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Marshmallows and Social Security

Posted on November 14, 2019 by Kerry Pechter -

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.

How to Choose an Annuity Issuer

Posted on November 7, 2019 by Kerry Pechter -

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.”)

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

Posted on November 7, 2019 by Kerry Pechter -

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.

Rates would be negative without government debt and deficits

Posted on November 7, 2019 by Editorial Staff -

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.

‘Performance-enhanced’ bond funds? Evidently.

Posted on November 7, 2019 by Editorial Staff -

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.”

Five Questions to Ask about an Annuity Issuer

Posted on November 7, 2019 by Editorial Staff -

We asked Louis Harvey, president and CEO of DALBAR, the financial services research firm, what advisers should think about when choosing an annuity issuer. Here’s what he said:

“There are five areas we think of as the important for providers of retail annuity products. The first area concerns the product itself; its construction and restrictions and so forth. That information is readily available online. The second area involves investment management. That can be harder to find, because sometimes the insurance companies use outside asset managers. That adds more complexity than if you’re dealing directly with an investment company.

Louis Harvey

“The third area is the company’s communications. Do they talk to advisers and investors in plain English? Is the information easily digestible? As an advisor, you don’t want to think, ‘What the heck is this?’ when you try to read a letter from a carrier.

“The next thing we look at is service. Are they available to answer questions? Are they accessible via a phone center or website. One key issue in that process is surrenders. Do they tell you that a surrender will cost your client $5,000 or do they make you figure it out for yourself? Those are the five key areas that we examine in our reviews.

“I recommend that an adviser develop his or her own criteria and put together a template, similar to an RFP [request for proposal], with questions to have answered when considering an annuity issuer. The first order of business is: Does the insurer have the product that you need? If you’re looking for lifetime income, you’ve narrowed the field.

If you’re cost sensitive, you can set cost limits. Then you have a product checklist: Does your product have income riders, principal guarantees, or an inflation adjustment, for example. While this template would be for the private use of the adviser, it could also offer tremendous protection against litigation or regulation.”

Fund Families with the Most ‘Misclassified’ Bond Funds

Posted on November 7, 2019 by No Author -

Honorable Mention

Posted on October 31, 2019 by Editorial Staff -

Great American amends fee-based annuity contracts

Less than three months after receiving an IRS Private Letter Ruling (PLR) that eases the taxation of advisory fees, Great American Life has applied a new endorsement to existing annuity contracts that also reduces potential negative effects of the payment of advisory fees from a no-commission (“fee-based) annuity.

The endorsement provides three new benefits for Great American’s fee-based annuity contract owners. First, withdrawals to pay advisory fees are not subject to an early withdrawal charge or market value adjustment. Second, the withdrawal does not reduce the contract’s free-withdrawal amount. And third, the withdrawal will not reduce income rider benefits.

This favorable treatment of advisory fees is the latest milestone in Great American’s goal to make annuities more compatible with an advisory portfolio.

“The negative consequences were twofold when it came to advisory fee withdrawals. The withdrawal may have been a taxable event to the client, with the potential for an additional 10% tax penalty. Plus, clients had to consider how the withdrawal would affect their annuity benefits,” says Tony Compton, Great American Life Divisional Vice President of Broker/Dealer and RIA Sales. “With the Private Letter Ruling and now this endorsement, we’ve eliminated those negative consequences, making it easier for our annuities to work within a fee-based portfolio.”

The endorsement is included with all Great American Life fee-based annuity contracts issued on or after October 28, 2019. The company is retroactively endorsing contracts issued before October 28. The favorable treatment is subject to the limitations described in the endorsement.

The PLR was issued to Great American Life on August 6, 2019 and concluded that advisory fees may be withdrawn from a nonqualified fixed-indexed annuity without creating a taxable event for the client. The ruling also eliminates the 10% tax penalty that may have applied to clients who are not yet age 59½. The ruling is limited to fee-based nonqualified annuities sold by Great American Life. The annual fee cannot exceed 1.50% of the annuity’s account value.

Great American Life launched the industry’s first fee-based fixed-indexed annuity in 2016. Since that time, the company has introduced several technology solutions to support the unique needs of Registered Investment Advisors (RIAs), including a cutting-edge portfolio simulator and an advanced electronic application system. Visit GreatAmericanRIA.com to find these resources and more.

Great American Life Insurance Company is a member of Great American Insurance Group and is rated “A+” by Standard & Poor’s and “A” (Excellent) by A.M. Best for financial strength and operating performance.

Security Benefit issues two new index annuities

Security Benefit Life Insurance Company has launched two fixed index annuities (FIA) as part of its new Strategic Growth Series. The Strategic Growth Annuity features accumulation-oriented caps, participation rates and spreads without a bonus, and the Strategic Growth Plus Annuity features a six percent premium bonus with competitive caps, participation rates and spreads.

Both annuities feature new 1-year and 2-year Index Accounts based on the Morningstar Wide Moat Focus Barclays VC 7% Index.

Advisers and clients can allocate the purchase payments among nine available interest crediting options, including three custom indexes through some of the leading names in financial services, S&P, Morningstar, Barclays, and UBS:

The S&P 500 Low Volatility Daily Risk Control 5% Index Accounts (1 year and 2 year options)
The UBS Market Pioneers Index Accounts (1 year and 2 year options)
The new Morningstar Wide Moat Focus Barclay’s VC 7% Index Accounts (1 year and 2 year options)

The new products both feature nursing home and terminal illness waivers in most states, and a free withdrawal of up to 10% of the prior year’s contact anniversary account value, beginning in the second contract year.

New mortality tables for pension plans issued by SOA

With its updated private sector mortality tables, Pri-2012, the Society of Actuaries has provided a new basis for mortality assumptions for U.S. pension plans, replacing its prior tables, RP-2006. The final version of the Pri-2012 tables includes clarifications but no material changes from the draft issued May 2019.

“Pri” is short for “private retirement plan,” and “2012” represents the central year of the final dataset from which the mortality tables were developed. The dataset includes data from 2010-2014, covering approximately 16.1 million life-years of exposure and 343,000 deaths from private-sector plans across the U.S.

“The Pri-2012 dataset is almost fifty percent larger than the data that was available when we developed our previous tables five years ago,” said Dale Hall, FSA, CERA, MAAA, CFA and managing director of research for the SOA.

Analysis of this comprehensive data reveals the following implications for private pension plans:

Pension liabilities: Most plan sponsors that update their mortality assumptions from the RP-2006 tables to the Pri-2012 tables will experience only a small change in their pension liabilities, usually within plus or minus one percent. The amount will vary depending on the plan’s mix of occupations, ages and gender, as well as the discount rate and other assumptions used to compute liabilities.

Life expectancy: When moving from the RP-2006 tables to the Pri-2012 tables, the life expectancy of a 65-year-old female pension plan participant remains roughly unchanged at 87.4 years. The life expectancy for a 65-year-old male pension plan participant decreases 0.3 years, to 84.7 years from 85.0 years.

Mortality predictors: Participants in multiemployer plans did not exhibit significantly different mortality than participants in single employer plans after controlling for other factors, such as “collar” type and income level. The SOA found that type of occupation (blue-collar vs. white-collar) is emerging as a stronger predictor of mortality than plan benefit amount.

