we work with reps on selecting an index annuity carrier, the newcomers usually ask, ‘Is this B or B+ rated carrier safe?” said Jon Legan, vice president of AnnuityRateWatch.com, in an interview. “The more seasoned folks look at the processes: Is it easy to do business with this carrier? The tough part is that you don’t really know until you work with a carrier how easy or hard it will be to work with them.”

J.D. Power’s 2019 U.S. Life Insurance Study includes an “Overall Customer Satisfaction” ranking for annuities. (See below.) Interestingly, each of the top five companies concentrates on a different segment of the annuity market. Generally, RiverSource is associated with individual variable annuities, New York Life with fixed and income annuities, TIAA with group variable annuities, American Equity with indexed annuities, and AXA with structured or “buffered” annuities.

What about those ‘platforms’?

“Curated” is a popular word today. It means “selected, organized and presented using professional or expert knowledge.” There are now several online platforms where a fee-based advisers can go to find lists of pre-screened annuities for direct purchase.

At the Fidelity Investments website, visitors can view and compare life insurers and annuity contracts that Fidelity considers best-in-class. Interestingly, Fidelity lists only one of its own products, a low-cost deferred variable annuity called the Fidelity Personal Retirement Annuity.

The site also offers a New York Life variable annuity with a guaranteed minimum accumulation benefit, the New York Life Clear Income Annuity (a fixed deferred annuity with a lifetime withdrawal benefit), and income annuities from Guardian, MassMutual, Principal, New York Life, and Western & Southern.

Several other platforms specialize in selling annuities and life insurance to fee-based advisers, including those not insurance-licensed. One of these is RetireOne, which offers annuities from Allianz Life, Ameritas, Great American, Great-West, Jackson National, Symetra, TIAA, and Transamerica.

Another new platform for indexed annuities, also aimed at fee-based advisers, is DPL Financial Partners, which offers products from Allianz Life, Ameritas, AXA, Great American, Great-West, Integrity, Jackson National, Lighthouse Life, Lombard International, and Security Benefit. Other platforms that aim to make it easy for RIAs to integrate annuities into their overall financial plans include Envestnet and Orion Advisory Services.

For individuals and advisers who would like select life insurers to bid for their annuity business, there’s Income Solutions, a web platform run by the Hueler Companies in suburban Minneapolis. Founder Kelli Hueler wanted to give investors an information advantage by making annuity issuers compete against each other to offer the most competitive payout rate. Companies currently offering immediate and deferred annuities on the platform include the Integrity Companies, Lincoln Financial, Mutual of Omaha, Nationwide, and Symetra.

Who offers product comparison tools?

Once you know the product type you’re looking for and selected the suitable life insurers, you still face the chore of comparing, contrasting and choosing specific contracts. Given the many types of riders and levels of fees, even on the same type of annuity from the same company, you may find it difficult to make apples-to-apples comparison.

Cannex, Beacon Research, and Wink are leading sources of annuity sales and/or contract data. Cannex offers its subscribers a tool for comparing variable annuity contracts with each other or index annuities to each other. Its Income Annuity Exchange supplies comparative quotes and illustrations to distributors and services providers for deferred or immediate income annuities.

On Wink’s website, you can find an alphabetized list of dozens of annuity companies, with a link to each. Wink’s AnnuitySpecs service provides product-level data on virtually all annuity products, including riders, along with tools for comparing and evaluating them.

Another company in that space, Beacon Research/AnnuityNexus.com, provides comparative data on fixed rate, indexed and variable annuities to annuity issuers and distributors. As mentioned above, there’s also AnnuityRateWatch.com, which provides advisers, brokers, banks, insurance marketing organizations and carriers with data on fixed and indexed annuities and their riders.

Immediateannuities.com is a logical (and free) first stop for retail income annuity shoppers who are looking for instant rough payout rates as well as lists of issuer-by-issuer quotes or who want to be referred to an insurance-licensed agent to execute an annuity purchase. Its data comes from Cannex.

Here are two more examples of companies in the annuity comparison business: Ebix, which offers a VitalAnnuity tool, and Capital Rock, which offers a proprietary comparison tool called RightBRIDGE Annuity Wizard.

VitalAnnuity is software that compares fixed annuity quotes and information to find the best or most appropriate rates and options for a given client. It gets its data from Beacon Research, which verifies product data provided by the carriers.

Through VitalSigns, an Ebix service, you can get the Comdex scores of life insurance companies. The Comdex score takes a company’s letter ratings from A.M. Best, Moody’s, Standard & Poor’s, and Fitch Ratings and averages them to a single number. The Comdex number makes comparisons between companies more accurate.

RightBRIDGE is a “systematic process to help advisors select and/or validate the best product types and products for each individual client’s needs and preferences,” according to the CapitalRock website. It uses a scoring engine and proprietary analytics to “explain why a profit fits a client’s needs.”

(See related story on today’s homepage, “Five Questions to Ask about an Annuity Issuer.”)

© 2019 RIJ Publishing LLC. All rights reserved.