For additional information, including the full Pri-2012 report, please visit https://www.soa.org/resources/experience-studies/2019/pri-2012-private-mortality-tables/.

Fidelity offers in-plan income planning tools

Fidelity Investments this week announced new Retirement Income Solutions for the individuals who choose to keep their savings in a previous employer’s retirement plan (e.g., 401(k) or 403(b)). More than half (55%) of retirees on Fidelity’s platform keep their savings in a plan past the first year of retirement, a Fidelity release said.

Fidelity’s first in-plan retirement solution is designed to be part of an employer’s retirement lineup and combines digital tools, mutual funds and a cash withdrawal strategy to help workers transition retirement savings into a durable income stream.

Fidelity’s new Retirement Income Solutions includes three core components:

A digital end-user experience, a customizable cash flow withdrawal strategy, and a suite of dedicated retirement income funds.

Fidelity Managed Retirement Funds are designed to be part of an employer’s 401(k) or 403(b) plan fund line-up for retirees. The funds, which provide an age-appropriate asset allocation mix that becomes more conservative over time, are designed to complement a withdrawal and payment process that help to deliver a sustainable income stream in retirement.

The Fidelity Managed Cash Flow withdrawal strategy is designed to complement the Fidelity Managed Retirement Funds. It models various systematic withdrawal payment options and aims to provide a steady income payment strategy for individuals while maintaining a balance throughout their retirement. Payout rates increase over time and are updated annually.

The Fidelity Managed Retirement Funds are designed to be part of an employer’s retirement plan fund line-up and used by investors at or nearing retirement who plan on withdrawing money from their retirement savings. The funds are designed to deliver an age-appropriate asset allocation of a diversified mix of underlying equity, fixed income, and short-term strategies that evolve over time.

Fidelity currently offers seven Managed Retirement Funds, allowing investors to select a fund that aligns with their birth year. Funds are designed for investors age 60 and older who turned (or will turn) age 70 in or within a few years of the applicable fund’s horizon date – for example, an investor born in 1945 would likely select Fidelity’s Managed Retirement 2015 Fund.

The Fidelity Managed Retirement Funds are available now, while the digital experience (which includes the online planning tool) will be available in early 2020. Fidelity Managed Cash Flow and the digital experience are available at no extra cost to Fidelity 401(k) and 403(b) clients, while there are expenses associated with the Fidelity Managed Retirement Funds.

State regulators pass on ‘best interest’ rule—for now

The latest draft annuities regulation approved by a National Association of Insurance Commissioners’ subcommittee and forwarded to the full Life Insurance and Annuities Committee for a vote stops short of creating a regulation to require agents to put customers’ “best interests” first.

State insurance commissioners say they are reluctant to replace the word “suitability” with “best interest” in their annuities regulation proposal for fear they will create a fiduciary standard for insurers and agents who recommend annuities products. They indicate that lack of clarity in the Securities and Exchange Commission’s Regulation Best Interest and whether or not the term “best interest” confers a fiduciary duty remain a roadblock. “I do think we’ll get there, sooner rather than later,” Iowa Insurance Commissioner Doug Ommen told Financial Advisor.

“We have a safe harbor for broker-dealers. The question now is do we create one that extends to individuals in the investment advisor space. We’re evaluating whether it is OK for an insurer to rely on securities regulation to eliminate the need for insurer supervision and rules. We’re still not there yet. We’ll be talking about it.”

Athene gets $1.6 billion in capital from Apollo

Athene Holding Ltd., the retirement services company, and Apollo Global Management, Inc., the global alternative investment manager, have agreed to a share exchange under which Apollo will buy Athene shares and eliminate Athene’s current multi-class share structure.

The proposed transaction will add about $1.6 billion of capital for Athene, including approximately $1 billion of incremental excess capital. The companies expect the move to “significantly improve Athene’s index inclusion eligibility and expand Athene’s investor base,” according to a release this week.

In connection with the transaction, Athene’s board of directors has approved an increase in the share repurchase authorization of $600 million of the company’s outstanding common shares. Athene expects to utilize the $350 million of cash proceeds from Apollo toward these repurchases. Since Athene commenced share repurchases in December 2018, it has repurchased 22.4 million shares in aggregate, representing $928 million of capital returned to shareholders.

Apollo’s operating group entities will acquire approximately 35.5 million common shares of Athene for approximately $1.55 billion, which is expected to increase economic ownership by Apollo and certain of its related parties and employees to approximately 35%. The acquisition by Apollo will consist of:

Approximately 7.5 million of Athene shares in exchange for $350 million of cash, valued at a price of $46.20 per share or a 10% premium to the closing market price on October 25, 2019; and,

Approximately 28.0 million Athene shares sold at a 2.3% premium in exchange for an approximately 7% equity stake in Apollo’s operating group entities (approximately 29.2 million Apollo operating group units), valued at approximately $1.2 billion based on the closing market price of Apollo’s Class A common shares on October 25, 2019.

Apollo and its operating group entities will enter into a lock-up on their existing and newly acquired shares of Athene for three years from the initial closing date. Athene will not have a lock-up on its Apollo operating group equity. Both companies view their investments as strategic in nature and intend to be long-term holders.

Athene’s bye-laws will be amended and restated to eliminate its multi-class share structure with all outstanding shares of Athene’s Class B Common Shares converted into shares of Class A Common Shares, and all outstanding Class M Common Shares converted into a combination of Class A Common Shares and warrants to purchase Class A Common Shares. Eliminating Athene’s multi-class share structure increases alignment of interests between Apollo’s voting and economic interests in Athene, and is expected to remove material impediments for additional index inclusion, which should serve to increase Athene’s appeal to a broader group of active and passive investors.

Brexit stymies pension law progress in UK

The Brexit controversy is, among many other things, putting Britain’s proposed pension reforms in limbo.

Major drafts of occupational pensions legislation were introduced by the UK government two weeks ago, but the House of Commons’ vote this week for a December election has short-circuited progress on the bill. The House of Lords is expected to approve that vote, and parliament will be dissolved on 6 November 6.

The decision to hold new elections has caused the cancellation of the second reading of the Pension Schemes Bill in the House of Lords, which was due to take place Tuesday, and to the cancellation of a meeting of the House of Commons Work and Pensions select committee, who had planned to interview executives of Clara Pensions, Pension SuperFund and Pension Insurance Corporation yesterday.

The Pension Schemes Bill was announced in the Queen’s Speech on October 14 and introduced in the House of Lords the next day for its first reading. An initial debate on the bill would have happened during today’s second reading.

However, a December election “pulls the curtain down on the government’s Pension Schemes Bill,” said David Everett, partner at pensions consultancy LCP. “In so doing, [it] throws completely up in the air work that has been underway, in one form or another, on a pensions bill since David Cameron was prime minister.”

The bill includes provisions to introduce a collective defined contribution (CDC) framework, enable pension dashboards, and grant new powers to The Pensions Regulator to tackle corporate misbehavior.

Even if Boris Johnson returns as prime minister following a general election it is not clear if the reform legislation will be resurrected and if so, when. “And if he isn’t, then at the very least there is likely to be a long delay whilst the work on the bill is reviewed by the incoming administration,” Everett said.

Settlement between MIT and its plan participants described

The St. Louis law firm of Schlichter Bogard & Denton, which specializes in representing 401(k) plan participants in class-action lawsuits against plan sponsors and providers, said that it filed a preliminary settlement approval motion this week for the employees and retirees of the Massachusetts Institute of Technology, in their suit against the university.

The settlement terms include the creation of an $18.1 million settlement fund for the plaintiffs, as well as non-monetary relief.

The original complaint, David B. Tracey, et al., v. Massachusetts Institute of Technology, et al., was originally filed in the U.S. District Court of Massachusetts, in August 2016, alleged that the school violated its fiduciary duties under the Employee Retirement Income Security Act (ERISA).

According to the complaint, MIT’s employees lost millions in retirement savings because of Fidelity’s excessive recordkeeping fees and its failure to monitor investments. MIT denied any fiduciary breach in its operation of the plan.

Beside providing financial compensation, MIT will provide annual training to plan fiduciaries on prudent and loyal practices under ERISA and proper decision making in the exclusive best interests of plan participants over the next three years.

Under the terms of the settlement, the school will also:

Issue a request for proposals from at least three qualified service providers for recordkeeping and administrative services for the plan

Establish recordkeeping fees based not on a percentage of assets, but instead on a flat fee per participant

Deposit any revenue-sharing related to plan investments in the plan trust and return them to plan participants at least annually, and not use them to defray lawful plan expenses.

Schlichter Bogard & Denton, based in St. Louis, MO, created the first excessive fee 401(k) and 403(b) litigation on behalf of employees and retirees. In 2009, the firm won the first full trial of a 401(k) excessive fee case against ABB. The firm’s Tibble v. Edison is the first and only 401(k) excessive fee case to be argued in the Supreme Court. On May 18, 2015, the firm won a landmark unanimous 9-0 decision in that case, in which both the AARP and the Solicitor General wrote supporting briefs for the employees.

MassMutual’s vision for Open MEPs (if they become reality)

Posted on October 31, 2019 by Editorial Staff -

In a new white paper, “Open Multiple Employer Plans: What Open MEPs May Mean for Your Business,” MassMutual touts the potential benefits of Open MEPs but cautions that they may depend on the specific needs and preferences of the participating employer and the plan.

Open MEPs are qualified retirement plans sponsored by third parties that many unrelated employers can join instead of sponsoring and operating their own 401(k) plans. The House of Representatives passed the SECURE Act, which enables such plans, but corresponding legislation has stalled in the Senate.

MassMutual has a dog in this fight. The mutual insurer and retirement plan provider has been managing multiple-employer plans for enterprises linked by associations, franchises, or Professional Employer Organizations since 1989, with more than 4,000 adopting employers and $4 billion in assets under management.

Assuming that the legislation eventually passes, the paper urges employers and plan advisors to consider these issues when evaluating an Open MEP:

Selecting the plan design. Because Open MEPs are designed to streamline the process of offering and maintaining a retirement plan, so participating employers may have limited choices when it comes to plan design. Employers are urged to carefully consider the plan provisions and whether they are a good fit for their specific plan goals and workforce demographics.

Deciding on hands-on vs. hands-off plan administration. By joining with other companies in an Open MEP, employers can hand off plan administration chores and reduce costs through economies of scale. A third-party administrator (TPA) can help participating employers handle administrative responsibilities outside the Open MEP umbrella, such as IRS nondiscrimination testing and contribution limits, allocating employer contributions and forfeitures, calculating participant vesting percentages, and preparing loan paperwork.

Choosing limited vs. customized investment menu. The investment options available within a MEP are obviously a top consideration for an employer. The ability to combine assets under one universal umbrella may give MEPs the ability to offer access to lower-cost funds typically available only to larger companies with greater assets and more purchasing power. Some Open MEPs might require participating employers to choose from more limited options.

Determining fiduciary oversight. MEPs are typically structured to reduce employers’ fiduciary responsibilities by a 3(38) investment manager. This is in contrast to 3(21) fiduciary services, where an advisor recommends investment options while the employer retains discretion, authority and fiduciary liability for fund selection.

‘Greatest Economy in American History’ still needs Fed help

Posted on October 31, 2019 by Editorial Staff -

Citing evidence of weakness in the U.S. manufacturing sector and export levels, the Federal Reserve lowered the target fed funds rate—the rate at which banks borrow reserves from each other overnight—by 25 basis points for the third time this year, to between 1.5% and 1.75%.

“Our outlook is for moderate growth of 2%. We feel that current stance is appropriate as long as that remains our outlook,” Fed chair Jerome H. Powell said during a press conference Wednesday afternoon. “I strongly believe the actions we’ve taken this year have been the right thing for the economy.”

Powell added, “Leverage among corporations is historically high. We’re monitoring that and taking appropriate steps. Corporate debt is something that we’re paying quite a bit of attention to.” The Fed chair declined to comment on President Trump’s tweet yesterday that today’s economy is “The Greatest Economy in American History!”

Asked if Fed policy could be characterized as “accommodative,” Powell said yes, noting that real benchmark interest rates in the U.S. are now negative. He acknowledged that the U.S. is “not exempt” from the deflationary pressures experienced in Japan and Europe, but said that the Fed is committed to keeping inflation at or close to 2% in the U.S.

Here’s the content of the statement released by the Fed Wednesday:

Information received since the Federal Open Market Committee met in September indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.

Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2%. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1.5% to 1.75%.

This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective are the most likely outcomes, but uncertainties about this outlook remain.

The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2% inflation objective.

This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against this action were: Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range at 1.75% to 2%.

Instead of ‘life span,’ think ‘health span’

Posted on October 31, 2019 by Editorial Staff -

With population-aging a major issue in the 21st century, the National Academy of Medicine (NAM) has launched a multi-year, international effort to improve the health, productivity, and quality of life for older people, with awards totaling $30 million over the next five years as incentives for the development of new ideas.

The initiative, called the Healthy Longevity Global Grand Challenge, aims to confront population aging on two fronts:

Near-term policy change informed by existing evidence
Catalysis of novel research and innovation

A workshop will be held to kick off the Challenge at AARP headquarters in Washington, D.C. on November 6-8, 2019.

The NAM envisions a study led by international experts that will “recommend actions for societies to take in the next 10 years and a global innovation competition to stimulate breakthrough ideas, research, and technologies that could extend health and well-being into later life,” according to the NAM release this week.

“Aging will be a defining challenge of our time,” the release said. “The rapidity of population aging will change the ways in which families, communities, societies, industries, and economies function. Multidisciplinary, innovative solutions are urgently needed to support and engage our older populations and maximize their years of good health.”

Benefiting from population aging “will require policies, socioeconomic infrastructure, and innovations that enhance the health of older populations while creating sustainable, health-promoting systems that support longer lives,” the release said. “[All sectors will need to] collaborate to promote the lifestyles, behaviors, services, supports, and infrastructure that are critical to fostering effective, affordable, and equitable outcomes.”

The NAM is tasking an independent, multidisciplinary, international commission made up of thought leaders from science, medicine, health care, public health, engineering, technology, economics, and policy to identify priorities and directions for improving health, productivity, and quality of life during extended longevity.

The commission will assess the “risks, challenges, and opportunities” presented by global aging and recommend priorities and actions for optimizing the health, function, and well-being of all people into later life.