So Far, Most 401(k)s Don’t Amount to Much

Posted on November 7, 2019 by -

The 401(k) defined contribution retirement saving system has been in existence in the U.S. since 1981, introducing millions of “Main Street” Americans to the pleasures and pain of Wall Street. Leading-edge boomers were 35 years old.

Since then—perhaps not coincidentally—the Dow Jones Industrial Average has grown, with only two great interruptions, from 1,016 on April 28, 1981 to 27,492 on November 5, 2019. That’s nominal growth: Its compound annual growth rate with dividends, adjusted for inflation, has been 7.8%.

Over that period, bonds haven’t done too badly either. Between April 1981 and October 2019, the 10-year Treasury showed an average annual return of 6.6% (or 3.67% when adjusted for inflation).

But, to the mystification of some economists and the frustration of many savers, those four decades of dizzying index growth—no doubt driven in part by a worldwide Boomer savings boom as well as the IT revolution—the 401(k) system hasn’t produced the generation of wealthy retirees that, under at least on paper, it might have.

Some plan participants have certainly large accumulations—those continuously employed in high-paid jobs in profitable companies with generous matching contributions and the capacity to save a high percentage of salary on a tax-deferred basis—but the average journeyman worker has lower-than-expected accumulations in 401(k)s or IRAs.

A new study from the Center for Retirement Research at Boston College (the Center) shows that in 2014 “the typical older worker [had] less than $100,000 in 401(k)/IRA assets, instead of the $364,000 he would have had under a system in which workers participated throughout their careers, paid zero fees on account balances, and did not withdraw money prematurely from their accounts.”

To someone who has experienced the U.S. workplace over those years, that finding isn’t surprising. Since the creation of the 401(k), I worked for only about nine consecutive years in a company with an excellent 401(k) plan (i.e., one with ultra-low fees, a 50% employer match and a 10% discretionary employer contribution).

Saving for retirement wasn’t even my primary concern for most of that time. There was a three-bedroom ranch to finance and children to educate. And I cheated a bit, briefly borrowing $1,100 from my plan to buy a used 16-foot sailboat, of all things. Had my wife not participated in a generous TIAA plan for 20 years, I’m not sure where we’d be.

My case turns out to be fairly typical. After looking closely into the subject, the authors of the study, Andrew Biggs of the American Enterprise Institute along with the Center’s Alicia Munnell (its director) and Anqi Chen, found four reasons why 401(k)/IRA accumulations for individuals ages 55 to 64 are so inadequate.

According to their analysis of federal census data and the Survey of Income and Program Participation (SIPP) , the ideal $364,000 accumulation was reduced to $247,800 by the “immaturity” of the 401(k) system, to $136,200 by the fact that so many small and mid-sized employers had no plan to offer, to $122,800 by fees, and to $92,000 by pre-retirement withdrawals (“leakage”).

On the bright side, that $92,000 balance is for individuals, not households. Many households have two earners, each potentially covered by a plan for at least part of his or her career. On the dark side, when the researchers removed people under 30 and people with defined benefit plans from the study, the ideal accumulation was only $270,000 and the total average individual accumulation at retirement in 401(k)s and IRAs was only $90,000. That’s after the longest bull market that the known universe may ever see, when millions of Boomers are departing the labor force, the global economy is wheezing, and governments everywhere are crying poorhouse.

If the 401(k) system hasn’t benefited Americans evenly, it’s not alone in that shortcoming. You could similarly indict the public schools and the health care system, and for the same reason. The competition for jobs in profitable companies, which often come bundled with generous retirement plans, generous medical coverage and access to good school districts, is intense. By definition, many are left out.

Some people are eager to improve the retirement savings situation. In eight or 10 states, workers without employer-sponsored retirement plans are being offered state-sponsored Roth IRAs. The 401(k) industry has been lobbying for legislation (the SECURE Act) that would allow small companies to join big, provider-sponsored 401(k) plans.

Personally, I believe that if every company put at least 10% of salary into a leak-proof, career-long, portable retirement plan, on top of a match, then all Americans would reach retirement in much better shape. But don’t hold your breath waiting for that.

© 2019 RIJ Publishing LLC. All rights reserved.

Rates would be negative without government debt and deficits

Posted on November 7, 2019 by -

In a new paper, “On Secular Stagnation in the Industrialized World” (NBER Working Paper 26198), Łukasz Rachel and Lawrence H. Summers try to explain why real interests have declined in developed nations over the past half-century.

Focusing on “the advanced economy interest rate,” an aggregate constructed from the prevailing interest rates in the OECD nations, the authors find that the neutral real global interest rate—the rate that balances desired saving and investment and thus leads to full employment and stable inflation—has fallen about three percentage points since the 1970s.

Today, they conclude, the average neutral real rate is around zero in industrialized nations. If not for an increase in government debt and deficits and increasingly generous social insurance programs, the neutral rate would have fallen nearly seven percentage points and would now be significantly negative, they write.