An International Oversight Board will determine the study scope, oversee the process, and provide strategic guidance and dissemination opportunities. The road map is expected to be available in the fall of 2020. It will have three branches: sciences and technology; health care systems and public health; and social, behavioral, and environmental enablers. The commission will consider policy and practice, health equity and disparities, technology solutions, sustainable financing, and monitoring metrics.

The NAM is sponsoring a Healthy Longevity Global Competition to incentivize new contributions in this field from individuals and teams from the biologic, medical, engineering, behavioral, and social sciences. Inspired by the Bill and Melinda Gates Foundation’s Grand Challenges Explorations awards, the Longitude Prize, and the X-PRIZE Foundation, the NAM has developed a model built on Catalyst Awards; bold ideas and successful pilots and prototypes will be followed by successively larger inducement prizes.

The competition will unfold in three phases between 2020 and 2025, mobilizing more than $30 million to foster innovations in healthy longevity. In the first phase, approximately 450 Catalyst Awards, worth $50,000 each, will be issued as seed funding to advance ideas originating from any field or combination of fields.

This October, the NAM and collaborating entities worldwide launched Catalyst Award competitions in more than 40 countries and territories.

In the second phase, Accelerator Awards will provide further funding to projects that have achieved proof of concept and may have promise for commercialization. The competition will culminate with one or more Grand Prizes, awarded for breakthrough achievements with potential for global impact.

Winning ideas may be basic science insights and other approaches to modifying the aging process, preventive treatments for age-related diseases, facilitative technologies, social and economic policy, or other advances that demonstrate promise for extending the human health span.

Sponsors of the Challenge include:

AARP
California Health Care Foundation
Nathaniel (Ned) David
Gary and Mary West Foundation
Harvey V. Fineberg Impact Fund
John A. Hartford Foundation
Mehta Family Foundation
Ministry of Health Singapore
National Research Foundation Singapore
National University Health System Singapore
National University of Singapore
Gil Omenn
Robert Wood Johnson Foundation
Rockefeller Foundation
Tsao Foundation

Scalia will help draft new fiduciary rule (after helping kill the old one)

Posted on October 31, 2019 by Editorial Staff -

Despite reports last August that Eugene Scalia would recuse himself from taking part in the drafting the Department of Labor’s new fiduciary rule if confirmed as Secretary of Labor, it turns out that Secretary Scalia will take part—despite having helped kill the previous version of the regulation as an attorney for the financial services industry.

As a litigator in private practice two years ago, Scalia represented SIFMA (Securities Industry and Financial Markets Association) the U.S. Chamber of Commerce, and the American Council of Life Insurers in their legal challenge to the Obama-era fiduciary rule, which required retirement account advisors to put clients interests first. The Fifth U.S. Circuit Court of Appeals vacated the rule in March 2018.

Secretary Scalia is the son of the late Associate Justice of the Supreme Court Antonin Scalia.

The DOL’s career ethics attorneys have determined that neither its own ethics rules nor President Donald Trump administration’s ethics pledge precluded Scalia’s involvement in drafting the new rule, according to a reports in the Wall Street Journal and at FinancialAdvisorIQ.com that identified the source as Kate O’Scannlain, the DOL’s solicitor.

“The new rulemaking is not a ‘particular matter involving specific parties’ and litigation related to a prior rule which the secretary handled while in private practice has ended,” O’Scannlain said in a statement cited by the Journal. She added that the Office of Government Ethics agreed with the DOL’s decision, according to the Journal.

Consumer advocates disagreed. “This is a totally unacceptable decision that will taint this rule-making thoroughly. Mr. Scalia first defended the brokerage and insurance industry’s right to engage in conflicts of interest that harm retirement savers. Now, he seems eager to engage in his own conflicts of interest,” said Micah Hauptman of the Consumer Federation of America in a statement Wednesday.

“The fact of the matter is he can’t separate his prior work doing the industry’s bidding and the sensitive information about his clients that he learned in his role as their advocate from a future rule-making that would involve the same issues and clients,” he added.

“I don’t know what type of legal gymnastics lawyers had to do to come to such a ridiculous conclusion,” Dennis Kelleher, chief executive of Better Markets, told the Journal. “Everyone can now be highly confident the Department of Labor will propose and finalize a rule that the industry will cheer and retirees will pay the price for.”

When Trump nominated Scalia in August 2019—after Labor Secretary Alexander Acosta resigned amid an outcry over his handling of a plea deal with convicted sex offender Jeffrey Epstein 10 years ago—lawyers said that Scalia’s experience in fighting the DOL’s rule may force him to recuse himself from drafting the new version of the rule.

During his nomination hearing, Scalia told members of the Senate Committee on Health, Education, Labor and Pensions that he would seek advice from ethics officials on whether he can take part in making the new rule but assured them that his previous private-sector work wouldn’t affect his work at the DOL if confirmed.

“I’m not necessarily my clients,” Scalia said at that time, according to the Associated Press. “I will seek to defend them, to vindicate their rights but that doesn’t mean that I necessarily think what they did is proper.” The full Senate confirmed Scalia for the position just days later.

Time to Put Benjamins Back in the Sock Drawer?

Posted on October 31, 2019 by Kerry Pechter -

Last Monday, two days before Federal Reserve chair Jerome H. Powell would announce this year’s third quarter-point reduction in the fed funds rate, MIT economist James Poterba was delivering a presentation in the Sheraton Boston on the headwinds that low rates create for middle-class retirement savers.

Poterba was one of the first speakers on the first day of the annual conference of LIMRA, the organization that conducts research for its member life insurance companies. He prefaced his remarks with a spoiler-alert that no one in the room—after a decade of historically low rates—especially needed.

James Poterba

“We’re in a much tougher environment for the provision of savings for retirement today, both in terms of the capacity to save and the capacity to turn savings into retirement income,” said Poterba, who is also president of the National Bureau of Economic Research. “What I have to say will be a little depressing.”

The audience was duly attentive. Life insurance companies earn their money by investing their customers’ premiums—trillions of dollars, collectively—mainly in bonds and other fixed income securities. When the Fed pushes down 10-year Treasury rates, as it did from 2009 to 2015, it squeezes their earnings and reduces the benefits they can pay.

More recently, the Fed has whipsawed insurers. Starting in December 2015, it raised the fed funds rate (the rate at which banks lend reserves to each other at the Fed) in nine quarter-point increments, to between 2.25% and 2.50%. But this year, after President Trump criticized the tightening policy for hurting the economy and the stock market (and his reelection chances), the Fed reversed course and reduced rates in three quarter-point increments, to between 1.5% and 1.75%. So Poterba’s presentation, if not uplifting, was timely.

How low are rates?

Since 2010, U.S. savers have been better off hiding Benjamins in the sock drawer than buying 10-year Treasuries. In 1990, the nominal rate was 8.48% and real after-tax yield was between 1.25% and 1.66%, depending on your tax bracket. By 2010, the real after-tax yield dropped to between -10 and -20 basis points. Prior to this week’s reduction, it was about -40 basis points.

“Over the many years I’ve taught intermediate macroeconomics, the real interest rate has always been positive,” Poterba said. “[But with rates falling so low], at what point do savers decide that currency dominates other financial instruments. Apple may decide to create a secure facility where their money will yield zero but will be safe. One of the reasons for going to a cashless society is that cash becomes a problem if the government wants to run a negative interest rate.”

Yet U.S. benchmark yields are higher than in many European countries. The yield on inflation-indexed government bonds in mid-October was 55 basis points in Canada and 28 basis points in the U.S. It was -200 basis points in Sweden and -231 basis points in the United Kingdom.

Low rates hurt mass-affluent households the most, Poterba said. “For the 20% to 40% of the population without much savings, and for the 20% with the most savings”—more than enough to retire on—“[low rates] won’t matter much,” he said. “It will mainly affect the middle group who used to depend on a combination of defined benefit pensions and private savings. They rely most on the rate of return to fund their retirements.”

All else being equal, low real rates require people to save more for a longer period to create a nest egg that will generate enough income in retirement to replace an adequate share of their final salary and allow them to maintain their standard of living after they stop working.

For instance, if you assume that a person save a real 1% of their salary per year and their salary increases by a real 1% per year, it will take considerably longer to replace one’s final salary at low risk when the real risk-free rate is 3% than when it is 1% or zero. The table below indicates that it would take about 20 years to replace about a quarter of one’s final salary by saving at 3%, but about 30 years to replace that amount with a 0% return.

Falling interest rates hurt younger people, who have yet to buy assets like homes and bonds, Poterba said, and help older people whose assets increase in value when rates go down.

“The long Treasury market has been the best asset for performance this year,” Poterba said. “If you already owned bonds and got the big capital gains, you did wonderfully. You’re much richer than you were last year. But younger people who buy new bonds will get a tiny rate of return” and not much chance of capital gains in the future because rates can’t drop much farther.

But low rates also impact older people who might otherwise buy annuities. Low rates depress the payout rates offered by single-premium income annuities, which makes them less attractive. In 1987, when AAA-rated corporate bonds paid between 9% and 10%, an annuity for a 65-year-old man paid out about $1,000 a month. At today’s rates, the payouts are less than $550 a month.

What to do about it?

To offset the impact of low yields on savings, Americans will have to save more, work longer, take more risk with their investments, inherit money from their parents, or live with their children in their old age, Poterba said. Working longer is the most reliable solution, he noted, because it can both increase savings and reduce the number of years spent in retirement.

As for investing in stocks instead of bonds, Poterba didn’t list that as one of his recommended remedies for low rates. The conventional wisdom is that low rates encourage investors to buy stocks or stay in stocks; but Poterba said that, unless you think the equity premium (the historical return advantage of stocks over bonds) will grow, then lower interest rates harbinger lower stock returns in the future.

“The expected real rate of return for stocks over the next ten years has fallen from 6.5% in 1996 to between 3.0% and 3.5% today,” he said. “So the expected returns on stocks have drifted down along with the interest rate, assuming that the risk premium stays constant.”

Lessons of Past Intra-Government Investigations

Posted on October 31, 2019 by Eugene Steuerle -

Recent stories in the news raise important questions about the ability of government to impose constraints on abusive government investigations.

I’m not here to judge the credibility of the allegations that President Trump used his office to encourage foreign governments to investigate Joe Biden’s son or that a Treasury Department official interfered with audits of the President’s or Vice-President’s tax returns.

Instead I want to turn to the history of the IRS to draw out important lessons in how issues such as these have been addressed in the past and then use that information as a base from which Congress can consider further guardrails to prevent future abuses. Among the possibilities are to further require, not simply offer protection for, whistle blowing.

The first line of defense, of course, is the integrity of public officials themselves and the norms they help create. More than four decades ago, White House Counsel John Dean gave IRS Commissioner Jonnie Mac Walters a copy of President Richard Nixon’s “enemies list” that included about 200 Democrats whose tax returns he wanted audited. Walters and Treasury Secretary George Schultz agreed between themselves to throw the list into a safe and forget about it.

When Walter’s successor, Donald Alexander, discovered that a handful of IRS staffers had been assigned to investigate the returns of about 3,000 groups and 8,000 individuals, often because of their political views, he disbanded the group. Those of us who knew him are aware of how proud he was for standing up to the White House and protecting the integrity of the IRS.

Interestingly, it wasn’t until 1998 that Congress turned this normative prohibition into law. The Taxpayer Bill of Rights, part of a bill that restructured the IRS that largely came out of a Republican-led Senate, said this:

It shall be unlawful for any applicable person to request, directly or indirectly, any officer or employee of the Internal Revenue Service to conduct or terminate an audit or other investigation of any particular taxpayer with respect to the tax liability of the taxpayer.

Congress said applicable persons include the President, Vice President, and any employee of the White House and most Cabinet-level appointees.

The Taxpayer Bill of Rights made clear that Congress was concerned about protecting potential victims, not just punishing offenders. Each individual is entitled to equal justice under the law, and Congress determined that politically motivated investigations violated that justice standard. The Joint Committee on Taxation staff in their explanation of the law listed another reason: The concern that improper executive branch influence could have a “negative influence on taxpayers’ view of the tax system.”

The 1998 law not only prohibited this improper influence, it explicitly required disclosure:

Any officer or employee of the Internal Revenue Service receiving any request prohibited by subsection (a) shall report the receipt of such request to the Treasury Inspector General for Tax Administration.

It says “shall.” Disclosure is not optional. Congress made it a crime for “any person or employee of the IRS receiving any request” to fail to report it, whether it was direct or indirect. No explicit quid pro quo necessary to get the Inspector General involved.

In the current context, the statute is clear: Anyone in the IRS, including the Commissioner, must report any improper attempt by high-level executive branch officials at interfering with audits of the president and vice-president or anyone else.

Thus, there are at least five bulwarks against inappropriate political interference with IRS investigations.

Appointment of professionals and strong leaders who will protect the integrity of their offices;

Social norms that most politicians would feel reluctant to violate;

Penalties on those who interfere in the investigative process;

A requirement that those receiving the unlawful request report it;

Penalties on those who fail to report the request (to go along with the penalties on the requestor).

No law is perfect, and a president or other person could find their way around current law or protect others who abuse it. Still, norms and laws do constrain the quantity and extent of bad actions. So does a transparent disclosure system for revealing abuses. Even if some figure out how to violate legitimate boundaries, fences still can limit trespassing.

As citizens, and taxpayers, we all have rights to equal justice. Enforcing those rights often requires laws, as well as norms. The development of law protecting taxpayers against abuses of the IRS audit process may set an example for Congress to apply to elected officials, officers, and employees beyond the IRS and to investigations undertaken by other agencies.

This article was first published in the TaxVox blog at taxpolicycenter.org.

Who Is Positioned to Win in the Global Economy?

Posted on October 31, 2019 by No Author -

Kindur, a young robo-advice firm, is growing up

Posted on October 24, 2019 by Editorial Staff -

Kindur, a robo-advice startup based in New York, has introduced SmartDraw, an automated service that creates retirement income streams by withdrawing funds from multiple retirement accounts tax-efficiently, Kindur founder and CEO Rhian Horgan said this week.

No matter how much they’ve saved or how financially-literate they are, many baby boomers are expected to be perplexed and daunted by the number of decisions about Social Security, Medicare, and required distributions from retirement accounts that they will face at retirement or soon after.