“But for major increases in deficits, debt, and social insurance, neutral real rates in the industrial world would be significantly negative by as much as several hundred basis points suggests substantial grounds for concern over secular stagnation,” the researchers conclude. “[T]he private economy is prone to being caught in a low inflation underemployment equilibrium if real interest rates cannot fall far below zero.”

The neutral real rate for any single open economy depends on a nation’s current account position, which depends on its real exchange rate, which in turn is affected by current and expected future real interest rates.

To overcome this problem, the researchers combine data from all developed countries and treat them as a single economic entity. They point out that the aggregate current account balance of this bloc has varied within a narrow range—less than 1.5% of GDP—since the 1970s. It has risen in recent years, suggesting that international capital flows, all else equal, have raised interest rates. The researchers also assume perfect internal capital mobility, given the large capital flows between the developed nations and common trends in long-term real rates and stock markets.

Instead of focusing on traditional measures of liquidity and risk, the researchers examine factors relating to saving and investment trends to analyze long-term changes in neutral real rates. They note that interest rates on highly liquid securities have declined in tandem with those on relatively illiquid government-issued inflation-indexed bonds and bond-like financial derivatives. While risk premiums on stocks have risen, the increases are small relative to the decades-long decline in real interest rates.

Had real interest rates not gone down over the last half century, savings would have exceeded investment in OECD countries by between 9 and 14 percentage points of GDP, the researchers’ baseline analysis indicated.

Several government policy changes counterbalanced this potential excess, they wrote. For example, developed nations have increased their debt dramatically during the period of study, to 70% of GDP from about 20%. They also boosted old-age payments to 7% of GDP from an average of 4%, and raised old-age healthcare spending to 5% from 2% of GDP.

The effect of these policies on interest rates has been substantial. For example, holding other variables constant, the increase in public debt should have raised real rates by between 1.5 and two percentage points over the last four decades. Increased social security and healthcare provision likely had a similar, if not slightly larger, effect.

To better understand and further quantify the impact of these policies on real interest rates, the researchers use two models of household saving: one focusing on lifecycle considerations, the other emphasizing idiosyncratic risk and precautionary saving. The baseline calibration of these models confirms the earlier results. The researchers conclude that the policy changes taken together may have raised equilibrium real interest rates by between 3.5 and 4 percentage points.

© 2019 RIJ Publishing LLC. All rights reserved.

‘Performance-enhanced’ bond funds? Evidently.

Posted on November 7, 2019 by -

Do active bond fund managers doctor their funds with performance-enhancing fixed income instruments in order to get a better Morningstar rating and increase fund inflows? Professors in three major graduate schools of business say many of them do.

“Many funds report more investment grade assets than are actually held in their portfolios, making these funds appear significantly less risky,” write Huaizhi Chen of Notre Dame, Lauren Cohen of Harvard, and Umit Gurun of the University of Texas-Dallas.

“This results in pervasive misclassifications across the universe of US fixed income mutual funds by Morningstar, who relies on these reported holdings,” they found, charging that “the problem is widespread—resulting in about 30% of funds being misclassified with safer profiles, when compared against their actual, publicly reported holdings.”

[Morningstar’s response to the paper’s findings can be found here: https://www.morningstar.com/learn/bond-ratings-integrity.]

Not all fund firms practice this enhancement to the same degree, according to the paper, entitled, “Don’t Take Their Word for It: The Misclassification of Bond Mutual Funds.” The paper was published this month by the National Bureau of Economic Research (Working paper 26423).

“We find that some fund families essentially never misstate holdings, while some families engage in misstatement regularly – and for nearly all of the funds in the their family. The list of the most frequent misstating and misclassified funds is in [table at right]. As can be seen, 100% of certain families’ fixed income funds are misclassified into safer categories as compared to what their actual holdings imply.”

The upshot is that these funds are riskier than advertised. and often provide higher returns than their portfolio holdings—as self-reported to Morningstar by the asset management firms but not as reported to the Securities & Exchange Commission—would suggest. Misclassified funds outperform their peers by an average of 10.3 basis points per quarter, the paper said, but underperform their peers by 11 basis points per quarter when properly categorized.

“We show that misclassification is widespread, and continues through present-day, rising to 33% of high and medium credit quality funds in 2018,” the authors write. “Moreover, as mentioned above misclassifications are overwhelmingly one-sided: 1% of all misstatements push funds down a category—99% of misstatements push up to a safer category.”

“A large portion of bond funds are not truthfully passing on a realistic view of the fund’s actual holdings to Morningstar and Morningstar creates its important risk classifications, fund categorizations, and even fund ratings, based on this self-reported data. Roughly 30% of all funds (and rising) in recent years, are reported as overly safe by Morningstar. This misreporting has been not only persistent and widespread, but also appears to be strategic.”

The paper concluded, “The misreporting has real impacts on investor behavior and mutual fund success. Misclassified funds reap significant real benefits from this incorrectly ascribed outperformance in terms of being able to charge higher fees, receiving ‘extra’ undeserved Morningstar Stars, and ultimately receiving higher flows from investors.”

© 2019 RIJ Publishing LLC. All rights reserved.