Rhian Horgan

Even as a relatively late arrival in the fintech market, Horgan still sees ample opportunity there. “When the stakes are this high, customers need to move past using rules of thumb and make sure they are creating a retirement income plan that specifically addresses their circumstances,” Horgan told RIJ this week. (See our December 2018 article about Kindur.)

The SmartDraw service is available for a subscription fee to Kindur clients, whether they have savings under Kindur’s management or not. There are three service levels: Select ($99/year), Premium ($149.99/year), and Concierge ($299.99/year) packages that may include:

Automated Withdrawal Recommendations. This service helps customers minimize taxes by analyzing their retirement accounts and spending needs and delivers recommendations on which account to make withdrawals from first.
Automated RMD Calculations. The system reports customers’ annual required minimum distributions from tax-deferred accounts, starting the year after the year in which they reach age 70½. The service is intended to help clients avoid the potential tax penalty of 50% of any unpaid RMD.
Medicare Surcharge Concierge Service. This handles the filing of high income customers’ Medicare surcharges. If the clients experience a sharp reduction of income, the service will make sure their Medicare premium shrinks accordingly.
Federal and State IRA Withholding Strategy. This helps customers avoid tax penalties and high year-end tax bills by recommending the right monthly withholding strategy for state and federal taxes when one makes withdrawals from their IRA accounts.
Access to a licensed financial adviser. The adviser will create a custom plan for each retiree.

For a household with $1 million in savings, SmartDraw could save as much as $61,000 over the course of retirement, a Kindur release said.

“Our software runs five different withdrawal strategies,” she told RIJ. “We take in the client’s age, the spouse’s age, filing status, federal and state tax rates, and look at where their assets are held. Then our software runs five different withdrawal strategies.

“The first strategy is taxable money out first, then tax-deferred, then tax-exempt,” she added. “The second is taxable money out first, then tax-exempt, then tax-deferred. We also run three variations of tax bracket management where we measured amounts from each type of account. We’ve found that, for someone with $1 million, the difference between the best and worst strategies is about $61,000 over the retirement period.”

“We have about 10,000 users who have created retirement plans with us or engaged with our calculator, and we’ve created $5 billion worth of retirement plans,” Horgan told RIJ this week. “We’ll release new growth numbers next year when we’ve been live for a year. We also expect another round of financing in 2020.”

Private equity investors don’t have as steep a learning curve as they once did, she said. “Three years ago, we had to explain to a lot of investors,” Horgan added. “We had to show what the [retirement] opportunity set was. Today the investor community understands it. An ecosystem is building that recognizes the opportunity to bring technology to the [boomer retirement] challenge.”

Kindur’s core technology is homegrown. “We’ve built all our own software rather than buy it,” Horgan said. “We found that most software is built for one narrow task or another. We also found that a lot of software is designed for advisers, not for the average human. Our core value is to be human in a world that often just sees numbers.”

Pitching Income Annuities on Greed

Posted on October 24, 2019 by Kerry Pechter -

“Longevity” was the theme of the combined Financial Planning Association (FPA) and Academy of Financial Services 2019 annual conference last week. Some 1,800 Continuing Education credit-hungry advisers convened in Minneapolis to receive wisdom from some of the heavy-hitters of the retirement income space.

Wade Pfau, Ph.D., of The American College, was there to talk about the most popular types of annuities and about life insurance in retirement. David Blanchett of Morningstar, Curtis Cloke of Thrive Income, and Social Security expert Bill Reichenstein all presented their work.

A paper evaluating three approaches to “bucketing,” co-authored by Harold Evensky, was showcased. Retirement gurus Bob Laura and Bob Mauterstock discussed emotional aspects of investing and retirement. Yi Liu and Michael Guillemette presented a paper, “Does Risk Aversion Influence Annuity Market Participation.” (Yes, it does.)

Pfau, who is director of the Retirement Income Certified Professional program at The American College, offered FPA members a 45-minute tutorial on the three main types of annuities: income annuities, variable annuities and index annuities. Pfau has just published “Safety-First Retirement Planning,” a book that describes the synergies that can arise from combining annuities and mutual funds or exchange-traded funds.

In one of his examples, he showed that a life-contingent immediate annuity for a 65-year-old woman could produce $10,000 per year for life for about $172,915 at current rates. Using the 4% safe withdrawal percentage rule, $172,915 in savings would initially produce annual income of about $6,920.

Pfau also compared the annuity with a bond ladder. A 35-year ladder of risk-free zero-coupon bonds producing a safe $10,000 per year for 35 years would cost about $224,872.

Retirees could in theory buy the annuity and invest the $52,000 savings ($224,872 – $172,915) in stocks, raising their potential for long-term growth.

Like Pfau, speaker Curtis Cloke, the creator of the Thrive method of retirement income generation and the Retirement NextGen retirement planning software, generally follows the floor-and-upside income philosophy, which involves financing essential needs with guaranteed income sources and financing “discretionary” or optional needs as well as legacy goals with risky assets.

But, unlike the academic Pfau, Cloke’s career originated in the insurance sales world, which relies far more on emotion since it involves direct persuasion of clients. His presentation, while partly numbers-driven, was equally dedicated to the emotional dynamics of the annuity sales process and its frequent reliance on building enough trust in the adviser to culminate in the transfer of a large lump sum of money to purchase an irrevocable annuity.

Cloke summarized his philosophy as “Buy income and invest the difference.” He described his retirement income generation methodology as a combination of bucketing and floor-and-upside. It also emphasizes including the purchase of adequate long-term care insurance and health insurance.

A summary of David Blanchett’s presentation on the uncertainty of retirement start dates and its impact on savings targets and retirement income sustainability was published in last week’s edition of RIJ. You can find it here.

Bucketing, Social Security

Another presentation, by a team that included celebrity adviser Harold Evensky, involved comparisons between three bucketing methods and a systematic withdrawal plan as methods of retirement income generation. The team’s other members were Yuanshan Cheng of Winthrop University in South Carolina, who presented the findings, and Tao Guo of William Paterson University in New Jersey.

This team concluded that a time-segmentation bucketing strategy (where retirement was divided into three multi-year periods and specific assets are matched with the income liability during each period) generally outperformed a cash reserve bucket method (a two-bucket system with a cash reserve bucket and a total return portfolio) and a goal-based bucket method (where assets are assigned to specific expenses, such as travel or education for grandchildren).

In their analysis, the team hypothesized a 65-year-old with $2 million and a 30-year time horizon. The retiree’s assumed marginal tax rate was 33% and long-term capital gains rate was 15%. They assumed a real return on equities of 5.1% per year and a real bond return of 0.30% per year.

The time-segmentation bucket (with an initial five-year bucket of bonds, followed by a five-year 50% stocks/50% bonds bucket, and then a 10-year bucket of equities) produced a higher annual income and smaller potential loss than any of the three other methods.

In a well-attended presentation on Social Security, William Reichenstein reviewed all of the special situations that can make it confusing or complicated to decide when and how to file for benefits in an optimal way. His tips and warnings are too numerous to repeat here, but you can glean many of them from Reichenstein’s slides.

In one slide, Reichenstein showed that latent but lucrative claiming strategies still exist, even though regulatory reform has eliminated the famous file-and-suspend strategy made famous by economist/author Larry Kotlikoff of Boston College.

For instance, Reichenstein described a 68-year-old retiree (born before the cut-off date of January 1, 1954) with a 62-year-old wife, who files a restricted application for spousal benefits (half of her full benefits) when she files for her own earned benefits at age 62. At age 70, he files for his own benefit, which includes all deferral credits. Depending on life expectancy, that strategy can be preferable to the husband waiting until age 70 and the wife waiting until her full retirement age (66½) to file for benefits.

Planners and annuities

Mainly through Pfau’s and Cloke’s presentations, financial planners at the FPA/AFS conference received a strong, positive introduction to the role that annuities can play in a retirement portfolio. But, despite the strong attendance at those two sessions, it’s still not clear to what extent planners are amenable to recommending annuities to their clients.

Pfau and Cloke made cases primarily for the use of income annuities, and for the use of those annuities as substitutes for bonds in retirement portfolios. But life insurers, especially non-mutual life insurers, would rather sell variable, index or structured annuities, not income annuities.

Those types of annuities, especially if they have income riders, might be substitutes for bonds or certificates of deposit. But they are just as likely to be substitutes for equities, since they offer direct or indirect access to the equity markets. That difference could confound the insurers’ attempts to communicate with advisers.

Annuity issuers might consider changing the way they talk to advisers about annuities. Insurance companies, whose business involves assuming or buying risk, are inclined to portray risks, including the various retirement risks, as evils. But financial planners and investment advisers are more likely to regard risk as a positive.

For advisers and their clients, risk is the path to reward. It is something to be embraced—gingerly, perhaps, but embraced nonetheless. Pfau and Cloke seemed to understand that, and they emphasized the ability of annuities to add upside potential as well as downside protection to a retirement portfolio.

Insurers should take a cue from them, and try to sell annuities on the basis of greed, not fear. The switch may not come naturally to them, but it may be the best way to win the hearts and minds of advisers.

The life of RILAs is improving

Posted on October 24, 2019 by Editorial Staff -

In a new Special Report, ratings service AM Best predicts that while the current sales volume of Registered Index-Linked Annuities (RILAs) is still small compared with sales of variable annuities (VA) and fixed-index annuities (FIA), RILA likely will outpace other individual annuity products over the near term.

Industry-wide RILA sales totaled $11.2 billion in 2018, representing 11% of all VA sales and 5.6% of total individual annuity sales (fixed and variable combined), according to industry sources. More importantly, RILA sales growth has accelerated since 2016, as sales of traditional VAs declined.

Through the first half of 2019, sales of RILAs totaled $7.7 billion, up 63% over the same period in 2018, and accounted for nearly 16% of industry-wide variable annuity sales and 6.2% of all individual annuity sales.

VA sales peaked at $184 billion in 2007 and have declined since. In 2018, VA sales dropped to about $100 billion, down 46% from 2007. Today, fixed annuity sales, led by FIAs, surpass VA sales, thanks to the uncertainty created by past Department of Labor efforts, abandoned in 2017 by the Trump administration, to regulate VA sales more tightly.

VAs allow for unlimited upside growth potential, but are vulnerable to the risk of loss. FIAs participate indirectly in equity markets through the use of options on the performance of equity or hybrid indexes, so their upside potential is limited. But they provide protection against the risk of loss.

RILAs are a compromise. They offer more upside potential than fixed annuities in exchange for policyholders’ willingness to absorb some risk of loss. Most current offerings feature a combination of guaranteed upside performance caps and downside absorption rates (“buffers” or “floors”). The guarantees are measured over periods as short as one year or as long as 10 years.

Only representatives registered with Financial Industry Regulatory Authority (FINRA) can sell RILAs, so they are likely to see limited penetration into the traditional Insurance Marketing Organization (IMO) channels used heavily by fixed index annuity writers.

However, given the current pace of product introductions, as well as the emerging trend of offering an optional guaranteed minimum withdrawal benefit rider on these products, AM Best believes RILAs will become more popular and constitute a larger portion of individual annuity product sales.

Note: Some distributors dislike the acronym RILA and prefer to call these products “structured” annuities; they resemble structured notes.

New safe harbor for electronic retirement plan disclosures

Posted on October 24, 2019 by Wagner Law Group -

In 2002, the DOL issued a safe harbor for electronic disclosure that is available only to those participants that have electronic media at work, and those individuals who affirmatively opt in to electronic documentation.

There have been calls from many quarters for the DOL to update those regulations to reflect the advances in technology since the 2002 regulations, including an August 2018 Executive Order calling upon the DOL, in consultation with Treasury, to explore “the potential for broader use of electronic delivery as a way to improve the effectiveness of disclosures and to reduce their associated costs and burdens.”

In response, on October 22, 2019, the DOL issued proposed regulations establishing a new safe harbor that would allow retirement plan sponsors to satisfy disclosure requirements by notifying participants and beneficiaries that the information will be made available on a website.

The proposed regulations only apply to pension plan disclosures, rather than welfare plan disclosures, such as group health plans and disability plans, although the proposed regulations have reserved consideration of applying these rules to welfare benefit plans.

When final regulations are issued, they will be effective 60 days after the notice is published in the Federal Register, but because this new safe harbor is voluntary and optional, the applicability date, which frequently is after the effective date, will be the first day of the first calendar year following publication of the final rule.

The proposed regulation applies to participants and beneficiaries who are entitled to covered documents and who, as a condition of employment, either at the beginning of plan participation or otherwise, provide the plan sponsor, employer, or plan administrator, with an email address.

However, this requirement is satisfied if an employer assigns an electronic address to an employee. At the time that a covered individual severs from employment with the employer, the administrator must take reasonable measures to ensure the continued accuracy of the electronic address the employer has been provided, or alternatively to obtain a new electronic address.

A covered document is any document that the administrator is required to furnish to participants and beneficiaries under Title I of ERISA, except for documents that must be furnished upon request.

Prior to reliance upon these proposed regulations, a plan administrator must furnish to each individual:

A paper notification that some or all covered documents will be provided electronically
A statement of the right to request and obtain a paper version of the requested document, free of charge
The right to opt out of receiving documents electronically, and an explanation of how to exercise these rights.

A notice of Internet availability must generally be furnished at the time the covered document is made available on the website. However, if the administrator furnishes a combined notice of internet availability for certain specified documents, then the combined notice must be furnished each plan year, and, if the combined notice was furnished in a prior plan year, the notice must be provided no more than 14 months following the date that the prior plan year’s notice was furnished.

The proposed regulations also dictate the content of the disclosure, including a prominent statement such as “Disclosure about Your Retirement Plan” and a statement that “Important Information about your retirement plan is available at the website address below. Please review this information,” as well as:

A brief description of the covered document
The Internet website address where the information is available
A statement of the right to request and obtain a paper version
A statement of the right to opt out of receiving electronic documents
A telephone number to contact the administrator or other designated plan representative

The notice can only contain the content described in the proposed regulations, other than design elements; and must be written in a manner calculated to be understood by the average plan participant.

The administrator is also required to ensure that the covered document is available on the website no later than the date on which the covered document:

Must be furnished under ERISA
Must remain available on the website until it is superseded by a subsequent version of the covered document
Must be presented in a manner calculated to be understood by the average plan participant
Must be presented in a format that is suitable to be both read online and printed clearly on paper, and the document can be searched electronically by numbers, letters, or words.

The administrator must also take measures reasonably calculated to protect the confidentiality of a covered individual’s personal information.

Additionally, upon request from a covered individual, the administrator must promptly furnish to each individual free of charge, a paper copy of a covered document, and the covered individual must have the right to opt out of electronic delivery and receive paper versions of some or all covered documents.

The system for furnishing notice of Internet availability must be designed to notify the administrator of a covered individual’s invalid or inoperable electronic address. If the administrator’s reasonable attempts to correct the problem, such as sending the notice to a secondary email address, do not work, the administrator must treat the covered individual as if he or she had elected to opt out of electronic document delivery.

Finally, [if] covered documents are temporarily unavailable on a website due to unforeseeable events or events beyond the control of the plan administrator, the conditions of the proposed regulations will continue to be treated as satisfied, provided that the administrator has reasonable procedures in place to ensure that covered documents are available in the manner required by the regulations, and the administrator takes prompt action to ensure that the documents become available as soon as practicable.

It’s Too Late for ‘Medicare for All’

Posted on October 24, 2019 by Kerry Pechter -

Medicare for All ain’t gonna happen.

Even as Democratic presidential candidates chat up the possibility of extending a single-payer, publicly operated, no-deductible, zero co-pay version of Medicare to all Americans regardless of age, today’s elderly-only Medicare resembles such a program less and less.

Instead, Medicare has been evolving into the multi-payer, privately operated high-deductible program known as Medicare Advantage. Already, about a third of Medicare-eligible seniors, or 22 million people, use private HMO- or PPO-style Medicare Advantage plans instead of traditional fee-for-service Medicare.

By 2029, an estimated 42% to 47% of seniors are expected to use Medicare Advantage plans instead of traditional Medicare alone or traditional Medicare with a Medigap supplement. Your father’s Medicare isn’t growing; it’s disappearing.

“The Medicare of tomorrow could look much different than it does today—more like a marketplace of private plans, with a backup public plan, and less like a national insurance program,” wrote health economists Patricia Neuman and Gretchen Jacobson in The New England Journal of Medicine a year ago. “This may or may not be the program that people envision when they talk about Medicare for All.”

In short, the government has been steadily outsourcing Medicare to private health insurance companies for more than 15 years, creating a massive, federally subsidized industry so profitable that it attracts more entrants every year.

Medicare today pays more than $200 billion a year—not as reimbursements for services, but in advance, as capitation payments—to Medicare Advantage providers like Humana and United Healthcare, plus an estimated $6 billion in performance bonuses. That transfer is projected to reach $580 billion in 10 years, according to Neuman and Jacobson.

Medicare is a single-payer plan today, but it’s biggest payment is to Medicare Advantage. In their last debate, as Elizabeth Warren and Bernie Sanders described their ideas for taking plans for making Medicare more purely public, President Trump was taking steps to make it more market-driven. His October 3 executive order calls for an analysis of ways “to inject market pricing into Medicare FFS reimbursement.”

Financial advisers need to be aware of all this, because they’re in a position to save their older clients a lot of money by steering them to the right kind of coverage. Medicare Advantage plans, with their low premiums but high deductibles, can be penny-wise but pound-foolish. Traditional Medicare plus a Medigap insurance plan could save them a lot of grief and expense in the long run.

At first glance, Medicare Advantage plans look irresistible to many 65-year-olds. The convenience of one-stop shopping for medical, drug, vision and dental coverage appeals to people accustomed to corporate health care benefits. The zero monthly premium options are alluring to people with low incomes. Plans can differentiate themselves by offering freebies that, as of 2020, can include non-medical services like home-delivered meals.

Often, in any given locality, the same familiar companies that provide corporate and individual health insurance also offer Medicare Advantage plans, and they heavily promote them every fall during the Medicare re-enrollment period, when people can switch plans. Individual agents also sell Medicare Advantage plans, attracted by $510-per-enrollee commissions.

“If I write a MAPD [Medicare Advantage plus drug] contract I get $500, and if I write a Medigap policy I get $250,” said Joanne Giardini-Russell, founder of Boomer Health Group near Lansing, Michigan. “This is what agents are pushing, and there’s often no mention of the Medigap option.”

But there are clawbacks, and some are irreversible. If your client gets sick, out-of-pocket costs can mount up. If the client has a diagnosis of cancer, for instance, the co-pays can mean maximum annual expenses of $6,700 (the current Medicare Advantage cap for in-network care) or $10,000 (the maximum for PPO plans), according to 65incorporated.com. Drug expenses may drive the cost higher.

At that point, he or she will have a pre-existing condition and either won’t qualify for a Medigap plan at an attractive price, or not at all. Also, Medicare Advantage patients may face the frustrations of utilization review, prior authorization and referral requirements, higher out-of-network charges, and unforeseeable changes in coverage from year to year.

Initially, Medigap plans aren’t cheap. The monthly premiums range from under $50 to over $200, depending on medical costs in your client’s state of residence. (This is on top of the standard monthly Medicare premium of $135 or more, depending on income, which may come out of your clients’ Social Security checks.) Nor do they offer one-stop shopping. Drug, vision and dental policies typically have to be purchased separately. (As of Jan. 1, 2020, Medigap plans will no longer cover the Medicare Part B deductible. See Medicare handbook for 2020.)

But Medigap plans, as a supplement to traditional Medicare, make life simpler and can save money later in life, when medical care becomes more frequent and more serious. Expenses are predictable, with few or no co-pays or deductibles. Medigap policyholders face unrestricted choice of physicians (among those who accept Medicare). As long as they sign up for Medigap plan when they first sign up for Medicare at age 65 or soon after, they can’t be refused coverage or charged higher premiums, even with a pre-existing condition. To look for a Medigap plan, click here.

Unfortunately, the future of Medicare is now caught between opposing political forces. Sanders and Warren are pulling for expansion of an all-public Medicare program for all Americans. Republicans are pulling for a more market-driven system. Just as no one is quite sure yet how the Democrats’ Medicare for All would work, no one I spoke to understood President Trump’s October 3 executive order—especially the part that suggests letting Medicare Advantage providers set their own reimbursement rates.

“The section of the executive order about commercial rates was a little surprising,” Gretchen Jacobson told RIJ. “Was it to tie traditional Medicare rates to market values, or was it to lower costs?”

If Democrats ever control all three branches of the federal government, they might fulfill the Sanders-Warren vision of reversing the outsourcing of Medicare to Medicare Advantage providers.

But no one expects that, just as no one who spoke with RIJ believed that the politically powerful Medicare Advantage genie can be coaxed or forced back into its bottle. If anything, it’s on track to replace traditional Medicare entirely.

Bridge to somewhere

United Technologies’ experiment

Factoids mentioned in passing

Great American amends fee-based annuity contracts

Security Benefit issues two new index annuities

New mortality tables for pension plans issued by SOA

Fidelity offers in-plan income planning tools

State regulators pass on ‘best interest’ rule—for now

Athene gets $1.6 billion in capital from Apollo

Brexit stymies pension law progress in UK

Settlement between MIT and its plan participants described

How low are rates?

What to do about it?

Bucketing, Social Security

Planners and annuities

Data Connection